Full text of Economic Policy Review (Federal Reserve Bank of New York) : August 1951, Vol. 33, No. 8

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MONTHLY REVIEW
Of Credit and Business Conditions

FEDERAL

RESERVE

V o lum e 33

BANK

A U GU ST

OF

NEW

YORK

19 5 1

No. 8

MONEY MARKET IN JULY

The money market was moderately tight through the month
of July, although bank reserve positions for the country as a
whole eased gradually until the final statement week. A
strengthening of investor confidence in the Government secur­
ity market occurred as Government bond prices increased
substantially on light trading and the prices of most types of
short-term Treasury securities remained relatively stable. From
July 16 to 19, the Treasury’s books were open for the exchange
of 5.4 billion dollars of 1V per cent notes, maturing August
1, into an 11-month 1% per cent issue of certificates of indebt­
edness. This exchange was the most successful of the postwar
period, with indicated cash redemptions less than 2.6 per cent
of the outstanding amount. The Treasury also obtained new
money through increases of 200 million dollars in each weekly
bill offering, beginning with the issue of July 5, and this
borrowing was readily absorbed by the market.
a

Pu b l i c D e b t T r a n s a c t i o n s

an d the

G o v e r n m e n t Se c u r it y M a r k e t

The favorable results of the Treasury’s refinancing operations
in June and the subsequent stability of the price of the refund­
ing issue (the April 1, 1952 certificates of indebtedness),
together with the factors bringing about rising Government
bond prices in July, contributed to the unusual success in
refunding the notes maturing August 1. There was little of
the churning about in the security market which often ac­
companies a refinancing operation as investors seek to find
issues most suited to their portfolios. Although the maturing
notes rose to a premium of 2/32, few holders of these "rights”
to subscribe to the new issue took the profit afforded by sale
at this premium, and trading in the new certificates on a
*when-issued” basis during the short time the books were open
for the exchange (July 16-19) was light. The final results of
the exchange indicated that only 135 million dollars of the
maturing notes were to be turned in for cash.
Public debt transactions, however, were not limited to re­
financing. During the course of the month, the Treasury
raised 800 million dollars of new money by increasing the
amount of each of the weekly Treasury bill issues by 200 mil­
lion dollars above the maturing issue. Demand for the new
bills, as well as for other short-term Treasury securities, includ­




ing near-maturity bonds, was active, and for the most part
the additional bills found a ready market, mainly among non­
bank investors. The nonbank market absorbed not only the
increase in the new bill offerings but also substantial liquida­
tion of outstanding bills and other short-term securities by
New York City and other large city banks in need of funds
to adjust their reserve positions. Demand from nonbank in­
vestors was sufficiently large to bring bill yields around the
middle of the month to levels running, for the various matur­
ities, from 5 to 25 basis-points below yields prevailing at the
beginning of July. Tightening of the money market subse­
quently brought yields back close to the levels that prevailed
at the beginning of the month.
Treasury financing of new money requirements through bill
offerings might ordinarily be considered inappropriate during
a period of concern over an early resurgence of inflationary
pressures, since bills have traditionally been considered princi­
pally an instrument for borrowing from the banking system.
However, in recent years a new market for Treasury bills has
developed among the large industrial corporations which have
placed growing tax reserves and other temporarily available
funds in Treasury bills. As shown in the accompanying chart,
industrial corporations and other nonbank investors ('all
other investors”) have augmented their holdings substantially
in the last four years, especially since the rise in the yield on
bills beginning with the middle of 1947. (The data shown in
the chart for "all other investors” include the holdings of those
banks not covered by the regular series of weekly reporting
CONTENTS
Money Market in July.......................................... . 105
Britain’s International Economic Position. . . . 108
Security Markets................................................... . 110
Treasury Financing in the Fiscal Year 1951.. . 114
Electric Power Output........................................

117

Department Store Trade...................................... . 119

MONTHLY REVIEW, AUGUST 1951

106

and made comparable gains, while the rise in prices of partially
tax-exempt bonds was somewhat smaller. Prices of the latter
issues improved moderately late in the month, while restricted
bonds drifted downward. As indicated in the review of the
security markets, which appears at a later point in this Revieiv,
the improvement in bond prices was also probably influenced
by an increase in personal savings at savings banks and other
institutions, by some reduction in the backlog of advance com­
mitments of financial institutions, and by a lull in inflationary
developments within the economy. Perhaps the most potent
market factor making for a better tone and increased confidence
among investors in Government securities was the sharp cur­
tailment in the offerings of restricted issues that had formerly
been made by the life insurance companies. Thus, the improve­
ment of restricted bond prices occurred in a rather thin market
and was related chiefly to a reduction in selling pressure. There
was evidence of a slight increase in demand, which probably
came principally from security dealers adding to their positions
member banks; the bill holdings of such banks have increased in restricted Government bonds.
only moderately in comparison with the rise in the holdings of
M e m b e r B a n k R eserves
nonbank investors.) As of July 18, 1951 (the latest date
An uneven
gains and
plotted in the chart), bill holdings of this “all other” group reserves duringgeographic distribution of responsible losses of
the past month was chiefly
for tight
totaled 11.1 billion dollars, or nearly 80 per cent of total out­ money conditions in New York and ease in the positions of
standing bill issues (14 billion dollars), as compared with less out-of-town banks. For the banking system as a whole, how­
than 600 million dollars of bills held by this group at the low
market transactions
a
point toward the close of May 1947, when "all other” holdings ever, moneyduring the four weeksexercised but25, minor effect
on reserves
ended July as shown in
were 4 per cent of a larger total. The bill holdings of the the accompanying table. Transactions tending to provide banks
Federal Reserve Banks have changed in the opposite direction. with additional funds were offset by those tending to absorb
For two years after World War II, owing to the low rate of re­
One
tending to ease reserve
particu­
turn on bills and the System’s readiness to purchase at supported reserves.the firstfactorweeks, was the decline in positions, reserves,
larly in
two
required
prices, there was a strong tendency for bills to gravitate to the resulting from a decrease of deposits attending substantial
Reserve Banks. Early in 1947, the System held about 90 per commercial bank sales of Government securities to nonbank
cent of the 17 billion dollars of bills then outstanding. By investors.
July 18, 1951, the Systems holdings had declined to less than
Federal Reserve credit outstanding increased substantially in
600 million dollars.
the first three statement weeks of July and accounted for most
Another public debt transaction during the past month
Weekly Changes in Factors Tending to Increase or Decrease
was the System’s conversion, in the week ended July 11, of 1
Member Bank Reserves, July 1951
(In millions of dollars; (-j-) denotes increase,
billion dollars of its holdings of 234 per cent nonmarketable
(— ) decrease in excess reserves)
bonds into five-year, IV2 per cent marketable Treasury notes
\
Four
Statement weeks ended
maturing April 1, 1956. The nonmarketable securities had
weeks
Factor
ended
originally been acquired on April 1, 1951 in exchange for
July 3 July 11 July 18 July 25 July 25
restricted Treasury bonds of 1967-72. It was indicated at the Routine transactions
operations*.........................
81
17
+181
time that this exchange of nonmarketable bonds for notes was TreasuryReserve float......................... -+242 -+127 -3 5 9 -2 9 6 -+ 76
Federal
40
+285
Currency in circulation...................... -3 4 7
+ 112
+ 55
-1 0 5
+ 75
a step toward a better balance in the maturity distribution of Gold and foreign account.................. + 93 - 54 + 44 - 12 + 71
Other deposits, etc............................. + 44 - 42
-1 1 7
-111
+ 4
the System’s open market account.
8 + 5 - 36 - 47 - 86
Total..................................... The recovery in prices of restricted and other Treasury
transactions
bonds, which had begun toward the close of June, continued Federal Reserve securities....................... +134 +115 - 11 - 24 +214
Government
Discounts and advances.................... - 39
+ 55
-2 2 1
-1 4 2
+ 63
and gathered momentum in July despite the tightness in the
Total..................................... + 95
+170
+ 52
-2 4 5
+ 72
money market. From their low point near the end of June,
+ 87
+175
- 14
+ 16 -2 9 2
restricted issues rose to a peak on July 23 with gains ranging Effect of change in required reserves....... + 34 +137 + 10
+181
from % to l 1^ ; the bonds which become eligible for Excess reserves......................................... + 1 2 1 +312 + 26 -2 9 2 +167
bank investment during 1952 showed the greater increases.
currency and cash.
Medium and long-term eligible bond prices moved in sympathy * Includes changes in Treasuryfigures do not necessarily add to totals.
Note: Because of rounding,
Ownership of Treasury Bills
(A s of last W ednesday of month*)

* Latest figures are for July 18, 1951.
# W eekly reporting banks.
t New series based on revised list of reporting banks.




FEDERAL RESERVE BANK OF NEW Y ORK

107

tion of about 180 million dollars in the commercial, industrial,
and agricultural loans of the weekly reporting member banks
in the four weeks ended July 18. On the latter date, total
business loans (19 billion dollars) were 225 million dollars
below the peak reached on April 11 of this year. However,
they were still 1.2 billion above the level at the end of 1950.
Almost 90 per cent of the 180 million dollar decrease in busi­
ness borrowing during the four weeks ended July 18 repre­
sented net repayments of loans at banks outside New York City.
Liquidation of business loans at the New York City banks was
but 22 million dollars. Data available for the New York
banks for the week ended July 25 showed that net repayments
came to 36 million dollars in this final statement week of
the month.
Judging from data collected from approximately 220 of the
larger weekly reporting member banks at the request of the
Voluntary Credit Restraint Committee, the recent decline in
business loans represents a liquidation of borrowing by non­
defense industries, partly offset by new borrowing in the
defense and defense-supporting industries. Thus, in recent
weeks bank loans to food, liquor, and tobacco manufacturing
companies, commodity dealers, sales finance companies, and
wholesale and retail merchants have shown a tendency to
decline. Manufacturers of metal and metal products and of
textile and textile products, public utility corporations, and
miscellaneous manufacturing and mining companies, on the
other hand, have stepped up their borrowing, although not in
sufficient quantity to offset the contraction in the other lines
(a contraction which may have been slowed up by the accumu­
lation of top-heavy inventories in some industries following
the abatement of the consumer buying waves of last summer
and winter).
The data collected for the Voluntary Credit Restraint Com­
mittee include only larger loans in order to limit the statistical
burden on the reporting banks. In general, reported loans
represent more than three quarters of the total business loan
activity of the 220 reporting banks; and the total business
loans of these banks are in turn about three quarters of the
total for all commercial banks in the United States. The recent
reports show clearly a downward trend of nondefense loans
and a constant increase in defense and defense-supporting loans.
In the four weeks ended July 18, reported loans of the 220
banks for financing defense contracts totaled over 75 million
dollars. Those financing defense-supporting activities amounted
to 55 million dollars, almost all of which provided funds for
plant and equipment expenditures and presumably represented
in some measure temporary borrowing pending the sale of
long-term securities in the open market. In this same period,
reported loans for inventory and working capital purposes in
B u sin e ss L o a n s
nondefense activities declined 225 million dollars while non­
Although business borrowing from the commercial banks defense loans for plant and equipment purposes, also probably
does not customarily decline during July, there was a reduc­ representing temporary accommodation, rose 10 million dollars.

of the 460 million dollar increase in excess reserves in this
period. This expansion of Federal Reserve credit reflected
largely the means by which the larger city banks, and particu­
larly those in New York City, adjusted their reserve positions in
response to substantial losses of funds arising principally from
Treasury operations. In the week ended July 25, much of the
earlier rise in aggregate excess reserves was drawn down as
the banks repaid advances at the Reserve Banks.
Treasury disbursements in the New York area were con­
siderably smaller than receipts from the New York money
market, and consequently there was a substantial shift of funds
out of New York City to other parts of the country. Much
of the increase in Treasury bills was purchased by the customers
of New York banks. In addition, more than 40 per cent of
the Treasury’s heavy withdrawals from its “X” balances during
July came from the New York City banks, which had received
a very considerable share of these balances when they were
being built up. The "X” balances arose, of course, from the
recently adopted method of depositing large quarterly income
tax checks of corporations and individuals in the banks upon
which these checks were drawn, and there was inevitably a
concentration of such tax deposits in the large City banks
serving depositors with sizable tax liabilities. It is illustrative
that data available for the Second District as a whole show
that this District accounted for 45 per cent of all "X” balances
throughout the country on June 30, 1951, as against only 25
per cent of the Treasury’s regular Tax and Loan deposits.
As a result of the losses of funds sustained from Treasury
and other transactions, the New York City banks were com­
pelled to borrow from the Reserve Bank and in the Federal
funds market in the three weeks ended July 18. Reserve posi­
tions of banks in other parts of the country, on the other hand,
were eased, and out-of-town institutions were able to reduce
part of their indebtedness to the Reserve Banks and to increase
their excess reserves. They were also able, through the medium
of the Federal funds market, to sell some of their gains of funds
to New York City institutions. In the week ended July 25,
the New York City banks continued to lose funds on Treasury
account, particularly as a result of net purchases of new
Treasury bills by their customers, but the loss of reserves was
more than offset by an inflow of funds from other parts of the
country. The City banks used these added funds, and also
drew down their excess reserves (which were at a temporarily
high level at the close of the preceding week), to repay the
major part of their borrowings from the Reserve Bank. Thus,
most of the decline for this final week in the total borrowings
of member banks represented the operations of the New York
City banks. Banks outside of New York City met the transfer
of funds to New York by reducing their excess reserves.




108

MONTHLY REVIEW, AUGUST 1951

BRITAIN’S INTERNATIONAL ECONOMIC POSITION

Chancellor of the Exchequer Gaitskell’s recent announce­
ment that Britain’s gold and dollar reserves had increased by
only 109 million dollars during the second quarter of 1951, as
compared with an increase of 458 million in January-March,1
has confirmed earlier official predictions that the rate of ac­
cumulation of reserves by the United Kingdom would prob­
ably fall off sharply during 1951. Since the beginning of the
year, Britain’s over-all trading position has also become increas­
ingly strained, as receipts from exports have lagged behind
swiftly rising import costs. According to Mr. Gaitskell, the less
favorable influences contributing to this adverse shift in
Britain’s international economic position may well continue
during the next few months.
The sweeping changes in Britain’s international economic
position since Korea reflect the extreme sensitivity of the
British economy to variations in the international political and
economic climate. Situated at a strategic crossroad of world
trade and finance, the United Kingdom functions not only as
a major producer and trader on its own account but also as the
banker for the very large group of countries constituting the
sterling area. In the latter role Britain serves as a clearing
house for the overseas members of the sterling area, who settle
their international receipts and payments through their sterling
reserve balances in London. In the case of dollar transactions,
the United Kingdom undertakes to provide, in exchange for
sterling, the dollars required by these countries; the latter, for
their part, deposit their current acquisitions of gold and dollars
in London in exchange for credits to their sterling balances.
The British gold and dollar position accordingly depends not
only upon the net dollar balance of the United Kingdom itself
but also upon the gold and dollar surpluses or deficits of Aus­
tralia, India, Malaya, and the other overseas members of the
sterling area.
Prior to the war, the dollar accounts of the sterling area
were characterized by a triangular pattern of payments under
which the usual gold and dollar surpluses of Overseas-SterlingArea countries such as South Africa and Malaya served to
finance the more or less normal deficits of the United King­
dom with the dollar countries. The triangle was completed
by a British balance-of-payments surplus with the OverseasSterling-Area countries. This pattern of payments was dis­
rupted by the war, thereby seriously complicating Britain’s
efforts to regain dollar viability. Although the dollar exports
of the Overseas-Sterling-Area countries quickly recovered, their
dollar imports rose even more swiftly, with the result that their
traditional dollar surpluses shifted to heavy dollar deficits.
This shift in the dollar balance of payments of the Overseas1 Figures include ERP aid to the United Kingdom and other sterling
countries of 98 million dollars in the first quarter and 55 million in
the second quarter.




Sterling-Area countries was one of the major causes of the
British dollar crisis that culminated in the devaluation of
sterling in September 1949.
Since the devaluation of the pound, the dollar balance of
payments of the sterling area has passed through two distinct
phases, the dividing line between them being marked by the
outbreak of hostilities in Korea. In the first phase, from deval­
uation to Korea, the sterling area not only succeeded in closing
the gap in its dollar accounts but did so without any major
increase in its dollar exports. The adjustment, instead, was
effected primarily by dollar-import cuts, initiated by admin­
istrative restrictions in the midsummer of 1949, and subse­
quently reinforced strongly by the concerted devaluation of
the sterling area currencies. As a result, the triangular pattern
of settlements that had been characteristic of the prewar period
reappeared. The Overseas Sterling Area reverted to its tradi­
tional dollar surplus, which during the first six months of 1950
more than offset the much reduced deficits of the United
Kingdom itself with the dollar area and of the entire sterling
area with the nondollar countries.
Having thus regained a considerable measure of dollar via­
bility before Korea, the sterling area has been able to devote
the huge increases in its dollar-export earnings during the
past year to strengthening its gold and dollar reserve position.
In this second phase, the predominant development has been
the spectacular rise in the value of raw material exports of the
Overseas-Sterling-Area countries, their surplus with the dollar
area increasing, as a result, to record levels during the winter
months of 1950-51. Simultaneously, the more or less normal
deficit of the United Kingdom with the dollar area became
converted into a surplus of 124 million dollars in the second
half of 1950. While an expansion of British dollar exports
contributed to this surplus, an even more important factor
seems to have been an influx of dollar funds probably attribu­
table both to speculation during the autumn on a possible
appreciation of the pound and to forward purchases by Ameri­
can importers who anticipated increases in sterling area com­
modity prices. Finally, in contrast to Britain’s initial concern
lest she should lose gold to the European Payments Union, the
sterling area as a whole actually earned an EPU surplus of 635
million dollars’ equivalent in the first nine months of the
union’s operations, and Britain received 89 million dollars from
the EPU during that period. Favored by this unusual com­
bination of circumstances, the gold and dollar surplus of the
sterling area as a whole rose remarkably last winter, running
at an annual rate of 1,516 million dollars during the six
months from October 1950 to March 1951. Indeed the re­
covery of the sterling areas dollar position was so rapid as to
permit the suspension of Marshall aid to the United Kingdom
as of the beginning of 1951, eighteen months in advance of the
scheduled termination date.

109

FEDERAL RESERVE BANK OF NEW YORK

This swift enlargement of Britain’s reserves could not be
maintained indefinitely, and for some time past there have
been indications that the sterling area was moving toward
a more balanced position in its dollar accounts. During
the second quarter, the dollar earnings of the OverseasSterling-Area countries apparently have fallen off sharply.
This decline is partly attributable to seasonal factors, it is true,
but the recent recession in the prices of certain raw material
exports of the Overseas Sterling Area, coupled with the
curtailment of United States stockpiling and private inventory
accumulation, may have exerted an even greater influence.
Furthermore, the dollar imports of both the United Kingdom
and the Overseas Sterling Area have risen substantially in
recent months. Finally, Britain’s dollar receipts from the
EPU in settlement of the sterling area’s payments surplus with
the OEEC countries were only 17 million in April-June, com­
pared with 76 million in the previous quarter. As a result of
these and other unfavorable influences, the dollar surplus of the
sterling area as a whole fell off abruptly during the second
quarter of this year, as shown in the table.
Although the strength of sterling as an international cur­
rency has been greatly reinforced by the 1,445 million dollar
addition to Britain’s reserves since hostilities began in Korea,
it should be noted that the United Kingdom has incurred in
the process a very substantial increase in its sterling liabilities.
As indicated above, the increase in Britain’s reserves has been
primarily attributable (apart from ERP assistance) to the
gold and dollar surplus of the Overseas-Sterling-Area countries,
which have accepted, in exchange for this surplus, credits to
their sterling balances in London. In addition, the Overseas
Sterling Area’s sterling balances were augmented during 1950
by net payments of 179 million pounds from countries outside
the dollar and sterling areas. Mainly as a result of these trans­
actions, the sterling balances of the Overseas Sterling Area
increased last year by almost 400 million pounds in spite of
the 225 million pound surplus in the current account of
Britain’s balance of payments with her sterling area partners.
It seems probable, moreover, that there has been a further
substantial growth in the Overseas Sterling Area’s sterling
balances in the first half of 1951. This striking growth in
Britain’s sterling liabilities may well lead to heavier demands
upon the United Kingdom’s export capacity, already seriously
strained, or alternatively to heavier conversion of balances for
purchases in dollar markets.
Even more serious, the great expansion in world, and par­
ticularly United States, demand for primary commodities has
brought in its train a rapid deterioration in Britain’s terms of
trade. Prices of Britain’s imports, which already had moved
sharply upward after devaluation, increased another 24 per
cent during 1950, most of the rise being attributable to a
46 per cent increase in raw material prices. Although Britain’s
internal price level has been sheltered against much of this




Sterling Area Net Gold and Dollar Surplus ( + ) or Deficit (— )*
Quarter ended
1949-December.............................................
1950-March...................................................
June......................................................
September.............................................
December.............................................
1951-March...................................................
June......................................................

Millions of dollars
— 31
+ 40
+180
+187
+398
+360
+ 54

* Excludes ERP and other dollar assistance to the United Kingdom and Ireland.
Source: United Kingdom Balance of Payments 19^6 to 1950 (Cmd. 8201),page 25,
and The Times (London), dated July 5, 1951.

external pressure by government subsidies, the cost-of-living
indicators began to move upward after warfare began in Korea,
and wage rates, which had been almost steady since devaluation,
also rose significantly. Export prices have increased by only
a fraction of the rise in import prices, and Britain therefore
has had to export an increasing volume of goods in order
to pay for even the existing volume of imports. Between
1949 and 1950 the index of the physical volume of British
imports remained steady at 114 (1947—100), but their cost
increased by 400 million pounds to 2,374 million. Despite a
16 per cent rise in the quantity of Britain’s exports, the
merchandise trade balance remained unchanged between the
two years, and it was only because of a doubling of net earn­
ings on "invisible” items that the country’s balance-of-payments
surplus on current account increased from 30 million pounds
in 1949 to 229 million last year.
The deterioration in Britain’s terms of trade continued dur­
ing the early months of 1951. By May, import prices were
42 per cent higher than the 1950 average, while export prices
had increased only 18 per cent. Such price increases had been
anticipated by the government, whose Economic Survey for
1951 had indicated that, although the volume of Britain’s 1951
imports would increase only about 8 per cent over 1950, their
cost would rise by some 900 million pounds to 3,300 million
pounds (including strategic stockpiling), or by almost 40 per
cent. The Survey, on the other hand, estimated that exports
would at best increase only to 2,750 million this year, as the
result of an average increase over 1950 of 18 per cent in prices
and 5 per cent in volume. The prospective 400 million pound
increase in the merchandise trade deficit was expected to be
offset to only a small extent by a rise of net "invisible” earn­
ings from 382 million to 450 million, and as a consequence
the government estimated that Britain’s balance of payments
on current account might show a 100 million deficit in 1951.
Although a deterioration in Britain’s balance-of-payments
position of more than 300 million pounds between 1950 and
1951 has thus been allowed for, it is still a question whether
the government’s forecast will not prove over-optimistic.
Imports, it is true, were running fairly close to the govern­
ment’s forecast during January-June. Commodity prices, more­
over, have recently shown a downward tendency, which has
retarded the rise in Britain’s import prices. At the same time,
export prices have continued to rise with the consequence that

110

MONTHLY REVIEW, AUGUST 1951

in June there were signs that the deterioration of Britain’s
terms of trade might at least temporarily be halted. On the
other hand, Mr. Gaitskell estimated late in July that, despite
the fall in primary commodity prices, British imports might
exceed the government’s original estimate for 1951 by well over
100 million pounds. Moreover, the nationalization of the
Anglo-Iranian Oil Company by Iran has injected an element of
uncertainty into the governments forecast of net ‘'invisible”
earnings and in his recent statement to Parliament the Chancel­
lor estimated that 1951 net earnings might reach only 400 mil­
lion pounds. In addition, the value of exports in the first half of
this year was running at an annual rate somewhat lower than
the original target figure, though their volume, during JanuaryMay at least, was about 4 per cent higher than the 1950 aver­
age. Mr. Gaitskell has, therefore, called upon Britain’s export­
ers to raise their sales target to 1,600 million pounds in the
second half of this year, compared with the 1,300 million
achieved in January-June.
The prospects for achieving such an increase in exports
remain obscure. A strong buyers’ market seems to exist, it is
true, for a considerable range of British exports, despite the
rise in their prices during the early months of 1951. Whether
the new export target can be achieved would seem to depend
primarily on the ability of British industry to expand output,
and of the government to curtail domestic expenditure through

its fiscal and monetary policies as well as its direct controls.
During January-May, indeed, industrial production reached
the government’s target figure, and raw material supplies have
recently become more plentiful. On the other hand, private
consumption expenditures seem to be running somewhat
above the corresponding 1950 levels, and the full impact of
the expanded rearmament program has yet to be felt by the
domestic economy. As defense production gets into full swing,
it would, therefore, not be surprising if the country experienced
difficulty in expanding exports to the required level.
The deterioration of Britain’s terms of trade, the trans­
formation of her over-all balance of payments from a sur­
plus to a deficit, and the large rise in her external sterling
debt, however, should not obscure the elements of strength in
the position of sterling as an international currency. Over
much of the nonsterling world, sterling remains relatively
scarce, and the British Government has consequently found it
expedient to relax further its exchange controls, thus increasing
sterlings usefulness as an international currency. Moreover,
the gold and dollar reserves are now about 60 per cent higher
than a year ago and almost three times as high as at the time
of devaluation. Finally, the pressure of rearmament on these
reserves is being cushioned by continuing United States assist­
ance under the Mutual Defense Assistance Program.

SECURITY MARKETS
Extraordinarily large capital expenditures of nonfinancial
business corporations for the enlargement of defense and other
facilities during the first seven months of 1951 made heavy
demands on the capital markets. These demands were par­
ticularly large in spite of the substantial volume of "internal”
funds available to corporations from their operations, as a result
of the high level of undistributed corporate profits and unusu­
ally large depreciation allowances related to the accelerated
amortization of defense facilities granted by the Federal Gov­
ernment. According to preliminary estimates, flotations of new
corporate security issues during the first seven months of this
year promised to be higher than for any comparable period
since 1929. Financing of a large volume of State and local
government public works and other public construction and
residential construction added to the pressure on the capital
market. As in the latter half of 1950, the demand for long­
term and permanent capital pressed heavily upon the supply
although some evidence of increased personal savings appeared
in the late spring and early summer months. Beginning in
March, initial steps were taken toward eliminating some de­
mands of a particularly inflationary character through the pro­
gram of voluntary restraint undertaken by the investment
bankers.
Not only were the demands on the capital market, including




the new issue market, unusually heavy during the first seven
months of 1951, but the supply of available funds was being
restricted. Following an accord between the Treasury and
the Federal Reserve System, published March 4, the System
was enabled to reduce the release of its own funds into the
Government security market. The resulting curtailment of
the volume of Federal Reserve credit, which had hitherto been
made available indirectly for financing new corporate security
issues, meant that the capital market was now more closely
responsive to underlying supply and demand conditions.
Demands on the market had to be satisfied more largely out
of the savings made available to it. Institutional investors,
which had made advance commitments in excess of the funds
that were to become available to them, found they could
liquidate long-term Treasury bonds to meet their excess com­
mitments only at a loss.
The combination of heavier demand for long-term funds and
more effective restraints on the supply was reflected in declines
in prices of both new and outstanding bond issues of all types.
Toward the end of the period under review, however, bond
prices tended to recover somewhat, reflecting perhaps the
influence of increased personal saving and a working down
of the advance commitments of financial institutions. Begin­
ning in May the higher cost of borrowed funds may have in­

111

FEDERAL RESERVE BANK OF NEW YORK

duced some hesitation in the upward movement of common
stock prices. Contributing to this hesitancy was the modifica­
tion of inflationary pressures on the economy following the
waves of consumer scare buying that had occurred last summer
and in midwinter. A consequent accumulation of substantial
business inventories, declining wholesale commodity prices,
and developments in the Korean war leading to cease-fire
negotiations (portending, in the opinion of many stock invest­
ors, some let-down in the rearmament program) were the
major factors bringing about some liquidation in the stock
market during May and June.

Yields on Long-Term Bonds and Stocks, 1946-51
Percent

P e rc e n t

Bo n d M ar k e t

The announcement of the Treasury-Federal Reserve “accord”
on March 4 was followed by a considerable downward adjust­
ment in bond prices. Between March and the closing days of
June, prices of most long-term restricted bond issues 15 years
and over (including the “bank” IVzs of September 1967-72)
declined, with a concomitant increase of about V4 of 1 per cent
in yield. The rise in yields on top quality corporate (Aaa and
Aa) bonds over this same period was about 0.30 per cent, while
the average yield on the A and Baa corporate bonds rose about
0.35 of one per cent, and that on high-grade municipal issues
about 0.60 per cent. As compared with yields prevailing just
before the invasion of South Korea, however, yields on Baa
corporate and on high-grade municipal bonds showed the
smallest increases. These changes are summarized in the table
below; changes in yields over a longer period of time are
shown in the accompanying chart. Reflecting perhaps the in­
crease in personal savings or a better balance between the
demand for and supply of funds, bond yields declined slightly
in the first three weeks of July.
As a result of the decline in bond prices, particularly GovY ield s on L o n g -T e r m B onds b y C lass o f B onds
for R ecen t Selected D ates
(In per cen t)
Change

Class^of bond

March 2,
June 23,
1950 (“ Pre- 1951 (“ PreKorea” )
Accord” )

June 27,
1951

March 2,
1951 to
June 27,
1951

June 23,
1950 to
June 27,
1951

Government
T a xable T reasu ry
b o n d s , fifte e n
years or more___

2 .3 4

2 .4 1

2.66

+ 0 .2 5

+ 0 .3 2

2 .6 1
2 .6 9
2 .8 9
3 .2 9

2 .6 9
2 .7 5
2 .9 1
3 .1 8

2 .9 9
3 .0 6
3 .2 6
3 .5 5

+ 0 .3 0
+ 0 .3 1
+ 0 .3 5
+ 0 .3 7

+ 0 .3 8
+ 0 .3 7
+ 0 .3 7
+ 0 .2 6

2 .0 9
4 .3 5

1 .6 5
4 .0 2

2 .2 6
5 .5 1

+ 0 .6 1
+ 1 .4 9

+ 0 .1 7
+ 1 .1 6

Corporation
A a a ..............................
A a .................................
A ...................................
B a a ..............................

Municipal
Actual yield..............
Taxable equivalent*

* Equivalent yield on taxable bonds based on combined normal and surtax rates
payable by taxpayers filing joint returns on taxable income of $50,000. Yield
for June 23, 1950 is based on combined normal and surtax rates under the
Revenue Act of 1948, others on rates in force under the Revenue Act of 1950.
Source: Government, Board of Governors of the Federal Reserve System; corpor­
ation, M oody’s Investors Service; municipal, Standard & Poor’s Corporation.




I-

-1

ta x a b le bonds *

o!_______ !_______ i ______ i
_
_______ i ______ i ______ lo
_
_
1946

1947

1948

1949

1950

1951

* Fifteen years and over.
Source: U . S. Government bonds, Treasury Department; 15 high-grade non­
callable preferred stocks and municipal bonds, Standard & Poor’s Corporation;
Aaa corporate bonds, Baa corporate bonds, and 200 common stocks, M oody’ s
Investors Service. For common stocks, latest figure is for end of June 1 9 5 1 ;
for all other data, July 1951 (estimated by the Federal Reserve Bank of
New Y o rk ).

ernment bond prices, it became much more difficult and costly
for institutions to liquidate long-term bonds in order to meet
the heavy demands for their funds. During a considerable
part of the last four months, sales of restricted Government
bonds could be made only at losses of 3 per cent or more of
the par value of bonds sold, and there were few buyers. As
a result, a number of institutions, which had made forward
commitments in excess of funds becoming available currently,
began to offer for sale in the market corporate bonds which
they had held for some period of time and which they could
still sell at some profit or at only a slight loss. It is reported
in the market that some issues were sold which had originally
been placed privately with a few investors.
The restriction of the volume of credit in the market had
perhaps its severest impact on the municipal bond market.
Over the four months ended in June, high-grade municipal
bond yields lost all the sizable gains that had been made in
the eight months following the invasion o f South Korea. The
increase in the yield on high-grade, tax-free municipal obliga­
tions was even greater than seems apparent, since Federal tax
rates on personal and corporate incomes were raised in 1950.
Actually, as the table shows, the equivalent yield on taxable
bonds for individual taxpayers in the $50,000 income bracket
(filing joint reairns) was more than l l$ per cent higher at
/
the end of June 1951 than the “pre-Korean” yield.
One major factor in the marked decline in municipal bond
prices (rise in yields) was the drying up of commercial bank
funds after Federal Reserve credit became restricted. Sales
of most of the banks* holdings of Government securities could
be made only at a loss and many banks were reluctant to obtain

MONTHLY REVIEW, AUGUST 1951

112

added funds through sales under these circumstances. Thus for
a time, the banks, which have been the major class of investors
in municipal securities, practically withdrew from the mar­
ket. Furthermore, short-term municipal issues, which usually
comprise the bulk of the banks’ purchases, had to compete with
rising and attractive yields on short-term Treasury securities
and corporate issues, such as the near-term maturities of rail­
road equipment trust certificates.
T h e St o c k M a r k e t

The decline in bond prices may have contributed to the
reaction in the stock market, and, after a rise of almost two
years from mid-June 1949 to early May 1951, stock prices
moved irregularly lower in a narrow range until early in
July. Prices of Standard and Poors broad index of 416 issues
fell about 6 per cent from the May 9, 1951 peak of 179.3
(1935-39= 100) to 169.0 two weeks later on May 23, and
were at this same lower level on July 3. By July 25 prices had
recovered to 177.0, approximately 1 per cent below the 1951
peak. The latter was about two-thirds higher than the midJune 1949 low and 10 per cent above the figure for the end
of 1950.
Public participation in the stock market tended to recede
during the period of irregularity in price movements. The
volume of trading on the New York Stock Exchange between
May 9 and July 18 averaged 1,300,000 shares daily, about
500,000 shares per day less than in the preceding part of the
year. Through the middle of July 1951 turnover of shares was
5 per cent below the same period of last year. Some portion of
the liquidation came from margin traders, as debit balances
of customers of New York Stock Exchange member firms
declined about 135 million dollars, from 1,410 million at the
end of January 1951 to 1,275 million at the end of June. Free
credit balances of customers fell about 110 million dollars to
840 million at the end of June, indicating some withdrawals
of funds by investors, perhaps to take advantage of the more
attractive yields that had become available in the bond market.
Among the factors inducing the increasing caution with
which investors and traders approached the stock market after
the early part of May were the apparent relaxation of infla­
tionary pressures, expectations of reduced corporate profits
( owing, in part, to a reduction in, or elimination of, inventory
profits and in part to higher Federal corporate income taxes)
and apprehensions of a possible resultant decline in dividend
payments. In general, higher-grade stocks resisted the down­
ward movement most successfully, while lower-priced shares
showed the greatest markdowns. Lower-priced shares along
with the railroad stocks were the only major groups whose
prices were at or below quotations prevailing toward the close
of 1950. The railroad shares fell about 13 per cent from the
May 9 high point, considerably more than the average decline
for the market as a whole. Disappointing first-quarter earnings
reports in view of the large volume of traffic handled, a rejec­




tion of requested increases in freight rates, and a general feel­
ing among investors that a slowdown of the rearmament pro­
gram would follow cease-fire negotiations in Korea and would
have an adverse effect on carloadings were principal factors in
the decline in railroad share prices. The utility shares, on the
other hand, which had been considered a poor inflation hedge
and had risen only 15 per cent during the preceding upswing
showed great resistance to a downward movement, and prices
of these issues were at their high points toward the close
of July.
N

ew

I ssues

Financing of record-breaking plant and equipment ex­
penditures brought a very sharp expansion in the offerings
of new bonds and stocks. It is estimated that securities floated
for new capital purposes aggregated 3.8 billion dollars in the
first seven months of 1951, which if realized will be the largest
total on record with the exception of 1929, and more than onethird greater than the flotation in the corresponding months of
1950 (2.8 billion dollars). Reflecting especially heavy capital
outlays for new manufacturing facilities, related in considerable
part to the defense program, new securities offered by manu­
facturing corporations increased most rapidly, as shown in the
accompanying chart. Offerings of manufacturing corporations
in the first seven months of this year exceeded those for the en­
tire year of 1950. New public utility issues rose less rapidly,
reflecting the greater stability of that industry’s capital expan­
sion program. Despite higher capital disbursements, the rail­
roads actually floated 30 per cent less securities than last year.
Part of these capital expenditures were financed through the
banks and other institutions on conditional sales contracts.
W it h the obvious exception of refunding issues, which fell

Corporate Security Issues for New Capital by Industry
(M onthly averages; half-year periods from 1948, and July 1951)

Source: Commercial and Financial Chronicle, classified by industry by the
Board of Governors of the Federal Reserve System. First half of 1951 partly
estimated by the Board of Governors; July 1951 estimated by the Federal
Reserve Bank of New York.

FEDERAL RESERVE BANK OF NEW YORK

by about 70 per cent from last year’s total, declining bond prices
failed to reduce the volume of corporate financing. The volume
of bond issues was almost 50 per cent higher in the first seven
months of 1951 than in the same period last year. Decreased
prices, however, did increase the difficulties of marketing new
securities. Higher yields had to be conceded in order to move
new bond issues, and the differential in yields between new and
outstanding bond issues has widened considerably since
February. Thus, the somewhat higher yields, as compared
with seasoned issues, customarily offered on new issues as an
inducement to investors to buy, had to be increased. The spread
between large new and outstanding corporate bond issues rose
to as much as 20 basis-points in the second quarter of 1951,
more than three times the average spread for the final quarter
of 1950. There were also numerous instances in which new
issues had to be sold by underwriters at large concessions from
original offering prices. In addition, a number of new issues
were postponed or canceled. In most instances, postponement
of new long-term financing that had already reached the
issuing stage was only temporary, with some corporations
seeking short-term credit accommodation from the banks,
pending a stabilization of bond market conditions. In a few
cases, fully prepared capital projects were suspended altogether.
N o data can be assembled, of course, for the borrowing projects
which were only in the process of initial formulation, and
which have since been postponed or suspended. With the
improvement in prices of outstanding bonds in July, the new
issue market developed a better tone. New flotations of cor­
porate securities (and municipal issues as well) were received
favorably by investors.
The fact that new issues, particularly bond issues, continued
to be offered in large volume even though prices were declin­
ing during most of 1951 is attributable not alone to the huge
corporate capital expenditures programmed for the year, but
also may be traced to some extent to the fact that much cur­
rent corporate financing had been privately arranged for with
life insurance companies early this year or in the closing
months of last year, and was not affected by subsequent interestrate developments since the terms of financing are usually set
at the time such arrangements are made. As a consequence,
new privately placed issues during the first half of 1951 ac­
counted for 40 per cent of total corporate financing, as against
30 per cent in the corresponding period of 1950.
For those new issues not covered by commitments, the de­
terrent effect of the increased borrowing cost for new projects
may have been more than offset by the high Federal tax
on corporate incomes, including the excess profits tax. Under
the new excess profits tax, in certain instances, the reduction
in taxes resulting from increased borrowing may offset, or even
exceed, the interest charges on the new money.
Lenders have apparently been satisfied to obtain higher rates
for their funds without seeking more restrictive terms from
corporations, except for insisting upon higher call prices to




113

minimize the calling of securities (and their refunding at
lower rates) in the event of an upturn in the bond market at
some future time. New bond issues in the last three months
have generally carried the same maturities as in preceding
months, and there appears to have been no acceleration of
amortization payments (which might have been a further de­
terrent to new financing). In addition, a large proportion of
new bond offerings represented the financing of defense facili­
ties which had to be effected despite increases in interest costs.
Nevertheless, it was more difficult to obtain new money
where borrowers had not previously arranged for commitments
from institutional investors. As already noted, the restriction
of Federal Reserve credit and declining bond prices made it
more difficult and costly for institutions which had not covered
their excess commitments by accumulating Treasury bills, other
short-term securities, and extra cash, to dispose of long-term
Treasury bonds to meet the heavy demands on their funds.
Thus, corporations which had not obtained commitments for
financing in advance found that money was not readily avail­
able during the second quarter of the year (although some
improvement in availability took place in July). The chief
source of uncommitted funds was the pension funds, which
could at best provide only a relatively small volume of funds
over any short period of time. Some of the smaller life in­
surance companies which do not have ready access to private
placements were also in a position to take on new, publicly o f­
fered corporate bonds, but again, the aggregate volume of their
purchases was not large.
The tightness in the bond market may have been responsible
for some part of the increase in corporate issues of new com­
mon stocks that took place in the second quarter of the year.
However, that period is usually one of seasonal increase in new
stock offerings, and the fact that stock prices were high, having
reached a new peak in May, also stimulated equity capital
financing. Much of the new stock financing, furthermore, con­
sisted of public utility issues undertaken by gas and electric
utility companies which had recently increased their flotations
of bond issues and were therefore meeting additional needs
for funds through stock offerings to maintain an appropriate
balance in their capital structures as between debt and equity
issues. One further stimulant to the sale of new common
stock issues is the fact that stockholders are permitted under
Regulations T and U to subscribe for and carry them at the
low margin of 25 per cent, thus providing a substantial
yield on funds invested in such issues. This has been con­
sidered an important factor in the success of such stable divi­
dend issues as those of the public utility corporations.
The combined volume of new preferred and common stock
issues (estimated at 839 million dollars) in the seven months
of this year was only 7 per cent higher than in the correspond­
ing period of 1950. However, common stock issues alone in
January through July of this year exceeded the corresponding
total for the first seven months of 1950 by more than two

114

MONTHLY REVIEW, AUGUST 1951

fifths, and just about equaled the total for the entire year of
1950. Flotations of new preferred stocks in the first seven
months of 1951, on the other hand, were considerably less
than for the same period of last year, reflecting a drop of eight
per cent in the average prices of better-grade preferred stocks
since the end of 1950, in sympathy with the decline in prices
of high-grade bonds.
Rising bond yields may have had some effect on new muni­
cipal financing, and there have been some rejections of pro­
posed offerings as a result of the voluntary credit restraint
program. The volume of State and local government securities
for new capital purposes was estimated at 1.7 billion dollars
for the first seven months of 1951, 500 million, or some­
what less than one fourth, below the 2.2 billion dollars
floated in the corresponding period of 1950. This decline in
new offerings came in the face of an expansion of State and
local public construction of about one sixth. More than one

half of the decrease in new issues, however, was due princi­
pally to the fact that last year s total included one especially
large bonus issue. As a partial offset, however, this year’s total
included the first offering of 171 million dollars of local pub­
lic housing bonds secured by a pledge of annual contributions
of the Federal Public Housing Authority, virtually guarantee­
ing payment of debt service on the bonds being floated.
Although the supply of new tax-exempt issues in the first
seven months of 1951 was considerably below the volume of
the corresponding period of 1950, the decreased volume had to
be distributed principally among individual investors and,
because of the progressive nature of Federal tax rates on per­
sonal incomes, sharp increases in yield were necessary. More­
over, municipal dealers had built up substantial inventories
during the bull market of the second half of 1950, and these
inventories, in the face of the competition of the new offerings
and the diminished demand, added to the pressure on prices.

TREASURY FINANCING IN THE FISCAL YEAR 1951
Despite a rise of 8.9 billion dollars in national defense and
related outlays in the first year of our rearmament effort, the
Treasury in the fiscal year ended June 30, 1951 obtained a
cash surplus of 7.6 billion dollars. In the preceding fiscal year,
the Treasury had disbursed 2.2 billion dollars more than it had
received from the public. Thus, the net change in the cash
position from fiscal 1950 amounted to some 9.8 billion dol­
lars. This is the fourth time in the six years since the end of
World War II that the Treasury’s cash income exceeded its
outgo.
The change to a cash surplus in the twelve months ended
June 30 from a cash deficit in fiscal 1950 reflected both
changed economic conditions and the higher tax rates im­
posed by Congress to help defray the costs of the rearmament
program. When the new tax programs were adopted, it was
estimated that somewhat less than 4.0 billion dollars addi­
tional income would be raised from the change in the tax
structure, on the basis of the estimates of personal and cor­
porate income then considered likely. Higher tax rates had
also been expected to provide a small additional amount dur­
ing fiscal 1951 from old-age insurance contributions. Both
private and corporate incomes rose throughout the year, how­
ever, and by the end of June the Treasury had collected
12.5 billion dollars more from the public than in fiscal 1950.
At the same time, income-responsive expenditures contracted
substantially as the need for Federal aid declined, and 5.5
billion dollars less was disbursed in fiscal 1951 by the Gov­
ernment for such programs (including price-support purchases
of farm products, international economic and veterans’ aid,
and unemployment insurance compensation) than in the pre­
ceding year when the economy was gradually recovering from
the inventory recession of 1949. Also, a sizable nonrecurring
reduction in outlays by the National Service Life Insurance




Fund occurred. In the preceding fiscal year, this Fund had
disbursed some 2.6 billion dollars in payment of a large ac­
cumulated special dividend, whereas in fiscal 1951 only some
200 million was paid in dividends. Altogether, these changes
improved the cash position by over 20.5 billion dollars. The
steady rise in national defense outlays, of course, added 8.9
billion dollars to expenditures in fiscal 1951 and other cash
expenditures required some 1.8 billion dollars more than in
the preceding fiscal year. Almost half of the additional non­
defense outlays were made for higher old-age benefits under
the amendments to the Social Security Act adopted last sum­
mer. Also in fiscal 1951 the cashing of outstanding checks
G overnm ent F in ancing, F isca l Y e a rs 1951
(In billions o f dollars)

and

1950

1950

1951

Source of funds and change in debt

4 1 .0
4 3 .2

5 3 .5
4 5 .9
N et cash income (-{-) or outgo ( —) ................... .........................

+

7 .6

-

2.2

Ghange in General F u n d * ...................................................
Cash redemptions ( — ) or borrowings (-{■*)................................

-

1.8

+

2.0

5 .8

6.2

+

-

2 .4
3 .8

+
+

4 .0

3 .9

Scheduled borrowing ( H or repayment ( —) ............
~)

+

0.1

+

1.8
2.0

Direct noncash borrow ing...............................................................
Direct cash borrowing.......................................................................

+
-

6.2

+
+

0 .3
4 .2

Direct public debt

-

2.1

+

4 .6

Government corporation d e b t.......................... .........................
Direct public de b t...........................................................................
Nonmarketable if..........................................................................
Marketable....................................................................................

...........................................................................

Balance in the General Fund June 30 ......................................

0 .4

4 .2

+
-

4 .0

7 .4

t
4 .2

0.2

5 .5

* The minus signs indicate the use of a surplus or borrowed funds to increase
the balance.
# Includes market purchases of Treasury securities by Government corporations
and trust funds.
t Less than 50 million dollars.
Note: Because of rounding, figures do not necessarily add to totals.
Source: Daily Statement o f the United States Treasury and Treasury Bulletin.
Partly estimated by the Federal Reserve Bank of New York.

115

FEDERAL RESERVE BANK OF NEW YORK

added over 200 million dollars to expenditures, whereas in the
preceding fiscal year there was an accumulation of nearly 500
million in uncashed checks; this shift in outstanding checks
accounted for 700 million dollars of the increase in disburse­
ments.
While rising incomes and inflationary conditions in fiscal
1951 were largely responsible for improving the Treasury’s
net cash receipts from regular operations, the changed
economic situation and the measures taken to restrain the
inflationary forces, on the other hand, produced a large drain
on the Treasury’s cash assets through its transactions in the
public debt. Whereas in fiscal 1950 the Treasury had ob­
tained 4.2 billion dollars from the net sale of securities, largely
on the initiative of private investors who purchased substan­
tial amounts of Savings notes and bonds during a period of
declining market rates, in the past fiscal year the Treasury
was required to redeem, net, some 5.8 billion dollars of Gov­
ernment securities. Attrition (i.e., the unexchanged portion)
on maturing or called securities alone required 3.9 billion
dollars; customary rates of cash redemptions were exceeded,
as investors found the terms offered by the Treasury unattrac­
tive in view of the rise in market yields on other securities.
Rising market rates and inflationary conditions also contribu­
ted to the dampening of investor interest in the nonmarket­
able fixed-rate Savings bonds and notes, and the Treasury
redeemed, net, 1.1 billion dollars of these securities. Thus,
the Treasury actually retained only 1.8 billion dollars of its
large cash surplus from regular operations, and by the end
of the fiscal year it held some 7.4 billion in the General Fund
to cover operations in the coming months. In the January
Budget, at the beginning of 1951, a balance of 5.5 billion
dollars was indicated as desirable.
Official statements suggest that the Treasury now expects
to disburse around 6 billion dollars more than it will receive in
cash operating income under existing tax legislation in the cur­
rent fiscal year. An anticipated gain in receipts, arising from the
full impact of the tax changes made last year and a prospec­
tive rise in incomes in this period, is expected to cover less
than half of the 25 billion dollar rise in cash outlays antici­
pated as the defense program moves from the retooling to
the mass production stage. W ith a favorable exchange ex­
perience on the over 55.1 billion dollars in issues (aside from
bills) maturing or becoming callable in the current fiscal year,
the Treasury would have to redeem close to 3 billion dollars
from attrition on marketable issues. Whether transactions
in Savings bonds and notes will require or provide addi­
tional large amounts of cash is not clear at this time. But
aside from its results with Savings bonds and notes, the Treas­
ury under current expectations would need to borrow over
7 billion dollars, unless new taxes are imposed, to cover
both operating and debt requirements and keep a General
Fund balance of 5.5 billion dollars in the current fiscal year.




B udget A c co u n ts

Budgetary receipts in the past fiscal year ended in June
amounted to 48.1 billion dollars and, since expenditures of
44.6 billion dollars were charged to these accounts, the Treas­
ury in fiscal 1951 recorded a budgetary surplus of 3.5 billion
dollars (as contrasted with the over-all cash surplus of 7.6 bil­
lion dollars). Nearly all of the budgetary receipts are ob­
tained from the public but a sizable amount of the budgetary
expenditures, including transfers and interest payments to
trust accounts and the net accrued interest on Savings bonds,
are not paid to the public. Thus, while the Treasury recorded
a budgetary surplus of 3.5 billion dollars, the cash surplus in
the regular budget accounts amounted to 6.1 billion dollars
(and in the trust and clearing accounts, to 1.5 billion dollars).
Budgetary receipts in the past fiscal year ended in June were
some 11.1 billion higher than in the preceding fiscal year and
cash receipts increased by almost the same amount. Budget
expenditures in fiscal 1951, at 44.6 billion dollars, were 4.5
billion dollars higher than in the preceding year but cash out­
lays were around 5.0 billion dollars higher. Noncash outlays,
on the other hand, declined some 600 million dollars.
The Treasury collected over 23.2 billion dollars from indi­
viduals and 14.5 billion from corporations in the past fiscal
year and these taxes alone were some 9.5 billioa dollars higher
than in fiscal 1950. Higher personal incomes and an increase
in tax rates during nine months of the year added some 5.8
billion dollars to individual income taxes, while record profits,
the acceleration of tax payments under the Mills Plan, and
the imposition of excess profits taxes and higher tax rates on
ordinary corporate income raised collections of corporate taxes
by about 3.6 billion dollars.
Higher incomes were primarily responsible for the rise in
other budgetary receipts in fiscal 1951. Miscellaneous internal
revenue (mostly excise taxes), at around 9.4 billion dollars,
provided over 1.1 billion dollars more than in fiscal 1950,
reflecting mainly the war-inspired spending sprees of both
business and consumers, while customs receipts, at over 600
million dollars, were almost 50 per cent higher than in the
preceding year, largely as a result of an increase in stockpiling
of raw materials by business after the outbreak of the Korean
conflict.
Despite a rise of 8.9 billion dollars in expenditures for
defense and related programs, budget cash expenditures in
fiscal 1951 were only 5.0 billion dollars higher than in the
preceding year. Substantial declines in the several budgetary
"aid” programs offset more than half of the rise in the defense
programs. International economic aid and veterans’ aid in
fiscal 1951 were around 1.8 billion dollars lower than
in the preceding fiscal year, and Government corporations
obtained around 300 million in receipts, whereas in fiscal 1950
they had spent 2.1 billion dollars in support programs.
The primary security programs, including defense-related

116

MONTHLY REVIEW, AUGUST 1951

outlays and international economic aid, amounted to 25.6 bil­
lion dollars, or 61 per cent of budget cash expenditures in
fiscal 1951. Spending for veterans’ aid, interest, and the sev­
eral support programs administered by Government corpora­
tions required another 9-0 billion, or 22 per cent, while the
remaining cash programs and the administrative costs of
operating the Government amounted to 7.2 billion dollars,
or 17 per cent, of budget disbursements.
As the nation moved to support the fight against aggres­
sion in Korea and to increase the level of preparedness of our
Armed Forces and those of our allies, defense expenditures,
including spending for strategic and critical materials, atomic
energy, mutual defense assistance, and several smaller but
related programs, as well as the military activities of the
Defense Department, jumped from 13-3 billion dollars to over
22.1 billion dollars in fiscal 1951. These expenditures rose
steadily throughout the year, and by June were at an annual
rate of nearly 34 billion dollars.
Economic cash aid to foreign countries (including some
300 million charged to the budget and left in Special Deposits
in the trust funds) amounted to 3.4 billion dollars. This
represented a decline of nearly 1 billion dollars from the pre­
ceding year and was largely accounted for by cutbacks in eco­
nomic aid through the Economic Cooperation Administration
and in spending for government services and relief in foreign
countries. It should be noted, however, that total American
cash aid to foreign countries, including defense assistance,
showed only a small decline in fiscal 1951, the decrease in eco­
nomic aid being almost offset by the increase in military aid
under the Mutual Defense Assistance Program, which is in­
cluded in defense and related outlays.
Veterans’ cash aid still required 5.2 billion dollars despite
the decline of 800 million which occurred mainly in the out­
lays for benefits under the "G. I. Bill”. The shift in the trans­
actions of Government corporations arose almost entirely from
a change in the activities of the Commodity Credit Corpora­
tion. In the twelve months ended June 30, the CCC obtained
nearly 600 million dollars from net sales of commodities, where­
as in fiscal 1950 it had spent over 1.7 billion dollars, net, for
price-support purchases of farm commodities. The ExportImport Bank increased its loan disbursements, and the Home
Owners’ Loan Corporation, which had largely liquidated its

portfolio in the preceding year, showed a drop in receipts from
mortgage resales, but these changes were about offset by shifts
in the transactions of "Fannie May” (Federal National Mort­
gage Association) and the Reconstruction Finance Corporation.
Net disbursements by "Fannie May” for secondary purchases
of guaranteed mortgages, at around 400 million dollars, were
somewhat lower than in fiscal 1950 despite a small increase
in purchases. Private investors repurchased sizable amounts
of mortgages in the early months of the fiscal year before
the rise in interest rates on other types of investments made
mortgages a relatively less attractive investment. Also, the
RFC obtained some net receipts from its activities in fiscal
1951, whereas it had made small net disbursements in the
preceding year.
Despite the rise in interest rates during the year, cash inter­
est payments, at over 4.1 billion dollars, were somewhat lower
than in fiscal 1950, partly reflecting the decline in the
amount of debt outstanding. As in earlier years, a large part
of interest, including such payments as interest to the trust
accounts and the excess of accrued interest over interest paid
on Savings bonds redeemed, did not require an immediate
outlay of cash. The noncash interest (1.6 billion dollars in
fiscal 1951), in effect, is reinvested immediately in Govern­
ment securities.
Other budgetary cash expenditures, at 7.2 billion dollars,
were about 400 million dollars higher than in the preceding
year. The principal increases in cash outlays occurred in
spending for public housing and the administration of the
Defense Production Act.
The noncash items in the 1951 fiscal budget expenditures,
as a whole, amounted to 3.0 billion dollars, or around 600
million less than in fiscal 1950. The decline reflected both a
sharp drop in payments to the National Service Life Insurance,
following a nonrecurring transfer in fiscal 1950 to cover a
revision in the estimates of the war costs, and the issuance of
noninterest-bearing notes to the International Monetary Fund
in fiscal 1950 when part of the original United States cash
subscription was returned. Aside from the interest payments,
mentioned above, the noncash charges in the budget expendi­
tures consisted mainly of the transfers made to the trust funds
to cover both receipts (the railroad retirement taxes and pay­
roll deductions for Civil Service retirement) and the Govern­
ment’s absorption of a share of the costs of the several funds.

SUBSCRIPTIONS TO MONTHLY REVIEW
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it. If you are not already on the mailing list and wish to receive the Review regularly, please write to the Domestic Research
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FEDERAL RESERVE BANK OF NEW YORK
T ru st A c c o u n t s

Trust account receipts in fiscal 1951, at 7.8 billion dollars,
included nearly 900 million in interest and some 1.4 billion in
transfers and other payments from the budget accounts. The
cash receipts, at 5.6 billion dollars, exceeded cash disbursements
from these accounts by 1.7 billion dollars.
Cash receipts from the public by the trust accounts in fiscal
1951 rose by more than 1.5 billion dollars. Contributions to
the Old Age and Survivors Insurance Trust Fund alone were
some 1.0 billion dollars higher than in the preceding fiscal
year, largely as a result of the higher contribution rate (effec­
tive for a full year, compared with six months in fiscal 1950)
and the greater number of people covered by the program
(beginning January 1, 1951) under the 1950 amendments to
the Social Security Act adopted last August. The tax rates had
been increased on January 1, 1950 to 1.5 per cent from 1 per
cent, each, on employers and employees. To some extent, in­
creased employment also was responsible for the rise in these
contributions. Deposits by States for unemployment insurance
rose nearly 300 million dollars, owing partly to higher em­
ployment and partly to the higher rates imposed by several
States to restore reserves after the poor employment experience
in the preceding fiscal year. A noticeable increase also occurred
in premiums received by the National Service Life Insurance
Fund, reflecting both the policies taken out by the new mem­
bers of the Armed Forces and the larger policies obtained by
the men already in service in this period of hostilities and
rearmament.
Cash payments to the public by the trust funds in fiscal 1951
declined sharply and, at 3.9 billion dollars, were some 3.0
billion dollars less than in the preceding fiscal year. The de­
cline reflected mainly the payment in the preceding fiscal year
of a large accumulated special dividend by the National Service
Life Insurance Fund. (In fiscal 1950 these payments had
amounted to over 2.6 billion dollars, whereas in fiscal 1951

117

only some 200 million was disbursed.) A substantial decline
of 1.0 billion dollars also occurred in withdrawals by States
for the payment of unemployment compensation, but this de­
cline was offset to a large extent by a rise in benefit payments
by the Old Age Fund resulting from the revised benefit scale
and the liberalization of the eligibility qualifications under the
revisions enacted in August 1950.
Chan g es

in

the

Pu b l ic D e b t

Cash redemptions of debt and market purchases amounted
to nearly 6.2 billion dollars during the year. Noncash borrow­
ing mainly from the trust funds and the net increase in ac­
crued interest, however, amounted to 4.0 billion dollars in
fiscal 1951. Thus, the Public Debt declined only 2.1 billion
dollars and on June 30 it amounted to 255.2 billion dollars.
A substantial shift from marketable to nonmarketable debt
occurred during the year as a result of the exchange on April 1
of nearly 13.6 billion dollars of the longest-term bank-restricted
bonds of June 15 and December 15, 1967-72 for a new issue
of 2 % per cent nonmarketable bonds callable in 1975 and
maturing in 1980, and exchangeable for marketable five-year
IV2 per cent notes (at the option of the holder). Almost 8.0
billion of the new nonmarketable bonds were taken by private
investors, while the Federal Reserve Banks and Treasury trust
accounts took the remainder.
Another novel financing offer by the Treasury in this period
was made to the holders of the Series E bonds which began
maturing in May. On January 18, the Treasury announced
it planned as an alternative to cash redemption, if the holders
so desired, to continue automatically the interest on these issues
or to exchange the bonds into current income Series G
Savings bonds. The automatic extension of interest became
possible under a law signed by the President on March 26.
Preliminary reports indicate that most holders of the E bonds
which matured in May and June accepted the extension offer.

ELECTRIC POWER OUTPUT
The indexes of electric power output in the United States
and in New York and New Jersey which appear in the table
of Business Indicators measure changes in the daily average
production of electric energy by utilities. Basic data for these
series are released regularly by the Federal Power Commission
in the form of total monthly production measured in kilowatthours. This bank converts the basic data to index numbers.
The first step is to determine average daily production for each
month (Saturdays, Sundays, and holidays are given lesser
weights than regular working days in computing the averages).
These averages are then put on a 1935-39 base, and are ad­
justed for seasonal fluctuations. This procedure improves the
value of the data as indicators of business conditions, because
electric energy production is significantly affected by the num­




ber of working days per month and by normal seasonal
differences in the need for light, heat, and industrial power.
The Federal Power Commission supplies statistics on electric
energy produced by both electric utility companies and power
plants of industrial establishments. The index numbers shown
here are based on the output of utilities only. Privately owned
utility companies are covered as well as the publicly owned
group, which includes municipal electric utilities, Federal proj­
ects, rural electrification cooperatives, power districts, State
power projects, and "noncentral stations”. The noncentral sta­
tions provide power chiefly for public street lighting, water
pumping, sewage disposal, and similar functions. The statistics
are compiled from monthly reports submitted to the FPC by
substantially all electric utilities. Power generated by indus­

118

MONTHLY REVIEW, AUGUST 1951

trial firms for their own use and energy used by street and
interurban railways and electrified steam railroads, which com­
bined account for about 15 per cent of all electric power
production, are excluded from the data upon which the indexes
are based because comparable figures are not available prior
to 1945.
The index numbers presented in the table of Business
Indicators are available for both the United States and for
New York-New Jersey from January 1935 to date, and may
be obtained from the Domestic Research Division, Research
Department, of this bank on request. Annual indexes for the
United States date back to 1920. The basic statistics are pub­
lished monthly by the FPC in a release entitled Production of
Electric Energy in the United States, and are subject to minor
revisions for a period of one or two years. An annual publica­
tion by the same agency, Production of Electricity and Capacity
of Generating Plants, gives detailed information by States on
electric utility generation and capacity by type of prime mover
and by class of ownership. Weekly statistics with similar coverage are prepared by the Edison Electric Institute.

The significance of these indexes as indicators of business
trends stems from the almost complete dependence of modern
industrial methods upon electricity. In the past, there has been
a high degree of correlation between short-term movements in
seasonally adjusted electric power output and changes in
business activity. Industrial users, however, absorb only about
a half of total output; and commercial and residential users, the
remainder. Commercial and residential consumption of elec­
tricity is only slightly affected by changes in business condi­
tions, and fluctuations in total electric power ouput are thereby
moderated. In addition, over short periods electric power use
may be affected by abnormal weather conditions.
In using these indexes as business indicators, allowance
should be made for the strong upward trend in electric power
sales. As shown in the accompanying chart for the years since
1935, electric power production has expanded sharply and
almost consistently. In June of this year the index of electric
power ouput in the United States was 325 (1 9 35 -3 9= 10 0).
In comparison, the index of industrial production, also on a
1935-39 base, was 222. Part of this tremendous growth is

B u sin ess Indicators
Percentage change
Item

1951
June

Unit

1950

M ay

April

223
320

223
325

200p

220

June

Latest month Latest month
from previous
from year
month
earlier

U N I T E D ST A T E S

Production and trade ^
Industrial production*.............................................................................
Ton-miles of railway freight*................................................................
Manufacturers’ new orders, to ta l........................................................
Manufacturers’ new orders, durable goods.....................................
Nonresidential construction contracts*............................................
Prices , Wages, and employment

Personal income* (annual rate)............................................................
Composite index of wages and salaries*...........................................
Nonagricultural employment*..............................................................
Manufacturing employment*............................. ... . . ..........................
Average hours worked per week, manufacturing \.......................
Unemployment............................................................................................

1 935 -39 =
1 935 -39 =
1 935 -39 =
billions of
billions of
billions of
billions of
billions of
1923 -25 =
1923 -25 =

100
100
100
$
$
$
$
$
100
100

Aug. 1939 = 100
1 9 2 6 = 100
1935 -39 = 100
billions of $
1 9 3 9 = 100
thousands
thousands
hours
thousands

222p
325
190p
23. Op
3 9 . 8p
2 3 .4p
12. Ip
11. 9p
295p
447p
3 5 1 .2
1 8 1 .7p
185.2

—

—
46,467p
16,002p
4 0 .8p
1 ,9 8 0

2 3 .9
3 8 .9
2 3 .3

2 2 .4
3 7 .8 r
2 3 .9

11.8
12.1

12.6
12.0

276
430
36 7 .1
1 82.9
1 85.4
2 4 9 .5p
223p
4 6,472
16,067
4 0 .7
1 ,609

283
446
3 7 3 .9
1 8 3 .6r
184.6
2 4 9 .0

199
289
179r
1 9 .8
3 0 .0
2 0 .7
9 .8
1 1.7
325
262

#
+
+
+
+
+
-

46,372r
16,074r
4 1 .0
1,7 4 4

2 6 6 .4
157.3
170.2
2 1 9 .0
207
4 4 ,0 1 0
14,802
4 0 .5
3 ,3 8 4
7 6 ,9 7 2
44,7 9 6
85 ,0 4 0
27,1 6 2
7 4 .9
9 3 . 5r
12,105

+
+

12,913p

7 1 ,040p
5 4 ,350p
8 9 , 500p
2 7 ,3 9 8
8 5 .4
105.1
1 2,905

4 ,1 4 8
5 ,1 5 4
2 ,6 7 9

2 ,9 6 0
4 ,1 4 4
2 ,3 8 6

222

2

5
4

2

4
3

2
7
4
4

1
#

#
#
#
#
+23

+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
-

Banking and finance
Total investments of all commercial banks....................................
Total demand deposits adjusted..........................................................
Currency outside the Treasury and Federal Reserve B a n k s * ..
Bank debits* (U. S. outside New York C ity )................................
Velocity of demand deposits* (U. S. outside New York C it y ) .
Consumer instalment credit outstanding!............. .........................
United States Government finance (other than borrowing)
National defense expenditures..............................................................

millions of $
millions of $
millions of $
millions of $
billions of $
1 935 -39 = 100
millions of $
millions of $
millions of $
millions of $

7 1 , 190p
5 5,040p
8 9 ,470p
2 7,686
8 5 .7

102.8
—
7 ,4 4 1 p
5 ,2 9 7 p
2 , 803p

70,600p
5 4 ,460p
8 9 ,5 0 0 p
2 7,516

88.2
102.8

4 ,6 8 7
4 ,0 6 1
1,107

1
1
#

+
-

1
3
#
#

+79
+ 3
+ 5

+
+
+
+
+
+

12
13

6

16
33

8
23

1

9
71

32
16
9
15

8
6
8
1

41

8
23
5

2
14

10
11

+ 59
+ 30
+153

S E C O N D F E D E R A L R E S E R V E D IS T R IC T
Electric power output*t (New York and New Jersey)..................
Residential construction contracts*........................................................
Consumers’ pricesf (New York C ity )....................................................
Nonagricultural employment*...................................................................
Manufacturing employment*.....................................................................
Bank debits* (New York C ity )................................................................
Bank debits* (Second District excluding N. Y . C. and A lb a n y ).
Velocity of demand deposits* (New York C it y )...............................

1935-39*=
1 9 23 -25 =
1923 -25 =
1 935 -39 =
thousands
thousands
billions of
billions of
19 3 5 -3 9 =

100
100
100
100

227
—

229
175p

—

201p

18 0 .5

—
$
$
100

2 ,6 7 2 .2 p
4 5 .0
3 .7
119.5

18 1 .4
7 ,3 0 5 .3 p
2 ,6 6 1 .5
4 6 .3
4 .0

111.6

227
182r
215
1 80.6
7 ,3 1 9 .6
2 ,6 7 0 .9
4 6 .4
3 .7
1 19.9

211
186
186
1 6 7 .0
7 ,0 0 1 .3
2 ,4 7 5 .9
4 0 .5
3 .2
1 0 6 .5r

-

+

1
4

6
#
#
#
3

6
7

p Preliminary.
r Revised.
t Seasonal variations believed to be minor; no adjustment made.
* Adjusted for seasonal variation.
j Corrected series.
# Change of less than 0.5 per cent.
Source: A description of these series and their sources is available from the Domestic Research Division, Federal Reserve Bank of New York, on request.




+
+
+
+
+
+
+

8
6
6
8
5

8
11
15

12

FEDERAL RESERVE BANK OF NEW YORK

Electric Power Output

Electric Power O utput
(A d ju ste d fo r seasonal variation ; 1 9 3 5 -3 9 average = 100 per cent)

(Adjusted for seasonal variation; 1935-39 average— 100 per cent)
P er ce nt

119

Month

P er c e n t

New York and
New Jersey*

United States

1950
276
277
280
284
284
289
288
297
298
306
306
316

September........................................
N ovem ber........................................

199

201
206
207
206

211
213
219

220
220
217

221

1951
318
322
323
325
320
325

224
228
225
227
229
227

* Revised indexes.
Source: Converted to a 1935-39 base and adjusted for seasonal variation by the
Federal Reserve Bank of New York from basic data released by the Federal
Power Commission.

Source: Converted to a 1935-39 base and adjusted for seasonal variation by
the Federal Reserve Bank of New York from basic data released by the
Federal Power Commission.

explained by the intensified use of electric power, development
of new uses, and the extension of electric facilities to hitherto
unelectrified areas over the years. Despite these drawbacks to
their use as a measuring rod, the electric power data are easily
and directly obtained and may be used as a check against more
complex indicators of business activity— such as industrial pro­
duction and personal income— which are compiled from many
different sources and involve painstaking computations.

Growth in electric power output in the New York-New
Jersey area since 1935 has been much slower than in the
nation as a whole, chiefly because this heavily industrialized
area was already largely electrified by the mid-1950s. The
index for this area in June was 227, compared with 325 for
the United States. Indexes of electric power production in
the United States during 1950 and the first six months of
1951, together with revised indexes for New York and New
Jersey, are shown in the table.

DEPARTMENT STORE TRADE
Faced with the extremely difficult task of “beating last years
figures”, merchandisers in many Second District department
stores attempted to do just that during July with extensive
promotions, which in some instances were virtually store-wide.
The degree of success of these promotional efforts is indicated
by the comparison of department store sales during July with
the inflated dollar volume associated with the “scare buying”
of July 1950. According to preliminary data, Second District
department store sales fell only about 6 per cent short of
equaling the dollar volume of July 1950. It should be pointed
out, however, that the rise in prices of department store mer­
chandise of approximately 10 per cent since July 1950 was a
major influence in achieving this relatively favorable compar­
ison with the July 1950 level of department store sales.
D e p a r t m e n t S t o r e C r e d it

One of the more noteworthy aspects of department store
trade in this District during the first half of 1951 was the
gradual decrease of instalment sales as a per cent of total sales
during a period of relatively strong retail activity in the major
household durables lines. As indicated in the accompanying




table, the relation between instalment sales and total sales has
recently been virtually the same as that prevailing during the
Sales b y T y pe of Transaction and Sales of Durable G oods* at Second
Federal R eserve D istrict D epartm ent Stores, Jan uary-June 1951

Month

Charge account
sales

Cash sales

Instalment
sales

Durable goods
sales

Percentage change, 1950 to 1951
+ 23
+15
+ 4
- 1
+ 8
+ 15

+45
+ 23
+ 15
+ 2
+ 4
+ 5

+ 23
+ 19
+ 5
+ 5
- 3
+ 7

+ 41
+ 29
+ 2
+24
- 6
+ 19

Percentage of total sales
1951

1950

1951

1950

1951

1950

1951

59
60
60
60
61
64

62
62
62
61
60
62

30
28
29
29
29
26

27
26
27
28
29
28

11
12
11
11
10
10

11
12
11
11
11
10

19

1950
17

21

20

16
17
14
15

17
14
15
14

♦Includes only data for furniture and bedding, domestic floor coverings, major household
appliances, and radio and television sales.

120

MONTHLY REVIEW, AUGUST 1951

first six months of 1950. The decline in the importance of
instalment sales in Second District department stores in recent
months is significant in that during the last half of 1950 in­
stalment sales were as high as 14 per cent of total sales, princi­
pally because of the intensive purchasing of consumer durables
which occurred after the start of the Korean war.
As previously mentioned, the leveling off of the relative
importance of instalment purchases in Second District depart­
ment stores, during the first half of this year, was not accom­
panied by a similar movement in the sales of consumer dur­
ables. As a matter of fact, retail purchases of this merchandise
surpassed year-ago levels both in dollar volume and as a pro­
portion of total sales. Inasmuch as instalment transactions
normally account for the major share of the sales of house­
hold durables, the increased importance of the sales of this
merchandise and the concurrently declining position of instal­
ment sales as a percentage of total sales are indicative of a
tendency on the part of consumers to make less use of instal­
ment credit rather than a lack of consumer interest in these
goods. Moreover, these may suggest the unwillingness of some
consumers ( in view of the currently large holdings of individ­
ual liquid assets and the high level of personal income) to pay
service charges on instalment purchases which now require
substantial down payments and shortened repayment periods.
Under these conditions, instalment buying for some consumers
may appear nearly as burdensome financially as cash or charge
account payments. There is little doubt, however, that there
have been some deferments of durable goods purchases owing
to the down payment requirements and shortened repayment
schedules called for under the terms of Regulation W .
While the proportion of instalment sales to total sales had
remained fairly constant, charge account purchases during the
first quarter of this year increased sharply from year-ago levels,
not only in terms of dollar volume, but also as a per cent of
total sales. As a result, the proportion of credit sales— charge
account plus instalment— to total department store sales was
somewhat higher than in the corresponding period a year ago.
By the end of the second quarter, however, the proportion of
cash sales to total sales had risen above the comparable yearearlier level largely as a result of the 'price war” which
occurred in New York City during June. The merchandise
affected by the "price war” included few, if any, "big-ticket”
items; hence, watchful customers were well able to make im­
mediate cash purchases when the price was "right”.
As a result of the decline in the importance of instalment
sales at Second District department stores, the value of instal-




Indexes of D epartm en t Store Sales and Stocks
Second Federal R eserve D istrict
(1 9 3 5 -3 9 averag-e==100 per cen t)
1951

1950

Item
June

May

April

June

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

254
267

238
243

232
252

229r
241r

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

274
290

294
290

306
297

222

209

r Revised.

ment accounts outstanding at the end of May, although con­
siderably above the May 1950 level, was well below the amount
uncollected on December 31, 1950. The index of instalment
accounts receivable of Second District department stores was
190 per cent of the 1941 average on May 31, 1951, or 14
per cent lower than the level of December 31, 1950.
Moreover, at the May 1951 rate of collection, instalment ac­
counts outstanding on May 1 would be liquidated in about
llV i months, or only about IV2 months longer than at the
same time last year.
By the end of May there had also been a marked drop in
charge account receivables, due primarily to a sharp increase
in the rate of collection during the preceding three months.
This increase in the collection ratio reduced the average re­
payment period on charge accounts outstanding to 65 days, or
6 days less than the average repayment period of May 1950.
D epartm ent and Apparel Store Sales and S tocks, Second Federal R eserve
D istrict, Percentage Change from the Preceding Y ear
Net sales
Locality
June 1951

Stocks on
Jan .th rou gh
hand
June 1951
June 30, 1951

Department stores, Second District___

+11

+12

+31

New York C ity ..........................................
Nassau C ounty..........................................
Northern New Jersey..............................

+14
+15
+ 9

+12
+21

+21

+14
+14

Westchester County.................................
Fairfield C ou n ty .......................................
Bridgeport...............................................
Lower Hudson River Valley................
Poughkeepsie..........................................
Upper Hudson River Valley................

+34
+ 5
+ 6
- 3
- 3
+ 6
+ 9
- 1
+ 6
+ 6
+ 9
+ 6

+20

+34
+35

+11

Schenectady............................................
Central New York S tate.......................
Mohawk River V a lley........................
Northern New York State....................
Southern New York State.....................
Binghamton............................................
Western New York State......................
Niagara Falls..........................................
Rochester.................................................
Apparel stores (chiefly New York C ity ).

+11
- 1
+
+
+
+
+

4
4
4
5
3

-

3

1

+13
+14
+ 4
+ 5
+14
+17

+10
+11

,

+34

+21

+23
+24
+18

+21
+17

+22

+11

+13
+34
+23
+24
+41
+14
+ 19
+16
+25
+27
+29
+26
+25

+

+23

+
+

9

+

9

8
+12

+11
+ 9
+16

+11
+12
+

9
5

NATIONAL SUMMARY OF BUSINESS CONDITIONS
(Summarized by the Board of Governors of the Federal Reserve System, July 30, 1951)

Industrial production in June was at about the same level
as during the first five months of this year, but a somewhat
more than seasonal decline is indicated in July. Prices of raw
materials have decreased further in the first three weeks of
July owing in part to prospects of near record crops. Consumer
buying of automobiles and department store goods has been
maintained, however, for this season of the year. The rate of
Federal defense expenditures has continued to rise considerably.
I n d u s t r ia l P r o d u c t io n

The Boards index of output at factories and mines in June
was 222 per cent of the 1935-39 average, and 12 per cent
greater than a year ago. Preliminary indications are that the
index may decline to around 215 in July owing mainly to vaca­
tion shutdowns in nondurable goods industries, which are not
currently allowed for in the index, and a further restricted
volume of auto assemblies.
Total durable goods output was maintained in June as
further increases in industrial and military equipment offset
additional curtailments in output of furniture and other house­
hold goods. Although increasing only moderately in recent
months, machinery output has risen more than 25 per cent in
the past year. Otftput of aircraft and ordnance has practically
doubled since last June. Reflecting capacity limitations, pro­
duction of basic metals has changed little in recent months.
A slight decline in nondurable goods production reflected
largely a further easing in demand for textile and paper
products. By June, output of these and some other nondurable
goods was only moderately below earlier peak rates but larger
than seasonal declines are indicated in July.
Output at mines was at a record level in June, reflecting an
increase in coal in anticipation of the vacation period for
miners in July, and a slight further expansion in crude
petroleum.
INDUSTRIAL

Federal Reserve indexes.




PRODUCTION

Monthly figures; latest shown are for June.

Co n s t r u c t io n

Construction contract awards, which rose to an unprece­
dented total in May as a result chiefly of almost 1 billion dol­
lars of publicly financed Atomic Energy awards, declined in
June to about the April total. Private awards also fell off fol­
lowing a marked rise in May. Private housing starts in June
remained substantially below last years high level, but be­
cause of an exceptionally large volume of publicly financed
units started, the total was only moderately below a year ago.
Em p l o y m e n t

Employment in nonagricultural establishments in June, after
adjustment for seasonal variation, was maintained at the
record May level. The workweek in manufacturing industries
continued to average close to 41 hours; average hourly earnings
advanced further by about 2 cents to $1.60 per hour. Unem­
ployment this June was at the lowest level for any June since
1945.
A g r ic u l t u r e

Crop production, based on July 1 conditions, was officially
forecast to be close to the 1948 record and 7 per cent above
last year. Cotton acreage was indicated to be three-fifths
greater, and somewhat larger hay and grain crops were fore­
cast. Milk and egg production in June was at last year’s level.
Marketings of meat animals, however, in June and the first
three weeks of July have fallen about 5 per cent below yearago levels.
D is t r ib u t io n

The seasonally adjusted total value of retail sales has con­
tinued to show little change from the reduced level reached
in April. Durable goods sales were somewhat lower in June
owing largely to a further decline in sales of building materials
EMPLOYMENT IN NONAGRICULTURAL ESTABLISHMENTS

Bureau of Labor Statistics’ estimates adjusted for seasonal variation by
Federal Reserve.
Proprietors and domestic servants are excluded.
M idmonth figures; latest shown are for June.

and hardware. Department store sales showed somewhat less
than the usual seasonal decline from June to the first three
weeks in July. Value of department store stocks declined
moderately further in June, but was still about 30 per cent
above a year ago.
C o m m o d ity

P ric es

The general level of wholesale commodity prices has declined
since mid-June, to a level about 3 per cent below the high
reached in mid-March. As during earlier months, the recent de­
cline has reflected chiefly decreases in prices of industrial ma­
terials. Spot cotton prices, which had held at ceiling levels until
July 3, dropped rapidly following the release on July 9 of the
Government acreage report, which indicated a crop even larger

B a n k C r e d it a n d t h e

than had been anticipated earlier. Wholesale prices of most
finished goods have been maintained, although reductions have
recently become more numerous reflecting reduced inventory
demands and further declines in prices of some materials.
Consumer prices eased slightly in June, but the index was
9 per cent above June 1950. Only rents increased slightly
further.

1926*100

S u p p ly

M o n e y M a rk ets

Yields on Government securities generally declined slightly
in the first three weeks of July. The Treasury increased the
bill offering by 200 million dollars each week. On July 12
the Secretary of the Treasury announced the offering of an
11-month V/8 per cent certificate of indebtedness to holders
of the Treasury notes maturing August 1.

WHOLESALE COMMODITY PRICES
PER CENT

M oney

Business loans outstanding at banks in leading cities in­
creased in June but declined somewhat in the first half of
July. Loans for defense-supporting activities, including princi­
pally loans to metal manufacturers and public utilities, ex­
panded further, while loans to processors of agricultural com­
modities were reduced further.
Deposits and currency held by businesses and individuals
increased somewhat during June but showed little further
change in early July. In June, the rate of use of demand de­
posits at banks in leading cities outside New York, on a season­
ally adjusted basis, remained at the high May level.
Average interest rates charged by commercial banks on
short-term business loans rose slightly further from March to
June in all areas of the country.

MEMBER BANKS IN LEADING CITIES
PER CENT

BILLIONS OF DOLLARS

1944

BILLIONS OF DOLLARS

1945

1946

1947

1948

1949

1950

1951

* CHANGE IN SERIES.

Bureau of Labor Statistics’ indexes.
week ended July 24.




W eekly figures; latest shown are for

W ednesday figures; latest shewn are for July 18.