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MONTHLY REVIEW
O f Credit and Business Conditions
FEDERAL
V olume 36

RESERVE

BANK

A U GU ST

OF

1 9 S4

NEW

YORK
No. 8

M O N E Y M A R K E T IN J U L Y

Member banks began the month of July with substantially
more than 500 million dollars of free reserves, and over the
month as a whole they received a large additional volume of
reserves through a net reduction in Treasury deposits with the
Reserve Banks and from the operation of the other market
factors. In view of the reduction in reserve requirements
scheduled for the end of July and early August, which will
release substantial amounts of reserves in advance of actual
needs, the Federal Reserve System absorbed a major part of
the reserve gains accruing to member banks during the month
by redeeming or selling 520 million dollars of its bill holdings.
Nevertheless, average free reserves held by member banks in
the four weeks ended July 28 were 76 million above the
average amount held in the five statement weeks of June. These
reserves, however, were not always evenly distributed, and at
times Chicago and New York City banks experienced deficien­
cies in their reserves, which resulted in temporary firming of
the rates for Federal funds.
The Government securities market was quiet during most of
July, reflecting not only the normal summer inactivity but
also the tendency for investors to refrain from major port­
folio adjustments pending the official disclosure of the terms
of the Treasury’s new cash offering and of the August and
September refunding program. On July 16, the Treasury
announced that it would offer for cash subscription on July 21
(the books to be open only one day) approximately 3.5 billion
dollars of 1 per cent tax anticipation certificates. The certifi­
cates are to be dated August 2 and will mature on March 22,
1955. They will be receivable at par plus accrued interest to
maturity in payment of income and profits taxes on March 15,
1955. Up to 75 per cent of the payments for the certificates
may be made through credits to the Treasury’s Tax and Loan
Accounts in the commercial banks. Subscriptions to the new
issue totaled approximately 9-3 billion dollars; subscriptions
for $50,000 or less were allotted in full, while those for larger
amounts were allotted on a 40 per cent basis, with none
receiving less than $50,000. The total amount of the certificates
to be issued will be 3,734 million dollars. The Treasury also
announced on the 16th that it will offer holders of the 7.5
billion dollars of 2 Ys per cent certificates of indebtedness
maturing on August 15 and September 15a one-year certificate




and either a long note or a short bond, the exact terms of
the refunding to be announced toward the end of the month.
On July 30, it announced that the refunding issues would be a
lVs per cent certificate to be dated August 15 and a 6*4 year,
2V% per cent bond maturing November 15, I960.
Treasury bills were in greater supply in the market during
most of July and bill rates rose somewhat, especially toward
the end of the month. A price rise that occurred in the inter­
mediate and long sectors of the list early in the month was
partially wiped out after the preliminary announcement on the
16th of the Treasury’s refunding plans, but prices of issues
callable after 1964 subsequently rose again, showing gains of
Vi to IY4 points for the month as a whole. Issues maturing
or first callable in the years 1958-61, the area in which the
market expected that the refunding issue would most likely be
placed, did not share in the rise and in some cases lost nearly
half a point for the month as a whole.
For the four weeks ended July 21 (the latest date available),
the loans and investments of the weekly reporting member
banks rose moderately. Most of the increase occurred in the
week ended June 30 when the reduction in member bank re­
serve requirements became partially effective. In subsequent
weeks the changes were smaller and partially offsetting.
M ember Bank R eserve P ositions
Member bank reserve gains were moderate on balance during
July, but the flow of funds through the market was large and
resulted in substantial day-to-day and week-to-week shifts in
member bank reserve positions. Treasury operations dominated
the market in the first two weeks of July, overshadowing even
the holiday demands for currency which usually are the most
important money factor at that time of year. At the end of
June, the Treasury’s general account balance with the Federal
Reserve Banks was 875 million dollars, a total substantially
CONTENTS
Money Market in July...................................................... .101
Recent Economic Progress in Greece ............................. .104
Treasury Financing in Fiscal 1954 .................... ............. .108
The Velocity of Demand Deposits in New York City.. . . 112
Selected Economic Indicators........................................... .114
Department Store Trade ....................................................115

102

MONTHLY REVIEW, AUGUST 1954
Table I
Weekly Changes in Factors Tending to Increase or Decrease
Member Bank Reserves, July 1954
(In millions of dollars; ( + ) denotes increase,
(—) decrease in excess reserves)
Statement weeks ended
July
7

July
14

July
21

July
28

Four
weeks
ended
July
28

Operating transactions
Treasury operations*...........................
Federal Reserve float...........................
Currency in circulation........................
Gold and foreign a ccou nt....................
Other deposits, e t c ................................

+ 578
4- 47
-2 5 0
- 25
2

-2 4 2
4- 69
4-173
-1 9 9
- 18

4- 23
- 29
4-127
4-144

- 15
-1 2 9
4- 78
4- 56
4- 76

+ 344
- 42
+ 12 8
- 24
+ 56

-2 1 8

4-267

4- 65

+ 46 2

-5 2 0

Factor

T ota l........................................

4-348

Direct Federal Reserve credit transactions
Government securities
Direct market purchases or sales..
Held under repurchase agreements.
Loans, discounts, and advances.........

-1 3 5

-1 8 8

-1 9 7

4- 47

-

1

4- 10

4-127

+ 183

T otal........................................

4- 47

-1 3 6

-1 7 8

-

70

-3 3 7

Total reserves...........................................
Effect of change in required reserves^.. . .

4-395
4- 3

-3 5 4
4-110

4- 89
- 48

-

5
35

+ 12 5
+ 30

Excess reservesf .......................................

4-398

-2 4 4

4- 41

-

40

+ 155

Daily average level of member bank:
Borrowings from Reserve B anks. . . .
Excess reservesf....................................

56
975

53
808

57
928

85
683

63
849

Note: Because of rounding, figures do not necessarily add to totals.
Includes changes in Treasury
t* These figures are estimated. currency and cash,
above normal working levels. In order to allow this balance to
drop to a more normal level, the Treasury limited its with­
drawals from its Tax and Loan Accounts for the week ended
July 7. But final fiscal-year payments by the various Govern­
ment departments and agencies turned out to be considerably
larger than anticipated, and the collection of these checks
reduced the Treasury’s deposits during the week of the 7th
by more than half a billion dollars. Thus the banks experi­
enced a substantial net gain of reserves for the week. In the
following statement week, the Treasury rebuilt its general
account balance and in the process withdrew 242 million dol­
lars (net) from the banking system, thus contributing to the
firmer tone of the money market. In the final two weeks of
July, Treasury receipts and expenditures were approximately
in balance. For the four weeks as a whole, therefore, the
Treasury put 344 million dollars into the market.
The currency demands generated by the Fourth of July
week end added to the usual end-of-the-month currency
requirements would have put pressure on member bank
reserve positions had it not been for the heavy Treasury dis­
bursements early in July. During the two statement weeks
that spanned the month-end and holiday period, member banks
withdrew almost 420 million dollars in cash from the Reserve
Banks, 250 million of it in the week ended July 7. During
the remainder of July, however, currency flowed back to the
banking system and member banks were able to deposit sizable
amounts with the Reserve Banks for credit to their reserve
accounts. For the four weeks as a whole, the banking system
gained 128 million of reserves through the net return flow of
currency.
Foreign account operations also had a marked effect on the
money market on occasions during July, although, as Table I
indicates, the net amount of funds absorbed by these accounts



for the month as a whole was negligible. In the week ended
July 14, foreign account holdings of Treasury bills were sub­
stantially reduced in order to meet a number of special bilateral
debt settlements among members of the European Payments
Union. Also, in the process of these settlements a substantial
volume of funds was shifted back and forth between accounts
with the commercial banks and with the Reserve Banks. After
the settlements had been completed, the funds were largely
returned to bank reserves, either through the purchase of new
securities or in the form of deposit transfers. The impact of
the bill reductions and deposit transfers and the subsequent
security purchases was largely concentrated in New York.
The net effect on bank reserve positions of changes in float
and the remaining market factors was small. The 76 million
dollar gain from "other” factors, shown in Table I for the week
ended July 28, reflects for the most part the quarterly pay­
ment by the Reserve Banks to the Treasury of the tax on the
amount of Federal Reserve notes not covered by gold certifi­
cates. (The money market does not gain directly from such
a transaction; however, direct Treasury payments to the public
were larger by the amount of this tax payment than the change
in its deposits would indicate.) Required reserves showed
almost no net change in the four weeks under review which
followed the reductions in reserve requirements in the latter
part of June and preceded the reductions of late July and
early August.
Federal Reserve discounts and advances rose moderately
during the month (183 million dollars), reflecting in part the
reaction from the abnormally low, "window-dressing” level of
June 30 as well as the fact that some of the smaller country
banks apparently find it more convenient to borrow from the
Reserve Banks than to come to the money market, regardless
of the availability of funds in the market. The largest amount
of member bank borrowings outstanding at any one time dur­
ing July was 125 million dollars, but total Reserve Bank ad­
vances and discounts, including loans to others than member
banks, rose to 220 million on July 28.
The total amount of funds made available to the banking
system through the operation of the regular market factors,
changes in required reserves, and Federal Reserve discounts
and advances was 675 million dollars, as indicated in Table I.
But, as noted earlier, in the weeks of July 14, 21, and 28, the
System Open Market Account sold or redeemed a total of
520 million dollars of Treasury bills. Thus, the net addition
to member bank excess reserves for the period from June 30
through July 28 was only 155 million dollars.
T reasury Financing and the M arket for
G overnment Securities
The Government securities market was generally quiet dur­
ing July, as often occurs during the vacation period. The sus­
tained high levels of member bank reserves and the continued
decline in commercial loans at a time when a seasonal rise
was expected were strengthening influences, but the occasional
firmness of the central money markets and the discussion

FEDERAL RESERVE BAN K OF NEW YO R K

period pending final announcement of the Treasury’s financing
plans tended to restrict activity and price improvement, par­
ticularly in the short and intermediate sectors.
Yields on Treasury bills tended to rise somewhat over the
month, reflecting reduced buying and a fairly sizable floating
supply in the market. Prices of other short-term issues showed
little net change during July, and the volume of trading in
them was not large. Average issuing rates on Treasury bills
rose from 0.646 per cent for the issue dated July 1 to 0.800
for the issue dated July 29. The principal participants in the
bill market were, as usual, corporations and banks, but the
System Open Market Account was a supplier of some impor­
tance. In the latter part of the month, the market’s expecta­
tion that corporations might offer a substantial volume of
short-term Treasury obligations for sale to raise funds to pay
for their subscriptions to the new tax anticipation certificates
tended to restrict trading and to put pressure on Treasury bill
rates. In addition, the demand which the market had antici­
pated through the investment of the proceeds of new security
offerings in the corporate and municipal security markets failed
to materialize in the volume expected, as some of these funds
were put into time deposits in commercial banks, certain of
which were offering to pay interest on such deposits at an
annual rate of approximately 1 per cent, whereas bills at that
time were yielding about % of 1 per cent. On the other hand,
some buoyancy appeared in the market as the period drew to
a close; the firmness probably reflected anticipation of the
final increments in the reduction of member bank reserve
requirements.
The new offering of tax anticipation certificates was well
received in the market. Both banks and corporations placed
substantial subscriptions, the banks having ample room to
subscribe within the specified limit of one half of their
combined capital, surplus, and undivided profits. Trading
in the new certificates on a ’when-issued'’ basis opened




103

at a % 2 premium that was maintained through the end of
the month. Activity in the "rights” for the issues to be re­
funded in August was light throughout the month, and
prices of the August and September certificates were marked
down slightly to 10 0 x% 2 and 1001% 2> respectively.
Prices of intermediate and long-term issues both rose fairly
steadily through Friday, July 16, when the preliminary an­
nouncement of the refunding offer was made, the increases
indicating an absence of selling more than substantial pur­
chase orders. But when trading opened on the following
Monday, bonds were marked down sharply, partly as a reflec­
tion of market uncertainties over the significance of the an­
nouncement and partly as a result of some light bank selling.
Prices were off as much as 1 % 2 for the day. Subsequently,
however, prices at the longer end of the list began to rise
again, and at the end of July issues not callable until 1964 or
later were more than V2 a point or more above their June 30
quotations. The 3!4’s of 1978-83, the pacesetter, was up l lA
points to a new high level of 1111%2- The 2V4’s of June and
December 1959-62, on the other hand, were close to V2 a point
below their June 30 levels, and the three bonds maturing or
callable in 1961 and 1962 showed smaller changes for the
month as a whole. Commercial banks were the principal
participants in the intermediate sector of the market during
July, purchasing a moderate amount of securities outright and
others through swaps. Public and private pension funds pro­
vided the principal demand for the longer issues.
Over the past twelve months, as the accompanying chart
indicates, the price increase in all sectors of the Government
securities market has been quite marked, although not without
interruption. The longest outstanding issue of Treasury bonds,
the 3}4’s of 1978-83, which were selling close to par at the
end of July 1953 rose to more than an eleven-point premium
during the past twelve months, and the yield at bid prices
on this issue dropped from 3.25 per cent to 2.60 per cent.
The 2Vz$ of December 1967-72, the so-called Victory issue,
rose from a price of slightly over 93 to more than a half-point
premium over par, the highest level since March 1951; the
yield declined from 2.97 per cent to 2.46 per cent. The inter­
mediate maturities, represented in the chart by the 2^4’s of
June 1959-62, have risen substantially; this issue gained ap­
proximately six points, and its yield declined from about 2.88
per cent to 1.99 per cent. Average bill rates, illustrative of the
trend in short-term obligations, declined from more than 2
per cent in mid-1953 to about % of 1 per cent at the end of
July 1954.
M ember Bank Credit
Total loans and investments of the weekly reporting member
banks rose 409 million dollars during the four weeks ended
July 21; although loans declined 209 million dollars, invest­
ments rose 618 million. Commercial, industrial, and agricul­
tural loans declined 338 million, following the sharp rise in
the June tax payment period and wrere only partially offset, as
Table II indicates, by moderate increases in each of the other

104

MONTHLY REVIEW, AUGUST 1954

major loan classifications except security loans. The decline in
commercial loans reflected in part another small retirement ( 62
million on July 9) of the Commodity Credit Corporations
certificates of interest. The remainder of these certificates,
along with a number of direct bank loans, all mature on
August 2. The rise in investments occurred principally in
Treasury bills.
In the comparable four-week period last year, weekly report­
ing member bank earning assets rose quite sharply (3,927 mil­
lion dollars), reflecting both substantial direct bank purchases
of the 5.9 billion dollars of tax anticipation certificates sold by
the Treasury on July 15 and an increase in security loans for
purchasing or carrying these certificates. Furthermore, com­
mercial loans declined by only 126 million against 338 million
this year, and portfolios of municipal obligations rose by 47
million, compared with a decline in 1954 of 21 million. This
year, however, real estate loans have expanded somewhat more
than they did in 1953—64 million against 18 million last year.
In 1953, most of the decline in commercial loans represented
a contraction in loans to food, liquor, and tobacco dealers, with
only moderate, largely offsetting changes in loans to the other
major industrial classifications. This year the decline in loans
to food, liquor, and tobacco dealers during these four weeks
was much more moderate, but there were in addition substan­
tial net repayments of credits extended to metal and metal
products companies, public utilities, and to unclassified
borrowers.

(In m illions o f d olla rs)
Statement weeks ended
Item

Change
from Dec.
30, 1953
to Julv
21, 1954

June
30

July
7

July
14

Julv
21

Loans and investments:
Loans:*
Commercial, industrial, and
agricultural loans..............
Security loans.......................
Real estate loans..................
Loans to ban ks.....................
All other loans (largely
consum er)...........................

- 12
+326
+ 30
-3 0 6

-1 5 6
-1 2 5
+
3
+357

- 81
+
9
+ 24
+ 96

- 89
-2 2 1
+
7
-1 1 3

+
-

1,822
' 175
224
120

+ 31

+ 64

-

-

-

229

Total loans, net*..........

+ 60

+144

+ 34

-4 4 7

—2.153

+297
+ 49

-1 0 1
- 49

+ 4
- 30

+339
+ 130

+
+

+346
- 26

-1 5 0
+ 25

-

26
33

+469
+ 13

+ 1,218
+
744

Assets

Investments:
U.S. Government securities:
Treasury bills....................
T o ta l...............................
Other securities.....................

13

33

292
926

Total investments........

+320

-1 2 5

-

59

+ 482

+ 1.962

Total loans and investm ents.. . .

+380

+

— 25

+ 35

-

Loans, net, and “ other” securities

+ 34

+ 169

+

-4 3 4

- 1,409

19

1

191

Liabilities
-7 9 7

-

8

+341

+ 829

- 1,736

+ 129
+892

- 33
—536

+193
-8 5 6

+ 44
-3 5 7

+ 1,584
261

+937
- 25

Demand deposits, adjusted----Time deposits except
Governm ent...............................
U. S. Government deposits........
Interbank demand deposits:

+ 252
+ 33

-

-3 7 0
+
1

—
-

97
33

632
31

* Figures for various loan items are shown gross (i.e., before deduction of valuation
reserves); they therefore may not add to the total, which is shown net.

R E C E N T E C O N O M IC PROGRESS IN G REEC E

Notable progress towrard improved economic balance has
been made in Greece in the last three years. The domestic
inflation that plagued the economy intermittently since the
war has been brought under control, and the large balance-ofpayments deficits of the earlier postwar years have now been
reduced to manageable proportions.
These encouraging developments are essentially the result of
a long effort of American-Greek cooperation. Postwar foreign
economic aid, which has totaled 1.6 billion dollars to date, and
four fifths of which has been provided by the United States,
helped create the preconditions for the effective execution of
energetic government policies, such as the re-establishment of
budgetary balance during the last fiscal year and the successful
devaluation of the drachma in April 1953. In addition, the
advance toward balance-of-payments equilibrium was greatly
aided by the gradual postwar recovery of Western European
countries, which has brought about the reopening of Greece’s
most important traditional export markets. The recent progress,
once it has been consolidated, should help pave the way for an
attack on the long-term problem of raising the country’s living
standards and achieving satisfactory employment for its grow­
ing population.
T he Background of Stabilization
The task of postwar economic recovery was especially diffi­
cult for Greece. The country, poor even before World War II,




Table II
Weekly Changes in Principal Assets and Liabilities of the
Weekly Reporting Member Banks

underwent during the war years extensive damage and economic
dislocations, including a hyperinflation, and its population
suffered malnutrition and many other hardships. Moreover,
liberation did not bring peace: the civil war, which did not
end until 1949, left additional damage and dislocation in its
wake, limited the area where reconstruction could be started,
and absorbed resources originally intended for this purpose.
The years 1944-49 were a period of grave political, economic,
and social tension. Although considerable progress was made
even during this period in re-establishing the transportation
system and power supply on the basis of United States aid,
industrial and agricultural output recovered only moderately
prior to 1949. Despite the large supply of foodstuffs, other
consumer goods, and raw materials furnished by the United
States, per capita income and consumption in 1949 were still
well below the level of the 1930 s.
Against this background of serious and continued scarcities,
efforts by trade unionists and other organized groups to regain
prewar living levels generated virtually irresistible demands
for increases in wages and other money incomes with resultant
sustained inflationary pressures. Under these circumstances,
neither direct controls^ on prices and wages nor attempts to
curtail credit or absorb excess liquidity by means of gold sales
were able to restore a measure of internal financial stability for
more than relatively short periods. The economic structure was

FEDERAL RESERVE BANK OF NEW YO RK

still so weak that any serious intensification of internal pres­
sures, such as the threat of a general strike or the fear of
renewed political unrest, or such external developments as a
sudden spurt in world commodity prices, served to set off a
new round of inflationary price and wage increases. Moreover,
the budget during these years was heavily unbalanced because
of the large military expenditures involved in the maintenance
of an army of almost 250,000 men, the huge costs of support­
ing civil war refugees numbering as much as one tenth of the
country’s total population, and the dislocation of the tax system.
Progress was further retarded by the fact that private
domestic savers, paralyzed by fears of renewed guerrilla action,
foreign invasion, and continued inflation, placed the great bulk
of their funds in stocks of merchandise, black-market foreign
exchange, and gold. As a result, private productive investment
had to be largely financed by means of bank credit or from
counterpart funds arising from American aid.
Just as internal stabilizing action could be only intermittently
successful during these years, attempts to cope with the huge
balance-of-payments deficit by means of successive devaluations
of the currency proved of only temporary help. Their bene­
ficial effects in stimulating exports and restraining import de­
mands were largely offset within a short time by further inter­
nal inflation. Moreover, there were definite limits to the
expansion of traditional Greek exports so long as such vital
foreign markets as Germany had not recovered.
In the two years following the end of the civil war in 1949,
Greece was finally able first to match and then to exceed its
pre-World War II output. By 1951 industrial production had
increased 44 per cent over the 1949 level and by 25 per cent
over 1939, while agricultural production had also made notable
gains. The output increase was, to a large extent, the delayed
result of the heavy importation of all types of industrial and
agricultural equipment and raw materials, as well as foodstuffs,
financed by United States economic aid. Since 1947, United
States economic aid has in effect been equal to over one third
of total Greek merchandise imports.
As early as 1950 a measure of internal price stability and
some improvement in the country’s external accounts had been
achieved, but international price developments following the
Korean outbreak led to renewed inflationary pressures that
Greek M on ey S upply and B an k C redit to P riv a te S ector
(In d e x e s ; D ecem b er 1 9 4 9 = 1 0 0 )
M oney supply
End of month

1950— Decem ber...........
1951— Decem ber...........
1952— D ecem ber...........
1953— M arch.................
D ecem ber...........
1954— M a rch .................
May.......................

Note
circu­
lation

D em and
d ep osits

102
118
133
130
188
169
176

134
184
191
189
278
303
n.a.

Total
116
147
159
156
228
229
n.a.

Bank credit to private sector
B y com ­
By
central mercial
bank
banks
138
172
158
157
167
167
178

127
152
164
n.a.
196
n.a.
n.a.

Total
135
166
160
n.a.
176
n.a.
n.a.

n.a. N ot available.
Source: Adapted from International M onetary Fund, International Financial
Statistics, and Bank of Greece annual reports.




105

could not be fully contained. By the end of 1951, however,
the post-Korea world price readjustment was leading to a
significant improvement in Greece’s terms of trade, domestic
output was running at a record level, and the social tensions
of the postwar period had measurably abated. The stage was
thus set for the launching of an internal stabilization program
that held real promise of enduring success.
T he P redevaluation Stabilization
The successful execution of the stabilization program that
got under way in late 1951 was aided by the fact that the
Greek elections held in November 1952 resulted in the forma­
tion, for the first time since the war, of a government with
strong parliamentary backing.
The program consisted primarily of the following steps. First,
the ordinary budget deficit, which in fiscal 1950-51 had still
amounted to about 13 per cent of expenditures, was eliminated
within eighteen months, mainly through a partial reorganiza­
tion of the tax system that led to an increase in tax receipts.
Secondly, the use for government investment of counterpart
funds arising from American aid was sharply curtailed, reduc­
ing public capital formation by some 35 per cent from 1950-51
to 1952-53, leading to a sizable increase in unused counterpart
deposits with the Bank of Greece, and thereby providing a
strong brake on further monetary expansion. Thirdly, existing
commercial bank reserve requirements were more strictly en­
forced, credit ceilings were established for individual banks,
and, most effective, substantial reductions were made in Bank
of Greece credit used to finance private activities.
The extent to which the stabilization program had begun to
bear fruit by the time the drachma was devalued in early 1953
may be seen in the Greek monetary and economic indicators
shown in the table and chart. The total money supply increased
only 8 per cent in 1952, compared with 27 per cent in 1951
and 16 per cent in 1950, and was actually declining in the
months preceding the devaluation. Total bank credit to the

106

M ONTHLY REVIEW, AUGUST 1954

private sector fell by 4 per cent in 1952, as against sharp rises in
previous years. At the same time, wholesale prices and the cost
of living, which had risen 17 and 10 per cent, respectively,
in 1951 declined slightly in 1952 and remained stable during
the first quarter of 1953. Finally, the quotation for the gold
sovereign fell by about 20 per cent, despite the fact that the
Bank of Greece ceased its selling operations in March 1952.
Economic activity, however, declined somewhat during this
predevaluation period. W ith the cuts in government invest­
ments and with the general lessening of inflationary demands,
industrial output, previously geared to these demands, fell
and unemployment rose—a manifestation of the not unusual
conflict between the restoration of a reasonable monetary bal­
ance and economic expansion. The business recession, which
was particularly marked during the second half of 1952 and
the first quarter of 1953, was especially noticeable in the build­
ing, textile, and other consumer goods industries.
Externally, the most tangible effect of the stabilization pro­
gram was the substantial decline in imports due to the lessen­
ing of inflationary pressures. The external payments position
was eased also by the post-Korea decline in world commodity
prices. These two factors are primarily responsible for the
sharp reduction of the current-account deficit of the Greek
balance of payments from 320 million dollars’ equivalent in
the fiscal year ended June 1951 to 59 million in the year
ended June 1953.
Exchange receipts from exports of goods and services, how­
ever, failed to increase significantly during this period, pri­
marily because of the continuing overvaluation of the Greek
drachma. Moreover, the failure of exports to expand con­
tributed to the internal business recession. It thus became
clear that the achievement of fuller external equilibrium and
the establishment of a firmer basis for renewed internal expan­
sion required an adjustment of the exchange rate. On April 9,
1953 the Greek Government accordingly devalued the drachma
by 50 per cent, thus changing the official exchange rate from
0.0066 United States cents (15,000 drachmas to the dollar)1
to 0.0033 per drachma (30,000 drachmas to the dollar), and
at the same time eliminated the complex multiple-exchangerate system previously in effect. Shortly afterward, moreover,
quantitative restrictions on imports from all currency areas
were virtually eliminated.
Effects of the D evaluation
The external effects of the devaluation were striking. During
July-December 1953, Greece for the first time since the war
achieved a current-account surplus, amounting to 13 million
dollars. Partly because of a seasonal drop in exports and
invisible earnings, a small deficit seems to have reappeared
during the first half of 1954, but it is expected that the deficit,
1 The Greek Government as of May 1, 1954 cut the face value of
bank notes, prices, wages, exchange rates, and all other monetary
values to 1/1,000 of their previous value, without changing their
relationships to each other. Until all "old” notes are withdrawn,
however, all such monetary values are quoted both in term of the
s
"new” and “old” notes. In this article, all values are in term of the
s
"old” notes.




if any, for the entire fiscal year ended last June will be only
a fraction of the predevaluation one.
Moreover, whereas in 1952 the reduction of the external
deficit had been due chiefly to a fall in imports reflecting in
part cuts in investment and the contraction of business activity,
the recent improvement may be attributed principally to an
increase in exports and invisible earnings. Exchange receipts
from merchandise exports are estimated to have risen by at
least a fifth from the year ended June 1953 to that ended June
1954, the currency readjustment making it possible to dispose
not only of the record crops that became available for export
in 1953, but also of previously accumulated stocks, notably
tobacco. No less noteworthy was the rise of over a third in
net earnings from tourism, shipping, emigrants’ remittances,
and other invisibles.
Imports have risen moderately, reflecting in part the virtual
elimination of trade restrictions following the devaluation. The
1953 record harvest has permitted further cuts in cereal im­
ports, which were valued at 18.2 million dollars during that
year, compared with 35.9 million in 1952 and 65.3 million in
1951. At the same time devaluation, by raising the drachma
price of imports relative to that of domestic import-substitutes,
led to a shift in demand from imports to domestically pro­
duced commodities.
The improvement in the Greek balance of payments has
involved all major currency areas. Particularly gratifying has
been the reduction in the trade deficit with the dollar area.
The Greek trade deficit with the United States and Canada
fell to 30 million dollars during the year ended March 1954,
from 56 million during the previous year and 88 million
in 1951-52. Similarly, during the twelve months prior to
March 31,1954, Greek operations with the European Payments
Union (EPU) resulted in a deficit of only 26 million dollars,
compared with deficits of 102 million in 1951-52 and 47 mil­
lion in 1952-53. Somewhat increased EPU monthly deficits,
however, were incurred in the second quarter of 1954.
The achievement of a current-account surplus during JulyDecember 1953 and the continuation of United States aid,
though on a greatly reduced scale, enabled Greece to strengthen
substantially its gold and foreign exchange position. By
December 31, 1953, official gold, dollar, and sterling holdings
amounted to 142.1 million dollars’ equivalent, as against 92.8
million a year previous; by March 31, 1954 the total had risen
to 152.5 million.
Beside contributing toward strengthening Greece’s external
economic position, devaluation helped to stimulate economic
activity. As already noted, it led to a shift in demand
from imports to domestically produced commodities. At the
same time, by stimulating exports and raising export prices in
terms of the drachma, it increased to some extent the income
of export producers and traders. These effects of the devalua­
tion in raising incomes and demand coincided with the subtantial rise in farmers’ incomes due to the exceptionally good
1953 harvest, which exceeded that of the previous year by

FEDERAL RESERVE B AN K OF NEW YO R K

more than a third. Industrial production responded vigorously
to the rising demand and, by the first quarter of 1954, was
running 36 per cent above a year before and some 65 per cent
above prewar levels.
While economic activity has thus picked up considerably,
the relative internal balance that had been achieved at the
time of the devaluation has on the whole been maintained. It
is true that prices are now substantially higher than before
April 1953—wholesale prices by some 30 per cent and retail
prices by 25—but the rise reflects primarily the usual costraising effects of devaluation. Following a short period of
increase, wholesale prices have been virtually stable for almost
a year. The fact that the repercussions of the devaluation on
domestic prices have not been so severe as might have been
feared has been due in part to the continued decline in world
commodity prices—although at a reduced rate—and even more
to the improvement on the supply side, resulting from the
record industrial and agricultural output and from the increase
in imports that followed the virtual elimination of all import
restrictions last year. To some extent, however, this has also
reflected the fact that the government has continued to pursue
cautious credit and fiscal policies.
R ecent M onetary and Fiscal D evelopments
The devaluation was followed by a substantial increase in
the money supply, which rose 47 per cent from April 1953
through March 1954. The increase reflected mainly two factors:
first, the influx of gold and foreign exchange into the official
reserves and, secondly, expanded government borrowing to
meet the needs of agriculture during the months when the
unusually large 1953 crops had to be harvested and put on
the market. Significantly enough, there was only a limited
expansion in total bank credit extended directly to the private
sector, while bank lending to the government for purposes
other than the financing of agriculture was reduced. With
industrial production running almost 40 per cent higher than
in the previous year, agricultural output one third larger, and
foreign sales booming, the increase in the money supply does
not seem unduly out of line. Nevertheless, the monetary
authorities took a number of steps in the first quarter of 1954
to prevent continued monetary expansion from jeopardizing
economic stability. The release of counterpart funds, arising
from United States aid, for the financing of investment out­
lays was temporarily slowed down, reserve requirements against
certain types of deposits of official entities with commercial
banks were raised, and the Bank of Greece curtailed its own
lending activities.
The governments resolve to prevent a renewal of inflation
was also indicated by its fiscal policies. Despite continued
heavy defense expenditures, which still accounted for some 50
per cent of total ordinary expenditures, the ordinary budget
for 1953-54 called for a 300 billion drachma (10 million
dollar) surplus, which may well have materialized. While such
a surplus represents less than 4 per cent of total ordinary




107

expenditures, its very existence is a stabilizing psychological
factor.
The 300 billion drachma surplus on the ordinary budget is
being applied toward the financing of the government’s invest­
ment program, which, after having been curtailed in 1951 and
1952 as part of the stabilization effort, is scheduled for a sub­
stantial expansion, with particular emphasis on electric power,
agriculture, and mining. The investment outlays are, however,
to be subject at all times to review in the light of over-all
monetary developments. Indeed, it was in line with this policy
that, as previously noted, the release of counterpart funds was
slowed down at the turn of the year to halt the continued
expansion of the money supply.
The government’s investment program is also being partly
financed by means of a 300 billion drachma, seven-year loan—
the first truly voluntary domestic bond issue since the war.
Issued at par, the new government bonds carry tax-free coupon
interest at 5 per cent per annum and, in addition, have a
lottery feature providing for cash, automobiles, tractors, and
similar prizes, which are also tax exempt. The principal of
the new issue (but not the coupon interest) is protected against
further devaluation through linkage to the United States dollar,
with redemption payments to be effected on the basis of the
official exchange rate at the time of payment. The issue, which
opened on June 9, was oversubscribed by 35 per cent within
a ten-day period primarily by nonbank investors, thus provid­
ing convincing proof of the growth of confidence in the
drachma during the past two years.
The free market for the gold sovereign, where the 50 per
cent exchange rate devaluation has not led to a fully com­
parable rise in the gold price in terms of drachmas, has also
reflected the growing conviction on the part of investors that
no early renewal of rapid price inflation is to be expected.
Domestic economic expansion at relatively stable prices offers
more promising profit opportunities than the purchase of gold;
in addition, the gold quotation has tended to move in line with
the world-wide decline in free-market gold prices.
Some Longer -term P roblems of
G reek Economic P olicy
The relative success of the Greek stabilization program has
important implications for the longer-term problems facing
the Greek Government, more particularly to insure that suffi­
cient new investments will be made to provide satisfactory
employment and higher living standards for the country’s grow­
ing population. Two major conditions must be fulfilled if
this aim is to be accomplished while maintaining reasonable
economic balance: an increasing pan of the internal expendi­
tures involved must be financed by means of budgetary sur­
pluses and voluntary private savings, and additional foreign aid
or credits will have to be obtained.
As far as securing the needed internal financing is concerned,
it is encouraging that public investment outlays are now being
partly financed by the surplus on the ordinary budget and

108

MONTHLY REVIEW, AUGUST 1954

through an internal loan, and that recently a certain amount
of private investment seems to have been financed with funds
obtained through the dishoarding of gold and foreign ex­
change. The external financing problem, on the other hand,
is more difficult because of the reduction and prospective end­
ing of United States economic aid. It is therefore vital that
exports of goods and services be expanded and diversified, and
with this aim in view the Greek development program is con­
centrating heavily on the promotion of mining activities and
export agriculture. Moreover, the continued expansion of
agricultural and industrial production will permit a further
curtailment of imports, thus releasing foreign exchange for
the financing of capital goods imports. Action is also urgent
in promoting tourism for which the country’s potential is great.
In addition, there appear to be some possibilities of cushion­
ing the impact of the reduction in United States Government
grants by securing loans from foreign and international public
lending agencies, and by encouraging the inflow of foreign
private capital. Negotiations are reportedly under way con­
cerning development loans by the International Bank for
Reconstruction and Development. In addition, a new foreign
investment law has been enacted that gives foreign private
capital favorable tax treatment and liberalizes the transfers of

earnings and the repatriation of capital. It is noteworthy that
similar privileges apply to Greek shipowners if they transfer
their ships from foreign to Greek registry. Moreover, with a
view to improving the country’s international credit standing,
the government is trying to arrive at a settlement of Greece’s
prewar external debts, which are in default.
Conclusion
The very real progress toward internal and external
stability in Greece in recent years shows how large-scale for­
eign aid, by helping a country to achieve a sizable recovery
of output, income, and productivity, can set the stage for the
successful application of the traditional fiscal and monetarypolicy weapons and promote the constructive use of available
internal funds. Combined with a timely devaluation of the
currency, the recent Greek anti-inflation program has laid the
basis for a renewed and stable advance in output and income.
With the easing of the tensions and pressures that had pre­
cluded successful stabilization in Greece during the earlier
postwar period, there have emerged relatively favorable eco­
nomic and political conditions under which the approximate
internal and external economic balance recently attained has
some promise of enduring.

T R E A S U R Y F IN A N C IN G IN F IS C A L 1954

The fiscal year that ended June 30 was marked by the transi­
tion of the nation from a fighting to a cold war economy and
was accompanied by a contraction in business activity. Treasury
receipts and expenditures during the year reflected the changes
in the economy that stemmed from these developments. While
defense expenditures declined substantially, certain of the
so-called "built-in stabilizers” called for larger outlays. The
full impact on Treasury income and outgo of the business
recession that began to develop about a year ago was not real­
ized, however, because of offsetting developments. On balance,
the Treasury’s financial position was better in fiscal 1954 than
in fiscal 1953, both on a cash and on a budget basis.
Nevertheless, the Treasury borrowed almost as much from
the public as in the preceding year in order to raise its operat­
ing cash balance to a more comfortable working level. Through
the choice of issues both in refunding operations and in new
money borrowings during the year, the Treasury was able to
alter the maturity schedule of the debt so that by the end of the
fiscal year the amount of issues maturing within five years was
8.8 billion less than at the beginning of the year. Also, some
progress was made in lengthening the average maturity of the
marketable debt despite the passage of time which brings out­
standing issues closer to maturity; the average maturity of this
portion of the public debt moved from 5.5 years at the year’s
beginning to 5.7 years at the end of June.

dollars, were almost 4.5 billion lower than in fiscal 1953, the
peak year for the rearmament drive following the outbreak of
the Korea conflict. However, cash receipts at 71.8 billion dollars
were close to the collections in fiscal 1953. Consequently, the
Treasury closed its books on cash operations with a small deficit
of 150 million dollars, whereas in the preceding year, as Table I
indicates, the cash deficit had amounted to over 5 billion dollars.
Various counteracting developments served to bring about
this virtual extinction of the cash deficit. The most notable
development of the year was the drop in defense spending.
Following the signing of the truce in Korea in July 1953,
spending for defense and related programs declined steadily
and, by the final quarter of fiscal 1954, was running at an
annual rate of around 44 billion dollars, compared with an
annual rate of over 53 billion in the last quarter of the preced­
ing fiscal year. This decline left total outlays for defense in
the past fiscal year several billion dollars below the level
planned as recently as January. The larger-than-anticipated cut­
back reflects in part a delay in the rearmament program arising
from the shift in the basic structure of the military organiza­
tion adopted during the year, as well as military economies
following the end of hostilities in Korea that were larger than
had been expected.
The total impact on the economy of the change in the defense
program was greater than the change in current expenditures
because of a sharp contraction in obligations incurred for future
Cash O perations
purchases. The decline in new orders placed by the Defense
Mainly as a result of lower defense expenditures, cash dis­ Department, which began in the fall of 1952, continued
bursements by the Government in fiscal 1954, at 71.9 billion through the second quarter of the past fiscal year. This decline




FEDERAL RESERVE BAN K OF NEW YO R K

in the rate of contract-letting carried new orders (obligations)
substantially below expenditures, as shown in the accompany­
ing chart. Some military contracts were canceled after the
Korea truce, while new orders for other items apparently were
delayed pending a revision in the basis of the defense program.
Despite a small increase in contracting in the subsequent
months—January through May 1954 (June data are not yet
available)—the volume of outstanding orders dropped by over
13 billion during the first eleven months of the past fiscal year
to almost 19 billion dollars below the peak of over 50 billion
dollars reached in September 1952. At the end of May, how­
ever, the Defense Department had over 22 billion dollars in
unobligated spending authorizations, or almost half the total
provided for the past fiscal year. Nearly 9.5 billion of these
unobligated balances are available for major procurement and
production, or in other words for ordering military hardware,
and another 7.5 billion are available for ‘undisclosed” purposes.
In the nondefense area, expenditures showed a net decline
despite growing unemployment compensation payments, result­
ing from the general reduction in economic activity, and an
increase in the need for farm price-support loans. The decline
in market interest rates reduced the need for Government sup­
port of the mortgage market, and a greater reliance on private
financing of farm price-support loans and of housing loans by
the Public Housing Authority reduced Federal cash outlays.
At the same time, foreign economic aid fell short of the prior
year’s spending.
T a b le I
Cash In com e and O u tg o o f the U nited S tates T rea su ry ,
F iscal Y ears 1953 and 1954

(In billions of dollars)

I.

Change
1953-54

71.8

+ 0 .5

32.6
21.7
6 .8
14.1
- 3 .4

+
*
+ 0 .2
+ 0 .3
+ 0 .3
- 0 .3

7 1.3

C ash in c o m e
Individual income taxes..............................
Corporate income taxes...............................
Trust funds f ..................................................
All other..........................................................
Refunds...........................................................

1954

1953

Transactions

32. Qp
21. op
6 .5
13.8
- 3 .2

71.9

—4 .5

50.7
25.7

47.3
24.6

- 3 .4
-1 .1

Interest on d eb t.........................................
Veterans......................................................
International finance and aid§...............
Government corporations#.....................
Trust funds t ..............................................
All other......................................................
Clearing account for outstanding checks
III.

76.4

National defenseX..........................................
Nondefense......................................................

II.

4 .7
4 .3
1.9
2 .0
5 .2
7 .4
+ 0 .3

-

4 .6
4 .2
1.2
0 .4
6 .8
7 .6
0 .1

_
*
-0 .1
- 0 .7
-1 .6
+ 1 .6
+ 0 .2
- 0 .4

-

-

0 .2

+ 4 .9

Cash, o u t g o P

N et ca s h d eficit (I -I I )

5.1

N ote: Because of rounding, figures do not necessarily add to totals.
V The breakdown is based partly on estimates by the Federal Reserve Bank of
New Y ork.
* Less than 50 million dollars.
f Covers only the major trust funds (i.e., funds covering old age, railroad retire­
ment, unemployment, veterans’ life insurance, and civil service retirement).
X Covers military outlays by the Defense Department and related expenditures
for strategic and critical materials, the National Advisory Commission for
Aeronautics, and the Selective Service System, as well as military assistance
under the Mutual Security Act, the Atom ic Energy Commission, government
maritime activities (formerly under the Maritime Commission), the Coast
Guard, expenditures for defense production, and the redemption of Armed
Forces leave bonds.
§ Covers economic and technical assistance under the Mutual Security A ct and
other foreign assistance programs, as well as the net redemption of notes
issued to the International Monetary Fund.
# Covers R FC, C CC, Export-Im port Bank, F N M A , and other wholly owned
Government corporations. The partially owned corporations are included in
the disbursements under “ All other” .
Source: Daily Statement of the United States Treasury.




109

DEFENSE DEPARTMENT EXPENDITURES AND OBLIGATIONS, FISCAL 1951-54

prior to that time,
p Preliminary average of April and May only.
Source:

Defense Department and Treasury Department.

While both defense and nondefense expenditures dropped
for the reasons just given, revenue remained essentially un­
changed. Collections of income and profits taxes were sub­
stantially the same as in the preceding year, despite the decline
not only of economic activity but also of tax rates on both
individual and corporation incomes. Individual income tax
collections remained level with the previous year, because per­
sonal income—although declining moderately on a quarterly
basis throughout the year—was higher in fiscal 1954; the
larger tax payments on this higher income apparently offset
the losses arising from the January 1 reduction in rates on
individual incomes. Corporate tax collections also changed very
little from the previous year; although the average profits—on
which the collections in fiscal 1954 were based—were higher,1
the increase in liabilities on the basis of profits alone was
apparently offset by the larger reduction arising from the
cumulative credit for new capital additions under the excess
profits tax. It should also be noted that neither the fairly sharp
reduction in corporate profits that occurred with the onset of
the business contraction in mid-1953, nor the demise of the
excess profits tax on January 1, 1954, was reflected in the tax
collections of fiscal 1954, since the tax payments for most
corporations on the lower calendar-1954 profits—on which
the lower rates are effective—would not be due until later in
the new fiscal year.
1
The tax collections in these two fiscal years were based on profits
in the three calendar years, 1951-53, which varied considerably.
Because of the Mills plan— under which tax collections are being
progressively moved ahead so that payments will be completed in the
six months following the income year— collections in fiscal 1954
included 90 per cent of the tax liabilities on calendar-1953 profits;
the latter were almost 3 billion higher than the 1952 profits, on which
80 per cent of the tax liabilities from that income were paid by most
corporations in the comparable half of fiscal 1953. The increase in
tax collections in fiscal 1954 from this pattern of payments and varia­
tion in profits more than offset the decline in collections in the first
half of fiscal 1954 from the comparable half of fiscal 1953, arising
from the lower proportion (20 per cent as against 30 per cent on the
second calendar-1951 profits) due on the smaller volume of calendar1952 profits.

110

MONTHLY REVIEW, AUGUST 1954

Budget O perations
In contrast to the small cash deficit, the budgetary deficit,
representing the excess of budget expenditures over receipts,
amounted in fiscal 1954 to slightly over 3 billion dollars. This
deficit compares with a net budgetary deficit of over 9.4 billion
dollars in the preceding year. The difference between the
budgetary and the cash deficit in fiscal 1954 is accounted for
in large part by: (1) the inclusion in budget expenditures
of 2.7 billion in noncash intra-Governmental payments and
accrued liabilities, such as the transfer of interest and other
payments to the trust funds and the excess of accrued interest
on Savings bonds over the interest actually paid on Savings
bonds that were redeemed; (2) by the exclusion from the
budget accounts of slightly over 150 million of net cash receipts
from the public by the trust accounts; and ( 3 ) by adjustments
both for net receipts by the miscellaneous group of funds
(including the partially owned Government corporations) in
the Deposit Fund Accounts and for a decrease in outstanding
checks.
While the cash position in fiscal 1954 was almost 3 billion
better than the budget position, the improvement was about
a billion and a half less than the nearly 4.4 billion difference
between the cash and budget deficits in the preceding year.
The smaller difference in fiscal 1954 was mainly the result of
a sharp drop in the excess of cash collections over disburse­
ments by the trust funds, which primarily reflected the shift
in the transactions of the Unemployment Fund from net
receipts to net disbursements. Receipts by the Old-Age and
Survivors* Insurance Fund increased as a result of the increase
in tax rates from 1Vz to 2 per cent each on employers and em­
ployees, effective January 1, but the rise was less than the rise
in benefit payments by that fund, and the net collections by
that fund, although substantial, were not quite so large as in
fiscal 1953.
Variation D uring Fiscal 1954
As in most recent years, the Treasury’s regular cash opera­
tions showed considerable variation over the fiscal year. The
Mills plan has progressively increased by 10 per cent, in each
of the past four years, the corporation tax payments falling due
in the first half of the calendar year. Furthermore, despite
greater reliance by individuals upon current withholding
arrangements, there has continued to be a decided concentra­
tion of individual income tax payments in the January-June
period. Consequently, the first half of a fiscal year, JulyDecember, has been a period of lean tax collections, during
with the Treasury has been compelled to borrow large amounts.
The variation in cash receipts was felt most acutely in the
past fiscal year, because at the beginning of the period there
was a margin of less than 9.5 billion dollars between the exist­
ing debt and the legal limit. Although the cash balance
on hand at the beginning of the year totaled over 4.5 billion
dollars, this was less than one month’s anticipated operating
disbursements (and part of it had been raised by anticipating
the September receipts through the sale of tax anticipation bills




in June). Operating outlays in the six months were expected
to exceed receipts by some 9 billion dollars; while the cash
borrowing needed to cover the operating needs could be under­
taken within the free margin below the debt ceiling, this
would leave only minimal leeway to cover the expected increase
in liabilities to the trust funds and the increase in accrued
interest.
When the President’s request for an increase in the debt
ceiling was denied, the Treasury resorted to several measures.
First, to keep cash needs within the debt limit, over 800 mil­
lion of farm price-support loans by the Commodity Credit
Corporation was resold to commercial banks. Secondly, to
leave room within the statutory debt ceiling for the sale of a
marketable bond in November, the Treasury terminated the
sales of Savings notes late in October. Until then, the latter
issue could be purchased at will by investors. Finally, to obtain
the maximum feasible public subscription to that bond within
the debt ceiling, the Treasury in November retired 500 million
dollars of a marketable note issue by using half of the "free”
gold in its General Fund. The notes were purchased from the
Federal Reserve System and, since the gold was transferred to
the System, the operation had no immediate effect on bank
reserves.
During this first six-month period, nearly 8.7 billion of
"new money” was raised in the market. The large volume of
new money borrowing in this six-month period was necessary
not only to finance the net cash deficit and to redeem a small
issue of tax anticipation bills maturing in September 1953,
but also to cover the attrition (the unexchanged portion)
of maturing marketable issues as well as some net redemption
of Savings bonds. The substantial volume of net cash borrow­
ing, along with an increase in noncash borrowing of 1.1 billion
dollars (that occurred through the issuance of Treasury obliga­
tions to the trust funds and other Government agencies and
through the net increase in accrued interest on Savings bonds),
brought the debt subject to the statutory ceiling to 274.7 bil­
lion dollars by the end of December, only 329 million short
of the maximum allowable.
During the last half of the year, the Treasury realized a sub­
stantial surplus of close to 8 billion dollars which was used to
redeem close to 5.7 billion net of debt (including Government
corporate issues) held by the public and to add about 2.2 bil­
lion to the Treasury’s working balance. Since almost 1.6 billion
in noncash borrowing occurred in the second half of the fiscal
year, the debt subject to the ceiling declined by 3.9 billion to
somewhat less than 271 billion dollars. This left a raargin
of slightly over 4.2 billion dollars to cover requirements in
the coming period of lean tax collections in the new fiscal year.
Comparison with Budget Forecasts
The close approach to a cash balance achieved in fiscal 1954
was about as forecast in the Budget Message submitted to
Congress last January by President Eisenhower. But, while the
net result was close to the mark, cash receipts and expenditures

111

FEDERAL RESERVE BAN K OF NEW YO R K

were each more than 3 billion below the January expectations.
The decline in cash outlays below the January Budget estimate
occurred mainly in defense outlays, while most of the reduc­
tion in receipts occurred in income and profits taxes. Corporate
profits during the 1953 calendar year (on which taxes were
paid by most corporations beginning March 1954) were less
than originally assumed. In addition, the cumulative credit for
new capital additions under the excess profits tax law apparently
tended to lower corporate tax liabilities more than anticipated.
At the same time, personal income sagged somewhat, whereas
stability had been assumed in the January estimate. Also, indi­
viduals apparently made larger-than-normal prepayments of
taxes on calendar 1953 incomes through withholdings, so that
the amount of final payments in 1954 on 1953 incomes was
less than had been projected. Both of these factors led to an
overestimation of individual income taxes and an underestima­
tion of refunds (which are deducted from receipts). Other
receipts were around 800 million below the Budget forecast,
reflecting for the most part less-than-anticipated collections of
excises and below-estimated contributions to the trust funds.
C hanges in the P ublic D ebt
Even though the Governments operating cash deficit was
much smaller than in the preceding year, borrowings from the
public in fiscal 1954 were only slightly less than in fiscal 1953.
The net borrowing in excess of the deficit resulted in a larger
working balance at the close of the year than at the beginning.
Nevertheless, the cash balance in the General Fund, together
with the remaining margin of borrowing authority under the
debt ceiling, was not expected to be sufficient to meet net
expenditures during the first half of the new fiscal year and
to leave an adequate working balance at the close of the period.
During fiscal 1954 over 2.7 billion dollars net was borrowed
in cash from the public, as shown in Table II, but, after adjust­
ing for the redemption of nearly 225 million of Government
corporation issues (which in effect reduced the size of the
Table II
Cash Deficit and Public Debt, Fiscal Years 1953 and 1954
(In billions of dollars)

1954

1953

Source and use of funds*

Chanee
1953-54

Cash operating deficit...................................
Change in Treasury balance, cash operations

+
-

5 .1
2 .3

+
+

0 .2
2 .6 t

-4 .9
+ 4 .9

Cash borrowing from the public, n e tt..............

+

2 .8

+

2 .7

-

Cash borrowing on direct debt, net...................
Gold retirement of direct d e b t............................
Noncash borrowing on direct d eb t.....................

+

2 .9

+

4 .0

+
+

3 .0
0 .5
2 .7

+
§
—0 .5
- 1 .3

Increase in the public direct d eb t..................

+

7 .0

+

5 .2

-1 .8

1

Public direct debt at end of year#.....................

266.1

271.3

+ 5 .2

Treasury’s balance at end of year. ...................

4 .7
3 .2

6 .8
5 .7
0 .5

+ 2 .1
+ 2 .5
-0 .5
+ 0 .1

Gold.......................................................................

1.0
0 .5

0.6

Note: Because of rounding, figures do not necessarily add to totals.
* Plus ( + ) indicates the provision of funds by borrowing to cover a deficit or build
up the balance.
f The net change in the General Fund reflects the reduction in gold for the purpose
of retiring debt, as well as the change in deposits from cash operations with
the public.
J Includes a small amount of redemptions of Government corporation issues.
§ Less than 50 million dollars.
# Ineludes a small amount of debt not subject to the statutory ceiling.
% Deposits in Tax and Loan Accounts at commercial banks and in available funds
at the Federal Reserve Banks.
Source: Daily Statement of the United States Treasury.




Table III
Changes in Gross Public Debt, Fiscal Years 1953 and 1954
(In m illions o f d olla rs)
T ype of issue
Marketable obligations..........................................
United States Savings b o n d st..............................
Treasury Savings notes..........................................
Investment Series bonds— Series B-1975-80. . .
Special issues.................... .......................................
All other obligations...............................................
T o ta l......................................................

1953

1954

+ 6 ,8 6 6 *
+
170
- 2 ,1 6 4
755 §
+ 2 ,7 9 9
+
49

+ 3 ,1 3 5 f
+
212
+
628
479f
+ 1 ,6 9 1
+
3

+ 6 ,9 6 6

+ 5 ,1 8 9

N ote: Because of rounding, figures do not necessarily add to totals.
* Takes into account the issuance of 921 million dollars of 1 H per cent marketable
Treasury notes in exchange for Investment Series B bonds (714 million dollars
of this was exchanged by the Federal Reserve System), and 417 million dollars
of SH per cent marketable bonds issued on M ay 1, 1953 in exchange for
Series F and G bonds, as well as a reduction of 132 million dollars of market­
able bonds arising from delayed payments on subscriptions, under a special
instalment arrangement, to a cash and exchange offering made in M ay 1952.
t Takes into account the issuance of 479 million dollars of 1 H per cent marketable
Treasury notes in exchange for Investment Series B bonds.
J Includes discount accrued during the year on all unredeemed Savings bonds,
i.e., the increase in the redemption value arising from accrued interest.
§ Change includes a reduction of 921 million in exchange for 1 A per cent market­
X
able notes and an increase of 166 million arising from delayed payments on
subscriptions to a cash and exchange offering made in M ay 1952.
Source: Daily Statement o f the United States Treasury.

Treasury’s net cash direct borrowing) and for the retirement of
debt to the extent of 500 million with "free” gold, the cash
increase in the direct public debt came to nearly 2.5 billion
dollars. Noncash borrowing, mainly from the trust funds, and
the net increase in accrued interest on Savings bonds amounted
to over 2.7 billion dollars. Thus, the public debt increased
nearly 5.2 billion dollars.
The net increase in the public debt was roughly equivalent
to the rise in holdings of Government securities by the bank­
ing system. Nonbank investors liquidated about 2 billion dol­
lars of their holdings (even after counting the increase in the
redemption value of Savings bonds arising from accrued
interest), and this was about equivalent to the increase in the
investments of Federal agencies and trust funds. The decline
in nonbank private holdings centered in holdings by business
corporations and may reflect the drop in tax liabilities on the
current years profits, arising both from the slackening in pro­
duction and from the termination of the excess profits tax
on January 1.
Changes in Composition of D ebt
Substantial changes in the composition of the debt were
effected during the year, as shown in Table III. Outstanding
marketable issues increased by over 3.1 billion dollars net,
reflecting not only an excess of new borrowing over the attri­
tion on maturing and called issues in exchange offerings and
the retirement of debt with "free” gold, but also a net increase
arising from conversions of nonmarketable issues.
During the year, nearly 480 million of Investment Series B
bonds were converted by private investors into IV2 per cent
marketable notes. This was more than double such conversions
in the preceding year. The decline in market rates during
the year made the sale of such issues more advantageous than
in the preceding year, when the notes could be sold only at
a discount, and more investors apparently took advantage of
the opportunity to shift some of their funds from the Investment Series B bonds into other, more attractive investment:
outlets.

112

M ONTHLY REVIEW, AUGUST 1954

Net sales of Savings notes in fiscal 1954 amounted to over
million dollars despite the termination of their sale late in
October. After October, redemptions of outstanding issues to
meet the large quarterly corporate tax payments and other
requirements reduced the amount of Savings notes outstanding
by nearly 1.2 billion dollars, largely offsetting earlier net sales.
Savings bonds rose slightly more than 200 million dollars
in redemption value during the fiscal year, as the net increase
of almost 600 million from accrued interest somewhat more
than offset the excess of redemptions (at issue price) over
sales. Reflecting the renewed interest in Savings bonds (particu­
larly by investors of large means) following the decline in
yields on comparable market issues, sales of Series E and its
companion Series H bonds set a new record level since fiscal
1946, and exceeded redemptions (at issue price) of these
issues by around 850 million dollars. Sales of Series J and K
bonds also increased, but they fell short of redemptions of
these and F and G bonds by nearly 1.3 billion dollars, mainly
as a result of redemptions of matured bonds of the latter two
series. Apparently, individuals to some extent reinvested the
funds obtained on the maturing F and G bonds in Series H,
J, and K bonds and also in the larger-denomination E bonds,
while institutional investors, which are also holders of F and G
bonds but are not eligible to purchase E and H bonds, increased
their purchases of J and K bonds but not sufficiently to replace
all of the maturing F and G bonds in their portfolios.
Special issues, which are available only to trust funds and
other Government agencies, increased in fiscal 1954 by over
1.9 billion as a result of the noncash intra-Governmental bor­
rowing, but part of this rise was offset by the cash redemp­
tions of these issues by the Postal Savings System to cover the
continued net withdrawals by their depositors. The rise in
625

special issues in the past fiscal year was considerably less than
in fiscal 1953, mainly because of a shift by the Unemployment
Fund from net purchases in fiscal 1953 to net redemptions in
fiscal 1954; with the rise in unemployment during the past
year, the fund drew on its reserves to cover the excess of com­
pensation payments over receipts, as mentioned previously.
M a rk e ta b le Issues

The composition and maturity schedule, as well as the vol­
ume, of marketable issues were altered during the year. The
amount of Treasury bonds outstanding, after increasing in
fiscal 1953 for the first time since February 1946, declined
by over 700 million dollars. Treasury note issues, on the other
hand, increased by more than 1.5 billion as a result of the new
issue offered in May, while certificates increased by almost
2.6 billion as a result of switches from bonds in exchange
offerings.
The change in the maturity schedule of the marketable issues
was even more marked than the change in the volume of the
debt and the types of issues. By the end of June, outstanding
issues maturing within five years were 8.8 billion less than
at the end of June 1953, while those maturing in more than
five years were 11.9 billion higher. The Treasury achieved
notable success during the past fiscal year in refunding almost
19 billion of maturing and called issues into intermediate
issues and in confining almost ail of its net new money borrow­
ing in the market to such issues. Despite this accomplishment,
over 60.1 billion dollars in marketable issues (including Treas­
ury bills outstanding at the beginning of the year) will mature,
and must be refunded, within the current fiscal year. In fiscal
1954, almost 67 billion dollars of maturing and called issues
were refunded.

T H E V E L O C IT Y OF D E M A N D DE P O S ITS IN N E W Y O R K C IT Y

Following the revision made last year of the monthly data
on debits to demand deposit accounts other than Government
and interbank and the related data on the rates of deposit turn­
over or velocity,1 this Bank recently completed the computation
of revised seasonal factors for the monthly series on deposit
turnover. Indexes of the revised turnover data, on a seasonally
adjusted basis, are now shown regularly in the table on Selected
Economic Indicators that appears elsewhere in this Review as
well as in a separate release.
The accompanying chart shows the actual turnover rates
(i.e.. debits divided by average deposit balances for the
month), adjusted for normal seasonal variation, of the deposits
of the banks in New York City, six other financial centers, and
all other (338) reporting centers. The chart discloses significant
differences, not only in the levels of the three series, but also
in the ways in which they reflect changes in general busi­
ness conditions or are affected by purely financial develop­
ments. The indexes of velocity that appear in the table on

Selected Economic Indicators, on the other hand, do not permit
a direct comparison between the rates of deposit turnover for
the different series. These indexes indicate only the compara­
tive change in velocity for each series from its own level during
a base period rather than absolute rates of turnover.
As may be noted on the chart, the velocity series for the 338
outside centers, which has remained well below the level of the
series for New York or for the six other financial centers, shows
clearly the recession of 1949, the subsequent recovery in the
spring of 1950, and the rapid increase in economic activity
following the outbreak of the war in Korea. This series, how­
ever, has shown relatively little movement since 1951 and has
failed to reflect, to any degree, the recessionary tendencies which
developed after the middle of last year. Velocity at the six
financial centers other than New York City, after declining in
similar fashion during the 1949 recession, has registered only
very moderate increases since 1951. In sharp contrast, the New
York City velocity series has been rising almost continuously
l
See "Bank Debits and Velocity: Economic Indicators” in the since the end of the postwar reconversion period except for
May 1953 issue of this Review. See also “Postwar Changes in the
brief interruptions during the 1949 recession and again in 1951.
Velocity of Deposits” in this Review for March 1949.




FEDERAL RESERVE BAN K OF N EW YO R K

Furthermore, the rate of increase has shown no signs of slack­
ening during the last two years, when velocity in the other
centers rose very little. As a result, the spread between the level
of the New York City series and those for the outside centers
has widened considerably over that period. Moreover, the rate
of deposit turnover in New York City, even after adjustment
for normal seasonal variation, has exhibited frequent and sizable
short-term fluctuations of a magnitude greater than those
shown by the six other leading financial centers and much
greater than those of the other reporting centers.
To a large extent, the difference between the levels of the
velocity of demand deposits in New York City and in other
reporting centers arises from the fact that a relatively large
proportion of New York City debits results from purely
financial transactions. The growing discrepancy over recent
years in these levels probably stems directly from the greatly
increased volume of activity in certain financial markets.
Historically, trading on the stock exchange has been the most
important source of financial debits, but in the years during and
since the last war the importance of debits arising from trading
in Government securities has increased considerably. The fact
that operations in the market for Government securities have
given rise to such substantial (and disproportionate) increases
in debits and velocity in New York City is a result of the rapid
turnover of the large dollar volume of such securities, together
with the use of trading techniques that require full payment
for each purchase (rather than payment of net balances after
offsetting purchases and sales, as for private securities) and of
financing practices that make it possible for traders to operate
with small deposit balances.
Trading in private securities and underwriting of new issues
probably have continued to contribute heavily to the increased
volume of New York debits and to account for some of the
short-run changes in the rate of deposit turnover, which in the
chart appear as irregular fluctuations, as well as for the propor­
tionally larger increase in the velocity of New York demand
deposits in recent years. In each year since 1947, the volume
of new corporate security issues has exceeded by a large amount




113

the volume issued during any year since 1929. Similarly,
offerings of new municipal securities since 1947 have been at
unprecedented levels. Furthermore, the volume of trading on
the stock exchange in recent years has recovered from the low
levels recorded during the late thirties and early forties, and
prices have pursued an upward trend.
It is clear, however, that the major irregular movements in
the New York City velocity series during the war reflected the
successive War Loan drives and, since the end of the war,
have been associated with major Treasury financing operations
and, on a few occasions, with Federal Reserve open market
operations. While appropriate data are not available to demon­
strate this interdependence on a firm statistical basis, almost
all peaks in the rate of deposit turnover in the new series can
be traced either to Treasury financing operations or to increased
activity in the market for Government securities arising from
overt Federal Reserve policy actions or other influences.
In many instances, peaks in the New York City velocity
series are matched by corresponding, although much less pro­
nounced, movements in the series for the six other financial
centers, but such peaks are proportionally much smaller in
the series for the 338 other centers, if they appear at all.
Increased financial debits in the six financial centers and in all
the other reporting centers during such periods of activity
probably reflect largely debits to the accounts of nonbank pur­
chasers of Government securities or the disposition of funds
obtained by sellers, even though the bulk of Government
securities transactions takes place in New York City. Trading
in Government securities on the part of large corporations
throughout the country has increased in recent years, as they
have attempted to keep their funds more fully invested.
During and immediately after World War II, eight succes­
sive peaks from January 1943 through the end of 1945 ia all
three series reflect the War Loan and Victory Loan drives.
The sharp increases in velocity during these drives were the
joint result of sudden drops in private demand deposits and
simultaneous increases in debits, as payments for subscriptions
to Government securities were charged to private accounts.
Thus, the numerator of the velocity ratio increased and the
denominator decreased simultaneously. Since the drives were
nation-wide, all three series show sharp peaks of comparable
magnitude.
Since the end of the Victory drive, most peaks in the velocity
of New York City demand deposits have been accompanied
by increased activity in the Government securities markets, fre­
quently related to portfolio adjustments by commercial banks
and nonbank investors. These adjustments were in turn often
precipitated by changes in reserve requirements or Treasury
refunding operations.
Thus, the sharp peak in August 1950 occurred during a
period of great market activity associated with a large Treasury
exchange operation involving substantial Federal Reserve port­
folio adjustments. The peak in March 1951 followed the
announcement of the "accord” between the Treasury and the
Federal Reserve System, the simultaneous exchange offering of

M ONTHLY REVIEW, AUGUST 1954

114

nonmarketable bonds for a large volume of long-term market­
able securities, and heavy trading in other Treasury issues. In
September 1953, still another peak was associated with a
marked increase in market activity following a large refunding
operation by the Treasury and the Federal Reserve System’s
re-entry into the Government securities market after more
than a month of inactivity although, in this instance particu­
larly, large offerings of private, and to a lesser extent municipal,
securities may have been of some significance. The marked
rise in the early part of 1954 apparently was also related to a
pronounced expansion in activity in both private and public
securities markets, but trading in short-term Government
securities seems to have played an especially prominent role.
As previously noted, the influence of large transactions in
the Government securities market on the rate of deposit turn­
over is accentuated by the trading practices of such markets.
Practically all payments among stockbrokers, Government
security dealers, investment bankers, and related financial busi­
nesses are made in funds which either are immediately avail­
able to buyers or become so within one day. With a very large
proportion of relatively prompt-payment items among the total

checks deposited, traders have little need to hold substantial
idle balances while awaiting the clearance of checks or while
anticipating payments. Thus, the "efficiency” of deposit bal­
ances held by security dealers or others participating in the
market is multiplied, and, even though the deposits of Govern­
ment security dealers are a relatively insignificant proportion
of the New York City total, their exceedingly high rate of
turnover exerts a disproportionate influence on the total
velocity figures for the City.
Moreover, Government security dealers (as well as security
brokers and dealers in general) are able to conserve further on
their holdings of deposit balances by virtue of their methods
of financing transactions. As indicated, full cash payment,
usually resulting in an equivalent debit (unless a bank is the
purchaser), must be made daily for each purchase of Govern­
ment securities. Dealer payments are frequently financed
through a special type of temporary credit accommodation
known as a "day loan”. These loans, payable the same day as
they are made, enable dealers either to pay for securities they
have contracted to purchase or to pay off loans secured by
securities that they wish to deliver. To the extent that the

SELECTED ECONOMIC INDICATORS
United States and Second Federal Reserve District
Percentage change
1953

1954
Item

Unit
June

M ay

April

June

Latest month Latest month
from previous from year
month
earlier

U N IT E D STATE S
Production and trade
Industrial production*......................................................................
Electric power output*.....................................................................
Ton-miles of railway freight*..........................................................
Manufacturers’ sales*.......................................................................
Manufacturers’ inventories*............................................................
Manufacturers’ new orders, tota l* ................................................
Manufacturers’ new orders, durable g ood s*................................
Retail sales*........................................................................................
Residential construction contracts*..............................................
Nonresidential construction contracts*........................................
Prices, wages, and employment
Basic com m odity p ricesf..................................................................
Consumer p ricesf...............................................................................
Personal income (annual ra te )* § ...................................................
Composite index of wages and salaries*.......................................
Nonagricultural employment*}:......................................................
Manufacturing employment*^........................ . .............................
Average hours worked per week, m an ufacturing^ ...................
Banking and finance
Total investments of all commercial banks.................................
Total loans of all commercial banks..............................................
Total demand deposits adjusted................................................
Currency outside the Treasury and Federal Reserve Banks*.
Bank debits (338 centers)*..............................................................
Velocity of demand deposits (338 centers)*................................
Consumer instalment credit outstandingf.......... %
......................
United States Government finance (other than borrowing)
Cash ou tgo..........................................................................................
National defense expenditures........................................................

100
100
100
$
$
$
$
$
100
100

124p
173
—
24.2 p
4 4 .5p
22.9 p
10.0 p
—
224p
189 p

124
169
92p
2 4.0
4 4.8
22.8
10.0
14. Op
216
178

123
165
89
24.4
45.2
2 3.0
10.0
14.2
213
184

136
164
102
25.9
46.2
25.2
12.4
14.4
174
166

1947-49 = 100
1947-49= 100
1947-49 = 100
billions of S
1939= 100
thousands
thousands
hours
thousands

9 2.3
110.Op
115.1
—
—
48,116p
15,976p
3 9 .6p
3,347

92.8
110.9
115.0
285.2p
255p
4 8 ,148p
16,064p
39.3
3,305

92.5
111.0
114.6
284.4
255
4 8 ,260r
1 6 ,150r
3 9.0
3,465

87.2
109.5
114.5
287.3
248
49,970
17,575
40.7
1,562

millions of $
millions of $
millions of $
millions of $
millions of $
1947-49 = 100
millions of $

—
—
—
30,006p
64,335
1 2 3 .lp
21,110

78,570p
6 7 ,120p
98,700p
30,013
60,854
119.4
20,932

7 7 ,360p
66,750p
9 8 ,600p
29,995
62,918
121.3
20,909

72,932
65,025
96,898
30,163
63,100
120.0
20,6 3 5r

+
+

millions of $
millions of $
millions of $

11,265
6,881
3,929

4,882
6,228
3,477

3,036
5,303
3,619

1 0 ,181r
7,901r
4,587

+ 131
+ 10
+ 13

+ 11
-1 3
-1 4

141
174
206
112.0
7 ,6 9 7 .0
2 ,8 6 8 .1
52,429
4,268
137.4

_

- 2
+30
+ 13
+ 1
- 3
- 8
+ 15
+ 2
+ 14

1947-49==
1947-49 =
1947-49=
billions of
billions of
billions of
billions of
billions of
1947-49=
1947-49 =

+
+
+

—

+
+
—
—

—

+
+

+
+
+

#
2
4
1
1
#
#
1
4
6

- 9
+ 5
-1 3
- 7
- 4
- 9
-1 9
- 3
+29
+14

1
1
#
#
#
#
1
1
1

+ 6
#
1
#
+ 3
- 4
- 9
- 3
—

2
1
'#
#
6
3
1

+

+
+
+
+
+
+

8
3
1
1
2
3
2

SECON D F E D E R A L R E S E R V E D IS T R IC T
Electric power output (New Y ork and New Jersey)*...................
Residential construction contracts*..................................................
Nonresidential construction contracts*............................................
Consumer prices (New Y ork C it y )f ..................................................
Nonagricultural em ploym ent*.............................................................
Manufacturing em ploym ent*..............................................................
Bank debits (New Y ork C ity )* ..........................................................
Bank debits (Second District excluding New Y ork C ity )* ........
Velocity of demand deposits (New York C it y )* ............................

1947-49= 100
1947-49= 100
1947-49 = 100
1947-49= 100
thousands
thousands
millions of $
millions of $
1947-49= 100

139
—
—

112.9
—
—
60,153
4,347
156.1

140
223p
221p
112.9
7 ,4 6 7 .4p
2 ,6 1 8 .lp
60,750
4,016
164.1

138
208
216
112.5
7 ,5 1 3 .2
2 ,6 3 9 .5
60,479
4,313
159.9

+
—
—
—
+

1
7
3
#
1
1
1
8
5

N ote: Latest data available as of noon, July 30, 1954.
§ Revised series.
p Preliminary.
r Revised.
# Change of less than 0.5 per cent.
* Adjusted for seasonal variation.
J Unemployment figures for June 1953 are on the basis of the old sample and, therefore,
t Seasonal variations believed to be minor; no adjustment made.
not necessarily comparable with the figures shown for 1954 which are on the new
% Employment and hours data have been revised as a result of adjusting
sample basis; consequently, a percentage change from a year ago is not shown.
employment levels to a more recent benchmark.
Source: A description of these series and their sources is available from the Domestic Research Division .Federal Reserve Bank of New Y ork, on request.




FEDERAL RESERVE BAN K OF N EW YO R K

transactions entered into by dealers do not add to their total
inventories during the day, these day loans are extinguished by
the end of the same day without any necessity for further bor­
rowing. Thus, a large amount of trading, giving rise to a great
volume of debits, may take place without the dealers needing
to hold large working balances and without any increase in
deposits growing out of the temporary day loans.
Another type of financial transaction, arising in part from
the payment practices in Government securities markets and
in part from the methods used by member banks in adjusting
reserve balances, also has contributed, although in a less im­
portant fashion, to the expanded volume of debits in New York
City since the end of World War II. When sales of Federal
(immediately available) funds to dealers or other nonbank
traders in the market take place, financial debits may be created.
These debits arise because a sale of Federal funds requires for
repayment, in many cases, a check drawn by the borrower;
this check, in the case of a nonbank borrower, results in a
debit. The effect of these transactions, which have been of
increasing importance in recent years, is not entirely limited
to the New York City series, as institutions outside New York

115

City have played an increasing role in this market in recent
years.
Both the velocity series for the six financial centers outside
New York City and, to a much lesser extent, that for the 338
other centers have reflected from time to time fluctuations in
activity in financial markets—especially those for Government
securities. In the case of the 338 centers, however, velocity is
shaped primarily by general economic forces,2 and the series
for those centers remains an important tool for analyzing busi­
ness conditions and, in particular, the credit situation. On the
other hand, the frequent and substantial fluctuations in the
velocity of demand deposits in New York City, while generally
explicable in terms of the structure and activity of the securi­
ties markets, tend to obscure the influence of broad economic
developments. Consequently, the value of the New York City
series in an analysis of general business conditions is sharply
limited.
2
It also has a narrower range of seasonal fluctuations (monthly
figures normally ranging between 94.0 and 105.5 per cent of the yearly
average, compared with 86.5 to 113.0 per cent for the New York City
series).

D E P A R T M E N T STO RE T R A D E

Preliminary estimates for July indicate that sales at Second
District department stores, on a seasonally adjusted basis, rose
2 per cent above the level of the previous month and equaled
sales in July 1953. Total sales during the first seven months
of 1954 were approximately the same as in the comparable
period last year.
G ross T ransactions and Average Value per
T ransaction at N ew Y ork City D epartment Stores
Retail sales data are generally reported in dollar terms, and
not in terms of the physical quantity of goods moved. The
quantity of goods sold may frequently be a significant economic
variable in itself, however; in addition, the analysis of trends
in dollar sales data may often be made more meaningful
through use of an indicator of changes in the physical quantity
of goods sold.
In department store statistics, an approximate indicator of
physical goods movement is available in sales transaction data.
A selected group of New York City stores reports regularly to
this Bank on gross transactions (the total number of sales
checks issued) and net dollar sales (gross sales minus re­
turns and allowances). One sales check frequently covers
more than one item, of course, and transactions data conse­
quently tend to understate physical goods movement. But
they do provide an approximate measure of it, and average
transaction values derived by relating these data to net dollar
sales are sometimes useful in analyzing certain aspects of con­
sumer spending in department stores—tendencies to buy
higher-priced or lower-priced merchandise, for example.
Hie total number of sales transactions reported by New
York City department stores and the average value of these




transactions changed only slightly in the first six months of
1954 from previous-year levels. (The accompanying table
indicates that transactions declined 1 per cent and average
value rose 1 per cent.) This relative year-to-year stability was
in marked contrast to the experience of the previous year and
a half. Then, consumers were indicating strong preferences for
higher-priced merchandise, preferences which were evidenced
by an increasing average value per transaction at a time when
prices of department store type merchandise generally were
gently declining. At the same time, however, consumers were
reducing the number of their purchases at department stores
to such an extent that New York City department store sales
Gross Transactions, Net Dollar Sales, Average Value per Transaction,
and Prices at New York City Department Stores, 1953-54
(P e rce n ta g e ch an ge fro m p reced in g yea r)

Period
1953
January-June............................

Average
Gross trans­ Net dollar
value per
tra n sa ction
actions
sales

Prices*

+5

-1

+4
-5
-4
-5
0
-3

+6
+6
+5
+5
+4
+1

-1
-1
-1
-1
0
-1

-

6

—2

+4

-1

+
-

July-Decem ber.........................

-1

- 2
-1 0
- 8
- 9
- 4
- 4

2
2
3
7
2
2

-2
+2
-3
+6
-3
0

0
+4
0
-1
-1
+2

-1
-1
-1
-1
-1
-1

-

1

0

+1

-1

-

6

1954

January-June............................

♦Weighted average of apparel and homefurnishings prices for New Y ork C ity,
computed from data of the Bureau of Labor Statistics.

116

M ONTHLY REVIEW, AUGUST 1954

In the absence of the factors leading to this "borrowing” of
sales by February and April from the months where they would
otherwise have fallen, net dollar sales would have been lower
in the two months when sales increased, but higher in some or
all of the other four months when they decreased or did not
rise. This points to an underlying element of stability in
department store trade during the six months that was perhaps
even greater than that actually shown by the monthly figures.
Two alternative interpretations may be made of this stability.
The more optimistic interpretation would emphasize the
"bottoming out”, after a two-year decline, in the volume of
gross transactions; the dimmer view would stress the leveling
off, after a two-year rise, of the average value per transaction.
Actually, the evidence of the half year’s experience does not
seem strong enough definitely to confirm either of these inter­
pretations. But the evidence does indicate clearly that the
first half of 1954 was a period of transition in consumers*
preferences as to the prices and quantities of merchandise they
actually declined from previous-year levels.1 These divergent would buy at New York City department stores.
tendencies in transactions and average value per transaction
are illustrated in the accompanying chart.
Sales
Second
The first six months of 1954, on the other hand, was a Department and Apparel StoreChangeand Stocks,PrecedingFederal Reserve
District, Percentage
from the
Year
period of relatively stable net dollar sales, resulting from simi­
Net sales
larly stable levels both of gross transactions volume and of
Stocks
Area
on hand
average value per transaction, in comparison with the preced­
Jan.through Feb.through June 30,
June 1954 June 1954
June 1954
1954
ing eighteen months. As the table shows, sales increased (by
- 3
2 per cent) in February, for the first time since July 1953, and Department stores, Second District..........
York— Northeastern New Jersey
increased again (by 6 per cent) in April. In the other four NewMetropolitan Area.......................... + 2
+
_
New York City..................................
months, sales either declined moderately from previous-year
—
—
—
Nassau County...................................
Westchester County...........................
+s
+ 4
+ 4
+
levels (in January, March, and May) or just equaled last year’s
+2
- 2
Northern New Jersey.........................
-f
—
level (in June). For the six-month period, the net dollar sales Fairfield County.................................... +23
+
—
-2
total was the same as for the first half of 1953.
4- i
+4
Lower Hudson River Valley..................
+
Poughkeepsie......................................
- 3
The February sales increase was associated with a 4 per cent Upper Hudson River Valley.................. + 3
- 3
- 2
— 3
Albany-Schenectady-Troy
increase in average value per transaction, which in turn resulted
- 2
Metropolitan Area......................
— 9
- 3
- 3
-1 3
in part from the fact that one department store remained open
_ 9
—
Schenectady....................................
_
—
- 3
on Washington’s Birthday, for a feature promotion of "big Central New York State........................ —.5
Utica-Rome Metropolitan Area.........
- 6
—5
—
_9
—
ticket” items—appliances and household goods. The April sales
+2
— 2
Syracuse Metropolitan Area..............
4Northern New York State.....................
rise depended on a 7 per cent increase in transactions volume; Southern New York State..................... —5
—3
-4
- 2
-4- 2
_
-j-4
—
Binghamton Metropolitan Area.........
this reflected both the excise tax reductions of April 1 and the
—
S
- 7
-j- ,‘i
Western New York State.......................
shifting of most of the Easter shopping season this year from
o
-3
Buffalo Metropolitan Area.................
o
-4
- 3
- 3
+ 3
March, where it fell last year, into April.
2
Niagara Falls..................................
-f 4
Rochester Metropolitan Area.............
+ 4
-fo
-r 3
4- 9
In the case of the Easter shift, it is clear that the April
transactions and sales increases were partly "borrowed” from Apparel stores (chiefly New York C ity)...
March. Also, the increases resulting from excise tax reductions
were partly borrowed from preceding months, as consumers
Indexes of Department Store Sales and Stocks
held off from the purchase of taxed articles in anticipation of
Second Federal Reserve District
lower tax rates after April l.2 The February rises in sales and
(1947-49 average=100 per cent)
average value per transaction may represent borrowings from
11)04
subsequent months, to the extent that consumer purchasing
Item
i
power used up in the Washingtons Birthday promotion was
May
June
April
J une
not available for expenditure later.
98r
09
98
Sales (average daily), unadjusted.................
+1

0

0

+1

0
0

1
0

2
— 7
— 7

-

0

0

1
1
7
7
1
0

1
7
1
1
1

0

3

0
0
+1
0

0
2

2

-

-10

2

1

-1 0

3

2

1

7
0

2
2
0
-10
0
2

1
3

—

-

—

r
>
— 6

4-

+6

+2

1

1

0

Sales (average daily), seasonally a d ju sted ..

10 2

10 0

10 1
10 2

10 lr

1 See the last discussion of department store transactions data in
this Review, November 1953, p. 172.

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

107
1H

US
115

118
113

11 Or
US

2 The initial impact of the excise tax reductions on department
store trade w discussed in the July issue of this Review, p. 100.
as

r Revised.