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M O N TH LY REVIEW
O f Credit and Business Conditions
F E D E R A L
V ol. 26

R E S E R V E

DECEMBER

M O N E Y

M A R K E T

The coincidence of heavy demands for currency with a con­
tinued shift of deposits from War Loan accounts to private
accounts, and the sale of Government securities to commercial
banks by nonbank investors in preparation for the Sixth War
Loan drive, led to further pressure on member bank reserves
and in turn to a rise in the amount of Federal Reserve Bank
credit outstanding to new peak levels during November.
Added to the wartime trend toward higher currency circula­
tion, the beginning of pre-Christmas demands lifted the
amount of currency outstanding by about 650 million dollars
during November—with one or two exceptions the largest
monthly increase on record. The increase in member bank
reserve requirements also was large, amounting to 500 million
dollars in the four weeks ended November 22, as the growth
of deposits which results from Government disbursement of
funds from War Loan accounts was augmented by the effects
of bank purchases of Government securities from nonbank
investors and an expansion of bank loans to Government
security dealers prior to the Sixth War Loan drive.
To meet this need for reserves, the commercial banks sold
large amounts of Government securities to the Federal Reserve
Banks, directly through the Treasury bill window, or indirectly
through the open market, and also increased their borrowing
from the Reserve Banks. Total security holdings of the
Reserve Banks rose by 1,150 million dollars in the four weeks
ended November 22. Loans and discounts of the Reserve
Banks increased about 150 million in this period to a new
eleven-year high of 474 million dollars and there was a con­
siderable further increase in the following week. Total
Reserve Bank credit including the "float” and other items
rose some 1.4 billion dollars to more than 19 billion dollars.
Although many banks were in need of reserves, others were
not. Shifts of funds between banks increased excess reserves
of the latter group from 800 million dollars on October 25
to 1.1 billion on November 15 where they held through
November 28. A substantial reduction in member bank
required reserves, which may be expected to result in further
increases in excess reserves of some banks and a reduction
in the need for Federal Reserve credit by others, will occur
immediately following December 1 as a result of heavy pay­
ments for War Loan securities, most of which will be issued




B A N K

1,

IN

O F

N E W

Y O R K

No. 12

1944

N O V E M B E R

as of that date. These payments will result in large reductions
in corporation and individual deposits and corresponding in­
creases in Government deposits, which are secured but require
no reserve. As the accompanying diagram indicates, this shift
of deposits has caused temporary increases in excess reserves
during each of the preceding War Loans.
The usual predrive shift in the ownership of Government
securities from nonbank investors to commercial banks oc­
curred prior to the Sixth War Loan drive. Nonbank investors
desirous of rearranging their portfolios and of augmenting
their cash resources to purchase new War Loan issues, sold
substantial amounts of Government securities, most of which
were absorbed by commercial banks. In addition, the com­
mercial banks extended loans on Government securities to
brokers and dealers in connection with their acquisitions of
securities, which presumably included called 4 per cent Treas­
ury bonds that are exchangeable for certain of the securities
offered in the War Loan. Reserve funds needed by the banks
to effectuate these operations, as well as to meet currency
demands and transfers of funds, were obtained through sales
of Treasury bills and certificates, which were absorbed mainly
Distribution of Excess Reserves of Member Banks*

1942

1943

1944

* Monthly averages of daily figures,
Data for November 1944 partly
estimated.
t Excess reserves in New York and Chicago reach such relatively small
amounts at certain periods that they cannot be plotted separately.
Source:
Board of Governors of the Federal Reserve System and Federal
Reserve Bank of New York.

90

M O N T H L Y R E V I E W , D E C E M B E R 1, 1944

by the Federal Reserve Banks, and through increased borrow­
ing from the Reserve Banks.
Weekly reporting member banks in 101 cities increased
their Government bond holdings by 482 million dollars in
the four weeks ended November 22, but in the same period
reduced their holdings of Treasury bills by 575 million. In
addition, their holdings of certificates of indebtedness were
reduced by 268 million dollars in the three weeks ended
November 15, but subsequently increased as purchases by
some banks of certificates sold by nonbank holders, in connec­
tion with the Sixth War Loan, more than offset further sales
by banks in need of reserves.
The trend of changes in Government security portfolios
during the month was the same among banks in New York
City and in 100 other cities except that New York banks
made heavier purchases of bonds and made net sales of certifi­
cates of indebtedness. Both groups disposed of substantial
amounts of bills. By November 22, total bill holdings of
the New York City banks had been reduced to 251 million
dollars, the lowest level since April 2, 1941.
The banks presumably will be called upon to buy large
additional amounts of Government securities in connection
with further sales by other investors during the Sixth War
Loan drive. Following the issue date for drive securities on
December 1, however, the shift of deposits from subscribers’
accounts to War Loan accounts will probably release bank
reserves in sufficient amounts so that the banks will be able
not only to acquire additional Government securities from
noribank investors, but also to repay indebtedness at the
Reserve Banks or to buy back substantial amounts of bills
from the Federal Reserve option accounts. After the drive
the situation will again reverse itself and the banks will
again have to sell securities or borrow in order to keep their
reserves at the required levels.
During previous interdrive periods, the commercial banks
have been forced to liquidate substantial portions of the
securities acquired during War Loan drives to meet rising
reserve requirements caused by Government expenditures of
funds from War Loan accounts and to cover losses of reserves
through increased currency circulation and foreign account
operations. At the same time, liquidation of Government
security loans through the sale of the collateral behind such
loans has led to substantial reductions, during interdrive
periods, in the holdings of nonbank investors other than
insurance companies, mutual savings banks, and Government
agencies and trust funds, which for the most part have
retained their holdings between War Loan drives. This
time, however, it is hoped to minimize such liquidation by
closer scrutiny of subscriptions to eliminate those which appear
to be speculative in character.
The extent to which various groups of commercial banks
have reduced Government security holdings between drives
has varied in accordance with the reserve or investment poli­
cies of the different classes of banks, and the movements of




funds between them. New York central reserve city banks
reached a fully invested position early in 1943—their excess
reserves were eliminated at that time. Chicago banks reached
this position at about the same time. Many reserve city
banks have maintained a fully invested position since the
middle of 1943, although this class of banks as a whole still
retains about 300 million dollars of excess reserves. As
shown in the accompanying chart, the only group of banks
which still possess sizable surplus cash resources is the
"country” banks.
Thus, as may be seen from the following table, over
the period of the five War Loan drives up to the beginning
of the Sixth, weekly reporting banks in Chicago sold between
drives (except between the Second and Third) nearly as
many Government securities as they had purchased during
drives. For 26 New York banks, the tendency has been
rather similar, although the proportion of sales between
drives to purchases during drives has not been quite so high.
The proportion of sales would have been higher if these
institutions had not resorted to borrowing from the Federal
Reserve Bank more frequently and in relatively larger vol­
ume than did other banks. Weekly reporting banks in 99
other important cities bought additional securities after the
First and Second War Loans, reflecting the later date on
which these banks, largely reserve city institutions, reached a
fully invested position, but made substantial sales after the
Third, Fourth, and Fifth War Loans.
All other banks (including other member banks and all
nonmember commercial banks) were able to add large amounts
of Government securities to their portfolios after the First
and Second War Loan drives, and smaller amounts after the
Third and Fourth, because of the substantial volume of excess
reserves held by those institutions as a group. Inasmuch as
these banks have continued to gain funds from the banks in
the financial centers, there has been no general pressure on
them to sell Government securities. They have utilized the
additional funds that came to them, but have not generally
adopted a fully invested position.
During the past year, the principal buyers of Government
securities at times when the commercial banks were selling
to maintain their required reserves have been the Federal
Reserve Banks.
Changes in Com m ercial B an k H oldin gs o f G overn m ent Securities
(In m illions o f d ollars; rounded to n earest hundred m illion)

New York*

Chicago*

99 Cities*

All other banks

Drive

First. . . .
Second. . .
Third. . . .
Fourth. . .
Fifth . . .

During
drives

Between
drives

+ 1 ,4 0 0
+ 1 ,9 0 0
+ 1 ,5 0 0
+ 900
+ 2 ,2 0 0

0
800
- 1 ,0 0 0
800
- 1 ,6 0 0

During Between
drives
drives
+300
+900
+300
+400
+600

-5 0 0
0
-3 0 0
-4 0 0
-3 0 0

During
drives

Between
drives

During
drives

Between
drives

+ 1 ,5 0 0
+ 2 ,9 0 0
+ 2 ,4 0 0
+ 1 ,7 0 0
+ 3 ,0 0 0

+ 1 ,3 0 0
+ 600
- 1 ,0 0 0
800
-1 ,0 0 0

+ 1 ,5 0 0
+ 2 ,9 0 0
+ 2 ,5 0 0
+ 2 ,1 0 0
+ 3 ,0 0 0

+ 2 ,0 0 0
+ 2 ,6 0 0
+ 200
+ 300
t

* Weekly reporting member banks, except for New York City which includes 10 banks in addi­
tion to the 16 weekly reporting member banks.
I inuo avauam e.
Source: Board of Governors of the Federal Reserve System and Federal Reserve Bank
New York.

FED ERAL RESERVE B A N K OF NEW Y O R K

SIXTH WAR LOAN
The Sixth War Loan drive formally opened on November
20, the date when marketable securities first went on sale;
but, following the customary practice, sales of Savings bonds
and Savings notes from the start of the month were credited
to the drive. Prior to December 1, the payment date for the
marketable issues, the Treasury Department reported only
the subscriptions by individuals; consequently it is too early
to draw reliable conclusions as to the results of the drive.
Even greater emphasis than in previous drives is being
placed on sales of securities to nonbanking investors, especially
those who will retain their investment unless there arises a
pressing and urgent need for its liquidation. All banking
institutions in the Second District were requested in a letter
from the President of this bank1 to help achieve the objec­
tive sought by continuing to give support to the sales effort,
by declining to make loans which would permit speculative
subscriptions, and by discouraging purchases made in antici­
pation of quick resale after the close of the drive. These
institutions were also asked not to make loans for the purpose
of acquiring indirectly, for their own account, securities offered
in the drive to nonbanking subscribers; and not to solicit sales
of outstanding Government securities with an understanding
that the sellers would use the proceeds to pay for subscrip­
tions entered through the institution during the drive. Some­
what similar requests were sent by other Reserve Banks to
banks in their respective districts.
Other means, new to this drive, are being employed by the
Treasury and the Reserve Banks to curb subscriptions other
than those for the permanent investment of funds which are
currently available, or shortly to become available, to nonbanking investors. Subscriptions by brokers and dealers in
securities are limited to an amount not in excess of (a) 50
per cent of their net worth, or (b) the amount of Fifth Loan
securities sold by them to nonbanking investors during the
first thirty days following the Fifth drive, whichever is
greater. Dealers and brokers were also asked to cooperate
in discouraging subscriptions for the purpose of subsequent
prompt resale.
In the publicity material designed to appeal to individual
investors, especially purchasers of Savings bonds, the impor­
tance of permanent, as distinguished from temporary, invest­
ment is stressed. For example, the Treasury Department,
through the Reserve Banks, has requested all issuing agents
of Series E War Savings bonds to distribute to bond pur­
chasers statements supplied by the Treasury emphasizing the
importance both to the war effort and to the subscriber of
not cashing the bonds before maturity. The statement calls
attention to the financial security of Savings bond holdings
and to the increasing interest yield the longer the investment
is held. The desirability of promoting the retention of War
Savings bonds at this time was heightened by the substantial
increase in redemptions of these securities during October, the
1Circular No. 2865, dated November 13, 1944.




91

first month of commercial bank participation in the function
heretofore restricted to Reserve Banks and the Treasury.
There was concrete evidence that many of the persons who
cashed their bonds through the banks did so as a result of a
misunderstanding of the purpose of the change, which war
merely to provide more convenient facilities for the redemp
tion of bonds in case of actual need for the funds by the
holders, and to spread the work of handling redemptions
among a large number of institutions.
It is to be expected that the total funds raised during the
Sixth War Loan will be less than would have been the case
if curbs on speculative purchases and indirect bank buying
had not been strengthened as described above. The reduc­
tion in the over-all goal from 16 billion dollars in the Fifth
drive to 14 billion in the Sixth reflects in part this expecta­
tion. It should be borne in mind, therefore, that while a
substantial excess of sales over the quota figure is in prospect,
there may be a decrease in aggregate sales for the Sixth drive
as compared with the preceding drive. This will not mean
that the campaign was less successful than previous ones in
absorbing true savings through sales of securities to non­
banking investors for permanent investment.
BANK CREDIT GROUPS FOR
FINANCING SMALL BUSINESS
As part of a program of increasing the availability of bank
credit to small business enterprise during the present war and
in the postwar period, at least fourteen bank credit groups
have been formed in recent months, primarily by banks in
larger cities, or are now in process of formation. The
aim of these groups is to provide an additional source of
credit for small and medium-sized business enterprise through
participation in loans originated by local banks which are
unable to handle the credits alone or with their correspondent
banks because of legal limits, or unfamiliarity with the type of
accommodation required, or because of the term or other con­
ditions of the loan. The bank credit groups are being formed
in order to assure that "every competent man, firm or corpora­
tion that needs bank credit for some constructive purpose will
get it.” Such loans may be extended even though the term of
the loan is longer than customarily made by individual banks
and though the loans involve risks which individual banks
unaided might hesitate to assume.
The organization of bank credit groups may be regarded
as an indication in itself of an intention to widen the area of
bank risk-taking and as recognition that with the adoption
of new lending techniques, which are tantamount to additional
safeguards, this area may properly be expanded without appre­
ciable increase in losses. In its banker education program,
the Post-War Small Business Credit Commission of the Ameri­
can Bankers Association is stressing the value of adopting
new types of loans—term loans, field warehouse, chattel mort­
gage, and accounts receivable loans, and instalment loans on
equipment and machinery. The emphasis is to be placed on

MONTHLY REVIEW, DECEMBER 1, 1944

92

making loans bankable. Bank credit groups, composed chiefly
of representatives of larger banks with considerable experience
in these techniques, may be instrumental in spreading theit
use among large numbers of smaller institutions.
It is estimated that, upon the final organization of all credit
groups now contemplated, the aggregate commitment to par­
ticipate in group credits will amount to well over 500 million
dollars. Although this sum may not appear very large, it is
sufficient to cover participations with local banks in a very
large number of loans to small business. It is expected that
a large majority of such loans will be made directly by indi­
vidual banks—with the help of correspondent banks if the
local institutions are not able to handle the credits unaided.
The facilities of the bank credit groups, in other words, will
ordinarily be utilized only when unusual problems are en­
countered.
With the exception of the New York City group, which in
its lending activities will encompass the entire country, these
voluntary associations of banks are or will be largely regional in
scope, operating within trade areas, States, or at most, Federal
Reserve districts. The limited information that is available
at the present time is shown in the accompanying table.
In New York City, 27 leading banks have provided an aggre­
gate of 100 million dollars to be made available for participa­
tions in loans to small business through local banks within the
Second District or wherever assistance may be needed. The
Bank Credit Group of New York City is not only the largest
of the bank credit groups but it is the first one to have been
formally organized, and for this reason has to some extent
served as the pattern for the others. Each member of the
New York group has pledged a specific maximum sum to be
outstanding at any one time, which may be drawn upon from
time to time under the terms of the arrangement at the call
of the group’s credit committee. The credit committee con­
sists of one representative, or his alternate, from each member
bank. A chairman, vice chairman, and secretary will head the
B ank Credit Groups

Location
Organization completed
New York C ity . . . .
Chicago.....................
New Orleans............
Houston............
Dallas........................
Louisville..................
Fort W orth..............
Oklahoma Ci t y. . . .
Philadelphia.............
Total.....................
Organization in process*
San Francisco..........
St. Louis...................
Baltimore.................
Connecticut..............
Maine........................

Number
of banks
in group

Amount of
commitment
(In thousands)

27
6
5

$100,000
50,000
25,000

Territorial limits
of lending
activities
Nation-wide
Chicago trade area
Louisiana, Mississippi,
and surrounding area

9
—
5
20

25,000
25,000
21,900
20,000
15,000
10,000

—

$291,900

—

—

$ 50,000
25,000
10,000
4,000
1,000

—

—
—

—
—

t
I

—

—
Louisville trade area
—
Oklahoma City trade area
Third Federal Reserve
District

—
—

State-wide
Probably State-wide

* Amounts given for these groups are provisional. In addition, bank credit groups,
for which commitments are unknown, are contemplated in the following cities or
States: Cincinnati, Cleveland, Los Angeles, Portland (Ore.), Seattle, Tulsa,
Wilmington, New Jersey, North Carolina, Rhode Island, Virginia, and West Virginia,
t State-wide, all commercial banks in the State are eligible for membership,
t State-wide membership contemplated.




committee and will designate individual committeemen, who
may be specialists (or whose banks may have specialized) in
particular types of loans, to conduct negotiations with originat­
ing banks, to make supplementary credit investigations beyond
those made by originating banks, and to make recommenda­
tions as to acceptance or rejection of particular loans.
Any member bank acting through its representative on the
credit committee may, however, refuse to participate in any
proposed loan. The committee will not consider any proposal
unless the originating bank agrees to accept a reasonable share
of the risk. The originating institution will also be required
to furnish financial and other relevant data concerning the
borrower and the plan or type of loan proposed as the
result of its negotiations with the credit-taker. Alternative
plans or revisions of the proposed plans may well be suggested
by the committee. The originating bank must further agree
to service the loan, for which it will be reimbursed by the
group, and to issue its participating certificates to members of
the group.
Membership in the credit group is open to all banks having
principal offices in New York City. The number of bank
members originally was 23 but has been increased to 27 up
to the time of this writing. Any member bank may with­
draw from the group upon ten days’ written notice to the
secretary of the credit committee. Out-of-pocket expenses
of the group are to be borne by the member banks in the
same proportion that their commitments bear to the total.
The general outlines of organization and operating pro­
cedures of most of the other bank credit groups that have
already been established or that are still in process of forma­
tion are said to follow that of the New York group. In Con­
necticut where a Bank Credit Association is now- being organ­
ized, there are a few variations in details. Because all com­
mercial banks in that State have been invited to join the group,
its credit committee is to consist of only 5 to 7 members,
selected by majority vote of the member institutions. Unlike
the New York group, the credit committee for the Connec­
ticut association has the authority to commit all the member
institutions to accept participation in any loan it has approved
by unanimous vote. The only way, therefore, that a bank
could refuse to share in an approved loan would presumably
be to withdraw from the Association. In addition to a credit
committee (which is the sole operating unit in the New
York group), the Connecticut organization calls for an agent
which is to be a trust company or a bank with trust powers
and which is to have custody of the records and files of the
Association and the credit committee. Inasmuch as it is
hoped that all Connecticut banks will be members of the
group, the originating bank may have a participation in a
loan over and above its proportionate part of the Association
commitment.
The bank credit groups in other cities or States differ only
in detail from those discussed above. Although these asso­
ciations of banks are primarily designed to provide additional

FEDERAL RESERVE BANK OF NEW YORK

credit facilities for small business, two agricultural credit
groups are reported to be in the formation stage, one being
promoted by banks in three counties surrounding Culpepper,
Virginia, the other, in Frederick, Maryland, by Group 2 banks
of the Bankers Association of that State.
The bank credit group represents an interesting develop­
ment in the field of banking. By providing for the distribu­
tion of credit risks among a number of institutions, these
banking groups may be the means of enabling the banking
system to widen the range of its lending activities and its
usefulness to the business community, and at the same time
improve its competitive position vis-a-vis nonbank lending
institutions, both private and governmental. The bank credit
group represents another development, "in a field where
further experimentation is probably desirable, to determine
the extent to which the credit requirements of marginal
borrowers can reasonably be met and the best means of
supplying them.”1 In large measure, the success of this
latest development will depend upon the degree to which
local originating banks become familiar with new lending
techniques.
1Quotation is from a review of this bank’s own experience in the
field of business loans, which appeared in the July 1, 1944 issue of
this Monthly Review.

GOLD AND SILVER SALES IN
EASTERN COUNTRIES
Sales of gold in many parts of the area extending from
Egypt to China, which have been reported for many months
at prices ranging far above the United States official price of
35 dollars a fine ounce, have attracted considerable attention,
and at times have given rise to certain misunderstandings.
Sales of silver also have been made at relatively high prices
in a few countries. Since the beginning of 1943, and in some
cases even earlier, monetary metal sales to the public have
been employed for the specific purpose of combating inflation
in Egypt, Palestine, Syria and Lebanon, Saudi Arabia, Iran,
Iraq, India, and China. These sales have been made out of
monetary stocks of local origin or from United States and
United Kingdom supplies. Though the volume of such gold
and silver sales has been modest, the experiment has some sig­
nificance to monetary developments in the foreign countries
concerned and also to the postwar position of the two mone­
tary metals.
Throughout the Near and Middle East and China inflation
has been under way in varying degree for several years,
chiefly as a result of large military expenditures in an area
acutely lacking in certain types of consumer goods and in
transport facilities. The military spending has directly taken
away supplies and transport from the local populations and,
more importantly in most cases, has increased the money
expenditures of local laborers and others competing for the
remaining supplies. The Allied procurement of strategic
materials from some areas has contributed to the inflationary
pressure, and special local circumstances have also helped to
promote inflation. In a community of farmers and small




93

traders, with poorly developed savings habits and no organized
money markets, the traditional anti-inflation measure of bor­
rowing from the public encounters obvious difficulties. Infla­
tion control measures such as price control and rationing,
which presuppose a highly developed administrative system
and a skilled bureaucracy, cannot be relied upon as much as
in Western countries. Administrative difficulties have also
been a reason for the limited recourse to additional taxation,
though more progress has been made here than in other fields
of wartime inflation control. In several areas, for instance,
new taxation has been introduced, including a wider applica­
tion of the income tax and a new excess profits tax, higher
levies on crops and farm property (sometimes payable in
kind), and a number of new indirect taxes.
Reports from the Near and Middle East indicate slacken ing of the inflationary pressure this past summer and fall,
and these reports find some degree of confirmation in the
course of wholesale prices, note circulation, and bank deposits
in some of the countries concerned.
The sales of gold coming from United States or British
supplies have been made either separately or for joint AngloAmerican account. The intended result of such gold sales is
dual: (1) to stimulate commodity dishoarding; and (2) to
cover Allied needs for local currency for disbursement pur­
poses. A secondary result of this latter aim is that a certain
restraint is placed upon the further growth of these countries’
already ample official exchange reserves; instead of giving
the countries in question dollar or sterling balances in exchange
for new issues of their local currencies, the British and
American authorities sell gold for hoarding or circulation.
Whereas an exchange of dollar or sterling balances for new
local currency issues would directly increase the aggregate
money supply, the gold sale procedure tends to restrain the
rise in the money supply.
Public data are not available to show the total imports of
monetary metals under the anti-inflation program by the
countries under consideration. However, there is reason to
believe that the sales have been confined to moderate limits.
In some areas, according to unofficial reports, sales of gold to
the public have been suspended, at least temporarily. India,
which has in times past been called the "sink of precious
metals,” is reported to have absorbed the largest share of the
wartime Anglo-American distribution of the monetary metals
under the anti-inflation program.
In the case of the foreign silver sold in India, the supply has
come mainly from a shipment of 100 million ounces out of
the "free” silver of the United States Treasury; this silver has
been lend-leased on condition that an equivalent amount will
be returned after the war. Other countries have received
silver under lend-lease in the form of coins minted for them;
this silver was shipped from the United States in order to
replenish the local coin supply, required in expanded amounts
by the native population and by Allied personnel for pay­
ment purposes, as well as to offer a hoarding medium.

94

MONTHLY REVIEW, DECEMBER 1, 1944

Considerable attention has been drawn to the fact that an
ounce of gold has sold at more than the equivalent of 35
dollars (at official exchange rates) throughout the Near and
Middle East and China. An ounce of gold in India, for
instance, during most of the past year fluctuated around the
local currency equivalent of about 60 dollars, while the price
in Egypt and Iran has been higher, standing around 71 dol­
lars a fine ounce. In China the price has been very much
higher, reaching during the past few months a level of more
than 500 dollars a fine ounce. However, a decline has occurred
in the gold price in all Near and Middle Eastern markets in
recent months, apparently in expectation of an early United
Nations victory in Europe. For example, the price in India
in late October reached the relatively low quotation of 50
dollars. The gold sovereign in Egypt, selling at a slightly
higher price than the gold bullion distributed through the
National Bank of Egypt, fell from $77.83 this past July to
$73.28 early in September.
The price of silver in the areas considered is also reported
to be above the 71.11 cents a fine ounce at which domestically
mined silver is sold in the United States. In India an ounce
of silver brought the equivalent of about $1.16 in the period
before April of this year, and a price of $1.09 was reported in
August. The downward tendency of the gold price this past
summer has also been reflected in the foreign markets for
silver.
While the high prices received abroad for the monetary
metals has been the most widely noted feature of .the gold
and silver sales, the fact is that these high prices prevail, not
because of any depreciation of the dollar and sterling in the
affected areas, but, on the contrary, because the exchange rates
of the local currencies against United States dollars and sterling
have generally been held steady by official control in the face
of inflation in those areas. If there were a free market for
these currencies so that the relative changes in national com­
modity price levels could be reflected in depreciation of the
currencies in the exchange markets, and if free gold move­
ments were permitted, the dollar equivalent of the local
currency price of an ounce of gold sold in these foreign
markets would be close to 35 dollars.
It may be recalled that during and immediately following
the last war, also, the monetary metals were quoted, for a
short time, at very high levels in India and China. Both these
countries absorbed substantial amounts of monetary metals
from abroad during that period. The reason was essentially
the same as now, but this time inflationary forces have been
strengthened by the fact that many parts of the Middle and
Far East have been serving as active war theaters, as well as
centers of heavy purchases of supplies by the Allied powers.
It is not yet possible to appraise the success of the monetary
metal sales as a factor in inflation control. One reason for
this is that the inflationary influences in many areas have not
spent themselves, so that it is not yet clear whether inflation
will be kept under control or will assume more serious pro­




portions. Another reason is that the monetary experiment
of selling gold and silver to the public is but one factor of
inflation control among many and it is not possible yet to
weigh the respective effects of each one. So far as India is
concerned, however, Sir Jeremy Raisman, Finance Member
of the British Indian Government, declared in his budget
speech last March that the effect of the metal sales had been
"extremely beneficial.” This statement is in contrast to the
critical views of the Indian Nationalist press, which remarked
at one time that "there is little to be said for encouraging so
late in the day the historic habit of hoarding in precious
metals.”
WAR PRODUCTION AND RECONVERSION
War production goals for the second half of 1944 call for
a volume of supplies larger than that achieved during any
previous 6 months’ period. In 1942 the output of munitions
amounted to 31 billion dollars, in 1943 it reached 57 billions,
and the 1944 goal—after a net cutback of 7 per cent in muni­
tions requirements—is 67 billion dollars. About 52 per
cent of the 1944 program remained to be achieved during
the last six months of this year. Cutbacks of a few prod­
ucts—notably aluminum, magnesium, steel landing mats, and
some airplane models—have been largely counterbalanced by
new orders for other supplies which are required in increasing
amounts. Among the items which are reported to be still
short of military needs or which lag behind production sched­
ules are heavy trucks, truck tires, heavy artillery and ammu­
nition, superbombers, cotton duck, assault cargo ships, and
radar equipment. On November 24 the War Production
Board announced that, at the request of General Eisenhower,
production of small-arms ammunition will be doubled and
the manufacture of mortar shells sharply increased. Recent
small drops in production indexes are due in most cases to
readjustments in production programs or labor shortages
rather than to reduced war needs. As long as the war in
Europe continues total war production is not likely to decline
appreciably although new weapons, shifts in materiel require­
ments, and changes in the demand for certain ship, airplane,
or tank models may result in a large volume of contract
cancellations.
The War Production Board reports that between July 15
and October 15 less than one half of one per cent of all war
workers were affected by contract cancellations. Those who
lost their jobs because of cutbacks had, on the whole, little
difficulty in finding other work. However, in order to pre­
vent hardships resulting from cutbacks in small communities
or in plants which cannot secure new contracts, the War
Production Board on August 15 authorized its regional direc­
tors to permit a limited output of civilian goods by manu­
facturers who can prove that they have labor and machinery
not needed for war work, and can get the necessary materials.
Preference under this "spot authorization” plan is to be given
to firms with fewer than 250 employees and to those that
can produce items which are on the essential list of the

95

F E D E R A L R E SE RV E B A N K OF N EW Y O R K

Office of Civilian Requirements.1 A total of 2,235 applica­
tions under this plan had been approved by November 14,
authorizing production between October 1944 and December
1945 of 334 million dollars worth of consumers’ goods, a
volume equal to about one half of one per cent of the present
annual output of war products. The number of workers in
all plants which so far have been given "spot authorizations”
is about 100,000 compared with 16 million in all manufac­
turing industries, and the amount of steel available for the
program during the fourth quarter of 1944 is set at 200,000
tons, about 1 per cent of production in the third quarter
of this year.
Production for civilians of goods which require materials
needed for the war effort is not limited to the "spot authoriza­
tion” program. Automotive replacement parts and storage
batteries, for instance, have been produced in 1943 and 1944
in quantities comparable to the prewar peak. Production of
the great majority of consumers’ durable goods was, however,
completely suspended during most of 1942 and throughout
1943. This year the manufacture of a few selected items
was resumed in limited quantities to meet some very urgent
needs, particularly of war workers and tenants of new war
housing projects, but in each case available supplies remain
far below normal peacetime production. Thus 88,000 electric
ranges are being produced in 1944, a figure which equals 16
per cent of 1941 output. The scheduled production of
2,000,000 flatirons this year represents less than half of a
normal year’s needs. The manufacture of a small number
of such other civilian articles as nonmechanical ice boxes,
alarm clocks, bicycles, cast iron bathtubs, radio receiving
tubes, and carpet sweepers does not mean that these products
will be obtainable in amounts sufficient to satisfy even the
essential civilian demand.
The total amount of steel at the disposal of the Office of
Civilian Requirements during the last quarter of this year
for the resumption of civilian production is 278,203 tons in
addition to the steel available under the "spot authorization”
plan. But this amount is not sufficient to relax restrictions
on the manufacture for civilians of automobiles, radios, wash­
ing machines, sewing machines, and electric refrigerators,
which in peacetime have accounted for a large part of the
output of consumers’ durable goods.
Two other orders designed similarly to facilitate the transi­
tion from war to peacetime production were issued in July:
one permits the use of essential materials for the construction
of experimental models of postwar products; the other lifts
the prohibition on the placement of orders now for industrial
equipment which will be needed after the war.

The continuation of the war in Europe has prevented furthei
steps toward reconversion, and the latest estimates indicate
a much smaller reduction in the over-all war production pro­
gram after the end of the war there than was anticipated a
few months ago. Nevertheless, considerable attention has
been given to transition problems. Special interest centers
around such issues as the price level to be set for products
which have not been produced during the war, the method
and timing of the Government’s disposal of surplus supplies,
the speedy removal of Government equipment and materials
from private plants, and the method which will determine the
selection of plants and firms to continue war production on
the one hand and those to produce for civilians on the other.
Indexes of Business
1944

1943
Index

Industrial production*, 1935-39 = 1 0 0 ........
{Board of Governors, Federal Reserve
System)
Munitions output, 1943 =100 r ...................
( War Production Board)
Electric power output*, 1935-39 = 1 0 0 ........
{Federal Reserve Bank of New York)
Ton-miles of railway freight*, 1935-39 =100
{Federal Reserve Bank of New York)
Sales of all retail stores*, 1935-39 = 1 0 0 ___
{Department of Commerce)
Factory employment
United States, 1939=100...........................
{Bureau of Labor Statistics)
New York State, 1935-39 = 1 0 0 ................
{N ew York State Dept, of Labor)
Factory payrolls
United States, 1939 = 1 0 0 ...........................
{Bureau of Labor Statistics)
New York State, 1935-39 = 1 0 0 ................
{N ew York State Dept, o f Labor)
Income payments*, 1935-39 = 1 0 0 ...............
{Department of Commerce)
Wage rates, 1926 = 1 0 0 ....................................
{Federal Reserve Bank of New York)
Cost of living, 1935-39 = 1 0 0 .........................
{Bureau of Labor Statistics)
Velocity of demand deposits*, 1935-39 =100
{Federal Reserve Bank of New York)
New York C ity.............................................
Outside New York City..............................
* Adjusted for seasonal variation.
t Not yet available.

Oct.

Aug.

247

232

Sept.

Oct.

231

230p

t

113

111

IlOp

198

198

195

194p

229

224

216p

188

178

175p

171

158

156

155p

161

146

146

146p

333

314

313p

300

279

289

218

234

232p

158

165

167 p

124

126

127

126 p

74
81

83
78

80
76

76
73

p Preliminary.

287p

r Revised,

DEPARTM ENT STORE TRADE
During November department stores in this District
reported sales approximately 10 per cent over those in the
corresponding 1943 period, a month when trade was excep­
tionally heavy because of the early Christmas shopping.
After allowance for seasonal variation, November sales estab­
lished a new record, slightly above that of last March and
about 5 per cent above the July-October level.
The retail value of department store stocks at the close of
October was 1 per cent above the year earlier level, and,
with the exception of October 1942 when anticipated short­
ages occasioned the piling up of inventory, the highest for
1
Although the Second District has received a few "spot authoriza­
tions” to cushion contract cancellations in some localities, an acute
any October on record. The accompanying chart shows that
need for additional war workers is reported by many plants in this
during the past five years the dollar amount of stocks on
region. Bridgeport will be affected by the doubling of ammunition
hand at the close of October has varied markedly among the
requirements; in New Jersey 40,000 persons are urgently needed in
war industries; and in New York State the War Manpower Commis­
individual departments. Under the limitation order on
sion called for 72,000 more workers needed for 'critical” production
department store stocks, only total store stocks are regulated,
programs.




96

MONTHLY REVIEW, DECEMBER 1, 1944

Second District Department Store Sales and Stocks by
Type of Merchandise, October 1939-October 1944*
(October 1939=100 per cent)
STOCKS

200

225

175
150

100

125

75

and the amount of merchandise in the departments can vary
according to supply and demand. Stocks in the homefurnish­
ings and men’s wear departments are generally and substan­
tially below the peaks reached in October 1942, as are stocks
of corsets and brassieres, and smaller reductions from the
1942 peaks are reported also in the shoe, lingerie, stationery,
infants’ wear, and toilet articles and drug sundries depart­
ments. Hosiery stocks reached an all-time high in October
1941, and subsequently have shrunk by about one half.
Women’s coats, dresses and sportswear, furs, and handbags
are now below the peaks reached in October 1943, whereas
stocks of juniors’ and girls’ wear, millinery, yard goods, and
boys’ clothing are at new highs for the five-year period.
Department store sales for each October during the past
five years are also shown on the chart so that the relative levels
of sales and stocks in the various types of merchandise may
be compared. At the close of last October the ratio of total
store stocks to total sales was the same as in October 1939.
Wide differences between the various departments are appar­
ent, however. In some cases stocks are low relative to sales
because of difficulties in obtaining supplies, while in other
cases October stocks have tended to run quite high com­
pared with October sales in recent years, perhaps because of
the necessity of stocking up earlier than usual for the holiday
trade.
D epartm en t and Apparel Store Sales and S toc k s, Second Federal R eserve
D istrict, P ercentage Change from the P receding Y e a r

100

Net Sales

125

Locality
Jan. through
Oct, 1944

Niagara Falls....................................
Rochester...........................................

+11
+12
+ 10
+ 9
+ 7
+ 5
+ 18
+ 16
+ 6
+ 8
+ 3
+ 11
+ 6
+ 3
+ 14
+16
+ 11
+13
+ 11
+ 8
+ 6
- 3
+13

+ 9
+12
+ 5
+ 3
+ 1
- 1
+ 16
+ 14
+ 1
+ 4
- 2
+ 10
+ 3
+ 4
+14
+ 12
+ 9
+10
+10
+ 7
+ 6
+ 3
+ 9

1
—
—
+ 2
+ 3
+10
- 1

Apparel stores (chiefly New York City)

+18

+10

+ 6

Department stores, Second District___
New York City.....................................
Northern New Jersey..........................
Newark...............................................
Westchester and Fairfield Counties..
Bridgeport.........................................
Lower Hudson River Valley..............
Poughkeepsie....................................
LTpper Hudson River Valley..............
Schenectady......................................
Central New York State.....................
Mohawk River Valley.....................
Northern New York State.................
Southern New York State..................
Binghamton.......................................
Western New York State...................

m e n ’s

100
200

c l o t h in g

*

125

*

Stocks on
hand
Oct. 31,1944

Oct. 1944

+

1
0
1
0
- 6
-1 5
+18
-

+ 2
+ 2
+ 6
- 1

—

+ 8
-

X

Indexes o f D epartm en t Store Sales and S tocks
Second Federal R eserve D istrict

225

M E N ’S 'f u r n i s h i n g s y V

*
... v

100

125

*

V .....
\
........\
\

s

A

1943
^

-

✓

1941

1942

1943

1944 193d

1940

O C TO B ER

* Index numbers based on sales during each October and stocks at the
end of each October.
Source:

Oct.

Aug.

Sept.

Oct.

1935-39 average—100
Sales (average daily), unadjusted.................
Sales (average daily), seasonally adjusted ..

156r
137r

110
151

158
149

173
152

1928-25 average—100
Stocks, unadjusted...........................................
Stocks, seasonally adjusted............................

131
119

128
131

129
124

132
120

Federal Reserve Bank of N ew York.




1944

Item

r Revised.

FEDERAL RESERVE BANK OF NEW YORK
MONTHLY REVIEW, DECEMBER 1, 1944

General Business and Financial Conditions in the United States
(Summarized by the Board of Governors of the Federal Reserve System)
and employment at factories and mines showed little change from September
to October. Value of department store trade increased further in October and the
early part of November, while commodity prices were stable.
/^\U T P U T

I n d u s t r i a l Pr o d u c t i o n

Index of Physical Volume of Industrial Production,
Adjusted for Seasonal Variation, 1935-39 Aver­
age — 100 Per Cent (Groups shown are
expressed in terms of points in
the total index)

The Board’s seasonally adjusted index of industrial production was 230 per cent of
the 1935-39 average in October as compared with 231 in September. Output of durable
manufactures continued to decline slightly, while production of nondurable goods and
minerals was maintained at the level of the preceding month.
At steel mills production increased slightly in October but for the month was 7 per
cent below the peak of a year ago. Production of copper and other nonferrous metals
continued to decline, with output of aluminum and magnesium curtailed more than 50 per
cent from the peak rates reached at the end of last year. In the machinery and transporta­
tion equipment industries activity declined slightly in October. Lumber production
showed little change in October from the September rate which was 10 per cent above the
pre-war level. Output of lumber and also pulpwood has been limited during the past two
years because of the difficulty of recruiting labor in these industries.
Activity at cotton textile mills and at shoe factories declined in October, while output
of manufactured food products increased, after allowance for the customary seasonal
changes. 'The rise in food manufacturing was mainly at canneries and was made possible
by increased farm production of fruits and vegetables. Newsprint consumption showed a
greater than seasonal increase in October. Output of chemicals, rubber products, and
other nondurable goods continued at about the level of the preceding month.
Output of coal and crude petroleum was maintained, while production of iron ore
continued to decline seasonally.
D is t r ib u t io n

Indexes of Value of Department Store Sales and
Stocks, Adjusted for Seasonal Variation
(1 9 35 -3 9 average— 100 per cent)

Department store sales increased considerably in October and were 13 per cent larger
than last year, which is about the same year-to-year increase that has prevailed in recent
months. In the first half of November sales rose further and exceeded by 8 per cent the
exceptionally high level of a year ago.
Railroad freight traffic was maintained at a high level during October and the early
part of November.
B a n k C r e d it

Member Banks in Leading Cities. Demand Deposits
(Adjusted) Exclude U . S. Government and Inter­
bank Deposits and Collection Items. Govern­
ment Securities Include Direct and Guaran­
teed Issues (Latest figures are for
November 15)

M em ber B ank R eserves and Related Item s
figures are for N ovem ber 15)




(L a te st

On the eve of the opening of the Sixth War Loan Drive bank deposits and currency
owned by individuals, partnerships, and corporations were larger than at any previous
time. Such holdings of deposits and currency have increased in recent months as the
Treasury expended funds raised during the Fifth War Loan Drive.
Adjusted demand deposits of individuals, partnerships, and corporations at reporting
banks in 101 cities increased by around 6 billion dollars between July 12 and November
15; this brought the total outstanding to a level about a billion dollars above that reached
before the Fifth War Loan Drive. Time deposits increased by about a billion dollars.
At country banks outside the leading cities it is estimated that demand and time deposits
are slightly more than three billion dollars larger than they were prior to the Fifth Drive.
Currency in circulation has increased by about 2.5 billion since the middle of June.
As a result of the deposit expansion, the average level of reserves required by all
member banks rose sharply during the inter-drive period and are about a billion dollars
greater than at the beginning of the Fifth Drive. Reserve funds to meet the increasing
requirements, as well as a currency outflow, were supplied largely through substantial
additions to the Government security portfolio of the Reserve Banks; holdings were
increased by over 3 billion dollars between July 12 and November 15. Member bank
borrowings at the Reserve Banks also increased as they had done prior to the Fifth Drive.
Excess reserves, which increased during the war loan drive, declined at a fairly rapid rate
immediately following the close of the drive and then fluctuated generally around a billion
dollars. About three-fourths of these excess reserves are held by country banks.
At reporting banks in 101 cities, bill and certificate holdings declined by around
234 billion dollars during the inter-drive period reflecting sales, largely to the Reserve
Banks, as member banks adjusted their reserve positions. Bond holdings were increased
by around 800 million dollars.
Loans to brokers and dealers for purchasing or carrying Government securities, which
had declined in August to a level comparable to that prevailing prior to the Fifth Drive,
fluctuated somewhat over the following period but began to increase early in November.
Other loans for purchasing or carrying Government securities continued to decline. Loans
for handling other securities, reflecting substantial flotations of new corporate issues,
increased during the late fall. Commercial loans also rose.