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M ONTHLY REVIEW
O f Credit and Business Conditions

FEDERAL
V o lu m e

30

RESERVE

BANK

DECEMBER

OF

1948

NEW

YORK
No. 12

MONEY MARKET IN NOVEMBER

The first half of November witnessed a certain amount of
shifting in the attitude of investors toward Government securi­
ties, which was reflected in the open market operations of the
Federal Reserve System. The selling of Treasury bonds, par­
ticularly of long-term restricted issues, which had resulted in
substantial purchases of these securities by the Federal Reserve
Banks in recent months, almost ceased immediately after the
elections. In fact, a modest demand for taxable and partially
tax-exempt Treasury bonds developed, which at times had to
be met by sales from the System portfolio, and prices of all
bond issues rose. The tendency of banks and other investors to
"shorten” maturities also waned, and the previous trend away
from longer maturities of Treasury certificates and notes to
the shortest issues was actually reversed.
Market sentiment shifted again following the disclosure, in
the Systems weekly statement as of November 17, that the
Federal Reserve Banks had been selling Government bonds.
Selling pressure reappeared, prices declined, and purchases of
Treasury bonds by the System were resumed, but on a much
smaller scale than for some time past.
According to reports in the market, the more optimistic
feeling, during the first part of November, regarding the trend
of bond prices was a quick reaction to the outcome of the
national elections. This was construed as involving a com­
bination of factors which might result in some curtailment of
capital expansion programs, a reduced corporate demand for
funds, and a consequent reduction in the selling of restricted
Government bonds by institutional investors seeking the
higher yields offered by corporate securities. The fact that less
than 70 per cent of the total amount of proposed State and
municipal bond issues was approved by voters in State and
municipal elections also indicated a somewhat smaller demand
for investment funds than had been expected.
This hasty market reappraisal did not, of course, establish
a Government security market of breadth and strength. Pri­
marily, it discouraged selling of both restricted and eligible
bonds, without creating a greatly increased demand for these
securities. Technical factors within the market supported the




main trends. It was known, for example, that some nonbank
investors had previously sold Government securities well ahead
of their needs for cash to meet other investment demands. In
the shorter sector of the bond market the Treasury’s decision
to retain the 1lA per cent rate on new one-year issues of cer­
tificates reversed an earlier tendency to anticipate a decline in
prices as a result of expected higher short-term rates. Finally,
brokers and dealers added to their positions. Loans to brokers
and dealers, on Government securities, of the New York City
weekly reporting member banks rose 181 million dollars in
the three weeks ended November 17; a large part of this in­
crease was required to carry expanded holdings of short-term
Treasury securities but some of it reflected a rise in long posi­
tions in Government bonds. (Such loans rose another 213
million dollars in the week ended November 24, again owing
chiefly to dealer operations in short-term issues.)
The peak of Government security prices for the month was
reached on November 16 for most issues. Quotations on tax­
able bank-eligible bonds were then 1/32 to 31/32 above the
levels prevailing at the beginning of the month, and advances
in the restricted issues ranged from 1/32 to 11/32. Reflecting
demand from commercial banks and others, as a hedge against
possible higher corporation income taxes, partially tax-exempt
bonds scored sharper gains in prices than did the taxable issues.
These price gains were largely reversed during the follow­
ing week when it became known that, in view of the small
market supply and in order to avoid price gyrations not indi­
cative of underlying market conditions, the Federal Reserve
System had sold 67 million dollars of Treasury bonds, most of
which had maturities of more than five years. Market offerings
continued light but demand evaporated and quotations were
marked down. Most of the restricted bond issues reached
earlier support prices by November 23 and prices of eligible
issues also declined. Toward the close of the month, bond
prices recovered slightly.
On November 16 the Treasury announced that it would
issue a IVa per cent, one-year certificate, in exchange for a
571 million dollar issue of 2 per cent bonds maturing

126

MONTHLY REVIEW, DECEMBER 1948
Prices o f Selected Treasury Bonds*

P R ICE

* Averages o f closing bid and asked prices, W ednesday dates; latest figures
are for November 24, 1948.

December 15 and a similar security in exchange for 6,127
million dollars of lVs per cent certificates and notes maturing
January 1, 1949. This announcement put an end to specula­
tion which had been widespread, particularly before the elec­
tion, that another increase in short-term rates was an immediate
prospect. As a result, yields on the longer issues of certificates
and notes moved lower (prices rose), and fairly sizable de­
mand for these issues developed from commercial banks and
from industrial corporations investing temporarily idle funds.
The Federal Reserve System supplied part of this demand for
longer-dated certificates and notes and acquired some of the
shorter maturities, thus reversing the recent character of its
operations in this area of the market.
M e m b e r B a n k R eserve P o s it io n s

Money market conditions were somewhat tight at the begin­
ning and toward the close of the period under review (the
four weeks ended November 24), and easy in the intervening
weeks. The major factors affecting member bank reserve posi­
tions were substantial net purchases of Government securities
by nonbank investors from the portfolios of the Federal Reserve
Banks (an influence largely operative early in the month), the
Treasury’s redemptions of maturing bills held by the Federal
Reserve System (which were resumed toward the close of the
period), the flow of currency into and out of circulation in a
month containing three holidays, and the ebb and flow of
Federal Reserve “float”—Federal Reserve funds credited to
the banks against checks still in the process of collection.
Despite the pull of these various forces in one direction
and in another, over the entire period there was little net
change in the reserve positions of the member banks and in
Federal Reserve credit outstanding. System security portfolios
fell 249 million dollars and loans to member banks rose 282
million.




Member bank reserve positions were under pressure in the
week ended November 3, chiefly as a result of the Government
security operations of nonbank investors. Federal Reserve
System holdings of Government securities showed a small net
decline of three million dollars in this week, but there were
substantial shifts as between the types of issues held. The
System’s bond purchases during the week aggregated 454 mil­
lion dollars (net), while bill holdings declined 388 million
dollars, and notes and certificates fell moderately. Although
a considerable portion of the increase in bonds represented
sales of nonbank investors, the latter made much larger pur­
chases of short-term securities, both from the Federal Reserve
System and the commercial banks, resulting in a considerable
decline in bank deposits and a loss of reserves. Member banks
consequently disposed of Treasury bonds and bills in order to
build up their balances to the required level.
The adjusted demand deposits of the weekly reporting
member banks declined more than 800 million dollars and their
net deposits due to other banks rose almost 270 million dollars
in the week ended November 3. It therefore appears that
most of the loss of funds fell upon the larger banks and that
some portion of the securities purchased by nonbank investors
came out of the portfolios of the nonreporting banks, thus
increasing their reserves. These institutions apparently used
these and other funds to increase their balances with the re­
porting banks.
During the following two weeks, ended November 17,
money market conditions eased considerably. A sharp expan­
sion of Federal Reserve "float,” a net return flow of currency
after Armistice Day, and disbursements by foreign central
banks and governments of most of the proceeds of their gold
sales to the Treasury provided more than enough reserves to
counterbalance the effects of other transactions which absorbed
reserves. Among the latter were net Treasury receipts, higher
required reserves, and moderate net purchases of Treasury
securities from the Federal Reserve System by nonbank in­
vestors. The banks used their net gains of funds chiefly to
retire Federal Reserve credit, principally by acquiring Treasury
bills from the System and repaying indebtedness to the
Reserve Banks.
Member bank reserve positions came under some strain in
the final week under review, as the retirement of 100 million
dollars of Treasury bills held by the Reserve System, a con­
traction of Federal Reserve "float,” and a pre-Thanksgiving
holiday demand for currency more than offset gains of funds
from other sources. Member banks met these drains chiefly
by expanding their borrowings from the Federal Reserve
Banks.
The New York City banks bore a large part of the loss of
funds resulting from nonbank investors’ net purchases of
securities from the Reserve System early in the month, and
they participated but slightly in the gains of funds of all mem­

FEDERAL RESERVE BANK OF NEW YORK

ber banks in the two weeks ended November 17. Moreover,
most of the drain on member bank reserves in the last week
under review was centered in New York. The metropolitan
institutions were therefore compelled to dispose of a sizable
amount of Government securities in order to adjust their re­
serve positions. Total Government security holdings of the
New York City weekly reporting banks fell 402 million dollars
in the four weeks ended November 24, and borrowings rose
185 million.
REAL ESTATE LOANS OF SECOND
DISTRICT COMMERCIAL BANKS

Since the end of the war the real estate market in this
country has been exceptionally active. Stimulated by the acute
housing shortages and the relatively easy mortgage terms per­
mitted under the Veterans* and Federal Housing Administra­
tion programs, the number of dwelling units started has in­
creased steadily. This year the total will probably exceed the
previous peak of 937,000, established in 1925. The turnover
of titles to old houses has likewise been very great. In addition,
high levels of business activity have stimulated a large amount
of commercial and industrial construction. The financing of
this large volume of home purchases and new construction has
meant a tremendous demand for mortgage loans from all
types of lenders.
Real estate loans of the commercial banks, one of the most
important groups of mortgage lenders, have, as a result, in­
creased faster since the end of the war than any other type
of loans extended by them, except consumer credit. In most
parts of the country, the expansion of bank mortgage holdings
was particularly rapid during the first two postwar years;
more recently it has shown some signs of leveling off. At the
end of December 1945 real estate loans outstanding of all
insured commercial banks amounted to 4.7 billion dollars, or
about 18 per cent of their total loan portfolio; by June 1948
this total had risen to 10.1 billion dollars, or more than 25 per
cent of total loans outstanding.
The percentage increase in bank real estate loans in the
Second District, which in June 1948 accounted for roughly
10 per cent of the national total, has been somewhat less than
in most other sections of the country. Between December
1945 and June of this year, total real estate loans of Second
District member banks increased approximately 105 per cent,
while for the country as a whole the increase was closer to
115 per cent. Residential mortgages, which currently account
for more than three quarters of the Second District banks'
total mortgage portfolio, increased during the same period
by 117 per cent in this District compared with 125 per cent
for the country as a whole. Mortgages on other nonfarm prop­
erty increased only 69 per cent in the Second District com­
pared with an increase of 114 per cent for the country. Al­




127

though farm real estate loans of the District banks nearly
doubled, the increase is not necessarily significant in view of
the smallness of the total amount in this category (only 29
million dollars at the end of last June).
While the pattern of real estate loan growth in the District
as a whole has been not unlike that in the rest of the country,
there have been differences among the various sections of the
District in the rate at which real estate loans have been expand­
ing in recent months and in the extent to which banks have
invested in mortgages. Real estate loans of the New York City
banks have always been an insignificant proportion (2 to 4
per cent) of the total loan portfolio of the City banks. Some
of the City banks do not make real estate loans at all. For the
ones that do, the increase in mortgage holdings during the first
two years after the end of the war was fairly moderate, and
proportionately less than the increase in the rest of the District
or in other parts of the country. During 1948, as the accom­
panying chart illustrates, the total more than doubled. How­
ever, a substantial portion of this sharp increase represents
construction loans under Title VI of the National Housing
Act to builders of large apartment and other housing projects,
some of which are located outside this District. As the projects
are completed, these loans are likely to be taken over by other
mortgagees, including life insurance companies.
Real Estate Loans of Selected Banks in Five
Second District Areas*
(Monthly, June 1947-October 1948f)
M IL L IO N S
OF D O L L A R S

* New York City, Northeastern New Jersey, W estern New York (Buffalo,
Niagara Falls, and R ochester), Central New York (Binghamton, Elmira,
Syracuse, and U tica ), and the Capital district (A lbany, Schenectady, and
T ro y ). Plotted on ratio scale to show proportionate changes,
t Figures are for the last W ednesday in each month.

128

MONTHLY REVIEW, DECEMBER 1948

Reporting member banks in the cities of Northeastern New
Jersey, have, as a group, made relatively substantial investments
in mortgages, since real estate loans account for approximately
a third of their total loan portfolios. During the last year and
a half,1 however, their total mortgage holdings have fluctu­
ated within fairly narrow limits, and have shown little net
increase. Real estate loans of the reporting banks in Western
New York (Buffalo, Niagara Falls, and Rochester) have shown
a fairly steady but moderate increase since June of 1947;
between that date and the end of October 1948 the total out­
standing rose about 28 per cent. Since the increase has just
kept pace with the expansion of other types of loans by the
same banks, mortgages have continued to account for slightly
less than a quarter of their total loan portfolio.
Mortgage portfolios of banks in the Central (Binghamton,
Elmira, Syracuse, and Utica) and Capital (Albany, Schenectady,
and Troy) areas of New York State both increased about 40
per cent between June 1947 and October 1948. In the Central
section the proportion of mortgages to total loans for the re­
porting banks rose during these sixteen months from 30 to 35
per cent, and in the Capital district from 18 to 21 per cent.
If figures for the State banks and trust companies in New
York are indicative of the experience of the other banks in
the District as well, both the amount and percentage of new
mortgage loans insured by the Federal Housing Administra­
tion have been rising since the end of the war. The volume
of loans to veterans, however, dropped off during 1948. Insured
loans accounted for slightly less than half of the total amount
of new mortgages made during the past year.
Most of the loans made by the State banks on 1 or 2-family
houses since the end of the war have been made on existing
houses, primarily in connection with title transfers, but since
1947 the amount of loans on new units has also been increas­
ing rapidly. During the 12 months ended September 30, 1946,
mortgages on new units accounted for only 7 per cent of the
total mortgages placed on 1 to 2-family residences, while dur­
ing the year ended September 1948, they accounted for over a
third of the total.
The share of commercial banks in total mortgage lending in
this District can be estimated only roughly from the available
statistics. However, the proportion appears to have risen since
the war. For the country as a whole, the proportion of total
mortgage loans held by the commercial banks has increased
markedly since the end of the war, although there are some
indications that it may have declined slightly this year. At the
end of 1939 commercial banks in the United States held 12
per cent of total urban real estate mortgages outstanding, at
the end of 1945 they held 13 per cent, and at the end of 1947,
19 per cent. At the close of last year, their holdings of mort­
1 Data for this section, and for the other sections of the District out­
side New York City, have been tabulated separately only since
June 1947.




gages on multifamily residential and commercial properties
totaled 3.4 billion dollars, and on 1 to 4-family houses, 5.2
billion. As Table I shows, this was 22 per cent and 17 per
cent, respectively, of the total amounts outstanding in the two
categories.
About 26 per cent of total nonfarm mortgage recordings
of $20,000 or less last year was made by commercial banks. A
substantial proportion of these recorded loans, however, were
apparently taken over later by other investors (or sold to the
Federal National Mortgage Association, a Government agency
which acts as a secondary market for insured loans), since the
figures on mortgages outstanding at the end of the year on 1 to
4-family houses show that the commercial banks held only
17 per cent of the total (see Table II) compared with 16 per
cent at the end of 1946. Part of the difference between the
proportion of mortgages acquired and the proportion held by
Table I
Percentage Distribution of Outstanding Mortgages by Type of
Property and Type of Mortgagee
(December 31, 1939, 1945, and 1947)

T ype of mortgagee

One to four-family
houses

M ultifamily residen­
tial and commercial
real estate

1939

1939

1945

1945 1947p

1947

Savings and loan associations*...........
Insurance companies.............................
Mutual savings banks...........................
Commercial banks..................................

20
8
15
10
47

27
11
13
13
36

30
12
10
17
31

_

_

_

28
18
15
39

32
14
14
40

28
11
22
39

T otal United States.......................

100

100

100

100

100

100

Preliminary.
* Savings and loan associations d o not usually make multifamily or commercial
real estate loans.
§ Includes Hom e Owners’ Loan Corporation.
Source: S urvey o f Current B u sin ess , October 1948.
V

the commercial banks may also reflect the banks’ faster repay­
ment schedules. Generally, nowadays, mortgage loans of the
commercial banks are made on an amortized or instalment
basis, while those of insurance companies and some other
investors are sometimes repayable in one lump sum at the
end of the term.
No figures on outstandings by type of mortgagee comparable
to those for the country as a whole are available for the Second
District. What figures there are, however, indicate that com­
mercial bank mortgage credit has been leveling off recently,
except in New York City. In contrast to the situation in many
other sections of the country, the mutual savings banks are still
the largest mortgage lenders in this District, although their
total holdings have not increased as rapidly as have the com­
mercial banks’ holdings since the end of the war. At the end
of 1947 mortgage loans of the New York savings banks totaled
3.1 billion dollars compared with only 1.0 billion for all mem­
ber banks in the District, their closest competitors.
Figures on nonfarm mortgage recordings of $20,000 or less
during 1947 in Connecticut, New Jersey, and New York indi-

FEDERAL RESERVE BANK OF NEW YORK
Table II
Percentage Distribution of Total Nonfarm Mortgage Recordings of
$20,000 or less in the United States and in Second District
States by type of Mortgagee, 1947

Connecti­
cut

New
Jersey

New
York

United
States

M ortgages
o u ts ta n d ­
ing, D e­
cember 31,
1947*
United
States

Savings and loan asso­
ciations .....................
Insurance companies.
Mutual savings banks
Commercial banks___
Others...........................

19
7
27
22
25

24
6
7
25
38

25
3
26
18
28

31
7
5
26
31

30
12
10
17
31#

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

100

100

100

100

Mortgage recordings, 1947
T ype of mortgagee

100

* Preliminary. The series on mortgage recordings and mortgages outstanding are
not strictly comparable. The mortgage recordings figures, while primarily home
mortgages, also include all other types of mortgages.; The other series covers
exclusively home mortgages.
# Includes Home Owners’ Loan Corporation.
Source: Home Loan Bank Board (Statistical S um m ary, 1 9 4 8 ) and U. S. Depart­
ment of Commerce (S urvey o f Current B u sin ess, October 1948).

cate that the proportion made by the commercial banks in this
District is somewhat below that for the country as a whole;
in New York it was only 18 per cent compared with 26 per
cent for all banks. From December 1947 through September
1948 real estate loans of the weekly reporting member banks
in the Second District outside New York City rose 11 per cent,
and those of reporting banks in the City, 76 per cent. Pre­
liminary figures indicate that the outstanding mortgage loans
of the New York savings banks increased only about 9 per
cent during the same period, and those of the New York State
chartered savings and loan associations about 12 per cent.
BRITAIN’S ECONOMIC PROSPECTS

Two months have passed since the publication of the British
White Paper on the United Kingdom’s postwar balance of pay­
ments1 gave rise to a flurry of optimism concerning Britain’s
immediate economic prospects. The information that the
White Paper conveyed and the comments that it provoked
were indeed very encouraging. Great Britain’s over-all balanceof-payments deficit was reported as having declined from 630
million pounds in 1947 to an estimated 280 million pounds
in 1948. Although this result was to a large extent attained
by a severe cutting of imports (to 80 per cent of their 1938
volume), the development on the receipts side appeared rather
favorable. Not only did exports (as estimated) increase in
1948 to 30 per cent over the 1938 volume, but other items,
such as income from foreign shipping, insurance, etc., showed
a marked recovery as compared with 1947. The situation
appeared less satisfactory so far as the dollar segment of
Britain’s international accounts was concerned. While the
1948 dollar deficit promised to be smaller than the peak figure
of 1,024 million pounds in 1947, it was still expected to
1 "United Kingdom Balance of Payments 1946-1948” , September
1948, Cmd 7520.




129

amount to approximately 500 million pounds. Nevertheless,
its drastic decline suggested the possibility that in a not too
distant future Britain’s further efforts, together with the bene­
ficial effects of the economic recovery of the world as a whole,
would eliminate Britain’s deficit on both the over-all and the
dollar accounts.
However, careful study of British and world economic
trends, and of data published since the White Paper, indicates
that these expectations are somewhat premature. While the
progress made with respect to the balance-of-payments position
is undoubtedly a major accomplishment, it would not seem to
call for a fundamental reappraisal of the longer-run British
economic position.
That position remains essentially unchanged. Great Britain
no longer receives net income from foreign investments, shiping, and other service transactions in the proportions that
enabled it before the war to nearly cover its import surplus.
Nor is there much prospect that increased income from these
sources will in the future do more than offset the substantial
payments that will have to be made on the debts to the United
States and other countries incurred during and since the war.
This loss of foreign revenue, in conjunction with price devel­
opments in world markets that are highly unfavorable to
Great Britain, has resulted in an over-all shrinkage in the
volume of foreign supplies for which the United Kingdom is
able to pay. Quite apart from the fact that the prices received
for British exports have increased less than the prices of what
Britain has to import, the fact that the world price level has
nearly trebled has in itself increased greatly the deficit in the
British balance of trade. At the same time, since a large part
of British foreign investment is of the fixed return type, in­
come derived from foreign assets has hardly risen despite the
general price increase, so that such income has offset a smaller
part of the balance-of-payments gap than before the war.
On the other hand, total requirements of the United King­
dom have increased markedly. The population of the British
Isles has grown by about 2 per cent since prewar. In order to
preserve health and efficiency, the meagre living standards of
the war years had to be substantially raised in the first two years
after the war. The tense international situation, moreover, has
forced the British Government to retain in the armed forces
large numbers of men who would otherwise be productively
engaged, and to devote a large share of the national resources
to the maintenance of an elaborate military establishment. The
impossibility during the war of carrying out the normal
replacement of worn-out equipment, the replenishment of
depleted inventories, and the usual housing repairs, has entailed
exceptionally large outlays for these purposes since the end of
hostilities.
Barring a major improvement in the terms of trade, the
only way to attain some sort of balance between these expanded
needs and the greatly reduced supplies—apart from borrowing

130

MONTHLY REVIEW, DECEMBER 1948

abroad or liquidating foreign assets—is a drastic increase of
domestic output. Yet, with the labor force fully employed, a
significant rise in total output can hardly be attained without
a thorough modernization and reequipment of Britain’s pro­
ductive apparatus. This in turn is predicated upon large-scale
investment in plant and facilities. The problem faced by
Britain is thus somewhat similar to that of the so-called under­
developed countries: large investments are needed to increase
output; but in the absence of an inflow of capital from abroad,
only an increase in output can yield the wherewithal for a
large investment program.
The economic policy of the British Government has accord­
ingly been directed toward two objectives: (1) to secure such
help from abroad (primarily from the rest of the British
Commonwealth and from the United States) as is obtainable;
and (2) to press the productive utilization of domestic
resources to the limits of political and social feasibility. These
efforts have been crowned with considerable success thus far.
Since the war, not only have the other members of the British
Commonwealth willingly cooperated with the United King­
dom in not demanding repayment of their sterling balances
in London, and in reducing to a minimum their claims on the
sterling area’s dollar pool, but they have actively supported
Great Britain with substantial loans and grants. The United
States has agreed to a generous settlement of the British lendlease account, has provided a loan of 3,750 million dollars, and
has allotted to the United Kingdom a large part of the first
ERP appropriation.
Britain’s progress on the domestic production front also has
been pronounced. Total manufacturing output in 1947 was
about 20 per cent above the prewar volume, while exports
exceeded their 1938 volume by 9 per cent. Further progress
was reported for the first half of 1948: the volume of manu­
facturing output exceeded prewar by 26 V2 per cent in the sec­
ond quarter of 1948, and export volume in the third quarter
climbed to 38 per cent above prewar.
At the same time, the disinflation policy of the government,
by siphoning off a large part of the excess purchasing power,
has reduced the effective demand for nonessentials and has
given powerful support to the policy of concentrating pro­
ductive resources on exports and investment projects.
It is perhaps not surprising that this sequence of successes
has been expected to continue. The rate of growth during the
first three postwar years has tended to generate hopes that
Britain will soon outgrow its economic difficulties and that by
continued austerity and further expansion of output and
exports it will be able to close the gap between the resources
at its command and national requirements.
Such anticipations, however, appear to overlook some very
serious hurdles which obstruct the road to Britain’s recovery.
The early successes in increasing industrial production were
to a large extent due to the return of more normal economic




conditions attained in the course of postwar reconversion. Men
were demobilized and returned to productive work. Slack in
the utilization of plant, machinery, and labor was progressively
removed. Bottlenecks in the supply of raw materials, power,
parts, etc., were gradually eliminated. It is obvious that this
phase had eventually to come to an end. Further progress
will have to break new ground and can be made only by
increasing the country’s productive capacity.
That the end of the first stage is rapidly being approached
is strikingly demonstrated by the economic program for July
1, 1948-June 30, 1949, which the British Government sub­
mitted to the Organization for European Economic Coopera­
tion in October.2 As set forth in this program, the curve of
growth that so far has been rapidly mounting is now distinctly
flattening out. The index of manufacturing production in the
year ending June 30, 1949 is to average between 125 and
130 per cent of the prewar level; this is hardly an increase
over mid-1948. Similarly, total exports are to attain 137 per
cent of the prewar volume, which is actually a step backward
compared with the 138 per cent attained in the third quarter
of 1948. Indeed, it would seem that, so far as exports are con­
cerned, the program represents possibly a downward revision of
the earlier targets of 150 per cent of prewar volume by the end
of the current year and 155 per cent by the end of 1949.
The conclusion seems inescapable that major increases in
output can no longer be squeezed out of Britain’s present
economic system, unless there is an increase in productivity
through a far-reaching reorganization of British industry and
through new investment in plants and facilities.
The prospects for increased productivity, however, are by no
means clear. At the annual average rate of 2 to 3 per cent that
was the British and American experience before the war, the
growth of total output would only slowly enable Britain to
narrow the gap between available supplies and even the present
drastically curtailed national requirements. It would not suffice
to reestablish Britain’s "viability” by 1951—the last year of
the European Recovery Program.
The British Government’s goals, it is true, are more ambi­
tious. In planning an annual investment of about 20 per cent
of the national income, it obviously expects productivity to
advance more rapidly than in the past. In agriculture the long­
term plan envisages that production by 1952 will equal 150 per
cent of the prewar level. About 25 million pounds are to be
invested in the coal industry, continuing the current increase
in mechanization. Major investments, aggregating nearly 200
million pounds, are scheduled in the electricity, steel, and
chemical industries. Yet this whole investment program does
not promise to affect the volume of output significantly until
the end of the ERP period.
Consumption, at least for the duration of ERP, will thus
have to be held down to its present level, and the balance-of2 "European Cooperation” , October 1948, Cmd 7545.

131

FEDERAL RESERVE BANK OF NEW YORK

payments deficit can hardly be expected to decline much
further in the immediate future.
It is quite conceivable that, granted a steady growth of its
total output and with rigid limitations of consumption, Britain
will be able to balance its foreign accounts a few years after
the end of ERP. This would presuppose, however, that world
markets continue as receptive to British exports as they have
been since the war and as they still appear to be. Whether this
assumption is realistic is difficult to say. The reappearance of
Germany and Japan as major exporters will undoubtedly con­
front Britain with serious competition. A decline of domestic
demand in the United States would also strengthen American
pressure on export markets while at the same time reducing
American imports from Great Britain. Under such conditions
a possible improvement of the British terms of trade might
be more than offset by a serious decline in the volume of
British foreign sales.
There are no present indications that the British balance-ofpayments deficit that would persist in that case could be bal­
anced by private capital movements. Should the private capital
market continue to be unwilling to supply the necessary funds,
the United Kingdom would have to continue to depend on
intergovernmental loans and grants.
These are indeed not bright prospects, but there seems no
reason to regard them as unrealistic. It will require all the
planning skill of the government, all the ingenuity and
flexibility of management, all the cooperation of labor, and all
the endurance of the consumer to keep the British balance-ofpayments gap down to manageable proportions.

R e c e n t T rends

St o c k s

in

and

O rders

During the 18 months preceding November 1948 the value
of stocks in Second District department stores fluctuated on a
lower level relative to the 1935-39 averages than sales, as is
shown in the accompanying chart. Once the "ersatz” goods
of the war and immediate postwar period were cleared out by
extensive markdowns and special sales at the beginning of
the 1947 spring season, this bank’s index of stocks remained
below that of sales, particularly during the stock-pruning
period in the middle of 1947. Only following a poor preEaster selling season in 1948 did the stock index for a brief
period exceed that of sales. Since then stocks have moved
mostly sidewise but with some downward tendency. The re­
cent movements of stocks indicate in part cautious buying by
store managers, despite over-all inflationary tendencies in the
economy, and in part a continuation of the downward trend
in the stocks-sales ratios.1
The extent to which the stores are endeavoring to avoid
inventory accumulations is indicated by recent changes in order
positions. The reporting group of the larger District stores
reduced outstanding orders at the end of October by fully
one-fifth below last year’s levels (as was the case at the end
of September). As a matter of fact, not since February (when
the increase was only 2 per cent) have outstandings been as
much as one per cent greater than in 1947. During October,
for the third consecutive month, these same stores placed new
orders (net of cancellations) for a significantly smaller amount
1 For a detailed analysis of this shifting relation of stocks to sales,
with particular emphasis on Second District stores, see Clement
Winston and Marie L. Puglisi, "Inventory Turn-Over in Retail Trade,”
Survey of Current Business, June 1948.

DEPARTMENT STORE TRADE

Sales at Second District department stores during Novem­
ber showed much less than the usual pre-Christmas rise, in
large part because of the unusually mild weather which pre­
vailed practically throughout the month. As a result, season­
ally adjusted sales showed a sizable decline, accentuating a
trend that began six months ago. Sales were also lower in
dollar volume than in November of last year, even though
there was an additional shopping day this year. In 1947, how­
ever, because of the warm weather that had prevailed during
much of September and October, a large volume of fall buy­
ing spilled over into November, making that month (season­
ally adjusted) the best of the entire 1947 fall-winter season.
There is considerable speculation in trade circles as to
whether the disappointing November sales figures are due
exclusively to warm weather or whether they result partly
also from more fundamental factors such as mounting con­
sumer resistance to prices (most recently for men’s clothing),
filling up of consumers’ inventories, and the effect of the high
cost of food.




Indexes of Department Store Sales and Stocks
Second Federal Reserve District*
(A djusted for seasonal variation, 1935-39 average=100 per cent)
PER CENT

3 00

280

260

240

220

200

180
J

F

M

A

M

J

J

1947

A

S

O

N

D

J

F

M

A

M

J

J

A

S

O

N

D

1948

* Seasonal factors^ used to adjust stocks have been revised, as announced in
the November 1948 issue o f this R e v ie w .

132

MONTHLY REVIEW, DECEMBER 1948
Ratio of Stocks and Orders to Sales
Second District Department Stores*

Indexes of Department Store Sales and Stocks
Second Federal Reserve District

(Month of October for selected years)

(1 9 35 -3 9 average=100 per cent)

1940

1946

1947

1948

Stocks#.................................................................

2 .4 8

2.72

2 .4 5

2 .44

Outstanding orders#.........................................

0 .9 5

3.29

1.53

1.17

New ord ersf.......................................................

1.31

1.21

0 .8 8

1.08

* For a group of the larger stores which in 1947 accounted for about 55 per
cent of estimated total District department store sales.
# Stocks and outstanding orders at end of month divided by sales during month,
t Net new orders during month divided b y sales during month.

than last year, although orders increased more than seasonally
above the particularly low level of September.
Because of year-to-year declines in orders at a time when
sales were making gains, the ratio of outstanding orders to
sales has continued to drop from the peak reached during the
scramble for goods in 1946. At the end of October in that year,
the ratio stood more than three times as high as its 1940 level
of about 1.0. It was reduced sharply from 3.3 to 1.5 within
one year, and by October 1948 the ratio was down to 1.2.
While stores are reluctant to build up inventories, as is clearly
indicated by the stocks-sales ratios in the accompanying table,
the outstanding orders-sales ratio is still slightly higher than
in 1940, since some order backlogs still exist for a few hard
goods lines.
The new orders-sales ratios of recent months display a
marked contrast to those of 1940. In only one month this
year has the ratio been greater than during the corresponding
Department and Apparel Store Sales and Stocks, Second Federal Reserve
District, Percentage Change from the Preceding Year

1948

1947

Item

August

Sept.

252r
225

187
256

257
252

280
250

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

253
224

242
242

256
243

267
236

r Revised.
, * Seasonal adjustment factors for 1946-48 revised; available upon request from
Research Department, Dom estic Research Division.

month of 1940, and in recent months the ratio has been de­
cidedly lower than in corresponding months of 1940.
The full implications of these developments in the stock and
order positions of department stores are not entirely clear.
Apparently there still are some lines whose delivery periods
are substantially longer than before the war. However, the
recent stability of the stocks-sales ratio in the face of a decline
in orders illustrates that supply conditions are continuing to
improve and that the principal retail trade ratios are rapidly
approaching prewar patterns.

Indexes of Business

Index

Industrial production*, 1935-39 = 100.........
( Board o f Governors , Federal Reserve

1947

1948

October

August

Sept.

October

190

191

192

19 5p

228

253

252

253p

S ystem )

Electric power output*, 1935-39 = 100........
(Federal Reserve B a nk o f N ew York)

Ton-miles of railway freight*, 1935-39 = 100
Sales of all retail stores*, 1935-39 = 100........
Stocks on
Jan. through
hand
October 1948 October 1948 Oct. 31, 1948

209

200 p

338r

340

339p

+ 6

+ 5

New Y ork C ity ......................................
Northern New Jersey...........................
Newark.................................................
Westchester C ounty..............................
Fairfield C o u n ty....................................
Bridgeport...........................................
Lower Hudson River V alley...............
Poughkeepsie......................................
Upper Hudson R iver V alley...............
A lb a n y .................................................
Schenectady........................................
Central New Y ork S ta te.....................
Mohawk River V alley.....................
U tica.................................................
Syracuse...............................................
Northern New Y ork State..................
Southern New Y ork State...................
Bingham ton.........................................
Elm ira..................................................
Western New Y ork State....................
B uffalo.........................................
Niagara Falls......................................
R ochester............................................

+ 5
+ 6
+ 3
+13
- 1
- 2
+15
+20
+13
+13
+16
+11
+10
+12
+12
+10
+ 8
+ 11
+ 4
+13
+10
+11
+19

+
+
+
+
+

5
6
5
3
2
0
+ 9
+12
+ 9
+ 8
+11
+ 7
+ 9
+ 9
+ 6
+14
+ 11
+13
+10
+11
+ 11
+ 7
+12

+ 3
+ 8
+ 5
- 2
+17
+17
+ 8
+ 9
+ 8
+ 6
+ 9
+11
+16
+15
+ 8

Apparel stores (chiefly New Y ork C ity ).

+ 6

0

+ 5

+12
+11
+24
+ 7
+ 1
+ 2
+19

Factory employment
United States, 1939 = 100..........................

160

162

165

163 p

132

126

128

127 p

(B ureau o f Labor Statistics)

New York State, 1935-39 = 100................
( N . Y . S . D iv . o f Place, and U n em p . In s .)
Factory payrolls
United States, 1939 = 100..........................

350

375

297

297

306

292

313

313p

181r

193

194p

164

175

175

174

94
88

103
96

104
93

109
93

(Bureau o f Labor Statistics)

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

P
<N

+ 7

(Department o f Commerce)

00
CO

Department stores, Second D istrict___




207
319r

(Federal Reserve B a nk o f N e w York)

Net sales
Locality

October

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

( N . Y . S . D iv . o f Place, and U nem p. In s .)

Personal income*, 1935-39 = 100..................

294 p

(Departm ent o f Commerce)

Composite index of wages and salaries*!,
1939 = 100......................................................
(Federal Reserve B a nk o f N e w York)

Consumers’ prices, 1935-39 = 100.................
(B ureau o f Labor Statistics)

Velocity of demand deposits*, 1935-39 = 100
(Federal Reserve B a n k o f N e w York)

New Y ork C ity ..............................................
Outside New Y ork C it y ..............................

* Adjusted for seasonal variation.
p Preliminary.
r Revised,
t A monthly release showing the 15 component indexes of hourly and weekly
earnings in nonagricultural industries com puted by this bank will be sent upon
request. Tabulations of the m onthly indexes, 1938 to date, m ay also be pro­
cured from the Research Department, Dom estic Research Division.

FEDERAL RESERVE BANK OF NEW YORK
MONTHLY REVIEW, DECEMBER 1948
INDUSTRIAL PRODUCTION

National Summary of Business Conditions
(Summarized by the Board of Governors of the Federal Reserve System, November 30, 1948)
production increased somewhat in October. Value of department store sales showed
less than the usual seasonal rise in October and the early part of November. Prices of foods and
some other products declined while prices of metal products advanced further. Growth of bank
loans has slackened considerably since September, and in November sales of Government bonds by
nonbank investors declined sharply. Bond prices advanced somewhat in November while common
stock prices declined sharply.

I

NDUSTRIAL

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

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

The Board’s seasonally adjusted index of industrial production increased 3 points in October
to a rate of 195 per cent of the 1935-39 average, owing mainly to a substantial gain in output of
durable goods.
Activity in durable goods industries in October was at a new high rate for the postwar period,
reflecting in large part a record volume of iron and steel output. Steel mill activity advanced 4 per
cent in October to a rate of close to 100 per cent of capacity, and operations continued at about
this level during November. Output of automobiles likewise showed a significant increase in October
and reached a new postwar peak rate. Production of copper and railroad freight cars declined.
Activity in most other durable industries in October was somewhat above the September rate.
Output of nondurable goods showed a slight further gain in October. Production of petroleum
products recovered to the August level, reflecting settlement of labor disputes at West Coast
refineries. Activity in the paper and publishing industries expanded moderately. Production of
textile and leather products, on the other hand, declined in October, according to preliminary reports.
Output of most other nondurable goods was maintained at about the September rate.
Minerals production recovered from the decline in September, which had reflected mainly a
temporary curtailment of crude petroleum output. Bituminous coal production declined further in
October and was 7 per cent below the same month a year ago. Output of metals was maintained
at about the September rate.
Co n s t r u c t io n

Bureau of Labor Statistics* estimates adjusted for
seasonal variation by Federal Reserve. Proprietors
and domestic servants are excluded. Midmonth
figures; latest shown are for September.
CONSUMERS’ PRICES

Construction contracts awarded, as reported by the F. W . Dodge Corporation, increased slightly
in October, reflecting chiefly large awards for publicly-financed housing projects and hospitals.
Awards for private residential building and public works and utilities continued to decline. The
number of new housing units started, according to Department of Labor estimates, dropped further
in October to 72,000. This compares with 81,000 in the preceding month and 94,000 in October
of last year.
D is t r ib u t io n

Department store sales in October and the early part of November were below the advanced
level of the preceding six months, after allowance is made for the usual seasonal changes. Value
of sales in the first three weeks of November was 8 per cent less than during the corresponding
period last year.
Shipments of most classes of railroad revenue freight in October and the early part of Novem­
ber were maintained at about the September level, after adjustment for seasonal changes. Total
carloadings during this period were 4 per cent below the same period a year ago, reflecting mainly
a smaller volume of shipments of coal and manufactured goods.
C o m m o d i t y P r ic e s

The general level of wholesale commodity prices decreased somewhat further from the middle
of October to the third week of November, reflecting mainly additional marked declines in prices
of meat and livestock. Prices of grains and cotton strengthened in this period. Further advances
were reported in metal prices.
Decreases in retail food prices lowered the consumers’ price index by one-half per cent from
September to mid-October. Retail prices of most other groups of items showed further small advances.
Bureau of Labor Statistics* indexes. “All items” in­
cludes housefurnishings, fuel, and miscellaneous
groups not shown separately. Midmonth
figures; latest shown are for October.
MEMBER BANK RESERVES AND RELATED ITEMS

Ba n k

C r e d it

Federal Reserve support purchases of long-term Treasury bonds from nonbank investors declined
sharply in early November, following substantial purchases in October. In mid-November, as prices
of Treasury bonds advanced somewhat, Reserve Bank holdings were reduced slightly. During October
and the first three weeks of November the System sold a larger amount of short-term Government
securities to banks and to other investors than it purchased of Treasury bonds, and total Govern­
ment security holdings at the Reserve Banks declined.
Following the increase in reserve requirements in the latter part of September, total loans of
all member banks showed little change in October. Loans to businesses increased further at banks
in leading cities during October and the first three weeks of November, but the increase was con­
siderably smaller than in the corresponding period last year. Holdings of short-term Government
securities rose substantially over the period. Demand deposits at member banks increased sharply
in October, as the result of Federal Reserve purchases of securities from nonbank investors, but
declined somewhat early in November at banks in leading cities.
S e c u r it y M

Wednesday figures; latest shown are for
November 17.




arkets

Trading in Government bonds was in small volume in the first three weeks of November.
Prices of high-grade corporate and municipal bonds advanced slightly. On November 16, the
Treasury announced a one-year 1*4 per cent certificate issue in exchange for issues maturing in
December and January.
Common stock prices declined about 10 per cent in early November, cancelling the advance
that began in late September.