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MONTHLY REVIEW O f Credit and Business Conditions FEDERAL RESERVE V olume 31 BANK DECEMBER OF NEW YORK No. 12 1949 MONEY MARKET IN NOVEMBER Prices of long-term Treasury bonds renewed their advance Prices of Selected Treasury Bonds* during the past month reaching new peaks for the year on November 18, but in qualification of this fact is the report that trading in these securities did not have breadth nor volume. The gains of the first half of the month were lost in subsequent trading, and at the end of the month prices were at or below the October 31 levels. Apparent lack of sufficient alternative outlets for investment funds and prospects for an increased demand for long-term Treasury bonds with the growth of company pension funds and other accumulations of savings were among the factors of strength in the long-term Govern ment bond market in the first half of the month. Price trends for highest-grade corporate and municipal bonds paralleled those of long-term Governments. Price changes of shorter-term Treasury bonds, eligible for bank ownership, were much narrower, and yields on short-term Treasury issues fluctuated with the ebb and flow of funds in the money market. Money market conditions were somewhat erratic, and member bank reserve positions were subject to alternate periods of tightness and ease, reflecting to a substan tial extent changes in the reserve positions of the New York City banks. * Averages of closing bid and asked prices, W ednesday dates; latest figures are for Novem ber 23, 1949. possibility of higher Federal corporate taxes in 1950 probably G o v e r n m e n t Bo n d M ar k e t The advance in Treasury bond prices during the first part of November was greatest in the longest-term issues. The explains the fact that the greater gains were registered by long term partially tax-exempt bonds, the 2 M ’s of 1960-65, which rose 2 1/32 between October 31 and November 18. In the same period, the long-term Victory bonds (December 2 1/^'s of 1967-72) rose 20 /3 2 of a point to the highest level since CONTENTS July 1946. Price movements in the longer-term eligible issues, Money Market in November.............................. 133 which in the past had risen more rapidly than the ineligible Consumer Credit since Regulation W .............. 136 Demand for Cash during Holiday Periods... . 137 The Economic Reconstruction of Japan.......... 139 Durable Goods Sales and Retail Trade............ 141 Department Store Trade since the End of the W a r .............................................. ................. .. 142 issues because of their wider market and their scarcity value for banks, were more restrained. The September 2V^’s of 1967-72 rose 14/32 of a point in the first 18 days of November, and were still below the levels of the summer and fall of 1947. The intermediate-term 2 Va's of 1956-59 advanced only 6 /32, while the shorter-term 2 s of December 1952-54 showed no change during this period. Because of investor interest in the highest-yielding Government securities, the shorter-term in 134 MONTHLY REVIEW, DECEMBER 1949 eligible issues with lower yields— those which become eligible reserve accounting period that ended on November 2. The re earliest— failed to move up as rapidly as the longer-term issues. ported excess reserves on the last day of the period consequently rose sharply. Underlying the strength in the Government bond market in the past month and in previous months has been the dimin In the first two days of the subsequent week, banks repaid ished private demand for capital, evidenced by a substantial about 450 million dollars of their indebtedness to the Reserve decline in the volume of new corporate bond flotations for Banks, primarily by reducing their excess reserves. Confronted new capital purposes during the third quarter of this year and with moderate net losses of funds attributable to a holiday again in November. As a result, life insurance companies rise in currency in circulation and other transactions during the have been selling Government securities on a smaller scale remainder of the week, however, the banks again found it than last year, and savings banks, instead of disposing of bonds necessary to borrow from the Reserve Banks, reducing their net to meet withdrawals of funds or to make alternative invest repayments for the entire week to 292 million dollars. ments, have been lengthening their portfolios of Government In adjusting their positions, member banks sold substantial issues. The settlements of recent labor disputes providing for amounts of short-term Government securities. Some of these pensions have caused a few trustees under pension trusts, and securities were purchased by the Federal Reserve Banks, but corporations administering their own pension systems, to shift many of them were acquired by Government security dealers existing holdings of Government securities into longer maturi who financed their purchases with loans from the banks, so ties in order to obtain the higher income needed to meet that little benefit to the reserve positions of member banks as a whole resulted. prospective obligations. Others are undoubtedly making similar preparations, and the further growth of pension plans The losses of funds attributable to transactions affecting all is generally recognized as an important potential source of member banks in the early part of the month were augmented, demand for high-grade bonds. The supply of long-term ineligible bonds tended to diminish in the case of the New York City institutions, by a substantial outflow of funds to other parts of the country. The strain on for a time as prices rose. Late in the month, however, a change the New York banks consequently was greater than on other of market sentiment led to fairly sharp reductions in Treasury banks. In adjusting their reserve positions to required levels, bond prices. There was no evidence of large-scale selling, but therefore, the City institutions accounted for most of the re the demand subsided considerably. duction of excess reserves by the banking system in the aggre Inasmuch as a large part of the demand for long-term ineligible Treasury bonds during the first part of the month came from institutions and corporations which were lengthen ing the maturity of their portfolios rather than adding to them, a substantial volume of eligible bonds and other Treasury se curities was made available to the market. This tended to restrain the advance in prices of eligible bonds, especially since the commercial banks were in a rather fully invested position most of the time and their commercial and other loans were expanding moderately. gate, and for most of the sales of short-term Government securities. A large part of the rise and subsequent fall in member bank borrowings from the Reserve Banks occurred at the New York City banks. Money market conditions turned easy in the week ended November 16, owing chiefly to a sharp expansion in Federal Reserve "float” and a substantial return flow of currency from circulation. Member banks were consequently able to pay off almost 200 million dollars of their borrowings from the Reserve Banks, to purchase substantial amounts of Government securi ties (mainly from Government security dealers) and to increase their excess reserves by more than 200 million to 1,140 million Sh o r t -t er m M o n e y M a r k e t dollars on November 16. Thus, when member banks lost mod erate amounts of reserves in the following week (ended Money market conditions were tight in the first part of the November 2 3 ), after making further purchases of Government month, through November 9. They turned easier in the follow securities, they met these losses largely by permitting excess ing week and remained easy until the closing days of the month. reserves to decline to below 700 million dollars. The money The pressure on reserve positions of the member banks in market was easy during this period, and the rate on immediately the first part of November resulted not so much from current available "Federal funds", after falling from 1 7 /1 6 per cent on money market transactions as from the need of individual banks November 9 to 1 /1 6 -1 /8 per cent on November 16, remained (particularly the larger institutions) to overcome reserve de at comparatively low levels during the following week. The ficiencies incurred toward the end of October. To correct these rate on new Treasury bills declined slightly from an average deficiencies, the larger commercial banks borrowed heavily discount of 1.074 per cent for the issue dated November 10 to from the Reserve Banks in the first two days of November, to 1.056 per cent on November 17 and 1.052 per cent in the bring their average reserves up to average requirements for the following week. FEDERAL RESERVE BANK OF NEW YO R K 135 Over the three-week period ended November 23, Federal November. After reaching a peak of 4,890 million dollars on Reserve Bank loans and discounts declined more than 450 mil November 9 (the largest amount since early in May), busi lion dollars, while the Systems total holdings of Government ness loans of the City banks declined 50 million dollars in the securities, mainly Treasury bills and to a lesser extent certifi cates, rose 136 million dollars, net. Holdings of Treasury bonds subsequent two weeks. This reduction does not necessarily maturing in more than five years fell 23 million dollars in this period. signify the beginning of a premature seasonal decline, how ever, as a considerable part resulted from repayments of loans out of the proceeds of security issues. Commercial, industrial, The need for Reserve Bank credit increased in the last week and agricultural loans of the weekly reporting banks in other of the month, as the banks sustained moderate losses of reserve principal cities rose 110 million dollars further in the three funds, chiefly as a result of an increase in currency in circulation weeks ended November 16, and remained unchanged in the and a moderate net excess of Treasury receipts over expendi following week. The business loans of all weekly reporting tures. A large part of the losses of reserves fell upon the New York City banks which had not only to meet the outflow of funds to other parts of the country, but also to finance substan tial increases in security dealers' portfolios. Consequently the money market tightened considerably, and "Federal funds” were scarce at 1 7 /1 6 per cent. During the past month, foreign central banks and govern ments continued to convert some dollar balances held in this country into gold and to accumulate funds in their balances with the Reserve Banks. Although the devaluation of the pound sterling and other foreign currencies has not by any means been the only factor responsible for this tendency, (some change in the availability of funds through the ECA has also been cited as a factor), it presumably has been an im portant one. Since September 21 (shortly after the devalua banks, however, were substantially below the level of the cor responding date in 1948, and in all probability 1949 will be the first calendar year since the end of the war in which business loans will have shown a net decline. Both real estate and all other (including consumer) loans continued their slow advance, at New York City banks as well as in institutions in the 93 other reporting cities, to reach new all-time highs during the month. Despite the steady expan sion of these types of credits, the gain over a year ago has not been large enough to offset the decline in business loans. Changes in security loans were large from week to week dur ing November, reflecting chiefly Government dealer opera tions in the money market, and for the four weeks ended November 23 resulted in a moderate net increase. tion of the pound) the United States gold stock has decreased Bank holdings of Government securities fluctuated with by more than 160 million dollars, while foreign deposits with money market conditions, and the major changes were in the Federal Reserve Banks have increased more than 310 mil holdings of short-term securities, mainly Treasury bills and to lion dollars. A major factor in the gold outflow has been the a lesser extent certificates of indebtedness. The weekly report purchase of gold from the Treasury by foreign countries to ing banks both in New York and outside made net sales of strengthen the gold backing of their currencies. Treasury issues during the weeks ended November 2 and 9 Despite the decline in United States gold holdings in the past two months, they were still 290 million dollars larger on November 23 than at the end of 1948. The rate of increase in United States holdings has declined considerably since the postwar peak rate of 2.8 billion in 1947 (before allowance and added to their holdings in the weeks of November 16 and 23. However, only part of the earlier sales were subsequently made up, and the New York City banks again became net sellers during the last week of the month. Bond holdings rose moderately, mainly at banks outside New York City. for the American gold subscription to the International Mone Reflecting the reductions in legal reserve requirements and tary Fund). In 1948, the increase was 1.5 billion dollars. in commercial loans, since a year ago, weekly reporting bank Increased U. S. aid to Western European and to other countries holdings of Government securities on November 16 were and the partial depletion of the gold and dollar reserves of a almost 3 % billion dollars larger than on the corresponding number of countries have been largely responsible for the date in 1948. The larger part of the increase was in the reduction in our net receipts of gold from abroad and in the shorter-term issues, but more than 1.2 billion dollars (over rate of spending out of foreign deposit accounts in American 45 per cent) of the increase in total Government security banks. holdings of the weekly reporting member banks outside New York City consisted of Treasury bonds. Net purchases of M em ber Ba n k C redit The seasonal expansion of commercial loans at New York City weekly reporting member banks was interrupted in Treasury bonds accounted for less than a third of the gain in the New York City banks' holdings of Treasury issues dur ing the year, reflecting the status of these banks as money market institutions. 136 MONTHLY REVIEW, DECEMBER 1949 CONSUMER CREDIT SINCE REGULATION W W carry their own instalment paper. Some financing is undoubt and Federal control over the exten edly being done on extremely liberal terms, but to a large extent sion of consumer credit came to an end last June, there was advertisements of such terms are still aimed primarily at considerable public discussion and speculation as to the prob drawing customers into a store or a lending agency. Once there, When Regulation able results of the lifting of controls. Although only a few the customer is urged to make his purchase or to take a loan months have elapsed since Federal control was terminated on more conservative terms. Furthermore, "easy” contracts are made available to choice risks only. some significant developments can already be noted. These and other recent developments in the field may be summarized Within these generalizations for the country as a whole, some as follows: First, there has been a marked, in some cases even regional differences in the pattern have also appeared. In broad a spectacular, liberalization of advertised credit terms. To date, terms, credit has tended to be somewhat more liberal in the however, "easy credit” is apparently still being used more as South and Southwest and least so in the Northwest. In the a means of drawing customers in than as a sales clincher and Second District minimum down payments for most appliances the actual amount of credit being extended on such terms have tended to be fairly well maintained, although maturities probably is still relatively small. Second, the use of credit for in many cases have tended to be somewhat above average. the purchase of automobiles is increasing very rapidly and Conditions also vary from community to community depending promises to continue to do so for some time in the future. upon whether or not a leading store or group of stores has Third, since sales of other consumers’ durable goods this year broken the line and the others were forced to follow along, and to date have fallen below the levels of 1948, the dollar volume upon whether or not retail outlets of mail-order houses are of credit extended for the purchase of such goods has also much of a competitive factor in a given community, as two of declined somewhat. There are some indications, however, that these large chains were among the first to liberalize their terms sales of these goods (and the volume of credit involved) may after the end of Regulation W . For the time being, however, rise rather markedly during the last quarter of 1949. Fourth, while available evidence indicates that the past year has wit the use of charge account credit and single-payment loans is nessed a gradual lengthening in the average time that contracts declining. And fifth, although delinquencies and losses have written by almost all credit grantors remain outstanding, the been creeping up, the cautious attitude of most credit grantors largest volume of new instalment contracts is probably being is tending to keep them close to a minimum. written on terms fairly close to those prevailing just before the outbreak of the war. Anyone reading newspapers or other forms of local adver tising media is aware that a marked liberalization in proffered From the available data, it is difficult to tell just what effect instalment terms has occurred in recent months. This trend has the availability of more liberal credit has had on sales volume. not been as marked in the Second Federal Reserve District as in some other parts of the country, but even here advertisements With the exception of automobiles, sales of most consumers’ have appeared for loans on the full value of a new car with (Percentage change, Jan.-Sept., 1948 to 1949) 36 months to pay and for console model television sets with Changes in Estimated Amounts of Consumer Instalment Credit Extended by Selected Sources nothing down and two years to pay. For the first time since the mid-thirties, coin meter sales of appliances such as re frigerators, and now television sets, are occurring in con siderable number. Also, instalment contracts involving "bal loon” payments— a depression-born technique that was out lawed under Regulation W — are again coming into use. Under F u rn itu re and household appliance s t o re s De p a rtm e n t s t o r e s and m ail-o rder hou ses this scheme, an instalment contract calls for a large lump pay Com m ercial and ment at the end which in turn is usually refinanced, in some in d u s tria l b a n k s'* cases even two or three times. A closer examination of the situation, however, indicates Sm all loan c o m p a n ie s* that this relaxation of credit terms has not been as universal or as widespread as the casual observer might assume. In many C re d it u n io n s'* sections of the country, banks and the large finance companies have tended to hold the line and have refused to take dealers’ A utom obile d e a le rs paper written on very liberal terms. Therefore, dealers have to follow fairly conservative terms on most of the paper they -10 -5 0 +5 -HO +15 +20 +25 +30 +35 +40 +45 +50 P e rc e n ta g e change originate with the exception of those not too numerous dis tributors who are in a sufficiently strong financial position to * Includes only direct loa n s; excludes repair and modernization loans. FEDERAL RESERVE BANK OF NEW YORK durables and the amount of credit granted for their purchase 137 Changes in Amounts of Consumer Credit Outstanding by Type (D olla r am ou nts in m illion s) have so far this year barely kept pace with, or have fallen behind 1948. The Department of Commerce reports that sea sonally adjusted sales totals for the first nine months of 1949 were 10 per cent below the same period in 1948 for furniture Change during first nine months Type of credit Dollar volume and housefurnishings stores and slightly more than 1 per cent below for household appliance and radio stores (the latter might have been greater were it not for television).1 The pic ture is similar if figures for the third quarter alone are com pared. Possibly the availability of more liberal credit prevented a more precipitous decline in recent months. As the accom panying chart indicates, the amount of credit granted by depart Percentage 1948 1949 + 1,288 + 922 3 + 369 +27 + 61 + 21 +19 + 15 + 47 * + 9 + - 3 -1 1 + 5 + 4 -1 0 -1 9 - 3 + 2 1948 1949 Total instalment credit.......... Automobile sale credit........ Other sale credit.................. Cash loans............................. + 1 ,7 5 6 + 707 + 400 + 649 Total noninstalment credit. . . Charge accounts................... Single-payment loans......... Service credit........................ + + 198 385 148 39 803 731 87 15 * Less than 0.5 per cent. ment stores and mail-order houses during the first nine months of 1949 is estimated to have been about 4 per cent below the same months of 1948; that granted by furniture and household appliance stores was about 7 per cent below 1948. The amount of credit granted by the banks for the purchase of consumers’ goods other than automobiles declined by an even greater per centage, but the total amount of credit granted by them was up somewhat as the chart indicates, owing primarily to the increase in their automobile loans. Preliminary and fragmen tary evidence in the Second District indicates, however, that the use of credit for the purchase of consumers’ goods other than automobiles may show a rather pronounced rise in the final quarter of 1949. ing slightly in recent months. Single-payment loans, which showed a minor increase of about 148 million during the first three quarters of 1948, declined approximately 87 million dur ing the same period this year. Service credit, however, has con tinued to show small increases. While losses and delinquencies have been creeping up, there is no evidence as yet of any sharp or alarming rise. DEMAND FOR CASH DURING HOLIDAY PERIODS Changes in the amount of currency in circulation are one of the more important factors affecting short-run fluctuations As has been indicated, the use of credit for the purchase of in member bank reserves and in the need for Federal Reserve automobiles rose very sharply during 1949. Judging from credit. Major periodic flows of money into and out of circula recent surveys of consumer financial positions and buying tion are caused by holidays, when the demand of the public intentions, and barring any unforeseen change in economic for currency fluctuates widely within a short period of time. For a week or more before each major holiday (several conditions, automobile credit sales may continue at a high level for some time to come. Credit extended by automobile dealers, weeks in the case of Christmas), the amount of money in as the chart shows, was 45 per cent greater during the first circulation increases very substantially, and after the holiday nine months of 1949 than in the same period of 1948. The it declines correspondingly, except in the case of Thanksgiving amount of automobile credit extended directly by commercial and industrial banks rose about 13 per cent. At the end of when the decline is concealed in the pre-Christmas increase. In some cases, these preholiday outflows and subsequent return September automobile sale credit outstanding accounted for flows of currency may amount to well over 200 million dollars. approximately 17 per cent of the total amount of consumer Unless offset by action by the Federal Reserve System, they credit in use compared with 12 per cent in September 1948. affect, for a limited period of time, conditions in the money In September 1941, however, when it reached its prewar peak, market. In this article, the influence of currency flows origi automobile sale credit represented 22 per cent of total volume nated by holidays upon member bank reserves is reviewed and of consumer credit outstanding. some tentative estimates of the magnitude of the movements The use of noninstalment types of consumer credit also has are presented. tended to decline in recent months, as the accompanying table Money in circulation, defined as all money outside of the indicates. At the end of September charge accounts were 731 Federal Reserve Banks and the Treasury, includes currency in million dollars below the level at the end of December 1948. the hands of the general public as well as in the vaults of Charge account receivables would normally be expected to be banks. At all times, the amount of money in circulation is lower this time of year than in December which is the seasonal ultimately determined by the demands of the public. It varies peak, but during the first nine months of 1948 the net decline constantly in response to the changing requirements for cur was only 385 million dollars. Also, the average number of rency on the part of individuals and businesses.1 days that charge accounts remain outstanding has been declin- 1 Currency may also be used at certain times as a store of value (i.e., hoarded), but generally this use does not affect to any considerable extent short-term changes in the amount of money in circulation. 1 Some part of these declines may reflect a decrease in prices. MONTHLY REVIEW, DECEMBER 1949 138 Currency in Circulation* (D ecem ber 31, 1947-December 29, 1948) a return flow of currency to the Reserve Banks and tends to ease the money market. A number of factors contribute to the increased needs for currency before a holiday. Individuals may require more cash on the average for pocket money to cover travel expenses, purchases of gifts and special foods, and expenditures for entertainment or for similar purposes. Certain holidays, notably Christmas, are preceded by gift shopping periods of several weeks’ duration. Also, some businesses, especially those catering to the holiday trade, may need an increased amount of till money and payroll money. In the case of bank holidays which are not generally observed by the business community, additional currency may be withdrawn in order to insure a sufficient supply for normal expenditures while the banks are closed. The amount of currency that the public requires for any particular holiday depends on a number of factors. Some holi days are traditionally spent at home, others away from home. Also, some holidays are nationwide— as the major religious holidays— while others are observed in certain parts of the country only. The holiday demand for currency is superimposed on the Currency ( including coin) is used by the public mainly for distinct patterns of currency demand which already exist the smaller current transactions commonly carried on in cash, between months of the year, within the month, and also within such as most types of retail purchases and various minor the week. On a monthly basis, currency tends seasonally to expenditures of individuals. Also, a large part of payrolls is return from circulation in January particularly, and to some paid out in currency. As more currency is required for these extent during the first third of the year. Thereafter, the amount purposes, of currency in circulation ordinarily fluctuates without a sus the public (including business establishments) makes withdrawals of deposits at the commercial banks; as the tained change of level until the last five months of the year, needs are reduced, currency is redeposited. Banks usually keep in their vaults only enough cash to insure that an adequate when the general trend is upward. The pattern within the month is characterized by an outflow of money into circulation supply is on hand to meet the needs of their customers. As a of considerable proportions during the last week of each month period of increased need for currency approaches, and until it ends, the banks may add temporarily to their vault cash. Vault and the first several days of the following month and a return flow in the remainder. The end-of-month outflow of currency cash, therefore, tends to fluctuate in close relation with the is larger in some months than in others and it does not always public’s demand for cash. appear at precisely the same time. It is, therefore, difficult to Both the amount and the fluctuations of vault cash are rela distinguish exactly between the month-end and holiday influ tively small compared with total money in circulation and its ences in many instances where holidays fall near the end of a movements. Since vault cash is not an earning asset and does month (July 4, Memorial Day, Labor Day, Thanksgiving, and not count as reserves for member banks, most commercial Christmas). As for the weekly pattern, there are regularly banks probably deposit promptly all surplus currency they rather large intraweekly changes in the amount of money in receive with the Reserve Banks (or with a correspondent bank, circulation, and these movements may alter any estimates of which in turn deposits its excess receipts with a Reserve Bank) the magnitude of the holiday influence. The following esti in order to gain reserves or to reduce borrowings. Conversely, mates presented are based on the average experience of recent they withdraw currency at the expense of their reserves (which they may need to restore by borrowing at the Reserve Banks) years. Among all legal holidays, Christmas has the most pronounced only in anticipation of an increased demand from the public. influence on the amount of money in circulation. Because its Thus, the large increases in the requirements for currency on effect really begins with the start of the Christmas shopping the part of the public before each holiday reduce member season several weeks before the holiday, the total effect of the bank reserves and raise the amount of money in circulation, holiday upon the amount of money in circulation cannot be while the reduced demand for money after the holidays causes evaluated with any considerable degree of reliability. There FEDERAL RESERVE BANK OF NEW Y O R K 13$ weeks before Christmas that may be directly attributed to the to the seventh), there may be a Labor Day outflow amounting to well over 100 million dollars. influence of the holiday, and during this period between 200 and 275 million dollars are drawn into circulation.2 Large The evidence regarding the influence on currency move ments of the Lincoln and Washington birthday holidays is not is, however, a very distinct movement beginning almost two purchases of gifts, greatly increased travel expenditures, ex conclusive, since there are a number of factors tending to panded purchases of food and delicacies, gifts of money, and obscure what influence may be present. These two holidays other holiday expenses, are reflected in this outflow. Immedi are less important than others in terms of travel expenditures ately after Christmas the need of the public for money is and gift and food purchases. In addition, they are only about rapidly reduced, and currency quickly returns to the Reserve nine business days apart, so that their influences overlap; Banks. This return flow takes place despite the fact that there moreover, Lincolns Birthday is not observed generally through is normally a large outflow at the end of each month. The out the country. Finally, the influence of the February 12 and only indication of this normal month-end movement in De February 22 holidays is further obscured by the fact that there cember is a somewhat slackened rate of return around the is a strong seasonal tendency for currency to return from cir beginning of January. culation both during the middle of each month and for several In terms of its effect upon the circulation of currency, Inde months after Christmas. pendence Day ranks next to Christmas. The influence of this Other holidays have considerably less influence on the vol day, traditionally the beginning of the summer vacation period, ume of money in circulation. Memorial Day, Columbus Day, is sometimes felt as much as ten business days in advance. and Armistice Day and Election Day combined are of roughly While it is unlikely that individuals or businesses have begun equal importance. They each increase money in circulation net withdrawals of currency at that time, the banks increase by approximately 75 to 130 million dollars; Armistice Day their vault cash in anticipation of the demands of the public (together with Election Day) ordinarily is the most impor to come several days later. Even after making allowance for tant of the three and Memorial Day the least important. The the normal month-end movement, which takes place at about effects of each of the three holiday periods may be first noted the same time, it is probable that Independence Day adds six or seven days before the holiday, and the return flow begins about 150 to 200 million dollars to the amount of money in one or two days after the holiday and continues for about a circulation. The extra amounts of currency are used largely week. The effect of Easter upon the amount of money in cir for travel and vacation expenses by individuals and in resort culation is apparently minor and it is also very difficult to deter businesses. The return flow takes place from one to three mine, because of the shifting date of this holiday. business days after the holiday; the beginning of the period Holidays other than those mentioned may affect currency of the return flow is later when the holiday falls at a week end. flows in certain sections of the country, but their influence is Less important than these two holidays is Thanksgiving, not discernible on a national scale. It may be concluded, how which produces an outflow of currency of 100 to 150 million ever, that all the major holidays, and especially Christmas and dollars more than normal for that period of the month. How Independence Day, require a considerable amount of currency ever, the influence is rather short lived, and is probably attrib utable almost entirely to travel expenses and extra food pur in excess of normal needs which is supplied by the Federal Reserve System without disturbing the money market. chases. It is first felt six or seven days before the holiday but there is no (or very little) return flow afterwards, because a large amount of currency is retained by the public (or the banks ) for month-end needs, and Christmas shopping is already under way. The influence of Labor Day may be substantial, in some years at least, but it is very difficult to estimate because from year TH E ECONOM IC RECO N STRU CTIO N OF JAPAN The current speculation about an early conclusion of a peace treaty with Japan has focused attention upon the political and economic problems of that country. This article seeks to assess recent developments in the economic field. to year this holiday falls on different days of the month. It is By August 1949 the output of Japanese manufacturing and probable that the effect of Labor Day is considerably less than mining had so far recovered from the effects of the war that it usual when the holiday falls within the first few days of the had reached 136 per cent above the 1946 average. N otw ith month. The normal month-end outflow at that time may standing this improvement, it was still only 78 per cent of the suffice, at least in large part, to cover holiday needs. However, average rate for 1932-36, the period immediately prior to the when the holiday falls a little later in the month (on the fifth “China Incident,” and one when the pattern of industry was 2 This and the following estimates are based on the experience of roughly similar to that which will probably prevail during the recent years. During the war these patterns were submerged in other next few years. Price levels during the same time rose very wartime developments. The magnitudes involved in prewar years sharply. The index of official wholesale prices for August 1949 were, of course, much smaller. 140 MONTHLY REVIEW, DECEMBER 1949 was 10 V2 times higher than in August 1946,1 while the cost of living index, based on expenditures in both official and exports of machinery and metal products have gained in prominence. black markets, was 4 times higher. The average monthly wage Although in the financial sphere of the Japanese economy in manufacturing industries, it is true, was 13 times greater there has not been the progress which with American assist than three years earlier, implying some improvement in wages ance has been made in physical output and foreign trade, signal measured in terms of actual purchasing power, but government improvement has occurred during 1949. The tremendous up estimates indicate that the latter were still less than half those of the mid-thirties. ward surge in prices that marked 1945 to 1948 was a conse The major hindrance to the restoration of the prewar level inflationary monetary and fiscal policies. This rise, however, of production has been the loss of Manchuria, Korea, Formosa, quence of inefficient enforcement of direct controls and of was largely checked in 1949. and the other colonial territories that previously provided On September 30, 1949 the national debt stood at 521.5 resource-poor Japan with the larger portion of her foodstuffs billion yen, 3 V2 times the March 1946 level, and 22 times that and industrial raw materials. of March 1940. The September figure, however, represents a To fill the strangling import vacuum resulting from the dismemberment of the empire, the 5 per cent decline from the December 1948 peak, and although United States has financed more than two thirds of Japan’s the usual seasonal year-end expansion will probably push the postwar imports, to a total of more than 1.5 billion dollars. total close to the December 1948 high mark, the avoidance of During the first three years of the occupation, half of these a rise for a whole year will have been a distinct achievement. imports, provided under the "prevention of disease and unrest” Similarly, the past year has witnessed some improvement, occupation formula, consisted of foodstuffs alone. In 1949, although small, in the distribution of the debt. At the end of however, the United States Government decided to give Japan September 1949 the Bank of Japan still held 46 per cent of more basic assistance in order to permit more rapid reconstruc the total debt, while the ordinary commercial banks and the tion of her economy, with the result that since July the amount nonbank investors held only 20 per cent (as against 7 per cent of American-financed imports devoted to relief types of sup and 58 per cent, respectively, in March 1946), but the Bank plies has been declining, and a growing proportion has con of Japans holdings represented a 10 per cent contraction from September 1948. The funded share of the debt was only 54 sisted of raw cotton, petroleum, fertilizers, and other producers’ goods. Total exports have increased steadily from the very low per cent, compared with 70 per cent in March 1946 and 97 per cent in March 1940. levels prevailing immediately after the war, rising from 103 The trend in the money supply is still upward, although million dollars in 19462 to an annual rate of 558 million during here too the rise has slackened, with the result that during the the first seven months of 1949. At the same time the annual trade deficit has also grown, albeit less rapidly, expanding from first seven months of 1949 the money supply expanded by less than one seventh, whereas during the corresponding period of 1948 the increase was about one third. Moreover, the entire 202 million dollars to an annual rate of 428 million for Janu ary-July 1949; the proportion of imports not covered by ex ports has declined from 66 per cent to 40 per cent. Notwith rise was confined to bank deposits, with the note issue declin standing this improvement, Japan still has far to go before she somewhat improved the composition of the money supply, ing from 355 billion yen to 296 billion. These changes have will regain her 1932-36 position when the volume of average although the ratio of notes to bank deposits was still 1 to 2 annual trade was roughly 150 per cent more than now, and compared with the 1932-36 ratio of about 1 to 6. the imports not covered by exports amounted to less than 4 per cent. Half of Japan’s postwar exports through 1948 consisted of textiles, the production of which had been fostered by the occupation authorities through the importation of large quan tities of raw cotton. Raw silk exports were next in importance, contributing another 17 per cent. During the current year, however, although the volume of textile and fiber exports has continued to rise, their percentage has diminished, while 1 The wholesale price index based on both official and black market prices recorded a less drastic threefold increase, reflecting the relatively more acute increase in black market prices during 1946, and their drop during 1949. 2 Including a small amount for the last four months of 1945. The improvements that have been noted in the financial sphere have stemmed in large part from the so-called Dodge reforms introduced this spring when Mr. Joseph Dodge, Detroit banker and former finance division chief of the Amer ican Military Government in Germany, was acting as advisor to SCAP in Japan. The reforms included a balanced budget with reduced government expenditures and increased taxes, as well as credit restrictions, a single exchange rate, and the elimination of export subsidies and the curtailment of domestic subsidies. While putting a much-needed brake upon the infla tion, these measures have understandably had a temporarily adverse effect upon production. Thus, after the index of indus trial production had risen 11 points from January to April 1949, thereby reaching 79 per cent of the 1932-36 level, it 141 FEDERAL RESERVE BANK OF NEW YORK trial base than she possessed in 1930-34, which will indeed ceased to advance and by the end of August had actually dropped one point. From April to August of the previous year help. But if American aid, which is scheduled to provide the production had risen 9 points. Although figures are not yet available, reports indicate that major part of her 1949 imports, were to be suddenly cut off, Japan would find herself in dire straits. A great expansion in the industrial readjustments had been largely accomplished by exports, a reorientation of her trade towards Asia and Africa September. The easier atmosphere that resulted was reinforced (where, however, political and economic instability will be an by the publication of the tax reforms worked out by a mission impediment), and the attracting of foreign loans, are now her headed by Professor Carl Shoup of Columbia University. most important and difficult tasks. Despite criticism from some sources, the general reaction of industrial leaders was one of approval and optimism, particu larly because of the lightened tax burdens advocated for busi ness and the high-income groups, and the inclusion of a longawaited program for the revaluation of business assets. But in the middle of September industry received a new blow from the sterling and other currency devaluations. These meant a twofold obstacle to Japan’s exports, since not only did her leading competitor, the United Kingdom, devalue, but 50 also did most of her important export markets. Almost one half of total Japanese exports in 1948 had gone to the devalu ing countries— 77 per cent in the form of textiles— but only 10 per cent of her imports came from those areas. The net effect of the devaluations upon both the terms of trade and die balance of trade of Japan is therefore likely to be unfavorable. Although SCAP has declared that the exchange value of the yen will not be lowered, probably in the belief that to do 50 would make internal stabilization more difficult, it has per mitted the abolishment of the floor prices on exports,3 a stra tegic step that should help to regain for Japan a good part of the competitive position lost when sterling was devalued. The outlook is particularly good for cotton goods, thus far the most D U R AB LE GOODS SALES A N D R E T A IL TR A D E One of the most significant factors in the readjustment period which began in the latter part of 1948 has been the relative stability of retail sales, even during the period of rising unemployment, declining payrolls, and curtailed production. From the all-time record set in August 1948 to the low point reached in July 1949, the seasonally adjusted dollar volume of retail sales (as measured by the U. S. Department of Com merces recently revised estimates of retail sales) declined less than 5 per cent, approximately by the same percentage as retail prices of all commodities. During the first ten months of this year, customers spent at all retail establishments only about 1 per cent less than in the corresponding period last year, while retail prices averaged 2 per cent lower. This stability in the aggregate volume of retail purchases was the result of a continued high level of expenditures for durable goods. In fact, it was almost entirely attributable to the rising sales of automobiles, since sales of other durable Total Retail Store Sales— Durable and Nondurable Goods (Third quarter 1947, 1948, and 1949; seasonally adjusted annual rate) important postwar export; the production of cotton textiles has been very profitable since the establishment in April of the single exchange rate of 360 yen to the dollar, and the jremoval of floor prices should result in quotations competitive with those of the United Kingdom. B IL L IO N S or DOLLARS B IL L IO N S OF D O LLA RS --------------------- 11 4 0 1 4 0 |------------------- 120 '/ rry yv / n AAAA* Despite the financial improvement in 1949, and the good prospects for renewed progress in production and exports, /< / // ■ f t '/,/'// Japans economic future remains very uncertain. To live Japan ,'A A'-> /y / / /a ///// Nondurable must trade. She has lacked sufficient foodstuffs and raw mate rials since she became an industrialized nation. The sudden W '/'W A expansion of her population from 72 million at the end of the war to 82 million in 1949,4 has greatly increased the pressure W ^ 7A\ 'v /A //A '/AA/a VA/'/A II regain the standard of living recommended as a goal by the Far Eastern Commission— that of 1930-34, a time when the population was only about 67 million. The cessation of the reparations program has left Japan with a more valuable indus3 Floor prices on silk products, however, will not be removed until the end of the year. 4 It is estimated that ten years hence her population will reach 95 million. Source: '///'//a ' '//''A //,- /,mAA/a on her resources. Having lost her empire, she will not easily ill U. 8 . Department ot Commerce. AAA, \AAAA yAAA/A tA/A/, Aa A A 142 MONTHLY REVIEW, DECEMBER 1949 goods on the whole have been tapering off during the past survey,1 made in July 1949, showed that the number of con year. Sales of homefurnishings (including household appli sumers planning to purchase automobiles during the coming ances), jewelry, and building materials stores have all been year was still at an extremely high level. Similarly, the demand below last year's levels. In the third quarter of 1949, sales of for home appliances, furniture, farm equipment, and building these three types of stores were running at an annual rate materials may have receded somewhat from its postwar peak, which was about 2.4 billion dollars below the third quarter of but is expected to be sustained in the next few years by the last year and even somewhat lower than the corresponding large need for replacements. In addition, an expanding market period of 1947. Sales of the automotive group, on the other for some of these items is provided by the high rate of resi hand, rose by about one fifth, or at an annual rate about 4.3 dential construction, which in 1949 is expected to break all billion dollars above the third quarter of 1948, and nearly previous records by providing nearly a million new homes, and 60 per cent above the same quarter of 1947. The sustaining probably at least 900,000 more in 1950, according to official influence of automobile sales has been so great that August, estimates. The accelerated sale and replacement of consumers’ September, and October of this year were the three highest durable goods in the past few years, however, may well have months on record for aggregate seasonally adjusted sales of repercussions later, since the proportion of households owning durable goods stores. relatively new automobiles and appliances will then be much In the nondurable goods category, consumer expenditures in food stores remained fairly stable despite somewhat lower larger and the demand for replacements commensurately smaller. prices, and filling station sales have been well maintained. Another factor which has stimulated sales of durable goods However, the sales volume of other nondurable goods stores more than those of nondurable goods is the ready availability has been declining and in the third quarter of 1949 was 9 per of credit, as evidenced by the rapid rise in consumer instalment cent below the same period in 1948, a drop of about 5 billion dollars at an annual rate. One of the sharpest declines occurred debt discussed elsewhere in this issue. Since the expiration of in the apparel group where sales were down 12 per cent. there have been some attempts, particularly among appliance Department store and mail-order house sales— often used as and radio dealers, to boost lagging sales by competitive loosen Federal Reserve consumer credit controls at the end of June, an indicator of retail sales in general— showed a decline of ing of credit terms. The announcement that 2.8 billion dollars 10 per cent between the third quarters of 1948 and 1949. The in Government insurance dividends will be distributed to vet discrepancy between this and the 3 per cent decline actually erans early next year may already be having some effect on registered in sales of all retail stores arises primarily from the sales, particularly of durable goods, because of anticipatory fact that department stores sell a negligible proportion of items spending. It is likely, however, that some portion of these pay — food, gasoline, and automobiles— whose sales have been stable or rising. ments will be saved, invested, or applied to the repayment of How long passenger car sales will be able to continue to offset the reduced volume of business in other lines is a ques tion that is attracting considerable discussion. Already there are some indications that automobile sales may have reached their postwar peak. From August through October, seasonally adjusted sales of the automotive group leveled off, and— what may be even more significant— retail stocks of this group of dealers rose sharply. Nevertheless, even if the extraordinarily high current rate of automobile sales should not be fully main debts. (The Federal Reserve Survey of Consumer Finances reported that about three tenths of the veterans cashing ter minal leave bonds in 1947 used them for such purposes, while about two fifths of those receiving bonds had not yet cashed them at the time of the survey in early 1948.) Hence, the impact on retail sales may not be as strong as might be antici pated in view of the total amounts to be distributed, particu larly if payments are spread over a period of several months. 1 Survey made for the Board of Governors of the Federal Reserve System by the Survey Research Center of the University of Michigan. (See October 1949 Federal Reserve Bulletin.) tained, a continued substantial level of replacement sales is in prospect. Earlier this year, the U. S. Department of Commerce estimated that the wartime deficit in automobile production DEPARTMENT STORE TRADE SINCE THE END OF THE WAR had nearly been made up and the over-all number of passenger Sales at Second District department stores during November cars was approximately in line with current levels of popula expanded somewhat more than seasonally, indicating a small tion and income. At the same time, however, the Department rise in seasonally adjusted sales above the low level of October, pointed out that in mid-1948, about 6 million passenger cars, according to a preliminary estimate. The year-to-year decline, or close to one fifth of the total, were already past the esti about 3 per cent, was the smallest since April, partly because mated postwar scrappage age (12 years) and were due for re business in November 1948 had been conspicuously slow. placement, while nearly one third of the cars on the road were Sales compared most favorably with those of the correspond past the prewar scrappage age (10 years). A Federal Reserve ing period of last year during the last calendar week of the 143 FEDERAL RESERVE BANK OF NEW YO R K Indexes of Department Store Sales and Prices Second Federal Reserve District (M ay 1920 and June 1948, respective postwar dollar sales peaks,—100 per cent) month. The cold snap that developed towards the end of November this year was apparently an important influence. T h e P o s t w a r R e a d j u s t m e n t i n S a le s By the end of November, sixteen months had elapsed since the dollar amount of sales in this District s department stores PERCENT PE RCENT began to recede from the all-time record level ( on a seasonally adjusted basis) of June 1948. This bank’s index of sales declined in this period from 262 per cent of the 1935-39 average to 221, indicating a loss of 16 per cent in the daily rate of dollar transactions. The most reliable information at hand suggests that during this period prices of department store merchandise had been reduced by only about 5 per cent. The much greater drop in dollar volume could only have stemmed from a diminished flow of merchandise, apparently amounting to about 11 per cent. The readjustment in the dollar volume of sales through November has a striking resemblance to the readjustment of 1920-21 after World War I. Changes in the estimated physical volume of goods sold, however, reveal striking differences. The very severe price cuts, which characterized the 1920-21 business realignment, apparently were accompanied, after a brief *'shakedown,1 ” by a rapidly rising volume of actual mer chandise moved in the face of declining dollar volume, as illustrated in the accompanying chart. While in September 1921, after having tended downward for sixteen months, sea sonally adjusted dollar sales were 19 per cent below the May 1920 peak, estimated physical sales volume had increased by some 17 per cent. Dollar sales turned upward in the follow ing month and in the subsequent period of relatively stable prices, units of goods sold continued the upward trend initi ated many months before. Owing to difficulties in securing adequate price statistics for estimating physical volume from dollar sales, the contours shown in the chart and the percentage changes computed (other than dollar sales) from the same basic data must be interpreted as rough approximations only. A further limitation is imposed by the lack of suitable allowances for changes in quality. As tentative estimates, however, the divergent movePostwar Department Store Sales Second Federal Reserve District (P ercentage change between seasonally ad ju sted data fo r selected m onth s) Dollar sales Prices# Apparent physical volume January 1919 to M ay 1920........................ September 1945 to June 1948................... +58 +54 +39 +33 +14 +16 M ay 1920 to September 1921................... June 1948 to November 1949*................. — 19 — 16 -3 0 - 5 +17 -1 1 January 1919 to September 1921............ September 1945 to November 1 9 4 9 * ... +28 +30 - 4 +26 +33 + 3 Period 1 9 2 0 -2 1 M J J A S O N D J F M A M J J A S O * Adjusted for seasonal variation; November 1949 estimated. # W eighted average of clothing (2 ) and housefurnishings ( 1 ) — subgroups of Bureau of Labor Statistics’ index of consumers’ prices. November 1949 esti mated by Federal Reserve Bank of New York. were interpolated between semiannual data. For 1920-21, monthly figures * November 1949 preliminary estimate. # See footnote to chart for source and method of estimating. MONTHLY REVIEW, DECEMBER 1949 144 ments in prices and physical volumes, as well as the general World War I from department store type merchandise to auto levels of the magnitudes involved, fit the testimony from busi mobiles, appliances, and new homes and— perhaps more im ness reports of the times. Other similarities, perhaps only accidental, and other differ portant— the sustained high cost of food in the recent period ences, no doubt incidental to the altered nature of the economy, appear from an examination of the two postwar periods, al compared to the drop of at least one third in 1920-21. Department and Apparel Store Sales and Stocks, Second Federal Reserve District, Percentage Change from the Preceding Year though activity in the second was, of course, on a much higher N e t ;sales level. The expansions in dollar terms prior to the readjust Locality ments were not very different ( although the second was spread over about twice as long a period)— 58 per cent between Janu ary 19191 and May 1920, compared with 54 per cent from September 1945 to June 1948. Much smaller but closely comparable growths occurred in physical volume, as the accom panying table indicates. But whereas the decline in physical volume after the World War I boom coincided closely in tim ing with the first months of the lag in dollar sales, and was apparently of very brief duration, after World War II a peak Oct. 1949 Department stores, Second D istrict___ New York C ity ...................................... Northern New Jersey........ .................. Westchester C ounty.............................. Fairfield C ou n ty.................................... Bridgeport ...................................... Lower Hudson River V alley............... Poughkeepsie...................................... Upper Hudson River V alley............... Schenectady........................................ Central New York S tate..................... Mohawk River V alley...................... in physical volume occurred long before the expansion in dollar sales had run its course. Inadequacies of the price data and the lack of adjustment for improvements in quality may very well mask the exact timing of the turning point and the Northern New York State.................. Southern New York State................... Binghamton........................................ Elmira.................................................. Western New York State.................... magnitude of the subsequent decline, but that some definite Niagara Falls...................................... R ochester............................................ decline occurred before 1948 seems a warranted conclusion.2 Apparel stores (chiefly New York C ity ). Stocks on Jan .throu gh hand Oct 1949 Oct. 31, 1949 -1 3 - -1 4 - 9 -1 0 -1 1 -1 6 -1 6 -1 2 -1 4 -1 8 -1 9 -2 2 -1 1 -1 6 -1 4 - 8 -1 3 -1 6 -1 7 - 8 -1 4 -1 3 — 12r -1 6 - 9 - 7 - 8 + 3 -1 0 -1 1 - 6 — 5 - 6 - 8 - 4 - 7 -1 1 - 9 - 6 - 7 -1 0 -1 0 - 9 - 5 - 3 - 7r - 9 -1 0 - 4 - 3 4* 7 -1 3 -1 4 - 8 -1 1 -1 2 -1 8 - 3 -1 1 -1 6 -1 9 - 8 -1 7 -1 1 -1 1 -1 4 - 7 - 7 - 8 - 8 -2 3 -1 1 -1 1 8 - 9 Thus, the estimated 16 per cent increase in physical volume between September 1945 and June 1948 represents the net r Revised. increase across that interval, not the maximum postwar rise. At the end of the full period of rise and fall of dollar sales Indexes of Business after World War I and after World War II to date, there 1948 remained almost equal net gains (28 and 30 per cent) in the dollar sales indexes. Prices, however, showed dissimilar courses. They were most likely somewhat lower in September 1921 than in January 1919 but were, according to indexes of retail prices, about 25 per cent higher in November 1949 than in Septem ber 1945. Hence the record indicates a net gain of one third in physical volume for the period after World War I but only a negligible one for the period just past. The difference may be explained at least in part by the shift in consumer expendi tures to a greater extent during the past year or two than after 1 Earlier sales data not available. 2 The likelihood that unit sales in 1947 were already below those of the year before was discussed in this bank’s Review of January 1948, p. 11. Indexes of Department Store Sales and Stocks Second Federal Reserve District (1 9 3 5 -3 9 a v e r a g e = 1 0 0 per ce n t) 1948 1949 Item Oct. Aug. Sept. Oct. Sales (average daily), unadjusted................. Sales (average daily), seasonally a d ju sted .. 281r 253r 171 234 243 241 243 219 Stocks, unadjusted............................................ Stocks, seasonally adjusted ............................ 268r 237r 204 204 225 213 244 216 r Revised. 1949 Index Industrial production*, 1935-39 = 100......... (Board o f Governors, Federal Reserve System) Electric power output*, 1935-39 = 100........ (Federal Reserve Bank o f New York) Ton-miles of railway freight*, 1935-39 = 100 (Federal Reserve Bank o f New York) Sales of all retail stores*t, 1935-39 = 100 ... (Department o f Commerce) Factory employment United States#, 1939 = 100........................ (Bureau of Labor Statistics) New York State, 1935-39 = 100................ (N Y S Div. o f Placement and Unemp. Ins.) Factory payrolls United States#, 1939 = 100........................ (Bureau of Labor Statistics) New York State, 1935-39 = 100................ (N Y S Div. o f Placement and Unemp. Ins.) Personal income*, 1935-39 = 100.................. (Department o f Commerce) Composite index of wages and salaries* t, 1939 = 100...................................................... (Federal Reserve Bank o f New York) Consumers’ prices, 1935-39 = 1 0 0 ................ (Bureau o f Labor Statistics) Velocity of demand deposits*, 1935-39 = 100 (Federal Reserve Bank o f New York) New York C ity .............................................. Outside New York C it y .............................. October August Sept. 195 170 174 257 258 255 October . 166p 256 p 208 154 154 p 338 330 336 331 p 158 141 144 UQp 127 113p 118p 117 p 367 323 335p 294 264p 283p 315r 308 307p 194 199 199p 174 169 170 169 lOSr 93 110 89 106 89 106 89 278p * Adjusted for seasonal variation. p Preliminary. r Revised, f Revised beginning January 1943. # Revised beginning January 1941. t A monthly release showing the 15 component indexes of hourly and weekly earnings in nonagricultural industries computed by this bank will be sent upon request. Tabulations of the monthly indexes, 1938 to date, may also be pro cured from the Research Department, Dom estic Research Division. NATIONAL SUMMARY OF BUSINESS CONDITIONS (Summarized by the Board of Governors of the Federal Reserve System, November 28, 1949) UTPUT and employment at factories and mines decreased Output of nondurable goods showed a further rise in Octo in October but increased in the latter part of November. New construction activity was maintained at a high rate in ber as a result mainly of substantial increases in the textile, paper, and printing industries. Activity in these lines in Octo October and the first half of November. Department store ber was generally at about the high levels prevailing last O sales showed a less than seasonal increase. Commodity price autumn. Output of petroleum products also increased in Octo changes continued to be relatively small. Prices of common ber but in early November was curtailed because of large stocks and bonds generally advanced. stocks. Activity in most other nondurable goods industries in October showed little change. I n d u s tr ia l P r o d u c tio n As a result of work stoppages at bituminous coal and iron The Board’s seasonally adjusted index of industrial produc mines, minerals output declined considerably further in Octo tion was 166 per cent of the 1935-39 average in October as ber. Anthracite production, however, increased substantially compared with 174 in September and 170 in August. Follow and crude petroleum output continued to expand. In Novem ing settlement of the steel labor dispute and resumption of ber, bituminous coal production has advanced sharply. operations at bituminous coal mines, total industrial production has increased in November. Activity in durable goods industries declined about 12 per C o n s t r u c t io n cent in October. The decrease reflected mainly sharp curtail Value of construction contracts awarded in October, accord ment in output at blast furnaces, steel works, and rolling mills. ing to the F. W . Dodge Corporation, was maintained at the Steel ingot production was reduced from a rate of 84 per cent exceptionally high September level. Increases in public awards, of capacity in September to 11 per cent in October. Since early following declines in August and September, offset small November, however, ingot production has increased again, declines in awards for most types of private construction. The and during the fourth week was scheduled at 78 per cent of number of residential units started in October, as estimated by capacity. Activity in iron and steel fabricating industries the Bureau of Labor Statistics, was 100,000, the same number declined only slightly in October, but in early November as in September and 27,000 more units than in October 1948. apparently was reduced considerably mainly as a result of tem porary steel shortages. Owing in part to model changeovers the number of passenger cars and trucks assembled was reduced Em p l o y m e n t from the record September rate by about one tenth in October Employment in nonagricultural establishments declined 2 and by one fifth in the first three weeks of November. Deliv per cent in October owing mainly to reductions in durable eries of copper to fabricators increased sharply in October, and goods manufacturing, mining, and transportation industries as output of furniture, electrical appliances, and most building a result of the steel and coal labor disputes. Unemployment materials continued to advance. rose one-quarter million in early October. INDUSTRIAL PRODUCTION Federal Reserve indexes. M onthly figures; latest shown are for October. DEPARTMENT STORE SALES AND STOCKS Federal Reserve indexes. M onthly figures; latest figure for sales is O ctob er; latest for stocks is September. D is t r ib u t io n Department store sales were 275 per cent of the 1935-39 additional domestic industrial products were advanced in November. average in October, according to the Board’s seasonally adjusted index, as compared with 289 in September, and an average of 286 for the first nine months. In the first three weeks of November sales were 6 per cent below year-ago levels when the sales index for the month was 290. Shipments of railroad revenue freight declined considerably in October reflecting chiefly sharply curtailed shipments of coal, iron ore, and steel products. Loadings increased in the middle of November, reflecting mainly sharp gains in coal shipments; loadings of miscellaneous freight showed a moder ate expansion. B a n k C r e d it Business loans at banks in leading cities continued to expand seasonally during October and the first half of November. Loans on real estate and loans to consumers also increased. Holdings of U. S. Government securities rose during October but subsequently declined early in November. A small reduction in gold stock and a seasonal outflow of currency into circulation tended to reduce member bank reserves in the first three weeks of November. Federal Reserve Bank credit expanded, however, reflecting primarily purchases of Government securities by the System. C o m m o d it y P rices Se c u r it y M a r k e t s The average level of wholesale commodity prices declined somewhat further from mid-October to the third week of A steady rise in prices of most long-term Government bonds November, reflecting chiefly seasonal decreases in prices of during the first three weeks of November has been accom livestock and meats. Spot prices of apparel wool, lead, and panied by a moderate increase in prices of high-grade corpo tin also declined owing in part to earlier reductions in foreign rate bonds. Common stock prices have fluctuated around the markets, while coffee prices showed a sharp increase. Steel new high level for the year reached in early November. New scrap prices rose above prestrike levels and prices of some corporate security issues have continued in small volume. WHOLESALE COMMODITY PRICES SECURITY MARKETS PER CENT 1942 Bureau of Labor Statistics’ indexes. week ended Novem ber 22. W eekly figures; latest shown are for p er 1943 1944 1945 1946 1947 1948 CENT 1949 Common stock prices, Standard & P o o r’s C orporation; corporate bond yields, M ood y’s Investors S ervice; U . S. Government bond yields, U . S. Treas ury Department. W eekly figu res; latest shown are for week ended N o vember 19. MONTHLY REVIEW S UPPLEM ENT FEDERAL V ol . 31 RESERVE BANK DECEMBER OF NEW 1949 Gold, Monetary Management and the Banking System Remarks of A l l a n Sp r o u l , President, Federal Reserve Bank of New York at the Seventy -Fifth A n n u a l Co n ve n tio n of the A merican Bankers A ssociation San Francisco, California November 2, 1949 YORK No. 12 Remarks of A l l a n Sp r o u l , President, Federal Reserve Bank of New York at the Seventy -Fifth A n n u a l Conve n tio n of the A merican Bankers A ssociation San Francisco, California November 2, 1949 s A native Califor nian — and a native San Franciscan— principal arguments as presented at hearings on bills to per I have tried to think of something I might discuss which mit free trading in gold in the United States and its territories. would be of special interest to our generous hosts at this con In this way I may avoid the fact as well as the appearance of building straw opponents. The arguments most frequently A vention. The fact that this is 1949, and that the whole State of California has been engaged in a two-year round of cele presented in favor of these bills were: brations of the 100th anniversary of the discovery of gold in 1. In the face of rising production costs and fixed selling California, and of its immediate consequences, gave me an obvi prices, the gold mining industry has been forced to curtail its operations, and to the extent that it has operated, its profits ous lead. Gold is something in which we are all interested. Nor is this an untimely topic on other grounds. The recent have been reduced. The higher gold prices which would pre wave of currency devaluations which swept around the world, sumably prevail in a free market would correct this situation. This is the "do something for the gold miners” argument at its baldest. following upon the devaluation of the British pound sterling six weeks ago, has fanned into modest flame the always smould ering fires of the gold controversy. In addition, I was eager to When this argument is embroidered a little, it is claimed review the gold question because it is a good starting point that since the prices of all goods and services have increased for an understanding of the place of the Federal Reserve so substantially during the past ten or fifteen years, it is nec essary to open the way for an increase in the price of gold so System in the monetary and economic life of the country. When I finish with gold, I shall want to say something more as to be sure there will be enough gold to carry on the country’s business; to bring the price of gold into adjustment with the prices of everything else. specific about the System, and about your relations with it. As central bankers, of course, charged with responsibility for our monetary and credit policies, we have the question of 2. A second group of arguments expresses concern over the unsettling effects of the "premium” prices which are paid gold under more or less constant surveillance. Most of the time, in recent years, we have been under attack from two sides because of our attitude toward gold. Those interested primarily or initially in the price of gold, and in what they call a free gold market, have fired from one side. Those inter for gold abroad, and claims that a free gold market in the United States, with no gold export restrictions, would cause these premium markets abroad to disappear, with beneficial effects upon world trade and international relations. ested primarily and eternally in gold coin convertibility— in a full and automatic gold standard domestically and internation ally— have fired from the other. More recently, we have had a brief respite from attack while these two groups fired at each other, each group arrogating to itself responsibility for the 3. Third, there is an argument in equity— that gold miners should be allowed to sell their product at the best price they can obtain, as do producers of other products; and that Ameri can citizens, like the citizens of most other countries, should only true gospel according to St. Midas. What I have to say be free to hold or to buy and sell gold. will probably bring that brief respite to an end. The fire will 4. Finally, there were those who viewed and favored a free again be concentrated on the monetary authorities, for whom gold market as a first step in the direction of a full gold coin I cannot presume to speak except as one individual engaged standard, and who held that even a free market would act as a in the practice of central banking, but who will, no doubt, be "fever chart” of the economy and lead to reform of extravagant blamed for my views. Government fiscal policies, remove inflationary tendencies fos tered by a managed currency, and lead to sounder conditions, Let me take account of each of these two groups separately; generally. those who concentrate, at least initially, on a free gold market, and those who will have none of this heresy, but who want a To take these arguments up in order, it should be pointed fixed and immutable gold price and convertibility of currency out right away that it is quite possible that a free market for — and therefore of bank deposits— into gold coin. gold in the United States would not result in a rise in the price The first group, which includes the gold miners, makes its of gold, if for no other reason than that the Secretary of the argument on several grounds, trying to combine economics Treasury is required, by law, to maintain all forms of United and psychology with self-interest. Let me paraphrase their States money at parity with the gold dollar which contains 2 1/3 5th of an ounce of fine gold. This means that the Treasury should maintain the price of gold at $35 a fine ounce in legal gold markets in the United States. To do this, if there were a legal free market for fine gold, the Treasury should sell gold mium markets represent insignificant speculative adventures around the fringe of the world supply and demand for gold. They reflect mainly the urgent and often illegal demands of a small group of hoarders, together with some private demand to the extent necessary to maintain the market price at $35 a fine ounce. W e might, therefore, get what would be in effect gold convertibility by way of a free market, but not a rise in for gold to be used in relatively backward areas, or areas where the forms of civilized government have broken down, and where the metal serves the needs of exchange— or hoarding— the price of gold. Aside from this possible outcome of the establishment of a free market for gold, what is it we are being better than a paper note. I do not think there would be any asked to do? In effect we are being asked to do something to opened the doors of this largely clandestine trade to our benefit the gold mining industry, to encourage a shift of pro domestic gold miners. But, by legalizing it, we might well appreciable stimulus to United States gold production, if we ductive resources, in this and other countries, into gold pro create what we are trying to destroy— uncertainty about the duction, in order to provide gold for hoarding. This, I submit, would be a witless proceeding, in terms of the welfare of the stability of the dollar and our own intentions with respect to its gold content. whole economy, matched only by our bonanza provisions for The third argument— that the miners of gold should be free the special benefit of the miners of silver. to sell their product at the best price they can get— is probably As for the economic embroidery of this request for aid to the gold mining industry, there is no lack of monetary means as a commodity when you think you can get a higher price the giveaway. It is the argument that gold should be treated of carrying on the business of the country, nor is there likely for it, and as a monetary metal and an international medium to be. It is the economics of perpetual inflation to argue that of exchange when you want a floor placed under its price. I a rise in the commodity price level should be followed by an would say that you can’t have it both ways. If you want the arbitrary increase in the price of gold and hence in the reserve protection of an assured market at a fixed price, because gold base, thus permitting and, perhaps, promoting additional is the monetary metal of the country, you should not ask per deposit expansion and a further upward movement of prices. mission to endanger the stability of the monetary standard by Even on the basis of statistics, which are not always reliable selling gold at fluctuating prices (the gold producers hope or comparable, it is interesting to note that the increase in the higher prices) in a fringe free market. Under present condi price of gold in the United States, in 1934, raised the price of tions, the only real price for gold is the price the United States Treasury is prepared to pay for it. So long as that is the case, gold by 69 per cent, whereas wholesale prices in the United States are now only 60 per cent above the 1927-29 level. W e there is no sense in a "make believe” free gold market, in which have been plagued, if anything, with an oversupply of money possible temporary or short-run deviations from the fixed price in recent years, and the United States gold stock, at the present of the Treasury might have disturbing consequences. price, is large enough to support whatever further growth in Nor is the argument that citizens of the United States should the money supply may be needed for years ahead. have the same privileges as the citizens of other countries, The second group of arguments has to do with the desira when it comes to holding or trading in gold, at all convincing bility of knocking out of business the premium markets in to me. It is true that in a number of foreign countries the gold which have existed and still exist in various foreign coun tries. I share the general dislike of these markets because they are parasites on the worlds monetary system and help to siphon holding of gold by private citizens is legal, and in some foreign countries strictly internal free trading in gold is permitted. In many cases, however, this merely represents the shifting around of a certain amount of gold which is already being hoarded in into gold hoards the resources of people who need food and clothing and equipment— and who wouldn’t need so much help from us if they didn't use scarce foreign exchange to buy gold for private hoards. But I don’t think the soundness nor the stability of the United States dollar is actually brought into the country, since in practically all of these countries the export and import of gold on private account is either prohibited or subject to license. And, in many countries where gold is pro duced, some percentage, if not all, of the newly mined gold question by these premium markets. At our official purchase must be sold to the monetary authorities, a requirement which price for gold— $35 a fine ounce— the United States has been further limits the amounts available for trading and hoarding. offered and has acquired more gold than the total world pro These restricted and circumscribed privileges in other coun duction ( excepting the U.S.S.R. for which reliable data on gold tries are no reflection of a loss of inalienable rights by our production, as on everything else, are not available), since people. They are attempts by these foreign countries to adjust 1934, the year of our devaluation. During those years— 1934 their rules with respect to gold to their own self-interest and, to 1948 inclusive— estimated world gold production, valued so far as possible, to the habits of their people, all under the at United States prices, was about $13.5 billion and United sheltering umbrella of a world gold market and a world gold States gold stocks increased $16 billion. Most of the producers price maintained by the Treasury of the United States. W e and holders of gold have been quite willing to sell us gold for have deemed it wise to maintain such a fixed point of refer $35 a fine ounce despite the quotations of $45 and $55 and ence, in a disordered world. W e have decided by democratic so on up in the premium markets. The fact is that these pre processes and by Congressional action, that this policy requires, 3 among other things, that gold should not be available for The second group of arguments, relating to the international advantages of a gold coin standard, generally make no distinc private use in this country, other than for legitimate industrial, professional, or artistic purposes. W e have decided that the place for gold is in the monetary reserves of the country, as a backing for our money supply (currency and demand deposits of banks), and as a means of adjusting international balances, tion between the effects of a unilateral adoption of such a standard by the United States, and the multilateral establish ment of an unrestricted gold standard by many countries, and of exchange rates fixed by such a standard. The arguments not in the pockets or the hoards of the people. If we want to run somewhat as follows: reverse that decision, the means of reversal are at hand, but it 1. The existence of premium markets in gold abroad and the lack of gold convertibility at home creates— and is should be a clear cut and a clean cut reversal, restoring con vertibility. Providing a dependent free gold market, in which representative of— lack of confidence in the gold value gold miners and a little gold group of speculative traders or of the dollar. In the absence of a thoroughgoing gold frightened gold hoarders (such as those who now take advan coin standard we cannot convince anyone that we may not devalue the dollar. tage of a provision in the regulations to buy and sell "gold in the natural state” ) could carry on their business is not the way I do not propose to get in the cross fire of those who claim 2. Restoration of "normal” patterns of international trade is being retarded by the inconvertibility of currencies in that a free gold market would be a step toward convertibility, terms of gold and, therefore, one with another. This and those who claim that a free gold market, without free coin age at a fixed price, would cause us to lose whatever modicum inconvertibility has led to tariffs, quotas, exchange con trols, and to general bilateralism. of a gold standard we now have and lead to monetary chaos. 3. Under a managed paper currency system there is always to meet the problem. That is one of those doctrinal arguments in which the subject the temptation to solve national problems by devices abounds. I will merely say here that I think authorization of which lead to international disequilibrium. This, in turn, a free gold market in this country, with no change in the pres has led to domestic devices restrictive of foreign trade. ent responsibility of the Secretary of the Treasury to maintain all forms of money coined or issued by the United States at The international gold standard, by eliminating the need for restrictive commercial policy, would increase the parity with the ‘ gold dollar”, would probably lead indirectly physical volume of international trade, resulting in an to convertibility. The desirability of doing this is another improved division of labor and higher standards of living for everyone. matter, which I shall now try to discuss briefly and dispassion ately. This is a hazardous attempt because there is no subject First, let me say that I perceive no moral problem involved in in the field of money and banking which so arouses the pass this question of gold convertibility. Money is a convenience ions, and which so readily defies brief analysis. devised by man to facilitate his economic life. It is a standard of value and a medium of exchange. Almost anything will serve as money so long as it is generally acceptable. Many things have served as money over the centuries, gold perhaps Two groups of arguments for the reestablishment of a gold coin standard may, perhaps, be distinguished in the writings and speeches of those who propose it, one group relating primarily to the domestic economy and one to the probable effects on international trade and finance. In the first group the longest of all because of its relative scarcity and its intrinsic arguments run about as follows: beauty. In this country we still retain some attachment to gold domestically, and more internationally, but to carry on our 1. Replacement of our "dishonest”, inconvertible currency with an "honest” money having intrinsic value would pro internal business we use a paper money (and bank deposit accounts) which has the supreme attribute of general accepta mote confidence in the currency, and encourage savings, bility. There is no widespread fear of the soundness of the investment, long-time commitments, and production. dollar in this country, no widespread flight from money into things. The constant cry of wolf by a few has aroused no 2. Irredeemable paper money leads to inflation, whereas the great public response. Savings, investment, long-term commit upper limits imposed upon currency and credit expansion ments, and the production and exchange of goods have gone by a thoroughgoing gold standard serve as a restraining forward at record levels. influence on irresponsible politicians and over-optimistic businessmen. Much of the nostalgia for gold convertibility is based, I believe, on fragrant memories of a state of affairs which was a 3. Present Governmental taxing and spending policies are special historical case; a state of affairs which no longer exists. wrong, and dangerous. The gold standard would put a The great period of gold convertibility in the world was from brake on public spending. 1819 to 1914. It drew its support from the position which 4. As a corollary of the preceding argument, since the gold Great Britain occupied, during most of the 19th century and standard would hinder further extension of Government the early part of the 20th century, in the field of international control and planning, it is a necessary implement of production, trade, and finance. The gold coin standard flour human liberty. ished because the organization of world trade under British 4 leadership provided the conditions in which it could, with a in the instinctive or speculative reactions of the people. No doubt some people would take advantage of their ability to get gold. There would be many reasons for their doing so. Conscientious resistance to large Government spending, or fear of inflation, might well be among these reasons. But specula few notable aberrations, work reasonably well. The ability of the British to sustain, to provide a focal point for this system has been declining for many years, however, and the decline was hastened by two world wars which sapped the resources of the British people. The heir apparent of Great Britain, of course, was the United States, but up to now w£ have tive motives, a desire for hoards (however motivated), and such panic reactions as are generated by unsettled international not been able to assume the throne and play the role. And conditions or temporary fright concerning the business outlook until some way has been found to eliminate the lack of balance or one’s individual security— all of these, and more— would be between our economy and that of the rest of the world, other among the reasons for gold withdrawals. than by gifts and grants in aid, we won’t be able to do so. This is a problem of unravelling and correcting the influences, mechanism does not distinguish among motives. Whenever, in international trade and finance, which have compelled world of the monetary system would be reduced. Moreover, if only wide suspension of gold convertibility, not vice versa. The job before us now is to attack the problems of trade and finance practically all other currencies were not, hoarding demands The gold coin for any reason, there was a demand for gold, the reserve base the United States dollar were convertible into gold while directly. W e should not deceive ourselves by thinking that from all over the world would tend to converge upon this gold convertibility, in some indefinable but inexorable way, country’s monetary reserves. Circumvention of the exchange could solve these underlying problems for us. controls of other countries would be stimulated, and dollar Nor is it true, of course, that gold convertibility prevented supplies which those countries badly need for essential supplies wide swings in the purchasing power of the dollar, even when or for development purposes would be diverted to the selfish interests of hoarders. we had convertibility. Within my own experience and yours, while we still had a gold coin standard, we had tremendous Even if a particular reduction in the reserve base did occur movements in commodity prices, up and down, which were for useful "disciplinary” reasons, the impact of such gold the other side of changes in the purchasing power of the dollar. withdrawals upon the credit mechanism is likely to be crude What happened to us in 1920-21 and 1931-33 under a gold coin standard should prevent a too easy acceptance of that and harsh. Since the present ratio between gold reserves and standard as the answer to the problem of a money with stable purchasing power. ratio will be in effect so long as this country retains a fractional reserve banking system, a withdrawal of gold coins (once any When you boil it all down, however, and try to eliminate free gold is exhausted) will tend to be multiplied many times the money supply is about one-to-five, and since some such mythology from the discussion, the principal argument for in its contractive effect on bank credit and the money supply. restoring the circulation of gold coin in this country seems to In a business recession, the Reserve System mig;ht undertake to be distrust of the money managers and of the fiscal policies of offset this effect as it does now in the case of gold exports but, Government. The impelling desire is for something automatic if the gold withdrawals attained sufficient volume, the shrinking and impersonal which will curb Government spending and reserve position of the Federal Reserve Banks would eventually prevent them from coming to the rescue. throw the money managers out of the temple, as were the money changers before them. To overcome the inherent weak ness of human beings confronted with the necessity of making hard decisions, the gold coin standard is offered as an imper sonal and automatic solution. Through this mechanism the public is to regain control over Government spending and bank fluctuating seasonal, regional, and growth requirements of the economy), that the Federal Reserve System was initially credit expansion. It is claimed that whenever the public sensed dangerous developments, the reaction of many individuals established. During the first two decades of its existence, the System devoted much of its attention to offsetting the capri would be to demand gold in exchange for their currency or cious or exaggerated effects of the gold movements associated It was, in part, to offset such arbitrary and extreme influences upon the volume of credit, and to make up for the inflexibility of a money supply based on gold coins (in responding to the their bank deposits. With the monetary reserve being depleted with continuance of a gold coin standard. W e had an em in this way, the Government would be restrained from deficit barrassing practical experience with gold coin convertibility as financing through drawing upon new bank credit; banks would recently as 1933, when lines of people finally stormed the become reluctant to expand credit to their customers because Federal Reserve Banks seeking gold, and our whole banking of the drain on their reserves; and the Federal Reserve System mechanism came to a dead stop. The gold coin standard was would be given a signal to exert a restraining influence upon abandoned, an international gold bullion standard adopted, the money supply. In this way, Congress, the Treasury, and because repeated experience has shown that internal converti the Federal Reserve System would be forced by indirection to bility of the currency, at best, was no longer exerting a accept policies which they would not otherwise adopt. stabilizing influence on the economy and, at worst, was perverse In effect, under a gold coin standard, therefore, the initiative in its effects. Discipline is necessary in these matters but it for over-all monetary control would, through the device of free should be the discipline of competent and responsible men; public withdrawal of gold from the monetary reserve, be lodged not the automatic discipline of a harsh and perverse mechanism. 5 country which produces gold would automatically receive an annual increase in its dollar supply, and its gold mining indus try would be stimulated to greater productive effort. The largest increases would go to the largest producers which are South Africa, Canada, and probably the Soviet Union. That would If you are not willing to trust men with the management of money, history has proved that you will not get protection from a mechanical control. Ignorant, weak, or irresponsible men will pervert that which is already perverse. Here, I would emphasize my view that the integrity of our be an indiscriminate way to extend our aid to foreign countries, both as to direction and as to timing. money does not depend on domestic gold convertibility. It depends upon the great productive power of the American economy and the competence with which we manage our The domestic results of an increase in the price of gold fiscal and monetary affairs. I suggest that anyone who is wor ried about the dollar concentrate on the correction of those would be no less haphazard. This country, as I have said, is not now suffering from a shortage of money and it has large tendencies in our economic and political life which have gold reserves, which could form the basis of an additional brought us a deficit of several billion dollars in our Federal money supply if we needed it. An increase in the dollar price budget, at a time when taxes are high and production, employ of gold would increase the dollar value of our existing gold ment, and income are near record levels. I suggest that, going reserves in direct proportion to the change in price. There beyond the immediate situation, they address themselves to the would be an immediate "profit” to the Treasury. The "profit” difficult problem of the size of the budget, whether in deficit could be spent by Congressional direction or Treasury discre or surplus or balance. At some point the mere size of the tion. This would provide the basis for a multiple expansion of budget, in relation to national product, can destroy incentives bank credit which, unless offset by appropriate Federal Reserve throughout the whole community, a dilemma which is even action, would expose our economy to the threat of an excessive now forcing curtailment of Government expenditures by the expansion of the domestic money supply. The arbitrary crea Labor government in Great Britain. These are problems gold tion of more dollars in this way would certainly be inappro coin convertibility cannot solve under present economic and priate under inflationary conditions, and would be an ineffective social conditions. Gold has a useful purpose to serve, chiefly method of combating a deflationary situation. as a medium for balancing international accounts among At the moment, also, we should have in mind that there has nations and as a guide to necessary disciplines in international just been an almost worldwide devaluation of currencies. Using trade and finance. It has no useful purpose to serve in the the fixed dollar as a fulcrum, individual foreign countries have pockets or hoards of the people. To expose our gold reserves taken action designed to improve their competitive position to the drains of speculative and hoarding demands at home vis-a-vis the United States, and to maintain their competitive position vis-a-vis one another. An increase in the dollar price and abroad strikes me as both unwise and improvident. Perhaps before I let go of this subject, which has held me of gold, which is devaluation of the dollar by another name, and you overlong, I should say a word about merely raising the would undo the possible benefits of a venture in improved price of gold, without doing anything about a free gold market currency relationships which already has its doubtful aspects. or gold coin convertibility of the currency. This is something which has intrigued Europeans and others who are "short of For all of these reasons it is encouraging to know that the Secretary of the Treasury has recently reiterated that the gold policy of the United States is directed primarily toward main dollars”, has interested some of our own people, and has become a South African war cry. An increase in the price the United States pays for gold would have two major results. It taining a stable relationship between gold and the dollar, and that for all practical purposes only the Congress can change that relationship. W e have maintained an international gold bullion standard by buying and selling gold freely at a fixed would provide the gold producing countries (and domestic producers), and the countries which have sizable gold reserves or private hoards, with additional windfall dollars with which price of $35 a fine ounce in transactions with foreign govern to purchase American goods. And it would provide the basis ments and central banks for all legitimate monetary purposes. for a manifold expansion of credit in this country which might This has been one fixed point in a world of shifting gold and be highly inflationary. currency relationships. W e should keep it that way as another contribution to international recovery and domestic stability. W e have been engaged in an unprecedented program of foreign aid for the past four years. The Congress has authorized This whole discussion of gold has been a long wind-up for this aid at such times and in such amounts as were deemed what may now seem to you like a small pitch. I want to end to be in the interest of the United States. This is much to be my remarks with a few words about the Federal Reserve System preferred, I suggest, to the haphazard aid which would be and the relations of your organization and you, as bankers and citizens, with that System. granted by an increase in the price of gold, which must be on the basis of a more or less accidental distribution of existing In my gold discussion I tried to emphasize what seems to gold stocks and gold producing capacity. If we raised the price me to be a fundamental proposition in the case of a country of gold, every country which holds gold would automatically with the domestic and international strength of the United receive an increase in the number of dollars available to it. States. W e can’t have, or we don’t want, both an automatic The largest increases would go to the largest holders which are gold coin standard and discretionary control of the reserve base the Soviet Union, Switzerland, and the United Kingdom. Every by a monetary authority. The existence of two independent 6 System as just another bank supervisory agency, in the name and frequently incompatible types of control over the reserves of our banking system is undesirable. In the light of that find ing we abandoned the gold coin standard as a control over the of maintaining proper checks and balances in Federal bank supervision, seems to me to miss, and to misrepresent, the main reason for our being. I mention this small but significant item first, because it cuts domestic money supply, and placed our reliance in monetary management by the Federal Reserve System. I think it has become established American policy that a principal means of Government intervention in the economic processes of the across the whole concept of the Federal Reserve System and, therefore, cuts across the whole range of our relationships with you. There are other points of apparent difference where we country is the administration of broad credit powers by the System. In this way a pervasive influence may be brought to seem to be at odds, or not pulling together effectively, because bear on our economy, without intrusion upon specific trans of mistrust, or lack of proper consultation, or inadequate study actions between individuals, which is likely to be the conse of the broad aspects of the questions with which we are quence of more detailed physical controls, and which would mutually concerned. I shall touch on a few of them. spell the end of democratic capitalism as we have known it. Concentration of Power— The picture of a Federal Reserve I have thought it reasonable to assume that the public in System trying to arrogate power to itself, which at times you general, and bankers in particular, clearly recognized the spe have painted, obscures the real picture. The real picture would cial place of the System in our economy. The fact that the show a Federal Reserve System trying hard to keep its powers development of a national monetary and credit policy is the in working order so that it can discharge its responsibilities responsibility of the Federal Reserve System should fix its place as a monetary authority, with a measure of independence from beyond question. This is not a function which can be split up the pressures of partisan political aims and the exigencies of and passed around. Many of the activities of other Govern managing a Federal debt which totals about 255 billion dol ment agencies engaged in making or guaranteeing loans, or lars and, unfortunately, is growing. conducting bank examinations, or insuring bank deposits, have Reserve System with the other bank supervisory agencies at a bearing on the way monetary policy works, but monetary Washington, and to play one against the other, is not an attack policy, as such, is one and indivisible. It is only the supervisory on the real concentration of power; it is giving aid and com To lump the Federal and service functions performed by the Federal Reserve System fort to those who would seize upon the failure of monetary which are comparable to the operations of these other Govern and credit controls as a pretext for fastening more direct con ment agencies. The distribution of these incidental duties among such agencies can be largely determined by administra trols upon our economy. Organization of the Federal Reserve System— I have been tive convenience, historical precedent, and economy of opera at one with many of you in my opposition to undue centraliza tion, so long as there are arrangements for consultation to tion of control of the Federal Reserve System by the Board of Governors at Washington. In testimony before Congressional avoid unnecessary differences in policy and practice. But over all responsibility for holding the reserves of the banking sys committees and in public statements, I have affirmed my belief tem, and influencing the creation of credit by varying the cost that we can have in the Federal Reserve System a wise blend and availability of those reserves, can only reside in the one of national authority and regional responsibility, of Govern agency designated by Congress as the national monetary ment control and private participation. I think we shall do well to retain and to improve the regional characteristics of the System, both in matters of decentralized operation and, more important, in matters of national credit policy. I should authority. The Federal Reserve System is not just one of a number of Federal agencies having to do with banking. Its duties and responsibilities are unique; they range over the whole of our economy and touch the lives of all our people. like to see the bankers of the country, and this organization of bankers, give some more thought to this problem, and I should like them to offer some constructive suggestions concerning it. The climate may be right for its calm consideration. I was somewhat dismayed, therefore, by recent reports that the American Bankers Association seemed to hold a different or opposite view. It is reported to have recommended to the Congress the maintenance of parity of compensation of the three Federal bank supervisory agencies (Board of Governors Reserve Requirements— The Federal Reserve System is of the Federal Reserve System, Board of Directors of the Fed charged with the responsibility of formulating and administer eral Deposit Insurance Corporation, and the Comptroller of ing national credit policy. It does this chiefly through its influ the Currency), on the theory of equal pay for equal work; ence upon the cost and availability of bank reserves. This is a equal pay for sharing equally heavy responsibilities. I mean no proper exercise of Federal power, and its point of incidence is disrespect of the Office of the Comptroller of the Currency, nor upon the commercial banks of the country because only they, of the Federal Deposit Insurance Corporation, when I say there among all of our financial institutions, have the ability to add is and can be no such equality of responsibility. The bank to or subtract from the money supply of the nation. I question supervisory duties of the Federal Reserve System are a dis whether there is good and sufficient reason for exempting any tinctly minor part of its work. There is no desire to increase commercial banks from a minimum participation in this or add to those duties against the wishes of the banks or the national undertaking. best interests of the public. To represent the Federal Reserve pencil and a grammar school knowledge of arithmetic to figure 7 It only requires a moderately sharp out how you can save money by not being a member of the Federal Reserve System, as things now stand. But I don’t think this country really likes "free riders”, and nonmember banks, in that sense, are "free riders”. I know the objections to com of control of consumer instalment credit. I have advocated the continuance of the control which the Federal Reserve System pulsory membership in the Federal Reserve System, I recognize of selective controls, whether over the credit used in commodity exercised, briefly, over consumer instalment credit. I would be concerned over the dangers of any further significant extension some of its dangers, and I think it is probably politically markets, in real estate transactions, in inventory financing, or impossible. But it should not be beyond our ingenuity to in other forms of business lending. Requests for further powers devise appropriate powers of fixing reserve requirements, to should meet two tests— is the power really needed and will its be exercised within statutory limits by an appropriate body use still leave an effectively functioning private economy? I within the Federal Reserve System; reserve requirements which have argued and still believe that control of consumer instal would be adequate for our national purpose, and which would ment credit meets these tests. Your official position has been opposed to this view. I would ask you, however, whether you apply to member and nonmember banks alike. Here is another instance, I believe, where your theory of are happy about the way things are now going in this field of checks and balances runs the danger of being all check and no finance. I am not. I suggest that we might sit down together balance. And let it be clear that this is no attack on the dual and reexamine the problem to our mutual advantage and to the advantage of the public which we both serve. banking system. State member banks have lived within the Federal Reserve System for years, and submitted to its reserve These are some of the matters which I think deserve your requirements, without loss of identity. W e welcome this con constructive attention. A negative approach has been and will tinued relationship. Nor am I frightened by the existence of a continue to be effective in stopping the passage of individual fringe of nonmembers, and the ability of State banks to move pieces of legislation, which you happen to dislike, but it won’t from one group to the other. A mass exodus of State member check the progress of the idea of Government controls and banks from the Federal Reserve System seems to me to be so intervention, if you have little constructive to offer in the face unlikely as to be outside the range of practical consideration. of difficult economic problems. Over the years you will win a lot of battles but you will lose the war. But I do think that all commercial banks have a common obligation and a common responsibility in this matter of I recognize and share your dislike for Government controls reserve requirements, and that they should assume the obliga and your distrust of too much centralized power. But I recog tion and share the responsibility. nize, as I think you must, that a certain amount of Government intervention is necessary to the preservation of our political and economic system. The central problem in our country, Correspondent Bank Relationships— Somehow there has grown up a feeling in some places that we in the Federal and in all countries but Russia and its satellites, is how far Reserve System are out to undermine the network of corre such Government guidance and control can go without destroy spondent bank relationships which you have built up over the ing the effective functioning of a private economy. In this years. Every time we suggest some change in the method of assessing reserve requirements, or make some minor improve ment in our check collection system, or in our methods of providing coin and currency, or in some other detail of our operations, the question seems to be raised. I can assure you that these things are suggested or done in an effort to improve the efficiency and economy of our operations in terms of the whole banking system, the business community, and the general country, with our traditions of individual enterprise, we have preferred to keep such guidance to a practical minimum, and to have it exercised largely through broad and impersonal controls— controls which affect the general environment. One cornerstone o£ such a philosophy is a competent and adequately powered monetary authority which can administer an effective monetary policy. In making monetary policy work to the limit of its capacity, we have one of the best defenses against control public. There is no hidden purpose. W e recognize that there by Government intrusion in our personal and private affairs. are some things which correspondent banks can do better than That is why I should like to see the American Bankers we can, and we are glad to have them perform these services. Association adopt an affirmative, constructive attitude toward At the same time we would caution them against competition the Federal Reserve System. If you don’t like it, as it stands, in providing services which really do not pay their way, and put some real time and effort into the study of ways to improve remind them that there are some things which, perhaps, the it— its personnel, its powers, its organization, its functioning. Federal Reserve System can do better than they. Surely here is In such an undertaking you will have the cooperation of all of an area, if our motives be reasonably pure on both sides, where us who are devoting our lives and our energies to what we there is no need for friction between us. believe to be a worthwhile public service. In the struggle of Selective Credit Controls— W e have differed on the matter ideas and ideals which now divides the world this is a minor of selective credit controls or, more specifically, on the matter front. But it is a fighting front. It is no place for a neutral. 8
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