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O f Credit and Business Conditions



V olume 31





No. 12


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


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



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.



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


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.





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






+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.


durables and the amount of credit granted for their purchase


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



+ 1,288

+ 61
+ 21

+ 15
+ 47
+ 9


- 3
-1 1
+ 5
+ 4

-1 0
-1 9
- 3
+ 2



Total instalment credit..........
Automobile sale credit........
Other sale credit..................
Cash loans.............................

+ 1 ,7 5 6

Total noninstalment credit. . .
Charge accounts...................
Single-payment loans.........
Service credit........................




* 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.

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.



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
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


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)

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



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

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 ­


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.



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

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’
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



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


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
Although SCAP has declared that the exchange value of
the yen will not be lowered, probably in the belief that to do


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

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.


--------------------- 11 4 0

14 0 |


'/ rry yv / n


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 / / /
Nn u b
o d ra le

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



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


'///'//a '

'//''A //,-


on her resources. Having lost her empire, she will not easily


U. 8 . Department ot Commerce.

Aa A A



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

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


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


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


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)




January 1919 to M ay 1920........................
September 1945 to June 1948...................




M ay 1920 to September 1921...................
June 1948 to November 1949*.................

— 19
— 16

-3 0
- 5

-1 1

January 1919 to September 1921............
September 1945 to November 1 9 4 9 * ...


- 4

+ 3

1 9 2 0 -2 1















* 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.



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 et;

level. The expansions in dollar terms prior to the readjust­


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....................................
Lower Hudson River V alley...............
Upper Hudson River V alley...............
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...................
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
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




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

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)






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








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










256 p



154 p




331 p








117 p























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



r Revised.

* 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.

(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


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


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.


Federal Reserve indexes. M onthly figures; latest shown are for October.


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

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.



Bureau of Labor Statistics’ indexes.
week ended Novem ber 22.

W eekly figures; latest shown are for

p er









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.

V ol .








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

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


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;


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


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,


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

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


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.


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


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


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.