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O f Credit and Business Conditions

V o l. 27







Nfr 2

The contraction of member bank excess reserves which
follows War Loan drives, as Treasury deposits built up during
the drives are transferred to private accounts, has been much
smaller than usual since the close of the Sixth War Loan.
Excess reserves of all member banks declined by only 200
million dollars from the peak in December to January 24,
1945. In comparable periods following the three preceding
drives, the reduction was 500 million dollars or more.
In large part, this departure from previous patterns may be
attributed to Government disbursements from accounts with
the Federal Reserve Banks, which have been substantially in
excess of receipts. Treasury deposits in the Reserve Banks,
which had reached a peak of 1,250 million dollars on
December 20, 1944 and had fallen to 900 million in the
succeeding week, were further reduced by almost two thirds
in the three subsequent weeks ended January 17, 1945. These
disbursements placed 565 million dollars of additional reserve
funds at the disposal of the banks of the country.
The other important factor responsible for minimizing the
decline in excess reserves of member banks was a return flow
of currency to the Federal Reserve Banks after Christmas
which contributed 160 million dollars to the easing of the
banks’ reserve positions in the four statement weeks ended
January 24. In peacetime years, the flow of currency from the
stores to the banks after the Christmas shopping period,
together with a seasonal reduction in employment and payrolls,
resulted regularly in a substantial retirement of currency, but
in war years these seasonal influences have been offset to a
large extent by the heavy demand for money for expanding
industrial payrolls and for hoarding and other purposes. This
year, however, the seasonal return flow of currency apparently
has not been fully offset by new demands; furthermore, there
was a new factor which contributed to the reduction in out­
standing currency in January— cash payments o f fourth quar­
terly instalments of individual income taxes for 1944 which
were postponed from December 15, 1944 to January 15, 1945.
Part of the gain in bank reserves from these and other
sources was absorbed by an increase in reserve requirements,

occasioned by the interdrive shift from War Loan deposits
which are reserve free, to private deposit accounts which are
subject to reserve requirements. Nevertheless, the banks had
enough surplus funds to enable them to retire about 500
million dollars of Federal Reserve credit in the three weeks
ended January 17, chiefly through the repurchase of Treasury
bills from the Reserve Banks’ option accounts, and second­
arily through direct subscriptions for Treasury bills in excess
of their maturities, as a result of which the Reserve Banks
were able to allow some of their bills to mature without
replacement. There was a further small decline in Federal
Reserve credit outstanding in the week ended January 24.
The easier reserve positions of the banks contributed also to
the development of a brisk demand for Government securi­
ties. Purchases of Treasury obligations in the New York
market by out-of-town banks and other investors brought
about a substantial inflow of funds from other sections of the
country. Weekly reporting member banks in New York City
sold sizable amounts of Treasury bonds, notes, and certificates,
and at the same time acquired about 350 million dollars of
Treasury bills from the Federal Reserve Bank and from new
issues in the three weeks ended January 17. In the week ended
January 24, the New York City weekly reporting banks again
bought bills and also small amounts of certificates and bonds.
Throughout this four-week period, the New York banks
were, in effect, utilizing funds sent in by out-of-town banks to
retire Federal Reserve credit. The effect of transfers of funds
to New York on the reserve positions of banks in other parts
of the country was partly offset by funds gained from other
sources, including net Government expenditures and some
return flow of currency. Nevertheless, excess reserves of all
member banks outside New York City showed a net reduction
of close to 200 million dollars.
The active demand for Government obligations also
afforded dealers and other nonbank investors an opportunity
to liquidate securities carried on bank credit from the Sixth
War Loan period. In the four weeks ended January 24, loans
on Government obligations at New York weekly reporting



banks declined by nearly 500 million dollars, divided almost
equally between dealers and others. There was a decrease of
183 million in such loans among the reporting member banks
in 100 other cities. The latter institutions evidently acquired
in the New York market a large part of the Government
securities which they added to their portfolios— primarily
Treasury bonds (434 million dollars) and some notes.
The market for certificates of indebtedness, which had
shown rising yields and declining prices prior to and during
the Sixth War Loan drive, improved considerably during
January. The Reserve Banks found it necessary to support
this market by purchasing large amounts of certificates during
December in order to maintain reasonably stable conditions in
the market, but Reserve Bank buying during the three weeks
ended January 24 was negligible and yields receded to approxi­
mately the levels prevailing earlier last fall. All weekly report­
ing member banks reduced their certificate portfolios by about
60 million dollars between January 3 and 24, indicating the
presence of considerable demand from corporations and other
nonbank investors.
The demand for Treasury bonds was particularly keen and
was not confined to reporting meiriber banks outside of New
York; nonreporting member and nonmember banks as well as
some nonbank investors were also in the market for Treasury
bonds. A considerable rise in prices was required to bring
out the necessary supplies, and the Federal Reserve Banks
sold bonds from time to time in order to help maintain orderly
conditions in the market. Bank demand centered chiefly
upon the 2 per cent issue floated during the Sixth drive,
which carried the smallest premium of the issues bearing
this coupon, although there was also continued active demand
for partially tax-exempt issues. Among the major suppliers
of the new 2 per cent bonds were institutional investors
which had acquired them at par during the Sixth drive largely
with the proceeds of sales to the banks of earlier issues of
Treasury bonds. In disposing of their Sixth War Loan securi­
ties, some of these investors repurchased the earlier issues,
in effect securing a net profit amounting to a large part of
the premium on the Sixth Loan bonds. The undesirable aspects
of this procedure were pointed out in the January 1945 issue
o f this Review.
Such practices, by promoting large increases in bank hold­
ings of Government securities, contributed to the ease with
which Sixth War Loan quotas were exceeded but may have
been a factor in arresting at least temporarily the progress that
had previously been made in channeling the liquid cash assets
of individuals, corporations, and others into the financing of
the war effort. As illustrated in the accompanying chart, it
appears that in previous War Loan drives a considerable pro­
portion of the demand deposits accumulated by nonbank
investors in the interdrive periods, had been absorbed through
sales of War Loan securities. In the Sixth drive, however,
the proportion of these accumulated deposits recaptured for
war financing fell sharply below that of previous drives, indi-

Adjusted Demand Deposits of Weekly Reporting
Member Banks


S ource:




Board of Governors of the Federal Reserve System.

eating a setback to efforts to finance the war as far as possible
with nonbank funds and to limit the amount of bank credit
expansion involved.
The growth in deposits between the low point of the Fifth
War Loan and the peak of the Sixth was unusually large. This
growth may be attributed partly to the fact that only one tax
period intervened between the Fifth and Sixth War Loans;
consequently corporation and individual withdrawals of
deposits for income tax payments were considerably less
between July and November than between February and June.
And, as Government expenditures continued at much the
same rate as in the earlier part o f the year, the Treasury was
compelled to make much heavier withdrawals from its War
Loan deposit accounts between the Fifth and Sixth drives, thus
greatly accelerating the growth of private deposit accounts.
Unusually large sales of Government securities to banks by
other investors in the period preceding the issue date for Sixth
War Loan securities also contributed to the growth in indi­
vidual, corporate, and institutional deposit accounts.
Because of this large growth of bank deposits, there should
have been substantially greater amounts of funds available for
investment in War Loan securities than ever before, and the
amount actually sold in the Sixth Loan was somewhat greater
than in any preceding War Loan. The absorption of private
deposits, however, while about as great in actual amount as
in the previous drives, represented a considerably smaller
percentage of the preceding growth than was achieved in other
drives. A partial explanation probably lies in the fact that
individuals were accumulating funds with which to meet their
income tax payments due on January 15 and March 15. But it
is questionable whether this factor is sufficient to explain fully
the unusually large net increase in deposits between the low
point at the close of the Fifth Loan, and the low point at the
end of the Sixth.


A new type of partially Government-guaranteed bank loans
has arisen out of the passage of the Servicemen’s Readjust­
ment Act of 1944, a statute designed to aid the veteran of
World War II in his readjustment to civilian life. Under
Title III of this act, popularly known as the "G I Bill of
Rights,” the Veterans’ Administration is empowered to issue
limited guaranties of loans made to ex-servicemen by private
and Governmental lending agencies. Such loans may be
extended for the following purposes: (1 ) the construction,
purchase, or repair or improvement of, or payment of delin­
quent indebtedness, taxes or special assessments on, homes;
(2 ) the purchase of farms and livestock and the purchase,
repair or improvement of farm buildings and equipment; and
(3 ) the purchase of a business or business property including
buildings, machinery and equipment, tools, and supplies.1
Farm crop production loans or business working capital loans
are not eligible for guaranty by the Administrator of Veterans’
Affairs. Loans for refinancing purposes are likewise ineligible
for guaranty.
Only veterans in service on or after September 16, 1940 who
have been released from the armed services of the United
States under conditions other than dishonorable, after active
service of 90 days or more, unless released after shorter service
because of disability or injury incurred in line of duty, are
eligible to apply for guaranteed loans. The veteran may apply
within two years after release from service or two years after
the war, whichever is later, but in no event later than five years
after its termination.
Aside from the fact that only loans extended for the pur­
poses specified above can qualify for the Administrator’s
guaranty, broadly speaking the following criteria of eligibility
have been established:
1. The property securing the loan must be situated in the
United States, its territories, and possessions, and must
be suitable for the purposes of the loan;
2. The proceeds of the loan will be used only for the
purposes specified;
3. The purchase price of the property or construction cost
(including the value of the land) may not exceed the
reasonable normal value of the property as determined
by appraisal;
4. The terms of payment of a home mortgage loan must
bear a proper relation to the veteran’s present and anti­
cipated income and expenses;
5. The veteran’s ability and experience and the conditions


under which he proposes to conduct farming or business
operations are such as to indicate reasonable likelihood
of success in the pursuit of his occupation. In addition,
in the case of farm loans, the veteran’s financial situa­
tion must be such that "he likely will be able to carry
on the farming enterprise successfully”.2
W ith the exception o f "second” loans discussed below, the
Administrator’s guaranty is limited to 50 per cent of the
amount of the loan or two thousand dollars, whichever is less,
no matter how large the loan may be. The guaranty may be
split among a number of loans for different purposes, but the
sum of the guaranties on all loans ( including second loans)
to one veteran may not exceed two thousand dollars. Subject
to certain exceptions contained in the regulations, guaranties
of construction loans, although issued before building begins,
do not become effective until completion of the project. The
guaranty declines or rises pro rata with the decrease or increase
in the unpaid amount of the loan. In the event of default,
however, the guaranty becomes payable to the lender in the
amount current at the time. The right o f the Veterans’
Administration to recover its loss out of foreclosure and
the proceeds of the sale of the security behind the loan becomes
effective only after the lending institution’s claim has been
fully met.
The loan guaranty provisions of the "G I Bill of Rights”
may be used to supplement insurance or guaranties of loans
which other Governmental bodies are authorized to provide.
Where another Federal agency has insured, guaranteed, or
made a loan to a veteran for any of the purposes stated in the
first paragraph of this article, the Administrator of Veterans’
Affairs may guarantee, subject to the limitation of two thou­
sand dollars, the full amount of a second or junior loan to
cover the remainder of the purchase price or the cost of con­
struction of the property to be acquired. Such second loans
are limited in amount to 20 per cent of the purchase price or
cost. For example, a veteran desirous of acquiring a ten
thousand dollar home might be able to obtain two loans from
a bank, one insured by the FHA for eight thousand dollars
and the other guaranteed for two thousand dollars by the
Administrator of Veterans’ Affairs. In this special type of
case the veteran need not invest any of his own funds in the
transaction, and the entire credit is insured or guaranteed. It
is expected that a great many home loans originating out of
the Servicemen’s Readjustment Act will be so-called second
loans. In the case o f loans for the purpose of enabling
veterans to go into business, however, this opportunity to
Obtain second loans is extremely limited inasmuch as very few
loans of this type have been made by any other Federal agency.

Regulations of the Veterans’ Administration covering all three types
In general, loans on real estate, equipment, machinery, and
of veterans’ loans have been distributed to all banks and trust com­
require first liens in the form of mortgages, conditional
panies in the Second Federal Reserve District by this bank. The regu­
lations and forms are now obtainable from local offices of the Veterans’
Administration located at Newington, Connecticut; Lyons, New Jersey;
2 Section 36.4102 (b ) (2 ) of the regulations of the Veterans’
Batavia, New York; and 215 West 24th Street, New York 1 1 ,
New York.
Administration on guaranty of farm and farm equipment loans.



sales contracts, chattel mortgages, or security in other forms
appropriate to the type of property acquired and to the laws of
the various States. The existence of prior tax liens on the
property, however, will not necessarily disqualify the loan.
Loans not in excess of 500 dollars and those for the purchase
of supplies may be unsecured. Loans for repairs or improve­
ments, for payment of delinquent indebtedness, taxes, or
special assessments or for initial payment of machinery, equip­
ment, or tools, and second loans to complete purchases are
likely to be junior liens secured by second mortgages or
For the most part no limit is placed, either in the Service­
men’s Readjustment Act or the regulations under it, on the
amount of a first mortgage real estate loan so that the laws of
the various States and, in the case of national banks the
Federal Reserve Act, govern. A number of States have changed
their banking laws or regulations to provide that the limita­
tion with respect to the ratio of the amount of the loan to the
appraised value of the real estate applies only to the unguar­
anteed portion of the loan. The Comptroller of the Currency
has issued a ruling to the same effect applicable to the national
The amount of a loan for repair, alteration, or improvement
of residential or farm property must bear a "proper” relation
to the value of the property and in the case of farm real estate
to the earning power of such property as well. Second loans,
as already noted, may not exceed 20 per cent of the purchase
price or cost.
Amounts and maturities of business loans vary with the
purpose of the loan. A loan for the entire purchase price of
equipment, machinery, or tools (new or used) may not run
for more than three years. A loan covering the initial pur­
chase price (down payment) of such items, however, may not
exceed one thousand dollars or one third of the purchase price,
whichever is lower, and may have an ultimate maturity of no
more than two years if the loan exceeds 500 dollars or one year
if 500 dollars or less. Loans for the purchase of supplies carry
a maximum of one thousand dollars and one year, while loans
to acquire businesses must be paid off within five years.
Loans on business and other real estate and all other non­
business loans may run as long as 20 years or for shorter
periods depending upon the amount of the loan, the amount
o f amortization payments, the character and condition of the
property, and upon other factors. All loans maturing in more
than one year are to be amortized at least annually except that
payments on the principal of farm real estate loans may be
deferred for the first three years and that a “term” loan matur­
ing within five years need not be paid off periodically, if
together with any prior liens it does not exceed two thirds of
the reasonable normal value of the property.
3This ruling has been confined to home loans only.

The maximum interest rate is set at 4 per cent per annum
on unpaid balances. The rate on second loans may be 1 per
cent higher than that charged on the principal or prior loan
but in no event may it exceed 4 per cent. In many instances
the rate on the second loan may have to be lower than that on
the prior one, inasmuch as the interest rate charged on Govern­
ment-guaranteed nonwar loans frequently exceeds 4 per cent.
The Veterans’ Administration is directed by law to pay the
first year’s interest on the portion of the loan it has guaranteed.
No bonus, commission, or application fee may be charged
the veteran in connection with the loan; nor may a premium
or penalty be required of the borrower for prepayment of the
loan. The customary charges for credit and appraisal reports,
title-searching, recording fees, premiums on fire and other
hazard insurance required on the property, and other such
expenses may be made, however, and may be added to the
principal of the loan or paid in any other way agreed upon by
the borrower and lender. In addition, the lender may make
reasonable charges for any funds advanced on a construction
loan during the building period.
Procedures set up for obtaining and approving loans differ
somewhat as to details with respect to the various types of
loans. In general, the veteran and the lender are required to
sign and submit an application for a "Certification of Eligi­
bility” to the regional office of the Veterans’ Administration.
The certification will be returned to the lender by the loan
guaranty office, stating whether or not the serviceman is
eligible for a loan and the amount of the guaranty available
to him, and listing the name of an approved appraiser who
will make an evaluation of the property.
Upon determination that the veteran is eligible the required
papers must be duly prepared, executed, and submitted to an
agency designated by the Veterans’ Administration for recom­
mendation— in the case of business loans, the RFC or the
SWPC, in the case of farm loans, the Farm Security Admin­
istration through local veterans’ loan certifying committees,4
and for second loans on residential property, the FHA. The
Veterans’ Administration has as yet designated no such agency
to review and make recommendations on other types of home
loans and is performing these functions itself through its
regional offices. The following papers are specified for most
types of loans:
1. Certification of eligibility.
2. Loan Guaranty Certificate evidencing the Administra­
tor’s obligation under the loan.
3. Original application for guaranty.
4 Where the ex-serviceman is unfamiliar with farming conditions or
the available farm land in the community in which he is desirous of
settling, he is required to seek the advice of a local veteran’s advisory
committee operating in conjunction with county agent’s office in the
Agricultural Extension Service; thus some protection against unwise
investment is provided. The veteran’s application may then be sub­
mitted by the lending institution to the certifying committee for


4. Credit report with respect to the borrower5 (in case of
farm loans required only upon request of the Admin­
5. Appraisal report.6
6. Copy of conditional sales contract if this form of security
is used; also a copy of any option or loan agreement.
7. Loan closing statement giving the estimated amounts to
be disbursed by the creditor for the borrower.
8. A statement of the kinds and amounts of insurance
required for the protection of all three parties against
loss from fire and other hazards, and the estimated
premium cost.5
If the loan is recommended by the agency it goes to the
regional office of the Veterans’ Administration for approval.
All papers except the original application and in appropriate
cases the appraisal and credit reports go back to the lender,
together with an executed contract of guaranty in the form of
a Loan Guaranty Certificate (in the case of second loans on
homes, the papers are returned to the FHA which in turn sends
them back to the lender). The loan is then 'closed” by the
lender by securing a certificate of title, necessary signatures,
etc., and a report of the loan closing is furnished the Adminis­
trator within two months of the closing. If the loan is dis­
approved, the papers are returned to the lender, together with
a letter stating the reasons for disapproval. A copy of the
letter is sent to the veteran. The lender or veteran may appeal
to the Administrator in Washington for a review of the
decision within a month after the receipt of notice of denial.
In view of these complicated procedures, the handling
of veterans’ loans may involve considerable expense to lending
institutions. The profitableness of such loans may therefore
be subordinate to the main consideration which will probably
be whether or not the loans can reasonably be expected to
assist ex-servicemen to reestablish themselves successfully in
civilian life.
C are R equired


M a k in g Lo a n s

It has been made quite clear that the loan provisions of the
Servicemens Readjustment Act do not confer on the veteran
the right to obtain a guaranteed loan more or less automati­
cally. Officials of the Veterans’ Administration have empha­
sized the distinction between a loan and a bonus or grant.
It should also be made clear that the lending institution shares
with the Government the risks involved in such loans, and is
5 Not required where the loan does not exceed 500 dollars.
8 Not required where the loan does not exceed 500 dollars.

In the
case of farm loans of 500 dollars or less for repairs, alterations, or
improvements, an abbreviated appraisal report must be submitted by
the agency recommending the loan. The opinion of such agency as
to the value of livestock, farm machinery, or equipment based on
inspection or evidence or review of the application for such a loan
of over 500 dollars, may constitute the appraisal report. N o appraisal
report is ordinarily required for business loans on new machinery,
equipment, tools, or supplies.


not relieved by the Government’s partial guarantee from
exercising ordinary business prudence. Because the loan must
eventually be paid back, both the lending agency and the
Veterans’ Administration will have to exercise considerable
care in appraising the prospects for repayment and will have
to make reasonably certain that the loan is practicable with
respect to the relationship o f the amount of the loan and the
schedule of payments to the veteran’s prospective income.
In connection with farm and business loans, the chief test of
practicability is the veteran’s ability and experience in his
particular field of endeavor which may be counted upon to
improve his chance of achieving success in his venture. It is
evident that a great many applicants for loans may not be able
to meet these tests. Representing primarily the younger ele­
ment in the population, ex-servicemen in large part had not
yet begun to make their way in the economic world at the
time they were called to the colors, and so may be lacking in
training and experience. The risks involved in the extension
of credits to veterans appear to be greatest for business loans—
the Administrator of Veterans’ Affairs has termed the business
loan as "probably one of the most hazardous provisions” of the
Act. Least risk appears to be attached to the home loans.
The provision of the Act authorizing partially guaranteed
loans to enable veterans to go into business for themselves
may constitute an innovation in Federal loan legislation, in that
it is probably the first attempt to provide loans for the specific
purpose of enabling individuals either to launch new busi­
nesses or to acquire interests (whole or part) in existing enter­
prises. The substantial risks involved in such loans are indi­
cated by the heavy mortality among small businesses. The
best interests of the veterans as well as the Government and
the lending institutions will be served by encouraging veterans
to embark only upon ventures in which they may have a
reasonable prospect of success.

OF JA N U A R Y 9, 1945
Owing to uncertainties relating to the end of the war,
one must regard as highly tentative the fiscal year 1946 budget
estimates of Federal receipts and expenditures contained in
the President’s Budget Message transmitted to the Congress
on January 9, 1945. Avoiding any prediction concerning the
length of the war on either front, the President stated that
for the fiscal year 1946 he was using a tentative estimate of
70 billion dollars for war expenditures, although the figure
might range from less than 60 billion to more than 80 billion
depending upon assumptions which might be made with
respect to the course of the war. Receipts, from income
taxes in particular, would also be affected to some extent by
deviations in actual expenditures from the estimates, because
of the effects on industrial production and the national income.
Based upon the projected receipts and expenditures of the



Treasury and Government corporations, net borrowing from
the public would amount to 44 billion dollars for the fiscal
year ending June 30, 1945 (o f which approximately 27 bil­
lion had been consummated by December 31, 1944) com­
pared with 57 billion for the fiscal year 1944, while the cor­
responding figure for the fiscal year 1946 would be 34 billion.
At present levels of savings it is expected that nonbank in­
vestors would provide about 30 billion dollars of the annual
requirements; the remainder would have to be raised through
the banking system. An earlier end of the war than was
assumed would, of course, imply an even more rapid decline
in the amount to be borrowed from the public, as expenditures
would tend to drop faster than receipts.
Net receipts of the Treasury are estimated at 41 billion
dollars for the fiscal year ending June 30, 1946, or 4.5 billion
below the revised estimate for the current year and 3 billion
below the year ended June 30, 1944. A little over 3 billion
of the decline from 1945 to 1946 is in direct taxes on indi­
viduals ( of which the completion this year of the payment of
"unforgiven” 1942 or 1943 taxes accounts for about 900
million), while taxes on corporations are expected to be
approximately 800 million lower. The President cited the
anticipated decline in Federal expenditures as an influence
toward lower incomes and tax receipts. Direct taxes •on
individuals and corporations together will account for ap­
proximately three fourths of the total revenues for the fiscal
year 1946.
Total expenditures, including the net outlays of Govern­
ment corporations, exclusive of those for debt retirement,
are estimated at 83 billion dollars for the year ending June
30, 1946, or 17 billion lower than for the fiscal year 1945
and 12 billion below actual expenditures for fiscal 1944.
The anticipated decline from 1945 to 1946 is accounted for
by a decrease of war expenditures from 89 billion to 70
billion and a rise of 2 billion in other expenditures. 'The war
expenditure estimate for 1946 assumes that the Lend-Lease
Act, which expires June 30, 1945, will be extended, but the
message stated that lend-lease "will be liquidated with the
end of the war.”
During the first half of the current fiscal year war expendi­
tures were made at an annual rate of 88 billion dollars; the
revised estimate indicates that an annual level of 90 billion
is expected to prevail during the six months ending June 30,
1945. It was estimated that the total war program, measured
by appropriations, unliquidated contract authorizations, and
net commitments of Government agencies, would reach 450
billion dollars by June 30, 1946 of which about 91 billion
would remain unexpended on that date.
Of the 13 billion of estimated 1946 expenditures for other
than war purposes, nearly 10 billion was placed in the
"aftermath-of-war” category which covers veterans’ pensions
and benefits (2.6 billion), refunds of taxes (2.7 billion),
and interest on the public debt (4.5 billion— of which, how­

ever, nearly 1 billion represents the interest charge on debt
incurred prior to the start of our defense program). The
total of these three items is larger than the whole Federal
budget for any year prior to 1941, with the exception of
the years 1918 and 1919.
Assuming declines in the Treasury’s cash balance of 5 bil­
lion during the fiscal year 1945 (to 15 billion on June 30)
and 2 billion during the next year (to 13 billion), borrowing
requirements of the Treasury are estimated to amount to 51
billion and 41 billion, respectively, compared with 64 billion
in 1944. This would allow for the net retirement of nearly
1.9 billion dollars of Government corporations’ obligations
during the entire fiscal year 1945 (leaving about 1.6 billion
for the period January 1-June 30, 1945) and 660 million dur­
ing the following fiscal year. The gross public debt (231 bil­
lion on December 30, 1944) would rise to 252 billion by
June 30, 1945 and to 292 billion a year later. The present
statutory debt limit of 260 billion (face amount) would
therefore be sufficient to carry the Treasury only to next
June 30, after allowing for the unearned discount on Savings
bonds. As a matter of fact, the Seventh War Loan drive,
predicted for next May or June by the Secretary of the
Treasury, may carry the debt above the present limit. Trust
account and other net cash receipts— Social Security taxes in
the main— will reduce the amount to be borrowed from
the public.
The President’s message called attention to the fact that
no change in tax legislation was proposed at this time and
stated that "wartime taxes must be maintained as long as
large-scale war expenditures are necessary.” On the other
hand, it was stated that minor tax adjustments will become
possible and desirable "when a favorable development of the
war allows a major decline in war expenditures.” Looking
to the postwar period, it was suggested that "we must over­
haul the wartime tax structure to stimulate consumers’ demand
and to promote business investment” and it was recom­
mended that the elements of such a program be developed
now so that it can be put into effect after victory.
The Budget Message contained a number of proposals
designed to aid domestic reconversion and the attainment
of full employment and a greater measure of economic secur­
ity, and also the reconstruction and rehabilitation of foreign
countries. If carried out, most of the proposals would lead
to substantial expenditures by the Federal Government in
the transitional and postwar periods. A departure from past
practice was the inclusion in the message of a table showing
the "nation’s budget”— a breakdown of the gross national
product for the calendar years 1939 and 1944. In referring
to this table, the President pointed out that if full employ­
ment is to be provided by private enterprise in peacetime,
consumers’ expenditures and business investments must in­
crease by about 50 per cent, measured in constant prices,
above the level of the year 1939. His discussion of the


subject implied that if consumers’ expenditures and business
investments are not sufficient to provide full employment and
a high level of gross national product, it will be the policy
of the Government to provide jobs and sufficient purchasing
power in the hands of the public to assure sustained markets
and employment.
Among the various factors which determine the annual
volume of department store trade, the amount of income after
taxes, or disposable income, is the most important. An analy­
sis of past relationships between disposable income and
department store sales may be of help in evaluating the
performance of individual stores or groups of stores and also
in appraising the postwar outlook for department store trade.
The accompanying chart compares department store sales
and disposable income in New York State for the period
1929-44. Estimates of year-to-year changes in department
store sales in New York State are based on reports obtained
by this bank from a representative group of department
stores.1 Disposable income of individuals in New York State
Indexes of Department Store Sales and Disposable
Income in New York State, 1929-44
(1939 averages 100 per cent)
Per cent


by business. In addition, income received by nonresidents
was excluded from the estimate of disposable income for New
York State.
It appears from the chart that fluctuations in department
store trade correspond closely to changes in disposable
income. In 1939 disposable income in New York State
amounted to 10,360 million dollars and department store
sales to 444 million. During the 16-year period the portion
of consumer income spent in department stores showed very
little variation, reaching 4.8 per cent in 1932 but declining
to 4.0 per cent in 1943. In depression years department
store sales decline somewhat less than the disposable
income of individuals, since many consumers spend out of
savings or reduce their current savings. In 1942 and 1943,
owing to shortages of many durable goods and to increased
saving, department store sales in New York State failed
to reach the volume which might have been expected on
the basis of peacetime relationships and of wartime income
levels. In 1944, however, department store sales appear to
have shown a relatively greater increase than the disposable
income of individuals in the State.
During the period 1929-44, an increase or decrease of 10
per cent in disposable income in the State has been accom­
panied by an average change of 8 per cent in department
store sales. A change of 1 billion dollars in disposable income
has in the average raised or lowered department store sales
by 34 or 35 million dollars.2
2 A report including estimates of disposable income and department
store sales for New York State, 1929-44, and a more detailed descrip­
tion of the technique used to obtain the data which appear in this
article may be obtained upon request.
Indexes of Business


Source: Federal Reserve Bank of N ew Y o r k ; disposable income estimate
for 1944 preliminary.

was computed by deducting from total income payments in the
State (as estimated by the United States Department of Com­
merce) all direct personal taxes collected in the State. The
principal direct taxes paid by individuals in New York are
Federal and State personal income taxes and Federal and
State estate and gift taxes; it was also assumed that 25 per
cent of all local property taxes are paid by individuals, the rest

Industrial production*, 1935-39=100..........
(Board, of Governors, Federal Reserve
Munitions output, 1943=100 r ......................
( War Production Board)
Electric power output*, 1935-39=100.........
(Federal Reserve Bank o f New York)
Ton-miles of railway freight*, 1935-39 = 100
(Federal Reserve Bank of New York)
Sales of all retail stores*, 1935-39=100........
(Department of Commerce)
Factory employment
United States, 1939 = 100 ..........................
(Bureau o f Labor Statistics)
New York State, 1 93 5 -39= 100.................
(New York State Dept, o f Labor)
Factory payrolls
United States, 1939=100............................
(Bureau o f Labor Statistics)
New York State, 1 9 3 5 -3 9= 1 0 0 .................
(New York State Dept, o f Labor)
Income payments*, 1935-39=100 ...............
(Department o f Commerce)
Wage rates, 1 926= 100....................................
(Federal Reserve Bank of New York)
Cost of living, 1935 -3 9= 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 it y .............................................
Outside New York C ity ..............................


Federal excise taxes and New York City sales tax not included in
sales figures.

* Adjusted for seasonal variation.



































312 p



















p Preliminary.

r Revised.



Unusual weather conditions, particularly in Upstate New
York, together with a merchandise inventory depleted by
the greatest Christmas buying on record, adversely affected
January trade in this District.

The dollar volume of depart­

ment store sales last month, after adjustment for seasonal

the war period sales in the District have lagged behind those
in the country as a whole, because of the relatively small
increases in New York City and Newark.

Buffalo and Syra­

cuse have shown gains greater than the United States average.
The annual increase during the past few years has been
fairly constant for New York City, Buffalo, Rochester, and

fluctuations, was about 7 per cent below the average for the


final quarter of 1944 and the lowest since last June.

During 1944, Newark showed a gain following

At the

a slight decline in 1943, while sales in Bridgeport were lower

beginning of January, the seasonally adjusted index of depart­

for the second consecutive year, following an unusually rapid

ment store stocks had declined almost 20 per cent from last

expansion in 1941 and 1942.

Augusts peak and was the lowest since the middle of 1943.

The trend of sales among the various cities is related to
the changes in the amount of income available for spending,
which are occasioned largely by the expansion and contrac­
tion in manufacturing activity and hence in payrolls (see
the discussion of sales and disposable income included in this
issue). It will be noted that department store sales have
substantially exceeded the predepression peaks in most cities.
These indexes, however, are based on the dollar volume of
sales; changes in the price and quality of department store
merchandise have varied considerably during the past two
decades. In addition, the trend during the war period has
been influenced by the preference for, and in some cases the
greater availability of, higher priced items.

Merchandise on order at the close of the year equaled the
dollar volume of stocks on hand.

Outstanding commitments

were 15 per cent above those of one year earlier and three
times the dollar amount on order at the close of 1942.
Trade sources indicate that a substantial portion of these
orders are overdue.
Department store sales in this District last year amounted
to roughly 800 million dollars, or 13 per cent of the United
States total.

New York City sold 425 million dollars worth

of department store merchandise; Newark, 75 million; Buf­
falo, 65 million; Rochester, 40 million; Syracuse, 20 million;
and Bridgeport, 13 million.

The accompanying chart shows

the trend of sales in these cities from 1925 to date.


Department and Apparel Store Sales and Stocks, Second Federal Reserve
District, Percentage Change from the Preceding Year
Net Sales

Indexes of Department Store Sales in the United States, Second
District, and Selected Cities within the District, 1925-44
(1935-39 average=100 per cent)

Dec. 1944
Department stores, Second District. . .
New York C i t y ....................................
Northern New Jersey..........................

Stocks on
Jan.through Dec. 31, 1944
Dec. 1944

Niagara Falls.....................................

+ 7
+ 21
+ 6
+ 13
+ 8
+ 7
+ 7
+ 6
+ 8

+ 7
+ 6
+ 3
+ 3
+ 6
+ 4
+ 5
+ 11
+ 7
+ 6
+ 4
+ 9

Apparel stores (chiefly New York City)



Westchester and Fairfield Counties..
Lower Hudson River V a lley..............
Upper Hudson River V alley..............
Central New York State.....................
M ohawk River V alley.....................
S yracu se.............................................
Northern New York State...................
Southern New York State...................
B ingham ton......................................
Western New York S ta te ...................



- 8
- 6
- 5
-1 7
-2 6



+ 2
+ 2
- 6

+ 6



+ 5
+ 3

Indexes of Department Store Sales and Stocks
Second Federal Reserve District










Source: Board of Governors of the Federal Reserve System and Federal
Reserve Bank of N ew York.





1935-39 average — 100
Sales (average daily), unadjusted.................
Sales (average daily), seasonally a d ju sted ..





1923-25 average = 1 0 0
Stocks, un adjusted ..........................................
Stocks, seasonally a d ju sted ............................





r Revised


General Business and Financial Conditions in the United States
(Summarized by the Board of Governors of the Federal Reserve System)






Index of Physical Volume of Industrial Production,
Adjusted for Seasonal Variation (1935-39
average = 1 0 0 per cent)

Indexes of Wholesale Prices Compiled by Bureau of
Labor Statistics (1926 average=100 per cent;
latest figures are for week ended January 20)

and employment at factories increased somewhat in December. Retail buying
was exceptionally active in December and the first half of January and wholesale commodity
prices advanced.

I n d u s t r ia l Pr o d u c t io n

Total industrial production was maintained in December at the level of the preceding
month, which was 232 per cent of the 1935-39 average, according to the Boards index.
Manufacturing output showed a slight rise because of increased output of war products, while
minerals production declined, reflecting a sharp drop in coal production.
Gains over the November levels of activity in the machinery, transportation equipment,
chemicals, petroleum refining, and rubber industries followed a renewed drive to expand
output of critical munitions. Military events in December resulted in higher production
schedules for munitions and in additional Federal measures to assure manpower for war
output and to increase inductions into the armed services. Stringent limits were placed on the
use of metals in civilian products under the programs initiated last fall.
Output of metals decreased somewhat further in December. In the first three weeks of
January steel production continued to decline, partly because of severe weather conditions.
Output of aluminum has been held at a level of about 90 million pounds per month since
last autumn. The curtailment of aluminum sheet production during 1944 was reported in
January to have led to a critical supply situation for this product in the light of the recently
raised aircraft schedule.
Lumber production showed the usual seasonal decline in December. Output for the year
1944 was about 5 per cent below 1943, and a further decline is expected in 1945 owing to
continued shortages of manpower and equipment.
Cotton consumption and output of manufactured foods were maintained in December at
the level of the preceding month. There were declines in shoe production and in activity at
paper mills.
Output of coal in December was about 12 per cent below average production in the
preceding 11 months. In order to assure supplies to meet the most essential needs, restric­
tions on less essential civilian uses of coal were instituted in January. Crude petroleum pro­
duction was maintained in December in large volume, while output of iron ore showed the
large seasonal decline customary in this month.
D is t r ib u t io n

During the November-December Christmas shopping season department store sales rose
to new high levels and were 15 per cent larger than in the corresponding period a year ago.
The high level of sales was maintained in the first half of January, taking into account usual
seasonal changes in trade.
Carloadings of railroad freight declined more than usual in December. During the first
two weeks of January loadings were 5 per cent less than during the same period a year ago,
owing to decreases in all classes of freight except miscellaneous shipments.
C o m m o d it y Prices

Member Bank Reserves and Related Items
(Latest figures are for January 17)

The general level of wholesale commodity prices advanced somewhat from the early part
of December to the middle of January. Prices of most farm products were higher. After the
middle of January grains and cotton declined but were still above early December levels.
Steel scrap, which had been considerably below ceiling levels in the autumn, showed a sharp
price rise. Prices of nonferrous metal scrap, cement, and various other industrial materials
also increased in December and the early part of January.

Member Banks in Leading Cities. Demand Deposits
(Adjusted) Exclude U. S. Government and Inter­
bank Deposits and Collection Items. Govern­
ment Securities Include Direct and Guaranteed
Issues (Latest figures are for January 17)

In the four weeks ended January 17, Government security holdings at weekly reporting
member banks increased further. Loans for purchasing and carrying Government securities
declined from the level reached during the Sixth War Loan drive; most of the decline was in
the loans to customers, but loans to brokers and dealers also were reduced moderately. The
Government securities added to reporting member bank holdings in this period consisted
mainly of bonds and bills.
Excess reserves held by member banks declined relatively little from the peak reached
during the Sixth War Loan drive. Reserve requirements increased, but member bank reserve
balances also increased by approximately the same amount. Spending of Treasury balances
and a reduction of nonmember deposits at Reserve Banks more than offset a decline in hold­
ings of Government securities by the Federal Reserve Banks. Currency in circulation declined
130 million dollars during the three weeks following the Christmas peak, the largest decline
for any corresponding period since early 1942.
Following the Sixth War Loan drive, adjusted demand deposits renewed their increase,
and time deposits increased at a more rapid rate than demand deposits. Between War Loan
drives, time deposits in all banks have been increasing at the rate of almost three quarters of
a billion dollars a month.

B a n k C redit