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M ONTHLY REVIEW
O f Credit and Business Conditions

FEDERAL
V o l.

RESERVE

28

BANK

JANUARY

OF

NEW

1946

YORK
No. 1

MONEY MARKET IN DECEMBER
Like its predecessors, the Victory Loan, the eighth and last
of the series of Treasury drives to raise funds for financing the
war, has surpassed its goal of 11 billion dollars by a wide
margin. While the actual sales total is not yet available, it is
expected that well over 20 billion dollars of new securities will
prove to have been sold when the final tabulations are com­
pleted. This would make the total for the Victory Loan ap­
proximately the same as the Fifth and Sixth Loans and although
considerably less than the total of 26 billion for the Seventh, it
represents the heaviest oversubscription of the goal for any
drive with the possible exception of the Seventh. It is yet
too early for accurate determination of the amount of bank
credit included in the drive totals but it appears that the
expansion of bank credit in the Victory Loan was larger, rela­
tive to the smaller sales total, than in the Seventh drive.
As shown in the accompanying table, the Victory Loan
promises to be the most expensive of any War Loan in terms
of the interest cost to the Treasury on marketable issues sold to
the investing public. Nonbank investors, apprehensive that
long term interest rates might decline and apparently convinced
that long term securities could be bought, even for short term
holding, with equal safety and greater profitability than the
shorter term obligations, subscribed heavily to the long term
bonds offered in the drive. According to press reports, close
to 10 billion dollars of IVi per cent and 3 billion of 2*4 per
cent bonds were sold in the Victory Loan drive— approximate­
ly 60 per cent of the total sales attributed to the drive. Thus,
the average computed rate of interest on marketable issues
sold to nonbank investors in the Victory Loan is estimated
at 2.09 per cent, as compared with 1.95 per cent for the entire
Average Interest Cost to Treasury of Marketable Issues Sold to Nonbank
Investors in War Loan Drives*

Drive
F i r s t ......................................
Second....................................
Third......................................
Fourth....................................

Average
rate
1 .8 4 %
1.81
1.76
1.62

Drive
Fifth......................................
Seventh..................................
Victory..................................

* Excludes Treasury investment accounts,
p Preliminary.
Source: Federal Reserve Bank of New York.




Average
rate
1 .6 0 %
1.70
1.92
2 .09p

public debt outstanding at the end of November. As indicated
in the table, the average interest rate on marketable securities
declined in each of the first five loans from 1.84 per cent in the
First drive to 1.60 in the Fifth, and then rose in successive
drives to 1.92 per cent in the Seventh and 2.09 in the Victory
Loan, the highest for all the drives, despite the downward drift,
during the past year, in yields obtainable on outstanding Treas­
ury securities purchased in the market.
To the list of devices designed to minimize speculative sub­
scriptions to drive offerings and to limit the expansion of bank
credit in connection with the drives, there was added in the
Victory Loan a restriction on War Loan accounts of the com­
mercial banks to 30 per cent of all deposits (except War Loan
deposits) held as of October 31, 1945. Despite this limitation
on War Loan accounts, the banks made substantial purchases
of outstanding Government securities during the drive, al­
though the aggregate amount was smaller than in the Seventh
campaign. In the seven statement weeks ended December 12,
during which the books remained open for subscriptions to
marketable issues, the increase in the Government security
holdings (other than Treasury bills) of the weekly reporting
member banks in 101 cities amounted to 2.6 billion dollars,
as compared with 3.2 billion in the seven weeks ended June 27
in the Seventh drive. Federal Reserve Bank net purchases
of Government obligations other than Treasury bills came
to about a billion dollars in the current drive against 1.2 billion
in the preceding one.
Loans on Government securities of the weekly reporting
member banks, on the other hand, increased more rapidly in
the Victory Loan than in the Seventh drive, reflecting chiefly
the heavy subscriptions for the 2 Vi per cent bonds. Total
Government security loans increased 2.6 billion dollars in the
seven weeks ended December 12, as against 2.3 billion in the
corresponding period of the Seventh drive. The increased
expansion came largely among the banks in 100 cities outside
New York where the rise in loans to borrowers other than
brokers and dealers was 250 million dollars greater than in the
preceding drive, while the increase in loans to brokers and
dealers was about 50 million dollars less. The reverse occurred

2

MONTHLY REVIEW, JANUARY 1946

among New York City banks where loans to brokers and
dealers rose 705 million dollars in the seven weeks ended
December 12 compared with 565 in the comparable Seventh
drive period, while loans to others rose about 830 million com­
pared with 925 in the last War Loan reflecting smaller borrow­
ings of insurance companies during the current drive. Pur­
chases of Government bonds by the insurance companies on the
deferred payment plan, however, were much more extensive
this time and may presage some expansion in insurance com­
pany borrowings before the final payments on such purchases
are due.
As shown in the accompanying chart, Government security
loans have risen steadily in the last four drives; new high points
have been scored in each, and the subsequent interdrive liquida­
tion has failed to eliminate all of the preceding expansion so
that each between-drive low point has been higher than the
previous one. On December 12, total loans on Government
securities of all weekly reporting member banks reached a new
peak of 4.7 billion, an amount 500 million above the previous
record. In the week ended December 19, limited amounts of
Government security loans were liquidated as some subscribers
were quick to take advantage of a strong market for the long
term bonds, which sold at premiums of one point or more
shortly after trading in the drive securities got under way.
For the entire banking system including the Federal Reserve
Banks, it may be estimated that the expansion of Government
security holdings and loans on Government obligations
amounted to roughly 10 billion dollars in the Victory Loan.
That is slightly less than the amount in the Seventh drive,
but represents a considerably higher percentage of the total
sales during the drive.
Loans for Purchasing or Carrying U. S. Government Securities
by Weekly Reporting Member Banks in 101 Cities




M em ber Ba n k

R eserve Po s it io n s

Member bank reserve positions were not eased as much dur­
ing the Victory Loan drive as might have been expected.
Reserve requirements fell about 300 million dollars in the seven
weeks ended December 12, compared with 670 million in the
corresponding period of the Seventh War Loan drive. The
factors chiefly responsible were the smaller net absorption of
securities by nonbank subscribers in the current drive and the
extensive use by such investors of funds received from the cash
redemption by the Treasury of maturing certificates and other
securities (amounting to about 1.6 billion dollars) to acquire
new issues offered in the drive.
In fact, the major factor in the easing of the member bank
reserve position in the week ended December 5, which included
the payment date for corporation subscriptions to Victory Loan
issues, was a heavy excess of Government expenditures over
receipts in connection with public debt redemptions. These
expenditures were sufficient not only to eliminate most of the
Treasury’s balance with the Reserve Banks, which amounted to
557 million in the preceding week, but also to make it neces­
sary for the Treasury to borrow temporarily from the Reserve
Banks through the sale to them of special certificates of
indebtedness, the amount of which totaled 318 million dollars
on December 5 and reached a peak of 484 million on December
7 and 8. Member banks receiving these funds were able to
retire a substantial amount of Reserve Bank credit— through
repayment of borrowings and repurchases of Treasury bills—
and to expand their excess reserves. At the same time, how­
ever, the Reserve Banks found it necessary to absorb consider­
able amounts of other short term Government securities
offered for sale by nonbank investors or by banks in need of
reserves, because of insufficient demand from other sources to
absorb the supply.
In order to avoid sudden heavy drains on the reserves of
banks whose corporation customers subscribed for Victory
Loan securities in such volume that the payments could not
all be credited to War Loan accounts within the 30 per cent
limit previously referred to, the banks were permitted tempo­
rarily to credit all payments for subscriptions to War Loan
accounts, even though they exceeded that limit. The banks
were then instructed to pay the "overages” to the Federal
Reserve Banks for account of the Treasury in five equal instal­
ments on December 10 to 14, inclusive. These payments were
made in such volume (over 400 million dollars a day) that the
banks were permitted to defer the last two instalments from
December 13 and 14 to December 15 and 17. These pay­
ments, together with collections o f corporation income and
excess profits taxes for the fourth quarter, so greatly exceeded
Government disbursements in the two weeks ended December
19 that the Treasury was able to repay its temporary borrow­
ings from the Reserve Banks and to accumulate balances of
718 million dollars in the Reserve Banks. In these circum­

FEDERAL RESERVE BANK OF NEW YORK

stances, member bank needs for Federal Reserve Bank credit
again increased and excess reserves were reduced.
Seasonal demands for currency also absorbed substantial
amounts of reserve funds in the three weeks before Christmas,
and are estimated to have raised the amount of money in circu­
lation in the month of December by about 450 million dollars,
exceeding the increase for the corresponding month o f 1944
(288 million) for the first time since August. To a large
extent the greater increase this December probably reflects the
unprecedented volume of holiday trade. A minor factor may
have been the smaller sales of Series E bonds (many of which
are paid for in cash) in the Victory Loan than in the Sixth War
Loan.
Owing to the usual transfer of funds out of New York City
during drives, related to payments for Government securities
sold in the New York market by out-of-town investors to
obtain funds for investment in the new issues, and to with­
drawal of funds from New York during tax periods to cover
payment of corporation taxes in other localities, banks outside
New York City were able to retire Reserve credit or expand
their Treasury bill holdings to a greater extent, relatively, than
the New York City institutions. Weekly reporting member
banks in other parts of the country acquired 617 million dollars
of bills in the seven weeks ended December 12 compared with
372 million in the Seventh drive.
LONG T E R M IN TE R E ST R A TE S AN D
STO CK YIELDS D U R IN G TH E W A R
During the war period we have experienced a decline in
long term interest rates to lower levels than ever before in the
face of huge demands for funds from the Treasury, first to
finance a rapidly expanding national defense program, and
then to finance a war program of a magnitude far beyond any­
thing previously imagined. The explanation lies primarily in
heavy bank buying of Government securities, which not only
provided a persistent demand for such securities, but at the
same time resulted in a great expansion in the money supply
in the hands of the public.
The decline in long term interest rates had been in progress
for some years prior to the war and its continuation during the
early years of the war reflected the large-scale inflow of gold
from abroad, which not only provided the basis for a substan­
tial expansion of bank credit, but also resulted in a heavy
accumulation of idle funds in the banks. Since early in 1942 the
great expansion in bank credit, the accompanying growth in the
money supply in the form of bank deposits and currency, and
the continued low interest rates have been made possible
chiefly by an expansion of Federal Reserve credit which has
lifted the total loans and investments of the Federal Reserve
Banks from less than 2 V2 billion dollars to nearly 25 billion.
While the Federal Reserve System has endeavored to limit its
extensions of credit to the amounts required to assure the




3

availability to the Government of adequate funds to finance
the war effort at stable interest rates, the huge growth in the
money supply and the efforts of individuals and investing
institutions to employ profitably the growing volume of funds
at their disposal has had far-reaching effects on the market
for various classes of long term investments.
The pressure of funds seeking investment, together with the
improved financial position of business concerns during the war
period and a growing optimism regarding business prospects,
has been reflected in a narrowing of the spread between yields
on investments involving varying degrees of risk to the point
where the over-all spread between yields on the various classes
of securities has become less wide than at any previous time
for which adequate records are available (since 1919). In
November, as indicated in the accompanying chart, the spread
between fully taxable long term Treasury bonds and the aver­
age yield on a list of 200 common stocks was only 1.4 per cent.
Comparisons between yields on long term Government
securities and yields on the highest grade corporation bonds
were confused during most of the period prior to the latter part
of 1941 by the tax exemption features of Government bonds.
It is clear, however, that the spread between yields on these
two classes of securities had been narrowing for several years
prior to the war, and that some further narrowing has occurred
since 1941. In the intervening period (1939 to 1941), the
spread between yields on long term partially tax-exempt
Treasury securities and on long term high grade corporation
bonds widened somewhat, reflecting higher taxes and the conse­
quent increase in the value to investors of the partial exemption
of income from Treasury securities. Allowing roughly for the
Yields on Long Term Bonds and Stocks
PER CENT

8

7

6
5

4
3

2

0
1939

1940

1941

1942

1 943

1944

1945

S ource: U . S. Government bonds, Treasury Departm ent; 15 high grade
noncallable preferred stocks, Standard & P oor’s C orporation; 20 Aaa cor­
porate bonds, 30 Baa corporate bonds, and 200 com m on stocks, M ood y’s
Investors Service.

4

MONTHLY REVIEW, JANUARY 1946

value of tax exemption features, the spread between yields on
Government and high grade corporation bonds undoubtedly
is now considerably narrower than in years prior to 1932.
During the 20’s the relatively wide spread was attributable, at
least in part, to the retirement of public debt and the conse­
quent limitation of the supply of Government securities, while
the supply of high grade corporate bonds was relatively ample.
The narrowing of the spread since 1932 is probably explained
in large measure by a reversal of that situation— an increasing
supply of Government securities and a limited supply of high
grade corporation bonds.
The rapid narrowing of the spread between yields on
medium grade corporate obligations (Baa bonds) and Treasury
and highest grade corporate bonds during the war period
apparently reflects the combined effect of improved conditions
and prospects for business, including the strengthened finan­
cial position of many business concerns during the war, and of
the efforts of individual investors and investing institutions to
obtain higher yields than are obtainable from investments in
the highest grade securities. As a result of these factors, the
average yield obtainable from a representative list of Baa bonds
receded from close to 5 per cent in December 1939 to 3.2 per
cent in November 1945. Railroad bonds of this grade had an
especially strong rise in price ( and decline in yield), reflecting
the notable expansion in railroad traffic and earning power
during the war which permitted heavy purchases by the rail­
roads of their outstanding obligations for retirement, as well
as attracting other investment demand. Toward the end of
1945, the spread between yields on medium grade and the
highest grade corporate bonds had become the narrowest
since at least 19IB— the period for which records are available.
In November of this year Baa bonds were selling at yields
equivalent to those obtainable from Aaa bonds toward the
close of 1939On the other hand, yields obtainable from a selected list of
high grade, noncallable corporation preferred stocks have
moved roughly parallel to yields on the highest grade corporate
bonds, and in the period from the end of 1939 to November
1945 declined only from 4.1 per cent to 3.6 per cent. At the
end of this period the yield on high grade preferred stocks was
nearly V2 per cent higher than on medium grade bonds, where­
as at the end of 1939 it was approximately 0.8 per cent lower.
The relative lag in the movement of preferred stock yields may
be attributable at least in part to the fact that institutional
demand for such stocks is limited by legal restrictions on the
investments permissible for commercial banks, savings banks,
and life insurance companies. In part, it may also reflect some
continuing uncertainty on the part of investors as to the future
of interest rates; prices of noncallable preferred stocks are
greatly affected by changes in the general level of interest rates,
since these securities have no maturity date as have bonds, and
thus are little affected by considerations other than the in­




vestor’s appraisal of the prospect for long term interest rates
and of the safety of the investment. Many preferred stocks of
this class were issued a number of years ago and are now selling
at prices far above their par value. Where preferred shares are
subject to call, the wartime rise in prices has been limited by
the call prices.
Yields obtainable from investments in common stocks have
fluctuated widely during the war years, reflecting the combined
effect of changes in prices and in dividend payments. Prices of
equity securities reflect primarily the investing public’s
appraisal of business conditions and prospects, but even these
securities are not entirely unaffected by the general levels of
interest rates. As the accompanying chart indicates, the aver­
age yield of a list of 200 common stocks rose from between
3.6 and 4.5 per cent in 1939 to a peak of 7.8 per cent in April
1942, and then fell to 3.7 per cent in 1945. Increased dividend
payments were a minor factor in the rise in common stock
yields from 1939 to the spring of 1942, but the major factor
was the influence of adverse developments in the war during
that period. Similarily, the rapid fall in common stock yields
from the spring of 1942 to the summer o f 1943 reflected pri­
marily the improvement in war prospects, although the high
level of business activity and the strengthened financial position
of business organizations undoubtedly contributed to the rise in
stock prices and the decline in their yields. The subsequent
further decline in yields on equity securities apparently reflects
public optimism concerning the prospects for business, with its
speculative accompaniments, and the efforts of investors to
find more profitable employment for their funds than is possi­
ble through investments in high grade bonds. Despite the
strong rise in common stock prices since the spring of 1942,
yields obtainable on such securities remain higher than in
several earlier periods of public optimism with respect to
investments in equity securities. They are still considerably
above the yields obtainable on highest grade or even medium
grade corporation bonds, whereas prior to the war they were
usually well below the yields obtainable on medium grade
bonds, and at times fell well below the yields obtainable from
investments in the highest grade corporation bonds.
A N G LO -A M E R IC AN F IN A N C IA L A G R E E M E N T
After nearly three months of detailed negotiations in Wash­
ington, a financial agreement between the American and British
Governments has been signed, with mutual concurrence reached
on all major points included in the agenda. The agreement has
already been approved by the British Parliament and will
become effective when ratified by Congress.
The documents issued by the two governments include a
financial agreement, a joint statement regarding the settlement
of lend-lease, reciprocal aid, surplus war property and certain
other claims, and a joint statement regarding understandings
reached on commercial policy.

FEDERAL RESERVE BANK OF NEW YORK

The statement covering lend-lease and other wartime claims
provides for a final and definitive settlement, amounting to a
virtual cancellation, of British lend-lease obligations to the
United States. It specifies that the net sum to be due the
United States from Britain for "the settlement of Lend-Lease
and Reciprocal Aid, for the acquisition of surplus property, and
the United States interest in installations, located in the United
Kingdom, and for the settlement of claims shall be $650,000,000,” subject to a possible adjustment noted below. This
amount consists of: (a ) 118 million dollars, representing the
excess of lend-lease goods and services furnished to Britain from
V-J Day to December 31,1945 over reciprocal aid extended by
Britain to the United States during the same period, less the
net sum due to the United Kingdom under the claims settle­
ment; and (b ) 532 million dollars, the sum agreed upon for
the settlement of all other lend-lease and reciprocal aid items
and for British acquisition of American surplus property, and of
American interest in installations, located in the United King­
dom. The sum of 118 million dollars mentioned above is
subject to adjustment in the light of subsequent accounting and
the total of 650 million dollars will then be adjusted accord­
ingly. The resulting net liability will be discharged on the
same terms as those specified in regard to the dollar line of
credit referred to below. A variety of supplementary technical
provisions are included to protect American interests in con­
nection with the disposal by the British of the surplus property,
lend-lease articles and installations referred to.
The financial agreement proper provides for the extension
of a line of credit amounting to 3,750 million dollars (over and
above the 650 million dollars already mentioned), which may
be drawn upon at any time between the effective date of agree­
ment ( the date on which the United States Government notifies
the British Government that Congress has made available the
funds necessary to extend the line of credit to Britain) and
December 31,1951, inclusive. The terms and conditions of the
line of credit, the main purpose of which is to assist Britain
over her transitional balance of payments difficulties, may be
summarized as follows:
(1 ) The amount drawn will be repaid in 50 equal annual
installments of principal and interest combined, commencing
December 31, 1951, with interest at the rate of 2 per cent per
annum calculated on the amount outstanding on December 31,
1951, and on January 1 of each year thereafter. The annual
installments will amount to 31.8 million dollars for each
billion dollars of credit utilized.
(2) If the International Monetary Fund certifies in any year
that average annual British receipts from merchandise exports
and net current "invisible” exports over the preceding five
years are less than (a) the average annual value of British
imports in 1936-38, adjusted for price changes, plus (b ) a sum
up to 43,750,000 pounds if used to repay or release sterling
balances accumulated before the effective date of the agree­




5

ment, Britain may request and obtain a waiver of the interest
payment (but not the principal repayment) due in that year.
The purpose of this provision is to introduce an element of
flexibility into the total annual loan payments so as to ease the
pressure on Britain in difficult years.
(3 ) Any loans which Britain receives from governments
within the British Commonwealth between December 6, 1945
and December 31, 1951, must be on terms no more favorable
to the lender than those contained in the American agreement.
(4 ) A waiver of interest will not be allowed in any year
unless the aggregate repayments in that year of foreign sterling
balances accumulated before the effective date of the agreement
are "reduced proportionately,” and unless interest payments are
similarly waived on the above-mentioned loans from British
Commonwealth governments.
Probably the most interesting features of the agreement are
the commitments imposed upon Britain in return for the line
of credit. The British Government agrees at the earliest
possible time, no later than one year after the effective date of
the agreement, to permit, with a few exceptions, free convert­
ibility of sterling accruing to sterling area countries from cur­
rent transactions (as defined by the International Fund Agree­
ment) and similarly to permit these countries to dispose freely
of any dollars which they are currently acquiring. It likewise
agrees that after the effective date of this agreement, and up to
December 31, 1951, it will not apply exchange controls in such
a manner as to restrict, " (a ) payments or transfers in respect
of products of the United States permitted to be imported into
the United Kingdom or other current transactions between the
two countries, or (b ) the use of sterling balances to the credit
of residents of the United States arising out of current trans­
actions.” Here a special clause is inserted stating that the
"scarce currency” provisions of the Bretton Woods Fund
agreement shall not be affected by these arrangements.
Extending these clauses to include all countries, the two
governments agree that beginning one year (or sooner) after
the effective date of the agreement, and at least until December
31, 1951, they will impose no restrictions on payments or trans­
fers for current transactions in general. Here exception is made
for convertibility of balances of third countries accumulated
before this provision comes into force, for restrictions imposed
under the International Fund Agreement (with the transitional
period provisions exempted, however), and for restrictions
imposed in connection with the uncovering and disposal of
German and Japanese assets.
The agreement also provides that if either of the two govern­
ments should impose or maintain quantitative import re­
strictions, such restrictions shall not be administered on a basis
which discriminates against imports from the other country.
This commitment, which is subject to certain qualifications, is
to become effective no later than December 31, 1946.

6

MONTHLY REVIEW, JANUARY 1946

W ith regard to accumulated sterling balances, the British
Government agrees to make an early settlement with the various
creditors, varying according to the circumstances of each case.
These balances will be divided into the following three cate­
gories: " ( a ) balances to be released at once and convertible
into any currency for current transactions, (b ) balances to be
similarly released by installments over a period of years begin­
ning in 1951, and ( c ) balances to be adjusted as a contribution
to the settlement of war and postwar indebtedness and in recog­
nition of the benefits which the countries concerned might be
expected to gain from such a settlement.” It is further specified
that balances released in any one of the above-mentioned ways
will be "freely available for current transactions in any currency
area without discrimination.”
The Anglo-American financial agreement constitutes an im­
portant step forward in the broad program of the United
Nations designed to restore a multilateral world trading system.
The line o f credit extended to Britain will help that country to
meet its global balance of payments deficit ( estimated in a re­
cent British White Paper at an aggregate of 5 billion dollars in
1946-48) during a period when it will be struggling to restore
its export position, and removes the dangerous possibility of
Britain being forced to continue or even intensify its present
restrictive and discriminatory trade and exchange policies. The
British, indeed, have agreed, with the few exceptions noted
above, to restore within a year multilateral convertibility of
sterling, to avoid using import licensing in a discriminatory
way, and to make plans for an early settlement of its huge
accumulated sterling balances (estimated at about 14 billion
dollars). In the longer run, however, the solution to the press­
ing British balance of payments problem, and thus the basis for
a removal of that country’s restrictive trade policies, must lie in
a very great expansion of its exports relative to imports. The
achievement of this objective will depend not only upon
Britain s ability to adapt the character of its exports to the
altered requirements of the world market and to raise the pro­
ductivity of its industry well above present levels, but also upon
the existence o f high levels of income throughout the world
(to which the United States can make an important contribu­
tion), the resumption of large-scale long term international
lending in general and a substantial reduction of tariffs and
other barriers to trade.

THE PROPOSED INTERNATIONAL TRADE
ORGANIZATION
In connection with the Anglo-American negotiations, and as
explained in the joint statement on commercial policy issued
at the end of the negotiations, the United States Government
has set forth a proposal for an International Trade Organization,
that will take its place beside the international institutions
established in the fields of relief and rehabilitation, currency,
foreign investment, food and agriculture, and civil aviation.




The plan for the trade body, as part of a State Department
document which is set forth in "Proposals for Expansion of
World Trade and Employment,” has been submitted to other
governments for their consideration, preparatory to a conference
on International Trade and Employment to be held not later
than the summer of 1946. The joint statement on commercial
policy prepared by the American and British negotiators states
that these Proposals have the endorsement of the executive
branch of the United States Government and that the British
Government is in full agreement on all important points and
accepts them as a basis for international discussion. The joint
statement also reports agreement by the two countries on pro­
cedures for the international negotiation and implementation
of the Proposals. It is understood that these negotiations will
be of two kinds: (1 ) "nuclear” trade agreements made under
the recently extended and broadened authority of the Reciprocal
Trade Agreements Act, into which the United States will enter
with Britain and other leading countries; and (2 ) a preparatory
conference next spring of the United States and fourteen other
countries, representing diverse types of foreign trading sys­
tems, in order to elaborate upon the draft Articles of Agree­
ment of the Organization.
The general Proposals contain two preliminary parts, the
first one pointing to the need for international economic co­
operation, and the second setting forth the aims and governing
principles to guide member States in their employment policies.
It is urged that countries exchange information and consult
regularly on their employment problems and that each take
action designed to achieve full employment within its own
jurisdiction and in ways appropriate to its political and econo­
mic institutions. Governments are also asked to pledge them­
selves not "to maintain employment through measures which
are likely to create unemployment in other countries or which
are incompatible with international undertakings designed to
promote an expanding volume of international trade and
investment in accordance with comparative efficiencies of
production.” The third part of the Proposals contains the
actual draft terms of the Internatinal Trade Organization.
Apart from organizational details, these fall into three main
chapters: General Commercial Policy; Restrictive Business
Practices; and Intergovernmental Commodity Arrangements.
The main separate sections in the first named chapter, the
core of the draft document, are on tariffs and preferences;
quantitative trade restrictions; subsidies; and State trading.
Acknowledging the guidance of Article VII of the Mutual
Aid Agreements, the section on tariffs and preferences requires
member States to arrange for "the substantial reduction of
tariffs” concurrent with "the elimination of tariff preferences.”
The implementation of this section by the United States and
Great Britain, for example, would result in the reduction of
American tariffs, which the President is now empowered to

FEDERAL RESERVE BANK OF NEW YORK

effect up to 50 per cent of duty rates prevailing on January 1,
1945, and the elimination of the British imperial preference
system set up at the Ottawa Conference in 1932. However,
there is a qualifying clause to the effect that a country reducing
its tariff may "take temporary action to prevent sudden and
widespread injury to the producers concerned. Undertakings
for reducing tariffs should therefore contain an escape clause
to cover such contingencies.”
The draft document recommends a general prohibition of
quotas, embargoes, and other quantitative restrictions on im­
port and export trade, save for certain important exceptions,
notably two: (1 ) in regard to import quotas on agricultural
products (imported in any form) that are required for the
enforcement of government measures of domestic marketing
of the same or like products; and (2 ) in cases of countries
having an adverse balance of payments. Import quotas in
force for either of these reasons should operate in nondiscriminatory fashion, that is, in the light of the import pattern of
"a representative period” and of "any special factors” affecting
trade in the products concerned, but not inequitably distinguish­
ing among sources of supply.
The International Trade Organization would require that it
be kept informed of all subsidies affecting international trade,
including domestic subsidies granted in lieu of tariff protection
on articles produced at home and export subsidies lowering
the prices of articles entering world markets. But only export
subsidies are expressly disapproved in the proposed draft, so
that it is not impossible, so far as the influence of the Organiza­
tion is concerned, that domestic subsidies might be more
commonly adopted than in the past as a substitute for tariff
protection. A maximum of three years from the date of estab­
lishment of the Organization is allowed before the recom­
mended prohibition against export subsidies must be made
effective, although for individual commodities an extension
may be granted a member by the Organization. A commodity
which is in burdensome world surplus is exempted from the
prohibition in case international cooperation (along the lines
of raising world consumption and reallocating productive
resources) fails to bring about a satisfactory supply-demand
balance "within a reasonable time.”
The paragraphs on State trading cover two categories of
foreign trade operation: complete government monopoly, as
in the Soviet Union, and State monopoly companies dealing
in individual commodities (salt, tobacco, and others), such
as exist in many countries. It is stipulated that all State trading
bodies should make their purchases and sales in a nondiscriminatory fashion and according to commercial considerations
alone, taking into account "price, quality, marketability, trans­
portation and terms of purchase or sale.” Under this provision,
the imports of any country (e.g. the Soviet Union) having a
State monopoly of foreign trade would be made under a
so-called global purchase arrangement, under which it would




7

announce its aggregate imports for a year and would pur­
portedly be required to refrain from pressing for unduly
favorable terms from one country as against another through
the threat of shifting its purchases.
The chapter on restrictive business practices contains a gen­
eral pronouncement against cartel operations in international
trade, which are defined as "combinations or agreements to fix
prices and terms of sale, divide markets or territories, limit
producton or exports, suppress technology or invention, exclude
enterprises from particular fields, or boycott or discriminate
against particular firms.” Apart from encouraging member
States to eliminate such practices within their own jurisdiction,
and to cooperate with one another toward this end, the Organi­
zation assumes responsibility for: (1 ) receiving complaints
both from member States against a cartel, and from private
business firms if their governments permit; (2 ) asking mem­
bers for information concerning such complaints; (3 ) recom­
mending appropriate action by members; (4 ) requesting re­
ports from members as to the progress of their implementation
of such recommendations; and (5 ) conducting studies, making
recommendations concerning uniform national standards, and
calling consultative conferences.
An important feature in the chapter on intergovernmental
commodity arrangements is the provision that any such arrange­
ment be limited to a period during which the chronic surplus
condition of particular primary commodities would be relieved
by fundamental economic adjustments "designed to promote a
shift of resources and manpower out of overexpanded indus­
tries into new and productive occupations.” For this purpose,
the Organization would establish limited-life commodity pacts
providing for a limitation of production and an allocation of
markets. These pacts would be formed (with full publicity)
for a period of no more than five years, subject to renewal if
circumstances warrant. Nations interested primarily in the
consumption o f the particular commodity would have equal
voting power in the agreements with producing nations inter­
ested in export markets.
It is finally stated in the draft Proposals that the International
Trade Organization will come within the scope of the coordi­
nating authority o f the Economic and Social Council of the
United Nations Organization. Coordination of the Organiza­
tion with other specialized economic agencies, particularly the
International Monetary Fund, as in joint endeavors to have
member States outlaw undesirable trade and exchange practices,
is an essential requirement for its success. Another essential
requirement, the importance o f which is underscored by the
long series of failures in commercial policy reform in the inter­
war years, is a sincere effort by member States to implement the
trade body’s recommendations. Political stability and secure
cooperation among nations are also essential desiderata if the
proposed Organizations objective of an expanding, multilateral
world trade is to be achieved.

e

MONTHLY REVIEW, JANUARY 1946

CU RR E N C Y R E FO R M IN TH E N ETH ERLAN DS

N ote Circulation of the Nederlandsche Bank

In liberated Europe one country after another has been
carrying out the basic changes in its currency system which
have been necessitated by the ending of enemy rule. In this
article the Dutch "currency purge,” as the recent currency
reform in the Netherlands has been officially called, will be
described against the background of the French and Belgian
policies which were surveyed in the October 1945 issue of this
Review.
As in Belgium and France, the object of the measures enacted
in Holland was to obtain a census of liquid assets, to cancel
notes acquired through illicit means, to prevent reinfiltration
of enemy-held notes, to put a brake on black market activities
and tax evasion, and, above all, to curtail the amount of notes
in circulation. Unlike the French measures, which entailed no
blocking whatever, the Dutch currency measures were charac­
terized by drastic blocking on the Belgian pattern.
The "currency purge” was not technically effected in a single
stroke, as in France and Belgium, but in two separate moves.
Between July 9 and 14 all 100-guilder notes (the largest
denomination still circulating) were deprived of their legal
tender attribute, and between September 26 and October 3 the
notes of all other denominations lost their validity as legal
tender. The procedure adopted for the withdrawal of the
100-guilder notes was simple. They were declared invalid and
had to be deposited with commercial and agricultural banks
in interest-free accounts which were blocked "for a time,”
except for the payment of taxes.
The second part of the currency reform was announced on
September 12. The fact that it was thus made public two
weeks before it was put in effect is in itself a distinctive feature
of the Dutch currency plan. In Belgium and in France, the
withdrawal of old currency began immediately after the
announcement was made; and in Belgium, the exchange of old
for new notes had to be completed within five days.
Another distinctive feature of the Dutch "currency purge”
is that it avoided, even for a short period, the simultaneous
circulation of old and new currencies. The experience of
Belgium and France had taught the Dutch that such simul­
taneous circulation was highly undesirable because it enabled
black market dealers to exchange "tainted” old currency for
the new notes. Accordingly, a procedure was devised in
Holland under which, during the final withdrawal of old notes,
all payments were deferred with the exception of day-to-day
subsistence expenditures. The timing of the successive phases
of the currency reform was roughly as follows: In the week
of September 19-25, immediately preceding the date on which
the old currency was to cease to be legal tender, the Dutch
population (except business enterprises) was requested to
deposit with banks all cash exceeding 300 guilders per house­
hold; simultaneously, each household head was given the
opportunity to exchange, for each member of the household, 10




1 9 3 9 * 4 0 *41 ’ 4 2 ’ 4 3

1944

1945

guilders into the new currency to be used during the following
week for current expenditures. On September 26 all of the
old paper money still in circulation (i.e., up to 300 guilders
per household and the notes held by business enterprises) lost
its validity as legal tender and had to be deposited with the
banks by October 3; and all balances with banks, savings banks,
public clearing institutions, etc., were blocked. Beginning
October 4 new notes were put in circulation and the blocked
accounts were partially released.
The deblocking process in Holland, in comparison with
the Belgian precedent, was both stricter and more flexible.
This is a third distinctive feature of the Dutch "currency
purge.” In principle, the new currency was made available
only to the extent that it was required for uses compatible with
the over-all national economic policies: (1 ) Funds necessary
for the payment of wages, salaries, pensions, interest, and
other periodical disbursements were freed immediately. In
this way, a flow of new notes was brought into circulation, and
it was expected that business enterprises, out of sales proceeds,
would soon have sufficient means to pay wages, salaries, etc.,
without further deblocking. As this expectation was realized,
the amounts permitted to be deblocked from week to week were
gradually reduced. (2 ) To replenish the cash holdings of
households, 100 guilders were released to each household in
cash on October 4; in addition, the bank balances of each
household were unblocked to the extent of 1,000 guilders plus
25 per cent of the balance as of September 12 (with an over­
all limit of 10,000 guilders) for use exclusively in transfers
from one account to another. (3 ) New currency was made
available to business enterprises to the extent required for per­
missible purchases of raw materials and equipment. (4 ) Ex­
emptions were provided for cases of individual hardship.
Unblocked funds could be used only for the payment of taxes
( including a proposed capital levy), for subscription to govern­
ment loans, and for conversion into savings deposits at savings
and commercial banks.

9

FEDERAL RESERVE BANK OF NEW YORK

As a result of these measures, the note circulation was sharply
contracted, as shown in the accompanying diagram. Between
May 15, when (immediately after liberation) it reached the
all-time peak of 5,507 million guilders, and September 10
(immediately prior to the announcement of the exchange of
notes), note circulation was reduced by 3,062 million guilders.
Of this reduction, some 1,332 million guilders were accounted
for by the withdrawal of the 100-guilder notes. Between
September 10 and October 1 the note circulation declined fur­
ther by 1,284 million guilders. Since October 8 the circulation
has been carried in the Nederlandsche Bank’s published state­
ments in two accounts, old currency and new currency (335
million and 1,220 million guilders, respectively, on December
17).
The deposit of hoarded currency with the banks enabled
them to purchase large amounts of Treasury bills. W ith the
funds thus obtained, the Treasury was able to redeem, within
ten weeks after the liberation, all of the Treasury bills which
it had placed directly with the Nederlandsche Bank, and which,
on May 14, 1945, had amounted to 789 million guilders. More­
over, the withdrawal of notes from circulation and hoards
resulted in an expansion of government and private deposits
with the Nederlandsche Bank. The progress of the week-byweek absorption of currency can be seen in the second diagram.
The Treasury, which had no deposits with the Nederlandsche
Bank prior to the liberation, accumulated a substantial balance
amounting to 12,417 million guilders on December 17. The
"other” deposits, which, since July 16, had included the 100guilder notes withdrawn from circulation, reached 2,245 million
guilders on October 1; beginning October 8, the notes sur­
rendered were excluded from "other” deposits and shown
separately as "frozen balances.” As the diagram shows, these
"frozen balances” were reduced from 1,708 million guilders on
October 8 to 564 million guilders on December 17; this reduc­
tion was almost balanced by an increase in the government
Demand Liabilities of the Nederlandsche Bank




deposits during this same period, which suggests that blocked
balances have been used by the owners either to pay taxes or
to purchase Treasury bills.
Through the "currency purge” and the accompanying fiscal
and other measures, Holland fulfilled some of the conditions
essential to her economic and financial rehabilitation. The
volume of money in circulation, including the unblocked de­
mand deposits available for current payments, was brought to
around 2.5 billion guilders— a level at which it is expected to
remain stabilized for the time being. Since the national income
is now officially estimated at some 5 billion guilders, the relation
between the supply of money and the national income appears
to have been restored to a level comparable to that prevailing
in the United States and the United Kingdom. As the national
income slowly rises, the government is reported to intend
increasing the note circulation correspondingly, maintaining a
close parallel between income and circulation.
Ind exes o f B u sin ess
1944

1945

Index
N ov.
Industrial production*, 1935-39 = 100.........
(Board o f Governors, Federal Reserve
System)
Electric power output*, 1935-39 = 1 0 0 ----(Federal Reserve Bank of New York)
Ton-miles of railway freight*, 1935-39 = 100
( Federal Reserve Bank o f 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, 1935-39 = 100................
(New York State Dept, o f Labor)
Factory payrolls
United States, 1939 = 100 ..........................
(Bureau o f Labor Statistics)
New York State, 1935-39 = 100................
(New York State Dept, of Labor)
Incom e payments*, 1935-39 = 100................
(Department o f Commerce)
W age rates, 1926 = 100....................................
(Federal Reserve Bank o f New York)
Consumers’ prices, 1935-39 = 100.................
(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 Y ork C it y ..............................
* Adjusted for seasonal variation.

Sept.

Oct.

Nov.

232

169r

163r

171p

200

185r

180p

215

193

169p

192

190

202p

163

123

122

145

117

116p

332

216

214p

286

215

217p

238

229r

232p

167

167

167p

127

129

129p

76
76

82
71

84
68

122p

p Preliminary.

82
73

r Revised.

D E P A R T M E N T STORE T R A D E
Christmas buying surpassed all previous expectations, and
the dollar volume of department store sales in this District
exceeded last year’s record by approximately 15 per cent.
Many items which normally account for a large proportion of
the holiday purchases were either absent from the shelves or
not available in sufficient quantities to meet the consumers’
demand. Nevertheless the shoppers filled their Christmas lists
with the merchandise at hand. Trade sources indicate that
gift buying was concentrated in the higher priced lines, and
the actual number of Christmas purchases did not vary
appreciably from that of a year ago.

MONTHLY REVIEW, JANUARY 1946

10

Among the individual departments, hosiery and lingerie
normally experience a heavy Christmas demand. Stocks of
these items were exceptionally thin this year, and many shop­
pers solved the gift problem with purchases of neckwear,
blouses, handkerchiefs, gloves, handbags, jewelry, and toilet
articles. Some houseware items reappeared on the market
in time for Christmas shopping, and gift buying was excep­
tionally heavy in these departments. Men’s furnishings, also
a department which normally receives a large share of the
holiday trade, experienced an exceptionally large sales increase
in spite of the absence of many desired items. Consumer de­
mand for both men’s and women’s ready-to-wear was very
heavy.
The dollar volume of merchandise sold by Second District
department stores is estimated to have exceeded 100 million
dollars in November and 135 million dollars in December.
Purchases in these two months surpassed the corresponding
1939 volume by 70 per cent. Department store sales for the
year 1945 approximated 915 million dollars, an increase of 13
per cent over 1944 and of about 70 per cent over 1939. Many
merchants have expressed their belief that 1946 will be a
prosperous year in retailing. A large part of the stocks of war
substitute merchandise has been cleared from the shelves and
many items in the durable consumer goods field are coming
through in substantial quantities. The pent-up demand for
this merchandise will add substantially to the 1946 sales
volume.

Department and Apparel Store Sales and Stocks, Second Federal Reserve
District, Percentage Change from the Preceding Year
Net sales
Locality
N ov. 1945

Stocks on
Jan. through
hand
N ov. 1945 N ov. 30, 1945

Niagara Falls......................................
R ochester.............................................

+14
+17
+12
+ 11
+ 3
+ 4
+ 16
+18
+13
+ 27
+ 1
+13
+ 5
+ 4
+16
+15
+ 10
+ 12
+ 7
+ 8
+ 9
+ 5
+ 7

+13
+14
+13
+14
+ 8
+ 3
+14
+15
+15
+24
+ 8
+11
+ 4
+ 4
+14
+17
+12
+15
+ 9
+ 9
+ 8
+ 8
+11

+ 4
+ 4
+ 5
+ 6
+ 3
+ 2
+ 4
+ 3
+ 8
+ 13
+ 4
+ 2
— 3
— 7
+ 6
—
+ 2
+ 2
— 1
+ 3
+ 3
— 6
+ 4

Apparel stores (chiefly New Y ork C ity ).

+26

+23

+ 2

Department stores, Second D istrict----New York C ity ......................................
Northern New Jersey...........................
Westchester and Fairfield C ounties..
B ridgeport...........................................
Lower Hudson River V alley...............
Poughkeepsie......................................
Upper Hudson River V alley...............
Schenectady........................................
Central New York S tate.....................
Mohawk River V alley......................
Northern New Y ork State..................
Southern New Y ork State...................
Bingham ton........................................
Western New Y ork State....................

Indexes of Department Store Sales and Stocks
Second Federal Reserve District
(1935-39 average = 100 per cent)
1944

1945

Item
Sept.

Oct.

N ov.

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

206
161

171
161

197
172

235
183

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

166
146

174
161

175
155

173
152

N ov.

STUDIES CONCERNING THE SECOND FEDERAL RESERVE DISTRICT
A number of studies of various aspects of economic activities in the Second Federal Reserve District,
or parts of the District, have been made by the Research Department of the Federal Reserve Bank of
New York and summarized in this Review during the past year. The more extensive studies on which
some of these summaries were based are available in mimeographed form and will be supplied upon
request.
Studies completed in 1945 include the following:
W

a r t im e
in the

M a n u f a c t u r in g Facilities Ex p a n s io n
Seco n d D istrict

N e w Y or k C it y 's C o m m o d it y Ex c h a n g e s
N e w Y or k C it y
T rade

as

a

C e n t er

of

W

h o l esal e

D e p a r t m e n t Store Sales a n d D isposable
I n c o m e in N e w Y or k St a t e , 1929-44
Po s t w a r Em p l o y m e n t Problem s i n Pa t e r ­
s o n , N . J.
Ec o n o m ic T rends i n N o r th east er n N e w
Jersey

The following additional studies, which were completed in 1944, are also available:
T he W

o r k in g

P o p u l a t io n

of

N

ew

Y or k C it y

N

Y o rk C it y as t h e Co r po r ate C a p it a l
U n it e d States
Em p l o y m e n t i n t h e Fin a n c ia l Industries
ew

of the

M a n u f a c t u r in g Industries




in

N e w Y o r k C it y

of

N e w Y or k C it y

11

FEDERAL RESERVE BANK OF NEW YORK

General Business and Financial Conditions
(Summarized by the Board of Governors of the Federal Reserve System)
Output at factories and mines increased considerably in November and activity continued
to expand in most other lines. Value of retail sales reached new record rates in November and
the early part of December reflecting in part further increases in prices.
In d u s t r ia l P r o d u c t io n

1937

1938

1939

1940

1942

-1943

1944

1945

ndex of Physical Volume of Industrial Production,
Adjusted for Seasonal Variation (193539 average = 100 per cent)

22 0

200

Indexes of Value of Department Store Sales and
Stocks, Adjusted for Seasonal Variation
(1935-39 average = 100 per cent)

Output in most industries showed important gains in November and the Boards index of
industrial production advanced about 5 per cent. The index, at a level of 171 per cent of the
1935-39 average, was about the same as in September and in the autumn of 1941. Output for
civilian use in November, especially of fuels, industrial materials and producers’ equipment,
was larger than in those earlier periods. Production for civilians of many finished consumer
products, however, like automobiles, radios, clothing, and shoes, while much higher in November
than in September, was still greatly reduced from 1941 levels.
Steel production showed a large rise during November and in the first three weeks of
December output was scheduled at an average rate of 83 per cent of capacity, which was higher
than the November average. Activity at shipyards continued to decline considerably in November
but increases occurred in most other metal fabricating industries. Further increases in output
were indicated in plants producing electrical products and machinery and in the railroad equip­
ment and automobile parts and assembly industries. Automobile production, however, was
curtailed sharply in the last week of November and the first half of December by a strike in the
plants of a major producer.
Lumber and glass production were at low levels in November owing partly also to industrial
disputes. In the case of lumber, however, output in recent months before the West Coast strikes
was below 1939 levels and one-third less than the rate in 1941.
Production of most nondurable manufactures and of fuels increased from October to Novem­
ber reflecting increased supplies of materials and labor and the end of work stoppages in the
petroleum and coal industries as well as strong demand generally for these and most other goods
for civilian use.
Incomes received by agriculture, business, and consumers appear to have continued to rise
in November as a result of the widespread increases in production and employment and further
rises in prices and wage rates. Payments to unemployed industrial workers and veterans also
increased somewhat in November.
Employment in nonagricultural establishments rose by over 300,000 workers in November,
after allowing for seasonal changes, reflecting increases in all major lines except Federal war
agencies. A further decline of about 100,000 workers in munitions industries was more than
offset by gains in employment in other manufacturing industries, mostly in reconverted metalproducts plants. Employment in the trades and services, construction, and various other lines
showed relatively larger increases than in manufacturing.
D

is t r ib u t io n

Department store sales increased sharply in November and the Board’s seasonally adjusted
index rose to a record level of 228 per cent of the 1935-39 average as compard with 213 in
October. November sales were 11 per cent larger than last year and in the first half of December
sales continued to show about the same increase. Sales at some other types of retail stores,
especially those selling automotive supplies, men’s apparel, furniture, building materials, and
hardware, have recently shown much larger increases than department stores, while sales of
foods and various other products have shown somewhat smaller increases.
Shipments of most classes of railroad revenue freight showed less decline than is usual in
November and the early part of December and were only 4 per cent below last year’s high level.
Carloadings of agricultural commodities and l.c.l. merchandise were considerably above last
year’s level.
C o m m o d i t y P r ic e s

Member Banks in Leading Cities. Demand De­
posits (Adjusted) Exclude U. S. Government
and Interbank Deposits and Collection
Items. Government Securities In­
clude Direct and Guaranteed
Issues
(Latest
figures
are for December 12)

Member Bank Reserves and Related Items
(Latest figures are for December 12)




Wholesale prices of most groups of commodities increased from the early part of November
to the middle of December. With most farm products at ceiling levels, advances in prices of
these products were smaller than in September and October. Ceiling prices were raised for news­
print, textile fabrics, building materials, and various other industrial products, but a general
increase in steel prices was turned down.
Ba n k

C r e d it

Loans and investments at banks in 101 leading cities increased by over 7 billion dollars
during the six weeks ended December 12; this period covered the major part of the Victory
Loan drive. Government security holdings increased by 3.7 billion dollars— a somewhat smaller
rise than had occurred in the three prior drives. Loans for purchasing or carrying Government
securities rose by 2.5 billion dollars, and at their mid-December levels loans both to brokers and
dealers and to other bank customers slightly exceeded the high points of the previous drives.
Commercial and industrial loans, which had been expanding since early fall, rose by an addi­
tional 800 million dollars during the six-week period. The increase in commercial credit
extension has been at a rate substantially greater than at any time in recent years.
As payments for security purchases transferred funds from deposits of businesses and indi­
viduals to reserve-exempt War Loan accounts, the average level of required reserves at all member
banks declined by around 500 million dollars during the first half of December. Early in the
month, excess reserves rose to above 1.5 billion dollars on a weekly average basis. Subsequently,
however, excess reserves declined somewhat, as the amount of War Loan deposits at many banks
reached the maximum limits and banks turned over to the Treasury current receipts from sales
of Government securities.
Currency outflow has continued at a slackened rate compared with wartime years; money
in circulation increased by close to 350 million dollars during the six weeks ended December 12
compared with over 750 million in the 1944 period. On a seasonally adjusted basis, currency
outflow has recently been at the lowest rate since the early part of 1941.