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O f Credit and Business Conditions


o l.








No. 1

Treasury transactions overshadowed all other developments
in the money market during the past month. Among these
transactions were the cash redemption of one-half billion dollars
of certificates of indebtedness, representing the unexchanged
portion of an issue maturing on the first of December, and the
cash redemption of 3.3 billion dollars of notes maturing at
the midmonth, Treasury withdrawals of more than 3V^ billion
dollars from War Loan accounts to provide funds with which
to effect these redemptions, interest payments in excess of 700
million dollars on the public debt, and heavy collections of
quarterly instalments on income taxes which it is estimated
amounted to more than 2 billion dollars (including Savings
notes presented in payment of taxes). Finally, heavy interest
disbursements and the redemption of a considerable volume
of securities held by nonbank investors resulted in a shift of
deposits from reserve-free War Loan accounts to private
accounts against which reserves must be maintained, and
member bank reserve requirements rose markedly in the three
weeks ended December 18. In the following week, however,
the decrease in private deposits associated with tax payments
caused a sharp decline in required reserves. Other important
money market developments included a substantial seasonal
increase in money in circulation which tended to bring pressure
on reserves, and sizable gains of funds by the market through
payments out of foreign deposit accounts with the Federal
Reserve Banks and through a seasonal increase in "float”.
The operations of the Treasury had the effect of inducing
very large shifts of funds between various parts of the coun­
try, particularly between New York and the rest of the
country. In making disbursements connected with public debt
operations the Treasury transferred large sums withdrawn from
War Loan accounts in "out-of-town” banks to New York City
where such payments were heavily concentrated. Banks outside
New York and nonbank investors then withdrew large
amounts of funds from the City to replace reserves lost through
Treasury War Loan calls and to meet quarterly tax payments.
In the four weeks ended December 24, the New York City
banks gained more than one billion dollars through Treasury
transactions, but lost nearly 1.4 billion dollars through banking
and business transfers of funds to other areas.
It was inevitable with such large movements of funds that

the losses of reserves of some banks exceeded their gains and
that the gains of others were larger than their losses. Thus,
while some banks were increasing their use of Federal Reserve
credit in order to adjust their reserve positions, others were
retiring Reserve credit or acquiring excess reserves. In the two
statement weeks ended December 11, most of the demand for
Federal Reserve credit came from the New York City banks. In
the following week, when the metropolitan banks gained funds
heavily through Treasury operations, they repurchased a large
amount of Treasury bills from the Reserve Bank and pur­
chased certificates of indebtedness in the open market from
out-of-town banks. The latter institutions also made net sales
of short term Government securities directly and indirectly to
Federal Reserve Banks, but most of the Federal Reserve credit
they obtained in this period came from a sharp expansion of
about 440 million dollars in the "float” . (This increase in
float is a seasonal development which is attributable to delays
in the mail at Christmastime that temporarily lengthen the time
required to collect checks, while the Reserve Banks continue to
give commercial banks credit according to the regular time
schedules for checks presented for collection.)
Retirement of the unexchanged portion of December 1st
certificates of indebtedness on December 2 (close to 500
million out of a total of 3.8 billion dollars), was accomplished
without material effect on the reserve positions of member
banks, as the Federal Reserve Banks exchanged all their hold­
ings for the new issue. Cash redemption of the entire
issue (3.3 billion dollars) of IV2 per cent Treasury notes
during the week ended December 18 was also accomplished
with little strain on the reserve positions of the member banks
in the aggregate, as the notes held by the Federal Reserve Sys­
tem were, in effect, redeemed with funds previously accumu­
lated in the Treasury’s balances with the Federal Reserve Banks.
However, this redemption operation, together with large inter­
est payments on the public debt and the heavy withdrawals
from War Loan deposit accounts, gave rise to distortions in the
reserve positions of individual banks and groups of banks and
led to the heavy shifts of funds mentioned above.
The major impact of the note redemption on the money
market was felt on December 16 when interest payments were
also made on outstanding Treasury obligations. As a result



the New York money market experienced the largest one-day
turnover of funds ever recorded, with the possible exception
of the payment dates for subscriptions to new securities offered
in some of the later War Loan drives. About 1.6 billion
dollars or one half of the notes redeemed and 400 million
dollars or two thirds of the interest on the public debt were
paid in New York, while the City banks were only required
to make payment, to the Treasury, of 700 million dollars out
of War Loan accounts. This was less than one fourth of the
call for all banks of the country. As a partial offset to this
gain of funds by New York City banks, however, there were
withdrawals of the proceeds of redeemed notes held here by outof-town customers of New York banks, and large withdrawals
of funds by banks in other parts of the country to enable them
to meet the Treasury’s War Loan call. These transactions re­
sulted in a loss to the New York money market of about 700
million dollars in a single day. Nevertheless, the New
York banks had the benefit of a net gain of approxi­
mately 600 million dollars which greatly eased their reserve
positions. The funds were used largely to repurchase about 250
million dollars of Treasury bills sold to the Reserve Bank earlier
in the week and temporarily to augment excess reserves, which
reached 350 million dollars on December 16. This excess was
quickly absorbed by further repurchases of Treasury bills from
the Reserve Bank, the acquisition of other short term Govern­
ment securities in the open market, and further transfers of
funds to other localities, so that by the end of the statement
week (December 18), the surplus had turned into a deficit of
about 70 million dollars.
In the week ended December 24, the Treasury built up its
deposits with the Federal Reserve Banks, chiefly out of income
tax collections, and public demand for currency continued
strong. Banks both in New York and other parts of the country
were affected and consequently were compelled to seek Federal
Reserve credit in adjustment of their reserves.
The increase in currency circulation was a constant source
of pressure on member bank reserves during most of the
month, but public demands for currency were much smaller
than in 1945. Outstanding currency rose by about 350 million
dollars in the four weeks ended December 24, 1946, as com­
pared with 480 million in the corresponding weeks of the pre­
ceding year. The current increase in demand for cash was
smaller despite the fact that in 1945 cash payment for subscrip­
tions to Savings bonds and other securities offered in the V ic­
tory Loan served to retard the growth of currency, a factor that
was of course absent in December of 1946.
R e t ir e m e n t o f

Pu b l ic D e b t

December redemptions brought to a total of approximately
23.3 billion dollars the amount of called or matured market­
able Treasury securities retired by the United States Govern­
ment since the end of February. In that period the Treasury’s
deposits in War Loan accounts were reduced from 24.4 to
2.2 billion.
The effects of the debt retirement program on the major

Changes in the Ownership of the Public D ebt*
(Cumulative weekly from February 27, 1946)


- 5


-1 5

-2 0












* Total interest-bearing debt exclusive of special issues, Savings notes,
and Armed Forces leave bonds.

classes of investors, as far as they can be determined from cur­
rently available figures, are shown in the accompanying chart.
The data represent the total interest-bearing debt, less special
issues which are available to Government agencies and trust
funds only, tax Savings notes, and Armed Forces leave bonds.
Savings bonds, the issue of which has increased about one
billion dollars since the end of February ( thus providing some
offset to the retirement of public marketable issues), are
included in the data.
Government security holdings of the weekly reporting mem­
ber banks in 101 cities declined almost 13 billion dollars be­
tween February 27 and December 18, an amount equal to more
than half the redemption of public marketable issues in the
corresponding period and well in excess of their probable hold­
ings of redeemed securities. Sales of Government securities by
these banks for the purpose of adjusting their reserve positions,
principally to meet the losses of funds resulting from the re­
demption of securities held by the Federal Reserve Banks, ac­
count for the difference. About IV 2 billion dollars, or close to
60 per cent of the decrease in reporting member bank Govern­
ment securities, consisted of certificates of indebtedness. Treas­
ury notes accounted for 4.8 billion, or more than one third, and
Treasury bills for one-half billion dollars. Bond holdings
showed a small net decline of 200 million dollars, indicating
that, in contrast to the heavy open market purchases of previ­
ous years, the weekly reporting banks did not fully replace the
Treasury bonds lost through retirements, owing to the pressure
on their reserves exercised by the redemption program and the
expansion of alternative outlets for bank credit, particularly
customer loans.
The decline in the Government security holdings of the
weekly reporting banks brought about a lengthening of the
average maturity of their Government security portfolios.
This was attributable primarily to the redemption of large
amounts of their short term securities, together with substan­
tial sales of such securities to obtain needed reserves, and was
only secondarily the result of purchases of medium term bonds.



The decline in bank holdings of Government securities also
was primarily responsible for a reduction of 17 per cent in
their total loans and investments since the end of 1945.
Toward the close of 1946, Government securities had fallen
to 64 per cent of total earning assets, against 72 per cent a
year previous.
Despite the fact that cash redemptions of Treasury obliga­
tions held by the Reserve Banks amounted to approximately
4 1/2 billion dollars, the holdings of these banks have risen about
200 million dollars since February 27. Federal Reserve pur­
chases of about 4.7 billion of securities, directly or indirectly
from commercial banks, provided the latter with more funds
than were withdrawn from them by the Treasury to redeem
securities held by the Reserve Banks. Thus, while the redemp­
tion program involved recurrent pressure on the reserve posi­
tions of member banks, the banks had little trouble in meeting
all needs for reserves, because of the ready availability of
Federal Reserve credit.
All other investors, including nonreporting member and
nonmember banks, as well as nonbank investors, show a decline
in their holdings of Government securities of about 9V2 bil­
lion dollars during this period. It appears that in this group
nonbank investors replaced part of their losses by buying other
Treasury obligations in the open market.
Today competition in the consumer instalment lending field
is so keen that it is difficult to realize that only fifteen or twenty
years ago loan facilities available to the small individual bor­
rower were extremely limited. Many individuals could get
accommodation only from lenders operating without super­
vision, some of whom belonged to the category of loan sharks
lending at exorbitant rates. In the last decade and a half this
gap in our credit system has been filled by the rapid growth
of small loan companies and the development of personal loan
departments of commercial banks. The importance of these
facilities in the field of instalment lending in the State of New
York today is indicated in the accompanying chart, showing
the amount, by type of lender, of consumer instalment loans,
outstanding in the years 1941 to 1946. At the end of last
June the commercial banks and the small loan companies are
estimated to have held about 55 and 30 per cent, respectively,
of the dollar volume of such loans outstanding.
Small loan companies in this State operate under the New
York Licensed Lenders’ Act, which was passed in 1932 with
the purpose of meeting the needs of the small borrower. It
provides for the licensing of small loan companies by the
State Superintendent of Banks, authorizes them to make loans
of 300 dollars or less, and sets maximum interest charges for
such loans. Because of the higher operating costs and greater
risks involved in the small loan business, the maximum rates
are considc tbly higher than the limits fixed by the general
interest laws. The majority of the customers of small loan
companies belong to the lower income groups, and many of
them are wage earners whose credit ratings usually do not

Consumer Instalment Loans in New York State
by Lending Agency, 1941-46*

2 8 0 ----------------------------------------------------------------------------------------------------------------------------

D E C .31,1941

D EC. 3 1 , 1 9 4 3

D EC.3 1 , 1 9 4 5

J UNE 3 0 , 1 9 4 6

* Amount outstanding, December 31, 1941-45, and June 30, 1946. Loans
of commercial banks and all data for June 30, 1946 estimated by Federal
Keserve Bank o f New Y o rk ; other data from New York State Department of

enable them to obtain loans elsewhere. The loans which they
seek are often too small to be handled by other lending
The most frequent reason why people borrow from small
loan companies is to meet emergencies, such as doctors’ or
hospital bills, or to consolidate debts. Purchases of major con­
sumers’ durable goods, such as automobiles, ordinarily require
larger loans than the small loan companies are permitted to
make. The contraction in the volume of such companies’
business during the war, therefore, although marked, was not
as sharp as the reduction which occurred in loans by other
lenders. The amount of consumer instalment loans outstand­
ing held by the commercial and industrial banks in New York
State declined approximately 50 per cent between the 1941
peak and the low point; the corresponding decline for the
small loan companies was less than 40 per cent. New instal­
ment credits extended by small loan companies began to exceed
repayments in 1943, several months earlier than in the case
of other lenders, but those extended by the commercial banks
have been rising more rapidly.
As is indicated in the accompanying table, the expansion of
the past few years in the volume of loans made by small loan
companies in New York State has not occurred as the result
of any significant increase in the number of loans made. In
1945, 633 thousand loans were made, only slightly above the
low point reached in 1943. Although preliminary figures for
1946 indicate a substantial increase in the number of loans,
the number is still undoubtedly well below the prewar peak
of over 900 thousand. Rather, the increase in volume has been
the result of a substantial rise in the size of the average loan,
which in turn is a reflection of the rise in the general price
level. While this trend has been in evidence since the begin­
ning of the war, it has been greatly accelerated in the past
three years.


L oa n s M ade b y Sm all L oan C om panies in N ew Y o r k State, 1939-45
In thousands


Number of

In millions of dollars


Amount out­
standing at
end of year

Size of

7 5.5
5 7.8


Source: New York State Department of Banking.

A breakdown by size groups of the loans made by small loan
companies in New York State shows strikingly this trend
toward larger individual loans. In 1939 close to 42 per cent
of the total number of loans made were for amounts of 100
dollars or less, and only 28 per cent were for more than 200
dollars. By 1945 these proportions had been very nearly
reversed, and only 183 thousand, or 29 per cent of the total
number of loans granted, were for 100 dollars or less; 243
thousand, or 38 per cent, were over 200 dollars. In 1945 the
smaller loans represented only 12 per cent of the total amount
loaned, while those over 200 dollars accounted for 59 per cent.
Comparable statistics are not readily available for other States,
but the size of the average loan in New York appears to be
larger than in most of the other States which still restrict small
loan companies to loans of 300 dollars or less.
The number of loans made by the small loan companies is,
however, not a particularly good indication of the number of
customers they serve. Renewals or repeat borrowings con­
stitute a very large fraction of their business. A special study
made some time ago by the State Department of Banking
revealed that in 1941 renewals accounted for 60 per cent of
the number of loans made, and 70 per cent of the total amount
loaned, by small loan companies. Renewals granted by per­
sonal loan departments of the commercial banks and by indus­
trial banks in that year represented 30 and 34 per cent, respec­
tively, of the total number of loans made by these agencies.
Another significant trend in the small loan business is the
increasing substitution of unsecured personal notes for house­
hold chattel mortgages. In 1945 nearly 40 per cent of the
number of loans made by the small loan companies were
unsecured, compared with about 10 per cent in 1936, while
the percentage secured by household chattel mortgages
dropped to 43 from 67 per cent. (The trend is more evident
in New York City and its suburban area than in other parts
of the State.) O f the remaining loans those secured by chattel
mortgages on automobiles (usually made for purposes other
than the purchase of a car) have accounted for anywhere from
8 to 12 per cent of the business in recent years, while endorsed
paper, wage assignments, and loans secured in other ways have
played only a very minor role.
The loss experience of the small loan companies has steadily
improved over the period for which we have data, although it
should be noted that this has occurred in a period of relative
prosperity. Recoveries have increased substantially in recent
years. For the ten-year period from 1936 through 1945 loan

balances charged off less recoveries were equal to 0.67 per cent
of the total volume of loans made, and the companies collected
between 96 and 98 per cent of the interest due them. Losses
in some individual years, of course, were much higher; in 1942,
for example, net charge-offs amounted to 1.13 per cent of the
year’s loan volume.
Profitable operation of small loan companies depends pri­
marily on efficient management, since maximum interest
charges are fixed by statute. The distribution of overhead costs
over as large a volume of loans as possible and the size of the
average loan are both important factors in determining earn­
ings. Because of the premium on the transaction o f a large
volume of business, large chains of loan companies have tended
to be the most successful. At the end of 1944, the 197
branches of national chains operating in New York held
approximately 86 per cent of the total amount of loans out­
standing in the 270 loan offices in the State. Two companies
alone, the Household Finance Corporation and the Personal
Finance Company, operated 114 offices and held 49 per cent
of the dollar volume of loans outstanding. Chains with
branches only in New York State held 9 per cent of the total,
and the remaining 5 per cent was distributed among the 27
single-office lenders in the State.
W ith so large a proportion of the business transacted by
concerns operating in several States, it is difficult to compute
the earnings and capital return attributable to the operations
of small loan companies in New York alone. However, in
1940-41 and 1946 the New York State Department of Bank­
ing made special studies of the earnings of representative
companies in an effort to determine the reasonableness of the
interest rate limits in force. It was found that in 1939 small
loan companies in New York State averaged after taxes a
return of about 10.8 per cent on their average assets. Believing
that such a return was higher than necessary to attract an
adequate amount of capital to the small loan field, the Banking
Department recommended that interest rates be reduced from
3 per cent per month on that part of the unpaid balance not
exceeding 150 dollars and 2Vz per cent per month on the
remainder (the rates prevailing since the Licensed Lenders’
Act was first passed in 1932), to IVz per cent monthly on the
first 100 dollars o f unpaid balance and 2 per cent monthly on
the remainder. These maximum rates were voted by the State
Legislature and became effective on July 1, 1941. In its most
recent study the Department found that, as a result of both this
reduction in rates and the wartime decline in the volume of
business, net earnings after taxes on average assets had declined
to approximately 7.5 per cent in 1944.
These ratios do not, however, show the actual rate of return
to the owner or stockholder, since small loan companies gen­
erally borrow a relatively large proportion of their total funds
from commercial banks or through the sale of debentures.
Since the cost of borrowed funds is relatively low, the larger
the proportion of borrowed money to total employed funds,
the higher the profits on equity capital. In 1941 approxi­
mately 44 per cent of the total funds employed in the small


loan business in New York State was borrowed. W ith the
wartime decline in demand, lenders required less working
capital, and temporarily repaid a portion of their borrowings.
In 1944 the proportion of borrowed funds was down to about
31 per cent. During the four years 1941-44 small loan com­
panies paid an average of 2.3 per cent for borrowed funds and
about 5.7 per cent on their preferred stock. The latter accounted
for roughly 20 per cent of their total funds. At the low point
in 1944, earnings on equity capital before taxes were about
11.8 per cent, compared with 17.6 per cent in 1942 (the first
full year after the lowered interest rates went into effect).
After taxes, the corresponding figures were 6.8 and 11.1 per
cent, respectively. The 1945-46 expansion in loan volume and
in the size of the average loan has reversed this trend in earn­
ings and final figures for 1946 will undoubtedly show a con­
siderable improvement.
The outlook for the small loan business is tied to the general
level of business activity and to the total demand for consumer
credit, but present indications point to a rising volume of
business for some time to come. Over-all consumer borrowing
is low in relation to disposable income as judged by prewar
standards; the number of loans currently being made by the
small loan companies is still considerably below prewar levels;
and the size of the average loan is continuing to increase.
Furthermore, the State Department of Banking on the basis
of its most recent study of the operations of small loan com­
panies has recommended that the maximum loan limit be
raised to 500 dollars. If this recommendation is adopted by
the State Legislature, it should open a new and profitable field
to the small loan companies. It is not possible to foresee just
how the commercial banks’ drive for a larger share of the con­
sumer loan business will affect the small loan companies.
However, a considerable proportion of the borrowers served
by these companies are probably too great a credit risk to be
handled by the banks or other lenders at the rates which they
are permitted to charge.
Mid-December marked a turning point in the national
postwar housing program. Following the resignation of the
National Housing Expediter, Mr. Wilson Wyatt, early in
December, President Truman announced that controls on hous­
ing construction would be greatly modified, and, in effect,
shifted the emphasis in the program from Government control
to private enterprise. The postwar housing program had been
launched in January 1946 under the President’s emergency
powers and was strengthened in May 1946 by the passage of
the Veterans’ Emergency Housing Act, which provided for
premium payments for certain building materials, purchase
priorities for veterans, allocation of scarce materials, guaran­
teed markets for prefabricated homes, and the restriction of
nonresidential and high-priced home construction. During the
year under review, the national housing program has moved
from the blue-print stage to a point where a considerable
acceleration in the volume of residential construction may be


With the end of the war and demobilization of the Armed
Forces, the shortage of housing, which had already been a press­
ing problem in wartime, reached emergency proportions. In
the decade before the war, the volume of new housing had been
insufficient to keep up with the normal replacement demand
and to provide for population growth. During the war years
residential construction was sharply curtailed, so that even by
normal standards a substantial backlog of demand for housing
had accumulated by late 1945. Furthermore, because of war­
time conditions and the accompanying prosperity, the number
of marriages and births had risen sharply. This increase in the
number and size of families, coupled with a high level of
income and savings, drew an unprecedented number of persons
into the market for new or enlarged living quarters. In addi­
tion to these general trends, substantial migration of popula­
tion within the country accentuated the local shortages in many
metropolitan areas. Through Government-guaranteed loans
to veterans and liberalized mortgage insurance by the Federal
Housing Administration, the market for low cost housing has
been increased still further. In the face of this pressing
demand and the extremely low supplies of building materials
and skilled labor prevailing at the end of the war, the Veterans’
Emergency Housing Program was inaugurated in order to
increase residential construction for the benefit of veterans by
giving it a preferred place in the nation’s reconversion program.
In appraising the accomplishments of the housing program,
it is important to take into account the obstacles confronting
the building industry. From the time of our entry into the war,
residential construction activity was curtailed to meet urgent
demands of war industries for both men and materials. Resi­
dential building in 1944 and the first half of 1945 was at the
lowest rate since the depths of the depression in the early
thirties. Many plants producing building materials had re­
duced considerably their scale of operations. In the light of
these shortages, the goals set by the housing program were very
ambitious. In 1946 it was planned to start construction on
1,200,000 dwelling units, of which 838,000 were to be new
permanent housing; in 1947, 1,500,000 permanent homes were
to be started. The greatest previous output of housing in the
nation’s history was the total of 937,000 dwelling units con­
structed in 1925, the climax of the building boom which fol­
lowed the First World War. The 1946 goals of the Veterans’
Emergency Housing Program and the accomplishments of the
program during the first ten months of the year are shown in
the accompanying chart.
The goal for new permanent housing included both con­
ventional housing and prefabricated units. Originally it was
hoped that Government-guaranteed markets and priority assist­
ance in obtaining materials would result in the production of
as many as 250,000 factory-built homes in 1946 and 600,000 in
1947. The 1946 goal was subsequently cut to 100,000, but by
October 30, only 30,300 had been shipped by manufacturers.
The number of conventional homes started in 1946 is running
about 10 per cent short of the goal, with 549,600 units started
in the first ten months of the year. However, the total number
of new dwelling units started in 1946 will almost certainly be
the greatest for any year since 1928, except 1941.



Federal H ousing Program : Goals for W ork Started in
Year 1946, and D welling Units Started and
thousands or
Completed Jan.- O ct. 1946*

1 20 0

1 00 0



4 00





Starts and completions for temporary re-use and conversion o f war hous­
ing ( “ temporary conversions” ) include both the emergency housing under
the Federal Public Housing Authority and the projects of State and local
governments and educational institutions.
Source: National Housing A gency.

Toward the end of 1946 the program of transforming tem­
porary war housing and military installations for emergency
use by veterans was approaching the goal of 212,000 units
originally set. In the first ten months of the year the Federal
Public Housing Authority had started the equivalent of
191,600 dwelling units. However, commitments of funds had
reached the maximum possible under present legislation and
increasing building costs were causing curtailment of some
projects, so that the number finally completed may be some­
what less. An additional 23,400 temporary units have been
started by local governments and educational institutions, but
only a small proportion of these have been completed thus far.
About 87,000 more dwelling units have been made available
by the conversion of existing homes and the manufacture of
house trailers.
Altogether, work was started on 882,200 dwelling units of
all types in the first ten months of 1946, and 500,400 units
had been completed by October 31.
Despite measures taken to control prices of building mate­
rials and wages of construction workers, building costs have
risen steadily in the past year. Shortages of materials and the
consequent delays in completions (as well as purchases of
materials at black market prices) raised the cost of housing
far above prewar levels. One of the main objectives of the
housing program was to stimulate the production of scarce
materials by premium payments for output in excess of certain
quotas, and by allocation of raw materials to building supply
plants. By October the output of most building materials was
at a new postwar peak and in several cases production exceeded
prewar levels. President Truman has announced that the out­
look is now sufficiently favorable for priorities and allocations
to be discontinued in the near future. Subsidies will continue
until the dates originally scheduled.
The Wyatt program did not encourage private rental con­
struction. In the entire New York City area, for example, not

a single apartment house was completed in the first ten months
of 1946, although several large projects have been started and
are expected to be completed some time in 1947. The new
liberalized housing policy announced by the President will
emphasize rental housing through financing aids and greater
flexibility in the establishment of rent ceilings for new con­
struction. It will also allow non-veterans to build for their
own occupancy. The ceiling of $10,000 on new residential
housing has been eliminated and replaced by a limitation of
floor space to prevent the building of luxurious homes during
the life of the program. It is anticipated that there will be an
increase this year in the amount of nonresidential construction,
which had been sharply reduced under the Wyatt program.
Although many families are currently being priced out of
the market for new homes by rising building costs, the current
outlook for construction in general is that of a high level of
activity during the coming year. Even if large groups of
potential buyers are eliminated by high prices and other groups
are not satisfied with the values offered, there will still remain a
considerable pressing demand for residential rental construc­
tion. There is also a large backlog of demand for commercial
and industrial building and public works. Recently published
estimates, including that of the Department of Commerce,
point to record-breaking construction activity in 1947, with
the total value of all types of building perhaps approaching
22 billion dollars.
Agricultural economists agree that farmers’ cash receipts
from marketing during the year just ended will be found to
have reached a record peak not likely to be surpassed or even
equaled in the years immediately ahead. Farmers in the country
as a whole received more than three times as much cash in
1946 as in an average prewar year. This postwar prosperity
of farmers resulted from a combination of two favorable fac­
tors— record crops, and a level of farm prices which in recent
months approached the peak attained after W orld War I. The
very large output was due primarily to unusually favorable
weather conditions and also to large plantings. After a period
of uncertainty immediately following the end of the war, the
Department of Agriculture recommended that farmers not
reduce production schedules, but aim instead at a maximum
output to meet this country’s increased domestic needs and
foreign obligations. As the industrial reconversion progressed
more rapidly than anticipated, domestic demand for all kinds
of food was well sustained; prices climbed to higher levels,
with particularly sharp increases following the end of price
Reconversion from wartime to peacetime conditions, which
has been practically completed in most manufacturing indus­
tries, still lies ahead for agriculture. For farm production,
conversion to war spelled mainly increased production all along
the line. Shifts to products for which demand was generated
or considerably increased by the war (such as oil-bearing
crops) affected only a small minority of farmers; no notable


shifts of this type took place within the Second District. The
majority of farmers continued to raise much the same products
they had marketed before the war.
The considerable increase in farm production during the war
— nearly one-third over the average for the five-year period
1935-39, measured in physical terms— has been aided signifi­
cantly by favorable weather conditions. More importantly,
however, much of the increase is due to improved farming
methods. The effects of better breeding and seed selection,
improved stock, increased numbers of tractors and farm ma­
chines on farms, contour plowing, and the spread of mechaniza­
tion into new areas of farm production, have permanently
increased the farmers’ ability to produce larger quantities of
food and of other agricultural products. Most of these wartime
developments must be viewed as an acceleration of prewar
In the past, when higher levels of output were reached as a
result of improvements in technique or increases in acreage,
farmers did not react to lower prices by limiting production.
Year-to-year fluctuations in output tended to reflect changes in
weather conditions and other influences independent of human
action rather than farmers’ willingness to adjust output to
demand. Farm production on the whole is rather inelastic.
Shrinking demand is more likely to result in downward price
adjustments than in reduction of output. Viewed in this light,
the postponed adjustment of our agriculture to reduced demand
is expected to lead to a decline from the present price levels in
some not too distant future. Whether such a decline will be
limited to 10 or 15 per cent, as anticipated by the Department
of Agriculture, will depend on a number of factors, including
future trends in the money income of nonagricultural workers.
The December 1, 1946 estimates for the major field crops
are given in the table below, together with the final estimates
for 1945. Percentage changes given in the last column show
eloquently that in the first full peacetime year production of
all major crops, with the exception of cotton, was considerably
above the average harvest of the last prewar years. The decline
in cotton production was due mainly to a reduction of acreage
devoted to this crop.
Production of livestock and livestock products fell slightly
in 1946. The Department of Agriculture expects the year’s
meat production to decline to 21.9 billion pounds from 22.9
billion in 1945, mainly because of a drop in cattle slaughtering.
Milk production in 1946 was within two per cent of the pre­
vious year’s record volume, while the output of creamery butter
P rod u ction o f M a jor Field C rops in the U nited States


U nit



C orn...................
O ats...................
W heat...............
C otton ...............
T ob a cco............

M illion s o f bushels
M illion s of bushels
M illion s o f bushels
Thousands o f bales
M illion s o f pounds
M illion s o f bushels



* December 1, 1940 estimate.
Source: U. S. Department of Agriculture.

change, 193539 average to


was about 25 per cent below, mainly because of the unfavorable
price situation prior to the lifting of price controls. Egg pro­
duction during the first eleven months of 1946 was within one
per cent of the high level of a year ago. Mild fall weather
favored both milk and egg production, and the large output
was achieved in spite of a reduced number of milk cows and
layers on farms.
The value of agricultural production in the Second District
in 1946 is estimated to have exceeded one billion dollars. New
York State customarily accounts for more than 80 per cent of
the District’s agricultural output and of its cash income from
farm marketings. In recent years New York State has ranked
eleventh or twelfth in farm production, and has been surpassed
by only Texas, California, and the large midwestern agricultural
States. The field crops harvested last fall in this State were
large compared with prewar averages, but short of the peak
harvests of some war years. At close to 27 million bushels the
corn crop was the third best on record. The oats crop was
considerably better than average, and the potato yield exceeded
the previous year’s very large crop. Among the major crops,
wheat alone, with 5.6 million bushels harvested, fell consider­
ably short of both the wartime level and prewar averages.
Dairy production in New York State was apparently main­
tained throughout the year at levels only a few per cent below
a year ago. A larger proportion was sold as fluid milk, how­
ever, and the output of creamery butter during the first eight
months of 1946 fell to little more than half of the production
in the corresponding period of 1945. Egg production in New
York State in 1946 advanced somewhat over the year-ago
record level, compared with a slight decline in the country as
a whole.
The fruit crop, on which many up-State farmers depend for
a considerable part of their cash income and which had been
particularly poor in 1945, owing mainly to late frost, was
quite satisfactory in 1946. The apple crop was about normal;
more than six times as many bushels were brought in as in the
previous year. Twice as many cherries were harvested, the
1946 volume representing an average crop. Also, twice the
previous year’s tonnage of grapes was gathered, a better than
average crop. Only pears fell short of prewar averages, although
they, too, were considerably above the poor 1945 crop.
Farmers throughout the country apparently take an opti­
mistic view of prospects for 1947. During the fall planting
season they expanded by 8 per cent their seeded acreage of
winter wheat. A record 1947 crop exceeding 1.2 billion bushels
(including spring wheat) is estimated, nearly twice the
1935-44 average. The rye acreage was also increased and the
condition of rye is reported excellent.
December sales of department stores in the Second Federal
Reserve District fell somewhat short of the expectations of
some of the leading store executives. Although the dollar
volume of sales is estimated to have run 28 per cent above a



D ep artm ent and A pparel Store Sales and S tock s, S econd F ederal R eserv e
D istrict, P ercen tag e Change from the P reced in g Y ea r
Net isales
N ov. 1946

Stocks on
Jan. through
N ov. 1946 N ov. 30, 1946

Department stores, Second District. .. .
New York C itv ......................................
Northern New Jersey...........................
Westchester and Fairfield Counties. .
Lower Hudson River V alley...............
Upper Hudson River V alley...............
Albanjr ........................................................
Central New York S tate.....................
Mohawk River V alley................... ..
U tica................................................
Northern New York State..................
Southern New York State...................
Elm ira..................................................
Western New York State....................
B uffalo.................................................
Niagara Falls......................................
R ochester............................................

+ 29
+ 29
+ 27
+ 29
+ 19
+ 27

+ 31


+ 36
+ 36
+ 31
+ 29
+ 29
+ 13
+ 31

+ 47
+ 47

Apparel stores (chiefly New York C ity ).

+ 9


+ 61


+ 49
+ 59

Indexes o f D epartm ent Store Sales and S tock s
S econd Federal R eserv e D istrict
(1 9 3 5 -3 9 a vera g e = 100 per ce n t)


N ov.



N ov.

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





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





year ago, this is a smaller rate of increase than in the first
part of the year. The reduced rate of increase occurred despite
the price advances which have taken place on many items
since the end of OPA controls and despite the stores’ larger
receipts of "big-ticket” items (such as refrigerators, furniture,
etc.). The seasonally adjusted index of sales for December
remains at about the same level as for November— 10 per cent
below the all-time high reached in August. Total Second Dis­
trict sales during the year 1946 are estimated at 1,195 million
dollars, an increase of 30 per cent over 1945.
Neither supply nor labor shortages seem to have set limits
for the increase in sales. Supplies of merchandise available
for Christmas buying were much larger this season than in
1945. At the end of November the dollar value of stocks
on hand in Second District department stores was more than
40 per cent greater than on the same date a year ago; in some
individual departments the increases were even larger. Stocks
of homefurnishings and of men’s clothing were 50 and 60 per
cent, respectively, above those of a year previous, and stocks
of piece goods, linens, and bedding were 85 per cent greater.
Stocks of women’s wear, which were already abundant during
the Christmas trade period a year ago, increased at the same
rate as inventories as a whole.
In November the dollar volume of sales of Second District
department stores was 28 per cent larger than a year earlier.
Sales of homefurnishings were 40 per cent greater than a year
previous and piece goods, linens, and bedding sales increased

50 per cent. Sales in these departments reflected the more
ample supply situation. Sales of mens wear increased 25
per cent, but sales of women’s wear advanced only 17 per cent.
As stocks increased more rapidly than sales during Novem­
ber, ratios of stocks on hand at the end of the month to sales
during the month were larger in nearly all departments. This
increase was not uniform. The stock-sales ratio for the
women’s wear group was 2.1, compared with 1.8 in November
1945; for the men’s wear group it was 2.6 compared with 2.0
in the previous year; while in the homefurnishings group the
stock-sales ratio, at 2.4, was little changed from the November
1945 figure of 2.2. A large number of pre-Christmas clearance
sales featuring furs and other women’s apparel, men’s robes and
sports shirts, costume jewelry, and expensive handbags and
linens indicate that the stores had overstocked some soft goods
items, especially high-priced goods. A shift to the prewar
pattern of consumer spending, with a larger proportion of
income spent on durable goods, might be expected to result
in some drop in the demand for soft goods.
Outstanding orders of Second District department stores
declined about 25 per cent from the end of October to Novem­
ber 30, 1946; it was the largest month-to-month percentage
decline since November 1941, and the only October to Novem­
ber decline since 1942. A part of the decrease was due to the
inflation of orders at the end of October as a result of the
delivery strike in the New York Metropolitan area, but it is
probable that outstanding orders also are returning to the pre­
war seasonal pattern.
Indexes o f B usin ess

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



N ov.








212 p



193 p

181 p



259 p

S ystem )

Electric power output*, 1935-39 = 100........
( Federal Reserve B a nk o f N ew York )
Ton-miles of railway freight*, 1935-39 = 100
(.Federal Reserve B ank o f N e w York)

Sales of all retail stores*, 1935-39 = 100........
(.Departm ent o f Commerce)

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




U 9p




131 p





















(Bureau o f Labor Statistics)

New Y ork State, 1935-39 = 100................
(N ew York State D ep t, o f Labor)

Factory payrolls
United States, 1939 = 100...........................
(.Bureau o f Labor Statistics)

New Y ork State, 1935-39 = 100................


(N ew York State D ep t, o f Labor)

Incom e payments*, 1935-39 = 100...............
(.Departm ent o f Com merce)

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

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

V elocity of demand deposits*, 1935-39 = 100
(Federal Reserve B a nk o f N e w Y ork )

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

* Adjusted for seasonal variation.
p Preliminary.
r Revised.
# A special monthly release tabulating the complete set of 15 indexes, supplanting
the index of “ wage rates” formerly computed by this bank, will be sent upon
request. A general discussion of the new indexes appeared in the November
1946 issue of this Review. Tabulations of the monthly indexes, 1938 to date, and
description of component series, sources, and weights may be procured from the
Research Department, Federal Reserve Bank of New York. A mimeographed
article discussing some of the technical problems involved is also available on



o l.








Monetary Management

Credit Control

Remarks of A l l a n

S p r o u l,

President, Federal Reserve Bank of New York
at the
Eig h t e e n t h M id -Y e ar T rust & Ba n k in g C o n f e r e n c e
N e w Jersey St a t e Ba n k e r s A s so c ia tio n

December 6, 1946

No, 1


Remarks of A l l a n S p r o u l,
President, Federal Reserve Bank of New York
at the
E ig h t e e n t h M id -Y e a r T r u s t & B a n k i n g C o n f e r e n c e
N e w J e rsey St a t e B a n k e r s A s s o c ia t io n

December 6, 1946


members of the silent service. W e have preferred, traditionally,
to let our acts speak for us and not try to explain them. This
approach has its advantages— many of our actions are difficult
to explain. It also has its disadvantages, the chief one perhaps
being that in a country such as ours you are likely to go out
o f business if you do not explain what you are doing in the
public domain. At any rate, I followed tradition in May and
resisted the blandishments of the program chairman for your
annual meeting, only to be caught in December by your per­
suasive President.
I embark on this discussion of money management and
credit control with some hesitation. I am not unmindful of the
fact that there was an election recently, and the voters seemed
to express impatience with controls of various kinds which they
had borne with varying degrees of resignation during the war.
But money management or credit control is not a war baby;
it is the product of many years of growth and development;
at least since the establishment of the Federal Reserve System
in 1914. It was made necessary by the key position which
money and credit occupy in our democratic society and our
capitalistic economy. And, by the same token, the powers of
money management and credit control must be so limited and
so administered as not to hamper that society; not to destroy
that economy.
Our primary job is the overall credit administration of the
country, and our objective must be to make credit policy serve
the demands of sustained high production, high income, and
high employment, while preserving public faith in our currency
and our credit. W e have long since learned, of course, that
credit policy is not the sole determinant of economic health
or sickness. The high hopes of a specific treatment of our
economic ills, which concentrated on central bank operations
in the ’20s, and which tended to center around fiscal policies in
the ’30s, have been disappointed in the past, and, I believe,
will be disappointed in the future. An integration of all of our
various economic programs is necessary and then, if we are to
avoid totalitarianism, or State capitalism, or State socialism,
we have to relate these programs to the social habits and
individual desires of millions of human beings without too

AVING been given freedom of choice— an important free­

dom which those who are interested in other freedoms
sometimes neglect— I have decided to talk with you tonight
about money management and credit control. This is not an
easy subject for popular presentation, but it is the most
important subject which confronts me as a central banker and,
in these critical days, I feel that I would not be justified in
taking up your time with lesser matters. Before I embark on
this discussion, however, I should make two statements and
one confession.
My first statement is that while my talk must include obser­
vations on the management of the public debt, I cannot and do
not speak for the Secretary of the Treasury. He speaks for him­
self. My second statement is that I cannot and do not speak for
the Federal Reserve System. The Federal Reserve System as
created by the Congress of the United States is, in fact, a
Federal system. There is the Board of Governors at Washing­
ton having broad powers of policy-making, supervision, and
coordination. There is the Federal Open Market Committee
composed of the members of the Board of Governors and
representatives of the Federal Reserve Banks, which has
specific authority over the open market operations of the
banks. There are the twelve Federal Reserve Banks and their
boards of directors, which have been given certain statutory
powers and which have certain powers of advice and counsel
growing out of those statutory powers. This is a Federal
system; it is at one and the same time national and regional;
some powers have been given to the central agency, some to
the constituent parts, some to a combination of the two, and
some have been reserved, as usual, to the people, includ­
ing the Federal Advisory Council. I cannot speak for such a
system; certainly not with regard to the future. I can try to
interpret policy once it has been fixed by the appropriate
body within the System but, if I go beyond that, I am merely
giving you my personal views. I can only speak as one individ­
ual who participates in the work of the System.
My confession is that I do not relish these speaking jobs and
like to avoid them when I can do so without dodging my
responsibilities. Central bankers have long been known as


detailed compulsions. It is an intricate, complicated, difficult
task. It suggests that humility should be combined with hope
if we, in the Federal Reserve System, are to play our part well.

ever was automatic, it was at a particular time and in a particu­
lar set of economic circumstances. Except in its earliest and
most rudimentary form it was a gold standard applicable to the
time and circumstance of England’s 19th century position in
the world. It rapidly became more of a sterling standard than
a gold standard, and it flourished with London as the acknowl­
edged financial center of the world, with Great Britain as the
great exporter o f capital and the great importer of raw mater­
ials, and with the rest of the trading world largely revolving
about the center. In essence it was an adjustment between one
economy and the rest of the world.

I believe that over the past thirty years the Federal Reserve
System has acquired the experience which should enable it to
acquit itself decently. And I anchor that belief in the unique
Federal character of our System. It has been said, in the past,
that the only way to insure the proper participation of the
Federal Reserve System in any reordering of our financial
affairs, is to deprive the System of all taint of private participa­
tion. The Government, so the argument runs, would be willing
to place full reliance in the Systems existing powers, or to
grant it new powers, only if every vestige of private participa­
tion in its management were removed. I know that this is
what is happening to central banks in other countries, and
that it appears to be a growing political philosophy abroad. But
so far as we are concerned it seems to me to be a misreading
of the longer term future and a miscalculation of the policy
which will best serve us now. Rather than seek powers by try­
ing to make the Federal Reserve System just another Govern­
ment agency, we should be able to claim powers because we are
a successful working example of Government functioning in
the economic field, with the aid and support of private busi­
ness. Our experience in Government-business cooperation—
Government having the dominant voice as it should have in
the field of monetary and credit policy— may be a signpost
along the way to solution of one of the major economic prob­
lems of the postwar years: the relation between Government
and business in our whole economy.
What are these powers I am talking about which the Federal
Reserve System tries to exercise? In laymens language, and
we are all pretty much laymen in this field, they are the powers
of "money management”. That is a term which is likely to
arouse the sensibilities of all those who deny any interference
with what they call "natural economic laws”. And "natural
economic law” in this case usually is thought of, if only vaguely,
in terms of restoration of an automatic gold standard— nation­
ally and internationally.

Quite early, and more clearly as it became necessary to cope
with simultaneous efforts of many nations to adjust their
economies during cyclical depressions, elements of manage­
ment crept into the gold standard even while it was still re­
ferred to as and considered to be automatic. Central banks
became more and more aware of their powers and responsi­
bilities. They said that they were working on the lender of
last resort theory, but this in itself interfered with the auto­
matic working of the gold standard. And they went beyond
this conception because events forced them to do so. Perhaps
the most striking example of this transformation was the recog­
nition, during the interwar period of the present century, that
movements of capital might be perverse— that instead of re­
dressing international balances they might accentuate unbal­
ance. This did not conform with gold standard theory— but
the "hot money” of the years between the wars did not respond
to theory; it responded to speculative urges and political fears.
Certainly since the end of the first World War we have had
more and more management of money in the international
sense, even though a return to the gold standard was one of the
early goals of that period. The central banks of the world,
under the leadership of the Bank of England and the Federal
Reserve Bank of New York, were in the ascendant during the
decade following that war, and they were the accepted instru­
ments of money management internationally. They still had
respect for the gold standard, but they thought it necessary
and desirable to supplement its working. Sometimes they
acted to alleviate seasonal strains, or temporary shortages of
foreign exchange on the part of one or another of the coun­
tries of the world. Sometimes they acted to accelerate the
effects of an inflow or an outflow o f gold, which was relatively
easy because of the multiplied effect of the fractional reserve
Obviously they failed to restore either the pre-1914 gold
standard or international monetary stability. But we should
not be too hasty in attributing that failure to men or to the
semi-private character of the institutions they served. They
were pioneers, and gallant and courageous pioneers, in the
development of common international economic policy through
consultation and cooperation. They were the legitimate fore­
runners o f world organizations such as the International
Monetary Fund; and that institution, which is now beginning

Nationally, I make the assumption that the gold standard,
in terms of a currency freely convertible into gold, has dis­
appeared and is not likely to return. This I do, not because I
am fearful of what might happen if we resumed specie pay­
ment, but because I fail to see the advantage of such resump­
tion. There is no lack of faith in our currency or our credit
without domestic gold convertibility, and the restraints of such
convertibility are not needed to insure wise administration
of our monetary affairs. In fact, if reimposed, they would not
guarantee such wisdom. This has been amply demonstrated
in the past. Restoration of gold circulation within the coun­
try would seem to me to be a step backward in the historical
evolution of "money”.
Internationally, the gold standard still persists and performs
a useful function, but it is not automatic. And in so far as it


to function, will do well to profit by their experience. Their
failures were not so much failures of men and institutions—
they were failures resulting from the tendency we have to place
too much emphasis on financial arrangements, not enough on
underlying economic conditions and the individual problems
of particular countries. A world organization run solely and
directly by national governments will not solve the problem
any better than did the semi-public central banks, if the
problem itself is misconceived.

Keynes, has said it, has said it well, and has said it, perhaps,
to the confusion of some of those young disciples, who followed
but could not always correctly interpret the master; who have
not been as agile of mind and as free to shift their position as
he was. In his last essay which discussed the United States
proposals for consideration by the International Conference
on Trade and Employment, Lord Keynes said:
. . W e have here sincere and thoroughgoing pro­
posals, advanced on behalf of the United States, expressly
directed towards creating a system which allows the classical
medicine to do its work. It shows how much modernist
stuff, gone wrong and turned sour and silly, is circulating in
our system, also incongruously mixed, it seems, with age-old
poisons, that we should have given so doubtful a welcome
to this magnificent, objective approach which a few years
ago we should have regarded as offering incredible promise
of a better scheme of things.

That is why the successful outcome of the negotiations on
trade and economic arrangements which have recently been the
subject of preparatory meetings in London, and which will be
continued during the coming year, is so important, so essential,
to the success of the international financial organisms already
created. International monetary instability, and currency deval­
uations, and exchange controls have been, most often, the
reflection of basic disturbances in a country’s international
position, or of international cyclical movements of wide ampli­
tude. Statesmen and economists could condemn currency
devaluation or exchange controls, as they condemned war, but
these phenomena still persisted. It doesn’t do much good to tell
a primary producing country, of small means, which has suf­
fered two or three bad harvests, or which has had its exports
drastically contracted because of depression in a major indus­
trial country, that it must avoid exchange control or currency
devaluation because that would not be "cricket”— would not
be ’ gold standard”.

"I must not be misunderstood. I do not suppose that the
classical medicine will work by itself or that we can depend
on it. W e need quicker and less painful aids of which ex­
change variation and overall import control are the most
important. But in the long run these expedients will work
better and we shall need them less, if the classical medicine
is also at work. And if we reject the medicine from our sys­
tems altogether, we may just drift on from expedient to ex­
pedient and never get really fit again . . .”

It is true, of course, that there has also been a shift of
emphasis in "money management” from the maintenance of
international exchange stability to the maintenance o f domes­
tic economic stability. Monetary policies are coming to be less
and less defined with reference to the state of the national gold
reserves and the international balance of payments, and more
and more in terms of domestic economic stability. It is the
difficulty of reconciling domestic stability and prosperity with
international balance which is the core of the exchange prob­
lem today— the one which the International Monetary Fund
and the International Bank for Reconstruction and Develop­
ment are setting out to help to solve. It means a considerable
degree of management of money internationally. But it also
requires a recognition of the fact that the problem, funda­
mentally, is not financial— it is a problem of production and
trade, of costs and prices, and of the maintenance of a stable,
growing economy in the principal countries of the world.

Nationally or domestically, I think most of us will agree
that the question of "money management” was thoroughly
studied and calmly decided by the review of our national
experience, the examination of the experience of other coun­
tries, and the investigations of our existing banking and credit
system which preceded the adoption of the Federal Reserve Act
in 1913. How successful we have been in the administration
of the Act, and of the various amendments which have been
adopted, particularly the Banking Acts of 1933 and 1935, may
well be a matter of some difference of opinion. But I know of
no serious body of opinion which seeks to abandon money
management, as it has developed over the past thirty years.
The Federal Reserve System has made a place for itself, as a
part of our banking and credit machinery, and has fortified
its position by performing services which could not have been
otherwise rendered during two struggles for our national

What we need to retain from the gold standard days, whether
pure and automatic, or adulterated and only semi-automatic,
is a realization that we cannot escape wholly from the dis­
ciplines which the international gold standard imposed on
domestic action. Persistent unsound national policies in the
fiscal and monetary field, persistent deficits in a country’s cur­
rent balance of payments, will end up in international insta­
bility no matter how much management you have. As in many
other situations, the late English economist, John Maynard

The principal new problem which now faces us in the suc­
cessful management of money grows out of our participation
in World War II. It has been created by the tremendous in­
crease in the size of the Federal debt and by the extent to which
public debt obligations have become a part of our banking
and institutional assets. On the one side this has emphasized
the relative importance of fiscal policy and debt management,
as contrasted with monetary policy, as a means of economic
control, and on the other side it has greatly reduced the area


ing— that we need them, at least until something better has
been devised. Our economy is peculiarly susceptible to the
influence of wide swings in the use of credit in the stock mar­
ket and in the mass distribution of consumers’ durable goods.
These swings have tended to accentuate our booms and our
depressions, and in so far as they can be moderated by credit
controls, it is a contribution to stability. The administration
of these controls is possible without interfering too greatly
with that independence of decision which will permit individ­
uals and business enterprises to adapt their practices to the
needs of a dynamic expanding economy. When you think of
extending such controls into other fields, however— and this
would be necessary if qualitative controls are entirely to sup­
plant quantitative controls— you find yourself wandering peril­
ously far from the kind of private enterprise economy we are
trying to preserve. I think we must still try to see what we can
do with quantitative controls.

in which monetary policy is free to work or can work effec­
The cost and the availability of credit were the twin weapons
of domestic money management as practiced by central banks.
In my opinion, substantial changes in interest rates, affecting all
maturities, such as were formerly employed for purposes of
monetary control, are now impractical. I deem them imprac­
tical because of their effect on the prices of public debt obliga­
tions, and therefore on all those holding such obligations, and
their effect on the cost of public debt service. At the same time
control over the availability of credit has been substantially
relinquished, for the time being, by obligations or responsi­
bilities which have been assumed in support of the Govern­
ment security market.
At the beginning of the recent World War it was decided
that our expenditures for war purposes should be financed at
stable, not rising, rates of interest such as the pressing needs of
previous wars had produced. To make this decision effective,
a pattern of rates for Government securities was established,
with Federal Reserve support. The almost inevitable conse­
quence of the fixing of this pattern, which meant supplying the
commercial banks with whatever funds were necessary to main­
tain the pattern, was pretty constant pressure on the longer
term rates. Actually, therefore, the war was financed not at
stable rates of interest, but at declining rates. W e came out of
the war with short-term rates still pegged where they were
when we went in, but with the longer term rates under steady
downward pressure. So long as differences in maturity, and
the risks which longer maturities are supposed to involve, are
deprived of their significance, the tendency of interest rates
is to come together at one figure for all maturities. If the short
end of the rate curve is fixed, that means that the long end will
tend to decline. So much for loss of control over the cost of
Similarly with the control of the availability of credit. In
its simplest terms, our support of the Government security
market has meant and still means that the commercial banks,
in large part, have the initiative in determining whether or not
reserve bank credit is to be created or extinguished. If the
commercial banks sell Government securities and the market
will not absorb them at somewhere near the going prices, we
are the residual buyers. If the commercial banks have surplus
funds, and Government securities of the kinds they want are
not available in the market, at least without a substantial run­
up of prices, we are the ultimate sellers. In either case we are

In current thinking the quantitative approach has had at
least two expressions. The Board of Governors of the Federal
Reserve System in its 1945 annual report to the Congress sug­
gested that the present powers of the Federal Reserve System,
granted in very different circumstances, are inadequate to deal
with present or possible future situations, and that we shall
have to have new powers if we are to be held responsible for
credit control— for "money management”. The Board sug­
gested that consideration might be given (1 ) to requiring
banks to maintain a secondary reserve in the form of Treasury
bills and certificates of indebtedness, which would be super­
imposed on our present cash reserve system, (2 ) to the control
of long-term security investments of commercial banks, and
(3 ) to an increased authority to change cash or primary reserve
requirements of banks. I am not going to try to explain,
analyze or discuss these proposals. Information concerning
them has been sent to you and their discussion could form the
content of one or more separate speeches. I can only say that
I think they have little relevance as far as meeting present
problems is concerned. I do not believe we can expect Con­
gressional consideration of and action upon such fundamental
changes in our banking system in the near term future.
It has seemed profitable to me, therefore, to concentrate on
what we might do with our present powers and our present
skill, combining our resources of power and skill with those
which the Treasury uses in managing the public debt. Money
management and debt management, as distinguished from fiscal
policy which depends largely on Congressional action, are
today’s Siamese twins of effective and usable power and influ­
ence in the hands of those who have executive authority and
responsibility. I think that it is possible to do something with
them as they stand. What we do need not be spectacular nor
drastic. It has not been sufficiently recognized, perhaps, that
the very size of the public debt and of the bank holdings of the
public debt have made the money market much more sensitive
to relatively modest action than was formerly the case. The fact

not the masters in our own house.
One way out of the dilemma— the loss of control over the
cost and availability of credit— would be to transfer our interest
and our affections from quantitative credit controls to qualita­
tive credit controls. W e have two such now, the control of
credit used in the stock market and the control of consumer
credit. Our experience with these controls has not been alto­
gether happy, but it is my opinion that they are worth continu­


its international political implications. If we are to lead the
world toward enduring peace, we cannot afford to dissipate our
influence and weaken our world neighbors by economic irre­
sponsibility. N o one who lives, as we all do, in the shadow
of the atomic bomb, should forget that fact for one instant.

is, of course, that we have been using the modest approach in
debt and money management— elimination of the preferential
discount rate, retirement of Government debt out of Treasury
balances, increases in acceptance buying rates— and that so far
this approach has been measurably effective in the economic
situation in which it has been used. Aggressive bank bidding
for longer term Government bonds has been diminished, at
least temporarily, the pressure on longer term rates of interest
has been reduced, the banks have been in intermittent need
of reserve funds, and some short-term rates of interest have

This partial digression should make clear, I think, that I
attribute to money management only a very secondary role in
meeting the major problems of today. It is important, how­
ever, that it be free to work in the right direction. That is
the significance of what might be called the next step in the
modest approach to restoring credit control— breaking out of
the strait-jacket of the pattern of rates, in which we voluntarily
allowed ourselves to be tied and fastened during the war. By
that I mean, specifically, the defrosting of the presently frozen
short-term rates on Government securities. I do not suggest
this as an urgent matter of the moment; other actions and
other factors have given us and are giving us time to consider
the problem. And I recognize that the benefits of such a move
are not certain; there are few certainties in credit administra­
tion. But it seems to me that if we are again to have a credit
policy worthy of the name, and if we are to be able to support
and supplement a constructive policy of debt management, we
must sooner or later get out of the strait-jacket of the pattern
of rates. W e cannot indefinitely leave with 14,000 commercial
banks the determination of how much Federal Reserve credit
will be used; how much further the money supply may be
expanded. And it makes little difference, in terms of the
money supply, whether the action o f the banks is motivated
by a desire to shift from short to long Government securities,
as was the case early this year, or whether it represents a shift
from Government securities to private credits, as has been the
case more recently.

risen slightly.
It is true that this is weak medicine in terms of combating
inflation— it has done little to reduce the volume of funds
already created and in the hands of the public, and nothing to
increase the supply of goods and services available to the public.
I have heard of no practical program of credit control which
would accomplish these purposes. So far as inflation is con­
cerned, ours is essentially a holding operation.
There is only one final and compelling and satisfying answer
to the present lack of balance between the supply of goods and
services and the supply of money, and to the present danger of
our climbing another loop in the cost-price spiral. That is an
increased supply of goods and services growing out of increased
production per man hour— out of increased efficiency of men
and machines. That is the only way we can validate the in­
creases in costs which have already taken place in our economic
structure. That is the only way we can prevent a further in­
crease in prices, or bring about a decline in prices, without the
hardship and suffering of depression and unemployment. Re­
sponsible management must know that this is the problem;
that putting into effect a price increase to meet every wage
increase is no real solution. Responsible labor must recognize
that its own interests, as well as the interests of the whole com­
munity— our standard of living— are bound up in the same
package with output per man hour. Recognition must lead to
action, however, or little will be accomplished. And action will
require consideration of our incentives to investment and to
work, and of the penalties for slackness in production, whether
of management or labor. Without adequate incentives for su­
perior performance and without observable penalties for infer­
ior performance, it is flying in the face of human experience
to expect increased production per man hour.
Unfortunately, the whole world will be affected if we ride
the roller coaster of boom and bust. W e shall not be the only
ones to suffer for our sins. Americas national income repre­
sents perhaps two-fifths of the worlds total income. It is cer­
tainly the most dynamic and significant factor in the world
economy. If we exhibit a lack of responsibility in our domestic
economic affairs, we shall betray a world which is looking to
us for leadership, and which depends on us, in large part, for
its own stability. Those who are concerned with the direction
of American business and American labor need to ponder this,
not only because of its economic implications but because of

I do not mean, of course, that so long as anything like the
present situation exists, we should abandon the short-term
market to its own devices. And I do not mean that we should
relax our controls so far as to breach the 2 Vz per cent rate on
long-term Government securities. The former is not necessary
and the latter is not desirable. But it is necessary and it is
desirable that we regain a position in which we shall be able
to apply the brakes to credit expansion when inflation
threatens, even if we can only apply them ever so gently.
That is why we should look forward to restoring some flexi­
bility to the interest rate structure. It can be argued that
flexibility of interest rates in a supported market merely means
changing the peg. But surely there is a vast difference be­
tween supporting a market at your own discretion, at rates
which can move up or down, and supporting a market at fixed
rates which you have announced in advance your determina­
tion to maintain. In the former case, all the advantages of
initiative and uncertainty will be working to make policy
effective. In the latter case, betting against the house is a
sure thing. If it is not known in advance exactly what we
are going to do, we may well find that very little pressure will


have sizable and beneficial results. If reserve funds can be
made a little less readily available, and the certainty as to their
future availability in any amount at a fixed price, can be

of member banks to moderate pressure at frequent intervals.
This has been the result of Treasury withdrawals of funds from
its war loan account at the banks, to redeem securities matur­

removed, banks as lenders may be deterred from inflationary

ing in the portfolios of the Federal Reserve Banks.

lending, such as lending to finance excessive inventory accumu­

funds were temporarily taken out of the market and this

lation or consumer spending. And banks as investors may be

limited, to some extent, the ability or the inclination of banks

deterred from reaching out for the longer term bank eligible

to expand their loans and investments, at least in the fringe

bonds if the safety of premiums is no longer guaranteed.

areas of credit.

Nor should there be any reason for Treasury concern, if
short-term rates are unfrozen.

The Treasury would still be

able to sell its short-term securities for refunding purposes just
as it does now. Banks and other investors would hardly prefer


The program also directly disposed of $23

billion of Treasury deposits which, if spent for other purposes,
would have increased by that amount the already large supply
of money in the hands of the public.
This phase of the debt retirement program will come to an

to hold idle funds, from month to month, in anticipation of a

end this month.

minor change in rates which might not be forthcoming.


Treasury notes maturing on December 15, Treasury balances

market for intermediate securities would be subject to greater

in war loan account growing out of the tremendous sale of
Government securities in the Victory Loan Drive a year ago
will have been largely eliminated. Hereafter, reduction in the
total Federal debt will depend primarily upon an excess of
current income over cash disbursements. While the effect of
debt retirement thus far has been mildly anti-inflationary,
further redemptions of bank-held securities, if financed by an
excess of tax receipts over Government disbursements, will
be actively deflationary. Money will be taken from individuals
and corporations and used to extinguish bank credit, thus
reversing the wartime process of credit creation.

uncertainty and therefore less attractive, especially to banks,
but the Treasury’s long-term market need not be affected.
Historically, there is no fixed relationship between long and
short rates, and certainly so long as the Federal Reserve System
gives its support, the long-term rate can be kept where it is.
Downward pressure on the long rate would be relieved, but
upward pressure, if it developed, could be successfully resisted.
Finally, the cost of servicing the debt need not be increased by
a rise in the shortest term rates. It has been estimated that
the annual interest charge on the $65 billion of marketable
Government securities maturing or callable before the end of
1950, excluding bills, is about $1 billion, or U/2 per cent. If
all of these securities were refunded with an average rate less
than 11/2 per cent, there would be a reduction in the annual
service cost. Inasmuch as the major part of these short secur­
ities are held by the banks, or will be when they mature, this
is not an impossible program! Refundings of Government
securities within the banking system could well be made with
shorter maturities and at lower rates than during the war— we
do not need to finance through the banks with 2% bonds.
Such a program, of course, would seem to be the reverse of
funding some of the debt but, in present circumstances, the
only funding of debt which has real meaning is the sale of
securities to non-bank investors, and retirement of bank-held
debt with the proceeds. That could still be accomplished, so
long as it is economically desirable, by stepping up sales of
Savings Bonds faster and further, and by sales of long-term
2 1/2 per cent bonds— with rollover removed— to institutional
investors. This is the kind of debt management which really
increases the cost of servicing the debt, but what you get is
worth what you pay for it.
Such a modest approach to money management would have
to lean on and to support a complementary program of debt
management, just as it has in the recent past. Since early this
year the Treasury policy of using surplus balances to retire
outstanding debt, held largely by the Federal Reserve Banks
and the commercial banks, has subjected the reserve position

W ith the redemption of $3,261 million of

A similar effect can be obtained by net sales of Government
securities to non-bank investors, the proceeds being used to
pay off bank-held debt. Such shifts of securities from bank
to non-bank investors would also extinguish bank credit, and
in addition would provide an outlet for accumulations of funds
which otherwise would have to seek employment elsewhere,
quite possibly with inflationary effects. So long as inflation,
or the threat of inflation, is our adversary, this aspect of
increased sales of Savings Bonds to individuals, and possible
sales of long-term restricted bonds to institutional investors,
should not be overlooked. If we should enter a deflationary
period, of course, a reversal of these public debt operations
would probably be appropriate and quite readily attainable.
Debt management as well as Federal Reserve policy must be
responsive to changing economic conditions.
Right now, faced with a violent resurgence of labor troubles,
we can do no more than stand fast. Nevertheless, problems
of money management and debt management should have our
consideration as we enter a new phase in our financial affairs.
I have outlined a modest approach to the restoration of credit
control. There is opposition to, disbelief in, and timidity with
respect to this modest approach, but it seems to me it may be
the best approach available to us in the circumstances in which
we find ourselves. For the longer term we may need new
methods or new powers. I am only concerned that we do not
get into the habit of seeking "just one more power” until we
have powers beyond our wisdom and our skills.


National Summary o f Business Conditions
(Summarized by the Board of Governors of the Federal Reserve System)
production and employment in most lines of activity continued to be main­
tained at record peacetime levels in November. Department store sales in November and
the early part of December were larger in dollar amount than the holiday trade last year,
reflecting mainly increased prices. Prices of industrial commodities have generally advanced
further, while a number of important farm products and foods have declined from
previous peaks.



Indexes of Physical Volume of Industrial Pro­
duction, Adjusted for Seasonal Variation,
1935-39 Average=lO0 Per Cent (Groups
shown are expressed in terms of
points in the total index)

Total output of manufactured goods and minerals, as measured by the Board’s seasonally
adjusted index, was 182 per cent of the 1935-39 average in November. This was about
the same as in October notwithstanding the sharp drop after November 20 in coal, coke,
iron, and steel production as a result of work stoppages in the bituminous coal industry.
After the resumption of bituminous coal ouput on December 9 activity at steel mills, which
reached a low of 60 per cent of capacity in the first week of the month, rose sharply and in
the third week was scheduled at 84 per cent.
Output of steel in the month of November was at an average rate of 84 per cent of
capacity as compared with 89 per cent in October. Activity in the nonferrous metals and
machinery industries continued to increase in November and output of most other metal
products was maintained at a high level. Lumber production showed less than the usual
seasonal decline.
Output of manufactured food products was maintained in November at an exceptionally
high level for this season of the year, reflecting chiefly further sharp increases in meat
production and larger output of flour and sugar products. Production of cotton and rayon
textiles, paperboard, rubber products, and some other nondurable goods showed further
small gains in November.





Value of Construction Activity. Figures Begin­
ning in 1944 Are Joint Estimates of the
Departments of Commerce and Labor; Ear­
lier Figures Estimated by Department of
Commerce. Data Exclude Repair and
Maintenance Work. Monthly Aver­
ages from Quarterly Totals Prior
to July 1944; Monthly Data,

Output of minerals declined 5 per cent in November. Bituminous coal production
dropped sharply as a result of work stoppages in the latter part of the month, while produc­
tion of anthracite and crude petroleum was maintained at high levels and output of metals
showed less than the usual seasonal decline.
C o n s t r u c t io n

Estimated expenditures on construction projects in November were maintained close to
the peak levels reached in August and September. Contracts awarded for nonresidential
construction, however, were at the lowest level since the end of the war, according to reports
of the F. W . Dodge Corporation; residential building awards were sharply below the peak
rate reached in the spring, but were still considerably above last year’s level.

is t r ib u t io n

Department store sales in November and the early part of December were about
one-fifth larger than during the same period of the holiday shopping season last year. The
total value of retail trade outside of department stores increased somewhat further in the
fourth quarter, reflecting chiefly higher prices and larger expenditures for foods.

Indexes of Consumers’ Prices Compiled by
Bureau of Labor Statistics. “All Items”
includes Housefurnishings, Fuel, and
Miscellaneous Groups Not Shown
Separately (1935-39 aver­
a g e s 100 per cent)

Loadings of railroad revenue freight declined in November owing to the sharp drop
in bituminous coal shipments at the end of the month. Loadings of manufactured products
and most other classes of freight showed substantial gains, after allowance for seasonal
C o m m o d i t y P r ic e s

Following the initial sharp increases in basic commodities which occurred with the
elimination of Federal price controls on November 11, price changes have become more
selective. Prices of copper, lead, steel scrap, and cotton gray goods for immediate delivery
have advanced further, while prices of hides, turpentine, and silk have declined. During the
past week there has been a sharp drop in hog prices. Wholesale prices of foods have
decreased somewhat further from the sharply advanced levels reached in the middle of
October. Prices of industrial products have continued to advance. In retail markets prices
of women’s wear and some other items have declined but in general retail prices have
continued to advance.
Ba n k

C r e d it

Commercial, real estate, and consumer loans increased further at banks in leading cities
during November and the first half of December. Government security holdings declined
considerably reflecting Treasury cash retirement of notes and certificates. Deposits of busi­
nesses and individuals increased somewhat and currency in circulation rose by the usual
seasonal amount.
Member Baraks in Leading Cities. Demand
Deposits (Adjusted) Exclude U. S. Govern­
ment and Interbank Deposits and Collection
Items. Government Securities Include
Direct and Guaranteed Issues. (Latest
figures are for December 11)

The Treasury retired for cash during November and the first half of December 5.8 billion
dollars of Government securities held largely by the banking system. Withdrawals from
War Loan deposits at commercial banks to redeem securities reduced U. S. Government
deposits at banks to a level of about 2 billion dollars in mid-December as compared with
24 billion dollars before the retirement program was begun in March.