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MONTHLY REVIEW
O f C7'edit and Business Conditions
FEDERAL
V o l u m e
33
RESERVE
BANK
OF
NEW
YORK
JA N U A RY1951
No. 1
MONEY MARKET IN DECEMBER
The money market was relatively easy during most of the
period before Christmas, as seasonal influences, on balance,
added to bank reserves and were augmented by substantial
Treasury and Federal Reserve disbursements in connection
with the Treasury’s refinancing operations on December 15.
The market tightened during the final third of the month,
principally because of the usual decline in ‘‘float” following
the Christmas holiday, and because of net Treasury receipts
through income tax collections.
Member bank reserve positions were easy through the first
three statement weeks of December, and as a reflection of this
general ease Federal funds were available in New York at
rates below Vz of 1 per cent for most of the period before
Christmas. The seasonal increase in Federal Reserve "float”
(checks credited to the banks’ reserve accounts with the
Reserve Banks prior to collection) was unusually large; the
rise from the levels prevailing in the early part of the month
amounted to roughly 1 billion dollars at the pre-Christmas
peak. In addition, System security purchases resulted in a net
release of over 650 million dollars in Federal Reserve credit
during the first three statement weeks of the month. Treasury
disbursements for interest payments and redemption of bonds
unexchanged on the 15 th, and other Treasury transactions,
caused a moderate reduction in Treasury balances at the Reserve
Banks during the first half of the month, but these were more
than balanced by net Treasury receipts stemming from tax
payments before the end of the third statement week. Thus
the principal factors increasing bank reserves contributed an
aggregate of more than IV 2 billion dollars during the preChristmas period.
Part of the gain in reserves over this period was absorbed
by a seasonal increase of nearly 400 million dollars in currency
in circulation before Christmas. Continued conversion of for
eign dollar balances into gold also drained more than 200 mil
lion dollars from the market during the first three statement
weeks of the month. Member banks took advantage of their
strong reserve positions to reduce borrowings at the Reserve
Banks by nearly 200 million. Required reserves of member
banks rose about 400 million dollars, principally as a result of
increases and shifts in demand deposits. These and other
factors, aggregating more than 1Va billion dollars, largely offset
the additional reserve funds that became available to the banks,
but member bank excess reserves on December 20 were 200
million dollars above the level at the end of November. Dur
ing much of the pre-Christmas period, total excess reserves
exceeded one billion dollars.
A reversal of the easing tendencies in bank reserve positions
occurred during the final third of the month. The "float”
dropped off sharply after Christmas and substantial income tax
collections by the Treasury continued, more than offsetting in
their combined effect the additions to reserves arising from
the beginning of the post-Christmas return flow of currency
from circulation and the decline in required reserves related to
the reduction in deposits stemming from income tax payments.
The rate on Federal Reserve funds rose to 1Ys per cent during
most of the week ended December 27. Banks, particularly those
in New York City, made substantial sales of short-term Gov
ernment securities indirectly to the Federal Reserve System to
meet reserve deficiencies and borrowed considerable amounts
from the Reserve Banks for short periods. And the amount of
excess reserves toward the close of the month fell to more
normal levels— about 790 million.
The New York City banks shared in the gains of reserves
during the first three weeks of the month, but their reserve
positions tightened sharply after the 20th. Usually the City
banks bear the brunt of the pressure of quarterly tax payments,
as out-of-town taxpayers transfer large amounts of funds from
CONTENTS
1
Money Market in December.................................
Increase in Reserve Requirements.......................
3
Bankers’ Acceptances...............................................
4
Gold Movements and Monetary Reserves...........
7
Banking and Business Developments
in the Second District.......................................... 11
Indicators of Business Activity..............................11
Department Store Trade........................................ .. 13
MONTHLY REVIEW, JANUARY 1951
2
New York to other parts of the country to meet their tax lia
bilities. This year a substantial outflow of funds came early
in the month (in the week ended December 6) but was
roughly balanced by nonbank sales of Government securities
indirectly to the Reserve System, thus leaving the reserves of
the City member banks largely unaffected. During the second
and third weeks, the reserve positions of the New York City
banks were for the most part subject to the same influences as
those affecting aggregate member bank reserves; but the gen
eral tightening throughout the country which began just before
Christmas resulted in a sizable drain of funds from New York
City.
G o v e r n m e n t Se c u r it y M a r k e t
Developments in the Government security market were
dominated by the influence of the Secretary of the Treasury’s
announcement, on November 22, that the 2.6 billion dollars
of IV 2 per cent Treasury bonds maturing December 15 and
the 5.4 billion dollars of lVs per cent certificates of indebted
ness maturing January 1 would be refunded in a single offer
ing of five-year 1Va per cent Treasury notes. Exchange sub
scriptions were received from December 4 through 7 for both
maturing issues, and the new notes were dated December 15,
with provision for an adjustment of interest on January 1,
1951 in the case of the maturing certificates. Since a substan
tial proportion of the maturing obligations had been acquired
by nonfinancial corporate investors as a short-term invest
ment, a significant volume of refunding took place within
the market prior to the actual exchange. On balance, the
"rights” were in considerable supply and the Federal Reserve
System acquired 1.8 billion dollars of certificates and short
bonds, while making offsetting sales of 0.9 billion in other
securities, during the two weeks from November 22 through
December 6. In addition, roughly 320 million dollars of the
maturing bonds were presented for cash redemption, result
ing in Treasury disbursements of that amount on Decem
ber 15. Approximately 835 million of the certificates were
not exchanged for the new issue and will be presented for
redemption as of January 1.
The combined effect of these operations was to augment
other seasonal factors which contributed temporarily to money
market ease during most of the period before Christmas. Sev
eral factors account for the desire, principally on the part of
nonbank investors, to acquire an increase in cash balances
through net sales indirectly to the System Account or through
cash redemption, rather than to accept a five-year issue at an
attraaive yield. In some measure, nonbank investors had
acquired the maturing securities against other commitments
for funds at the year end, such as dividend and bonus pay
ments. Also, normally heavy sales and cash redemptions of
short-term Treasury securities by nonbank investors through
the tax date, partly in preparation for the payment of income
taxes, were understandably concentrated upon the maturing
securities. Both of these factors were manifestations of typical
seasonal behavior. Similarly, many banks and other financial
institutions were reluctant to purchase "rights” to the new
offering because of their customary practice of strengthening
their liquidity in connection with preparations for year-end
statements. Banks also had to take into account recurring
rumors of a possible increase in legal reserve requirements
(which was, in fact, announced by the Board of Governors of
the Federal Reserve System near the end of the month), and
recent evidences of a willingness to allow short-term interest
rates to increase under market pressure.
In addition, the period between the Treasury’s refunding
announcement and the "opening of the books” for the exchange
was characterized by a decisive deterioration in the interna
tional situation, which contributed to investor uncertainty and
a desire for temporary liquidity. The technical characteristics
of the exchange, particularly with respect to the certificates,
which had to be held for three weeks following the formal
commitment to exchange, apparently were unattractive to any
investors who were unwilling to hold unmarketable securities
during this unsettled period. Moreover, many corporate in
vestors— relatively new to the Government securities markets,
operating under limited authorizations as to the types of securi
ties they might hold, and generally hesitant to engage in mar
ket trading— apparently preferred to hold cash temporarily
while awaiting a further supply in the market of very short
term Government securities at attractive prices.
As expected at the time of the exchange, the net movement
of many investors into cash began reversing itself after a brief
period of reappraisal. Substantial Federal Reserve sales of the
shorter-term Treasury notes in the three weeks ended Decem
ber 27 suggested that the release of funds in connection with
the refinancing operation might prove to be largely temporary.
The absorption of funds by the System through note sales dur
ing much of December was offset, however, by other security
market operations. The System purchased bills toward the close
of the month as banks made heavy sales in adjusting their
reserve positions. Sales of restricted bonds by nonbank investors
throughout the month continued to account for some System
purchases in the longer-term sector of the market. Partly as
a reflection of these sales, prices on the Victory bonds of
1967-72 declined 2/32 from November 29 to the end of
December, and the remainder of the bond list reflected a
similar slight decline. Many partially tax-exempt issues showed
small net gains, however, as growing prospects for enactment
of an excess profits tax and for further tax increases in 1951
apparently increased the value of the tax-exemption feature
to corporate investors. Nonetheless, there was very little net
change in most bond prices for the month as a whole.
M e m b e r B a n k C r e d it
Total loans of the weekly reporting member banks rose
somewhat less during the first three statement weeks of
December than in previous months, but loans for commercial,
industrial, and agricultural purposes ("business” loans) ex
panded at an increasing rate. The growth in business loans
averaged 235 million dollars per week, as compared w*th
152 million for the four statement weeks in November and a
similar average for October. Although the reporting banks in
3
FEDERAL RESERVE BANK OF NEW YORK
New York City, whose seasonal readjustment often precedes
that for the rest of the country, had fallen to a weekly rate of
increase of 44 million dollars in November, their business
loans increased at a weekly average of 107 million dollars for
the first three weeks of December. Security loans, in the
aggregate, fell off markedly, particularly in New York City,
while real estate and other loans (including consumer loans)
of all the weekly reporting member banks continued to rise
at rates comparable to those of November, despite net re
ductions for the period in these loans at New York City banks.
Data for the fourth statement week (available only for the
New York banks) showed a net reduction of 24 million dollars
in business loans; security loans increased substantially, while
real estate and other loans increased slightly.
The increase in member bank loans during December rep
resented a continuation of an expansion which began early in
the year and which had, in the case of real estate and "other”
(including consumer) loans, been proceeding without major
interruption from the early postwar years. As indicated in the
accompanying chart showing changes in the major categories
of loans and investments of the weekly reporting member banks
during 1950. commercial, industrial, and agricultural loans rose
sharply after an unusually moderate seasonal contraction in
the first five months of the year. The increase in business loans
for the year as a whole of about 4 billion dollars (about
30 per cent) was the largest year-to-year gain in dollar amount
since the end of the war and the largest on record. This heavy
demand for business loans for inventory accumulation and
other working capital purposes was accompanied by growing
demands for credit to finance the construction and purchase
of homes and other real estate and the purchase of automobiles
and household equipment and appliances in unprecedented
Cumulated Changes in Selected Categories of Loans and
Investments of the Weekly Reporting Member Banks*
(Cum ulated weekly from Decem ber 28, 1949)
B illio n s
o f d o lla r s
B illio n s
o f d o lla r s
+6
amounts. Thus, there were substantial (although lesser) in
creases in real estate and "other” loans throughout the year
amounting to 900 million and 1.4 billion dollars, or one fifth
and one third, respectively. Some acceleration in the extension
of such loans, particularly consumer loans, occurred during the
summer months as a result of a spurt in consumer expenditures
in anticipation of war-induced material shortages following
this country’s participation in United Nations’ action resisting
the invasion of South Korea. The weekly reporting banks also
added 1.4 billion dollars to their holdings of other than
Federal Government securities (an increase of about one
fourth). Most of these securities consisted of obligations of
State and local governments and were probably acquired to a
considerable extent in anticipation of higher Federal income
taxes. A moderate advance of loans on corporate and munici
pal securities was just about offset by a decline in loans on
Government securities (these two items are not shown in the
chart). In view of the fact that their excess reserves remained
generally near minimum working levels throughout the year,
the banks financed the additions to their loans and other
securities mainly through the sale and cash redemption of
Government securities. Weekly reporting bank holdings of
Treasury issues were reduced by about 3.6 billion dollars
(10 per cent), or from about 56 per cent of total loans and
investments on December 28, 1949 to 47 per cent toward the
close of 1950.
INCREASE IN RESERVE REQUIREMENTS
The Board of Governors of the Federal Reserve System
released the following statement for publication Friday,
December 29, 1950:
"The Board of Governors has increased the amount of
reserves required to be maintained with the Federal Reserve
Banks by banks which are members of the Federal Reserve
System. The increase will become effective according to
the following schedule:
On net demand deposits
Effective
Central reserve city banks
From 22 to 23 per cent
From 23 to 24 per cent
+2
January 11, 1951
January 25, 1951
Keserve city banks
From 18 to 19 per cent
From 19 to 20 per cent
January 11, 1951
January 25, 1951
Country banks
From 12 to 13 per cent
From 13 to 14 per cent
January 16, 1951
February 1, 1951
On time deposits
-4
Central reserve city and
reserve city banks
From 5 to 6 per cent
J
F
M
A
M
J
J
A
S
O
N
D
Country banks
1950
From 5 to 6 per cent
* W ednesday dates; latest figures are for December 20, 1950.
# M ostly consumer loa n s; loans on securities and loans to
charted.
January 11, 1951
banks not
January 16, 1951
This action was taken as a further step toward restraining
inflationary expansion of bank credit, in accordance with
4
MONTHLY REVIEW, JANUARY 1951
the statement issued by the Board August 18, 1950, that
the Board and the Federal Open Market Committee are
prepared to use all the means at their command to restrain
further expansion of bank credit consistent with the policy
of maintaining orderly conditions in the Government
securities market/
The volume of bank credit and the money supply have
continued to increase despite previous actions by the Federal
Reserve and other supervisory agencies, and efforts of
individual banks to be restrictive in granting credit. Loans
of member banks have increased by about 7 billion dollars
since June, reflecting in part seasonal influences and in part
accumulation of inventories at rising prices. This is an un
precedented rate of expansion and has contributed to an
excessive rise in the money supply. Moreover, with the end
of usual seasonal demands for credit and currency, banks
will have additional funds available for lending. The pur
pose of the announced increase in reserve requirements is to
absorb such funds and generally to reduce the ability of
banks further to expand credit that would add to inflationary
pressures. The increase is timed so as to absorb reserves
coming into the banks from the post-holiday return flow
of currency.
The effect of this increase will be to raise the required
reserves of member banks by a total of approximately two
billion dollars which, under our fractional reserve banking
system, could otherwise be the basis for about a six-fold
increase in bank credit in the banking system as a whole.
After the increase, reserve requirements at banks other
than central reserve city banks will be at the maximum legal
limits which prevailed during the war period. Requirements
on net demand deposits at central reserve city banks will be
two percentage points less than the maximum under existing
authority but above requirements that prevailed for these
banks during most of the war period.”
BANKERS’ ACCEPTANCES
The postwar period has witnessed some increase in the use
of the bankers’ dollar acceptance as a device for financing
trade and as a medium for short-term investment. The volume
of acceptances now outstanding (383 million dollars at the
end of November 1950) is more than three times that recorded
in the spring of 1945, when the wartime low in acceptance
financing was reached. Present volume is still small compared
with the prewar peak of 1,732 million dollars reached in
December 1929, but the recent growth in acceptance use
follows a period of continuous decline in the market which
began in 1930.
The bankers’ acceptance is a time draft which has been
drawn on and accepted by a bank, trust company, or other
institution engaged in the business of granting bankers’ accept
ance credits. Upon acceptance, such a draft becomes an un
qualified promise to pay at maturity and is eligible, under
certain conditions, for purchase or rediscount by Federal
Reserve Banks. After presentation and acceptance, bankers’
acceptances are either returned to the presentor (the drawer
or other owner, or his agent) for sale in the open market, or
discounted for him by the accepting bank.
The bankers’ acceptance thus makes possible the substitution
of the credit of a bank or accepting institution for that of a
purchaser or holder of merchandise. This substitution of credit
makes of the bankers’ acceptance a readily marketable, nego
tiable instrument, through the sale of which sellers of goods
may obtain funds quickly and easily. For accepting drafts on
behalf of their customers, financial institutions charge a com
mission, customarily 1Vz per cent per annum,1 and a customer
is required to provide the accepting institution with funds to
meet his drafts before they mature.
The financing of trade through the use of bankers’ accept
ances is a practice of very long standing. Active markets for
bankers’ "bills” have existed in Europe— notably in London—
for centuries. Prior to World War I, however, bankers’ dollar
acceptances were used but little in this country. It was not the
practice of national banks to accept drafts drawn on them,
and only a comparatively small amount of acceptance credit
was created by State banks and private bankers. The Federal
Reserve Act, enacted in December 1913, authorized member
banks of the Federal Reserve System to accept drafts, subject
to certain restrictions and to the regulations and rulings of the
Federal Reserve Board. The Act also made acceptances eligible
for discount at Federal Reserve Banks, subject to the usual
requirements as to maturity and endorsement, and authorized
Federal Reserve Banks to deal in eligible acceptances on the
open market. The passage of the Federal Reserve Act (and its
amendment in 1916 broadening the accepting powers of mem
ber banks) thus made possible the development of an accept
ance market in the United States.
The Federal Reserve Act authorizes member banks to accept
drafts or bills of exchange drawn upon them to finance four
broad categories of transactions: the import and export of
goods; the shipment of goods within the United States; the
storage of readily marketable staple commodities, either in
the United States or in foreign countries; and the furnishing
of dollar exchange. Drafts or bills accepted must have not
more than six months to run, except for those drawn to furnish
dollar exchange, which must have not more than three months
to run.
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The use of bankers’ dollar acceptances for financing exports
and imports is not limited to financing the foreign trade of the
United States. American accepting banks are also permitted
to extend dollar acceptance credits to finance the movement
of goods between foreign countries. Such broad acceptance
l
That is, Vs per cent on 30-day sight drafts, Va per cent on 60-day
sight drafts, Ys per cent on 90-day sight drafts, etc.
FEDERAL RESERVE BANK OF NEW YORK
powers were granted to facilitate financing the foreign com
merce of the United States, to aid in establishing the dollar as
an international currency, and to promote the development of
an international money market in the United States. Drafts
to finance exports and imports are often drawn for acceptance
under authority of a letter of credit, issued to the drawer by
the accepting bank.2 American accepting banks issue such
"credits” on behalf of their own customers and customers of
their domestic correspondents. In addition, letters of credit
are issued on behalf of foreign residents by arrangement with
foreign banks,3 which are usually correspondents or branches
of the accepting bank.
Acceptances covering domestic shipments of goods must
have attached at the time of acceptance the shipping docu
ments conveying title to the goods. Further, domestic ship
ment acceptances must have a maturity consistent with the
customary credit terms in the particular business involved.
These requirements are designed to prevent the improper
use of this type of acceptance credit as a source of working
capital.
The storage of readily marketable staples in the United
States or in any foreign country may be financed by means
of bankers’ acceptances. Bills drawn for this purpose must
be secured at the time of acceptance by warehouse, terminal,
or similar receipts for the goods stored. Also, the acceptance
must remain secured until paid.4 Since the purpose of ware
house acceptances is to permit the temporary holding of
readily marketable staples in storage pending their sale, ship
ment, or distribution, such acceptances ordinarily should not
have maturities in excess of the time necessary to effect reason
ably prompt sale, shipment, or distribution of the goods into
the process of manufacture or consumption.
Member banks of the Federal Reserve System are also
authorized by law, upon receipt of permission from the Board
of Governors, to accept drafts having not more than three
months to run for the purpose of furnishing dollar exchange
to foreign countries, or to dependencies or insular possessions
of the United States, where banks or bankers are justified by
the usages of trade in drawing on member banks in this
country for the purpose of creating such dollar exchange.
The Board of Governors publishes a list of these countries
and areas.5 In an early ruling, the Board appeared to imply
that "the usages of trade” referred primarily to the practices
growing out of a lack of regular mail connections. In later
2 Letters of credit authorize the drawing of drafts in accordance with
certain terms, and stipulate that all drafts drawn in conformity with
these terms will be accepted and honored at maturity.
3 The arrangements provide that the foreign bank will supply the
American accepting bank with funds to meet the drafts at maturity.
Both banks charge a commission, the cost of which is borne by the
foreign customer initiating the transaction.
4 Goods may be withdrawn from storage prior to the maturity of
acceptances secured by them provided other acceptable security is sub
stituted.
5 All countries of Latin America (except Haiti and the Dutch West
Indies), Australia, New Zealand, the Australasian dependencies, and
the Dutch East Indies (Indonesia) are presently on the list.
5
years, however, the degree of seasonality in a country’s foreign
trade became an important consideration.
The use of dollar exchange credits makes it easier for foreign
banks to provide dollar payment for imports from the United
States during periods when exports to the United States
suffer a seasonal decline. Their use may thereby also help
to smooth out seasonal fluctuations in exchange rates between
the dollar and other currencies. However, drafts are drawn to
create dollar exchange in anticipation of actual exports, and
Federal Reserve regulations prohibit the acceptance of drafts
drawn merely because dollar exchange is at a premium, or for
any speculative purpose. Neither are member banks permitted
to accept "finance bills”, which are not drawn primarily to
meet the demand for dollar exchange arising out of the normal
course of trade.
Of a total of 383 million dollars of bankers’ dollar accept
ances outstanding at the end of November 1950, 234 million
was based on imports into the United States, 88 million on
exports from the United States, 30 million on goods stored
in or shipped between foreign countries, 19 million on goods
stored in the United States, and 10 million on goods shipped
in the United States. Only 2 million was for the purpose of
furnishing dollar exchange. The order of relative importance
indicated by these figures is one which has persisted with
but slight change since the mid-thirties. Since 1943, imports
alone have been the basis for more than half of all dollar
acceptance credits granted in every year.
The market for bankers’ acceptances includes, in addition to
the various sources of supply, dealers (who act as middlemen,
bringing buyers and sellers together), and a variety of insti
tutions which buy and hold acceptances.
Acceptance dealers buy bills from holders seeking to
dispose of them, sell bills to those seeking them, and generally
make ready markets, for either purchases or sales. They
ordinarily purchase acceptances outright, instead of handling
them on a commission basis. Dealers operate with small port
folios and endeavor to sell bills purchased as quickly as possible.
The dealers’ compensation is represented by the spread between
the rates at which they buy and those at which they sell,
currently 1/16 of 1 per cent.
Dealers were active in the acceptance market almost as
soon as the market was established. One of the largest of
present-day acceptance houses commenced business in January
1919, and by the spring of 1921 Eastern dealers had established
branches on the Pacific Coast. Some dealers active during the
twenties withdrew from the market following 1929, and in
1931 only eight dealers remained. At present, there are six
dealers, of whom four account for the greater share of the
business. Only one of these deals exclusively in acceptances,
the others being also engaged in one or more phases of the
securities business.
Accepting banks discount some of their own bills directly
and also purchase the bills of other acceptors from correspond
ents and in the open market. They purchase for their own
6
MONTHLY REVIEW, JANUARY 1951
account and for the account of foreign and domestic corre
spondents. At the beginning of the American discount market,
the number of accepting banks increased rapidly, and in the
years 1918-21 a total of several hundred was reached. The
number has declined since then, as banks in smaller interior
cities, and those without adequate knowledge of acceptance
financing or properly equipped acceptance departments,
dropped out of the market. By the end of 1930, about 164
banks were listed as acceptors of bankers’ bills, while at present
there are about 125 accepting institutions. But throughout the
history of the American acceptance market, by far the greater
part of the accepting has been done by 40 to 50 institutions.
These large acceptors are located in major financial centers.
New York, the country’s foremost financial center, is the prin
cipal acceptance market.
Prior to 1932, both Federal Reserve Banks and "others”
(that is, all other buyers except accepting banks) were much
larger holders of acceptances than the accepting banks were.
But during the period 1932-48, accepting banks held well over
half of the total volume of acceptances outstanding in every
year, and since 1948 they have held nearly half the total
volume. Yields on acceptances in the years before the depres
sion were low in comparison with commercial paper,
Government securities, and call loans secured by stock
exchange collateral. Banks therefore held acceptances only
in moderate amounts, for use in adjusting their reserve posi
tions. However, between 1932 and the outbreak of war,
when excess reserves were large, accepting banks retained
larger amounts of their own acceptances than before, and also
sought bills more aggressively in the market. Starting in 1930,
on the other hand, the total volume of acceptances outstanding
declined sharply. As a result of these factors, bill portfolios
of accepting banks came to represent a much larger proportion
of total acceptances outstanding than had previously been the
case. By 1945, when the low point in volume of acceptances
outstanding was reached, accepting banks held over three
fourths of the total, compared with only 11 per cent in 1929.
Also, within their portfolios, the accepting banks’ own bills
increased markedly in importance relative to bills bought,
rising from less than one third in 1929 to almost 60 per cent
in 1945. In the postwar period, as acceptances outstanding
have increased in volume from their wartime low, and as
short-term interest rates have become somewhat firmer, the
proportion of total acceptances outstanding held by accepting
banks has declined (to 43 per cent in November 1950). But
the proportion of accepting banks’ own bills to their total
acceptance portfolios (63 per cent in November) is now
slightly larger than in 1945.
In the earlier years, as already indicated, Federal Reserve
Banks were large purchasers of acceptances. They bought
both for their own account and for the account of foreign
central banks. Traditionally, Reserve Banks never sought
actively to buy acceptances for their own account; instead,
they stood ready to purchase, at specified i’ates, all prime eligi
ble acceptances endorsed and offered by member banks. Also,
it was the policy of the Reserve Banks not to sell accept
ances acquired for their own account, but to hold them until
maturity. Reserve Banks did enter the market actively
in order to purchase and sell for foreign central bank corre
spondents, however.
When private demand for acceptances was strong, open
market rates tended to fall below the buying rates of
the Reserve Banks. But throughout the period from 1916
to 1931, private demand was generally insufficient to clear
the market. Market rates therefore rose toward Federal Reserve
buying rates, and the Reserve Banks were offered large quanti
ties of acceptances. Between 1916 and 1924, they bought
each year from 25 to 60 per cent of all bills drawn. And
from 1925 through 1931, their holdings for their own account
at the end of each year averaged from one fifth to one half
of total acceptances outstanding.
Reserve Bank acceptance portfolios shrank very rapidly
in 1932, but rose slightly in 1933, owing to the banking
crisis. Thereafter, the Federal Reserve Banks held no accept
ances for their own account until 1945, and they made only
nominal purchases for foreign correspondents in scattered
years. In 1946 and again in 1947, small amounts offered
at Reserve Bank buying rates were purchased by the Reserve
Banks for their own account. In 1946 also, there was a
resumption of purchases at market rates for the account of
foreign correspondents, and these purchases have continued
throughout the postwar period, though in amounts greatly
reduced from those of the late twenties.
The almost complete cessation since 1934 of Federal Reserve
acceptance purchases for their own account is primarily the
result of two factors— (1) the spectacular decrease in the
supply of acceptances following 1929 and continuing until
the spring of 1945, and (2) the concomitant growth of
demand by accepting banks (which had not been large
holders of acceptances during the twenties) for the smaller
supply. As a result of these influences, practically no accept
ances were offered to the Reserve Banks from 1934 through
1945. The small purchases of 1946 and 1947 coincided
with a relatively sharp increase in the supply of acceptances
in these years. By 1948, private demand for acceptances had
accommodated itself to the larger supply and Federal Reserve
purchases for own account ceased.
During one or more stages in the life of the American
acceptance market, bankers’ acceptances have been held by
various categories of investors other than the Federal Reserve
Banks (for own or foreign account) and the accepting banks
(for their own account). Such categories include nonaccept
ing banks (for their own account), customers and correspond
ents of domestic commercial banks, dealers in bankers’
acceptances, foreign banks with agencies in the United States,
savings banks and insurance companies, and individuals, part
nerships, associations, and corporations in many other lines of
activity. The great decline since 1929 in the volume of accept
FEDERAL RESERVE BANK OF NEW YORK
7
ances outstanding, however, has caused a considerable narrow
GOLD MOVEMENTS AND MONETARY RESERVES
ing of the market. The major holders of acceptances today,
In the fifteen months since September 1949, immediately
following the devaluation of the pound sterling and numerous
other currencies, through December 1950, the United States
sold about 1.8 billion dollars’ worth of gold to foreign
countries. These sales marked a sharp reversal of the
previous years’ gold movements, which had brought to the
United States from abroad a net total of 5.4 billion dollars
between the beginning of 1946 and the end of September 1949.
other than accepting banks for their own account and Federal
Reserve Banks for the account of foreign correspondents, are
believed to be foreign banks with agencies in the United States
and the customers and foreign correspondents6 of domestic
commercial banks.
Holders other than the Reserve Banks and accepting banks
were an important source of demand for bankers’ acceptances
prior to 1932. Their holdings from 1925 through 1930, for
example, were in most months larger than those of the
Reserve Banks, and exceeded holdings of accepting banks in
every year. But from 1932 through 1945 they played a sub
sidiary role to accepting banks as buyers of acceptances. After
1945, as the supply of acceptances began to increase, both
accepting banks and other holders added to their portfolios
through 1947. Holdings of accepting banks declined in 1948
and 1949; those of other holders, however, continued to
increase. Thus in 1949, for the first time since 1930, other
holders provided a larger source of demand for bankers’
acceptances
than
accepting
banks.
They
continued
in
1950 to be the most important factor in the demand for
acceptances. At the end of November, they held 193 million
(51 per cent) of the total of 383 million dollars of acceptances
outstanding. This compares with holdings at the same time
of 166 million (43 per cent) by accepting banks and 24
million (6 per cent) by Federal Reserve Banks for the account
of foreign correspondents.
Further growth in the use of bankers’ dollar acceptances
depends on the future course of privately financed international
trade. Domestic uses of acceptances have never been important
in this country, since the practice of open-account financing
was firmly established here before an acceptance market
Of the 1.8 billion dollars of gold sold by the United States
during the fifteen months following the currency devaluations,
only about 350 million was sold during the nine months
ended June 1950, while about 1.5 billion was sold in the six
months from July through December. This acceleration in
United States gold sales reflects in part merely a more rapid
conversion into gold of dollar balances acquired by
foreign countries. For the rest, it reflects the more rapid
acquisition of dollars by foreign countries which has resulted
mainly from the swift rise in the prices of basic commodities
and in the aggregate value of United States imports since
the beginning of the war in Korea.
Just as in earlier years it was the practice for foreign
monetary authorities to sell gold whenever they needed to
replenish dollar balances that had fallen below customary levels,
so now it is common practice for them to convert into gold
any dollar balances that are in excess of these levels.1 From
October 1949 to September 1950, however, foreign countries’
dollar assets increased by 2 billion dollars despite the fact that
they purchased gold from the United States during these
twelve months to the extent of 1.1 billion. By buying
and selling gold freely at a fixed price in transactions with
foreign monetary authorities for all legitimate monetary pur
poses, the United States maintains an international gold bullion
standard which enables the dollar to serve as a fixed point
of reference for all other currencies.
developed. It is the international uses, particularly the financing
The scope and general direction of the gold outflow during
of merchandise imports and exports, which have traditionally
the first postdevaluation year is shown in Table I. Of the total
accounted for the bulk of the bankers’ dollar acceptances
net sales of gold to foreign countries by the United States from
drawn. Substantial increases in the volume of acceptances
October 1949 through September 1950, 58 per cent repre
outstanding, therefore, can be expected only from expansion
sented sales to the sterling area. Sales to ERP countries other
of these international uses. Such expansion presupposes a
than the United Kingdom made up 17 per cent of the total,
growth of international trade in nongovernmental channels,
and sales to Latin America 16 per cent. Despite this outflow,
whether through an over-all increase in trade (both private
the monetary gold stock of the United States, which amounted
and governmental) or through a shift of existing trade from
to 22.7 billion dollars on December 29, 1950, still represents
governmental to private channels.
almost two thirds of the world’s central monetary gold re
serves, exclusive of gold reserves held by the USSR.
6 Foreign correspondents of domestic commercial banks are usually
also commercial banks, although some foreign central banks maintain
deposits with American commercial banks. Like the foreign corre
spondents of Federal Reserve Banks, they have for years followed the
practice of investing part of their dollar holdings in bankers’ accept
ances.
1 Most of the gold so purchased by foreign monetary authorities is
earmarked for their account at the Federal Reserve Bank of New York.
Gold under earmark at the Federal Reserve Bank of New York for the
account of foreign central banks and international institutions amounted
to 5,626 million dollars on December 29,1950, as against 4,061 million
on September 30, 1949.
MONTHLY REVIEW, JANUARY 1951
8
T able I
U nited S tates N et G old Sales to F oreig n C ountries
(In m illions o f d olla rs)
Year ended September 30, 1950
Area and country
Sterling area................................................
E R P countries (other than the United
K ingdom )................................................
Latin A m erica.............................................
All other.......................................................
T ota l*..............................................
Three months Nine months
ended June
ended Sept.
30, 1950
30, 1950
Total
580
47
627
69
56
20
116
114
75
185
170
95
726
352
1,078
* Excluding transactions with the Bank for International Settlements.
N ote: Because of rounding, figures may not add to totals shown.
All transactions in monetary gold between the United States
and foreign countries are conducted through official channels,
and as a rule they are reflected in changes in the central
monetary reserves of foreign countries. Besides the gold pur
chased from the United States since the fall of 1949, foreign
countries as a whole (excluding the USSR) have also added
to their reserves that portion of current gold output that was
neither absorbed by the arts and industry nor acquired by
private hoarders. In 1949, of some 750 million dollars of gold
mined outside the United States and the USSR, somewhat less
than 300 million seems to have found its way into foreign
monetary reserves, while 230 million was sold to the United
States. In 1950, gold outpu't outside the United States and
the USSR amounted to some 775 million dollars, but it is
still too early to make a reliable estimate of the portion of
this newly mined gold which went into the central monetary
reserves of foreign countries.
Foreign countries as a whole (excluding the USSR)
increased their official gold stocks in the twelve months ended
September 1950 by 1.6 billion dollars to a total of about 10.6
billion. Of the increase, almost 300 million took place in the
last quarter of 1949, about 550 million in the first two quarters
of 1950, and about 775 million in the third quarter of 1950.
In contrast with these gains, foreign countries lost 1.2 billion
dollars of gold in 1948, and 2.4 billion in 1947 (exclusive
of gold contributions to the International Monetary Fund
totaling 670 million). In the first three quarters of 1949,
only a small amount of gold was lost by foreign countries.
The recent pattern of gold transactions can be better under
stood if account is taken not only of the gold stocks which
foreign monetary authorities own, but also of the dollar
balances and some other dollar assets which are held in the
Table II
Foreign Gold Reserves and Dollar A ssets
Millions of dollars
September 1950p
Area and country
Canada...........................................................................
Sterling area*...............................................................
E R P countries (other than United Kingdom):
Belgium-Luxembourg (and Belgian Congo) . . .
France (and dependencies)...................................
Netherlands (and Netherlands W est Ind ies). . .
Sweden.......................................................................
Switzerland...............................................................
Other E R P countries’}-...........................................
Gold
Dollar
assets
554
3,070
1,593
946(a)
628
543
252
229
87
1,529
730
163
280
305
285
110
604
559
June 1950
Per cent change in
total holdings
September 1949
July 1950 Oct. 1949
to Sept.
to June
1950
1950
Gold
Dollar
assets
Total
Gold
Dollar
assets
Total
521
2,322
984
1,151
1,505
3,473
460
1,777
827
670
1,287
2,447
+43
+16
+17
+ 42
791
823
557
514
197
2,133
1,289
691
543
252
229
71
1,559
732
154
243
280
256
113
595
478
845
786
532
485
184
2,154
1,210
740
545
258
179
70
1,485
676
166
191
280
194
62
509
382
906
736
538
373
132
1,994
1,058
+
+
+
+
+
- 7
+ 7
- 1
+30
+ 39
+ 8
+14
Total
2,147
4.016(a)
6
5
5
6
7
1
7
T o ta l.............................................................
3,998
2,306
6,304
4,077
2,119
6,196
3,953
1,784
5,737
Other Continental Europe %......................................
473
94
567
482
102
584
499
102
601
Latin America:#
Argentina..................................................................
Brazil..........................................................................
Venezuela.................................................................
Other Latin America..............................................
216
317
373
803
269
187
102
960
485
504
475
1,823
216
317
373
796
238
125
117
869
454
442
490
1,665
164
317
373
726
222
145
99
819
386
462
472
1,545
+ 7
+14
- 3
+10
+18
- 4
+ 4
+ 7
+ 2
+ 8
-
-
3
3
T o ta l.............................................................
1,769
1,518
3,287
1,702
1,349
3,051
1,580
1,285
2,865
+ 8
+ 6
Asia:#
Philippine R epublic................................................
Other A sia.................................................................
3
679
318
719
321
1,398
2
677
291
607
293
1,284
1
703
348
521
349
1,224
+10
+ 9
-1 6
+ 5
T o t a l.............................................................
682
1,037
1,719
679
898
1,577
704
869
1,573
+ 9
0
All other........................................................................
100
91
191
86
86
172
55
85
140
+ 11
+ 23
Grand to ta l..................................................
10,646
9,869
6,689
16,558
9,028
5,622
14,650
+ 11
+ 13
7 , 585(a) 18.231(a)
p Preliminary.
(a) Including certain dollar assets held in specific trust accounts, previously not covered.
* Including the United Kingdom but excluding Eire and Iceland, which are included under “ Other E R P countries” .
t The data for this group of countries include gold to be distributed, as restitution by Germany, by the Tripartite Commission to European countries (including some
non-ER P countries).
% Including the dollar assets, but not the gold reserves, of the USSR.
# Excluding sterling, French-franc, and Dutch-guilder areas.
N ote: The table covers reported gold reserves of central banks and governments (excluding the USSR) and official and private dollar assets held in the United States
by foreigners (including the USSR). Gold and dollar holdings of the International Monetary Fund, the International Bank for Reconstruction and Developm ent,
and the Bank for International Settlements are excluded. Gold figures are partly estimated. See, also, footnote 2 on page 9.
9
FEDERAL RESERVE BANK OF NEW YORK
United States on both official and private foreign account.2
Table II shows the changes in foreign gold and dollar assets
during the twelve months ended September 1950; June 1950
data are also given in order to distinguish the pre-Korean
and subsequent developments. The chart shows the quarterly
movements in such assets for the more important areas since
the end of 1945.
Gold and dollar assets of foreign countries increased from
14.7 billion dollars in September 1949 to 18.2 billion in
September 1950, or by 24 per cent. Of this 3.5 billion dollar
increase, 1.9 billion occurred between the currency devaluations
of September 1949 and the outbreak of the Korean war, while
1.7 billion took place during the first three months of the
Korean hostilities. In September 1950, however, foreign
gold and dollar assets were still 12 per cent less than the 20.7
billion dollars to which they had amounted at the end of 1945,
before they began to be seriously depleted under the impact
of the postwar dollar disequilibrium. On the other hand, the
September 1950 total was 25 per cent higher than the postwar
low of June 1948, three months after the beginning of the
European Recovery Program, when foreign gold and dollar
assets fell to 14.6 billion dollars.
The rise in foreign gold and dollar assets has, however, been
^ery unevenly distributed among the various countries, as is
apparent from Table II and the chart. Almost 45 per cent
of the total increase during the year ended September 1950
was in the gold and dollar assets of the sterling area, which
rose by more than one billion dollars during the nine months
ended June 1950, and by over 500 million dollars during the
three months ended September 1950. The gold and official
dollar holdings of the United Kingdom alone stood at 2,756
million dollars at the end of September 1950, as against 1,425
million at the end of September 1949. The gold and dollar
assets of countries other than the United Kingdom that
participate in the European Recovery Program increased about
570 million dollars in the twelve months ended September
1950; of this increase, Switzerland accounted for 139 million
dollars; the Netherlands (including dependencies), 141
million; France (including dependencies), 87 million; and
Sweden, 65 million. On the other hand, the gold and dollar
holdings of Belgium-Luxembourg ( including the Belgian
Congo) declined by 115 million, partly because of a repurchase
from the International Monetary Fund of 20.6 million dollars’
worth of Belgian francs in January 1950.
Foreign Gold Reserves and Dollar Assets
Billions
of dollars
Billions
o f dollars
1946
1947
1948
1949
1950
* Excluding gold holdings, but including dollar assets, of the
International institutions are excluded.
t E xcept the United Kingdom and Switzerland.
# Including the United Kingdom but excluding Eire and Iceland.
$ Excluding sterling, French-franc, and Dutch-guilder areas.
U SS R .
Canadas gold and U. S. dollar assets increased 218 million
dollars during the nine months ended June 1950, and 642
million during the following three months, reflecting in part
an accelerated flow of capital from the United States to Canada.
Latin America gained 422 million dollars of gold and dollar
assets between September 1949 and September 1950, thus
continuing the replenishment of its reserves that had begun
early in 1949.
The rise in foreign gold and dollar assets, and the con
comitant decline in United States monetary gold stocks and
increase in dollar indebtedness to foreign countries, reflect,
of course, important changes in the various countries’ balances
of international payments. Most important have been the
changes in the balance of payments of the United States, whose
export surplus of goods and services virtually disappeared in
the third quarter of 1950. In both August and October, the
United States achieved a merchandise import surplus— the
first since June 1937.
At its postwar peak in the second quarter of 1947, the
United States export surplus of goods and services, including
2 Unless otherwise stated, the term "foreign gold and dollar assets” , those exports which were financed by foreign aid, was running
as used in the remainder of this article, comprises the gold reserves
at an annual rate of 12.7 billion dollars; the annual rate
and dollar assets held by foreign central banks and governments, and
dropped
to 7.6 billion in the first half of 1949, to 4.9 billion
in addition the dollar assets held on private foreign account. The gold
reserve of the USSR is excluded, but its dollar assets are included.
in the second half of 1949, and to 3.0 billion in the first half
Gold data are taken, as a rule, from central bank statements, but in
of 1950. This decline in the export surplus was the combined
a few cases other official holdings have also been included. Where
published data are incomplete or unavailable, figures have been
result of a decrease in exports and a rise in imports, with the
partly estimated. Data on foreign assets in the United States are
fall in exports as the main factor until 1950, when a rapid
drawn from the statistics of the United States Treasury, and cover all
rise in imports occurred. Exports of goods and services
short-term assets (i.e., deposits, short-term commercial paper, Treasury
bills, etc.) held for foreign residents by banks in the United States.
declined from an annual rate of 21.1 billion dollars in the
In addition, some foreign countries are holding relatively short-term
second quarter of 1947 to 13.9 billion in the third quarter of
United States Treasury notes, which are also taken into account here.
10
MONTHLY REVIEW, JANUARY 1951
1950, and imports of goods and services rose from an annual
rate of 8.4 billion dollars to 13.6 billion.
Prior to the invasion of South Korea, the gradual decline in
the United States export surplus rested on the sound foundation
of a rise in production and productivity and a subsidence of
inflation in a large number of foreign countries. The countries
whose economies had been disrupted by the war gradually
recovered their exporting capacity and their ability to replace
abnormal postwar imports from the United States by domestic
production. The tendency to shift purchases from dollar to
nondollar sources of supply was abruptly reinforced in the
middle of 1949 by the tightening of foreign exchange controls
in many countries. The United Kingdom and other sterling
area countries, for instance, announced that imports payable
in dollars would be cut by about 25 per cent. Shortly thereafter,
the devaluation of the pound sterling and some thirty other
currencies had the effect of rendering American export com
modities less attractive pricewise. Between the first half of
1949 and the first half of 1950, foreign countries as a whole
cut their merchandise purchases from the United States by 27
per cent and the United Kingdom and the rest of the sterling
area actually reduced such purchases by 39 per cent.
On the other hand, United States merchandise imports in
the first half of 1950 were little more than 12 per cent
higher (measured by dollar value) than during the recession
in the first half of 1949. United States imports from the
overseas sterling area3 were only 9 per cent higher; this
rise of 47 million dollars was small in comparison with the
improvement in the dollar position of the sterling area as a
whole during that period.
Canada likewise approached a self-sustaining position in
mid-1950, by which time the countries of Continental West
ern Europe, particularly France, were also much closer to a
dollar equilibrium than a year earlier.
There were several reasons for caution in interpreting the
"pre-Korean” rise in foreign gold and dollar assets. In the
first place, exports from the industrial Western European
countries to the United States and to the rest of the Western
Hemisphere were showing only a disappointingly small expan
sion. In addition, capital movements— an unpredictable factor,
especially under present circumstances— appeared to have
contributed to the improved gold and dollar position, although
the sterling area apparently would have attained a dollar
surplus even without the aid of private capital movements.
Finally, the rise in foreign gold and dollar assets was very
unevenly distributed; nor was it large enough in many
countries to provide a reasonable margin of safety.
A change in the gold and dollar outlook for foreign countries
became observable soon after the invasion of South Korea.
Foreign countries in the aggregate experienced a rapid improve
ment in their dollar position, not only under the impact of
those basic factors that had previously operated, but also
because of the sudden upsurge in United States imports of
primary commodities for strategic stockpiling, private inven
tory accumulation, and a booming private economy, at prices
that in some cases attained all-time highs.4
As previously explained in this Review,5 however, the
recent stimulation of our imports is likely to remain fairly
general only so long as the transition to rearmament is
relatively more rapid in the United States than in Western
Europe. Once the European rearmament program gets actively
under way, resources will be increasingly diverted from export
industries and the growth of European exports to this country
may be arrested or reversed. Moreover, the rise in primary
commodity prices affects not only the United States imports,
but also those of European and other manufacturing areas.
Up to the end of 1950, Western Europe had not yet felt the
impact of its own accelerated rearmament. As the additional
defense expenditures now contemplated are undertaken, the
strain of rearmament will become more and more apparent;
and it is bound to affect adversely the balances of payments
and monetary reserves of Western Europe. It was because of
these anticipated difficulties and burdens, which seem certain
to fall upon the British economy and balance of payments in
1951, that ERP aid to Britain was not formally terminated but
was merely suspended as from January 1, 1951, with the
understanding that the whole question would be reconsidered
if necessary.
The rise in primary commodity prices has greatly accentu
ated the worsening in the terms of trade of the Western
European industrial countries that had already been noticeable
before the Korean war. Furthermore, Great Britain, as banker
of the sterling area, has begun to incur new sterling liabilities
vis-a-vis the overseas sterling countries, owing to the conversion
into sterling of their increased dollar earnings. Although the
strengthening of sterling area gold and dollar reserves has
greatly improved the standing of the pound sterling as an
international currency, the United Kingdom, in order to make
its payments position secure, will need to increase its exports
to the sterling area as much as possible to minimize the
accumulation of fresh sterling debts.
By the end of 1950 it had thus become increasingly difficult
to separate the permanent factors working toward dollar
equilibrium from the temporary and extraneous ones, and to
appraise the effects of rearmament under conditions of full
employment. Yet the prevailing and prospective special circum
stances must not be allowed to obscure the remarkable progress
toward reestablishing foreign countries’ dollar equilibrium that
had become clearly discernible before the invasion of South
Korea. The problem that now arises is how to preserve the
gains which have been made thus far on the difficult road
toward dollar equilibrium, while at the same time facing the
needs of defense in an unsettled world.
4 See “ International Commodity Price Trends” in the Monthly
Review for December 1950, pages 141-144.
5 See “Recent Trends in the United States Balance of Payments” in
3
I.e., the sterling area excluding the United Kingdom, Eire, and
the October issue of this Review, pages 112-115.
Iceland.
FEDERAL RESERVE BANK OF NEW YORK
11
BANKING AND BUSINESS DEVELOPMENTS
IN THE SECOND DISTRICT
reported that truck farmers, who harvested a bumper crop,
received very low prices for their produce.
The most significant economic issue facing the country today
is the threat of inflation, in the opinion of bankers in various
parts of the District outside New York City who were visited
during the fourth quarter by representatives of the Federal
Reserve Bank of New York. Bankers have, therefore, wel
comed the reimposition of Regulation W , restricting consumer
credit, and the new Regulation X, limiting credit in connection
with new residential construction. But while they feel that such
regulations are necessary, most bankers also expressed the
belief that credit control alone cannot prevent inflation.
Business loan demand continued heavy, and the outstanding
volume of business loans was increasing at most banks. Some
part of this demand is considered seasonal, in anticipation of
holiday trade. In numerous instances, however, bankers re
ported that larger demands for funds result from higher costs
of goods. Also, merchants are said to be borrowing to carry
higher receivables and to meet their accounts payable, which
are being billed more promptly than has been customary in
the past.
In recent weeks the results of consumer credit regulation
have become evident. The total of instalment loans outstand
ing, and particularly of loans to finance new automobiles, has
been stabilized or reduced in most of the banks visited. Many
bankers have indicated that the terms of Regulation W now
make it difficult for the average wage earner to purchase a new
car. (It has been pointed out elsewhere, however, that wage
earners more commonly buy used cars, and that prices of such
cars started to decline some time before the tightening of con
sumer credit restrictions, and continued downward subse
quently, so that the cost of used cars to wage earners has been
substantially reduced.) The reduced demand for new cars,
combined with heavy shipments to dealers from automobile
manufacturers and the usual fall lag in anticipation of new
models, caused some backing-up of inventory in the automobile
dealers’ hands.
Regulation X, on the other hand, has had little direct effect
on most of the commercial banks visited. There has been little
new construction in the rural areas of the District and the
normal mortgage terms of most banks have been within those
prescribed by the Regulation.
Banks in industrial areas reported increased manufacturing
activity, with numerous plants engaged in overtime operations.
Unemployment was declining rapidly and in some areas short
ages of certain classes of labor were appearing. Shortages of
materials are feared for the future. Retail trade, except for the
automobile business, was reported to be good throughout the
District.
The large portion of the Second District in which dairy
farming is important has enjoyed higher earnings this year,
as the result of a material increase in the price of milk. The
grape crop in New York State was heavy and was sold at
high prices. Some farmers were reported to be storing the
large yield of apples in expectation of higher prices. Potato
growers in New Jersey, most of whom sold their crop at
Government-supported prices, enjoyed a prosperous season.
On the other hand, New York potato farmers, who elected
not to take advantage of the Government price-support
program, barely broke even on this year’s harvest. Also, it was
Farm loans to cover harvest costs and to carry warehoused
produce account for part of the increase in loans of banks serv
ing agricultural areas. In addition, farmers are continuing to
buy equipment as a hedge against possible shortages of
machines and manpower next spring. Local municipal borrow
ings for school buses and snow removal equipment have in
creased banks’ loan totals in a number of instances.
In contrast to demand deposit totals, which have been stable
or increasing at most Second District banks, time deposits have
generally been moving downward, though more slowly than
earlier in the year. The chief reason given for recent decreases
is the usual pre-holiday payment of Christmas Club deposits.
The earlier withdrawals, however, were attributed to the wave
of buying brought on by hostilities in Korea and, frequently,
to transfers to savings banks offering a higher interest rate.
The decline in time deposits in commercial banks is thought
now to have been checked. A few banks have resorted to
increases in the rate of interest paid but, by and large, bankers
feel that the possibility of declining earnings in the future
makes such a move undesirable.
There have been few over-all changes in bank investment
portfolios. Here and there banks have reported that holdings
of municipal securities were being increased, and most banks
invested in the special offerings of Series F and G Savings
bonds during the fall. But the expectation of increased reserve
requirements (which have since been announced by the Board
of Governors) tended either to immobilize excess reserves or to
channel new investments into short-term Government securi
ties. Recent increases in short-term yields have served as an
additional inducement to the latter type of action.
INDICATORS OF BUSINESS A CTIVITY
For several years, this Review has carried each month a table
of selected "Indexes of Business”. This table replaced the
monthly indexes of production and trade which had been
compiled and published by this bank until early in 1944.1
Hereafter, a considerably revised and enlarged table will be
presented in a form which, it is hoped, will be of greater use
in appraising business conditions.
1 See this Review, February 1, 1944, p. 14.
12
MONTHLY REVIEW, JANUARY 1951
B u sin ess In d ica tors
Percentage change
1950
1949
Item
Unit
November
October
September
November
Latest month Latest month
from previous from year
month
earlier
U N IT E D STATES
Production and trade
Industrial production*......................................................................
Electric power output*.....................................................................
Ton-miles of railway freight*..........................................................
Manufacturers’ sales*.......................................................................
Manufacturers' inventories*...........................................................
Manufacturers’ new orders, to ta l...................................................
Manufacturers' new orders, durable good s..................................
Retail sales*. ....................................................................................
Residential construction contracts*..............................................
Nonresidential construction contracts*........................................
Prices, wages, and employment
Basic com m odity p rice s f..................................................................
Personal income* (annual rate)......................................................
Composite index of wages and salaries*........................................
Nonagricultural em ploym ent*.........................................................
Manufacturing em ploym ent*..........................................................
Average hours worked per week, m anufacturingf.....................
U nemploy ment....................................................................................
Banking and finance
Total investments of all commercial banks.................................
Total loans of all commercial banks..............................................
Total demand deposits adjusted.....................................................
Currency outside the Treasury and Federal Reserve B an k s*..
Bank debits* (U. S. outside New York C ity ).............................
Velocity of demand deposits* (U. S. outside New York C ity )..
Consumer instalment credit outstanding!...................................
United States Government finance (other than borrowing)
Cash incom e........................................................................................
Cash ou tgo...........................................................................................
National defense expenditures........................................................
1935-39 =
1935-39 =
1935-39 =
billions of
billions of
billions of
billions of
billions of
1923-25 =
1923-25 =
100
100
100
$
$
$
$
$
100
100
Aug. 1939 = 100
1926 = 100
1935-39 = 100
billions of $
1939 = 100
thousands
thousands
hours
thousands
millions of $
millions of $
millions of S
millions of $
billions of $
1935-39 = 100
millions of $
millions of $
millions of $
millions of $
217
306
207p
2 1 .2p
31. op
2 4 .6p
12. Ip
11.8
294p
303p
211
298
199
21.0
30.6
23.6
11.5
12.1
332
312
173
256
158
16.2
28.7
16.9
6 .9
10.6
256
273
-
1
#
+ 4
+ 1
+ 3
+ 4
+ 5
- 3
-1 1
- 3
+24
+ 19
+54
+34
+ 9
+ 43
+75
+ 8
+ 9
+ 17
329.0
169.1
174.8
2 3 0 .Ip
213p
45,407
15,596
41.3
1,940
328.2
169.5
173.8
228.7
211
45,201
15,441
41.0
2,341
249.4
151.6
168.6
205.7
201
42,431
13,684
39.1
3,409
+ 4
+ 1
#
+ 1
+ 1
#
#
#
+ 15
+38
+13
+ 4
+ 14
+ 6
+ 7
+14
+ 5
-3 4
7 3 ,860p
51,650p
9 0 ,650p
27,298
80.7
97.7
74,600p
49,890p
8 9 ,400p
27,233
79.2
100.5
13,379p
74,630p
4 9 ,030p
8 8 ,lOOp
27,208
79.4
102.3
13,337p
77,290
42,860
85.000
27,395
6 5.0
8 6.0
10,441
- 1
+ 4
+ 1
#
+ 2
- 3
#
- 4
+ 21
+ 7
#
+24
+14
+ 32
3 ,489p
3,417p
1 ,616p
2,426
3,335
1 ,499p
4,865
3,199
1,155
2,965
3,426
1,124
+ 44
+ 2
+ 8
+18
123
148p
181p
171.0
7 ,2 1 5 .Op
2 ,5 8 9 .4
43.8
3 .5
116.6
123
163
205
170.3
7 ,1 6 0 .4
2 ,5 5 5.1
47.8
3 .3
130.0
112
156
207
165.8
6 ,8 7 3 .3
2,3 6 6 .2
37.9
2.9
9 9.3
- 1
- 9
-1 2
+ 1
+ 1
- 1
+ 1
+ 6
- 2
+ 9
- 3
- 7
+ 4
+ 5
+ 9
+ 17
+28
+15
215p
306
1 1 .4p
343.8
171.6v
175.6
45,385p
15,578p
41. Ip
2,240
+44
SECON D F E D E R A L R E S E R V E D IS T R IC T
Electric power output* (New Y ork and New Jersey)...................
Residential construction con tracts*...................................................
Nonresidential construction contracts*............................................
Consumers’ pricesf (New York C ity )...............................................
Manufacturing em ploym ent*..............................................................
Bank debits* (New York C ity )..........................................................
Bank debits* (Second District excluding N. Y . C. and A lb a n y ).. .
Velocity of demand deposits* (New York C ity )............................
1935-39 =
1923-25 =
1923-25 =
1935-39 =
thousands
thousands
billions of
billions of
1935-39 =
100
100
100
100
$
$
100
122
172.1
2 ,5 7 3 .Op
44.2
3 .7
114.4
p Preliminary.
* Adjusted for seasonal variation.
t Seasonal variations believed to be minor; no adjustment made.
# Change of less than 0.5 per cent.
Source: A description of these series and their sources is available from the Domestic Research Division, Federal Reserve Bank of New York, on request.
A total of 29 national and 9 regional business indicators are
shown in the new table. A mimeographed description of these
series and the sources from which they are obtained is avail
able from the Domestic Research Division of this bank on
request. The table will show regularly the latest available data
for each of the series, as well as percentage changes from the
preceding month and from the same month a year previous,
thus facilitating comparisons. As indicated in the mimeo
graphed description mentioned above, nearly all series included
in this table are available in their original form in easily acces
sible statistical sources, which should be consulted for back
data. So far as possible, the series have been adjusted for
normal seasonal variations, in order to present a clearer picture
of cyclical movements.
It is difficult to choose a group of business indicators which
will satisfy the needs of readers in many different lines of
activity. In attempting to select a list of series which would
meet a wide variety of needs, this Review has been guided by
a recent study of statistical indicators of turns in the business
cycle, made by Dr. Geoffrey Moore of the National Bureau of
Economic Research.2 Dr. Moore tested the cyclical behavior
of over 800 statistical series and selected 18 monthly and three
quarterly series which he considered outstanding business indi
cators. Fifteen of the monthly series included in the new table
presented herewith are identical with or closely related to
those in Dr. Moore’s list.3
Dr. Moore classified the series he selected as to whether
they had led or lagged behind the turns of the general business
cycle, or coincided with them. The purpose of this classifica2 Geoffrey H. Moore, Statistical Indicators of Cyclical Revivals and
Recessions, Occasional Paper 31, National Bureau of Economic
Research, 1950.
3 The monthly series omitted are those on industrial common stock
prices, liabilities of business failures, and new incorporations. The
quarterly series, also omitted, are those on gross national product,
corporate profits, and bank rates on business loans.
13
FEDERAL RESERVE BANK OF NEW YORK
in the economic area surrounding New York City, and Fairfield
County, Connecticut, much of which is suburban to New York
City. Where data for the Second District, as such, were not
available, statistics for significant areas falling wholly or partly
within the District have been used instead. Data for bank
debits and the velocity of demand deposits are given for New
York City separately because of the influence of the large
volume of New York City financial transactions on them.
DEPARTMENT STORE TRADE
tion was, of course, to give a better idea of the ability of these
indicators to predict or confirm cyclical turning points. Series
which generally turn up or down before business in general
does are called "leading” series by Dr. Moore. "Leading” series
included in the accompanying table are new orders of durable
goods manufacturers, residential building contracts, commercial
and industrial building contracts, average hours worked per
week, and basic commodity prices. Series in the accompanying
table which were characterized by Dr. Moore as being "roughly
coincident” with business cycle turns include nonagricultural
employment, unemployment (inversely), bank debits outside
New York City, industrial production, railway freight traffic,
and wholesale prices. The "lagging” group in the table is made
up of personal income, retail sales, consumer instalment debt,
and manufacturers’ inventories.
Because of this banks responsibilities in the field of money
and credit policy and its position as fiscal agent of the United
States Government, special attention has been paid to banking
and financial statistics. The preliminary figures on cash income
and outgo of the Federal Government are computed by this
bank from published Treasury statistics. The figures on defense
expenditures are a reclassification of Treasury data and cover
expenditures of the Atomic Energy Commission and the Coast
Guard, and for Mutual Defense Assistance and maritime activi
ties, as well as national defense outlays as grouped by the
Treasury.
In connection with the revision of the table of business
indicators published in the Review, an effort has been made
to expand the number of series shown for the Second Federal
Reserve District. As shown in the accompanying map, the
Second Federal Reserve District consists of all of New York
State, the twelve northern New Jersey counties4 which fall
Shoppers spent more money in Second District department
stores during December than in any previous month,
according to preliminary indications. The December sales
volume, in dollars, is estimated to have been about 4 per
cent greater than a year earlier and some 1 to 2 per cent
above the December 1948 volume, although there was one
less pre-Christmas shopping day in December 1950. However,
it is very likely that the physical volume of sales was some
what less than in December 1949 and about the same as in
December 1948.
The estimated total consumer expenditure in department
stores in this District during December was approximately
200 million dollars, of which from 90 to 95 per cent was
spent during the first twenty shopping days of the month,
with the heaviest concentration of buying occurring during
the week ended December 16.
The record dollar volume of inventories held by the stores
on December 1 apparently provided consumers with a fairly
complete assortment to choose from in most merchandise
lines. Sizable year-to-year increases in sales were reported
in many departments, with hosiery, gloves, jewelry, and men’s
furnishings in strong demand. Household durables also
recorded large gains, with radio-television sales particularly
outstanding.
At the end of November, future inventory commitments
of Second District department stores generally conformed
with the pattern of the previous five months, as the dollar
volume of outstanding orders remained well ahead of the
year-ago level. During November, however, some departure
from the recent buying policy of the stores was noted in that
the value of new orders was reduced below the comparable
year-earlier dollar volume.
In s t a l m e n t B u y i n g
in
N e w Y o r k Cit y
The reaction to virtually three entire months of unprece
dented midsummer retail activity was clearly evident in the
comparative showing of New York City department store
sales during October and November. Consumer purchases
of household appliances and other housefurnishings and the
concurrent expansion of instalment credit to finance the major
4 The twelve counties are: Bergen, Essex, Hudson, Hunterdon, portion of these sales— the most consistently noteworthy
Middlesex, Monmouth, Morris, Passaic, Somerset, Sussex, Union, and
features of the high volume of department store sales during
Warren.
14
MONTHLY REVIEW, JANUARY 1951
the third quarter— receded sharply in relation to their respec
tive year-earlier levels. In fact, for the month of November,
instalment sales in New York City department stores fell
4 per cent below the November 1949 volume— the first
year-to-year decrease in sixteen months. To some extent, the
reduction in consumer spending may be regarded as a normal
aftermath of the spending wave during the summer. How
ever, the restraining effects of Regulation W on instalment
buying was apparently also a major factor in the contraction
of household durables sales, and of total sales as well, relative
to their year-ago volumes. In each week since the tightening of
Regulation W on October 16, except in the week ended Octo
ber 28, instalment sales in New York City department
stores failed to exceed those of the corresponding week in
1949. The rush to buy television sets before the Federal
excise tax became effective on November 1 was largely respon
sible for the increase in instalment sales during the week
ended October 28.
The importance of instalment purchases in the over-all
sales performances of New York City department stores is
revealed in the accompanying table. The strong demand for
consumer durables, in which instalment credit has always
been a decidedly important factor, aided considerably in
maintaining total store sales during the first half of the year
near the corresponding year-earlier volume, was a major reason
for the record gains in the third quarter, and helped in the
achievement of some year-to-year increases in total sales
in October. During November, however, the proportion
of instalment sales to total sales declined, and although the
dollar volume of instalment buying was 4 per cent less than
the November 194-9 level, noninstalment purchases rallied
sufficiently so that total sales were down only 1 per cent.
It is interesting to note that instalment sales in New York
City department stores, expressed as a percentage of total
Instalment and Durable Goods* Sales at
New York City Department Stores
Percentage of total sales
Percentage change,
1949 to 1950
Instalment
sales
Period
January-June. . .
Third quarter.. .
O ctober...............
Novem ber...........
Instal
ment
sales
Durable
goods
sales
1950
1949
+14
+32
+10
- 4
+ 6
+33
+16
+ 5
11.7
14.1
13.2
11.9
9 .7
11.9
12.5
12.2
Durable goods
sales
1950
17.3
21.9
21.2
15.8
1949
15.6
18.4
19.1
15.0
Includes only data for furniture and bedding, domestic floor coverings, major
household appliances, and radio and television sales.
Indexes of Department Store Sales and Stocks
Second Federal Reserve District
(1 9 3 5 -3 9 a v e ra g e = 1 0 0 per ce n t)
1950
1949
Item
N ov.
Oct.
Sept.
N ov.
Sales (average daily), unadjusted.................
Sales (average daily), seasonally ad ju sted ..
302
234
259
238
267
262
29 Sr
23 lr
Stocks, unadjusted............................................
Stocks, seasonally adjusted............................
306
266
291
258
256
243
256r
222r
r Revised.
sales, are higher than for the United States as a whole. This
has been generally the case since 1941 (the earliest year for
which data are available), and very likely for many years
before then, as New York City retailers were among the
first to utilize the instalment credit mechanism, both as a
competitive weapon and as a means of broadening their
markets by attracting the lower income groups. Moreover,
in New York City department stores, the sales volume of
durable goods constitutes a larger portion of total store
sales than if does in most other areas of the United States.
This is primarily due to the large number of apparel stores
in New York City, selling in direct competition with the
department stores. Since apparel stores are relatively more im
portant here than in the retail trade structure of other parts
of the country, they draw proportionately more business from
their department store competitors.
Department and Apparel Store Sales and Stocks, Second Federal Reserve
District, Percentage Change from the Preceding Year
Net £sales
Locality
N ov. 1950
Department stores, Second D istrict...
New York C ity ......................................
Northern New Jersey...........................
+
1
Niagara Falls......................................
Rochester............................................
- 1
+ 2
+ 1
+ 2
+ 6
+ 8
- 4
— 5
+11
+ 12
+ 12
+ 2
+ 3
+ 2
+ 1
+ 4
+ 3
+ 1
+ 7
+ 8
+ 7
+ 11
+ 10
Apparel stores (chiefly New York C ity ).
— 5
Westchester C ounty..............................
Fairfield C o u n ty ....................................
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 York State...................
Binghamton........................................
Western New York S t a t e ...................
Stocks on
Jan. through
hand
Nov. 1950 Nov. 30, 1950
+ 2
+20
+
+
+
+
+
+
+
1
5
3
5
7
8
1
0
+ 3
+ 2
+ 2
+ 6
+ 6
+ 6
+ 5
+ 3
+ 4
+ 2
+ 10
+ 3
+ 2
+ 8
+ 4
+ 21
+20
+ 21
+ 4
+ 15
+ 18
+ 17
+ 16
+ 19
+26
+12
+20
+ 17
+32
+21
+ 17
+ 13
+ 11
+ 19
+ 21
+ 26
+ 7
+1.5
0
+ 14
15
FEDERAL RESERVE BANK OF NEW YORK
NATIONAL SUMMARY OF BUSINESS CONDITIONS
(Summarized by the Board of Governors of the Federal Reserve System, December 30, 1950)
Most measures of business activity were maintained at record
levels during November and December. Further marked in
creases occurred in prices, wages, and bank credit. Additional
Federal measures, including the declaration of a national
emergency, were undertaken to stabilize the economy and
expedite the defense production program.
I n d u s t r ia l P r o d u c t io n
The Board’s index of industrial production was 215 per cent
of the 1935-39 average in November as compared with the
revised October figure of 217. This small decline reflected
mainly the temporary effects of severe weather on coal and
steel output at the end of the month, and some curtailment of
activity in the automobile industry accompanying model
changeovers. In December, the index is expected to remain
at the November level.
Steel production declined 5 per cent in November, while
output in most other durable goods industries increased further.
Activity in machinery industries reached a rate of 307 per cent
of the 1935-39 average as compared with 265 at midyear and
229 at the beginning of the year. The November rise in
machinery reflected further gains in output of producers’ equip
ment; output of radios, television sets, and household appli
ances leveled off after advancing sharply in earlier months.
Activity in the aircraft, shipbuilding, and railroad equipment
industries was also far above the levels prevailing earlier in
the year.
INDUSTRIAL PRODUCTION
Output in most nondurable goods industries continued at
the exceptionally high level of the preceding three months.
Production of chemicals continued to rise. As a result of
Federal orders to curtail consumption of rubber for civilian
purposes, activity in the rubber products industry was reduced
from the record October rate.
Em p l o y m e n t
Employment in nonagricultural establishments, allowing for
seasonal changes, was maintained in November at the record
October level of 45.4 million persons. Manufacturing employ
ment leveled off after expanding by about 1.6 million persons
in the preceding nine months. Federal Government defense
employment continued to increase substantially.
Wage rates have continued to advance. In mid-November
average hourly earnings of factory workers were $1.51. This
was 7 per cent above the level at the beginning of the year.
C o n s t r u c t io n
Value of contracts awarded in November for most types of
private construction showed only small seasonal declines.
Awards for manufacturing buildings rose contraseasonally and
their total value this year will probably be almost double the
1949 volume. The number of housing units started continued
to decline from earlier very high levels and in November
amounted to 85,000 as compared with 103,000 in October.
Starts in November of this year were 11,000 less than in
November 1949.
EMPLOYMENT IN NONAGRICULTURAL ESTABLISHMENTS
1946
1948
1950
1946
1948
1950
* REVISED SERIES
Federal Reserve index. M onthly figures; latest figure shown is for November.
Bureau of Labor Statistics’ estimates adjusted for seasonal variation by
Federal Reserve. Proprietors and domestic servants are excluded. Midmonth
figures; latest shown are for November.
MONTHLY REVIEW, JANUARY 1951
16
D is t r ib u t io n
Department store sales showed somewhat more than their
usual sharp expansion in the first three weeks of December,
reflecting in part a marked pickup in sales of household dur
able goods, which had been declining in October and Novem
ber from earlier record levels. Total department store sales in
the first half of December were about 5 per cent larger than
in the corresponding period last year. Value of department
store inventories at the end of November was about one-fifth
greater than in the same month a year ago.
C o m m o d it y P rices
Wholesale prices rose further in December, with agricul
tural commodities showing the largest gains. Grain prices
reached new highs for the year and prices of livestock and
products, which had declined seasonally in September and
October, were advancing again.
Early in December steel prices were raised an average 6 per
cent and increases were announced for a variety of goods,
including automobiles, machinery, petroleum products, and
wool carpets. In some cases these increases were canceled
when the Economic Stabilization Agency announced a system
of pricing standards and requested that in general prices not
be advanced beyond the levels prevailing on December 1.
DEPARTMENT STORE SALES AND STOCKS
Federal Reserve indexes. M onthly figures; latest figure for sales is N ovem
b e r; latest for stocks is October.
The consumers’ price index advanced 0.5 per cent in Novem
ber as prices of apparel and housefurnishings rose further.
B a n k C r e d it
Loans at commercial banks increased substantially further
during November and the first three weeks of December.
Business loans continued to show increases greater than might
be expected seasonally. The rate of growth, however, for real
estate and consumer loans continued to slacken somewhat.
Since June, total loans and corporate and municipal security
investments of banks in leading cities have increased by over
6 billion dollars. This is the largest expansion in these loans
and investments on record.
A strong seasonal outflow of currency into circulation, which
totaled about three quarters of a billion dollars, reduced bank
reserves during November and the first three weeks of Decem
ber. Continued reductions in monetary gold stock also
absorbed reserves. These changes were offset by increases over
the same period in Federal Reserve System holdings of Gov
ernment securities of about one billion dollars.
Se c u r it y M a r k e t s
Yields on Government securities showed little change dur
ing the first three weeks of December. Prices of common
stocks rose, following a marked decline in the last week of
November.
WHOLESALE COMMODITY PRICES
Bureau of L abor Statistics' indexes.
week ended December 19.
W eekly figu res; latest shown are for
@FedFRASER