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MONTHLY REVIEW
O f Credit and Business Conditions
FEDERAL
RESERVE
V o lum e 33
BANK
JULY
OF
NEW
YORK
1951
No. 7
MONEY MARKET IN JUNE
After having been unusually tight through most of May, the
money market turned sharply on June 1 and remained easy
until the closing week of the month. The principal easing
influences arose from public debt transactions of the Treasury,
from Federal Reserve System purchases of called or maturing
Government securities, and from an unusual rise in the vol
ume of uncollected checks (for which the Reserve Banks had
already given credit in member bank reserve accounts) which
was accentuated by a labor dispute that interrupted some
important air transportation services. Most of the increase in
member bank reserves occurred during the first week of the
month, when the banks were also able to repay a large part
of the advances they had obtained from the Reserve Banks in
May. Moreover, the customary stringency associated with a
quarterly tax payment date was relieved in the period follow
ing June 15 by the Treasury’s further use of a new technique
for delaying the transfer of tax collections from the banks into
Treasury deposits at the Reserve Banks. There was an eventual
tightening toward the close of the month, however, as the
volume of "float” (credits to member bank reserves for un
collected checks) declined abruptly, the Treasury began calling
its deposits in commercial banks for transfer into the Reserve
Banks, and the release of funds through System purchases of
Government securities subsided. As a result, the earlier growth
in excess reserves of member banks was largely eliminated,
member bank borrowings increased moderately, and the rate
on Federal funds was again relatively high after the 22 nd.
Pu b l ic D e b t T r a n s a c t io n s
On June 1 it became profitable for a large proportion of the
holders of the old Series D Savings notes to redeem them
for cash and purchase the new and considerably more attrac
tive Series A notes (which the Treasury had begun offering
for sale in May). Actually, cash redemptions on the first of
the month were about 2.1 billion dollars, while sales amounted
to about 1.8 billion, thus resulting in an increase of roughly
300 million dollars in bank reserves. The occurrence of large
redemptions and simultaneous sales at this time had been
anticipated, and temporary informal arrangements were made
to handle the operation in a manner comparable with an ex
change of marketable securities. Instead of crediting sales pro
ceeds to Treasury Tax and Loan Accounts in the commercial
banks, both the redemption of old notes and the sale of new
notes in instances of such switching were to filter through the
Treasury’s accounts with the Reserve Banks without materially
affecting the banking system. However, because of the tech
nical difficulty in these circumstances of matching their sales
of new Savings notes to individual customers against redemp
tions of the old notes by those customers, some banks treated
a substantial volume of sales as new subscriptions instead of
exchanges. Thus these banks retained for temporary invest
ment at least a part of the proceeds of the redemption of the
old series of Savings notes turned over to them by their cus
tomers in payment for the new notes. The Treasury under
took to regain a considerable part of these funds by issuing
special calls on the specific banks involved. But these calls
came too late to avoid temporary Treasury borrowing from
the Reserve Banks in order to cover the excess of redemptions
over the return flow of funds into the Treasury’s account at
the Reserve Banks. Thus, on June 1, the Treasury sold 100
million dollars of special certificates to the Reserve Banks, and
liquidated them the next working day.
On May 28 the Secretary of the Treasury had announced
that the 1.6 billion dollars of 2% per cent partially tax-exempt
bonds called for June 15 and the 8.4 billion dollars of 1*4
per cent Treasury notes maturing July 1 would be exchanged
on June 15 for a l 7/s per cent 9V2 month certificate of indebt
edness. The books were open for this exchange from June 4
through 7. On completion of the conversion, the Secretary
CONTENTS
Money Market in June.............................................
The Financing of British Rearmament.................
A Day’s Work at the Federal Reserve Bank
of New Y o r k .........................................................
The Defense Program in Transition.....................
National Defense Expenditures..............................
Department Store Trade..........................................
The Treasury’s Cash Balances................................
89
91
92
94
96
98
99
90
MONTHLY REVIEW, JULY 1951
reported that less than 6 per cent of the ten billion dollar total
had been presented for cash redemption. This represented a
Treasury disbursement of 110 million dollars on June 15 for
the called bonds and indicated a further disbursement of 435
million dollars on July 1 for the maturing notes.
Yields on Treasury Bills
(Daily, May 1-June 26, 1951*)
G o v e r n m e n t Se c u r it y M a r k e t
In order to facilitate refunding in the market by holders
of the called or maturing Government securities who required
cash or very short-term investments, despite the attractive
terms of the Treasury’s exchange offering, the Federal Reserve
System purchased the "rights” to the new offering, as well as
some of the new certificates on a "when-issued” basis. As a
result, System net purchases of Government securities for the
first two statement weeks of the month aggregated 465 million
dollars. Net purchases later in the month were small—85 mil
lion dollars. Largely because of their gain in funds from
System purchases, the banks paid back (net) 320 million
of their advances from the Reserve Banks over the four state
ment weeks ended June 27.
Among the investors switching out of maturing or called
issues (i.e., the "rights” to subscribe to the new issue) were
those nonbank investors whose maturity requirements are of
very short term and those in need of cash to pay taxes on
June 15. Some investors subscribed for the new certificates,
but then in turn sold them on a "when-issued” basis for
delivery June 15. "When-issued” sales, however, were much
smaller than the sale of the "rights”. In addition, commercial
banks in need of funds early in the month to adjust their
reserve positions, liquidated sizable amounts of the maturing
notes which they could sell more advantageously than most
other securities they held. Still other investors, who wished
to maintain their positions in partially tax-exempt bonds, dis
posed of considerable amounts of the called bonds in order to
reinvest the proceeds in other partially tax-exempt issues.
Prices of the entire list of partially tax-exempt bonds conse
quently moved up moderately during the first half of the
month, although they declined thereafter.
Because the pressure of demand was heaviest on the shorter
maturities of Treasury bills and the August 1 Treasury notes,
the yield on the nearest maturity bills (as shown in the accom
panying chart) declined sharply and reached a low of 1
per cent bid on June 12, as compared with lVi per cent at
the end of May and the recent peak of 1.65 per cent on
May 14. Yields on the longer maturities of Treasury bills fell
more moderately, and the yield spread between the longest and
shortest maturities widened markedly over the first three weeks
of the month, as illustrated in the chart. The drain on bank
reserves from tax collections, Treasury calls on its Tax and
Loan Accounts, and other transactions brought an increase in
yields and closed the gap toward the end of the month.
There was very little activity in the market for longer-term
* Saturdays, Sundays, and Decoration Day (when no trading occurred) are
omitted.
Government securities during the greater part of the month,
and most prices fluctuated over a limited range with some
tendency toward a slight decline. The shortest of the restricted
issues fell off in price about 1/8 of a point, and the longer
issues from 1/16 to 1/8 of a point over the month as a whole.
However, the longest-term bank-eligible bonds, the 2V^’s of
September 1967-72, declined during most of the month, and
toward the close of June were more than one point lower than
at the end of May.
M e m b e r B a n k R eserve P o s it io n s
The major changes in member bank reserves came in the
first and fourth statement weeks of June; the bulk of the gains
occurred in the first week, and the bulk of the losses in the
fourth week. Little net change occurred in the intervening
period as transactions furnishing additional reserves were more
or less offset by those absorbing funds.
The ease in the money market in the week ended June 6
resulted, as noted above, from the new funds which became
temporarily available to the market owing to the cash redemp
tion and conversion of Treasury Savings notes on June 1, and
from the System Account’s purchases of the called and matur
ing issues. The resulting gains from these sources and from
routine money market transactions, on balance, including a
200 million dollar increase in Federal Reserve float, permitted
the banks to retire 410 million dollars of their indebtedness
to the Reserve Banks and to increase their excess reserves by
560 million dollars. On June 6, excess reserves amounted to
860 million dollars and borrowings to only 130 million. The
corresponding figures on June 20, two weeks later, were 825
million dollars and 165 million, respectively. The individual
factors which more or less offset each other as influences upon
91
FEDERAL RESERVE BANK OF NEW YORK
bank reserve positions through the second and third weeks of
the month are summarized in the accompanying table.
In the final week, continued payments of income taxes and
transfers from Tax and Loan Accounts into the Treasury’s
accounts with the Reserve Banks, a sharp month-end reduction
of Federal Reserve float, and the beginning of the pre-holiday
(July 4th) outflow of currency all combined to tighten mem
ber bank reserve positions, resulting in renewed borrowing
from the Reserve Banks and a sharp decline in excess reserves.
Federal funds were quoted at IVl-lYs per cent on June 25 and
remained firm in the closing days of the month.
The impact of the payment of quarterly income taxes on
member bank reserve positions was much less severe than in
the past, despite the sharply higher volume of taxes this year,
for reasons which are more fully explained in the article on
the Treasury’s handling of its cash balances which appears at
a later point in this Review. The lessened impact of tax col
lections was due to the renewal of the Treasury’s practice,
first begun with the March 15 tax payments this year, of
redepositing the proceeds of corporate income tax checks of
10,000 dollars or more in a special account maintained in the
bank on which such checks were drawn. In June, the practice
was extended to include the large checks of individual tax
payers.
A corollary effect of the new practice of handling income
tax payments has been to shift private deposits to Government
deposits, and thus minimize the decline in required reserves
which normally occurs in connection with tax payments that
are fully credited to the Treasury’s accounts in the Reserve
Banks. Thus in the week ended June 27, the decrease in
required reserves came to only 45 million dollars. In the
preceding three weeks of easy money conditions, however,
required reserves rose 450 million dollars and represented the
major factor absorbing excess reserves. This increase reflected
W eekly Changes in Factors Tending to Increase or Decrease
Member Bank Reserves, June 1951
(In millions of dollars; ( + ) denotes increase,
(— ) decrease in excess reserves)
Four
weeks
ended
June 6 June 13 June 20 June 27 June 27
Statement weeks ended
Factor
Routine transactions
Treasury operations*.........................
Federal Reserve float.........................
Currency in circulation......................
Gold and foreign account..................
Other deposits, etc.............................
-2 9 9
+333
+ 20
+ 7
+ 16
-3 2 7
-12 2
-10 0
- 42
+
1
+218
+287
-1 4 0
- 52
+ 48
+134
-
40
-4 7 2
+362
+360
-4 1 1
+105
+ 50
+ 48
- 13
+ 37
+ 55
+550
-3 1 9
-
50
+155
+ 35
+ 92
+232
+ 690
-
5
-2 5 5
-3 8 0
+ 45
+594
-4 0 3
-2 6 0
-S 3 5
+191
+474
- 59
4
+129
+
+
+
+
+740
+200
Federal Reserve transactions
Government securities.......................
Discounts and advances....................
27
81
21
13
18
Effect of change in required reserves.......
-1 2 8
+289
- 65
Excess reserves.........................................
+562
+224
* Includes changes in Treasury currency and cash.
Note: Because of rounding, figures do not necessarily add to totals shown.
principally the net Treasury redemptions of Savings notes
and the Federal Reserve System net purchases of Treasury
securities, both of which tended to add to the bank deposits
of nonbank investors.
The country’s monetary gold stock continued to show little
net change for the third successive month. While the decline
of the gold outflow has greatly reduced one source of contrac
tion affecting member bank reserves, another has taken its
place in some measure. Money in circulation this year has
increased more rapidly since the post-Christmas decline than
in the corresponding period a year ago. Between the end of
January and the close of June 1951 the volume of currency
in use rose by more than 700 million dollars, as against a
corresponding increase of only 215 million in 1950. Higher
prices, wages, and a larger volume of retail sales are probably
major factors in the expansion of circulation this year.
THE FINANCING OF BRITISH REARMAMENT
The acceleration of defense efforts throughout the Western
world since the outbreak of the Korean war has had important
repercussions on the British economy. As in other countries,
the developments of the past year have tended to increase
inflationary pressures and are expected to affect adversely the
country’s balance of payments. This article will discuss the
impact of these developments on Britain’s domestic economy,
giving particular emphasis to the government’s proposed
budget for 1951-52, under which the new defense program
announced by Prime Minister Attlee last January is to be
carried forward. Another article in a subsequent issue of this
Review will discuss the implications of these developments
for Britain’s international economic position.
The adoption of the new defense program, which calls for
the expenditure of 4,700 million pounds during the next three
fiscal years, has brought about a major change in the gov
ernment’s financial position. While the budgetary accounts have
shown substantial over-all surpluses during the last three fiscal
years—the surplus in the past year was 247 million pounds—
Chancellor of the Exchequer Gaitskell has estimated that in
the year ending next March 31 the budget will run a deficit
of 457 million, as shown in Table I. Government expenditures
are expected to expand by almost 1,000 million pounds to
4,777 million, or to about 33 per cent of the estimated 1951
gross national product, as against 28 per cent last year. De
fense expenditures alone (including strategic stockpiling and
the defense functions of the Ministry of Supply) are to in
crease by 636 million pounds to 1,417 million, equivalent to
about 10 per cent of the estimated gross national product,
or about the same proportion as is currently being expended
for defense by the United States.
92
MONTHLY REVIEW, JULY 1951
Table I
United Kingdom Central Government Revenue and Expenditure
(In millions of pounds; fiscal year ended March 31)
1951-52 estimates
on basis of
1950-51
Item
1951-52
taxes
1950-51
taxes
Actual
Original
estimate
Receipts:
Ordinary revenue.......................
"Below the line” receipts..........
4,236
84
4,098
84
3,978
73
3,898
70
Total receipts.............................
4,320
4,182
4,051
3,968
Expenditure:
Ordinary expenditure................
“Below the lin^” payments. . . .
4,197
580
4,197
580
3,258
546
3,455
520
Total expenditure......................
4,777
4,777
3,804
3,975
+ 39
-4 5 7
- 99
-5 9 5
+720
+247
+443
7
Surplus (+ ) or deficit ( —):
Ordinary revenue and expendi
ture..........................................
Total revenue and expenditure.
‘
Source; United Kingdom Treasury, Financial Statement {1951-52).
The proposed budget contains no important expenditure
cuts to offset the large increase for defense. Social welfare ex
penditures continue upward, although the rise this year has
been held to a very moderate sum. Small increases in pensions
and other allowances are granted to old people and others least
able to bear the impact of rising prices. At the same time,
however, the government has adopted measures to postpone
the age at which both men and women retire from the labor
force, and, in a move to limit the rising cost of the health
service, has decided to impose a fee to cover part of the cost
of artificial teeth and spectacles. Food subsidies, moreover, are
to remain unchanged at the 1950-51 level of 410 million,
which means that the cost of living will receive the full impact
of the rise in import prices.
Less than one third of the increase in expenditures is to be
offset by higher revenues, which are expected to yield 4,320
million pounds, an increase of 269 million pounds over actual
revenues of 4,051 million in 1950-51. The anticipated revenue
increase is attributable in roughly equal proportions to the
scheduled increases in tax rates, and to the prospective expan
sion of the national income. Personal and corporate income
tax rates are to be raised by a half shilling on the pound; a
cut in the top rate of the surtax will result in no change in the
tax burden of those in the top surtax bracket, however, while
the concession of larger deductions for dependents will actually
reduce the tax load carried by many individuals in the lower
income tax range. Taken together, these changes in the income
tax are expected to increase income tax collections by 73 mil
lion pounds in the current fiscal year. Higher customs and
excise taxes, particularly on gasoline, new cars, and consumers’
durable goods, are to raise an additional 61 million; and an
increase to 50 per cent from 30 per cent in the tax on dis
tributed profits is expected to yield 5 million.
The government’s revenue proposals are accompanied by a
number of measures designed to curb tax evasion. Perhaps the
most important of these would forbid any British company to
transfer its own residence abroad or to permit any overseas
firm controlled by it to issue or transfer any stocks or bonds
except with Treasury approval. Another proposal to curb tax
evasion would grant the Treasury authority to require banks
and discount houses to supply the names and addresses of in
dividuals who have received interest payments of £15 or more,
before tax, in any specified year. Critics of this measure have
observed that the number of personal deposits averaging
£3,000 or more (thus yielding £15 at Yz per cent) is probably
relatively small, and have accordingly raised the question as to
whether the gain to the Treasury would sufficiently compensate
for the additional administrative burden that would thus be
thrust on the banking system.
In appraising the possible inflationary implications of the
budget, Mr. Gaitskell pointed out that the prospective shift
from an over-all surplus of 247 million pounds to an over-all
deficit of 457 million did not provide a true measure of the
deterioration in the government’s financial position. Thus, the
budgetary estimates include projected outlays for stockpiling
and other capital items which, for purposes of analyzing the
budget’s inflationary significance, should be considered as a
part of over-all national investment instead of current govern
mental expenditure. After excluding these capital items from
his budgetary estimates, Mr. Gaitskell estimated that the net
deterioration in the government’s financial position (after
allowance for the new taxation) would approximate 340
million pounds.
The inflationary impact of this adverse shift in the govern
ment’s financial position will, according to Mr. Gaitskell’s
estimates, be fully absorbed by a decline in foreign investment
and by a rise in business savings. In effect, the public is
expected to invest less and save more in order to make room
for the heavier financial requirements of the government.
Much of the compensating adjustment on the investment
side is to be effected through changes in Britain’s international
balance of payments. Thus, the balance-of-payments surplus
on current account in the last financial year, provisionally
estimated at 200 million pounds, represented net foreign
investment; the Chancellor estimates that this investment will
be eliminated in 1951-52.
Domestic investment by private individuals and firms is
also expected to decline substantially in 1951-52. The Treasury
has instructed the Capital Issues Committee and the banks to
curb capital outlays not considered essential for defense and
foreign trade purposes, and Mr. Gaitskell has expressed the
A D AY’S W ORK AT THE FEDERAL RESERVE BANK
OF NEW YORK
A booklet entitled A Day’s Work at the Federal Reserve
is now available free of charge to any
one interested in receiving a copy. It describes the wide
range of activities that are carried on by this bank and the
important functions which the Federal Reserve System
performs in our present-day "money economy”. Requests
for copies should be sent to the Public Information Depart
ment, Federal Reserve Bank of New York, New York
45, N. Y.
Bank of New York
FEDERAL RESERVE BANK OF NEW YORK
93
Table II
British Economic Indicators
Year or month
194 8
194 9
195 0
1951-January..
February,
March...
April. . . .
May. . . .
Physical volume of
Industrial
production
Money
supply,
end of
period
Long-term
interest
rates
1946 = 100
In billions
of pounds
Per cent
5.12
5.19
5.28
5.22
5.05
5.04
5.13
3.21
3.30
3.54
3.53
3.64
3.67
3.73
3.81f
121
129
140
140
150
140
151p
n.a.
Exports
Retained
imports
Export
prices
1947 = 100
1950=100
127
140
162
105
114
114
160
120
182p
Import
prices
92*
94
100
( 107
1 109
1112
115
118
83*
85
100
119
125
128
136
142
Retail
prices
Wholesale
prices
1938 = 100
Wage rates
June 17, 1947 June 30, 1947
=
216
227
259
296
301
309
314
315
100
=
108
100
106
109
111
114
117
118
119
111
115
116
117
118
n.a.
121
124
n.a. Not available.
p. Provisional.
* Estimated; not strictly comparable with rest of series.
t May 30.
Source: Central Statistical Office, Monthly Digest of Statistics, May 1951; The Economist, Records and Statistics, June 2, 1951; International Monetary Fund,
International Financial Statistics, May 1951.
hope that the recent rise in interest rates (see Table II) will
also have a restraining influence. With a view to limiting
private investment next year and thereafter, the Chancellor
also announced the government’s intention to suspend, as of
April 6, 1952, the initial depreciation allowance for income
tax and profits tax purposes of 40 per cent on plant and ma
chinery and of 10 per cent on industrial buildings, mines, and
oil wells; this change would not affect ordinary annual depre
ciation charges, which would continue to be deductible from
gross taxable income and profits as before. Mr. Gaitskell
stated that the year’s grace was given in consideration of the
time that industry would need to adjust its investment plans;
the government has subsequently indicated that this grace
period might be extended for the shipbuilding industry, whose
investment plans necessarily reach far into the future. These
measures to restrain private domestic investment are expected
to offset all but 30 million pounds of the projected increases in
domestic investment by the central government. On balance,
over-all investment— both foreign and domestic—is expected
to decline by 170 million pounds.
So far as savings are concerned, Mr. Gaitskell estimates that
business savings will rise 200 million pounds above the level
of the fiscal year 1950-51. Corporations and other business
enterprises are expected to increase substantially the amounts
that are put aside to cover depreciation of capital, to provide
for future tax payments on currently earned profits, and as
free reserves. In this connection, the Chancellor estimated that,
by putting a damper on dividends, the increase in the tax on
distributed profits would raise corporate savings some 30 mil
lion. In view of the rising cost of living, on the other hand,
personal savings were not expected to show any increase.
Moreover, the savings of local authorities and social insurance
funds are expected to decline by 15 million pounds.
On balance, the anticipated net increase in savings, i.e., 185
million pounds, in combination with the expected decline in
investment of 170 million pounds aggregates 355 million
pounds, or somewhat more than the prospective deterioration
in the government’s financial position. On the basis of these
estimates, Mr. Gaitskell concluded that over-all saving would
be adequate to finance over-all investment, and that, despite
the large change in the government’s budgetary position, addi
tional inflationary pressure—apart from the impact of rising
import prices—could be avoided.
Mr. Gaitskell’s first budget has been widely discussed in
British financial circles, and searching questions have been
raised about the economic forecasts on which it is based
(see Table III). Particularly important is the forecast that
industrial production in 1951 can be maintained at approxi
mately the level attained in the final quarter of last year, or
about 4 per cent above the 1950 average. Critics have been
quick to observe that the government’s Economic Survey for
1951 itself stated that Britain could not count on getting the
raw materials to support such a level of production. During
the first quarter of this year, indeed, industrial output fell
slightly below the Chancellor’s goal, as Table II indicates.
British observers have also questioned whether the govern
ment has not been somewhat optimistic in estimating that the
balance of payments will change from a 200 million pound
surplus on current account in 1950-51 to a deficit of only
Table III
United Kingdom Gross National Product and Expenditure
(In millions of pounds)
Forecast for 1951
1950
As fore
cast in
Economic
Survey
for 1950
1949,
actual
13,572
13,345
12,933
-2 2 9
-5 0
-3 0
13,343
13,295
12,903
Item
National product:
Gross national product . .
Balance-of-payments sur
plus (—) or deficit ( + ) . .
Disposable product.......
National expenditure:
Gross domestic invest
ment ...............................
Government current ex
penditure on goods and
services...........................
Personal consumption. .
At current
prices
At 1950
prices
14,500
13,897
-f 100a
14,600
- 145ab
13,752
Actual
2,415a
2 ,336ab
2,277
2,435
2,297
2,510
9,675
2,425
8,991
2,025
9,041
2,220
8,640
2,039
8,567
14,600
13,752
13,343
13,295
12,903
Total domestic expendi-
a. Includes strategic stockpiling.
b. Partly estimated.
Source: Economic Survey for 1950 (Cmd. 7915), page 20 ; and Economic Survey
for 1951 (Cmd. 8195), pages 34, 38, and 41.
94
MONTHLY REVIEW, JULY 1951
about 130 million in 1951-52. Realization of the govern
ment’s forecasts will require, according to the Economic Survey,
not only an 18 per cent rise in export prices over 1950 and a
5 per cent increase in the physical volume of Britain’s exports,
but also a limitation of the import price rise to no more than
28 per cent. Actually, import prices in May had already risen
42 per cent above the 1950 average, while export prices were
up only 18 per cent. In contrast to the seasonal pattern of
recent years, moreover, the physical volume of exports in the
first quarter of this year dropped slightly below the 1950 aver
age. Whether labor shortages and booming raw material
prices, as well as the pressure of expanding defense and civilian
demand, will vitiate the governments balance-of-payments
forecast is therefore still a moot point.
In formulating his budget, Mr. Gaitskell also assumed that
personal incomes would increase more slowly than the cost of
living, and that the volume of personal consumption would
consequently fall in 1951, thus releasing productive resources
for defense purposes. There were signs during the first four
months of 1951 that this expectation was being realized,
although most of the pinch seems to have been felt by salaried
individuals and pensioners whose incomes normally rise rela
tively slowly in inflationary periods; on the other hand, wage
rates since last September seem to have been keeping pace with
the rise in retail prices.
Economic forecasts are naturally subject to wide margins of
error, and Mr. Gaitskell appears to have made extensive allow
ances for the unexpected in preparing his budget. Thus,
estimates of forthcoming revenue appear relatively conserva
tive, while those on the expenditure side may well overstate
the amounts that will actually be spent. Although an increase
in the gross national product of over 900 million pounds had
been officially forecast (see Table III), the Treasury has cal
culated that revenues on the basis of 1950-51 tax rates would
rise only 131 million pounds, or by 14 per cent of the rise in
the gross national product. In view of Britain’s high tax rates
(27 per cent of personal incomes was collected in taxes in
1950), it would not be surprising if revenue actually rose
somewhat more than has been estimated.
As to expenditures, inevitable delays in getting the defense
program under way, such as the difficulties in the conversion
of industry and in the negotiation of contracts that have
developed in the United States, may well occur, and it is
therefore possible that not all the funds already appropriated
for defense will actually be paid out of the Exchequer before
the end of the current fiscal year. Moreover, the government
has included in its estimates 160 million pounds for defense
that Parliament has not yet been asked to appropriate. Should
delays be experienced in expending the funds already granted,
or should the country experience serious inflationary difficulties,
the request for these additional funds may not in fact be made.
It is therefore quite possible that the over-all budget deficit
may turn out to be somewhat smaller than Mr. Gaitskell’s
forecast of 457 million pounds. By the same token, however,
the government would seem to have left itself room for
maneuver in case its forecasts of the amount of private saving,
or of the increase in production, should prove wide of the
mark.
THE DEFENSE PROGRAM IN TRANSITION
At the conclusion of the first year of the Korean war, this
country finds itself experiencing a lull following the initial
period of strong inflationary pressures. We have just com
pleted a year of preparation for large-scale defense production,
but throughout this period the economy has—to a far greater
extent than was generally expected—been dominated by
changes in civilian demand, rather than by the defense pro
gram itself. Defense activity has not yet made great demands
on materials and manpower, since the major emphasis thus
far has been on the planning of requirements, the letting of
contracts, and the preparation of facilities. In the months
ahead, so long as there is no reversal of present plans for
rearming, output of defense goods and capital equipment will
claim an increasingly important share of the nations produc
tive capacity. Renewed inflationary pressures growing out of
increasing diversion of production to defense purposes, cou
pled with a rising volume of consumer income, are generally
anticipated over the next year.
R ecen t D evelopm ents
The pause in the general advance during recent months has,
however, been a helpful and welcome interruption. Sales,
production, and prices have leveled off, or in some cases have
receded somewhat. Prices, at all levels of distribution, have
remained fairly stable or declined since early spring. Retailers,
with stocks high and sales lagging, have found intensified pro
motional measures necessary to stimulate the interest of con
sumers, who earlier this year were more than eager to buy.
Materials restrictions and reduced demand have caused some
cutbacks in consumer goods production, tending to offset the
gradual rise in output of goods for the defense effort and
related programs.
The leveling off in prices may, to some extent, be attributed
to the influence of price controls. But the tenor of the mar
kets in the last few months has indicated that a softening in
the demand for goods has been of fundamental importance in
keeping most prices within the controlled limits. There have
been few cases reported thus far in which demand has been
so intense as to give rise to large-scale black markets. In fact,
prices of a number of basic commodities have receded from
their ceilings, prices for future delivery have dropped even
more markedly, and at the retail level price cuts, rather than
black markets, are making the headlines. Even with the
reduced supply of beef currently available, reports have empha
sized consumer resistance to high ceiling prices more than
extra-legal sales at still higher prices.
The lull in demand has occurred not only at the consumer
level but at the distributive and industrial levels as well. To
FEDERAL RESERVE BANK OF NEW YORK
a considerable extent it represents a reaction from the buying
spree in which both consumers and businessmen indulged last
summer and again last winter. Fears of shortages, lower qual
ity, or higher prices then caused consumers to rush to the
stores, particularly for durable goods. Consumers showed great
willingness to spend a larger share of their incomes, to dip
into accumulated savings, or even to go into debt in order to
obtain the goods they wanted. Businessmen, too, bought
heavily. Many dealers had concluded early in the defense pro
gram that large inventories would be advantageous in view
of the prospects for increased consumer income and greater
curtailment of civilian goods production later in 1951. Their
efforts to acquire these stocks were accompanied in many
instances by expansion of bank credit, and, like consumer buy
ing, contributed to higher prices.
Meanwhile the nation’s industrial plants continued to pour
out a far greater volume of consumer goods than had been
considered possible. The military situation in Korea improved
materially. Consumers soon realized that the supply and price
situation was not worsening as much (or as rapidly) as they
had originally feared, and retail sales slackened off appreciably
during the spring months. Dealers’ stocks piled up despite
sharp cuts in new orders. Often deliveries were received on
orders which were not expected to be filled for a number of
months. Wholesalers and manufacturers also experienced in
voluntary accumulation of inventories. As a result, many firms,
particularly in the consumers’ durable goods field, had to
liquidate inventories, in part because of shortages of local
storage space and sometimes because of pressure from the
banks to shorten doubtful inventory positions. The program
of voluntary credit restraint and recent general measures to
restrict the availability of bank credit may have played a part
in stimulating a critical surveillance of inventories by the
banks and their customers.
In the New York City area, in particular, retailers have tried
such devices as public auctions and extensive price cutting to
revive lagging consumer interest. The competitive price cut
ting on merchandise for which prices were formerly fixed by
the manufacturers under "fair-trade” laws has resulted in yearto-year gains of as much as 21 per cent in New York City
department store sales. The buying rush that developed has
been quite unlike the scare buying of July and January, how
ever; consumers are buying, not from fear of shortages, but
because desirable merchandise is selling at attractive prices.
The widespread interest in the items on sale demonstrates
that, despite the earlier waves of anticipatory buying, there is
still a sizable backlog of demand for these goods—if the
prices are attractive. Though the currently highly competitive
behavior of local stores is more typical of a deflationary than
an inflationary period, the rush of consumers to buy indicates
that they do not expect further general declines in prices or
even continued bargain prices. In addition, the sharp upswing
in sales offers a reminder that the huge inflationary potential
of high levels of income and accumulated savings is still
present and, as was the case last summer and again last winter,
95
a change in consumer attitudes can swiftly change the eco
nomic situation.
The flow of consumer goods has, up to the present, been
more than adequate to meet the demand, in spite of limitations
on the use of scarce materials. For instance, more than 3 mil
lion passenger cars rolled off the assembly lines in the first half
of 1951, one of the largest six-month totals on record. The
changes in consumer goods output have dominated the course
of industrial production during the past year, while actual
production of defense goods has been relatively small but
growing. Even more important in maintaining the level of
output this spring has been the large-scale plant and equip
ment expenditure carried out by business for both defense and
nondefense purposes. These expenditures have more than off
set in dollar volume (and in utilization of manpower) the
scattered consumer goods cutbacks resulting from slackening
in demand, materials shortages, and conversion of facilities to
defense work. Over all, the level of industrial production has
remained very stable, advancing only 1 per cent from January
to May. As defense production gathers momentum, an increas
ing proportion of civilian goods output will be displaced.
Total defense expenditures, which accounted for about 4 l/2
per cent of the total national output of goods and services
before Korea and 8 per cent in the first quarter of this year,
are expected to take about 15 per cent of the gross national
product by the end of 1951.
D e f e n s e A c t iv it y
in
the
Se c o n d D is t r ic t
The impact of the defense program has, of course, varied
considerably from one area or locality to another. The Second
Federal Reserve District has received what appears to be its
proportionate share of defense work, if not more, and many
defense plants are scheduled for construction, expansion, or
reopening. Defense activity in this region will be centered
mainly in electrical equipment, aircraft, shipbuilding, and
primary metals, as it was during World War II. Major defense
contracts awarded in this area so far cover a widely diversified
list of items, but some of the largest awards have been for air
craft engines, tanks, and jet planes. In general, durable goods
centers, such as Buffalo, Bridgeport, Schenectady, Syracuse, and
Long Island, have experienced an increase in production and
a tightening of the labor market. However, because of the
Second District’s large concentration of consumers’ nondurable
goods manufacturing, trade, and service industries, the defense
boom is far from general in this area. Cities producing mainly
nondurable goods, such as New York City, Utica, and Bing
hamton, have as yet felt relatively little effect from defense
production. The many small industries in the New York City
area are unlikely to benefit much until the volume of subcon
tracting has been greatly expanded. While this District is
currently prosperous and is likely to remain so, it may (as in
World War II) fail to keep pace with the increases in other
industrial areas once defense production gains momentum.
A large number of defense industries in this District have
qualified for certificates of necessity, enabling them to amortize
MONTHLY REVIEW, JULY 1951
96
new plant and equipment at an accelerated rate. In addition,
a great deal of expansion of civilian production facilities has
been planned, although much of this might also be available
for war production. In New York State alone, according to
the State Department of Commerce, the amount of new indus
trial construction for which plans have been filed since the
outbreak of war in Korea totals over 1 billion dollars. Chief
among these plans is the 75 million dollar steel mill expansion
planned for the Buffalo area. Other large projects have been
announced for the manufacture of electronic equipment in
several Central New York cities, aluminum in Northern New
York, aircraft on Long Island, and petroleum products, tele
vision, and automobiles in Northern New Jersey. Large World
War II plants are being converted to the manufacture of air
craft engines in the Buffalo and Bridgeport areas. In addition,
several military installations in this District have expanded or
reopened.
T h e Ec o n o m i c O u t l o o k
The large-scale expansion of facilities, occurring in the
country as a whole as well as in this District, parallels the
experience of the early stages of World War II. The arma
ment program then passed through three phases, the dominant
characteristic of the first phase being shortages of defense
production facilities; of the second, shortages of materials; and
of the third, shortages of manpower. All parts of the present
defense program do not progress at the same speed, and there
tends to be considerable overlapping of these stages among
various sectors of the economy. Nevertheless, the more
stringent restrictions on use of scarce materials for nonessential
purposes scheduled to be imposed in the third and fourth
quarters of 1951 indicate that most of the economy will soon
be passing from the first to the second phase of the defense
program, within little more than a year after the program’s
inception. The first phase—the placing of contracts and the
conversion or tooling up of facilities—is well under way, and
the additional facilities now being built will supplement an
already strong defense production potential. In the months
ahead, defense goods will be coming off the assembly lines in
ever-increasing quantities, and shortages of raw materials are
likely to be among industry’s most pressing problems.
The first phase has been much shorter in duration than it
was in World War II, because this time we had a vast amount
of specialized defense facilities, such as shipyards, aircraft fac
tories, and ordnance plants, left over from World War II.
Because of the huge postwar expenditures on capital equip
ment, this country’s industrial plant was in far better shape in
1950 than in 1940. However, the prospects both of expanded
defense production and of a continued high level of consumer
demand have led to plans for considerable further expansion
by private business. In cases where the defense program will
eventually be aided, the Government is encouraging expansion
by allowing accelerated amortization on new facilities or by
allocating materials for the manufacture of equipment. In
other cases, where the new facilities appear to be less essential,
their construction is being discouraged through both credit
restrictions and materials controls. The plant and equipment
expenditures to be made in coming months will compete for
materials with the output of consumer goods and the growing
volume of defense production. For example, in order to
expand steel production, sizable quantities of steel are required,
making supplies temporarily even tighter until the new facili
ties come into production. When capacity for the production
of various basic materials begins to expand more rapidly than
defense needs, some of the limitations on the use of these
materials may be eased—provided the defense program stays
within its present scope—but such developments are unlikely
for some time to come.
In the interim, however, defense production and plant ex
pansion are likely to cut increasingly into the supply of mate
rials available for consumer goods. At the same time, output
of defense materials and capital goods will be generating addi
tional consumer income. As employment and wages advance,
it is likely that the demand for consumer goods will also rise.
Although the large current inventories may help to offset the
decline in output of consumer goods, the danger of renewed
inflationary pressures will be steadily increasing. Unless there
should be a lessening of international tension, with an impor
tant modification in consumer and business attitudes, these
pressures can be expected to subside only after the economy
has passed "over the hump” of expanding defense output.
NATIONAL DEFENSE EXPENDITURES
In view of the growing importance of the national defense
program, a series on national defense expenditures has recently
been added to the data regularly appearing in the table of
Business Indicators. This series covers a group of related
security programs as well as the military outlays of the armed
forces. By following the general principle of including related
and allied programs whenever such data were available, a
consistent set of data on defense expenditures has been pre
pared from 1914 to the present.
This series currently includes, in addition to the military
outlays of the Defense Department, spending for atomic
energy, mutual defense assistance, strategic and critical mate
rials, and for several smaller but related programs.1 Expendi
tures for United Nations Relief and Rehabilitation and the
early spending for government and relief in occupied countries
after World War II have been included. For the years 1940
to 1946 (inclusive) the war-related activities of the Recon
struction Finance Corporation and its affiliates as well as
comparable activities of other Government departments have
been taken into account. In all essential aspects this is the
1 Maritime activities by the Commerce Department ( formerly the
Maritime Commission), the Coast Guard, the National Advisory Com
mittee for Aeronautics, the Selective Service System, and cash payments
and the redemption of bonds under the Armed Forces Leave Act.
97
FEDERAL RESERVE BANK OF NEW YORK
series that was developed and used during World War II by
the War Production Board. During the period 1922-39, the
programs allied to defense were limited and only expenditures
by the Maritime Commission (known as the U. S. Shipping
Board until 1939) and a relatively small amount of payments
and receipts carried over from miscellaneous war activities of
World War I have been included. In the period dominated
by World War I, 1917-21, substantial expenditures were made
for related programs. Large loans were made to our allies and
these have been included in the series along with the spending
by the United States Shipping Board and the War Finance
Corporation, as well as Federal expenditures for the control
of transportation. In the years 1914-16, there were no warrelated programs.
The data included in this series on national defense expendi
tures can be obtained from this bank on an annual basis for
the fiscal years, 1914 to date, and on a monthly basis for the
period since July 1939.
Since March 1951, a related series showing the quarterly
deliveries of defense items from 1949 to date (at an annual
rate as compiled by the Department of Commerce) appears
as Government purchases of goods and services for national
defense in the Economic Indicators prepared by the Council
of Economic Advisers. Information on the deliveries of war
goods and services has been published both on a quarterly
and an annual basis from 1939 through 1946 in the July
1950 Survey of Current Business (Department of Commerce).
Defense outlays rose slowly during the early months of the
renewed armament effort, as shown in the accompanying
chart. Following a fairly rapid step-up during the past nine
months, defense outlays are expected to level off so that the
over-all rate of increase through mid-1952 will be considerably
less than that achieved during the comparable period of World
War II.
During the past year it was unavoidable that appropriations
and contracts should expand more rapidly than expenditures.
A striking example of this difference in timing was evident
during the first quarter of 1951 when expenditures of all types
averaged less than 2 billion dollars monthly while orders were
being placed at an average monthly rate of 5 billion. There are
many causes for this type of behavior. A principal consideration
is the inescapable fact that the manufacture and delivery of
some of the goods ordered under the new program, particu
larly heavy military equipment, require many months. In
some cases, payments are made as production progresses; in
other cases, production is financed by the manufacturers out of
Business Indicators
Percentage change
1951
1950
Item
Unit
May
April
March
May
Latest month Latest month
from previous from year
month
earlier
UNITED STATES
Production and trade
Industrial production*................................................................
Ton-miles of railway freight*.....................................................
Manufacturers’ sales*. . ..............................................................
Manufacturers’ inventories*.......................................................
Manufacturers’ new orders, total................................................
Manufacturers’ new orders, durable goods...............................
Residential construction contracts*...........................................
Nonresidential construction contracts*.....................................
Prices, wages, and employment
Consumers’ pricesf.......................................................................
Personal income* (annua""' rate).................................................
Composite index of wages and salaries*....................................
Nonagricultural employment*....................................................
Manufacturing employment*......................................................
Average hours worked per week, manufacturingf...................
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 Banks*..
Bank debits* (U. S. outside New York City)...................
Velocity of demand deposits* (U. S. outside New York City).
Consumer instalment credit outstandingf................................
United States Government finance (other than borrowing)
National defense expenditures....................................................
223p
320
197p
23.5 p
38.8 p
23. 2p
223
325
219p
22.4
37.9
23.9
269p
409p
283
446
Aue. 1939 - 100
1926= 100
1935-39= 100
billions of $
1939= 100
thousands
thousands
hours
thousands
367.1
182.8p
1.85.4
—
—
46,348p
16,034p
40.6p
1,609
373.9
183.5
184.6
244.4p
223p
46,387
16,089
41.0
1,744
millions of $
millions of $
millions of $
millions of $
billions of $
1935-39= 100
millions of $
70,600p
54,460p
89,500p
27,516
1935-39= 100
1935-39= 100
1935-39= 100
billions of $
billions of $
billions of $
billions of $
billions of $
1923-25= 100
1923-25= 100
1 1 .op
12.0 p
88.2
102.8
_
223r
323
205
23.4
36.4
28.6
15.5
12.3
292
314
195
284
173
19.3
29.7
19.1
8.5
11.3
303
250
380.9
184.0
184.5
242.8
— 2
#
46,274r
16,068r
41. lr
2,147
259.1
155.9
169.3
214.5
206
43,578
14,629
39.9
3,057
71,040p
54,350p
89,500p
27,398
85.4
105.1
1 2 ,908p
71,320p
54,420p
89,000p
27,253
87.0
103.3
12,975
77,080
44,080
85,000
27,212
73.0
92.5
11,667
— 1
#
#
#
+ 3
12.6
12.0
221
— 2
-10
+ 5
+ 2
3
— 9
#
__ 5
__ 8
#
+ 1
+ 1
#
#
1
— 8
_
2
I
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
14
13
13
22
31
21
35
6
11
64
42
17
Vo
14
8
6
10
2
47
8
24
5
1
21
n
H
millions of $
millions of $
millions of $
4 ,152p
5 ,162p
2 ,679p
2,960
4,144
2,386
8 ,489
4,219
2,238
2,939
3,700
1,095
+40
+25
+ 12
+ 41
+ 40
+145
1935-39= 100
1923-25= 100
1923-25= 100
1935-39= 100
thousands
thousands
billions of $
billions of $
1935-39= 100
229
—
—
181.4
—
2,656.3p
46.3
4.0
227
181
215
180.6
7,319.6p
2,670.9
46.4
3.7
119.9
225
188
213
180.4
7,329.0
2,657.9r
49.7
3.8
126.7
206
186
214
166.1
6,977.7
2,461.0
42.3
3.3
1 1 0 . 5r
+ 1
_ 4
+ 1
#
#
— 1
#
+ 6
7
8
+ 9
+ 5
+ 8
+ 9
+ 20
+ 1
SECOND FEDERAL RESERVE DISTRICT
Electric power output*J (New York and New Jersey)...............
Residential construction contracts*..............................................
Nonresidential construction contracts*.........................................
Bank debits* (New York City)......................................................
Bank debits* (Second District excluding N. Y. C. and Albany).
Velocity of demand deposits* (New York City)..........................
1 1 1 .6
t Corrected series.
r Revised.
f Seasonal variations believed to be minor; no adjustment made.
* Adjusted for seasonal variation.
# 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 Re&erve Bank of New York, on request.
p Preliminary.
+ 11
t
MONTHLY REVIEW, JULY 1951
98
Comparison of National Defense Expenditures*
Quarterly averages of monthly outlays
July 1939-September 1941 and April 1950-June 1952f
* Plotted on ratio scale to show proportionate changes,
t Figures for fourth quarter 1951 and second quarter 1952 are estimates
based on latest official Budget data.
Source: Compiled by the Federal Reserve Bank of New York from basic
data of the War Production Board and the U. S. Treasury Department.
their own funds or by borrowing, and payments are made by
the Government only after the contracts and orders are com
pleted; while, in still other cases, a combination of these finan
cing methods is employed. Under any of these arrangements,
however, a lag of some proportion will be experienced between
contract awards and actual payment, so long as contracts con
tinue to increase in total volume.
During the current rearmament period, the rate of increase
in war expenditures will probably be somewhat slower than
that experienced in the initial phase of defense mobilization
after Pearl Harbor. The relative slowness in acceleration of
the present effort reflects both initial uncertainty as to the
scope and characteristics of the program and the higher state
of military preparedness from which the current expansion
has begun.
Before the outbreak of the Korean conflict, defense dis
bursements were running at an annual rate of 13 billion dollars
and absorbing less than 5 per cent of the gross national product.
After a slow start, defense expenditures began to pick up,
and by June of this year expenditures were about IVz times
the pre-Korean level. Official expectations (as reflected in
the Budget and subsequent requests to Congress) are that
early next year they will be close to 50 billion dollars (annual
rate), or nearly four times as large as in June 1950. Some
further increase, to an annual level of possibly 55 billion
dollars, may occur before the middle of 1952. It is also appar
ently expected that expenditures will be maintained at this
high level into 1953.
When the program reaches its peak, the defense and related
outlays included in this banks "current series” are expected
to account for roughly 17 per cent of the national output of
goods and services, or more than three times the proportion
devoted to defense before Korea. The total program, including
such other activities as economic aid to foreign countries,
defense housing, and civilian defense (which cannot be segre
gated at this time) are expected, under, present plans, to
absorb roughly 18 per cent of gross output. While this is
substantially less than the 41 per cent of total output which
went to military and all other security purposes at the peak
of World War II, the proposed scale nevertheless involves a
considerable strain for the economy, at least until a growth
in real output can overtake the increased physical volume of
defense requirements.
DEPARTMENT STORE TRADE
After several weeks of comparative quiet following Easter,
with sales generally ahead of year-ago levels by less than the
corresponding percentage increase in consumers’ prices, retail
activity at New York City department stores was sharply
accelerated late in May by a price "war” involving many fairtraded (price-fixed) items. Customers were quick to respond,
flocking to the warring stores in numbers characteristic of a
pre-Christmas buying rush. As a result, the dollar volume of
department store sales in New York City during the week
ended June 2 spurted 21 per cent ahead of the comparable
weekly total in 1950. This was followed by year-to-year
increases of 19, 15, and 14 per cent during the weeks ended
June 9, 16, and 23, respectively. (It is estimated, that for
the month of June department store sales in New York City
were up 14 per cent from the June 1950 level, while the gain
for the rest of the Second District amounted to about 7 per
cent.)
As the chart shows, one of the most striking effects of the
price war was the contraseasonal rise in sales volume during
the week ended June 2. Normally, there is a sharp decline
in volume during the week in which Memorial Day occurs,
as there is one less day on which the stores are open for busi
ness. During the later weeks in June, as sales renewed their
usual seasonal pattern, the volume maintained was well above
year-ago levels not only because of activity in the lines directly
affected by the price reductions but also because there was a
carryover of consumer interest to other types of merchandise.
The significance of the marked increase in demand generated
by the price war is brought into sharp focus by comparing the
week-to-week increase in dollar volume from June 2 to June 9
with the corresponding week-to-week movement in 1950.
Department store sales during the week ended June 9 were
27 per cent above those of the preceding week, while the
comparable increase in 1950 amounted to 31 per cent. Thus,
the percentage gain in sales from the week ended June 2 to
that ended June 9 this year almost equaled that of the com
parable period a year ago, despite the much higher level from
which the rise this year began.
FEDERAL RESERVE BANK OF NEW YORK
Indexes of Department Store Sales and Stocks
Second Federal Reserve District
(19.35-39 average = 100 per cent)
Weekly Indexes of New York City Department Store Sales,
January-June 1950 and 1951*
(W ithout adjustment for seasonal variation, 1935-39
average=100 per cent)
1950
1951
Item
P e rc e n t
99
May
April
March
May
Sales (average daily), unadjusted................
Sales (average daily), seasonally adjusted..
238
243
232
252
230
230
224r
223r
Stocks, unadjusted........................................
Stocks, seasonally adjusted..........................
294
290
306
297
306
299
232r
229r
P e rc e n t
r Revised.
recording increases, however, has diminished somewhat since
the week ended June 2.) The sharp increase in consumer
traffic attributable, in large measure, to the price war also
apparently bolstered sales in several New York City apparel
stores, although these stores stock few of the merchandise
lines affected by the fair-trade controversy and did not initiate
substantial price reductions (as far as can be determined) in
their other lines. Unlike the situation with regard to the
‘neutral” department stores, however, substantial year-to-year
advances in sales volume were generally limited to those
* Indexes are totals for calendar weeks without adjustment for variations
apparel stores located in the immediate vicinity of the war
in the number of shopping days. Figure for week ended June 23, 1951 is
preliminary.
ring department stores and, in most cases, those advances did
not
continue after the first week of the price war.
As already noted, the fair-traded merchandise that was
drastically reduced in price did not by any means represent Department and Apparel Store Sales and Stocks, Second Federal Reserve
District, Percentage Change from the Preceding Year
the sole object of consumer interest. Demand for major house
hold durables, for example, was particularly outstanding. As
Net sales
a matter of fact, sales of furniture and bedding, rugs and
Locality
Stocks on
Jan.through
hand
carpets, and major appliances during the week ended June 2
May 1951
May 1951 May 31, 1951
were up 33, 71, and 104 per cent, respectively, from their Department stores, Second District.... + 7
+ 13
+27
corresponding year-ago levels. Moreover, the rapid turnover New York City................................... + 4
+ 12
+29
+ 15
+28
of these goods was not confined to the first week of the price Northern New Jersey......................... ++ o7
+ 14
+29
+24
County...........................
+ 17
+20
war but rather continued throughout the rest of the month. Westchester
Fairfield County.................................
+ 17
+ 15
+23
Bridgeport.......................................
+ 19
+ 16
+24
Demand for radio-television, however, did not show any Lower Hudson River Valley.............. - 1
+21
+ 6
+ 2
+ 8
Poughkeepsie...................................
+23
appreciable increase until the weeks ended June 9 and 16 Upper Hudson River Valley.............. + 15
+ 16
+ 14
+ 11
+ 19
+ 17
when year-to-year gains in sales of 31 and 78 per cent, re
+20
+13
Schenectady.....................................
+ 12
Central New York State........<.........
+ 4
+ 12
+30
spectively, were registered.
Mohawk River Valley....................
+ 10
+24
+ 3
+24
+ 2
+ 7
Just as the resurgence of consumer demand during June
+13
Syracuse...........................................
+34
+ 4
Northern New York State.................
+ 9
+ 17
4* 8
was not limited to price-war merchandise, substantial year-to- Southern New York State................. + 4
+14
+ 19
Binghamton.....................................
+ 12
+ 3
+ 16
year increases in total sales were not restricted to those stores
- 6
+20
+28
+13
+28
most actively engaged in the price war. As a matter of fact, Western New York State................... ++ 1112
+13
+29
Niagara Falls...................................
+ 10
+28
+ 5
many of the other New York City department stores report
+ 12
Rochester.........................................
+ 13
+25
ing weekly to this bank have shown sizable gains in sales Apparel stores (chiefly New York City). + 1
+21
+ 7
volume in recent weeks. (The number of non-warring stores
THE TREASURY’S CASH BALANCES
In the past month, the Treasury again made use of a technique
that had first been introduced in March of this year to soften
the impact of quarterly tax collections on the reserve positions
of the banks. When tax checks drawn on the commercial banks
are deposited in the Treasury’s accounts in the Reserve Banks,
there is, of course, an equivalent drain on member bank re
serves, because the Reserve Banks collect the checks by de
ducting the amounts from the member banks’ reserve bal
ances. Therefore, heavy concentrations of tax payments can
result temporarily in severe and sudden tightness in the
money market, as banks attempt to obtain funds in that
market to replenish their reserves. This tight condition in
the money market would normally ease only gradually, as
the Treasury spent tax receipts over a period of time. In
an effort to reduce this temporary and more or less me
chanical tightening of bank reserve positions, the Treasury
is permitting the banks to carry as Treasury deposits on their
own books amounts equivalent to the checks (of 10,000
100
MONTHLY REVIEW, JULY 1951
dollars or more) which have been drawn upon them for
payment of income and profits taxes, after these checks have
been deposited by tax collectors for the Treasury’s account
in the Federal Reserve Banks. The credits arising in “Treasury
Tax and Loan Accounts” from these tax payments have been
specially designated as "X” balances. The funds thus built up
in Treasury accounts at the commercial banks are being with
drawn as they are needed by the Government; they will be
depleted (or any small residual amounts will be transferred to
the regular accounts) before calls are made on the other credits
in Tax and Loan Accounts.
The "X” balance procedure was first used, in March to cover
the record tax payments by corporations, but last month it was
extended to include individual income tax checks of 10,000
dollars and over. The extension will not add appreciably to the
amount of credits to the "X” accounts since relatively few
individuals have a yearly tax liability over 40,000 dollars. The
change will, however, tend to equalize the benefits of the new
procedure between the banks.
If all of the quarterly tax collections had been allowed to
flow directly into the Reserve Banks in the usual fashion, the
banks would have faced an extremely difficult task in maintain
ing their reserve positions. This year, record payments of cor
porate taxes were made as a result of unparalleled profits,
higher tax rates on ordinary income, the enactment of an
excess profits tax law, and the introduction of the Mills Plan
for accelerating the payment of corporate taxes. Moreover,
the banks could no longer rely upon as ready a market as in
former years for the Government securities which they might
have had to sell to cover the losses of reserves entailed in
paying tax funds into the Treasury’s deposits at the Federal
Reserve Banks.
Under the Mills Plan, corporate tax collections are being
gradually brought forward, so that eventually all corporate
taxes will be paid within six months after the end of the year
in which the tax liability is incurred. Formerly, corporations
paid their taxes in approximately equal instalments in the four
quarterly periods following the end of their tax year (which
Treasury Deposits in Federal Reserve Banks and Special Depositaries, January 1950-June 22, 1951*
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
* Closing balances; Sundays and holidays omitted.
Source: U. S. Treasury Department and Board of Governors of the Federal Reserve System.
SEP
OCT
NOV
DEC
FEDERAL RESERVE BANK OF NEW YORK
for most corporations is December 31). In 1951, however,
30 per cent of the tax liability of most corporations for 1950
income had to be paid in the first quarter; an additional 30 per
cent was due in the second quarter; and 20 per cent is to be
paid on each of the two remaining quarterly "tax dates”. By
1955 half of a corporation’s tax liability will be due in the
third month after the close of its fiscal year, and the remaining
half before the end of the following quarter.
The adoption of the "X” balance device for the March and
June income and profits tax payments represents another step
in the Treasury’s continuing effort to prevent seasonal or other
fluctuations in Treasury cash receipts or disbursements from
exerting an unduly abrupt or extreme influence upon bank
reserves and the money market. Some of the other special pro
cedures previously developed by the Treasury have been dis
cussed in past issues of this Review.1 This article brings to
gether the principal changes in procedure over the past several
years in order to present a brief description of the present char
acteristics of the Treasury’s cash operations.
T ypes
of
D e p o s it a r ie s
Like that of any business, the working cash of the Treasury
consists of bank accounts and currency, but unlike private con
cerns, the Treasury’s active cash is held mainly in deposit ac
counts maintained at each of the Federal Reserve Banks and
their branches. Large balances are, of course, built up in the
Treasury Tax and Loan Accounts maintained at "Special De
positaries” (qualified commercial banks and other banking in
stitutions ), but these balances are not drawn upon directly for
Treasury disbursements. They are instead transferred into the
Treasury accounts at the Reserve Banks through "calls” of
varying amounts from time to time. Government disburse
ments to the public for the most part are made through checks
paid from the balances held in the Federal Reserve Banks.
Daily average balances at the Reserve Banks in recent years
have ranged from around 1.4 billion dollars in 1948 to
an average of about 600 million in the first six months of
1951. The amount on deposit in the Tax and Loan Accounts,
on the other hand, increased from an average of nearly 1.8
billion dollars in 1948 to 3.8 billion in the first half of 1951.
The rise in the latter accounts reflected not only the rise in the
Treasury’s cash receipts in this period but also the Treas
ury’s increasing use of the Tax and Loan Account technique,
since March 1948, as a means of spacing out the impact of
its large cash receipts on the reserves of the banking system.
Relatively small amounts (around 300 million dollars) of
the Treasury’s funds are also held in insured domestic banks
designated as "General Depositaries”, and in insular, territorial,
and foreign depositaries. Accounts are maintained in these
various types of depositaries, in areas at some distance from
Federal Reserve Banks or their branches, to provide agents of
1 See "U. S. Treasury Tax and Loan Accounts at Banks” , published
by this bank in a collection of articles entitled, Bank Reserves— Some
Major Factors Affecting Them, March 1951, and "Direct Security Pur
chases from the Treasury by the Federal Reserve Banks” , Monthly
Review, August 1950.
101
the Federal Government with convenient facilities for deposit
ing funds collected and to permit disbursing officers to make
payments in local funds. In many cases General Depositaries
qualify as Special Depositaries as well. The Treasury also main
tains a "Cash Room” in Washington where currency may be
obtained or Treasury checks cashed, but the flow of funds
through the Cash Room is relatively insignificant.
In addition to these bank accounts and cash balances, the
Treasury has an additional large cash asset referred to as "free
gold” (excess of gold bullion over specific gold liabilities) and
some "free” silver bullion, which for the most part could be
used to cover general operations. These are not properly in
cluded, however, in a description of the routine banking of the
Treasury’s funds.
Fu n d s
in t h e
Sp e c ia l D e p o s it a r ie s
"Treasury Tax and Loan Accounts” (formerly known as
"War Loan Deposit Accounts”) are maintained at nearly
11,000 designated banking institutions in the continental
United States. By allowing funds to accumulate in the Tax
and Loan Accounts and withdrawing them through calls only
as desired, the Treasury can achieve a measure of control over
the flow of cash into its accounts at the Federal Reserve Banks,
and the potential disturbance to the money market and to bank
reserves can be held to a minimum. The reserves which banks
lose through calls can be immediately or very shortly returned
through Government disbursements, if calls are planned to
coincide closely with out-payments, whereas if all Treasury re
ceipts were deposited immediately at the Reserve Banks, re
serves would frequently be drained off long before the Treasury
could be in a position to disburse them. Although the Tax and
Loan deposits are payable on demand, the Treasury gives sev
eral days’ notice by calling for the funds before payments are
due.
In order to permit some differentiation between larger and
smaller deposit accounts, the Treasury has classified its Special
Depositaries into two groups. The present classification places
banks whose Treasury Tax and Loan Account balances on
December 20, 1950 were 100,000 dollars or less in group A;
those with larger balances on that date, in group B. (This
classification does not apply to the "X” balances, however.)
The Treasury may also call for funds from individual banks
without regard to any classification, but this has not often been
done. Individual calls were made early in the past month, but
these withdrawals were confined to those banks which bene
fited more than the Treasury thought desirable from the
switching out of the old Savings notes into the new series
by their depositors.
Until 1948, funds flowed into the Special Depositary ac
counts only as a result of Treasury borrowing operations. But
early in that year the Treasury decided to permit withheld in
come taxes to be credited to its accounts in the depositary
banks. At the beginning of 1950, the same arrangement was
extended to payroll taxes under the old-age insurance pro
gram; and as already noted, the large quarterly corporation tax
payments (checks of 10,000 dollars or more) were handled
MONTHLY REVIEW, JULY 1951
102
similarly in March of this year, with the quarterly payments of
large nonwithheld individual income tax checks (10,000 dol
lars or more) being treated in this way for the first time in
June. Beginning July 1, taxes on carriers under the Railroad
Retirement Act have become eligible for payment into the Tax
and Loan Accounts. If the "X” balance technique should be
applied to the remaining quarterly tax payments this year,
roughly three fifths of the Treasury’s receipts (including cash
borrowing) from the public will have been creditable initially
to the Treasury Tax and Loan Accounts. In 1947, when only
the proceeds of sales of Savings bonds and notes were payable
into the War Loan Deposit Accounts (as they were then
called), the maximum flow of funds into the Special Deposi
taries could not have been greater than 17 per cent of aggre
gate Federal cash receipts.
Not all of the creditable receipts pass through accounts held
with the Special Depositaries, but a large share of them do.
In 1950, about two thirds of the receipts from Savings bonds,
withheld income taxes, and old-age taxes were credited to
these accounts, and practically all of the proceeds of Savings
notes went into Tax and Loan Accounts. About 85 per cent
of all corporate income and excess profits taxes collected in
March 1951 flowed into the Special Depositaries. Only a small
portion of the individual income tax checks in June were large
enough (10,000 dollars) to be paid by crediting the Treasury
Tax and Loan Accounts, but it is estimated that they added
around 150 million dollars to the flow of funds into these
accounts.
The flow of funds into the Special Depositaries from the
several eligible sources has until recently been fairly stable,
averaging around 1.4 billion dollars in most months in 1950.
Receipts from the sales of Savings bonds, except for the special
sales, have been highest in the first three months of the year
and in July and December, whereas receipts of withheld taxes
are customarily low in the first month of each quarter, high
on the second month, and moderate in the third as a result of
technical characteristics of the payment schedule. The major
changes in sales of Savings notes during the postwar peri
od have apparently paralleled the changes in market rates of
interest; but sales have also tended to rise in the quarterly
months when corporation taxes were paid (and notes re
deemed), as corporations then purchased new issues to cover
later tax payments. This year, of course, large receipts from
the quarterly income and excess profits taxes were received
in March and June. If the Treasury continues to permit
quarterly payments of these taxes to flow into the Tax and
Loan Accounts, receipts at the Special Depositaries will no
doubt show sharp quarterly peaks in the future.
D e po s it s
a t the
Fe d e r a l R eserve B a n k s
The Treasury’s accounts at the Federal Reserve Banks have
fluctuated basically with the Treasury’s needs, reflecting the
Government’s cash income and outgo (both operating and debt
transactions). But the precise level, above the operational mini
mum, has normally been determined with reference to the
influence on the money market of a shift of funds into (or
out of) the Federal Reserve Banks. The minimum level must
be adequate for expected daily cash needs, and must also pro
vide for the appropriate distribution of the funds for operating
convenience among the 12 Federal Reserve Banks and their
24 branches. When the aggregate volume of receipts and ex
penditures is increasing, larger errors may be made in esti
mating the daily needs, and consequently a somewhat higher
minimum level is necessary.
The influence of the Treasury’s cash receipts and payments
upon the money market can be most nearly neutralized by
maintaining the volume of deposits at the Reserve Banks rela
tively constant. To soften the impact on member bank reserves
of unusually large receipts, however, the Treasury may let this
balance run off in advance and temporarily borrow directly
from the Reserve Banks rather than call for funds from the
Special Depositaries. This has been done on several occasions
in recent years to cover quarterly interest payments, which to
a large extent immediately precede the collection of quarterly
income and profits tax checks.
At times, the Treasury may exert a strong influence on the
money market by changing the level of its deposits at the
Reserve Banks. In 1948, for example, on the basis of con
sultation with the Federal Reserve System, these deposits were
increased and maintained during the last half of the year at
an average level of about 1.6 billion dollars at a time when the
System was striving to restrain expansionary tendencies in bank
credit. Conversely in 1949, Treasury deposits at the Reserve
Banks were allowed to decline, and in the second half of the
year averaged less than 600 million dollars.
In order to schedule its calls to take account both of its
daily needs and of the effect of its operations on money market
conditions, the Treasury must have short-term estimates of its
cash receipts and Government disbursements and their net ef
fect on its balance in the Reserve Banks. Similiarly, it must
estimate the inflow of funds to its accounts at the Special
Depositaries. These estimates require detailed study of Treas
ury receipts from regular operations, the probable proceeds of
Treasury borrowing operations, the time pattern of Govern
ment disbursements, and the drain arising from cash redemp
tions of outstanding Treasury debt. Estimates must distinguish,
of course, between factors initially affecting Treasury balances
at the Reserve Banks, and those representing accumulations
(subject to later call) at the Special Depositaries. These esti
mates are prepared continuously by the Treasury and Federal
Reserve staffs, on a daily, weekly, monthly, and quarterly basis.
Because of the wide range of influences at work — the vary
ing tax dates, changing levels of taxable incomes, seasonal and
cyclical influences on outlays, changes in the schedule of call
able and maturing debt, as well as changes in Government
programs — it is not a simple problem to manage the Treas
ury’s balances. The special collection arrangements adopted
this year, in conjunction with similar measures taken since
March 1948 to expand the use of the Special Depositary
technique, will materially lessen the severity of the impact
upon the money market of fluctuations in the Treasury’s
cash position.
103
FEDERAL RESERVE BANK OF NEW YORK
NATIONAL SUMMARY OF BUSINESS CONDITIONS
(Summarized by the Board of Governors of the Federal Reserve System, June 29, 1951)
Industrial production was maintained at earlier advanced
levels in May and the first three weeks of June. In wholesale
markets basic commodity prices declined further, while prices
of finished commodities generally changed little. Consumers’
prices in May advanced to a new high. Awards for defense
construction rose sharply. Retail sales were maintained, fol
lowing earlier declines. Up to early June bank loans to business
declined somewhat, but subsequently a sharp rise occurred;
defense loans have been increasing significantly.
A further small gain in minerals output in May reflected
mainly near-record volume of iron ore production for this sea
son. In May and early June crude petroleum production was
maintained at record levels and coal output continued at a
reduced rate.
Em p l o y m e n t
Employment in nonagricultural establishments in May, after
allowances for seasonal influences, continued at the record April
level. The average factory work week declined slightly, while
average hourly earnings continued to rise. Unemployment
I n d u s t r ia l P r o d u c t io n
declined somewhat further to 1.6 million, the lowest level since
The Board’s seasonally adjusted production index in May October
1945.
was maintained at the March-April level of 223 per cent of the
C o n s t r u c t io n
1935-39 average. In June, industrial production is expected to
continue at about this rate, which is 12 per cent higher than
Value of construction contract awards showed an unprece
a year ago.
dented increase in May, reflecting primarily issuance of several
Activity in durable goods industries has been stable since large awards by the Atomic Energy Commission totaling almost
March, with industrial and military equipment expanding one billion dollars. Awards for some other types of non
further, consumer goods declining, and most metals and build residential construction also showed more than the usual seasing materials showing little change. Steel mill activity in May sonal rise. Nonfarm housing starts increased to 97,000 in
and June has continued at earlier record levels, and ingot out May; this was more than one-third below the same month a
put of about 52.5 million tons in the first half of this year has year ago but about the same as in May 1949.
exceeded that in the first half of 1950 by 11 per cent. Passenger
car assembly in May and June has been maintained close to
D is t r ib u t io n
the April rate of 500,000 cars per month, while output of most
Value of retail sales, seasonally adjusted, was maintained in
household durable goods has apparently declined considerably
May,
following a considerable decline from January to April.
further.
Sales
of
household durable goods decreased further, while sales
Output of nondurable goods in May remained at the high
of
apparel
and other soft goods increased somewhat. Sales by
April level. A slight gain for textiles reflected mainly termina
automotive
dealers showed little change. In the first three
tion of a labor dispute at cotton mills. Paperboard production
weeks
of
June
sales at department stores continued at about
reached a new record rate in May, but subsequently declined
slightly. Chemicals production continued to expand. Meat the May level; in New York City sales rose considerably in re
production declined somewhat in May; in the first half of sponse to a "price war”. Seasonally adjusted value of depart
June, pork production increased while beef output dropped ment store stocks at the end of May was about 30 per cent
sharply.
above year-ago levels, roughly the same as at the end of April.
INDUSTRIAL PRODUCTION
Federal Reserve index.
Monthly figures; latest figure shown is for May.
CONSTRUCTION CONTRACTS AWARDED
F. W . Dodge Corporation data for 37 Eastern States.
latest shown are for May.
Monthly figures;
MONTHLY REVIEW, JULY 1951
104
in some types of loans, particularly those to commodity dealers
C o m m o d i t y Pr ices
The general level of wholesale commodity prices has con
tinued to change little since mid-May. Prices of such basic
commodities as grains, fats and oils, cotton gray goods, wool,
and tin have declined further, and a 14 cent reduction in the
price of rubber, to 52 cents per gound, has been announced
effective July 1. Prices of finished goods generally have been
maintained. Several manufacturers of carpets have reduced
prices up to 11 per cent, less than the increases effected in April
when ceilings were raised. Prices of hard floor coverings, in
contrast, have been raised further.
Consumer prices rose 0.4 per cent in May. Prices of foods,
which had declined slightly in April, rose 0.8 per cent to a
new high.
and processors of agricultural commodities.
Deposits and currency held by businesses and individuals
increased somewhat in the first half of June following rela
tively little change in May. The rate of use of demand deposits
at banks in leading cities outside New York remained high
in May, but was slightly below that of April, the seasonally
adjusted peak for recent years.
M o n e y R a te s a n d S ec u rity M a r k e ts
Common stock prices showed a moderate advance in early
June but by the end of the third week had declined to a level
slightly below that of May 31. Yields on high-grade corporate
bonds increased moderately during the first three weeks of
June.
W ith
easy money conditions prevailing, yields on
Treasury bills and other short-term Government securities de
B a n k C r e d it
and
the
clined somewhat. On May
M o n e y Su p p l y
Business loans outstanding at banks in leading cities declined
somewhat between mid-May and early June and rose there
after. Loans to finance defense contracts and "defense support
ing” activities, principally to metal manufacturers and public
utilities, increased considerably. Seasonal decreases continued
1926*100
the Secretary of the Treasury
of indebtedness to holders of the 2 % per cent bonds previously
called for redemption on June 15, and the IV a per cent
Treasury notes maturing on July 1. O f the 10.1 billion dollars
of maturing securities, about 9.5 billion were exchanged for
the new certificates.
LOANS AND INVESTMENTS AT MEMBER BANKS IN LEADING CITIES
W HOLESALE COMMODITY PRICES
PER CENT
28
announced the offering of a 9V^ month l 7/s per cent certificate
O T H E R T H A N U. S. G O V E R N M E N T S E C U R I T IE S
PER CENT
/M
cciRPORATE AN o
--------- MUNIC !IPAL SECURI TIES —/ -----1
V f\
l/ 1
^ R E A L ESTAT E
LOANS
0T1-1ER LOANS*
CONSUMEI
( LARGlELY
fv
_____
s A lJ n lfh t >
FOR
PURCHASING SECURITIES
-xA/------1948
Bureau of Labor Statistics’ indexes. Weekly figures; latest shown are for
week ended June 19.
1949
1950
1951
1948
*
1949
EXCLUDES LOANS> TO BANKS.
1950
1951
Commercial loans include commercial, industrial, and agricultural loans.
Wednesday figures; latest shown are for June 13.
@FedFRASER