Full text of Economic Policy Review (Federal Reserve Bank of New York) : July 1952, Vol. 34, No. 7

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MONTHLY REVIEW
O

f

F E D E R A L

V o l u m e

34

C r e d it

a n d

B u s in e s s

R E S E R V E

B A N K

JU LY

C o n d itio n s

O F

N E W

Y O R K

19 52

No. 7

MONEY M ARKET IN JUNE
The continuous tightness that had characterized the money
market through April and May was interrupted briefly after
the middle of June, but by the end of the month the
market was again tight. Treasury operations superimposed
on the usual intramonth behavior of Federal Reserve float
largely accounted for the temporary easing and the subsequent
return to tight conditions. Federal Reserve security operations,
in the form of repurchase agreements with dealers early in
the month and later through temporary purchase of special
certificates of indebtedness from the Treasury, additional repur­
chase agreements with dealers, and open market purchases of
short-term securities, provided a varying supply of funds to
the market through the month.
Developments in the Government security market during
June were dominated by the heavy schedule of Treasury
financing operations, including announcement of the results
o f the May offering of 2 % per cent nonmarketable bonds
for cash and exchange of the four longest restricted bonds, sale
of 4*4 billion dollars of new 2 Ys per cent six-year bonds,
and preparations for refunding of the more than 5 billion
dollars of 1% per cent certificates of indebtedness maturing
July 1 with 1% per cent eleven-month certificates maturing
June 1, 1953. After borrowing a total of 1.4 billion dollars
of new money through 200 million dollar increases in seven
of the nine regular bill maturities in April and May, the
Treasury raised only 200 million dollars from this source in
June, through an addition to the bill issue dated June 5.
Yields on Treasury bills and certificates of indebtedness
moved in consonance with the easing and subsequent tight­
ening in the money market, while prices and yields of other
Government securities fluctuated in a narrow range over the
greater part of June. During the last week, bond prices tended
to ease as subscribers to the new bond issue adjusted their
portfolios to raise funds to meet their subscription commit­
ments. While the largest price decline occurred in the inter­
mediate issues directly competitive with the new six-year




maturity, the entire list closed the month down fractionally
from May closing prices.
Bank credit movements in June were highlighted by a mod­
est expansion of business loans— after three months of con­
tinuous decline— possibly associated in part with the June 15
tax date. Increases were recorded in most of the commercial
and industrial categories, with the seasonally larger lending
to sales finance companies accounting for a significant part of
the total increase.
M

ember

Ba

n k

R

eserves

On the first day of business in June, excess reserves held by
member banks totaled only 335 million dollars, while bor­
rowing by member banks from the Federal Reserve Banks
amounted to 885 million dollars; by June 11, the end of the
second statement week in the month, excess reserves at 802
million dollars were still less than borrowing, which totaled
834 million dollars. These figures illustrate the continuing
tightness in the availability of reserve funds over this period.
As the table on the next page shows, a limited volume of funds
was temporarily supplied the market in the first two statement
weeks by Federal Reserve security operations; these consisted
of repurchase agreements in short-term Government securities
negotiated with dealers. During this period the New York
City banks experienced a net outflow of funds as a result both
of Treasury operations and banking and industry transactions.

CONTENTS
M oney Market in J u n e ........................................

93

Sources and Uses o f M em ber Bank Reserves,
1914 to 1 9 5 1 .........................................................

97

Recent Monetary Developments A b r o a d .........

100

Pattern o f United States Im port T r a d e ...........

103

Department Store T r a d e ......................................

105

M O N T H L Y R E V I E W , J U L Y 1952

94

W e e k ly Changes in F actors Tending to Increase or D ecrease
M em ber Bank R eserves, June 1952
(In m illions of d o llars; ( + ) denotes increase,
(— ) decrease in excess reserves)
Statement weeks ended
Factor
June
4
Operating transactions
Treasury operations*...................
Federal Reserve float...................
Currencv in circulation..............
Gold and foreign account..........
Other deposits, e tc ........................

+ 41
4-122
-1 3 2
- 11
+
3

+
+
+
+

21
28
12
14
5

+
+
+
+

T o ta l................................

-j- 25

+

49

Direct Federal Reserve credit trans­
actions
Government securities................
Discounts and advances.............

+105
+ 109
+214

T o ta l................................

June
25

June
18

June
11

Four
weeks
ended
June
25

+
-

128
408
27
54
49

+431
+229
-1 0 4
+ 52
- 50

+ 1,042

-

558

+558

+114
- 91

+
-

505
293

-

433
235

+291
-5 1 0

+

23

+

212

-

668

-2 1 9

-1 ,2 2 6
+
90

+339
-3 5 0

-1 ,1 3 6

-

497
487
43
23
9

Total reserves ........................................
Effect of change in required reserves.

+239
+ 46

+
+

72
6

+ 1 ,2 5 4
492

Ex ce ss reserves.....................................

+285

+

78

+

762

11

N ote: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash.

The availability of bank reserves eased markedly in the third
statement week. Treasury interest payments on June 15 and
cash redemptions of tax anticipation bills maturing on that
date, in conjunction with somewhat reduced calls on the Tax
and Loan Accounts, more than offset cash tax collections, with
the result that Treasury operations added about 900 million
dollars to reserve balances. Part of the total net Treasury
outlay appears in the table under the category for System
purchases of Government securities; that is because roughly
half of these outlays were actually financed on a temporary
basis by the sale of special certificates of indebtedness to the
Federal Reserve Banks (413 million of these certificates were
outstanding on June 18). As it has done in all quarterly
income tax periods during the past year except that of last
December, the Treasury authorized the deposit of 100 per cent
of the larger tax checks in special "X ” balances with the com­
mercial banks on which they were drawn, thereby limiting the
reserve drain upon the banks in such periods. A very large
increase in float in the third statement week of June offset
the equally large increase in required reserves of member
banks growing out of the net Treasury expenditures and other
sources of deposit increase, so that the full accretion to reserves
from Treasury operations, System security purchases, and the
other operating factors was available to the banks to repay
some of their borrowing from the Federal Reserve Banks and
to add to excess reserves.
In large part, the developments in the following week and
the closing days of the month were a reversal of the develop­
ments of the tax-date week. Float underwent a normal end-ofthe-month contraction, and the Treasury repaid its temporary
borrowings from the Reserve Banks and rebuilt its balances




with the Federal Reserve Banks to more normal levels. The
resulting large loss of reserves to the banks was only partially
offset by the related decline in required reserves, so that by
the end of June bank reserves were once again in tight supply.
The large excess reserves carried earlier in the period, how­
ever, tended to reduce the need for borrowing to average out
reserve requirements in the week ended June 25. In the clos­
ing days of the month, the prospect of very large needs for
additional reserves in early July, as the result of market pay­
ments to the Treasury for the new bond issue and currency
requirements for the July 4 week end, resulted in a sizable
increase in borrowing from the Reserve Banks. On Monday,
June 30, however, borrowings were reduced to a minumum
as banks made preparation for their midyear statements.
Through the periods of ease and subsequent tightness in
the last half of June, the New York City banks reflected devel­
opments in the banking system as a whole. The concentration
of interest payments and other Treasury outlays in New York
at the middle of the month, together with the usual inflow of
banking funds as excess reserves accumulated in the banking
system, resulted in a temporary excess of reserves in the City
banks; however, a sizable outflow of funds through commercial
and agency transactions in the latter part of the month imparted
a substantial degree of tightness to City bank reserve positions
before the end of June. This was reflected in the rate on Fed­
eral funds, which returned to the maximum l 1^
Per cent
on June 25, and in yields on short-term Treasury bills, which
by the end of June had climbed to their highest levels since
late December of last year.
T r e a s u r y Fin

ance

Treasury financing operations in June involved nearly 4.9
billion dollars in new money issues in addition to providing
for the exchange of 5.2 billion dollars of certificates maturing
July 1. Of the new money raised in June, 200 million dollars
represented an addition to the Treasury bill issue dated June
5. The Treasury announced on June 5 the results of its offer­
ing of 2% per cent Series B 1975-80 investment bonds for
cash and in exchange for the 2 Vi per cent restricted bonds
of 1965-70, 1966-71, and the June and December 1967-72
issues (the ratio of cash to securities exchanged to be no less
than one to three). Subscriptions for the nonmarketable in­
vestment bonds totaled close to 1,758 million dollars, includ­
ing cash subscriptions of 450 million dollars (o f which 132
million dollars represented investment for Government
accounts) and exchange subscriptions of slightly more than
1,307 million dollars.
A major step in the Treasury’s program for financing the
cash deficit expected in the first half of fiscal 1953 was taken
with the announcement on June 10 that the Treasury would

FED ER AL RESERVE B A N K OF N E W Y O R K

offer for cash on June 16 an intermediate bond to be dated
July 1, 1952, in the approximate amount of 3,500 million dol­
lars. Proceeds from the sale of this bond were to be eligible for
deposit in Treasury Tax and Loan Accounts; nonbank sub­
scriptions were to be accompanied by a 10 per cent cash
payment. In a subsequent announcement on June 12, the Sec­
retary of the Treasury announced that nonbank subscriptions
to the bond offering would be allotted in full, while subscrip­
tions from commercial banks for their own account would be
limited in each case to an amount not exceeding the combined
capital accounts (excluding reserves) of the bank, or 5 per
cent of its total deposits, whichever was greater. Commercial
bank subscriptions of 100,000 dollars or less were to be allot­
ted in full, and subscriptions over that amount were to be
awarded on a percentage basis. After the market closed on
Friday, June 13, a third announcement specified that the new
bond was to mature on June 15, 1958, with no call option,
and was to bear interest at the rate of 2% per cent.
Subscription books for the new bond remained open for
only one day, June 16, as the very favorable market reaction
to the issue resulted in an immediate heavy oversubscription.
Allotments of 4,249 million dollars were made, including
3,642 million to nonbank subscribers, 507 million to com­
mercial banks, and 100 million to Government investment
accounts. Nonbank subscriptions were allotted in full, but
commercial banks were restricted to a maximum of 100,000
dollars for any individual bank.
The other major Treasury financing operation in June in­
volved an exchange offering on June 16 (announced June 10)
of eleven-month 1% per cent certificates of indebtedness to
mature June 1, 1953 for the 5.2 billion of l 7
/ s per cent certifi­
cates maturing on July 1. It was announced that the new
certificates would have an eleven-month maturity, so as to
mature on June 1, 1953 and thus keep the June 15 date open
for tax anticipation bills. Treasury books on the certificate
offering were open from June 16 through June 19, and
exchange subscriptions were received for approximately 95
per cent of the maturing issue.
The Go

vernm ent

S e c u r it y M

arket

Despite the announcement on June 5 of the relatively small
response to the Treasury’s offering of 2% per cent nonmarket­
able convertible bonds for cash and in exchange for market­
able bonds, prices of intermediate and longer-term Treasury
bonds, after extending the price contraction that had developed
in the last half of May through the opening days of the
month, tended to firm moderately until the middle of June,
largely on professional activity in a thin market. Another
factor probably having some bearing on this development
was the rumor circulated in the market that the Treasury,




95

having failed to raise a significant volume of new money
through its offering of long-term nonmarketables, might restrict
its immediate new money operations to shorter-term issues.
Immediately after the preliminary announcement on June 10
of the Treasury’s prospective offer of a new bank-eligible inter­
mediate bond, however, prices of taxable Treasury bonds were
marked down to take account of the expected market reaction
to the additional supply of medium-term bonds. The largest
price decline on the Treasury announcement, V2 of a point,
was recorded for the recently issued 2 Ys per cent bond of
March 15, 1957-59, which had risen to a premium of more
than a point.
Prices of longer-term eligible and restricted bonds had large­
ly recovered from their June 11 decline by the time the
subscription books for the new six-year bond and for the
certificate exchange opened on June 16, while some of the
intermediate issues tended to remain near the levels reached
following the Treasury’s announcement of the offering. One
factor in the immediate price recovery on most issues was
the Treasury’s announcement early on June 12 of the terms
on which subscriptions would be received, which led to
expectations in the market that banks would not receive all
the bonds they wanted on their direct subscriptions and
would find it necessary to satisfy their demand for the new
issue in the secondary market. Trading in the 2% ’s on a
when-issued basis, which developed immediately after the
Treasury books closed, was accelerated following announce­
ment on June 19 of the heavy oversubscription to the
Treasury’s offering and the small allotment to banks, and
such trading continued in moderate volume for the remainder
of the month as banks sought to purchase the new bonds and
some nonbank subscribers offered their bonds in the market.
Selling of other issues by nonbank investors to raise funds to
meet subscription commitments and by banks to finance pur­
chase of the 2Ys’s in the secondary market, although mainly
in the short-term issues, caused prices of short, intermediate,
and long-term bonds, both bank eligible and restricted, to
recede slightly in the last half of June. An initial interest in
the 2Va per cent bonds of June 1959-63, which became eligible
for bank purchase on June 15, slackened as the attention of
the market shifted to the new securities.
It appeared at the end of June that secondary distribution
of the forthcoming bonds was still under way and that further
bank purchases of these bonds, or other securities sold to
make room in nonbank portfolios for the 2 Ys's, might be
expected. The Treasury’s recourse to the commercial banking
system in its financing operations raises anew the question of
the inflationary potentialities of this method of deficit financ­
ing, a question on which some confusion has been expressed.
While net commercial bank purchases of Government securi­

96

M O N T H L Y R E V I E W , J U L Y 1952

ties result directly in an increase in demand deposits and the
money supply, appraisal of the inflationary consequences
involves another side of the problem. When banks invest in
Government securities, reserve funds are tied up that might
otherwise have been utilized to support other forms of
credit expansion. In fact, unless the Reserve System makes
new reserve funds readily available, acquisitions of the
bonds by banks and loans to nonbank subscribers, and the
increased volume of deposits thereby created, will tend to put
a severe strain on the reserves of the banking system. And,
contrary to some impressions, when the Treasury spends the

Changes in Business and Consumer Loans of Weekly
Reporting Member Banks in 94 Leading Cities
(Cumulated weekly from Decem ber 26, 1951)

funds it has borrowed, the banks will not secure new reserves
on which to base a multiple expansion of private credit; the
Treasury’s deposits are simply transferred to other holders.
It is the availability and cost of reserve funds provided by
the Federal Reserve Banks, to support the expansion of deposits
growing out of Treasury financing through the commercial
banks, which largely determines the inflationary consequences
of such financing.
In the last half of June, to help the market make portfolio
adjustments to the new pattern of outstanding Treasury
securities, the Federal Reserve System purchased short-term
securities, including the 'rights” to the new certificate to be
issued on July 1, and made partially offsetting sales of other
short-term issues that were in demand, so that on balance the
net accretions to the Federal Reserve Open Market Account
during the Treasury’s heavy financing schedule in June were
relatively modest. Attrition on the certificate refunding
amounted to 253 million dollars, or 4.85 per cent of the
maturing issue.
The ease that developed in the money market at the middle
of June was reflected temporarily in significantly lower yields
on Treasury bills, which for a time sold at yields 15 to 30
basis-points below their beginning-of-the-month quotations.
A part of the decline in yields on bills may also be attributable
to temporary investment of funds scheduled for July 1 pay­
ment for the new Treasury bonds. Toward the close of the
fourth statement week, bill yields rose sharply to around
1.80 per cent and held at their high levels for the rest of June
as the market adjusted to the expected money market strain
over the end of the month and in the opening days of July.
Average issue rates on allotments of 91-day bills issued during
June ranged from 1.737 per cent and 1.753 per cent on the
issues dated June 5 and June 12, respectively, to 1.626 per
cent and 1.682 per cent on the June 19 and June 26 issues.

* Commercial, industrial, and agricultural loans.
f “ A ll other loans” , a category largely consisting
reported by weekly reporting member banks.

of

consumer

loans,

as

over the first three statement weeks in June, from 20,530
million dollars on May 28 to 20,776 million dollars on June
18. At the latter date, business loans held by the reporting
banks were down 816 million dollars from their high on
December 26 of last year. While increases occurred in most
of the industrial categories this month, one of the largest
increases was in loans to sales finance companies, which were
probably influenced by seasonal factors. It is also probable
that the loan expansion in June resulted in part either from
loan renewals occasioned by income tax payments or, in some
instances, from new loans for tax purposes. Business loans of
reporting banks in New York City followed the national pat­
tern, increasing by 162 million dollars between May 28 and
June 25, from 7,508 million dollars to 7,670 million dollars.
Real estate loans of reporting banks continued the gradual
expansion that has taken place over the past several months,
and ‘ other” loans

(primarily consumer loans)

increased

markedly in the three weeks ended June 18, by 94 million
dollars, to 6,281 million dollars, the highest level on record
for this category of bank lending. The accompanying chart
illustrates the course of business and consumer lending over
the first six months of 1952, showing the fairly steady decline

M

em ber

Ba

n k

C r e d it

Business loan totals as reported by weekly reporting member
banks in 94 larger cities increased by 246 million dollars




in business loans during the first half of this year and also show­
ing the rather marked increase in consumer and unclassified
loans following the elimination of Regulation W early in May.

97

FED ER AL RESERVE B A N K OF N E W Y O R K

SOURCES AND USES OF MEMBER
The preceding issue of this Review contained an article on
"The Functions of Reserve Requirements”, at the end of which
it was indicated that there would be a sequel giving an his­
torical review of the sources from which banks have acquired
reserve funds and the effects of the changes in the supply of
and demand for such funds upon the earning capacity of both
member banks and Federal Reserve Banks. This article will
review the factors that have been responsible for the growth
in member bank reserves and the uses which have been made
of the reserve funds the banks have acquired.
As the last column in the accompanying table indicates, net
additions to the nations monetary gold stock and expansion
of Federal Reserve credit have constituted the two principal
sources of reserve funds over the period from the end of 1914
to the end of 1951. Net increases in the amount of currency
in circulation and increases in the required reserves of the
banks have constituted the two principal uses of these funds.
The growth in required reserves of member banks resulted
partly from statutory increases in the percentages of reserves
which member banks have been required to maintain against
their deposit liabilities, but mainly from the enormous expan­
sion in bank credit and bank deposits that took place during
this period.
When the Federal Reserve System was established in 1914,
the total cash reserves (excluding interbank deposits) of all
banks in the country, member and nonmember, were probably
less than 2 billion dollars. During the 37 years from the

B A N K R E S E R V E S , 1914 T O 1951

beginning of 1915 to the end of 1951, the inflow of gold from
abroad ( together with some moderate amounts of domestically
produced gold) contributed a net amount of more than 20
billion dollars to member bank reserves. The actual increase
in the United States gold stock, reflecting revaluation of the
dollar in 1934, was even greater, but approximately 1 billion
dollars is still held as "free gold” by the Treasury, and about
700 million dollars was used as part of this country’s subscrip­
tion to the International Monetary Fund. Federal Reserve
credit during this same period showed a net expansion of
nearly 24 billion dollars (almost entirely through purchases
of Government securities), and Treasury operations, chiefly in
the form of issues of "Treasury currency” (silver certificates
and metal dollars, subsidiary silver, minor coins, etc.), con­
tributed a relatively small additional amount, bringing the
gross additions to member bank reserves to a total of about
46 billion dollars. On the other hand, currency in circulation
increased 26 billion dollars, as banks obtained currency to
meet the needs of their customers and to maintain adequate
supplies of vault cash. Since the banks obtain this currency by
drawing on their reserve accounts in the Federal Reserve
Banks, a corresponding amount of reserve funds was absorbed,
leaving a net increase in member bank reserve balances of
slightly under 20 billion dollars. Most of this increase in reserve
balances was used as the basis for expansion of bank credit and
was absorbed in increases in required reserves, leaving only a
small residual to be added to excess reserves. The expansion
in total loans and investments of member banks during this

Changes in F a ctors T ending to Increase ( + ) or D ecrease (— )
M em ber B ank R eserves and E x cess R eserves, D ecem ber 3 1 , 1 9 1 4 - D ecem ber 3 1 , 1951
(In m illions o f dollars)

Factor

Dec. 31, 1914Dec. 31, 1920

Dec. 31, 1920Dec. 31, 1929

Treasury factors*........................ ........................................
Gold and foreign account transactions...........................
Currency in circulation.........................................................

335
+ 1 ,1 0 8
- 2 ,2 9 3

+
343
+ 1 ,3 5 7
+
747

+
+
-

239
41
941

- 1 ,5 2 0

+ 2 ,4 4 6

-

660

+
287
+ 2 ,9 3 7
+
119
262

+
224
-1 ,9 2 3
72
101

Federal Reserve factors........................................................
Government securities.......................................................
Discounts, advances, and industrial loanst..............
Other deposits and F. R . accountsft..........................

Dec. 31, 1929Dec. 31, 1933

Dec. 31, 1933Dec. 31, 1940

Dec. 31, 1940Dec. 31, 1945

Dec. 31, 1945Dec. 31, 1951

Dec. 31, 1914Dec. 31, 1951

- 1,510+
+ 1 6 ,8 3 0 +
- 3 ,2 1 3

+
569
- 1,659
-1 9 ,7 8 3

+ 2 ,1 1 7
+ 2 ,9 6 6
691

+ 1 ,423
+ 2 0 ,6 4 3
-2 6 ,1 7 4

+ 1 2 ,1 0 8

-2 0 ,8 7 0

+ 4 ,3 9 1

-

+ 1 ,9 2 6
793
28
71

+
-

253
221
60
395

+ 2 2 ,0 7 8
+
241
+
498
58

+
-

461
227
606
168

+ 2 3 ,8 0 1
+
14
+ 1 ,183
- 1 ,0 5 5

809

250

4 ,1 0 7

+ 3 ,0 3 6 W

-1 ,8 7 2

+ 1 ,0 3 4

-

+ 2 2 ,7 5 9

-

Effects of changes in required reserves...........................

+ 1 ,5 1 6
— 1 , 520e

+
-

574
668e

+
+

374
558

+ 1 1 ,2 9 7
- 5 ,541

+
-

1 ,889
7 ,0 4 6

+ 4 ,1 4 1
- 5 ,2 1 0

+ 1 9 ,7 9 1
-1 9 ,4 2 7

Excess reserves..........................................................................

—

-

94e

+

932

+

-

5 ,1 5 7

- 1 ,0 6 9

+

4e

5 ,7 5 6

+ 2 3 ,8 9 8 J t

364

Note: Because of rounding, figures do not necessarily add to totals,
e Estimated.
* Includes changes in Treasury currency outstanding, Treasury cash holdings, and Treasury deposits with the Federal Reserve Banks.
t Under the Gold Reserve Act of 1934 the price of gold was increased from $20.67 to $35.00 per ounce; this resulted in an increase of approximately 3 billion dollars in
the nation’s monetary gold stock and in Treasury cash. The effects of these changes have been included in the 1933-40 data shown here.
t Changes in this total prior to 1934 consist almost exclusively of changes in bills discounted and bills bought; those during and after 1934 include changes in industrial
loans; and those after 1939 consist mainly of changes in advances.
** The volume of checks credited to the member banks’ reserve accounts with the Reserve Banks prior to collection.
f t Excludes foreign deposits. Federal Reserve accounts consist of capital accounts plus other liabilities and accrued dividends minus bank premises and other assets.
i t To make this total comparable with those for other periods shown, it has been adjusted downward by 45 million dollars. Such an adjustment has been necessitated
by two features of member bank reserves in 1914: (1) member banks held some of their reserves outside the Federal Reserve Banks; and (2) member bank re­
serve balances held with the Reserve Banks were computed on a slightly different basis than in later years shown in the table. See Ban kin g and M onetary Sta ­
tistics, p. 327.




98

M O N T H L Y R E V I E W , J U L Y 1952

37-year period was approximately 104 billion dollars, and total
member bank deposits increased by 133 billion dollars.
From these summary data, it is clear that there could have
been no such growth in the nations money supply— currency
and bank deposits— or in the banks' earning assets as has
occurred without the great increase in Federal Reserve credit.
While specific sources and uses of bank reserves cannot be
precisely linked to each other, and while a given expansion in
Federal Reserve credit has often provided banks with reserves
to meet their currency drains, the fact remains that, from a
purely accounting point of view, increases in reserves from
sources other than the expansion in Federal Reserve credit
between the end of 1914 and the end of 1951 did not supply
member banks with enough reserves to meet the actual increase
in the amount of currency outstanding. Thus, in effect, the
banking system of this country, in order to do its part in
financing this country’s participation in two world wars and
in providing the credit needed to finance the growth in the
country’s production and trade, has been dependent upon the
ability of the Federal Reserve Banks to create additional reserve
funds.

them by Congress. And, as the preceding summary of sources
and uses of reserve funds has demonstrated, the credit-granting
capacity of member banks and the growth in their earnings
over the entire period since the Federal Reserve System was
created have been heavily dependent upon the reserves pro­
vided by the Reserve Banks, rather than the earning assets
and earning power of the Reserve Banks being dependent
upon funds provided by the member banks. Indeed, the fre­
quent view that Federal Reserve Banks invest the reserve
deposits of their member banks in Government securities can
now be seen to be the opposite of the actual process. What
really happens is that, when the Reserve Banks purchase Gov­
ernment securities in the open market, they create bank
reserves. (Payment is made by check drawn on the Federal
Reserve Bank and the check is collected when the Reserve
Bank credits the amount to the reserve account of the member
bank presenting the check.) Just as the commercial banking
system of the country is able to expand deposits (through
lending and investing operations) up to five times the amount
of available reserves, if reserve requirements are assumed to
average 20 per cent, so the Federal Reserve Banks can expand
bank reserves up to four times the amount of available gold

R

eserve

Ba

n k

E a r n in g A
Ba

n k

R

ssets a n d

M

em ber

eserves

It is true, however, that there have been periods in which
the banks have acquired large amounts of additional reserves
independently of Federal Reserve credit, and the idea has
been expressed from time to time that member banks, by
depositing these reserve funds in the Federal Reserve Banks,
have enabled the Reserve Banks to enlarge their earning assets
and hence their earnings. This has led to the conclusion that
the earnings of Reserve Banks have been derived from funds
provided by the member banks, and hence that the member
banks should be permitted to participate more largely in the
earnings of the Reserve Banks, instead of having so large a
portion of the net earnings of the Reserve Banks paid to the
Treasury. Actually, however, as will be seen from the follow­
ing review of various periods since the Federal Reserve System
was established, the earning assets of the Reserve Banks have
tended to decline at times when there have been large addi­
tions to member bank reserves from sources other than Fed­
eral Reserve credit— notably gold inflows— and have tended to
be greatest when there have been heavy drains on member
bank reserves from factors such as gold outflows and large
public demands for currency.
The ability of the Federal Reserve Banks to add to the
reserves of member banks by purchasing Government securi­
ties or by making loans to member banks stems mainly, not
from funds provided by the member banks, but rather from
the note issue privilege and the credit-creating power granted




certificates. At the end of 1951, the Reserve Banks had almost
10 billion dollars of gold certificates in excess of the 25 per
cent reserve required against their note and deposit liabilities.
The misunderstanding with respect to this matter no doubt
derives from the fact that individual member banks, except
to the extent that they obtain reserves directly from the Reserve
Banks by borrowing, usually obtain new reserves through
deposits with them by their customers of currency or checks
drawn on other banks, or through sales of some of their securi­
ties. For the banking system as a whole, however, currency
transactions with customers over the years have constituted an
enormous drain on the banks’ reserves, rather than a source
of additional reserves, and the reserves obtained by one bank
through collections of checks drawn on other banks involve
only a shift of reserves between banks and cannot in any way
add to the total volume of reserves. In fact, the deposits on
which the checks are drawn are largely created through expan­
sion of bank credit— bank loans and investments— and, as the
deposits of the banking system as a whole increase, the required
reserves of the banks correspondingly increase and the amount
of free reserves is reduced. Sales of securities by the banks
produce additional reserves only to the extent that the securi­
ties are purchased by the Reserve Banks. To the extent that
the securities are sold to bank depositors (nonbank buyers),
there is a corresponding reduction in the banks’ deposit lia­
bilities, and consequently a fractional release of required
reserves; but there is no over-all increase in total reserves.

99

FED ER AL RESERVE B A N K OF N E W Y O R K

W

o rld

W

ar

I

and

the

In t e r w

ar

Y

ears

The sources of reserve funds and the demands for them
varied widely from time to time over the 37-year period from
the end of 1914 to the end of 1951. In the table, this period
is broken down to show some of the major swings in the
various factors affecting member bank reserves.
In the six years from the beginning of 1915 to the end of
1920, which covered most of the First World War and the
postwar inflation, there was a net inflow of gold, which for
those days was substantial. The public’s demand for cur­
rency, however, exceeded the size of the gold inflow; conse­
quently, the banking system suffered a heavy net loss of
reserves. In addition, a rapid increase in the volume of bank
credit occurred, first in connection with the financing of the
war, and then to finance the postwar inflationary boom. As
a result, there was a heavy demand for Federal Reserve credit
to provide the necessary reserve funds, which took the form
mainly of member bank borrowings from the Reserve Banks.
The next period, from the beginning of 1921 to the end of
1929, started with the postwar depression and ended with
the 'new era” boom. In that period a substantial gold inflow,
together with a reduction in the amount of currency in circu­
lation, provided the banks with a sizable volume of additional
reserves. Part of these reserves was used as the basis for fur­
ther credit expansion, but a major part was used to repay
member bank indebtedness at the Reserve Banks. For member
banks, much of the period was one of high prosperity, but,
despite an increase in member bank reserve deposits in the
Reserve Banks, the earning assets of the Reserve Banks fell
sharply and then remained at a relatively low level during
most of the period, and the earnings of the Reserve Banks
were much reduced compared with the preceding period.
In the years of acute depression, 1930-33, the major factor
affecting the reserves of member banks was the withdrawal of
currency from banks by depositors who were disturbed by the
wave of bank failures. An unprecedented liquidation of bank
loans and investments released a substantial amount of reserves
by lowering bank deposits and required reserves, but the banks
had to turn to the Reserve Banks for assistance in meeting
the demands on them. The Federal Reserve Banks had sup­
plied the banks with additional reserve funds at the end of
1929 and in 1930 through purchases of Government securities
to assist the banks in reducing their indebtedness to the
Reserve Banks, and later in the period made additional secu­
rity purchases in substantial amount to supply the banks with
excess reserves and thus to make it easier for them to meet
the cash demands of their customers.
The most important monetary and banking development
of the period 1934-40 was the tremendous inflow of gold. It
reflected, first, a flow of capital to the United States from the




‘ gold bloc” countries which were endeavoring to remain on
the gold standard without devaluation of their currencies, and
subsequently, the flight of capital from Europe in fear of Nazi
aggression before the war and payments for war materiel in
the early stages of the Second W orld War. Despite some off­
setting factors, such as a sizable increase in the amount of
currency in circulation and the sterilization of gold inflows by
the Treasury, member banks were not only completely inde­
pendent of the Federal Reserve System in maintaining their
required reserves, but accumulated a very large volume of
excess reserves for which they could find no suitable use. In
that period, there was a steady expansion in member bank
loans and investments, but competition for the available earn­
ing assets caused a decline in interest rates to unprecedentedly
low levels, which had a depressing effect on banks’ earnings.
At the same time, despite the extraordinary growth in member
bank reserve deposits in the Reserve Banks, the earning assets
of the Reserve Banks were at a very low ebb and in some of
the years their earnings wrere barely sufficient to cover expenses
and statutory dividends. The increase in the Reserve Banks’
assets that paralleled the growth in their deposit and note
liabilities was entirely in the form of claims on gold, which
produce no earnings.
W

o rld

W

ar

II

and

the

Po stw

ar

Y

ears

During W orld War II, the excess reserves of member banks
melted away rapidly as a result of the tremendous upsurge in
public demands for currency. In addition, the reserves required
of member banks increased rapidly ( despite the suspension of
reserve requirements against Treasury War Loan deposit
accounts in the banks), as a result of very large bank pur­
chases of Government securities and the rise in private deposits
as the Government spent the proceeds o f the War Loans. Fur­
thermore, there was a sizable outflow of gold after 1942,
reflecting heavy imports from other countries at a time when
civilian production was restricted here and only very limited
amounts of goods (apart from lend-lease operations) could
be made available for export. As a result, there was a steep
rise in the volume of Federal Reserve credit extended to
enable the banks to meet both the drains on their reserves
and their enlarged needs for required reserves as deposits
increased rapidly. At the end of 1945 the amount of Federal
Reserve credit outstanding was more than 9 billion dollars
in excess of the total volume of member bank reserves.
Since the end of the war, there have been wide swings in
the factors affecting the supply of reserve funds. The heavy
gold inflow from the end of 1945 to the fall of 1949, together
with a gradual decline in the amount of currency in circula­
tion after 1946 was nearly offset by the retirement of approxi­
mately 6 billion dollars of Federal Reserve credit. In effect,
this retirement was accomplished mainly by the Treasury’s

100

M O N T H L Y R E V I E W , J U L Y 1952

use of its surplus to retire Government securities held by the
Federal Reserve System. But at the low point in the fall of
1949 the volume of Federal Reserve credit outstanding still
exceeded the total amount of member bank reserve balances.
After the outbreak of war in Korea, a substantial outflow of
gold, which reflected chiefly a great acceleration in United
States imports, together with a renewed public demand for
currency and a rapid increase in member bank reserve require­
ments as a result of loan expansion, brought about a renewed
and very heavy demand for Federal Reserve credit. Despite
the reluctance of the System to release a large volume of such
credit in response to this demand, its support operations in
the Government security market actually led to a growth
in Federal Reserve credit which canceled the earlier postwar
contraction. Throughout the entire postwar period, therefore,
the amount of Federal Reserve credit outstanding has substan­
tially exceeded the total volume of member bank reserve
balances.
The increase in currency circulation alone since 1940 has
exceeded the total amount of reserves held by member banks
at the beginning of the period by more than 6 billion dollars,
and, in addition, the required reserves of the banks have
increased by about 12 billion dollars, only a limited part of
which is attributable to increases in percentage reserve require­
ments. Between the end of 1940 and the end of 1951, there
were no material net additions to bank reserve funds from
sources other than Federal Reserve credit, so that the banking
system has been dependent almost entirely upon expansion
of Federal Reserve credit to meet its reserve needs.

These years have witnessed the greatest period of expansion
in the history of banking in this country. Total loans and
investments of all member banks increased by 75 billion
dollars, and at the end of 1951 were more than three times
their volume at the end of 1940. Gross earnings of the banks
increased somewhat less than proportionately, however, and
a considerable part of the increase which did occur was used
to meet increased expenses and heavier taxation. The direct
benefit to bank stockholders in the form of dividends was
limited; but there was a considerable increase in the value of
their equity, as the banks retained substantial percentages of
net profits to strengthen capital positions. Despite this plow­
ing back of earnings, as well as some sales of new stock, how­
ever, many banks have had difficulty in increasing their capital
funds in proportion to the growth in their business.
The rate of growth in the earnings (gross and net) of the
Federal Reserve Banks was much greater than that of the
commercial banks during this decade, partly because their
earning assets increased even more rapidly, partly because their
expenses did not increase proportionately, and partly because
the Reserve Banks are not subject to income and profits taxes.
As pointed out above, however, their earning power arose out
of the note issue and credit-granting authority given them by
Congress, a circumstance which made it appropriate for them
to pay to the United States Treasury the greater part of their
net earnings, after expenses and the statutory dividend of
6 per cent on their paid-up stock.

RECENT MONETARY DEVELOPMENTS ABROAD
Inflationary pressures seem to have receded for the present
throughout most of the world. Prices are once again being
tested by consumer resistance; the demand for raw materials
and capital goods has tapered off; and in a few countries there
is even apprehension lest the difficulties felt by a few indus­
tries, such as textiles and clothing, may mark a general down­
turn from the recent high levels of employment and output.
In this change in the world economic climate, the slackening
of inflationary pressures in the United States since April 1951
appears to have been of some significance, partly because of the
related decline of United States imports after the bulge asso­
ciated with the Chinese entry into the Korean conflict, and
partly because of the influence that business conditions in the
United States exert on business sentiment elsewhere. A sub­
stantial contribution to the abatement of inflation has come,
however, from the renewed emphasis that many countries
have given to domestic programs for economic stability.
The relative stability that has so far been attained in Canada
and most of industrial Western Europe, in the face of continu­




ing international tension and expanded defense spending, can
be attributed in large measure to the application of restrictive
monetary policies. A particular need arose for monetary
restraint of a general character, since the scramble for goods
following the Korean outbreak— the accelerated purchases of
consumer goods, speculation in inventories, and greatly enlarged
private investment in industrial plant and housing— depend­
ed to a considerable extent upon a rapid expansion in bank
credit to business and individuals. In addition, there was a
serious danger lest the effects of monetary expansion continue
to nourish inflation long after the initial buying surge had
subsided. The need for monetary restraint was also accentuated
by the fact that increasing defense expenditures limited the
potential effectiveness of anti-inflationary fiscal action.
Although the impact of mounting defense outlays has not in
itself been a serious inflationary factor in most countries until
fairly recent months, most governments anticipated the infla­
tionary dangers that were likely to be associated with this
increased spending, and apparently felt that they would be

F ED ER AL RESERVE B A N K OF N E W Y O R K

minimized if any prior monetary expansion had been effectively
restrained.
In countries producing primary commodities, inflationary
developments after mid-1950 could be traced, more in some
cases than in others, to an increase in export earnings brought
about by the spectacular rise in primary commodity prices
prior to the second quarter of 1951. Moreover, in many of
these countries, a wave of speculative demand also appeared,
which, as in the industrial countries, was sustained by an
expansion of bank credit. Beginning in March 1951 when
world commodity prices began to fall and export proceeds
began to decline, the inflationary pressures that continued to
make themselves felt in many of the primary-producing coun­
tries were largely attributable to continued bank credit expan­
sion to private borrowers and the re-emergence of budgetary
deficits. In most of these countries, however, monetary con­
trols played a distinctly lesser role than in the industrial
countries of Western Europe and in Canada.
T h e St r e n g t h e n in g

of

M

onetary

Contro ls

It is symptomatic of the resurgence of general controls over
the availability of credit that much greater interest rate flexi­
bility now prevails in most countries than in the early postwar
years. While the discount rate instrument had been used spar­
ingly in the earlier postwar years, except in a few Continental
European countries, there has been a more widespread and
more frequent recourse to it since June 1950. However, apart
from Bolivia, Chile, India, Japan, and South Africa, its recent
use has been confined to Western Europe and Canada, as shown
in the table. In the United Kingdom the raising of the bank
R ecent C hanges in Central B ank D iscount R ates

Total number
of changes
Country

Date of
last
change

New
rate
(per
cent)

Change
from
previous
rate

Date of
previous
change

Austria................
Belgium...............
Bolivia................
Canada................
Chile....................
Denmark.............
Finland................
France.................
Germany*...........
India...................
Ireland................
Japan..................
Netherlands.........
South Africa.......
Sweden................
Turkey................
United Kingdom..

Dec. 6, 1951
Sept. 13, 1951
Sept. 30, 1950
Oct. 17, 1950
March 1951
Nov. 2, 1950
Dec. 16, 1951
Nov. 9, 1951
May 29, 1952
Nov. 15, 1951
March 25,1952
Oct. 1, 1951
Jan. 22, 1952
March 27,1952
Dec. 1, 1950
Feb. 26, 1951
March 12,1952

5
3M
6
2
st
5
5H
4
5
3X
3X
5.84
3H
4
3
3
4

+1X
- M
+1
+ x
+2
+ X
—2
+1
-1
+ X
+1
+0.73
- X
+ X
+ 3^
-1
+1X

Aug. 3, 1945 f
July 5, 1951
Feb. 4,1948
Feb. 8, 1944
June 12, 1935
July 4. 1950
Nov. 3, 1950
Oct. 11, 1951
Oct. 27, 1950
Nov. 28, 1935
Nov. 23, 1943
July 5, 1948
April 17,1951
Oct. 13, 1949
Feb. 9, 1945
July 1, 1938
Nov. 8, 1951

July 1945 July 1950
to
to
June 1950 June 1952
_

4
1
—

—
1
5
5
2
—
—

3
—

1
—
—

1
3
1
1
1
2
2
2
2
1
1
1
3
1
1
1
2

”

Note: Latest data available as of the close of business on June 27, 1952.
* Federal Republic (Western Germany); discount rate of the Land central banks,
t The rate effective August 3,1945 is the rate set following the re-establishment of the National
Bank of Austria.
t Rate applicable to discounts for the public, which represent an important part of total dis­
counts. The rates applicable to discounts for member banks and specialized institutions
have generally remained unchanged in recent years.
Source: Federal Reserve Bank of New York.




101

rate last November, by Vi per cent, to 2 Vi per cent was the first
increase in 19 years, except for a very temporary rise at the
beginning of the Second World War; a further 1^/2 per cent
rise to 4 per cent in March 1952 induced the first major move­
ment in the London short-term interest rate structure since
1945. In Belgium, Finland, Western Germany, and the Nether­
lands, the official discount rates were raised during the early
phase of the inflation that followed the Korean outbreak but
were subsequently lowered somewhat to meet changing condi­
tions; elsewhere the higher discount rates continue in force.
As a rule, the discount rate changes have had direct effects
upon the rates charged by commercial banks on discounts,
loans, and advances, as well as upon the rates applicable on
treasury bills and other short-term credit instruments.
Long-term rates have also been allowed to fluctuate more
freely. Government bond yields in several Western European
countries and the Union of South Africa had already risen sub­
stantially prior to the outbreak of Korean hostilities in June
1950. From July 1950 to October 1951 they rose in Australia,
Canada, Egypt, India, the Netherlands, Norway, Sweden, and
Switzerland, after having remained generally unchanged, or
actually declining, during the early postwar years; they rose
also in Belgium, Denmark, France, Italy, and the United
Kingdom, where, however, they had already risen in the earlier
postwar years. More recently, from November 1951 to June
1952, they went up in New Zealand— for the first time since
I 9 4 5 — ancj rose further in South Africa, Canada, India, and
the United Kingdom. In most South American countries and
in Pakistan, government bond yields showed little change,
Brazil being the most notable exception. Other long-term rates
have tended to increase in accordance with government bond
yields.
The availability of money was also restricted by new or spe­
cial measures of general or quantitative credit control. Prior to
mid-1950 such restrictions had already been established in
Australia, Belgium, France, Germany, Italy, and some Latin
American and Far Eastern countries; they were subsequently
introduced also in the Netherlands and Sweden, and in the
early months of 1951 were tightened in Western Germany, and
toward the year end in France. While in these countries the
new or special controls over commercial bank credit were
extended primarily by means of statutory regulation, in the
United Kingdom the monetary restraint that was imposed in
November 1951 was informal in character, commercial bank
liquidity being reduced by funding a considerable portion of
the outstanding treasury bills. In many countries, including
Australia, Canada, New Zealand, France, the Netherlands, and
the United Kingdom, selective or qualitative controls over
particular uses of credit were introduced or enlarged. In most
countries these controls worked effectively only when buttressed

102

MONTHLY REVIEW, JULY 1952

by general or quantitative credit controls; in most primaryproducing countries the controls, however, are still primarily
qualitative.1
In the last few months, there has been a moderate relaxation
of restrictive monetary policies in certain countries. The cen­
tral bank discount rate reductions in Belgium, Finland, Western
Germany, and the Netherlands have already been mentioned.
In addition, Canada has suspended its selective credit controls,
the Netherlands has lifted the commercial bank reserve require­
ments, and Denmark, Sweden, and the Netherlands have taken
special steps to prevent credit restrictions or higher interest
rates from adversely affecting housing construction. A more
liberal credit policy also has been initiated in India.
While the conditions of inflation that had induced the resort
to generally restrictive monetary policies were broadly similar
in the various countries and areas, the inflation itself came to
a head at different times. The initial rise in prices after the
outbreak of hostilities in Korea was world-wide; beginning in
April 1951, however, those countries that had adopted effec­
tively restrictive monetary policies generally experienced a
much slower price rise than did the others. In Canada, Belgium,
Western Germany, Italy, the Netherlands, and Switzerland,
the earlier rapid expansion of bank credit to business and
individuals either slackened or was altogether halted in the
latter part of 1951. Wholesale prices in these countries either
remained stationary from April 1951 onward or, as in the
United States, tended to decline, while retail prices increased
only moderately.

new monetary measures taken in November 1951 and in March
1952 have had little time as yet to show any fundamental effects
on the economy; measured in monetary terms, however, the
new policy has been effective, since the persistent rise in bank
credit has been checked. In the other countries of Western
Europe and Canada, the new monetary measures have been
fairly effective in inducing business to cut stocks back to more
nearly customary levels, to revise downward or postpone some
capital investment, and to favor those forms of capital outlays
that yield a relatively early return. The new monetary policies
have also greatly contributed to the diversion of resources from
home investment and consumption to exports, as will be noted
later. Finally, as a part of this altered economic climate,
business has begun to exercise greater vigilance in controlling
labor and other costs.

VULNERABILITY OF TH E PRESENT BALANCE

The monetary balance that has emerged in Western Europe
following the latest inflationary upswing is still vulnerable.
The programmed levels of defense expenditures are yet to be
reached. In France (largely because of military operations in
Indo-China) and in the United Kingdom, defense expenditures
have already increased sharply and are partly responsible for
the continuance of inflationary pressures in these countries
at a time when inflation has subsided elsewhere. In some
countries, nondefense expenditures have been reduced— nota­
bly in the Netherlands and in the United Kingdom where sub­
sidies have been cut, and in France where certain nonmilitary
expenditures have been reduced and various government capital
In other countries, however, the course of the inflation that
outlays are to be continued only as long-term funds are raised
followed the Korean outbreak was altogether different. For
from genuine savings. Nevertheless, these countries have gen­
instance, in France and the United Kingdom, in some of the
erally found it difficult to balance their budgets. In the United
independent countries of the overseas sterling area, and in parts
Kingdom and some Scandinavian countries, the estimated sur­
of Latin America, bank credit to business and individuals con­
pluses barely cover the scheduled capital outlays. Taxes cannot
tinued to expand after March 1951, sometimes even at an
as a rule be raised sufficiently to finance wholly the new defense
accelerated rate. Not until the first quarter of 1952 was the
expenditures; in the United Kingdom, indeed, some income tax
expansion finally slowed down or brought to a halt. Wholesale
relief has had to be granted as an offset to reduced subsidies.
prices in these countries continued, as a rule, to rise after March
Some primary-producing countries, more particularly Australia
1951 despite the reversal in world commodity prices at that
and India, have budgeted for a genuine surplus; in most of
time, and retail prices went up distinctly more than in the
these countries, however, fiscal policies are not strong.
United States; these rising price trends were reversed only in
Another reason for uncertainty over continuance of the
the early months of 1952.
internal stability thus far achieved in Western Europe is the
Although it is always difficult to assess the role that monetary
current trend of wages. Up to mid-1950 wages had generally
measures play in any given situation, the experience in foreign
risen roughly in proportion to the increase in per capita output,
countries since the outbreak of hostilities in Korea suggests
but since Korea they have risen faster; in a boom atmos­
that the promptness, resoluteness, and effectiveness with which
phere, in which labor was scarce, they have also generally risen
the measures of monetary restraint were adopted have exerted
more than the cost of living. Further wage increases have
a marked influence on both the duration and the extent of
recently been made or are now pending in a number of coun­
inflation. In some countries, such as the United Kingdom, the
tries. Another element of cost inflation in some countries has
1 For a brief account of the mechanics of some of the credit controls been the raising of farm prices and incomes above the levels
in other countries, see "Recent Monetary Policy Measures Abroad”,
consistent with world demand or the need to stimulate food
Monthly Review, March 1951, pp. 35-38.




FEDERAL RESERVE BANK OF NEW YO R K

production. The pressure for higher money incomes and the
reluctance to accept any reduction in consumption standards
(primarily as regards manufactured goods) tends to accentuate
the shortage of resources. Personal consumption has been con­
sciously reduced as a direct result of governmental policy only
in the Netherlands and a few other countries.
Because of the difficulties of reducing personal consump­
tion, Western European countries have relied in general on
cuts in investment, both private and public, to reduce infla­
tionary pressure. As already noted, many countries have been
fairly successful in curtailing speculative investment, primarily
in inventories. Last year, however, in a number of countries
there apparently was very little decline in capital investment,
and in some cases an actual increase. In several countries,
public investment (including investment in the nationalized
enterprises) was reduced, but private investment remained
higher than had been contemplated. The housing programs to
which several European governments are committed were
reduced only in one or two instances, and then only on a
temporary basis. The urge to invest also remains very strong
in the rapidly developing primary-producing countries.
This pressure for higher consumption and investment, at
a time when the requirements of defense are rising, is strong
everywhere; and, although many governments have proved
themselves both willing and able to prevent the competing
claims on resources from greatly exceeding the available total,
a tendency toward easing the policy of retrenchment has
already appeared in some countries. Measures relaxing the
existing restrictive monetary policies have, as already noted,
been taken thus far only in a few. However, in some Western
European countries there has recently been a slight increase
in unemployment and a slowing down of industrial output,
and as a result there is a certain amount of apprehension
regarding the current outlook.
Unem ploym ent

and

R e f l a t i o n a r y P o l ic ie s

In the early months of 1952 unemployment increased some­
what in some European countries, including the United King­
dom and the Netherlands; and, although it has lately declined,
it is still higher than at any previous time during the postwar
years. It remains high in Western Germany and Italy; Belgium
also continues to have an unemployment problem. In countries
with heavy unemployment, the problem is, of course, primarily
structural; elsewhere unemployment occurs largely in pockets
in some consumer goods industries, especially textiles and
clothing— mainly a result of the postwar overexpansion of
textile output in various parts of the world. In many countries
a slump in the consumer goods industries currently coexists
with a shortage of labor in mining and engineering. With
unemployment at about 2 per cent of the labor force or even




105

PATTERN OF UNITED STATES IMPORT TRADE
A limited number of copies of a monograph entitled
'The Pattern of United States Import Trade Since 1923;
Some New Index Series and Their Application” is avail­
able to those interested. Requests should be addressed
to the Publications Division, Federal Reserve Bank of
New York, New York 45, N. Y.
This study utilizes newly computed series for the unit
value and quantity of various groups of United States
imports, in an effort to analyze the influence upon our
imports of changes in the levels of income and industrial
production in the United States and of changes in price
relationships (through currency depreciation, through
tariff reductions, or through the price fluctuations that
occurred in the market place). The pamphlet also in­
cludes tables presenting the newly constructed index
numbers, classified by the major geographic regions from
which United States imports originate.

less, as in the case of England and some other European
countries, compared with the 3 per cent which Lord Beveridge
considered a few years ago to be the bare minimum for an
efficient fully employed economy, there appears little need in
such countries for steps to increase aggregate demand. The
search for employment stability in each particular industry
should not obscure the fact that manpower for defense and
exports has got to come from those industries for whose
products there is inadequate demand at home and abroad.
Nor does the slowing down in the postwar rate of increase
in Western Europe’s industrial production2 call for reflationary
policies. This slowing down appears attributable only to a
small extent to the falling off in demand for the products of
the textile and certain other consumer goods industries. Pro­
duction of the capital goods industries is still expanding,
although at a reduced pace, since unutilized capacity has
largely disappeared even in Belgium, France, Germany, and
Italy, where until recently industrial plant had not been fully
utilized. The shortage of raw materials— not, it should be
noted, of materials imported from overseas, but of those in
which Europe is normally self-sufficient, principally coal and
steel— also limits the expansion of industrial output. Until
recently the European coal shortage appeared particularly
critical and has had to be remedied by large imports from
the United States. Today coal and other commodities seem
somewhat less scarce, but this is largely because in many
countries credit restrictions and other measures have placed
a significant check on competing demands for these resources.

2 According to the OEEC, the percentage increase in Western
Europe’s industrial output over the corresponding quarter of 1950
was 3.6 per cent in the fourth quarter of 1951, as against 13.0 per
cent in the second and 8.3 per cent in the third quarter.

104

MONTHLY REVIEW, JULY 1952

The further increase in output that may be reasonably
expected in the industrialized as well as in the primaryproducing countries will constitute an important offset to the
pressure of excessive aggregate demand. However, an expan­
sion of output may possibly itself be inflationary, in a sense,
in that incomes are paid out before goods appear on the mar­
ket; in so far as the expansion of output is for defense produc­
tion or exports, the goods, of course, do not become available
for domestic civilian use at all. The inflationary impact of ris­
ing output is no doubt a less serious problem than inflation
caused by acute or widespread shortages; nevertheless, a rise in
output cannot, by itself, restore or preserve economic stability.
The line of demarcation between inflation and deflation is
therefore exceedingly difficult to trace. Nevertheless, under
the circumstances prevailing in Western Europe today, an
attempt to stimulate aggregate demand would almost cer­
tainly bring about not larger output but merely an inflationary
relapse. Attaining high output and employment, of course,
remains an important objective, but it is equally essential to
restore and maintain in the Western European economies
a measure of flexibility. Most of these economies are not
yet adaptable enough to move labor and other productive
resources from industries that should contract to those that
should expand to meet the requirements of defense and
exports. The wage and price structures, in particular, are not
so differentiated as to attract labor and other resources to the
undermanned or undercapitalized high-priority industries and
to withdraw them from the less important industries. In the
primary-producing countries, on the other hand, the maldis­
tribution of economic resources generated by inflationary
pressures manifests itself principally in the growth of high-cost
domestic industries. In both groups of countries, there is
accordingly a pressing need for further redistribution of eco­
nomic resources and readjustment in the pattern of production.
Such changes, however, can take place in an orderly manner
only if inflationary pressures remain under control.
In

ternal

St a b il it y N

eeded fo r

E x t e r n a l So l v e n c y

The subsidence of inflation, too, is a necessary condition for
the attainment of external solvency. This fundamental con­
nection between internal stability (or its lack) and a country’s
balance-of-payments position, which had been obscured during
the early postwar years by the general scarcity of goods, the
currency chaos, and the disintegration of the channels of world
trade, has become increasingly apparent in recent years. The
international payments problem is, of course, more than a
by-product of inflation, since it is likewise affected by the
various structural problems of production, productivity, and
foreign trade. Nor can it be realistically appraised without
giving consideration to various special factors such as the




slowing down or speeding up of strategic stockpiling, ttie
impact of sharp price fluctuations of certain commodities, and
the speculative and other movements of capital. These various
influences are important. The very fact, however, that most
countries that experienced payments difficulties in the latter
part of 1951 were in an unbalanced position vis-a-vis not only
the dollar area but all major trading regions points to the
conclusion that it was internal inflation which greatly aggrav­
ated the effects of these special factors. In any event, the
international payments problem thus appeared to be broader
than that of adjustment with the dollar area.
This analysis is clearly confirmed by recent developments.
The rise in import costs after mid-1950 greatly worsened the
terms of trade of most Western European countries, thereby
causing a heavy drain on their national income and making it
necessary to increase exports greatly to pay for a given volume
of imports. Yet, although the terms of trade appear to have
worsened more or less equally in France, Western Germany,
Switzerland, and the United Kingdom, and to a somewhat
smaller extent in the Netherlands, some of these countries
experienced a deterioration in their payments position and a
loss in gold and dollar reserves at the same time that others
gained; in the latter, the deterioration in the terms of trade
was offset by heavier exports, which were removed from
domestic use by a policy of general retrenchment. Today the
terms of trade of these countries are at least halfway back to
the pre-Korea level, and the drain on the national income has
been correspondingly reduced.
It is also interesting to note that in countries like Denmark,
Germany, and the Netherlands, which applied severe monetary
restraints, the volume of exports went up last year proportion­
ally more than did production. Monetary restraints helped
to increase exports by holding costs down and by discouraging
home consumption of exportable goods. In France, too, exports
rose, but they went to a considerable extent into the franc
area. While British exports rose, the whole increase went to
the overseas sterling area, exports to other countries actually
falling. In general, domestic conditions within each country
have had an important influence upon the release of goods for
export, with the exports of countries that imposed more
effective monetary restraints finding a somewhat broader world
market on successful competitive terms.
The volume of imports likewise appears to have been deter­
mined to a large extent by domestic conditions, although
various measures to liberalize or to tighten import restrictions
also exerted considerable influence. In the United Kingdom,
imports could not be held down in the face of rising infla­
tionary demand (last year’s rise in import volume also reflected
restocking), and the same was true in France. In contrast, the
physical volume of imports expanded last year relatively little

FEDERAL RESERVE BANK OF NEW YORK

105

in Belgium, Germany, Italy, and the Netherlands, and actually
declined in Denmark. The independent countries of the over­
seas sterling area and most Latin American countries, on the
other hand, experienced a considerable rise in imports last
year.
The uneven course of inflation, and the differences in the
speed and resoluteness with which effective anti-inflationary
policies have been implemented, have thus exerted a pro­
nounced influence on international trade and payments in the
recent past. Broadly speaking, the countries that halted infla­
tion soon after the wave of inflation receded in the United
States have either maintained or enlarged their monetary
reserves (notably Belgium, Denmark, Germany, Italy, and the
Netherlands). The dollar deficits of most of these countries
have been kept manageable with the help of United States aid.
On the other hand, the external positions of France and the
United Kingdom, as regards both the dollar and nondollar
areas, deteriorated in the latter part of 1951 and in the early
months of 1952; several signs of improvement have appeared
since the recent strengthening of their monetary and economic
policies. Outside Europe, Canada has considerably improved
its international position; on the other hand, most of the inde­
pendent countries of the overseas sterling area have found them­
selves in deficit in their external payments not only with the
United States, but with every other major area. The recent
strain on the European Payments Union and the reversal of
gold and dollar movement between the United States and the
rest of the world reflected principally the persistent inflationary
pressures in certain foreign areas at a time when inflation had
subsided elsewhere.3

3 Cf. "Reversal in Foreign Holdings of Gold and Dollars”,
February 1952, pp. 13-16.

Review,

In recent months the more general use of restrictive mone­
tary measures has been helping to redress the unbalance in
international payments. However, the new direct restrictions
on trade, to which the sterling and franc areas particularly have
had recourse under emergency conditions, may accentuate the
existing distortions in trade and the spread between dollar and
nondollar prices. They thus threaten to hinder the necessary
eventual readjustment in the patterns of production and trade.
Provided the restrictions are only imposed temporarily, how­
ever, their immediate usefulness in checking the deterioration
of reserve positions may overbalance their unfortunate effects
in delaying the restoration of convertibility and nondiscrimina­
tion, and hence in impeding fundamental progress toward the
more efficient use of the world’s productive resources.
N o country can continue to consume or invest or use for
the government more than it produces; it can live beyond its
means only so long as it spends its gold and foreign exchange
reserves or receives loans and grants from abroad. The only
choice it has in the long run is whether to restrict the com­
peting claims on its economic resources in a way that prevents
(or limits) inflation, or to tolerate inflation; the actual cur­
tailment will have to be done, whichever way is chosen. In
any event, the restoration and preservation of monetary balance,
far from being an obstacle to economic expansion and develop­
ment and thus to a high and steady level of employment, is a
necessary condition if the economies of the developed and the
developing countries are to be efficient and adaptable. The
triple task of accelerating the defense effort of the free world,
of ensuring economic and social progress, and of minimizing
the balance-of-payments deficits, therefore, hinges importantly
on the re-establishment and maintenance of reasonable mone­
Monthly
tary balance throughout the world.

DEPARTMENT STORE TRADE
Although Second District department store sales during June
fared poorly in comparison with the dollar volume of June
1951, which was inflated by a "fair trade” price war, retailers
could derive some degree of optimism from the knowledge
that consumer demand apparently declined slightly less than
seasonally during June. It is estimated from incomplete data
that, although department store sales in June were 10 per cent
below year-ago levels, they were one per cent higher than in
May 1952 (after correction for calendar irregularities— one
less shopping day this year— and after adjustment for seasonal
variations).
Summer apparel lines, particularly womens cotton dresses
and men’s lightweight suits, were reported to be moving well.
Sales of the major durable goods continued substantially below
year-ago levels, but year-to-year comparisons in those lines




were distorted by the brisk demand generated by the price
war in New York City in June 1951.
R

ecen t

D

evelo pm ents

Store I

in

D

epartm ent

n v e n t o r ie s

In recent months the major concern of Second District
department store executives has been the absence of any sus­
tained resurgence of consumer demand; thus, the program of
inventory retrenchment, begun in the spring of 1951, has been
continued in 1952, although on a much more moderate scale.
Since July 1951 the value of stocks (on a seasonally adjusted
basis) held by Second District department stores that report
outstanding orders to this bank has decreased 21 per cent, with
most of the decline occurring between July and December
1951. By May 31, 1952 the seasonally adjusted dollar volume

106

MONTHLY REVIEW, JULY 1952

Department Store Stocks and Outstanding Orders
Second Federal Reserve District, January 1949-May 1952*

(M onthly indexes adjusted for seasonal variation;
1940 average=100 per cent)
Per cent

Per cent

orders expressed as a per cent of end-of-month stocks has thus
far in 1952 been consistently below corresponding 1951 figures,
even though inventories have been considerably lower than
year-earlier levels. In fact, on May 31, 1952 outstanding orders
amounted to only 21 per cent of total stocks, the lowest since
at least 1940, although inventories were almost 16 per cent
lower than on May 31, 1951.
S t o c k s -S a l e s R

a t io s

Year-to-year comparisons in the relationships between endof-month stocks and monthly sales further illustrate the
changed behavior with respect to inventories. These stockssales ratios are computed by dividing stocks at the end of the
month by sales during the month, and hence represent the
number of months’ supply on hand at the current rate of sales.
As stocks are valued by the stores at current market prices
and sales necessarily reflect current market prices, these ratios
tend to ‘ cancel out” the effects of price changes and thus
largely indicate variations in the relation between the physical
volume of inventories and the physical volume of sales.
*For a representative group of stores whose
half of the estimated Second District total.

1951

sales

were more than

of department store inventories was 9 per cent lower than at
the end of 1951.
As the accompanying chart indicates, the rather sharp declines
in department store inventories during the last half of 1951
and during the very early months of this year were largely the
result of the extensive and prolonged curtailment in forward
buying initiated by the stores in March 1951. At that time,
after the second wave of post-Korea scare buying had termi­
nated, retailers were faced with rapidly mounting stocks and
equally rapidly declining sales. As a result, they became less
concerned with future supply problems and prospective price
changes and, as the chart shows, sharply curtailed the volume
of commitments for additional merchandise. The dollar vol­
ume of orders outstanding at Second District department
stores on September 30, 1951 (after seasonal adjustment) was
less than half of what it was seven months before. While there
was a temporary reversal of this downward movement during
October and November, a sharp decline occurred the following
month and the seasonally adjusted value of commitments for
additional merchandise in December was the lowest since June
1949. Although the dollar volume of outstanding orders, on
a seasonally adjusted basis, subsequently turned upward and
has remained moderately higher than the December 1951
level, there is little evidence to suggest that retailers have
basically altered their program of achieving closer relation­
ships between stocks and current levels of demand. The data
presented in Table I show that the actual value of outstanding




Monthly ratios of stocks to sales since February have been
lower than corresponding 1951 figures despite the fact that
sales for the first five months of 1952 have averaged about 7
per cent below year-ago levels. On May 31, Second District
department stores had just about three months’ supply on hand
at the May rate of sales. This ratio (3.0) while smaller than
the May 1951 figure (3.4) was, however, somewhat higher
than the average ratio for the month of May from 1943
through 1950 (2 .6 ), suggesting that the shortening of inven­
tory positions, while pronounced, has not led to actual under­
stocking in terms of the needs experienced in earlier years.
Preliminary data for selected departments reveal a few of
the merchandise lines in which stocks-sales ratios at the
end of May were higher than corresponding 1951 levels.
Stocks of men’s clothing on May 31, for example, were 5.4
times as large as sales during the month, compared with a
ratio of 5.0 at the same time last year. Stocks of piece goods,
women’s dresses, women’s and children’s shoes, and several
of the small volume basement departments were also larger
in relation to current sales than they were in May 1951. With
those exceptions, the stocks-sales ratios of most of the impor­
tant merchandise lines were generally below year-ago levels,
according to preliminary reports. Some of the most notable
year-to-year reductions in stocks-sales ratios in May occurred
in the household durables lines. Television inventories were
only 5.2 times as large as sales, compared with a ratio of 14.9
at the same time last year. Stocks-sales ratios of the furniture
and bedding, domestic floor coverings, and major appli­
ances departments (4.0, 5.5, and 3.9, respectively) were much
lower than their respective May 1951 figures of 4.6, 6.8, and

FEDERAL RESERVE BANK OF NEW YORK

6.8. Stocks of household textiles, women’s accessories, women’s
coats and suits, and men’s furnishings were also closer to

107

Table II
Stocks-Sales Ratios and Rate of Stock Turnover of
Selected Merchandise, Second District Department Stores

current sales levels than they were at the same time in 1951.

Rate of stock
turnover*
January-May

Stocks-sales
ratios
Department

St o c k T u r n o v e r

M ay
1952p

The noticeable improvement in stocks-sales relationships
of many of the major departments was achieved mainly by
reducing commitments for additional merchandise rather than
by increased consumer demand. This is illustrated by exam­

W om en’s dresses..................................
W om en’s and children’s sh o e s.. . .
M en’s clothing.....................................
Furniture and bedding.....................
Domestic floor coverings..................
Major appliances.................................
Television sets......................................

M ay
1951
3 .2
1 .2
4 .4
5 .0
4 .6
6 .8
6 .8
14 .9

3 .3
1 .3
4 .5
5 .4
4 .0
5 .5
3 .9
5 .2

1952p

1951

1 .5
3 .2
1 .0
0 .9
1 .3
0 .9
1 .1
1 .1

1 .6
3 .1
1 .1
1 .1
1 .3
0 .9
1 .2
0 .9

ination of stock-turnover data for several of the more impor­
tant merchandise lines shown in Table II.
The number of times stock turned over in the major house­

p Preliminary.
* Rate of stock turnover was computed by dividing total sales from January
through M ay by the average inventory from January 1 through M ay 31, and
thus indicates the number of times the average inventory was sold (or turned
over) during the first five months of the year.

hold durables lines, with the exception of the television depart­
ment, has shown no improvement during the first five months
of 1952 over corresponding 1951 figures, even though end-

Indexes o f D epartm en t Store Sales and S tocks
Second Federal R eserve D istrict
(1 9 4 7 -4 9 a v e r a g e = 1 0 0 per cent)

of-month inventories of these goods have averaged substan­

1952

1951

Item

tially lower than year-ago levels; the sales declines have been

M ay

April

March

tories. In general, the same situation has prevailed in many of

Sales (average daily), unadjusted...................
Sales (average daily), seasonally adju sted..

95
96

94r
96r

85r
97 r

the important nondurables lines and in some instances, notably

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

115
112

proportionately as large or larger than the decreases in inven­

98
100
132r
128

113
108

116
111

M ay

piece goods, women’s and children’s shoes, and men’s cloth­
ing, the stock-turnover rate has been below that of the first five
months of 1951, despite lower inventory levels throughout

r Revised.

D epartm ent and Apparel Store Sales and Stock s, Second Federal R eserve
D istrict, P ercentage C hange from the Preceding Y e a r

most of this year.
This brief analysis suggests that, although extensive reduc­

N et sales
Locality

tions have been made in department store stocks in this Dis­
trict in the last twelve months, there are still relatively wide
variations among types of merchandise. In general, the inven­
tory retrenchment as well as the sales decline has been most
pronounced among goods of greater durability.
Ta ble I
Relationship of D epartm ent Store Sales, S tock s, and
O utstanding Orders, Second D istrict, Jan u a ry -M a y 1951 and 1 9 5 2

Ratio to sales

Month

Stocks

Outstanding orders

Stocks plus
orders

As a per cent
of sales

As a per cent
of stocks

M ay 1952
Department stores, Second District----New York C ity * ........................................
Nassau C ounty..........................................
Northern New Jersey..............................
Westchester County.................................
Fairfield C ounty........................................
Bridgeport...............................................
Lower Hudson River V alley.................
Poughkeepsie..........................................
Upper Hudson River Valley.................
Schenectady............................................
Central New York State........................
Mohawk River Valley........................
Syracuse...................................................
Northern New York State....................
Southern New York State.....................
Binghamton............................................
Western New York State......................

January.........
February.. . .
M arch............
A pril...............
M a y ................

1952

1951

1952

1951

1952

1951

1952

1951

3 .1
3 .3
3 .3
3 .1
3 .0

2 .8
3 .8
3 .5
3 .8
3 .4

4 .2
4 .5
4 .3
3 .8
3 .7

4 .7
6 .1
4 .9
4 .9
4 .3

110
123
99
74
63

192
233
135
107
88

35
37
30
24
21

69
62
38
28
26




Niagara Falls..........................................
Apparel stores (chiefly New York C ity ).

-1
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

4
6 (-2 )
3
3
5
1
7
7
8
6
1
2
1
1
1
2
2
6
5
4
2
2
2
6
9
1

Stocks on
Jan .th rough
hand
M ay 1952
M ay 31, 1952
-

7

-1 4

0 (-8 )
3
7
7
3
1
1
1
2
2
7
4
4
3
1
5
2
1
2
0
- 3
0
+ 3
- 7

- 1 6 ( -1 2 )
- 6
-1 6
-1 8
1
- 6
—
-1 1
-1 3
- 7
-1 0
- 2
- 7
-1 6
-1 9
- 2
- 9
- 9
-1 2
- 1
-1 2
-1 4
—
- 7

-

-1 0

-1
-1
+
+
+
+
+
-

2

* The year-to-year comparisons given in parentheses exclude the 1951 sales of a
Brooklyn department store that closed early in 1952.

MONTHLY REVIEW, JULY 1952

108

S E L E C T E D E C O N O M IC IN D IC A T O R S
U nited S tates and Second Federal R eserve D istrict
Percentage change
1952
Item

1951

Unit
M ay

April

March

M ay

Latest month Latest month
from previous from year
earlier
month

U N IT E D STATES
Production and trade
Electric power output*^..........................................................................
Ton-miles of railway freight*J..............................................................
Manufacturers’ new orders, to ta l........................................................
Manufacturers’ new orders, durable goods.....................................
Retail sales*.................................................................................................
Residential construction contracts*^.................................................
Nonresidential construction contracts*t..........................................
Prices, wages, and employment

Personal income (annual rate)*............................................................
Composite index of wages and salaries*...........................................
Nonagricultural employment*..............................................................
Manufacturing employment*............................. ..................................
Average hours worked per week, manufacturingf.......................
Ban kin g 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 C ity )* ..................>............
Velocity of demand deposits (U. S. outside New York C ity)*J.
Consumer instalment credit outstandingf.......................................
United States Government finance (other than borrowing)
Cash outgo....................................................................................................
National defense expenditures..............................................................

1935-39 =
1 9 47 -49 =
1947 -49 =
billions of
billions of
billions of
billions of
billions of
1947 -49 =
1947-49 =

100
100
100
$
$
$
S
S
100
100

Aug. 1939 = 100
1947 -49 = 100
1935 -39 = 100
billions of $
19 3 9 = 100
thousands
thousands
hours
thousands
millions of $
millions of $
millions of $
millions of $
billions of $
1947 -49 = 100
millions of $
millions of $
millions of $
millions of $

214p
140
—

2 3 .2 p
4 2 .3 p
2 1 .9 p
10.6 p
13 .0 p
—
—

2 9 6 .5
111.6p
189.0
—

—
46,498p
15,819p
40. Op
1,602
74,540p
5 8 ,520p
9 5 , 300p
28,787
8 9 .4
118.3
—

4,720p
5 ,7 55p
4,2 3 7

220
143
107
2 1 .9
4 2 .3
2 3 .1
1 1.7
1 2 .4
174
157

222r
131
107
2 3 .4
3 8 .1
2 3 .6
1 2 .4
1 2 .4
166
211

2 9 5 .8
111.8
188.7
2 5 8 .9 p
233p
46,507
15,905
3 9 .8
1,612

30 3 .9
1 12.3
1 88.0
2 5 8 .2
233
4 6 , 534r
15,883r
4 0 .6
1 ,804

367.1
115.9
1 85.4
2 4 9 .8
224r
46,507r
16,081r
4 0 .7
1,609

7 4 , 120p
5 8 ,220p
9 5 , 120p
28,689
8 9 .6
1 14.5
13,302p

74,690p
5 7 ,840p
94,780p
28,637
8 5 .9
116.1
13,155

70,6 0 0
5 4,460
8 9,500
2 7,544
8 8 .2
118.3
12,920

+
+

4 ,1 4 8
5 ,154
2,7 3 9

+
-

123
177
144
181.4
7 ,3 8 1 .3r
2 ,6 7 5 .Or
4 6 .3
4 .0
116.6

- 2
+ 16
+27
#
#
#
- 5
- 1
+ 1

216
141
103p
2 3 .3
4 2 .5
2 3 .1
1 1.9
1 2.7
192
158

4 ,6 8 9
5 ,9 7 2
4 ,2 2 7

10,436
6 ,1 2 0
3 ,9 0 5

-

1
#
4
#
#
- 5
-1 1
- 2
+10
+ 1

-

+
-

+
+

- 4
+ 7
-1 2
- 1
+11
- 7
-1 5
+ 5
+13
-2 8

#
#
#
#
#
#
1
1
1

-1
+
+
+

1
1
#
#
#
3
1

+
+
+
+
+

1
4
#

+14
+12
+55

-

+

9
4
2
4
5
#
2
2
#
6
7
6
5
1
#
3

SE C O N 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 York and New Jersey) *J ..................
Residential construction contracts*^.....................................................
Nonresidential construction contracts*:}:..............................................
Consumers’ prices (New York C it y ) f ....................................................
Nonagricultural employment*...................................................................
Manufacturing employment*.....................................................................
Bank debits (New York C ity )* ................................................................
Bank debits (Second District excluding N . Y . C. and Albany)* .
Velocity of demand deposits (New York C ity )*J .............................

1947 -49 =
1947 -49 =
1947 -49 =
1935 -39 =
thousands
thousands
billions of
billions of
1947 -49 =

100
100
100
100

124
—
—

183.2
—

$
S
100

2 ,6 9 3 .Op
5 0 .5
4 .0
133.6

127
—
—

183.5
7 ,4 3 9 .Op
2 ,6 8 9 .3
53 .1
4 .0
132.5

130
185p
200p
1 82.4
7 ,4 3 1 .9
2 ,6 8 4 .6
4 6 .9
3 .8
125.7

N ote: Latest data available as of noon, June 30.
p Preliminary.
r Revised.
# Change of less than 0.5 per cent.
* Adjusted for seasonal variation.
t Index changed to 1947-49 average = 100.
t Seasonal variations believed to be minor; no adjustment made.
## The seasonal adjustment factors for this series have been revised.
Source: A description of these series and their sources is available from the Domestic Research Division, Federal Reserve Bank of New York, on request.




+ 1
- 2
+30
+ 1
+ 1
+ 1
+ 9
#
+15

NATIONAL SUMMARY OF BUSINESS CONDITIONS
(Summarized by the Board of Governors of the Federal Reserve System, June 27, 1932)

Industrial production continued to decline in May and
June as labor disputes cut output sharply in steel and some
other lines. Construction volume was maintained close to
record levels in May, and retail sales, mainly of durable
goods, expanded. Consumer prices rose further and were close
to the January high. Wholesale commodity prices changed
little in May and declined somewhat in June.
I n d u s t r ia l P r o d u c t io n

The Boards preliminary seasonally adjusted index of indus­
trial production in May was 214 per cent of the 1935-39
average, down 2 points from April and 8 points from last
February and May 1951. Reflecting mainly the work stoppage
at steel mills, a sharp further decline is indicated for June.
May output of durable goods was slightly lower than in
April, owing largely to a labor dispute in the lumber industry
and to small further curtailments in activity in most industrial
equipment lines. Production of trucks and passenger automo­
biles held steady, while output of major household durable
goods declined somewhat further. As a result of the strike,
steel production is estimated at about 20 per cent of rated
capacity in June, as compared with 90 per cent in April and
May— also affected by work stoppages— and with 102 per
cent in March. Reflecting expanded supplies of aluminum
and copper, the NPA in mid-June substantially increased
the amounts of these metals that small users may obtain
beginning in the third quarter, without requiring direct alloca­
tions.
A decrease of about 2 per cent in nondurable goods pro­
duction in May resulted mainly from work stoppages at oil
refineries, which were terminated by early June. Over-all
activity at textile mills showed an important gain, while out­
put of most other nondurable goods continued at earlier
levels.
INDUSTRIAL

Minerals production declined in May and June as coal and
crude petroleum output was reduced, owing partly to the steel
and oil refining disputes. W ork stoppages resulted in a sharp
curtailment of iron ore mining in June.
C o n s t r u c t io n

Value of construction contract awards in May continued at
the very high April level as awards for private construction
increased further, offsetting the first decline this year in total
public awards. The number of housing units started totaled
107,000, as compared with 108,000 in April and 101,000 in
May 1951. Value of new construction work put in place dur­
ing May was a record for the month, as was each preceding
month this year.
Em

Seasonally adjusted employment in nonagricultural estab­
lishments in May continued at 46.5 million, the same level
as a year ago. The average factory work week at 40 hours
was slightly above the reduced April level; average hourly
earnings showed little change. At 1.6 million in May, the
number unemployed was unchanged from a month earlier
and a year ago.
D

CONSTRUCTION CONTRACTS AWARDED

PRODUCTION

F.




M onthly figures, latest shown are for M ay.

is t r ib u t io n

Seasonally adjusted sales at department stores, which had
increased moderately in May, continued to rise during the
first two weeks in June. The rise reflected a less than seasonal
decline in apparel sales and a marked upward shift in sales
of appliances and television which had reached a low point
in April. Sales by automotive dealers rose substantially further
in May. Pickup in automotive and household durable goods
sales reflects in part the May 7 suspension of credit controls
under Regulation W .

1948

Federal Reserve indexes.

plo ym ent

1949

1950

1951

1952

W . Dodge Corporation data for 37
latest shown are for M ay.

1948

1949

Eastern

1950
States.

1951

1952

M onthly

figures;

C o m m o d it y

The general level of wholesale commodity prices declined
somewhat in June. Wheat prices declined as reports indicated
a near record crop this year, one-third above last year, and
there were decreases in prices of livestock. Prices of zinc
were reduced 23 per cent, and the previously announced reduc­
tion in the RFC resale price for rubber became effective.
Meanwhile price ceilings on imported copper were suspended,
lead prices were raised, following reductions in April and
May, and prices of raw cotton and textile products advanced.
The consumers’ price index advanced 0.2 per cent in May,
to about the peak level of January 1952. Rents and prices of
foods and miscellaneous services increased, while apparel and
housefurnishings were reduced further.

M

oney

and

Se c u r i t y M a r k e t s

P r ic e s

In the third week of June, common stock prices regained
the high level attained in the last week of January. Yields
on Treasury bills increased steadily in late May and early
June, and following a sharp decline in the midmonth, rose
again to near the discount rate. Yields on certificates and
notes increased, while bond yields moved irregularly. On
June 10 the Secretary of the Treasury announced the offering
for cash of an intermediate bond in the amount of 3.5 billion
dollars, or thereabouts, and the offering in exchange for the
certificates maturing July 1, 1952 of an 11-month V/s per
cent certificate maturing June 1, 1953. The new bond, which
was a 2 Ys per cent issue to mature in 1958, was heavily over­
subscribed, and allotments of 4.2 billion dollars were made by
the Treasury.
PRICES AND TRADE

C r e d it

Bank credit outstanding increased somewhat during the lat­
ter part of May and early June, reflecting mainly bank pur­
chases of United States Government, corporate, and municipal
securities. Seasonal repayments of loans by commodity dealers
and food, liquor, and tobacco manufacturers continued, but
in smaller volume. In mid-June there was a sharp expansion
in business borrowing from banks associated with quarterly
income tax payments.
The total money supply increased in late May and early
June, owing largely to the bank credit expansion. Demand,
time, and currency holdings of businesses and individuals ex­
panded. The turnover of demand deposits outside New York
City rose in May.
Bank reserve positions were tight up to mid-June when
they eased temporarily, principally as a result of seasonal
Treasury operations and some increase in Federal Reserve
credit outstanding.




1948

1949

1950

1951

1952

1948

1949

1950

1951

1952

Seasonally adjusted series except for prices. Wholesale prices, Bureau of
Labor Statistics indexes. Consumer prices, total retail sales, and dispos­
able personal income, Federal Reserve indexes based on Bureau of Labor
Statistics and Department of Commerce data. Department store trade,
Federal Reserve indexes.