View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

MONTHLY REVIEW
o f C r e d it a n d
S e c o n d

B u s in e s s

F e d e r a l

R e s e r v e

C o n d itio n s
D is t r ic t

Federal Reserve Bank, New York

M o n e y M a r k e t in M a y
The security markets, highly sensitive to war develop­
ments, reacted sharply to the sudden war moves of the
past month. But although the war assumed more nearly
the form which had been anticipated when it started
eight months ago, the market behavior of the various
classes o f securities was in striking contrast to their
behavior last September. In the weeks immediately fo l­
lowing the outbreak o f the war in September, heavy
selling and sharp declines in prices occurred in the
market fo r Government and other high grade bonds,
while active buying and a strong rise in prices occurred
in the market fo r common stocks and, to a lesser degree,
in the market fo r the lower grade bonds. In May, how­
ever, the invasion of the Netherlands, Belgium, and
Luxembourg, and the subsequent course of the fighting
there and in France, brought on an acute weakness in
stocks and lower grade bonds, while the market fo r high
grade bonds was subject to much less selling pressure
than at the beginning o f the war, and prices of such
bonds showed no such acute weakness as in that period.
The divergent tendencies in the security markets, dur­
ing these two periods, may be attributed to the difference
in the prevailing attitude of investors toward the war
situation. Immediately follow ing the invasion of Poland
and the declaration of war by Great B ritain and France
last September, the rather common expectation in this
country was that the war in Europe would lead to
acceleration of business activity in the United States, to
higher commodity prices, to substantially increased de­
mands fo r bank credit, and to a rising trend in interest
rates, and that, as a result of such developments, invest­
ments in the more speculative securities would be profit­
able, while investments in high grade securities would
entail greater risk o f depreciation in value. Develop­
ments in May, on the other hand, apparently aroused
fears as to the outcome and questions as to the duration
of the war which increased investors’ preference fo r
liquid funds and made many disinclined to take specu­
lative risks, while causing much less apprehension o f an
early reversal o f trend in interest rates. A s a result,
common stock prices in M ay fell precipitately and, at
the end o f the month, average prices were considerably
below those prevailing before the war started, having
receded to the lowest levels since the spring o f 1938.
The market fo r Government and other high grade
securities was by no means immune from the disturbing
influence o f the grave events in Europe, but prices of




such bonds during M ay lost only a little more than
half of the ground gained from the low point of last
September to the high point reached early in A pril.
D uring the latter part o f May, of course, the develop­
ment o f the preparedness program in this country also
had its effect upon the various sectors o f the market, but
the immediate war influence continued to be dominant.
The irregular decline in the Government security
market which had begun A p ril 9, gained momentum
after May 10, but selling orders were mostly fo r small
amounts, and at no time did they reach any such aggre­
gate volume as in the early part o f last September.
Nor was there any such absence o f private bids in the
market as prevailed at that time. The contrast between
the two periods is illustrated by the fact that, while
in the first two weeks of last September Reserve Bank
holdings o f Government securities increased $398,000,000,
in the two weeks ended M ay 22 Reserve Bank holdings
of Government securities increased only $10,000,000,
yet prices receded considerably less in the recent period
than in the earlier period.
The apparent tendency o f most investing institutions
to retain their holdings o f high grade securities, or even
to add to their holdings, in the face of disturbing develop­
ments abroad, may be attributable largely to the fact that
the supply o f funds available fo r investment has con­
tinued to increase faster than outlets fo r the employment
o f funds. In the fou r weeks ended May 22, reserves
P R IC E

Prices o f Stocks and Corporation Bonds (Standard Statistics Com­
pany 90 stock index and M oody's Investors Service average
prices o f Aaa and Baa bonds)

42

MONTHLY REVIEW, JUNE 1, 1940

of all member banks rose $340,000,000, reflecting the
combined effects o f a continued rapid inflow of gold
and large Government disbursements, while total loans
and investments o f weekly reporting member banks
showed a small net decrease. Excess reserves of all mem­
ber banks, despite a further increase in the amount o f
required reserves, rose $260,000,000 to $6,370,000,000,
a new high level. D uring the first five months o f this
year, total member bank reserves increased nearly
$1,750,000,000, while total loans and investments of
weekly reporting member banks increased less than
$300,000,000. Excess reserves of all member banks rose
$1,325,000,000 during this period.
M on ey R ates

Yields on all classes of securities increased somewhat
during May, accom panying the decline in security prices,
but short term money rates were unchanged except fo r a
slight increase in yields on the weekly issues o f Treasury
bills. The increase in the average yield on the fou r long­
est Treasury bonds was about ^4 Per cent, and on three
to five year Treasury notes was a little over % per cent.
M oney Rates in New Y ork
M ay 31, 1939 April 30, 1940 M ay 29, 1940
Stock Exchange call loans.......................
Stock Exchange 90 day loans.................
Prime commercial paper 4 -6 m onths.. .
Bills— 90 day unindorsed.........................
Average yield on Treasury notes (3-5
y ea rs). ......................................................
Average yield on Treasury bonds (not
callable within 1 2 yea rs)......................
Average rate on latest Treasury bill sale
91 day issue.............................................
Federal Reserve Bank of New Y ork dis­
count rate.................................................
Federal Reserve Bank of New York
buying rate for 90 day indorsed bills. .

1

1

*1H
x %

1

*1H
X -5
A
%

*1H

0.3 8

0 .4 4

0 .8 4

2.13

2 .2 4

2.47

0.004

0 .004

0.067

1

1

1

H

M

X

* Nominal

M e m b e r B a n k C r e d it

Total earning assets o f weekly reporting member banks
showed some net reduction during the four weeks ended
May 22, as a decrease o f $88,000,000 in loans, the p rin ­
cipal element in which was a reduction in loans to security
brokers and dealers, more than offset a net increase o f
$48,000,000 in investments.
In the New Y ork City banks, loans to security brokers
and dealers declined $77,000,000, and commercial and
industrial loans were reduced $18,000,000. Total invest­
ments showed a net increase of $98,000,000. Treasury
bill holdings, reflecting the cessation o f tem porary special
demands in other areas, increased $95,000,000; Treasury
note holdings increased $41,000,000; and Treasury bond
holdings showed a net increase o f $27,000,000 as a result
o f net purchases o f $47,000,000 during the second and
third weeks o f May, when prices were declining, follow ­
ing net sales of about $ 2 0 ,000,000 in the preceding two
weeks. Government guaranteed securities, despite the
retirement o f a substantial amount of Home Owners
Loan Corporation bonds, showed a net reduction o f only
$10,000,000. Investments in other securities were re­
duced $55,000,000, reflecting redemptions o f maturing
State and municipal obligations.
T o ta l lo a n s a n d in v e s tm e n ts o f r e p o r t in g b a n k s in 100
o th e r p r in c ip a l citie s w e re r e d u c e d $ 4 6 ,0 0 0 ,0 0 0 d u r in g




the fou r week period, due to moderate reductions in hold­
ings o f various classes o f Government securities. H old­
ings o f Treasury bonds, after irregular fluctuations in
the last week o f A p ril and the first two weeks o f May,
were reduced $34,000,000 in the third week of May, and
showed a net decrease o f $ 2 2 ,000,000 fo r the fou r weeks.
Treasury bill holdings also declined $18,000,000, and in­
vestments in Government guaranteed securities were re­
duced $28,000,000, but Treasury note holdings increased
slightly. Commercial and industrial loans showed a
small decrease, but real estate loans increased somewhat.
Demand deposits in the reporting banks increased with
unusual rapidity and reached new high levels, apparently
reflecting, in part, continued foreign spending in this
country, and in part United States Government dis­
bursements o f amounts substantially in excess o f receipts.
A djusted demand deposits increased $211,000,000 to
$9,332,000,000 in the New Y ork City reporting banks
and $226,000,000 to $10,869,000,000 in reporting banks
in other cities, during the four weeks.
G o v e r n m e n t S e c u r it ie s

Intensification o f the European war was reflected in
declines in prices of United States Government securities,
though o f smaller extent than the declines in other classes
o f bonds or in stock prices. D uring the first part o f May
the average price o f Treasury bonds not callable within
1 2 years fluctuated within a range o f % o f a point, at a
level about 1 point below the high o f this year reached in
the opening days o f A pril, but beginning on M ay 1 0 ,
after the German invasion o f the Low Countries, these
long term issues showed further losses, which by M ay 24
amounted to about 3
points. As the accom panying dia­
gram indicates, the recent decline in long term Govern­
ment bonds was considerably less than the 8x point
/2
drop which occurred last summer in anticipation o f and
in response to the outbreak o f the European war. As a
consequence, at the lowest closing quotations reached in
May, prices remained some 4 % points higher, on the
average, than at the lows o f last September. A t no time
during the period when prices were declining was the
volume o f offerings heavy, but there was an increase in
the number o f sales o f small amounts and a reluctance on
PRICE
AVERAG E

Average Price o f L ong Term Treasury Bonds (F our issues not
callable before 1955)

FEDERAL RESERVE BANK OF NEW YORK

the part o f potential buyers to acquire Government securi­
ties except after price recessions had occurred. In the
last week of May, quotations fo r long term Treasury
bonds tended to be firmer except on May 28 when, fo l­
lowing reports o f the capitulation o f the Belgian army,
closing prices tem porarily declined to about the same
level as on May 24.
In short term Government securities, declines in
Treasury notes between May 9 and May 29 resulted in
an advance in the average yield on 3 to 5 year Treasury
notes from a 0.45 per cent basis to a 0.84 per cent basis.
D uring the same period the long term Treasury bond
yield advanced from 2.25 per cent to 2.47 per cent.
The rates on weekly issues o f new Treasury bills
floated during May showed progressive, though moderate,
increases. The issue dated M ay 1 was awarded at an
average rate o f 0.007 per cent, as compared with 0.004
per cent on the issue o f A p ril 24, and the issue dated
May 29 was awarded at 0.067 per cent, the highest rate
since September 27, 1939. Each of the five weekly issues
o f M ay was in the amount o f $100,000,000 and fo r 91 day
p eriod s; they replaced similar maturities.
C o m m e r c ia l P a p e r a n d B il l s

No change occurred during M ay in the % -% per cent
prevailing range o f rates fo r average grade prime four
to six month commercial paper. E xcept fo r a temporary
rise last fall, these rates have been in effect since the
middle of January, 1939. E specially choice paper was
quoted at % per cent, but, as in recent months, the bulk
o f the sales were made at % per cent. Bank investment
demand for commercial paper continued active and
readily absorbed the small amounts o f new paper cur­
rently offered by dealers. A total o f $238,600,000 o f
paper was outstanding through commercial paper houses
at the end o f A pril. This compares with $233,100,000 at
the end o f March, and is the largest amount outstanding
in approxim ately two years. In A pril, 1939, the amount
outstanding was $191,900,000.
Dulness continued to prevail in the market fo r bankers
acceptances during May. W ith only a small volume o f
bills being drawn and smaller amounts being released to
the market by accepting banks and bankers, the invest­
ment demand for bills was largely unfilled.
S e c u r it y M a r k e t s
A fte r holding within a narrow trading range since the
advance o f last September, stock prices declined rapidly
and substantially follow ing the German invasion o f
Belgium and the Netherlands. Between M ay 9 and M ay
21, the general average o f stock prices dropped 25 per
cent to reach quotations which averaged only 8 per cent
above the prices which prevailed at the end o f March,
1938, when the bottom o f the 1937-38 decline was reached.
The decline during the M ay period was the sharpest fo r
a comparable length o f time since October, 1929, and the
volume o f trading on the New Y ork Stock Exchange in ­
creased on several days to between 2 and nearly 4 million
shares. A fter M ay 21, stock prices registered a small net
recovery, despite the decline which occurred on M ay 28,
follow ing reports o f the surrender o f the Belgian army,
and trading was considerably less active than earlier in
the month.
Domestic corporation and municipal bond prices also




43

were subject to sizable price declines during May. Bonds
o f the class rated Baa by M ood y’s Investors Service
showed an average decline o f about 8 points from M ay 9
through May 28. As compared with the lows reached in
September, 1939, shortly after the outbreak o f the war,
the quotations reached in May were about 1 % points
low er; Baa railroad bonds declined considerably below
the September, 1939 lows, and industrial bonds were
slightly lower, while public utility bonds o f this grade
held considerably above the September lows.
H igh grade corporate bonds, those rated Aaa by
M ood y’s, which had held close to the highest levels o f
the year through M ay 9, declined about 5 % points after
the intensification o f the war, and recovered only slightly
in the latter part o f the month. A t the lows, however,
prices o f this class o f bonds remained more than 6 points
above the September, 1939 lows. M unicipal bonds o f high
grade, although showing large declines, likewise remained
considerably above the September, 1939 lows.

N e w F i n a n c in g
D uring May, the capital market was characterized
more by deferment o f scheduled offerings than by new
issues, with the result that the volume o f corporate and
municipal flotations declined to $155,000,000, the smallest
total since September, 1939. Corporate financing ac­
counted fo r $116,000,000, including $36,000,000 to be
used fo r new capital purposes. Corporate issues totaling
about $136,000,000 were deferred, most o f these issues
having been scheduled fo r offering to stockholders or to
the public during the latter half o f the m onth; three
other offerings, made to stockholders and totaling about
$39,000,000, were only partially consummated.
The largest corporate offering was $75,000,000 o f
United States Steel Corporation debentures, which were
brought out on M ay 15 and, despite unsettled conditions
in the security markets, were com pletely disposed o f by
the syndicate within a little more than a week’s time.
W ith the removal o f price restrictions, however, quota­
tions fo r the longer maturities o f the issue dropped to
substantial discounts below the offering prices. The
debentures mature from 1940 to 1955 and were offered at
par to yield from 0.375 per cent to 2.65 per cent to ma­
turity. Proceeds from the sale are to be used fo r refund­
ing purposes. Two issues of New Y ork Central Railroad
one to ten year equipment trust certificates were placed
privately during the month. The first o f these, $10,400,000
o f 2 per cent certificates, was awarded (on M ay 7) to a
banking agent on an interest basis o f 1.80 per cent, while
the second issue, $9,000,000 o f 2 % per cent certificates,
was sold to banking agents by the Reconstruction Finance
Corporation (about M ay 20) on an interest basis o f 2.29
per cent. The Boeing A irplane Company and the Eastern
A ir Lines, Inc. offered about $5,800,000 and $3,400,000,
respectively, o f common stock to their stockholders. Ow­
ing to the adverse market conditions which developed,
substantial unsubscribed portions were taken by under­
writers. A similar situation arose with respect to
$30,000,000 o f convertible preferred stock which the
Bank o f Am erica National Trust and Savings Associa­
tion offered its stockholders; it is reported that these
securities may be taken up without a public offering at
this time.

44

MONTHLY REVIEW, JUNE 1, 1940

The largest municipal award was $8,000,000 City o f
Detroit, Michigan, 3% per cent refunding bonds, due
serially from 1941 to 1962, which were sold at 100.0028
and placed privately. In general, municipal awards were
made on bids substantially lower than on similar pre­
vious offerings.
The total of tem porary financing, at $251,000,000, was
considerably higher than in previous months, owing
chiefly to the award by thirty-one local housing authori­
ties o f $126,000,000 o f six month notes at interest costs
ranging from 0.39 per cent to 0.55 per cent. In addition,
New Y ork City allotted $60,800,000 o f short term notes
to a group of banks, and the Federal Intermediate Credit
Banks sold $30,600,000 o f consolidated debentures.
G o ld M o v e m e n ts
Im ports o f gold into the United States during May
were considerably heavier than in the previous month,
and apparently in about the same large volume as in
March of this year and December, 1939. The increase in
the gold stock o f the United States during the month
amounted to about $440,000,000, the largest monthly
gain fo r the war period. The amount o f gold held under
earmark fo r foreign account at the Federal Reserve Bank
o f New Y ork increased about $40,000,000 and at the end
o f May amounted to approximately $1,270,000,000.
Gold imports into the United States during the four
weeks ended M ay 22, as reported b y the Department o f
Commerce, totaled $390,200,000, o f which $238,000,000
came from Canada, $44,300,000 from the United K in g­
dom, $35,200,000 from the Union o f South A frica,
$19,300,000 from Switzerland, $9,900,000 from Italy,
$9,400,000 from the Netherlands, $5,300,000 from
Australia, $4,700,000 from Japan, $4,500,000 from
Sweden, $3,800,000 from H ong Kong, $3,000,000 from
H ungary, $2,400,000 from the Philippines, $2,100,000
from Colombia, $2,000,000 from Mexico, and $1,700,000
from British India.
F o r e ig n E x c h a n g e s
The events o f the past month, which included the with­
drawal o f A llied forces from southern Norway, the
British cabinet crisis, the spread o f the war to the Low
Countries, and the subsequent German drive into France,
all had repercussions in the New Y ork foreign exchange
market, where a number o f exchange rates declined
sharply against the United States dollar.
Most New Y ork exchange dealings continued to be con­
centrated in the pound sterling, fo r which, however, the
market remained relatively narrow. Rates, therefore,
continued highly sensitive to small changes in supply and
demand. The pound quotation, which had been as high
as $3.53 on A p ril 29, began to show an easier tendency
on news o f A llied reverses in N orway and, accom panying
parliamentary criticism o f the Chamberlain Government,
this decline was accentuated on M ay 6, 7, and 8, when
the rate receded some 16 cents to $3.311
/2. Immediately
follow ing the sudden German attack on the Low Coun­
tries, the first nominal quotations fo r sterling on M ay 10
showed wide spreads between bid and offered rates until
an opening trade was made at the record low o f $3.00.
This rate, which was 35 cents below the previous closing
quotation and 14% cents below the previous all time low




touched in 1932, represented about a 25 per cent depre­
ciation o f free-market sterling against the official rate in
the London market. This low level, however, proved to
be only temporary, as it soon attracted some demand,
particularly by domestic commercial concerns, which
stimulated a partial recovery. D uring the remainder o f
the month, the pound showed erratic fluctuations within
a range o f $3.11% -$3.28% . No general tendency was
apparent, day-to-day movements being influenced mainly
by the progress o f m ilitary operations and by recurrent
market rumors o f possible new British exchange control
measures designed to reduce the supply o f sterling which
might be offered in the free market. A t the end o f M ay
the pound was quoted at about $3.20.
Canadian exchange, after ending A p ril at a discount
o f about 15 per cent against the United States dollar,
weakened steadily to a maximum discount o f 2 2 ^ per
cent on May 25. Toward the end o f the month, however,
the discount narrowed to about 21 y 2 per cent.
P rior to invasion o f the Lowr Countries on M ay 10,
Belgian and Dutch exchange had undergone severe pres­
sure, largely as a result o f continued flight o f funds from
those centers which previously had been havens fo r
refugee funds. The belga rate declined from $0.1686 at
the end o f A p ril to $0.1656 on M ay 9, and the three
month forw ard discount widened to the equivalent o f
about 20y2 per cent per annum. A lthough the spot quo­
tation fo r the guilder was maintained at about $0.5309,
increased pressure was evidenced in widening discounts
on forw ard deliveries. Since the extension on May 10
o f the Executive Order, “ freezin g” certain foreign
assets in this country, to cover Netherlands, Belgian,
and Luxem bourg assets, no current quotations have
been available fo r the currencies o f the Low Countries
in this market.
C en tra l B a n k R a te C h a n g es
The Swedish Riksbank advanced its discount rate on
May 17 from 3 to 3 y2 per cent, and on M ay 22 the
National Bank o f Denmark reduced its rate from 5y2 to
4y2 per cent.
A ccordin g to the press, the Adm inistrative Council fo r
the German held part o f Norway announced on May 12
a reduction o f 1 y 2 per cent in the rate o f the Bank o f
Norway, establishing a 3 per cent rate, presumably
effective M ay 13.
B u s in e s s P r o fit s
Reflecting the decline in production and trade since
last December, this bank’s seasonally adjusted index o f
the net profits o f 168 industrial and mercantile corpora­
tions showed some recession in the first quarter o f 1940,
but, as the accom panying diagram indicates, profits
remained at a fairly high level. The decline in the index
from the ten year peak reached in the fourth quarter o f
1939 was due prim arily to a more than seasonal recession
in the net profits o f steel companies, which were com ­
paratively large in the last quarter o f 1939. The effect
of this decline, and o f smaller declines in profits o f some
other groups, was partly counterbalanced b y a rise in
seasonally adjusted profits o f the automotive group.
(A ctual profits o f automobile companies were maintained
at about the level reached in the fourth quarter o f 1939,
instead o f showing a seasonal decline.)

FEDERAL RESERVE BANK OF NEW Y ORK

P RCN
E ET

also reported larger profits than in the high first quarter
o f 1937; prominent among these were the aviation, cigar,
coal mining, automobile, paper and paper products, and
copper mining groups o f companies.
Class I railroads as a group reported a deficit, after
fixed charges, fo r the first quarter o f 1940 amounting to
$13,000,000, or considerably less than the $43,000,000
deficit in the corresponding period a year ago. In the
first quarter o f 1937, Class I railroads earned $15,000,000
o f net income, but with that exception the earnings of the
railroads this year were the best fo r any first quarter
since 1931. Net operating income o f 94 telephone com­
panies increased 10 per cent over the first three months
o f 1939 and was the highest first quarter since 1931. Net
income o f 50 other public utilities showed an increase o f
14 per cent over 1939 and also over 1937.

125
100
/

A

75
/

IiVj

/

50

I

\J

25

V

O
-25
1 9 2 8 1929

1930

1931

193 2

193 3

1 93 4 1 93 5

1936

1937

1933

1939

1940

Index o f Profits o f 168 Industrial and Mercantile Corporations,
Adjusted for Seasonal Variation (1928 average = 100 per cent)

First quarter data extending back to 1937, fo r 437
industrial and mercantile companies, are summarized in
the follow ing table. In the aggregate, profits o f these
companies during the first quarter o f 1940 were 68 per
cent larger than a year previous and only 5 per cent less
than in the first quarter o f 1937, which was the period of
highest first quarter earnings since 1929. O f the 437
individual companies, less than 10 per cent operated at a
loss this year, as compared with 22y2 per cent in the first
quarter o f 1939.
A ll o f the groups o f companies shown in the table, with
the exception o f the bakery group, reported larger profits
than in the first quarter o f 1939, the largest percentage
increases being those o f the railroad equipment, paper
and paper products, steel, petroleum, machinery and
tools, copper, and textile groups. A number o f groups
(Net profits in millions of dollars)
First quarter
Corporation group
Advertising printing and publishing................
Automobiles.............................................................
Automobile parts and accessories (excluding
tires)......................................................................
A viation....................................................................
Building materials and supplies..........................
Chemicals .............................................................
Containers (metal and glass)..............................
Drugs and cosm etics.............................................
Electrical equipm ent.............................................
Food and food products:
B ev era g es ...........................................................
C onfectionery.....................................................
Other food products..........................................
Heating and plum bing..........................................
Machinery and to o ls .............................................
M ining:
C o a l .....................................................................
Copper
.......................................................
Gold and silver...................................................
Other........................ ............................................
Office equipment.....................................................
Paper and paper products....................................
Petroleum ..............................................................
Railroad equipm ent...............................................
Stores........................................................................
Textiles ..................................................................
T obacco (cigars).....................................................
Miscellaneous..........................................................

No
of
cos.
6

13
41
9
24
28
4
7
22

7
9
9
12

7
39
12

5
9
14
7
17
25
13
30
15

1937

2 .3
4 .5

2 1 .1 —
0 .6
1 1 .2

2 .2

38.5
1.7
5.3
2 0.5

3 .8
9 .0
4 .4
15.7

1.3
2 .6

17.4
1.0

1.3 —
13.1
6 .7

1.2

12 .8

4^2

0 .8
10 .2

1.4 — 0 .3
6 .0

5 .6

Total, 28 groups............................................. 437

0 .8

4 .1
9 .5
5 .4
14.4

6 9.5 —
4 .7

2 2.3
5.9
7.9
4 0.0

4 .6
9 .0
5 .0

0 .6

0 .6

12.7
3 .8
4 .1
26.0

4 .5
8 .2

11 .8

5
38

3 .0
8 3.7

5 .6
19.4

38.9
6 .1

1940

64.3

2 .1

5 .5
11.5

4 .5
2 .9
4 .3
2 .4
2 8.3

6 .6
6 .6
6 .0

1939

4 .3
9 .8

4.1
13.9
2 .8 —
1.3
14.6
5 .7

10

Class I railroads, net incom e.............................. 137

1938

3 .8
60.7

1.2
0 .8

6 .8

3 .9

2 .8

4 .4
1 .8

11.7
1.7
11.3
5 .0

1.9
15.0
3 .9
5 .4
5 .6
7 .7
30.1
9 .9
46.0
6 .2

21.5

0 .5
7 .4

13.6

3 .8
0 .9
18.2

407.1

128.0

231.5

388.0

1 .8
0 .6

15.4 — 105.7 — 42.8 — 1 2 . 6

Telephone companies, net operating in com e. .

94

60.3

50.0

56.6

6 2.5

Other public utilities, net incom e......................

50

50.8

4 4.8

50.7

57.9

— Deficit




45

C o m m o d i t y P r ic e s
Accom panying the invasion of the Low Countries
on M ay 10, com m odity prices momentarily stiffened in a
number o f markets, but gains generally gave way to sub­
stantial losses as the month progressed, in response to
reports o f German m ilitary successes. The Bureau o f
Labor Statistics daily index o f 28 basic commodities,
after advancing 3 per cent between May 9 and May 13,
declined during the remainder o f the month and showed
a 4 per cent decline fo r M ay as a whole. The current
level o f the index is comparable with that o f early Sep­
tember, 1939.
Severe declines occurred in wheat markets. The price
o f wheat at Kansas City, after rising 4 % cents on M ay
10-11, dropped about 30 cents to 81 cents a bushel in the
follow ing w eek; the net loss fo r the month, however, was
reduced to about 24 cents by a recovery follow ing the
establishment o f minimum trading prices fo r grain
futures and the announcement o f a 1940 Government
wheat loan program similar to last y e a r’s. Im proved
crop prospects were reflected in the Government M ay 1
crop report which raised the estimate o f the winter wheat
crop 34,000,000 bushels to 460,000,000 bushels. Corn,
which had declined 8 % cents in the week follow ing the
attainment on May 11 o f a peak o f 70% cents, the highest
level since October, 1937, recovered a large part o f this
loss and showed little net change fo r the month as a whole.
Livestock quotations moved lower during May.
Cotton prices, reflecting a prospective loss o f foreign
markets, reached a low point on M ay 18, when the aver­
age price at ten Southern markets was quoted at 9.21
cents a pound, 1% cents lower than at the end o f A pril,
and well below the level at which cotton would be at­
tracted from the Government loan stock. A subsequent
rally o f about % cent, attributed to the limited supply
o f “ fr e e ” cotton, cut the net loss fo r the month to about
y2 cent a pound. W ool tops, which had risen 5 cents to
$1.03 a pound on M ay 10 to 11, declined 10 cents in the
follow ing week and a half. Raw sugar and hides also
showed net declines fo r the month, while rubber and
silk registered net advances.
In contrast to agricultural commodities, prices tended
higher in a number o f metal markets during May. Cus­
tom smelters raised their quotations on copper to 11%
cents a pound while prim ary producers continued to
quote the 11% cent price which has prevailed since
February. Tin rose 6 % cents to 54 cents a pound and
the export quota fo r July-September was raised to 100

46

MONTHLY REVIEW, JUNE 1, 1940

per cent by the International Tin Committee, as com ­
pared with the present 80 per cent quota. Zinc advanced
% cent to 6 cents a pound, the first change since Febru­
ary, but lead receded 10 points to 5 cents a pound. The
Iron A ge composite price of scrap steel rose $1.79 to
$18.17 a ton, the highest quotation since early last
December.

PER C E N T

P r o d u c t io n a n d T r a d e
Prelim inary evidence indicates that the recession in
production and trade was checked, and in some cases
reversed during May. Steel mill activity turned u p ­
wards early in the month and by the final week operations
were averaging about 77 per cent of capacity as com ­
pared with 60 per cent at the end o f A pril. In addition
to increased orders for steel from the A llied powers, fo l­
lowing the development o f intensive warfare on the
W estern Front, steel producers reported numerous in­
quiries from neutral countries wT
hose steel requirements
form erly were served in whole or in part by Belgium
and Luxembourg. A further important factor in the
rise in steel making during May was specifications against
orders fo r sheets and strip placed during the short period
o f reduced prices in A pril. There were also reports that
steel producers wrere tending to expand inventories o f
steel in crude forms, in anticipation o f National defense
requirements. Railw ay freight traffic appears to have
increased somewhat more than usual in May, and auto­
mobile production and the generation of electric power
were well maintained. On the other hand, mill sales of
cotton goods were reported considerably below the cur­
rent rate o f production, and bituminous coal output
apparently failed to show its usual M ay increase.
The general level o f business activity declined only
slightly further between March and A pril, according to
this bank’s comprehensive index of production and trade.
The index fo r A p ril is placed at 86 per cent o f estimated
long term trend, as compared with 87 in March, a peak
o f 95 last December, and 81 a year ago. Reflecting a well
maintained volume o f railway freight traffic, the index
o f prim ary distribution was unchanged between March
and A pril, and retail trade continued at the general level
prevailing since February. Department store sales ad­
vanced slightly during A p ril and sales o f new passenger
cars were well sustained, although declines occurred in
some other types o f retail trade after seasonal adjust­
ments. A s in the first quarter of the year, the decline in
production was selective and marked divergences ap­
peared between various lines of activity. A m ong the
series included in the produ cers’ goods group, steel
ingot production and textile mill activity declined
further in A pril, while nonresidential construction
work increased and some industries stimulated by
Government and war orders continued at high levels.
Am ong consumers’ goods industries, shoe m anufacturing
and operations at meat packing plants were somewhat
lower after seasonal adjustm ents; on the other hand,
residential construction contracts increased, and ac­
tivity in a number o f other lines held relatively steady.
The President’s recent request that the cou n try’s air­
craft producing capacity be increased to provide 50,000
war planes annually, and measures being adopted to
enlarge production, point to a further rapid expansion
in this relatively new industry. It has been stated that
the fulfilment of the President’s program would neeessi-




Index of M an-Hours of Employment in A ircraft Factories (1933
average “ 100 per cent; based on Bureau o f Labor Statistics data)

tate the employment of about three times as many work­
ers as are now engaged, and a correspondingly large
increase in plant capacity. The accom panying diagram,
showing an index of man-hours o f employment in air(Ad jus ted for seasonal variations, for estimated long term trend,
and where necessary for price changes)
1939

1940

April

Feb.

f ...................
Production of:
Producers’ durable go o d s.......................
Producers’ nondurable goods.................

81
67
80

Consumers’ durable g o o d s .....................
Consumers’ nondurable good s...............
Primary distribution....................................
Distribution to consum er...........................

In d ex o f Production and Trade

Industrial Production

Mar.

April

89

87 p

862?

83
93

77 p
92 p

74 p
91 p

60
91

75
95

72 p
95 p

94 p

75
90

84
92

82 p
92 p

82 p
92 p

61

85 r
96
89
94
97
106

73 r

71
80
lO lp
93 p
96 p
98
71'P
89 p

68

Bituminous coa l............................................
Crude petroleum ...........................................
Electric pow er................................................
Cotton consum ption....................................
W ool consum ption........................................
Meat packing.................................................
T obacco products..........................................
Em ploym ent

Employment, manufacturing, U. S ..........
Employee hours, manufacturing, U. S... .
Construction

Residential building contracts...................
Nonresidential building and engineering

30 r
89
91
96r
85
lOOr
89
89

10 2

94
9 5p
103

88

86

94

87
80

95
88

93
87

92p
86p

10 1

10 1

38

42

42

45

74

57

46

56

77
60
81
77

84
80
107
69

80
79

79
84
99p
69 p

85
78r
95
99
96

85
74
99
94
95

68

86

Distribution to Consum er

Department store sales, U. S .. . . .............
Department store sales, 2nd D istrict. . . .
Chain grocery sales......................................
Other chain store sales................................
Mail order house sales r . ............................
New passenger car registrations...............

85
95
97 p

105
103

P rim a ry Distribution

Car loadings, merchandise and misc. r . ..
Car loadings, other r ....................................

86 r

68 p

10 1

70
84
77
97
98
93
89

86

78
96p
92
92
88p

Velocity o f D ep osits*

Velocity of demand deposits, outside New
Y ork C ity (1919-25 average = 100). .
Velocity of demand deposits, New York
City (1919-25 average = 100)...............
Cost o f L iving and W a g es*

Cost of living (1926 average = 100) r. . .
W age rates (1926 average = 1 0 0 )...........

59

58

59

57

31

25

26

27

82

83
113

83p
U 3p

83p
113p

111

p Preliminary.
r Revised.
* N ot adjusted for trend.
|Back figures for the index of Production and Trade and its subordinate group
indexes are available upon request (from 1919 monthly).

47

FEDERAL RESERVE BANK OF NEW YORK

craft factories, portrays the growth of this industry since
1937. As reflected by labor ‘ 4i n p u t /’ activity o f airplane
plants has doubled since a year ago, and has reached a
level nearly eight times the 1933 average. It is estimated
that approximately 100,000 workers are now employed in
the manufacture o f airplanes, airplane engines, and
accessories.
F o r e ig n T r a d e
Merchandise exports from the United States during
A p ril were valued at $324,000,000, a decline o f 8 per
cent from March, reflecting in part the extension o f the
European war and its effects on shipping facilities, and
in part the customary seasonal decline at this time o f
year. Reductions in exports to the Scandinavian coun­
tries and the Netherlands, as well as to South Am erican
and F ar Eastern countries, were, however, partly coun­
terbalanced by increased exports to the A llied powers
and to the m ajority o f the British Dominions. Com­
pared with the relatively low level in A p ril o f last year,
total exports from the United States showed a 40 per
cent gain. On the other hand, the value o f this cou n try’s
merchandise imports, at $212,000,000, while but slightly
below the March figure, showed only a 14 per cent in­
crease over A pril, 1939.
The export balance o f $112,000,000 was the smallest
since last November, but was considerably larger than
the excess o f exports in A pril, 1939. F or the eight months
since the outbreak of war, the export balance o f the
United States has amounted to $923,000,000.
The accom panying diagram shows the monthly values
of eight of the leading merchandise exports from this
country during 1938, 1939, and the first fou r months o f
this year. Owing in considerable measure to changes in
the requirements o f the belligerents fo r Am erican p rod ­
ucts, large shifts since last September have occurred in
these exports from the United States, as is indicated in
the diagram. In general, exports o f aircraft, metalwork­
ing machinery, iron and steel products, chemicals, and
raw cotton during recent months have been far above the
levels o f a year previous, although in the case o f cotton
M IL L IO N S
OF D O L L A R S
75

M IL L I O N S
OF D O L L A R S
3 0 | ------------------

50

20

R AW
COTTON

the excess has narrowed considerably since January.
The value of m otor truck exports, while fluctuating
rather widely in recent months, has also averaged some­
what above the level o f a year previous. In addition,
exports o f lubricating oil, not shown in the diagram,
registered a 66 per cent increase in A p ril over a year
previous. On the other hand, exports o f Am erican to­
bacco and passenger automobiles, and o f several other
products— wheat and wheat flour, gasoline, and crude
petroleum, which are not shown in the diagram— have
been below the levels of a year ago.
W ith respect to imports, a 42 per cent gain over a year
ago was recorded in the crude materials classification dur­
ing A pril, which was the combined result o f higher prices
and increases in quantities o f such imports as undressed
furs, crude petroleum, rubber, and unmanufactured wool.
Imports o f semimanufactures, including woodpulp, in­
edible expressed oils, and nonferrous metals, showed an
advance o f 12 per cent over A pril, 1939. Receipts o f
coffee and sugar were also somewhat larger in quantities
and values than a year ago. Im ports o f most other items
o f food and the m ajority o f manufactured products, how­
ever, were smaller than in A p ril o f last year.
E m p l o y m e n t a n d P a y r o lls
Between the middle o f March and the middle o f A pril,
the number o f factory workers employed in New Y ork
State was reduced 2y2 per cent, and payrolls decreased
nearly 5 per cent. These declines, which were greater
than the usual seasonal recessions, reflected in part ex­
ceptionally large lay-offs at clothing and m illinery es­
tablishments. Associated with the early date o f Easter
and unfavorable weather conditions during the spring
selling season, employment and payrolls in the apparel
lines declined 11 per cent and 22 per cent, respectively,
the largest A pril declines fo r the apparel industries in
the 25 year record o f the New Y ork State Department
of Labor. Metalworking plants and textile mills reported
slightly reduced working forces in A pril, while the
stone, clay, and glass products industries increased both
employment and payrolls seasonally. Compared with
A pril, 1939, total employment was 9 per cent higher
M IL L IO N S
g E D O LLAR S

M IL L IO N S
OF D O LLA R S

UNM ANUFACTURED
(T O B A C C O

/

1938,/

\/

l\

/1 9 3 9 V
25

7 T ’
M 938

10

xr*

1939

1940

J
F M A
M IL L IO N S
OF D O L L A R S
30

M

J J

A S O N D

J
F M A
M IL L IO N S
OF D O L L A R S
30j

M J J A S O K I D

J
F M A
M IL L IO N S
OF D O L L A R S

M

J J

A S O N

D

J
F M A
M IL L IO N S
OF D O L L A R S

M J J

A

S

O

NT O

-----------------------------------

11
8—

-1 9 4 0

1938

IR O N & S T E E L
JS E M I M A N U F A C T U R E S
J

F

M

A

M

J

J




A S O N D

C H E M IC A L S
J

F M A M J

J

A S O N D

J

F M

A M J J

A

S O

N D

V
alue of Selected Im
portant E
xports from the U
nited States, 1938-1940

J

F

M

A

M

J

J

A S

O N

O'

48

MONTHLY REVIEW, JUNE 1, 1940

and payrolls were 11 per cent greater.
Little change in nonagricultural employment in the
country as a whole was reported from March to A pril,
although usually there is a substantial increase at this
time of year. Em ploym ent gains in construction, public
utilities, and the service industries were largely offset
by an estimated decline o f 75,000 wage earners in fa c­
tories, a larger than usual reduction of 66,000 employees
in retail and wholesale trade, and decreased working
forces in coal mines. It is estimated that there were over
a million more workers actually employed than in A pril,
1939, but in that month some 300,000 coal miners
were tem porarily out o f work pending the signing o f
new wage agreements.
The reduction in United States factory employment
and a concurrent decline in payrolls in A p ril occurred
at a time o f year when ordinarily there is little change.
The largest decreases in working forces occurred in the
apparel and textile groups, practically all branches o f
these industries reporting reduced employment. Steel
mills and automobile factories also employed somewhat
fewer workers. Continued gains occurred at certain
factories stimulated by Government or war orders, and
seasonal increases occurred in the food and construction
material industries. Total factory employment was
6 per cent above the A pril, 1939 level, and payrolls
were 13 per cent higher.
B u ild in g
D uring A p ril construction contracts in the 37 States
covered b y the F . W . Dodge Corporation survey were
awarded at a daily rate 19 per cent above the March
average, but 5 per cent below the level o f a year ago. A ll
the m ajor construction categories, except public utilities,
showed gains over the previous month, partly in reflec­
tion o f the usual seasonal expansion at this time o f year.
Contracts fo r residential building registered a 20 per
cent increase over March, and reached the highest
monthly total since 1929. Owing especially to the placing
in A p ril o f large contracts fo r educational buildings, the
public purpose classification showed a 54 per cent in­
crease over the com paratively small March volume, but
was about one-fourth less than in A pril, 1939. Contracts
fo r heavy engineering projects were reduced 34 per cent
from A p ril of last year, but gains over a year ago amount­
ing to 23 and 29 per cent, respectively, occurred in
awards fo r residential building and fo r commercial and
industrial building.
F or the first fou r months o f 1940, total contract awards
were 12 per cent lower than in the corresponding period
o f 1939; large decreases in awards fo r public purpose
building and heavy engineering projects more than offset
the effect o f increases in the commercial, industrial, and
residential building categories.
In the New Y ork and Northern New Jersey area the
average daily rate of contract awards during A p ril was
5 per cent lower than in M arch and showed a decrease o f
23 per cent from A p ril o f last year. Contracts fo r heavy
engineering projects were reduced to the smallest monthly
total since February, 1938, but total contracts fo r other
types o f construction showed a gain over both the p re­
vious month and a year ago. Residential building awards
were 20 per cent larger than in M arch and 42 per cent
above the level in A pril, 1939; contracts for commercial
and industrial building advanced 53 per cent from the




previous month and registered an increase o f 39 per cent
over A p ril o f last year. On the other hand, awards fo r
public purpose building, though slightly larger than in
March, were 60 per cent below the volume o f a year ago.
F or the first fou r months o f this year, contracts fo r all
types o f construction were 33 per cent below the total
fo r the comparable period o f 1939; awards fo r commer­
cial and industrial building alone showed a gain, which
amounted to 26 per cent.
D uring the first three weeks o f M ay the daily rate o f
construction contract awards in the 37 States remained
approxim ately the same as in A p r il; increases in con­
tracts fo r heavy engineering projects and residential
building were counterbalanced b y a decline in contracts
fo r nonresidential types o f building. Compared with the
first three weeks of May, 1939, however, total contract
awards showed a gain o f 5 per cent.
D e p a r tm e n t S tore T r a d e
F or the fou r weeks ended M ay 25, total sales o f the
reporting department stores in this D istrict were prac­
tically unchanged from the corresponding 1939 period.
The average daily rate o f sales fo r this portion o f May
showed somewhat less than the expected seasonal advance
from A pril.
Total A p ril sales o f the reporting department stores
in this D istrict were approxim ately 1 % per cent lower
than in A pril, 1939, a less favorable year-to-year com ­
parison than in a number o f months, which is attributable
to the early Easter this year. The daily rate o f sales was
higher than in March, although not much change between
these two months was to be expected on the basis o f
seasonal factors. Total sales o f the leading apparel stores
in this D istrict were about 3 % per cent lower than in
A pril, 1939.
Percentage
change
April, 1940
compared with
April, 1939

LocalityNew York and B rooklyn................................

Net
Sales
— 2 .4
0

— 1.2
+ 7 .0
Northern New Jersey......................................
Northern New Y ork State.........................
Southern New Y ork S tate..........................
Central N ew Y ork S tate............................
Hudson River Valley D istrict...................
Westchester and Stam ford.........................
Niagara Falls
............................................

0
-f 0 .1

—
—
—
—
—
—
+

3 .1

Per cent of
accounts
outstanding
March 31
collected in
April

Stock
on hand
end of
month

1939

1940

+
-f
+
+
+
—
+

4 .2

4 7.4
4 5.7
5 7.0
39.9
3 9.8
3 6.7
3 2.8

48.0
44.0
54.3
40.9
35.9
3 8.7
3 2.4

1 .1

0 .7
6 .6

7 .5
6 .4
1 .1

1 .0

7 .2
2 .3
5 .5
1 .6
6 .2

All department stores..............................

— 1.7

+ 2 .3

4 4.7

43.6

Apparel stores...........................................

— 3 .6

— 9 .2

4 3 .4

4 5.0

Indexes of Department Store Sales and Stocks, Second Federal Reserve District
(1923-25 average = 100)
1939

1940

Apr.

Feb.

Mar.

Apr.

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

86

69

89

86

82
89

83
90

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

78
77

76
81

80
79

80
78

FEDERAL RESERVE BANK OF NEW YORK
MONTHLY REVIEW, JUNE 1, 1940
Business C onditions in the U nited States
(Summarized by the Board of Governors of the Federal Reserve System)
NDUSTRIAL activity was steady during April after three months of sharp
decline, and in the first half of May increases appeared in some lines,
particularly steel. Prices of basic commodities showed mixed changes toward
the middle of May, accompanying the extension of active warfare in Europe,
while stock prices declined sharply.

I

P r o d u c tio n

In d e x o f P h y s i c a l V o lu m e o f I n d u s t r ia l P r o d u c ­
t io n , A d j u s t e d f o r S e a s o n a l V a r i a t i o n ( 1 9 2 3 2 5 a v e r a g e = 1 0 0 p e r c e n t ; d u r a b le m a n u ­
f a c t u r e s , n o n d u ra b le m a n u f a c t u r e s , a n d
m in e r a ls e x p r e s s e d in t e r m s o f p o in t s
in t o ta l in d e x )

In d e x e s o f V a lu e o f D e p a rt m e n t S t o r e S a le s
a n d S to c k s , A d ju s te d fo r S e a so n a l V a ria tio n
(1 9 2 3 -2 5 a v e ra g e = 1 0 0 p e r c e n t)

The Board’s seasonally adjusted index of industrial production for the
month of April was 102, compared with 104 for March and1109 for February.
Steel ingot production was steady during April at slightly over 60 per cent
of capacity as compared with an average rate of 64 per cent in March; in
the first half of May output rose sharply and currently is scheduled at about
70 per cent of capacity. Automobile production in April continued at about
the March rate, although ordinarily there is an increase at this season, and
in early May declined somewhat. Retail sales of new cars approximated
production in April and dealers’ stocks of both new and used cars remained
at earlier high levels. Output of plate glass, used largely by the automobile
industry, declined considerably in April, and lumber production showed some­
what less than the usual seasonal increase. In the machinery, aircraft, and
shipbuilding industries activity continued at the high rate of other recent
months.
In the textile industry activity at cotton and woolen mills declined some­
what further in April, following considerable reductions in March. At silk
mills activity remained at a low level, while rayon production was maintained
at a high rate. Output at meat packing establishments continued in large
volume. There was some further curtailment in shoe production in April;
in most other industries producing nondurable goods changes in output were
largely seasonal in character.
Coal production, which usually declines sharply in April, showed only a
small decrease this year. Output of crude petroleum, which had reached
record high levels in March, was largely maintained in April and the first
half of May, although stocks of crude oil were increasing and gasoline stocks
were unusually large.
Value of construction contract awards increased further in April, reflect­
ing principally a rise in contracts for private building, according to figures
of the F. W. Dodge Corporation. Awards for private residential building
were in somewhat larger volume than a year ago. Private nonresidential
building was about one-third greater than at this season last year and was
near the previous peak level reached in mid-1937. Awards for public con­
struction, however, were considerably below the level of last spring.
D is t r ib u t io n

Distribution of commodities to consumers showed little change in April
and the first half of May. The Board’s seasonally adjusted index of depart­
ment store sales was 90 per cent of the 1923-1925 average in April, about
the level that has prevailed since the first of the year but below the peak of
96 reached last December.
Total freight car loadings in April were in about the same volume as in
March. Shipments of coal declined less than seasonally, while loadings of
miscellaneous freight, which include most manufactured products, showed
less than the sharp rise that is customary at this season. In the early part
of May increases were reported in shipments of most classes of freight.
C o m m o d it y P r ic e s
In d e x o f T o t a l L o a d in g s o f R e v e n u e F r e ig h t ,
A d ju s te d
fo r S e a so n a l V a ria tio n
(1 9 2 3 -2 5
a v e ra g e =
1 0 0 p e r c e n t ; m is c e lla n e o u s ,
c o a l, a n d a l l o t h e r c a r lo a d i n g s e x p r e s s e d
in t e r m s o f p o i n t s i n t o t a l i n d e x )

G o v e r n m e n t S e c u r it y M a r k e t

TES r ONs
RAlli MoC
Oo
M
(« rt«dy e V )
r * " V a.
K
RSREBN
EEV AI
N 1
l*CO A
v ) * ° >O TR
V jv ,
J
7 I1
—TESWME
RA « NTS
<-» Y O
*UU )
TE!SRusL!
RAmseI L
Y
tU B
is )
<934

1935

1936

1937

Prices of United States Government securities declined sharply from
May 10 to May 14, accompanying the further spread of war in Europe. Prices
of long term Treasury bonds on May 14 were 3 % points below the high point
reached on April 2. The yield on the 1960-65 2% per cent bonds rose from
2.26 per cent on April 2' to 2.48 per cent on May 14.
B a n k C r e d it

J
__ A1938

1939

M o n e y R a t e s in N e w Y o r k C it y




Prices of a number of basic commodities, which had been declining after
a rise in April, advanced from May 10 to May 14. Increases in this period
were particularly marked for imported materials, such as rubber, tin, and silk.
Grain prices rose at first but subsequently showed sharp declines. Price
changes for other commodities were mixed; steel scrap advanced, while cotton
declined considerably. Prices of certain steel products, which had been reduced
early in April, were restored to earlier levels on May 1, and producers
announced that steel purchased at the lower prices must be taken by the
buyers on or before June 30.

1940

Total loans and investments at reporting member banks in 101 leading
cities increased during the four weeks ended May 8. Most of this increase
was at New York City banks and reflected purchases of United States
Government obligations. Deposits and reserves of banks in leading cities
continued at record high levels.