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MONTHLY REVIEW
ofCreditandBusinessConditions
S e c o n d

F e d e r a l

R e s e r v e

D is tr ic t

F ederal E eserve Bank, New York

M o n e y M a r k e t in M a y
The rapidly rising volume of Treasury expenditures
in prosecution of the war has become a dominant factor
in the flow of funds through banking and commercial
channels and in the operation of the banking system.
W ar expenditures for the first 25 days of May were
equivalent to a monthly rate of about $3,600,000,000.
Comparable monthly totals were $1,450,000,000 for
November, prior to our entrance into the war, and
$860,000,000 for May a year ago. While tax receipts
this year have also been far larger than a year ago,
the growth in tax and other revenue receipts has fallen
far short of matching the; pace of expenditures and the
Treasury has been called upon to meet more and more
of its financial requirements through borrowing opera­
tions. During May the Treasury raised more than
$3,000,000,000 through borrowings, as follows:
$1,290,000,000
880.000.000
630.000.000
300.000.000
300.000.000

2 per cent bonds of 1949-51
registered 2 % per cent bonds of 1962-67
War Savings bonds (estimated)
Treasury bills (net receipts)
tax anticipation notes (estimated net
receipts)

An unusual feature of the May financing was the
sale of the 2y2 per cent registered bonds of 1962-67.
This issue was of a new type, available to investors other
than commercial banks. It has been referred to as a
“ tap” issue, as the subscription books were held open
for ten days, and the bonds could be bought at any time
during that period without limitation as to the amount
that might be taken by eligible subscribers. The offer­
ing of 2 per cent bonds of 1949-51, on the other hand,
was of a specified amount, of the conventional “ market”
type. Details concerning the new offerings are presented
in a later section of this Review.
With excess reserves at reduced levels, banks made
increased use of the “ book credit” method of payment
for new issues of Government securities, bought by
them or by their depositors. This method (crediting
Government “ War Loan” deposit accounts on their
books, which are subject to call on short notice, instead
of making immediate payment in cash) was used to
make 61 per cent of the payments for the 1949-51
bonds and 64 per cent of the payments for the regis­
tered bonds of 1962-67 sold during the month. These
figures compare with 48 per cent on the certificates of
indebtedness issued during April and with 47 per cent




June 1,1942

on the 2*4 per cent Treasury bonds of 1952-55 sold in
February.
While payment by the “ book credit”
method spreads out the impact, on bank reserve posi­
tions, of Government security purchases by banks and
their customers, Treasury expenditures are now so large
that cash received by the Treasury in payment for new
Government security issues is quickly disbursed and
frequent calls must therefore be made on accumulated
Government deposits in the banks. By the call, the
Treasury directs that some of its deposits in commer­
cial banks be transferred to the Treasury account with
the Federal Reserve Bank for use in making current
disbursements. During May, calls upon “ W ar Loan”
deposits reached a total of $1,385,000,000, of which
$750,000,000 was withdrawn from New York City banks.
The particularly heavy calls made upon New York
City banks resulted from two factors: the relatively
greater use made in New York City of the “ book credit”
method of payment, and the disproportionate amounts
of some recent Government issues sold in New York—
for example, 45 per cent of the February issue of 21/£ per
cent bonds (1952-55) was taken in this District and 55
per cent of the April issue of certificates of indebtedness.
E ffects

of

Government F inancing
on the B anks

and

E xpenditures

Even though disproportionate amounts of some Treas­
ury security issues have been taken by New York City
B ILLIO N S
O f DOLLARS

42

MONTHLY REVIEW, JUNE 1, 1942

batiks and their customers, experience here in recent
months illustrates the fact that payments for new
Treasury securities are largely offset by Government
expenditures and do not result in corresponding reduc­
tions in bank deposits or reserves. Since the first of
April (through May 27) Second District banks—mainly
New York City institutions— have made cash payments
for new Treasury securities (for their own account and
for customers) of $1,000,000,000 over and above amounts
received through redemptions of maturing Government
obligations. In addition the New York banks have paid
around $1,300,000,000 to the Federal Reserve Bank as
a result of Treasury calls for transfers from 44War
Loan” deposits. Nevertheless, adjusted demand depos­
its-—principally deposits of individuals and business
enterprises— have been reduced only $160,000,000 and
excess reserves are down about $440,000,000 (to
$520,000,000). The principal offset to the Treasury’s
drain upon bank deposits and reserve funds has been
the deposit with the New York banks of Government
checks to an amount of roughly $2,000,000,000 during
this period— representing the return flow of funds to
the banks as a result of Government expenditures. Other
factors which have helped to support reserve positions
of banks in New York City have been disbursements of
funds from foreign accounts (in part from loans to
other United Nations by the Government), and net
purchases in New York of Government securities for
the System Open Market Account.
For all member banks in the country reserve balances
showed virtually no net change between April 1 and
May 27, although excess reserves were reduced
$460,000,000, to $2,540,000,000, under the influence of
increasing required reserves. Required reserves rose
because of deposit expansion, and deposits in turn
expanded through growth in bank credit— principally
represented by bank purchases of newly-issued Gov­
ernment securities. So far as aggregate member bank
reserve balances are concerned, Treasury operations
resulted in some net release of reserve funds to the
banks, as funds absorbed by the Treasury through tax
and other revenues, cash payments by banks for new
Government security issues, and tranfers to Reserve
Banks of 4‘ W ar Loan” deposits in response to Treasury
calls, were somewhat more than offset by the return flow
of funds resulting from the unprecedented volume of
Government expenditures. Moreover, the System Open
Market Account added $245,000,000 to its holdings of
Government securities between April 1 and May 27.
These factors tending to increase member bank reserves
were counterbalanced by a $378,000,000 increase in cur­
rency circulation.
■The current expansion in the aggregate volume of
bank deposits is accounted for by bank purchases of
neMy-issued Government securities, although, as a
result of currency withdrawals, the increase in bank
deposits has been smaller than the increase in Govern­
ment security holdings. It is perhaps easiest to observe
how bank purchases of Government securities increase
deposits by taking as an example a case where a pur­
chase is made by the ‘ 4book credit” method. When a
bank buys newly-issued Government securities and pays
for them by the *‘ book credit” method, its investments
and its deposit liabilities increase at the same time and




by the same amount. The increase in deposits of the
particular bank is only temporary, because the deposits
will be transferred later to the Federal Reserve Bank,
at the direction of the Treasury. But the purpose of
transferring the funds is only to make them available
for expenditure through the Treasury’s checking account
with the Reserve Bank, and most of the funds are again
deposited promptly in the banks, so that bank deposits
tend to maintain the higher level reached when the
‘ ‘ book credit” was created. When banks buy Govern­
ment securities and pay cash at the time of purchase,
the result is similar, for the funds which the Govern­
ment spends swell the bank deposits of the recipients.
On the other hand, as has frequently been pointed
out, purchases of Government securities by individuals,
insurance companies, and corporations tend to leave the
aggregate volume of bank deposits unchanged; the
deposits which result from Treasury expenditures rep­
resent funds which previously came out of the deposits
of the purchasers. Government expenditures directly or
indirectly reaching any particular locality may, of
course, be greater or less than amounts paid for Govern­
ment securities in that locality, but large discrepancies
of this kind in any particular locality are not apt to
persist indefinitely, because if the volume of available
funds is diminished, Government security purchases by
banks in that locality are apt to be diminished, and vice
versa.
The effects of Treasury operations upon the volume of
reserve funds available to banks may be important over
short periods but tend to cancel out over longer periods
of time. If in one week the Treasury receives more than
it spends, in another week it is likely to spend more
than it receives. Fluctuations in Treasury cash and
deposits with Federal Reserve Banks provide a measure
of temporary flows of bank reserve funds into and out
of the Treasury, and out of and into the banks. The
principal effect of Treasury financing on the reserve
position of the banks in the long run is to increase the
required reserves of the banks as their deposits grow,
and thus to reduce gradually the amount of their
excess reserves.
A djustment of R eserve P ositions of B anks T hrough
S hort T erm T reasury Securities
A broadening market for short term Government
obligations is providing a means by which banks can
invest even temporarily idle funds and obtain cash
when needed. This development has been facilitated
by enlargement of the volume of available short term
Government securities, and by the more attractive yields
now obtainable. The weekly offerings of Treasury bills
were raised from the prevailing $100,000,000 issues to
$150,000,000 issues in October, 1941, and the supply was
further increased, beginning May 13, 1942, by the rais­
ing of the weekly offerings to $250,000,000. Inasmuch
as the weekly Treasury bill maturities during May were
in the amount of $150,000,000 each, the $250,000,000
sales on May 13, 20, and 27 (91 day issues) added
$300,000,000 to the market supply. Treasury bills now
outstanding total $2,250,000,000 as compared with
$1,600,000,000 a year ago, and the rate of return has
advanced from 0.10 per cent or less to about 0.36 per
cent (on the four May issues). Moreover, $1,500,000,000

43

FEDERAL RESERVE BANK OF NEW YORK

of % per cent Treasury certificates of indebtedness
were added to the supply of outstanding short term
Government securities during April.
The adjustment of reserve positions of banks through
purchases and sales of Government securities has also
been promoted by open market operations for the
System Open Market Account, in which all Federal
Reserve Banks participate. On April 30, the Board
of Governors of the Federal Reserve System announced
that the Federal Open Market Committee had directed
the Federal Reserve Banks to purchase for the System
Open Market Account all Treasury bills offered to them,
on a discount basis at the rate of % per cent per annum.
This arrangement gives assurance to purchasers of
Treasury bills that, in case of a need for cash before
the maturity of the bills, they may obtain it by selling
Treasury bills to the Federal Reserve Bank. Purchases
of Treasury bills for the System Open Market Account
under this provision, as well as other purchases and
sales of Government securities for the Account, are help­
ing to promote more active and more stable markets, by
absorbing securities which may be temporarily in supply
and releasing to the market securities which are in
demand.
Government Security M arket

in

M ay

Despite the growing volume of Treasury borrowing
and a gradual shrinkage in excess reserves, the market
for Government securities during May showed a satis­
factory degree of stability. In fact, prices of long and
intermediate term Treasury bonds firmed, particularly
in the latter half of the month. Between April 30 and
May 25 the average yield on long term partially tax
exempt Treasury bonds declined from 2.05 per cent to
1.99, lowest since December 8, 1941. In similar fashion,
the average yield on long term taxable Treasury bonds
dropped from 2.38 per cent to 2.32, equaling the pre­
vious low point for 1942.
Treasury note prices weakened temporarily during
May. Continuing an irregular rise which started late in
March, the average yield on three to five year taxable
Treasury notes rose to a new 1942 high of 1.05 per cent
on May 22, but later dropped back to the April 30 level.
Sharing in the rise in yields on other tax exempt notes,
the yield on the tax exempt % per cent Treasury note
due March 15, 1945, moved up from 0.43 per cent on
May 12 to 0.54 (highest since the beginning of January)
on May 26. There was no change thereafter.
The % per cent Treasury certificates of indebted­
ness, issued in April, showed little fluctuation during the
month, the yield remaining close to 0.50 per cent.
On May 4, the United States Treasury offered
$1,250,000,000 of taxable 2 per cent Treasury bonds of
1949-51, dated May 15. Limitations placed on sub­
scriptions to the December and February bond offer­
ings of the Treasury did not apply to this issue. Sub­
scriptions up to $10,000, totaling about $69,000,000, were
allotted in fu ll; larger subscriptions were allotted on a
38 per cent basis and a total of $1,292,000,000 of the
bonds was issued. The new 2 per cent bonds were
quoted May 5 at 100 6/32 bid, on a “ when issued”
basis and at 100 19/32 bid, toward the end of the month.
During May the Treasury also offered an unspecified




amount of registered 2y 2 per cent Treasury bonds of
1962-67, dated May 5, and available for purchase during
the period May 5-14. This issue was designed especially
for insurance companies, savings banks, trust funds,
and large private investors. Commercial banks (banks
accepting demand deposits) were not eligible to enter
subscriptions for the new bonds for their own accounts,
and will not be eligible to purchase them until 1952, at
which time they will first become available in coupon
form. Distinguishing characteristics of the issue were
the absence of any specific limitation as to the amount
which might be sold and the availability of the bonds
for purchase for a number of days, and for these reasons
it has been referred to as a “ tap” issue. Total sales
amounted to $882,100,000.
Continuing its program of refinancing guaranteed debt
of the Federal agencies with direct Treasury obligations,
the Treasury on May 25 offered 1 % per cent Treasury
notes, dated June 5, 1942 and due December 15, 1946,
in exchange for $875,000,000 of 2 % per cent Home
Owners * Loan Corporation bonds (called for payment
July 1, 1942), and $276,000,000 of 1 per cent Recon­
struction Finance Corporation notes, maturing July 1,
1942.
The new notes were well received and were
quoted on May 29 at 100 14/32 bid, on a “ when issued”
basis.
M oney IRatesTin*N ew 'Y ork
M ay 31, 1941 Apr. 30, 1942 M ay 28, 1942
Stock Exchange call loans..........................
Stock Exchange 90 day loans...................
Prime commercial paper— 4 to 6 months
Bills— 90 day unindorsed.......................
Yield on % per cent Treasury note due
March 15, 1945 (tax exem pt)................
Average yield on taxable Treasury notes
(3-5 years)....................................................
Average yield on tax exempt Treasury
bonds (not callable within 12 years) . .
Average yield on taxable Treasury bonds
(not callable within 12 years)..............
Average rate on latest Treasury bill sale
91 day issue.................................................
Federal Reserve Bank of New York dis-

1

1

*1X

n u

X

%

%

%

0 .4 5

0 .4 3

0 .5 4

X

0 .7 1

1 .0 2

1 .0 2

2 .0 0

2 .0 5

2 .0 0

0 .0 6 9

2 .3 8

2 .3 3

0 .3 3 5

0 .3 6 5

1

1
Federal Reserve Bank of New York buy­
ing rate for 90 day indorsed bills. . . . .

1

*1H

X ~ X

X

1
X

* Nominal

M ember B ank Credit
Total loans and investments of the reporting member
banks in 101 leading cities advanced $495,000,000 to
$31,888,000,000 during the four weeks ended May 20.
As in the previous month, the rise was occasioned entirely
by an increase in Government security holdings; total
loans declined $230,000,000 further and investments
other than in Government securities were $50,000,000
lower.
Holdings of
Treasury bonds increased
$581,000,000, the greatest part of which represented
purchases of the 2 per cent Treasury bonds of 1949-51
during the week ended May 20. Treasury bill holdings,
reflecting acquisition by these banks of part of the
$200,000,000 increase in outstanding bills over this
period, were $133,000,000 higher, and additions to hold­
ings of certificates of indebtedness amounted to
$78,000,000. Enlarged holdings of Treasury bills were
concentrated in banks outside New York City, but the
major part of the aggregate increase in holdings of cer­
tificates of indebtedness was accounted for by purchases
by the New York City institutions. Commercial, indus­
trial, and agricultural loans declined $261,000,000

44

MONTHLY REVIEW, JUNE 1, 1942

further, with $148,000,000 of the decline occurring in
the week of April 29 and resulting in large part from
the repayment of bank loans by the American Tobacco
Company out of the proceeds of a security issue.
Adjusted demand deposits increased $251,000,000 in
the country as a whole during the four weeks’ period,
although in New York City, where large payments by
insurance companies were made for the registered 2 ^
per cent Treasury bonds of 1962-67, there was a
$61,000,000 decline. United States Government deposits
increased $224,000,000 in New York City banks, but
declined $171,000,000 in all other reporting centers,
because of relatively larger “ book credit” payments
for new Treasury bonds in New York than in other
sections of the country, where withdrawals as a result
of Government calls exceeded the establishment of new
credits.
U se of T a p Issu e s:

G rea t B ritain and the

U n ite d States
The new registered 2 % per cent bonds resemble cer­
tain so-called tap issues sold by the British Government,
with the important difference that the British tap issues
usually have been on sale for far longer periods. Sev­
eral other foreign governments have also used tap
methods of financing, but the British experience is prob­
ably of most interest in this country.
In the financing of its war effort the British Govern­
ment has relied extensively upon various tap issues
which, bdng unlimited in amount and continuously open
to subscription for extended periods, are designed to
absorb current savings as they accrue. This device was
also widely used during and immediately after the first
World War. Current tap issues are of two main types
which, for want of better terms, may be designated as
“ large savings” and “ small savings” tap issues, respec­
tively. The former are designed to appeal to institu­
tional and other large investors, and are negotiable.
Since the outbreak of the war there have been five of
these issues, which have accounted for the great bulk
of the Government’s medium and long term financing,
and up to the end of March, 1942, had yielded almost
£2,000,000,000. There have been three separate issues
of 2 % per cent National W ar bonds, maturing in 1945-47,
1946-48, and 1949-51, respectively, and two issues of 3
per cent Savings bonds, maturing in 1955-65 and 1960-70,
respectively. A t the present time, only the 2 ^ per cent
National W ar bonds 1949-51 and the 3 per cent Savings
bonds 1960-70 are on tap.
The “ small savings” tap issues— the counterpart of
the present Series E War Savings bonds in the United
States— have been designed for wage earners and others
of limited incomes, and include an issue of National
Savings certificates and an issue of 3 per cent Defence
bonds, both of which were placed on tap in November,
1939. These issues are not negotiable but are redeem­
able at any time on short notice. From November,
1939, to the end of March, 1942, these issues had realized
£879,000*000.
In December, 1941, the British Government also placed
on tap an issue of Tax Reserve certificates— similar to
our Tax Series Treasury notes — which bear interest at




one per cent per annum if tendered in payment of taxes.
The most conspicuous example of tap financing by the
United States Government is, of course, the United
States Savings bonds, which first went on sale March 1,
1935.
Sales of these bonds have aggregated nearly
$10,000,000,000, of which $6,000,000,000 have been sold
since May 1, 1941, when the present National Defense
Series were inaugurated. Provisions relating to the eli­
gibility of particular types of purchasers, terms of re­
demption, maximum limits for individual purchasers,
and other features have been changed from time to time,
but, subject to these changes, Savings bonds have been
available “ on tap” continuously for more than seven
years.
Other United States Treasury issues “ on tap” are 2
per cent Depositary bonds, issued only to banks for use
in securing certain deposits of the Federal Government,
and the Tax Series Treasury notes, designed to aid tax­
payers in making provision for future tax payments.
Of the Depositary bonds $77,000,000 have been sold
since they were first made available a year ago. More
than $3,500,000,000 of the tax notes have been purchased
since they went on sale August 1, 1941. (Of these,
$620,000,000 have been turned in for payment of taxes.)
W a r S avings B o n d s
Sales of W ar Savings bonds during May, the first
month of the Treasury’s intensified campaign, evidently
surpassed the quota of $600,000,000 announced earlier.
The Daily Statement of the Treasury for May 25, show­
ing receipts of $519,000,000 to that date, indicates sales
for the full month of about $630,000,000. This amount
would be approximately a fifth greater than last month’s
figure and the third largest monthly total so far recorded.
The National quotas for June and July have been set at
$800,000,000 and $1,000,000,000, respectively.
Plans for the Treasury’s War Bond Pledge Campaign
are rapidly taking shape. In the near future (beginning
June 14 in Greater New York) thousands of volunteer
workers will be engaged in visiting every home in the
country in an effort to secure a voluntary signed pledge
of 10 per cent of each person’s income toward the system­
atic purchase of W ar Savings bonds.
In addition to the efforts described, which will be
directed chiefly toward stimulating sales of Series E
bonds and W ar Savings stamps, more attention is to be
given to increasing the sales of Series F and G bonds
to the larger investors and to corporations. The War
Savings bonds of these series differ from Series E bonds
in that yields are lower (2.53 and 2.50 per cent, respec­
tively, as compared with 2.90 per cent on Series E ), their
term is twelve years instead of ten, and maximum pur­
chase limits are much higher. Series F and G bonds in
turn differ through the fact that the former are of the
“ appreciation” or interest accumulation type, whereas
the latter provide a current interest income. Heretofore,
purchasers of Series F and G bonds have been limited to
a total of $50,000 in any one calendar year, of either
series, or both series combined. On May 25, Secretary
of the Treasury Morgenthau announced that the limita­
tion on Series F and G bonds would be raised to $100,000
on July 1 as a result of numerous requests by purchasers
who asked the opportunity to put more of their money

FEDERAL RESERVE BANK OF NEW YORK

into the war effort through the medium of W ar Savings
bonds. During the period May, 1941, through April,
1942, Series E bonds accounted for 53 per cent of total
sales of Savings bonds; Series F, 8 per cent; and Series
G, 39 per cent. For New York State corresponding per­
centages (partly estimated) are 44, 7, and 49, respectively.
C on sum er C redit R egulation
As part of the President’s program for preventing an
undue rise in the cost of living, the Board of Governors
of the Federal Reserve System announced on May 6 the
adoption of an amendment to Regulation W relating
to consumer credit. The purpose of the amendment is
to contract further the outstanding volume of consumer
credit in line with the Government’s purpose of prevent­
ing the rapid bidding up of prices. The principal
changes made in the Regulation are:
1. The list of articles to which the Regulation applies
has been broadened, to cover the bulk of consumers’
durable and semidurable goods, including such items as
wearing apparel, bedding and blankets, and almost all
types of household equipment.
2. The maximum permissible maturity of instalment
sales of listed articles has in general been reduced to
12 months, and the required down payment for most
articles has been increased to 33 1 /3 per cent. Excep­
tions to this rule are furniture and pianos, for which
the required down payment is increased from 10 per
cent to 20 per cent; and automobiles, for which the
maximum maturity of 15 months is retained.
3. The scope of the Regulation has been broadened
to include charge accounts. Unless charge accounts due
either for listed or unlisted articles are paid by the tenth
day of the second calendar month following the purchase,
no further credit may be extended to purchase any listed
article until the items in default have been paid for in
full or have been placed on an instalment basis for pay­
ment within 6 months. No down payments are required
on charge account purchases.
4. Single payment loans of $1,500 or less (not pre­
viously covered by the Regulation) are limited to a
maturity of 90 days. Where the proceeds of such a
loan are used to purchase a listed article costing $15
or more, a down payment is also required. If not paid
in 90 days, the loan must be placed on an instalment
basis.
5. Other revisions provide that instalment payments
shall not be less than $5.00 a month or $1.25 a week;
also, instalment sales maturing within three months will
no longer be exempt from down payment requirements.
Copies of Regulation W , as amended, may be obtained
upon application to this bank or to its Buffalo Branch.
Security M a rk e ts
The stock market was subjected to varying influences
during May but, in the end, showed a fairly sharp net
advance for the month.
In their most pronounced
upward reaction since January, share prices advanced




45

sharply between April 28 and May 11, reflecting, at
least to some degree, favorable war news from Mada­
gascar and from the Australian area. Standard’s 90
stock price index during this period advanced 7 per
cent from the lowest level reached in nine years and
thereby canceled about one third of this year’s decline.
During the following ten days, when a number of reduc­
tions in dividends were announced, the stock market
tended to weaken slightly. Subsequently, stocks resumed
their upward move, and, on May 28, the Standard index
was at the highest point in seven weeks. For the month
as a whole the index was up 6 per cent. The principal
gains during May were shown by public utility and
industrial shares. Trading activity was light; shares
traded on the New York Stock Exchange fell to the
lowest level since August, 1918.
As in recent months, domestic corporate bond prices
pursued a steady course, apparently being little affected
by either domestic or foreign news. Prime municipal
bond prices moved up fractionally, and Standard’s aver­
age yield on these issues was 2.43 per cent on May 27,
about halfway between the year’s high and low.
N e w F inancing
During May a total of $140,000,000 corporate and
municipal new security issues was publicly offered or
privately sold. Of the May total, corporate financing
accounted for $109,000,000, an amount 8 per cent below
the monthly rate during the first four months of 1942.
New capital raised by corporations amounted to
$64,000,000, an 18 per cent decline from the JanuaryApril average. The volume of State and municipal
issues, at $31,000,000, was the lowest since September,
1939, the first month of the war.
Temporary financing, not included in the $140,000,000
total, amounted to $100,000,000, nearly all of which was
accounted for by two issues: $50,000,000 State of New
York 0.375 per cent tax anticipation notes maturing in
October, 1942, and $41,000,000 Federal Intermediate
Credit Bank 0.75 and 0.85 per cent consolidated deben­
tures maturing in January and April, 1943.
F oreign E xch anges
During May the widest fluctuations in New York rates
for foreign exchange occurred in the quotation for Swiss
francs for noncommercial purposes. This movement,
however, was of little long-run significance and reflected
merely the thinness of the market for this type of
exchange in the present circumstances. Accompanying
some demand in the face of the virtual absence of any
supply, the rate for the so-called free Swiss francs, which
had turned upward in the latter part of April, continued
to advance sharply, reaching a peak of $0.3620 on May
12; this quotation was more than 50 per cent above the
equivalent of the rate at which Swiss exchange is sup­
plied by Swiss banks for certain specified purposes.
Subsequently some supply of “ free” Swiss francs
reached the market, and, although these offerings would
not be considered large in normal conditions, they appar­
ently were sufficient to satisfy the existing demand.
The “ free” rate consequently reacted abruptly and by

MONTHLY REVIEW, JUNE 1, 1942

46

May 19 had declined to $0.2725, thereby canceling all
but 2 % cents of the previous advance. A t the end of
May, “ free” Swiss francs were quoted at $0.2900 in an
extremely thin market.
With respect to the Western Hemisphere currencies,
the free market rate for the Venezuelan bolivar continued
the advance which had persisted since the beginning of
the year, and by the latter part of the month had reached
a point about 13 per cent above that prevailing at the
end of 1941. The current quotation, $0.2985 bid-$0.3015
offered, is about the level at which the bolivar reportedly
is now being pegged through official Venezuelan interven­
tion in the free market. The Cuban peso reacted slightly
on May 8, accompanying reports that a 10 million peso
currency issue— half the authorized amount— would soon
be introduced in Cuba, but the peso has since recovered
and at the end of May was quoted at a premium of %
per cent in terms of the dollar. The Canadian dollar
appreciated further in the unofficial market during May,
closing the month at a discount of 9 % per cent, as
compared with lS 1/^ per cent early in April, when the
current recovery began.
P rodu ction and T ra d e
Intensification of the war effort was again manifest
during May. Preliminary data for the month indicate
that industrial activity held or exceeded the record level
attained during the first four months of this year. The
steel mills again operated at virtually full rated capacity,
electric power production during the first three weeks
of the month averaged somewhat higher than in April,
and mining of bituminous coal continued in heavy vol­
ume. The movement of bulk freight over the railroads
increased further, although loadings of merchandise and
miscellaneous freight averaged somewhat lower than in
April.
1941

1942

April

Feb.

(100 = estimated long term trend)
Index of Production and Trade t ...............

106

Production.......................................................

109

Producers’ goods— to ta l........................
Producers’ durable goods................
Producers’ nondurable goods.........

March

April

Ill

IlOp

IlOp

120

120p

121p

114
120
108

143
158
126

144p
162p
124p

146p
164p
126p

Consumers’ goods— to ta l......................
Consumers’ durable goods..............
Consumers’ nondurable goods. . . .

102
100
103

92
56
105

90p
49p
104p

89p
48p
103p

Durable goods— to ta l.............................
Nondurable goods— total.....................

114
105

128
113

129p
112p

130p
112p

Primary distribution!.................................
Distribution to consumer..........................
Miscellaneous services................................

98
105
101

104
96
115

104p
93p
114p

107p
89p
114p

102

113

114

115

118

131

132p

56
87

62
90

Indexes o f Production and Trade*

Cost o f Living , Bureau of Labor Statistics
(100 =

1935-39 average)...............................

Wage Rates
(100 — 1926 average).....................................

Velocity of Demand Deposits*
(100 =

1935-39 average)

Outside New York C it y .................................

60
90

60
87

p Preliminary.
* Adjusted for seasonal variation.
t For January, 1942, the index of production and trade has been revised to
113, and the index of primary distribution to 101.




* E R CENT

4 0 0 -------

3 5 0 ---------

300

50--------------------------------------------------------------------------------Ol--------I-------- I--------1---------------- 1_____ I____ I____
1939
1940

„ I

I.
1941

I

, ____ I____ I_____L _
1942

Indexes o f Production o f T ransportation Equipm ent and M ach in ery,
A d ju sted for Seasonal V ariation (B o ard of G overn ors of the
Federal R eserve S y ste m d a ta ; 1 9 3 5 -3 9 a v e r a g e = 1 0 0 per cen t)

In a further move to conserve strategic materials for
war needs, the War Production Board on May 5 issued
an order limiting the use of iron and steel in the pro­
duction of over 400 articles of ordinary civilian use for
a period of three months from that date and prohibit­
ing use for those purposes thereafter. Adopting for
the first time the principle of “ concentration of produc­
tion,” the W .P.B. issued an order (applying to the stove
industry) designed to release the facilities of the larger
firms of an industry for war production, while per­
mitting the smaller concerns to continue to meet essen­
tial civilian needs.
Transportation and storage problems engaged increas­
ing attention during May. In order to assure more ade­
quate cargo space for iron ore, the Office of Defense
Transportation banned all grain shipments on the Great
Lakes after May 14, except by permit, and placed sharp
restrictions on the use of vessels for certain coal move­
ments beginning June 1. To prevent port congestion and
delays, such as those which handicapped overseas ship­
ments during the first World War, the O.D.T. issued
instructions to carriers designed to prohibit the ship­
ment of export goods into port areas until shipping space
is available. The Association of American Railroads
announced that beginning May 20 the shipment of all
grains intended for storage would be restricted owing
to congestion of storage facilities.
P roduction and T rade in A pril
In April, this bank’s index of production and trade,
seasonally adjusted, was unchanged from the March
level of 110 per cent of estimated long term trend. This
figure compares with 106 in April, 1941. Productive
activity was at a new record level in April, but retail
trade again failed to come up to seasonal expectations.
In response to war demands, the group index of
producers’ durable goods production rose further in
April. Largely responsible for the continued rise in
this index are the machinery and transportation equip­
ment industries in which the production of war goods
is highly concentrated. The accompanying chart por­
trays the rapid strides which these industrial groups

47

FEDERAL RESERVE BANK OF NEW YORK

have made since the beginning of the National defense
program in the summer of 1940. In April the produc­
tion of consumers ’ durable goods, which had dropped
sharply between July and March, showed only a minor
additional decline. The output of nondurable goods in
the aggregate was about unchanged between March and
April, seasonal factors considered. The daily rate of
cotton consumption rose to a new peak, following a
temporary decline in March, and bituminous coal mining
was at an unusually high level. The output of crude
petroleum was curtailed further, but the reduction was
less marked than in March.
In respect to retail trade, the volume of department
store sales was lower than in March, contrary to seasonal
tendencies, and mail order house sales failed to increase
as much as usual at this time of the year. Sales by
chain store systems, on the other hand, showed a some­
what greater than seasonal increase. The movement of
bulk freight over the railroads (represented in the index
of primary distribution) registered a marked contraseasonal increase in April, but loadings of merchandise
and miscellaneous freight declined slightly.

C o m m o d ity Prices
Price movements throughout May were relatively
slight, following the announcement at the end of April
of the General Maximum Price Regulation. The order,
which placed general ceilings at the highest levels reached
in March, became effective on May 11 for most whole­
sale prices previously uncontrolled and on May 18 for
retail prices of the items covered under the regulation.
Ceilings on certain service charges will become effective
July 1. The Office of Price Administration issued sup­
plemental formulae during May for determining retail
price maxima on certain seasonal goods.
Wholesale prices of the major crops, and of about 40
per cent (by value) of the food products included in the
Bureau of Labor Statistics comprehensive wholesale
price index, have not been subjected to ceiling regula­
tions, but these were apparently influenced indirectly by
the general order, showing little net change during May.
The Senate’s passage of a bill permitting limited sales
of Government-owned holdings of grain at less than
parity levels was no doubt an additional factor restrain­
ing agricultural price advances during May. Previously,
advances in farm and food prices had been prominent in
the general price rise. From August, 1939 to April,
1942 wholesale prices of farm products increased over
70 per cent and of foods (including many processed
items) nearly 50 per cent, according to the Bureau of
Labor Statistics indexes; the general index of whole­
sale commodity prices in April of this year was 32 per
cent higher than in August, 1939.
According to the Bureau of Labor Statistics index,
the cost of living for wage earners and lower salaried
workers in the United States rose slightly further during
April to the highest level since late in 1930, as the ac­
companying chart shows. A t its April level the index
was 17 per cent above the prewar June, 1939 level; the
increase has amounted to 4y 2 per cent since November
15, 1941, immediately prior to our entry into the war.




PER CENT

/

f

■

J-LL
<930

1 1 1
11

*31

I1

’32

11

’33

III

III

II 1

’3 4

’35

’36

II 1
’37

1 11
11

’38

’39

1

II 1 1..I..I.
’4 0

’41

-LU*4 2

Index o f the C ost o f L iv in g in the U n ited S tates (B u reau o f Labor
S ta tistic s d a ta ; m on th ly figures prior to Septem ber,
1 9 4 0 , obtained by interpolation)

The sharpest gains in living costs have occurred in retail
prices of food, clothing, and housefurnishings, expendi­
tures for which make up approximately one half of the
family budget in lower income brackets. Rents and fuel
items have shown relatively slight increases during the
war period. Retail prices of about 60 per cent of the
foods and of 75 per cent of other goods and services are
reported to be covered under the new ceiling regulations.
In addition to its direct controls of prices, the O.P.A.
has extended its rationing controls as a further measure
to assure consumers of a fair distribution of the items
that have become scarce, either because of curtailed pro­
duction or because of insufficient transportation facili­
ties. During May country-wide rationing of sugar was
instituted and gasoline was rationed for noncommercial
consumers in 17 Eastern States and the District of
Columbia. Sales of automobiles, tires, bicycles, and
typewriters had been made subject to restrictions before
May 1.
E m p lo y m e n t and P ayrolls
Between March and April there was little net change
in the total number of New York State factory employees,
although payrolls increased somewhat. A continued
expansion in employment at plants producing war goods
was canceled out by reductions in working forces in con­
sumers ’ goods industries. Shipyards and manufacturers
of aircraft, railroad equipment, and other war material
continued to report substantial employment gains, but
firms engaged in the production of clothing and mil­
linery, carpets, confectionery, and nonessential metal
goods curtailed their working forces. Total manufac­
turing employment in April was 1 4 ^ per cent greater
than in the corresponding month of last year and pay­
rolls were 42 per cent larger.
In the United States as a whole, there was a slight gain
in the number employed in manufacturing establish­
ments during April, and payrolls rose 2 per cent further.
Compared with the April, 1941 level, employment was
11 per cent greater and payrolls were 38 per cent larger.

48

MONTHLY REVIEW, JUNE 1, 1942

B u ild in g

D e p a r tm e n t S to re T r a d e

During the past month there has been discussion of
the need for reviewing the program of plant expan­
sion in light of the growing shortage of raw mate­
rials resulting from the rapid increase in the rate of
war production. A point may soon be reached where
it may become necessary to choose between military
equipment for immediate use and new facilities for the
production of a much greater output some time in the
future. Something of the magnitude of the plant expan­
sion program which has already been planned may be
indicated by the increase in United States Government
commitments for industrial facilities from around
$2,000,000,000 at the end of March, 1941 to nearly
$6,000,000,000 by the end of last December.
Our
entrance into the war in December tended to accelerate
the process of converting existing plants to war produc­
tion, and meanwhile the program for the construction
of new facilities continued to be pushed ahead. By
March 30 commitments had reached $10,700,000,000, and
by the end of April the total volume of funds authorized
for such plants amounted to $16,300,000,000. The pro­
gram for Government-financed plant expansion visual­
ized at that time was about equal to all expenditures,
both public and private, for manufacturing plant and
equipment from 1929 through 1939. During the 1916-18
period public and private expenditures for such pur­
poses have been estimated at a little over $5,000,000,000.

Average daily sales of the reporting department stores
in the Second District apparently decreased during
May somewhat more than usual, although, judging by
figures for the three weeks ended May 23, sales ran
slightly ahead of the corresponding period of 1941.

On the basis of the reports of the F. W . Dodge Cor­
poration, which cover construction in 37 Eastern States,
the volume of contracts awarded for manufacturing
building during the first four months of this year was
almost 50 per cent above the corresponding period of
1941. All other types of construction contracts com­
bined showed a rise of about 20 per cent. In the case
of residential building, the volume of contracts awarded
for private dwellings during the first four months of
1942 was about 17 per cent below the corresponding
period of 1941, while contracts for public residential
projects, including barracks as well as homes for workers
in war industries, were three times as great as in the
year earlier period.
In New York State and Northern New Jersey the
volume of contracts awarded during the first four
months of 1942 was about one-quarter above the total
for the corresponding months in 1941. The most import­
ant factor contributing to this increase was awards for
manufacturing building, which more than doubled be­
tween the two periods. Of all such contracts awarded
in the 37 States from January through April of this
year, about one eighth was for industrial facilities in
this region. Other types of construction awards in New
York and Northern New Jersey rose only 10 per cent in
the first four months of 1942 over the year earlier figure.
In this District the year-to-year decline in the volume of
awards for private projects has been especially marked,
and in the case of private residential building the de­
crease amounted to almost 50 per cent. However, the
increase in the volume of public awards over this period
has been relatively greater than in the 37 States as a
whole.




In April sales of the reporting department stores in
this District were about 5 per cent higher than' in the
corresponding month last year, and the average daily
rate of sales fell off from the level of March, contrary
to the usual seasonal tendency. The largest gains over
April, 1941 were reported in the sales of radios, house­
hold appliances, and piece goods.
During April retail stocks of merchandise on hand
in department stores in this District expanded further.
As the stores continued to accumulate fall merchandise,
stocks on hand at the end of April were about 70 per
cent higher than a year earlier. Although this rise
doubtless is predominantly a reflection of larger phy­
sical inventories, some part of it is accounted for by
price increases over the past year.
Returns from a limited number of department stores
in this District indicate that at the end of April out­
standing orders for merchandise purchased by the stores
but not yet delivered were declining but were still about
twice as large as those at the end of April, 1941.

Percentage changes from a year earlier
N et 1
Sales
Department stores

New York C ity ..............................................
Northern New Jersey...................................
Newark..........................................................
Westchester and Fairfield Counties. . . .
Lower Hudson River V alley.....................
Poughkeepsie...............................................
Upper Hudson River V alley.....................
Central New York S tate............................
Mohawk River V alley............................
Northern New York State.........................
Southern New York State.........................
Binghamton.................................................
Western New York S tate...........................
Niagara Falls..............................................

April,
1942

Jan. through
April, 1942

+ 4
+ 4
+ 4
+15
+15
+ 1
+ 8
— 5
— 9
+ 5
+14
+ 1
— 15
+ 2
— 2
+ 9
+12
+15
+33
+ 7

+18
+20
+20
+27
+29
+16
+20
+17
+12
+26
+41
+21
+ 6
+25
+23
+30
+26
+30
+45
+20

Stock on hand
end of month
April,
1942
+77
+68
+67
+55
+59
+37
+44
+68
+72
+67
+52
+55
+55
+37
+61

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

+

5

+20

+70

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

+

7

+21

+56

Indexes of Department Store Sales and Stocks, Second Federal Reserve District
(1923-25 average = 100)
1942
1941
Apr.
Feb.

M ar.

Apr.

Sales (average daily), unadjusted...................
Sales (average daily), seasonally ad ju sted..

lOOr
102r

94
116

106r
120r

106
110

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

89
87

119
127

137r
135r

152
149

r Revised

FE D E R A L RESERVE B A N K OF N E W Y O R K

M O NTHLY REVIEW, JUNE 1, 1942

General Business and Financial Conditions in the United States
(Summarized by the Board of Governors of the Federal Eeserve System)

Index o f P h ysical V o lu m e o f Industrial Produc­
tion, A d ju ste d for Seasonal V ariation
( 1 9 3 5 - 3 9 a v e r a g e s 1 0 0 per cen t)

Index o f T o ta l L o adings o f Revenue F reig h t,
A d ju ste d for Seasonal V ariation ( 1 9 3 5 - 3 9 ave r­
age — 1 0 0 per c e n t; m iscellaneous, coal, and all
other car loadings expressed in term s o f
points in total index)

M em ber B ank R eserves and R elated Item s
________

at

tWI

casu
ryb
o
n
c

PI
A
A

Wv
^AKJ

V

TR
E
A
SU
R
YN
O
TE
S
4- *
w/

VU
R
E
A
SU
R
YB
IU
t—A. .A—

M oney Rates in New Y ork City




I N D U S T R IA L activity increased in A p ril and the first half of May reflecting con­
tinued advances in armament production. Following an increase in buying during
the first quarter, retail trade declined somewhat. Wholesale commodity prices advanced
further.
P roduction
Expansion of industrial production in A p ril was reflected in an advance in the
B oard’s seasonally adjusted index from 172 to 174 per cent of the 1935-39 average.
This increase followed upon a period of relative stability during the first quarter of
the year, when growing war production was offset by decreased civilian output.
Since the beginning of the year total volume of industrial output has shown little
change but there have been marked differences among individual industries. In general
output of machinery, chemicals, and armament of all kinds has continued to expand
at a rapid rate. There have also been substantial increases in output of electric
steel, nonferrous metals, glass containers, wood pulp, and coal. On the other hand,
output of many products fo r civilian use such as automobiles, tires and tubes, wool
textiles, electrical appliances, alcoholic beverages, petroleum, and petroleum products
has been sharply reduced either by direct order or by shortages of material or trans­
portation facilities. In the month of A p ril crude petroleum and petroleum products
were the principal commodities showing a decline in output. Output of furniture,
cotton and rayon textiles, manufactured foods, paper products, and tobacco products
has been maintained in large volume.
Value of construction contracts awarded in A p ril, as reported by the F. W. Dodge
Corporation, was almost one-fifth below the high March total, reflecting a decline in
publicly financed construction. Residential contracts decreased by one fourth and for
the month were at about the same level as last year. Awards for nonresidential building
increased slightly, mainly because of a 40 per cent increase in awards fo r factory
construction, practically all publicly financed.
In the first four months of 1942, total awards were about one-fourth greater than
in the corresponding period last year; public awards more than doubled, while those
fo r private projects were down by about two fifths. Public awards in this period
made up over 70 per cent of the total, compared with about 40 per cent last year.
D istribution
Retail sales declined somewhat in A p ril, following a considerable amount of
anticipatory buying during the first quarter of this year. A t department stores, dollar
sales in A p ril were about 10 per cent below the first quarter average, making allow­
ance fo r usual seasonal variations, but were 5 per cent above the level prevailing
during the latter part of 1941. During the first half of May sales showed a further
decrease and were around 6 per cent larger than a year ago in contrast to price
increases amounting on the average to about 20 per cent over the year period.
Total freight car loadings increased sharply in A p ril owing chiefly to larger
shipments of coal and forest products, and to a sharp rise in iron ore loadings as the
Great Lakes shipping season got under way. Shipments of merchandise in less than
carload lots, which had begun to decline in March, were reduced sharply further in
A p ril, reflecting Government action to increase the average load per car in order to
effect fuller utilization of railroad equipment.
Commodity P rices
Beginning on May 11, wholesale prices of most commodities were limited to the
highest levels reached during March, according to the general maximum price regula­
tion issued A p ril 28. Effective May 18, retail prices of most commodities were like­
wise limited. Retail prices of related services w ill be limited beginning July 1.
About 30 new maximum price schedules fo r industrial products were issued from
the middle of A p ril to the middle of May. Most of these covered wholesale prices of
items previously subject to inform al or temporary controls. Upward adjustments in
maximum prices were allowed fo r coal, ferromanganese, tires, petroleum products, and
a few other items.
Wholesale prices of most farm products and basic foods, which are exempt from
direct control, showed little change in this period, following sharp increases earlier
in the year.
B a n k Credit
During the five weeks ended May 20 Federal Reserve Bank holdings of Govern­
ment securities increased by about 200 m illion dollars, while currency in circulation
rose by 260 million. Member bank deposits increased during the period and required
reserves showed a corresponding growth. The net result was a decline of 300 m illion
in excess reserves. Holdings of United States securities at banks in leading cities
increased further, while commercial loans declined. Liquidation of loans was con­
centrated at banks in New York City and in the Kansas City district.
U nited States Government Security P rices
Prices of U. S. Government bonds declined in the last half of A pril, but steadied
in the first half of May. Rates on current Treasury b ill issues rose from about 0.20
per cent in March to 0.36 per cent in May. The Federal Open Market Committee
announced on A p ril 30 that Federal Reserve Banks stood ready to purchase all
Treasury bills offered at 0.375 per cent.