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O f Credit and Business Conditions

o lum e








No. 6

The announcement on May 13 that the Treasury had decided
to refinance its certificates and bonds maturing in June, and
also the July certificates, with lVs per cent one-year certificate
issues, occasioned some surprise in the market. Previous dis­
cussion had inclined investors to the belief that the Treasury
would offer a 1lA per cent one-year certificate issue in exchange
for the 1.8 billion dollars of Vs per cent certificates maturing
June 1 and the 3.1 billion dollar issue of 1% per cent bonds
falling due on June 15, or alternatively that it might offer a
lVs per cent security of shorter maturity, preparatory to a
IVa per cent, one-year issue on July 1. The Treasury’s action
was followed by a sharp rise in prices of Treasury bonds in
a thin market.
Even before the announcement, however, there had been a
strengthening of the demand for longer-term, bank-eligible
bonds accompanied by rising prices, 'possibly reflecting in part
some doubt concerning the prospect for a rise in short-term
interest rates, and in part the belief of investors that the prices
of longer-term bonds would not recede, even though the cer­
tificate rate were advanced. On the day o f the announcement,
there was a sharp rise in prices of bank-eligible bonds, particu­
larly the longer-term issues. The price advances among re­
stricted issues and long-term, partially tax-exempt bonds were
somewhat smaller. Volume of trading in all issues was not
large. The immediate advance in prices was temporarily inter­
rupted by reports that the Federal Reserve System was selling
bonds, but was resumed at a somewhat slackened pace in the
next four trading days ending with Wednesday, May 19. Prices
then leveled off, except for the longer-term, partially taxexempt bonds which rose further on concentrated buying.
In all groups, the long-term issues showed the largest price
gains. As illustrated in the accompanying chart, covering
selected Treasury bonds which may be considered representa­
tive of the general trend of prices for fully taxable issues, the
sharp run-up in quotations brought the longest-term, bankeligible and ineligible bonds close to levels prevailing before
the Federal Reserve System lowered its support prices on

Prices of Selected Treasury Bonds*

* Averages of closing bid and asked prices, Wednesday dates; latest figures
are for May 26, 1948.

December 24 of last year. All bonds, however, still remained
substantially below their 1947 peaks.
Trading in Treasury bonds, especially in the early stages of
the price rise, was reported to have been largely professional.
Turnover was light because o f the small supply of bonds avail­
able for sale and because the sharp rise in quotations tended
to create investor resistance. Holders of bonds were not in­
clined to sell, and the large investors were not able to acquire
substantial amounts of bonds without running prices up to
levels which they were unwilling to pay. Nevertheless, a mod­
erate amount o f trading developed, a considerable amount of
which represented switching by investors from one type of
Treasury security to another.
The commercial banks, which had sold large amounts of
short-term bonds and the longer-term certificates in order to
buy the securities to be exchanged for new issues of certificates
in June and July, lost some income as a result of the failure of
a higher certificate rate to materialize. Some institutions in


Changes in Treasury Bond Prices for Selected Periods in 1948*
(In 32nd*s of a point)
Range from
Type of issue
May 5 to
May 12

May 12 to
May 13

May 13 to
May 19

May 19 to
May 26

Callable 1959 and later..........

Oto + 5

+ 4 to + 8

+ 8 to +14


Bank eligible
Due or callable prior to 1952.
Callable 1952-55.. i...............
Callable 1956 and later..........

— 1 to + 2
— 1 to + 2
+ 6 to +10

+ 1 to + 6
+ 4 to + 6
+10 to +13

0 to + 6
+ 5 to + 7
+12 to +17

— 2 to
0 to + 1
— lto+2

Partially tax-exempt
Due or callable prior to 1952.. — 1 to
Callable 1952-55.................... + 2 to + 6
Callable 1956 and later.........
+ 6

0 to + 3
+ 2 to + 6
+ 6 to +10

0 to + 8
+ 10 to +12
+12 to +26

—i n t o
Oto + 6
+ 6 to +10

1 to + 5

* Averages of closing bid and asked prices in 32nd’s of 1 point; data are the ranges of change
forua._varied.numberof bonds„in,each*group.

this position subsequently sought to make good this loss by
purchasing bonds, particularly the intermediate and long ma­
turities, with funds obtained by the sale of short-term secu­
rities. Such transactions were restricted by the limited supply
of longer-term bonds offered for sale, although a moderate
supply of bank-eligible issues became available from nonbank
investors, chiefly from savings banks switching into ineligible
Federal Reserve System purchases of longer-term certificates
and notes and short-term bonds, and sales of short-term cer­
tificates and bills continued in substantial volume up to the
time of the Treasury’s announcement. But subsequently all
bond purchases ceased as prices rose sharply, and the System
sold some of the longer-term bonds from its portfolio. Federal
Reserve System dealings in short-term Treasury securities dur­
ing the latter part of the month reflected chiefly operations to
assist member banks in adjusting their reserve positions.
M e m b e r B a n k R eserve P o s it io n s

Money market conditions were easy at the beginning of the
month as a result of net Treasury disbursements, a large in­
crease in Federal Reserve “float”, and net payments out of
foreign and other deposit accounts in the Reserve Banks dur­
ing the week ended May 5. A month-end increase in currency
in circulation and a small rise in required reserves absorbed
only a minor part of the funds gained by the banks. The com­
mercial banks, therefore, were able to retire a substantial vol­
ume of Federal Reserve credit through net purchases of short­
term Government securities and repayment of borrowings.
Reserve positions of the banks were under pressure during
the remainder of the month. Drains on bank reserves resulted
mainly from Treasury withdrawals from War Loan accounts
with depositary banks, which amounted to 978 million dollars
in the three weeks ended May 26, and together with direct tax
receipts exceeded current expenditures of the Government by
675 million dollars. Government deposits with the Reserve
Banks rose by a like amount to almost 1.8 billion dollars on May

26. Federal Reserve "float” declined irregularly during this
period, absorbing another 90 million of reserve funds. On the
other hand, disbursements out of foreign and other deposit ac­
counts in the Reserve Banks, a resumption of the decline in
currency in circulation, and a small decrease in required re­
serves provided the banks with some reserve funds, but the
gains from these sources were far below the banks’ losses. As a
result the banks had to bolster their reserves through increased
use of Federal Reserve credit.
In the week ended May 12 the banks sold Treasury securities
indirectly to the Reserve System and increased their borrowing
from Federal Reserve Banks. In the following week, however,
they not only failed to take action to offset their losses of re­
serves but also acquired substantial amounts of securities
from the; Reserve Banks and paid off a small part of their bor­
rowings. As a result, there was a temporary, sharp decline of
about .600 million dollars in excess reserves o f member banks
to 330 million dollars, the smallest amount since May 17,1933.
About , half o f this: reduction reflected the operations of the
central reserve New York City banks and to a lesser extent
those in Chicago, both of which had sizable deficiencies in their
reserves on May 19. These institutions had acquired substantial
excess reserves early in the statement week and, toward the end
of the period, they drew upon their reserves to repay indebted­
ness and to buy large amounts of Treasury bills and other short­
term Government securities, in the process of bringing their
average holdings of reserves into line with their average re­
quirements over a week’s time. In the week ended May 26,
this process was reversed and largely as a result member bank
excess reserves in the aggregate increased to 700 million dollars.
The banks sold large amounts of short-term securities, chiefly
Treasury bills, and Reserve Bank holdings increased by nearly
500 million dollars. In addition, member bank borrowings in­
creased by nearly 100 million dollars.
Near the end of the month it appeared that member bank
reserve positions might be eased during the week ending
June 2. Treasury withdrawals from War Loan deposit accounts
were scheduled in the amount of approximately 390 million
dollars, but it seemed likely that Government disbursements,,
augmented by cash redemption of substantial amounts of
Savings notes and maturing certificates, would be even larger.
And other factors affecting bank reserves, such as monthend currency demands, were not expected to constitute more
than a partial offset to net Government expenditures.
On June 2 the Board of Governors of the Federal
Reserve System announced an increase from 22 to 24 per
cent in reserve requirements on demand deposits in cen­
tral reserve city banks in New York City and Chicago.
The higher rate becomes effective June 11.

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

Bank deposits rose rmarkedly in April after three months
of steady decline brought about chiefly by heavy net tax receipts
by the Treasury during the first quarter of the year. Adjusted
demand deposits of all member banks fell 4.8 billion dollars
during the quarter to 68.7 billion on March 31, and then rose
1.3 billion through April 28. Part of the decline in the first
quarter o f the year was temporary and was occasioned by pur­
chases, toward the end of March, of short-term Government
securities by customers of the Chicago banks, in order to
avoid the Cook County tax on deposits and other personal
property held on April 1. A large part of the gain in member
bank deposits in April, therefore, was the result of the re­
verse process, the redemption or sale of short-ternr Treasury
securities after April 1, and the absorption of corresponding
amounts of Treasury securities (chiefly bills): by the banks.
Judging from the figures for the weekly reporting member
banks, however, the renewed growth in adjusted demand
deposits was halted in May.
Total loans and investments of all member banks also turned
upward in April, following the sharp contraction of the first
quarter, but the increase appears to have been limited almost
exclusively to short-term Government security holdings. Small
reductions were reported in holdings o f other securities and in
loans. Much the same tendencies prevailed at weekly reporting
member banks during May, although there was a sharp (but
probably temporary) increase in loans to Government security
dealers at the end of the month.
Government security holdings of all member banks in­
creased 900 million dollars in April, following the reduction
o f 3.5 billion dollars in the first quarter o f the year owing to
the same factors operating to depress the volume of deposits.
A large part of the April gain in member bank holdings of G ov­
ernment securities came in Chicago, because of the local tax
day situation there, although all classes of member banks except
the "country” banks made net purchases o f Treasury securities
during the month. Judging from data for the weekly report­
ing member banks, total Government security holdings con­
tinued to rise irregularly during the first three week's of May.
Most of the increase in security holdings of the weekly report­
ing banks in the last two months has been in Treasury bills'
and other short-term securities, the largest part o f which was
acquired indirectly from the Reserve Banks.
Changes in the loan accounts of all; member banks during
April continued in the pattern set during most of the pre­
ceding three months; loans declined slightly in air classes of
member banks but the "country” banks. (Nonmember banks’
loans also rose in these four months.) If the experience of the
weekly reporting member banks is applicable to that of all
other members, the two per cent decline in total loans o f the
central reserve and reserve city banks in the first four months


of the year came primarily in business loans. Increases, prin­
cipally in mortgage and "other” loans, offset in part the de­
crease in commercial credits. Business loans moved irregularly
in May, suggesting that the decline might be coming to an end.
Loans on real estate and all other loans continued to expand
during May, reflecting continued demand for mortgage and
consumer credit.
Since the end of the war, domestic capital formation has
greatly contributed to the maintenance of high levels of pro­
duction and employment. The fears entertained earlier in some
quarters that wartime expansion of production facilities would
result in excess capacity in some lines and that surplus war
plants and tools would be a drag on the market for capital
goods have proved to be groundless. In every year since the
end of the war, American industry has increased its outlays for
new capital. During the current year, American business enter­
prises plan to spend for this purpose 18.7 billion dollars, ac­
cording to joint estimates of the Department of Commerce and
the Securities and Exchange Commission. The expected out­
lays are 15 per cent above the previous record of 16.2 billion
dollars of actual expenditures in 1947.
The estimates for the current year are based on stated in­
tentions of business firms; similar surveys for recent quarterly
periods indicate that business organizations tend to under­
estimate their capital expenditures, partly because o f the con­
tinued rise in construction and equipment costs. As postwar
business conditions have proved to be more stable than was
generally anticipated, some firms have probably stepped up
their expansion plans beyond original expectations.
The postwar capital reequipment and expansion programs
of manufacturing enterprises got off to an early start after the
war because many o f these industries had difficult reconversion
problems. In some manufacturing industries, postwar expan­
sion and improvement plans are nearing completion, while
others have either started later or still have considerable back­
logs. During the current year manufacturing enterprises antici­
pate expenditures aggregating 7.8 billion dollars, a gain of 300
million dollars or only 4 per cent over actual expenditures
in 1947. While the share o f manufacturing in total capital
expenditures has been declining since the end o f the war, it
is still expected to account in 1948 for 40 per cent of the
national total. Mining firms, which account for less than 5 per
cent o f total expenditures planned for 1948, expect no change
in the volume o f their expenditures from the preceding year’s
To a certain extent, capital expenditures of other industries,
including the electric and gas utilities, railroads, and other
groups, were delayed until the reconversion o f the manufac­
turing industries (particularly o f those producing durable



goods) was well advanced. Thus, the capital expenditures of
nonmanufacturing corporations were slower to expand after
the war and are scheduled to increase more rapidly during
1948. The utilities and the commercial and miscellaneous class
of industry ( which includes trade, service, finance, communica­
tions, and transportation other than railroads) each are
planning to spend 20 per cent more on facilities than in 1947,
and the railroads 75 per cent more. The very striking increase
scheduled for railroads reflects in part the lagging o f their
postwar improvement and reequipment program behind that
of most other industries. The very high levels of freight traf­
fic, after several years of reduced replacements and maintenance
during the war years, apparently have made necessary a sub­
stantial volume of expenditures, not only for new rolling
stock but also for replacement of worn-out rails and ties, for
new signal equipment, etc.
During the war, a disproportionately large volume of war
facilities was built in the Pacific States and in the West South
Central and the South Atlantic States. In some o f these areas,
wartime population growths proved to be more than
temporary gains. The resultant creation and expansion of
markets have naturally been followed during the postwar years
by large-scale construction in these areas of peacetime facilities
by manufacturers, distributors, and service industries. In the
three years, 1945-47, the total volume o f new industrial and
commercial buildings and public utility construction authorized
in these States accounted for about 40 per cent of the aggregate
for the entire country.
In a sense, these war and postwar developments were a
continuation of the prewar tendency o f manufacturing cor­
porations to decentralize their operations. Manufacturers have
established branch factories, sub-assembly and assembly plants
in the rapidly growing areas, frequently locating new facilities
outside the large urban centers. The quest for more economical
operations, more stable labor relations, and new markets,
as well as the lure of considerable tax savings, have been among
the main causes of this decentralization movement.
Research and development of new labor-saving equipment
and machinery have been going forward, and it is to be ex­
pected that producers will introduce a variety of new capital
equipment with radical design changes and of greatly enhanced
performance enabling substantial reductions in manufacturing
and distributing costs. Such new developments may help to
sustain the volume of capital expenditures after initial postwar
plans for expansion and modernization of plants have 'been
Although the dollar volume of business capital outlays in
1948 is expected to exceed 1947 expenditures, both in the
aggregate and in most industry groups, it is expected to run
below the rate for the fourth quarter of 1947. The rate of
planned outlays in the second half of 1948 is in turn expected

Business Expenditures on New Plant and Equipment*





]// '
// '

/ V

// /// ‘



1945 1940 1947 1945




|6r gNO 3*0 ^TH |ST aNa 3 RDA4.THM/.

* Exclusive of agriculture.
t Includes trade, service, finance, communication, and transportation other
than railroads.
Source: Securities and Exchange Commission and Department of Commerce.

to fall somewhat below that for the second quarter of this
year. The decline in the last half is likely to occur chiefly
in the manufacturing and mining industries, while the rate of
expenditures in all other industries will remain substantially
unchanged, and the railroads are expected to spend more than
in any previous postwar half-year period.
From the trend o f estimated outlays for the present year,
it would appear that in a number of industries postwar capital
expansion plans may be approaching completion and that the
demand for industrial capital goods may decline after 1948.
It should be recalled, however, that these figures merely
measure intentions and that the latter may be changed by
subsequent developments. On balance, the favorable develop­
ments— enactment o f enlarged foreign aid, increased defense
expenditures, reduced taxes, wage increases, and rising common
stock prices ( which if maintained will facilitate equity financ­
ing and perhaps stimulate some capital projects that might not
otherwise be undertaken)— seem to outweigh the unfavorable
factors. The improved outlook for sustained prosperous busi­
ness conditions may well result in more optimistic appraisal
o f future capital needs.
If the plans for 1948 are fulfilled, industry will have spent
47 billion dollars for new plant and equipment in the first
three calendar years after the war. Much of this impressive
total represents merely reconversion and replacement of wornout or obsolete facilities. Allowing for depreciation o f plant
and equipment (conservatively estimated for 1946-48 at
roughly 18 to 19 billion dollars), net additions tx> capital assets
appear to have been comparatively modest, particularly in view


of the growth of population and reduced investment during
the depression years. When further consideration is given to
the fact that depreciation is calculated on the basis of the con­
siderably lower original costs, while new plant and equipment
are valued at the much higher prices of the postwar period, it
would appear that the net physical additions to domestic
capital equipment in the postwar period have been of much
smaller proportions than might be suggested by the gross
dollar figures.
It is interesting to note, furthermore, that despite the billions
spent on manufacturing and other facilities in 1946, 1947, and
early 1948, the Federal Reserve index of industrial production
(seasonally adjusted) has risen only 6 per cent from the 1946
peak of 183 in November (1935-39= 100) to the 1948 peak
of 194 (in February). Thus, it appears that the very large
output of the country’s plants in postwar as compared with
prewar years has been as much or more the result of the fuller
utilization of productive capacity than additions to its indus­
trial facilities.
Judging from data available for the corporate sector of
business, the bulk of the financial requirements of business or­
ganizations have been met through retention of earnings, after
dividends and entrepreneurial withdrawals, and from deprecia­
tion allowances. According to estimates of the Department
of Commerce, retained profits and depreciation charges of all
nonfinancial corporations were about 2
/ $ larger than external
sources of financing through bank loans or securities in 1946
and twice as large in 1947.1 In 1946, however, corporations
financed a larger part of their needs through the sale of Gov­
ernment securities (which represent in part retained earnings
of the war years) than in 1947.
The outstanding feature of the financing of corporate capital
investment since the war, aside from the heavy reliance on cur­
rent earnings, has been the large dependence on debt financing.
When bond issues and loans from banks and insurance com­
panies ( including the indirect form of debt financing whereby
corporations sell capital assets to insurance companies or other
institutions and rent them on long-term leases) are taken into
account, debt financing has far exceeded equity financing ( in­
cluding common and preferred stock issues). For all non­
financial corporations net equity issues came to approximately
20 per cent of total external financing through security issues
and bank and other loans in 1946, and to more than 15 per cent
in 1947. The dearth of new common stock issues is ascribable
primarily to the depressed condition which has prevailed in
the stock market most of the time since the summer of 1946
and has severely restricted this source of funds. Since common
1 U. S. Department of Commerce, Survey of Current Business,
"Business Financing in the Postwar Period,” by Irwin Friend, March
1948, p. 10.


stock flotations tend to increase substantially during sustained
periods of rising stock prices, the recent upswing in the market,
if maintained, may eventually increase the contribution of this
source of corporate funds.

In view of the inclusion of China under the Foreign As­
sistance Act of 1948, an act otherwise restricted to Europe,
a review of the purposes of the 463 million dollar authorization
for China may be appropriate.
In the first place, it clearly is anticipated that the forth­
coming aid will contribute to the rehabilitation of the Chinese
economy only to a limited extent. President Truman, in rec­
ommending on February 18 that Congress authorize a Chinaaid program, indicated that he regarded the program as no
more than an effort to combat further economic deterioration.
He stated that since General Marshall’s return, "we have hoped
for conditions in China that would make possible the effective
and constructive use of American assistance in reconstruction
and rehabilitation. Conditions have not developed as we had
hoped, and we can only do what is feasible under circum­
stances as they exist. W e can assist in retarding the current
economic deterioration and thus give the Chinese Govern­
ment a further opportunity to initiate the measures necessary to
the establishment o f more stable economic conditions”. That
the aid was approved without any belief that it would con­
tribute materially to economic recovery in China was also
clearly reflected in the Senate Foreign Relations Committee’s
report on the program, which pointed out that "some of the
basic ingredients for recovery and cooperative effort, which in
a short time might respond to American aid, do not exist
in the project for China. But . . . the committee believes
it is sufficient to encourage the constructive, democratic ele­
ments in China to ‘carry on’ ”. In the introductory clause of
the act itself, the emphasis is upon the international implica­
tions of a Communist victory in China in these days of political
tension, and the consequent desire for the administrative in­
tegrity of China under a democratic government .
The actual purposes of the act are three. In the first place,
it seeks to lend moral support to the Chinese Government in
its civil war, on the assumption that a Communist victory
would draw China into the Russian orbit. In addition, the
act provides for tangible assistance to the Chinese Govern­
ment in the form of military supplies. Finally, it will furnish
some consumer goods and a small amount of industrial
machinery in an effort to retard the rapid economic deteriora­
tion, and so provide a breathing space in which the Chinese
Government may initiate steps toward stability.



The larger part of the assistance authorized for China under
the act consists of 338 million dollars to be handled by the
Economic Cooperation Administrator. About this sum the
Senate Committee stated "that in view of the financial situa­
tion of the National Government it is probable that the
great proportion of the assistance contemplated in this bill
will have to be advanced in the form of grants”, rather than
loans. The second part comprises 125 million dollars in out­
right grants for which the President, rather than the Economic
Coordination Administrator, will be responsible. Although the
use to be made of this 125 million is not explicitly indicated
in the act, the Senate Committee report states that "in view of
the Chinese requirements for military supplies, it may be
assumed that the Chinese Government, on its own option
and responsibility, would seek this grant for such supplies”.
It is probable that the 338 million dollars will be utilized
for goods in roughly the same proportions as were suggested by
the State Department when it drew up a list of imports for
China on the basis of a 570 million dollar aid program.1 The
60 million dollars earmarked by the State Department for key
reconstruction projects will, however, be retained in full. This
will leave 278 million dollars, of which about 60 per cent
may be used for wheat, rice, cotton, and fertilizer, about 6
per cent for tobacco and pharmaceuticals, 21 per cent for
petroleum, 5 per cent for metals and coal, and about 6 per cent
for replacement parts for capital equipment.
The urgent reconstruction projects to be financed with the
60 million dollars include the building of an electric generating
plant in Shanghai to replace part of the generating capacity
destroyed by the Japanese, the rehabilitation of the important

Hankow-Canton-Kowloon railroad, and the mechanization of
four coal mines to serve central and southern China— areas
that have heretofore obtained most of their coal from North
China and Manchuria. A good part o f the other import needs,
especially cereals, cotton, tobacco, and coal, arise primarily
from the interruption by the civil war of the normal trade of
North China and Manchuria (the usual sources o f a large part
of these commodities) with the coastal cities. It is in these
cities, rather than the interior o f China, that most of the food
and other commodities are to be distributed.
The new aid is only the latest instalment of the assistance
that has been flowing from the United States to China since
the beginning o f the Sino-Japanese War. This assistance will
reach, with the current program, a total of more than 3V5
billion dollars, as detailed in the table. Nearly 60 per cent of
this total, or over 2 billion dollars, has been provided sub­
sequent to V-J Day, since the ending of the war with Japan
brought no letup in the need for foreign aid.
Among the prospective effects on China of the current
program, probably the most important are the repercussions
on its foreign trade balance. During 1946 and 1947 China
incurred import surpluses o f 400 million and 300 million
dollars, respectively, the decline in 1947 reflecting principally
the imposition o f import controls. Available figures for the
first five months of 1948 indicate a continuation of the down­
ward trend. The twelve months’ authorization o f 278 million
dollars for goods primarily for current consumption thus
would probably cover the nonmilitary import deficit for one
year. This would leave for the government’s expenditures on
foreign military supplies its remaining foreign exchange hold­

1 The 570 million dollar aid plan originally outlined by the State ings, which totaled 274 million dollars at the end of 1947,2 plus
Department, but rejected by Congress, covered a fifteen-month period
any additional accruals from overseas remittances.3
instead of the twelve-month period actually adopted, and was intended
for nonmilitary purchases exclusively.

Internally, the Chinese economy will benefit from the forth­
United States Government Aid to China, July 1937-April 1948
Type of aid

Millions of dollars

1942 Congressional credit.....................................................................


Total pre-V-J D a y ........................................ ..................

1 ,4 6 9 .4

E xport-Im port Bank credits................................................................
Surplus property credits (estim ated).................................................
United States foreign relief program .................................................
United Nations International Children’s Emergency Fund*-----

8 2.8
4 70.5
4 5.7
2 .1
2 ,0 8 1 .8

T o t a l ................................... ................................................

3 ,5 5 1 .2

* United States contribution.
Source: Amended Report of the Senate Comm ittee on Foreign Relations on
S. 2393, March 25, 1948.

coming assistance to the extent that sale of the imported com­
modities drains off some o f the excess currency in circulation.
At the present official exchange rate, the 278 million dollars
of aid is equivalent to 130 trillion yuan; at the black market
2 This total consisted of 138 million dollars in the form of dollar
balances in the United States, 96 million in gold holdings in the United
States and China, and the equivalent of 40 million dollars in sterling
area currencies: Text of Proposed China Aid Bill and Background
Information on Economic Assistance Program for China, submitted
by the Department of State to the Committee on Foreign Affairs,
February 20, 1948.
3 Estimates of overseas remittances to China for the postwar period
vary considerably, and because of the low official rate for the United
States dollar, only a minor portion of the exchange from remittances
enters official channels. Dollar exchange accruing to the government
from remittances in 1946 and 1947 was probably in the neighborhood
of 20 million and 10 million dollars, respectively.



rate it is about 356 trillion yuan.4 Judicious and effective
disposal of the imports could therefore absorb much of the
note circulation were it not for the large government deficits.
Note circulation at the end of March was increasing at a rate
of more than 30 per cent per month largely because of the
government deficits. The continuation of such deficits would
result in the rapid dissipation of any Treasury revenues from
the commodity sales.
Any internal reforms that might be initiated by the gov­
ernment, concomitantly with the distribution of the com­
modities provided through American aid, could have only
transitory effects on the budgetary position under present
conditions. The root cause of the financial chaos is the civil
war which is absorbing about 80 per cent of the govern­
ments outlays, disrupting the normal flow of commerce within
China, and presenting insuperable obstacles to the export trade.

Changes in Main Store and Basement Store Sales, Second
District Department Stores (first quarter fiscal
year* 1948 compared with same quarter 1947)









4 The 60 million dollars that has been scheduled for spending on
reconstruction projects is not included in the above because most of
* February, March, and April.
the capital equipment for which it will be used will probably be
utilized directly by the government. The conversions are calculated
at the open market rate of 474,000 yuan to 1 U. S. dollar instituted
sets, are priced at lower levels. Consumers’ interest is in­
on May 17, 1948, and at the Shanghai black market rate of 1,300,000
creasingly concentrating on medium priced merchandise, with
yuan to 1 U. S. dollar on May 11.

Seasonally adjusted daily average dollar sales at Second
District department stores increased further during May and are
estimated to have broken the previous record established during
the buying wave of August 1946. Consumers* response to
extensive spring clearance sales, including many that were
storewide, was strong. It is probable that the physical flow of
goods also was at unusually high levels in April and May.
Special sale prices reflected extensive promotions of mer­
chandise furnished at concessions by suppliers as well as markdowns, particularly on fashion goods, taken on store inventories.
The department stores entered April with record stocks
(seasonally adjusted and valued at retail prices). Although
merchandise receipts during April were large, sales were so
substantial that by the end of that month stocks declined
contraseasonally by a small amount. At the end of the month
they were, however, still 8 per cent higher than a year previous.
The largest year-to-year increase occurred in housefurnishings.
Stocks of housefurnishings increased sharply, even though dur­
ing the first quarter of fiscal 1948, as the chart shows, this
group made the greatest year-to-year gain in main store sales.
The supply of housefurnishings is clearly improving, and prices
of many major appliances — automatic washing machines,
refrigerators, and radios for example — have recently been
reduced. New models of some appliances, such as television

correspondingly reduced emphasis on the top-quality, highpriced lines. In the apparel departments, stocks of men’s wear
increased more than inventories of women’s wear.

The gap between main store and basement store year-to-year
sales gains narrowed further during the first quarter of the
store year (February through A pril). In fact, this gap has
been narrowing for about a year. In April, basement sales
increased 6 per cent and main store sales 5 per cent. The
particularly narrow difference noted in the April year-to-year
changes probably reflects special price inducements in the
main store as well as the fact that basement store sales had
made a fairly large gain the year before.
First quarter gains in the women’s ready-to-wear apparel
and accessories departments, the largest group in sales volume,
were particularly large in both the main and basement stores.
Men’s wear sales, on the other hand, were 3 per cent below last
year’s during the quarter in the main store ( in none o f the three
months did sales increase over last year), and made less than
the average increase in the basement. Piece goods and houseRatio of Outstanding Orders to Sales*
Second District Department Stores#
M onth





F ebruary.............................................

0.9 8
0.7 8
0 .7 4

3 .5 5
3 .8 4
3 .0 3
2 .51

2 .06

2.0 0
0 .9 5

A pril.....................................................

* Outstanding orders at end of month divided by sales during month.
§ For a group of stores whose sales in 1947 accounted for about 55 per cent o f
estimated total District department store sales.


hold textile sales showed a small gain for the quarter, owing
chiefly to improvement in sales in April.
Outstanding orders for merchandise, at department stores
which in 1947 accounted for over half of total estimated de­
partment store sales in this District, declined further during
April, and were unchanged from a year ago. Nevertheless, the
dollar amount of new orders placed during April was almost
half again as large as the amount placed during April 1947,
when the stores were limiting their purchases rather severely.

lower than a year ago and substantially lower than in 1946.
It was still moderately above the ratio in 1940, a year of
relatively stable sales, and was about the same as for these
months in 1941, when sales were increasing.
Indexes o f B usin ess

Industrial production*, 1935-39 = 100........

Receipts of merchandise against outstanding orders have
been heavy in recent months, in comparison with the previous
year. The ratio of outstanding orders to sales for March and
April 1948, as shown in the preceding table, was somewhat


February March







(Board of Governors, Federal Reserve

Electric power output*, 1935-39 = 100.......
(Federal Reserve Bank of New York)

Ton-miles of railway freight*, 1935-39 = 100



























l 8op




169 p





(Federal Reserve Bank of New York)

Sales of all retail stores*, 1935-39 = 100.......
(Department o f Commerce)

D epartm ent and A pparel S tore Sales and S tock s, Second F ederal R eserve
D istrict, P ercen tag e C hange from the P recedin g Y ear

Factory employment
United States, 1939 = 100.........................
(Bureau o f Labor Statistics)

New York State, 1935-39 = 100..............
(New York State Division of Placement
and Unemployment Insurance)



Stocks on
Jan. through
April 1948 April 30, 1948

Factory payrolls
United States, 1939 = 100........................
(Bureau o f Labor Statistics)

New York State, 1935-39 = 100...............

Department stores, Second District----

+ 6

+ 6

+ 8

(Ned) York State Division o f Placement
and Unemployment Insurance)

New York City...................................
Northern New Jersey.........................
Westchester County...........................
Fairfield County.................................
Lower Hudson River Valley..............
Upper Hudson River Valley..............
Schenectady............. ......................
Central New York State...................
Mohawk River Valley....................
Northern New York State.................
Southern New York State.................


+ 5
+ 13
+ 9
+ 7
+ 13
+ 11
+ 18
+ 18
+ 15
+ 16

Personal income*, 1935-39 = 100.................

Western New York State...................
Niagara Falls...................................

+ 7
-j- 2
- 1
- 2
+ 11
+ 3
+ 7
+ 4
+ 1
+ 14
+ 15
+ 6
+ 7
+ 3

Apparel stores (chiefly New York City).


+ 10
+ 13
+ 6
+ 3
+ 11
+ 8
+ y
+ 8
+ 7
+ 19
+ 11
+ 14
+ 11
+ 12
+ 7
+ 11


+ 18
+ 12
+ 9
+ 7
+ 2
+ 11




Indexes o f D epartm ent S tore Sales and S tock s
Second Federal R eserv e D istrict
(1 9 3 5 -3 9 a vera g e = 100 per ce n t)



February March


Sales (average daily), unadjusted. . ............
Sales (average daily), seasonally adjusted*..





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





r Revised.
* Seasonal adjustment factors for 1945-48 revised; available upon request from
Research Department, Domestic Research Division.




(Department o f Commerce)

Composite index of wages and salaries*^,
1939 = 100..................................................
(Federal Reserve Bank o f New York)

Consumers’ prices, 1935-39 = 100................
(Bureau of Labor Statistics)

Velocity of demand deposits*, 1935-39 = 100
(Federal Reserve Bank o f New York)

New York City..........................................
Outside New York City...........................

* Adjusted for seasonal variation.
p Preliminary.
t A monthly release showing the 15 component indexes of hourly and weekly
earnings computed by this bank will be sent upon request. Tabulations of the
monthly indexes, 1938 to date, together with information on component series,
sources, and weights, and reprints of articles describing the indexes may also
be procured from the Research Department, Domestic Research Division.

The Board of Governors of the Federal Reserve System
announced on May 19 that it had appointed Robert T.
Stevens of Plainfield, New Jersey, as a Class C director of
the Federal Reserve Bank of New York for the unex­
pired portion of the term ending December 31, 1950,
and had designated him as Chairman and Federal Reserve
Agent for the remainder of 1948. Mr. Stevens is Chair­
man of the Board of J. P. Stevens & Co., Inc., and a
director of a number o f other corporations. He was a
Class B director from January 1, 1934 until January 8,
1942, when he resigned to enter active service with the
United States Army.


National Summary o f Business Conditions


(Summarized by the Board of Governors of the Federal Reserve System, May 26, 1948)
production decreased in April and increased in May owing chiefly to changes in
coal production and supplies. Department store sales were at exceptionally high levels fol­
lowing the Easter shopping period. Wholesale and retail price levels were higher, reflecting
chiefly increases in meat prices.



In d u s t r ia l Pr o d u c t io n

Federal Reserve indexes. Monthly figures;
latest shown are for April.

The Board’s seasonally adjusted index of industrial production declined 5 points in April
to 187 per cent of the 1935-39 average, reflecting chiefly lower output of iron and steel resulting
from the labor dispute at coal mines, which began in the middle of March. Following settlement
of the dispute around the middle of April, output of coal and steel increased and the total index
in May is expected to be around 190.
Steel production reached a low point of 71 per cent of capacity in the third week of April,
as compared with a March average of 95 per cent, then advanced rapidly to a rate of 97 per
cent in the fourth week of May. Automobile output was substantially curtailed in the first 3 weeks
of May, as pig iron and steel supplies continued short and a work stoppage began at the plants
of a major automobile company. Lumber output, adjusted for seasonal variation, declined 9 per
cent in April, owing in large part to work stoppages on the West Coast.
Output of nondurable goods showed a further slight decline in April. According to pre­
liminary indications textile production was below the March level. Coke production was sharply
curtailed because of reduced coal supplies. Activity in the rubber products industry and in some
chemical industries declined. On the other hand, production of gasoline increased, and news­
print consumption showed somewhat more than the usual seasonal rise.
Coal production for the month of April was in about the same small volume as in March.
Output of crude petroleum was maintained at a record level, and there was an exceptionally
large increase in output of iron ore.
C o n s t r u c t io n

Value of construction contracts awarded expanded sharply in April, according to the F. W .
Dodge Corporation, reflecting chiefly large increases in awards for private residential construction
and for religious and other institutional buildings. Awards for manufacturing plants and public
works and utilities showed little change from the levels prevailing in recent months.
F. W . Dodge Corporation data for 37 Eastern States.
Other includes nonresidential buildings and
public works and utilities. Monthly
figures; latest shown are for April.


is t r ib u t io n

Department store sales, which usually decline after the Easter shopping season, were main­
tained this year and the Board’s seasonally adjusted index rose from 284 in March to 299 in April,
with some further rise indicated for May.
Railroad shipments of coal and coke showed a sharp increase in the latter part of April
following the end of the coal strike. Shipments of perishable goods were curtailed temporarily
in the middle of May in anticipation of a rail strike which was subsequently called off. Carload­
ings of most classes of manufactured goods continued to show little change in April and the
first half of May.
C o m m o d i t y P r ic e s

Bureau of Labor Statistics’ estimates adjusted for
seasonal variation by Federal Reserve.
Proprietors and domestic servants
are excluded. Midmonth figures;
latest shown are for April.

___ ____________________________




___ r*~‘






MEMBE:r bank








Ba n k

C r e d it

Little change occurred in member bank reserve positions in the last half of April and the
first two weeks of May. Treasury operations were largely neutral in their effect on total bank
reserves. A further moderate gold inflow permitted a small reduction in Reserve Bank credit.
In the third .week of May member bank reserve balances were reduced considerably, in part as
a result of a transfer by the Treasury of funds from War Loan accounts to its balances at Reserve
Banks. In addition, member banks used reserve funds to purchase in the market Treasury bills
held by the Reserve Banks, with the result that the reserves of many large city banks fell tem­
porarily below requirements.
Real estate and consumer loans continued to expand at banks in leading cities during April
and the first half of May. Commercial and industrial loans increased somewhat during May
following a decline in earlier months of the year.





Wholesale prices of meats, livestock, and vegetable oils advanced from the middle of April
to the third week of May, while most other farm products and foods showed little change or
declined somewhat.
Price changes were also mixed for industrial materials. W ool tops, coal, coke, and building
materials were higher in this period, reflecting in part freight rate increases, while prices of
steel, cotton grey goods, and certain other materials were reduced somewhat. Price reductions
were announced for various electrical products.
Consumer prices in mid-April were 1.4 per cent higher than in March and exceeded
slightly the previous peak reached in January. The advance in April reflected higher retail
prices for foods, owing chiefly to reduced supplies of meats and fresh vegetables, and further
rises in prices for various consumer services.



V 'W * '






Wednesday figures; latest shown are for May 19.

Se c u r i t y M


Prices of common stocks showed a marked further rise in the middle of May to a level 14
per cent below the high of May 1946, according to Standard and Poor’s index of 90 stocks.
Volume of trading was unusually large.
Following the Treasury announcement on May 13 that June and July certificate maturities
would be refunded at lVs per cent, prices of Treasury bonds advanced sharply.