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MONTHLY REVIEW O f Credit and Business Conditions FEDERAL V o lu m e 31 RESERVE BANK OF NEW YORK JU N E1949 No. 6 MONEY MARKET IN MAY The principal influences in the money market and Govern Over the entire period from April 29, when the reduction ment bond market during the past month were related to of reserve requirements was announced, through May 16, when the repercussions of the announcement of the refunding terms two developments in the spheres of Federal Reserve credit policy and Treasury debt management. The first was the took effect, the advance in the prices of the various medium- lowering of the reserve requirements of member banks, term bank eligible bonds ranged from 3 /3 2 for the nearer announced by the Board of Governors of the Federal Reserve maturities to one-half point for the 2 lA ’s of September 1956- System on April 29. The second was the announcement on 59. Bank demand for the latter was particularly pronounced, May 13 of the Treasury’s decision to refund both an issue of and (as illustrated in the chart) the advance in the price of lVs per cent certificates maturing June 1 and an issue of 2 per cent bonds called for redemption on June 15 with a ble bonds (the IVzs of September 1967-72). Apparently the this issue was greater than that of the longest-term bank eligi new issue of VA per cent certificates, rather than with inter commercial banks, at least the larger banks which did the bulk mediate-term notes offering a somewhat higher interest rate, which had been widely expected in the market, at least in of the buying in this period, were unwilling to reach out for the longest issue. Presumably it was felt that the spread in exchange for the called bonds. yield between a 7-year and an 18-year maturity (roughly one half of 1 per cent) did not warrant so great a lengthening of maturities. D evelopm ents in t h e G o v e r n m e n t Bo n d M a rk et The effect of these actions on the Government bond market was to stimulate commercial bank demand for the medium and longer-term issues which the banks are eligible to hold and, indirectly, through nonbank investors’ reinvestment of the proceeds of their sales of eligible bonds to the banks, to stimulate the demand for ineligible issues. Commercial bank purchases were made principally by the larger central reserve and reserve city banks. Country banks remained relatively inactive, at least in the early part of the month. After an initial spurt during the trading on April 29, fol lowing the announcement of the lowering of member bank reserve requirements, and to a lesser extent on May 2, prices Restricted bonds in this period made somewhat more mod erate price advances, ranging from 1/32 to 9 /3 2 . Demand for the restricted bonds originated mainly from savings banks seeking to reinvest the proceeds of sales of bank-eligible bonds. The most popular issues were those which will become eligi ble for commercial bank investment earliest and which thus will first reflect the scarcity value characteristic of eligible bonds. Consequently, those restricted issues which are callable from 1959 through 1962, and particularly the 2 Vi’s of June 15, 1962-67, showed more sizable increases than the hitherto more popular Victory and other longer-term “tap” issues. As a result of the demand for Treasury bonds created by the developments in the first half of the month, the Federal Reserve of Treasury bonds moved irregularly upward until the middle of the month. They then received further stimulus from the Treasury’s announcement of the terms of its June refinancing. In terms of prices this second stimulus was short-lived, but in terms of continuing pressure of demand for medium and longer-term bank-eligible securities it is likely to be a continu ing force. After the Treasury announcement, prices of the 2 per cent bonds called for redemption on June 15 declined sharply, as a sequel to the sizable advance which they had made when a refunding issue more attractive to the market was expected. CONTENTS Money Market in May................................ .. . , . 61 Employment, Unemployment, and the Labor Force........................................ ......... 63 Present Status of the ITO Proposals........ ........ 66 Department Store Trade...................................... 68 62 MONTHLY REVIEW, JUNE 1949 Prices of Selected Treasury Bonds* from the banks. In both instances, considerable strain on the banks’ reserve positions resulted. The country member banks, on the other hand, tended to add to their excess reserves a substantial portion of the funds released by the reduction of their legal reserve requirements (effective May 1 ). This prevented, -temporarily at least, the easing of their reserve positions from being transmitted to the rest of the banking system and so contributing to the reduction of pressures that developed elsewhere. The net effect of the lowering of member bank legal reserve requirements was to bring about a sharp reduction of Federal Reserve credit. In the aggregate the member banks had about 1.9 billion dollars of free reserves to invest during the four weeks ended May 25. Of this amount, 1.3 billion became avail able through the reduction in required reserves, while the rest represented net gains of reserves, mostly from net Treasury dis bursements. With these funds, the member banks sharply increased their holdings of Government securities (principally bills and bonds), reduced their borrowings from the Federal Reserve Banks by 100 million dollars, net, and added about 300 System sold 465 million dollars of Government bonds in the million dollars to their excess reserves, which had been abnor three weeks ended May 18. More than half of this amount mally low toward the end of April. The Reserve System’s was sold in the first week of especially strong bank buying. holdings of Government securities declined about IV2 billion dollars in this period. Commercial bank purchases of Treasury bonds were reduced as prices rose in the middle of the month and the higher prices The aggregate figures, of course, conceal the alternation be for eligible bonds brought out fresh supplies of such issues tween pressure and ease which developed in the market from week to week, principally among the larger banks, and particu from nonbank investors. Consequently, the rise in prices of most medium-term eligible issues leveled off in the latter part of the month. Except in a few cases including the two longest larly among the New York City institutions. In the week ended May 4, the larger banks tended to anticipate the decline in issues, however, quotations on restricted bonds continued to their required reserves and made substantial additions to their rise modestly, despite further sales out of Federal Reserve portfolios. holdings of Treasury securities. Such purchases were made, through the market, partly from the Reserve System and partly from nonbank investors. The latter in turn bought substan M e m b e r B a n k R eserve P o s it io n s tial amounts of other types of Government issues, especially Money market conditions during the past month were dom inated by the decline in reserve requirements and by the opera tions of member banks incident to their investing the "free” reserves made available. The investment process was not restricted bonds, a large portion of which came out of Federal Reserve portfolios. The New York City banks were also called ment security dealers. entirely a smooth one; it led to considerable cross currents in were under considerable pressure, and it became necessary for the flow of funds through the money market, producing at one them to borrow substantial amounts, temporarily, from the time the rather anomalous situation of a falling rate on new Reserve Bank. Treasury bill issues and a rising rate for "Federal funds” in New funds ruled at 1 7/16 per cent during most of the week. upon to finance a considerable volume of purchases by Govern Their reserve positions consequently The rate on immediately available Federal York. At times there was considerable ease in the market and The reduction of their reserve requirements, together with at other times considerable strain, particularly in New York smaller gains of funds from other sources during the week City. For the most part, this pattern of turbulence was related ended May 11, enabled the central reserve and reserve city to the Government security operations of the larger central banks to reduce their borrowings from the Reserve System reserve and reserve city banks which, in pursuit of a policy of considerably and to acquire large amounts of Treasury secu fully investing all surplus funds, increased their holdings of rities. Excess reserves were practically unchanged in the week, Government obligations in anticipation of the lowering of despite the drop of about 900 million dollars in required reserves. their required reserves on May 5, and of Government security dealers who apparently overstocked in Treasury bills around The anticipation of a large release of bank reserves stimu the middle of the month in expectation of further demands lated bidding on May 2 for the new Treasury bills to be issued FEDERAL RESERVE BANK OF NEW YORK on May 5. As a result, the commercial banks, particularly the New York City banks, and the Government security dealers obtained a substantial part of the new issue. The average rate on new bills consequently fell to 1.147 per cent on May 5, from 1.156 per cent on April 28. 63 More than two thirds of the increase in borrowing originated in New York City, where the money market stringency was particularly pronounced. Excess reserves of all member banks increased 220 million dollars to 1,080 million on May 18 as the New York banks short-term securities, the Government security dealers were built up surplus reserves toward the end of the week for the purpose of averaging out their reserves against requirements able to dispose of most of their allotments of the new bills as over a week’s period. In the circumstances, however, the rise well as previous accumulations of short-term Treasury obliga in excess reserves reflected a tight money market situation, rather than the opposite, and the rate on Federal funds again rose to 1 7/16 per cent. In view of the favorable market for Treasury bills and other tions. Consequently, the dealers reduced their borrowings from the banks rather sharply in the week ended May 11— 285 million dollars in New York City, as indicated by the weekly reporting member bank figures. Through the Reserve System’s sales and redemptions of securities, a large part of the funds released by the reduction in reserve requirements of the central reserve and reserve city banks was channeled into the Federal Reserve Banks, thus limiting the impact of such funds on Treasury bond prices. In the week ended May 11 the System redeemed or made net sales of almost 710 million dollars of Government securities, con sisting of 427 million of bills, 175 million of certificates, 89 million of bonds, and a small amount of notes. The decline in the Treasury bill rate and the ease with which the previous issue of bills had been absorbed led the larger banks and the Government security dealers to outbid the rest of the market for the next bill issue, dated May 12. Since the larger banks had already fully invested the "free” funds gained through the reduction in their reserve requirements, In view of the heavy supply of outstanding issues, bids for the bill issue dated May 19 by the banks and dealers were lowered. As a result, there was a better balanced participation by the market as a whole, and the average rate rose from 1.148 per cent in the previous week to 1.157 per cent, approximately the level prevailing late in the previous month. In the week ended May 25, the initial high level of excess reserves, together with further gains of funds, mainly through Treasury operations, permitted the member banks to repay the greater part of their borrowings from the Reserve Banks and to add further to their holdings of Government obliga tions. A considerable part of the addition to Government security holdings was supplied by dealers, who were thus able to reduce their heavy accumulation of Treasury bills in the previous week and to cut down their bank loans. Toward the end of May, the money market was approxi mately in balance, transactions tending to contract reserves being offset by those tending to expand them. their subscriptions to the new bill issue presumably were made in anticipation of further gains of funds. But these gains failed to materialize, mainly because the current receipts of the Treasury exceeded its disbursements in the week ended May 18. The reserve positions of the larger institutions, espe cially in New York City, were therefore under considerable strain temporarily. The burden on reserve positions was made even heavier by the inability of the Government security dealers to dispose of a sizable proportion of their new bills. Dealers were com pelled to borrow from the commercial banks to pay for their allotments, and their loans from the New York City weekly EM PLOYM ENT, UNEM PLOYM ENT, AND T H E L A B O R FORCE Recent declines in production, prices, and employment have high-lighted the problem of adequately measuring the extent of changes in employment and unemployment. The wide spread reports of layoffs and increased claims for unemploy ment insurance would be difficult to evaluate without some comprehensive measure of over-all employment to indicate the extent to which these factors have been offset by rehirings or plant expansion in other areas. The two principal employ ment indicators in common use are those of the U. S. Bureau of reporting member banks rose 371 million dollars in the week the Census and the U. S. Bureau of Labor Statistics. The Census ended May 18. The result was a loss of a substantial amount Bureau series gives data on the labor force, employment, and of bank reserves, since a large portion of the funds loaned were unemployment, while the B.L.S. series reports the number of turned over to the Treasury in payment for the bills. nonagricultural employees. In order to adjust their reserve positions, therefore, mem The Census Bureau makes monthly estimates of changes in ber banks had to expand their use of Federal Reserve credit. the employment status of the population of working age, They sold substantial amounts of Treasury bills, most of which based on personal interviews with a scientifically selected were absorbed by the Federal Reserve System, and borrowed national sample of households during a week in the early part 570 million dollars from the Reserve Banks. Total member borrowings reached 773 million dollars on May 18, the high of each month. In April 1949, these estimates indicated total employment of 57.8 million persons, somewhat more than est figure for any weekly report date since November 1945. during the first quarter of 1949, but about half a million less MONTHLY REVIEW, JUNE 1949 64 than in April of last year. Total employment, as defined by the Census Bureau, includes all those who worked either full or part time for pay or profit, unpaid family workers on farms or in businesses who worked 15 hours or more during the week surveyed, and persons with a job but temporarily away from it. Unemployment in April was about 3 million persons, down somewhat from February’s postwar peak of 3.2 million. Unemployed persons include those without jobs who are ac tively seeking work, plus a few categories of individuals normally regarded as in the labor market but who, because of illness, indefinite layoff, or unavailability of suitable work in their community, are not looking for work. These two cate Changes in the Composition of the Labor Force* ( F i r s t f o u r m o n th s o f 1 9 4 9 c o m p a r e d w ith t h e f ir s t f o u r m o n th s o f 1 9 4 8 , in t h o u s a n d s o f p e r s o n s ) Employment status Average Jan.April 1949 Total noninstitutional population, 14 years of age and over.............................................. 109,244 Outside the labor fo rce ................................ 47,225 T otal labor force........................................... 62,019 Armed services.......................................... 1,490 Unem ployed............................................... 3,017 T otal em ployed......................................... 57,512 Nonagricultural industries................. 50,270 7,242 Agriculture............................................. Average change Jan.-April 1948 to Jan.-April 1949 Total Men W omen +1,162 + 199 + 963 + 255 + 683 + 25 186 + 211 +537 - 51 +589 + 256 +56 8 -2 3 5 -3 1 5 + 81 + 62 5 + 250 +374 1 +11 5 + 260 + 129 + 130 * Because of rounding, items may not add to the totals shown. Source: U. S. Bureau of the Census. gories, the employed and the unemployed, make up what is known as the civilian labor force. When the armed forces are also included, the total labor force is accounted for. The labor force measured by currently published figures is not a constant figure, nor does it expand solely with popula tion growth. Instead, the number of persons at work or seek 1949. (The average of the first four months was chosen in order to eliminate any distortion which weather, holidays, labor conflicts, and similar factors might induce in a com parison of data for a single month in the two years.) The population of working age has been increasing recently at an tion. Seasonal workers, particularly in agriculture, often do annual rate of nearly 1.2 million. Between 1948 and 1949 there was a net decrease of 250,000 in the number of veterans not seek work after their season of employment, and many in school or otherwise outside the labor force and a correspond ing jobs varies seasonally and with changes in the business situa students tend to look for work only during the summer and ing rise in the civilian labor force. These changes in the (in some cases) other vacation periods. During the war veteran population were more than offset, however, by in numerous women, youngsters, and older persons who would creases in the numbers of nonveterans remaining in school, not normally have been part of the labor force, took jobs in of older persons retiring, and of women dropping out of the order to help the war effort by offsetting the drain of men to the armed services. After the war, while jobs remained plenti ful and wages high, many of these persons remained at work. labor force to keep house. The net increase of 963,000 persons in the total labor force between the first four months of 1948 and the similar period of 1949 reflects these shifts plus the When gainful employment became less remunerative, how addition to the labor force that resulted from population ever, they tended to drop out of the labor force and keep house, resume schooling, or retire. In such times, though, there is also a tendency for additional secondary wage earners— wives and older children— to seek part-time or full-time employment as family heads lose their jobs or suffer substantial cuts in earnings. Altogether, it should be emphasized that the vol ume of unemployment is not solely dependent upon fluctua tions in employment; in fact, it has often happened that unem ployment and total employment both rose or both declined growth. This gain was only partly offset by the addition of during a given period. 255,000 to the armed forces and a net increase of 25,000 in total civilian employment; as a result, unemployment rose by 683,000, or more than two thirds of the net increase in the labor force. In similar fashion, unemployment could continue to rise substantially during the coming year even if total em ployment remained at present levels or increased somewhat. (These figures, of course, all represent net changes; the per sons who join the labor force are not necessarily the same ones who become unemployed. A substantial labor turnover may Part of the increase of 1.4 million persons in unemployment be concealed by a small net change; for example, the Census since last October (the month of lowest unemployment in Bureau estimates that while between February and March 1949 1948) and of the drop of 2.3 million in total employment has nonagricultural employment increased 80,000, net, 2,566,000 been seasonal, particularly where the farm labor force is con workers found new jobs while 2,486,000 workers were dis cerned. The accompanying chart illustrates the seasonal fluc missed or left their old jobs voluntarily.) tuations of both employment and unemployment in recent years. Although the total numbers of those employed or unem ployed are generally more widely publicized, the nature of To some extent, the rise in unemployment compared with employment, as indicated by the Census Bureau’s data, is like last year’s levels may be attributed not only to a decline in wise a factor of prime importance. Thus, during the past year the number of jobs but to the failure of employment oppor there seems to have been some shift from employment in non- tunities to continue to expand as rapidly as the labor force. agricultural industries to agricultural employment. Even more The accompanying table shows to what extent this was true noteworthy is the sharp growth in part-time work in nonagri between the first part of 1948 and the corresponding period of cultural industries. In the early part of 1949, the number of FEDERAL RESERVE BANK OF NEW YORK nonagricultural workers on a short work week (less than 35 hours per week) was nearly 1.2 million more than a year pre vious, and the number of full-time workers was correspond ingly reduced. In fact, the decrease in the number of women working 35 hours or more per week was more than offset by the increase in the number of women holding part-time jobs. 65 Practically all of this decline was accounted for by manufactur ing, which (on a seasonally adjusted basis) employed fewer workers in April than at any time since September 1946. Despite the general decline, employment in construction, trade, finance, and government still showed year-to-year increases. The tendency toward shortened work weeks is also apparent in For men, there was an over-all decline in nonagricultural jobs the B.L.S. data; in April the average number of hours worked (although the number of veterans at work increased) and an increase in part-time work. Cuts in the average work week, per week in factories was only 38.3, almost two hours per week less than a year earlier, and the shortest work week since July in effect, amount to concealed unemployment through spread 1940. ing a reduced amount of work among approximately the same The data on unemployment published by the Census Bureau are not directly comparable with figures on claims for unem number of workers. The data also indicate that there may very well have been a shift by persons who lost jobs in indus try to part-time trade or service jobs or to agriculture, with a ployment insurance published by the Federal Security Agency, since the unemployment insurance program does not cover all consequent drop in income and purchasing power. branches of economic activity or all types of workers, and It should be noted that, since the Census Bureau’s labor force figures are based on sample surveys, they necessarily contain errors of estimation which would have been avoided in a com plete census. These variations may amount to as much as 2 or there are differences in the two agencies’ definitions of what constitutes unemployment. Nevertheless, the unemployment insurance data serve as a useful check on the level and direc tion of changes in the unemployment estimates. 3 per cent in the larger aggregates and somewhat more for the The layoffs at factories and railroads and the net over-all component figures. The reliability of month-to-month changes, increases in unemployment have caused much discussion in recent months. In most areas, however, the growing number of job seekers has been so far much more in the nature of a danger signal than an acute social problem such as it was dur ing the thirties. The accompanying chart shows that, despite recent declines, civilian employment is still well above even or percentage distributions of the data is, however, much greater. The other major source of current information on employ ment trends is the U. S. Bureau of Labor Statistics. The esti mates of total nonagricultural employment released by the B.L.S. each month cover all wage and salary workers in pri vate and public establishments other than farms and are based primarily upon reports from more than 110,000 business estab lishments, employing over 11 million workers. Employment and Unemployment in the United States (Annually from 1929 through 1945, monthly from The esti mates cover civilian employees only; proprietors, self-em ployed persons, domestic servants, and unpaid family workers are excluded from the B.L.S. estimates, although they are covered by the Census Bureau data. If a person worked in more than one establishment during the reporting period, he would be counted by the B.L.S. more than once, but by the Census Bureau only once. The Census Bureau, however, counts as employed those persons who have a job but who are tem porarily absent from it because of illness, vacations, labor disputes, or short-term layoffs; B.L.S. figures ordinarily exclude such persons except where they are kept on the payrolls during vacations or illness. The B.L.S. estimating methods permit a much more detailed breakdown by industry and locality than the Census Bureau surveys and are particularly useful for fol lowing the employment, payroll, and wage trends in particu lar industries. In April 1949, the B.L.S. estimated nonagricultural employ ment at 43-9 million persons, about the same as in March and about 400,000 less than in April of last year. After allow ance for seasonal variation (as computed by the Board of Governors), this series declined in April for the sixth consec utive month and was 3 Vi per cent below its October peak. * E xcluding the armed services. S ource: 1919-39 estimated by U. S. Bureau of L abor Statistics; 1940 to date, U. S. Bureau of the Census. MONTHLY REVIEW, JUNE 1949 66 the wartime peaks, while unemployment is below the levels prevailing in the defense production boom of the early forties, administration of quota restrictions is prohibited unless re quired in order to support exchange controls permitted by the not to mention the depressed thirties. International Monetary Fund, or other regulatory measures authorized by the ITO. Export subsidies are to be banned after PRESEN T STATUS OF T H E ITO PROPOSALS two years, except that member governments retain broad In March 1948 at Havana, Cuba, fifty-four national delega tions to the United Nations Conference on Trade and Employ discretionary authority to subsidize exports of primary com modities. State trading enterprises are to be required to con ment accepted for submission to their respective governments duct their operations in accordance with "commercial con the so-called Havana Charter for an International Trade Organization. That Charter is the final revision of the draft gins— comparable in effect to export or import duties— proposals which were originally made by the United States between the foreign and domestic prices of commodities siderations”, and to negotiate reductions of any artificial mar Government in December 1945. It incorporates, of course, traded by them. Emergency provisions permit the withdrawal many changes which had to be made in the course of several of tariff reductions or other concessions that prove damaging. Members further agree to take appropriate action to elimi international conferences for the purpose of achieving agree ment among the negotiating governments.1 Actual establish ment of the ITO now waits upon ratification of the Charter nate business practices on the part of their nationals (e.g., cartel arrangements) that, after investigation by the ITO, by at least twenty of the signatories of the Havana Agree are proved to have a restrictive effect upon international trade. ment. In this country, early action is sought by the Adminis The Organization is empowered to convene intergovern tration, which submitted the Charter to Congress on April mental conferences for the regulation of certain primary commodity markets when natural economic forces fail, or 28, 1949 in the form of a joint resolution requiring the ma jority approval of both houses. Of the foreign signatories, only threaten to fail, to produce a satisfactory equilibrium. In all Australia has ratified the Charter to date; most of the others such agreements, the consuming countries are to have a voice are expected to defer action until the United States position equal to that of the producing countries. becomes known. The Charter is a complex document of sixty-six closely printed pages which sets forth the projected role of the ITO as an agency of international collaboration in the foreign trade The principal organs of the ITO are to be a Conference; an Executive Board; Commissions as may be required; and a Secretariat. Unit voting by countries is to prevail within all of field. The major provisions of the Charter may be briefly members will include eight members of "chief economic im summarized as follows: Full employment and rising "effective” demand are accepted as necessary conditions for the expansion of international trade. Each member country recognizes its responsibility for portance”, in the determination of which particular regard is to be paid to their shares in international trade. With respect fulfilment of such conditions by measures "appropriate to its political, economic, and social institutions”. The Charter fur ther recognizes that the development of economically retarded countries will effectively contribute to international prosperity and accepts the possibility that tariff and other protection of promising infant industries may usefully serve such economic these administrative organs. The Executive Board of eighteen to trade disputes, members failing to reach agreement by mutual consultation are to refer their differences to the Execu tive Board. Decisions or other actions of the Executive Board may be appealed to the Conference and thereafter, under cer tain circumstances, to the International Court of Justice. Although nothing in the Charter excludes any member from maintaining economic relations with nonmembers, the Charter prohibits agreements between members and nonmembers that development. Members of the Organization agree to assist in discriminate against other members of the Organization. the development of the economically retarded countries, which Members assume no obligation whatsoever to extend most- in turn agree to subject their protectionist measures to a con favored-nation treatment to nonmember countries. # siderable measure of ITO control. All ITO members undertake to negotiate most-favorednation tariff reductions, which are to operate automatically # to reduce existing margins of tariff preferences. Quantitative trade restrictions are barred, subject to numerous exceptions among which balance-of-payments difficulties on the part of individual member countries (as appraised by such individual members) provide the broadest loophole. Discriminatory # # A certain measure of practical application of the Charter has already been secured in the form of the General Agree ment on Tariffs and Trade, signed at Geneva in 1947, which incorporates the bulk of the commercial-policy provisions of the Charter. Tariff concessions subsequently granted by the twenty-three governments2 provisionally accepting the Gen 2 Australia, Belgium, Brazil, Burma, Canada, Ceylon, Chile, China, Cuba, Czechoslovakia, France, India, Lebanon, Luxembourg, the 1 The original draft proposals and the subsequent internationalNetherlands, New Zealand, Norway, Pakistan, Southern Rhodesia, Syria, the Union of South Africa, the United Kingdom, and the United negotiations were discussed in the January 1946, April 1947, and States. May 1948 issues of this Review. FEDERAL RESERVE BANK OF NEW YORK eral Agreement have reportedly covered approximately 50 per cent of world trade.3 The United States tariff concessions, granted under the Reciprocal Trade Agreements Act, are calcu lated to have reduced the average rate of duty on all dutiable imports into the United States from 32 per cent to 25.4 Repre 67 purposes of furthering economic development, full employ ment, and other governmental projects. Import quotas for the protection of infant industries may be imposed only with the approval of the ITO. Under special circumstances, however, such as the protection of infant indus sentatives of the General Agreement countries are now engaged tries established between January 1939 and the date of the at Annecy, France, in the further negotiation of multilateral Charter, the ITOs prior approval is rendered virtually auto concessions with eleven other countries seeking to participate matic. Furthermore, ITO approval may be sought after, rather in the Agreement. than before, the introduction of protective measures if the The General Agreement thus has already rendered con process of negotiation with the ITO threatens to create undue spicuous service in reducing the tariff barriers to world trade, speculation in the market concerned. Moreover, the prospec and may well continue to exert this beneficial influence even if the ITO Charter fails of general acceptance. Provisions of tive preponderance of undeveloped countries in the ITO the General Agreement which permit the signatories to with membership may prove conducive to a liberal interpretation of the Charter provisions. hold tariff concessions from nonparticipating countries after two years should exert considerable pressure upon nonmembers Although the Charter prohibition of quantitative restrictions is thus qualified by exemptions sufficient to permit their main to enter the pact. Failing widespread defection from the Gen tenance and even growth, authorized deviations from the rule eral Agreement upon its formal termination in January 1951, of nondiscrimination have been more closely limited. While the Agreement is to be extended indefinitely. Considerably more crucial to the expansion of world trade, however, is international action to curtail the use of quantita tive restrictions. In this endeavor, the ITO is intended to con stitute the logical complement of the International Monetary Fund, which is empowered to regulate the use of exchange controls. Since exchange controls and quantitative restrictions are largely alternative methods of regulating foreign trade, it is evident that international action to remove exchange con trols should be accompanied by similar action to remove trade restrictions; otherwise, relaxation of exchange controls may well be nullified by a corresponding intensification of trade restrictions. In striking contrast to the Fund Agreement, however, the Havana Charter fails to subject the use of quota restrictions in all cases to the prior approval of the ITO. Thus, ITO members retain extensive discretionary authority to maintain or reimpose quota restrictions in order: (a) to forestall the imminent threat of, or to stop, a serious decline in the level of monetary reserves; or (b ) in the case of a member with very low mone tary reserves, to achieve a reasonable rate of increase in its re serves. Opportunity for a highly elastic interpretation of such "imminent threats” is afforded by another Charter provision recognizing the need of members to safeguard their economies against deflationary pressure in the event of a serious decline of the effective demand of other countries. Moreover, the Charter recognizes that such threats to monetary reserves may legitimately arise not only from market forces, such as the curtailment of exports by depression abroad, but also from member countries’ deliberate expansion of imports for the 3 State Department Bulletin, Vol. X IX , No. 483, Oct. 3, 1948, p. 445. 4 Clair Wilcox, "A Charter for World Trade,” p. 65. a broad range of existing tariff preferences is temporarily recognized, reductions in general tariff rates are to operate automatically to reduce preference margins. Furthermore, no preference margin may be increased. On the other hand, the Charter’s acceptance, under specified circumstances, of quota restrictions may well prove tantamount to acceptance of their discriminatory administration. Foreign governments intent upon discriminating would not be seriously constrained by the provision that import and export quotas must be allocated solely on the basis of the geographical distribution of the same exports or imports in an earlier representative period (subject to any special factors affecting the market). It is evident that choice of the "representative period” and appraisal of "special factors” will afford ample opportunity for more or less dis guised discrimination. State trading monopolies, subject only to the vague rule of "commercial considerations”, will retain an even greater degree of freedom to pursue discriminatory policies. # # * As an instrument of international supervision of the use of trade restrictions, the ITO blueprinted by the Havana Charter obviously leaves much to be desired. The Charter has en countered widespread criticism on the grounds that it is so riddled with exceptions as to render it almost valueless as a means of restoring multilateral and nondiscriminatory trade. In so far as such current criticism rests on the assumption that the primary solution to the world trade problem lies in a thoroughgoing elimination of exchange and trade restrictions, and that our immediate need is for an international agency endowed with sufficient authority to compel the removal of such trade barriers, it oversimplifies the problem. In recent years, it has become increasingly clear that the disequilibrium of world trade, particularly the dollar scarcity, is attributable MONTHLY REVIEW, JUNE 1949 68 in large part to other and deeper causes such as wartime losses of invisible earnings, the lag of European productivity behind that of the United States, discrepancies in international cost and price levels, and other basic difficulties. Sa l e s T r e n d s i n M a j o r D e p a r t m e n t s The most significant recent development in department store trade— the contractioii in sales of housefurnishings and appliances— conforms, in a sense, to a familiar pattern. In the So long as these root causes of disequilibrium remain un prewar years, when aggregate consumer demand rose, sales of corrected, many foreign countries may well find themselves durable goods usually rose faster than sales in most other lines and, conversely, during a period of generally lessening unable to dispense with quantitative and discriminatory restric tion of their foreign trade. Restrictive measures currently in force cannot be suddenly swept away without causing painful transitional effects and quite possibly retarding, rather than advancing, progress toward trade equilibrium. As part of an over-all effort to restore a balanced pattern of international trade, however, reduction of trade barriers can contribute significantly to a successful solution. Thus, lack of foreign markets rather than inadequate output may soon ap demand they declined more sharply. The relatively sharper changes in durable goods sales occurred partly because the high unit price of durables renders them especially sensitive to changes in income and in consumer expectations, and partly because durable goods, by their very character, need not be purchased with the same regularity as the more perishable lines of merchandise or those which are more subject to shortrun changes in style. During the past year or so, moreover, pear as a limiting factor in the recovery of Western Europe. department stores have probably lost some business to neigh Action to secure a closer integration of national economies will require careful planning, however, and, inevitably, protracted borhood stores which have given discounts on standard brand appliances (frequently by making overgenerous trade-in al consultation and negotiation among the various nations con lowances). However, the numerous price reductions at the manufacturers’ level and the rapid introduction of lower cerned. In general, therefore, it would seem that our immediate need priced, less elaborate models in many durable goods lines are is for an international instrument of planning and negotiating symptomatic of an over-all easing of consumer demand. During the first fiscal quarter of 1949 (February, March, and April), consumer dollar outlay for housefurnishings in Second District department stores was about one-tenth smaller than in the corresponding period of 1948. But, as the accom panying chart shows, housefurnishings sales had been excep tionally large during the first fiscal quarter of 1948 and, indeed, had shown a greater increase over the corresponding quarter reductions of trade barriers rather than an instrument for compelling their elimination. The serious national trade policies that emerged during the Charter would inevitably have dominated negotiations of most countries, implicitly if divergencies of the drafting of the future trade not openly. By clarifying these issues, the Charter has contributed substan tially to mutual understanding of the obstacles to be overcome in future negotiations. The International Trade Organization itself could provide the international machinery for such negotiations. D E P A R T M E N T STORE TR A D E During May, consumer purchasing at Second District depart ment stores, after adjustment for the usual post-Easter dip, remained close to the April level, according to a preliminary of 1940 (also a period of very good housefurnishings busi ness) than any other major category of department store trade. While a part of the dollar volume decline from 1948 resulted from lower prices, some part reflected reduced unit volume. Despite the year-to-year decrease, dollar sales of housefurnish ings in the first fiscal quarter of 1949 were still somewhat more than two and one-half times those of 1940. In a few housefurnishings departments, because of special estimate. A comparison with the exceptionally good business circumstances, sales increased contrary to the general down ward trend. For example, the Oriental rug department actually of last May, however, indicates a year-to-year decline of per gained almost 50 per cent from last year’s first quarter, an haps 8 or 9 per cent in dollar volume. In view of generally improvement probably not matched by any other department. lower prices than last year’s, the decrease in physical terms was This gain, however, was made against a period when, owing undoubtedly less than that showed by the dollar amounts. to consumer price resistance, sales of Oriental rugs were lag Partly because of the relatively unfavorable level of business ging markedly. Although specific data are not available, first as compared with last year, and partly because of lower valua quarter sales of television sets, stimulated by aggressive special tions, the retail value of inventories at the end of April was sales and price reductions, were apparently good. 6 per cent lower than a year previous. The value of outstand The sharpest declines occurred in refrigerators and other ing orders declined seasonally during April and was one-third appliances, the drop in refrigerator sales amounting to more less in value than in the year before. The stores have main than 50 per cent. These declines, following the lag in sales tained this year-to-year ratio rather consistently since the first which began late in the fall season, have caused not only com of the year. The dollar volume of new orders placed during petitive price reductions but also shifts in production sched April, however, about equaled that of April 1948. ules in favor of lower-priced models. It is noteworthy that 69 FEDERAL RESERVE BANK OF NEW YORK Department Store Sales, Second Federal Reserve District, First Fiscal Quarter* of Selected Years (In dex numbers, first fiscal quarter of 1940=100 per cent) Per cent Percent 300 300 1----- 250 250 2 00 200 15 0 150 100 100 5* VA '// I 50 50 f // /// 1. 1 9 4 0 * 4 5 *48 ’4 9 G ra n d to ta l 1 940*45 M 8 ’4 9 M a in sto re f 9 4 0 ,4 5 ’ 4 8 »49 1940M 5M 8M 9 Basenient store Women’ s wea r 1 9 4 0 ’ 4 5 * 4 8 ’4 9 Men’s w ear 1 9 4 0 * 4 5 *48 *49 Housefurnish in g s * February, March, April. appliance sales were lower in each month of the quarter than in the corresponding month of 1948. In practically all other housefurnishings lines, year-to-year gains were made in at least one month, even though for the quarter as a whole sales showed a drop. In fact, a few departments did so well in March that the year-to-year decline for that month in the housefur nishings group was the narrowest in the entire store (one per cent, against 11 per cent for the store as a whole). Furniture sales were about 4 per cent below the dollar vol ume of the first fiscal quarter of 1948. There is some likeli hood, however, that the physical volume of upholstered furni ture sales was at least as large as last year’s. Sales of upholstered lines have held up better than other types of furniture, par ticularly bedding, in part because in the initial postwar period, decline in sales of women’s and misses’ apparel. In the Second District, a larger share of apparel sales is handled by specialty stores than in the rest of the United States. For the first four calendar months of 1949, a group of the larger District apparel stores, located chiefly in New York City and specializ ing in women’s lines, also reported a sales decline (6 per cent) from 1948. Women’s suits have continued to be very popular in 1949. Dollar sales in that department during the first quarter were 16 per cent greater than one year previous. The gain was par ticularly large in April, in part because of the later Easter this year, but even in March it was very substantial. Other women’s apparel departments declined sufficiently to more when customers had had to postpone all but the most urgent than offset the increased buying of suits. In dress lines, all of which showed decreases, the decline was greater for the higher demands for other furniture, bedding had been readily avail priced lines than for the inexpensive ones, in a way parallel able. The domestic rugs, carpets, and linoleum department, ing the 1948 experience when gains had been sharper for the partly because of neighborhood store competition, sold about inexpensive lines. Furs showed a further decline. 14 per cent less than in February-April of 1948. In other Sales of almost every type of accessory, in dollar terms, failed housefurnishings departments, declines were less marked; sales to improve from 1948. Even hosiery, which a year ago was of lamps and shades, for instance, were only one per cent below among the stores’ best selling items, showed no improvement. the 1948 dollar volume. The impact on hosiery of new styles and colors has apparently In ready-to-wear departments, the outstanding development during the first quarter of the store year was a year-to-year waned with the filling of consumers’ stocks. As the chart shows, sales of all types of women’s wear taken 70 MONTHLY REVIEW, JUNE 1949 together had reached an exceptionally large dollar volume Department and Apparel Store Sales and Stocks, Second Federal Reserve District, Percentage Change from the Preceding Year by the first quarter of 1945, more than double that of 1940; Net sales the relative growth up to that time was far greater than for the store as a whole. Between 1945 and 1948, despite the retirement of many women from the labor market and the renewed availability of many other kinds of merchandise which had been practically unobtainable during the war, women con tinued to increase their purchases of ready-to-wear considerably. In the first fiscal quarter of this year, the decline in sales of women’s wear from the 1948 first quarter was on the whole fairly moderate. First quarter sales in 1949 stand best of the three major groups of department store merchandise relative to 1940. Basement stores also showed a sales decline from the first quarter of last year, but it was smaller than in the main store. Hardly any individual basement department made better sales than a year ago. It is not surprising that basement sales declined along with the aggregate. The chart shows that in the first quarter of 1948 basement sales, relative to those of Locality April 1949 Stocks on Jan. through hand April 1949 April 30, 1949 Department stores, Second D istrict... . 0 - 5 - 6 New York C ity ...................................... Northern New Jersey........................... - 3 + 1 + 1 +23 - 1 - 4 + 4 + 5 + 8 + 6 - 6 - 6 5 7 4 6 Westchester C ounty............................. Fairfield C o u n ty .................................... B ridgeport........................................... Lower Hudson River V alley............... Poughkeepsie...................................... Upper Hudson River V alley............... Northern New Y ork State.................. Southern New Y ork State................... Bingham ton........................................ + + + + + + + Western New Y ork State.................... 0 + 6 Niagara Falls...................................... Rochester............................................ + 7 - 5 + 6 + + + + - Apparel stores (chiefly New York C ity ). + 7 - Schenectady........................................ Central New Y ork S tate..................... Mohawk River V alley ..................... +11 4 2 6 4 5 1 3 5 3 2 6 -10 -12 6 +10 - 9 - 9 -1 4 -1 6 1 3 5 -10 - 8 -10 2 7 6 3 7 9 7 5 9 - 7 - 7 -1 3 -10 - 9 -1 3 - 6 - 8 1 1 3 5 -1 1 2 _ - 8 1940, had had a greater growth than the main store sales ( which account by far for the bulk of total transactions). The est declines from 1948. Stocks of womens accessories were growth of basement sales since 1945, particularly in 1947, is reduced somewhat more than stocks of apparel. A large part especially noteworthy. of the reduction in stocks reflects revaluation at lower prices, but some part of it results from the drastic cuts in outstand Department Store Sales and Stocks Second Federal Reserve District (Percentage change from preceding year) ing orders initiated towards the end of 1948. Sales Indexes of Business Departmental group FebruaryApril 1948 M a in store .................................................... + 5 Housefurnishings................................... W om en’s apparel................................... W om en’s accessories............................. Piece goods and household textiles. . . Small wares............................................. M en’s wear.............................................. Miscellaneous merchandise................. +12 + 8 Basement store ............................................ + 4 + 2 0 - 3 7 +10 FebruaryApril 1949 — - Stocks April 30, 1949 7 9 -10 Industrial production*, 1935-39 = 100......... (Board o f Governors , Federal Reserve S ystem ) Electric power output*, 1935-39 = 1 0 0 . . . . - - Ton-miles of railway freight*, 1935-39 = 100 2 4 -1 1 - 7 9 2 1949 1948 Index — 4 - 1 - 3 - 4 -1 3 - 1 - 1 -2 3 April February March April 188 189 184 179p 244 262 256 254p 182 177 163p 338r 329r 329 332 p 156 153 151 148p 125 120p 118p 113 p 347 358 349p 280 286p 279p 304r 315 312p 186 196 197p 169 169 170 170 99 98 87 95 103 88 88 (Federal Reserve B ank o f N ew York) 2 (Federal Reserve B ank o f N e w York) Sales of all retail stores*, 1935-39 = 100----- The accompanying table illustrates the cuts in stocks which ( Department o f Commerce) merchants have made as sales prospects weakened. Stocks in Factory employment United States, 1939 = 100.......................... all major departmental groups at the end of April were lower New York State, 1935-39 = 100................ than a year previous. This was notably true of piece goods and Factory payrolls United States, 1939 = 100.......................... household textiles and of miscellaneous merchandise: in these two departmental groups, first quarter sales showed the sharp- (Bureau o f Labor Statistics) ( N Y S D iv. o f Placement and Unem p. In s.) (Bureau o f Labor Statistics) New Y ork State, 1935-39 = 100................ Indexes of Department Store Sales and Stocks Second Federal Reserve District (1935-39 average—100 per cent) 258 p ( N Y S D iv. o f Placement and U nem p. In s.) Personal income*, 1935-39 = 100.................. (Department o f Commerce) Composite index of wages and salaries*J, 1939 = 100...................................................... (Federal Reserve B a nk o f N e w York) Item Consumers’ prices, 1935-39 = 100................. 1949 1948 (Bureau o f Labor Statistics) Velocity of demand deposits*, 1935-39 = 100 April February March April 209 Sales (average daily), unadjusted................. Sales (average daily), seasonally ad ju sted ... 238r 256r 192 229 220 237 242 Stocks, unadjusted............................................ Stocks, seasonally adjusted............................ 252r 245r 218 224 238 232 237 230 r Revised. (Federal Reserve B ank o f N ew York) New York C ity ............................................. Outside New York C ity .............................. 88 * Adjusted for seasonal variation. p Preliminary. r Revised. X A monthly release showing the 15 com ponent indexes of hourly and weekly earnings in nonagricultural industries com puted by this bank will be sent upon request. Tabulations of the monthly indexes, 1938 to date, may also be pro cured from the Research Department, Domestic Research Division. 71 FEDERAL RESERVE BANK OF NEW YORK N A T IO N A L S U M M A R Y OF BUSINESS CO NDITIONS (Summarized by the Board of Governors of the Federal Reserve System, May 26, 1949) Industrial output declined further in April and the early part of May. Prices of industrial commodities were reduced further, while prices of farm and food products continued to show little change. Construction awards showed a marked seasonal expansion. Value of department store sales increased to close to the advanced level pre vailing a year ago. Industrial Production Industrial production, as measured by the Board’s seasonally adjusted index, declined further in April to 179 per cent of the 193539 average as compared with 184 per cent in March and 195 per cent in November 1948. Present indications are that in May manu facturing has continued downward and that there has also been some decline in output of minerals, which had increased in April. ton consumption declined 8 per cent in April. Activity at paper mills decreased about 5 per cent, while paperboard production was main tained at the reduced March level. Newsprint consumption increased slightly, and output of manufactured foods was maintained at the March level. Minerals production advanced about 8 per cent in April, reflect ing chiefly the ending of the work stoppages at coal mines. Iron ore production was in exceptionally large volume for this season. Crude petroleum output, however, was curtailed further by about 4 per cent. Construction Value of construction contracts awarded in April, according to the F. W . Dodge Corporation, was one-eighth larger than in March, reflect ing increases for private residential building and public works and utilities. Private awards continued considerably smaller than a year ago, while public awards were about one-third larger. The number of permanent residential units started ia April, as estimated by the Bureau of Labor Statistics, rose from 62,000 to 86,000 but was still consid erably below the postwar peak of 100,000 units in April and May 1948. Open hearth steel production declined 3 per cent in April from the record March level and output at electric furnaces, which accounts for only a small part of total steel output, was curtailed by 23 per cent to the lowest rate since January 1948. Activity at steel mills has continued to decline in May. Assembly of passenger automobiles increased sharply in April to the highest rate of the postwar period; a strike at plants of one major producer, however, has curtailed ac tivity in May. Output of most types of machinery in April declined considerably further. Deliveries of nonferrous metals to fabricators were sharply reduced, as prices and private purchases dropped; refinery output of most nonferrous metals, however, was maintained at a high level, reflecting in part Government demands for stockpiling. Output of most building materials, after allowance for usual seasonal changes, decreased somewhat further. Employment in nonagricultural establishments continued to decline in April, after allowance for seasonal changes, owing mainly to further reductions in most manufacturing industries. The average work week in manufacturing was also reduced further. Construction employment, which had lagged in March, rose somewhat more than seasonally in April. Employment in most other nonagricultural lines showed little change. Nondurable goods output declined about 4 per cent in April reflect ing mainly further marked reductions in the textile, paper, and chem ical industries, as a result in part of seasonal influences not currently allowed for in the Board’s adjusted indexes. Rayon production and deliveries to textile mills decreased sharply, and, according to trade reports, activity in the wool textile industry was reduced further. Cot Value of department store sales increased more than seasonally in April and the first half of May. Allowing for the later date of Easter this year, sales in this period were only about 3 per cent below the high level in the corresponding period last year. Since retail prices Em ploym en t D istribution INDUSTRIAL PRODUCTION CONSTRUCTION CONTRACTS AWARDED MILLIONS OF DOLLARS 150 A r\ a \* I ' 200 Vw " PRIVATE I* N O N R ESIDEN TIAL A1 1949 Federal Reserve indexes. M onthly figures; latest shown are for April. 1945 1947 F. W . D odge Corporation data for 37 Eastern States. latest shown are for April. 1949 M onthly figures; 72 MONTHLY REVIEW, JUNE 1949 were moderately lower than a year earlier, little change in over-all unit sales at department stores was indicated. Carloadings of railroad freight were in larger volume in April and the early part of May, mainly because of the recovery in coal shipments from the reduced March rate. Loadings of most other classes of freight declined somewhat further, after allowance for seasonal changes. C o m m o d it y Prices Prices of agricultural commodities continued to show little change from mid-April to the third week of May, while prices of industrial commodities generally declined further. Prices of scrap metals continued to weaken and refined copper was cut from 23.5 cents per pound to below 18 cents. Prices of some other industrial materials, however, like burlap, hides, and wool tops, were quite stable in this period. The consumers’ price index showed little change in April as further small advances in rents and in prices of meats and miscellaneous items were largely offset by declines in prices of most other groups of goods and services. B a n k C redit Required reserves of all member banks were decreased by about 1.2 billion dollars in early May when the reduction in reserve require ments announced by the Board of Governors in late April became effective. Banks used most of the released funds to purchase both short term and longer-term Government securities. Reserve Bank hold ings of Government securities declined by about 1.5 billion dollars during the first three weeks of May. The market for Treasury bonds continued active and System sales of these issues amounted to about 500 million dollars. Business loans declined by 1 billion dollars at banks in leading cities during April and the first half of May; somewhat over half the decline occurred at banks in New York and Chicago. Real estate and consumer loans showed little change. Se c u r it y M a r ke ts Prices of common stocks fluctuated within a narrow range and high-grade corporate bonds changed little in the first three weeks of May. PERSONAL INCOME BILLIONS OF DOLLARS SEASONALLY ADJUSTED. ANNUAL RATES LOANS AT MEMBER BANKS IN LEADING CITIES BILLIONS OF DOLLARS 140 BILLIONS OF DOLLARS BILLIONS OF DOLLARS 18 120 100 16 14 12 80 10 60 .1 1 1 1 1 GOVERNMENT VWAGES AND SALARIES |V . I j l \\ V j T R A N S F E R PA YM EN TS (MAINLY GOVERNMENT) 40 8 6 4 20 2 0 0 1942 : for Department of Commerce estimates. M onthly figu res; latest shown March. Total includes “ other labor incom e” , such as employer contributions to private pension funds, not shown separately. Employee contributions for social insurance are included in wage and salary disbursements but not in total. 1943 1944 1945 1 94 6 1947 1948 1949 *CHANGE IN SERIES. Excludes loans to banks. W ednesday figures; latest shown are for M ay 18.
@FedFRASER