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O f Credit and Business Conditions







No. 3

During the past month, the Treasury announced its inten­
tion to retire about 2,780 million dollars of its outstanding
obligations falling due or called for redemption in March.
The issues to be retired consist of 489 million dollars of 334 per
cent bonds called for redemption on March 15, 1946, 1,291
million 1 per cent Treasury notes maturing on that date, and
about one billion dollars of an issue of 4,147 million Vs per
cent certificates of indebtedness due March 1, 1946. The
remaining certificates are to be refunded with a similar issue
bearing the same rate and term to maturity as the expiring one.
Holders of the maturing issue are to be alloted new certificates
on an equal percentage basis (76 per cent), except that hold­
ings of 25 thousand dollars or less will be renewed in full if
the investor so elects and that for holdings in excess of that
amount the allotment will be not less than 25 thousand.
The scheduled reduction of the public debt is made possible
by the very high working balance of the Treasury which re­
sulted from the heavy oversubscription of the Victory Loan.
The Treasury raised considerably more funds than it will need
to meet current disbursements for many months to come, and
its working balance is still close to the peak reached at the end
of the Victory Loan. Government expenditures have fallen
off more rapidly since the beginning of this year than had been
anticipated, and receipts have held up better than expected.
Consequently, Treasury withdrawals from War Loan deposit
accounts in the banks have been so small that they have been
largely offset by new credits to such accounts arising out of
payments on deferred subscriptions to Victory Loan issues and
payments for current purchases of savings bonds and notes.
Near the end of February the Treasury working balance was
less than 400 million dollars below the peak of close to 26.2
billion dollars on January 2.
The redemption operation will afford the Treasury an oppor­
tunity to reduce its large working balance and the public debt;
it will also reduce the potential expansion of private deposits
which would occur if all the funds now in War Loan deposit
accounts were used to meet ordinary Government disburse­
ments. To the extent that the Government securities to be
redeemed are held by the banking system, including the Federal
Reserve Banks, no increase in private deposits will result from
their redemption. On the whole, it appears unlikely that the

operation will have material effects upon the market for Gov­
ernment securities, or upon the money market in general.
The effects of the retirement of public debt on bank reserves
and on deposits depend upon the distribution of the securities
to be redeemed among bank and nonbank investors, and upon
the method of payment adopted by the Treasury. In the case
of the March redemptions, about 80 per cent of the total
amount involved was held by commercial banks, Federal
Reserve Banks, and Government agencies and trust funds as of
November 30, 1945, the latest date for which statistics are
available. The commercial banks alone owned about two
thirds of the total. The Treasury will meet the redemptions
largely with funds withdrawn from War Loan deposits in com­
mercial banks, and to a more limited extent with funds on
deposit with the Federal Reserve Banks, which on February 20
had reached the unusually high total of 940 million dollars.
To provide funds for the redemption of approximately one
billion dollars of certificates maturing on March 1, the Treasury
has issued a call for the payment from War Loan deposits of a
total of 708 million dollars, 472 million dollars on March 1
and 236 million on March 2. The difference will evidently be
made up by drawing down the Treasury’s balances with the
Federal Reserve Banks.
Withdrawals from War Loan deposits to retire securities
owned by commercial banks will bring about a net reduction
of total deposits, but as the funds withdrawn are immediately
returned to the banks in payment for redeemed securities, bank
reserves will, in the aggregate, remain unchanged. Thus, the
net effect on the commercial banking system will be a simul­
taneous decline in bank holdings of Government securities and
in deposit liabilities.
It is not to be expected, however, that the reserves gained
by individual banking institutions from the redemption of
securities held by them or their depositors will in all cases
approximate the loss of reserves resulting from withdrawals of
War Loan deposits. Some banks will receive more funds than
they will lose, while others will experience net withdrawals and
losses of reserves. Some banks and other holders of securities
to be redeemed are reported to have begun adjusting their
portfolios shortly after the announcement of the March re­
demptions by selling part of their holdings of the securities to



be retired and purchasing other short term Treasury securities
— certificates of indebtedness, notes, and short term taxable

January. Prices of certificates, notes, and short term taxable
bonds were generally firm.

To the extent that the securities to be retired are held by
nonbank investors, their redemption will result in an increase
in private deposits and an accompanying rise in bank reserve
requirements. If the funds to meet these redemptions are
obtained through Treasury withdrawals from War Loan ac­
counts, the banks as a whole will have to adjust their reserve
positions to the required levels by drawing upon their excess
reserves, disposing of earning assets, or borrowing from the
Federal Reserve Banks. Under present conditions, the sale of
Treasury obligations in the open market or directly to the
Federal Reserve Banks (in the case of Treasury bills), is likely
to be the form of reserve adjustment most frequently used.
The amount of adjustment required, however, will not be large
since holdings of nonbank investors represent a relatively small
proportion of the amount of securities to be redeemed.
Redemption of securities held by the Federal Reserve Banks
( and Government agencies and trust funds) can apparently be
met, at least in the case of the March 1 certificates, by drawing
upon Treasury balances in the Federal Reserve Banks, and thus
will cause no loss of reserves to member banks. However, it
is not possible at this time to foresee whether any net with­
drawal of funds from the banks in connection with the March
15 redemptions of securities in Federal Reserve and Govern­
ment accounts will be necessary, or not.
There has been a relatively heavy demand for short dated
Treasury issues in recent weeks which has been in marked
contrast to the experience of the past year or more, in which
banks tended to purchase largely medium and longer term
Treasury bonds with any gain of reserves, or even with funds
obtained by the sale of short term securities. There is some
evidence that this tendency may have been undergoing a
change recently, as a result of the narrowing spread between
yields on medium and long term and short term Treasury
issues and some uncertainty as to the future course of interest
rates, occasioned by frequent discussions in the press of sug­
gested changes in Federal Reserve credit policies and in public
debt management policies.

M e m b e r B a n k R eserve P o s it io n s

Some reduction in member bank excess reserves has occurred
during the past month. In part, this was attributable to
Treasury operations and in part to the operations of the mem­
ber banks themselves. Heavy tax receipts, together with a
decline in Federal expenditures for war purposes, were largely
responsible for an increase of approximately 360 million
dollars in the Treasury’s balance with the Reserve Banks dur­
ing the four weeks ended February 20. Operations of the
member banks and of other investors in the Government
security market resulted in a substantial reduction in Federal
Reserve Bank holdings of Treasury certificates of indebtedness
and notes, which more than offset increases in other types of
Federal Reserve credit (loans to and Treasury bill purchases
from banks losing reserves).
Tax collections and nonbank investor purchases of securities
held by the banking system were accompanied by a decline in
private deposits, and reserve requirements fell 86 million
dollars during the four weeks. A further gain in the monetary
gold stock of 98 million dollars, and a small decline in cur­
rency in circulation— both additional indications of the reversal
of the wartime trends— tended to add to bank reserves. But
the aggregate of these and other factors tending to ease member
bank reserve positions was far less than the increase in Treasury
deposits with the Reserve Banks and the net decline in Federal
Reserve credit, and member banks drew down their excess
reserves by about 280 million dollars.
For the most part, the same factors affecting the reserves of
all member banks were operative in New York City, except
that there was a small increase in outstanding currency and that
Treasury net receipts were exceptionally large in New York.
A substantial movement of business and financial funds to the
City, offset in part by a decline in correspondent bank balances
kept in New York, tended to ease the pressure on the New
York City banks, however.

Demand for Treasury issues with near term maturities or call
dates was reflected in a further decline in Federal Reserve
System holdings of certificates of indebtedness and short term
Treasury notes of nearly 500 million dollars in the first three
weeks of February and a reduction in excess reserves of banks
located outside New York City, especially during the week
ended February 20. A substantial increase in certificate and
note holdings and a decrease in bond holdings of the New York
City weekly reporting member banks in that same week sug­
gests some switching out of bonds into short term Treasury

Profits after income taxes, realized by all member banks in
this District during 1945 averaged 11.6 per cent of capital
funds, compared with 9.5 per cent in 1944 and 7.2 per cent
in 1943.* Not all banks, however, shared in the increase;
there were over 200 banks in the Second District, or more than
25 per cent of all member banks, which showed a decrease in
net profits after income taxes. Most of the banks showing
decreases were institutions with less than 20 million dollars of
deposits, although a number of the larger banks outside New
York City also had smaller profits in 1945 than in 1944.

Strength in the Government bond market through the first
nine days of February gave way to irregularity subsequently,
but after alternate recessions and advances, prices near the close
of the month were higher in most cases than at the end of

These figures represent unweighted averages of the percentages
for individual banks; the ratio of aggregate profits to aggregate capital
funds, in which the large New York City banks predominate, showed
an increase only two-thirds as great in 1945, as those banks had much
smaller increases in profit ratios than many medium size banks in the

Selected Average Operating Ratios of All Member Banks
Second Federal Reserve District



Number of b a n k s .....................




Percentage of Total Capital Accounts
Net current earnings.............................
Profits before income taxes.................
Net profits after income taxes............
Cash dividends declared......................

7 .3
7 .9
7 .2
2 .0

8 .8
9 .5
2 .1

9 .4
2 .1

}4 5 .0
3 9 .5
7 .0
8 .5

}5 2 .4
3 2 .3
7 .2
8 .1

49 .2
8 .0
2 8 .8
6 .4
7 .6

Percentage of Total Earnings
Interest on U. S. G ov’t securities----Interest on other securities.................
Earnings on loans..................................
Service charges on deposit accounts..
A ll other earnings..................................
Total earnings............................




Salaries and wages................................
Interest on time and savings deposits.

3 1.5
2 7.2

2 5.3

2 8.4
2 4 .8

Total expenses...........................
N et current earnings............................

7 3 .5
2 6 .5

7 0 .0
3 0.0

6 9.6

Net recoveries........................................
Taxes on net incom e.............................

2 .9
2 .5

7 .7
4 .2

7 .8

Net profits after income taxes.


3 3 .5

3 8.1

4 7 .0
9 .6
1 9.4
2 2.0

5 6.9
7 .2

6 1.3
6 .1

Percentage of Total Assets
U. S. Government securities...............

Even though the net profits of nearly three out of four
member banks in this District were higher in 1945 than in
1944, bank stockholders obtained little direct benefit in the
form of increased dividend payments, as banks generally con­
tinued the conservative policy of adding a large part of their
net profits (about 80 per cent on the average) to capital
accounts, thereby increasing capital funds about 9-5 per cent.
The remaining 20 per cent of profits was used for dividends,
which for all banks in the District averaged 2.1 per cent of
total capital accounts, the same as in 1944.
Operating income increased considerably because of a larger
volume of earning assets, mainly in the form of Government
securities, although there were also substantial increases in
loans to finance the purchase or carrying of Government securi­
ties, and, in the case of New York City banks, some increases
in industrial and commercial loans. The average rates of return
on earning assets were lower than in the previous year. The
increase in total current income was more than enough to take
care of the increased expenses for salaries, interest on the ex­
panded amount of time deposits, and other increased costs of
bank operations, leaving the ratio of net current earnings to
total earnings practically unchanged from 1944 for most
groups of banks. There were sizable additions to current net
earnings from profits on securities sold during the year and
from recoveries on loans and securities that had been written
down or charged off in previous years, particularly for the
medium and larger size banks. However, taxes on net income
were much larger than in previous years and for all banks aver­
aged 7.8 per cent of gross earnings and about one fourth of net
current earnings. The proportion of earnings used for income
taxes increased with the size of banks, and was by far the
highest for New York City banks having total deposits of more
than one hundred million dollars.


Despite the additions to capital funds, as previously men­
tioned, the average ratio of capital accounts to total deposits
declined from over 9 per cent to 8 per cent, but the ratio of
capital to all assets other than cash and Government securities
rose to 43 per cent from 40 in 1944 and 34 in 1943.
At the end of January joint resolutions were introduced in
the Senate and the House of Representatives designed to give
legislative effect to the Anglo-American Financial Agreement
of December 1945 (the main provisions of which were sum­
marized in the January issue of this Review), and it is antici­
pated that hearings will soon be held before the appropriate
Congressional committees. The agreement has already been
approved by the British Parliament. Because of the size of the
credit provided for in the agreement, and because of the wide
scope and complex nature of the other provisions of the agree­
ment, it may be useful to review the character of the British
balance of payments difficulties which have given rise to the
need for financial assistance, the contribution which the pro­
posed 3,750 million dollar line of credit would make toward
the solution of those problems, and the benefits which this
country may expect to derive from the agreement.
In the years immediately preceding the war the British bal­
ance of payments was in a state of reasonable equilibrium.
For example, in 1936-38 the United Kingdom experienced an
annual average deficit on current account of only 43 million
pounds, the net result of an average deficit of 389 million on
merchandise trade account, and of net receipts of 203 million
from overseas investments, 105 million from shipping, and 38
million from all other services, such as insurance, commissions,
and tourist trade.
This balance of payments pattern was sharply upset by the
war, and the external financial position of the United Kingdom
underwent a severe deterioration. Primarily as a result of huge
overseas military expenditures, the British deficit on current
account rose to an annual average of 731 million in the years
1940-44, and aggregated 4,189 million pounds from September
1939 to June 1945 (apart from goods and services acquired
under lend-lease and Canadian mutual aid). In order to fin­
ance this cash deficit, it was necessary for the United Kingdom
to increase its external debt (chiefly in the form of sterling
balances held by foreign monetary authorities) by 2,879 mil­
lion pounds, to sell 1,118 million pounds of its overseas invest­
ments, and to reduce its official gold and dollar holdings by
152 million pounds. By June 30, 1945 the United Kingdom,
long the worlds leading creditor nation, had become a net
debtor, with external debts of 3,355 million pounds (o f which
about 80 per cent was owed to sterling area countries), while
its overseas investments had been reduced to substantially
under 3,000 million pounds (in nominal values).
The serious condition of disequilibrium in which the war
has left the British balance of payments will inevitably persist,
although on a diminishing scale, for several years. Sales of



overseas investments and increases in foreign debt have reduced
net investment income receipts by about 50 per cent, compared
with the 1936-38 annual average. Reductions in net shipping
earnings may be anticipated for several years as a result of a
net wartime decline of about 25 per cent in British shipping
tonnage. Earnings from insurance and other financial services
are also likely to be smaller. Moreover, continuing large over­
seas military expenditures may be expected for another year or
two, in view of the time required to bring British troops home.
Above all, imports will tend to be much larger than before the
war because of the need for reconstruction and repair of wardamaged factories and homes, reequipment and replacement of
peacetime plant (which was seriously undermaintained during
the war), replenishment of depleted inventories, and expansion
and modernization of the prewar plant generally. Import
prices will also be considerably higher than before the war,
probably by at least 50 per cent.
In order to offset this disequilibrium in its current balance of
payments and also to pay off its external debts over a period of
years, the United Kingdom will have to increase the volume of
its exports, according to official estimates, to about 175 per cent
of the 1938 level. For several years, however, no such increase
is possible, despite active foreign demand. For one thing,
since British exports had to be sacrificed during the war, and
declined in volume by 70 per cent between 1938 and 1944, it
will inevitably take time, even from a purely technical point of
view, for the United Kingdom to switch over again to a full
exporting basis. More important, however, its available domes­
tic resources will be relatively scarce over the next few years in
the face of pressing internal requirements, and, despite con­
tinued rationing and priorities, the amount that can be released
for export purposes will of necessity be limited.
The United Kingdom will therefore face an unavoidably
large deficit on current account during the transition period
when it is reconverting and restoring its industries to peace­
time production and struggling to expand its export trade. It
is officially estimated that this deficit, even on the assumption
of continuing close control over expenditures abroad, will
aggregate about 1,250 million pounds in 1946-48, of which
750 million will be incurred in 1946 alone. The British anti­
cipate more modest deficits in 1949 and 1950, and expect that
exports will have risen sufficiently by 1951 to wipe out the
deficit. Over the 6-year period to 1951 the aggregate deficit
may thus be estimated at about 1,500 million pounds (o f
which probably between 35 and 40 per cent will be incurred
vis-a-vis the United States). The exchange requirements of
the United Kingdom will be further increased to the extent
that it is found necessary to pay off some portion of the exist­
ing external debts during this period.
Available British resources are insufficient to meet these re­
quirements. Net official gold and dollar holdings had declined
by October 1945 to 453 million pounds, of which a part must
necessarily be held as a minimum working balance. Little
reliance can be placed upon further sales of overseas invest­
ments, since the most marketable ones have already been dis­

posed of. Any additional sales, moreover, would further
increase the British balance of payments deficit by reducing
interest and dividend receipts. Finally, the maximum amount
of net aid that the United Kingdom might obtain from the
International Monetary Fund would be limited to the amount
of its quota, or 325 million pounds.
It is clear, then, that if the British are to be enabled to finance
overseas expenditures in the volume necessary to carry them
safely through the transition period, resort will have to be had
to substantial borrowings abroad. The British deficit vis-a-vis
Canada is likely to be met by means of Canadian credits.
Credits might also be expected for another year or two from
sterling area and other countries in the form of continued for­
eign accumulations of sterling balances. In general, however,
the external financing problem of the United Kingdom over
the next five years is primarily one of obtaining dollars needed
to meet the deficit with the United States, as well as with other
countries to the extent that they are unwilling to accept further
If the proposed American credit to the United Kingdom is
not forthcoming, that country will inevitably be forced to
reduce its expenditures on American goods and services in
keeping with the limited amount of dollars at its disposal,
thereby retarding necessary domestic reconstruction, restora­
tion of exports, and alleviation of its austere wartime standard
of living. Instead, the United Kingdom would have to try as
far as possible to obtain needed imports from the sterling area,
and other countries closely allied to it economically, by tighten­
ing the financial and trading links with these countries, by
continuing and even intensifying its restrictive external war­
time controls and arrangements, and by pursuing bilateral
arrangements designed to exploit its strong bargaining position
as an importer. The United States would find its exports in­
creasingly discriminated against in foreign markets or even
excluded in some cases. The world as a whole would tend
to drift into State-directed, bilateral, and discriminatory trade
and exchange practices, organized on bloc lines, thereby con­
tributing to economic warfare and political instability. The
Bretton Woods organizations, now about to be set up, would
have no place within such a framework. The British authori­
ties have already announced, in fact, that they would have to
withdraw from these organizations if the credit agreement fails
to pass Congress.
The proposed American line of credit of 3,750 million
dollars is specifically designed to meet the minimum net dollar
requirements of the United Kingdom and thereby to assist that
country over its difficult transition period without the need for
recourse to restrictive external controls and policies. The size
of the credit has been so adjusted that, in conjunction with its
other external resources, the United Kingdom will be enabled
to finance its over-all dollar shortage during this period, includ­
ing the dollars needed in connection with certain of the com­
mitments imposed upon that country under the terms of the
agreement. These commitments, which will remove wartime
arrangements which have operated in a restrictive and dis­


criminatory fashion against American and other non-sterling
area countries’ exports, include: (1 ) the restoration of free
convertibility into dollars or other currencies of sterling
obtained through current transactions by sterling area coun­
tries; (2 ) the removal of exchange controls with regard to
current transactions with the United States; (3 ) the removal of
restrictions on payments or transfers for current international
transactions in general; (4 ) the abolition of the so-called dollar
pool (i.e., permitting sterling area countries to dispose freely
of any dollars they acquire); and (5 ) free convertibility of
some part of the accumulated sterling balances now held by
sterling area countries. Except for (2 ) and ( 5) , which are to
become operative from the effective date of the agreement and
at an "early” date, respectively, these commitments are to come
into operation no later than one year from the effective date of
the agreement. These commitments may be expected to
improve considerably the prospects for the foreign trade of the
United States, not only with the United Kingdom, but also with
many other countries.
The United Kingdom will also be committed to the com­
pletion at an early date of arrangements to settle its huge
accumulated external debts. These arrangements (in addition
to making part of the debts freely convertible into dollars or
other currencies at once) are to involve a scaling down in the
principal of the debts and the repayment of the remainder in
freely convertible currency over a period of years beginning
in 1951. Furthermore, the United Kingdom agrees not to use
quantitative import restrictions in such a way as to discriminate
against imports from any country. Above all, the British
authorities have agreed to support the American proposals for
an International Trade Organization at the forthcoming Inter­
national Conference on Trade and Employment. These pro­
posals look forward, among other things, to international
cooperation in the reduction of tariffs, elimination of preferen­
tial duties, limitations upon the use of quantitative import
restrictions and export subsidies, establishment of equality of
treatment in international trade, curbing of restrictive business
practices, supervision of inter-governmental commodity agree­
ments, and the achievement of high levels of employment and
By enabling the United Kingdom to speed the restoration
of its industries and the recovery of its export trade, and by
calling for the early dismantling of its discriminatory external
controls, the Anglo-American agreement constitutes an essen­
tial condition for the reestablishment of multilateral, nondiscriminatory policies in international trade, a high over-all
level of American exports, and an expansion of international
trade in general. These wider international benefits will result
from the strategic position of the United Kingdom in the
world economy and of the pound sterling in the network of
international settlements, and from the traditional role of
that country as the world’s largest importer (and our greatest
single customer). Unless, therefore, there is a rehabilitation of
Britain’s external finances (to which the American credit will
make an important contribution), there can be no hope of a


removal of restrictive and discriminatory practices which inter­
fere seriously with international trade, are obstacles to the
achievement of international economic well-being, and even
threaten the maintenance of world peace.
While the agreement will enable the United Kingdom to
permit free convertibility of sterling at an early date and to
remove discriminatory exchange and trade arrangements, there
can, of course, be no absolute assurance that that country will
be able to continue such policies into the more distant future
and gradually to remove quantitative import restrictions and
State-directed trading. The crucial problem is whether British
exports of goods and services will have risen by the end of
1951 (when repayments on the proposed American credit and
other external debts will commence) to a level sufficient to
enable the United Kingdom to finance debt repayments as
well as current overseas expenditures (which will continue
at a high level) within the multilateral framework envisaged
in the agreement. For, clearly, the United Kingdom could not
countenance foreign borrowing indefinitely.
The ability of the United Kingdom to expand its exports
to the required level by 1951 and to maintain them at a high
and reasonably stable level thereafter will depend essentially
upon deliberate action by that country, as well as upon a favor­
able international economic environment in general.
From the specifically British side, export expansion will
depend, for one thing, upon the ability of British producers
to adapt the character of their exports to the changing require­
ments of the world market resulting from industrialization
of other countries and technological change. For example, since
former leading exports such as coal and cotton textiles will
probably continue their prewar declines, increasing attention
will have to be directed to machinery, vehicles, and other
capital goods, and to higher grade consumers’ goods which
require unusual skill in their production. It will also be neces­
sary for the United Kingdom to modernize and expand its
capital plant and to raise its over-all national productivity in
order to improve its competitive position in world markets.
External conditions will also be of great importance, since
a large expansion of British exports will require a high level
of foreign demand. This will depend upon the maintenance
of high levels of national income, notably in the United States,
as well as upon the removal of barriers to international trade.

On March 8 the first meetings of the Boards of Governors of
the International Monetary Fund and of the International Bank
for Reconstruction and Development will be held at W ilming­
ton Island, near Savannah, Georgia, for the purpose of organiz­
ing the two institutions. In keeping with the provisions of the
Articles of Agreement, the meetings have been called by the
United States in its capacity as the member having the largest
quota in the Fund and the largest number of shares in the Bank.
In attendance will be the governors of each institution



appointed by each of the 35 charter members of the Fund and
of the 34 charter members of the Bank. (Colombia has offi­
cially adhered to the Fund, but not to the Bank.) The Ameri­
can governor of both institutions is Secretary of the Treasury

active operations is not known, it is generally believed that the
Fund and the Bank should be functioning within about six

Fred M. Vinson.
Countries which attended the United Nations Monetary
and Financial Conference at Bretton Woods, New Hampshire,
in July 1944, but did not sign the Articles of Agreement by
December 31, 1945, have been invited to send observers to
the meetings. These countries (whose quotas and subscrip­
tions aggregate somewhat less than 20 per cent of the total
quotas and subscriptions of the Fund and the Bank, respec­
tively), include: the Soviet Union, Australia, New Zealand,
Venezuela, Panama, Nicaragua, El Salvador, Haiti, and Liberia.
Observers have also been invited from Denmark, which
may become a member, according to the Articles of Agreement,
when a Fund quota and a Bank subscription have been officially
assigned to it.


Although few details have been released concerning the
nature of the agenda, it may be presumed that the two meet­
ings will be concerned primarily with drawing up by-laws and
other organizational details.
Each of the five members having the largest quotas in the
Fund and the largest number of shares in the Bank is entitled
to appoint an executive director of each institution. At the
present time the "Big Five” of each institution consist of the
United States, Great Britain, China, France, and India (the
latter country being included because of the failure of the
Soviet Union to ratify the agreements before December 31,
1945). The remaining directors must be elected, and these
elections are likely to take place at the forthcoming meetings.
In the case of the Fund, two directors are to be elected by the
Latin American countries and five by the other members
(excluding the "Big Five” ). In the case of the Bank, seven
directors will be elected by members other than the "Big
Five.” Once the executive directorates are constituted, they
are to choose the managing director of the Fund and the presi­
dent of the Bank.
It is probable that the two meetings will also discuss the
terms and conditions on which new members will be admitted
to the Fund and the Bank, including countries which attended
the Bretton W oods conference but which did not sign the
Articles of Agreement by December 31, 1945, and countries
which did not attend that conference. The size of the quota
and subscription for Denmark and the admission of that coun­
try to the Fund and the Bank may be decided, and any applica­
tions for membership which may have been made will pre­
sumably be considered at the meetings.
The location of the head offices of the Fund and the Bank
may also be decided upon. The Articles of Agreement specify
that the head office of each institution shall be established in
the United States. According to newspaper reports, Washing­
ton and New York are the two cities most actively being
While the date on which the two institutions will commence

The total amount of consumer credit outstanding increased
approximately 800 million dollars between the end of 1944
and 1945, or nearly twice as much as in the preceding year,
according to the latest estimates of the Board of Governors of
the Federal Reserve System. The total outstanding at the end
of December, 6.6 billion dollars, was, nevertheless, still nearly
a third under the 1941 peak. Resumption of the manufacture
of limited amounts of consumers’ durable goods and further
price increases were among the more important factors tending
to enlarge the demands for consumer accommodation, although
with the large backlog of wartime savings many individuals
who formerly might have borrowed or purchased durable
goods on the instalment plan now are in a position to pay cash.
Consumer Credit by Principal Types
(Estimated amount outstanding at end of year*)

81------------------------ -- -------------------------------------------------------

7--------------------- ,---------------------------------------------------------------6


. -------------------------------------------------------------------------------


*4 3

» 45


*4 3

'4 5


*4 3




’ 45

* December 31, 1945 preliminary.

Most of the increase in consumer credit was in the volume
of instalment and single-payment loans, particularly those
extended by the commercial banks. In addition, instalment
cash loans of small loan companies were up a little over 50
million dollars, and there were also smaller increases in loans
made by credit unions and in the instalment credits of automo­
bile dealers, furniture, department, jewelry, and other retail
stores. Instalment accounts of household appliance stores
showed no net change over the year. Automobile paper, how­
ever, which is ordinarily the largest single type of instalment
paper, and outstanding credits of household appliance com­
panies were only small fractions of their prewar volume.
Department stores, furniture stores, and other retail outlets
were not affected to the same extent by wartime production
restrictions, but even their instalment sales at the end of
December were more than 50 per cent below 1941 levels.
Before the war instalment credit was the most important type



of consumer credit, usually accounting for 50 to 60 per cent of
the total amount outstanding, and an expansion in total con­
sumer credit to anything like prewar levels will probably be
dependent upon expansion of this type of credit, once con­
sumers’ durables again become available in quantity.
Charge account sales also rose substantially during 1945, and
at the end of December accounts payable were estimated to be
approximately 9 per cent above the end of 1941. This modest
expansion in charge account credit, however, reflects the tre­
mendous increase in the volume of retail store sales and
the general rise in the price level rather than a growth in the
proportion of charge account to total sales. For the last two
years roughly 30 per cent of total department store sales have
been charge account transactions, while before the war this
figure was usually closer to 45 per cent. Credit arising out of
the services of doctors, hospitals, cleaning and laundry estab­
lishments, and other service organizations continued its steady
rise during the past year. Service expenditures have risen con­
siderably with higher levels of income, but the increase in
service credit outstanding has been comparatively small.
Co nsum er

In s t a l m e n t L o a n s o f

C o m m e r c ia l B a n k s

Consumer instalment loans of commercial banks expanded
somewhat more rapidly during 1945 than those made by any
other type of financing institutions in the consumer credit field,
and at the end of December they represented a little over 11
per cent of the total amount of consumer credit outstanding.
In large measure this above average increase was the result of
a conscious effort on the part of many banks to expand their
activities in this field. The initial results of this policy can be
seen in the fact that while before the war the larger part of
the banks’ retail automobile paper was purchased from dealers
or other financing agencies, most of the increase in bank hold­
ings of automotive paper today represents direct loans made by
banks to consumers for the purchase of automobiles. Bank
holdings of purchased automobile paper have shown little net
change since 1943, while direct loans rose nearly 50 million
dollars between the end of 1944 and 1945, accounting for
nearly a third of the total increase in the consumer instalment
paper of the commercial banks in this period. Personal instal­
ment cash loans also accounted for a substantial part of the rise
Percentage Change in Consumer Instalment Credit Outstanding
of Commercial Banks in 1944 and 1945
Dec. 31, 1943 to
Dec. 31, 1944
Type of credit

Dec. 31, 1944 to
Dec. 31, 1945f

A ll commer­ 37 banks in All commer­ 37 banks in
cial banks*
cial banks*

Retail instalment credit..........
A utom obile...........................
O ther......................................
Repair and modernization
Personal instalment cash loans

+ 13 r

+ 8
+ 6


+ 8

— 7
+ llr

— 18r
+ 2r



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

+ 9r

— lr



♦ Estimated b y Board of Governors of the Federal Reserve System,
t December 31, 1945 preliminary,

r Revised.

in this type of bank credit during the past year, and repair and
modernization loans showed a net increase for the first time
since 1940, reflecting both the easing of building restrictions
following the end of hostilities and the tremendous demand
for housing.
In the Second District, reports from 37 member banks indi­
cate that the largest dollar increases in their consumer loans in
1945 were in personal instalment and repair and moderniza­
tion loans. Automobile loans, as the accompanying table
shows, increased very sharply percentagewise during the year,
but at the end of December they represented only about 5 per
cent of the total outstanding amount of consumer instalment
credits of this group of banks. For the past several years, how­
ever, banks in the District have not held as large a proportion
of automobile paper in their consumer instalment loan port­
folios as banks in other sections of the country.
Noticeable improvement in furniture store sales in this
District began in the fourth quarter of 1945, but the
dollar volume of sales for the full year was still slightly below
that of the peak year 1941, whereas in all other districts com­
bined, furniture store sales were above 1941. Furniture pro­
duction was curtailed sharply in 1942 and retail stores in this
District reported a decline in sales volume of 12 per cent from
the preceding year’s peak. Only slight declines were registered
in the two following years. During the first nine months of
1945 sales increased 7 per cent over the corresponding 1944
period, and a gain of 20 per cent in the fourth quarter raised
the increase for the full year to 12 per cent. Among the five
principal cities of the District, percentage comparisons with
1944 and 1941 sales were as follows:

1945 compared with
New Y ork C ity .........................................




+ 2
-1 7
- 4
+ 6
-1 5



Furniture is sold predominantly on the instalment basis, but
the proportion sold for cash has been increasing during the past
four years. In 1941 Second District stores sold approximately
12 per cent on a cash basis. This proportion increased to 17
per cent in 1942, and by 1945 cash sales accounted for almost
one quarter of the total.
W ith the advent of Regulation W , accounts receivable of
the furniture stores declined sharply. Receivables have shown
little change during the past year, and they are currently 50
per cent below the 1941 high. The collection ratio (collections,
exclusive of down payments, as a percentage of first-of-themonth receivables) has increased from 10 per cent in 1941 to
16 per cent in 1945.



At the close of last year stocks on hand in the furniture stores
of this District were 11 per cent higher than at the close of the
preceding year, but 35 per cent below the 1942 peak.

the dollar volume of stocks is only two thirds of outstanding
orders, as compared with twice the orders at the beginning
of 1943.


Department and Apparel Store Sales and Stocks, Second Federal Reserve
District, Percentage Change from the Preceding Year

At the present time sales in the men’s wear group are being
hampered by the shortage of suits and coats. The men’s fur­
nishing departments report exceptionally large gains in spite of
the inadequate supply of shirts. Within the homefurnishings
group, many items are moving into stock rapidly, and the
increased sales are not being supported out of inventory.
Exceptionally large increases are being reported for house­
wares, and stocks are well above the year earlier level. In the
furniture department the supply is becoming more adequate
to meet the demand, and sales are considerably higher than last
year. In the coming months the ready market for major
household appliances and radios will contribute to a high sales
volume for this group.
Sales of women’s wear as a whole continue to maintain a
substantial increase over last year’s record volume, although
wide variations appear within the departments. Fur sales con­
tinue below last year’s level, although stocks are adequate.
Hosiery and lingerie sales show declines because of the mer­
chandise shortages. The shoe department has been reporting
better-than-average sales gains, although stocks are relatively
low. Ready-to-wear sales and stocks show increases about
equal to the total store average.
Anticipating a high level of sales during the coming months,
department stores in this District at the close of January had
a record dollar volume of outstanding orders on their books.
During the past year these orders have increased 15 per cent
and are now about three times the amount outstanding at the
beginning of 1943. The dollar volume of stocks at the close
of January was also at a record high for that date, 8 per cent
above the January 31, 1945 level and 5 per cent higher than
on the corresponding 1943 date. Since the close of September,
however, the ratio of stocks to sales has declined. Currently

Jan. 1946

Stocks on
Jan. through
Dec. 1945 Jan. 31, 1946

Department stores, Second D istrict___



+ 8

New Y ork C ity ......................................
Northern New Jersey...........................
Westchester and Fairfield Counties . .
Lower Hudson River V alley...............
Upper Hudson River V alley...............

+ 8
+ 4
+ 8
+ 11
+ 5
+ 4
+ 9
+ 9
+ 8
+ 8

+ 7
+ 14
+ 5
+ 5
— 3
+ 6
— 7

Niagara Falls......................................
R ochester............................................

+ 9
+ 31
+ 9
+ 6

Apparel stores (chiefly New Y ork C ity ).




Central New Y ork S tate.....................
Mohawk River V alley......................
Northern New York State..................
Southern New Y ork State...................
Bingham ton........................................
Western New York State....................

+ 7
+ 4
+ 6
— 2

Indexes of Department Store Sales and Stocks
Second Federal Reserve District
(1 9 3 5 -3 9 average = 1 0 0 per cent)



N ov.



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





Stocks, unadjusted............................................
Stocks, seasonally a djusted ............................





r Revised.

Indexes of Business


Industrial production*, 1935-39 = 100.........
(.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
( Federal Reserve Bank of New York)
Sales of all retail stores*, 1935-39 = 100. . .
(Department of Commerce)
Factory employment
United States, 1939 = 100...........................
(Bureau of Labor Statistics)
New York State, 1935-39 = 100................
(New York State Dept, of Labor)
Factory payrolls
United States, 1939 = 100...........................
(Bureau of Labor Statistics) .
New Y ork State, 1935-39 = 100................
(New York State Dept, of Labor)
Incom e payments*, 1935-39 = 100...............
(Department of Commerce)
W age rates, 1926 = 100....................................
( Federal Reserve Bank of New York)
Consumers’ prices, 1935-39 = 1 0 0 .................
(Bureau of Labor Statistics)
V elocity of demand deposits*, 1935-39 = 100
(Federal Reserve Bank of New York)
New Y ork C it y ..............................................
Outside New Y ork C it y ..............................
♦ Adjusted for seasonal variation.



N ov.



























216 p







Variations in the departmental buying trends are becoming
more pronounced. During the war years department stores
depended on the high dollar volume of women’s wear sales,
and they supported peak operating activity by promoting these
lines to the fullest extent. W ith the shift to a peacetime
economy, the most important factor in the further rise in sales
is the pent-up demand for homefurnishings and men’s wear.
The outlook for the coming months is based on the anticipated
market for this type of merchandise.

Net sales










p Preliminary.


Retail merchants in this District are marketing an unpre­
cedented dollar volume of merchandise, and they are planning
for a still larger consumer demand during the coming months.
Using department store reports as a barometer of trade activity,
sales in February were again more than 25 per cent above those
of a year earlier, and the seasonally adjusted index exceeded
last March’s peak by about 10 per cent. This index is now
more than double the 1935-39 average.



General Business and Financial Conditions
(Summarized by the Board of Governors of the Federal Reserve System)
at factories declined further in January and the early part of February owing to
O work stoppages.
Production and employment in most nonmanufacturing lines, however,

continued to advance and the value of retail trade was maintained considerably above last
year’s level.
In d u s t r ia l Pr o d u c t io n

Wage disputes sharply reduced output in the iron and steel and electrical machinery
industries during January and the early part of February. These decreases were offset in
part by increased output in most other manufacturing lines and in mining. The Board’s
index of total industrial production was at a level of 159 per cent of the 1935-39 average
in January, as compared with 164 in December.
Index of Physical Volume of Industrial Produc­
tion, Adjusted for Seasonal Variation
(1935-39 averages 100 per cent)

Steel mill operations, which averaged 83 per cent of capacity in the first three weeks of
January, dropped to around 6 per cent during the succeeding four weeks. Since settlement
of die wage dispute in the steel industry, output has recovered sharply and during the last
week of February operations were scheduled at 59 per cent of capacity.
Activity in machinery industries declined about 5 per cent in January, mainly because
of work stoppages in plants of leading electrical equipment producers after January 15.
Output of most other types of machinery continued to increase. Activity in the automobile
industry rose in January, even though plants of the leading producer remained closed by a
labor-management dispute. About twice as many automobiles and trucks were assembled
in January as in December. Passenger car assemblies were at an annual rate of 700,000
cars which, however, was only about one fifth of the 1941 rate.
Lumber production rose considerably in January and there were substantial increases
in output of most other building materials from previous low levels. Production gains
were also recorded in January at textile and paper mills, at printing and publishing establish­
ments, and in the furniture, tobacco, chemical, and rubber products industries.





Income Payments to Individuals, Based on
Department of Commerce Estimates. Wages
and Salaries Include Military Pay.
Monthly Figures Raised to
Annual Rates

Output of minerals rose 5 per cent in January, reflecting large increases in output of
anthracite and bituminous coal and a small gain in production of crude petroleum. Coal
production in January and the first part of February was at a rate about 8 per cent above
a year ago.

ploym ent

Employment at trade establishments in January showed a much smaller decline than
is usual after the Christmas season and employment in most other industries continued to
advance. Construction employment in January was double the level in the same month last
year, and, following large increases since last autumn, employment in the trade, finance,
service, and miscellaneous industries was substantially larger than a year ago. Employment
at factories was about one-fifth lower than at the beginning of 1945 as reductions in munitions
employment were only partly offset by increases in other employment. Unemployment rose
somewhat further by the middle of January to a level of 2,300,000 persons.

is t r ib u t io n

Value of department store sales in January was 15 per cent above last year and in the
first half of February the increase was larger. Retail sales at stores selling furniture, building
materials, and other durable goods were from 25 to 40 per cent above a year ago in January
and the total value of retail trade since the first of the year has been about one-fifth higher
than during the same period last year.
Indexes of the Cost of Living as Compiled by
Bureau of Labor Statistics.
Last Month
in Each Calendar Quarter through Sep­
tember 1940, Monthly Thereafter
(1935-39 average=100 per cent)

Railroad freight traffic was reduced from the middle of January to the middle of
February owing mainly to the work stoppage in the steel industry. Shipments of agricultural
commodities, coal, and general merchandise, however, remained at high levels.
C o m m o d i t y P r ic e s

Federal price policies were modified in the middle of February to permit increases in
ceilings made necessary by Federally approved wage-rate advances and sellers now may ask
for immediate price relief rather than waiting six months. Accompanying this action steel
prices were raised by 8 to 9 per cent. Ceiling prices for a number of other manufactured
products, including certain foods, cotton goods, paper, and lumber, have also been increased
in recent weeks.
Ba n k C r e d it

Treasury deposits increased by more than one billion dollars in the five weeks ended
February 20, reflecting large Treasury tax receipts, reduced expenditures, and sales of savings
bonds and tax savings notes in excess of securities redeemed. Deposits, other than Govern­
ment and interbank, showed little change during this period, in contrast to developments in
former post-drive periods when funds were shifted rapidly from Treasury balances to accounts
of businesses and individuals. Bank loans made for purchasing and carrying Government
securities were further reduced, while commercial, industrial, and agricultural loans continued
to increase.
Member Banks in Leading Cities.
Deposits (Adjusted) Exclude U. S. Govern­
ment and Interbank Deposits and Collection
Government Securities Include
Direct and Guaranteed Issues. (Latest
figures are for February 20)

Banks continued to increase their holdings of Government securities, purchasing bonds
in the market and Treasury certificates from the Federal Reserve Banks. Nonreporting banks
drew upon their balances with city correspondents to increase their loans and investments.
City banks met this and other drains in part by selling bills to the Reserve Banks.