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M ONTHLY REVIEW O f Credit and Business Conditions FEDERAL V o lu m e RESERVE 31 BANK MARCH OF NEW YORK 1949 N o .3 MONEY MARKET IN FEBRUARY The money market was under considerable pressure during tions in required reserves accompanying the collection of February until late in the month. Chief among the transac income and other tax checks and a moderate decline in cur tions absorbing bank reserves were substantial net Treasury rency in circulation. Although the Treasury paid out more funds than it took receipts, augmented by continued collections of personal in come taxes early in the period. While the Federal Reserve in during the last statement week under review (the week System continued to sell sizable amounts of Treasury bonds, ended February 2 3 ), member bank reserve positions remained such sales were at a slower pace than in January. As income tight until the latter part of the week. The banks’ required and other tax payments reduced demand deposits, required reserves continued to decrease, but there was a substantial reserves of the member banks fell substantially, thus provid contraction of Federal Reserve "float” (Federal Reserve funds ing the chief offset to the pressure on the bank reserves. A per sistent drain of funds from New York City to other parts of the country placed a large part of the burden of adjusting reserve credited to banks against checks still in the process of collec tion) and a further loss of reserves through a moderate rise in currency in circulation. The uneven distribution of these gains positions upon the City banks, at the same time easing, in part, and losses of funds tended to put pressure especially on the the position of the other banks. There was a considerable reserve positions of banks in certain sections of the country, demand for Federal Reserve credit, and excess reserves de while in other areas, particularly in New York City, the banks’ clined markedly. position was more comfortable. In the closing days of the month, the money market was easier than in several weeks. The post-Christmas return flow of currency came to an end late in January. During the following weeks, seasonal factors Demands for Federal Reserve credit were continuous that had a tightening effect upon member bank reserves, such throughout most of February but were heaviest in the early as net Treasury receipts, assumed more importance. Treasury part of the month. Member banks obtained such credit largely tax receipts were heaviest in the early part of the month and by selling substantial amounts of short-term Treasury securi fell off subsequently. However, a moderate withdrawal of funds from the Treasury’s War Loan accounts in depositary ties, although they borrowed sizable amounts temporarily from the Reserve Banks at times. In the three weeks ended Febru commercial banks in the middle of the month and a decrease ary 16, they also drew heavily upon their excess reserves (by in Government expenditures prevented any material easing of the money market until late in the month. In the three weeks ended February 16, Treasury deposits with the Federal Reserve Banks rose about 620 million dollars, to 1,754 million 380 million dollars). However, a part of these and other funds were used to reduce indebtedness to the Reserve Banks, which declined 220 million dollars, net, in this period. Most dollars. In addition, about 90 million dollars of funds with drawn by the Treasury from the money market were absorbed by retiring Federal Reserve System holdings of certificates of indebtedness maturing February 1. The Treasury’s substantial net excess of cash receipts from the money market coincided with other transactions, such as sizable purchases of Govern ment bonds by nonbank investors from the Reserve System, that caused further losses of reserves by the banks. The pressure on reserve positions was only partly eased by other money market factors, among which were the reduc CO NTENTS Money Market in F eb ru a r y ........................... 25 Postwar Changes in the Velocity of D e p o s i t s ........................................................... 27 The OEEC Interim R e p o r t ........................... 29 Population in the Second Federal Reserve District, 1940-48 ............................................. 31 Department Store T r a d e ................................ 33 MONTHLY REVIEW, MARCH 1949 26 of the decrease in excess reserves and member bank borrow ing occurred in the week ended February 2. In the week ended Ownership of Treasury Bills (As of last Wednesday of month*) February 23, both the excess reserves and the borrowings of member banks increased moderately and the System con tinued to purchase short-term Treasury securities. Over the entire four-week period, the System purchased (net) 414 million dollars of certificates and 327 million of bills, and sold 343 million dollars of bonds and 78 million dollars of notes. Although still sizable, Federal Reserve System sales of Treasury bonds during the past month were on a much reduced scale as compared with January, reflecting the decrease in market activity. Savings banks apparently did not purchase long-term restricted Treasury bonds as vigorously as in the previous month, presumably in part because their deposit gains were smaller. Switching operations of these institutions are reported to have continued on a sizable scale. However, the commercial banks did not appear to be as eager as before to take the eligible issues which the savings banks offered in order to obtain additional funds for the purchase of ineligible securities. Prices of eligible bonds declined slightly during the second half of the month. Thus, the past month saw an * Latest figures, February 16, 1949, are preliminary. # W eek ly reporting banks. t New series based on revised list of reporting banks. ings to 43 per cent. Part of the decline reflects Treasury cash abatement of the commercial banks’ tendency to resume their retirement of bills held by the System, but an equally large part war and early postwar practice of reaching out for longer-term has resulted from the shift in ownership of bills to the com bonds with funds raised principally through the sale of short mercial banks and other private investors. Thus, to a large term Government securities to the Reserve System. The Reserve System sold Treasury bonds and purchased extent, the expectation that Treasury bills would again become certificates in each week of the month. The certificate pur rates were "unpegged”, has been realized. an important money market investment instrument, once their chases in considerable part reflected investor preferences for other types of Government securities, particularly Treasury M e m b e r B a n k C r e d it bills and bonds. Member banks in need of reserves adjusted Reflecting the generally tight money market conditions, the their positions through the sale of certificates, particularly the weekly reporting member banks in 94 cities reduced their holdings of Treasury bills and certificates by 1,100 million dollars during the four weeks ended February 16. Their longer-dated issues, and invested in Treasury bills funds which they expected to retain only a short time. In recent months the steady rise in the rate on three-month Treasury bills to 1.16-1.17 per cent (while one-year certificates have remained on a 1 lA per cent basis) has favored the use of bills as a medium of short-term investment. As shown in the accompanying chart, Treasury bill hold Government bond holdings continued the rise which had begun shortly after the national elections. During the fourweek period, the rise amounted to 300 million dollars, or to one per cent of their total Government bond portfolios. Total Government securities held by the weekly reporting banks ings of commercial banks and nonbank investors have risen declined by 859 million dollars. Since the Federal Reserve substantially since July 1947, when the Treasury bill rate was Systems portfolio in this period showed an increase of 915 "unpegged”. Many industrial corporations, attracted by the million dollars in bills and certificates and a decrease of 610 higher rate, have invested idle demand deposits at least tem million in bonds, it appears that the reporting member banks porarily in Treasury bills. The combined bill holdings of nonreporting banks and nonbank investors (representing mostly the holdings of the latter) have in recent months been bore a large share of the loss of reserves resulting from pur chases of Government bonds by nonbank investors and from various other transactions. at the highest level on record. The increase in bill holdings About half of the decline in the weekly reporting banks’ of the weekly reporting member banks, which usually are fairly Government security portfolios during the four weeks occurred representative of changes at all banks, has been less rapid. among the New York City banks. The New York institu In October 1948 the holdings of those banks had regained tions, however, acquired only a nominal amount of bonds the levels of early 1945, but they declined subsequently owing (net). On the other hand, the liquidation of Treasury bills to the pressure on bank reserves. The Federal Reserve System, and certificates by reporting banks in the 93 other cities was which early in 1947 held close to 90 per cent of all Treasury accompanied by a rise of nearly 300 million dollars in their bills outstanding, had by February 16, 1949 reduced its hold- holdings of Treasury bonds. Thus it appears that those banks FEDERAL RESERVE BANK OF NEW YORK disposed of part of their short-term holdings to acquire longerterm bonds. Compared with a year ago, however, the Govern ment security holdings of all weekly reporting banks decreased by 3,744 million dollars, and the decline came almost entirely in Government bonds (3,594 million dollars), the highest yielding type of security. Commercial, industrial, and agricultural loans of the weekly 27 over a period of time in the rate of deposit turnover are more important than the absolute rate at any given time. In addi tion to check payments, reported debits include transfers of funds between accounts of the same holder, withdrawals of currency, and other nonpayment transactions, so that the computed rates of turnover are really indices, rather than actual measures of velocity of deposit money. reporting member banks continued their seasonal decline with Normally, deposits, debits, and the rate of turnover move a further decrease of almost 150 million dollars in the four in the same direction, with debits (and therefore the rate of weeks ended February 16. This brought the contraction of turnover) moving somewhat more rapidly than deposits. When business is good or improving, the use of bank credit (and business loans from the December 22, 1948 peak to about 370 million dollars. In the same period last year, the decrease was deposits) expands and money is spent more rapidly. In a less than 100 million dollars. Almost the entire decline in recession, both the money supply and the rate at which it circu such loans in recent weeks has occurred among the reporting lates tend to decline. During the middle 1930’s, however, the banks located outside New York City. Banks in the City reported only a nominal decline in the four weeks ended increases in total deposits and debits were just about parallel, so the turnover rate remained fairly constant. After 1937 February 16. Since February 2, in fact, business loans of the velocity began to decline and, with the brief exception of reporting banks in New York City have shown a small in 1941, continued to decline through 1945. The reason why the crease. On February 23, they were only 27 million dollars turnover rate during the 1930s remained unchanged, or de below the December 22, 1948 level (and only 76 million clined, was that the large additions to bank deposits resulting below the peak level in the City of November 10, 1948). The only other noteworthy development during the month from a heavy inflow of gold and from the Governments deficit financing program were not related to business demands for was the continued gradual decline in all other loans (includ money and therefore were often held idle. ing consumer loans) of the weekly reporting banks. Total During the war, the rate of deposit turnover continued to loans of all weekly reporting banks remained 1.5 billion dol fall off primarily as a result of three factors. First, since the lars higher on February 16, 1949 than on the corresponding Government was then the sole purchaser of roughly two fifths date in 1948. A large part of the increase was in commercial of the goods and services produced within our economy, a and real estate loans, although there was a substantial net number of intermediary transactions were eliminated that increase also in the "other loans” category, which includes would otherwise have taken place and given rise to bank instalment and other loans to consumers. debits between the time of production and the final con sumption stage. In the second place, deposits continued to P O ST W A R CH ANGES IN T H E V E L O C IT Y OF DEPOSITS The money supply is one of the factors mentioned most fre quently in discussions of the causes and manifestations of infla tion. Of considerable significance also, but less frequently dis cussed, is the velocity or rate at which money turns over. If the money supply were contracting at the same time that turn grow rapidly as the Government continued to finance a large part of its deficit by borrowing from banks. Finally, as a result of a combination of high incomes and a shortage of producers’ and consumers’ goods, both business concerns and individuals tended to hold larger idle deposit balances than usual. Since the end of the war, some of the factors which tended over was increasing, the sum total of all payments in the to reduce the velocity of money have been reversed. Goods economy might remain the same and the price level would then be unaffected. and services for civilian use, with very few exceptions, have Perhaps one reason why the rate at which money circulates ment as a buyer of goods has declined; its share of the gross become more plentiful. The importance of the Federal Govern through the economy is not given more attention in discus national product dropped from 42 per cent in 1944 to 8 per sions of inflationary developments is the difficulty of measur cent in 1948. Deposits have fluctuated within relatively nar ing it. In particular, there are no statistical data with which row limits since 1945, and business activity has continued to to measure the rate of turnover of banknotes and coins. How remain on a very high level. As a result, both debits and de ever, a fair idea of the rate at which bank deposits are being posit turnover showed a fairly steady increase from the end used can be had from published data on the ratio of bank of the war until very recently. debits to deposits. Such ratios are even more significant if During the middle 1930’s, total deposits (after deducting limited to demand deposit accounts, since a very high pro interbank deposits and collection items) at all commercial portion of payments in this country is made by means of checks banks turned over on the average 15 or 16 times a year. By against demand deposits, while rates of turnover of time de 1945 the rate had declined to less than 11 times a year. While posits are much less subject to rapid change. Also, changes final figures for 1948 are not yet available, the rate probably 28 MONTHLY REVIEW, MARCH 1949 rose to approximately 14 times, about the same as that prevailing in 1939 and 1941. The velocity of demand de ness conditions. The velocity of deposits in this City reached a low point of 17.1 in 1940, compared with over 30 in the posits is, of course, much greater than that of time deposits, middle 1930’s. From the 1940 low, it increased gradually each but the short-run fluctuations in the series for total and for demand deposits are very similar. In 1929 the velocity of de year until 1947, when there was a slight decline, but in 1948 it again moved up fairly rapidly. The wartime increase in New mand deposits of all commercial banks reached a peak of 54. York may partly reflect debits arising from the Treasury’s War In the middle 1930s the average turnover was around 25 or Loan financing and the large amount of transactions in out 27 times a year. At the end of the war it was down to 13V^> standing Government securities which accompanied War Loan but it has since recovered to about 20. The decline in velocity drives. Outside New York City the turnover of demand de has been larger for demand than for total deposits because posits at the weekly reporting member banks declined from most of the increase in deposits in the past 15 years has been around 22 or 23 times a year in the middle 1930’s to 16.1 in in demand balances and a large part of these balances have 1945. Since then, the advance has been fairly steady. The been held relatively idle. The accompanying chart shows monthly fluctuations in the average for 1948 was about 27 in New York and 19 outside New York. velocity of demand deposits at the weekly reporting member A study of the velocity figures for each of the Federal banks in New York City and outside New York from the be Reserve Districts indicates that all sections of the country have ginning of 1946 to date (adjusted for seasonal variation). The participated in the postwar increase in turnover rates. The rise in velocity can be seen clearly from the five-month moving most substantial increases outside New York City were in average, which has been plotted as a dashed line. Both curves the Cleveland, Dallas, Philadelphia, and Atlanta Reserve Dis seem to indicate that the velocity of demand deposits reached tricts. In all of these the velocity of adjusted demand deposits a peak in the fall of 1948, and turned down somewhat at the was roughly 8 to 10 per cent higher last year than in 1947. year end. Turnover rates in New York City, as the chart also illus The smallest increases were in the Minneapolis, Richmond, and San Francisco Districts, where the rate of turnover in trates, are higher and often move quite differently from those 1948 was only 2 or 3 per cent higher than in the preceding in other parts of the country. This difference is largely attribut year. A leveling off of the rate toward the end of the year was able to the fact that financial transactions account for a much also noticeable in all of the districts. higher proportion of debits in New York City than else where in the country. Financial accounts are the most active which statistics are available, increases in the velocity of total type of deposit account and are subject to especially wide fluc deposits (other than interbank) during recent months have tuations which are not necessarily related to changes in busi- been quite small. Differences within the District in the annual Annual Rate of Turnover of Demand Deposits* of Weekly Reporting Member Banks in New York City and Outside New York City (Monthly, 1946-Jan. 1949; adjusted for seasonal variation) In those Second District cities outside New York City for turnover of total deposits, however, are considerable. The character of the economic activity in the community and the proportion of time deposits to total deposits have an important influence on the activity of deposit accounts. In communities which are primarily residential, such as Montclair, New Jersey, the turnover rate is low— for total deposits of all clearing house banks in such cities, it is currently around 5 or 6 times a year. In Binghamton and Bridgeport, which are industrial communi ties, it has been averaging approximately 10 times a year. In Albany, where debits and deposits are subject to special influ ences arising from the handling of State funds, the average last year was about 21. Does this general increase in the velocity of deposits have any special significance beyond marking the postwar return to normal trade relationships and expenditure patterns? The ac companying table showing percentage changes during the three postwar years in the rate of turnover of demand deposits (other than interbank accounts and collection items) and in the money supply, gross national product, the volume of indus trial production, and prices may help to answer the question. In 1947 and 1948 both production and prices increased, but the money supply (demand deposits adjusted, U. S. Govern ment deposits, and currency outside banks) showed little 29 FEDERAL RESERVE BANK OF NEW YORK Annual Percentage Changes in the Turnover of Commercial Bank Deposits _____________________ and in Related Factors, 1946-48_________ ____________ Factor 1946 1947 1948p Gross national product................................ Industrial production................................... Wholesale prices............................................. Consumers’ prices.......................................... M oney supply*............................................... Turnover of deposits#.................................. — 1 .9 — 1 6 .3 + 1 4 .5 + 8 .5 + 0 .8 + 1 0 .4 + 1 0.7 + 1 0 .0 + 2 5 .6 + 14 .3 - 5 .9 + 1 5 .4 + 10.1 + 2 .7 + 8 .4 + 7 .5 + 0 .4 + 1 6 .3 p Preliminary. * Demand deposits adjusted, U. S. Government deposits, and currency outside banks. # Demand deposits of all commercial banks, other than interbank deposits and collection items; 1948 estimated. Source: Board of Governors of the Federal Reserve System, U. S. Department of Commerce, and U. S. Department of Labor. change, owing primarily to policies adopted by the Treasury In addition, there are plans for increased production of food and raw materials in the dependent territories of the area. Al though the full effects of many of these projects will not be felt for 10 or 15 years, significant gains are expected by 1952-53. The OEEC, in examining the prospects for achieving the various production targets, concludes that "with some excep tions there will be enough food and raw materials physically available to support the production programs as a whole”, assuming the countries are able to pay for the imports neces sary for this output. Resources for capital investment, how and the Federal Reserve System. In order to handle the larger ever, are likely to fall short of needs, and it is considered volume of payments generated by higher production and price doubtful whether output per manhour will be increased the levels, the rate of turnover of deposits increased; deposits that anticipated 15 per cent in the next 3^2 years. The OEEC had formerly been held idle were activated. This increase, as consequently regards it as unlikely that the production targets shown in the table, was roughly in line with the increases in will be reached by 1952-53. The most significant estimates in the report relate to the production and prices. After the middle of 1948, prices, and consequently many value series, showed signs of leveling off after nearly a decade of practically uninterrupted increases. areas balance of payments. Imports from the outside world at the end of the European Recovery Program are placed at This leveling off has been reflected in the recent declines in 99 per cent of 1938 in terms of physical volume, or 12.8 bil the velocity of deposits. lion dollars at 1948-49 prices. Of the total imports in 1952- TH E OEEC IN T E R IM REPO R T and fuel for 55 per cent, and manufactures for only 7 per 53, food is expected to account for 38 per cent, raw materials As the first year of the European Recovery Program comes to a close and Congressional hearings on appropriations for the second year begin, the Council of the Organization for European Economic Cooperation (OEEC) has submitted a report to the Economic Cooperation Administration on the cent. The current sources of imports differ widely from the prewar trade pattern, but it is planned to restore that pattern by decreasing imports from North and Central America and increasing them from other parts of the world, as shown in Table I. The countries’ estimates of the import goods that will be programs of the participating Western European countries for the achievement of "viability”, i.e., independence from "extra ordinary outside assistance” by 1952. The programs and con clusions set forth in the report are reviewed and commented upon below. The plans of the participating countries are based on the following assumptions: (1 ) a continuation of peace; (2 ) a high level of employment throughout the world, and especially in the United States; (3 ) a high level of world trade; (4 ) the continued mutual co- control of inflationary pressure; (5 ) operation; and (6 ) United States assistance during the next three years "on a sufficient scale.” available in 1952-53 from areas other than North and Central America are considered by the OEEC as about 1 billion dollars too high, in the aggregate. Nevertheless, if the participating countries "are prepared to take positive action to encourage new production either by offering long-term contracts, indi vidual or collective, or by investment or by any other method, the volume of supplies available may well be increased. How ever, in view of the time necessary to develop primary pro duction, the full effects of plans made now may not be felt until after 1952.” Exports to nonparticipating areas are scheduled by the indi- A large increase in Western Europe’s industrial and agri Table I Sources of Imports of OEEC Countries from Outside World Excluding Imports from Dependent Territories (In per cent of total) cultural output by 1952 is planned. Industrial output, on the basis of the national programs, is scheduled to rise about 30 per cent above the prewar level by 1952-53, or about 25 per 1938 1947 1952-53 program North and Central America. . . . South America............. ..................... Nonparticipating sterling area*. Eastern Europe................................. Middle East, Far East, etc......... 3 1 .5 1 3.1 2 2 .3 2 3 .1 1 0 .0 5 8 .4 1 3 .6 1 6 .0 7 .2 4 .8 2 9 .7 1 6.4 2 5 .8 17.2 10.9 T otal........................................ 1 0 0 .0 1 00.0 100.0 cent above present levels. Agricultural output is to rise about 15 per cent above the prewar level. The increase in agricul tural production over prewar is expected to be concentrated in the United Kingdom, France, and Turkey; the other coun tries plan merely to regain their prewar levels.1 1 The report points out that a 3 per cent increase in present agri cultural output would eliminate 1 billion dollars’ worth of imports, or virtually the whole estimated deficit of the area in 1952-53 with the outside world. * The non participating sterling area includes the British Empire ''except, the Uni ted Kingdom, Eire, Canada, and Newfoundland), British Mandated territories, British protectorates, Burma, and Iraq. Source: Organisation for European Econom ic Co-operation— Interim R eport on the European Recovery Programme, Vol. I (December 1948). 30 MONTHLY REVIEW, MARCH 1949 vidual countries to aggregate 10.6 billion 1948-49 dollars in 1952-53, or 33 per cent more than in 1938. Manufactures are to comprise 80-90 per cent of the total. The changes from in this regard that: "since, however, it is the view of certain countries that the total trade, including both exports and im ports, with this area may be capable of further expansion as 1938 are to be as follows: increases of 46 per cent to North a result of discussion with the countries concerned, the pro and Central America, 92 per cent to South America, and 65 visional estimates are not regarded as representing an upper per cent to the nonparticipating sterling area2; a decrease of 20 limit of what may be possible.” per cent to Eastern Europe; and an increase of 27 per cent to The emphasis on the balance of payments with the outside other areas. The OEEC comments regarding these estimates world should not be allowed to obscure the importance of that if there are no significant changes in present national intra-OEEC trade (including that with the OEEC countries’ export policies, exports in 1952-53 actually are likely to dependent areas). In the program for 1952-53 such imports amount to only 8.5 billion dollars. If, however, there are basic are expected to comprise 48 per cent of total imports. How changes in the export policies of the participating countries, ever, the programs of the individual countries are not com export earnings might reach 9.5-10 billion dollars. pletely reconcilable in this respect, since the aggregate intra- "Invisible” earnings in 1952-53 are estimated by the partici pating countries at 1.2 billion dollars, in addition to 250 mil OEEC balance of payments on current account shows that lion dollars that French, Belgian, Dutch, and Portuguese de million dollars more to one another than they expect to im the nonsterling participants expect in 1952-53 to export 394 pendent territories are expected to earn. The British territories port from one another. The excess exports are only 7 Vi per are not included in these estimates, although they are expected cent of the total, but for certain individual commodities the discrepancy is much larger. Trade between the nonsterling to have a surplus with North and Central America of 0.3 billion dollars. The estimates are considered by the OEEC too high by about 10 per cent. participants and the sterling area is expected to be in broad balance, but the estimates of the distribution of trade made The deficit with the outside world in 1952-53 is expected by the nonsterling participants are quite different from those by the participating countries to be reduced to an aggregate made by the United Kingdom. Another difficulty in the intra- of 0.8 billion dollars, as shown in Table II, total earnings being European trade program pointed out by the OEEC is that the expected to pay for 94 per cent of imports. The OEEC, on Benelux countries (Belgium, Luxembourg, and the Nether the other hand, forecasts that total earnings from exports and lands) and the Bizone (the American and British-occupied invisible items will be only 9.8 billion dollars if present export policies are continued. On the assumption of basically altered European trade, but the other European countries are unlikely export policies, the OEEC estimates total earnings at about to be able to pay in dollars. zones of Germany) evidently expect to earn dollars in intra- 11 billion, or enough only to pay for 85-90 per cent of pro The OEEC feels that, in spite of the inconsistencies in the grammed imports. This pessimistic conclusion, however, is various national plans, some expansion of intra-European trade subject to an important qualification: in the OEEC estimate based on fundamental changes in export policy, the effects of such changed policies on trade with the nonparticipating in excess of the programmed amount may be possible. Some of the plans did not take full account of the prospective avail ability of certain products, particularly food, within Europe. sterling area are not considered. The report merely states Increased trade in less essential products is also considered advantageous, so long as it does not involve dollar payments. 2 The nonparticipating sterling area includes the British Empire On the basis of the various national production and trade (except the United Kingdom, Eire, Canada, and Newfoundland), British Mandated territories, British protectorates, Burma, and Iraq. estimates, the participating countries expect their combined gross national product by the end of the Recovery Program Table II Combined National Forecasts of Current Transactions of OEEC Countries with the Outside World, 1952-53 (In billions of dollars at 1948-49 prices) North N on p a r Middle and ticipat East, Central South ing sterl Eastern Far East, A m erica A m erica ing area Europe etc. Im port programs........... Programmed exports’plus net invisible earnings* 3 .8 2 .1 3 .3 2 .2 1.4 to be about 20 per cent above 1938, or about 35 per cent more than in 1947. Consumption levels are to return almost to 1938, compared with present levels of around 20 per cent less. These increases are considered too great by the OEEC, T otal 12.8 2 .5 ** 2 .0 4 .0 2 .1 1.4 12.0 B ala n ce a cco r d in g to programs..................... - 1 . 3 * * - 0 .1 + 0 .7 - 0 .1 0 .0 - 0.8 mainly on the ground that the imports necessary to maintain the requisite high level of production probably cannot be paid for. The OEEC report estimates that the aggregate gross national product will probably be only 10 to 15 per cent above 1938, and consumption only 5 to 10 per cent above 1948 (or 12 to 16 per cent under 1938). * Including estimated balances of French, Belgian, Dutch, and Portuguese de pendent overseas territories, amounting to 0.25 billion. ** In addition, the dependent overseas territories of the United Kingdom are expected to have a surplus with North and Central America of 0.3 billion. This would increase earnings in North and Central America to 2.8 billion, and reduce the deficit there to 1 . 0 billion. Source: Organisation for European Econom ic Co-operation— Interim Report on the European Recovery Programme, Vol. I (December 1948). The OEEC thus paints a rather gloomy picture of Euro pean prospects in 1952-53, even though it considers the various programs likely to fall short of their goals by only small per centages. In appraising the OEEC’s conclusions, it must be FEDERAL RESERVE BANK OF NEW YORK 31 borne in mind, however, that the figures are subject to a wide margin of error. In particular, the difficulties of fore and Central America are therefore scheduled to decline by 48 casting the volume and direction of a major part of the worlds per cent (in terms of 1948-49 prices) between 1947 and trade four years hence are obvious. For example, a signifi cant shift in the terms of trade alone might either double or 1952-53, i.e., from 7.3 billion dollars to 3.8 billion, or to less than the 4.1 billion imported in 1938. This would signify volume of imports from the dollar area. Imports from North wholly eliminate the gap between expected earnings abroad the perpetuation of discriminatory trade and exchange arrange and the imports necessary to support the OEEC economies at ments abroad, and a considerable loss in trade to the United full employment. Furthermore, relatively minor improvements States. To prevent this, it would be necessary for the European in crop conditions, working hours, and the allocation of man countries to conduct an aggressive sales campaign in this power might substantially increase the volume of domestic country at competitive prices, and for the United States to be production and thus permit a reduction in imports, or an in willing to face increased foreign competition in the domestic crease in exports. market, unless this country is prepared to supply free aid The aggregative approach of the European Recovery Plan, while it has great virtues, obscures the fact that some of the problems of the OEEC area are the problems of a few indi vidual countries only, not necessarily shared by the rest. For indefinitely or to export capital on a very large scale. PO P U L A T IO N IN T H E SECOND F E D E R A L R E SER V E D IST R IC T , 1940-481 instance, the decline in "invisible” foreign income for the In the nine years since the last national Census of population entire area from about two billion dollars in 1938 to an was taken, both the Second Federal Reserve District and the actual deficit of 750 million in 1947 is mainly a British and United States as a whole have experienced a considerable Dutch problem. If, as the British believe, they can solve their increase in population. Although the figures needed for a part of the problem by 1952, this particular difficulty is thorough analysis of population developments will not be actually in good part taken care of. Similarly, the OEEC area’s available until tabulation of the data from the 1950 Census balance-of-payments deficit with the Western Hemisphere that is completed two or three years hence, the changes that have will remain in 1952 will to a large extent be the problem of taken place since 1940 can be estimated from the current re ports of the Bureau of the Census. the Benelux countries and Germany. If the Benelux countries are able to shift some of their Western Hemisphere purchases to European sources, and if Germany also can make progress A sharp rise in the national birth rate during and since the war to levels that prevailed in the 1920s has belied predic in that direction, the dollar problem, too, can thus be solved, tions of an early leveling off or decline in population. A l at least in part, by the policies and actions of individual coun though the postwar peak in the rate of natural increase (the tries. Furthermore, the OEEC program includes, along with excess of births over deaths) seems to have been reached in relatively strong countries, countries with special problems— 1947, absolute gains through natural increase continue to be chiefly Greece, Austria, and Germany, and perhaps also Italy— substantial. The total population of the continental United that may find it difficult to do without "extraordinary assist States was estimated at about 148 million at the end of 1948, ance” after 1952 unless circumstances are highly favorable. an increase of roughly 13 per cent, or 16 million, over the It is important to note in this connection that the policies recommended by the OEEC include vigorous control of in April 1, 1940 Census count. The principal factor in this in crease has been the excess of births over deaths (including war flationary pressures, reexamination of investment programs losses), with immigration accounting for less than 10 per cent of the gain. to eliminate unnecessary duplication and to encourage those investments that will aid most in the attainment of viability, Population gains in the Second Federal Reserve District strenuous efforts to reduce dependence on imports that cost since 1940 have not been as great as in the rest of the country. dollars, and "radical changes in export policy”. What the OEEC means by "radical changes in export policy” is not In mid-1948 an estimated I8 V2 million people lived in this District. The increase of about 1 Vi million since 1940 repre fully defined, but the report says for instance that: sents a gain of approximately 8 Vz per cent, a rate of growth The power of Western Europe to regain lost markets will depend to a considerable extent on prices. The export prices of many OEEC countries are not in all cases competitive with those of the United States . . . It is unlikely that without a substantial reduction in relative prices, it will be possible to achieve the large export expansion planned. (Paragraph 191). The anticipated effect of the European programs on the about 20 per cent less than for the country as a whole. This relatively slower rate of growth goes back to the depression decade. Up to about 1932 the rate of population gains in this District exceeded that in the rest of the country, but in the later 1930s the rate of growth here contracted even more sharply than it did nationally and this District’s share of the country’s population declined somewhat. the chart.) (See Table I and trade of the United States is rather striking. It is anticipated by the report that Western Europe will not, after 1952, be able to earn enough dollars to finance anything like the present 1 Copies of a more extensive analysis, on which this article has been based, may be obtained from the Domestic Research Division of this bank on request. MONTHLY REVIEW, MARCH 1949 32 Table I Total Population of New York State, the Second District, and the United States* Table II Percentage Changes in Total Population, Selected Periods 1940-48* Population (in thousands) Date New York State Second District United States Second District as per cent of United States June 1, 1900. . . April 1 , 1 9 3 0 ... July 1, 1940.. . July 1, 1944. .. July 1, 1948. .. 7,269 12,588 13,460 12,815 14,386 8,887 16,118 17,107 16,454 18,557 75,995 122,775 131,954 132,552 146,114 11.7 13.1 13.0 12.4 12.7 * Excludes armed forces overseas. Source: U. S. Bureau of the Census; Second District estimated by the Federal Reserve Bank of New York. The decline in the Second District’s share was further ac Area New Jersey................................ Connecticut............................... Second Federal Reserve Dis W ar Postwar Defense T otal July 1, 1940 July 1, 1942 July 1, 1945 July 1, 1940 to to to to July 1, 1942 July 1, 1945 July 1, 1948 July 1, 1948 -2 -3 # +4 - 1 - 1 + 12 +15 +15 + 7 + 14 +18 - 1 -2 + 13 + 8 united States outside Second Total United States................. +2 - 1 +10 +11 + 1 - 1 +11 + 11 * Excludes armed forces overseas. # Increase of less than X of 1 per cent. Source: Computed from data of the U. S. Bureau of the Census b y the Federal Reserve Bank of New York. celerated during the years 1941-44, when, in addition to losing personnel stationed here, the District also lost civilian popula not share in the employment boom of the early years of de fense and war production to the same extent as some other tion through out-migration to other areas (see Table II). districts. In addition, large numbers went from this region During the defense period— July 1, 1940 to July 1, 1942— to military establishments elsewhere in the United States. The total population declined in the Second District, although in tendency to locate large training camps away from the East Coast raised the ratio of military to total population in the more people to the armed forces than it gained in military the rest of the country it increased 2 per cent. There was con siderable out-migration of civilians to defense production centers, since this area, particularly New York City with its rest of the country to almost double that in the Second District, particularly in 1943 and 1944. emphasis on consumers’ nondurable goods manufacturing, did Between mid-1944 and mid-1945, when the New York City area felt the full impact of the war production boom, the Total Population of the United States and the Second District*: Second District as a Per Cent of United States (July 1, 1910-48) Second District’s civilian population rose while the rest of the country continued to show an over-all decline. As reconver sion progressed more rapidly in this area than in most other sections of the country, population gains from mid-1945 to mid-1947, reflecting increased in-migration as well as de mobilization of the armed forces and a high rate of natural increase, surpassed those of the rest of the country. Nonethe less, this District has not fully recovered its prewar share of the United States population. Since mid-1947 population in the rest of the country has again begun to increase more rapidly than in the Second District, and it appears likely, as a result of more rapid expansion, both economically and in terms of population, in other sections of the country (par ticularly the Far West) than in this region, that the Second District will not regain the proportion of population it main tained in the early 1930’s. The fact that this District contains a greater proportion of old people than does the country as a whole may contribute to the decline of its share in the total population of the country. The most important factor in population growth in this District, as in the rest of the country, has been the excess of births over deaths, although the rate of natural increase here did not reach the levels achieved in the rest cf the country. Net in-migration was of relatively minor importance in the population growth cf this District, in contrast to the imponant role which ic played in the population increases enjoyed by sections of the West. Nevertheless, the States which comprise * Excludes armed forces overseas. # Plotted on ratio scale to show proportionate changes. S ource: U. S. Bureau of the Census and Federal Reserve Bank of New York. the Second District ranked high in absolute annual increases in net in-migration during the later war years and the post war period, reversing the prewar tendency to lose population FEDERAL RESERVE BANK OF NEW YORK 33 through migration. (Connecticut, however, had already shown gains than the less industrialized sections of the State. On the a net increase through migration in the prewar period.) It is most likely ( although the data are inadequate to fully substan other hand, within these counties, small communities (those with populations of less than 10,000) grew more rapidly than the cities. The same tendency for the population to shift away from the most heavily populated areas may be observed in tiate this point) that a sizable share of net in-migration in this District represents foreign immigration, many of the immigrants of the late war and postwar periods apparently New York City. Since 1940, according to estimates of the having settled in the Middle Atlantic States. Consolidated Edison Company, Manhattan’s population has The very scattered and meager data on the characteristics grown only 3 per cent, compared with gains ranging from of the Second Districts population seem to indicate that the 6 to 14 per cent in the outlying boroughs. In the New Jersey division of the New York-New Jersey long-term tendency toward industrialization and suburbaniza tion continued during the past nine years, especially after losses to the armed forces were recouped. There are even indications that highly industrialized cities like Buffalo and Syracuse, which Metropolitan District a similar trend was apparent. The popu lation of the four large cities4 increased 13 per cent from 1940 either ceased growing or lost population during the 1930’s, gain was 16 per cent. have recently enjoyed large increases in population which may be the beginning of a new upward population movement. to 1947 while in the remaining part of this area the population In New York State nonfarm rural areas experienced their greatest growth in population during the decade of the In the absence of precise data for the Second District, some twenties, while farm population declined during the same conclusions may be drawn from figures for the larger geo period. In the thirties the growth of nonfarm areas con graphic region of which the Second District is a part, namely, tinued. However, the farm population also increased during the Northeastern States.2 This assumes that trends in the the thirties, the decline in farm population in purely agricul Second District were rather similar to those in the rest of the Northeastern area. tural regions being more than offset by a gain in farm popula While the farm population in all sections of the country (except the Pacific States) declined by about 10 per cent on the average between 1940 and 1947, the rural-nonfarm popu lation, both in the country as a whole and in the Northeastern States, made relatively greater gains than the urban population.3 The number of persons residing in rural-nonfarm areas in the Northeastern States increased far more rapidly than in the rest of the country— about 24 per cent in the former compared with about 11 per cent in the latter. Despite a slight decline in farm population, the rate of gain in total rural population in the Northeastern States was still 2 Vi times as great as that for urban population, with the result that the urban proportion of the area’s population declined from 77 per cent in 1940 to 75 per cent in 1947. The spectacular growth of rural-nonfarm areas may, at least in part, reflect the fact that some commu nities classified in 1940 as rural (and still considered as such for the 1947 estimate) have experienced considerable growth and have actually become suburban communities likely to be classified as urban in the next Census. tion around the large cities; in the counties around New York City, for example, farm population grew almost 60 per cent. Undoubtedly, a large number of these "farmers” were not primarily engaged in farming, but were commuting to the nearest city. However, they produced enough on their land to be classified with the farm population. (A "farmer” was de fined in 1940 as one whose produce was valued at more than $250 a year.) It is likely that the communities which are satellites of the large industrial centers in the Second District will continue to grow more rapidly than either farm areas or the large cities themselves. While it seems likely that the proportion of the country’s population residing in the Second District will not again reach the levels it did during the 1930’s, it is noteworthy that the Second District States have all gained by net in-migration over the period 1940-47, whereas in some of the more rural States the net out-migration more than offset the natural increase, often a substantial number in itself. As a result, housing con struction has been maintained here at a high level since the war and the Second District’s status as a mass market for con sumers’ goods has been enhanced. New York State data also seem to indicate that the ruralnonfarm population increased relatively more than the popu 4 Newark, Jersey City, Paterson, and Elizabeth. lation in either urban or farm communities. On the whole, the industrial and suburban counties show greater population 2 The Second District accounts for somewhat less than half of the population of the Northeastern States, which include New England, New York, New Jersey, and Pennsylvania. 3 Urban areas are defined by the Bureau of the Census as cities and other incorporated places having 2,500 or more inhabitants. The remainder of the population is classified as rural, and is subdivided into the rural-farm population, which comprises all rural residents living on farms, regardless of occupation, and the rural-nonfarm population, which comprises the remaining rural population. D E P A R T M E N T STORE T R A D E In February, sales at Second District department stores declined contraseasonally, reflecting a further narrowing of consumer buying. According to a preliminary estimate, sea sonally adjusted dollar sales volume was about 6 per cent lower than a year ago, and may have reached the lowest level in two years. Beginning with the last week in January, sales ran steadily below those of the corresponding weeks of 1948. 34 MONTHLY REVIEW, MARCH 1949 Indexes of Department Store Sales and Stocks Second Federal Reserve District* (Adjusted for seasonal variation, 1935-39 average=100 per cent) February was the second of the past four months in which daily average sales showed a year-to-year decline. It is doubtful that the buying restraint of this past February, as compared with the same month a year ago, has been due to the circumstance that Easter is farther away this year. Sales in the pre-Easter season of 1948 were particularly disappointing, but rose substantially after Easter Sunday, partly because of exceptional promotional efforts and clearance sales. The trend of department store sales in this District has been downward ever since the post-Easter expansion of sales in May and June of 1948. In those two months, the seasonally adjusted daily rate of sales had risen to 262 per cent of the 1935-39 average. By January of this year, however, this bank’s index had fallen to 243 per cent and it is expected to be at least 15 points lower for February. The stores cut their stocks at the end of the fiscal year (January 31) more than usual. Trade sources reported, how ever, that markdowns on merchandise left over from the Christmas season were not greater than in the year before. It is therefore likely that the reduction in stocks came primarily * Seasonal factors used to adjust sales have been revised, as noted on accom panying table. Department and Apparel Store Sales and Stocks, Second Federal Reserve District, Percentage Change from the Preceding Year Jan. 1949 Department stores, Second D istrict----New York C ity ...................................... Northern New Jersey........................... Newark................................................ Westchester C ounty.............................. Fairfield C ou n ty .................................... B ridgeport........................................... Lower Hudson River V alley............... Poughkeepsie...................................... Upper Hudson River V alley............... A lbany.................................................. Schenectady........................................ Central New York S tate..................... Mohawk River V alley...................... U tica................................................. Syracuse............................................... Northern New Y ork State.................. Southern New York State................... Bingham ton........................................ Elm ira.................................................. Western New York State.................... B uffalo................................................. Niagara Falls...................................... R ochester............................................ Apparel stores (chiefly New Y ork C ity). - Stocks on Jan. through hand Dec. 1948 Jan. 31, 1949 3 - 5 - 1 - 5 +23 + 2 - 1 + 2 + 4 + 9 +15 + 3 - 4 - 1 + 5 - 5 + + + + - + 4r - 2 + + + + + + + + + + + - 2 3 5 3 3 1 1 6 9 8 7 +10 + + + + + + 4 6 1 3 3 5 7 9 2 1 5 9 0 0 2 1 2 5 + + — - 2 6 6 4 10 8 +11 + 6 -1 1 0 0 4 4 3 + + + + 9 9 9 + 1 - 3 - 9 -1 3 +13 5 - 1 - 6 3 r Revised. Indexes of Department Store Sales and Stocks Second Federal Reserve District (1935-39 averages 100 per cent) 1949 1948 Item Jan. N ov. Dec. Jan. Sales (average daily), un ad justed ................ Sales (average daily), seasonally adjusted*. 193r 241 298 229 414 247 194 243 Stocks, unadjusted.......................................... Stocks, seasonally adjusted............................. 205 233 278 242 215 236 228 201 r rujvistju. * Seasonal adjustment factors for 1942-48 revised; available upon request from Research Department, Dom estic Research Division. month’s Review. In January the value of net merchandise receipts was about 15 per cent less than a year previous. Orders outstanding at the end of that month showed a substantial seasonal increase over the end of December, but Net sales Locality from the tightening up in store buying policy discussed in last were more than one-third below the level for the same date in 1948. Indexes of Business 1949 1948 Index Industrial production*, 1935-39 = 100 ........ (Board of Governors, Federal Reserve System) 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 = 1 0 0 ........................... (Bureau of Labor Statistics) New Y ork State, 1935-39 = 100................ (N . Y . S. Div. of Place, and Unemp. In s .) Factory payrolls United States, 1939 = 100............................. (Bureau of Labor Statistics) New York State, 1935-39 = 100................ (N . Y . S. D iv. of Place, and Unemp. In s.) Personal income*, 1935-39 = 100.................. (Department of Commerce) Composite index of wages and salaries*J, (Federal Reserve Bank of New York) Consumers’ prices, 1935-39 = 100................. (Bureau of Labor Statistics) Velocity of demand deposits*#, 1935-39 = 100 (Federal Reserve Bank of New York) New Y ork C ity .............................................. Outside New York C it y .............................. Jan. N ov. Dec. Jan. 193 195 192 191p 244r 255 257 262p 192 192 186p 325r 334 344 329p 161 162 159 155p 131 125 124 120p 359 379 378p 302 301 298 304r 321 322p 288p 184r 195 196p 169 172 171 171 88 86 101 95 87 99 89 93 * 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, Dom estic Research Division. # Seasonal adjustment factors for 1942-48 revised; available upon request from Research Department, Financial Statistics Division. FEDERAL RESERVE BANK OF NEW YORK 35 INDUSTRIAL PRODUCTION National Summary of Business Conditions (Summarized by the Board of Governors of the Federal Reserve System, February 26, 1949) production showed little change in January, continuing somewhat below the peak «*• of last October and November. Employment in manufacturing showed a marked decline. Value of department store sales showed a larger decline than usual in January and the first three weeks of February. Prices of agricultural commodities decreased further but recovered part of their declines in mid-February. Prices of some industrial products were reduced further. TNDUSTRIAL In d u s t r i a l P r o d u c t i o n 1941 1942 1943 1944 1945 1946 1947 1948 Federal Reserve index. Monthly figures; latest figure shown is for January. EMPLOYMENT IN NONAGRICULTURAL ESTABLISHMENTS 1942 1944 1946 1948 1942 1944 1946 1948 bureau of Labor Statistics* estimates adjusted for seasonal variation by Federal Reserve. Proprietors and domestic servants are excluded. Midmonth figures; latest shown are for January. CONSTRUCTION CONTRACTS AWARDED The Board’s seasonally adjusted index of industrial production was 191 per cent of the 1935-39 average in January, as compared with 192 in December, 195 in November, and 193 in January 1948. Activity in durable manufacturing industries decreased slightly in January, while non durable goods production was somewhat above the December rate. Output of minerals declined 3 per cent. Steel production rose 2 per cent in January to capacity levels and was at the highest rate on record. Activity in the automobile industry also expanded, reflecting mainly increased production of trucks and of parts for new model passenger cars. Output in the steel and automobile indus tries has been maintained at the advanced January rate in February. Activity in machinery industries decreased about 4 per cent in January, reflecting reductions in industrial equipment as well as household appliance lines. Lumber production showed a substantial decline, in part be cause of unfavorable weather conditions in the Northwest, and activity in the furniture industry declined 6 per cent. Output of most other durable goods was maintained at about the December level. According to preliminary indications, output of nondurable goods showed a slight increase in January. Activity at cotton textile, paper, and paperboard mills was above the reduced December rate. Newsprint consumption showed less than the usual seasonal decline. Activity in the petroleum refining, chemicals, and rubber products industries, on the other hand, was reduced somewhat. Output of manufactured food products showed the usual large seasonal decline. Crude petroleum production declined 3^2 per cent in January and was curtailed further in the early part of February, as stocks of crude and refined products continued to rise. Anthracite production was curtailed sharply in the latter part of January and early February, mainly because of unusually mild winter weather in the East. Output of bituminous coal and of metals was main tained in January at the reduced level of the preceding month. Em p l o y m e n t Employment in nonagricultural establishments showed more than the usual large seasonal decline in January and was 250,000 less than in January 1948, reflecting mainly reduced employ ment in most manufacturing industries. The number of persons unemployed increased by 700,000 in January and was substantially above the level of a year ago. Co n s t r u c t io n Value of construction contract awards, according to reports of the F. W . Dodge Corporation, dropped sharply in January, with marked declines in most classes of construction. The number of new dwelling units started in January, as estimated by the Bureau of Labor Statistics, was 50,000 units as compared with 56,000 in December and 53,000 in January 1948. D W . Dodge Corporation data for 37 Eastern States. Other includes nonresidential buildings and public works and utilities. Monthly figures; latest shown are for January. is t r ib u t io n Value of merchandise sold at department stores, despite a large number of special sales, showed more than the usual seasonal decline in January. The Board’s adjusted index was 290 per cent of the 1935-39 average, as compared with 309 in December and 286 in January 1948. Sales during the first three weeks of February were 4 per cent smaller than in the corresponding period last year. Carloadings of railroad freight generally declined further in January and the early part of February and were about 10 per cent below a year ago. Declines in rail freight from the levels of a year ago have resulted in part from diversion of shipments to other forms of transportation. Co m m o d it y CONSUMERS’ PRICES P r ic e s Following marked /declines in January, prices of farm products and foods dropped further in the early part of February but in mid-February returned to the levels prevailing at the beginning of the month. Prices of some industrial commodities including scrap metals, alcohol, and rayon and petroleum products, were reduced further in February, while prices of most other industrial items continued to show little change. Retail food prices continued to decline from mid-January to mid-February, reflecting mainly further sharp decreases in meat prices. In the latter part of February wholesale prices of meats showed some advance from the earlier low points which were one-fourth below the record levels prevailing last summer. Ba n k 1941 1942 1943 1944 1945 1946 1947 1948 ureau of Labor Statistics* indexes. “ All items’* ncludes housefurnishings, fuel, and miscellane ous groups not shown separately. Midmonth figures; latest shown are for January. C r e d it Seasonally large Treasury tax receipts increased Treasury deposits at the Reserve Banks in the latter part of January and the first half of February. This reduced deposits and reserves of commercial banks, and banks sold short-term Government securities and drew down their excess reserves. Reserve Bank holdings of Government securities increased as purchases of short-term securities exceeded further sales of bonds. Business loans at banks in leading cities declined somewhat during the last half of January and the first half of February. Holdings of Government securities were reduced, reflecting sales of short-term securities. Banks outside New York City increased considerably their portfolios of Treasury bonds.
@FedFRASER