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Of Credit and Business Conditions

V o lu m e









No. 3

Money market conditions were rather tight during the past

which had been regarded in some quarters as a possible

month, except for a temporary period of ease in the third

'resistance point”. On the other hand, there was a fair amount

week of February. Interest rates on Federal funds were IVa to
1-7/16 per cent during most of the month (only slightly

of demand for Treasury bonds on a downward price scale
from investing institutions such as savings banks and stock

below the Federal Reserve discount rate), and yields on short­

insurance companies, and from trust funds and public invest­

term Government securities rose further. The average yield

ment funds. In addition, the commercial banks continued to

on new issues of Treasury bills advanced from 1.103 per cent

buy moderate amounts of "bank-eligible” issues. The demand

on the issue dated January 26 to 1.119 on the issue dated

was met to a considerable extent by the Federal Reserve Banks.

February 9, and to 1.137 on the bills to be issued on March 2.

Sales of Treasury bonds made by the Reserve Banks during

Yields on Treasury certificates of indebtedness also rose

the three weeks ended February 22 totaled a little more than

slightly. These rates were influenced, not only by the firm

215 million dollars. Although such sales were larger in Febru­

money market conditions, but also by the Treasury’s announce­

ary than in the preceding month, the decline in bond prices

ment on February 14 of its refunding program for March

was considerably smaller— about Ys of a point for the longest-

and April.

term ineligible bonds, as against about % of a point in Janu­

The announcement indicated that lVz per cent notes matur­
ing on March 15, 1955 would be offered in exchange for the
2 per cent bonds called for redemption on March 15, 1950

ary. Shorter maturities of Treasury bonds showed smaller
M e m b e r B a n k R eserve P o s it io n s

and for the lYs per cent notes maturing on April 1, 1950,

Member bank reserve positions were under some pressure

and that two l l per cent Treasury notes both maturing
July 1, 1951 would be offered in exchange for the two issues
of 154 per cent certificates of indebtedness maturing on
March 1 and April 1, 1950. Inasmuch as the new 1J4 per

On February 1 member bank borrowings from the Federal

cent notes will mature in 16 and 15 months from the issue
dates, as compared with the 20-month maturity of the note
issue that was offered in exchange for certificates maturing
on February 1, the new financing was viewed in the market
as a further step in the direction of slightly higher interest
rates on short-term Treasury obligations. As a result, Govern­
ment security dealers quickly adjusted their quotations for

in the first half of the past month and again in the last week.
Reserve Banks amounted to about 455 million dollars. Repay­
ment of a large part: of this indebtedness early in the follow­
ing reserve week placed the banks, particularly the larger
New York City banks, in a tight position when, subsequently,
they lost considerable amounts of reserve funds, mainly as a
result of the security transactions of nonbank investors. The
latter made substantial net purchases of Government bonds
and short-term Treasury securities, a large part of which came

outstanding securities. The two longest maturities of Treas­
ury certificates and the most recently issued notes offered on
February 1, 1950

(as well as the 1Ys per cent notes of

March 15, 1954 issued on December 15, 1949) sold slightly
below par after the announcement.
Prices of Government bonds continued the irregular decline

Money Market in February.................................. 25
Changes in Reserve Classification...................... 27
Federal Funds ...................................................... 28

that began in January. Offerings of bonds for sale were not

The Second OEEC Report.................................. 30

large, although a moderate increase in offerings developed

Recent Wage and Salary Trends.......................... 32

in the latter part of February when the price of the longest

Department Store Trade...................................... 33

issue of restricted Treasury bonds declined below 103, a price



from the Federal Reserve System’s holdings. In addition, the

Other money market transactions, on balance, alternately

commercial banks and others made sizable net purchases of

added to and afforded partial relief from the pressure on the

new Treasury bills on allotment from the Treasury, resulting

New York City banks’ reserves. In the third week of the

in a decline in the System s bill holdings. The pressure on the

month, an inflow of funds from other parts of the country

member banks’ position caused by these transactions was only

resulting from net Treasury disbursements, together with

partly alleviated by net gains or releases of reserve funds

transactions connected with the sale of a refunding issue of
the International Bank, helped to ease the New York money

resulting from other factors. These included a rather sizable
increase in Federal Reserve '’float” and a decrease in required
reserves, which together were considerably in excess of losses

In the last week of February, the money market again be­

of reserves due to a rise in currency in circulation, net Treas­

came tighter as a result of a heavy outflow of funds to other

ury receipts, and gold and foreign account operations.

parts of the country, apparently mainly as the result of an

In order to meet their net losses of reserves and to repay a

excess of Treasury withdrawals of deposits from Tax and

portion of their borrowings, the member banks sold substan­

Loan accounts in commercial banks and other receipts over
Government disbursements.

tial amounts of Government securities in the open market,
mainly Treasury bills and certificates. Despite cash redemp­

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

tions of maturing bill issues, the Federal Reserve System’s
holdings of bills rose 63 million dollars in the two weeks

Total loans and investments of the weekly reporting member

ended February 15; market purchases of these issues were

banks declined markedly in the three weeks ended Febru­

considerably larger than the net change in the System’s hold­

ary 15, more than canceling the increase which had taken

ings. The net increase in the System’s portfolio of all Treasury

place during January following the post-Christmas return

securities, other than bonds, was about 110 million dollars.

flow of currency and other gains of funds. The major factor

The pressure on the member banks’ position lifted some­

in the February decline was a 1.1 billion dollar decrease in

what during the third week of the month, chiefly as a result

Government security holdings, mostly Treasury bills, reflect­

of large net Government expenditures, although other money

ing the shift of holdings from banks to nonbank investors.

market factors (notably a decline in Federal Reserve float)

Total loans rose almost 200 million dollars.

tended to absorb part of the banks’ gains from Treasury

ended February 22, however, the security holdings of the

operations. Member banks were able further to reduce their

weekly reporting New York City member banks rose substan­
tially as money market conditions eased.

indebtedness to the Reserve Banks, and added moderate
amounts of Government securities to their holdings, partly

In the week

The rise in the total volume of loans at the weekly reporting

bank reserve positions affected the reserves of the New York

banks in 94 centers during the three weeks ended February 15
was due chiefly to an expansion of loans on Government and
other securities. Commercial, industrial, and agricultural loans

City banks. In considerable part, the Treasury securities which
nonbank investors bought indirectly from both the com­
mercial banks and the Federal Reserve Banks during the first

reached a new high point for recent months on February 1,
but declined somewhat in the following two weeks. In the
case of the reporting New York City banks, a further moderate

half of February were paid for out of balances on deposit
with the New York City banks, and a substantial part of the

ary 22.

excess of allotments of Treasury bills over redemptions of

credits at all reporting banks has shown little seasonal con­

by drawing upon their excess reserves.
Most of the pressures on and subsequent easing of member

decline in such loans was reported in the week ended Febru­
However, the volume of business and agricultural

maturing issues took place in New York. Much of the mem­

traction this year to date, reflecting a continued high level of

ber bank indebtedness to the Reserve Banks at the beginning

business activity in the new year and, perhaps, a demand for

of February represented borrowings by the New York City

agricultural credit (including loans guaranteed by the Com­

banks, and, similarly, a large part of the subsequent retire­

modity Credit Corporation). Real estate loans of the weekly

ment of this debt consisted of repayments by the City banks.

reporting member banks have continued to advance to new

The City banks thus were forced to sell substantial amounts

peaks as construction activity has remained at high levels. All

of short-term Treasury securities (mainly bills and certifi­

other loans (including consumer loans) declined slightly, but

cates) during the first half of the month. Since a sizable part

remained close to the peak reached toward the middle of

of the securities which they disposed of were purchased by
nonbank investors, resulting in little relief to their reserve

Measured from the end of 1949, total loans of weekly

positions, the City banks in the aggregate sold securities in
substantially larger amounts than their reserve deficiencies

reporting member banks declined less than 70 million dollars
by February 15, compared with a reduction of approximately

before realizing sufficient reserves to adjust their positions.

700 million in the corresponding period last year. The small

Adjusted Demand Deposits— All Commercial Banks
and Weekly Reporting Banks
(1939-46 annually, 1947-February 1950 m onthly*)


factor in arresting the expansion of deposits in those years
was the use of the Treasury’s large cash surplus to retire
Government securities held by the banking system, particularly
by the Federal Reserve Banks. Other factors tending to check
the growth of the money supply in the form of demand
deposits were the efforts of the Federal Reserve System and
other supervisory agencies to restrain the expansion of bank
credit during the inflationary period, and the repayments of
bank loans by business organizations during the recession in
the first half of 1949.
One of the outstanding banking trends of the war and early
postwar period— the much sharper expansion of deposits in
other parts of the country than in New York City— was
checked after 1947. However, the changes in deposits since
that year have not been such as to restore the New York City
banks’ prewar share in the total volume of demand deposits.
At the end of 1949 the New York City banks held only 18
per cent of total demand deposits, compared with 28 per cent
in 1939.

* Annual data are for either the last day or last W ednesday of December,
monthly data are for the last W ednesday of the month.
# Latest figures are estimates for January 25, 1950.
t Latest figures are February 15, 1950.
t The decline in the adjusted demand deposits of all other banks during
1946 and the increase for the weekly reporting member banks (particularly
those outside New Y ork C ity) reflected a revision of the weekly reporting
member bank series rather than actual changes in deposits.

decline this year was the net result of a decrease of 125
million at New York City banks and an increase of 60 million
at banks outside of New York. Total security holdings of all

Effective February 16,1950, the reserve classification of three
New York City member banks located in the Boroughs of
Brooklyn and The Bronx was changed from a reserve city to
a "country” bank status.1 These banks hold very small amounts
of correspondent bank balances and most of their business
is local.

weekly reporting banks declined during the same period a

The change in the three banks’ reserve status was made

little more than 325 million dollars, a decrease of 405 million
in New York City being partly offset by an increase of 80

under Section 19 of the Federal Reserve Act, which author­

million in the other reporting centers.

present rules governing reserve requirements more flexible

Reflecting the continued increase in liquid savings of the
public, time deposits of the weekly reporting member banks
rose during the month ended February 15 to the highest level
since June 1949. Adjusted demand deposits, however, receded
as individuals paid their income taxes and nonbank investors
purchased Government securities from the banking system.
As shown in the accompanying chart, there has been com­
paratively little net change in the demand deposits of indi­
viduals, partnerships, corporations, and State and local govern­
ments in the postwar years since 1946. This is true not only
with respect to deposits held at the weekly reporting member
banks, but with respect to deposits in all other commercial
banks as well. Such stability of deposits is in sharp contrast
to the marked expansion of the war years. It reflects the

izes the Board of Governors to make the application of the
by shifting banks in outlying areas of central reserve and
reserve cities to classifications which require lower reserves.2
Pursuant to this provision, the Board on February 8, 1950
amended its former rulings to read as follows:
", . . any member bank located outside the downtown
business and financial district of Brooklyn . . . and hav­
ing no branch in such downtown district or in the
Borough of Manhattan, will be eligible for permission
to maintain the reserves required to be maintained by
banks located outside of central reserve and reserve
“The boundaries of the downtown financial and busi­
ness district above-mentioned are as follows: On the
south, Atlantic Avenue from the East River southeast­
erly to Flatbush Avenue, then northwesterly on Flatbush Avenue and Flatbush Avenue Extension to the

cooperative efforts of the Federal Reserve System and the
Treasury during 1947-48 to restrain the expansion of deposit
money in the face of a huge expansion of business, mortgage,
and consumer borrowing, a substantial inflow of gold from
abroad, and some return of currency from circulation. A major

1 The three banks are: The Peoples National Bank of Brooklyn in
New York, The Bensonhurst National Bank of Brooklyn in New York,
and the Bronx County Trust Company.
2 See "Reserve Requirements of Commercial Banks,” in this R e v ie tv ,
July 1948, pp. 71-73, and "Change in Reserve Requirements for
Member Banks,” November 1949, pp. 123-24.



East River. The remainder of the district is bounded
by the East River.”



". . . any member bank located in the Borough of the
Bronx, and having no branch in the Borough of Man­
hattan or in the downtown district of Brooklyn . . .
will be eligible for permission to maintain the reserves
required to be maintained by banks located outside of
central reserve and reserve cities.”
These three banks are not the first member institutions in

In each banking center, local banks are normally the chief
source of supply of Federal funds. Of late, however, sales of
Federal funds have been made, on an increasing scale, by
out-of-town banks also. Banks, moreover, are not the only
suppliers and users of Federal funds. In fact, the supply of
Federal funds which is put on the market by nonbanking
institutions is quite significant. Chief among such suppliers
are the Government security dealers. In the course of their
operations these dealers frequently acquire title to Federal
funds, either before such funds reach commercial banks or on

New York City to be classified as "country” banks. All banks

the way from one bank to another. For example, when a

situated in the Boroughs of Queens and Richmond with no

dealer sells Government securities to the Federal Reserve

branches in other boroughs had previously been classified as

System he receives payment in Federal funds. The dealer may

"country” banks. Twenty-five members of the Federal Reserve

sell the funds for other means of payment (such as clearing

System in New York City are now classified as central reserve

house funds), which he may deposit with his bank or use to

city banks, 9 as reserve city banks, and the remaining 14 as

repay his borrowings. Government security dealers also acquire
Federal funds in other ways. They may have contact with

"country” banks.

nonmember banks or with local agencies of foreign banks in

possession of Federal funds. In addition, they may acquire

In recent months frequent reference has been made in this

such funds through the sale of Government securities to non­

Review to the New York City rate on Federal funds. It seems

bank investors which have obtained Federal funds (in the

appropriate, therefore, to discuss briefly the place of Federal

form of Treasury checks)

funds in the money market. What are Federal funds? Who
wants them and who supplies them?

from redemptions of Treasury

The demand for Federal funds stems mainly from member

In the last analysis, Federal funds are the title to reserve

banks which need to adjust their reserve positions. Many times

balances with the Federal Reserve Banks. They are immediately

it is cheaper to buy such funds than to borrow at the Reserve

available funds at the Reserve Bank as contrasted with other

Bank. In addition, some banks have a tradition of not being

types of balances, such as clearing house funds (checks or

in debt to the Reserve Bank. A few of the New York City

drafts on clearing house banks) which in New York are not

banks, for example, have not borrowed from the New York
Federal Reserve Bank for years.

available until the day after their receipt.
The over-all supply of Federal funds is determined by the
familiar factors of supply and use of reserve balances. For
example, when currency in circulation or Treasury balances
with the Reserve Banks go down, Federal funds tend to become

When dealers buy Government securities from the Federal
Reserve System, they need Federal funds in order to be able
to make payment on the day the securities are delivered.
They may need this means of payment also in order to do

more plentiful. On the other hand, when the gold stock,

business with other investors which require cash settlement

Federal Reserve "float”,1 or System holdings of Government

on the date of sale. Among such investors are corporations
and State and local governments, all of which have been in­

securities fall, Federal funds tend to become scarce.
The reservoir of available Federal funds at times is smaller

creasingly anxious to keep their funds invested in Government

than the aggregate amount of excess reserves of member banks

securities up to the day when the funds are needed for actual

— first, because not all member banks wish to make their

disbursements. Thus, they may sell Government securities on

excess balances available to the market, and second, because

the day when their own securities must be paid off, or on the

excess reserves of certain banks may be immobilized to offset

day when funds are needed for transfer to distant areas. As a

a previous (or an anticipated) deficiency in the current reserve

result of such close timing, these groups of investors need im­
mediately available funds.

requirement period.

On the other hand, a bank may sell

Federal funds even when its reserves are temporarily deficient

Owing to their strategic position, Government security

if it is protected by "overages” (excess reserves) during the

dealers not only participate in the Federal funds market but

earlier part of the same reserve requirement period. Generally,

also contribute greatly to its functioning. For example, a bank

however, a bank will supply Federal funds in the market only

in need of funds may indicate its needs to a dealer who, if

when it has excess reserves.

he does not have the funds himself, may know some bank
that does. He will also know approximately what the going

1 For a discussion of the nature of "float” see the September 1949
issue of this Review.
rate is and will put the buyer in touch with the seller. Some


dealers will perform, even for a bank, the function of agent


Sales of Federal funds between banks in different banking

in placing or obtaining Federal funds.

centers are made by using the Federal Reserve wire transfer

In rendering such services, for which they make no charge,
the offices of many Government security dealers become, in
effect, a market place. Probably the most important single

service. The lending bank transfers funds to the borrower on
one day and a reverse shift is made the next day. In New York
City, these transfers to and from out-of-town banks have

New York City market in terms of daily dollar volume of

increased of late. Ordinarily, only the large banks in other

transactions, however, is in the offices of a Stock Exchange

centers are involved. When banks in the City need Federal

firm. This particular firm merely performs the service function

funds, their requirements are so great that the borrowing of

of bringing buyers and sellers of Federal funds together and

small amounts of Federal funds is not worth the trouble.

is in no way a participant in the market.

After having

When funds are scarce elsewhere and relatively plentiful in

determined their reserve positions from the clearing house

New York City the same reasoning applies with respect to the

settlements and from other transactions, some banks telephone

lending of Federal funds by the City banks. A bank with an

the broker’s office in the morning and indicate whether they

“overage” of 100 million dollars, for example, would not

are in need of funds or have them for sale; sometimes they

care to put itself to the trouble of parceling it out in lots of

also indicate approximate amounts. Buyers and sellers are then

say, one million dollars.

brought together by the broker and rates are agreed upon.

The increase in out-of-town participation in the New York

This service and that of recording rate changes ( or prospective
changes) during the day is performed by the intermediary

City market has contributed to a widening of fluctuations in
the flow of funds in and out of this area. One day large amounts

without fee or differential. Other banks in the City make

of funds will flow into the City and the next day large sums

little use of the services of an intermediary in their Federal

will flow out. The magnitude of these daily flows is often

funds operations, preferring to deal directly with one another.

upwards of a hundred million dollars. Under such conditions

The actual transfer of Federal funds within a given locality

the Systems problem in gauging money market prospects and

usually involves an exchange of checks. The lender gives a

in conducting its operations in Government securities is made

draft on the Federal Reserve Bank and receives a clearing

more difficult. The System, and the New York Federal Reserve

house check payable the following business day. Ordinarily,

Bank in particular, must take into account not only country­

the interest payment based on the number of calendar days2

wide developments affecting member bank reserve positions

of use is included in the clearing house check, but some banks

but also the situation in New York City, which is by far the

prefer a separate check covering the interest payment. Some­

most important money market in the country. Anything that

times no interest is charged and the borrowing bank merely

causes money market conditions in New York City to depart

makes a commitment to return the same amount of funds

widely and unpredictably from those in the country as a whole

upon demand or at a specified later date. Since this commit­

complicates the Systems problems, for it may give rise to a

ment involves risk in terms of the cost of the funds at the
time of repayment, such “swapping” of funds is not a common

situation where one type of operation may be called for locally
and another in the country as a whole.

An upper limit on the price of Federal funds is set by the

It is obvious from the nature of the transactions that the
sale of Federal funds is a loan and that their purchase con­

rate at which funds may be borrowed at the Federal Reserve

stitutes borrowing; member banks have been directed by the

Bank. While occasionally the rate on Federal funds has ex­

System to treat them as such on their statements. This results

ceeded the Federal Reserve Bank discount rate, this occurred

in limiting the amount of Federal funds which may be sold

in times of a shortage of paper eligible for rediscount or as

by either National or State banks. With certain exceptions, a

collateral for advances. With the present supply of Govern­

National bank is prohibited by the National Bank Act from

ment securities, the possibility of such an occurrence is very

lending to any one borrower more than 10 per cent of its

remote. Thus, in recent times the upper limit has been 1-7/16

paid-in capital and unimpaired surplus. New York State banks

per cent, just below the borrowing rate of W 2 per cent at the
Federal Reserve Banks.3

are subject to a similar limitation, except that undivided profits
are included in the base. National banks, moreover, may be
restricted in their purchases of Federal funds by the provision

2 Transactions are usually for a single day; but over week ends they
are for two or three days, depending upon whether the participating
institutions are open for business on Saturday.
3 Actually a market rate of 1-7/16 per cent for Federal funds is even
closer to the discount rate than the figures indicate. Federal funds are
calculated on the basis of 360 days per year, while borrowing from the
Reserve Banks is calculated on a year of 365 days. This has the effect
of reducing the differential between the two rates.

that aggregate borrowings of such banks cannot exceed their
capital stock. There are no restrictions on borrowing by New
York State banks.
In practice, borrowing limitations would be a hardship only
to those National banks whose capital stock is very small rela­
tive to the fluctuations in their deposits and reserves. The loan



limitation, on the other hand, makes it difficult at times for
banks to dispose of large excess reserves.

Industrial production has registered even more striking
advances. The OEEC report estimates that over-all industrial

Most of the above discussion of Federal funds relates to the

output has increased by no less than 29 per cent since 1947,

New York City market, since that market is by far the most

and is currently running at a rate 15 per cent in excess of

important one in the country. The trading in Federal funds

1938. The basis of this revival is well reflected in the OEEC

in New York City consists for the most part of transactions

estimates of increases since 1946 of nearly 30 per cent in hard

between City buyers and sellers or between City banks and

coal production and of nearly 7 5 per cent in the output of crude
steel. Textile production has regained prewar levels, machine

out-of-town institutions, but some of the trading involving
out-of-town banks exclusively is also consummated here. Local

tool production (excluding Germany) is 20 per cent above

markets do exist in a number of other banking centers, but

the 1938 rate, and earlier acute shortages of nonferrous metals,

the bonds between some of them (particularly the Philadelphia

chemicals, and forest products have been substantially relieved.

market and the New York market) are very strong. A few

Road and rail transport facilities have been restored suffi­

outside markets have rates which bear no close relationship

ciently to permit an even heavier flow of traffic than before

to the New York City rates. This is true, for example, on the

the war. The merchant fleets of the ERP countries, reduced by

West Coast and in the St. Louis area, where a flat rate is

1945 to 58 per cent of their prewar tonnage, have been

charged to participating banks. However, most of the rate

strengthened by domestic construction and purchases of United

quotations in markets outside New York City are based on

States tonnage until they now represent nearly 90 per cent

City rates.

of their prewar size. The total output of goods and services
of all kinds by the ERP countries is estimated to have risen


by roughly 25 per cent since 1947, to a point now in excess

The Organization for European Economic Cooperation ( the
common agency of the countries receiving aid from the United
States under the European Recovery Program) has issued a re­
port, its second one, which gives cause for both satisfaction and
concern. It is clear from a reading of this report that, as the

of the prewar level. (Since, however, the population of ERP
Europe has meanwhile increased substantially, per capita pro­
duction is probably still below the prewar level.)
This impressively swift recovery of output has facilitated,
and simultaneously benefited from, a general stabilization of

ERP approaches the halfway mark, we can look back upon

the internal finances of the ERP member countries. The OEEC

a record of accomplishment that has in many respects sur­

notes that in four out of fifteen countries wholesale prices

passed the progress initially anticipated. On the other hand,

declined during 1949 below 1948 levels, while in only three

the OEEC report provides additional disquieting evidence

countries did price increases of more than 10 per cent occur.
Such relief from earlier inflationary pressure, both overt and

that the most difficult obstacles to a closure of the dollar gap
are still to be overcome.
The European economic crisis of 1947, which called forth
the ERP, was fundamentally a crisis of production. The fac­
tories and fields of Western Europe, ravaged by war damage
and the lack of repairs and maintenance, were then incapable

suppressed, is largely attributable to the general improvement
of fiscal and credit controls which, with other basic reform
measures, has been so urgently recommended by both ECA
and the OEEC since the inception of the program. But while
the improved balance between the flow of goods and the flow

of supplying the goods required for basic consumption needs

of money enabled ERP Europe to weather the severe shock of

without outside assistance in the form of consumer goods,

the 1949 devaluations without undue strain, the report stresses

raw materials, and capital equipment. Within less than two

that still greater efforts will have to be made to restrain the

years, the dollar aid provided through the ERP has made pos­

Table I

sible a truly remarkable recovery of output, exceeding in many

Current Balance of Payments of ERP Countries*

instances both the target objectives originally set and the

(In m illions o f d olla rs)

recovery that followed the First World War.


Calendar year

encouraging has been the restoration of food production,

assistance in the form of consumer goods, to financing the
capital development upon which the economic viability of the

Imports (f.o .b .).....................
Exports (f o .b .).....................



which has permitted a diversion of ERP funds from relief





1949-50f 1950-51f


ERP countries must ultimately rest. Except in Turkey, the

Balance of visible trade. . . . Balance of invisible item s.. . -


- 5,828

- 4,443

- 3,203

- 2,366

grain harvests in these countries had recovered by 1949 virtu­

Balance on current a ccou n t.






ally to their 1935-38 averages, while the 1949 production of
other staple food items, aside from milk and meat, either
approximated or exceeded the prewar levels.






* Excluding Switzerland,
t Fiscal year beginning July 1.
Source: European Recovery Program, Second Report of the O E EC, February
1950, p. 81.

T a b le II
Gold and D ollar B alance o f P a ym en ts o f E R P C ountries*
(In m illions o f d o lla rs)

domestic demand for goods and thereby release additional
productive capacity for the export drive.
It is with respect to export earnings that the most resistant

Calendar year

obstacles to a full recovery seem likely to be encountered. As
regards over-all exports, it is true, much progress has already
been achieved, and the export programs submitted to the

But with respect to dollar earnings, both the actual and the

short of earlier hopes. This is shown by Table II, which pro­
in the gold and dollar portion of the aggregate balance of
payments of the OEEC countries.
These OEEC estimates suggest that of the total reduction
in the gold and dollar deficit from 8,500 million dollars in
1947 to an anticipated level of 2,250 million in 1951-52,


Current-account pay me tits of
m e tro p o lita n areas with
U.S.A. and Canada:—
1. Im ports...............................
2. E xports...............................
3. Invisibles (n e t).................

-6 ,7 1 9
+ 833

-5 ,5 1 2
+ 1,218

-4 ,3 1 6
+ 1,037

-3 ,6 4 4
+ 1,255
I ll

-3 ,1 5 0
+ 1,498


further substantial advances by the end of the Marshall Plan.

vides a convenient summary of the anticipated developments

1950-51 i 1951-52f


OEEC by the various ERP countries (see Table I) forecast

anticipated progress reported by the OEEC falls considerably


-6 ,3 8 5

-4 ,4 3 8


-2 ,5 0 0

-1 ,7 3 4









Current balance................

Current balance of m etropoli­
tan areas with other dollar

C. Current balance of m etropoli­
tan areas with whole dollar
area (A4 + B ) ........................
D. Other gold and dollar trans­
a ctio n s o f m e tr o p o lita n
1. Public and private capital
2. O ther g o ld an d d o lla r

increased earnings through merchandise exports to the United


100 *












T otal....................................





cent, while improvement in the balance of current “invisible”

E. Total gold and dollar deficit
o f m e tr o p o lit a n a re a s
( C + D 3 ) ................................

-7 ,5 2 4


-4 ,1 7 2

-3 ,2 0 5

items is expected to narrow the deficit by only a further 7 per


States and Canada will account for hardly more than 10 per

cent. The decisive measures to narrow the dollar gap are
apparently being taken on the dollar import side, where drastic
cuts in imports from the United States and Canada are expected
to account for more than 57 per cent of the anticipated reduc­
tion of the deficit. The remaining 26 per cent is expected to
derive from an improved balance in the dollar transactions
of the ERP countries with markets other than the United
States and Canada, and from a similar improvement in the
dollar accounts of overseas territories and of other areas whose
currencies are linked with those of certain ERP countries.
In these latter accounts, important gains in dollar exports may
occur but cuts in dollar imports will probably also figure


Net gold and dollar transac­
tions of overseas territories
and associated m onetary


G. Total gold and dollar deficit
( E + F ) ...................................

-8 ,5 0 0

H. Financed b y :—
1. E R P and G A R IO A * * . . .
2. Other exceptional methods +7,000
3. Drawings on gold and dol­
lar reserves......................... + 1,500

T otal...................................







-5 ,6 2 2

-4 ,3 7 3


-2 ,2 5 0
















* Excluding Switzerland. The term “ metropolitan area” refers to the European
territory of the E R P countries; it excludes overseas territories and associated
monetary areas.
** Government and Relief in Occupied Areas,
t Fiscal year beginning July 1.
e Estimated.
Source: European Recovery Program, Second Report of the OEEC, February
1950, p. 84.

In appraising this prospect of a narrowing of the dollar

third markets covered the difference. As a consequence the

gap primarily by means of dollar-import cuts, one should of

increases in dollar earnings that would be required to close

course bear in mind that Western European imports from the

the dollar gap by the expansion of exports alone are for most

dollar area were abnormally inflated in 1947 by acute short­

countries of almost impossible proportions.

ages of domestic output which are now being overcome. Nor

As the flow of Marshall aid diminishes, the programmed

does the comparatively minor role assigned to an expansion

cuts in the ERP countries’ dollar imports may begin to bite
into their essential supplies, with possibly adverse reactions

of dollar export earnings necessarily imply that excessively
modest export targets have been set, for the OEEC country

on their domestic economies. And with such a compression

programs schedule an 80 per cent increase of export earnings

of import programs to the rigid minimum requirements for

from 1947 to the end of the Marshall Plan; less than a quarter

basic foodstuffs and raw materials, the scope for emergency

of this target increase seems likely to be accomplished by the

adjustments to crop failures or other unpredictable develop­

end of June 1950. In this connection, the OEEC report rightly

ments will correspondingly diminish. Moreover, the export

points out that the effort to close the dollar gap from the

targets that are now set assume that production levels in the

export-earnings side involves far more than a restoration of

United States will be maintained at the relatively high rates

prewar markets.

Even before the war, Western Europe's

of the second and third quarters of 1949. But recent experi­

exports to the United States and Canada financed only a frac­

ence, the report argues, has shown that even minor setbacks in

tion of its imports from these areas; “invisible” receipts ( tour­

United States economic activity can have disproportionately

ist expenditure, shipping charges, etc.) and dollar earnings in

severe repercussions upon foreign export sales here. All these



potential threats are rendered the more serious by the generally
inadequate gold and dollar reserves of the OEEC member

designed to supplement the Federal old-age and survivors

The outlook for the years after 1952, when the ERP will

followed the "Bethlehem formula,” providing for noncontribu­

insurance program, and many of the major contracts have
tory pension systems but jointly-financed insurance plans.

presumably have been terminated, is even more uncertain.

The failure of unions to gain greater wage increases during

According to the OEEC program schedule, there will remain

1949 may be traced primarily to the falling off in business

in the year beginning July 1, 1951— the last year of the

activity in late 1948 and early 1949 and to the gradual decline

Marshall Plan— a deficit of 2,250 million dollars, against which,

in living costs. The major contracts providing for pension

OEEC assumes, a final appropriation to the Economic Coopera­

benefits were generally not signed until the latter part of the

tion Administration of about 2 billion will be available. Since

year, when business had already started to revive. The direct

such a grant of 2 billion would represent 63 per cent of the

effects of the pension and insurance plans on consumers’ over­

total programmed imports of the ERP countries from the

all income and spending habits will probably be slight in the

United States and Canada in the 1951-52 year, the scheduled

immediate future. The cumulative, long-run effects are much

cessation of dollar aid after mid-1952 may force truly drastic

more difficult to assess. These will depend not only on the

cutbacks in dollar imports. To a certain extent, the immediate

volume of benefits paid out but also on the impact of the

impact of the termination of the Marshall Plan will be

employers’ contributions on prices, dividend payments, and,

cushioned by the continuing arrival of shipments financed by

indirectly, the savings patterns of wage earners.

earlier aid grants, while increased export earnings and further
progress in the development of substitute sources of supply
perhaps may also be expected to narrow the 2,250 million
dollar deficit during the course of 1952-53. But, as noted by
the OEEC report, it would seem clear that a serious problem
will remain after 1952.

The relative stability of wages during 1949 is indicated in
the accompanying table, based on the composite indexes of
wages and salaries which this bank computes from data for
individual industries published by the U. S. Bureau of Labor
Statistics and other agencies. The only noteworthy change in
hourly earnings occurred in the public utilities group (in­
cluding transportation), which showed a 10 per cent increase


between December 1948 and December 1949. This resulted
largely from an increase which was awarded in March 1949,

In contrast to the early postwar years, the contract negotia­

retroactive to October 1948, to nonoperating railroad em­

tions between labor unions and employers which marked the

ployees and which was in reality a delayed "third round” of

opening months of 1950 were not the start of a new "round”

wage increases rather than a "fourth-round” raise. The large
decline in weekly earnings in the mining industry reflects
mainly the short work-week prevailing in the coal mines dur-

of hourly wage-rate increases. Instead, most contract negotia­
tions were carry-overs from last year. Even in 1949, no dis­
tinct pattern of increases in wage rates had emerged. On the
average, hourly earnings of wage earners in nonagricultural
industries rose only about 2 Vi per cent during 1949, compared
with the previous "rounds” of wage increases averaging 7

Changes in Indexes of Hourly and Weekly Earnings
in Nonagricultural Industries
(A d ju s te d fo r seasonal va ria tion )

per cent in 1948, 11 per cent in 1947, and 15 per cent in 1946.
The most significant collective bargaining developments in

Percentage change to December 1949
1939 average

July 1945

Dec. 1948

+ 114
+ 123
+ 100
+ 113
+ 110

+ 41
+ 51
+ 41

+ 3
+ 1
+ 10
+ 3
+ 2

+ 9
+ 31
+ 31


Public utilities....................................
Trade and service..............................
Clerical and professional.....................

+ 133
+ 96
+ 81

Average weekly earnings, all groups. .

+ 105



Composite index of wages and salaries* .

+ 103

+ 39

+ 3

1949 and so far in 1950 have involved not wage-rate increases
but various types of pensions and social security benefits. In
previous years, these had been lumped with other contract
demands under the heading of "fringe benefits,” but in 1949-50
the so-called fringe developed into the main issue at stake
in negotiations involving many of the country’s leading firms
and industries. In fact, the idea of industry pensions had
gained such a firm foothold that last year’s steel strike and the
current Chrysler strike involved not the question of whether
a pension system should be established but the details of how
such a plan should be financed or administered. Many hun­
dreds of thousands of workers will be covered by new or

Average hourly earnings
W age earners..........................................
Public utilities....................................
Trade and service..............................
Average weekly earnings
W age earners..........................................

-2 0
+ 4
- 3
+ 3
+ 3

expanded pension and insurance plans under contracts signed
during the past six months. In general, these plans have been

* Weighted average of index of hourly earnings of wage earners and index of
weekly earnings of clerical and professional employees.

Indexes of Weekly Earnings in Nonagricultural
Industries, 1945-49*
(Adjusted for seasonal variation, 1939 average=100 per cent)


offset, since income and social security taxes are now consider­
ably heavier than they were before the war.
The composite indexes of hourly and weekly earnings used
in this article and in the accompanying chart have recently
been revised. Last fall, many of the series of basic data used
in this bank’s wage and salary indexes were revised by the
Bureau of Labor Statistics. At the same time that the re­
visions were incorporated into this bank’s indexes, the oppor­
tunity was taken for a thorough overhaul.

The seasonal

adjustment factors were revised wherever necessary, the prob­
lems of weighting were reviewed, and the methods of com­
puting some of the series were improved. One new series—
weekly earnings of bank and trust company employees— was
included in the clerical and professional group. In most cases
the indexes were recomputed from January 1947 to date,
but for manufacturing wage earners and the composite indexes
of which this series is a part, the revision extended back to
September 1946.1 Together with the previously published
* Revised from September 1946 to date.

indexes, the series are continuous from 1938 to date. The
revised indexes show substantially the same trends as the

ing December 1949. Gains in weekly earnings during 1949

monthly data formerly published, but, in general, the new

were generally in those categories which had shown the

indexes are slightly higher than the old.

smallest over-all gains since 1939- Thus, the weekly earnings
of employees of public utilities and trade and service establish­

1 Tabulations and descriptions of the revised indexes are available
on request from the Domestic Research Division of this bank.

ments had lagged behind other groups, but in 1949 they rose
3 to 4 per cent. On the other hand, weekly earnings of factory
production workers showed practically no change between


December 1948 and December 1949. The same contrast is

As had been the case in January, sales at Second District

shown in the chart; while the weekly earnings of clerical and

department stores during February were below trade expecta­

professional employees continued to advance during 1949,

tions. Dollar volume dropped about 6 per cent below that of

those of wage earners, in general, showed but little change

February 1949, and was well below the February 1948 level

from the level reached at the end of 1948. Wage earners,

as well. There is even a strong likelihood, judging by prelim­

however, have increased their weekly earnings 116 per cent

inary information, that dollar sales failed to match those of

above the 1939 average, while the clerical and professional

February 1947. On a seasonally adjusted basis, it is estimated

group has attained a level only 81 per cent above that pre­

that February 1950 dollar volume touched one of the lowest

vailing in 1939. It should be noted that the average work­

levels in more than three years.

week prevailing in factories and other nonagricultural estab­

Stocks showed the usual seasonal drop during January as

lishments was longer in 1949 than in 1939, whereas the gen­

the stores liquidated merchandise left over from Christmas

eral trend of hours worked in offices has probably been down­

and ‘ cleaned house” in preparation for taking physical in­


ventory at the end of January. This bank’s index of seasonally

In view of the 2 per cent decline in the index of con­

adjusted stocks, after four months of steady rise following the

sumers’ prices, the moderate rise in average weekly earnings

drastically curtailed stock position developed by the stores

of both the wage-earning and the clerical-professional groups

during the summer of 1949, leveled off only slightly below

during 1949 reflects some gains in real income for those

the index of seasonally adjusted sales. As the chart shows,


during mid-1949 the stocks index had been considerably

While the composite weekly earnings of non-

agricultural workers have more than doubled since 1939, con­

lower than the sales index. The aggregate value of stocks on

sumers’ prices are only 69 per cent higher than in 1939- This

hand on January 31 was one per cent below the level of a

rise in real wages and salaries, however, has been substantially

year previous. This small decline in dollar terms, considerably



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

Indexes of Department Store Sales and Stocks
Second Federal Reserve District*

(Adjusted for seasonal variation, 1935-39 average— 100 per cent)

Net sales

P er cen+

Per cen t






S le






V j






'vjN l\J
\ \



1 1 1 1 1 1 11 i i


it l l 1 i M l i l



New Y ork C ity ......................................
Northern New Jersey...........................
Westchester C ou n ty.............................
Fairfield C o u n ty ....................................
B ridgeport...........................................
Lower Hudson River V alley...............
Upper Hudson River V alley...............
Central New York S tate.....................
M ohawk River V alley.....................
Northern New York State..................
Southern New York State...................
Bingham ton........................................

— 200

180 J 1 1 I 1 1 1 ! 1 1 1

Department stores, Second D istrict.. . .


r, . s
S ck\y/

Jan. 1950

1 1 II 1 1 1 1 1 1 L. 1 80



- 6
— 5
— 5
— 6
— 8
— 8
- 7
- 8
-1 2
-1 4
-1 4
- 3
- 3
- 2
- 3

Niagara Falls......................................

-1 3
-1 7
- 7
- 5
— 5
- 4
- 6

Apparel stores (chiefly New Y ork C ity ).

-1 0

Western New Y ork S tate....................

Stocks on
Jan. through
Tan. 31, 1950
Dec. 1949







- 1
+ 5
+ 7
— 1
— 3
- 6
- 7
- 8
-1 7
+ 1
- 3
- 5
- 7
- 2
— 7
- 8
- 8
-1 1
- 1
- 3
+ 3
+ 3






Seasonal factors used to adjust sales have been revised, as noted on
accom panying table.

Indexes of Business

less than the year-to-year decline in prices, indicates some

expansion in real volume.


Reflecting a pickup in buying for delivery during the spring
season, outstanding orders at the end of January were about
one-third greater in dollar volume than at the first of the year.
However, the rate of new ordering during January was 8 per
cent below that of the same month in 1949 while incoming
merchandise in January was almost up to the level of a year
previous, so that the rise in outstanding orders was less sharp
this January than last. Nevertheless, on this past January 31
outstanding orders were equal to those on the same date in
1949, owing to a more substantial level at the start of January
1950 than was the case the year before.
Indexes of Department Store Sales and Stocks
Second Federal Reserve District
(1 9 3 5 -3 9 a v e ra g e = 1 0 0 per cen t)






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





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





* Seasonal adjustment factors for 1946-49 revised; available upon request from
Research Department, Domestic Research Division.

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 Y ork State, 1935-39 = 100................
( NYS Div. of Placement and Unemp. Ins.)
Factory payrolls
United States, 1939 = 100...........................
(Bureau of Labor Statistics)
New York State, 1935-39 = 100................
( NYS Div. of Placement and Unemp. Ins.)
Personal income*, 1935-39 = 100..................
(Department o f Commerce)
Composite index of wages and salaries*!,
1939 = 100.......................................................
(Federal Reserve Bank of New York)
Consumers’ prices, 1935-39 = 100.................
(Bureau o f Labor Statistics)
Velocity of demand deposits*#, 1935-39 = 100
(Federal Reserve Bank of New York)
New York C ity ..............................................
Outside New York C it y ..............................

























115 p









27 op

















* Adjusted for seasonal variation.
p Preliminary.
r Revised.
e Estimated by the Board of Governors of the Federal Reserve System.
% A monthly release showing the 15 com ponent indexes of hourly and weekly
earnings in nonagricultural industries computed b y this bank will be sent upon
request. Tabulations of the monthly indexes, 1938 to date, may also be pro­
cured from the Research Department, Domestic Research Division. This series
has been recently revised back to September 1946; see descriptive article in
this Review.
# Seasonal adjustment factors for 1946-49 revised; available upon request from
Research Department, Financial Statistics Division.



(Summarized by the Board of Governors of the Federal Reserve System, March 1, 1950)


output increased somewhat further in January
but was reduced by work stoppages in the early part of


February. Construction activity was maintained at very high

Lumber production declined in January from the exception­
ally high December level.
Output of nondurable goods in January was maintained at

levels for this time of year. Personal incomes were supple­

earlier high levels. There were small increases in cotton con­

mented by large payments of insurance dividends to veterans.

sumption, rayon deliveries, paper and paperboard production,

Value of department store sales was close to last year’s level

and chemicals output,. Production of most other nondurable

and sales of automobiles were considerably larger. Prices gen­

goods showed small declines or little change from the level
of the preceding month.

erally remained stable.

Minerals production showed a slight decline in January and
I n d u s t r ia l P r o d u c t i o n

in February was curtailed sharply further, as a result of work
stoppages at coal mines. Output of petroleum showed little

The Board s seasonally adjusted index of industrial produc­

change, while metals production increased.

tion rose 3 points in January to 183 per cent of the 1935-39
average— the highest level since March 1949. In February,
industrial output has apparently declined about 5 points,

Em p l o y m e n t

Employment in nonagricultural establishments, seasonally

largely as a result of work stoppages in the coal and auto­

adjusted, was little changed in January as a sharp drop in

mobile industries.

employment at coal mines was more than offset by increases

Production of durable goods increased 3 per cent in January

in construction and in plants manufacturing durable goods.

reflecting a large expansion in output of automobiles and

Employment in most other lines showed little change. Unem­

smaller gains in nonferrous metals and iron and steel. Follow­

ployment rose to 4.5 million persons in January, up 1.8 mil­

ing model changeovers, automobile production by mid-January

lion from January 1949.

regained the record rate of last fall. Beginning January 25,
C o n s t r u c t io n

however, auto assembly operations were reduced about one
fifth by a labor dispute at the plants of a major producer.

Value of construction contract awards declined seasonally

Output at steel mills increased to 95 per cent of capacity in

in January but was more than one-half larger than a year

mid-January but subsequently decreased as a result of coal

earlier. The number of new residential units started in January

shortages. For the month of February ingot production was

was estimated by the Bureau of Labor Statistics to be 80,000

scheduled at about 89 per cent of capacity but during the week

as compared with 79,000 units in December and 50,000 in

beginning February 27 it dropped sharply to 74 per cent.

January 1949.




Federal Reserve index.

Monthly figures; latest figure shown is for January.

Department of Commerce estimates. Monthly figures; latest shown are for
December. Total includes “ other labor income” , such as employer contribu­
tions to private pension funds, not shown separately. Employee contributions
for social insurance are included in wage and salary disbursements but not
in total.


D is t r ib u t io n

Ba n k

C r e d it

Value of department store sales showed somewhat more than

During January and the first half of February holdings of

the usual seasonal decline in January and the Board’s adjusted

Government securities at member banks in leading cities and

index was at 282 per cent of the 1935-39 average as compared

Federal Reserve Banks combined declined by about 1.5 billion,

with 293 in December and 276 in November. Sales during

indicating substantial purchases by nonbank investors. Federal

the three weeks ended February 18 were maintained at the

Reserve Banks sold large amounts of Treasury bills and a sub­

same level as in the corresponding period last year. Sales of

stantial volume of bonds in response to a strong market

apparel at department stores remained below year-ago levels

demand, but purchased certificates and notes. Reporting mem­

while sales of most durable goods were in greater volume.

ber banks purchased bonds, while reducing their holdings of

Sales of new automobiles were exceptionally large for this

shorter-term securities.

season of the year. The payment of insurance dividends to

Bank holdings of corporate and municipal securities in­

veterans beginning the middle of January is providing an

creased further in January and February, and real estate loans

important supplement to personal income at this time, tend­

expanded moderately. Business loans did not show the usual

ing to increase retail sales.
Shipments of railroad revenue freight rose somewhat in

seasonal decline. Adjusted demand deposits at reporting banks
declined substantially, while Treasury deposits increased.

January, after allowance for seasonal changes, as increased

Member bank reserves showed little net change from late

loadings of most manufactured goods and ore more than off­

December through the first three weeks of February. Decreases

set declines in grain and forest products. Freight carloadings

in money in circulation and in Treasury deposits supplied

dropped sharply in early February, reflecting mainly the cur­

reserves, which were largely absorbed by the decline in Fed­

tailment of coal and coke production.

eral Reserve holdings of Government securities.

C o m m o d i t y Prices

Se c u r it y M a r k e t s

The general wholesale price index rose somewhat from midJanuary to the third week of February, reflecting largely

Common stock prices declined slightly after the first week

increases in prices of cotton, hogs, and pork. These changes

of February when they had reached a new high level since

resulted in part from seasonal reductions in supplies. Prices

1946. Corporate bond prices remained stable while long-term

of lumber and some other building materials also were

Treasury issues showed a small further decline. Yields on

advanced in this period. On the other hand, prices of some

short-term Treasury securities continued to increase.

textile and chemical products and automobiles were reduced.

Treasury announced the offering of a l 1 per cent, five-year


The average level of consumer prices declined further by 0.4

note issue in exchange for bonds called for redemption on

per cent from December to January owing to small decreases
in retail prices of foods and most other groups of goods and
services, except fuels and rent which continued to increase.

March 15 and notes maturing on April 1; also 1 V per cent
Treasury notes maturing on July 1, 1951 were offered in
exchange for certificates maturing March 1, and April 1.


Bureau of Labor Statistics’ indexes. “ All items” includes housefurnishings,
fuel, and miscellaneous groups not shown separately.
Midmonth figures;
latest shown are for January.








Common stock prices, Standard & Poor’s Corporation; corporate bond
yields, M oody’ s Investors Service; U . S. Government bond yields, U . S.
Treasury Department.
W eekly figures; latest shown are for week ended
February 18.