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MONTHLY REVIEW Of Credit and Business Conditions FEDERAL V o lu m e 32 RESERVE BANK MARCH OF NEW YORK 1950 No. 3 MONEY MARKET IN FEBRUARY 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 declines. 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 A 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 CONTENTS 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 MONTHLY REVIEW, MARCH 1950 26 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 market. 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 January. 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 FEDERAL RESERVE BANK OF NEW YORK Adjusted Demand Deposits— All Commercial Banks and Weekly Reporting Banks (1939-46 annually, 1947-February 1950 m onthly*) 27 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 CHANGES IN RESER V E CLASSIFICATION 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 cities. “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. 28 MONTHLY REVIEW, MARCH 1950 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 F E D E R A L FUNDS 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) issues. 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 FEDERAL RESERVE BANK OF NEW YORK dealers will perform, even for a bank, the function of agent 29 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 practice. 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 MONTHLY REVIEW, MARCH 1950 30 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 T H E SECOND OEEC R E PO R T 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. Particularly Calendar year encouraging has been the restoration of food production, 1947 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 .)..................... 1948 17,598 10,359 which has permitted a diversion of ERP funds from relief 19,607 13,779 18,722 14,279 18,347 15,144 18,300 15,934 1949-50f 1950-51f 1951-52t ERP countries must ultimately rest. Except in Turkey, the Balance of visible trade. . . . Balance of invisible item s.. . - 7,237 190 - 5,828 + 844 - 4,443 + 490 - 3,203 + 785 - 2,366 + 926 grain harvests in these countries had recovered by 1949 virtu Balance on current a ccou n t. 7,427 - - - - 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. - 4,984 3,953 2,418 1,440 * Excluding Switzerland, t Fiscal year beginning July 1. Source: European Recovery Program, Second Report of the O E EC, February 1950, p. 81. FEDERAL RESERVE BANK O NEW YORK F 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 B. 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, 1948 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 + 833 499 -5 ,5 1 2 + 1,218 144 -4 ,3 1 6 + 1,037 153 -3 ,6 4 4 + 1,255 I ll -3 ,1 5 0 + 1,498 82 4. further substantial advances by the end of the Marshall Plan. vides a convenient summary of the anticipated developments 1950-51 i 1951-52f 1947 A. OEEC by the various ERP countries (see Table I) forecast anticipated progress reported by the OEEC falls considerably 31 -6 ,3 8 5 -4 ,4 3 8 -3,432 -2 ,5 0 0 -1 ,7 3 4 631 397 275 152 -5,069 -3,829 -2,775 -1,886 Current balance................ Current balance of m etropoli tan areas with other dollar countries................................ 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 areas:— 1. Public and private capital operations........................... 2. O ther g o ld an d d o lla r transfers.............................. increased earnings through merchandise exports to the United -6,912 100 * 129 196 - 259 612 214 234 - 161 - 473 T otal.................................... 612 359 343 430 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 -5,428 -4 ,1 7 2 -3 ,2 0 5 items is expected to narrow the deficit by only a further 7 per F. 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 prominently. 3. Net gold and dollar transac tions of overseas territories and associated m onetary areas........................................ 976 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 4. T otal................................... +8,500 53 312 -2,359 + 109 -5 ,6 2 2 -4 ,3 7 3 -3,258 -2 ,2 5 0 +4,800* +4,202 +3,072 + 50 +2,061 + + 822 171 + +5,622 +4,373 136 +3,258 + 189 +2,250 * 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 MONTHLY REVIEW, MARCH 1950 32 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 countries. 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 R E CE N T W A G E A N D SA L A R Y TRENDS 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 From 1939 average From July 1945 From Dec. 1948 + 114 + 123 +112 + 100 + 113 + 110 + 41 +36 +50 + 51 + 41 +43 + 3 + 1 0 + 10 + 3 + 2 +28 +20 + 9 + 31 + 31 +41 +32 + Public utilities.................................... Construction....................................... Trade and service.............................. Clerical and professional..................... +116 + 133 +107 + 96 +136 +103 + 81 Average weekly earnings, all groups. . + 105 +29 + 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.......................................... Manufacturing................................... Public utilities.................................... Construction...................................... Trade and service.............................. Average weekly earnings W age earners.......................................... Manufacturing................................... 1 0 -2 0 + 4 - 3 + 3 + 3 1 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. FEDERAL RESERVE BANK OF NEW YORK Indexes of Weekly Earnings in Nonagricultural Industries, 1945-49* (Adjusted for seasonal variation, 1939 average=100 per cent) 33 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 D E P A R T M E N T STORE T R A D E 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 ward. 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, employed. 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 MONTHLY REVIEW, MARCH 1950 34 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 Locality P er cen+ 300 Per cen t 300 280 260 - - 240 S le as /y n A V 220 l/ y V j 260 - - 260 240 'vjN l\J \ \ - / 1 1 1 1 1 1 11 i i i it l l 1 i M l i l 1948 1949 New Y ork C ity ...................................... Northern New Jersey........................... Newark................................................ Westchester C ou n ty............................. Fairfield C o u n ty .................................... B ridgeport........................................... Lower Hudson River V alley............... Poughkeepsie...................................... Upper Hudson River V alley............... Schenectady........................................ 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 1947 Department stores, Second D istrict.. . . 220 r, . s S ck\y/ to 200 Jan. 1950 1 1 II 1 1 1 1 1 1 L. 1 80 1950 - 6 - 6 — 5 — 5 — 6 — 8 — 8 - 7 - 8 -1 2 -1 4 -1 4 - 3 - 3 - 2 - 3 Niagara Falls...................................... Rochester............................................ -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 hand Tan. 31, 1950 Dec. 1949 - 7 - + — - 8 6 6 3 8 8 4 4 5 7 5 6 8 7 5 7 8 9 7 - 4 4 8 - 1 + 5 + 7 +11 — 1 — 3 - 6 - 7 - 8 -1 7 + 1 - 3 - 5 - 7 - 2 — 7 - 8 - 8 -1 1 - 1 - 3 + 3 + 3 1 - 9 - 7 * 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 1949 expansion in real volume. Index 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) 1949 1950 Item Jan. Nov. Dec. Jan. Sales (average daily), unadjusted................. Sales (average daily), seasonally adjusted* 195r 244 293 227 401 237 183 229 Stocks, unadjusted............................................ Stocks, seasonally adjusted............................ 202r 229r 255 221 207 227 200 227 Revised. * 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 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 = 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 .............................. 1950 Jan. Nov. Dec. Jan. 191 173 180 I83p 262 256 267 276p 179 157 160p 329 330r 326 149 138r 141 140p 120 115 p 115p 113p 346 316r 332p 330e 288 269p 27 op 270p 313 305 308p 198 202 203p 171 169 168 167 99 89 99 86 98 84 96 87 337p * 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. FEDERAL RESERVE BANK OF NEW YORK 35 N A T IO N A L S U M M A R Y OF BUSINESS CONDITIONS (Summarized by the Board of Governors of the Federal Reserve System, March 1, 1950) I output increased somewhat further in January but was reduced by work stoppages in the early part of NDUSTRIAL 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. INDUSTRIAL PRODUCTION PERSONAL INCOME PYICLVLM,SAOAL AJ SE, 13 -3 -1 0 HS A OUE ESNLY DUTD 95 9 0 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. MONTHLY REVIEW, MARCH 1950 36 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 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 a Treasury notes maturing on July 1, 1951 were offered in exchange for certificates maturing March 1, and April 1. SECU RITY MARKETS CONSUMERS’ PRICES 1942 Bureau of Labor Statistics’ indexes. “ All items” includes housefurnishings, fuel, and miscellaneous groups not shown separately. Midmonth figures; latest shown are for January. 1943 1944 1945 1946 1947 1948 1949 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.