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MONTHLY REVIEW ofCredit andBusiness Conditions S e c o n d F e d e r a l R e s e r v e D is tr ic t F ederal E eserve Bank, New Y ork O ctober 1,1942 M o n e y M a r k e t in Septem ber September was marked by a further substantial rise in the volume of war expenditures and the consequent necessity of large scale borrowing by the Treasury, despite the receipt by the Treasury of third quarter income tax instalments, and by a continued outflow of funds from New York which led to a further modification in the schedule of reserve requirements for Central Reserve City member banks. While member bank excess reserves fluctuated widely during September, trading in Government securities was relatively limited and prices of outstanding Government obligations moved within generally narrow ranges throughout the month. On the basis of the Daily Statement of the Treasury for September 25, Government war expenditures dur ing September may be estimated at approximately $5,400,000,000, equivalent to an annual rate approach ing $65,000,000,000, or within striking dis tance of the rate ($67,000,000,000) fore cast for the fiscal year ending June 30, 1943 in the revised budget estimates pre sented in April. The monthly totals for July and August were $4,500,000,000 and $4,900,000,000, respectively. The cash requirements of the Govern ment during September were somewhat enlarged by the necessity of paying off $342,000,000 of 2 per cent Treasury notes which matured on the 15th. On the other hand, the amount to be raised through additional borrowings was reduced by quarterly income tax collections. Of the total income tax collections of approxi mately $2,100,000,000, somewhat less than $1,600,000,000 were in cash, the remainder in tax anticipation notes. The proportion of income tax payments made by the use of the tax notes was moderately larger than in March and June. In addition to the cash received through income tax collections, the Treasury ob tained funds through withdrawals from war loan deposit accounts, through weekly FOR VICTORY ★ Buy United States Treasury bill offerings in excess of maturing issues, through cash payments for new issues of $1,500,000,000 each of Treasury certificates of indebtedness and Treas ury notes sold during the month, and through sales of W ar Savings bonds and tax anticipation notes. “ Calls” upon authorized depositaries for the repayment of war loan account balances, made almost daily during the period September 1-12, aggregated $1,500,000,000 over this period, drawing down the war loan balances from $1,880,000,000 on August 31 to $460,000,000 on Septem ber 12. The remainder was substantially exhausted by “ calls” issued for payments on September 17-18. Of the total of $1,960,000,000 of “ calls” September 1-18, 57 per cent represented withdrawals from New York City insti tutions, and since the volume of Government checks deposited by customers of these banks was substantially smaller than the amount of the war loan account with drawals, deposits and reserve balances of the New York banks were substantially reduced. Weekly Treasury bill offerings, which had been increased from $150,000,000 to $250,000,000 in May, and further advanced to $300,000,000 in June and $350,000,000 in July, were stepped up to $400,000,000 beginning with the issue dated September 16. The Treasury obtained an aggregate of $1,900,000,000 from the five issues of Treasury bills during September, as com pared with the $1,450,000,000 needed to pay off five maturing issues. There was only one “ special” bill maturity during the tax period; the maturity of the issue which ordinarily would have come due September 23 had been shortened so as to come due September 17. No special Treas ury bill maturities have been arranged for the December period. With the high rate of Government war expenditures in rela tion to income tax collections, the need for “ bunching” of Treasury bill maturities just after the quarterly income tax dates, to counteract the effect of tax collections on bank reserves, has been reduced this year, from one tax period to the next. W a r Savings Bonds and Stamps MONTHLY REVIEW, OCTOBER 1, 1942 74 B IL L IO N S 1941 1942 E x cess R eserves H eld by the Central R eserve C ity M em ber B anks of N ew Y o rk and Chicago, and b y A ll O th er M em ber B an k s Payments were not due on the new market offerings of certificates and notes until September 21 and Septem ber 25, respectively, and meanwhile cash income tax receipts did not provide sufficient funds for war expendi tures, quarterly interest payments, and redemptions of the $342,000,000 of maturing Treasury notes on Septem ber 15 and the $300,000,000 special maturity of Treasury bills on September 17. As in June, therefore, the Treas ury found it necessary, not only to draw heavily upon war loan account balances with commercial banks, but also, for a number of days beginning September 15, to borrow from the Federal Eeserve Banks on special one-day certificates of indebtedness. The largest of these temporary borrowings, $324,000,000, occurred on September 15, when the Treasury notes matured and large payments of interest on outstanding Government securities were also due. Cash receipts of $420,000,000 from the sale of the certificates of indebtedness on Sep tember 21, and $530,000,000 from the sale of Treasury notes on September 25, together with the proceeds from the sale of $400,000,000 Treasury bills on September 23 (when there were no maturing bills), enabled the Treas ury to pay off the temporary borrowings from the Eeserve Banks and provided a substantial remainder of working balances on deposit in the Eeserve Banks. M ember B ank E xcess E eserves Excess reserves of the Central Eeserve New York City banks have continued to show the persistently declining tendency that has prevailed since January, 1941 when they exceeded $3,500,000,000. While the New York City Member Bank Excess Reserves (In millions of dollars) Central Reserve City banks New York Jan. 15, 1941......................................... Apr. 15, 1942........................................ Aug. 1 9 .................................................... Aug. 20 (opening of business). . . . Sept. 1 2 ................................................... Sept. 14 (opening of business). . . . Sept. 1 6 ................................................... Sept. 2 3 .................................................... * Estimated. 3,545 720 180 525 175 505 625 210 Chicago 375 250 15 85 65 135 70 25 Reserve City and country All member banks banks* combined* 2,980 1,920 1,905 1,910 2,300 2,310 2,345 1,795 6,900 2,890 2,100 2,520 2,540 2,950 3,040 2,030 banks were disproportionately affected, the decline in excess reserves which set in at that time was, for a time, shared in to lesser extent by other member banks through out the country, and, by April 15 of this year, excess reserves of all member banks were down to $2,890,000,000 from $6,900,000,000 fifteen months before. The Central Eeserve New York City banks lost four fifths of their excess reserves over this period, while excess reserves of the Central Eeserve City banks of Chicago, and those of Eeserve City and country banks combined, showed declines of approximately one third in each case over this period. A minor part of these reductions in excess reserves was attributable to the lifting of member bank reserve requirement percentages to their statutory maxima, effective November 1, 1941, but the major part resulted basically from a decided slackening in the rate of gold inflow, an accelerated movement of currency into circu lation, and continuously increasing deposits and reserve requirements. The gold inflow came to a halt altogether late in the summer of 1941, and money in circulation, which had been increasing at an average rate of some what less than $100,000,000 a month during 1940, rose at an average monthly rate of $200,000,000 during 1941. Bank deposits, which form the basis for reserve require ments, had been rising steadily since 1938. Since last April the drain upon the excess reserves of member banks has been intensified by two principal factors: a further acceleration in the flow of currency into circulation, to 300-400 million dollars a month; a more rapid increase in bank deposits, and hence in reserve requirements, resulting from enlarged purchases of Government securities by banks. Although the Federal Eeserve Banks, beginning April 15, have been adding an average of approximately $250,000,000 a month to their portfolio of Government securities, total excess reserves of all member banks have declined further. Practically all of the shrinkage in excess reserves in this period has occurred at Central Eeserve City banks in New York and Chicago. Despite the heavy demand for currency and the accelerated rise in deposits and required reserves, total excess reserves of Eeserve City and country banks, taken together, have been maintained at an average level of $1,900-2,000,000,000, as their reserves have been replenished, largely through Government expendi tures, at the expense of Central Eeserve City banks. The concentrated impact of declining excess reserves upon the Central Eeserve City banks has been the result, by and large, of purchases of Government securities by these banks and their customers at a rate disproportionate to the volume of Government checks deposited with them. Temporarily to correct, in some degree, the unequal dis tribution of member bank excess reserves, the Board of Governors of the Federal Eeserve System on August 20 lowered the reserve requirement percentage against net demand deposits for Central Eeserve City banks (i.e., the principal New York and Chicago banks) from 26 per cent to 24 per cent. This step had the effect of tempo rarily lifting the level of excess reserves in New York from $180,000,000 to $525,000,000. During the follow ing three weeks, excess reserves in New York again dropped rapidly, a consequence of the exceptionally large subscriptions entered in this District to the Treas ury certificates of indebtedness and 2y 2 per cent “ tap” 75 FEDERAL RESERVE BANK OF NEW YORK bonds sold during August. The book credit method was used to a predominant extent initially in making pay ments for these securities, and of the total war loan account deposits of $3,360,000,000 on August 15, more than half were held by the Central Reserve New York City banks. Thereafter the excess reserves of the New York banks were drawn against heavily through the Treasury “ calls” upon the war loan accounts. Within three weeks excess reserves of the New York banks were again below $200,000,000, and the Board of Governors, effective at the opening of business Septem ber 14, further lowered the reserve requirement per centage against net demand deposits for Central Reserve City banks from 24 per cent to 22 per cent. This action again had the effect of replenishing temporarily the excess reserves of the New York City banks to the extent of $330,000,000, and those of the Chicago banks to the ex tent of $70,000,000. As a result of an exceptional volume of Government disbursements at the middle of the month, excess reserves were even higher on Wednesday, Sep tember 16. But additional Treasury calls upon war loan deposit accounts, and cash payments for the pur chase of new Government security issues, resulted in a rapid shrinkage in member bank excess reserves during the latter part of the month. To these factors was added, in the case of New York City banks, the effect of sizable withdrawals of funds by out-of-town banks from their New York balances. Between September 16 and 23, excess reserves of the Central Reserve New York City banks fell from $625,000,000 to $210,000,000; those of all member banks from $3,040,000,000 to $2,030,000,000. M e m b e r B a n k C redit During the five weeks ended September 23, total loans and investments of weekly reporting member banks rose $127,000,000 further in New York City and $705,000,000 in 100 other leading cities. These increases were largely accounted for by the participation by these banks in the September 21 issue of 0.65 per cent certificates of in debtedness. Of this $1,500,000,000 issue, the reporting member banks in New York City purchased for their own accounts somewhat more than 20 per cent, and reporting banks outside New York City purchased about 35 per cent. The increase in holdings of certificates of indebted BILLIONS OF DOLLARS ness of the reporting New York banks amounted to $327,000,000 over the five weeks and these banks also increased their holdings of Treasury bills and Govern ment guaranteed obligations, but total holdings of Govern ment securities expanded to the extent of only $214,000,000 through the effect of the maturity of 2 per cent Treasury notes on September 15 and net sales in the market of Treasury notes and bonds. Reflecting short term borrow ings by New York City and New York State, the New York banks added $64,000,000 to their holdings of other securities. For the reporting banks in the 100 other centers, total investments increased $862,000,000 over the five weeks’ period. Certificate of indebtedness holdings expanded $504,000,000; Treasury bills were acquired to the extent of $283,000,000, and Treasury bonds to the extent of $104,000,000. Treasury bill holdings of the report ing member banks outside New York City reached $1,673,000,000 on September 23. Since the end of April, accompanying a $2,550,000,000 increase in the outstand ing supply, Treasury bill holdings of the reporting banks outside New York City have risen nearly $1,000,000,000. Reductions were general among the loan classifications for reporting member banks both in New York City and outside. Commercial, industrial, and agricultural loans decreased $109,000,000 for the weekly reporting banks as a whole, despite the consummation of a number of loans for the provision of funds required to carry out war contracts. In New York, where the contraction in commercial, industrial, and agricultural loans was rela tively small, a $67,000,000 decline in loans to brokers and dealers in securities was the largest single factor in the reduction in total loans over the five weeks’ period. Since the beginning of 1941 total loans and investments of the weekly reporting member banks have increased almost $10,000,000,000, or by 38 per cent. As the accom panying charts show, the dominating factor in the rise has been the expansion in bank holdings of U. S. Govern ment securities, in turn associated with the large increase which has taken place over this period in the Federal debt. As was also true of 1940, the weekly reporting member banks in New York City added more than $1,000,000,000 to their holdings of Government securities in 1941; up to September 23 of this year the Govern ment portfolios of these banks had been enlarged about BILLIONS 1940 in New Y ork City 194.1 1942 L oans and In vestm en ts of W e e k ly R eporting B anks in 1 0 0 Leading C ities O utside N ew Y o rk C ity MONTHLY REVIEW, OCTOBER 1, 1942 76 $1,800,000,000 more. Government security holdings of the other weekly reporting banks, which were not sub stantially changed during 1940, expanded to the extent of $1,500,000,000 during 1941 and $4,600,000,000 up to September 23 of this year. Of the $6,300,000,000 increase in the outstanding volume of market issues of U. S. Government obligations during 1941, the New York banks accounted for 18 per cent and the weekly reporting mem ber banks elsewhere for 23 per cent. Between J anuary 1 and September 23 of this year, the supply of market issues available for bank investment grew to the extent of $15,400,000,000, and of this amount purchases of the reporting banks in New York accounted for 12 per cent while reporting banks elsewhere accounted for 30 per cent. Despite the fact that the reporting banks outside New York have been purchasing Government obligations in increasing volumes, the ratio of Government securities to total loans and investments in the 100 cities, at 59 per cent on September 23, was still below the corresponding figure of 64 per cent for New York City banks. The weekly reporting member banks as a whole added $3,000,000,000 to the volume of loans and investments, exclusive of U. S. Government securities, during 1940 and 1941, but so far this year there has been a net con traction of more than $1,000,000,000 in earning assets other than Government securities. From a peak in March, 1942, the volume of commercial, industrial, and agricultural loans has declined $240,000,000 for the New York City banks and $510,000,000 for the banks in the 100 cities. Money Rates in New York Sept, 30, 1941 Aug. 31, 1942 Sept. 29, 1942 Stock Exchange call loans.......................... Stock Exchange 90 day loans................... Prime commercial paper— 4 to 6 months Bills— 90 days unindorsed......................... Yield on % per cent Treasury note due March 15, 1945 (tax exem pt).............. Average yield on taxable Treasury notes (3-5 years).................................................... Average yield on tax exempt Treasury bonds (not callable within 12 years). . Average yield on taxable Treasury bonds (not callable within 12 years).............. Average rate on latest Treasury bill sale 91 day issue................................................. Federal Reserve Bank of New York dis count rate..................................................... Federal Reserve Bank of New York buy ing rate for 90 day indorsed bills.......... 1 *1M 1 *1M 5 -H A A 7 A 7 1 *1 H V s -U A 7 0 .3 7 0 .5 5 0 .6 5 1 .2 5 0 .5 7 1 .2 8 1 .9 7 2 .0 2 2 .0 5 2.11 2 .3 4 2 .3 4 0 .0 3 7 0 .3 6 9 0., 373 1 1 'A 1 K * Nominal. W a r F in ancing In spite of the quarterly income tax collections in September, the Treasury borrowed a total of about $4,300,000,000 during the month. In addition to pro viding funds to meet the ever increasing volume of war expenditures, it was necessary to obtain funds for the redemption on September 15 of $342,000,000 maturing Treasury notes. The distribution of this borrowing was as follows: $1,606,000,000— 1*4 per cent Treasury notes 1,506,000,000— 0.65 per cent certificates of indebtedness 750.000.000— War Savings bonds (estimated) 450.000.000— Treasury bills (net receipts) The new issues of Treasury notes and certificates of indebtedness were offered by the Treasury on September 10. As in the case of other recent offerings, subscription books for these issues remained open for two days. The Treasury notes, bearing interest at the rate of l 1/^ per cent, were dated September 25, 1942 and will mature March 15, 1945. Subscriptions to this issue, the first Treasury note issue sold for cash since January, 1941, totaled $3,637,000,000. Subscriptions of $25,000 or less (amount ing to $134,000,000) were accepted in full, while the larger subscriptions were allotted on a 42 per cent basis. Allotments to subscribers in the Second Federal Eeserve District ($592,000,000) amounted to 37 per cent of the total. The 0.65 per cent certificates of indebtedness were dated September 21, 1942 to mature May 1, 1943. The term of slightly more than 7 months was almost the same as that on the % per cent June issue of certificates, but about 4 months shorter than the term on the % Pe r cent August issue. Subscriptions to the new certificates totaled $1,992,000,000, compared with somewhat over $3,000,000,000 on each of the two previous issues, reflect ing the effects on subscriptions of the simultaneous offer ing of the Treasury note issue. Subscriptions of $25,000 or less ($44,000,000) were accepted in full and those above $25,000 were allotted on a 75 per cent basis. Allot ments to subscribers in this District ($599,000,000) amounted to 40 per cent of the total compared with 43 per cent on the August certificates and 46 per cent on the June issue. Probably owing in part to the sales campaign led by the radio stations and moving picture theatres during September, and in part to the progressive increase in sales under payroll savings plans, total sales of War Sav ings bonds were the third highest of any month on record. While the $775,000,000 National quota does not appear to have been quite met, it is estimated that sales may have reached $750,000,000, which would compare with $697,000,000 in August, 1942, and $232,000,000 in Sep tember, 1941. Sales of War Savings bonds by agencies other than post offices in the Second Federal Reserve District during September were estimated tat $125,000,000, 10 per cent above the August level and more than double the sales in September, 1941. According to statistics recently released by the Treas ury Department, 18,500,000 workers were participating in payroll savings plans for the purchase of War Savings bonds at the end of August. During that month, $225,000,000 or 7 per cent of the total wages paid these workers was deducted under these plans. As a further evidence of widespread participation in purchases of War Savings bonds, the number of $25 denomination bonds issued has shown marked increases from month to month. About $450,000,000 in “ new money” was raised from sales of Treasury bills during September. On September 16, the weekly bill issue was increased from $350,000,000 to $400,000,000; weekly maturities during September amounted to $250,000,000 on September 2 and $300,000,000 on each issue thereafter. Sales of tax anticipation notes, stimulated by the changes in terms of the notes described below, are estimated at well over $500,000,000 for the month as compared with an average of $400,000,000 dur ing the May-August period. More than $500,000,000 of tax notes were presented in payment of taxes during September, however, so that the volume of these securities outstanding was not substantially changed. Changes in the terms of the tax savings notes which have been on sale since August 1, 1941 were announced 77 FEDERAL RESERVE BANK OF NEW YORK on September 14 by the Treasury. Two new series of tax notes, designated as Series A-1945 and Series C-1945, were offered for sale beginning September 14. The new Series C notes are designed to provide a security well adapted for the temporary investment of idle funds by corporations and other investors, as well as for the ac cumulation of tax reserves. These notes have been made more attractive by an increased yield and by a provision for cash redemption with interest. (The notes are not de signed as an investment medium for banks which accept demand deposits; such banks may earn an interest return from the notes only when they are redeemed in meeting tax liabilities.) The Series C notes will be dated as of the first day of the month in which purchased, will mature three years thereafter, and will be issued at par. Interest accrues each month on a graduated scale so as to yield from 0.60 per cent, if held for six months, up to approxi mately 1.07 per cent, if held to maturity. The former Series B notes, which these replace, yielded 0.48 per cent and then only when used in paying taxes. The new Series A-1945 notes are substantially the same as the former Series A except that the maturity has been increased from two to three years, and the limitation, for both old and new series, on principal amount that may be presented on account of any one taxpayer’s liability for each class of taxes (income, estate, or gift) for each taxable period has been raised from $1,200 to $5,000. These notes, which are designed primarily for smaller taxpayers, are redeemable in cash only at the purchase price, but yield 1.92 per cent when used in the payment of taxes. Security M a rk e ts General price stability and light trading activity characterized the Government security market during September. The announcement on September 2 that the Treasury would offer $3,000,000,000 of new securities dur ing the month had little effect upon the market, nor did the actual offering, on the tenth, of the new issue of $1,500,000,000 certificates of indebtedness and a like amount of new notes. Both issues were well received, but the volume of subscriptions indicated that the note issue was considered the more attractive of the two. As in recent months, prices of long term fully taxable Treasury bonds remained within an extremely narrow range in September, while quotations for the long term partially tax exempt bonds drifted slightly lower through out the month. In continuation of the tendency pre vailing in July and August, prices of the three to five year taxable Treasury notes declined, and the average yield on these securities rose from 1.25 per cent on August 31 to 1.28 per cent at the end of September. The price of the % per cent tax exempt Treasury notes maturing March 15, 1945 declined somewhat during the early part of September, but subsequently recovered most of this loss. Prices of the various issues of certificates of in debtedness held generally steady throughout the month and the average rate at which new Treasury bill offerings were sold continued close to the % per cent buying rate of the Federal Eeserve Banks. Continuing the movement in evidence since February, municipal bond prices rose further during September, as indicated by a decline in the average yield on prime municipal bonds computed by Standard and Poor’s Cor poration from 2.26 on August 26 to 2.24 per cent on Sep tember 23. The current average yield is at the lowest point since early last December. Prices of domestic corporation bonds held steady throughout September, following a slight firming tendency in August. Stock prices, after remaining relatively steady in a quiet market during the first three weeks of September, moved into higher ground toward the end of the month as trading activity became more brisk. On September 24, 850,000 shares were traded on the New York Stock Exchange, the largest volume for any day this year. Although industrial stock prices participated in the advance, the principal strength was shown among the railroad and utilities equities. N e w Security Issues Corporate and municipal new security financing during September continued at the low level of recent months, with a total of about $68,000,000 of issues publicly offered or privately sold. Corporate financing amounted to $43,000,000, of which slightly more than one third repre sented funds to be used for new capital purposes. Muni cipal awards during the month aggregated $25,000,000. The principal corporate financing during the month was the offering of $32,925,000 Southwestern Public Service Company securities. This offering consisted of $20,000,000 first mortgage 4 per cent bonds due in 1972, $6,000,000 of 2y 2 and 3 per cent serial notes maturing from 1943-1954, 60,000 shares ($6,000,000) of 6y 2 per cent preferred stock, and 185,000 shares ($925,000) of common stock. Proceeds from this financing are to be used in connection with a plan of integration involving retirement of subsidiary obligations and purchase of the securities of three additional companies. The only municipal award of appreciable size was that of $8,286,000 Boston Metropolitan District 1% per cent refunding bonds maturing from 1943 to 1967. As shown in the accompanying chart, the volume of corporate new security issues in the third quarter of 1942 averaged only $56,000,000 monthly, the lowest for any quarter in several years. Issues for new capital purposes, which had been maintained at a relatively high level dur ing the first half of the year, fell off substantially in the third quarter. The volume of corporate refunding, which I REFUNDING I NEW CAPITAL W l'M ~ 47 V 7 7 T, 29 22 34 193 7 193 8 1939 1 9 4 0 YEAR 1ST 2ND 3RD 4TH QUARTER 1941 1ST J&a&Lx.. 2ND 3RD 4TH QUARTER 1942 M on th ly A v era g e V olu m e o f D om estic Corporate Security Issu es for R efundin g and for N ew Capital (D a ta for third quarter of 1 9 4 2 prelim inary) 78 MONTHLY REVIEW, OCTOBER 1, 1942 had already been reduced sharply in the first six months of this year, continued at a low level in comparison with the large amount of refundings during the period 1936-1941. 1941 1942 August June July August (100 — estimated long term trend) Index of Production and Trade t ................ 116 114 118p 120p Production....................................................... 116 123 126p 128 p Producers’ goods— to ta l........................ Producers’ durable goods................ Producers’ nondurable goods......... 124 131 118 152 177 124 156p 184p 124p 160p 191p 125 p Consumers’ goods— total...................... Consumers’ durable goods.............. Consumers’ nondurable goods. . . . 105 108 105 88 45 102 89 p 44 p 103p 88 p 38 p 104p Durable goods— to ta l............................. Nondurable goods— to ta l..................... 124 110 138 111 143p 112p 146p 113p Primary distribution"}-................................. Distribution to consumer.......................... Miscellaneous services................................ 119 115 105 130 84 120 134p 89p 124p 133p 94p 126p 106 116 117 117 124 136 138p 65 93 61 85 Indexes of Production and Trade* F oreign E xch anges Aside from irregular fluctuations in the unofficial rate for the Canadian dollar and the so-called free rate for the Swiss franc, New York foreign exchange quotations were stable in a continued quiet market during the past month. Accompanying a seasonal slackening in the tourist demand for Canadian exchange, the discount in the unofficial market continued to widen steadily during the first part of September to reach 13 1/16 per cent on September 10, the largest discount since the middle of April. Subsequently, however, some demand developed and the discount narrowed gradually to 11 5/16 per cent on September 24; at the end of the month it was quoted at 1 2 per cent, as compared with 10 15/16 per cent at the end of August. As a result of the appearance of some demand in its usually thin market, the ‘ ‘ free ’ ’ Swiss franc appreciated substantially vis-a-vis the dollar during the early part of the month and by September 12 the “ free” rate had advanced to $0.3050 bid. Some supply subse quently appeared in this market, however, and the quo tation receded gradually to close September at $0.3000 bid, unchanged for the month as a whole. P rodu ction and T ra d e Business activity in September held close to the ad vanced level reached in August, according to early indi cations. Weekly estimates of steel production reveal the continuation of the high rate of output maintained in earlier months of this year. Production during the first nine months of 1942 ran at a rate more than onethird above the average level of 1929 and more than 70 per cent above that of 1917, the peak year for steel pro duction during the first World War. Although actual or threatened shortages of steel scrap have been a matter of concern throughout the past year, the vigorous collection drives conducted by numerous municipalities, news papers, and other organizations are said to be bringing encouraging results. According to the W .P.B., more than three fourths of the output of finished steel is now going into direct war use. For the first three weeks of September the daily average rate of electric power production was at a new high point and the daily output of bituminous coal increased somewhat over the level maintained in August, but the production of crude petroleum was off slightly from the average of the preceding month. Loadings of railway freight in the week ended September 19 exceeded 900,000 cars, the highest weekly volume since the peak of last October. Early in September the special committee appointed by the President to investigate the rubber situation re ported that the country’s stockpile of crude rubber would be exhausted within a year by military and export needs alone unless new supplies could be obtained. In con sonance with recommendations contained in this report to conserve rubber tires, preparations were made to insti tute nation-wide gasoline rationing, effective by November 22, on the same basis as the program now in effect in Cost o f Living , Bureau of Labor Statistics (100 = 1935-39 average)............................... Wage Rates (100 = 1926 average)..................................... Velocity o f Demand Deposits * (100 = 1935-39 average) New York C ity .................................................. Outside New York C it y ................................. 62 86 71 87 p Preliminary. * Adjusted for seasonal variation. t For M ay, 1942, the index of production and trade has been revised to 113, and the index of primary distribution to 128. seventeen Eastern States, and a country-wide speed limit of 35 miles per hour was ordered. Late in September, the O.P.A. announced plans for restricting the use of fuel oil in homes in thirty Eastern and Midwestern States during the coming winter. P roduction and T rade in A ugust During August the monthly index of production and trade computed at this bank rose 2 points further to 120 per cent of estimated long term trend, a new record level. The figure for August last year was 116. While produc tion of consumers’ durable goods continued the decline in evidence since July, 1941, there was an additional seven point rise in the output of producers’ durable goods, a group which includes many important war materials, and production of nondurable goods increased slightly further. The recovery in retail trade which got under way in July was continued in August, the component index of distribution to consumer advancing 5 points further to approximately the level of last March. E m p lo y m e n t and P a yrolls Developments during the month of September demon strated an increasing tendency toward a unified National labor policy embracing more comprehensive Government regulation of wages, working hours, and the labor supply. On Labor Day, President Roosevelt indicated a deter mination to stabilize all elements entering into the cost of living, including the prices of farm products and wages. Later in the same week, he signed an order, effec tive October 1, prohibiting double pay for Saturday, Sunday, and holiday work as such, but making double pay compulsory for any seventh consecutive day of labor “ on all work relating to the prosecution of the war.” Under another executive order (effective September 27) the Chairman of the W ar Manpower Commission was given complete control over the transfer of any of the 2,300,000 Federal employees. The W ar Labor Board FEDERAL RESERVE B AN K OF N EW YO R K adopted a policy of “ equal pa y fo r equal w ork ” for women employees in war industry. Other developments o f the month included steps taken by the W a r Manpower Commission to stabilize em ployment in the lumber and nonferrous metal industries o f twelve W estern States in order to check manpower losses due to labor “ p ira tin g ” and migration, and a W a r Production B oard order fo r a 48-hour work week in the Pacific Northwest lumber industry. The total number o f persons at work in the U nited States in A u gu st was unchanged from the record high J u ly level of 54,000,000 persons, according to estimates of the D epartm ent o f Commerce. A gain o f h alf a million in nonagricultural em ployment offset a seasonal decrease in agricultural working forces during the month. Total em ployment in A u gu st was 3,000,000 higher than in the corresponding month last year, and 6,300,000 above the A u gu st, 1940 level. Unem ploym ent was estimated at 2,200,000 persons in A u gu st, the lowest level in recent years. A large part of the month-to-month increase in non agricultural em ployment occurred in m anufacturing establishments, where working forces in A u gu st were 2 per cent larger than in Ju ly, and wage paym ents were 5 per cent greater. N ot only was there an expansion of employment at plants producing machinery, various types of transportation equipment, and other war goods, but more workers were employed in the m anufacture of apparel and food products, largely as a result of seasonal expansion in these industries. F actory em ployment was 9 per cent above the A u gu st, 1941 level, and payrolls increased 36 per cent. In N ew Y o rk State, factory em ploym ent rose 3 per cent during A u gu st and payrolls increased 4 % per cent, largely as a result of seasonal expansion in the apparel industry. M ost other consumers’ goods industries, how ever, reduced working forces somewhat between J u ly and A ugust. W a r plants, especially those producing tanks, ships, and aircraft, continued to add to their working forces. Taken as a whole, reporting factories in New Y o rk State employed 6 per cent more workers than in A ugust, 1941, while they increased their payrolls 25 per cent, reflecting an increase o f 18 per cent in average weekly earnings during the year. 79 PERCENT Index of Physical Volume of Total Agricultural Production in the United States (1935-39 average=100 per cent; 1942 production estimated) advances fo r the month of about 70 cents to new 22-year record levels, above $15.00 per hundredweight. B utter quotations rose to new high levels since 1929. Quotations for cotton and steers fluctuated irregularly, but showed slight net changes for the month. The physical volume o f all agricultural production, including livestock and products as well as crops, is expected to reach an all-tim e high this year, according to estimates of the D epartm ent o f A griculture. The indicated production in 1942 is substantially above the 1941 total— about 12 per cent— and is nearly 40 per cent above the low level in 1935. The D epartm ent of A g ricu l ture published revised estimates of individual crops based on conditions as o f September 1, which in most instances were higher than those o f a month earlier. The latest estimate o f the 1942 cotton production was placed at 14.028.000 bales, which would compare with the crop of 10.744.000 bales in 1941, and exceed that o f any year since 1937. Forecasts of the corn and wheat crops this year indicate the largest volumes since the respective peaks in 1920 and 1915. I t was estimated that the oil seed crops this year would be at record levels, offsetting the deficiency in imported oils. Commodity Prices Building The general average o f wholesale commodity prices rose slightly further during September to a new high level since 1926, according to the Bureau o f Labor Statis tics comprehensive weekly index. Price advances were again concentrated largely in commodities no£ subject to ceiling regulations— chiefly farm products and foods. In the controlled markets, including the m ajority of finished industrial materials, price movements tended to show the steadiness that had prevailed since the General M axim um Price Regulation became effective in M ay. A ccom panying Congressional discussion during Sep tember, of the P resident’s proposal to stabilize farm prices, quotations fo r a number o f farm products showed considerable advances. On September 24 winter wheat in Kansas C ity rose to $ 1 .2 6 % a bushel, which was about 10 cents above the price at the end o f A u gu st and the highest since J a n u a ry ; quotations fo r other grains ialso moved higher. Despite some increase in receipts at the prim ary markets, prices fo r hogs in Chicago showed The daily rate o f construction contracts awarded in the Metropolitan N ew Y o rk C ity area showed a further sharp decline between Ju ly and A u gu st according to the F . W . Dodge Corporation report. A s the accompanying chart shows, since the beginning of 1939 the rate of con tract awards in the metropolitan region (including, in addition to New Y o rk C ity, Nassau, Suffolk, and W e s t chester Counties) has been more than cut in half. The previous peak period, at the end o f 1938 and the first part o f 1939, reflected the inclusion o f several large public and private housing projects, including the Metropolitan L ife Insurance Com pany housing development in the B ronx, and, in the nonresidential building field, a con siderable volume o f W o r ld ’s F a ir and public projects. D u rin g 1940 and 1941, when the volume o f awards in m any other sections o f the country was being raised to record levels by the defense program , the volume of awards in this area remained at a relatively steady level. Residential building began to fa ll off in 1941, but fo r a 80 M ONTHLY REVIEW , OCTOBER 1, 1942 Daily Average Value of Construction Contract Awards in Metropoli tan New York (F. W. Dodge Corporation data; six month moving average of seasonally adjusted figures) while the increase in nonresidential building was enough to offset this decline. Some defense projects, more p ar ticularly fo r the construction and expansion of m anufac turing and shipbuilding facilities, were included in the nonresidential building figures for that period. B egin ning in 1942, however, the rate of awards for all con struction has declined sharply, reflecting prim arily a further curtailment in residential building. A w ards for nonresidential building and for public works and u tili ties construction also have fallen off this year, but much more moderately. Figures fo r the 37 Eastern States included in the F . W . Dodge Corporation report present a striking contrast to the New Y o rk City data. A lth ou gh the rate of awards in the 37 States as a whole dropped during A u gu st from the near-record level of Ju ly, it was only slightly below the A u gu st, 1941 rate, which was the highest reported fo r last year. The demands of the war construction pro gram have been large enough during recent months sub stantially to counterbalance the enforced curtailment of nonessential construction. A lthough A u gu st awards fo r private construction, which include some volume of war projects, amounted to only a little over one-third those of the corresponding month of last year, additional steps were taken during September by the W a r Production B oard to curtail even further the amount of nonessential building. Effective September 7, lim its on the amount of civilian construction which could be undertaken with out the specific authorization of the Board, were cut from $500 to $200 in the case of residential buildings, from $5,000 to $200 for such buildings as clubs, assembly halls, etc., and from $5,000 to $1,000 in the case o f such con struction as highways and utilities. H owever, in the case of m ultiple residential buildings providing accommoda tions fo r more than five families the lim it was raised, from $500 to $1,000. basis— was larger than usual. Sales in A u g u st were con siderably smaller than in the corresponding month of last year, when retail trade was exceptionally active as consumers sought to anticipate shortages and price ad vances, but were about 1 7 % per cent higher than in A u gu st of 1940. Estim ates based on the first four weeks o f September, however, indicate that sales failed to show all o f the usual seasonal rise between A u g u st and Sep tember. F o r the first eight months of 1942, total dollar sales of the reporting department stores in this D istrict were 7 per cent higher than in the corresponding 1941 period. Considering the higher prices prevailing this year, how ever, it is evident that the physical volume of sales was lower than a year ago. There has been a wide variation in relative sales volumes among the various departments. Sales of piece goods and w om en’s coats and suits showed pronounced gains, while there were declines in sales of mechanical refrigerators, furniture, m illinery, and cameras from those of the corresponding eight months of 1941. The seasonally adjusted index o f department store inventories declined slightly in A u gu st fo r the first time this year, and the increase over 1941 narrowed from 82 per cent in Ju ly to 59 per cent in A u gu st. Returns from a lim ited number of department stores in this D istrict indicate that at the end of A u gu st outstanding orders for merchandise purchased by the stores, but not yet deliv ered, were about 10 per cent lower than at the end of Ju ly, and 33 per cent below A u gu st, 1941, but 46 per cent higher than in A u gu st, 1940. Percentage changes from a year earlier Department stores Net Sales August, 1942 New York City....................................... Northern New Jersey............................. — 8 — 15 — 11 — 9 — 7 — 11 — 6 — 19 — 26 — 2 +12 — 7 — 14 — 10 — 13 — 10 — 7 — 7 +18 — 7 + 7 + 5 + 7 +11 +13 + 2 + 7 — 2 — 8 +11 +23 + 7 — 7 + 8 + 5 +13 +12 +14 +34 + 9 All department stores................. — 9 + 7 +59 Apparel stores............................. — 8 + 8 +36 Westchester and Fairfield Counties. . . . Lower Hudson River Valley................. Poughkeepsie....................................... Upper Hudson River Valley................. Central New York State....................... Mohawk River Valley....................... Northern New York State..................... Southern New York State..................... Binghamton......................................... Western New York State...................... Niagara Falls...................................... +63 +61 +62 +37 +49 +26 — +39 — +55 +94 +44 — +44 .— .— +51 +49 +29 +60 Indexes of Department Store Sales and Stocks, Second Federal Reserve District (1923-25 average == 100) 1941 August Department Store Trade Departm ent store sales in this District continued to evi dence a rising tendency during A u gu st, on the basis of reports made by a representative group of stores. W h ile sales frequently have risen between J u ly and A u gu st, the increase this year— 15 per cent on an average daily Stock on hand,end Jan. through of month, August, 1942 August, 1942 Sales (average daily), unadjusted................ Sales (average daily), seasonally adjusted.. 100 132r Stocks, unadjusted........................................ Stocks, seasonally adjusted r........................ 98 102 r Revised. 1942 June July August 92 97r 81 114 93 123 156r 168 162 165 158 163 FED ERAL RESERVE BANK OF N EW YORK M ONTHLY REVIEW, OCTOBER 1, 1942 General Business and Financial Conditions (S u m m arized by th e B o ard of G overnors o f th e F e d e ra l R eserve S ystem ) I N D U S T R IA L o u tp u t continu ed to rise in A u g u st and th e first h a lf o f Septem ber and re ta il d istrib u tio n o f com m odities also increased. P rice s o f fa rm p ro d u cts and foods advanced fu rth e r. P r o d u c t io n Index of Physical Volume of Industrial Produc tion, Adjusted for Seasonal Variation (1935-39 average—100 per cent) In d u s tria l o u tp u t increased in A u g u st an d the B o a rd ’s seasonally a d ju ste d index rose 3 p o in ts to 183 p er cent o f th e 1935-1939 average. T here w ere fu rth e r m ark ed increases in a c tiv ity in th e m achinery, tra n sp o rta tio n equipm ent, and other a rm am en t in d u stries. C rude petro leum pro d u ctio n increased considerably fro m th e reduced level of recent m onths and o u tp u t of m an u fa ctu re d food pro d u cts rose m ore th a n is usu al a t th is tim e o f year. P ro d u c tio n of m aterials, such as steel, n o n ferro u s m etals, coal, and lum ber, continued in larg e volum e. V alue of co n struction c o n tracts aw ard ed in A u g u st declined fro m the reco rd high levels o f Ju n e an d Ju ly , according to figures o f the P . W . D odge C orporation. T he extent to w hich the continu in g larg e volum e of construction reflects the w ar p ro g ram is in d ica te d by th e fa c t th a t in the first e ig h t m onths of th is y e ar 84 per cent of to ta l aw ard s have been fo r pu blicly financed p ro je c ts and in recen t m onths th e p ercentag e has been higher. D is t r ib u t io n D istrib u tio n of com m odities to consum ers increased considerably in A ug ust, reflect in g p a rtic u la rly m ark ed increases in d e p a rtm e n t sto re sales an d in sales of general m erchandise in sm all tow ns and ru ra l areas. D ollar value o f sales to consum ers in A u g u st w as som ew hat low er th a n th e u n u su ally larg e sales a y e a r ago, w hen th ere was a considerable am o unt of a n tic ip a to ry bu y in g , w hile average prices w ere about 12 per cent higher. On th e basis of p h y sical volum e, th erefo re, sales w ere sm aller th a n a y ear ago. R ailro ad fre ig h t car load ing s w ere su stain ed a t a h igh level d u rin g A ug ust and the first h a lf o f Septem ber, reflectin g continu ed larg e shipm ents of m ost classes of fre ig h t. Co m m o d it y P Indexes of Value of Department Store Sales and Stocks, Adjusted for Seasonal Variation (1923-25 average—100 per cent) FACTO R SU SIN GRESERVEFU N D S -----------1----------M E M B E R B A N K RESERVEBALANCES S ^ ■ . X M O N EY1 CIR CU LATIlONy'** TREASURYCASh AfvSlV ..••'■"■'N O N M EM BER ^ DEPOSITS 1940 1941 1942 1940 1 1941 ---- . 1942 Member Bank Reserves and Related Items (Latest figures are for September 9) ALL MEMBER BANK v x . outside N Y CITY r ~ Q ---------------- 1 stfU m r ic e s D u rin g A u g u st an d th e first h a lf of S eptem ber th e g en eral w holesale price index advanced a b o u t h a lf a p o in t to 99.2 per cent o f th e 1926 average, reflectin g chiefly increases in prices o f livestock pro ducts. P rice s o f w heat, flour, and some other un con tro lled com m odities also advanced. N ew crop tobacco prices showed sh arp increases over la st y e ar an d a tem p o rary ceiling a t c u rre n t levels w as estab lished fo r flue-cured types. R e ta il food prices continued to rise fro m th e m iddle of J u ly to the m iddle of A u g u st and fu rth e r increases are in d icated in S eptem ber. P rices of un con tro lled foods in A u g u st w ere 10 p er cent hig h er th a n in M ay. A g r ic u l t u r e Crop pro spects im proved considerably d u rin g A u g u st and a g g re g a te pro duction th is y ear is expected to be ab o u t 15 p er cent g re a te r th a n in 1941, w hich w as close to a record y e ar fo r crops. U nu sually high yields p er acre a re in d ica te d fo r m ost m ajo r crops and fo r some others, like oilseed crops, su b sta n tia lly increased acreages are expected to be harvested. F eed g ra in supplies a re expected to be of record p ro p o r tions, b u t ow ing to th e grow ing nu m b er o f livestock on fa rm s the sup ply per anim al w ill p ro b ab ly be a b o u t th e sam e as la s t season. B a n k C r e d it Excess reserves of m em ber banks, w hich have g en erally flu ctu ated betw een 2.0 an d 2.5 billion do llars in recent m onths, rose tem p o rarily to over 3 billion on Septem ber 16. T his increase w as due p a rtly to a fu rth e r red u ctio n in reserve requirem ents on dem and deposits a t C entral Reserve C ity banks fro m 24 to 22 p er cent and p a rtly to T rea su ry disbursem en ts out o f its balances w ith th e R eserve B ank s in connection w ith S eptem ber 15 ta x collections an d fiscal op erations. F u n d s fo r these disbursem ents arose in p a rt fro m th e issuance o f special one-day certificates to th e R eserve B anks. E xcess reserves of N ew Y ork C ity b anks have been declin in g fo r a nu m b er of m onths ow ing p rin c ip a lly to th e excess o f fu n d s ra ise d in th a t c ity b y the T reasu ry over am ounts expended there. T he effect o f th is d ra in has been offset in p a rt b y p u r chases of G overnm ent securities b y th e F e d e ra l R eserve System and b y th e tw o suc cessive reductions in reserve requirem ents. A t b anks outside N ew Y ork C ity excess reserves have show n little change in recent m onths. T hese banks have lost reserves th ro u g h currency d ra in and th eir required reserves have increased ow ing to gro w th o f th e ir d e p o sits; bo th these facto rs, how ever, have been larg e ly offset by tra n s fe rs of fu n d s fro m N ew Y ork. H oldings o f G overnm ent securities a t N ew Y ork C ity banks, w hich increased sub s ta n tia lly in J u ly an d A ug ust, declined som ew hat in the first h a lf o f S eptem ber. A t banks outside N ew Y ork C ity holdings have continu ed to increase. U n it e d S t a t e s G o v e r n m e n t S e c u r it y P r ic e s Wednesday Figures of Estimated Excess Re serves of All Member Banks (Latest figures are for September 9) T he recen t 3 billio n do llar T rea su ry cash financing op eration h a d little effect on th e G overnm ent securities m ark et, and prices continu ed steady.
@FedFRASER