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MONTHLYREVIEW
O f Credit and Business Conditions
FEDERAL
V ol.
27
RESERVE
BANK
O CT O BER
OF
NEW
1 94 5
YORK
No. 10
MONEY MARKET IN SEPTEMBER
Large movements of funds, induced chiefly by Government
receipts and expenditures, were the principal influence on the
reserve position of member banks and on money market con
ditions during September. Continued, though reduced, net
expenditures by the Government caused further shifts of funds
from Government War Loan accounts to private deposit ac
counts and consequent increases in reserve requirements of
member banks. Income tax collections, interest payments on
the public debt, redemptions of unexchanged Treasury securi
ties at the beginning and middle of the month, and other
Government disbursements resulted in large-scale movements
of reserves between different parts of the country and between
individual banks.
War expenditures, including disbursements to war con
tractors, in the first 18 days of September were approximately
750 million dollars below the level of the corresponding
period in August, but the decline in such expenditures was
offset by interest payments and redemptions of maturing or
called securities. In the first few days of September the Treas
ury redeemed 245 million dollars of certificates which had
not been exchanged for the new certificates issued on Septem
ber 1, and also 155 million dollars of Series A and C Savings
notes which matured on that date. Failure of some holders
of the certificates to exchange their certificates which matured
on September 1 was attributed in part to a desire of some
business organizations to increase their cash holdings in prepa
ration for reconversion expenditures. As a result of these
redemptions, together with other Government disbursements
which, despite some reduction, were still running at a sub
stantial rate, it was necessary for the Treasury to withdraw
substantial amounts from War Loan deposit accounts in the
first half of the month, prior to the heavy quarterly collection
of income taxes. The disbursement of these funds caused a
rapid rise in business and personal deposit accounts and an
accompanying increase in the required reserves of member
banks amounting to about 400 million dollars.
Temporary relief from the pressure on member bank reserve
positions was afforded on and immediately after September 15,
when the Treasury disbursed about 550 million dollars of
interest on the public debt and redeemed a sizable amount
of unexchanged 2% per cent Treasury bonds which were
called for redemption. These disbursements exceeded income
tax and other collections and resulted in some reduction in
the Treasury balance with the Federal Reserve Banks and a
consequent increase in member bank reserves.
The situation quickly reversed itself, however, despite the
fact that, because of recent legislation enabling corporations
to apply postwar excess profits tax credits against instalments
of 1944 tax liabilities not previously paid in 1945, the Treas
ury’s tax receipts in September were considerably less— per
haps as much as 400 million dollars— than they were in June.
Current Government expenditures were also substantially re
duced and tax collections ran well ahead of disbursements
from September 19 to 26. This excess of income, together
with small calls on War Loan depositaries on September 24
and 25, resulted in a rise in Treasury balances in the Reserve
Banks to an unusually high level— about 960 million dollars.
In view of this large balance and continued tax collections in
substantial amounts, the Treasury was able to suspend calls on
War Loan depositaries for the balance of the month. Mean
while, however, the net cash receipts of the Treasury caused
renewed pressure on the reserves of the banks.
To some extent, this pressure on bank reserves was mitigated
by a slackening of public demand for currency. In the two
weeks which included the heaviest income tax collections there
was a small net reduction in the amount of currency out
standing, doubtless reflecting in part the use of currency to
meet income tax payments, and in addition there was the
usual seasonal reduction in the demand for currency follow
ing a sizable expansion in the early part of the month. For
the four weeks ended September 26 the increase in currency
outstanding was only 129 million dollars, compared with in
creases in the two preceding four-week periods of 470 million
dollars and 296 million, respectively.
As a result of the combined effect of increased reserve
requirements, the moderate rise in currency circulation, and
the accumulation of unusually large Treasury balances in the
Reserve Banks after the middle of the month, there was a
more or less persistent demand by member banks throughout
the month for Federal Reserve credit to enable them to
maintain their reserves at the required levels. In view of
the rapid shifting of funds, however, the demand came from
MONTHLY REVIEW, OCTOBER 1945
individual banks and from different parts of the
.ry from time to time. There was a rather steady excess
offerings, in the market, of Treasury certificates and short
term notes which came largely from banks in need of reserves,
although some offerings were reported to have come from
corporations seeking to increase their cash resources. The
Federal Reserve Banks, through the System Open Market
Account, made purchases of such securities totaling over 700
million dollars in the four weeks ended September 26, which
served the combined purpose of maintaining equilibrium in
the market and of supplying member banks with needed
reserves.
Member bank borrowings from the Reserve Banks, and
sales of Treasury bills to the Reserve Banks under repurchase
options and subsequent repurchases of such bills, fluctuated
widely in response to rapid changes in the reserve positions
of individual banks and of banks in different areas.
For
the four-week period as a whole, member bank indebtedness
at the Reserve Banks showed a net reduction of 20 million
dollars.
It appears that some banks have been more disposed
in recent weeks to sell short term securities, such as Treasury
certificates, in the market than to borrow from the Reserve
Banks when they were in need of additional reserves. On the
other hand, Reserve Bank holdings of Treasury bills (the sale
of which by member banks under repurchase option is more
in the nature of a borrowing operation than of an open
market operation) showed a net increase of 81 million dollars.
In general, fluctuations in the reserve positions of New
in bank bond portfolios since March 1944 when another
refunding operation brought about a decline of similar pro
portions. In addition, there was some selling of Treasury
bonds by a few large New York City banks during Septem
ber, reportedly for the purpose of shifting to securities of
shorter maturities.
As illustrated in the upper panel of the accompanying
chart, marketable Treasury bond holdings of commercial banks
which report monthly to the Treasury (comprising institu
tions owning 95 per cent of all commercial bank held Gov
ernment obligations) increased 13.4 billion dollars between
the end of 1943 and June 30, 1945 (the latest date available),
compared with an increase of 8.4 billion for all other types
of marketable Government obligations. (Part of these gains
are attributable to the increase in the number of reporting
banks in this period.)
The substantial growth of bank holdings of Government
securities and bonds in particular has taken place in spite of
the fact that no direct offerings have been made to the banks
since the Third War Loan (except for limited amounts related
to the investment of time deposits) and that the Treasury,
through restrictions on the eligibility of Government securi
ties for bank investment and through refunding operations,
has limited the types of securities available to the banks.
The expansion of bank holdings of Government obligations,
therefore, was effected through open market purchases. The
most persistent purchases were of intermediate term, fully
taxable bonds— the longest and highest yielding Treasury
securities the banks are eligible to hold in more than very
York City member banks were in inverse relationship to the
fluctuations in reserve positions of member banks in other
parts of the country.
During the early part of the month,
there was an outflow of funds from New York to other
Volum e, Average Maturity, and Average Coupon Rate of
Governm ent Securities H eld by Com mercial Banks*
B IL L IO N S
B IL L IO N S
areas, probably reflecting in part corporation withdrawals of
funds from New York balances for the purpose of meeting
income tax payments in other localities, and in part sales of
Government securities in the New York market.
Around
the middle of the month, however, this outflow of funds was
more than offset by Treasury disbursements in New York
for the redemption of Government securities and for interest
payments on the public debt.
These disbursements in New
York were met by Treasury transfers of funds from other
parts of the country, which had the effect of tightening the
reserve position of banks elsewhere and easing the reserve
positions of New York City banks.
AV E RA G E MA TURITY
S CA L E
G o v e r n m e n t Se c u r i t y P o r t f o l i o s o f t h e
AVERAGE CC)UPON RATI
C o m m e r c ia l B a n k s
I
.1.,
The refunding on September 1 of the 2% per cent Treasury
bonds of September 15, 1945-47 with a % per cent certifi
cate during the month brought the first substantial decline
D
1943
J
1. ....
F
M
.1
A
M
J
JL_
SC A LE
,i
J
. . . . i...._ i >
A
S
O
i..... !
N
1944
I
D
J
,
i
.
F
M
A
i
M
J
1945
* Public marketable securities at par values.
Source: T r e a su r y B u lletin . Average maturity and coupon rate computed
by Federal Reserve Bank of New York.
FEDERAL RESERVE BANK OF NEW YORK
limited amounts. The banks also acquired large amounts of
certificates and other short term Treasury securities, especially
in periods just preceding and during War Loan drives, but
found it necessary to dispose of substantial amounts of such
securities in subsequent periods in order to maintain their
reserves at the required levels. In addition, there were indi
cations at times of some switching from short term securities
into bonds.
As a result, the general impression has arisen that the
average maturity of bank portfolios of Government obliga
tions has been lengthened considerably. Actually, in spite
of the increase in the proportion of bonds held and the sub
stantial reduction of bill holdings, there has been no lengthen
ing of the average maturity of bank portfolios of Govern
ment securities (as shown in the lower panel of the chart).
On the average, Government securities held by the banks
had about four years to run in most of the months between
the end of 1943 and the middle of 1945. Apparently the
purchases of medium term Treasury bonds only made up for
the gradual decline in the average period to maturity of pre
vious holdings, brought about by the passage of time. There
were some slight temporary declines in the average maturity
during War Loan drives when the banks purchased Treasury
bills and other short-dated securities, but these were followed
by increases in the months between drives when banks in
need of reserves sold bills to the Federal Reserve Banks and
other short term securities in the market.
Not only was there little change in the average maturity
of bank holdings of public marketable securities, but the
average coupon rate likewise remained practically stationary.
The average rate of interest paid on bank held Government
securities fluctuated in a narrow range from a high of 1.68
per cent to a low of 1.60 per cent between the end of 1943
and the middle of 1945 >(also indicated in the lower panel
of the chart). Apparently shifts from bills into certificates
and purchases of bonds just about offset the exchange of
maturing or called, higher coupon issues for low interestbearing obligations. Consequently the net cost to the Treas
ury per dollar of bank held debt remained unchanged. The
average yield to the banks is, of course, below the interest
cost to the Treasury, inasmuch as large amounts of the Gov
ernment obligations held by the banks have been acquired
in the open market at prices well above par, and other avail
able data indicate that the average yield to the banks has
been declining gradually.
B R ITISH F IN A N C IA L A G REEM EN TS W IT H
D E N M A R K AN D TH E N ETH ERLAN D S
Great Britain’s network of financial agreements with West
ern Europe was extended on August 16 by an agreement
with Denmark and on September 7 by an agreement with
the Netherlands. Both arrangements fall within the frame
work already established by the British financial agreements
75
with other countries of Western Europe and the Near and
Middle East, which were examined in some detail in the
August and September issues of this Review; accordingly,
only the distinctive features of the new agreements will be
pointed out in this article.
The Anglo-Danish agreement follows closely the pattern
of the Anglo-Swedish agreement. N o limits are formally
placed upon the balance which each government is prepared
to hold in the currency of the other country; any net liability
may be liquidated in gold by the debtor country, although
there is no undertaking to provide gold against an accumulated
debit balance; and it is anticipated that in the initial period
Denmark will accumulate sterling on balance.
On the other hand, the Anglo-Dutch agreement is closely
similar to the monetary agreement which Great Britain con
cluded in October 1944 with Belgium. Provision is made
for reciprocal overdraft facilities up to 5 million pounds ster
ling or its equivalent, 53,450,000 guilders; there is a clause
stipulating that, in addition to this overdraft limit, the Dutch
sterling balances outstanding at the time of the conclusion
of the agreement are available for the payment of purchases
in the United Kingdom; and any debit balance in excess
of these limits is to be settled by the debtor in gold.
Both agreements cover the sterling area as it may be rede
fined from time to time. The Netherlands monetary area
comprises Holland, the Netherlands East Indies, and the
Netherlands West Indies. The Danish currency area con
sists of Denmark and Greenland; pending further negotia
tions, the Faroe Islands, which had been part of the sterling
area during the war, will not be reincluded in the Danish
monetary area.
The duration of the Anglo-Danish agreement is five years,
that of the Anglo-Dutch agreement three years; both may,
however, be terminated by either party upon three months’
notice. There is also the usual clause that in the event the
parties join in a future general international monetary pact,
the terms of the agreement shall be reviewed with a view
to making any amendments that may be required.
An important dissimilarity of these latest agreements to
the earlier ones is in the basis of exchange rate determination.
While, in the previous agreements with Western Europe, the
existing exchange rates were simply reaffirmed, either at the
level determined in connection with pre-liberation currency
arrangements (Belgium, France, Netherlands) or at the level
prevailing before the war (Sweden), the exchange rate of
the Danish krone in terms of the pound sterling has been
fixed neither at the prewar level (22.40 kroner) nor at the
rate allowed for the conversion of sterling by British troops
in Denmark (24 kroner), but at the nominal rate (19.34
kroner per pound) corresponding to the krone-reichsmark rate
which prevailed in Denmark under the German occupation,
after the appreciation of the krone in January 1942; and on
76
MONTHLY REVIEW, OCTOBER 1945
this exchange basis initial prices have been fixed for British
purchases of Danish bacon and dairy produce.
The exchange rate basis chosen for the Anglo-Dutch agree
ment differs in its own way from that used in earlier British
agreements. Unlike the Belgo-British and Franco-British
agreements, under which the rates of exchange in terms of
the pound sterling are identical for the currency of the
mother country and the currencies of its colonies and de
pendencies, the Anglo-Dutch agreement prolongs the present
duality of exchange values for the metropolitan guilder and
the West and East Indian guilders. After the invasion of
Holland by Germany, the Dutch Government-in-exile con
cluded two financial agreements with Great Britain, one on
June 14, 1940 on behalf of the Netherlands East Indies,
and another on June 25, 1940 on behalf of the Netherlands
West Indies. Under these agreements, the exchange rates
of the two Indian guilders were fixed at 7.6 to the pound
(against the former 8.7), a rate which remained in force in
the Netherlands West Indies throughout the war. The new
Anglo-Dutch agreement provides for the abrogation of the
West Indian agreement of June 25, 1940, but for the time
being transactions with Curacao and Surinam will continue
to be governed by the rate of 7.6 guilders to the pound sterling.
On the other hand, the agreement of June 14, 1940, con
cluded on behalf of the Dutch East Indies, remains in force,
and the rate of 7.6 to the pound was reestablished after the
liberation of the Indies. The value of the metropolitan
guilder is kept unchanged at 10.691 to the pound, to which
it had been reduced prior to the liberation of Holland.
Like the Anglo-Swedish agreement, the Anglo-Danish
agreement may be of special benefit to Great Britain in that,
during the initial period, sterling balances accruing from
Dan;sh exports to England will be carried until British
exports of manufactured goods can be expanded to liquidate
the debt. On the other hand, the new agreement with Hol
land, like the arrangements with Belgium and France, will
not by itself expand the volume of trade between the parties.
Trade between the metropolitan British and Dutch territories
is now limited chiefly by the fact that the export potentials
of England and the Netherlands are exceedingly small at
present. Accordingly, the trade facilities opened by the
Anglo-Dutch agreement are likely to be confined in the near
future to the Netherlands’ purchases in parts of the sterling
area which are in a position to export such products as are
not obtainable in the Dutch overseas territories, and vice versa.
The Anglo-Danish and Anglo-Dutch agreements would
seem practically to complete the program of British bilateral
agreements. When negotiations with Norway and Portugal,
reportedly under way, are concluded, the whole of Western
and Northern Europe, with the exception of Switzerland,
will be part of the new structure. Moreover, not only metro
politan Holland, but also the Dutch East Indies, just liber
ated, and the Dutch West Indies, whose link with sterling
was to have been severed six months after the end of the
war, are covered by the new Anglo-Dutch agreement. As a
result, the French franc area, the Belgian franc area, the
Dutch guilder area, and the Danish krone area are at present
connected by bilateral agreements with the sterling area;
the agreement with Portugal which is reportedly in course
of negotiation will presumably extend to the Portuguese
colonies. Thus a large part of the world has been covered
by the network of bilateral agreements between Great
Britain and Western Europe.
It is true that the Anglo-Danish and Anglo-Dutch agree
ments, like all those which Great Britain concluded earlier
with other Western European countries, contain a multi
lateral clause providing that each party will endeavor to
restore the multilateral convertibility of its currency, "as
opportunity offers.” If these multilateral clauses, which are
of such potential value for the future pattern of international
monetary relations, are not to remain a dead letter, appro
priate international, as well as American action, will have
to be taken to create world economic conditions which will
make possible the abandonment of bilateral and other restric
tive exchange practices. The current American negotiations
with the United Kingdom and other Western European
countries regarding the forms and modalities of possible
future American financial aid offer another opportunity to
review the broader problem, and to help devise ways and
means of ensuring the eventual effective application of the
multilateral clauses which are contained in these British
monetary agreements.
B E LG IA N AND FREN CH M O N E T A R Y PO LICIES
On the threshold of the postwar era, Belgium and France
are at grips with the problems of economic and monetary recon
struction bequeathed them by five years of war devastation
and of the draining of their material and human resources by
the enemy. The purpose of this factual survey is to outline
the currency conditions prevailing in Belgium and in France
at the close of their first year of restored freedom.
On the eve of liberation, the fiscal and monetary positions
of Belgium and France showed a considerable degree of simi
larity. In both countries, up to the middle of 1944, the pro
portion of the national government’s expenditures raised by
current revenue was almost identical— about 30 per cent.
This was a very low proportion, compared with 41 per cent
in the Netherlands and 57 per cent in Denmark, or with 48
per cent in the United Kingdom and 41 per cent in the
United States. From the standpoint of controlling inflation,
taxation is the most effective instrument for curtailing excess
purchasing power; the fact that neither Belgium nor France
covered more than a third of total wartime expenditure by
taxation and other current revenue had, therefore, an impor
tant bearing on their immediate situation after the liberation.
It should be borne in mind, however, that the greater part of
FEDERAL RESERVE BANK OF NEW YORK
government expenditures in Belgium and France during the
war period consisted of the extraordinary burdens cast upon
those countries in the form of occupation army costs and the
financing of large net exports to Germany. Of the aggre
gate government expenditures, Germany absorbed in these
ways some 59 per cent in Belgium and 49 per cent in France.
As a result of large-scale deficit financing, domestic debt of
the national government increased by approximately 250 per
cent in both Belgium and France, and the proportion of total
government deficit covered by expansion of bank credit was
70 per cent in Belgium and 62 per cent in France. At the
time of liberation, four fifths of the total assets of the National
Bank of Belgium (including those of the Nazi-conceived
‘'Bank of Issue in Brussels” ) and of the Bank of France con
sisted of claims on the government (plus, in the case of the
"Bank of Issue in Brussels,” claims on Germany). At that
time, moreover, some two thirds of the assets of the Belgian
commercial banks and four fifths of the assets of the large
French commercial banks consisted of government securities.
Against this expansion in banking assets, the note circula
tion increased in both countries by 350 to 400 per cent,
and commercial bank sight deposits by about 170 per cent.
Liquid assets in the form of notes, current deposits, and savings
deposits held by the French public at the time of liberation
were approximately 1,000 billion francs, as compared with
264 billion francs in 1939; similar holdings in Belgium in
creased to 186 billion francs in August 1944 from 64 billion
francs in May 1940. In addition, the public and the banks
in both countries at the time of liberation held large amounts
of government paper convertible into money at short notice;
in France Treasury bills amounted to 600 billion francs, against
60 billion francs before the war.
In this essentially similar situation, Belgium and France
pursued widely divergent policies. In Belgium, a government
decree issued on October 7, 1944— only a month after the
return of the government to Brussels— provided for an imme
diate over-all contraction of currency. The existing notes
ceased to be legal tender, and new notes were issued in ex
change for the old on a franc-to-franc basis, but only to a
maximum of 2,000 francs per person. The balance of the
old notes was credited to the holders only in blocked accounts,
and all existing bank deposits were also blocked, save for 10
per cent or the amount which had stood to the credit of the
account on May 9, 1940, whichever was the greater. (In
the case of business enterprises, 1,000 francs per employee
was exempt from blocking.) The blocked currency accounts
and blocked portions of deposits were in turn divided into a
"definitely unavailable” part of 60 per cent and a "tempo
rarily unavailable” part of 40 per cent. The "temporarily
unavailable” notes and deposits were to be released gradu
ally as imports and economic activity revived (although to
alleviate hardships minor withdrawals were authorized, under
certain conditions, in November 1944 and again in June
1945). By October 1944, the aggregate volume of "free”
77
money in the form of bank notes, deposits, and savings ac
counts was reduced as a result of these measures from 186
billion francs to 72 billion francs, while the note circulation
alone was contracted from 101 billion francs to 25 billion
francs.
In France, on the other hand, the reduction in the note
circulation was effected gradually, and there was no blocking
of notes or of deposits with commercial and savings banks. A
3 per cent National Liberation Loan was issued early in
November 1944; a new type of medium term government
bonds (Liberation Bonds) was devised in April 1945 to
absorb the savings of individuals; and an exchange of old
notes for new and an exchange or stamping of Treasury bills
and short term Treasury bonds was effected in June 1945.
By these methods the note circulation was contracted from
the all-time peak of 656 billion francs in October 1944 to
562 billion francs in January 1945, or by somewhat more
than the cash proceeds of the Liberation Loan, and from 589
billion francs in May 1945 to below 400 billion francs early
in July. The last mentioned reduction in the note circulation
represented currency which holders deposited in bank accounts
in preference to exchanging it for new notes, currency which
had been acquired by Nazi collaborationists or for tax evasion
or other illicit purposes and therefore not turned in, and
currency which had been lost or destroyed.
The net result of the measures enacted in both countries
was a substantial reduction in the inflation potential, but
inflationary pressures reappeared almost immediately.
In
Belgium, the aggregate amount of "free” money increased
from 72 billion francs in October 1944 to 107 billion in
April 1945, and the note circulation alone expanded from
25 billion in October 1944 to 62 billion in August 1945.
Similarly in France, the note circulation in May 1945, prior
to the exchange of notes, had increased to 589 billion francs
from 562 billion francs in January; and after the completion
of the note exchange, it rose by approximately 50 billion
francs to 444 billion francs on August 2.
The expansion in the note circulation reflects partly the
unsettled budget position of Belgium and France, and partly
the requirements of the Allied armed forces. In Belgium,
up to August 30, 1945, the National Bank made advances
totaling 23 billion francs on behalf of the Allied forces and
Mutual Aid, as against 7 billion francs advanced to the Bel
gian Government for its own requirements. In France, pro
visional advances by the Bank of France to the government,
which had been reduced as a result of the Liberation Loan
from 55 billion francs to only 900 million francs in January
1945, rose again to 31 billion francs in May; they were, how
ever, entirely repaid in June, and at the beginning of August
the Treasury’s deposits with the Bank of France reached
102 billion francs, an unprecedented amount.
Officially controlled prices rose during the war much less
than the volume of money— by 183 per cent in France and
by approximately 100 per cent in Belgium, up to the time
78
MONTHLY REVIEW, OCTOBER 1945
of liberation. During the same period, hourly wage rates
are reported to have increased in both countries by 45 per cent.
On the other hand, the post-liberation currency contraction did
not result in any reduction of prices; if anything, officially
quoted prices rose between the time of liberation and the
German surrender both in Belgium and in France. Wage rates
have been permitted to increase since liberation by 60 per cent
in Belgium and by 40 per cent in France, but, reportedly, these
percentages of increase have been frequently exceeded.
Industrial share quotations, which in both countries had
advanced much more than the official price indices, were
much lower in Belgium than in France at the time of libera
tion, when the Belgian index figure was 379 and the French
590 (taking January— June 1939 as 100 in both cases).
However, stock prices in France subsequently have fallen
sharply (to 372 for industrial shares in May).
As part of their reform programs, Belgium and France
devised, both for fiscal and political reasons, levies on capital
and taxes on wartime profits. In France, a law imposing
such extraordinary taxation was promulgated in August 1945;
in Belgium, the government project is still pending before
parliament. A detailed description of the French "National
Solidarity Tax” cannot be given here, but it consists of (a)
a capital levy payable in four instalments during 1946-49
at rates ranging from 3 per cent on capital holdings up to
500,000 francs to 20 per cent on holdings over 300 million
francs (after an exemption of 200,000 francs per person and
further exemptions of 100,000, 200,000, and 400,000 francs
for a first, second, and third child, respectively); and (b ) an
"enrichment levy” to be charged on the difference between
wealth possessed by the taxpayer on January 1, 1940, and
on June 4, 1945, the basic exemption being 50,000 francs
and the rates ranging from 5 per cent on 150,000 francs to
100 per cent on amounts above 5 million francs.
By way of summary, one may say that, in both Belgium
and France, substantial reductions in the war-expanded cur
rencies have been effected, that the rate of increase in central
bank advances to the government and in the resulting supply
of money has slowed down since the German surrender, that
the degree of control of the currency authorities over their
respective monetary and banking systems has been strength
ened, and that some of the conditions preliminary to more
comprehensive reconstruction policies have thus been ful
filled. Now that a measure of currency reform has been
achieved, it may be expected that appropriate action will be
taken to implement such fiscal and economic policies as may
be conducive to an orderly transition to a postwar economy.
Prompt and efficient action in this respect appears all the
more important because the inflation which in many Euro
pean countries originated in the war of 1914-18, and the
resulting disintegration of the economic and social fabric of
those countries, assumed its most serious proportions, not
during the war, but after it.
Indexes of Business
1944
1945
Index
June
July
August
232
220
211
188 p
202
205
202
193p
224
235
232 p
181
183
191 p
168
151
146
142 j)
146
134
128
128p
August
Industrial production*, 1935-39 = 1 0 0 ..........
{Board o f Governors, Federal Reserve
S ystem )
Electric power output*, 1935-39 = 1 0 0 .........
(Federal Reserve B a nk o f N ew York)
Ton-miles of railway freight*, 1935-39 = 100
{Federal Reserve B ank o f N ew York)
Sales of all retail stores*, 1935-39 = 1 0 0 j. . .
{Department o f Commerce)
Factory employment
United States, 1939 = 1 0 0 § ....................... ..
{Bureau o f Labor Statistics)
New York State, 1935-39 =100 ...............
(N ew York State D ept, o f Labor)
Factory payrolls
United States, 1939 = 1 0 0 § .........................
335
303
287p
279
263
249
234
245
242p
165
170
170 p
126
129
129
129 p
83
78
106
92
94
76
87
72
{Bureau o f Labor Statistics)
New York State, 1935-39 =100 ................
232p
{N ew York State D ept, o f Labor)
Income payments*, 1935-39 = 1 0 0 ................
{Department o f Commerce)
Wage rates, 1926 = 1 0 0 ..................................
{Federal Reserve B ank o f N ew York)
Cost of living, 1935-39 = 1 0 0 ..........................
{Bureau o f Labor Statistics)
Velocity of demand deposits*, 1935-39 =100
{Federal Reserve B ank o f N ew York)
New York C ity.............................................
Outside New York C it y ..............................
* Adjusted for seasonal variation.
t Series revised beginning January 1944.
§ Series revised beginning January 1943.
p Preliminary.
R E CO N VERSIO N IN TH E SECOND D ISTR IC T
The sudden end of the war in the Pacific resulted in lay-offs
of war workers estimated to total 450,000 in the Second
Federal Reserve District, or close to 8 per cent of total non
agricultural employment, but, on the whole, has not caused
any widespread dislocation. In individual centers, such as
Buffalo, Paterson, and Bridgeport, the closing of production
facilities built during the emergency has released a particu
larly large proportion of the workers employed, while in
New York City only about 4 per cent of all workers employed
on V-J Day have been laid off. In most major production areas
the number of job seekers exceeds the number of openings
available in peacetime industries, including the service and
distributive fields. One of the abnormalities of the present
picture is, however, that both the number of job seekers and
the number of openings are large.
In the principal peacetime industries of the District, the
clothing, textile, and food industries, and in some branches
of other important industries, such as the chemical and elec
trical machinery industries, the undertaking of contracts for
the Armed Forces involved little, if any, conversion of pro
duction facilities, and some of these industries had hardly
any technical reconversion problems after cancellation of
contracts. In others, a gradual adjustment was in progress
after substantial cutbacks following the end of the European
war and in anticipation of further reductions. In some indus
tries of the District, the main problem before and after V-J
Day has been scarcity of labor and of raw materials, rather
than bottlenecks in physical reconversion.
FEDERAL RESERVE BANK OF NEW YORK
The sharp cutbacks in the weeks immediately following
final victory affected the District primarily through the termi
nation of major aircraft contracts. Although employment
in the aircraft industry had declined from its wartime peak
of over 325,000 in December 1943 to about 210,000 on
V-J Day, this industry was still the most important war indus
try of the District. Some large Government aircraft factories,
such as Curtiss-Wright in Buffalo and Wright Aeronautical
in W ood Ridge, New Jersey, released nearly all of their work
ers; others face an uncertain future when the current con
tracts, which have permitted them to continue operations on
a reduced scale, are completed. Several aircraft companies,
domiciled in this District before the war, have announced
plans for postwar operations, which, of course, will offer a
much smaller number of jobs than during the war.
The shipbuilding industry has been affected less than in
other parts of the country, mainly because in this District
naval construction and ship repair and alteration have pre
dominated, rather than large-scale construction of Liberty and,
later, Victory cargo ships. N o large new shipyards were
built in this District during the war, although a few existing
yards, among which the Brooklyn Navy Yard is the most
important, were greatly expanded. Employment in New York
States shipbuilding industry on V-J Day was only slightly
below the wartime peak level, and in the New Jersey part
of the District it was still relatively large. Although in the
Newark area shipbuilding employment has declined substan
tially since V-J Day, the level of activity of the Brooklyn
Navy Yard, which in the last few years accounted for about
half of total shipbuilding employment in New York State,
remains very high.
Relatively few publicly financed new ammunition and
explosives plants (which have experienced the sharpest cuts
since the termination of hostilities) were built in this Dis
trict. On the whole the fact that the contribution of this
District to the war effort was based largely on its existing
manufacturing capacity rather than on new facilities is an
important factor in minimizing the immediate effects of the
sudden termination of war production.
The maintenance of a high level of activity at the Port
of New York contributes towards cushioning the effect
of the end of the war on New York City. During the war
the Port of New York was the country’s main port of em
barkation and topped all other ports in the volume of war
cargo handled. It has now become the main funnel for the
return of soldiers and equipment from the European theater
and also from some other parts of the world where our forces
have been deployed. At the same time the Port of New
York handles a considerable volume of shipments of supplies
for our occupation forces and for relief and rehabilitation
in foreign countries. The continuing large volume of port
operations, and the effects on trade and the service industries
of the great numbers of transients who continue to crowd
79
the City, cannot fail to exert a favorable influence on employ
ment. Employment in various service and distributive indus
tries which provide the largest part of the payroll in New
York City remains very high and has not been affected by
the end of the war; in fact, such industries continue in the
market for additional help.
In the District as a whole, and in particular in New York
City, the level of employment in the months to come will de
pend only partly on the success of the physical reconversion in
this region and to a considerable extent on the progress of the
reconversion in the country as a whole. In this District, as else
where, the first wave of lay-offs has been rapidly subsiding, and
has been partly offset by retirement from the labor force of war
emergency workers. The number of such workers still em
ployed is now greatly reduced and future cutbacks may result
in a larger number of job seekers relative to the number
laid off than in the first weeks after V-J Day. On the other
hand, job openings which could not be filled as long as the
demand of war industries for labor was pressing and persistent
have been available for those willing to shift without delay
to the generally lower paying peacetime jobs.
Some of the favorable factors which have so far cushioned
the effect of the sudden end of the war in this District may,
however, be only temporary. A sharp decline in shipbuild
ing employment may be expected after completion of Navy
vessels now under construction and of the numerous ship
repair and transformation jobs.
It is also questionable
whether, even if world trade reaches a considerable volume,
the Port of New York can be expected to operate on the
present record level after the last American soldier not
needed for occupational duties has been brought back and
the shipment of war and relief supplies ceases. Finally, by
far the largest part of the soldiers and sailors to be demo
bilized has yet to reach separation centers, and many of those
already released are not yet actively seeking employment.
Although the first phase of reconversion has apparently
met with fewer difficulties and produced less unemployment
than expected, here as elsewhere, it is too early to pass final
judgment.
It is becoming increasingly clear that what
before V-E Day was rather vaguely termed "reconversion”
really consists of three distinct but related processes: (1 )
physical reconversion to their original use of those facilities
which have been converted to war production; (2 ) adapta
tion, in so far as possible, to peacetime operation of new
facilities built to meet specific war needs; (3 ) adjustment
of facilities to meet expected enlarged demands and to meet
new competitive conditions.
This last point may need particular emphasis. The eco
nomic process is one of continuous adjustments guided by
changing price and cost relationships. During the war years,
shifts in population, some of them permanent and others
temporary, technical developments, new materials and prod
ucts, changes in relative labor costs, and many other factors
so
MONTHLY REVIEW, OCTOBER 1945
have created many new situations. All these new factors will
have to be scrutinized carefully by businessmen. Temporary
influences must be distinguished from lasting changes. W ar
time conditions in industry and trade have obscured some
of the underlying shifts, and the net effect of new develop
ments on the competitive position of various industries and
regions will not become clear immediately after the com
pletion of physical reconversion. Only after a certain time
will it be possible to judge what District industries have
been strengthened by recent trends and what, if any, have
been weakened.
It has been pointed out that the real test of economic
statesmanship will come not during, but after, the period
of reconversion. If the victorious conclusion of the biggest
military conflict in human history is to be followed by a
period of prosperity and domestic peace, then the job of
reconversion must transform itself into a process of gradual
expansion of our economy to absorb all available human
and material resources, and thus to achieve a standard of
living far above that prevailing in this country before the
outbreak of the war.
Indexes of Sales, Receipts of Merchandise, Stocks, and
Outstanding Orders of Department Stores,
Second Federal Reserve District
(1940 monthly average=100 per cent)
S ource:
Compiled by Federal Reserve Bank of New Y ork from returns
from a limited number of stores. Data for stocks and orders are for end of
month. The receipts series is derived from sales and changes in stocks, and
represents approximately the new merchandise received during each month.
D E P A R T M E N T STORE TR A D E
The volume of department store sales has not yet indicated
any decline in consumer demand in this District since the
Japanese capitulation. After allowance for seasonal factors,
department store sales last month approximately equaled those
in August and were close to the average for the year to date.
Sales are now running about 10 per cent above the 1944
average. Totals for the complete year, however, will depend
upon the dollar volume for October through December,
which normally accounts for about one third of the year’s
total.
Although department stores so far this year have sold a
record dollar volume of merchandise, they have also accumu
lated large inventories. The accompanying chart shows that
since the beginning of this year receipts of merchandise have
substantially exceeded sales, and stocks are the largest since
the close of 1942. How much of this increase represents
a larger physical volume and how much reflects price increases
and shifts toward higher priced lines, is unknown. During
the past few months the dollar amount of new orders placed
by the department stores has not equaled the merchandise
received, and outstanding orders have declined somewhat.
However, merchandise ordered but not yet delivered approxi
mately equals the dollar amount of stock on hand. During
1942 the value of outstanding orders amounted to only one
third of the merchandise on hand. In terms of August
sales, outstanding orders plus stock on hand at the close of
the month represented over seven months’ supply, approxi
mately the same ratio that prevailed in the same month
of 1942.
Department and Apparel Store Sales and Stocks, Second Federal
Reserve District, Percentage Change from the Preceding Year
Net sales
Locality
August 1945
Department stores, Second D istrict... .
New York C ity ......................................
Northern New Jersey...........................
Westchester and Fairfield Counties. .
B ridgeport..........................................
Lower Hudson River V alley...............
Poughkeepsie......................................
Upper Hudson River V alley...............
A lb a n y.................................................
Schenectady........................................
Central New York S tate.....................
Mohawk River V alley.....................
U tica................................................
Northern New York State..................
Southern New Y ork State...................
Bingham ton........................................
Western New York State....................
B uffalo.................................................
Niagara Falls.....................................
Rochester............................................
Apparel stores (chiefly New York C ity ).
Stocks on
Jan.through
hand
August 1945 Aug. 31, 1945
+ 9
+ 9
+ 8
+ 10
+ 5
— 4
+14
+15
+18
+ 29
+ 7
+ 10
+ 4
— 1
+ 13
+ 23
+ 10
+ 8
+20
+ 6
+ 4
+ 7
+ 8
+ 14
+14
+ 14
+ 15
+ 9
+ 4
+ 16
+ 16
+ 16
+ 21
+ 12
+ 12
+ 5
+ 5
+16
+ 19
+14
+ 17
+ 10
+ 10
+ 8
+10
+ 13
— 8
— 4
— 1
+ 5
+ 4
— 18
+12
+23
+ 23
+ 8
+ 7
+ 7
+ 15
+ 16
+10
+ 2
+ 1
— 2
+ 6
+13
— 1
+ 3
— 8
— 9
+10
Indexes of Department Store Sales and Stocks
Second Federal Reserve District
(1935-39 average = 100 per cent)
1944
1945
Item
August
June
July
August
Sales (average daily), unadjusted.................
Sales (average daily), seasonally ad justed ..
lllr
152r
156
169
118
176
120
165
Stocks, unadjusted............................................
Stocks, seasonally adjusted............................
161
166
165
172
161
175
174
178
r Revised.
FEDERAL RESERVE BANK OF NEW YORK
MONTHLY REVIEW, OCTOBER 1945
General Business and Financial Conditions
( Summarized by the Board of Governors of the Federal Reserve System)
and employment at factories dropped sharply after the middle of August when most
Pmilitary contracts
were cancelled. Activity in most other lines was maintained and the value of
RODUCTION
retail sales continued above last year’s high levels.
In d u s t r i a l P r o d u c t i o n
1937
1938
1939
1940
1941
1942
1 9 43
1944
1945
dex of Physical Volume of Industrial Production,
Adjusted for Seasonal Variation (1935-39
average = 100 per cent)
200
180
Industrial production declined 11 per cent in August, reflecting primarily the sharp curtailment
of activity in aircraft, shipbuilding, and ordnance plants in the last half of the month, and the
Board's seasonally adjusted index was 188 per cent of the 1935-39 average as compared with 211
in July.
The largest part of the decline was in the machinery and transportation equipment industries,
where activity during the month averaged about 20 per cent below July. Output of steel and of
nonferrous metal products likewise declined with the sudden elimination of almost all military
demands. In September steel output increased with the receipt of orders in large volume from the
automobile and other steel-consuming industries now rapidily converting to civilian production.
Output of lumber and stone, clay and glass products declined slightly in August.
Production of nondurable goods in August was also below the July level, reflecting primarily
military contract cancellations affecting output in the chemicals and rubber products industries.
Cattle slaughter at Federally inspected plants rose sharply in August and the first two weeks of
September. Output of shoes and newspaper publishing activity also increased in August. Output
of textiles, most manufactured food products, and other nondurable goods showed little change or
declined slightly. Immediately after Japan’s capitulation, rationing was ended for gasoline, fuel oil,
and canned fruits and vegetables. Increased supplies of dairy and meat products and tobacco
products were also made available for civilians.
Minerals production declined somewhat in August reflecting chiefly a 4 per cent decrease in coal
production. In the first part of September output of bituminous coal advanced. Crude petroleum
output was maintained in August at the record July level, but owing to the substantial decline in
military demand for petroleum products, the production rate in the first half of September was about
8 per cent below August.
Awards for the construction of privately-owned factories and commercial buildings continued
to increase sharply in August. Contracts for private residential construction were awarded at about
the same rate as in June and July, which was about twice the value of awards in the summer of 1944,
D is t r ib u t io n
Indexes of Value of Department Store Sales and
Stocks, Adjusted for Seasonal Variation
(1935-39 average= 1 0 0 per cent)
FARMPRODUCTS^
I
-
/ ALLCOM
M
O'DITIES
1
r__
R*
Department store sales in August were smaller than in July on a seasonally adjusted basis but
about 6 per cent larger than in August last year. In the first half of August sales w^ere about 20 per
cent larger than a year ago. In the last half of the month and the early part of September, following
Japan’s surrender, sales slackened and were little changed from last year’s level. Sales in the two
weeks ended September 22, however, rose sharply and were 11 per cent larger than in the corre
sponding period a year ago.
Railroad shipments of revenue freight in the last two weeks of August and the early part of
September were in almost as large a volume as in the period prior to the week of Japanese surrender
and only 7 per cent smaller than during the same period last year. In the middle of September
shipments of most classes of freight were as large or larger than a year ago; loadings, however, of
miscellaneous manufactured products which include munitions were at a reduced level.
C o m m o d i t y P r ic e s
Prices of agricultural commodities declined from the early part of August to the early part of
September but since that time have increased somewhat.
Maximum prices of petroleum products have been reduced somewhat since the early part of
August, owing to lower transportation charges, while maximum prices of cotton goods, building
materials, and various other industrial commodities have been increased.
A g r ic u l t u r e
*TH»
dexes of Wholesale Prices Compiled by Bureau
f Labor Statistics (1926 average = 100 per cent;
latest figures are for week ended September 15)
jmber Bank Reserves and Related Items (Latest
figures are for September 19)
Crop prospects continued to improve during August and total production is expected to equal
the record harvests of 1942 and 1944. Cotton production, however, is forecast at only 10 million
bales, which is about 2 million smaller than last year’s crop and the average for the past 10 years.
Total carryover of raw cotton in this country on August 1 was about 11 million bales, slightly more
than in the two previous seasons.
Ban k
C r e d it
In the first month of peace, Federal Government expenditures though reduced were still well in
excess of receipts, and war loan balances at commercial banks were accordingly reduced. Adjusted
demand and time deposits of weekly reporting banks increased by 1.8 billion dollars during the
five weeks ended September 19, while war loan balances at these same banks declined by 3.4 billion.
Thus, as in other periods between Treasury financing drives, Treasury expenditures tended to increase
deposits of business and individuals at small banks more than at large ones.
The currency outflow continued and totaled 425 million dollars during the five-week period, but
it was somewhat below the outflow of last year for the comparable period. Time deposit expansion
continued as rapidly as in recent months.
Loans for purchasing and carrying Government securities at reporting banks were further
liquidated during the five weeks by 470 million dollars and, in addition, reporting banks reduced
holdings of U. S. Government securities by 1.3 billion dollars to meet the increase in reserve require
ments and net deposit declines. Smaller banks appear to have been purchasing Government
securities during the period.
Reserve funds during the five-week period were supplied by an increase of 1.1 billion dollars in
Reserve Bank holdings of Government securities and by a small increase in member banks borrow
ings from the Reserve Banks. This increase met the currency outflow and increased average reserve
balances by close to 550 million dollars; this was about as much as the increase in required reserves,
and excess reserves remained near one billion dollars.