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O f Credit and Business Conditions

V o lu m e









No. 10

Money market conditions during the past month were in­
fluenced principally by Treasury transactions, including sub­
stantial net disbursements in the first half of the month and
large quarterly income tax collections in the latter half. The
devaluation of the British pound sterling and of numerous
other foreign currencies was a dramatic development, of course,
the ultimate consequences of which cannot be foreseen, but it
apparently had little or no immediate effect upon the money
market, except to the extent that buying of foreign exchange
to cover import commitments was stimulated by the British
announcement. Member bank reserve positions were easy in
the two weeks ended September 14. During the rest of the
month, however, the member banks lost substantial amounts
of reserves as quarterly Federal income tax collections tended
to swell Treasury balances with the Reserve Banks.
The final step, on September 1 , of the progressive decrease
in legal reserve requirements, announced by the Board of
Governors of the Federal Reserve System early in August, pro­
vided the member banks with over 250 million dollars of free
reserves during the week ended September 7. Furthermore,
the Treasury’s cash disbursements during the week ended Sep­
tember 7 exceeded by about 140 million dollars its receipts
from taxes, sales of securities, and other sources, while the
"float” ( Federal Reserve funds credited to banks against checks
still in the process of collection) rose 80 million dollars. These
additions to bank reserves, and moderate net dollar expendi­
tures by foreign countries out of the accounts maintained by
their central banks with the Reserve Banks, provided the com­
mercial banks with a substantial amount of funds. The only
major loss of reserves to the banks came from the sharp monthend and Labor Day expansion of currency in circulation,
amounting to 200 million dollars.
Member banks were consequently in a position to repay a
part of their indebtedness to the Reserve Banks or to acquire
additional earning assets. As a result, Federal Reserve loans
and discounts declined substantially (415 million dollars), and
there was also a moderate decline in System holdings of Gov­
ernment securities. The volume of Reserve credit thus retired
absorbed more funds than the banks gained from current
transactions and reduced reserve requirements, and, to make

up the difference, the banks drew heavily on their excess re­
serves, which were reduced 270 million dollars during the
week, to one billion dollars.
The nationwide gains in "free” reserve funds in the week
ended September 7 were not uniformly available to all banks.
New York City banks experienced only a minor net gain be­
cause the Treasury’s receipts in New York were considerably
larger than its disbursements. Nevertheless, the City banks
retired most of their indebtedness to the Reserve Bank, thus
sharply reducing their excess reserves, which had been raised,
by borrowings, to an unusually high level at the beginning of
the month to make up for preceding deficiencies. Most of the
decline in member bank borrowings from the Reserve Banks
in this week, therefore, reflected repayment o f the New York
City banks’ indebtedness. The decline in excess reserves of the
City banks exceeded that for all member banks, indicating that
banks outside New York did not invest or otherwise employ
all the funds made available to them during the week.
The approach of the quarterly tax collection period permitted
the Treasury to forego calls on its deposits in special depository
commercial banks after September 7. Consequently, in the
week ended September 14, the Treasury continued to pay out
more cash than it received, and with a further sharp expansion
in Federal Reserve “float,” a substantial return of currency from
circulation after the Labor Day holiday, and continued mod­
erate net expenditures from foreign accounts with the Reserve
Banks, member bank reserve positions continued easy. A rise
in required reserves accompanying a growth in deposits ab-

Money Market in September.......................... .. 109
Banking Developments in the
Second District.............................................. .. I l l
Construction Activity in 1949........................ ,


The Dollar Problem of the Sterling Area. . . , . 114
Department Store Trade.................................. , . 117



sorbed only a portion of the member banks’ increased reserves.
The banks were again able to acquire additional earning assets
during this week, and made substantial purchases of Govern­
ment securities, a portion of which came out of Federal Reserve
portfolios. Government security holdings of the System de­
clined 163 million dollars. Not all the funds made available
to the banks were used, however, and excess reserves rose 2 1 0
million dollars.
Most of the increase in surplus reserve balances occurred
among the New York City banks, which had the benefit of net
gains of funds not only from such current transactions as
affected member bank reserve positions in the aggregate but
also from a substantial inflow of funds, reflecting easy money
conditions in other parts of the country. The City banks appar­
ently chose to build up their excess reserve balances pending the
expected substantial drain on reserves during the coming tax
period, and they added only moderately to their holdings of
Government securities.
The money market eased noticeably on September 15 when
the Treasury paid out more than 400 million dollars, mainly
interest on the public debt supplemented by the cash redemp­
tion of the small proportion of called 2 per cent bonds which
were not exchanged for new certificates of indebtedness. This
ease was short-lived, and member bank reserve positions tight­
ened materially in the last half of the month, particularly in
the closing statement week, as third-quarter income taxes
reached the Treasury in large volume. In addition, the banks
lost moderate amounts of reserve funds from other transactions.
They consequently had to draw upon their excess reserves, sell
Government securities, and increase their borrowings.
While funds were available during the week ended Septem­
ber 2 1 , however, the banks made considerable purchases of
Government securities, only a portion of which came from
Federal Reserve portfolios. They also adjusted their reservesj
by reducing their surplus balances with the Reserve Banks,
which fell 610 million dollars. In substantial part, the banks’
Government security purchases and the sharp decline in excess
reserves reflected the operations of the New York City banks.
Ordinarily the City banks bear a very large part of the drain
on reserves during tax payment periods, since they lose funds
not only through heavy local payments of taxes but also through
large transfers of funds to other parts of the country for tax
payment purposes. During the week ended September 21,
however, owing to heavy payments of interest on the public
debt in the New York market, the City banks gained funds
from Treasury transactions, and the outflow of funds was
lighter than usual for a tax period. Since their excess reserves
were at a high level at the beginning of the week and were
augmented on the first day of the week by heavy Treasury pay­
ments, the New York banks were able to meet the first heavy
tax collections through reducing their excess reserves. At

the same time they acquired substantial amounts of short-term
Treasury securities, mainly bills. A substantial part of these
purchases came from Government security dealers, who were
able in this way to reduce their borrowings from the New York
City weekly reporting banks by about 135 million dollars.
A temporary reserve deficiency arose on September 21 at
the New York City institutions as a result of their Govern­
ment security purchases. The deficit had to be corrected in the
following week, and this, together with further losses through
an outflow of funds, local tax collections, and other transactions
placed the reserve positions of the New York City banks under
considerable pressure in the final week of the month.
Over the month as a whole, the Federal Reserve System
reduced its loans by 231 million dollars, but its Government
security holdings rose 328 million dollars. While the System
made substantial net purchases of bills in the market, chiefly in
the last week o f the month, its holdings o f certificates of in­
debtedness declined (after allowance for the exchange of cer­
tificates for bonds called on September 15) in response to con­
siderable demand for the longer maturities of this type of issue.
As a consequence of this preference for the longer-dated certifi­
cates, rates on successive new Treasury bill issues continued to
advance gradually, despite the fact that the Treasury suspended
increases in the supply o f new bills after September 8 , thus
holding the month’s increase in the face amount of new issues
to 200 million dollars. Government bond prices eased early
in the month, firmed subsequently, and declined again toward
the end of the month.
M e m b e r B a n k C r e d it a n d t h e R e d u c t io n
R eserve R a t io s


Le g a l

The completion on September 1 of the third of three suc­
cessive reductions in member bank legal reserve requirements
brought the total reduction to an estimated 3.8 billion dollars
in a period of about four months. Most o f the reserves freed
by the decrease in required reserves ( which actually amounted
to 3.4 billion dollars between April 27 and September 2 1
because of a rise in demand deposits) were invested in Gov­
ernment securities, a large part of which had to be supplied by
the Reserve Banks in order to maintain orderly market con­
ditions. The same was true o f funds made available to the
banks by other transactions, notably substantial net Treasury
and foreign disbursements from accounts maintained with the
Reserve Banks. Sales and cash redemptions reduced System
holdings o f Government securities by 4.1 billion dollars, and
in addition member banks repaid, net, 1 2 0 million dollars of
indebtedness to the Reserve Banks during this period.
However, a considerable volume of funds was made avail­
able indirectly for business and other purposes through the
substantial purchases of Government securities which com­
mercial banks made from nonbank investors and the Treasury,
with resulting increases in bank deposits and the money supply.



Cumulated Net Changes in Holdings of Government Securities
by Type of Investor, April 27 to September 21, 1940*

Savings note sales, however, was permitted to accumulate tem­
porarily in the Treasury’s balance in War Loan accounts and
will be routed to industry as the Treasury makes net with­
drawals from these accounts during the next few months.
Ex p a n s i o n

* Data for weekly reporting member banks include changes in holdings o f
nonmarketable issues which are probably nominal. Figures for all other
investors relate largely to public marketable issues but are affected slightly
by the nominal changes in weekly reporting bank holdings of public nonmarketable securities. Data for the Federal Reserve Banks cover changes in
public marketable issues only. Latest figures available for weekly reporting
member banks outside New Y ork City and for all other investors are for
September 14, 1949.

Thus, the Reserve System was not the sole source of supply o f
Government issues to the market. The weekly reporting mem­
ber banks in New York City and 93 other leading cities made
net purchases of 1.5 and 3.4 billion dollars of Treasury securi­
ties, respectively, thus acquiring not only the equivalent in
amount of the Systems sales and redemptions but also 800
million dollars of securities from nonreporting banks, nonbank
investors, and the Treasury. The latter raised about 800 million
dollars through increasing the face amount o f its weekly bill
issues during August and part of September. (However, cash
redemptions of 600 million dollars of maturing or called securi­
ties cut the net increase in the marketable Government debt
to 200 million since the close of April.) Nonreporting mem­
ber banks probably made net acquisitions of Government
securities in this period, inasmuch as their legal reserve
requirements were also reduced. Sales of nonbank investors
may therefore have been somewhat larger than indicated by
the curve for ’ all other investors,” shown in the accompany­
ing chart.
Nonbank investors in turn used the proceeds of their sales
to the banks partly to acquire new corporate security issues,
thus making bank credit indirectly available to business, and
partly to purchase large amounts of Treasury Savings notes,
thus transferring some of the increase in bank deposits to the
Government. Part of the funds made available to the Treasury
in this way, and through sales o f new bill issues to the banks,
was likewise made available to business and agriculture as the
Government spent the funds. A portion of the proceeds of


C o m m e r c i a l Lo a n s

During the period of the last series of reductions in legal
reserve requirements, there was a modest expansion of business
loans. This increase, however, most likely reflects seasonal
credit needs. Total commercial, industrial, and agricultural
loans of the weekly reporting member banks rose 345 million
dollars between August 3 and September 14, but this was little
more than 60 per cent o f the advance in the corresponding
weeks of 1948, and followed a decline of 2.8 billion dollars
between December 2 2 , 1948 and August 3, 1949. Nearly half
this expansion occurred among the New York City banks,
which have recently accounted for only about a third of the
business loans of all weekly reporting banks.
The seasonal upswing in business loans usually gets under­
way in July, but was delayed this year until August. The cur­
rent increase may reflect in part the recent moderate rise in
general business activity and some rebuilding of depleted in­
ventories. Until early September, the advance in loans of the
out-of-town banks lagged considerably behind those of the
New York City institutions. The more marked expansion of
business loans of the New York City banks appears to reflect
increased short-term borrowing by sales finance, public utility,
tobacco, and other large, national companies which normally
borrow largely in New York.

In the three-month period ended August 31, representatives
of the Federal Reserve Bank of New York called on banks in
49 counties in the Second Federal Reserve District. As a result
they formed the following impressions of what bankers and
businessmen in the areas visited were thinking about current
business conditions, the business outlook, and banking policies
and developments.
Those interviewed by our representatives were more opti­
mistic about the future than they had been a few months
earlier. Manufacturing activity was still well below the levels
of a year ago, but numerous plants were reported to be stepping
up their operations again. Retail trade was still feeling the
impact of reduced incomes, but established merchants appeared
to be moving their stocks again at a normal pace, assisted in
some instances by clearance sales at lower prices. Inventories
generally appeared to be in line with current sales, although
shortages had shown up in certain lines, and some merchants
were beginning to stock up in anticipation of brisker business



in the fall. One exception in this picture appeared to be the
farm machinery line, which had still been quite active in the
spring. Inventories of farm machinery were reported to be
backing up a bit as dairy farmers felt the pinch of lower milk
prices and the early summer drought. The latter adversely
affected early summer crops, but the prospect for fall crops was
reported to be nearly normal.
In the agricultural areas, seasonal loan peaks were reached
by banks in June, and some decline had taken place in recent
weeks as the result of the repayment of farmers* borrowings.
Elsewhere the loan trend varied, but generally speaking the
portfolios of ‘ country” banks outside the agricultural areas
reflected no pronounced changes. Mortgages and consumer
loans accounted for most of the new credit extended during the
quarter, while the demand for business loans continued to lag.
Some bankers commented that many borrowers seeking mort­
gage loans seemed to have more money of their own, which
might be an indication that potential home owners, who had
been waiting for price declines, were coming into the market.
Loan delinquencies and requests for adjustments were reported
to have developed, particularly in the areas where unemploy­
ment had been relatively high, but they did not seem to have
assumed serious proportions anywhere. On the whole, loan
rates had remained steady. In some of the more competitive
areas, however, a tendency to shade rates for prime loans was
Most banks reported very little activity in their investment
accounts. Funds released by the recent reductions in reserve
requirements had generally been invested in short-term
Government securities. Some bankers had shown an increasing
interest in municipal bonds because of their tax-exemption
feature, and in railroad equipment obligations because of their
slightly higher yields.
Deposits of banks in the agricultural areas were moving
upward, as was to be expected during the mid and late summer
periods. Elsewhere deposits showed no clear general trend,
and in most instances any movement up or down had been
moderate in amount and appeared to reflect chiefly some
change in the local situation. Demand deposits in the industrial
and residential communities had shown small but general
increases in recent weeks. Time deposits of the commercial
banks for the most part had either remained about the same
or had shown some slight decline, which was generally ex­
plained as resulting from the competition of savings banks or
savings and loan associations paying higher rates. The trend
toward a 2 per cent interest rate was continuing among the
savings banks, but with a few exceptions commercial banks
did not appear to be giving much consideration to rate
Construction activity was reported as varying quite widely.
In the rural areas new construction had been almost entirely

limited to small individual units built on contract or by the
owner himself. In the New York commuting area, home con­
struction continued at a high level but was confined principally
to multiple housing units and to homes selling under $ 10 ,000 .
The market for existing dwellings had fallen off considerably,
and for the first time in several years rental units were again
becoming available.
The opinion seemed to be quite widespread that the business
decline had just about come to an end, at least for the time
being, and that it had constituted a healthy and needed adjust­
ment. Most bankers, however, were still pursuing cautious
policies pending further clarification of the economic picture.

The high national level of construction activity during 1949
has been a major factor in moderating the extent of the recent
business decline. At a time when activity in most sectors of
the economy was falling below last year’s levels, construction
during the first eight months of this year averaged somewhat
higher than in 1948. For the entire year 1949, the dollar volume
of construction work is expected to set a new all-time record.
Since costs and profit margins in the construction industry
have been declining, the increase in the physical volume of
construction this year may be even greater than the rise in
dollar value. The moderate increase in over-all construction
activity conceals, however, a number o f divergent tendencies
among the several branches o f construction and among the
various geographical areas. Private construction in general has
declined while publicly financed projects have increased
sharply. Within the private sector there is less residential and
industrial building than last year, but more construction by
utilities and institutions. Also, in certain sections of the
country the construction industry has made a much better show­
ing than in others.
The value of private residential building during the first
eight months of 1949 was 1 1 per cent less than in the corre­
sponding period last year. During the winter and early spring
there was a lull in housing construction, but in the past four
months residential building has been picking up markedly,
and the month-to-month increases in the value of work put in
place have been greater than seasonal expectations. The same
tendency toward expansion is apparent in the number of new
homes started. Between 95,000 and 100,000 new permanent
nonfarm dwelling units (both private and public) were started
in each month from May through August; the work of com­
pleting these dwellings should prolong the current high
volume of housing activity through the next few months.
Since the end of the war no consistent seasonal pattern in
housing "starts” has emerged. In 1948 the number of dwelling
units started reached its peak in April and May and declined
steadily during the rest of the year, while in 1947 residential



building made a slow beginning but increased each month until
October. This year there has been a tendency for the number
of 'starts” to level out close to the peak during the summer
A greater number of the dwelling units started this year
have been in the lower price brackets, largely because the de­
mand for high-priced and even medium-priced homes has
slackened considerably. The construction of low-priced homes
has been facilitated by the use of simplified designs, improved
supplies of materials, and the decline in construction costs.
The last appears to have been more pronounced in residential
building than in many other types of construction. The cost
of frame-type construction, in particular, has been cut by
marked declines in the prices of lumber and paint. As a result
of this lower average price per unit, the value of housing work
done has shown a sharper decline than has the number of
dwellings started.
Private nonresidential construction activity as a whole has
been maintained so far this year at about last year’s rate. The
level of commercial and industrial construction, however, was
approximately one-fifth lower during the first eight months
of 1949 than the exceptionally high level prevailing in the
corresponding 1948 period. Many of the postwar programs
of plant expansion have been completed, and the increasing
emphasis on modernization and cost-reducing investment will
involve greater expenditure for producers’ durable equipment
than for construction. The public utilities and railroads are
still increasing their construction programs, although the rate
of telephone and telegraph construction is tapering off some­
Once virtually all the shortages o f building materials had
disappeared and construction costs had started to stabilize or
to decline, many privately-financed community service projects
got under way. The greatest relative increase in private con­
struction— more than one third— has occurred in the various
types of community service buildings— churches, hospitals, and
private educational and recreational facilities.
One of the most significant developments in the construc­
tion field has been the marked increase in publicly-financed
projects during 1949. A large backlog of public construction
had been accumulated during the war and early postwar years,
and many public authorities had also acccumulated the funds
for financing these projects. As construction prices showed
definite signs of leveling off, ground was broken for many
Federal, State, and local projects, some of which had been on
the drawing boards for many years. During the first eight
months of 1949, public construction activity showed a gain of
30 per cent over the corresponding period last year, as con­
trasted with a decline of 6 per cent in privately-financed con­
struction. Public housing activity has nearly doubled this year,
construction o f schools is up by two thirds, and public hospital

C hanges in C onstruction A c tiv ity in the U nited S tates,
N ew Y o r k , and N ew Jersey

Percentage change
second quarter of 1948 to second quarter of 1949
Type of construction
United States
T o ta l................................................


New York

New Jersey



Nonresidential b u ild in g .. . .
Public utility.........................

- 9
-1 5
- 8
+ 7



- 21

Nonresidential building. . . .
H ighway.................................
Sewer and w ater...................
Other public*.........................

+ 9

+ 71

+ 18
+ 119
+ 13
- 22
- 48


* Includes residential, military, conservation and development, and miscellaneous
public service enterprises.
Source: Joint estimates of the U. S. Department of Commerce and the U. S.
Bureau of Labor Statistics.

and institutional building is two and one-half times the 1948
level. Over a billion dollars was spent on highway construction
in the first eight months o f this year, even more than in the
same period in 1948, when road building had already reached
considerable proportions.
The impact of publicly-financed construction has been par­
ticularly noteworthy in New York State, as indicated in the
accompanying table. During 1948, New York State accounted
for 10 per cent of the nation’s public construction, as com­
pared with 6l/2 per cent of total private construction. Even
so, the gains in public construction between 1948 and 1949
in this State were sharper than those in the rest o f the country,
and by the second quarter of 1949 (the latest period for which
construction activity data by States are available), New York
State accounted for fully one eighth o f all publicly-financed
construction activity.
New York leads all other States in the volume of highway
construction work this year. After the end o f the war, the
State Public Works Department launched an 840 million dollar
highway program, a key feature o f which was a super-express­
way extending from near New York City to the Pennsylvania
border southwest o f Buffalo. Material shortages and rising
prices seriously delayed the program, but by September 1949
the State had awarded highway and bridge construction con­
tracts totaling more than 250 million dollars, in addition to
those financed by county and local authorities. New York is
also the leading State in the volume of public contracts awarded
during 1949 for hospital and institutional facilities, although
it is third (behind California and Ohio) in school construc­
tion. Educational facilities have become an increasingly press­
ing problem as children born during the war years reached
school age; New York City alone has been starting construc­
tion of new schools at the rate of one a month in the four years
since the end of the war.
The phase of public construction activity in which New
York State is particularly outstanding is public housing. Dur­



ing the first half of 1949, State and local housing authorities in
New York awarded contracts for more than twice as much
public housing as all other States combined. The 1 6 ,1 2 1 dwell­
ing units started in New York City by State and City housing
authorities during the first seven months of 1949 accounted
for nearly three fifths of all residential construction started in
the City and for more than two fifths of the State total in urban
areas. A State-financed project involving 1,400 units was
started in New York City in August, and a number of addi­
tional units of public housing are expected to be started before
the end of the year. Outside New York City, seven Statesponsored projects in Mount Vernon, Troy, Schenectady, White
Plains, Utica, Binghamton, and Port Chester accounted in the
first seven months of this year for 1,872 dwelling units— more
than one sixth of the total number of urban housing units
started outside New York City during the period.
Private residential building in this District has also been
maintained at a high level. During the second quarter of 1949,
both New York and New Jersey showed an increase in private
housing activity over the year before, whereas the country as
a whole registered a drop of 15 per cent. Data on building
permits issued indicate that most of the gain for this District
occurred in unincorporated suburban areas, whereas privatelyfinanced housing in both New York City and Upstate New
York cities showed a decline from the 1948 rate.
Estimated New Construction Activity, United States and
New York State, First Six Months, 1947-49*



Particularly noteworthy is the greater volume of multi­
family dwellings being built, both in this area and in the
nation. Construction of rental units has been stimulated in
part by liberalized mortgage insurance provisions. The number
of privately-financed apartment units started in New York
City during the first seven months o f 1949 rose one third over
the corresponding 1948 period, while the number of singlefamily and two-family homes started dropped by nearly
one half.
As in other parts of the country, the volume o f housing be­
ing built in the lower price brackets has been increasing.
Builders in some portions of the metropolitan area claim that
high land costs and local building codes keep them from pro­
ducing homes selling for less than $ 1 0 ,000 , but in other locali­
ties large numbers of such homes are being erected. Construc­
tion costs in the metropolitan New York and New Jersey area
have declined 8 per cent between September 1948 and Sep­
tember 1949, with the bulk of the decline coming in the first
half of the period, according to estimates o f the Dow Service.
Not only are building material prices lower, but output per
worker has risen through improved work scheduling, greater
availability o f skilled labor, and the end of delays caused by
material shortages. In addition, there has probably been an
increase in the quality of workmanship and materials used.
The improved cost structure and the adequate supply of
mortgage credit available here are factors favorable to con­
tinued large-scale activity in the construction of low-priced
homes and apartments with moderate rentals, for which an
extensive demand still exists. Public housing will be still fur­
ther stimulated by the Housing Act of 1949. New York City
alone is reported to have plans for 20,300 new dwelling units
to be built during the next two years under the provisions of
this Act, and other cities in this District have applied for lowrent housing projects totaling more than 18,000 units. In the
case o f higher-priced homes, however, the large volume of
residential building in this area in recent years has relieved
much of the pressure on the market and has sharply reduced the
demand for homes selling for more than $20,000. Very little
speculative building is going on in this price bracket, or even
in the medium-price range. Completed dwellings in this cate­
gory have been moving slowly, with occasional price conces­
sions reported necessary in order to sell them.




* Value of construction work put in place (cost of materials installed plus
expenditures for labor and overhead).
Source: Joint estimates of the U. S. Department of Commerce and the

U. S. Bureau of Labor Statistics.

The drain on the gold and dollar reserves of the United
Kingdom that developed during the second quarter of this year
signalized a dangerous setback not only to the British recovery
effort but also to the entire European Recovery Program in
which the United Kingdom plays so prominent a role. As an


immediate consequence, the United Kingdom reluctantly de­
cided to slash by 25 per cent its imports of goods payable in
dollars. Even as a short-run emergency measure, this severe
restriction of imports from the dollar area represented a dam­
aging blow to the British economy. But a more alarming aspect
of the dollar drain and the emergency import cuts was that these
adverse developments should have appeared at a time when
British industrial production had risen to 133 per cent of pre­
war levels, total export volume had attained a level 50 per cent
higher than in 19 3 8 ,1 and total imports had already been drasti­
cally cut to 85 per cent of their prewar volume.2 Perhaps even
more ominous, the severe drain on the British reserves during
the second quarter coincided with the receipt of ECA dollar
assistance at an annual rate of 1,360 million dollars, close to
the highest rate recorded in any quarter since inauguration of
the European Recovery Program.
Beyond the immediate crisis loomed the danger that, in the
absence of fundamental correctives, the 25 per cent cut in
dollar imports by the United Kingdom would be succeeded
only by a series of even more drastic limitations upon dollar
imports as the flow of Marshall aid dollars gradually tapered off.
If it were thus impelled by lack of dollar exchange to pro­
gressively curtail its dollar imports, the United Kingdom would
have had no alternative but to resort to the slow and costly
process of seeking sources of import supply within the sterling
area, and in other areas with which discriminatory trading
arrangements could be negotiated. Thus the dismal prospect
would have been that of a steadily deepening cleavage of inter­
national commerce into dollar and sterling trading blocs, in­
volving a progressive closure of both British and other foreign
markets to United States exports and undoubtedly some deteri­
oration of the standard of life in the United Kingdom and other
nations of the sterling bloc.
The economic crisis that overtook the United Kingdom in
the second quarter of the year, therefore, transcended the com­
paratively narrow limits of an internal British problem, and
justifiably aroused anxiety throughout the world. W ith the
swift deterioration of the British reserve position, the central
issue which came to the forefront of international economic
affairs was whether British trade equilibrium was to be achieved
by means of an expansion of dollar earnings in a multilaterally
trading world or by a curtailment of dollar expenditures and a
resultant degeneration of international commerce into a stifling
network of bilateral agreements.
It was of course not to be thought that both the short and
the long-term problems of dollar balance in the United King­
dom’s trade accounts could have been adequately solved, even
1 Measured in sterling value terms, exports had risen to a level 279
per cent above that of 1938.
2 In value terms, imports have been running 144 per cent above
the prewar level.


with the utmost British effort and the best of international co­
operation, during the few short months that have elapsed since
the onset o f the British crisis. Nevertheless, the discussions of
the British economic problem undertaken by the Common­
wealth finance ministers, the Council of the Organization for
European Economic Cooperation, and more recently the United
States, British, and Canadian delegates to the Washington con­
ference have achieved encouraging progress. Quite aside from
the concrete accomplishments of the several conferences, it is
significant that there has been general agreement upon the
basic objective of a progressive advance towards unrestricted
multilateral trade. Thus, the British devaluation decision, taken
prior to the Washington meeting (but announced subse­
quently), reflects the determination of the British Government
to seek a solution to its trading problems in the competitive
arena of multilateral trade instead of permanently sheltering
an overvalued pound behind the protective barriers of bilat­
eralism. For their part, the United States and Canada have
undertaken to reexamine existing barriers to the entry of ster­
ling area products with a view to the reduction of these barriers
wherever possible. Simultaneously, however, there has been a
general recognition o f the imperative necessity of temporary
deviations from the multilateral objective, such as the 25 per
cent cut in dollar imports by the Commonwealth countries, in
order to cope with the present emergency.
A useful starting point from which to appraise the dollar
problem of the sterling area is the geographical pattern of the
gold and dollar deficit of the area— a deficit that was running
at an annual rate of roughly 1,900 million dollars during the
first six months of 1949- Contrary to the common impression,
this deficit was not incurred primarily on British account with
the United States but rather was broadly distributed among
a number o f countries, both in the dollar area and elsewhere,
that demanded settlement in gold and dollars, not only for
deficits incurred by the United Kingdom but also for those of
the overseas sterling area. British official estimates suggest
that the gold and dollar deficit of the United Kingdom and
overseas sterling area during the first six months of 1949 was
roughly distributed as shown in the accompanying table.

E stim ated N et Gold and D ollar D eficit o f the Sterling A rea, 194 9
(In m illions of dollars)

First six

Annual rate
based on
first six

On United Kingdom account with dollar area.................



On overseas sterling area account with dollar area.........



On entire sterling area account with nondollar countries.





Source: Parliamentary Debate (Hansard), House of Commons, July 14, 1949
columns 803-4.



Of the total deficit of the United Kingdom with the West­
ern Hemisphere, the payments gap with the United States
was initially expected by the British financial authorities to
approximate an annual rate of 400-500 million dollars during
the first six months of 1949. In view of the sharp decline in
British exports to the United States in the second quarter of
this year, however, the annual rate of deficit may actually
have approached 600-700 million dollars, or about 30-35 per
cent of the total gold and dollar deficit of the combined
British and overseas sterling area during the first half of 1949.
The residual deficit of the United Kingdom with Canada and
other Western Hemisphere countries seems to have been at
roughly the same annual rate as that incurred on United States
trading account. The Western Hemisphere deficit of the
overseas sterling area, for which the United Kingdom assumes
responsibility, approached an annual rate of 300 million dollars
during the first half of 1949, accounting for nearly 16 per
cent of the total deficit of the entire sterling area. An even
more severe drain upon British gold and dollar assets appeared
in the form of a deficit of 336 million dollars (annual rate)
incurred by the sterling area as a whole with Belgium, the
German Bizone, Switzerland, Iran, and other countries that
demand conversion into gold and dollars of their sterling
acquisitions above certain agreed levels.
Appraised in the light of this distribution of the sterling
area’s dollar deficit, the decisions taken by the recent interna­
tional conferences dealing direcdy or indirectly with the British
economic problem assume a considerably greater significance.
Considering first the deficit of the sterling area with Belgium
and other nondollar countries, it should be noted that the
Intra-European Payments Plan for 1949-50 will provide the
United Kingdom with drawing rights and long-term credits of
102 million dollars to finance its expected deficit with Belgium.
This represents an increase of 72 million dollars over British
drawing rights upon Belgium in 1948-49, when the United
Kingdom had to transfer to Belgium 76.5 million dollars in
settlement of its Belgian franc deficit. British dollar losses to
Western Germany should decline during the coming year as a
result of recent agreements reducing Britain’s dollar liabilities
for support of Western Germany and providing for more
liberal financing of the trade between the two countries. More
significant from a longer-run point of view, it may be hoped
that the recent devaluation of sterling in terms of the currencies
of Belgium, Switzerland, Western Germany, and Iran will
stimulate an expansion of British exports to those countries,
with resultant relief from the serious deficits and dollar drains
hitherto experienced. While it is of course impossible to esti­
mate with any precision the beneficial effects of all these de­
velopments upon the British position, there would seem to be
a reasonable prospect that the British dollar deficit with the

nondollar countries may be substantially narrowed in the course
of the coming year.
W ith respect to the deficit of the overseas sterling area with
the Western Hemisphere, which rose to an estimated annual
rate of nearly 300 million dollars during the first half of 1949,
the July agreement of the Commonwealth finance ministers
(excepting the Canadian minister) to cut the dollar imports
of their countries by 25 per cent will, if put into effect, sub­
stantially narrow and possibly entirely close the dollar deficit of
the overseas sterling area. During 1948, the imports of the
overseas sterling area from the United States and Canada
amounted to almost 1,600 million dollars. The recent loan of
34 million dollars by the International Bank to India may also
help to reduce the total of drafts by the overseas sterling area
on British dollar reserves during the coming year. In this con­
nection, it should also be noted that the communique issued
at the close of the recent Anglo-American-Canadian financial
discussions recognized the desirability of achieving a more
vigorous flow of private as well as public investment from
North America to the undeveloped countries, and requested
the Presidents Committee for Financing Foreign Trade to ex­
plore possible lines of action, with particular reference to the
problem of incentives. The success of such efforts as may be
undertaken to stimulate private investments of this sort could
be a more fundamental and more satisfactory remedy for the
disequilibrium in the overseas sterling area’s balance of pay­
ments than enforced cuts in the area’s dollar purchases.
A basic problem is that of further expanding the dollar
earnings of the non-British sterling area, which amounted in
1948 to 1,096 million dollars as against the 289 million dollars
earned by British exports to the United States. As was fre­
quently suggested prior to the recent currency devaluations,
there is considerable danger that price concessions on the
primary commodities normally exported by the sterling area
will not result in appreciable increases in the dollar value of
the area’s exports, owing to the relative insensitivity of demand
to price cuts. Some encouragement to the recovery and growth
of sterling area exports has been afforded, however, by the
United States’ agreement at the Washington conference to
permit freer competition of natural with synthetic rubber in
the American market and to review this country’s program of
stockpiling rubber and tin. Somewhat more specific stockpiling
commitments were agreed to by Canada.
In general, the United Kingdom appears to have materially
improved its chances of checking for the time being the dollar
drain arising from the deficit of the overseas sterling area with
the Western Hemisphere and the deficit of the sterling area as
a whole with Belgium, Iran, and certain other nondollar coun­
tries. But the hard core of the British dollar problem is the
deficit of the United Kingdom with the United States, Canada,
and other Western Hemisphere countries, which was running


S toc k -S ales R atio s*

during the first six months of 1949 at an estimated annual rate
of nearly 1,300 million dollars.
Over the short run, the Western Hemisphere deficit of the
United Kingdom should be substantially reduced by the 25
per cent import cuts announced in July by Sir Stafford Cripps.
This restrictive action, coupled with the ECA 1949-50 alloca­
tion, should go far toward checking the loss of gold and dollar
reserves in settlement of the British deficit with the Western
Hemisphere. The dollar savings resulting from the scheduled
cuts may amount to as much as 400 million dollars, while the
OEEC has recently recommended an ECA allocation to the
United Kingdom of 962 million during 1949-50. This alloca­
tion, together with those recommended for the other partici­
pants, will be subject, it is true, to some reduction in order to
establish the reserve fund of 150 million dollars requested
by ECA, but this downward adjustment should not seriously
impair the British allocation. Neither does it seem likely that
the United Kingdom will suffer serious losses of conditional
aid as a result of the increased transferability of "drawing
rights” provided for in the Intra-European Payments Plan for
It would thus appear that th,e United Kingdom has a favor­
able opportunity for stemming the dollar drain upon its gold
and dollar reserves. In the longer run, however, much will de­
pend upon the success of British efforts to resist increases in
production costs and to raise industrial productivity, in order
to consolidate the competitive advantage gained for British ex­
porters through the recent devaluation. As Sir Stafford Cripps
has so vigorously asserted, increases of money wage rates to
British labor at this juncture would threaten to vitiate all of the
progress that has been so laboriously achieved during recent

Second D istrict D epartm en t Stores


Three-month average.. . .




2 .6
3 .6
3 .7

2 .5
3 .2
3 .4

2 .4
3 .4

3 .2

3 .0

2 .9

* End-of-m onth stocks divided b y total sales during month.

drop in stocks. W hile during the eight-month period JanuaryAugust 1949, dollar sales were running about 7 per cent below
last year’s volume, the drop in the retail value o f stocks from
the end o f August 1948 to the same date this year was 16 per
cent. There was some increase in inventory during August
in preparation for the fall season, but it was o f less than normal
proportions; as a result, the seasonally adjusted index of stocks
(at retail valuation) fell to the lowest level in close to three
The accompanying table shows the extent to which the stores
have pursued an inventory curtailment policy since last winter.
The August stock-sales ratio has been lower than this years
ratio of 3.1 only once since 1919, namely in 1946. (The
corresponding ratio for 1935-39 was 3.7.) When the 1946
exception occurred, sales were growing so rapidly that stores
found it difficult to keep inventories in adequate balance, in

Estimated Receipts of Incoming Merchandise and Sales of
Second District Department Stores*

Sales at Second District department stores, stimulated early
in the month by "back to school buying” of greater propor­
tions than anticipated, rose in September more than seasonally,
for the second successive month. During the week ended
September 10, the dollar volume of Second District sales
even showed a small gain over the corresponding week a year
ago, reflecting heavy sales in New York City and Newark, but
volume subsequently fell below last year s. For the month
as a whole, according to a preliminary estimate, sales showed
a reduction of close to 6 per cent, or about the same as the
average year-to-year reduction for the preceding eight months
of 1949.
R e c e n t In v e n t o r y P o l ic y

As on past occasions when business had fallen off, the cur­
rent lag in sales has been accompanied by a relatively sharper

* Sales, but not receipts, are seasonally adjusted.



spite of a greatly extended forward buying position. Indeed,
the stock-sales ratio was very low throughout most of 19 4 6 ,
reflecting in the main the inability of the stores to maintain
the flow of incoming merchandise at the level of consumer
The very low ratio of stocks to sales for this past August
may be traced to quite different causes. Beginning last Novem­
ber, the stores reduced sharply the amount of new orders and
cut outstanding orders severely. Hence, not only were receipts
of merchandise in 1949 smaller than during the corresponding
months of 1948, as the accompanying chart shows, but they
were deliberately cut below the current rate of sales. The drop
in receipts between Easter and midsummer was sharper than
usual for that period in the year. During July, at the trough
of the seasonal decline, receipts amounted to less than 70 per
cent of the estimated dollar amount for July 1948. The gap
between sales and merchandise receipts was bridged through
a reduction of inventories.
Towards the end of August and during September there
were signs that retailers, in order to replenish the reduced
inventories, had reversed their inventory policy. Without any
great change in consumer demand other than the seasonal
pick-up, the stores reentered the market vigorously, particu­
larly for women’s apparel and accessories. The dollar volume
of new orders placed during August as a whole showed a
greater than seasonal rise, and came to within 4 per cent or
so of last year’s volume, following cuts of 20 to 25 per cent
in immediately preceding months. Reports generally charac­
terize the aggressive buying by the stores during the past 5 or
6 weeks as a belated response to seasonal needs, stemming
partly from too extensive preseason dependence on reorders.
The District’s garment trades were, therefore, stimulated into
a particularly sharp seasonal burst of activity. Since manu­
facturers had been no less reluctant to carry inventory than
the stores, spot shortages of particularly desirable fabrics de­
veloped, and in a few instances prices turned upwards.
Indexes o f D epartm en t Store Sales and S tocks
Second Federal R eserve D istrict
( 1 9 3 5 - 3 9 a v e r a g e s 1 0 0 per cen t)







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





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





r Revised.

D epartm ent' and Apparel Store Sales and S toc k s, Second Federal R eserve
D istrict, P ercentage Change from the Preceding Year
Net sales
August 1949

Stocks on
Jan. through
August 1949 Aug. 31, 1949

Department stores, Second D istrict.. . .

— 5


New York C ity .................................
Northern New Jersey............................
Westchester County................................
Fairfield C ou n ty........................................
Lower Hudson River V alley................
Upper Hudson River Valley................

- 6
— 5
- 6
+ 10
- 4
- 4
- 3
- 3
— 5
-1 0
- 2
- 6
-1 0
-1 1
- 4
+ 2
- 9
- 8
- 9
— 5
- 4
- 8
- 8

- 9
- 8
- 9
+ 5
- 9
-1 0
- 6
- 4
- 3
- 4
— 2
- 8
-1 0
- 9
— 7
- 6
- 9
- 8
- 9
- 4
- 1
- 4
- 8

-1 7
-1 5
-1 4
- 4
-2 0
-2 1
-1 3
-1 4
-1 8
-2 5
-1 2
-1 1
-1 4
-1 0
- 9
-2 4
-1 5
-1 6
-1 9
-1 3
-1 2
-1 5
-1 3



-1 5

Central New York State.......................
Mohawk River V alley........................
Northern New York State....................
Southern New York State.....................
Western New York State......................
Niagara Falls..........................................

Apparel stores (chiefly New York C ity ).



-1 6


Indexes o f B u sin ess



Industrial production*, 1935-39 = 100........
(Board of Governors, Federal Reserve
Electric power output*, 1935-39 = 100........
(Federal Reserve Bank of Nerd) York)
Ton-miles of railway freight*, 1935-39 = 100
(Federal Reserve Bank o f New York)
Sales of all retail stores*, 1935-39 = 100........
(Department o f Commerce)
Factory employment
United States#, 1939 = 100........................
(Bureau of Labor Statistics)
New Y ork State, 1935-39 = 100................
( NYS Div. o f Placement and Unemp. Ins.)
Factory payrolls
United States# , 1939 = 100 .......................
(Bureau o f Labor Statistics)
New Y ork State, 1935-39 = 100................
( NYS Div. o f Placement and Unemp. Ins.)
Personal income*t» 1935-39 = 100................
(Department of Commerce)
Composite index of wages and salaries*t,
(Federal Reserve Bank of New York)
Consumers’ prices, 1935-39 = 100.................
(Bureau o f Labor Statistics)
Velocity of demand deposits*, 1935-39 = 100
(Federal Reserve Bank o f New York)
New Y ork C ity ..............................................
Outside New York C it y ..............................








170 p









































* Adjusted for seasonal variation.
p Preliminary.
# Revised beginning January 1941.
f Revised beginning January 1942.
f A monthly release showing the 15 component indexes of hourly and weekly
earnings in nonagricultural industries computed by this bank will be sent upon
request. Tabulations of the monthly indexes, 1938 to date, m ay also be pro­
cured from the Research Department, Domestic Research Division.



(Summarized by the Board of Governors of the Federal Reserve System, September 30, 1949)

production and employment increased in August

I and early September. Construction activity was maintained

at advanced levels. Wholesale commodity prices rose slightly
from mid-August to mid-September but subsequently declined.
Department store sales increased somewhat after mid-August.
In d u s t r i a l Pr o d u c t i o n

The Board’s seasonally adjusted index of industrial produc­
tion advanced in August to 170 per cent of the 1935-39 aver­
age, which was slightly above the June rate. According to
present indications the index may show a small further rise
in September despite a work stoppage at coal mines after the
middle of the month.
Production of durable goods rose 5 per cent in August,
mainly because of substantial gains in activity in the iron and
steel, nonferrous metals, and lumber industries. Steel output
in August was at a rate of 82 per cent of capacity, the same
as in June, as compared with 71 per cent in July. In Septem­
ber steel production has been scheduled at about 85 per cent
of capacity. Assembly of passenger automobiles continued at
record rates in August and early September, while truck assem­
blies declined, partly as a result of work stoppages at plants of
a leading producer. Over-all activity in the machinery indus­
tries was maintained at the July level in August, as increased
output of refrigerators and other consumers’ electrical appli­
ances offset further declines in industries making producers’
Nondurable goods production advanced in August to the
highest level since March. There were large increases in out­
put of cotton and rayon textiles, shoes, paper, paperboard, and

tobacco products. Production of meat, seasonally adjusted, was
maintained in August and early September and was at a level
substantially above that o f a year ago. Output of most other
nondurable goods showed little change in August.
Minerals output increased in August, reflecting mainly a
somewhat larger volume of coal production. Coal output in
August, however, was one-third below a year ago. Crude
petroleum production showed little change in August and
advanced 2 per cent in early September. Iron ore production
declined more than seasonally in August and early September.
Em p l o y m e n t

Employment in nonagricultural establishments showed some­
what more than the usual seasonal rise in August. Gains were
mainly in manufacturing and State and local government em­
ployment. The number of persons unemployed declined from
4.1 million in early July to 3.7 million in early August.
C o n s t r u c t io n

Value of construction contract awards in August, according
to the F. W . Dodge Corporation, declined slightly from the
high July level, but early reports indicate that awards in Sep­
tember regained the July level. The August decrease reflected
substantial declines for most types of nonresidential construc­
tion, which more than offset a 15 per cent increase in resi­
dential contracts. The number of new housing units started in
August, as estimated by the Bureau of Labor Statistics, totaled
98,000 compared with 96,000 in July and 87,000 in August

Federal Reserve indexes.

M onthly figures; latest shown are for August.

Bureau o f Labor Statistics' indexes.
week ended September 20.

W eekly figures; latest shown are for


D is t r ib u t io n

Value of department store sales increased somewhat more than
seasonally in August and the first half of September. The
Board’s adjusted index for August is estimated at 282 per cent
of the 1935-39 average, compared with 279 in July and an
average of 286 for the first eight months of the year. Sales
of major household appliances have increased in recent months
and have not been as far below year ago levels as they were
Railroad freight shipments in August and early September
were above the July level, reflecting mainly gains in coal and
numerous manufactured goods, but they subsequently declined
again as a result of sharply curtailed coal shipments. Total
carloadings in August were 19 per cent below the same period
a year ago.
C o m m o d i t y P r ic e s

The general wholesale price index advanced somewhat from
mid-August to the middle of September but subsequently
declined again. These changes reflected to a large extent fluc­
tuations in livestock and meat prices. Following devaluation
of British and many other foreign currencies, generally by
about 30 per cent, dollar prices of tin, rubber, and some other
imported materials declined from 5 to 8 per cent. Prices of
most nonferrous metals, following moderate advances in July,

showed little change during August and most of September.
Prices of steel scrap and of cotton and rayon cloth continued
to increase.
Ba n k

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

Prices of Government and high-grade corporate bonds
showed relatively little change in the first three weeks of Sep­
tember. After rising in the second week of September to the
highest level in nearly a year, common stock prices moved



W ednesday figures; latest shown are for September 14.

C r e d it

Business loans at banks in leading cities increased moder­
ately during August and the first three weeks of September.
Portfolios of municipal and corporate securities also were
expanded somewhat. Holdings of Government securities in­
creased over 2 billion dollars, reflecting in large part the use
of the funds released by the reductions in reserve requirements
in August and early September to acquire additional bills
offered by the Treasury and to purchase short-term Govern­
ment securities from the Federal Reserve Banks.
A reduction in Treasury balances at the Reserve Banks early
in September supplied reserve funds to member banks. In the
third week of the month Treasury balances were rebuilt
through quarterly income tax receipts, and excess reserves of
banks were reduced sharply.








Common stock prices, Standard & P o o r’s C orporation; corporate bond
yields, M ood y’ s Investors S ervice; U . S. Government bond yields, U . S.
Treasury Department. W eekly figures; latest shown are for week ended
September 24.