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O f Credit and Business Conditions


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No. 9

The usual contraction of member banks’ excess reserves, securities during the War Loan drive. In the five weeks ended
which follows War Loan drives, has been apparent during August 30, currency outstanding increased at an average rate
August. The shift from reserve-free War Loan deposits, of about 130 million dollars a week, compared with a weekly
created during the Fifth drive, to private deposits requiring re­ rate of 155 million in the corresponding period a year ago.
serves, began during the week ended July 19 and proceeded
The heavy public demand for currency, together with some
at an accelerated pace thereafter. Owing largely to this shift, loss of funds by the banks through foreign account transactions,
and the increase in reserve re­
reserve requirements of mem­
Principal Factors Affecting Member Bank Reserves,
led to an increase
ber banks rose some 700 mil­
Changes since December 30, 1942*
in member bank needs for
lion dollars during the August
Federal Reserve Bank credit
rose by more than one
Treasury withdrawals from
dollars during the fiveWar Loan deposit accounts
week period. Most of the
amounted to 4.9 billion dol­
increase was in Reserve Bank
lars during the five weeks un­
holdings of Treasury bills, for
der review. In addition.
the most part acquired direct­
Treasury receipts were aug­
mented by quarterly Social
ly from the member banks in
Security taxes and withheld
need of additional reserves.
income taxes. These aggre­
Member bank borrowing from
gate receipts, however, were
Reserve Banks also increased
just about counterbalanced by
slightly. The expansion of
Treasury disbursements which
Reserve Bank credit, though
appear in the member bank
substantial, was considerably
figures as deposits of Govern­
less than the losses of reserves
ment checks to the account of
by the member banks, and
private depositors. T h u s
the increase in reserve re­
Treasury operations had lit­
quirements. Consequently, ex­
tle effect on the actual amount
cess reserves declined from
of member bank reserves;
their principal effect was to
(and a peak of 1.6 billion on
raise reserve requirements as
July 12) to about 900 million
War Loan d e p o s i t s were
on August 23, and remained
drawn down and private deposits increased.
unchanged in the last statement week of the month. Most of
In addition, there was a renewed flow of currency into cir­ this contraction occurred among the country and reserve city
culation which involved a substantial drain on bank reserves. banks where gains in excess reserves during the War Loan
In the three weeks ended July 26, there occurred a reduction of drive had been largest. Excess reserves of New York and
14 million dollars in currency circulation, which led to hopes Chicago central reserve city banks remained nominal.
that the public demand for currency might be leveling off.
New York City banks, which had experienced a net gain
It now appears, however, that the reduction was only temporary of funds through Government transactions during the Fifth
and may have been related to cash purchases of Government War Loan drive, sustained considerable losses of funds through

of dollars

* C u m u lative w eekly data.
S o u r c e s: B oard of G overnors of the F ederal R eserve S y ste m and Federal
R eserve B a n k of N e w Y o r k .

billion d



such transactions in August. During the drive, Treasury with­
drawals of War Loan deposits in the banks were greatly re­
duced, partly as a result of quarterly income tax collections in
the latter half of June, and partly as a result of cash payments
for securities sold during the drive. Meanwhile deposits of
Government checks in the New York banks continued in large
volume. Subsequently, however, large withdrawals of War
Loan deposits again were made and, together with other
Treasury receipts, exceeded deposits of Government checks
in the New York banks. In addition, there was an accelerated
demand for currency at New York City banks as in other parts
of the country. These losses of funds were only partly offset
by some inflow of funds from other sections of the country,
which was probably related, to a considerable extent, to the
redistribution of Government securities after the close of the
drive. In addition, the reserve requirements of the New York
City banks increased considerably. Consequently, the New
York City banks found it necessary to obtain substantial
amounts of Federal Reserve credit, chiefly through the sale
of Treasury bills to the Federal Reserve Bank of New York.
(For the four weeks ended August 23, the amount of such
sales totaled approximately 430 million dollars.) In addition,
the New York banks sold moderate amounts of other securities,
chiefly Treasury certificates and notes, in the market, and in­
creased their borrowings at the Reserve Bank moderately.
R e d is t r ib u t io n


Fif t h W


L o a n Se c u r it ie s

The brisk demand which developed in the market for Gov­
ernment securities after the close of the drive quieted down
in August. The market, on the whole, continued firm, how­
ever, as there was a persistent, though moderate, demand especi­
ally for the new 2 per cent bonds and 1V4 per cent notes
sold in the drive, and offerings were limited. Switching opera­
tions by investing institutions seeking to obtain securities of
desired maturities were numerous, and resulted in a good
demand for other fully taxable medium term bonds and the
longer term notes. In these circumstances, there was a rapid
liquidation of loans contracted for the purpose of carrying
Government securities during the Fifth War Loan drive, and
by August 23 loans to security brokers and dealers, both in
New York City and at reporting member banks in other prin­
cipal cities, had fallen to predrive levels. Loans to individuals
and others which had increased even more rapidly during the
drive than had loans to brokers and dealers, also were reduced
substantially, either through sales of securities acquired during
the drive or through payments against loans out of current
income. The rapidity of the reduction in such loans suggested
that a considerable part of the reduction was accomplished by
the sale of securities which were subscribed for during the

drive, or by the sale of other securities. In New York City,
approximately 45 per cent of such loans arranged during the
drive were liquidated in the six weeks following its close, and
at reporting member banks in 100 other principal cities
throughout the country, the liquidation was even more rapid,
amounting to approximately 60 per cent.
Despite the rapid liquidation of securities financed by tem­
porary loans, the demand for medium term bonds and the
longer term notes was in such volume that the Federal Reserve
System Open Market Investment Account found it desirable
to supply securities of those types to the market rather steadily.
The demand was reported to have come largely from banks
all over the country.
M e m b e r B a n k C r e d it

Data for weekly reporting member banks in the principal
cities account for only part of the buying, and suggest that a
considerable portion came from nonreporting member banks
and nonmember banks. Reporting banks in 100 cities outside
New York increased their holdings of Government bonds by
170 million dollars during the five weeks ended August 23,
and their holdings of Treasury notes and certificates showed
little net change. Their holdings of Treasury bills were re­
duced by 324 million dollars as the result of sales by some
banks to the Federal Reserve Banks to obtain needed reserves.
New York City reporting banks increased their holdings of
Government bonds by only 62 million dollars during the fiveweek period and sold 110 million of Treasury certificates and
62 million of Treasury notes, in addition to their heavy sales
of Treasury bills to the Reserve Bank, mentioned previously.
Just as the decline in private deposits during the Fifth War
Loan drive was smaller than the gain in Government War
Loan deposits, because of bank purchases of Government se­
curities and loans to subscribers which provided funds for sub­
scriptions to the securities offered during the drive, so the
subsequent rise in private deposits has been smaller than the
reduction in War Loan deposits. A reduction of approximately
2,970 million dollars in Government deposits in reporting
member banks between July 12 and August 23 was accom­
panied by an increase of about 2,160 million dollars in the
sum of "demand deposits—adjusted” and time deposits. At
the same time, interbank deposits in the reporting banks were
reduced by about 690 million dollars. The explanation for
the disparity between the reduction in Government deposits
and the growth in other deposits may be found mainly in a
shrinkage during that period of about 1,300 million dollars in
total loans and investments of reporting banks, due chiefly to
the liquidation of loans on Government securities. In addi­
tion, public demands for currency were a smaller factor limiting
the growth in private deposits.







Primarily because of the rapid wartime growth in the
volume of currency outstanding, the reserve ratio of the
Federal Reserve Banks has declined from a peak of 91 per cent
in 1941 to 55 per cent as of August 23, 1944. Since the
expansion in currency here has its parallel in all parts of the
world, it may be instructive to examine briefly the wartime
experience of foreign central banks with regard to their
reserve requirements.
Traditionally, central banks throughout the world have been
obligated by law to hold specified amounts of reserves against
their notes, or against their notes and deposits. Requirements
have been of essentially two major types. By far the most
common type, exemplified by requirements of the Federal
Reserve System, has been the maintenance of a proportional
legal reserve against notes, or against notes and deposits in
the same or differing ratios. Generally, this requirement has
been coupled with the provision that, subject to certain condi­
tions such as the payment of a penalty tax, the reserve ratio
might be permitted to fall below the legal minimum. In some
cases the legal reserves have consisted only of gold; in other
cases foreign exchange holdings, generally in specified
currencies or up to specified percentages, also have been
included—a practice fostered by the widespread adoption of
gold exchange standards during the interwar period. The
second type of reserve requirement was exemplified by the
Bank of England fiduciary note issue principle, under which
the central bank was empowered to issue a fixed amount of
notes covered only by government securities, with all notes in
excess of that amount covered 100 per cent by gold. In some
cases the nonfiduciary note issue had to be covered not 100
per cent in gold but by a smaller per cent. Elasticity was
usually provided by the provision that the fiduciary issue,
subject to certain conditions, could be increased.
A lth ough there was a noticeable tendency during the thirties

for reserve requirements to be relaxed and in certain cases,
such as Germany, Italy, and Greece, completely suspended,
nearly all central banks at the outbreak of the war were still
subject in varying degrees to legal reserve requirements.
Because of the almost complete elimination, before the war,
of internal convertibility of notes into gold, the essential func­
tion of these reserves, to the degree that they exceeded the
legal minimum, was to settle balance of payment deficits.
Since the beginning of the war substantial changes, ranging
all the way from moderate liberalization to complete suspen­
sion, have been made in the reserve requirements of many
foreign central banks. In some countries these changes have
been motivated by a desire to make the national stock of gold
fully available to meet an anticipated balance of payments
deficit arising out of greatly expanded wartime import require­
ments. In most cases, however, the changes have been the
result of actual or anticipated increases in note circulation.



accentuated in some instances by decreases in the monetary
reserves, which made or would have made the maintenance of
the preexisting reserve requirements either impossible or
intolerable. Increases in the deposit liabilities of foreign
central banks, in those cases where such liabilities had to be
covered by reserves, have not been an important cause of
changes in reserve requirements.
The outstanding illustration of a complete break with the
prewar reserve requirements is provided by the Bank of
England. In order to centralize all British gold holdings in the
hands of a single authority and to make them available for use
in meeting an unavoidable deficit in England’s wartime balance
of payments, the gold stock of the Bank of England, amount­
ing to roughly 280 million pounds, was transferred early in
September 1939 to the Exchange Equalization Account in
exchange for Treasury bills. By this step the fiduciary note
issue of the bank was automatically raised from 300 million
pounds to 580 million pounds, and since then virtually the
entire note issue of the bank has been unsecured by gold.
Moreover, twelve subsequent increases in the fiduciary issue,
totaling 620 million pounds, have had to be authorized by
Parliament. In similar fashion, all the gold holdings of the
Bank of Canada, valued at 226 million dollars, were sold to
the Canadian Foreign Exchange Control Board on May 1, 1940
for government securities; simultaneously, the legal reserve
ratio of 25 per cent gold cover for notes and deposits was
At the outbreak of war reserve requirements were suspended
by the Bank of France, which had previously required 35 per
cent in gold against note and other demand liabilities, and by
the National Bank of Denmark, whose legal minimum reserve
ratio had been 25 per cent in gold against notes. In occupied
Belgium, the Nazi-dominated institution which still styles
itself the "National Bank of Belgium” was "relieved” by the
German Military Commander in March 1942 of the obligation
to maintain a 40 per cent reserve in gold and gold exchange
against notes and deposits.
Other foreign central banks met the problem of greatly
expanded note circulations (coupled in some cases with
reduced reserves) either by lowering their legal reserve per­
centages or by broadening their definitions of legal reserves.
For example, in September 1939 the required reserve of the
National Bank of Rumania, previously consisting of 35 per
cent in gold and gold exchange against notes and deposits (at
least 25 per cent in the form of gold), was lowered to 25 per
cent in gold alone. In December 1941 it was further provided
that legal reserves could include not only gold but effective
gold claims as well; the purpose of this provision was to make
eligible for reserves Rumanian gold holdings that were blocked
in the United States and Great Britain. In the case of the
National Bank of Bulgaria legal reserves, which had consisted



of gold and gold exchange, were broadened in May 1941 to
include all other foreign exchange, in order to make possible
the use of large accumulated clearing balances in Germany as
cover for note and other demand liabilities. The reserve
requirements of the Nazi-dominated Netherlands Bank were
similarly altered to permit the inclusion of reichsmark clearing
balances in legal reserves. Until March 1942 the bank had to
maintain a legal reserve of 40 per cent in gold behind its
notes and deposits, but thereafter the bank was permitted to
include in its reserves foreign balances and "checks, bills, other
commercial instruments and Treasury certificates payable
abroad,” the required reserve ratio remaining at 40 per cent.
Actually, most of the banks gold reserves were removed from
Holland during the German invasion and they are now under
the control of the Dutch Government-in-exile. In June 1943
the fiction of a 40 per cent legal reserve ratio was dropped and
the bank was authorized thereafter merely to hold such stocks
of gold and foreign exchange "as are necessary for the settle­
ment of foreign payments and for the maintenance of the value
of the currency.” Another illustration of a widening of the
concept of legal reserves is provided by the central bank of
Sweden, the Sveriges Riksbank. Before the war, 85 per cent
of the gold cover behind the bank’s note issue had to be held
at home, but in January 1940 the distinction between gold
reserves at home and abroad was removed in order to enable
the bank to increase its gold earmarked abroad without reduc­
ing its reserve ratio. At the same time the bank was authorized
to revalue its gold holdings at the market price, rather than
at the lower parity value, in computing the reserve ratio.
Important changes have also been made with respect to the
reserve requirements of two Axis central banks adhering to
the fiduciary note issue principle. Up to March 1941 the
Bank of Japan was permitted a fiduciary note issue of 2.2
billion yen; any sum in excess of that amount had to be cov­
ered 100 per cent in gold and silver (of which silver could
not exceed 25 per cent). In that month the distinction be­
tween fiduciary and nonfiduciary note issues was abolished
and an over-all limit of 4.7 billion yen was fixed as the maxi­
mum permissible tax-free note issue, to be covered by gold,
silver, commercial bills, Treasury bills, and government bonds
(no minimum proportion of gold being specified). This
limit was raised to 6 billion yen on April 1, 1942, and since
then further increases are believed to have been authorized
in view of the rise of the note issue well above that limit. In
similar fashion the Bank of Finland had been authorized in De­
cember 1938 to increase its fiduciary issue from 1.2 billion
markkaa to 1.8 billion markkaa. A year later the cover for
the banks nonfiduciary issue, which previously had to be
gold and specified foreign balances, was broadened to include
other assets, notably Treasury bills.
Exceptions to the tendencies described in the preceding
paragraphs are found most notably in Near and Middle East­
ern countries and in Latin American countries. Net payments

to these countries by foreign countries (principally belliger­
ents), for goods and services have caused an expansion of their
reserves coincident with the expansion of their money supply
as a whole, and consequently have tended to increase the
reserve ratios of the central banks. Therefore, no significant
alterations in legal reserve requirements have been necessary.
Similarly, the central banks of the four British dominions and
of the European neutrals have, in general, shown substantial
increases in their eligible foreign exchange and gold reserves
since the beginning of the war, under the influence of an
active balance of payments, although their reserve ratios have
not increased so conspicuously or so consistently as those of
the Near and Middle Eastern and Latin American groups.
With the exception of Canada, however, none of these coun­
tries has suspended its reserve requirements, although as noted
above a slight liberalization was made in the case of the Bank
of Sweden. (In the case of Canada the bulk of the gold and
foreign exchange reserves has been held by the Foreign
Exchange Control Board since May 1940.)
G r o w t h in C u r r e n c y C i r c u l a t i o n

The primary reason for the relaxation or suspension of
reserve requirements by foreign central banks, as indicated
earlier, has been the expansion in their currency circulations.
The universal rise in currency circulation during the war may
be explained by (a) the factors increasing the aggregate money
supply1 in general and (b) the factors causing currency to
increase faster than deposits. The chief cause of the expan­
sion in the aggregate money supply has been, in most cases,
war or defense financing by governments, to the degree that
such financing has involved borrowing from the banking
system; in some cases, expansion has been due primarily to a
large excess of payments received from abroad over payments
made abroad. The almost universal tendency for currency to
rise faster than bank deposits is due to a variety of reasons.
One such reason is the fact that income payments to wage
earners, many of whom use cash rather than checks, have
tended to rise at a faster rate than the total of income pay­
ments. Part of the increased currency circulation in most
countries, moreover, undoubtedly reflects large shifts in popu­
lation, disruption of normal trade channels, reduced banking
facilities in many areas, and increased currency hoarding,
owing to uncertainties arising out of the war. Black market
transactions and efforts to reduce taxation by concealing income
have also been factors in some cases. In summary, then, the
degree to which currency circulation has expanded in any
given country during the war has been primarily dependent
upon the amount of government borrowing from the banking
system, the character of the country’s international balance
of payments, and the strength of the factors tending to cause
a preference for currency relative to deposits.
1The term 'aggregate money supply” includes demand deposits,
currency issued by banks and governments, and coin.


The rate of expansion in the note circulation of central
banks in 27 countries since the outbreak of the war is pre­
sented in the accompanying chart, which is divided for con­
venience into six main groups of countries. While all of the
countries represented in the six groups have experienced
substantial increases in note circulation, the rate of expansion
has been most rapid in the Near and Middle Eastern countries
and in Canada, Finland, and Japan, and least rapid in the
Latin American group, the United Kingdom, Sweden, and
Switzerland. (Data for Russia, China, and Greece are not
available; in China and Greece the note issues are reported
to have increased several thousand times.) No attempt can
be made here to account in detail for the different rates and
patterns of note expansion in the different countries, but
certain general influences affecting groups of countries can
be indicated.
Wartime Increase in Central Bank Note Circulation
(June 1939=100 per cent)


Among the four major belligerents represented in the first
group, the rate of expansion in the note circulation in Japan
has been twice as rapid as that in the United Kingdom, while
Germany and the United States occupy an intermediate posi­
tion. In all four countries government borrowing from the
banking system has been the principal factor increasing the
money supply in general, but various special factors as well
have brought about the different rates of expansion in note
circulation. The expansion of note circulation in the
Near and Middle Eastern countries may be attributed largely
to heavy Allied military expenditures in those countries. An
exception is Turkey, which has differed from other Near
Eastern countries in being a neutral (until quite recently);
for this reason, as well as because it lies partly in Europe, it
is shown in the group of European neutrals. The expansion in
the Latin American countries has reflected mainly British and
American purchases of war materials and foodstuffs. In the
European occupied countries, note expansion has been
due largely to the payment of heavy occupation costs and to
the accumulation of reichsmark clearing claims as a result
of large net exports to Germany.

* Data for the U. S. S. R. and for China are not available. United States
data include Treasury as well as Federal Reserve notes in circulation,
t Represents note circulation of Palestine Currency Board.

The final report on the Fifth War Loan drive, issued early
in August, showed that total subscriptions amounted to 20.6
billion dollars, thus exceeding by a wide amount the minimum
goal of 16.0 billion. Comparable totals for previous War
Loans, excluding commercial bank and Treasury investment
account purchases, were: First, 7.6 billion dollars; Second,
13.1 billion; Third, 18.3 billion; and Fourth, 16.7 billion. In
the Fifth drive, as in the Fourth, sales of Savings bonds and
Savings notes over a two-month period were credited to the
War Loan, while subscriptions to marketable issues were
accepted within a period of somewhat less than one month.
The drive figures do not include purchases by Treasury
investment accounts or commercial banks. Large offerings of
securities to commercial banks were included in the First and
Second drives, but were eliminated from the Third and subse­
quent War Loans.
During the last drive, bank loans on Government securities,
and bank purchases in the market of securities previously held
by nonbank investors, were larger than in any of the previous
drives. Between June 7 and July 12 the weekly reporting
member banks in leading cities expanded their total loans on
Government securities by over 1.8 billion dollars, the increase
amounting to nearly twice that in the Fourth Loan; and their
holdings of Government securities rose by 4.9 billion dollars,
compared with an increase of 3.1 billion during the previous
drive. Funds realized by nonbank investors from bank loans
and from sales of prior holdings of Government securities, and
invested in drive issues, played an important role in the attain­
ment of the high sales total for the drive. Nevertheless, the



amount of funds raised from savings of individuals and avail­
able funds of corporations appears to have surpassed that of
any previous drive.
Of the total sales, 6.3 billion dollars represented purchases
by individuals, whose quota had been set at 6 billion, while
subscriptions by corporations and other investors amounted to
14.3 billion, compared with a quota of 10 billion. Every class
of nonbank investor (with the minor exception of brokers
and dealers, whose subscriptions were restricted) subscribed to
an amount greater than that in any other drive. Purchases by
individual investors exceeded those in the previous drive by 1
billion dollars; insurance companies and mutual savings banks
purchased 900 million dollars more; and other investors, 2
billion more.
In the accompanying chart are shown the sales of securities
in the five War Loans, by type of investor, for the entire
country and for the Second Federal Reserve District, together
with the percentages of the country’s total sales that were made
in the Second District. It will be noted that, for every investor
class but one, Fifth War Loan sales in the Second District, as in
the entire country, surpassed previous records. On the other
hand, in every category the percentage of Second District
subscriptions has tended to decline since the First drive.
This appears to be the result of (1) the gradual absorption
into War Loan investments of accumulations of idle funds
centered in New York City at the start of the War Loan drives,
(2) the increasing proportion of allocations of sales to other
sections of the country as procedure for such transfers was
perfected, and (3) the relatively increased effectiveness of sales
Sales of Securities in the Five War Loans,
by Type of Investor*
P e r c e n t a g e s I n d i c a t e P r o p o r t io n o f S e c o n d D i s t r i c t to U . S . T o t a l

* Excludes sales to commercial banks and Treasury investment accounts.
Sources: Treasury Department and Federal Reserve Bank of New York.

organizations in other regions where the machinery was not
so well established at the start. However, in the Fifth drive
as in previous drives, all three States included in whole or in
part in the Second Federal Reserve District exceeded their
over-all quotas, despite the fact that their goals for sales to
individual investors were not reached. New York State
exceeded its quota by 24 per cent, New Jersey by 17 per cent,
and Connecticut by 16 per cent.
For the country as a whole, the percentage of total subscrip­
tions accounted for by sales to individual investors was
approximately the same (31 per cent) in the Fifth drive as
in the Fourth. Of the total subscriptions by individuals, 57
per cent represented purchases of Savings bonds, compared
with 71 per cent in the last drive. Sales of Series E Savings
bonds barely exceeded the quota of 3 billion dollars and fell
somewhat short of the 3.2 billion total reached in the Fourth
Loan. This may have been due to the fact that many large
investors purchased their full calendar year limit of this type
of security during the earlier drive this year; evidence of this
is found in the decline in the number of large denomination
Savings bonds sold. However, the number of Series E Savings
bonds of all denominations that were sold reached a new high
record of 72,100,000, indicating the success of the widespread
sales efforts. About 200,000 units were sold of the new 10
dollar denomination Series E Savings bond, authorized June 7
for purchase only by members of the armed forces through
agencies within their organizations.
About 5.2 billion dollars, or 25 per cent of total subscrip­
tions, represented sales of the 2 per cent 8 to 10 year Treasury
bonds. Although a similar issue had been offered in the Third
War Loan, it was replaced in the Fourth drive by a 2 V4 per
cent bond which commercial banks were not eligible to ac­
quire. Individual investors and corporations purchased about
the same amount of the 2 per cent bonds as during the Third
drive, while savings banks increased their purchases somewhat.
The next most popular issue was the % per cent certificate of
indebtedness, sales of which amounted to 4.8 billion dollars,
primarily to corporations. Sales of Savings notes reached 2.6
billion dollars, a new high record for a War Loan drive. Sales
of IVz per cent bonds totaled 2.3 billion dollars, which is
more than was sold during the Fourth Loan, but considerably
less than during the previous drives. For the first time,
Treasury notes were included among the War Loan offerings;
corporations and associations other than insurance companies
and mutual savings banks took nearly half of the 1.9 billion
sales of this issue. Sales of Series F and G Savings bonds
declined to approximately 800 million dollars in this drive,
apparently because of earlier purchases of the calendar year
Subscriptions to Fifth War Loan securities by commercial
banks under the savings deposit formula amounted to 765
million dollars, and Treasury investment accounts subscribed



to 593 million; but these amounts were not credited to the
Fifth War Loan sales. The bulk of the commercial bank sub­
scriptions represented the 2 per cent bonds, while the Treasury
investment account purchases were entirely of the 2 Vis.
During the Fourth drive, commercial bank subscriptions
totaled 618 million and Treasury investment accounts 350

Income payments to individuals in the Second Federal Re­
serve District are estimated at 22.2 billion dollars in 1943,
compared with 19.2 billion in 1942 and 13.9 billion in 1939-1
Continued expansion in activity in most major industry groups
except construction was responsible for the 16 per cent gain
last year; in 1942 the rise amounted to 15 per cent, and in 1941
to 14 per cent. Thus, in the Second District the rate of ex­
pansion last year was a little greater than in either of the
two years preceding, whereas for the entire country the rate
of increase in 1943 (20 per cent) was less than in either 1941
(22 per cent) or 1942 (24 per cent).
The fact that the Second Federal Reserve District was slow
to feel the effects of war production has been pointed out in
a previous article in this Review.2 The concentration of con­
sumer goods industries in New York City and some Upstate
areas, the importance of trade, finance, and service activities,
and the prevalence of many small manufacturing concerns in
the region meant that the District did not respond so readily
as other sections of the country to the stimulus of war con­
tracts. But as activity in the large durable goods industries
began to spread, through subcontracting, to the smaller plants,
and as nonmanufacturing industries were drawn into the war
effort, income payments in the District increased substantially.
The expansion, however, has lagged considerably behind that
in the entire country, and, therefore, the District’s share in
the nations total has declined in each year of the war period.
In New York State, which accounts for an estimated 80
per cent of total District income payments, the increase be­
tween 1939 and 1943 amounted to 54 per cent, which was
little more than half that for the country. (See accompanying
table.) In Connecticut and New Jersey, parts of which are in­
cluded in the Second District, the gains were 99 per cent and
85 per cent, respectively. The major gains in income payments
throughout the country during the war period have come
from three sources: manufacturing, agriculture, and govern­
ment. These three groups as a source of payments are rela­
tively less important in New York State than in the country
as a whole, which explains to a considerable extent the slower
rate of expansion in this State. Groups that, taken collectively,
Estimates based on revised Department of Commerce data for the
various States.
2March 1, 1943.

Income Payments to Individuals by Industrial Source
United States and New York State
(Dollar figures in millions)

Industrial source

United States


New York State


154 $ 325
Agriculture........................... $ 5,091 $ 13,500 $
Contract construction........
Power and gas.....................
Payroll deductions for
social insurance*.........
Net salaries and wages &
8,268 14,234
entrepreneurial income 54,823 119,243

Per cent change,
United New York
+ 75
+ 81
+ 16
+ 42
+ 57
+ 29
+ 46
+ 47

+ 57
+ 18
+ 41
+ 21
+ 86
+ 37
+ 37

+ 126

+ 67


+ 72


+ 22
+ 14


Total income payments . . . $70,601 $138,101 $11,301 $17,361

+ 96

+ 54

Dividends,interest,net rents
Other income payments! . .





Source: United States Department of Commerce.
* Contributions to Social Security and other retirement funds under Government
t Includes direct relief, pensions, compensation for injuries, social insurance
benefits; in 1943, allowances and allotments paid to dependents of military
personnel also were included.
t Decline of less than one per cent.

accounted for more than half of the income payments in
New York State before the war—trade, service, finance, and
property (including dividends, interest, and net rents)—are
among those that have shown the smallest increases since 1939In per capita payments New York, Connecticut, and New
Jersey rank high among the rest of the States. According to
1943 payments, Connecticut was first with an average income
of $1,452 per person; New York sixth, with an average income
of $1,340; and New Jersey ninth, with a per capita income of
$1,282. The average for the country was $1,031.
Indexes of Business


Industrial production*, 1935-39 =100
( Board o f Governors, Federal Reserve
Munitions output, 1943 = 1 0 0 .......................
{W ar Production Board)
Electric power output*, 1935-39 = 1 0 0 ........
(Federal Reserve Bank o f New York)
Ton-miles of railway freight*, 1935-39 =100
(Federal Reserve Bank of New York)
Sales of all retail stores*, 1935-39 = 1 0 0 .. . .
( Department o f Commerce)
Factory employment
United States, 1939 = 1 0 0 ...........................
(Bureau o f Labor Statistics)
New York State, 1935-39 = 1 0 0 ................
( New York State Dept, o f Labor)
Factory payrolls
United States, 1939 = 100...........................
(Bureau of Labor Statistics)
New York State, 1935-39 = 1 0 0 ................
(N ew York State Dept, o f Labor)
Income payments*, 1935-39 = 1 0 0 ................
(Department of Commerce)
Wage rates, 1926 = 1 0 0 ....................................
(Federal Reserve Bank of New York)
Cost of living, 1935-39 = 100..........................
(Bureau o f Labor Statistics)
Velocity of demand deposits*, 1935-39 =100
(Federal Reserve Bank o f New York)
New York C ity.............................................
Outside New York City..............................
* Adjusted for seasonal variation.












197 p

















145 p

















126 p





p Preliminary.




Department store sales in this District during August were
the largest on record for that month and approximately 15 per
cent greater than in August a year ago. The seasonally adjusted
index held close to the high for July; for the year to date, the
index has averaged 8 per cent above the corresponding period
in 1943.
The dollar volume of sales thus far this year indicates that
the annual total will reach the all-time record of around 785
million dollars—a figure 240 million dollars, or almost 45 per
cent, above that for 1939. The accompanying chart shows
that virtually the entire gain during the five-year period has
occurred in cash purchases. The rapid rise in consumer in­
comes, together with consumer credit regulations, has been
the principal cause of the increase in cash payments. These
transactions in Second District department stores now amount
to approximately 570 million dollars annually, or 72 per cent
of total store sales, compared with 335 million, or 61 per cent
of total sales, in 1939Although total credit sales currently are about the same as
in 1939, they have contracted sharply since 1941. Instalment
sales rose 30 per cent between 1939 and 1941, and the annual
total of 55 million dollars for the latter year established a new
record. The decline that took place in 1942 reflected both re­
strictions on the extension of instalment credit (imposed by
Regulation W on September 1, 1941) and shortages in many
lines of durable goods. The downward tendency in instalment
sales has continued since 1942, and the total for this year is
now estimated at 40 million dollars, or only 5 per cent of all
department store sales. Charge account sales increased 18 per
cent between 1939 and 1941, reaching a peak of 200 million
Department Store Sales by Type of Transaction
Second Federal Reserve District

dollars in the latter year. The broadening, in May 1942, of
Regulation W to include charge accounts was largely respon­
sible for a decline in total charge account sales for that year; and
a further decrease, to 175 million dollars, occurred in 1943.
So far this year such sales have continued at approximately the
same rate as in 1943, and have accounted for about 23 per
cent of total department store sales.
Because of the exceptionally large volume of instalment ac­
counts outstanding in 1941, receivables of department stores
in this District reached a record high level in that year. In
1942, however, considerable improvement occurred in the
rate of collections, and receivables declined fairly sharply.
Since 1942, the collection ratios have changed very little. In­
stalment receivables have declined, as sales have contracted,
while charge accounts outstanding have shown no significant
change. At the close of July this year, about 65 per cent of
the accounts outstanding were for charge account purchases,
compared with 55 per cent on the corresponding date of 1941.
Charge accounts are now being paid up in slightly less than 2
months on the average, compared with 7 months for instalment
accounts; the corresponding averages in 1941 were about IVi
months for charge accounts and about 10 months for instal­
ment accounts.
D epartm en t and Apparel Store Sales and Stock s, Sccond Federal R eserve
D istrict, Percentage Change from the Preceding Y e ar

Net Sales


July 1944

Stocks on
Ja:a. through
July 1944
July 31, 1944

Department stores, Second District.........

+ 4

+ 8

+ 4

New York City..........................................
Northern New Jersey...............................
Newark . . . .............................................
Westchester and Fairfield Counties . . . .
Lower Hudson River Valley....................
Upper Hudson River Valley....................

+ 6
+ 4
+ 4
- 7
-1 2
+ 7
+ 4
-1 1
- 8
-1 5
+ 5
- 1
+ 1
+ 9
+ 12
+ 3
+ 1
+ 3
- 4
+ 9

+ 2
- 3
- 7
- 1
+ 3
- 5
+ 9
+ 1
+ 4
+ 8 ..,
+ 6
+ 6
+ 9
+ 6
+ 6
+ 7

+ 4
+ 5
+ 6
- 7
-1 6

+ 3
+ 4
+ 8
+ 1

+ 7

+ 9

Central New York State...........................
Mohawk River Valley..........................
Northern New York State.......................
Southern New York State........................
Binghamton.............. ...........................
Western New York State.........................
Niagara Falls.........................................
Apparel stores (chiefly New York City)

+ 3


- 1
- 3
+ 6
+ 2
+ 8
+ 3

Indexes o f D epartm ent Store Sales and Stocks
Second Federal R eserve D istrict


Charge __
100 _ Account
S a le s


Ena | EH I ™





* Estimated on basis of sales in first seven months.
Source: Federal Reserve Bank of New York.

3 S 9 | EE |


1935-39 average = 100
Sales (average daily), unadjusted.................
Sales (average daily), seasonally adjusted. .
1923-25 average =100
Stocks, unadjusted...........................................
Stocks, seasonally adjusted............................











| June



General Business and Financial Conditions in the United States
(Summarized by the Board of Governors of the Federal Reserve System)
production and employment declined slightly further in July. Wholesale commodity
prices generally continued to show little change, while the cost of livng increased somewhat.
I n d u s t r i a l Pr o d u c t i o n

Index o f P h ysical V o lu m e of Industrial Produc­
tion, A d ju ste d for Seasonal Variation
( 1 9 3 5 - 3 8 av e ra g e= 1 0 0 per cen t)

Output at factories and mines continued to decline slightly in July and the Board’s seasonally
adjusted index was 233 per cent of the 1935-39 average as compared with 235 in June. The
decrease in industrial production largely reflected small declines in a number of industries due to
continued minor readjustments in the munitions program and to manpower shortages.
Output of steel and of nonferrous metals declined further in July to levels respectively 8 per
cent and 20 per cent below the high levels of last autumn. A small decrease in activity in trans­
portation equipment industries reflected partly the indirect effects of manpower shortages in
foundries and continued readjustments in the shipbuilding and aircraft industries. In August
a cutback in aircraft production was announced which was expected to result in the immediate
release of 20,000 aircraft workers and the gradual release of 100,000 more during the balance
of this year.
Production of manufactured dairy products and meats, after allowance for seasonal change,
was maintained in July while output of other food products declined slightly. Cotton consump­
tion showed little change from the rate of the last two months. Activity in the rubber products
industry continued to decline slightly in July and supplies of heavy truck and bus tires available
for civilians during the third quarter were substantially below estimated needs. Output of
chemicals likewise continued to decline slightly.
Crude petroleum output and metal mining were maintained in large volume during July.
Coal production dropped 5 per cent from the level of the preceding month, but for the year
through August 12 was approximately 8 per cent above the corresponding period of last year,
reflecting uninterrupted operations, longer working hours, and a great expansion of strip mining.
So far this year the value of construction contracts awarded, as reported by the F. W . Dodge
Corporation for 37 States, has fluctuated around 160 million dollars a month— the lowest level
since early 1935.
D is t r ib u t io n

Indexes o f the C ost o f L iv in g a s Com piled b y
B ureau o f L a bor S ta tistic s. L a s t M on th in
E ach Calendar Q uarter throu gh Septem ­
ber 1 9 4 0 , M on th ly T h ereafter ( 1 9 3 5 -3 9
a v e r a g e s 100 per cen t)

Department store sales declined considerably less than is usual in July, and have continued
in August at a higher level than a year ago.
Freight carloadings continued to rise in July and were maintained at a high level during the
first two weeks in August. There were considerable increases in shipments of grain, forest
products, and miscellaneous freight, offset partly by a small decrease in coal shipments.
A g r ic u l t u r e

Dry weather during July in the east central area has reduced somewhat national prospects
for corn, hay, and potatoes. Aggregate crop production, however, is likely to exceed last year by
5 per cent, reflecting chiefly a record wheat crop 35 per cent larger than last year.
Total production of all feed grains is estimated at 112 million tons compared with 115
million tons produced in 1943. While hay production, except in the drought areas, has been
large, it will provide a smaller supply per animal unit than has been available in any of the last
6 years.
Crop prospects for most fruits and vegetables, except potatoes, are better than last year.
Tobacco production is indicated as being above average and cotton yields may be good as dry
weather has held the boll weevil in check.
B a n k C r e d it
M em b er B ank R eserves and R elated Item s
(L a te s t figures are for A u g u s t 1 6 )

M em ber B an k s in L eading C ities. D em and D e ­
p osits (A d ju s te d ) E xclu de U . S . G overn m ent
and Interbank D ep osits and Collection
Item s.
G overn m ent S ecurities Include
D irect and G uaranteed Issu es (L a te s t
figures are for A u g u s t 1 6 )

In the five weeks following the close of the Fifth War Loan Drive, loans by banks for pur­
chasing and carrying U. S. Government securities declined sharply; calls on War Loan deposits
and subsequent Treasury expenditures increased adjusted demand deposits and consequently
required reserves; the rapid outflow of currency into circulaton was renewed; and excess reserves
In the five weeks from July 12 through August 16 loans to brokers and dealers for purchas­
ing and carrying Government securities declined 500 million dollars to about the pre-drive level.
Loans to others for purchasing and carrying Government securities declined about the same
amount, but are still considerably larger than before the drive. Commercial loans continued to
show little change.
Treasury War Loan balances at all depositories declined in the five-week period by 2.7 billion
dollars. At weekly reporting banks, Government deposits fell by 2.2 billion during the same
period and adjusted demand deposits increased by 1.4 billion. Time deposits continued the
steady increase that has been in progress for more than a year.
Following a slackened rate of outflow during the War Loan drive, currency renewed its
rapid outflow and in the next few weeks increased at a rate of about 500 million dollars a month.
The resulting drain on bank reserves and the increase in required reserves were met in part by
purchases of Government securities by the Reserve Banks and in part by a decline in excess
Weekly average excess reserves of all member banks declined about 300 million dollars
from their peak during the War Loan drive and amounted close to 1.1 billion dollars in midAugust. The rate of decline was about the same at reserve city and at country banks.