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O f Credit and Business Conditions

V o l.








No. 9

The victorious conclusion of the war in the Pacific may be
expected to have a substantial influence on various factors
affecting the supply of and demand for funds in the New York
money market. As the Treasury’s need for funds diminishes and
the wartime pattern of production is unwound, a shrinkage in
the demand for currency, changes in the flow of funds between
New York and other parts of the country, and a possible halt
in foreign accumulations of gold in this country, are likely
possibilities. These changes may not be substantial for some
time, however, and their prospective development had little
effect on the money market during August.
The more immediate effects of the end of the war were
felt in the market for Government and other securities where
the initial reaction was a temporary decline in prices. The re­
cession in prices of Government obligations reflected primarily
the withdrawal of purchasers from the market, rather than a
substantial increase in selling. Partially tax-exempt Treasury
bonds which had been weak for a month before the termina­
tion of the conflict fell further in price as the wars end im­
proved the prospects for lower taxes on corporation income
which would reduce the value of the exemption. Other sections
of the Government security market, which had shown signs of
recovering from a decline in July, also turned down temporar­
ily when, after the acceptance by the Japanese of the Allied
surrender terms, reports that the Treasury planned to hold a
Victory Loan at the earliest possible date became the basis for
rumors that the drive might be started in September or early
October. As this would have considerably shortened the antic­
ipated period between the seventh and eighth war loans, dur­
ing which period investors could accumulate funds and make
portfolio adjustments, and since it would have made new
securities available at an earlier date than had been expected,
some slight selling pressure developed.
However, following the official announcement on August 23
that the Victory Loan would begin on October 29 and that
subscriptions from investors other than individuals would not
be accepted until December 3, prices recovered rapidly. The
goal of 11 billion dollars (3 billion less than that of the
Seventh War Loan) also suggested smaller supplies of new
Government securities in the future. And the absence of a

short or intermediate term bond in the "basket” of offerings
announced for the Victory Loan, appeared to lend a scarcity
value to such securities already outstanding. Prices of inter­
mediate taxable bonds, in particular, turned strong, as banks
weighed the possibility that further increases in the amount
of Treasury securities available to banks, other than short term
issues, might not be anticipated with assurance.
In the corporate security markets a substantial recovery in
prices also occurred in the latter part of August, apparently
reflecting optimism concerning the prospect for rapid recon­
version of industry to a peacetime basis. High grade corpora­
tion bonds remained somewhat below their previous highs, but
medium grade bonds regained their previous peaks. Industrial
stock averages reached new high levels for recent years, but
public utilities remained moderately below their 1945 peaks,
and railroad stocks regained only part of their losses.
During most of the first weeks of August Treasury certifi­
cates of indebtedness and short term Treasury notes were
comparatively firm. Toward the end of the third week, how­
ever, prices of such securities eased on selling by banks in need
of reserves and by a few corporations seeking cash for recon­
version purposes, and the Federal Reserve Banks acquired (net)
approximately 174 million dollars of certificates and notes dur­
ing the week in order to supply banks with needed reserves
and to maintain an orderly market. Subsequently, the market
for these securities became somewhat less active, but there con­
tinued to be net sales, chiefly by banks, and Reserve System
purchases in the week ended August 29 amounted to 119 mil­
lion dollars.
R e d i s t r i b u t i o n o f S e v e n t h W a r L o a n Se c u r i t i e s

The irregularity in Government security prices during the
past month has tended to slow down the liquidation of specula­
tive holdings of securities acquired in the Seventh War Loan
drive for resale at a profit, although the selling was stimulated
in the third week of August by the fear that an early Victory
Loan might soon make available a new supply of securi­
ties at par. After a decline of about 500 million dollars in
loans on Government obligations among weekly reporting
member banks in 101 cities in the two weeks ended July 18, it
required the next four weeks to effect the liquidation of a like



amount of borrowings. Loans on Government securities to
borrowers, other than brokers and dealers, showed an acceler­
ated decline in the week ended August 22, but at the end of
that time these loans still were higher than at the peak of any
preceding War Loan. Borrowings on Treasury securities by
brokers and dealers also remained at a high level on August 22.
Not all the liquidation of loans by "other” borrowers, of
course, represented the sale of securities for the purposes of
realizing speculative profits. A large part undoubtedly re­
flected repayment of loans out of current income by investing
institutions and investors who subscribed for Seventh War
Loan securities against future income and financed their pur­
chases with bank loans. Nevertheless, a substantial redistribu­
tion of the securities offered in the Seventh War Loan drive
from speculative purchasers into more permanent holdings,
primarily nonreporting banks and institutional investors, ap­
pears to have been effected in the seven weeks ended August
22. This is indicated by the fact that while total Government
security loans fell by about 1,100 million dollars, weekly
reporting member bank holdings of Treasury obligations other
than Treasury bills actually decreased by 150 million dollars
and the Federal Reserve Banks added 257-million to their
holdings of such securities.
A decrease of 390 million dollars in holdings of Treasury
certificates of indebtedness and 134 million in notes in this
period was not fully offset by net purchases of 374 million
dollars of Treasury bonds. In addition, the reporting banks
reduced their holdings of Treasury bills by more than 500
million dollars. During the period of declining Government
security prices purchases of Treasury bonds by the banks also
tapered off noticeably. The net increase in bond holdings
came to 186 million dollars in the five weeks ended August
22, compared with an increase of 188 million in the two weeks
ended July 18. On the other hand, the liquidation of bills and
other Treasury securities, primarily certificates, took place
largely in the last four weeks of this period and was related
to the need for reserve funds resulting from higher reserve
requirements and increased currency in circulation. Weekly
reporting member banks made net purchases of "other” securi­
ties in each of the six weeks ended August 22, amounting in
the aggregate to 232 million dollars and bringing total holdings
to 3.4 billion, highest since November 4, 1942.
M ember Ba n k

R eserve Po s it io n s

Member bank reserves during August were subjected to
considerable pressure from a heavy public demand for currency
and substantially higher reserve requirements. In the four
weeks ended August 22, currency circulation rose 580 million
dollars reflecting vacation demands and an unusual increase in
the week following the end of the war with Japan. Treasury
expenditures continued heavy and resulted in the usual inter­
drive shift of deposits from reserve-free War Loan to private
accounts subject to reserves. Consequently, reserve require­
ments rose by 400 million dollars. Compelled to seek Federal

Reserve Bank credit in order to meet the needs for reserve funds
resulting from these and other transactions, notably a loss of
reserves through foreign account transactions, member banks
increased their borrowings 170 million and made substantial
net sales of Treasury bills and certificates which were acquired
by the Reserve Banks. In addition, total excess reserves of
member banks were reduced moderately. Total Reserve System
security holdings rose 726 million in the four weeks ended
August 22, and excess reserves of member banks fell 100 mil­
lion to a total of about 1,050 million.
Over the entire four-week period, Treasury receipts from
War Loan deposit calls and other sources were just about in
balance with expenditures. In New York City, however, Gov­
ernment receipts exceeded disbursements by a wide margin,
and the banks lost substantial amounts of reserve funds which
the Government evidently spent in other parts of the country.
As a result, demand deposits of individuals and businesses in
the New York City banks declined 155 million dollars instead
of showing the increase usually associated with the disburse­
ment of War Loan deposits. In order to compensate, for the
loss of reserves resulting from Treasury and other transactions,
the New York City banks had to obtain Federal Reserve credit
to bring their reserves up to the required levels, largely through
the sale of Treasury bills to the Reserve Bank and sales of
Treasury certificates in the market (many of which were pur­
chased for the Federal Reserve Open Market Account), and to
a much smaller extent through borrowing from the Reserve
Deposits in the New York State mutual savings banks are
equal to more than half of the deposits in all mutual savings
banks in the country. During the war they have risen substan­
tially from 5.6 billion dollars at the end of 1939 to 7.7 billion
on June 30, 1945, a gain of 38 per cent, and on the latter date
they accounted for nearly a fifth of the total time deposits of
individuals, partnerships, and corporations in all banks. The
expansion in savings deposits reflected not only a sizable in­
crease in previously established accounts (the size of the
average deposit rose from 763 dollars to 943) but also some
gain in the number of accounts which increased from 5,974,000
in the beginning of 1940 to 6,333,000 at the beginning of this
The wartime growth of savings deposits did not get under
way until 1943. For the first three calendar years of war as
a whole (1940-42 inclusive), withdrawals from savings ac­
counts exceeded both new funds deposited and dividends
accrued, as illustrated in the accompanying chart. Thus there
was a small decrease in deposits between the end of 1939 and
the end of 1942, as consumers first utilized increased incomes
to repay debts and to acquire consumers’ durable goods and
then drew on their savings accounts to purchase war bonds.
But since 1942, as the country became more fully mobilized
for war, consumers’ durable goods have largely disappeared

Factors A ffecting Deposits o f N ew Y ork
State Mutual Savings Banks*




4 .0
3 .5
3 .0








* Total deposits, 1939-44, are end-of-year figures; dividends, amounts
deposited, and withdrawals, 1940-44, are annual totals.
Source: Savings Banks Trust Company, S a v in g s B a n k s C hart B o o k .

from the market and many nondurable goods have become
scarce. Incomes, however, have continued to grow, and many
people have had little alternative but to save in one form or
Other forms of savings such as time deposits in commercial
banks and in Federal and State savings and loan associations
increased more percentagewise between the end of 1942 and
1944 than did mutual savings bank deposits, after exhibiting
the same pattern of little or no growth in the first three years
of the war. Over the entire period (1939-44) time deposits
in New York State commercial banks increased about 40 per
cent, and savings and loan association shares nearly 50 per cent.
The greater relative increase in the other forms of savings may
be attributed partly to the fact that their amounts were much
smaller in 1939 than mutual savings deposits so that their
increases are measured from a much lower base. Over the
five-year period commercial bank time deposits increased from
1.9 billion dollars to 2.7 billion and private repurchasable
shares in savings and loan associations from 350 million dol­
lars to 520 million. While it is not possible to determine the
net amount of United States Savings bonds purchased in the
State during these years, at the end of 1944 there were approxi­
mately 4 billion dollars of Series E bonds ( at current redemp­
tion value) outstanding in the Second Federal Reserve District.
The growth of mutual savings bank deposits has been slower
for three other important reasons. First, the dividends paid
on such deposits are lower than those paid on savings and
loan association shares or Savings bonds.1 Second, in the past
1 The prevailing dividend rate in the more important New York
savings banks is l|/2 per cent. The average rate of dividends paid
on shares of New York State savings and loan associations for the
year ended June 30, 1944 was about 2V^ per cent. The yield on
Series E Savings bonds, if held to maturity, is about 2.90 per cent
per annum.


one of the great attractions of savings banks was their record
of safety. Today deposits up to $5,000 in most commercial
banks and shares in savings and loan associations are insured
by Federal agencies. Third, mutual savings deposits are much
more heavily concentrated in New York City than are other
types of time deposits, and neither time nor demand deposits
in New York City have risen as rapidly as in the rest of the
During the war savings banks were forced to make con­
siderable adjustments in their investment policies. Construc­
tion activity and hence the number of new mortgages available
has been severely curtailed, and the high level of business
activity and earnings and correspondingly large tax receipts
have enabled many corporations and State and local govern­
ments to retire large blocks of bonds. The only outlet, there­
fore, for the investment of new funds and funds released from
other investments has been Government securities. As the
accompanying table shows, the mortgage and other real estate
T otal A ss e ts o f N ew Y o rk State M u tu al S av in gs B anks
(In millions of dollars)






and other
real estate#



Cash on hand
and due from

house and
other assets


*Book value.
# Includes real estate acquired by foreclosure,
t Tune 30.
Source: Savings Banks Trust Company and Savings Banks Association, State of
New York.

holdings of the New York savings banks decreased over a half
billion dollars from the end of 1939 to June of this year. Cash
and other assets declined by smaller amounts. But the bond
portfolio increased nearly 3 billion dollars.
In 1929 about 15 per cent of the savings banks’ bond port­
folios was invested in Government securities. A decade later
this figure had risen to 67 per cent and by the end of last year
to 95. At the present time the savings banks hold over 5
billion dollars of such securities which represent about 60 per
cent of their total earning assets.
Band H old in gs o f N ew Y o r k S tate M u tu al S av in gs B anks
(Par value; in millions of dollars)

T otal






State and






Savings Banks Trust Company.

These changes in the composition of the earning assets of
the mutual savings banks have been accompanied by a reduc­
tion in the average return on their investments and in the



dividends the banks have been able to pay their depositors.
The yield on Government securities is at the lowest point in
history, and market conditions have also enabled many corpo­
rations to refund their obligations at lower rates. The effect
of declining yields on the savings banks’ earnings is clearly
evidenced by the fact that while the bond portfolio of the sav­
ings banks nearly doubled from 1939 to 1944, the amount of
interest received increased only 36 per cent. The operating
expenses of the savings banks, on the other hand, have shown
only a slight increase during the war period in spite of the
greatly expanded volume of deposits.
The war, however, has enabled the mutual savings banks
to make considerable nonoperating profits from the sale of
securities and to liquidate at favorable prices much of the real
estate they had acquired through foreclosure in earlier years.
For example, partially tax-exempt Government securities are
of no special advantage to the savings banks since they are not
subject to income taxes. Their holdings of these securities,
therefore, have been sold at a premium to commercial banks
and other corporations in the excess profits tax brackets or to
individuals with large incomes. Profits of this type reached
a peak of 124 million dollars in 1943 but declined to 83 mil­
lion in 1944. Such nonrecurring gains, however, have not
been large enough to offset the effects of declining interest
rates, and as a result, the average dividend paid by the State’s
savings banks dropped from the 1929 peak of 4.36 per cent
to 1.95 by 1939 and 1.60 by 1944.
Beginning in 1943 additions to surplus and undivided profits
have been made for the first time since 1936, partly owing to
the high levels of nonoperating profits. The ratio of surplus
to deposit liabilities has, nevertheless, been declining steadily
since that year. But if cash and United States Government
securities are subtracted from deposits, the ratio shows a steadily
rising trend and is now about 35 per cent. The need for pro­
tection against losses has been reduced during the war by the
banks’ disposal of much of their holdings of foreclosed real
estate, which in 1938 equaled 50 per cent of surplus and un­
divided profits but which has subsequently fallen to about 6 per
The future trend of savings bank deposits is not readily
ascertainable. Withdrawals of funds might be increased, as
individuals utilize some of their savings to make good the war­
time shortages of consumers’ durable goods, or to tide them
over periods of unemployment. However, the maintenance
of economic activity at comparatively high levels should further
generate new savings, offsetting to an unknown extent any
unusual withdrawals. In the past, furthermore, deposits in
mutual savings banks have not been subject to wide swings.
In the depression of the thirties they declined only slightly,
compared with a drop of nearly 50 per cent in the time
deposits of New York State’s commercial banks.
In an effort to build up their real estate and mortgage invest­

ments the savings banks are today gearing themselves to enter
the field of low cost housing and small home financing instead
of concentrating on mortgages on large commercial and resi­
dential properties as in the past. F.H.A. insured mortgages
on properties in adjoining States, which were authorized in
1943, may prove to be of assistance in maintaining mortgage
volume. In the mortgage field though, the savings banks
will have to face keen competition from the commercial banks,
savings and loan associations, and other institutions. The
amount of securities other than Government obligations on the
legal list or which may be placed on the legal list for savings
bank investment will probably increase some as corporations
and local government units seek new funds for expansion, new
equipment, and other purposes. How much of the savings
banks’ earning assets can be shifted into investments with a
higher yield than Government securities will, however, depend
to a considerable extent on business conditions.

In the August issue of this Review, a brief analysis was
presented of Great Britain’s recent financial agreements with
three Western European countries (France, Belgium, and
Sweden). In the present article, the scope and nature of the
British financial agreements with Egypt, Turkey, and Iraq
will be discussed. The Egyptian pact was signed in January
of this year, and the other two pacts in May. Since the
underlying issues of these three agreements are applicable
also to other countries in the Near and Middle East, analysis
of the agreements should throw some light on America’s
commercial problems in this important region. The agree­
ments with Egypt and Iraq, which are of parallel character and
are more novel and significant than the agreement with
Turkey, are considered first.
The absence of free convertibility of the pound sterling
into so-called hard currencies, notably the dollar, and the
apparent impossibility of soon reattaining this convertibility
in view of the expected aggregate excess of the sterling area’s
demand for dollars over its dollar supply, are the underlying
reasons for the special agreements with Egypt and Iraq.
Until this year, no formal agreement limiting the demands
upon the sterling area’s common pool of scarce foreign ex­
change was necessary for Egypt and Iraq, because the import
licensing practised by the Middle East Supply Center1,
together with prevailing shipping and supply shortages, was
sufficiently effective. But with the partial relaxation of MESC
controls early this year, and in anticipation of increased pur­
chases of civilian goods by Egypt and Iraq in 1945, it was
1The directing body of British and American officials responsible
during the war for coordinating the allocation of shipping space and
commodity supplies to the widespread Middle Eastern area including


felt that special restraints were necessary. The reason why
formal agreements were signed only with these two members
of the sterling area lies in the fact that the closely controlled
import licensing of other sterling area countries, coordinated
in London since the outbreak of the war, has acted to hold
down the demand for scarce currencies.
The essential feature of the two agreements is the establish­
ment for the calendar year 1945 of a maximum, or target, as
the British call it, of allocations of scarce currencies (designated
in the agreements as the U. S. dollar, the Canadian dollar,
the Swiss franc, the Swedish krona, and the Portuguese escudo)
for the payment of imports, services, and investment returns.
On the basis of official exchange rates, Egypt is granted a
target of the scarce currency equivalent of 10 million Egyptian
pounds, equal to about 41.5 million dollars, and Iraq a target
of 3,502,500 Iraqi dinars (excluding oil company require­
ments), equal to about 14 million dollars. The figures are
in gross terms, i.e., they do not take account of the scarce
currency contributions these countries make to the sterling area
pool; such contributions in the case of Iraq, particularly
because of its petroleum exports, are usually in excess of its
demands upon the pool, and in the case of Egypt, commonly
less than its demands, although in certain periods during the
war when dollar expenditures by the American military were
especially high that was not the case. The target figures do
not provide for any liquidation of the blocked sterling balances
(mostly accumulated during the war) held by Egypt and
Iraq, amounting at the end of 1944 to approximately 300
million and 55 million pounds sterling, respectively.
The agreements stipulate that upward target adjustments
are to be made in the event of certain contingencies. In the
Egyptian pact, for example, an additional 3 million Egyptian
pounds equivalent is provided in case of an Egyptian wheat
crop failure, which has since materialized. The agreements
also reaffirm the wartime principle of maximum reliance upon
the sterling area as a supply source, except that major items
now scheduled to come from this area may be obtained from
scarce currency areas and paid for out of the pool if there
is a saving in cost of over 10 per cent. There is no limitation
on Egypt’s and Iraq’s use of the currencies of countries outside
the sterling area whose currencies are not scarce in the pool
(the French franc for example), provided such use conforms
with exchange control regulations.
The U. S. Department of Commerce has roughly estimated
that, under the terms of the Egyptian agreement, American
exporters will have a market in Egypt this year (excluding
special wheat purchases) of about 5.4 million Egyptian pounds,
or about 22.3 million dollars. Except for the lend-lease
swollen wartime totals, this would be a record figure and
would compare with less than 2.7 million Egyptian pounds
in 1939- Though not specified in the agreements, it is believed
that sales of surplus American property will be charged
against the dollar target. American commercial and financial


interests are also expected to benefit, within this year’s target,
by Egyptian remittances on account of film royalties, interest,
dividends, etc., and for traveling and other Egyptian expendi­
tures in the United States, to the equivalent of an estimated
1,075,000 Egyptian pounds.
The agreement with Iraq abolishes the special dollar account
that contained that country’s dollar earnings and which was
earmarked for its eventual free use. Apart from Palestine’s
dollar receipts for Jewish national institutions and from a small
portion of India’s dollar earnings, Iraq was. alone among sterling
area countries in enjoying such an account. The Iraqi Govern­
ment has favored the continuance of this account in the past
on the ground that the retention of its dollar earnings con­
stituted an incentive toward an increase in these earnings.
It has been felt on the British side, however, that any important
result of this incentive is precluded by the raw material
character of Iraqi exports; that, in any event, it would hardly
be sufficient to justify special treatment; and that it surely
was not to be compared to what Britain itself could gain
by expanding the export of its specialties and promoting its
tourist attractions, based on a similar incentive. In any case,
the abolition of the special Iraqi dollar account, and the more
general question of how the sterling area members divide up
their available dollar supply, are matters of great interest to
the United States, particularly from the viewpoint of their
potential influence on the character of American commodity
exports, and also from that of the development of direct
American connections with the Middle East. A larger target
for Iraq and other economically undeveloped countries of the
sterling area, for instance, would tend to expand the export of
American trucks, machinery, and other manufactured items,
whereas a relatively larger supply of dollars for Britain’s own
use would tend to stimulate American exports of raw cotton
and tobacco, for example.
Common to both the Egyptian and Iraqi agreements is the
British recommendation that the governments of Egypt and
Iraq assume greater responsibilities of exchange control and
import licensing so as to keep within their targets. Both
governments have accordingly made their exchange control
more comprehensive and have also tightened their screening
of import license applications. It would therefore appear
necessary, at least during the life of these agreements, for
American foreign traders in the Middle East to accommodate
themselves to a more elaborate structure of commercial con­
trols than before the war; in fact, it is possible that these
controls, established for the first time during the war and
now expanded somewhat anomalously in the so-called decontrol
period, may be maintained even after the agreements lapse.
The agreements themselves are to run for the whole of this
calendar year and will presumably be subject to renegotiation
next year in the light of the circumstances then prevailing.
The most important consideration affecting the longevity
of the agreements concerns the development of Britain’s inter­



national economic position after the war, including its progress
in the orderly liquidation of war debts and in meeting postwar
current account deficits. Elimination of the bilateral and
discriminatory features of these agreements after the transition
years will undoubtedly depend heavily upon the degree of
success achieved through appropriate international action
(which would be greatly aided by a vigorous and orderly
American economy) in establishing an expanding and stable
level of international trade and investment. The proposed
International Monetary Fund is intended to exert an influence
toward that end, since one of the Funds purposes will be to
restore a multilateral system of international payments for
current transactions and to eliminate foreign exchange restric­
tions which hamper world trade. On the other hand, the
Fund cannot, during the first five years (or even more) of its
operations, prevent the retention of restrictions on current
account transactions such as are incorporated in the agreements
here reviewed, so long as the national authorities concerned
consider the restrictions necessary.
The Anglo-Turkish Agreement, following the lines of the
bilateral trade and payments arrangements established between
Britain and Turkey in the past, notably in the agreement of
February 3, 1940 (superseded by the present document), aims
to facilitate the resumption on a peacetime basis of orderly
commercial and financial relations between the two countries.
The new agreement mainly provides that all payments between
Turkey and the sterling area will be made in their respective
currencies through special, supervised accounts, which are not
convertible into third currencies except that up to 20 per cent
of Turkish holdings of sterling may be used, at the discretion
of the British authorities, for payments in other currencies,
including the dollar. Though no limit is placed upon either
country’s holdings of the other’s currency, it is not expected
that sizable balances will accumulate on either side, because
of the limited convertibility of the pound sterling and the
long-frozen Turkish balances of the past. The agreement,
as a matter of fact, includes special incentives to Turkish
exportation so as to help British creditors use their frozen
Turkish balances.
Unlike the British agreements with Western European
countries, the Anglo-Turkish agreement lacks any monetary
stabilization feature, that is, neither government obligates
itself to help support the other’s currency at an agreed-upon
exchange rate. The only reference to exchange rates is in
the responsibility placed upon the Turkish Government not
to reduce the premium which it pays for the proceeds of
exports to the sterling area, though it is free to raise the
premium. Under the agreement, Britain, in the event of its
formal readoption of agricultural import quotas, promises to
give Turkey equitable treatment, a provision that has been
interpreted in British trade circles as possibly foreshadowing
the reintroduction of such restrictions. The agreement is to
remain in force until April 30, 1946 and for successive periods

of twelve months, unless proper termination notice is given
no later than three months before the end of any such period.
It is also provided that the terms of the agreement will be
reviewed and necessary amendments made in case either sig­
natory becomes a party to an international monetary agreement.
Under the terms of the International Monetary Fund plan,
this would mean the eventual abolition of the limited and
discretionary convertibility of the currencies involved, as
embodied in all three agreements under review, in favor of
free and unlimited convertibility, at least so far as currently
accruing balances resulting from trade and service transactions
(as distinct from capital transactions) are concerned.

The volume of new corporate security issues rose sharply
during July to a total of almost one billion dollars, the greatest
volume in any month since September 1929- In part, the
heavy July financing represented the accumulation of offerings
that might have been made in May and June but for the
Seventh War Loan drive. About 15 per cent of the month’s
flotations were offered by domestic corporations for the purpose
of financing the expansion of plant and equipment and meet­
ing additional working capital requirements. The estimated
total of "new money” issues of about 150 million dollars was,
nevertheless, highest since August 1941. Securities issued for
the purpose of retiring outstanding issues, repaying bank
indebtedness, and for other purposes dominated the month’s
offerings, amounting to more than 800 million dollars, an alltime record. (Data are based on compilations of the Securities
and Exchange Commission.)
An unusually large volume of corporate financing was
achieved in July in spite of the tendency toward lower prices
that developed in the security markets during the month,
which retarded to some extent the smooth distribution of new
securities to investors in several instances. In a few cases trad­
ing in new issues took place at prices lower than those at
which the securities were initially offered by underwriters. It
appeared, nevertheless, that most of the new securities were
eventually placed with investors.
Irregular price tendencies continued into the following
month and were a factor in curtailing the volume of flotations
in August, which according to preliminary indications fell to
about 40 per cent of the July total. However, this was in part
a natural drop from the very high volume of the preceding
For the first seven months of 1945, corporate financing in
the capital market approximated the three billion dollars of
new issues offered to investors in the whole of 1944. The
total volume for the current year will undoubtedly be the great­
est since 1936. As in 1944, refunding issues so far this year
have accounted for about 80 per cent of the total.


During the war the volume of corporate financing in the
capital market was subject to wide fluctuations. The outbreak
of war in 1939 was not followed by any sharp expansion in the
volume of new corporate issues; despite a substantial increase
in industrial activity stimulated by defense preparations, the
volume of capital financing increased only about 25 per cent
from 1939 to 1940 and remained unchanged in 1941. The
entrance of the United States into the war was followed by a
decline in new issues in 1942 to a level 60 per cent below that
of the preceding two years, as Government financing expanded
and the sale of corporate issues for expansion of peacetime
activities and refunding purposes contracted. A gradual rise
in corporate security offerings ensued in 1943 and gathered
momentum in 1944 and 1945.
In the three years, 1942-44, the volume of railroad and
public utility financing for improvements and expansion de­
clined by about 65 per cent from the volume of the preceding
three years, while that of industrial corporations increased more
than 50 per cent. Wartime restrictions on the availability of
materials and labor reduced the expenditures of railroad and
utility companies for such purposes to a point where they could
be met in large part from high current earnings, whereas
restrictions on construction and equipment fell less heavily
upon industrial concerns which were directly engaged in the
war effort. Nevertheless, the major part of the increase in new
capital raised by industrial companies went to meet added
working capital needs rather than new plant and equipment.
In spite of the unprecedented expansion in industrial capa­
city and business activity during the war, the volume of security
issues to finance plant expansion and to supply working capital
showed no such increase as occurred during the first World
War, and in no year equaled the last peacetime peak of about
one billion dollars reached in 1937.


piled by the New York Journal of Commerce), as compared
with an average of about 1.5 billion a year from 1939 through
1944, and the proportion for new capital investment was
probably much greater in the earlier period. Although informa­
tion concerning the distribution of the new issues between new
capital and refunding is not available for the World War I
period, in view of the rising trend of interest rates during those
years it is probable that a major part of the new issues repre­
sented new capital in the strict sense. On the other hand,
about three quarters of the value of new corporate securities
issued from 1939 through 1944 were refunding issues.
The predominance of refunding issues during the war points
to an even more striking anomaly, declining interest rates in
wartime. Unprecedentedly heavy Government demands upon
the capital market were financed at record low interest rates
and yields on corporate obligations declined further. As a
result corporate issuers were able to achieve substantial savings
in fixed charges by refunding outstanding securities with new
issues bearing lower coupons, a tendency which spread into
preferred stocks on a growing scale in recent years. In many
instances, corporations supplemented the proceeds of the sales
of new securities with their own cash resources (which were
augmented by increased earnings and conservative dividend
payments) to pay off outstanding issues. Redemptions of
security issues in excess of new offerings, together with open
market purchases of outstanding obligations, resulted in a net
reduction of about 2 billion dollars, or 5 per cent, in corporate
long term debt between the end of 1939 and 1944.

New Corporate Security Issues*

The reason for this seeming anomaly is the direct financing
by the Federal Government of a large part of the war industrial
facilities built (or building) between July 1, 1940 and the end
of the war. Private enterprise, nevertheless, invested sub­
stantial amounts of its own funds in war (and war-supporting)
facilities. Offerings of new corporate securities for the pur­
pose of adding to plant and equipment, however, amounted
to only 2 billion dollars. The major part of the expansion,
together with enlarged working capital needs, was evidently
financed from other sources, including depreciation allowances,
Government-guaranteed war production loans, Government
progress payments and advances on war contracts, and the tem­
porary use of funds accumulated for tax payments.
An entirely different policy was pursued in financing indus­
trial expansion during World War I when the bulk of the
capital expenditures were made with private funds obtained in
large part from the capital market. Thus, in order to satisfy
the requirements of a far smaller program, domestic corpora­
tions floated an average of 1.6 billion dollars of new securities
each year from 1914 through 1918 (according to figures com­

* Net proceeds of the sale of new issues after underwriting and other
expenses, and purposes for which proceeds are used.
S ource: Securities and Exchange C om m ission; July
totals estimated by Federal Reserve Bank of N ew York.

and A ugust




At the same time, declining interest rates, together with the
Government’s financing of the major portion of the expansion
of industrial facilities and of working capital needs, precluded
the necessity for active supervision of new corporate security
flotations such as existed during W orld War I, when issuing
of new securities without the approval of the Capital Issues
Committee was practically prohibited. In this war, coopera­
tion between investment bankers and the Treasury has been
substituted for control. New corporate and other non-Federal
issues since 1943 have been timed by bankers so as to reach
the market in the months between War Loans, with virtually
no such offerings made while drives were in progress. The
concentration of corporate security marketings in the months
between drives is evident from the sharp peaks and troughs
shown in the accompanying chart for the period beginning
in 1944 when the sale of new issues reached high levels.
Department store sales in this District during August were
approximately 10 per cent above those of a year earlier. Con­
siderably larger increases were reported in the early part of
the month, but the gain for the month was affected by the
rather general closing of stores for two days after the Japanese
capitulation and by somewhat smaller increases in the latter
part of the month. The seasonally adjusted index declined
slightly from the July peak and was close to the average for
the first seven months.
During the period January through July sales have averaged
14 per cent above the corresponding 1944 period and more
than 65 per cent above 1939. Among the individual cities,
Binghamton has shown one of the largest gains for any city
of the District over last year and also the war period as a whole;
sales in that city have increased almost 150 per cent since 1939.
Although Albany ranks first in its gain over 1944, comparison
with 1939 shows sales only 30 per cent higher, the smallest
increase for any city. Syracuse and Newark both show in­
creases a little above average for the year, but for the war
period Syracuse experienced an increase of over 100 per cent
while Newark gained only 50 per cent. Sales in New York
and Rochester were about average, and the gain since 1939
was approximately 70 per cent for both cities. Niagara Falls,
Buffalo, and Bridgeport fell considerably below average in
their gains this year; during the war period Niagara Falls
experienced one of the largest gains, 150 per cent, while Buf­
falo and Bridgeport experienced increases of 90 and 50 per
cent, respectively. Sales in the latter city recovered this year
to the 1942 peak, while all other cities reached new highs for
the war period.
The dollar value of department store stocks at the close of
July was 16 per cent above a year earlier and 75 per cent
larger than 1939- Outstanding orders approximately equaled

the dollar value of stock on hand. They were 8 per cent above
those on July 31, 1944 and about 5 times the 1939 level.
D ep artm ent and A pparel S tore Sales and S tock s, Second Federal
R eserv e D istrict, P e rcen tag e Change from the P re ce d in g Y e a r

Net sales
Stocks on
July 31, 1945

July 1945

July 1945
+ 5
+ 6
+ 5
+ 16
+ 9
+ 11
+ 9
+ 10
+ 14

+ 16
+ 27
+ 21
+ 6

Niagara F a lls....................................
R o ch e ste r..........................................

+ 18
+ 19
+ 20
+ 23
+ 8
+ 4
+ 18
+ 17
+ 6
+ 6
+ 8
+ 19
+ 14
+ 8

Apparel stores (chiefly New York City)


+ 22

+ 16

Department stores, Second D istrict... .
New York C ity ......................................
Northern New Jersey...........................
Westchester and Fairfield Counties . .
Lower Hudson River V alley...............
Upper Hudson River V alley...............
Central New York S tate.....................
Mohawk River V alley.....................
Syracuse .............................................
Northern New York S ta te.................
Southern New York State...................
B in gh am ton......................................
Western New York State...................



+ 7
+ 2

+ 9
+ 9
-1 3

Indexes o f D epartm ent S tore Sales and S tock s
S econd F ederal R ese rv e D is trict
(1 9 3 5 -3 9 a v e r a g e = 1 0 0 p er ce n t)



M ay



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





Stocks, unadjusted . ........................................
Stocks, seasonally a d ju s te d ...........................





Indexes o f B u sin ess

Industrial production*, 1935-39 = 1 0 0 ....
(jBoard o f Governors, Federal Reserve






















144 p




128 p
















129 p





System )

Electric power output*, 1935-39 = 100. . . .
{Federal Reserve B a nk o f N e w York)

Ton-miles of railway freight*, 1935-39 =100
{Federal Reserve B a nk o f N ew York)

Sales of all retail stores*, 1935-39 = 100. . . .
(.D epartm ent o f Commerce)

Factory Employment
United States, 1939= 100.........................
{Bureau o f Labor Statistics)

New York State, 1935-39 = 100...............
{N ew York State D ep t, o f Labor)

Factory Payrolls
United States, 1939 = 100.........................
{B ureau o f Labor Statistics)

New York State, 1935-39 = 100...............

249 p

{N ew York State D ep t, o f Labor)

Income payments*, 1935-39 = 1 0 0 ...............
{Department o f Commerce)

Wage rates, 1926 = 1 0 0 ....................................
{Federal Reserve B a n k o f N ew York)

Cost of living, 1935-39 = 100.......................
{Bureau o f Labor Statistics )
Velocity of demand deposits*, 1935-39 =100
{Federal Reserve B a n k o f N ew York)

New York C ity .............................................
Outside New York C ity ..............................
* Adjusted for seasonal variation.



r Revised.


General Business and Financial Conditions
(Summarized by the Board of Governors of the Federal Reserve System)
activity declined further in July and the early part of August and was sharply curtailed
in the latter part of the month as munitions cutbacks were greatly accelerated. Retail trade was
maintained in July and early August at a high level for this season of the year.



In d u s t r ia l P r o d u c t io n

dex of Physical Volume of Industrial Production,
Adjusted for Seasonal Variation (1935-39
average = 100 per cent)

Industrial production in July, the last full month of high level production for war, was
212 per cent of the 1935-39 average, according to the Board’s seasonally adjusted index, as compared
with 220 in June. Following the surrender of Japan most munitions contracts were canceled, and
as a result it is expected that munitions output and industrial production will show much larger
declines in August.
Production of aircraft declined about 20 per cent in July and operations at shipyards and in
other munitions industries were reduced considerably from the June rate. Steel production in
July and the early part of August was about 5 per cent below the June level. In the week following
Japan’s surrender activity at steel mills decreased sharply to a rate of 70 per cent of capacity.
Production of nonferrous metals continued to decline in July, while output of lumber and stone, clay,
and glass products was maintained.
Production of most nondurable goods declined somewhat in July, but, as a group, output of
these products was slightly above a year ago. Cotton consumption was 14 per cent below the
preceding month and was 11 per cent below last July. Activity in the meatpacking, canning, and
baking industries, after allowance for seasonal changes, was down somewhat from June. Production
of alcoholic beverages rose sharply as distilleries were released from industrial alcohol production.
Activity in chemical, rubber, and other nondurable goods industries declined slightly.
Coal production declined about 5 per cent in July and the first part of August from the June
rate, while output of crude petroleum continued to increase and was in record volume.
Contracts awarded for private construction continued to rise sharply in July and were more
than three times the low level prevailing last summer, according to F. W . Dodge Corporation data.
Contracts for privately-owned nonresidential building showed the largest increase. On August 21,
all restrictions over the construction of industrial plants were removed.

dexes of Value of Department Store Sales and
Stocks, Adjusted for Seasonal Variation
(1935-39 average^ 1001 per cent)

is t r ib u t io n

Department store sales declined much less than is usual from June to July, and the Board’s
seasonally adjusted index rose from 201 to 218 per cent of the 1935-39 average. Sales in July
were 15 per cent larger than in the corresponding period last year. During the first two weeks of
August sales were about 20 per cent larger than a year ago.
Carloadings of most classes of railroad freight declined somewhat in July and the early part
of August and were below the volume shipped during the same period last year. Shipments of
l.c.l. merchandise, however, were at about the same rate as prevailed during the same period last year.
C o m m o d it y P r ic e s

Wholesale commodity prices generally showed little change from the early part of July to the
early part of August. Following the announcement of peace negotiations prices of cotton and grains
declined somewhat— especially contracts for delivery next year— while prices of most other basic
commodities continued unchanged.
Retail prices advanced somewhat further in June. Food prices rose 2 per cent and retail
prices of clothing, housefurnishings, and miscellaneous items continued to show slight advances.
A g r ic u l t u r e

Crop prospects improved during July and, according to indications on August 1, total output
this year will be only slightly smaller than the record volumes of 1942 and 1944. Of the major
crops only production of cotton, corn, and apples is expected to be less than a year ago. Marketings
this summer of most livestock products except hogs have been about as large as, or larger than,
the high levels of recent summers.
Ba n k

lexes of Wholesale Prices Compiled by Bureau
of Labor Statistics (1926 averages: 100
per cent; latest figures are for
week ended August 18)

mber Bank Reserves and Related Items (Latest
figures are for August 15)

C r e d it

Loans and investments at reporting banks in 101 leading cities declined by 1.2 billion dollars
between the close of the Seventh War Loan and mid-August. Reflecting repayments on advances
made during the drive, loans for purchasing or carrying Government securities declined by a
billion dollars. Loans both to brokers and dealers and to other bank customers decreased by
approximately 500 million dollars each, compared to drive and immediate pre-drive increases of
1.1 billion and 1.8 billion dollars, respectively. While bank holdings of Treasury bonds continued
their steady week-to-week increase, holdings of bills and certificates, which had increased during the
drive, began to decline again in late July and August. On balance, the total portfolio of Government
securities declined by 350 million dollars. Holdings of other securities showed a small increase over
the six-week period.
Following the close of the Seventh Drive, deposits of businesses and individuals began to
increase again as Treasury expenditures transferred funds from war loan to private accounts. The
average level of required reserves accordingly rose by about 500 million dollars between the
drive-end low point and mid-August. Reserve balances increased by about 300 million dollars
and excess reserves dropped by about 200 million to around 1.2 billion outstanding; this was still
somewhat above the generally prevailing interdrive level of slightly less than a billion dollars.
Member bank borrowing from the Federal Reserve Banks, which had declined to a minimum
by the close of the Seventh Drive, increased by 275 million dollars in the subsequent six-week
period ended August 15. Reserve funds were also supplied to member banks through an increase
of 125 million dollars in Government security holdings at the Reserve Banks, as well as by
temporary fluctuations in other Federal Reserve Bank credit and in Treasury deposits at the Reserve
Banks. Only partially offsetting increases in such funds were a currency outflow of 520 million
dollars and a small decline in gold stock. The currency outflow during July, 360 million dollars,
was the largest in the past few months; early August increases were also substantial.