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M ONTHLY REVIEW O f Credit and Business Conditions FEDERAL V o lu m e 30 RESERVE BANK SEPTEMBER OF NEW YORK 1948 No. 9 MONEY MARKET IN AUGUST Developments in the money market and in the security markets during August were influenced mainly by the steps taken during the month to implement further the antiinflationary policy which the Federal Reserve System, in cooperation with the Treasury, has been pursuing for some time past. This policy has been directed toward restraining the unnecessary expansion of bank credit and toward making short-term Government securities more attractive relative to alternative uses of bank funds — interest rates, risks, and liquidity considered. The initial step was taken on August 9 when the Treasury announced an increase in the rate on new issues of short term Government securities. In contrast to the lVs per cent rate borne by the one-year Treasury certificates issued July 1, 1948, the one-year certificates which will be issued in ex change for 2.8 billion dollars of certificates and 4.1 billion of notes maturing October 1, 1948 will bear interest at the rate of 114 per cent a year. A 3.7 billion dollar issue of Treasury notes maturing September 15 will be refunded with a lYs per cent note issue maturing April 1, 1950. The Treasury also announced that it would raise the rate on Treasury tax Savings notes. (A subsequent announcement gave the new rate as 1.40 per cent per annum if held for the full three years’ life of the note, as against 1.07 per cent on the old issues.) The Treasury’s action in raising the interest rate to be paid on short-term refunding securities caused an immediate decline in prices for short and intermediate Government obligations. This rise in the yields on short and mediumterm Government securities was followed by an advance in the discount rates of the Federal Reserve Banks, including the Federal Reserve Bank of New York, from 1Va to IV2 per cent. The increase in discount rates at this bank was an nounced on August 12, effective August 13. These changes in the rates at which member banks may borrow from the Federal Reserve Banks set off a series of increases in short term open market rates, as shown in the accompanying table. Acceptance dealers increased their rates for bankers’ accept ances by Vs of 1 per cent, effective August 13. Commercial bank rates on loans to brokers and dealers on Government securities were firmer, and the rates on other security loans (call money) and on prime commercial paper were also lifted. Several New York banks increased the prevailing rate on commercial and industrial loans to prime business borrowers to 2 per cent from 13/4 per cent, and several of the larger banks in other cities made similar adjustments. In addition to the monetary moves described above, ad ditional powers to control the expansion of credit were granted the Federal Reserve System by the Congress and the discussion of this legislation, which was signed by the Presi dent on August 16, 1948, affected market sentiment and market action. The new legislation is discussed on page 91 in this issue of the Review. G o v e r n m e n t Se c u r it y M a r k e t s The Treasury’s announcement of higher rates on new short term security issues was promptly reflected in the market for outstanding short and intermediate-term bonds. Yields on bonds of these maturities adjusted upward to conform with the new higher short-term rates. Prices of bonds maturing Short-term Interest Rates in the Postwar Period* (Per cent per annum) Item Federal Reserve discount rate..................... Three-month bills.......................................... One-year certificates..................................... Ninety-day bankers’ acceptancest.............. Four to six-month prime commercial paper. Bank loans to prime commercial borrowers. Bank loans to brokers and dealers on: Government securities Long........................................................ Other securities.......................................... Apr. 25, 1946 Oct. 1, 1947 1 0.376 K 1 0.827 1 % 1- 1H 1X A 7 M 1X l 1 A 7 1 IX 1 X -1 X Jan. 12, Aug. 13, 1948 1948 IH 0.976 lVs 13*6 ix -m l-l % IX lX IK 1.066 134 1% 1H 2 } lH -l X l'A-lH * Dates for which changes in rates on various types of paper are shown are those closest to changes in the Federal Reserve discount rates except for the October 1, 1947 data which are taken at the time of an increase in the rate on a new issue of Treasury certificates, t Dealers’ offering rates on unindorsed bills. MONTHLY REVIEW, SEPTEMBER 1948 90 or callable through 1952 declined by from 1/32 to 7/32 on August 10. The change in prices was mainly a mark-down of quotations, as there was relatively little selling by banks and other investors. Yields on outstanding Treasury certificates and notes also rose promptly following the announcement of the higher rate on forthcoming short-term Treasury issues. All maturi ties but the nearest-dated issues were adjusted upward in yield. A moderate demand developed for the maturing notes and certificates and prices rose temporarily as investors sought to obtain the higher interest rates offered on the issues into which they were to be exchanged. The current refunding is the first of recent refinancing opera tions in which the Treasury has not, in effect, given advance indications of an impending change in interest rates on new issues. In previous refundings (since mid-1947), rate increases were more gradual. Maturing certificates or notes were ex changed for new issues of slightly shorter maturity at the same rate, or of a longer maturity at a higher rate. The market therefore had had definite signals of forthcoming changes, and the adjustment of rates in the market was made over a longer period, as shown in the accompanying chart. Treasury bill rates also responded rapidly, in the market, to the latest change in the rate on new Treasury certifi cates and notes. Bill yields quickly stabilized at about one sixteenth of one per cent above former levels. However, investors, pending the next new bill issue, preferred to shorten the average maturity of their bill holdings so as to reduce the amounts of bills which they would have to hold and the time they would have to carry them at lower rates. Consequently, switching from long to short bills occurred on a sizable scale for a few days until the results of the Yields on Treasury Bills and Certificates of Indebtedness, April 1947-August 1048* PER C E N T * Bill yields are discounts on three-month maturities based on dealers’ bid prices as quoted in the open market. Certificate yields are based on composite market bid quotations. Data not available for com puting yields on 12-month certificates between A ugust 20 and September 3, 1947, inclusive. W ednesday dates; latest figures are for A ugu st 25, 1948. next new bill issue (dated August 19) were known. The average rate on new bills rose from 0.997 per cent for the August 12 issue to 1.066 per cent on August 19, and then increased more gradually to 1.072 and 1.075 per cent for the issues of August 26 and September 2, respectively. M e m b e r B a n k R eserve P o s it io n s Reserve positions of the member banks were under mild pressure during most of August. Treasury operations, an outflow of currency into circulation, and higher required reserves brought considerable needs for bank reserves. How ever, selling of bonds on an increased scale by nonbank in vestors, most of which were absorbed by the Federal Reserve System, provided the banks with the bulk of the needed reserves. Bank demands for Federal Reserve credit were consequently moderate, and in fact in the aggregate the banks were able to reduce their use of Reserve credit over the four weeks ended August 25. The amount of bank reserves absorbed by Treasury trans actions during the month was substantial. War Loan with drawals from depositary banks of close to one billion dollars, together with tax receipts from the general public, exceeded total disbursements by 80 million dollars in the four weeks ended August 25, and the Treasury’s balances with the Re serve Banks consequently rose by a like amount. Mean while the Treasury used approximately 400 million dollars of its balances with the Reserve Banks to effect weekly retirements of Treasury bills held by the Federal Reserve System, thus reducing the amount of its outstanding debt without returning funds to the market. The member banks’ needs for reserves, as a result of Treas ury operations and other transactions, were met to a large extent by sales, by nonbank investors, of substantial amounts of restricted Treasury bonds which were purchased by the Federal Reserve System, since a small part of the proceeds of such sales were reinvested in short-term Government securi ties purchased from the System. The larger part of the funds thus realized by nonbank investors is evidently finding em ployment in loans or investments returning higher yields than do the Government obligations sold. However, the flow of reserve funds to the banks as a result of these transactions at times failed to coincide with the ebb of reserves away from the banks, and the geographic distribution of the gains and losses of reserves was uneven. Thus, from time to time, the banking system in the aggregate was forced to meet reserve deficiencies by selling Treasury bills and other short-term securities and by drawing down excess reserves. At other times, the banks were able to retire Federal Reserve credit, principally through the purchase of bills, and to build up their excess reserves. The unevenness of the geographic distribution of reserve gains and losses was most evident in the case of the New York City banks. The New York central reserve city banks FEDERAL RESERVE BANK OF NEW YORK bore a substantial part of the losses from Treasury operations, and large transfers of business and financial funds from New York to other parts of the country brought additional strain on the reserve positions of the metropolitan institutions. Sales of bonds by nonbank investors indirectly to the Reserve System did not fully offset the banks’ losses. Most of the weekly fluctuations in the use of Federal Reserve credit by all banks, and in the volume of excess reserves, reflected to a large extent the operations of the New York City banks. M e m b e r B a n k C r e d it The seasonal upswing in commercial, industrial, and agri cultural loans gained momentum during August. Increases were substantial in the first two weeks of the month, and then tapered off in the third week. Since the June 2 low point of 14,207 million dollars, business loans of the weekly report ing member banks have risen 665 million dollars, or 4.7 per cent, as against a gain of 615 million dollars, or 5.2 per cent, in the corresponding period of 1947, and on August 18, 1948 they were the highest on record. More than half the in crease of the past few months occurred in the first two weeks of August. The New York City banks accounted for almost half (285 million dollars) of the increase in business bor rowing among all weekly reporting member banks since June 2 of this year. In the week ended August 25, however, business loans of the City banks declined slightly. In addition to seasonal influences, the current expansion of bank loans to business reflects the persistence of inflationary forces in the economy. Demands for credit may be traced in part to higher wages and prices following the third round of wage increases, as well as to continued mortgage borrowing and instalment purchase financing. While loans on Gov ernment and other securities fell and loans to banks fluctuated irregularly (with a sharp rise in the week ended August 18), real estate and all other loans (including consumer loans) of the banks continued to expand. The weekly reporting member banks continued to reduce their holdings of Treasury certificates during the past month, and on August 18 their certificate portfolios were about 700 million dollars below the June 9 peak for this year of 4,915 million dollars. Bond holdings also declined, while the banks bought small amounts (net) of notes and added considerably to their bills. Bill holdings, however, fluctuated widely from week to week, reflecting principally changes in the reserve positions of the reporting banks. NEW CREDIT CONTROL LEGISLATION Broader credit controls were among the recommendations for an anti-inflation program presented by the President to the recent special session of Congress, which convened July 26 and adjourned August 7. These, in addition to housing legis lation, were the only parts of the program on which any action was taken by Congress. 91 The "anti-inflation” act passed by the special session and approved by the President on August 16 (Public Law 905) gave the Board of Governors of the Federal Reserve System authority, until June 30, 1949, to increase the reserve require ments of all classes of member banks 4 percentage points above the previous maxima for demand deposits and 1V2 per centage points above the previous maximum for time deposits. If the requirements for all classes of banks and deposits were raised to the new legal limits, member banks would have to increase their reserves with the Reserve Banks by roughly 4 billion dollars. Currently the reserve requirements for all member banks are at the previous maxima, except those against demand deposits of central reserve city banks, which are 2 percentage points below the old limit of 26 per cent. The new law also restored the power of the Board of Gov ernors of the Federal Reserve System, until June 30, 1949, to regulate the extension of consumer instalment credit. Under its provisions the Board of Governors has announced that controls on consumer instalment loans and instalment sales credits will be reimposed beginning September 20, and has reissued Regulation W to govern such loans and credits extended after that date. In the revised form, Regulation W is somewhat more liberal in its provisions with respect to down payments and terms of repayment than the regulation that was in force at the time the Boards powers to regulate consumer credit were repealed by a Congressional resolution (November 1, 1947). The new regulation covers the same groups of com modities as did the original regulation at the time of its repeal, but increases the upper limit for the price of goods that are subject to regulation from $2,000 to $5,000. The "listed articles”—those subject to the new regulation—in clude automobiles, household appliances (refrigerators, cook ing stoves, etc.), radios, television sets, phonographs, sewing machines, vacuum cleaners, furniture, and rugs. Instalment sales of or loans for the purchase of all listed articles with a cash price of $50 to $5,000 are subject to regulation. Like the old Regulation W (after its December 1, 1946 revi sion), the new regulation does not cover charge accounts. Loans for home repairs, the purchase of jewelry and silver ware, medical and educational expenses, and certain other consumer purposes, also are not included under the new regulation. The Board of Governors has stated, however, that it is studying conditions in the field of loans for the repair and modernization of homes, and that if such loans, or any other category of consumer instalment loans, should show signs of unhealthy expansion, the new regulation may be amended to include them. Under the new regulation, down payments are to be at least 33 Ys per cent for automobiles and 20 per cent for all other listed articles. The balance is to be paid within 15 months if the principal amount is $1,000 or less and within MONTHLY 92 R E V I E W , S E P T E M B E R 1948 18 months if it is larger. Except under certain conditions, monthly payments must be in substantially equal amounts or so arranged that no instalment is substantially greater than any preceding instalment, and must be at least $70 if the credit granted is over $1,000. At the time the original regulation was terminated in the fall of 1947, the minimum down pay ment was 33 Yz per cent for all listed articles with the excep tion of furniture and floor coverings, on which it was 20 per cent. Under the old regulation, the balance of all credits had to be repaid within 15 months. The new regulation should make little difference, in prac tice, where the standards set for instalment sales by the American Bankers Association and the various consumer credit organizations are rigidly adhered to by all who are engaged in financing consumers. Since the termination of controls last fall, however, it is reported that many dealers have relaxed their terms on instalment sales considerably, particularly on home appliances, television sets, and furniture. Down payments have been reduced to 10 or 20 per cent and contracts generally extended to around 18 months (in the case of refrigerators, to 36 months). In some instances where competition has been strong and a buyers’ market has appeared, terms are said to have been made even more liberal, with down payments sometimes eliminated. The terms required by the new regulation may, therefore, reduce sales of those goods on which terms have been the most liberal. In the case of automobiles, repayment periods dur ing the absence of regulation were generally lengthened to 18 or 24 months, depending upon the age of the car, but down payments in most cases have remained at 3 3 ^ per cent. The demand for automobiles is still so great that the new regulation is expected to have less effect on sales volume than in the case of some other listed articles. The operations of instalment lenders such as commercial banks are also not expected to be greatly affected by the new regulation, since most of these have reputedly pursued a conservative policy during the period of no regulation of consumer instalment credit. EARNINGS AND EXPENSES OF THE SECOND DISTRICT MEMBER BANKS Net profits of the central reserve New York City banks during the first six months of 1948 declined 13 million dollars, or 19 per cent, from the corresponding 1947 level. In the remainder of the Second Federal Reserve District the con solidated returns of representative groups of member banks, shown in the accompanying table, indicate that between the first half of 1947 and the first six months of 1948 net profits declined between 11 and 27 per cent in the three largest size groups and rose IIV 2 per cent in the smallest size banks. The decline in the largest size groups (including New York City) was caused mainly by charges to earnings for the accumula tion of reserves for bad debts on loans, as authorized by the Treasury ruling of December 8, 1947, while the better show ing of the smallest size banks resulted mainly from a larger increase in gross income and a relatively smaller volume of bad debt reserve charges. To the extent that the provision for bad debt reserves is utilized, it will tend to smooth out the cyclical fluctuations in banking profits arising from losses on loans, by enabling banks to accumulate tax-free reserves (in excess of actual current Percentage Changes in Earnings and Expenses of Selected Second District Member Banks First Six Months of 1948 Compared with the First Six Months of 1947 New Y ork City banks Item Central reserve Over $20,000,000 35 Number of banks. Interest on United States Government obligations..................................................... Interest and dividends on other securities..................................................................... Interest and discount on loans......................................................................................... Service charge? on deposit accounts................................................................................ Trust department incom e.................................................................................................. Other current in com e.......................................................................................................... Sample banks located outside New York City Deposit size - 10.1 + 1.8 • + 24.4 + 46.6 + 7 .9 0 .9 $5,000,000 to $20,000,000 $2,000,000 to $5,000,000 Under $2,000,000 35 25 8 .0 + 19.1 + 22.9 + 22.6 + 8 .8 + 7 .4 9 .4 + 1.2 + 18.0 + 21.5 + 14.4 + 7 .9 6 .3 2 .8 + 23.9 + 25.3 + 63.6* 0 .3 6 .1 + 6 .2 + 38.6 + 17.4 0 + 7 .6 25 15 Total current operating earnings............................................................................. + 5.1 + 8 .2 + 5 .2 + 8 .5 + 14.1 Salaries and wages— officers and em ployees.................................................................. Interest on time and savings deposits............................................................................ All other current expenses................................................................................................. + + + 2 .9 2 .7 2.4 + 11.2 + 1.1 + 9 .4 + + 10.3 0 10.2 + + + 13.0 2 .4 10.9 + + + 10.5 6 .1 17.1 Total current operating expenses............................................................................ Net current operating earnings, before income taxes......................................... + + 2 .4 9 .2 + + 8 .6 7 .2 + + 7 .6 0 .4 + + 9 .6 6 .3 + + 11.8 18.5 87.4 54.3 9 7.0 2 6.8 Profits on securities sold ..................................................................................................... Recoveries.............................................................................................................................. Losses and charge-offs......................................................................................................... Taxes on net incom e............................................................................................................ - 41.1 + 1 0 8 .6 + 2 2 0 .0 5 .9 - 16.9 + 20.8 + 2 0 1 .5 - 23.6 + + - Net profits.............................................................................................................................. Dividends paid............................................................................................................. Retained earnings........................................................................................................ - 19.4 + 1.0 - 4 8.0 - 26.2 + 9 .3 - 4 5.5 - 2 7.0 + 8 .4 - 37.0 * Change is not representative because of small number of banks having trust departments. - 40.6 + 1 1 3 .5 + 191.1 - 21.7 4 .8 - 19.6 + 8 2.0 9 .0 + - + 11.5 + 28.0 + 8 .6 11.0 4 .4 16.2 93 F E D E R A L R E SE R V E B A N K OF N E W Y O R K loan losses) in prosperous years for use in lean years when actual losses may be large. Such a policy is undoubtedly con servative, and it has been recognized as such in the past by many banks which have regularly set up reserves for possible loan losses out of net profits after taxes. During the first six months of 1948, additions to reserves for bad debts on loans were greatest in the larger banks of the District. Such addi tions amounted to 7.4 per cent of total current operating income in both the central reserve New York City banks and the largest banks outside the City. The proportion of total current operating income set aside in the remaining groups declined steadily with the size of the bank sampled, equaling 6.0 per cent in the 5-20 million dollar group, 4.8 per cent in the 2-5 million dollar group, and only 1.3 per cent in the smallest size group of banks, with deposits under 2 million dollars. Total current operating income showed gains compared with a year ago ranging from 5.1 per cent in the case of the central reserve New York City banks to 14.1 per cent for the smallest size banks (with deposits under 2 million dol lars), and for every group of banks it attained a new semi annual postwar peak. In all cases the gain in loan income, which generally accrued from both greater volumes and higher rates, was more than sufficient to offset the decline in interest received on U. S. Government securities—a decline resulting from the reduction in holdings of such securities. Service charges collected on deposit accounts continued their upward trend and rose substantially in all groups of banks, but the gain was especially large at the central reserve New York City banks. Total current operating income in most of the groups of banks also was enlarged by gains in trust department income and larger income from non-Government securities. Total current operating expenses for all groups of banks increased over last year’s level, but the rise in New York City (2.4 per cent) was considerably less than in the other Second District groups. The smaller rise in the City banks stemmed largely from smaller increases in payroll totals, occasioned by a virtual cessation in the upward trend of City bank employment, as contrasted with continued sizable gains in employment in the banks outside New York City. The City banks also appear to have kept a closer check upon "all other” current operating expenses than did the other banks. Their close control of operating expenses enabled the City banks to show a 9-2 per cent rise in net current operat ing income before income taxes, a gain surpassed only by the smallest size banks. Additions to net current operating income, before income taxes, arising from profits on securities sold were lower than a year ago in all groups of banks and reflected the generally lower level of Government security prices in 1948. Cur rently, security profits in the various groups of banks shown in the table are from 7 to 39 per cent of the peak semi annual volumes attained in the first half of either 1945 or 1946. For the central reserve New York City banks, security profits realized in the first half of 1948 were iV l million dollars, or one-fifth the peak volume established in the first six months of 1945. Recoveries of previously charged-off assets were greater than a year ago in all but the smallest size banks. In many instances the expansion in total recoveries arose from the recovery on the March 15 tax date of part of the tax re serves set up in 1947 and later found to be too large because of deductions for bad debt reserves on loans. The setting up of bad debt reserves was also the primary factor in the substantial rise in each group in losses and charge-offs on assets. As of June 30 four fifths of the City banks and half of the sample banks located in the Second District outside New York City had set up such reserves. Reserves set aside for taxes on net income were generally lower than in the first half of 1947, in line with the cur rently reduced taxable income in the larger banks and the lower actual income tax payments, based on 1947 incomes, of the smallest banks, whose books are usually on a "cash basis”. Despite the generally lower level of net profits, divi dend payments again were higher in all groups of banks, continuing the steady upward trend of payments which has been in effect since 1943. The volume of net profits retained as capital to provide increased depositor protection thus was reduced rather substantially from last year’s levels in all groups of banks but the smallest, where it increased 8.6 per cent. Net Profits of Various Deposit Size Groups of Second District Member Banks by Semiannual Periods* M IL L IO N S OF D O L L A R S 3 0 0 .0 A L L CENT R A L RESERVE NEW YORK CIT Y B A N K S 2 0 0 .0 1 0 0 .0 5 0 .0 2 0.0 10 -0 5 .0 2.0 1 *0 0 .5 0.2 0.1 .0 5 1945 1946 1947 * Plotted on ratio scale to show proportionate changes. 1948 94 M O N T H L Y R E V I E W , S E P T E M B E R 1943 The trend of semiannual net profits from the first half of 1945 through the first half of 1948 for the central reserve New York City banks and for the sample member banks in the Second District outside New York City is shown in the accompanying chart, which is drawn to show percentage changes and thus facilitate comparison between the various groups of banks. It will be noted that net profits in the City banks reached a high in the six months immediately following the end of the war, while in the three largest size groups out side the City the highs were established six months later and in the case of the smallest size banks, a year later. Except in the smallest banks, where the growth of operating income was the dominant factor, the highs in the various groups coincided with the peak volumes of profits on securities sold and recoveries of previously charged-off securities. Con sequently, other than in the 5-20 million dollar group, in which a reduction in operating earnings extended the de cline, the drop from the peaks occurred in the following six months or year as the sustaining influence of security profits evaporated. Subsequently, the steadily rising volume of net current operating earnings has exercised a stabilizing in fluence on the level of net profits, offsetting to some extent the declining volume of recoveries and profits on securities sold and the initial charge-offs to bad debt reserves on loans in the last two half-year periods. MONETARY REFORM IN GERMANY The monetary reform measures recently enacted in Western Germany have been widely commented upon, but relatively little attention has been given to their technical details or to the many features that distinguish them from similar measures elsewhere in Europe. This article therefore examines the monetary reform laws which were issued uniformly by the United States, British, and French military governments, com pares them with the monetary reform measures adopted in the Soviet zone of Germany, and appraises the implications of the Western zone currency reform for the German economy. The pressing need for a drastic reduction of the excessive money supply inherited from Nazi war finance had long been recognized by all four of the occupation powers, but it was the United States military government that took the lead in seeking quadripartite action toward such a reduction. More than two years ago technical experts from the United States, after an on-the-spot study of the major monetary and financial problems, prepared a comprehensive reform program for sub mission to the Allied Control Council.1 Protracted negotiations for a quadripartite agreement on monetary reform followed in Berlin, and were not terminated until the Soviet withdrawal from the Allied Control Council machinery early this year. Meanwhile, monetary conditions in Germany went from bad to worse. It was no secret in Ger many that a currency reform program was being prepared under which the bulk of the money supply would be wiped out. Monetary reform became an issue widely discussed in the press. The effect of this continual debate was about what might have been expected: it soon undermined whatever confidence in the mark had survived the demise of the Nazi Reich. Ger man individuals and firms refused to add to their redundant cash holdings; the desire to acquire money no longer served as a stimulus to effort; goods were hoarded or bartered rather than sold for cash; and the mark was used as a medium of exchange only for the small supply of goods available against ration cards, or in the black market, where its worth had dwindled to an insignificant fraction of its former value. M on etary R eform in t h e W estern Z ones Confronted with numerous signs of a progressive disintegra tion of Germany’s monetary system and unable to reach an agreement with the Soviet military administration on joint reform measures, the military governments of the three West ern occupation powers finally decided to take independent but uniform action in their zones. Late in June 1948 a number of laws and regulations were promulgated that provided for an extremely drastic contraction of the money supply, the lift ing of some of the more repressive price and rationing con trols, and the reduction of several taxes that were under mining economic incentives. Monetary reform in Western Germany must be viewed as much more than a technical meas ure for the conversion of the currency and the scaling down of the cash balances held in the economy; its cardinal purposes were rather to reestablish the price mechanism as a decisive determinant of German economic behavior and to restore the incentive to produce. In broader terms, the program must be looked upon as another step in the series of measures that have recently been taken toward normalizing the economic life of Western Germany, in order that the area may play its assigned role in the European Recovery Program. The reform was carried out in two stages. During its initial phase which began June 20, all old notes (reichsmarks, rentenmarks, etc.) of more than one mark circulating in Western Germany2 became invalid and had to be turned in, while notes and coins of one mark or less remained in use at one tenth of their face value. However, each inhabitant of the Western zones was permitted to make a preliminary exchange on a one-to-one basis of 60 marks of the old bank notes for the new currency, called "deutsche marks”; forty of these new marks were made immediately available and the remainder two months later. No provision was made until June 26 for old bank note hold 2 Because of the technical difficulties involved, the Western-spon sored monetary reform did not at first apply to the Western-occupied sectors of Berlin. The currency reform measures that were finally adopted by the Western Allies in Berlin differed in a number of minor 1 Some of these problems, together with the requisite remedial points from those in the Western zones and were more similar to the measures, were surveyed in the September 1946 issue of this R e v ie w . reform sponsored by the Soviet military administration. 95 FED ER AL RESERVE B A N K OF N E W Y O R K ings in excess of sixty marks or for deposits held in bank accounts. On that day, the second stage of the reform began, a law being promulgated in each of the three Western occupa tion zones under which old credit balances as well as the bank notes which had been turned in during the initial phase of the program were to be converted into deutsche marks at the rate of ten old marks for one deutsche mark.3 Before the ten-to-one ratio could be applied to old credit balances and to the bank notes which had been turned in but not converted during the initial phase of the program, the new law required that the sixty marks originally exchanged on even terms be in effect adjusted to a ten-to-one basis. Thus, a person who had already drawn forty deutsche marks and who was entitled to obtain another twenty was considered (in cases where his total funds subject to conversion exceeded 60 marks) to have used up as much as 600 marks of his old cash holdings at the time the monetary reform program began. In other words, the first 540 marks of the old deposits (and bank notes in excess of 60 marks) belonging to people who had already obtained their initial quota of the new currency were thus entirely wiped out. Another clause in the new law restricted the utilization of bank deposits by permitting conversion by individuals of amounts in excess of 5,000 marks only after the Tax Office had cleared the excess as having been acquired legitimately. Moreover, one half of the new marks had to be deposited in blocked accounts which were to be unfrozen only when economic conditions permitted. In general, all unpaid debts, including mortgages, municipal bonds, and other certificates of indebtedness were written down by the monetary reform legislation at the rate of ten-to-one, but salaries, wages, pensions, and similar recurrent payments had to be continued on a one-to-one basis. The bank deposits of all German governmental agencies and of the occupying powers were completely wiped out under the new legislation, but were partially replaced by cash allotments to permit continued operations. Similarly, the reserves or cash balances of all credit institutions were canceled and the securities and other obligations of the Nazi Reich were not included in the conversion. In order to pro vide German credit institutions with new reserves, the central banks of the eleven Western German states were directed to credit to the accounts of such institutions an amount equal to 15 per cent of the latter s demand liabilities and IV2 per cent of their savings and time deposits. In addition, since the bulk of their assets had consisted of securities issued by the Nazi government, credit institutions were given "equalization claims” against the public authorities, but only sufficient to bring their total assets up to their liabilities. The allot 3 However, the law provided that at some future date, the military government could— after consultation with the competent German legislative bodies— authorize an additional grant of up to 1 deutsche mark for every 10 old marks. ment of such equalization claims could be made dependent upon the fulfilment of certain conditions imposed by the banking supervisory authorities. W ith a view to strengthening the incentives to work and produce, a tax reform law was issued on June 22, providing for a reduction of income taxes by one third. The property tax was cut by more than one half, and the corporate profit tax was fixed at a straight 50 per cent, replacing the former sliding scale of 35 to 65 per cent. The authors of the reform legislation were, of course, aware that a straight cut in the nominal value of money and monetary claims left much to be desired from the viewpoint of equity. Except for holders of very small cash amounts, the law made no distinction whatever between large and small holders. Moreover, debtors and owners of physical goods or property were likely to profit greatly from the tento-one conversion ratio. The German authorities were there fore instructed to adopt legislation for the equalization of the burdens on various classes of inhabitants arising both from the currency inflation and from the monetary reform. M on etary R eform in the So v ie t Z o n e The currency reform executed in the Soviet zone by virtue of an order of the Soviet military administration resembled in some respects that enacted in the Western zones, but there were also very significant differences. The principal distinc tion is less in technical details than in ultimate objectives. Monetary reform in the East was not combined, as in the West, with an attempt to restore free market forces. Any relaxation of controls over production, rationing, and prices would have been at variance with the basic principles of the socialized economy of the Soviet zone. In Eastern Ger many, monetary reform served to facilitate the operation of controls, in contrast to the situation in the Western zones, where it ipaved the way for their dismantlement. A distinctive feature of the reform In the Eastern zone was the fact that small savers were permitted to retain a much larger proportion of their cash reserves. The general conversion ratio was also ten-to-one, but the old currency that was turned in on a one-to-one basis for the initial quota (which in the Russian zone was 70, not 60 marks) was not, as in the Western zones, later counted as a part of the amount converted at the ten-to-one ratio. Moreover, savings deposits in the Soviet zone were converted on the preferential basis of one-to-one on the first 100 marks, five-to-one on the next 900, and ten-to-one on balances in excess of 1,000 marks. The Soviet-sponsored reform provided in addition for con version at the one-to-one ratio of all accounts of public agencies and of Soviet-owned and nationalized enterprises. The over-all reduction of the money supply was thus less severe in Eastern than in Western Germany. The exchange of currency in the Soviet zone was carried out in two stages. In June, old currency was exchanged for 96 M O N T H L Y R E V I E W , S E P T E M B E R 1948 specially-marked reichsmark notes. In July, these stamped notes were converted into new ones, called by the same name (deutsche marks) as in the Western zones, which were put into circulation by a newly established bank of issue in Berlin. Currency holdings in excess of 70 marks had to be deposited in bank accounts, from which withdrawals were to be permitted after August 15. Cu r r e n c y M easures in B e r l in The Soviet military administration attempted to introduce Soviet-zone currency unilaterally as the sole currency in the Western sectors of Berlin as well. This move was rejected by the Western powers because it would have implied ac ceptance of the Soviet claim that Berlin was to be regarded not only economically but also politically as a part of the Soviet zone. Contrary to their original intention, the Western powers then put their own deutsche mark into circulation in the sectors of the city under their administration, but this Western measure did not deprive the Soviet-sponsored cur rency of its legal tender quality in those sectors and in fact expressly permitted its partial use for payroll purposes. Measures against the free movement of funds across the city followed, producing a currency chaos that can be eliminated only by an agreement between the Eastern and the Western military regimes or between the governments they represent. T h e P r o spec ts of Success More than two months have now passed since the reform program was inaugurated in Germany, and the first results in the Western zones have become apparent. On the whole, the first phase appears to have been a success. Technically, the withdrawal of outstanding currency, the issuance of the new currency, and the supplying of adequate funds to com mercial enterprises and government agencies, have proceeded relatively smoothly. One of the principal purposes of the re form was to force manufacturers, merchants, and others to dis gorge their large hoards of consumer goods, and this purpose has been accomplished. The effect of the reform on the supply of labor and on labor productivity has so far been bene ficial. Now that there is less urgent need for people to take time off from their work in order to travel through the countryside in search of farm products, absenteeism has fallen very substantially. At the same time, the reform has laid bare much of the poverty concealed by the monetary overhang. The sharp cut in cash reserves has caused a great deal of hardship to certain sections of the public. The old and the sick and other groups, such as students, who had been living on their (or their families’) savings, have fallen on hard times. Many manufac turers who formerly had ample supplies of cash now com plain about the dearth of medium and long-term credit. Following the rapid dismantling of controls, most prices have shown a rising trend and some have risen to levels be yond the reach of many consumers. This has led to protest demonstrations in several German cities. Many traders, after the rapid sale of their hoarded stocks, are now in a highly liquid position and are again withholding goods from the market. The changeover from a system of partly repressed and partly open inflation to a market economy has been so sudden that it will take some time for prices and production to adjust themselves to the new cost level. But in view of the deterio ration of plant and equipment, and the decline in business efficiency and labor productivity, the new price and cost levels are likely to remain substantially above those enforced prior to the reform. The hoarded goods that are now being liquidated are small compared with the large backlog of de mand. Unless production of consumer goods in Western Germany increases much more rapidly than some observers anticipate, severe shortages in all sectors of the economy may reappear, and confidence in the new currency may then falter. Much will depend on whether the new Western German banking system under the leadership and control of the newly established central bank (Bank Deutscher Laender), follows a wise credit policy that will not generate inflationary pressures, while yet satisfying the essential credit needs of industry. Much will depend also on the early arrival in Germany of the raw material deliveries scheduled under the European Recovery Program. THE OUTLOOK FOR AGRICULTURE The outlook for production of most major farm crops this year has been very bright, and the wheat, corn, and cotton crops are expected to attain record or near-record levels. The Department of Agriculture states that "The aggregate volume of all crops, as estimated on August 1, promises to surpass any year of record by a considerable margin.” This is a sharp contrast to the situation a year ago, when a short corn crop caused prices of farm products to advance to new peaks. Not only has the agricultural supply picture improved, but the demand in some lines has also lessened. The bumper grain crops will be an important factor in creating conditions for an ultimate increase in livestock production and a sub sequent decline in prices for livestock and dairy products. The 1948 wheat crop, now estimated at 1,284 million bushels for all types, is 6 per cent below 1947, but is greater than any other crop on record. This marks the fifth successive year in which wheat production has exceeded one billion bushels, whereas in the decade before the war the annual harvest averaged less than 750 million bushels. The corn crop is estimated at 3.5 billion bushels, compared with 2.4 billion in 1947 and an average of 2.8 billion in the pre ceding ten-year period, 1937-46. Early this spring it was thought that there would be just about enough wheat available during the 1948-49 season to meet domestic and export needs. These estimates soon proved F E D E R A L R ESER VE B A N K OF N E W Chart I U. S. W heat, Corn, and Cotton Crops (1937-46 average, 1947, and 1948*) AVER. EST. AVER. EST. AVER. EST. * For 1948, A ugust 1 estimate. S o u rce: U. S. Bureau of Agricultural Econom ics. over conservative, however, since growing weather was par ticularly favorable for both wheat and corn. Also, less wheat was used to feed livestock and poultry than had been antici pated earlier, and the extraordinary corn crop in 1948 means that still less wheat will be used for this purpose in the coming season. The Bureau of Agricultural Economics estimates domestic wheat consumption in 1948-49 at 750 million bushels, of which 510 million will be used for food, 150 million for feed, and 90 million for seed and alcohol. This leaves 534 million bushels from this year’s wheat crop available for export and for adding to domestic stocks (which totaled 195 million bushels on July 1, 1948, at the start of the current crop year). In the 1947-48 crop year, following widespread crop failures in Europe, this country exported the equivalent of 485 million bushels of wheat. Harvest prospects abroad are much improved this year, although European crops on the whole are still below prewar levels. Continued large shipments from this country will be necessary if Europe is to have more adequate rations and if European stocks are to be restored to reasonable work ing levels. Estimates of total exports of wheat in the current season have ranged from 300 to 450 million bushels, with the final goal probably closer to the latter figure. In any case, it is likely that wheat stocks in this country at the end of the crop year will be somewhat larger than the average year-end stocks during the thirties. Such an abundance of supply relative to demand has, as might be expected, resulted in substantially lower prices, as shown in the accompanying table. Prices of most leading crops have declined sharply from their 1948 peaks, although livestock prices are still close to their recent record levels. Wheat and corn have each declined approximately $1 per 97 YORK bushel from their January peaks, or about one third; the rela tive decline in oats, barley, and rye has been even steeper. Grain prices might have dropped even further were it not for the Government price support program. In the case of wheat, the price is supported through nonrecourse loans or through purchase agreements with the farmers at an average level of $2.00 per bushel on the farm, which is the equivalent of $2.23 for No. 2 hard winter wheat at Kansas City. Never theless, during most of July and all of August this grade sold in Kansas City below the price at which loans could be obtained, reaching a low of $2.06 per bushel on August 2. This apparent paradox is explained by the fact that, to be eligible as security for a loan, a farmers wheat must be stored under specified conditions. In many areas, farmers who have found storage facilities already crammed by the huge harvest have been forced to market their wheat immediately, thus forcing prices down. Once it has been sold by the farmer, the wheat is no longer eligible for price support through non recourse loans or purchase agreements. Prices of most other grains are currently at or near the sup port level based on the parity legislation. Corn prices cur rently have been maintained well above support levels because of the short supply remaining from last year’s small crop. Prices for future delivery, however, indicate that the new crop will sell at a lower level.1 Cotton prices, depressed by the largest crop in eleven years and by a decline in domestic and export demand, have dropped to a level approximately equal to the support price. Prices for livestock, poultry, and their products, on the other hand, have remained at peak levels. They are unlikely to decline appreciably in the immediate future, despite substan tially lower feed prices. The high cost and short supply of feed in recent years, combined with high livestock prices, have compelled many farmers to reduce the size of their 1 The futures prices shown in the table do not always cover exactly the same quality or grade of a commodity as the spot prices, and they are often influenced by factors which do not enter into trading for spot commodities. They do constitute, however, a valuable indication of the opinion of professional commodity traders as to the course of prices during the coming year. Prices of Selected Agricultural Commodities Commodity Spot prices (immediate delivery) Futures prices (delivery in July 1949) August 24, 1948 Per cent change August 24, 1948 $ 2.168 2.181 1.800 .754 1.848 1.400 .307 1.780 29.375 35.000 -2 9 -3 0 -3 6 -4 8 -4 2 -4 9 -2 0 -1 2 - 6 - 4 $1,915 2.115* 1.438 .708 1948 peak Winter wheat (b u .).......................... Spring wheat (b u .)........................... R ye (b u .)............................................ W ool tops (lb .).................................. $ 3.065 3.105 2.808 1.458 3.175 2.755 .386 2.015 31.200 36.375 * M ay 1949 delivery. Source: U. S. Bureau of Labor Statistics and Journal of Commerce. _ — .291 1.785 _ — M O N T H L Y R E V I E W , S E P T E M B E R 1948 98 herds. As a result the livestock population is the lowest in many years and meat production in 1948 is expected to be 10 per cent below last year’s. Not only is the current supply of meat well below the levels demanded by current high incomes, but it will take a long time to rebuild the livestock population to a point where demand may be satisfied at reasonable prices. It takes over two years to breed and fatten beef cattle and at least ten months to produce hogs of market able quality. Moreover, to the extent that livestock is withheld from market for breeding purposes or for further fattening, the current supply will be still further reduced. The farmer will have a choice between selling his stock this year at high prices and having increased herds for sale in a year or two when prices may possibly be lower. In New York State, where dairy and poultry farms account for over three fifths of the value of the State’s marketings, production of most farm products (as partly indicated in Chart II) has also risen this year. Although high feed costs have been instrumental in cutting the number of milk cows on farms to the lowest level in ten years, the amount of milk produced per cow has been close to last year’s record level and total milk output during the first half of the year was somewhat above average. The number of laying hens on New York State farms has been increasing relative to last year, ever since it became apparent that feed would be plentiful and less expensive in the coming year. Egg production in the first seven months of this year has been well above the same period last year in New York State, although in the country as a whole it declined somewhat, mainly because of reduced flocks. If consumer incomes remain high, it seems likely that the demand for milk and eggs will maintain a favorable rela tionship between prices of these products and the farmers’ feed costs, whereas last year many farmers in this area found Chart II Output of Selected Farm Products in the United States and in New York State (Percentage change, 1937-46 average to 1947 and to 1948*) 1947 that their expenses for feed and other items were rising much faster than the prices they received. Output of potatoes in New York State has increased over last year, and disposing of the surplus has involved continued Government assistance in supporting prices. The crop of apples, as well as peaches, pears, and grapes, is below normal this year. As a dairy State, New York needs plenty of fodder, and this year its hay crop is the largest of any State. Nevertheless, the total hay production is somewhat below last year, although this is partially compen sated for by the increase in New York State grain harvests. The wheat crop, which declined somewhat in the country as a whole, was nearly one-third larger in New York State than last year. For the consumer, the bumper crops which the nation is producing in 1948 may not have too great an immediate effect. For some manufactured foodstuffs and textiles, increased processing and distribution costs may largely offset the lower price of the raw materials. As explained earlier, the enlarged supplies of feed grains will not become available to the public in the form of more and fatter livestock until late in 1949. Moreover, declines in food prices may be offset by increases in the cost of fuels and metal products, and in rents. DEPARTM ENT STORE TRADE Adversely affected by the unusually hot weather which pre vailed towards the end of the month, sales at Second District department stores during August made but little of the usual seasonal increase in dollar volume. Although sales in the first three weeks of August are estimated to have increased at least 9 per cent over last years, for the month as a whole they probably increased only about half as much as in other recent months. The seasonally adjusted retail value of stocks has shown a persistent decline from a peak level at the end of March. By the end of July, adjusted stocks were valued at 228 per cent of their 1935-39 average. This relatively low level Department and Apparel Store Sales and Stocks, Second Federal Reserve District, Percentage Change from the Preceding Year “( 9 4 8 (EST.) Net sales Locality July 1948 Department stores, Second D istrict.. . . + 6 + 6 +12 New York C ity ...................................... Northern New Jersey........................... + 4 + 2 - 4 + 1 +18 +17 +12 +13 + 16 +18 +10 + 9 +16 +14 + 5 +21 +21 +22 +25 +14 +18 +12 +10 + + + + + 5 6 5 4 2 0 + 9 +11 + 8 + 6 + 9 + 6 +10 + 9 + 5 +18 +12 +13 + 14 +10 +10 + 7 + 11 + 11 +12 + 9 - 1 +10 + 9 +24 +26 +18 +20 + 9 +18 +25 +20 +14 0 + 2 Westchester C ounty............................. Fairfield C o u n ty .................................... Bridgeport........................................... Lower Hudson River V alley............... Poughkeepsie...................................... Upper Hudson River V alley............... Schenectady........................................ Central New York S tate..................... Mohawk River V alley..................... Northern New York State.................. Southern New Y ork State................... Bingham ton........................................ P E R C E N T A G E CH AM G E * For 1948, A ugust 1 estimate for crop s; milk and egg output estimated on basis of first seven months. S ource: U . S. Bureau of Agricultural Econom ics and N. Y . State Dept, of Agriculture and Markets. Stocks on Jan.through hand July 1948 July 31, 1948 Western New Y ork State.................... Niagara Falls...................................... Rochester............................................. Apparel stores (chiefly New Y ork C ity ). - 2 + 17 +15 + 33 +10 + 7 + 7 +15 FEDERAL RESERVE BANK OF NEW YORK of stocks (as compared with a sales index of 266 per cent) was nevertheless 12 per cent higher than the level of a year ago, in dollar terms, largely because stocks were cut to an exceptionally low amount during the summer of 1947, and because prices have continued to rise. The dollar volume of outstanding orders reported for the end of July by a group of the larger stores in this District was for the fifth consecutive month somewhat lower than at the corresponding time in 1947. Compared with the end of June 1948, outstanding orders showed the usual very sharp seasonal increase preceding the fall selling season. Although new orders of these same stores during July totaled 8 per cent more than last year’s, outstandings were held below the figures of a year ago by heavy receipts of merchandise. Indexes of Department Store Sales and Stocks Second Federal Reserve District (1 9 35 -3 9 average = 100 per cent) 1947 1948 Item July M ay June July Sales (average daily), unadjusted................. Sales (average daily), seasonally ad ju sted .. 171 251 252 268 246 265 181 266 Stocks, unadjusted........................................... Stocks, seasonally adjusted............................ 192r 204 247 243 228 237 216 228 r Re vised. 99 Indexes of Business Index Industrial production*, 1935-39 = 100......... (Board of Governors, Federal Reserve System) Electric power output*, 1935-39 = 1 0 0 ... . (Federal Reserve Bank of 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 of Commerce) Factory employment United Statesf, 1939 = 100................... (Bureau of Labor Statistics) New Y ork State, 1935-39 = 100................ (N. Y. S. Div. of Place, and Unemp. Ins.) Factory payrolls United Statesf, 1939 = 100........................ (Bureau of Labor Statistics) New Y ork State, 1935-39 = 100................ (N . Y. S. Div. of Place, and Unemp. Ins.) Personal income*#, 1935-39 = 100............... (Department of Commerce) Composite index of wages and salaries*:}:, 1939 = 100................................................... (Federal Reserve Bank of New York) Consumers’ prices, 1935-39 = 100................. (Bureau of Labor Statistics) Velocity of demand deposits*, 1935-39 = 100 (Federal Reserve Bank of New York) New York C ity .............................................. Outside New York C it y .............................. 1947 1948 July M ay June July 176 192r 192 187p 218 247 246 247p 188 210 206p 301 328r 331 331p 153 156r 158 158p 121 123 123 122 p 322 347 359p 265 277 283 282 303 309p 176 187 188p 158 171 172 174 83 82 105 90 98 88 97 91 284p * Adjusted for seasonal variation. p Preliminary. r Revised, t Revised beginning January 1946. # Revised beginning January 1944. j A monthly release showing the 15 component indexes of hourly and weekly earnings computed b y this bank will be sent upon request. Tabulations of the monthly indexes, 1938 to date, may also be procured from the Research Department, Domestic Research Division. MONTHLY REVIEW, SEPTEMBER 1948 100 N ational Summary of Business Conditions (Summarized by the Board of Governors of the Federal Reserve System, August 28, 1948) NDUSTRIAL output declined somewhat in July and regained part of the loss in August. Unusually favorable weather in July resulted in a further marked gain in crop prospects. Prices of basic commodities generally decreased somewhat further from mid-July to the latter part of August, reaching the lowest levels since the end of August 1947. The general wholesale price level showed little change and was 10 per cent higher than a year ago. I I n d u s t r i a l Pr o d u c t i o n 1941 1942 1943 1944 1945 1946 1947 1948 Federal Reserve index. Monthly figures; latest figure shown is for July. DEPARTMENT STORE SALES AND STOCKS The Board’s seasonally adjusted index of industrial production declined 5 points in July to a level of 187 per cent of the 1935-39 average. This decline reflected in large part the effects of employee vacations, especially in certain nondurable industries. Preliminary information for the first part of August indicates a somewhat higher rate of total production than in July. Output of durable goods showed a slight decrease in July. Production of iron and steel declined 3 per cent, but recovered during August to about the June rate. Activity in the automobile industry showed a substantial further gain in July as assembly of passenger cars and trucks reached a new postwar peak rate. Lumber production increased more than seasonally in July. Output of most other durable goods declined somewhat. Production of nondurable goods declined about 4 per cent in July, mainly because of reduced activity in the textile and paper industries. Cotton consumption declined 18 per cent from June to July as compared with a decrease of 11 per cent during the same period last year. Pork production was reduced more than seasonally in July while beef production was maintained. Activity in most other nondurable goods industries showed little change. Minerals production declined 3 per cent in July mainly because of reduced output of bituminous coal. Total coal production for the month, however, was about one-fifth above the rate in July 1947. Crude petroleum production continued at an exceptionally high rate in July and rose further in the early part of August. Co n s t r u c t io n Value of new construction put in place, according to joint estimates of the Departments of Commerce and Labor, rose further in July to a new record of over 1,700 million dollars, an increase of 100 million from June. The number of new houses started in July was estimated at 94,000, 2,000 units fewer than in June, but 13,000 more than the number started in July 1947. D Federal Reserve indexes. Monthly figures; latest figure for sales is July, latest for stocks is June. WHOLESALE PRICES is t r ib u t io n Department store sales in July and August showed chiefly seasonal changes. Value of sales in the first half of August was substantially larger than in the corresponding period last year when sales were temporarily limited by unfavorable weather. Also, sales in recent weeks appear to have been stimulated by prospective restrictions in terms resulting from the reimposition of instalment credit regulations on September 20. Shipments of railroad revenue freight were maintained in July at about the June rate. Load ings of coal were reduced further, while shipments of grain and forest products continued to show marked gains. Loadings of coal and most other classes of freight were in somewhat larger volume in the first half of August. C o m m o d i t y P r ic e s Prices of most basic commodities decreased further from the middle of July to the latter part of August. Cotton and grains reached Federal price support levels. Nonferrous metal prices, how ever, were raised sharply. Wholesale prices of meats were generally maintained at the advanced levels reached in mid-July and some additional increases occurred in prices of other manufactured products. The consumers’ price index rose further by 1.2 per cent from mid-June to mid-July, reflecting chiefly higher retail prices for foods and automobiles, and increased transportation fares. A g r ic u l t u r e Bureau of Labor Statistics’ indexes. W eekly figures; latest shown are for week ended August 21. During July and August weather conditions continued to be unusually favorable for crop development. The August 1 official forecast of cotton was 15.2 million bales, more than a fourth larger than last year’s crop. The outlook for grains showed further marked improvement and total production of these and other principal crops was indicated to be 12 per cent larger than last year. Marketings of livestock and products in August continued below the same period a year ago, reflecting mainly the reduced number of meat animals on farms. LOANS AT MEMBER BANKS IN LEADING CITIES Ba n k C r e d it Support purchases of Treasury bonds and certificates by the Federal Reserve System were large in July and the first three weeks of August. These additions to the portfolios of the Reserve Banks were in excess of reductions in holdings of bills as a result of Treasury cash retirement and market sales, and total System holdings of Government securities increased somewhat. A further increase in gold stock also added to bank reserves. Commercial and industrial loans increased substantially at banks in leading cities during July and the first three weeks of August. Real estate and consumer loans rose further. Government security holdings expanded somewhat over the period; bill and note holdings were increased and certificate and bond holdings reduced. In t e r e s t R a t e s Excludes loans to banks. Wednesday figures; latest shown are for August 18. and Se c u r i t y M arkets In August the Treasury announced a rate of IV a per cent on the October issue of one-year certificates and yields on outstanding short and medium-term Government securities rose. The Federal Reserve Banks increased discount rates from 1]4 to 1Vi per cent. Some increases also occurred in other short-term money market rates and in rates on commercial bank loans. Prices of corporate bonds declined further in the first three weeks of August. Common stock prices fluctuated near the reduced level reached in the third week of July.
@FedFRASER