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Of Credit and Business Conditions

V o lu m e









No. 9

The dominant factors in the money market during the past
month were the lowering of legal reserve requirements of
member banks and the Government security operations of
these banks in connection with the investment of the funds
so released. The reduction in requirements, announced on
August 5 by the Board of Governors of the Federal Reserve
System, and made partially retroactive to August 1 for the
country banks, amounted to 2 per cent on net demand and
1 per cent on time deposits for all classes of banks. The
decreases were effected in instalments, between August 1 and
September 1, as indicated in the text of the Boards statement
reproduced on page 99 of this 'Review.
The reduction of reserve requirements was a further step in
the System’s policy of assuring a readily available supply of
funds in the market, at Iowr rates, to meet the needs of business
and agriculture. It was the third reduction since the end of
April 1949 and, by freeing 1.6 billion dollars of reserves
during August (1.8 billion through September 1 ), it brought
substantial ease, in the aggregate, to member bank reserve
positions. In the New York money market, however, the
purchases of Government securities, mainly new Treasury bills
and certificates of indebtedness which the banks and Govern­
ment security dealers made in anticipation of the receipt of
funds from banks in other parts of the country, as the successive
reductions in requirements became effective, brought about
relatively tight conditions from time to time, and yields on
short-term securities tended to rise gradually during August,
instead of declining further. The rate on immediately avail­
able Federal funds fluctuated sharply between a nominal
figure and 1-7/16 per cent, just short of the Federal Reserve
Banks’ discount rate.
The larger city banks outside New York appeared to be prin­
cipal beneficiaries of the Board’s action, even though there was
a proportionately greater release of reserves at banks outside the
reserve and central reserve cities. Not only were their require­
ments lowered, but as correspondents of country banks they
received as deposits a substantial portion of the country banks’
funds which had been freed by the lowering of the latter s
reserve percentages. They were therefore able to buy substan­
tial amounts of Treasury securities, to reduce their indebted­
ness to the Reserve Banks, and even to lend reserves (Federal

funds) from time to time to the New York City banks. The
latter, despite the periods of alternate ease and strain on their
reserve positions, also increased their Government security
holdings considerably, on balance. However, the New York
City banks found it necessary intermittently to borrow sub­
stantial sums from the Reserve Bank and from out-of-town
commercial banks in order to retain their securities.
In the aggregate, therefore, the decline in required reserves
enabled the banks to retire substantial amounts of Federal
Reserve credit and to increase their holdings of liquid earn­
ing assets during August, chiefly by purchasing Government
securities indirectly from the Reserve System. Net purchases
of Government issues by the larger banks, as indicated by the
weekly reporting member bank condition statements, exceeded
the decrease in the Systems holdings. A large part of the
banks’ demand for Treasury obligations was supplied by the
market, chiefly in the form of sales of short-term securities
by nonbank investors who switched into Savings notes, and
by the Treasury, which increased the amount of its bill issues
outstanding by 600 million dollars during the month.
G o v e r n m e n t Se c u r it y M a r k e t

The August 5 announcement by the Board of Governors
provided a strong, though temporary, stimulus to the slow,
gradual advance in intermediate and long-term Treasury bond
prices which had occurred in the •early days of the month.
Although short-lived, the rise in prices by August 11 carried
the longest-term eligible bonds nearly % of a point above the
August 1 quotations, with ineligible bonds making some­
what smaller gains. The volume of trading was very light,

Money Market in A ugust......................................
Reduction in Reserve R equirem ents.................
Federal Reserve F lo a t..........................................
Earnings and Expenses of
Second District Mem ber B anks.......................
The New Intra-European Payments P la n ........
Agriculture in 1949.................................................
Department Store T ra d e ......................................

10 2




however, and the price changes did not reflect a firm demand
for bonds. Prices consequently drifted lower until August 22
when the Treasury made known its intentions with respect to
refunding the September 15 and December 15 maturities of
its bond issues. The Treasury announced that it would refund
the 1.3 billion dollars of September 15 bonds with a one-year,
1 Vs per cent certificate ( Vs per cent below the coupon on the
certificate last offered), but that it would offer a note in
connection with the refunding of the 4.4 billion dollars of 2 ,
2Vi, and 3Vs per cent bonds called for redemption on Decem­
ber 15, 1949- The Treasury also announced that 6.5 billion
dollars of certificates of indebtedness maturing October 1
would be refunded with another certificate but did not specify
the rate. The subsequent rise in intermediate and long-term
bond prices was small, and the new financing announcement
mainly tended to stabilize the Government bond market.
The Treasury’s refinancing plans had greater significance
for the market for shortest-term bonds. Bank demand for
those issues increased noticeably after the Boards action lower­
ing reserve requirements was announced, on the expectation
that a security maturing in more than one year would be
offered in the refunding of at least the December maturities of
bonds— an expectation borne out by events.
Demand for Treasury bills and certificates was also stimu­
lated by the months developments in the field of credit and
debt management policies, while the market supply of such
issues was increased by the Treasury's action in raising the
face amount of the weekly new bill issues by 10 0 or 200 mil­
lion dollars (600 million dollars for the month as a whole)
and by reductions in Reserve Bank holdings. The principal
demand was for certificates of indebtedness of the longer ma­
turities which would retain their current yields the longest.
Government security dealers, as well as the banks, subscribed
heavily for new Treasury bill issues, but found it difficult to
sell them to ultimate investors. As a result, the average inter­
est rate on successive new issues of bills rose gradually during
the month.
M e m b e r B a n k R eserve P o s it io n s

Although the lowering of reserve requirements had the
effect of substantially easing the reserve positions of the mem­
ber banks in the aggregate, the impact of the decrease on banks
in different parts of the country was uneven, reflecting chiefly
differences in commercial bank policy with respect to the use
of the funds so released. The larger city banks outside New
York apparently benefited most from the reduction, since they
gained free reserves not only through the decrease in their
own requirements but also through transfers from the country
banks. The latter deposited part of their "freed” funds with
their correspondent banks outside New York City, and left
most of the remaining funds, including funds gained through
other transactions, in their accounts with the Federal Reserve
Banks. Balances of out-of-town banks deposited with New
York City banks showed only a small increase. Thus, in the
three weeks ended August 17, the weekly reporting member

banks in 93 cities outside New York showed an increase of
367 million dollars in net deposits due to other banks, while
the excess reserves of all country member banks rose substan­
tially in the same period.
The larger out-of-town banks were consequently able to
acquire large amounts of Government securities (principally
short-term). In the three weeks ended August 17 Govern­
ment security portfolios of the weekly reporting member banks
outside New York City increased 888 million dollars, of which
Treasury bills and certificates amounted to 715 million dollars.
They also substantially reduced their borrowings from the
Federal Reserve and other banks, and even made considerable
amounts of Federal .funds available to the New York City
banks from time to time.
The New York City banks also benefited from the decline
in legal reserve requirements. The easing of their reserve
positions, however, was obscured by the development of
temporary periods of money stringency which resulted chiefly
from overinvestment in certificates and new Treasury bill
issues in anticipation of inflows of funds from banks in other
parts of the country, and from heavy temporary borrowings
from the New York banks by dealers to cover payments by the
latter for Treasury bills allotted to them. Thus, the rate for
immediately available Federal funds fluctuated widely— from
Vs to 1-7/16 per cent— usually rising on days when new
Treasury bill issues had to be paid for, but declining subse­
quently when anticipated inflows of funds materialized.
The initial effect of the Board’s announcement was to ease
the tightness in the New York money market prevailing in
the early days of the month, and in the week ended August 10,
the City banks were able to retire a large amount of Federal
Reserve credit. However, the New York banks and particu­
larly the Government security dealers subscribed heavily for
the new Treasury bill issues of August 1 1 , 18, and 25. Their
allotments were substantially in excess of their holdings of the
maturing issues, and large amounts of maturing bills held by
the Federal Reserve Banks were redeemed for cash, despite the
fact that the Treasury increased the face amount of each of the
new issues by 10 0 or 200 million dollars. Payments for the new
bills ( and loans to dealers to carry such bills) involved the City
banks in substantial temporary losses of reserve funds, since the
expected inflows of funds from other parts of the country did
not coincide, in time or amount, with the payments for bills
bought on original subscription.
Thus, the New York City banks incurred a deficit in their
reserves on the first days of each of the three weeks ended
August 31, and during the remainder o f each week they
eliminated the deficit by building up excess reserves, largely
with funds received from other parts of the country. They
also supplemented these funds from time to time with reserves
obtained through the sale o f Government securities in the open
market, some of which were absorbed by the Federal Reserve
System, and through temporary borrowing from the Reserve
Bank and out-of-town commercial banks.


Despite the temporary stringencies evident in the New York
money market, the New York City banks were able, on bal­
ance, to expand their Government security holdings, since
their gains through the inflow of funds from other parts of the
country, the reduction in their own legal reserve ratios, and
other factors, were larger than the losses from heavy subscrip­
tions to new Treasury bills and other transactions. Thus, the
Government security portfolio of the New York City weekly
reporting member banks rose 333 million dollars in the four
weeks ended August 24.
T r e a s u r y Fi n a n c i n g

Declining revenues and the maintenance of disbursements at
a high or slowly increasing level have caused sizable Treasury
deficits in recent months. Although expanded sales of Savings
notes and smaller net sales of Savings bonds have provided
substantial amounts of funds, the excess of expenditures has
been or promises to be too large to be financed solely through
nonmarketable issues. By the end of July, the Treasury’s gen­
eral fund balance had fallen to 3.3 billion dollars (from 5.1
billion a year previous). In the past month the Treasury
resumed new financing in the open market for the first time
since the Victory Loan drive toward the close of 1945, raising
600 million dollars through increasing the weekly offerings
of new bill issues.
The resumption of new open market financing this past
month also marks the first increase in the Treasury’s market­
able debt since early 1946. As illustrated in the accompanying
chart, up to last month the Treasury had been able to make
steady reductions in its marketable debt since early 19 46 —
first, during 1946, through retirement of securities out of the
surplus proceeds of the Victory Loan drive, and since then
out of surplus revenues and net sales of nonmarketable secur­
Total marketable debt was reduced from a peak of almost
200 billion dollars at the end of February 1946 to a low point
of 155 billion at the end of July 1949. The reduction in the


Treasury’s floating debt (marketable issues due or callable
within one year) was, however, smaller than the net retire­
ment of the total marketable debt, since the Treasury followed
the practice of refunding most maturing or called bond issues
with certificates of indebtedness maturing in one year. Thus,
the floating debt declined 18 billion dollars between Febru­
ary 1946 and July 1949, while the total marketable debt was
reduced by 45 billion.
The resumption of open market financing through bill issues
in August brought an increase in the Treasury’s short-term
indebtedness. If it were coupled with a continuation of the
policy of refunding bonds with certificates of indebtedness,
this new financing through bills would result in a very rapid
expansion of the floating debt and increasing congestion of
maturities during the next three years. The Treasury’s decision,
announced four months in advance, to offer a note ( which will
have a maturity of more than one year) in connection with
the refunding of the 4.4 billion dollars of bonds called for
redemption December 15, 1949 constitutes a departure from
previous policy. It is a step in the direction of a better sched­
uling of maturities, keeping the floating debt within readily
manageable proportions, facilitating the task of refunding
weekly and quarterly maturities of bills and certificates, and
adding to the stability of the market.

In a statement released for publication August 5, 1949, the
Board of Governors of the Federal Reserve System announced
a reduction of reserve requirements of member banks effective
as to member banks not in reserve and central reserve cities
in instalments from August 1 , 1949, and effective as to mem­
ber banks in reserve and central reserve cities in instalments
commencing at the opening of business on August 1 1 , 1949.
The full text o f the Board’s statement follows:
The Board of Governors has reduced by 2 per cent of net demand
deposits and 1 per cent of time deposits the amount of reserves
required to be maintained by member banks of the Federal Reserve
System. The reduction, which will amount to approximately $1.8
billion, will become effective as follows:
On net demand deposits
Central reserve city ban\s
From 24
From 231/2
From 23
From 2 2 !/ 2

to 23V2 per cent
to 23
per cent
to 2 21/2 per cent
to 2 2
per cent

Reserve city banks

19 Vi


19 V2, Per
I 8 V2 per


August 11, 1949
August 18, 1949
August 25, 1949
September 1, 1949

N cn'reserve city ban\s
From 14 to 13 per cent
From 13 to 12 per cent

August 1, 1949
August 16, 1949

From 6 to 5 per cent
From 6 to 5 per cent

August 11, 1949
August 16, 1949

On time deposits
Central reserve and
reserve city banks
Non'reserve city banks

Source: 1945-July 1949, U . S. Treasury; August 1949 estimated by the
Federal Reserve Bank of N ew York,

The effect of these decreases will be to lower the reserve require­
ments of banks in central reserve cities by approximately $500
million, of banks in reserve cities by approximately $675 million,
and of banks in non-reserve cities by approximately $625 million.
In announcing this action, Mr. McCabe, Chairman of the Board
of Governors of the Federal Reserve System, stated that it was
taken after full discussion by the Board and the Federal Open Mar­
ket Committee of the coordination of policies with respect to
reserve requirements, open market operations, and other system
credit instruments, with primary regard to the general credit and
business situation and the maintenance of orderly conditions in the
Government security market.


M O N T H L Y R E V I E W , S E P T E M B E R 1949


Obviously, some points within a given collection territory
have particularly bad transportation connections so that,
One of the factors which influence the level of member bank
the overwhelming majority of items drawn on points in
reserves at any given time is "Federal Reserve float.” While
can normally be collected within the time stipulated,
the gain or loss of reserves through Federal Reserve float is
can not. As the deferred availability schedules are
not ordinarily great over an extended period of time, the im­
normal experience for the bulk of the volume
pact of short-run fluctuations in float (particularly in recent
area, the largest part of the Federal Reserve
years) on member bank reserves is far from negligible. The
the fact that in each State some proportion
amount of Federal Reserve float has been fluctuating since
collected within the time specified in the
1943 within a range considerably higher than that of earlier
^ears, but has shown some decline since the middle of 1948.
While the bulk of the float arises from lags in the clearing
While fluctuations in float may cause weekly changes in total
deferred availability items, a not inconsiderable proportion
Federal Reserve credit outstanding of more than 100 million
to the delayed collection of immediate-credit items.
dollars, it is difficult to make accurate projections of the direc­
Reserve Districts, immediate credit is given for
tion and magnitude of such changes. These movements of
because normally such checks are collectible
Federal Reserve float, which are closely watched by money
but in some cases payment is actually not
market analysts, have been the subject of careful studies by
following day (because of early clearing
the Research Department of this bank.
hours, train delays, overburdening of the Federal Reserve Bank
Federal Reserve float does not appear as such in the state­
staffs, or for other reasons).
ments of condition of the Federal Reserve Banks. It is a com­
It is readily apparent that the level of float is primarily
puted item used mainly in analyzing changes in member bank
determined by the relationship of the time intervals set forth
reserves. Federal Reserve float is equal to the difference be­
in the Federal Reserve collection schedules to the actual speed
tween the "uncollected items” on the assets side of a Federal
of collection of the checks that are cleared. In order to keep
Reserve Bank statement and the "deferred availability items”
this relationship reasonably stable, the individual Reserve
on the liabilities side. In the weekly analysis of Federal Reserve
Banks revise their time schedules from time to time so as to
credit which the Board of Governors of the Federal Reserve
take account of increases in the rapidity of transportation,
System releases, float is the chief component of "other Federal
improvements in the efficiency of handling items in transit,
Reserve credit/’
and other factors which tend to make collections more rapid.
The existence of Federal Reserve float arises from the fact
From 1916 to 1928, the deferred availability schedule of the
that the Federal Reserve Banks, which clear and collect a very
New York Reserve Bank involved delays up to eight calendar
considerable proportion of all checks written in this country,
days (in the case of items drawn on country banks in some
give credit to the banks which make use of its facilities, not
Far Western States). The improvement of the transportation
for individual items as they are actually collected, but rather
and check handling arrangements has permitted so considerable
automatically for whole groups of items according to a time
a shortening of collection schedules that California country
schedule which is based on the broad geographical areas where
items, for example, are now credited by the New York Reserve
the items are collectible. Each Federal Reserve Bank and
Bank three business days after their receipt.
branch has its own schedule indicating when deferred avail­
By crediting member bank accounts before the actual col­
ability items (as a rule checks collectible out o f town) will
lection process is completed, the Federal Reserve System actu­
be credited to the reserve balance of the bank that deposits
ally adds to member bank reserves. The amount of such credit
them for collection. Each schedule indicates how many calen­
was relatively small (averaging less than 10 million dollars)
dar (or, in a few cases, business) days must elapse before the
in the years immediately preceding 19 3 9 , when the deferred
proceeds of items drawn on banks located in each Federal
availability schedules were revised sharply throughout the
Reserve Bank or branch city will automatically become avail­
Federal Reserve System, but has been much greater in recent
able to the depositing bank. Similarly, items drawn on banks in
years ( averaging over 400 million dollars).
other localities are classified by States (or parts of States) ac­
Most short-run fluctuations in the amount of float result
cording to the number of business days after which credit is from factors beyond the control of the Federal Reserve author­
automatically given to the depositing bank, irrespective of
ities. In general, whenever there is an increase in the volume
whether the individual items have been actually collected or not.1
of checks written— either for seasonal reasons or because gen­
1 At present, the Federal Reserve Bank of New York gives credit eral business is expanding— more deferred credit is given by
one calendar day after receipt cn out-of-town items payable in certain the Reserve Banks as the volume of checks in the process of
Federal Reserve Bank cities or branch cities (including Buffalo), two collection rises, and float consequently increases. Conversely,
calendar days after receipt on items payable in all other Federal Reserve
Bank cities or branch cities, two business days after receipt on items when the volume of check payments contracts, float declines.

payable in certain Eastern States (other than in Federal Reserve Bank
or branch cities), and three business days after receipt on all other
out-of-town items. (For items payable at certain New York City or
Northern New Jersey banks, immediate credit is given.)

On the other hand, in some cases checks can be collected earlier
than specified in the schedules, thus giving rise to a "negative float”;
the amounts involved, however, are very small.


Thus changes in the size of float may reflect fluctuations in
levels of production, income, and trade.
Another important influence in determining the volume of
float is significant changes in the interregional movement of
goods and services. For instance, if the deferred availability
time schedules are relatively more favorable to the banks (i.e.,
relatively short) for checks that must be collected from a long
distance, any increase in the relative volume of long-distance
payments will be an upward influence upon the level of float.
Also any delays in collection due to temporary transportation
difficulties are compounded as the average distances involved
become greater.
The rapidity and regularity of the transportation system are
important as both a short-term and a long-term influence on
the amount of float. Over a period of years, as transportation
becomes more efficient and rapid, the disparity between the
time taken for the collection of checks and the credit periods
stipulated in the schedules becomes less and float tends to
decrease. However, any considerable increase in the speed of
transportation for the bulk of items collected is followed by a
shortening of the time schedules. For instance, after collections
by air shipment were started in June of 1946, a number of the
Reserve Banks shortened their schedules considerably to com­
pensate for the increased speed of collection thus made pos­
sible. In the short run, delays caused by adverse weather con­
ditions, an exceptional overloading of postal, transportation,
and other facilities (as customarily occurs in the few weeks
before Christmas), and various other factors, tend to enlarge
float. Atmospheric conditions have become especially impor­
tant, now that most long-distance collections are made by air
freight or express, and a sharp increase in float occurs after
any severe storm covering a large area of the country.
Bill-paying patterns of individuals and businesses, resulting
from custom or law, also find some reflection in the movements
of float. The link between payment patterns and float can be
most clearly seen in day-to-day changes in the volume of collec­
tion items and of float. The number of checks received daily
for collection by the Federal Reserve Banks varies substantially
in the course of a month or a week. In large part this is because
many businesses and individuals tend to write more checks
on or near certain days of each month or week, and because
many payments (business or personal) become due only
monthly or quarterly (rents or income taxes, for instance).
As a result, regular intraweekly or intramonthly movements
in float may be observed. Levels of float tend to be higher
towards the end of each week, and there are distinct peaks
near the beginning and middle of most months.
Changes in the level of float may also result from Saturday
bank closings, holidays, and the like. However, these influ­
ences are of little importance except on a day-to-day basis. In
general, any delay by the banking institutions in processing
checks will increase float. Such delays might result from an
attempt to avoid overtime payments to clerical staffs during
rush periods, inadequate facilities for handling checks in
transit, etc.



Federal Reserve Float, August 1939-July 1949*

* Monthly averages of working day figures. Plotted on ratio scale to show
proportionate changes.
# Twelve months’ moving average, centered.
t M aximum three day deferred availability adopted September 1, 1939.

The influence of almost all these factors— changes in busi­
ness activity or location, rapidity of transportation, bill-paying
patterns, and revisions in the time schedules— may be observed
by examining the movements of float since late in 19 3 9 , when
time schedules of Federal Reserve Banks were substantially
shortened. A considerable jump in the average amounts of
float immediately followed. As shown by the moving average
in the accompanying chart, the float, with seasonal movements
eliminated, rose steadily and rapidly between early 1940 and
the fall of 1943, then leveled off, and from 1944 until late in
1948 fluctuated between approximately 390 million dollars
and 460 million dollars. With seasonal changes included, the
fluctuations were much greater, ranging between 280 and 650
million dollars.
Part of the more than eightfold increase in float during the
defense and early war period (1940-1943) may be attributed
directly to the greatly increased business activity, and to the
rise in prices which accompanied it. The value of all checks
( exclusive of Treasury checks) handled by the Federal Reserve
System approximately doubled, likewise reflecting the increase
in national income and product. However, a major part of
the 1940-1943 expansion in float must be explained in terms
of other factors. The relocation of industry and population
before 1944 had the effect of increasing the proportion of
out-of-town collections, and this resulted in a strong upward
influence on the level of float. Southern and western regions
of the country received a more than proportionate share of the
new industrial plants built at that time, and population shifts
to those areas took place. The construction by large corpora­
tions of war plants far from home offices appears to have



involved a considerable number of checks collectible only from
a long distance. The collection problem was further accentu­
ated by the migration of military and civilian personnel
throughout the country during that period.
Transportation delays during the early war period, combined
with the strain on collection facilities caused by the increased
physical volume of checks handled (especially when the large
amounts of Treasury checks are considered), also tended to
slow collections and, consequently, to increase float.
Since early in 1944, there has been no further expansion of
float despite a continued rise (in monetary terms) of national
product and income. While the number and value of checks
handled by the Federal Reserve Banks have become larger,
reflecting the further rise in national income, other factors
which tend to contract the level of float seem to have offset
the upward pressure from this source.
Transportation conditions improved towards the close of
the war and continued to do so afterward, and the rapid
decrease in the physical volume of Treasury checks after the
war relieved the Reserve Banks of a considerable amount of
strain upon their facilities. Although the time schedules were
shortened (very considerably in some cases), the speeding up
of collections by air shipment may have, on balance, been a
downward influence on float. Finally, the use of check routing
symbols, which the Federal Reserve System inaugurated in June
1945 with the cooperation of the American Bankers Associa­
tion, has facilitated the speedy handling of checks. Between
late 1943 and the recent shortening of time schedules by sev­
eral Reserve Banks and branches, the increased efficiency of
check collection has almost offset the upward influence on float
of the increasing amounts of checks entering the Federal
Reserve Banks, so that, aside from short-run fluctuations, the
amount of Federal Reserve credit extended in the form of float
has remained relatively steady.

An analysis of the reports o f selected member banks in the
Second District indicates that aggregate net profits of the larger
banks, those with deposits o f more than 5 million dollars,
registered rather substantial gains in the first half of 1949 over
the first six months of 1948, while the smaller banks of the
District, in the aggregate, recorded only nominal gains or
suffered actual declines. As shown in the accompanying table,
the central reserve New York City banks and the largest size
group of banks in the Second District outside New York City,
both increased their net profits 17 per cent over last year’s
level, owing primarily to a much smaller volume of charges this
year for the accumulation of reserves for bad debt losses on
loans. The group o f out-of-town banks with deposits of 5 to
20 million dollars recorded the largest half-year gain in net
profits over 1948 in the District, a rise of 34 per cent, owing
to a comparatively large increase in net current earnings, a
heavier volume o f profits than last year on securities sold or
redeemed, and a sharp decline in the volume of actual net
losses and charge-offs. In the smaller banks o f the District,
a substantial increase in actual net losses and charge-offs on
loans, together with a rise in expenses that was somewhat
greater than in the case of the larger banks, accounted for the
less favorable results compared with 1948.
Each of the groups of banks shown in the table transferred
a smaller volume of funds to the reserve account for bad debt
losses on loans in the first half of 1949 than a year ago. In the
group of banks with deposits of 5 to 20 million dollars, accumu­
lations in other valuation reserves on loans and on securities
(which are not deductible according to a formula for income
tax purposes) were sufficient to increase total transfers to
reserves by about one fifth. In many banks, and especially in

P ercentage Changes in E arnings and Expenses of Selected Second D istrict M em ber B anks
F irst Six M on th s o f 1 949 Compared w ith the F irst Six M on th s o f 1 9 4 8

New York City

Sample banks located outside New Y ork City
Deposit size

Central reserve





Number of banks





Interest on United States Government obligations.....................
Interest and dividends on other securities.....................................
Interest and discount on loans.........................................................
Service charges on deposit accounts................................................

-1 0 .7
- 2.1
+ 15.2
+ 9 .1
+ 3 .1

- 2 .3
+ 2 .5
+ 8 .8
+ 2 4 .3
+ 5 .0

2 .9
9 .8
+ 15.0
— 8 .0

6 .0
3 .3
+ 18.6
— 10.7

Total current operating earnings.........................................

+ 2 .5

+ 4 .9


5 .2


4 .4


5 .6

Salaries and wages— officers and em ployees..................................
Interest on time and savings deposits.............................................
All other current expenses.................................................................

+ 2 .3
+ 0 .1
+ 3 .5

+ 5 .4
+ 2 .6
+ 2 .4






6 .7
2 .2


7 .6
0 .4
2 .4


6 .6
6 .7
6 .1

T otal current operating expenses.........................................
Net current operating earnings, before income taxes........

+ 2 .7
+ 2 .2

+ 3 .7
+ 7 .8


3 .2
9 .5


3 .9


6 .4
4 .1

Profits on securities sold .....................................................................
Net losses and charge-offs (actual)..................................................

-4 4 .9
- 1.3
-8 8 .1
+ 1 6 .6

-4 1 .4
+ 2 .2
-4 6 .4
+ 1 6 .7

+ 1 6 .9
+ 1.0
+ 6 0 .6

+ 1 7 .2
- 2 .7
+ 3 8 .9

Taxes on net incom e............................................................................
Net profits..............................................................................................
Retained earnings....................................................................

+ 1 5 5 .4
+ 19.9

+ 1 0 4 .2
— 1.3

+ 33.6
0 .9
+ 50.3




+ 2 6 4 .9
+ 19.2





3 .8
0 .1

Includes net additions to reserves for bad debt losses on loans, other valuation reserves on loans, and valuation reserves on securities.

__ 6 .6
3 .2
+ 14.6
+ 10.6
+ 0 .7


3 .1


the large New York City banks, the drop in additions to the
volume of bad debt reserves compared with the first half of
1948 reflects the fact that this year the reserve accumulations
do not include, as they did in 1948, a large volume applicable
to the previous year. Also, many banks are probably deferring
this years reserve accumulations until the year end, when their
profit position and loan losses relative to outstanding loans will
be fully known for 1949Gains in total current earnings in the first half of 1949
occurred in all groups of Second District banks and ranged
from 2.5 per cent in the New York City banks to 5.6 per cent
in the smallest banks outside the City. As during most of the
postwar period, the rise in interest and discount on loans and
in service charges on deposit accounts was greater than the
decline in interest received on holdings of United States Gov­
ernment securities. Also, except in New York City, a greater
volume of interest and dividends on other securities was a
factor bolstering total current operating earnings. The decline
in income from Government securities in most instances paral­
leled reductions in average holdings of such securities. In alJ
groups of banks, however, the rise in interest and discount
earned on loans exceeded the increase in the average volume
of loans outstanding. In New York City it was about double
the latter increase, indicating the higher level of interest rates
prevailing this year. Increases in service charges on deposit
accounts have tapered off considerably compared with the
increases which occurred between the first six months of 1947
and 1948. The current rise in New York City, 9.1 per cent,
compares with a rise of 46.6 per cent between the first halves
of 1947 and 1948, and in the three smallest groups of banks
outside the City the current increases are approximately onethird less than those occurring a year ago.
Total current expenses increased proportionately less in the
New York City banks than in the other groups of Second
District banks. Nevertheless, the rise was sufficient to absorb
the greater part of the City banks’ increase in total current
operating income, and to confine the increase in net current
operating earnings before taxes to 2.2 per cent, also the lowest
for any group of banks in the District. The smaller rise in City
bank expenses reflected a smaller increase in total payrolls.
Average employment in the City banks during the first half
of 19 49 was slightly below last year s level and the small rise
in total payrolls thus arose entirely from higher salary levels. In
the banks outside the City, where the rise in total payroll ex­
pense was much larger, both average employment and salary
levels were higher than a year ago.
Net additions to net current earnings before income taxes—
in the form of profits on securities sold or redeemed— were
generally substantially below a year ago, except in the 5 to 20
million dollar banks outside New York City. Actual net losses
and charge-offs were, on the whole, little changed from last
year’s level in the case of the New York City banks and the
largest banks outside New York City. The 5 to 20 million
dollar group, however, had sharply lower losses and chargeoffs than a year ago and the two groups of smallest size banks


Net Profits of Various Deposit Size Groups of Second District
Member Banks by Semiannual Periods*


* Plotted on ratio scale to show proportionate changes.

both sustained substantially greater losses and charge-offs.
These small banks, currently and in the postwar period as a
whole, have shown the largest percentage growth in loan vol­
ume, and the current increase in losses and charge-offs is prob­
ably a reflection of the greater risk entailed in that growth.
Dividend payments showed only minor changes from the
level in effect a year ago and the volume o f earnings added
to capital funds increased substantially except in the two
groups o f smallest size banks.
The accompanying chart, which is drawn to show rates of
change and thus to facilitate comparison between the various
groups o f banks, shows the trend of semiannual net profits
from the first half o f 1945 through the first half of 19 49 for
the central reserve New York City banks and for the sample
member banks in the Second District outside New York City.
Except in the smallest banks, where fluctuations in operating
earnings were the dominant influence, the high points of net
profits between 1945 and the close of 1947 coincided with the
peak volumes of profits on securities sold and recoveries of
previously charged-off securities, while the sharp declines fol­
lowing the peaks were brought about by the evaporation ol
such security profits or recoveries. Since December 1947 the
trend of net profits has been affected to a large extent by
fluctuations in the volume of transfers to reserves, with the
steady growth in net current operating earnings providing an
upward bias. In the two smallest size groups of banks, how­
ever, in which reserve transfers have influenced the profit
level least, a rising volume of net charge-offs on loans has pro­
vided another offset to the growth in operating earnings, and
profits have tended to level out.

M O N T H L Y R E V I E W , S E P T E M B E R 1949


After lengthy negotiation, the Council of the Organization
for European Economic Cooperation reached agreement in
Paris on July 1, 1949 upon the major provisions of a new
intra-European payments plan for the year ending June 30,
19 5 0 , to replace the 1948-49 payments plan which expired
at the end of last June. These agreed provisions have been
subsequently approved in principle by the Economic Cooper­
ation Administration in Washington and the OEEC is now
engaged in the detailed drafting of the new payments plan.
Like its predecessor,1 the new plan is designed to provide
financing of the debit and credit balances that may be expected
to develop in the trade of each European Recovery Program
country with the other participants in the program. In the
absence of such financing, each of the ERP participants would
be forced to cover its debit balances with gold or dollars or,
lacking these, to seek a bilateral balancing of its commerce
with every other member, with the probable consequence of a
severe contraction in the over-all volume of trade. This was
the situation that developed in 1947 as the intra-European
creditor nations became increasingly reluctant to extend fur­
ther credits to their debtors while the debtor countries became
more and more unwilling or unable to finance their import
surpluses by payment of gold and dollars. The growing
paralysis of intra-European trade in turn accentuated the reli­
ance of Western Europe upon United States financial assist­
W ith the inauguration of the European Recovery Program
in April 1948, the ECA and the OEEC accordingly sought to
devise some effective means of reviving trade among the ERP
participants, which before the war had accounted for 51 per
cent of their total exports and 3 1 per cent of their total im­
ports. The first method developed was the so-called "offshore
purchase” technique under which the ECA provided the debtor
countries in intra-European trade with the dollars required to
pay for their deficits with the other participants.
The offshore purchase method suffered from various defects,
however,2 and on October 16, 1948 it was replaced by the first
intra-European payments plan, the basic principles of which
are being largely retained in the new plan now being drafted
by the OEEC. The central feature of both the old and the new
payments plan is the financing of intra-European trade bal­
ances by means of ECA allotments of so-called 'conditional”
dollars directly to the creditor countries, who in turn under­
take to extend equivalent grants, the so-called "drawing rights”,
to their intra-European debtors. The schedule of drawing
rights and the corresponding schedule of conditional dollar
allotments for 1949-50 are now being prepared by the OEEC
on the basis of the credit or debit balances expected to develop
during the twelve-month period in the trade of each ERP
participant with the other members. Thus, after securing the
1 Described and analyzed in the November 1948 issue of this Review.
2 Ibid.

approval of all of the member countries concerned, the OEEC
may determine that the United Kingdom, for example, should
extend drawing rights of a given amount in its own currency
to France, Greece, Austria, and various other countries with
which the British are expected to run an export surplus during
1949-50. ECA will then proceed to earmark an equal amount
out of the total dollar allocation to the United Kingdom as
"conditional” aid, i.e., aid granted conditionally upon fulfill­
ment by the United Kingdom of its commitments to grant
drawing rights on itself.
Effective operation of the payments plan obviously calls for
a certain measure of flexibility in the drawing rights and con­
ditional aid allotments. Without provision for modification of
the drawing rights and conditional aid grants, trade would be
rigidly confined within the initial, and perhaps faulty, estimates
of trade balances and drawing right requirements. Further­
more, the creditors might fail to provide full value against
their drawing right commitments.
In an effort to provide an element of flexibility, the first
payments plan provided that under circumstances of force
majeure or proof by the debtor that despite every reasonable
effort he had been unable to use his drawing rights upon the
original creditor, a "transfer of drawing rights” might take
place. The OEEC and ECA were to arrange for this transfer
by making the rights spendable in some other creditor country,
and by simultaneously taking the conditional aid correspond­
ing to these rights away from the former creditor and giving
it to the new creditor. The conditions, however, governing
this "transferability of drawing rights” proved so constraining
as to render the relevant provision of the first payments plan
Dissatisfaction with the nontransferability (in practice) of
drawing rights under the old plan gave rise to a variety of pro­
posals designed to liberalize the transfer provisions of the new
payments agreement for 1949-50. During the recent OEEC
discussions of the new plan, perhaps the most controversial
proposal was one urging that the drawing rights (and the
corresponding conditional aid) should be made freely trans­
ferable at the option of the country receiving the drawing
rights. This proposal would have permitted Austria, for
example, to use drawing rights originally received from the
United Kingdom to finance purchases in Belgium. In effect,
this proposal would have allowed the debtor countries to "shop
around” with their drawing rights in order to obtain essential
goods at the lowest possible prices. It was even suggested that
a debtor country should be allowed to spend its drawing rights
in the United States as well as in any ERP country. The adop­
tion of this proposal would have rendered the drawing rights
not only transferable within Western Europe but, in effect,
also convertible into dollars.
Such unrestricted transferability of the drawing rights would
no doubt have provided full scope for the day-to-day correc­
tion during 1949-50 of mistaken forecasts of trade balances
and drawing rights requirements which might be made during


the period of advance planning early in the fiscal year. More­
over, the bargaining position of the debtor countries vis-a-vis
their creditors would have been greatly strengthened— perhaps
excessively so, as some of the OEEC delegates contended. But
probably the most significant argument advanced in support
of both transferability (switches among European creditors)
and convertibility (switches into dollars) of the drawing
rights was that the intra-European creditor nations would be
forced to compete more vigorously with one another in order
not to lose the conditional dollar aid initially allotted to them.
In the case of convertibility of the drawing rights, the creditor
nations would have been forced into competition with United
States suppliers as well. Such enhanced competition, it was
argued, would in turn force cost economies and the other major
correctives required to improve the international competitive
position of Western European exporters, with resultant salutary
effects upon their dollar earnings.
On the other hand, the United Kingdom representatives
contended that unrestricted transferability and competition for
conditional dollar aid would probably incite such a scramble
for dollars as to produce a contraction rather than an expan­
sion of trade. It was argued that the creditor nations might
seek to maximize their intra-European surpluses in order to
insure that their European debtors, by remaining short of the
creditor currencies, would not be tempted to seek transfers
of drawing rights. Such a maximization of intra-European
surpluses would more likely be achieved, it was argued, by
imposition of new import restrictions than by concession
of lower export prices. Furthermore, automatic transferability
might seriously handicap negotiation of an appropriate pat­
tern of drawing rights for 1949-50. Since automatic trans­
ferability would force the creditor nations to regard their
drawing right commitments as potential losses of dollar aid,
the creditor nations would probably try to reduce their draw­
ing right commitments as much as possible in order to mini­
mize the "conditional” share of their dollar allocations.
Finally, the British representatives urged that transfers of con­
ditional aid among European creditors, at the discretion of
the debtor countries, might cause certain creditor nations to
suffer losses of dollars that were urgently required to cover
their deficits with the Western Hemisphere, while other
participating countries might succeed in accumulating ECA
dollars in excess of their requirements. In the case of the
United Kingdom, it was alleged, the dollar import program
could not be satisfactorily planned without the assurance of
a fixed amount of dollar aid.
On July 1 , the Council of the OEEC reached agreement
upon a compromise arrangement providing that 25 per cent
of the drawing rights might be unconditionally transferred
at the option of the recipients of the drawing rights. Trans­
fers within this limitation are to be automatically accom­
panied by equivalent transfers of conditional aid. Thus, if
the United Kingdom should agree to extend 20 million
dollars’ equivalent in drawing rights to Greece, the latter
could, if it so desired, spend 25 per cent, or 5 million dollars,



of these rights for purchases in Belgium rather than in the
United Kingdom. In such an event, the ECA would transfer
to Belgium 5 million of the conditional dollar aid originally
allocated to the United Kingdom.
The transferability of drawing rights was further limited
by stipulating that the total drawing rights to be transferred
to (i. e., spent in) Belgium was not to exceed 40 million
dollars. Belgium is generally regarded as the creditor country
most likely to be the beneficiary of transfers of drawing rights
and conditional aid. Although transferability of the drawing
rights thus remains fairly closely circumscribed, the new transfer
provisions should nevertheless provide adequate margin for
correction of erroneous trade estimates while also strengthening
the bargaining position of the debtor countries. It is by no
means clear, however, that the new plan will intensify com­
petition among the creditor countries to the point of forcing
significant reductions of costs and prices.
A second major innovation of the new payments plan is
the special provision made for financing the Belgian export
surplus. Belgium occupies a very special position among the
ERP participants in that its export surplus on intra-European
account has come to exceed its Western Hemisphere deficit
by a very considerable margin. During the year ended
June 30, 1949, the gross drawing rights extended by Belgium
amounted to 218.5 million dollars, whereas the Belgian
surplus in intra-European trade in the course of the year rose
well above that figure. As a consequence, a number of the
ERP participants— and particularly the United Kingdom—
were forced to cover their Belgian franc deficits by payment
in gold and dollars.
Under the new plan, the dollar allocation covering Belgium’s
Western Hemisphere deficit, and the corresponding drawing
rights extended by Belgium, will be supplemented by a special
ECA allocation of 112.5 million dollars and by Belgium’s grant
of additional drawing rights for an equivalent sum. In recog­
nition of this favorable treatment of its dollar problem,
Belgium will also make available to several debtor countries,
out of its own funds, long-term loans in Belgian francs
aggregating the equivalent of 87.5 million dollars. Thus, very
sizable means are provided for covering the deficits of the
other participating countries with Belgium, with consequent
hope for relief from the gold and dollar transfers that proved
necessary during 1948-49.
At the same time, however, this solution of the Belgian
export surplus problem points up one of the basic difficulties
standing in the way of a satisfactory system of intra-European
payments: the continued existence of very large surpluses and
deficits in the intra-European trade of some of the participating
countries. For the time being, the payments plan bridges
these gaps by means of drawing rights, which, however, are
in turn entirely dependent upon the artificial support of ECA
dollar allocations. But, in the long run, heavy deficits on intraEuropean trade account can be financed only if the debtor
countries can earn corresponding surpluses of dollars or other
hard currencies outside Europe.



Total farm output in the United States in 1949 promises to
be approximately as great as in the record-breaking year of
1948. The output of livestock and livestock products, particu­
larly poultry and eggs, is expected to increase this year, off­
setting a decline in crops harvested. The U. S. Bureau of Agri­
cultural Economics estimated recently that aggregate 1949
crops, while about 5 per cent smaller than last year’s record
total, would still be 44 per cent above the 1935-39 average.
With prices received by farmers during the first seven months
of 1949 averaging about 1 2 per cent below those in the same
period last year, gross farm income has declined substantially.
Although quantities marketed have been slightly greater this
year, farm expenses have declined less rapidly than the prices
of farm products, so that net farm income appears to have
declined somewhat more than 10 per cent thus far in 1949.
Another year of bumper harvests of both food and feed
grains seems assured. Unfavorable weather and disease have
reduced the wheat crop more than 200 million bushels from
the levels expected earlier, but it is still likely to be the fourth
largest on record. This year’s anticipated harvest of 1 ,1 3 2
million bushels marks the sixth consecutive wheat crop of
more than one billion bushels. Only the extremely high post­
war demand for grain exports has prevented the accumula­
tion of unmanageable surpluses, since peacetime domestic
demand has averaged in the neighborhood of 700 million
bushels per year. In the four years since the end of the war,
a total of more than 1.8 billion bushels of wheat have been
shipped abroad, or an average of 450 million bushels per
year— over ten times the rate which prevailed in the decade
before the war. At its present size, the 1949 wheat crop will
just about equal the anticipated domestic consumption of 685
million bushels plus exports (including military procurement)
of 450 million. If unfavorable conditions had not caused a
decline in yield this year, it is likely that some type of market­
ing controls would have been adopted for the 19 5 0 crop, since
stocks on hand at the start of the crop year (July 1 , 1949)
were 300 million bushels. As it is, acreage allotments have
been announced by the Department of Agriculture, but the
more drastic marketing quotas have not been imposed.
Feed supplies in the 1949-50 crop year are expected to be
the greatest on record, both in the aggregate and per animal
unit. The corn crop will be close to last year’s record, and will
probably total more than 3.5 billion bushels. In both food
grains and feed crops the bumper harvests are raising a storage
problem. The Government has encouraged the construction
of additional storage facilities and has liberalized its loan
requirements to permit advancing of funds at 75 per cent of
the regular loan rate on grain stored on the ground or in
temporary shelter for not more than 90 days. Nevertheless,
since the new crop came on the market, wheat prices have
remained consistently below this year’s support price of $2 .2 1
per bushel at Kansas City. Presumably the level of market
prices reflects distress sales of wheat for w*hich storage space
could not readily be found, although earlier fears of an acute

shortage o f storage space did not materialize. The support
price to farmers is expected to average $ 1.95 per bushel on the
farm in 1949-50, the decrease from last year’s $2.00 support
level on the farm reflecting the decline in average prices paid
by farmers.
The quantity of livestock coming to market this fall and
winter is expected to exceed the 1948 levels, largely as a result
of the greater number of pigs being raised. The pig crop this
spring was 15 per cent greater than in 1948 and is expected
to reach the market in September and October. The greater
supplies of meat available are expected to reduce prices some­
what, particularly for pork, and hog prices may be supported
by the Government for the first time since the end of the war.
While the abundant supplies of feed may reduce the quantity
of beef cattle marketed this fall (since they are likely to be
held for further fattening), the supply in the winter and spring
should be correspondingly increased.
In the country as a whole, food grains, feed crops, and
meat animals account for nearly half of the total cash income
from farm marketings. Cotton, tobacco, and oil-bearing crops
— the production of which is negligible in this District—
account for another one seventh of total United States farm
marketings. In New York State, however, as the accompany­
ing chart indicates, only one eighth of gross farm income is
produced by grain, feed, and meat animals. Nearly three fifths
of New York’s cash farm income in 1948 was derived from
dairy products, poultry, and eggs, while another quarter of the
total came from fruits and vegetables. The high proportion of
the products of this State which is sold more or less directly
to the consumer reflects in part this area’s proximity to the
large metropolitan markets.
The dairy industry has been favorably affected by the decline
in feed prices from last year’s high levels. In 1947 and early
1948 the price relationships of dairy products and feeds had
been particularly unfavorable, but since then prices of feed
Percentage Distribution of Cash Income from Farm Marketings,
New York State and the United States, 1948

* Includes cotton, tobacco, oil-bearing crops, and other farm crops.
Source: U . S. Bureau of Agricultural Econom ics.

Table 1
Production of Selected A gricu ltu ral C om m odities in th e Second Federal
R eserve D istrict and in the U nited S tates


Second District

United States

Percentage change
1949 from

Percentage change
1949 from

W heat..................
C otton.................
E g g s#...................
C orn .....................
O ats......................
H a y .......................



+ 2
— 5

-3 9
-2 3
-2 5


+ 8

-2 3
-1 0
-1 6

-1 2
- 3
+ 2
-1 9
-1 2
- 2

- 8
+ 6
- 3

T able II
A v e ra g e Prices R eceived b y F arm ers in N ew Y o rk S tate and in the
___________U nited S tates for Selected A g ricu ltu ral C om m odities
New York State

Second D is­
trict as a
of United
States, 1949

* Commodities ranked according to value of United States marketings in 1948.
# New York and New Jersey used to represent Second District.
$ Less than 0.5 per cent.
Source: Computed from data of U. S. Bureau of Agricultural Economics and
Board of Governors of the Federal Reserve System; 1949 figures are based on
the crop report for August 1, except eggs which are estimated from the first
seven months’ production.

have receded relatively more sharply than those of dairy prod­
ucts. The volume of milk received at New York State milk
plants in the first seven months of this year was nearly 10 per
cent higher than in the corresponding months of 1948. The
number of milk cows on farms in this State has been increas­
ing and is now somewhat greater than a year ago, whereas in
the rest of the country the number declined in July to the
lowest level for that month since 1930. On August 1, however,
pastures in New York State were furnishing only about half
the normal amount of feed and in most of the State their con­
dition has been reported as 'Very poor” or "severe drought”
compared with last years "good to excellent*’. At the same
time, the hay crop was about one-fourth less than in 19 4 8 , so
that feeding of grain and concentrates to cows was the highest
in many years.
New York State egg production in the first seven months of
1949 has been about the same as in 1948, but substantially
above the average for the preceding ten years. As in the case
of milk, the relationship between egg and feed prices has
become much more favorable this year. Egg prices in July
were practically the same as last year, but poultry feed prices
were down about one fifth. Increased laying flocks are antici­
pated in the fall, and egg production is also likely to increase
more than seasonally.
The weather has been generally favorable for fruits in this
area. The apple crop in New York State is the largest in ten
years, and New Jerseys is the largest since 1942. Pears and
peaches are also well above last year, but the grape and cherry
crops are down about one fourth from 1948. Truck crops
were affected by the dry weather and high temperatures in
June and early July and are expected to be smaller than in 1948.
Not only was the acreage of potatoes planted this year smaller
than in 1948 (in large part because of Government acreage
allotments), but the yield per acre has also decreased, causing
a drop of nearly two fifths in production in this District (as
against one fifth in the country as a whole). Potato prices
are being supported by the Government at only 60 per cent of
parity this year, compared with 90 per cent in 1948.


United States

Percentage change
July 15, 1949 from

Beef cattle (c w t.).. . .
Chickens (lb .).............
Potatoes (bu.).............
W heat ( b u .) ................
Corn ( b u .) ...................

Percentage change
July 15, 1949 from

July 15,

Julv 15,

Julv 15,

July 15,

July 15,

July 15,

$ 4 .1 5
1.5 0
1.7 5
1 .4 2
2 .5 0

-1 9
- 4
-2 1
-2 1
-2 3
-1 7
-2 0
-3 4

+ 1
+ 3
+ 7
-1 4
-1 4
- 3
-3 0
-3 2
-2 3

$ 3 .7 2
2 0 .0 0
1 .5 5
1 .8 2
1 .2 5
2 .3 2

-2 4
- 1
-2 1
-2 3
-2 4
- 5
-1 0
-3 8
+ 9

- 4
- 1
+ 3
-1 2
-1 4
- 8
— 15
-3 8
-2 1

Source: U. S. Bureau of Agricultural Economics.

As shown in Table I, output of this country’s four major
field crops— wheat, cotton, corn, and tobacco— is still well
above the long-term average despite the moderate decline in
the wheat and corn crops from 1948 levels. Other crops and
livestock and poultry are also being produced at generally high
levels. The acreage of principal crops for harvest this year is
the largest since 1 9 3 2 , while at the same time yields per acre in
most cases have been lifted well above the long-term average,
despite unfavorable weather in many sections, by the use of
more fertilizer, insecticides, and weed-killing chemicals, as well
as the increasing use of improved varieties of crops, such as
hybrid corn. Composite yields per acre in 1949 are estimated to
be 41 per cent above the 1 9 2 3 -3 2 (pre-drought) average, and
higher than any other year except 1948. With the easing of
the extraordinary war and postwar demands, the problem of
farm surpluses in this country is likely to become increasingly
pressing. As noted earlier, the normal domestic consumption
of wheat is substantially less than the average amount that
has been harvested in recent years, and the same has likewise
been true of corn and cotton. The decline in prices, shown in
Table II, largely reflects the continuing abundant supply and
the tapering off in demand for most farm products. Even
prices for livestock, poultry, and dairy products are now well
below last year’s high level.

During August, sales at Second District department stores
improved more than seasonally. A modest daily average gain
of about 4 per cent from July would have been in line with
normal seasonal tendencies; but the rise in sales may actually
have amounted to 9 or 10 per cent, judging by preliminary
information. As a result, this bank’s adjusted index of District
sales is expected to be better than 230 per cent of the 19 3 5 -3 9
average, in contrast to 222 per cent for July. Compared with
last year, however, there was a drop of 5 to 6 per cent on a
calendar month basis. Since August this year had one more shop­
ping day than last year, the daily average loss in sales from a
year ago was about 9 per cent.
During the week ended August 27, Second District depart­
ment stores registered an actual gain in sales, amounting to


Indexes of Department Store Sales and Stocks
Second Federal Reserve District

Indexes o f D epartm ent S tore Sales and S tock s
S econd Federal R e se rv e D is trict
(1 9 3 5 -3 9 a v e ra g e “ 100 per ce n t)



M ay



Sales (average daily), unadjusted...................
Sales (average daily), seasonally ad ju sted..





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





r Revised.

Relative to 1935-39 averages, however, stocks have moved at
a somewhat lower level than sales. A seasonally adjusted stock
level at the end of July of 213 per cent of the base period
average compares with a sales level during that month of
2 2 2 per cent.

at least 6 per cent. This was the first year-to-year sales increase
in 19 weeks. It must be noted, however, that during the corres­
ponding week of last year a severe heat wave held customers
away from the stores. This year, the week’s weather was more
favorable to business, especially since it had been preceded by
several weeks of hot weather which had no doubt caused some
deferment of purchases.
As the accompanying chart shows, changes in sales and stocks
have continued to be almost parallel. Divergent trends occurred
only during the shelf-clearing period in mid-1947 prior to the
exceptional changes in styles. However, the same proportionate
reduction in stocks as in sales means a greater actual reduction
in stocks, since stocks are usually equal to 2 to 3 months’ sales.
D epartm ent and A pparel S tore Sales and S tock s, S econd F ederal R eserv e
D istrict, P ercen tag e Change from the P reced in g Y ear
Net sales
July 1949
Department stores, Second District . . . .
New York C ity .....................................
Northern New Jersey..............................
Westchester Countv................................
Fairfield C ounty...................................
Lower Hudson River V alley................
Upper Hudson River V alley................
Central New York S tate.......................
Mohawk River Valley...................
Northern New York State....................
Southern New York State.....................
Elm ira................................................ ..
Western New York State......................
Niagara F a l l s ........................................
Apparel stores (chiefly New York C ity ).

Stocks on
fan. through
July 1949
July 31, 1949

-1 7


-1 8
-1 9
— 21
— 6
— 21
-2 2
-1 1
— 11
-2 1
— 23
— 17
-1 5
-1 9
— 19
— 13
— 5
-1 9
— 19
-1 8
— 14
-1 3
-1 8
-1 7

- 9
- 8
- 9
+ 4
— 9
-1 1
— 6
- 4




-1 1
-1 4
— 15
— 8
-1 9
-1 0
- 9
-1 6
-1 4
-1 6
-2 3
— 8

-2 1



-1 1


-1 2
— 13
— 10
— 9
-r 4
- 3
- 4
-1 0
-1 2
— 15
-2 2

The usual July expansion in ordering for fall and early
winter delivery brought outstanding orders of the group of
large cooperating stores in this District (on July 31) to the
customary high for the year to date. However, the value of goods
on order was about one-third less than on July 31 of last year.
Reflecting the stores’ policy of maintaining commitments as
short as possible, outstanding orders since the end of October
1948 have consistently been only 75 per cent or less of the pre­
vious year’s dollar volume. Thus, the value of incoming mer­
chandise during July 1949 dropped more than 30 per cent below
last July’s receipts to a 5-year low. Receipts during July were
no more than 68 per cent of sales, compared with 82 per cent
last year, and 74 per cent in July 1940.

Indexes o f B u sin ess



Industrial production*, 1935-39 = 1 00.........
(Board of Governors, Federal Reserve
Electric power output*, 1935-39 = 100.........
(Federal Reserve B a n k of New York)
Ton-miles of railway freight*, 1935-39 = 100
(Federal Reserve B a n k of New York)
Sales of all retail stores*, 1935-39 = 1 0 0 ....
(Department of Commerce)
Factory employment
United States, 1939 = 100.............................
(Bureau of Labor Statistics)
New York State, 1935-39 = 100.................
( N Y S D iv. of Placement and Unem p. In s .)
Factory payrolls
United States, 1939 = 100.............................
(Bureau of Labor Statistics)
New York State, 1935-39 = 100.................
(N Y S Div. of Placement and Unem p. In s .)
Personal income*#, 1935-39 = 100..................
(.Department of Commerce)
Composite index of wages and salaries*t,
1939 = 100............................................................
(Federal Reserve B a n k of New York)
Consumers’ prices, 1935-39 = 100...................
(.Bureau of Labor Statistics)
Velocity of demand deposits*, 1935-39 = 100
(Federal Reserve B a n k of New York)
New York C ity ..................................................
Outside New York C ity .............................. .


M ay























llO p





















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

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

production declined further in July but increased
in the early part of August. Prices of basic commodities
advanced, while the average of ail wholesale commodity prices
showed little change. Department store sales declined in July
and early August. Construction activity continued at a high



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

The Board’s seasonally adjusted index of industrial produc­
tion declined in July to 162 per cent of the 1935-39 average.
This compares with 169 in June and with 186 in July 1948.
The July decline reflected in part the effects of plant-wide
vacations, mainly in nondurable lines, which are not currently
allowed for in the Board’s index. According to preliminary
indications, industrial production in August may be close to
the June rate.
Activity in durable goods industries showed a further sub­
stantial decline in July, mainly because of another sharp cut in
steel output, a further decline in activity in machinery indus­
tries, and a reduction in lumber output. In August, steel pro­
duction has been scheduled at about 83 per cent of capacity as
compared with the actual rates of 71 per cent in July and 82
per cent in June. While refinery output of most nonferrous
metals was reduced further in July, shipments to fabricators
advanced. Automobile production in July and during most of
August has been at an exceptionally high level, exceeding
earlier record rates reached in 19 2 9 .
Among nondurable goods activity was reduced at cotton
textile, paper, and paperboard mills during July, but appears to
have increased in August. Deliveries of rayon to textile mills
showed a large further gain in July, and petroleum refining
activity increased slightly.
Minerals output was reduced considerably further in July,
reflecting substantially curtailed operations at coal mines, and

smaller volume of output of crude petroleum and metals. In
the early part of August coal production increased somewhat.
Em p l o y m e n t

Employment in nonagricultural establishments in July was
slightly below the level of the preceding two months, after
allowances for the usual seasonal changes, and 1.6 million
below the high level of July 1948.
C o n s t r u c t io n

Value of construction contracts awarded in July, according
to the F. W . Dodge Corporation, was the same as in June and
slightly below the value in July 1948. Further increases in
awards for public construction from June to July offset declines
in private building awards. The number of new housing units
started in July, as estimated by the Bureau of Labor Statistics,
was 96,000, compared with 100,000 in June and 95,000 in
July 1948.
D is t r ib u t io n

Value of department store sales declined slightly in July,
after allowance for usual seasonal changes. The Board’s adjusted
index is estimated at 280 per cent of the 19 3 5 -3 9 average, as
compared with 285 in June and 311 in July 1948. Owing in
part to the effects of exceptionally hot weather, sales during
the first two weeks of August showed much less than the usual
seasonal rise, but in the third week sales rose considerably.
Rail shipments of most classes of freight declined further
in July and continued in August substantially below the levels
of other recent years. Grain shipments in July, however, were
the largest on record.
C o m m o d it y P rices

Prices of basic commodities advanced from the early part of
July to mid-August. The principal increases over this period
were for cottonseed oil, cocoa, and numerous industrial ma­



1935 - 39 *100


F ederal R eserv e index. M on th ly fig u res; la test figu re show n is for J uly.



Bureau o f L a b or Statistics* estim ates a d ju sted for seasonal va ria tion by
F ederal R eserv e. P ro p rie to rs and d o m e stic serva n ts are exclud ed .
M idm onth fig u re s; la test show n are fo r July.

terials including nonferrous metals, steel scrap, and cotton
cloth. Prices of agricultural products generally declined and
prices of worsted fabrics and some other finished manufactured
goods were reduced over this period.
The average level of consumers’ prices decreased 0.6 per
cent in July as a result mainly of a reduction in food prices
and further slight declines in apparel and housefurnishings.
A g r ic u l t u r e

Total crop production, according to the August 1 official
forecast, is expected to be 5 per cent below last year’s record
volume but above any earlier year. The wheat harvest was
indicated to be 12 per cent smaller, mainly because of crop
deterioration in June and July, while fractionally smaller corn
and cotton crops were forecast.
Marketings of meat animals in July and August have been
substantially above the reduced level of last year.

ing through September 1 which will release a total of approxi­
mately 1.8 billion dollars of member bank reserves. During
the first three weeks of August, banks used a large part of the
funds released to purchase short-term Government securities
from the Federal Reserve, continuing a trend noted in July.
Excess reserves of member banks also increased.
Business loans at member banks in leading cities increased
slightly in the first half of August. This rise followed a moder­
ate decline in July which brought the total contraction in busi­
ness loans since the first of the year to nearly 2.7 billion dollars.
Treasury deposits at banks increased substantially in August,
reflecting large sales of savings notes and additions to weekly
offerings of Treasury bills. Other deposits, which had increased
in July, declined somewhat in the first half of August.
Se c u r it y M a r k e t s

Prices of Treasury bonds moved within a narrow range in
the first three weeks of August. On August 22 the Treasury
announced the offering of ll/g per cent one-year certificates to
refund the 2 per cent bonds called for September 15.
On August 5 the Board of Governors announced a schedule
Prices of corporate bonds advanced further while prices of
of reductions in member bank reserve requirements extend­ common stocks fluctuated within a narrow range.


r ed it


B ureau o f L a b or S ta tistics ’ indexes. W eek ly fig u re s; latest
show n are for w eek ended A u g u st 23.


W ed n esd a y fig u re s; latest show n are for A u g u st 24.