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MONTHLY REVIEW
O f Credit and Business Conditions

F E D E R A L
V

o lu m e

R E S E R V E

B A N K

SEPTEMBER

33

BUY

DEFENSE BONDS

To B u i l d S e c u r i t y
To F ig h t I n f l a t i o n

J p

N E W

Y O R K
No.

1951

| Hake today
a
your day i
/ buy United States \
( P e fe n s e Bonds J

To M a k e S u r e Y o u S a v e

OF

KEEP

9

DEFENSE BONDS

F o r A S a fe I n v e s t m e n t
F o r I n c r e a s in g V a l u e
F o r F u t u r e N eeds

MORTGAGE LENDING IN THE SECOND FEDERAL RESERVE DISTRICT
Comprehensive data on the amount and type of mortgages
held and serviced by various groups of lenders in this region
are now available for the first time. Because of the concen­
tration of large institutional lenders in the New York City
area, many of them of national importance, these figures
undoubtedly include substantial amounts of mortgages on
properties located in other parts of the country. This informa­
tion has been gathered in connection with the registration,
under the terms of Regulation X of the Board of Governors
of the Federal Reserve System, by organizations and indi­
viduals engaged in the business of extending real estate credit
or acting as agents in arranging for such credit. In part of the
registration statement, lenders were required to fill out a
simple statement of the amount of the different types of
mortgages held on May 31, 1951, together with the amount of
mortgages they were servicing for others. Heretofore, detailed
data in the field of real estate credit have been relatively
sparse, and the rapid growth of mortgage debt in the postwar
period has increased the need for comprehensive figures;
these registration statistics have thus greatly improved the
coverage of this important financial field.
Preliminary data for nearly 4,400 registrants holding about
19 billion dollars in mortgages have now been tabulated for the
Second Federal Reserve District,1 and these eventually will be
combined with data from other districts to provide data for
the country as a whole. This information will be highly
useful to the Board of Governors in fulfilling its responsi­
bilities under the Defense Production Act for control of
real estate credit. The data represent mortgage ownership
1 The totals do not include the mortgage holdings of institutions or
investors who were exempt from registering. Those extending credit
three times or less in 1950 or 1951 in an aggregate volume of $50,000
or less per year were not required to register, including those whose
entire portfolio of mortgages was acquired prior to 1950.




and should not be used as a measure of the volume of mort­
gage credit originated by the various types of financial insti­
tutions, because much of their portfolios may have been
acquired through brokers or from other lenders. Also, the
totals for any given region do not represent the mortgage
indebtedness of that region; particularly in the Second Dis­
trict, investors have large holdings of mortgages secured by
properties located in all parts of the United States.
R e l a t iv e I m p o r t a n c e

of

D i f f e r e n t C la sse s

of

R e g is t r a n t s

A total of 4,378 organizations and individuals had regis­
tered in the Second District by mid-August. As shown in
Table I, over 1,200 of these registrants, or 28 per cent of the
total, did not hold any mortgages on May 31, either for their
own account or that of others. About 7 per cent, or 323
registrants, held no mortgages of their own but were engaged
in servicing 629 million dollars’ worth for others. The total
dollar volume of mortgages which the remaining 2,826 regis­
trants held for their own account amounted to 18,983 million
dollars. Judging from rough estimates of total mortgage debt
in the United States, over one fourth of the national total
is held by Second District investors. In addition, 467 of

CONTENTS
Mortgage Lending in the
Second Federal Reserve D istrict..................................... 121
Money Market in A u g u st...................................................... .125
The First Year of the European Payments U n io n ............127
Earnings and Expenses of the Second District
Member Banks— First Half of 1951 ............................... .131
Construction Contracts ..........................................................133
Department Store T r a d e ........................................................ .135

MONTHLY REVIEW, SEPTEMBER 1951

122
Table I

N u m b er o f R egistran ts and V a lu e o f M o rtg a g es H eld or Serviced
in the Second D istrict, M a y 3 1 , 19S1
Mortgages
(In millions of dollars)

Number of registrants

Type of I ender
Total
Life insurance companies................
Mutual savings banks......................
Commercial banks............................
Trust departments of banks*........
Savings and loan associations........
Mortgage companies, mortgage title
ana guaranty companies, corres­
pondents........................................
Real estate and mortgage brokers
and agents.....................................
Nonprofit organizations..................
Investors............................................
Builders and developers..................
Individual trustees or executors...
Miscellaneous#..................................
Total......................................

Holding
mortgages
Held for
Without
for own
mortgage account or own ac­
count
holdings for others

22

0
0
2
0
0

164
815
162
440

22
164
813
162
440

8,409
6,274
2,024
180
1,679

Serviced
for
others

0
6
388

22
5

79

10

69

31

668

1,437
104
367
326
58
404

852

35
113
62
15
15
146

611

152

585
103
342
140
57
252

4,378

1,229

3,149

18,983

1,806

1
25
186

1

1

9

1
1
94

* Excludes liens on real and other property held under corporate trusteeship as security for
bond issues.
f Includes industrial banks, insurance companies other than life insurance, National Farm
Loan Associations, thrift funds, credit unions, lawyers, investment companies, etc.

this last group of registrants reported that they were servicing
1,177 million dollars of mortgages owned by other lenders.
These other lenders for whom mortgages are being serviced,
however, are not necessarily all confined to the Second Dis­
trict, but may be located anywhere in the United States.
Of all the types of registrants, life insurance companies held
the largest dollar volume of mortgages for their own account,
owning 8,409 million dollars, or 44 per cent of the total
volume held by the District’s registrants. They were followed
by mutual savings banks with a total of 6,274 million dollars,
or approximately one third of the total. Commercial banks
(including their trust departments) accounted for 2,204
million dollars, or an additional 12 per cent of the total,
while savings and loan associations held 1,679 million dollars,
or 9 per cent. In the aggregate, these four groups of regis­
trants held 18,566 million dollars, or 98 per cent of all
mortgages owned by registrants in this District.
Real estate and mortgage brokers and agents were the
most numerous type of registrant, accounting for one third
of the total number of establishments or individuals engaged
in the mortgage business in this District. Their function

is mainly one of providing service— bringing lender and
borrower together— and, in many cases, the function is per­
formed with a relatively small volume of capital. Mortgage
investment positions by brokers are usually considered tem­
porary, with ownership being only incidental to the process
of effecting purchases and sales. It is not surprising, therefore,
that, of the 1,437 real estate and mortgage brokers registering
in the District, 852 (representing approximately three fifths
of the total) reported no mortgage position on May 31,
1951, either for their own account or for the account of
clients. Only 328, or 23 per cent, reported mortgage holdings
for their own account. The remaining 257 functioned exclu­
sively as servicing agents. Registrants classified as mortgage
companies, title and guaranty companies, and correspondents
were also active in servicing mortgages, but in this category
a greater proportion of the registrants— over three quarters—
held mortgages for their own account. Together these two
groups accounted for 70 per cent of the value of mortgages
reported as serviced for others. Among the other groups,
commercial banks, in addition to maintaining a position for
their own account, were most active in servicing mortgages
for others and accounted for 21 per cent of the total, while
other types of lenders serviced relatively minor amounts.
Builders and developers were one of the most numerous
groups, but their relative importance in the dollar totals was
much less than it would have been in terms of mortgage
credit originated.
Co n c e n t r a t io n

of

H o l d in g s

The high degree of concentration of mortgage holdings
among relatively few registrants is clearly shown in Table II.
A little more than 1 per cent of the total number of regis­
trants (51 out of 4,378) owned over 70 per cent of the total
mortgage debt reported. The top 316 registrants held over
17 billion dollars in mortgages for their own account, or 91
per cent of the Second District total.
Holdings were centered in an especially small number of
registrants in the case of life insurance companies and mutual
savings banks. Eight life insurance companies owned 8.3
billion dollars’ worth of mortgages, or 98.4 per cent of the
total for all 22 life insurance companies registered in this

T a ble II
N um ber o f R egistran ts and A m o u n t o f M o rtg a g es H eld for Own A c cou n t, C lassified b y
T y p e o f Owner and Size o f H oldin gs, Second D istrict, M ay 3 1 , 1951
(A m o u n ts in m illions o f dollars)
M utual savings
banks

Life insurance
companies
Volume of mortgages held for own
account
(millions of dollars)
50 and over...................................................
25 to 5 0 ..........................................................
10 to 2 5 ..........................................................
5 to 1 0 .............................................................
1 to 5 ...............................................................
0.1 to 1 ...........................................................
Less than 0 .1 ...............................................
N o holdings for own account................
T o ta l..................................................

Number

Amount

8
2
4

8 ,2 7 3
70
55

0

0

3
5

7
4

0
0
22

Number
36
23
31
34
38

Amount
4 ,6 1 4
835
476
236

0
0

2
0
0

112
1
0
0

8 ,4 0 9

164

6 ,2 7 4

Commercial banks
(including trust
departments*)
Number

6
8
22

Amount

Savings and loan
associations
Number

Amount
53
359
444
312
435
75

Number

0
2

101

449
261
334
302
617
236
5

29
46
161
175
18

4

0

0

1
0

3
7
49
410
746
1,5 5 8

977

2 ,2 0 4

440

1,679

2 ,7 7 5

44
298
494

* Excludes liens on real and other property held under oorporate trusteeship as security for bond issues.




1
10

All other lenders
Amount

Total
Number

Amount
13,389
1 ,606
1,351
898
1,2 7 5
433
31

0

51
45
89
131
549
1,086
865
1,5 6 2

417

4 ,3 7 8

18,983

0
81
42
48
104
117
25

0

FEDERAL RESERVE BANK OF NEW YORK

District. In fact, the holdings of the four companies which
reported over a billion dollars each in mortgages totaled
more than 7 billion dollars, which was close to two fifths of
the life insurance company holdings in the entire United
States. Among the 164 mutual savings banks which regis­
tered, more than half the total volume of mortgages was held
by the 15 banks with over 100 million dollars each in mort­
gages. Nearly three quarters of the holdings of Second Dis­
trict savings banks (and more than half of the national sav­
ings bank total) were concentrated in the top 36 mutual
savings banks registered here.
A somewhat more even distribution was apparent among
savings and loan associations and commercial banks. The top
9 per cent of savings and loan associations owned a little
more than half of the mortgages held by this group. The
80 largest commercial banks (including trust departments),
about 8 per cent of the registrants in this classification, held 61
per cent of the mortgages. At the other end of the scale, how­
ever, 193 savings and loan associations and 599 commercial
banks and trust departments owned less than a million dollars’
worth of mortgages apiece, compared with only five life insur­
ance companies and two savings banks in this category. The
concentration of registrants with small holdings was most pro­
nounced in the "all other” classification (mainly agents, bro­
kers, and investors); 56 per cent did not hold any mortgages
for their own account, and 95 per cent of the remainder, or
1,156 registrants, held less than a million dollars apiece in
mortgages. The remaining 61 lenders accounted for two
thirds of the dollar value held by this group.
T ypes

of

M o r tg a g e s H eld b y P r i n c i p a l G r o u p s
Le n d e r s

of

The accompanying chart shows the distribution of the
various types of mortgages held by different groups of lenders
registering in this District. The major institutional lenders—
life insurance companies, banks, and savings and loan associa­
tions— own all but a minute fraction of the Governmentinsured or guaranteed home mortgages and farm mortgages
held in this District, and all but 2Vz per cent of conventional
(not Government-aided) residential mortgages and all except
5 per cent of "other” mortgages (primarily on commercial
properties). Life insurance companies held a larger dollar
volume of each type of mortgage than any other group of
investors except in the case of conventional mortgages where
savings banks were in the lead. Life insurance companies were
the only group in this District to report sizable holdings of farm
mortgages, partly because of the wider geographical area in
which they are permitted to invest. Residential mortgages held
by life insurance companies were fairly evenly distributed
among the three types, FHA, VA, and conventional. Over half
of the savings banks’ residential mortgages were conventional,
and one third were FHA-insured. Among savings and loan
associations, conventional mortgages accounted for nearly two
thirds of the portfolio and VA-guaranteed loans made up
most of the remainder. Commercial banks in this District




123

emphasized FHA-insured loans (presumably mostly those
on large apartment projects, including a large volume of
construction loans), but trust departments held mostly con­
ventional mortgages.
M o r t g a g e H o l d in g s
W i t h t h e R e st

in

N e w Y o r k C it y Co m p a r e d
Se c o n d D is t r ic t

of the

In the aggregate, the lenders located in New York City
owned nearly three fifths of the District mortgage total, or
some 10.9 billion dollars, while the lenders located in the
remainder of the District held two fifths, or 8.1 billion. Nearly
half of the holdings in the remainder of the District was
concentrated in several large institutional investors in the
metropolitan area around New York City.
The larger total for the New York City registrants arose
principally from the heavier mortgage volume held by the
mutual savings banks, 4.7 billion dollars in New York City
contrasted with only 1.5 billion dollars in the Upstate and
other Second District areas. This contrast is attributable to
the concentration of savings banks deposits in New York
City. The principal variation in the distribution of the
mortgage portfolios of the savings banks in the two areas
was a sharply lower proportion of V A mortgages and a
heavier proportion of commercial mortgages in the City
banks. Mortgage holdings of the life insurance companies
located in the City aggregated 4.7 billion dollars and moder­
ately exceeded the total of 3.8 billion dollars reported by
other Second District insurance registrants, most of which
was concentrated in several large companies in Northern
New Jersey. The mortgage portfolio of the City insurance
registrants consisted of heavier proportions of conventional,
VA, and commercial mortgages, and smaller proportions of
Principal Types of Mortgages Held by Lender Groups in the
Second Federal Reserve District, May 31, 1951

* Residential mortgages not Government-insured or guaranteed.

MONTHLY REVIEW, SEPTEMBER 1951

124

Table III
M ortgag e H oldings for Own A ccou n t in Second D istrict M em ber B anks
R egisterin g on M a y 3 1 , 1 9 5 1 , w ith Changes from June 3 0 , 195 0
(D ollar am ounts in m illions)
Banks Located Outside New York City
131
Banks with deposits
under $2 million

212
257
Banks with deposits of Banks with deposits of
$5 to $20 million
$2 to $5 million

73
Banks with deposits of
over $20 million

41 New York City
banks*

Total Second District
(714 banks)

Type of mortgage
Dollar
amount
1951

Per cent
change

Dollar
amount
1951

F H A .....................................
VA
Conventional....................

......................

1.0
6.1
11.0

Total residential.........
Farm....................................
Other....................................

18.1
5 .1
3 .3

3
3

10.1

T o ta l......................

2 6 .5

+

8

Per cent
change

Dollar
amount
1951

Per cent
change

Dollar
amount
1951

Per cent
change

Dollar
amount
1951

Per cent
change

Dollar
amount
1951

Per cent
change

+21

9 .6
3 5 .1
54 .6

+ 5
+19

+ 14

+11

4 3 .4
1 23.8
172.6

+ 3
+ 19
+15

2 8 9 .7
186.8
16 7 .8

+13
+43
+28

3 8 0 .3
8 .7
5 9 .5

+31
+ 9
+64

7 2 4 .0
3 6 0 .5
4 6 5 .5

+12

9 9 .3

3 3 9 .8
9 .8
6 5 .6

+ 15
+ 2
+ 7

6 4 4 .3
5 .3
100.7

+24
+ 8

1 7 .6

+ 13
- 2
+ 5

+12

4 4 8 .5
(a)
5 9 .7

+34

+

4

1 ,5 5 0 .0
3 0 .3
2 4 6 .9

+24
+ 1
+ 8

1 27.0

+10

4 1 5 .2

+ 13

7 5 0 .3

+22

5 0 8 .2

+30

1 ,8 2 7 .2

+21

+ 2
+10

+

+30
+24

* Includes banks in all five boroughs of New York City.
(a) Less than $50,000.

FHA and farm mortgages than in the rest of the District.
The aggregate mortgage holdings for commercial banks were
greater in the areas outside New York City than in the City,
reflecting the more extensive mortgage lending on the part
of these institutions in other parts of the District. The bulk
of the City commercial banks’ mortgage portfolio of 519
million dollars consisted of FHA mortgages, but elsewhere
in the District every type of mortgage except farm was well
represented in a total portfolio of 1,503 million dollars.
Reflecting the relatively greater importance of savings and
loan associations outside New York City, such associations
held 585 million dollars in mortgages in New York City
and 1,093 million in the rest of the District, but there was
no significant geographical variation in the type of holdings.
Changes

in

M e m b e r B a n k M o r t g a g e H o l d in g s

Detailed information on changes in mortgage holdings
is available for only one group of registrants, those com­
mercial banks which, as members of the Federal Reserve
System, had submitted a breakdown of their real estate loans
on June 30, 1950.2 Table III shows the May 31, 1951 port­
folio and the change which had occurred in the preceding
eleven months— one of the most active periods of real estate
lending on record. In the aggregate, the 714 Second District
member banks for which comparisons are available expanded
their mortgage holdings by 315 million dollars, or 21 per
cent. Residential mortgages held by member banks increased
297 million dollars, or 24 per cent, and commercial and
industrial mortgages rose 18 million dollars, or 8 per cent,
but farm mortgages showed only a negligible change. The
gains in total mortgage holdings during this period varied
directly with the size of the bank, ranging steadily upward
from 8 per cent in the smallest banks (those with deposits
of less than 2 million dollars) to 30 per cent in the large
New York City banks. Among the various types of residential
mortgages, the greatest gain, 30 per cent, was shown by VA-

guaranteed mortgages, perhaps partly as a result of the more
liberal maturity and guarantee provisions under the Housing
Act of 1950.
The most striking characteristic of the distribution of mort­
gage loans among commercial banks in this District is the
relatively small proportion held by the large New York City
banks, despite the large increase in their portfolios during
the past year. The volume of lending on real estate by New
York City banks is only 5 per cent of their total loan port­
folios, while among the other banks in the Second District
such loans are over two fifths of all loans outstanding. In
particular, New York City banks have not engaged in much
permanent financing of residential property, apparently
largely because the proportion of time deposits at these banks
is far lower than in other banks. Many of the FHA-insured
loans are construction loans on large projects which will be
turned over to another lender for permanent financing on
completion of construction.
One manifestation of the limited activity of New York
City banks in the field of permanent residential financing
is the remarkably small part VA-guaranteed loans play in
the residential mortgage portfolios of these banks, accounting
for only about 2 per cent of the total, compared with nearly
one third in other member banks in this District. Outside
New York City, the increases between June 1950 and
May 1951 in the holdings of V A mortgages tended to vary
with the size of the bank, with gains ranging from 10 per
cent in the smallest banks to 43 per cent in the largest. A
somewhat similar but not so consistent relationship also pre­
vailed in the case of conventional mortgages, in which increases
ranged from 11 per cent in the next to the smallest group
to 28 per cent in the largest. In New York City, where con­
ventional mortgages are much less important than elsewhere
in the District, the gain was 64 per cent.

The increase in holdings of FHA-insured loans was almost
entirely confined to the New York City banks and the largest
2 See "Nonfarm Real Estate Lending of Second District Member
banks outside the City. The three smallest size groups of
Banks” in this Review for November 1950,




FEDERAL RESERVE BANK OF NEW YORK

banks showed very minor dollar and percentage gains in
FHA mortgages. To a large extent this reflects the con­
centration of large housing projects, particularly apartment
projects insured under Section 608 of the National Housing
Act, in the metropolitan areas served by large banks. T o­
gether, the New York City banks and the largest banks out­
side the City held virtually all of the unutilized commitments
under Section 608 reported by member banks in this District

125

in June 1950. Because of their larger resources these banks
are better able to meet the financing needs of the large-scale
builders who originated so much of the housing and the
mortgage debt during the past year. The smaller banks appar­
ently tend to deal less often with the large builders who
initiate FHA mortgages than they do with the small builders
and individual home owners who take out conventional or
VA-guaranteed mortgages.

MONEY M ARKET IN AUGUST
The money market, after having been almost continuously on
the tight side since the last week of June, firmed somewhat
further through much of August. Pressure on bank reserve
positions was centered on the New York money market,
although the gains and losses of reserves were somewhat more
widely distributed geographically than in the preceding month.
The usual seasonal expansion in business (and agricultural)
loans also got under way in most sections of the country during
the past month, although not in the volume experienced
a year ago.
As a consequence of money market conditions, short­
term money rates were relatively high. Immediately available
Federal funds changed hands on most days at 1% per cent,
and occasionally at 1 11/16 per cent— just short of the Fed­
eral Reserve discount rate. The new Treasury bills issued on
August 16 reached the highest average discount rate in over
18 years. The bill issue on that date culminated seven con­
secutive weeks of new money borrowing by the Treasury, in
weekly amounts of 200 million dollars, and thereafter rates
on Treasury bills and other shorter-term Government securities
declined slightly, as the Treasury confined its subsequent bill
offerings to the amounts of maturing issues. Long-term money
rates (bond yields) declined somewhat further as growing
investor confidence, encouraged by a sharply curtailed volume
of liquidation on the part of insurance companies, brought
the prices of restricted Treasury bonds to the highest levels
since the first half of April. The Treasury’s refinancing
announcements during the month played some part in con­
tributing to the rise of longer-term bond prices.
G o v e r n m e n t Se c u r it y M a r k e t

On four different days during the month, the Secretary of
the Treasury made announcements which affected the Govern­
ment security market. On August 13, he announced that the
2 per cent bonds of December 15, 1951-55 (outstanding in
an amount of 510 million dollars) would not be called for
redemption. At the same time, the Secretary called for pay­
ment on December 15, 1951 the 1.1 billion dollars of 2Va per
cent partially tax-exempt bonds of December 15, 1951-53. On
August 16, the Secretary announced that the Treasury bill offer­
ing of August 23 would be made in an amount sufficient only
to equal the maturing issue, thus bringing to an end for the
time being the Treasury’s program of obtaining new money in
connection with the weekly bill tenders. On August 21, follow­




ing reports that recommendations had been made to commercial
banks to engage in forward arbitrage transactions with respect
to the restricted bonds which will become eligible for bank
purchase in 1952, the Secretary requested the Federal and
State bank supervisory authorities to investigate through their
bank examinations any violation of the letter or spirit of the
Treasury regulations which (1 ) forbid commercial bank pur­
chase of restricted bonds for the bank’s own benefit in advance
of the date on which such bonds become eligible, and (2 ) limit
commercial bank transactions in restricted issues to the needs
of an active trading account maintained to facilitate purchases
and sales of such issues by bank customers. On August 27, the
Secretary announced that the 755 million dollars of 3 per cent
Treasury bonds maturing September 15, and the 1.9 billion
dollars of 1V4 pet cent Treasury notes coming due October 1
would each be refinanced through an offering of V/% per cent
11-month certificates of indebtedness. Thus, the certificates
offered in exchange for the maturing bonds will mature on
August 15, 1952, while those offered in exchange for the
maturing notes will come due on September 1 next year.
As already noted, the Treasury’s decision to cease new money
borrowing through its bill issues helped to ease slightly the
average discount rate on new bill offerings. For the issues
dated August 2, 9, and 16, the average discount rates were,
respectively, 1.611, 1.652, and 1.660 per cent. For the two
remaining issues during August, the average discount rate
declined, respectively, to 1.651 and 1.645 per cent. Yields
on outstanding bills, except for the very short maturities,
fluctuated during most of the month in a narrow range at
levels slightly above those prevailing toward the close of July.
Despite the pronounced firmness in bill rates during the
month, the Federal Open Market Account did not find it
necessary to make appreciable bill purchases in order to assist
reserve adjustments by the banks. The Federal Reserve Bank
of New York did, however, enter into a moderate volume of
repurchase agreements, which permitted qualified dealers in
Government securities to obtain funds temporarily through
sales of bills and other short-term securities to the Reserve
Bank subject to repurchase within 15 days at the same price.
The Reserve Bank provided such accommodation at charges
equivalent to its discount rate in order to assist dealers in
carrying "positions” of sufficient volume to enable them to do
their part in maintaining orderly market conditions. Reserve
Bank holdings of securities under these agreements fluctuated

126

M ONTHLY REVIEW , SEPTEMBER 1951

Closing Bid Prices of Selected Treasury Bonds
(W eekly from February 28, 1951*)

generally anticipated by investors. However, the Treasury’s
announcement that it would redeem the partially tax-exempt
bonds callable as of December 15 pointed toward further
reduction in the supply of partially tax-exempt bonds, and thus
provided some additional stimulus to the rise in prices of the
longer maturities of such bonds.
M e m b e r B a n k R e s e r v e P o s it io n s

* Wednesday dates except for latest figures which are for Monday, August 27.

from day to day in response to changes in money market con­
ditions and the demand for the securities, and after the state­
ment week ended August 8 accounted for practically all of the
changes in holdings of Government securities by the Federal
Reserve System as a whole.
Prices of Treasury bonds rose further, in the face of the
tight money market, in response to the same stimulating forces
that had become apparent during July— a moderate increase in
personal savings, a lull in inflationary pressures within the
economy, some catching up by financial institutions on back­
logs of advance commitments, and scattered instances of post­
ponement in business expansion plans. Price advances—
which by August 27 had recovered roughly half of the declines
that occurred in the three months immediately following the
development toward freer market conditions that began with
the announcement on March 4 of the Treasury-Federal Reserve
“accord”— were again made in a relatively thin market, more
conspicuous for a reduction in selling than for any great
increase in demand.
Prices of two representative medium-term eligible and
ineligible issues, and the prices of two comparable longerterm issues, are plotted on the accompanying chart. These price
movements, which generally characterize the changes that
occurred throughout the Treasury bond list, indicate greater
upward price adjustments for restricted bonds of longer term
(reversing the experience of July when price increases were
somewhat greater among the medium-term restricted bonds).
Prices of eligible bonds increased less than those of the
restricted issues, but the longest-term eligible issue sold frac­
tionally above par for the first time since early May. The
Secretary of the Treasury’s decision not to call the 2 per cent
bonds of December 15 apparently had no direct effect on the
course of eligible bond prices because this decision had been




During the last week in July (the statement week ended
August 1 ), member banks were able to maintain their reserve
positions only by obtaining substantial advances from the
Federal Reserve Banks. The convergence of usual monthend transactions which exerted this heavy pressure on bank
reserve positions was intensified by the Treasury’s final call
on its "X ” balances on July 30. The influence of Treasury
operations on the banks was reversed in the following week,
but a substantial portion of the reserves accruing to the mem­
ber banks was devoted to the repayment of advances previously
obtained from the Reserve Banks. The net increases in total
reserves and excess reserves during the statement week ended
August 8 were gradually employed in meeting other reserve
drains that persisted, on balance, through the remainder of the
month. In the final statement week there was a repetition of
the experience at the end of July. The various factors con­
tributing to the persistent tightness in bank reserves over the
month are summarized in the accompanying table.
Member banks outside New York City found it necessary
to draw against their correspondent balances here more or less
continuously after the first week of August. This was partly
because the banks outside New York experienced a somewhat
greater proportion of the direct impact of Treasury transac­
tions than during July, and consequently drew upon New York
in order to maintain their reserve positions. Correspondingly,
there were two influences which lessened the direct impact of
Treasury transactions upon the New York City banks. One of
these was the Treasury’s exhaustion of its "X ” balances, which
W e e k ly Changes in F actors T ending to Increase or D ecrease
M em ber B ank R eserves, A u g u s t 1951
(In m illions of d o llars; ( + ) denotes increase,
(— ) decrease in excess reserves)

statem ent weeks ended

Factor

Five
weeks
ended
A u g u s t A u g u s t A u g u s t A u g u st A u g u st A u g u st
1
8
15
22
29
29

Routine transactions
58
90
7
42
24

-1 2 1

-1 0 0

+
+
-

41
57

-1 0 9
-2 7 0
-3 2 8
+137
+ 146

+399

-1 1 8

-

18

-3 4 6

-4 2 5

+ 24
+330

+ 37
-2 0 8

+
+

33
42

-

67
28

+

18
63

+
9
+ 199

+353

-1 7 0

+

75

-

95

+

45

+208

11

+229

-

43

-1 1 3

-3 0 1

-2 1 7

+

34

-

11

-

7

-

-

+

45

+218

-

50

-1 3 1
-1 3 4
-1 3 6
+ 52
+
9

+366
- 66
- 62
- 43
+204

-2 8 1
+239
- 21
+ 45

-3 4 2

Treasury operations*.............
Federal Reserve float.............
Currency in circulation.........
Gold and foreign account.. .
Other deposits, etc..................

-2 1 9

-1 0 2
+
+

Federal Reserve transactions
Government securities...........
Discounts and advances. . . .

+

Effect o f change in required re­

51

-1 6 4

11

-3 1 2

* Includes changes in Treasury currency and cash.
N ote: Because of rounding, figures do not necessarily add to totals.

-

46

-2 6 3

FEDERAL RESERVE BANK OF NEW YORK

had been built up in New York City banks in amounts pro­
portionately greater than the customary distribution of
Treasury balances throughout the banking system. As the
Treasury reverted to withdrawing funds from its regular
Tax and Loan Accounts, Treasury receipts from the New
York money market fell below the volume of Government
disbursements in the New York area. The other influence
helping to minimize pressure on bank reserve positions in
New York City was the Treasury’s discontinuance after August
16 of its program for new money borrowing through weekly
additions to its bill offerings. Because a relatively large part of
the Treasury’s new offerings had been purchased by customers
of New York banks, the cessation of further Treasury new
borrowing helped to lessen the net drain of funds out of
New York City to the rest of the country through Treasury
transactions.
The New York City banks also gained the bulk of the
proceeds of disbursements by foreign central banks and gov­
ernments from accounts held at the Reserve Bank. At a

127

rough magnitude of 40 to 50 million dollars each week, one
week excepted, these gold and foreign account transactions
continued to provide funds to the banking system, in sharp
contrast to the sustained gold outflows that had persisted until
April of this year following the currency devaluations of
September 1949.
It was noteworthy during the month that the New York
City banks and the banks in other sections of the country
showed a diminishing inclination to adjust their reserve posi­
tions through the market sale of Government securities.
Increasing reliance is apparently being placed upon direct
borrowing from the Federal Reserve Banks, as interest rates
on shorter-term Government securities hover close to the
discount rate and fluctuate in price in response to the tighten­
ing or easing of money market conditions. W ith the exception
of the sales contract agreements mentioned above, the Federal
Reserve System was only called upon to engage in minor trans­
actions in Government securities during the period.

THE FIRST YEAR OF THE EUROPEAN PAYMENTS UNION
On June 30 the European Payments Union completed its
first year of operations, a year marked by grave disturbances
to the world economy as a result of the Korean war. Although
these disturbances created many unforeseen obstacles to a
smooth functioning of the payments mechanism, the EPU has
evidenced sufficient strength to withstand the pressures result­
ing from the war, as well as a notable degree of flexibility in
adapting itself to changing circumstances, and has emerged a
potent instrument for the promotion of European integration.
Particularly noteworthy has been the progress made under
the EPU toward the restoration of multilateral trade among
the monetary areas of the EPU countries. The EPU achieve­
ment in this regard marks a major advance beyond the limited
progress made under the earlier Intra-European Payments
Agreements. The latter, which functioned from October 1948
through June 1950, undertook to facilitate an expansion of
intra-European trade by arrangements under which creditor
countries extended bilateral grants to their prospective debtors
in the form of "drawing rights”. These drawing rights, in turn,
were backed by ECA dollar aid to the creditor countries. The
IEPA tended, however, to freeze intra-European trade into
rigid bilateral channels, and failed to provide adequate incen­
tives to the debtor countries to reduce their deficits.
The EPU was designed to overcome both these difficulties.
First, the union re-established the interconvertibility of
European currencies by making it possible for a member
country to use a surplus in any member currency for settling
a deficit in any other. This was accomplished by means of a
clearing house procedure through which at the end of each
month the EPU offsets against each other, as far as possible,
the various surpluses and deficits of an individual member
country with all of the other members, so as to establish its net
monthly deficit or surplus with the union. In addition, this




net deficit or surplus is offset against any net surplus or deficit
that the country may have incurred during the previous
months.
Secondly, the net deficit or surplus of each country
resulting from the monthly clearing is then settled in
accordance with a quota, which regulates, in the case of
deficit countries, the extent to which they receive credit
from the union or are required to make payments to it in
dollars to settle their net deficits. The provision for credit was
made to finance seasonal and temporary disequilibria, and to
allow time for remedial action to be taken where necessary;
the requirement of dollar payments tends to discourage the
debtor countries from running excessive deficits. Net deficits
up to one fifth of a country’s quota are settled in full through
the extension of credit by the union, and in excess of this
through a combination of credits by and dollar payments to the
union, but with a progressively increasing proportion of dollar
payments.
To provide backing for the credits extended by the union,
the countries with surpluses are required to extend credit to
the union, settling their net surpluses completely in credit up
to one fifth of their quotas; thereafter they extend credit
to the union and receive dollars from it in equal propor­
tions. In addition to this quota mechanism, provision was
also made for a deficit country to settle all or part of its net
deficit, if it so desired, by using its "existing resources”, i.e.,
its exchange reserves in the form of another member country’s
currency, such as sterling. Furthermore, in the EPU’s first
year, six debtor countries were granted special "initial credit
balances” to help toward paying for their deficits. These
credit balances were partially backed by initial debit balances
allotted to three creditor countries, the latter balances in turn
being underwritten by United States aid. The initial credit

128

MONTHLY REVIEW, SEPTEMBER 1951

and debit balances therefore resembled the drawing rights of
the old IEPA even though they were much smaller. The
United States further strengthened the EPU by providing it
with a 350 million dollar working-capital fund to cover a
temporary excess of dollar payments by the union over its
dollar receipts.
I n d iv i d u a l C r e d it o r

and

D e b t o r Po s it io n s

During the first twelve months of EPU operations, three
countries— the United Kingdom, France, and Belgium—
emerged as major creditors, accounting for 94 per cent of the
net surpluses within the EPU. On the debit side, two major
debtors— Western Germany and the Netherlands— accounted
for 50 per cent of the total net deficits. The positions of these
and the other member countries are shown in the table.
Although the United Kingdom remained a major creditor,
important shifts in its position ( which reflects the transactions
of the whole sterling area except Iceland) took place during
the year. On joining the EPU, the United Kingdom received
special safeguards against dollar losses that, it was feared, might
result from the settling through the EPU mechanism of the
sterling balances held by other EPU members; this protection
was principally in the form of an ECA guarantee to under­
write any British dollar losses resulting from the use of sterling
resources. As matters turned out, this proved superfluous.
During the first months of the EPU, the United Kingdom
accumulated increasing surpluses with the union, primarily
because of the increases in primary commodity exports by the
overseas sterling area at inflated prices, and of the considerable
anticipatory purchases of sterling by other EPU members,
following rumors of possible revaluation.1
The unexpectedly rapid extension of credit by the United
Kingdom to the EPU caused considerable concern in Britain,
especially since the counterpart of the overseas sterling area’s
surplus with the EPU was accumulating in the form of sterling
balances credited to these sterling area countries. At the
same time misgivings were voiced by the United Kingdom’s
European trading partners as to the adequacy of the trade
liberalization measures both of the United Kingdom itself
and of the rest of the sterling area. In March 1951 the British
surplus fell substantially, however, and in May and June the
United Kingdom registered its first clearing deficits since the
start of EPU operations. This change appears partially attrib­
utable to increased imports from Western Europe by both
the United Kingdom and the overseas sterling area, to the break
in the prices of sterling area raw materials, and to the slowing
down in the expansion of British exports to the Continent.
Perhaps even more important, sterling area exports of certain
primary commodities, which are at their seasonal lows from
1 Of the total United Kingdom surplus of 476 million dollars’
equivalent during the first six months of EPU operations, according
to United Kingdom balance-of-payments statistics, 185 million was
accounted for by the United Kingdom’s own current-account surplus
with the EPU area, and 196 million by the surplus of the overseas
sterling area. The remainder represented the net result of capital
transactions and other transfers.




April to September, fell sharply, while British purchases of
fruits and vegetables and British expenditures on travel on
the Continent rose as usual during the summer months. These
seasonal factors, which may be expected to continue during
the third quarter, tend to obscure any long-term trend in the
United Kingdom’s EPU position that may be developing.
France’s EPU position has developed in a similar manner,
registering a surprisingly large surplus during the first ninemonth period and then changing over to monthly deficits. The
surpluses may have been primarily attributable to an improved
balance in France’s domestic economy, which has tended to
reduce import demand and at the same time has released goods
for export in response to rising demand in the other countries.
However, it may also be noted that some of France’s trading
partners have complained that its slow removal of import
quotas and its high tariffs have contributed to its surpluses.
Belgium initially had been expected to remain the out­
standing intra-European creditor, but during the first six
months of the EPU’s operations its transactions resulted in
an approximate balance with the union. In fact, had it not
been for Belgium’s sizable surplus with the Netherlands and
the repayment to Belgium of outstanding debts by other mem­
bers, Belgium would have shown a substantial deficit in this
period. During these six months it ran a consistently heavy
deficit with the United Kingdom, mainly attributable, accord­
ing to press reports, to forward purchases of sterling in antici­
pation of a revaluation of the pound, and to abnormally heavy
purchases of sterling area primary commodities. After the
turn of the year, Belgium reverted to a strong surplus position,
the result in part of an expansion in Belgium’s intra-European
exports following the rise in its imports, of a change from
deficits to surpluses vis-a-vis the United Kingdom, and of the
financing, through Belgium, of various types of capital flight
from other European currencies.
Western Germany became EPU’s dominant debtor soon
after the beginning of EPU operations and, despite a tighten­
ing of internal credit and import controls in October, ex­
hausted its quota completely during November. The EPU
managing board after investigation concluded that Western
Germany should receive additional EPU assistance for a limited
period, on the assumption that the deficit would be overcome
if remedial measures were taken. The EPU diagnosed the
difficulties as caused in part by increased stockpiling made
possible by liberalization measures taken by the West German
Government, and in part by an acceleration of payments for
imports together with a slowing down of receipts from ex­
ports. It noted that relatively easy credit conditions had contrib­
uted to the crisis, but also pointed out that the need to provide
for working capital made it likely that a payments gap would
accompany increased West German economic activity. Besides
these causes, various commentators advanced the view that the
West German quota, which like those of the other countries
was based on its 1949 intra-European payments, was inade­
quate since Western Germany’s intra-European trade had ex­
panded much faster during 1950 than that of the other EPU

FEDERAL RESERVE BANK OF NEW YORK:

129

Eu ropean P a y m en ts U n ion O p eration s, b y C ou n tries, Ju ly 1950 - Ju ne 1951

(In millions of dollar equivalent)
Settlement operations

Offsetting operations
Member
countries
and
monetary
areas

Quotas utilized

Total of gross bilateral
Surpluses

Deficits

Net
surplus
or
deficit*

26.4
450.7
85.6
445.1
365.9
5.9
0.9
159.6
183.5
50.4
91.4
146.6
111.5
58.1
993.0

130.5
214.9
153.7
251.1
647.2
146.3
7.9
189.6
453.1
130.2
32.7
206.0
100.5

104.1
236.3
68.6
196.4
284.7
140.4
7.0
30.4
271.0
80.0
59.1
59.7

122.1

64.0
607.7

+3,174.6

-3,174.8

Austria.................
Belgium ................
Denm ark..............
France .................
Western Germany
Greece...................
Iceland.................
Ita ly ......................
Netherlands.........
N orw ay................
Portugal...............
Sweden.................
Switzerland!!- •••
T urkey.................
United K ingdom .

385.8

11.1

“ Existing”
resources
used (net)
against ( + )
or by ( —)
member
- 1 5 .8
2.0
1-1
- 1 1 .9

- 80.0
+ 29.4

+

-

1.1

-115.0
- 4.0

- 4 2 .5
-

+ 1.9
+85.7

/ —1,109.9*\

T otals...................

Initial
debit ( + )
or
credit ( —)
balance
utilized

\+1,110.6*/

30.0
60.0 +

- 25.0|
+150.0
(- 3 1 4 .0
(+ 1 7 9 .4

Credit
extended ( + )
or
received ( —)
by member
+ 147.4
- 61.1
+ 149.6
-1 8 2 .6

+

Dollars
received ( + )
or
paid ( —)
by member
- 2 4 .lt
+ 75.4
5.5
+ 45.6
-

-

2 4 .lt

—

66.6

+222.8

+195.3
- 2 7 2 .8
- 24.3 t
3.0t

00.2

-

Total
dollars
and
credit

24.3 f
3.0t

+

12.1

12.1

-1 7 5 .6
20.0
+ 36.5
- 44.3

-

+ 22.5

-2 4 1 .0
20.0
+ 59.1
- 44.3

- 28.2
+292.0

- 12.7
+ 80.0

- 40.9
+371.9

-5 1 1 .7
+648.7

-2 2 5 .2
+223.5

Per cent
of total
quota
utilized

0

67.4
34.2
37.6
85.3

0
0

5.9
73.0
10.0
84.4
17.0
4.4
81.8
35.1

737.0 \
+87:
172.3/

65.4

-

+ 11.1

+ 11.1

Note: Because of rounding, figures may not add to totals shown.
* The net surplus or deficit includes interest paid on loans granted or received. The difference between the two totals in this column is the amount by which inter­
est paid by the EPU to member countries exceeded interest received from members,
t Settled fully in dollars outside of quota, since under the EPU agreement Austria, Greece, and Iceland have not been allowed to use their quotas when debtors to
the E PU ; indicated amounts financed in full by EGA special aid in the cases of Greece and Iceland and to the extent of 10 million in the case of Austria.
N orway’s initial balance included 10.0 million in the form of a loan repayable to the E P U ; the entire initial balance for Turkey was in this form,
t t Switzerland included only from November 1950.
Source: Organization for European E conom ic Cooperation.

t

countries. To tide Western Germany over these difficulties,
it was granted a special short-term credit of 120 million
dollars’ equivalent from the EPU to be used in combination
with its own dollar resources, on the condition that it take
certain internal and external measures to improve its position.
Nevertheless, the deficit continued to rise, and at the end of
February, the West German Government, faced with ap­
proaching exhaustion of the special credit, suspended all
further import licensing.
The effect of this step was a striking improvement in
Western Germany’s position, imports falling abruptly. In
addition, exports continued to rise and exporters repatriated
their export proceeds more rapidly. From March through
June, Western Germany registered surprisingly large sur­
pluses, and was able not only to repay the special credit of
120 million dollars’ equivalent but also to start repaying the
credit extended to it under its quota. But it is improbable
that Western Germany will accumulate surpluses indefinitely,
since in order both to continue its economic progress and not
to hinder that of its European partners, it requires a more
liberal import program. How far it can liberalize its imports,
however, will of course depend on how its foreign exchange
position develops.
The Netherlands ended EPU’s first year as its second largest
debtor, but in contrast to Western Germany its position shows
little sign of immediate improvement. The Netherlands’
fundamental problem is its large deficit with Belgium, which
in the first year was almost as large as its entire deficit with
the EPU. During the spring, moreover, the Netherlands was
most unfavorably affected by Western Germany’s February
import restrictions, owing to its great dependence on the West
German market. To combat its payments deficit the Dutch




Government has restricted domestic credit and has also taken
other deflationary measures. This new policy should signifi­
cantly contribute toward an improvement in the Dutch pay­
ments position, but may require some time to become fully
effective.
Notwithstanding the payment difficulties encountered by
the various member countries, however, the EPU clearing and
credit mechanism proved generally adequate to cope with the
unexpectedly wide swings in intra-European payments result­
ing from the Korean war. After reviewing its first year of
operations, the EPU has accordingly found it necessary to
make only minor modifications in its payments mechanism,
increasing Germany’s quota from 320 million dollars’ equiva­
lent to 500 million, and raising the Netherlands quota from
330 million to 355 million. Furthermore, the EPU ended its
first year with the 350 million dollar working capital, pro­
vided by the United States, intact. Even though it had to
draw upon its working capital during the course of the year,
by the end of the year its current payments operations had
added 1.7 million to its dollar resources.
Li b e r a l iz a t io n

of

T rade

The establishing of the EPU has opened the way for a
progressive liberalization of intra-European trade by rendering
intra-European discrimination unnecessary and by providing
credit to finance possible short-term deficits arising out of such
liberalization.
Liberalization has been effected primarily by a gradual re­
moval of quotas on intra-European imports. By the spring of
1951, the proportion of nongovernmental imports that member
countries were required to admit free of quotas had been in­
creased to 75 per cent (computed on the basis of trade in

MONTHLY REVIEW, SEPTEMBER 1951

130

1948), exemption being granted several debtor countries.
However, this percentage method allowed each member
country to choose independently of the others the commodities
it would free, with the result that certain quotas that were
among the greatest obstacles to intra-European trade were
not removed. To meet this and other difficulties a new ap­
proach has been developed. Lists of specific products are to be
drawn up, on which all member countries will remove quota
restrictions completely. The first such list, consisting mainly
of textile products, was agreed to in July 1951, several debtor
countries being exempted from complete compliance.
The removal of quotas by the various member countries
was at first on a generally uniform percentage basis, but in
the spring of 1951 it was made somewhat more flexible. In
April, at the request of the Council of the Organization for
European Economic Cooperation, the stronger creditor coun­
tries for the most part agreed both to permit some degree of
West German discrimination against themselves and to make
unilateral import concessions to Western Germany and to
the other debtor countries. This modification of the original
liberalization procedure has been regarded by some as a
retrogression from the ultimate objective of a single European
market. On the other hand, thoroughgoing uniformity in
trade liberalization, with the various countries at different
stages of recovery, may well have tended to lead to a trade
pattern that was artificial in the sense that it has depended
upon a continuing flow of grants and credit.
The primary objective of the efforts to liberalize intraEuropean trade has been, of course, the integration of Western
Europe into a unified market; competition would thereby
be stimulated, resources reallocated to more effective uses,
productivity increased, and Western Europe relieved of de­
pendence on United States aid. While there has been general
agreement as to the importance of this objective, questions
have been raised as to the extent of the potential contribution
integration can make toward the solving of Western Europe’s
fundamental difficulties. It is argued that liberalization would
create a high-cost area insulated from the rest of the world,
and that an expansion of intra-European trade might well tend
to reduce rather than increase European exports to dollar
markets.
It is of course impossible to measure precisely the results
of liberalization, but there is little doubt that intra-European
trade has been noticeably stimulated. While the liberalization
program may have to be pursued for a considerable time in
order to achieve any significant integration, the essential fact
is that the Western European countries have accepted the
principle and have begun to move in that direction.
So m e M a j o r Po lic y I ssues

One of the major policy issues underlying the whole con­
cept of the European Payments Union has been the question
of the pattern of trade and payments that the union has been
designed to encourage. Before the war some Western Euro­
pean countries had surpluses in Europe with which they




financed their deficits elsewhere, while other countries had
deficits in Europe covered by outside surpluses. This pattern
of payments was disrupted by the war. Most Western Euro­
pean countries were unable to return to convertibility, and
were accordingly forced to seek a bilateral balancing of their
payments with other countries. The EPU made it possible
to replace this bilateralism with multilateral settlements within
the EPU area, but on the other hand it provided for only
a limited convertibility of net balances into dollars. As a
consequence EPU creditors cannot fully use their intra-European surpluses to finance their deficits with the outside world.
The scope for such financing, however, may have been reduced,
since the disruption of the prewar pattern of world payments
may have created a tendency for Western European countries
to move toward a closer balance with each other as a group.
Be that as it may, it is by no means clear that, in view of the
reluctance of Western European countries to utilize their
scarce dollar assets to settle their intra-European deficits, a
fuller settlement of such deficits in dollars is feasible at present.
Another question concerns the adequacy of the credits
provided by the union, and in contrast, the severity of the
dollar-payments requirements. The dollar-free segments of
most countries’ quotas were exhausted much sooner than was
expected, and the requirement for progressively increasing
dollar payments has put increasing pressure on the debtor
countries to remedy their positions. But whether the threat
of such increasing dollar payments is a sufficient deterrent to
debtors when they retain the hope of further credits or further
outside assistance remains questionable. The creditors on
their part feel that the fact that only one half of any con­
tinuing surpluses is paid for in dollars puts undesirable infla­
tionary strains on their economies since they cannot use the
whole of their EPU surpluses elsewhere. This, however, may
eventually lead to a further easing of import restrictions by
the creditors in order to achieve a closer balance with the EPU.
Thirdly, there is the question of chronic deficits in the
intra-European trade of a number of all-round debtor countries,
such as Austria and Greece. The initial balances given to a
number of debtor countries during EPU’s first year have not
solved the problem, and some of these debtors have had to
receive additional United States assistance. During 1951-52
the United States Government, instead of underwriting new
grants of initial balances, is giving assistance directly to four
chronic debtor countries— Austria, Greece, Iceland, and Turkey
— as and when they incur deficits in the EPU.
Finally, there is the very important issue of whether the
EPU’s group approach represents the most useful avenue
toward the attainment of convertibility of West European
currencies into dollars, or whether this objective could not be
better achieved by the stronger countries establishing such
convertibility singly. Although the EPU’s group approach has
increased the freedom of payment among its members in the
face of wide differences in the strength of their currencies, it
has been at the cost of facilitating a movement of capital
toward the stronger currencies that has created a definite

FEDERAL RESERVE BANK OF NEW YORK

problem. On the other hand, the single country approach to
convertibility might be at the expense of the weaker countries,
and in addition there is doubt as to whether it could have
stood the strains resulting from the Korean war.
Against these four major unresolved issues, however, the
EPU has accomplished much within its limited geographical
scope, even though full convertibility of sterling— the most
widely used of Europe’s currencies— remains essential for a
return to a world-wide multilateral system of trade and pay­
ments. The EPU has provided sufficient flexibility to meet
the strains of the Korean war, and has made possible the
growth of multilateral trade within the EPU area. In addition,

131

it has made great progress toward developing European as
opposed to purely nationalistic policies for the solving of
mutual problems— progress that would otherwise have been
more difficult to achieve.
In conclusion, it may fairly be said that, while the ultimate
goal of complete convertibility of European currencies is still
distant, the EPU has made progress toward the day when it
will be able to coalesce into a wider trading and payments
system. But there is no magic in the EPU mechanism that
can relieve individual countries of the task of strengthening
their international economic positions by appropriate internal,
as well as external, policies.

EARNINGS AND EXPENSES OF THE SECOND DISTRICT MEMBER B A N K S FIRST HALF OF 1951
Reflecting principally the impact of heavier income taxes,
net profits of all member banks in the Second Federal Reserve
District declined to 96.4 million dollars during the first six
months of 1951, a drop of about 3 per cent below the net
profit of 99.5 million dollars earned during the corresponding
period of 1950. The decrease in the aggregate net profit for the
District, which is based upon a preliminary tabulation of the
principal items in reports submitted by the individual banks,
compares with a decline (also preliminary) of 16.0 million
dollars, or 4.0 per cent, for all member banks in the country
as a whole.
Net profits of the central reserve New York City banks, as
shown in the accompanying table, amounted to 70.4 million
dollars during the first half of 1951, or virtually the same
amount as during the first six months of 1950, whereas the
net profits of sample groups1 of other Second District member
banks fluctuated irregularly— the changes ranging from 6
per cent above the corresponding period of 1950 in the largest
institutions to 14 per cent lower in the smallest banks. In
general, the main determinants of the movements of net
profits among the various groups of banks were the rise in net
current operating earnings on the one hand and the increase
in income taxes on the other, although increased expenses
were also a factor of some importance in holding down net
profits. In all groups of banks, lower security profits and
recoveries were contributing factors drawing down net profits,
and in two groups of banks (the smallest sized group with
deposits of less than 2 million dollars and the middle sized
group with deposits of 5 to 20 million) they assumed a major
role in the final results.
Total current operating earnings expanded in most banks
1 Sample groups of Second District member banks outside New
York City have customarily served as the basis for articles on bank
earnings and expenses appearing in this Review in order to permit
early publication of the principal results of recent member bank
operations, in advance of the complete checking and tabulating of all
income and expense accounts on all reports submitted to the Federal
Reserve Bank of New York. Identical samples of banks have been
used since 1945. These samples include roughly half of the banks
with deposits in excess of 20 million dollars and 10 per cent of the
number in each of the smaller groups.




throughout the District, and the larger banks, which had
experienced the sharpest gains in loan income, generally had
the greatest gains in gross income. In the New York City
banks, income from loans showed a substantial rise of 48.3
million dollars, or 50 per cent, over the first six months of
1950, reflecting not only a greater average loan volume but
also higher rates of interest and a somewhat greater propor­
tion of higher rate loans in the total loan portfolio. Outside
New York City the percentage gains in loan income varied
directly with the size of the bank, ranging upward from
9 per cent in the smallest banks to 27 per cent in the largest
banks. It is interesting to note that the percentage gains
in loan income in the two largest sized group of banks outside
the City exceeded the rise in the average loan volume held
during the two periods, whereas in the two smallest sized
groups the gain in income was proportionately less than
the gain in volume. Apparently, the larger banks were able
to increase the rates they were charging on loans while the
smaller banks, whose loan rates have generally been somewhat
higher and more rigid, were unable to do so.
Inasmuch as the larger banks experienced the heavier
demand for loans, they had to sell a proportionately greater
volume of Government securities in order to accommodate
this demand. As a result, their average holdings of Govern­
ment securities and their income from them showed propor­
tionately greater declines. Generally, however, the percentage
drop in income from Government securities was less than
the decline in the average volume of such investments (except
for the smallest sized groups of banks), indicating that
portfolio yields had risen between the two periods. Interest
and dividends received on investments in non-Government
securities, which consist mainly of tax-exempt State and
municipal obligations, increased in most banks in the District.
In the largest sized group of banks outside New York City,
however, a small decline is shown in this item which reflects
substantial write-offs of premiums by a few banks against
the income received. In all groups of banks, average holdings
of State and municipal obligations were heavier than in the
first half of 1950, as banks made purchases to reduce the

132

MONTHLY REVIEW, SEPTEMBER 1951

amount of income subject to income taxes and excess
tax, or in the expectation that future tax increases
enhance the value of the tax-exemption feature and
also result in higher prices and an opportunity to
security profits.

profits
would
might
obtain

Security profits and recoveries were either drastically reduced
from the level of the first half of 1950 or, as in the case of the
two smallest sized groups of banks, converted to small net
losses. These changes reflected the steady downward trend in
Government security prices through most of 1950 and early

Total current operating expenses increased in all groups
of banks and generally the larger banks, which had the
heaviest gains in gross income, showed the largest rises in
both total operating expenses and in net current operating
earnings before taxes. Salary and wage outlays also increased
more in the larger banks and reflected the combined effect
of a larger volume of employment and higher wage and
salary rates. Interest payments on time and savings deposits
were higher than in the first six months of 1950 in all groups
of banks and reflected a fairly general rise in the rates paid.
In the large New York City banks and in the smallest banks
outside the City the percentage rise in interest expense out­
stripped the gains in the average volume of time deposits,
whereas in the remaining groups of banks the increases occurred
despite reductions in average time deposit volume. All other
current expenses, which include real estate taxes, recurring
depreciation on "banking house”, deposit insurance premiums,
and the physical expenses of banking were 9 to 22 per cent
higher in the various groups of banks. However, for the
year 1951 as a whole, the banks probably will have much
smaller increases in this "all other” category, as deposit
insurance payments in the second half will be reduced heavily
by F.D.I.C. credits, totaling 60 per cent of its net assessment
income for the year 1950.

1951 and the sharp drop following the adjusrment to free
market conditions which resulted from the accord reached
between the Treasury and the Federal Reserve System in early
March. Prices of State and municipal bonds, the only other
type of security held in volume by commercial banks, also
declined sharply after March 1951, but, on the average, their
prices were higher in the first half of 1951 than in the cor­
responding period of 1950.
Valuation reserves for loan losses were increased by all
groups of banks and reflected additions by those institutions
which had not as yet accumulated the maximum allowed for
income tax purposes (three times the average loss experience
of the past 20 years) and by banks setting up loan reserves for
the first time. Actual net losses on outstanding loans, however,
were confined to the three smallest sized groups of banks, with
the City banks and the largest banks outside New York both
recording actual net recoveries.
The amounts set aside for State and Federal income taxes
were 73 per cent greater than in the first six months of 1950
for the central reserve New York City banks, 36 per cent
greater in the largest banks outside the City, and 3 to 20 per
cent greater in the remaining three groups. These especially
heavy increases in the larger banks were necessitated by the

E a rn in gs an d Expenses o f Selected Second D istrict M e m b e r B an k s for th e First Six M o n th s o f 1951
an d th e Percentage C h a n g es fro m th e F irst Six M o n t h s of 1950
(Dollar amounts in thousands)
Sample banks located outside New York City
Deposit size

New York City banks

Central reserve
(22 banks)

$2, 000,000 to
$5,000,000
(25 banks)

$5,000,000 to
$20,000,000
(25 banks)

Over $20,000,000
(35 banks)

Under $2,000,000
(15 banks)

Item
Dollar
volume

Per cent
change
1950 to
1951

1951

Per cent
change
1950 to
1951

1951

Per cent
change
1950 to
1951

Interest on United States Government obligations..
Interest and dividends on other securities.................
Interest and discount on loans....................................
Service charges on deposit accounts............................
Trust department income.............................................
Other current income....................................................

63,431
17,743
145,075
9,017
30,336
26,540

-1 4 .5
+24.2
+49.9
+11.7
+10.9
+27.3

7,258
1,837
15,046
1,699
1,226
2,178

8.5
0.7
+ 27.4
+
8.4
+
3.5
+
7.8

1,066
252
2,225
327
43
152

- 5.2
+22.9
+19.0
+ 9.0
- 21.8
+ 4.1

372

Dollar
volume

1st half

Dollar
volume

1st half

1st half
1951

Dollar
volume

1st half
1951

88
797
115
14
87

Per cent
change
1950 to
1951

Dollar
volume

1st half
1951

Per cent
change
1950 to
1951

1.0
0

0.5
+
8.6
+ 15.3
+ 19.8
+ 100.0
+ 61.1

103
18
229
28
13

+ 8.3

+

0

-

+ 8.5
+ 12.0

0

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

292,142

+ 21.0

29,244

+

10.9

4,065

+ 9.9

1,473

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

92,597
5,914
63,663

+15.5
+28.6
+10.7

9,490
3,310
7,662

+
+
+

13.2
9.1

1,157
599
974

+10.7
+ 7.0
+10.4

441
196
386

Total current operating expenses............................
Net current operating earnings, before income taxes.

162,174
129,968

+14.0
+30.9

20,462
8,782

+
+

9.8
13.5

2,730
1,335

+ 9.8
+ 10.1

1,023
450

Security profits and recoveries( + ) or charge-offs(—)*.
Net additions to (—) or deductions from ( - f ) loan
valuation reserves!....................................................
Net recoveries ( + ) or charge-offs (—) on loans..........
All other net recoveries ( + ) or charge-offs ( —) ........
Taxes on net income......................................................

+3,729

-5 1 .0

+ 86

-

75.3

+

12

-9 3 .9

-

3

(a)

-

1

(a)

-4 ,8 0 6
+3,149
- 2,021
59,662

(a)
(a)
+49.6
+ 72.7

-5 0 8
+ 216
-5 8 7
2,858

-

49.2
(a)
+511.5
+ 35.7

-1 1 6
- 15
- 17
432

+ 68.1
-6 0 .5
-2 2 .7
+ 3.3

-

18
15
60

-

8

110

- 57.1
- 48.3
+650.0
+ 15.8

+33.3
(a)
(a)
+ 20.0

70,357
43,577
26,780

- 0.7
+ 5.1
- 8.8

5,121
1,962
3,159

+
+

6.1
0.2

767
265
502

- 11.1
+ 4.7
-1 7 .7

244
85
159

+
+
-

Net profits......................................................................
Retained earnings..................................................

2.8

10.4

* Also includes transfers to or from valuation reserves for losses on securities,
f Includes transfers to or from both bad debt and all other valuation reserves for loan losses.
(a) No percentage change can be calculated, the change being from a zero or from a plus to minus or vice versa.




13.0

391

+ 5.7

+ 15.4
+
1.0
+ 21.8

113
48
98

+ 8.7
+ 2.1
+ 10.1

+
+

259
132

+ 7.9
+ 1.5

14.6
9.8

1.7
13.3
3.7

5

0
30

88
19
69

- 1 3 .7
+ 11.8
-1 8 .8

FEDERAL RESERVE BANK OF NEW YORK

larger volume of taxable income (profits before taxes were
greater), the increases in the corporate, normal, and surtax
rates, and the enactment of an excess profits tax.
Except in the largest sized banks outside the City, which
recorded virtually no net change, dividend payments continued
to move upward in a conservative manner, while the amounts

133

of earnings retained and added to capital structures declined
moderately from the amounts added at this time last year.
Dividend payments in the first half of 1951 amounted to 62
per cent of the available net profits for the City banks and
ranged from 38 per cent of net profits in the largest banks
outside New York City to 22 per cent in the smallest.

CONSTRUCTION CONTRACTS
The volume of construction is one of the most difficult
components of business activity to measure accurately— partly
because of the varied nature of the end product (ranging from
summer cottages to large industrial plants and highways and
bridges) ; partly because of the length of time required to plan,
undertake, and complete a given project; and partly because of
the difficulty of obtaining comparable data for all areas of the
nation. As a result, a number of heterogeneous statistical series
are regularly prepared, covering the different phases of the con­
struction process, by selected categories, with varying degrees
of comprehensiveness. The indexes of construction contracts
which appear in the table of Business Indicators measure
changes in the dollar value of contract awards for all types of
residential and nonresidential building. They are prepared
by the Board of Governors of the Federal Reserve System
(national figures) and the Federal Reserve Bank of New York
(Second District figures) from basic data supplied monthly
by the F. W . Dodge Corporation.
A preliminary step before most construction work is under­
taken, particularly the larger projects, is the signing of a con­
tract between the owner and the contractor who is to do the
building. Field representatives of the F. W . Dodge Corpora­
tion collect data on the awarding of such contracts in 37 States

east of the Rocky Mountains (including the District of Colum­
bia but excluding Montana, Idaho, Wyoming, Colorado, New
Mexico, Arizona, Utah, Nevada, Washington, Oregon, and
California). The data on which the indexes of residential
contracts are based cover all types of dwellings, including one
and two-family houses (both for sale and for rent), apart­
ments, hotels, dormitories, and other shelter. The indexes for
nonresidential contracts cover commercial, manufacturing, edu­
cational, social, institutional, civic, and other types of nonresi­
dential buildings; public works (streets and highways, bridges,
dams, reservoirs, sewerage systems, parks, playgrounds, etc.);
and utilities (water, gas, and electric light and power systems,
railroad construction, etc.). The Dodge series includes addi­
tions and alterations as well as new construction. Maintenance
work, however, is excluded, as is shipbuilding. A negligible
amount of farm building and of "force account work” (work
done by a firms own employees, rather than by outside con­
tractors) is included.
The F. W . Dodge Corporation does not estimate the volume
of work for which they do not have reports or that done in the
11 Western States. In so far as changes in the volume of con­
struction contracts in the 11 Western States are not proportion­
ate to those in the rest of the country, the indexes in the table

Construction Contracts Awarded
(M onthly indexes adjusted for seasonal variation; 1923-25 average=100 per cent)

Per cent

Per cent

* Including the District of Columbia, but excluding Montana, Idaho, W yom ing, Colorado, New M exico, Arizona, U tah, Nevada, W ashington, Oregon, and
California.
Source: Computed by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York from basic data of the F . W . Dodge
Corporation,




134

MONTHLY REVIEW, SEPTEMBER 1951

of Business Indicators will not adequately reflect national
trends. There may also be some undercoverage of contract
awards in the reporting States, particularly of smaller projects.
In general, the Dodge statistics are considered to be more com­
prehensive in the field of nonresidential construction than for
residential construction, principally because low-cost one and
two-family houses erected individually in small communities
are probably not fully reported. However, to whatever extent
it may be safe to assume that the construction contracts not
covered in the 37 Eastern States are subject to the same general
movements as those actually counted, the index numbers are
adequate indicators of changes in the volume of all contract
awards in their respective areas.
Contract awards are subject to wide month-to-month fluctua­
tions, not only because of normal seasonal influences, but also
because of accidental factors such as the awarding of a few
large contracts in a particular month. Such erratic movements
may conceal the basic trend in construction activity at a given
time. Therefore, the Federal Reserve lessens the influence of
any one month by basing its index numbers upon centered
three-month moving averages.1 That is to say, the index num­
ber for April is computed from the average value of contracts

awarded in March, April, and May. Normal seasonal varia­
tions are eliminated by use of adjustment factors computed by
the Federal Reserve, which differ somewhat for residential and
nonresidential building and for the Second District and the
national total. Finally, the adjusted dollar values of contract
awards are converted to index numbers on a 1923-25 base.
The basic Dodge data for the 37 States have been prepared
monthly from May 1924 to date. From January 1910 through
April 1924, comparable information was collected for a smaller
number of States, ranging from 27 to 36. (Adjustments were
made by the Board of Governors of the Federal Reserve System
to obtain an estimate of contract awards in all 37 States during
the 1923-25 base period.) The index numbers as shown in
the table are available for the nation and for the Second
District from 1919 to date. The latter may be obtained from
the Domestic Research Division, Research Department of this
bank on request. Back data for the national series, including
total contract awards as well as the residential and nonresi­
dential breakdowns, appear in each issue of the Federal Reserve
1 The award of nearly a billion dollars’ worth of contracts for atomic
energy plants in May 1951 was so exceptionally large that indexes for
April, May, and June were all distorted.

B u sin ess Indicators

Percentage change
1951

1950

Item
July

Unit

June

M ay

222

223
320

July

Latest month Latest month
from previous
from year
month
earlier

U N IT E D STATES

Production and trade
Industrial production*.............................................................................
Electric power output*............................................................................
Ton-miles of railway freight*................................................................
Manufacturers’ sales*...............................................................................
Manufacturers’ inventories*..................................................................
Manufacturers’ new orders, to ta l........................................................
Manufacturers’ new orders, durable goods.....................................
Residential construction contracts*...................................................
Nonresidential construction contracts*............................................
Prices , wages, and employment
Basic commodity pricesf........................................................................
Wholesale pricesf.......................................................................................
Consumers’ pricesf....................................................................................
Personal income* (annual rate)...........................................................
Composite index of wages and salaries*...........................................
Manufacturing employment*................................................................
Average hours worked per week, manufacturingf.......................
Unemployment............................................................................................

213p
324
190p
—
—
—
—
1 1 .9p
279 p
291 p

3 9 .8 p
23 .bp
12.3 p
1 1.9
289
443

Aug. 1939 = 100
1 9 2 6 = 100
1 9 35 -39 = 100
billions of $
1939 = 100
thousands
thousands
hours
thousands

3 3 0 .8
1 7 9 .5p
185.5
—
—
4 6 ,5 6 2 p
16,044p
4 0 .4p
1,856

3 5 1 .2
1 81.8
185.2
2 5 1 .Ip
223p
4 6,622
16,105
4 0 .8
1,980

3 6 7 .1
182.9
1 85.4
2 4 9 .8
223
4 6 , 513r
1 6 ,lOlr
4 0 .7
1 ,609

2 8 8 .3
1 62.9
1 72.0
2 2 2 .7
209r
4 4 ,2 5 9
14,977
4 0 .5
3 ,2 1 3

millions of $
millions of $
millions of $
millions of $
billions of $
1 9 35 -39 = 100
millions of $

7 1 ,350p
5 4 ,590p
9 0 , 800p
27 ,9 1 5
8 2 .8
9 9 .5
12,898p

7 1 , 190p
5 5 ,040p
8 9 , 500p
27,686
8 5 .7

70 ,600p
5 4 ,460p
8 9 , 500p
27,5 1 6

76 ,3 4 0
4 5 ,9 8 0
8 6 ,5 0 0
27,171
7 3 .2
9 6 .7
12,598

millions of $
millions of $
millions of !$

2 , 858p
4,8 5 1 p
3 ,1 5 8

1935 -39 = 100
1 923 -25 = 100
1 9 23 -25 = 100
1 935 -39 = 100
thousands
thousands
billions of $
billions of $
193 5 -3 9 = 100

225
—
—
1 81.2
—
2 , 6 8 5 .5p
4 4 .1
3 .7
113.4

1935 -39 =
1935 -39 =
1935 -39 =
billions of
billions of
billions of
billions of
billions of
19 23 -25 =
192 3 -2 5 =

100
100
100
$
$
$
$
$
100
100

Banking and finance
Total investments of all commercial banks....................................
Total loans of all commercial banks..................................................
Total demand deposits adjusted..........................................................
Currency outside the Treasury and Federal Reserve B a n k s*..
Bank debits* (U. S. outside New York C ity )................................
Velocity of demand deposits* (U. S. outside New York C ity ). .
Consumer instalment credit outstandingf.......................................
United States Government finance (other than borrowing)
National defense expenditures..............................................................

325
196 p

22.8 p

102.8

201
2 3 .8r
3 8 .9
2 3 .3

11.8
12.1
276
430

88.2
102.8

12,955

12,920

7 ,3 6 7
5 ,2 2 3
2 ,8 0 3

4 ,1 4 8
5 ,1 5 4
2 ,6 7 9

196
288
186r
2 0 .3
2 9 .8

22.2
10.6
1 2.7
369
289

2,110
3 ,1 4 3
1,1 1 8

+
+
+

4
#
3
4

2
1

5
#
- 3
-3 4
-

6
1
#

+

1
#
#
#

-

1
6
#

+
+
-

1
1
1

3
3
#

+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+

9
13

2
15
33
14
25
7
24

1
15

10
8
15

8
5
7
#
42
7
19
5
3
13
3

2

-6 1
- 7
+13

+ 35
+ 54
+182

1
6
+10

+
+
+
+
+
+
+

S E C O N D F E D E R A L R E S E R V E D IS T R IC T
Electric power output* (New York and New Jersey) ...................
Residential construction contracts*.......................................................
Nonresidential construction contracts*.................................................
Consumers’ pricesf (New York C it y )....................................................
Nonagricultural employment*...................................................................
Manufacturing em ployment*....................................................................
Bank debits* (New York C ity )................................................................
Bank debits* (Second District excluding N . Y . C . and A lb a n y ).
Velocity of demand deposits* (New York C it y ) ...............................

227
166p

229
176

180.5
7 ,3 1 2 .5 p
2 ,6 7 2 .6
4 5 .0
3 .7
1 1 9 .5

18 1 .4
7 ,3 0 5 .3
2 ,6 6 1 .5
4 6 .3
4 .0

221p

201

111.6

213
186
187
1 69.8
7 ,0 4 8 .4
2 ,5 0 2 .1
3 9 .5
3 .2
1 1 3 .0

-

#
#
#
+
-

2
1
5

p Preliminary.
r Revised.
* Adjusted for seasonal variation.
f Seasonal variations believed to be minor; no adjustment made.
# Change of less than 0.5 per cent.
Source: A description of these series and their sources is available from the Domestic Research Division, Federal Reserve Bank of New York, on request.




6
11
19
7
4
7

12
17
#

FEDERAL RESERVE BANK OF NEW YORK

Bulletin. The basic data are published in some detail— by
project type, valuation, and floor area— by the F. W . Dodge
Corporation in a series of monthly releases.
After a contract is awarded, months and even years may
elapse before the project is completed. There may even be a
considerable delay before the project is started. The average
time lag between the signing of a contract and the peak of
activity or completion of a project varies considerably accord­
ing to the type of construction involved and the conditions
prevailing in the construction industry at the time. Thus,
the indexes of contract awards are by no means indicators of
the actual volume of construction work done in the month of
reference. They measure, simply, changes in the dollar value
of contracts awarded. As business indicators, the National
Bureau of Economic Research found that on the average con-

135

tract awards reach turning points four to six months in advance
of the general business cycle.
There are a number of other statistical series relating to con­
tract awards and other measures of construction activity.
Among the most commonly used are the contract awards data
of the Engineering News-Record, the construction activity
estimates (value of new construction put in place) of the
Department of Commerce, and the Bureau of Labor Statistics*
series on building permits in urban areas and the number of
nonfarm dwelling units started. Any of these may show diver­
gent movements from the indexes given here. In using any set
o f construction figures, it is well to keep in mind the exact
phase of construction being measured and the categories of
buildings covered, as well as the comprehensiveness of the
particular series.

DEPARTMENT STORE TRADE
The "scare buying” that followed the outbreak of the
Korean war last summer continued to present Second
District department stores with an unattainable statistical tar­
get during August. From preliminary data, it is estimated
that the dollar volume of department store sales was about
7 per cent below that of August 1950. There was evidence,
however, of some resurgence of consumer demand, following
the comparative lull of recent months, as department store
sales increased more than seasonally during August. Back-toschool buying was reported proceeding satisfactorily, and the
early response to the fall fashion lines was considered
promising.
The relaxation of Regulation W on August 1 has apparently
had little, if any, stimulating effect, thus far, on the demand
for the major durables lines in Second District department
stores. Moreover, judging from New York City newspaper
advertising in recent weeks, department store executives appar­
ently feel that the change in credit terms, alone, does not con­
stitute an effective promotional device. On a nation-wide basis,
however, there were some indications that the new credit
terms had bolstered sales of household durables, specifically
appliances and television.
D e p a r t m e n t St o r e I n v e n t o r i e s

By the end of July, the department stores in this District
appeared to have made little progress in bringing their inven­
tories closer to the current level of consumer demand for
department store merchandise. While extensive promotions
during July helped to raise the months sales to within 6
per cent of the inflated dollar volume of July 1950, receipts
of additional merchandise by the stores almost completely
offset the stock depletion owing to consumer purchases. As
a result, the value of department store stocks in this District
on July 31 was only slightly below that of a month earlier and
fully 35 per cent higher than on July 31, 1950. The lessthan-seasonal decline in stocks during July accounts for the
fact that the seasonally adjusted index of department store




Indexes of Department Store Sales and Stocks
Second Federal Reserve District
(Adjusted for seasonal variation, 1935-39 average=100 per cent)

stocks, shown in the accompanying chart, rose moderately.
An examination of the stocks-sales ratios shown in the table
on the next page indicates that there was some narrowing of the
gap between inventories and sales during May and June. These
ratios are computed by dividing stocks at the end of the month
by sales during the month and hence represent the number of
months’ supply on hand at the current rate of sales. As the stocks
are valued by department stores at current market prices, and
sales necessarily reflect current market prices, these ratios tend
to "cancel out” the effect of price changes and thus to indicate
variations in the relation between the physical volume of
inventories and the physical volume of sales.
The reduction in stocks on hand through May and June
occurred mainly as a result of the usual seasonal decline in
inventories during this period of normally rising retail activity.
(Although the New York City "price war” occurred at this

MONTHLY REVIEW, SEPTEMBER 1951

136

R atios o f S tocks to Sales at Second D istrict D epartm en t Stores
T o ta l Store, Jan uary-J uly 1 9 5 0 -5 1 ; Selected D epartm en ts, Ju ly 1 9 5 0 -5 1
Selected departments, July p

Total store
M onth
J an u ary .
February,
March
Ap ril.........
M a y ..........
June..........
July...........

1951

1950

2.8

2 .9
3 .5

3 .8
3 .5
3 .8
3 .4
2 .9
4 .4

2.8
2 .9

2.8
2 .5
3 .0

Department
W om en’s coats and suits. . . .
W om en’s dresses........................
M en’s clothing............................
Furniture and bedding............
Domestic floor coverings.. . .
Major household appliances.
Television.....................................

1951

1950

5 .5

3 .9

1.2

1.2

5 .2
4 .4
8 .4
6 .3
1 3 .2

4 .8
3 .4
5 .5

1.2
2 .4

p Preliminary.

time, it had virtually no effect on over-all department store
inventories in the City.) Of more significance, however, is
the fact that by the end of June the ratio of stocks to sales
was closer to the year-ago level than it had been since
February.1 However, this downward movement of the stockssales ratios of Second District department stores toward the
corresponding 1950 levels did not continue during July. The
sharp seasonal drop in sales at that time was not accompanied
by a comparable decline in inventories. Consequently the
stocks-sales ratio on July 31, 1951 was markedly higher than
it had been a year earlier and reached the highest mark for
this District since mid-1942, when retailers were rapidly
building up inventories in the expectation of war-induced
shortages.
At the end of July, the heaviest inventory accumulation ( in
terms of current consumer demand) was concentrated in the
household durables lines, and merchandisers were apparently
reluctant to apply substantial markdowns in an effort to stimu­
late consumer demand for these goods. The reluctance may
be due to two factors. First, most of the major durables lines
are not as subject to style innovations as are many of the
nondurables lines (particularly womens apparel). Hence,
their marketability is retained for a much longer period of
time. Second, if a more rapid acceleration of defense produc­
tion takes place and inflationary pressures are resumed, the
inventory situation may very well solve itself.
As the table shows, the stocks-sales ratios of television and
of major household appliances were by far the largest when
compared with their respective July 1950 levels. Although
well-advertised promotions of furniture and bedding and
domestic floor coverings by many of the stores during July
were moderately successful, the stocks-sales ratios of these
goods were no nearer to their respective year-ago levels than
they had been a month or two earlier. Moreover, stocks of
domestic floor coverings were still more than 60 per cent
higher than on July 31, 1950. By way of contrast, the stocks1 The stocks-sales ratios of January and February 1951 and July
1950 were reduced by the extraordinarily large volume of anticipatory
buying which occurred during those months.




sales ratios of the major apparel departments shown in the
table were much closer to their corresponding year-earlier
levels than were those of the durables lines. This dissimilarity,
of course, reflects primarily the need for keeping apparel stocks
geared more closely to current consumer demand.
Some indication of the future course of department store
inventories in this District may be found in the less-thanseasonal rise in the volume of outstanding orders during July.
The value of commitments outstanding on July 31 was barely
12 per cent above that of a month earlier, as compared with
corresponding month-to-month increases of 103 per cent in
1950 and almost 60 per cent in 1949. Moreover, although
there are no data available as to the composition of these
commitments for additional merchandise, it would appear
likely that they consisted primarily of orders for seasonal
merchandise (particularly men’s and women’s apparel). This
may indicate that, precluding any greater-than-seasonal in­
crease in demand, department store stocks (on a seasonally
adjusted basis) may begin to level off during the next few
months.
Indexes o f D epartm ent Store Sales and Stocks
Second Federal R eserve D istrict
(1 9 3 5 -3 9 a v e r a g e = 1 0 0 per cen t)
1951

1950

Item
July

June

M ay

July

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

179
256

254
267

238
243

192
274

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

262
294

274
290

294
290

195r
219r

r Revised.
Departm ent and Apparel Store Sales and Stocks, Second Federal R eserve
D istrict, P ercentage Change from th e Preceding Y ear

Locality
July 1951
Department stores, Second District___
New York C ity ........................................
Nassau C ou n ty........................................
Northern New Jersey............................
Newark...................................................
Westchester County..............................
Fairfield C ounty.....................................
B ridgeport............................................
Lower Hudson River V alley..............
Poughkeepsie........................................
Upper Hudson River Valley..............
A lb a n y ....................................................
Schenectady..........................................
Central New York S tate.....................
Mohawk River V alley.....................
Utica...................................................
Syracuse.................................................
Northern New York State..................
Southern New York State..................
Binghamton..........................................
Elm ira.....................................................
Western New York State....................
B uffalo....................................................
Niagara Falls.......................................
Rochester.....................................
Apparel stores (chiefly New York City)

-

5

+ 12
-11
- 9
+ 2
- 7
- 6
-1 9
-1 6
- 5

- 8
- 1
-10
-1 4

-1 1

- 8
- 2
-1 5
-1 6
-1 6

- 6
-

7
7
3

- 6

Stocks on
J an .th rou gh
hand
July 1951
July 31, 1951

+10
+10
+20
+ 11
+1
1
+18
+ 9

+11

0
+ 2
+1
1
+13
+ 8
+ 8
+ 6
+
+
+
+
+

+35
+36
+40
+42
+45
+34

+22
+22
+ 21

+23
+25
+40

+11

+42
+28
+28
+51

+2 0
+23

+2 0

+11
+ 9
+ 9
+ 7
+ 9

+27
+31
+33
+23
+29

+

+25

4

NATIONAL SUMMARY OF BUSINESS CONDITIONS
(Summarized by the Board of Governors of the Federal Reserve System, August 27, 1951)

Industrial output in July and August was somewhat below
earlier peak rates, reflecting in part the reduced rate of con­
sumer buying earlier this year and consequent accumulation
of business inventories. After the early part of July, consumer
buying apparently increased more than seasonally. Defense
expenditures continued to expand rapidly. Prices of raw
materials generally changed little after mid-July, following
substantial declines from earlier peak levels. Business loans
at banks showed some expansion.

C o n s t r u c t io n

Value of construction contract awards, according to the
F. W . Dodge Corporation, showed little change in July as
decreases in most types of privately financed awards were offset
by increases in public awards. Value of work put in place,
allowing for seasonal influences, continued to decline from
the peak reached earlier this year, reflecting chiefly further
declines in private residential building. Business construction
activity continued to rise from already advanced levels.

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

Em p l o y m e n t

The Board’s index of industrial production declined in
July to 213 per cent of the 1935-39 average, as compared
with a half-year plateau of around 222 and a year-ago level
of 196 per cent. The decline from June was mainly due to
plant-wide employee vacations in a number of industries, but
there were also more than seasonal reductions in output of
automobiles, textiles, and certain other goods. Preliminary
indications are that output in August will be above July
but still somewhat below the first half level.
Passenger car assemblies in July were curtailed by about
one fifth from the June rate, reflecting mainly the cuts
ordered by the National Production Authority for the third
quarter. Production declines were less marked for furniture
and other household durable goods. Output of producers'
equipment and of primary metals was generally maintained
close to earlier peak levels. Production of lumber was reduced.
Among the nondurable goods pronounced decreases occurred
in the output of textile and leather products, while chemicals
production continued to rise slightly.
Mining output decreased from the high June level largely
as a result of the coal miners’ vacation in early July. Crude
petroleum production continued in excess of 6 million barrels
daily, as compared with about 5 l> million a year ago.
/

Employment in nonagricultural establishments in July,
after adjustment for seasonal influences, was maintained at
about record June levels. The average work week in manu­
facturing industries declined somewhat; hourly earnings con­
tinued at a peak level of $1.60 per hour. There were about
1.9 million persons unemployed in July, the lowest number
for this month since 1945.
A g r ic u l t u r e

Crop prospects decreased slightly during July with over­
all prospects at the beginning of August indicated to be 6
per cent larger than last year and 3 per cent below the 1948
record. The cotton harvest was forecast at 17.3 million bales,
as compared with the small crop of 10 million bales last year.
Beef slaughter has increased from the reduced level of June
and early July.
D is t r ib u t io n

Seasonally adjusted sales at department stores in July and
the first three weeks of August were moderately above the
level of the preceding three months, reflecting increases in the
volume of apparel and household durable goods stimulated
partly by extensive promotions. Consumer buying of new
DEPARTMENT STORE SALES AND STOCKS

INDUSTRIAL PRODUCTION
PER CENT

PHYSICAL VOLUME, SEASONALLY ADJUSTED, 1935 - 39 « 100

PER CENT

Federal Reserve index. Monthly figures; latest figure shown is for July.




PER CENT

DLA VLM SAOAL AJ SE. 13-3*10
OLROUE ESNLY DUTD 95 9 0
.

PRCN
E ET

Federal Reserve indexes. Monthly figures; latest figure for sales is July;
latest for stocks is June.

passenger cars also expanded moderately after declining in
the early part of July. Value of stocks at department stores
changed little during July, according to preliminary data,
following some reduction in May and June. Stocks of house­
hold durable goods continued at high levels.
C o m m o d ity P rices

ing cities, however, increased seasonally during late July and
early August. Loans to finance direct defense contracts and
defense-supporting activities, principally loans to metal manu­
facturers and public utilities, expanded further. Loans to com­
modity dealers and food manufacturers also began to increase
after a steady decline during the spring and early summer
months.
Holdings of Government securities by commercial banks
and the Federal Reserve Banks have shown little change since
June. Increased weekly offerings of bills by the Treasury
during July and the first half of August were largely absorbed
outside the banking system.
Deposits and currency held by businesses and individuals
increased somewhat in July, while Federal Government bal­
ances declined. In the first half of August deposits at banks
in leading cities declined.

The general level of wholesale commodity prices has con­
tinued to decline since mid-July, but at a slower rate than
in the preceding month. Prices of most basic commodities
have shown little further decrease. Reductions in wholesale
prices of consumer goods have become more numerous. Some
automobile manufacturers, however, have requested higher
Federal ceiling prices. Price increases for machine tools will
be permitted under recent Federal action.
The consumers’ price index advanced slightly in July. Since
then retail prices of apparel, housefurnishings, and some other
S
M
goods have declined somewhat further, while food prices have
Prices of common stocks in the first week of August reached
been maintained at the high level reached in February and
the highest levels since May 1930 and declined slightly there­
rents have increased somewhat further.
after. Prices of long-term U. S. Government securities and
B a n k C r e d it a n d t h e M o n e y S u p p ly
high-grade corporate bonds have risen somewhat since the
The total volume of bank credit outstanding has changed end of June. Yields on Treasury bills advanced somewhat
only slightly in recent weeks. Business loans at banks in lead­ in July and August, while other short-term rates declined.
e c u r it y

arkets

LOANS AND INVESTMENTS AT MEMBER BANKS IN LEADING CITIES
CONSUMERS PRICES

Bureau of Labor Statistics’ indexes. “ All items” includes housefurnisliings,
fuel, and miscellaneous groups not shown separately. Midmonth figu res; latest
shown are for July.




OTHER THAN U. S. GOVERNMENT SECURITIES

Commercial loans include commercial, industrial, and agricultural loans.
W ednesday figures; latest shown are for August 15.