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Busin ly eview F in a n c e, In d u str y , Agriculture, and Trade Fourth Federal Reserve District Federal Reserve Bank of Cleveland Vol. 27 ____________ Cleveland, O hio/ August 31, 1945___________________ No. 8 BANK RESERVES DURING RECONVERSION Background The ability o f the United States to wage war effectively was bolstered in some degree b y the apparent ease with which un precedented financial requirements were met. The procurement o f 3200 billion o f borrowed funds during the past five years, not to mention another 3130 billion or more obtained in the form o f taxes, was facilitated in turn by the existence o f adequate re serves in the banking system. T he fact that the banking system was fortified with sufficient, and at times excessive, reserves for all valid purposes is attributable to a com bination o f both fortuitous developments and deliberative policies. t The $15 billion increase in the N ation’ s monetary gold stocks during the seven years prior to Pearl H arbor had com e to be regarded during 1941 as a threat to dom estic m onetary stability because o f its inflationary potentialities. Y e t without that un paralleled influx o f gold, the country’ s wartime credit structure would have had to be erected upon a much narrower metallic base. Margins o f safety in evitably would have been much thinner along the entire financial front, with correspondingly unfavor able implications. The prodigious influx o f gold made possible an increase in the public debt o f over $26 billion without any supplementary action by the m onetary authorities. The first tw o years o f the rearmament effort, including the first six months o f active participation in war, were financed, therefore, wholly out o f existing reserve funds and bank balances without any extension o f reserve bank credit. M oreover, within that same period, approximately $4 billion in currency was paid out (net) to the general public without impairing the reserve position o f member banks. As a m atter o f fact, legal reserves were still some $3 billion in excess o f requirements in mid-1942 when the creation o f additional reserves by internal action was initiated on a m odest scale. However, at that juncture the volum e o f bank reserves gradually m oved out o f the realm o f chance, so to speak, and became a matter o f fundamental central banking policy. This transition was initiated by the establishment of a percent buying rate on 91-day Treasury bills by the reserve banks in April 1942, for the purpose o f stabilizing short-term m oney rates which had been in a rising trend for some time. In this declaration o f support for the price o f Treasury bills for the duration o f the war, it was contem plated not only that banks would refrain from further liquidation o f bills and other short-term securities, but also that a consider able portion o f the existing idle funds would be at tracted to the bill market. However, owing chiefly to the persistent outflow o f currency into circulation, more and more bills were being sold by member banks — to the reserve banks— as a means o f replenishing reserves. It was as an indirect consequence o f this first step to support the bill market that the ultimately huge wartime increase o f reserve bank credit ori ginated. During the past three years, over $12.5 billion o f mem ber bank reserves were created through this medium— more than twice the am ount created through any other single channel. 2 TH E M O N TH LY BUSINESS REVIEW Some months after the establishment o f the H per cent floor under bills, and prior to the First W ar Loan Drive, it was made known that prices and yields on the entire range o f Governm ent securities would be maintained close to then-prevailing levels for the period o f the war. Those assurances had no immediate effect upon member bank reserves. However, with the passage o f time the tendency became more and more pronounced for member banks, when in temporary need o f reserves, to liquidate short-term Treasury obligations rather than long-term, higher-yielding Governm ent bonds. On successive occasions, the reserve banks through the System Open M arket A c count acquired considerable quantities o f bills, certi ficates and notes, which automatically created an equivalent volum e o f member bank reserves. Sub sequently, as the reserve position o f such banks im proved, the newly available funds were more likely to be invested in Government securities o f longer maturity. Thus, at no time during the course o f each succeeding cycle, did member bank reserves contract sufficiently to offset the previous, and theoretically temporary, expansion. During the past three years, and aside from the 312.5 billion increase in Treasury bill holdings, the reserve banks acquired roughly $7 billion o f Treasury notes and certificates o f indebted^ ness in the interest o f maintaining the short end o f the pattern o f rates. T w o other factors might be mentioned as having contributed to the expansion o f member bank reserves during the war period. One was the establishment, in O ctober 1942, o f a 3^ percent preferential discount rate on advances to member banks, when secured by obligations o f the United States Government matur ing or callable in one year or less. However, it is only within the past year that member banks have taken significant advantage o f this special avenue o f accom modation. A t the wartime peak on June 6, approxi mately $900 million o f bank reserves had been created by virtue o f member bank borrowing at the prefer ential rate. The other factor was the issuance during 1942-43 o f some 3600 million o f unused Federal reserve bank 33 LARGE MEMBER BANKS PRIMARY R ES ER V ES lOOCr---------- ----- ---------------- ---------------- ----------------------------------r— jO 800- — --------------------— notes as a measure to conserve labor and materials. This currency, a heritage o f the banking crisis o f 1933, was issued as a legal tender obligation o f the U. S. Treasury. M em ber bank reserves were quite incidentally increased by approxim ately $600 million as a result o f that expedient. The yearly increment in the amount o f silver certificates in circulation (which is currently being augmented by the “ m onetization” o f a synthetic paper profit on silver purchases since 1934) has had a similar effect on member bank reserves. Thus, the present volum e o f member bank reserves o f approximately $15 billion (the residual after a $20 billion outflow o f currency) is the end result o f a series o f developments. In some cases, an increase in reserves was the avowed ob jective; in others it was an in cidental by-product. M oreover, there was wide variation in the wartime trend o f reserves among groups o f banks, as revealed on the accom panying charts. Trends in Fourth District During 1939 and 1940, when gold imports were the predominant cause o f expansion o f reserve bal ances, the eight largest banks accounted for virtually 70 percent o f the aggregate $400 million increase in the fourth district. This tendency for reserves to gravitate to m etropolitan banks was typical for the country as a whole during those earlier years. Early in 1941, reserves o f the eight largest banks began to decline rapidly from the all-time high o f nearly $600 million. Gold imports, the former main stay, had begun to recede, especially after the enact ment o f lend-lease which obviated gold payments for a considerable fraction o f American exports. Also, the proceeds o f Treasury offerings which were pre dominantly o f the type most likely to appeal to the money market banks with substantial excess reserves, were being disbursed elsewhere in connection with an expanding armament program. Similarly, the con siderable increase in defense and other industrial loans, most noticeable among the large institutions, brought about a shift o f deposits as the borrowed funds were expended in more remote localities. ALL OTHER MEMBER BANKS PRIMARY R E S E R V E S 1000,----------- ----------- ----------------------------------- ----- ---------------------------------------------------- ----------------- ------------------ < -J O -5 0 0 --------------------------------------------------------------------------- — -------- 1939 * INCLUDING ITEM S IN PROCESS O r C O LLEC TIO N 1940 1941 1942 * INCLUDING ITEM S IN PROCESS O r COLLECTION 1943 1944 1945 THE M ON TH LY BUSINESS REVIEW This flow o f funds from the money centers toward outlying areas prevailed more or less throughout the war period. In its early stages the losing banks met the drain out o f the huge backlog o f idle funds which had accumulated during 1939-40. Subsequently, re serves were usually replenished by means o f the sale o f short-term Governm ent securities, in a minor degree by borrowing from the reserve banks, and to a still lesser extent by withdrawing balances from cor respondent banks. B y virtue o f such sales and borrow ing, legal reserves o f the eight largest banks were maintained within a range o f five to ten percent in excess o f slowly increasing requirements during 1944 and 1945. A t the other extreme is the wide variety o f socalled country member banks whose reserve balances grew more rapidly after 1941 than before. It was not only because deposits, especially individual and corporate demand deposits, increased at a faster rate at country member banks from 1942 to date that reserve balances continued the pre-Pearl H arbor trend. A more significant reason was the apparent re luctance o f such outlying banks to pursue the policy o f com paratively full investment adopted by the larger city banks. In the fourth district, country member banks have regulary carried reserves from 30 to 40 percent in excess o f requirements throughout the past tw o years. Balances with city correspondent banks were also permitted to accumulate beyond the end-of-1941 levels, a tendency which incidentally mitigated some what the reserve problem o f the correspondent banks. Effect of Changes In Reserves Changes in the volum e o f reserves affect the ability o f a bank or banks to lend, the inclination to invest or liqui date, the behavior o f interest rates and the earning power o f banks. Because o f these ramifi cations the future trend o f reserves, with respect to both city and country banks, in the fourth district as well as elsewhere, is o f extreme im portance for the establishment o f a basically sound peacetime econom y. A t the m om ent, the postwar behavior o f security prices, o f com m odity and real estate prices, the prob able level o f industrial production and employment, the prospective volum e o f borrowing on both Govern ment and private account including consumption loans by individuals, cannot be estimated with pre cision. Until these various elements crystallize into a recognizable pattern, the question o f what consti tutes an appropriate volum e o f member bank reserves — for the long-term welfare o f the country— will remain somewhat in suspense. 3 Furthermore, events o f the past decade emphasize the fact that the ultimate results are almost inevit ably a com position between official policy and ex traneous econom ic forces. Th e deliberate expansion or contraction o f reserve bank credit is not a laboratory operation wherein all surrounding conditions are sub ject to exact control. It is such extrinsic factors as international gold m ovem ent, dom estic currency re quirements, the m ood o f the people, and the existence o f a tremendous public debt with its virtually in terminable refunding operations, that are m ost likely to generate conflictions in the evolution o f national postwar credit policies. But at this early stage o f reconversion and adaptation to peacetime conditions, no sudden change in credit policy appears imminent. RECENT FINANCIAL DEVELOPMENTS Deposits and Currency A t the termination o f hostilities, total deposits o f fourth district weekly reporting banks were only slightly below the all-time high established on July 18. A t that point, aggregate deposit liabilities o f this representative group o f banks had increased 80 per cent since the time o f Pearl Harbor. The nominal contraction o f the past several weeks is consistent with earlier experience between war loan drives when de posits have tended to shrink somewhat as collateral loans are reduced and because o f currency m oving into circulation. Over the same period, the rise in individual and corporate demand and time deposits was only around 60 percent, or somewhat less than that o f all deposits com bined. This disparity is accounted for by the fact that Governm ent balances are still extremely large in terms o f prewar standards. Ultimately, after the forthcom ing war loan, and as federal financial needs recede to a peacetime basis, a m ajor portion o f those Treasury deposits will be transposed into privately-owned deposits. N otwithstanding the m oderate but steady decline in wage-earner payrolls o f the past year or so, the war time growth o f time deposits has continued unchecked. I f anything, the rise thus far in 1945 has been even more pronounced. Likewise, the rate o f currency outflow seems not yet to have been m arkedly affected by the recent reduction in payrolls. Th e increase o f fourth district Federal reserve notes in circulation within the past m onth was approxim ately 341 million or not far from that which occurred in the same interval a year ago. It is too early to ascertain whether, or to what extent, current industrial developments will alter those trends significantly. 4 TH E M ONTHLY BUSINESS REVIEW Investments W ith regard to investments, in August Treasury bill holdings o f the 41 report ing banks reached the lowest point in three years, which was only about 330 million more than in D e cember 1941. Conversely, these banks’ holdings o f Treasury certificates o f indebtedness, notes, and bonds were up nearly $3 billion, a 300 percent increase. As a result o f this tremendous acquisition o f Governm ent obligations, corporate and other securities have re ceded to a position o f minor importance dollarwise in the com posite portfolio. However, presumably in response to renewed activity in the new issue market, holdings o f such securities have expanded some 10 percent since the wartime low o f over a year ago. Loans A t the war’ s end, commercial, industrial, and agricultural loans stood close to the lowest levels o f recent years. N ew loan volume apparently has been barely sufficient to offset pay ments on outstanding V -type and other war produc tion loans. Real estate and all other loans are not far above their wartime lows recorded during the past year. On the other hand, on July 3 collateral loans o f weekly reporting banks had risen to a record $328 million, o f which $285 million was secured by U. S. Governm ent securities. W ith the announcement that the Eighth “ V ictory” Loan would be launched on O ctober 29, or only about eight weeks hence, the volum e o f unliquidated bank credit which remains from the Seventh Loan is o f some interest. Liquidation o f loans for the purpose o f carrying Governm ent securities, during successive inter-drive periods, has consistently fallen short o f 100 percent. A lthough there are no clear indications that the present interlude will be an exception, during the first eight weeks 'o f liquidation (to August 29), this special category o f collateral loans declined nearly 20 percent. A slight acceleration in that rate would reduce the volum e below the pre-Seventh W ar Loan low b y N ovem ber 1. The disposition o f borrowers to lighten their com mitm ents has presumably been affected by the fact o f declining Treasury bond prices in the past several weeks. MANUFACTURING AND MINING The Industrial A lthough Governm ent and industry Outlook had not com pleted their plans to change over quickly from War to peacetime production, total unsettlement actually m ay be less than if a year or more had elapsed between the ending o f the tw o wars. The end o f war telescopes the problems o f a slower reconversion but at the same time it permits the full play o f American business ingenuity which, accom panied by the release o f ex tensive material and labor resources, can be applied to peacetime production. The next few weeks and months will constitute a period in which indexes o f industrial production and national income, as well as data pertaining to unem ploym ent and the length o f the work week, will have tem porary meanings with out their usual causal relationships. It will be a touchand-go period in which both the forces o f inflation and deflation will be evident. The capacity o f Govern ment, industry and labor to work constructively together during this trying period will have much to do with the smoothness and rapidity o f reconversion. The diversified character o f fourth district industry will stand it in good stead as the switch from war to peace is made. Manufacturers in the fourth district produced nearly one-eighth o f the total value o f manufactured products prewar. Several industries in the district— all heavily associated with war produc tion— have larger portions o f the national totals. Am ong these are iron and steel; rubber; machinery; stone, clay, and glass; and electrical equipment. W ar time expansion o f the district’ s industrial facilities amounted to approximately $2.5 billion, or some 10.4 percent o f the N ation’ s aggregate wartime industrial expansion. Iron and steel experienced the largest absolute expansion o f any district industry, while machinery and electrical equipm ent; machine tools; and aircraft, including engines, parts, and accessories, showed great relative growth. Although new plant facilities are scattered widely throughout the district, the greatest growth occurred in areas which were im portant industrially prewar. It also is significant that, for the most part, the greatest expansion has occurred in the industries which were most im portant before the war. These lines will face relatively few reconversion problems, though they may confront the necessity o f contraction to peace time requirements. It is estimated that nearly 80 percent o f district industry is free from serious re conversion difficulties. The effect o f com plete and rapid reconversion on em ploym ent in the district is o f paramount interest. The industry o f the district is not narrowly specialized for single-purpose war objectives. Therefore, such industries as steel, coal, rubber, machinery, chemicals, and ceramics will continue to produce in peacetime, with changes only in the degree and character o f oper ations. The machine tool, the numerous m etal-work ing industries, and the great variety o f parts suppliers will all be needed, both to help industrial reconversion and to provide materials and parts for the reconverted TH E M ON TH LY BUSINESS REVIEW industries. Unem ployment in fourth district industry due to physical reconversion should be less than the average for the country. Likewise, frictional delays in transferring labor and industrial facilities to peace time production should be less serious in this area than in many more specialized sections. Even so, unem ploym ent largely o f a tem porary character will create many tensions and necessitate heavy drains on un em ploym ent funds and private savings. However, just as “ priority” unemployment did not develop on the predicted scale in 1942, a smooth and flexible meshing o f our intricate industrial mechanism may reduce the shock o f reconversion unemployment. Steel Steel ingot output in July totaled 6,999,625 net tons as compared with 6,842,290 tons in June and 7,498,387 tons in the corresponding month o f 1944. The tw o-day holiday o f August 15-16 cut the production rate o f that week to 60 percent with recovery in the following week to about 70 percent, contrasted with close to 90 percent in previous weeks. Current statistics on steel production and operating rates have less than their custom ary meaning because o f suspensions following the end o f the war with Japan. Revision o f schedules, necessitated by the change from war to peace, is the order-of-the-day for mill managements. Sheets, bars, shapes and tin plate are in heavy demand for peacetime products and may provide a cushion for operating rates in the near future. Goal The reduction in military requirements may permit a reversal o f the recent inventory decline in bituminous coal. W ith the resumption o f large-scale civilian production, however, industrial demand again will be heavy. On an over-all basis, pressure on coal should be lessened from this time on, except for certain grades o f household-type coals. Bituminous coal production in the fourth district during July amounted to 18,260,000 tons. This brought the January 1— August 1, 1945 district total to 129,006,000 tons, compared with a national total o f 352,006,000 tons for the period, January 1— August 4, 1945. Rubber A myriad o f rubber products, held back by war demands on this industry, will make their appearance in distributive channels following the gradual release o f controls. The tire and tube industry, which has been laboring to meet military requirements, can easily turn its production ability to the peacetime market. It is possible that tire production m ay reach 4 million a month in the O ctober-D ecem ber quarter. T otal rubber consumption in the next twelve months may not reach the 800,000 tons predicted, but the 5 expected release o f larger supplies o f crude m ay pro vide the volume and variety o f rubber to meet most consumer and trade demands. The rubber industry believes that there is a place for both synthetic and natural rubbers and that the two will have approxi mate cost equality. It is anticipated that the m ajority o f synthetic capacity will be used, although petroleum rather than alcohol will constitute the econom ic source base. Machine Tools The machine tool industry was a vital requisite to expanded wartime produc tion. It remains a key industry in a N ation at peace. Current shipments o f approximately 340 million m onthly are far below the wartime peak reached in 1942 when annual shipments amounted to #1.3 billion. Reconversion needs o f the automobile, steel, railroad, electrical machinery, and the con struction industries, plus the needs o f certain durable consumer goods producers, promises continued ma chine tool production above prewar rates. The dis posal o f Government-owned machine tools—-esti mated at some 600,000 in number, o f which approxi mately 80 percent can be used in civilian production — constitutes the biggest question concerning the industry’ s peacetime rate o f operation. Other District Industries M ilitary requirement cutbacks and cancelations soon will be reflected in a sharp upturn in the production o f consumer goods. In general, this will be brought about through the release o f manpower and materials to civilian production. For instance, cancelations o f military lumber requirements, com bined with the relaxation o f many lumber controls, will aid greatly in releasing labor and productive facility so necessary to fill the anticipated demands o f a rapidly expanding building program. M ilitary and lend-lease cutbacks have released such substantial quantities o f cowhide for upper and soles that shoe rationing may not long be necessary. The textile industry should expand operations as manpower becomes sufficiently available to match supplies o f raw materials. The reconversion o f the shoe and textile industries does not apply to production as much as it does to reallocation o f sales. Reconversion in the glass industry presents no difficult problems and civilian and reconversion needs will be met. Other ceramics industries, especially the dinnerware industry, report production at approximately 80 percent o f capacity and are eagerly awaiting man power developments. The paper and paperboard in dustries report some im provem ent in deliveries and a hope for additional manpower. This industry, like many others, is concerned with the handling o f Governm ent-owned surpluses. 6 THE M ONTHLY BUSINESS REVIEW HYBRID CORN PRODUCTION H ybrid corn represents the most outstanding econom ic example o f the influence o f theoretical scientific research in revolutionizing production prac tices o f American agriculture. In little more than a decade o f rapidly increasing use, though backed by many years o f cum ulative research, the hybrids have established their superiority in productiveness, in resistance to wind, disease, drouth and other unfavor able conditions. Because o f the better stand-ability o f the hybrids, they have been instrumental, too, in increasing the use o f mechanical pickers which have enabled labor-short farm operators to harvest the record yields that have been so essential to both the war and home fronts. Y et, despite the scope o f this agricultraul revolution, hybrid corn has crept quietly into the N ation’ s econom y and way-of-life. Corn is the backbone o f American agriculture. It is grown on three-fourths o f the six million farms, although the north-central states (the Corn Belt) account for 60 percent o f the acreage planted and about 75 percent o f the total crop. Th e relative posi tion o f corn belt production, in com parison to the rest o f the country, has im proved during the last decade because o f extensive use o f high-yielding hybrid seeds. This is borne out by the fact that o f the N ation ’ s 100,000,000 total corn acreage in 1945 approximately 60 percent was hybrid, whereas it averaged over 80 percent throughout the Corn Belt and was well above 90 percent in the leading corn producing states. Traditionally, the pollination o f corn was uncon trolled. However, hybrid seed corn— the first-generation cross on hybrid o f two or more inbred or purified strains— is pollinated under controlled conditions. Breeding is directed toward the developm ent o f de sired qualities adapted to local conditions. Its value is for seed in the production o f a crop o f commercial HYBRID CORN ACREAGE, SELECTED STATES, 1944 70 - 79 percent leas than 70 peroent THE M ONTHLY BUSINESS REVIEW corn. Although the resulting corn will grow, o f course, it cannot be used for seed without a loss in yield in succeeding generations. This has caused a drastic change in the thinking o f farmers who have followed the time-honored system o f selecting their seed from their own fields. The accom panying table indicates the rapidity with which corn acre age planted with hybrid seed has expanded throughout Corn Belt and fourth district S om e P rod u c- t io n F a cto rs states. PERCENTAGE O F T O T A L C O R N A C R E A G E P L A N T E D W IT H H Y B R ID C O R N 1936 1937 1938 1939 1940 1941 1942 1943 1944 U n it e d S t a t e s ............... 3.1 7.9 14.9 C o r n B e lt S t a t e s ......... 5.1 12.9 25.4 I o w a ............................... 14.4 30.7 51.9 I n d ia n a .......................... 3.5 11.1 28.5 Illin o is ........................... 9.9 25.2 47.5 O H IO .......................... 2.0 6.7 25.0 9.1 20.4 M in n e s o ta .................... 3.7 W isc o n s in ..................... 5.0 11.1 24.0 0.6 1.8 M issou ri........................ 0.3 N e b ra sk a ...................... 1.0 2.5 6.8 M ic h ig a n ...................... 0.5 1.1 3.2 S o u th D a k o ta .............. 0.4 1.2 3.1 K an sas................................... 0.2 1.6 N orth D a k o t a .................... ... 0.4 22.5 38.6 73.4 50.8 65.5 42.1 37.0 39.7 12.1 12.7 8.1 7.0 5.3 1.6 30.4 51.8 90.3 63.1 76.4 56.0 57.6 56.6 26.9 24.9 20.9 12.6 11.1 3.8 39.1 64.9 96.9 83.1 86.9 74.7 72.4 70.1 46.7 36.5 41.6 24.7 18.1 7.6 45.8 51.3 57.0 72.9 98.9 92.8 93.3 86.7 83.0 76.5 60.1 51.4 55.2 33.9 24.4 12.3 78.0 99.3 95.9 96.1 91.5 87.5 81.2 70.7 63.5 62.9 43.8 30.1 16.3 82.5 99.0 97.0 96.0 94.0 89.0 85.0 79.0 72.0 71.0 54.0 44.0 22.0 F o u r t h D i s t r ic t : O h io ..................................2.0 P en n sylva n ia.............. ..0.1 K e n tu c k y ..................... ..0.2 6.7 0.9 0.8 25.0 3.4 1.8 42.1 8. 3 4.1 56.0 74.7 14.7 25.1 8.2 13.5 86.7 36.1 22.7 91.5 94.0 44.7 54.0 35.8 49.0 West Virginia.............0.1 0.6 1.9 4.0 8.0 12.3 21.9 29.5 31.0 In the leading Corn Belt states one could drive for days without seeing corn fields planted with other than hybrid seed. W hat this has meant in increased pro duction is even yet not fully understood. Im proved seed alone, o f course, is not the entire answer to the record crops o f recent years because good weather, better seed-bed preparation and more rapid planting when the soil is receptive to the seed have been o f great importance. However, the ability o f hybrid seed to meet the challenge o f higher production un questionably is o f dominant importance. Perhaps it is no indication o f the conservatism o f Government crop reports that the final corn crop figures, in bushels, were above the August 1 reports as follows: 1941— 88,000,000; 1942— 378,000,000; 1943 — 160,000,000; and 1944— 299,000,000. The average increased yield per acre between August 1 and the final corn crop figure during these years was about 2.5 bushels. I f this is applied to the August 1 crop estimate o f 2,850 million for this year’ s acreage o f 92,000,000 this would mean a 1945 corn crop just over 3 billion bushels. Management Factors The use o f corn hybrids has expanded so rapidly because the seed has proved to be the most profitable in vestment a corn farmer could make. In 1943, 1944 and 1945, for instance, hybrid seed corn cost farmers 7 about $60 million each year. The Department o f Agriculture estimates increased yields for each year o f at least 600 million bushels, which resulted in a financial return o f about $10 for each dollar invested. This is prefaced on the fact that one bushel o f seed corn, which had a United States average retail price on M ay 15, 1945, o f $8.62 per bushel, will plant about seven acres, and hybrids planted under favorable conditions will increase production by 10 to 30 percent. Corn hybrids have many other plus values. Their vigor has been proven, especially in drouth years. Equally impressive has been their ability to produce a crop under late planting conditions, a factor o f real importance in 1945. Because hybrid corn makes better use o f soil fertility and can withstand drouth, it has helped to take some o f the speculation out o f corn farming. Corn hybrids also have fitted into the soil conservation program because hybrid seed has enabled farmers to grow sufficient corn while acreage has been released to clover and other soil-building crops. However, even under continuous corn crop ping the improvement o f hybrid seed corn has in creased yields about as fast as the soil has depreciated. The unbelievable im pact o f hybrid corn can be seen in better crop rotations, as well as the release o f a large amount o f fertile acreage to much needed soybeans, wheat and other cereals made necessary by the war effort. Even with the release o f former corn acreage to other crops the record corn production during the war years is fit testim ony to the ability o f hybrids to meet the challenge. T h ey will continue to prove just as important as a means o f assuring needed production and maintenance o f soil fertility in peacetime years. Summary Under favorable conditions corn pro duces a greater yield o f grain and o f total digestible nutrients per acre than any other crop now grown. A bou t 90 percent o f corn production goes to livestock feeding, in one form or another, with 50 to 55 percent going to hogs. I f corn production reaches the near-three billion bushel mark this year, total grain tonnage o f the country m ay reach a record high. Such feed stock totals would permit a sizeable increase in the hog population and the maintenance o f beef cattle, dairy animals and poultry at present levels. The corn crop, therefore, is o f extreme im portance in determining whether the present livestock population can be better fed out, and their numbers possibly increased. The discontinuance o f meat rationing in late 1945 or early 1946 is dependent upon the size o f the 1945 corn crop. H ybrid corn m ay again prove its importance by providing the key to a normal supply o f meat for peacetime America. 8 TH E M O N TH LY BUSINESS REVIEW AGRICULTURAL SUMMARY Fourth district agricultrual production, as well as that for the entire country, is headed for many new records during 1945. The Ohio corn crop, aided by good growing weather during August, m ay set a new record although the August 1 crop estimate at 181 million bushels is slightly less than the amount produced in 1942. The Ohio wheat crop at 62j/£ million bushels is the largest on record, while oats production at 353 million is the largest since 1931. Soybean production, estimated on August 1 at 25 million bushels, would be the second largest in the State’ s history. July egg production at 231 million eggs is the highest ever recorded for that month. Is is generally believed that August milk production wae the highest ever recorded for that month, and tht conditions o f pastures during August, com bined with heavy feeding, assures a continuation o f a high milk supply. Reports from Kentucky indicate that the tobacco crop is well above average in quality, though slightly * less in volum e than last year’ s record production. T o b a cco cutting has begun and will continue on a large scale during September. The Kentucky condi tion is fairly general throughout the tobacco belt and sufficient national supplies are assured. N ationwide, the near-record total grain tonnage not only promises relief from fears o f food or livestock shortages but it permits increased hog production for 1946. The record wheat and oats production will more than offset the possible shortage o f corn, and total feed stocks available for 1945-46 will be as great as in 1944-45. H ay production will reach a record high in 1945 and it is generally reported that pasture conditions in late summer have not been so good in 30 years. In a national way, too, the country has record crops o f peaches, peanuts, rice and truck crops. Although the end o f war and the lend-lease program will reduce agricultural com m odity requirements, de mand is expected to be good during the remainder o f 1945 and throughout 1946. N ational income, o f course, is expected to be down somewhat from war time levels, but it may not decline as rapidly as em ployment. W hen this lag is taken up by reconverted industry, and by an increase in non-manufacturing employment, the high demand for agricultural prod ucts may be expected to continue without seriously endangering the agricultural price-support program. Indicative o f the fact that fear is cumulative, the agricultural surplus specter has not been discussed as much with the actual end o f war as it was in the fall o f 1944 when the talk o f the end o f the war in Europe first began. It is true, o f course, that the armed services have accumulated vast stocks o f food, both for current consumption and as a safety factor in the military scheme. The factor o f military food supplies, m oreover, is but one o f the problems con fronting farm leaders in their efforts to correlate agricultural production to demand. However, the difficulty encountered with the ill-fated hog reduction program, which was a m ajor cause o f the meat short age on the hom e-front, m ay occasion some hesitation in formulating plans which call for lower agricultural production quotas. DEPARTMENT STORE TRADE W ith W orld W ar II ended, it seems appropriate to discuss briefly the effects o f the war on fourth district department store business. The outstanding develop ment was the sizable increase in total stores sales, as shown on the accom panying chart. Sales have ad vanced steadily since 1938, and last year’ s dollar volume was up 72 percent from 1939 and 57 percent over the prewar peak established in 1929. Merchants continued to report gains during the first seven months o f this year, and sales in this period were 13 percent larger compared with January-July 1944. The surrender o f Germany had little effect on con sumer buying, as sales during June and July this year were considerably greater than a year ago. The pressure on prices resulting from record-high salary and wage payments, combined with unex pectedly high civilian inventories, was largely respons ible for the tremendous gains in retail sales. M any consumers, particularly those em ployed in industries manufacturing materials for war, used their greatly enlarged earnings to purchase luxury items and other higher-priced articles which they could not afford prior to the war. The increases in sales over the past several years also reflect higher retail prices, upgrading o f merchandise, deterioration in the quality o f certain staples, and the absence o f many lower-priced lines o f THE M ON THLY BUSINESS REVIEW goods. Thus, there have been hidden price increases, as well as direct price advances, with the result that the gains in the physical volume o f merchandise sold have not been as great as in the dollar value. The gains in sales over the war period have been far from uniform among the various departments o f reporting stores. As a result o f shortages o f certain types o f merchandise, especially heavy appliances and various other housefurnishings, consumers shifted their purchasing power to departments which were more heavily stocked, especially those selling wom en’ s ready-to-wear and accessories. Piece goods sales recently were two to three times larger than the pre war level, as many women were making their own garments because certain ready-made clothing was difficult to secure or o f inferior quality. M en ’ s apparel departments did not experience sales increases as large as those in the wom en’ s wear divisions, principally because m any o f the stores’ male customers were in the armed forces. However, this loss was partly offset by the larger amount o f goods purchased by war workers. O f special interest in a discussion o f department store trade over the war years is the fact that retailers were able to maintain a large volume o f merchandise stocks in the face o f war production and the accom panying curtailment in production o f many civilian items. Following entry o f the United States into W orld W ar II, department stores made every effort to build up their inventories in anticipation o f future shortages. On M a y 31, 1942, stocks at fourth district stores were the largest on record, but during the remainder o f 1942, these were liquidated almost as rapidly as they had been built up earlier in the year. During 1943 and 1944, reporting stores were able to secure approxim ately as much merchandise as they sold, despite the fact that they experienced recordhigh dollar sales month after month. In discussing dollar stocks, as well as dollar sales, one must take into consideration the upgrading o f merchandise and other factors which have tended to inflate the stocks figures. W hile department store inventories during 9 the war have been greater than in the years prior to 1941, there have been fewer articles from which cus tomers could make their selections. Total store sales during July 1945 were up 15 per cent from the same month a year ago and were the largest on record for that period. The decrease from June was considerably smaller than usual, and the seasonally adjusted index advanced to 220 percent o f the 1935-39 base, only two points less than the all-time high established last M arch. The year-toyear gains for July showed considerable variation among the leading cities o f the district, ranging from one percent in Erie to 26 percent in Youngstown. Sales in Pittsburgh and Cleveland were up 16 percent, and in Cincinnati 19 percent. Since the first o f this year, there has been some improvement in the inventory situation at fourth district stores, and stocks at the end o f July were up 34 percent compared with January 1. During the same period, the seasonally adjusted stocks index advanced from 137 percent to 187 percent o f the 1935-39 average, the highest point in nearly three years. A t the present time stores are faced with the necessity o f closing out their wartime goods, many o f which are o f substandard quality. Some merchants report that they are can celing orders for such merchandise in anticipation o f receiving better quality goods within a short period o f time. Customers, too, are very reluctant to purchase goods o f this type. It is generally expected that departm ent store sales during the next several months will drop from the wartime peak, but it is difficult to predict the length or degree o f this decline. The amount o f time needed for reconversion in this area and the volume o f con tract cancelations, with the accom panying layoff o f war workers, will be determining factors. Certain merchants have reported that their business already is falling o ff somewhat. However, following the re conversion period, departm ent stores again should experience a boom in sales, especially as articles which have not been available at all, or only in limited quantities, reach the market in large volume. 10 TH E M ONTHLY BUSINESS REVIEW Fourth District BusinessIndexes Indexes of Department Store Sales and Stocks (1935-39 = 100) Bank D ebits (2 4 )c itie s ).......................................... C om m ercial Failures (N u m b e r ).......................... (L ia b ilitie s )....................... Sales— Life Insurance (O. and P a .)................... ” — D epartm en t Stores (97 fir m s )............... ” — Chain Drugs (5 fir m s)* ............................ ” — Chain G roceries (4 fir m s )........................ Building C o n tr a c t s — ( T o t a l ) ............................... — (R e s id e n tia l)................... Produ ction— Coal (O ., W . Pa., E. K y .) .......... — Cem ent (O ., W . Pa., E. K y .)* * — E lectric Pow er (O ., Pa., K y .)* * — Petroleum (O ., Pa., K y .) * * ____ — S h oes.................................................... D aily A vera ge for 1935-39 = 100 July 1945 213 4 19 128 161 171 165 113 65 146 68 194 99 73 July 1944 216 9 12 110 140 160 175 78 27 149 70 190 100 70 Julv 1943 199 16 38 101 126 163 163 72 101 154 132 186 105 84 Julv 1942 171 45 20 81 106 141 141 344 85 148 161 161 101 111 Julv 1941 147 70 52 105 107 120 122 268 433 137 178 143 91 123 * Per individual unit operated. **June. a N ot available. July 1945 SALES: Akron ( 6 ) ..................... Canton ( 5 ) ................... C incinnati ( 9 ) ............. Cleveland ( 1 0 ) ............ Colum bus ( 5 ) ............. Erie ( 3 ) .......................... Pittsburgh ( 8 ) ............ Springfield ( 3 ) ............ T o le d o ( 6 ) .................... W heeling ( 6 ) ............... Y ou n gstow n ( 3 ) ____ D istrict ( 9 7 ) ............... ST O C K S * D istrict (5 1 )................ 196 211 170 155 200 167 138 192 160 148 180 161 W ith ou t A d ju sted for Seasonal A d ju stm e n t Seasonal V ariation June J u ly Ju ly Jun e J u ly 1945 1944 1945 1945 1944 218 237 193 174 223 ,1 9 2 172 225 186 174 212 187 168 180 198 148 139 171 164 120 184 150 125 149 140 236 261 232 206 257 219 212 256 226 200 240 220 146 237 246 215 189 239 216 173 228 200 196 226 197 217 244 203 186 219 216 184 246 211 169 199 191 180 164 Debits to Indiv dual Accounts (T h ou san ds o f D ollars) B u tle r.......................... C a n t o n ........................ C in cin n a ti.................. C le v e la n d ................... C o lu m b u s ................... C o v in g to n -N e w port D a y t o n ........................ E rie ............................... F ran k lin ...................... G reen sb u rg................ H a m ilto n .................... H o m e ste a d ................ L e x in g to n ................... L im a ............................. L o r a in .......................... M a n sfield ................... M id d le to w n ............... Oil C i t y ...................... P ittsb u rg h .................. P o rts m o u th ............... S h a ron ......................... S prin gfield................. S teu b en ville.............. T o l e d o ......................... W a r r e n ........................ W h eelin g .................... Y o u n g s to w n .............. Z a n esv ille ................... T o t a l ........................ % change July 1945 from 1944 197,643 + 10.5 21,110 + 16.1 81,257 - 7.3 + 4.7 651,256 1,333,977 - 4.8 323,167 + 1.3 27,890 + 8.2 149,257 + 7.0 68,771 + 1 3 .7 6,072 - 2.5 14,145 + 6.8 23,238 + 2 1 .3 5,437 + 2.1 + 2 0 .3 33,791 26,980 - 5.5 8,957 + 2.1 + 1 2 .6 22,955 18,196 - 1.6 15,348 + 2.9 1,302,859 - 1.8 11,943 - 0.6 17,114 + 3.5 + 0.8 31,874 16,266 + 1 4 .5 251,524 -1 1 .6 22,649 -1 1 .8 47,634 - 2.2 89,943 + 1.0 15,001 + 8.4 - 0.9 4,836,254 Jan.-July 1945 1,444,147 153,346 599,321 4,598,610 9,648,970 2,423,063 186,444 1,061,552 434,243 42,667 90,643 166,133 36,610 359,662 205,822 63,595 165,574 141,027 116,803 9,562,204 86,307 120,936 231,695 112,152 1,757,738 173,699 314,007 620,007 97,401 35,014,378 J an .-Ju ly 1944 1,254,839 123,495 575,909 4,292,562 9,240,400 2,251,136 174,563 1,013,183 450,229 42,873 86,519 141,939 34,844 268,939 189,229 61,493 144,339 140,961 106,996 9,356,742 79,914 118,815 227,664 95,149 1,881,216 170,857 299,304 600,512 90,310 33,514,931 % change from 1944 + 15.1 + 2 4 .2 + 4.1 + 7.1 + 4.4 + 7.6 + 6.8 + 4.8 - 3.6 - 0.5 + 4.8 + 1 7 .0 + 5.1 + 3 3 .7 + 8.8 + 3.4 + 1 4 .7 -0 + 9.2 + 2.2 + 8.0 + 1.8 + 1.8 + 1 7 .9 - 6.6 + 1.7 + 4.9 + 3.2 + 7.9 + 4.5 Fourth District Business Statistics F ourth D istrice Unless Otherw ise Specified (000 o m itte d ) J u ly % change 1945 from 1944 Bank D ebits— 24 c it ie s ......................$4,742,000 Savings D eposits— end o f m on th : 39 banks O. and W . Pa............... .. $ 1,302,322 Life Insurance Sales: O hio and Pa........................................$ 107,729 D ept. Stores— 97 firm s................. $ W earing A pparel— 17 f i r m s . . . . $ Furniture— 74 firm s...................... $ B u ilding C on tra cts— T o t a l ............. J5 — R esidential . $ C om m ercial Failures— L ia b ilities .......................................... $ N u m b e r .............................................. P rod u ction : Pig Iron — U. S...............N et tons Steel In g ot— U. S......... N et tons B itum inous C oal— O ., W . P., E. K y .. . .N e t tons C em ent— O ., W . Pa., W . V a ........... Bbls. E lectric Pow er— 0 . , Pa., K y ...T h o u s . K .W .H . S h oes.........................................Pairs B itum inous C oal Shipm ents: Lake Erie p o r ts .............N et tons a January, b January-June. c C onfidential. — 1 Jan .-Ju ly % change 1945 from 1944 34,364,000 • + 4 +25 +17 732,546 +12 37,856 1,657 2,747 +15 +19 +10 293,687 14,401 19,160 +13 +13 + 5 27,476 4,994 +44 +143 130,840 24,094 +39 +11 282 3 +66 —50 1,458 32 +36 —37 4,801 7,000 - 7 7 33,955 50,154 - 7 - 5 18,260 - 3 129,006 - 7 558a - 3 3,016b + 2,965a c + 2 + 4 18,179b c + 2 — 2 6,646 — 7 24,982 — 10 8 Wholesale and Retail Trade (1945 com p ared w ith 1944) Percentage Increase or D ecrease SA L E S S A L E S S T O C K S July first 7 July 1945 m onths 1945 D E P A R T M E N T S T O R E S (97) A r k o n ................................................................................ C a n to n .............................................................................. C in cin n a ti....................................................................... C lev ela n d ........................................................................ C o lu m b u s........................................................................ E rie.................................................................................... P ittsbu rgh ....................................................................... Springfield....................................................................... T o le d o .............................................................................. W h eelin g .......................................................................... Y o u n g sto w n ................................................................... Other C itie s.................................................................... D istrict............................................................................. +13 +11 +19 +16 +22 + 1 +16 + 9 +11 +18 +26 -0 +15 +14 + 9 +16 +11 +18 + 7 +12 + 8 +12 +19 +19 + 5 +13 W E A R I N G A P P A R E L (17) C a n to n ............................................................................. C in cin n a ti....................................................................... C le v e la n d ........................................................................ P ittsbu rgh ....................................................................... Other C ities.................................................................... D istrict............................................................................. +18 +16 +17 +27 +19 +19 +13 +13 +13 +13 +12 +13 + 9 — 14 - 2 +11 +13 + 3 F U R N I T U R E (74) C a n to n .............................................................................. C in cin n a ti....................................................................... C lev ela n d ........................................................................ C o lu m b u s........................................................................ D a y t o n ............................................................................. P ittsb u rg h ....................................................................... A llegheny C o u n ty ........................................................ T o le d o ............................................................................... Other C ities.................................................................... D istrict............................................................................. +24 +13 + 9 + 6 +22 +18 —0 +14 + 5 +10 + 7 +13 + 3 — 2 + 5 + 7 + 6 + 2 + 7 + 5 +21 + 9 +16 + 2 a a a -1 1 + 4 +11 C H A IN S T O R E S * Drugs— D istrict ( 5 ) ..................................................... Groceries— D istrict ( 4 ) ............................................. + 7 — 1 + 4 +10 a a W H OLESALE T R A D E ** A u tom otive Supplies ( 7 ) ........................................... Beer ( 5 ) ............................................................................ C on fection ery ( 5 ) ......................................................... D ry G oods ( 3 ) ............................................................... Electrical G oods ( 7 ) .................................................... Fresh Fruits and Vegetables ( 1 0 ) ......................... Furniture & H ouse Furnishings ( 3 ) ..................... G rocery G rou p ( 4 1 ) .................................................... T ota l H ardware G rou p ( 1 7 ) .................................... General H ardware ( 5 ) ........................................... Industrial Supplies ( 6 ) .......................................... Plum bing & H eating Supplies ( 6 ) .................... Jew elry ( 1 0 )................................................................... Lum ber and B uilding M aterials ( 4 ) .................... M achinery, E quip. & Sup. (E x c e p t E lec.) (4) M etals ( 3 ) ....................................................................... Paper and Its Produ cts ( 5 ) ...................................... T o b a c c o and Its Produ cts ( 1 5 ) .............................. M iscellaneous ( 1 4 ) ....................................................... D istrict— All W holesale T rad e (1 6 0 )................... + 6 - 3 + 6 — 1 +18 +26 —28 + 2 +15 +30 — 6 +24 +23 + 6 — 3 —31 +16 +12 + 9 + 4 +20 - 5 +13 a + 7 +20 a + 4 + 8 a — 2 +10 + 3 + 3 a a + 9 — 3 — 5 + 4 +13 a +17 + 2 +16 a +10 +11 a +21 a — 16 —40 + 9 — 3 a —22 -0 —0 a a a + 3 +12 a a —23 — 13 — 15 * Per individual unit operated. **W holesale data com piled b y U. S. D epartm en t o f C o m m erce, Bureau o f the Census. a N o t available. Figures in parentheses indicate num ber o f firms reporting sales. 11 TH E M O N TH LY BUSINESS REVIEW Summary of National Business Conditions By the Board of Governors of the Federal Reserve System Industrial activity declined further in July and the early part o f August and was sharply curtailed in the latter part o f the month as munitions cutbacks were greatly accelerated. Retail trade was maintained in July and early August at a high level for this season o f the year. INDUSTRIAL PRODUCTION Industrial production in July, the last full month o f high level production for war, was 212 percent o f the 1935-39 average, according to the Board’ s season ally adjusted index, as compared with 220 in June. Following the surrender o f Japan most munitions contracts were cancelled, and as a result it is expected that munitions output and industrial production will show much larger declines in August. Production o f aircraft declined about 20 percent in July and operations at shipyards and in other muni tions industries were reduced considerably from the June rate. Steel production in July and the early part o f August was about 5 percent below the June level. In the week following Japan’ s surrender activity at steel mills decreased sharply to a rate o f 70 percent o f capacity. Production o f nonferrous metals continued to decline in July, while output o f lumber and stone, clay, and glass products was maintained. Production o f most nondurable goods declined somewhat in July, but, as a group, output o f these products was slightly above a year ago. C otton con sumption was 14 percent below the preceding month and was 11 percent below last July. A ctivity in the meatpacking, canning, and baking industries, after allowance for seasonal changes, was down somewhat from June. Production o f alcoholic beverages rose sharply as distilleries were released from industrial alcohol production. A ctivity in chemical, rubber, and other nondurable goods industries declined slightly. Coal production declined about 5 percent in July and the first part o f August from the June rate, while output o f crude petroleum continued to increase and was in record volume. Contracts awarded for private construction con tinued to rise sharply in July and were more than three times the low level prevailing last summer, according to F. W . D odge Corporation data. Con tracts for privately-owned non-residential building showed the largest increase. On August 21, all re strictions over the construction o f industrial plants were removed. Distribution Department store sales usual from June to July, adjusted index rose from 1935-39 average. Sales in declined much less than is and the Board’ s seasonally 201 to 218 percent o f the July were 15 percent larger than in the corresponding period last year. During the first tw o weeks o f August sales were about 20 percent larger than a year ago. Carloadings o f most classes o f railroad freight de clined somewhat in July and the early part o f August and were below the volum e shipped during the same period last year. Shipments o f l .c .l . merchandise, however, were at about the same rate as prevailed during the same period last year. Commodity Prices W holesale com m odity prices generally showed little change from the early part o f July to the early part o f August. Follow ing the announcement o f peace negotiations prices o f cotton and grains declined somewhat— especially contracts for delivery next year— while prices o f most other basic com modities continued unchanged. Retail prices advanced somewhat further in June. Food prices rose 2 percent and retail prices o f cloth ing, housefurnishings, and miscellaneous items con tinued to show slight advances. Agriculture Crop prospects im proved during July and, accord ing to indications on August 1, total output this year will be only slightly smaller than the record volumes o f 1942 and 1944. O f the m ajor crops only production o f cotton , corn, and apples is expected to be less than a year ago. Marketings this summer o f most livestock products except hogs have been about as large as, or larger than, the high levels o f recent summers. Bank Credit Loans and investments at reporting banks in 101 leading cities declined by 1.2 billion dollars between the close o f the Seventh W ar Loan and mid-August. Reflecting repayments on advances made during the drive, loans for purchasing or carrying Governm ent securities declined by a billion dollars. Loans both to brokers and dealers and to other bank customers decreased by approxim ately 500 million dollars each, com pared to drive and immediate pre-drive increases o f 1.1 billion and 1.8 billion dollars respectively. W hile bank holdings o f Treasury bonds continued their steady week-to-week increase, holdings o f bills and certificates, which had increased during the drive, began to decline again in late July and August. On balance, the total portfolio o f Governm ent securities declined by 350 million dollars. Holdings o f other securities showed a small increase over the six-week period. Follow ing the close o f the Seventh Drive, deposits o f businesses and individuals began to increase again as Treasury expenditures transferred funds from war loan to private accounts. The average level o f re 12 TH E M O N T H L Y BUSINESS REVIEW quired reserves accordingly rose by about 500 million dollars between the drive-end low point and m idAugust. Reserve balances increased by about 300 million dollars and excess reserves dropped by about 200 million to around 1.2 billion outstanding; this was still somewhat above the generally prevailing interdrive level o f slightly less than a billion dollars. M em ber bank borrowing from the Federal Reserve Banks, which had declined to a minimum by the close o f the Seventh Drive, increased by 275 million dollars in the subsequent six-week period ended August 15. Reserve funds were also supplied to mem ber banks through an increase o f 125 million dollars in G overn ment security holdings at the Reserve Banks, as well as by tem porary fluctuations in other Federal Reserve Bank credit and in Treasury deposits at the Reserve Banks. O nly partially offsetting increases in such funds were a currency outflow o f 520 million dollars and a small decline in gold stock. Th e currency out flow during July, 360 million dollars, was the largest in the past few m onths; early August increases were also substantial.
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