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MONTHLY REVIEW TWELFTH FEDERAL DECEMBER 1 9 4 9 RESERVE DISTRICT Fe d e r a l R e s e r v e b a n k of S a n Fr a n c i s c o r e y ie w o f b u s i n e s s c o n d i t i o n s H E Twelfth District economy at the end of 1949 is in urban dwelling units in the District was greater in Oc a stronger position than had been generally expected tober than a year ago. In addition, October marked the arlier in the year. The decline in business activity on a third successive monthly increase in the number of units road front, which started in the latter part of 1948, con- authorized in the District. It also appears likely that inued into the early months of 1949. During March em- fourth quarter totals may be equal to or better than third loyment turned upward and continued to rise at a mod- quarter totals— a reversal of normal seasonal behavior rate but steady pace through September. The effects of and a marked departure from the rapid decline in the everal work stoppages and a seasonal decline in canning fourth quarter last year. aused a moderate drop in nonagricultural employment Declines in the production of other durable goods, in i October. While agricultural employment has been fall- addition to lumber, retarded District gains in output in ig off steadily since September, nonagricultural employthe first nine months of 1949. Currently, however, pro íent during November and December probably has not duction in several of these lines has again increased or has aried much from the October level. at least remained steady. Of particular interest is the high Other indicators of economic activity also started to rate of steel output in the District. Steel production de ise in the spring. In most cases, however, they remained clined from the first quarter of 1949 through the summer. elow the high levels of 1948 and in few instances was In the past several months, except for the period of the here any sign of an expansion comparable to that which strike, steel output has been increasing. No doubt current pok place during the second and third quarters of 1948. demand reflects the replacement of strike-depleted stocks n contrast with the latter part of 1948, however, there is to some extent, but most District producers were of the ttle evidence at the year end of any significant weakenopinion that the fourth quarter demand would have ex ig in demand. ceeded that of earlier periods even if no strike had oc curred. The furniture and electrical equipment industries treas of recent improvement have also shown some improvement in recent months. Many of those lines in the District economy which Though considerably off from 1948, the machinery in /ere most unfavorably affected by events in the 12 dustry has tended to be steady in recent months in con íonths ending September 1949 have improved toward trast to fairly sizeable declines earlier in the year. lie end of the year. The lumber industry, for example, xperienced a sharp decline in demand late last year. The Some soft spots remain ffects of a smaller demand for lumber were felt throughThere are some lines in the District economy, how ut most of 1949, but in the last few months of this year ever, which still are not sharing fully in the generally im imber markets have been strong. In large measure this proved outlook. Pre-Christmas department store trade in effects the excellent record in new housing starts made December was not far behind a year earlier, in contrast to ationally. Through September, the District record in the first 11 months of 1949 when sales lagged behind 1948 ome building has not compared so favorably with 1948 by 7 percent. Much of the drop in dollar volume during s that for the nation as a whole. Nationally, the dollar 1949 was due to lower prices, but the decline was large olume of housing starts in the first nine months of 1949 enough to indicate a somewhat smaller physical volume ras slightly ahead of 1948, as was the number of urban too. Total retail trade, however, has not fallen off so much welling units authorized by permit. In this District, as department store sales in 1949 because of the continued owever, the number of new housing units authorized in high levels of automobile, gasoline, and food sales. rban areas was off 22 percent. Housing starts for the )istrict as a whole are not available, but the Bureau of Also in This Issue .abor Statistics reports that starts during the first nine íonths of this year were down 20 percent from 1948 in The Price of Gold be Los Angeles area and 7 percent in the San Francisco rea. Recent District developments, however, have been The Livestock Situation lore encouraging. The number of authorizations for new r 130 FEDERAL RESERVE BANK OF £AN FRANCISCO Base metal mining continues to decline. After some re covery during June, July, and early August, demand and prices weakened and in the closing months of the year have shown a further tendency to fall off. The shipbuild ing industry does not offer any prospect of early recovery, and aircraft employment has been declining moderately since July. Prior to October, the declines in aircraft em ployment in Washington were partly offset by gains in California. Starting with October, however, both states have reported moderate declines. District agricultural in come also has lagged behind 1948, principally because of lower prices. With most estimates indicating a continued gradual decline in farm prices, and with acreage allot ments applicable next year to additional crops, District farm income is likely to continue to decline moderately. Employment during 1949 has failed to regain the yearago level, and in November lagged behind 1948 by a little over \y2 percent. In addition, the labor force has con tinued to grow during the past year. As a result, unem ployment in November was about 40 percent higher than a year ago. The increase in unemployment this winter is apt to be less severe, however, than in the winter of 1948-49, when unemployment doubled between Novem ber 1948 and February 1949. In that period declining business activity and unusually severe winter weather added to the usual seasonal declines. Nevertheless, the number of jobless probably will still be greater this win ter than a year earlier. In November of this year, an esti mated 450,000 were unemployed out of a labor force of over 6 million in the three Pacific Coast states. An in crease of 250,000 in the number of unemployed would raise unemployment to the February 1949 peak. Such an increase, though in excess of 50 percent, is quite likely in view of the seasonal factors involved, and is less than 5 percent of the number employed in November. Most of the increase in the number of jobless will result from sharp seasonal eut-backs in agricultural employment, ac companied by the usual winter declines in lumbering and food processing. Bank loans to business down, to consumes up, from year ago Business and agricultural demand for credit has not been so strong during the second half of 1949 as in the December 1949 same period last year. There has been a fair increase since late summer, however, in commercial, industrial, and agricultural loans of member banks, even though the amount outstanding in early December was down some 10 percent from a year earlier. Total loans of member banks were much closer to last year’s level, because of the slow but persistent increase in real estate loans out standing and the substantial gains in consumer instal ment loans during the year. Effect of devaluation on exports not yet apparent The effect of the recent currency devaluations has not yet been felt to any large extent in the District. Few District items entering into export trade have been af fected thus far, and it is likely that the effects will be gradual. The film, petroleum, citrus, and dried fruit in dustries have been having considerable difficulty in for eign markets for some time, and the devaluation inten sifies their problem. It is the opinion of most traders that quotas on imports or dollar spending by foreign coun tries may continue to be greater barriers to exports in the next few months than the recent devaluation. The extent to which the devaluation will make foreign goods more competitive with District products in domestic mar kets also is not yet clear. District business appears relatively stable The sum of all evidence that can be obtained does not point to a level of economic activity in the next few months comparable to that in the peak months of 1948, On the other hand, there are few indications now of a decline comparable to that experienced in the winter of 1948-49. Even though business continues, apart from normal seasonal fluctuations, at a more or less stable or even moderately increasing rate, some problems will re main. Unemployment, though not critical, is sufficiently large to cause considerable concern to the community. With a labor force that is growing because of inmigra tion as well as natural increase, a fair degree of continue ing expansion in employment is necessary even to keep the level of unemployment constant. In addition, the usual seasonal employment decline in the winter months adds substantially to the unemployment problem in many areas of the District. THE PRICE OF GOLD the months prior to the recent currency devaluations, there had been an increasing demand from certain groups, both within and without the United States, for an increase in the price of gold. The widespread devalua tion of currencies since the middle of September has les sened this demand, at least temporarily, on the part of gold producers in countries that devalued their curren cies. At the same time, it has given rise to a somewhat greater interest in the subject within the United States. n I Since early 1934 the official price of gold in the United States has been $35 per fine ounce— an automatic conse quence of the fact that the weight of the gold dollar is fixed1 at 15 5/21 grains of gold nine-tenths fine, which is 1/35 of an ounce. Moreover, since the United States holds three-fourths of the reported gold reserves of cen1 T h e T h o m a s A m e n d m e n t to th e F a r m R e lie f A c t o f M a y 1 2 , 1 9 3 3 a u th o r iz e d t h e P r e s id e n t t o r e d u c e t h e g o ld c o n t e n t o f t h e d o lla r b y 5 0 p e r c e n t. T h is a u th o r iz a tio n w a s o p tio n a l r a th e r th a n m a n d a to r y a n d w a s n o t a t th a t t im e m a d e t h e b a s is fo r a d m in is tr a tiv e a c t io n . T h e G o ld R e s e r v e A c t o f 1 9 3 4 a m e n d e d t h is p r o v is io n b y r e q u ir in g t h e P r e s id e n t to f ix t h e g o ld c o n t e n t o f t h e d o lla r a t n o t m o r e t h a n 6 0 p e r c e n t a n d n o t le s s th a n 5 0 p e r c e n t o f it s e x is t in g fig u r e . O n J a n u a r y 3 0 , 1 9 3 4 , th e P r e s id e n t, b y p r o c la m a t io n , fix e d t h e g o ld c o n t e n t o f t h e d o lla r a t 15 5 / 2 1 g r a in s o f g o ld n i n e - t e n t h s f i n e — a n a m o u n t e q u a l t o 5 9 .0 6 p e r c e n t o f i t a o l d c o n t e n t o f 2 5 . 8 g r a i n s . A f t e r s e v e r a l e x t e n s i o n s , t h e P r e s i d e n t ’s p o w e r t o v a r y t h e g o ld c o n t e n t o f th e d o lla r w it h in t h e lim it s in d ic a te d a b o v e fin a lly e x p ir e d on Ju ne 30, 1943. •ecember 1949 MONTHLY REVIEW :al banks and governments throughout the world (exluding the U.S.S.R., which does not report its holdings), : plays a strategic role in influencing the world price of old. In more recent years, this role has been complelented by the activities of the International Monetary und. The Articles of Agreement of the International Moneiry Fund provide for certain controls over changes in the ar values of its members’ currencies. These par values re expressed in terms of gold as a common denominator r in terms of the United States dollar of the weight and neness in effect on July 1, 1944. The Fund also has the uthority to prescribe the price (with allowance for hanling charges) at which each country may buy or sell old, such price being determined by reference to the acepted par value of the currency for each particular counry. Because the par values of the various currencies are leasured in terms of the United States dollar with its resent gold content, the International Monetary Fund as exerted its influence to dissuade member countries rom buying or selling gold at prices in excess of $35 an unce. demand for higher gold price Prior to the recent devaluations, the demand for a igher gold price came both from our domestic producers f gold and from producers situated in other countries lat mine and export large quantities of gold. Two major ictors contributed to the impetus of this demand. One > the fact that the official price of gold in the United States and in many other countries has remained at $35 er fine ounce or its equivalent since 1934 despite subtantial increases in the costs of producing gold. Conseuently the profitability of gold mining had been reduced -in some cases quite drastically. The other contributing lement is the fact that for a number of years the price f gold in certain countries, principally in the Near and 'ar East, has been substantially above the price of $35 er fine ounce or its equivalent. 131 million in 1948— a decrease of about 40 percent. Gold output in both the Twelfth District and the United States declined nearly 60 percent during the same period. A substantial part of the decrease was caused initially by wartime restrictions placed upon gold mining in various countries, including the United States, but the removal of these restrictions later on has not resulted in any sig nificant recovery in output from the wartime low reached in 1945. Since the Twelfth District has supplied some what more than half of all the gold mined in the United States during the past ten years, there is an especially vital concern here in the price of gold. Subsidies paid to gold producers The relatively low output of gold in recent years has led several countries to provide governmental assistance to the industry in an effort to maintain or stimulate the volume of production, primarily for the purpose of ob taining additional scarce foreign exchange. Some coun tries, including Canada, Colombia, Australia, and South ern Rhodesia, have introduced subsidy schemes of one sort or another, while other countries have provided as sistance to producers in the form of taxation relief. Can ada, which is the second largest producer of gold* started its subsidy in 1948, and the average aid to domestic gold producers during that year was $3.26 an ounce. This means an average price to Canadian producers of $38.26 per fine ounce. Marginal producers received a substan tially higher price. During 1948, payments by the Gov ernment to gold producers totaled $10.3 million. Produc tion has increased about 15 percent since the start of the subsidy program. The costs of the Canadian subsidy come out of the gen eral revenue of the Government, since Canada sells gold in the international market at $35 an ounce. While the International Monetary Fund is not enthusiastic about such domestic subsidy programs, it has no authority to stop them as long as the government involved maintains an official buying and selling price for gold of $35 an ounce.1 »old output substantially below prewar peak Under the impact of rising costs and a fixed price, the rorld gold output (excluding the U .S.S.R .) has fallen rom its prewar peak (1940) of an estimated $1,311 milon (valued at $35 per fine ounce) to an estimated $780 G old P r o d u c t io n (in m illions of dollars) Twelfth District »39 ...................................... ....94.2 >40 .......................................... 99.1 >41 .......................................... 97.2 >42 ...................................... ... 70.2 >43 .......................................... 33.3 >44 ...................................... ....26.8 >45 ...........................................23.7 >46 .......................................... 28.6 >47 ...........................................39.3 >48...................................... ....4Ô.6 9 ta l.................................... 553.0 United States1 178.1 196.4 209.2 131.0 48.8 35.8 32.5 51.2 75.8 70.9 1,029.7 Estimated world pro* duction out* side U.S.S.R. 1,219.4 1,311.5 1,265.6 1,125.7 867.7 782.0 739.0 754.1 763.9 780.0 9,608.9 [ncludes Philippine production received is United States through 1945. South Africa sells some gold for $38.20 an ounce In February of this year the Union of South Africa, the world’s largest producer of gold, announced that it had made arrangements to sell 100,000 ounces of gold (12,500 ounces a week over an eight-week period) to a London firm of bullion brokers for $38.20 per fine ounce. The Union Government stated that thé gold would go only into industrial, professional, or artistic uses, and not into monetary use. The gold was to be shipped in 22 carat alloy form, whereas monetary gold is customarily 24 carat of pure gold. This was the first official departure on the part of a government to sell gold above $35 an ounce. ïn announc ing the sale, Mr. Havengâ, the South African Finance Minister, stated that as a member of the International ‘ The Fund did interpose objections to sonie features of the Canadian pro* gram when it was first proposed and the Canadian Government modified the program to meet these objections. 132 FEDERAL RESERVE BANK OF SAN FRANCISCO Monetary Fund, South Africa was obliged to sell gold for monetary use at the official price of $35 an ounce. H e con tended, however, that the Fund had no jurisdiction over international sales of gold for industrial, professional, and artistic uses. He furthermore asserted that South Africa should not be denied the opportunity to sell gold for such purposes at a price above $35 an ounce. The Fund objected strenuously at first to the program announced by South Africa. It acknowledged that it had no authority to control the sale of gold for other than monetary purposes, but asserted that there was not suf ficient guarantee that the gold being sold by South Africa under this contract would not find its way into monetary channels. The Fund and the Union of South Africa finally compromised their dispute. The Fund stated that safe guards had been established to insure that the gold would be sold for purposes of genuine manufacture only and the prospective importer would obtain prior permission from his own authorities to make the purchase. After the initial amount of 100,000 ounces had been sold, South Africa announced that she planned to sell additional amounts on the same basis. High prices for gold in certain foreign countries F or several years the price of gold in several Near and Far Eastern countries has been substantially above $35 an ounce. In some cases the markets in these countries are free and open and in others they partake of the nature of black markets. The price of gold is quoted regularly on the free market in Bombay and prior to devaluation was approximately the local currency equivalent of $95 an ounce. The price in other countries in this group ranges downward from that level to about $45 an ounce. There are also markets in certain European countries in which the price of gold is significantly above $35 an ounce. Some of them are black markets but others are free markets. The fact that gold does sell for prices substantially higher than $35 an ounce in various countries of the world has led to a demand from some quarters that the price should be raised to some higher, more “realistic” level. The presumption underlying this belief is that if all restrictions were removed on the sale of gold the price would rise significantly above the official level of $35 an ounce. This presumption is of doubtful validity because the conditions now surrounding the sale of gold in the higherpriced markets are such that the supply of gold offered for sale on those markets is relatively small. Exact figures on the amount of trading in these markets are not avail able, particularly because many of them are black mar kets. The London bullion firm of Samuel Montagu and Company estimates that 3.5 to 4 million ounces of gold were traded in the “off-white” markets during 1948, which would be not more than one-sixth of the total world production for the year. O f course, not all of the gold traded on these markets during the course of a year comes from current production. December 1949 In view of the relatively small volume of trading on the present higher-priced markets, the current prices on these markets cannot be taken as representative of the prices that would prevail if free trading in gold were opened up on a world-wide basis. Because of the predominant posi tion of the United States in total world gold holdings, it is reasonable to believe that the price which would prevail in a world-wide free market for gold would depend to a very high degree upon the policy which the United States would follow in buying and selling gold. Foreign demand for higher price for gold largely silenced by devaluation Although the recent currency devaluations have not resulted in any higher price for gold in terms of dollars, they have produced higher prices in terms of the devalued currencies. The higher prices for gold in terms of the re spective devalued currencies have increased the profit ability of gold mining in those countries, at least until such time as their mining costs may rise to higher levels. This has largely silenced, for the present at least, the de mand of these countries for a higher price for gold. It has also opened the way for some of the countries to reduce or eliminate their subsidies to gold producers. Canada, for example, has announced that she will reduce her subsidy payments in 1950 by the amount of the increase in the price of gold resulting from the devaluation of the Ca nadian dollar. Southern Rhodesia has announced that she will discontinue her gold subsidy when her gold pro ducers begin to receive the new, higher price resulting from devaluation. Devaluation of dollar would deprive other countries of benefits flowing from their currency devaluation Since the widespread devaluation of the currencies of foreign countries, the question has been asked in many quarters as to when the United States will devalue the dollar, thereby raising the price of gold. Other countries resorted to devaluation because their currencies had been overvalued in terms of the dollar. This overvaluation had, among other things, made it difficult for them to sell goods in the dollar area. The change in their dollar ex change rates to a more realistic level was deliberately de signed to increase their exports to the dollar area and to diminish their imports from that area. This shift in their trade is necessary in order to eliminate or diminish their dollar shortage. Devaluation of the dollar, which would necessitate an increase in the price of gold, would operate to move ex change rates back toward their former ratios. The benefits that other countries had hoped to attain through devalua tion could not be realized, therefore. A rise in the price of gold would lead fo an increase in the monetary gold stock of the United States From the purely domestic point of view, an increase in the price of gold would serve only to aid domestic gold producers and to increase our already substantial stock of monetary gold. The only basis upon which aid to do December 1949 MONTHLY REVIEW mestic gold producers might be economically justified is our need for a greater stock of monetary gold. No such need exists at present nor appears likely to arise within the foreseeable future. The Federal Reserve System currently holds some what more than $23 billion of gold certificates, which in turn represent an equivalent amount of gold held by the United States Treasury. In addition, the Treasury holds somewhat more than $1 billion of gold against which gold certificates have not been issued. Of the $23 billion of gold certificates, only slightly more than $10 billion are needed as the 25 percent reserve against Federal Reserve Notes and member bank and other deposits in the Federal Re serve banks. The difference of about $13 billion could support a very large increase in our money supply. If it were used only as reserve against additional Federal Reserve Notes, it could support about $52 billion of additional notes. That is over twice as many Federal Reserve Notes as are now outstanding. Or the difference of about $13 billion could be used to support additional deposits. As a 25 percent reserve against member bank reserve accounts, it could support an additional $52 billion in member bank reserves. That is more than three times as large as the present volume of required member bank reserves. Moreover, on the average for all deposits subject to reserve in all member banks, $1 in the form of legal reserves supports about $7 in the form of member bank deposits at the present time. Therefore, $52 billion in additional reserves could sup port about $360 billion in additional bank deposits. That is about three times as many member bank deposits as now exist. A reduction in member bank reserves to the legal minimum would allow an even greater expansion of deposits. These illustrations use, of course, the extreme limits to expansion which might be supported by the gold certifi cates now held by the Federal Reserve System. Actually, any increase in currency and deposits that might occur would undoubtedly involve an increase in both Federal Reserve Notes and bank deposits. In any event, it seems clear that our present monetary gold stock is large enough, at the present price, to support whatever further growth in the money supply may be needed for years ihead. A rise in the price of gold would increase the dollar value of the existing gold stock held by the United States Treasury. This increase in dollar value would constitute i “profit” to the Treasury. Since additional gold certifi:ates could be issued against this “increase” in the gold stock, it would also provide the basis for an increase in joth Federal Reserve and member bank reserves and support a monetary expansion over and above that outined above. Since the price of gold was increased to $35 an ounce iarly in 1934, the United States has been offered and has acquired more gold than the total world production (ex 133 cepting the U.S.S.R. for which reliable data on gold pro duction are not available). During the years 1934 to 1948 inclusive, estimated world gold production, valued at $35 an ounce, was about $13.5 billion and United States gold stocks increased $16 billion. It is obvious that most of the producers and holders of gold have been quite willing to sell us gold for $35 a fine ounce despite the substantially higher prices offered in a few other markets scattered around the world. An increase in the price of gold by the United States would result only in further accretions to our already more than adequate stock of gold. The higher price would stimulate the production of gold throughout the world, and most, if not all, of the world’s production would con tinue to flow to the United States. The higher price might also encourage foreign holders of present stocks of gold to sell part of their current holdings in the United States. An increase in the price of gold as a means of extending aid to foreign countries It has been suggested that an increase in the price of gold would be a relatively simple and painless way for the United States to provide financial aid to foreign countries. This would enable both gold-producing and gold-holding countries to get more dollars for a given amount of gold. The countries that would stand to benefit most would be those that have the most gold at their command, either as the result of current production or of accumulated hold ings. Those countries, however, are not necessarily the ones that are in greatest need of financial aid. If we are to provide financial aid, we can do it much more effec tively by giving it directly to those countries most in need. Congressional action required to change gold content of the dollar The official price of gold in the United States is an automatic consequence of the gold content of the dollar. Since early 1934 the gold content of the dollar has been 15 5/21 grains (1 /3 5 of an ounce) of gold nine-tenths fine. For 10 years the President possessed the power, under legislation first passed in 1933, to make adjust ments, within limits, in the gold content of the dollar. When this power lapsed on June 30, 1943, the right to determine any change in the gold content of the dollar reverted to Congress. This right of Congress to determine the gold content of the dollar is explicitly recognized in the Bretton Woods Agreements Act of July 31, 1945, whereby the United States joined the International Monetary Fund and the International Bank for Reconstruction and Development. In that Act it is explicitly stated that: “ Unless Congress by law authorizes such action, neither the President nor any person or agency shall on behalf of the United States . . . propose or agree to any change in the par value of the United States dollar . . .” Ambiguities in the law Some of the rumors about a possible change in the official price of gold probably spring from the provisions 134 FEDERAL RESERVE BANK OF SAN FRANCISCO of Sections 8 and 9 of the Gold Reserve Act of 1934. These sections give the Secretary of the Treasury, with the approval of the President, authority to purchase and sell gold “at such rates and upon such terms and condi tions as he may deem most advantageous to the public interest.” This is not, however, authority to change the gold content of the dollar. In buying and selling gold, the Secretary of the Treas ury has never yet departed from the basic price of $35 an ounce which results from the gold content of the dollar. Moreover, his authority to buy and sell at other prices is limited by a number of factors. The United States, as a member of the International Monetary Fund, is obli gated, as are the other members, not to buy or sell gold at prices other than $35 an ounce, except within the limits prescribed by the Fund. Those limits, at present, allow a margin of one-quarter of one percent above or below the official price. In addition, the gold parity provisions con tained in the Gold Standard Act of 1900 and the Act of May 12, 1933 provide that the gold dollar “shall be the standard unit of value and all forms of money issued or coined by the United States shall be maintained at a par ity with this standard and it shall be the duty of the Secre tary of the Treasury to maintain such parity.” For the Treasury to buy gold at a price other than $35 an ounce, without alteration in the present gold content of the dol lar, might be interpreted as a violation of these provisions, on the grounds that it might be alleged that the funds used December 1949 for such purchases were not being maintained at parity with the standard dollar. The price of gold in a world-wide free market The higher prices for gold that prevail in a few markets have led to the suggestion that a free market for gold should be established on a world-wide basis. Such a mar ket, it is said, would establish the “true” price for gold. The presumption is, of course, that this price would be significantly above $35 per fine ounce. In reality, the posi tion of the United States in total world gold holdings is so predominant that the price of gold which would pre vail in a world-wide free market would depend to a very high degree upon the policy which the United States would follow in buying and selling gold. Moreover, as has already been indicated, the Secretary of the Treasury is required, by law, to maintain all forms of United States money at parity with the gold dollar which contains 1/35 of an ounce of fine gold. As Allan Sproul has pointed out: “ This means that the Treasury should maintain the price of gold at $35 a fine ounce in legal gold markets in the United States. To do this, if there were a legal free market fof fine gold, the Treasury should sell gold to the extent necessary to maintain the market price at $35 a fine ounce. W e might, therefore, get what would be in effect gold convertibility by way of a free market, but not a rise in the price of gold.” 1 1 A lla n S p r o u l, P r e s id e n t, F e d e r a l R e s e r v e B a n k o f N e w Y o r k , r e m a r k s b e fo r e th e 7 5 th A n n u a l C o n v e n tio n o f th e A fn tr ic a n B a n k e r s A s s o c ia t io n , S a n F r a n c is c o , C a lifo r n ia , N o v e m b fe r 2 , 1 9 4 9 . THE LIVESTOCK SITUATION great increase in the demand for meat during and sumption was estimated at one pound higher than a year earlier. W ith the seasonal increases expected in the last quarter, the amount of meat consumed per person in 1949 sible for this increased demand. The first of these is the will equal or perhaps slightly exceed the 146 pounds of sharp increase in population. The current annual increase 1948. This high consumption in recent years occurred in United States population is around two and a half mil- while meat prices have been at record high levels, lion, and population at present is 16 million greater than in 1940. Secondly, people have been more completely em- Livestock numbers increasing ployed than ever before, and at higher wages. H igh levels The demand for more livestock to meet the needs of of consumer income have confronted producers with the our military forces and those of our allies, in addition to problem of filling the greatest demand for meat in the the requirements of a greatly expanded civilian erttployhistory of the American livestock industry. ment force, served as a great stimulus to production. A s _ . . . i i i a result, by 1944-45, the numbers of hogs and cattle had he since the war has significantly affected the nation’s T livestock industry. Tw o factors have been largely respon- Per capita consumption at record levels Throughout the war period» while price controls and U n i t e d S t a t e s a n d T w e l f t h D i s t r i c t L i v e s t o c k I n v e n t o r i e s 1 rationing were in effect) the American people were acAS 0F J a n u a r y 1 tually consuming more meat per capita than before the (mthou““d,) aji cheep war. From 1935 to 1939, average yearly consumption was 126 pounds per person. During the war, consump1state* District State* District state* District tion never fell below 139 pounds, and a 40-year record JJjJ ;;;;;;;; JjjJg JJJf JJJg J;¡1* JJJg of 155 pounds was set in 1947. In 1948, which will prob- iw ......... 85,334 %,iu 83,741 2,732 50,782 9,441 ably ptove to be a low point in available livestock sup- g « g K JJg H f Q\ £52 plies, consumption was still 146 pounds. In the first six 1947 ......... 81,207 7,741 56,921 1,376 37,818 ?,ns xi. r -trxAn ^1. . r ^ ^ 1948 ................... 78,126 7,529 55,028 1,427 34,827 6,883 months of 1949, the rate of per capita meat consumption 1949* ........ 78j49 5 7>698 57,139 1,559 31,963 6,400 was somewhat below that of 1948 for the same period. — — . .^ 4 ^ , T i . t 1 S o u r c e : U . S . D . A .. B u r e a u o f A g r ic u lt u r a l E c o n o m ic s . From July through September, however, the rate of con- »Preliminary* December 1949 MONTHLY REVIEW 3een increased to their highest point since the birth of :he American livestock industry. During the last year of the war, however, the increased »laughter of cattle reversed the upward trend in inven:ories, and numbers started to decrease. Following the removal of price controls in late 1946, this decrease was accelerated, and slaughter of cattle and calves reached :he highest level on record in 1947. Rising cattle prices wrought producers favorable returns. The uncertainty as :o how long the unusually high level of beef prices would last prompted operators to sell liberally out of their breeding herds and also induced a sharp liquidation of heifers that might have gone into replacement channels. This trend apparently was arrested toward the end of 1948. Hog producers curtailed production after 1944 as a re sult of reduced feed supplies. The demand for feed grains caused corn prices to rise relatively more than hog prices, and the uncertainty of what seemed to be a dispropor tionately high level of meat prices prompted a reduction in hog inventories until last year. Sheep numbers declined steadily after 1942, in spite of the tremendous demand for meat and the support pro gram for wool. The sharp rise in operating costs, the scarcity of competent herders, and the uncertainty of future wool prices were influential in the decline. Also important was the fact that other classes of livestock proved more profitable. By July of 1948, farm prices of beef cattle had increased 293 percent over the 1935-39 average, and veal calves 242 percent, but lamb rose 236 percent, sheep 160 percent, and wool only 106 percent. This condition prompted many sheepmen to switch, where practical, to cattle raising. Reduction in the num bers allowed to graze on the public domain in some areas may also have influenced the decline. There are indications at present that the cycle of live stock numbers for the country as a whole may again be turning upward. A 1 percent gain in cattle numbers was registered at the turn of the year. Though this was pri marily the result of a larger number on feed on January first, this year the slaughter of cows has been sharply re duced and about 7 percent fewer calves were slaughtered than a year ago. This would seem to indicate that pro ducers are retaining a larger proportion of female stock for replacement and breeding purposes. The estimate of the 1949 spring pig crop (59 million tiead) was the third largest on record and the Depart ment of Agriculture’s December survey indicates an 11 percent increase in the number of sows farrowing this fall season. There are also some current indications that the dras tic and continuous reduction in sheep numbers since 1942 may soon be halted. Slaughter of mature sheep during the May-August period this year was only half as large as a year ago, and lamb slaughter was 14 percent smaller. Furthermore, the apparent active demand for breeding iwes implies some intention on the part of sheepmen to expand their flocks. 135 Demand and price situation The slight increase in livestock supplies, due primarily to the expansion in hog numbers, may imply slightly lower meat prices in 1950. Prices of meat animals reached an all-time high in the summer of 1948, after which time they experienced a steady decline that was not arrested until toward the end of the first quarter of 1949. This de cline, while to some extent seasonal, also probably re flected consumer resistance to high prices, decreasing feed costs, and heavy marketings in early 1949. During the early summer months of the current year, some pessim-^ ism still existed among livestock circles as to the course of livestock prices. Lower levels were anticipated as a re sult of the large 1949 spring pig crop. The anticipated de pressing effect of a large hog run was cushioned, how ever, by earlier marketing of hogs. Cornbelt producers started fall deliveries at lighter average slaughter weights in anticipation of falling prices due to the large increase in spring pigs. Over the fall-winter season, this will re sult in marketings of the pig crop over a longer period of time, so that the price decline at this season will perhaps be only moderately greater than the 18 percent average seasonal drop. This orderly marketing, in conjunction with smaller cold storage inventories, has helped to main tain a higher level of livestock prices than was antici pated by the industry earlier in the year. Increased confidence in the future level of livestock prices has been reflected also in the market which devel oped for stocker and feeder cattle, and in the large vol ume of cattle feeding under way this season, which will be as large as or slightly larger than last year. Though prices are lower than in 1948, they have gradually moved upward from the low levels reached early this year. The heavy losses experienced by many feeding operators as a result of the February price break infused a strong ele ment of caution among feeders in their replacement buy ing earlier this year. Contracts offered in the summer for range calves to be delivered in the fall after weaning started $8 to $10 per hundred pounds below the level of a year ago. Producers, particularly in areas of favorable grass conditions, were reluctant to contract at reduced prices. This resistance and generally plentiful supplies of feed caused prices to increase gradually as the season wore on and the cost of feeder calves and yearlings grad ually moved to higher levels. With the continuing reduced supplies of lamb and mut ton, prices are likely to remain relatively higher than the prices of other meat animals and per capita consumption in 1949 will perhaps be the lowest on record. Though sheep numbers may have started on an upward cycle in 1949, several years will be required for any appreciable increase in lamb and mutton supplies. With the reduction in the 1949 spring lamb crop, the number of lambs which will be fed this winter will be smaller than a year ago. The 1949 lamb crop for the United States as a whole, 10 million head, was 6 percent smaller than last year and 35 percent below the 1938-47 average. 136 FEDERAL RESERVE BANK OF SAN FRANCISCO Situation Favorable to District Expansion The West has been a producer of raw materials in the livestock field since pioneer days. First came hides, tal low, and wool— the nonperishable raw commodities from the frontier production ranges. Following the develop ment of rail transportation, livestock was shipped east ward to the feed resources in the central part of the na tion for finishing into the merchantable products — dressed meats— to supply the markets of the great urban concentrations of population. During and since the last war, shifts in population created District markets which have opened a new outlet for the livestock production of District ranges. In California, which is one of the nation’s great livestock producing states, imports of cattle and calves for immediate slaughter increased 34 percent in the 1944-48 period over the 10-year average of 1937-46. Of meat consumed in California, only 50 percent of the beef, 63 percent of the lamb, and 30 percent of the pork are produced in the state. The sharp upward trend in livestock transportation costs will favor producers close to the area of consump tion. With the westward shift in the District pattern of livestock marketing, growers will not be forced to absorb the high freight costs formerly required to place their product in Eastern centers of consumption. Potential pasture and feed This rapidly expanding Western market over the last several years and the indications that it will continue to increase have provided an incentive for District livestock men to look into the possibilities of enlarging their indus try. Livestock production in the natural grazing areas cannot be appreciably increased. In fact, the productivity of the Western range has decreased since it was first used for the grazing of livestock. There are indications that it will continue to do so until the efforts now being made to rebuild its carrying capacity succeed. Within the District, more and more acreage is being put to the growing of irrigated pastures with the water facilities presently available. In California where irrigated permanent pasture first came into use in the early 1930’s, it is presently estimated that approximately 600,000 acres have already been developed. This acreage will be further increased by the diversion of a portion of the land presently in cotton production. The contemplated recla mation and irrigation projects within the Twelfth Dis trict states also imply the possibility of greatly expand ing the area used for the growing of livestock feed. In addition, technical improvements are being made in land preparation equipment and research is continuing on the development of more adaptable and productive grass va rieties and seed mixtures. Twelfth District wheat production found no outlet in feed channels before the war, as surplus livestock moved to Corn Belt feeders. In view of the present District meat shortages, however, wheat producers are becoming con scious of the feed market possibilities for their surplus December 1949 grain. The value of wheat as livestock feed has been dem onstrated to be equal to corn. The two grains are prac tically interchangeable in the feeding ration; it is simply a matter of relative prices as to which can be most profit ably used as feed. High livestock prices, the long-term uncertainties regarding Government price support pol icy, and the prospects of acreage limitations have prompted District grain farmers to consider production readjustments geared to diversification with livestock. The potential expansion in irrigated permanent pas ture, in conjunction with District supplies of feed crops and crop by-products of feeds and concentrates— sugarbeet tops, cottonseed meal, beet-pulp, and a host of others — besides surplus grain production, is therefore of great significance, for it suggests the possibility of considerable expansion of the livestock industry in the Twelfth Dis trict. Financial position of District operators Cattle and sheep operators generally are in a strong financial position. The debt incurred for capital expan sion which weighed so heavily on livestock producers following World W ar I has not been widespread in the industry following the recent war, either in District states or in the country as a whole. Ample operating credit is available to District producers and financial institutions are continuing to service sound requests for loans. A lower level of livestock prices would not be so apt to force widespread marketing of foundation stock in order to liquidate loans. Under such conditions, however, lend ing agencies could be expected to appraise more cau tiously and to place even more emphasis upon adequate feed reserves and the general efficiency of ranch oper ations. In summary The long-term outlook for livestock producers in the District, relative to the rest of the country, is favorable. District livestock inventories are insufficient to meet FarWestern market demands. The supply of feed is ample for all livestock on hand and can be further increased to meet an expansion in production. Population increases concentrated in urban areas should continue to expand the regional market. This in turn will reduce livestock transportation costs for District producers generally, since an increasing proportion of District production will be consumed in local markets. The high level of livestock prices that has prevailed since the removal of price control in 1946 has given Dis trict operators an excellent opportunity to reappraise their production herds, and to institute planned programs for the liquidation of uneconomical and inefficient breed ing units. As a result, District livestock growers are in a favorable position to produce the type and quality of meat animals the expanding Western market can be ex pected to demand in the future. December 1949 136A MONTHLY REVIEW B U S IN E S S IN D E X E S — T W E L F T H D IS T R IC T * (1935-39 average = 100) I n d u s tr ia l p r o d u c tio n ( p h y s ic a l v o lu m e )* Y ear and M o n th * L um ber P etro l eu m * C rude R e fin e d C em en t L ead * C op per* W heat flo u r * C ar T o ta l C a li lo a d in g s m f ’g fo r n ia (n u m E le c t r ic e m p lo y fa c to r y b e r )1 p ow er m e n t 4 p a y r o lls 4 88 100 112 96 104 118 155 230 306 295 229 175 184 189 135 116 91 70 70 81 88 103 109 96 104 110 128 137 133 141 134 136 142 134 112 104 92 69 66 74 86 99 106 101 109 119 139 171 203 223 247 305 330 354 134 127 110 86 78 83 88 96 108 101 107 114 137 190 174 179 183 238 300 348 1 3 2 .0 1 2 4 .8 1 0 4 .0 8 9 .8 8 6 .8 9 3 .2 9 9 .6 1 0 0 .3 1 0 4 .5 9 9 .0 9 6 .9 . 9 7 .6 1 0 7 .9 1 3 0 .9 1 4 3 .4 1 4 2 .1 1 4 6 .3 1 6 7 .4 2 0 0 .3 2 1 6 .1 294 293r 295 298 192 192 191 189 454 452 449 444 146 131 132 131 349 345 342 358 351 346 340 320 2 1 7 .8 2 1 7 .1 2 1 5 .6 2 1 6 .5 300 297 295 303 304 315 299 310 308 306 185 185 185 186 186 185 182 185 183 183p 430 423 412 412 415 419 423 429 437 435 105 103 118 126 134 139 120 138 138 124 343 309 325 339 340 336 323 334 325 337 321 327 342 331 320 313 302 309 333 330 2 1 7 .9 2 1 4 .1 2 1 3 .3 2 1 5 .6 2 1 1 .0 2 0 9 .9 2 0 6 .3 2 0 5 .7 2 0 7 .3 2 0 5 .5 148 112 77 46 62 67 83 106 113 88 110 120 142 141 137 136 109 130 141 144 129 101 83 78 76 77 92 94 105 110 99 98 102 110 125 137 144 139 147 149 127 107 90 84 81 81 91 98 105 103 103 103 110 116 135 151 160 148 159 162 110 96 74 48 54 70 68 117 112 92 114 124 164 194 160 128 131 165 193 211 171 146 104 75 75 79 89 100 118 96 97 112 113 118 104 93 81 73 98 107 160 106 75 33 26 36 57 98 135 88 122 144 163 188 192 171 137 109 163 153 106 100 101 89 88 95 94 96 99 96 107 103 103 104 115 119 132 128 133 116 83 84 82 73 73 79 85 96 105 102 112 122 136 167 214 231 219 219 256 284 1948 S e p t e m b e r ___________ O c t o b e r ______________ N o v e m b e r ____________ D e c e m b e r ____________ 148 144 138 134 123 151 153 153 110 155 173 171 219 229 217 196 106 107 115 111 161 152 109 104 123 114 126 122 115 115 131 141 143 146 136 135 140 139 151 152 153 152 149 148 146 144 144 141 174 170 176 169 170 174 162 165 166 158 176 173 195 212 215 219 217 209 208 200 112 107 120 124 126 118 98 93 84r 77 108 129 169 167 159 138 131 121 136 136 128 118 102 82 100 104 108 109 108 104 October. __________ D e p ’t R e ta il sto r e fo o d sto c k s (v a lu e i 5 p r ic e s ' 111 93 73 54 53 64 78 96 115 101 110 134 224 460 705 694 497 344 401 430 1 9 2 9 ..................... 1 9 3 0 ..................... 1 9 3 1 .................. . 1 9 3 2 ..................... 1 9 3 3 . .................. 1 9 3 4 ..................... 1 9 3 5 ..................... 1 9 3 6 ..................... 1 9 3 7 ..................... 1 9 3 8 ..................... 1 9 3 9 ..................... 1 9 4 0 ..................... 1 9 4 1 ..................... 1 9 4 2 ..................... 1 9 4 3 ..................... 1 9 4 4 ..................... 1 9 4 5 ..................... 1 9 4 6 ..................... 1 9 4 7 ..................... 1 9 4 8 ..................... 1949 J a n u a r y ______________ F e b r u a r y _____________ M a r c h _________ . _____ A p r i l ____- ____________ M a y ___________________ J u n e ___________________ J u l y ...................................... A u g u s t _______________ S e p t e m b e r ___________ D e p ’t sto r e s a le s (v a lu e )* . * . ♦ B A N K IN G A N D C R E D IT S T A T IS T IC S — T W E L F T H D IS T R IC T (amounts in millions of dollars) C o n d it io n i t e m s o f a ll m e m b e r b a n k s 1 Y ear and m o n th L oans and d is c o u n ts 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1948 O c to b e r N ovem b er D ecem ber 1949 January F eb ru ary M arch A p r il M ay June J u ly A u g u st S e p te m b e r O c to b e r November D em and U .S . G o v ’t d e p o s it s s e c u r it ie s a d ju ste d * T o ta l tim e d e p o s it s 2 ,2 3 9 2 ,2 1 8 1 ,8 9 8 1 ,5 7 0 1 ,4 8 6 1 ,4 6 9 1 ,5 3 7 1 ,6 8 2 1 ,8 7 1 1 ,8 6 9 1 ,9 6 7 2 ,1 3 0 2 ,4 5 1 2 ,1 7 0 2 ,1 0 6 2 ,2 5 4 2 ,6 6 3 4 ,0 6 8 5 ,3 5 8 6 ,0 3 2 495 467 547 601 720 1 ,0 6 4 1 ,2 7 5 1 ,3 3 4 1 ,2 7 0 1 ,3 2 3 1 ,4 5 0 1 ,4 8 2 1 ,7 3 8 3 ,6 3 0 6 ,2 3 5 8 ,2 6 3 1 0 ,4 5 0 8 ,4 2 6 7 ,2 4 7 6 ,3 6 6 1 ,2 3 4 1 ,1 5 8 984 840 951 1 ,2 0 1 1 ,3 8 9 1 ,7 9 1 1 ,7 4 0 1 ,7 8 1 1 ,9 8 3 2 ,3 9 0 2 ,8 9 3 4 ,3 5 6 5 ,9 9 8 6 ,9 5 0 8 ,2 0 3 8 ,8 2 1 8 ,9 2 2 8 ,6 5 5 1 ,7 9 0 1 ,9 3 3 1 ,7 2 7 1 ,6 1 8 1 ,6 0 9 1 ,8 7 5 2 ,0 6 4 2 ,1 0 1 2 ,1 8 7 2 ,2 2 1 2 ,2 6 7 2 ,3 6 0 2 ,4 2 5 2 ,6 0 9 3 ,2 2 6 4 ,1 4 4 5 ,2 1 1 5 ,7 9 7 6 ,0 0 6 6 ,0 8 7 5 ,9 1 0 5 ,9 8 4 6 ,0 3 2 6 ,4 4 0 6 ,3 5 8 6 ,3 6 6 8 ,6 4 7 8 ,6 5 8 8 ,6 5 5 6 ,0 1 8 5 ,9 9 8 6 ,0 8 7 6 ,0 0 9 6 ,9 1 0 5 ,8 9 9 5 ,8 1 1 5 ,7 3 8 5 ,7 6 2 5 ,7 0 7 5 ,7 2 9 5 ,8 5 3 5 ,8 6 0 5 ,9 1 9 6 ,3 8 2 6 ,3 0 6 6 ,2 0 8 6 ,2 3 0 6 ,3 5 7 6 ,3 3 0 6 ,5 4 8 6 ,8 4 6 6 ,8 6 3 6 ,9 3 3 6 ,9 4 4 8 ,6 6 4 8 ,3 3 0 8 ,1 4 7 8 ,1 5 7 8 ,1 5 4 8 ,0 0 6 8 ,1 3 9 8 ,2 2 1 8 ,2 7 3 8 ,3 5 3 8 ,5 1 1 6 ,0 8 2 6 ,0 9 7 6 ,1 0 2 6 ,1 0 9 6 ,1 1 2 6 ,1 7 9 6 ,1 7 9 6 ,1 7 0 6 ,1 8 6 6 ,1 8 6 6 ,1 5 7 B ank ra tes o n sh o rt-ter m b u s in e s s lo a n s * M e m b e r b a n k r e s e r v e s a n d r e l a t e d I t e m s 1» R eserve bank c r e d i t 11 _ — + — — + + — + + + + + + + + + 3 .1 6 + + '3 .2 7 ' — + " 3 .2 4 ' + ' 3 .Í 4 ' + 4* — C o in a n d T reasu ry c u r r e n c y in C o m m e r c ia l o p e r a t i o n s 1* o p e r a t i o n s 1* c i r c u l a t i o n 11 34 16 21 42 2 7 2 6 1 3 2 2 4 107 214 98 76 9 302 17 12 25 11 2 4 15 6 8 0 20 30 13 2 20 — — — — — — — — — — — — -1 -3 -3 -3 -1 — + — -— 0 53 154 175 110 198 163 227 90 240 192 148 596 980 751 534 743 607 443 472 8 40 2 — 101 — — 3 47 --- 12 20 72 — 53 — — 21 19 34 41 + — 95 + 49 + + + + + + + + + + + + + + + + + + + 1 2 4 4 4 1 _. + --+ + + + + + 23 89 154 234 150 257 219 454 157 276 245 420 ,0 0 0 826 486 483 682 329 630 482 35 7 45 58 19 6 109 94 5 130 40 37 92 21 _ + + + — + + + — + + + + + + + + — — — + — — — — — + + — + + + R eserves B a n k d e b it s in d e x 3 1 c i t i e s * .« » (1 9 3 5 -3 9 1 0 0 )* 6 16 48 30 18 4 14 38 3 20 31 96 227 643 708 789 545 326 206 209 175 183 147 142 185 242 287 479 549 565 584 754 930 1 ,2 3 2 1 ,4 6 2 1 ,7 0 6 2 ,0 3 3 2 ,0 9 4 2 ,2 0 2 2 ,4 2 0 146 126 97 68 63 72 87 102 111 98 102 110 134 165 211 237 260 298 326 355 8 8 61 2 ,3 5 1 2 ,3 2 3 2 ,4 2 0 363 355 376 54 4 31 11 37 0 16 1 9 7 13 2 ,3 2 9 2 ,3 0 8 2 ,2 9 9 2 ,2 6 4 2 ,1 2 8 2 ,0 6 3 1 ,9 9 7 1 ,8 3 2 1 ,8 3 7 1 ,8 3 1 1 ,8 5 4 356 344 364 354 345 351 344 332 336 351 349 1 A i l m o n t h l y i n d e x e s b u t w h e a t f lo u r , p e t r o l e u m , c o p p e r , l e a d , a n d r e t a i l f o o d p r i c e s a r e a d j u s t e d f o r s e a s o n a l v a r i a t i o n . E x c e p t i n g f o r d e p a r t m e n t s t o r e s t a t is t ic s , a ll in d e x e s a r e b a s e d u p o n d a t a fr o m o u ts id e so u r c e s , a s fo llo w s : L u m b e r , v a r io u s lu m b e r tr a d e a s s o c ia tio n s ; P e t r o le u m , C e m e n t, C o p p e r , a n d L e a d , U . S . B u r e a u o f M i n e s ; W h e a t flo u r , U . S . B u r e a u o f t h e C e n s u s ; E l e c t r i c p o w e r , F e d e r a l P o w e r C o m m i s s i o n ; M a n u f a c t u r i n g e m p l o y m e n t , U .S . B u r e a u o f L a b o r S t a t i s t i c s a n d c o o p e r a t i n g s t a t e a g e n c i e s ; F a c t o r y p a y r o l l s , C a l i f o r n i a S t a t e D i v i s i o n o f L a b o r S t a t i s t i c s a n d R e s e a r c h ; R e t a i l f o o d p r i c e s , U .S . B u r e a u o f L a b o r S t a t i s t i c s ; a n d C a r lo a d i n g s , v a r i o u s r a i l r o a d s a n d r a i l r o a d a s s o c i a t i o n s . 1 D a ily a v er a g e. ' N o t a d ju s t e d fo r s e a s o n a l v a r ia tio n . 4 E x c l u d e s f i s h , f r u i t , a n d v e g e t a b l e c a n n in g . F a c t o r y p a y r o l l s i n d e x c o v e r s w a g e e a r n e r s o n l y . * A t r e ta il, en d o f m o n th o r y e a r . • L o s A n g e le s , S a n F r a n c is c o , a n d S e a t t le in d e x e s c o m b in e d . T A n n u a l fig u r e s a r e a s o f e n d o f y e a r ; m o n t h ly fig u r e s a s o f l a s t W e d n e s d a y in m o n t h o r, w h e r e a p p lic a b le , a s o f c a ll r e p o r t d a t e . * D e m a n d d e p o s i t s , e x c l u d i n g i n t e r b a n k a n d U . S . G o v ’t d e p o s i t s , l e s s c a s h i t e m s i n p r o c e s s o f c o l l e c t i o n . M o n t h l y d a t a p a r t l y e s t im a t e d . • N e w q u a r t e r l y s e r ie s b e g i n n i n g J u n e 1 9 4 8 . A v e r a g e r a t e s o n l o a n s m a d e i n f i v e m a j o r c i t i e s d u r in g t h e f i r s t 1 5 d a y s o f t h e m o n t h . 10 E n d o f y e a r a n d e n d o f m o n t h fig u r e s. 11 C h a n g e s f r o m e n d o f p r e v i o u s m o n t h o r y e a r . 11 M i n u s s i g n i n d i c a t e s f l o w o f f u n d s o u t o f t h e D i s t r i c t i n t h e c a s e o f c o m m e r c i a l o p e r a t io n s , a n d e x c e s s o f r e c e i p t s o v e r d i s b u r s e m e n t s i n t h e c a s e o f T r e a s u r y o p e r a t io n s . 11 D e b i t s t o t o t a l d e p o s i t a c c o u n t s , e x c l u d i n g i n t e r bank deposits. p — preliminary. r— revised. *— Seasonal factors for recent years revised. 136B FEDERAL RESERVE BANK OF SAN FRANCISCO December 1949 DEPOSITARIES FOR FEDERAL TAXES The Treasury Department has announced that effective Janu ary 1, 1950, banking institutions, which have been qualified to do so, may accept deposits of taxes from employers covering income taxes withheld at source on wages, and employment taxes under the provisions of the Federal Insurance Contributions Act (that is, social security taxes). Banks will be permitted to hold Federal taxes paid to them as a Government deposit in their Treasury Tax and Loan Accounts, formerly known as War Loan Deposit Accounts. Beginning with the first World War it has been the practice of the Treasury to authorize banks to pay for United States Govern ment securities purchased for their own account and for account of their customers by giving the Treasury credit in War Loan Deposit Accounts. When the Treasury needs funds to meet its current obligations it “ calls” for payment of all or part of these deposits, and the banks make payment to Federal Reserve Banks who credit such funds to the account of the Treasurer of the United States. Thus a greater degree of balance is achieved in the flow of funds into and out of the Treasurer’s account with the Reserve Banks. Federal legislation which became effective on April 13, 1943 re lieved War Loan Deposit Accounts from Federal Deposit Insur ance Corporation assessments for the duration of the war and six months thereafter. This statute also provided that member banks would not be required, during the same period, to maintain legal reserves against such accounts. These provisions expired June 30, 1947. Again, in order to smooth the flow of reserve funds, effective March 22, 1948, banks qualified as depositaries for withheld taxes and for War Loan Deposit Accounts were permitted, in lieu of remitting withheld taxes deposited with it directly to the Federal Reserve Bank, to make such remittances by transfers from the Withheld Tax Account to the War Loan Deposit Account on their books. The new plan announced by the Treasury, by allowing social security taxes, in addition to the withholding taxes, to be de posited in the Treasury Tax and Loan Accounts, is another step to even the flow of funds into and out of the Treasurer’s account at Federal Reserve Banks and thus to prevent wide fluctuations in member bank reserve funds. In the absence of Treasury Tax and Loan Accounts, the amounts involved in the payment of the designated taxes would be added directly to the Treasurer's ac count at Federal Reserve Banks and would be deducted from the reserve accounts of the banks as payments are made. The new plan provides for transfers of these Federal taxes to the Treas urer’s account at Federal Reserve Banks only when “ called” by the Treasury, and hence it reduces the drain upon member bank reserve accounts that otherwise would accompany periodic pay ment of the designated taxes.
@FedFRASER