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MONTHLY REVIEW TWELFTH FEDERAL R E S E RV E D I ST R I C T D e c e m b e r 1950 F ed e ral Reserve B a n k o f S a n F r a n c is c o REVIEW OF BUSINESS CONDITIONS far as business activity in the Twelfth District is So concerned, the year 1950 should be divided into two parts. From January through June the improvement in business conditions was so good as to surprise even the optimists. This period was one of steady, strong gains in many economic segments of the District and was not related to or stimulated by any increase in Government spending. The expansion in various lines of activity was geared to demands in the civilian sector of the economy. Prospects appeared good in most lines of District activ ity, though base metal mining failed to benefit as much as most other District raw materials. After the outbreak of hostilities in Korea, the already rapid pace in the District stepped up quickly. Through the third quarter of the year at least, most of the impetus came from the civilian sector of the economy. Panic buy ing by consumers, inventory buying by business, plus a minor increase in military orders— principally for air craft— and expanding activity at Government installa tions accounted for the early increase in business expan sion after Korea. In the fourth quarter, expanding mili tary orders were beginning to become somewhat more important, but were still not a large factor. More signifi cant than the growing military program were civilian demands buttressed by the anticipation of growing de fense production. One major development that may be of importance for the near future was the very substantial absorption of jobless workers during 1950. From a labor market of considerable ease early in the year, the District progressed to a level of employment which absorbed all but a very small portion of the labor force. Industrial production gains principally in durable goods Industrial output in the Twelfth District in 1950 sur passed any previous production on record. Lumber, steel, aluminum, cement, refined petroleum products, and machinery were among the goods for which production exceeded any volume previously recorded. The outstand ing feature of production in the District was the much greater expansion in durable goods production than in nondurable goods production. In October, output of dur able manufactured goods was about 20 percent higher than in October 1949, but nondurable goods gained only 4 percent in the same period. Improvement in the durable lines is a reversal of the 1949 pattern, when durable goods production declined relatively more than nondurables, which dropped only slightly from the 1948 level. The resurgence of durable goods output was particu larly conspicuous in the California machinery industries. In 1949 the machinery industries in California were markedly affected by the recession early in the year. The nonelectrical machinery industry failed to register any recovery in the second half of the year, though most manufacturing lines improved. The steady, strong gains since early 1950, however, have reversed the pattern of 1949. Employment in California machinery industries reached an all-time high in October 1950 and in Washing ton and Oregon these industries, though small, ap proached the World War II peak. Lumber production and the output by other forest in dustries, including plywood and wood pulp, also sur passed or approached the previous highs. Steel output gained and some small steel mills in the Pacific North west lengthened their work week to approach capacity operations in 1950. The aircraft industry registered sharp gains in output after the outbreak of the Korean war. Following a weak start, metal mining improved, and as a result of the increase in activity since the end of June the nonferrous metal markets have been exceptionally strong. Nonagricultural employment surpasses 1948 record Led by the increased industrial activity, nonagricul tural employment reached an all-time high in September Also in This Issue W hat is Happening to Construction? Real Estate M ortgage Lending of Twelfth District Member Banks W hat the Federal Reserve System is Trying to Do: Regulation W Revision of Manufacturing Employment Index Annual Index, January-December 1950 Supplement The Lumber Industry of the Pacific Coast 144 FEDERAL RESERVE B A N K OF SA N FRANCISCO and held steady in October despite the pressure of sea sonal forces. In November, however, seasonal forces were sufficient to reduce employment moderately. Most of the decline came in food processing, logging and lumbering, and construction. Losses in these areas were offset in part by gains in aircraft, retail trade, and government. De cember employment also dropped moderately because of seasonal forces. Even so, toward the end of the year nonagricultural employment in most District states was about 10 percent ahead of 1949. In addition to the increase in manufacturing over 1949, a large increase in construc tion employment, reflecting the unusually large volume of construction in the District this year, helped boost total nonagricultural employment. Most other lines of activity gained moderately, but toward the end of the year gov ernment employment began to expand fairly rapidly as activity at military establishments increased. As a result of the sharp gains in employment, the num ber of unemployed dropped sharply during the year. In mid-November the number of jobless covered by unem ployment insurance was almost 60 percent less than a year ago and the percentage of the labor force out of work was one of the lowest on record. Retail trade well ahead of last year Retail trade in the District exceeded all previous rec ords in 1950. Though department store sales in the first half of the year were slightly behind 1949, sales of auto mobiles, appliances, furniture, and food were well ahead of a year ago. The outbreak of war in Korea induced a wave of panic buying in mid-summer that pushed retail store sales volumes up to Christmas levels. The index of department store sales jumped off the chart in July, and automobile sales in California were nearly double those of the previous July. With the introduction of consumer credit restrictions automobile sales subsided to about their 1949 level. Sales volumes in most retail lines (few of which were affected by consumer credit controls) ran well ahead of 1949 in the second half of 1950. Current situation creates some problems The still strong demand of consumers plus the likely increase in military orders poses a number of problems for the Twelfth District. For some industries it may merely mean trading military for civilian customers, while in other lines some rearrangement of production will be required. In the lumber industry, production may decline because of a smaller volume of construction and possible shortages of manpower and materials. Some restrictions have already been placed upon the civilian use of rubber and several metals in short supply. Moreover, as military orders begin to come forth in large volume there will be increasing pressure upon the supply of many materials. Although the years since 1945 have not been noted for any extensive ease in the supply of goods, the conditions in 1951 may make them appear as an era of relative plenty. Discussions of materials are apt to be punctuated to an increasing extent by the not too unfa December 1950 miliar term “ shortage.” Because of the labor market de velopments in this District during the second half of this year, it appears likely that manpower shortages may prove to be really severe in this District as it becomes necessary to expand industrial output further. Farm situation improved in 1950 The postwar downward readjustment in agricultural prices and income initiated in mid-1948 came to an end during the first half of 1950. Most farm commodity prices began turning upward early in the year and were given a strong boost by the outbreak of the Korean war. The sharpest rise occurred in cotton, wool, and meat animal prices. By November 15, farm prices had risen 15 per cent above December 1949, the low point of the last three years. District farm incomes so far in 1950 have been slightly below the comparable period last year, owing largely to lower prices received for farm commodities during the first six months and a smaller volume of farm marketings. Output of some District crops— notably cot ton, dry beans, flaxseed, rice, and dry peas— was re duced as a result of government allotment programs and lower price support levels. These reductions were offset by shifts to feed crops and sugar beets. Fruit production in the Pacific Northwest and Intermountain areas was drastically reduced by severe spring frosts. Although there wTere no damaging spring frosts in the fruit raising areas of California, all fruit crops except apricots were smaller in volume than in 1949. Sharp expansion of bank credit in second half of 1950 The post-Korean rise in business activity has been ac companied by a sharp increase in business and consumer demand for credit in both the Twelfth District and the country as a whole. In dollar terms, the expansion in total bank loans has been much greater than has occurred in the corresponding period of any previous year on record. In the District, more than half the total increase in bank loans outstanding has gone to business and agriculture, about one-quarter to consumers for the purchase of auto mobiles and other durable goods, and about one-fifth to purchasers of homes and other types of real estate. In addition to the effect of seasonal influences, the in crease in business and agricultural loans may be attributed to two principal factors: an increase in inventories in some lines of activity, and higher prices necessitating larger loans for any given physical volume of business. At the same time, however, the continued expansion of credit accentuates the rise in prices. Since our economy is already running at virtual capacity, the production of goods and services cannot keep pace with the demand for them when that demand is based not only upon a high level of personal income and large holdings of liquid assets but also upon substantial increases in bank credit, whether to private business or to Government. Moreover, the sup ply of some types of civilian goods will have to be reduced from its present level in order to meet the requirements of national defense. December 1950 m o n th ly Measures to restrain inflation In an effort to hold inflationary forces in check, the Federal Reserve System has employed several credit re straints. Since the latter part of August, the System, through its open market operations, has made bank re serves more difficult and more costly to obtain, thereby affecting the availability of all types of bank credit. Con trols over consumer credit for the purchase of automo biles, household appliances, and other consumer durables were introduced in mid-September. Early in October similar controls over credit for the purchase of homes were placed in effect. On December 29, 1950, the Board of Governors of the Federal Reserve System announced that reserve require ments of all member banks will be increased during Jan uary by 2 percentage points on demand deposits and 1 r e v ie w 145 percentage point on time deposits. The increase will take place gradually on a step-by-step basis. When completed, reserve requirements will be at their legal maximums ex cept on demand deposits for central reserve city banks, which will be 2 percentage points below their legal maxi mum of 26 percent. The effect of the increase will be to raise the required reserves of all member banks by about $2 billion and of Twelfth District member banks by about $250 million. Although banks still may readily ob tain additional reserves by selling Government securi ties, they will now have to maintain about $2 more in reserves behind each $100 of deposits. Further restraint is thus placed on potential credit expansion. While these various credit controls help in restraining inflationary forces, they need to be supplemented by other measures, such as higher taxes, to restrict purchasing power if the fight against inflation is to succeed. WHAT IS HAPPENING TO CONSTRUCTION? mitments from the Federal Housing Administration or Veterans’ Administration prior to October 12. The vol ume of construction approved on this basis is estimated permits granted were well over 30 percent ahead of the to be large enough to maintain home construction at a first half of 1949. The unprecedented level of construction fairly good pace well into the first half of 1951. reflected primarily a housing boom. In almost all respects In October, the volume of residential permits issued in the picture was highly satisfactory. Costs prior to July did most District states was maintained at a high level because not rise sharply and builders were able to absorb some of of builders’ desires to make firm any plans they had made. the increased material and labor costs because of greater Informal reports for November indicate not much more efficiency. More of the housing under construction was in than a seasonal decline as builders with firm commitments the moderate price class than at any time since the end continued their planned programs. In addition, some of World War II. areas report an increase in the building of single houses To a very large extent the housing boom was supported on a contract basis by individuals attempting to avoid pos by the most liberal credit terms ever offered. Government sible material shortages in the future. As an offset to these insured and guaranteed loans required very modest down factors, however, there has been a delay in the planning payments, and some homes were financed up to 100 per of new projects involving both small and large tracts to cent of the sales price. To restrain inflationary pressures allow time to determine what effect the credit restrictions arising out of the expanded military program, the terms might have and to avoid competition with building under for credit on new construction of one- and two-family the more lenient terms. dwelling units were tightened considerably starting Octo Some indication of the strength of the housing boom ber 12, as were F H A and V A terms for existing prop this year is apparent from the dollar volume of residential erties. In addition the National Production Authority building authorized in urban areas of the District. The banned the building of certain classes of commercial build value of such permits was more than 50 percent greater ings deemed to be nonessential. Despite these factors the • in the first 10 months of this year than in the same period construction boom has continued in recent months. The of 1949. On the other hand, the number of units author value of construction authorized in the Twelfth District ized was only a little over 40 percent above the 1949 through November totalled over 40 percent more than in volume because of cost increases since July and some the first 11 months of last year. The high volume in recent shift toward more expensive houses. Through June, how months reflects in part a backlog of work already planned ever, the increase in the number of units had been much in the residential field and in part increased nonresidential closer to the gain in dollar volume. building. he record volume of construction completed and in Tprocess was a major factor in the strong position of the District economy in the first half of 1950. Building Nonresidential construction stronger in recent months Residential backlog helps support high level of construction The impact of controls on residential real estate credit has not yet had an opportunity to become fully apparent. In most areas of the District, builders of large tracts had plans or had actually developed land and obtained com Construction of nonresidential buildings lagged about 5 percent behind 1949 in the first half of the year. Idaho, Oregon, and Utah were the only District states to report gains in that category during that period. In recent months, however, nonresidential construction has in 146 December 1950 FEDERAL RESERVE B A N K OF SA N FRANCISCO though it was quite strong earlier this year and in 1949. Other categories of nonresidential construction, including private and public activity, have either maintained their position or increased somewhat in recent months. creased markedly. From July through October it gained more than 70 percent over the same period last year. Pre liminary data for November 1950 indicate another very substantial increase in nonresidential building over No vember 1949, and also over October of this year. Total construction authorized in urban areas during November was up substantially over October. Though the prelim inary estimates do not show separate data for residential and nonresidential construction, the evidence available from builders, lenders, and Government guarantee and insurance agencies indicates a decline in new residential construction authorized in November. It appears quite likely, therefore, that nonresidential building accounts for all of the increase. The impetus behind nonresidential building appears to have been generated by several factors. Increased com mercial building in recent months reflects the impact of improved business conditions, an attempt to escape short ages which may arise out of the defense effort, and the need to provide additional shopping facilities in areas of large-scale residential development. Factories and other industrial buildings have also gained substantially and their construction has probably resulted from increased civilian activity earlier this year as well as the pressures created by the anticipated military demands of the past several months. School building has also increased even Construction volume may continue strong Because of the large volume of residential construction approved under the credit terms prevailing before Octo ber 12, 1950, home building is likely to continue quite active for several months. Some of the houses approved at that time and not yet started have been sold from blue prints, which indicates the strength of the demand for housing under the old credit terms. While there is no certainty yet as to the effect of the new credit restrictions, the demand for housing under the new terms may be sufficiently strong to provide the basis for a moderate level of residential construction activity after the supply of new houses available on the old terms has been ex hausted. Moreover, there are indications that nonresi dential building will be strong for several months and that additional plant expenditures may be induced be cause of an increasing volume of military orders. These factors point to a reasonably good level of construction in the near future, and any severe decline during the next few months appears unlikely unless the Government finds it necessary to restrict construction on a broad scale. RESIDENTIAL REAL ESTATE FINANCING BY TWELFTH DISTRICT MEMBER BANKS the various lenders in the Twelfth District, com mercial banks carry the largest volume of residential mortgage credit, while savings and loan associations are the most important lenders of this type of credit in the United States as a whole. It is not surprising, therefore, that loans on residential properties comprise nearly twofifths of the total loans of District member banks in con trast to only one-fifth for all member banks. A m o n g P ercentage D is t r ib u t io n by T y p e , R e s id e n t ia l T w e lfth Type of loan outstanding Residential mortgage loans 1-to 4-family F H A -insu red ................................................. V A first lien ................................................. V A junior l i e n .............................................. On June 30, 1950, Twelfth District member banks had outstanding nearly 514,000 residential real estate loans totalling $2.3 billion, of which a small portion was in loans to non-bank mortgage lenders. Detailed information on the residential mortgage portfolios of Twelfth District member banks became available for the first time, when, in completing the June 30, 1950 call report, banks were asked to list the number and amount of their residential R eal E state L oans D is tr ic t S ta te s , J u n e O u t s t a n d in g at M em ber /— Twelfth District— x \ fM millions $825.0 776.6 61.0 DmA total 35.4 33.3 2.6 Arizona California 66.1 21.8 2.8 34.3 35.3 2.8 Idaho 48.9 26.6 1.6 p ‘ Percent of total Nevada 49.8 15.8 4.6 Total guaranteed or in su r e d ............... 1662.6 71.3 90.7 72.4 77.1 70.1 Oregon 29.9 30.5 0.1 60.5 Conventional, a m o r tiz e d ........................... Conventional, not amortized ................. 499.6 17.2 21.4 0.7 3.5 0.1 20.6 0.6 12.7 1.6 22.8 0.8 29.5 2.0 Total con ven tion al.................................. Total 1- to 4 -f a m il y ..................................... 5-family or more Insured or g u aran teed ................................ Conventional, amortized ........................ Conventional, not a m o r tiz e d ................. Banks, 30, 1950 Utah 46.3 9.4 2.6 27.8 3.0 37.5 0.8 58.3 Washington 36.4 18.5 0.7 55.5 516.8 22.2 3.6 21.2 14.3 23.6 31.5 30.7 38.3 2179.4 93.5 94.4 93.7 91.4 93.8 92.0 89.0 93.8 12.9 35.2 2.8 0.6 1.5 0.1 1.4 0.1 0.4 1.4 0.1 1.9 0.7 0.1 2.1 0.2 5.0 1.9 * 1.5 3.2 * 0.2 2.3 * 1.5 1.9 2.6 2.5 7.0 4.7 * 2.5 Total 5-family or m o r e ............................. 50.9 2.2 Loans secured by vacant l o t s .................... 2.3 0.1 Total mortgage loans .................................... 2232.6 95.8 95.9 95.7 94.0 96.2 99.0 93.7 96.3 M ortgage and other real estate loans Total mortgage loans .................................... Construction loans ......................................... Loans to nonbank mortgage lenders . . . 2232.6 97.0 1.5 95.8 4.2 0.1 95.9 4.1 95.7 4.3 * 94.0 6.0 96.2 3.5 0.2 99.0 1.0 93.7 5.4 0.8 96.3 3.0 0.8 Total residential real estate financing.......... 2331.1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 0.1 *Less than one-half of 1 percent. N o te : Percentages are based on original unrounded figures and will not necessarily add to 100. * December 1950 147 M O N T H L Y REVIEW real estate loans of each major type. The accompanying table gives the figures by states and for the Twelfth Dis trict. When broken down and classified as indicated on the table, these figures shed important light on the post war lending activity of District member banks. Federally insured or guaranteed loans accounted for almost 72 percent of the total amount of residential mort gages outstanding at District member banks. Of these, approximately half were FHA-insured and half guaran teed by the Veterans’ Administration. Virtually all the Government-sponsored mortgage credit was secured by 1- to 4-family properties, with less than one percent repre senting mortgages on properties for 5 or more families. Conventional mortgages comprised slightly less than one-fourth of the total outstanding. Less than 4 percent of the amount of conventional mortgages held was of the old unamortized type. In contrast to the F H A and V A mortgages, almost 7 percent of conventional mortgage credit was secured by dwellings for 5 or more families. Loans to finance residential construction totalled $97 million or 4 percent of all real estate credit granted by member banks. In addition, reporting banks indicated that they held other loans amounting to $22 million which had been extended for the primary purpose of financ ing construction of residential properties. A negligible amount of credit extended to nonbank mortgage lenders was also listed among member banks' real estate loans, but an additional $45 million of such credit was reported to have been included among other loans. Interesting regional differences in Twelfth District mortgage market patterns are revealed by comparison of data on loans secured by 1- to 4-family homes in each state. California member banks reported the highest pro portion of such loans guaranteed by the Veterans’ Admin istration— over 38 percent of their mortgage portfolios; Oregon was second in this respect with slightly less than 31 percent. At the other extreme, Utah member banks’ GI loans comprised only 12 percent of their residential mortgage portfolios. The relatively large percentage of W orld War II veterans in California’s rapidly expanding population offers a partial explanation for the difference. Conventional mortgages on 1- to 4-family homes varied widely in their relative importance. In Washington, they accounted for more than 38 percent of home financing, and in Oregon and Utah about 31 percent. In sharp con trast, less than 4 percent of the mortgage credit outstand ing at Arizona member banks was of the conventional type, while FHA-insured mortgages comprised almost two-thirds of the state total. The F H A had insured almost half the real estate loans of member banks in Nevada, Idaho, and Utah, but less than 30 percent in Oregon. Loans secured by dwellings for 5 families or more accounted for less than 3 percent of the total in every Twelfth District state but Oregon and Utah, where the proportions were 7 and almost 5 percent, respectively. Differences in the average size of various types of mortgages must be interpreted with caution, since they arise partly from differences in the age and maturity dis tributions of loans of each type, as well as from variations in the market values of the properties when mortgaged, and in banks’ lending policies. The existence of any Gov ernment guarantee or insurance is also a major influence on lending policy. Nevertheless, significant differences between states are apparent. The average size of V A first liens on 1- to 4-family houses (the most homogeneous type of mortgage analyzed) for each state was as follows: California ....................................................... $6,940 Nevada ........................................................... 5,497 Oregon ........................................................... 4,936 Idaho ............................................................... A rizo n a ........................................................... U ta h ................................................................. Washington ................................................... 4,576 4,437 4,384 3,648 The average size of V A first mortgages appears to be closely correlated with per capita income payments in recent years, with a single significant exception ; Wash ington, which has ranked third or fourth among Twelfth District states in average income, ranks seventh in terms of average size of GI loans at member banks. This may be partly explained by the fact that conventional mortgages still dominate the member bank portfolios in Washington. For the District as a whole, V A first liens averaged $6,591, V A secondary mortgages $1,563, FHA-insured home loans $5,087, and amortized conventional mort gages on 1- to 4-family properties $3,118. Government insured or guaranteed loans on 5- or more-family dwell ings averaged $57,130, while amortized conventional mortgages on such properties averaged $11,539. The average residential construction loan was $4,378. WHAT THE FEDERAL RESERVE SYSTEM IS TRYING TO DO: REGULATION W e g u l a t io n W is a form of selective credit control. It represents a device whereby the central bank can R direct its efforts to assist in the maintenance of economic stability toward a specific sector of the economy that may be contributing more than its share to economic instabil ity. The Federal Reserve System’s regulations T, U, and X are also “ selective” in this sense.1 All of these regula tions are at present being used in an attempt to restrict 1 Regulations T and U apply to the use of credit for specified security trans actions. See October M o n t h l y R e v i e w for description of Regulation X . the use of credit for particular purposes such as the pur chase of certain securities, radios, refrigerators and other household appliances, automobiles, and houses. Regula tions W and X are an effective aid in the fight against in flation at the present time because they apply specifically to important commodities undergoing strong inflationary pressures. On the other hand, the use of general credit controls, such as open market operations, changes in reserve re 148 FEDERAL RESERVE B A N K OF SA N FRANCISCO December 1950 On the other, we have the prospect of a decline in the civilian supply of various raw materials and finished prod ucts, primarily because of our national defense program. This imbalance between supply and demand has led and will continue to lead to a marked upward pressure upon prices unless either demand is held in check or supply is increased, or both. Basically, we have an urgent need for greater output, but this does not offer a major solution to our immediate problem since it requires time and mate rials to increase productive capacity. Particularly while we are in the process of expanding our productive ca pacity over the somewhat longer run, selective credit con These inherent limitations on the effectiveness of gen trols can be used advantageously to hold in check at eral credit controls become most evident when the public present that part of demand which arises from the use of debt is large and banks hold large quantities of Govern consumer credit. This will serve to diminish the pressure ment securities. Ready conversion of such securities into upon prices now and hence will facilitate the necessary bank reserves serves as an easy basis for the growth of expansion in productive capacity. bank credit. This greatly minimizes the effects to be ob Regulation W prescribes minimum down payments and tained from any feasible use of the traditional credit con maximum maturities for instalment credit obtained to trols available to the Federal Reserve System. Such lim purchase automobiles, television sets, radios, furniture, itations of these traditional devices and the steady growth and other major durable goods. These are items typically of the use of instalment and mortgage credit through the purchased on the instalment plan by many people, and for years have elevated selective credit controls to a position the most part their production uses materials that are also of major importance as instruments of national monetary required in large quantities for our expanding military policy. program. The demand for these products has been The present type of selective controls was first used in brought into somewhat better balance with the available the United States in 1934 when Congress delegated au supply through the use of stricter credit terms than had thority to the Federal Reserve System to regulate the formerly prevailed. minimum margin or down payment that must be made This has retarded the growth in over-all money supply on specified security transactions on organized exchanges. which normally accompanies credit expansion. Following Not until the introduction of Regulation W in 1941, how increases of more than $300 million in consumer instal ever, were selective controls made applicable to the every ment credit outstanding in each of the five preceding day lives of a large segment of the general public. Con months, the increase fell to only $42 million in October. sumer credit regulation was in effect throughout World Preliminary figures indicate that there may have been a War II and until November 1,1947, when Regulation W small decline in the volume outstanding during Novem was terminated by Congressional resolution. This au ber. If this proves to be the case, it will have been the thority was restored as a peacetime anti-inflationary first November decline since 1943. measure with somewhat limited application, effective By restraining expansion in the money supply, con September 20, 1948, and was allowed to lapse again on sumer credit controls thereby diminish inflationary pres June 30, 1949. sures in the economy as a whole. They also diminish the The upsurge of inflationary pressures that followed upward pressures upon the prices of those commodities the outbreak of war in Korea led Congress to restore once that are subject to Regulation W . One of the clearest more to the Federal Reserve System its authority to con instances of this has been the substantial reduction in the trol the terms of consumer credit. At the same time, Con prices of used automobiles that occurred after Regulation gress authorized a new and somewhat different selec W became effective in September of this year. Following tive credit control— control over mortgage credit. The the outbreak of war in Korea, the prices of late model System revived Regulation W on September 18, 1950, used cars rose by as much as $200. They later declined by and issued Regulation X ,1 controlling the terms of resi more than that. As a result of the fall in price, the down dential mortgage credit of the conventional type, effective payment required for a late model used car under Regu October 12, 1950. lation W was less than in August before Regulation W Previous articles in the Monthly Review on the subject was in effect and the monthly payment was about the of credit controls have indicated the general basis of the same as the unregulated average. New cars also became inflationary pressures that confront us today. On the one more generally available without the necessity of purchas hand, we have a large volume of purchasing power based ing equipment or paying special premiums. While not all upon a high and rising level of personal income, large of these changes in the retail automobile market were at holdings of liquid assets, and ready access to bank credit. tributable to Regulation W , that Regulation contributed significantly toward the reestablishment of a more com 1 Discussed in the October 1950 M o n t h l y R e v i e w . quirements, and raising or lowering the discount rate, affects the cost, availability, and supply of all bank credit regardless of the use to which it is put. Under existing conditions, the use of these traditional controls is neces sary and desirable. As we have seen in a previous article, however, their usefulness is somewhat limited at times. Sufficiently vigorous use of such controls to make them truly effective could have repercussions that would not only disturb the Government securities market, but might also retard productive effort and thus place direct limita tions on one of the most important factors in the anti inflation struggle. December 1950 149 M O N T H L Y REVIEW petitive market. The recent adverse turn of the war in Korea has led to some tightening in the automobile mar ket in December, but its extent is not fully known at the present time. The effect of Regulation W upon other covered com modities has not been as marked as upon automobiles. Nevertheless, the sharp slowing up in the growth of total instalment credit is evidence that Regulation W has di minished the demand for consumer durable goods in gen eral. In so doing, it has diminished the upward pressure upon their prices. By the same token, it has also facilitated the transfer of materials ordinarily used in their produc tion to the more urgent military needs. In conclusion, it should be borne in mind that Regula tion W serves to curb directly only that portion of con sumer demand that is ordinarily created by the extension of consumer credit. While it is essential under present circumstances to place a restraining influence upon that segment of demand, credit restraint is not sufficient by itself to solve our over-all inflationary problem. Credit controls, both general and selective, help in the fight against inflation, but in addition we need to reduce pur chasing power through increased taxation and to encour age both business and consumers particularly to refrain from unnecessary spending on goods and services in criti cal supply. REVISION OF THE TOTAL MANUFACTURING EMPLOYMENT INDEX— TWELFTH DISTRICT change in the industrial classification used in the preparation of employment estimates for the state of California has necessitated a revision of this Bank’s index of total manufacturing employment for the period 1946 to date.1 The industry grouping used for the manu facturing series in the California estimates was shifted in July of this year to the latest Standard Industrial Classi fication. This shift makes the estimates now presented by California comparable with the estimates of the other District states and of the United States. The present revision includes all changes made in the manufacturing employment series of all District states through October this year. Any future revision of the index will depend upon the development of new bench mark data upon which the state employment estimates are based. The effect of the revision upon the index has been to increase somewhat the size of the fluctuations in manu facturing employment since 1946. The revised index stands well above the old index for the years 1946 through 1948 but the reverse is true for 1949 and the first eight months of 1950 during which period the revised index is somewhat below the old index. The general pattern re A r ec e n t mains essentially unchanged with the post-World War II peak still occurring in August-September 1948 and the subsequent low still occurring in January 1950. The 1948 peak in the index was exceeded in August this year re flecting the extremely high level of business activity in the District at that time and which was due only in very small part to the then new war in Korea. t o t a l m a n u f a c t u r in g e m p l o y m e n t * - TWELFTH DISTRICT, 1946-50 (Seasonally adjusted, 1935-39=100) P ercent 1 For a complete description of the index see the M o n t h l y R e v i e w for Janu ary 1948. N o t e : Detailed tabulations of the index for the entire period of the revision are available upon request. M EM BER B A N K RESERVE REQUIREM ENTS TO BE INCREASED IN J A N U A R Y 1951 On December 29, 1950, the Board of Governors of the Federal Reserve System announced an increase in the amount of reserves required to be maintained with the Federal Reserve banks by banks which are members of the Federal Reserve System. The increase will become effective according to the following schedule: On net demand deposits Central reserve city banks from 22 to 23 percent from 23 to 24 percent E ffective January 11, 1951 January 25, 1951 Reserve city banks from 18 to 19 percent from 19 to 20 percent January 11, 1951 January 25, 1951 Country banks from 12 to 13 percent from 13 to 14 percent January 16, 1951 February 1,1951 On time deposits Central reserve city and reserve city banks from 5 to 6 percent E ffective January 11, 1951 Country banks from 5 to 6 percent January 16, 1951 The effect of this increase will be to raise the required reserves of member banks by a total of approximately two billion dollars which, under our fractional reserve banking system, could other wise be the basis for about a six-fold increase in bank credit in the banking system as a whole. After the increase, reserve require ments at banks other than central reserve city banks will be at the maximum legal limits which prevailed during the war period. Requirements on net demand deposits at central reserve city banks will be two^ percentage points less than the maximum under exist ing authority, but above requirements that prevailed for these banks during most of the war period. 150 December 1950 FEDERAL RESERVE BA N K OF SAN FRANCISCO BUSINESS INDEXES— TW ELFTH DISTRICT1 (1935-39 average = 100) Year and month Total Cali j Car Dep’ t m f’g fornia load! nfts store sales Wheat Electric employ factory (num ment4* payrolls4 ber)2 (value)2 Copper* flour* power Industrial production (physical volume)* Petroleum* Lumber Crude Refined Cement 1929................. 1931.................. 1 9 3 2 -............... 1933................. 1934................. 1935.................. 1936................. 1 9 3 7 ................ 1938.................. 1939.................. 1940.................. 1941................. 1942................. 1943................. 1944................. 1 9 4 5 ................ 1946.................. 1947................. 1948.................. 1949.................. 148 77 46 62 67 83 106 113 88 110 120 142 141 137 136 109 130 147 159 151 September-----------October___________ November_________ December________ Lead* 137 144 139 147 149 147 127 90 84 81 81 91 98 105 103 103 103 110 116 135 151 160 148 159 162 167 110 74 48 04 70 68 117 112 92 114 124 164 194 160 128 131 165 193 211 202 171 104 75 75 79 89 100 118 96 97 112 113 118 104 93 81 73 98 107 103 160 75 33 26 36 57 98 135 88 122 144 163 188 192 171 137 109 163 153 140 106 101 89 88 95 94 96 99 96 107 103 103 104 115 119 132 128 133 116 104 83 82 73 73 79 85 96 105 102 112 122 136 167 214 231 219 219 256 284 303 156 156 151 156 144 141 140 140 166 158 161 156 208 200 200 196 84 77 89 105 136 136 145 140 108 104 101 189 308 306 299 306 129 141 160 174 207 181 184 186 176 187 140 139 138 138 140 142 142 145 148 153 161 157 151 159 162 170 170 178 177 177 178 179 201 217 240 244 245 251 248 252 123 118 122 125 131 118 86 95 103r 104 168 164 169 172 181 172 167 177 175 177 104 91 91 87 95 105 113 112 105 99 322 313 299 325 341 331 341 340 339 352 129 83 78 76 77 92 94 105 110 99 98 102 110 125 Dep’ t Retail store stocks food (value)5 prices*»1 694 497 344 401 430 423 135 91 70 70 81 88 103 109 96 104 110 128 137 133 141 134 136 142 134 126 112 92 69 66 74 86 99 106 101 109 119 139 171 203 223 247 305 330 353 331 134 110 86 78 83 88 96 108 101 107 114 137 190 174 179 183 238 300 346 323 132 0 20 4 .0 8 9 .8 8 6 .8 9 3 .2 9 9 .6 100.3 10 4 .5 9 9 .0 9 6 .9 9 7 .6 10 7 .9 1 30.9 143.4 1 42.1 146.3 167.4 2 0 0 .3 216.1 2 0 9 .6 182 182 179r 178 437 435 421 424 138 124 129 128 326 337 319 339 333 330 331 315 2 0 7 .3 2 0 5 .5 2 0 5 .7 2 0 2 .5 175 179 184 186 192 193 196 203 205 208 417 421 427 432 445 468 96 108 125 135 141 148 125 135 140 131 316 322 321 333 336 342 454 374 368 342 323 337 349 342 335 326 318 333 387 402 2 0 6 .4 204.1 2 0 3 .4 2 0 5 .4 2 0 5 .4 2 0 6 .3 2 0 9 .6 2 1 0 .6 2 0 9 .0 2 1 2 .4 111 73 54 53 64 78 96 115 101 110 134 224 460 ’ *88 100 112 96 104 118 155 230 306 295 229 181 187 191 183 705 1949 1950 January___________ February__________ March____________ April______________ May______________ June______________ J u ly - ............................. August______________ September_________ October___________ BANKING AND CREDIT STATISTICS— TW ELFTH DISTRICT (amounts in millions of dollars) Year and month 1929 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 Bank rates on short-term Total time business loans1 deposits Loans U.S. Demand deposits and Gov’ t discounts securities adjusted* Reserve bank credit11 _ 2,239 1,898 1,570 1,486 1,469 1,537 1,682 1,871 1,869 1,967 2,130 2,451 2,170 2,106 2,254 2,663 4,068 5,358 6.032 5,925 495 547 601 720 1,064 1,275 1,334 1,270 1,323 1,450 1,482 1,738 3,630 6,235 8,263 10,450 8,426 7,247 6,366 7,016 1,234 984 840 951 1,201 1,389 1,791 1,740 1,781 1,983 2,390 2,893 4,356 5,998 6,950 8,203 8,821 8,922 8,655 8,536 1,790 1,727 1,618 1,609 1,875 2,064 2,101 2,187 2,221 2,267 2,360 2,425 2,609 3,226 4,144 5,211 5,797 6,006 6,087 6,255 * *3.20 5,873 5,919 5,925 6,909 6,944 7,016 8,317 8,511 8,536 6,196 6,157 6,255 3.16 5,901 5,893 5,946 5,914 6,005 6,034 6,162 6,418 6,664 6,810 6,963 7,123 6,999 6,923 6,896 6,932 6,905 6,810 6,699 6,495 6,452 6,319 8.620 8,311 8,167 8,307 8,354 8,289 8,458 8,627 8,754 8,871 9,018 6,244 6,262 6,303 6,282 6,275 e,315 6,250 6,210 6,213 6,239 6,194 34 21 42 — 2 — 7 2 + 6 + 1 — 3 2 + 2 + 4 + 107 + + 214 98 + 76 9 + 302 17 + 13 + + + Coin and currency in Commercial Treasury operations13 operations11 circulation11 0 154 175 110 198 — 163 — 227 — 90 — 240 — 192 — 148 — 596 -1 ,9 8 0 - 3 ,7 5 1 - 3 ,5 3 4 —3,743 - 1 .6 0 7 — 443 + 472 — 931 23 154 234 + 150 + 257 + 219 + 454 + 157 + 276 + 245 + 420 + 1 ,0 0 0 + 2 ,8 2 6 + 4 ,4 8 6 + 4 ,4 8 3 + 4 ,6 8 2 + 1,329 + 630 482 + 378 2 12 40 — + + 95 21 32 + + 92 2 30 48 5 2 28 14 10 3 2 62 56 24 — 92 — 34 — 223 — 126 — 199 23 + — 149 — 102 — 45 — 93 21 + + + + + + + + + + 5 7 204 106 170 32 169 125 72 150 42 + 1949 October November December Bank debits index 31 ci ties*« >• Member bank reserves and related items10 Condition items of all member banks7 — — — — + + + Reserves + + + + + + + + — — — — 6 48 30 18 4 14 38 3 20 31 96 227 643 708 789 545 326 206 209 65 175 147 142 185 242 287 479 549 565 584 754 930 1,232 1,462 1,706 2,033 2,094 2,202 2,420 1,924 146 97 68 63 72 87 102 111 98 102 110 134 165 211 237 260 298 326 355 350 + — — 7 16 8 1,831 1,854 1,924 351 349 376 — 62 10 16 4 8 5 0 18 9 10 3 1,892 1,848 1,842 1,821 1,802 1,836 1,858 1,863 1,893 1,930 1,983 354 360 373 360 371 389 382 384 417 428 425 + + — + + + 1950 January February March April M ay June July August September October November — + 3.36 — + — 3.37 — 3.29 + + — — + (1 9 3 5 -3 9 * 100)* + — + + + + + + 1 All monthly indexes but wheat flour, petroleum, copper, lead, and retail food prices are adjusted for seasonal variation. Excepting for department store sta tistics, all indexes are based upon data from outside sources, as follows: Lumber, various lumber trade associations; Petroleum, Cement, Copper, and Lead, U.S. Bureau of Mines; W heat flour, U.S. Bureau of the Census; Electric power, Federal Power Comlnission; Manufacturing employment, U .S. Bureau of Labor Statistics and cooperating state agencies; Factory payrolls, California State Division of Labor Statistics and Research; Retail food prices, U.S. Bureau of Labor Statistics; and Carloadings, various railroads and railroad associations. 2 Daily average. * N ot adjusted for seasonal variation. * Excludes fish, fruit, and vegetable canning. Factory payrolls index covers wage earners only. 6 A t retail, end of month or year. 6 Los Angeles, San Francisco, and Seattle indexes combined. 7 Annual figures are as of end of year, monthly figures as of last Wednesday in month or, where applicable, as of call report date. 8 Demand deposits, excluding interbank and U .S. G ov’t deposits, less cash items in process of collection. M onthly data partly estimated. 9 New quarterly series beginning June 1948. Average rates on loans made in five major cities during the first 15 days of the month. 10 End of year and end of month figures. 11 Changes from end of previous month or year. 12 M inas sign indicates flow of funds out of the District in the case of commercial operations, and excess of receipts over disbursements in the case of Treasury operations. 13 Debits to total deposit accounts, excluding inter bank deposits. ^Explanation of revised series appears in this issue. p — preliminary. r — revised.
@FedFRASER