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M o n th ly R e v ie w * FEDERAL RESERVE B A N K OF S A N F R A N C IS C O J A N U A R Y 1, 1 9 4 3 W artim e Financial Policies of the Twelfth District Aircraft Industry by military necessity, the aircraft industry on the Pacific Coast has undergone a spectacular expan sion since 1939. The financial requirements of this vast growth have been met from sources markedly different from those customarily drawn upon by industry, par ticularly in times of peace. The Federal Government has participated directly in financing part of the expansion of plant and facilities while advance payments and contract deposits by customers have provided firms with a substan tial proportion of their working capital requirements. In contrast, capital stock issues and bank loans have played only a relatively minor role. S p u r r e d The following paragraphs review the wartime financial policies of Twelfth District aircraft manufacturers as re vealed by their financial statements. The sources from which the companies have obtained funds are indicated by increases in various liability and net worth items, and uses made of funds obtained are shown by increases in asset items of the bal ance sheets. Profit and loss and surplus state ments published by the companies provide information on the trend of sales, earnings, and dividends. The study is based upon the financial statements of six companies for the years 1935-39, and upon the statements of the same six and two other companies for the years 1940-41. These companies account for virtually the entire district output of finished planes. increase in financial requirements of the six-year period. The decline in the relative importance of equity capital resulting from this situation is shown by the fact that in 1935 stock and paid-in surplus were equivalent to 72 per cent of total assets, but by the end of 1941 the proportion had fallen to 9 percent. Contract deposits and advances made by customers have recently become the most important single source of funds received by Pacific Coast aircraft manufacturers. Such payments have customarily been made in the indus try for a number of years, but at no time prior to 1939 did they account for as much as 8 percent of total assets. At the present time, both the War and Navy Departments are authorized to make advance payments in amounts up to 30 percent of the contract price of the planes ordered. Under this authority they have advanced a large part of the 204 million dollars in customers’ de posits and advances, or the equivalent of 38 percent of total assets, reported by Pa cific Coast manufacturers at the end of 1941. Sources Draw n upon for Funds More recently, the use of cost-plus con tracts, under which the customer is billed for costs as they are incurred, has in creased. This development has led to a de cline in the relative importance of custom ers’ deposits and advances as a source of working capital and at the same time has also reduced the working capital require ments of the industry. Bank loans were never an important source of funds until recently. At no time before 1941 did bank loans reported by the major Pacific Coast airplane manufactur ers exceed 7 million dollars. By the end of that year, however, bank loans outstanding had advanced to 49 million dollars. O f this amount, 13 million represented loans se Between 1935 and 1941, total assets of the Pacific Coast firms included in the study in creased by 525 million dollars. During this period, however, capital stock and paid-in surplus increased by only 37 million dollars. In other words, funds obtained from stock holders accounted for only 7 percent of the WAR FINANCE $9,000,000,000 was asked for in December. $13,000,000,000 in purchases of United States securities was the response. That is an outstanding accomplishment in which every person who did his fair share may well take pride. We cannot stop now. $25,000,000,000 more must be borrowed before June 30, 1943. Keep on buying. Do your full part in cooperation with the Victory Fund Committee. ★ ★ ★ ★ SUPPORT YOUR GOVERNMENT—THE TWELFTH DISTRICT MUST DO ITS SHARE ★ ★ ★ ★ 2 January 1, 1943 FEDERAL RESERVE BANK OF SAN FRANCISCO cured by accounts receivable from the United States Gov ernment for plant construction costs incurred, while the remainder represented amounts borrowed by two firms which contracted for Government business almost en tirely on a fixed-pfice rather than a cost-plus basis. The use of bank credit has increased recently as a result of loans made under the provisions of Regulation V of the Board of Governors of the Federal Reserve System. Regulation V was issued April 10, 1942 pursuant to the authority contained in an Executive Order dated March 26, 1942. According to this Regulation, either the War Department, the Navy Department, or the Maritime Commission, acting through the Federal Reserve banks, may guarantee loans made to firms engaged in essential war work. Other sources of funds which have been drawn upon by the aircraft manufacturing industry to finance the re cent expansion in assets are shown in the accompanying tables. In large part, the rapid increase in accrued liabili ties during 1941 reflects the increase in funds which com panies have set aside out of profits for the payment of Federal income taxes. It may be noted that provision for payment of 1941 income taxes, amounting to 90 million dollars, exceeded total sales for any year prior to 1940. Profits retained in the business have been an additional source of funds, amounting to 11 percent of all assets in 1941. Distribution of Assets The most striking difference revealed by a comparison between 1935 and 1941 balance sheet asset items is the increased proportion of funds tied up in inventories. In ventories comprised 26 percent of assets in 1935 and 48 percent in 1941. During the six years, inventories ac counted for 48 percent of the increase in total assets. This percentage would be considerably larger were it not for the fact that purchasing and accounting practices fol lowed by the industry result in an understatement of the B a l a n c e S h e e t a n d S e le c te d P r o f i t a n d P a c ific C oast A ir c r a ft M a n u fa c tu r in g Loss Ite m s In d u stry , 1935-41 (amounts in thousands of dollars) Assets Cash and cash items. Trade receivables. Advances on inventory purchases. Other current assets........................... Total current assets. Investment in affiliates................. Other investm en ts........... .............. Land, buildings and equipment. Patents ................................................ G o o d w ill.............................................. Development expense...................... Other deferred charges................. Other a s s e t s ....................................... Total assets. Liabilities and N et W orth N otes payable...................... /------ 1935------ x Per Am t. cent 0.3 22.1 3.0 7.2 37.6 0.0 0.1 25,834 1,300 5,945 31,078 1,036 83 30.5 1.5 7.0 36.7 1.2 0.1 130,477 2,048 18,289 102,957 8,306 10,964 39.8 0.6 5.6 31.4 2.6 3.4 91,238 19,554 77,236 259,274 4,729 8,988 16.7 3.6 14.2 47.5 0.9 1.6 62.7 21,845 66.2 31,011 68.1 34,903 69.9 65,276 77.1 273,041 83.4 461,019 84.5 1.9 1.1 27.0 * 1,304 320 7,611 5 156 927 592 226 3.9 1.0 23.1 * 43 334 10,506 6 156 1,933 1,141 409 0.1 0.7 23.1 * 207 153 10,045 8 848 146 14,434 29 1.0 0.2 17.0 * * 4,584 119 43,129 45 1.4 * 13.2 * * 1,825 419 69,255 102 0.3 4.3 2.5 0.9 0.4 0.3 20.1 * * 0.3 0.1 12.7 * * 3,227 1,087 298 6.5 2.2 0.6 2,370 227 376 2.8 0.3 0.4 3,263 2,879 481 1.0 0.9 0.1 5,062 6,783 862 12,469 378 210 5,366 0.8 3.2 2.4 0.9 19,883 100.0 Total current liabilities....................................... 2,135 10.8 L ong term debt.......... Deferred income’. . . . Contingent reserves. Other reserves.......... 17 0 373 67 Preferred stock.......... Common s t o c k .......... ¿Profit and Loss Items Sales ............................................................. N et profit from operations................. Provision for income t a x ...................... N et profit after all charges................. D iv id e n d s ............................. '.................... 0.5 2.8 1.8 0.7 32,986 100.0 2,116 2,288 1,296 1,027 Total liabilities and net worth. t------ 1941-------x Per cent Am t. 11,012 1,499 3,580 18,771 0 41 0.8 5.6 3.6 0.8 * Total surplus. t-------1940------- \ PerA m t. cent 11.6 0.3 8.4 47.7 0.0 0.1 155 1,109 713 153 5 Total stock......................................................... . . . ,------ 1939------- ^ PerAm t. cent 5,269 151 3,818 21,719 0 54 Accrued liabilities.......................................................... Customers’ contract deposits and advances. . . . Other current liabilities................................................ Paid-in surplus. Earned surplus. ,------ 1938------- , PerAm t. cent 13.6 4.2 12.7 35.5 0.0 0.2 16.7 11.5 8.1 26.1 * t ,------ 1937-----PerAm t. cent 4,501 1,374 4,206 11,710 0 53 3,325 2,281 1,619 5,181 2 61 156 646 475 181 ,------ 1936------ \ PerA m t. cent 45,539 100.0 6,442 3,443 2,656 2,335 t 6.4 7.0 3.9 3.1 * 6,727 20.4 14,876 0.1 0.0 1.9 0.3 64 46 438 81 0.2 0.1 1.3 0.3 t 0 10,145 0.0 51.0 1,149 11,390 10,145 51.0 4,187 2,960 21.1 14.9 t 49,928 100.0 t t t 0.9 1.3 0.2 84,706 100.0 327,541 100.0 545,327 100.0 14.0 7.5 5.8 5.1 * 2,787 3,130 3,209 3,632 648 5.6 6.3 6.4 7.3 1.3 3,636 7,008 7,433 20,717 801 4.3 8.3 8.8 24.4 0.9 4,402 23,532 16,705 190,896 11,425 1.3 7.2 5.1 58.3 3.5 15,053 55,753 110,645 204,286 4,266 2.6 10.2 20.3 37.6 0.8 32.4 13,406 26.9 39,595 46.7 246,960 ~75A 390,003 71.5 49 489 125 * 0.1 1.1 0.3 1,250 40 1,760 119 2.5 0.1 3.5 0.2 1,098 108 890 117 1.3 0.1 1.1 0.1 3,560 119 1,425 169 1.1 * 0.4 0.1 34,180 62 10,921 229 6.3 * 3.5 34.5 1,185 12,767 2.6 27.8 1,191 12,941 2.4 25.9 1,191 15,414 1.4 18.2 1,191 18,957 0.4 5.8 0 19,055 0.0 3.5 12,539 38.0 13,952 30.4 14,132 28.3 16,605 19.6 20,148 6.2 19,055 3.5 8,587 4,498 26.0 13.7 11,204 5,203 24.4 11.3 12,970 6,251 26.0 12.5 12,929 13,362 15.3 15.8 28,310 26,845 8.6 8.2 31,936 58,937 5.9 10.8 t 2.0 * 7,147 35.9 13,085 39.7 16,407 35.7 19,220 38.5 26,291 31.1 55,155 16.8 90,873 16.7 17,292 87.0 25,624 77.7 30,359 66.1 33,352 66.8 42,896 50.6 75,301 23.0 109,925 20.2 19,883 100.0 32,982 100.0 45,898 100.0 49,928 100.0 17,323 1,778 349 1,490 351 21,835 1,908 411 1,443 26 52,259 4,194 999 2,507 1,078 64,974 8,795 1,286 5,497 3,732 84,705 100.0 107,893 17.102 3,363 11.102 7,528 327,537 100.0 545,323 100.0 184,134 34,841 9,195 23,668 10,023 625,573 149,071 90,482 48,730 14,295 ■fLess than $500. *L ess than one-tenth of 1 percent. N o t e : Basic data obtained from financial statements of companies covering fiscal years ending in years indicated at top of columns. Six companies are included for the period 1935-39_and eight companies for 1940-41, accounting for virtually th«e entire output of Twelfth District finished airplanes. Plants of • Pacific Coast companies located outside the Twelfth District are included, but their operations were' relatively unimportant prior to 1942. Apparent slight discrepancies in some totals arise from the fact that all dollar amounts have been rounded off to the nearest thousand and all percentage's to the • nearest tenth of 1 percent. January 1, 1943 actual amount of goods-in-process on hand. First, inven tories are understated because funds received from cus tomers are often set off directly against the goods in process to which they apply. In 1935, this type of offset accounting understated the amount of inventories on hand by $159,000; in 1941 inventory understatement result ing from this practice totaled 69 million dollars. Second, S o u r c e s of F u n d s — P a c if ic C o a s t A ir c r a f t M a n u f a c t u r in g I ndustry C h a n g e s i n L i a b i l i t y a n d N e t W o r t h I t e m s , 1935-41 Increase in : Common stock................................................................... Paid-in surplus................................................................. Earned surplus................................................................. Thousands of Dol,ars 8,910 27,749 55,977 Percent of Total 1.7 5.3 10.7 Total increase in net worth........................................... 92,633 17.6 Increase i n : Customers’ contract deposits and advance's.. . . N otes payable................................................................... Accounts payable............................................................ Accrued liabilities.......................................................... Other current liabilities................................................ 204,133 14,898 54,644 109,932 4,261 38.8 2.8 10.4 20.9 0.8 Total increase in current liabilities............................. 387,868 73.8 Increase i n : Long term debt.............................................................. Deferred income............................................................... Contingent reserves....................................................... Other reserves................................................................... 34,163 62 10,548 162 6.5 * 2.0 * Total increase long term debt, de'ferred income and reserves................................................................. 44,935 8.6 Total increase in net worth and liabilities............... 525,440 100.0 *Less than one-tenth of 1 percent. the amount of inventories actually on hand is also larger than appears on the balance sheet because of the account ing practices usually followed in the treatment of costplus contracts. Expenditures under cost-plus contracts are often shown as a trade receivable from the United States Government rather than in the inventory account. At the end of 1941, the eight firms had 69 million dol lars, representing 13 percent of their total assets, invested in fixed assets. The actual amount of land, building, and equipment in use, however, was considerably greater than that shown on the balance sheets. Plant facilities built under Emergency Plant Facilities Contracts costing 24 million dollars were completed by the end of 1941, of which only about one-half are included in the above fig ures. Much more important are facilities built and owned by the Defense Plant Corporation for use by private com panies producing war goods, and they are entirely ex cluded from the latter’s balance sheets. Under an Emergency Plant Facilities Contract ar rangement, private funds are used in the construction of a plant, the cost of which is directly reimbursed by the Government in 60 equal monthly payments. The Govern ment’s promise to reimburse the manufacturer for the plant may be used as security for a bank loan covering the cost of the project. After the Government has completely repaid the manufacturer for the plant, title passes from the company to the Government unless the company exer cises its option to purchase the property at either original cost less depreciation, or at a fair value arrived at by negotiation. The private management of a plant owned 3 M O N T H L Y REVIEW by the Defense Plant Corporation is also given an option to purchase the plant upon termination of the lease. Other changes which have occurred in capital usage and its distribution among assets are shown in the accom panying tables. A word may be said about the item “de velopment expense/’ which in 1941 amounted to 5 million dollars. Although this amount is fairly large, it by no means represents the real importance of developmental and research work to the aircraft manufacturing industry. Leading aircraft companies have long realized the neces sity of spending large sums in the development of new airplane models that are not immediately offered for sale, yet according to the conservative accounting practices usually followed, most development costs are written off as rapidly as feasible and are capitalized only in part on the balance sheets. Further evidence of conservative ac counting practices followed by the industry is the fact that goodwill is either entirely omitted or shown as one dollar, while the stated value of patents held by coast companies totaled only $102,000 at the end of 1941. Sales, Earnings, a nd D iv id en d R eco rd Essentially, the period through 1941 must be viewed as one in which the aircraft industry was preparing for a later period of enlarged production, yet even during this period the dollar volume of sales increased substantially. Between 1935 and 1940, annual sales, identical with the value of deliveries in this industry, increased from 17 million dollars to 184 million. During 1941 several new plants were brought into production, and their output, to gether with technological progress in methods of producU se s o f F u n d s— P a c ific C o a st A ir c r a ft M a n u fa c tu r in g In d u stry C h a n g e s i n A s s e t I t e m s , 1935-41 Increase i n : In v e n to rie s........................................................................ Trade receivables............................................................ Cash and cash items....................................................... Marketable securities..................................................... Advances on inventory purchases........................... Other current assets........................................................ Thousands of Dollars 254,093 75,617 87,913 17,273 4,727 8,927 Percent of Total 48.3 14.4 16.7 3.3 0.9 1.7 Total increase in current assets....................................... 448,550 85.4 Increase in : Investment in affiliates................................................ Other investments.......................................................... 1,447 209 0.3 * Total increase in investments....................................... 1,656 0.3 Increase in land, buildings and equipment............ 63,889 12.1 Increase in patents............................................................... 102 * Decrease’ in goodw ill.......................................................... 156 * Increase in : Development expense..................................................... Other deferred charges................................................ 4,416 6,308 0.8 1.2 Total increase in deferred charges............................... 10,724 2.0 Increase in other assets..................................................... 681 Total increase in all assets.............................................. 525,444 0.1 100.0 *Less than one-tenth of 1 percent. tion, accounted for a threefold increase in sales during the year. The current rate of production for the seven major aircraft manufacturing companies located in south ern California is reported at more than 2 billion dollars annually, an amount over two-thirds as large as the total FEDERAL RESERVE BANK OF SAN FRANCISCO 4 value of all manufactured products produced in all Cali fornia during 1939. Although profits available to stockholders have in creased substantially, earnings have not kept pace with the recent increases in sales. As is shown in the accom panying chart, the ratio of net profit to sales declined from 13 percent in 1940 to 8 percent in 1941, and will un doubtedly be lower for subsequent years. Profit margins on Federal Government work, which now accounts for virtually all sales, are considerably smaller than those previously obtained on foreign and commercial sales. An increasingly larger proportion of Government contracts is being let on a cost-plus-fixed-fee basis carrying mar gins of 6 percent and in some cases 5 percent, consider ably below the 10 to 12 percent margins commonly ob tained under fixed-price contracts. In contrast to the declining ratio of net profit to sales, the ratio of net profit to net worth has increased substan tially each year since 1936, reaching a new high of 44 per cent in 1941. Explanation of this seemingly paradoxical 1935 >936 1937 1938 1939 1940 194 \ R A T IO S O F N E T P R O F IT T O N E T W O R T H A N D T O S A L E S P A C IF IC C O A S T A IR C R A F T M A N U F A C T U R IN G I N D U S T R Y , 1935-41 situation lies in the fact that net worth has constituted a steadily declining proportion of total assets, since, as has already been explained, funds to finance the recent ex pansion have been drawn primarily from customers’ de posits and advances and other liability items. This increase in the ratio of total liabilities to net worth has thus pro vided a “leverage” by means of which it has been possible during a period of rapidly rising sales to increase the ratio of profits to net worth, even though the ratio of profit to sales has declined. Although the Pacific Coast industry as a whole has shown some profit each year since 1935 (an aggregate loss was suffered in 1934), one large company incurred losses during three years out of the last seven, while two other firms have each reported losses for one year. Aircraft manufacturers have traditionally followed a conservative policy with regard to dividend declarations. During the past seven years, the proportion of earnings paid out to shareholders as dividends has amounted to 39 percent. Retention of a large proportion of earnings is characteristic of young industries in need of capital for January 1, 1943 expansion purposes, and the exceptional hazards which normally confront the aircraft industry present an addi tional incentive. A p p ra isa l of W a rtim e Financial Policies Methods currently followed in financing both plant ex pansions and working capital needs are aimed at protect ing the industry from entering the post-war period with heavy fixed financial charges and an inflated capital struc ture. A large proportion of new plant facilities is either already Government-owned or can be turned over to the Government upon the termination of hostilities. On the other hand, should the post-war demand for airplanes be greater than the quantity which can be produced in pri vately-owned plants, individual companies may exercise their options to purchase Government-financed facilities or may lease them. With regard to financing working capital requirements, advance payments and cost-plus contracts represent arrangements under which the amount of funds received by aircraft producers adjusts itself al most automatically to working capital requirements. Un like other forms of financing, such as issuing securities and borrowing from banks, the receipt of funds by the manufacturer under cost-plus contracts and advance pay ments is directly related to particular contract awards, and delivery of the product eliminates the liability. Capitalization of Pacific Coast companies, consisting entirely of common stock at the end of 1941, did not quite double during the preceding six years, a period during which total assets increased over twenty-six fold. The fu ture position of some aircraft manufacturing companies is being buttressed by the setting up of large reserves for post-war readjustment purposes. From the manufactur ers’ point of view, therefore, financial policies being fol lowed are aimed at leaving the companies in a strong financial position after the war, but it is unlikely that anything the companies themselves can do will protect them completely should the post-war demand for air planes fall to very low levels. In the broader sense, the test of the industry’s wartime financial policies is the extent to which they have facili tated the maximum output of military planes. There have been some production delays, to be sure, but apart from those which originally occurred in getting the expansion program under way in 1940, most of them have been of the type associated with the inevitable problems of fre quent changes in design and shortages of men and mate rials. The over-all effectiveness of the program is clearly indicated by the fact that United States production in creased from less than 5,000 planes in 1939 to 48,000 in 1942. Furthermore, production is expected to be more than double the 1942 figure during the current year, and this expansion appears even more remarkable when it is remembered that the average size of planes has increased considerably during the past year. The aircraft industry has not achieved this tremendous increase in output without considerable change in finan cial procedure. Unusual risks attached to investment in new and growing war industries tend to make private January 1, 1943 5 M O N T H L Y REVIEW capital hesitant unless that investment is accompanied by unusual protection on the part of the Government. As a result the Government has emerged as the most important party in the assumption of those financial risks attached to the development of new plant facilities or fixed invest ment for aircraft production. This is equally true for most of the war industries. As for the provision of work ing capital, not only aircraft but other war goods pro ducers have made considerable use of contract deposits or advance payments. Although this device is no recent innovation in the aircraft industry, it is only with the current expansion of military production and its sale to a single customer, the Government, that such advances have grown to account for a substantial proportion of the funds employed. In aircraft manufacturing, as in other war industries, the requirements of total war appear to demand provision by the Government of a large part of the necessary funds in order to insure that the only limits upon output shall be those set by the availability of man power and physical resources. R eview o f Business Conditions— T w elfth District W a r P r o d u c t io n , L a b o r S h o rta g e s , a n d T ra d e strides have been taken during the past year in H mobilizing production resources in the war effort. In the Twelfth District, most spectacular results have been achieved in aircraft fabrication and in shipbuilding. Late in the year, aircraft industry production was at an annual rate exceeding 2 billion dollars, more than double that of two years earlier. Deliveries of Liberty cargo vessels in November by Pacific Coast yards attained a rate of 540 ships per year. Industrial expansion has been accom panied by full employment, and labor shortages have de veloped in many areas. Under these conditions, trade has reached high levels, but the year closed with indications of important shortages of consumers’ goods in many categories. u g e W a r Su p p ly and Facility Contracts Almost two-thirds of the awards in the district (8.8 billion dollars) were made in California, and that state ranked second only to New York. Within the district, California was followed by Washington with 2.7 billion, and by Oregon with .6 billion, while the remaining four states together received only .8 billion dollars. The prom inence of California and Washington is accounted for by awards for aircraft and ships, totaling 9 billion dollars, placed with firms in those states. Oregon shipyards re ceived orders valued at 362 million dollars. A d d itio n a l La bor Shorta ge A re a s Indicative of the demands being made upon district resources is the value of war supply and facility contracts awarded in the area. The most recent release on the sub ject by the W P B reveals that from June 1940 through September 1942 firms in the seven western states com prising the Twelfth District received contracts of ap proximately 13 billion dollars, excluding awards having a value of less than 50 thousand dollars and all contracts Production and Employment— Index numbers, 1923-25 average=100 for foodstuffs. This represents 13 percent of the total awarded in the country as a whole during the period, and assumes added meaning when related to the fact that in 1939 the district accounted for but 7 percent of the value of all products manufactured in the United States. With Seasonal Without Seasonal As stated previously in this Review, the vast increase in war production over the past two years in the Twelfth District has taken place to a marked extent through ex pansion rather than conversion of industrial facilities. The result has been a sharp increase in overall expansion of industrial production during the past two years and an accompanying increase in factory employment. This large increase in employment has been fed by the migration of workers to district war production centers from other areas, both within the district and from other parts of the country. In November 1942, the seasonally adjusted t------- Adjustment-------% /------- Adjustment------- \ ,------- 1942--------\1941 Industrial Production1 N ov. Lumber2 ............................. p l4 9 Refined o i l s ........................ — Cement ............................... 197 W heat f l o u r ...................... 114 Petroleum ........................... — Electric p o w e r ................. p353 r----------1942--------N 1941 Oct. Sept. N ov. N ov. Oct. Sept. N ov. 145 139 144 p l4 2 157 162 137 — — — 196 196 194 176 182 214 177 197 210 226 177 97 99 94 125 116 118 103 — — — 110 110 110 99 359 329 284 p334 338 344 269 Factory Employment and Payrolls3 Employment Pacific C oast................. p318 p298 California ................. 354 332 Oregon ...................... p291 p260 W a s h in g t o n ............ p261 p248 Payrolls Pacific C oast................. p568 p496 California ................. 598 539 Oregon ...................... p586 p440 W a s h in g t o n ............ p497 p434 p289 326 p260 p230 204 246 155 145 p322 p311 p302 361 348 338 p288 p270 p281 p261 p258 p242 207 252 153 145 p486 535 p426 p413 266 321 203 183 p569 p524 p505 604 566 544 p574 p471 p473 p492 p464 p438 267 324 198 181 1 Daily average. 2 Converted to 1935-39 base. Back figures will be supplied on request. 3 Excludes fish, fruit, and vege'table canning, p Preliminary. Distribution and Trade— Index numbers, 1935-39 daily average=100 W ith Seasonal /---------Adjustment/ ------- -1 9 4 2 ~194? Nov. Oct. Sept. N ov. Retail Trade Department store sales (value) Twelfth D i s t r i c t . .. .. p209 182 176 151 Southern California. . p200 178 171 157 Northern California.. p l83 167 165 133 Portland ............ ............ p228 199 180 150 W estern W ashington. p282 229 213 183 Eastern Washington and Northern Idaho p208 145 171 125 Southern Idaho and U tah ........................... p216 193 177 146 P h o e n ix ........................... p201 196 206 137 Carloadings (num ber)1 p l0 4 p i 07 112 110 Merchandise and misc. p l l 8 p l l 3 118 128 p 87 plOO 104 89 1 1923-25 daily average = 100. p Preliminary. Without Seasonal /---------Adjustment ,--------- 1942----------\ 1941 Nov. Oct. Sept. N ov. p219 p204 p200 p237 p291 191 180 172 210 240 184 176 164 204 238 158 160 145 156 190 p217 198 193 132 p242 p230 224 213 193 180 164 156 p l05 p l26 p l l 8 p l3 7 p 89 p l l 3 129 140 116 111 128 91 6 January 1, 1943 FEDERAL RESERVE BANK OF SAN FRANCISCO index of factory employment in the three Pacific Coast states had risen to 318 percent of the 1923-25 average, compared with 204 a year earlier and 138 in November 1940. Despite additions to the labor force from migra tion and from local groups not customarily employed in factories, acute labor shortages have developed in many localities. The War Manpower Commission found labor shortages in 17 areas in the Twelfth District in Decem ber, compared with nine during October. In two other areas, shortages are anticipated. O f the 91 localities in the United States reported as having labor surpluses, none were in the Twelfth District. A r e a s in t h e T w e lf t h D is t r i c t R e p o r tin g L a b o r S h o r ta g e s in D ecem ber Everett Las Vegas1 Los Angeles Ogden1 Phoenix1 Pocatello 1942 Portland-Vancouver1 Provo Sacramento Salt Lake City1 San Bernardino San Diego1 San Francisco Seattle-Bremerton1 Spokane1 Stockton Tacoma1 1Areas reporting labor shortages in October. In further recognition of the serious labor situation in the district, the War Manpower Commission on Novem ber 22 announced “a management-labor manpower plan for the mobilization and utilization of labor in Califor nia, Washington, Oregon, Nevada, and Arizona.” The plan is designed to facilitate orderly withdrawal of em ployees by Selective Service, to further the recruitment and training of new workers, and to reduce labor piracy and the present excessive migration, absenteeism and turnover. 1942 F arm P r o d u c tio n a n d Livestock Products Cattle marketings ., Sheep marketings . , H ogs to farrow. M ilk production . . , Chicken production , Turkey production , E g gs ........................... Unit Thous. head Thous. head Thous. head M ill. lbs. Thous. lbs. Thous. lbs. Thous. doz. Field Crops Beans, d r y ................. C o r n ............................. .. Cotton, a l l ............... Cotton, long staple. F la x s e e d .................... H a y ............................. O a t s ............................. Peas, d r y ..................... Potatoes, Irish R i c e ............................. Rye ............................... Sugar b e e t s ............ .. W h e a t ........................ .. Thous. Thous. Thous. Thous. Thous. Thous. Thous. Thous. Thous. Thous. Thous. Thous. Thous. Vegetable crops Artichokes ................. Asparagus ................. Beans, snap................. Cabbage ..................... Carrots ........................ Cauliflower ............ . C e le r y ........................ C u c u m b e rs............... L e t t u c e ...................... .. Melons ...................... Onions ............ . . . . . . Peas ............................ S p in a c h ............ .. Tomatoes ................. Acres Acres Acres Acre’s Acres Acres Acres Acres Acres Acres Acres Acres Acres Acres Source : United States Department of Agriculture. acres acres acres acres acres acres acres acres acres acres acres acres acres 1943 D epartm ent Store Trade in N o v e m b e r a nd D e ce m b e r Department store trade in November and December broke all previous records. A larger proportion than usual of Christmas purchases was made in November this year, and this bank's seasonally adjusted index advanced 25 points to 209 percent of the 1935-39 level. In December the index receded to about the October level, which, itself, had marked a new high. Inventories of district department stores declined mod erately from July through November. Estimated on the basis of a substantial sample, total inventories of all dis trict department stores reached a peak of approximately 155 million dollars on July 31. They had declined to about 131 million by the end of November but were substan tially larger than the 123 million estimated for a year earlier and the 94 million estimated for November 30, 1940. In relation to demand, however, stocks of a number of items, particularly of goods made in whole or in part of metal, were scarcer in November than at any time in recent years. F ood S h orta g es an d F a rm P r o d n c tio n In no phase of the economy has the transition from surplus to shortage been more striking than in foods. The list of commodities in short supply has grown rapidly and now extends beyond items which are largely imported, such as sugar, coffee, and olive oil, and which were ex pected to become deficient. Included are many staples, such as butter, eggs, and meats, some of which were con sidered as “surplus” commodities less than a year ago. F arm Idaho Oregon t— W ashington—\ 1942 1943 1,014 1,167 2,820 3,004 281 339 4,989 5,070 54,727 62,397 64,521 55,877 136,619 138,957 165 147 209 159 *8 2,722 741 450 212 G o a ls — T w e l f t h Utah /-------Nevada------1942 1943 338 346 1,496 1,450 42 52 722 740 8,805 10,020 18,089 21,746 28,243 30,739 14 30 14 32 2,732 722 553 232 696 50 698 49 is 18 78 112 3,392 80 112 3,282 *4 49 257 *4 46 214 9,800 9,800 3,720 1,710 980 950 3,770 2,200 950 700 6,390 3,900 8,950 4,300 1,150 2,300 5,600 4,150 9,750 4,400 1,200 2,700 *9 450 300 500 500 600 500 400 1,400 300 350 1,500 300 350 406 D is tr ic t California t------Arizona-----1942 1943 1,916 1,954 2,696 2,711 212 192 5,489 5,480 60,307 70,366 55,986 67,316 166,383 170,478 Total Twelfth t-------District------1942 1943 3,429 3,306 7,211 6,966 515 603 11,290 11,200 142,783 123,839 129,952 153,583 331,245 340,174 81 164 10 180 682 625 287 642 47 231 5,317 964 450 301 168 93 351 4,388 759 307 630 49 377 5,335 920 553 331 164 94 338 4,178 8,800 35,000 12,500 9,000 32,000 13,000 11,250 1,300 112,500 47,200 10,400 32,900 3,000 28,350 9,600 45,620 10,250 13,100 28,460 17,900 14,780 1,500 140,690 65,650 20,350 38,850 4,100 31,000 8,800 44,800 12,500 13,270 34,700 13,950 12,450 1,300 118,100 51,700 21,650 37,600 4,200 31,600 446 110 642 47 223 1,899 173 536 116 630 49 368 1,905 149 74 168 11 190 739 9,600 35,820 10,250 8,930 26,450 16,920 13,230 1,500 134,300 61,350 10,000 34,250 2,950 28,504 January 1, 1943 Farm production in the United States was large in 1942, output or marketings of a number of crops and livestock products attaining record proportions. The source of current shortages, consequently, has been the expansion in demand, which has arisen from military and lend-lease requirements and from the increased civilian consumption. Three related Government programs have now evolved to cope with the problem of food shortages. Their objectives are to increase production of foods con sidered most essential, to assure adequate supplies for the armed forces and for lend-lease purposes, and to pro vide for an equitable distribution of supplies available to the civilian population. A llo ca tio n of Essential Foods for Non-civilian Use In order to assure an adequate supply of foods for the armed forces and for lend-lease, producers have been or dered to set aside stated proportions of their output. In 1942, almost the entire dried fruit crop was taken by the Government. Deliveries of meat for civilian consumption have now been limited by W P B order for several months. During the first quarter of 1943, meat packers will be permitted to deliver only 70 percent of the beef, veal, and pork, and 75 percent of the lamb and mutton deliv ered during the like period of 1941. One-half the butter in cold storage was recently ordered “ frozen” for Gov ernment purchase. Canners have been asked to set aside for Government use approximately one-half of the canned vegetable pack and somewhat more than half of the canned fruit pack in 1943. Rationing of Sca rce Foods A m o n g C ivilians The large and growing demands for food for the armed forces and for lend-lease necessitate reduced civilian con sumption of some foods. It is estimated, for instance, that a maximum of 33 pounds of canned food per capita will be available for civilians in 1944, as compared with an annual per capita consumption of about 46 pounds in the 1935-39 period. In order to provide for a more equi table distribution of restricted supplies available to the civilian population, rationing programs at the consumer level have been instituted. The most recent development in this field was the announcement on December 27 of a program of “point” rationing, to become effective in February, of most canned, dried, and frozen fruits, vege tables, and soups available to civilians. Secretary of A g riculture Wickard has announced that meat will soon be rationed and it is expected that rationing of milk prod ucts will follow shortly thereafter. Production G o a ls For 1943 The encouragement of agricultural production to meet expanding food requirements is embraced in the program of production goals, supported by price guarantees, ini tiated by the United States Department of Agriculture for the 1942 crop year. Goals for Twelfth District agri culture in 1943, together with production during the past 7 M O N T H L Y R EVIEW year, of major district field and truck crops, and of live stock products, are shown in the accompanying table. They aim generally toward encouraging the maintenance of production at the high levels of 1942, but at the same time stress the need for expanding output of the more essential products, even at the expense of curtailing out put of others. Major emphasis is again placed upon ex pansion of high protein yielding products, such as meat, milk products, dry peas, and beans. To supplement the meat supply, increased poultry production, and market ings of meat animals, particularly of hogs, at heavier weights is urged. A prominent feature of the 1943 goals is the emphasis upon further conversion of lands, where practicable, to the production of certain crops considered more essential than others. Particularly in the case of vegetables, goal crops such as tomatoes for processing and cabbage for dehydration are favored to replace such crops as melons and lettuce. It is urged that more wheat land in the Pacific Northwest be used for producing dry peas, and in California for raising flaxseed. G o v e r n m e n t F in a n c e a n d B a n k C r e d it The success of the Treasury's D’ecember loan drive is evidenced by the fact that total sales for the month amounted to 12.9 billion dollars, and exceeded the un precedented goal of 9 billion dollars set by Secretary Morgenthau at the outset by 3.9 billion. Although these results were most favorable and no further borrowing, except for the continued sale of Treasury bills, war sav ings bonds, and tax savings notes, is contemplated before early April, it should be remembered that a substantial volume of Treasury financing remains for the future. Of the 60 billion that it is anticipated the Treasury will bor row in the fiscal year ending June 30, 1943 about 25 billion remains to be raised. Several types of securities were offered by the Treas ury in December. These included the regular weekly is sues of 91-day Treasury bills, % percent certificates of indebtedness of 1943, 1% percent bonds of 1948, and 2^4 percent bonds of 1963-68, in addition to war savings bonds and tax savings notes which are available at all Banking and Credit— Averages o f Wednesday figures (m illions of dollars) Condition Items of W eek ly Reporting Member Banks Total loans .............................................. Commercial, industrial, and agricultural l o a n s ........................ Open market p a p e r ........................ Loans to finance securities transactions ................................ Real estate loans ............................. All other loans .................................. Total investments ............................... Unite'd States Government securities ......................................... All other securities ............ ............ Adjusted demand d e p o sits................. Time deposits ......................................... Coin and Currency in Circulation Total (changes only) ........................ Federal Reserve notes of F . R. B. of S. F .................................................... Member Bank R e s e rv e s ........................... D ec. N ov. Oct. D ec. 1,017 — 14 — 16 — 147 — — + 4 1 — 40 — 13 — 8 + 249 — 58 + 868 465 13 9 0 40 361 138 2,347 + 1 — 3 — 3 + 157 2,044 303 2,071 1,105 + 157 0 + 86 — 3 + 253 — 4 + 199 +900 — 32 +583 — 2 0 +60 + 127 + 596 + 61 + 53 + 126 + 126 + 570 + 312 — 1,248 1,270 8 times. The approximate amount of each type of security sold, both in the United States as a whole and in the Twelfth District, is shown in the accompanying table. The division of sales between commercial banks (i.e., banks which accept demand deposits) and other purchas ers is also indicated. S January 1, 1943 FEDERAL RESERVE BANK OF SAN FRANCISCO ales of G o ve r n m e n t t h e T S w e lfth e c u r it ie s D is t r ic t in — D t h e U n it e d ecem ber S tates a n d 1942 (m illions o f dollars) 1----- Twelfth t------United States------^ C om ’l Security Banks Other Total Tre'asury bills ( n e t ) ................. 897* 0 897 % % C. I. of 194 3 .................... 2,117 1,678 3,795 1 * 4 % Treas. bonds of 1948. 2,058 1,003 3,061 2 ^ % Treas.bonds of 1963-68 0 2,827 2,827 W a r savings bonds.................... 0 l,0 1 4 t l,0 1 4 t T a x n o t e s .................................... 0 1,312$ 1,312$ Total .................................... 5,072 7,834 12,906 District----- \ /— Total—> % of C om ’l U . S. Banks Other Am t. Tot. 107* 0 107 11.9 184 38 222 5.8 198 39 236 7.7 0 58 58 2.1 0 112 112 11.0 0 41 41 3.1 489 288 776 6.0 * Includes small amount of sales to othe'rs. tRedemptions of war savings bonds during December totaled 55 million dollars. $T ax notes turned in or redeemed during December totaled 631 million dollars. Securities of primary interest to banks included Treas ury bills, certificates of indebtedness, and Treasury bonds of 1948. Commercial banks are not eligible to hold the 2 percent bonds of 1963-68 until ten years after the date of issue. All sales of Series E, F, and G War Savings Bonds and most of the sales of tax notes were made to non-bank purchasers. ing chart, earning assets of district member banks have increased by more than 50 percent in the two and onehalf years since that date, with almost all of the increase accounted for by the expansion in holdings of obligations of the United States. Holdings of these securities amounted to 55 percent of all earning assets of member banks in late December compared with 36 percent in mid-1940. These data indicate a marked change in the credit func tion of the commercial banks. Many usual avenues of bank credit extension to industry are closed by allocation and limitation orders relating to the uses of materials by producers, and to consumers by restrictions on construc tion of homes and on the purchase of durable goods. The only new loans being made by banks in significant pro portions are made to essential industries. At the same time, however, the financial needs of the United States Treasury have increased enormously and the banking system is now lending more money to the Treasury than to all other borrowers combined. M aturities of G o v e rnm e nt Securities H e ld by Banks As banks have expanded their holdings of Government securities, there has been a distinct shift toward shorter term securities. It will be noted from the following table D is t r ib u t io n of T w e lfth of Bank H o ld in g s of G overnm ents in the Twelfth District As a result of this financing, Twelfth District member bank holdings of Government securities increased sharply in December. Banks which reported 90 percent of all Gov ernments held by district member banks on June 30,1942 increased their investments in these securities from 2,622 million dollars on November 25 to 3,040 million on DeB IL L IO N S OF D O L L A R S G D is t r ic t S o v ern m en t M em ber B a n k H o l d in g s e c u r it ie s (amounts in millions of dollars) June 29, June 30, D ec. 23, ,-------- 1940-------- N t-------- 1942-------- N ,-------- 19421— x PerPerPerAmount cent Amount cent Amount cent Treasury bills (maturity 91 days or le s s )............................. Certif. of indebted, (maturity 1 yr. or le s s ) ............................. Treas. notes (maturity 5 yrs. or less) ....................................... Bonds maturing in 5 yrs. or less Bonds maturing in 5-10 y r s .. . Bonds maturing in 10-20 yrs.. Bonds maturing after 20 y rs.. Guaranteed obligations Maturing in 5 yrs. or less. . 1 Maturing after 5 yrs.............. 6 2 106 5 470 — — 114 5 320 10 109 31 439 433 71 8 2 31 31 5 185 84 4553 831 149 9 4] 211 39 f 7J 420 12 1,950 58 26 190 9 14 160 39 s\ 2f 200 6 3,360 100 T o t a l ........................................... ..1 ,4 0 5 100 ,122 100 14 1 Estimate’d from holdings of a group of reporting member banks which held 90 percent of the Governments held by all member banks on June 30, 1942. 2 Less than 0.5 percent. 3 Includes all holdings of U . S. savings bonds (5 million dollars). L O A N S A N D I N V E S T M E N T S O F T W E L F T H D IS T R IC T M EM B ER BANKS Selected call dates, 1940-42. (December 1942 figures estimated) cember 23. Treasury borrowing and, of late, restricted opportunities for industrial, commercial, and consumer loans are reflected in the sharp increase in relative im portance of Government security holdings of member banks since June 30, 1940. As shown in the accompany that in the two years from June 1940 to June 1942, securi ties maturing in five years or less increased from 20 to 31 percent of the total held by district member banks. A l though a classification of bonds by maturities is not avail able, holdings of bills, certificates of indebtedness, and notes rose from 19 to 36 percent of the total between June 1942 and the end of the year. The increase in the amount of weekly offerings of the 91-day Treasury bills, resumption of the use of certificates of indebtedness, and the announced policy of limiting the maturity of new bond issues which commercial banks may purchase to ten years or less are important factors in this tendency toward greater relative holdings by banks of shorter term securi ties. M O é U H U f, K & u i& iu FEDERAL SUPPLEMENT RESERVE B A N K OF S A N J A N U A R Y 1, 1 9 4 3 FRANCISCO S u m m a ry o f N a tio n a l B u sin ess C o n d itio n s Released December 22, 1942— Board of Governors of the Federal Reserve System production in November was maintained close to the October level, A -reflectingindustrial a continued growth of output in war industries and a seasonal decline in g gregate production of civilian goods. Distribution of commodities to consumers rose further in November and the first half of December, reducing somewhat the large volume of stocks on hand. Retail food prices continued to advance. P I N D U S T R I A L P R O D U C T IO N Federal Reserve monthly index of physical volume of production, adjusted for seasonal variation, 1935-39 average =100. Subgroups shown are ex pressed in terms of points in the total index. Lat est figures shown are for November 1942. D D E P A R T M E N T S T O R E S A L E S A N D ST O C K S Federal Reserve monthly indexes of value of sales and stocks, adjusted for seasonal variation, 192325 average = 100. Latest figures shown are for November 1942. 130 120 110 / RENT FACTORS SUPPLYING RESERVE P FACTORS USING RESERVE F GOLD STOCK^. A TREASURY CURRENCY M E M B E R B A N K RESER VES A N D R E L A T E D IT E M S Wednesday figures. Latest figures shown are for December 9, 1942. o m m o d it y P r ic e s Grain prices advanced from the middle of November to the middle of December, while most other wholesale commodity prices showed little change. Retail food prices increased further by 1 percent in the five weeks ending November 17 to a level 16 percent higher than in November 1941. Prices of such fresh foods as are uncontrolled— fruits, vegetables, and fish— showed the largest advances from October to November, but price increases in controlled items contributed about two-fifths of the o a C O ST O F L IV IN G Bureau of Labor Statistics indexes, 1935-39 average=100. Fifteenth of month figures. Last month in each calendar quarter through September 1940, monthly thereafter. Latest figures shown are for November 1942. is t r ib u t io n Distribution of commodities to consumers increased further in November and December with active Christmas buying. A t department stores, variety stores, and mail-order houses serving rural areas, sales in November expanded more than seasonally. In the first half of December department store sales continued to rise sharply and were considerably larger than a year ago. Freight-car loadings in November declined about 7 percent from their peak levels in September and October but on a seasonally adjusted basis rose slightly over the October level. Coal loadings rose somewhat although a decline is usual in November. Shipments of other commodities declined seasonally. C CLOTHING r o d u c t io n Maintenance of industrial production in November when the seasonal tendency is downward was reflected in a rise of the Board’s seasonally adjusted index from 189 to 191 percent of the 1935-39 average. This rise was largely accounted for by a further advance in output of durable manufactures. Nondurable manufactures declined season ally, while output of minerals showed less than the usual seasonal decrease. In all groups of products the proportion of output for war purposes was considerably larger than a year ago. The increase reported for durable manufactures from October to November was in finished munitions and industrial equipment for new plants which will be completed in large number over the next few months. Steel production, at 98 percent of capacity in November and the first three weeks of December, was down slightly from the October peak, but the reduction appeared temporary as the scrap supply situation had been relieved and as further progress was being made on construction of additional iron and steel capacity. Supplies of iron ore on hand are regarded as sufficient for operations at capacity until movement of ore down the lakes is resumed in the spring. Shipments from Upper Lake ports this year totaled 92 million tons, and were 15 percent above the record estab lished in 1941. Construction contract awards in November were 10 percent below the level of the three preceding months, according to data of the F. W . Dodge Corporation, but were still about 40 percent higher than in November of last year. As in other recent months, publicly-financed work accounted for over 90 percent of all awards. r is e . B a n k C r e d it a n d G o vern m en t S e c u r it y M ark ets During the period of large-scale Treasury financing in December, total excess reserves of member banks were generally above 2.5 billion dollars. Substantial purchases of Gov ernment securities for the Federal Reserve System offset the effect of drains on reserves by the continued heavy currency outflow and further increases in required reserves resulting from a rapid growth in bank deposits. Reserve Bank holdings of Government securities showed an increase of 850 million dollars in the four weeks and reached a total of 5.5 billion on December 16. A t reporting member banks in 101 leading cities holdings of United States Government securities increased by 800 million dollars in the four weeks ending December 9. Treasury bills accounted for practically the entire increase, with almost two-thirds of the amount going to New York City banks. In the week ending December 16, bond holdings rose sharply as banks received their allotments of the new 1% percent bonds subscribed on November 30-December 2 ; allotments of this issue to all banks totaled 2 billion dollars, representing 85 percent of subscriptions. Total loans showed little change over the four weeks ending December 9. Commercial loans declined by 200 million dollars, with about half the decline at New York City banks, while loans to brokers and dealers increased over the period, reflecting largely advances made to security dealers in New York in connection with the Victory Fund drive. Payments by bank depositors for new Government security issues resulted in a decline of adjusted demand deposits and a rise of U. S. Government deposits to 5.8 billion dollars in mid-December, the largest total on record. Prices of United States Government securities have been steady in the past three weeks following an adjustment in the latter part of November when the Treasury announced the drive to sell 9 billion dollars of securities in December. Long-term taxable bonds are selling on a 2.36 percent yield basis on the average and long partially tax-exempt bonds on a 2.09 percent basis. UNITED STATES GOVERNMENT SECURITIES CO M M A N D INVESTMENT INTEREST Savings Bonds Series F and G are Always on Sale ☆ Tax Notes Series A and C are Continuously Available ^ a ^ . Other issues will be available when Victory Loan Drive Number 2 is announced JL Victory Fund Committee Twelfth Federal Reserve District EVEN THE SMALLEST INVESTOR CAN BUY WAR SAVINGS BONDS SERIES E AND SAVINGS STAMPS
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