Full text of Economic Review (Federal Reserve Bank of San Francisco) : October 1950

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MONTHLY REVIEW
TWELFTH

O

cto ber

FEDERAL

RESERVE

DISTRICT

Fe d e r a l R e s e r v e B a n k

1950

of

S a n Fr a n c i s c o

THE DOLLAR AN D THE DOLLAR GAP
the month of August the merchandise export
surplus of the United States was replaced by an im­
port surplus and thus at least for one month the “ dollar
gap” was eliminated. This news does not come as a sur­
prise to those who have been following the trend of our
balance of trade in the recent past. It culminates a sharp
upward trend in our merchandise imports and a decrease
in merchandise exports which developed immediately
after the outbreak of hostilities in Korea. However, if
one goes back to a year ago, to August 1949, the sig­
nificance of this reversal in our trade position and the
rapidity with which it has taken place becomes clear. It
will be remembered that August 1949 was the month
preceding the devaluation of the pound sterling and the
ro u n d of devaluations which followed; it was the month
of a serious sterling crisis. If at that time anyone had pre­
dicted that within a year’s time the dollar gap would be
closed, he would have been accused of the most fanciful
thinking.
u r in g

D

The balancing of our exports and imports has been
accompanied by other closely related events: the building
up of dollar and gold reserves in many of the former
deficit countries and the resulting loss of gold by the
United States; the appreciation of the Canadian dollar
as a result of establishing a free market for this currency;
and finally the persisting rumors of appreciations or reU N I T E D S T A T E S IM P O R T S A N D E X P O R T S , 1946-50

valuations of the pound sterling, the Australian pound,
and the Mexican peso.
In order to interpret the significance of these develop­
ments a number of points of primary significance should
be considered. W e want to know first, what has actually
happened to our balance of trade; second, the more im­
portant explanations of our shrinking export surplus;
third, the future of our program of foreign aid under ECA
in view of rapidly increasing dollar and gold balances in
the hands of recipient countries; and finally, the possible
effects, good or bad, upon our economy and the world
economy of our changing trade position.
Postwar balance of trade

Our export surplus reached its peak in 1947, amount­
ing to $8.7 billion for the year. For the year 1948 our
excess of merchandise exports was considerably reduced,
to $5.3 billion. This rate of decrease was not continued
into 1949, however, and the export surplus amounted to
$5.2 billion for that year. During 1949, the trend of ex­
ports was downward throughout the year; at the same
time imports were decreasing at a faster rate in response
to the brief recession in the early part of the year in the
United States. In August 1949, however, the value of
imports turned upward, establishing a trend which has
continued to date, and which increased sharply follow­
ing the outbreak of hostilities in Korea. Exports, on the
other hand, continued declining through January 1950 at
which time they turned upward until they were sharply
curtailed in July.
For the month of August of this year, according to
preliminary figures of the Department of Commerce, the
value of our total imports set an all-time high of $819.4
million— 50 percent above the 1949 monthly average and
Also in This Issue

W ayw ard Fruit Prices
W hat is Happening to the Buying Spree
Recent Developments in Credit Regulation
W hat the Federal Reserve System
Is Trying to Do: Regulation X
o! i:LÍ:,n ;i lu
1946

i Li-11n ,1111 u .L l l I u .I- u J M i n i n.l
1947




1948

1949

i lI u

.LllLí
1950

120

FEDERAL RESERVE B A N K OF SAN FRANCISCO

29 percent above the average for the first six months of
1950. Total exports, on the other hand, were valued at
$760.7 million— 25 percent below the monthly average
for 1949 and 7 percent below the average for the first six
months of 1950. This August import surplus of $58.7
million is the first import surplus that has been recorded
for any month since June 1937.
The most important commodities accounting for the
increase in imports were coffee, sugar, rubber, copper,
lead, tin, and petroleum. Among our exports, the largest
decrease took place in the machinery and vehicles classifi­
cation.
Turning next to specific trading areas, we find that
from January through July of 1950, an import balance
was recorded with Latin America, the Far East, and
Africa, while our trade with Europe continued to show
an export balance. It is interesting to note that our total
surplus of merchandise exports for this period amounted
to $1,147,356,000, which is practically identical with the
export surplus with the ERP countries of $1,147,259,000.
By comparing our merchandise balance for the first seven
months with the same period in 1949, the rapidity with
which the dollar gap has been closing becomes apparent.
In the first seven months of 1949 our total export surplus
amounted to $3.7 billion, over three times as large as the
total of $1.1 billion for 1950. Similarly, in the case of the
ERP countries our export surplus has been approxi­
mately halved from $2.3 billion in 1949 to $1.1 billion in
1950. Turning to other areas we find that with Latin
America our export surplus for 1949 of $344 million has
become an import surplus of $89 million ; in the Far East
an export balance of $548 million was changed to an im­
port balance of $3 million ; similarly, in the case of Africa
an export balance of $204 million became an import bal­
ance of $50 million ; our export surplus with Canada for
1949 of $324 million was reduced to $49 million in 1950 ;
and finally, when we look at the British Commonwealth
of Nations as a special category, we find the largest
change— from an export balance of $858 million to an
export balance of only $41 million. During the month of
July 1950, our merchandise trade with the Common­
wealth crossed over the line to the import surplus side,
with a total excess of imports of $39 million.
The role of ECA in our declining export surplus

In considering the underlying reasons for this rapid
narrowing of the dollar gap and its actual closing in
August, it appears that there are four primary factors
which should be noted : our program of economic assist­
ance under ECA, the effect of the devaluation of foreign
currencies vis-à-vis the dollar, rapidly increasing prices
of certain basic United States imports, and finally, the
effects of the Korean incident and the resulting stimulus
to rearmament.
In considering the explanations of the present trend in
our merchandise trade, it will be seen that many of the
factors may be of a temporary nature, or if not temporary




O ctober 1950

at least uncertain as to their effective duration. Our ECA
program of economic assistance can be considered as long
run in its consequences. The basic economic objective
behind our ECA program, and particularly its European
Recovery Plan segment, has been to increase productivity
in the countries of Western Europe and by so doing re­
duce their dependence upon United States imports and
increase their ability to export. Stated baldly, our ECA
program has sought to reduce the dollar gap. In accom­
plishing the objective of increasing productivity in West­
ern Europe, ECA has been highly successful, and it must
be given a large share of the credit for Western Europe’s
improved trade position. Productivity in Western Europe
was returned to prewar levels by 1949 and has since been
expanded above this point. Europe thus has been able to
produce for itself many of the commodities previously
imported from the United States and at the same time
has been able to produce a surplus for export both to the
United States and to the rest of the world. The ECA pro­
gram was not intended to eliminate the United States
export surplus with Western Europe; rather, it repre­
sents an attempt to reduce the surplus to manageable
proportions. The objective is to reduce Western Europe’s
import surplus with the United States to a point where
it can be covered by the export of goods to dollar surplus
countries of the world and thus bring about an over-all
balance through multilateral trade. The expenditure of
almost $10 billion1 for economic rehabilitation by ECA,
therefore, has been a major factor in the declining dollar
gaPThe effect of the devaluations of September 7949

The second factor playing a major role in our decreas­
ing export surplus, and by contrast a much more tempo­
rary and less tangible one, has been the devaluation of
many foreign currencies initiated by the devaluation of the
pound sterling in September 1949. As has been pointed
out earlier, the situation in the United Kingdom a year
ago on the eve of devaluation was indeed critical. United
States imports from the United Kingdom had fallen off
sharply as a consequence of the recession in the United
States in the early part of the year. This resulted in a
drain on British dollar and gold reserves in spite of largescale United States assistance. In addition, there was the
complicating factor of large accumulated sterling balances
to the account of other countries. Sterling creditor coun­
tries were insisting upon release of these balances to pay
for current British exports. Britain, on the other hand,
realized that a part of these balances had to be released
in order for her to maintain and expand her markets in
these countries. The result was a considerable volume of
“ unrequited exports,” and thus at a time when she could
ill afford it, she was exporting a part of her output for
which she realized no current return.
The decision by the United Kingdom to depreciate the
pound by 30 percent vis-à-vis the dollar was promptly
followed by similar action on the part of all the sterling
1 Cumulative E C A foreign aid totaled $9,828,930,000 on October 17, 1950.

O ctober 1950

M O N T H L Y REVIEW

countries except Pakistan and also by a 9 percent depreci­
ation of the Canadian dollar. The great importance of this
group of countries in world trade soon forced most of the
other countries of Western Europe and many other over­
seas areas to devalue their currencies. Thus, in effect,
what actually occurred was an appreciation of the dollar
in relation to other currencies. This relative appreciation
of the dollar constituted a recognition of the deterioration
of many non-dollar currencies against the dollar and a
recognition that the parities that had been set up at the
end of the war were unrealistic.
The success of any devaluation is to a certain extent a
gamble and the September devaluations were not an ex­
ception. The gamble in this case, however, has paid off,
although aided, it is true, by other developments. A de­
valuation, in effect, lowers the price of a country’s exports
expressed in foreign currencies and, at the same time,
increases the price of imports in terms of the domestic
currency. A devaluation may be said to turn the terms
of trade against the devaluing country, in the sense that
a given volume of exports can be exchanged for a smaller
volume of imports than could have been obtained before
the devaluation of its currency. It is hoped, however, that
the disadvantageous change in the terms of trade will be
more than offset by an increased demand for its exports
as a result of the lower price. If this is the outcome, the
devaluing country will receive an absolute increase in the
amount of foreign exchange obtained. Such an advantage,
however, assuming the demand response to the lower
price is sufficient to produce the desired results, may be a
furtive one if imported raw materials are important in the
country’s productive process. The increased cost of im­
ports which accompanies a devaluation must eventually
be reflected in increased costs of production and thus in
export prices. In this way, if prices of imports increase
sufficiently and imports are of significant importance in
the particular economy, the effects of a devaluation and
the advantages obtained may be short-lived. In the case
of the United Kingdom this danger has been avoided, at
least up to the present. On the average, the prices of
British imports have increased 21 percent since devalu­
ation, but the prices of British exports have increased
only 7 percent.
In the case of the September 1949 devaluations, how­
ever, certain additional factors should be considered. Be­
cause the devaluations were so widespread, the resulting
price reductions were, with few exceptions, effective only
in terms of the dollar. Thus not only was it hoped that
exports to the United States would increase, but in addi­
tion that exports could be diverted from non-dollar areas
to dollar areas. According to studies of the International
Monetary Fund covering the flow of world trade through
February 1950 ( and thus unaffected by the Korean de­
velopments), such a shift did take place. This is an im­
portant factor when it is remembered that production was
at a high level in the devaluing countries, and could not
be increased readily in response to United States demand.
Second, since many of the raw material producing coun­




121

tries were within the devaluing group, the price of raw
materials would not immediately rise in other devaluing
countries, and, in fact, would not rise except to the extent
that competitive bidding against dollar purchasers became
necessary, a contingency which has become a reality in
recent months.
While the devaluations might also be expected to
decrease imports from the United States owing to the
increase in prices expressed in the domestic currencies
of the devaluating countries, this effect was insured, at
least by the sterling area countries, by an additional pro­
vision to reduce imports from the United States arbi­
trarily by 25 percent of the then existing level.
Now, almost a year after the devaluations, it would
appear that these expectations have been realized. Cer­
tainly the desired results as evidenced by the reduction in
dollar deficits and the growth of dollar and gold reserves,
as typified by the doubling of Britain’s reserves since the
devaluation, would indicate that the devaluation had been
successful even beyond the most optimistic expectations.
Unfortunately, it is virtually impossible to evaluate the
specific effect of devaluation because of the development
of other factors which have worked towards the same end.
In other words, it is not possible to determine what the
situation would have been over the past year if devalu­
ation had not taken place, nor, on the other hand, what
the effect of devaluation would have been without the
large increases in the prices of internationally traded raw
materials, or if there had been no Korean war and the
resulting large scale rearmament. However, the devalua­
tions must be reckoned as one of the factors in the im­
proved trade position of the devaluing countries.
Increasing import prices

The third important factor contributing to the closing
of the dollar gap has been the large increase in the dollar
prices of important internationally-traded raw materials,
which resulted largely from revival of economic activity
and speculative demand in the United States and other
industrial countries. The average price of United States
imports turned sharply upward during the first seven
months of 1950. The Department of Commerce index of
the unit value of imports rose during this period from 217
to 241 percent of the 1936-38 average, while the index of
export prices on the same base decreased from 182 to 176.
The movement of both these indexes, therefore, indicates
that price movements have contributed to the decrease in
our export surplus. On the average, we had to pay 12 per­
cent more for our imports in July as against last Decem­
ber, while at the same time we received 9 percent less for
our exports.
It might appear at first glance that there is a contradic­
tion between the last two factors which have been men­
tioned as contributing to our declining export surplus.
Countries devaluing their currencies hoped to increase
their dollar earnings by increased sales due to lower
prices, but we find that one of the reasons for the declining
value of our export surplus has been the higher price we

122

FEDERAL RESERVE B A N K OF SAN FRANCISCO

INDEXES OF AVERAGE PRICES* OF EXPORTS AND IMPORTS
AND WHOLESALE PRICES—UNITED STATES, 1946-50
(1936-38=100)
Percent

Fft
Import Pric<. . A
;

/

a

V»’

j

........
V

«

^ S ii

S 's
Export Prices

s
»>•'* Wholi »sole Prices1
.1,1 II ill 1111 I in

1 !i m 1 . m i l i u m .

1111 il 1j i,i l. 1111111 1XLL

1 Department of Commerce index of unit value. * All commodities.
Source : United States Department of Commerce.

have had to pay for imports. This seeming inconsistency
disappears, however, when we consider the nature of
United States imports. By far the most important segment
of our total imports is raw materials for which there are
either no alternative domestic sources or inadequate
domestic supplies. Owing to unprecedented levels of de­
mand, we have been willing to pay the higher prices and
at the same time take virtually all of these commodities
which we can obtain. Devaluation, on the other hand, has
benefited those countries which export products of a
finished or manufactured nature which must compete
with United States products. This latter group of coun­
tries consists primarily of the E R P countries.
Korea and rearmament

The last important factor which has helped to produce
the rapid change in our trade balance has been the out­
break of armed conflict in Korea and the accelerated
defense programs both in the United States and abroad.
The effects of the Korean incident upon our international
trade have been obvious and are well known. The out­
break of armed conflict has served to accelerate our Gov­
ernment program of stockpiling strategic raw materials
that are obtained from sources outside the country. Not
only has this stimulus increased the volume of imports,
but it has served to accentuate the already rapidly rising
prices of such internationally traded raw materials as
rubber, tin, wool, ferro-alloys, and copper.
On the export side, available supplies of domestically
produced goods have been diverted away from export
markets into our rearmament program, as evidenced by
the precipitous drop in exports in July. While the steep
drop in our exports in July was not continued at the same
rate in August, nevertheless, we can expect the supply of
goods available for export to be restricted in the future,
particularly as productive capacity is shifted into defense
production. On the opposite side of the picture, an in­
crease in our exports of military supplies to the Atlantic
Pact countries and the Far East may be expected as




October 1950

present plans reach fruition. However, whether or not
these military shipments under our Mutual Defense As­
sistance Program will actually constitute a net increase
in exports is questionable. Such military shipments may
to a large extent replace other exports of a non-military
nature. Under existing conditions, it may be difficult to
satisfy our own domestic demand for civilian goods, and
this will limit our ability to provide a surplus for export.
The effect of the Korean incident was the last sharp
squeeze that resulted in the closing of the dollar gap in
August. In the months ahead, however, if world rearm­
ament and particularly United States rearmament pro­
gress on the scale presently planned, this last factor will
probably become the most important one in keeping the
dollar gap closed.
The problem of continued foreign economic assistance

Thus far we have been concerned with the actual
changes in our balance of trade and the contributing
factors and have said little about the consequences of a
greatly reduced export surplus or perhaps a continuation
of an import surplus. Some of these consequences are
already in evidence and the subject of considerable popu­
lar discussion; for example, our loss of gold, expanding
reserves in other countries, and the revaluation of cur­
rencies. Other consequences of our changed trade position
are yet to be realized and, therefore, are still matters of
speculation.
Perhaps the most commonly discussed problem is the
question of the position of ECA assistance in view of the
rapidly growing dollar and gold balances in recipient
countries. It is often contended that ECA has served its
purpose of providing dollars to finance necessary imports
until production can be restored to a point of self-support.
The fact that our merchandise exports are now balanced
by our merchandise imports is taken as proof that this
point has been reached, and that further grants of dollars
would serve merely to increase reserve balances in the
hands of other countries. Our ECA program at present
is scheduled to come to an end on June 30, 1952. It has
been suggested that this date should be advanced.
A scaling down of ECA assistance will undoubtedly
take place and, in fact, will probably be necessary in order
for shipments of war materials under the Mutual Defense
Assistance Program to take place on the scale planned.
However, the contention that EC A grants are merely
being used to build up reserve balances and, therefore,
should be discontinued fails to recognize one important
fact. This fact is that one of the objectives of the over-all
United States policy, of which our ECA program is a
part, has been to encourage greater convertibility of cur­
rencies as a necessary prerequisite for a growth of multi­
lateral trade. Convertibility of currencies is impossible
without adequate reserves of exchange and gold to carry
countries through short-term exchange difficulties coinci­
dent with seasonal fluctuations in trade, temporarily de­
pressed conditions in export markets, temporary short­

O ctober 1950

M O N T H L Y REVIEW

ages in raw materials, work stoppages of various sorts,
crop failures, etc.
Unfortunately, it is practically impossible to set up
hard and fast criteria to determine just what constitutes
a safe reserve position, although present reserves for the
most part appear to be much too small. For example,
although the gold and dollar reserves of the United King­
dom have more than doubled since the devaluation ( from
a total of only $1,340 million on September 30, 1949 to
$2,756 million on September 30, 1950) they are still far
below their prewar level. In commenting on the adequacy
of Britain’s present reserves, Hugh Gaitskell, new Chan­
cellor of the Exchequer, recently pointed out that prior
to the war Britain’s short-term liabilities and reserves
were approximately equal. Today, however, short-term
liabilities are more than four times as large as total
reserves. The figure most commonly mentioned as being
the minimum necessary to provide full convertibility of
sterling is $5 billion, which even under the present very
favorable conditions still leaves a long way to go. The
danger in the present situation is that we do not want to
jeopardize the billions that we have spent to rehabilitate
world trade by pulling the stops before the benefiting
countries are in a sound enough reserve position to
weather the normal ups and downs of international trade.
If the decision to cut off all economic assistance is taken
too soon, it is possible that the first minor storm which
comes along will result in a panic and a wholesale resort
to trade restrictions. This would mean a contraction of
trade and a virtual cancellation of the accomplishments
that have been made as a result of ECA. Or perhaps
even more frustrating, if ECA assistance is suddenly
terminated, it might immediately arrest the present mo­
mentum towards convertibility and the growth of multi­
lateral trade. Today, with the dollar gap no longer pre­
senting a major obstacle, convertibility has become a
practical possibility. However, with a discontinuation of
ECA grants, recipient countries may feel that their re­
serves are inadequate and seek to protect them by adopt­
ing restrictive measures, thus moving in the opposite
direction from that which is desired. Our changed trade
position certainly makes possible a reduction in the
burden imposed by our program of foreign economic
aid, but the cuts should not be applied on such a scale
as to endanger our investment.
The loss of gold

The improving reserve position of foreign countries has
been reflected in part in gold losses by the United States.
During the earlier postwar period, the United States had
been consistently an importer of gold, and imports of gold
reached a peak of $2,850 million in 1947. After the peak
year 1947, imports of gold decreased as the dollar gap
decreased until finally in September 1949 we became a
net exporter of gold. Our exports of gold, however, were
relatively modest until the outbreak of hostilities in Korea,
averaging approximately $45 million a month. In July
1950, our gold loss increased to $90 million and in August




123

climbed to $494 million. The large loss of gold in August,
however, has apparently marked the peak; preliminary
figures on the basis of weekly data indicate that the out­
flow was reduced to $278 million in September and for
the first three weeks of October to $183 million. For the
year ending August 31,1950, our total gold loss amounted
to $1,026 million and for the entire period of gold loss
(including the weekly data for September and through
the third week of October) it amounted to $1,487 mil­
lion.
In spite of this comparatively large loss of gold, the
total United States gold stock on October 18, 1950,
amounted to $23,291 million or approximately 70 percent
of the world’s total known monetary reserves. In refer­
ring to our loss of gold it should be noted that most of
this gold actually has remained in the United States ear­
marked for foreign account at Federal Reserve banks.
While the effect of this loss of gold has been to increase
the monetary reserves of foreign countries, it should not
be assumed that it constitutes the counterpart of a United
States import balance of merchandise trade. A glance at
the previously mentioned figures will reveal that we were
losing gold while at the same time our merchandise trade
showed an export balance. To some extent ECA dollars
have enabled foreign countries to purchase gold. In the
United Kingdom, for example, for the quarter ending
September 30, ECA dollars accounted for $147 million of
the total increase in reserves of $187 million, a large part
of this increase in reserves taking the form of gold pur­
chased in the United States.
Some of our gold loss may also be explained purely in
terms of capital transactions, that is, an exchange of other
foreign held dollar assets for gold. It is possible only to
speculate as to motivations behind such transactions. To
a certain extent they have been of a speculative or panic
nature. Capital transactions of this nature are common to
all periods of war panic and the Korean incident has been
no exception. As typical of this sort of transaction we
might mention rumors that Americans and foreign hold­
ers of dollar assets, fearing increased taxes, governmental
controls, and inflation in the United States, have sold dol­
lars to obtain foreign assets. These dollars may have been
used in part to purchase gold. Rumors of an appreciation
of the Canadian dollar reportedly brought about move­
ments of speculative capital from the United States to
Canada prior to the freeing of that currency from its
official parity with the United States dollar. This may
also have contributed to our gold loss. Similar movements
in response to rumors of revaluations in Australia, Mex­
ico, and the United Kingdom have been taking place, but
their magnitude is not known.
Further, the flow of private investment capital from
the United States, as contrasted to purely speculative
movements, has enabled certain governments to increase
their gold stocks. This has been particularly true in the
case of Canada, the countries of the Near East, and Latin
America.

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FEDERAL RESERVE B A N K OF SA N FRANCISCO

Revaluation of foreign currencies

A further international monetary development that has
been closely connected with the closing dollar gap is the
appreciation of the Canadian dollar and the rumors of
upward revaluations of certain other currencies, primarily
the pound sterling and the Australian pound.
Canada announced on October 2 that the Canadian
dollar was to be freed from its official parity with the
United States dollar of 91 cents, to seek its own level in
response to the forces of supply and demand in exchange
markets. Prior to this action there were persistent rumors
that Canada would restore the Canadian dollar to equal
parity with the American dollar. To have established an
official equality with the dollar would have overvalued the
Canadian dollar, as shown by the fact that in a free market
the Canadian dollar has been fluctuating around 95 cents
to the United States dollar.
Canada’s decision to let her dollar appreciate was made
possible by her rapidly declining merchandise import
deficit with the United States, as has been pointed out
earlier, and by her rapidly increasing reserves of dollars
and gold. Canadian exports to the United States have
increased approximately 36 percent during the first eight
months of 1950. During the same period Canada’s re­
serves of dollars and gold have increased by $534 million
since June 30 and by $285 million during the month of
September alone. As of September 30 Canada’s total
reserves amounted to $1,789 million as compared with
$985 million a year ago.
Canada’s decision to appreciate its currency apparently
was motivated by two primary considerations. It probably
was taken as an anti-inflationary measure and also as an
effort to turn the terms of trade in favor of Canada. While
a great deal of that country’s recent inflow of capital has
been in the form of long-term investment, part of it has
been speculative in nature. Commenting on this problem,
Canadian Finance Minister Abbott made this statement:
“ An influx of funds on this tremendous scale would, if
it continued, be likely to exercise an inflationary influence
in Canada at a time when government policy in all fields
is directed to combating inflationary developments.”
Canada’s efforts to turn the terms of trade in her favor
by an appreciation of her currency reflects her confidence
in a continued strong demand in the United States for
her exports. In view of the nature of our Canadian im­
ports, such confidence would appear to be justified. Our
most important imports from Canada consist of lumber
and lumber products, ferro-alloys (of which nickel is the
most important), and animals and animal products. All
of these commodities, while always important to our econ­
omy, have assumed increased importance in view of our
present military development program. With this favor­
able outlook, Canada apparently feels that she can obtain
more favorable terms of trade. By appreciating her cur­
rency Canada, in effect, is raising the prices of her exports
expressed in United States dollars while at the same time




October 1950

reducing the price, expressed in her own currency, that
she must pay for her imports. Thus, for a given volume of
exports to the United States, Canada will be able to obtain
a larger volume of imports from the United States.
In the case of other rumored appreciations of foreign
currencies against the dollar, the factors making such
moves feasible and the motivations are similar to the
Canadian situation. The position of the United Kingdom
cannot be considered to be as favorable as that of Canada.
Nevertheless, the United Kingdom’s unfavorable terms
of trade which require her to send out one-eighth more
exports for a given volume of imports than she did before
the devaluation have become increasingly burdensome.
She has had difficulty in producing sufficient goods to
meet export demands and this difficulty will undoubtedly
increase as her defense program is expanded. At the same
time, increasing prices of imports will have to be trans­
lated into increased retail prices. The wage front is also
becoming increasingly restless, thus further contributing
to inflationary pressures.
Australia’s position appears highly favorable in view of
an export surplus with the United States of $15 million
for the first seven months of 1950. A recent $100 million
loan by the International Bank will increase the supply
of available exchange. In the case of the flow of specu­
lative funds in anticipation of some upward revision in
the value of the Australian pound, there has been some
forward buying by American businessmen with future
Australian claims to meet. The inflow of British specu­
lative capital in Australia has been more important, how­
ever. Australia’s improved position reflects in part the
favorable prices which she is obtaining for her current
wool clip. Latest estimates, with the price of wool 40 to
50 percent above last year, are that Australia will realize
£ A 450 million from wool exports this year as against
£ A 250 million last year. An additional factor adding to
the possibility of some revision in the value of the Aus­
tralian currency is the fact that while the purchasing
power of the Australian pound is at least as great as that
of the pound sterling it is nevertheless quoted at a 20 per­
cent discount under sterling.
How strong is the dollar?

As a result of the closing of the dollar gap, our recent
loss of gold, and the actual or rumored appreciation of
other currencies against the dollar, there has been a rash
of pessimistic articles declaring that the dollar is deteri­
orating and that a “ flight from the dollar” is developing.
Since this decline is relative to other currencies, it does
not necessarily indicate a lack of confidence in the dollar
so much as it demonstrates growing confidence in other
currencies. In other words, the present situation is a
reversal of that which prevailed just prior to the devalu­
ations in 1949. At that time, the relative value of other
currencies to the dollar had been deteriorating rapidly
and the devaluations recognized this situation. Today be­
cause of improved conditions in many foreign countries,

October 1950

M O N T H L Y REVIEW

and in particular the sterling countries, as indicated by
a more favorable balance of payments position and grow­
ing reserves, there has been a restoration of confidence in
these currencies.
Conclusion

T o sum up, there is no basis for fears as to the present
strength of the dollar. Our underlying balance of pay­
ments situation is still strong in spite of the August deficit
which would have been impossible without the artificial
restrictions placed by other countries against American
imports. Our monetary gold reserves still account for 70
percent of the world’s total reserves. Psychologically, the
dollar is still the world’s strongest currency and there can
be little doubt that the present so-called “ flight from the
dollar” would be quickly reversed if all exchange controls
were abolished throughout the world.
It is even more difficult to view the present world trade
situation pessimistically when it is realized that the United
States has been working since the end of the war to pro­
duce the very conditions that are at present developing.
W e have spent $10 billion through EC A assistance in our
efforts to close the dollar gap and to restore convertibility
of world currencies. Today with world trade approaching
a balanced position and with growing reserves behind
other currencies we are at last reaching a point where
convertibility and a growth of multilateral trade are be­
coming practical possibilities.

125

While there does not appear to be anything in the
present situation which would cause us to fear for the
strength of the dollar, there are, nevertheless, dangers in
the near future. There is no doubt that the United States
will continue her support of the United Nations fight
against Communist aggression and that she will bear the
bulk of the military and economic effort, just as she has
in Korea. Our defense expenditures will far outstrip those
of any other member of the United Nations. The result
will be a continued large scale importation of strategic
materials, a diversion of our industry away from civilian
to defense production, and a reduction of our ability to
export. In addition, the flow of dollars to the rest of the
world for economic and defense assistance is expected to
continue on a large scale. W e have earmarked $5.2 bil­
lion for our Mutual Defense Assistance Program, and
Economic Cooperation Administration program, while
reduced by $900 million below original estimates, calls
for an additional $2.2 billion.
There can be little doubt that the economic burden indi­
cated by present plans will severely tax our economic
capacity. The inflationary pressures that may be gen­
erated do foreshadow grave dangers for the dollar.
Should we be unable to keep inflationary developments
under control, and should inflation in the United States
proceed at a faster rate than elsewhere in the world, the
value of the dollar vis-à-vis other currencies would in all
probability deteriorate.

W AYW ARD FRUIT PRICES
r u it

is not a very important contributor to total agri­

cultural income in the United States. Between 1946
F
and 1949 the fruit industry supplied only about 5 percent
of the nation’s total cash farm returns. To the agricultural
economy of the Twelfth District, however, fruit is of
special significance. A major share of the nation’s output
is concentrated in this area. From 1946 to 1949, 56 per­
cent of the nation’s yearly average cash farm receipts from
fruit and nut marketing came from District orchards, and
within the District over 22 percent of total cash farm in­
come was derived from fruits and nuts.1
Of the major fruits, only three are of importance
in states outside the Twelfth District; namely, apples,
peaches, and citrus. Peaches are grown in 40 states and
the production of apples is almost as widely distributed.
On the other hand, prunes (both fresh and d ry ), apricots,
and lemons are produced exclusively within the District.
California, Oregon, and Washington consistently account
for approximately 85 percent of the national output of
grapes, pears, plums, and figs. Fluctuations in prices
received by growers for fruits, therefore, exert a signifi­
cant influence on the cash income realized by District
farmers, with growers from the Pacific Coast states the
primary victims or beneficiaries.
1 Percentages include receipts from nuts which are a relatively small part of
total fruit and nut receipts.




A general similarity of movements has been evidenced
in the pattern of fruit prices during the postwar years.
This pattern, however, has been very different from price
movements of other major farm commodity groups— food,
feed, fibre, truck crops, and livestock and livestock prod­
ucts. Fruit prices were the only group of farm prices in
1947 to fall from 1946 levels and, conversely, the only
agricultural price group to rise in 1949 from the previous
year’s level. On the other hand, between 1946 and 1949,
the price index of food and feed grains, cotton, and truck
crops increased the first year, only to be followed by two
successive years of decline. Average prices for livestock
products meanwhile worked upward during 1947 and
1948 before starting to decline in 1949. During 1950, how­
ever, fruit prices have accompanied the general upward
movements of other farm commodity prices.
Citrus fruit

Between 1946 and 1949, citrus prices followed the gen­
eral movement of the fruit price index. Average prices
received by growers for oranges in 1947 in the nation as
a whole dropped 46 percent below 1946 and were further
depressed 20 percent in 1948, before turning upward the
following year. Within the Twelfth District, price fluc­
tuations for citrus fruit varied considerably. While Cali­
fornia orange prices in 1947 declined at about the same

126

October 1950

FEDERAL RESERVE B A N K OF SAN FRANCISCO
I N D E X E S O F P R IC E S R E C E I V E D B Y F A R M E R S — U N I T E D S T A T E S , 1946-50

St

«Pf
......... .
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350

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4

.u Jiailll.il ,u_Lul.uiu ..ulul ul.ii .i-LiuJjJLlu. i.i 1i i Li 11j a.

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A

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y

1946

1947

1948

1949

1950

1946

1947

1948

1949

1950

150 .nüilnlu. xiix d w iu .
1946
1947

iduluLi
1948

u I u Lu J jll l llx x h ilx L

1949

1950

1946

1947

1948

1949

1 This line represents a free-hand smoothing of the fluctuations *o point out the major directions these prices have taken over this period.
Source: United States Bureau of Agricultural Economics, A g r ic u l t u r a l P r i c e s .

rate as the national average, fruit from Arizona groves
declined only one-third as much. The following year,
when average orange prices in California were further
reduced 9 percent, prices received by Arizona growers
were down 45 percent. With the upturn in 1949, however,
Arizona prices rose 73 percent as against 8 percent in the
United States and 10 percent in California.
Prices received by growers for lemons, which are
grown almost exclusively in California, declined in 1947
and again in 1948 at approximately the same rate as
California orange prices, but rose over 70 percent in 1949.
Prices received by growers for grapefruit both within and
without the District were down in both 1947 and 1948,
though less pronounced in California than in Arizona.
The later price rise, however, was approximately equal
in both states.
These price fluctuations experienced by citrus fruits in
the postwar period have been essentially a reflection of
supply and demand conditions. The reduction in exports
has not been so influential a factor on the price level of
citrus fruits as it has been on prices of some other fruits
during the past few years. Before the war, approximately
35 percent of the nation’s dried fruit production and 14
percent of its canned fruit production found an outlet in
foreign exports, while between 1935 and 1939 only about
7 percent of domestic orange production was exported. A
large share of these exports, however, were absorbed by
the Canadian market, which for all practical purposes, the
citrus industry considers a part of the domestic market.
The consumption of citrus, both fresh and processed,
has increased greatly, and the increase in the use of frozen
and processed citrus juices has been particularly outstand­
ing. In 1945-46, when frozen orange juice was first intro­
duced, it created an outlet for only one-fifth of 1 percent
of the crop. By 1948-49, over 10 percent of the crop found
a market in this form. Frozen concentrate juice is so far
a more important outlet for Florida citrus than for the
Twelfth District crop. Production of frozen orange con­
centrate in the District, however, did not get started until
1947-48. Of the 12 million gallons of concentrated orange
juice produced in 1948-49, 20 percent came from Cali­
fornia and Arizona fruit. In company with these increases




in the use of citrus fruit in both fresh and processed form
over the past decade, citrus production, particularly or­
anges and grapefruit, has also been greatly increased.
Production increases, accelerated during the past decade,
culminated in record crops in both 1947 and 1948. The
drop in prices received by growers during these years
reflected this increase in supply. The drastic freeze in
District groves and inclement weather in Texas and
Florida citrus areas in the winter of 1948-49, however,
resulted in a short citrus crop. Average citrus prices in
1949 reflected this crop reduction; growers received 36
percent more for oranges, 71 percent more for lemons,
and 56 percent more for grapefruit.
During the first four months of 1950, the monthly aver­
age price for oranges has been at higher levels than in
1949. Between May and August, prices averaged below
last year, but again rose above 1949 levels in September.
Carry-over stocks of canned orange juice at the beginning
of the new pack season this fall were reported at very low
levels, and it is expected that strong demand will be made
on this year’s crop to replenish the supply.
Pears and apples

Prices received by growers in the Twelfth District for
both pears and apples since 1946 have reflected the basic
relationship between supply and demand. Price declines
in 1947 accompanied increases in total production. The
following year as District output fell 25 percent for both
crops, prices received by growers advanced 25 percent for
pears and 10 percent for apples. Growers received dras­
tically lower prices again in 1949, however, as orchards
brought forth bountiful crops.
The fluctuations in both United States and District
average prices received by growers obscures the fact that
actual cash farm receipts for fruits are apt to suffer more
in some localities than in others from price fluctuations.
Average pear prices, for example, for the United States
as a whole dropped 53 percent in 1949 below the previous
year’s level. Average prices to growers meanwhile were
down 71 percent in California and 56 percent in Wash­
ington, but only 24 percent in Oregon. The sharper reduc­
tions in California and Washington prices were due to

October 1950

M O N T H L Y REVIEW

the greater decline in prices received for Bartlett pears
as contrasted to other varieties. Other varieties are mar­
keted principally in fresh fruit channels— an outlet faced
with fewer marketing problems in 1949 and in which
price declines were, therefore, less drastic.
Bartletts are primarily a canning fruit and factors in
the canning industry exert a significant influence on aver­
age prices paid to growers. In 1949, the carryover of the
previous year’s pack was large. The situation was later
aggravated by the Hawaiian longshoremen’s strike which
delayed pineapple shipments to West Coast packers. As
both pears and pineapple are essential ingredients in the
fruit cocktail pack, the uncertainty of the pineapple supply
resulted in a slow-up of demand for Bartlett pears. In
1949, production of Bartletts was up 40 percent over 1948
in California and more than 50 percent in Washington.
On the average, this variety accounts for approximately
87 percent of all California pears and 73 percent of the
Washington crop. It is readily seen why average prices
received by pear growers in these two District states were
so much more depressed than in other pear-producing
areas where this canning pear is not so important.
In 1947, in response to a bumper harvest, average an­
nual prices received by apple growers over the nation as
a whole were 28 percent below 1946 levels. This was
approximately equal to the general price decline in most
District apple growing areas. In California, however,
prices dropped nearly twice as much. The following year,
a short crop was reflected in appreciable price advances
throughout the major commercial producing districts. A
larger than usual hold-over of cold storage stocks from
the previous year’s output and restricted export demand
dampened what otherwise might have been more substan­
tial price increases. As could be expected, carryover
stocks at the end of 1948 were small— 40 percent below a
year earlier. With a 50 percent increase in 1949 produc­
tion (23 percent over the 1939-48 average), apple growers
again felt the effects of drastic price reductions— 30 per­
cent under 1948 levels. In 1950 however, some increase
in average annual prices may be registered over 1949.
Preliminary figures indicate a 12 percent decrease in total
production, and carryover stocks from last year’s harvest
were only slightly higher than the 1945-49 average.
Though these stocks had some dragging effect on prices
during the early months of the year, fall prices will prob­
ably average out above last year as a result of the reduced
output.
California apple growers frequently suffer more drastic
price reductions on a decreasing price trend than do
growers in other major commercial apple growing areas.
As is the case with pears, this is the result of the relative
importance of different varieties. Approximately a third
of California’s production consists of the Gravenstein
variety, and this state also produces 93 percent of all
Gravensteins grown in the nation. This California spe­
cialty is the nation’s leading summer apple, a variety first
developed for the purpose of supplying the nation’s mar­




127

ket basket at a time of fresh fruit scarcity. The introduc­
tion of refrigeration and cold storage made possible both
the nationwide marketing of soft fruits during the summer
and the sale of other apple varieties the year round. The
favored position of this summer crop was consequently
undermined. Gravenstein prices declined 70 percent in
1947 compared to 47 percent for all California apples and
27 percent for all United States apples. Subsequently,
however, price declines for this variety have not exhibited
such disparity.
Per capita consumption of apples has fallen sharply
over a long period of time. Between 1910 and 1920 aver­
age consumption of apples amounted to 63 pounds per
person. In the period 1940-48 it had dropped to only 26
pounds. In contrast to this sharp drop in apple con­
sumption, production has dropped only one-fourth. Prices
received by growers, therefore, are now vastly more sensi­
tive to yearly production changes, and marketing prob­
lems are made more difficult.
Peaches

Peach prices have fluctuated considerably since the war,
dropping in 1947, increasing in 1948, declining again in
1949, and rising again this year. This price pattern was
evident both for the clingstones raised in California and
the freestones raised in all District states. Clingstones are
utilized almost entirely for canning, so that the prices
paid growers are dependent upon the size of the crop, the
stocks of canned peaches on hand, and the demand for
canned fruit and canned peaches in particular. In 1947,
the clingstone crop was smaller than the 1946 crop, but
canners paid growers less. The Government’s large mili­
tary purchases had ceased, export demand was small, and
the supplies of all fruits were large. The following year
the crop was again reduced, pushing prices back up to the
1946 level. The 30 percent drop in prices to growers in
1949 stemmed largely from the pressure of the largest
crop of clingstones on record. At the same time, large
carryovers of canned peaches and fruit cocktail put further
pressure on prices. This year, stocks were considerably
lower and the crop turned out about 17 percent smaller.
Grower prices for the No. 1 grade fruit being canned are
up 50 percent.
In contrast to clingstones, most freestone peaches are
marketed fresh. In addition to the size of the District crop,
the size of the peach crop in the Southern states which
compete with District peaches for the eastern market, and
consumer demand for all fresh fruit are important price
making factors. Since the war, the principal price deter­
minant has been the size of the peach crop, both in the
District and in other competing states. The price declines
in 1947 and 1949 accompanied large crops. In 1948 and
again this year, smaller crops brought larger returns to
growers.
Grapes

Few other fruits suffered so sharp a price decline in the
postwar years as did grapes, From a record high price

128

FEDERAL RESERVE B A N K OF SAN FRANCISCO

of $90.50 per ton for all varieties in 1946, returns tumbled
60 percent in 1947. Grower prices remained at this low
level in both 1948 and 1949, and have just recently shot
up again to over twice the 1948 and 1949 level. Such
extreme price fluctuations have plagued the grape indus­
try over the last decade and clearly illustrate the peculiar
and complex grape problem.
From 1931 to 1946, District production (almost en­
tirely in California) of all varietal classes of grapes in­
creased steadily, more than doubling during the entire
period. This increase was due almost entirely to an in­
crease in the yield per acre since bearing acreage has
remained fairly constant. Since 1946, production has
decreased gradually each year, with the 1950 estimated
output being the lowest since 1942. The fact that prices
remained at lower levels in the face of these smaller crops
points out the complexity of the industry. Many varieties
of grapes, whether they are wine, table, or raisin varie­
ties, can be utilized in one or both of the other outlets.
Consequently, the supply and market conditions for either
wine, raisins, or table grapes exert a strong influence on
the prices growers receive for the other varietal types.
The large 1946 output of grapes was mainly reflected
in swollen inventories of wine. A few months after the size
of the crush became known, wine prices broke sharply. By
harvest time in 1947, with the crop only slightly smaller,
wineries were offering growers only $30 per ton compared
to the $90 paid in 1946. It was not until the short crush
of 1949 that wine prices began to improve. During the
three years of low prices, from 1946 to 1949, conditions
in the raisin segment of the industry also contributed to
low grower returns. After the large diversion of grapes to
wine in 1946, 1947 saw the largest peacetime raisin pro­
duction in history. But the important prewar export mar­
ket was restricted and the Government had ceased its
military purchases. Even though the Government bought
40 percent of the raisin crop in 1947 and 30 percent in
1948 to ease the surplus situation, stocks were excessive
for commercial needs and prices remained at low levels.
This year with packers raising their opening prices on
raisins, grower prices have more than doubled.
Prunes and plums

Conditions in the District's dry prune industry have
been similar to those in the grape industry. Grower prices,
which had reached a peak in 1946, fell over 40 percent in
1947 and remained at this low level for the next two years.
After the large crops of 1945 and 1946, supplies became
burdensome, especially since the very important export
market was lost. Production decreased each year begin­
ning in 1947, and the 1949 crop was the smallest since
1929. Supplies still remained excessive, however, and
prices were largely determined by marketing programs
and various forms of Government assistance. The Gov­
ernment purchased 62 percent of the total District crop in
1947 and 37 percent of the 1948 crop. Though grower
prices in 1949 were up only slightly over 1947 and 1948




October 1950

levels, market conditions were generally improved and
supplies were not excessive. With a slightly smaller crop
again this year, and with marketing programs limiting
the saleable quantities, grower prices are up three to four
cents per pound over the 1949 prices.
Plum prices have differed from dry prune prices in
their behavior since the war. Grower prices rose mod­
erately in 1947, remained steady in 1948, and then de­
clined 50 percent in 1949. Since plums are largely mar­
keted as fresh fruit, plum prices depend principally upon
the supply of plums and upon the supply and prices of
competing fresh fruit. During the last four years plum
prices have moved in the opposite direction from produc­
tion changes, and this relationship is evident again this
year. Plum prices are up from last year and production
is down. The 25 percent increase in prices growers have
been receiving on the Eastern markets, however, is also
due to the small crop of Southern peaches, which gen­
erally compete with plums on the early market.
Apricots

The loss of the important export market and the gen­
eral dullness in the demand for all dried fruits have had
a marked influence on the postwar market for District
apricots. Grower prices declined from 1946 to 1948 in
spite of a drop in production of almost 50 percent in 1947,
and remained at this lower level in 1949. Until recently,
drying has been the most important outlet, but canners
are now taking larger and larger percentages. The prewar
importance of the export trade is shown in the fact that
exports averaged 50 percent of the 1935-39 output of
dried apricots. Only about 10 percent of the 1949 produc­
tion was exported ; in addition, the total out-turn of dried
apricots last year was slightly less than the average
quantity exported in prewar years.
Apricot growers have received slightly higher prices
for this year's crop, even though it was larger than the
1949 crop. Fresh shipments out of state were considerably
larger than last year because of severe freeze damage to
fruit in other states. Since cannery demand has also been
active, the market for all utilizations has been much
stronger than last year.
Complex factors affect prices

This brief analysis of postwar District fruit prices
points up the complexity of the factors which influence
the prices fruit growers receive for their crops. As with
most agricultural commodities, farm prices for fruit are
not determined solely by the size of the crop or the in­
come of consumers. The size of competing crops in other
areas, trends in per capita consumption, the demand for
canned fruits, the amount of dollar exchange in the hands
of importing countries— all these may at one time or
another affect the price for a particular District fruit crop.
Most of these factors played a part in the decline in
fruit prices which began in late 1946. Production of most
District fruit crops had been increasing during the war,
reaching a peak in 1946. Though the 1947 crops were

O ctober 1950

M O N T H L Y REVIEW

somewhat smaller, production totals were still large. At
the same time, with price controls and rationing ended,
other foods became more readily available. The weaker
tone in the canned fruit market was also important. The
year 1946 had seen a record canned fruit pack in the
District and the 1947 pack was second only to 1946. By
the middle of 1947 with cannery stocks double those of
a year earlier, canned fruit prices had weakened. These
two conditions naturally affected the prices canners were
paying to growers.
The postwar loss of export markets was a serious one
to many District and national fruit growers. Prewar ex­
port markets took about 11 percent of our national pro­
duction of fresh fruit, about 35 percent of our dried fruit,
and 14 percent of our canned fruit. W orld W ar II left
European countries without purchasing power to buy
fruits, which further depressed many fruit prices, par­
ticularly those which were largely dried. In addition, the
problem of the dried fruit industry has been increased
by the apparent impossibility of increasing the domestic
per capita consumption of dried fruits. Per capita con­
sumption has remained consistently between 5 and 6
pounds over the last thirty years.
These factors were primarily responsible for the down­
turn in fruit prices from 1946 to 1948, while the prices of

129

most other agricultural commodities were turning upward
and national income was increasing. The pressure of large
crops had been felt in the fruit industry in 1946 and 1947,
but it was not until 1948 that this condition affected the
other agricultural industries. During 1948 and 1949,
prices of most agricultural commodities, except fruit,
declined sharply in the face of large supplies. In the fruit
industry, however, many of the price depressing influ­
ences had been partially overcome and prices recovered
some from their low levels of the previous years. The
size of many fruit crops, particularly in 1948, were smaller
than in 1946 or 1947. In addition, marketing programs,
Government subsidies, and purchases by the Government
of substantial quantities of some crops tended to remove
surplus supplies from the market.
The divergence of fruit prices from the pattern of other
agricultural prices may have come to an end in 1949.
So far this year, most agricultural commodity prices in­
cluding fruit prices have been moving upward. Smaller
crops have been largely responsible though the infla­
tionary tendencies of our whole economy have made their
influence felt. Fruit prices will probably continue to follow
much the same pattern as other agricultural prices, but
the various complex factors which were so influential dur­
ing the 1946-49 period are still important and make price
predictions difficult.

W H A T IS H A P PEN IN G TO THE BU Y IN G SPREE
looked like the pre-Christmas season at retail stores
during July and August— at least in terms of sales
volume. Shoppers started crowding the stores shortly
after the outbreak of fighting in Korea on June 25 and
bought heavily throughout July and the first week of
August. The heavy buying eased during the second week
in August and since then increases over last year in total
retail sales have been within more reasonable limits.
In July, the dollar amount of total retail sales in the
United States jumped about 20 percent above the July
1949 volume. The increase in August was only slightly
less. Shoppers concentrated their buying efforts at dur­
able goods stores. Sales of building materials increased
the most over the comparable months in 1949 (over 40
percent in both July and August), while the increases in
house furnishings sales were second highest. Automobile
sales also increased considerably under the impact of
scare buying. Nondurable goods stores, offering fewer
items on the scare list, had only moderate increases in
July and August. Sales at department stores, which sell
both durable and nondurable goods, were up 30 percent
in July and 18 percent in August. Although the buying
spree slackened during August, total retail sales during
September were still well above the sales of the same
month last year. As during July and August, sales of
building materials and house furnishings during Septem­
ber increased the most over last year. Nondurable sales
were up, but by less than 10 percent.
t

I




Moving up with sales were prices charged customers
for house furnishings at retail stores throughout the
nation. In August, house furnishing prices were 2.4 per­
cent higher than in August 1949, and in September, 5.3
percent above September 1949. Apparel prices increased
slightly from July to August, but in August were still
about 1 percent below those of August 1949. In Sep­
tember, however, apparel prices increased 1.8 percent
above the September 1949 level. Complete sales data are
not available for all retail businesses in the Twelfth Dis­
trict, but the figures that are available— for department,
apparel, and furniture stores— indicate a similar behavior
in District retail sales.
United States total retail sales rose in the first
half of 79 50— before Korea

United States retailers could have expected sales to
have been at a reasonably high level last summer even
without the sudden demand created by the Korean War.
Although total nonagricultural employment in the coun­
try was down during the first four months from a year
ago, in May and June it exceeded last year’s level. For
the first half of this year, compared with the first half of
1949, personal income was up slightly, average hourly
earnings of manufacturing employees were up 4 percent,
and total residential construction activity— which directly
affects house furnishings sales— was up almost 50 per­
cent. Total retail sales for the period were about 5 per­
cent above the first half of 1949. Sales at department

FEDERAL RESERVE B A N K OF SA N FRANCISCO

130

stores, however, lagged 4 percent behind the comparable
period of 1949. The difference between total retail sales
and department store sales was caused by the large in­
creases in sales of automobiles and building materials,
items not handled by department stores.
District department store sales in first half
nearly matched last year's sales

In the Twelfth District, department store sales during
the first half of 1950 were only slightly below those of
the first half of 1949. Total dollar sales, adjusted for
seasonal variation, were at a low level in January, com­
pared with other post-war Januarys. In February they
rose only slightly, then leveled off in March. During the
next three months, however, dollar sales rose steadily to
reach a high level in June. During this period shoppers
bought more durable and less nondurable goods than dur­
ing 1949. Dollar sales of piece goods and household tex­
tiles, women’s clothing, and the basement items (mainly
clothing) totalled less each month from January through
June than during the comparable months of last year.
Sales of small wears (toilet articles, silverware, jewelry,
etc.) fell behind 1949 in each month except May. Sales
of men’s clothing and women’s accessories, however,
showed small increases. Nearly offsetting the decreases
in most soft goods departments were consistent increases
in sales of house furnishing items. Increases in sales of
furniture, rugs, and major appliances reflected the large
increases in residential construction this year. The large
increases in sales of the radio-phonograph-television de­
partment reflected for the most part a very heavy demand
for television sets.
Twelfth District department store sales
rise sharply after June

The panic buying at Twelfth District department
stores was concentrated in the period from July 8 through
August 5, except for a large increase during the week
ending September 16. For the country as a whole the
buying spree was of somewhat longer duration, but was
not so extreme as in this District. It is estimated that
sales of major appliances— refrigerators, stoves, etc.— in
the District during the week ending July 22 were more
than four times greater than those of the comparable
T w e l f t h D i s t r i c t D e p a r t m e n t S to r e S a l e s
by

S elected D e p a r t m e n t s

Percent change, July, Au gust, and September 1950 compared with
the same months last year

Linens (including towels) .................
Domestics, muslins, sheeting ..........
Blankets, comforters and spreads —
W o m en ’s hosiery .....................................
Knit underwear .......................................
Furniture and b e d d in g ...........................
Domestic floor coverings ....................
M ajor household appliances ............
Radios, phonographs and television.
Total sales ..............................................




July
+ 53
+ 257
+ 64
+ 153
+ 62
+ 59
+ 50
+ 239
+ 114
+

38

August
+18
+85
+25
+16
+ 9
+33
+47
+29
+94
+12

Sept.
+ 13
+ 86
+ 30
—
1
+ 1 2
+ 33
+ 43
+ 39
+106
+

15

O ctober 1950

week of last year. The increase in total sales for the week
ending September 16 was largely the result of widespread
use of the easy credit terms during the week before the
reinstitution of Regulation W on September 18. For the
weeks from August 6 through September 30, however,
the year-period sales increases were moderate— ranging
from 6 to 11 percent. For the weeks ending October 7
and 14 District sales were up only slightly, and for the
week ending October 21, Twelfth District sales decreased
2 percent, compared with the corresponding week of the
previous year.
Most of the departments affected by the scare buying
(see table) experienced substantially smaller increases in
August and September than in July. In general, shoppers
did not seek out the lower-priced items, but bought indis­
criminately. Evidence of the nature of buying is apparent
from the fact that most basement store departments in­
creased less than the comparable departments in the main
store. An interesting sidelight can be found in the sales
of women’s inexpensive dresses compared with sales of
better dresses. Sales of inexpensive dresses increased
only slightly in July and in August dropped 5 percent
from a year ago. Sales of better dresses, however, were
up 8 percent in July and 10 percent in August over the
same period last year. In September, sales of inexpensive
dresses were up 1 percent and better dresses were up
15 percent.
The fear of shortages and possibly of price increases
and installment buying regulations during July and early
August centered the buying spree at the durable goods
counters of department stores. This accentuated the shift
from nondurable goods sales to durable goods sales which
had taken place during the first half of the year. In July
and August 1949, nondurable goods accounted for about
68 percent of Twelfth District department store sales and
durable goods, about 32 percent. During the same period
this year the percentage of nondurable sales fell to about
65 percent and durable goods sales increased to about
35 percent of total sales.
T otal department store sales were up over last year in
all areas of the District. In July, sales in Bellingham,
Washington, increased 76 percent— more than in any
other District city. Two other cities, Fresno and Sacra­
mento, had increases above 50 percent. In August and
September, all District cities showed increases, though
the gains were not so large as in July. Bellingham again
had the largest year-period increases in the District in
both months.
Installment sales rise sharply prior to
reimposition of Regulation W

Department store customers paid for their July and
August purchases with less cash and more credit than
ever before. Installment sales in July were over 100 per­
cent above those of July 1949. Cash sales were up only
13 percent. In August, installment sales were up 33 per-

O ctober 1950

M O N T H L Y REVIEW

R a t io of C o l l e c t io n s
able

at

D u r in g

B e g in n in g

of

M onth

to

A ccou nts

M on th — T w elfth

R e c e iv ­

D is t r ic t

D e p a r t m e n t S tores
/--Regular charge-»*
1950
1949

1950

1949

54
54
53

18
17
18

23
23
21

August

54

18

22

53

19

20

.................................................. 52
............................................52

cent and cash sales 4 percent. September installment sales
increased 35 percent and cash sales 6 percent, compared
to the same month in 1949. Estimates of weekly sales
indicate that the largest increases in installment sales in
this District came during the weeks ending July 22, 29,
August 5, and September 16. Department store sales are
normally on a cash and charge basis with only a small
percent of total sales on an installment basis. Of each
dollar spent at District department stores in 1949, 47
cents were paid in cash, another 47 cents were charged,
and 6 cents paid in installments. To pay for the large in­
creases in purchases of high-priced items such as stoves,
refrigerators, and television sets, shoppers made very
extensive use of easy credit terms in the period after the
Korean conflict started. July installment sales jumped to
10 cents per dollar spent, regular charge sales increased
only slightly to 49 cents of each dollar spent, and cash
sales dropped to 41 cents of each dollar spent. In both
August and September the comparable amounts were
installment sales— 9 cents, charge sales— 48 cents, and
cash sales— 43 cents.
The large dollar volume spent at department stores
during July, August, and September did not slow down
the collections of the amounts owed by customers using
credit. The collection ratio, which indicates the percent­
age of total amounts owed at the beginning of the month
which were paid off during the month, was in fact slightly
higher for installment sales in July than in June. Com­
pared with last year, however, collections were down
considerably.
Twelfth District department store stocks and
orders outstanding: first half of 1950

The dollar value of stocks held by department stores
rose from January to March on a seasonally adjusted
basis, but then decreased steadily to June. During this
period stocks were at a slightly higher level than in the
comparable months of 1949. Orders outstanding during
the first two months of this year were at about the same
level as the year before, but the seasonal decline in March,
April, and May was not so great as last year. By the end
of June, the stores increased their orders nearly 30 per­
cent in anticipation of the buying spree.
The stocks held by department stores did not follow
the shift from nondurables to durables experienced in
sales during the first half of the year. Instead, nondurable
stocks were generally up and durables were down. This
was caused by several factors: the failure of anticipated
increases in nondurable sales this year to materialize,




I N D E X E S O F T W E L F T H D IS T R I C T 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
(1935-39 = 100)
Adjusted for Seasonal Variation

t -----Instalment----- N

M ay ..........................................................53
J u n e ..................................................... .... 52
July ..................................................... .... 52
September

131

especially during the Easter season, thereby increasing
nondurable stocks; a high level of durable goods stocks
during the first half of last year; and the difficulties of
getting deliveries of certain durable items even before
the Korean war.
Twelfth District department stores increase
stocks and orders after June

Although hit by unexpectedly heavy sales in July, de­
partment stores found themselves in a reasonably well
stocked position at the end of July. In anticipation of
further increases in sales and to stock up against short­
ages, they placed large commitments. Orders outstanding
at the end of July were 70 percent above, in August 67
percent above, and in September 30 percent above the
corresponding months of 1949. Stocks declined appre­
ciably in only a few of the heavily hit departments during
July compared with the same period last year, though
stocks for a number of departments decreased mod­
erately. In August and September, stocks in most of the
heavily hit departments were above those of the same
period last year.
T w elfth

D is t r ic t

D epartm ent

S tore

S tocks

by

D epartm ents
Percent change, July, August and September, 1950 compared
with the same months last year
Linens (including towels) .................. . .
Domestics, muslins, s h e e tin g s..........., , .
Blankets, comforters and sp re a d s ...
W om en ’s h o s ie r y .................................... . . .
Knit un d erw ea r......................................... . .
Furniture and bedding ........................ . .
Domestic floor c o v e r in g s ..................... . . .
M ajor household appliances .............. . . .
Radios, phonographs and television
Total s t o c k s ........................................... . . .

July
— 5
— 32

August

— 16
+ 3
— 4
+10
— 45
0

+ 12
— 28
+ 9
+44
+ 25
+ 4
+ 23
— 15
+ 13

Sept.
+ 29
+ 6
+ 31
+ 70
+ 33
+ 14
+ 37
+ 2
+ 47

+~2

+ 10

+ 16

Correction: A chart on page 107 of the September issue
of the M o n t h y R e v i e w is entitled “ Insured employment,
July.” The correct title should read “ Insured unemploy­
ment, July.”

132

O ctober 1950

FEDERAL RESERVE B A N K OF SAN FRANCISCO

RECENT DEVELOPMENTS IN CREDIT REGULATION
Residential mortgage credit

Pursuant to the Defense Production Act of 1950, the
Board of Governors of the Federal Reserve System is­
sued Regulation X , effective October 12, governing credit
on new residential construction. Simultaneously, revised
credit terms governing mortgages insured by the Federal
Housing Administration or guaranteed by the Veterans’
Administration were also placed in effect. The terms re­
quired by the latter agencies extend to both new and
existing residences, but Regulation X applies only to
any construction started on or after August 3 which is
not insured or guaranteed by any department or inde­
pendent agency in the executive branch of the United
States Government or any Government Corporation.
The credit area covered by Regulation X is commonly
described as conventional mortgage lending. There is a
provision for exceptions or relief from the Regulation
for credit granted or commitments actually made be­
tween August 3 and October 12, the effective date of
the Regulation.
The terms adopted by the organizations referred to
above apply only to one- and two-family dwelling units.
The terms announced by the Board of Governors of the
Federal Reserve System for conventional loans and by
the Administrator of the Housing and Home Finance
Agency for F H A loans are identical. In addition to the
down payments required, maturities are limited to 25
years for houses having a bona fide sales price of less
than $7,000 and to 20 years for any residential property
in excess of that sale price. The Veterans’ Administration,
in compliance with the intent of Congress expressed in
the Defense Production Act, adopted a set of down pay­
ment terms somewhat less stringent than that required
by the other agencies. The maturity restrictions are the

same, however, except in individual cases where hard­
ship can be proven. In those cases the maturity may be
extended to 30 years. Down payments for selected pur­
chase prices are listed below.
M a x im u m

R eal

E state

D own

P aym ents

and

M a t u r it ie s

12, 1950

E f f e c t iv e O c to b er

f--------------------Regulation X 1 and F H A --------------------N

Value
$5,000 ...................................
6.000
7.000
...
8.000
9.000
10.000
12.000
15.000
18.000
20.000
25.000

f-----------------V A ---------------- N
Down payment
Down payment
PercenPercenAmount
tage
Amount
tage
$ 500
10.0
$ 250
5.0
850
14.1
250
4.2
1,200
17.1
500
7 .1
1,550
19.4
750
9.4
1,900
21.1
1,000
11.1
2,300
23.0
1,300
13.0
3,100
25.8
1,900
15.8
4,300
28.7
3,550
23.7
6,700
37.2
5,800
32.2
8,300
41.5
7,300
36.5
12,500
50.0
11,250
45.0

1 Covers only residential new construction or “ major addition” or “ major
improvement” to residential property.

Consumer credit

Effective October 14, the Board of Governors of the
Federal Reserve System issued Amendment No. 1 to
Regulation W . The changes in the Regulation affect
down payments on all items except automobiles and home
improvements, and maturities on all items except home
improvements. In addition, the Regulation which for­
merly covered articles having a cost price of $100 or
more has been extended to those costing $50 or more.
The new and old terms are listed below:
Down
r ~-— payments------N

(in percent)
Old
New
Automobiles ................................................ •
Television sets, radios,
and other major durable goods. . . .
H om e improvements ............................. .
Unclassified instalment loans ............

331/a

33^

15
10
10

25
15
10

Maturi ties-------- >
(in months)
Old
New
21
15
18
18
30
18

15
15
30
15

W H A T THE FEDERAL RESERVE SYSTEM IS TRYING TO DO: REGULATION X
is well known that the Federal Reserve System has
the responsibility for formulating and implementing
national monetary and credit policy, particularly as it af­
fects the activities of our commercial banking system.
The principles involved are not so generally understood,
however. In the September issue of the M o n t h l y R e ­
v ie w , the need for restrictions of various types to check
current inflationary pressures was outlined in broad
terms. Special attention was devoted to the functions per­
formed in this regard by the general credit controls exer­
cised by the Federal Reserve System. This article will
describe briefly the principles underlying selective credit
controls, using the most recent addition to that field—
mortgage credit control— as the primary illustration.
t

I

As indicated in last month’s article, current and con­
templated increases in military output will necessitate
some reduction in the volume of those types of civilian
goods which use materials available in limited supply and
essential to the military program. At the same time, how-




ever, the increased production of military goods and the
general operation of our military establishment provide
people with additional spendable income. The declining
supply of civilian goods coupled with rising income
creates strong inflationary pressures which need to be
curbed if our economy is to operate most effectively in
meeting both our military and civilian needs.
Current income, liquid assets, and borrowing consti­
tute the three sources of spendable funds available to
consumers. Since the purchase of a house represents a
relatively large investment for most consumers, they rely
heavily upon borrowed funds to finance such purchases.
For similar reasons, credit is also used extensively to
purchase automobiles, furniture, and major household
appliances. As the years have gone by, more and more
people have come to rely upon credit to finance purchases
not only of houses, but also of automobiles and other con­
sumer durable goods. Without such credit, home owner( Continued on page 134)

M O N T H L Y REVIEW

O ctobcr 1950

133

B U S IN E S S IN D E X E S — T W E L F T H D IS T R IC T 1
(1935-39 average = 100)
Y ear
and
m o n th

I n d u s t r ia l p r o d u c t io n (p h y s ic a l v o lu m e )*
P e t r o le u m *
L um ber

C rude

R e fin e d

148
77
46
62
67
83
106
113

129
83
78
76
77
92
94
105

110
120

99
98

127
90
84
81
81
91
98
105
103
103
103

142
141
137
136
109
1HO
147
159
151

102
110

110
110

125
137
344
139
147
149
147

135
151
160
148
159
162
167

1949
Ju ly..............
August_____
September .
October____
November».
December _

152
150
156
156
151
156

146
144
144
141
140
140

162
165
166
158
161
156

1950
January____
February.
M a rch _____
April_______
M a y _______
June_______
July ............
August_____

129
141
160
174
207
181
184
186

140
139
138
138
140
142
142
145

161
157
151
159
162
170
170
178

1929.
1931.
1932.
1933.
1934.
1935.
1936.
1937.
1938.
1939.
1940.
1941.
1942.
1943.
1944.
1945.
1946.
1947.
1948.
1949.

88

110

C em en t

110

L ead 3

C op per*

171
104
75
75
79
89

74
48
54
70

68

100

117

112

118
96
97

92
114
124
164
194
160
128
131
165
193

112

113
118
104
93
81
73
98
107
103

2)1

202
217
209
208
196

98
93
84
77
89
105

178
179

123
118

200
200

122

201

125
131
118
86 r
93

217
240
244
245
251

W heat
f lo u r *

106

160
75
33
26
36
57
98
135

101
89
88
95
94
96
99
96
107
103
103
104
11.5
119
132
128
133

88
122
144
163
188
192
171
137
109
103
153
140

116
104

108
109
108
104

131

121

136
136
145
140

101

189

108
164
169
172
181
172
167r
176

104
91
91
87
95
105
113

112

C arT o ta l
C a li­
m f ’g
fo r n ia
lo a d in g s
(n u m ­
E le c t r ic e m p lo y ­ fa c to r y
b e r )2
pow er
m e n t 4 p a y r o lls *

83
82
73
73
79
85
96
105

102
112
122

111

135
91
70
70
81

73
54
53
64
78
96
115

88
100
112

136
167
214
231
219
219
256
284
303

134
224
460
705
694
497
344
401

299
310
308
306
299
306

186
186
185
185
183
182

423
429
437
435
421
424

322
313
299
325
341
331
341
340

179
182
186
189
194
195
201r
203

417
421
427
432
445
468

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

13 2 .0
10 4 .0
8 9 .8
8 6 .8
9 3 .2
9 9 .6
1 0 0 .3
1 0 4 .5
9 9 .0
9 6 .9
9 7 .6
10 7 .9
13 0 .9
1 43.4
1 42.1
1 46.3
167.4
2 0 0 .3
21 6 .1
2 0 9 .6

120

138
138
124
129
128

329
333
326
337
319
339

302
309
333
330
331
315

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

96
108
125
135
141
148
125
135

316
322
321
333
336
342
454
373

323
337
319
342
335
326
318
333

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

88

103
109
96
104

101
110

96
104
118
155
230
306
295
229
175
184
189
186

D ep ’ t
D ep ’ t
store
R eta il
store
sales
stock s
food
(value)2 (value)6 prices*»*

110

128
137
133
141
134
136
142
134
126

4H0
423

B A N K IN G A N D C R E D IT S T A T IS T IC S — T W E L F T H D IS T R IC T
(amounts in millions of dollars)
C o n d itio n ite m s of all m e m b e r b a n k s7
Year
an d
m o n th
1929
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949

Loans
an d
d isc o u n ts

D em and
U .S .
deposits
G ov’ t
securities a d ju s te d 8

T o ta l
tim e
dep osits

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

1949
August
September
October
November
December

5,729
5,853
5,873
5,919
5,925

6,846
6,863
6,909
6,944
7,016

8,221
8,273
8,317
8,511
8,536

6,170
6,186
6,196
6,157
6,255

1950
January
February
M arch
April
M ay
June
July
August
September

5,901
5,893
5,946
5,914
6,005
6,034
6,162
6,418
6,664

7,123
6,999
6,923
6,896
6,932
6,905
6,810
6,699
6,495

8,620
8,311
8,167
8,307
8,354
8,289
8,458
8,627
8,754

6,244
6,262
6,303
6,282
6,275
6,315
6,250
6,210
6,213

B an k
rates o n
sh o rt-term
bu sin ess
lo a n s 9

M e m b e r b a n k reserves a n d related it e m s 10
Reserve
ban k
cred it11
+
—
—
+
+

3.20

3.14
3.16

3.36
3.37
3.29

34
21
42
2
7
2
6

1

—
3
2
+
2
+
4
+
+ 107
+ 214
98
+
76
9
+
— 302
17
+
13
+
—
+
+
+
—
+
—
+
—
—
+
+

C o in an d
C o m m e rcia l
T reasu ry
cu rren cy in
op era tio n s12 op era tio n s12 circu la tio n 11
0
154
175
110
198
163
227
—
90
— 240
— 192
— 148
— 596
- 1 ,980
- 3 ,751
—3 ,534
- 3 ,743
- 1 .607
__ 443
+ 472
— 931
—
—
—
—
—

30
13
2
12
40

—
+
—
+
+

48
5
2
28
14
10
3
2
62

—
92
—
34
— 223
— 126
— 199
23
+
149
— 102
45

194
41
95
21
32

23
154
234
150
257
219
454
157
276
245
420
+ 1 ,000
+ 2 ,826
+ 4 ,486
+ 4 ,483
4-4 ,682
+ 1 ,329
+ 630
482
+ 378
+
+
+
+
+
+
+
+
+
+

+
+
+
+
+
+
+
+
+
+
+

40
37
92
2
30
5
7
204
106
170
32
169
125
72

__

B an k d ebits
index
31 cities*»1«
Reserves

(1935-39=
100)2

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

1
9
7
16
8

1,832
1,837
1,831
1,854
1,924

332
336
351
349
376

62
10
16
4
8
5
0
18
9

1,892
1,848
1,842
1,821
1,802
1,836
1,858
1,863
1,893

354
360
373
360
371
389
382
384
417

+
+

+
+
+
—
—
+
+
+
+
+
+

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 Commission; 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.
1 N ot adjusted for seasonal variation.
4 Excludes fish, fruit, and vegetable canning. Factory payrolls index covers wage earners only.
8 A t retail, end of month or year.
• 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.
* Demand deposits, excluding interbank and U.S. Gov t deposits, less cash items in process of collection. M onthly data partly
estimated.
• 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.
12Minus 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.
l* Debits to total deposit accounts, excluding inter­
bank deposits.
*Revised series from 1945 to date. Explanation of revision will appear in the November issue.
p — preliminary.
r — revised.




134

FEDERAL RESERVE B A N K OF SA N FRANCISCO

October 1950

WHAT THE FEDERAL RESERVE SYSTEM IS TRYING TO DO: REGULATION X
(Continued from page 132)

ship and mass distribution of durable goods would have
been less widespread.
In times such as the present, however, when current
income is likely to outrun the supply of goods and services
unless prices are allowed to rise drastically, the unre­
strained use of mortgage and consumer credit serves to
accentuate the imbalance between demand and supply.
This leads to additional upward pressure upon prices and
speeds our course of ascent on the dangerous inflationary
spiral.
The recent actions to tighten residential mortgage
credit, including Regulation X of the Board of Gover­
nors of the Federal Reserve System and the associated
restrictions on F H A and V A loans announced by the
Housing and Home Finance Administrator,1 were taken
for the purpose of lessening the current demand for hous­
ing by checking the growth in mortgage credit. There is
a two-fold need for this reduction in demand. In the first
place, because housing construction has been running at
unprecedented levels so far this year, the prices of lumber,
plywood, cement, brick, tile, and many other materials
had risen to very high levels. Without some restriction
upon demand for the finished product— a house, the
prices of these materials in all probability would have
been forced to still higher levels. Moreover, it had become
increasingly evident that the current volume of building
could not be maintained, and in fact it had already shown
signs of decline, owing to the scarcity of certain critical
materials and equipment needed in the final stages of
construction. Secondly, our stepped-up defense program
requires that in the near future a significant proportion
of these materials must be diverted from housing to de­
fense. The most efficient way to accomplish this is to
reduce the demand for housing by tightening up on mort­
gage credit.
This method makes it possible for the flow of mate­
rials to the housing market to diminish and the flow to the
defense market to increase with little, if any, upward
pressure upon prices. In the absence of credit restriction
or direct allocation or rationing, the diversion of mate­
rials could be accomplished only by competitive bidding
between the housing and defense markets. This could
serve only to drive prices higher and higher until enough
people were priced out of the housing market to enable
the Government to get the materials it needs. This ob­
viously would increase costs both to home purchasers
and to the Government— and ultimately to the taxpayers
who have to foot the Government’s bills.
In the light of the defense program as currently indi­
cated, it has been estimated that the materials and labor
available for residential construction will not allow the
building of more than 800,000 to 850,000 new housing
1 For a description of the terms of these various restrictions, see page 132.




units in 1951. The recent action in tightening credit terms
seeks to hold the demand for housing to about that level.
The creation of credit supporting a demand for more
houses than that would not increase the number of houses
built. All that it would do would be to contribute to
further inflation and higher prices— a fact that needs to
be kept constantly in mind.
This goal involves, admittedly, a significant reduction
from the unprecedentedly high level of construction ac­
tivity achieved this year. It is estimated that 1,400,000
houses will have been started during the entire year 1950.
However, the construction of 800,000 housing units in
1951 would still be a relatively high level of activity,
exceeded only in the postwar years beginning with 1947
and in four years during the housing boom of the mid­
twenties. Furthermore, if it should develop that the
requirements of the defense program or the effects of
these credit restrictions upon the demand for housing
were not anticipated correctly, these regulations may
readily be loosened— or tightened— as circumstances
require.
On the surface it may appear that these restrictions,
including both those on consumer and mortgage credit,
benefit the wealthy as against those with lower incomes.
However, such a view assumes, whether recognized or
not, that there really need be no reduction in the supply of
new houses or of other consumer durable goods, and that
demands can be satisfied without further price increases.
But if increased military needs are to be met, someone
must give up something that he might otherwise have
had. The alternative to credit restrictions is either price
controls and rationing, or it is to reduce buying through
still higher prices. The first of these alternatives involves
great inconvenience to everyone and necessitates setting
up elaborate governmental machinery. Under the second
alternative, the people who would first be priced out of
the market would be those with lower incomes and
smaller savings. Short of a system of rationing on the
basis of need (as determined by a Government agency)
without regard for an individual’s financial condition, the
man who has saved his money to buy something is inevi­
tably in a preferred position compared to the man who
lacks the necessary funds.
Controls over consumer and mortgage credit will not
do the job by themselves. Increased production is ob­
viously essential. But since it requires time and mate­
rials to increase productive capacity, this does not offer
a major solution to our immediate problem. For the
present, higher taxes and reduced Federal expenditures
wherever possible are the major weapons in our fight
against inflation. If we are to succeed in that fight, we—
consumers, business, and government— must accept less
in terms of civilian goods and services than we are try­
ing to get with the incomes, liquid assets, and access to
credit that we have.