The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
MONTHLY REVIEW T W E L FT H I E D E R A L R E SE R V E D I ST R I C T O ctober Fe d e r a l 1 9 5 2 reserve Ba n k of S a n Fr a n c i s c o CONSUMER SPENDING AND RETAIL SALES sales in the Twelfth District and in the nation so far this year are larger than they were last year. Nationally the gain has been about 2 percent, but in this District the increase has been somewhat larger, primarily because of greater expansion of employment here than in the country as a whole. In both cases, however, the in creases have been so moderate and so unevenly distributed among retail lines that some merchants have not shared in the increase. R e t a il Although sales in this District and in the nation have shown an underlying tendency toward growth through out the year, there has been enough variation from month to month so that the over-all pattern appears quite ir regular. Despite the somewhat erratic behavior of con sumers, recent sales volume indicates that retailers will probably move a record volume of goods in the last quarter of the year. The underlying strength in retail sales, however, will not be felt uniformly by all retail lines. The dollar volume of department store sales was no larger than in the same nine months last year, although, as previously indicated, total retail sales in the nation were 2 percent above the year-ago level. The major increases over last year were reported by gasoline service stations, jewelry stores, food stores, and drug stores. Automobile sales lagged behind last year until the removal of Regula tion W in May and then moved up sharply. The cut in supplies resulting from the steel strike caused a reduction in sales. Through September, automobile sales were 5 percent behind 1951. Furniture and appliance dealers did fairly well early this year. A slight decline in their sales this spring was followed by a sharp upsurge after the sus pension of Regulation W . Since then, sales have been running at fairly high levels. As a result, furniture and appliance sales were slightly ahead of the first nine months last year. Sales of apparel have also been good and in June surpassed the peak volume reached in the buying boom of early 1951. Consumer spending rises So far this year consumer spending has been ahead of last year’s record level, and has increased more than retail trade figures alone would indicate. In the first three quar ters of 1952, consumers spent about 4 percent more than they did in the corresponding period of 1951. Consumer outlays increased during the first two quarters of this year but failed to rise in the third quarter as sales of new auto mobiles were reduced by the steel strike. Last year, in contrast, there was a sharp drop after the first quarter with a slow recovery during the third and fourth quarters. The impetus to consumer spending this year has resulted primarily from a moderate rise in consumer disposable income. Retailers' experience varies Retailers, in some cases at least, are likely to regard statements about higher consumer spending this year with some degree of skepticism. Almost half the increase in consumer outlays over last year has gone for such items as gas, electricity, laundry, and other services. The remaining increase in spending has been concentrated almost entirely in purchases of nondurable goods. A look at individual lines reveals a wide variation in experience. Twelfth District department store sales ahead of nation The dollar volume of Twelfth District department store sales in the first nine months of this year was somewhat above that for the corresponding period of 1951, in con trast to no gain on a nationwide basis. Generally, retail sales in this District, based on department store sales and retail sales subject to tax, appear to be running at some what better levels than those nationally. The pattern of sales, however, has not been too different here from that in the country as a whole in terms of the goods that con sumers have bought. For example, an examination of department store data reveals that sales of nondurable goods, particularly apparel, were doing better than total department store sales. Automobile sales based on data available for California have followed the national pattern A ls o in This Issu e The Aircraft Industry and the Twelfth District Economy International Finance— A Period of Ferment 90 FEDERAL RESERVE B A N K OF SAN FRANCISCO and have lagged behind 1951. Also apparent from the de partment store sales reports for this District is a marked price consciousness on the part of consumers. Close analy sis of weekly reports reveals that consumers have tended to concentrate their buying in weeks in which large markdowns were offered. In addition, consumers have tended to shift their buying to the newer stores located in out lying areas surrounding large metropolitan centers. Sales fend to follow employment increases San Diego, reflecting the boom in aircraft and defense establishment activity, reported one of the largest in creases in sales for the first nine months of the year. Large increases were also reported in San Francisco, San Jose, and Sacramento. Sales in the Los Angeles area, despite large defense orders and rapidly expanding employment, increased only moderately through September, but in recent months the gains have tended to surpass those for the District. In contrast to the performance in California, sales in the Pacific Northwest, except for Walla Walla, have tended to lag behind 1951 until recent months. The expansion in employment in Oregon and Washington has not been as pronounced as in California. Except for Idaho Falls, which had a much better experience than the Dis trict, the volume of sales in the Intermountain area was not particularly good during most of the first nine months. Salt Lake City reported a modest gain but the BoiseNampa area and Twin Falls lagged behind 1951. In re cent months, Twin Falls has made sharp gains and re ported a 13 percent increase for September. October 1952 Credit and retail sales Consumers have been tending to use an increasing amount of credit in making purchases ever since the end of W orld War II. As incomes expanded and goods be came available in larger quantities, credit was used to help finance the large volume of durable goods which consum ers wished to acquire. Shortly after Korea, Regulation W was reinstituted and credit terms were limited for many durable goods items. Before the restrictions became effec tive, a large buying spree by consumers forced consumer credit up sharply. After Regulation W became operative, consumer credit leveled off and for a period declined moderately. In April of this year, consumer instalment credit outstanding was still below the 1950 peak. In early May the regulation was suspended and consumer instal ment credit rose very sharply in May and June, but the increase slowed somewhat in July and was even more moderate in August and September. In this District consumer credit at commercial banks increased $50 million in May and $85 million in June, but in August and September the increase was less than $50 million a month. Nevertheless, the outstandings in creased from $1,200 million at the end of April to $1,430 million at the end of September. Department store sales further emphasize the role that consumer credit has played. In April, 8 percent of District department store sales were on an instalment basis. By July, 10 percent of total sales involved time payments, and the ratio of instal ment selling has remained constant since then. THE AIRCRAFT INDUSTRY AND THE TWELFTH DISTRICT ECONOMY to the Air Force in October of the world’s largest jet bomber— the 100 ton XB-52 “ Stratofortress”— by the Boeing Aircraft Company of Seattle calls attention in a striking way to the importance of this District’s aircraft industry to the national defense. This plane marks a distinct advance over the B-47 jet bomber, which is the only plane of this type currently being pro duced on a quantity basis, and is in most respects ex cept range superior to the huge B-36 which is under going extensive revamping at San Diego. The first B-52 was produced at a cost of about $25 million and involved some 8 million man-hours of design engineering work. Scheduled deliveries will start coming off the production line in about a year, the Seattle plant having already been tooled up to start mass production. Significant progress is also being made by District aircraft manu facturers in the commercial field. At least three Pacific Coast aircraft producers are reliably reported to have reached an advanced stage of engineering design on jetdriven passenger transports intended for commercial airline use and will probably soon be in position to take orders for such craft. Unlike shipbuilding— which at the peak of W orld War II construction activity gave employment to over 600,000 D e l iv e r y persons on the Pacific Coast, only to disintegrate as an independent industry at the end of the war— aircraft manufacture has continued to be a substantial industry in this area. The industry experienced a difficult period of adjustment in the postwar period, however, as a con sequence of the wholesale cancellation of military con tracts following V-J Day.1 While its position remained precarious in the immediate postwar years, the more im portant units in the industry managed to survive by turning their attention to the expanding needs of the commercial airlines, by manufacturing small two-place planes and non-aircraft products, and by cultivating ex port markets. Here, again unlike shipbuilding, the air craft industry has until recently had an edge over foreign competition. With the gradual revival of military air craft procurement after 1948 and the expenditure by the federal government of large sums on guided missile de velopment and other fundamental research projects, the industry has consolidated its position and has provided employment for increasingly large numbers of people. It contributes significantly to the trade balance of the Dis1 For a discussion of the conditions faced by the industry during the period of adjustment in 1946-47, see an article entitled “ Aviation Policy and the Aircraft Industry” which appeared in the M o n t h l y R e v i e w , August 1947, pp. 69-72. October 1952 M O N T H L Y REVIEW trict, as much the larger part of its output is sold to the United States Government or to customers outside the District. Under the impact of the rearmament program, particularly since 1950, the industry’s volume of new business has expanded enormously. Dominant position of the aircraft industry in Twelfth District employment and pay rolls Disbursing a pay roll which now approaches a billion dollars a year, the aircraft industry has become the dom inant manufacturing industry of the entire Pacific Coast region. For the year 1951 it ranked second only to the lumber and wood products industry in this region in vol ume of employment and pay rolls. During 1952 the rate of operations in aircraft plants has continued to expand so rapidly that for this year there can be little doubt that the average number of employees and total wage and salary payments in the aircraft and parts plants of Cali fornia and Washington will exceed those in the combined lumber and wood products plants of the three Pacific Coast states by a substantial margin. West Coast aircraft and parts manufacturers1 have accounted in recent years for about 40 percent of the em ployment and value product of the entire American air craft industry— an industry having a value output in 1950 of approximately $1.5 billion, or nearly 2 percent of the total for all manufacturing plants in the United States in that year.2 In this area aircraft production is the most highly concentrated of all important manufac turing industries. Probably nowhere else in the world is there so large an aggregation of airframe plants as in Southern California. Within a ten-mile radius in the Los Angeles industrial area are located the principal plants of four of the seven largest aircraft producers in the United States. With a pay roll in mid-1952 of close to 200,000 persons employed in aircraft and aircraft parts manufacturing, Los Angeles and San Diego counties ac counted for approximately one-third of total United States aircraft employment. One person out of every four manufacturing workers in the Los Angeles labor area in August 1952 was employed in an aircraft or aircraft parts plant, while three-fourths of all San Diego factory workers were so employed. In. Kings County, Washing ton, the location of the Boeing plants, the proportion of JThe Pacific Coast aircraft industry consists of six large manufacturers of airframes who design, assemble, and sell complete aircraft; four concerns of intermediate size which manufacture aircraft engines or engine parts and also produce sub-assemblies for airframes or do fundamental research and design w o rk ; one helicopter m anufacturer; and some 400 manufac turers of aircraft parts and specialized equipment, including electronic and radar supplies. Five of the six larger companies whose principal plants are on the Pacific Coast also operate plants in other parts of the United States, chiefly in the Midwest. M ost of these plants were established in such locations during W orld W a r I I , partly for economic reasons and partly in order to lessen the vulnerability of the industry to possible air attack. 2 W ith respect to that part of the industry producing complete aircraft (e x cluding concerns primarily; engaged in making engines, propellers, and parts and the numerous miscellaneous sub-contractors), the proportion of the national output represented by Pacific Coast establishments is even higher. California and Washington accounted for more than half the em ployment and well over half the value product of the aircraft industry in this narrower sense at the Census of 1947. Even as recently as July 1952, when national defense orders were stimulating the industry in other areas, California and Washington establishments employed over 53 percent of the workers in the entire airframe industry. 91 all manufacturing workers employed in aircraft produc tion in the first quarter of 1952 was four out of every ten. In California the aircraft industry has become by far the largest manufacturing industry in the state. It em ployed one-third more people and paid out 42 percent more wages in the first quarter of 1952 than the en tire group of machinery producing industries, and out ranked the important metal and metal working indus tries by an even wider margin. The gap has been con siderably widened since that time. Some 112,000 persons have been added to the work force of the state’s aircraft industry during the past two years— an expansion of 130 percent— accounting for more than one-half of the total increase in California manufacturing employment since mid-1950. In Washington the story has been much the same. Employment in District aircraft plants and in shops producing airplane parts has currently attained a level of approximately 230,000. This is roughly about 25 per cent below the wartime peak level established in mid1943. While the demand for aircraft workers may carry the volume of District employment somewhat above the current level, it is not likely, short of all-out war, that the 1943 peak of 315,000 will be exceeded in the near future. Some of the impact of this big expansion in District aircraft employment may be seen in the especially rapid growth of certain California cities. For example, San Diego and its two neighboring communities, National City and Chula Vista, have added about 112,000 per sons— or more than 30 percent— to their combined pop ulation within a two-year period, 1950-1952. Part of this growth is accounted for by the increase of naval and other military personnel, as San Diego is an important naval base whose activities have greatly expanded since the onset of the Korean war, but an appreciable part is due to enlarged aircraft employment. The aircraft industry employs a relatively high pro portion of people in the upper wage and salary brackets. This is due to the large number of engineers, designers, and other “ non-production” personnel required in the normal operations of airplane manufacturing as well as to the necessity, in many cases, of employing a considerable scientific staff in fundamental research work. For the “ durable goods” manufacturing industries as a whole the proportion of all employees classed as other than “ production workers” in recent years in the United States has averaged about one in six, while in the aircraft in dustry the ratio is more than one in four. Even after allowing for this heavy weighting of upperbracket employees, aircraft wages are relatively high. The average gross hourly earnings of “ production workers” in the aircraft industry run considerably above the general average for all durable goods industries in the United States. Only a relatively few manufacturing industries, such as automobiles, primary metal products, rubber 92 FEDERAL RESERVE B A N K OF SA N FRANCISCO products, and the printing trades, have higher gross hourly earnings. Som e labor problems in the industry All Pacific Coast aircraft producers have faced a more or less difficult problem in securing adequate labor sup plies during the last two years of expanding operations. In spite of continuing rapid population growth, the ex pansion of general manufacturing activity in the area has absorbed most of the local labor force and very little surplus has been available to meet the special labor re quirements of the aircraft industry. Labor recruitment presents special problems for Pacific Coast aircraft pro ducers because this region has no semi-permanent pool of trained labor, such as exists in the large population centers of the East and Midwest which have a more diversified industrial structure. Western aircraft plants are too far away from those centers to absorb workers temporarily displaced in metal working establishments whose output has been curtailed by the current necessity to restrict civilian supplies of scarce metals, such as alu minum, copper, and brass mill products. Some limited recruitment of higher paid labor has been extended to distant areas, but for the most part it has been necessary to utilize the labor supply locally avail able by setting up special training programs, by employ ing more women, by lengthening the average work week, and by working additional shifts. Almost four times as many women are currently employed in California air craft plants as there were two years ago. Nearly 34,000 women employees were added to the pay rolls of Cali fornia aircraft plants between August 1950 and August 1952 when their number reached 46,000. One in five of all aircraft workers in the Los Angeles labor market area in mid-1952 were women; in San Diego the pro portion was nearly one in three. These rates are, of course, still considerably below those which prevailed at the peak of the war when 120,000 women were employed in Cali fornia airframe plants, representing about 43 percent of their total pay roll. Aircraft labor needs are further complicated by the relatively high rate of labor turnover characteristic of the industry. The quit rate in aircraft production is con siderably higher than for most types of metal fabrication, particularly in a period of rapidly expanding local em ployment. Newly trained people (who in many cases have been paid while learning) frequently leave their jobs to accept alternative employment opportunities, or be cause they prove unadapted to this type of work. Quits in aircraft plants have risen sharply, for example, in Seattle and San Diego where critical labor shortages ex isted through most of 1951 and early 1952. Unemployment hazards , individual and social Excessive concentration of any locality’s work force within a single highly specialized industry brings risks, both for the individuals concerned and for the community October 1952 as a whole. This is particularly true in the aircraft indus try which is subject to extreme fluctuations of activity. Irregularity of operations arising from the erratic and unpredictable variations in placement of military orders, which constitute roughly 90 percent of the total volume of business of American aircraft producers, is notor iously the basic problem of the aircraft industry. The wholesale cancellations of military orders in 1945 follow ing the end of the war resulted in acute unemployment in the aircraft centers of southern California and west ern Washington. In the case of San Diego and Long Beach this condition persisted well into the postwar period. Even the flow of commercial orders is highly irregular and undependable as a basis for continuity of operations. After all, the market for commercial transport planes is an extremely limited one and is highly competitive. The capacity of the American aircraft industry vastly ex ceeds any reasonably foreseeable demand from commer cial sources, and from V-J Day to mid-1950 it was much larger than the total market demand, foreign and do mestic, military and commercial. From the standpoint of the aircraft producer, the fluc tuations of market demand constitute an ever-present occupational hazard,. Progress in airplane design is ex tremely rapid and existing types of planes speedily be come obsolete, at least in their capacity to match the performance of the latest “ models.” On the other hand, an incredibly long-drawn-out period is involved in de signing a new plane, manufacturing the prototype— al most literally a hand process in this case— and in testing and perfecting it before an acceptable product can be of fered to potential customers and orders taken for “ quan tity” production. This, in turn, means further large in vestment in tooling and other plant equipment before production can actually begin. From three to five years and sometimes longer usually intervene between the de sign stages of a new airplane and its sale in substantial quantities to the final user. For example, eight years elapsed between the preliminary design of the nation’s latest operative high speed bomber, the B-47, and the emergence of the first production model. With the stead ily increasing complexity of modern aircraft, particularly military models, there is little possibility except under the extreme pressure of a national emergency of acceler ating the aircraft production cycle.1 This extremely long interval between initial invest ment and the ultimate realization of sales dollars multi plies the risks inherent in the production of new airplane types. The pressure of technological progress is persist ent and compelling, to say nothing of the spur of com petition, both within the American industry and from abroad. On the other hand, many things can happen to disrupt the market or in extreme cases cause heavy can1 For a discussion of the problems arising- from this lengthy production cycle in the aircraft industry, see “ Aviation Policy and the Aircraft I n dustry,” M o n t h l y R e v i e w , Au gust 1947, pp., 70-71. October 1952 M O N T H L Y REVIEW cellations of orders, an experience with which the Amer ican aircraft industry is only too painfully familiar, both from the commercial airlines and from the United States Government. Such uncertainties, together with the un predictable fluctuations in rate of military procurement of aircraft, lie at the root of the basic labor problem of the industry— the problem of attracting and keeping a dependable labor supply in the face of fluctuating em ployment opportunities. Large backlogs assure high level of employment for some time to come There appears to be little danger at the present mo ment of any threat of serious unemployment in the Dis 93 trict aircraft industry. That remains a problem for the more distant future. The backlog of unfilled orders cur rently held by the six leading Pacific Coast aircraft man ufacturers is approximately $7 billion, or the equivalent of about three full years of operation at current rates of production. Between 90 and 95 percent of these orders are for military types of planes, guided missiles, or other fundamental research work. Congress at its last session authorized an increase in the size of the Air Force from its current goal of 95 “ wings” to 143 “ wings.” This pro jected expansion, dictated by the requirements of na tional defense, will probably keep the District aircraft industry reasonably well provided with business for sev eral years to come. INTERNATIONAL FINANCE— A PERIOD OF FERMENT S tarting early in September with the Annual Meet ings in Mexico City of the International Bank for Re construction and Development and the International Monetary Fund, there have been several international meetings concerned with international financial policies. The fourth session of the Council of Europe met in Stras bourg during the last part of September and was followed by a meeting of the Council of the Organization for Euro pean Economic Cooperation (O E E C ). A meeting of the Contracting Parties to the General Agreement on Tariffs and Trade ( G A T T ) started in Geneva early in October and is still in session at the time of writing. In all of these meetings major issues discussed at Mexico City have been re-echoed. Moreover, it is generally felt that rather significant changes in the monetary policies of the sterling area will result from the discussions at the meet ing of the Prime Ministers of the British Commonwealth scheduled to start late in November. It would appear, therefore, that after seven years of continuing balance of payments difficulties, a major reconsideration of the basic assumptions on which postwar international finan cial arrangements have been based is in the making. One feature common to all of these meetings has been the proposal to hold an international conference to consider the present monetary and financial dilemma of the world. It is proposed, in other words, to hold a new Bretton Woods Conference in which the experience of the post war period can be used for purposes of developing a more realistic approach to the world’s monetary and financial problems. In view of subsequent developments it would appear that the discussions at Mexico City were of greater sig nificance than was generally supposed at that time. For these reasons it is appropriate to take a closer look at some of the issues which were raised at these meetings. The Annual Meetings of the International Bank and Fund were held from September 3 to 12. In addition to the Boards of Governors of these two international or ganizations and the official delegations of the member governments, there were a large number of observers representing not only national and international govern ment agencies but also an encouragingly large number representing commercial banks and private business. The nature of the annual meetings Upon reviewing the results of these and previous an nual meetings of the Bank and Fund, it might at first appear that very little was accomplished. A more careful consideration of the nature and purposes of these meet ings indicates, however, that a great deal more is ac complished than is at first apparent. Possibly the most accurate way to describe these meetings is to say that they constitute a forum at which the member countries are given a chance to criticize the operations of these two institutions and the policies carried out by the Exec utive Directors. The members also have an opportunity to air their own particular problems in the international financial sphere and to outline policies for future consid eration by the Executive Directors of the two institu tions. Thus, these meetings are not primarily legislative sessions but are rather mainly consultative in nature. The starting point for the discussions at the annual meetings are the annual reports of the Bank and Fund. The reports are not merely housekeeping reports on the year's operations. They also contain a summary of inter national economic developments during the year, in which existing major problems are highlighted as well as recommendations for member governments in dealing with these problems. In effect, therefore, the annual re ports form an agenda for the discussions in the general meetings. In order to judge the degree of success of the meet ings, sufficient time must pass to enable the Bank and Fund either to put into effect or to disregard the rec ommended changes in policies which were aired during the meetings themselves. In the case of the most recent meetings the frequency with which the proposals first made there have been repeated at later dates indicates that some of these proposals may be of important future significance. 94 FEDERAL RESERVE B A N K OF SA N FRANCISCO The issues raised at Mexico City From the standpoint of those people with a general in terest in the solution of the problems arising from the continuing imbalance of international trade, the most in teresting aspects of the Mexico City meetings were the specific issues which were raised at the general meetings. In a sense, the statements made by the various govern ments are harbingers of things to come. They provide us with a valuable insight into the current thinking in other parts of the world, not only with respect to the future ac tivities of the Bank and Fund but also to the prospects for a reduction in restrictions on the flow of trade and thus a growth of multilateral trade and the re-establishment of convertibility of world currencies— the two cornerstones of the Bretton Woods Agreement. A few of the more im portant issues discussed at the meeting were: (1 ) pro posals for an International Finance Corporation and an International Commodity Corporation; (2 ) the reten tion system in exchange control; (3 ) a more active role for the International Monetary Fund; (4 ) a closer re lationship between the Fund and the European Payments Union ( E P U ) ; and (5 ) proposals to hold a new “ Bret ton W oods” conference to revise the articles of the Bank and Fund. The International Finance Corporation The annual report of the International Bank discussed the proposal to establish an “ International Finance Cor poration” which would be affiliated with the Bank. The purpose of this affiliate would be to make loans or equity investments in private enterprise. This proposal arises from the fact that the Articles of the Bank require that all loans to non-government borrowers must be guar anteed by the government or by the central bank of the country in which the project is to be located. It is thought that this restriction discourages private borrowers be cause they fear that a governmental guarantee might lead to governmental interference. Governments, on the other hand, have hesitated to make such guarantees for fear that they might be charged with favoritism to par ticular firms. The proposal also gives recognition to the inability of the Bank to engage in equity financing and the report points out that the Bank has had to abandon many promising projects because they required more equity capital than could be obtained. The Bank made no specific recommendation on the proposal in its report, stating that it was continuing its study of the subject in consultation with member governments and would make a report to the United Nations Economic and Social Council in 1953. At that time it will make recommenda tions as to what action might be taken on the proposal. The proposed International Finance Corporation was discussed at some length at Mexico City. The under developed countries, in particular, supported the pro posal but it apparently received no support from the United States delegation. October 1952 While action on the proposed International Finance Corporation was postponed at Mexico City, it has re mained a live issue at later international meetings. Dur ing the last part of September a limited version of the proposal was discussed at the meeting of the Consulta tive Assembly of the Council of Europe at Strasbourg. Adopted at this meeting was a resolution in favor of a plan which has been named the “ Strasbourg Plan.” This plan calls for the establishment of a new trading area composed of the British Commonwealth countries and the countries of Western Europe and their overseas ter ritories. It places particular emphasis on the pooling of the resources of Western Europe for the development of European overseas territories and dominions. An inte gral part of this program is the creation of a European bank to finance the development of overseas territories and to finance intra-European projects. The discussion of the creation of a European invest ment bank was continued in October at the meeting of the Council of the Organization for European Economic Cooperation. The United States representatives at this meeting favored the formation of such an organization, pointing out that it would be evidence that the countries of Western Europe were willing to do their part in finan cing the development of underdeveloped areas while at the same time making a contribution to the solution of the dollar problem. The International Commodity Corporation A second proposal made at Mexico City was to es tablish an International Commodity Corporation. It was proposed that this organization be affiliated with the International Monetary Fund and its function would be to stabilize raw materials prices through a stockpiling program whereby the corporation would buy during periods of weak prices and sell during periods of rising prices. Thus the raw materials countries would be as sured a relatively steady income. There were, however, many variations on this theme expressed at Mexico City. Some countries advocated a stabilization program by in dividual commodities as has been done in the case of wheat under the International Wheat Agreement. Others opposed piecemeal stabilization and advocated a stock pile which would consist of a composite of commodities. Still other countries felt that putting raw materials sales under long-term contracts would be sufficient since that would assure markets to the raw materials producing countries. The primary objective of these proposals is to avoid, if possible, the widely oscillating prices that have resulted from the present stockpiling programs of im porting countries, especially the United States. In addition, it was proposed that some type of a parity system be set up between the prices of raw materials and the prices of manufactured goods. Such a parity system would prevent a situation from arising as it did in 1951, in which raw materials prices are going down while October 1952 M O N T H L Y REVIEW prices of manufactured goods purchased by the raw ma terials producing countries are going up. As was true in the case of the International Finance Corporation, a limited version of these commodity pro posals was made a part of the “ Strasbourg Plan” of the Council of Europe. This plan, adopted shortly after the Mexico City meetings, recommends the use of long term international contracts on basic products to assure markets for the producing areas. The retention system in exchange control While many of the existing procedures of exchange control came in for discussion at the Mexico City meet ings, the one which brought forth the most heated debate was the retention system. In its typical form this system permits the exporters of a particular country to retain a certain percentage of their exchange earnings (especially earnings of dollars) for disposal at whatever price or for whatever purpose they desire. This privilege is some times limited to the export of commodities which the country particularly wishes to encourage, but sometimes it even applies to re-exports. This system actually con stitutes a subsidy paid to particular exporters or a hid den devaluation of the practicing country's currency. During the past year the use of this system has spread rapidly in Western Europe. At the Mexico City meetings this practice was condemned by such countries as the United States, Canada, Belgium, and the United King dom, and supported by practicing countries as a neces sary expedient. While no conclusions were reached at Mexico City, the International Monetary Fund was re quested to make a study of the retention system and to report at a later date. It was made clearly apparent, how ever, that the growth of this practice posed a serious threat to the future of the exchange system which has been set up during the postwar period. A revitalized International Monetary Fund? A t the most recent annual meeting, and also at earlier meetings, the International Monetary Fund came in for considerable criticism. In contrast, the International Bank was praised for the role that it has played during the postwar period, particularly in assisting the under developed countries in carrying forward programs of economic development. Although the Bank was criticised because of its conservative approach to further dollar loans, its explanation that it was seriously concerned over the ability of certain countries to service further dollar loans appeared to be generally accepted. As far as the Fund is concerned, this year at Mexico City marked a significant and very discouraging anni versary. At the time that the charter for the Fund was drawn up, it was realized that following the war a diffi cult period of adjustment would take place. It was pro vided, therefore, that for a period of five years following the date that the Fund came into operation member coun tries would be permitted to retain various exchange re 95 strictions which were deemed necessary to protect their balance of payments. Since the Fund started operation in 1947, this year marked the conclusion of this fiveyear transition period. Needless to say, with the contin uing imbalance of world trade, there is little immediate prospect for the wholesale abandonment of exchange re strictions. The International Monetary Fund was set up as a sort of world-wide stabilization fund. Its resources of over $8 billion in foreign exchange and gold were to be available to assist member countries in solving shortrun balance of payments problems. A country faced with a genuinely temporary balance of payments problem thus should be able to go to the Fund and obtain the necessary exchange instead of resorting to increased exchange con trols or devaluation. Yet in spite of its large resources the Fund up to April 30, 1952 had made only $850 mil lion available to members. This relative inactivity of the Fund is made particularly difficult for the member coun tries to understand when its financial statements show that its resources include over $1.5 billion in gold and a similar amount in United States and Canadian dollars. There was, therefore, as there had been at previous meet ings, an appeal by many members to the Fund to make its resources more readily available. The relationship between the Fund and the European Payments Union The relative ineffectiveness of the Fund has been at tributed to the fact that it is based on the assumption of a restoration of world-wide convertibility of currencies and of multilateral trade. The European Payments Union, on the other hand, has been praised as a realistic ap proach to postwar problems. The EPU has set as its ob jective the convertibility of currencies and the expansion of multilateral trade within a limited area— Western Eu rope. It has been quite successful in working toward this objective. At the same time; moreover, it has recognized that world-wide convertibility is not at present possible because of the magnitude of existing. balance-of-payments problems. In reality, the success of the EPU is largely due to the fact that, because of its very organiza tion, it practices discrimination against the dollar and other hard currency areas. Many of the speakers at Mexico City advocated a closer relationship between the Fund and the EPU and the support of the latter organization by the resources of the Fund. It was pointed out that the EPU provided an example of a successful approach to exchange problems while the Fund presented an unrealistic approach. The EPU has been supported by a grant from the United States. Members of the EPU would much rather have such support coming from an international organization such as the Fund. Officials of the Fund, however, have pointed out that it can provide exchange only to individ ual member governments and that there is no provision for its support to another international organization. Of 96 FEDERAL RESERVE B A N K OF SA N FRANCISCO ficials of the Fund did point out, however, that they had made available to Belgium a drawing up to the amount of $50 million in order to make it possible for Belgium to continue extending credits to the EPU. This indicates one way in which the Fund could support the EPU. A closely related development at the Mexico City meetings was the proposal that the area of the European Payments Union be extended to include the Latin Amer ican Republics. Such a proposal was supported on the grounds that, as an important supplier of raw materials for the European nations and as an important market for their output, the Latin American countries might be integrated into the existing organization, thus extending the area of convertibility and multilateral trade. Such proposals received a cool reception especially from the United States and Canada. Proposals to hold a new “Bretton W o o d s" conference One of the most important developments of the Mex ico City meetings was the proposal by Pakistan that a new “ Bretton W oods” conference be held to revise the charters of the Bank and Fund. While this proposal was directed at both the Bank and the Fund, it was primarily concerned with the Fund. This proposal by Pakistan is closely related to a pro posal by several of the sterling area countries that “ sur plus” countries (countries with an export balance of trade) be required to make a part of the adjustment which must inevitably be made if the world’s present imbalance of trade is to be corrected. At the time the Bretton W oods Agreement was signed it was realized that during the interwar period “ deficit” countries (countries with a persistent import balance of trade) had been required to make all of the adjustment with a resulting contraction of world trade. It was pro posed, therefore, that in the postwar period countries with an export balance of trade should be prevailed upon to make a part of the adjustment and in fact such a pro vision was included in the charter of the Fund. The rea soning behind this decision was very simple. If one coun try has an import balance of trade, some other country October 1952 must have an export balance. If the import balance country makes all of the adjustment, it can do so only by reducing imports or by expanding exports to the sur plus countries. If the export surplus countries refuse to accept increased imports, this leaves only one alternative for the deficit countries— a contraction of imports and a reduction in the total volume of world trade. On the other hand, if the surplus countries expand their im ports, the adjustment will be made upwards, their ex ports will be maintained, and the net effect will be an expansion of world trade. Acting on this reasoning the framers of the Fund Char ter included the “ scarce currency” provisions. They pro vide that, if the Fund finds that the demand for a par ticular currency is so large that its supplies of this cur rency are threatened (as would be true if a country had a persistent export balance of trade), it could call for a vote of its members and, if supported by a majority vote, could declare this currency to be a “ scarce currency.” If a particular currency were declared “ scarce,” all other countries would be free to discriminate against imports from this country until the imbalance was corrected. Thus, pressure would be placed directly against surplus countries to make at least a part of the adjustment. How ever, the clause cannot be applied to the United States dollar at present since the conservative policy of the Fund has prevented the Fund’s holdings of dollars from being in danger of running out. The proposal at Mexico City for a new world mone tary conference may prove to be the most significant. A similar proposal was also considered by the Council of Europe, which adopted a resolution favoring such a meet ing, and will perhaps be advanced at the coming London Conference of Ministers. If such a proposal should be adopted, some effort by the nations of the world to de vise a new approach to the solution of the continuing payments dilemma might be anticipated. Correction: In the charts on page 80 of the September 1952 Monthly Review each dot should represent 5,000 carloads. October 1952 fed er al reserve b a n k of s a n 96A f r a n c is c o BUSINESS INDEXES—TWELFTH DISTRICT1 (1947-49 average = 100) Ind ustrial producti on (ph ys cal volur r»e)2 Year and m o n th L um ber P e tro le u m 3 C rude R efin ed C e m e n t Lead3 C opper3 W heat flour3 T o ta l W atei rborne nonagri T o ta l C ar D ep’t for<sign m f’g cu ltu ra l loadings Retail store tratáe3*« sales E le c tric e m p lo y e m p lo y ( n u m food power ber)2 m ent m e n t4 (v a lu e)2 prices3» 8 E x p o rts I m p o rts 97 51 41 44 54 70 74 58 72 79 93 93 90 90 72 85 97 104 99 112 114 87 57 52 52 62 64 71 75 67 67 69 74 85 93 97 94 100 101 99 98 106 78 55 50 50 56 61 65 64 63 63 68 71 83 93 98 91 98 100 103 103 112 54 36 27 35 33 58 56 45 56 61 81 96 79 63 65 81 96 104 100 112 128 165 100 72 76 86 96 114 92 93 108 109 114 100 90 78 70 94 105 101 109 89 105 49 17 24 37 64 88 58 80 94 107 123 125 112 90 71 106 101 93 115 115 90 86 75 81 87 81 84 81 91 87 87 88 98 101 112 108 113 98 88 86 95 29 29 26 28 30 34 38 36 40 43 49 60 76 82 78 78 90 101 108 119 136 1951 August September October November December 114 105 118 109 99 107 107 107 107 106 115 116 114 116 109 138 129 130 124 119 67 74 80 85 88 98 108 116 114 118 90 96 96 99 101 1952 January February March April M ay June July August 93 107 108 110 94 117 108 106 106 106 106 107 108 107 107 107 111 113 115 114 114 116 116 122 94 112 113 120 129 126 125 131 88 104 96 95 89 87 68 81 109 109 115 117 116 112 106 104 112 105 90 88 87 84 90 103 1929 1931 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 30 25 18 21 24 28 30 28 31 33 40 49 59 65 72 91 99 104 98 105 108 64 50 42 45 48 48 50 48 47 47 52 63 69 68 70 80 96 103 100 100 113 190 138 110 132 135 131 170 164 163 132 124 80 72 78 109 116 119 87 95 101 ioo 101 96 95 99 102 99 103 110 “ 47 54 60 51 55 63 83 121 164 158 122 104 100 102 98 105 119 102 68 52 60 66 77 81 72 77 82 95 102 99 105 100 101 106 100 94 97 100 "¿ 9 129 86 85 91 186 “ ¿7 81 98 121 137 157 141 135 141 140 136 111 110 111 111 111 120 118 120 121 120 94 104 101 101 100 106 108 106 114 110 112 112 113 114 117 240 215 187 182 192 142 155 172 144 130 142 139 142 141 147 150 150 153 113 113 112 112 112 113 114 114 122 124 125 126 125 126 127 129 86 101 100 106 98 108 96 106 108 103 106 118 115 110 116 116 114 114 116 115 115 114 114 183 208 210 185 207 187 146 138 157 143 143 182 187 1 01 ... BANKING AND CREDIT STATISTICS—TWELFTH DISTRICT (amounts in millions of dollars) C o n d itio n ite m s o f all m e m b e r b a n k s 7 Year and m o n th 1929 1931 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 U.S. D em an d Loans deposits and G o v ’t d is c o u n t s s e c u r itie s ad ju s te d 8 T o ta l tim e deposits 2,239 1,898 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 7,105 7,907 495 547 720 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 6,392 6,533 1,234 984 951 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 9,244 9,940 1,790 1,727 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 6,256 6,720 1951 September October November December 7,704 7,791 7,885 7,907 5,998 6,204 6,356 6,533 9,235 9,485 9,584 9,940 6,576 6,642 6,625 6,720 1952 January February March April M ay June July August September 7,806 7,760 7,787 7,850 7,921 8,062 8,114 8,270 8,444 6,543 6,413 6,378 6,313 6,238 6,258 6,507 6,469 6,473 9,951 9,420 9,426 9,408 9,306 9,501 9,643 9,679 9,908 6,806 6,900 6,915 6,924 6,985 7,083 7,143 7,197 7,249 B ank rates on short-term busin ess lo a n s9 M e m b e r ban k reserves and related it e m s 10 Reserve bank cre d it11 — + — + + — + + + + + + + — 3.20 3.35 3.66 3.65 3.82 + + + + - 18 143 239 102 84 180 309 176 52 211 45 213 230 - 228 109 17 237 174 97 208 126 153 — + + 3.95 3.96 0 154 110 198 163 227 90 240 192 148 596 - 1 ,9 8 0 -3 ,7 5 1 - 3 ,5 3 4 -3 ,7 4 3 - 1 ,6 0 7 510 + 472 930 - 1 ,1 4 1 -1 ,5 8 2 — 43 — 121 + 236 — 276 + + 3.94 34 21 2 7 2 6 1 3 2 2 4 107 214 98 76 9 302 17 13 39 21 C oin and C o m m ercia l Treasu ry cu rrency in o p era tio n s12 o p e ra tio n s12 circ u la tio n 11 — + + b 23 - 154 - 150 - 257 - 219 - 454 - 157 - 276 - 245 - 420 -1,000 -2,826 -4,486 -4,483 -4,682 1-1,329 - 698 - 482 + 378 + 1 ,1 9 8 + 1 ,9 8 3 + + + + + b 42 b 283 b 118 b 279 + + + + + + + + 194 I ll 272 102 185 190 288 163 213 + + + + + + + Reserves B ank debits Index 31 citie s8* 18 ( 1 9 4 7 -4 9 = 100)2 6 48 18 4 14 38 3 20 31 96 227 643 708 789 545 326 206 209 65 14 189 175 147 185 242 287 479 549 565 584 754 930 1,232 1,462 1,706 2,033 2,094 2,202 2,420 1,924 2,026 2,269 42 28 18 21 25 30 32 29 30 32 39 48 61 69 76 87 95 103 102 115 132 32 17 18 14 2,293 2,291 2,392 2,269 129 134 137 141 86 20 7 13 49 29 7 49 4 2,416 2,365 2,313 2,341 2,347 2,209 2,333 2,535 2,363 134 138 139 135 128 144 134 134 144 1 Adjusted for seasonal variation, except where indicated. Except for department store statistics, 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; wheat flour, U.S. Bureau of the Census; electric power, Federal Power Commission; nonagricultural and manufacturing employment, U .S. Bureau of Labor Statistics and cooperating state agencies; retail food prices, U .S. Bureau of Labor Statistics; carloadings, various railroads and railroad associations; and foreign trade, U.S. Bureau of the Census. 2 Daily average. * N ot adjusted for seasonal variation. 4 Excludes fish, fruit, and vegetable canning. 6 Los Angeles, San Francisco, and Seattle indexes combined. 6 Commercial cargo only, in physical volume, for Los Angeles, San Francisco, San Diego, Oregon, and Washington customs districts; starting with July 1950, “ special category” exports are excluded because of security reasons. 7 Annual figures are as of end of year, monthly figures as of last Wednesday in month or, where applicable, as of call report date. 8 Demand deposits, excluding interbank and U.S. G ov’t deposits, less cash items in process of collection. Monthly data partly estimated. 9 Average rates on loans made in five major cities during the first 15 days of the month. 10 End of year and end of month figures. 11 Changes from end of previous month or year. 12 Minus 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. 18 Debits to total deposit accounts, excluding inter-bank deposits. r— revised.
@FedFRASER