FEDERAL ESERVE BULLETIN - St. Louis Fed · 2018. 11. 6. · FEDERAL RESERVE BULLETIN VOLUME 37...

F E D E R A L E S E R V E

BULLETIN1951

BOARD OF GOVERNORS

OF THE FEDERAL RESERVE SYSTEM

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

EDITORIAL COMMITTEEELLIOTT THURSTON WOODLIEF THOMAS WINFIELD W. RIEFLER RALPH A. YOUNG

SUSAN S. BURR

The Federal Reserve BULLETIN is issued monthly under the direction of the staff editorialcommittee. This committee is responsible for interpretations and opinions expressed, exceptin official statements and signed articles.

CONTENTSPAGE

Voluntary Action to Help Curb Inflation. 1347-1355

Postwar Construction Expenditures of State and Local Governments and their

Financing 1356-1360

Voluntary Credit Restraint Releases. 1361-1367

Statement on Gold Policy by the International Monetary Fund. 1368

Current Events and Announcements. 1368

Annual Report of the Commonwealth Bank of Australia, Fiscal Year 1951 1369-1373

Law Department 1374

National Survey of Business Conditions. 1375-1376

Financial, Industrial, Commercial Statistics, U. S. (See p. 1377 for list of tables) 1377-1427

International Financial Statistics (See p. 1429 for list of tables) . 1429-1447

Board of Governors and Staff; Open Market Committee and Staff; Federal

Advisory Council 1448

Senior Officers o£ Federal Reserve Banks; Managing Officers of Branches. 1449

Federal Reserve Publications. 1450-1451

Map of Federal Reserve Districts 1452

Subscription Price of Bulletin


FEDERAL RESERVE BULLETINVOLUME 37 November 1951 NUMBER 11

VOLUNTARY ACTION TO HELP CURB INFLATIONSince the start of the Korean war, several

new measures have been introduced andexisting measures used more intensively forthe purpose of curbing inflationary pressureswhich result in part from excessive credit ex-pansion. One of the new measures, the Vol-untary Credit Restraint Program, provideson a nationwide basis a means whereby allmajor groups of lending institutions can par-ticipate in an over-all effort to help check in-flation. The cooperative efforts of partici-pants in this Program to curtail the use ofcredit for speculative purposes and to divertfunds from nonessential to essential useshave been very helpful in limiting over-allcredit expansion while at the same time as-suring adequate funds for the defense effort.

The Voluntary Credit Restraint Programwas established as a supplement to, ratherthan as a substitute for, general credit re-straint measures. It is very difficult to ap-praise the over-all credit needs of the econ-omy or to say whether the granting of aparticular loan may have undesirable infla-tionary repercussions. By screening requestsfor short- and long-term financing on thebasis of broad criteria for essential and non-essential uses, however, lending institutionscan help to restrain over-all credit expansionand assure that available funds are employedfor essential purposes.

The effectiveness of any measure of pub-lic policy depends to a great extent on a fullunderstanding of its limitations as well as

its capabilities. To expect the VoluntaryCredit Restraint Program to do more thanit is capable of doing would be as damagingto its success as would its own failure to em-ploy fully the means at its disposal. Sincethe Program is dependent on the supportwhich it gets from lending officers, publicofficials, businessmen, and the general pub-lic, a brief statement of its objectives andmethods of operation may be useful.

NEED FOR CREDIT RESTRAINT

It became apparent soon after the out-break of war in Korea that comprehensivemeasures would have to be adopted for thepurpose of restraining inflation. Speculativeand scare buying by individuals and busi-nesses in anticipation of defense needs andpossible wartime shortages brought about arapid advance in prices during the summerof 1950. Much of this buying was financed,from either choice or necessity, with bor-rowed funds, and the resulting expansionof the money supply helped to sustain andmultiply inflationary pressures.

The Defense Production Act of 1950,which became effective September 8, au-thorized the establishment of selective regu-lations to restrain consumer instalment creditand some forms of real estate mortgagecredit. While consumer instalment creditregulation had an almost immediate effect inthat area, the impact of the real estate mort-gage credit regulation was considerably de-

NOVEMBER 1951 1347


VOLUNTARY ACTION TO HELP CURB INFLATION

layed, largely because of loan commitmentsmade prior to the effective date of regulation.

The Act did not, however, authorize, ex-cept on a voluntary basis, the regulation ofsuch other important credit areas as businessand State and local government borrowingor conventional mortgage lending on exist-ing properties. During the last half of 1950,credit in these areas continued to expand inresponse to demand. Business borrowingfrom commercial banks rose 5 billion dol-lars, as shown in the table, while both Stateand local government and corporate newlong-term financing remained at fairly highlevels.

INCREASES IN SELECTED TYPES OF CREDIT, 1950-51

[In billions of dollars]

Period

1950—1st Q.2nd Q.3rd Q.4th Q.

1951—1st Q.2nd Q.3rd Q.

Con-sumerloans

- 0 . 51.31.70.8

- 0 . 7- 0 . 1

0.1

Realestatemort-gageloans

1.82.93.03.1

2.52.92.3

Businessloans ofcommer-cial banks

0.0- 0 . 1

2.52.5

1.8- 0 . 1

1.0

Security issues

Corpo-rate newcapital

1.11.60.91.3

1.62.21.4

State andlocal gov-ernment

1.20.90.80.7

0.61.00.8

Source.—Federal Reserve Board, Home Loan Bank Board,Department of Commerce, Securities and Exchange Commission,and Bond Buyer.

NOTE.—Data on consumer and real estate mortgage credit andcommercial bank business loans represent net changes in outstand-ing amounts; those on corporate new capital and State and localgovernment security issues are gross amounts of new issues withno account taken of retirements or redemptions.

It was expected that materials allocationsand shortages, building restrictions, and se-lective restraint of real estate mortgagecredit would in time necessitate some over-all curtailment of investment expenditures,including business inventory accumulationand plant and equipment expenditures, Stateand local government capital expenditures,and residential construction. Nevertheless,the outlook for 1951 was for a substantialvolume of investment, some essential to thedefense effort but some nonessential and de-

ferrable. A total volume of investment aslarge as that anticipated for 1951 was boundto intensify inflationary pressures, especiallyif financed through borrowing which re-sulted in additions to the money supply, andeven to some extent if financed from past orcurrent savings. The problem, therefore,was one of diverting labor and materialsfrom nonessential uses to defense produc-tion and the expansion of basic industrialcapacity, employing whatever measures wereavailable and could be used effectively toaccomplish this diversion.

Since a substantial part of the investmentcontemplated by individuals, businesses, andState and local governments would be fi-nanced with funds obtained from banks,insurance companies, and other financinginstitutions, the restriction of such financ-ing could aid in the diversion of labor andmaterials to essential projects. The DefenseProduction Act of 1950, in Section 708, au-thorized financing institutions to enter intovoluntary agreements and programs to re-strain credit in such manner as would furtherthe objectives of the Act. Voluntary re-straint of this type would require the activecooperation of suppliers of short-term work-ing capital as well as long-term investmentfunds.

Institutional investors, including life andproperty insurance companies, commercialand mutual savings banks, and savings andloan associations, are at present the principalsources of long-term investment funds, whilecommercial banks have long been majorsources of short-term business credit. Dur-ing the postwar period 1946-50, additions tothe investment portfolios of these institu-tions accounted for 88 per cent of the in-crease in real estate mortgage debt, and for77 per cent of the increase in long-term cor-porate and State and local government debt.

1348 FEDERAL RESERVE BULLETIN



INSTITUTIONAL HOLDINGS OF DEBT, DECEMBER 1950

REAL ESTATEMORTGAGE

CORPORATELONG-TERM

STATE ANDLOCAL GOVERNMENT

FEDERALGOVERNMENT

50 200 250100 150Billions Of Dollars

NOTE.—Figures on total outstanding debt: Department ofCommerce estimates. Figures on institutional holdings: life in-surance companies—Institute of Life Insurance; property in-surance companies—The Spectator Insurance Year Book; mu-tual savings banks—National Association of Mutual SavingsBanks; commercial banks—Federal Reserve System; savingsand loan associations—Home Loan Bank Board.

Total long-term corporate debt, denned as debt having anoriginal maturity of one year or more from date of issue, ex-eludes intercorporate borrowing. Federal and State and localgovernment debt includes both short- and long-term but excludesportion held by agencies and trust and sinking funds.

At the end of 1950, as shown in the chart,they held three-fourths of all real estatemortgage debt, over half of all State andlocal and long-term corporate debt, and overtwo-fifths of Federal debt outstanding.

If the investment and lending activities ofthese financing organizations could be di-rected, through a program of voluntarycredit restraint, toward the restriction ofspeculative uses of credit and the diversion offunds from nonessential to essential pur-poses, there was a real possibility that suchaction would help to check inflationary pres-sures and facilitate the diversion of laborand materials to essential uses.

In accordance with the provisions of theDefense Production Act of 1950 and relatedexecutive order, and upon invitation of theBoard of Governors of the Federal ReserveSystem, representatives of commercial banks,life insurance companies, and investmentbankers undertook to set up such a program.Following a series of conferences that beganin the fall of 1950 there emerged, on March 9,1951, a program of voluntary credit restraint.

NOVEMBER 1951

With the approval of the Attorney General,a letter was sent by the Board to all privatefinancing institutions in the United States,requesting their cooperation in accomplish-ing the objectives of the Program.

Adequate safeguards were established bythe Defense Production Act to assure thatthere would be no infringement of anti-trust statutes. A representative of the Fed-eral Reserve System is present to representthe public interest in practically all regionalor national meetings of those taking part inthe Voluntary Credit Restraint Program.Moreover, the Program by its very natureexcludes one of the primary incentives tocollusive action by calling for the limitationof lending activity and hence of lenders'profits.

In contrast to general measures which in-fluence the over-all supply of credit, and se-lective restraints which influence the demandfor specific types of credit through regula-tion of loan terms and conditions, the Vol-untary Credit Restraint Program seeks todirect the flow of credit away from non-essential and speculative uses by the volun-tary action of lenders in approving or dis-approving applications for funds. T o dothis it has been necessary to have certaincriteria that would be of aid in assessingobjectively the merits of individual loanapplications and proposed bond and stockofferings in relation to over-all economicconditions and requirements.

Responsibility for formulating and apply-ing such lending criteria rests with the in-stitutions participating in the Program. Fortheir guidance the Board of Governors hasdrawn leaders from the private lending fieldtogether in a National Voluntary Credit Re-straint Committee. The functions of theNational Committee include the formula-tion of appropriate general lending stand-

1349



ards that may be applied throughout thecountry and the coordination of the workof numerous regional committees. The re-gional committees, whose members are ap-pointed by the National Committee, assistthe thousands of participating financing in-stitutions in applying these standards. Whileneither the National Committee nor theregional committees have any authority todirect the policies of the cooperating financ-ing institutions, they can and do exert con-siderable influence on the thinking and de-cisions of lending officers and upon prospec-tive borrowers who know of the Programand are in sympathy with its principles andobjectives.

The original conference group, in prepar-ing the Statement of Principles, and the Na-tional Committee, in drafting the Bulletinswhich explain the application of these princi-ples to specific credit areas, were fully awareof the difficulties that would be involved informulating and applying comprehensiveand precise rules and regulations to accom-plish the purposes of the Program. Moreover,it was felt that detailed rules and regulationswould not be compatible with the voluntarycharacter of the Program, and might welldiscourage many institutions from even at-tempting to participate.

It was deemed better to phrase the stand-ards in fairly broad terms, to try to ex-press a point of view rather than a host ofdetailed and specific criteria for lendingpractices, and to rely upon the willingness oflending institutions to conform to the spiritof the Program. Hence, lending standardsset forth initially in the Program's Statementof Principles were very general in character,attempting primarily to distinguish betweenfinancing which contributed to the produc-tion and distribution of essential goods andservices and financing which served merely

to effect a transfer of ownership of existingsecurities or physical assets or to permitspeculative purchases of securities and com-modities.

AREAS OF RESTRAINT

As the Program developed, more specificlending standards were formulated to guiderestraint in particular credit areas. In gen-eral, the areas selected by the Committeehave been those in which actual or antici-pated expansion of credit was substantial,statutory selective credit restraints were notapplicable, and for which the financial insti-tutions participating in the Program were amajor source of credit. Between March andSeptember 1951, the National Committeeissued six Bulletins, setting forth generalprinciples to guide participants in meetingdemands for inventory loans, business capi-tal expenditure financing, State and localgovernment borrowing, certain types of realestate credit, borrowing by foreigners, andborrowing on unlisted securities. Of these,the first four are of most widespread interest,and are discussed in some detail in the fol-lowing sections.

INVENTORY LOANS

In the months following the outbreak ofwar in Korea, business inventories expandedsharply. Between June and December 1950,total book value of manufacturing and tradeinventories rose nearly 8 billion dollars.Much of the increase was in raw materials,and a good part of it was financed with bankcredit. For example, purchased materials inthe hands of manufacturers increased nearly3.5 billion dollars, or 30 per cent, in the lastsix months of 1950, and manufacturers'inventories of goods in process and whole-salers' inventories each rose about 18 percent.

During this same period, as shown in the




chart, business loans of commercial banksincreased about 5 billion dollars. A majorpart of this increase appears to have repre-sented loans for purchasing or carrying in-ventories. A special survey of business loansmade by the larger weekly reporting mem-ber banks between June 28 and November 1revealed that 60 per cent of the net fundsadvanced was estimated to be inventoryloans, of which more than 80 per cent wasadvanced to dealers and processors of agri-cultural commodities.

COMMODITY PRICES,BUSINESS INVENTORIES, AND BANK LOANS

thly, December 1949-100 Cen»160

June1950

June1951

Dec.

1951

NOTE.—Prices, Bureau of Labor Statistics index for 28 basiccommodities, last week in month. Business loans include com-mercial and industrial loans of all insured commercial banks atend of month; June and December figures from call reportsof Federal Deposit Insurance Corporation, other months esti-mated by Federal Reserve from weekly reporting member bankdata. Inventories, U. S. Department of Commerce data ontotal manufacturing and trade inventories at end of month;book value, unadjusted for seasonal variation.

While these groups customarily borrowrather heavily from banks in the last halfof the year, such borrowing and the inven-tory accumulation that it permitted were sub-stantially larger in 1950 than was requiredfor the orderly movement of agriculturalcrops. That speculation was an importantelement in this period is indicated by thesharp price increases which occurred. The

average of 28 basic commodity prices ad-vanced 50 per cent between end-of-June 1950and mid-January 1951. Inventories continuedto rise sharply through the early months of1951 and were at extraordinarily high levelsin mid-March when the National Commit-tee held its initial meeting and selected thisarea as the subject of its first Bulletin.

The Committee pointed out that excessiveinventory accumulation had contributed di-rectly to a rise in wholesale and retail pricesto levels beyond those justified by the supplysituation and that an important part of theabnormal inventory increase was being fi-nanced with borrowed money. The Com-mittee expressed the hope that all participat-ing financing institutions would refrain fromfinancing inventory increases above normallevels relative to sales, or reasonable require-ments as determined by other available yard-sticks, and also that all participants wouldencourage borrowers who already had excessinventories to bring them in line as promptlyas possible in order to reduce the amount ofcredit outstanding.

PLANT AND EQUIPMENT FINANCING

Prospects of good business for some timeto come and of materials and equipmentshortages that would result from increaseddefense production, as well as the necessityof expanding productive capacity for suchvital materials as steel, aluminum, and pe-troleum, encouraged businessmen to revisetheir capital expenditure plans sharply up-ward in the months following the outbreakof war in Korea.

Early in 1951, according to surveys madeby the Department of Commerce and Secu-rities and Exchange Commission, businessesas a group were planning to spend nearly 24billion dollars during the current year forthe enlargement and modernization of theirfacilities. These earlier expectations, which

NOVEMBER 1951 1351



now appear to have understated the actual1951 volume of plant and equipment out-lays, called for a total expenditure one-fourthlarger than the previous peak expenditure of19.2 billion in 1948. Such major defense ordefense-supporting industries as steel, alumi-num, petroleum, electric power, and rail-roads accounted for roughly half of theanticipated capital expenditures. Of the re-maining half, an important part representedexpansion that appeared to be postponablewithout detriment to the defense effort.

Though many of these business expansionprograms would be financed, as in previouspostwar years, out of retained earnings, anumber would necessitate external financ-ing through bank or insurance companyloans or the sale of securities. In 1948, forexample, with business expenditures on newplant and equipment totaling 19.2 billiondollars, corporate new capital issues to fi-nance plant and equipment amounted to4.2 billion; similarly, in 1950, with expendi-tures of 18.6 billion, new capital issues forthis purpose totaled 3.0 billion. While notmuch more than one-fourth of capital ex-penditures might be financed in this man-ner, a projected increase in capital expendi-tures of 25 per cent for 1951 could be ex-pected to result in a substantial increase inthe volume of security issues. Though manyof these expenditures were in defense or de-fense-connected industries, it was recognizedthat this was an area in which voluntary ac-tion could prove useful in obtaining thepostponement of nonessential projects andthe diversion of the credit they would haverequired to more essential purposes.

While the Committee feels that capitalexpenditure programs should be held to aminimum during the present emergency, inthe interest of reducing inflationary pres-sures and facilitating the use of labor and

materials where most essential to the defenseeffort, its recommendations in this area haveof necessity been somewhat circumscribed.For one thing, the Statement of Principlesexcluded from review loans guaranteed orinsured, or authorized as to purpose by aGovernment agency. For another, the Com-mittee has not been in a position to dis-courage directly outlays to be financed outof accumulated business savings or throughpreviously arranged commitments. Thus, itsrecommendations have related to new financ-ing for clearly nonessential investment pur-poses.

To the extent that nonessential capital ex-penditure programs were to be financed withthe proceeds of security flotations, the par-ticipating institutions were in a strategic po-sition to exert a restraining influence. In re-cent years, more than half of the dollaramount of new capital issues has been placeddirectly with financial institutions, especiallylife insurance companies, and most publiclyoffered securities are sold through investmentbankers.

On April 20, the Committee issued Bulle-tin No. 2 citing long-term financing whichmight be postponed to a more propitioustime. This included loans and security is-sues for such purposes as: (1) constructionof facilities to improve the competitive posi-tion of an individual producer of nonessen-tial goods; (2) expansion and modernizationexpenditures of concerns in distribution orservice lines where the distribution or serv-ice is not defense supporting; and (3) ex-pansion and modernization programs forthe manufacture of consumer goods not re-lated to the defense effort.

STATE AND LOCAL GOVERNMENT FINANCING

Credit expansion by State and local gov-ernments has been substantial during the




postwar period. As discussed on pages 1356-60 of this BULLETIN, relatively large amountsof long-term credit have been obtained byStates and localities to finance their postwarconstruction programs. Many of these pro-grams are still far from completion. More-over, the tax-exempt status of State and localgovernment securities, which makes themvery attractive to certain investors in a pe-riod of high progressive income taxes, fa-cilitates the financing of continued large ex-penditures. In order to curb the potentialinflationary pressures inherent in a situationof this type, the National Committee hasrecommended the deferment of public worksnot urgently needed for preservation of pub-lic health and safety or for purposes directlyrelated to defense.

On May 3, 1951, in Bulletin No. 3, theCommittee recommended postponement ofsuch capital outlays as those for recreationalfacilities, war memorials, and the acquisi-tion of privately owned utilities and of sitesand rights-of-way not immediately needed.The Committee also expressed the view thatsoldiers' bonus issues were inflationary underthe conditions then prevailing and shouldbe postponed until such time as immediatepurchasing power might be needed to coun-teract unemployment and when it might bemore beneficial to the veteran. In addition,institutional lenders were urged to encouragelocal governments to balance their operatingbudgets and to hold to a minimum short-term borrowing in anticipation of revenues.

REAL ESTATE MORTGAGE CREDIT

The role of voluntary action in supple-menting and reinforcing selective credit re-straint measures is particularly well illus-trated by developments in the real estatemortgage credit area. In an effort to curbthe rapid expansion of real estate mortgage

credit, the Board of Governors of the Fed-eral Reserve System, exercising the authoritygranted it by the Defense Production Act of1950 and related executive order, issued withthe concurrence of the Administrator of theHousing and Home Finance Agency itsRegulation X, effective October 12, 1950.Simultaneously the Federal Housing Ad-ministration and Veterans Administrationadapted their regulations to the new stand-ards developed by the Board.

The establishment of these regulations,which applied to Government-guaranteedmortgages on new and existing houses, tonon-Government-guaranteed, or convention-al, mortgage loans on newly constructedhouses, and to loans on certain classes ofcommercial property, brought about a sharpdecline in the number of new houses startedin 1951. On the other hand, failure to in-clude credit extended on conventional termsfor the purchase of existing houses enhancedthe competitive advantage of such propertiesin the real estate market, and in many casestheir transfers were accompanied by an ex-pansion of real estate mortgage debt whichadded to inflationary pressures.

The National Voluntary Credit RestraintCommittee, in Bulletin No. 4, issued on June6 and revised in some respects on Septem-ber 5, recommended that new conventionalmortgage loans on existing one- to four-family residential units, together with otherindebtedness outstanding on the property,should not exceed the limit which Regula-tion X imposes on new construction or alimit of two-thirds of the fair value of theproperty, whichever is greater. The Com-mittee also recommended that loans onlarger residential properties and on commer-cial, agricultural, and industrial propertyshould in most cases not exceed two-thirdsof the fair value and should be made only if

NOVEMBER 1951 1353



careful screening as to purpose indicates thatthey are in harmony with the VoluntaryCredit Restraint Program.

EVALUATION OF THE PROGRAM

The Voluntary Credit Restraint Programhas been one of the factors contributing tothe abatement of inflationary pressures dur-ing the late spring and summer of 1951.Its contribution, however, must be evaluatedin the light of other factors.

For one thing, inflationary pressures havebeen lessened and credit demands have beenreduced by a decline in demand for certaintypes of consumer durable goods, liquidationof some types of inventories, and a markedincrease in individuals' current saving. Foranother, the Program is only one of a numberof measures for curtailing the use of creditfor speculative purposes and for divertingavailable funds from nonessential to essen-tial uses.

Since the primary function of the Volun-tary Credit Restraint Program is one of di-recting the flow of available credit ratherthan of regulating the over-all volume ofcredit expansion, its effectiveness as an anti-inflationary measure was greatly enhancedby the Treasury-Federal Reserve accordreached in March 1951. Following the ac-cord, the Federal Reserve System abandonedits policy of purchasing United States Gov-ernment securities at largely predeterminedand inflexible prices—a policy that had en-abled holders to dispose of Governmentsecurities at will, generally without incurringlosses, whenever more attractive loan or in-vestment opportunities presented themselves.This policy had resulted in substantial addi-tions to bank reserves.

The existence of a freer and more flexiblemarket for Government securities has causedmany financing institutions to restrict their

lending activities and forward financingcommitments and this has helped to checkover-all credit expansion. Thus, with the

CHANGES IN COMMERCIAL, INDUSTRIAL, AND AGRICULTURAL

LOANS, BY INDUSTRY, MIDYEAR THROUGH OCTOBER

{In millions of dollars]

Business of borrower

Manufacturing and mining:Food, liquor, and tobaccoTextiles, apparel, and leatherMetals and metal productsPetroleum, coal, chemicals, and rubber. .Other manufacturing and mining

Trade—wholesale and retailCommodity dealersSales finance companiesPublic utilities and transportationConstructionAll other types of business

Loans classified as to businessLoans not so classified

Total +1,351 +2,874

1951

+521-217+537+68+75+40

+394-104+318

-61- 6

+1,565-214

1950

+413+130

-17+19+17

+272+690+324

+50+55

+113

+2,065+809

NOTE.—Data for 1951 were collected at the request of theNational Voluntary Credit Restraint Committee from about 220weekly reporting member banks. Data for 1950 are from a specialsurvey of selected member banks in leading cities. Although thecoverage is less complete for 1950 than for 1951, all of the largebanks that cooperated in the 1950 survey are included in the 1951data.

Federal Reserve System acting to restrict thegrowth of total credit, it has been possiblefor the Voluntary Credit Restraint Programto function with greater effectiveness.

That the Voluntary Credit Restraint Pro-gram, together with other selective and gen-eral credit restraint measures, has achievedconsiderable success in diverting credit fromspeculative and nonessential activities to es-sential uses is suggested by the postponementof a number of proposed security offeringsand by the shift in lending at member banksfrom nondefense to defense and defense-supporting industries. As shown in thetable, the amount of new loans granted tomanufacturers of metals and metal productsand to public utility and transportation con-cerns was substantially greater from midyearthrough October 1951 than in the corre-sponding period of 1950. On the other hand,the amounts granted to wholesale and retailtrade concerns, commodity dealers, and salesfinance companies were substantially less this




year than last, as was the total of all commer-cial, industrial and agricultural loans.

No over-all figures on the number of loanapplications denied or postponed by financ-ing institutions in accordance with the prin-ciples of the Program are available. While,as noted in the statement on pages 1362-65of this BULLETIN, a substantial number ofcases have been referred to one or anotherof the regional committees for recommenda-tions, financing institutions have themselvesin the majority of cases taken the initiativein approving or denying financing requestson the basis of recommendations containedin the national Bulletins. In cases whereproposed security offerings or loan applica-tions have been referred to regional commit-tees, and where such regional committeeshave recommended against the proposedsecurity issue or loan, the financing insti-tutions involved have almost without ex-ception strongly supported committee recom-mendations.

One of the initial deterrents to the Pro-gram's success, the existence of legally bind-ing commitments to provide funds thathad been made before the Program came intoexistence, has in recent months become lessimportant. Data collected in connectionwith the Program show, for example, that45 life insurance companies, whose com-bined assets represent 85 per cent of all lifeinsurance company assets, had 4.5 billion dol-lars of commitments outstanding at the endof April 1951. Of this amount roughly 1.7billion represented proposed financing of de-fense and defense-supporting activities andthe remainder nondefense business activitiesand mortgage financing of home purchases.By the end of August, however, the totalof such commitments had been reduced to3.7 billion dollars, as shown by the chart. Asother commitments are worked off, more

LIFE INSURANCE COMPANY COMMITMENTS

Billions of Dollars Billions o\ Doilc

APR. 30, 1951 AUG 31,1951NOTE.—Outstanding commitments to acquire domestic loans

and investments. Data compiled by Life Insurance Associationof America from reports submitted by 45 life insurance com-panies whose combined assets represent 85 per cent of all lifeinsurance company assets.

and more current financing will come un-der the Program.

In encouraging lending officers of financ-ing institutions and businessmen in generalto consider the role of credit in an inflation-ary situation and in providing them withstandards by which to judge the relativeessentiality of proposed uses of credit, theProgram has perhaps achieved its greatestsuccess.

CONCLUSION

Voluntary credit restraint is an extremelyuseful adjunct to general credit restraintmeasures and should be further developedfor use whenever inflationary pressuresthreaten depreciation of the dollar. If theinternational situation does not worsen, theremay be a tendency for the sense of urgencyand the spirit of cooperation developed inthis period of national emergency to becomesubmerged in competitive self-interest as de-fense production goals are approached. Withemployment, personal income, and businessexpenditures on plant and equipment atrecord levels and defense expenditures in-creasing rapidly, further test of all credit re-straint measures may lie ahead.

NOVEMBER 1951 1355


POSTWAR CONSTRUCTION EXPENDITURES OF STATE ANDLOCAL GOVERNMENTS AND THEIR FINANCING1

During the postwar period State and local gov-ernments have undertaken large-scale constructionprograms to meet community needs which hadbeen cumulating throughout the depression andwar years. Expenditures for highways, schools,and other State and local facilities totaled 18.2billion dollars in the years 1946 through 1950;an additional 6 billion may be spent by the endof 1951.

At the time of the Korean crisis in mid-1950,when it became necessary for the United States toshift to a defense economy, there were many indi-cations that State and local government constructionmight continue to increase for some years to come.Deferred needs had not been fully met, the over-allfinancial position of State and local governmentswas good, and the market was favorable for tax-exempt securities.

This situation presented a problem from thestandpoint of the national defense program. Inorder to assure adequate labor, materials, and creditfor defense and defense-supporting activities andto curb inflationary pressures, it was necessary thatmeasures be taken to discourage less essential capi-tal expenditures in all areas. Building restrictionsand materials allocation were invoked, and creditrestraint measures, including the Voluntary CreditRestrain Program described on pages 1347-55 of thisBULLETIN, were adopted. In the State and localgovernment area the objective of the VoluntaryCredit Restraint Program has been to restrict bor-rowing for less essential construction and otherpostponable purposes.

CONSTRUCTION EXPENDITURES

A tremendous backlog of requirements forState and local construction of all types existedat the end of World War II. Part of it had beencarried over from the depressed thirties, whenconstruction work had fallen far short of meetingcurrent requirements, and part of it was the resultof wartime shortages and restrictions. Widespread

1This article was prepared by Elinor Harris under thesupervision of Charles H. Schmidt, Chief of the BusinessFinance and Capital Markets Section of the Board's Divisionof Research and Statistics.

population movements and a substantial rise inthe birth rate during the war years had also ac-centuated the need for additional public facilities.

The period 1946-50. As soon as manpower andmaterials became available after the war, Stateand local governments began to bring public fa-cilities in line with current needs. Their annualconstruction expenditures increased rapidly butfairly evenly, as shown in the table, rising from1.5 billion dollars in 1946 to 3.7 billion in 1948and to a new peak of 5.5 billion in 1950.

In the 1946-50 period as a whole, States, cities,counties, special authorities, and other non-Federalpolitical units invested a total of 18.2 billion dollarsin new construction projects and major improve-ments and alterations of existing facilities. Morethan 46 per cent of this amount was spent on high-ways, 18 per cent for sewerage and water systemsand other community facilities, 17 per cent forschools, and 6 per cent for public housing. Allother types of construction, including hospitals andother institutions, public administration buildings,and social and recreational centers accounted forthe remaining 13 per cent.

While each of the major types of constructionexpenditures increased sharply between 1946 and1950, significant changes in their relative impor-tance took place. Highway construction, thoughit consistently represented by far the largest singleexpenditure, declined in relative importance in eachof the postwar years, from 58 per cent of totalexpenditures in 1946 to 42 per cent in 1950. Out-lays for local public facilities such as sewerage andwater systems also declined somewhat relative tothe total. Expenditures for schools, on the otherhand, increased proportionately each year, risingfrom 7 per cent of the total in 1946 to 21 per centin 1950. To some extent these shifts in impor-tance are a measure of the end-of-war deficienciesin different areas, the length of time required to fillthem, and increasing selectivity on the basis of need.To some extent they may also reflect differences infinancing practices. For example, constructionprograms to be financed largely from tax receipts—such as some highway programs—could bestarted almost as soon as wartime restrictions were



POSTWAR CONSTRUCTION EXPENDITURES OF STATE AND LOCAL GOVERNMENTS

CONSTRUCTION EXPENDITURES BY STATE AND LOCAL GOVERNMENTS 1946-51

[In millions of dollars]

Type of construction

Total

HighwayLocal public facilities:

Sewer and waterOther

ResidentialEducationalHospital and institutionalPublic administration, social and recreational, and penal

and correctiveAll other . . . . .

Calendar years

Total1946-50

18,245

8.511

2,368837

1.0963,040

I 2.062

331

1946

1,492

869

19299

12699

99

8

1947

2,650

1,474

351164191229

1 55( 124

62

1948

3,731

1,818

535185123615125

24882

1949

4,913

2,070

619203326934308

36390

1950

5,459

2,280

671186330

1,163330

41089

First 10 months

1949

4,131

1,776

519174260772249

30774

1950

4,583

1,967

555154272941273

34576

1951*

5,188

1,900

618172485

1,256354

34261

^Preliminary.1 Construction is defined as new construction plus major additions to and major alterations of existing structures; expenditures for

equipment are excluded. Federal grants-in-aid are included in construction expenditures.Source.—Departments of Labor and Commerce.

lifted, while programs to be financed by borrowing—such as school construction—had to wait forapproval from the voting public and from legis-lative and executive groups.

The year 1951. State and local government con-struction expenditures in 1951 are likely to exceedthe previous year's total. Such expenditures areestimated to have totaled 5.2 billion dollars duringthe first 10 months of this year, as compared with4.6 billion for the corresponding period of 1950.To a large extent, this continued increase reflects•expenditures on projects initiated prior to theadoption of building restrictions, materials allo-cation, and credit restraints.

There has been evidence during 1951, however,of greater selectivity among different types of Stateand local government programs. Expenditures forschools and public housing have been substantiallylarger, and those for hospitals and other institu-tions moderately greater, in 1951 than in 1950.On the other hand, expenditures for public admin-istrative and recreational projects and highway con-struction are estimated to have been somewhatsmaller. A number of factors help to explain thisselectivity. One of the most important has beenthe rapid rise in construction costs, which hasled to the deferment of all but the most urgentlyneeded construction outlays. Since interest pay-ments are also an important cost factor, less favor-able borrowing terms in the spring and early sum-mer of 1951 resulted in the "shelving" of numer-ous prospective bond issues. In addition, the vot-ing public gave preference in both the 1950 and1951 elections to such proposed bond issues as

those for schools, and generally refused to approveissues for such purposes as administrative andrecreational facilities.

Other factors operating to postpone some publicconstruction projects have been labor and materialshortages and the recommendations of participantsin the Voluntary Credit Restraint Program. Asdefense requirements have increased, allocationsof steel and certain other construction materialsfor civilian use have been reduced, and Stateand local construction projects have been screenedmore carefully both with respect to materials re-quirements and immediate essentiality. Moreover,as discussed on pages 1352-53, the Voluntary CreditRestraint Program has recommended the postpone-ment of less essential public construction projectsin the interest of curbing inflationary pressures,and participating financing institutions have dis-suaded a number of States and localities from offer-ing bonds to finance certain types of projects.

In the light of these various factors, and de-spite a large backlog of unsatisfied requirements,it seems likely that State and local capital ex-penditures will decline as projects currently underway are brought to completion. Greatest declinesmay be expected in those types of public buildingwhich are neither essential to the national defenseeffort nor required immediately for the commu-nity welfare, such as municipal office buildings andjails, city halls and county courthouses, and swim-ming pools and gymnasiums.

On the other hand, construction of schools,hospitals, public housing in defense areas, andhighways connecting strategic military or industrial

ISFOVEMBER 1951 1357



areas should continue at a fairly high level. Suchbuilding is being accorded preferential treatmentwherever possible both in allotment of scarce mate-rials by the Defense Production Administrationand in the granting of credit by financing institu-tions participating in the Voluntary Credit Re-straint Program.

BORROWING TO FINANCE CONSTRUCTION

Much of the building of new schools, publichousing, water and sewerage systems, toll bridgesand super-highways, and other types of costly,long-lived State or municipally owned facilitiesis financed through long-term borrowing. Dur-ing the period 1946-50, when total constructionexpenditures of the State and local governmentsamounted to 18.2 billion dollars, the long-termsecurity issues of these governments amounted to10.5 billion exclusive of refunding and bonus issues.Other sources of construction financing duringthis period included Federal grants-in-aid, reservefunds accumulated during the war years, andfunds available from current tax receipts.

It is impossible, on the basis of aggregate data,to identify long-term borrowing in any singleyear with the construction expenditures it is in-tended to finance. Such borrowing is customarilydone in advance of actual construction and oftencovers the entire cost of the proposed project, whilethe expenditure of the proceeds may be spreadover some period of time. Nevertheless, the an-nual totals of long-term borrowing and construc-tion expenditures of State and local governmentsdo move together and, as shown in the chart, bothincreased substantially throughout the postwaryears 1946-50. From a total of 1.0 billion dollarsin 1946, State and local government security offer-ings, exclusive of refunding and bonus issues, in-creased to 3.0 billion in 1950.

Several factors, in addition to the growth inconstruction projects of the type customarily fi-nanced through bond issues, help to explain thispostwar increase in long-term borrowing by Stateand local governments. For one thing, neitherthe reserve funds accumulated during the waryears, the excess of current tax revenues over cur-rent operating expenses, nor Federal grants-in-aidhave been adequate or so distributed among indi-vidual States and localities as to cover the sharppostwar increase in construction expenditures. Foranother, the general financial position of State and

local governments has been improved by debt reduc-tion during the war years and the opening up ofnew sources of revenue during the postwar period.This facilitated further State and local governmentborrowing by improving the market's appraisalof such issues. Also, the general demand for tax-exempt securities has been basically strong through-out the period, because of the continued highrates of Federal income taxes since the war.

STATE AND LOCAL GOVERNMENTBORROWING TO FINANCE CONSTRUCTION

/

TOT U CONSTRLEXPENDITUR

/

/

CTION ^SES f^

LONG-1 ERM BORRO*

WING

* Defined as total long-term State and local government offer-ings less refunding issues and bonus issues.

Sources.—Total construction, Department of Labor; long-term borrowing, The Bond Buyer. Data for 1951 are estimated.

An additional factor in the postwar increase ofborrowing by State and local governments hasbeen the growth since prewar years of the prac-tice of issuing "revenue bonds" to finance income-producing projects such as toll roads and bridges.From the point of view of the State or localgovernment concerned, these issues have several im-portant advantages. Only the income from theself-liquidating project itself need be committedto current debt servicing and repayment of princi-pal, and this money is obtained from users of thefacility rather than from taxpayers in general. Inmany cases revenue bond issues need not be sub-mitted to the voters for approval and thus maybe issued more promptly than general obligations.In addition, the government unit may not be re-quired to include revenue bonds as part of out-standing debt for purposes of complying with




statutory debt limitations. Revenue bonds carrythe tax-exemption privilege common to all Stateand local securities but, in recognition of greaterrisk, usually bear a higher interest rate.

After increasing in each of the years 1946through 1950, long-term borrowing by State andlocal governments for construction purposes willprobably show no further increase in 1951. Totalnew long-term borrowing, in fact, declined from3.6 billion dollars in 1950 to an estimated 3.0billion in 1951, but practically all of this declineresulted from a sharp drop in bonus issues.

Since borrowing customarily precedes actual con-struction, the leveling of! in State and local gov-ernment security issues for construction purposesprobably foreshadows a decline in total construc-tion expenditures as projects currently under wayare brought to completion. At the same time, dataon new long-term borrowing by purpose, shownin the table, suggest a continuation of the recentemphasis on more essential projects. Schools, waterand sewerage systems, and public housing ac-counted for nearly two-thirds of all new issuesidentifiable as to purpose, totaling 2.1 billion dollars,during the first 10 months of 1951.

STATE AND LOCAL GOVERNMENT BOND ISSUES

BY PURPOSE

[In millions of dollars]

Purpose

SchoolsHousingSewerage and water systemsHighwaysMiscellaneous public servicesHospitals and other institutionsBridges and tunnelsImprovementsPorts and airportsRecreational facilitiesBonusOthers

Total—1951Corresponding total—1950

—1949

1951

1stQ

10129

102225754

15424

211

5561,179

574

2ndQ

25016

1071676198271972

252

1,006901873

3rd

1271211

1304132205126

81

123

820796

First10

mos.,1951P

5152 41438227418313482671974

622

2,7033,1282,474

P Preliminary.1 Includes a 25 million dollar State of California issue for vet-

erans' farm and home purchase loans and 171 million dollars ofissues under the Housing Act of 1949.

2 Includes for October 1951 an additional 157 million dollars ofissues under the Housing Act of 1949.

3 Includes issues under $500,000, refunding issues, and issuesfor which purpose is not given.

Source.—The Bond Buyer.

T H E MARKET FOR STATE AND LOCAL GOVERNMENT

SECURITIES

The tax-exempt feature of State and local govern-ment issues gives them a special place in the national

securities market. Their interest yield is exemptfrom Federal income tax and in some instancesfrom State income taxes within the State of issue.Thus prevailing tax rates, together with potentialchanges in rates, exert a strong influence on themarket for these securities.

Commercial banks and individuals are the prin-cipal investors in State and local government se-curities, as shown by the chart. Life insurance

OWNERSHIP OF STATE AND LOCAL GOVERNMENT SECURITIES

1941 1942 1943 1944 1945 1946 1947 1948 1949 1950

* Includes insurance companies, corporations, U. S. Govern-ment investment accounts, mutual savings banks, and miscel-laneous investors.

Source.—U. S. Treasury.

companies, mutual savings banks, and individualsof moderate income, to whom the tax-exemptionfeature has thus far had little significance, havetypically shown little interest in these securities.The recent enactment of legislation subjecting theincome of mutual savings institutions to the Fed-eral income tax is likely to bring mutual savingsbanks into the market for these securities.

Tax exemption has two facets. By attracting in-vestors who are willing to accept a relatively lowbefore-tax yield in order to obtain tax exemption,it enables State and local governments to obtainfunds at lower interest rates than would otherwisebe possible. On the other hand, the lower rate ofreturn tends to narrow the market by limiting itfor the most part to buyers who will benefit fromthe tax-exemption privilege. The market is there-fore very specialized and particularly sensitive toshifts in investor psychology and to prospectivechanges in income tax rates.

NOVEMBER 1951 1359



Despite the substantial volume of State and localgovernment security offerings during the postwaryears 1946-51 the market for these securities hasbeen basically strong, partly because generally easycredit conditions, except in late 1947 and 1948,facilitated large-scale commercial bank purchases,and partly because of the maintenance of Federalincome taxes at higher than prewar levels. Suchchanges in tax rates as there were, however, didhave a marked effect on the municipal bondmarket. The moderate reduction in Federal incometax rates in 1946, for example, led to some pricedeclines and increases in yields on State and localgovernment securities, as may be seen from thechart.

Following the outbreak of the Korean war, in-vestors' interest in tax-exempt securities mountedand yields dropped sharply. This decline reflectedfears of a general war and anticipation of higherFederal income taxes and of a possible curtailmentof construction expenditures that would reducethe supply of tax-exempt issues. As during WorldWar II, investors were willing to accept relativelylow yields in order to obtain tax exemption.

The subsequent downward adjustment in Stateand local bond prices between February andJune 1951 appears to have been in part a reactionto previous speculative overbidding for these issues.Also, since this market is highly sensitive, it re-flected developments in the United States Govern-ment securities market. The adoption of an openmarket policy permitting more flexibility in theprices of United States Government bonds was fol-lowed by a rise in yields on these securities whichmade State and local bonds relatively less attractive.

Since June 1951, however, renewed investor in-terest in tax-exempt securities has carried yieldsa little below the level prevailing at the outbreak

BOND YIELDS

1942 1944 1946 1948 1950

Latest figures plotted are for October 1951.Sources.—Corporate, Moody's Investors Service; U. S. Gov-

ernment, U. S. Treasury; Municipal, Standard and Poor'sCorporation.

of the Korean war. In view of the increased in-come taxes and the probable entrance of mutualsavings banks into the market for State and localissues, favorable market conditions seem likely topersist generally.

CONCLUSION

Despite a relatively large volume of State andlocal government construction expenditures duringthe postwar period, the need for additional publicfacilities is still great. In general, the current finan-cial situation of State and local governments is suchthat further long-term borrowing is feasible, whilethe demand for these securities is basically strong.With a marked increase in defense expendituresanticipated during the coming year, the possibilityof renewed inflationary pressures makes advisablethe continued restriction of State and local govern-ment borrowing for less essential construction andother postponable purposes.



VOLUNTARY CREDIT RESTRAINT RELEASES

MEETING OF NATIONAL AND REGIONAL COMMITTEE MEMBERS OF THE VOLUNTARY

CREDIT RESTRAINT PROGRAM, OCTOBER 15-16, 1951

More than 50 national and regional committeemembers of the Voluntary Credit Restraint Pro-gram met Monday and Tuesday, October 15 and 16,to discuss the progress of the Program as an anti-inflationary control measure and some of the cur-rent problems in connection with its administration.This was the first meeting since April which all ofthe regional chairmen of the various industrygroups represented on the National Committee hadbeen invited to attend.

In reviewing the Voluntary Credit RestraintProgram, Reserve Board Governor Oliver S. Pow-ell, National Chairman, cited statistics showing thatbusiness loan expansion during the third quarterof 1951 had been less than half of the increase regis-tered during the same period in 1950. Some in-crease from June to September, he pointed out,was to be expected from purely seasonal factors.

Reserve Board Chairman William McChesneyMartin, Jr. expressed the gratification of the Boardwith the progress of the Voluntary Credit RestraintProgram. The enthusiasm and interest demon-strated by all those serving on the regional andnational committees, he said, has confounded thecynics and those who sneer at self-regulation.

Among the subjects discussed during the two-day meetings was the relationship of the VoluntaryCredit Restraint Program to possible "leaks in thedyke" through credit granted under Governmentprograms in fields where private financing institu-tions are attempting to restrain unnecessary creditexpansion. The committee also discussed the relo-cation of industries from defense to nondefenseareas, the consideration to be given to the grantingof an NPA permit where the use of material allot-ment subsequently involved the use of credit, anda clarification of the specific application of the State-ment of Principles and the various bulletins issuedrecently by the National Committee in the fieldsof loans to finance companies, loans on oil and gasproperties, smaller municipal issues and residentialreal estate loans. In the field of mortgage credit,the relationship of mortgage bankers to the Volun-

tary Credit Restraint Program was discussed, andit was decided that greater effort should be madeto keep this group informed on the application ofthe Program to their operations.

Members of the National Voluntary Credit Re-straint Committee in attendance at these meetingsincluded:

William K. Barclay, Jr., Partner, Stein Bros, andBoyce, Philadelphia, Pennsylvania

C. Sterling Bunnell, Vice President, The NationalCity Bank of New York, New York, New York

Kenton R. Cravens, Vice President, MercantileTrust Co., St. Louis, Missouri

Carlisle R. Davis, Vice President, State-PlantersBank and Trust Company, Richmond, Virginia

Francis Kernan, Partner, White, Weld & Co., NewYork, New York

Robert M. Morgan, Vice President and Treasurer,The Boston Five Cents Savings Bank, Boston,Massachusetts

M. K. M. Murphy, President, Boiling Springs Sav-ings and Loan Association, Rutherford, NewJersey

Oliver S. Powell, Member, Board of Governors ofthe Federal Reserve System, Washington, D. C.

Everett D. Reese, President and Trust Officer, ParkNational Bank, Newark, Ohio

Carrol M. Shanks, President, Prudential InsuranceCompany of America, Newark, New Jersey

Rudolf Smutny, Partner, Salomon Bros, and Hutz-ler, New York, New York

E. B. Stevenson, Jr., Executive Vice President, Na-tional Life and Accident Insurance Company,Nashville, Tennessee.

W. H. Walker, President, First Federal Savings &Loan Association, Miami, Florida

Chairmen and other representatives of the re-gional committees present were:

For commercial ban\s:

John E. Toulmin, Senior Vice President, FirstNational Bank of Boston, Boston, Massachusetts

NOVEMBER 1951 1361



George Whitney, Chairman of the Board, J. P.Morgan & Co., Inc., New York, New York

Frederic A. Potts, President, The Philadelphia Na-tional Bank, Philadelphia, Pennsylvania

John K. Thompson, President, Union Bank ofCommerce, Cleveland, Ohio

Archie K. Davis, Senior Vice President, WachoviaBank & Trust Company, Winston-Salem, NorthCarolina

John A. Sibley, Chairman of the Board, Trust Com-pany of Georgia, Atlanta, Georgia

Homer J. Livingston, President, First NationalBank of Chicago, Chicago, Illinois

Arthur J. Fushman, Vice President, ManufacturersNational Bank of Detroit, Detroit, Michigan

D. T. Beals, President, Inter-State National Bankof Kansas City, Kansas City, Missouri

Milton F. Brown, President, Mercantile NationalBank at Dallas, Dallas, Texas

William M. Hale, Executive Vice President, Amer-ican Trust Company, San Francisco, California

Chester A. Rude, Chairman, Executive Committee,Security-First National Bank of Los Angeles,Los Angeles, California

E. C. Sammons, President, United States NationalBank of Portland, Portland, Oregon

For insurance companies:

Frederick W. Ecker, Executive Vice President,Metropolitan Life Insurance Co., New York,New York

James J. O'Leary, Director of Investment Research,Life Insurance Association of America, NewYork, New York

W. L. Wilkinson, Assistant Counsel, ConnecticutGeneral Life Insurance Co., Hartford, Con-necticut

Willard N. Boyden, Vice President, ContinentalAssurance Co., Chicago, Illinois

Harry J. Stewart, President, West Coast Life In-surance Co., San Francisco, California

For investment banking:

Percy M. Stewart, Kuhn, Loeb & Co., New York,New York

D. Dean McCormick, McCormick & Co., Chicago,Illinois

John H. Rauscher, Rauscher, Pierce & Co., Dallas,Texas

For savings and loan associations:

Ralph R. Crosby, President, Old Colony Co-operative Bank, Providence, Rhode Island

Ernest A. Minier, President, Carteret Savings &Loan Association, Newark, New Jersey

James J. O'Malley, President, First Federal Savingsand Loan Association, Wilkes-Barre, Pennsyl-vania

J. B. Bourne, President, Franklin Federal Savingsand Loan Association, Richmond, Virginia

Edward L. Johnson, Vice President, Bell Savingsand Loan Association, Chicago, Illinois

C. R. Mitchell, Executive Vice President, FirstFederal Savings and Loan Association, KansasCity, Missouri

Gerrit VanderEnde, President, Pacific First FederalSavings and Loan Association, Tacoma, Wash-ington

For mutual savings ban\s:

Richard A. Booth, President, Springfield Institutionfor Savings, Springfield, Massachusetts

Joseph Kaiser, Vice President, Williamsburgh Sav-ings Bank, Brooklyn, New York

Donaldson Cresswell, Vice President, PhiladelphiaSavings Fund Society, Philadelphia, Pennsylvania

Irving W. Distel, Vice President, Society for Sav-ings in the City of Cleveland, Cleveland, Ohio

DIGEST OF OPINIONS RENDERED BY REGIONAL COMMITTEES ON TYPICAL CASESREFERRED BY LENDING INSTITUTIONS x

The National Voluntary Credit Restraint Com-mittee released today the attached digest of opin-ions rendered through September 1951 by the re-gional committees on typical cases referred to themby individual lending institutions. The regionalcommittees, consisting of representatives of various

1 Statement by National Voluntary Credit Restraint Com-mittee, released for publication on Nov. 13, 1951.

kinds of lending institutions, were established fol-lowing inauguration of the Voluntary Credit Re-straint Program last March to aid in its administra-tion and to offer opinions regarding the applicabilityof the adopted principles to proposed loans specifi-cally referred to them by individual lending insti-tutions.

The National Committee believes that the re-




lease of information on typical cases will assist co-operating financing institutions in conducting theiroperations in accordance with the principles of theProgram. Moreover, the publication of these di-gests should be of interest to borrowers in planningtheir operations and to the public at large.

The regional committees have been guided inrendering opinions by standards provided in theProgram to the effect that financing institutionsshould extend credit in such a way as to help main-tain and increase the strength of the domesticeconomy by restricting credit for nonessential pur-poses and making readily available credit for theessential needs of agriculture, industry, and com-merce. In addition they, as well as individualfinancing institutions, have been aided through theissuance of periodic bulletins by the National Com-mittee interpreting and supplementing the prin-ciples of the Program with reference to specificcredit areas.

The digest of cases represents in general opinionson cases which have raised doubts in the mindsof lenders and have, therefore, been referred to theregional committees. The volume of such opinionshas been substantial indicating that the cooperatingfinancing institutions have been diligent in the ap-plication of the principles of the Program to theconduct of their every day operations and that theirefforts have been effective in reducing the volumeof credit for purposes not in harmony with itsstandards.

SEASONAL AND INVENTORY LOANS

BORROWER AND PURPOSE OPINION

Wholesale seeds FavorableTo buy and clean seeds for resale to retail-ers of seed for use by farmers in necessaryreseeding operations.

Retail dry goods FavorableFor normal seasonal inventory acquisition.

Retail hardware, lumber and building supplies FavorableFor normal inventory acquisition to care forsummer and early fall trade.

Retail fuel oil FavorableTo purchase 1 million gallons of fuel oil(1/10 of annual volume) for storage andsale during the 1951-2 season.

Public accountant FavorableSeasonal loan for operating funds.

Retail hardware UnfavorableTo enable borrower to carry inventory dis-proportionate to his normal business opera-tions.


Retail sewing machine UnfavorableTo increase inventory of imported machinesin anticipation of future curtailment indomestic manufacture of sewing machines.

BUILDING PROGRAMS

Machine tool company FavorableTo build new plant to take care of presentneeds. Present rental property too smalland unsuitable for increased volume andemployment.

Delicatessen FavorableTo build a new store building to serve anewly developed residential area.

Retail farm tractor and implement dealer UnfavorableTo erect sales and service building in orderto retain franchise.

Grain elevator and feed mill—Sale of feedsand seeds to farmers Unfavorable

To erect a new building to replace presentfacilities which are not very convenient fromstandpoint of services to customers.

Municipality UnfavorableTo erect agricultural-live stock exhibitionbuilding.

Nursing home for aged FavorableTo buy existing building which is suitablefor needed additional space for operations.

Mortuary FavorableTo build a new mortuary in replacement ofpresent quarters which are inadequate forneeds of community. This is the only mor-tuary serving the area.

Tourists' hotel UnfavorableTo construct 2 5-room motel in vacation andrecreational area.

Educational institution UnfavorableTo finance partially construction of a library.

Municipality FavorableFor construction of needed school buildings.Committee deferred its opinion on financingfor that part of program which extendedbeyond current fiscal year.

Church FavorableTo build a new church in replacement ofpresent structure which is in unsafe andhazardous condition.

Church UnfavorableTo build a parish hall and an addition toSunday School building.

N E W PLANT OR E Q U I P M E N T

Publisher of daily newspaper FavorableTo purchase a printing press in replacementof outmoded press which does not take careof present requirements.

NOVEMBER 1951 1363




Tan\ship owners FavorableTo purchase oil tanker for charter to an oilcompany.

Excavating contractor FavorableTo purchase diesel tractor shovel to replaceworn and obsolete equipment now in use.

Wholesale petroleum FavorableTo buy tractor-tanker units necessary in op-erations; one replacement and one additionalunit.

Public utility Favorable

For improvements to its gas distribution sys-tem.

Municipality FavorableFor needed fire fighting equipment in rap-idly expanding community.

Laundry UnfavorableTo purchase new machinery and equipmentfor expansion of plant. Deferrable unlessprogram had been started and commitmentsmade prior to inauguration of VCR Pro-gram.

Social club and recreation center UnfavorableTo purchase bar and equipment togetherwith furnishings for social room. Presentfacilities not adequate to meet demand.

MODERNIZATION

Farmer FavorableTo repair and remodel farm buildings on176 acre producing farm.

Retail variety store FavorableFor modernization and enlargement of storebuilding. Approval based on facts thatarchitect's plans drawn and materials con-tracted for prior to inception of VCR Pro-gram.

Retail ladies ready-to-wear UnfavorableTo modernize store, add new front and in-crease floor capacity to maintain competitiveposition.

Gasoline service station UnfavorableFor purchase and modernization of equip-ment and facilities of two existing gas sta-tions.

W O R K I N G CAPITAL LOANS

Woodworking—Manufacturer of business fix-tures and equipment Favorable

For necessary and normal working capitalin connection with contract work in process.

Metal stamping plant FavorableFor necessary and normal working capital.Sixty-five per cent of present volume isunder defense contract.

Shoe manufacturer FavorableFor necessary and normal working capital.

DEBT RETIREMENT AND REFINANCING


Retail automobile dealer FavorableTo repay existing bank loans.

Manufacturer of electrical appliances FavorableFor reduction of bank debt.

Retail mil\ dealer UnfavorableTo refinance existing indebtedness held byformer owner of business.

Chain variety stores UnfavorableTo retire outstanding preferred stock.

ACQUISITION OF EXISTING BUSINESSES

Hotel operator FavorableTo purchase building and equipment ofhotel from owner who is retiring becauseof ill health. Failure to effect transfer mightcreate hardship for community in havinghotel closed. Approval based on assump-tion self-financing purchaser cannot befound or that seller is unable to accept apurchase-money mortgage.

Trucking UnfavorableTo purchase motor trucking company andequipment for expansion of present opera-tions. Trucking business to be acquired iscurrently hauling foodstuffs but continuedoperation by present owner is assured untila sale can be made.

Pharmacist UnfavorableTo purchase business, inventory and fix-tures of an existing drug store.

Accountant UnfavorableTo purchase an established accounting busi-ness.

ACQUISITION OF STOCKHOLDERS' OR PARTNERS'

INTERESTS

Individual (officer and principal stockholder Favorable—machine tool manufacturer)

To acquire one-third stock interest incompany from widow of borrower's formerpartner. Proceeds of this loan, used topurchase the minority interest in the com-pany, would preserve continuity of man-agement and avoid the minority stock in-terest getting into possibly unfriendly hands.

Retail novelty store UnfavorableTo buy other partner's interest in businessto become sole owner.

Wholesale iron and steel UnfavorableTo purchase minority shareholders' interest.

Trucking company UnfavorableFamily group operating company wishes tobuy back 51 per cent of stock now heldby outside interests.




N E W VENTURES


Retail grocer FavorableTo stock a new store to be opened in anew and expanding community now lack-ing a grocery.

Retail grocer UnfavorableTo stock a new grocery store which facilityappears not to be necessary in the commu-nity.

Dentist FavorableTo purchase furnishings and equipmentnecessary to operate a dental office. Bor-rower recently graduated from dental school.

Retail men's clothing UnfavorableTo open new men's clothing store. Cityhas sufficient retailers to satisfy the demand.

Retail gasoline distributor UnfavorableTo equip a new self-service station. Presentfacilities in community are adequate.

Amusement par\ UnfavorableFor erection of plant and purchase ofequipment necessary for operations. Otheramusement and recreational facilities areavailable in area.

LOANS TO FARMERS, ETC.

Rancher FavorableTo purchase and carry cattle.

Farmer FavorableTo clear 50 additional acres of land for pas-turage.


Farmer FavorableTo purchase 260 acre farm for purpose ofputting it into production.

Farmer UnfavorableTo purchase farm land for lease as an in-vestment. Considered speculative in char-acter where the land is already in produc-tion and borrower desires simply to increasehis holdings of real estate.

DEVELOPMENT OF LAND

Individual FavorableTo purchase acreage for housing develop-ments in a defense area.

Individual UnfavorableTo purchase and develop land for sale asbuilding lots.

Municipality UnfavorableTo acquire unimproved land for erection ofparking facilities.

O T H E R LOANS

Housewife UnfavorableTo buy single premium life insurance con-tract. To provide for purchase of dis-counted premium life insurance contract.

Individual UnfavorableTo purchase real estate for investment.Property is already financed on a long-termbasis.

State Government UnfavorableFor payment of bonus to veterans of WorldWar II.

CHANGES IN REGIONAL VOLUNTARY CREDIT RESTRAINT COMMITTEES

STATEMENT OF NATIONAL VOLUNTARY CREDIT

RESTRAINT COMMITTEE, SEPTEMBER 24, 1951

The National Voluntary Credit Restraint Com-

mittee announces the following appointments and

designations affecting the membership of the sub-

committees indicated:

Los Angeles Regional Commercial Banking VoluntaryCredit Restraint Committee

Designation of J. C. Lipman, Senior Vice Presi-

dent, Union Bank and Trust Company of Los

Angeles, Los Angeles, California, as Vice Chair-

Seattle Regional Commercial Banking VoluntaryCredit Restraint Committee

Appointment of Stuart Frazier, Executive Vice

President, Washington Mutual Savings Bank,Seattle, Washington, as an alternate member.

Mid-Western Insurance Voluntary Credit RestraintCommittee

Designation of Frank J. Travers, Vice President,

American United Life Insurance Company, Indi-

anapolis, Indiana, as Vice Chairman.

Appointment of the following as alternate mem-bers:

Richard H. Samuels, Financial Secretary, Conti-

nental Assurance Company, Chicago, Illinois

Grant Torrance, Vice President and Treasurer,

Business Men's Assurance Company of America,

Kansas City, Missouri

Howard Dean, Financial Secretary, Bankers Life

Company, Des Moines, Iowa

NOVEMBER 1951 1365



Norman H. Nelson, Vice President, The Minne-sota Mutual Life Insurance Company, St. Paul,Minnesota

James H. Windsor, Financial Vice President,Equitable Life Insurance Company of Iowa, DesMoines, Iowa

Andrew H. Alexander, Manager of City Loans,The Northwestern Mutual Life Insurance Com-pany, Milwaukee, Wisconsin

Edward Karrmann, Treasurer, American UnitedLife Insurance Company, Indianapolis, Indiana

Neil B. Dawes, Vice President, Federal ReserveBank of Chicago, Chicago, Illinois

Southwestern Insurance Voluntary Credit RestraintCommittee

Appointment of Charles S. Sharp, Vice Presi-dent, Fidelity Union Life Insurance Company,Dallas, Texas, as an alternate member.

Western Insurance Voluntary Credit RestraintCommittee

Appointment of H. F. Slade, Vice President,Federal Reserve Bank of San Francisco, San Fran-cisco, California, as an alternate member to re-place R. E. Ever son.

Western Investment Banking Voluntary CreditRestraint Committee

Appointment of H. F. Slade, Vice President,Federal Reserve Bank of San Francisco, San Fran-cisco, California, as an alternate member.

Second District Savings and Loan Voluntary CreditRestraint Committee

Designation of Willis J. Almekinder, President,First Federal Savings and Loan Association ofRochester, Rochester, New York, as Vice Chair-

Third District Savings and Loan Voluntary CreditRestraint Committee


Walter E. Margie, President, First Federal Savingsand Loan Association, Pittston, Pennsylvania

Fred A. Werner, President, Lansdowne FederalSavings and Loan Association, Lansdowne, Penn-sylvania

James W. Cullen, President, Anchor Savings andLoan Association, Atlantic City, New Jersey

G. Raymond Greeby, President, Burton C. SimonSavings and Loan Association, Philadelphia,Pennsylvania

New York-New Jersey Mutual Savings BankVoluntary Credit Restraint Committee

Appointment of M. Harold Higgins, President,Bloomfield Savings Bank, Bloomfield, New Jersey,as an alternate member.

Mid-Atlantic Mutual Savings Bank Voluntary CreditRestraint Committee


R. Stewart Rauch, Jr., Vice President, PhiladelphiaSavings Fund Society, Philadelphia, Pennsylvania

Howard A. Hoffman, Assistant Secretary andAssistant Treasurer, Dollar Savings Bank, Pitts-burgh, Pennsylvania

Gerard W. Kirby, Vice President, Provident Sav-ings Bank, Baltimore, Maryland

Thomas Tatnall, Vice President, Wilmington Sav-ings Fund Society, Wilmington, Delaware

STATEMENT OF NATIONAL VOLUNTARY CREDIT

RESTRAINT COMMITTEE, OCTOBER 23, 1951

The National Voluntary Credit Restraint Com-mittee announces the following appointments anddesignations affecting the membership of the sub-committees indicated:

First District Commercial Banking VoluntaryCredit Restraint Committee

Appointment of Walter E. Borden, Senior VicePresident and General Manager, The NationalShawmut Bank of Boston, Boston, Massachusetts,as an alternate member, replacing George E. Pierce,deceased.

Eighth District Commercial Banking VoluntaryCredit Restraint Committee

Appointment of William M. Harlan, President,Manchester Bank of St. Louis, St. Louis, Missouri,as an alternate member.

Ninth District Commercial Banking VoluntaryCredit Restraint Committee

Designation of Julian Baird, President, The FirstNational Bank of St. Paul, St. Paul, Minnesota, asChairman, replacing Arthur Quay, deceased.




Tenth District Commercial Banking VoluntaryCredit Restraint Committee


C. J. Chandler, President, First National Bank,Wichita, Kansas

G. P. Bramwell, Vice President, First NationalBank, Kansas City, Missouri

Wilfred C. Wann, Vice President, Commerce TrustCompany, Kansas City, Missouri

W. B. Millard, Jr., President, Omaha NationalBank, Omaha, Nebraska

R. E. Thompson, Senior Vice President, First Na-tional Bank and Trust Company, Tulsa, Okla-homa

P. K. Alexander, Vice President, First NationalBank, Denver, Colorado

D. W. Woolley, Vice President, Federal ReserveBank of Kansas City, Kansas City, Missouri

Southwestern Insurance VoluntaryCredit Restraint Committee

Appointment of Mac C. Smyth, Vice President,Federal Reserve Bank of Dallas, formerly an alter-nate member, as a member, replacing H. R. De-Moss, and appointment of J. Lee Cook, Vice Presi-dent and Cashier, Federal Reserve Bank of Dallas,as an alternate member.

Mid-Western Mutual Savings Bank VoluntaryCredit Restraint Committee

Designation of Harry }. Fitzgerald, Secretary,The Peoples Savings Bank, Evansville, Indiana, asVice Chairman.


M. F. Schaeffer, President, The Peoples SavingsBank, Evansville, Indiana

C. P. Clifford, Assistant Treasurer, Farmers andMechanics Savings Bank, Minneapolis, Minnesota

G. G. Litzko, Vice President, Society for Savingsin the City of Cleveland, Cleveland, Ohio

Fourth District Savings and Loan VoluntaryCredit Restraint Committee

Designation of C. Elwood Knapp, Executive VicePresident, Friendship Federal Savings and LoanAssociation, Pittsburgh, Pennsylvania, as ViceChairman.


Allen R. Rankin, Secretary, Buckeye Federal Sav-ings and Loan Association, Columbus, Ohio

D. H. Fork, Secretary, Friendship Federal Savingsand Loan Association, Pittsburgh, Pennsylvania

Cyrus J. Fitton, Attorney, Dollar Federal Savingsand Loan Association, Hamilton, Ohio

Tenth District Savings and Loan VoluntaryCredit Restraint Committee

Designation of C. R. Mitchell, Executive VicePresident, First Federal Savings and Loan Associa-tion, Kansas City, Missouri, as Vice Chairman.

Eleventh District Savings and Loan VoluntaryCredit Restraint Committee

Appointment of Mac C. Smyth, Vice President,Federal Reserve Bank of Dallas, formerly an alter-nate member, as a member, replacing H. R. De-Moss, and appointment of J. Lee Cook, Vice Presi-dent and Cashier, Federal Reserve Bank of Dallas,as an alternate member.

Twelfth District Savings and Loan VoluntaryCredit Restraint Committee

Designation of Gerrit VanderEnde, President,Pacific First Federal Savings and Loan Association,Tacoma, Washington, as Vice Chairman.

NOVEMBER 1951 1367


STATEMENT ON GOLD POLICY BY THE INTERNATIONALMONETARY FUND

The Executive Board of the International Mone-tary Fund on September 28, 1951 issued the fol-lowing statement on gold policy}

In June 1947, the Fund issued a statement recom-mending to its members that they take effectiveaction to prevent external transactions in gold atpremium prices, because such transactions tend toundermine exchange stability and to impair mone-tary reserves. From time to time the Fund hasreviewed its recommendations and the effectivenessof the action taken by its members.

Despite the improvement in the payments posi-tion of many members, sound gold and exchangepolicy of members continues to require that to themaximum extent practicable, gold should be heldin official reserves rather than go into privatehoards. It is only as gold is held in official reservesthat it can be used by the monetary authorities tomaintain exchange rates and meet balance-of-pay-ments needs.

However, the Fund's continuous study of thesituation in gold-producing and -consuming coun-tries shows that their positions vary so widely as

xFor an earlier policy statement on gold by the Interna-tional Monetary Fund, see Federal Reserve BULLETIN, July1947, p. 851.

to make it impracticable to expect all members totake uniform measures in order to achieve theobjectives of the premium gold statement. Accord-ingly, while the Fund reaffirms its belief in theeconomic principles involved and urges the mem-bers to support them, the Fund leaves to its mem-bers the practical operating decisions involved intheir implementation, subject to the provisions ofArticle IV, Section 2 and other relevant articles ofthe Articles of Agreements of the InternationalMonetary Fund.

The Fund will continue to collect full informa-tion about gold transactions, will watch carefullydevelopments in this field and will be prepared inconsultation with members to consider problemsrelating to exchange stability and any other prob-lems which may arise.

On the same date, the Secretary of the Treasuryissued the following press release:

After thorough discussions, the InternationalMonetary Fund has issued today a statement onexternal transactions in gold. The United Statesconcurred in this statement, which accords withits own gold policy. The Treasury plans to con-tinue in effect existing gold practices and pro-cedures.

CURRENT EVENTS AND ANNOUNCEMENTS

Federal Reserve MeetingsA meeting of the Federal Open Market Commit-

tee was held in Washington on November 14, 1951.The Federal Advisory Council held a meeting in

Washington on November 18-20, 1951, and metwith the Board of Governors of the Federal Re-serve System on November 20, 1951.

Deaths of DirectorsMr. A. H. Quay, President, First National Bank,

Minneapolis, Minnesota, who had served as a

Class A director of the Federal Reserve Bank ofMinneapolis since November 7, 1950, died onSeptember 26, 1951.

Mr. Robert L. Mehornay, Chairman of the Board,Mehornay Furniture Company, Kansas City, Mis-souri, who had served as a Class C Director andDeputy Chairman of the Federal Reserve Bank ofKansas City since January 1, 1942, died on Novem-ber 19, 1951.



ANNUAL REPORT OF THE COMMONWEALTH BANK OF AUSTRALIAFISCAL YEAR 1951

Recent economic and financial developments inAustralia are reviewed in the following excerptsfrom the Annual Report of the CommonwealthBan\ of Australia for the fiscal year ending June30, 1951. The report describes in general termsthe major foreign and domestic developmentswhich have contributed to the sharp rise in priceswithin Australia during the past year and theseveral steps ta\en to restrain ban\ lending andto limit investment activities.

ECONOMIC SURVEY

As a consequence of the high levels of publicand private investment, swollen export incomes,and population growth, increasingly heavy demandshave been made upon the resources available tothe Australian economy. Domestic output washigher than in the previous year and was supple-mented by a larger volume of imports but theincrease in total supplies, although considerable,was quite inadequate to meet the sharply risinglevel of demand. Moreover, the rise in prices over-seas exerted a strong upward pressure upon thedomestic structure of prices and costs. As a resultof this pressure, and of the higher basic wageawarded at the end of 1950, prices, wages, andcosts rose in an increasingly rapid sequence. In-deed, the increases in prices during the year werethe largest of any recorded during or since WorldWar II.

The efTects of excessive demand were more seri-ous than the rise in prices alone would indicate.Competitive bidding tended to divert labor andmaterials from basic industries and developmentalprojects to consumer goods industries. This fur-ther increased the demands on scarce resources ofsteel, power, transport, and other essential goodsand services, and seriously distorted the productiveeffort of the economy. Moreover, efficiency in allsectors of industry was seriously impaired by thehigh rate of labor turnover and by delays in pro-duction processes which resulted from attempts tospread available resources over too many projects.

Apart from the immediate effects of rising pricesand widespread shortages and inefficiencies, thereare dangerous elements of instability growingwithin the economy. In response to high exportincomes, the inflow of capital, and major develop-mental plans, we have built up a volume of im-

ports which we are unlikely to be able to sustainover a long period from our own resources. Thepassing through into Australian costs of prices ofinternationally traded goods substantially higherthan general domestic prices here and abroad istending to establish levels of costs which will exposeAustralian industries to acute competition whenthe present excessive demand conditions pass. Theconcentration of public and private developmentplans is leading to the expansion of capital goodsindustries on a scale which it may be difficult toemploy continuously from the savings voluntarilymade by the Australian community.

FEDERAL ESERVE BULLETIN - St. Louis Fed · 2018. 11. 6. · FEDERAL RESERVE BULLETIN VOLUME 37...

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