federal reserve bulletin august 1943 - st. louis fedfederal reserve bulletin volume august number 8...

FEDERAL RESERVE

BULLETINAUGUST 1943

BOARD OF GOVERNORSOF THE FEDERAL RESERVE SYSTEM

WASHINGTON

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

^CONTENTS:

Review of the Month—Third War Loan Drive. 707-711

Ownership of Bank Deposits 713-716

Revision of Statistics of Bank Debits. . . 717

Postwar International Monetary Stabilization. 718-718

British White Paper on War Finance.. . 72.9-740

Current Events. 741

National Summary of Business Conditions . 741-743

Financial, Industrial, Commercial Statistics, U. S. (See p. 745 for list of tables).. 745-790

International Financial Statistics (Sec p. 791 for list of tables) 791-803

Board of Governors and Staff; Open Market Committee and Staff; Federal Ad-visory Council 804

Senior Officers of Federal Reserve Banks; Managing Officers of Branches. . . 805

Map of Federal Reserve Districts 806

Federal Reserve Publications (See inside of back cover)

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FEDERAL RESERVE BULLETINVOLUME August NUMBER 8

THIRD WAR LOAN DRIVEOn July IJL the Secretary of the Treasury

announced that the goal set for the ThirdWar Loan drive, which is scheduled tobegin on September 9, is 15 billion dollars.This is the largest financing program in thehistory of the world. The entire amountis to be sold outside of commercial banks,that is, to individuals, corporations, in-surance companies, and other nonbankinginvestors. In the first and second war loandrives commercial banks were included.Shortly after the drive terminates a separateoffering of securities will be made to thebanks.

This change of program is in keepingwith the policy of financing the war to aslarge an extent as possible outside of thebanking system. Emphasis on sales ofsecurities to individuals is for the purpose ofabsorbing funds that might otherwise beused to bid up prices of the diminishingsupply of consumer goods. Subscriptionsby others than commercial banks were 8billion dollars in the first war loan drive inDecember and 13 billions in the second warloan drive in April. The proposed 15billions of nonbank funds for the thirddrive consequently represents a substantialincrease from the record of the previousdrives.

On July z6 the President of the" UnitedStates issued the following proclamationcalling upon the people of the country toaid and support the drive:

Recognizing the fact that in carrying the warinto enemy territory, we shall need greater

amounts of money than any nation has everasked from its citizens in all history, I, FRANK-LIN D. ROOSEVELT, President of the UnitedStates of America, do officially proclaim that onThursday, the ninth of September, 1943, theThird War Loan shall be launched.

As Commander-in-Chief, I hereby invokeevery citizen to give all possible aid and supportto this Third War Loan drive, not only so thatour financial goal may be reached, but to en-courage and inspire those of our husbands andfathers and sons who are under fire on a dozenfronts all over the world. It is my earnest hopethat every American will realize that in buyingWar Bonds in this Third War Loan he has anopportunity to express voluntarily and underthe guidance of his conscience, the extent towhich he will "back the attack."

The American people supported well the firstand second War Loan drives and in fact did evenmore than was asked of them. Our need formoney now is greater than ever, and will con-tinue to grow until the very day that Victoryis won; so we must ask far more sacrifice, farmore cooperation than ever before.

In Witness Whereof, I have hereunto set myhand and caused the seal of the United Statesof America to be affixed.

Done at the City of Washington, this twenty-sixth day of July, in the year of

(SEAL) our Lord nineteen hundred andforty-three, and of the Indepen-dence of the United States ofAmerica the one hundred andsixty-eighth.

FRANKLIN D. ROOSEVELT

By the President:CORDELL HULL

Secretary of State

AUGUST 1943 707


REVIEW OF THE MONTH

SECURITIES OFFERED

The types of securities to be offered inthe drive in September are essentially thesame as those sold in the Second War Loandrive and are designed to meet the require-ments of all classes of nonbank investors.The new issues to be offered in the driveare x>^ per cent bonds of December 1964-69,x per cent bonds of September 1951-53, andY% of 1 per cent certificates of indebtedness.In addition, savings bonds of Series E, F,and G and Treasury savings notes of SeriesC, which are continually on sale, will beincluded in the drive.

A provision requiring 30 days' notice forredemption of Series C Treasury savingsnotes has been eliminated, and the notes cannow be redeemed at any time after sixmonths from the date of issue. Subscrip-tions for all of the issues included in thedrive will be allotted in full. The bondsand certificates will be dated September 15.The bonds will be issued in denominationsfrom $500 to $1,000,000 in either registeredor coupon form, while the certificates willbe issued in denominations of $1,000 to$1,000,000 and only in coupon form. Com-mercial banks will not be permitted toacquire the x>2 per cent bonds until tenyears after the date of issue.

ORGANIZATION FOR THE DRIVE

The raising of the 15 billion dollars willbe handled by the new War Finance Comrrnittees of each State, and the securities willbe sold principally by hundreds of thou-sands of volunteer salesmen. Since a majorconsideration is to increase the number ofpeople who are buying war bonds, the salesorganization will concentrate on house-to-house selling. In addition, as in the case ofthe April drive, many forms of publicitywill be used as part of the sales campaign,

708

including the press, the radio, theaters,posters, and circulars. Under the programof separating commercial bank and non-bank borrowing, the largest possibleamounts of securities will be sold to non-bank investors during the periodic drivesthrough intensified sales campaigns. Ad-ditional amounts needed by the Treasurycan then be borrowed from commercialbanks between drives.

SALE OF WAR BONDS TO INDIVIDUALS

The Treasury has raised its goal for thesale of war bonds to individuals during thelast half of 1943 to 18 billion dollars. Thisgoal is more than double the 7 billiondollars sold in the first six months of theyear. A goal has not been set for the fiscalyear as a whole because of uncertainty sur-rounding additional taxes for next year.

Sales at the expected rate for the last halfof this year, however, would amount to 36billion dollars on a full year basis, whichwhen added to estimated tax receipts underpresent legislation would be about two-thirds of total estimated Treasury expendi-tures, including net expenditures by Gov-ernment agencies as well as regular budgetaccounts. A large part of the remainingone-third of expenditures would be raisedthrough non-inflationary borrowing fromnonbank investors. Under this program,it appears that borrowing by the Govern-ment from banking sources can be held tomuch less than the proportion for the firsthalf of 1943, when increases in Governmentsecurity holdings of commercial banks andFederal Reserve Banks represented approxi-mately 40 per cent of the increase in thedebt. The intensified effort to sell securitiesto nonbank investors does not, however,lessen the need for increased taxes, since theGovernment's war program will be larger

FEDERAL RESERVE BULLETIN


REVIEW OF THE MONTH

in the coming fiscal year than in the pastand the dangers of inflationary develop-ments are still present.

FUNDS AVAILABLE FOR PURCHASE OF

WAR BONDS

In setting a higher goal for its next drivethe Treasury is aware both of the increasingvolume of war expenditures and the conse-quent rise in the amount of funds that willbe available for the purchase of Govern-ment securities. War production is gen-erating incomes roughly equal in amount tothat production. While the Government isspending far more than it is receiving intaxes and is faced with a deficit, the peopleof the country are receiving more incomethan they spend, because goods availablefor purchase are diminishing. It is theresultant surplus of income that the Govern-ment is proposing to channel back into thewar effort.

It is recognized that the increase in sur-plus income (or savings) will not be equallydistributed among different groups or differ-ent individuals. Some individuals—thoseliving on fixed incomes, pensions, annuitiesand so on—are much less able to increasetheir savings, while others, whose incomeshave advanced rapidly—and they representa large proportion of the people—are savingfar in excess of the national average.

According to estimates supplied by theTreasury, shown in the accompanyingchart, the value of all goods produced andof services rendered in the country will haveincreased from 93 billion dollars in thefiscal year 1939-1940 to an estimated 196billion in the fiscal year 1943-1944. Mostof this increase is accounted for by FederalGovernment expenditures for war activities,which will amount to about 100 billiondollars in this fiscal year. Since 1941 there

GROSS NATIONAL PRODUCT

FISCAL YEARS

1940 1941 1942 1943 1944Figures for fiscal years 1940 through 1942 are from Bureau of Foreign

and Domestic Commerce, Department of Commerce; figures for fiscalyears 1943 and 1944 are estimates by Division of Research and Statistics,Treasury Department.

has been a decline in the production of pri-vate capital goods, while the availablesupply of consumers' goods and serviceshas increased in total dollar value. Itis estimated that in the fiscal year 1944,under existing tax legislation, a littlemore than one-third of Government ex-penditures, or about 38 billion dollars, willbe covered by taxes and the remainingtwo-thirds, or about 70 billion dollars, byborrowing. The amount that needs to beborrowed corresponds closely to the amountof corporate and individual surplus or sav-ings that will be available after payment oftaxes and purchasing the available supplyof goods and services.

The fundamental task of war finance is totransfer this excess income from private topublic use; to draw back into the Treasuryout of the income created by our ever-expanding national production an amountequal to what the Government is spending.The best way to do this is by increasingtaxes and the sale of War Bonds. To theextent that these two methods of rechan-nelling excess funds are used, pressure for aninflationary advance in prices of civiliangoods can be avoided,.

AUGUST 1943 7O9


REVIEW OF THE MONTH

OFFERINGS TO BANKS

The Treasury announced that shortlyafter the September drive terminates, a 2. percent bond and a % of 1 per cent certificateof indebtedness will be offered for sub-scription by commercial banks for their ownaccount. In order to confine all sales in thedrive to nonbank sources, commercial banksare requested not to buy in the market, andthe market is requested not to trade in, the2. per cent bonds and J/g of 1 per cent certifi-cates offered in the drive until the books forbank subscriptions are closed. This in-novation will discourage speculative pur-chases of securities in the drive for resalelargely to commercial banks.

Late in June the Treasury offered forpublic subscription lyi per cent 4-yearnotes. Allotments of these notes, forwhich payment was made on July i2_,amounted to about 1.7 billion dollars.Commercial banks were the largest pur-chasers of the notes.

The Treasury refunded the 1.6 billiondollars of certificates of indebtedness ma-turing August 1 by offering in exchangenew % of 1 per cent certificates to maturein one year. An additional yoo milliondollars of the new issue was offered to com-mercial banks only for their own account.The restriction of the cash offering to com-mercial banks is in line with the policy ofexcluding commercial banks from the offer-ings in the drives. Cash subscriptionswere limited to 100 per cent of the sub-scribing bank's capital, surplus, and un-divided profits, or 5 per cent of total de-posits, whichever is larger.

EXCESS RESERVES

Excess reserves of member banks, whichremained at an average level of about 1.5billion dollars during June declined during

July and at the end of the month wereabout 1.1 billion dollars. Continued sub-stantial increases in the amount of currencyin circulation and in the volume of requiredreserves and wide fluctuations in Treasurydeposits at Reserve Banks were largely off-set in their effects on excess reserves bypurchases, and occasionally resales, of Treas-ury bills by the Federal Reserve Banks.Member banks, particularly in New YorkCity and Chicago and to an increasing extentin many other cities as well, now follow thepractice of adjusting their reserve positionsby selling Treasury bills to the ReserveBanks when they need additional reservesand repurchasing bills when they have sur-plus funds. During June and July therewas a net increase of 2..$ billion dollars inReserve Bank holdings of Treasury bills,with rather wide daily fluctuations attimes during the period.

During the forthcoming drive, excess re-serves of member banks may be expectedto increase substantially. A considerablepart of the payments for securities will re-sult in shifts from deposits that requirereserves to war loan deposits, which are ex-empt from reserve requirements. Requiredreserves consequently will decline sharplyduring the drive; thus releasing reservefunds, which may be held as excess reservesor used to repurchase Treasury bills fromthe Reserve Banks. This increase in avail-able funds, however, will be only tem-porary, for as the Treasury reduces itsbalances and the proceeds are credited toaccounts of the public, reserve requirementswill again increase.

Banks following a full investment policymay use the temporary increase in reservefunds to purchase short-term securities.Treasury bills provide the most flexiblemedium for the investment of temporaryfunds. As a consequence, there will prob-

7 1 0 FEDERAL RESERVE BULLETIN


REVIEW OF THE MONTH

ably be an increase in commercial bank funds through periodic offerings of bondsdemand for Treasury bills, both those cur- and certificates and through a regularrently offered and those previously sold to weekly increase in the volume of Treasurythe Federal Reserve Banks under option, bills outstanding. As shown in the chart,

these various issues have been purchased inCHANGE IN OWNERSHIP OF GOVERNMENT d i f f e r e n t proportions by banks and other

SECURITIESinvestors.

Since last November, when the first war Treasury bills, which have a maturity ofloan drive began, the Treasury has raised three months, have been sold at a discount

OWNERSHIP OF GOVERNMENT SECURITIES

• I IUOMS OF DOLLARS

20

10

0 E

COMMERCIAL ^B A N f C S ^ ^

REVIEW OF THE MONTH

rate of about % of i per cent, the rate atwhich Reserve Banks stand ready to buysuch bills, and they have been boughtlargely by commercial banks and theFederal Reserve Banks. The amount of theweekly offerings of these bills has graduallyincreased from 150 million dollars early in194.x to 1,000 million dollars in recentweeks. At the end of June there were 11.billion dollars of such bills outstanding, ofwhich commercial banks held about 7billion and Federal Reserve Banks 3.8billion. In June and July commercial banksreduced their holdings of bills through salesto Federal Reserve Banks for the purpose ofobtaining needed reserves. As a conse-quence the increase in Reserve Bank hold-ings exceeded the additions to the totalamount of bills outstanding.

The amount of certificates outstandinghas increased since last November by 9.4billion dollars, over half of which wereabsorbed by commercial banks. The cer-tificates have a maturity of one year andbear an interest rate of % of 1 per cent.Attracted by their short maturities andready marketability, corporations have alsoinvested a substantial amount of liquidfunds in these certificates. Increases in

Reserve Bank holdings of certificates inrecent months have been small in amount.

There was little change in the volume ofTreasury notes outstanding or in the dis-tribution of these holdings between No-vember of last year and June. The newissue of notes sold in July, were mostlybought by commercial banks.

The amount of Treasury bonds outstand-ing increased by about 14 billion dollarsfrom the end of last November to the endof June. New bond offerings consisted ofx>2 per cent bonds maturing in abouttwenty-five years and not available for bankpurchase, and of 1% per cent and 2. per centbonds maturing in less than ten years andavailable for purchase by banks as well asby others. Banks, besides purchasing thenew offerings available to them, have alsoincreased their holdings of outstandingissues of Treasury bonds, including somematuring after ten years. From Novemberto the end of June commercial banks in-creased their total bond holdings by about7 billion dollars, holdings of other investorsincreased by about 8 billion, while holdingsof Federal Reserve Banks declined by a bil-lion. Commercial banks further increasedtheir holdings of bonds during July.

7 1 1 FEDERAL RESERVE BULLETIN


OWNERSHIP OF BANK DEPOSITS

Demand deposits at commercial banks in-creased at an unprecedented rate in 1942. and thefirst quarter of 1943, and the total of business andpersonal deposits reached a new high figure of53 billion dollars at the end of that period.Information about the ownership of these de-posits has been obtained through a recentexploratory survey made by the Federal ReserveSystem.

Tentative estimates based upon sample reportsreceived from about 700 banks indicate thatsomewhat more than two-thirds of demand de-posits of individuals, partnerships, and corpora-tions at all commercial banks in the countrybelong to businesses and that less than a thirdare personal. In total it appears that incor-porated and unincorporated business deposits,including those of financial institutions andagencies other than banks as well as those ofconcerns engaged in manufacturing, construc-tion, trade, services, etc., were in the neighbor-hood of 35 billion dollars, while personal de-mand deposits, including those of farmers, werearound 15 billion dollars. It should be ob-served, however, that in addition individualsheld predominant proportions of the 2.9 billiondollars of savings and other time deposits atcommercial and mutual savings banks and of the15 billion dollars of currency in circulationoutside banks at the end of March.

It has been estimated that of the total increaseof 15 billion dollars in demand deposits over thefifteen months ending March 31, 1943, perhaps5 to 6 billion dollars occurred in the accounts ofmanufacturing, mining, and construction busi-nesses and another 5 or 6 billion in accounts ofall other businesses—financial and nonfinancial.This estimated increase in business deposits—agrowth of about 50 per cent—accounts for two-thirds to three-fourths of the increase in totaldemand deposits, and indicates that the growthof personal deposits (including those of farmers)was probably around 3 or 4 billion dollars overthe period, an increase of about one-third.These estimates, because of the exploratory

AUGUST 1943

nature of the survey, should be considered onlyrough indications of probable amounts of per-sonal deposits and of deposits owned by variousbroad business groups.

NATURE OF REPORTS

These estimates were based on reports receivedfrom a sample of 689 banks, which held about 40per cent of all demand deposits of individuals,partnerships, and corporations in the UnitedStates on March 31, 1943. About 70 per cent ofdeposits at reporting banks were classified as toownership; the accounts so classified were thelarger ones, including all those above limitsvarying from $5,000 to $100,000 at most banks,although a few banks used higher or lowerlimits. The bulk of the dollar volume of de-posits classified was at large- and medium-sizedbanks, where the sample was relatively muchmore complete than for small banks. Thebroad estimates for deposit ownership at allbanks make allowance for the greater proportionof personal deposits among the accounts notclassified and among nonreporting banks thanamong reported classified deposits. These allow-ances, however, in the absence of actual figurescan only be approximated, and the estimatedfigures here given are necessarily tentative.1

PLANS FOR REGULAR COLLECTION OF DATA

Because of the importance of informationabout who owns the rapidly growing volume of

1 The results of the survey may be compared with estimates of sav-ings of individuals and unincorporated businesses made quarterly bythe Securities and Exchange Commission. These broad estimates ofsavings are subdivided and one item shows changes in holdings of cur-rency, demand deposits, and time deposits of individuals and unincor-porated businesses. They are derived by deducting from changes intotal domestic deposits and currency estimates of changes in corpora-tion cash holdings, which in turn are derived from current reports of asample of corporations. In addition to the inclusion of currency andtime deposits in the SEC figures, there are a number of important dif-ferences between the two sets of figures. The principal difference isthat in the SEC figures deposits of unincorporated businesses are com-bined with those of individuals, whereas in the Federal Reserve figuresthose of corporate and noncorporate businesses are shown together.This difference, together with the fact that foreign deposits (which arelargely business deposits) and both interbank and intercustomer floatare excluded from the SEC figures of corporate cash but are includedin the Federal Reserve figures, explains in part the large difference be-tween the Federal Reserve estimates of business deposits and the SECestimates of corporate deposits. Some other elements accounting forthe differences are the inclusion of trust funds of banks in the FederalReserve figures of business deposits and the separate reporting of non-profit associations in the Federal Reserve figures. Further study isbeing made of data that may help to account for the differences.

713



bank deposits and what shifts have occurred inthis ownership, the Board and the Federal Re-serve Banks have decided to obtain regularsemiannual statistics of this nature. Reportsare to be obtained on a purely voluntary basis fora sample of member banks as of the end of Julyand January; they are expected to cover a some-what larger number of banks and to includemore medium-sized banks than the preliminaryMarch survey. Most banks are being asked toclassify as to ownership a larger proportion oftheir deposits; in general banks will be asked toclassify all accounts of $10,000 or more, althoughsome larger banks will use higher minimumlimits. In addition, a special survey is beingmade as of the end of July of a substantial num-ber of small banks to obtain more completeinformation than was received in the Marchsurvey on how their deposit distribution differsfrom that of the larger banks. More compre-hensive and uniform results from reporting banksand the wider coverage will provide the basisfor more accurate estimates as to the distributionof all bank deposits than were possible from theMarch survey.

OWNERSHIP OF BANK DEPOSITS AT REPORTING

BANKS MARCH 31, 1943

Of the estimated 53.1 billion dollars of demanddeposits of individuals, partnerships, and cor-porations at all commercial banks on March 31,1943, the 689 banks covered by the survey held2.0.8 billion, of which 14.4 billion were classifiedas to ownership. Slightly over half of all per-sonal and business deposits at these banks wereclassified as belonging to nonfinancial businessesand ix per cent as belonging to financial busi-nesses, while amounts of large deposits classifiedas personal were small. About 31 per cent ofthe total were not classified. The actualamounts reported in each group are shown inTable 1, which also indicates the relative size ofthe sample as compared with all commercialbanks.

Table 1 summarizes figures reported by asmaller number of banks giying a more detailedbreakdown of business deposits by broad types

of business. These figures indicate that nearlytwo-thirds of the deposits in the classified"large" nonfinancial business accounts belongedto concerns engaged in manufacturing, mining,

TABLE 1. DEMAND DEPOSITS OF INDIVIDUALS, PARTNER-SHIPS, AND CORPORATIONS AT 689 BANKS,

BY TYPES OF DEPOSITORS1

March 31, 1943

Amount j Percent'outstand-1 age of

ing(Ini millionsI ofI dollars)

total de-posits atreporting

banks

Classified "large" deposits:2Nonfinancial businessesFinancial businessesNonprofit associations, clubs, churches, etc...Personal (including farmers)

Total classifiedUnclassified deposits

Total deposits at reporting banksDeposits at nonreporting bankse . . . .

Deposits at all commercial bankse

10,8182,401327882

14,4306,380

52.011.51.64.2

69.330.7

20,810 100.032,290 !...

53,100

1 Including approximately 400 branches in San Francisco FederalReserve District.

2 Lower classification limit varied from $3,000 to $1,000,000; mostbanks used from $5,000 to $100,000, and 8 used over $100,000.

e Estimated.

and construction, with public utilities and tradeeach accounting for about an eighth of the grouptotal. Among the financial accounts, those ofinsurance companies comprise the most impor-tant group.

TABLE 2. DISTRIBUTION OF "LARGE" BUSINESS DEPOSITSBY TYPES OF BUSINESS1

March 31, 1943

Nonfinancial businesses

Manufacturing, mining, and construction....Public utilities, transportation, and communi-

cationRetail and wholesale trade and dealers in com-

modities . . . . .All other., . . . ,

Financial businesses.

Insurance companiesInvestment trusts and investment com-

paniesSecurity brokers and dealersTrust funds of banks ..All other

Amountsoutstand-

ing (Inmillions

ofdollars)

8,738

5,571

1,253

1,112802

1,581

782

13690

230343

Percent-age ofgrouptotals

100.0

63.8

14.3

12.79.2

100.0

49.5

8.65.7

14.521.7

1 Includes only demand deposits in accounts above certain minima,varying from $3,000 to $1,000,000; most banks used from $5,000 to$100,000 and a few used over $100,000. Financial business breakdownbased on reports from 159 banks; nonfinancial business from 572 banks.




DISTRIBUTION OF DEPOSITS AT DIFFERENT

SIZED BANKS

Table 3 indicates that business deposits com-prise a substantial proportion of demand depos-its in banks of all sizes, although the proportionis greater for large banks than for smaller ones.The amount of unclassified deposits was muchgreater in the small banks than in the large ones,even though lower minimum limits were usedin the former than in the latter. The very largebanks, which mostly classified accounts of over$100,000, reported a classification for aboutthree-fourths of all their demand deposits of thetype covered, while the smallest banks classifiedslightly less than half of their deposits. Thesedifferences in proportion of unclassified depositsreflect the greater relative importance of smallpersonal accounts at the smaller banks than atthe larger ones.

Detailed classification of business accounts,

TABLE 3. PERCENTAGE DISTRIBUTION OE DEPOSITS INSELECTED BANKS BY TYPES OF OWNERS IN VARIOUS

SIZE GROUPS OF BANKS

March 31, 1943

Classified " large" deposits:Nonfinancial businesses . . . . . . . .Financial businesses . . . .

Nonprofit associations, clubs,churches, etc

Personal (including farmers)

Total classified deposits.

Unclassified "small" depositsTotal deposits of individuals,

partnerships, and corpora-tions

Banks with deposits of—

Over$250

million(13

banks)

58.213.3

1.43.7

$50 to$250

million(64

banks)

$10 to$50

million(175

banks)

49.612.0

1.74.3

76.6 67.6

23.4 j 32.4

Under$10

million(350

banks)

50.48.3

2.05.7

66.4

33.6

33.34.3

1.97.2

46.7

53.3

I 100.0 I 100.0 j 100.0 I 100.0

NOTE.—Size of bank, as well as distribution of deposits, based ondemand deposits of individuals, partnerships, and corporations. Inlarge banks classified deposits generally include all accounts of over$100,000 each, while in smaller banks minimum limit is mostly between$5,000 and $25,000. Branches of banks in the San Francisco Districtare classified separately according to size of branch rather than accord-ing to size of bank as a whole. These branches comprise a large pro-portion of the banks with deposits of under $10,000,000 each. Thisgroup contains few very small banks. Reporting banks in the twolargest size groups held over half of the estimated total of such depositsat all commercial banks of those sizes, and the sample of banks withsuch deposits of between 10 and 50 million dollars had about a fourthof the estimated total for that group; in the smallest size group thesample was about 6 per cent. Number of banks in two smaller sizegroups is approximate because exact number of branches includedis uncertain.

reported by most banks but not shown in thetable, indicates that deposits of establishmentsengaged in trade and in miscellaneous servicesare relatively much more important at the smallbanks than at the large ones. Deposits of manu-facturing and mining concerns, of insurancecompanies, and of other financial businesses arerelatively more important at the large banks.

CHANGES IN DEPOSITS BY TYPES OP OWNERS

Table 4 shows for 533 banks, which reportedback data, the dollar and percentage increase ineach type of account between December 31, 1941and March 31, 1943. Of the total increase indeposits at reporting banks over the period, overthree-fourths was in reported large nonfinancialbusiness accounts, primarily those of manufac-turing, mining, and construction concerns, withanother 7 per cent in financial businesses. Mak-ing allowance for a division of the unclassifieddeposits, it seems certain that well over 90 percent of the total increase in deposits at reportingbanks occurred in business accounts—financial

TABLE 4. CHANGES IN "LARGE" DEMAND DEPOSITS OFINDIVIDUALS, PARTNERSHIPS, AND CORPORA-

TIONS AT 533 REPORTING BANKS1

December 31, 1941-March 31, 1943[Amounts in millions of dollars]

Amount Increase oroutstanding decrease

March31,1943

and

Nonfinancial businesses2...

Manufacturing, mining,construction

Public utilitiesTradeAll o ther . . . . .

Financial businesses3.

Insurance companies.Investment trusts, etcSecurity brokers and dealers .Trust funds of banks . . . . .Allother

Nonprofit associations, clubs,churches, etc

Personal (including farmers).

Total classified deposits..

I 6,265

De-cember

31,1941

3,972

3,108761588502

1,515

579905995

152

163459

1,905639377350

1,306

Am-

2,293

Per-cent-age

57.7

1,203 63.2122 19.1211 i 56.0152

209

37692 !66 i90 I

146 i

203- 2- 7

43.4

16.0

!

8,402

163451

5,892

54.0- 2 . 2

-10 .65.64.1

1.8

2,510 42.6

1 Includes only classified "large" accounts at reporting banks.2 Total exceeds sum of subgroups because only 478 banks reported

subgroups.3 Total exceeds sum of subgroups because only 58 banks reported

subgroups.

AUGUST 1943 715



and nonfinancial. The broad estimates givenearlier in this statement show that at all com-mercial banks the increase in business depositsaccounts for a somewhat smaller proportion ofthe total increase, reflecting the larger volume ofpersonal deposits at nonreporting banks.

The largest dollar and percentage increaseswere in manufacturing, mining, and constructionbusinesses; large percentage increases were alsoshown in deposits of insurance companies andwholesale and retail trade concerns. Whenallowance is made for overstatement of the in-crease inherent in the classification of only largedeposits (i.e. for the shift of accounts from belowto above the minimum size classified) and fordistribution of unclassified accounts, it appearsthat deposits of nonfinancial business concernsincreased by about 50 per cent, compared withan increase of about a third in personal accounts.

The very large increases in cash holdings inmanufacturing, mining, construction, and tradereflect various factors, including increased work-ing capital needs associated with the unprece-dented volume of war production, liquidation of

inventories, and the accumulation of uninvestedreserve funds, depreciation allowances, accruedtax liabilities, and retained earnings. They alsoreflect the building up of liquid funds prepara-tory to the Treasury war loan drive, which camein April shortly after the date of the survey.Much of the increase in business deposits oc-curred in the last three months of the fifteen-month period, and a large portion of the depositsthen accumulated were utilized to purchaseGovernment securities during the war loan drive.Insurance companies, which held exceptionallylarge deposits at the end of March, utilized alarge portion of these to purchase securitiesduring the drive. In addition, purchases of newsecurities by other corporations were substantial.During the drive, bank deposits of individuals,partnerships, and corporations declined by 5billion dollars or more. Subsequently thesedeposits have risen above pre-drive level asfunds borrowed from the public and from thebanks during the drive have been expended bythe Treasury.

716 FEDERAL RESERVE BULLETIN


REVISION OF STATISTICS OF BANK DEBITS

Beginning with the month of May 1942., whenthe collection of bank debits statistics waschanged from a weekly to a monthly basis, anumber of banks in previously reporting centersand 60 new reporting centers were added.However, in the statistics heretofore publishedin the BULLETIN the figures for the additionalbanks and new reporting centers have been ex-cluded because comparisons with the precedingyear have not been available.

In the Board's release of bank debits figuresfor July 1943 the figures for the additional banksare included for the first time, and figures for thenew reporting centers are also included in thesummary for the first time, with year ago com-parisons. The monthly figures shown in thetable on page 756 of this issue of the BULLETINhave also been revised beginning with May 1942.;the total figure for the year 1941 has not beenrevised because figures on the new basis areavailable for only the last eight months of theyear. A comparison of the old and new seriesfor the past twelve months is shown in thetable in the next column.

The total bank debits of all reporting centersare nearly 6 per cent higher on the revised basis,In New York City the additional banks haveincreased the bank debits on the revised basisnearly 8 per cent. For the national series of140 other centers, available since 1919, the

TOTAL DEBITS TO DEPOSIT ACCOUNTS EXCEPTINTERBANK ACCOUNTS JULY 1942-JUNE 1943,

INCLUSIVE[In millions of dollars]

New York City140 other centers . . . . . . . . . . . . . .Other reporting centers1

Total . . . . . .

Old Series

248,584378,78357,874

685,245

New Series

267,881384,58272,533

724,998

1 133 in old series and 193 in new series.

revision results in an increase of less than 2. percent. In the other reporting centers (formerly133 and now 193) the new series is approxi-mately X5 per cent higher than the old series.

The effect of the additional reporting bankshas been considerable in certain individualcities. For example, the increase in Topekahas been around 55 per cent, Atlanta 14 per cent,and Chicago 7 per cent. In the district sum-maries the Dallas and Minneapolis Districtswere most affected by the added banks andreporting centers, which resulted in increases inbank debits of approximately 10 per cent; in theNew York and Atlanta Districts the increaseswere approximately 8 per cent.

Accompanying the Board's July 1943 releaseare tables showing back figures from May 1941on the revised basis for (1) the 2.1 cities in whichnewly reporting banks were added, and (V)district and national totals.

AUGUST 1943 717


POSTWAR INTERNATIONAL MONETARY STABILIZATION

On July 12, 1943, the Canadian Minister of Fi-nance, the Hon. J. L. Us ley, tabled in the CanadianHouse of Commons a document containing generalobservations of Canadian experts on plans for -postwarmonetary organisation and tentative draft proposalsof these experts for an International Exchange Union.As explained in the general observations, the proposalsof the Canadian experts, like the British and Ameri-can plans,1 are provisional and tentative in character.Mr. I Is ley, in presenting the Canadian plan to theHouse of Commons, stated that' 'the document does notnecessarily represent the vieivs of this Government bywhich, indeed, it has not as yet been considered, andinvolves no commitment ivhatsoever as to the attitudewhich may later be taken by the Government whenformal internatonal discussions are held to deal withthe problem in question.'' The text of this documentis given below, with certain minor modifications in theheadings.

GENERAL OBSERVATIONS OF CANADIAN EXPERTSON PLANS FOR POSTWAR MONETARY

ORGANIZATION

1. Officials of the Canadian Government havehad an opportunity of examining the UnitedStates Treasury Department Preliminary DraftOutline of a Proposal for a United and AssociatedNations Stabilization Fund, and have receivedexplanations of this proposal from Americanofficials. A similar procedure was followed inconnection with the paper containing proposalsby British experts for an International ClearingUnion. The discussions with both British andAmerican officials have been entirely exploratoryand the Canadian Government has not beencommitted to any course of action as a result ofthese conversations. The American and Britishexperts, for their part, have laid stress on thefact that their proposals are tentative in charac-ter, and have made it clear to representatives ofthe Canadian Government (as well as to those ofother Governments) that they would welcomecritical comment and constructive suggestions.Canadian experts who have been studying theBritish and the American proposals are, there-fore, led to make certain observations of a gen-eral character and to submit an alternative plan.

1 For texts of these plans, see the BULLETIN for June 1943, pp. 501-521.

718

Like the British and the American plans, theproposals of the Canadian experts are provisionaland tentative in character; they incorporateimportant features of both the American and theBritish plans and add to them certain newelements.

2.. The main objectives of the American andthe British proposals appear to be identical,namely, the establishment of an internationalmonetary mechanism which will aid in therestoration and development of healthy inter-national trade after the war, which will achievea high degree of exchange stability, and whichwill not conflict with the desire of countries tocarry out such policies as they may think appro-priate to achieve, so far as possible, economicstability at a high level of employment andincomes. To aid in the achievement of theseobjectives, the British and American expertshave proposed the establishment of a new inter-national monetary institution. Their proposalsare large in conception, but no larger than theproblem itself. There is every reason to improvethe structure and operation of the monetarymechanism on the basis of experience. Butthere is no reason why proposals should be basedexclusively on the limited, and on the whole,bad experience of the past two decades. Unlessdependable exchange and credit relations be-tween countries can be achieved before thestresses and strains of the postwar period begin,there is little likelihood that irreparable damagecan be avoided.

3. If plans for international monetary organi-zation are to be successful, other problems—byno means less difficult or less important—willalso have to be faced and solved by joint inter-national action. It would, indeed, be dangerousto attach too much importance to monetaryorganization of and by itself, if this resulted inneglect of other problems which may be evenmore important and difficult, or in a misguidedfaith that with a new form of monetary organi-zation the other problems would solve them-selves. In the international field alone (to saynothing of the innumerable domestic problemsinvolved in the profound changes in the struc-ture of production and employment which havetaken place in all belligerent and many non-belligerent countries due to the exigencies of thewar) it will be necessary to attack frontally suchproblems as commercial policy, internationalinvestment, the instability of primary product




prices—to name but a few. No internationalmonetary organization, however perfect in form,could long survive economic distortions result-ing from bilateralist trade practices, continuedrefusal of creditor countries to accept imports inpayment of the service on their foreign invest-ment or to invest their current account surplusabroad, or enormous fluctuations in food andraw material prices such as characterized theyears between the two wars. But the fact thatthere are many problems to be faced cannot beused as an excuse for facing none. A start mustbe made somewhere, and for the reasons givenin paragraph 5, the problem of internationalmonetary organization is a logical and fruitfulstarting-place.

4. The establishment of an internationalmonetary organization is no substitute for themeasures of international relief and rehabilita-tion which will be required as the war draws toits conclusion and afterwards; and in the view ofthe Canadian experts any monetary organizationwhich is set up should not be called upon tofinance transactions of this nature. Some con-tinuing and stable arrangements regarding inter-national long-term investment are also clearlyessential if equilibrium is to be achieved andmaintained. Nor should it be thought that theproposed international monetary institution ismerely an instrument of the transition periodfrom war to peace. True, it has special impor-tance in this period but it should be designed asa permanent institution and not as a stop-gap tofunction during a relatively short period of time.

5. An important, perhaps the most important,feature of the British and the American proposalsis the provision in both plans for the extensionof credit between countries. The two plansdiffer as regards the precise techniques to be usedin extending credit and as regards the amountswhich may be involved; but both plans providethat foreign credits are to be available undercertain conditions to countries having need ofthem, and that they shall be made availablethrough an international monetary organizationrather than through bilateral arrangementsbetween pairs of countries. The provision forcredit extension is nothing more nor less than astraightforward and realistic recognition of thefact that at the end of the war a large number ofcountries, whose import requirements will beconsiderable, will not have immediately avail-able a sufficient reserve of foreign assets toenable them to expose themselves to the risk ofparticipation in a world economic system. Aninterval will be needed to give time for adjust-ment and reorganization. If the penury in

foreign means of payment of certain importantcountries is to be allowed to fix the pattern ofpostwar trading and domestic policies, then allcan look forward to penury—no country, rich orpoor, will escape the impoverishment resultingfrom the throttling of international trade whichwill result.

6. It is useful to consider what would happenif no action were taken to set up internationalmachinery of the general character suggested bythe experts of the United States and the UnitedKingdom. Theoretically, one alternative wouldbe immediate cash settlement for all interna-tional transactions. But how can cash beproduced for purchases abroad? Only by sellinggoods or services abroad, or by disposing ofacceptable foreign assets such as securities andgold. The facts regarding the distribution ofthe world's monetary gold reserves and thechanges which have taken place in the course ofthe war in various countries' holdings of foreignsecurities are too well known to require elabora-tion. Broadly speaking, and allowing forcertain exceptions and time-lags, a cash basis forthe settlement of international transactionswould mean that any country's capacity toexport would be limited to the amount of its owncurrency it made available to foreign countriesthrough its imports and other current paymentsabroad—in other words, trade would in effect bereduced to barter. In point of fact, however,there is no possibility that countries would forlong allow themselves to be confined in such astrait jacket. Faced with the problem of anunsalable surplus of export goods and with con-sequent domestic unemployment, they wouldrefuse to accept the penalty of disorganizationof export trade if that penalty could be avoided,even temporarily, by the extension of credit.Countries would embark on bilateral creditarrangements, no doubt linked with deals relat-ing to the purchase and sale of goods; and assoon as certain countries began to adopt thiscourse others would find that they had to followsuit to protect their trade interests. It is diffi-cult to imagine a more fruitful source of inter-national dissension than a competitive trade andcredit extension programme of this character.

The Canadian experts believe it to be true,therefore, that the Stabilization Fund or ClearingUnion plans do not involve a decision as towhether foreign credits shall be extended orwithheld. In some form or other, credit will infact be extended; and the decision which has tobe taken relates primarily to the method em-ployed. For the reasons given above, interna-

AUGUST 1943



tional arrangements are greatly to be preferredto bilateral deals.

7. This leads to the question, how muchcredit should be made available through theinternational monetary mechanism? A vitalfeature of any plan of this sort is the provision itmakes for the borrowing power of each partici-pant and for the contribution to the resources ofthe organization by the participating countriesthrough the provision of capital, the accumula-tion of balances or through loans. Someconcern has been expressed in regard to the sizeof the commitment which may be assumed byprospective creditors. It is probable that Can-ada will be a creditor country on current account,and the Canadian experts have therefore givencareful thought to this aspect of the arrange-ments.

8. There is one preliminary observation whichshould be made in this connection. It wouldbe a distortion of the realities of the situation forany country, or its citizens, to regard the will-ingness to provide resources to an internationalorganization of the general character proposedby the British and the American experts as anact of generosity which is performed for the sakeof foreign countries. Resources are provided tothe organization first, because all have a stakein recreating a functioning international eco-nomic system and secondly, because for eachindividual country the realistic alternatives inthe form of trade disorganization are costlierthan the provision of resources. Moreover,and most important of all, the resources pro-vided are not given away; they are fully securedby the organization's holdings of gold andnational currencies. It can only lead to confu-sion of thought to regard participation in suchplans as these as in any way similar in characterto participation in international relief schemes,important and necessary though the latter maybe.

9. It seems apparent that, in one way or an-other, substantial unregulated movements ofcapital between countries will be prevented. Inthese circumstances, countries will, by and large,lose or gain foreign exchange to the extent, butonly to the extent, of the unbalance in theircurrent account transactions with the rest of theworld. If a country is building up a substantialcredit position, it will know that this situationis produced because it is selling more goods andservices abroad than it is buying abroad. If itis dissatisfied with this position, if it wishes toreduce its credit balance, it has through partici-pation in the proposed organization lost nosingle one of the courses of action ever open to it.

True, it is by no means easy for a country, actingalone, to solve problems of unbalance. But asa last resort a country can find a solution byunilateral action. It can do the only things itever could do in these circumstances; it can buymore abroad—goods, services or investments;or it can sell less abroad. It is therefore quitewrong to assume that countries participating inthe proposed institution would, because of thisparticipation, be left without control over theirinternational commitments. It may be, and nodoubt is, useful to erect danger signals at variousstations along the road followed by both debtorsand creditors. Such signals are useful reminders.But there is nothing to prevent either creditor ordebtor from taking remedial action at any time.

10. If the foregoing is a correct analysis of thesituation—and it would appear to be a simplestatement of fact—creditors need not be undulyconcerned about the possible size of their invest-ment in the Fund, knowing that the ultimateactual size of their stake can be determined bytheir own course of action from day to day andfrom year to year. Nevertheless, even theappearance of an unlimited commitment is prob-ably undesirable and in the tentative proposalsof Canadian experts, a limit is placed on theobligation of each participant to provide re-sources to the institution. But there is less realdanger to the interests of creditor countries inthe establishment of a Fund or a Union whosepotential resources are unnecessarily large (andmay in consequence never be entirely used) thanthere is in the establishment of an institutionwhose resources are obviously too small. Theinterests of all will best be served by providing afair degree of latitude, a satisfactory breathing-space—to debtors and creditors alike. If itsobjectives are to be achieved, the resources mustbe large enough to permit time for basic read-justments to be accomplished; they must be suchthat the organization will command general con-fidence in its own stability. For if this is notthe case, what will happen? It will be believedthat certain currencies are likely to become"scarce" currencies—a belief which will bereinforced by the reduction in the institution'sholdings of that particular currency. Countrieswhich are likely to require a "scarce" currencywill hasten to make their purchases which arepayable in that currency. As the holdings ofthe "scarce" currency are used up, as discussionsand arguments commence regarding an enlarge-ment of the quota or some other form of exten-sion of credit, grave misgivings in regard to theinternational situation will arise. The positionwill be very much akin to that of a bank whose

7x0 FEDERAL RESERVE BULLETIN



cash reserves are feared to be insufficient. Therewill be a run on that currency in the institution;and if the currency concerned is an importantone, the international effects will be very seriousindeed. No form of international monetaryorganization can continuously compensate forchronic maladjustments in the current accountbalance of payments of the countries which maybe concerned, but it would be most unwise to setup machinery which stood a fair chance of facinga crisis at a comparatively early date.

I I . To avoid misunderstanding it should beemphasized that it would be extremely danger-ous to use short-term credits as a device Co coverup basically unsound positions. This would beno less disastrous in the international than inthe domestic field, and any monetary systemwhich made such an attempt on a large scalewould inevitably break down. A chronicunbalance in current account balances of inter-national payments which is not matched byvoluntary long-term capital movements—lend-ing abroad by creditor countries, and borrowingabroad by debtor countries—is symptomatic of adeep-seated maladjustment which has to bedealt with if equilibrium is to be restored. Nodebtor country can live beyond its resourcesindefinitely; and no creditor country can per-sistently refuse to lend its surplus abroad or makeother adjustments to its creditor position with-out ripping the international fabric. But timeis required for adjustments to be made and forremedial measures to have their effects, and thecontention of this paper is that the time allowedmust be adequate. More time may be purchasedat a smaller real cost than less time.

ix. There is one final observation of a generalcharacter which should be made. The newinternational monetary institution which it isproposed to establish will be neither omniscientnor omnipotent. Its aim will be to promoteconditions in which member countries are free tocarry out sound economic policies for the wel-fare of their own people and in which they willnot be induced or forced, for lack of organizedcooperation, to pursue policies which impover-ish themselves and contribute to the impoverish-ment of the world. The organization should beinternational and not supernational. Nationsshould enter into the proposed agreement forcommon purposes and advantages, realizingthat without such agreement the common pur-poses cannot be achieved. In their nationalpolicies, countries should be limited only bytheir own will in entering and remaining in theorganization. If the proposed institution func-tions well, it will have at its disposal more

AUGUST 1943

information regarding the currents of interna-tional financial transactions and the causes ofdisequilibrium than has ever been availablebefore. It will be in a position to offer informedand disinterested advice to its members. It maybe hoped that the quality of the advice offeredwill be such that it will carry great weight.But no member state should be asked to binditself in all circumstances to follow the advicegiven by the organization. Moreover, if acountry feels at any time that its national inter-ests are being jeopardized by the actions of theorganization, and is willing to sacrifice theadvantages of continued membership, it shouldbe free to withdraw, after making provision toliquidate its obligations to the organization or,if the country is a creditor, it should have re-turned to it its original contribution to theresources of the organization. The proposalshere advanced are put forward in the belief thata soundly conceived international agreementcan give greater scope for national policiesthan can exist outside it.

13. To sum up these general observations, itis suggested that:

(a) An international agreement for the estab-lishment of an international monetaryorganization which involves the exten-sion of credit is essential if internationalcooperation in the postwar world is to beachieved.

(b) Such machinery will deal with only one ofthe numerous problems which must befaced, but it is a logical and convenientstarting place for joint internationalaction.

(c) The credit made available through theinternational monetary organizationshould be adequate to deal with that por-tion of current account surpluses anddeficits which is not met by relief andother concerted international action inthe years immediately after the war; itshould be sufficient to provide a firm basison which multilateral world trade can bere-established after the war; and it shouldprovide time to countries which find theirinternational accounts unbalanced to takethe necessary corrective measures to ad-just their position.

(d) The extension of credit is not a cure-all;it merely provides time for adjustments;and unless unbalanced positions (exceptthose accompanying long-term capitalmovements) are brought into equilibrium,any arrangements made will break down.

(e) No country participating in the arrange-

72-1



ments loses control over the size of itsinternational commitments, since it candetermine their size by its own action, ifit wishes to do so.

(f) No country participating in the arrange-ments loses control over its domesticeconomic policies.

TENTATIVE DRAFT PROPOSALS OP CANADIAN

EXPERTS FOR AN INTERNATIONAL

EXCHANGE UNION*

I. Purposes of the Unioni. To provide for stability of exchange rates

and to provide an orderly method for their de-termination.

x. To provide a convenient clearing mechan-ism to settle balances in international payments.

3. To provide to all countries access to foreignexchange resources in order to reduce the dangerthat economic and commercial policies in theperiod immediately after the war will be largelydetermined by a shortage of foreign exchangeand to enable countries thereafter to be guidedin their economic and commercial policies bylong-run considerations when faced with atemporary reduction of foreign markets.

4. To aid in the achievement of internationalequilibrium by measures designed to preventexcessive short-term borrowing through theUnion or the excessive accumulation of unin-vested foreign surpluses.

5. To contribute to the re-establishment anddevelopment of a multilateral trading systemand to the elimination of discriminatory tradingand currency practices.

II. Resources of the Union

Member countries shall agree to make thefollowing resources available to the Union:

1. A capital subscription to the amount of thequota assigned to each member country, theaggregate of such quotas to be 8,000 milliondollars.

(a) Determination of quotasThe quota for each member country shallbe determined by a formula which willgive due regard to factors such as inter-national trade, national income, and hold-ings of gold and foreign exchange convert-ible into gold. A special assessment may

* It might be preferable to refer to the proposed organization as theInternational Exchange Fund. However, to avoid any possible mis-understanding which might arise through the use of the term Fund todescribe both the association of members and the resources of the in-stitution, the term Union has been used throughout this document todescribe the organization itself.

be levied in any case where this formulawould be inappropriate.

(b) Payment of capital subscriptionsThe capital subscription of each membercountry shall be paid up in full on or be-fore the date set by the Governing Boardof the Union on which the Union's opera-tions are to begin. Each member countryshall pay in at least 15 per cent of its quotain gold and the balance in national cur-rency; a country may substitute gold fornational currency in meeting its quotarequirements. The Union may makesuch arrangements as it deems appropriateto provide a period of time within whichcountries having less than 300 milliondollars in gold or foreign exchange con-vertible into gold in official exchangereserves may pay up their gold contribu-tion in full, the equivalent in nationalcurrency to be paid in the interval. Not-withstanding the provisions of subsequentparagraphs, the Union shall sell foreignexchange to such member countries forthe purpose of acquiring gold to pay theircapital subscriptions.

(c) Change in quotasThe Board may from time to time changethe quotas of particular member countries,provided, however, that in voting onproposals to increase quotas the votingstrength of each member shall be increasedor decreased to take account of theUnion's net sales or purchases of the cur-rency of each member country in accord-ance with the weighted voting formulaset out in IX, 3, below. No increaseshall, however, be made in the quota ofany country without the consent of therepresentative of the country concerned.

x. Loans to the Union, as required, in amountsnot exceeding 50 per cent of the quota of eachmember country.

(a) Conditions of borrowingThe terms and conditions of loans madeby member countries to the Union underthe provisions of paragraph II, x, shall beset out in the rules and regulations of theUnion. The Union's authority to borrowdomestic currency from member countriesin amounts up to 50 per cent of theirquotas shall be a revolving authority.The union shall not exercise its right toborrow until it has used its available goldresources to acquire additional supplies ofthe currency in question. Subject to theprovisions of the preceding sentence, the




Union must exercise its right to borrowwhen its holdings of the currency of anymember country have been reduced to 10per cent of the quota of that membercountry. When the Union exercises itsright under the provisions of paragraphII, x, to borrow additional supplies of thecurrency of any member country it shallhave the duty to attempt to improve itsposition in the currency concerned byacquiring the currency or gold from theholdings of other member countries forpayment in their national currencies or inother foreign exchange they need.

(b) Conditions of repaymentThe Union shall have the right to repayloans contracted under the provisions ofparagraph II, x, at any time. The membercountry making the loan shall have theright to demand repayment in gold to theextent of the Union's gold holdings atany time and shall also have the right todemand repayment in its national cur-rency provided that such repayment doesnot reduce the Union's holdings of thatcurrency below 50 per cent of the quota ofthe member country. Member countriesshall agree to give 30 days' notice ofdemand for repayment of loans made tothe Union under the provisions of thepresent article.

III. Monetary Unit of the Union

1. The monetary unit of the Union shall be aninternational unit of such name as may beagreed (hereafter referred to as the Unit) and itshall consist of 137 \ grains of fine gold. Theaccounts of the Union shall be kept and pub-lished in terms of the Unit.

x. The value of the Unit in terms of gold shallnot be changed without the approval of four-fifths of member votes.

3. Member countries shall agree with theUnion the initial values of their currencies interms of gold or the Unit and, except as providedin paragraph IV,i, below, shall undertake not toalter these values without the approval of theUnion.

4. Deposits in terms of the Unit may be ac-cepted by the Union from member countries uponthe delivery of gold to the Union. Such Unitdeposits shall be transferable to other.membercountries. They shall be redeemable in gold andthe Union shall maintain at all times a 100 percent reserve in gold against all Unit deposits.

AUGUST 1943

IV. Exchange Rates

1. The Union shall fix, on the basis of ex-change rates initially agreed between it and eachmember country, the rates at which it will buyand sell one member's currency for another's,and the rates in local currencies at which it willbuy and sell gold. The spread between theUnion's buying and selling rates for member cur-rencies and for gold shall not exceed 1 per cent.Except as provided in paragraph IV, 2., below,member countries shall agree not to change theinitially agreed exchange rates without theapproval of the Union and any country whichalters the value of its currency without the con-sent of the Union shall be declared in default ofits obligations and become subject to the penal-ties provided in XI, 1, below.

x. Notwithstanding the provisions of para-graph IV, 1, above, any member country whichis a net purchaser of foreign exchange from theUnion (arising from other than capital accounttransactions) to the extent of at least 50 per centof its quota and has so been on the average of thepreceding 12. months shall be entitled to depreci-ate its exchange to the maximum extent of 5per cent; provided, however, that the provisionsof this paragraph shall not apply to any countrywhich holds independent official reserves of goldand foreign currencies freely convertible intogold in amounts exceeding 50 per cent of itsquota. No country shall be entitled to repeatthe exchange depreciation provided for in thisparagraph without the specific approval of theUnion.

In the course of conversation in Washingtonthe Canadian experts expressed the view that itmight be desirable to provide for a somewhatgreater permissive range of depreciation in ex-change rates with somewhat different safeguardsthan those incorporated in paragraph IV, 2.The following is a draft of a paragraph whichmight be substituted for paragraph IV, 2., ofthe text:

"Notwithstanding the provisions of para-graph IV, 1, above, any member country whichhas had an adverse balance of payments on cur-rent account during a two year period of suchmagnitude that it has utilized, to cover thisdeficit, 50 per cent of its independent gold andforeign exchange reserves and is, in addition, anet purchaser of foreign exchange from theUnion to the extent of 50 per cent of its quotashall be entitled to depreciate its exchange rateto the maximum extent of 10 per cent. Theprovisions of this paragraph shall only be ap-plicable once in respect of each member country

72-3



unless the specific approval of the Union has beenobtained. Any member country intending todepreciate its exchange rate under the provisionsof this paragraph shall inform the managementof the Union in advance and shall afford it anopportunity to make such observations as itdeems appropriate before taking such action."

3. No change in the value of currencies ofmember countries shall be permitted to alter thevalue of the assets of the Union in terms of goldor the Unit. Thus if the Union approves areduction in the value of the currency of amember country, or if a country depreciates itsexchange under the provisions of the precedingparagraph, or if a significant depreciation in thevalue of the currency of a member, as determinedby quotations on the exchange markets of othermember countries, has in tact occurred, thatcountry must on request deliver to the Union anamount of its local currency equal to the de-crease in the value of that currency held by theUnion. Likewise, if the currency of a particularcountry should appreciate, the Union must re-turn to that country an amount in the currencyof that country or in gold equal to the resultingincrease in the value of the Union's holdings.

V. Operations of the Union—Provisions ofSpecial Applicability to Deficit Countries

1. The Union shall have the power to sell tothe Treasury of any member country (or ex-change fund or central bank acting as its agentfor the purpose) at the rate of exchange estab-lished by the Union, currency of any countrywhich the Union holds, subject to the followingprovisions:

(a) Without special permission, no countryshall be a net purchaser of foreign ex-change from the Union except for thepurpose of meeting an adverse balance ofpayments on current account and theUnion may at any time limit the amountsof foreign exchange to be sold to anymember country which is permitting sig-nificant exports of capital while having anadverse balance of payments on currentaccount.

(i) A county shall be regarded as a net pur-chaser of foreign exchange if as a result ofthe Union's purchases and sales of curren-cies the Union's holdings of its currency riseabove the amount originally provided tothe Union by way of capital subscription.

(it) The Union may require any membercountry to furnish at periodic intervalsstatistics of its balance of internationalpayments on current account and on capi-

72-4

tal account and statistics of gold andforeign exchange holdings, public andprivate. Each such member country shallagree to furnish officers of the Union withdetailed explanations of the basis onwhich such statistics are computed. Ifat any time the Governing Board hasreason to believe that an outflow ofcapital from any member country isresulting directly or indirectly in netpurchases of foreign exchange by thatcountry from the Union, it shall have theright to require a control of outwardcapital movements as a condition ofmaking additional sales of foreign ex-change to such country. Without limit-ing the generality of the foregoing, theUnion shall normally require any membercountry which has been a net purchaserof foreign exchange to the extent of 2.5per cent of its quota to impose restrictionson outward capital movements if noneexist.

Qiii) In considering applications from countrieswhich have been net purchasers of foreignexchange from the Union for the specialpermission referred to in paragraph V, 1,Qa), to purchase foreign exchange forpurposes other than the meeting of anadverse balance of payments on currentaccount, the Governing Board shall givecareful attention to applications forforeign exchange to facilitate the adjust-ment of foreign debts where this is deemedto be desirable from the point of view ofthe general economic situation and shallalso give special attention to applicationsfor foreign exchange by member countriesnot in default on their foreign obligationsfor the purpose of maintaining con-tractual principal payments on foreigndebt.

(b) In order to promote the most effectiveutilization of existing stocks of gold andforeign exchange, no member countryshall have the right to be a net purchaserof foreign exchange from the Union solong as that country's holdings of goldand foreign currencies freely convertibleinto gold (including private as well asofficial holdings) exceed its quota.

In interpreting this provision the Gov-erning Board shall give special considera-tion to the position of certain Asiaticcountries where gold has long been usedas private treasure.




(c) In general, the Union shall have the powerto sell foreign exchange for domesticcurrency to member countries up to zooper cent of the quota of each such membercountry. Net sales of foreign exchangeshall not exceed 50 per cent of the quotaof each member country during the firstyear and the cumulative net sales shallnot exceed 100 per cent, 150 per cent, orzoo per cent during the first two, three,and four years of the operation of theUnion.

On special vote of the GoverningBoard, in which voting strength shall beweighted to allow for the Union's netpurchases and sales of each membercountry's currency in accordance with theprovisions described in paragraph IX, 3,below, the Union may purchase anycurrency in excess of these limits providedthat (a) the country whose currency isbeing acquired by the Union agrees toadopt and carry out measures recom-mended by the Union to correct the dis-equilibrium in its balance of payments, or(b) it is the view of the Governing Boardthat the country's prospective balance o^payments is such as to warrant theexpectation that the excess currencyholdings of the Union can be disposed ofin a reasonable time.

(d) In order to promote the most effectiveutilization of existing stocks of gold andforeign exchange the Union may, as acondition of making further sales offoreign exchange to any member countrywhich would bring its net purchases toan amount in excess of 50 per cent of itsquota, require such country to sell to theUnion, for domestic currency, appro-priate amounts of any reserves it (or itsresidents) may hold of gold or foreignexchange acceptable to the Union.

{e) Notwithstanding the provisions of para-graph (c) above, whenever a membercountry is exhausting its quota morerapidly than is warranted in the judgmentof the Governing Board, the Board maymake such recommendations to thatcountry as it thinks appropriate with aview to correcting the disequilibrium,and may place such conditions uponadditional sales of foreign exchange tothat country as it deems to be in thegeneral interest of the Union.

z. A charge of 1 per cent per annum payablein gold shall be levied against member countries

AUGUST 1943

on the amount of their currency held by theUnion in excess of the quotas of such countries.

VI. Operations of the Union—Provisions ofSpecial Applicability to Surplus Countries

1. In order to promote the most effectiveutilization of the available and accumulatingsupply of gold and foreign exchange resources ofmember countries, each member country shall,on request of the Union, sell to the Union, for itslocal currency or for foreign currencies which itneeds, all gold and foreign exchange it acquiresin excess of the amounts held immediately afterjoining the Union.

For the purpose of this provision, only freeforeign exchange and gold are considered.Each member country shall agree to furnish theUnion with periodic reports of gold and foreignexchange holdings, public and private.

z. When the Union's operations have resultedin excess sales of the currency of any membercountry to the extent of 75 per cent of the quotaof that country the Union may, in order to in-crease its resources of the currency in question,attempt to arrange, in cooperation with suchagencies as may be established to promote inter-national investment, with the member countrya programme of foreign capital investment (orrepatriation) and may sell foreign exchange tofacilitate such capital movements.

3. When the Union's holdings of the currencyof a member country are being exhausted morerapidly than is warranted in the judgment of theGoverning Board, the Board may make a reporton the situation. Without restricting thegenerality of the foregoing, whenever theUnion's operations have resulted in excess salesof the currency of any member country to theextent of 85 per cent of the quota of that country,the Union has the authority and the duty torender to the country a report embodying ananalysis of the causes of the depletion of its hold-ings of the currency and recommendations ap-propriate to restore the equilibrium of theinternational balances of the country concerned.Such recommendations may relate to monetaryand fiscal policies, exchange rate, commercialpolicy, and international investment.

The Board member of the country in questionshall be a member of the Union Committee ap-pointed to draft the report. The report shallbe sent to all member countries and, if deemeddesirable, made public.

4. The Union shall have the right at any timeto enter into arrangements with any membercountry to borrow additional supplies of its



currency on such terms and conditions as maybe mutually satisfactory.

5. The Union shall have the right at any timeto enter into special arrangements with anymember country for the purpose of providing anemergency supply of the currency of any othermember country on such terms and conditionsas may be mutually satisfactory.

6. Whenever it becomes apparent to theGoverning Board that the anticipated demandfor any currency may soon exhaust the Union'sholdings, the Governing Board shall inform themember countries of the probable supply of thiscurrency and of a proposed method for its equit-able distribution together with suggestions forhelping to equate the anticipated demand andsupply.

(a) The provisions of paragraph VI,6, shallcome into force only after the Union hasexercised in full its right under paragraphII,x, to borrow additional supplies of thecurrency of the member country and afterthe Union has taken such further steps toincrease its supply of this currency as ithas deemed appropriate and found pos-sible.

(b) The provisions of paragraph V,i, (c),shall, if necessary, be restricted by theduty of the Union to assure an appropri-ate distribution among various membersof any currency the Union's supply ofwhich is being exhausted.

(c) In rationing its sales of any scarce cur-rency the Union shall be guided by theprinciple of satisfying the most urgentneeds from the point of view of thegeneral international economic situation.It shall also consider the special needs andresources of the various countries makingthe request for the scarce currency.

(d) Member countries shall agree that re-strictions imposed by other membercountries on the importations of goodsfrom a country whose currency is beingrationed by the Union shall, for the dura-tion of such rationing, not be regarded asconstituting an infraction of the mostfavoured nation obligations of com-mercial treaties except in the case ofcountries holding official reserves of goldand the currencies of member countries inamounts exceeding 50 per cent of theirquotas.*

* This proposal will clearly have to be reviewed in the light of suchgeneral arrangements as may be made regarding international com-mercial policy and coordinated with those arrangements.

7. Whenever the Governing Board has, underthe provisions of the preceding paragraph, takensteps to ration the Union's supply of the currencyof any member country, it may require the re-maining member countries to prevent the saleby their residents of each other's currencies,including bills of exchange, in the countrywhose currency is being rationed and to preventthe purchase by their residents of the rationedcurrency through the exchange markets of non-member countries. In addition, whenever theBoard has taken steps to ration the Union'ssupply of the currency of any member country, itshall have the duty to re-examine the prevailingexchange rates and to recommend such changesas it may regard as appropriate to the changedcircumstances.

VII. Powers of the Union-General

1. The Union shall have the powers to takesuch actions as are required to carry out theoperations enumerated in the preceding para-graphs. For greater clarity, the Union shallhave the power to buy, sell and hold gold, cur-rencies, and government securities of membercountries; to accept deposits and to earmarkgold; to issue its own obligations and to dis-count or offer them for sale in member countries;and to act as a clearing house for the settling ofinternational movements of funds and gold.

Member countries agree that all of the Union'slocal currency holdings shall be free from anyrestrictions as to their use for payments withinthe country concerned.

x. When the Union's holdings of the localcurrency of a member country exceed the quota ofthat country the Union shall have the power toresell to the member country, upon its requestthe Union's excess holdings of its currency forgold or acceptable foreign exchange.

3. The Union shall have the power to investany of its currency holdings in governmentsecurities of the country of that currency, pro-vided that the Board representative of thecountry concerned approves.

4. The Union shall have the power to buy andsell currencies of nonmember countries, but shallnot normally hold the currencies of nonmembercountries beyond 60 days after the date of pur-chase.

5. The Union shall have the power to levyupon member countries a pro rat a share of theexpenses of operating the Union, such levy to bemade, however, only to the extent that theearnings of the Union are inadequate to meet itscurrent expenses.




6. The Union shall make a service charge ofone-quarter per cent on all gold transactions.

7. In conducting its own operations theUnion shall have the power to deal only with orthrough (a) the Treasuries, exchange funds, orfiscal agents of governments, (b) central bankswith the consent of the member of the Boardrepresenting the country in question, and (c)any international banks owned predominantlyby member countries. The Union may, never-theless, with the approval of the member of theBoard representing the country concerned, sellits own securities directly to the public or toinstitutions of member countries.

8. The Union shall have the power and theduty to cooperate with such other institutions ofan international character as may exist or be es-tablished to deal with matters of internationalconcern, including but not restricted to inter-national investment and commercial policy.

VIII. Abnormal Wartime Balances

During the first two years of operation theUnion shall have the right to purchase abnormalwartime balances held by member countries inother member countries for the national currencyof the country selling such balances or for foreignexchange needed to meet current account def-icits in such country's balance of internationalpayments, in amounts not exceeding in the ag-gregate 5 per cent of the quotas of all membercountries. At the end of two years of operationthe Governing Board shall propose a plan for thegradual further liquidation, in whole or in part,through the Union, of abnormal wartime bal-ances lying to the credit of member countries inother member countries and other financialindebtedness of a similar character. If theGoverning Board feels unable to recommendthat the Union's resources be used for thispurpose it shall have the duty to propose someother method by which the problem can beconsidered.

IX. Voting Power1. Each member country shall have 100 votes

plus one vote for the equivalent of each 100,000Units of its quota.

1. All decisions, except where specificallyprovided otherwise, shall be made by majorityof the member votes.

3. Notwithstanding the provisions of para-graph 1 above, in any vote on a proposal toincrease the quota of any member country,member countries shall acquire one additionalvote for each 100,000 Units of their contribution

to the resources of the Fund (by way of originalcapital subscription or by way of loans madeunder the provisions of paragraph 11,2.) whichhas been utilized, net, on the average of thepreceding year by the Union for sale to othermember countries; and member countries shalllose one vote for each 100,000 Units of their netutilization of the resources of the Union on theaverage of the preceding year.

X. Management1. The administration of the Union shall be

vested in a Governing Board. Each govern-ment shall appoint a representative and analternate who shall serve on the Board for aperiod of three years subject to the pleasure oftheir government. Representatives and alter-nates may be reappointed.

z. The Governing Board shall select a Gov-ernor of the Union and one or more assistants.The Governor shall become an ex officio memberof the Board and shall be chief of the operatingstaff of the Board. The Governor and his as-sistants shall hold office for five years and shallbe eligible for re-election and may be removed forcause at any time by the Board.

3. The Governor of the Union shall select theoperating staff in accordance with regulationsestablished by the Governing Board. Membersof the staff may be made available upon requestof member countries or of other institutions of aninternational character for consultation inconnection with economic problems and policies.

4. The Governing Board shall appoint fromamong its members an Executive Committee toconsist of not fewer than eleven members. TheChairman of the Board shall be the Chairman ofthe Executive Committee and the Governor ofthe Union shall be ex officio a member of theExecutive Committee. Meetings of the Ex-ecutive Committee shall be held at least onceevery two months and more frequently if theExecutive Committee shall so decide.

5. The Governing Board shall hold an annualmeeting and such other meetings as it may bedesirable to convene. On request of membercountries casting one-fourth of the votes theChairman shall call a meeting of the Board forthe purpose of considering any matters placedbefore it.

6. Net profits earned by the Union shall bedistributed in the following manner:

(a) 50 per cent to reserves until the reservesare equal to 10 per cent of the aggregatequotas of the Union,

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(b) 50 per cent to be divided each year amongthe members in proportion to their quotas.

XL Withdrawal and Expulsion from the Union

1. A country failing to meet its obligations tothe Union may be suspended provided a majorityof the member votes so decides. While undersuspension the country shall be denied theprivileges of membership but shall be subjectto the same obligations as any other member ofthe Union. At the end of one year the countryshall be automatically dropped from member-ship unless it has been restored to good standingby a majority of the member votes.

1. Any country which has been a net pur-chaser of foreign exchange from the Union maywithdraw from the Union by giving notice andits withdrawal shall take effect one year fromthe date of such notice. During the intervalbetween notice of withdrawal and the takingeffect of the notice such country shall be subjectto the same obligations as any other member ofthe Union.

3. Any country which has not been a netpurchaser of foreign exchange from the Unionmay withdraw from the Union by givin

federal reserve bulletin august 1943 - st. louis fedfederal reserve bulletin volume august number 8...

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