1941: Financial Review

Effects of War.

The field of finance was dominated in 1941, as it was in 1940, by the World War and events related thereto. New heights of business activity, virtual termination of the huge imports of gold of recent years, a sharp decline in excess bank reserves, continued low interest rates, huge Government borrowing, taxing, and spending program, and increasing bank loans and investments can be attributed in large part to war developments.

The outstanding financial development of the year was, of course, the continual enlargement of the defense program, with the concomitant requirement of raising by one means or another the untold billions of dollars called for by that program. This phase of finance is more fully discussed in Public Finance.

Stock Market.

So far as security prices are concerned, the most important development during 1941 was a fairly sharp decline in stocks. The Dow Jones average of 30 industrial stocks listed on the New York Stock Exchange closed 1941 at 110.96 as compared with 131.13 at the close of 1940, a decline of about 16 per cent. The corresponding averages of 20 railroad stocks were 25.42 and 28.13, a decline of 9 per cent, and 15 utility stocks were 14.02 and 19.85, a decline of 29 per cent. With the exception of the sharp decline in stock prices immediately following the direct participation of the United States in war, in December 1941, there were no outstanding trends in the stock market during the year. As measured by the Dow Jones index of industrial stocks, prices followed an irregularly declining trend from a high of 133.59 in January to a low of 115.30 in May. Prices then rose gradually to 130.06 at the end of July. By early December prices had fallen to 116.65, which was followed by a sharp break to the year's low of 106.34 following our entry into the war.

Lower prices, accompanied in some cases by increased dividends, raised stock yields to new high levels during the year. Measured by the stocks used in the Dow Jones averages, the yield on industrial stocks during the year rose from 5.46 per cent to 7.12 per cent, on railroad stocks from 6.08 per cent to 8.00 per cent, and on utilities from 6.68 per cent to 9.81 per cent. This sharp increase in stock yields during the year further intensified the abnormal discrepancy already existing between stock yields and bond yields. Immediately prior to our entry into the war, the prices of high-grade bonds, whether corporate, municipal, or Federal, were slightly higher than at the close of 1940, thus continuing to some extent the long-existent down-trend in bond yields. By the close of the year, however, war developments had brought bond prices to a level slightly under that at the close of 1940.

The volume of trading in stocks on the New York Stock Exchange during 1941 marked a continuation of the declining activity characteristic of each of the four preceding years. Total sales for the year, 170,600,000 shares, were 18 per cent less than the figure for 1940, 66 per cent less than that for 1936, 85 per cent less than that for 1929, and were at the lowest level since 1918. Total bond sales on the New York Exchange stood at $2,112,000,000, an increase of 26 per cent over the previous year. During 1941 a seat on the New York Stock Exchange sold at $19,000, a new low price for the present century. The high price for the year was $35,000 and the final price $25,000. These figures compare with a 1940 low of $32,000 and a 1929 high of $625,000, before a 25 per cent increase in the number of seats.

Capital Financing.

On the basis of figures published by the Commercial and Financial Chronicle, for the first 11 months of 1940, capital financing during that period (exclusive of the Federal Government and its agencies) amounted to $3,358,000,000, slightly less than the corresponding figure for the previous year. Further analysis, however, brings out some interesting variations in the make-up of the total, the most important of which was an increase in new capital corporate financing to $963,000,000 from $674,000,000 in the previous year. Plant modification and expansion necessitated by the defense program was presumably the cause of this increase, but in spite of this stimulus the amount of capital financing remained substantially below the average for more normal times. It is thus clear that much the greater part of the cost of plant expansion is being met by the Federal Government.

Continued low interest rates during the year were responsible for the refunding prior to maturity of $1,493,000,000 of corporate issues. A substantial proportion of issues of corporate securities was placed privately during the year rather than being publicly sold through investment bankers; estimates of the proportion run from one-third to one-half. Competitive bidding for public utility securities, which was ordered by the Securities and Exchange Commission in May 1941, was expected to lessen somewhat the private placing of securities, and certain other corporations sought competitive bids for their offerings, thus in many cases breaking down banker-company relationships of long standing. One of the more unusual events of the year was the purchase by the Reconstruction Finance Corporation of an issue of $136,000,000 of refunding highway bonds offered by the State of Arkansas.

Possible revisions of the Federal Securities Act of 1933, which regulates the sale of new issues of securities, have been under discussion for more than a year between representatives of the investment bankers, the Securities and Exchange Commission, and the House Committee on Interstate and Foreign Commerce, but no legislation has as yet been forthcoming. It has truthfully been said that money and credit is one major war requisite with which this country seems plentifully supplied. The exact mechanism, however, by which this huge supply will be drawn into the war effort has not yet been clarified.

New Taxes and Industry.

Compilations by the National City Bank of New York show the heavy impact of increased taxes upon rising corporate profits. Profits of 350 leading industrial corporations in the first 9 months of 1941 amounted to $1,111,000,000, an increase of 26 per cent over the corresponding figure for 1940. An analysis of the reports of 140 of these corporations, which give tax details, shows that their earnings before taxes were $1,632,000,000, an increase of 91 per cent; income and excess profits taxes were $895,000,000, an increase of 255 per cent; and net profits were $737,000,000, an increase of 22 per cent.

A group of 25 large public utility companies reached a new high in operating revenues in the 12 months ended Sept. 30, 1941, showing an increase of 6 per cent over the preceding 12 months. Because of increased taxes and other expenses, however, their net income showed a decrease of 5 per cent. Despite sharply increased revenue from both freight and passenger business, the railroads of the country are still earning less than 4 per cent on their property investment. Recently granted wage increases, as well as increases in other operating costs, may reduce this return substantially unless recent requests for increased rates are allowed.

United States Monetary Status.

The heavy gold movements into the United States during the preceding several years seem to have come to a halt during 1941. In contrast to a net increase in our gold stock of $4,351,000,000 in 1940, the net increase in 1941 was only $741,000,000, and the year-end total of $22,736,000,000 was actually lower by $25,000,000 than the total reached in September. Gold held at Federal Reserve Banks under earmark for foreign account at the end of November amounted to $2,116,000,000, an increase of $308,000,000 since the end of 1940. Although the huge additions of recent years to our net domestic gold stock seem to have come to an end, there is still a substantial potential addition represented by an annual production now running at the rate of more than $1,000,000,000, as well as by the more than $2,000,000,000 of gold held here for foreign account. Problems presented by our ownership of a large majority of the world's gold supply are among the more important questions confronting those responsible for the monetary policies of the nation.

The sharp decline in gold imports, a large increase in currency in circulation, the increase in bank loans and investments resulting from increased business, and finally an increase in the reserve requirements, combined to bring about a reduction from the $6,896,000,000 excess reserves of Federal Reserve member banks on Jan. 15, 1941, to $3,090,000,000 at the close of the year. The significance of this to the monetary picture of the nation is perhaps more clearly indicated by the statement that excess reserves at the close of 1940 were $6,620,000,000, or 89 per cent of the required reserves of $7,406,000,000, whereas at the close of 1941 excess reserves of $3,090,000,000 were only 33 per cent of the required reserve of $9,360,000,000. The threat to the monetary stability of the country by huge excess reserves has thus been greatly lessened during the year.

Money in circulation increased sharply from $8,733,000,000 at the close of 1940, to $11,161,000,000 at the close of 1941. Part of this increase is believed to be attributable to hoarding, but probably the greater part is the result of increased employment and payrolls. Short-term commercial money rates remained practically unchanged during 1941, at the low levels which have prevailed for several years. There have been no changes since 1939 in the various Federal Reserve Bank discount rates. Effective Nov. 1, 1941, the member bank reserve requirements were increased by about one-seventh, bringing them up to the maximum permitted by law as it now stands. During the week when the new rates became effective, excess reserves dropped from $4,602,000,000 to $3,409,000,000.

Banking.

Increased business activity during 1941 was accompanied by increased banking activity. Federal Reserve Reporting Member Banks in 101 cities showed on Dec. 31, 1941, total loans and investments of $30,085,000,000, an increase of $4,558,000,000 over the figure a year earlier. Of this increase, $1,980,000,000 was represented by loans, consisting of $1,710,000,000 to commerce, industry and agriculture, $122,000,000 of open market paper, and other loans of $240,000,000. Loans relating to the securities business declined by $92,000,000. The net increase of $2,578,000,000 in investments was represented entirely by purchase of direct or guaranteed obligations of the Federal Government, other investments having decreased by $9,000,000. Bank clearings of member banks in the first 11 months of 1941 totalled $335,799,000,000, an increase of 19.6 per cent over the corresponding figure for the previous year.

New Developments.

Other financial developments of interest during the year were the Federal regulation of instalment financing, the freezing of certain foreign-owned bank deposits in this country, and various restrictions relating to dealing in foreign exchange. As is true of all other phases of our economic life, the outlook for finance in 1942 is completely dominated by the war program and the actions of the Federal Government in administering it. See also BANKS AND BANKING; BUSINESS; PUBLIC FINANCE.