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FEDERAL RESERVE BANK
OF NEW YORK

ANNUAL REPORT
1962

FEDERAL

RESERVE

BANK

NEW

YORK

February 27, 1963
To the Member Banks in the
Second Federal Reserve District:
I
am pleased to present our forty-eighth
Annual Re p o r t , reviewing the economic and finan
cial developments of 1962. As you know, the
domestic economy advanced moderately during the
year, but less-than-satisfactory progress was
made in absorbing unused resources of men and
machinery. The persistent balance-of-payments
deficit was of continuing concern throughout the
year. As in 1960-61, monetary policy had to look
both ways--seeking to encourage the domestic
expansion and, at the same time, to protect the
international position of the dollar. At the
year end it was encouraging to observe the grow
ing public awareness of the complexity of the
twofold task of stimulating more rapid economic
growth at home and correcting the stubborn p a y
ments imbalance. New measures extending far
beyond the narrow sphere of monetary policy were
clearly required. In particular, the need for
tax reduction and the urgent requirement for
specific additional measures to correct our
balance-of-payments deficit were high on the
agenda of unfinished business. Nevertheless,
monetary policy remained ready to do its part in
contributing to a satisfactory solution of these
pressing problems.

ALFRED HAYES
President

Federal Reserve Bank
of New York

FORTY-EIGHTH
ANNUAL REPORT
For the Year
Ended
December 31, 1962

Second Federal Reserve District

Contents:
Page

Page

Reconciling Domestic and
International Goals........................... .... 5

Changes in Membership...................
Changes in Directors and Officers..

THE AMERICAN ECONOMY IN 1962

Changes in directors..........................
Changes in officers ............................
Member of Federal Advisory
Council — 1963 ...................................

53
54

List of Directors and Officers..........

Business Conditions:
A Disappointing Advance...................... 10
The problem of unused resources . . . . 12
The lag in aggregate dem and............ ....14
The continuing need for price
stability.....................................................18

Monetary Policy:
Another Year of Ease....................... ... 20
Bank credit and bank liquidity........ ....22
The public’s liquidity ........................ ....25
Interest rate and capital market
developments .......................................... 28

BUTTRESSING THE
INTERNATIONAL PAYMENTS SYSTEM 30
Easing Short-run Pressures on the
International Monetary Mechanism.. 31
Slow Progress Toward Equilibrium . 35

C HART S
Chart 1: Changes in Gross National
Product and Inventory Investment . . .

Chart 2: The Unemployment Problem

Chart 3: Sluggishness in Business
Investment ..............................................

Chart 4: Price C hanges ......................

Chart 5: Bank C red it ........... ...............

Chart 6: Free Reserves ......................

The Continuing Contrast Between
Rich and Poor...................................... 41

Chart ‘7: Bank Liquidity ....................

Chart 8: Nonbank Liquid Assets . . . .

The Prospect........................................ 43

Chart 9: Interest Rates ......................

THIS BANK’S OPERATIONS................. 45

Chart 10: Central Bank Discount
R a te s .........................................................

Chart 11: Recent Wage and Price
Changes in Europe and the United
States ......................................................

Financial Statements....................... ...49

Chart 12: Major Components of the
United States Balance of Payments..

Statement of earnings and expenses.. 49
Statement of con dition ...................... ...50

Chart 13: Long-term Government
Bond Y ield s ............................................

Volume and Trend of the
Bank’s Operations............................. ...45
Domestic operations .......................... ...45
Foreign and international operations.. 48

Forty-eighth Annual Report
Federal Reserve Bank of New York

Reconciling Domestic and International Goals
A year ago, at the beginning of 1962, the record showed a strong upswing from
the unusually mild 1960-61 recession. Total output of goods and services had
risen to an all-time high, and employment had moved up encouragingly. Prices
had been relatively stable, and inflationary psychology had largely disappeared.
While neither unemployment nor excess capacity was so large as a year earlier,
they were still at levels implying that the economy was operating considerably
below its potential. A continuance of the strong 1961 uptrend would, however,
have provided at least a partial solution of this problem.
At the same time, the persistence of a substantial, though reduced, balanceof-payments deficit was a continuing source of concern. The cumulative effects
of large deficits during 1958-61 had shown up in a sizable, though reduced,
outflow of gold during 1961. In addition, there was a further build-up of
foreign liquid claims on the United States. Although speculative pressures
against the dollar had been successfully resisted, partly through the resumption
of Treasury operations in foreign exchange markets (conducted by this Bank as
the Treasury’s agent), the situation remained delicate. More basic measures to
improve the balance-of-payments situation were still being developed and were
beginning to take effect, but could not be expected to come quickly to full
fruition.
Against the 1961 background, domestic developments during 1962 provided
grounds for only moderate satisfaction. The economy did continue to move

ahead despite such complicating factors as the working-off of steel inventories
built up early in the year in anticipation of a steel strike, the adverse effects
on business sentiment of the steel price episode in April, the stock market break
in May, the Canadian dollar crisis in June, and the Cuban crisis in October.
That the economy weathered these disturbances as well as it did was some
ground for reassurance. Yet the domestic advance was markedly slower than in
1961, and fell below the pace achieved in the last previous strong cyclical
upswing in 1954-57. Corporate profits and business fixed investment both
reached record peacetime levels, but lagged relative to over-all activity. Unem
ployment, after declining early in the year, subsequently leveled off and, on
balance, showed only moderate improvement over the year. In this environ
ment it was not surprising that, as the year progressed, attention veered toward
the possibility that the expansion would run out of steam before the economy
had approached its full potential.
If the domestic economic expansion during 1962 proved to be less than
strong, the international payments position of the United States continued to
be unsatisfactory. The over-all balance-of-payments deficit did decline in 1962,
an encouraging result in the face of a substantial rise in imports associated
with higher levels of domestic economic activity. But the deficit still remained
uncomfortably high at a little over $2 billion, and was reflected in both a decline
in the United States gold stock and an increase in foreign holdings of liquid
dollars. Of course, with every increase in the stock of such United States liquid
dollar liabilities, the risk of further gold losses became greater.
In the setting of a slower domestic advance and a continued serious inter
national payments position, monetary policy faced a set of circumstances similar
in broad terms to those that had characterized 1960 and 1961. At no time was
the domestic outlook strong enough to justify — and even less, to require —
the kind of shift away from monetary ease that had occurred even earlier in
the two previous cyclical expansions. A further substantial advance in bank
credit was encouraged. And, in fact, the growth of bank credit over the year
actually exceeded the rapid 1961 pace; in contrast, during the earlier cyclical
upswings, the growth of bank credit had slowed markedly after the first year
of expansion. For a period more than a year after the bottom of the recession,
the banking system remained unusually liquid, interest rates unusually stable,
and nonbank liquidity unusually high.
On the other hand, the continuation of a sizable balance-of-payments deficit,
further gold losses, and a further increase in foreign liquid dollar holdings
6

all pointed to the seriousness of the balance-of-payments problem. There was
a continuing danger that liquidity provided to encourage domestic expansion
would spill abroad, thus worsening our payments position. As a defense against
adverse short-term capital outflows, the Federal Reserve System and the Treas
ury cooperated closely to maintain a firm short-term interest rate structure.
Treasury debt management policies made a major contribution, mainly by
increasing the volume of short-term Treasury securities outstanding. At the
same time, System open market operations to provide reserves through pur
chases of Government securities were conducted, whenever possible, outside
the bill area. And a substantial part of the seasonal needs for reserves in the
fall of the year was made available by easing reserve requirements on time
deposits.
In 1962, the Federal Reserve System assumed a major role in the coop
erative international effort to build defenses against exchange rate and gold
speculation and disruptive international capital flows. For the first time since
the interwar period, the System actively undertook open market transactions in
foreign currencies, and in the course of the year these were of major importance.
Such operations were closely coordinated with the Treasury operations in this
area that had been resumed in 1961. The effectiveness of coordinated inter
national action to meet emergencies was demonstrated most vividly during the
summer, when potentially dangerous speculative pressures stemming from the
world-wide drop in stock prices were effectively minimized and when inter
national resources were quickly mobilized to defend the Canadian dollar.
Throughout the year, System and Treasury foreign exchange market operations
served to dampen speculative and other temporary influences that might have
adversely affected confidence in the dollar. In addition, operations to protect
the United States gold stock, by absorbing dollars flowing temporarily into
foreign official reserves, were conducted directly with foreign central banks and
treasuries. It was to some extent a measure of the demonstrated success of the
techniques employed that the Cuban crisis had only a modest and fleeting
impact on the gold and foreign exchange markets.
As 1962 drew to a close, the freedom and ability of monetary policy
to do more to spur the domestic economy further were increasingly brought
into question. The balance-of-payments situation ruled out actions that would
flood the economy with liquidity, since the odds were strong that a policy of
even greater ease would aggravate the payments problem and raise doubts in
the minds of foreign holders of dollars as to our willingness to defend the dollar.

Furthermore, given the very ample liquidity already available and the rapid
advance in bank credit, doubts were raised as to whether monetary policy
could do much more, by inducing an even more rapid increase in bank credit,
to revitalize the domestic business situation.
Increasingly, attention turned to the possibility of using new methods, rather
than pressing further on those which had already been tried. Fiscal policy,
specifically a reduction in Federal tax rates, stood out as a desirable method of
providing enduring benefits through a less burdensome tax structure, and thereby
stimulating more rapid economic growth and reducing unemployment. There
seemed to be a fair degree of agreement that the alternative possibility of in
creasing Federal Government expenditures simply to increase aggregate demand
was unacceptable and that all proposals for increased outlays should be judged
on their own merits. By the same token, reduced expenditures had obvious
merits wherever unnecessary Governmental services could be eliminated, or
existing services provided at reduced cost. A continuous reappraisal of the
need for, and benefits from, existing services as compared with other needs
and alternatives, including new types of Government programs, is of course
an integral part of a dynamic fiscal policy. To most observers, Government
spending, undertaken solely to spur the economy, had little merit as compared
with the alternative of encouraging private spending through a tax cut that
would add to after-tax personal incomes and profits. Indeed, a tax cut of any
sizable magnitude clearly implied the need for greater efforts to restrain unnec
essary Government spending.
Despite widespread agreement on the advisability of a tax cut as a means
of stepping up economic activity, there were potential problems that had to be
recognized. The slower-than-expected pace of the economic advance had
already resulted in a sharp revision in budget estimates for fiscal 1963 — from
a small surplus to an estimated $8.3 billion cash deficit — as tax receipts fell
short of earlier projections. Expectations of an even larger deficit, an inevitable
initial result of a tax cut, raised the possibility that inflationary fears would
revive and adversely affect the stability of the dollar internationally. To min
imize such possible effects of a temporarily enlarged budget deficit, it was
essential that the deficit be prudently financed, with reliance on current savings
rather than bank financing to the extent that this seemed advisable in the light
of the whole complex of domestic and international conditions. A more rapidly
advancing domestic economy would also tend, at least in the short run, to
increase imports and perhaps reduce in some degree the attractiveness of for
8

eign markets to United States exporters. Thus, while a stronger domestic
advance would undoubtedly enhance the opportunities for profitable investment
in plant and equipment at home — thereby simultaneously reducing the relative
attractiveness of investment abroad and the availability of United States funds
to foreign borrowers, and also tending to increase the cost of such borrowing —
there were still, at least in the short run, balance-of-payments risks inherent
in more rapid growth.
Tax reductions, although primarily designed to spur the domestic economy,
should not be taken to imply any letdown in concern over the balance of pay
ments. On ‘the contrary, if tax cuts have the expected expansionary effects, the
monetary authorities would have increased freedom to move significantly away
from the long-continued policy of credit ease, should international considera
tions make this necessary. In more general terms, tax reductions can be a means
of increasing the expansionary force jointly exerted by fiscal and monetary pol
icies— as they seek to achieve domestic goals — and a means of providing
greater freedom to change the part played by monetary policy, if this becomes
advisable for international reasons.
In the past, monetary policy has frequently borne the major burden of check
ing both deflationary and inflationary pressures, with little active assistance from
fiscal policy. In part, this has stemmed from the fact that the economic scene
changes too rapidly for the relatively slow changes in fiscal policy to catch up
with current developments. It should not be impossible, however, for fiscal
policy to adjust more rapidly to changing economic conditions.
While the cessation of inflationary pressures and the disappearance of infla
tionary psychology may over the long run turn out to be merely temporary,
1962 was in these respects highly reassuring. Both prices and costs in the
United States showed an encouraging degree of stability. This stability, espe
cially in the context of substantial price and cost advances in most industrial
countries abroad, provided a setting which, if enduring, would be a factor of
major importance tending, over the long pull, to correct our balance-ofpayments deficit. More immediately the balance-of-payments deficit was a
matter of great urgency, requiring specific additional corrective measures.
As the year closed, the continued existence of unused real resources and the
relatively slow pace of the business advance put the risks of inflation from
expansionary fiscal measures at home at a minimum. It was, however, as
important as ever to guard against any general upward push in prices and costs
if rapid growth at home and international equilibrium were to be achieved.

THE AMERICAN ECONOMY IN 1962
Business Conditions: A Disappointing Advance
Despite the fact that most measures of business activity rose to new highs
during 1962, the economy’s performance had to be marked down as a dis
appointment. The advance over the year was slow and sporadic, in sharp
contrast to the vigorous pace of recovery during most of 1961 and also in con
trast to what many had expected at the year’s outset. Indeed, there were few
months in which a majority of the broader measures of production, employment,
and sales showed any substantial rise, and doubts about the durability of the
expansion were widespread during much of the year.
A series of developments tended to dampen business optimism during the
first six to nine months of 1962 and hence undoubtedly contributed to the
economy’s lackluster performance. The year got off to a shaky start in its
very first month, as unusually severe weather conditions helped to bring about
a decline in production and payroll employment. Although the March labor
agreement in the steel industry had encouraging implications for price stability
and the longer run prospects for sound economic growth, its more immediate
effect was a working-off of inventories built up in anticipation of a possible strike
—a process that tended to exert a significantly depressing influence on the
economy until autumn. Moreover, the quick reversal of the steel price rise in
April under the combined impact of Government efforts and a weak demand
had a clearly adverse impact on business sentiment. In the meantime, the ero
sion of stock prices which had begun in late 1961 — partly in belated recogni
tion of the lessened influence of inflationary forces in the economy — was
gathering momentum. When prices broke sharply in late May and early June,
confidence in the business outlook touched what was perhaps its low point for
the year.
By fall, however, there appeared to be some renewal of confidence. Fears
of a year-end recession— widely forecast during the summer months— began to
ebb, while the stock market recovered much of its earlier losses. At the same
time, the drag on output exerted during the spring and summer by the largerthan-expected liquidation of steel inventories was substantially eliminated and
10

new orders for machinery and other equipment picked up somewhat in the final
quarter of the year. Consumer buying, moreover, expanded strongly in the
fourth quarter, spurred by the highly favorable reception accorded to the new
automobile models. Yet despite these bright spots, the over-all performance
of the major indicators of production and employment continued to lack vigor.
Indeed, as 1962 came to a close, industrial production and nonagricultural em
ployment were little changed from their levels six months earlier. And while
the fourth-quarter increase in gross national product was greater than the very
small gain registered in the preceding quarter (see Chart 1), the total GNP ex
pansion since the low point of the 1960-61 recession had been less than the in
creases achieved during comparable portions of the previous postwar upswings.
In many respects, of course, comparison of the 1962 experience with other
postwar periods of expansion might be misleading. The modest gains that did

C H A N G E S IN G R O S S N A T I O N A L P R O D U C T A N D I N V E N T O R Y I N V E S T M E N T .
Q u a rt e r -t o -q u a r t e r ga in s in G N P in 1 9 6 2 were m uch m ore m odest th a n the
advance s registe re d in the la st nine m onth s of 1 9 6 1 . T h e lessened pace of
increase in p a rt reflecte d the reduced s tre n g th of in v e n to ry a c c u m u la tio n ,
w h ic h sagged n o tic e a b ly in the m id d le q u a rte rs of 19 6 2 .

Billions of
dollars
C H A N G E S IN
irm
GROSS N A TIO N A L
PR O D U C T
15
C H A N G E S IN
IN V E N T O R Y
IN V E S T M E N T

-5
1962

CHART 1

Seasonally adjusted annual rates.

take place in 1962 were achieved in a more competitive environment. Inflation
ary expectations had, at least for the moment, largely disappeared—not simply
because of a lack of buoyancy in over-all demand, but also because of the
impact of foreign competition and other structural factors. In such a setting, a
more irregular pace of advance, often strongly influenced by swings in sentiment,
might have been expected. Indeed, many of the factors that tended to have
adverse effects on at least some segments of business sentiment in 1962 could
be regarded as sources of strength in the longer run. This was particularly true
of the growing recognition that it had become more difficult to pass on cost in
creases by raising prices, and of the fact that businessmen were generally pur
suing more cautious inventory policies than in the earlier periods. And while
inventory behavior accounted for much of the lag in total GNP growth in
1961-62 relative to the two preceding periods of upswing, it would be hard to
regard the slower pace of inventory accumulation as a true source of weakness.
On the contrary, the avoidance of a speculative inventory build-up based on
expectations of future shortages and price increases removed a source of in
stability often associated with sudden reversals in the business trend.
While assessment of last year’s performance along these lines thus yielded a
more favorable picture relative to other recent years than was suggested at
first sight, it was also true that a mere repetition of past patterns of economic
expansion might not be enough, given the rates of growth in productivity and
the labor force. Unused capacity — whether measured in terms of men or of
machines — remained uncomfortably high as 1962 ended. A much fuller use
of the economy’s potential had to be achieved before the performance of the
economy could be considered satisfactory.

o f u n u s e d r e s o u r c e s . The disappointing nature of the
advance in 1962 comes into clearer focus against the background of develop
ments over the preceding five years. Between the fall of 1957 and the end of
1961— a period marked by two recessions and a prolonged steel strike— unem
ployment had remained almost continuously above 5 per cent of the labor force
(see Chart 2), rising substantially higher during recessions. Plant utilization
likewise fell considerably short of capacity. Over the same period, moreover,
there had been a decline in plant and equipment spending and only a small
advance in corporate profits. In each of these respects, 1962 showed little
improvement.

t h e p r o b le m

T H E U N E M P L O Y M E N T P R O B L E M . U n e m p lo ym e n t in 1 9 6 2 ave ra ged som ew hat
lo w e r th a n in 1 9 6 1 , b u t rem ained above th e levels th a t p re va ile d in o th er recent
nonrecession ye ars. A t the sam e tim e , the perce ntage of the p o p u la tio n in the
la b o r fo rc e co n tin u e d to d e cline.

1953

1954

CHART 2

1955

1956

1957

1958

1959

1960

1961

1962

U n em ploym ent rate is seasonally adjusted. P opulation
fig u re s exclude persons in in s titu tio n s .

The unemployment rate, to be sure, fluctuated around a lower level in 1962
than had prevailed in 1961, when the economy was still pulling out of the
recession; part of the improvement, moreover, reflected a reduction in the
volume of long-term unemployment. Nevertheless, the rate showed virtually
no change after the beginning of the year and, at 5.6 per cent in December,
stood higher than at almost any time during the postwar years, excepting
periods directly associated with recessions or major strikes. Moreover, the
proportion of the population at work or looking for work in 1962 continued
the decline that had begun in 1956. This decline was widespread among

the various age groups. It reflected not only the tendency toward earlier
retirements and the fact that students, on average, were remaining in school
longer, but also a significant reduction in the labor-force participation of men
in the prime 20- to 59-year age group. In part, at least, this reduction may
have been due to withdrawals from the labor force of men who had become
discouraged about the prospects of obtaining work.
Like unemployment, unused plant capacity in manufacturing in 1962 showed
some reduction from 1961 levels and, at about 14 per cent, was near the
lowest levels of the 1957-61 period. In the earlier postwar years, however,
unused capacity had typically amounted to 10 per cent or less, except for re
cession periods. By this comparison, the 1962 rate was disappointingly high.
Although the many conceptual and technical difficulties associated with the
measurement of capacity require particular caution in the interpretation of
these data, it does seem clear that unused capacity continued to be a major
deterrent to vigorous gains in capital investment.
The presence of idle plant and equipment has also had an important impact
on corporate profits. While labor costs per unit of manufacturing output moved
downward in 1962 to the lowest level since 1956, the costs of maintaining large
amounts of idle capacity helped to push up total per unit outlays. Given the
slow growth in sales, corporate profits thus edged up only slightly during 1962.
In the final quarter of the year, they reached an estimated $52 billion, less than
$1 billion above the level of a year earlier. Corporate cash flow, however,
which includes the steadily expanding depreciation allowances as well as retained
profits, continued the strong uptrend of the past five years.

The persistence of substantial unem
ployment and unused capacity could to a large extent be attributed to the fact
that total demand, though rising, was not rising fast enough. Indeed, among the
major components of expenditures, only residential construction outlays and
government spending showed greater strength in 1962 than in comparable peri
ods of earlier business expansions.
The increase over the year in residential construction outlays contrasted
markedly with the generally downward movements experienced in the corres
ponding periods of the two previous expansions. Undoubtedly one of the major
factors supporting the continued advance in 1962 was the further easing of the
mortgage market, where rates declined contrary to the rising pattern of earlier

th e la g

in a q q r e g a t e d e m a n d .

business upswings. This reversal of past cyclical experience, in turn, reflected
both the continuation of general monetary ease and the sharp increase in mort
gage lending by banks eager to find outlets for time deposit funds.
In the government sector, outlays for goods and services rose more rapidly
than in the comparable periods of the two preceding expansions and accounted
for a substantially larger fraction of the total increase in GNP. Spending by
state and local governments continued to move along the steady upward trend
that it has shown in recent years. Expenditures by the Federal Government
increased more than in other recovery periods, largely as a result of the higher
military spending that followed the Berlin crisis in mid-1961. Nevertheless, the
ratio to GNP of Federal spending on goods and services remained at about the
11 per cent rate that has prevailed since 1955.
Among business outlays, spending on additions to inventories in 1962 lagged
sharply behind the 1961 advance. As already noted, moreover, the total expan
sion in such expenditures since the business-cycle trough turned out to be much
less than during comparable periods of earlier upswings. It was the slow rate
of growth in business spending on plant and equipment, however, which was
a major source of concern. Although business spending for new plant and
equipment rose by 9 per cent in 1962 to reach a record annual rate of $38
billion in the fourth quarter (see Chart 3), this amount represented a gain of
only $0.6 billion over the previous peak in the third quarter of 1957 — and in
real terms was actually somewhat below the 1957 high. With the presence of
unused capacity, much of the new capital spending was designed primarily to
improve products or to reduce per unit costs, rather than to accommodate a
rising volume of sales.
It is clear that the slow growth of sales in recent years and the persistence
of substantial excess capacity have played a key role in the sluggishness of fixed
business investment. Part of this excess capacity is the heritage of the capital
spending boom of 1956-57, during which many businessmen formulated plans
in hopes that the vigorous growth of consumer demand in 1955 would continue
unabated. With the rate of growth in demand falling short of these optimistic
expectations, however, the willingness of industry to expand capacity still further
has naturally suffered. The expectation of a sharp acceleration in business activ
ity might have outweighed this influence in 1962, but the decline in stock prices,
uncertainty about the course of Government policies, and doubts regarding the
strength of the near-term outlook all tended to be unfavorable to such a
development.

S L U G G IS H N E S S IN B U S IN E S S I N V E S T M E N T . In 1 9 6 2 business ex pe nditures
on p la n t and eq u ip m e n t w ere s c a rc e ly h igh e r th a n five ye ars e a rlie r, despite
ga in s in econ om ic a c t iv ity over the pe rio d . T h u s , the share of c a p ita l spen ding
in the a d vance of gross na tio n al p ro d u c t between 1 9 5 7 and 1 9 6 2 was less tha n
1 pe r cen t, in c o n tra s t to an 11 per cent share fro m the peak in business
a c t iv it y in 1 9 5 3 to the 1 9 5 7 peak.

1953-57

1953

CHART 3

Like business spending, total consumer outlays on goods and services ad
vanced at a slower pace in 1962 than during the quarters o f the preceding year
when over-all activity was rising, and their rate o f gain since the 1961 trough
in business activity lagged well behind the percentage gains in the two previous
expansions. T o a significant extent, the lack o f real vigor in these outlays was
due to a comparatively slow growth in disposable personal income. While the
advance in personal income in the current business upswing was about in line
with the weak 1958-60 expansion, it fell significantly short of the rate of gain
in the comparable portion o f the upturn after m id-1954. Moreover, with the
steady rise in incomes, many individual taxpayers have been pushed into
higher tax brackets, so that the Federal personal income tax on average now
tends to take a larger proportion o f each income gain than was the case sev
eral years ago.
16

The lags in both business and consumer spending clearly were interrelated.
On the one hand, capital spending by business had not been sufficiently vigorous
to make a dynamic contribution to the growth of consumer incomes. As a
result, consumer spending suffered. By the same token, the slow growth in
consumer spending made existing capacity excessive and thereby helped to
depress the incentives for business investment.
It is of course possible that longer run factors have been at work to under
mine strength in both sectors. But whatever the role played by such factors, it
seemed clear as the year progressed that additional measures to promote faster
growth were needed. Since monetary policy, as noted in the opening section of
this Report and detailed further below, was already making a significant con
tribution, attention focused increasingly on the role that reductions in personal
income and corporate profits taxes could play in stimulating both the business
and consumer sectors.
Two steps tending to expand corporate cash flow and the net rate of invest
ment on new business equipment were in fact taken in 1962. In July the
Treasury revised its regulations regarding depreciation allowances on equipment
to facilitate more rapid write-offs of capital goods in line with current experi
ence. The net effect was substantially shorter depreciation guidelines, a reduc
tion in current tax liabilities, and new stimulus for equipment spending. In Sep
tember, moreover, Congress authorized corporations to take a tax credit of up to
7 per cent (3 per cent for public utilities) of the cost of productive equipment
acquired. Whether these two measures were as yet having a significant effect on
capital spending, however, was not clear as 1962 ended.
In any case, the need for further tax measures to stimulate both business
and consumer spending remained. Indeed, just as the weakness of one sector
has tended to depress the other, so the stimulus of tax reductions in both
sectors would tend to be mutually reinforcing. A lowering of personal income
tax rates would increase personal disposable income, thereby encouraging a
higher volume of consumer spending and, therefore, the incentive to expand
capacity in meeting the growing demand. A personal income tax cut, to the
extent that it substantially reduced the very high marginal rates currently appli
cable to the top tax brackets, would also directly strengthen incentives for
investment and would improve business psychology. At the same time, a reduc
tion in corporate income taxes would increase the supply of funds available
to business for financing expansion. Moreover, a reduction in corporate tax
rates would enlarge the potential after-tax profitability of new investments and

thereby increase the incentives to take on the risks that are always involved
in the acquisition of new plant and equipment.

n e e d f o r p r ic e s t a b ilit y .
While the importance of
finding new ways to encourage a more rapid growth of demand was apparent,
the importance of continued vigilance against the development of inflationary
pressures remained equally clear.
In 1962, prices continued to show the relatively high degree of stability that
had characterized most of the 1958-61 period. Wholesale prices again fluctuated
within a very narrow range and at the end of 1962 were no higher than four
years earlier. As in 1961, prices of industrial commodities showed a small
decline but, contrary to the experience in that year, prices of agricultural goods
registered a small increase. The 1.2 per cent rise in the consumer price index,
to be sure, exceeded the small 0.6 per cent advance in 1961 (see Chart 4),
but the difference was due mainly to the behavior of food prices rather than
to the presence of any over-all inflationary pressures. Food prices had declined
in 1961 but advanced in 1962 as a result of special market developments
affecting individual products, notably meats. Retail prices of goods other than
food advanced by less than 1 per cent, while the increase in the price of
services was the smallest of the postwar period.
The relative steadiness of prices in the United States over the past two or
three years could be regarded with considerable satisfaction, particularly in view
of this country’s pressing need to become more competitive in world markets.
But the fact that this stability was associated with excess manufacturing capacity
and a substantial degree of unemployment raised the question to what extent it
could be maintained once the business atmosphere becomes more buoyant. The
answer will depend upon many factors, among them the willingness of manage
ment and labor to exercise a reasonable degree of restraint and the strength of
foreign competition as a disciplining influence.
Our ability to prevent the resurgence of inflationary tendencies as full em
ployment approaches may also depend on how successfully the problem of
structural unemployment can be handled. To the extent that a significant part
of the labor force is tied to regions, industries, and occupations particularly hard
hit by shifts in the composition of demand or by technological innovations,
efforts to reduce unemployment through increases in aggregate demand are
more likely to put upward pressure on prices as the economy operates closer

t h e c o n t in u in g

P R IC E C H A N G E S . C o nsum er p rices shewed som ew hat la rg e r increases in 1 9 6 2
th a n in 1 9 6 1 , bu t the a cce le ra tio n la rg e ly reflected special s u p p ly -d e m a n d situ*
ations in some a g ric u ltu ra l c o m m o d itie s. C o nsum er p rices o th er th a n those for
food and services m oved up o n ly s lig h tly , w hile w holesale p rices oth er tha n those
fo r fa rm p ro d u c ts and processed foods edged d o w n w a rd .

Y E A R L Y P ER CENTAGE C H A N G E S IN
C O N S U M E R PRICE IN D EX

ALL ITEMS
ALL ITEMS LESS
F O O D A N D SERVICES

Y E A R L Y P E R C E N TA G E C H A N G E S IN
W H O L E S A L E PRICE IN D E X

ALL C O M M O D IT IE S
A LL C O M M O D IT IE S O TH ER
T H A N FA R M A N D F O O D

* N o change
1954

1955

CHART 4

1958

1959

1960

1961

1962

Data are percentage changes from December to December.

to its potential. Structural changes have of course characterized our entire his
tory, and it is very difficult to determine whether they have become more
significant recently than in the past. In a setting of weak over-all demand, how
ever, they result in especially acute problems for many groups of workers —
particularly the unskilled and undereducated, who are often members of minority
groups for whom access to educational opportunities and to some occupations
is especially difficult. And there can be no doubt that efforts to reduce structural
unemployment by increasing job mobility through retraining and other tech
niques will contribute to our ability to achieve full employment without inflation.

Monetary Policy: Another Year of Ease
The main features of the problem confronting the monetary authorities in
1962 were in broad outline similar to those that had characterized 1961. As in
that year, the objective was to encourage the domestic economy while protecting
the international position of the dollar. The absence of inflationary pressures
permitted— and the sluggishness of the business advance required— the mainte
nance of a basic policy of ease throughout the year. At the same time, the
balance-of-payments situation remained serious and continued to be a major
source of concern. Thus the Federal Reserve sought to encourage economic
expansion by promoting ample liquidity for the domestic economy while doing
this in such a way as to avoid levels of short-term interest rates that would
lead to unduly large capital outflows.
Reflecting the sluggish character of the business advance and the continuation
of monetary ease over a far longer period than in earlier expansions, the
behavior of most financial variables in 1962 contrasted markedly with that
experienced in the comparable stages of previous upswings. This could be seen,
for example, in the record expansion in bank credit, the mild decline in long
term interest rates, and the significant improvement in nonbank liquidity. The
magnitudes and directions of many financial flows, moreover, were profoundly
affected in 1962 by the widespread increases in rates paid by commercial banks
on time and savings deposits following the rise on January 1 in maximum rates
permitted under Regulation Q. This development was partly responsible for the
extraordinary growth in these deposits, the relatively slow growth in the money
supply (demand deposits plus currency) and the record expansion of real estate
loans as well as of bank investments in state and local securities.
As in 1961, the Federal Reserve System and the Treasury employed a num
ber of techniques to offset or reduce downward pressures on short-term interest
rates in a manner that would offer minimal interference with other policy
objectives. In supplying reserves through open market operations, the System
sought to avoid direct pressures on Treasury bill rates— and on short-term
rates in general— through an extensive use of repurchase agreements and
through purchases of Treasury coupon issues whenever feasible. Conversely,
when seasonal factors called for the withdrawal of reserves, open market sales
were frequently concentrated in the three-month maturity area where interest
rates relative to those paid abroad are a particularly important determinant of
international capital movements.

Complementing these efforts, the Treasury continued to enlarge the market
supply of bills through additions to the regular weekly auctions of three- and
six-month issues and to the offerings of special one-year bills in January and
October. In November, moreover, the Treasury offered a $1 billion “ strip” of
bills maturing in each of ten successive weeks and sold as a package. Despite
these operations in the short-term area, the Treasury successfully maintained a
debt structure appropriate to longer range needs and lengthened the average
maturity of the total marketable Federal debt from four years seven months at
the end of 1961 to four years eleven months at the end of 1962. This was
accomplished largely through successful advance refundings, involving offerings
of longer term issues in exchange for outstanding securities of shorter maturity.
To provide for the longer term growth of bank reserves, while at the same
time minimizing direct pressure on short-term interest rates, the Board of
Governors of the Federal Reserve System announced in October a reduction
from 5 to 4 per cent in the reserve requirement on member bank time and
savings deposits. Coming at a time when seasonal reserve needs are normally
high, this move released about $780 million of reserves that would otherwise
have had to be provided through open market purchases, largely of short-term
issues. The Board’s action was in part also designed to improve the competitive
position of member banks relative to other savings institutions, which in many
cases are entirely exempt from reserve requirements.
Another action affecting time deposits was taken in the fall, when Congress
suspended for three years the interest rate ceilings applicable on time deposits
of foreign governments, central banks, and other monetary authorities, as well as
of certain international financial institutions. Effective October 15, this step
enabled commercial banks to increase the attractiveness of holding official
foreign dollar claims in this form. A number of the large money market banks
did raise the rates paid on these deposits, and holdings rose during the closing
months of the year.
Taking account of the sharp reduction in stock market credit that had
occurred following the spring break in stock prices and of the subsequent
abatement of speculative psychology, the Board of Governors on July 9 reduced
from 70 to 50 per cent the minimum equity or “margin” that buyers of stock
must supply in purchasing securities with credit obtained from brokers or banks.
The change was the first since July 1960 when margin requirements were
lowered from 90 to 70 per cent.

b a n k

c r e d it

a n d

b a n k

l iq u id it y

The policy of ease maintained by the

monetary authorities in 1962 resulted in the largest year-to-year expansion in
total bank credit since W orld War II — $18.7 billion. Since the rise in 1961
had been only slightly smaller, the rate o f advance over the entire period from
the recession trough in February 1961 to the end of 1962 proved far greater
than the gains in the corresponding portions o f the two previous recoveries

B A N K C R E D IT . Th e ra p id ra te of ban k c re d it e xp an sio n in 1 9 6 2 c o n tra ste d
m a rk e d ly w ith ban k c re d it b e h avio r in c o rre sp o n d in g p e rio d s of e a rlie r
re c o v e rie s . B a n k h o ld in g s of G o vern m ent s e c u r itie s in 1 9 6 2 rem ained about
unchang ed , and th e ir h o ld in g s of other s e c u r itie s rose r a p id ly ; in the co m p a rab le
sta g e s of p re v io u s re co v e rie s , ho ld in g s of both ty p e s of s e c u r itie s had d e clin e d .
Th e grow th in to ta l lo a n s in 1 9 6 2 , how ever, w as slo w e r than in the c o rre sp o n d
ing p h ase s of e a r lie r c y c le s .

cent TOTAL B A N K CREDIT

TOTAL L O A N S

Per cent

G O V ER N M E N T SECURITIES

110

100

140

OTHER SECURITIES

120

Months after trough
0
2
4
Feb Apr Jun

6
8
10
Aug Oct Dec

1961

CHART 5

12
14
16
Feb Apr Jun

18 20
Aug Oct

1962

22
Dec

0
2
4
6
Feb Apr Jun Aug
1961

8
Oct

10
Dec

12
14
16 18
20
Feb Apr Jun Aug Oct

22
Dec

1962

All data are seasonally adjusted. Troughs in general
business a c tiv ity in August 1954, April 1958, and
February 1961 are set equal to 100.

F R E E R E S E R V E S . F re e re se rv e s rem ained g e n e ra lly high in 1 9 6 2 , in m ost
m onths a v e ra g in g on ly s lig h tly below re ce ssio n le v e ls . Th e c o n tra st w ith e a rlie r
b u sin e ss u p sw in g s w a s even more s tr ik in g than in 1 9 6 1 .
M illions of

-600

Months after trough
-800
0
1
2
3
4
5
Feb M ar Apr M a y Jun Ju l
1961

CHART 6

6
Aug

7
8
Sep Oct

9
Nov

10
11
Dec Ja n

12
13
14
15
16
17
Feb M ar Apr M a y Jun Ju l
1962

18
19
20
Aug Sep Oct

21 22
Nov Dec

M em ber bank fre e reserves are excess reserves less
borrow ing s from the Federal Reserve. Troughs in
general business activity: August 1954, A p ril 1958,
and February 1961.

(see Chart 5 ). The rapidity of this increase largely reflected the continued
availability of an ample supply of reserves. For most o f 1962, free reserves
were maintained within a range o f approximately $350 million to $450 million
(see Chart 6 ), just slightly below the 1961 average and at a level experienced
during the past decade only in recessions. Total reserves of member banks grew
by nearly $700 million in 1962, after adjusting for the effects o f the reduction
in the reserve requirement ratio against time and savings deposits. While this
expansion was a bit smaller than the 1961 increase, bank credit was able to
grow by a record amount since the bulk of total deposit expansion was in time

and savings accounts, for which reserve requirements are relatively low.
As their lending capacity generally tended to outrun business loan demands,
banks aggressively sought to employ their funds in other outlets, thereby con
tributing to the ready availability of long-term credit. In particular, the gains
in total securities holdings— concentrated in state and local government issues—
contrasted sharply with the reductions that had taken place in the corresponding
months of earlier business advances. The striking $5 billion increase in bank
holdings of tax-exempt bonds was more than 1y2 times the 1961 gain. This
record expansion was stimulated by the need to find additional high-yielding
assets to meet increased interest costs on rapidly expanding time and savings
deposits. More generally, the large growth of savings deposits, which are re
garded as less volatile than demand deposits, increased the willingness of banks
to lengthen their investment portfolios.
Although total loans rose more rapidly than in 1961, the increase (season
ally adjusted) lagged behind that of the corresponding months of the two
previous recoveries, owing largely to the moderate character of the business
loan advance. These loans showed relatively little increase in the first seven
months of the year, but rose somewhat more rapidly over the rest of the
period, apparently reflecting in part the reduced rate of new securities flotations.
Bank loans to consumers also lacked buoyancy, even though there was a sub
stantial rise in total consumer credit. On the other hand, banks extended a
record volume of real estate loans, as they sought to increase their share of
mortgage lending in response to the savings deposit advance and continued
credit ease.
The fact that the 1962 expansion in many types of loans fell short of bankers’
expectations clearly was due not to a lack of lending capacity but to a dis
appointing demand connected with the relatively slow business expansion, the
enlarged flow of internally generated business funds, and the growth of non
bank lending. Indeed, there was overwhelming evidence that, if the demand
had been present, banks would have been both able and willing to expand loans
by substantially greater amounts. The banking system as a whole had ample
liquidity throughout the year. While the ratio of short-term liquid assets to
deposits declined somewhat over the year (see Chart 7), it remained well
above the levels reached during the corresponding stages of previous expan
sions. Loan-deposit ratios, although somewhat higher than in the comparable
months of previous business advances, rose less than in these earlier periods,
and many banks apparently felt comfortable with loan-deposit ratios that in

B A N K L IQ U ID IT Y . A lth o u g h the ra tio s of sh o rt-te rm liq u id a s s e t s to d e p o sits
a t b a n k s in New Y o rk C it y and e lsew h ere d eclin ed d u rin g the y e a r, they
averag ed som ew hat h ig her in 1 9 6 2 th an in the 1 9 5 8 - 5 9 u p sw in g . L o an -d e p o sit
r a tio s moved on ly m od era tely h ig her.

1958

CHART 7

1959

1960

1961

1962

1958

1959

1960

1961

1962

M onthly averages o f W ednesday figures fo rw e e k ly re p o rtin g m em b er banks.The s h o rt-te rm
liq u id assets ra tio shows v a u lt cash, bala nces w ith d o m e s tic banks, loans to banks, loans to
b rokers and dealers, and U nited States G o vernm e nt s e c u ritie s m a tu rin g w ith in one year, less
borrow ing s, as a percentage o f to ta l d e p o s its less cash item s in process o f c o lle c tio n and reserves
held at the Federal Reserve Banks.The loan-deposit ra tio shows loans (a d ju s te d ) less loans to
brokers and d e a le rs as a percentage of to ta l dep osits less cash ite m s in process o f c olle ction .
Shaded areas show recessions as dated by the N ational Bureau of Econom ic Research.

earlier postwar years would have been considered high. Indeed, most banks were
aggressively reaching out for loans at interest rates virtually unchanged from
recession lows and, at least in some instances, were offering concessions on
nonrate terms.

t h e

p u b l ic s

l iq u id it y

Paralleling the rise in bank credit, the public’s

holdings of commercial bank deposits expanded by a record 8 per cent in 1962.
Most of the 1962 increase took the form of an unprecedented build-up of indi
vidual savings and other time deposits, on which interest rates had risen at the
beginning o f the year. Savings deposits grew at a rapid rate throughout the

year, while much of the increase in other time deposits was concentrated
in the first five months. Growth in both types of deposits was encouraged
by the sluggishness of the business advance which held down the public’s
demand for checking deposits. An additional reason for the rapid expansion
in time deposits in 1962 was the further broadening of the market for nego
tiable time certificates of deposit. Issues of these certificates by large New
York City banks jumped by 80 per cent, while growth in other parts of the
country appears to have been even more rapid. The relative stability of rates on
competing open market instruments was also a factor sustaining the growth in
time and savings deposits. During the corresponding period of the previous
business expansion, the sharp rise in such rates had led to withdrawals of these
deposits by investors seeking a higher rate of return.
There was little evidence that the expansion in savings and other time de
posits at commercial banks came at the expense of deposit growth in compet
ing savings institutions. Indeed, savings and loan shares and deposits at mutual
savings banks continued to expand at about the rapid 1961 rate— although it
is of course possible that savings at these institutions might have grown even
more rapidly had there been no increase in commercial bank interest rates.
To some extent increased balances in commercial bank time and savings ac
counts may have reflected withdrawals of funds from the stock market during
its precipitate spring decline. Evidence is not available, however, as to the
degree to which such transfers may have been offset by reductions in these
deposits on the part of individuals purchasing stock.
With the heavy increase in time and savings deposit growth and the build-up
of United States Treasury deposits at commercial banks that occurred during
the first half of the year, the private money supply (demand deposits plus
currency) drifted irregularly downward until August. While the subsequent
rapid gains more than offset this decline, the money-supply increase from the
end of 1961 to the end of 1962 amounted to only 1.5 per cent.
Despite the small net expansion of the money supply last year, the total rise
in money supply since the business-cycle trough in February 1961 (4.3 per cent)
slightly exceeded the increase over the corresponding period of the 1954-56
upswing and was distinctly ahead of the 1958-60 advance (see Chart 8). More
over, with a 30 per cent rise in commercial bank time deposits, the gains since
the 1961 recession in money supply plus time deposits and in total liquid assets
held by the public (in both cases amounting to 13.2 per cent) far outstripped
the rates of advance in the two previous business upswings. This piling-up of

liquid assets, together with the eagerness of banks to expand loans, suggested
that, if the business advance had accelerated, supporting funds would have been
in ample supply. Indeed, contrary to normal cyclical experience, the ratio of
total liquid assets to GNP climbed throughout the year, reaching a level that
actually exceeded its previous peak, attained during the 1960-61 recession.

N O N B A N K L IQ U ID A S S E T S . W h ile the money s u p p ly rose on ly m o d erately in
1 9 6 2 , the in cre a se in tim e d e p o sits w as v e ry la rg e . Th e g row th in m oney s u p p ly
p lu s tim e d ep o sits p u lle d fa r ahead of th a t in e a r lie r b u sin e ss e x p a n sio n s — as
did th e ris e in to ta l liq u id a ss e t h o ld in g s of th e n onbank p u b lic.
Per cent

M O N E Y SUPPLY

M O N E Y SU P P L Y PLU S TIME DEPOSITS
1 9 5 4 -5 6

Feb Apr Jun Aug Oct Dec Feb Apr Ju n Aug Oct Dec
1961

CHART 8

1962

Feb Apr Jun Aug Oct
1961

Dec Feb Apr Jun Aug Oct

Dec

1962

Money supply (com p risin g dem and deposits and cu rre n c y in the hands o f the pu b lic ) and tim e deposits
at com m e rcia l banks are on a d a ily average basis. Total liq u id assets held by the nonbank pub lic,
inclu ding money supply, tim e deposits, oth e r savings d ep osits and shares, United States Governm ent
savings bonds, and s e c u ritie s due in less than one year, are m easured as o f the last Wednesday of the
m onth. All data are seasonally adjusted. Troughs in general business a c tiv ity in August 1954, A p ril
1958, and February 1961 are set equal to 100.

IN T E R E S T R A T E AND CAPITAL. M A R K E T D E V E L O P M E N T S .

In 1961 both

long- and short-term interest rates had shown a stability that contrasted markedly
with the increases in the two previous recoveries. With the broad outline o f
underlying econom ic conditions little changed in 1962, interest rate movements
continued to be modest. Largely reflecting the increase in consumer credit and
in mortgage lending, the total volume of funds raised on the credit and equity
markets reached a record. Yet the substantial flow o f financial savings and the
large increase in bank credit occurring against a background of monetary ease
permitted the market to satisfy these heavy demands without strain, and long
term interest rates edged downward over the year (see Chart 9 ).
Short-term rates, however, fluctuated within a range somewhat above that
prevailing in the previous year, partly as a result o f the various official actions
noted earlier and the concentration of bank investments in the long-term area.
Rates on three-month Treasury bills ranged between 2.60 and 3.00 per cent,

I N T E R E S T R A T E S . W h ile T r e a su ry b ill ra te s averag ed h ig her in 1 9 6 2 than in
the p re v io u s y e a r, lo n g -term ra te s d ec lin e d .

2 .0 0
1960
CHART 9

1961

1962

compared with a 2.25-2.65 per cent range in 1961. With these divergent
movements in long- and short-term rates, the yield spread between three-month
bills and long-term Treasury bonds moved down from 1.44 per cent in Decem
ber 1961 to 1.01 per cent in December 1962.
The largest net increase in credit extensions occurred in mortgage lending,
where demands were stimulated by the advance in new construction and appar
ently also by an increase in borrowing against existing buildings. Contrary to
the experience of previous recoveries, rates declined further. To a large degree
this decline reflected the heavy increase in mortgage lending by commercial
banks seeking an outlet for the expanded flow of time and savings deposits, as
well as stepped-up lending by other savings institutions specializing in the mort
gage field. The expansion of time and savings deposits also played a major
role in the decline of yields on tax-exempt bonds of state and local governments
by helping to stimulate a record commercial bank demand for these securities.
With capital spending by state and local governments expanding only moderately,
the supply of new tax-exempt issues was little changed from high 1961 levels.
In the corporate sector, bond yields declined, on balance, partly in response
to declines in other long-term rates and also to a marked reduction in capital
market flotations, particularly in the final half of the year. A large part of this
reduction, however, reflected the drying-up of new equity issues following the
spring break in stock prices. The stock market decline tended, of course, to
increase the difficulties of placing equity issues, and its psychological impact
may also have generated some reluctance to take on additional long-term debt.
Thus the drop-off in capital market flotations that occurred during the summer
and autumn was accompanied by an increase in sales of short-term corporate
paper and an increase in business borrowing from banks.
Total borrowing by the Federal Government in calendar year 1962 was
unchanged from the previous year. The cash deficit declined by about $1.0
billion to $5.7 billion, as a rise in cash outlays was more than offset by higher
cash receipts associated with the advance in tax revenues generated by the
upward movement of the economy. While the need to raise funds to meet the
current cash deficit declined, additional borrowing was undertaken to build up
the level of Treasury balances at the Federal Reserve and commercial banks.
Should a tax cut be enacted this year, demands of the Federal Government on
the capital market would of course be stepped up. This development could well
prove to be a significant element in determining the character of money and
capital market developments in 1963.

BUTTRESSING THE
INTERNATIONAL PAYMENTS SYSTEM
Innovation in the techniques of international monetary cooperation and further
progress toward payments balance among many of the industrial countries —
but a smaller improvement in the United States balance of payments than had
been hoped for — were the hallmarks of 1962.
The network of cooperative international monetary arrangements begun
in crisis during 1961 was extended and consolidated. The monetary mechan
ism successfully weathered several major tests, most notably the speculative
attack on the Canadian dollar, the sharp decline in stock prices in May and
June, and the Cuban crisis in October. Moreover, short-term interest rates
in Western Europe and in the United States tended to come into closer align
ment, thereby reducing the scope for purely interest-induced short-term capital
flows and easing the pressures on the international monetary system.
Underlying these improvements was the continued progress toward adjust
ment in the relative balance-of-payments positions of the industrial countries.
Nevertheless the United States payments imbalance remained stubborn and,
although a calm atmosphere prevailed in the exchange markets at the year end,
it was clear that the United States would have to intensify its efforts to achieve
full equilibrium. At the same time, it was also apparent that the surplus coun
tries of Western Europe would have to make further significant efforts toward
reaching payments balance.
The year produced few signs of progress toward closing the gap that sep
arates the levels of living of the underdeveloped areas of the world from those
of the industrial countries. Indeed, in far too many instances the poorer nations
did not share in the rise in living standards and fell even further behind the
industrial world, in part because of failure to carry out internal reforms that
would contribute to growth. As the year ended it seemed clear, however, that,
if the underdeveloped countries were to grow significantly and if the industrial
world was to achieve better balance in its international payments, more rapid
economic growth in the key currency countries and freer trade and payments
among all countries were urgently needed.

Easing Short-run Pressures on the International
Monetary Mechanism
The most striking international economic development during 1962 was the
increasing scope and success of cooperation among central banks and treasuries
in creating defenses against exchange rate speculation and other disruptive
capital flows. This phase of postwar international financial cooperation had
begun in March 1961 at the regular monthly Bank for International Settle
ments (BIS) meeting of central bankers. Its immediate purpose was to cope
with the exchange market strains that followed the revaluations of the German
mark and the Dutch guilder through an informal agreement to provide assist
ance to the Bank of England for the defense of sterling. Soon thereafter the
scope of cooperation was extended when the United States Treasury undertook
market operations in foreign currencies.
Experience with consultation and cooperation among central banks and
treasuries and the International Monetary Fund (IMF) proved sufficiently suc
cessful in dealing with the exchange crisis of 1961 to encourage further efforts
in this direction as 1962 began. It was apparent at once that, because of the key
role of the dollar in the international financial mechanism, the United States
would have to play a major part in any extension of the informal measures thus
far arranged. In particular, it seemed likely that a significant increase in the vol
ume of official United States foreign exchange operations would be necessary.
Consequently, in February 1962 the Federal Open Market Committee of the
Federal Reserve System — with the full concurrence of the United States Treas
ury — authorized the resumption of Federal Reserve foreign exchange opera
tions. The Federal Reserve System’s re-entry into this field was in keeping with
both its exchange stabilization experience in the interwar period and its general
function of safeguarding the value of the dollar. The System’s operations were
to be conducted in cooperation with the Treasury. Close coordination of Treas
ury and Federal Reserve exchange transactions was to be ensured by the fact
that the Federal Reserve Bank of New York would carry out System operations
(in accordance with instructions from the Federal Open Market Committee)
while continuing to act as agent for the Treasury.
In order to perform its new task, the Federal Reserve System had to acquire
foreign currencies with which to deal in the exchange market. After making
small initial purchases of several convertible currencies from the United States
Treasury, the System began to acquire more substantial balances directly from

foreign central banks through a series of swap arrangements. These arrange
ments involved reciprocal credit facilities under which a bank agreed to ex
change on request its own currency for the currency of the other party, up
to a maximum amount and over a limited period (such as three or six months),
with forward cover provided to both parties. By the end of 1962 such arrange
ments had been entered into with eight of the major European central banks,
the Bank of Canada, and the BIS, for a total of $900 million. Moreover, the
United States Treasury had been able to widen the scope of its foreign exchange
operations through a series of short- and medium-term borrowings in Switzer
land and Italy.
Funds acquired through these facilities were used throughout the year in
System and Treasury market operations to minimize disturbing fluctuations in
both spot and forward exchange rates in order to maintain orderly market
conditions and reduce the flow of dollars into foreign official reserves. During
the first half of 1962, for example, when the German mark was temporarily
strong, the Treasury supported the dollar by spot sales of marks. The Treasury
also entered the Italian lira market, dealing in both spot and forward lire
through the Bank of Italy. Later in the year, both the Treasury and the Federal
Reserve System carried out additional operations to smooth fluctuations in
several continental European currencies, including the German mark, the Neth
erlands guilder, and the Swiss franc.
Throughout 1962 the System and the Treasury also engaged in direct trans
actions with central banks. In these operations, foreign currency holdings
acquired in swap arrangements were used to mop up temporary flows of dol
lars to the cooperating central banks, thereby reducing the potential drain on the
United States gold stock. Such operations were effected with the Swiss National
Bank in July, after the large inflow of dollars to Switzerland following the sharp
decline in stock prices here and abroad and the speculative attack on the Cana
dian dollar in May and June. Similar operations were subsequently conducted
with the Netherlands Bank, the National Bank of Belgium, the Austrian Na
tional Bank, and the Bank of Italy. Some of these operations soon proved
reversible. By the end of the year, the System had repaid a part of the draw
ings made under swap arrangements and in other instances had reconstituted
balances previously acquired through swaps.1

1For a detailed review of Treasury and Federal Reserve foreign exchange operations, see this Bankfs
Monthly Review of October 1962, pp. 131-40.

Federal Reserve and Treasury exchange operations were conducted in the
context of a steadily widening pattern of consultation and cooperation among
the governments and central banks of the North Atlantic community. The
monthly BIS meetings provided a valuable forum both for general discussion
and for more detailed coordination. At the same time, the regular meetings of
the OECD Working Party on balance-of-payments problems became increas
ingly important, for they brought together, on a continuing basis, representatives
of the member countries’ central banks as well as of the treasuries and other
government agencies. Contacts made in these formal gatherings were multiplied
by frequent telephone communications and informal meetings.
Although a variety of stabilizing exchange operations was conducted during
the year, the first major test of the arrangements during 1962 occurred when
the Canadian dollar came under heavy speculative attack in the late spring.
The rapid mobilization of over $1 billion in international assistance for the
defense of the Canadian dollar, coupled with measures by Canada to reduce
the country’s balance-of-payments deficit, quickly brought the speculation to
an end. This episode provided a convincing demonstration of the effective man
ner in which joint and prompt action by the various monetary authorities could
ward off a massive speculative attack on a major currency. By the year end,
Canada had repaid a large part of the assistance, removed some of the emer
gency import taxes, and raised its international reserves above the pre-crisis
level.
The sharp break in prices on the New York, London, and other stock ex
changes, which occurred at the same time as the attack on the Canadian dollar,
produced widespread nervousness in the exchange markets. The withdrawal of
foreign-owned funds from New York and London to Switzerland and other
continental countries put some pressure on the United States dollar and tended
to reinforce existing exchange uncertainties. In these circumstances, coordi
nated operations in several currencies were undertaken by the Federal Reserve
System and the Treasury, both to maintain orderly market conditions and to
neutralize dollar gains of foreign central banks.
The success of the Canadian effort, the actions taken during the stock
market decline, and the other ventures in international financial cooperation
during the summer months helped to create and preserve an atmosphere of
relative calm in the exchange markets. This climate was further strengthened
in October when, with the adherence of the United States, the IMF’s supple
mentary borrowing arrangements came into effect. Under these arrangements,

up to $6 billion of additional reserves may be made available to the Fund by
ten major industrial countries provided such action is needed to forestall or
cope with an impairment of the international monetary system. Thus, the Fund
gained access to convertible currency reserves sufficient to meet even a very
large United States drawing should the need ever arise. The relative stabil
ity displayed by the exchange and gold markets during the subsequent Cuban
crisis reflected in part the fact that the world-wide nature of the danger made
it difficult for investors to find a safe haven for their funds anywhere. Never
theless, prompt cooperative action by the monetary authorities of the major
countries, coupled with the markets’ awareness of the very extensive arsenal of
weapons to counter speculation that the authorities had available, clearly con
tributed to the preservation of orderly market conditions.
The cooperative efforts in the exchange markets were accompanied by a
somewhat greater degree of coordination of monetary policies, as the industrial
countries took increasing account of the effects of domestic policies on the
international payments mechanism. Thus, some progress was made toward
bringing short-term interest rates in the various money market centers into
closer alignment, thereby reducing purely interest-induced capital flows while
encouraging the financing of a greater proportion of trade in the surplus coun
tries. However, in several countries with large payments surpluses the out
flow of capital was held back by relatively high interest rates and by the con
tinuation of direct controls. Such restrictions tended to inhibit the growth of
the market instruments and institutions necessary to ensure the efficient domestic
and international mobilization of capital. Much remained to be done, therefore,
in relaxing such restrictions and in achieving the appropriate balance of interest
rates among the major industrial countries. Nevertheless, the steps taken toward
reducing large disparities in interest rates during 1962, in conjunction with the
efforts in the field of exchange and gold market operations, seemed by the
year end to have significantly reduced the possibility of the development of
speculative threats to major currencies arising from short-term payments
imbalances. At the same time, it was evident that these achievements had not
lessened the need for continued efforts to make the longer range adjustments
necessary to restore equilibrium in international transactions and to assure
further growth in international trade and payments.

Slow Progress Toward Equilibrium
A number of major industrial countries, both those in deficit and those in sur
plus, moved significantly closer to payments balance during 1962. These im
provements were the result both of the natural workings of the economic
adjustment mechanism and of the use of the instruments of monetary and fiscal
policy. The adjustment process remained difficult, however, and progress toward
more general international payments balance continued to be slow and uneven.
The most striking improvements in balance-of-payments conditions occurred
in the United Kingdom, Canada, and Japan — in each case following the impo
sition of fiscal and monetary restraints and the receipt of international assist
ance. As their payments positions improved, central bank discount rates in these
countries were lowered (see Chart 10) and other steps were taken to ease
credit, for the necessary restraint associated with the resolution of the payments
crisis had in each country been accompanied by a slowdown in domestic
economic growth.
While these three countries were engaged during 1962 in reversing large
deficit positions in their international payments, most leading continental nations
— with the major exception of France, which continued in substantial surplus
— were moving toward payments equilibrium from the opposite direction. Eco
nomic policy measures played a role on the continent too, for clearly the gradual
evaporation of the large surpluses of Germany and the Netherlands was partly
a result of the 1961 exchange rate revaluations which had cut into the competi
tive margin enjoyed by exporters in these two countries while also making
imports cheaper. Moreover, Italy, France, and Austria took advantage of con
tinued surpluses to ease trade and payments restrictions further, in part as a
means of relieving inflationary pressures in their domestic economies. Neverthe
less, numerous controls remained in force at the year end. Indeed, in view of the
continued very high level of economic activity on the continent, and the fact
that such restraint in most cases no longer seemed justifiable on balance-ofpayments grounds, the dismantling of restrictions on imports and on capital
flows did not seem to have proceeded so rapidly as might reasonably have been
expected.
Although such liberalization as occurred did contribute to the movement
toward payments equilibrium, the increases in wages and prices in Europe (see
Chart 11) — at a time when prices in other industrial countries were stable —
probably were the most important factors in the reduction of the trade sur-

C E N T R A L B A N K D IS C O U N T R A T E S . Th ere w as a te n d en cy fo r d isc o u n t ra te s
in th e m ajo r in d u stria l c o u n trie s to be brought into lin e w ith e a ch other d u rin g
1 9 6 2 , a s exch a n g e c r is e s w ere re so lved and those d e fic it c o u n trie s th a t had
p u rsu ed r e s t r ic tiv e m on etary p o lic ie s co u ld re la x r e stra in t.

UNITED K IN G D O M

UNITED STATES

FRANCE

CANADA*

ttttW
Mi

0
8

BELGIUM

ITALY

<<<♦>>>>

88888$

0
1962

1961

1962

* Canada established a fixed d is c o u n t rate in June 1962. Prior to that,
the dis c o u n t rate was set at 1 /4 per cent above the weekly average
CH ART 1 0

te n d e rra te fo r9 0 -d a y T re a s u ry b ills ;d a ta s h o w n a re e n d o f m onth.

pluses. Exports rose at a much slower pace than in 1961. It had been antici
pated that a slowdown in export growth would result in some slack in the
continental economies. In most cases, however, rising wages bolstered consumer
demand, thereby maintaining or increasing pressures on available domestic
resources. Consequently, imports tended to rise rapidly, thus further cutting
into trade surpluses.
Significant imbalances persisted, however, despite the gains made by both
deficit and surplus countries. In particular, the United States deficit, though
slightly reduced, still totaled somewhat over $2 billion. Earnings from the export
o f nonmilitary goods and services rose $1.3 billion, but this improvement was
36

insufficient to finance the increase in imports. Consequently, the net surplus
arising from transactions in civilian goods and services declined $0.7 billion to
$7 billion. On the other hand, with the assistance of further prepayments of
postwar econom ic aid debts by France and Italy, an increase in German pay
ments for military equipment purchases in this country, and more effective
tying of foreign aid to American exports, the net balance-of-payments drain
o f United States Government expenditures abroad appeared to have been about
$800 million less than in 1961. Net outflows of private capital remained large,
however, as the movement of private short-term funds abroad was reduced, but
the flow of longer term American investment continued at about its previous
rate. Thus, after several years o f efforts to eliminate it, the United States pay
ments deficit remained large and of considerable concern.

R E C E N T W A G E A N D P R IC E C H A N G E S IN E U R O P E A N D T H E U N IT E D S T A T E S .
B etw een th e fin a l q u a rte r of 1 9 6 0 and the fin a l q u a rte r of 1 9 6 2 , w age rate s
and p r ic e s rose s ig n ific a n tly fa ste r in W e ste rn E u ro p e than in the U nited S ta te s .

PERCENTAGE C H A N G E S IN H O U RLY W A G E
RATES IN M A N U FA C TU R IN G

PERCENTAGE C H AN G ES IN W H O L E SA L E PRICES

UNITED K IN G D O M

Latest data p a rtia lly estim ated.
CHART 11

*C h a n g e between fourth q u a rte r of
1960 and th ird qua rter of 1962.

Even so, last year’s payments performance contained some hopeful signs
for the longer run outlook. The most important single adverse development from
a balance-of-payments standpoint was the 12 per cent rise in merchandise im
ports — over half of which was in finished manufactures from Western Europe
— to a total of $16.2 billion. But this substantial increase was largely a natural
concomitant of cyclically rising domestic business activity. Moreover, during
the second half of 1962, imports seem to have been somewhat smaller in rela
tion to gross national product than at the comparable stages of either of the
two preceding business recoveries.
United States merchandise exports rose about 3 y2 per cent. That the increase
was no greater — despite the continued existence of unused capacity in major
export industries and the maintenance of stable prices and wages — was due
in part at least to special factors. Two of this country’s principal export markets
— Canada and Japan — suffered from serious balance-of-payments problems
which were countered with measures tending to curtail imports. As a result,
United States exports to Japan declined sharply during the first three quarters
of 1962, prior to the relaxation of monetary restraint in the country, while the
growth of sales to Canada was curbed by the special surcharges and domestic
restraint employed there. With these difficulties largely resolved, with Govern
ment export promotion efforts getting under way, and with American business
increasingly sensitive to the export potential, the 1963 outlook for further
increases in United States exports seemed good if price stability could be main
tained. Such an expansion of United States exports is necessary, of course,
primarily to finance military and foreign aid expenditures and the continued
outflow of private capital.
A major contribution to the reduction in the over-all United States payments
deficit in 1962 was the significant decline in aggregate short-term capital move
ments and unrecorded transactions (see Chart 12). Net short-term capital out
flows and so-called “ errors and omissions” dropped to roughly $1.3 billion in
1962, compared with about $2 billion in 1961. In addition to the generally
more stable international monetary climate, the principal factor accounting for
the improvement was the virtual cessation of net short-term borrowing here by
Japan, in part because that country’s payments deficit and the need to finance
it declined sharply as a result of its policy of domestic restraint.
Interest arbitrage flows continued to be an important element in the out
flow of short-term capital from the United States. This was true especially dur
ing the first quarter of the year, when relatively high rates in the United Kingdom
38

M A J O R C O M P O N E N T S O F T H E U N IT E D S T A T E S B A L A N C E O F P A Y M E N T S .
T h e U nited S ta te s pa y m e n ts b a la n c e im proved s h a rp ly in th e f ir s t h a lf of the
y e a r, a s the goods and s e rv ic e s s u rp lu s ro se and sh o rt-te rm c a p ita l o u tflo w s
d e c lin e d . Th e g ain w as p a r tly o ffse t d u rin g th e seco nd h a lf, d e sp ite an
im pro vem en t on G o vern m ent a c c o u n t, by renew ed sh o rt-te rm c a p ita l o u tflo w s
and a d e c lin e in the tra d e s u rp lu s .

attracted some funds, and during the third quarter, when there were substantial
flows to Canada. Although the United States three-month Treasury bill rate
moved upward and interest rates generally came into closer alignment later in
the year, there was still scope for the flow o f funds abroad in search of higher

returns. Exchange speculation was again the cause o f some money movements,
especially when funds were transferred to Switzerland in search o f a safe haven
during the “ bear” attack on the Canadian dollar and in reaction to the May
break in stock prices. For the year as a whole, however, the impact o f “ hot”
money flows was far less than in 1961.
Although the total net outflow of long-term funds from the United States
changed little during 1962, the volume o f new portfolio investment rose while
that o f direct investment declined. Net direct foreign investment by American
firms appears to have been lower than the $1.5 billion and $1.7 billion of

L O N G - T E R M G O V E R N M E N T B O N D Y I E L D S . Lo n g -te rm bo rro w in g c o s ts
rem ain ed s u b s ta n t ia lly low er in the U nited S ta te s than in other in d u stria l
c o u n trie s, e xce p t S w itze rla n d , a s y ie ld s tended to ris e or rem ain a t re la
t iv e ly high le v e ls on the co n tin e n t and in C a n a d a . A lth o u g h y ie ld s in the
U nited K ingdom dropped s h a rp ly , they rem ain ed am ong the h ig h e st in
E u ro p e .
Per

UNITED K IN G D O M /

s
t

N ETH ERLA N D S

STATES

V
1959

1960

CH ART 13

1961

1962

V SW IT Z E R L A N D

1959

1960

1961

1962

Internationa l M onetary Fund.

the two preceding years. The net flow of such funds to Canada slowed some
what— probably as a consequence of the uncertainty prevailing during the
first half of the year — and that to Latin America dried up completely as
United States direct investment tended to be concentrated more and more in
the expanding Western European market. Portfolio investment, on the other
hand, again rose substantially and for the first time in the postwar period
apparently equaled new direct investment, as the very large and efficient United
States capital market continued to be liquid and thus a ready source of loan
funds for borrowers around the world. Long-term borrowing costs were lower
here than in most other principal capital markets (see Chart 13), and much
larger amounts of funds could be obtained by foreign borrowers in this country
than were available abroad, where foreign access to capital markets in many
cases remained under official control.
In settlement of the payments deficit of about $2.2 billion the United States
sold $0.9 billion of gold, slightly more than in 1961, while foreigners increased
their holdings of liquid dollars by nearly $1.3 billion. Gold sales made up a
slightly larger part of the settlement payments than in 1961, in part perhaps be
cause a greater proportion of the deficit found its counterpart in surpluses of
countries that traditionally maintain most of their reserves in gold. In addition,
some countries had already built up their foreign exchange reserves to the point
where they were reluctant to add substantially to their present dollar holdings.
Indeed, the gold drain would have been larger except for large advance debt pre
payments to the United States, large repayments in dollars of drawings on the
IMF, and the effects of various United States foreign exchange operations which
neutralized foreign official accumulations of dollars. Thus the need for further
and more rapid progress toward a solution to the payments imbalances of the
industrial countries became increasingly acute.

The Continuing Contrast Between Rich and Poor
During 1962 the economies of most of the industrial countries continued to
expand. Few of the underdeveloped nations made any substantial progress,
however. Most of these countries found it especially difficult to raise their levels

of per capita income, despite further increases in bilateral and multilateral eco
nomic assistance. The gap in living standards between the developed and under
developed nations thus again widened in 1962.
Many of the underdeveloped countries continued to be plagued by inflation
and balance-of-payments problems, in good part because of their inability or
unwillingness to adopt appropriate policies to mobilize and make effective use
of domestic resources. In particular, efforts to achieve domestic financial stabil
ity, to improve administration, land use, education, and technology, and to
adapt new production to changing demand conditions were not pursued with
equal energy in the various parts of the underdeveloped world. At the same
time, world prices of most major commodities continued weak until the last
quarter of the year, thereby cutting into export earnings since volume did not
rise enough to make up the difference. In these circumstances and with popu
lation pressures building up in many countries, foreign aid in its present forms
often seemed able to accomplish little more in some countries than to help
maintain existing levels of per capita income. At the end of the year, therefore,
the United States Government undertook a general examination of its aid pro
gram in the hope of finding means to make its large contributions more effective
in promoting economic growth.
The long decline in commodity prices — only partly arrested during 1962 —
attracted increasing attention to the possibilities of stabilizing prices or export
earnings through international agreements. In the past, most such commodity
agreements had proved inadequate, partly because of the failure of some
significant producers or major consuming nations to participate. The signing
of the international coffee agreement by this country in September marked a
major change in United States policy in this area. If the agreement is ratified
by the Senate, it may well be a significant turning point for commodity stabiliza
tion agreements in general. Commodity agreements, of course, are no panacea
for the development problems of the primary-producing countries. Indeed, at the
year end it remained to be seen whether the coffee agreement would prove
workable. Nevertheless, it was evident that even a partial solution to the prob
lem of fluctuating commodity earnings would provide welcome assistance to
many underdeveloped countries.

The Prospect
Where, then, did the international economy stand at the end of 1962? Interna
tional monetary and exchange cooperation had proceeded to the point where
the monetary system seemed able to cope with the effects of disequilibrating
short-run capital flows. Underlying this success had been significant gains in
reducing the payments imbalances among the industrial countries. The continued
large deficit of the United States, however, coupled with the chronic payments
problems of the underdeveloped countries, meant that the over-all situation
remained significantly out of balance. Moreover, there was no assurance that
the progress made in equilibrating payments among the industrial countries
was secure. If continental European countries were to pursue policies that
tended to preserve payments surpluses at a time when the United States, Can
ada, and the United Kingdom moved to stimulate domestic economic growth,
prospects for ensuring the stability of the international payments mechanism
would be seriously endangered.
This complex of interrelated problems obviously was not capable of any
quick or easy solution, but clearly could be resolved most satisfactorily in the
context of expanding economic activity and rising world trade. Domestic policies
to stimulate growth in the United States might well have some adverse short-run
effects on this country’s payments position, principally because of their tendency
to stimulate a rise in imports. In the longer run, however, a higher level of eco
nomic activity here would improve investment opportunities, thus significantly
reducing the net outflow of private capital. Moreover, economic growth, if
achieved in a noninflationary setting, very likely would contribute further to the
competitive efficiency of United States business, already bolstered by four years
of relative price stability. Measures to stimulate economic growth in the United
States would have to be complemented by European steps to reduce tariffs and
to remove remaining restrictions on imports and on capital movements, and by
efforts to develop the capital markets on the continent. Then the growth and
payments problems of this country and the inflationary pressures on the conti
nent could be resolved in an environment of expanding common prosperity
and of payments balance.
The growth of world trade that should result from reduced restrictionism
and a higher level of economic activity in the industrial countries would also be
of tremendous benefit to the underdeveloped nations. Although the underde
veloped countries have not fared very well in the most recent growth of trade

— which has occurred principally in the exchange of manufactured goods — an
opening-up of the markets of the industrial countries probably would be of
greater long-run benefit to the underdeveloped nations than an expansion of
economic assistance or the establishment of commodity stabilization programs,
however necessary they may be in the short run. The adjustments that such
imports would require in the economies of the industrial countries would not be
painless, but the economic benefits could well be as significant as trade adjust
ments among the industrial nations have been. Thus it was important to see
that, in the course of the further development of economic cooperation in
Western Europe and in the North Atlantic community in general, the industrial
nations would not become inward looking, but rather would remain receptive to
imports of all kinds. In this regard the Trade Expansion Act of 1962 provided
the United States with a powerful and flexible instrument for working toward
this country’s long-standing goal of multilateral free trade. Coordinated moves
in all these areas would not, of course, be easy. As the year ended, however,
such moves — together with the pursuit of sound domestic policies in the major
countries — seemed to offer the best hope for simultaneous progress toward
an easing of inflationary pressures in Europe; more rapid economic growth in
the United States, the United Kingdom, and the underdeveloped countries; and
the achievement of balance in the world payments system.

THIS BANK’S OPERATIONS
Volume and Trend of the Bank’s Operations
With few exceptions, the volume of the Bank’s
activities in transferring funds on behalf of the public and as agent of the
Treasury expanded appreciably during 1962.
The volume of checks processed (other than those of the United States
Government) rose substantially in 1962. The rise is only partially reflected in
the figures shown in the accompanying table because of a change in reporting
procedures instituted during the year. The new procedures require that a pro
cessed check be counted only once, while under the old procedures checks
handled by several departments within the Bank were counted more than once.
According to the old counting procedures, the number of ( “ all other” ) checks
handled by this Bank during 1962 amounted to 661 million, 6 per cent more
than the comparable figure reported for 1961. After elimination of double
counting, however, the 1962 number of checks processed amounted to 635
million, the figure shown in the accompanying table. The dollar volume on the
new basis was $384 billion; on the old basis it was $393 billion, 9 per cent
above the comparable figure for 1961.
The increase in check volume was accompanied by a substantial rise in the
use of this Bank’s wire transfer facilities (exclusive of Treasury transfers
between Federal Reserve Districts). This dollar volume of transfers totaled
$1.3 trillion in 1962 — a rise of 19 per cent over 1961, compared with an
increase of 13 per cent in 1961 over 1960. The number of transfers handled
in 1962 was about 777,000, up 11 per cent from the preceding year.
Coin received by this Bank in 1962 decreased by about 8 and 10 per cent
in number and dollar volume, respectively, thus reversing the upward trend
of several years in coin shipments from banks in the District. The 1962 reduc
tion in the volume of coin received was principally due to the nation-wide coin
shortage that resulted mainly from the fact that the Mint, at the scale of
operations allowed under its present budget, was unable to produce enough
coin to meet the public’s increasing needs.
Continuation of the marked expansion, begun in 1959, in the Treasury’s

d o m e s t ic o p e r a t io n s .

SOME MEASURES OF TH E VO LUM E OF OPERATIONS OF
TH E FEDERAL RESERVE BANK OF NEW YORK (Including Buffalo Branch)
Number of pieces handled (in thousands)

Currency received ...................................................................
Coin received ...........................................................................
Gold bars and bags of gold coin handled..............................
Checks handled:
United States Government checks ......................................
All other ...............................................................................
Postal money orders handled..................................................
Collection items handled:
United States Government coupons p a id ............................
Credits for direct sendings of collection ite m s..................
All other ...............................................................................
Issues, redemptions, exchanges by fiscal agency departments:
United States savings bonds ..............................................
All other obligations of the United States and Federal
agencies ...............................................................................
Obligations of the International Bank for Reconstruction
and Development .................................................................
Safekeeping of securities:
Pieces received and delivered..............................................
Coupons detached .............................................................
Wire transfers of funds* ........................................................

1962

1961

1,333,299
1,999,074
221

1,308,147
2,184,729
327

58,804
635,0731
35,502

59,891
625,354
36,120

4,284
334
17,215

4,685
403
14,888

27,084

27,466

6,895

6,285

119
8,105
5,464

Ill

43
7,208
4,783
702

Amounts handled (in millions of dollars)

Discounts and advances § ........................................................
5,353
Currency received ...................................................................
8,833
Coin received ...........................................................................
228
Gold bars and bags of gold coin handled..............................
3,181
Checks handled:
United States Government checks ......................................
23,034
All other ..............................................................................
384,1351
Postal money orders handled .....................................................................649
Collection items handled:
United States Government coupons p a id ............................
2,511
Credits for direct sendings of collection ite m s.................. ...................646
All other ............................................................. ; ...............
2,822
Issues, redemptions, exchanges by fiscal agency departments:
United States savings bonds ..............................................
1,635
All other obligations of the United States and Federal
agencies ...............................................................................
501,923
Obligations of the International Bank for Reconstruction
and Development ................................................................. .................. 419
Safekeeping of securities:
Par value pieces received and d e live re d ............................
720,577
Wire transfers of funds t ........................................................
1,304,308

4,054
8,637
252
4,586
20,676
360,715
653
2,517
733
2,634
1,739
445,325
308
604,678
1,095,010

* Two or more checks, coupons, etc., handled as a single item are counted as one “ piece” ,
t Figures for 1962 are not directly comparable with those for preceding years because of a change in
reporting procedures.
t Excludes Treasury transfers between Federal Reserve Districts.
§ The number of discounts and advances handled in 1962 was 910, compared with 993 in 1961.
46

financing operations caused the Bank’s fiscal agency operations to increase
significantly during 1962. The dollar volume of Government obligations (other
than United States, savings bonds) processed in 1962 was $502 billion, an
increase of 13 per cent from 1961, compared with a rise of only 1 per cent in
1961 over 1960. In contrast, issues, redemptions, and exchanges of United
States savings bonds processed by this Bank in 1962 were in number and
dollar volume about 1 and 6 per cent lower, respectively, than in 1961. This was
the fifth consecutive decline for the dollar volume of savings bonds handled.
There were also significant rises in the Bank’s noncash collections and in
its securities safekeeping activities. The number of noncash collection items
handled (other than United States Government coupons) rose in 1962 over
1961 by 15 per cent, compared with a 10 per cent rise in 1961 over 1960.
In number and dollar volume, securities received and delivered in conjunction
with safekeeping operations rose in 1962 by 12 and 19 per cent, respectively,
reversing a two-year downward trend in these activities.
To cope with the steadily growing volume of the Bank’s operations, two
electronic computers were acquired in the spring of 1962, and a third computer
has been ordered for delivery in early 1963. One of the machines is a general
purpose computer for the processing of ordinary banking operations, such as
payrolls, member bank reserve balance reports, and securities safekeeping
records. A second computer is being used by the Research and the Market
Statistics Departments to process data for recurring reports and statistical analy
ses, and also for more complex research projects related to the performance
of member banks and the nation’s economy. The third computer is scheduled
primarily for processing checks and should enable the Bank to increase the
volume of checks handled on high-speed equipment to about y2 million items
per day, compared with about y3 million items per day at the end of 1962.
The aggregate volume of Second District member bank borrowings during
1962 increased nearly one third but remained well below the Second District
postwar high of $29.4 billion reached in 1957. The proportion of member
banks that borrowed at least once during the year declined to 39 per cent in
1962 from 45 per cent in 1961.
Over the year as a whole, a substantially heavier volume of work was
carried out by a slightly larger number of employees. The average number of
employees at the Bank during 1962 was 2.4 per cent larger than in 1961.

Gold, dollar, and other as
sets held for foreign and international account increased for the fifth consecutive
year, establishing another all-time peak of $26.8 billion as the year ended.
Assets held for foreign account by this Bank on behalf of all Federal Reserve
Banks rose by $1.6 billion to a new high of $18.7 billion. While dollar deposits
declined by $32 million and miscellaneous securities (including bankers’ accept
ances) dropped $56 million, gold earmarked for foreign account rose $681
million, and United States Government securities (including securities payable
in foreign currencies) increased by $984 million. The accounts of the inter
national organizations rose $894 million to a new high of $8 billion at the
year end. New accounts were opened during the year in the names of the cen
tral banks of Jamaica, Spain, Laos, and Syria.
Gold operations declined in number and dollar volume primarily because
of a drop in transfers between individual accounts and a reduction in releases
of earmarked gold for export. Credits against gold collateral, aggregating $96
million, were made available to monetary authorities in six foreign countries to
assist them in meeting seasonal and other temporary dollar requirements. Each
of these credits was utilized entirely or in part, but repayments reduced the
aggregate outstanding at the year end to only $1 million.
Due to the resumption in February of System Open Market Account opera
tions, the scope and volume of foreign exchange transactions increased sub
stantially. In addition, the Bank continued to conduct foreign exchange trans
actions on behalf of the United States Treasury.
f o r e ig n a n d in t e r n a t io n a l o p e r a t io n s .

Financial Statements
S TA TE M E N T OF EARNINGS AND EXPENSES FOR TH E
CALEND AR YEARS 1962 AND 1961 (In thousands of dollars)

1962

1961

Total current earnin gs.........................................................................

261,931

235,242

Net expenses .......................................................................................

36,115

32,776

Current net earnings

225,816

202,466

Additions to current net earnings:
Profit on sales of United States Government securities (net)............

492

859

All other ...............................................................................................

120

Total additions

612

870

Deductions from current net earnings................................................
Net additions ............................................................................... —

408
204

4
866

Net earnings available for distribution

226*020

203,332

Dividends paid .....................................................................................

7,419

7,043

Paid United States Treasury (as interest on Federal Reserve notes)..

210,886

182,396

Transferred to su rp lu s.........................................................................

7,715

13,893

Surplus-beginning of y e a r .................................................................
Transferred from net earnings for year ............................................

242,996
7,715

229,103
13,893

Surplus - end of year

250,711

242,996

Surplus Account

STATEM ENT OF CONDITION

(In thousands of dollars)

Assets

DEC. 3 1 , 1 9 6 2

DEC. 3 1 , 1 9 6 1

Gold certificate account .....................................................................

3,394,817

3,479,129

Redemption fund for Federal Reserve n o te s ......................................

302,818

278,306

Federal Reserve notes of other B an ks................................................

94,866

107,774

Other cash ...........................................................................................

42,078

54,645

3,834,579

3,919,854

Discounts and advances.......................................................................

15,474

105,600

Acceptances .........................................................................................

110,254

51,523

United States Government securities..................................................

7,868,600

7,262,246

Total loans and securities

7,994,328

7,419,369

Cash items in process of collection....................................................

1,604,892

1,643,694

Bank premises .....................................................................................

8,413

8,898

All other ...............................................................................................

90,286

58,640

Total other assets

1,703,591

1,711,232

Total Assets

13,532,498

13,050,455

Total cash

Other assets:

STATEM ENT OF CONDITION

(In thousands of dollars)

Liabilities

DEC. 3 t , 1 M 2

DEC, 3 1 , 1 9 6 1

7,234,647

6,751,488

Member bank reserve accounts...........................................................
United States Treasurer — general account ......................................
Foreign* ...............................................................................................

4,643,682
117,026
58,121
289,176

4,516,757
129,236
88,059
229,209

Federal Reserve notes .........................................................................

Deposits:

Total deposits

5,108,005

4,963,261

Other liabilities:
Deferred availability cash ite m s .........................................................
All other ...............................................................................................

795,421
18,358

955,610
15,602

Total other liabilities

813,779

971,212

Total Liabilities

13,156,431

12,685,961

Capital paid in .....................................................................................
Surplus .................................................................................................

125,356
250,711

121,498
242,996

Total Capital Accounts

376,067

364,494

Total Liabilities and Capital Accounts

13,532,498

13,050,455

Capital Accounts

Contingent liability on acceptances purchased for foreign
correspondents t .................................................................................
Ratio of gold certificate reserves to deposit and Federal Reserve
note liabilities combined ...............................................................

24,464

36,004

30.0%

32.1%

* After deducting participations of other Federal Reserve Banks amounting to
t After deducting participations of other Federal Reserve Banks amounting to

188,760
61,057

190,800
90,000

Changes in Membership
During 1962 the total number of commercial banks in this District that are
members of the Federal Reserve System declined from 475 to 449. The net
decrease of 26 banks was the result of mergers of 28 member banks with other
members and of three member banks with nonmembers, the conversion of one
national bank to a nonmember bank, two new member banks, two new national
banks, and the conversion of one nonmember and one industrial bank into
national banks. The 449 banks constitute 85 per cent of all national banks,
State banks, and trust companies in this District and hold 95 per cent of the
total assets of all such institutions in this District.

NUMBER OF OPERATING MEMBER AND NONMEMBER BANKS IN
SECOND FED ER A L RESERV E DISTRICT AT THE YEA R END
(Exclusive of savings banks, private bankers, and industrial banks)
DECEMBER 3 1 , 1 9 6 2

Type off Bank

National banks * .. ..............
State banks and
trust companies . ..............
Total *

DECEMBER 3 1 y 1 9 6 1

Members

Non
members

Per cent
members

Members

Non
members

Per cent
members

310

100

328

100

139

80
—

63
—

147
------

80
—

65
—

449

475

* Includes one national bank located in the Virgin Islands.
CHANGES IN FED ER A L RESERV E MEMBERSHIP IN
SECOND DISTRICT DURING 1962

Total membership beginning of y e a r .................................................................................................

475

Increases:

Newly organized State member b a n k s ...........................................................................................
Newly organized national banks ...................................................................................................
Conversion of nonmember to national bank ...............................................................................
Conversion of industrial bank to national bank ...........................................................................

2
2
1
1

Decreases:

Member banks combined with other members ...........................................................................
Member banks combined with nonmembers .................................................................................
Conversion of national bank to nonmember .................................................................................
Total membership at the year end

28
3
1
449

Changes in Directors and Officers
in d i r e c t o r s .
In November 1962, member banks in Group 2
elected Ralph H. Rue as a Class A director of the Federal Reserve Bank of
New York for a term of three years beginning January 1, 1963. Mr. Rue, who
is Chairman of The Schenectady Trust Company, Schenectady, N. Y., succeeded
Cesar J. Bertheau, Chairman of the Board of Peoples Trust Company of
Bergen County, Hackensack, N. J., whose term expired December 31, 1962.
At the same time, member banks in Group 2 re-elected Kenneth H. Hannan
as a Class B director for the three-year term beginning January 1, 1963. Mr.
Hannan is an Executive Vice President of Union Carbide Corporation, New
York, N. Y.
In November 1962, the Board of Governors of the Federal Reserve System
reappointed Philip D. Reed as a Class C director for the three-year term
beginning January 1, 1963. and redesignated him as Chairman of the Board
of Directors and Federal Reserve Agent for the year 1963. Mr. Reed is a
former Chairman of the Board of General Electric Company, New York, N. Y.
At the same time, the Board of Governors reappointed James DeCamp Wise
as Deputy Chairman for the year 1963; Mr. Wise is a former Chairman of the
Board of Bigelow-Sanford, Inc., New York, N. Y.
At the Buffalo Branch of the Federal Reserve Bank of New York, in June
1962, John M. Galvin, Chairman of the Executive Committee of The Marine
Trust Company of Western New York, Buffalo, N. Y., was appointed by the
Board of Directors of the Federal Reserve Bank of New York as a director of
the Buffalo Branch for the unexpired portion of the term ending December 31,
1963. Mr. Galvin succeeded Francis A. Smith, President of The Marine Trust
Company of Western New York, Buffalo, N. Y., who died on May 8, 1962.
In November 1962, the Board of Directors of this Bank designated Thomas E.
LaMont as Chairman of the Board of Directors of the Buffalo Branch for the
year 1963. Mr. LaMont is engaged in farming in Albion, Orleans County, N.Y.
At the same time, the Board of Directors of this Bank appointed J. Monroe
Hodges as a director of the Branch for the three-year term beginning January
1, 1963. Mr. Hodges, who is President of The Exchange National Bank of
Olean, Olean, N. Y., succeeded Howard N. Donovan, President of the Bank
of Jamestown, Jamestown. N\ Y., whose term expired December 31, 1962.
In December 1962, Maurice R. Forman, President of B. Forman Co., Roch
ester, N. Y., was appointed by the Board of Governors of the Federal Reserve

c h a n g e s

System as a director of the Buffalo Branch for the three-year term be
ginning January 1, 1963. Mr. Forman succeeded Raymond E. Olson, Presi
dent of Taylor Instrument Companies, Rochester, N. Y., whose term expired
December 31, 1962.

Since February 1962, no officers have retired and
one officer has terminated his service with the Bank.
Merlyn N. Trued, Assistant Vice President assigned to the Foreign function,
was appointed Deputy Assistant Secretary of the Treasury, effective January
28, 1963. His service with the Bank terminated the preceding day.
The following additional changes in official staff, including the appointment
of three new officers, have taken place since February 1962:
Robert G. Rouse, Vice President, formerly assigned to the Open Market
Operations and Treasury Issues function, was appointed Vice President and
Senior Adviser, effective May 15, 1962. Mr. Rouse resigned as Manager of
the System Open Market Account, effective at the close of business May 14,
1962. In his new position, Mr. Rouse has broad responsibilities for advising the
directors, the President of the Bank, and other officers with respect to monetary
and other matters.
Robert W. Stone, formerly Assistant Vice President in the Open Market
Operations and Treasury Issues function, was appointed Vice President effective
May 15, 1962, and assigned to the Open Market Operations and Treasury Issues
function, succeeding Mr. Rouse. Mr. Stone was also appointed by the Federal
Open Market Committee of the Federal Reserve System to succeed Mr. Rouse
as Manager of the System Open Market Account, effective May 15, 1962.
Thomas J. Roche, formerly Manager of the Foreign Department, was ap
pointed Senior Foreign Exchange Officer (a position equivalent in rank to that
of Assistant Vice President), effective May 15, 1962.
Edwin S. Rothman, formerly Chief of the Foreign Operations Division,
Foreign Department, was appointed an officer with the title of Manager, effective
May 15, 1962, and assigned to the Foreign Department.
George Garvy, formerly Adviser in the Research and Statistics function, was
appointed Economic Adviser, effective September 24, 1962. In his new posi
tion, which is equivalent in rank to that of Vice President, Mr. Garvy has
responsibility for advice and special studies with respect to economic affairs and
monetary policy.

c h a n g e s in o f f i c e r s .

Alan R. Holmes, formerly Assistant Vice President, was appointed Vice
President, effective September 24, 1962, and assigned to the Research and
Statistics function where he has the responsibility for the administration of the
function.
Leonard I. Bennetts, formerly Manager of the Collection Department, was
appointed Assistant General Auditor, effective September 24, 1962.
Martin W. Bergin, Manager, formerly assigned to the Savings Bond Depart
ment, was assigned to the Public Information Department, effective September
24, 1962.
Ernest E. Blanchette, formerly Special Representative in the Bank Relations
Department, was appointed an officer with the title of Manager, effective
September 24, 1962, and assigned to the Bank Relations Department.
Karl L. Ege, formerly Assistant General Auditor, was appointed Manager,
effective September 24, 1962, and assigned to the Savings Bond Department.
Robert C. Thoman, Manager, formerly assigned to the Bank Relations
Department, was assigned to the Collection Department, effective September
24, 1962.
Peter Fousek, formerly Senior Economist, was appointed Manager, effective
October 4, 1962, and assigned to the Foreign Department.
Thomas O. Waage, formerly Assistant Vice President assigned to the Public
Information function, was appointed Vice President, effective January 3, 1963,
and assigned to the Public Information function where he has the responsibility
for the administration of the function.
A. Thomas Combader, formerly Building Superintendent, Building Operating
Department, was appointed an officer with the title of Manager, effective
January 3, 1963, and assigned to the Building Operating Department.
Paul Meek, Manager, formerly assigned to the Public Information Depart
ment, was assigned to the Securities Department, effective January 4, 1963. His
appointment as Assistant Secretary was continued.

The Board of Direc
tors of this Bank selected George A. Murphy to serve during 1963, for the
third successive year, as the member of the Federal Advisory Council repre
senting the Second Federal Reserve District. Mr. Murphy is Chairman of the
Board of Irving Trust Company, New York, N.Y.

m e m b e r o f f e d e r a l a d v i s o r y c o u n c i l — 1 963.

Directors of the Federal Reserve Bank of New Y o rk
DIRECTORS

Term expires Dec. 31

Class Group

G eorge C h a m p i o n .............................................................................................. ..................................1964
Chairman of the Board, The Chase Manhattan Bank, New York, N. Y.

R a l ph H . R u e ..................................................................................................... ..................................1965
Chairman, The Schenectady Trust Company, Schenectady, N. Y.

A . L eonard M o t t .............................................................................................. ..................................1963
President, The First National Bank of Moravia, Moravia, N. Y.

B. E a r l P u c k e t t ................................................................................................
Former Chairman of the Board, Allied Stores Corporation, New York, N. Y.

K en n et h H . H a n n a n ....................................................................................... ..................................1965
Executive Vice President, Union Carbide Corporation, New York, N. Y.

........................... 1963

P h ilip D . R eed , Chairman, and Federal Reserve A g en t ................ ..................................1965
Former Chairman of the Board, General Electric Company, New York, N. Y.

James D eC am p W ise, Deputy Chairman ...................................... ..................................1964
Former Chairman of the Board, Bigelow-Sanford, Inc., New York, N. Y.

E v e re tt N . C a s e ................................................................................................ ................................. 1963
President, Alfred P. Sloan Foundation, New York, N. Y.

A lb er t L . N ickerson .....................................................................................
Chairman of the Board, Socony Mobil Oil Company, Inc., New York, N. Y.

DIRECTORS — BUFFALO BRANCH
T h om a s E. L a M o n t, Chairman.......................................
Farmer, Albion, Orleans County, N. Y.

1963

John M . G alvin ................................................................................
Chairman of the Executive Committee, The Marine Trust Company of
Western New York, Buffalo, N. Y.

1963

W h it w o r t h F e r g u s o n ....................................................................
President, Ferguson Electric Construction Co., Inc., Buffalo, N. Y.

1964

E l m e r B. M i l l i m a n .........................................................................
President, Central Trust Company Rochester N. Y., Rochester, N. Y.

1964

A nson F. Sh e r m a n .........................................................................
President, The Citizens Central Bank, Arcade, N. Y.

1964

M aurice R. F o r m a n .............. ..........................................................
President, B. Forman Co., Rochester, N. Y.

1965

J. M onroe H odges ...........................................................................
President, The Exchange National Bank of Olean, Olean, N. Y.

1965

MEMBER OF FED ERA L ADVISORY COUNCIL — 1963
G e o r g e A . M u rp h y ............................................................................................................................... 1963
Chairman of the Board, Irving Trust Company, New York, N. Y.

Officers of the Federal Reserve Bank of New York
A l f r e d H ay es, President
W illia m F . T r e i b e r , First Vice President
H a r o ld A . B ilb y , Vice President
R o b e r t G . R ou se, Vice President and
C h a r le s A . C o o m b s, Vice President
Senior Adviser
H o w a r d D . C r o s s e , Vice President
W a l t e r H. R o z e l l , Jr., Vice President
G e o r g e G a rv y , Economic Adviser
H o r a c e L . S a n fo r d , Vice President
M a r c u s A . H a r ris , Vice President
R o b e r t W . S t o n e , Vice President
A la n R . H o lm e s , Vice President
T o d d G . T ie b o u t, Vice President and
H e r b e r t H . K im b a ll, Vice President
General Counsel
T h om a s O . W aage, Vice President
J o h n J C la r k e ,

Assistant General Counsel

E d w a rd G . G u y ,

Assistant General Counsel

S p e n c e r S. M a rsh , J r., Assistant Vice President
F e l i x T . D avis, Assistant Vice President
F r e d W . P id e rit, Jr., Assistant Vice President
N o rm a n P. D avis, Assistant Vice President
L a w r e n c e E. Q u a ck en b u sh ,
J o h n P. J en sen , Assistant Vice President
Assistant Vice President
P e t e r P. L a n g, Adviser
T h om as J. R o ch e , Senior Foreign Exchange Officer
R o b e r t G . L in k , Assistant Vice President
A n g u s A . M a cIn n e s , J r., Assistant Vice President F r e d e r ic k L. S m e d le y , Assistant Vice President
John F . P ierce ,

M ar tin W . B ergin ,

Manager, Public Information Department
Manager, Bank Relations Department

Manager, Planning Department
C h a r le s R . P r ic h e r ,

W illia m H . B ra u n , Jr.,

Manager, Personnel Department

Assistant Counsel

J oh n P. R in g en ,

A . T h om a s C om ba d er,

Manager, Building Operating Department
R o b e rt L. C ooper,

Manager, Bank Examinations Department
E dw in S. R oth m a n ,

Manager, Securities Department

Manager, Foreign Department
W a l t e r S. R u sh m ore,

R o b e r t J. C r o w l e y ,

Assistant Counsel
K a r l L . E ge,

Manager, Savings Bond Department
P e t e r F o u se k ,

Manager, Foreign Department
M a r t in F r e n c h ,

Manager, Cash Citstody Department
F r e d H . K lo p s t o c k ,

Manager, Research Department
H a r o ld W . L e w is,

Manager, Security Custody Department

Manager, Government Bond and
Safekeeping Department
F ra n k W . S c h i f f ,

Manager, Research Department

F r a n cis H . S c h o t t ,

Manager, Foreign Department

W illia m

M. S c h u lt z ,

Manager, Personnel Department
T h om a s C . S lo a n e ,

Assistant Counsel
K e n n e t h E. S m a ll,

Manager, Cash Department

R o b e r t Lin dsay,

Senior Economist

G e o r g e C . Sm ith ,

W illia m E. M a r p le ,

Manager, Credit and Discount Department
M a d e lin e H . M cW h in n e y ,

Manager, Market Statistics Department
P a u l M eek,

Manager, Securities Department.
and Assistant Secretary
D o n a ld C . N ile s ,

Manager, Accounting Department
A r t h u r H. N oa,

Manager, Service Department

Chief Examiner
E v e r e t t B. P o s t ,

E r n e s t E. B la n c h e t t e ,

Manager, Check Department

A lo y s iu s J. S t a n t o n ,

Manager, Check Mechanization Department

P e t e r D . S t e r n li g h t ,

Manager, Securities Department
R o b e r t C . T h om a n ,

Manager, Collection Department
T h om a s

M. T im le n ,

Jr.,

Secretary, and Assistant Counsel
R o b e r t Y o u n g , J r.,

Assistant Counsel

D o n a ld J. C a m e r o n . General Auditor
L e o n a rd 1. B e n n e t ts . Assistant General Auditor

O FFICER S — BUFFALO BRANCH

I n s le y B. S m ith, Vice P resident
H a r o ld M . W e s s e l, A ssistant Vice P resident
G eorge J. D o l l , C ashier

Joh n T . K ea n e, A ssistan t C ashier

G erald H . G r e e n e , A ssistan t C ashier

M . M o n r o e M y e rs , A ssistant Cashier

Full text of Annual Report of the Federal Reserve Bank of New York : Annual Report : 1962

FRASER