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F e b r u a r y 26,


T o the M e m b e r B a n k s in the
S econd F e d e r a l R e s e r v e D istrict:
I a m p le a s e d to p r e s e n t our fifty -s ix th Annual R e p o r t,
r e v ie w in g the m a jo r e c o n o m ic and f in a n c ia l d e v e lo p m e n t s o f 1970.
L a s t y e a r the n a t io n 's e c o n o m y e n d u r e d the in e v it a b le
h a r s h c o n s e q u e n c e s o f the in fla tio n a r y e x c e s s e s o f the p r e v io u s h a lf
The r e s t r ic t i v e p o lic ie s p u r s u e d through out 1969, c o u p le d
w ith th e d e - e s c a l a t i o n o f th e V i e t n a m w a r , l e d to the h a ltin g o f r e a l
e c o n o m ic g r o w th and a sw ift r i s e in u n e m p lo y m e n t. Y et, p r i c e and
w a g e i n c r e a s e s c o n t i n u e d r e l a t i v e l y u n a b a t e d . We r e l e a r n e d t h e
l e s s o n that c u r in g in fla tio n b e c o m e s a p r o g r e s s i v e l y m o r e pain fu l
p r o c e s s the lo n g e r that c u r e is d e la y e d .
M o n e t a r y p o l i c y e a s e d e a r l y in the y e a r , a s th e F e d e r a l
R e s e r v e s o u g h t to c u s h io n the e c o n o m ic a d j u s t m e n t by p r o m o t in g a
r e s u m p t io n o f m o d e r a te g ro w th o f m o n e y and c r e d it . And, a fte r a
m id y e a r liq u id ity c r i s i s had b e e n n a r r o w ly a v e r te d , fin a n c ia l c o n ­
d itio n s m o r e c o n d u c iv e to a r e s u m p tio n o f sou nd e c o n o m ic g r o w th
w e r e a c h i e v e d . H o w e v e r , th e e a s i n g o f c r e d i t c o n d i t i o n s a t h o m e
im p o s e d a h e a v y n e w b u rd en on our in te rn a tio n a l p a y m e n ts p o s itio n .
A l t h o u g h no s e r i o u s r e p e r c u s s i o n s d e v e l o p e d d u r i n g 1 9 7 0 , i t b e c a m e
i n c r e a s i n g l y c l e a r that o u r in te r n a tio n a l p a y m e n t s p r o b l e m s w ill
r e q u ir e c l o s e o f f ic ia l a tte n tio n in 1971.
T he n ew y e a r p r o m i s e s to c h a lle n g e our r e s o l v e and
our a b i l i t i e s . C l e a r l y w e m u s t not aban don the b a ttle a g a in s t in fla tio n ,
bu t n e i t h e r c a n w e i g n o r e t h e p r o b l e m o f u n e m p l o y m e n t . W a y s m u s t
b e fo u n d to b r e a k t h e c i r c u l a r p r o c e s s o f w a g e a n d p r i c e e s c a l a t i o n ,
w h ile at th e s a m e t im e e n c o u r a g in g a r e s u m p t io n o f sou nd e c o n o m ic
g r o w th . I co n tin u e to b e l ie v e that s o m e f o r m o f i n c o m e s p o l i c y is
e s s e n t i a l in th is r e g a r d .

P resid en t


Federal Reserve Bank
of New York

For the Year
December 31, 1970

Second Federal Reserve District




A Year of Painful Transition..............



Volume and Trend of the
Bank’s Operations ............................



Financial Statem ents........................


ECONOMY IN 1970 ...........................


Business Conditions:
Inflation in a Sluggish Economy----


Statement of condition .......................
Statement of earnings and expenses..



Changes in Membership...................


Changes in Directors and Officers ..


Changes in directors ..........................
Changes in officers ..............................
Member of Federal Advisory
Council— 1971 ......................................


List of Directors and O ffic e rs .........


Falling output and
rising unemployment .........................
Income flows and the
pattern of demands ...........................
Federal spending and taxation...........
Prices, labor costs, and
productivity: the embedded


Monetary Policy and Credit
Market Developments.......................


Monetary policy: a year
of shifting emphasis ...........................
A year of liquidity rebuilding...........


ECONOMY IN 1970 ..........................


Economic Conditions Abroad...........



Inflation persists..................................
Most countries abroad maintain
relatively high interest rates..............


Chart 1: Production, Prices,
and Unemployment ..............................



Chart 2: Wages and P r ic e s ..................



Chart 3: M oney, Bank Credit, and
M oney M arket C o n d itio n s..................


Chart 4: Interest Rates and
Stock P r ic e s ..............................................


Chart 5: Commercial Paper
Outstanding and Bond Flotations
by M ajor S e c to r s ....................................


Chart 6: Short-term Interest Rates
and Central Bank Discount Rates . . . .


Chart 7: Consumer Prices and Wages
in Major Industrial C o u n trie s............


Chart 8: United States Balance
o f Payments ............................................


United States Balance
of Paym ents.......................................
Massive deficit emerges on official
settlements basis.................................
Modest progress made in reducing
liquidity deficit ...................................
Current-account surplus widens.........
Private long-term capital
accounts worsen..................................
Developments in the International
Monetary System: Some Unresolved
Issues .................................................




Fifty-sixth Annual Report
Federal Reserve Bank of New York

A Year of Painful Transition
In 1970 the United States economy marked the end of a long period of generally
excessive demand conditions that had begun in 1965 with the escalation of the
war in Vietnam. This cooling of demand reflected, in part, the results of restric­
tive fiscal and monetary policy measures taken in 1968 and 1969. It had been
widely recognized for some time that the elimination of demand pressures would
be an absolute precondition for any progress in stemming inflation. It was also
recognized that this process would not, and indeed could not, be entirely painless
if it were to succeed. As it turned out, the disinflation of demand in 1970 proved
rather more painful than had been generally expected. Sad to relate, moreover,
progress in slowing the rate of price increases was disappointingly modest and
uncertain, leaving policy makers at the end of 1970 with some very difficult
decisions for the new year.
The effects of the slowdown in demand permeated every aspect of the economic
fabric. The growth in the aggregate output of goods and services, which had
actually begun to fall short of its long-term potential as early as the last
quarter of 1968, halted altogether in the final quarter of 1969 and showed a
fairly marked decline in the first quarter of 1970. In the spring and early summer,
the decline seemed to be bottoming out and, indeed, real GNP rose slightly in
the second and third quarters. The fourth quarter, however, was deeply marked
by the depressing effects of the General Motors strike, and real GNP posted a
renewed drop. The 1970 declines in output in the face of a growing labor force
and further additions of productive facilities and technical know-how opened up
a substantial amount of excess capacity in the economy. Unemployment, which


was at a very low 3.6 percent of the labor force at the end of 1969, rose steadily
in 1970 to 6.2 percent in its final month.
More perspective will be needed to place 1970 in relation to the past record
of business-cycle developments. As the year drew to an end, however, it
seemed entirely possible that 1970 might come to be entered into business annals
as a year of mild recession. All major components of demand showed the effects
of the overall slowing, though with varying timing. As is often the case, the last
sector to react was business spending on plant and equipment, but by the last
half of 1970 the growth of spending in this sector ground to a halt. The ending
of the long expansion in outlays for capital goods was, among other things, a
testament to the marked change in the overall economic atmosphere. When the
economy began to slow in late 1969, it was widely feared that attempts to curb
the boom atmosphere might be aborted by an “other-side-of-the-valley” psy­
chology, one in which consumers and businessmen would look forward to a
quick resumption of strong demand pressures such as had occurred after the
short-lived “mini-recession” of 1967. By mid-1970, however, such talk had
disappeared, perhaps largely as a result of the rather tumultuous developments in
financial markets that had occurred in the first half of the year. Bond prices fell
sharply and stock prices, which had already begun to decline in 1969, plunged
nearly 25 percent from the end of that year to their May 1970 lows. This decline
reflected, among other things, rather widespread fears that a serious “liquidity
crisis” might be in the making.
Fears of a liquidity crisis— the cumulating inability of businesses with weakened
balance-sheet positions to finance current expenses and/or maturing indebtedness
because of a deterioration of creditor confidence— were probably exaggerated.
Nevertheless, these fears were not wholly without substance. The inflationary
euphoria of the previous several years had no doubt led to a general weakening
of respect for traditional standards of prudent financial management. The
liquidity positions of most business firms had reached rather low levels, and
it had become increasingly difficult and expensive to obtain external funds.
A wave of mergers had created a new type of conglomerate, with special problems
in some cases. Moreover, a large number of stock brokerage firms were afflicted
with a variety of serious problems. Unless inflation was to be underwritten in­
definitely, it was almost inevitable that some of the more exposed positions would
eventually prove troublesome.
While the soundness of a number of firms and industries did in fact come
under suspicion in 1970, the most conspicuous development was the insolvency

of the Penn Central in late June. Since the railroad had defaulted on a substantial
block of maturing commercial paper, anxieties in the financial markets focused
on this sector. Over the next few weeks, a large number of worried investors
withdrew from the market and the outstanding volume of paper issued by
nonbank borrowers dropped substantially. Had the banking system, assisted
by the Federal Reserve, not been willing and able to replace this source of credit
with bank loans, a number of firms formerly relying on sales of commercial paper
to obtain funds might have experienced difficulties. These difficulties, in turn,
might well have had serious further repercussions on the economy at large.
After a few weeks of strain, however, the financial situation returned to a more
orderly condition. The experience may have had some salutary effects. Investors
seemed to have become more conscious of the quality of the obligations they
bought, while business and financial firms, on the other hand, became more
conscious of the need to maintain sound balance-sheet positions. By the end of
the year, some liquidity rebuilding had been achieved and both stock and bond
prices had rallied sharply from their spring and summer lows. Problems in the
brokerage business, however, some of them of a quite deep-seated nature, con­
tinued to surface throughout the year, leading to some spectacular rescue opera­
tions and a few failures as well.
As regards the United States international payments position, the most im­
portant development in 1970 was undoubtedly the large-scale repayment by
United States banks of their borrowings in the Euro-dollar market. This process,
which began late in 1969, accelerated early in 1970 when an increase in Regula­
tion Q ceilings on time and savings deposit interest rates facilitated bank access
to domestic funds. When Regulation Q ceilings on short-dated, large certificates
of deposit were suspended in June 1970, United States banks shifted from Euro­
dollar borrowings into CD’s on a massive scale, since CD’s represented a
significantly cheaper source of funds. The rundown in Euro-dollar borrowings
by United States banks received further impetus later in the year from the sharp
weakening in United States loan demand and from a growing confidence that CD
money would remain available in adequate amounts for the foreseeable future.
These reflows contributed to a weakening of Euro-dollar rates and were accom­
panied by a substantial movement of funds into countries where loan markets
remained tight and interest rates were maintained at high levels. In the process,
dollars were converted into local currencies, adding to exchange market pres­
sures on the dollar from other sources. As a result, a number of foreign central
banks bought dollars to keep their currencies within exchange ceilings. The


increase in foreign official holdings of dollars was reflected in a very large official
reserve transactions deficit of over $10 billion. Since the foreign central banks
that acquired dollars were in most cases willing to increase their holdings or
needed dollars for debt repayment, the sharp deterioration of our official balance
did not create a serious financing problem in 1970. Indeed, the exchange markets
actually experienced their calmest period in quite some time. To a large extent,
this reflected the constructive effects of the parity adjustments that had taken
place in recent years.
The liquidity deficit, which is not directly influenced by flows of Euro-dollars
into the hands of foreign monetary authorities, improved in 1970 but still
amounted to almost $5 billion as compared with $7 billion in 1969. The usual
accounting procedures, moreover, overstated the extent of the improvement and,
in any case, the 1970 deficit was still excessive. One factor that did improve
somewhat was the trade surplus, which rose from its dismal, strike-depressed
1969 level to $2.2 billion. Exports to several industrialized countries advanced
sharply, especially during the first half of the year, and the slower growth of
domestic demand tended to limit the growth of imports. The growth of imports
was more rapid than might have been expected, however, given the sluggish state
of the economy, in part because of the continued stimulus to imports from the
rising domestic price level. The improvement in the liquidity deficit was also
limited by a decline in foreign purchases of United States equities, reflecting the
sharp drop in stock prices during the first half of the year.
Clearly the ability and willingness of private and official foreigners to absorb
deficits of the 1970 magnitude are limited. Continued deficits on this scale could
cause major problems for the dollar.
Monetary policy in 1970 turned its attention to cushioning the emerging
economic slowdown without encouraging an excessive resurgence in demand.
In January, the Federal Open Market Committee began actively to encourage
a moderate growth in the money supply and bank credit, both of which had
shown little growth in the latter half of 1969. Moderate growth in these aggre­
gates remained an underlying objective throughout the year and one that was,
indeed, largely realized. Against this background and in view of a reduction in
credit demands associated with the economic slowing, especially noticeable toward
the end of the year, interest rates fell substantially over 1970. Indeed, toward
the year-end, declines in many rates, especially short rates, became quite
precipitate. These declines were followed by a two-stage reduction in the Federal
Reserve discount rate, totaling Vi percentage point in early November and

early December. As 1970 closed, interest rates were poised for further drops
in the new year.
Fiscal policy also began to move to a more stimulative position in 1970. Thus
the 10 percent Federal income tax surcharge enacted in mid-1968 to dampen
business and consumer demand was reduced to 5 percent in January and elimi­
nated altogether in July. In the second quarter, moreover, a rise in social security
benefit payments and an increase in Federal pay, both retroactive to the beginning
of the year, produced a massive injection into the income stream. Partly off­
setting these stimulative developments, however, Federal defense spending con­
tinued generally downward over the year, creating difficult adjustment problems
for a number of defense-related industries, especially aerospace.
While a moderate growth in the monetary and credit aggregates was an under­
lying aim of monetary policy throughout 1970, this objective took second place
in the spring and early summer to concern over tensions in the financial markets,
reflecting the basic responsibility of a central bank to ensure the orderly func­
tioning of these markets and to serve as lender of last resort. Thus the Federal
Reserve provided reserves more liberally than might otherwise have been the
case in late April and early May, partly to help avert the threatened failure of a
Treasury financing in the highly unsettled market atmosphere following the
announcement of the Cambodian incursion. Financial markets remained the
primary concern of policy until well into the summer. When it became clear on
Friday, June 19, that the insolvency of the Penn Central was imminent, this
Bank took action over the weekend to advise its member banks that adequate
assistance at the discount window would be available to banks pressed by heavy
loan demands from creditworthy borrowers unable to roll over maturing com­
mercial paper. The following week, similar assurances were also given by the
other eleven Federal Reserve Banks. On June 23, the Board of Governors of the
Federal Reserve System announced its suspension of the Regulation Q interest
ceilings on short-dated CD’s of $100,000 and over. This action permitted banks
to market these certificates on a competitive basis and thereby to make loans
to corporations which had formerly obtained credit directly through sales of com­
mercial paper. Not surprisingly, the resulting reintermediation of credit led to
a sharp expansion in the growth of bank credit for a time. The money supply
growth rate remained on a generally moderate course during most of this period,
as it did during most of the rest of the year.
The monetary aggregates, principally the narrow money supply (currency plus
private demand deposits) and bank credit, played an increased role in the day-


to-day conduct of monetary policy in 1970. The behavior of the aggregates,
especially over the intermediate and longer runs, had always had a large place
in the thinking of the Federal Open Market Committee. On certain occasions
in the past, however, the growth rates in these aggregates had shown unduly
large and undesired swings. The adoption of more explicit targets for these
aggregates and their increased use as a focus of day-to-day operations may make
it possible to avoid similar developments in the future.
It remains true, however, that undue concentration on the behavior of any
single monetary aggregate, especially over short periods, can be dangerous, both
as a program for policy makers and as a guide to observers of monetary develop­
ments. First, close control by the Federal Reserve over the behavior of these
aggregates during relatively short periods is, for technical reasons, extremely
difficult. Second, the behavior of the different aggregates may diverge rather
sharply in the short run, and some flexibility in weighing the importance of these
divergent movements is desirable. Third, there are occasions when concern over
the health of financial markets and/or international developments may require
the primary attention of a central bank. Fourth, current statistical information
on the aggregates is, for a variety of reasons, often subject to revision. This fact
of life was well illustrated in 1970 when it became necessary to make significant
revisions in money supply data for that and other recent years. These revisions
largely reflected new information on evolving market practices that were proving
to have significant implications for the money supply data. Finally, the aggregates
such as the money supply and bank credit may at times respond to sharp, but
temporary and quickly reversible shifts in the demand for them. Such shifts
can be offset, if at all, only by permitting equally sharp and short-lived changes
in money market conditions. Such whipsawing may tend to impair the functioning
of the money and credit markets and, in many cases, is quite inappropriate in
the absence of any more fundamental change in the basic economic situation.
All these considerations strongly suggest the need to continue evaluating a variety
of factors in framing and executing monetary policy.
In some respects, economic developments in 1970 proceeded along a con­
structive course. The slowdown in aggregate demand essential for the curbing
of inflationary pressures was achieved. At the same time, the monetary policy
actions taken in 1970 seemed likely to encourage an environment in which a
resumption of orderly economic expansion could take place. This policy was
implemented, moreover, while warding off the escalation of some more or less
inevitable financial turbulence into a disruption of far graver proportions. Never­

theless, the meagerness of the response of prices to the slowdown in aggregate
demand stood out as a source of bitter disappointment in 1970. This response
was both more modest in size and longer in coming than almost anyone had
expected at the beginning of the year.
There are several reasons why prices and wages in a modem economy may
continue to rise for a time after demand pressures have been removed. Some
prices, such as public utility rates, tend to react only after a lag to inflationary
conditions. Similarly, wage contracts that are negotiated every two or three years
will frequently include a “catch-up” adjustment to past price increases. These
increases raise costs and thereby lead to further price advances. More generally,
the experience of inflation generates expectations of future inflation. Such ex­
pectations continue to get built into a wide range of price and wage adjustments
well after the point where they might still be justified by current demand
Even after taking all these factors into account, the responsiveness of wage
and price movements to the economic slowdown in 1970 nevertheless was un­
usually sluggish. Perhaps the explanation may lie in the sheer length and intensity
of our recent inflationary experience. Whatever the reason, the persistence of
consumer price increases at average annual rates of more than 5 percent toward
the year-end, coupled with an unemployment rate of around 6 percent, made
compelling the need for new approaches to supplement monetary and fiscal policy
in combating inflation.
Indeed, the belief was spreading that a number of developments, some
economic, some social and political, have made it increasingly difficult for
monetary policy, even when supported by fiscal policy, to shoulder the full burden
of simultaneously achieving price stability and steadily high levels of employment.
By late 1970, a wide range of proposals was being offered by public officials
and by others for strengthening the economy’s ability to fight inflation. Some of
these proposals were directed at improving the efficiency and competitiveness of
labor and product markets. Others sought to provide more direct means for
restraining excessive wage and price increases through some more general form
of incomes policy. Clearly, these proposals deserved the serious and open-minded
consideration of all those concerned with the future of the American economy.
At the least, 1970 should have made clear the long and tortuous chain of events
that is ultimately set in motion whenever aggregate demand becomes excessive—
as it was during much of the latter 1960’s. At the same time, this experience
should provide powerful motivation for avoiding such episodes in the future.


Business Conditions:
Inflation in a Sluggish Economy
The anti-inflationary monetary and fiscal policies instituted in the second half
of 1968 and pursued vigorously throughout 1969 had a major impact on the
economy in 1970. Industrial production, which had begun to drop in August
1969, declined substantially further throughout 1970; overall economic growth
as measured by real gross national product (GNP) came to a halt, and
unemployment of both labor and production facilities increased markedly.
The first half of the year was characterized by considerable turbulence in the
financial markets, highlighted by a precipitous drop in the stock market which
carried the major price indexes by May to their lowest point in almost a decade.
Subsequently, the financial collapse of the Penn Central railroad sent tremors
through both the debt and equity markets, and the Federal Reserve System imme­
diately took steps to head off further major financial problems, especially in the
commercial paper market. Thereafter, however, relative financial calm was
gradually restored, and the most credit-sensitive sectors of the economy strength­
ened. Housing starts, which hit their low early in the year, recovered vigorously.
State and local governments also regained a stronger position in the credit
markets, and in the second half of the year this apparently was being reflected
in an acceleration of their capital spending.
The emerging strength in home building and state and local government
expenditures was not enough to offset the weakness that developed elsewhere.
Sharply declining defense spending had a strong depressing effect on the economy
in general and on the defense industry and its work force in particular. Plant
and equipment spending weakened, rising above the 1969 total by less than the
climb in capital goods prices. And inventory spending, while maintained at
higher levels than might have been expected on the basis of historical experience,
nevertheless cut substantially into GNP growth during the first half of the year.
Consumers adopted quite cautious spending patterns, and higher savings absorbed
a sizable share of the increase in their disposable income.

Despite the elimination of excessive demand pressures, and unemployment that
reached 6.2 percent by the year-end, the pace of inflation was little diminished.
Wages on average soared last year about twice the long-run average growth of
productivity. At the same time the price indexes continued to move up rapidly,
and convincing evidence of a slower rate of climb was still lacking at the year-end.

f a l l i n g o u t p u t a n d r is in g u n e m p lo y m e n t.
Industrial production
was already declining as 1970 began and, while unemployment remained low,
the job market was also beginning to feel the pervasive economic effects of the
restrictive monetary and fiscal policies initiated in 1968. Real GNP declined in
the final quarter of 1969, and by early 1970 it was clear that the economy was in
a period of contraction (see Chart 1). At the time, the general expectation seemed
to be that inflation would progressively moderate and that output would turn
higher later in the year, thereby preventing a large rise in unemployment. But,
as matters turned out, industrial production fell fairly steadily throughout the
year and was depressed sharply further from September through November by
the strike at General Motors. In December, after auto production had been
partially restored at GM, industrial production stood 4.2 percent below the
previous December and 6.1 percent below the July 1969 peak. The drop last
year in industrial activity was only partially offset by the continued expansion
in the output of services. Real GNP turned marginally higher in the second and
third quarters, but declined again in the fourth quarter because of the GM strike.
Hence, fourth-quarter real GNP was down about 1 percent from a year earlier.
Declines in industrial production were pervasive, touching nearly all the major
commodity and market groupings. As consumers turned more conservative in
their spending patterns, businessmen quickly moved to adjust inventories and
production of most categories of consumer goods tailed off. A three-month strike
at General Electric, ended in February, held down the production of appliances
and electrical machinery early in the year, and auto output was severely depressed
by slumping sales and by the mid-September to late-November work stoppage
at GM. The sluggish performance of retail sales dampened businessmen’s antici­
pation of future sales and, together with reduced profits, contributed to a pro­
gressive scaling-back of business investment spending. Thus, while business
equipment output remained near its October 1969 peak through March, it de­
clined sharply thereafter. Reflecting the sharp curtailment in Federal Government
defense expenditures, the production of defense goods plummeted further in 1970


C h a r t 1.
P R O D U C T I O N , P R I C E S , A N D U N E M P L O Y M E N T : A c t iv it y in th e
in d u s t r ia l s e c t o r o f t h e e c o n o m y c o n t in u e d t o d r o p in 1 9 7 0 , h a lt in g th e
g r o w th o f r e a l g r o s s n a t io n a l p r o d u c t . Y e t t h e g e n e r a l p r ic e le v e l c o n t in u e d
t o m o v e s h a r p ly h ig h e r . U n e m p lo y m e n t r o s e r a p id ly , a s jo b o p p o r t u n it ie s
d e c lin e d w h ile th e c iv ilia n la b o r f o r c e g r e w .

All data are seasonally adjusted. Quarterly GNP numbers are
at an annual rate.


and by the year-end stood about one-third below its mid-1968 peak. The only
significant exception to the general trend of falling production was in the utilities
sector, where output continued to climb.
The persistent sluggishness of output during 1970 and the growing preoccu­
pation of businessmen with the need to cut costs led to a progressive softening
of the labor market and a sharp rise in unemployment (see Chart 1). By De­
cember the unemployment rate had reached 6.2 percent of the labor force, up
2.6 percentage points over the year. At the end of 1969 and into the early
months of 1970, the labor market remained tight even though general economic
activity had turned down. In part, this appeared to be the result of business
hoarding of labor in anticipation of renewed expansion and expected future
difficulty in attracting workers. However, as the economic outlook deteriorated,
many businessmen came to the view that the squeeze on profits would continue
well into the future, requiring a major streamlining in 1970 of managerial as well
as production employment. Hence, work forces were trimmed and the unem­
ployment rate moved sharply higher. By the year-end the number of jobless
workers had risen by 2.2 million to a level of 5.1 million. While the increase in
joblessness was in part a result of a small decline in total employment, it was
magnified by sustained labor force growth in the face of diminishing job oppor­
tunities. This labor force growth centered in young people and adult women
who, not surprisingly, also absorbed much of the burden of rising unemployment.
At the same time the civilian labor force was swollen further by a reduction in
the armed services of about 400,000.


Personal income

growth during 1970 was about three fourths of the 1969 gain, as the economic
downturn limited the rise in most categories of wage and nonwage income. In
the case of wage and salary payments—by far the largest component of personal
income—the slowing entirely reflected reduced employment and a shorter work­
week inasmuch as advances in wage rates continued rapid. Increases in pay scales
were particularly large among the more than 4.5 million union workers covered
by major collective bargaining settlements during the year. For these workers,
pay and benefit rates jumped an average of 13 percent in the first year of the
new contracts. Federal Government employees, both military and civilian, also
received an increase in pay rates in April, retroactive to January. Moreover,
social security benefit scales were increased in April, again retroactive to January,


contributing substantially to the growth of nonwage income. However, these
income gains only partially offset the impact on personal income of declining
employment and hours of work.
Despite slower personal income growth, disposable income moved sharply
higher in 1970, largely as a result of the two-step elimination on January 1 and
July 1 of the 10 percent surcharge on personal income taxes. However, the
potential stimulus to consumption spending from this tax reduction was blunted
by growing uncertainty among consumers as to the future course of the economy.
Indeed, consumers channeled an exceptionally large share of this added income
into current saving. Thus, the savings rate— the percentage of disposable income
saved—jumped sharply and in the final three quarters averaged 7.5 percent, at
the upper end of the post-World War II range.
With consumers saving a large share of income, consumption expenditures
climbed slowly during the year. The weakness in consumer outlays occurred
primarily in the durable goods category where expenditures declined in three of
the four quarters. This was principally the result of weak auto sales, but expendi­
tures on household durables were also sluggish. On the other hand, consumer
purchases of nondurable goods and expenditures on services, measured in current
dollars, expanded in 1970 at least as rapidly as in earlier recent years. Spending
on services is usually maintained through periods of overall economic contraction,
and this past year that tendency was reinforced by rapid further increases in the
prices of services.
The slowing of consumption expenditures for manufactured goods during 1970
gave rise to an inventory correction, similar to but considerably smaller than that
which occurred in the 1967 “mini-recession”. As sales slowed, both retailers
and manufacturers found themselves with unintentional accumulations of inven­
tories. But, in contrast to the 1967 experience when the correction followed a
record surge in inventory investment, businessmen this time began cutting back
on inventory spending before severe imbalances developed. Thus, the major por­
tion of the inventory adjustment was accomplished in the two quarters ended
March 1970, when inventory spending dropped back by nearly $10 billion to
reach the low of about $IV2 billion. This phase of the inventory adjustment was
largely completed by midyear with a much smaller adverse impact on GNP
growth than occurred in the first half of 1967. Inventory spending remained
low in the second half of the year, although total stocks did rise further in rela­
tion to business sales as the latter declined—in part because of the GM strike.
Business fixed investment spending, which had nearly doubled over the pre­

ceding seven years, leveled off in 1970 and declined in real terms. Despite the
elimination in 1969 of the investment tax credit, businessmen at the outset of the
year were still anticipating a large further increase in capital outlays. However,
these plans were cut back substantially in the manufacturing sector, as a growing
proportion of existing capacity became idle, the deteriorating economic outlook
reduced prospects for profitable near-term investments, and the refinancing of a
growing burden of short-term debt absorbed much of the proceeds of bond
flotations. Business capital spending would probably have been cut back even
further had it not been for continued strong inflationary expectations. Surveys
taken during the year uniformly found that businessmen expected the current
rapid increases in wages and capital goods prices to continue, an expectation
that would be an incentive to upgrade production techniques in the near future.
Moreover, exceptionally heavy long-term borrowing at the high 1970 interest
rates suggests that businessmen were willing to gamble that inflation would help
reduce the burden of carrying that debt in the future.
Residential construction activity generally suffers quickly and severely during
a period of intense monetary restraint, and the sharp tightening of credit condi­
tions early in 1969 slowed activity in this sector progressively in spite of massive
support to the mortgage market by Federal credit agencies. Dramatic increases
in flows of mortgage money in 1970 precipitated an equally rapid recovery.
Continued heavy support by Federal agencies aided the market substantially,
but privately supplied funds flowing through thrift institutions primarily accounted
for the increase in mortgage lending. Thrift deposit inflows were increased both
by the rapidly rising volume of personal savings and by lower market interest
rates which, together with higher regulatory rate ceilings on deposits, improved
greatly the ability of thrift institutions to compete for funds. With residential
financing again enjoying good availability, the strong underlying demand for
housing surfaced. The volume of housing starts, after dropping down close to
a 1 million annual rate early in the year, turned sharply higher after midyear,
resulting in substantial increases in residential construction outlays over the third
and fourth quarters. By the last quarter, housing starts were up to an annual rate
of 1.8 million units. However, there were increasing indications that home
builders are attempting to offset soaring construction costs by reducing the size
of housing units and eliminating some luxury features, with the result that actual
construction expenditures— which lag behind starts— may not show proportion­
ately as much strength as the latter. And, despite this attempt to hold down the
rise of home and apartment construction costs, the continued high volume of


mobile home sales indicates that many families remain unable to afford the price
of conventional housing.
Outlays by state and local governments rose by $11 billion during 1970, con­
tinuing the strong expansionary trend set throughout the 1960’s. The largest
share of the expenditure increase came in the second half of the year, spurred by
significantly higher sales of state and municipal bonds, some of which had been
previously authorized but remained unsold because of high interest costs.
However, the slowing economy cut into state and local government operating
revenues, causing many local governments to limit hiring of personnel and to
curtail services.

s r e n d in g a n d t a x a t i o n .
The Federal budget began to move
into deep deficit last year. Indeed, fiscal year 1971 (ending June 30, 1971) is
now officially forecast to show an excess of expenditures over receipts amounting
to $18.6 billion, in sharp contrast to the slight surplus of receipts planned by the
Administration before the budget year began and far above the actual deficit of
$2.8 billion that occurred in fiscal 1970.
About half of the expected sharp deterioration in the Federal deficit is a
direct consequence of feedback effects on the budget from last year’s lagging
economy. These effects— the coming into play of the so-called automatic eco­
nomic stabilizers— were reflected in both reduced tax payments by individuals
and corporations and higher Federal transfer payments to persons such as for
unemployment compensation. However, these effects of the economy on the
budget were also supplemented by other spending and tax actions through which
the Federal Government exerted a direct and active influence on the economy.
On the spending side, expenditures for nondefense programs were increased
sharply by an estimated $20 billion, about double the increase initially budgeted
and also double the rapid climb in other recent years when the “Great Society”
programs were being initiated. Some offset to this civilian spending surge was pro­
vided by the $4 billion reduction in defense spending, centering in calendar 1970.
That reduction was, of course, achieved largely as the result of the de-escalation
of the Vietnam war, and prospects for further large savings from defense cutbacks
appear to have become increasingly limited. At the same time, the tax burden
on the economy was reduced sharply last year through legislative actions. The
phasing-out of the 10 percent income tax surcharge in two steps in the first half
of calendar 1970 lowered personal and corporate taxes on the order of $10 billion


annually. And, the Tax Reform Act of late 1969 contained a number of tax
reducing steps spread over several years, including a $50 increase at mid-1970
in the personal exemption allowance. To be sure, the elimination of the invest­
ment tax credit in late 1969 (retroactive to the previous April) undoubtedly had
some restraining effects on the economy last year, but taken together Federal tax
actions in the past year were decidedly stimulative for the private sectors.
The recent rapid increase in Federal nondefense spending has centered in
transfer payments such as those for welfare, social security, health, and grantsin-aid to state and local governments. Total Federal purchases of goods and
services— that portion of budget outlays that is explicitly included in GNP—
actually declined in calendar 1970, as defense purchases fell $4 billion over the
year while nondefense purchases were about unchanged. Thus, the economic
effects of budget outlays are increasingly indirect, having their effect on measured
economic activity only as additional transfer payments to a particular economic
sector are reflected in higher spending by that sector. Moreover, the rapidly
growing activities of the Federal Government and its agencies in stimulating the
private economy through various credit programs fall almost entirely outside the
coverage of the budget. In fiscal 1971, total Federal and Federally assisted credit
is projected to rise by $24 billion. Thus, the Federal Government and its agencies
are currently involved in more than one fourth of all private borrowing either as
direct lender, insurer, or guarantor. The effects of these rapidly expanding credit
programs on the economy are almost impossible to quantify but are no doubt
quite important, especially in the areas of home building and agriculture.
The relaxation of fiscal restraint that was undertaken in 1970 served both to
bolster the economy and to provide for pressing social needs. However, the great
momentum in Federal civilian spending that built up last year, together with the
further cuts in taxes that are embodied in the Tax Reform Act of 1969, may
make it difficult to preserve the budget flexibility needed to achieve, and main­
tain over the longer run, a strong and noninflationary economy.









Certainly the most discouraging aspect of the economic picture
during 1970 was the failure to make more significant progress in the battle against
inflation despite the sharp rise in unemployment. Restrictive fiscal and monetary
policy succeeded in eliminating excess demand on the nation’s economic re­
sources, the first crucial step toward reducing the rate of inflation to an ac­
ceptable level. By the year-end it was clear that, while the elimination of
excess demand had halted the acceleration of price gains and also generated
a sharp reversal of business psychology, only modest progress had been made in
reducing the rate of inflation. Indeed, the increase in many price indexes in 1970
turned out to be about as great as in 1969. The GNP deflator, an economy-wide
measure of price behavior, accelerated slightly to a 5.3 percent rate of climb.
However, the fourth-quarter deflator reading was distorted upward by the GM
strike, and except for that distortion the deflator would probably have shown
about the same gain as in 1969. The consumer price index rose about V2 per­
centage point less than in the previous year, but this was due entirely to slower
growth of food prices (see Chart 2). This latter development reflected increased
supplies of farm products and was not indicative of improvements in the under­
lying inflationary pressures. Indeed, price increases for housing and services (7.4
percent and 8.2 percent, respectively), which together account for a large part of
consumption expenditures, were steeper in 1970 than in 1969. Wholesale prices
on average increased last year at about half the 1969 pace of 5 percent, but this
improvement also reflected a 1.2 percent decline in food prices in 1970 following
a jump of 7.4 percent the previous year. Wholesale prices of industrial com­
modities, a better indicator of underlying inflationary pressures, climbed by 3 Vi
percent, only about Vi percentage point less than the 1969 gain.
The economic slowdown in 1970 has, however, altered the nature of the current
inflation significantly. Excess aggregate demand pressures were largely eliminated,
and the inflation is now spurred on by cost factors, the most important of
which is rapid wage rate gains. Compensation per man-hour in the private
economy rose by 6.7 percent, continuing the trends of very high gains recorded
since 1968. In part, this climb reflected historically high wage and benefit gains
in major collective bargaining settlements, most of which extend for three years.
During 1970 these settlements called for an average wage and benefit increase of
9 percent per annum over the life of the contract (see Chart 2) and about
13 percent in the first year. Contract settlements were particularly large in the
construction industry, with first-year gains averaging nearly 20 percent. Of
in f l a t io n


C h a r t 2.
W A G E S A N D P R I C E S : M a j o r la b o r c o n t r a c t s e t t le m e n t s in 1 9 7 0
le d t h e a d v a n c e in w a g e s t h r o u g h o u t th e e c o n o m y a n d u n d e r s c o r e d t h e e x t e n t
o f th e c u r r e n t c o s t p u sh on p r ic e s . T o t a l c o n s u m e r a n d t o t a l w h o le s a le p r ic e s
b e n e fite d fro m le s s in fla tio n in t h e p r ic e s o f a g r ic u lt u r a l p r o d u c t s , b u t n o n fo o d
c o n s u m e r p r ic e s w e r e a g a in s h a r p ly h ig h e r a n d in d u s t r ia l w h o le s a le p r ic e in ­
c r e a s e s m o d e r a t e d o n ly s lig h t l y .












1st h a lf 2nd ha lf









Labor contract data are average annual wage and benefit increases over the life of contracts
covering 1,000 or more workers, except for 1964 and 1965 data which are median increases.
Price changes are based on index readings the last month before, and the final month of, the
period plotted. Half-year data for 1970 are seasonally adjusted annual rates of change.


course, by virtue of the widespread publicity given these large settlements, their
importance goes well beyond the relatively small proportion of the total labor
force actually affected by the contracts themselves.
The large wage increases of 1970 substantially exceeded productivity gains,
thereby contributing to upward cost pressures. Output per man-hour in the
private economy edged up during the year by only IV2 percent, well below the
long-run growth trend. The depressed productivity performance resulted in large
part from the weakened state of the economy. In such circumstances, the down­
ward adjustment of labor inputs usually lags that of output. This was particularly
true in the first quarter of 1970. In that quarter, real GNP was on the decline,
but businesses retained workers in anticipation of a quick resumption of economic
expansion and productivity actually fell. Then, in the final quarter, the GM strike
exerted a temporary depressing effect on average output per man-hour. Thus,
productivity rose substantially only in the second and third quarters, when real
GNP turned marginally higher and businesses at the same time aggressively
trimmed work forces and overtime hours. Since the modest overall productivity
gains of last year offset only a small part of the rapid climb in compensation per
man-hour, labor costs per unit of output rose by about 5 percent.
As the extraordinary stubbornness of the inflation became increasingly clear
during the year, pressures mounted for additional policy actions that would
control inflation without depressing economic activity further. At midyear,
President Nixon requested a series of “inflation alerts” from the Council of
Economic Advisers, calling public attention to major cases of inflationary cost
and price increases. Two such alerts were issued, and in December the Adminis­
tration initiated further limited measures designed to stem inflationary pressures.
For example, steps were taken to expand the supply of oil in the hopes of easing
the rapid increase in fuel prices. At the same time, many persons in and out of
Government came to the view that an incomes policy would be a desirable addi­
tion to the battle against inflation. The Chairman of the Board of Governors of
the Federal Reserve System and the President of this Bank both appealed publicly
last year for the institution by the Administration of an incomes policy to guide
private wage and price decisions.


Monetary Policy and Credit Market Developments
The attempt to bring inflation under some measure of control remained a major
objective of monetary policy in 1970, although rising unemployment and increas­
ing economic slack emerged early in the year as an additional major problem
facing policy makers. The already difficult problems posed by the simultaneous
existence of severe inflation and rising unemployment were further complicated
several times during the year by the need to focus attention on turbulent and
potentially dangerous conditions in the financial markets. Recognizing the
economic downturn which emerged in late 1969, monetary policy was shifted
early in the year from a stance of marked restraint toward a posture of moderate
ease aimed at achieving a moderate acceleration of money supply and bank
credit growth. However, liquidity pressures mounted during the spring, cul­
minating in the summer’s commercial paper market crisis. During this period,
monetary policy was focused on promoting stability in the credit markets.
A major step toward this objective was taken in June when the Federal Reserve
suspended Regulation Q interest rate ceilings on large-denomination certificates
of deposit of 30- to 89-day maturities. This action led to rapid flows of large
CD’s into commercial banks, further acceleration of bank credit growth, and a
rechanneling of credit flows from direct short-term lending markets back into
the banking system. Fears of a generalized liquidity crisis abated thereafter,
and the primary thrust of monetary policy was redirected at promoting a mod­
erate monetary expansion. Pursuit of this objective contributed to further de­
clines in both short-term interest rates and net borrowed reserves over the re­
mainder of the year. Short-term market yields, which had been generally around
9 percent early in the year, dropped below the 6 percent Federal Reserve discount
rate by November, leading to two V percentage point downward adjustments in
the discount rate before the year-end.

At the end Of
1969, monetary policy was in a posture of active restraint. Both the money
supply and bank credit had grown slowly in the preceding six months, interest
rates were at or near record highs, and member bank borrowings at the Federal
Reserve had averaged $1.1 billion in December (see Chart 3). The economic
outlook at that point appeared to be for a short and shallow downturn followed
by some recovery before the close of 1970. Thus, the move toward ease was made


cautiously, in recognition of the still extrem ely strong inflationary psychology
and w idespread public skepticism th at the required degree of m onetary and fiscal

C h a rt 3.
M O N E Y , B A N K C R E D IT , A N D M O N E Y M A R K E T CO N D IT IO N S : The
n a rro w m o n e y s u p p ly r o s e a b o u t S l/ i p e r c e n t la s t y e a r , re fle c tin g : e a s ie r F e d ­
e r a l R e s e r v e p o lic y . B a n k c r e d it g r o w th a ls o a c c e le r a t e d , a s r e s e r v e s w e re
s u p p lie d in g r e a t e r v o lu m e a n d b a n k s o n c e a g a in b e c a m e c o m p e t it iv e in th e
is s u a n c e o f la r g e c e r t if ic a t e s o f d e p o s it . R e d u c e d p r e s s u r e s on m e m b e r b a n k s ’
r e s e r v e s w e r e r e fle c t e d in s h a r p ly lo w e r F e d e r a l f u n d s r a t e s a n d r e d u c e d
b o r r o w in g s a t t h e d is c o u n t w in d o w . T o w a r d t h e y e a r - e n d , tw o c u t s w e re m a d e
in t h e d is c o u n t r a te t o t a lin g */2 p e r c e n t a g e p o in t.






The money supply growth rates are com puted from daily average levels in the
final month of the preceding period and the final month o f the period covered.
Changes in bank credit include loan sales to affiliates and are based on levels
for the last Wednesday of the period covered and the last Wednesday of the
preceding period. Sem iannual m oney and credit figures for 1969 and quarterly
figures for 1970 are expressed at seasonally adjusted annual rates.


restraint would be pursued long enough to check inflation. Reflecting this easing,
money supply growth increased and, on balance, interest rates fell through the
first quarter. In an additional policy move, the Board of Governors of the Federal
Reserve System raised Regulation Q interest rate ceilings to AV2 percent on pass­
book accounts and to a maximum of IV2 percent on large-denomination CD’s
maturing in a year or longer. This change, which took effect on January 21, was
primarily designed to limit time deposit outflows from commercial banks. The
higher Regulation Q ceilings, together with the downturn in short-term interest
rates, contributed to modest growth in bank credit during the early months of
the year.
The gradual easing of monetary policy during the first quarter gave rise to a
growing expectation of further ease, which accentuated the rapid decline in
short-term interest rates. However, early in the second quarter it became clear
that credit demands were still relatively strong, as the scramble to rebuild depleted
liquidity positions began to gain momentum. Moreover, market participants were
increasingly coming to the view that the move toward monetary ease was more
modest than they had initially anticipated, and this belief was reinforced when
larger than expected money supply growth led the Federal Reserve to encourage
temporary firming in the money market. Together, these factors set the stage
for an upward adjustment in interest rates beginning in mid-April (see Chart 4)
and led into a period, which was to last through midsummer, when the major
emphasis of monetary policy was shifted to concern with financial market stability.
The upward adjustment in interest rates began in the Treasury securities market,
where anticipations of still lower short-term rates had been exceptionally strong.
When these anticipations were disappointed, there was a major selling wave and
a substantial increase in Treasury bill rates just prior to the major Treasury
refunding in early May. As the refunding date approached, the Federal Reserve
stepped up its purchases of Treasury securities to promote orderly market condi­
tions. To complicate matters further, a large $3.5 billion cash offering was under­
taken by the Treasury simultaneously with the refunding, and the entry of United
States troops into Cambodia was announced. The financing was completed suc­
cessfully, but the degree to which markets were strained is suggested by the fact
that 100 percent subscription awards were made on the cash offering for the first
time in at least thirty-five years. Subscription awards on cash offerings typically
range around 25 percent.
The upward adjustment in interest rates spread to other financial markets
through May and June, as additional demand for debt financing from state and


C h a rt 4.
I N T E R E S T R A T E S A N D S T O C K P R I C E S : S h o r t- t e r m in t e r e s t ra te s
m o v e d s h a r p ly lo w e r in 1 9 7 0 , y e t lo n g - t e r m b on d y ie ld s re m a in e d n e a r t h e ir
r e c o r d h ig h s u n til t h e c lo s in g m o n th s , r e f le c t in g e n o rm o u s d e m a n d s on th e
c a p it a l m a r k e t s . H o m e m o r t g a g e r a t e s r e m a in e d a t r e c o r d p o s tw a r le v e ls
d e s p it e a v a s t ly im p r o v e d s u p p ly o f m o r t g a g e fu n d s . S t o c k p r ic e s b e g a n to
r e c o v e r a f t e r m id y e a r , f o llo w in g a s p r in g d ro p t h a t had c a r r ie d p r ic e s t o a
s e v e n - y e a r lo w a n d r a is e d c u r r e n t d iv id e n d y ie ld s to a t w e lv e - y e a r h ig h .

local governm ents and corporations pushed rates back to record levels. U ncer­
tainties about the econom y and the early M ay m ovem ent of U nited States troops
into C am bodia also affected the financial m arkets, and contributed to a sharp
decline in stock m arket prices, which reached a seven-year low later in the m onth.
M atters reached crisis proportions on Friday, June 19, when efforts to secure
G overnm ent-backed em ergency credit for the failing Penn C entral T ransportation
C om pany collapsed. This event m ade it clear that the railroad w ould be forced
to petition for reorganization under Federal bankruptcy law within a few days,
defaulting on some $82 million in outstanding com m ercial paper. Recognizing

that these circumstances could lead to serious disruption of the commercial paper
market, the Federal Reserve Bank of New York acted on Saturday, June 20.
Member banks in the Second Federal Reserve District were informed that the
Federal Reserve—in its capacity as lender of last resort—would regard discount
window borrowings favorably if used in support of loans to creditworthy bor­
rowers unable to roll over maturing commercial paper. The Penn Central
bankruptcy petition was filed on Sunday, June 21, leading to a $3 billion con­
traction of commercial paper in the following three weeks and generating wide­
spread fears of a general liquidity crisis as corporations unable to roll over
maturing paper scrambled for scarce funds in other markets. Additional Federal
Reserve actions were taken during the week of June 22. Discount officials at
other Federal Reserve Banks conveyed similar information to member banks
in their districts, and member bank borrowings rose by about $0.5 billion to
average $1.4 billion during July (see Chart 3). Additional reserves were pro­
vided through open market operations during this period. In a further move
on June 23, the Board of Governors suspended Regulation Q interest rate ceil­
ings on large CD’s maturing in 30 to 89 days. As a consequence, banks experi­
enced massive inflows of large CD’s which provided a more permanent source
of funds to fill the credit gap created by the rundown of commercial paper.1
Following these actions, fears of a general liquidity crisis subsided and the
financial markets stabilized. Consequently, in July the primary thrust of mone­
tary policy was again redirected at promoting a moderate monetary expansion.
However, it was clear that the economy was weaker than expected, leading to
further easing of money market conditions in an effort to realize the desired rate
of money supply and bank credit growth. In the fall, the long GM strike clouded
the policy picture in several ways. The strike made it more difficult to determine
strengths and weaknesses in the economy and apparently contributed to a weak­
ening of the public’s demand for cash, hindering efforts to achieve the desired

1 In a follow-up action aimed at equalizing treatment of CD’s and bank-related commercial paper
liabilities, the Federal Reserve announced on August 17 that all member bank funds arising from
commercial paper sales by bank-related companies would be classified as deposit liabilities subject
to reserve requirements. Banks were required to hold 5 percent required reserves against paper
maturing in thirty days or more, and shorter dated paper was classified as demand deposits. Prior to
the change, commercial banks had been able to secure reserve-free funds by selling loans to affiliated
corporations in exchange for the proceeds of commercial paper sold by these bank-related firms.
At the same time, the reserve requirement against time deposits in excess of $5 million was reduced
from 6 percent to 5 percent. The October 1 effective date of these changes was timed to coincide
with the fall period of seasonal reserve needs.


rate of monetary expansion. Hence, money supply and bank credit growth
slowed somewhat, and by the year-end short-term interest rates fell to their
lowest levels since the fall of 1968. Long-term rates, which had remained at
very high levels through much of the year, also began to retreat toward the end
of the year. The prime lending rate charged by large commercial banks was
lowered four times in the last third of the year to a level of 6% percent, and
the Federal funds and Treasury bill rates dropped below the 6 percent Federal
Reserve discount rate which had been in effect since April 1969. Thus, in tech­
nical responses to these interest rate declines, the Federal Reserve Banks lowered
their discount rates a total of Vi percent to 5 Vi percent. The change occurred
in two Vx percentage point steps, one initiated on November 10, the other on
November 30. Also on November 30, the Board of Governors announced
several amendments to Regulations M and D pertaining to Euro-dollar reserve
requirements which, taken together, were designed to provide an inducement to
commercial banks to limit the rapid repayment of Euro-dollar borrowings. The
repayment of such balances had contributed to the sizable balance-of-payments
deficit on an official settlements basis during the year.
In response to the policies of moderate monetary expansion, the rate of growth
of the money supply and total bank credit quickened in 1970 (see Chart 3).
The money supply—the public’s holdings of currency and checking deposits—
expanded by 5.4 percent following an increase of only 3.1 percent in 1969. Since
the money stock grew at an annual rate of only 1.2 percent in the second half of
1969, the acceleration in growth during 1970 was considerably more rapid than
is suggested by the annual data. Money balances turned over at a somewhat
slower pace in 1970 than in 1969. The income velocity of circulation— GNP
divided by the money supply— turned downward after a 3 percent increase in the
previous year. The decline in velocity probably, in part, reflected lower interest
rates on alternative liquid financial assets as well as attempts of consumers and
businesses to rebuild depleted liquidity positions.
A large revision in the money supply series was announced in late November,
aimed primarily at elimination of a major downward bias in the money supply
data. This bias arose from foreign exchange transactions, Euro-dollar borrow­
ings, and other foreign payments flowing through certain institutions specializing
in international banking, in particular Edge Act corporations and United States
agencies and branches of foreign banks. These banking institutions had been
accounting for a growing volume of transactions of this nature which in turn had
resulted in a rising amount of “cash items in the process of collection” on

the books of domestic commercial banks. Cash items are subtracted from total
demand deposits in calculating the demand deposit component of the money
supply in order to eliminate double counting. However, since the balances due
to the institutions mentioned above are not reported as money supply deposits,
the subtraction of the resultant cash items led to a downward bias in the money
supply as previously measured. By mid-1970 the bias had reached quite sizable
proportions, and the November revisions raised the reported money supply level
by about $7 billion and significantly increased money supply growth rates over
the first three quarters of 1970. Prior to the revisions, money supply growth
rates had been reported at 3.8, 4.2, and 5.1 percent in the first three quarters,
respectively. Correction for the downward bias raised these three quarterly esti­
mates to 5.9, 5.8, and 6.1 percent. Money supply growth slowed to a 3.4 percent
rate in the fourth quarter, owing in part to a temporary reduction in the public’s
demand for cash balances associated wtih the strike at GM.
Total bank credit expanded at a 7.4 percent rate in 1970, nearly double the
1969 gain. Most of the bank credit growth occurred in the third quarter of
the year, following the suspension of Regulation Q ceilings on short-dated CD’s
in late June. This action, together with the across-the-board raising of Regulation
Q ceilings in January and declining short-term interest rates, enabled commercial
banks to expand large CD’s by $ 1 5 ^ billion in the last eleven months of the year,
more than offsetting the $14 billion CD loss between December 1968 and January
1970. As banks became more confident of their ability to attract and hold CD’s,
they reduced dependence on nondeposit funds which had been used heavily the
preceding year. Toward the year-end, most banks had reduced Euro-dollar
liabilities below their original reserve-free bases and, despite an increase in
marginal reserve requirements designed to discourage further repayments, total
Euro-dollar borrowings of banks fell further in December. In addition, use of
bank-related commercial paper diminished markedly following the summer’s
crisis in that market, and Federal Reserve regulation changes announced shortly
thereafter established reserve requirements on such liabilities. The net effect of
all these developments was to increase rapidly credit flows into the banking
system and shift the liability structure of commercial banks back into more tradi­
tional patterns. Moreover, these developments were accompanied by dramatic
shifts in the composition of bank credit which greatly enhanced commercial bank


l iq u id it y
r e b u il d in g .
The major share of increased
commercial bank deposit resources was used to acquire liquidity-building invest­
ments, as net loan demand waned considerably. In 1969, commercial banks had
liquidated some $9.6 billion in securities holdings to finance additional loan
expansions. This pattern was reversed in 1970, when bank holdings of Treasury
and municipal securities rose by $20.4 billion. About $14.3 billion represented
purchases of state and local government securities, which were spurred by a July
Internal Revenue Service ruling that interest costs incurred by a bank on funds
obtained in the ordinary course of business would remain tax deductible even
if the bank invests in tax-exempt securities. In contrast, net demands for bank
loans moderated throughout much of 1970, and the 3Vi percent increase in
total bank loans outstanding was the smallest since 1953. Business loan demand
was weak throughout the year, reflecting reduced capital outlays, smaller in­
ventory accumulations, and the shifting of existing corporate liabilities into long­
term debt. Bank lending showed strength only in the third quarter, when loans
to finance companies surged in the wake of the commercial paper crisis.
Although demands for short-term bank loans were moderate, long-term
financing in the capital markets soared in 1970 as a wide array of borrowers
entered the markets for funds that were available on somewhat easier terms than
in 1969. This extraordinary demand limited the decline in long-term interest
rates, and for much of the year borrowing costs in the capital markets were not
much below the peak levels reached in 1969.
Liquidity rebuilding appeared to be a dominant element in the corporate
capital markets last year, as reflected in the acceleration of both debt and stock
issues at a time when bank loan availability was increasing and the cost of bank
credit was declining. Total corporate bond issues came to $30 billion in 1970, far
above the 1969 total of $18.3 billion and a new record by a wide margin (see
Chart 5). Only a part of this increased borrowing could be ascribed to the fall in
corporate profits that moderately reduced the flow of internally generated funds
available to finance capital spending and other needs. A major proportion was
used to repay short-term borrowings at banks and in the commercial paper
market and to rebuild holdings of liquid assets, such as Treasury bills and bank
CD’s. The term structure of interest rates reflected this fact quite strongly. Thus,
new high-grade corporate bond issues sold at an average of about 8 V2 percent
throughout most of the year—except for a move upward in May and June and
a drop at the very end—while Treasury bill rates declined sharply from 8 percent
at the start of the year to less than 5 percent at the close.



T he U nited States T reasury again becam e a m ajor borrow er in the capital
m arkets in 1970, reversing the 1969 trend w hen $0.9 billion of m arketable
Treasury securities h ad been retired. The sluggish econom y cut deeply into
expected tax revenues throughout the year, Federal outlays clim bed significantly
in the second half, and the T reasury borrow ed a total of $11.8 billion. Despite
this sharp increase in the volum e of outstanding F ederal debt, interest rates on all
m aturity categories of T reasury securities declined sharply, as both banks and

C h a rt 5.
M A J O R S E C T O R S : F o llo w in g a lo n g p e r io d o f r a p id e x p a n s io n , t h e v o lu m e o f
n o n b a n k c o m m e r c ia l p a p e r o u t s t a n d in g c o n t r a c te d s h a r p ly t h r o u g h 1 9 7 0 ’ s
s u m m e r c r is is . W it h d e c lin in g in t e r e s t r a te s , flo t a tio n s o f b o th c o r p o r a t e a nd
s t a t e a n d lo c a l g o v e r n m e n t b o n d s a c c e le r a t e d t o r e c o r d ra te s .










i Hi





Comm ercial paper data are seasonally adjusted end-of-month levels.
For securities issued from 1966 through 1969 data are total annual
flotations, while data for 1970 are quarterly flotations at annual rate.


corporations purchased them in volume primarily to fill out depleted liquidity
Borrowing in the tax-exempt bond market was also a record last year (see
Chart 5). State and local governments sold $17.7 billion of new debt issues,
well above the $11.5 billion of 1969. The heavy borrowing in this market un­
doubtedly reflected some catching-up on the backlog of issues that had arisen as
the result of earlier cancellations. Borrowing conditions in the tax-exempt market
throughout 1969 and early 1970 had forced many governments out of the bond
market, either because the rates being demanded on these issues exceeded ceiling
rates that could be paid under state or local statutes or because buyers for the
issues simply could not be found at rate levels issuers were willing to pay.
However, by mid-1970 the market had recovered and interest rates on top-rated
issues had dropped to around 6 percent. The lower rate levels made statutory
borrowing ceilings much less of a problem and new issues flooded the market,
tending to peg the tax-exempt rate at the 6 percent level. It was not until late in
the year that tax-exempt rates were able to drop much below 6 percent.
Another major development in the financial markets last year was the much
improved condition that emerged in the supply of mortgage credit from private
lenders, most notably the mutual savings banks and savings and loan associations.
Thus, despite slightly reduced Federal credit agency activity, the mortgage
market eased, though more so in availability than in borrowing costs. The rise
in conventional mortgage rates did come to a halt and rates began to decline later
in the year, when the ceiling on Federally insured mortgages was also lowered.
The reason for the easing of the mortgage market was, as noted earlier, the sharp
improvement in the competitive position of the mortgage specialized thrift
institutions. The rates paid on deposits rose— as a result of both higher
permissible rate ceilings and improved earnings on their portfolios— and com­
peting rates in the securities markets dropped. Thus, as the year wore on, thrift
deposits once again became a relatively attractive investment for savers. At the
same time, the thrift institutions also benefited from the surge in consumer
savings that occurred last year.
By the year-end, it appeared that the prior substantial easing in short-term
rates was beginning to spread to the longer term markets. In November and
December, all major long-term yield series declined. The new issue rates on highquality corporate bonds, for instance, dropped a full percentage point to close
the year at about IV2 percent, and the tax-exempt yield was down almost as

The international financial markets were characterized by very large flows of
short-term capital in 1970, as changes in monetary policies associated with shift­
ing economic conditions among the principal industrial countries resulted in a
sharp alteration in the international pattern of interest rates. Unlike other recent
years, however, these capital flows were largely free of speculation over ex­
change rate relationships. Parity adjustments in 1967 and 1969, together with
the changing configuration of cyclical economic conditions in the world, had
contributed to a more balanced pattern of current-account transactions among the
major trading nations and thus had alleviated some of the accumulated strains
on the international monetary system.
Comparatively restrictive monetary policies were pursued in most major coun­
tries abroad in 1970 for a variety of reasons. The primary target of these policies
remained strong inflationary pressures which persisted even where economic
activity had slackened. On the other hand, with an economic slowing under
way in the United States, Federal Reserve policy began to move toward a
posture of less restraint as the year opened, and the trend to easier financial
conditions became more pronounced during the second half of the year when
credit demands contracted markedly. As United States banks were increasingly
able to meet their liquidity needs in the domestic market, particularly following
the partial suspension of interest rate ceilings on certificates of deposit in June,
they repaid their higher cost Euro-dollar borrowings on a very large scale,
thereby transmitting downward pressure to Euro-dollar rates. By the year-end,
United States banks’ liabilities to their foreign branches had been reduced by
some $6 billion to approximately $7 billion, and the rate on three-month Euro­
dollar deposits had fallen from about 10 percent per annum to 7 percent
(see Chart 6). Concomitantly, funds moved through the Euro-dollar market
into the domestic markets of countries where stringent credit conditions and
high interest rates prevailed. Upon conversion into local currencies for domestic
use, the dollars tended to accumulate in foreign official reserves. The dollar
accruals represented a massive— and in some cases unwanted— inflow of liquidity,
although a large proportion were used by foreign central banks to repay out-


C h a r t 6.
R A T E S : A s in t e r e s t r a t e s on d o lla r in s t r u m e n ts d e c lin e d s h a r p ly , m a n y m o n e ­
t a r y a u t h o r it ie s a b r o a d r e d u c e d t h e ir d is c o u n t r a te s , in p a r t t o f o r e s t a ll la r g e
flo w s o f s h o r t - t e r m c a p it a l in to d o m e s t ic m o n e y m a rk e t s .


P e rce nt
E U R O -D O L L A R




The interest rates shown for the foreign countries are the domestic
short-term rates that are most competitive with dollar-denominated
rates abroad. The United States rate is the market yield on prime
four- to six-month com mercial paper. The
deposits ot three m onths'm aturity.

Euro-dollar rate

is for

standing foreign debts. These flows of funds contributed to a large-scale growth
in, and redistribution of, official international reserves in 1970 and led to an
enorm ous deficit in the U nited States balance of paym ents on the official settle­
m ents basis.

The unexpectedly large buildup of dollars in world reserves, coming at a time
when international liquidity was deliberately increased through the initial alloca­
tion of special drawing rights (SDR’s), evoked renewed concern about the
chronic international payments imbalance of the United States. It also pointed
up the difficulties of pursuing independent monetary policies in a world of high
capital mobility, and sparked considerable discussion of the need to find addi­
tional and more effective methods to cope with domestic inflationary pressures
without sacrificing the goal of external payments equilibrium.

Economic Conditions Abroad
Inflation, which in 1969 had accelerated in most
industrialized countries abroad, continued to be a widespread and worrisome
problem in 1970. Although there were a few signs of moderation in the rate
of price rise in some countries as the year progressed, it was increasingly
apparent that the roots of the worldwide inflation had been deeply planted and
that a return to price stability was likely to be a painful process. Much of the
impetus for the present inflationary spiral abroad can be traced to the cyclical
upswing in economic activity in Western Europe and Japan that began in mid1967. By 1969, the upward pressure on prices from excess demand had induced
many countries to apply restrictive stabilization policies. However, much as in
the United States, the earlier demand-pull inflation gave rise to heavy cost
pressures, primarily in the form of wage demands far in excess of productivity
gains, which further bolstered inflation in 1970 (see Chart 7).
in f l a t io n

p e r s is t s


The desire to contain these inflationary pressures was a major factor
behind the maintenance of restrictive monetary policies by many foreign mone­
tary authorities in 1970. Germany, Japan, the Netherlands, and Belgium main­
tained high interest rates, as booming demand conditions continued to exert
substantial upward pressure on prices. Although some signs of slackening in
capacity pressures began to appear in most of these countries in the latter part
r a tes


of the year, rapid wage increases sustained the inflationary trends. Britain, Italy,
and France, where aggregate demand was not pressing on capacity, also con­
tinued to experience substantial inflation arising out of large wage settlements.
The decision to maintain relatively high interest rates in these countries reflected
not only the battle against inflation, but also a desire to rebuild or bolster their
international reserves. Italy, in fact, raised domestic interest rates early in the
year in an attempt to curb short-term capital outflows and to encourage borrow­
ing in the Euro-dollar market. Large flows of interest-sensitive funds into some
countries, however, threatened to undermine their policies of monetary restraint
aimed at restoring domestic price stability, and led to a variety of policy actions
to curtail inflows while maintaining internal restraint.
In Germany, the pace of economic activity remained very buoyant in the first
part of the year. There were few signs of any deflationary effect from the October
1969 revaluation. The merchandise trade surplus continued at roughly the
1969 rate, although Germany’s current account did deteriorate as service and
transfer payments swelled. With prices and wages rising rapidly, the German
Federal Bank moved to tighten monetary policy in March, principally through
a substantial increase in the discount and Lombard rates. As a result of the
relatively high domestic short-term interest rates that developed, German banks—
and even more importantly German corporations—began to borrow very heavily
in the Euro-dollar market in an attempt to alleviate pressures arising from the
domestic credit squeeze. This inflow of short-term funds was at times augmented
by flurries of speculative mark purchases— particularly in the somewhat nervous
market atmosphere following the floating of the Canadian dollar in early June—
and was reflected in sizable dollar reserve gains by the German Federal Bank
in the spring.
The maintenance of a restrictive monetary policy involving high interest rates
was increasingly hampered by substantial borrowing in the Euro-dollar market
by German corporations and banks during the second half of the year when the
decline in Euro-dollar rates accelerated. The German Federal Bank acted to
reduce the incentive for German banks and businesses to borrow abroad by
lowering its discount and Lombard rates in three successive steps starting on
July 1. In an effort to maintain a tight rein on domestic liquidity, the monetary
authorities sharply raised the banks’ minimum reserve requirements in the fall
months and sought specifically to curtail nonbank borrowing abroad by extending
the scope of reserve requirements to cover bank-guaranteed liabilities. With
short-term money market rates in Germany remaining well above Euro-dollar

rates, the inflow of funds borrow ed abroad continued through m ost of
half of the year. This was reflected in a further sharp buildup in
reserves of the Federal B ank; by the middle of the fourth quarter,
serves had clim bed back to the level reached prior to the revaluation.

the second
the dollar
official re­

C h a r t 7.
C O N S U M E R P R I C E S A N D W A G E S IN M A J O R I N D U S T R I A L C O U N ­
T R I E S : P r ic e s c o n t in u e d t o r is e a t a r a p id r a te in 1 9 7 0 , a lt h o u g h t h e r e w e r e
s o m e s ig n s o f a d e c e le r a t io n in a fe w c o u n t r ie s b y t h e s e c o n d h a lf o f th e
y e a r . In fla tio n a ry p r e s s u r e s w e r e b o ls t e r e d b y r a p id ly in c r e a s in g w a g e s .

C O N S U M E R PRICES, 1 96 3 = 1 0 0

H O U R L Y W A G E R A TE S O R E A R N I N G S IN M A N U F A C T U R I N G , 1 96 3 = 10 0 *

* Index for Belgium based on hourly earnings in manufacturing, mining,
and transport; that for Japan, on monthly earnings in manufacturing.
Fourth quarter based on partial data.


the inflows of short-term capital and accompanying central bank reserve gains
tapered off sharply toward the year-end, as reductions in the discount and
Lombard rates in November and December finally produced a significant re­
duction in the incentive for German borrowers to enter the Euro-dollar market.
The upward pressure on prices exerted by strong aggregate demand similarly
lay behind the maintenance of a restrictive monetary stance in the Netherlands,
Belgium, and Japan during most of the year. In the Netherlands, the combina­
tion of surging demand and cost pressures arising out of large wage settlements
led the authorities as the year progressed to reinforce anti-inflationary policies
by higher taxes, credit restrictions, and finally the institution of a price freeze
in November. While the Dutch current account deteriorated as a result of boom­
ing domestic demand, official reserves were nevertheless augmented by sizable
net capital inflows, occurring mainly in the second half of 1970. Much of the
capital inflow was due to foreign purchases of recently issued guilder-denominated
securities, stimulated in part by rumors of a possible guilder revaluation.
In Belgium and Japan, however, some signs of an easing in pressures on
capacity began to appear during the latter part of the year, and the monetary
authorities in those countries were induced by the steep decline in international
interest rates to lower their discount rates so as to discourage excessive inflows of
short-term capital. Thus, reserve gains in these countries came to be more fully
associated with strong trade accounts, although short-term capital flows remained
a contributory factor.
The effort to contain strong inflationary pressures, largely of a cost-push
variety, contributed to the maintenance of relatively high interest rates in Britain,
France, and Italy, even though a considerable amount of slack existed in their
economies. This decision was reinforced by external considerations, as these
countries adjusted their domestic interest rates to strengthen their international
reserve positions.
Inflows of short-term funds, partly responding to interest rate differentials
and partly reflecting the reversal of leads and lags, contributed to very large
reserve gains by Britain and France, particularly in the first half of 1970. In
addition, these countries enjoyed strong performances on current account as a
result of sluggish or slowing domestic demand and the effects of both recent
currency devaluations and selective policy measures aimed at stimulating exports
and holding down imports. A large part of these reserve gains were used by
France and Britain to repay previously incurred short- and medium-term foreign
indebtedness. By midyear, more than $1 billion of the Bank of England’s debts

to the Federal Reserve and the United States Treasury had been repaid, and
progress was made in reducing other foreign debts as well. By June the Bank
of France had been able to liquidate completely the $1.5 billion in foreign short­
term debts it had contracted prior to the franc devaluation in August 1969. Dur­
ing the second half of the year, as the buildup in cost pressures stemming from
spiraling wage settlements threatened to undermine the recent strength in Britain’s
trade balance, the monetary authorities maintained relatively high interest rates
despite the continued stagnation in business activity. Britain’s reserves thus con­
tinued to benefit from inflows of interest-sensitive funds, which bolstered the
demand for sterling from time to time, as well as from the surplus on current
account, and the Bank of England was able to reduce further its outstanding
foreign indebtedness. In France, with external equilibrium achieved by midyear,
the focus of stabilization policy shifted toward stimulating lagging demand and
checking rising unemployment. The Bank of France reduced its discount rate
as international interest rates declined. In addition, selective consumer credit
restraints were relaxed during the course of the year, and ceilings on bank lending
were lifted in October.
Canada also pursued a fairly restrictive monetary policy during the be­
ginning of 1970, as wage increases continued to exert upward pressure on prices
despite sluggish domestic demand. Consequently, short-term capital began
flowing into Canada as Euro-dollar rates fell. Canada’s reserves were also
bolstered by an expansion in the Canadian trade surplus, reflecting the domestic
slowdown as well as a sharp growth in exports to countries abroad where
economic activity was booming. Canada moved to reduce the interest incentive
for short-term capital inflows by lowering the discount rate in May and, at the
same time, by raising the banks’ minimum secondary reserve requirements to
offset domestically the effects of both the discount rate cut and the liquidity
created by the capital inflows. However, with the trade account still in heavy
surplus and the Canadian balance of payments entering its seasonally strong
period, these actions had little apparent effect on curbing the capital inflows
which, indeed, began to accelerate as speculation over a possible parity adjust­
ment grew. To curtail further excessive reserve gains, the authorities announced
that, effective June 1, the Canadian dollar for the time being would be allowed
to appreciate on the exchange market in response to supply and demand forces.
The deflationary force exerted on the domestic economy by this floating of the
Canadian dollar permitted a further reduction in the bank rate at that time.
These actions served to check short-term capital inflows, and the Canadian


authorities were able to direct policy actions more to domestic considerations
later in the year. As signs of an easing of inflationary pressures emerged, policies
were aimed at stimulating sluggish domestic demand and reducing rising unem­
ployment. The Bank of Canada reduced its discount rate several times and, in
addition, the Canadian government moved further toward a posture of fiscal
stimulus in December in an attempt to reduce a level of unemployment that was
approaching 7 percent of the labor force. Although the floating of the Canadian
dollar is conceived as a temporary measure, at the year-end steps had not yet
been taken to reestablish a new parity.

United States Balance of Payments
Only modest progress was made in curtailing the net flow of dollars abroad in
1970. The improvement was primarily attributable to an expansion in the United
States trade surplus, which benefited in 1970 from strong demand from countries
abroad where high levels of economic activity prevailed. Much of this improve­
ment was offset, however, by greater direct investment abroad by United States
companies and by a reduction in foreign purchases of United States corporate
securities. Despite some reduction in the recorded liquidity deficit, the dollar
weakened sharply on the foreign exchange market, as easing credit conditions in
the United States led to a sharp decline in the amount of private foreign-owned
dollar balances employed in this country. Foreign private dollar holdings were
instead redeployed in foreign loan markets, where the borrowed dollars were
sold to obtain local currencies. The absorption by foreign monetary authorities
of these excess dollars in exchange market operations produced a massive shift
into deficit in the United States balance on official settlements.



1968, and particularly 1969, increasingly stringent monetary conditions in the
United States, together with restrictive regulatory ceilings on deposit interest
rates, had led to a substantial attrition in the volume of banks’ time deposits.
To replace these funds, major United States banks borrowed very heavily in the

Euro-dollar market through their growing network of overseas branches, absorb­
ing not only the net outflow of dollars generated by the liquidity deficit but also
drawing dollars out of existing foreign official balances. As a consequence, the
official settlements balance was in surplus by $1.6 billion in 1968 and $2.7 billion
in 1969, and the dollar was relatively strong on the foreign exchange market.
In 1970, however, this flow of liquid funds was reversed and was reflected in a
tremendous $10.7 billion official settlements deficit for the United States (or
$9.8 billion taking account of the $867 million initial allocation of SDR’s).
As noted earlier, up to a point the flow of dollars to foreign central banks
was not an unwelcome development, as it allowed certain countries to make
substantial foreign debt repayments or rebuild reserves. In other instances, how­
ever, the continued absorption of excess dollars from the market by the monetary
authorities was accompanied by increased recourse to the Federal Reserve System
swap network. During the first half of the year, the Federal Reserve System
remained a net creditor despite the liquidation of United Kingdom drawings,
as the System’s foreign indebtedness was reduced and Italy drew on the swap
facility to cover reserve losses. Subsequently, the System’s position shifted to
one of net indebtedness as it was repeatedly called upon to provide exchange
risk cover for dollar accruals by Belgium, the Netherlands, and Switzerland.
The financing of the 1970 deficit on the official reserve transactions basis was
largely achieved through an accumulation of $7.3 billion of claims on the United
States by foreign official institutions. The $3.3 billion decrease in United States
monetary reserves ($2.5 billion including the SDR allocation) was mainly
attributable to a $2.2 billion net decline in United States holdings of foreign
convertible currencies, as monetary authorities abroad utilized dollar accruals
to extinguish earlier drawings on mutual swap facilities with the United States.
The $0.8 billion decline in gold holdings was largely the result of a resale of gold
to the International Monetary Fund from its gold investment fund in the United
States and of a gold payment to the IMF associated with the increase in the
United States quota. Despite this quota increase, the United States IMF position
declined $0.4 billion. Thus the 1970 official settlements deficit, although the
largest on record, did not lead to massive strains on the international financial
system. But there should be no doubt that the continued willingness of the inter­
national financial community, official as well as private, to finance the United
States deficit through accumulations of dollars is likely to depend upon tangible
evidence that the United States is dedicated to the task of restoring equilibrium
in the balance of payments.




trast to the deterioration in the official settlem ents balance, the change in the
external position of the U nited States as m easured by the liquidity balance

C h a rt 8.
B A L A N C E O F P A Y M E N T S : E x c lu d in g s p e c ia l
t r a n s a c t io n s , t h e U n it e d S t a t e s liq u id it y b a la n c e s h o w e d s o m e im p r o v e m e n t in
1 9 7 0 , b u t t h e e x c e s s o f p a y m e n t s o v e r r e c e i p t s r e m a in e d a t an u n a c c e p t a b ly
h ig h le v e l. T h e o ffic ia l s e t t le m e n t s b a la n c e swung; m a s s iv e ly in to d e f ic it , a s
U n it e d S t a t e s b a n k s r e p a id E u r o - d o lla r b o r r o w in g s on a la r g e s c a le .

B illio n s of
d o lla rs




D eficit


showed a large, but mainly statistical, improvement last year, moving down from
a recorded deficit of $7.0 billion in 1969 to a deficit of $4.7 billion in 1970
($3.8 billion including the initial allocation of SDR’s ) . Much of this improvement,
however, represented the absence in 1970 of exceptionally adverse factors which
had temporarily enlarged the deficit in the previous year. On the one hand, the
liquidity balance in 1970 benefited superficially from a $0.4 billion conversion
of liquid into nonliquid claims on the United States by foreign official institutions,
largely reflecting the placement of dollar reserve gains by Canada into long-term
instruments. This contrasted with 1969, when such special financial transactions
resulted in a net shift from the nonliquid to liquid category and contributed
adversely to the recorded balance by some $0.6 billion. Such shifts represent
no fundamental change in the underlying external position of the United States,
and when the published figures on the liquidity balance are adjusted for these
transactions, it is clear that the $5.1 billion deficit in 1970, although less than
the $6.4 billion deficit in 1969, was somewhat greater than the average net
outflow in the 1966-69 period (see Chart 8).
Equally important, the liquidity deficit in 1969 had been inflated by circular
flows of United States short-term funds to the Euro-dollar market in response to
the high yields available there and then back to the United States as banks in this
country absorbed the dollars through their foreign branches. Last year, however,
in the absence of strong United States bank demand for Euro-dollars, rates in
that market fell, thereby reducing the attractive yield differential. Thus, the
distortion of the liquidity balance from such flows—which are largely unrecorded
— was much less in 1970 than in 1969.
After accounting for special financial transactions and abnormal short-term
capital flows, the underlying year-to-year improvement in our external position
was of much more modest proportions than the recorded figures would suggest.

-a c c o u n t s u r p l u s w id e n s . After five years of deterioration,
the surplus on current account expanded in 1970, as the merchandise trade
surplus widened to $2.2 billion from the very disappointing level of $600 million
registered in both 1968 and 1969. However, the bulk of the trade surplus was
achieved in the first half of the year, with a significant deterioration setting in
thereafter, and the improvement partly reflected the absence of the depressing
effect of the 1969 dock strike. Furthermore, the magnitude of the 1970 surplus
remained low by historical standards, and any optimism for future developments



must be tempered by the fact that the pattern of cyclical conditions in the world
was exceptionally favorable to the United States trade position in 1970. Since
that pattern cannot be expected to continue indefinitely, it is increasingly im­
portant for the United States to restore price stability in order to enhance the
competitiveness of domestic products on world markets.
The expansion of the trade surplus in 1970 was attributable to a 15 percent
growth in United States exports to $42 billion and reflected, to a large extent,
the high levels of economic activity abroad, particularly in Western Europe and
Japan. Much of the export expansion was in shipments of machinery, manu­
factured goods, and industrial raw materials, and the bulk of the export growth
occurred in the first half of the year when pressures on foreign industrial capacity
were particularly severe. As these demand pressures abroad began to ease in
the second half of 1970, the growth of United States exports tapered off sharply.
In addition, exports were bolstered by very large shipments of agricultural prod­
ucts throughout the year.
Despite the reduced level of economic activity in the United States, merchandise
imports rose rapidly in 1970, although a portion of the 11 percent rise reflected
higher import prices. The import growth was primarily centered on an increase
in purchases of food and consumer goods from abroad, such as automobiles from
Western Europe and Japan, and was associated, to some extent, with the very
sharp rise in disposable personal income in the United States. The further in­
crease in prices in the United States may also have resulted in additional
substitution of imported goods for domestic products.
The balance of other current-account transactions showed little change in 1970.
The growth in receipts from investment income slowed from 1969, largely as a
result of a smaller increase in income from United States direct investment abroad,
but this was matched by a smaller growth in payments to foreigners on their
investments in the United States, mainly reflecting the decline in interest rates.
After five years of fairly rapid growth, the deficit on military transactions was
essentially unchanged in 1970 as military expenditures leveled off.

l o n g -t e r m
c a p it a l a c c o u n t s w o r s e n .
A significant por­
tion of the favorable developments on current-account transactions last year
was offset by a larger net outflow of private nonliquid capital. The deterioration
principally occurred in the first half of the year when the precipitous decline
in United States stock prices resulted in a net withdrawal of foreign funds from

p r iv a t e


the United States stock market. Although foreign confidence in the stability of
the United States market was somewhat shaken by the failure of several large
brokerage firms and the financial troubles of the Investors Overseas Services
empire, the net liquidation of outstanding holdings of United States equities by
foreigners was relatively modest and was attributable to a tapering-off of pur­
chases, as foreigners were apparently reluctant to commit new funds to the
market during a period of uncertainty. Consequently, when the market began
to rally, net purchases by foreigners resumed and exceeded the net sales of the
first half. Still, for the year as a whole the net $0.7 billion investment in United
States equities was far below the $1.6 billion figure of the previous year.
United States corporate expenditures on foreign plant and equipment facilities
boomed last year. Although the amount of funds United States corporations
were able to raise abroad for use both overseas and domestically was similar
to the 1969 total, the increase in total direct investment expenditures resulted
in a larger net transfer of funds from the United States.
Partially offsetting these unfavorable developments, United States portfolio
investment abroad declined sharply in 1970. Part of this decline was associated
with high long-term interest rates in this country, which discouraged the flotation
of new Canadian bond issues in the United States market, and thus may be only
of temporary duration.

Developments in the International Monetary
Systems Some Unresolved Issues
The difficulties inherent in successfully pursuing independent monetary policies
in a world of high capital mobility prompted considerable discussion in official
circles of the possible utilization of alternative policies to achieve simultaneously
external and internal objectives. Widespread attention was given to the possibility
of increasing the flexibility of exchange rates as a means toward facilitating
international adjustment as well as reducing the impact of balance-of-payments
constraints on domestic policy considerations. The Executive Directors of the
IMF submitted a report of their study on this matter to the Fund Governors at
the annual meeting in Copenhagen. The report, with which the Governors


largely concurred, reaffirmed the Directors’ belief in the fundamental soundness
and viability of the fixed par value system. While ruling out proposals sub­
stantially altering the basic system, such as freely fluctuating rates, the Governors
recognized that prompter and perhaps more frequent parity changes, if under­
taken before large and persistent disequilibria are allowed to emerge, might
facilitate the smoother functioning of the international financial system. Further
study of several alternative methods of increasing flexibility, including slightly
wider margins around parity and the use of a transitional float, is to be pursued
by the IMF.
In juxtaposition to these discussions of greater exchange rate flexibility, the
Council of Ministers of the European Economic Community intensified their con­
sideration of steps to achieve complete monetary integration by the end of the
decade, and agreed early in 1971 to begin a limited three-year trial phase. There
are still serious obstacles in the path leading to the ultimate objective, but the
first small move toward a single currency bloc is scheduled to begin early in 1971
in the form of narrowing the range of permissible fluctuations between the cur­
rencies of the Common Market countries. Should a European monetary union
emerge, this could have manifold and far-reaching implications for the evolution
of the international monetary system.
Against the background of concern about the United States balance-ofpayments deficit and the difficulties of isolating domestic economies from the in­
flationary impact of dollar accruals, two other significant developments occurred
on the international monetary scene in 1970. First, there was a sharp expansion
in official international reserves. This was, in part, due to the initial allocation
of SDR’s, an unconditional and deliberately created reserve asset designed to
ensure a growth in world reserves appropriate to the expansion in international
payments. The bulk of the increase in 1970, however, was attributable to the
unexpectedly large United States official deficit, and this unplanned addition
to world reserves cast some doubt among participants on the advisability of
further deliberate reserve creation through the SDR facility until the flow of
dollars to official reserves has moderated.
Second, the use of monetary policy as a domestic stabilization tool frequently
was complicated by international capital flows. With many countries encounter­
ing difficulties in obtaining prompt economic responses from the application of
monetary and fiscal measures, the possibility of enhancing their efficacy through
the implementation of an incomes policy received renewed interest in several
official quarters. Although the historical record of experimentation with such

policies presents no clear evidence of great success, the adoption of this approach
might prove to be particularly suitable in economies faced with the dilemma of
persistent inflation in a period of reduced demand accompanied by rising
Certainly, it is to be hoped that balance-of-payments problems, whatever their
source, do not lead to efforts to achieve their solution through protectionist
devices. The relatively smooth functioning of the international monetary system
in 1970 owed much of its success to the continued cooperation among the world’s
central bankers and their heightened awareness of the interdependency of the
world’s economies. In view of this, the apparent renewed interest in adopting
protectionist trade measures in the United States was an ominous development.
Not only would this move raise the specter of international retaliation, but it
would represent a distressing reversal of two decades of efforts to liberalize trade
policies— efforts which contributed substantially to growth and prosperity in
the free world.


Volume and Trend of the Bank’s Operations
This Bank continued to provide an expanding volume of services in 1970, and
operations increased substantially in many departments. Indeed, by the past year
the growth of activity related to transactions in United States Government securi­
ties had reached the point where it imposed exceptionally heavy strains on the
financial community’s facilities for handling those transactions. To cope with
the problem, this Bank has made substantial progress toward further automation
of its facilities for processing transactions in United States Government securities.
By the year-end, preparations were virtually completed for the early introduction
of high-speed equipment to handle telegraphic transfers of marketable Govern­
ment securities with the major New York City banks. This system, in turn, will
be linked to all other Federal Reserve Banks through a new nationwide
communications-computer network. Moreover, during the year the volume of
Government securities held by this Bank under book-entry procedures rose by
$75 billion to over $96 billion, largely through the addition of securities held in
the System Open Market Account. At the same time, most of the legal and tax
problems that had limited the types of accounts eligible for such handling
appeared well on the way to resolution by the year-end. This development,
along with the full integration of book-entry procedures with high-speed clearing
arrangements, is expected to reduce the mounting problems that have been
associated with the delivery and custody of Government securities as well as with
the rising number of thefts of such instruments.
The solution to these problems will not come too soon. Near the year-end,
banks, brokers, and dealers were faced with the possible elimination or severe
cutback in insurance coverage for bearer Government securities, as of January
4, 1971. It appeared for a while that this situation would lead to the withdrawal
of some major participants from Government securities trading. Consequently,
this Bank developed emergency procedures to accept Government securities from
banks, brokers, and dealers for safekeeping until some of the remaining technical,
tax, and legal roadblocks keeping the holdings of these accounts out of the book48

T H E F E D E R A L R E S E R V E B A N K O F N E W Y O R K (including Buffalo Branch)
Num ber off pieces handled (in thousands)*

Currency received .....................................................................
Coin receivedf .........................................................................
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....................
Food stamps redeemed .......................................................
All other ...............................................................................
Issues, redemptions, exchanges by fiscal agency departments:
United States savings bonds and notes ..............................
All other obligations of the United States............................
Obligations of Federal agencies...........................................
Obligations of international organizations............................
Custody of securities:
Pieces deposited in and withdrawn from unissued stock
held by this Bank as fiscal agent.........................................
Pieces received and delivered for safekeeping accounts —
Coupons detached.................................................................
Wire transfers of marketable securities....................................
Wire transfers of fundst .........................................................





























Am ounts handled (in millions of dollars)

Discounts and advances§ .......................................................
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....................
Food stamps redeemed .......................................................
All other ...............................................................................
Issues, redemptions, exchanges by fiscal agency departments:
United States savings bonds and n o te s ..............................
All other obligations of the United States............................
Obligations of Federal agencies...........................................
Obligations of international organizations............................
Custody of securities:
Par value pieces deposited in and withdrawn from
unissued stock held by this Bank as fiscal a g e n t..............
Par value pieces received and delivered for safekeeping
accounts ...............................................................................
Par value wire transfers of marketable securities....................
Wire transfers of fundsf .......................................................




★ Two or more checks, coupons, etc., handled as a single item are counted as one “ piece” ,
t Excludes shipments of new coin from the Mint.
| Excludes Treasuiy transfers between Federal Reserve Districts.
§ The number of discounts and advances handled in 1970 was 2,251, compared with 3,947 in 1969.


entry system were hurdled. However, these emergency facilities were not needed
in most cases, since a last-minute agreement was reached between the principal
insurance carrier involved and some of the banks and firms affected. Modified
insurance coverage will be provided to the money center banks concerned at least
until April 1971, when the automated book-entry system should be available to
such banks for the inclusion of their customers’ securities.
In another effort to cope with the growing problem of thefts of Government
securities, this Bank instituted a “checklist” procedure for maintaining a sur­
veillance for Government securities reported as lost or stolen. Similar procedures
were adopted at other Reserve Banks, and by the end of the year the procedures
had been established on a uniform, coordinated basis among all Federal Reserve
offices throughout the country, with this Bank acting as the coordinating bank
for the System.
It was remarkable that, even with the limitations imposed by the Bank’s
standard transmission facilities in service during 1970, the number of intracity
wire transfers of Government securities rose sharply. Nearly 39,000 of such
transfers took place among the active participants in this Bank’s Government
securities clearing arrangement—which includes this Bank and ten New York
City banks—while the dollar volume rose by about 66 percent to over $106
billion. At the same time, the total dollar volume of securities transfers, including
intracity transfers and those to and from other Federal Reserve offices, expanded
by nearly 20 percent to $375 billion.
During the year, money transfers handled by this Bank again rose sharply,
although at somewhat decelerated rates in response to the slower pace of overall
economic activity. The number of wire transfers (excluding Treasury transfers
between Federal Reserve Districts) increased by more than 9 percent, to 1.7
million, and the dollar volume jumped by over 22 percent to a record level of
$4,360 billion.
Both the number and dollar volume of total checks processed by this Bank
advanced to new record levels in 1970. A total of 921 million checks (other
than Government checks) was processed, an increase of almost 4 percent.
On the other hand, the dollar volume of checks processed soared 37 percent
to a level of $1,785 billion, with the further expansion of large-sized Euro-dollar
transactions apparently accounting for much of this disparately faster growth.
Following a small decline in 1969, the number of United States Government
checks handled increased by 7 percent, primarily as a result of the payment
of retroactive social security benefits in the early part of 1970. The total number

reached a record 77 million, but the dollar volume declined to $33 billion,
down 2Vi percent from the 1969 high.
As a result of the easier financial environment that emerged in the latter part
of 1970, member banks in the Second District cut back their use of this Bank’s
discount window. For the entire year, total member bank borrowings were
lowered to $37.2 billion— about 12Vi percent below the 1969 postwar high of
$42.5 billion—and the number of discounts and advances declined by 43 per­
cent, to 2,251 from 3,947. Moreover, the percentage of Second District member
banks which borrowed at the discount window at least once during the year
declined to 43 percent from 49 percent in 1969. A major feature of discount
window operations last year was the provision of special credit assistance to
member banks to enable them to meet the heavy demand for loans that arose
during the summer’s commercial paper crisis.
The dollar volume of this Bank’s fiscal agency operations expanded markedly
during 1970. The total amount of obligations handled for the United States
Government (other than United States savings bonds and notes), Federal agen­
cies, and international organizations increased by more than 24 percent to $1,192
billion. However, the number of certificates handled declined for the first time
since 1967, to 11 million, down 13 Vi percent as a result of increased use of
the book-entry procedure and the establishment of a higher minimum denomina­
tion for the issuance of new Treasury bills.
Average employment at the Bank rose, reaching a level of 4,528 persons, a
5 percent increase over 1969. By the end of the year, employment—including
the officers and staff at the Head Office and at the Buffalo Branch— totaled 4,682.
During 1970 more than 776,000 copies of the Bank’s publications and nearly
2.8 million Bank periodicals were distributed. About 10,279 visitors toured the
Bank (compared with 13,621 during 1969), and 134 speeches were delivered
by members of the Bank’s staff.
Total assets held by the Bank for foreign and international accounts rose 45
percent during 1970, reflecting the massive accumulation abroad of official dollar
holdings—primarily by the central banks of Germany, Canada, and France—
and a further increase in IMF quotas. At the year-end, these accounts totaled
$38.3 billion: international accounts amounted to $10 billion (up $2.9 billion)
and foreign accounts were $28.3 billion (up $9.1 billion). The additional balances
were concentrated in investments in United States Government securities, which
by the year-end had nearly doubled to $21.6 billion. Holdings of gold and other
assets each increased only slightly—to $12.9 billion and $3.8 billion, respectively.


Financial Statements
In thousands of dollars

A s s e ts

DCC. 31, 1970

DEC. 31, 1969

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



Special Drawing Rights certificate account..........................................



Federal Reserve notes of other B a n k s................................................



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






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



Acceptances bought outright .............................................................



United States Government securities bought outright* ....................



Total loans and securities



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



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



All otherf .............................................................................................



Total other assets



To ta l A ssets

2 1 ,4 4 3 ,9 9 4

1 9 ,8 6 0 ,2 8 8

★ Includes securities loaned — fully secured by United States Government
securities pledged with the Bank



Other assets:

t Includes assets denominated in foreign currencies and IMF gold deposited.


In thousands of dollars


DEC. 31, 1970

DEC. 31, 1969





Total deposits



Other liabilities:
Deferred availability cash items .......................................................
All other ..............................................................................................



Total other liabilities



To ta l Liabilities

2 1 ,0 7 4 ,4 1 4

1 9 3 0 7 ,1 9 0

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


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

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

Capital Accounts


To ta l Capital Accounts


3 5 3 ,0 9 8

T o ta l Liabilities and Capital Accounts

2 1 ,4 4 3 ,9 9 4

1 9 ,8 6 0 ,2 8 8

Contingent liability on acceptances purchased for foreign
correspondents^ ...............................................................................



★ After deducting participations of other Federal Reserve Banks amounting to





t Includes IMF gold deposit.

t After

deducting participations of other Federal Reserve Banks amounting to


TH E CALEN DAR Y EA R S 1 9 7 0 AND 1969 (In thousands of dollars)



Total current earnings .......................................................................



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



Current net earnings



Profit on sales of United States Government securities ( n e t) ..........



Profit on foreign exchange transactions (net) ..................................



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



Total additions



Loss on sales of United States Government securities (net) ..........



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



Additions to current net earnings:

Deductions from current net earnings:

Total deductions



Net additions .......................................................................................



N et earnings available for distribution

9 2 0 ,2 1 1

7 8 8 ,4 3 0

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



Payments to United States Treasury (interest on Federal Reserve
notes) ..............................................................................................



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



Surplus — beginning of year ...........................................................



Transferred from net earnings for year ...........................................



1 8 4 ,7 9 0

1 7 6 ,8 4 9


Surplus— end off year


Changes in Membership
During 1970 the total number of member banks of the Federal Reserve System
in this District declined from 362 to 352. The net decrease resulted from the
merger of fourteen member banks, the liquidation of a national bank, the con­
version of one nonmember bank into a national bank, and the organization of
four new member banks. The 352 banks constitute 78 percent of all commercial
banks and trust companies in this District and hold 96 percent of the total assets
of all such institutions in the District

E c s e o s v g b n s p iv t b n s a d in u t ia b n s
x lu iv f a in s a k , r a e a k , n
d sr l a k
DECEMBER 31, 1970

DECEMBER 31, 1969

M em bers

T y p e off Bank



M em bers

mem bers

mem bers












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


To ta l

3 5 2

9 7

7 8

3 6 2

9 6

7 9

*In lu e o e n t n l b n lo a e in t e V in Is n s
c d s n a io a a k c t d
h irg
la d .

S E C O N D D IS T R IC T D U R IN G 1 9 7 0

T o ta l m em bership at beginning off year

New national banks ....................................................................................................................
Nonmember converted into a national b a n k ...............................................................................



Member banks merged into other members* .............................................................................
Member banks merged into nonmembers...................................................................................
National bank declared insolvent...................................................................................................
T o ta l mem bership at the year-end


^ c d s o e m r e in o e b r b n in t eT ird F d r l R s r e D tric
In lu e n
eg r a m m e a k
h h
e e a e e v is t.


Changes in Directors and Officers
In September, member banks in Group 1 elected
W. D. Eberle a Class B director for the unexpired portion of the term that ended
December 31, 1970. Mr. Eberle, President of American Standard Inc., New
York, N. Y., succeeded Arthur K. Watson, who had resigned earlier in the year
to accept appointment as United States Ambassador to France after having served
as a Class B director since January 1965.
In December, member banks in Group 1 elected William S. Renchard a
Class A director and reelected Mr. Eberle a Class B director for three-year terms
beginning January 1, 1971. Mr. Renchard, Chairman of the Board of Chemical
Bank, New York, N. Y., succeeded R. E. McNeill, Jr., Chairman of the Board
of Manufacturers Hanover Trust Company, New York, N. Y., who served as a
director of this Bank for the three-year term that ended on December 31, 1970.
Also in December, the Board of Governors of the Federal Reserve System re­
designated Albert L. Nickerson Chairman of the Board and Federal Reserve
Agent and appointed Roswell L. Gilpatric Deputy Chairman, each for the year
1971. Mr. Nickerson, former Chairman of the Board of Mobil Oil Corporation,
New York, N. Y., has been serving as a Class C director and as Chairman and
Federal Reserve Agent since January 1969; he formerly served as a Class B
director from August 1961 to the end of 1966. Mr. Gilpatric, a partner in the
law firm of Cravath, Swaine & Moore, has been serving as a Class C director
since January 1969 and succeeded, as Deputy Chairman, James M. Hester,
President of New York University, whose term as Deputy Chairman and as a
Class C director expired December 31, 1970. Dr. Hester served as a Class C
director since January 1965 and as Deputy Chairman since January 1969.
At the same time, the Board of Governors appointed Whitney M. Young, Jr.,
a Class C director for the three-year term beginning January 1, 1971. Mr.
Young, Executive Director of the National Urban League, New York, N. Y.,
succeeded Dr. Hester as a Class C director.
Buffalo Branch. In November, the Board of Directors of this Bank appointed
William B. Anderson and Angelo A. Costanza as directors of the Buffalo
Branch for three-year terms beginning January 1, 1971. Mr. Anderson is
President of The First National Bank of Jamestown, Jamestown, N. Y., and
Mr. Costanza is President of Central Trust Company Rochester N.Y., Rochester,
N. Y. On the Branch Board, they succeeded Wilmot R. Craig, Chairman of the
Board of Lincoln Rochester Trust Company, Rochester, N. Y., and Charles L.


in d ir e c t o r s


Hughes, President of The Silver Creek National Bank, Silver Creek, N. Y., who
served on the Branch Board since January 1968. At the same time, the Board
of this Bank designated Norman F. Beach as Chairman of the Branch Board for
the year 1971. Mr. Beach, who is Vice President of Eastman Kodak Company,
Rochester, N. Y., has been a Branch director since January 1968. As Chairman,
he succeeded Robert S. Bennett, former General Manager of the Lackawanna
Plant of Bethlehem Steel Corporation, Buffalo, N. Y., whose term as a director
expired December 31, 1970. Mr. Bennett served as a Branch director since
January 1965 and as Chairman of the Branch Board in 1967, 1968, and 1970.
In December, the Board of Governors appointed Rupert Warren a director
of the Branch for a three-year term beginning January 1, 1971. Mr. Warren,
President of Trico Products Corporation, Buffalo, N. Y., succeeded Mr. Bennett
as a Branch director.

in o f f ic e r s .
The following changes in the official staff, including
the appointment of ten new officers, have been made since January 1970:
John J. Clarke, Vice President and Special Legal Adviser, was assigned re­
sponsibility for the newly established Foreign Banking Regulations Department
in the Bank Supervision and Relations function on July 6, 1970. The respon­
sibility of Fred W. Piderit, Jr., Vice President, for the other departments of the
Bank Supervision and Relations function, including the newly established Bank
Applications Department and Bank Reports and Analysis Department, was
continued. Mr. Clarke’s responsibility for the Payment Systems and the Con­
sumer Information and Securities Regulations functions was also continued.
Leonard Lapidus, Assistant Vice President, was assigned responsibility for the
Bank Reports and Analysis Department in the Bank Supervision and Relations
function on July 6, 1970. Mr. Lapidus’ responsibility for the Banking Studies
Department in that function was continued.
Robert C. Thoman, Assistant Vice President, was assigned responsibility for
the Bank Applications Department in the Bank Supervision and Relations func­
tion on July 6, 1970. Mr. Thoman’s responsibility for the Bank Relations De­
partment in that function was continued.
James H. Booth, Manager, formerly assigned to the Bank Examinations De­
partment, was assigned to the Bank Reports and Analysis Department on July 6,
Edward F. Kipfstuhl, Manager, formerly assigned to the Bank Examinations


Department, was assigned to the Foreign Banking Regulations Department on
July 6, 1970.
Benjamin Stackhouse, Manager, formerly assigned to the Bank Examinations
Department, was assigned to the Bank Applications Department on July 6, 1970.
Thomas C. Sloane, formerly Assistant General Counsel, was appointed Deputy
General Counsel on July 16,1970.
Robert Young, Jr., formerly Assistant Counsel, was appointed Assistant Gen­
eral Counsel on July 16,1970.
Scott E. Pardee, formerly Manager, was appointed Assistant Vice President
on July 16,1970 and assigned to Foreign.
John T. Keane, formerly Assistant Vice President, Buffalo Branch, was ap­
pointed Vice President at the Head Office on October 15, 1970 and assigned to
Administrative Services, with supervisory responsibility for the operations of the
Accounting, Management Information, and Planning Departments, under William
H. Braun, Jr., Vice President.
Everett B. Post, formerly Assistant Vice President, was appointed Vice Presi­
dent on October 15, 1970 and assigned to Administrative Services, with primary
responsibility for the newly established Computer Operations, Computer Plan­
ning, and Computer Support Departments, under the general supervision of
Mr. Braun.
Howard F. Crumb, formerly Manager, was appointed Assistant Vice President
on October 15, 1970 and assigned to Administrative Services, with responsibility
for the Computer Operations and Computer Support Departments.
Karl L. Ege, Assistant Vice President, was assigned responsibility for the newly
established Check Adjustment and Return Items Department in the Cash and
Collections function on October 15, 1970. Mr. Ege’s responsibility for the Check
Processing and Collection Departments in that function was continued.
Ronald B. Gray, Cashier, Buffalo Branch, was appointed Assistant Vice Presi­
dent of the Branch on October 15, 1970. Mr. Gray’s appointment as Cashier
was continued.
Madeline H. McWhinney, Assistant Vice President, was assigned responsibility
for the newly established Research Computer Department in the Research and
Statistics function on October 15, 1970. Miss McWhinney’s responsibility for
the Statistics Department in that function was continued.
Donald C. Niles, Assistant Vice President, was assigned responsibility for the
Computer Operations, Computer Planning, and Computer Support Departments
in the Administrative Services function on October 15, 1970.

A. Marshall Puckett, formerly Manager, was appointed Adviser on October 15,
1970 and assigned to Research and Statistics.
Walter S. Rushmore, formerly Manager, was appointed Assistant Vice Presi­
dent on October 15, 1970 and assigned to Administrative Services, with respon­
sibility for the Accounting and Management Information Departments.
Philip Van Orman, formerly Assistant Counsel, was appointed Assistant Vice
President on October 15, 1970 and assigned to Personnel.
John C. Houhoulis, Manager, was assigned to the Consumer Information and
Securities Regulations Department on October 15, 1970. Mr. Houhoulis’ assign­
ment to the Payment Systems Department was continued.
Joseph M. O’Connell, formerly Chief of the Accounting Division, Accounting
Department, was appointed an officer with the title of Manager on October 15,
1970 and assigned to the Check Adjustment and Return Items Department.
James H. Oltman, formerly Manager, was appointed Assistant Counsel on
October 15, 1970.
Ralph C. Schindler, formerly Special Assistant in the Statistics Department,
was appointed an officer with the title of Research Computer Officer on October
15, 1970 and assigned to the Research Computer Department.
Rudolf Thunberg, formerly Special Assistant in the Securities Department,
was appointed an officer with the title of Manager on October 15, 1970 and
assigned to the Domestic Research Department.
William M. Walsh, formerly Chief of the Research Computer Division, Sta­
tistics Department, was appointed an officer with the title of Manager on October
15, 1970 and assigned to the Research Computer Department.
H. David Willey, formerly Senior Economist, was appointed Manager, and
Assistant Secretary on October 15, 1970. As Manager, Mr. Willey was assigned
to the Foreign Department.
Richard H. Hoenig’s appointment as Assistant Secretary was terminated on
October 15, 1970. Mr. Hoenig’s appointment as Manager and assignment to
the Public Information Department was continued.
Edward J. Geng was appointed Assistant Vice President effective November
21, 1970 and assigned to Open Market Operations and Treasury Issues. Mr.
Geng had resigned as an officer of the Bank in November 1969 to accept appoint­
ment as Special Assistant to the Secretary of the Treasury for Debt Management,
a position he held until November 20, 1970.
Paul Aiken, formerly Chief of the Computer Programming and Training Divi­
sion, Computer Support Department, was appointed an officer with the title of


Manager on January 7, 1971 and assigned to the Computer Support Department.
Gerald Hayden, formerly Special Assistant in the Statistics Department, was
appointed an officer with the tide of Manager on January 7, 1971 and assigned
to the Computer Planning Department.
Bernard J. Jackson, formerly Chief of the Foreign Operations Division, Foreign
Department, was appointed an officer with the title of Manager on January 7,
1971 and assigned to the Foreign Department.
Thomas P. Kipp, formerly Chief of the Securities Division, Securities Depart­
ment, was appointed an officer with the title of Manager on January 7, 1971 and
assigned to the Check Processing Department, with primary responsibility for
the operations of the evening and night forces of that Department.
Ronald E. Long, formerly Chief of the Methods and Systems Division, Planning
Department, was appointed an officer with the title of Manager on January 7,
1971 and assigned to the Accounting Department.
Benedict Rafanello, formerly Chief of the Credit Division, Credit and Discount
Department, was appointed an officer with the title of Manager on January 7,
1971 and assigned to the Credit and Discount Department.
Edwin R. Powers, Manager, formerly assigned to the Foreign Department, was
assigned to the Computer Operations Department, effective January 8, 1971.
In addition, one officer has resigned since March 1, 1970. John T. Arnold,
Manager, Foreign Department, resigned effective July 16, 1970 to accept a
position as an Assistant Vice President of Morgan Guaranty Trust Company
of New York. Mr. Arnold joined the Bank’s staff in July 1958 and became
an officer in January 1968.

1971 . The Board of Directors
of this Bank selected John M. Meyer, Jr., to serve during 1971 as the member
of the Federal Advisory Council representing the Second Federal Reserve District.
Mr. Meyer, Chairman of the Board of Morgan Guaranty Trust Company of New
York, New York, N. Y., served as a member of the Council during 1970.
member o f fe d e ra l a d v is o ry c o u n c il-


Directors of the Federal Reserve Bank of New York


Term expires Dec. 31 Class Group

W il l ia m S. R e n c h a r d .......................................................................................
Chairman of the Board, Chemical Bank, New York, N. Y.



C h a r l e s E . T r e m a n , J r ....................................................................................................
President, Tompkins County Trust Company, Ithaca, N. Y.



A r t h u r S. H a m l i n ...........................................................................................................
President, The Canandaigua National Bank and Trust Company, Canandaigua, N. Y.



W . D . E b e r l e .....................................................................................................................
President, American Standard Inc., New York, N. Y.



M il t o n C . M u m f o r d ....................................................................................................
Chairman of the Board, Lever Brothers Company, New York, N. Y.



M a u r ic e R . F o r m a n ....................................................................................................... ............................
Chairman of the Board, B. Form an Co., Inc., Rochester, N. Y.



A l b e r t L . N ic k e r s o n , Chairman, and Federal Reserve A g e n t............... ............................
Former Chairman of the Board, Mobil Oil Corporation, New York, N. Y.



R o s w e l l L . G il p a t r ic , D eputy Chairman ............................................... ..............................
Partner, Cravath, Swaine & Moore, Attorneys, New York, N. Y.



W h it n e y M . Y o u n g , J r ................................................................................................................................
Executive Director, National Urban League, New York, N. Y.



D IR E C T O R S ----- B U F F A L O B R A N C H

N o r m a n F . B e a c h , Chairman ........................................................................ ............................
Vice President, Eastman Kodak Company, Rochester, N. Y.


J a m e s I. W y c k o f f ........................................................................................................... ............................
Chairman of the Board, The National Bank of Geneva, Geneva, N. Y.


M o r t o n A d a m s .................................................................................................................. ............................
General Manager, Pro-Fac Cooperative, Inc., Rochester, N. Y.


D avid J . L au b ..................................................................................................................... ............................
Chairman of the Board, Marine Midland Bank — Western, Buffalo, N. Y.


W il l ia m B . A n d e r s o n .................................................................................................... ............................ 1973
President, The First National Bank of Jamestown, Jamestown, N. Y.
A n g e l o A . C o s t a n z a ....................................................................................................... ............................
President, Central Trust Company Rochester N. Y., Rochester, N. Y.


R u p e r t W a r r e n ...................................................................................................................................................
President, Trico Products Corporation, Buffalo, N. Y.



O F F E D E R A L A D V IS O R Y C O U N C IL ----- 19 7 1

J o h n M . M e y e r , J r ..............................................................................................................................................
Chairman of the Board, Morgan Guaranty Trust Company of New York, New York, N . Y.



Officers of the Federal Reserve Bank of New York

A l f r e d H a y e s , President
WILLIAM F. T r e ib e r , First Vice President
C h a r l e s A. C o o m b s , Senior Vice President
M a r c u s A. H a r r is , Senior Vice President

A l a n R . H o l m e s , Senior Vice President
R o b e r t G . L in k , Senior Vice President

D avid E . B o d n e r , Vice President
W il l ia m H . B r a u n , J r ., Vice President
J o h n J . C l a r k e , Vice President

J o h n T . K e a n e , Vice President
S p e n c e r S. M a r sh , J r ., Market Adviser
F r e d W . P id e r it , J r ., Vice President
E v e r e t t B. P o s t , Vice President
P e t e r D . S t e r n l ig h t , Vice President
T h o m a s M . T i m l e n , J r ., Vice President
T h o m a s O. W aage , Vice President

and Special Legal Adviser
R ic h a r d A. D e b s , Vice President
P e t e r F o u s e k , Vice President
GEORGE G arvy , Economic Adviser
E d w a r d G . G u y , Vice President

and General Counsel

T h o m a s C . S l o a n e , Deputy General Counsel
A . T h o m a s C o m b a d e r , Assistant Vice President
R o b e r t J. C r o w l e y , Assistant Vice President
H o w a r d F . C r u m b , Assistant Vice President
R ic h a r d G . D a v is , Adviser
K a r l L . E g e , Assistant Vice President
M a r t in F r e n c h , Assistant Vice President
E d w a r d J. G e n g , Assistant Vice President
P e t e r P . L a n g , Adviser
L e o n a r d L a p id u s , Assistant Vice President
M a d e l in e H . M c W h in n e y , Assistant Vice President
P a u l M e e k , Assistant Vice President

D o n a l d C. N il e s , Assistant Vice President
SCOTT E. PARDEE, Assistant Vice President
CHARLES R . P r ic h e r , Assistant Vice President
A. M a r sh a l l P u c k e t t , Adviser
WALTER S. R u s h m o r e , Assistant Vice President
F r e d e r ic k C. S c h a d r a c k , J r ., Assistant Vice President
W il l ia m M . S c h u l t z , Assistant Vice President
FREDERICK L. S m e d l e y , Assistant Vice President
ROBERT C. THOMAN, Assistant Vice President
P h i l i p V a n O r m a n , Assistant Vice President
R o b e r t Y o u n g , J r ., Assistant General Counsel

P a u l A ik e n ,

J o h n C how ansky,

Manager, Computer Support Department
Br u ce G . A lexander,

Manager, Personnel Department
Jam es O. A ston,

Manager, Cash Custody Department, and
Manager, Collection Department
I r v in g M . A u e r b a c h ,

Manager, Statistics Department
L e o n a r d I. B e n n e t t s ,

Manager, Check Processing Department
A l l e n R . B iv e n s ,

Assistant Counsel
J am es H . Booth,

Manager, Bank Reports and Analysis Department
A r m o n d J . B r a ig e r ,

Manager, Savings Bond Department
L o u is J . B r e n d e l ,

Manager, Planning Department

Manager, Management Information Department
L o u is J . C o n r o y ,

Manager, Service Department
R obert L. C oo per,

Manager, Acceptance Department, and
Manager, Securities Department
R ic h a r d D . C o o p e r s m it h ,

Assistant Counsel
J o seph R . C oyle,

Securities Trading Officer
F r e d e r ic k W . D e m in g ,

Manager, Securities Department
A d a m R . D ic k ,

Manager, Bank Relations Department
M atth ew C . D r exler,

Manager, Building Operating Department
E d n a E . E h r l ic h ,

Senior Economist



C h e s t e r B. F e l d b e r g ,

E d w in R . P o w e r s ,

Secretary, and Assistant Counsel

Manager, Computer Operations Department

F r e d e r ic k L . F r e y ,

B e n e d ic t R a f a n e l l o ,

Manager, Credit and Discount Department

Chief Examiner

L e o p o l d S. R a s s n ic k ,

R a l p h H . G eld er ,

Manager, Banking Studies Department
Manager, Computer Planning Department
Manager, Public Information Department
M a tth ew J. H oey,

Manager, Government Bond and
Safekeeping Department
J o h n C . H o u h o u l is ,

Manager, Consumer Information and
Securities Regulations Department, and
Manager, Payment Systems Department
W h it n e y R . I r w i n ,

Manager, Personnel Department
E d w in S. R o t h m a n ,

Manager, Foreign Department
H erbert H . R u ess,

Manager, Credit and Discount Department

Ir w i n D . S a n d b e r g ,

Securities Trading Officer
R a l p h C . S c h in d l e r ,

Research Computer Officer
B e n j a m in Sta c k h o u se,

Manager, Cash Department

Manager, Bank Applications Department

B ernard J. J a ckson,

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

Manager, Foreign Department

Manager, Security Custody Department

E dw ard F . K ip f s t u h l ,

Manager, Foreign Banking Regulations Department
T hom as P. K ip p ,

R udolf T hunberg,

Manager, Domestic Research Department
R u th A n n T yler,

Manager, Check Processing Department

Manager, Personnel Department
R ic h a r d V o l l k o m m e r ,

F red H . K l o pst o c k ,

Manager, International Research Department
R onald E . L o n g ,

Manager, Accounting Department
J o s e p h M . O ’C o n n e l l ,

Manager, Check Adjustment and
Return Items Department
Assistant Counsel

Assistant Counsel
F r a n c is H . R o h r b a c h ,

R ic h a r d H . H o e n ig ,

J am es H . O ltm a n ,

Assistant Counsel
M ary J. R o d g er s ,

G er a l d H a y d e n ,

Manager, Government Bond and
Safekeeping Department
W il l ia m M . W a l s h ,

Manager, Research Computer Department
W il l ia m H . W e t e n d o r f ,

Manager, Protection Department
H . D avid W il l e y ,

Manager, Foreign Department, and
Assistant Secretary
G e o r g e C . S m i t h , General Auditor
J o h n E . F l a n a g a n , Assistant General Auditor

O F F IC E R S — B U F F A L O B R A N C H

A n g u s A . M ac I n n e s , J r ., Vice President
RONALD B. G ray , Assistant Vice President and Cashier
H arry A . C u r t h , J r ., Assistant Cashier
G e r a ld H . G r e e n e , Assistant Cashier
A r t h u r A . R a n d a l l , Assistant Cashier



Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102