Full text of Annual Report of the Federal Reserve Bank of New York : Annual Report : 1963

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FEDERAL

RESERVE

BANK

OF

NEW

YORK

February 26,

1964

To the Member Banks in the
Second Federal Reserve District:
It is with great pleasure that I present
our forty-ninth Annual Report, reviewing the
economic and financial developments of 1963.
The past year has witnessed impressive
achievements but also left important
unfinished tasks.
The third consecutive year
of domestic economic expansion led to new
records in production and employment.
The
United States also made further progress
in reducing its balance-of-payments deficit,
after a serious setback in the first half
of the year.
Monetary policy, while taking a
moderate turn toward less ease and thus
aiding in the advance toward international
payments equilibrium, provided bank reserves
that permitted a near-record increase in
bank credit.
Despite the achievements of
1963, unemployment remained high and the
balance-of-payments problem still serious as
1964 opened.
Further growth at home,
the maintenance of price stability, and the
nec essary corrections in this country's
balance of payments will require an
imaginative and flexible use of monetary,
fiscal, and other policies in the year ahead.




ALFRED HAYES
President
1914

F IF T IE T H

A N N IV E R S A R Y

1964




Federal Reserve Bank
of New York

FORTY-NINTH
ANNUAL REPORT
For the Year
Ended
December 31, 1963

Second F ederal R eserve D istrict




Contents:
Page

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

1963: Achievements and
Unfinished T a sk s...............................
The year’s achievements.....................
Unfinished tasks: the domestic
economy .............................................
Unfinished tasks: the international
economy .............................................
A look ahead......................................

10
12

THE AMERICAN ECONOMY IN 1963.

14
16
18
20

Monetary Policy:
Moderate Movement from E a se .......
Bank credit and bank liquidity..........
Liquidity position of the public..........
Interest rates......................................

23
26
28
30

THE INTERNATIONAL
ECONOMY IN 1963...........................

55
56
56
57

14

Business Conditions:
The Third Year of Expansion.............
Standards of economic performance ..
Challenge for the future.....................
Need for continued price stability —

5
5
7

Changes in Directors and Officers...
Changes in directors.........................
Changes in officers............................
Member of Federal Advisory
Council — 1963 ................................
List of Directors and Officers..........

59
61

C HA R T S
Chart 1: Quarterly Changes in Gross
National Product and Inventory
Investment ......................................

15

Chart 2: The Challenge of Achieving
Full Employment............................

19

Chart 3: Relatively Stable Prices ......

21

Chart 4: Free Reserves....................

24

32

Chart 5: Further Expansion in Bank
Credit .............................................

27

Slow Progress Toward Equilibrium..

33

Chart 6: The Public’s Liquidity.........

29

Improving the International
Monetary Mechanism........................

42

Chart 7: Interest Rate Movements __

31

Relations Between Developed and
Underdeveloped Nations...................

45

Chart 8: United States Balance of Payments and Some Major Components ..

35

The International Outlook.................

47

THIS BANK'S OPERATIONS..............

48

Volume and Trend of the
Bank's Operations.............................
Domestic operations ..........................
Foreign and international operations ..

48
48
51

Financial Statements.........................
Statement of condition......................
Statement of earnings and expenses ..

52
52
54




Chart 9: Long-Term Government Bond
Yields .............................................. 36
Chart 10: Short-term Interest Rates in
Selected Countries........................... 37
Chart 11: United States Purchases
of Foreign Securities Issued in this
Country ..........................................

38

Chart 12: Central Bank Discount Rates 41




Forty-ninth Annual Report
Federal Reserve Bank of New York

1963: Achievements and Unfinished Tasks
On many counts, the 1963 performance of the United States economy and, in­
deed, of the international economic and financial system as a whole, gave grounds
for solid satisfaction. The year was one of continued growth, unmarred by setbacks
of recession or damaging foreign exchange crises. Yet 1963 also brought a height­
ened awareness that progress toward optimum resource utilization at stable prices
and toward balance-of-payments equilibrium was far from adequate. At the year
end, it was apparent that solutions to persisting as well as newly emerging problems
would not only require intensified efforts along many established lines but would
also call for new policy approaches and changes in the “ mix” of policy instruments.

t h e y k a r ' s a c h i k v e m e n t s . A few months before 1963 began, the prospect
for continued economic progress had by no means seemed assured. Production and
employment in the United States had shown little gain since the summer of 1962,
and many observers predicted that the new year would see an economic downturn
— a view that gained impetus from the fact that the upswing from the last cyclical
trough had already lasted close to two years. A possibility that a major strike might
engulf the steel industry by mid-1963 added to the existing uncertainties. The defi­
cit in the United States balance of payments, moreover, was increasing at an alarm­
ing rate, and there were indications that it would remain very large in the early part
of 1963.




5

Viewed against this setting, the economy’s actual performance in 1963 was im­
pressive. Real output of goods and services rose by more than 4 per cent over the
year, slightly more than during 1962. Indeed, by the end of 1963 the economy’s
expansion had already lasted almost as long as the 1954-57 upswing, and the net
gain in output since the trough in activity in early 1961 compared favorably with
most earlier postwar cyclical advances. Personal income per capita and corporate
profits reached record levels in 1963, employment expanded by over a million
persons, and while the over-all jobless rate showed no change, unemployment
among married men averaged somewhat lower than in the preceding year. The
balance-of-payments drain, after intensifying severely in the second quarter, was
sharply reduced in the second half of the year, and the foreign exchange markets
remained remarkably stable throughout 1963. These accomplishments are all the
more noteworthy if one takes account of the many events during the year that could
have had seriously adverse repercussions on the business situation or on interna­
tional financial markets— including the rejection early in the year of Great Britain’s
application for membership in the European Economic Community; the wide­
spread unrest connected with the civil rights struggle; the failure of Congress to
pass the tax reduction bill; and, above all, the tragic death of President Kennedy
at the hands of an assassin in November.
In part, the progress achieved in 1963 was a tribute to the underlying strength
and resiliency of both the domestic economy and the existing international eco­
nomic and financial system. On the domestic front, much of the credit for the con­
tinuation of the economic expansion could also be ascribed to the fact that the
advance took place in a relatively noninflationary and competitive environment,
largely free of the excesses of speculative inventory build-ups that had developed
in the course of earlier postwar upswings. Moreover, the achievement of a reason­
able wage settlement in the steel industry well before the contract deadline helped
to provide a sound underpinning for an orderly and sustained advance, as did the
influence of the 1962 changes in depreciation rules and the tax treatment of invest­
ment. In the international area, at least some of the improvement in the United
States balance-of-payments position could be regarded as stemming from the
gradual working of underlying equilibrating forces as well as from the slowly cumu­
lating influence of long-term governmental corrective measures initiated in prior
years. More immediate and dramatic effects were, of course, exerted by the
Administration’s proposal for an interest equalization tax on purchases of new and
outstanding foreign securities from foreigners and by monetary policy actions that
placed upward pressures on short-term interest rates.

6




Monetary policy — closely coordinated with debt management — clearly played
an important role in the year’s accomplishments. A slight firming in policy had
taken place late in 1962, and a further turn toward less ease occurred in mid1963, in response to the serious deterioration in the balance of payments and
within the context of an improved business situation. Even with these policy
changes, however, the domestic economy remained amply supplied with credit and
liquidity throughout the year. The 8 per cent advance in aggregate bank credit
almost matched the record postwar gain of the previous year, and the ratio of total
liquid assets of the nonbank public to gross national product rose above its level
at the recession trough of 1961, contrary to the experience of earlier postwar up­
swings. At the same time, the modest policy shifts that did occur — including the
midyear increases in the discount rate and in Regulation Q ceilings on time deposit
rates — played a major role in the reduction of capital outflows and of the over-all
payments deficit.
It was encouraging, moreover, that these actions could be carried out as part of
a broader complex of Federal Reserve and the Treasury measures designed
to strengthen the position of the dollar. The network of reciprocal currency arrange­
ments among central banks was broadened and consolidated, and there was con­
tinuing close cooperation among monetary authorities here and abroad. That these
arrangements had been refined to a point where they could cope successfully with
the most severe sudden emergencies was convincingly demonstrated by the stabil­
ity of the gold and foreign exchange markets in the face of several extraordinary
shocks — most dramatically the assassination of the President of the United States.
In turn, the knowledge that the monetary authorities here and abroad were able
and willing to act speedily and decisively in times of crisis served as a major deter­
rent to the emergence of speculative disturbances.

Almost paradoxically,
the relative success with which shorter term domestic and international economic
problems were being tackled in 1963 focused attention more forcefully on the
nature and magnitude of the structural and longer range problems that remained
unresolved. Although many of the issues posed were essentially no different from
those that had existed or could have been foreseen a year earlier, the difficulty of
arriving at basic solutions tended to place these problems in a new perspective as
the year drew to a close, and raised new questions about the priorities that needed
to be assigned to different types of solutions.

u n f in is h e d t a s k s s t h e d o m e s t ic e c o n o m y .




7

Domestically, it was striking that, even with a marked further growth in demand
and output and a rise in average living standards, the economy continued to operate
well below its potential. The over-all unemployment rate was no lower than a
year earlier, and all too little progress had been made toward eliminating the nu­
merous pockets of poverty. There were indications, moreover, that the difficulties
of finding solutions might increase as a result of structural changes that were emerg­
ing or still lay ahead — most notably the dramatic rise in the proportion of younger
persons in the labor force and the apparently accelerated pace of mechanization
and automation.
A second issue that received increasing attention during 1963 related to the im­
pact of shifts in demand on different sectors and areas of the country. Such shifts
have, of course, always occurred in the American economy. But the magnitude of
the changes that had taken place in recent years or were now appearing on the hori­
zon seemed in a number of respects to be more substantial than those experienced
for some time, and to pose exceptional problems of adjustment. In part, these
changes were related to the rapid growth in the demand for services, to the spread
of new products and techniques, and to the influence of foreign competition. There
was also, however, an indication that for the first time in many years defense and
related expenditures in the aggregate might soon be reduced significantly, even
within the context of a strengthening in the country’s military position. In addition,
the conclusion of a test ban treaty with the Soviet Union made the possibility of
limited moves toward disarmament appear at least somewhat less remote than in
the past.
A third problem that seemed to loom larger by the year’s end was that of price
stability. If efforts to move the economy closer to its potential should indeed prove
successful, could price stability be maintained? Although the general level of prices
in the United States had shown remarkably little change in the past six years, it was
not clear to what extent this had merely been a result of the fact that the country
had operated well below capacity over this period, and to what extent it represented
a more basic strengthening in the economy’s ability to resist inflationary influences.
A note of warning was sounded during the latter months of the year as indications
appeared that the firming in the economic picture which had already occurred was
beginning to lead to some scattered upward cost and price pressures, well before
unemployment had been reduced to a tolerable level. The real test in this area
clearly still lay ahead.
In the light of such problems, it became increasingly apparent as 1963 pro­
gressed that achievement of optimum resource utilization in an environment of
8




price stability would not only require a relatively rapid rate of increase in the
volume of total spending, but would also necessitate a wide range of measures
designed to deal with specific problems of economic structure and adaptation to
economic change. To cope with the problem of unemployment, for example, and
to increase over-all efficiency, much greater stress than in the past would have to
be placed on measures to raise the general level of education, to improve and
expand particular types of technical training, and to enhance labor mobility as
well as equality of access to job opportunities. A more concentrated attack was
also required on many of the more specific causes of poverty. While many of these
measures called for increased governmental and community efforts, there was a
simultaneous need to increase the effectiveness of the Federal, state, and local gov­
ernments themselves by eliminating unneeded or inefficient operations wherever
possible. And there was an equal or even greater need for steps that would enhance
the efficiency and competitiveness of the private sector and encourage a freer play
for private initiative.
Public and private efforts along these lines would not only help to create the
jobs that were needed and to smooth the process of adaptation to major structural
shifts in demand and production, but they would also provide the best insurance
against the emergence of a renewed inflationary push. Reliance on restrictive
practices and inefficient methods — often in an effort to delay or ward off the ef­
fects of economic changes — in the past had all too frequently led to higher costs
and prices. If a “cost push” was to be avoided, it was essential that labor, business­
men, and farmers alike make every effort to adapt to the changing economic en­
vironment in a way consistent with rapid increases in efficiency. At the same time,
their willingness to follow this prescription would in appropriate instances need
to be strengthened by expanded public and private measures to mitigate the tem­
porary hardships that might be entailed.
While action along such lines seemed a prerequisite to the solution of the longer
term economic problems, it was equally true that a vigorous increase in total de­
mand remained essential, both as a direct stimulant to the over-all volume of activ­
ity and as a needed lubricant in the process of required structural adjustments. But
it was also apparent that the weight of responsibility for assuring an appropriate
growth in total demand had fallen too heavily on monetary policy, and that fiscal
policy needed to bear a larger share.
These conclusions had seemed evident a year earlier in the light of considera­
tions relating to the United States balance-of-payments position; they now appeared
firmly established on purely domestic grounds as well. There seemed no doubt that




9

monetary measures had played a vital role in the promotion and support of the
sustained economic expansion during the past three years. But this had entailed
large and steady increases in the volume of liquid assets. Consequently, the mone­
tary authorities had to be alert to the danger that a continuation of the existing
degree of monetary ease, as the economy more closely approached its full potential,
might provide it with a volume of liquidity that exceeded its needs and that could
serve as an underpinning for an inflationary outburst at a future date. Moreover,
there were signs that instances of speculative abuses or other undue relaxation of
standards had tended to increase in some credit markets.
Of course, the existence of some undesirable uses of credit did not in itself
necessarily indicate that the over-all volume of liquidity in the economy was
already excessive. To some extent, such credit uses might be the result of over­
confidence engendered by the sustained nature of economic expansion — an
expansion to which credit ease itself had contributed materially. There was also
a question to what degree the recent dramatic changes in financial techniques,
structure, and institutional arrangements— which in many respects were highly
desirable— and the resultant heightening of competition among financial institu­
tions and markets could be held responsible for instances of reduced credit quality.
The monetary authorities would have to pay close attention to the impact of these
many changes on the direction of credit flows and their implications for monetary
policy, as well as to their effects on the longer run strength and efficiency of the
banking system.
Nevertheless, there was a definite need for giving new thought to the question of
what constituted an appropriate rate of over-all growth in bank credit and liquidity.
Monetary policy had proved more flexible in responding to the needs of the econ­
omy than had fiscal policy. But this was not a sufficient reason for overburdening
monetary tools. On the contrary, it called not only for prompt enactment of
the long delayed tax cut, but for institutional changes that would render the
fiscal system more capable of responding quickly to changing economic cir­
cumstances in the future. These actions were all the more necessary because
of the continued need to give monetary policy adequate scope to deal flexibly
with the crucial task of defending the international position of the dollar.

Despite progress
in the second half of 1963 toward achieving balance in the United States pay­
ments position it was clear that the gains already made had to be consolidated and
UNFINISHED T A S K S : TH E INTERNATIONAL ECONOMY.

10




further inroads made on the deficit in the year ahead. The vital role played by the
dollar as the keystone of the international financial system made it imperative —
for the rest of the world as well as for the United States — that this process of
adjustment be seen through to completion. The need for continued progress in this
direction was indeed becoming more urgent with the passage of time because of
the cumulative effects of sustained payments imbalances.
While the United States could thus in no way afford to relax its efforts to improve
its payments balance, it was important to remember some of the special character­
istics of its position. It is often too easily forgotten that the payments difficulties
of the United States were in significant part a direct result of the extraordinary
success of its earlier efforts to help strengthen the economies of its Western allies.
Had these efforts not aided in achieving our goal of increased currency converti­
bility and thus contributed to the rapid internationalization of financial markets, the
United States and other countries would not now have to cope with the problems of
highly volatile short-term capital movements; and it was this country’s own role in
enhancing the attractiveness of investment in Europe which had been a strong factor
in the growth of direct American investment abroad.If, moreover, additional pres­
sures on the United States balance-of-payments position were exerted by greatly
enlarged foreign demands on the United States capital market, such pressures
arose precisely because of the unique size, strength, and accessibility of this
market. And it also had to be recognized that the United States’ continuing
outlays for defense and foreign aid— which contribute to the payments drain
despite useful moderating devices such as offsetting foreign military purchases in
the United States and the tying of aid— were of vital importance to the security of
the countries in whose hands United States dollar liabilities had accumulated, and
in sustaining and fostering economic growth and freedom in underdeveloped
countries.
A satisfactory solution to the problem of the United States payments deficit
did not lie in measures that would weaken the over-all strength of the Free
World, nor in steps that would basically jeopardize the further development of a
world economic and financial system characterized by growing freedom for private
trade, investment, and initiative. Neither, however, was it appropriate for the
United States to continue to bear as heavy a share of the responsibility for further­
ing these objectives as in the past. While important progress in this area was made
in 1963, there remained a need for other industrialized countries to assume a
relatively larger share of the burdens of mutual defense and foreign aid, to make
greater efforts to provide for their internal development by recourse to their own




!l

capital markets, arid to reduce existing restrictions on the free movement of goods
and capital. In this context, the impending 1964 round of GATT negotiations
offered a major opportunity for effective trade liberalization— especially by those
countries forming regional, and potentially discriminatory, trading areas.
The underdeveloped countries, moreover, faced a greater responsibility to make
certain that the United States aid resources they received would be used in a truly
effective manner — and there was, indeed, a greatly increased determination in the
United States to insist that this responsibility be carried out, and that the procedures
used in giving aid be improved. At the same time, there was a clear obligation on
the United States itself to strengthen its own economy. Indeed, the very measures
that were required for sound economic growth at home — including the encourage­
ment of greater competitiveness, increased stress on productivity, and avoidance
of price inflation — were crucial for the improvement of the country’s international
position.
During the year considerable attention was paid to the long-run problems of
international liquidity. There was general agreement that no present shortage of
liquidity existed, and it was quite clear that for the United States its own balance of
payments remained the matter of first priority. The initiation in 1963 of formal
studies looking forward to the time when the United States deficit would no
longer be adding to the liquidity of the rest of the world was welcome. It was equally
clear, however, that a solid foundation for meeting future liquidity needs already
existed in the International Monetary Fund and in the cooperative arrangements
undertaken by the monetary authorities of the leading industrial countries in the
recent past. There could be no doubt, moreover, that the dollar’s role as the major
reserve currency, which had served the world so well, had to continue if further
progress was to be made. Indeed, it had to be recognized that suggestions for
revolutionary changes in the international financial mechanism were fraught
with danger. Just as increases in the volume of liquidity at home were not the
full answer to the problems of the domestic economy, major attention in the inter­
national area needed to be paid not only to over-all liquidity but to the nature and
uses of any new liquidity instruments that might be created, as well as to the extent
to which their employment would be compatible with the exercise of the basic
disciplines necessary for achieving and maintaining payments equilibrium.

a lo o k a h e a d .
As the year closed, it remained clear that solutions to both
current and longer range economic problems would have to be found within an

12




environment of sustained growth. But it was also becoming increasingly evident
that the nature and quality of economic growth could be as important as its magni­
tude. Monetary policy would play a part in the effort to deal with these problems,
but fiscal policy as well as a wide range of other policy instruments would have to
assume an expanding role.
This was the case abroad as well as in the United States, in part because in a
world of freely convertible currencies no nation can disregard the policies being
carried out in other leading countries, or the effects its own policies are having
elsewhere. Looking ahead to 1964, the measures adopted by those European
countries that currently face inflationary tendencies will be of considerable impor­
tance for the United States. Altogether, the achievement of a soundly based
advance both here and abroad is likely to prove a complex task calling for sterner
internal disciplines and a greater measure of mutuality in international relations
than have yet been attained.




1
3

THE AMERICAN ECONOMY IN 1963
Business Conditions: The Third Year of Expansion
Through most of 1963, as the American economy achieved its third successive
year of sustained growth, business sentiment regarding short-term prospects was
generally favorable, reflecting both rising profits and the anticipation of a tax cut.
This was in marked contrast to the general feeling of uneasiness that had prevailed
during much of 1962. Thus, even though over-all activity was curtailed by un­
usually severe weather in January and retail sales continued to edge downward
through May, it was readily apparent by mid-April that most areas of the economy
had broken out of the pattern of sluggishness that had characterized the last half
of 1962. The underlying business optimism— as reflected, for example, in the
spring surveys of capital spending plans which pointed to gains in plant and
equipment outlays over the balance of the year— was reinforced when the steel
industry in April found demand strong enough to put selective price increases into
effect.
The subsequent expansion in over-all activity well fulfilled these expectations
— though of course there continued to be occasional setbacks in individual
sectors. Housing starts fell off in June and August, for example, following a surge
in the preceding several months. Steel production also declined during the summer
months under the influence of a large overhang of inventories that had been built
up during the first half of the year in anticipation of a possible steel strike, and
automobile output dropped sharply in August because of a greater than usual
concentration of model change-overs. While these developments caused declines
in a number of the broad monthly measures of activity, they were generally re­
garded at the time as temporary interruptions of a continuing expansion— an ap­
praisal that proved correct. One barometer of business confidence— the stock
market— actually pushed upward in August and, in September, rose above the
previous all-time high reached in December 1961.
Although business sentiment during the fall seemed to reflect a gradually grow­
ing disappointment that a reduction in taxes had not yet materialized, most
measures of actual activity showed further gains. Indeed, the advances in gross
national product (GNP) in the third and fourth quarters were the largest in two

14




years (see Chart 1 ). This momentum served as reassurance regarding the under­
lying strength of the economy when the world was shocked by the assassination of
President Kennedy on November 22. By the year’s end, the current expansion,
which had begun in March 1961, had lasted for thirty-four months. This exceeded
the length of the cyclical advance that had started in May 1958 and almost equaled
that o f the 1954-57 upswing. The economy was, however, still not utilizing all
o f its resources. The unemployment rate in December, at 5 Vi per cent, was the
same as a year earlier and, indeed, had shown little change since early 1962;
manufacturers, moreover, were still operating below their preferred rates o f capac­
ity utilization. Thus, it was gratifying that President Johnson gave his full support

Q U A R T E R L Y C H A N G E S IN G R O S S N A T IO N A L P R O D U C T A N D IN V E N T O R Y
IN V E S T M E N T . G N P sh o w e d s iz a b le g a in s in a ll fo u r q u a r t e r s of 1 9 6 3 and,
c o m p a re d w ith 1 9 6 2 , s w in g s in in v e n to ry in v e stm e n t w e re v e r y m ild .
Billions of
dollars




CH ANG ES IN
G R O S S N A T IO N A L PRODUCT
CH ANGES IN
IN VE N TO RY INVESTMENT

S e a so n a lly a d ju ste d ann u a l rates.

15

to an early-1964 enactment of the proposed tax cut, which in turn seemed to buoy
confidence in the prospect for further economic expansion.

Whether one is satisfied with
the performance of an economy depends, of course, on the standards by which that
performance is judged. Measured against the gains in production that had been
expected, or against historical rates of growth of physical output, the economy’s
achievements in 1963 have to be marked down as good. In climbing to $585
billion, GNP reached a level above the upper end of the range that the Council
of Economic Advisers had forecast at the year’s start — and this forecast had
been based on the assumption of a mid-1963 tax cut. The rise in GNP from the
fourth quarter of 1962 to the final quarter of 1963 amounted to nearly $35 billion.
Measured in constant prices, the over-the-year advance was 4.3 per cent, with
the gain since the business-cycle trough in 1961 running at an annual rate of
nearly 5 Vi per cent. This exceeded the gains in each of the preceding cyclical
upswings since World War II, except that of 1949-53, which had been boosted
by the step-up in military production for the Korean war. Taking a longer view, the
advance in GNP in constant prices in 1963 was considerably above the 3.2 per cent
annual average rate of growth experienced so far this century, and even com­
pared favorably with the rate of growth during the immediate postwar years up
through 1957— a period when backlogs of unfilled demands stimulated production.
Along with the growth in over-all output, there were many other indications
of the economy’s impressive performance in 1963. During the summer more than
70 million Americans were at work— an all-time high— and disposable income
per capita for the year as a whole rose above the $2,100 mark— nearly a 2 per cent
gain in constant prices. Sales of domestic and imported cars finally topped the
previous record set in 1955, and the steel industry had its best year since 1957,
turning out over 109 million tons of ingots. With credit conditions remaining
generally easy in the mortgage market, work was begun on more than 1.6 million
new private nonfarm housing units. Partly in response to these high levels of
activity, corporate profits rose to a new record, and profit margins continued to
be maintained, in contrast to the declines in margins that occurred after the first
year and a half of expansion in the preceding postwar cycles.
Rapid growth or the setting of new production records, however, is not neces­
sarily the most relevant standard for judging the economy. The potential level
of output is also important, and in this respect 1963’s performance could have

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

16




been better. To be sure, there is no completely accurate measurement of what the
economy might have produced in 1963, since estimates of this potential based on
historical relationships may not fully take into account the structural changes in
technology and labor-force composition that have been occurring. It is noteworthy,
however, that, even if no attempt is made to measure potential output, 1963’s
performance left much to be desired. GNP (in constant dollars) has since 1959
grown at an average annual rate that is about the same as the growth rate over
the 1946-57 period. Yet, there was an interruption in growth during the 1958
recession, which could have been made up fully in the past few years only with
better than pre-1957 growth rates. A similar interruption appears in the Federal
Reserve’s index of industrial production.
Whatever the measurement, there was little disagreement that the shortfall from
the economy’s potential was directly reflected in the unemployment rate, which
has remained high during the past several years and in 1963 averaged 5.7 per cent
of the civilian labor force. It was encouraging that the unemployment rate for
married men averaged lower than in 1962, suggesting that cases of severe hardship
from unemployment may have been somewhat less widespread than a year earlier.
In contrast, the jobless rates for unmarried adult men and for teen-agers other
than married males both rose in 1963, in part reflecting the structural and educa­
tional aspects of the nation’s unemployment problem.
It is, of course, impossible to determine just how many of those who were
unemployed or who were potential job applicants could have been put to work
even if a sufficient number of jobs had been available. Certainly some of the
unemployed were voluntarily between jobs or were out of work for seasonal
reasons; this type of unemployment has existed even in periods when jobs have
been extremely plentiful. In addition, there undoubtedly were many in the re­
maining unemployment total who were considered by potential employers to be
“ unemployable” with their present training and at the going wage in their present
localities. Many such persons are much in need of more job training before they
can realistically be considered as part of an immediately usable untapped poten­
tial. Also, more guidance may well be needed as to available employment oppor­
tunities in other localities and, quite possibly, in some cases with regard to
practical wage expectations. The experience in 1963 in such communities as
Buffalo, Detroit, Gary-Hammond, and Youngstown — where additional jobs
became available with gains in steel and automobile production — demonstrates,
however, that, even at the current high levels of output, increases in demand
remain a powerful force in putting people back to work.




1
7

The gap between actual and potential performance was also reflected in the
continued presence in 1963 of a larger than desired amount of unused industrial
capacity. There are, of course, conceptual and technical difficulties associated
with the measurement of capacity. It is not known for certain, for example, how
much of reported capacity is realistically operational and how much is obsolete
or, on the other hand, whether some capacity is not reported. Some of these
difficulties may not be so important when comparisons are made over reasonably
short periods of time, however; and it may be significant in this regard that there
did seem to be some improvement in over-all utilization rates, concentrated in the
first half of 1963. Moreover, output in some individual sectors— notably the
aluminum, paper, and textile industries— apparently was fairly close to practical
capacity. Nevertheless, according to the McGraw-Hill survey, manufacturers as
a group were at the end of September still operating at about 7 percentage points
below what they indicated as their preferred utilization rate; and there was little
apparent closing of this gap during the remainder of the year.

c h a lle n g e f o r th e fu t u re .
The challenge of stepping up the rate of
growth of our economy appears even greater for the years ahead because of the
more rapid increase that is expected in the labor force and that may occur in pro­
ductivity. Some glimpse of the coming surge in job applicants was already appar­
ent in 1963, as the youths who were born in the baby boom following World War
II began to reach the age at which many seek either permanent or part-time
employment. Thus, the number of 16- and 17-year-olds in the labor force jumped
by about 250,000 in 1963, in contrast to decreases in this age group in the two
preceding years. By 1970, according to Labor Department projections, the pros­
pect is that there will be nearly 20 million persons under twenty-five years of age
in the labor force— an increase of 6 million persons, or 45 per cent, over the
number in this age bracket in 1960; during the 1950’s, the size of this age bracket
grew by only 370,000, or less than 3 per cent (see Chart 2).
The sheer size of the group of new entrants into the labor market renders far
from easy the task of absorbing them smoothly and quickly into useful employment.
Rapid productivity gains, while gratifying in themselves, may complicate the task
further. Such gains have already proceeded at a more rapid rate in the current
expansion than in the two previous business upswings (see Chart 2) and may well
continue to be large, in part reflecting mechanization and automation.
Changes in technology, to be sure, have in the past created many new jobs —

1
8




T H E C H A L L E N G E O F A C H IE V IN G F U L L E M P L O Y M E N T . T h e e x p e c te d s u r g e
in th e la b o r fo r c e , a s th e y o u th s born in th e p o stw a r baby boom co m e o f a g e ,
and th e p r o s p e c t of fu rt h e r ra p id g a in s in p ro d u c tiv ity p r e s e n t th e eco n o m y
w ith a tw o fo ld c h a lle n g e to it s a b ilit y to p ro v id e s u f f ic ie n t e m p lo y m e n t o p p o r­
t u n it ie s fo r a ll who w an t to w ork.
Millions of
persons

12

CHANGES IN TOTAL LABOR FORCE
ESTIMATED CHANGE
I
------1
1 9 6 0 -1 9 7 0
I
|6 4 YEARS A N D OVER
I
□ 3
I

G N P (IN CO N STAN T PRICES) PER EMPLOYED PERSON
IN THREE RECENT BUSINESS EX PA N SIO N S

I 4 5 TO 6 4 YEARS
2 5 TO 4 4 YEARS
I 14 TO 2 4 YEARS

10
CHANGE
1 9 5 0 -1 9 6 0

8

6

4

2

0
Q uarters after trough
P rodu ctivity data are derived by dividing GNP in 1954 dollars by total employment.
The figures for the q u a rte rly troughs in general business a c tiv ity — 1954-111,1958-11
and 196 1-l-are setequal to 100.

not only in fields that were unknown several years earlier but also in existing fields,
since lower costs, if reflected in lower prices, tend to broaden a product’s market.
On the other hand, technological progress has also made some jobs obsolete; and
the higher the level of productivity the fewer the number o f new jobs created by
any given growth in sales. In the steel industry, for example, which spent about $1.2
billion for new plant and equipment in 1963 and plans to spend another $1.9 billion
in 1964, the new basic oxygen furnaces apparently can produce about three times
as much output per man-hour as was produced by the open hearth process. And
in the farm sector, which as late as 1950 provided jobs for about one out o f every




19

eight workers, productivity gains have been so rapid that employment has dropped
by a third over the past thirteen years despite a 15 per cent gain in output.
To find ways of dealing with the problems created by the accelerated rise in the
labor force and by technological progress is a major challenge for the nation. Cer­
tainly, part of the solution, as mentioned earlier, would seem to lie in raising the
over-all level of education of the work force as well as in providing more specific
job training. Thus, there is a need to ensure that young people remain in school
long enough, and learn enough, to be able to keep pace with the rapid changes in
job demands that are constantly raising the general educational requirements
placed upon workers. It is also necessary to provide for effective vocational train­
ing for some of these youths and to establish facilities for retraining persons who
are or may become unemployed as technology advances. The $91 million spent
in 1963 under the Manpower Development and Training Act reflects a recognition
by the Federal Government of the need and the Governmental responsibility to
improve the specific skills of individual workers. Broadened union-apprenticeship
programs and private retraining facilities are also necessary and are only gradually
being given the attention they deserve; and the same is true of mechanisms guiding
a worker into localities where jobs are available once he possesses the needed edu­
cation and training. At the same time, however, the very ability of the economy to
create these job openings will depend to an important extent on the rate of over-all
economic growth. Indeed, without adequate creation of additional jobs, training
and labor mobility can go to waste and even add to feelings of frustration.

n e e d f o r c o n t in u e d p r ic e s t a b i l i t y .
The pressing need for rapid eco­
nomic growth in the years ahead must not obscure the equally important necessity
of maintaining over-all price stability such as has characterized the past six years.
Only if prices and costs are kept substantially stable can the nation hope to solve
the problem of reconciling economic growth with balance-of-payments progress.
Price developments in 1963 were, on the whole, relatively free from inflationary
overtones, in gratifying contrast to the appreciable pressures on wages and prices
in some foreign industrialized nations. There was, to be sure, a somewhat larger
rise in the consumer price index during 1963 than in other recent years, but the
advance was still considerably less than that experienced in the 1956-57 period
(see Chart 3). Food prices rose somewhat further over the year, and prices for
consumer services continued their postwar uptrend. Among commodities other
than food and services, prices went up during the year for such diverse items as

20




R E L A T I V E L Y S T A B L E P R I C E S . A lt h o u g h th e in c r e a s e in c o n s u m e r p r ic e s in
1 9 6 3 w a s a lit t le la r g e r th a n th e a n n u a l a v e r a g e r is e in th e p r e c e d in g f iv e
y e a r s , t h e a d v a n c e w a s le s s th a n in th e 1 9 5 6 - 5 7 p e r io d . T o t a l w h o le s a le p r ic e s
a g a in s h o w e d lit t le n e t c h a n g e o v e r th e y e a r , b u t t h e r e w a s a n o t ic e a b le
s t r e n g t h e n in g in p r ic e s o f in d u s t r ia l c o m m o d it ie s a f t e r A p r il .
Per cent

Per cent

CONSUMER PRICES
EXCLUSIVE OF FOODS AND SERVICES

TOTAL CONSUMER PRICES

102

1956-57
Average

1956-57
Average

101

1958-62
Average
100

1958-62
Average

99
103
TOTAL WHOLESALE PRICES

1956-57

WHOLESALE PRICES
EXCLUSIVE OF FARM PRODUCTS
AND PROCESSED FOODS

Average

1956-57
Average

1958-62
Average

1958-62
Average

M o n th ly fig u r e s fo r e a c h y e a r are sho w n in t e r m s o f an in d e x w ith
th e v a lu e fo r D e c e m b e r o f th e p r e c e d in g y e a r s e t e q u a l to 100.

petroleum fuels, newspapers, cigarettes, and apparel. At the wholesale level, the
over-all index continued to show the same over-the-year stability that had char­
acterized the preceding five years, as declines in the prices of farm products and
processed foods offset a small net advance in industrial goods prices.
Over-the-year changes do not, however, offer a complete picture o f the price
situation in 1963, and during the last half of the year in particular much o f the
“ business news” seemed to be about price increases. This impression was only
in part based on increased strength in world commodity prices. M ore specifically,
the steel industry, after having raised prices on a selected group o f items in




21

April, broadened the list further in October so that about three fourths of the
industry’s total tonnage was raised in price during the year. The over-all increase
averaged just under 2 per cent. Increases in wholesale prices were also announced
for such commodities as aluminum, lead, carpets, several types of machinery,
and some construction materials. Reflecting this flurry of price rises, the wholesale
index for all industrial commodities edged upward by 0.8 per cent from a four-year
low in April to 101.2 per cent of the 1957-59 average by the end of the year.
Moreover, it is possible that prices in actual transactions rose somewhat more
than shown by the official index, owing to the fact that some reporting firms may
have failed to indicate changes in discounts previously available. During a business
upswing—particularly if it has proceeded for some time—such changes would
most likely tend to be largely in the direction of lowering or wiping out discounts
and thus raising actual prices paid by buyers.
On the other hand, there still were encouraging signs of continued substantial
stability in industrial prices in 1963. Along with the second flurry of increases—
after those in April—some price hikes were rescinded, while price reductions for
such important materials as some chemicals, fuels, and leather were also an­
nounced. Moreover, the decision by the automobile manufacturers to introduce
the new models at about the same price as a year earlier, together with an appar­
ently widespread practice on the part of fabricators of absorbing increases in mate­
rials costs, seemed to underscore the absence of significant inflationary pressures.
It remains true that further economic expansion strong enough to bring busi­
nesses closer to their preferred operating rates could strengthen the forces making
for higher prices, as could further rises in world commodity prices. There is a
need, therefore, for businessmen and labor unions to continue to exercise restraint
in their wage and pricing decisions. Efforts directed at modernizing productive
facilities and raising productivity must be transmitted into lower prices in a
significant number of instances if upward pressures on the general price indexes
are to remain minimal. Some encouragement can be derived from the fact that
during the past several years the rapid gains in productivity have on average been
sufficient to offset wage increases, which in turn have been proportionately smaller
oh average than in most of the earlier postwar years. The substantial rise in the
labor force that is expected in the years ahead may help to provide a continuing
restraint on upward wage pressures. The strength of foreign competition should
also act as a disciplining influence on domestic pricing decisions and wage demands.

22




M onetary Policy: M od erate M ovem en t from Ease
With domestic economic activity expanding at a good rate throughout the year
and with business sentiment generally confident, monetary policy took a modest
further turn toward less ease in 1963. Nevertheless, another major expansion of
bank credit—only a little less than the record postwar rate of increase in 1962—
was readily accommodated within the framework of that policy. The gradual turn
in policy was prompted primarily by the need to reduce the deficit in the nation's
balance of payments, but the steps taken were compatible with domestic economic
and credit developments as well. Thus, in broad terms, 1963 did not witness any
sharp shifts but rather only graduai modifications in policies pursued earlier, as
the authorities continued to take advantage of the inherent flexibility of monetary
policy—probing toward less ease, while maintaining the possibility of halting or
even reversing the process should domestic economic developments have made
such steps necessary.
In promoting firmer short-term interest rates while continuing to encourage
growth in bank credit, the Federal Reserve had less need to resort to the special
operating techniques that had been employed during the preceding two years. To
be sure, the System once again provided reserves through purchases of coupon
securities, but at a reduced rate. Moreover, the concentration of Treasury bill sales
in the three-month area—a characteristic of 1962—was less often necessary in
the firm money market environment of 1963. The System, in fact, increased its
Treasury bill holdings by $1.7 billion during the year.
The first step in shaping Federal Reserve policy during 1963 was taken just
prior to the end of 1962 when the Federal Open Market Committee voted to
conduct System operations during the immediate post-Christmas period “with a
view to offsetting the anticipated seasonal easing of Treasury bill rates, if necessary
through maintaining a firmer tone in money markets, while continuing to provide
moderate reserve expansion in the banking system”. The money market was
somewhat firmer in the months that followed. Thus, during January-May 1963
the interest rate on Federal funds was seldom below the discount rate, and the
market rate on three-month Treasury bills edged up to the 2.88-2.98 per cent
range, compared with a 2.87 per cent average in December 1962. At the same
time, free reserves averaged about $300 million, compared with about $400
million during the last half of 1962. Even so, free reserves remained well above the
levels that had prevailed two years or so after the two previous business-cycle
troughs (see Chart 4).




23

With the accumulating evidence of the sharp second-quarter deterioration in the
balance of payments (see section on The International Econom y in 1 9 6 3 ), the
System attempted to promote somewhat more firmness in the money market.
Market rates on Treasury bills, which had begun to edge upward in June, rose
more sharply in the first weeks of July. On July 16 the discount rate was raised at
this and six other Federal Reserve Banks to 316 per cent from the 3 per cent
level that had been in effect since m id-1960; the other five Reserve Banks followed
suit shortly thereafter. A t the same time, the Board of Governors revised Regulation
Q to increase to 4 per cent the maximum rate of interest that member banks could
pay on time deposits with maturities from ninety days to one year.

F R E E R E S E R V E S . A lt h o u g h f r e e r e s e r v e s d e c lin e d in 1 9 6 3 , t h e y w e r e s t ill
a p p r e c ia b ly a b o v e th e le v e ls t h a t had p r e v a ile d a f t e r a s im ila r le n g t h o f th e
e x p a n s io n p h a s e o f th e tw o p r e c e d in g b u s in e s s c y c le s .

M illio n s of
dollars

-200

-400

M onths after trough

CHART 4

24



M e m b e r b a n k fre e re s e rv e s a re e x c e s s re s e rv e s le s s b o rro w in g s
fro m th e F e d e ra l R e s e rv e B a n k s . T ro u g h s in g e n e ra l b u s in e s s
a c tiv ity : A u g u s t 1 95 4, A p ril 1958, and F e b ru a ry 1 96 1.

These actions were designed primarily to curb short-term capital outflows,
which in the second quarter had once again become very substantial. At the same
time these moves, as well as a further slight firming in money market conditions
during the remainder of the year, clearly were permitted by the increased strength
of the domestic economy. Reflecting the effects of these modest changes in policy,
member bank borrowings from the Federal Reserve were consistently above $300
million from July through December, compared with a June average of S236
million and somewhat lower levels in the earlier months of the year. Free reserves
declined in June, and then edged off further later in the summer, but still averaged
about $100 million over the last five months of the year.
In early November, the Board of Governors announced an increase from 50
to 70 per cent in the minimum equity or “margin” that buyers of stock must supply
in purchasing securities with credit obtained from banks or brokers. The change
reversed a reduction in margin requirements in July 1962 following the sharp
second quarter 1962 break in the stock market and reduction in credit use. In the
intervening sixteen months, the volume of outstanding stock market credit had
risen markedly to the highest total since the data began to be collected in 1931.
In cooperation with the Federal Reserve's efforts to raise short-term interest
rates, the Treasury continued through early 1963 to augment the supply of the
regular three- and six-month bills. For the year as a whole, however, these addi­
tions were smaller in amount than in 1962, and the Treasury actually reduced
temporarily the supply of bills auctioned in mid-November, as it was thought that
short-term rates had by then reached an appropriate relation with rates in other
money centers. The introduction of a new monthly series of one-year bills—which
in dollar amount more than replaced the quarterly series that had previously been
offered—also brought some upward pressure on bill rates. The change was pri­
marily designed, however, to put these offerings even more on a routine basis.
In addition to these operations in the short-term area, the Treasury conducted
two advance refundings as well as four regular quarterly refundings and sold three
new coupon issues for cash. In two of these cash offerings, the Treasury ventured
into a new area: the marketing of long-term bonds through sales at auction to the
highest bidding syndicate. The first of these auctions was an unqualified success,
with the Treasury selling the bonds at a highly acceptable rate and the winning
syndicate distributing the securities easily and rapidly. In the second auction of
bonds, the Treasury also obtained closely priced competitive bids at rates near
current market levels, but the issue was distributed only slowly to final investors.
As a result of this combination of operations in the short-term and long-term




25

sectors, debt management during the year contributed to the objective of bringing
United States money market rates into better alignment with those in other leading
centers; at the same time the average maturity of the total marketable debt out­
standing was lengthened from four years eleven months at the end of 1962 to
five years one month at the end of 1963.

b a n k c r e d i t a n d b a n k l i q u i d i t y . Despite the slightly firmer tone in the
money market in 1963, the banking system had a plentiful supply of funds to
lend and invest. Indeed, growth in reserves was sufficiently ample, and credit
demands sufficiently strong, to bring about another large rise in bank credit in
1963—some $18.6 billion, or 8 per cent (see Chart 5). As in 1962, the principal
counterpart of this increase in credit was a substantial growth in time deposits, for
which reserve requirements are relatively low—a growth that was in part en­
couraged by the further liberalization of Regulation Q.
In addition to their efforts at expanding the total amount of bank credit out­
standing, banks in 1963 continued to shift the composition of their portfolios in
search of higher earnings to offset the increased cost of obtaining funds. This shift
largely involved in 1963 a net movement by commercial banks out of United
States Government securities into higher yielding tax-exempt issues of state and
local governments and into mortgages. In 1962, by contrast, bank holdings of
Government securities had shown little net change over the year. Bank demand
for tax exempts was again large in 1963, although it appeared to be tapering off
in the latter months of the year. The volume of outstanding real estate loans
continued to expand rapidly, however, with the over-the-year increase of $5.3
billion being about a third larger than in 1962.
The continued willingness on the part of banks to take on tax exempts and mort­
gages reflected to some extent the relatively modest character of the rise in busi­
ness loan demands until late in the year. Commercial and industrial loans had
already in 1962 fallen substantially behind the upward pace set in the two previous
cyclical expansions. Even with the pickup in such loans toward the end of 1963,
their over-all rate of expansion since the business-cycle trough in 1961 fell still
further behind the 1954-57 performance. Since internal sources of funds were in
ample supply at nonfinancial corporations — in part as a result of the 1962
measures revising depreciation guidelines and granting tax credit on investment
expenditures— and with the over-all need for new investment held in check by
conservative inventory policies as well as by the continued presence of excess

26




F U R T H E R E X P A N S I O N IN B A N K C R E D I T . T o t a l b an k c r e d it in c r e a s e d s u b ­
s t a n t ia lly in 1 9 6 3 , a g a in t h a t w as o n ly s lig h t ly le s s th a n th e p o s tw a r r e c o r d
a d v a n c e o f th e p r e c e d in g y e a r . B a n k h o ld in g s o f ta x e x e m p t s m o v e d s t r o n g ly
u p w ard u n til t h e e n d o f th e y e a r w h e n b u s in e s s lo a n s b e g a n to g a in s tr e n g t h .
B a n k in v e s t m e n t in r e a l e s t a t e lo a n s c o n t in u e d h e a v y t h r o u g h o u t 1 9 6 3 . U n ite d
S t a t e s G o v e r n m e n t s e c u r it ie s h e ld by b a n k s , in c o n t r a s t , sh o w e d a n e t d e c lin e
o v e r th e y e a r.

T he s c a le in the p a n el s h o w in g to ta l ba n k c re d it d iffe rs from th o se in the
o th e r p a n els. O n ly sele cte d c a te g o rie s in b a n k loan p o rtfo lio s are show n.
A ll d a ta are s e a s o n a lly ad ju sted . M o n th ly fig u re s fo r e ach yea r are shown

CHART 5

in te rm s o f an in de x w ith th e v a lu e fo r D ecem be r o f th e p re ce d in g y e a r set
e q u a l to 100.

capacity, businessmen simply had no reason to look for substantial additional
amounts o f bank financing. Business, in fact, also curtailed its recourse to equity
financing. Flotations o f new stock issues of nonfinancial corporations in 1963
actually fell short of company repurchases of outstanding stock, and the net
volume of nonfinancial corporate bond issues was slightly smaller than in 1961
and 1962.
There did not seem to be any unwillingness, or lack of ability, of banks to meet
the loan demands that did arise. T o be sure, bank liquidity positions — as meas­
ured by the ratio o f short-term liquid assets to deposits — declined further during
1963, and loan-deposit ratios were at or near postwar highs. The levels reached




27

by these measures may not, however, have implied as much of a constraint in 1963
as in earlier years, in view of the substantially larger proportion of deposits cur­
rently held in the form of time rather than demand deposits. In any event, bankers
were seeking out new loans both at home and abroad throughout the year and
would undoubtedly have made more funds available to businesses had the demand
been present.

The available indicators suggest that
nonbank liquidity was little affected by the move toward less monetary ease. Total
liquid assets held by the nonbank public rose by 7.6 per cent in 1963, not much
less than the advance recorded in 1962, despite the increased attractiveness of the
stock market and long-term securities as alternative outlets for savings. This gain
was larger than the rate of advance in GNP. As a result, the ratio of such assets
to GNP continued to move upward in 1963, in marked contrast to the declines
that had occurred during the two previous expansions (see Chart 6 ).
The increase in nonbank liquidity in 1963 — like that of 1962 — reflected the
acquisition of a wide variety of assets. As mentioned earlier, there continued to
be a large flow of funds into time deposits, in part reflecting the further liberaliza­
tion of Regulation Q which especially stimulated a somewhat more widespread
use of negotiable time certificates of deposit. Nevertheless, the full-year increase in
time deposits at commercial banks did not quite match the very large gain reg­
istered in 1962. Demand deposits, on the other hand, rose more rapidly than in
1962, reflecting in part the somewhat faster pace of the business advance. The
volume of funds placed with competing financial institutions—such as savings
and loan associations and mutual savings banks—also showed a large over-theyear increase, approximately repeating the 1962 performance.
With the substantial increase in demand deposits, the money supply (defined
narrowly to include privately held demand deposits plus currency outside banks)
expanded more than twice as rapidly in 1963 as in 1962. The gain, however, still
fell short of the increase in GNP, so that the ratio of the money supply to GNP
continued its long-term decline. On the other hand, the money supply plus time
deposits did grow more rapidly than GNP. The ratio of this broader measure to
GNP rose during 1963, and in the third and fourth quarters was at a level above
that at the comparable stage of the 1954-57 upswing.
There are good reasons for emphasizing the broader measure that includes time
deposits. Monetary policy, by supplying reserves liberally, can encourage banks
liq u id it y

28




p o s it io n

o f

th e

p u b lic .

T H E P U B L I C ’ S L I Q U I D I T Y . M e a s u r e s o f n o n b a n k liq u id it y c o n t in u e d u p w a rd in
1 9 6 3 , w ith th e m o n e y s u p p ly g r o w in g m o re th a n t w ic e a s r a p id ly a s in t h e p r e ­
c e d in g y e a r . M o r e o v e r , th e r a t io s o f m o n e y s u p p ly p lu s t im e d e p o s it s to G N P
and o f to ta l n o n b a n k liq u id a s s e t s to G N P b o th m o v e d h ig h e r d u r in g t h e y e a r .
T h e s e r a t io s w e re n o t o n ly a b o v e t h e ir le v e ls at th e 1 9 6 1 r e c e s s io n t ro u g h b ut
a ls o a b o v e th e c o m p a r a b le r a t io s a f t e r th e e x p a n s io n p h a s e s o f th e p r e c e d in g
tw o c y c l e s had la s te d f o r a s im ila r p e rio d .

19 6 0 -6 3

26

*"**

. 5 .4

.3 .2

-1

0

1

Quarters b e f o r e t r o u g h
* B u s in e s s - c y c le p e a k

2

3

4

5

6

7

8

Q u a rte rs a fte r tro u g h

9

10 1
1

.5 -4 -3

-2

-1 0

Quarters b e fo r e trough

1

2

3

4

5

6

7

8

9

10 1
1

Q uarters after trough

M o n e y s u p p ly (c o m p ris in g d e m a n d d e p o s its and c u rre n c y in the
h a n d s o f th e p u b lic ) an d m o n e y s u p p ly p lu s tim e d e p o s its at c o m ­
m e r c ia l b a n k s are q u a rte rly a v e ra g e s o f d a ily fig u re s . N o n b a n k
liq u id a s s e ts , w h ic h in c lu d e m o n e y s u p p ly , tim e d e p o s its , s a v in g s
d e p o s its and s h a re s, and U n ite d S ta te s G o v e rn m e n t s a v in g s bonds
and m a rk e ta b le s e c u r it ie s du e in le s s th a n on e year, are a v e ra g e s

CHART 6




o f th e fig u re s fo r th e la s t W e d n e sd a y o f the m onth p re ce d in g , and
o f th e th re e m o n th s in, e a ch q u a rte r. A ll d a ta are s e a s o n a lly a d ­
ju s te d . Q u a rte rly tro u g h s in g e n e ra l b u s in e s s a c tiv ity : 1954-111,
1958-11,and 1961-1. For e a c h c y c le th e d a ta begin at th e p re c e d in g
b u s in e s s - c y c le pe ak.

29

to make loans and investments, which in turn add to the deposits held by the
nonbank public. Although bank lending or purchase of securities generally gives
rise initially to demand deposits— and hence to an increase in the money supply—
this effect may be only temporary. Once the funds so created have worked their
way through the economy, a part of the total deposit expansion usually ends up
as time deposits. While these time deposits are not counted as part of the money
supply narrowly defined, they can be converted into money with little delay and
then channeled into the general stream of spending. Thus, the large rise during
1963 in money supply plus time deposits, and in total nonbank liquid assets, under­
scores the fact that credit and liquidity were amply available during the year.

r a t e s . While facilitating further economic growth, monetary pol­
icy also contributed to the improved balance-of-payments performance of the
second half of 1963. Short-term interest rates rose appreciably over the year —
reflecting, of course, not only the effects of Federal Reserve operations but also
such important influences as a further substantial enlargement of certificates of
deposit outstanding and the moderate increase in Treasury bill supplies. Toward
the end of the year the rate on three-month Treasury bills was fluctuating in a
narrow band just above 3.50 per cent, compared with the 2.87 per cent level in
December 1962 (see Chart 7). As indicated earlier, this increase brought United
States rates into better alignment with short-term rates in the major foreign markets.
Rates on long-term Governments also rose somewhat in 1963, reflecting among
other factors the lessened over-all monetary ease and the increased supply
of long-term Treasury bonds outstanding. The extent of the rise was moderated,
however, by the continued large flow of funds into the longer term markets. The
spread between the bill rate and rates on coupon issues thus narrowed during the
year. Similar-sized spreads between these two rates had, however, occurred around
mid-1959 and again for a time during the second quarter of 1960; in these periods
the bill rate had been at about the same levels as during 1963.
The large influx of funds into the longer term market served to moderate not only
the upward movement in yields on Government coupon issues, but also that for
other types of long-term debt. Mortgage interest rates actually receded further,
following declines in each of the preceding three years. As a result, mortgage rates
returned to the levels that had prevailed in 1958, a development which together
with lower downpayments and longer maturities was a factor in the continued surge
in residential construction activity during the year. In the corporate sector, yields on
in t e r e s t

30




I N T E R E S T R A T E M O V E M E N T S . W it h th e s lig h t tu rn to w a rd le s s e a s e in m o n e ­
ta ry p o lic y , s h o r t- te r m r a te s m o v e d a p p r e c ia b ly u p w ard in 1 9 6 3 . Y ie ld s on lo n g ­
te rm T r e a s u r y and c o r p o r a t e o b lig a t io n s a ls o r o s e s o m e w h a t, w h ile m o r t g a g e
in t e r e s t r a t e s c o n t in u e d t o e d g e d o w n w a rd , r e a c h in g th e lo w e s t le v e l s in c e
1957.

FHA-INSURED HOME MORTGAGES

NEW CORPORATE BOND OFFERINGS

b.

X

v

^
LONG-TERM
GOVERNMENT BONDS

THREE-MONTH TREASURY BILLS

1956

CHART 7

1963
S h a d e d a re a s sh o w r e c e s s io n s a s d a te d by the
N a tio n a l B u re a u o f E c o n o m ic R e a s e a rc h .

new issues advanced slightly from the levels that had prevailed at the end o f 1962
but remained below the rates of other recent years, reflecting the relatively ample
availability of long-term funds. Funds were also in ready supply in the market for
municipal securities, but the substantial demands placed on the capital markets
by state and local governments pushed yields on tax exempts noticeably upward
during the latter part of the year. The net result of these various forces was that
interest rates tended to converge during 1963 into a narrower range than at any
time since the end o f 1959 (see Chart 7 ).




31

THE INTERNATIONAL ECONOM Y IN 1 9 6 3
Further advances toward international payments equilibrium among the industrial
countries were recorded in 1963. The United States, in particular, succeeded in
reducing its full-year deficit on regular transactions despite a serious first-half
setback. Many of the other industrial nations, typically creditors in recent years,
also moved significantly closer to payments balance last year, although Germany
proved to be a very important exception. Nevertheless, the adjustment process
remained difficult. As the year ended, it was clear that both the United States and
the surplus countries of Western Europe would have to persist in their endeavors
to ameliorate payments imbalances.
Although progress toward international equilibrium was slow and uneven,
cooperative measures of national monetary authorities — based in good part on
the broadened network of reciprocal currency arrangements among central banks
— enabled the exchange markets to take in stride several major potential dis­
turbances. Meanwhile, fresh emphasis was laid on consideration of the future of
the international monetary system. The so-called Group of Ten (representatives
of ten large industrial nations whose combined international reserves account for
about two thirds of the world total) decided in September to formalize their con­
tinuing examination of the question of international liquidity. At the same time,
the International Monetary Fund (IMF) began a parallel and coordinated inquiry
on the subject.
Domestic growth in the underdeveloped parts of the world again failed to keep
pace with the progress achieved by the industrial countries. In part, this reflected
the fact that many of the poorer nations were making only slow headway toward
mobilizing and making most effective use of their own resources, which in turn
limited their ability to attract additional funds from abroad. With the plight of
much of Latin America, Asia, and Africa remaining serious, the industrial coun­
tries continued their efforts to promote economic growth and stability in these
areas.
32




Slow P rogress Toward Equilibrium
The United States in 1963 demonstrated its determination and capacity to reduce
its payments deficit, and thus took a major step toward eventual achievement of
external equilibrium. After a sharp deterioration in the United States payments
position during the first six months of the year, the United States authorities stepped
up their attack on the problem, introducing a broad new range of policy
measures. Following these actions, there was a dramatic improvement in the
payments situation (see Chart 8 ); at a seasonally adjusted annual rate, the deficit
on regular transactions fell from roughly $4.5 billion in the first half of the year
to about $1.6 billion in the second half. For the year as a whole the deficit on
regular transactions was an estimated $3.0 billion, representing a moderate im­
provement over the $3.6 billion deficit on such transactions recorded in 1962.
The worsening of the United States balance of payments on regular transactions
in the first half of 1963 was due primarily to a marked rise in the outflow of pri­
vate United States capital. Of particular importance was the exceptional increase
in foreign securities issues in the New York capital market. Most of the issues
originated in Canada, Japan, and those Western European countries where long­
term borrowing costs were generally higher than in the United States (see Chart
9). United States private direct investments abroad and recorded short-term
capital outflows were also very large during these same months.
The official United States response to these adverse developments came shortly
after midyear. The Federal Reserve’s decisions to increase the discount rate and to
raise maximum interest rates on major categories of time and savings deposits
permitted under Regulation Q were announced on July 16. Both actions were
aimed specifically at minimizing short-term capital outflows—the recorded portion
of which had climbed in the second quarter to a seasonally adjusted annual rate
of approximately $2V2 billion — by bringing United States short-term interest
rates into closer alignment with the higher rates prevalent in other countries (see
Chart 10).
Two days later, on July 18, President Kennedy presented a Special Balance-ofPayments Message to Congress urging enactment of a temporary interest equaliza­
tion tax on purchases by Americans from foreigners of new or outstanding foreign
securities of three or more years’ maturity originating in any industrial nation. The
principal object of the proposed legislation was to reduce foreign securities issues in
New York by increasing costs to foreigners of long-term financing in the United
States by approximately 1 per cent per annum. Subsequently, an understanding




33

was reached with the Canadian Government to exempt new Canadian issues
needed to maintain an unimpeded flow o f trade and payments between the two
countries; the Canadian authorities simultaneously agreed not to increase Canada’s

BALANCE-OF-PAYMENTS CONCEPTS

The deficit on regular transactions measures the balance o f all foreign
transactions o f United States residents plus all transactions resulting
from the foreign activities o f the United States Government, notably
foreign aid and military expenditures. It records the size o f the over-all
imbalance in the United States international payments exclusive of
specially negotiated transactions of the United States Government
with other industrial nations, such as debt and military prepayments
and sales o f special Treasury debt obligations. Tw o alternative meas­
ures o f the deficit— which include some or all o f these special G ov­
ernment transactions “ above the line” as inflows o f foreign capital—
are also presented by the Department o f Commerce in the official
statistical accounts. These two measures are estimates o f the change
in the United States liquidity position after allowing for all or part of
the specially negotiated transactions; they differ from one another in
their treatment o f those Treasury borrowings from foreign official insti­
tutions that are convertible into cash at very short notice. For the last
two years the two alternative measures compare as follows. The balance
on regular and all special transactions was $2.2 billion in 1962 and
$1.9 billion in 1963; the balance on regular and all special transactions
except convertible, nonmarketable Treasury bonds was $2.2 billion
in 1962 and $2.6 billion in 1963. O f the three measures, the balance on
regular transactions is the most useful estimate o f the magnitude of the
over-all payments problem that must be solved, although special G ov­
ernment transactions, by absorbing dollars held by foreign central
banks, have a significant effect on the size o f the United States gold
outflow associated with any given deficit on regular transactions.

34



U N IT ED S T A T E S B A L A N C E O F P A Y M E N T S A N D S O M E M A JO R C O M P O N E N T S .
T h e U n it e d S t a t e s b a la n c e o n r e g u la r t r a n s a c t io n s im p r o v e d d r a m a t ic a lly in th e
s e c o n d h a lf o f 1 9 6 3 , la r g e ly r e f le c t in g th e e f f o r t s o f th e U n it e d S t a t e s a u ­
t h o r it ie s to c u r b s h o r t- te rm a n d lo n g - t e r m c a p it a l o u t flo w s . A s a r e s u lt , t h e r e
w a s a s ig n if ic a n t r e d u c t io n in t h e d e f ic it f o r th e f u ll y e a r .

B illio n s of
d o lla rs

MERCHANDISE TRADE
f NADE BAi. A N C k

4

2
BALANCE ON PRIVATELY FINANCED TRADE

0
0

UNITED STATES GOVERNMENT EXPENDITURES ABROAD ( - )

-2

NET EXPENDITURES ABROAD

-4
GROSS EXPENDITURES ABROAD
-6
-8
2

0
-2
-4
2

0
-2

-4

CHART 8




T h e b a la n c e o f p a y m e n ts on re g u la r t r a n s a c t io n s sh o w n h e re
e x c lu d e s U n ite d S ta te s G o v e r n m e n t r e c e ip t s a r is in g fro m s a le s
o f s p e c ia l T r e a s u r y o b lig a t io n s an d fro m s p e c ia lly n e g o tia te d
d e b t an d m ilit a r y p re p a y m e n ts . U n ite d S ta te s G o v e rn m e n t
g ro s s e x p e n d itu re s a b ro a d in c lu d e m ilit a r y e x p e n d itu re s an d
fo re ig n a id o u t la y s , n et o f s c h e d u le d lo a n re p a y m e n ts .
U n ite d S ta te s G o v e r n m e n t n et e x p e n d itu re s a b ro a d c o n s is t o f
g ro s s e x p e n d itu re s le s s m ilita r y s a le s to fo re ig n c o u n trie s and
G o v e rn m e n t aid s p e n t in th e U n ite d S ta te s. The b a la n ce on
p r iv a t e ly fin a n c e d tra d e e x c lu d e s e x p o rts fin a n c e d by
U n ite d S ta te s aid . A ll d a ta are s e a s o n a lly a d ju s te d a n n u a l ra te s.

35

L O N G - T E R M G O V E R N M E N T B O N D Y I E L D S . T h e r e w a s a m o d e r a t e in c r e a s e in
m o s t U n it e d S t a t e s lo n g - t e r m in t e r e s t r a t e s in 1 9 6 3 , b u t lo n g -t e r m b o r r o w ­
in g c o s t s h e r e re m a in e d lo w e r th a n in m o s t o t h e r m a jo r in d u s t r ia l c o u n t r ie s .

UNITED K I N G D O M

\

WEST G E R M A N Y

/

\

ITA LY
CANADA
\ jf
FRANCE

UNITED STATES
N E T H E R LA N D S

S W IT Z E R L A N D

1960
CHART 9

official reserves through the proceeds of borrowings in the United States. The
President also listed a variety of other measures, including further economies in
Government overseas expenditures, that would be taken or intensified by the
Administration in order to restore payments balance. He concluded the message
by announcing that the United States had arranged a $500 million stand-by facility
with the IMF, mainly to make possible further repayments to the Fund by foreign
countries holding dollars at a time when the Fund’s dollar holdings had risen to
approximately their normal limit of 75 per cent of the United States quota.
These intensified efforts by the Administration and the Federal Reserve System
contributed to the second-half recovery of the United States payments balance.
As short-term interest rates here rose, and despite subsequent increases in several
36




central bank discount rates abroad, the recorded outward movement of United
States short-term funds declined significantly in the second half of 1963. For the
year as a whole, net recorded short-term capital outflows totaled roughly three
quarters of a billion dollars, as against one half billion dollars in 1962.
The outward movement of long-term United States funds also declined in the
second half of 1963. This reflected directly the interest equalization tax proposal,
which had a dramatic impact on the volume of new foreign securities issues. Even
so, United States purchases of new issues for the year as a whole totaled almost
$1.3 billion, a new record (see Chart 11). More than three quarters of total flota-

S H O R T - T E R M I N T E R E S T R A T E S IN S E L E C T E D C O U N T R I E S . T h e in c r e a s e in
s h o r t- te r m in t e r e s t r a t e s in th e U n it e d S t a t e s in 1 9 6 3 r e f le c t e d e f f o r t s to s te m
o u tflo w s o f s h o r t- te rm fu n d s . In m o s t o t h e r m a jo r in d u s t r ia l n a tio n s , t h e r e w as
a s im ila r t e n d e n c y f o r s h o r t- te r m r a t e s to r is e — e s p e c ia lly in th e s e c o n d h a lf
o f th e y e a r — a s p r o g r a m s to c u rb in fla tio n w e re c o n t in u e d . T h is t e n d e n c y w as
p a r t ic u la r ly p r o n o u n c e d in s o m e c o n t in e n t a l E u r o p e a n c o u n t r ie s .

THREE-MONTH TREASURY BILLS




1960

1961

1962

1963

37

U N I T E D S T A T E S P U R C H A S E S O F F O R E I G N S E C U R I T I E S I S S U E D IN T H I S
C O U N T R Y . T h e v o lu m e o f new f o r e ig n s e c u r it ie s p u rc h a s e d by U n it e d S t a t e s
in v e s t o r s — m a in ly C a n a d ia n , W e s t e r n E u r o p e a n , and J a p a n e s e is s u e s — a t ­
t a in e d r e c o r d p r o p o r t io n s in 1 9 6 3 . H o w e v e r , th e p r o p o s e d in t e r e s t e q u a liz a t io n
ta x s h a r p ly c u r t a ile d s u c h f o r e ig n f lo t a t io n s in th e s e c o n d h a lf o f th e y e a r.

B illio n s of
d o lla r s

Billions of
d o lla r s

OTHER
INTERNATIONAL
1.2

JAPAN
—

WESTERN EUROPE
CANADA
1.0

.8

.6

.4

.2

0
1963

1st half 2nd half
1963

tions originated in Canada, Western Europe, and Japan — areas now fully or
partially affected by the proposed special tax. The increase in United States port­
folio investments was paralleled by a rise in direct investments abroad, particularly
in manufacturing and oil refining facilities. As a result, the total net outflow of
long-term capital from the United States in 1963 approximated $3.2 billion, up
from $2.8 billion in 1962. Income on United States foreign investments, however,
also continued to rise, reaching a new high of $4.1 billion.
Contributing to the reduction in the over-all United States payments deficit in
1963 was a significant improvement in the merchandise trade balance. Mer­
38




chandise exports rose almost 6 per cent. Agricultural exports were strong,
reflecting in part poor harvests in Europe. Exports to Canada also increased, as
the Canadian Government removed the last of the remaining special surcharges
and domestic restraints imposed as part of the program to protect the Canadian
dollar in 1962. The magnitude of the increase in United States exports suggests
that the slow-working long-term factors tending to improve this country’s balanceof-payments position — including price and wage stability here in the face of
strong inflationary pressures in several major competitor countries abroad, as well
as United States export promotion and improved export financing facilities — may
at last have begun to take hold. It must be recognized, however, that a substantial
portion of the over-all 1963 increase reflected shipments financed by larger
Government aid outlays.
Largely as a consequence of the continued expansion in domestic business activ­
ity in 1963, United States merchandise imports rose roughly 5 per cent. The rise
was concentrated in the second half of the year, when a more normal relationship
was restored between import volume and gross national product. Increased pur­
chases of finished manufactures from Western Europe and Japan and of industrial
materials from Latin America and Canada, both familiar developments in a
cyclical expansion, were primarily responsible.
In order to finance part of the $3.0 billion deficit on regular transactions, the
United States Government negotiated a number of special transactions with other
industrial nations. The Treasury sold $660 million equivalent, net of redemptions,
of nonmarketable debt obligations, and received $232 million of nonscheduled
Government loan repayments from France and the Netherlands. The United
States also received some advances on military exports. These special transactions
can also be recorded as inflows in the United States international accounts rather
than as part of the settlement item (see page 3 4 ), yielding a 1963 deficit on
regular and all special transactions equal to $1.9 billion. Of this amount, approxi­
mately $1.5 billion was added to foreign holdings of liquid dollars and $461 million
was used to purchase gold from this country, while official United States holdings
of convertible foreign currencies rose by somewhat over $100 million.
Gold purchases constituted a significantly smaller proportion of the settlement
payments than in 1962. In part, the reduced United States gold losses reflected
the sale of special United States Treasury debt obligations. The United States gold
position also benefited from enlarged total Free World gold availabilities, resulting
from an increase in world production and unusually heavy gold sales by the Soviet
Union. In addition, private gold hoarding almost certainly declined in 1963, as




39

confidence in established currency parities was bolstered by active central bank
cooperation in the London gold market as well as in the foreign exchange markets.
Thus, official gold reserves of Free World countries increased by more than $800
million, compared with just over $300 million in 1962. The 1963 increment to
such monetary gold stocks was in fact the largest of any year since World War II.
As the United States payments situation continued to improve, many of the
principal industrial countries abroad that had previously experienced substantial
balance-of-payments surpluses moved toward equilibrium from the opposite direc­
tion. The most striking changes were recorded in France and Italy, where wide­
spread price and wage increases took place. The French payments surplus was
substantially diminished in the second half; and the French Government instituted
a broad anti-inflationary program in September, while the Bank of France raised
its discount rate in November. In Italy, where determined anti-inflationary
measures were forestalled by an uncertain political situation, the swing from a
small surplus in 1962 was actually so large as to result in a substantial payments
deficit in 1963. Balance-of-payments surpluses also shrank in the United Kingdom
and a number of the other industrial nations, following in many cases a relaxation
of domestic monetary and fiscal restraints. In Germany and the Netherlands, on
the other hand, sizable payments surpluses reappeared. Germany’s return to the
status of a major creditor followed only a relatively short period of external
balance for that country. In a few countries, notably Canada and Belgium as well
as France, central bank discount rates were raised during the year (see Chart 12).
The movement toward international equilibrium was reinforced in 1963 by the
continuing tendency of wages and prices to rise more rapidly in Western Europe
and Japan than in the United States. The movement was given impetus also by a
variety of measures further relaxing trade and payments restrictions in those same
areas abroad. In some cases, such liberalization measures were included in broader
programs aimed at relieving domestic inflationary pressures. Nevertheless, numer­
ous controls still remained in force at the year end, many of which seemed no
longer essential for either domestic or balance-of-payments purposes.
In May, the leading countries adopted broad principles under the General Agree­
ment on Tariffs and Trade (GATT) for reducing tariffs in the forthcoming round
of negotiations — the “Kennedy Round” — to be based on the new bargaining
authority granted the United States President by the Trade Expansion Act of 1962.
Under the 1962 Act, the President has general authority to decrease virtually all
United States tariffs by 50 per cent; in addition, he has special authority to negoti­
ate with the European Economic Community (EEC) for reductions of up to 100
40




per cent in duties on goods for which the EEC and the United States together
furnish more than 80 per cent of world exports. This special authority, which was
provided on the assumption that the United Kingdom would become an EEC
member, was to have applied to a wide variety of products. However, it was
rendered virtually inoperative — and prospects for the Kennedy Round cast into
doubt — when the EEC suspended negotiations for the entry of the United King­
dom in January 1963. Further problems arose as a consequence of the subsequent
EEC insistence on a relatively restrictive import policy affecting poultry and other
agricultural products, and also because the EEC sought concessions from the

C E N T R A L B A N K D I S C O U N T R A T E S . A f t e r d e c lin in g o r r e m a in in g u n c h a n g e d in
th e la s t h a lf o f 1 9 6 2 a nd th e f ir s t h a lf o f 1 9 6 3 , d is c o u n t ra te s in s e v e r a l m a jo r
in d u s t r ia l c o u n t r ie s m o v e d u p in t h e s e c o n d h a lf o f th e y e a r , a s m o n e ta r y
a u t h o r it ie s a c t e d to c u r b a c t u a l o r p o t e n t ia l in fla t io n a r y p r e s s u r e s a n d t o b r in g
s h o r t- te r m in t e r e s t r a t e s in to s o m e w h a t c lo s e r a lig n m e n t w ith t h o s e a b ro a d .

Per cent

GERMANY

JAPAN

0
1962

1963

1962

1963

* C a n a d a e s ta b lis h e d a fixe d d is c o u n t rate in J u n e 1962. P rio r
to th at, the d is c o u n t rate w as set at 1 / 4 per ce n t ab ove the
w e e k ly a v e ra g e te n d e r ra te fo r n in e ty -d a y T re a s u ry b ills;

CH AR T 12




d a ta show n are e n d o f m on th .

41

United States prior to the application of the general rule of equal percentage tariff
reductions in the forthcoming negotiations. According to a principle finally agreed
upon, high individual tariffs would be cut relatively more than low tariffs where it
is established through bargaining that there are significant disparities and a sub­
stantial amount of trade is affected.
A more encouraging trend in 1963 concerned the signs of evolution of a more
active and integrated European capital market. Capital markets in the separate
European countries have generally been either too small or too restricted to satisfy
all the growing capital needs of governments and industry in Europe. European
borrowers, consequently, have had increasing recourse to the large and efficient
New York capital market, thus adding to the strain on the United States balance of
payments. However, in 1963, prompted in part by the interest equalization tax
proposal, the European countries took a number of steps — both officially and
upon private initiative — to enlarge and partially unify their national markets.
Nevertheless, many legal and institutional impediments still remained at the year
end to impede such expansion and integration. The eventual development of a
unified and self-reliant European capital market could have beneficial effects for
the international payments mechanism by permitting and facilitating an increasing
amount of equilibrating flows of long-term funds.

Improving the International M onetary M echanism
The international monetary mechanism has long been under study and review by
the central banks and treasuries of all leading industrial nations. Means for
improving the mechanism have been discussed at the regular monthly Bank for
International Settlements (BIS) meetings of central bankers, at the Paris meetings
of the various committees of the Organization for Economic Cooperation and
Development (O E C D ), and at the IMF. The cooperative measures of 1961-63,
evolved through such contacts, were a direct response to liquidity needs as they
arose. In 1963, it was decided to put these studies on a more formal basis. It was
quite evident that international liquidity was currently adequate to satisfy the needs
of the world economy, and that it would be likely to remain so in the near future.
But the possibility could not be excluded that the growth of world economic activity
42




might be hampered by a liquidity shortage at some future date if adequate prepara­
tions were not made in advance.
Looking forward to the eventual elimination of the United States deficit, Presi­
dent Kennedy in his speech at the September IMF meeting in Washington, as well
as in his July Balance-of-Payments Message, expressed this country’s willingness
to study and discuss measures that would lead to a further evolution and strength­
ening of the international monetary system. Other governments expressed similar
views. The leading financial nations represented in the Group of Ten therefore
agreed to undertake a comprehensive inquiry, looking toward the 1964 IMF meet­
ing in Tokyo. Senior officials of the BIS, IMF, and OECD are participating in the
deliberations of this group, which consists of Belgium, Canada, France, Germany,
Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States.
The IMF is also conducting an inquiry and is expected to submit a special report
on its own potential contribution to future monetary arrangements.
Monetary arrangements for easing short-run pressures in the foreign exchange
markets were also improved in 1963. These arrangements had begun in early 1961
with an informal agreement among several European central banks to cooperate in
easing the exchange market strains that followed the revaluations of the German
mark and the Dutch guilder. This agreement was immediately followed by the
resumption of market operations in convertible foreign currencies by the United
States Treasury and, somewhat later, by the Federal Reserve System. During 1963,
as they have been from the start, foreign exchange operations for both Treasury
and Federal Reserve System accounts were conducted by the Federal Reserve
Bank of New York. System operations have been based largely on a network of
reciprocal currency, or “swap” , arrangements with a number of foreign central
banks and with the BIS. The swap network, begun in early 1962, was extended
and consolidated in 1963. In particular, the arrangement with the Bank of England,
initially fixed at $50 million in May 1962, was raised in May 1963 to $500 million,
greatly reinforcing market confidence in the stability of the sterling-dollar parity
relationship. The swap lines with the central banks of five other countries and with
the BIS were also increased over the course of the year, and new agreements were
negotiated with the Bank of Sweden and the Bank of Japan. At the end of the year,
the network covered eleven foreign central banks, plus the BIS, and involved a
total amount of $2,050 million, most of which remains on a stand-by basis.
The exchange markets were orderly in 1963, despite several potentially disturb­
ing events. The stability of the exchanges was due in large part to the markets’ con­
fidence in the adequacy of the network of cooperative international monetary




43

arrangements to deter even major and sustained speculation against any of the
leading currencies. The first test came early in the year when a brief but intensive
speculative attack on sterling developed, following the failure of negotiations for
British entry into the EEC. Prompt action by the Bank of England in cooperation
with other monetary authorities forcefully and successfully counteracted a specu­
lative outflow from London, primarily to the European continent. By the time the
Chancellor of the Exchequer announced early in April that the United Kingdom
had obtained credits of $250 million equivalent from several continental European
central banks to reinforce its defenses during the previous two months, uneasiness
in the market had largely disappeared. The Bank of England also utilized part of its
swap line with the Federal Reserve Bank of New York, which then amounted to
only $50 million.
Another major test of cooperative monetary arrangements came on Friday, No­
vember 22, and during the next few days, following the assassination of President
Kennedy. Immediately upon receiving the news, the Federal Reserve Bank of New
York offered sizable amounts of five major foreign currencies at existing market
rates in order to maintain orderly conditions in the exchange markets. By the end
of the day, the Bank had also contacted leading foreign central banks and worked
out a coordinated approach for official intervention in the major exchange markets
during succeeding days. In addition, the Federal Reserve System concluded in­
creases of $50 million each in its swap lines with the Swiss National Bank and the
BIS, underscoring the flexibility of these reciprocal currency arrangements. On
the following Saturday and Monday, when the New York market was closed,
operations by the foreign central banks in their respective markets reinforced the
New York Federal Reserve Bank’s intervention of Friday. Given this prompt
cooperative action by the various monetary authorities, foreign exchange markets
remained orderly, and speculative movements were held to a minimum.
A variety of short-term, reversible flows of funds were minimized and counter­
acted through coordinated efforts in 1963. During the spring and summer months,
when there was almost continuous buying pressure on the German mark, strains in
the mark-dollar exchange market were resisted by closely coordinated action of
the German Federal Bank and the Federal Reserve Bank of New York. The latter
intervened heavily in New York for both Treasury and Federal Reserve accounts,
partly through drawings on its reciprocal currency agreement with the German
central bank. A substantial part of the drawings under the swap arrangement was
repaid as early as August, and the mark-dollar remained fairly quiet until Novem­
ber. At that time renewed buying pressure on the mark again occasioned official
44




intervention by the German and American authorities. Similar stabilizing opera­
tions were conducted during the year to smooth flows into and out of several other
leading currencies, including the Swiss franc, the Dutch guilder, the Italian lira,
sterling, and the Canadian dollar.
During the year, the Treasury sold a number of nonmarketable bonds to foreign
central banks and treasuries. These issues, the bulk of which were denominated in
the holder’s currency, helped strengthen United States exchange resources while
providing foreign monetary authorities with an investment opportunity for ac­
cumulated dollars; they thus represent a second line of defense behind the central
bank swap network. These borrowings were additional evidence of the efficiency
with which the international monetary mechanism operated in 1963. By the end
of the year it was clear that the network of cooperative currency arrangements,
backed by IMF quotas and supplementary borrowing facilities, was capable
of mobilizing truly impressive resources in support of any currency temporarily
under duress. At the same time, it was also evident that these arrangements were
facilitating progress toward international equilibrium. The atmosphere of calm and
confidence in the exchange markets, sustained by the concerted official action,
provided financial authorities with a margin of time to adopt and carry out ap­
propriate policy solutions in an orderly manner.

Relations Betw een Developed and
U nderdeveloped Nations
The search continued in 1963 for an appropriate balance between the efforts of
the underdeveloped countries themselves to bring about more rapid and sustained
economic growth and the efforts of the industrial nations in contributing to
such growth. Each passing year appears to re-emphasize the magnitude and diffi­
culty of the development task. Again in 1963, many nations of Latin America,
Asia, and Africa were plagued by inflation and balance-of-payments problems and
by population pressures and food shortages. To be sure, progress was clearly
being made in some underdeveloped countries in bringing policies into line with
the requirements of economic development through such steps as improvements
in education and tax and land reforms. On the whole, however, such progress was




45

slow and halting, and in a number of countries serious setbacks occurred, in part
because political problems hampered the effective utilization of domestic resources
or implementation of needed economic reforms.
The industrial nations once more had to face the fact that a substantial contribu­
tion on their part was a very important element in the success of even the most con­
certed efforts of the underdeveloped countries. One important contribution, it was
recognized, was growth in the developed world itself, which would enlarge demand
for the output of primary-goods-producing nations. In this regard, it was encourag­
ing that the demand for primary commodities was sufficiently strong to help raise
the prices of a number of such products. This was especially true for the prices of
metals and foodstuffs which, in some cases, reached their highest level since 1958.
The possibilities of smoothing short-term fluctuations in commodity prices and
the export earnings of underdeveloped countries through concerted action also
received considerable attention. In March, the IMF created supplementary draw­
ing facilities for the primary-producing countries to support their balances of
payments in the event of temporary declines in their export proceeds; and, later in
the year, ratification of the International Coffee Agreement by the United States
Senate raised hopes that the market for this major commodity would now become
more stable. In general, greater recognition appeared to be given by the developed
countries to the potential contribution generous trade policies could make in
facilitating economic development. There remained a very real danger, however,
that this contribution might be vitiated through the emergence of separate trading
blocs from which large groups of underdeveloped countries might be excluded.
The industrial nations also made efforts in 1963 with regard to a third potential
contribution — that of financial assistance. The total amount of all foreign eco­
nomic assistance disbursed to countries in Asia, Africa, and Latin America was
again increased, with special attention being paid to opportunities for the multi­
lateral coordination of aid. The member countries of the International Develop­
ment Association (ID A ), an affiliate of the International Bank for Reconstruction
and Development (IB R D ), agreed to add $750 million to the institution’s re­
sources through increased contributions, and the IBRD itself proposed to make
more loans for development purposes, participate more actively in project plan­
ning, and gradually relax terms on some categories of loans. In addition, foreign
aid consortia formed over the last few years for such countries as Greece, India,
Pakistan, and Turkey continued their support of economic development. Among
individual lending nations, the United Kingdom and Germany eased terms of
repayment of loans to underdeveloped areas.
46




On the other hand, the industrial nations also placed increased emphasis on the
quality and effectiveness of their aid. This consideration was especially important
for the United States. There was a clear need to reappraise the foreign aid
program in the light of past achievements and of the continuing balance-of-payments
problem, and reviews of the program and its administration suggested that there
was indeed room for economy without reducing the over-all effectiveness of aid.
The results of this reappraisal began to be reflected in Administration and Con­
gressional decisions during the year.

The International O utlook
Despite the progress toward international equilibrium recorded in 1963, the
over-all payments situation remained significantly out of balance. Much still had
to be done — by surplus countries as well as by those with external deficits — to
ensure a further approach toward international equilibrium in 1964. As regards
the longer range question of international liquidity, the experiences of recent
years and the formal studies under way in the Group of Ten and the IMF should
help in assessing any need for future measures designed to maintain the viable
international monetary system that has emerged from the intensive cooperation
of recent years.
The leading nations will also have to deal directly with the longer range question
of the growth of world trade, when the Kennedy Round of G A TT negotiations
begins in 1964. The outcome of the bargaining will depend largely on the attitudes
and policies adopted by the major participants. If tariffs and other barriers to
multilateral free trade are reduced substantially along the lines implied by the
United States Trade Expansion Act, world trade should grow at a rate that would
help ensure continued high levels of economic activity in the industrial nations.
Rising world trade would also be of great benefit to the developing nations. By
adopting liberal trade policies, while also continuing to cooperate in the improve­
ment of the international monetary mechanism and in eliminating payments
imbalances, the leading nations could go far toward assuring sustained economic
growth in the Free World.




47

THIS BAN K’S OPERATIONS
Volum e and Trend of the Bank’s Operations
The volume of operations expanded moderately in
1963 in most of the Bank’s departments. One particularly significant exception

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

was coin activity in the Cash Department, which contracted sharply.
During 1963 this Bank processed 665 million checks, amounting to $379 bil­
lion (excluding United States Government checks). This represented an increase
over 1962 of nearly 5 per cent in the number of items handled and a decrease of
about 1 per cent in the dollar volume. The decline in dollar volume reflected in part
the greater use of this Bank’s wire transfer facilities by New York City banks in
paying for late deliveries of securities, as against the alternative of effecting pay­
ments by drawing checks on this Bank. As a consequence, the dollar volume of
checks drawn on this Bank during 1963 declined by about 7 per cent. In contrast,
the dollar volume of checks processed, other than those drawn on this Bank,
increased during 1963 to $258 billion from $253 billion in 1962. The number of
checks handled, on the other hand, was not significantly affected by changing bank
practices in making payments for securities. In fact, the 1963 rise of nearly 5 per
cent in the number of checks handled was higher than the 4 per cent average annual
rise during 1953-62.
The decline in the dollar volume of checks drawn on this Bank was more than
offset by an increase in the use of wire transfer facilities. The dollar volume of
transfers (exclusive of Treasury transfers between Federal Reserve Districts)
totaled $1.4 trillion in 1963, a rise of about 7 per cent over 1962. The number
of transfers handled during 1963 was also 7 per cent above 1962.
During 1963 continued efforts were directed toward promoting the application
of high-speed electronic equipment in the check collection function of this Bank.
The number of checks handled on electronic equipment rose substantially during
1963. Since the electronic handling of checks requires that all checks be properly
encoded, the Magnetic Ink Character Recognition (M ICR) program of the
American Bankers Association remained a subject of active interest to the Bank
during 1963. An August survey showed that 91 per cent of the checks handled
by this Bank bore MICR routing symbol-transit numbers. By the end of the year
48




SOM E M EASURES OF T H E VO LUM E OF O P ER ATIO N S OF
T H E FED ER A L RESERVE B A N K O F NEW YORK (Including Buffalo Branch)
Number of pieces handled (in thousands)*

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

1 963

1962

1,351,268
1,601,876
177

1,333,299
1,999,074
221

60,403
665,207
35,151

58,804
635,073
35,502

4,124
315
18,634

4,284
334
17,215

29,327
7,420

28,0511
6,895

36

119

7,922

8,105
5,464
777

6,020
833

Amounts 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 o th e r...................................................................................
Postal money orders handled.....................................................
Collection items handled:
United States Government coupons paid.................................
Credits for direct sendings of collection item s......................
All o th e r...................................................................................
Issues, redemptions, exchanges by fiscal agency departments:
United States savings bonds .................................................
All other obligations of the United States and Federal agencies
Obligations of the International Bank for Reconstruction and
Development ...........................................................................
Safekeeping of securities:
Par value pieces received and delivered................................
Wire transfers of fu n d s t..................................................... .

179
2,515

5,353
8,833
228
3f181

23,367
379,428
643

23,034
384,135
649

2,806
724
3,038

2,511
646
2,822

14,547

1,889
546,146

l,689t
501,923

300

419

713,535
1,400,795

720,577
1,304,308

* Two or more checks, coupons, etc., handled as a single item are counted as one "piece” ,
t Revised.
t Excludes Treasury transfers between Federal Reserve Districts.
(The number of discounts and advances handled in 1963 was 1,369, compared with 910 in 1962.




49

all banks in the Second District had some checks in circulation bearing such
numbers. In addition, an increased number of depositing banks started to encode
the dollar amount on checks during 1963 in order to qualify such checks fully
for high-speed electronic handling.
Coin received by this Bank declined during 1963 for a second consecutive year,
reflecting a nation-wide shortage of coin of all denominations. Although the Mint
stepped up its shipments of coin to this Bank during 1963, the increase was not
large enough to counteract a sharp decline in coin deposit receipts from banks.
As a result, the number of coins received by this Bank during 1963 was 20 per
cent less, and the dollar volume 21 per cent less, than during 1962. These reduc­
tions were more than twice as large as the corresponding declines between 1961
and 1962. The shortage of coin necessitated a general rationing of coin shipments
to banks throughout the year; at various times of the year — whenever demand
for coin was particularly strong — only token shipments could be made.
A further moderate expansion in the Treasury’s refunding and financing opera­
tions during 1963 again boosted the volume of this Bank’s fiscal agency operations,
although not by so great a margin as in the previous year. The dollar volume of
all Government obligations, other than United States savings bonds, processed
by this Bank in 1963 was $546 billion — an increase of about 9 per cent over the
1962 volume, which compares with a 13 per cent increase the year before. The
1963 rise was distributed about equally between an expansion in interdistrict trans­
fers of securities and a rise in securities received and delivered in connection with
cash and refunding offerings by the Treasury and Federal agencies. The number
of pieces handled during 1963 was 7.4 million, 8 per cent more than in 1962.
This Bank’s operations connected with the servicing of United States savings
bonds also rose during 1963. The dollar volume of issues, redemptions, and ex­
changes of savings bonds increased by 12 per cent in 1963, to $1,889 million, from
a revised 1962 figure of $1,689 million, thus reversing a five-year downward
trend in these activities. The number of items handled during 1963 increased by
only 5 per cent over the revised 1962 figure. There also was a significant rise during
1963 in noncash collection activities of this Bank.
Lending activities of this Bank expanded sharply during 1963, as moderately
less easy reserve positions caused member banks to make greater use of the “dis­
count window” . As a result, the aggregate volume of Second District member
bank borrowing during 1963 nearly tripled, compared with 1962. Nevertheless,
the proportion of member banks that borrowed at least once during the year —
40 per cent — was only slightly higher than that reported for 1962. Moreover,
50




the 1963 volume of advances to member banks was only half as large as the postwar high of $29.4 billion reached in 1957.
The moderate rise in the volume of operations of this Bank during 1963
necessitated an increase in employment, but the 1.7 per cent increase in the
average number of employees at this Bank during 1963 was less than the increases
in employment in the past two years, when employment rose on the average by
2.4 per cent annually. At the end of 1963, the Bank’s officers and staff numbered
4,135, including 248 at the Buffalo Branch.

Gold, dollar, and other assets
held for foreign and international account increased for the sixth consecutive
year, resulting in a new high of $28.8 billion as the year ended.
Foreign accounts, in which all Federal Reserve Banks participate, rose by
nearly $2 billion to a total of $20.7 billion. Except for a decline of $76 million
in dollar deposits, each type of asset held at the Bank increased. United States
Government securities, in particular, rose by $1.7 billion. Earmarked gold
increased $142 million, and miscellaneous securities (including bankers’ accept­
ances) advanced by $222 million. The accounts of the international organizations,
in which the other Federal Reserve Banks do not participate, registered a nominal
rise, up by $65 million to a total of $ 8.1 billion at the year end.
Gold operations were somewhat under the level of the preceding year both
in number of transactions and in dollar value, reflecting a falling-off in purchases
from and sales to the United States Treasury as well as a sizable drop in imports
and exports. There was relatively minor demand for loans against gold under
earmark; four credits, aggregating $87 million, were made available to banks in
three countries in order to assist them in meeting seasonal and other temporary
dollar requirements. Each of the credits was utilized in full, but at the year end
only $32 million was outstanding.
Cooperative arrangements among the monetary authorities of the major indus­
trial countries were further expanded during the year. At the year end Federal
Reserve swap facilities totaling $2,050 million were in effect with the monetary
authorities of eleven countries plus the Bank for International Settlements, while
United States Treasury securities denominated in foreign currencies had risen to
the equivalent of $760 million.
fo r e ig n

a n d




in t e r n a t io n a l o p e r a t io n s .

51

Financial S ta tem en ts
S T A T E M E N T O F CO N D ITIO N
(In thousands of dollars)

Assets

DEC. 3 1 , 1 9 6 3

DEC. 3 1 , 1 9 6 2

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

3,608,466

3,394,817

Redemption fund for Federal Reserve n otes........................................

334,006

302,818

Federal Reserve notes of other Banks..................................................

109,996

94,866

Other ca sh .............................................................................................

31,676

42,078

4,084,144

3,834,579

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

9,998

15,474

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

161,720

110,254

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

8,707,557

7,868,600

Total loans and securities

8,879,275

7,994,328

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

1,688,500

1,604,892

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

8,110

8,413

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

105,935

90,286

1,802,545

1,703,591

Total cash

Other assets:

Total other assets
Total Assets

52




14,7 6 5,9 6 4

13,5 3 2,4 9 8

S T A T E M E N T O F C O N D ITIO N
(In thousands of dollars)

Liabilities

D E C .3 1 , 1 9 6 3

DEC. 3 1 ' 1 9 6 2

7,939,568

7,234,647

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

4,994,535
227,126
54,054
167,741

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

Total deposits

5,443,456

5,108,005

Deferred availability cash item s...........................................................
All other.................................................................................................

967,104
21,014

795,421
18,358

Total other liabilities

988,118

813,779

Total Liabilities

14,371,142

13,156,431

Capital paid i n ........................................................... ...........................
Surplus...................................................................................................

131,607
263,215

125,356
250,711

Total Capital Accounts

3 9 4 ,8 2 2

3 7 6 ,0 6 7

Total Liabilities and Capital Accounts

1 4 ,7 6 8,9 6 4

1 3 ,5 3 2 ,4 9 8

24,673

24,464

29.5%

30.0%

116,960
67,179

188,760
61,057

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

Deposits:

Other liabilities:

Capital Accounts

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

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




53

S T A T E M E N T OF EARNINGS AN D EXPENSES FOR
T H E CALEN D A R Y EA R S 1963 AND 1962 (In thousands Of dollars)

19 63

1962

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

291,817

261,931

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

39,099

36,115

252,718

225,816

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

77

492

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

113

120

190

612

Current net earnings

Total additions

Deductions from current net earnings...................................................

11

408

............................

179

204

Net earnings available for distribution

2 5 2 ,8 9 7

2 2 6 ,0 2 0

7,743
232,650
12,504

7,419
210,886
7,715

Surplus-beginning of year...................................................................
Transferred from net earnings for year................................................

250,711
12,504

242,996
7,715

Surplus — end of year

2 6 3 ,2 1 5

2 5 0,7 11

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

Dividends paid.......................................................................................
Paid United States Treasury (as interest on Federal Reserve notes). . .
Transferred to surplus.........................................................................

Surplus Account

54




Changes in Membership
During 1963 the total number of commercial banks in this District that are mem­
bers of the Federal Reserve System declined from 449 to 426. The net decrease of
23 banks was the result of the organization of one new national bank, and mergers
of 22 member banks with other members and two member banks with non­
members. The 426 banks constitute 84 per cent of all national banks, state banks,
and trust companies in this District and hold 96 per cent of the total assets of all
such institutions in this District.

NUM BER OF OPERATING M EM B ER AND NONM EM BER B A N K S IN
SECOND FE D E R A L R ESERVE DISTRICT A T THE Y E A R END
(Exclusive of savings banks, private bankers and industrial banks)
DECEMBER 3 1 , 1 9 6 3

DECEMBER 3 1 , 1 9 6 2

Members

Type of Bank

Non­
members

Per cent
members

Members

Non­
members

Per cent
members

296

0

100

310

0

100

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

130
■

Total

.... -

426

80

62

—

——

80

84

139

80

63

------------

—

—

449

80

85

* Includes one national bank located in Virgin Islands.

CHANGES IN FE D E R A L R ESERVE M EM BERSHIP IN
SECOND DISTRICT DURING

19 63

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

449

Increases:

New national bank.............................................................................................................................

1

Decreases:

Member banks combined with other members.................................................................................
Member banks combined with nonmembers.....................................................................................

22
2

Total membership at end of year

426




55

Changes in Directors and Officers
c h a n o k s i n d i r e c t o r s . In November 1963, member banks in Group 3
elected Robert H. Fearon a Class A director of the Federal Reserve Bank of
New York for the term of three years beginning January 1, 1964. Mr. Fearon,
President of The Oneida Valley National Bank of Oneida, Oneida, N.Y., suc­
ceeded A. Leonard Mott, President of The First National Bank of Moravia,
Moravia, N.Y., whose term expired December 31, 1963.
At the same time, member banks in Group 3 re-elected Albert L. Nickerson
a Class B director for the three-year term beginning January 1 , 1964. Mr.
Nickerson is Chairman of the Board of Socony Mobil Oil Company, Inc., New
York, N.Y.
Also in November 1963, the Board of Governors of the Federal Reserve System
redesignated Philip D. Reed as Chairman of the Board of Directors of the Bank
and Federal Reserve Agent for the year 1964. Mr. Reed is a former Chairman of
the Board of General Electric Company, New York, N.Y. At the same time, the
Board of Governors reappointed James DeCamp Wise as Deputy Chairman for the
year 1964. Mr. Wise is a former Chairman of the Board of Bigelow-Sanford, Inc.,
New York, N.Y.
In November 1963, the Board of Governors also reappointed Everett N. Case
as a Class C director of this Bank for the three-year term beginning January 1 ,
1964. Mr. Case is President of the Alfred P. Sloan Foundation, New York, N.Y.
At the Buffalo Branch of the Federal Reserve Bank of New York, Arthur S.
Hamlin, President of The Canandaigua National Bank and Trust Company,
Canandaigua, N.Y., was appointed in May 1963 by the Board of Directors of
the Federal Reserve Bank of New York as a director of the Branch for the unex­
pired portion of the term ending December 31, 1965. Mr. Hamlin succeeded
J. Monroe Hodges, President of The Exchange National Bank of Olean, Olean,
N.Y., who died on April 13, 1963. In November 1963, the Board of Directors
of this Bank designated Whitworth Ferguson, President of Ferguson Electric
Construction Co., Inc., Buffalo, N.Y., as Chairman of the Board of Directors of
the Branch for the year 1964. At the same time, the Board of Directors appointed
Charles W. Millard, Jr., a director of the Branch for the three-year term beginning
January 1, 1964. Mr. Millard, Chairman of the Board and President of Manu­
facturers and Traders Trust Company, Buffalo, N.Y., succeeded John M. Galvin,
Chairman of the Executive Committee of The Marine Trust Company of Western
New York, Buffalo, N.Y., whose term expired December 31, 1963. Also in

56




November 1963, Thomas E. LaMont, who is engaged in farming in Albion,
Orleans County, N .Y ., was reappointed by the Board of Governors of the Federal
Reserve System as a director of the Buffalo Branch for the three-year term begin­
ning January 1,1964.

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

Since February 1963, one officer has resigned and six

officers have retired.
Herbert H. Kimball, Vice President in charge of the Accounting and Planning
function, retired effective September 17, 1963. Mr. Kimball had joined the Bank’s
staff as an officer in 1931.
Donald J. Cameron, General Auditor, retired effective November 1, 1963.
Mr. Cameron, an officer since 1933, had completed forty-six years of service
with the Bank. Mr. Cameron died on January 27,1964.
Todd G. Tiebout, Vice President and General Counsel, retired effective Decem­
ber 1, 1963. Mr. Tiebout, the senior officer in charge of the Legal Department
since August 1953, had been an officer of the Bank since 1933.
M . Monroe Myers, Assistant Cashier of the Buffalo Branch, retired effective
January 1,1964. Mr. Myers had joined the Bank’s staff in 1942. He had transferred
to the Buffalo Branch in 1943 and had been an officer of the Branch since 1945.
Norman P. Davis, Assistant Vice President assigned to the Accounting and
Planning function, retired effective February 1, 1964. Mr. Davis had been a
member of the Bank’s staff since 1932 and had been an officer since 1938.
Harold W. Lewis, Manager of the Security Custody Department, retired effec­
tive February 16,1964. Mr. Lewis had completed almost forty-six years of service
with the Bank and had been an officer since 1961.
John F. Pierce, Chief Examiner, resigned effective February 29, 1964 to
accept appointment as Governor of the proposed central bank of Trinidad and
Tobago.
The following additional changes in official staff, including the appointment
of four new officers, have taken place since February 1963.
William H. Braun, Jr., formerly Assistant Counsel, was appointed Assistant
Vice President, effective July 1, 1963, and assigned to the Loans and Credits
function. Effective August 19, 1963, Mr. Braun was assigned to Accounting and
Planning, continuing his assignment to the Loans and Credits function.
Frank W . Schiff, formerly Manager of the Research Department, was appointed
Assistant Vice President, effective July 1, 1963, and assigned to the Research and




57

Statistics function.
Bruce K. MacLaury, formerly Chief of the Public Information Division, Public
Information Department, was appointed an officer with the title of Manager,
effective July 11, 1963, and assigned to the Foreign Department.
Francis H. Schott, Manager, formerly assigned to the Foreign Department, was
assigned to the Research Department, effective July 11,1963.
Harold A. Bilby, Vice President, in charge of Government Bond and Safe­
keeping of Securities, Loans and Credits, and at the time Building Operating and
Service, was also assigned responsibility for the Accounting and Planning function,
effective August 19,1963.
Robert Lindsay, Senior Economist, Research Department, was granted a oneyear leave of absence, commencing in September 1963, to accept a visiting faculty
appointment at the School of Business Administration, University of California,
Berkeley, California.
Harold M. Wessel, formerly Assistant Vice President, Buffalo Branch, was
appointed Assistant Vice President at the Head Office, effective September 1,1963,
and assigned to the Cash and Collections function. His appointment as an officer
of the Branch terminated as of the same date.
George J. Doll, formerly Cashier, Buffalo Branch, was appointed Assistant
Vice President of the Branch effective September 1, 1963. His appointment as
Cashier was continued.
John P. Jensen, formerly Assistant Vice President in the Cash and Collections
function, was appointed General Auditor, effective November 1, 1963.
John J. Clarke, formerly Assistant General Counsel, was appointed Vice Presi­
dent and General Counsel, effective December 1,1963.
Thomas C. Sloane, formerly Assistant Counsel, was appointed Assistant Gen­
eral Counsel, effective December 1, 1963.
Peter Fousek, formerly Manager of the Foreign Department, was appointed
Assistant Vice President, effective January 2, 1964, and assigned to the Foreign
function.
Robert G. Link, formerly Assistant Vice President in the Research and Statistics
function, was appointed Adviser, effective January 2, 1964, and assigned to the
Research and Statistics function.
Peter D. Stemlight, formerly Manager of the Securities Department, was
appointed Assistant Vice President, effective January 2, 1964, and assigned to
Open Market Operations and Treasury Issues.
Gerald E. Beach, formerly Chief of the Food Supply Division, Service Depart­
58




ment, was appointed Manager, effective January 2, 1964, and assigned to the
Security Custody Department.
Richard A . Debs, formerly an Attorney in the Legal Department, was appointed
Assistant Counsel, effective January 2,1964.
James H. Oltman, formerly an Attorney in the Legal Department, was appointed
Assistant Counsel, effective January 2, 1964.
Robert C. Thoman, Manager of the Collection Department, was also appointed
Assistant Secretary, effective January 2, 1964, the appointment of Paul Meek,
Manager of the Securities Department, as Assistant Secretary being terminated
on the same date. Effective January 3 ,1964, Mr. Thoman’s assignment as Manager
was changed to the Government Bond and Safekeeping Department.
Robert L. Cooper, Manager, formerly assigned to the Securities Department,
was assigned to the newly established Acceptance Department in Open Market
Operations and Treasury Issues, effective January 3, 1964.
Karl L. Ege, Manager, formerly assigned to the Savings Bond Department, was
assigned to the Collection Department, effective January 3, 1964.
Walter S. Rushmore, Manager, formerly assigned to the Government Bond and
Safekeeping Department, was assigned to the Savings Bond Department, effective
January 3 ,19 6 4.
Walter H. Rozell, Jr., Vice President, in charge of Personnel, was also assigned
responsibility for Building Operating and Service, effective February 1, 1964,
replacing Harold A. Bilby as Vice President in charge of that function.
Lawrence E. Quackenbush, Assistant Vice President, formerly assigned to
Building Operating and Service, was assigned to Bank Supervision and Relations
and to Administration of Regulations T and U, effective February 1, 1964. In his
new assignment, Mr. Quackenbush will be concerned primarily with matters re­
lating to the examination of banks.
Frederick L. Smedley, Assistant Vice President, assigned to Personnel, was also
assigned to Building Operating and Service, effective February 1, 1964.
Aloysius J. Stanton, Manager, formerly assigned to the Check Mechanization
Department, was assigned to the Check Department, effective February 1, 1964,
when the Check Mechanization Department was merged into the Check Depart­
ment.

m e m b e r o f f e d e r a l a d v is o r y

c o u n c il - 1964.

The Board of Directors

of this Bank selected William H. Moore to serve during 1964 as the member of




59

the Federal Advisory Council representing the Second Federal Reserve District.
Mr. Moore is Chairman of the Board of Bankers Trust Company, New York, N .Y .
He replaced George A . Murphy, Chairman of the Board of Irving Trust Company,
New York, N. Y ., who had served as a member of the Council for the past three
years.

60




Directors of the Federal Reserve Bank of New York
DIRECTORS

Term expires Dec. 31

Class Group

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

..................................1964

A

1

R a l p h H . R u e ..............................................................................................................
Chairman of the Board, The Schenectady Trust Company, Schenectady, N. Y .

..................................1965

A

2

R o b e r t H . F e a r o n ...................................................................................................
President, The Oneida Valley National Bank o f Oneida, Oneida, N. Y .

..................................1966

A

3

B. E a r l P u c k e t t ........................................................................................................ ..................................1964

B

1

Former Chairman of the Board, Allied Stores Corporation, New York, N. Y .
K e n n e t h H . H a n n a n ...............................................................................................
Executive Vice President, Union Carbide Corporation, New York, N . Y .

..................................1965

B

2

A l b e r t L. N i c k e r s o n ...............................................................................................
Chairman of the Board, Socony M obil Oil Company, Inc., New York, N. Y.

..................................1966

B

3

P h il ip D . R e e d , Chairman , and Federal Reserve A g e n t ......................
Former Chairman of the Board, General Electric Company, New York, N. Y.

..................................1965

C

J a m es D e C a m p W is e , Deputy Chairman ............................................... ................................... 1964
Former Chairman o f the Board, Bigelow-Sanford, Inc., New York, N. Y.

C

..................................1966

C

E v e r e t t N . C a s e .......................................................................................................
President, Alfred P. Sloan Foundation, New York, N. Y .

DIRECTORS — B U FFA LO BRANCH
W h i t w o r t h F e r g u s o n , Chairman ................................................................................................. 1964
President, Ferguson Electric Construction Co., Inc., Buffalo, N. Y.
E l m e r B. M i l l i m a n .........................................................................................................................................1964
President, Central Trust Company Rochester N. Y., Rochester, N. Y .
A n s o n F. S h e r m a n ........................................................................................................................................... 1964
President, The Citizens Central Bank, Arcade, N. Y.
M a u r ic e R. F o r m a n ......................................................................................................................................... 1965
President, B. Forman Co., Rochester, N. Y .
A r t h u r S. H a m l i n ........................................................................................................................................... 1965
President, The Canandaigua National Bank and Trust Company, Canandaigua, N. Y.
T h o m a s E. L a M o n t .........................................................................................................................................1966
Farmer, Albion, Orleans County, N. Y .
C h a r l e s W. M il l a r d , Jr ................................................................................................................................. 1966
Chairman o f the Board and President, Manufacturers and Traders Trust Company, Buffalo, N. Y.

M EM B ER OF FE D E R A L ADVISORY C O U N C IL --- 19 64
W i l l i a m H . M o o r e ...........................................................................................................................................1964
Chairman o f the Board, Bankers Trust Company, New York, N. Y .




61

Officers of the Federal Reserve Bank of New York
A l f r e d H a y e s , President
W i l l i a m F . T r e i b e r , First Vice President
H a r o l d A . B i l b y , Vice President
A l a n R . H o l m e s , Vice President
J o h n J. C l a r k e , Vice President, and
R o b e r t G . R o u s e , Vice President,

General Counsel
C h a r l e s A . C o o m b s , Vice President
H o w a r d D. C r o s s e , Vice President
G e o r g e G a r v y , Economic Adviser
M a r c u s A . H a r r i s , Vice President
E dw ard

and

Senior Adviser

G. Guy, Assistant General Counsel

W a l t e r H . R o z e l l , J r ., Vice President
H o r a c e L. S a n f o r d , Vice President
R o b e r t W . S t o n e , Vice President
T h o m a s O . W a a g e , Vice President
T h om a s C . S lo a n e ,

Assistant General Counsel

W i l l i a m H . B r a u n , J r ., Assistant Vice President
F e l i x T . D a v is , Assistant Vice President
P e t e r F o u s e k , Assistant Vice President
P e t e r P. L a n g , Adviser
R o b e r t G . L in k , Adviser
A n g u s A . M a c I n n e s , J r ., Assistant Vice President
S p e n c e r S. M a r s h , J r ., Assistant Vice President

F r e d W . P id e r it , J r ., Assistant Vice President
L a w r e n c e E . Q u a c k e n b u s h , Assistant Vice President
T h o m a s J. R o c h e , Senior Foreign Exchange Officer
F r a n k W . S c h i f f , Assistant Vice President
F r e d e r i c k L . S m e d l e y , Assistant Vice President
P e t e r D . S t e r n l i g h t , Assistant Vice President
H a r o l d M . W e s s e l , Assistant Vice President

G erald E . B each ,

J a m es

Manager, Security Custody Department
M a r t i n W . B e r g in ,

Manager, Public Information Department
E r n e s t E. B la n c h e tte ,

Manager, Bank Relations Department
A . T h om as C om b a d er,

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

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

Assistant Counsel

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

Manager, Personnel Department
J o h n P . R in g e n ,

Manager, Bank Examinations Department
Manager, Foreign Department
Manager, Savings Bond Department

K a r l L. E ge,

Manager, Collection Department
M a r tin F re n c h ,

Manager, Cash Custody Department
H. K l o p s t o c k ,

Manager, Research Department

F r a n c is

H. S c h o t t ,

Manager, Research Department
W illia m

M. S c h u l t z ,

Manager, Personnel Department
K e n n e th E. S m a ll,

Manager, Cash Department

R o b e r t L in d s a y ,

Senior Economist

G e o r g e C . S m it h ,

B ru ce K . M acL au ry,

Manager, Foreign Department
W illia m E. M a r p le ,

Manager, Credit and Discount Department
H. M c W h i n n e y ,

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

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

Manager, Accounting Department
A rth u r

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

W a l t e r S. R u s h m o r e ,

Assistant Counsel

M a d e lin e

Joh n F . P ie rc e ,

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

R ic h a r d A . D e b s ,

F red

H. O l t m a n ,

Assistant Counsel

H. N o a ,

Manager, Check Department
A l o y s i u s J. S t a n t o n ,

Manager, Check Department
R o b e r t C . T hom an,

Manager, Government Bond and
Safekeeping Department, and
Assistant Secretary
T hom as

M. T i m l e n , J r .,

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

Manager, Service Department

Assistant Counsel

J o h n P . J e n s e n , General Auditor
L e o n a r d I. B e n n e t t s , Assistant General Auditor

62




OFFICERS — BUFFALO BRANCH

I n s i e y B. S m it h ,
G e o r g e J. D o l l .
G e r a ld

H. G r e e n e , Assistant Cashier




Vice President

Assistant Vice President, and Cashier
Joh n T . K e a n e ,

Assistant Cashier

63