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FEDERAL RESERVE BANK
OF NEW YORK

ANN UAL REPORT

1965

FEDERAL

RESERVE

BANK

NEW

YORK

F e b r u a r y 28, 1966

T o the M e m b e r Banks in the
S e c o n d F e d e r a l R e s e r v e D is t r ic t :
It is a p le a s u r e to p r e s e n t ou r f i f t y - f i r s t A nnual R e p o r t
h igh ligh tin g the m a jo r e c o n o m ic and fin a n cia l d e v e lo p m e n ts o f 1965.
The U nited States e c o n o m y in 1965 r e c o r d e d its fifth c o n
s e c u tiv e y e a r o f ex p a n sion . R a pid g row th le d to a g ra tify in g d e c lin e
in u n em p loy m en t, but the V ietn a m c o n flic t c a s t a sh ad ow upon p r o s
p e r ity , as did the a p p e a r a n ce o f in fla tio n a r y p r e s s u r e s . The P r e s id e n t 's
b a la n ce o f pa ym en ts p r o g r a m m a d e a m a jo r c o n trib u tio n in cutting down
the s iz e o f the p a ym en ts d e fic it . N e v e r t h e le s s , the d e fic it w as s t ill
la r g e .
M o n e ta ry p o li c y la st y e a r , w h ile p e r m ittin g the la r g e s t
g row th o f c r e d it and liq u id ity o f any y e a r o f the c u r re n t b u sin e s s
ex p a n sio n , g ra d u a lly sh ifte d to w a rd m ild r e s tr a in t. In D e c e m b e r
F e d e r a l R e s e r v e d iscou n t ra te s w e re in c r e a s e d , and the B o a rd o f
G o v e r n o r s r a is e d c e ilin g ra tes on tim e d e p o s its . T h e s e ste p s s e r v e d
both to a m e lio r a t e a ctu a l and p oten tia l d is to r tio n s in the fin a n cia l
m a r k e t s , and to stren g th en the p o s tu re o f m o n e ta r y p o lic y in c o u n te r
in g p r ic e p r e s s u r e s and in b a ck in g up the P r e s id e n t 's b a la n ce o f
p a ym en ts p r o g r a m fo r 1966.
L ook in g ahead, the m o n e ta r y and f i s c a l a u th o ritie s fa c e
the m a jo r ch a lle n g e o f fu rth e r exten din g the r e m a r k a b le r e c o r d o f
r e a l e c o n o m ic g row th , w hile at the sa m e tim e con tain in g in fla tio n a r y
f o r c e s that, if u n ch e ck e d , w ou ld je o p a r d iz e both g row th i t s e lf and the
a c h ie v e m e n t o f b a la n ce o f p a y m en ts e q u ilib r iu m .

A L F R E D HAYES
P r e s id e n t

Federal Reserve Bank
of New York

FIFTY-FIRST
ANNUAL REPORT
For the Year
Ended
December 31, 1965

Second Federal Reserve District

Contents:
Page

Page
Problem s in the M idst of
P ro sp e rity .........................................
THE UNITED STATES ECONOMY
IN 1965 ....................................................

Business Conditions: The Economy
Approaches Full Use of Resources..

11
Background ........................................... ....11
1965: A year of rapid growth...............14
Monetary Policy: Moves Toward
R e stra in t...........................................

Changes in M em bership...................

Changes in D irectors and O fficers ..

L is t of D irectors and O fficers...........

Changes in directors ............................54
Changes in officers ............................ 55
Member of Federal Advisory
Council— 1966 ................................. 58

The Credit and Capital Markets: Rising
Demands M et on Firm er Term s.........
26
CHARTS

THE UNITED STATES AND THE
WORLD E C O N O M Y ..........................

The United States Payments Balance:
D istinct but Insufficient Improvement

Chart 1: Gross National Product . . . .

Chart 2: Unemployment...................

International Monetary Cooperation:
A Year of Progress and S tu d y .........

Chart 3: Changes in Consumer and
Wholesale Prices ..............................

Industrialized Countries:
Mixed T re n d s ...................................

Chart 4: Long-term and Short-term
Interest Rates ...................................

The Less Developed and Eastern
European Countries..........................

Chart 5: The Liquidity Position of
the Public .........................................

THIS BANK’S OPERATIONS.............

Volume and Trend o f the
Bank’s O p eration s............................

Chart 6: Net Funds Raised by Private
Domestic Nonfinancial Sectors.........

Chart 7: The United States Balance of
Payments and its Major Components.

Chart 8: Production and Prices in
Selected Countries............................

Domestic operations ............................ ...46
Foreign and international operations.. 49
Financial Statem ents........................ 50
Statement of condition........................ 50
Statement of earnings and expenses.. . 52

Chart 9: Central Bank Discount Rates 44

Fifty-first Annual Report
Federal Reserve Bank of New York

P roblem s in the M idst of Prosperity

In an unprecedented fifth year of peacetime expansion, the United States econ
omy in 1965 moved closer to full utilization of capacity than it had been in nearly
a decade. This encouraging progress toward one of the nation’s main economic
objectives was, however, not without blemishes. Although the payments deficit
was cut substantially, the goal of balance of payments equilibrium again proved
elusive. At the same time, another principal aim of economic policy, price
stability, was increasingly threatened. Monetary policy gradually shifted toward
moderate restraint, including an increase in the Federal Reserve discount rates
in early December. As total production, employment, and incomes rose to
new highs, satisfaction with record prosperity was marred by the escalation of
the Vietnam conflict and by the old problems of poverty in the midst of plenty
and of racial barriers to equal opportunity.
When 1965 opened, the country faced two particularly troublesome eco
nomic issues: the alarmingly rapid increase in the payments deficit, and the dan
ger of internal dislocations if labor negotiations in the steel industry were to
result in either a prolonged strike or an inflationary settlement. The possibilities
of a significant slowing in the pace of the domestic upswing and of an upheaval
in the international financial system stemming from the sterling crisis were also
very real. As it turned out, these threats did not materialize. Domestically a
judicious mix of policies, and later in the year the growing pace of defense spend
ing, spurred the economy to new records. In the steel industry, labor and man
agement negotiated a responsible settlement that was broadly in line with the

Administration’s guideposts, and the economy absorbed a major swing in steel
inventories with hardly a ripple. On the international plane, the two keycurrency countries— the United States and the United Kingdom—took deter
mined policy measures to improve their payments positions, and further progress
was made in strengthening the world’s monetary system.
Early in the year, the momentum of economic expansion accelerated under
the temporary stimulus of strike-hedge steel inventory accumulation and of
heavy automobile purchases— the latter in reaction to the strike-reduced avail
ability of cars in the closing months of 1964. The over-all advance then con
tinued at only a slightly slower pace, as all the major types of demand, except
housing and exports, continued to grow rapidly. Fiscal policy remained expan
sionary as the second stage of the 1964 tax cut was reinforced after midyear by
a reduction in excise taxes. In the second half of the year, the increased United
States commitment in Vietnam lifted business and consumer expectations re
garding the economic outlook and led to larger military outlays on top of grow
ing civilian programs.
For the year as a whole, total output of the economy in real terms rose by a
notable 5 Vi per cent. Industrial capacity and manpower came to be utilized
more fully despite substantial growth of both. Especially heartening was the
sizable absorption of the unemployed into the working population. The over-all
unemployment rate was cut back by almost a full percentage point to 4.1 per
cent at the end of the year, while the rate for married men— an important group
of breadwinners— fell to a new low of 1.8 per cent. These advances, however,
were not equally shared by all. In particular, unemployment rates among non
whites— despite further declines— remained very substantially above those of
whites. Further progress in this area is vital, not only on grounds of economic
efficiency, but also— and even more importantly— on grounds of equity.
As the economy moved closer to full capacity, upward price pressures in
creased. Consumer prices began rising at a faster rate, and the long period
of virtual stability of wholesale prices ended. The Administration’s wage-price
guideposts, which had made a major contribution to the remarkable steadiness
of costs and prices over the first years of the expansion, continued to play a sig
nificant restraining role. The Government also took specific action to stabilize
prices of some individual commodities, including sales from its stockpiles. But
neither approach can be fully effective in an economy where swiftly rising de
mands threaten to outrun the growth of manpower and capital resources.
Against this background and with a still sizable— though much reduced—
6

payments deficit, monetary policy shifted over the year from a posture of mild
ease to mild restraint. Early in the year, free reserves moved from a moderate
plus range to a moderate negative position. With the business expansion and
resulting credit demands accelerating and with the escalation of the Vietnam
conflict exerting an increasing impact on expectations, interest rates came under
general pressure in the second half of the year. The increase in interest rates,
largely confined to the short-term area earlier in the expansion, gradually spread
into the market for long-term capital. Bank reserves, however, were supplied
in sufficient volume to permit a record advance in commercial bank credit.
Savings flows continued very large, and lending outside the commercial banking
system also expanded rapidly. The pace of total borrowings by private nonfinancial borrowers accelerated and again exceeded the rate of advance of total
output by a substantial percentage. With continued fast growth of both the
money supply and time deposits and of other types of liquid assets, the over-all
liquidity of the economy remained ample.
In the boom atmosphere that was developing toward the end of the year,
the possibility of a breakout from the still tolerable pattern of price increases
became very real. The remarkable performance of the economy in the last
five years owes much to a successful mix of fiscal, monetary, and other policies
over this period. But it would not have been possible without the eradication
of the inflationary psychology of the 1950’s. To avoid an inflationary degenera
tion of the expansion in late 1965, excessive demand pressures had to be
countered before they gathered momentum. Assuring price stability, moreover,
was also crucial to the achievement of a viable external balance.
Accordingly, on December 6, Federal Reserve Bank discount rates, which had
remained unchanged since November 1964, were raised from 4 per cent to 4 Vi
per cent, and the ceilings on time deposit interest rates were increased to 5 Vi
per cent on all maturities of 30 days or more. (The maximum rate payable on
commercial bank savings deposits was left unchanged at 4 per cent.) With
money market rates above the discount rate and time deposit rates bumping
against the ceilings, the discount rate and the time deposit ceilings had ceased
to be compatible with conditions in the market; more importantly, they were no
longer compatible with the objective of preventing additions to money and credit
so large as to turn an orderly upswing into an inflationary boom.
The efforts to eliminate the United States balance of payments deficit have
over the last few years involved some fundamental decisions. Policy makers have
had to decide to what extent to use specific measures that would place obstacles

in the way of international transactions, and to what extent to rely on policies
that were general rather than specific. One of the most significant achievements
in the world economy since World War II has been the broad sweep toward
freer flows of trade, services, and capital. And to halt, or to reverse, this ad
vance could not be a decision made lightly. The interest equalization tax pro
posal of 1963 and the President’s voluntary restraint program of February
1965 were adopted only after it was concluded that general policies, including
monetary policy, should not be required— particularly while unemployment re
mained serious— to deal by themselves with the threat of a rapid deterioration
in the dollar’s international position. Their adoption represented a practical
compromise rather than a change in underlying philosophy.
The Federal Reserve-administered restraint program covering the banks and
other financial institutions successfully and quickly met its objectives in 1965.
The related Commerce Department program applying to nonfinancial corpora
tions also made a major contribution to the balance of payments, particularly
in reversing the outflow of short-term corporate funds. The entire voluntary
restraint program, however, has always been thought of as a temporary measure.
Achieving a lasting improvement in the balance of payments with a minimum
of restrictions on our international transactions will require further efforts both
by the United States and by the surplus countries of Europe. While it is largely
up to the United States to take corrective action, there is much that the surplus
countries could be doing, particularly in the way of enlarged contributions to
economic aid and joint defense arrangements, further improvement in their
monetary-fiscal policy mix, and reduced restrictions on borrowing by foreigners
and on imports. The United States, for its part, needs further to strengthen its
competitiveness both through maintaining stability of costs and prices and
through a redoubling of efforts by business and labor and by the Government
to improve the position of United States products in world markets.
No attempts at a solution of our balance of payments problem can be effec
tive unless they are persistent and unless they deal in concerted fashion with all
the major elements of our international accounts rather than with one or two.
Throughout the past eight years of large deficits, improvements in one area have
been offset by deterioration in others. Thus, in 1965 the gains from the sub
stantial savings on our capital outflows were more than halved by a reduction
in our trade surplus, as imports rose faster than exports. Over all, the payments
deficit for 1965— measured on the liquidity basis— was cut back to $1.3 billion
from the $2.8 billion of 1964.
8

While our payments problem retained its high priority in 1965, the future
shape of the international payments system received increased attention. The
system has, of course, undergone significant evolution in recent years, as changes
both within the International Monetary Fund and outside have strengthened
the system’s ability to serve a growing world economy. However, the prospect
that the aid of United States payments deficits would dry up this major source
of international liquidity in the postwar period has raised some questions as to
the adequacy of the future volume of international liquid assets under the present
arrangements. Future liquidity needs should not necessarily be judged on the
basis of the persistent large surpluses and deficits of recent years; the search for
speedier and more effective methods of adjustment of such imbalances must
continue. Although the danger of a general liquidity shortage should not be
exaggerated, the international financial system must continue to evolve to meet
the world’s changing needs. International credit facilities have been substan
tially enlarged over recent years and have on innumerable occasions proved their
flexibility and adaptability. All the potentialities of this approach have by no
means been explored, including increases in international reserve assets through
the further development of automatic drawing rights on multilateral credit facili
ties. A cardinal principle— one well worth emphasizing again— is that future
arrangements to meet international liquidity needs should be carefully examined
to make sure that they do not jeopardize the status of the dollar as a reserve
currency.
The debate over international liquidity has to some extent obscured the se
riousness of an at least equally grave international economic problem—the dis
appointingly slow and uncertain progress of the underdeveloped nations in
raising their intolerably low living standards. No international liquidity scheme,
however well meaning, can solve the diverse problems of development. Much
larger and more flexible long-term external assistance is necessary, if income
levels in the vast underdeveloped areas of the globe are to increase at a rate
that would give even a minimum of hope for the future. Nevertheless, it is
only on the basis of still more intensive efforts by the underdeveloped coun
tries themselves that the high income countries can be asked to devote more
resources to them. At the same time, it is encouraging that increased attention
is being given to the slow growth and abrupt fluctuations of the export earn
ings of the underdeveloped countries. Such earnings after all exceed by several
times the volume of foreign capital and aid received by them.
As 1966 began, it was clear that the sixth year of expansion presents a dif

ferent challenge for economic policy makers. The task of preserving reason
able price stability and balanced growth at high levels of capacity and manpower
utilization poses problems for the United States economy that are the more ex
acting because of their very newness. At the same time, the long existence of
the balance of payments problem makes its solution not less but more urgent.
The achievement of these economic goals will not be easy. It will require judi
cious use of general monetary and fiscal policies, since selective measures alone,
although some may be needed, cannot carry the load.
Monetary policy has played its part in facilitating this record-breaking expan
sion. Its flexibility makes it a particularly useful instrument whenever circum
stances call for a shifting of gears. At the present juncture, moreover, it can con
tribute to both domestic and external equilibrium. Monetary policy, however,
cannot bear the entire burden. Fiscal policy has scored a most significant break
through in the last two years when its great potential for propelling the economy
forward has gained wide public acceptance and has proved most effective in
practice. With the heavy military expenditures of the Vietnam conflict super
imposed upon rapidly growing private and public demands, the posture of fiscal
policy has begun to change. In recent years, when stimulating economic growth
has been the order of the day, much has been said of the desirability of increas
ing the flexibility of fiscal policy. Such added flexibility would seem to be equally
important now that restraint may be needed instead. The uncertainties of the
Vietnam war may, in fact, have increased the urgency of finding a workable
solution to this question. The speed with which temporary tax increases could
be imposed in 1966 might spell the difference between continued balanced
growth and inflationary excesses that could lead to recession. And should a
settlement of the Vietnam conflict prove possible, fiscal as well as monetary
policy must be prepared to meet promptly the demands of the new situation that
might then emerge.

THE UNITED STATE S ECONOM Y IN 1 9 6 5
B usiness Conditions: The Econom y A pproaches
Full U se of R esou rces

The year 1965 clearly represents a milestone on the road of this country’s eco
nomic progress. A new record was established for length of an expansion— World
War II excepted— and economic growth actually accelerated from the already
rapid pace of 1964, while unemployment declined steadily. The total value of
goods and services produced amounted to $676 billion, and the 5.5 per cent
growth in real terms for the year as a whole equaled the most optimistic projec
tions made at the start of the year. The year’s record, on the other hand, also
includes the revival of inflationary pressures and a continued, although reduced,
balance of payments deficit. Nevertheless, the facts of the country’s sustained
economic growth and the concrete achievements during the expansion are worth
recalling, as are the policy measures that prolonged and fostered this five-year
advance.
b a c k g r o u n d . From the first quarter of 1961— the trough of the last recession
— through the fourth quarter of 1965, gross national product (GNP) in con
stant (1958) dollars rose by $142 billion, or more than 29 per cent, for an aver
age annual compound rate of growth of over 5 Vi per cent (see Chart 1). This
rapid growth in real output has been made possible, on the one hand, by in
creases in real GNP per employed person averaging about 3 Vi per cent per year
and, on the other hand, by large additions to the work force. Since February
1961, some 6.8 million new jobs have been created— enough not only to absorb
the growth in the civilian labor force but also to reduce the rolls of the un
employed by some 1.8 million. In consequence, the unemployment rate declined
from 6.9 per cent in early 1961 to 4.1 per cent in December 1965.
The rate of increase in real output has, however, varied considerably over
the course of the current upswing. Thus, from the trough of the recession in the
first quarter of 1961 through the second quarter of 1962, the annual rate of
growth of GNP in constant dollars exceeded 7 per cent. During the next twelve

C h a r t 1.
G R O S S N A T I O N A L P R O D U C T : T h r o u g h o u t t h e p a s t f iv e y e a r s o f e x
p a n s io n , G N P m e a s u r e d in m o n e y t e r m s a s w e ll a s in c o n s t a n t d o lla r s h a s a d
v a n c e d s t e a d ily . T h e p a c e o f t h e a d v a n c e w a s r a p id fr o m 1 9 6 1 t o m id - 1 9 6 2 ,
s lo w e d b e t w e e n m id - 1 9 6 2 a n d m id - 1 9 6 3 , a nd h a s s in c e s p e e d e d u p a g a in , e x c e p t
f o r t h e s t r ik e - d e p r e s s e d f o u r t h q u a r t e r o f 1 9 6 4 .

Billions of
dollars
68 0

660

640

620

600

580

560
✓

G N P IN C O N S T A N T (1958) D O LLAR S

540

520

500

480

GNP is expressed at seaso nally adjusted annual rates.

months, the annual growth rate dropped sharply to 3 per cent. Then the pace
accelerated once again, and since then the economy has trended upward at an
average annual rate o f about 5 Vi per cent.
As just noted, the expansion from the recession low was very rapid during the
first year, as had been typical o f earlier periods o f recovery. Unemployment fell
steadily from the recession peak o f about 7 percent to around 5 Vi percent in the
spring o f 1962. However, at that time a slowdown in the upward pace o f eco12

nomic activity became evident. This development had been partially foreshadowed
a few months earlier by news that several key industries were planning little or no
further increases in plant and equipment spending in 1962.
Once it had begun, several factors contributed to prolonging the slowdown in
growth until about mid-1963. There was a clash between the Administration and
the steel industry over proposed increases in steel prices. This conflict dampened
business confidence temporarily and may well have contributed to the sharp
stock market decline from the high price levels reached in 1961 and early 1962.
The substantial loss in stock market values over the middle months of 1962 in
turn probably had a pervasive, though short-run, effect on the economy.
Beyond these specific factors, it should also be recalled that the weakening
of the recovery at such an early stage repeated the experience of the immedi
ately previous expansions. The fact that expansions peaked well short of full
resource utilization may in part have been related to the tendency for growing
money incomes to raise the proportion of Federal taxes paid per dollar of in
come, a tendency accentuated by steeply progressive tax rates. Thus, the tax
structure moved the Federal budget toward a surplus and cut into private spend
ing— including capital outlays by business— well before the economy reached
full employment output.
After mid-1963, the rate of advance in business activity picked up once again
as business and consumer confidence improved. This favorable development
can be attributed in part to the Federal Government’s liberalized depreciation
guidelines and the investment tax credit legislated by Congress late in 1962,
which materially enhanced the rate of return on business plant and equipment
outlays in 1963. Perhaps equally important, it was becoming apparent by then
that the prospects for a cut in personal and business tax rates at the Fed
eral level were steadily improving, and these expectations were mirrored in a
substantial and orderly rise in stock prices throughout 1963. Monetary policy—
which had made a significant contribution to sustaining the expansion in 1962
through the provision of ample liquidity— continued to be expansive in 1963,
although balance of payments considerations necessitated a discount rate in
crease in July of that year. The balanced nature of the expansion, as reflected
in both the absence of inventory speculation and continued price and wage
stability, reinforced the outlook for further advances over the coming months
and permitted the application of further stimuli through economic policy.
In 1964 the reduction in Federal taxes on personal and business incomes be
came a reality, with the reductions in personal withholding rates taking place in

March. Business spending on plant and equipment moved ahead sharply and
consumer spending quickly moved into line with the advance in after-tax per
sonal incomes. Growth during that year was impressive and would have been
even stronger but for the fact that strikes in the automobile industry depressed
output late in the year. The credit and liquidity indicators once again moved up
substantially even while monetary policy moved toward slightly less ease.
1 9 G 5 : a y e a r o f r a p i d g r o w t h . The accelerated rate of economic growth
evident since the second half of 1963 continued through 1964 and into 1965.
In fact, as the year opened, economic momentum was unusually high. Yet, the
outlook at that time was not without elements of doubt, particularly with respect
to impending contract negotiations between labor and management. A dock strike
on the East and Gulf coasts was under way in January, and slow progress toward
a contract settlement in the steel industry— with a contract expiration date in
May— was inducing users to stockpile steel and steel products at a much faster
than normal rate. This inventory buildup, coupled with a surge in automobile
production and sales following earlier strikes in that industry, pushed the firstquarter growth rate to an unsustainable level, and raised some doubts as to the
pace and even the continuance of general economic gains once that stimulus
was removed. There were also longer run questions: the prolonged high rate
of investment and consumer accumulation of durables might slacken in 1965,
and the contract settlement in the automobile industry in late 1964— which ex
ceeded the Council of Economic Advisers’ wage-price guideposts of 3.2 per cent
— might set the pattern for settlements in excess of the guideposts in other in
dustries.
As it turned out, the economy followed up the fast pace set early in the year
with further substantial progress throughout 1965. The year as a whole saw gains
over a broad range of economic activity, which were reflected not only in the
impressive GNP advance but also in many other indicators. Industrial produc
tion posted an 8.0 per cent advance, the strongest rise of the expansion. Business
outlays on plant and equipment rose by 15.4 per cent, thus bettering the already
considerable advance of 14.5 per cent in 1964. Outlays for goods and services
by governments at all levels combined were a major stimulus throughout the
year. The stock market reflected the buoyant economy and recovered from a
brief decline in the second quarter to move up to record levels at the year-end.
Among individual demand sectors, personal consumption spending once again

accounted for the largest part of the GNP advance. For the year, such spending
rose by $30 billion, up almost IV2 per cent over 1964. As in that year, the
sharpest gains were in outlays for durable goods, financed in part by a strong
advance in consumer credit. Automobile sales topped 9 million units, and sales
of major appliances such as washing machines, refrigerators, and color television
sets surged ahead.
Living standards benefit from many types of government expenditures, in
cluding those at the state and local level where expenditures are heavily oriented
toward education, highways, water facilities, and other services directly used by
broad classes of consumers. During 1965, state and local purchases of goods
and services exceeded those at the Federal level for the first time since 1950.
The Federal Government contributed to individual welfare through stepped-up
social programs associated with the Great Society objectives. The bulk of the
enlargement of Federal spending, however, had to be directed toward a strength
ening of the nation’s defenses in connection with the Vietnam conflict— a devel
opment that also had a considerable impact on expectations and actions in the
private sector of the economy throughout the second half of 1965.
In the business sector, strong production gains resulted in an increase in the
capacity utilization rate in manufacturing industries early in the year and in
another moderate move upward after mid-1965. A number of key industries,
including nonferrous metals and automobiles, were operating at or above their
preferred rates. This pressure on capacity was a major stimulus to continuing
upward revisions in projected outlays on plant and equipment. Business also
stepped up its inventory accumulation, and the ratio of inventories to sales sta
bilized for the year as a whole after an irregular decline during the first four
years of the expansion.
Private residential construction was one major demand sector that failed to
show any significant advance over the year, and the regional picture included a
pronounced weakness in the Western states. The rate of addition of new housing
units has leveled off in recent years, albeit at a high level, in spite of the ample
availability of mortgage funds. While apartment construction in the last three
years has remained well ahead of the early 1960’s, the building of single-family
houses has remained sluggish. It will be a few more years before the rapidly rising
number of young married couples moves into the prime home-buying age groups.
Vigorous economic growth had a major impact on the level and structure of
employment. Total employment showed a greater rise in 1965 than in any other
year of the current expansion. By the year-end, average hours worked by pro-

duction workers in manufacturing had reached a post-World War II record.
Reports of shortages of skilled labor became more persistent as the year pro
gressed, and in a few lines of activity, such as the machine tool industry, labor
shortages appeared to be on the verge of becoming a limiting factor on further
increases in production. The over-all unemployment rate moved down from
5 per cent at the end of 1964 (see Chart 2) to just above 4 per cent in Decem
ber 1965, the lowest unemployment rate since the spring of 1957. The un
employment rate for teen-agers receded from 14.8 per cent in the fourth quarter
of 1964 to 12.9 per cent in the fourth quarter of 1965, a decline particularly
remarkable since it was achieved in the face of the largest gain in the teen-

1965

C h art
. U N E M P L O Y M E N T : T h e u n e m p l o y m e n t r a t e d e c l i n e d in
t o th e
l o w e s t l e v e l in e i g h t y e a r s . U n e m p l o y m e n t a m o n g m a r r ie d m e n f e l l t o a r e c o r d
l o w , a n d t h e r e w a s a d i s t i n c t i m p r o v e m e n t in t h e e m p l o y m e n t s i t u a t i o n o f t e e n
a g e r s and n o n w h ite s .

All data are quarterly averages of seasonally adjusted monthly
figures. Shaded areas denote periods of recession.

age labor force ever recorded. Unemployment rates for all other categories
of workers also moved lower: for married men— workers especially hurt by
joblessness— unemployment fell below 2 per cent by the end of 1965, and
unemployment of fifteen weeks or more duration as a percentage of the
civilian labor force was below 1 per cent for the first time in eight years. Un
employment among nonwhite workers also moved down over the year but, at
7.3 per cent in December 1965, it was almost twice as large as that of whites.
Clearly, the solution of the problem of high unemployment among minority
groups requires a further concerted national effort.
Although the large growth in the labor force in 1965 was more than fully
absorbed, the influx of new inexperienced workers involved problems over and
above their initial absorption. With skilled workers increasingly in short supply,
employers were adding workers with relatively little work experience. Over
half the gain in the labor force in 1965 consisted of teen-agers, whose produc
tivity could not be expected to match that of workers with more experience.
Partly reflecting this fact, productivity (as measured by output per man-hour in
the private economy) showed the smallest year-to-year gain of the current ex
pansion. The 1965 productivity data may even conceal a more marked deteriora
tion in the underlying ability of the economy to utilize labor and material inputs
more efficiently. For example, there may have been a need for business at times
to utilize older and hence less productive equipment— equipment which under
conditions of less vigorous demand would have been retired. In addition, bot
tlenecks, delays, and shortages of parts and materials were reported in a few
lines of activity. While these problems appeared to be temporary pending the
completion of further planned capital outlays, a major long-run challenge to
business centers around the problem of training new entrants into the labor
force. A closer approach to full employment will inevitably create conditions
under which some businesses will not be able to obtain all the skilled and experi
enced workers they would like. As a result, Government policies and business
attitudes toward hiring must reflect the fact that the major sources of unutilized
manpower in the economy now are younger, relatively untrained workers. Ex
panded vocational as well as on-the-job training and further improvements in
general education are clearly required to promote further productivity gains and
thus to curb upward pressures on costs.
The slowdown in the rate of productivity increase in the private economy as
a whole also affected the manufacturing sector of the economy considered sepa
rately. But, despite the tightening in the labor market and despite some labor

settlements late in 1964 and early 1965 well in excess of the wage-price guideposts, unit labor costs in manufacturing apparently did not move up. The
guideposts settlement in steel in September appears to have been beneficial in
stabilizing other wage settlements at a level more in line with productivity gains.
In contrast with the manufacturing sector of the economy, workers in many
lines of nonmanufacturing activity experienced percentage increases in wages
somewhat in excess of those of manufacturing workers. Wage levels in many
lines of nonmanufacturing activity (particularly laundries, hotels, and retail
trade) are, of course, well below wages in manufacturing. Nevertheless, in
creases in the general wage level in excess of productivity gains have a tendency
to raise prices, especially in periods of high and rising economic activity.
In fact, while 1965 was an excellent year in terms of real economic gains,
the record on prices was not so good. There was a distinct acceleration in the
rate of price advances which, if not checked, could conceivably undermine the
balanced nature of the expansion. The consumer price index moved up 2 per
cent during 1965, a rate of advance considerably in excess of the average in
creases of the preceding four years. Furthermore, this increase would have been
about 0.3 per cent higher if it had not been for excise tax cuts, implemented
in July, which substantially reduced the rate of increase in the prices of com
modities other than food. Food prices advanced by more than 3 per cent over
the year, and the price of services, which had risen by close to 2 per cent in each
of the past four years, posted a rise in excess of 2Vz per cent.
Acceleration and broadening of price advances in 1965 were most clearly
evident, however, in wholesale prices, which moved up more than 3 per cent
in 1965 after remaining virtually flat for almost seven years. Prices of farm and
food products accounted for a considerable part of the 1965 advance, but the
step-up in price increases was also reflected in a 1.4 per cent rise in industrial
commodities (see Chart 3). Expanding pressure on capital goods-producing
industries had already begun to affect prices charged by those manufacturers in
1964, and in 1965 price pressures were generally spreading to industrial ma
terials. To be sure, the 1965 price increases were still well below the rate of
advance of nearly 5 per cent per year in industrial prices in the inflationary
period from mid-1955 through 1956; and, while price increases affected a broad
range of commodities, price reductions also took place. For example, prices of
office copying machines, color television sets, cement, and some grades of steel
were marked down in 1965. Nevertheless, the facts of specific price rises and the
tendency for rising prices to become more widely diffused both underscored the
18

C h a r t . C H A N G E S IN C O N S U M E R A N D W H O L E S A L E P R I C E S : C o n s u m e r p r i c e s
m o v e d u p s o m e w h a t f a s t e r in
t h a n in p r e v i o u s y e a r s , w it h f o o d p r i c e s
r i s i n g m o s t r a p i d l y . W h o l e s a l e p r i c e s o f i n d u s t r ia l c o m m o d i t i e s a l s o a d v a n c e d
c o n s id e r a b ly d u r in g t h e y e a r , a f t e r fo u r y e a r s o f d e c l in e s o r s m a ll in c r e a s e s .

1965

Per cent

2 ------------------------r
WHOLESALE PRICES

1961

1962

1963

1964

1965

Data are percentage changes from December to December inthe consumer
and wholesale price indexes and their components (1957-59=100).

need for continued wage and price restraint. Such restraints will be most effective
if they prevent inflationary movements before they get started. Policies aimed at
curtailing an inflation once it is well under way face the burden of overcoming
a speculative psychology— including the cumulation of price-wage increases
that tends to develop once price rises have become widespread— and carry a
greater risk of contributing to the onset of a recession.

Monetary Policy: Moves Toward Restraint
Monetary policy in 1965 continued to promote real economic growth. How
ever, the emphasis in System policy gradually changed from ease toward mild
restraint in response to the increased evidence of the substantial reduction of
previous slack in the economy, rising price pressures, enlarged credit demands,
and the less than satisfactory balance of payments performance. In February
and March, the System began supplying reserves with somewhat greater reluc
tance in response to an exceptionally rapid credit increase early in the year and
to an unusually large deficit in the balance of payments in late 1964 and the first
weeks of 1965. The System’s policy stance then remained roughly unchanged
until early December, when the discount rate and maximum rates on time
deposits payable under Regulation Q ceilings were raised to combat mounting
demand pressures in the financial markets and price increases in excess of those
characteristic of earlier years of the expansion.
As 1965 opened, the money and credit markets had substantially completed
the interest rate adjustments to the November 1964 increase to 4 per cent in the
Federal Reserve discount rate, and to the new higher ceiling rates on bank time
deposits, including time certificates of deposit. The money market was generally
firm, with the rate on Federal funds averaging about 4 per cent (see Chart 4 ). In
the longer term markets, investment demand was strong at prevailing rate levels,
and in early January the United States Treasury found it possible to conduct a
highly successful advance refunding, exchanging $9 billion of new long-term
securities for outstanding issues of shorter maturity. Ninety-day Treasury bill
rates, which were somewhat below the discount rate throughout January, edged
upward in February along with the modest reduction in reserve availability
effected by the System. Reflecting this change in the System’s posture, total
member bank borrowings at Federal Reserve Banks rose above excess reserves for
the first time in the current expansion, so that member banks as a group moved
from a small net free reserve position to average net borrowed reserves of about
$150 million.
With the approach of spring, Treasury bill rates began to edge downward.
State and local governments were heavy buyers of bills during this period, and
the demand for bills was also bolstered by the reflux of short-term capital from
abroad under the voluntary restraint program. Moreover, Federal income tax
receipts were running considerably above expectations, while Federal expendi
tures were being kept under tight rein. Hence, the Treasury accumulated large
20

C h art .
L O N G -T E R M A N D S H O R T -T E R M I N T E R E S T R A T E S : P a r t l y r e f l e c t i n g
h e a v y c r e d i t d e m a n d s , l o n g - t e r m i n t e r e s t r a t e s in t h e l a s t h a l f o f
S m oved
up s ig n ific a n t ly . Y ie ld s o n s t a t e and lo c a l g o v e r n m e n t s e c u r it ie s s h o w e d th e
l a r g e s t i n c r e a s e . T h e i n f l u e n c e o f f i r m e r m o n e t a r y p o l i c y w a s f i r s t f e l t in s h o r t
te r m m a r k e ts , w h e r e r a t e s c o n t in u e d th e r is in g tr e n d th a t h a s p r e v a ile d s in c e
.

196

1961

Data are monthly averages except for certificates of deposit. For this series, the
approximate monthly range of rates is indicated, beginning with April 1963, at
which time a representative number of secondary market rates were first collected.

cash balances at commercial banks through May. Rising Treasury balances were
accompanied by a temporary slackening in the growth of the privately held
money supply.
Despite the downward trend of rates in the Treasury bill market, money
market conditions in the first half of the year remained firm. Bank demand for
reserves to meet an expanding loan demand— especially from business concerns
— continued strong, and Federal funds consistently traded at 4 per cent and
4Va per cent. Indeed, to satisfy the unusually strong loan demand, commercial
banks again permitted their loan-deposit ratios to rise further, to near-record
highs, and reduced their holdings of Government securities. On the other hand,
banks continued to add to their holdings of state and local government securi
ties. (This trend continued throughout the year, and the banks’ total investments
remained about unchanged for the year as a whole). Competition among banks
for loanable funds was reflected in aggressive bidding for time deposits. The
rates on 90-day negotiable time certificates of deposit remained well above the
discount rate throughout the first half of the year, with the result that the yield
spread between Treasury bills and certificates of deposit widened substantially.
In addition, a number of banks moved up rates paid on savings deposits.
Around midyear, the climate in the money and credit markets began to reflect
new elements in the fiscal and economic outlook, and expectations that demand
pressures might ease a bit over the second half of the year rapidly disappeared.
The visible supply of future new corporate securities issues was increasing—
evidence that rising business spending on plant and equipment would probably
require a greater degree of external financing than previously, despite the con
tinued growth of internally generated corporate funds. Moreover, Federal ex
penditures both for defense and for expanded domestic social programs began
to move upward, and it became apparent to market participants that Treasury
financing needs were likely to increase.
By the third quarter of 1965, this outlook began to affect the longer term
credit markets. All long-term securities yields— with the notable exception of
mortgage rates— moved up sharply, and the reoffering yields on new corporate
bond issues for the first time in several years rose considerably above yields
available in the secondary market for corporate bonds. Market rates on municipal
bonds, after approaching a six-year low earlier in the year, began to increase
more rapidly than other long-term yields. Bank credit terms were also stiffening
somewhat, although most loan demands continued to be accommodated readily.
In November 1965, the strength of the economic advance and the reality of
22

inflationary pressures gave impetus to firmer anticipations of impending interest
rate adjustments in the money and credit markets. Money market rates, in
cluding the Treasury bill rate, by that time, were uniformly above the discount
rate, and offering yields on new 90-day time certificates of deposit issued by even
the largest money market banks were firmly at the maximum allowable under
Regulation Q. Against this background, it became apparent to the Federal
Reserve System that interest rate adjustments in the banking sector were im
perative. The discount rate and the prime rate were clearly out of line with pre
vailing market conditions, and the potential for abrupt shifts of funds and a
further tightening in the money market arising from an impending loss of rela
tive competitiveness of banks clouded the financial outlook.
In meeting the problem, the Federal Reserve had two alternatives— either
it could supply additional reserves in greater volume, and thus maintain the
existing rate structure at the cost of further acceleration of credit expansion, or
it could raise the discount rate and liberalize again the maximum rates banks
could pay on time deposits. In the light of current and projected economic and
fiscal trends, the first of these two alternatives seemed inappropriate. The margin
of unemployed manpower and productive capacity had already been reduced
to the lowest level in many years, military operations in Vietnam were placing
ever greater demands on the budget and the economy, and the outlook for 1966
included the results of surveys pointing to another large rise in business capital
outlays. The additions to money and credit availability required to validate the
existing discount and time deposit rates would clearly have added to inflationary
pressures. Indeed, such pressures were already being reflected in key price in
dexes. While restraint was being applied successfully against price increases in
selected commodities, the isolated cases in which substantial Government stock
piles and moral suasion would hold the line could not be counted upon as a firm
defense against broad inflationary forces.
Furthermore, the economy was supplied with ample liquidity, which could
have been mobilized in a burst of anticipatory buying. As Federal spending in
creased in the second half of the year, the high Treasury cash balances accumu
lated in the first six months were steadily reduced. The privately held money
supply expanded rapidly, offsetting the relatively slow growth in the first half of
the year, while time deposits and total liquid assets were continuing to advance
at high rates. For the year as a whole, the money supply— which is a narrow
measure of liquidity— increased 4.8 per cent, more than in any other year of
the prolonged economic expansion. However, since GNP in current dollars grew

even more rapidly, the ratio of money supply to GNP continued to decline in
1965 (and the income velocity of money continued to increase) about in line
with the trend of recent years. In contrast, the money supply plus time deposits at
commercial banks as a ratio to GNP increased rather steadily, moving to record

C h art S.
TH E L IQ U ID IT Y P O S IT IO N O F TH E P U B L IC : T h e p u b lic ’ s t o t a l h o ld
i n g s o f l iq u id a s s e t s r e l a t i v e t o a g g r e g a t e e c o n o m i c a c t i v i t y r e m a i n e d a m p l e in
. T h e r a t io o f m o n e y s u p p ly p lu s tim e d e p o s i t s t o G N P c o n t in u e d t o in
c r e a s e , r e f l e c t i n g in p a r t s t r o n g g r o w t h in c o m m e r c i a l b a n k c e r t i f i c a t e s o f
d e p o s i t . H o w e v e r , t h e r a t i o o f m o n e y s u p p l y t o G N P m a i n t a in e d i t s l o n g d o w n
t r e n d in
, a s t h e p u b lic c o n t in u e d t o e c o n o m iz e o n c a s h h o ld in g s .

1965

Total liquid assets held outside the banking system, which include the money supply,
time deposits, savings deposits and shares, and United States Government savings
bonds and marketable securities due in less than one year, are averages of the
figures for the end of the month preceding, and of the three months in, each quarter.
The money supply-demand deposits and currency in the hands of the nonbank
public-and the money supply plus time deposits at commercial banks are quarterly
averages of daily figures. All data are seasonally adjusted. Shaded areas denote
periods of recession.

levels for the current expansion. Moreover, total liquid assets in the hands of the
nonbank public— the broadest available measure of liquidity— advanced suf
ficiently to keep the ratio of these assets to GNP at the high 1964 level when the
two years as a whole are compared, although the ratio did decline slightly from
the last quarter of 1964 when GNP growth was depressed by strikes (see Chart 5).
Growth in liquid asset holdings, however, was not shared by all sectors of the
economy, as businesses as a group, under the pressure of strong capital spending,
were only able to keep such holdings roughly unchanged.
Against this background of a strong and generally liquid economy, the di
rectors of this Bank and the directors of the Federal Reserve Bank of Chicago
voted, subject to review and determination of the Board of Governors of the
Federal Reserve System, to raise their discount rates from 4 per cent to AV2
per cent, and the Board of Governors approved the increases effective Decem
ber 6. (The discount rates at the other Federal Reserve Banks were raised
within the next week.) Simultaneously the Board increased to 5Vi per cent the
maximum rate payable on member bank time deposits and certificates of de
posit with a maturity of 30 days or more. The previous maximum time deposit
rates had been 4 per cent for maturities of 30 to 89 days, and AV2 per cent on
maturities of 90 days or more. The Board made no change in the 4 per cent
maximum rate payable on savings deposits.
The timing of these Federal Reserve actions caught the market somewhat by
surprise, and interest rates reacted quickly. Commercial banks immediately
raised their prime lending rate from 4Vi per cent to 5 per cent, and auction rates
on 90-day Treasury bills advanced beyond 4 Vi per cent within two weeks, while
rates on new certificates of deposit rose by 25 to 30 basis points over the same
period. To ease these market adjustments and seasonal pressures, the System
provided for ample reserve availability during the weeks immediately following the
discount rate increase, and Federal funds frequently traded well below the discount
rate. The longer term markets probed for higher yield levels, but investment
demand quickly reappeared, and yield advances in these markets were fairly
modest. Furthermore, credit availability remained ample and credit demand strong
in December. The close of 1965 found the money and credit markets in the process
of adjusting to the discount rate and Regulation Q changes.

The Credit and Capital Markets:
Rising Demands Met on Firmer Terms
The capital markets, as noted earlier, tended to tighten in 1965— particularly
in the second half— under the influence of rising credit demands, changing ex
pectations regarding interest rates and monetary policy, and stronger prospects
for further economic growth. As the year closed, interest rates were up signifi
cantly in all sectors of the bond market; moreover, mortgage rates were show
ing signs of firming after years of either marked decline or stability. Never
theless, the economy was amply supplied with the funds needed to finance rapid
growth in real economic activity. Indeed, total funds (net of repayments) raised
by consumers, business, and state and local governments (shown in Chart 6)
increased by $10.6 billion in 1965, to $66.4 billion, a gain far in excess of the
1964 rise of $5.9 billion. Within the increased 1965 total, the specific sources
and uses of funds reflected shifts in the demand for credit among user sectors as
well as changes in the pattern of financial intermediation. For example, rela
tively heavier business borrowing tended to increase the role of commercial
banks in 1965.
One of the significant developments during 1965 was the growth of cor
porate bond issues as the year progressed. For the year as a whole, the out
standing volume of such issues advanced by 7 per cent, and in the last six
months of 1965 it grew at an annual rate of about 8Vi per cent. Retained earn
ings— a key source of corporate investment financing— expanded sharply as
corporate profits increased, while dividend payments remained at about the
1964 level. Nevertheless, the high rate of corporate spending on plant and
equipment and on inventories necessitated increased recourse by business to
outside sources of funds. In the first half of 1965, the need for external finance
was reflected most strongly in borrowing from banks as business accumulated
inventories, including especially steel stockpiles, at a rapid pace. But in the
second half of the year, corporations turned to the bond market for the more
permanent investment funds needed to finance growing capital expenditures, and
their demand for bank loans eased somewhat.
Total corporate holdings of cash, time deposits, and short-term Government
securities remained about unchanged over the year despite the rising level of
sales and hence of working capital needs. Within the total of corporate liquidity,
time deposits at banks increased substantially. Holdings of Government securi
ties, however, declined markedly. Quite possibly, the acceleration of corporate
26

C h art
.
N ET F U N D S R A IS E D B Y P R IV A T E D O M E S T IC N O N F IN A N C IA L S E C
T O R S : F u n d s r a is e d th r o u g h n ew b o r r o w in g and th r o u g h is s u in g o f s e c u r it ie s
(b o t h n e t o f r e p a y m e n ts ) b y h o u s e h o ld s , b u s in e s s , and s ta te an d lo ca l g o v e r n
m e n t s a d v a n c e d s t r o n g l y in
. T h e b u lk o f t h e i n c r e a s e w a s s u p p l i e d b y
c o m m e r c ia l b a n k s . F u n d s p r o v id e d d ir e c t ly b y n o n fin a n c ia l an d n o n d e p o s it a r y
fin a n c ia l s e c t o r s o f t h e e c o n o m y a l s o a d v a n c e d , r e f l e c t i n g in p a r t a n i n c r e a s e
in p u b l i c f l o t a t i o n s o f c o r p o r a t e s e c u r i t i e s .

1965

Billions of
dollars

SOURCES OF FUNDS
| NONFINANCIAL SECTORS
] NONDEPOSITARY FINANCIAL INSTITUTIONS

6 0 -

| SAVINGS AND LOAN ASSOCIATIONS AND MUTUALSAVINGS BANKS

'(■//■A COMMERCIALBANKS

1 960

1961

1962

1963

1964

1965

Funds supplied comprise the total (net of repayment) of the additional obligations of business,
consumers, and state and local governments acquired during a period by (a) nonfinancial
sectors (mainly individuals and nonprofit institutions); (b) nondepositary financial institutions
(primarily insurance companies, pension funds, and finance companies); (c) savings and loan
associations and mutual savings banks; and (d) commercial banks.

tax payments under the 1964 tax law— designed to bring payments into closer
alignment with tax accruals— was a factor of some importance in contributing
to this reduction.
American consumers also relied more heavily on borrowed funds in 1965
than they had in the past few years. Consumer credit outstanding grew more
rapidly in 1965 than at any time in the current expansion as consumer expendi
tures on durables, which are heavily financed on instalments, advanced sharply.
However, consumers as a group again added substantially to savings, and the

growth in their holdings of liquid assets more than matched the increase in
consumer indebtedness.
Demands in the credit markets by state and local governments continued to
expand in 1965, as they have done steadily over the postwar period. In 1965, the
emphasis in state and local expenditures was especially on capital projects such
as schools, water and sewerage facilities, and highways— which typically are debt
financed. Heavy flotations of municipal securities gradually put downward
pressure on market prices, and at the year-end yields on municipals were almost
Vi of a percentage point higher than at the beginning of the year.
The single most important source of funds for the nonfinancial sectors of the
economy in 1965 was the commercial banks. In fact, within a rising total of
credit flows the year witnessed a marked shift from nonbank financial institu
tions toward the banks as a source of finance. Bank credit showed its strongest
year-to-year gain of the current expansion, increasing over the year by 10 per
cent in contrast to an average for the current expansion of around 8 per cent per
year. This strong growth in bank credit, however, was accompanied by a slight
decline in the rate of growth of total credit extended by nonbank depositary
institutions, reflecting primarily a marked slowdown in the rate of growth of
savings shares at savings and loan associations. These institutions are, of course,
in fairly close competition with commercial banks. The slowdown in savings in
stitution credit may in part have reflected the virtual stability in residential con
struction. Given the relatively moderate demand for the type of loans which
savings and loan associations traditionally make, these institutions were under
less pressure to raise rates or undertake promotional efforts in order to attract
funds. A second reason for a slowdown in the credit growth at nonbank de
positary institutions was probably the continued aggressive bidding by commer
cial banks for consumers’ savings deposits. It should be noted that the reduced
rate of growth of the mortgage-oriented savings institutions has not resulted in
a scarcity of mortgage funds, since commercial banks have been increasingly
active in the real estate loan field.
Loans to business accounted for almost half of the increase in total com
mercial bank credit in 1965 and for most of the margin of increase in bank
credit growth over the 1964 pace. As in the case of total credit flows, how
ever, lending to business by banks also reflected in part a shifting pattern of
financing. While the bulk of the enlarged business borrowing resulted from ris
ing credit needs, some of the increase also appears to have reflected substitution
of bank borrowing for funds usually obtained by issuing directly placed com
28

mercial paper. This shift— encouraged by the high rates on money market in
struments relative to the banks’ prime rate during virtually all of 1965— was
most marked in the first quarter of the year. In the face of generally rising rates
on money market instruments following the discount rate and Regulation Q in
creases of November 1964, prime risk borrowers, who had access to both the
commercial paper market and bank loans, chose to borrow from banks which
were then maintaining their lending terms relatively unchanged from the previous
year. The volume of commercial paper outstanding declined in the first quarter
after advancing strongly in 1964, while bank loans to commercial and industrial
borrowers advanced at an annual rate in excess of 25 per cent in the first
quarter. Moreover, while bank loans to business increased more moderately
over the remainder of the year, they continued to advance more strongly through
out 1965 than earlier in the expansion. Meanwhile, commercial paper outstand
ing resumed its upward trend after the first quarter in spite of its fairly high
relative cost to borrowers.
In addition to strong demands on the capital markets by the private nonfinancial sectors of the economy, the year 1965 also saw a marked increase in
securities flotations by financial institutions, and particularly by commercial
banks. To help meet the loan demands of their customers and capital needs,
banks augmented deposit inflows by raising about $1.5 billion through issues of
new debentures and equities. The banks also raised several hundred million
dollars of short-term funds through sale of promissory notes or “ acknowledg
ments of advance” .
In summary, the capital markets during 1965 reflected the strength of the
economic expansion. The demand for funds of all maturities rose as individuals,
business, and state and local governments and other official entities all sought
additional financial resources needed to support larger spending. Monetary policy
facilitated bank credit growth and associated credit growth from other sources
at a rate sufficient to finance enlarged outlays without a major strain on the
liquidity of the nonfinancial sectors of the economy, but interest rates were per
mitted to rise and exercise some moderating influence on credit demands.

THE UNITED STATES AND TH E
WORLD ECONOMY
The United States Payments Balance:
Distinct but Insufficient improvement
The United States balance of payments in 1965 showed a distinct but still in
sufficient improvement (see Chart 7, and note on concepts on pages 32-33).
Much of the progress may be traced to the President’s balance of payments pro
gram which was first announced on February 10, 1965. United States deter
mination to take the steps necessary to correct the persistent imbalance in its in
ternational payments was underscored toward the year-end by a tightening of
the President’s program, which was further supported through the increase in
the Federal Reserve discount rates and in the ceilings on time deposit rates.
The reduction of the deficit from $2.8 billion in 1964 to $1.3 billion in 1965
was spread unevenly over the year and over the major components of our
international transactions. A substantial deficit in the first quarter, partly reflect
ing large capital outflows, was followed by a second-quarter surplus— as the
President’s program became effective— and by relatively moderate deficits in
the third and fourth quarters. For the year as a whole, the United States private
capital outflow was reduced considerably and the surplus on services was in
creased, but these favorable changes were accompanied by a marked decline in
the merchandise trade surplus and a contraction of foreign (primarily official
British) portfolio investments in this country.
Outflows of United States private capital had risen from $4.5 billion in 1963
to $6.5 billion in 1964 and were especially high in late 1964 and early 1965.
The interest equalization tax on United States purchases of foreign securities
proposed in mid-1963 and monetary and debt management techniques held
back some outflows, but others accelerated. In order to achieve a decisive im
provement, the President’s balance of payments program placed special em
phasis on reducing the capital outflow through voluntary restraint— financial in
stitutions and business concerns were requested to limit their foreign lending
and investment activities. Voluntary credit restraint was conceived as, and
continues to be considered, a temporary measure to remain effective only until
30

C h art
.
T H E U N IT E D S T A T E S B A L A N C E O F P A Y M E N T S A N D I T S M A J O 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 i n t e r n a t io n a l p a y m e n t s d e f i c i t ( a s m e a s u r e d
b y t h e l iq u id i t y b a l a n c e ) r e m a in e d l a r g e in
, a lth o u g h t h e r e w a s a d i s
t in c t im p r o v e m e n t. M o s t o f th is im p r o v e m e n t r e fl e c t e d a r e d u c e d o u t flo w o f
p r iv a t e c a p it a l. A s m a lle r tr a d e s u r p lu s a n d le s s n e t f o r e i g n n o n liq u id i n v e s t
m e n t s in t h e U n it e d S t a t e s w e r e i m p o r t a n t a d v e r s e f a c t o r s .

1965

1964

BgejaB

1965 (p r e lim in a r y )

NET PAYMENTS

NET RECEIPTS

LIQUIDITY BALANCE
TRADE BALANCE

INCOME ON DIRECT INVESTMENTS

OTHER NONMILITARY SERVICES *

DIRECT INVESTMENTS
OTHER UNITED STATES PRIVATE
LONG-TERM CAPITAL t
UNITED STATES PRIVATE
SHORT-TERM CAPITAL
MILITARY SALES AND EXPENDITURES
UNITED STATES GOVERNMENT
GRANTS AND CAPITAL
FOREIGN NONLIQUID CAPITAL

ERRORS AND OMISSIONS

1 2

Billions of dollars

Includes transportation, travel, income on investments (other than direct
investments), pensions,and transfers.
Net United States purchases of foreign securities, UnitedStates bankterm
loans, and long-term commercial credits.
+ Foreign investments in thiscountry, prepayments for military shipments, and
purchases of non marketable nonconvertible United States Treasury securities.
t

BA LA N CE OF PA YM EN TS CO N CEPTS

The United States balance of payments is an accounting record of all
residents’ payments to, and receipts from, foreigners. A surplus or
deficit is struck by taking the net sum of certain types of transactions.
This sum is commonly referred to as the “above-the-line” balance.
The remaining transactions are the “below-the-line” counterpart of
this sum.
The “balance on liquidity basis” is the net sum of identifiable
transactions in merchandise trade, services and transfers, United
States private capital, United States Government grants and capital,
and foreign nonliquid capital, as well as transactions that cannot be
identified. This sum gives rise to a change in the United States inter
national liquidity position. A change in this position is measured by
changes in United States monetary reserves and its liquid liabilities
to all foreigners. A deficit worsens this position by reducing monetary
reserves, or by increasing liquid liabilities, or both; a surplus has the
opposite effects. The liquidity balance is currently one main measure
of the United States international payments accounts published quar
terly by the Department of Commerce in the Survey of Current Busi
ness. (A variant of this balance often used in the past few years,
that of the “balance on regular transactions” , differs from the liquidity
balance by treating net receipts from certain special United States
Government transactions “below the line” . These special receipts
amounted net to $0.3 billion in 1964 and $0.6 billion in 1965. The
deficit on this basis thus was $3.1 billion in 1964 and $1.9 billion in
1965.)
An alternative measure published in the Survey, the ‘‘balance on
basis of official reserve transactions”, is a preliminary Department of
Commerce adaptation of a concept recommended by the Governmentappointed Review Committee on Balance of Payments Statistics
which submitted its report in 1965. In this concept, changes in
reserve assets of monetary authorities in this country and abroad
are considered as settling the balance arising from all other trans
actions. It therefore differs from the liquidity balance primarily
by including changes in private foreigners’ liquid claims on this
country as part of the “ above-the-line” balance. (A second difference

relates to the dissimilar treatment, in the two balances, of certain United
States nonliquid liabilities to foreign monetary authorities.) By this
official transactions measure, the deficit totaled $1.2 billion in 1964
and $1.4 billion in 1965. Because private foreigners increased their
liquid claims on this country substantially in 1964, the official transac
tions balance shows a much smaller deficit than the liquidity balance
for that year.
The proper interpretation of the official transactions balance, how
ever, depends largely upon the factors underlying the change in pri
vate foreigners’ liquid dollar holdings. If increases in such holdings
reflect primarily strengthened confidence in the dollar or private mar
ket incentives rather than official action, they may represent a gen
uinely favorable factor in the United States payments position. On
numerous occasions, however, private foreigners have been induced
by official exchange operations— undertaken by United States as well
as by foreign monetary authorities— to enlarge or to contract their
dollar holdings, as the counterpart of opposite movements in official
dollar holdings. Such official operations may serve the domestic
monetary policy objectives of foreign authorities, or may be a part
of the techniques of international financial cooperation. In either case,
such variations would be misinterpreted if viewed primarily as reflect
ing greater or less attractiveness to private foreigners of liquid dollar
claims as an investment or financing medium. Furthermore, the total
of these operations varies greatly from period to period. It is also
true that strong speculative attacks on a currency may lead to large
but strictly temporary shifts of dollar holdings out of private foreign
into official foreign hands. These and similar variations heavily in
fluence the official transactions measure of the United States balance
of payments over many accounting periods. The liquidity balance is
not similarly affected by such transfers, for under that concept the
net change in United States liquid liabilities to all foreigners, private
and official, falls “below the line” . On the other hand, the liquidity
balance, by failing to treat part of the growth of private foreign
dollar holdings as a capital inflow, does not take into account the
favorable effect that arises from the desire of private foreigners to
increase over the years their dollar holdings for the purposes of in
vestment or financing international trade.

underlying forces bring our international payments into balance. A voluntary
approach was deemed preferable to legislative measures, which often have too
sweeping an effect, are subject to delay before coming into force, and may re
main on the books longer than absolutely necessary. The program also included
implementation of the Gore Amendment— which provided for the extension of
the interest equalization tax to most bank loans with a maturity of one year or
more to developed countries— and a request for legislation (with which Con
gress subsequently complied) to prolong this tax and to broaden its coverage to
nonbank credits of one to three years. The program was supported by a move
toward monetary restraint early in the year, as already noted.
These measures helped limit the 1965 outflow of United States private capital
to about $3.5 billion, or $3.0 billion less than in 1964. Long-term outflows
were reduced from $4.4 billion in 1964 to $4.2 billion, and the $2.1 billion
short-term capital outflow of 1964 was replaced by a return flow of $0.7 billion.
The reduction in the rate of long-term outflow reflected primarily a decline in
term lending by banks, for net purchases of foreign securities issues by United
States residents were approximately the same as in 1964, while corporate direct
investment abroad was actually higher. The reversal of short-term capital flows
took the form mainly of a sharply reduced outflow of short-term bank loans and
acceptances, and of a repatriation of short-term balances held abroad by busi
ness corporations and by nonbank financial institutions.
Administration of the voluntary restraint program was shared between the
Federal Reserve System and the United States Department of Commerce. The
System, in cooperation with the United States Treasury, was made responsible
for working with financial institutions. The Commerce Department, also in co
operation with the Treasury, was given the task of working with nonfinancial
corporations.
In administering its part of the program, the System issued guidelines to the
commercial banks requesting them to limit the increase in their foreign claims
during 1965 to no more than 5 per cent of the amount outstanding at year-end
1964. Within this ceiling, banks were to give priority to the financing of United
States exports and to loans to less developed countries and were to avoid placing
an undue burden on the balance of payments of Canada, Japan, and the United
Kingdom. While in early 1965, before announcement of the voluntary program,
the outflow of bank credit to foreigners had been heavy, commercial banks as
a group subsequently reduced their outstanding credits so that by year-end 1965
these credits were less than 2 per cent above the end-1964 base. Factors
34

other than the restraint program of course also affected the amount of bank
credit extended to foreigners. Some foreign borrowers had already exhausted
the credit lines United States banks were prepared to grant them when the pro
gram was announced. Furthermore, considerably stronger domestic demand
for bank loans and the further reduction of the banks’ liquidity positions may
have made foreign lending less attractive, while the firming of interest rates
here— plus the interest equalization tax— and slower growth of economic activity
in some foreign countries may have moderated foreign credit requests.
Most of the bank credit extended to foreigners in 1965 prior to the Presi
dent’s program was in the form of term loans. Subsequently, term loans were
reduced— principally in the second quarter when several large banks sold a
portion of their loans to branch offices abroad. On balance, outstanding short
term and long-term bank credit to foreigners rose only moderately for the year,
although term lending to less developed countries approached the same amount
as during 1964, a record year for such loans.
The guidelines established for nonbank financial institutions were broadly
similar to those for banks and also met with a favorable response. The 1965
increase in foreign credits maturing in ten years or less was to be kept within 5
per cent of the amount outstanding at year-end 1964, and short-term investments
in foreign money markets were to be reduced to the year-end level of either 1963
or 1964, whichever was lower.
The main change in System guidelines for 1966, announced on December 6,
was a boost in the credit ceiling for banks and nonbanks to 109 per cent of the yearend 1964 base (more precisely, the ceiling rises by 1 percentage point per quar
ter). Special allowances for banks with small base-date credits to foreigners are
expected to add about 1 percentage point to the over-all ceiling for 1966,
making possible foreign credit expansion for the banking system as a whole
about equal to that provided for 1965. Also, an additional ceiling was estab
lished for nonbank financial institutions, applicable to credits and investments
of more than ten years’ maturity to developed countries.
In administering its part of the 1965 program, the United States Department
of Commerce asked United States firms with substantial business abroad to im
prove by 15 to 20 per cent the aggregate of selected components of their indi
vidual balance of payments. The choice of means to achieve this target was left
to the cooperating corporations, which could increase their exports, accelerate
repatriation of income from their direct investments abroad, or decrease their
direct investments financed from this country by postponing or canceling marginal

direct investment in developed countries and by relying more on foreign financ
ing. In addition to the targeted improvement, cooperating firms were requested
to reduce their short-term investments held abroad to a level no higher than the
amount outstanding at the end of 1963. The actual results for 1965 included
a substantial reduction of short-term investments held abroad, some export
gains, a further increase in the repatriation of direct investment income, and
substantially larger borrowing in foreign markets. On the other hand, direct
investment outflows— which had reached the very high level of $2.4 billion in
1964— continued to mount, especially in early 1965, and in the first three
quarters alone surpassed the 1964 total. Estimates for 1966 of projected plant
and equipment expenditures abroad by United States firms indicated the pros
pect of continued heavy outflows. In order to moderate the unfavorable impact
of these expenditures on the 1966 payments balance, the Department of Com
merce strengthened the applicable guidelines late in 1965, mainly by enlarging
the number of cooperating firms and by suggesting a ceiling on the sum of direct
investment and earnings retained abroad, less financing obtained from foreigners
by domestic firms, applicable to a broad group of foreign countries.
United States residents made net purchases of about $0.7 billion in foreign
securities in each of the years 1964 and 1965. Canada floated the bulk of the
new issues in both years. This type of outflow from the United States would
undoubtedly have been higher in 1965 had not a number of Canadian new
issues been postponed from the fourth quarter until the first quarter of 1966 in
accordance with an intergovernmental understanding. Foreigners reduced their
holdings of United States corporate securities by $500 million during the sec
ond and third quarters. A large part of this decline reflected British Govern
ment sales from its portfolio of such securities and the conversion of these
funds into more liquid dollar assets. (These holdings serve as a secondary line
of defense for the pound and do not show up in the figures on official British
gold and foreign currency reserves.) An increase in other foreign nonliquid
holdings, however, including substantial prepayments for military shipments,
resulted in a small net inflow for this component of the balance.
The net change from 1964 to 1965 in United States Government military
sales and expenditures was small, as was the change in official grants and net
capital outflows. Some increases in military expenditures and in foreign aid were
offset by larger military sales and increased foreign repayments of Government
loans.
A major adverse factor in the 1965 payments performance was a decrease
36

in the trade surplus from $6.7 billion in 1964 to $4.8 billion in 1965— a level
slightly below the 1960-63 average. The decline from 1964 was the result of a
slower advance in exports and a more rapid rise in imports than in the preceding
year.
Exports in 1965 rose only 4 per cent above the 1964 level, following a 15
per cent advance the previous year. (About the same amount of our exports as
in 1964 represented shipments under Government-aid programs.) Much of the
slower rise in commercial exports can be explained by cyclical and policy
developments abroad. Some slowing-down of the rate of growth in economic
activity in a number of European and Latin American countries and in Japan
retarded these countries’ purchases from the United States (as well as from
other areas). There was no repetition of the large Eastern European wheat
purchases. But developments in the United States also limited the 1965 export
rise. Anticipation of the dock strike in the first months of the year caused the
shift forward of some exports to late 1964, and strike-caused delays may have
led some customers to place orders elsewhere. In addition, buoyant domestic
demand may, in some cases at least, have interfered with prompt delivery. It
is noteworthy, however, that the United States export performance tended to
improve in the second half of the year when exports ran about 10 per cent above
the average for the year 1964.
Imports, on the other hand, rose 15 per cent as against an increase of 10
per cent in 1964. The import increase in both years was much faster than the
growth in gross national product. An exceptional rise in steel imports— partly
for stock-building in anticipation of a possible steel strike— accounted for some
of the 1965 increase. But there was also a rapid rise in other manufactured im
ports which are directly competitive with similar goods produced in the United
States. The 1965 record thus strongly reaffirms the need for price stability in the
United States and for competitiveness of American industry and agriculture. For
the longer term, an enlarged trade and services surplus is essential for ending
our payments deficits.
The services account was worsened in 1965 by a rise in United States
residents’ net payments to foreigners for transportation and travel. The growth
in recent years of United States tourist expenditures abroad led to inclusion in
the President’s program of a “ See the U.S.A.” campaign and a further limitation
on duty-free exemptions for returning tourists. The loss of freight earnings
stemming from the summer maritime strike also contributed to the rise in net
transportation payments.

The counterpart of our payments deficit was a worsening of the United States
liquidity position— i.e., total monetary reserves less liquid liabilities to all for
eigners. United States monetary reserves fell by $1.2 billion in 1965— almost the
amount of the deficit. Gold reserves declined $1.7 billion, as against a loss of
$125 million in the preceding year. About half the 1965 gold sales occurred
during the first quarter. France, with a persistent payments surplus and a policy
of converting dollars into gold, accounted for more than half the first-quarter
gold loss and was the largest single purchaser for the year as a whole. The
heavy 1965 gold loss is a clear reminder that sizable United States balance of
payments deficits cannot be allowed to continue.
The gold losses were partially offset by an improvement in the United States
reserve position with the International Monetary Fund (IMF) and a rise in con
vertible foreign currency holdings. The United States transferred $259 million
in gold to the IMF in June in payment for the gold portion of our quota increase,
thereby raising our automatic drawing rights with the Fund. The dollar compo
nent of Britain’s Fund drawing in May ($200 million) also added to the United
States reserve position with the Fund, but three United States drawings (in
March, July, and September), totaling $435 million equivalent, reduced it. These
and other transactions resulted in a net improvement in the United States position
at the Fund of $94 million. Another factor tending to increase United States
monetary reserves was a $349 million rise in holdings of convertible foreign
currencies, due largely to an expanded foreign use of swap arrangements with
the Federal Reserve System. Liquid liabilities to all foreigners rose only slightly
in 1965. Foreign authorities reduced their holdings by about $50 million, while
private foreigners and nonmonetary international institutions increased their
holdings by about $130 million.

International Monetary Cooperation:
A Year of Progress and Study
In 1965, monetary cooperation continued to play a major role in preserving ex
change rate stability, and at the end of the year the markets for all the major
currencies were calm and orderly. During the year, the monetary authorities
made further progress in strengthening the international financial system. Inter
national resources available to meet temporary payments imbalances were
increased, United States authorities made additional use of International
Monetary Fund drawing rights and paid off substantial short-term commit
ments previously incurred through international monetary operations. Fur
thermore, ways to assure an adequate supply of reserves and credit facilities for
the world economy in the future were explored.
International monetary cooperation again aided in the defense of sterling. The
pound came under renewed selling pressure early in 1965, and doubts arose
as to whether the measures taken by the British Government late in 1964 to
curb excessive domestic demand and to restrain the inflationary trend of wage
settlements would be sufficient to eliminate the balance of payments deficit.
Despite a $1.4 billion British drawing from the IMF in May (which permitted
repayment of previously received short-term central bank credits), market senti
ment regarding sterling remained skeptical and the British authorities made
further use of credit facilities in resisting exchange market pressures. New
financial arrangements to support the pound, announced on September 10, were
made by the Bank of England with the monetary authorities of ten countries
(including the United States) and the Bank for International Settlements (BIS).
Improved British balance of payments figures and operations conducted under
the new arrangements brought about a sustained improvement in sterling rates
during the fall and winter. The Bank of England was able to recoup a part
of its earlier reserve losses, and its official gold and foreign currency reserves
expanded even after substantial repayments of central bank assistance and
liquidation of maturing forward exchange market commitments.
International monetary cooperation also played an important role in dealing
with the large Italian balance of payments surplus that emerged in 1964 and
continued through 1965. The Italian authorities minimized the impact of this
surplus on the exchange markets and on United States reserves by channeling a
large part of their dollar accruals to Italian banks, which in turn placed signifi
cant amounts in the Euro-dollar market. The renewed flow of funds into the

Euro-dollar market eased the tightness that had developed in that market when
voluntary credit restraint in the United States led to withdrawals of dollar de
posits from London. The United States shared in official Italian contracts to
purchase forward dollars from Italian commercial banks, as had previously been
done from January 1962 through March 1964. In addition, the United States
purchased dollars from the Italian authorities with lire which were acquired by
drawings under the Federal Reserve System lira swap arrangement, the sale of
a lira-denominated bond to the Bank of Italy, a drawing on the IMF, and pur
chases from third countries. The financing of Italy’s balance of payments surplus
through cooperative action, following as it did a period of Italian deficits and inter
national support for the lira, again demonstrated the reciprocal nature of existing
international credit and currency arrangements.
The access to credit under the Federal Reserve swap network was enlarged
to a total of $2.8 billion in 1965 through increases in swap facilities with the
Bank of Italy (from $250 million to $450 million), the Bank of Japan (from
$150 million to $250 million), and the BIS (from $150 million to $300 million).
Six of the twelve currencies available through reciprocal credit arrangements
were actually used during the year; the United States drew five currencies, while
one country— the United Kingdom— drew on its facilities with the Federal Re
serve. These transactions were supplemented with substantial foreign exchange
market operations undertaken by the System and by the United States Treasury.
The Treasury also issued $123 million (net) of convertible foreign currency
bonds, raising the amount of outstanding nonmarketable foreign currency bonds
to $1,208 million at the year-end. The reversible nature of these borrowings was
illustrated in 1965 when— during a period of German payments deficits— the
United States Treasury was able to acquire Deutsche marks and to repay $75
million equivalent of mark-denominated bonds previously issued to the German
Federal Bank. Other Treasury transactions in securities denominated in foreign
currencies included new issues to Italy ($125 million), Austria ($50 million),
and the BIS ($23 million).
A major step toward augmenting the resources available for coping with
international payments disequilibria was taken early in 1965 when the governors
of the IMF approved a 25 per cent increase in the quotas of all member coun
tries, with additional special increases for sixteen members. As a result, total
quotas in the Fund will be raised from about $16 billion to possibly as much as
$21 billion. By the end of the year, members accounting for more than 60 per
cent of the total quotas— almost the necessary two thirds— had ratified the in
40

crease. Since 1962, Fund resources have been supplemented by a $6.0 billion
standby credit with ten major industrial members, the Group of Ten, subscribing
to the General Arrangements to Borrow. These arrangements were renewed
in September and now run to October 1970.
Much of the increase in foreign official monetary reserves in recent years has
consisted of dollars accumulated by foreign central banks as a result of United
States payments deficits. United States determination to end these large deficits
means that other countries can no longer count on such deficits as a regular
source of reserves. In this new situation, the problem of what ought to be done
should the present adequate supply of liquidity not suffice at some point in the
future requires thorough exploration. Secretary of the Treasury Fowler an
nounced in July that this country was ready to participate in an international
monetary conference on this subject and appointed an advisory committee
headed by former Secretary of the Treasury Douglas Dillon to help prepare for
future discussions.
Major differences of view, however, have emerged around the world on the
question of how much international liquidity will be required to support growth
in world trade and investment. Other differences concern the proper approach
to any future creation of additional reserves. Explorations range from means of
expanding IMF and other credit facilities, including the further development of
automatic drawing rights on multilateral credit facilities, to creation of a new
reserve unit. At the September Fund meeting, the ministers and central bank
governors of the Ten instructed their deputies to proceed with the work of deter
mining what agreement could be reached on any needed improvements in the
monetary system, and urged that consultations proceed with the Fund as to how
these recommendations might best be brought up for review in a wider forum.
The ministers and governors also noted that the required amount of international
reserves depends in large part on the ability of countries to adjust quickly to eco
nomic changes, so that major and persistent payments imbalances can be
avoided. Thus they requested an early report on the international adjustment
process by a study group in the Organization for Economic Cooperation and
Development.

In d u s tria liz e d C o u n trie s : M ix e d T re n d s
In the major industrialized countries abroad, economic growth generally pro
ceeded less rapidly during 1965 than in earlier years, although industrial activity
continued at high levels in virtually all countries and price pressures remained
strong (see Chart 8 ).

International payments imbalances were on the whole

somewhat less severe than in the previous year. However, the broad picture

C h art
.
P R O D U C T I O N A N D P R I C E S IN S E L E C T E D C O U N T R I E S : In t h e m a j o r
f o r e i g n d e v e l o p e d c o u n t r i e s , in d u s t r ia l p r o d u c t i o n g e n e r a l l y a d v a n c e d l e s s
r a p i d l y in
t h a n in e a r l i e r y e a r s . N e v e r t h e l e s s , a c t i v i t y c o n t i n u e d a t h i g h
l e v e l s in v i r t u a l l y a ll c o u n t r i e s , a n d p r e s s u r e s o n p r i c e s b y a n d l a r g e r e m a in e d
stron g.

1965

Index numbers based on 1957-59 average=100. Ratio scales on left
and right panels are not identical. Industrial production data, except
forthe Netherlands,are seasonallyadjusted.Consumer pricedataare
not seasonally adjusted.

conceals divergent trends among individual countries. In some countries, in
cluding especially Canada, economic growth was swift, and the slack that had
remained in employing productive resources was largely eliminated. In a num
ber of other countries, including Germany, industrial production rose at
a slower pace than in 1964, and price pressures grew as strains on available
resources increased. Elsewhere— especially in France, Japan, and the Nether
lands— industrial production leveled off or actually declined temporarily.
These variations in the pace of economic activity and in price movements sub
stantially influenced external payments positions abroad, as did the decline in
the United States payments deficit. In some countries, the external accounts
improved— the United Kingdom’s deficit declined while Italy’s surplus increased.
In other countries, including Germany and Sweden, the external positions wors
ened. A number of the major countries tended to conduct their official policies
more with a view toward their external positions than in previous years. At the
year-end, the range of central bank discount rates (see Chart 9) and of short
term interest rates appeared to be somewhat narrower than at the end of 1964.
Among the policy measures taken in 1965, the comprehensive restraint pro
gram adopted in the United Kingdom commanded the most attention. Begin
ning in the fall of 1964 and through most of last year, the British Government
sought to develop a combination of domestic and foreign economic policies that
would be stringent enough to curb excess domestic demand, retard the increase
of costs and prices, and diminish the serious external payments gap. This broad
attack included tax increases and reforms, tightening of credit, retrenchment
in government spending, curbs on imports and on exchange outlays subject to con
trol, improved assistance to exporters, and a firmer policy limiting wage in
creases. Cumulatively, the British program came to represent a substantial re
straint package, and its effect was being felt increasingly as 1965 drew to a
close.
A number of countries besides the United Kingdom found it necessary to
introduce or maintain some degree of restraint last year. Germany, faced with
rising prices, a deteriorating trade balance, and a congested capital market, con
siderably reinforced restrictive measures. Sweden had somewhat similar prob
lems, and policy remained oriented toward restraint. In Austria, Canada, the
Netherlands, and Switzerland, where inflationary pressures were somewhat
milder, restraints were generally of less severity.
In several countries in which earlier restrictive measures had been followed by
a substantial slowing-down of economic growth— Belgium, France, Italy, and

C h art
.
C E N T R A L B A N K D IS C O U N T R A T E S : T h e r a n g e o f c e n t r a l b a n k d i s
c o u n t r a te s at y e a r -e n d
S w a s n a r r o w e r th a n a t y e a r -e n d
. T h e U n it e d
K in g d o m in
r e d u c e d its r a te fr o m th e
p e r c e n t “ c r i s i s ” le v e l in s t it u t e d
l a t e in
. F r a n c e , w it h a f a v o r a b l e e x t e r n a l p o s i t i o n , a n d J a p a n , w it h a
m a r k e d l y i m p r o v e d b a l a n c e , r e d u c e d t h e i r r a t e s . A m o n g c o u n t r i e s w it h b a l a n c e
o f p a y m e n t s d e f i c i t s , t h e U n it e d S t a t e s r a i s e d i t s r a t e , a s d id G e r m a n y .

1965
1964

1964

1965

196

1964

1965

1964

1965

1964

1965

1964

1965

Japan— stimulative policies were continued or adopted. However, with prices
in these countries still rising and the margin of unemployed resources remaining
thin in most cases, stimulatory efforts generally were cautious. A noteworthy
aspect of foreign official policies, both of restraint and ease, is that the authorities
of many countries are increasingly searching for a more balanced mix of mone
tary and fiscal instruments to deal simultaneously with internal and external
imbalances.
44

The Less Developed and Eastern
European Countries
The need to raise living standards in the less developed countries remained an
urgent problem in 1965. In these countries, high rates of population growth
continued to limit or prevent a rise in per capita income in spite of production
gains, and the need for a greater effort to utilize domestic and foreign
resources effectively for economic development was still apparent. Internal and
external political strife also was a cause of economic setbacks in a considerable
number of such countries. At the same time, the major industrial countries have
not significantly raised the level of their development assistance in the last few
years, even though a number of underdeveloped countries, according to the
World Bank, have the capacity effectively to absorb larger capital inflows than
they have been receiving. On the whole, the less developed countries in 1965
probably did not match their 1964 progress.
Progress was made in the establishment of regional development organiza
tions. The African Development Bank, founded in 1964, added to its paid-in
capital and plans to begin accepting loan applications in 1966. The Asian De
velopment Bank charter was agreed upon, and commencement of the bank’s
operations is expected in the near future. Operation of the Latin American Free
Trade Association and the Central American Common Market resulted in ex
panded trade among their respective members.
A number of countries of Eastern Europe continued to make efforts during
1965 to introduce significant reforms for the purposes of raising productivity
and achieving a better allocation of resources. In particular, there were addi
tional moves to reduce central administrative controls and to give scope to de
cisions taken at the industrial management level. Consumer demands and
preferences were given increased weight in guiding production decisions; some
additional incentives were introduced, both in industry and in agriculture; and
some efforts were made to make the price structures more rational and flexible.
More generally, the last few years have witnessed noteworthy developments in
Eastern Europe, such as considerable experimentation in economic policy and
less rigid adherence to received doctrine. East-West trade probably rose again in
1965, but United States trade with Eastern European countries fell below the
1964 level, mainly because the grain purchases made from the United States in
1964 were not repeated. There were, however, large Soviet grain purchases from
other Western countries.

THIS BANK’S OPERATIONS
Volume and Trend of the Bank’s Operations
d o m e s tic o p e r a t io n s .
During 1965, the volume of services this Bank
performs for the public continued to expand. This steady upward trend basically
reflects the expansion of the domestic economy.
Checks processed by the Bank (exclusive of United States Government
checks and postal money orders) rose to a new record. The number of checks
handled advanced nearly 3 per cent to 722 million and the dollar amount 19
per cent to $528 billion. The comparable increases in 1964 over 1963 were 6
per cent in number handled and 17 per cent in dollar amount. Both checks
drawn on this Bank and those drawn on commercial banks shared in the gain
in dollar volume, rising 25 per cent and 16 per cent, respectively.
The growth in money transfers processed by this Bank through the Federal
Reserve System’s leased wire network continued. The number of wire transfers
effected rose 9 per cent to just over 1 million, while dollar volume advanced 10
per cent to $1,715 billion, about the same rates of increase as in the immediately
preceding years. A part of this steady growth is attributable to increased activity
in the Federal funds market; the leased wire facilities are used for the bulk of
such transactions.
With the installation of two new high-speed check-processing systems in
1965— which brought the total now in operation to eight— the check collection
function concluded the transition to fully automated facilities. By December,
about 90 per cent of all checks dispatched were processed on the electronic
equipment, up from 64 per cent a year earlier. The remaining 10 per cent either
were high-speed rejects or were not compatible with high-speed operations. The
percentage of checks preprinted with Magnetic Ink Character Recognition
(MICR) symbols flowing into the Bank rose to about 97 per cent from 94 per
cent in 1964. To increase efficiency and lower costs, the Bank in 1966 will
replace six of the existing systems with new ones of greater capacity.
The enactment on July 23 of the Coinage Act of 1965 marked an important
shift in coinage policy in the United States. Burgeoning demand for silver over
the past few years had placed a severe drain on Government stocks of silver

SOME M EA SU RES OF TH E VOLUM E O F OPERATIONS O F
THE FED ER A L R E SE R V E BANK OF NEW YO R K (Including Buffalo Branch)

Number off pieces handled (in thousands) *
Currency received.....................................................................
Coin receivedf ........................................................................
Gold bars and bags of gold coin handled...............................
Checks handled:
United States Government checks.........................................
All other................................................................................
Postal money orders handled...................................................
Collection items handled:
United States Government coupons paid...............................
Credits for direct sendings of collection items......................
All other..........................................................................
Issues, redemptions, exchanges by fiscal agency departments:
United States savings bonds.................................................
All other obligations of the United States and Federal agencies
Obligations of the International Bank for Reconstruction and
Development..........................................................................
Obligations of the Inter-American Development Bank............
Participation certificates of the Federal National Mortgage
Association ............................................................................
Safekeeping of securities:
Pieces received and delivered...............................................
Coupons detached .................................................................
Wire transfers of fu ndst.........................................................

1965

1964

1,455,219
678,248
430

1,426,131
556,807
203

63,259
722,005
31,533

60,937
703,430
33,233

3,581
339
18,689

4,007
325
19,022

30,814
8,565

29,719
8,510

122
13

98
59

8,521
5,767
1,011

8,135
6,193§
924

Amounts handled (in millions of dollars)
Discounts and advances||.........................................................
Currency received.....................................................................
Coin receivedf ........................................................................
Gold bars and bags of gold coin handled................................
Checks handled:
United States Government checks.........................................
All other................................................................................
Postal money orders handled...................................................
Collection items handled:
United States Government coupons paid...............................
Credits for direct sendings of collection items......................
All other................................................................................
Issues, redemptions, exchanges by fiscal agency departments:
United States savings bonds.................................................
All other obligations of the United States and Federal agencies
Obligations of the International Bank for Reconstruction and
Development..........................................................................
Obligations of the Inter-American Development Bank............
Participation certificates of the Federal National Mortgage
Association ............................................................................
Safekeeping of securities:
Par value pieces received and delivered...............................
Wire transfers of fu n dst.........................................................

24,327
9,968
48
5,994

11,686

22,897
527,745
613

23,629
443,195
618

2,834
820
3,841

2,925
724
3,656

1,750
589,451

1,727
590,742

893
46

630
209

2,635

786

724,282
1,715,001

717,402
1,554,372

9,582
65
2,901

★ Two or more checks, coupons, etc., handled as a single item are counted as one "piece” ,
t Excludes shipments of new coin from the Mint.
$ Excludes Treasury transfers between Federal Reserve Districts.
§ Revised.
|| The number of discounts and advances handled in 1965 was 1,555, compared with 1,248 in 1964.

bullion. The act authorized the minting of new dimes and quarters containing
no silver, and of half-dollars with a greatly reduced silver content. Late in the
year, the new quarters began to be released for circulation. They consist of a
copper core sandwiched between two cupro-nickel layers. In 1966, similar
dimes and silver-copper half-dollars are scheduled for release.
The Coinage Act and stepped-up Mint production in 1964 and 1965 helped
greatly in easing the national coin shortage as 1965 progressed. While coin
rationing continued throughout the year, record shipments of $91 million of
new coin from the Mint enabled the Bank to expand total coin payments to
member banks in 1965 to $133 million, 24 per cent above 1964. The dollar
volume of coin received from member banks during the second half of 1965
exceeded receipts in the comparable period of 1964 but, reflecting the low firsthalf figure, the total for 1965 remained below the 1964 volume. The number of
coins received, however, exceeded the 1964 level. Higher Mint production of
cents and nickels helped especially to relieve the shortage of these minor
coins.
Operations performed by the Bank during the past year as agent of the
Treasury were virtually unchanged from 1964. The dollar amount of all Gov
ernment obligations (excluding United States savings bonds) processed by this
Bank in 1965 declined by less than 1 per cent to $589 billion, while the
number of such items handled edged up 1 per cent to 8.6 million. The volume
of operations in United States savings bonds advanced slightly.
Second District member banks borrowed more than $24 billion from this
Bank in 1965, the highest dollar volume since 1957 and twice the amount bor
rowed in 1964. While the number of discounts and advances increased 25 per
cent, from 1,248 to 1,555, the proportion of banks borrowing at least onoe
declined to 40 per cent from 42 per cent in 1964. On the one hand, utilization of
the “ discount window” by the large money market banks increased. On the other
hand, many smaller banks made greater use of their correspondents’ services
and of the Federal funds market for reserve adjustments.
This Bank is a popular source of information on the Federal Reserve System.
During 1965, 13,077 visitors were received for tours, the staff delivered 251
speeches to various business and educational groups, and 502,149 copies of a
wide variety of Bank publications were distributed.
Despite a significantly higher volume of work, average employment at the
Bank declined by 1 per cent in 1965. This decline followed a similar reduction
in 1964 over 1963 and in both years reflected largely the expanded application
48

of electronic check-processing equipment. At the year-end, this Bank’s officers
and staff numbered 3,965, including 233 at the Buffalo Branch.

f o r e i g n a n d i n t e r n a t i o n a l o p e r a t i o n s . Foreign exchange activities
of this Bank reached record levels in 1965 as a result of active participation in
the defense of the pound and extensive operations for System and Treasury ac
counts, centering on repayments and consolidation of United States short-term
foreign indebtedness. At the same time, this Bank participated actively in broad
ening and refining the practical applications of international monetary cooper
ation. As already noted, the System’s reciprocal swap arrangements with the
monetary authorities of eleven countries and the Bank for International Settle
ments were increased during the year by $450 million to $2.8 billion, while
issues and redemptions of United States Treasury foreign currency bonds placed
with foreign authorities left outstanding at the year-end the equivalent of $1,208
million.
Over-all holdings of gold, dollar balances, and other assets for foreign and
international accounts on December 31 amounted to $28.9 billion, down some
what from the peak level of $29.0 billion in October but $634 million higher
than at the end of 1964. Holdings for international institutions increased $690
million, while those for foreign accounts fell $56 million— the second decline in
the last two years, although much smaller than in 1964. Declines in foreign ac
counts’ combined holdings of United States Government securities and dollar
balances slightly exceeded gains in holdings of gold and miscellaneous securi
ties (including commercial paper and bankers’ acceptances).
Significantly larger purchases of gold from the Treasury and a further increase
in exports accounted for a marked increase in gold operations. Demand for loans
against gold under earmark was fairly substantial. Credit facilities were made
available during 1965 to banks in five countries in order to assist them in meet
ing seasonal and other temporary dollar requirements. Each bank made use of
the facilities, and at the year-end $41 million of drawings was outstanding.

Financial Statements
STATEM EN T OF CONDITION

(In thousands of dollars)

A ssets

DEC. 31, 1965

DEC. 31, 1964

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

2,478,306

3,072,781

Redemption fund for Federal Reserve notes.......................................

409,153

355,066

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

151;311

183,441

Other c a sh ...........................................................................................

16,507

32,083

Total cash

3,055,277

3,643,371

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

30,627

40,980

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

186,434

93,768

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

10,034,131

9,285,737

Total loans and securities

10,251,192

9,420,485

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

1,676,821

1,833,246

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

8,667

7,804

All other* ..........................................................................................

276,390

139,526

1,961,878

1,980,576

Other assets:

Total other assets

Total Assets 1 5 ,2 6 S ,3 4 7

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

1 5 ,0 44 ,43 2

STATEM ENT OF CONDITION

(In thousands of dollars)

Liabilities

DEC. 31, 1965

DEC. 31, 1964

8,600,326

8,253,863

4,803,963
159,647
39,581
184,729

4,829,799
152,505
67,430
180,824

5,187,920

5,230,558

1,141,912
49,263

1,113,473
172,110

Total other liabilities

1,191,175

1,285,583

Total Liabilities

14,9 79 ,42 1

1 4,7 7 0 ,0 0 4

144.463
144.463

137.214
137.214

Total Capital Accounts

2 8 8 ,9 2 6

274*428

Total Liabilities and Capital Accounts

1 5,2 68 ,34 7

1 5,0 44 ,43 2

Contingent liability on acceptances purchased for foreign
correspondents^ ..............................................................................
Ratio of gold certificate reserves to Federal Reserve note liability___

37,546
33.6%

32,311
41.5%

110,700

161,480

105,977

90,135

Federal Reserve n otes...............................

Deposits:
Member bank reserve accounts.................
United States Treasurer — general account
Foreign* ....................................................
Otherf ........................................................
Total deposits
Other liabilities:
Deferred availability cash item s.................
All other ....................................................

Capital Accounts

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

★ After deducting participations of other Federal Reserve Banks amounting to
t Includes IMF gold deposit.
X After deducting participations of other Federal Reserve Banks amounting to

STATEM ENT OF EARNINGS AND EX P EN S ES FOR
THE CALENDAR Y EA R S 1965 AND 1964 (In thousands of dollars)

1965

1964

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

391,856

335,357

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

41,716

40,956

350,140

294,401

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

151

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

264

227

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

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

Current net earnings
Additions to current net earnings:

Total additions

Deductions from current net earnings:

Total deductions

258

221

Net earnings available for distribution

350398

2 9 4 ,6 2 2

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

8,501

8,138

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

334,648

412,485

7,249

— 126,001

Surplus — beginning of y e a r..............................................................

137,214

263,215

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

7,249

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

126,001

Surplus—end of year

1 44 ,46 3

1 3 7 ,21 4

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

Transferred to surplus........................................................................

SU RPLUS ACCOUNT

Changes in Membership
During 1965, the total number of commercial banks in this District that are
members of the Federal Reserve System declined from 418 to 409. The net
decrease of banks was the result of the mergers of fourteen member banks and
the organization of five new national banks. The 409 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.

N U M B ER OF OPERA TIN G M E M B E R A N D N O N M EM B ER B ANKS IN
SECOND FEDERAL RESERVE D IS T R IC T A T TH E Y EA R -E N D

(Exclusive of savings banks, private banks, and industrial banks)
DECEMBER 31, 1965
Type of Bank

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

DECEMBER 31, 1964

Members

Non
members

Per cent
members

Members

Non
members

Per cent
members

288

100

294

100

124

82
»■'....

121

■
409

—
80

——

418

60
-

★ Includes one national bank located in the Virgin Islands.

CHANGES IN FEDERAL RESERVE M E M B E R S H IP IN
SECOND D IS T R IC T D U RING 1965

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

418

Increases:

New national banks........................................................................................................................

Decreases:

Member banks combined with other members..............................................................................
Member bank combined with nonmember.....................................................................................

Total membership at the year-end

13
1
409

Changes in Directors and Officers
In November, the Board of Governors of the Fed
eral Reserve System designated Everett N. Case Chairman of the Board of
Directors of the Federal Reserve Bank of New York and Federal Reserve Agent
for the year 1966. Mr. Case, President of the Alfred P. Sloan Foundation, New
York, N. Y., has been a Class C director since January 1961 and served as
Deputy Chairman in 1965. He succeeded Philip D. Reed, former Chairman of
the Board of the General Electric Company, New York, N. Y., whose term as a
Class C director expired December 31, 1965. Mr. Reed had served as a Class
B director in 1959 and as a Class C director and Chairman and Federal Reserve
Agent since January 1960.
Also in November, the Board of Governors appointed Kenneth H. Hannan a
Class C director for the three-year term beginning January 1, 1966, and Deputy
Chairman for the year 1966. Mr. Hannan, Executive Vice President of the
Union Carbide Corporation, New York, N. Y., had served as a Class B director
since January 1960.
In December, member banks in Group 2 elected Robert G. Cowan a Class A
director and Milton C. Mumford a Class B director, each for the three-year term
beginning January 1, 1966. Mr. Cowan, Chairman of the Board of the National
Newark & Essex Bank, Newark, N. J., succeeded Ralph H. Rue, Chairman of
the Board of The Schenectady Trust Company, Schenectady, N. Y., who served
for the three-year term that ended December 31, 1965; Mr. Rue died on Janu
ary 6, 1966. Mr. Mumford, Chairman of the Board of the Lever Brothers Com
pany, New York, N. Y., succeeded Mr. Hannan.
At the Buffalo Branch, the Board of Governors in November reappointed
Maurice R. Forman a director of the Branch for the three-year term beginning
January 1, 1966. Mr. Forman, President of the B. Forman Co., Rochester,
N. Y., has been a director of the Branch since January 1963 and served as
Chairman of the Branch Board of Directors for the year 1965. In December,
the Board of Directors of this Bank reappointed Arthur S. Hamlin a director of
the Branch for the three-year term beginning January 1, 1966. Mr. Hamlin,
President of The Canandaigua National Bank and Trust Company, Canandaigua,
N. Y., has been a Branch director since May 1963. At the same time, the
c h a n g e s in d i r e c t o r s .

Bank’s Board of Directors designated Thomas E. LaMont Chairman of the
Branch Board for the year 1966. Mr. LaMont, who is engaged in farming in
Orleans County, N. Y., has been a Branch director since November 1959 and
served as Chairman of the Branch Board in 1963.

Since March 1, 1965, four officers have resigned
and two have retired:
Robert W. Stone, Vice President, resigned effective May 15, 1965 to become
a Vice President of the National Bank of Detroit. Mr. Stone had also resigned as
Manager of the System Open Market Account effective at the close of business
March 23. His assignment as Vice President in charge of Open Market Opera
tions and Treasury Issues was terminated effective March 24; from then until he
left the Bank, Mr. Stone advised the President and senior officers on economic
matters. Mr. Stone had joined the Bank’s staff in May 1953 and had become an
officer in January 1958.
George J. Doll, Assistant Vice President and Cashier of the Buffalo Branch,
retired effective July 1, 1965. Mr. Doll had joined the Branch’s staff in July
1919 and had become an officer of the Branch in January 1942.
Howard D. Crosse, Vice President in charge of Bank Supervision and Rela
tions, resigned effective July 31, 1965 to become Deputy Chairman of the Board
of the Franklin National Bank. Mr. Crosse had joined the Bank’s staff in July
1932 and had become an officer in July 1947.
John P. Ringen, Manager, Bank Examinations Department, retired effective
October 1, 1965. Mr. Ringen had joined the Bank’s staff in February 1951 and
had become an officer in January 1959.
Peter D. Sternllght, Assistant Vice President assigned to Open Market Opera
tions and Treasury Issues, resigned effective November 15, 1965 to become
Deputy Under Secretary of the Treasury for Monetary Affairs. Mr. Sternlight
had joined the Bank’s staff in June 1950 and had become an officer in Jan
uary 1962.
Ernest E. Blanchette, Manager, formerly assigned to the Bank Relations De
partment, was assigned to the Accounting Department effective October 1, 1965.
Effective the same date, he was also appointed Assistant Secretary. Mr.
Blanchette resigned from the Bank effective December 31 to accept a position
with an accounting firm in New York City. He had joined the Bank’s staff in
September 1955 and had become an officer in September 1962.

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

The following additional changes in official staff, including the appointment
of seven new officers, have been made since March 1, 1965:
Alan R. Holmes, Vice President, formerly assigned to Research and Statis
tics, was assigned to Open Market Operations and Treasury Issues effective
March 24, 1965. Effective the same date, Mr. Holmes was selected by the Fed
eral Open Market Committee, with the agreement of this Bank, as Manager of
the System Open Market Account, to succeed Mr. Stone.
Robert G. Link, formerly Adviser, Research and Statistics, was appointed
Vice President effective March 24, 1965 and assigned to Research and Statistics.
Peter Fousek, Assistant Vice President, formerly assigned to Foreign, was
assigned to Research and Statistics effective April 1, 1965.
David E. Bodner, formerly Special Assistant, Foreign Department, was
appointed an officer with the title of Manager effective April 1, 1965 and
assigned to the Foreign Department.
Fred W. Piderit, Jr., formerly Assistant Vice President, Bank Supervision and
Relations, was appointed Vice President effective July 1, 1965 and assigned to
Bank Supervision and Relations.
John T. Keane, formerly Assistant Cashier, Buffalo Branch, was appointed
Cashier of the Branch effective July 1, 1965.
Gerald E. Beach, Manager, formerly assigned to the Security Custody De
partment, was assigned to the Government Bond and Safekeeping Department
effective July 1,1965.
Leonard I. Bennetts, formerly Assistant General Auditor, was appointed
Manager effective July 1, 1965 and assigned to the Cash Custody Department.
Effective October 1, Mr. Bennetts was assigned to the Bank Relations Depart
ment, his assignment to the Cash Custody Department being terminated as of the
same date.
Robert J. Crowley, formerly Assistant Counsel, was appointed Manager
effective July 1,1965 and assigned to the Foreign Department.
Harry A. Curth, Jr., formerly Special Representative, Buffalo Branch, was
appointed an officer of the Branch with the title of Assistant Cashier effective
July 1, 1965.
Richard A. Debs, Assistant Counsel, was also appointed Assistant Secretary,
effective July 1, 1965. Effective October 1, Mr. Debs was appointed Secretary,
continuing as Assistant Counsel.
Martin French, Manager, formerly assigned to the Cash Custody Department,
was assigned to the Security Custody Department effective July 1, 1965.
56

William M. Schultz, formerly Manager, Personnel Department, was ap
pointed Assistant General Auditor effective July 1, 1965.
Robert C. Thoman, Manager, formerly assigned to the Government Bond
and Safekeeping Department, was assigned to the Personnel Department effec
tive July 1, 1965, his appointment as Assistant Secretary being terminated as
of the same date.
Ronald B. Gray, formerly Special Assistant, Planning Department, was ap
pointed an officer of the Buffalo Branch with the title of Assistant Cashier
effective August 1, 1965.
Arthur A. Randall, formerly Chief, Personnel Division, Buffalo Branch, was
appointed an officer of the Branch with the title of Assistant Cashier effective
August 1, 1965.
William H. Braun, Jr., Assistant Vice President, formerly assigned to Account
ing and Planning, and to Loans and Credits, was assigned to Bank Supervision
and Relations effective October 1,1965.
Bruce K. MacLaury, formerly Manager, Foreign Department, was appointed
Assistant Vice President effective October 1, 1965 and assigned to Foreign.
Thomas M. Timlen, Jr., formerly Secretary, and Assistant Counsel, was ap
pointed Assistant Vice President effective October 1, 1965 and assigned to
Accounting and Planning, and to Loans and Credits.
Karl L. Ege, Manager, Collection Department, was also assigned to the Cash
Custody Department, effective October 1, 1965.
The assignment of Everett B. Post, Manager, to the Accounting Department
was terminated effective October 1, 1965, his assignment to the Planning De
partment continuing.
Betty Jean Shea, formerly Attorney, Legal Department, was appointed an
officer with the tide of Assistant Counsel effective October 1, 1965.
Francis H. Schott, formerly Manager, Research Department, was appointed
Adviser effective January 6, 1966 and assigned to Research and Statistics.
Richard G. Davis, formerly Senior Economist, was appointed Manager effec
tive January 6, 1966 and assigned to the Domestic Research Department.
Frederick W. Deming, formerly Special Assistant, Securities Department, was
appointed an officer with the title of Manager effective January 6, 1966 and
assigned to the Securities Department.
Edward J. Geng, Manager, Securities Department, was also appointed Assist
ant Secretary, effective January 6, 1966.
Fred H. Klopstock, formerly Manager, Research Department, was appointed

Senior Economist effective January 6,1966.
Madeline H. McWhinney, Manager, Market Statistics Department, was
assigned to the Statistics Department effective January 6, 1966.
Frederick C. Schadrack, Jr., formerly Chief, Foreign Research Division, Re
search Department, was appointed an officer with the title of Manager effective
January 6, 1966 and assigned to the International Research Department.
Aloysius J. Stanton, Manager, formerly assigned to the Check Department,
was assigned to the Accounting Department effective January 6, 1966.

m e m b e r o f f e d e r a l a d v i s o r y c o u n c i l —1 9 6 6 . The Board of Directors
of this Bank selected William H. Moore to serve during 1966, for the third
successive year, as the member of the Federal Advisory Council representing
the Second Federal Reserve District. Mr. Moore is Chairman of the Board of
the Bankers Trust Company, New York, N. Y.

Directors off the Federal Reserve Bank of New York
DIRECTORS

Term expires Dec. 31

Class Group
A

R o b e r t G . C o w a n .......................................................................................................................................... 1968
Chairman o f the Board, National Newark & Essex Bank, Newark, N. J.

R o b e r t H . F e a r o n ...........................................................................................................................................1966
President, The Oneida Valley National Bank o f Oneida, Oneida, N. Y.

A r t h u r K . W a t s o n ........................................................................................................................................ 1967
Chairman of the Board, IBM World Trade Corporation, New York, N. Y., and
Vice Chairman of the Board, International Business Machines Corporation, Armonk, N. Y.

M d l t o n C . M u m f o r d ......................................................................................................................................1968
Chairman o f the Board, Lever Brothers Company, New York, N. Y.

A l b e r t L . N i c k e r s o n ................................................................................................................................... 1966
Chairman o f the Board, Socony Mobil Oil Company, Inc., New York, N. Y.

E v e r e t t N . C a s e , Chairman, and Federal Reserve A g en t...................................................... 1966
President, Alfred P. Sloan Foundation, New York, N. Y .

K e n n e t h H . H a n n a n , Deputy Chairman...................................................................................1968
Executive Vice President, Union Carbide Corporation, New York, N. Y.

J a m es M . H e s t e r ............................................................................................................................................. 1967
President, New York University, New York, N. Y.

G e o r g e A . M u r p h y ........................................................................................................................................ 1967
Chairman o f the Board, Irving Trust Company, New York, N. Y .

DIRECTORS—BUFFALO BRANCH
T h o m a s E . L a M o n t , C h airm an ........................................................................
Farmer, Albion, Orleans County, N. Y.

1966

C h a r l e s W . M il l a r d , Jr ..................................................................................................
Chairman o f the Board, Manufacturers and Traders Trust Company, Buffalo, N. Y.

1966

R o b e r t S. B e n n e t t ..........................................................................................................
General Manager, Lackawanna Plant, Bethlehem Steel Corporation, Buffalo, N. Y.

1967

J. W a l l a c e E l y ....................................................................................................................
President, Security Trust Company o f Rochester, Rochester, N. Y .

1967

J o h n D. H a m i l t o n .............................................................................................................
Chairman o f the Board, Marine Midland Chautauqua National Bank, Jamestown, N. Y.

1967

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

1968

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

1968

M EM BER OF FED ER A L AD VISORY COUNCIL — 1966
W i l l i a m H. M o o r e ......................................................................................................................................... 1966
Chairman o f the Board, Bankers Trust Company, New York, N. Y .

Officers of the Federal Reserve Bank of New York
A l f r e d H a y e s , P resident
W i l l i a m F . T r e ib e r , F irst Vice P residen t
H a r o l d A . B i l b y , V ice P resident
J o h n J. C l a r k e , Vice P residen t and
C h a r l e s A . C o o m b s , Vice P resident
G e o r g e G a r v y , E conom ic A d v ise r
M a r c u s A . H a r r is , Vice P residen t

A l a n R . H o l m e s , V ice P residen t
R o b e r t G . L in k , V ice P residen t
F r e d W . P id e r it , Jr ., V ice P residen t
W a l t e r H . R o z e l l , Jr ., V ice P residen t
H o r a c e L . S a n f o r d , V ice P residen t
T h o m a s O . W a ag e , Vice P residen t

E d w a r d G . G u y , A ssistan t G eneral C ounsel

T h o m a s C . S l o a n e , A ssistan t G eneral C ounsel

G eneral C ounsel

W i l l i a m H . B r a u n , Jr ., A ssistan t V ice P resident
D o n a l d C . N il e s , A ssistan t V ice P residen t
F e l i x T . D a v is , A ssistan t V ice P residen t
L a w r e n c e E . Q u a c k e n b u s h , A ssistan t V ice P resident
P e t e r F o u se k , A ssistan t Vice P residen t
T h o m a s J. R o c h e , S enior F oreign E xchange Officer
F r a n k W . S c h if f , A ssistan t V ice P residen t
P e t e r P . L a n g , A d v iser
A n g u s A . M ac I n n e s , Jr ., A ssistan t Vice P resident F r a n c is H . S c h o t t , A d v ise r
B r u c e K . M a c L a u r y , A ssistan t Vice P resident
K e n n e t h E . S m a l l , A ssistan t V ice P residen t
S p e n c e r S. M a r s h , Jr ., A ssistan t V ice P resident
F r e d e r ic k L . S m e d l e y , A ssistan t V ice P resident
T h o m a s M . T i m l e n , Jr ., A ssistan t V ice P residen t
L e o n a r d L a p id u s ,

G erald E . B each,

M anager, G overn m en t B on d and
Safekeeping D epartm en t

M anager, C red it and D iscou n t D ep a rtm en t

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

M anager , B ank R elation s D epartm en t
M a r t in

W. B e r g in ,

M anager, P ublic In form ation D epartm en t

M anager, C o m p u ter Services D epartm en t

A. T h o m a s C o m b a d e r ,

R obert M eyer,
A rth u r

H. N o a ,

M anager, Service D epartm en t

M anager, Building O perating D epartm en t

Ja m e s

H. O l t m a n ,

M anager, B ank E xam inations D epartm en t

R obert L . C ooper,

M anager, A cceptan ce D ep a rtm en t

E verett B. P o st,

M anager, Planning D epartm en t

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

M anager, Foreign D ep a rtm en t
R ic h a r d G . D a v is ,

M anager, D o m estic R esearch D epartm en t

A. D e b s ,

Secretary, and A ssistan t C ounsel

W. D e m i n g ,

M anager, Securities D ep a rtm en t
K arl L . E ge,

M anager, Cash C u stody D epartm en t, and
M anager, C ollection D epartm en t
M a r t in F r e n c h ,

M anager, Security C u stody D epartm en t
E d w a r d J. G e n g ,

C h a r l e s R . P r ic h e r ,

M anager, Cash D epartm en t
E d w in S. R o t h m a n ,

M anager, Foreign D ep a rtm en t
W a l t e r S. R u s h m o r e ,

M anager, Savings B on d D ep a rtm en t
F r e d e r ic k C . S c h a d r a c k , Jr .,

M anager, International R esearch D epartm en t
B e t t y Je a n Sh e a ,

A ssistan t C ounsel
G eorge C . Sm it h ,

M anager, C heck D epartm en t
A l o y s iu s J. S t a n t o n ,

M anager, A ccou ntin g D epartm en t

M anager, Securities D epartm en t, and
A ssistan t Secretary
Senior E conom ist

P aul M eek,

A ssistan t C ounsel

L o u is J. B r e n d e l ,

F red H . K lo pstoc k ,

H. M c W h in n e y ,

M anager, Securities D ep a rtm en t

M anager, F oreign D epartm en t

F r e d e r ic k

M a d e l in e

M anager, S tatistics D ep a rtm en t

D a v id E . B o d n e r ,

R ic h a r d

M anager, Personnel D ep a rtm en t
W i l l ia m E . M a r p l e ,

R obert C . T h om an ,

M anager, Personnel D epartm en t
R o b e r t Y o u n g , Jr .,

A ssistan t C ounsel
J o h n P . Je n s e n , G eneral A u d ito r
W i l l i a m M . S c h u l t z , A ssistan t G eneral A u d ito r

O F F IC E R S — B U F F A LO BRANCH
I n s l e y B . S m it h , Vice President
J o h n T . K e a n e , Cashier
H a r r y A . C u r t h , J r ., Assistant Cashier

G e r a l d H . G r e e n e , Assistant Cashier

R o n a l d B . G r a y , Assistant Cashier

A r t h u r A . R a n d a l l , Assistant Cashier

Full text of Annual Report of the Federal Reserve Bank of New York : Annual Report : 1965

FRASER