Full text of Annual Report of the Federal Reserve Bank of New York : Annual Report : 1966

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FEDERAL RESERVE BANK
OF NEW Y O R K




A N N U A L REPORT
1966

F E D E R A L

R E S E R V E

BAN K

OF

NEW

YO R K

M arch 6, 1967

To the M em ber Banks in the
Second F ed era l R e s e rv e D istrict:
It g iv es m e great p lea su re to p resen t our fifty -s e c o n d
Annual R eport, review in g the m a jor e co n o m ic and fin an cial developm en ts
o f 1966.
The United States econ om y w as under grea t strain in 1966,
as mounting defen se needs w e re su p erim p osed upon a civ ilia n econ om y
alrea dy operating at full capa city. Output advanced at a rapid p a ce, but
this expansion was a ccom p a n ied by a sharp r is e in p r ic e s and c o s ts and
by a m a rk ed w orsen in g o f the fo re ig n trade surplus. A s the y ea r drew
to a c lo s e , the p r e s s u r e s in the econ om y abated som ewhat. It w as c le a r ,

however, that the noninflationary environment that had characterized the
e a r lie r y e a r s o f the cu rren t expansion had not yet been regained. On the
international side, our paym ents d e ficit and our international position
g en erally continued to be m a tters of deep con cern .
M onetary p o licy b eca m e in crea sin g ly r e s tr ic tiv e during the
fir s t part of the y ea r in an e ffo rt to restra in in flation ary fo r c e s in the
econ om y. This restra in t, in conjun ction with rapidly grow ing dem ands
fo r b o rro w e d funds, p rodu ced se rio u s strain s in the cre d it m a rk ets by
m id su m m er. T h erea fter, the slow er rate of expansion in the econ om y,
additional m e a su re s o f fis c a l restra in t, and an easing o f m on etary p o licy
contributed to a lessen in g of the p r e s s u r e s in the c re d it m ark ets.
The outlook for 1967 is clou d ed by c r o s s c u r r e n ts in the
econom y and the continuing uncertainty o f the Vietnam w ar. The tasks
o f returning to a balanced, noninflationary grow th and o f reaching
external equ ilibriu m p ose d ifficu lt p r o b le m s fo r p o licy m a k ers.




-----A L F R E D HAYES
P re sident




F ed era l R e s e r v e B a n k
o f N ew Y ork

F IF T Y - S E C

A

N N

U A

L

O

N

R E P O

D

R T

For the Year
Ended
December 31, 1966

Second Federal Reserve District




Contents:
Page

Page
The Strains and S tresses o f an
Overheated Econom y............................

5

THE UNITED STATES ECONOMY
IN 1 9 6 6 ....................................................

12

Business Conditions: A Year o f Strong
Demand and Inflationary Pressures .
The stimulus o f military demand.........
Residential construction and consumer
demand ....................................................
Cost and price pressures accelerate. . .

12
13
15
18

Monetary Policy and Credit M arkets:
Restraint Takes H old............................
Intense competition in the
credit m arkets.........................................
Credit market tensions ease.................

24
28

THE WORLD ECONOMY IN 1966 . . .

31

52
52
54

Changes in M em bersh ip......................

55

Changes in D irectors and O ffice r s .. .
Changes in directors..............................
Changes in officers...................................
Member o f Federal Advisory
Council— 1967 .......................................

56
56
57

List o f D irectors and O fficers.............

61

60

21

The United States Balance o f
Payments: The Vietnam War Retards
Restoration o f Equilibrium ................. ....31
Excessive demand cuts trade surplus.
33
Government spending abroad rises. . . 34
Long-term capital outflows reduced.
34
Moderate short-term capital outflows. 35
Financing the deficit.............................. ....36
Voluntary restraint program extended 37
The International Monetary
System: Progress in
Cooperation and R eform ......................

38

Econom ic Conditions Abroad:
Strains on R esources R e d u c e d .........

40

THIS BANK’ S OPERATIONS

47

Volume and Trend o f the
Bank’ s O p era tion s.................................... 47
Domestic operations ............................ ... 47
Foreign and international operations. 50




Financial S tatem en ts............................
Statement o f condition..........................
Statement o f earnings and expenses. . .

CHARTS
Chart 1: Gross National Product.........

14

Chart 2: Consumer and Wholesale
Price In cr ea se s .......................................

17

Chart 3: Resource U tilization .............

19

Chart 4: Bank Credit............................

23

Chart 5: Interest R ates..........................

26

Chart 6: The United States Balance
o f Payments— Its Components and
Financing ................................................

32

Chart 7: Central Bank Discount Rates
and Short-term Interest Rates in
Selected C o u n tr ies .................................

42

Chart 8: Long-term Bond Yields in
Selected Countries .................................

43

Chart 9: Industrial Production and
Consumer Prices in Selected Countries

45




Fifty-second Annual Report
Federal Reserve Bank of New York

The Strains and Stresses of an
Overheated Economy
The United States economy was under great strain in 1966. The escalation of
the Vietnam conflict beginning in mid-1965 had superimposed an enlarged
defense effort upon a civilian economy rapidly approaching full utilization of
resources. Despite an increasingly restrictive monetary policy as well as a num­
ber of fiscal policy steps, the expansion of aggregate demand outran the growth
of productive capacity in the first part of 1966. Prices and costs broke out
of the pattern of remarkable stability of the preceding years, and the foreign
trade surplus deteriorated sharply. As monetary policy bore the brunt of the
effort to protect the internal and the external value of the dollar, interest rates
soared to levels not seen in more than a generation. The upward ratcheting of
rates and heavy prospective credit demands led by late summer to fears that
financial markets would break under the strain. Developments in September,
including a Federal Reserve statement on business loans and discount admin­
istration and the introduction of new fiscal restraints, dissipated the crisis atmos­
phere. A slowing of the rise in the private economy contributed to a shift in
expectations, and by the year-end monetary policy had moved to less restraint.
Abroad, economic and financial conditions were almost as turbulent. The
pound sterling experienced another major crisis, and only a sweeping program
of deflationary measures, without peacetime precedent in a democratic country,
helped restore confidence in the British currency. Interest rates in most indus­
trial countries rose rapidly, as monetary policies were tightened to contain
inflationary pressures and as the effects of credit tightness in individual coun­




5

tries spread beyond national borders. While developed countries grappled with
inflation, payments imbalances, and the issues of international liquidity, less devel­
oped nations faced not only the age-old problem of poverty and capital shortage
but also a widening gap between precarious food supplies and surging popula­
tion growth.
In the United States, the economy moved into 1966 at an excessively rapid
pace, spurred by mounting defense expenditures and booming business capital
outlays. The expansion slowed down in the second quarter, mainly because
consumers cut back their spending on automobiles and other durable goods
under the impact of accelerated personal income tax payments and of a wide­
spread discussion of automobile safety. After midyear, the overall advance
speeded up again though not back to the inordinate rate of the first months of
the year. Defense outlays accelerated further, but private spending began to
slow as residential construction slumped and the growth of plant and equip­
ment outlays showed signs of tapering off. At the same time, the rise in prices
started to moderate, reflecting a reversal of the earlier sharp runup, first, of crude
industrial materials prices and, then, of food prices. Labor costs, in contrast,
went on increasing and, with the slowdown in productivity gains, labor costs
per unit of output turned sharply upward.
The year ended with the total output of goods and services growing quite
rapidly but with somewhat diminishing pressures on capacity. The outlook
was clouded, however, by divergent trends in different parts of the economy.
Inventory accumulation was proceeding at an unsustainable rate, the capital
spending boom was waning, and consumers were hesitant. On the other hand,
defense expenditures still seemed headed strongly upward, state and local gov­
ernment outlays remained on an uptrend, and the housing slump gave signs of
bottoming out.
For 1966 as a whole, aggregate spending rose more rapidly than in 1965.
But with the economy at full capacity more of the advance was dissipated in
higher prices, and total output in real terms rose somewhat less than in 1965.
Inflationary pressures dealt a damaging blow to the Administration’s wage-price
guideposts, as wage increases well above national productivity gains were nego­
tiated. Labor unions, moreover, sought to protect their members from rising
consumer prices through cost-of-living escalator clauses. An inflationary climate
inevitably increases union interest in such clauses, even though they are often
self-defeating and clearly adverse to the national interest. In the first years
of the expansion before excess demands developed, the wage-price guideposts
6




on balance played a useful stabilizing role, notwithstanding some problems in
their application. The working-out of some kind of national consensus on the
behavior of wages, other costs, and profits in relation to prices would make
an important contribution to stable growth in the future.
Another major unresolved problem is the involuntary idleness of too many
workers among the minority groups, the unskilled, and teen-agers. The reduc­
tion of overall unemployment to below 4 per cent of the labor force in 1966
was a very satisfactory achievement. There does seem to be general agreement,
however, that in order to achieve significant further reductions in unemploy­
ment greater emphasis needs now to be placed on special manpower programs
and related measures designed to draw into employment those who have not
been able to find jobs. Such programs are required both to assure fuller utili­
zation of the country’s economic potential and to help provide greater equality
of opportunity for all individuals.
The upsurge of demands and the absence of greater fiscal restraint made
1966 a year of difficult problems and decisions for the Federal Reserve, as
it endeavored to carry out its responsibility for encouraging noninflationary
growth and assuring the proper functioning of the financial system. Monetary
restraint was gradually increased during the first eight months of the year,
but close attention was paid to the effects of the resulting reduction in liquidity
throughout the economy. The plant and equipment spending boom, heavy in­
ventory accumulation, in part stimulated by surging defense outlays, and a
marked speedup in tax payments substantially enlarged the gap between busi­
ness needs for funds and internally generated cash flows. Credit demands on
the banking system and the capital markets soared, and, given the restrictive
stance of credit policy, interest rates reached the highest levels in several
decades. Commercial banks found themselves under tremendous pressure, with
seemingly unlimited demand for loans confronting an eroded liquidity posi­
tion and heightened competition for loanable funds. In an effort to honor
loan requests, under established— and often long unused— lines of credit, from
customers who were only slightly deterred by stiffening terms, commercial banks
liquidated securities and vigorously bid for time deposits. Those with foreign
branches avidly sought dollar deposits abroad. Through midsummer, the upswing
in business loans continued at a record-breaking rate and the advance in total
bank credit slowed only a little.
Mortgage lending, however, fell off sharply, largely because the inflow of sav­
ings into thrift institutions dropped abruptly with the increased attractiveness




7

both of market instruments and of commercial bank time deposits. At the
midyear interest payment period, the savings institutions— in particular savings
and loan associations— were threatened by substantial withdrawals of funds. In
earlier years many of these institutions had acquired a substantial volume of
funds through aggressive bidding, and such funds were highly sensitive to
changes in interest rates. Later in the summer, with market interest rates con­
tinuing to mount, commercial banks began losing time deposits as Regulation Q
ceilings on interest rates payable on time deposits limited their attractiveness
vis-a-vis market instruments. At the same time, the banks continued to face
heavy credit demands, including anticipatory borrowing, and thus found them­
selves forced to sell Government and municipal securities in an unreceptive
market. Heavy Federal agency financing and the sale of financial assets by the
United States Government had added to the market pressures before midyear,
and the lack of evidence that fiscal restraints would be brought into play in­
creased developing uncertainties. With no apparent end to the demand for funds
and the upsurge in interest rates, conditions in the financial markets seriously
deteriorated in August and some observers even saw the threat of a financial
panic.
At the very end of August, hints reached the market that some fiscal measures
were in the wind and that agency financing would be curtailed. On September 1,
the Federal Reserve System issued a statement designed to help calm the finan­
cial markets and to express the System’s concern over the unsustainably rapid
growth of bank credit. The following week, the President proposed fiscal re­
straint measures, specifically the suspension of certain tax benefits applicable to
business capital spending, and the Treasury announced the curtailment of Gov­
ernment agency financing and the suspension of sales of participation certificates.
The atmosphere in the financial markets, as a result, improved considerably.
Early in the fall, the financial setting began to change. The upswing in interest
rates topped off, net flows of funds into nonbank financial institutions started
to improve, and the growth of bank credit waned as commercial banks continued
to lose time deposits. With the moderation of private demands in the economy
and a downturn in total bank credit, the Federal Reserve moved overtly through
open market operations gradually to lessen monetary restraint. And, just before
the year-end, the System announced that the special factors referred to in the
September 1 statement on business loans and discount administration were no
longer applicable. The year closed with interest rates generally declining and
bank credit again increasing.
8




As the year ended, it was clear that System policy had helped to prevent the
breakout of inflationary psychology which threatened in the early part of 1966
and to moderate the excessively rapid advance of the economy. It was also ob­
vious that the imbalance between monetary and fiscal policy had led to disturb­
ingly rapid increases in interest rates and to profoundly uneven impacts on dif­
ferent sectors of the private economy. Credit policy, moreover, had to resort to
certain specific measures, such as the use of Regulation Q to limit maximum in­
terest rates on time deposits, that like other selective and direct regulations have
definite limitations. In the light of the 1966 experience, financial institutions ap­
peared to be reappraising their policies with a view to avoiding the recurrence of
some of their recent difficulties. Certain groups among the savings institutions
faced the problem of finding ways to strengthen their liquidity and to establish a
better balance of their assets and liabilities with respect to maturity. The com­
mercial banks, for their part, seemed to be reevaluating in particular the proper
function of credit lines and the degree of ease or caution with which they should
be extended in the future, as well as their practices with respect to liquidity and
their recently increased dependence on borrowed funds. More generally, public
attention was drawn to the disruptive side effects of a situation in which excessive
reliance had to be. placed on monetary policy to avoid an inflationary surge. All
in all, there were good prospects that the financial stresses and strains of 1966
could result in public and private actions which would lead to a more soundly
based and more readily adaptive credit and financial system.
The policy of monetary restraint proved of great help in the continuing en­
deavor to eliminate the United States balance-of-payments deficit and, more im­
mediately, in protecting our official reserves. It was a major factor in maintaining
confidence in the dollar when foreign opinion was skeptical about United States
determination to prevent unsustainably rapid growth; it contributed importantly
to improving this country’s capital account when the balance on other inter­
national transactions worsened. Overall, the liquidity deficit for 1966, at $1.4
billion, was little changed from the $1.3 billion to which it had fallen in 1965.
The financing of the deficit, however, altered greatly: the large borrowings of
United States banks abroad led to a reduction in official foreign holdings
of dollars and thus helped turn the balance on official transactions, as contrasted
with the liquidity balance, from a deficit to a surplus. On the other hand, this
shift of funds, and to some extent other improvements in capital flows attrib­
utable to the tight monetary conditions in the United States, also made the
country’s external position more vulnerable over the near term.




9

In view of the continuing balance-of-payments problem, there was no choice
but to extend into 1967, and to strengthen modestly, the voluntary restraint
programs instituted in 1965— the Federal Reserve-administered program cov­
ering the banks and other financial institutions and the Commerce Department
program applying to nonfinancial corporations. However undesirable such arti­
ficial restraints on international capital flows may be as longer run measures, their
extension for another year must be viewed as an alternative to the greater evil
of a weakening of confidence in the United States dollar.
Given the key role of the dollar in the world’s financial system, assuring that
its status as a reserve currency is not jeopardized must also remain a principal
goal in the continuing search for ways to improve that system. In the summer of
1966, the system came under heavy pressure as a result of massive speculative
sales of sterling. The pressures were successfully countered with the aid of cen­
tral bank credit arrangements anchored in the Federal Reserve reciprocal cur­
rency network. The market then turned in sterling’s favor again with the British
government’s sweeping program of corrective measures. On the positive side,
the stability of the international monetary system was substantially strengthened
through the increase in the Federal Reserve swap network from $2.8 billion to
$4.5 billion in September. In the first part of the year, the facilities available
under the International Monetary Fund were also greatly enlarged.
As 1967 opened, both achievements and problems loomed large. On the in­
ternational economic front, the world’s monetary arrangements appeared to be
stronger than a year earlier and international liquidity negotiations were making
progress in a broader forum. The international adjustment mechanism, however,
still appeared less than satisfactory, as many countries struggled with the prob­
lem of reaching and maintaining a mix of policies appropriate both for domestic
and external objectives. Some Continental countries had made progress in 1966
in reducing their payments surpluses. But a serious overall imbalance persisted in
the international payments of the United States on the one hand and of many
Continental countries on the other. Development policies increasingly focused
on the population problem, as food shortages became a widespread concern. In
the meantime, development aid from the industrial nations was kept down by
balance-of-payments and budgetary difficulties and numerous other factors in­
volving both givers and takers.
In the United States, the full employment of resources had been achieved and
an excessively rapid upswing of total demands had been moderated. But the
economy had developed distortions, and costs were under heavy pressure. Re­
10




turning to a balanced, noninflationary growth and reaching external equilibrium
thus posed difficult problems for policy makers. Monetary policy recognized the
easing tendencies that had developed in the economy before the end of 1966.
After the turn of the year, President Johnson’s proposal for surcharges on per­
sonal and corporate income taxes pointed up the probable need for fiscal
restraint in 1967. Especially in the continuing uncertainty of the Vietnam war,
it would seem essential that fiscal, as well as monetary, policy be able to move
promptly to meet changing conditions.




11

THE UNITED STATES ECONOMY IN 1966
Business Conditions: A Year of Strong Demand
and Inflationary Pressures
The economy showed clear indications of overheating as 1966 opened. Through­
out the year the nation was beset by serious inflationary problems, stemming
largely from rapidly growing military demands. Gross national product (GNP)
— the total output of goods and services— in 1966 amounted to $740 billion,
a gain of $58 billion over 1965. A disturbingly large part of this advance, how­
ever, reflected higher prices rather than real growth. In the overly exuberant
first quarter of the year, a sharp increase in demand induced an unsustainably
rapid expansion in real output as well as an accelerating rise in prices. Real
growth through the remainder of the year was slower, reflecting in part the effect
of policy measures, but the rate of price increase continued to be excessive. A
moderation in the tempo of expansion in the private economy during the latter
months of 1966 was accompanied by sluggishness in some important business
indicators— such as retail sales and industrial production— and by the emergence
of uncomfortably large inventory positions in certain industries.
Inflationary pressures were pervasive in 1966, with prices and costs rising
throughout the economy. Price advances in the agricultural sector played a
smaller part in the overall increase than had been the case in 1965. On the other
hand, wholesale prices of nonagricultural goods, as well as consumer prices
for services and nonfood commodities, recorded the sharpest advances in many
years. While agricultural prices tend to fall as well as rise over time, experience
suggests that higher costs and prices outside the agricultural area are largely
permanent. In this respect, the course of events in 1966 was of particular con­
cern in view of the difficulties higher industrial prices put in the way of achiev­
ing an improvement in the nation’s balance of payments. Moreover, the sharp
advance in consumer prices is bound to be a factor in the numerous labor nego­
tiations scheduled for 1967, raising the probability of wage settlements that will
put further upward pressure on production costs.
12




The rapid growth of defense re­
quirements was the largest single factor shaping the course of economic activity
in 1966. This marked a major shift in the character of the business expansion.
For several years the share of defense spending in overall GNP had been de­
clining, and in fact such expenditures had actually edged downward during the
years 1962-64. When the commitment of United States forces to Vietnam was
expanded in mid-1965, however, there began a sharp, accelerating rise in spend­
ing on goods and services for military purposes. Though the share of GNP di­
rectly attributable to defense requirements was still only a relatively modest 8 V2
per cent in the fourth quarter of 1966, in contrast to more than 13 per cent
during much of the Korean war period, burgeoning military demands had a
dominant influence on the economy’s expansion during the year (see Chart 1).
The significance of these demands is suggested by the fact that enlarged defense
outlays for goods and services accounted for nearly 25 per cent of the increase
in GNP during the year, a striking shift from the earlier years of the current
expansion when such spending contributed little or nothing to the overall growth
of demand.
The military buildup and the demand pressures associated with it affected
virtually every sector of economic activity. The armed forces, in adding more
than 500,000 men during the year, took a substantial share of the total increase
in the nation’s available manpower, contributing appreciably to the tightening
of civilian labor markets. The surge of military demands was obviously a sharp
spur to activity in a number of industries— among them aircraft, ordnance,
electronics, and apparel— leading in turn to intensified pressures on productive
capacity. The result was further stimulus to the already high level of capital
spending. Moreover, the rapid rate of business inventory accumulation during
much of the year was in good part related, directly or indirectly, to the expan­
sion of defense demands.
Business fixed capital spending recorded a further strong increase in 1966,
generating intense pressures on the capital goods industries as well as very heavy
demands for credit. The expansion was particularly rapid early in the year, when
corporate profits were continuing to grow in line with the substantial 1965 ad­
vance and profit expectations were buoyant. In an effort to moderate exces­
sive demand pressures and restrain some of the exuberance in the civilian econ­
omy, President Johnson in April asked businessmen to review their spending plans
with a view to finding projects that could be eliminated or stretched out. The
growth of capital spending was subject to dampening by other influences as well
t h e s t im u lu s o f m ilit a r y d e m a n d .




13

C h a rt 1 . G R O S S N A T IO N A L P R O D U C T : T h e e x p a n s io n o f G N P w a s e s p e c ia lly
stro ng : in th e f ir s t q u a rte r o f 1 9 6 6 , fo llo w e d by a m o re m o d e ra te r a t e of g ro w th .
A la r g e p a rt of th e y e a r ’s in c r e a s e in G N P w a s a ttrib u ta b le to r is in g p r ic e s , and
th e g ro w th o f o u tp u t m e a s u re d in c o n s ta n t p r ic e s slo w e d . T h e s h a re of b u s in e s s
fix e d in v e stm e n t in to ta l o u tp u t r o s e th ro u g h m o s t of th e y e a r , w h ile th e s h a re
of d e fe n s e s p e n d in g m o ved s h a rp ly h ig h e r.

G N P is e xp re sse d at sea so n a lly adjusted ann ual rates.

— including the rising cost and reduced availability o f credit, shortages of labor
and materials, delivery delays, and rising prices. Nevertheless, capital spending
continued to expand strongly throughout the first half. In early September, the
President asked Congress to suspend temporarily the 7 per cent tax credit on
14




capital investment and the use of accelerated depreciation in business tax cal­
culations. The enactment of these suspensions, effective in early October, may
have played some part in the slower rate of capital spending growth in the
fourth quarter. The rise in such spending had in fact already slowed in the
third quarter, reflecting the influence of the various constraints already cited.
A major factor coming to bear toward the end of the year was a slowing in the
growth of final demand, while capacity continued to expand. Not only did
pressures on capacity ease somewhat, but there also developed some undesired
inventory accumulation, which tended to put an additional damper on the in­
vestment boom.

While the size
and great productive potential of the United States economy generally facilitated
a continued growth in the output of “butter” despite the sharp rise in the pro­
duction of “guns” , the year was nevertheless marked by some significant read­
justments of output and resources. Thus, the shift of national output toward
sectors oriented to defense and capital investment was accompanied by a damp­
ening of demand in some civilian-oriented sectors. There was a slowing in the
growth of output of consumer goods, particularly durables, but the most severe
impact was on residential construction, where activity dropped sharply.
The shift away from residential construction was, in large measure, induced
by a reduction in the flow of housing credit. The impact of the reduced
availability and sharply rising cost of credit, both for construction loans
and for long-term mortgages, was felt in most other types of building activity as
well. Construction of stores and offices declined appreciably, and public con­
struction flattened out.
During the first half of the year, exceptionally heavy business demands for
credit were augmented by a very large volume of sales of United States Gov­
ernment agency securities and participations in Federal loans. With the overall
supply of savings narrowing at the same time, interest rates rose sharply. In the
competition for funds, the major traditional sources of home mortgage credit—
savings and loan associations and mutual savings banks— experienced particu­
larly severe pressure on their ability to attract funds and hence on their ability
to lend. Moreover, the existence of interest rate ceilings under usury laws
created additional problems for mortgage lenders in some states. Spending on
residential construction fell by 25 per cent between the first and fourth quarters
RESID EN TIA L CONSTRUCTION AND CONSUMER D E M A N D .




15

of the year, despite a steady rise in building costs, while over the same period
the number of new private nonfarm housing units started dropped by more
than one third. The shortage and high cost of mortgage credit also slowed the
turnover of existing homes. A sizable volume of backed-up demand for housing
apparently developed during the year, as vacancy rates in both sale and rental
units moved appreciably lower. By the year-end, there had been some improve­
ment in the housing credit situation, partly as a result of measures taken during
the summer and fall (described on pages 27-28 below) to improve the relative
position of home mortgage lenders in the competition among institutions seek­
ing loanable funds. At the same time, there were indications in the final months
of the year that the decline in housing activity had bottomed out.
The slump in housing activity had ramifications in other parts of the econ­
omy. There was some redistribution of productive resources from housing to
other areas in the construction sector, as well as some actual release of resources:
employment declined in construction while rising strongly elsewhere, and an eas­
ing of demand for construction materials reduced pressures in supplying indus­
tries. Moreover, there was a slowing in the demand for home furnishings, particu­
larly household appliances. This had a bearing on the sluggishness, during the
second half particularly, of aggregate retail sales volume and of consumer goods
output. Toward the year-end, some appliance manufacturers apparently found
their inventories to be rather heavy and some production cutbacks were instituted.
The growth of consumption expenditures during the year was influenced by
a number of other factors in addition to the problems of the housing industry.
The vigorous rise of employment and of wage rates led to a brisk advance in
money incomes. Yet there was evidence that some uneasiness developed among
consumers as the year progressed, arising from various concerns: the Vietnam
conflict, the highly publicized issue of auto safety, the stock market decline,
rising prices and the possibility of an income tax rise, and apprehension in the
latter part of the year that a recession might lie ahead. The rash of buyer strikes
during the summer and fall, in protest over food prices particularly, was vivid
evidence of consumer restiveness.
Indeed, while personal income was growing strongly, real purchasing power
expanded less because of widespread price increases as well as a variety of tax
increases. The consumer price index advanced at a rapid pace, as price increases
were recorded for a broad range of consumer goods and services (see Chart 2).
The 3.3 per cent rise in this index during the year was the largest since 1951.
Aside from higher prices, a rise in social security tax rates also cut into the

16




growth of income available for spending. M oreover, higher taxes were imposed
by states and localities, including in this Federal Reserve District an income tax
in New York City and a sales tax in New Jersey. The quick reimposition of some
Federal excise taxes that had been cut in January was specifically intended to
restrain demand, as was the shift to graduated Federal income tax withholding
(the latter affecting only the timing of tax payments, not actual liabilities). After

C h a rt 2 . C O N S U M E R A N D W H O L E S A L E P R IC E I N C R E A S E S : T h e r is e in c o n ­
s u m e r p r ic e s a c c e le r a t e d in 1 9 6 6 , w ith s u b s ta n tia l a d v a n c e s fo r a broad r a n g e
o f nonfood c o m m o d itie s a s w e ll a s fo r fo o d s and s e r v ic e s . A t th e w h o le s a le
le v e l, th e o v e r a ll a d v a n c e w a s slo w e d by a d e c lin e of a g r ic u lt u r a l p r ic e s in th e
fo u rth q u a rte r, but in d u stria l p r ic e s r o s e m o re ra p id ly than in 1 9 6 5 d e s p ite a
d rop in raw m a t e r ia ls p r ic e s in th e la tt e r p a rt of th e y e a r .

f]|J |1961-64 AVERAGE

1965

j§§§§| 1966

CONSUMER
TOTAL INDEiK

SIRVICES

FOOD

NONDURABLE
GOODS (nonfood]

DURABLEGOODS

>>>*♦>

WPS,
w

r

;

w&
P i
km

m
■

^

vy/y$&&

r... YjWyy&Hw

I

/////
WHOLESALE
TOTALINDEX

FARMPRODUCTS
AND PROCESSED
FOODS

-

INDUSTRIAL
COMMODITIES

CONSUMER
FINISHEDGOODS
(nonfood)

PRODUCER
FINISHEDGOODS

—

m

1

_ W
r

M

“I
r

<

Mi

■

1




-

MM

...,.. M«!vM
;

Data are percentage changes on a December-to-December basis.

17

making allowance for the rise in the consumer price index, the take-home pay
after taxes of the average worker showed virtually no improvement during 1966.
Consumer demand for durable goods was sluggish through most of the year.
In addition to the effect of the housing decline on durables sales, new car de­
mand was decidedly less buoyant in 1966 than in the two preceding years. Auto
sales in the fall, after the introduction of the new models, did not come up to
industry expectations, and consequently production schedules were revised down­
ward. Total consumer spending on durable goods fell off in the second quarter,
when auto sales dipped very sharply, then recovered and held through the
second half at about the level reached in the first quarter. Excluding the effects
of higher prices, expenditures on durable goods declined somewhat during the
course of the year. Outlays for nondurables and services moved ahead through­
out 1966, but a substantial share of the higher sales volume reflected higher
prices, and in both categories the real growth of consumption during 1966 was
smaller than in 1965.

The pace of economic ac­
tivity in 1966 put heavy pressure not only on plant capacity but also on the
labor supply (see Chart 3). The unemployment rate held below 4 per cent in
most months and on several occasions dipped to 3.7 per cent— the lowest rate
in thirteen years. Labor shortages, especially of skilled workers, were a factor in
the amount of overtime worked and the high level of the factory workweek. The
pressures in the labor markets, and the skilled-worker shortage particularly,
were to some degree a reflection of the fact that 400,000 adult men (aged
20 and over) were added to the armed forces during the year, along with
about 125,000 teen-agers. Under the pressure of heavy nonagricultural and
military demands, the long-term downtrend of farm employment accelerated
further— releasing more than 300,000 workers. Close to 3 million persons, two
thirds of them adults, nevertheless remained unemployed at the year-end.
Though many of these workers were unemployed because of normal job turn­
over, the fact that many others were simply unable to find employment re­
affirmed the desirability and value of manpower training and similar programs
designed to give these workers the skills required for the jobs the economy has to
offer.
In the tight labor market conditions prevailing in 1966, wages rose more
rapidly than in any other year of the current expansion. Employers competed to
c o s t a n d p r ic e p r e s s u r e s a c c e le r a t e .

18




C h a rt 3 . R E S O U R C E U T IL IZ A T IO N : A t th e end o f 1 9 6 S , u tiliz a tio n r a t e s both
of m an p o w er and o f m a n u fa c tu rin g c a p a c it y w e re a lre a d y a t h ig h le v e ls . U n d e r
th e p r e s s u r e o f s tr o n g d e m a n d s, r a t e s of r e s o u r c e u tiliz a tio n r o s e e v e n 'f u r t h e r
in th e f ir s t p a rt o f 1 9 6 6 and re m a in e d h ig h th ro u g h o u t th e y e a r.

All data are sea s o n a lly adjusted.

attract and keep personnel, particularly those with scarce skills, and workers
generally found the situation favorable to obtaining sizable pay gains. The high
level of corporate profits, following their rapid advance over the several preced­
ing years, was frequently a significant factor both in the formulation of workers’
demands and in the terms of the settlements reached. In the latter half of the
year, an identifiable pattern of annual increases approximating 5 per cent was
emerging from well-publicized negotiations, raising serious concern over the
course of labor costs in 1967 when a number of major contracts com e up for
negotiation. Another worrisome development was the renewed interest in costof-living escalator clauses, which in the past have contributed significantly to
feeding inflationary pressures. The substantial gains in compensation being
recorded in a broad range of industries were outpacing the growth o f overall




19

labor productivity— which was slowing while wage rises were accelerating— and
unit labor costs began to rise after several years of virtual stability. Increases
of this sort were a particularly important factor in the rapid advance of con­
sumer service prices, but their impact was felt, on both profits and prices, over
a wide range of the economy. In the manufacturing sector, unit labor costs rose
by close to 3 per cent during the year, with the rate of increase accelerating in
the second half.
The strength of aggregate demand not only played a role in the rise of unit
labor costs but also clearly permitted— indeed even encouraged— producers of
goods and services to raise their prices on a broad front. The most striking
feature of the price advance during the year was its pervasiveness throughout
the nonagricultural sectors. Though sharp increases for foods and other farm
products were a significant force pushing up the overall level of both whole­
sale and consumer prices during much of 1966, the latter months of the year
saw a substantial reversal of this thrust as agricultural supply conditions im­
proved. Nonagricultural prices, in contrast, generally rose at a pace substantially
faster than in recent years. In consumer markets, this was true of prices both
for services and for nonfood commodities. At the wholesale level, the index of
industrial prices rose during the first half at an annual rate in excess of 3 per
cent, more than twice the 1965 advance. After midyear the industrial index
showed only a very modest further rise, largely as a result of price declines for
certain raw materials— such as lumber and other building materials and leather
— which had previously soared to very high levels. Prices of semifinished and
finished commodities continued to rise at a substantial pace. Increases during
the year were especially sharp for machinery and for producers’ equipment gen­
erally.

20




M onetary Policy and Credit Markets:
Restraint Takes Hold
At the beginning of 1966, it was evident that the major task of monetary policy
would be to restrain demand pressures in an economy that was clearly over­
heated. While there had been a moderate shift toward monetary restraint in
1965, in the latter months of that year it had become clear that the threat of
serious inflationary pressures was increasing. The need not only to preserve
balance in the domestic economy but also to improve our international pay­
ments position called for further measures to moderate the rise in aggregate de­
mand. Since fiscal policy in 1966 continued to be stimulative on balance, a heavy
burden was placed on monetary policy in the task of exerting the needed restraint.
The period roughly comprising the first two thirds of the year was character­
ized by a gradual increase in monetary restraint. In the face of very strong
credit demands both at banks and in securities markets, there was a sharp rise
in interest rates and increasing strain in financial markets. In contrast, the latter
months of the year were marked by an easing of demands in the private economy
and a slowing in the pace of credit expansion coupled with an appreciable calm­
ing and subsequent easing of the atmosphere in financial markets. With the
moderation of private demand, the Federal Reserve moved in the late fall toward
a less restrictive policy stance.
The gradual move toward restraint by the Federal Reserve during 1965 had
culminated in an increase in the discount rate in early December and a simul­
taneous increase in time deposit interest rate limits under Regulation Q. In De­
cember and January, the System sought to facilitate a smooth transition to higher
interest rate levels by easing the pressure on bank reserves, and net borrowed
reserves fell to levels of less than $50 million from an average of about $150
million in the preceding months. Thereafter, increasing pressure was put on
bank reserve positions. Member banks stepped up their borrowings from the
Federal Reserve, and net borrowed reserves averaged between $300 million
and $400 million in May and June.
Between July 14 and September 2, the boards of directors of seven of the
Federal Reserve Banks voted discount rate increases of either V* or 1 per­
centage point, subject to review and determination by the Board of Governors
of the Federal Reserve System. In no instance did the Board of Governors
approve the proposed discount rate increases. This Bank’s directors voted to
increase the discount rate V2 of a percentage point, to 5 per cent, on July 14.




21

The directors felt that such action was appropriate in view of the inflationary
pressures in the economy, the continuing balance-of-payments deficit, and the
absence of greater fiscal restraint. Moreover, the wide spread between the exist­
ing discount rate and most market rates was contributing to the uncertainties
in the credit markets and might lead to difficulties in discount window adminis­
tration. In disapproving this discount rate increase, the Board of Governors
noted that it might weaken the effect of the previously announced rise in the
British bank rate, designed to strengthen the position of the pound sterling. The
Board questioned whether a discount rate increase of V2 of a percentage point
would be sufficient to quiet domestic credit market uncertainties; it suggested
that the announcement effect of such a change could be exaggerated, and might
result in further undesirable interest rate escalation. The Board also noted that it
was not evident that the unusual spread between the discount rate and market
rates was causing unmanageable problems in discount window administration.
During the summer months, the Board of Governors of the Federal Reserve
System moved to limit member bank reserve availability by increasing, in July
and September, reserve requirements on time deposits in excess of $5 million.
In addition, the Board constrained banks’ ability to attract funds, and thus their
lending ability, by reducing maximum rates payable on smaller denomination
time certificates of deposit (C /D ’s) in July and September and by not raising
the maximum rate on large-denomination C /D ’s. Banks sought to maintain their
lending ability by reducing their Government securities holdings and bidding
aggressively for loanable funds. As a result, they were able to maintain a very
rapid expansion of lending, particularly to business, into the third quarter of the
year (see Chart 4).
Though policy restraint clearly worked to moderate aggregate demand growth
during the year, the heavy reliance on monetary measures was accompanied by
mounting strains in the financial markets. Through the late spring and into the
summer, sharply rising interest rates and growing congestion in the securities
markets reinforced expectations of still tighter credit conditions. These develop­
ments came to a climax in August, when many interest rates reached the highest
levels in more than a generation and disorderly conditions appeared to threaten
in some market sectors. In a statement to member banks dated September 1, the
Federal Reserve made clear its desire to see a slowing in the growth of bank loans
to business, as a means both of reducing the rate of total bank credit expansion
and of easing the pressure that banks were putting on the securities markets.
At the same time, the System sought to assure financial markets of its intent to
22




provide adequate reserves to support reasonable credit growth, and to prevent
any unduly severe market stringency. Furthermore, the Administration early

C h a rt 4 .
B A N K C R E D I T : F o llo w in g an e x c e p t io n a lly s tr o n g a d v a n c e in 1 9 6 5 ,
to ta l ban k c r e d it c o n tin u ed to g ro w a t a f a s t r a t e th ro u g h th e f i r s t e ig h t m on ths
of 1 9 6 6 . B u s in e s s lo a n s sh o w ed a p a r tic u la r ly ra p id e x p a n sio n , d u e in p a rt to
s p e c ia l p r e s s u r e s a s s o c ia te d w ith a s h ift in ta x p a y m e n t s c h e d u le s . H o ld in g s
of U n ite d S t a t e s G o v e rn m e n t s e c u r it ie s d e c lin e d th ro u g h m o st of th e y e a r ,
w h ile th e a g g r e g a te p o rtfo lio of o th e r in v e stm e n ts c e a s e d g ro w in g a f te r m id ­
y e a r . B u s in e s s loan g ro w th slo w e d in th e la t t e r m o n th s o f 1 9 6 6 , and th e e x ­
p a n sio n o f to ta l ban k c r e d it w a s in te r r u p te d ; a t th e c lo s e o f th e y e a r , h o w e v e r,
ban k c r e d it w a s a g a in e x p a n d in g .




Data show n are fo r all co m m e rcia l banks, as of the end o f the m onth, seasonally
adjusted. M onthly figu res fo r each yea r are expressed in te rm s o f an index w ith
the value for Decem ber o f the preced ing ye a r set equal to 100.

23

in September introduced measures of additional fiscal restraint and announced
a curtailment through the end of the year of demands to be placed on the credit
markets by the sale of Federal agency securities and participations in Federal
loans.
In the latter months of the year, market expectations improved significantly,
as financial pressures moderated and interest rates declined appreciably from
their late-summer peaks. The easing of excessive demand pressures led the Fed­
eral Reserve to relax the degree of restraint on bank reserve positions. While net
borrowed reserves gradually declined, the lending ability of banks nevertheless
remained heavily constrained. This tightness, as well as some apparent slacken­
ing in loan demand, was reflected in a very marked slowing of bank loan expan­
sion and an actual interruption, for a short period during the fall, in the growth
of overall bank credit. The expansion of total bank credit was resumed in
December. Late in the year, it was announced that, in view of substantial mod­
eration in bank credit growth and in financial market strains, the Federal Reserve
System’s September 1 statement was no longer applicable.

The aggregate expan­
sion of credit through most of 1966 was clearly too rapid relative to the econ­
omy’s capacity for real growth without causing inflationary imbalances. Busi­
ness demand for borrowed funds was extremely heavy, stimulated by the
widening gap between cash flow and outlays for investment in capital facilities
and inventories. Internal cash flow was very heavily limited in the first half of
the year by changes in the schedules for paying Federal corporate income taxes
and taxes withheld from employees, and these special but nonrecurring factors
provided an unusual extra stimulus to business borrowing in that period. Cash
flow was also affected by the fact that corporate profits, after reaching a record
high in the first quarter, failed to expand further in the second quarter and de­
clined slightly during the second half of the year. The credit needs associated
with the vigorous growth of economic activity wfcre augmented in the spring and
summer by anticipatory borrowing stemming from expectations of continuing
interest rate rises and shrinking credit availability. Moreover, large sales of Fed­
eral Government agency and participation issues, concentrated in the second
quarter, added heavily to pressures on the credit markets and on interest rates.
A striking characteristic of the very rapid growth of total credit during the
year was the substantial shift of credit flows toward business borrowers. Busi­

i n t e n s e c o m p e t i t i o n in t h e c r e d i t m a r k e t s .

24




nesses borrowed very heavily in the securities markets, while at the same time
banks were most reluctant to turn down their business customers. Given the
restrictive policy of the Federal Reserve, banks could maintain this rapid loan
growth only by seeking aggressively to attract loanable funds and by reducing
their holdings of securities. Early in the year, rates paid on C /D ’s of most maturi­
ties moved swiftly toward the 5 V2 per cent ceiling set under Regulation Q, but
the inflow of time deposit funds nevertheless slowed as competing money market
instruments became more attractive (see Chart 5). Facing a slowdown in sales
of large-denomination C /D ’s to business, banks moved aggressively to tap con­
sumer savings by offering small-denomination C /D ’s. A good part of the growth
in these deposits was at the expense of the banks’ own passbook savings accounts.
There was also a shift of savings flows away from thrift institutions, such as sav­
ings and loan associations and mutual savings banks, and toward both the credit
markets and commercial banks.
Aggressive bidding for Federal funds, at progressively higher interest rates, also
reflected the heavy pressure on bank liquidity. In still another measure to attract
loanable funds, large banks with international operations borrowed substantial
amounts of foreign-owned dollar balances through their branches abroad. As
banks found it increasingly difficult and costly to attract funds and bank liquidity
declined, lending terms grew progressively stiffer. Rates on consumer loans
generally advanced, and the prime rate, charged to the best business customers,
was upped three times during the year to reach 6 per cent in August. In such
conditions, the chief means open to banks of obtaining funds for lending was the
running-down of investment portfolios. The decline in United States Govern­
ment securities holdings was sharp, while the acquisition of state and local gov­
ernment securities— for which banks had provided important buying support in
recent years— slowed substantially. These actions contributed significantly to
the upward pressure on market interest rates.
Responding to the high market rates available, the savings flows of the nonfinancial public shifted markedly toward the direct acquisition of capital market
instruments in preference to claims on banks and other depository institutions.
The rise in direct lending meant that the public was increasingly acquiring less
liquid capital market instruments, with the result that its liquidity position
gradually became less ample. While depository institutions as a group experi­
enced a reduction both in fund inflows and in their importance as credit sup­
pliers, the commercial banks fared better than the savings and loan associations
and mutual savings banks. Savings institutions are heavily invested in long-term




25

C h a rt 5 .
IN T E R E S T R A T E S : In te n s e c o m p e titio n fo r fu n d s w a s r e f le c t e d in a
s h a rp r is e th ro u g h m uch of 1 9 6 6 in both s h o rt- and lo n g -te rm in t e r e s t r a t e s .
B y la te su m m e r, r a t e s in m any m a rk e t s e c t o r s had re a c h e d th e h ig h e s t le v e ls
in d e c a d e s , but r a t e s m oved lo w e r a g a in in th e la tt e r p a rt of th e y e a r a s fin an ­
c ia l p r e s s u r e s e a s e d .

M ortgage interest rate data are average yield s in secon d ary m arkets
for Federal H ousing A d m in istra tio n -in su red m ortgages on new hom es,
w ith th irty-ye a r m a tu rity. For short periods follow ing changes in the
m axim u m contractual rate, secon dary m arket yield data are not
available; such periods are indicated by broken lines.

26



mortgages carrying fixed interest rates, while the bulk of their liabilities is short
term. Thus these institutions had much less flexibility than the commercial banks
in raising the rate of return on their portfolios. This in turn limited their ability
to raise interest rates on deposits and compete for loanable funds.
The increasing interest rate competition among financial intermediaries dur­
ing the spring and summer was of concern to the Federal Reserve System and
to other regulatory agencies. Mutual savings banks and savings and loan asso­
ciations were encountering especially serious difficulties, as their overall net
intake of funds dwindled and many suffered sizable deposit losses. In this situa­
tion, special arrangements were made by the Federal Reserve to provide emer­
gency credit assistance to nonmember depository-type financial institutions that
might experience large deposit drains. These arrangements were designed for
use in the unlikely event that exceptional drains of funds from such institutions
could not be accommodated through normal adjustment procedures. In fact, the
special arrangements were not used.
On the other hand, the strong competitive position of banks in the deposit
markets enabled them to maintain a high rate of lending, especially to businesses.
To exert a tempering influence on bank issuance of C /D ’s, the Federal Reserve
Board in July and September increased the reserve requirements on time de­
posits in excess of $5 million. In July, the Board also reduced from 5Vi per
cent to 5 per cent the maximum rate that banks could pay on new multiplematurity time deposits, the form in which small-denomination C /D ’s were most
commonly sold.
As a result of the combined effects of heavy credit demands and restrictive
policy, it appeared to market participants that current and prospective credit
demands were running well ahead of available supplies, with the result that
market expectations deteriorated as the summer progressed. Interest rates were
by August at the highest levels in decades, and there was growing conges­
tion in the securities markets as the prospect of a further heavy volume of Fed­
eral agency securities and participation certificates was superimposed on the
strong and growing credit demands of businesses and state and local govern­
ments. At the same time, banks continued to liquidate sizable amounts of some
types of securities, while sharply curtailing the acquisition of others. Insurance
companies, too, were hard pressed to meet loan commitments as a sharp rise in
policy loans and a fall in loan repayments cut into their cash flow. The rise in
interest rates and an expectation that credit conditions would become still tighter
in turn stimulated additional anticipatory demand for credit. Against this back­




27

ground of sharply rising interest rates, falling bond prices, and a heavy calendar
of forthcoming issues, there developed something of an atmosphere of impending
crisis. Sellers in the securities markets found dealers very reluctant to bid, and
new issues moved very slowly even at sharply higher offering yields. Market
participants were increasingly concerned over the chance that even more severe
pressures might develop— especially if banks began to experience, at the
September tax date, a sizable loss of C /D funds.

m a r k e t te n s io n e ases .
The fears that characterized the credit
markets proved unfounded. The System sought, during the late summer and the
fall, to reemphasize that it had both the instruments and will to do whatever might
be needed to avoid a financial crisis. Perhaps more importantly, the Administra­
tion moved to moderate Federal credit demands. It was announced in September
that sales of participations in Federal loans would be temporarily suspended and
that Federal agencies likewise would cease temporarily to raise new funds
through the markets. Moreover, the Administration’s request for suspension of
tax incentives to investment was a specific measure to impose some degree of
fiscal restraint on aggregate demand, thus tending to moderate some of the
pressures generated by the heavy reliance on monetary policy. In late September,
Congress granted to the Federal Reserve, and to other agencies responsible for
supervising financial institutions, broader and more flexible powers to regulate
the rate practices of banks and savings institutions. The System quickly im­
posed a 5 per cent ceiling on the smaller denomination, fixed maturity C /D ’s
that were competing most directly with deposits at savings institutions. At the
same time, the Federal Deposit Insurance Corporation and the Federal Home
Loan Bank Board established various interest rate limits intended to reduce the
intensity of competition among institutions seeking to attract savings. These
actions served further to reduce the earlier concern regarding the condition of
the thrift institutions.
The restoration of a calmer atmosphere in the financial markets during the
fall took place along with a perceptible easing of demand pressures in the private
areas of the economy. This easing, as well as the abatement of anticipatory
credit demands, and the termination— at least temporarily— of special credit
needs associated with the acceleration of corporate tax payments, all contributed
to a reduction of financial pressures. Interest rates in a number of market sectors
declined appreciably from their late-summer peaks. Credit conditions remained
c r e d it

28




tight, however. State and local governments, in particular, continued to encoun­
ter difficulty in raising funds at interest rates acceptable to them, and there was
scarcely any easing in mortgage interest rates. Toward the year-end, however,
there was an appreciable improvement in fund flows to thrift institutions, and
this further helped to dispel the highly apprehensive atmosphere that had pre­
vailed in midsummer.
Late in the year, with some abatement of excessive demand pressures in the
economy, the Federal Reserve took a less restrictive stance in the supplying
of bank reserves. Net borrowed reserves declined and in December averaged
about $150 million, contrasted with as much as $400-500 million during the
August-October period. The moderation in aggregate demand pressures, as well
as the changes that had occurred in the credit markets, was reflected in the an­
nouncement late in December that the System’s September 1 statement relating to
business loans and discount administration had served its purpose and was no
longer applicable.
Though there was some apparent easing in the intensity of demand for bank
loans, as for credit generally, supply factors were also of great importance in the
sharp slowing of business loan expansion during the latter part of the year and
the interruption, for a period, of growth in total bank credit. In the period from
August through November, banks experienced a runoff of large-denomination
C /D ’s, to the extent of nearly $3 billion, as funds shifted to competing instru­
ments yielding more than the maximum 5V2 per cent payable on the C /D ’s.
The loss of C /D funds was partly offset by a rise in the inflow of foreign-owned
dollar balances, borrowed by some banks through their branches abroad. Never­
theless, to maintain expansion of their loan portfolios, banks had to make con­
tinuing sizable reductions in their investment holdings. Bank liquidity thus
declined even further, and this served as an important constraint on lending. As
the year drew to a close, the easing of financial market pressures and the decline
of interest rates helped to improve the position of banks by stemming the out­
flow of C /D funds, and the expansion of total bank credit was resumed. The
liquidity position of banks remained tight, however, and there was no easing
of their lending terms.
Bank credit expanded in 1966 by a bit less than $18 billion, down sharply
from the exceptionally large increase of $28 billion recorded in 1965. The pace
of overall credit expansion also slowed in 1966, but the reduction was milder
than that which occurred in bank credit. The flow of credit to the nonfinancial
sectors of the economy, from all sources, amounted to $70 billion in 1966, com­




29

pared with about $72 billion in 1965. Through most of 1966, as bank credit
became costlier and harder to obtain, borrowers increasingly turned to other
sources of credit. The year was thus marked by a substantial rise in the share of
credit flowing directly from savers to final borrowers, bypassing both com­
mercial banks and other financial intermediaries. In these circumstances, the
shrinkage in bank credit growth exaggerated the degree of tightness in overall
credit availability. The growth in direct lending was, however, associated with
a marked slowing in the growth of the nonfinancial public’s holdings of liquid
assets— money, time deposits, savings shares, and the like. As a result, there
was a sharp decline in the public’s liquidity position measured relative to the
aggregate volume of economic activity.
In the final months of the year, direct lending by the nonfinancial public
dropped off sharply. At the same time, financial intermediaries— thrift institu­
tions and insurance companies, as well as commercial banks— were giving high
priority to the rebuilding of their liquidity positions, and they increased their
lending only moderately. Thus, the flow of overall credit to the nonfinancial
sectors of the economy declined in the latter part of the year.

30




T H E W O R L D E C O N O M Y IN 1966
Th e United States Balance of Payments: Th e
Vietnam W ar Retards Restoration of Equilibrium
The United States balance-of-payments deficit on the liquidity basis1 increased
slightly to $1.4 billion in 1966 from $1.3 billion in 1965 (see Chart 6). The
direct and indirect effects of the expanding United States role in the Vietnam
war hindered further progress in reducing the deficit. In addition to mounting
United States Government and troop spending abroad, the growing military
effort also intensified domestic demand pressures which cut into the United
States trade surplus. Had it not been for a very large shift from liquid to non­
liquid investments by foreign monetary authorities and international organiza­
tions, a sharp worsening in the payments balance would have occurred. At the
same time, tighter credit conditions in the United States and the President’s
voluntary restraint program— particularly that part covering foreign transactions
of domestic business concerns— significantly improved the United States balance
on private long-term capital flows.
Tight credit conditions and relatively high interest rates in this country also
played a major role in the emergence in 1966 of a $0.3 billion payments sur­
plus on the basis of official reserve transactions— a substantial improvement over
the $1.3 billion deficit recorded in 1965. The squeeze on the liquidity positions
of major United States international banks in 1966 led them to bid aggressively

1 The “balance on liquidity basis”, as defined by the United States Department of Commerce in its
Survey o f Current Business, is the net sum of transactions in merchandise trade, services and trans­
fers, United States private capital. United States Government grants and capital, foreign nonliquid
capital, and unidentified transactions. When summed, these transactions equal the change, if any,
in the United States international liquidity position, i.e., in United States monetary reserves and
liquid liabilities to all foreigners. Another definition of the payments position published in the
Survey is called the “balance on official reserve transactions basis”. This definition differs from the
“liquidity” balance in that changes in liquid liabilities to private foreigners and nonmonetary inter­
national organizations are put “above the line” , and certain nonliquid liabilities to official foreigners
are put “below the line”. Hence, this balance is measured by changes in United States monetary
reserves and changes in liquid and certain nonliquid liabilities to official foreigners.




31

C h a rt 6 .
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 — I T S C O M P O N E N T S
A N D F IN A N C IN G : T h e U n ite d S t a t e s b a la n c e -o f-p a y m e n ts d e fic it (o n th e
liq u id ity b a s is ) in 1 9 6 6 w a s s lig h t ly la r g e r than th e d e f ic it th e p re v io u s y e a r .
T h e e x p a n s io n of th e V ie tn a m c o n flic t led to in c r e a s e d G o v e rn m e n t sp e n d in g
ab ro ad and in te n s ifie d dem and p r e s s u r e s in th e d o m e stic e c o n o m y, w h ic h c u t
in to th e tra d e s u r p lu s . D e s p ite a d e c lin e in liq u id lia b ilit ie s to o ffic ia l f o r e ig n e r s ,
to ta l liq u id lia b ilit ie s to a ll f o r e ig n e r s sh o w e d a la r g e r in c r e a s e in 1 9 6 6 than in
1 9 6 S , but g o ld lo s s e s d e c lin e d to le s s than h a lf th e 1 9 6 5 ra te .

i

1965

1966(Preliminary)
NETPAYMENTS

NETRECEIPTS

BALANCEON LIQUIDITYBASIS
M A J O R CO M PO N E N TS

TRADEBALANCE
NONMILITARY SERVICES
ANDTRANSFERS
UNITEDSTATESPRIVATE
LONG-TERMCAPITAL
UNITEDSTATESPRIVATE
SHORT-TERMCAPITAL
UNITEDSTATESGOVERNMENT
GRANTS AND CAPITAL
NETMILITARY EXPENDITURES
FOREIGNNONLIQUID
CAPITAL *
ERRORS AND OMISSIONS
FIN AN CIN G O F UNITED STATES DEFICIT

DECREASE IN ASSETS OR
INCREASE IN LIABILITIES

INCREASE IN ASSETS OR
DECREASE IN LIABILITIES

GOLD
FOREIGNEXCHANGE
IMFGOLDTRANCHEPOSITION
LIQUIDDOLLARLIABILITIES
TO PRIVATEFOREIGNERS t
LIQUIDDOLLARLIABILITIES
TO OFFICIALFOREIGNERS

1

0

1

Billions of dollars
* F o reign p riva te and o ffic ia l long-term in v e s tm e n ts in th is co u n try ,
p re p a ym e n ts fo r m ilita ry sh ip m e n ts , and p u rc h a s e s o f n on m a rke tab le
n o n co n ve rtib le U n ited States T re a s u ry secu rities.
+ In clu d in g n o n m o n e ta ry inte rn ationa l and regional o rg a n iza tio n s.

32



for dollar funds through their branches abroad. As a result, Euro-dollar rates
climbed steeply, private investors abroad were encouraged to increase their hold­
ings of dollars, and the flow of dollars to foreign central banks was cut back.
Prepayments of governmental obligations to the United States also tended to
reduce official dollar holdings in some countries. United States monetary re­
serves, however, declined.

With the rise in aggregate
spending intensifying the pressure on domestic resources and prices, excess de­
mand spilled over into imports and tended to retard export growth. Thus, the
trade surplus declined $1.1 billion to $3.7 billion in 1966.
Imports rose by 19 per cent in 1966, compared with 14 per cent in the pre­
ceding year and an average 6 per cent increase in the previous ten years. Almost
all the rise in 1966 was due to a larger physical volume of imports. Although
increased demands for imports were spread across the board, there were espe­
cially large advances in imports of consumer goods and capital equipment,
particularly machinery. The rise in machinery imports reflected, in part, the
lengthening delivery schedules of domestic suppliers. There was also a large
increase in automotive imports, mainly caused by the implementation of the free
trade agreement on automobiles and parts signed by the United States and
Canada in 1965. At the end of 1966, some slowdown in the rate of growth of
imports was probably due to the easing of pressures on domestic resources.
The large increase in imports was partially offset by a substantial rise in United
States exports. During the year, exports expanded by some 11 per cent, com­
pared with 4 per cent the previous year. The growth of exports was due to a
number of special factors as well as to the generally high level of economic activ­
ity abroad. Agricultural exports were up very sharply, partly as a result of a
step-up in United States Government-financed shipments under Public Law 480.
The free trade agreement on automotive products with Canada also led to sub­
stantial increases in exports of passenger cars and parts. Aside from these special
gains, exports of machinery (particularly electrical machinery) and chemicals
showed significant increases. Aircraft exports were, however, delayed by pro­
duction bottlenecks.
A reduction in the demand pressures in the United States economy could
halt the erosion of the trade surplus. But adverse cost-price developments in
the United States during 1966 could have a more lasting effect on our inter­
e x c e s s iv e d e m a n d c u t s t r a d e s u r p lu s .




33

national competitive position. In contrast to the more rapid rate of increase of
United States prices and costs, price increases in most industrial countries abroad
were apparently not much greater, and were often less, in 1966 than in 1965.
Thus, in 1966, the United States probably experienced a smaller improvement
in its international competitive position than in the earlier years of the current
economic expansion.

g o v e r n m e n t s p e n d i n g a b r o a d r i s e s . The increasing scale of the United
States commitment in Vietnam led to a substantial rise in United States Govern­
ment spending abroad. Net military spending overseas increased by an estimated
$0.7 billion. Almost all of this rise was directly associated with the war effort.
While the Government’s net foreign grants and loans did not increase sig­
nificantly, there would have been a sizable increase in the outflow except for the
receipt of over $0.4 billion of debt prepayments by France, Italy, and Germany.

c a p i t a l o u t f l o w s r e d u c e d . In contrast with the adverse
impact of the Vietnam war, a number of factors— including the restrictive credit
policy of the Federal Reserve and the voluntary restraint program— contributed
to a significant improvement in the United States balance on long-term capital
account. The flow of private foreign capital into nonliquid dollar assets was sub­
stantial, while the outflow of private United States long-term capital was appar­
ently reduced by over $0.9 billion in 1966 from approximately $4.4 billion in
1965 and 1964.
While direct investment outflows by United States corporations in 1966 were
not substantially below the $3.4 billion outflow in 1965, the net balance-ofpayments impact of these outflows was mitigated as a result of the Administra­
tion’s voluntary restraint program. Under this program, participating corporations
were requested to limit the total of direct investment outflows and reinvested
earnings in developed countries abroad. However, funds borrowed overseas could
be set against investment outflows in meeting targets, and United States corpora­
tions financed a larger proportion of their foreign investments through new securi­
ties issues in Europe. The total of such issues by financial affiliates incorporated
in the United States is estimated to have risen to $0.6 billion in 1966, from
about $0.2 billion in 1965. The long-term capital inflow resulting from these
new issues abroad partly offset the adverse balance-of-payments impact of
lo n g -te r m

34




direct investment outflows. At the same time, the restraint program encouraged
large borrowings in foreign markets by subsidiaries and affiliates incorporated
abroad of United States firms, thus reducing their need for direct investment
funds from the United States.
The balance of payments drew additional support in 1966 from a moderate
reduction in long-term United States bank loans to foreigners. The strong domes­
tic demand for credit and a shortage of loanable funds reduced the incentive
to lend abroad, with the result that net bank claims on foreigners declined by
some $0.3 billion— the decline in long-term claims more than offsetting a
slight increase in short-term claims. Consequently, most banks had no diffi­
culty in staying well within the guidelines suggested by the Federal Reserve under
the voluntary credit restraint program and, at the end of the year, banks were
about $0.9 billion below the recommended ceiling.
Also contributing to the reduction in the outflow of private United States long­
term capital in 1966 was a modest decline in net purchases of foreign securities
by United States residents. Although new issues by foreign borrowers totaled
about the same in both years, the 1966 total was swollen by some $150 million
of Canadian securities that were delayed from 1965 to 1966 under an intergov­
ernmental understanding. Redemptions and transactions in outstanding foreign
securities resulted in a larger influx of funds in 1966 than in 1965, but a large
part of this improvement reflected special purchases by the Canadian govern­
ment of Canadian and World Bank securities held by United States residents.
In any case, it appears that tighter credit conditions and higher long-term inter­
est rates in the United States tended to deter new offerings by foreign borrowers
and to discourage purchases of foreign securities by domestic residents.
An inflow of foreign nonliquid capital in excess of $2.0 billion— compared
with a $0.2 billion inflow in 1965— provided major support for the United States
payments position. About half of this inflow reflected shifts out of short-term,
liquid dollar instruments into long-term investments by international institutions
and foreign monetary authorities. In addition, net military prepayments by Ger­
many (under its agreement to offset the foreign exchange cost of stationing
United States troops in Germany by military purchases in the United States)
contributed to the inflow of official nonliquid capital.

m o d e r a te s h o r t-te r m
c a p i t a l o u t f l o w s . While long-term capital
flows shifted sharply in favor of this country in 1966, there was a moderate




35

outflow of United States short-term funds. This outflow represented a substan­
tial deterioration from the $0.8 billion inflow of funds in 1965. However, the
1965 experience had been largely due to the initial impact of the voluntary
restraint program, as United States business firms and financial corporations
repatriated funds held abroad in compliance with the 1965 guidelines.

f i n a n c i n g t h e d e f i c i t . In contrast to 1965, when the liquidity deficit was
largely financed by gold sales, the $1.4 billion 1966 deficit was financed by an
increase of over $0.8 billion in liquid dollar liabilities to foreigners and a $568
million decline in United States monetary reserves. The reserve loss consisted
of a $571 million gold outflow and a $537 million decline in the United States
International Monetary Fund (IMF) position, only partially offset by a $540
million increase in United States holdings of convertible currencies. While liquid
dollar liabilities to foreign monetary authorities declined by nearly $1.6 billion
in 1966, liquid liabilities to private foreigners— which include the foreign branches
of United States banks— and nonmonetary international institutions increased by
$2.4 billion. This massive buildup in foreign private liquid dollar holdings,
which helped reverse the preceding year’s flow of dollars to foreign central
banks, largely reflected tight credit conditions in the United States. Major
United States international banks, in their efforts to satisfy domestic demand for
credit, borrowed heavily in the Euro-dollar market, including funds with very
short maturities, through their foreign branches. As a result, liabilities to these
branches abroad increased by approximately $2.5 billion. A substantial portion
of the inflow of liquid funds represented by this increase in foreign private hold­
ings of dollars could be reversed should credit conditions in this country ease
significantly in comparison with credit conditions abroad. Such a reflux could
lead to substantial dollar sales to foreign monetary authorities, which by itself
could shift the balance on official reserve transactions into deficit again.
Most of the 1966 decline in the United States gold stock occurred in the first
half of the year and was more than accounted for by French gold purchases.
However, as the year advanced the French payments position deteriorated, and
the Bank of France bought no more gold from the United States after Septem­
ber. During 1966, the United States made a number of drawings on the IMF;
however, other countries drew substantial amounts of dollars, reducing the
Fund’s dollar holdings and thus decreasing the United States repayment obli­
gation. As a result, the increase in net United States indebtedness to the Fund

36




was held to $537 million during 1966. The increase in United States holdings
of convertible currencies largely reflected official United States participation in
international currency stabilization operations; monetary authorities abroad re­
ceived dollars to use in these operations, and the United States received foreign
currencies in return.

r e s t r a i n t r r o g r a m e x t e n d e d . In view of the continu­
ing need for a reduction in the United States balance-of-payments deficit, the
Administration’s voluntary restraint program was extended for another year
in December 1966. The Department of Commerce guidelines for 1967 were
designed to improve the aggregate of selected balance-of-payments transactions
of nonfinancial corporations. As part of the overall target, the total of direct in­
vestment outflows and retained earnings in selected countries, minus borrow­
ings abroad, is to be limited under a formula designed to hold the net total of
such flows close to the 1966 experience.
The Federal Reserve guidelines for banks in 1967 are somewhat more restric­
tive than in 1966. The 1967 ceiling on bank credit to foreigners was kept at the
same level as in 1966, but banks were asked to space out the use of the leeway
under the ceiling which, as of September 30, 1966, amounted to approximately
$1.2 billion. Not more than 40 per cent of the leeway is to be used before
March 31, 1967, and an additional 20 per cent becomes usable in each of the
remaining three quarters to the end of 1967. In addition, increases in credits to
developed countries (which should give absolute priority to financing United
States exports) during the five quarters should take up no more than 10 per cent
of the total leeway. In effect, this provision limits the increase through the end
of 1967 in lending to developed countries by banks to about $120 million. In
connection with such loans, banks were again requested to avoid policies that
would place undue burden on the payments position of the United Kingdom,
Japan, and Canada. The guidelines for nonbank financial institutions were sim­
plified: these institutions were requested to limit the increase in certain types of
loans and investments in selected foreign countries until the end of 1967 to no
more than 5 per cent of the level on September 30, 1966.
v o lu n ta r y




37

T h e International M onetary System:
Progress in Cooperation and Reform
In 1966, the Free World made further progress in expanding working arrange­
ments to meet current problems and in developing plans for reform of the insti­
tutional framework so that future reserve adequacy and efficient adjustment of
international payments imbalances can be assured.
The strong speculative pressure on sterling in the exchange markets in early
summer was met by the British authorities through use of credit facilities that
were largely in force when the heavy selling of sterling started. These facilities,
developed in the last few years, included central bank and other credit lines from
the United States, nine other countries, and the Bank for International Settle­
ments (BIS). The short-term credits from European central banks, which had
formed a part of the September 1965 arrangements in support of the pound,
came up for renewal in June and were placed on a continuing basis, this time
including French participation. Drawing upon the various facilities as selling
pressures on sterling grew, the British authorities were able to gain the
time needed to put into effect the sweeping corrective program announced on
July 20 (seepage 41 below).
The sterling and other exchange markets, which had been subject to consider­
able buffeting during July when speculation against the pound reached major
proportions, settled down to more balanced and orderly trading in August, but
in an atmosphere of continued anxiety. Against this background, the Federal
Reserve broadened earlier discussions aimed at enlarging its network of swap
arrangements with foreign monetary authorities (eleven central banks and the
BIS). In September, nearly all swap lines were increased, including a $0.6 bil­
lion increase (to $1.35 billion) in the facility with the Bank of England. The
total of all arrangements was raised to $4.5 billion from $2.8 billion, increasing
reciprocal credit facilities to levels well above the size of any routine drawing
that might reasonably be expected and thus creating a broad margin of safety
against any unforeseeable threats to international currency stability. The Bank
of England announced the negotiation of new credit facilities with European
central banks at the same time that its swap line with the Federal Reserve was
increased; these moves helped to set the stage for the return of market confidence
in sterling.
In addition to the expansion of bilateral credit lines between central banks,
the general increase in country quotas at the IMF served to strengthen further
38




the international monetary system. Most countries— including the United States
— agreed to a 25 per cent increase in their quotas, and some sixteen countries
(including Canada, Germany, and Sweden), whose international transactions
have become increasingly important in the world economy, accepted even larger
percentage increases. The effect was to raise aggregate IMF quotas from $16.0
billion to $20.6 billion during the year. The IMF also made several innovations
in its own operations. For example, in connection with a United States drawing
in August, the Fund arranged to borrow $250 million equivalent of lire from the
Italian monetary authorities; the lire borrowed by the IMF were additional to
those to be supplied by Italy under its Fund quota and committed to the Fund
under the General Arrangements to Borrow (instituted in 1962). Also, the IMF
increased the amounts available under its compensatory financing facility, estab­
lished three years ago to help counter the effects of temporary declines in export
proceeds of primary producing countries.
Official discussions of international monetary problems continued in 1966,
delineating new areas of agreement upon which eventual reform— probably in
the form of a contingency plan for deliberate creation of international reserve
assets— may be based. The deputies of finance ministers and of central bank
governors of ten major industrial countries— the Group of Ten— issued a report
in August, describing the results of their deliberations on the adequacy of in­
ternational liquidity and the possible development of new reserve media. This
report, and the statements of the various countries at the September IMF meet­
ing in Washington, revealed significant areas of agreement, although major
differences remain. It was agreed, for example, that the distribution of any new
reserves among countries should follow the pattern of the distribution of quotas
in the Fund, or a similar formula, and that new reserves should be created on
the basis of long-term needs for liquidity, rather than to finance particular na­
tional deficits or short-term fluctuations in world economic activity. Moreover,
there was general agreement that the interests of all Fund members in an ade­
quate growth in world reserves must be fully recognized, although it was clear that
the major industrial nations, which must provide much of the financial strength
behind any new reserves, would have to have an appropriate weight in decisions
to create new reserves, especially with respect to timing and amounts. While the
consensus among developed countries was that existing reserves are adequate,
differences remain on how soon it would be necessary to activate any contingency
plan. In addition, important questions concerning the form new reserve assets
should take and procedures governing holding and use remain to be resolved.




39

Any decisions on these matters must, of course, be consistent with the con­
tinued role of the dollar as an international currency. At the time of the Sep­
tember IMF meeting, it was decided to hold a series of joint meetings between
the executive directors of the Fund and the deputies of the Group of Ten to
develop a convergence of views on the elements of a contingency plan. The first
of these joint meetings was held at the end of November 1966.
Concurrent with the discussions on liquidity, a study group in the Organiza­
tion for Economic Cooperation and Development considered the closely related
question of improving the balance-of-payments adjustment process. To the ex­
tent that the magnitude of payments imbalances can be limited, or adjustment
of imbalances speeded up, or more appropriate policy measures taken to correct
imbalances, the need for international reserves would be reduced. The study
group’s report (also released in August) was a review of the types of poli­
cies— and the strengths and weaknesses of each— that are appropriate to bring
about adjustment in varying circumstances. The responsibilities of surplus as well
as deficit countries were discussed. Some attention was given to the possibility
of establishing rules under which countries would agree to take certain types of
policy measures under specified conditions. The prevailing view, however, was
that circumstances vary too much for rigid rules to offer appropriate guidance.
However, a set of informal guidelines, which should contribute to improving the
adjustment process, was developed. In this connection, the group recommended
that fiscal policy be used more actively as a countercyclical weapon, and that
more flexible and selective fiscal instruments be adopted in some countries.

Economic Conditions Abroad:
Strains on Resources Reduced
Perhaps the most dramatic events of the world economy in 1966 were related
to Britain’s efforts to reshape its economy so that both a high level of domestic
growth and the pound’s stability would be assured over the long run. Throughout
the 1960’s, and before, the British economy has suffered from a variety of ills:
recurrent excess demand, inadequate growth of productivity, strong tendencies

40




toward price and wage inflation, and— particularly since 1964— a stubborn pay­
ments deficit.
Although Britain had made some progress toward achieving internal and ex­
ternal equilibrium in 1965, the continued rise in demand coming from both the
household and public sectors was pushing up prices and spilling into imports at
an increasing rate. As a result, the basic balance-of-payments position worsened
somewhat in the first half of 1966. In addition, sizable wage settlements sug­
gested that further spiraling of costs and prices would be forthcoming. The May
budget was designed to deal with these difficulties, but the major impact of the
budget was to come in the autumn, and events in the exchange markets did not
allow the time needed for these measures to become effective. The seamen’s
strike, the Rhodesian crisis, and tight monetary conditions abroad had an un­
favorable impact on the pound in the exchange markets. These pressures cul­
minated in the July attack on sterling in the exchange market, and the British
government moved quickly to assemble an even more severe series of restraining
measures.
Monetary measures, announced early in July, included an increase in the Bank
of England’s discount rate to 7 per cent, a tightening of the allowable ceiling on
lending by commercial banks, and a doubling of the special deposits required
of commercial banks. These measures did not stem the sales of sterling.
On July 20, new and more drastic measures were announced. Taxes were in­
creased, consumer credit controls were tightened, and the government announced
cuts in planned domestic and overseas spending. On top of this, prices, wages,
and dividends were to be frozen for six months and severe restraint was to be
maintained for another six months, with legislative powers to enforce the
program.
Evidence of the effectiveness of these measures accumulated over the re­
mainder of the year. Excess demand pressures in the domestic economy were
considerably relieved, and imports tended to level off. At the same time, exports
resumed their earlier rise. While the long-run problems were still to be solved,
sterling had a more resilient tone in the exchange market by the year-end, and
the Bank of England had not only repaid part of the official credits received
earlier, but had also substantially reduced its commitments in the forward ex­
change market.
Britain’s efforts to achieve external balance had been complicated by the gen­
eral tightening of credit conditions and widespread increases in interest rates
in the other industrial countries in 1966 (see Chart 7 and Chart 8). Worldwide




41

C h a rt 7 .
C E N T R A L B A N K D IS C O U N T R A T E S 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 IN S E L E C T E D C O U N T R IE S : M o n e ta ry r e s t r a in t and s t ro n g c r e d it d e ­
m an d s re s u lte d in in c r e a s e s in sh o rt-te rm in t e r e s t r a t e s in m o st in d u s tria liz e d
c o u n tr ie s and in th e E u ro - d o lla r m a rk e t in 1 9 6 6 . M a rk e t r a t e s e a s e d to w ard th e
y e a r-e n d in so m e c o u n trie s , a s in fla tio n a r y p r e s s u r e s m o d e ra te d .

EURO-DOLLARMARKET
^
^

---------

IEE-MONTHDEPOSITS

UNITEDSTATES
TREASURY BILLS
-----*«

4.0
3.9

— s'

4.5

UNITEDKINGDOM
7.0

4.5

DISCOUNTRATE

6.6

CALLMONEY

yI--=----70
—■■— 66

TREASURY BILLS

NETHERLANDS
DISCOUNT RATE

V

47

5.0

LLMONEY

\ JAPAN
\
4.-^ CALLMONEY
\

CANADA

4 .2 5
3.9

DISCOUNTRATE

8—"iw- n . 5.25
5.0

TREASURY BILLS

I I I I i 1I I 1 M I I I I I I I I I I I
1965

DISCOUNTRATE
I
SWITZERLAND CALLMONEY-.
—------------ -DISCOUNT RATE
i i 1 i i 1 if 1 ii 1 i i 1 i i 1 i V 1 ii
1965

1966

demands for credit were very strong, and central banks in a number o f major
countries moved to restrict credit availability in efforts to restrain inflationary
pressures. Between March and July, discount rates in Canada, the Netherlands,
Germany, Belgium, Switzerland, and Sweden were all increased. Although the
tightening of monetary policy was primarily directed to restraining domestic
demand in each o f these countries, the general rise in interest rates abroad was
42




5.5

often cited as a supplementary factor by the various central banks.
Other restraining measures were also taken in many of these countries. In
Canada, new measures largely took the form of fiscal restraint, including both
the scaling-down of planned government expenditures and upward adjustments
in tax rates. In the Netherlands, budgetary measures were supplemented by
the imposition of a ceiling on wage increases in new labor contracts and a con­
tinuation of the ceiling on bank lending. In Belgium, price controls were main­
tained on many basic products throughout the year, and a price freeze was im­
posed from May to September. By and large, as the year drew to a close, there

C h a rt 8 .
L O N G -T E R M B O N D Y I E L D S IN S E L E C T E D C O U N T R IE S : H e a v y d e ­
m an d s fo r c r e d it in th e U n ite d S t a t e s and m any E u ro p e a n c o u n t r ie s le d to
w id e s p re a d in c r e a s e s in lo n g -te rm in t e r e s t r a t e s in 1 9 6 6 . In th e fin a l m o n th s
of th e y e a r , h o w e v e r, lo n g -te rm in t e r e s t r a t e s d e c lin e d m a rk e d ly in th e E u r o ­
d o lla r m a rk e t, th e U n ite d K in g d o m , and G e rm a n y , and to a le s s e r e x te n t in a
n um b er of o th e r c o u n t r ie s , m o stly r e f le c t in g an e a s in g of d em and p r e s s u r e s .




Yie ld s on re p re s e n ta tive g o v e rn m e n t o r public se c to r bonds, except fo r
Japan w h e re seven-yea r industria l bonds are used.

43

was evidence that demand pressures had eased in most of the countries that
had been suffering from overheating.
In Germany, moderating domestic demand was partly offset by a continued
increase in exports, and unemployment remained relatively low. With the growth
of imports slowing, the trade surplus increased sharply and Germany’s balance
of payments shifted from deficit to surplus in 1966.
In Japan, Italy, and France, the economic situation during 1966 was quite
different. Previous retrenchment programs had reduced pressures on resources,
and by the beginning of 1966 policies of expansion were again in force. As a
result, these countries were able to achieve a substantial increase in economic
growth in 1966 and, in the case of Italy and Japan, price pressures were sig­
nificantly reduced from 1965 (see Chart 9 ). At the same time, interest rates
were relatively stable in Japan and Italy, while rates in France gradually rose.
The payments surpluses of Italy and France narrowed substantially in 1966 as
their economies expanded. Japan’s surplus apparently declined only slightly
in 1966 as an increase in its trade surplus partly offset a larger outflow of long­
term capital than in 1965.
In the less developed countries, the picture was mixed, especially with respect
to their all-important export markets. Several of the Middle Eastern oil-producing
states benefited, in terms of increased receipts, from more advantageous tax and
royalty agreements worked out in 1965 and early 1966, and their international
reserves rose in 1966. Copper supplies were tight early in the year, and Chile and
Zambia benefited from the very high levels that copper prices reached toward
the middle of the year. On the other hand, a number of other Latin American
and African countries were adversely affected by declining sugar and coffee prices
during the year.
The capital needs of the less developed countries remained great, but the level
of aid from the industrial countries did not increase significantly in 1966. How­
ever, to encourage private investment in less developed areas, the World Bank
established procedures for settling, on a voluntary basis, investment disputes be­
tween states and nationals of other states. Over forty-five countries had signed
the convention by late summer 1966. Moreover, international arrangements of a
regional nature are playing a more important role in development finance. The
Asian Development Bank, with over thirty members and a total capital authori­
zation of $1.1 billion, was inaugurated in December 1966. The African Devel­
opment Bank enlarged its membership and resources, although it had not yet
begun actual lending operations. And, as part of the movement toward integra-

44




C h a rt 9 .
IN D U S T R IA L P R O D U C T IO N A N D C O N S U M E R P R I C E S IN S E L E C T E D
C O U N T R IE S : In F r a n c e , It a ly , and Ja p a n , in d u stria l p ro d u c tio n in 1 9 6 6 in ­
c r e a s e d m uch m o re ra p id ly than in 1 9 6 5 , w h ile in th e U n ite d K in g d o m , B e lg iu m ,
and G e rm an y , p ro d u c tio n g re w a t le s s than h a lf th e r a te of 1 9 6 5 . P r ic e p r e s ­
s u r e s in Ita ly and Ja p a n w e re s ig n ific a n tly re d u c e d in 1 9 6 6 . A lth o u g h p r ic e
in c r e a s e s in C a n a d a , th e N e th e rla n d s , and S w e d e n w e re n o tic e a b ly la r g e r in
1 9 6 6 than in 1 9 6 5 , t h e r e w a s so m e e a s in g of in fla tio n a ry p r e s s u r e s a s th e
y e a r d re w to a c lo s e .

W here consu m er price o r industrial production data w e re not available for all o f 1966, the
percentage increase in 1966 o ve r 1965 was com puted by com p aring the average level o f
the index in the m onths fo r w h ich figu res w e re available in 1966 w ith the average level o f
the index for the sam e m onths in 1965.

tion in Latin America, a limited clearing agreement (including bilateral credit
facilities) began operating among most members of the Latin American Free
Trade Association.
In 1966, a number of Eastern European countries continued to modify their
economic policies. Overall production targets were still determined by central
planning, but more emphasis was placed on the market process and on decentrali­
zation of decision making. Furthermore, some progress was made in rationalizing




45

price and wage structures to reflect relative scarcities. The pace of change differed
among these countries, with Czechoslovakia and East Germany tending to show
greater experimentation along new lines. At the same time, trade between Eastern
Europe and the West continued to grow, with some evidence that Western
European nations, who accounted for the bulk of this growth, were offering
easier credit terms.

46



T H IS B A N K ’S O P E R A T IO N S
Volume and Tre n d of the Bank’s Operations
d o m e s t i c o p e r a t i o n s . The volume of operations in most departments of
the Bank rose in 1966, reflecting continued growth in the Bank’s activities of
transferring funds for the public during a period of rapid economic expansion
and as agent of the Treasury.
Both the number and the dollar amount of checks processed by this Bank
reached record levels during 1966. The dollar amount of United States Govern­
ment checks handled increased by 29 per cent, to $29 billion, but the number of
such checks increased only 1 per cent over the 1965 level. Some 770 million
other checks were handled during the year, an increase of 6 per cent over 1965 as
compared with a 3 per cent advance in 1965 over 1964. While the dollar volume
of such checks processed during 1966 rose 11 per cent to $589 billion, the rate
of increase was smaller than the very large 20 per cent gain recorded in 1965.
The relatively slower rate of growth in 1966 reflected an 18 per cent decrease in
the dollar amount of checks drawn on this Bank, which was the counterpart of
expanded use of this Bank’s wire transfer facilities to effect interbank settlements.
In contrast, the dollar volume of checks drawn on commercial banks during 1966
increased by 28 per cent, compared with a 17 per cent increase recorded in 1965
over 1964.
Although the dollar amount of checks drawn on this Bank fell in 1966, there
was a sharp rise in the use of this Bank’s wire transfer facilities— more than off­
setting the lower check volume. The dollar volume of wire transfers (excluding
Treasury transfers between Federal Reserve Districts) increased by 24 per cent
to reach $2,128 billion, an all-time high. This gain was more than double the
percentage increases that occurred in each of the previous two years. However,
the 11 per cent advance in the number of transfers during 1966 was roughly of
the same size as the comparable gains recorded in the past two years.
This Bank continued to make substantial improvements during 1966 in its
check collection function which had completed the transition to a fully auto-




47

SOME MEASURES OF THE VOLUME OF OPERATIONS OF
THE FEDERAL RESERVE BANK OF NEW YORK (Including Buffalo Branch)
N u m b e r o f p i e c e s h a n d le d (in thousands) ★

I9 6 0

1965

C u rrency r e c e i v e d ..............................................................................................

1 ,4 6 9 ,1 3 5

1 ,4 5 5 ,2 1 9

C oin r e c e iv e d f

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

1 ,4 6 2 ,8 3 0

6 7 8 ,2 4 8

G old bars an d b a g s o f g o ld c o in h a n d l e d ...........................................

347

430

C h eck s h a n d led :
United S ta tes G overn m en t c h e c k s ........................................................

6 3 ,9 3 3

All o t h e r ..............................................................................................................

7 6 9 ,6 5 3

P ostal m on ey o r d e r s h a n d l e d ......................................................................

2 9 ,7 9 2

3 1 ,5 3 3
3 ,5 8 1

6 3 ,2 5 9
7 2 7 ,7 0 7 *

C o llection ite m s h a n d le d :
U nited S ta tes G ov ern m en t c o u p o n s p a i d ...........................................

3 ,7 1 3

C redits fo r d ire ct s e n d in g s o f c o lle c tio n i t e m s ..............................

337

339

All o t h e r ..............................................................................................................

1 8 ,3 9 9

1 8 ,6 8 9

United S ta tes sa v in g s b o n d s ...................................................................

3 0 ,8 3 1

3 0 ,8 1 4

All o th e r o b lig a tio n s o f th e U nited S t a t e s ........................................

9 ,8 9 5

8 ,3 7 7

Issu es, re d em p tion s, e x c h a n g e s by fisca l a g e n c y d ep a rtm en ts:

O b lig a tion s o f Federal a g e n c ie s §

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

142

53

O b lig a tion s o f intern ationa l o r g a n i z a t i o n s ........................................

76

135

S a fe k e e p in g o f s e c u r itie s :
P ie c e s rec e iv e d an d d e l i v e r e d ................................................................

1 0 ,1 3 0

8 ,5 2 1

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

5 ,1 3 1

5 ,7 6 7

W ire tra n sfe rs o f funds||..............................................................................

1 ,1 2 3

C o u p o n s d e ta c h e d

1,011

A m o u n t s h a n d le d (in millions of dollars)
a d v a n c e s f ...........................................................................

3 1 ,1 4 8

2 4 ,3 2 7

C u rrency r e c e i v e d ..............................................................................................

D iscou n ts

an d

1 0 ,1 8 7

9 ,9 6 8

C oin r e c e iv e d f

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

167

48

G old b a rs an d b a g s o f g o ld co in h a n d l e d ...........................................

4 ,9 1 2

5 ,9 9 4

C h eck s h a n d led :
U nited S ta tes G overn m en t c h e c k s ........................................................

2 9 ,4 8 2

All o t h e r ..............................................................................................................

5 8 9 ,0 5 9

P ostal m on ey ord e rs h a n d l e d ......................................................................

604

613

U nited S ta tes G overn m en t c o u p o n s p a i d ...........................................

3 ,1 3 2

2 ,8 3 4

Credits fo r d ire ct s e n d in g s o f c o lle c tio n i t e m s ..............................

826

820

All o t h e r ..............................................................................................................

3 ,5 2 4

3 ,8 4 1

2 2 ,8 9 7
5 3 0 ,1 8 2 *

C o llection item s h a n d led :

Issu es, re d em p tion s, e x ch a n g e s by fisca l a g e n c y d e p a rtm e n ts:
U nited S ta tes sa v in g s b o n d s ...................................................................

1 ,7 6 8

1 ,7 5 0

All o th e r o b lig a tio n s o f th e U nited S t a t e s ........................................

6 1 2 ,5 0 3

5 8 5 ,4 6 0

O b lig a tion s o f Federal a g e n c ie s § ...........................................................

7 ,5 6 4

3 ,0 5 2

O b liga tion s o f intern ational o r g a n i z a t io n s ........................................

925

939

S a fe k e e p in g o f s e cu ritie s:
Par valu e p ie c e s re ce iv e d and d e l i v e r e d ...........................................

7 8 5 ,2 8 1

7 2 4 ,2 8 2

W ire tra n sfers o f funds||..............................................................................

2 ,1 2 7 ,9 0 6

1 ,7 1 5 ,0 0 1

* 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,
t Revised.
§ The 1966 figures include the addition of two agencies.
|| Excludes Treasury transfers between Federal Reserve Districts.
f The number of discounts and advances handled in 1966 was 2,698, compared with 1,555 in 1965.

48




mated system in 1965. The eight high-speed check processing systems in use at
the beginning of 1966 were replaced during the year with seven new systems of
greater capacity. This change contributed importantly to increasing the efficiency
and lowering the costs of handling the rapidly rising volume of checks. By De­
cember, 91 per cent of all checks dispatched by this Bank were processed on the
high-speed equipment, compared with 90 per cent in December 1965. About
99 per cent of the checks handled by this Bank were preprinted with the routingsymbol transit numbers of the drawee banks in Magnetic Ink Character Recog­
nition (MICR) symbols.
During 1966 coin receipts (other than shipments of new coin from the Mint)
increased substantially, reversing the downward trend that had prevailed since
1962. This Bank received 1,463 million pieces of coin in 1966, more than double
the number received in 1965, while the dollar volume of these receipts amounted
to $167 million, compared with only $48 million recorded in 1965. The sharp
rise in coin receipts reflects the end of the five-year coin shortage. With the in­
fusion of new coins into circulation, as authorized by the Coinage Act of 1965,
there was only a limited amount of coin rationing during the first quarter of
1966. Thereafter, rationing was eliminated for all coins except half-dollars, which
continued to be distributed on a pro rata basis.
This Bank’s fiscal agency operations expanded moderately in 1966. The
processing of obligations of the United States Government (other than United
States savings bonds), Federal agencies, and international organizations in­
creased by 18 per cent to about 10 million items; the corresponding dollar vol­
ume advanced 5 per cent to reach $621 billion. The enlarged volume of opera­
tions reflected in part the expansion of this Bank’s fiscal agency function, as the
Bank became the agent for the Export-Import Bank and the Commodity Credit
Corporation.
Aggregate Second District member bank borrowings from this Bank during
1966 reached a postwar high of $31.1 billion as monetary policy tightened. This
was 6 per cent higher than the previous postwar high of $29.4 billion recorded
in 1957. However, on a daily average basis, the dollar volume of discounts and
advances in 1966 was $171 million, 19 per cent below the 1957 high of $212
million. The proportion of Second District member banks which borrowed at
least once during the year was up sharply in 1966 to 52 per cent of the banks
that were members at any time during the year, compared with 39 per cent
during 1965.
The growing public interest in economic affairs was reflected in the activities




49

of this Bank as a source of pertinent information. Throughout the year, over
half a million copies of the Bank’s publications, other than periodicals, were
distributed and 279 speeches were delivered by the staff to various business,
banking, and educational groups. In addition, 13,266 visitors were received
for tours of the Bank.
Average employment at this Bank declined for the third consecutive year. The
reduction in average employment in 1966 came to nearly 4 per cent, consider­
ably above the 1 per cent decreases recorded in both 1965 and 1964. The de­
cline in employment reflects the trend toward increased automation of check
processing and other facilities at the Bank’s Head Office. Total employment, in­
cluding the officers and staff of the Buffalo Branch, was 3,913 at the end of 1966.

f o r e ig n a n d in t e r n a t i o n a l o p e r a tio n s .
This Bank, acting on be­
half of the Federal Reserve System and the United States Treasury, once again
engaged in sizable foreign exchange operations during 1966, taking advantage
of market conditions to reduce official United States foreign exchange commit­
ments whenever possible and relying on credit facilities available to the United
States when the dollar came under occasional pressure.
Total holdings of gold, dollar balances, and other assets for foreign and inter­
national accounts rose to a record level of just over $29.0 billion in June but
closed on December 31 at $28.4 billion, down $509 million for the year. Hold­
ings for international organizations increased by a net $763 million, mainly as a
result of increased quota payments in gold to the International Monetary Fund
(IMF) by member countries and United States drawings from the Fund. Hold­
ings for foreign accounts, on the other hand, fell $1.3 billion, with much of the
reduction having been concentrated in a few accounts. Declines in foreign
accounts’ combined holdings of United States Government securities and— to a
lesser extent— of gold more than offset increases in other assets.
Gold operations declined considerably from 1965 levels, as correspondents
purchased less gold from the United States Treasury and repatriated a smaller
amount of gold deposited at this Bank. In order to help correspondents relieve
seasonal pressures and meet other temporary dollar requirements, this Bank
once again extended credits to several central banks against gold under earmark.
All such credits had been repaid at the year-end.
A number of countries purchased gold from the United States during 1966 and
1965 in connection with their subscription payments under increased quotas at

50




the IMF. In order to compensate for these losses, the quota-increase arrange­
ment provided that the Fund would deposit gold with the Federal Reserve Bank
of New York. These compensating operations began in September 1965, and
as of December 31, 1966 the Federal Reserve Bank of New York held (for
United States Treasury account) $211.5 million of gold so deposited by the
IMF.




51

Financial Statements
STATEMENT OF CONDITION
(In thousands of dollars)

A ssets
G old

DEC. 3 1 , 1 9 6 6

c e r tific a te

DEC. 3 1 , 1 9 6 5

a c c o u n t ................................................................................................

2 ,0 4 8 ,0 1 0

2 ,4 7 8 ,3 0 6

R ed em p tion fu n d fo r Federal R eserve n o t e s ........................................................

4 4 3 ,8 1 2

4 0 9 ,1 5 3

F ederal R eserve n o te s o f o th e r B a n k s ...................

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

1 8 9 ,0 8 5

1 5 1 ,3 1 1

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

3 1 ,3 1 7

I S ,5 0 7

T otal ca sh

2 ,7 1 2 ,2 2 4

3 ,0 5 5 ,2 7 7

D iscou n ts an d a d v a n c e s ................................................................................................

3 2 ,3 5 2

3 0 ,6 2 7

O ther ca sh

A c c e p ta n c e s

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

1 9 3 ,1 1 9

1 8 6 ,4 3 4

Federal a g e n c y o b lig a t io n s ...........................................................................................

3 3 ,8 0 0

0

U nited S ta tes G overn m en t s e c u r it ie s ......................................................................

1 1 ,5 2 5 ,5 0 0

1 0 ,0 3 4 ,1 3 1

Total loa n s and se cu ritie s

1 1 ,7 8 4 ,7 7 1

1 0 ,2 5 1 ,1 9 2

Cash ite m s in p r o c e s s o f c o lle c t io n ...........................................................................

1 ,9 9 3 ,6 9 0

1 ,6 7 6 ,8 2 1

Bank p r e m i s e s ...................................................................................................................

9 ,3 5 8

8 ,6 6 7

5 2 6 ,2 2 2

2 7 6 ,3 9 0

Total o th e r a s s e ts

2 ,5 2 9 ,2 7 0

1 ,9 6 1 ,8 7 8

T o ta l A s s e ts

1 7 ,0 2 6 ,2 6 5

1 5 ,2 6 8 ,3 4 7

O ther a s s e ts :

All o t h e r * ................................................................................................

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

52




STATEMENT OF CONDITION
(In thousands of dollars)

L ia b ilit ie s

DEC. 3 1 , 1 9 6 6

Federal R eserve n o t e s ......................................................................................................

DEC. 3 1 , 1 9 6 8

9 ,2 3 8 ,1 8 3

8 ,6 0 0 ,3 2 6

M em ber ban k reserve a c c o u n t s ................................................................................

5 ,2 7 7 ,7 4 2

4 ,8 0 3 ,9 6 3

U nited S ta tes T reasu rer — ge n e ra l a c c o u n t ........................................................

2 7 1 ,1 5 4

1 5 9 ,6 4 7

D ep osits:

F o re ig n ^

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

5 5 ,9 6 5

3 9 ,5 8 1

3 9 6 ,4 3 2

1 8 4 ,7 2 9

6 ,0 0 1 ,2 9 3

5 ,1 8 7 ,9 2 0

D eferred availability ca sh ite m s ................................................................................

1 ,4 1 7 ,5 8 1

1 ,1 4 1 ,9 1 2

All o t h e r ................................................................................................................................

7 2 ,5 1 2

4 9 ,2 6 3

Total o th e r liab ilities

1 ,4 9 0 ,0 9 3

1 ,1 9 1 ,1 7 5

T o t a l L i a b i l it i e s

1 6 ,7 2 9 ,5 6 9

1 4 ,9 7 9 ,4 2 1

i n ...................................................................................................................

1 4 8 .3 4 8

1 4 4 .4 6 3

1 4 8 .3 4 8

1 4 4 .4 6 3

T o t a l C a p it a l A c c o u n t s

2 9 6 ,6 9 6

2 8 8 ,9 2 6

T o t a l L i a b i l it i e s a n d C a p it a l A c c o u n t s

1 7 ,0 2 6 ,2 6 5

1 5 ,2 6 8 ,3 4 7

T otal d e p o s its
O ther liab ilities:

C a p it a l A c c o u n t s
Capital p aid

C on tin gen t liability on a c c e p ta n c e s p u rch a sed fo r fo re ig n
co rre sp o n d e n ts!: ...........................................................................................................

4 9 ,0 0 5

3 7 ,5 4 6

R atio o f g o ld ce rtifica te reserv es to Federal R eserve n ote lia b ility ...........

2 7 .0 %

3 3 .6 %

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

118,080

110,700

141,548

105,977

t




53

STATEMENT OF EARNINGS AND EXPENSES FOR
THE CALENDAR YEARS 1 9 6 6 AND 1 9 6 S (In thousands of dollars)

1966
Total

1965

cu rren t

e a r n in g s ...................................................................................................

4 8 5 ,3 4 7

3 9 1 ,8 5 6

N et e x p e n s e s

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

4 1 ,3 9 5

4 1 ,7 1 6

4 4 3 ,9 5 2

3 5 0 ,1 4 0

395

264

Current net e a rn in g s

A d d ition s t o cu rren t net e a r n in g s ..............................................................................

D ed u ction s from cu rre n t net e a rn in g s:
L oss on s a le s o f U nited S ta te s G o vern m en t s e c u r itie s ( n e t ) ......................

622

2

All o t h e r .................................................................................................................................

7

4

Total d e d u ctio n s

629

6

N et a d d itio n s o r d e d u ctio n s (— ) ................................................................................

— 234

258

N e t e a r n in g s a v a ila b le f o r d is trib u tio n

4 4 3 ,7 1 8

3 5 0 ,3 9 8

D ividen ds paid

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

8 ,7 7 0

8 ,5 0 1

P a ym en ts t o U nited S ta tes T reasury (in te re st o n Federal R eserve
n o te s ) ................................................................................................................................

4 3 1 ,0 6 3

3 3 4 ,6 4 8

T ran sferred t o s u r p l u s ...................................................................................................

3 ,8 8 5

7 ,2 4 9

S u rp lu s — beg in n in g o f y e a r ......................................................................................

1 4 4 ,4 6 3

1 3 7 ,2 1 4

Tran sferred fro m n et e a rn in g s fo r y e a r ................................................................

3 ,8 8 5

7 ,2 4 9

S u r p lu s — e n d o f y e a r

1 4 8 ,3 4 8

1 4 4 ,4 6 3

SU RPLU S

ACCOUNT

54




Changes in Membership
During 1966, the total number of member banks of the Federal Reserve System
in this District declined from 409 to 399. The decrease in the number of member
banks was the net result of the mergers of eleven member banks and the organiza­
tion of one new national bank. The 399 banks constitute 83 per cent of all com­
mercial banks and trust companies in this District and hold 97 per cent of the
total assets of all such institutions in this District.

N U M B ER O F O P E R A T IN G M EM B ER AND N O N M EM BER B A N K S IN
SECO N D F E D E R A L R E S E R V E D IS T R IC T A T T H E Y E A R -E N D
(Exclusive o f savings banks, private banks, and industrial banks)

D ECEM BER 3 1 , 1 9 6 6
M em bers

T ype o f Bank
N ational

b a n k s * . . . ................

S tate ba n k s a n d
tru st c o m p a n ie s

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

DECEM BER 3 1 , 1 6 6 8

N on­
m em bers

281

M em bers

N on­
m em bers

Per cen t
m em bers

100

288

0

100

0

118
— —

82
-------

399

82

T ota l

P er cen t
m em bers

59

—
83

121
——409

80

GO

—
80

84

★ Includes one national bank located in the Virgin Islands.

CH A N G ES IN F E D E R A L R E S E R V E M E M B E R S H IP IN
SECO N D D IS T R IC T D U RIN G 1 9 6 6

T o t a l m e m b e r s h i p b e g i n n i n g off y e a r

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

409

In crea ses:
N ew n ational b a n k s ......................................................................................................................................................................

1

N on m em b er co n v e r te d t o nation al b a n k s ........................................................................................................................

2

D ecrea ses:
M em b er ban ks m e rg e d w ith o th e r m e m b e r s ................................................................................................................

9

M em b er ban ks m e rg e d with n o n m e m b e r s .....................................................................................................................

2

N ational ban ks co n v e rte d t o n o n m e m b e r s ......................................................................................................................

2




T o t a l m e m b e r s h ip a t t h e y e a r -e n d

399

55

Changes in Directors and Officers
In November, the Board of Governors of the Fed­
eral Reserve System reappointed Everett N. Case a Class C director for the
three-year term beginning January 1, 1967 and redesignated him Chairman of
the Board of Directors and Federal Reserve Agent for the year 1967. Mr. Case,
President of the Alfred P. Sloan Foundation, New York, N. Y., has been a Class
C director since January 1961. He served as Deputy Chairman in 1965 and as
Chairman and Federal Reserve Agent in 1966.
Also in November, the Board of Governors reappointed Kenneth H. Hannan
Deputy Chairman for the year 1967. Mr. Hannan, Executive Vice President of
the Union Carbide Corporation, New York, N. Y., served as a Class B director
from January 1960 through 1965. In 1966, he was appointed a Class C direc­
tor for a three-year term and Deputy Chairman for 1966.
In December, member banks in Group 3 elected Eugene H. Morrison a Class
A director and Maurice R. Forman a Class B director, each for a three-year
term beginning January 1, 1967. Mr. Morrison, President of Orange County
Trust Company, Middletown, N. Y., succeeded Robert H. Fearon, President of
The Oneida Valley National Bank of Oneida, Oneida, N. Y., who served for
the three-year term that ended December 31, 1966. Mr. Forman, President of
B. Forman Co., Inc., Rochester, N. Y., served as a director of the Buffalo
Branch of this Bank from January 1963 through 1966 and as Chairman of the
Branch Board of Directors in 1965. As a director of this Bank, he succeeded
Albert L. Nickerson, Chairman of the Board of Mobil Oil Corporation, New
York, N. Y., who served from August 1961 through 1966.
At the Buffalo Branch, the Board of Governors in December appointed
Gerald F. Britt a director of the Branch for a three-year term beginning Janu­
ary 1, 1967. Mr. Britt, President of L-Brooke Farms, Inc., Byron, N. Y., suc­
ceeded Thomas E. LaMont, who is engaged in farming in Orleans County, N. Y.
Mr. LaMont had served as a Branch director since November 1959, and as Chair­
man of the Branch Board in 1963 and 1966. Also in December, the Board of
Governors appointed Carl A. Day a director of the Buffalo Branch for the un­
expired portion of Mr. Forman’s term, ending December 31, 1968. Mr. Day is
Executive Vice President of Bausch & Lomb Inc., Rochester, N. Y. In Decem­
ber, the Board of Directors of this Bank appointed E. Perry Spink a director of
the Buffalo Branch for a three-year term beginning January 1, 1967. Mr. Spink,
Chairman of the Board of the Liberty National Bank and Trust Company, Buf­
c h a n g e s in d i r e c t o r s .

56




falo, N. Y., previously served for a three-year term as a director of the Buffalo
Branch from January 1958 through December 1960. In his present term of
office, he succeeded Charles W. Millard, Jr., Chairman of the Board of Manu­
facturers and Traders Trust Company, Buffalo, N. Y., who served for the threeyear term that ended December 31, 1966. In December, the Bank’s Board of
Directors also designated Robert S. Bennett Chairman of the Branch Board for
the year 1967. Mr. Bennett, General Manager of the Lackawanna Plant of the
Bethlehem Steel Corporation, Buffalo, N. Y., has been a director of the Branch
since January 1965.

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

Since January 1966, five officers have retired or

resigned:
Martin W. Bergin, Manager, Public Information Department, resigned effec­
tive March 31, 1966, to accept a position with the Retirement System of the
Federal Reserve Banks in anticipation of his appointment as Secretary of the
Retirement System, which became effective August 1, 1966. Mr. Bergin joined
the Bank’s staff in July 1951 and became an officer in January 1960.
Horace L. Sanford, Vice President, Foreign, retired effective July 1, 1966,
after completing forty-eight years of service with the Bank. Mr. Sanford joined
the Bank’s staff in July 1918 and became an officer in 1936. He served as an
officer in the Foreign function from 1942 until his retirement.
Insley B. Smith, Vice President in charge of the Buffalo Branch, retired effec­
tive November 1, 1966. Mr. Smith had completed forty-four years of service at
the time of his retirement, having joined the Bank’s staff at the Head Office in
September 1922. He became an officer in January 1938, and in January 1945
he was assigned to the Buffalo Branch as the officer in charge of the Branch.
Francis H. Schott, Adviser, Research and Statistics, resigned effective January
15, 1967, to accept a position with The Equitable Life Assurance Society of the
United States. Mr. Schott joined the Bank’s staff in July 1951 and became an
officer in August 1961.
Thomas J. Roche, Senior Foreign Exchange Officer, retired on special service
retirement effective February 1, 1967. Mr. Roche joined the Bank’s staff in July
1934 and became an officer in January 1956.
The following additional changes in the official staff, including the appoint­
ment of nine new officers, have been made since January 6, 1966:
Richard H. Hoenig, formerly Chief, Public Information Division, Public In­




57

formation Department, was appointed an officer with the title of Manager effec­
tive April 1, 1966 and assigned to the Public Information Department.
Fred H. Klopstock, formerly Senior Economist, was appointed Manager effec­
tive July 1, 1966 and assigned to the International Research Department.
Frederick C. Schadrack, Jr., Manager, formerly assigned to the International
Research Department, was assigned to the Domestic Research Department effec­
tive July 1, 1966.
Thomas O. Waage, Vice President assigned to Public Information, was also
assigned to Foreign, effective August 1, 1966, where he assumed certain admin­
istrative responsibilities.
Harold A. Bilby, Vice President, formerly assigned to Accounting and Plan­
ning, Government Bond and Safekeeping of Securities, and Loans and Credits,
was appointed Vice President and Senior Adviser, effective October 1, 1966. In
his new position, Mr. Bilby has broad responsibilities for advising the directors,
the President and the First Vice President, and other officers with respect to
policy matters.
William H. Braun, Jr., formerly Assistant Vice President, Bank Supervision
and Relations, was appointed Vice President effective October 1, 1966 and
assigned to Accounting and Planning.
Felix T. Davis, formerly Assistant Vice President, Government Bond and
Safekeeping of Securities, was appointed Vice President effective October 1,
1966 and assigned to Government Bond and Safekeeping of Securities.
Angus A. Maclnnes, Jr., formerly Assistant Vice President, Cash and Collec­
tions, was appointed Vice President in charge of the Buffalo Branch effective
October 1,1966.
Thomas M. Timlen, Jr., formerly Assistant Vice President, Accounting and
Planning, and Loans and Credits, was appointed Vice President effective Octo­
ber 1,1966 and assigned to Loans and Credits.
John T. Keane, Cashier, Buffalo Branch, was appointed Assistant Vice Presi­
dent of the Branch effective October 1, 1966, continuing as Cashier.
William E. Marple, formerly Manager, Credit and Discount Department, was
appointed Assistant Vice President effective October 1, 1966 and assigned to
Loans and Credits.
Paul Meek, formerly Manager, Securities Department, was appointed Assis­
tant Vice President effective October 1, 1966 and assigned to Open Market
Operations and Treasury Issues.
Everett B. Post, formerly Manager, Planning Department, was appointed

58




Assistant Vice President effective October 1, 1966 and assigned to Accounting
and Planning, with responsibility for the Accounting and Planning Departments.
George C. Smith, formerly Manager, Check Department, was appointed Assis­
tant Vice President effective October 1, 1966 and assigned to Cash and Collec­
tions, with responsibility for the Check Department.
Robert C. Thoman, formerly Manager, Personnel Department, was appointed
Assistant Vice President effective October 1, 1966 and assigned to Bank Super­
vision and Relations.
Leonard I. Bennetts, Manager, formerly assigned to the Bank Relations De­
partment, was assigned to the Cash Custody Department and the Collection De­
partment effective October 1,1966.
Louis J. Brendel, Manager, formerly assigned to the Computer Services De­
partment, was assigned to the Planning Department effective October 1, 1966.
Howard F. Crumb, formerly Chief, Computer Services Division, Computer
Services Department, was appointed an officer with the title of Manager effective
October 1, 1966 and assigned to the Computer Services Department.
Adam R. Dick, formerly Special Representative, Bank Relations Division,
Bank Relations Department, was appointed an officer with the title of Manager
effective October 1, 1966 and assigned to the Bank Relations Department.
Karl L. Ege, Manager, formerly assigned to the Cash Custody Department
and the Collection Department, was assigned to the Check Department effective
October 1,1966.
Francis H. Rohrbach, formerly Chief, Personnel Relations Division, Person­
nel Department, was appointed an officer with the title of Manager effective
October 1,1966 and assigned to the Personnel Department.
Herbert H. Ruess, formerly Chief, Credit Division, Credit and Discount De­
partment, was appointed an officer with the title of Manager effective October 1,
1966 and assigned to the Credit and Discount Department.
Ralph H. Gelder, formerly Chief, Public Information Division, Public Infor­
mation Department, was appointed an officer with the title of Manager effective
January 5,1967 and assigned to the Personnel Department.
Scott E. Pardee, formerly Chief, Foreign Research Division, International Re­
search Department, was appointed an officer with the title of Manager effective
January 5,1967 and assigned to the Foreign Department.
Edwin R. Powers, formerly Special Assistant, Foreign Department, was ap­
pointed an officer with the title of Manager effective January 5, 1967 and as­
signed to the Foreign Department.




59

A. Marshall Puckett, formerly Chief, Domestic Research Division, Domestic
Research Department, was appointed an officer with the title of Senior Economist
effective January 5,1967.
Leonard Lapidus, Manager, formerly assigned to the Personnel Department,
was assigned to the Bank Examinations Department effective January 6, 1967.

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 - i 9 « 7 . The Board of Directors
of this Bank selected R. E. McNeill, Jr., to serve during 1967 as the member of
the Federal Advisory Council representing the Second Federal Reserve District.
Mr. McNeill is Chairman of the Board of the Manufacturers Hanover Trust
Company, New York, N. Y. He replaced William H. Moore, Chairman of the
Board of the Bankers Trust Company, New York, N. Y., who served as a mem­
ber of the Council for the past three years.

60




Directors of the Federal Reserve Bank of New York
Termexpires Dec. 31 Class Group

DIRECTORS

G eorge A . M u r p h y ................................................................................................................................. 1967

A

1

A

2

A

3

B

1

B

2

B

3

Chairman o f the Board, Irving Trust Company, New York, N. Y.

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

E ugene H . M o r r is o n ............................................................................................................................ 1969
President, Orange County Trust Company, Middletown, N. Y.

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

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

M aurice R. F o r m a n ...............................................................................................................................1969
President, B. Forman Co., Inc., Rochester, N. Y.

Everett N . C ase,

Chairman, and Federal Reserve Agent...........................................................1969

C

President, Alfred P. Sloan Foundation, New York, N. Y .

K enneth H . H annan ,

Deputy Chairman......................................................................................... 1968

C

Executive Vice President, Union Carbide Corporation, New York, N. Y.

Jam es M . H estIb r ......................................................................................................................................1967
President, New York University, New York, N. Y .

DIRECTORS— BUFFALO BRANCH

R obert S. Bennett ,

Chairman............................................................................................................1967

General Manager, Lackawanna Plant, Bethlehem Steel Corporation, Buffalo, N. Y.

J. W allace E l y .......................................................................................................................................... 1967
President, Security Trust Company o f Rochester, Rochester, N. Y .

John D . H a m il t o n ....................................................................................................................................1967
Chairman of the Board, Marine Midland Chautauqua National Bank, Jamestown, N. Y.

C arl A . D a

y

............................................................................................................................................... 1968

Executive Vice President, Bausch & Lomb Inc., Rochester, N. Y .

A rthur S. H a m l in ................................................................................................................................... 1968
President, The Canandaigua National Bank and Trust Company, Canandaigua, N. Y.

G erald F. Britt

......................................................................................................................................1969

President, L-Brooke Farms, Inc., Byron, N. V.

E. Perry Sp i n k .......................................................................................................................................... 1969
Chairman o f the Board, Liberty National Bank and Trust Company, Buffalo, N. Y.

MEMBER OF FEDERAL ADVISORY COUNCIL— 1 9 6 7

R. E. M cN eill , Jr .....................................................................................................................................1967
Chairman o f the Board, Manufacturers Hanover Trust Company, New York, N. Y .




61

C

Officers of the Federal Reserve Bank of New Y o rk
A l f r e d H a y e s , President
W i l l i a m F . T r e i b e r , First Vice President
G e o r g e G a r v y , Economic Adviser
M a r c u s A . H a r r is , Vice President
A l a n R . H o l m e s , Vice President
W i l l i a m H . B r a u n , J r ., Vice President
R o b e r t G . L in k , Vice President
J o h n J. C l a r k e , Vice President and
F r e d W . P id e r it , J r ., Vice President
General Counsel
W a l t e r H . R o z e l l , J r ., Vice President
C h a r l e s A . C o o m b s , Vice President
T h o m a s M . T i m l e n , J r ., Vice President
F e l i x T . D a v is , Vice President
T h o m a s O . W a a g e , Vice President
H a r o ld A . B ilb y ,

Senior Adviser

E d w ard G . G u y,

Vice President and

Assistant General Counsel

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

Assistant General Counsel

P e t e r F o u s e k , Assistant Vice President
P e t e r P . L a n g , Adviser
B r u c e K . M a c L a u r y , Assistant Vice President
W i l l i a m E . M a r p l e , Assistant Vice President
S p e n c e r S. M a r s h , J r ., Assistant Vice President
P a u l M e e k , Assistant Vice President
D o n a l d C . N i l e s , Assistant Vice President

E v e r e t t B. P o s t , Assistant Vice President
L a w r e n c e E . Q u a c k e n b u s h , Assistant Vice President
F r a n k W . S c h i f f , Assistant Vice President
K e n n e t h E . S m a l l , Assistant Vice President
F r e d e r i c k L . S m e d le y , Assistant Vice President
G e o r g e C . S m it h , Assistant Vice President
R o b e r t C . T h o m a n , Assistant Vice President

G erald E . B each,

F red H . K lo p st o c k ,

Manager, Government Bond and
Safekeeping Department

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

Manager, Cash Custody Department, and
Manager, Collection Department

Manager, International Research Department

L e o n a r d L a p id u s,

Manager, Bank Examinations Department

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

M a d e l i n e H . M c W h in n e y ,
Manager, Statistics Department
R o b e r t M ey er,

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

A r th u r H . N oa,

A . T h om as C om b ad er,

J a m es H . O l t m a n ,

R o b e r t L. C oop er,

S c o t t E. P a rd ee,

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

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

H o w a rd F . C ru m b,

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

R ic h a r d G . D a v is ,

A . M a r s h a ll P u c k e tt,

R ic h a r d A . D eb s,

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

F r e d e r i c k W . D e m in g ,

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

A d am R . D ic k ,

H e r b e r t H . R u ess,

Manager, Foreign Department
Manager, Planning Department
Manager, Building Operating Department
Manager, Acceptance Department

Manager, Foreign Department
Manager, Computer Services Department
Manager, Domestic Research Department

Secretary, and Assistant Counsel

Manager, Securities Department
Manager, Bank Relations Department

K a r l L. E ge,

Manager, Check Department

M a r tin F re n c h ,

Manager, Security Custody Department

R a lp h H . G e ld e r ,

Manager, Personnel Department

E d w a r d J. G e n g ,

Manager, Securities Department, and
Assistant Secretary

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

Manager, Public Information Department

62




Assistant Counsel

Manager, Service Department
Manager, Bank Examinations Department
Manager, Foreign Department

Manager, Foreign Department
Manager, Cash Department
Senior Economist

Manager, Personnel Department

Manager, Foreign Department
Manager, Credit and Discount Department

W a l t e r S. R u s h m o r e ,
Manager, Savings Bond Department
F r e d e r i c k C . S c h a d r a c k , J r .,

Manager, Domestic Research Department

B e t t y J e a n S h ea ,

Assistant Counsel

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

Manager, Accounting Department

R o b e r t Y o u n g , J r.,

Assistant Counsel

J o h n P . J e n s e n , General Auditor
W i l l i a m M . S c h u l t z , Assistant General Auditor

OFFICERS — BUFFALO BRANCH

Vice President
Assistant Vice President and Cashier

A n g u s A . M a c I n n e s , J r.,
John T. K ean e,

Assistant Cashier
Assistant Cashier

Assistant Cashier
Assistant Cashier

H a r r y A . C u r t h , J r .,

G e r a ld H . G r e e n e ,

R o n a ld B. G ra y ,

A r t h u r A . R a n d a ll,




63