Full text of Business Review (Federal Reserve Bank of Philadelphia) : September 1955

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

SEPTEMBER 1 9 5 5

business

view

FEDERAL RESERVE
BANK OF
PHILADELPHIA

THE BILL MARKET:
ITS NATURE AND STRUCTURE
Treasury bills play a key role in the money market.
This article tells how they are issued, describes the market,
and gives the pattern of ownership.

A MID-SEASON REPORT FROM THE FARM
Growing weather has been erratic and local markets unstable.
But, with diversified farming, the season's final returns may be
better than these conditions seemed to indicate.

CURRENT TRENDS
The nation has made up the ground lost during the recession
but in Pennsylvania, employment is not yet back to 1953 levels.

Additional copies of this issue are available
upon request to the Department of Research,
Federal Reserve Bank of Philadelphia,
Philadelphia 1, Pa.

THE
ITS
This article is about bills — not the kind the post

managing the public debt.

man delivers in quantity the first of the month,

were that being sold on a discount basis, it would

but three-month marketable bills issued weekly by

relieve the Treasury of the difficult task of trying

the United States Treasury.

It deals primarily

to adjust the interest rate on new issues to chang

with the nature of the market and the pattern of
ownership.

ing money-market conditions; there would be
less tendency for the price to fall below the issue

The Treasury bill has played a key role in the
post-war money market — a role somewhat simi

price to the detriment of Government credit; and
it would provide a more liquid type of invest
ment for the temporary funds of banks and

lar to that of the call-loan for several decades
prior to the Great Depression. Many commer
cial banks use Treasury bills in adjusting their
reserve positions;

Advantages given

other institutions.
The Treasury bill soon displaced the certificate

other institutions put tem

as the primary method of offsetting the impact of

porary funds into bills and dispose of them when

Treasury operations on the money market, but

in need of cash; and the Federal Reserve Sys

the amount outstanding prior to World War II

tem usually buys or sells bills when it wants to

rarely exceeded $21/£> billion. The market rate on

inject funds into or siphon them out of the

the three-month bill was exceptionally low in tbe

market.

latter part of the thirties. From 1938 to 1940, the

The Treasury bill first came into use in Decem

rate was typically below 1/10 of 1 per cent, pri

ber 1929. Before that time the Treasury had used

marily because of the tax-exempt feature and the

certificates of indebtedness, usually maturing in

large volume of excess reserves held by commer

one to three months, to counteract the impact of

cial banks. Commercial banks were the principal

periodic tax and bond receipts on the money

owners of bills in the pre-war period.

market. Treasury authorities stated that the bill

Deficit financing in World War II brought a

would have important advantages over the cer

tremendous increase in Treasury bills as well as

tificate of indebtedness from the standpoint of

other types of Treasury obligations. The amount

b u sin e ss re v ie w

of bills outstanding in the post-war period has

tive bids to be certain of receiving the amount

ranged from a low of $ l l 1/2 billion in mid-1949

desired at the average price rather than run the

to a high of $22 billion in 1954.

twin danger of paying more than necessary or of
not bidding enough to receive the amount wanted.

THE M A R K E T
First, let us take a brief look at the nature of the
bill market. Two facets of the market need to be
distinguished — the sale of new issues and trading
in outstanding bills.
M a r k e tin g o f new issues

Subscribers may pay for their new bills with
either cash or maturing Treasury bills. Holders
other than the Federal Reserve System, however,
usually redeem their maturing bills and pay cash
for the new issue. The Federal Reserve allows its
maturing bills to run off, i.e., redeems them for
cash, when it wants to absorb funds; otherwise
its maturing bills are exchanged for the new issue.

New offerings of the three-month bills are made

The Treasury also issues at times special tax

weekly. The Treasury usually announces the new

anticipation bills which are accepted in payment

offering on Thursday, a week in advance of issue.

of Federal taxes. Commercial banks are usually

Subscriptions or tenders are received by the

permitted to pay for these bills purchased for

Federal Reserve Banks until 2 p.m. on the follow

their own account and for their customers, by

ing Monday.

crediting the Treasury’s tax and loan account.

Bills, unlike other marketable securities issued

Tax anticipation bills are usually issued in the

by the Treasury, are sold on a discount basis —

fall when Treasury expenditures exceed receipts,

that is, below par or face value. For example,

and mature in the first part of the following

bills bought at $99,532 will pay the holder $100

year when receipts exceed expenditures. The net

at maturity three months hence, thus providing an

effect is to siphon funds into the Treasury when

interest return equivalent to 1.85 per cent a year.

the Federal Government is paying out more than

There are two types of subscriptions — those sub

it is taking in. In the following spring, the use

mitted on a competitive and those on a non

of these bills to pay taxes reduces the Treasury’s

competitive basis. Subscriptions received by the

cash intake while the redemption of bills not

Reserve Banks are transmitted to the office of the

submitted in payment of taxes enlarges expendi

Secretary of the Treasury where approximately

tures when they are substantially below receipts.

the amount of the announced offering is allocated

This helps to smooth out the seasonal impact of

among subscribers.

Treasury operations on the money market.

Non-competitive subscrip

tions — in recent years up to a maximum of
$200,000 from a single subscriber — are allotted

O u tsta n d in g bills

in full. The remainder is awarded to the highest
bidders among those entering subscriptions on a

There is a broad market for the large volume of

competitive basis. Non-competitive subscriptions

Treasury bills outstanding. The bill market, as

are awarded at the average price for accepted

any other, consists of three principal groups:

competitive bids. The bulk of the subscriptions

buyers, sellers, and dealers who bring the two

is on a competitive basis. Small banks and busi

together. Purchases and sales are made at a price

ness corporations frequently submit non-competi

which reflects the relationship between the supply

b u sin e ss rev iew

them.

banks gaining and others losing reserves. There

Actually, there is no single market place where

bills

offered

and the demand for

are other important forces which increase or de

bills are bought and sold, as in the case of an

crease total bank reserves, although ordinarily

organized stock exchange. Bills are traded in the

they do not affect the reserve position of every

“ over-the-counter” market, where the bulk of the

bank. An inflow of currency from circulation,

transactions is executed by a relatively small num

gold imports, and Federal Reserve purchases of

ber of dealers in securities. The term “ over-the-

securities or advances to member banks increase

counter” market reputedly originated many years

total bank reserves; a reverse movement of these

ago when it was common practice for the buyer to

factors drains reserves from the banks. The re

walk into the dealer’s place of business where the

serve balance of an individual bank, therefore,

seller, upon receiving payment, handed the buyer

is constantly changing as a result of the many

the securities over the counter.

day-to-day operations that influence its reserve

Buyers and sellers. Who are the principal buy

position.

ers and sellers of Treasury bills? Both sales and

The ebb and flow of funds through bank re

purchases originate mainly with three groups:

serve accounts pose a problem for the banker —

commercial banks, non-financial institutions, and

what to do with excess reserves that he may have

the Federal Reserve System.

for only a short time, and how to be in a position

Commercial banks have long followed the

to meet temporary deficiencies in his reserve ac

policy of keeping a part of their resources in

count. Excess reserves earn no income. On the

liquid assets — assets that are readily marketable
with a minimum loss of principal. The bulk of

other hand, if excess reserves are invested in se
curities that fluctuate in price, the banker would

commercial bank liabilities is payable on demand

incur a loss if forced to sell for less than the pur

or short notice, and banks are required by law to

chase price to meet a reserve deficiency.

maintain a certain minimum reserve against their

Treasury bill offers a partial solution, at least, to

deposits. A secondary reserve of liquid assets can

this problem. It provides some return, although

be converted into cash readily to meet drains on

the yield is usually lower than on longer maturi

reserve positions.

ties, and a bill can be sold at any time with a min

Many factors affect bank reserve positions —
deposit shifts among banks, Treasury operations,

The

imum risk of loss from a price change.
A second major source of buying and selling is

inflow and outflow of currency, gold imports and

from the “ all other” group as reported in the

exports, and Federal Reserve actions. A consider

Treasury survey of the ownership of Government

able portion of the checks drawn by customers on

securities. This group includes all owners except

their banks shows up in other banks, resulting in

the Federal Reserve System, commercial banks,

a shift of deposits and reserves from the former to

savings banks, U.S. Government investment ac

the latter when the checks are collected. Transfers
of Treasury deposits from commercial banks to

counts, and insurance companies. Although a
r/\
breakdown within this group is not available,

the Reserve Banks draw down bank reserves;

fragmentary data indicate important holders to

Treasury disbursements tend to restore them.

be large business corporations, foreign institu

Both check collections and Treasury operations

tions (especially central and commercial banks),

are constantly shifting funds among banks, some

and state and local governments. Large business

b u sin e ss r e v ie w

corporations are frequently in possession of sub

at quoted prices. A principal source of income

stantial amounts of funds of a temporary nature.

to the dealer is the spread between his selling

The flow of receipts is usually not geared closely

(asked) price and his buying (bid) price.

to day-to-day expenditures, resulting in tempo

A relatively small number of dealers, most of

rary excesses of receipts and vice versa. The cor

them specializing in Government securities, form

poration must either accumulate excess receipts

the core of the dealer group. Most of these firms

to meet periods of heavy expenditures such as in

have their head offices in New York City, with

terest, dividend, and tax payments or borrow
during periods of excess expenditures, repaying

country. Head offices and branch offices are con

from the excess receipts of subsequent periods.

nected by private wire, providing a dealer net

branch offices in principal cities throughout the

Proceeds from the sale of longer-term securities

work which funnels buying and selling orders

also provide funds temporarily pending actual

from all over the nation — even from foreign

disbursement on the project being financed by

countries — into New York City where the bulk

the securities flotation. The latter is frequently

of the orders is executed. The bill market is a

an important source of demand from state and

negotiated market, and most transactions are con

local authorities as well as large corporations.

summated over the telephone.

Foreign institutions, especially central banks,
commercial banks, and other institutions engaged

The bill rate

in financing international trade, maintain dollar

Treasury bills, as any commodity, are bought and

balances in this country. Excesses over minimum

sold at a price. Market quotations, however, are

working balances are frequently invested

Treasury bills and other short-term securities.
The Federal Reserve System is another impor

in terms of the rate at which the bill is discounted.
The bid quotation is the price dealers are willing
to pay; the asked quotation is the price at which

tant buyer and seller of bills. The purchase and

they are willing to sell to customers. Naturally,

sale of Government securities in the market —

the bid or buying price is lower than the asked or

primarily bills — is the principal tool used by the

selling price. In terms of the rate of discount,

System to put funds into or take funds out of the

however, the bid quotation is higher than the

market. The System buys when it wants to put

asked. To illustrate:

additional funds into the market; it sells when it

tions for a bill maturing in 90 days were 1.89 bid

The recent dealer quota

wants to absorb funds. Changes in System hold

and 1.85 asked. This means that the dealer was

ings, therefore, reflect the immediate goal of

offering to pay $99,527 for a $100,000 bill matur

credit policy, and not the amount of funds it has

ing in 90 days and offering to sell at $99,537.

available to invest.

The difference between the bid and asked prices

Dealers. The job of bringing buyers and sellers
together is performed primarily by dealers. A

represents the dealer’s gross profit on the trans
action.

dealer, in contrast to a broker, buys and sells se

The market rate reflects changing conditions

curities for his own account as well as executes

in the supply of and demand for bills. When the

orders for his customers.

supply of bills offered is larger than buyers are

He helps to make a

market by-carrying an inventory — a “ portfolio”

willing to take at the quoted rate, the tendency is

of securities and standing ready to buy or sell

for the market rate to rise (price to fall) and vice

b u sin e ss rev iew

versa. The bill rate is a sensitive interest rate,
rising and falling in accordance with the ebb and

OWNERSHIP OF TREASURY BILLS*
PER CENT

flow of short-term funds in the market. For this
reason, the market rate on bills has become one
of the most significant indicators of ease or tight
ness in the money market.
An institution with funds to invest has alterna
tive outlets other than Treasury bills. Treasury
certificates usually mature within nine to twelve
months from the date of issue, and there is a wide
choice of maturities among other Government se
curities, namely, notes and bonds. Consequently,
institutional investors weigh the liquidity advan
tage of bills against the greater income usually
provided by longer maturities. The spread be
tween the market rate on bills and the rates on

SOURCE: TREASURY OWNERSHIP SURVEY
• exc lud es MINOR AMOUNTS HELD
BY MUTUAL SAVINGS BANKS AND INSURANCE COMPANIES

longer maturities is therefore an important factor
influencing the market demand and supply of bills.

sistent decline in the proportion of outstanding

O W N E R S H IP PATTERN
Many institutions include Treasury bills in their

creased their bill holdings substantially, but the
most marked rise was in the holdings of the “ all

investment portfolios. Sufficient data are avail

other” group.

able from the Treasury ownership survey and

group has held the bulk of the outstanding bills.

bills held by the System. Commercial banks in

commercial bank data to give some picture of the

In the past few years the latter

A dominant factor determining the ownership

structure of the market.

pattern in the early post-war period was continu

By institutional g ro u p s

structure of interest rates. Under this policy, the

ation of the policy of maintaining the wartime
The market for Treasury bills is dominated by in

Federal Reserve System stood ready to buy bills

stitutions:

at % of 1 per cent discount, and give the seller

the

Federal

Reserve,

commercial

banks, and the “ all other” group, as previously

the option of repurchasing bills at the same rate

described. In April 1955, of $19.5 billion of bills

at any time before maturity.

outstanding, the Federal Reserve System held less

System accumulates bills. It is not surprising

than 5 per cent; commercial banks, about 18 per

that under this policy the Federal Reserve gradu

cent; and the “ all other” group, about 78 per cent.

ally accumulated most of the outstanding bills.

The pattern of ownership among these institu

Banks faced with the problem of acquiring sub

tional groups, however, has changed considerably.

stantial amounts of reserves throughout the war

In the early post-war period, about 90 per cent

and early post-war period chose the cheaper

of the outstanding bills were held by the Federal

method. They sold Treasury bills which yielded

Reserve System. Following the unpegging of the

only % of 1 per cent. Thus bills purchased by

bill rate in July 1947, there was a steady and per-

commercial banks and others at the time of origi

b u sin e ss re v ie w

nal issue soon found their way into the System’s
portfolio.

YIELDS O N
UNITED STATES G O VER NM ENT SECURITIES

A closely related reason why bills accumulated
in the System’s portfolio was “ playing the pattern
of rates.” The support program made all maturi
ties of Government securities almost equally
liquid. Recognition of this fact, together with'
growing confidence that the pattern of rates would
be continued, led bank and aon-bank holders to
lengthen the maturity of their Government port
folios. From mid-1944 to mid-1946, commercial
bank holdings of bills dropped 75 per cent, cer
tificates were up moderately, and Government
bonds rose over 50 per cent. Non-bank investors
were lengthening their maturities by selling inter

1947
1949
• chance in issues included

I
1951

I
1953

I
1955

mediate and buying long-term bonds. This move
ment toward longer maturities pushed additional

banks added $1.3 billion to their holdings and

amounts of bills and other short-term Govern

other investors added a billion dollars. Federal

ments into the Federal Reserve.
The war and early post-war periods reflected
the strong influence of the pattern of interest rates

Reserve holdings declined $3.1 billion, reflecting
in part the redemption of some outstanding bills
by the Treasury.

on the willingness of investors to hold Treasury

One of the most pronounced changes in owner

bills. The sacrifice in earnings from holding bills

ship in the post-war period was the almost steady

was too great, particularly in view of the liquidity

rise in bills held by the “ all other” group. Bill

of longer maturities under the support program.

holdings of these institutions rose from about

By mid-1947, out of a total of $15.8 billion of

$500 million in mid-1947 to nearly $15 billion in

bills, the System held $14.5 billion; commercial

May 1953. Bills purchased by this group were

banks, $800 million; and other investors, $500

supplied mainly from the System’s portfolio and

million.
Shift to bank and non-bank holders. In July

also by an increase of approximately $5 billion in
bills outstanding.

1947, the Federal Reserve terminated its policy of

Several developments explain this marked shift

standing ready to buy bills at % of 1 per cent. The

of bills from the System to non-bank investors.

market rate on bills moved up rapidly, reaching

The System reduced its holdings as a means of

almost 1 per cent by the end of the year. The rate

combatting inflationary pressures which persisted

on Treasury certificates also moved upward in the

during most of the ^period 1947-1953. A rising

latter part of the year — from % to over 1 Per
cent.

longer-term rates made bills more attractive to in

The response of commercial banks and non-

vestors. A third factor was the growing volume of

financial investors to the rising bill rate was

temporary funds available for investment. Cor

prompt. In the second half of 1947, commercial

porate earnings were rising and corporations were

bill rate and narrowing spread between short- and

busin e ss review

faced with the problem of accumulating increas
ing amounts to meet larger dividend, interest, and

MEMBER BANK BILL H O LD IN G S ,
UNITED STATES

tax payments. A generally growing volume of
corporate, state, and municipal security issues
provided proceeds temporarily which might be
invested pending final disbursement. Dollar bal
ances held by foreigners in United States banks
also increased substantially during the period.
Treasury bills are well suited for the investment
of such temporary funds. Also, the practice of
investing temporary funds is apparently becom
ing more widespread among non-bank institu
tions. Finally, termination of the policy of sup
porting the prices of Government securities, in
the spring of 1951, restored to bills their tradi
tional advantage of liquidity over longer matu
rities.
TREASURY BILLS O U T S TA N D IN G
A N D H O LD IN G S OF COM M ERCIAL BANKS

icy; both by class of bank and among Reserve Dis

BILLIONS $

tricts.
Class of bank. Member banks, for purposes of
reserve requirements, are classified into three
groups: central reserve city, reserve city, and
country banks. Roughly, these three classifica
tions represent the larger, the medium-size, and
the smaller banks, respectively.
In April of this year, country banks, with 38
per cent of member-bank deposits, accounted for
49 per cent of member-bank bill holdings. Re
COMMERCIAL BANKS

I
1947

1949

I
1951

serve city banks, with 39 per cent of the deposits,

I
1953

•I ■
1955

held 30 per cent of the bills, and central reserve
city banks, with 23 per cent of the deposits, held

* REFLECTS ISSUES OF TAX ANTICIPATION BILLS

21 per cent of the bills. This pattern of ownership
A m o n g m em ber banks

is considerably different from that which pre

Looking behind these large institutional groups to

vailed during the early post-war period. Prior to

the holdings of commercial banks, one finds con

mid-1951, bill holdings of these three groups of

siderable variation in policy with respect to hold

banks were roughly equal in amount and gener

ing bills. Member banks, which in recent years

ally moved in the same direction.

have held about 90 per cent of the total bills owned

The most significant change in the distribution

by all commercial banks, show variations of pol-

of bills among these classes of banks occurred in

b usin e ss re v ie w

the last half of 1951. During this period, reserve

affected the investment policy of the smaller banks

city and country hanks more than doubled their

more than that of the larger money-market banks.

bill holdings, but central reserve city banks in

Finally, the practice of investing at least a part of

creased their bill portfolios less than 20 per cent.

excess reserves in bills seems to be gradually

There was a sharp reduction in bill holdings in

spreading among country banks.

the latter part of 1952 and the early part of 1953

Member-bank holdings of bills relative to de

as the System’s policy of credit restraint put in

mand deposits vary rather widely not only among

creasing pressure on reserve positions. Percentage-wise, however, the reduction was less in coun

classes of banks but also over time. In mid-1947,
bill holdings of reserve city member banks

try banks, so that their proportion of total mem

equalled 1 per cent of their demand deposits; the

ber-bank holdings has continued to rise.

percentage was slightly less for central reserve

The explanation of the relatively sharp rise in

city and country banks. Both bank and non-bank

bill holdings of reserve city and country banks in

investors were unwilling to hold bills in quantity

the last half of 1951 appears to be primarily two

when the yield was only % of 1 per cent. By 1950,

fold. Bills outstanding rose $4.5 billion in the

central reserve city banks had built up their sec

latter part of 1951 — $2 billion in regular bills

ondary reserve of bills to 4.7 per cent of demand

and $2.5 billion in tax anticipation bills which

deposits, and reserve city and country banks held

matured in the first half of 1952. The tax antici

3.3 and 3.6 per cent, respectively.

pation issues were attractive to banks because

The strong demand for credit in early 1953 to

they could pay for their own purchases and those

gether with a policy of credit restraint pulled

made for their customers by crediting the Treas

down the secondary reserve of bills in central re

ury’s tax and loan account. The only immediate

serve city banks. In mid-1953, bill holdings were

drain on their funds was the additional reserve

down to 3.3 per cent of deposits as compared to

required to support the newly created deposits.

4.7 per cent in mid-1950. Country banks, how

Reserve city and country banks apparently pur

ever, increased their bill portfolios relative to de

chased substantial amounts of these tax anticipa

mand deposits, the percentage rising from 3.6 per

tion bills. That this was a factor is indicated by

cent in mid-1950 to 4.9 per cent in mid-1953. The

the sharper rise in reserve city and country bank

percentage for reserve city banks was unchanged.

holdings than in central reserve city banks during

Business recovery following the 1953-1954 reces

periods when tax anticipation bills were issued

sion was accompanied by an unusually strong de

followed by sharper declines in the holdings of

mand for credit. To meet this demand, banks have

these groups in periods when tax anticipation is

been liquidating bills and other Government se

sues matured. Even so, this does not explain why

curities. By April 1955, central reserve city and

country banks and, to a lesser extent, reserve city

reserve city banks had reduced their secondary

banks continued to hold more bills than central

reserve of bills to about 2 per cent of demand de

reserve city banks after the tax anticipation issues

posits; the percentage for country banks had

were retired. Another factor was the termination

dropped to 3.8 per cent.

of the System’s policy of supporting the prices of

Bill holdings have also declined in recent years

Government securities in the spring of 1951. This

relative to member-bank reserve balances.

made longer maturities less liquid and apparently

mid-1950, bills held by both central reserve city

b usin e ss r e v la w

and country banks were around 25 per cent of
their reserve balances, while that of reserve city

MEMBER BANK BILL H O LD IN G S ,
UNITED STATES (APRIL 19 5 5 )

banks was about one-fifth. By April 1955, bill

P erce ntag e d is trib u tio n b y Reserve d istrict

holdings of central reserve city and reserve city
banks had declined to only 11 per cent of reserve
balances, while those for country banks had risen
to 27 per cent.
By Reserve District. Member-bank bill hold
ings relative to demand deposits vary rather
widely among Reserve Districts. In April of this
year, the ratio of bills to demand deposits ranged
from a high of 4.9 per cent in the Kansas City
District to a low of 1.9 per cent in New York. Bos
ton and Philadelphia were near the low with ratios
of only 2 per cent. Districts other than Kansas
City with high ratios were Atlanta, Dallas, and
Richmond.

MEMBER-BANK BILL HOLDINGS
AS PERCENT OF DEMAND DEPOSITS
BY RESERVE DISTRICT
Federal Reserve
D is tric t
Boston ........................
New York ..................
P hiladelphia .............
C leveland ..................
Richmond .................
A tla n ta ......................
C h ic a g o ......................
St. Louis ....................
M in n e a p o lis ...............
Kansas C ity ...........
Dallas ......................
San F ra n c is c o ...........

A p ril

As o f June
1947

1950

1951

1953

1955

0-7%
0.6
1.8
0.5
0.8
0.4
1.6
0.5
0.7
1.4
0.7
l.l

2-3%
4.2
3.9
3.9
2.8
2.6
5.4
2.7
2.1
4.9
4.3
2.1

3.8%
4.0
3.6
4.0
3.7
2.4
3.6
2.4
1.2
4.8
4.2
1.8

3-4%
3.4
2.5
4.3
3.7
5.0
4.0
4.6
3.4
6.8
5.1
2.4

2.0%
1.9
2.0
2.7
3.1
4.3
2.4
2.3
2.7
4.9
3.7
2.5

from mid-1950 to mid-1953 occurred during a
period of loan and deposit expansion. For one
thing, there was a substantial rise in the volume
of Treasury bills outstanding during the period.
Then, too, certain developments made bills more

From mid-1950 to mid-1953 the ratio of bills to

attractive to commercial banks. The market rate

demand deposits increased in most of the Reserve

on bills rose significantly during the period and

Districts. The only exceptions were Chicago, New

the spread between the rates on bills and longer

York, and Philadelphia. Member banks in the

maturities narrowed considerably. The reduced

Atlanta and St. Louis districts nearly doubled

liquidity of longer-term Government securities

their ratios of bills to demand deposits, and rather

following termination of the support policy and

large increases occurred in the Boston, Dallas,

the sharp rise in loans relative to holdings of Gov

Kansas City, Minneapolis, and Richmond dis

ernments probably pointed up the need for greater

tricts.

liquidity.

This rise in bill holdings relative to deposits

Bill holdings relative to deposits were lower in

b usin e ss r e v ie w

nearly all districts in April of this year than in

and Cleveland. The percentage held by member

mid-1953. One reason is the very strong demand

banks in the Atlanta District has risen steadily —

for credit since the fall of 1954, forcing many

from 2 per cent in mid-1947 to 10 per cent in

banks to sell Government securities in order to

April of this year. The rise in the Dallas District

meet the loan demands of their customers. Until

also has been large, and the proportion held in the

recently, the yield on bills has been less attrac

Cleveland District has almost doubled during the

tive, the market rate averaging less than 1 per

same period. More moderate increases have oc

cent in 1954 as compared to 1.9 per cent in 1953.

curred in the Kansas City, Richmond, and St.
Louis Districts.

PERCENTAGE DISTRIBUTION OF
MEMBER-BANK BILL H O LD IN G S
BY RESERVE DISTRICT

A larger number of member banks in the Third
A p ril

As o f June 30

Federal Reserve
D istrict
Boston ......................
New York ...............
Philadelphia ...........
C leveland ...............
Richmond ...............
A tla n ta ....................
C hicago ..................
St. L o u is ....................
M inneapolis ...........
Kansas C i t y .............
D a lla s ........................
San Francisco .........

Third District

1953

1955

2.9%
3.8%
4.3%
5.3%
31.7
24.3
33.3
20 8
9.9
3.3
5.2
5.1
7.4
3.9
8.7
8.5
4.7
4.4
3.9
3.3
6.9
3.4
2.0
3.5
15.9
15.7
25.4
21.4
4.9
2.9
2.7
2.4
.9
2.2
2.2
1.5
9.9
8.4
7.3
7.2
7.1
8.4
4.2
7.0
5.7
7.0
13.1
6.1

3.6%
19.7
3.7
7.7
5.4
9.5
13.7
3.6
2.6
10.4
9.1
1 1.0

1947

1950

1951

District held bills at the end of June this year than
in mid-1951 — over one-third as compared to
28 per cent in 1951.
Nearly one-half of the banks with total deposits
of $20-100 million held bills in mid-1955, and 43
per cent of those with deposits of $5-10 million.
Fewer of the small banks hold bills; only 26 per
cent of those with deposits under $1 million
owned bills at mid-year. The most significant in
creases since 1951 in the number of banks holding

There have been some marked changes in the post

bills occurred in the $2-5 million and $5-10 mil-

war period in the distribution of member-bank
bill holdings among Reserve Districts. The New
York district usually accounts for the largest per
centage of total member-bank holdings, followed

PERCENTAGE OF BANKS H O LD IN G BILLS,
THIRD DISTRICT MEMBERS
PER CENT

by Chicago. These two districts accounted for
over one-half of the total in mid-1950, but only
one-third in April of this year.
The proportion of the total held by member
banks in the Chicago and Philadelphia districts
has declined almost steadily. In April 1955, mem
ber banks in the Chicago District held only 14 per
cent of the total as compared to 25 per cent in
mid-1947. The decline in the Philadelphia Dis
trict was relatively greater — from 10 per cent in
mid-1947 to 4 per cent in April 1955.
On the other hand, striking increases have oc
curred in some districts, notably Atlanta, Dallas,

1-2

2 -5

SIZE OF BANK-DEPOSITS IN MILLIONS OF DOLLARS

5-10

10-20

20-100

100

b usin e ss re v ie w

lion size groups. The only size group to show a

increases occurred also in the $10-20 million,

decrease was the larger banks with deposits of

$2-5 million, and $1-2 million groups.

over S i00 million.
The declining importance of bills in the port

C O N C L U S IO N S

folios Qf the larger banks, not only in this district

Receipts flowing into large business firms and

but throughout the country, reflects in part the

other institutions are usually not closely geared to

liquidation of Governments to meet the pressure
on reserves arising from the sharp expansion in

the outflow of expenditures. Business transactions
and Treasury operations are constantly shifting

loans which has accompanied the recovery of bus

funds among institutions, some gaining and

iness from the 1953-1954 recession. Such pres

others losing funds. This creates the problem of

sures tend frequently to converge on the larger

how income can be derived from funds temporar

banks in the money-market centers. It may also

ily accumulated in excess of current needs and yet

reflect greater reliance by the larger banks on

have funds available for meeting temporary short

other methods of adjusting their reserve positions.

ages. The need is for an investment which yields

The larger banks are more apt to use the Fed

income but which can be readily converted into

eral funds market than the smaller banks. There

cash without loss of principal. The Treasury bill

is usually some arrangement in the principal

usually fills this need quite well. The bulk of the

money-market centers for bringing together banks

bills outstanding in the post-war period has been

in need of reserves and banks with excess reserves

held by three main groups — The Federal Reserve

to lend. The Federal funds market enables banks

System, commercial banks, and non-financial in
stitutions. The latter two have relatively high

with reserve deficiencies to borrow excess reserves
of other banks. Borrowed funds are usually re

liquidity needs, and the Federal Reserve System

payable the following day, and the rate is almost

has found the Treasury bill an appropriate

always below the discount rate of the Reserve

means of injecting funds into or withdrawing

Banks. The rate is high, of course, when the sup

them from the market.

ply of reserve funds offered in the Federal funds

The structure of the bill market has undergone

market is small relative to the demand and vice

marked changes in the past two decades. Prior to

versa. Finally, the larger banks may rely more

the war, commercial banks usually held most of

on borrowing from the Reserve Banks to meet

the outstanding bills. During the war and early

short-term reserve deficiencies than the smaller

post-war periods, the bulk of the bills moved into

banks.

the System’s portfolio, investors being unwilling

Even though many district member banks hold

to hold securities that yielded only % of 1 per

bills, a large part of the total is lodged in the

cent. Unpegging the bill rate in July 1947 was

larger banks. Banks with deposits of over $100

followed by a persistent rise in the market rate.

million held 61 per cent of the district total in

Bills became more attractive to investors, and the

mid-1951 and nearly 50 per cent in mid-1955.

bulk of the outstanding supply gradually moved

The medium- and smaller-size groups held a

into the portfolios of non-financial institutions.

larger part of the total this year than in 1951.
however.

In the past few years there has been a tendency

The largest increase, percentagewise,

for commercial bank holdings to become more

was in banks with total deposits of $5-10 million;

widely distributed. The medium- and smaller-size

busin e ss re v ie w

banks have increased their proportion of total

the larger money-market banks to rely more heav

bank holdings, while that of the large banks has

ily on other methods of adjusting their reserve

declined. This may reflect in part a tendency for

positions.

A MID-SEASON REPORT
FROM THE FARM
A diversified agricultural economy such as ours

season growing conditions were generally good,

in this Third Federal Reserve District gives farm

but July and August brought just “ too much

ers their best insurance against adverse growing

weather.”

conditions and the wide fluctuations in market

July drought were severe. Yields were sharply

prices so frequently encountered. This aspect of

reduced and quality was lowered to a point where

In some cases, crop losses from the

crop diversification has been severely tested in

market returns sometimes scarcely paid for the

recent months. For one thing, the growing season

cost of planting and harvesting. Then, in August,

to September 1 has been marked by weather ex

the two hurricanes took their toll in wind damage

tremes seldom equaled in the past. And in local

and floods. The second storm ran up a big repair

markets, demand and prices for many of the prod

bill for farmers in some eastern counties where

ucts raised on Pennsylvania, New Jersey, and Del

private roads washed out, crops drowned, and

aware farms have been anything but stable.
County farm agents with whom we have dis

fields eroded with a heavy loss in top soil. The
best that can be said of hurricanes “ Connie”

cussed the ups and downs of the current season

and “ Diane” is that they broke the drought and

describe it as among the most erratic they have

gave some of the later crops a chance to recover.

experienced. In the opinion of these specialists
some of our farmers will make a little money this

E arly field crops fa re d rath e r w ell

year. Others may not do so well. But for most

Grain crops like wheat, oats, and barley yielded

farmers, except the few who put “ all their eggs in

average or better in most parts of this district.

one basket,” this season’s final returns may be

Quality generally was high. In many counties the

better than the extremes of weather and unstable
markets seemed to indicate.

managed to cure and store it with a minimum in

first cutting of hay also was good, and farmers
losses. As things turned out, this was a real

“Too much w e a th e r”

“ break” because they soon found themselves feed

Some crops grown in this area develop best with

ing hay in place of grass on the burned-out pas

high temperatures; others prosper most when

tures. Moreover, for some of our farmers there

there is a lot of moisture. So far, no one can deny

was no second hay crop worth harvesting. Field

that we have had a superabundance of both. Early-

corn was off to a poor start but has improved

b usin e ss review

since the rains and may make a fair crop after

remains very much in doubt, but it is clear that

all.

production will be something less than the opti
mistic early-season forecasts seemed to indicate.

M a n y v e g e ta b le gro w e rs
h a v e h ad a ro u gh tim e

O rch ard fruits a re m o st p ro m isin g

Perhaps the hardest hit among vegetable crops

Some varieties of early peaches were too small be

were the tomatoes ripening at mid-season. These

cause of insufficient moisture, and in the south

included both fresh-market and processing vari

eastern counties they had to be harvested in a big

eties. In some counties, yields ranged from 3 %

hurry before the winds of hurricane Connie

to 5 tons an acre, compared with normal harvests

reached them. So, for a time, the markets were

of 10 tons and more. According to the county

over-supplied and prices suffered accordingly. All

agents, contract prices on tomatoes for processing

the later varieties seem to be yielding well and the

were not too bad, but low yields and generally

quality of the fruit has improved considerably.

poor quality brought small returns to the growers.

Peach growers may have little cause for complaint

Beans and some other crops that survived the

once the full harvest is in. About the same situa

drought in July were revived by August rains

tion has prevailed in the case of summer apples.

only to be damaged by disease that seemed to

Fruit growers generally count themselves very

spread rapidly with the sudden change from too

fortunate that wind damage was relatively light

dry to excessively wet weather. The main potato

and few trees suffered permanent damage. Farm

crop is still in the ground so it is hard to evaluate
at this point. But if the recent growth of vines

ers with fall apples are looking forward to a crop
very little smaller than last season’s and are

means anything, the tubers may be small and loss

greatly encouraged by the manner in which most

from rotting could be considerable in the wet soil.

varieties are coloring and sizing. There is a good

Sweet corn showed some improvement, following

demand in prospect from the manufacturers of

a bad start when the ears filled poorly. Early

sauce, butter, and other apple products. With high-

vegetables like asparagus and onions helped make

quality fruit probable, the market for packaged

it possible for growers to salvage something from

apples should be at least as good as last year.

an otherwise rough season.
D a iry m e n h av e not d one too b a d ly
Tobacco h as been d a m a g e d

Low milk prices are a chronic complaint of the

In Lancaster County, tobacco is another cash crop

dairy farmer, and so far 1955 has not been much

that has been injured by storms and generally ad

different from any other recent year. Milk de

verse

fields were

mand, however, has been fairly steady; surpluses

flooded in the backwash of hurricane Diane and

in local markets have not been too severe; and

weather conditions.

Some

here the losses are said to be extremely heavy.

most dairymen rriay make a little money. They

Elsewhere plant disease — notably “ wildfire” —

have been, and still are, working hard to increase

has spread rapidly since the rains. There is little

efficiency. Quality in most herds is improving as

the farmers can do to combat this disease except

low producers are eliminated in the culling proc

cut the tobacco and get it into drying sheds as

ess. And some substantial expenditures have been

rapidly as possible. The final outturn of the crop

made for new and up-to-date dairy equipment.

b usin e ss re v ie w

These efforts are bringing rewards in the way of

keting the later ones, including the bulk of the

slightly higher profit margins. Operations this

crop, have brought considerably higher prices.

season, however, have been made more difficult

One thing helping local growers is the fact that

because of the heavy supplementary feeding nec

market competition has been reduced by the loss

essary when pastures failed in July. Dairy farm

of a large part of the southern peach crop this

ers who normally meet the bulk of their feed needs

year.

must purchase a little more this year; those who

been in the worst spot. Their problem has been

do not raise nearly enough hay and silage will
have to buy a great deal of dairy rations for the

the fact that early summer prices were low. And
that was when they had their largest volume and

coming winter.

highest quality. Later, with greatly reduced vol

Market-wise, the vegetable growers have

ume and lowered quality, it was very hard to
This h as been a much better y e a r

reach a break-even point for the season as a whole.

for poultry
The poultry business has staged a remarkable

Farm purch asin g p ow e r

comeback in recent months. Broiler markets are

is u n like ly to increase this y e a r

much better than last year, and prices are far

Cash income from marketings in each of the three

enough above production costs to insure profit

states included in this district ran close to 1954

able operations. Feed costs have decreased a little

levels through mid-year. In that period, receipts

and poultrymen hope that they may go lower. Egg

from crops were showing moderate gains while

markets, too, are decidedly stronger than in the

income from livestock and livestock products was

spring and early summer, and poultrymen are en

trailing somewhat.

couraged. Flocks of both broilers and layers were

versed, at least temporarily, in coming months

sharply reduced last fall and winter, but they are

partly because of reduced yields and lowered qual

This situation may be re

building up now and it looks as though our poul

ity of some mid-season crops. In any case, total

trymen will be considerably better off financially

cash income in 1955 is unlikely to be high enough

than they were in 1954.

to raise the purchasing power of farmers because
most production costs have remained rigid.

Price w e a k n e ss persists

Purchased feeds are about the only expense

a n d m a rk e ts a re sp otty

item that has decreased in recent months. Labor

The over-all trend of farm prices in recent months

costs remain high and in the skilled category they

has been downward nationally and locally.

have even increased a little. Fertilizer and insect

this district, market demand has fluctuated widely

icides continue expensive and local farmers may

since the spring. Earlier, beef prices were low but

have to use larger quantities of both to re-build

they have staged some recovery.

Demand for

washed-out fields or to fight plant disease encour

hogs has been weak right along because of heavy

aged by unfavorable growing conditions. Equip

supplies. Poultry and egg markets have been in

ment and machinery costs have increased. For

the strongest position in the past two months and

those farmers who are buying tractors, or cold-

give some promise of continuing so for a while.

wall tanks for the milk house, or are installing

Offerings of the season’s first peaches were too

irrigation systems, these are big-cost items that

heavy to be absorbed; but in more orderly mar

must be reckoned with.

b u sin e ss re v ie w

CURRENT

TRENDS

Most business indicators continue to push up

ally. Industrial employment weighs more heavily

ward. Yet, the business climate seems a little dif

in Pennsylvania, so total employment here suffers

ferent. Perhaps it is just that we are now accus

more of a drag when the factory sector lags.

tomed to increases and the plus signs do not get

But this is not the whole story. Employment in

so much attention as a few months ago. More

Pennsylvania factories was off 10 per cent from

likely it is that the increases are not so large now.

July 1953, whereas for the nation as a whole,

Our rate of advance has probably slowed some

employment in manufacturing was down less

what.

than 5 per cent. In other words, employment in

This is natural enough. Gross national product
in the second quarter of this year was $27 billion

Pennsylvania industries has not recovered so fast
as in the rest of the nation.

higher than the low point touched a year ago.
Growth of this kind is more than we can normally

EMPLOYMENT

expect from increased efficiency and new workers.

Percent C h an ge July 1 9 5 3 - July 19 5 5

NO N-AG RICU LTURAL

What the economy has been doing is making up

Penn
sylvania

for the ground lost during the downturn in late
1953 and the first six months of 1954. Much if
not all of that ground has been recovered.
This does not mean that we should merely turn
our efforts to keeping just what we have. Increases

Total

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

C o n tra c t construction .............................
M a nu fa ctu rin g ..........................................
W holesale and retail tr a d e ....................
G ove rnm ent ..............................................
O th e r ............................................................

— 5
— 30
— 2
— 10
— 0
+ 3
+ o

LINES

U nited
States
— 0
— 12
- 3
— 4
+ 2
+ 5
+ 1

in income and employment are still desirable —
even necessary. It may mean, however, that we

As can be seen in the preceding table, industry

might expect a less spectacular rate of advance.

is not the only category in which employment is

E m p lo y m e n t in P e n n sy lv a n ia la g s

coming back slower here than in the rest of the
nation. The fact of the matter is, only employ

If, as seems to be the case, the nation as a whole

ment in contract construction shows to advantage

has made up the ground lost during the recession,

in Pennsylvania as compared with the nation.

this does not hold true in all sections. In Pennsyl
vania, for example, employment is not back to
where it was in 1953. The fact is Pennsylvania
employment in July of this year was 5 per cent
below the level reached two years ago — though
2 per cent above July 1954.
Why should Pennsylvania — the second larg
est industrial state — trail behind the nation?
One reason is just that — Pennsylvania is an in
dustrial state and employment in industry has not
come back to where it was in 1953, even nation

PERCENT C H AN G E IN EMPLOYMENT
BY LABOR-MARKET AREA
(P ennsylvania, July 1 9 5 3 - July 1 9 5 5 )
Lancaster ..................................................................
Lehigh Valley .......................................................
Reading ...................................................................
H arrisb urg ..............................................................
Philadelphia
............................................................
York ...........................................................................
A lto o n a .....................................................................
Johnstown ................................................................
Erie
...........................................................................
Scranton
................................................................
P ittsburgh ..............................................................
W ilkes-Barre ............................................................

—0
—I
-2
-3

—3
-3

—4
—4
—5
—6
—6
— 7

b u sin e ss re v ie w

Within Pennsylvania the story is pretty much

trial area that responds more slowly to changes in

the same. Not one of the twelve labor market

the general business environment. Though com

areas has broken through its July 1953 level of

forting, this conclusion would not be entirely ac

employment. The Lancaster area is closest to

curate. Pennsylvania reacted rapidly to the de

where it was two years ago, but all of the other

cline in business activity in late 1953 and 1954;

areas are more than 1 per cent below 1953.

in fact, the decline here was sharper than nation

It would be comforting to be able to say that
all this means that Pennsylvania is an older indus

ally.

The evidence seems to indicate lethargy

only on the way up.

F O R T HE R E C O R D . . .
INDEX

b il l io n s

_______ MEMBER

B A N K S 3R D ER.D.

B A N K IN G
DEPOSITS

\J \
V

/\ V \

/
v

CHECK PAYMENTS

C20cities)

IN V E S TM E N TS

^
T

----------

LOANS

---------------------------JWV
AGO

AGO

2 YEARS
AGO

1955

YEAR
AGO

Factory’
Third Federal
Reserve District

Un ted States

July
1955 from
mo.
ogo

O U TP U T
M anufactu rin g production . . . - 2
C onstruction c o n tra cts*........... + 8
C o a l m in in g ................................
0
EM PLOYM ENT A N D
IN C O M E
Factory employ.nent (T o ta l). . .
TRADE“
Department store sa le s............
B A N K IN G
( A ll member banks)
D eposits.......................................
Loans............................................
Investments..................................
U.S. G o vt, securities.............
O th e r .........................................
Check paym ents........................

year
ago

+ 5
+ 5
+36

7
mos.
1955
from
year
ago

+ 1
+15
+12

July
195 5 from
mo.
ago

-5
-5
+4

1
-1

+
+

1
9

2
4

+ 7
0

+14
+ 7

+9
0

year
ago

+ 16
+24
+ 35

CHANGES

+ 10
+29
+19

+ 11
+ 4

+ 2
+15
- 4
- 3
- 6
+ 8t

+ 4
+11
+ 1
- 1
+ 7
+ 5t

‘ Based on 3-month moving averages.
“ A d ju ste d fo r seasonal va ria tio n .

+ 5
+ 15
0
- 2
+ 7
+ 4

+ 5
+10
+ 5
+ 4
+ 11
+ 6

0
0

0
1

V‘

PRICES
C onsum er.....................................

+1
+1
0
+1
0
-9

0
0

t2 0 C ities
+Philadelphia

Per cent
change
uly
195 5 from

Per cent
Per cent
Per cent
change
change
change
July
July
J uly
195 5 from 19 5 5 from 195 5 from

mo.
ago

year
ago

year mo.
ago ago

mo.
ago

Per cent
change
July
1955 from

year mo.
ago ago

year
ago

5 +

2 + 19

3 +

4 + 12

-1 0

Lancaster. . .

+ 2

6 +

2 + 12 +

P h ila d e lp h ia .

-1

1 -

Reading

-3

...

7 +

6 +

5 -

1 +

4 - 2 2 + 13 -

3 +

7 -1 0

3 -1 1

+ 10

4 +

2 -1 4

5 +

1 -

2 +

9 -1 1

+ 20 - 1 1

2 -

2 +

5 -2 1

+ 1

5 + 10 + 16 - 1 9

W ilk e s -B a rre

-3

4 -

W ilm in g to n . .

+ 1

+ 10 +

Y o rk ...............

-1

2 -

6 + 15

6 + 13 -

Scranton . . .
-1
+1
0
0
-1
-9 t

Stocks

Sales

Payroll3

LOC AL

7
mos.
1955
from
year
ago

Departm ent Store
Check
Payments

Employ
ment

Per cent change

Per cent change
SUMMARY

JULY
1955

6 -

+ 16 -

6 + 22 +

5 + 11 - 1 6 + 18 -

6 + 21 - 1 7

+ 14 +

4 + 15 - 1 7

+ 23

6 +

1 + 18 - 1 5
8 +

4 +

4 + 18 -

4 -1 1

‘ N o t restricted to co rp o ra te limits o f cities but covers areas of one or
more counties.

Full text of Business Review (Federal Reserve Bank of Philadelphia) : September 1955

FRASER