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54

MONTHLY REVIEW, APRIL 1962

T h e P r im e R a te *
Of all the interest rates charged by banks, only one is
widely publicized and uniform throughout the country—
the prime rate on business loans. The prime rate is the
rate that banks charge their most credit-worthy customers;
other borrowers must pay more. Rightly or wrongly,
changes in the prime rate are often regarded by the public
and the banks as one of the chief indexes of credit condi­
tions. The present article reviews the history of the prime
rate and assembles the available statistical evidence con­
cerning its role in the lending process. A second article
to be published in a later issue will deal with changes in
the prime rate and their causes.
T H E E V O L U T IO N O F T H E P R IM E R A T E

While banks have always had rates reserved for their
best customers, a nationally publicized and uniform rate
apparently did not emerge until the depression of the
1930’s. The rate set in that period of slack loan demand
and swollen reserve positions, 1V2 per cent, represented a
floor below which banks were said to regard lending as
totally unprofitable, given the administrative costs involved.
The rate remained unchanged through the war and until
December 1947, at which time it was raised to 1% per
cent. In the ensuing fourteen years, there have been eight­
een changes in the rate (all but four of these upward).
Over several intervals of approximately a year’s duration
(or more) there were no changes at all. Indeed, the rate
currently prevailing, 4Vi per cent, has been in effect since
August 23, 1960.
Prime rates are “officially” posted only by the largest
banks; changes in the rate become effective by means of
announcements by these banks. Normally one bank an­
nounces a change in rate; the other banks follow suit within
a day or two. On all but one occasion, the bellwether has
been a New York City bank, and three such banks—First
National City Bank, The Chase Manhattan Bank, and
Bankers Trust Company—have initiated fourteen of the
nineteen changes recorded. Through August 1956, rate
changes were in steps of X
A of a percentage point; sub­
sequent movements have been in steps of Vi a point.
* Albert M. Wojnilower and Richard E. Speagle had primary
responsibility for the preparation of this article.




It is clear that the prime rate is not a sensitive, open
market rate (such as, for example, the Treasury bill rate)
fluctuating from day to day in response to the changing
intensities of demand and supply channeled into, and
measured by, a national market. Movements in the prime
rate lag appreciably behind changes in the general business
situation and open market money rates. The practice of
moving only in half-point steps has lengthened this lag,
since it has meant that larger shifts in open market rates
and credit conditions are now the prerequisite for a change
in the prime rate.
The lag, however, appears to be characteristic of bank
loan rates in general, rather than of the prime rate in par­
ticular. Loan rates were “late” movers relative to other
business and credit market indicators long before the rise
to prominence of the prime rate. According to the figures
of the National Bureau of Economic Research, fluctua­
tions in loan rates charged by banks have been trailing
cyclical changes in business at large at least since 1919,
when the statistical record begins. The median lag in the
post-World War II period has, however, been somewhat
longer than in earlier years.
Until late 1953, the prime rate was almost always lower
than the prevailing yield on new issues of high-grade cor­
porate bonds, by and large the principal alternative source
of outside financing available to prime borrowers. Since
1953, however, the prime rate has at times exceeded the
yield on new issues of Aaa-rated corporate bonds (see
Chart I). Bond yields have generally turned upward or
downward ahead of the prime rate, but the differential
between the two interest rates has been at most V2 of 1
per cent and normally much smaller.
The prime rate has generally been in the range of 1 to
2 percentage points above the Federal Reserve discount
rate. In recent years, changes in the prime rate have been
less frequent than changes in the discount rate, which has
been more closely related to short-term open market rates,
but the general pattern of movements has been similar.
B R E A D T H O F A P PL IC A T IO N

The criteria that borrowers must meet if they are to
qualify as “prime” cannot be precisely defined. Over the
long run, at banks in the nineteen cities included in the

55

FEDERAL RESERVE BANK OF NEW YORK

Chart I

THE PRIME RATE AND OTHER KEY MONEY RATES

1948 49 50 51 52 53 54 55 56 57 58 59 60 61
Sources: Board of Governors of the Federal Reserve System;
first N ational City Bank

the competitive realities of the situation would demand.
The Quarterly Interest Rate Survey does not analyze
term loan rates in the same detail as short-term rates.
Only rate averages are calculated, and only the New York
City data are published. These New York results imply
that a large proportion of term loans is made at the prime
rate. Since 1951 the average rate on new term loans in
New York City has only once exceeded the prime rate by
more than Vi per cent (March 1954), and then by an
insignificant margin. Indeed, on numerous occasions since
mid-1956 the average rate on new term loans in New
York has been below the prime rate, apparently because
loans were being taken down under fixed-interest commit­
ments entered into at previous times of lower rates (Chart
II). Recently, there has been an effort to avoid such oc­
currences through the more frequent use of “escalator”
clauses that tie the rate on term loans to some fixed rela­
tion with the prime rate at the time of take-down.
TH E PR EV A LEN C E OF TH E P R IM E RATE

Federal Reserve Quarterly Interest Rate Survey, approxi­
mately half the total dollar volume of reported short-term
business loan extensions (and renewals) has carried the
prime rate.1 This proportion is much higher, however, for
large loans and far lower for small loans (detailed figures
are given later in this article), so that the number—as
opposed to the dollar amount— of loans granted at the
prime rate is much less than half the total. Since large
loans are normally made to large businesses, and small
loans to small firms, it is clear that, whatever the formal
standards that may be required of a “prime” borrower,
the prime rate is extended principally to large firms.
Indeed, interest rates on loans exceeding $200,000 are
dominated by the prime rate. Since 1951, the differential
between the prime rate and the average interest rate on
these large loans has never been larger than 0.5 percentage
point and usually smaller, normally ranging from 0.20 to
0.35 of a percentage point. Differentials between the
prime rate and average interest rates on smaller loans have
been much larger and more variable, as shown in Table I.
As mentioned earlier, a formal prime rate is apparently
posted only by the larger banks. The question therefore
arises whether the short-term rate levels and changes estab­
lished by the leading banks are adhered to by smaller
banks as well. Data for average new loan rates from the
Federal Reserve Commercial Loan Surveys of 1955 and
1957 suggest that loans to large firms are made principally
at the prime rate by small banks as well as by large— as
1 This proportion is subject to cyclical fluctuations described
later.




The argument is sometimes made that the posted prime
rate may be a facade hiding a much more flexible interest
rate structure. The available statistical evidence, however,
suggests the contrary. Changes in the prime rate seem to
be a reliable index of what is happening to the average
level of business loan rates paid; indeed, prime rate fluc­
tuations are generally larger than changes in rates on other
business loans. The following discussion explores the
relevant evidence and its implications.
Since the prime rate moves infrequently, later than
other rates, and only in sizable steps, one might expect
“shading” of the rate to become fairly prevalent from
time to time. Unpublicized discounts might be offered at
times of slack demand, with “gray market” premiums ap­
pearing when supplies are tight. This, at least, is what is
fairly commonly observed in other markets where the
published “list price” is established by a few large sellers,
but where there are also many small sellers, as well as

Table I
DIFFERENTIALS BETWEEN THE PRIME RATE
AND AVERAGE INTEREST RATES
ON SHORT-TERM BUSINESS LOANS
Size of loan
$200,000 and over
$100,000 to $200,000
$ 10,000 to $100,000
$ 1,000 to $ 10,000
All loans

Range of differentials, 1951-61
(in percentage points)
0.15
0.43
0.66
0.92
0.27

to
to
to
to
to

0.50
0.97
1.49
2.24
0.71

Source: Qllarterly Interest Rate Survey of the Board of Governors of the
Federal Reserve System.

56

MONTHLY REVIEW, APRIL 1962

numerous large and small buyers. With respect to the prime
rate, however, such unpublicized concessions appear to
be rare. While there are always a few short-term loans
(ranging up to about 2 per cent of the total at the banks
reporting in the quarterly survey) which are extended at
rates nominally below the prime rate, these consist largely
of special arrangements in which the effective interest cost
is easily shown to be at least as high as the prime rate.
The equivalent of rate “shading” could, of course, be
accomplished through adjustment of one or more of the
many other dimensions of a loan contract. An obvious
expedient, virtually equivalent to a rate change, would be
the variation of the standards established for the “prime”
rating. If loan demand were slack, for example, these
standards might be lowered, making more borrowers eli­
gible for the prime rate. The average level of rates actually
paid would thereby be reduced, even though the prime rate
remained unchanged. Conversely, these standards might
be stiffened at times of tight money, resulting in a higher
level of rates actually paid. Such accommodations to mar­
ket forces could also occur through a multitude of other
nonrate factors— such as adjustments of the size of the
compensating deposit balances borrowers are expected to
maintain, the collateral they must post, the duration for
which loans are granted, the accompanying services the
bank undertakes to render, and many others. Furthermore,
it is conceivable that, at those times when the market is
“moving away” from the prime rate, rates to less-thanprime borrowers are adjusted while prime borrowers are
left untouched, so that the level of the prime rate becomes

Chart ill

PERCENTAGE OF SHORT-TERM LOANS EXTENDED AT
OR CLOSE TO THE PRIME RATE
Percentage
of loans

Quarterly, 1951-61; based on dollar volume

Interest rate
«n
<ent

6

5

4
3
1951 52

53

54

55

56

57

58

59

60

,61

2

* June 1956: data not a v a ila b le in the appropriate detail,
t September 1958: prime rate increased on eleventh d ay of fifteen-day
reporting period; higher rate used as prime rate in computing proportions.
Source: Quarterly Interest Rate Survey of the Board of Governors of the Federal
Reserve System. Banks in nineteen cities report rates for loans extended
during the first fifteen days of each end-of-quarter month.

less representative of the true loan rate structure. Despite
all these possibilities, the available evidence, both statisti­
cal and as obtained in interviews, suggests that “under­
mining” of the prime rate, at least through those “non­
rate” aspects that affect true interest costs in an obvious
and easily measured way, has been of minor significance
in the aggregate.
FLUCTUATIONS IN THE PROPORTION OF LOANS QUALIFYING

The proposition that more borrowers
qualify for the prime rate when money is easy and fewer
when it is tight can be tested against data collected in the
Quarterly Interest Rate Survey as to the amounts of busi­
ness loans extended at various interest rates.2 Chart III
shows, for the last decade, the percentage of short-term
loans extended at the prime rate or less (lower line) as
well as the proportion extended at rates within 0.5 per
cent of the prime rate (upper line). Because of the irregu­
lar fluctuations, little can be said about changes in the
proportion of prime loans during periods when the prime
rate remained unchanged. What does seem clear, however,
f o r t h e p r im e r a t e .

Chart II

AVERAGE INTEREST RATES ON SHORT- AND LONG-TERM
BUSINESS LOANS AT NEW YORK CITY BANKS
Per cent

Per cent

Source: Quarterly Interest Rate Survey of the Board of Governors of the Federal
Reserve System. Tw enty-five branches of seven large banks report rates on
loans extended during the first fifteen days of each end-of-quarter month.




2 The Federal Reserve Quarterly Interest Rate Survey gives in­
formation on the average interest rate, for various loan sizes,
charged by the sample banks (or branches) on short-term business
loans made during the first fifteen days of each end-of-quarter
month. Data are also compiled giving the percentage distribution
of the dollar volume of loans extended at selected interest rate
levels.

57

FEDERAL RESERVE BANK OF NEW YORK
Table II
SHORT-TERM BUSINESS LOANS EXTENDED AT THE PRIME RATE
AT TIMES OF CREDIT TIGHTNESS AND EASE
Percentage of loan volume extended at the prime rate (or less)
Size of loan

September 1957
(tightness)

June 195S
(ease)

June 1959
(tightness)

December 1960
(ease)

$200,000 and over
$100,000 to $200,000
$ 10,000 to $100,000
$ 1,000 to $ 10,000
All loans

73
31
12
5
62

60
21
6
1
48

69
28
11
6
59

66
25
8
2
56

Percentage of loan volume extended at no more than 0.5 per cent
above the prime rate
Size of loan

September 1957
(tightness)

June 195S
(ease)

June 1959
(tightness)

December 1960
(ease)

$200,000 and over
$100,000 to $200,000
$ 10,000 to $100,000
$ 1,000 to $ 10,000
All loans

89
67
45
23
82

75
44
20
5
64

86
62
44
24
79

83
52
28
12
74

Source: Quarterly Interest Rate Survey of the Board of Governors of the
Federal Reserve System.

is that periods of tight money and rising rates have most
often been times when the proportion of loans made at, or
close to, the prime rate has increased. Conversely, periods
of easy money and reduced prime rates have been accom­
panied by declines in the proportion of loan volume trans­
acted at the prime rate. When money is tight, more of the
loan volume carries the prime rate; when it is easy, a
smaller proportion of loans qualifies. Thus, changes in the
prime rate appear to overstate rather than understate the
extent of actual changes in the average rate level.
The same finding holds not only for total loan exten­
sions, but also “within” each of the loan-size classes dis­
tinguished by the statistics. Table II illustrates the prevail­
ing pattern for two periods of credit ease and tightness.
The same pattern held for the whole period under review.
In all size groups, a larger proportion of the dollar volume
of loans qualified as prime when the prime rate was rising,
while a smaller share qualified when the prime rate was
low.
The growth in the proportion of prime loans when rates
rise, as well as its contraction as rates fall, appears to re­
flect two major influences. One is the cyclical behavior of
bank loan demand by prime borrowers. At times of busi­
ness expansion and rising interest rates, credit demand by
these borrowers increases and, because they are preferred
customers, is more likely to be satisfied than loan requests
by other firms. Thus, the proportion of prime loans rises
within each loan-size category (and the dollar volume of
large loans, which contains the highest proportion of prime
loans, rises relative to the volume of smaller loans). Con­
versely, at times of economic slack these borrowers nor­
mally make repayments, reflecting larger net cash flows




and the often greater availability of other means of financ­
ing, such as open market (commercial) paper. The share
of these borrowers in the loan total is thus reduced.
A second important factor is the traditional “stickiness”
of loan rates. When the prime rate is raised from, say,
3 Vi to 4 per cent, some borrowers who previously paid
4 per cent are apparently allowed to renew loans at the
same rate, expanding the proportion of prime rate loans
in the loan total. Conversely, when the prime rate falls,
some borrowers may not have their rates reduced; as a
result, the proportion of prime loans drops. While the
influence of the demand and stickiness factors cannot
be segregated, bank interviews as well as the statistics on
average rates paid (see below) strongly suggest that both
factors are significant.
THE PRIME RATE AND RATES ON OTHER BUSINESS LOANS.

Comparison of the behavior of the prime rate with aver­
age interest rates on new business loans (Chart IV) yields
corresponding results. When the prime rate has advanced,
the average rate also has increased, but by a smaller
amount. Thus, when the prime rate rises, rates on non­
prime loans do not increase correspondingly. Conversely,
when the prime rate has been lowered, the average rate
for all loan extensions has not declined to the same extent;
rates on nonprime loans have fallen by less than the prime
rate. To summarize, changes in the average level of rates
charged have always been smaller than the prime rate
change. Moreover, there has been little movement in

Chart IV

AVERAGE INTEREST RATES ON SMALL AND
LARGE SHORT-TERM BUSINESS LOANS
Per cent

Per cent

Source: Quarterly Interest Rate Survey of the Board of Governors of the
Federal Reserve System. Banks in nineteen cities report rates on loans
extended during the first fifteen days of each end-of-quarter month.

58

MONTHLY REVIEW, APRIL 1962

average loan rates except at times of a change in the prime
rate.
These relations also hold within each loan-size class
taken separately; changes in the actual average rate have
been smaller than changes in the prime rate. The pattern
is illustrated in Table III for two characteristic periods,
during one of which the prime rate rose 1 per cent, while
during the other it fell 1 per cent.
It is evident that, when the prime rate falls, small-loan
rates do not drop as much as large-Ioan rates. Conversely,
when the prime rate rises, small-loan rates do not increase
correspondingly, partly because they may be close to the
legal rate ceilings prevailing in many areas. This pattern,
too, held throughout the entire ten-year period. Indeed,
the pattern of a narrowing in rate differentials as rates rise,
and a widening as they fall, is observable over the entire
historical span of loan rate statistics, which begins in
World War I.
To some extent, the pattern of these rate changes
merely reflects the cyclical changes in the proportion of
loans at the prime rate (in combination with the greater
prevalence of the prime rate for larger loans) already
described. If in any loan aggregate the proportion of
prime (low-rate) loans rises, the average rate for that
group must fall, and conversely. As a result, given the
cyclical behavior of the proportion of prime loans, we
should expect that a 1 per cent fall in the prime rate will
lower average rates by something less than 1 per cent
and, similarly, that a 1 per cent rise in the prime rate
will raise the over-all rate average of any loan group
by less than that amount. The effect of such shifts in loan
distribution on the average rate can be arithmetically iso­
lated, however: the actual degree of rate sluggishness was
found to be clearly greater than could be accounted for by
shifts in loan distribution alone. Even when the changes
in the proportion of prime loans are attributed solely to
the demand factor, a significant part of the gap between
the change in the prime rate and the smaller change in
average rates remains unaccounted for. Thus, rate sticki­
ness appears to be an independent factor tending to stabi­
lize rates.3
f i n d i n g s a t i n d i v i d u a l b a n k s . These results based on
statistical aggregates do not imply, of course, that all

8 It is conceivable that, in addition to the cyclical rise and fall
of prime loans relative to nonprime loans, it is also the case that
nonprime loans cyclically rise and fall relative to others of still
lower quality. If this should be the case on a large scale, all of
the stickiness might be explained away. But the pattern of the
data and the interview results make it appear unlikely that this
actually happens.




Table IH
CHANGES IN THE AVERAGE INTEREST RATE
ON SHORT-TERM BUSINESS LOANS
Size of loan
$200,000
$100,000
$ 10,000
$ 1,000

and over
to $200,000
to $100,000
to $ 10,000

December 1957-Jlune 1958
Fall in average rate
(as prime rate fell
1 percentage point)

March 1959-December 1959
Rise in average rate
(as prime rate rose
1 percentage point)

0.76
0.61
0.41
0.21

0.92
0.80
0.65
0.46

Source: Quarterly Interest Rate Survey of the Board of Governors of the
Federal Reserve System.

banks behaved uniformly. Investigation of the recent
behavior of a few New York City banks as regards fluc­
tuations in the proportion of loans made at the prime rate
revealed a degree of diversity but, on the whole, gave re­
sults consistent with the broad statistical findings. Thus,
at one large institution, the proportion of loans granted
at the prime rate moved in accord with the national pat­
tern. The same was true of term loans at a second bank
(this was the only class of loans studied at this bank).
At a third institution, however, the 1960 cut in the prime
rate was followed by an increase in the proportion of new
loans made at the prime rate, contrary to the pattern shown
by the aggregate statistics. Nevertheless, officers of this
bank agreed, a larger proportion of loans normally car­
ries the prime rate when money is tight than when it is
easy, and conversely. This was explained in terms of the
difficulty of raising rates that are already at, or close to,
the 6 per cent statutory ceiling. On the other hand, rates
on such loans are not reduced when the prime rate falls.
The use of variations in loan terms other than interest
rates, such as compensating balances, maturity, etc., as
alternatives to rate changes was not directly investigated.
Such little evidence as is available suggests, however, that
systematic variation of loan contract terms in lieu of rate
changes has not played a generally prominent role except
for certain classes of bank customers, notably sales finance
companies.
t e r m l o a n s . Rates charged on term loans behaved
somewhat differently. Comparing the New York City
average rate with the out-of-town averages, which prob­
ably include relatively fewer large and/or prime borrowers,
it appears that, as in the case of the short-term rate, a
rise in the prime rate exerts its largest impact on rates
paid by prime borrowers and has less effect on rates paid
by others. As compared with changes in average short­
term rates, however, the average term rate tends to lag a
few months, possibly reflecting a longer gap in the case
of term loans between the negotiation of the loan and the
actual drawing.

FEDERAL RESERVE BANK OF NEW YORK

A divergence between short-term and term loan rates
has occurred during the later part of rate upswings, as in
mid-1953, mid-1956 to mid-1957, and mid-1959 to mid1960. Short-term rates advanced in step with the prime
rate at these times, but term loan rates rose more slowly
(Chart II). As a result, there have been periods of as long
as a year in which the average rate on new term loans has
been lower than that on even the largest ($200,000 or
more) short-term loans.
N O N R A T E A S P E C T S O F B A N K -C U S T O M E R
R E L A T IO N S

Although the present study was not directly concerned
with the nonrate aspects of bank loan allocation, it pro­
vided some insights consistent with the results of other
recent studies. In particular, a critical factor considered
by banks in ruling on particular credit requests seems to
be the past and expected profitability of the customer re­
lationship as a whole, including prominently its deposit as
well as its loan aspect. At one large bank, for example,
the rise in the proportion of prime loans as money tight­
ened was attributed partly to the fact that “many good
customers [depositors], nonborrowers for years, seemed
to come in for loans”. Conversely, when deposits are
abundantly available, the banks become less concerned
about the deposit side of the customer arrangements and
more willing to make loans to other credit-worthy bor­
rowers. Much more investigation into lending terms and
practices is needed, however, to justify any firm conclu­

59

sions on these points. Indeed, there may be considerable
differences in basic philosophy and policy among individ­
ual banks and among banks of different sizes.
It should be kept in mind that the prime rate originated
as a floor to lending rates in a period of excess liquidity
and slack bank loan demands. For many years thereafter,
banks operated in an atmosphere of ample liquidity and
historically low interest rates. Over the past decade, how­
ever, this liquidity has been largely used up, to the extent
that some large banks may at times find themselves unable
to accommodate fully the loan demands (including de­
mands for advance commitments) of all their prime cus­
tomers. Under these more recent circumstances, nonrate
elements have gained importance in rationing bank credit
among eager borrowers of highest credit standing.
It is vital to recognize, furthermore, that the importance
of nonrate factors in individual transactions does not neces­
sarily imply that rate changes play an insignificant role in
the aggregate. Borrowers with access to several sources
of funds, such as large utilities and finance companies, are
often quite sensitive to rates and rate differentials. Their
reaction to rate movements may at times substantially
affect the over-all loan situation. Moreover, all bor­
rowers may be marginally influenced by rate levels, and
anticipations of rate changes, in the size of their bank
loan requests. Since most loan proceeds are quickly spent
on goods and services, even a relatively small response of
the pace of loan extensions to a change in interest rates
can have significant effects on total economic activity.

T h e B u s i n e s s S it u a tio n
Business expansion in the first quarter of the year ap­
parently was less rapid than expected, and slower than at
comparable stages of the two previous business cycles. To
be sure, the major economic series that turned down in
January had generally recovered their losses by February,
and early indications are that additional gains in produc­
tion and sales may have occurred in March. But the
advances in these series over year-end levels that have
been recorded so far have been quite moderate.
That the economy will continue to expand seems indi­
cated by a number of developments. Federal spending is
scheduled to increase throughout the months ahead. Per­




sonal income is rising, and while consumers have been
somewhat hesitant in their spending during recent months,
the brisk pace in automobile sales in March may mean that
purse strings have now been loosened. The latest survey
of businessmen’s capital spending plans, moreover, points
to increases in plant and equipment outlays throughout the
year, although at a slower rate than during the comparable
stages of both the 1954-56 and 1958-59 expansions.
Finally, the steel wage settlement that was reached at the
end of March should significantly add to the long-run
strength of the economy. Not only does it remove the
threat of erratic inventory movements, but its reported

60

MONTHLY REVIEW, APRIL 1962

however, total industrial production was only 13A per
cent above the level attained six months earlier. More­
over, it was only 12 Vi per cent above the level at the be­
ginning of the upswing in February 1961, contrasting with
increases of 15 per cent and 22 per cent, respectively, dur­
ing the comparable phases of the 1954-55 and 1958-59
expansions. Although the information thus far available
for March is fragmentary, total production may have in­
creased again in that month. Auto assemblies, for instance,
appear to have shown a slight gain from the February
level, and iron and steel production may also have moved
upward.
New orders received by manufacturers of durable goods
in February dropped by 2Vi per cent (see Chart I).
JA N U A R Y -F E B R U A R Y M O V E M E N T S O F F S E T T IN G
While this represents the first decrease in this forwardIndustrial production in February (seasonally adjusted) looking series since the business cycle trough in February
recouped the loss suffered in January. Output moved up 1961, it is also true that the series tends to be somewhat
one point to 115 per cent of the 1957 average (see Chart erratic and a steady upward trend is unusual. Further­
I). Iron and steel production, which had been a major more, the downward movement of the series in February
source of strength in each of the preceding three months, was largely attributable to a drop in steel orders caused
rose 5 per cent, and output of such final products as com­ by the progress in the steel wage negotiations.
mercial and industrial equipment, television sets, and
The rise in industrial production in February carried
apparel also increased. Even with the February gains, employment and hours worked to higher levels. Nonfarm
employment, seasonally adjusted, rose by 269,000 persons,
according to the Bureau of Labor Statistics payroll survey,
and seasonally adjusted average weekly hours clocked by
Chart I
production workers in manufacturing increased from 39.8
JANUARY AND FEBRUARY IN PERSPECTIVE
to 40.3 (see Chart I). The Census Bureau’s household
Seasonally adjusted
survey indicated that agricultural employment also rose
in February and that seasonally adjusted total employment
(farm and nonfarm) reached a record level of 67.9 mil­
lion. This gain in employment was greater than the large
rise that occurred in the civilian labor force, so that the
number of unemployed persons fell by 150,000 persons
to 4.0 million (seasonally adjusted), the lowest level
since July I960.. Consequently, unemployment as a
percentage of the civilian labor force declined again, but
at 5.6 per cent it still was above the levels at the com­
parable stage of the two preceding expansions— 5.2 per
cent in April 1959 and 4.3 per cent in August 1955.
Partly in response to the continuing high rate of unem­
ployment, the Administration in late March proposed a
$600 million program of public improvements to provide
jobs for workers in economically depressed areas.
Whether the unemployment total can be significantly
lowered in the months ahead will depend primarily on
the pace of future economic expansion, the gains in pro­
ductivity, and the trend of the labor force. In 1961 the
labor force showed virtually no net change, whereas in
1961
1962
Sources: Board of Governors of the Federal Reserve System; United States
both of the two preceding years it had grown by more
Departments of Commerce and Labor.
than a million. A variety of factors was responsible for

terms definitely appear to enhance the prospect that busi­
ness expansion will continue to take place against a back­
ground of relative price stability.
While on balance the various “foreshadowing” statistics
suggest further economic gains, they do raise questions as
to whether the pace of the advance will be sufficiently vigor­
ous to meet the economy’s requirements for growth. This
is a particularly serious problem because of the possibility
that increases in the labor force this year may be sub­
stantially larger than in 1961, thus greatly complicating
the task of reducing an unemployment rate that still re­
mains much too high.




61

FEDERAL RESERVE BANK OF NEW YORK

this lack of growth during 1961, including an increase in
the number of students remaining in school, a large influx
of persons into the armed forces, and the fact that changes
in legislation permitted elderly people to choose earlier
retirement with immediate social security benefits. Similar
factors may not be present in as large a degree this
year, and the labor force may well resume its more normal
growth trend.

Chart II

PLANT AND EQUIPMENT SPENDING IN THREE EXPANSIONS
S ea sonally adjusted

per cent

F O R C E S O F FU TU R E E X PA N SIO N

One factor that should contribute to expansion in com­
ing months is consumer spending. Throughout the past
year personal income has grown at a rate approximately
in line with the patterns experienced during previous up­
swings, the most recent increase of $2.7 billion (season­
ally adjusted annual rate) in February more than offsetting
the January decline. Despite these higher incomes, con­
sumer spending on goods (as opposed to services) has been
somewhat hesitant in recent months. Thus, retail sales in
February, according to preliminary indications, increased
only XA of 1 per cent, seasonally adjusted (see Chart I),
with sales of durable goods declining. Some change in
consumer attitudes in March, however, may be indicated
by the sharp rise in automobile sales. The March data
on department store sales similarly appear to show
strength, although these statistics are difficult to assess
because of the late date of Easter this year.
Business spending will, of course, also play an im­
portant part in determining the configuration of eco­
nomic expansion in the months ahead. For a while it
appeared that inventory accumulation, spurred on by steel
stockpiling as a hedge against the possibility of a steel
strike, might provide a strong push to the expansion.
In part because of the early start of the steel wage negotia­
tions, however, such a build-up of inventories seems to
have been moderate. Even the two-week recess in negotia­
tions early in March did not budge steel users from a
wait-until-April attitude. Such an attitude had already
been reflected by a Department of Commerce survey taken
in February (i.e., before the break-off and resumption of
negotiations). The survey showed that, although manu­
facturers planned to add $1.2 billion (seasonally adjusted)
to their inventories during the first quarter of the year,
they expected to accumulate only $0.8 billion in the sec­
ond quarter. During the 1959 steel negotiations, by con­
trast, manufacturers’ inventories had risen by $1.3 billion
in the first quarter and by $1.7 billion in the second quarter.
Capital spending plans surveyed by the Commerce
Department-Securities and Exchange Commission in Janu­
ary and February suggest that such spending will move up




Note: Business-cycle trough quarters = 100. Trough quarters are those determined
b y the N ational Bureau of Economic Research chronology: 111-1954, 11-1958,
and 1-1961.
Sources: United States Department of Commerce,* Securities and Exchange
Commission.

steadily during 1962 (see Chart II). Estimated outlays
in the first quarter of $36.1 billion (seasonally adjusted
annual rate), although slightly below last November’s ex­
pectations, represent a gain of almost 2 per cent over
actual outlays in the final quarter of 1961, which had also
been somewhat below earlier expectations. Outlays are
expected to rise further to a $36.6 billion rate in the sec­
ond quarter of 1962, bringing the average for the first six
months to a level that would be 3% per cent above that
attained in the last half of 1961. For the year as a
whole, capital spending is expected to total $37.2 billion,
implying that outlays during the second half of 1962
will rise to $38.0 billion, or 4 Vi per cent above the average
for the first half. Such a gain, however, would still leave
capital spending for the year at virtually the same volume
as in 1957 when GNP was three-fourths as large as what
is widely suggested for 1962.
While these quarterly estimates suggest that the rise in
capital spending in the first five quarters of the 1961-62
business expansion (that is, through mid-1962) will fall
slightly behind the increase during the comparable period
in the 1958-59 upswing and substantially behind the

62

MONTHLY REVIEW, APRIL 1962

1954-55 performance, it is of course possible that actual
outlays in 1962 will surpass the estimates. Such a betterthan-planned performance was experienced in the 195455 expansion, although not in 1958-59 when outlays were
held down by the steel strike. Assessment of the estimate
implied for the second half of 1962 in terms of the experi­
ence in earlier business cycles is rather difficult. In part,
this is because in each of the two previous business ex­
pansions such long-range estimates were made at a some­

what earlier stage of the advance. (It is worth noting,
however, that these long-range estimates were surpassed
by the volume of outlays actually rung up.) Moreover,
this year there is a possibility that important changes in tax
treatment of investments will be adopted— both through
additional administrative rules and new legislation— and
this could well provide an added stimulus to capital spend­
ing, even though pressure on available capacity is far from
widespread.

T h e M o n e y M a r k e t in M a rc h

The money market was generally comfortable during
March, as the effective rate on Federal funds held to a nar­
row 2% -3 per cent range virtually through the entire month.
Rates on loans to Government securities dealers posted by
major New York City banks also held to a fairly narrow
range, fluctuating between Vk point above or below 3 per
cent. The money market took the midmonth tax and divi­
dend period easily in stride, although the money market
banks came under some reserve pressure in the latter part
of the month as Federal Reserve float fell short of antici­
pated levels and as Chicago banks made preparations for
the April 1 Cook County tax date.
Treasury bill rates fluctuated relatively little over the
month. A rising supply of bills provided by $100 million
increases in each of the regular three-month bill offerings
in March was met by a growing demand. This demand
was associated with the build-up of bill portfolios by finan­
cial institutions in Chicago in preparation for their tax
date, and the reinvestment on March 23 of proceeds of
tax anticipation bills held to maturity. To some degree,
however, this demand may also have been related to the
two reductions in the British bank rate, effective March 8
and 22, which reduced the attractiveness of investment in
British Treasury bills. However, movements of short-term
funds to the United Kingdom are not necessarily related
to Treasury bill rate differentials alone, but can reflect rate
relationships with a broader range of short-term instru­
ments. Furthermore, a substantial rate incentive continued
to exist for uncovered movements of funds to London on
various types of instruments, including Treasury bills,
although the covered arbitrage incentive in the case of
Treasury bills was slightly in favor of New York after
March 8.




A confident tone prevailed in the market for Treasury
notes and bonds. Uncertainties concerning the strength of
the business recovery, as well as the British bank rate re­
ductions, gave rise to the view that longer term interest
rates might continue to hold steady, or even edge lower in
the period just ahead. The unusually narrow yield spread
that developed by mid-March between Treasury obligations
and high-grade corporate issues also tended to raise de­
mand for Government securities. As prices of Treasury
notes and bonds moved to highs for the year, the market
continued without much strain the distribution of new and
reopened bonds issued in the Treasury’s regular and ad­
vance refunding operations in February.
M EM BER BANK RESERVES

Market factors (operating transactions, vault cash, and
required reserves) absorbed $472 million of member
bank reserves on balance over the four statement weeks
ended March 28 (see table). Reserves fell during the first
week, as vault cash declined sharply. A rise in vault cash
along with a decline in required reserves largely offset re­
serve losses from operating transactions, particularly a rise
in currency in circulation in the second week. In the third
week, a substantial increase in required reserves associated
with tax and dividend borrowing by corporations, while
offset in part by an expansion in float, nevertheless pro­
duced some temporary reserve pressures in the money
market banks. During the fourth week of March, a con­
traction in float again drained reserves on balance.
System open market operations in March generally off­
set reserve losses stemming from market factors. System
operations supplied $394 million of reserves during the

FEDERAL RESERVE BANK OF NEW YORK
CHANGES IN FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, MARCH 1962

63

ness loans, and the very moderate improvement in most
other significant indicators of business activity; the con­
In millions of dollars; ( + ) denotes increase,
tinued hesitation of the stock market; and the narrow
( —) decrease in excess reserves
yield spread between long-term Treasury and corporate
Daily averages—week ended
bonds. Finally, some demand for intermediate-term se­
Net
Factor
curities
by public funds seeking a placement for pro­
Changes
March
March March M arch
21
28
14
7
ceeds of new flotations, and demand for long-term bonds
by institutional and savings-type investors, also contrib­
Operating transactions
— 7
Treasury operations* ................................ + 69 — 58 — 8
— 4
uted
to the strength of the market. Over the month as a
4
194
— 198
1 — 87
— 92
4 - 97 — 96
Currency in circulation.............................. — 53 — 158
+ 18
whole,
prices of long-term issues were generally 2lA points
—
10
— 21
Gold and foreign account.......................... — 5 — 58
— 94
4- 36
— 95
Other deposits, etc....................................... 4 - 58 4- 96
4- 95
higher, while intermediate-term issues rose from V2 to %
4 - 232 — 225 — 190
Total .......................................... 4 . 69 — 266
point.
Direct Federal Reserve credit transactions
Against this background, the substantial volume of mar­
Government securities:
4- 236 4- 366
Direct market purchases or sales........ 4- 134 4- 44
— 48
ket
churning associated with the placement of the newly
Held under repurchase agreements----- 4- 14 4 . 25
4- 33 — 44 4- 28
Loans, discounts, and advances:
issued
and reopened securities involved in February’s two
Member bank borrow ings...................... 4- 34 — 37
4 . 80 ——.47 4- 30
—
Other ......................................................... 4 - 14 — 1
+ 13
large
refundings
was accommodated with little difficulty.
B ankers’ acceptances:
1
Bought outright ...................................... +
1 — 1 — 2
1
Thus
the
price
of
the new 4 per cent notes due August
Under repurchase agreements................
—
—
—
—
1966
rose
by
%
to
1012%2, and the price of the new 4
4- 30 4- G5 4-143 4- 435
Total .......................................... 4-197
per
cent
bonds
of
August
1971 rose by 1V4 points to 101.
Member bank reserves
— 82
4- 245
W ith Federal Reserve Banks.................... 4 - 266 — 236 4- 297
Among
the
reopened
issues,
the 4’s of 1980 rose by 1 % ,
Cash allowed as reserves!.......................... — 267 4- 99
+ 21 4- 59 — 88
while
the
3Vi’s
of
1990
and
1998
rose by 2%2 points each.
1 — 137 4- 318 — 23 4- 157
Total reservest ......................................... _
— 194
-j- 20
Effect of change In required reservesf....... — 73 4- 166
— 307
Treasury bill rates fluctuated within a relatively narrow
Excess reserves! ....................................... — 74 4- 29
4- 11 — 3 — 37
range during the month. A strong demand developed,
Daily average level of member bank:
buttressed by greater confidence in current rate levels and
91t
53
Borrowings from Reserve B anks..............
90
86
133
473t
Excess reservesf ..........................................
446
475
483
486
by the reductions in the British bank rate. Through the
382?
422
397
Free reservesf ..............................................
356
353
first half of March, rates on three-month and six-month
Note: Because of rounding, figures do not necessarily add to totals.
bills edged up by about 5 basis points each to reach their
* Includes changes in Treasury currency and cash,
t These figures are estimated.
highs for the month at 2.80 and 2.97 per cent, respec­
t Average for four weeks ended March 28, 1962.
tively, in the March 12 auction. This rise in rates followed
the Treasury’s announcement at the close of the market
four statement weeks ended March 28. Between Wednes­ on March 8 that it would auction $1.8 billion of Septem­
day, February 28, and Wednesday, March 28, System ber 1962 tax anticipation bills on March 20, and that
holdings of securities increased by $419 million, with offerings of bills in the regular weekly auctions might con­
holdings maturing within one year rising by $106 million tinue to be increased. As little strain developed in the
and holdings in the more-than-one-year category moving market over the mid-March tax and dividend period, how­
ever, bill rates tended to move down and by the close of
up by $313 million.
Over the four statement weeks ended March 28, free March 16 were back to, or below, their March 8 levels.
A fairly strong interest developed in the regular auction
reserves averaged $382 million, compared with $435 mil­
lion the previous month. Average excess reserves declined of March 19, and the special auction on March 20 of $1.8
by $29 million to $473 million, while average borrowings billion of September tax anticipation bills. Average issuing
from the Federal Reserve rose by $24 million to $91 rates in the regular March 19 auction of about 2.69 and
million.
2.85 per cent turned out to be about 12 basis points less
than in the prior auction. In the special auction of sixmonth tax anticipation bills maturing September 21, 1962,
TH E G O V ER N M E N T SE C U R IT IE S M A R K ET
and sold without the Tax and Loan Account privilege, the
In the market for Treasury notes and bonds the upward average issuing rate was 2.90 per cent, or about halfway
price movement that became evident in February gathered between the rates carried by regular six-month bills in the
further strength in March. Among the factors underlying two prior auctions. During the fourth week of the month,
the price rise were the market interpretations placed on bill rates edged up a bit, and at the end of March rates
the two V2 per cent reductions in the British bank rate; on three-month and six-month bills were less than 5 basis
the absence of a significant pickup in the demand for busi­ points away from end-of-February rates.




—

—

—

MONTHLY REVIEW, APRIL 1962

64

O TH ER SE C U R IT IE S M A R K E T S

The markets for seasoned corporate and tax-exempt
bonds continued to gain in strength during the first half of
March, and good progress was made in the distribution of
a number of large issues that, when offered initially, had
been considered closely priced. The Blue List of adver­
tised dealer offerings dropped from the February 28 record
level of $560 million to $335 million at mid-March, al­
though it rose once more in the second half of the month
to reach $480 million on March 30. Growing investor con­
fidence was based in part on the factors that strengthened
the market for Government securities. At the same time,
the volume of publicly offered new corporate and taxexempt issues was relatively light. An estimated $600 mil­
lion of State and local securities reached the market during
the month, or slightly more than half the record $1.1 billion
of new flotations in the preceding month. (In March 1961,
tax-exempt flotations aggregated $690 million.) The $340
million of corporate flotations compared with $490 million
in the prior month and $150 million in March 1961. In
the second half of the month, however, as the calendar of
new flotations scheduled for later issue began to build up

and market demand slackened somewhat, bond prices
tended to stabilize. For the month as a whole, Moody’s
average yield on seasoned tax exempts declined by 7
basis points to close at 3.01 per cent, and the average
of Moody’s Aaa-rated corporate bonds declined 4 basis
points to 4.38 per cent.
Market reception of new issues during the month ranged
from fair to excellent, with some closely priced new issues
moving particularly slowly while other issues, providing
more attractive yields in relation to the current market,
were quickly distributed. The largest new tax-exempt issue
was a $54 million (Aaa-rated) 2.60 per cent Connecticut
highway bond issue reoffered March 14 to yield from 2.20
per cent in 1968 to 2.70 per cent in 1975. The issue was
accorded only a fair investor response initially, and at the
month end 70 per cent of the issue still remained un­
sold. Among the larger corporate offerings was a utility
issue of $65 million (Aa-rated) 43/s per cent refunding
mortgage bonds, due in 1994 and reoffered at par on
March 13. Initial demand for the bonds was light, because
the issue was regarded as rather closely priced in relation
both to available corporate issues and to outstanding
Treasury bonds.

R e c e n t M o n e ta r y P o lic y M e a s u r e s in W e s t e r n E u r o p e
The measures taken by Western European monetary
authorities during recent months have reflected continu­
ing efforts both to correct imbalances in international
payments and to cope with diverse domestic economic
conditions.1 In some countries that had relatively strong
external payments positions and faced little or no threat
of domestic inflation, the authorities moved to bring do­
mestic money rates more closely into line with rates in
other financial centers, with a view toward moderating
the movement of short-term funds across national fron­
tiers. In a number of other countries, by contrast, where
persisting domestic inflationary pressures had been accom­
panied by some weakening in balance-of-payments posi­
tions, steps were taken to restrain internal credit expan­
sion. The authorities in these countries, however, pri­

marily tended to employ quantitative policy instruments
rather than changes in interest rates.
In both the United Kingdom and Belgium, external con­
siderations were the major factor in the authorities’ deci­
sion to lower short-term interest rates, although in Britain
lagging domestic production and employment also played
a role. The Bank of England’s discount rate, which in
October-November had been reduced in two steps to 6
per cent from the 7 per cent “crisis” level set last July,
was cut again in March in two steps to 5 per cent (see
table). Except for one short period, sterling had dis­
played great strength since the announcement of Britain’s
emergency program last summer. From July 31, 1961 to
February 28, 1962 the country’s gold and convertiblecurrency reserves rose $971 million to $3,424 million,
despite Britain’s repayment of the bulk of its “Basle”
debts and the advance repayment of $630 million on its
1 For a discussion of monetary policy abroad during the summer $1,500 million August 1961 drawing from the Interna­
and fall of 1961, see “International Economic and Financial De­
tional Monetary Fund. Sterling’s strength reflected in part
velopments”, Monthly Review, December 1961, pp. 198-201.




FEDERAL RESERVE BANK OF NEW YORK

the improvement in Britain’s current and long-term-capital
account, a seasonal upturn in overseas-sterling-area ex­
ports, and the success of various measures adopted during
1961 by several sterling-area countries to bolster their
over-all payments positions. The reserve gains were,
however, also attributable to substantial inflows of short­
term capital into London as a result of the cessation of
speculation against the pound during the latter part of
1961 and the attractiveness of the relatively high interest
rates offered in England. The March 8 discount rate
reduction evidently failed to stem this influx, since sterling
strengthened further thereafter. Following the March 22
reduction, sterling dropped sharply but then quickly re­
covered.
In Belgium, similarly, the central bank’s basic discount
rate was reduced in two steps to 4 per cent from 4Vi in
January and March, apparently in response to favorable
balance-of-payments developments. The reductions were
the third and fourth since the rate was raised to 5 per cent
in August 1960 to check an outflow of short-term funds.
The substantial improvement in Belgium’s underlying ex­
ternal position during the second half of 1961, foreign
borrowing by the Belgian Treasury, and an apparent
inflow of private short-term funds were reflected in a 13
per cent increase in Belgium’s reserves to $1,656 million
during the eight months through February 1962. This
strengthening in turn contributed to easier conditions on
the domestic money market, as evidenced by the recent

CHANGES IN FOREIGN CENTRAL BANK
DISCOUNT RATES IN 1961-62
In per cent
Date of
change
1961:

1962:

Country

January 20
January 26
January 26
March 23
May 5
May 5
May 15
May 23
June 9
June 24
July 1
July 22
July 25
August 24
September 29
October 5
November 2
December 7
December 28

Germany
Ceylon
Japan
New Zealand
Germany
South Africa
Philippines
Denmark
Spain
El Salvador
Turkey
Japan
United Kingdom
Belgium
Japan
United Kingdom
United Kingdom
South Africa
Belgium

January 9
January 18
March 8
March 22
March 22
March 30

Philippines
Belgium
United Kingdom
Belgium
United Kingdom
Finland

New rata

Amount of
change

3*4
4
6.57*
7
3
5
3
6*4
5f
6
7*4
6.94*
7

-V i
+1*4
-0 .3 7
+1
-* 4
+**
-2
+1
—%
+*i
-1 * 4
+0.37
+2

7.3*

AVi

+0.37
—*4
—*4
—*4

6

+3

5*4
4
5
8

-* 4

4V4
6Vi

6

4*4

4Ya

-* 4

-* 4

~*4

-y 4

~V 2

+m

Note: Since November 1956, the discount rate of the Bank of Canada has
been set at
per cent above the latest average tender rate for Treasury
bills. The rate stood at 3.37 per cent on March 29, 1962.
♦ “Basic” rate for commercial bills,
t Rate for private nonbank borrowers.




65

decline in the volume of the central bank’s discounts and
an appreciable downward trend in short-term rates.
In Italy, the achievement of a comfortable balance-ofpayments surplus in 1961, together with continuing price
stability and the absence of serious pressures on the labor
supply, permitted the authorities to give further encourage­
ment to domestic economic expansion. Effective Feb­
ruary 1, commercial bank cash reserve requirements were
reduced to 22.5 per cent from the 25 per cent rate
prevailing since 1947, thereby releasing an estimated 190
billion lire ($300 million) for industrial investment. The
change was prompted by the substantial decline of the
banking system’s liquidity in 1960 and 1961 as a result
both of the heavy credit demands accompanying the high
level of domestic economic activity and of the central
bank’s efforts in 1961 to reduce the banks’ short-term
foreign indebtedness through liberal sales of foreign ex­
change for lire.
In France, on the other hand, external and domestic
considerations conflicted. The combination of an ex­
ceptionally favorable foreign trade year and large invisible
earnings apparently resulted in a record balance-ofpayments surplus on current account for 1961. Since the
capital-account position was also very strong, France’s
gold and convertible-currency reserves rose almost $870
million to $2,939 million in 1961, despite substantial
repayments of external debts. This favorable trend con­
tinued into early 1962. Indeed, the French franc retained
its strength even as the Algerian crisis intensified. How­
ever, the persistent rise in domestic costs and prices during
the latter half of 1961 caused concern about the mainte­
nance of price stability at home. Monetary policy was
therefore directed at holding the over-all credit expansion
within limits, while encouraging the flow of credit into
productive investment. Effective January 17, the Bank of
France increased to 32 per cent from 30 per cent the
banks’ liquidity ratio, which has to be met by specified
holdings of cash, short-term government securities, and
medium-term commercial paper. Then, effective March 31,
the minister of finance announced two measures de­
signed to facilitate the flow of medium-term credit into
new private investment. First, the percentage of deposits
that banks must invest in Treasury paper was reduced
from 17*4 to 15 per cent. Secondly, the interest rate on
two-year Treasury paper subscribed by the banks was cut
from 3% to ZVa per cent. These measures were generally
expected to induce the banks to shift some of their re­
quired reserves out of government paper into medium-term
credits. The minister also forecast the early introduction
of steps to promote the flow of long-term credit into the
capital goods industries.

66

MONTHLY REVIEW, APRIL 1962

In Austria, a country whose external position has also
been strong, the authorities acted to restrain internal credit
expansion in the face of a marked increase in bank
liquidity, continued upward pressures on prices and wages,
and full utilization of capacity in many sectors of the
economy. On February 1 the central bank: (1) raised
minimum reserve requirements by Vi per cent to 9.5 per
cent and 7.5 per cent, respectively, for most sight and
savings deposits; (2) boosted the penalty rate for reserve
deficiencies to 3 from 2 per cent above the discount rate
(i.e., to 8 per cent); (3) for the first time engaged in open
market operations by selling to the banks, out of its 1,160
million schilling portfolio of Treasury paper, 560 million
schillings ($22 million) of 3V2 per cent Treasury certifi­
cates, to be held by the banks for one year; and (4)
lowered to 50 per cent from 75 per cent the share of new
deposits that would be available for credit expansion. The
last step was taken under the agreement on credit ceilings
of April 1957, which had set a credit institution’s maxi­
mum permissible loan volume at 75 per cent of its de­
posits. On March 1, moreover, the Austrian authorities
for the first time imposed controls on consumer instalment
credit.
In a number of other European countries, where persist­
ing domestic inflationary pressures had weakened balanceof-payments positions during 1961, the authorities also
moved to restrict credit availability. In the Netherlands, the
commercial and agricultural-credit banks agreed, after
consultations with the central bank, to limit their credit
expansion to a maximum of Vi per cent a month during the
first four months of 1962; a previous agreement concluded




in July 1961 had set a monthly norm of 1 per cent.2 More­
over, the Dutch finance minister asked parliament for new
powers to regulate capital spending by local authorities.
In Norway, the central bank and the finance ministry con­
cluded an agreement in January with the private credit
institutions to limit credit expansion in 1962 to about the
1960 amount. The agreement provided in particular that:
(1) commercial banks would not increase their outstand­
ing loans by more than 500 million kroner (or 8 per cent)
during 1962, or permit their investments in government or
government-guaranteed bonds to fall below the end-of1961 level; (2) savings banks would not raise their out­
standing loans by more than 8 per cent during the year
and would increase their investments in government or
government-guaranteed bonds by 25 per cent of the rise in
their deposits; (3) life insurance companies would invest
100 million kroner in new government issues and would
increase their holdings of government or governmentguaranteed bonds by an equal amount; and (4) all in­
stitutions would observe particular restraint in granting
personal and consumer credit. And in Denmark, the cen­
tral bank announced that as of March 21 its advances
against bonds quoted on the Copenhagen Stock Exchange
would be limited to 60 per cent of their market value, as
against 70 per cent previously; on May 21 the ratio is to
be cut further to 50 per cent. Similar cuts have been an­
nounced on loans against certain other fixed-interestbearing securities.
2 If a bank’s credit expansion exceeds the norm, the bank is obli­
gated to maintain an interest-free deposit at the Netherlands Bank.