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138

MONTHLY REVIEW, AUGUST 1960

T he B usiness Situation
There has been little change recently in the business
situation. The economy continues to move along a high
plateau, and prices remain relatively stable. Divergent
movements in the major components of demand, which
limited the advance of gross national product (GNP) in
the April-June quarter, appear to have persisted in July.
Preliminary estimates show continued strength in the “final
demand” of consumers, business, government, and foreign
countries, which rose by a slightly larger amount in the
second quarter than in the preceding three months. The
leveling-off of economic activity resulted from the decline
during the second quarter in the rate of accumulation of
business inventories. Although this decline was sharp, the
second-quarter build-up of stocks was nevertheless sub­
stantial and has, along with the dwindling of manufactur­
ers’ order backlogs, contributed to some apparent deterio­
ration of business sentiment. While the economy continues
to produce a record level of real output, some business
analysts note an absence of factors which would lead to a
further pronounced surge of final demand, and see the
possibility that some continued reduction in the rate of
inventory accumulation may be a drag on activity over the
next few months.
Major monthly indicators of business activity show
movements similar to those occurring in GNP. Industrial
production during the second quarter hovered a point or
two below the January peak, and unemployment as a per­
centage of the civilian labor force fluctuated around the
5 per cent mark, after seasonal adjustment, although gains
in nonindustrial sectors of the economy carried total em­
ployment to new highs. Unemployment appears to have
receded little in July as slackness continued in some dura­
ble goods industries, particularly steel. At the same time,
however, total consumer demand appears to have been
sustained at a high level, as both department store and
automobile sales showed continued gains over a year ago.
Current indicators suggest that business capital outlays
may hold close to present levels but without any strong
upward push.
M O D E ST G A IN S

IN T O T A L O U T P U T

In the second quarter, GNP rose by $3.7 billion to
a record, seasonally adjusted annual rate of $505 billion,
according to preliminary estimates by the Council of
Economic Advisers (see Chart I). The gain of only 0.7 per




Chart I!

GROSS NATIONAL PRODUCT AND FINAL DEMAND
Current dollars; seasonally adjusted annual rates
Billions of dollars

Billions of dollars

Sources: United States Department of Commerce and President’s Council

cent was significantly smaller than the 3.1 per cent spurt
during the first quarter, when total output rebounded from
the steel strike to surpass the previous peak reached in the
second quarter of 1959. Final purchases for use by con­
sumers and government, fixed investment by business, and
net foreign purchases of United States products— that is,
GNP exclusive of the change in business inventories—
expanded by $9.1 billion in the second quarter, compared
with an increase of $8.2 billion in the preceding quarter.
Offsetting much of this increase, however, was a decline
estimated at $5.4 billion in the annual rate at which busi­
nesses were adding to their inventories.
Nonagricultural employment expanded during the sec­
ond quarter, but in June it showed a negligible gain of
less than 0.1 per cent, seasonally adjusted, according to
the Census Bureau’s survey (see Chart II). Total employ­
ment (seasonally adjusted) rose more substantially in
June, reaching a new record of 67.4 million persons;
the major factor was a large advance in the volatile agri­
cultural sector. The labor force, however, expanded more

FEDERAL RESERVE BANK OF NEW YORK

sharply than employment. As a result, the seasonally
adjusted unemployment rate rose to 5.5 per cent from 4.9
per cent in May. The June rate was, in fact, the highest
since the steel strike period of last December. In part, the
increased unemployment rate came from the upward trend
of recent years in the number of teenagers and recent
college graduates entering the labor force at this season,
thus highlighting the challenge which the economy will
have to face in the years ahead. However, the survey week
—which is always the calendar week containing the
twelfth day of the month—was as late as is possible this
June, and as a result an unusually high proportion of
students just out of school was covered in the survey.
Bureau of Labor Statistics data, based on payroll informa­
tion, suggest that declines in manufacturing and gov­
ernment employment also may have contributed to the
rise in unemployment. Part of the decline in manufactur­
ing employment, however, is traceable to a strike among

Chart II

CURRENT ECONOMIC INDICATORS

1

................................ ^
no

..

J ...

Industrial production
Seasonally adjusted
1957:100

100 -

90
.!_ ! !
Miiliens of persons

irT^J

Lu_..

—100
I I

1 1I 11

1 ! 1 1 1 1 1 II

90

Millions of persons
62

“1

62

110

r

Nonagricultural employment
Seasonally adjusted

Unemployment
as a percentage
__ of the labor force
1Seasonally adjusted

(

i I 1 i. i ! i i 1 M

1 i i 1 i i
Billions of dollars
19

Billions of dollars
19'

18
17

Retail sales
Seasonally adjusted

16

1 1 1 I

*

I 1 1 1 1 1 1

1 1 1. 11
Per cent
128

Per cent
128 r
Consumer prices
1947-49=100
..... ..-

126 ~
124 —

_ 124

m

122

l I.,L i. 1 .1 .!
1958

126

'

i I i i 1 ..... l L l i - .. 1 I L l . l
.1
1959
1960

122

* Census Bureau Household Survey Series.
Sources:

Board of Governors of the Federal Reserve System, United States

Departments of Commerce and Labor.




139

aircraft workers rather than to a lack of employment
opportunities.
The decline of manufacturing employment in June re­
flected, in part, the slight decrease in industrial production.
The total index (seasonally adjusted) declined by 1 point
to 109 per cent of the 1957 base. Output of finished
equipment declined by 2 points, to a large extent reflect­
ing the already mentioned aircraft production strike. Total
output of consumer goods was unchanged in June, as
expansion of automobile production and consumer staples
offset declines in output of some consumer durables.
Materials output slipped by 1 point, primarily as a result
of the continued slump in the steel industry, which de­
pressed coal and metal mining as well as primary metal
production. In July, operations in the steel industry
dropped to slightly above 50 per cent of capacity and the
output of automobiles was cut back in preparation for
somewhat earlier-than-usual model change-over s.
Declines in production, both in the steel industry and
in some lines of consumer durables, reflect in large part
an attempt to bring inventories into a better relationship
with sales. Additions to total business inventories dropped
sharply in the second quarter (as noted above) to an esti­
mated annual rate of $6.0 billion. The near-record $11.4
billion rate of accumulation in the first quarter represented,
in good part, a post-strike restocking of steel and various
steel products such as automobiles. Thus it was virtually
certain that additions to inventories in the following
months would be smaller if there was not to be an appre­
ciable, and in most cases unwanted, increase in the ratio
of inventories to sales. Yet the second-quarter pace of ac­
cumulation was substantial. While inventory-sales ratios
remain low relative to past periods of prosperity, further
efforts to cut back the rate of accumulation may exert
continued downward pressure on the economy in coming
months.
Over half of the $9.1 billion advance in final demand
in the second quarter was accounted for by a $5.2 bil­
lion gain in personal consumption outlays. In relative
terms, the rise in business fixed investment was even
steeper, surpassing the first-quarter increase despite a
leveling-off in nonresidential construction. Outlays for
home building, however, showed a small decline. Govern­
ment expenditures on goods and services rose by $1 bil­
lion— or about the same amount as in the first quarter— as
the continued growth in State and local expenditures more
than offset a slight decline in Federal defense outlays.
Estimates indicate that net exports of goods and services
also increased further to a seasonally adjusted annual rate
of $2.5 billion, more than double the first quarter and the
highest rate in over two years.

140

MONTHLY REVIEW, AUGUST 1960

Personal consumption expenditures in the second quar­
ter scored the largest quarterly gain since early 1959.
Slightly more than half of the increase in spending was on
nondurable goods and the rest for services, while purchases
of durable goods remained at the first-quarter level. This
strong advance in consumer spending had, of course,
already shown up in the monthly movements of retail
store sales. The all-time peak in retail sales was reached
in April, partly on the strength of some purchases that
had been postponed during an unusually blustery March.
Sales, adjusted for seasonal influences, slipped almost 2
per cent in May, but an increase of almost 1 per cent in
June recovered part of this loss. The strength in automo­
bile sales, which in June reached the highest daily average
rate since September 1955 (22,848 units), served to offset
weakening sales of other consumer durable goods. Both
automobile and department store sales continued strong
through July.
The steady advance in personal consumption at least
in part reflected the 2 per cent expansion in personal income
in the second quarter. Recently revised monthly statistics
show that personal income at seasonally adjusted annual
rates, after a fairly sharp increase of $2.8 billion between
April and May, rose by only $1.1 billion in June to $405.8
billion. The June decline in factory wages and salaries,
largely attributable to the low level of activity in the steel
industry and the aircraft strike, was more than offset by
increases in other forms of income.
Business outlays on fixed investment in the April-June
quarter reached a new record of $48.4 billion (seasonally
adjusted annual rate). This resulted from a $2.1 billion
rise in expenditures for producers’ durable equipment to a
peak $29.2 billion, surpassing the previous records posted
in 1957. Meanwhile, outlays for nonresidential construc­
tion remained at about the first-quarter rate.
IN D IC A T O R S OF C A P IT A L S P E N D IN G

The important role of plant and equipment spending
in the growth of economic activity during the first
half of the year directs particular attention to current
trends in this area of spending and, in turn, to advance
indicators which may throw light on trends over the period
immediately ahead. Such indicators have predictive value
because fairly concrete plans and commitments normally
precede major capital outlays. Well before actual spend­
ing occurs, detailed decisions must be made about specific
financial outlays, and orders must be placed or contracts
awarded. At almost any stage, of course, there can be
subsequent modifications. Projects can be curtailed or
expanded, and the schedule of actual work and expendi­
tures can be stretched out or accelerated. It is therefore




useful to study information on plans and on each subse­
quent stage of the investment process in assessing past
trends and current prospects, even though not all plans
or changes in plans are accurately reflected in published
data.
Corresponding in rough fashion to the planningordering-spending process of business firms, there are a
number of statistical series to which the analyst of capital
expenditures may turn. Best known— and most compre­
hensive— are the surveys of planned outlays for new plant
and equipment by the United States Department of
Commerce and the Securities and Exchange Commission
(Commerce-SEC) and by the McGraw-Hill Publishing
Company. The Commerce-SEC" annual survey is taken in
January-February and measures the volume of outlays for
fixed investment which are planned for the entire coming
year and for the first and second quarters. It is followed
by quarterly surveys taken throughout the balance of
the year and released early in the last month of each
quarter. The principal McGraw-Hill survey which is
taken each spring and released in April also measures
annual spending plans; it is preceded by a preliminary
survey taken in the previous fall and usually released in
November. Both Commerce-SEC and McGraw-Hill draw
on fairly large samples, although the McGraw-Hill survey
is more heavily weighted with large industrial firms (and
until 1960 included certain outlays by the petroleum in­
dustry which are charged to current account).
By using the January-February results of the CommerceSEC survey, it is possible to estimate the portion of planned
annual spending expected to take place in the first half
of the year and the part implicitly expected to occur in
the second half. To some extent, these expectations and
implications can be substantiated, or perhaps put in doubt,
by the degree to which they are paralleled by the flow
of new capital spending “appropriations” (official topmanagement approvals of expenditures on specific parts
of plans) and by the flow of “commitments” (primarily
new orders for equipment or contract awards for con­
struction work).
Appropriations by an important segment of business are
covered in a quarterly survey by the National Industrial
Conference Board (NICB) wliich is released in the last
month of the following quarter. This survey covers a
sample of the largest manufacturing firms that have for­
malized budget procedures. These firms report on new
spending appropriations, the volume of appropriations
“used up” by firm commitments or actual expenditures,
and the backlog of unused appropriations. Thus, while
the Commerce-SEC and McGraw-Hill surveys measure the
spending that firms expect to make within a specified time

FEDERAL RESERVE BANK OF NEW YORK

period, the appropriations survey measures the “flow” of
new spending decisions (and the backlog of approvals)
without specifying when the spending will occur.
There is no theoretical reason for any hard and fast
timing relationship between these two types of series.
Many of the appropriations made, for example, in the last
half of a year will be for spending that is planned for the
first half of the following year and, therefore, covered by
the annual surveys of spending plans in the first half of
the calendar year. Some appropriations, however, will
be for immediate spending and others may be for spending
to occur a year or more later. It is possible, therefore, for
movements in the volume of planned expenditures and the
volume of appropriations to diverge without necessarily
implying major changes in plans. However, since major
turning points in the appropriations series have tended to
“lead” turns in expenditures, divergent movements of the
series do raise the question whether plans are being modi­
fied.
Actual commitments for spending — new equipment
orders or construction contract awards— might be expected
to give a more concrete indication of the extent to which
plans are carried out. These commitments are also sig­
nificant because they have a direct impact on production,
employment, and inventory policies of the firms receiving
the orders. Some of the major statistical series on com­
mitments are the Department of Commerce measure of
new orders for nonelectrical machinery, the index of new
orders for nonelectrical machinery compiled by the
McGraw-Hill Publishing Company, the Machine Tool
Builders Association series on domestic orders for ma­
chine tools, and nonresidential building contract awards
tabulated by the F. W. Dodge Corporation.1 There are
limitations, however, to the usefulness of these series as
advance indicators of actual outlays, the major ones being
the erratic short-run fluctuations in the series and the varia­
tion in the time lag between commitments and expendi­
tures. In good part, the erratic nature of month-to-month
fluctuations is an inevitable outgrowth of the “lumpiness”
of individual large orders— for example, for complicated
turbines or the construction of large plants. Changes in the
time lags result in part from changes in the composition of
orders; a few large orders for turbines with particular
specifications and a long production time cannot be filled
so quickly as many small orders for simple standardized
motors which can perhaps be filled from stock or as­
sembled from standard parts. The delay between order­
1 All these series are published monthly and released about a month
after the data are gathered. The first two are based on broad samples,
are seasonally adjusted, and include foreign orders. There are many
additional surveys of more limited (usually industry-wide) scope.




141

ing and receiving shipment may also be longer if manu­
facturers have large backlogs of orders.
A brief historical review of the relationship among
movements in the series relating to capital spending may
shed some light on their analytical value. Chart III shows
that both the Commerce-SEC and the McGraw-Hill sur­
veys predicted the direction of change in actual spending
correctly in each year while neither was consistently
superior in estimating the magnitude of change. The
Commerce-SEC survey underestimated the magnitude of
changes in spending in every year except 1957. The
McGraw-Hill survey, on the other hand, appears to have
had a slight upward bias, overestimating an increase or
underestimating a decrease in five cases out of seven. This
may have resulted from the greater proportion of large
firms in its sample; it has been found that large firms are
more likely to overestimate their outlays than the reverse.
There also seems to be a significant relationship between
the point in the business cycle at which a survey is taken
and the accuracy of the forecast. In the first quarter of
1955, for example, a turning point in capital outlays was
reached just as the Commerce-SEC survey was taken;
the survey predicted a less than 1 per cent gain while
output actually rose about 7 per cent. The McGraw-Hill
survey, taken slightly later, was closer to the mark. In

Chari III

PLANNED OUTLAYS AND ACTUAL OUTLAYS
ON PLANT AND EQUIPMENT
Percentage change from previous year
Per cent

Sburces: United States Department of Commerce, and Securities and
Exchange Commission; McGraw>Hill Publishing Company.

Per cent

142

MONTHLY REVIEW, AUGUST 1960

1956, however, when a decided upturn had already been
under way for nearly a year, the Commerce-SEC survey
estimate of a 22 per cent gain was almost exactly realized.
Examination of anticipated and actual expenditures on
a half-yearly basis indicates that spending plans shown in
the Commerce-SEC survey have overestimated the vol­
ume of actual expenditures in the first half of each year
since 1955. In the implicit forecasts for the second half,
outlays were underestimated in the periods of sharp
expansion— 1955, 1956, and 1959. In contrast, in 1957
when a recession began around midyear, the actual level
of outlays in the second half of the year fell short of the
implicit estimate. In 1958, also, the level of spending in
the second half was overestimated, although it was cor­
rectly anticipated early in the year that spending would
decline further in the second half.
Since the appropriations series has the same broad con­
tour as capital outlays, but with an average lead of about
two quarters, appropriations, cautiously interpreted, can be
used as a supplement to the Commerce-SEC quarterly data
in giving a “warning signal” of turning points that may be
in the offing. However, it appears that the appropriations
data cannot be used to estimate the actual volume of out­
lays, or to improve upon estimates derived from the
Commerce-SEC survey, since the appropriations series is
subject to occasional abrupt deviations from a smooth
cyclical pattern and since the amplitudes of the two series
show no close correspondence.
The new orders series for nonelectrical machinery also
tends to foreshadow movements in capital spending (see
Chart IV). Both the Commerce and the McGraw-Hill new
orders series, however, exhibit frequent and large short­
term fluctuations, so that there is no fixed interval between
turning points in these series and in actual expenditures.
The McGraw-Hill orders series, which is available over
a longer period, led the 1953 downturn in spending by
one quarter and the 1955 and 1958 upturns by two quar­
ters. It moved concurrently with spending in 1957, how­
ever, after considerable random fluctuation. The Com­
merce series showed the same pattern as the McGraw-Hill
series in 1958 but preceded the 1957 downturn by three
quarters. The pattern of machine tool orders is less help­
ful since its coverage is limited to only one industry and
it, therefore, has a slightly different contour than total out­
lays. The series on construction contract awards can be
a misleading indicator because of strong seasonal patterns
and erratic fluctuations resulting from the influence of
a few large projects.
Applying these results to the present scene, in the early
months of 1960 businessmen were planning to increase
their plant and equipment spending this year by 14 per




Chart IV

MOVEMENTS OF NONELECTRICAL MACHINERY
ORDERS AND PLANT AND EQUIPMENT OUTLAYS
Q uarterly, season ally adjusted; 1955=100
Per cent

1953

Per cent

1954

1955

1956

1957

1958

1959

I960

* Business plans.
Sources: United States Department of Commerce, and Securities and
Exchange Commission; M cGraw -H ill Publishing Com pany.

cent (Commerce-SEC) or 16 per cent (McGraw-Hill) over
1959. Six quarters of rising appropriations— through the
fourth quarter of 1959— seemed to substantiate a firm up­
ward trend in capital outlays. Results of the quarterly
Commerce-SEC survey taken in April-May, and discussed
in the last issue of the Monthly Review, suggested that
anticipations of substantially higher spending were being
fulfilled in the first half of the year but that spending in
the second half would expand at a much slower rate.
Earlier in the year, it seemed entirely possible that plans
for spending in the second half might be revised upward,
as has happened in previous periods of expansion. Fur­
thermore, substantial backlogs; of appropriations by large
corporations combined with their high level of liquidity
indicated the potential for a continued strong advance in
the level of outlays. The recent behavior of new appropria­
tions and orders does not, however, support this expecta­
tion. In the first quarter, new appropriations declined on a
seasonally adjusted basis. The Commerce new orders series
slipped in both the first and second quarters; although the
McGraw-Hill new orders series rose during the same period,
it remained slightly below the peak reached a year earlier.
Shrinking profit margins, dec-lining stock market prices,
and a quite pervasive mood of hesitation are factors which
may work against upward revision of capital spending

143

FEDERAL RESERVE BANK OF NEW YORK

plans. On the other hand, there has been little to indicate
that earlier plans have been revised downward, either,
The strongest likelihood at present seems to be that

the economy will continue to draw some support from
gently rising capital expenditures over the balance of
the year.

Electronic Check H andling
The Federal Reserve Bank of New York will receive
delivery in the next few weeks of the various components
of its pilot installation of high-speed electronic checkprocessing equipment. Similar equipment will be installed
at four other Federal Reserve Banks in the next several
months, thereby providing a thorough System-wide test­
ing of performance capability and operational feasibility
of equipment of various manufacturers under the require­
ments of check handling in different Federal Reserve
offices.1 In efforts to move toward practical electronic
processing of checks, the Federal Reserve System has been
working closely with the American Bankers Association
(ABA), the organization which has been the prime mover
behind the progress toward check automation.
This introduction of “machines that can read if written
to in their own language”, the common machine language
in E-13B magnetic ink characters recommended by the
ABA, represents another significant step toward solution of
the most pressing operational problem facing banks today
—namely, how to process efficiently an enormous and
ever-mounting volume of checks. The number of checks
used each year was about 3.5 billion before World War II
but grew to about 8 billion in 1952, and to more than
12 billion last year, of which some 4 billion passed through
the Federal Reserve System. By 1970 the annual volume
of checks passing through the banking system is expected
to exceed 20 billion.
Staggering as these totals may be, they reveal only part
of the work involved, since each check is handled ten
to twenty times and by two or more different banks.
Hand in hand with the expansion of check-handling opera­
tions has come an increasingly acute shortage of qualified
personnel and a corresponding increase in the costs of
sorting, posting, and other check-handling operations. And
1 The five Federal Reserve Banks selected for these testing opera­
tions, and the major basic equipment to be used, are the following:
Boston— National Cash Register Co.; New York— Ferranti-Packard
Electric, Ltd. and Pitney-Bowes, Inc.; Philadelphia— IBM Corporation;
Chicago— Burroughs Corporation; San Francisco— National Data
Processing Corporation.




just as the old-fashioned hand processing became hope­
lessly inadequate twenty years ago, the conventional check
sorting and listing machine now in general use is also
rapidly becoming inadequate to cope with today’s flow of
checks. It was the acuteness of this problem that led the
Bank Management Commission of the ABA to explore
the possibility of automation.
C H E C K A U T O M A T I O N ---- P R O G R E S S S O

PAR

The large-scale testing of electronic check-handling
equipment about to start at five Federal Reserve Banks
follows a period of intensive study, designing, and pre­
testing by the various institutions and manufacturers
concerned. In December 1958, the common machine
language in magnetic ink characters— developed under
ABA auspices and with the cooperation of the checkprinting industry and equipment manufacturers— was
unanimously approved by all major manufacturers in­
volved. Since about 80 per cent of all the checks deposited
in or cashed at one bank must be sent to other banks for
payment, the development of such a common language for
all machines to “read” was an all-important step in the
program. This language, which has now gained widespread
acceptance, is known as MICR (Magnetic Ink Character
Recognition).
The test about to be made at various Federal Reserve
Banks will be meaningful only if the transit number and
amount fields are encoded, as described below, on a
sizable number of checks passing through the Federal
Reserve Banks. The progress achieved so far has been
highly encouraging. For a number of months, the Federal
Reserve Bank of New York has been preprinting the rout­
ing symbol-transit number in magnetic ink on all its
own checks, and has been supplying preprinted check forms
to member and nonmember clearing banks foi drawing on
their accounts at the “Fed”. The commercial banks have
also begun to make significant progress in implementing
the program. A survey in June by the Federal Reserve
Bank of New York revealed that 125 out of the approxi­
mately 1,000 banking offices to which this Bank sends

144

MONTHLY REVIEW, AUGUST 1960

checks in the Second District had customers who were
writing checks on forms that had the routing symboltransit number preprinted in magnetic ink characters— a
threefold gain since January 1960. Nearly all New York
City Clearing House banks had begun to provide their
customers with preprinted checks, and 82 checks per
thousand drawn on these banks carried the routing symboltransit number in magnetic ink characters, compared with
only 16 per thousand in January. Outside New York City,
58 out of each one thousand items drawn on Second
District banks carried the routing symbol-transit number
in June as against only 22 in January.
FURTHER

IM P L E M E N T A T IO N

OF THE

PROGRAM

Encouraging as the progress thus far may be, the poten­
tial benefits of electronic check-handling operations cannot
be fully realized until a considerably higher percentage of
the checks passing through the banking system is
“qualified”— that is, properly prepared for handling by the
new equipment. The Federal Reserve Bank of New York
and the other Reserve Banks have therefore joined the
ABA in urging all commercial banks to have their check
forms so prepared, and to encourage depositors who have
their own checks printed to do likewise.
What are the steps that a bank should take to “qualify”
its check forms? These steps are quite simple and rela­
tively inexpensive if a bank does not contemplate automa­
tion of its own check-handling operations at this time.
First, some redesigning of a bank’s checks may be re­
quired. T h is Bank understands, however, that the m ajority
of check printers who are members of the Lithographers
and Printers National Association have already redesigned
their so-called catalogue or stock checks. For banks using
these checks, the redesign problem will therefore be solved
at only slight cost, if any. Most printers, moreover, are
prepared to assist the banks in the redesign of all special
checks, and in addition this Bank will be glad to lend such
assistance as it can. Actually, as may be seen in the
illustration, the MICR check looks very much like most
conventional checks. However, its length must be at least
6 inches and must not exceed 8% inches, and its width
must fall between 2% inches and 3% inches. Moreover—
and this is crucially important—there must be a clear
“Magic Band” of %-inch width, extending at least 6 inches
along the bottom of the check from the lower right corner,
in which no printing other than the prescribed E-13B
characters in magnetic ink is permitted. Printing in non­
magnetic ink of border lines is permitted in this band
provided it does not interfere with the visual reading of
the magnetic ink characters. The redesigning of checks to




open up this “Magic Band” may require that the informa­
tion now on checks be somewhat concentrated in other
areas. One side benefit to banks of a widespread acceptance
of these specifications is a probable significant reduction
in the number of “headache” checks—nonstandard checks
which cause errors and slowdowns in present checkhandling procedures.
The next step is to arrange for the preprinting in mag­
netic ink characters of the routing symbol-transit number
in the position prescribed by the ABA (see illustration)—
in effect giving the check its “electronic address”. For
banks not contemplating the adoption of automated ac­
counting systems for their own check handling, no other
action is necessary with respect to their own checks. Other
banks, however, will wish to consider the preprinting in
magnetic ink of the customer's account number in the
“On Us Field” of the “Magic Band”, since this is required
to make checks compatible with a fully automated depositaccounting system.
The final step in making the check fully qualified in­
volves coding the amount of the check in the “Amount
Field”. This operation, which calls for encoding equip­
ment, can be performed by the first bank receiving the
check that has such equipment, in most cases as a by­
product of proving the deposit. In connection with testing
its newly installed equipment, the Federal Reserve Bank
of New York for the present will encode the amount on
some checks not so coded but otherwise qualified. From
the point of view of a smoothly operating MICR system,
however, it is obviously desirable that as many checks
as possible arrive at the “Fed” or at any other intermediate
collecting bank with the amount already encoded.
Many of the large and middle-sized banks in the Second
District have ordered or are considering encoding equip­
ment. Moreover, to encourage the wider use of encoding
devices, the Federal Reserve Bank of New York will be
prepared to consider reciprocal agreements with any of
its member banks under which it will encode dollar
amounts on checks sent by it to such banks and the
member banks will similarly encode checks sent by them
to the “Fed” for collection. Once fully encoded, the check
becomes qualified for processing through high-speed
equipment capable of handling upward of 50,000 checks
an hour.
COSTS AND

ADVANTAGES

Questions will naturally be raised in the banker’s mind
regarding the costs of the program and its advantages. As
to the costs, these appear quite moderate when viewed
against the potential benefits. The redesigning of a bank’s

FEDERAL RESERVE BANK OF NEW YORK

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TRANSIT NUMBER

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The routing symboltransit number tells
the electronic equip­
ment how to sort the
check for its proper
destination.

At the bank on which the
check is drawn the account
number tells the accounting
machine whose account to
charge.

The amount of the
check should be
encoded by the first
collecting bank which
has the necessary
equipment.

This number is used for
identification and control
purposes at the bank on
which the check is drawn,

checks may involve some added expenditure, but this can
be minimized through the use, as previously noted, of stock
or catalogue checks. For special checks, the redesigning
cost will of course vary according to the design but, in any
case, will be incurred only once. The preprinting of the
routing symbol-transit number in magnetic ink may also
involve slightly higher outlays, although this additional
cost is expected to decline as experience and volume in­
crease. Equipment to encode the amount on incoming




checks will, to be sure, require a larger initial outlay than
some of the smaller banks may wish to make immediately.
However, it is not expected at this stage of the program
that all of the smaller banks will encode the amount.
The potential advantages of a widespread adoption of
the MICR system far outweigh the probable cost of the
program. From the point of view of large and medium­
sized banks that process a large number of checks, the
use of equipment capable of handling some 50,000 checks

MONTHLY REVIEW, AUGUST 1960

an hour will clearly provide important benefits, in lower
handling costs, increased productivity, and greater ac­
curacy. For these banks, MICR opens the way toward
putting virtually their entire check-handling operation on
a fully automated basis. While the benefits in the case of
the smaller banks may not seem so great, they are never­
theless real. The new system will undoubtedly result, for
example, in a reduction of mis-sent items, the speedier
collection of checks, and a more prompt return of unpaid
checks. Many of the smaller banks, moreover, may have
depositors who draw large volumes of checks and who
may be interested in using MICR in the “On Us Field” of
the check, as well as in coding the amount, in order to
make the check compatible with their own automated
accounting systems. Under such circumstances, the addi­
tion of the routing symbol-transit number in magnetic ink
characters would probably involve very little, if any, addi­
tional cost. Finally, cooperation in the program will satisfy
the natural desire of most bankers to participate in any
effort to improve the efficiency of the entire banking
system.
The overnight adoption of MICR coding is, of course,
not to be expected. Given the large number, varied size,
and other characteristics of banks in this country, any
major procedural innovation takes time. Furthermore,
banks would not be expected to replace their present stocks
of check forms with the “new” checks unless it is to their
advantage to do so. A parallel can be drawn between the
present program and the introduction in 1945, also under
the auspices of the ABA, of the familiar fractional transit
number-routing symbol now printed in the “northeast”
corner of most checks. As most bankers will recall, the
widespread adoption of this program took some time.
However, as its advantages became apparent, an increasing

number of banks began to print the fractional symbol and
in recent years nearly all checks have been so printed.
The use of the transit number-routing symbol permitted
operators to obtain maximum speed from proof machines
without requiring instruction in all transit details, elimi­
nated the problem of determining the proper Reserve
Bank or branch for States located in two Reserve Districts,
and greatly reduced the number of sorting errors. And
just as the introduction of this system was undoubtedly
instrumental in permitting the banking system to handle
efficiently the sharp increase in the volume of checks
since World War II, the MICR program is expected to
enable banks to handle further growth in the number of
checks over the coming decade.

C O D IN G

D E M A N D D E P O S IT S TO F A C ILIT A T E
P R E P A R A T IO N OF R E PO R T S

A suggested coding system for classifying demand
deposits was recently sent to all member banks in
the Second District. These! codes were developed
primarily for the benefit of banks adopting automated
accounting procedures, but they could be used to
advantage by all banks, since once a bank has coded
its accounts it can provide all the statistical infor­
mation requested by the Federal Reserve Bank in
quarterly condition and other reports without any
further classification or identification of its accounts.
Similar coding programs are being developed for time
deposit and asset ledgers. Additional copies of the
demand deposit codes may be obtained from the
Financial and Trade Statistics Division of this Bank.

International D evelopm ents

U N IT E D

S T A T E S FO R E IG N

TRADE

The United States merchandise trade surplus showed
a pronounced increase during the first half of 1960. With
imports fluctuating around a monthly average not much
above the year-earlier level, commercial exports rose
sharply and exceeded imports during January-June 1960
by $2.0 billion. This trade surplus was nearly four times
the surplus during the comparable months of 1959.
Contributing significantly to this year’s enlarged export




margin were nonmilitary shipments of $5.0 billion in the
second quarter, the highest total for any such period since
the all-time record of $5.1 billion set in April-June 1957.
A particularly encouraging aspect of these recent results
was that total exports achieved this near-record volume
notwithstanding the substantial decline of raw cotton
shipments from their abnormally high January volume.
With the exception of fuels and metals, all major categories
of exports have approximately returned to their earlier
peak levels.

FEDERAL RESERVE RANK OF NEW YORK

The pervasiveness of the recent export surge is clearly
evident in the five-month comparison shown in the accom­
panying table (detailed commodity data for June are not
yet available). Shipments of unmanufactured cotton,
spurred by booming textile production abroad and by last
summer’s upward adjustment of the United States Govern­
ment’s export subsidy payment, scored the most notable
increase— an advance of more than 220 per cent— and
accounted for about one fourth of the year-to-year gain in
all United States exports.1 Although the peak of the mar­
keting season for raw cotton has passed, shipments have
remained well above the values recorded in the corre­
sponding five months of 1959. Another large share of the
year-to-year increase was provided by the 90 per cent gain
in commercial jet aircraft exports. These shipments leveled
off in April and May at about the average monthly rate
estimated by the industry on the basis of their scheduled
deliveries for 1960 as a whole. Wheat exports, which
move largely under Government aid programs, advanced
by about one fourth.
Higher industrial activity in Western Europe and Japan,
together with the more gradual effects of the progressive
elimination of restrictions against dollar goods, has been
a basic supporting factor in the recent upsurge in this
country’s exports. Shipments of machinery, vehicles,
metals, and chemicals showed an especially notable re­
sponse to the rapid cyclical expansion of business activity
abroad. In the case of machinery and vehicles, the most
important single commodity subgroup and frequent bell­
wether of American exports, shipments during JanuaryMay of this year were 17 per cent above the year-earlier
period. Part of that increase was attributable to a sharp
upturn in truck and passenger-car exports to a JanuaryMay rate approaching the record levels of 1955 and 1956.
Another sizable share of the rise in machinery and vehicle
exports can be traced to the fact that European automobile
manufacturers are engaged in a massive tooling-up opera­
tion comparable with that which took place in the United
States in 1955 and 1956. For the present at least, they are
turning to this country for special types of machinery and
machine tools, as well as for some standard units that
heavily booked European tool builders cannot supply as
readily as American firms, whose export potential has
been enhanced by unused capacity in some lines.
Overseas shipments of chemicals and related products,
which had increased more than 80 per cent from 1953
to 1959, registered a further advance of 16 per cent in
the first five months of this year as compared with the
year-earlier period. The largest percentage increase of all
l See “United States Cotton Export Program”, Monthly Review,
May I960, p. 89.




147

the products shown in the table was for aluminum semi­
manufactures, which have assumed unaccustomed promi­
nence in the American export list this year as the result
of Europe’s growing use of aluminum in a wider range
of industrial and consumer goods.
Steel exports made a rapid recovery following the vir­
tual halt of output during the 1959 strike. But the recent
rise was also helped by strong demand for steel in Europe,
where local consumption of some types currently exceeds
capacity. This is said to be particularly true of cold-rolled
steel for Europe’s booming automobile industry.
While American imports have been on a high plateau for
almost one year, the ratio of this country’s general imports
to gross national product has declined since the second
quarter of 1959. Although imports in that quarter were
boosted in anticipation of the steel strike, United States
purchases abroad continued to be supported to some
extent by temporary influences through the first six
U n ited S ta te s M erchandise Trade, Janu ary-M ay 1959 and 1960
In m illions of dollars

Major commodity groups and selected subgroups

1959

1960

E xports

Crude m aterials................................................................

664

Crude foodstuffs...............................................................

602

Manufactured foodstuffs.................................................
Semimanufactures............................................................
Iron and steel plates, sheets, strips, and b a rs..........
Copper semimanufactures...........................................
Chemicals and related products.................................
Aluminum semimanufactures.....................................
Finished m anufactures....................................................
Machinery and vehicles..............................................
Aircraft, parts and accessories...................................

156

1,033

502

675

293

369

391
976

443
1,389

64
70
61
605
18

94
107
100
703
79

4,448

4,877

2,603
304

3,033
567

76

86

7,157

8,503

6,598

8,022

Crude m aterials................................................................
Crude rubber.................................................................
Crude petroleum...........................................................
Crude foodstuffs...............................................................
Coffee, raw or green.....................................................
Manufactured foodstuffs.................................................

1,245

1,264

148
356

149
348

802
646

740
410
639

Semimanufactures............................................................
Iron and steel semimanufactures...............................

1,322

1,389

1,964

2,284

T o ta l, ex clu d in g m ilita r y -a id s h ip m e n t s ...........
Im p o r ts

Industrial chemicals.....................................................
Finished manufactures....................................................
Steel mill products.......................................................
Iron and steel advanced manufactures.....................
Automobiles and p arts................................................
Agricultural machinery and implements..................
Other machinery..........................................................
Vehicles, except automobiles......................................
Entries into bonded warehouses....................................

469
320
75
49
60
37

231

141
49
131
42

6,058
E xport su rp lu s, ex clu d in g m ilita r y -a id sh ip m en ts

79

163
51
S60
105
217
52
2

6,318

540

1,704

116
42
350
81
166
48

Source: United States Department of Commerce, Bureau of the Census.

148

MONTHLY REVIEW, AUGUST 1960

months of 1960. To cite the most important, almost half
of the rise in imports in January-May from a year
earlier was generated by greatly increased deliveries of
foreign iron and steel products, large quantities of which
had been ordered last year when supplies were tight be­
cause of the steel strike. These arrivals dropped per­
ceptibly in May, however, and further reductions are
widely expected. Imports of copper semimanufactures
more than doubled in the same period but in this case,
too, the rise was partly transient, since the increase was
largely associated with an attempt, first, to meet copper
requirements during the work stoppages in the domestic
copper industry and, later, to replace depleted inventories.
A particularly significant development in the first five
months of this year was the slower advance of automobile
imports. Compared with a more than 50 per cent rise
from 1958 to 1959, the value of imports of automobiles
and parts in January-May 1960 was only 3 per cent higher
than in the comparable 1959 period. This suggests that
European cars may be losing a share of their markets in
the United States to competing domestic “compact” mod­
els. The latter now account for 26 per cent of all American
cars sold, compared with 12 per cent last year. With the
phenomenal surge of automobile imports apparently being
checked and with vehicle exports showing a good advance,
it is widely expected that exports of vehicles and parts will
make their traditional net contribution to the United States
merchandise surplus this year, compared with 1959 when
they fell $66 million short of the record import volume of
$844 million.
The main shift in the geographical pattern of United
States foreign trade in the first five months of 1960 was
a sharp rise in sales to Western Europe and Japan. In con­
trast to the increases of 57 per cent and 50 per cent, re­
spectively, in exports to those two areas, the value of our
shipments to Latin America was practically unchanged.
United States exports to Venezuela fell 21 per cent during
the first five months of this year, reflecting that country’s
foreign exchange difficulties which were in large part due
to the softening of world petroleum markets. In the same
period the depressed world level of coffee prices was re­
flected in a 25 per cent decline in exports to Brazil, while
the unsettled situation in Cuba caused declines in our ship­
ments there. On the other hand, there were large in­
creases in exports to Argentina, Chile, Colombia, Peru,
and Uruguay.
The trend of exports and imports has a close, but not
necessarily decisive, influence on this country’s balanceof-payments position. In the first quarter of 1960— the
latest period for which balance-of-payments data are avail­
able— the merchandise surplus was $3.0 billion at a sea­




sonally adjusted annual rate, up sharply from the $0.9
billion surplus recorded in 1959. The improvement in the
over-all payments position was not, however, of compara­
ble size, since repayments of United States Government
loans were lower in the first quarter of this year and net
receipts from unrecorded transactions declined. As a re­
sult, the first-quarter payments deficit remained large at
$2.8 billion (seasonally adjusted annual rate) although
down from 1959’s $3.8 billion deficit (excluding the quota
transfer to the International Monetary Fund). The fact
that changes in the trade balance are not always fully
reflected in the balance-of-payments position means that
the further improvement in the; trade balance in the second
quarter does not necessarily imply that the payments posi­
tion in that quarter will turn out to have been stronger
than in the first quarter. A cautionary note is also sounded
by the fact that the substantial increase in the United States
trade surplus during the past year was due in part to the
strong cyclical expansion in business activity in industrial
nations abroad. While not the only means of attacking
our balance-of-payments problem, encouragement of ex­
ports is still a very worthy national goal.
EXCHANGE

RATES

In the New York foreign exchange market spot sterling
moved rather erratically during July. Substantial demand
for sterling from Continental sources, attracted by the
continued high short-term interest yields in London, caused
appreciable advances in the rate at the beginning of July
and again shortly after midmonth. The quotation in the
latter period reached $2.8107, but subsequently eased
and closed the month at $2.8089. In the forward market
the discounts on three and six months’ sterling generally
widened to 170 and 240 points by July 20, the widest
spreads since August 1958. Thereafter they tended to nar­
row, and at the month end were 138 and 216 points.
The Canadian dollar, after easing to $1.014%4 during
the first week reportedly on movements of short-term capi­
tal from Canada to London, subsequently firmed steadily
in a thin market. A general inflow of capital funds to
Canada during the latter half of the month appeared to
be the primary factor in advancing the rate to $1.022%2
on July 28. At the month end it closed at $1.02!% 2.
The Belgian franc, reflecting the political unrest in the
Congo, was quoted for a short time toward the month end
below its parity of 50 francs to the dollar for the first time
since December 1959. The Swiss franc, under upward
pressure from the repatriation of capital, gradually ad­
vanced from $0.2316^ at the beginning of July to
$0.2323^ by the end of the month.

FEDERAL RESERVE BANK OF NEW YORK

149

M on ey M ark et in July
Bank reserve positions eased further in July. Much of
the easing in reserve positions occurred at country banks;
the New York City and Chicago banks remained under
moderate pressure and were net purchasers of Federal
funds during most of the month. Federal funds trading
was predominantly at the 3V2 per cent ceiling except
around country bank settlement dates, and rates posted by
the major New York City banks on loans to Government
securities dealers ranged from 3% to AV2 per cent.
Prices for most Government securities rose during the
month, influenced by continuing uncertainty over economic
prospects, the marked stock market decline, and current
indications and expectations that credit policy might be
easing further. Prices of many notes and bonds rose to
new highs for the year, as the market drew encourage­
ment from the absence of a longer offering in the
Treasury’s July financing operations. The Treasury’s
financing operations included the auction on July 6 of
$3.5 billion of March tax anticipation bills and the July 12
auction to roll over $1.5 billion of the $2.0 billion in
one-year bills maturing July 15. The weight of these
financings, in which the Treasury raised $3.0 billion
of new money, was temporarily felt in the bill market,

STOCK MARKET CREDIT AND MARGIN REQUIREMENTS
Billions of dollars

1957

Billions of dollars

1958

1959

^Change in series.
Source: Board of Governors of the Federal Reserve System.




1960

and yields on most bills moved moderately higher during
the early part of the month. Thereafter rates declined
irregularly and were generally down on balance over the
month. Late in the month the Government securities mar­
ket was bolstered by the Treasury announcement that it
would refinance only about $9 billion of the $9.6 billion
in Treasury securities maturing August 15 and would
redeem the $800 million of Federal National Mortgage
Association (FNMA) debentures maturing August 23. The
Treasury also announced that holders of its maturing issue
would not be offered pre-emptive rights to subscribe for
the new issues, as had been the practice in the past.
Effective July 28, the Board of Governors of the Federal
Reserve System reduced stock margin requirements to 70
per cent from the 90 per cent level at which they had stood
since October 1958 (see chart).
MEMBER

BANK

RESERVES

Member bank reserve positions were somewhat easier
in July than in June. Federal Reserve System holdings of
Government securities rose sharply early in the month,
offsetting in part the large currency outflow around the
July 4 holiday and other reserve-absorbing factors. Bank
reserve positions remained comfortable over the remainder
of the month despite the increase in required reserves
during the July 20 statement week in the wake of bank
payments for the new March tax anticipation bills through
credits to Treasury Tax and Loan Accounts. Partly as
a result of bank participation in the Treasury’s new financ­
ing, bank credit rose substantially during the month, as
reflected in a more-than-seasonal rise in member banks’
required reserves over the four statement weeks ended
in July. Total reserves of the banks also rose more than
is usual for the month.
System open market operations, on balance, added sub­
stantially to member bank reserves during the month.
From June 29 to July 27, Federal Reserve holdings of
Government securities were increased by $465 million,
including $443 million in outright holdings and $22 million
through repurchase agreements. For the four statement
weeks ended in July member bank excess reserves rose
to $491 million, $16 million over the June statement
weeks’ average, while borrowings from the Federal Reserve
banks fell by $44 million to $390 million. Average free
reserves of all member banks rose to $101 million during

150

MONTHLY REVIEW, AUGUST 1960
C hanges in F a cto rs T e n d in f to Increase or D ecrea se M em ber
B ank R eserv es, J u ly 1960
In m illions o f d o lla rs; ( ~ f ) d enotes increase,
(—) decrease in ex cess reserv es

Daily averages—week ended
Factor

Net
changes

July
6

July
13

July
20

July
27

Operating transactions
Treasury operations*..................................
Federal Reserve float.................................
Currency in circulation..............................
Gold and foreign account...........................
Other deposits, eto.....................................

- 12
- 128
- 288
+ 20
+ 29

+ 95
+ 98
- 206
- 28
+ 42

- 128
+ 285
+ 162
- 26
+ 57

+ 64
- 336
+ 158
- 53
+
1

+ 19
- 81
- 174
- 87
+ 129

Total...........................................

- 380

+

3

+ 349

- 167

- 195

+
+

26
34

- 101
+ 44

+ 106
- 63

+ 393
+ 77

-

99

+

-

-

Total...........................................

oo
<
M

+

Direct Federal Reserve credit transactions
Government securities:
Direct market purchases or sales............. + 362
Held under repurchase agreements.......... + 62
Loans, discounts, and advances:
Member bank borrowings................ .
Other.....................................................
Bankers’ acceptances:
Bought outright..................................... +
1
Under repurchase agreements.................
—

-

88

—

3

78
—

61

-

2

+

—

2

-

2

32

-

36

+ 407

—

-

41

+

72
93

+

38
57

+ 381
-f- 40

- 203
- 30

+ 212
- 26

Total reservesf............................................. Effect of change in required reserves f ........... -

21
30

+ 19
+ 111

+ 421
- 467

- 233
+ 146

+ 186
- 240

Excess reserves f .......................................... -

51

+ 130

-

-

-

440
438
- 2

341
568
227

+ 452

Member bank reserves
With Federal Reserve Banks...................... +
Cash allowed as reserves!........................ . -

Daily average level of member bank:
Borrowings from Reserve Banks................
Excess reservesf.......................................
Free reserves!...... . • .................................

46
429
522
93

87
351
435
84

54
3901
491J
1011

Note: Because of rounding, figures do not necessarily add t© totals.
* Includes changes in Treasury currency and cash,
t These figures are estimated.
t Average for four weeks ended July 27, 1960.

the four statement weeks ended in July from $41 million
in June.
GOVERNMENT

S E C U R IT IE S

MARKET

In the Treasury bill market, attention during the first
half of July centered on the Treasury’s cash financing
operations. The July 6 auction of $3.5 billion of March
1961 tax anticipation bills, dated July 13, brought tenders
aggregating $4.4 billion, as commercial banks were per­
mitted to make full payment by credit to Treasury Tax
and Loan Accounts, The average issuing rate on this issue
was 2.823 per cent. Following the auction, the bills traded
at rates of 2.93 per cent to 3.02 per cent, reflecting the
value to subscribing banks of the Tax and Loan Account
privilege, and by the end of the month were 2.82 per
cent bid.
Reversing the late June downtrend in bill yields, which
had carried the weekly auction rates to 2.307 per cent on
91-day bills and 2.805 per cent on 182-day bills on
July 1, rates on most outstanding bills, and particularly
on longer bills, moved moderately upward during the early




part of July as banks were heavy sellers and dealers ap­
parently sought to lighten their inventories. In the regular
weekly auctions on July 11, rates were 26 and 37 basis
points higher than in the previous auctions, reaching 2.567
and 3.175 per cent on the new 91- and 182-day bills,
respectively. A more confident tone surrounded the next
day’s auction of $1.5 billion of one-year bills to replace
the $2.0 billion maturing July 15. In aggressive bidding,
the average issuing rate was 3.265 per cent, somewhat
below earlier market estimates; and far less than the 5.067
and 4.608 per cent average rates in the last two quarterly
roll-overs of one-year bills.
Continuing market confidence carried rates on most bills
downward during the following week, and the average rates
in the July 18 weekly auctions declined to 2.307 and 2.625
per cent. However, a note of caution became evident in
the market soon thereafter, as widespread demand failed to
materialize and the rate decline was interrupted. By
July 25, in the final auctions of the month, average rates
were slightly above the previous week’s level, at 2.404 per
cent on 91-day bills and 2.701 per cent on 182-day bills.
In the closing days of the month rates declined, influenced
by the implications of the Treasury’s August refinancing
program, which provided for a substantial reduction of
outstanding short-term debt and foreshadowed a potential
reinvestment demand in mid-August. Over the month as
a whole, rates on short-term bills were generally un­
changed to 10 basis points higher and longer bills were
8 to 20 basis points lower.
The market for Treasury notes and bonds was relatively
buoyant during July, reinforced by a growing realization
of the Treasury’s more comfortable budget position, com­
bined with continuing uncertainties over the economic out­
look and declining stock prices. The absence of a longer
issue in the Treasury’s cash offering in early July added
another strengthening influence, bringing a rise in note
and bond prices at the start of the month, and although
the uptrend was interrupted by market reports of a pos­
sible longer offering to be included in the August refund­
ing, the rise was resumed by midmonth.
Prices of most issues reached new highs for the year, and
recent high coupon issues set new records. By July 15,
yields on all notes and bonds had dropped below 4 per
cent—for the first time since December 1958. Demand
came partly from market professionals and partly from
investors apparently influenced by the decline in stock
prices. Buying interest in the 2Vi per cent “tap”
bonds issued during World War II increased, as talk of
possible advance refunding of these issues following the
August refunding revived. Trading activity was light, par­
ticularly in the latter half of the month, as the market

FEDERAL RESERVE BANK OF NEW YORK

awaited the Treasury’s announcement of the terms of the
August refunding.
The Treasury announced after the close of business on
July 2 8 that it would borrow about $ 8 % billion— about
$7% billion through a 3Ya per cent 11 Vi-month certificate
and about $1 billion through a 3% per cent 7-year
9-month bond issued last June and now reopened. The
new funds will be used, in conjunction with a reduction of
about $1V2 billion in the Treasury’s cash balance, to pay
off in cash $9.6 billion of a maturing Treasury 4% per
cent note ($3.9 billion of which is publicly held) and $ 8 0 0
rnillion of a 3% per cent FNMA note maturing in August.
Subscription books for the new issues, which will be dated
August 15 for payment in either cash or by means of the
maturing issues, were open August 1 and 2 without pre­
emptive rights for holders of the maturing issues. An­
nouncement of the new issues met an enthusiastic market
response and contributed to strength throughout the
Treasury securities list at the close of the month.
Over the month, prices of notes and intermediate bonds
generally rose by % to 3 Y2 points and longer term
bonds by 2 Ys to 2
>Vz points. The average yield on
three- to five-year issues declined 52 basis points from
June 30 to close at 3.46 per cent on July 29, while the
average yield on issues due in ten years or more fell by
22 basis points to 3.74 per cent.

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

Prices of seasoned corporate bonds moved upward
during most of the month, in line with long-term Govern­
ment bonds, as increased investor demand contributed to a




151

firm undertone in the market. Prices of seasoned taxexempt bonds, on the other hand, were sluggish under the
pressure of exceptionally heavy dealer inventories of new
issues. This overhanging inventory was sharply reduced
late in the month, and prices of State and local bonds
advanced. The average yield for seasoned Aaa corporate
bonds, as measured by Moody’s, declined 9 basis points
over the month to 4.35 per cent to reach a new low for
1960, while the average for similarly rated State and local
issues declined 2 basis points to 3.28 per cent.
Offerings of corporate bonds for new capital amounted
to an estimated $420 million, somewhat below the $505
million June total but far greater than the $170 million
marketed in July 1959. Most issues carrying protection
against early call met excellent investor response, while
other issues tended to move slowly. A $50 million finance
company flotation of 4% per cent notes maturing in 1979
(nonrefundable for eight years), not rated by Moody’s,
was reoffered to yield 4.83 per cent and quickly moved
to a premium. New tax-exempt bond offerings totaled an
estimated $550 million, a substantial decrease from the
estimated $950 million sold in June but about in line with
the July 1959 total of $567 million. Receptions accorded
new tax-exempt issues were mixed.
Rates on some short-term debt instruments were re­
duced during the month, apparently reflecting earlier de­
clines in Treasury bill yields. Commercial paper rates were
reduced by Ye per cent on July 1 and again on July 6,
bringing the offered rate on 4- to 6-month paper to 3%
per cent. Major sales finance companies lowered rates on
their paper of shorter maturities by V* per cent on July 20,
making the new rate on 60- to 89-day paper 2Yz per cent.