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RESERVE RANK FEW YOR] MONTHLY R E V I E W A U G U S T 1963 Contents Conversations on International Finance .... 114 The Business Situation .............................. 12 1 The M oney Market in J u ly ....................... Volume 45 123 No. 8 114 MONTHLY REVIEW, AUGUST 1963 C o n v e r s a tio n s o n In te r n a tio n a l F in a n c e By C . A. C o o m b s (Federal Reserve Bank of New York), M. I k l e (Banque Nationale Suisse), E. R a n a l l i (Banca d’ltalia), and J. T u n g e l e r (Deutsche Bundes bank). In the course of their duties, the officers in charge of foreign exchange operations of various central banks have many opportunities to exchange personal views on questions of mutual interest. Recently, Messrs. Coombs, Ikle, Ranalli, and Tungeler — mindful that their views had coincided in a great many respects— undertook an experiment to set down on paper these mutual thoughts. The result was the following notes which are published here with the thought that they would be of interest to a wider public, particularly those concerned with international finance. Since early 1961 the Bank of Italy, the German Fed eral Bank, the Swiss National Bank, and the Federal Reserve Bank of New York (as agent for both the United States Treasury and the Federal Reserve System) have been closely associated together with other central banks in various joint operations in the gold and foreign ex change markets. In our respective banks, we have been entrusted with the negotiation and conduct of these and other related operations and, in the process of almost daily consultation with one another, have found ourselves thinking along more or less similar lines. In the course of recent meetings in New York and Basle to deal with vari ous operational problems, we have also reviewed our market experience of the past two years and have tested how far we could agree, as individuals, on some of the outlines of a possible pattern of operational policy for the future. We found such a substantial measure of agreement that we thought it might be useful to prepare a summary of our conversations. S O M E G E N E R A L C O N C L U S IO N S First of all, it seems clear to us that the international financial system has demonstrated a high degree of flexibil ity and resilience in absorbing, during a period of re current pressure on both fee dollar and sterling, the successive shocks of the German mark and the guilder re valuations, the Berlin crisis, the Canadian devaluation, world-wide stock market declines, the Cuban crisis, and, finally, the rejection of the British application for mem bership in the Common Market. These emergency situa tions were swiftly and effectively dealt with by coopera tive action by the major central banks and treasuries on both sides of the Atlantic and by the International Mone tary Fund. The informal arrangements for joint activity in the London gold market, central bank forward opera tions, provision of central bank credit facilities either on the “Basle” ad hoc basis or formalized through stand-by swap facilities, United States acquisition of foreign ex change and intervention in the exchange markets, massive Fund credits to the United Kingdom and Canada, and, most recently, United States Treasury issuance of certificates and bonds denominated in foreign currencies— all these have amply proved their usefulness in offsetting and re straining speculative pressures in a number of critical situations. Those who might be tempted to speculate against any major currency are now confronted with the prospect of coordinated defensive action by central banks, treasuries, and the International Monetary Fund. Through such cooperative arrangements, truly impressive resources can now be mobilized in support of any currency under attack. FEDERAL RESERVE BANK OF NEW YORK There has been a tendency in certain quarters to regard these central bank and other intergovernmental defensive arrangements as no more than temporary and unreliable expedients. It is quite true, of course, that many of these defenses were quickly improvised, sometimes within a matter of hours, to deal with sudden emergencies. In most cases, they were negotiated on a bilateral basis and may give the impression of being no more than an unrelated patchwork. But these bilateral defenses have the most important advantage of being solidly based on market and institutional realities in each country and are capable of being flexibly adapted to new and unforeseeable needs. One cannot overemphasize the importance of being able to move quickly— on the basis of telephone consultations if necessary— against speculative pressures before they gain momentum. In our view, the central bank and inter governmental defenses developed during the past two years should be regarded as a permanent reinforcement of the international financial machinery. We are at the same time aware of doubts expressed by many important personalities in the universities and else where whether such gradual adaptation and reinforce ment of the international financial system will suffice to meet long-term liquidity needs. These doubts often seem to stem from the so-called “liquidity dilemma” which, in effect, suggests two highly undesirable alternatives: first, that the United States may continue to supply interna tional liquidity through balance-of-payments deficits and, in so doing, progressively undermine the dollar until a collapse becomes inevitable; or, second, that the United States by balancing its accounts may thereby cut off the continuing flow of international liquidity upon which the secular growth of international trade and payments is alleged to depend. We have studied the various theoreti cal plans developed in an effort to find a solution to this liquidity dilemma and are inclined to think that the authors of these plans are asking many of the right ques tions, but so far suggesting unworkable solutions. Quite clearly, the United States Government has given the only possible answer to one horn of the liquidity dilemma by asserting its firm determination to close the United States balance-of-payments deficit. Failure to do so would have disastrous consequences extending far into the future. While some progress toward reducing the deficit was made in 1961 and 1962, the time factor has now become a matter of major importance. With respect to the second horn of the liquidity di lemma, that is, the alleged need for international liquidity to expand more or less in step with world trade and pay ments, the late Dr. Jacobsson cut through a lot of con fused thinking on this matter: 115 As trade increases— either domestic or foreign trade— enlarged credit facilities are required in na tional currencies to ensure adequate financing. Trade is of course financed in national currencies, and foreign trade is financed largely in the currencies of the main industrial countries. Thus an expansion in foreign trade is financed through the credit mechanism in individual countries. Under the old gold standard, the creation of credit in the various countries was closely linked to movements of gold, and in quite a number of countries, changes in the volume of credit have continued to depend to a large extent on changes in their balance of pay ments, as reflected in their monetary reserves. But despite this link, one should guard against implying that no increase in the credit volume can occur without an addition to monetary reserves. . . . The link is not absolute; there can be no question of any inherent parallelism between the expansion of credit and growth of reserves. Similarly, the 1963 Annual Report (page 30) of the Bank for International Settlements has pointed out: One must be clear about the function of official liquid resources in the international payments sys tem. These are not a circulating medium used to effect payment in day-to-day transactions, as the domestic money supply is used to settle internal transactions; the vast bulk of transactions is settled by offsetting sales and purchases on the foreign ex change markets, with the actual circulating medium coming from the domestic money supply. The use of foreign exchange resources is limited, therefore, to covering the differences that arise from time to time between the flows of receipts and payments. This means that there is no simple functional rela tion between the need for some aggregate of official liquid resources and the volume of world trade; in fact, it is the increased movement of short-term funds since convertibility that has required greater use of external liquidity rather than increased trade. Similarly, it may be readily seen by comparing the experience of various countries that there is no simple functional relation between the need for liquidity and any other statistical magnitude, such as the domestic money supply or total external trans actions. This is because the need for liquidity is related to instability and the causes of instability are so varied and affect countries so differently that they cannot be expressed in a universal equation. 116 MONTHLY REVIEW, AUGUST 1963 We are inclined to think that the problem of interna tional liquidity is essentially a problem of dealing with the swings from surplus to deficit and back again by the major trading countries. While it would seem highly un likely that the amplitude of these swings will increase in proportion to the growth of trade and investment, we would agree that some increase in the swings may well occur. But the problem of financing such broader swings would differ only in degree and not in its essential nature from the type of problem that we have been dealing with on the exchanges during the past two years. At the 1962 meeting of the IMF and IBRD, Chancellor Maudling rightly asserted that reliance upon gold alone to provide for long-term liquidity needs was not an intellectually sustainable proposition. The Chancellor also warned that the expansion of the two reserve currencies — the dollar and sterling—was subject to limitations, which might consequently inhibit the growth of world trade and production. While we believe that the potential expansion of both gold and foreign exchange in official hands is considerably greater than is often supposed, more particularly if the United States were to supplement its gold stock by sizable holdings of foreign exchange, we would recognize the imprudence of exclusive reliance upon these sources of liquidity for an indefinite period of time to come. Recognizing the possible long-term need for supple menting outright official holdings of gold and foreign exchange, we have considered various proposals designed to permit a continuing growth in foreign official holdings of dollars and sterling by equating these key currencies with gold through the medium of a gold guarantee. We would conclude that such “instant gold” proposals afford only illusory advantages. Such guarantees probably would not prove credible. But if such guarantees should even temporarily appear credible, and if the key currencies were thereby encouraged to expand their liabilities to third countries even more, this would result in a deteriora tion in the liquidity position of the key currency countries and progressively undermine the credibility of the gold guarantee. In effect, the key currencies cannot escape, and cannot by any device be rendered capable of escap ing, the balance-of-payments disciplines that are the only real guarantor of a currency’s stability. Assuming that neither gold nor foreign exchange nor gold guarantee schemes can adequately provide for the long-term growth in liquidity that may be required, we can, visualize no effective alternative but to rely upon a further development of mutual credit facilities among the major trading nations to cope with the inevitable swings in their payments accounts. Provision of medium-term credit facilities to supplement outright reserve holdings was, of course, precisely the purpose for which the Inter national Monetary Fund was developed, and the borrow ing arrangements negotiated in 1961 now enable the Fund to supply truly massive amounts of liquidity to any member country, including the United States. At the short end of the credit facility spectrum, the Federal Reserve has negotiated during the past eighteen, months an extensive network of swap arrangements with most of the major central banks on both sides of the Atlantic. Such stand-by swap facilities provide for vir tually automatic access to credit up to specified amounts but, as has been repeatedly emphasized by the central banks concerned, they are primarily designed to deal with flows of funds expected to reverse themselves within a relatively short period of time. What seemed to be lacking, however, was a type of medium-term credit facility in the, say, fifteen- to thirtymonth maturity range, which might usefully be employed to deal with deficits and surpluses that were unlikely to reverse themselves within the short space of time appro priate to swap arrangements but were not so generalized as to suggest recourse to the Fund. In this connection, we have studied recent United States experiments with the issuance of special certificates and bonds denominated in foreign currencies, and are inclined to think that the use of such borrowing instruments might well be developed further. More particularly, insofar as such special certifi cates and bonds contain clauses assuring their liquidity in the event of need, they would open up an important new dimension of international liquidity. We can visualize, therefore, in very rough outline, the consolidation of an international financial system which would provide four main sources of liquidity: (a) Official holdings of gold and foreign ex change. (b) Formal swap arrangements, or similar bi lateral understandings on an informal basis. (c) Issue of special certificates and bonds de nominated in the currency of the creditor country. (d) Access to the International Monetary Fund. Such a system could provide for each country an appropriate blend of economic discipline and interna tional credit. Short-run credit facilities would be largely automatic, while longer term credit requirements would necessitate either bilateral negotiations between the debtor and creditor country or negotiation between the debtor country and the International Monetary Fund. In the remainder of these notes, we summarize in somewhat FEDERAL RESERVE BANK OF NEW YORK more detail our discussions on various specific aspects of each of the four sources of liquidity listed above. S O U R C E S O F IN T E R N A T IO N A L L IQ U ID IT Y GOLD AND FOREIGN EXCHANGE: (a) Gold. The SUpply Of newly mined and Russian gold reaching the market is now running at an annual rate of approximately $1.5 billion. Industrial uses of gold normally take up $400-500 million annually and, in recent years, much of the remaining supply has been absorbed by private speculative buying generated by international political tensions and the re current weakness of both the dollar and sterling. The gold pool arrangements developed late in 1961 have greatly facilitated official control of the London gold market, and may increasingly have the effect of per suading potential gold speculators that the present official price of gold can and will be held. More fundamentally, the 1962 Cuban crisis may have marked a major turn ing point in international political relationships and opened lip the prospect of a gradual relaxation of political ten sions. If, in this context, the United States makes further appreciable progress toward closing its payments deficit, private demand for gold might well become largely limited to industrial and artistic needs. In turn, this might permit central bank and other official buyers to acquire a much larger share of newly mined and Russian gold. In view of the heavy expense being incurred by gold specu lators in carrying the massive hoards acquired during recent years, it would not be surprising, in fact, to see a sizable volume of dishoarding, thereby increasing the supplies available for official use. Under the twin assump tions of both an easing of international political tensions and a strengthening of the dollar, the flow of newly mined and Russian gold might well augment official gold reserves at a rate of roughly 2 per cent per year, which would represent a very substantial contribution to the growth of international liquidity. The orderly distribution of such new gold among the various official buyers would be facilitated by continuance of the present gold pool arrangements. (b) Foreign exchange. As previously noted, it essential that the United States balance of payments be restored to equilibrium as soon as possible so as to curtail the flow of dollars to foreign central banks and thereby minimize further reductions in the United States gold stock. In this connection, however, it might be worth while considering whether the present balance-of-payments accounting system of the United States does not unduly magnify its deficit position. Thus, the United States does not net out the short-term claims of American banks 117 against their short-term liabilities but, rather, takes into account only the change in gross short-term liabilities in calculating the balance-of-payments deficit or surplus. Since the gross short-term liabilities of the United States are convertible into gold if held by foreign central banks and, if in private hands, may readily be shifted to foreign official account, this accounting practice serves to focus attention upon the liquidity position of the United States, i.e., the volume of potential claims upon the gold stock. Until such time as the United States restores a solid equilibrium in its balance-of-payments accounts, it would probably be prudent to continue such accounting pro cedures. On the other hand, after an equilibrium in thie United States payments position is restored, it might be worthwhile considering whether some, if not all, the short term banking claims of the United States might not be offset against its short-term banking liabilities. As United States exports increase over the years, an increase in United States claims against foreigners through accept ance and other trade financing will be both natural and desirable. Conversely, with the continuing growth in world trade and payments, foreign commercial banks and private traders will probably wish to carry a gradually rising volume of dollar balances for financing trade and other current requirements. If through central bank co operation and other means speculation can be kept under control, a statistical offsetting of such claims and liabili ties resulting from trade financing might have consider able merit. In 1961 the United States initiated a program of acquiring outright holdings of foreign exchange as a means both of defending the dollar and* over the long run, of contributing to international liquidity. This has been a truly revolutionary development which has added a new dimension to the international financial system and opened up a broad range of possibilities for further strengthening the international financial machinery. Mainly due to the continuation of United States payments deficits, the United States authorities have so far been able to acquire only limited amounts of foreign exchange, but encouraging results have nevertheless been obtained from ismoderate-scale intervention to support the dollar. As the United States accounts move closer to equilibrium or surplus, extensive scope for accumulation of foreign cur rencies will appear. Although the United States authorities will naturally wish to give careful consideration to the risk factor involved, it seems quite possible that the ac cumulation of foreign exchange balances by the United States may encounter two institutional limitations before the amounts held become so large as to suggest the exist ence of serious risks. The first limitation is that of short 118 MONTHLY REVIEW, AUGUST 1963 term investment facilities which in a number of European permanent reduction of their ratios, perhaps no more countries would at the present time be quite unable to than a willingness to take in for temporary periods some accommodate a sizable accumulation of United States what larger foreign exchange balances. Alternatively, if official funds. Sterling and the highly developed London they find it difficult to justify temporary bulges in official money market are, of course, a major exception, and this holdings of foreign exchange, the high ratio countries in itself might suggest that the United States authorities might examine ways and means of immunizing their might find it technically convenient to hold a sizable pro official purchases of foreign exchange, during their periods portion of their foreign exchange in the form of sterling. of balance-of-payments surplus, by entering into swap or Much will also depend upon the pace of development forward operations with their commercial banks— thereby of the money and capital markets in Continental coun encouraging the banks to hold the foreign exchange com tries, with the possibility of United States official place ing to them because of the country’s surplus, instead of ments perhaps giving additional impetus to such a unloading it on the central bank. Even if the present spread among reserve ratios were development. The institutional obstacles with respect to investment facilities do not lie entirely upon the European appreciably narrowed, however, there would remain the side, however, since the Federal Reserve finds itself con problem of the most appropriate mode of adjustment to strained by law from placing any foreign exchange bal flows of dollars between relatively low and relatively high gold ratio countries. Thus, a flow of dollars from Ger ances in foreign treasury bills. The second major limitation on the accumulation of many to Switzerland would create a potential drain upon United States foreign currency balances is the fact that the United States gold stock even though the American balances in one currency are not always fully useful for accounts were in balance at the time. As noted above, making payment to a third country. Thus, while the the surplus countries might temporarily cushion the ad United States can readily shift from one European cur justment process through some degree of flexibility in rency to another, either directly or through the mar their gold ratio policies and through swap or forward ket, such transfers result in parallel transfers of dollars, operations with their commercial banks. If, on the other with the effect that the entire operation tends to become hand, a high gold ratio country continues to run persistent self-defeating. Some escape, however, from this perverse and sizable surpluses, the United States might find it consequence of the use of the dollar as an international appropriate to absorb part of the surplus dollar acquisi currency has been found in the swap of German marks tions of the creditor country by issuing special bonds for Swiss francs executed for United States Treasury denominated in the currency of the creditor. Such bonds, account in December 1962 with the cooperation of the as will be outlined in more detail below, would provide German Federal Bank, the BIS, and the Swiss National an appropriate investment medium for such balance-ofBank. This technique is clearly capable of further useful payments surpluses. development. (c) Ratios o f gold to foreign exchange. The gold c e n t r a l b a n k s w a p f a c i l i t i e s . During the past year ratios of the major central banks on both sides of the there has gradually been created a network of swap Atlantic vary widely. It seems to us questionable whether arrangements amounting to more than $1.5 billion be so divergent a ratio pattern will prove stable and, unless tween the Federal Reserve on the one side and nearly all special arrangements can be made, one might expect to of the major European central banks, plus the Bank of see a gradual upward drift of the lower ratios. Equaliza Canada and the Bank for International Settlements, on tion of gold ratios at a very high level would represent, the other. Initially, most of these swap arrangements of course, a retreat from the gold exchange standard and provided for a basic $50 million credit line. The degree a contraction of international liquidity. of flexibility as to amount is well illustrated, however, by To deal with this problem, we are inclined to suggest the execution of a United States-Canadian swap in the an evolutionary approach which should seek a gradual amount of $250 million during the Canadian dollar crisis, narrowing of the present spreads among gold ratios, first, two Swiss franc swaps totaling $200 million which were by encouraging the fullest possible flow of newly mined arranged to take care of speculative pressures arising out and Russian gold to those low ratio countries that of the stock market decline, the increases of the Bank of wish to raise their ratios and, second, by seeking Italy and German Federal Bank swaps to $150 million somewhat greater flexibility in the gold policies of the each, the increase from $50 million to $100 million in the high ratio countries. Such gold policy flexibility by swap line with the Bank of France, and finally the increase the high ratio countries need not necessarily involve a of the Bank of England swap line to $500 million. Thus FEDERAL RESERVE BANK OF NEW YORK reinforced, the swap network now constitutes a first line of defense capable of withstanding the most severe specu lative challenges. Even more important, the very existence of the swap network tends to suppress the growth of speculation at its source by providing convincing evidence of central bank determination to maintain the existing network of gold and exchange parities. Whether other central banks will choose to take the initiative, as has the Federal Reserve, in negotiating a similar network of swap facilities, remains to be seen. What is far more important is the spontaneous and under standing concern of the entire central banking community for any member central bank subjected to speculative pressure. The “Basle” credits of more than $900 million extended by European central banks to the Bank of Eng land during the sterling crisis of 1961 provided a dramatic example of the ability and readiness of central banks to spring to the defense of a currency under attack. More recently, in February-March 1963, the provision of $250 million in short-term credits to the Bank of England by several Continental central banks helped to nip in the bud another speculative attack on sterling. Central bank swaps and other credit facilities are, by their nature, essentially short term, and use of such facili ties should accordingly be limited to situations in which the flow of funds is expected to be reversible within a relatively short period of time. In various operations during the past two years, the Bank of England, the Bank of Can ada, the Federal Reserve, and other central banks involved have closely adhered to this principle. Quite clearly, how ever, it will not always be possible for a central bank to make an accurate diagnosis of payments trends. What initially appears to be a temporarily adverse swing may turn out to be rooted in an underlying disequilibrium re quiring time-consuming corrective measures. In such cir cumstances, reliance on central bank swaps to bridge a protracted deficit would involve repeated roll-overs of short-term credits with potentially embarrassing con sequences for both central banks concerned. In such cir cumstances, medium-term financing should be substituted for central bank swaps. The British shift from the “Basle” short-term credits to medium-term financing by the International Monetary Fund is an illustrative case in point, while in other situations a shift from central bank swaps to intergovernmental financing at medium term might be more appropriate. The risk that a central bank may become so deeply involved in short-term borrowings as to make necessary recourse by its government to draw ings upon the Fund or other medium-term credit facilities points up the desirability of a full exchange of information on swap and similar credit operations among the cooperat 119 ing central banks on both sides of the Atlantic. s p e c i a l c e r t i f i c a t e s a n d b o n d s . As previously noted, some form of medium-term credit should be substituted for swap credits which cannot be liquidated through an early reversal in the flow of funds. In cases where that likelihood can be foreseen, medium-term credits should be arranged from the beginning. For certain countries, and in certain circumstances, recourse to the Fund will prove to be the most appropriate course of action. In other contexts, however, bilateral arrangements between the creditor and debtor countries concerned may well be deemed preferable. After the last war, direct governmental loans by the United States to various European countries, of which some $6 billion remain outstanding, provided such an alternative to drawings upon the Fund, and there is no reason why the United States, when confronted with stubborn deficits of its own, should not seek to arrange similar medium-term credit facilities on a bilateral basis with the surplus countries. Precisely such a bilateral medium-term credit arrange ment did in fact arise out of the strong surplus position of Italy during 1962 and the resultant heavy accumulation of dollars by the Italian Exchange Office. Early in the year, both Italian and United States officials recognized the probability that the flow of funds to Italy was likely to continue for a good many months to come, and accordingly no effort was made to deal with the situation through central bank swap arrangements. Instead, the United States Treasury proceeded to absorb the flow of dollars to Italy through issuance of three months’ cer tificates denominated in Italian lire. After several re newals of such certificates in the face of continuing sur pluses in the Italian accounts, the United States Treasury and the Bank of Italy agreed to fund the certificates into fifteen-month bonds, thereby explicitly and publicly rec ognizing the need for such medium-term financing. By taking into its portfolio such medium-term bonds, the Bank of Italy provided effective financing of the Italian surplus in 1962 through a flow of official investment funds to the United States. This technique of medium-term for eign investment by creditor central banks in bonds de nominated in their own currency need not necessarily be confined to the financing of current surpluses, but might also be employed ex post to consolidate part of earlier surpluses which have meanwhile been placed in short term earning assets abroad. Thus, it has proved advan tageous for the United States Treasury and German Fed eral Bank to fund a certain amount of the current dollar reserves of the German Federal Bank into medium-term mark obligations. In view of certain technical obstacles 120 MONTHLY REVIEW, AUGUST 1963 effectively limiting the maturity of the German Federal Bank’s assets to no more than ninety days, such mediumterm German mark bonds carry a conversion privilege into ninety-day certificates on the implicit understanding that such conversions would not be made except under conditions of heavy drains upon the German Federal Bank’s reserves, in which event the United States would also find it appropriate to prepay such debt. From the German point of view, these bonds thus fully retain their usefulness as a sound financial instrument buttressing in ternational liquidity. Such a substitution of medium-term mark bonds for short-term dollar assets held by the Ger man Federal Bank has had the further collateral advan tage of improving the bank’s gold ratio. A similar conversion privilege was subsequently ex tended to the Italian lira bonds issued to the Bank of Italy in 1962. Convertible bonds denominated in Belgian francs and Austrian schillings have also been issued to the National Bank of Belgium and the National Bank of Austria in order to absorb surplus dollars accumulated by these central banks. The usefulness of such issues of special bonds and cer tificates need not be limited to the financing by the surplus countries of bilateral deficits incurred by the United States. In actual fact, of course, the surpluses of most European countries reflect an over-all creditor position vis-a-vis not only the United States but many other countries as well. Even after the United States has regained equilibrium in its payments accounts, certain countries will from time to time move into a strong creditor position which will, in turn, expose the United States, as banker for the international financial system, to the risk of net drains upon its gold stock. We have previously suggested that informal understandings should be sought whereby the creditor countries might attempt, either through greater flexibility in their gold policy or through more extensive use of forward exchange and related operations, to avoid causing a net drain upon the United States gold stock. To round out such a system of minimizing net losses of gold by the United States as a result of pronounced surplus and deficit positions in other countries, the United States might also find it useful on occasion to provide the creditor country with an invest ment outlet for its surplus in the form of special bonds denominated in the creditor’s currency. Still another useful role for these special bond and cer tificate issues is illustrated by the recent United States Treasury arrangements with the Swiss Confederation and the Swiss National Bank. The Swiss Confederation for several years past has been running sizable budget sur pluses and has thus been desirous of investing such savings drawn from the Swiss public. Initially these Con federation investments were largely placed abroad in short-term instruments such as United States Treasury bills. The Confederation naturally sought forward cover on such investments and, in the process, found itself com peting in the forward market with the Swiss commercial banks and other private investors. To relieve this and other pressures on the forward rate, the United States Treasury began in 1961 a program of offering forward Swiss francs on the market, with the result that a sizable volume of forward contracts was taken up by the Swiss Confederation. Since the Swiss Confederation wished to stay more or less fully invested, repeated roll-overs of forward contracts by the United States Treasury to facili tate this investment were eventually recognized as an un necessary complication. The decision was accordingly reached to provide an investment outlet for the Swiss Confederation in the form of Swiss franc bonds, thereby enabling the Confederation to avoid recourse to the ex change markets and lessening the risk that Confederation investment operations might become confused with other Treasury and Federal Reserve exchange operations. A second operation involved the issuance by the United States Treasury to the Swiss National Bank of eightmonth Swiss franc certificates (subsequently funded into medium-term bonds) which are convertible into ninety-day certificates. These issues were designed to afford an in vestment outlet for funds previously drawn by the Swiss Confederation from the commercial banks through the issue of so-called “sterilization rescriptions” and hitherto retained unused in a special account at the Swiss National Bank. The Swiss franc proceeds thus acquired by the United States Treasury at a relatively favorable rate of interest may be employed for purposes of exchange market intervention or for conversion into gold at a fixed price on demand. Quite aside from the possibility thus afforded the United States Treasury of supplementing its gold re sources, on a temporary basis, the operation provides confirmation of the fact that, in individual instances, arrangements that embody an exchange guarantee are capable of doing all that could be expected from a gold guarantee, with none of the complications involved in the latter procedure. In effect, Switzerland is prepared to sell gold to the United States against payment in a Swiss franc security. We are inclined to recommend further careful explora tion of the potentialities of such special certificates and bonds which might conceivably grow into a second line of defense behind the swap network. THE INTERNATIONAL MONETARY FUND. The Fund COnstitutes in many respects the ultimate liquidity resource of FEDERAL RESERVE BANK OF NEW YORK the international financial system. IMF quotas are an effective addition to international liquidity, and these re sources are capable of further expansion. Substantial parts of each country’s quota can readily become part of its reserves when it runs deficits, and the entire quota can become available, as has been shown in several important cases. We do not feel ourselves competent to make any judgment on the profound policy questions involved in more or less automaticity in Fund drawings, but we feel confident that an appropriate blending of automaticity and discipline will in time be achieved. In any event, the swap network and the possibility of broader use of bi lateral credits through issuance of special certificates and 121 bonds can provide a most useful supplement to the Fund’s activities. In fact, there is no need to expect, or to seek to achieve, a uniform path along which debtor and creditor countries move as they receive or grant credits in the course of payments swings. For some countries, the IMF is and will continue to be virtually a first line of defense, while others may prefer to reserve its use for more protracted and generalized deficits. Whichever course may be taken, how ever, the very existence of the Fund and of its large re sources will provide to all member countries continuing assurance of the type of international monetary cooperation that the Fund symbolizes and embodies. T h e B u s in e s s S itu a tio n As the first half of the year came to a close, most meas ures of business activity were showing a continuation of the stepped-up rate of advance that had begun last spring, following the sluggishness which marked the second half of 1962. In June, industrial production, nonfarm payroll employment, and personal income all remained on their respective uptrends of the previous several months. For the second quarter as a whole, gross national product posted a substantial advance, and, with prices remaining relatively stable, most of the rise reflected real growth. Thus, contrary to the expectations of most business ana lysts at the beginning of the year, the gain in GNP in the first half of 1963 was slightly above the rise registered dur ing the latter half of 1962. This better than expected per formance of the economy helped to reduce the Federal budget deficit for the fiscal year ended June 30 to $6.2 billion, or $2.6 billion less than had been estimated in January. The usual difficulties of making proper allowance for seasonal factors during the summer months will probably complicate the evaluation of the economic outlook for the third quarter. An additional factor will be the drag on steel output due to the working-ofl of inventories. Indeed, weekly data for July do suggest a substantially more than seasonal decline in steel ingot production. Auto output, moreover, also appears to have fallen more than is normal for the end of the model year, but this drop must be evalu ated against the very strong performance of the industry in June. At the same time auto sales recovered in July, and there were signs that total retail sales may have moved to new high ground. G R O S S N A T IO N A L P R O D U C T IN T H E S E C O N D Q U A R T E R According to preliminary estimates by the Council of Economic Advisers, GNP rose to a seasonally adjusted annual rate of $579 billion in the second quarter.1 The $7.2 billion gain was slightly larger than the first-quarter advance (see Chart I) and was also above the average quarterly rise in 1962. The increase was particularly im pressive in view of a slowdown in the rate of gain in inventory spending. Indeed, the second-quarter rise in final demand amounted to $8.8 billion, the largest advance in a year. This increase, moreover, was centered largely in the private sector, as government purchases of goods and services showed an appreciably smaller rise than in the two previous quarters. Spending for residential construction and for business fixed investment rebounded sharply in the second quarter, 1 The usual midyear revision of the national income accounts resulted in a lowering of earlier estimates of GNP for each quar ter from 1960-1 through 1962-1 by some $0.2-1.3 billion and a raising of the 1962-11 through 1962-1V estimates by some $0.4-1.7 billion. MONTHLY REVIEW, AUGUST 1963 122 D E V E L O P M E N T S IN J U N E A N D J U L Y C h art I RECENT CHANGES IN GROSS NATIONAL PRODUCT AND ITS MAJOR COMPONENTS The Federal Reserve’s index of industrial production continued upward in June, reaching 125.1 per cent of the 1957-59 average (see Chart II). This marked the fifth consecutive month in which gains of a full point or more have been scored. The increase so far this year amounts to about 6 percentage points in contrast to a rise of 3.5 percentage points for the whole of 1962. Producers of consumer goods accounted for the greater part of the June advance— largely reflecting a 10 per cent rise in assemblies by the automobile industry, though output of S e a s o n a lly a d ju s te d a n n u a l rates I C h a n g e fro m fou rth q u a rte r I 1 962 to first q u a rte r 1963 C h a n g e from first q u a rte r , to seco n d q u a rte r 1963 G R O SS N A TIO N A L PRODUCT Inventory investment Final demand Consum er expen ditu res for durable and nondurable g oo ds Consum er expenditures for service s Residential construction Business fixed investment Governm ent purchases of goods and services Net export of goo ds and services 2 4 6 8 10 Billions of dollars So u rce s: U n ite d Sta te s D e p a rtm e n t of C o m m e rce ; C o u n cil of E co n o m ic A d v is e r s . following declines in the opening quarter of the year. With the improvement in the weather that began in April, builders were able to begin or resume work on projects that had been delayed by the unusually severe winter. Partly as a result, the second-quarter gain in residential construction outlays was the largest of any quarter in the postwar period. The rise in plant and equipment spending, while of more modest proportions, was about as large as had been indicated in the Commerce Department-Securities and Exchange Commission survey of capital spending plans taken in May. The survey had also projected a 5 per cent gain in capital outlays for the year as a whole. With the second-quarter increase, this now appears to be somewhat closer to realization. Consumer spending registered its smallest rise in more than two years. The second-quarter gains in outlays for both services and nondurable goods were smaller than in the first quarter, and spending for durables showed only a modest increase. The increase in durables consumption, however, occurred while new car sales of 7.2 million units (seasonally adjusted annual rate) were essentially un changed from the first quarter. FEDERAL RESERVE BANK OF NEW YORK other consumer goods also moved up slightly. Production of business equipment advanced markedly for the second month in a row and finally topped the record set in Sep tember of last year. Despite a sharp fall-off in iron and steel production and a strike in the lumber industry on the West Coast, output of materials was unchanged. Weekly figures for July suggest that steel ingot production fell appreciably further (seasonally adjusted). At the same time auto assemblies, while at about the seasonally ad justed annual rate that was maintained from last October through May, were still no match for the better than 8.0 million unit rate in June. A slightly adverse development in June was a 2.7 per cent decrease (seasonally adjusted) in new orders received by manufacturers of durable goods. This marked the second month in a row that this forward-looking indi cator has declined, following four consecutive months of advance. A substantial part of these recent movements, however, reflects fluctuations in orders for steel, which rose appreciably in the first five months of the year before falling off sharply in May and June in anticipation of, and following, the settlement of the steel labor negotiations. In June, moreover, new orders for durable goods other than steel were virtually unchanged from the advanced level of the month before. At the same time, the backlog of un filled orders for all durable goods, while down slightly in June, still was at the second highest level in the current expansion. Seasonally adjusted nonfarm payroll employment moved up by 143,000 persons in June, marking the fifth consecu tive month of advance. About one half of the June rise was due to an expansion in government employment, with an increase in service and trade jobs largely accounting for the rest. Employment in the manufacturing sector 123 showed little change, despite a strike on the West Coast which reduced the number of persons on payrolls in the lumber industry by about 20,000. In July, nonagricultural employment posted a sizable rise, according to the Census Bureau’s household survey, and there was some pickup in farm jobs. The advance in total employment was nearly paralleled by a 549,000 rise in the civilian labor force, and the unemployment rate at 5.6 per cent was es sentially unchanged from the 5.7 per cent registered the month before. Thus, the total number of unemployed in July remained above four million persons, higher than the level of a year earlier, despite recent gains in economic ac tivity. In the consumer sector, demand appears to have been maintained. To be sure, three leading indicators of future spending for residential construction— contract awards, housing starts, and new building permits issued— all fell off slightly in June. However, there continues to be a sub stantial backlog of unused permits on which work was not initiated during the winter because of the unusually severe weather. And the fact that starts and awards were at a record level during the second quarter may point to strength in outlays for the near term. Moreover, there have been signs of some renewed strength in consumer retail spending for store goods. Thus, after having shown little movement from February through May, retail sales moved up in June to set a new record. Weekly data for July sug gest that retail volume may have expanded somewhat further in that month, with an increase in sales of new cars providing much of the push. At the same time, trade sources report an unusually brisk sales pace for air conditioners, brought about by the sustained heat spell that apparently gave a boost to department store sales of other summer merchandise as well. T h e M o n e y M a r k e t in July Financial markets were heavily influenced in July by expectations of, and reactions to, official moves designed to deal with the persistent deficit in the United States balance of payments. Discussion of the likelihood of an imminent increase in the discount rate— touched off by market advisory letters and newspaper stories— grew in intensity during the first half of the period. Expectations of such a move were reinforced prior to midmonth by news of fur ther gold losses and by official testimony before a Con gressional committee that an upward adjustment in short-term rates could play a significant role in combating the payments problem by discouraging outflows of short term funds. Against this background, the July 16 an nouncement that the Board of Governors of the Federal Reserve System had approved an increase of V2 per cent to 3V2 per cent in the discount rate of the Federal Reserve 124 MONTHLY REVIEW, AUGUST 1963 Bank of New York and of six other Federal Reserve Banks was greeted with littie surprise. The rate change, which was the first since the rate was reduced to 3 per cent in August 1960, became effective at these seven banks on July 17, at three others on July 19, and at the remaining two Federal Reserve Banks on July 24 and July 26. The Board of Governors also announced on July 16 that it had increased to 4 per cent the maximum interest rates that member banks are permitted to pay under Regu lation Q on time certificates and other time deposits with maturities of ninety days to one year. Since January 1962, the rate ceilings had been 3 V2 per cent on maturities of six months to one year, and 2 V2 per cent on those of ninety days’ to six months’ duration. Maximum rates remain un changed at 1 per cent on time certificates and deposits maturing in less than ninety days and at 4 per cent on ma turities of one year or more. No changes were made in the maximum rates that member banks are permitted to pay on savings deposits. In announcing the changes in the dis count rate and in maximum rates on time certificates and deposits, the Board stated that: Both actions are aimed at minimizing short-term capital outflows prompted by higher interest rates prevalent in other countries. Preliminary information indicates that short-term outflows contributed ma terially to the substantial deficit incurred once again in the balance of payments during the second quarter of this year. Recently, market rates on United States Treasury bills and other short-term securities have risen to levels well above the 3 per cent discount rate that had prevailed for nearly three years, making it less costly for member banks to obtain reserve funds by borrowing from the Federal Reserve Banks rather than by selling short-term securities. The increased discount rates will reverse that cir cumstance, making it once again more advantageous for member banks seeking reserve funds to obtain them by selling their short-term securities rather than by borrowing from the Federal Reserve Banks. Sales so made should have a bolstering effect on short term rates, keeping them more in line with rates in other world financial markets. Meanwhile, the increase in the maximum rates of interest payable on time deposits and certificates with maturities from ninety days to one year will permit member banks to continue to compete effectively to attract or retain foreign and domestic funds for lend ing or investing. These actions to help in relieving the potential drain on United States monetary reserves associated with the long-persistent deficit in the balance of payments do not constitute a change in the System’s policy of maintaining monetary conditions conducive to fuller utilization of manpower and other resources in this country. On July 18, President Kennedy announced new Admin istration plans for reducing the balance-of-payments deficit. In order to help stem the outflow of long-term capital, the President urged enactment of an “interest equalization tax” on purchases by Americans of new or outstanding foreign securities (other than those of less developed countries) from foreign issuers or owners. The proposed tax would not apply, however, to acquisitions of securities maturing in less than three years, nor would it apply to direct investments abroad or to loans by commercial banks. (Subsequently, an understanding was reached with the Canadian Government under which the Treasury would include in the draft legislation a provision permitting the President to exempt new Canadian issues as needed to maintain an unimpeded flow of trade and payments be tween the two countries, while the Canadian authorities stated that it was not their intention to increase Canada’s official international reserves through the proceeds of borrowings in the United States.) The President also an nounced plans for further substantial reductions in Federal expenditures abroad, and said that the United States had been granted a $500 million stand-by arrangement by the International Monetary Fund to facilitate dollar repayments to the Fund by other countries during the coming year. These various developments related to the balance-ofpayments problem exerted a significant influence in the financial markets. Treasury bill rates rose steeply early in the month in response to expectations of a discount rate advance. Around midmonth, rates receded somewhat, how ever, as demand expanded at the higher yield levels. When the long-expected discount rate change went into effect on July 17, rates adjusted moderately higher in early trading but subsequently receded in the face of growing market scarcities in a temporarily easier money market. In the closing days of the month, the money market firmed again and bill rates edged higher, closing around the highs of the month. In the market for Treasury coupon-bearing issues, prices moved moderately lower during the first half of the month in a cautious atmosphere generated by anticipations of a discount rate move. After the discount rate increase and the President’s message, however, bond prices rose in generally quiet trading, as the market be came increasingly convinced that the main impact of 125 FEDERAL RESERVE BANK OF NEW YORK official actions would be on short-term rates. In the market for corporate and tax-exempt bonds, prices drifted lower in the first half of July, reflecting chiefly the same factors affecting the Government bond market. However, in the latter part of the month, prices of these securities rose as investors stepped up their buying, evidently with confi dence in the near-term outlook for long-term interest rates; the revision of Regulation Q was an important additional factor contributing to strength in the tax-exempt market. The Treasury announced on July 16 that it was con sidering the use of monthly auctions of one-year Treasury bills, in the interest of a more orderly scheduling of its short-term debt maturities. Under such a program, the outstanding quarterly series of one-year bills—which cur rently are dated to mature on January 15, April 15, July 15, and October 15—would gradually be retired as they were replaced by monthly issues. These issues would, ac cording to the Treasury, probably amount to $1 billion each, although they might be varied in size to meet both market conditions and Treasury cash needs. On July 24, the Treasury announced that holders of $6.6 billion of securities maturing on August 15 would be given the opportunity to exchange their holdings for a new 33A per cent note dated August 15, 1963 and due to mature on November 15, 1964. No cash subscriptions were to be received for the new notes, which were of fered at par. Subscription books were open from July 29 through July 31. On August 2, the Treasury announced that over $6.3 billion of the $6.6 billion of maturing securities had been submitted in exchange for the new 3% per cent notes, including about $2.2 billion of the $2.5 billion held by the public. Attrition amounted to $268 million, or 10.8 per cent of public holdings. BANK RESERV ES AND THE M ONEY M ARKET The money market remained generally firm in the first half of July, with Federal funds trading almost entirely at 3 per cent. Reserve distribution continued to favor banks outside the money centers, while money market banks sought to cope with large and persistent reserve deficien cies through heavy purchases of Federal funds and through expanded borrowing at the Federal Reserve Banks. After the discount rate increase became effective in seven Federal Reserve Districts, the money market firmed up briefly but then became progressively easier in the state ment week ended July 24 as reserves shifted markedly in favor of banks in the money centers. In considerable measure, this shift stemmed from earlier steps taken by the New York City banks to improve their liquidity posi tions, and from heavy borrowing by banks in Federal Re serve Districts where the cost of borrowing remained at 3 per cent. Funds thus flowing to the money centers were augmented by the usual transfer of funds which occurred over the July 24 “country” bank reserve-settlement date. In the final statement week of the month, the money market firmed again and Federal funds traded mainly at 3% to 3V2 per cent. Paralleling movements in rates on Federal funds, rates posted by the major New York City banks on new and renewal call loans to Government se curities dealers were generally quoted within a 3% to 33A per cent range through July 19, declined over the next few days to a 2 Vi to 3 per cent range, and then firmed at 3V2 to 33A per cent in the final days of the month. In the wake of the sharp rise in bill yields, the discount CHANGES IN FACTORS TENDING TO INCREASE OR DECREASE MEMBER BANK RESERVES, JULY 1963 In millions of dollars; (+ ) denotes increase, (—) decrease in excess reserves Daily averages— week ended Factor July 3 July 10 Net changes July 17 July 24 July 31 159 75 325 49 33 4 89 203 4- 49 — 22 4- 48 4 - 43 4 - 61 4- 152 — 21 — — 8 — 646 4- 137 — 11 — 16 — — — 4- — 506 — 425 + :>,G7 4- 233 — 547 —878 + 648 4- 230 — 369 — 252 4-357 4 - 614 + 18 4- 173 — 241 — 103 4 - 42 —HI + 95 — — 6 — 4- 77 + 1 — 88 — — 169 — 1 — 91 — Operating transactions Treasury operations* ............ Federal Reserve float ............ Currency in circulation.......... Gold and foreign account----Other deposits, etc.................. Total...................... + — — — — 46 203 295 34 20 — + — — + + 11 510 282 140 45 Direct Federal Reserve credit transactions Government securities: Direct market purchases or Held under repurchase agreements .......................... Loans, discounts, and advances: Member bank borrowings.. Bankers’ acceptances: Bought outright .................. Under repurchase agreements .......................... Total...................... Member bank reserves With Federal Reserve Banks. Cash allowed as reservest. . . —. — 2 + 1 + + 762 3 _ 2 4- 396 — 528 — 450 4 - 227 4 -4 0 7 4- 256 — 66 — 20 — 120 — 161 4- 238 — 217 — 25 — 320 + 37 — 471 4- 64 — 407 — 4-190 — 149 — 139 4 - 182 51 329 430 + 3 — — 77 — 242 — 283 54 4- 119 + 33 4- 131 — 123 — 222 323 463 140 400 594 194 312 471 . 159 143 249 106 Effect of change in required + Daily average level of member bank: Borrowings from Reserve Banks Excess reservest .................... Free reservest ........................ 101 1 — 6 + Note: Because of rounding, figures do not necessarily add to totals. * Includes changes in Treasury currency and cash, f These figures are estimated. X Average for five weeks ended July 31. 61 — 2 — 2 4 - 277 — 130 son 441$ 140$ 126 MONTHLY REVIEW, AUGUST 1963 rate change, and the revision in maximum rates on time deposits and certificates, rates on several other short-term money market instruments were adjusted upward during the month. Rates on ninety-day unendorsed bankers’ acceptances rose by Va per cent to 35/s per cent (bid); rates on prime four- to six-month commercial paper in creased by lA per cent to 3% per cent (offered); and rates on various maturities of sales finance company paper generally rose by Vs per cent. Following the establishment of a 4 per cent ceiling under Regulation Q for member bank time deposits maturing in ninety days to one year, commercial banks generally raised the rates they offer on negotiable time certificates of deposit. New York City banks posted rates of 3% to 3 Vi per cent on three- to sixmonth maturities, 3 V2 to 3% per cent on six-month to oneyear maturities, and 3Vz to 33A per cent on certificates maturing in one year or more. Time certificates of deposit outstanding at the New York City banks rose $146 mil lion over the last two weeks of the month. Market factors absorbed reserves on balance from the last statement period in June through the final statement week in July, as reserve drains—primarily reflecting a con traction in float, an expansion in currency in circulation, and movements through gold and foreign accounts—more than offset a contraction in required reserves and an expan sion in vault cash. System open market operations during the month partially offset the net reserve drains produced by market factors. System outright holdings of Government securities increased on average by $614 million from the last statement period in June through the final statement week in July, while holdings under repurchase agreements declined by $111 million. From Wednesday, June 26, through Wednesday, July 31, System holdings of Govern ment securities maturing in less than one year rose by $667 million, while holdings maturing in more than one year increased by $204 million. T H E G O V E R N M E N T SE C U R IT IE S M A R K E T The Government securities market was pervaded by an atmosphere of caution in the first half of the month, when market participants became increasingly convinced that an increase in the discount rate might soon be announced as part of the official efforts to reduce the balance-ofpayments deficit. The most pronounced reaction occurred in the market for Treasury bills, where offerings from both dealer and investor sources expanded and rates moved sharply higher early in the month. By July 9, the newest three- and six-month issues had risen 24 and 27 basis points from end-of-June levels to 3.23 per cent and 3.33 per cent (bid), respectively, the highest rates in three years. Against this background, the market approached with some wariness the July 9 auction of $2 billion of one-year bills to replace a like amount of bills maturing on July 15. A few days earlier, rates as low as 3.25 per cent had been discussed in the market, but, as the bidding approached, rates as high as 3.65 per cent were reportedly anticipated on the new issue. A good interest developed at the higher rate levels, however, and an average issuing rate of 3.582 per cent was established, up 52 basis points from the rate set in the April auction of $2.5 billion of one-year bills. The market steadied after the special auction, as bank and nonbank demand for outstanding bills began to ex pand and encountered developing scarcities, particularly of short-term maturities. Rates moved lower for several days, rose temporarily on July 17 in response to the dis count rate announcement, and then edged down again through July 25. Bank demand rose further in the easy money market, and nonbank customers also increased their buying once the uncertainties of the anticipated discount rate rise were out of the way. A cautious undertone per sisted, however, with market participants uncertain that lower rate levels— particularly in the ninety-day area— could be sustained in view of the 3 Vi per cent discount rate. This cautious atmosphere, reinforced by a renewed firming in the money market, became increasingly evident in the closing days of the month, and bill rates edged higher in the final days of the period. The newest three-month bill closed the month at 3.27 per cent (bid) as against 2.99 per cent at the end of June, while the newest six-month bill was quoted at 3.40 per cent (bid) as against 3.06 per cent at the close of the preceding month. The market for Government notes and bonds in the first half of July also responded in some degree to expectations of a higher discount rate, but the reaction was compara tively mild as most market observers felt that official actions to deal with the balance of payments through monetary and other financial policies would have their main impact on the short-term area. Indeed, while a very brief decline in prices followed the changes in the discount rate and in Regulation Q ceilings, the market for notes and bonds tended to strengthen over the balance of the month. Various official statements tended to reinforce the market view that System actions were aimed at bolstering short-term rates while not impeding domestic economic expansion. Senti ment was further strengthened by the President’s July 18 re quest for a tax on foreign securities, which the market thought might reduce the supply of securities offered in United States capital markets and, at the same time, might to some extent ease the burden placed on monetary policy by the balance-of-payments problem. Another encouraging FEDERAL RESERVE BANK OF NEW YORK influence in the long-term market was the fact that the Treasury confined its August refunding offering to the short term area, while additional strength was derived from the prospective reinvestment in intermediate-term Treasury issues of the proceeds of a large tax-exempt bond offering. The largest gains centered in selected long-term issues and in the 2V i per cent wartime issues which had given ground earlier in the month. Over the month as a whole, prices of short- and intermediate-term issues ranged from % 2 higher to 2%2 lower, while longer term maturities were 1%2 higher to %2 lower. The market reacted favorably to the Treasury’s offer ing of a fifteen-month 3% per cent note in exchange for the 2 V2 per cent bonds and the 3 Vz per cent certificates maturing on August 15. “Rights”— the maturing issues eligible for conversion— moved up by %4 to %2 in early trading, while the “when-issued” securities were quoted at premium bids of from % 2 to %2, Only a modest amount of trading activity in the refunding issues occurred, however, largely because public holdings of the maturing $6.6 bil lion of securities amounted to only $2.5 billion. O T H E R SE C U R IT IE S M A R K E T S Prices of seasoned corporate and tax-exempt bonds edged moderately lower on limited volume during early July, as investors remained cautious and selective in view of persistent reports of possible increases in short-term 127 interest rates. Dealers were able to make some progress in reducing inventories of recent issues by cutting prices, while new flotations were marketed at slightly higher yields. Following the various official announcements noted above, activity expanded and a firmer tone emerged in both sectors. The corporate sector was buoyed by a seasonal scarcity of new issues and by the market’s feeling that the authorities were largely concerned with boosting short-term rates. At the same time, the tax-exempt sector was encouraged by expectations that commercial bank demand might be stimulated if an expansion in time de posits resulted from the change in Regulation Q. Con sequently, prices of both corporate and tax-exempt bonds moved higher in the latter half of July. Over the month as a whole, the average yield on Moody’s seasoned Aaarated corporate bonds rose by 6 basis points to 4.29 per cent, while the average yield on similarly rated tax-exempt bonds declined by 2 basis points to 3.08 per cent. The total volume of new corporate bonds reaching the market in July amounted to approximately $345 million, compared with $455 million in the preceding month and $220 million in July 1962. New tax-exempt bond flota tions totaled $800 million, as against $990 million in June 1963 and $590 million in July 1962. The Blue List of tax-exempt securities declined by $128 million during the month to $515 million on July 31. New corporate and tax-exempt bond issues floated during the period gen erally were accorded fair to good receptions by investors.
@FedFRASER