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246

MONTHLY REVIEW, DECEMBER 1969

T h e B u sin e ss S i t u a t io n
The business statistics indicate that some further
slowing of the econom y’s rate of growth is under way,
but on a longer view expansionary forces seem still domi­
nant. The consumer appears to have become cautious about
the econom ic outlook: retail buying has been sluggish for
some time now, and recent surveys of spending plans have
found further evidence of consumer restraint. Inventories
at retail have risen relative to sales, and production of
consumer goods— particularly of automobiles— appears to
be in the process of adjustment. Partly for this reason, in­
dustrial production has declined moderately over the past
three months, but strikes have also played a part in reduc­
ing output. A t the same time, home-building activity re­
mains under pressure from tight conditions in the mortgage
market, although the readings 011 new housing starts over
the past few months suggest that the rate of decline may
have slowed as demand for new homes and apartments
has becom e even more intense. On the stronger side, busi­
nessmen’s plant and equipment spending plans indicate
that capital outlays are likely to continue rising at a fast
clip— a finding that is supported both by new survey evi­
dence and the recent strong performance of new orders for
durable goods. Moreover, looking further ahead, the ex­
piration next year of the surtax on personal income
and corporate profits will add stimulus to the economy,
as will the prospective large increase in social security
benefits. Meanwhile, price and cost pressures are as severe
as ever, and expectations of continuing inflation appear
to remain an overriding element in much econom ic deci­
sion making, including collective wage bargaining.
P R O D U C T IO N A N D C O N S T R U C T IO N

The volume of industrial output declined in October for
the third consecutive month. The Federal Reserve Board’s
index of industrial production fell 0.4 percent in October
to a seasonally adjusted level of 173.3 percent of the
1957-59 average (see chart). In the decade of the sixties,




output has fallen three months in a row only twice— during
the mini-recession in 1967 and in the 1960 recession. The
August-October decline amounted to only 0.7 percent,
however, much milder than the downward movement in
either 1960 or 1967. Furthermore, the recent drop has
been partially the result of strikes.
Consumer goods production in October was off V2
percent from September and more than IV2 percent from
July. Scattered strikes in the automobile industry contrib­
uted to this decline, but auto production schedules for the
fourth quarter— originally set below 1968 actual levels—
have been cut back further. On a unit basis, output of new
cars fell from a seasonally adjusted annual rate of 8.7 mil­
lion in September to 8.4 million in October, and in N ovem ­
ber were off an additional IOV2 percent to 7.5 million
units. Production of other consumer goods also eased in
October. After rising in September, output of business
equipment remained strong despite the General Electric
strike. The overall materials index was about unchanged,
and the iron and steel component was also steady at the
September level. Following a very strong first half, iron
and steel output has moved down from its June peak. In­
dustry spokesmen, however, continue to predict strength
through the end of the year, and data on steel ingot pro­
duction indicate that output rose slightly in November.
Total construction activity continues at a high level, with
private nonresidential building providing much of the
strength. Residential construction spending moved higher
in September and October, after declining steadily in the
preceding four months. However, home building remains
under pressure from very tight mortgage market condi­
tions. During the third quarter, private nonfarm housing
starts averaged 1.4 million units at an annual rate, down
from 1.7 million in the first quarter, and the starts
rate fell further in October to 1.3 million units. Moreover,
steady declines in the number of building permits issued
by local authorities suggest continued weakness in home
building over the near term. Permits volume has trended

FEDERAL RESERVE BANK OF NEW YORK

down each month since April, and in October the number
of permits issued was the lowest since early 1967.
I N V E N T O R I E S , O R D E R S , A N D C A P IT A L , S P E N D I N G

Total business inventories1 rose $1.0 billion in Septem­
ber from an upward revised August level, with retail and
manufacturing inventories each increasing $48 0 million.

1T h e D e p a r tm e n t of C om m e rc e has revised u p w a rd its thirdq u a r te r estimate of gross n ational p rod uct ( G N P ) by $0.5 bil­
lion to $942.8 billion. T he estimate fo r inventory accum ulation
was raised fr o m $9.4 billion to $10.7 billion, and consum ption ex­
penditures were revised do w n w ard fro m $581.6 billion to $579.8
billion.




247

For the retail sector, this was the fourth successive month of
large accumulation averaging $445 million per month. Both
durable and nondurable retail stores built up their stocks
in September, with virtually all the increase at durables
stores due to higher inventories held by auto dealers.
Since retail sales have been sluggish overall, the large in­
ventory accumulation recently has been reflected in an
appreciably higher inventory-sales ratio than was the case
earlier in the year. At the manufacturing level, on the
other hand, a substantial jump in shipments in September,
particularly of durable goods, caused the inventory-sales
ratio to fall despite the rapid increase of inventories. As a
result, the ratio for all businesses was about unchanged in
September and remained well within the range prevailing
over the past year or two. The October data for manu­
facturing indicate that inventory building in the sector
was again very large, but shipments also gained and the
inventory-sales ratio rose only slightly.
N ew orders received by manufacturers of durable goods
continued strong through October. During the third
quarter, incoming orders averaged $31.2 billion per month,
up $1.2 billion from the April-June period. In September,
volume advanced sharply to a record $32.1 billion as
machinery and equipment buying surged. As was to be
expected, new durables orders dropped a bit in October
following the strong September performance, but at $31.8
billion they remained above the third-quarter average.
Business capital spending plans for 1970 point to further
substantial growth, but also suggest that price inflation may
absorb much of the planned increase in outlays. The fall
survey by McGraw-Hill found that businessmen plan to
spend 8 percent more on plant and equipment in 1970 than
in 1969. Furthermore, a very recent survey conducted by
the Department of Commerce and the Securities and Ex­
change Commission presents an even stronger picture. The
Commerce-SEC study found that businessmen plan a 13 Vi
percent spending increase (at an annual rate) between the
fourth quarter of this year and the second quarter of 1970.
In the McGraw-Hill survey, however, businessmen re­
ported that they expect prices of plant and equipment to
rise 7 percent in 1970, which implies that purchases in
real terms would be up considerably less than dollar
spending. It should be noted in assessing the plant and
equipment outlook that plans for next year are still some­
what indefinite for many businesses, and that substantial
revision could occur before orders are placed and con­
struction contracts signed. However, the several surveys
conducted consecutively over the past few months clearly
indicate that businessmen have been upping their estimates
of 1970 spending as the year draws closer. Growing fears
of sharply higher capital goods prices, giving rise to a “buy

MONTHLY REVIEW, DECEMBER 1969

248

now” or “build now” attitude, may have played a role in
this upgrading.
On the other hand, if internal funds for financing capital
programs continue under pressure from declining profits,
the extremely tight conditions now prevailing in the fi­
nancial markets may take on a more critical role in influ­
encing capital spending decisions. In this connection,
after-tax corporate profits turned in a second consecutive
decline in the third quarter to a seasonally adjusted annual
rate of $50.0 billion, the lowest level in a year.
E M P L O Y M E N T , P E R S O N A L IN C O M E
A N D R ETA IL S A L E S

In the labor market, signs of a slight easing have
remained numerous, even though the unemployment rate
fell back sharply in November after several months of
increase. From June to November, nonagricultural pay­
roll employment rose only 64.,000 per month, compared
with the exceptionally large average gains of 2 3 8 ,000 in
the first half of the year. While the services and trade sec­
tors registered sizable increases in jobs, construction
payrolls in November remained at June levels and manu­
facturing payrolls were below June levels. Sluggishness
in manufacturing was further evidenced in October and
November by a large seasonally adjusted decline of 0.3
hour in the average workweek of factory workers. Data
from the household survey of employment and the labor
force also point to some letup in the very tight conditions
in the labor market that have prevailed over the last year.
The labor force increased by fully 1 million persons from
June to October on a seasonally adjusted basis, a rate
about half again faster than that of the first half of the
year. During the same period there was a 0.4 million in­
crease in the number of unemployed, bringing the total
count of unemployed to 3.2 million. Thus, in October,
3.9 percent of the labor force was unemployed, down 0.1
percentage point from September but still significantly
higher than the 3.4 percent averaged in the first half of
this year. The sharp November decline in the aggregate
rate to 3 V percent resulted largely from a fall in the labor
2
force, as employment increased only moderately. The
movement was centered in the adult women category,
where the unemployment rate fell 0.5 percentage point to
3.5 percent, equaling the low for the year. The rate for
adult men also dropped to 2.2 percent from 2.4 percent
but still far exceeded the previous low of 1.8 percent set
last December.
Personal income moved up slowly in October, increasing
by only $2.4 billion, the smallest monthly rise in over a
year. Despite an upward revision in the September esti­




mate, the September and October gains in wages and
salaries were substantially smaller than those earlier this
year. Had it not been for the midyear Federal pay increase,
the July change would also have been quite modest. Octo­
ber’s small $1.6 billion rise in wages and salaries reflect­
ed, in part, the decline in the average workweek in manu­
facturing.
Consumer demand continues to show little buoyancy.
In October, according to the revised estimate, retail sales
increased to a new record level of $29.6 billion but were
still only about V percent above the previous peak reached
2
last April. Moreover, the AV2 percent dollar gain in re­
tail sales since last December has probably been associated
with unchanged volume in real terms, since consumer
goods prices have risen at about the same pace. Weak­
ness is particularly apparent in the durables sales figures,
which are below the levels of early this year. Sales of
domestically produced new automobiles rose to an annual
rate of 9 million units in September, but then fell back
in October and November to less than 8 V million units,
2
in line with the slow pace of the months prior to Septem­
ber. Sales of other consumer durables have edged down
further since July, when there was a large drop.
W AGES A N D PR IC E S

The price situation remains critical. Steep advances
continue at wholesale and consumer levels, and wage
pressures appear to be intensifying at a time when pro­
ductivity growth is lagging.
During the third quarter, labor compensation per manhour in manufacturing rose at a seasonally adjusted an­
nual rate of 6.3 percent, well in excess of the IV2 percent
annual rate of productivity increase in the quarter. These
widely divergent trends resulted in a 5 percent growth in the
labor cost per unit of output, on an annual rate basis,
compared with 3 percent in the second quarter. Moreover,
negotiated wage settlements point to mounting cost pres­
sures. In the first nine months of 1969 the median nego­
tiated settlement provided for a 7.4 percent per year gain
in wages and fringe benefits over the life of the contract.
This is well above the median increase of 6.0 percent
per year negotiated in 1968 and more than twice as
great as the median provided by 1965 contracts. N ego­
tiated settlements were larger in nonmanufacturing than in
manufacturing, with construction workers receiving par­
ticularly sizable boosts in wages. The labor contracts of
recent years typically have provided for bigger pay raises
in the first year of the contract than later, and this trend
appears to be continuing. Thus, while the average annual
increase in wages (excluding fringe benefits) under agree­

FEDERAL RESERVE BANK OF NEW YORK

ments signed this year is 6.6 percent over the life of the
contract, the median increase in the first year is a full 8.0
percent. Cost-of-living escalator clauses may, of course,
add to the scheduled raises beyond the first year of many
contracts.
W holesale prices of industrial commodities continue un­
der severe pressure. The index of industrial goods prices
advanced at a sharp 6.4 percent annual rate in October.
A particularly steep price increase in transportation equip­
ment resulted from the higher prices on 1970-m odel cars,
which took effect that m onth.InNovem ber, industrial prices
moved up further at a 4.2 percent annual rate, according
to the revised estimate. Thus, the average annual rate of
rise during the first two months of the fourth quarter was
5.3 percent, compared with a 3^2 percent annual rate in
the third quarter.
Consumer prices continue to climb at excessively high
rates, although there has been some slight moderation
since the first half of the year. From June through October,
the average annual rate of increase of the consumer price
index was 5.2 percent, compared with 6.3 percent in the
first six months of 1969. In October, prices rose at an an­
nual rate of 4.6 percent as food prices fell for the first




249

time in eight months, a largely seasonal phenomenon.
Excluding the food component, prices moved up at a 7.4
percent rate. A major factor in the October rise was the
price increase on domestically produced 1970-m odel cars.

PER SPEC TIV E * 6 9

Each January this Bank publishes Perspective, a
brief, informative review of the performance of the
economy during the preceding year. This booklet is
a layman’s guide to the econom ic highlights of the
year. A more comprehensive treatment is presented
in our Annual Report, available in March.
Perspective ’6 9 will be available without charge
from the Public Information Department, Federal
Reserve Bank of N ew York, 33 Liberty Street, New
York, N .Y . 10045. (A copy will be mailed with the
January 1970 issue of the Monthly Review.)

250

MONTHLY REVIEW, DECEMBER 1969

T h e M o n ey and Bond M a rk e ts in N o vem b er
The rapid drop in prices of intermediate- and long-term
securities, which began in the latter part of October fol­
lowing a rally earlier that month, carried market yields
in many sectors to new highs during November (see
Chart I ) . Vietnam and inflation continued to dominate
market attention, and in large measure the sharp price
declines during the month were fueled by discouragement
over the absence of apparent progress in either area. In
addition, market participants increasingly came to feel
that fiscal restraint was lessening and that the prospect of
any near-term relaxation of monetary restraint was re­
mote. Borrowing demands continued to be very heavy,
and the response of institutional investors to new offer­
ings was often indifferent. Even at progressively higher
offering yields, which reached as much as 60 basis points
above those at the beginning of the month, many corporate
flotations could not be fully placed. When unsold portions
were released from underwriting syndicates to trade in
the secondary market, their yields soared further. New
offerings of tax-exempt issues also moved slowly despite
record-high interest rates, and a considerable volume
of flotations was again held off the market because of
statutory rate ceilings.
Yields on most Treasury bills also climbed sharply
higher to new record levels in November, with many in­
creases ranging from 40 to 50 basis points. The bulk of
the advances took place after midmonth, when auctions of
bills on three successive business days— November 21, 24,
and 2 5 — taxed the capacity of the market. Upward bill
rate pressures also resulted from large demands for new
short-term funds by Federal agencies and tax-exempt bor­
rowers and from sales of Treasury bills by foreign holders.
Only in the short end of the bill market did strong demand
place a damper on the rate advances. Prices of intermediateand long-term Government securities dropped sharply, and
yield increases of from 20 to 30 basis points were not un­
common. In the process, long-term bond yields registered
new record highs, although yields on higher coupon
intermediate-term issues failed to reach the early-October
peaks.
Bank reserve positions continued to be hard pressed




during November, and member bank borrowings re­
mained sizable. Federal funds traded above 9 percent
until late in the period, rates on three-month Euro-dollars
climbed sharply around midmonth, and other short-term
rates were as much as Vi percentage point higher at the
end of November.
BANK RESERVES AN D THE M ONEY M ARKET

Nationwide bank reserve availability remained relatively
unchanged on balance during November. Member banks’
net borrowed reserves averaged around $1 billion and
their average borrowings at the discount window were
$1.2 billion, both about the same as in October. Federal
funds traded generally at 9 percent or above until the
last week of the month, when the effective rate averaged
below 8 V percent. Operating factors absorbed member
2
bank reserves in each of the statement weeks ended in
November (see Table I ). The amount absorbed— over $2
billion— was considerably greater than usually occurs in
November, partly because foreign central banks made
large repayments of previous drawings under the Federal
Reserve swap network. As an offset to the reserve absorp­
tion by market forces, the Federal Reserve injected reserves
through open market operations, primarily by outright
purchases of Treasury securities.
Money center banks, particularly those in New York
City, experienced large deposit outflows early in the month,
and in the week ended on November 12 the net basic
reserve deficit of the forty-six major banks soared to $5.3
billion (see Chart I I ), the highest level of 1969. The
combination of this sw'ing and the aggregate reserve ab­
sorption by market forces placed heavy strains on the
Federal funds market, where rates averaged 9 lA percent
for the first two weeks of the month. That the rate did not
push higher was due in part to recourse by the large banks
to borrowings from Federal Reserve Banks. During the
week of November 12, average borrowings for the fortysix banks reached $646 million (see Table I I ), the highest
volume since the beginning of the year.
The large banks were slow to recoup their deposit losses

FEDERAL RESERVE BANK OF NEW YORK

after midmonth, and until the week of November 26 the
Federal funds rate generally held steady around l per­
A
cent. During that week, reserve deficits were pared con­
siderably and, with a relatively small net shift in reserves
caused by market factors, Federal funds rates eased a bit
to a 7 to 9 percent range.
Most short-term money market rates moved higher over
the month. Although ninety-dav finance company paper
remained around 1 3 percent, bankers’ acceptances and
A
prime four- to six-month dealer-offered commercial paper
each rose Vi point. The three-month Euro-doilar rate was
steady at 10 percent until midmonth, then jumped to
around 11 percent for most of the balance of the period.
In part, demands for Euro-doilar funds were spurred by
the prospect of closer regulation of member banks’ use of
the commercial paper market.1 At the end of October the
volume of bank-related commercial paper outstanding
approximated $3,6 billion, up over $1 billion during the
month and $2.4 billion higher than in June.
Monetary aggregates moved up in November. Accord­
ing to preliminary data, the narrow money supply ex­
panded at about a 5 percent annual rate after several
months of little change, and total member bank deposits
subject to reserve requirements (adjusted to include Euro­
dollar liabilities) advanced 11 percent.

9

T H E G O V E R N M E N T S E C U R I T I E S 8VSARXET
Rates on most Treasury bills recorded their sharpest
rises of the year in November and, in the process, swept
to new all-time high levels. The advances reflected the
spreading belief that monetary policy would have to re­
main restrictive for a protracted period before inflationary
pressures would recede. Heavy Treasury and agency finan­
cing and bill sales by foreign holders also contributed to
pressures in the short-term markets. Only in the very short
bill maturities, where strong demand was in evidence, did
rates fall. Over the month as a whole, one-month bill rates

^On O ctober 29 the Board of G ove rn ors of the Federal Reserve
System annou nced that il had de termined that comm ercial paper
and similar obligations issued by subsidiaries of m e m b e r banks
were, unde r the provisions of Regulations Q and D, subject to
interest-rate limitations and reserve requirem ents to the same
extent as obligations issued directly by m em b e r banks. T h e Board
subsequently announced measures for the a cco m m o dation of an
orderly adjustm ent by m em b er banks to that d eterm ination, i n
an oth e r action on O ctober 29, the Board announced that it was
considering amending the provisions of Regulation Q to apply to
funds received by m em b e r banks from the sale of com m ercial
paper or similar obligations by either the p arent holding co m pan y
or a collateral affiliate of a m e m b e r b a nk in a holding co m p a n y
system.




251

fell 35 basis points to 6.65 percent, while rates on threemonth and one-year bills climbed 52 and 47 basis points,
respectively, to 7.51 percent and 7.50 percent.
Most of the upward rate movement in bills came after
midmonth, when the concentration of bill auctions on
three successive business days, November 21, 24, and 25,
contributed to an abrupt upsurge. Early on Monday, N o­
vember 17, the Treasury announced that it would auction
an additional $2.5 billion of April and June tax anticipa­
tion bills (T A B ’s) on November 21. The announcement
immediately pushed longer bill rates higher and, in the reg­
ular weekly auction held later on Monday, the average
rate of discount on the six-month bill reached a record
7.518 percent, 8 basis points higher than the week before
(see Table III). In the TAB auction four days later the
$1 billion of the April maturity commanded an average
rate of 7.815 percent, and the rate on the $1.5 billion of
the June maturity averaged 7.975 percent— 53 and 77
basis points higher than the rates that had been set for the
same maturities at two auctions during October. These
were the highest auction rates ever recorded for new TAB
issues.
In the span of the four business days from Novem ­
ber 20 through November 25— which encompassed the of­
fering of the T A B ’s and the regular weekly and monthly bill
auctions— rates on issues maturing in three months or
more soared as much as 25 to 35 basis points. These
pressures pushed the new-issue rates to new highs in the
auctions on November 24 and 25. On November 24 the
auction rates for the new three- and six-month issues
averaged 7.476 percent and 8.027 percent, respectively,
up 34 and 51 basis points from the previous week’s auction.
The 8.027 percent rate was the highest ever set on any
maturity in a Treasury bill auction. Then, on November
25, the new nine- and twelve-month bills were auctioned
at average rates of 7.778 percent and 7.592 percent, re­
spectively, 53 and 47 basis points higher than a month
earlier. At the higher rates, considerable investor and
dealer interest materialized in the longer maturing bills.
At the close of the month the bid rate on the new sixmonth bills was 7.81 percent, down 22 basis points from
the November 24 auction rate.
Yields on intermediate- and long-term Treasury coupon
issues also forged higher in November— in many cases to
record highs. The pressures generated by the large volume
of Federal agency and corporate new-issue flotations were
an important contributing factor. In addition, disappoint­
ment over the President's November 3 speech, which was
interpreted in the market to mean that no new develop­
ments in Vietnam were in the offing, prompted dealers to
lighten positions. Yields rose 20 to 35 basis points in light

252

MONTHLY REVIEW, DECEMBER 1969
Chart I

SELECTED INTEREST RATES
September-November 1969
Percent

MONEY MARKET RATES

September

O ctober

BOND MARKET YIELDS

N ovem ber

September

O ctober

Percent

N ovem ber

Note: Data a re shown for business d ays only.
M O N EY MARKET RATES QUOTED-. Bid rates for three-month Eu ro-do llars in London; offering
rates for directly p laced fin an ce com pa n y pap er; the effective rate on Fe d e ra l funds (the
rate most representative of the transactions executed); closing bid rates (quoted in terms
of rate of discount) on newest outstanding three-month and o ne-year Treasury bills.
BO N D MARKET YIELDS Q U O TED : Y ields on new A a a - an d A a -ra te d p ublic utility bonds
(arrows point from underwriting syndicate reoffering yield on a given issu e to market
yield on the same issue im m ediately after it has been released from syndicate restrictions];

trading, with the 4V4 percent bond of 1987-92 reaching a
record 6.86 percent during the month. Although the rise
in rates in the intermediate-term sector was somewhat
sharper than that of long-term, deep-discount bonds,
yields on the high-coupon notes failed to reach the peaks
registered in late September and early October, and yields
on most intermediate-term issues moved lower during the
last few days of November.
O T H E R S E C U R IT IE S M A R K E T S

Yields on new corporate securities moved sharply up­
ward almost without pause during November, leaving a
wake of unsuccessful underwriting ventures as evidence of




d a ily ave ra g e s of yield s on seasoned A a a -ra te d co rporate bonds; d aily ave ra g e s of
y ie ld s on long-term Governm ent securities (bonds due or c a lla b le in ten ye a rs or more)
and on Governm ent securities due in three to five y e a rs , computed on the basis of closing
bid prices; Thursday ave rag e s of y ie ld s on twenty seaso n ed twenty-ye a r tax-exem pt bonds
(carrying M oody's ratings of A a a , A a , A , and Baa).
Sources: Fed eral Reserve Bank of New York, Board of G o vernors of the Fe d e ra l Reserve System,
M oody’s Investors S ervice, and The W e e k ly Bond Buyer.

increasing congestion in the market. The continued mani­
festations of the strength of inflation cast a pall over market
sentiment, and the fact that the President’s November 3
address failed to contain encouraging news about immedi­
ate peace prospects was an additional disappointment.
The heavy volume of financing demands and the un­
wieldy positions of dealers and underwriters discouraged
any rush by institutional investors to initiate new com ­
mitments. Utility offerings, which have tended to glut the
market of late, were again under especially heavy pressure.
The feature of the early part of the month was a $125
million offering on November 12 by South Central Bell
Telephone Company. The issue carried an 8 V percent
2
coupon and yielded investors 8.45 percent, 20 basis points

253

FEDERAL RESERVE BANK OF NEW YORK

above the previous record high for a Bell System offering
set in September. Initial investor interest was light, how­
ever, and when the unsold portion was released from syn­
dicate price restrictions on November 18, the yield soared
as high as 8.67 percent in early secondary market trading.
Only when new-issue yields approached the 9 percent
level did investor interest quicken, but even then recep­
tions were mixed. Two finance subsidiaries of large retail
firms each offered $50 million of A-rated debentures at
9 percent, and sales were brisk. In contrast, on November
19 a very weak reception was accorded another utility,
Pacific Gas and Electric Company, which offered $80
million of 9 percent mortgage bonds to yield 8.81 percent,
a new record for Aa-rated issues. The next day, however,
a quick sellout greeted the $50 million issue of Boston
Edison Company, offered with a 9 percent coupon to yield
8.90 percent to investors. While much of the interest was
reported to be from individuals, som e institutional support
again emerged. Although this response contributed to
some added sales of the Pacific Gas and Electric offering,
when the issue was finally released from pricing restric­
tions after the month end, the yield jumped 23 basis points.
The generally unreceptive condition of the market, to
which a succession of syndicate terminations testified,
prompted Commonwealth Edison to defer a $100 million
bond offering, which had been scheduled for November
25. A t the month end, demand pressures remained very
strong and the beginning of a seasonal slackening in the
volume of scheduled offerings afforded little relief to the
market. In the last week of November the four-week vis­
ible supply of forthcoming corporate financings approxi­
mated $1.3 billion.
Federal agency financings continued to be sizable, and
new offerings provided an upward thrust to rates in both
short- and long-term markets. The highlight of the month
was a $1.1 billion financing on November 13 by the Fed­
eral Hom e Loan Banks. The issue, which raised $600
million in new funds, consisted of an 8% percent tenmonth note, an 8.20 percent 2 Va-year bond, and an 8
percent five-year bond. The offering encountered investor
resistance, in part because of the overhang of other im­
minent agency flotations, and at the close of the period
bid-price discounts were %2,
and 1%2> respectively.
In the tax-exempt market, statutory interest-rate ceil­
ings, which have restricted new offerings throughout much
of the year, again curtailed activity. A large volume of
new issues carried short maturities as a means of tapping
a less congested sector, where financing was less costly
and rate ceilings less constraining. Indeed, some issues
were sold at rates lower than earlier in the fall. In con­
trast, long-term bonds with serial maturities encountered




investor resistance which resulted in higher costs and, in
some cases, cancellations or postponements.
On November 6, for the second consecutive occasion,
a 6 percent interest-rate ceiling impeded the flotation of
tax-exempt Federally guaranteed housing bonds through
the Federal Housing Assistance Administration. Only
about $33 million of an offering totaling $139 million was
awarded to bidders, and the issue cost averaged 5.996
percent— a record. However, short-term Federally guar­
anteed notes issued under the auspices of the Department
of Housing and Urban Development (H U D ) fared con­
siderably better than the longer term housing bonds. On
November 12, local renewal agencies marketed almost
$330 million of project notes having an average maturity
of about 9 V months at an average interest rate of 5.49
2
percent. This cost was about 10 basis points lower than
that in an October financing. H U D announced that no
placement fees had been paid, although such an option
is open in the event borrowing costs exceed the 6 percent
interest-rate ceiling generally applicable on these notes.
In another financing on November 18, local public hous­
ing authorities sold almost $300 million of project notes

Chart II

BASIC RESERVE POSITION OF
M A JO R MONEY MARKET BANKS
Billions of dollars

Billions of dollars

Note: Calculation of the basic reserve position is illustrated in Table ii.

MONTHLY REVIEW, DECEMBER 1969

251
Table I

II

Table

FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, NOVEMBER 1969

RESERVE POSITIONS OF MAJOR RESERVE CITY BANKS
NOVEMBER 1969

In millions of dollars; ( 4 ) denotes increase
(—) decrease in excess reserves

In millions of dollars
Daily averages— week ended on

Nov.

Nov.

26

— 480

273
729
198

—
4—
—
—
—

174
19

52
283
-

Total “ market" factors ...........................

1,002

4- 358
- - 722
— 197
4- 67
4 25
— 191
— 424

— 294
4 . 597
4- 94

266
104
34

1

—

10

— 557
— 419

333
4

— 774 | — 364

- 243

19

Nov. 26

Eight banks in New York City

" M a r k e t ” factors

Member bank required reserves ..................
Operating transactions (subtotal) .............
Federal Reserve float .................................
Treasury operations* ......................................
Gold and foreign account ...........................
Currency outside banks ...............................
Other Federal Reserve accounts (n e t)t--

Nov.
26

Nov.

12

Nov.

19

12

5

Nov.

Nov.
5

Net
changes

Factors
Nov.

Average of
four weeks
ended on

Factors affecting
basic reserve positions

Changes in daily averagesweek ended on

—

372

— 2 ,0 1 1

4- 306
—

47

—
5
— 1,133
— 1,130

96
121

1,583

224

-1 ,8 5 4

670
3

54

79
350

199
1.731
1,532

Reserve excess or deficiency (— )* . . .
Less borrowings from Reserve Ranks ,
Less net interbank Federal funds
purchases or sales (— ) .............................
Gross purchases ...............................
Gross sales ...............................................
Equals net basic reserve surplus
or deficit ( — ) ...............................................
Net loans to Government
securities dealers ........................................
Net carry-over, excess or deficit (— ) t

614
70

-

120

1,396
2,519
1,124

2,200

937
2,051

1,752
1,184

1.114

1,002

-

528
60

503

22

579
37

31
39 —
389 I
438

387

-2 ,3 8 3

Thirty-eight banks outside New York City
Direct Federal Reserve credit
transactions

4-1,075 ! 4 . 381 j 4 - 735

Open market operations (subtotal)
Outright holdings:
Government securities

:
.............................! 4

Bankers’ acceptances ............................... - f
Federal agency obligations ........... .. . J 4 Member bank borrowings ............................... 4
Other loans, discounts, and advances.........
Total

^

*i

261

— 194;

7i —
1

—

4-2,352

+

§

67

—
4
8 ; — 10
83
— 172

4 - 135

4

4 298 I - f 563

4 304

4-2,384

18 • —
—

................................................................ 4 1 .2 1 9

Excess reserves ..................................................... 4

^

4-2,360

-4 164
4- 5

j
I
7^8 j 4 - 585 ! 4 ^15

’j

Backers' acceptances .............................
Repurchase agreements:
;
Government securities ...................... .... • i 4 -

4 - 169

217

4*

57
296

2,780
4,346
1,566

3,213
5.164
1,951

2,753
4.820
2,067

2,196
4,130
1,935

2,736
4,615
1.880

— 3,152

—3,452

—3,181

— 2,665

— 3,113

178

138
43

161
37

216
14

173

6

—

10

53
425

22

24

+

55 | — 211

Reserve excess or deflciencv (— )* . . . . .
Less borrowings from Reserve Banks ,.
Less net interbank Federal funds
purchases or sales (— ) ...............................
Gross purchases ...................................
Gross sales ...................................................
Equals net basic reserve surplus
or deficit (— ) ..................................... ..
Net loans to Government
securities dealers ............................................
N et carry-over, excess or deficit (— ) t - -

N ote: Because of rounding, figures do not necessarily add to totals.
* Reserves held after all adjustm ents applicable to the reporting
\

'equircd

Not reflected in data above.

D aily average levels

Table III
AVERAGE ISSUING RATES*
vT REGULAR TREASURY BILL AUCTIONS

Member bank:
27,662
27,365
297
1 1,327
1,030
Free, or net borrowed <~ •), reserves........... - —
| 26,335
52
Net carry-over, excess or deficit

27,696
■ 27,342
354
: 1,244
! — 890
26.45?
J
181

27,965
27,822
.
143
; 1,072
— 929
■ 26,893
i
211

i

Total reserves, including vault cash .........
Required reserves ...........

!

27.547
27,464
83
1,207
-1 .1 2 4
26,340
108

27,7171
27.498J
2191
1 , 212 +
— 9!>3t
26,505*

In percent

Weekly auction dates— November 1 96 5
Maturities

138J

Nov.

i

Chamjes in Wednesday levels

Three-m onth.
Six-m onth. ...

System Account holdings of Government
securities maturing in :
Less than one year
More than one year

6.998
7.281

N
ov.
17

10

\ 157
'.435

Nov.
24

7.141
7.518

Nov,

7.476
8.027

Monthly auction dates— September-November 1969
4-1.471 |
—
; 1

|

" ~j

43 | 4-1.647
—

1 - 1 .1 4 1

—

_

!
—

■

■

Not e: 1’“cause of rounding, figures do not necessarily add to totals.

95

4-3,066
— 1 .H 1

95

Sent
23

4 -1.9 25
N ine-m onlh.
One-year. . .

Oct.
28

Nov.
25

7.357
7.350

7.244
7.127

7.778
7.592

* Includes changes in Treasury currency and cash.

1 Inem des assets denominated in foreign currencies.
+ Average for four weeks ended on November 20.
§ Not reflected in data above.




nterest rates on bills are quoted in terms of a 360-day year, with the discounts from
par as the return on the face amount of the bills payable at maturity. Bond yield
equivalents, related to the am ount actually invested, would be slightly higher.

FEDERAL RESERVE BANK OF NEW YORK

with an average maturity of 6 V months at an average rate
2
of 5.36 percent. This cost was almost 50 basis points below
that in October.
N ot only did interest-rate ceilings block some flotations,
but one recently raised ceiling proved barely high enough
to allow a sale. The instance in question involved the Penn­
sylvania State Public School Building Authority, which in
October had its ceiling raised from 6 percent to 7 percent.
An offering of $53 million by the Authority was awarded
at a net interest cost of 6.996 percent and was moderately
well received by investors at yields ranging from 5.60 per­
cent in 1972 to 7 percent in 2008.

The Blue List of dealer-advertised inventories advanced
in November from the already sizable levels of October.
At midmonth a new record 1969 high of $632 million
was registered, and inventories were usually above $550
million throughout the period. Moreover, the four-week
visible supply of forthcoming new financings generally ex­
ceeded $900 million until late in the month. Both fur­
nished clear evidence of the congestion of the tax-exempt
sector— a condition also reflected by The Weekly Bond
Buyer's index of twenty municipal bond yields, which
closed November at 6.58 percent, up 45 basis points over
the month.

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255

256

MONTHLY REVIEW, DECEMBER 1969

R e ce n t Econ o m ic P o licy in Industrial C o u n tries A b ro ad
The two most serious econom ic policy problems con­
fronting industrial countries over the past year or so have
been large international payments imbalances and acceler­
ating inflationary trends. Major steps taken this year to
resolve these difficulties have included the French devalua­
tion in August, the German revaluation in October, and
a gradual swing to monetary and fiscal restraint in all
the major countries. While it is too soon to judge the ulti­
mate results of these measures, exchange markets have
recently been more orderly. The pattern of international
payments has also benefited from a British swing into
surplus after a period of heavy payments deficits. This
welcom e change stems in part from the 1967 sterling
devaluation and a subsequent policy of increasingly severe
econom ic restraint. On the other hand, the massive
balance-of-payments deficit of the United States continues
to be a major concern.
The external payments imbalances which the recent cur­
rency readjustments were designed to reduce have, of
course, been rooted in the inevitable differences in eco­
nomic conditions among the major industrial nations and
in the varying priorities they have assigned to domestic
policy objectives. In November 1968, when payments disequilibria were large and currency speculation intense, the
strength of the mark reflected Germany’s successful pursuit
of price stability in the face of more inflationary conditions
elsewhere. In France, on the other hand, massive labor
disturbances in the spring of 1968 had resulted in large
wage increases and other expansionary measures. Strong
inflationary pressures in the United States were being re­
flected in current-account balance-of-payments deteriora­
tion, and rising consumer demand in Britain was slowing
the realization of gains from that country’s 1967 devalua­
tion. (The trends in consumer prices and in the currentaccount balance of payments of the major countries are
shown in Charts I and II.)
Following the Bonn conference of November 1968, all
industrial countries took some measures to reduce pay­
ments imbalances. France and Germany adjusted their
taxes to produce the effect of a small devaluation and
revaluation, respectively, and the United Kingdom added




a temporary boost to the import price effects of the
1967 sterling devaluation by requiring interest-free de­
posits on imports of manufactures. Further, while all
countries turned toward economic restraint late in 1968
and in 1969, those where inflationary pressures had been
strongest— notably the United States, Canada, France,
and the United Kingdom— applied especially severe fiscal
and monetary restraints. However, m ost countries found
their monetary policy complicated by flows of funds
through the Euro-dollar market. On the one hand,
intensified monetary restraint in the United States caused
large American banks to draw heavily on Euro-dollars as a
source of funds to lend in the United States. On the other
hand, there were intermittent but heavy speculative flows
into German marks and out of French francs and other
currencies. Both flows tended to raise Euro-dollar rates
to levels higher than believed desirable in any national
credit market. Countries losing funds acted to protect their
domestic financial conditions and their foreign exchange
reserves by direct control of international capital flows.
Germany, by contrast, confronted with unwelcome capital
inflows, took steps to discourage or rechannel them or,
failing that, to offset their inflationary impact.
The recent French and German parity adjustments will,
of course, contribute more substantially than the earlier
measures could to reducing current-account balance-ofpayments disequilibrium of those countries and of their
trading partners. The adjustments have also reversed the
disturbing speculative capital flows caused by anticipation
of these moves. However, the accelerating pace of infla­
tion in many countries during 1969 continues to retard
international payments adjustment. Hence, most coun­
tries are maintaining or strengthening their policies of eco­
nomic restraint.
GERMANY

At the time of the November 1968 currency crisis,
German economic policy faced a dilemma. There was
a need, on the one hand, for domestic restraint to con­
tain incipient inflationary pressures and, on the other,

FEDERAL RESERVE BANK OF NEW YORK

Ch art I

CONSUMER PRICES IN M AJO R COUNTRIES
1963=100

Note.- The countries ore ranked from top to bottom by the size of their overall
price increases since the beginning of 1967.
Sources: O rganization for Economic Cooperation and Development;

for ease to encourage capital outflows that would offset
Germany’s very large and persistent current-account sur­
plus. It was widely assumed that this dilemma, arising
from Germany’s understandable reluctance to accept the
degree of inflation prevalent in other countries, would
be resolved by a mark revaluation. A t that time, Germany
was rounding out a year of industrial growth unequaled
since 1951— an expansion spurred by rapidly rising ex­
ports (especially to the United States) and by the after­
effects of expansionary monetary and fiscal measures un­
dertaken in 1967 to overcome the 1966-67 slump. As
output pressed against capital and labor resources, price
and wage increases did accelerate but remained less rapid
than in most other countries, and the current-account




257

surplus widened. The January 1968 switch from a turn­
over to a value-added tax system may also have con­
tributed to this increased surplus. The change had little
effect on export prices but gave rise to substantially
increased border taxes on imports. Official efforts to off­
set the current-account surplus by encouraging foreign
bond flotations were frustrated by offsetting short-term
capital inflows arising from both cautionary leads and lags
in current payments and outright currency speculation.
Although the German government decided against a fullfledged revaluation in 1968, it did reduce for a limited
period of time the export rebates and border taxes associ­
ated with the value-added tax. The authorities hoped this
de facto revaluation of about 3 percent for merchandise
trade would significantly reduce the current-account sur­
plus. But, since this process clearly required time, it re­
mained necessary to balance the growing need for domes­
tic restraint against the continuing need for large capital
outflows. A moderate shift toward fiscal restraint served
both domestic restraint and balance-of-payments purposes.
The deferral and subsequent cancellation of about 2 per­
cent of Federal expenditures that had been planned for
1969, an acceleration of corporate tax payments, and
rising tax yields served to swing the cash accounts of the
Federal and provincial governments (with whom tax re­
ceipts are shared) from deficit to surplus. These changes
tended to reduce domestic demand for goods and services
and, at the same time, made more room for foreign bor­
rowing in German capital markets. The authorities also
allowed domestic money and capital markets to be tight­
ened by the unwinding of speculative mark positions and
by a record volume of mark-denominated foreign bond
issues early in 1969, and supplemented these influences in
February by discontinuing open market support for long­
term government bonds. By this past April, however, the
rate of foreign bond issues had becom e so heavy that the
semiofficial West German Capital Committee announced
a temporary suspension of foreign issues and plans for
slowing the future pace of such borrowing.
At about the same time, monetary policy was further
complicated by another wave of massive short-term capi­
tal inflows spurred by doubts regarding the effectiveness of
Germany’s border tax adjustments in reducing its currentaccount surplus and reports that mark revaluation was
under official consideration. As in November, the German
Federal Bank attempted to discourage and deflect these
inflows, but with indifferent success. Requirements that
100 percent reserves be held against increases in foreignowned bank deposits tended to shift speculative inflows
to nonbank channels. Providing German banks with
forward cover at favorable rates encouraged bank place­

258

MONTHLY REVIEW, DECEMBER 1969

ments abroad but may also have facilitated further capital
inflows. (These swaps were sometimes suspended as in
M ay.) Firm official rejection of the revaluation idea tem ­
porarily ended capital inflows in May, but the flows were
only partially reversed in subsequent months. T o reduce
the inflationary impact of short-term capital inflows, the
central bank raised deposit reserve requirements at banks
and other financial institutions in June and again in
August, and reduced rediscount quotas in July. It also
raised the official discount rate—-to 4 percent (from 3
percent) in April, then to 5 percent in June, and to 6 per­
cent in September. As a result, the wide gap between
short-term interest rates in Germany and those prevailing
in other money markets in 1968 and early 1969 was re­
duced to small proportions (except vis-a-vis Euro-dollar
ra te s). However, the differential between yields on markdenominated and dollar-denominated Euro-bonds was
little changed.
Despite these moves toward monetary restraint, bank
liquidity continued ample, and money and credit tended
to grow about as rapidly as the year before. As the strain
on economic resources intensified, price and wage in­
creases accelerated. Thus it seemed increasingly unlikely
that Germany would regain the desired control over do­
mestic monetary and price developments until the external
value of the mark had been officially readjusted, or until
internal inflation had eliminated the necessity for such a
readjustment. In September, it was decided to allow the
mark to “ f lo a t1 until after the establishment of a new gov­
ernment. Then, on October 26, the mark was officially re­
valued by 9.3 percent. As the outflow of speculative funds
gathered momentum thereafter, the Germ an Federal Bank
reduced reserve requirements in November, and again in
December, to steady the German financial markets. Very
recently the central bank also raised sharply, from IV 2
percent to 9 percent, its rate for loans against government
securities and requested banks to exercise restraint in
lending at home and abroad as well as to repatriate m a ­
turing foreign placements. To protect German farmers
from lower price imports, a border tax, now 8V2 per­
cent, has been applied to agricultural imports since the
mark rate was temporarily floated. This arrangement is
expected to be superseded soon by a subsidy for G erm an
farmers to which the European Economic Community
( E E C ) would contribute.

FRANCE
At the end of 1968, France found itself headed for
the inflationary end of the international price spectrum
after several years on middle ground. The proximate cause




was the Grenelle wage agreement, aimed at restoring
industrial peace after the crippling student and labor dis­
turbances of May and June. This agreement resulted in
a 16 percent increase in wage rates during 1968. Faced
with such a dramatic wage explosion, the official strategy
for the period through November 1968 was to apply strong
fiscal and monetary stimulus to push the economy toward
fuller utilization of plant and labor resources than had pre­
vailed early in the year. Improved price surveillance, tem­
porary import quotas, export subsidies, and exchange
controls (briefly) were employed to minimize transitional
strains. It was hoped that the productivity gains result­
ing from rapid economic expansion would largely offset
the rise in wages, thus preserving the real value of wage
concessions and at the same time protecting France’s trade
position. The authorities expected to have taken up most
of the slack in the economy by the end of 1968, at which
time withdrawal of policy stimulus and protection was to
result in a self-sustained and slower rate of expansion.
At the time of the Bonn conference, the effects of
F ra n c e ’s expansionary policy were beginning to emerge.
Bank credits were about 25 percent higher than a year
earlier, and industrial output was up 13 percent. M o re­
over, labor productivity in manufacturing was 15 percent
higher than a year earlier, nearly sufficient to offset the 16
percent wage increases granted for 1968. However, the
close to 5 percent rise in consumer and export prices d ur­
ing 1968 placed France in the forefront of inflationary
countries, and the trade account was deteriorating as im­
ports spurted ahead of exports. Then, just as France was
completing the initial expansionary phase of her original
program, the early N ovember speculative rush into G er­
man marks, exacerbated by fears regarding the political
and economic outlook for France, made serious inroads on
F rance’s international reserves.
Folio wing the Bonn conference, the French govern­
ment decided against a devaluation. However, tax changes
were made which had a total effect on trade equivalent to
a roughly 2 percent devaluation, and foreign exchange
controls on capital transactions and travel were reimposed
in tighter form. In addition, the authorities moved strongly
toward monetary and fiscal restraint. Minimum reserve
requirements and liquidity ratios were raised, discount
quotas were reduced, and credit ceilings were imposed
which, in effect, limited short-term bank credit to the
private sector to temporary accommodation of seasonal
needs. Also, the official discount rate was raised from 5
percent to 6 percent. Fiscal policy was adjusted by re­
ducing subsidies to the nationalized gas, electric, and rail­
road industries and by increases in the value-added tax.
In the hope that private investment would be maintained

FEDERAL RESERVE BANK OF NEW YORK

despite the reduced rate of economic expansion, invest­
ment incentives were left intact.
During the first seven months of 1969, the French
economy failed to respond to fiscal and monetary restraint
as quickly as it had earlier to expansionary policies. Bank
credit rose almost as rapidly as in 1968, partly because
bank financing of the government— and others exempt
from the credit ceilings— was heavier than anticipated,
but the credit ceilings themselves were also breached.
Further, the investment tax incentive had proved unex­
pectedly potent. Although initial labor-management dis­
cussions in March regarding a second nationwide wage
adjustment had proved inconclusive, labor shortages were
forcing locally negotiated wage increases running close to
a 10 percent annual rate. Moreover, retail sales— espe­
cially of durable goods— continued to rise. Given these ex­
pansionary developments, imports continued upward and
the trade deficit widened somewhat. In May, therefore,
the authorities initiated a new series of restraint measures
by tightening consumer credit regulations. In June, all
bank credit ceilings were extended and the official discount
rate was increased from 6 percent to 7 percent. In July, the
government established a countercyclical investment fund
which, in effect, postponed part of its expenditures until
such time as the economy required a fiscal stimulus.
Early in August, following Mr. Pompidou’s election as
president, the new government devalued the franc by
11.1 percent. A month later it outlined the major features
of its overall economic strategy. It intensified restraint on
consumption by further tightening instalment credit re­
strictions for a five-month period and by offering new
tax incentives to purchasers of life insurance and long­
term fixed-interest securities. Previously revised bank
credit ceilings were reinforced by tying the banks’ impor­
tant rediscount privilege to ceiling compliance. In October
the official discount rate was raised to 8 percent. Although
the brunt of the restrictive burden was borne by monetary
policy, the government also impounded more public invest­
ment authorizations in the countercyclical fund, and— de­
parting from previous policy— moved to dampen private
investment by terminating the special tax incentive three
months early in September. But devaluation was the key­
stone of the overall strategy. It was adopted in the hope
that it would permit the shift of resources, required to pro­
duce external balance, to be made with less sacrifice of
economic growth and, hence, with less ultimate damage to
the French standard of living than would otherwise be the
case. Although contributing to attainment of general
balance-of-payments equilibrium, the French devaluation
did upset the EEC policy of common agricultural prices,
which were fixed in terms of a common unit of account.




259

CURRENT-ACCOUNT BALANCE OF PAYMENTS OF
M A JO R INDUSTRIAL COUNTRIES*

r

500

p

'

0
-5 0 0

M illio n s of dollars

1

[ Ger many

1000
7^1

!

....._ J ______ J_______L

.1 ...... 1 ______J _

1000

ml

Pm

500

1

-5 0 0

I

1000

Japan

P

m

500

__,

0

! .....1 .
..

!

-5 0 0
500

II 1

United Kingdom

1§

0

P I

....J .... L. _
..L

-5 0 0

1000

i .J

KS3

-

...

1 J

PI

KSSSl ^

500

!

1

1■

1

1

1
1 Pil it H

Italy

"

n

^

[._..

-5 0 0
500

1

-5 0 0
1000

-

500

M -

L
.

-5 0 0
500

.

1

...1 _J_

_

J

_
1__ I_ L . .. -5 0 0
500

Netherlands
l—

LA - L i\\\;
-I |

1__L . 1
_

.
500

i----1

-1

J.

1

!

1

1

Belgium

0 k\Vvl
-5 0 0

l v v vt ....... .

1

500

1

r-r-T -t
-T

L

.....

!

-

1I

....

..L.J..._L_
.

^ ^ i^s ^
... 1 ..J_...L _

500

_ -5 0 0

500

Switzerland^

-5 0 0

-5 0 0
500

_ L ...1___L

1

.

1

!

500
500

C anada
H
I

-5 0 0

f

1M

'

............ E

j ______ i

500

J

i

m

:1

I...

1 _ ! _______
.._

i

1

!

I

0

"

'^ 3

1

-5 0 0
500

ES3

"

!

-5 0 0

I

500

France^

0
-5 0 0

I-

-5 0 0
500

Sweden

1

1

!

1967

!

1

X

1968

^ Ex cep t for France and Switzerland.
^ Trade account only; imports CiF, exports FOB.
^ Trade account only; imports FOB, exports FOB.
Source: National statistics.

S,
1969

,

260

MONTHLY REVIEW, DECEMBER 1969

To avoid undue stimulation to French agriculture and
heavier subsidy costs for its EEC partners, France was
exempt from the uniform price requirement for twentyeight months and was required to tax exports and sub­
sidize imports in order to offset the difference between
French and other EEC agricultural prices.
U N IT E D K IN G D O M

By the end of 1968, a full year after the 14.3 percent
sterling devaluation, the hoped-for balance-of-payments
surplus had not yet appeared. Prior to devaluation the
United Kingdom had suffered chronic payments deficits,
partly as the result of a poor price and productivity
record relative to her major competitors, especially Ger­
many. This tendency had forced Britain to choose be­
tween a slow rate of growth, in the interests of external
balance, and the payments deficits which attended strong
econom ic growth. The government had expected that de­
valuation would resolve the dilemma and permit modest
econom ic growth to coexist with a developing balance-ofpayments surplus, needed to repay indebtedness incurred
to finance previous deficits. The strategy, which was ex­
pected to produce a surplus by the second half of 1968,
was outlined in the March budget presentation. The plan
called for a maximum 4 percent growth in gross domestic
product (G D P ) from the second half of 1967 to the
second half of 1968 and for a resource shift from con­
sumption to exports and investment. Restrictive fiscal,
monetary, and incomes policies were undertaken to rein­
force devaluation by cutting back consumption. While the
GDP target was achieved in 1968, the external basic
balance was still slightly in deficit at the year-end. A major
difficulty had been that domestic consumption had in­
creased by 1 percent, rather than, declining by 2 percent
as planned, and had pulled in extra imports. In retrospect,
the authorities recognized that sizable monetary expan­
sion, despite ceilings on certain bank loans, had facilitated
the breaching of the incomes policy and assisted consumer
resistance to fiscal restraint.
In the light of the 1968 experience, a modified strategy
was worked out between November 1968 and April 1969,
when objectives for the year were set out in the budget
message. Between the second halves of 1968 and 1969,
real GDP growth was to be no more than 2.6 percent,
real public and private consumption (taken together)
were to be roughly unchanged, and the increase in invest­
ment was to be pulled back to less than 3 percent. Real
imports were to be held level and, with rising exports,
a current-account balance-of-payments surplus was ex­
pected to emerge in the second half of 1969. Measures




to implement the new strategy took effect in the NovemberApril period. To curb consumer expenditures, consumer
credit regulations were tightened and purchase taxes on
alcohol, gasoline, tobacco, and a broad range of durable
goods were increased by 10 percent in November 1968.
The April budget also raised the “selective employment
tax” (which hits the consumers’ services sector hardest).
To reduce domestic investment incentives, special tax con­
cessions were allowed to lapse in December 1968, and the
new budget included an increase in corporate taxes. Attack­
ing imports directly, a six-month interest-free deposit with
the government, equal to 50 percent of the value of their
imports, was required of importers of manufactures begin­
ning in December 1968; the interest to be thus forfeited
probably added 1 to 2 percent to the cost of imports.
More generally, the government aims— by means of
fiscal, debt management, and monetary policy— to limit
“domestic credit expansion” to no more than $960 million
equivalent in the financial year ending in March 1970,
compared with the $2.8 billion increase in the preceding
year. This total includes credit extended to public and pri­
vate borrowers by the domestic banking sector and foreign
lending to the public sector (including public corpora­
tions). Fiscal policy— based on relatively stable expendi­
tures and a rise in tax rates and tax yields— is designed
to permit a sizable reduction of government debt, includ­
ing that held by banks. Tax exemptions have been granted
on capital gains from the sale of government bonds, with
the intent of encouraging government debt ownership by
nonbank investors. As for monetary policy, bank credit
ceilings have been set in order to reduce loans to the
private sector, and the buildup of import deposits in early
1969 absorbed substantial liquidity. (The deposit require­
ment has recently been renewed until the end of 1970 but
at the reduced rat eof 40 percent of import value). The
official discount rate has been maintained at 8 percent
since February.
On the basis of fairly complete information about the
first half of 1969, and preliminary indications for the
second half, it appears that the British economy is, in
the main, holding to the course plotted. “Dom estic credit
expansion” is running well below the intended limit, with
a sharper than planned reduction in government borrow­
ing more than offsetting continued breaching of credit
ceilings. Consumption and investment are probably close
to planned levels, and output is rising modestly. The tend­
ency of exports to hold their own in rapidly expanding
world markets (in contrast to many years of declining shares
before devaluation), and the stability of imports in 1969,
helped to swing the basic balance of payments to a $686
million surplus in the second and third quarters of 1969,

FEDERAL RESERVE BANK OF NEW YORK

taken together. This is close to the $72 0 million balanceof-payments surplus originally hoped for in the year ending
in March 1970. A t present, therefore, the United Kingdom
appears to be achieving modest growth and a balance-ofpayments surplus.
ITA LY

Despite Italy’s expansionary monetary and fiscal policies
and strongly rising exports in 1968, domestic demand
and imports continued sluggish through much of that year
and price increases remained moderate. Although the
current-account surplus had increased, political uncer­
tainties stimulated a capital outflow so large that the
financing of domestic investment may have suffered. Fur­
thermore, uneven regional growth and continued unem­
ployment were contributing to growing social unrest. In
view of all of these factors, Italy’s econom ic policy re­
mained predominantly expansionary well into 1969. Con­
siderable reliance has been placed on increases in govern­
ment expenditures which have recently been directed
largely to raising old-age pensions and the wages of gov­
ernment workers. The Bank of Italy continued to en­
courage domestic credit expansion but, at the same time,
took steps to force repatriation of bank funds and dis­
courage capital outflows. In March, commercial banks
were requested to bring their net foreign position into bal­
ance by the end of June, while their participation in in­
ternational bond consortia was temporarily suspended.
The purchase of foreign mutual fund shares was restricted.
T o reduce the differential between domestic and foreign
interest rates, the Bank of Italy withdrew support from
the treasury bill market.
During the early months of 1969, domestic consumption
responded strongly to expansionary policies, price and
wage increases accelerated, and there was some reduction
in Italy’s current-account surplus. In view of developing
inflationary pressures and continued heavy capital outflow,
the Bank of Italy in July raised from 3 Vi percent to 5
percent its official penalty discount rate for banks whose
average rediscounting during the preceding six months
exceeded 5 percent of their minimum reserve require­
ments. On August 14 the basic discount rate for banks
not subject to this penalty was raised from 3 V2 percent
to 4 percent, the first change since June 1958.
OTHER EU R O PE A N C O U N T R IE S

During 1968, strongly rising demand in the larger in­
dustrial countries had been rapidly transmitted to the
smaller industrial countries of Europe— the Netherlands,




261

Belgium, Sweden, and Switzerland. By the end of the year,
plant capacity was becoming strained, labor shortages were
emerging, and price and wage increases were accelerating.
As restrictive monetary policies initiated in the larger
countries late in 1968 began to affect the money markets
of the smaller industrial countries, they also moved toward
monetary restraint. Thus, official discount rates were
gradually shifted upward, but the timing and the size of
the rate changes were, of course, influenced by differing
domestic considerations. The National Bank of Belgium
made an upward discount rate adjustment in December
1968 and again in March, May, July, and September 1969
for a total increase of 3 3 percentage points to IV2 percent.
A
The Netherlands Bank raised its discount rate in Decem ­
ber, April, and August 1969 for a total of IV2 percentage
points to 6 percent. Sweden, whose business cycle lagged
somewhat behind that of other countries, moved in Feb­
ruary and July to raise its discount rate 2 percentage points
to 7 percent. In Switzerland, the authorities permitted the
interest rate on three-month commercial bank deposits
to move upward by 1 percentage point to 5 percent in the
first six months of this year, but did not adjust the official
discount rate until September, when it was increased by
% percentage point to 3% percent. (This was the first
change in the official discount rate since the V percentage
2
point reduction in July 1967.)
Since none of the monetary authorities of these smaller
European countries were prepared to accept a level of
interest rates as high as that in the Euro-doilar market,
measures were taken to pull back short-term capital previ­
ously placed in that market. In April, the Belgian central
bank requested commercial banks to cut nearly in half by
the end of June important components of their foreign ex­
change position. In August, the central bank abandoned
its preferential discount rate for certain export paper and
tightened foreign exchange regulations. A lso, the Nether­
lands Bank, in July, obtained a voluntary agreement from
commercial banks that they would cut back their foreign
exchange position during the second half of the year. In
Sweden, capital flows were already subject to exchange
controls, but these controls were applied more strictly in
1969 than earlier.
Introducing an element of credit rationing, the monetary
authorities also established a ceiling on the permissible
expansion of bank credits to the private sector. The
Netherlands Bank obtained agreements from the commer­
cial and agricultural credit banks which limited their 1969
short-term credit expansion to 10 percent. The National
Bank of Belgium imposed ceilings on both the rediscount
privileges it extends to commercial banks and the permis­
sible volume of commercial bank loans outstanding. Swe­

262

MONTHLY REVIEW, DECEMBER 1969

den’s Riksbank in July recommended a cutback in most
bank credit. The Swiss National Bank had hoped for
parliamentary approval of a proposed law which would
have given the bank added powers, including the right to
set mandatory credit ceilings. After the proposal was re­
jected in June, the central bank developed the customary
“gentleman’s agreement” limitation on bank credit.
In most cases, fiscal policy has also moved moderately
in the direction of restraint. The general approach has
been to limit the increase in expenditures, rather than to
make any major changes in tax rates. However, the Neth­
erlands and Sweden, as previously planned, switched from
a turnover to a value-added tax, which the EEC countries
and some other European countries are in the process of
adopting. In the inflationary atmosphere which existed in
the Netherlands when the tax change was launched, the
tax was often simply added to the sales price. This helped
produce a 6 percent increase in consumer prices during
the first four months of 1969, which in turn necessitated
sizable compensatory wage increases. To arrest the infla­
tionary spiral, the Netherlands authorities imposed a com­
prehensive price freeze from April to September. In view
of the Dutch experience, Belgium and Italy have an­
nounced plans to postpone their planned changeover to a
value-added tax until inflationary pressures in their coun­
tries have abated.
Economic developments in the smaller industrial coun­
tries of Europe reflect both the timing and the character
of the restraint measures adopted. Belgium, Switzerland,
and Sweden continue to experience lower than average
increases in consumer prices, while Dutch prices, after an
initial increase, were stabilized by the freeze. The currentaccount balance of payments of Sweden, Switzerland, and
Belgium deteriorated somewhat in the first part of 1969,
but the Netherlands current account improved.
JAPAN

The 1968 rate of industrial growth in Japan, had, as
usual, exceeded that of any other industrial country, and
wages in manufacturing also rose faster than in most coun­
tries. In the export and capital goods industries, these
increases were apparently covered by productivity gains
so that prices remained stable; but, in the less dynamic
consumer goods industries, wage increases produced a
substantial rise in the cost of living. Because of rising
exports to the United States, Southeast Asia, and the
Middle East, and long-standing import restraints, the
current account had improved strongly. In view of this
generally favorable situation, Japan made no substantial




change in fiscal policy in 1969 and continued until late in
the year the moderately expansionary monetary policy to
which she had turned in September 1968. Since the cur­
rent account continued strong, the authorities sought to
offset this by stimulating capital outflows. The Bank of
Japan, in April, issued a “yen shift” guideline to the banks,
encouraging them to reduce liabilities to foreigners and to
assume the financing of foreign trade previously financed
abroad. The ensuing yen shift, which exceeded $700 mil­
lion in the second quarter of the year, temporarily reduced
official reserves.
By the summer of this year, signs of domestic strain and
inflationary pressures began to emerge, and on September
1 the Bank of Japan moved toward restraint, raising the
discount rate from 5.84 percent to 6.25 percent. The de­
velopment of domestic inflationary pressures, without any
accompanying current-account deterioration yet apparent,
is a novel experience for Japan. The persistence of the
payments surplus has stimulated considerable discussions
as to whether any change in trade or domestic develop­
ment policy, or further promotion of capital exports, is
required in the interests of external equilibrium or whether
further reserve accumulation would be desirable.
CANADA

The Canadian economy had moved ahead very briskly
in 1968, stimulated by rising exports to the United States
and by a construction boom. Monetary policy had been
easy since midyear and, although the government had
planned to eliminate its fiscal deficit, rising prices and un­
expected difficulties in cutting back expenditures frustrated
that intention. Both price and wage increases quickened
disturbingly. In 1969, therefore, both fiscal and monetary
policy moved toward restraint. The government’s cash
budget swamg into surplus, owing to firm expenditure con­
trol and to higher tax yields and tax rates. Deferral of
capital cost allowances provided a tax disincentive to
commercial construction. On the side of monetary policy,
the Bank of Canada followed international interest-rate
trends quite closely, raising the official discount rate from
6 percent to 6 V percent in December 1968, to 7 percent in
2
March 1969, to IV2 percent in June, and to 8 percent in
July. However, it proved possible to hold Canadian inter­
est rates somewhat below Euro-dollar levels. In part this
was because guidelines for banks, other financial institu­
tions, and nonfinancial corporations limited investment in
Europe. (These guidelines were originally established in
1968 to prevent an outflow of capital from the United
States through Canada to third countries.) In July, the

FEDERAL RESERVE BANK OF NEW YORK

central bank created a further barrier to capital outflow by
imposing a freeze on “swapped deposits”,1 which had
financed substantial capital outflows to the United States
and Europe. A s the result of fiscal and monetary re­
straint, the growth of bank credit, which had been very

X “swapped deposit” is a U nited States dollar-denom inated
A
tim e deposit accom panied by a United States dollar-Canadian d o l­
lar swap which leaves the depositor with Canadian dollars at the
end o f the term.




263

strong in the winter and spring, tapered off at midyear.
However, inflationary tendencies have not abated. A wave
of strikes, especially severe in the mining and metal in­
dustries, held back industrial growth. Strike settlements in
October and November, which resulted in large wage
and price increases, threatened a further inflationary surge.
A Prices and Incomes Commission, established in the
summer to study the inflation problem, has proposed a
system of voluntary restraint for both wages and prices.
This idea has met with considerable resistance, especially
from the labor unions.