Full text of Economic Policy Review (Federal Reserve Bank of New York) : February 1958, Vol. 40, No. 2

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MONTHLY REVIEW
O f Credit and Business Conditions
FEDERAL
V

olum e

40

RESERVE

BANK

F E B R U A R Y

OF

NEW

YORK

1958

No. 2

MONEY MARKET IN JANUARY
Discount rates at nine Federal Reserve Banks were
reduced from 3 per cent to 2% per cent during January,
and there was a substantial further easing of member bank
reserve positions. Accompanying the reductions in
discount rates, the rates charged by a number of lead­
ing banks to their prime customers were reduced from
4 Vi per cent to 4 per cent, this being the first decrease
in the prime loan rate since March 1954. Market rates
on short-term obligations moved down almost steadily over
the month, under the influence of sustained demand from
nonbank investors, the generally easier tone in the money
market, the discount rate action, and the Treasury refund­
ing operation. Markets for longer term securities were
strong during the early part of the month, but later the
heavy volume of new flotations and uncertainties over the
Treasury refunding resulted in some investor resistance to
the downward rate trend.
Member bank reserve gains stemming from seasonal
return flows of currency and declines in required reserves
were offset by Federal Reserve open market operations
to a much smaller extent than in early 1957. During the
four weeks ended January 29, 1958 System holdings of
Government securities were reduced 878 million dollars,
as against a 1.4 billion reduction a year earlier. By the
last statement week in January this year, free reserves had
risen to a weekly average of 216 million dollars from an
approximate balance between member bank borrowings
and excess reserves in the last half of December; a year
earlier, reserve positions had moved from near balance
in late December to a deficiency of free reserves which
averaged 134 million dollars in the statement week ended
January 30, 1957. Despite the easier reserve positions, the
effective rate for Federal funds remained at the discount
rate through most of the month— 3 per cent until the first
announcement of discount rate reductions and 2% per
cent thereafter. In the last week of the month, however,
most Federal funds trading was at rates substantially below
the discount rate.
In addition to the reduction in discount rates at most
Reserve Banks, the Board of Governors of the Federal




Reserve System during January also reduced margin re­
quirements against stock exchange collateral. The cut in
margin requirments from 70 per cent to 50 per cent under
Regulations T and U was announced late on January 15,
effective the next day. The initial reduction in discount
rates to 2 3A per cent was announced by the Federal
Reserve Bank of Philadelphia on January 21, effective
January 22. Similar announcements were made on Janu­
ary 23 by the Federal Reserve Banks of New York,
Cleveland, Richmond, Chicago, St. Louis, and Kansas
City, effective the following day. The Atlanta and Boston
Federal Reserve Banks followed suit on January 27
with 23A per cent rates taking effect on January 28. The
new rate represents a return to the level that had prevailed
between April and August 1956.
B a n k R e s e r v e P o s it io n s

While member bank borrowings from Federal Reserve
Banks had exceeded excess reserves during most of Decem­
ber, the statement week ended January 1 was marked by
the appearance of free reserves— as average borrowings
fell slightly below average excess reserves. Reserve posi­
tions showed little change in the next two weeks. However,
in the final two weeks, those ended January 29, free re­
serves rose first to 170 million dollars and then to 216
million. Average borrowings by member banks declined
to 517 million dollars in the five statement weeks in Janu­
ary from 703 million in the four weeks ended December 25
and dropped to 295 million in the week ended January 29,
the lowest level since mid-1955. Average excess reserves
CONTENTS
Money Market in January.................................... 17
International Monetary Developments . . . . . . .

21

State and Local Borrowing in 1957 .....................

23

Trends in Foreign Gold and Dollar Holdings
in 1957 .......................................... ......................... 27
Selected Economic Indicators.............................. 32

MONTHLY REVIEW, FEBRUARY 1958

18

for the full five weeks amounted to 615 million dollars,
81 million above the four December weeks.
As is normally the case, the post-Christmas return flow
of currency was the chief factor adding to bank reserves
in January. This year the decline of currency in circula­
tion was at a record high, exceeding even the exceptionally
large decline in January 1957. The return flow this year
was the more significant since it followed a pre-Christmas
outflow that was no more than seasonal, while a year
earlier it had been relatively large. The sharper decrease
in currency this year no doubt reflected, in part, the con­
tinued decline in business activity. Aside from the return
flow of currency, bank reserve positions were also eased
during the month by a decline in required reserves, which
was not, however, so large as in the comparable five weeks
last year.
Some of the reserves released by currency and required
reserve movements were canceled out during the month
by the seasonally lower level of float. In addition, how­
ever, a large amount of reserves was withdrawn by System
sales and redemptions of Government securities, which were
scheduled so as to absorb the larger part of the seasonal
reserve flows and also to offset the wide week-to-week
swings in reserves that would otherwise have occurred. In
Table I
Changes in Factors Tending to Increase or Decrease Member
Bank Reserves, January 1958
(In millions of dollars; ( + ) denotes increase,
(— ) decrease in excess reserves)

Daily averages—week ended
Factor

Net
changes

Jan.
1

Jan.
8

Jan.
15

Jan.
22

Jan.
29

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

+ 15
-344
+130
- 34
- 6

— 64
-222
+406
+ 67
+ 64

+ 24
-289
+346
+ 31
- 2

- 16
+191
+329
+ 32
- 35

- 16
-311
+253
+ 1
- 48

57
— 975
+ 1464
97
+
— 27

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

-239

+252

+111

+500

-121

+

+118
+276

- 90
-243

- 64
-227

-315
- 90

+ 69
- 12

282
— 296

-125
—

+ 46

-127
—

-220
- 1

- 60
- 4

—

+
+

5
4

+ 1
- 14

-

-

1
4

+

1

+
—

Total................................ +280

6

- 1080

Operating transactions

503

Direct Federal Reserve credit transactions

Government securities:
Direct market purchases or sales...
Held under repurchase agreements..
Loans, discounts, and advances:
Member bank borrowings..............
Other.............................................
Bankers’ acceptances:
Bought outright.............................
Under repurchase agreements.........

—

1
3

_

_

486
5
4
16

-301

-421

-632

-

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

+ 41
- 25

- 49
+ 62

-310
+133

-132
+ 91

—127
+ 113

+

577
374

Excess reservesf .....................................

+ 16

+ 13

-177

- 41

- 14

-

203

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

658
730

702
743

575
566

355
525

295
511

Note: Because of rounding, figures do not necessarily add to totals.
• Includes changes in Treasury currency and cash,
f These figures are estimated.
t Average for five weeks ended January 29.




_

517|
615$

the week ended January 1, when year-end strains were at
their peak and a decline in float threatened to put addition­
al pressure on reserve positions, System holdings of Govern­
ment securities rose by 219 million on a Wednesday-toWednesday basis. The bulk of the additions took the
form of repurchase agreements with Government securities
dealers, of which 519 million dollars’ worth was outstand­
ing at the year end. In subsequent weeks, as return flows
of currency added to reserves, holdings of securities under
repurchase agreements declined sharply, and by Janu­
ary 29 were almost entirely eliminated. During the same
period, outright holdings of Government securities were
also reduced; the bulk of the outright sales and redemptions
occurred in the week of January 22, while net purchases
in the final week more than offset the further retirement
of repurchase agreements. Although System holdings of
Government securities were reduced on balance by 878
million dollars during the four weeks through January 29,
the decline was markedly smaller than a year earlier, when
holdings were reduced by 1.4 billion dollars over the
comparable weeks.
G o v e r n m e n t S e c u r it ie s M a r k e t

Prices of United States Government notes and bonds,
which had leveled off toward the end of December follow­
ing a sharp advance over the previous month and a half,
resumed their upward movement during the first half of
January. Outright trading remained light and switching
subsided after the end of the year, but the relatively mod­
erate investor demand was sufficient in the prevailing bull­
ish atmosphere to move prices higher. The underlying
strength in the market was illustrated by the enthusiastic
response given a 750 million dollar offering of Federal
National Mortgage Association (FN M A ) notes on Janu­
ary 9 and by the generally favorable reaction of investors
to the heavy calendar of corporate and municipal flota­
tions. Pessimism over the business outlook gave rise to
recurrent rumors of further easing of credit policy and was
an important influence on the market attitudes. Prices of
most issues reached their peak for the month on Janu­
ary 13, at which point some of the longer issues were 1 to
1% points above their December 31 levels and from 9Va
to 9% points higher than three months earlier.
After midmonth, however, prices of intermediate and
longer term Government issues moved generally down­
ward. Among the factors influencing the turnabout was
the Treasury announcement that Congress would be asked
to approve a temporary increase of 5 billion dollars in the
public debt ceiling. More pervasive, however, was the
growing awareness of the approaching Treasury refunding,
the associated expectation that the refunding would include

FEDERAL RESERVE BANK OF NEW YORK

a long-term bond, and reports that early approval of a
higher ceiling might soon lead to a cash offering. In this set­
ting, the January 15 announcement reducing margin re­
quirements on stock exchange collateral and the subsequent
reductions in discount rates from 3 per cent to 23A per cent
provided only a temporary stimulus to prices. Toward
the end of the month, prices on notes and bonds fluctuated
considerably from day to day, but there was no pro­
nounced trend. The initial response to the refunding terms
announced on January 29 (described below) was favor­
able, and “rights” moved to a substantial premium; most
longer issues, however, were marked down by about Vi a
point. Over the month, the four longest issues declined in
price by about \ \o W 2 points, while issues maturing or
callable between 1963 and 1967 showed only small in­
creases or decreases, and most shorter notes and bonds
were up Vi to % of a point.
In contrast to the up-and-down price pattern in the
longer end of the Government securities market, Treasury
bill rates declined sharply over the month. At the begin­
ning of January, however, rates on Treasury bills rose
slightly as the expected post-year-end demand was slow
in developing. Dealer bidding in the January 6 auction
was light, and the average issue rate rose to 2.858 per cent,
some 11 basis-points higher than in the last auction held
in December. Subsequently, however, a sustained demand
stemming primarily from nonbank investors brought about
renewed declines in bill rates. The strength of current
demands and easier money market conditions, accompa­
nied by expectations of a reduction in discount rates, con­
tributed to robust bidding in the January 13 auction and
the average issue rate fell to 2.591 per cent. Although the
issue rate remained almost unchanged at 2.587 per cent
in the succeeding auction, yields on outstanding issues
moved down almost continuously under the impetus of a
reduced supply of bills in the market and continued strong
demand from nonbank investors. In the auction held on
January 27, the first following the discount rate reductions,
the new bill went at 2.202 per cent, the lowest rate since
March 1956 and down about 55 basis-points from the end
of December. The prospect that the impending Treasury
refunding operation would reduce the available supply of
short-term Treasury securities probably stimulated the de­
mand for bills. Following the announcement of the refund­
ing, bills were in strong demand by sellers of “rights” and
others. By January 31 the longest outstanding bills were
bid at 1.55 per cent, as the decline of 1.21 percentage
points from December 31 set a postwar monthly record.
On January 29, the Treasury announced the terms of its
refunding operation involving almost 17 billion dollars of
maturing securities. Holders of five outstanding issues—




19

the 33/s per cent certificates maturing February 14, the
2 V2 per cent bonds maturing March 15, the IV 2 per cent
notes maturing April 1, the special issue of Treasury bills
maturing April 15, and the W 2 per cent certificates matur­
ing April 15— are permitted to subscribe to any of the
three new issues. The new issues, all to be dated Febru­
ary 14, 1958, include a 2 V2 per cent certificate maturing
February 14, 1959, a 3 per cent bond maturing Febru­
ary 15, 1964, and a 3V2 per cent bond maturing February
15, 1990. Exchange of the maturing securities will be
made on a par-for-par basis with varying interest adjust­
ments. Subscription books are open February 3 through
February 5.
O t h e r Se c u r it ie s M a r k e t s

The tone of the corporate and municipal bond markets
continued firm through most of January, although some
of the new offerings in the last half of the month did not
move immediately out of underwriters’ hands. Total new
offerings of State and local governments, corporations
(including private placements), international institutions,
and foreign entities were estimated at 1,475 million dol­
lars, about 250 million less than in January 1957; in addi­
tion, 1,485 million dollars of United States Government
agency issues were offered, compared with 710 million a
year earlier.
Speculation over the prospects for additional official
measures to ease credit contributed to the strength in the
markets for outstanding issues, as well as to the successful
marketing of new issues. The reduction in discount rates
by a number of Federal Reserve Banks after midmonth
seemed to confirm prevailing market opinion that the trend
was toward lower interest rates generally. However, to­
ward the end of the month, uncertainties arising from the
Treasury refunding operation contributed to a decline in
the prices of outstanding issues. Yields on high-grade
corporate bonds, as reflected in Moody’s Aaa corporate
index, declined 10 basis-points over the month to 3.58
per cent and were 57 basis-points below the peak of last
September. For similarly rated municipal issues, the de­
cline was larger, carrying the index to 2.68 per cent, 18
basis-points lower than at the end of December and 77
basis-points below the late August peak. In neither case,
however, were the January declines as large as in Decem­
ber, and in each case the month-end yields were several
basis-points above the lows reached earlier in January.
Offerings of municipal bonds amounted to an estimated
670 million dollars in January, the largest volume of flota­
tions since April 1957 and significantly above offerings in
January 1957. With year-end statement dates past, and in
an atmosphere marked by expectations that credit condi-

20

MONTHLY REVIEW, FEBRUARY 1958
Table II
Changes in Principal A ssets and Liabilities of the
W eekly Reporting Member Banks
(In millions of dollars)

Statement week ended
1958

1957

Item
Dec.
25

Dec.
31*

Jan.
15

Jan.
8

Jan.
22

Five
weeks
ended
Jan. 22,
1958

Assets

Loans and investments:
Loans:
Commercial and industrial loans... — 19 - 52 - 589 - 287
3
Agricultural loans.......................... + 2 +
1 + 3 Securities loans..............................
160 + 208 - 214 - 210
3
Real estate loans............................ _
8 - 11 - 11 All other loans (largely consumer).. + 16 + 58 - 99 - 33

-506
+ 2
+ 29
+ 6
- 69

- 1453
+
5
- 347
27
- 127

Total loans adjusted!.............. - 171 + 140 - 910 - 537

-538

- 2016

96
46

- 96
+ 12

-

81
68

77 + 336 - 336 - 142
3 + 24 + 3 - 47

- 84
+125

+

149
108

Total investments................... +

80 + 360 — 333 - 189

+ 41

-

41

Total loans and investments adjusted f.. -

91 + 500 -1243 - 726

-497

- 2057

23

+252

+

Loans adjusted! and “other” securities.. - 168 + 164 - 907 - 584

-413

- 1908

+ 24
+ 92
+ 11

95
+ 622
- 1551

Investments:
U. S. Government securities:
Treasury bills............................. +
Other.......................................... +
Total...................................... +
Other securities.............................. +

63 + 355 - 307 14 - 19 - 29 -

Loans to banks..................................... - 266 - 478 + 644 +

175

Interest rates on privately issued short-term instruments
were reduced repeatedly during January. Bankers’ accept­
ances were in strong demand, reflecting both the usual
January revival in buying interest and an increasingly favor­
able yield differential between acceptances and Treasury
bills. Most dealers in bankers’ acceptances reduced rates
in a series of steps, four times by Vs per cent between
January 2 and January 24 and a fifth time by V* per cent
on January 30. By the close of the month, dealer rates on
90-day maturities were 23A -2% per cent (bid and
offered), down a full % per cent from the end of Decem­
ber. Major dealers in open market commercial paper cut
their rates four times, thrice by Vs per cent between
January 8 and January 21, and again by lA per cent on
January 29, thus reducing the rate on four-to-six months’
paper to 3 Vs per cent. Major finance companies reduced
rates on their directly placed paper by Vs per cent on
January 8, by V4 per cent on January 20, and by a Vx per
cent on January 27; the rate on directly placed 30 to 89day paper was thus lowered to 2% per cent.
M e m b e r B a n k C r e d it

Total loans and investments of weekly reporting banks
declined by 2,057 million dollars during the five weeks
ended January 22, as loans decreased by 2,016 million and
- 758
+ 154 -964
investment holdings by 41 million.
- 116
- 93 - 30
The decline in loans over the period was even larger
than the heavy 1,741 million decrease that occurred a year
* Tuesday.
| Exclusive of loans to banks and after deduction of valuation reserves; figures for the individua
earlier and about two and half times as large as the de­
loan classifications are shown gross and may not, therefore, add to the totals shown.
cline in the comparable 1955-56 period. The bulk of the
decrease in recent weeks was accounted for by net repay­
tions would ease further, institutional investors were recep­ ments of business loans, which fell by 1,453 million dol­
tive to new offerings even at reduced yields. Indicative of lars, or by 551 million more than the year before. The
the yield adjustments on new issues in recent months was sharper fall in business loans wras partly a reflection of net
the net cost on the largest municipal offering of the month, repayments of almost 300 million dollars by sales finance
a 100 million dollar State of California Veterans Aid issue, companies, which in the previous year had reduced their
maturing on various dates from 1959 through 1983; the indebtedness to banks only slightly. However, compared
net interest cost was about 3.07 per cent, almost 60 basis- with the similar weeks last year, larger loan declines, or
points below a comparable issue last October and 23 smaller increases, showed up in almost all other categories
basis-points below a similar issue in January 1957.
of business loans.
The decrease in total loans was also attributable in part
The estimated volume of public offerings of corporate
bonds for new capital rose to 430 million dollars in to a 347 million dollar decline in securities loans, which
January from 155 million in December, but was, however, was 125 million dollars smaller than the decline a year ago.
well below the 620 million dollars of flotations in January Real estate loans and “all other” loans (largely to con­
1957. Investor enthusiasm for new corporate issues was sumers) declined in amounts not differing widely from a
evinced for almost all offerings, despite continued declines year earlier.
in reoffering yields. The extent of the yield adjustments in
The 41 million dollar decline in total investments of
recent months was reflected in a sizable issue of Aa-rated weekly reporting banks contrasted with reductions of 380
thirty-year utility bonds, which was priced to yield about million last year and 872 million two years ago. Week-to1V4 percentage points less than similar issues in Septem­ week swings in holdings of Treasury bills were unusually
large: in the wake of net acquisitions amounting to 346
ber 1957.
Liabilities

Demand deposits adjusted....................
482 + 718 - 531
Time deposits except Government........ + 170 + 202 - 28
U. S. Government deposits.................... + 425 - 341 -1124
Interbank demand deposits:
Domestic.......................................... — 408 +1454 - 994
Foreign.......................................... + 13 + 10 - 16




+ 176
+ 186
- 522

FEDERAL RESERVE BANK OF NEW YORK

million in the week ended December 18, banks added a
further 418 million in the next two weeks, and then re­
duced their holdings by 499 million in the three weeks
ended January 22. Holdings of other Government securi­

21

ties showed a moderate net decline over the five weeks,
and non-Government securities holdings rose by 108
million dollars, partly reflecting bank acquisitions of the
new FNMA notes in the week ended January 22.

INTERNATIONAL MONETARY DEVELOPMENTS
M o n e t a r y T r e n d s a n d P o l ic ie s

Germany.
The German Federal Bank lowered its dis­
count rate to 3Y2 per cent from 4 effective January 17;
this was the fourth successive Vi per cent reduction since
September 1956. The reduction came against a back­
ground of high money market liquidity and an easing of
short-term interest rates. Although toward the year end
the cash position of the banking system had tightened
somewhat because of seasonal factors as well as foreign
exchange losses, the banks were able to satisfy most short­
term credit needs by reducing their large Treasury bill
holdings acquired as a result of the heavy open market
sales conducted by the central bank earlier last year. In
fact, during December the banks’ bill holdings fell by
1.3 billion marks, or 24 per cent; a large part of this
decline represented maturing bills that had been taken up
earlier by the banks in anticipation of their year-end needs.
In view of these sales of liquid assets commercial bank
borrowing from the central bank had remained exception­
ally low; during most of December the central bank’s
domestic bill portfolio amounted to less than 4 per cent
of total assets. Recently, day-to-day money rates have
dropped substantially— to as low as 2 V2 per cent at the
year end, as against 33A to 4 per cent at the beginning of
December; in mid-January they ranged between 3 and
3*4 per cent.
In a broader sense, the discount rate reduction must,
of course, be viewed in the light of prevailing German eco­
nomic conditions. The pace of the domestic economy gen­
erally has continued strong; in fact, industrial production
in November reached an all-time high, some 5 per cent
over November 1956. There are, however, some indica­
tions that the investment boom is tapering off, primarily
under the impact of reduced export orders. The lowering
of the discount rate is nevertheless not generally regarded
in Germany as signaling an outright reversal of the central
bank’s policy of restraint; reserve requirements for com­
mercial banks today still are higher than at the time of
the 5Vi per cent rate in mid-1956 and the central bank’s
recent open market purchases appear to reflect mainly
seasonal factors.




The Netherlands.
The Netherlands Bank reduced its
discount rate to AV2 per cent from 5 on January 24. The
central bank reportedly stated that it was no longer neces­
sary to maintain the 5 per cent rate established last August
in order to underline the determination of the Dutch
authorities to defend the guilder against a further specula­
tive outflow of funds which, together with a sizable trade
deficit, had caused a sharp drain on the nation’s gold and
foreign exchange reserves. Since that time the outflow of
short-term funds has been reversed, and there has been a
continuing improvement in the Netherlands’ external posi­
tion. The net gold and foreign exchange holdings of the
Netherlands Bank rose by 273 million dollars’ equivalent
from their early September low to late January 1958; more
than one half of the improvement was attributable, how­
ever, to the Dutch drawing of 69 million dollars on the
International Monetary Fund and to recent large pur­
chases of Dutch Treasury bills by German commercial
banks. Nevertheless, there was also a substantial improve­
ment in the Dutch trade position during the last quarter
of 1957 when imports were 2 per cent lower and exports
10 per cent higher than a year previous.
The Dutch internal economic and financial situation has
also eased considerably since last summer when strong
inflationary pressures predominated. Industrial production
has declined somewhat recently, and the cost of living,
which rose about 7 per cent during the first nine months
of 1957, reportedly has been relatively stable since then.
Bank credit has declined moderately, and there has been
a general easing of the money market tightness, reflected
in the decline in the Treasury bill rate from 4% per cent
to AV2 since mid-September. However, the Netherlands
Bank has reportedly indicated to the banks that the dis­
count rate reduction should not be interpreted as a signal
that they may increase their loans.
United Kingdom. While the lowering of the German
and Dutch discount rates marked some relaxation of the
policies of monetary restraint pursued on the Continent,
the British authorities last month reaffirmed their deter­
mination to maintain their present tight restrictive policies
as long as is necessary for the defense of the pound. The
new Chancellor of the Exchequer, Mr. Heathcoat-Amory,

22

MONTHLY REVIEW, FEBRUARY 1958

declared that the “tough, drastic deflationary policies of
the government adopted last September will be continued
without relaxation until success has been achieved”. In
the forefront of these policies was, of course, the tighten­
ing of monetary restraint marked by the increase in the
Bank of England’s discount rate to 7 per cent; on another
occasion, the Chancellor stated that events since September
“have shown the effectiveness of Bank Rate in counter­
acting external pressure on sterling and also in support
of internal measures”. The Chancellor also called atten­
tion to the substantial cut in bank advances that had been
made during recent months and expressed his hope that
the bankers would maintain their restrictive attitude.
In the two months ended mid-January the London
clearing banks’ advances declined by 15 million pounds,
somewhat less than in the corresponding period a year
ago, and on January 15 total advances were slightly lower
than in January 1957. Despite a sharp decline in advances
since last June, which has more than offset the increase
that took place in the first half of 1957, total bank credit
has continued to expand; during November-January net
deposits rose by 156 million pounds, about 20 million
more than the increase a year earlier. The major counter­
part of the sharp rise in deposits in recent months has
been the expansion of the banks’ liquid assets, mainly
reflecting Treasury borrowing; on January 15 the London
clearing banks’ average liquidity ratio was 37.5 per cent,
slightly above the very high level of a year ago.
The decline in British interest rates that began in Decem­
ber continued at a somewhat more rapid pace last month.
The average Treasury bill tender rate fell by almost V<\
percentage point to 6.13 per cent at the last January
tender, while the yield of 2 V2 per cent Consols declined
steadily during the month to 5.17 per cent on January 31,
the lowest it has been since August.
Cuba. The National Bank of Cuba in December an­
nounced several monetary restraint measures reportedly
aimed at countering the inflationary pressures that resulted
in a sharp rise in imports last year. Minimum interest
rates to be charged by commercial banks were fixed at 7
per cent on loans for the importation or sale of consumer
durable goods, and 6 per cent for loans to the sugar indus­
try. The rediscount rates of the central bank were also
raised from 4Vi per cent to 5Vi on “ordinary” rediscounts,
from 2 to AV2 on rediscounts of paper generated by the
sugar industry, and from 3 to 4 on advances secured by
government bonds. In addition, effective January 9, all
commercial bank reserve requirements were raised as
follows: for demand deposits, from 25 to 30 per cent; for
30 to 90-day time deposits, from H V 2 to 20 per cent;
and for time deposits of longer than 90 days, from 10 to




15 per cent. It was also announced that effective May 1
these rates would be raised further to 40, 35, and 30 per
cent, respectively. On the other hand, the percentage of
centralized required reserves that the banks may hold in
the form of government bonds was increased from 10 per
cent to 20 on January 9, and it will be raised again to
40 per cent on May 1.
E xchange

Rates

American-account sterling was strong during January;
the quotation was maintained above the $2.81 level
throughout the month with the exception of January 7
when it dropped to $ 2 .8 0 1%6 following the resignation of
Mr. Thorneycroft as Britain’s Chancellor of the Exchequer.
General commercial demand for sterling in New York
combined with occasional substantial offerings of dollars
in London to bring about a rise in the quotation from
$2.81 y at the beginning of January to $2.81% on Janu­
ary 23. Thereafter the quotation held at the $2.81% level,
as commercial demand persisted. On January 31 the
rate reached $ 2 .8 1 1% 6, the highest quotation since early
August 1954.
The commercial demand for sterling was also evident
in the forward market, which was relatively quiet during
the month. Discounts on three and six months’ sterling
were narrowest at 2 cents and 32% 2 cents on January 9
and 10, respectively. Thereafter, three months’ sterling
moved to the widest spread of 2 % cents at the month end,
while six months’ sterling, after having widened to 4 % 6
cents on January 20, closed the month at 4% 2 cents.
Transferable sterling was held between $2.79 and
$2.7925 during the early part of the month, in part as the
result of some demand from sugar interests. Subsequently,
on offerings from the Near East, South America, and the
Continent, the rate declined to $2.7840 on January 16.
Thereafter, as Continental sources became buyers of trans­
ferable sterling, the rate recovered to $2.79. Since this de­
mand was not sustained, the quotation dipped to $2.7875
on January 22 but closed the month at $2.79. The
securities-sterling market was relatively small during the
month; the quotation, moving somewhat erratically, ranged
between a high of $2.75Vfc on January 6 and a low of
$2.73 at midmonth and was $2.74V6 on January 31.
The Canadian dollar, under pressure of demand for
United States dollars— particularly by Canadian commer­
cial interests— and of offerings of Canadian dollars from
Europe, declined from $ 1 .0 1 15/ 32 on January 2 to $1.00%
on January 6, the lowest quotation since May 1956. Sub­
sequently, although the movement of the rate was some­
what erratic, the general tendency was toward higher
quotations as American and Continental investor interest

S2

FEDERAL RESERVE BANK OF NEW YORK

developed in the offerings of new Canadian securities,
Also, European demand for Canadian dollars, some profit
taking by Canadian investors in certain American securities, and offerings of United States dollars by Canadian

23

paper companies contributed to the strengthening of the
Canadian dollar to $ 1 .0 2 % 6 by January 23. Thereafter,
the rate eased somewhat and on January 31 closed at
$1.01% .

STATE AND LOCAL BORROWING IN 1957
Confronted with expanding public needs for services
requiring large investment outlays, State and local govern­
ments borrowed heavily in the long-term capital market
last year. After two years of decline, their total offerings
of securities rose sharply from 5.4 billion dollars in 1956
to 6.8 billion dollars in 1957.1 This resurgence of State
and local borrowing coincided with a sizable increase in
security financing by corporations and continued growth
(though at a reduced rate) of mortgage debt. In combina­
tion, these demands for funds placed the capital markets
under heavy pressure during most of 1957.
By taking various steps (including raising ceilings on
interest rates) to meet the higher borrowing costs and
other market terms, State and local governments succeeded
last year in enlarging their share of the available supply
of long-term funds. At the same time, the more attractive
yields provided by State and local securities, the income
from which is exempt from Federal income taxes, and a
smaller spread between these yields and those on other
securities stimulated investor interest and broadened the
market for State and local obligations. Although there
were substantial swings in bond prices and yields, the vol­
ume of flotations remained fairly steady during the year,
and periodic congestion in dealer inventories was corrected
through aggressive selling, which sometimes involved price
concessions.

since the volume of borrowing by statutory authorities and
miscellaneous types of issuers declined in 1957.
About three fourths of the State and local securities sold
in 1957 were general obligation bonds secured by the full
taxing power of the issuer. The remainder were revenue
bonds, so designated because both the principal and inter­
est are payable primarily from the receipts of incomeproducing facilities— although a few such issues are also
secured in part by taxes. The total of revenue bond sales,
which had remained fairly stable at 1.7 billion dollars in
1955 and 1956, rose to nearly 2 billion dollars in 1957.
This amount was exceeded only in 1954 when new turn­
pike financing reached its peak and sales of revenue bonds
amounted to 3.2 billion dollars, or nearly half of all State
and local offerings in that year. Despite the sharp decline
in toll-road issues, numerous governmental units continue
to find revenue bonds an attractive form of borrowing,
especially to finance sewer and water systems and other
utilities. Furthermore, revenue bonds still account for one
half or more of all road and bridge bonds sold.
U se o f P r o c e e d s

Traditionally, State and local governments borrow to
finance capital projects rather than operating deficits.
There have been some exceptions, however, as in the case
of borrowing to finance veterans’ aid programs which were
particularly large in the early postwar years. The classifica-

V o l u m e o f O f f e r in g s

Long-term borrowing by State and local governments in
1957 approximated the record of 7 billion dollars set in
1954 when there was a heavy concentration of toll highway
financing.2 In contrast to the experience in that year, last
year’s increase mainly reflected the rise in school bond
offerings which were considerably larger than in any
previous period.
As shown in Table I, municipalities accounted for al­
most one third of total flotations in 1957, while school
districts and State governments each sold about one fourth.
The last two shares are somewhat higher than in 1956,
1 For a discussion of trends in State and local government spending
during recent years, see "The Expanding Role of State and Local
Governments in the National Economy’', Monthly Review, June 1957.
2 Including State and local borrowing from the Federal Government,
the 1957 total is 7,135 million dollars, or slightly more than in 1954.




Table I
Bond Sales by State and Local Governments
By Issuing Authority, 1956 and 1957
(Amounts in millions of dollars)

1956
Issuing authority
States.........................................................
Counties....................................................
Municipalities..........................................
School districts.........................................
Statutory authorities..............................
Townships, special districts, and un-

1957

Amount

Per cent
of total

Amount

Per cent
of total

800
290
1,706
1,030
983

14.7
5.3
31.3
18.9
18.1

1,401
412
2,116
1,598
722

2 0 .6
6 .0
31.1
2 3 .4
10.6

638

11.7

563

8 .3

5,446

100.0

6,811

100.0

Note: Figures may not add to totals because of rounding. Federal Government
loans are excluded.
Sources: Compiled from Bond Buyer for 1956 and from Statistical Bulletin , Invest­
ment Bankers Association, for 1957.

24

MONTHLY REVIEW, FEBRUARY 1958
Table II
Borrowing by State and Local Governments by
Use of Proceeds, 1956 and 1957
(Amounts in millions of dollars)

1956
Use of proceeds

1957

Amount

Per cent
of total

Amount

Per cent
of total

E ducation.................................................
Roads and bridges...................................
W ater and sewer. ....................................
Other utilities...........................................
Health and welfare..................................
Recreation.................................................
Ports and airports...................................
Industrial..................................................
Flood control............................................
Public housing......................... ................
Veterans’ aid ............................................
Unclassified...............................................

1,455
698
753
646
62
41
137
11

26.7
12.8
13.8
11.9
1.1
0 .8
2 .5
0 .2

2,428
1,035
1,010
493
135
83
184

258
110
1,213

4 .7
2 .0
22 .3

49
113
333
891

3 5.7
15.2
14.8
7.2
2 .0
1.2
2 .7
0 .1
0 .7
1.7
4 .9
13.1

T o ta l................................................
Refunding. ...............................................

5,383
63

9 8.8
1.2

6,760
50

99.3
0 .7

Grand to tal..................................

5,446

100.0

6,811

100.0

*

Note: Figures may not add to totals because of rounding. Federal Government
loans are excluded.
* Not identified separately in 1956.
Sources: Same as Table I.

tion of borrowing by use of proceeds in Table II shows
that as much as 5 per cent of total borrowing in 1957 was
for veterans’ aid, the highest proportion since 1950.
The financing of educational facilities was by far the
main purpose of State and local borrowing in 1957, and it
accounted for the bulk of the increase in the total over
1956. Last year, 2.4 billion dollars of school bonds were
sold, as against sales of 1.5 billion of school bonds in both
1955 and 1956 (see Chart I ). The share of these bonds
in the total was 36 per cent in 1957. This share has
increased in each year since 1952, with the exception of
1954, when as already noted, toll-road financing dominated
the borrowing picture.
This vast financing program was necessitated by the
continuing increase in school construction activity. Out­
lays for new school construction totaled 2.8 billion dollars
in 1957, or about 300 million dollars more than in 1956.
Nevertheless, the nation’s school facilities are generally
reported to be overcrowded and inadequate (although
conditions vary greatly from one locality to another) and
each month voters are asked to approve a substantial vol­
ume of school bond issues. A total of 1.5 billion dollars
of such issues was submitted to the voters in 1957 and
1.2 billion, or 79 per cent, were approved.
A modest revival in the sale of highway bonds occurred
in 1957, when more than 1 billion dollars of these bonds
were issued, compared with about 700 million in 1956.
Only a small part of the 1957 increase in highway bonds
was for toll-road financing, and very little of the increase
was attributable to the stepped-up progress of the National
Highway Program. Rather, the main impetus seems to
have been a more concerted effort to catch up with needed




repairs on existing roads and with construction of modern
highways to relieve traffic congestion in large cities. Work
on the Interstate Highway System was speeded up during
1957, but this cost was met largely out of the Federal
Highway Trust Fund.
Sales of bonds for sewer and water projects also reached
a record level in 1957, when just over 1 billion dollars of
such issues were marketed. Of the remaining categories
of State and local borrowing listed in Table II, increases
were registered in bonds sold to finance ports and airports,
health, welfare, and recreational programs, and veterans’
aid. On the other hand, fewer bonds were sold for utilities
(such as electric power and gas works), industrial projects
and public housing.
The variety of governmental arrangements for financing
public services is apparent in Table III in which borrowing
is cross-classified by level of government and use of pro­
ceeds. For example, every type of governmental unit sold
school bonds in 1957. School districts, however, offered
two thirds of all such issues during the year and did not
sell bonds for any other purpose except for a small
amount of refunding. Municipalities sold 376 million
dollars of school obligations (representing 16 per cent of
such issues) and channeled into school construction ap­
proximately 18 per cent of the total volume of funds which
the municipalities raised through long-term borrowing.
States offered about 10 per cent of all school bonds sold,
with such issues accounting for nearly one-sixth of their

Chart I

SECURITIES O FFERIN G S BY STATE AND
LO CAL GOVERN M ENTS
B i l l i o n s of d o l l a r s

1 9 5 3 ’ 5 4 ’ 55

B i l l i o n s of d o l l a r s

’ 5 6 ’ 57

IS 5 3 * 5 4 ’ 55 ’ 5 6 ’ 57

S o u r c e s : C o m p i l e d f ro m B o n d B u y e r f o r 1 9 5 3 - 5 6 a n d f r o m
S t a t i s t i c a l B u l l e t i n , I n v e s t m e n t B a n k e r s A s s o c i a t i o n fo r 1 9 57 .

25

FEDERAL RESERVE BANK OF NEW YORK

Table III
total borrowing. A substantial share of these State funds
State and Local Government Borrowing Classified by
Uses of Proceeds and Issuing Authority, 1957
probably was passed along to local governments and school
(In millions of dollars)
districts as grants-in-aid, although some part went for the
support of educational institutions directly administered
Special Statutory
Coun­ Munic­ Town­ School
Use of proceeds States
ipali­ ships districts districts authori­ Total
ties
by the States.
ties
ties
The construction and maintenance of roads (other than
101
4
3
110
2,428
249
376
1,584
—
Roads and bridges.
552
4
56
194
2
227
1,035
local streets) remain primarily the function of State gov­ Water and sewer...
14
165
72
58
696
1,010
5
Other utilities.......
276
20
493
197
ernments. Thus, of the 1,035 million dollars of highway All other............... 585 196
652
8
13
96
294
1,845
issues marketed last year, State governments offered 552
Total............. 1,401
722
6,811
412
543
1,598
2,116
19
million— or 53 per cent of the total. Inclusion of borrow­
Note: Figures may not add to totals because of rounding. Federal Government loans are ex­
ing by statutory authorities for roads and bridges raises
cluded.
this proportion to 75 per cent. Approximately two fifths Source: See Table I.
of total borrowing by the States went into highway pro­ helped to stimulate the demand for State and local issues.
grams. The financing of sewer and water systems and Against this background average yields on seasoned highother utilities is undertaken primarily by municipalities grade State and local issues (as measured by Moody’s
which issued about three fifths of all such bonds sold in Aaa index) stabilized in January at around 3 per cent, and
1957.
then declined by about 20 basis-points in February. Sub­
sequently, average yields rose somewhat, but at the end of
D e v e l o p m e n t s in t h e M u n ic ip a l B o n d M a r k e t
March they still were below the 20-year highs reached in
The near-record volume of offerings in the municipal the fourth quarter of 1956.
bond market in 1957 at times burdened the distribu­
Early in April, however, the continued heavy flow of
tion facilities but never to the extent of disrupting the municipal securities began to encounter strong investor
functioning of the market. Dealers on occasion found it resistance, and by June the first quarter’s price gains had
necessary, however, to make price concessions when some been completely erased. The decrease in buying interest
large issues encountered investor resistance at the initial partly reflected the seasonal slackening of reinvestment
offering prices. The cost of borrowing during 1957 fol­ demand, but the growing calendar of proposed new issues
lowed essentially the same trend in the municipal market also induced some investors to defer purchases in anticipa­
as in the corporate and Government securities markets, but tion of higher yields. In addition, investors were influenced
with this important difference: yields in the municipal by evidence of continued expansion in economic activity
market started downward as early as September, whereas accompanied by inflationary pressures and restrictive
yields on Treasury bonds began to recede only in mid- Federal Reserve policy. Nevertheless, 1.7 billion dollars
October and no significant declines occurred in corporate of bonds were sold in the second quarter, only 3 per cent
bond yields until the lowering of the Reserve Bank dis­ less than sales in the first three months. The successful
count rate in the middle of November.
distribution of this large volume required sizable increases
The volume of State and local government offerings was in interest rates, and by the end of the quarter municipal
exceptionally large from the very beginning of the year. bonds were again offering investors the highest yields
In January alone, about 660 million dollars of bonds were obtainable since the 1930’s. The May advance in market
marketed, and in both February and March the flow of new yields on outstanding high-grade municipal securities was
issues remained at or above 500 million dollars. This heavy 12 basis-points and a somewhat larger gain of 23 points
volume of financing was greatly aided by a substantial in June raised these yields to 3.23 per cent in the last
revival of investor interest following a period of hesitancy week of the month. Considerably higher rates— varying
toward the end of 1956. The renewed buying interest according to credit rating and marketability—were re­
(which came primarily from stock insurance companies, quired for the sale of new issues.
savings banks, pension funds, and individual investors)
During most of the second quarter the market was con­
reflected, in part, a wave of pessimism regarding the busi­ gested. The volume of unsold bonds, as indicated by the
ness outlook and the related expectation of lower interest totals reported in the Blue List (of advertised dealer
rates ahead, and post-year-end reinvestment that was stocks), was just over 250 million dollars in the last part
bolstered with the proceeds of large redemptions of sav­ of March (already high compared with earlier m onths).
ings bonds. Also the market interpreted a temporary eas­ The advertised backlog rose to over 300 million dollars in
ing in bank reserves as a decision by the Federal Reserve the closing days of April, but the situation eased some­
System to relax credit restraint, and this attitude perhaps what in May as the Blue List total returned to around the




—

—

—

—
—

26

MONTHLY REVIEW, FEBRUARY 1958

structure was adjusting to the increase of the prime rate
and
the Federal Reserve discount rate, the rise in yields
M ARKET YIELDS ON BONDS
P e r c en t
P e r ce nt
stemmed
mainly from the continued heavy supply of new
4.25
issues and the expectation of an even larger volume later
4.00
in the year.
The yield increases in August had a dual effect. New
3 .7 5
funds, some of which may have been diverted from the
3.50
stock market, were drawn into the municipal market, while
a few State and local borrowers may have been induced to
3.25
defer planned offerings. In combination, these develop­
3.0 0
ments caused the market to turn around, at first slowly, but
then more rapidly as the outlook for business conditions
2 .7 5
weakened. The mid-November reductions in Federal
2 .5 0
Reserve discount rates, which were interpreted in the mar­
ket as signaling some relaxation of credit restraint, had
2.25
a smaller immediate effect on yields in the municipal mar­
2.00
ket, where substantial declines had already occurred, than
1.75
on yields in other bond markets. However, the action of
1953
1954
19 55
19 56
1957
the monetary authorities was followed by a surge of buying
N o t e : Y i e l d s a r e m o n t h l y a v e r a g e s of d a i l y o r w e e k l y f i g u r e s .
of municipal securities, as well as of other bonds, and
* O l d serie s.
S o u r c e s ! F e d e r a l R e s e r v e B u l l e t i n a n d M o o d y ’s I n v e s t o r s S e r v i c e .
practically all unsold balances were cleaned out within a
few days.
The closing of existing syndicate accounts facilitated
250 million level. Dealers’ efforts to lighten their inven­
tories were aided by the reduction in new flotations in the rapid distribution of new offerings, and the total vol­
June. It was reported that during the period of most seri­ ume of State and local issues expanded appreciably during
ous market congestion a considerable volume of recently the fourth quarter. It is noteworthy that some of the issues
offered issues “in the Street” was not advertised in the postponed in earlier months were brought out in the fourth
quarter because of the more favorable environment created
Blue List.
During early July the municipal market still reflected the by the change in credit policy.
As of the end of 1957, the average yield on outstanding
firmer tone which had emerged toward the end of June.
high-grade
State and local issues rated Aaa by Moody’s
The higher reoffering yields established through cautious
bidding by underwriters aided considerably in distributing was 2.84 per cent— about 60 basis-points less than the
the new issues. In fact, some dealers were encouraged by peak reached in late August. The downward adjustment
this experience to mark up prices, and this led to slight in Treasury bond yields, while compressed within a shorter
declines in both seasoned and new offering yields in July. period, was equally as sharp; for example, the average
Before long, however, there were new signs of investor yield on long-term taxable Treasury bonds dropped from
resistance as the volume of new issues in July surpassed 3.77 per cent on November 9 to 3.15 per cent on Decem­
the previous month’s total and the calendar of scheduled ber 28. On the other hand, corporate bond yields declined
offerings expanded rapidly. The upward adjustment in more slowly; between mid-November and the last day of
municipal bond yields near the end of July was speeded December, the average yield on high-grade corporate
by the Treasury’s announcement that some of the issues bonds (Moody’s Aaa issues) fell from 4.13 per cent to
to be included in the July 22 refunding would carry 4 per 3.68 per cent, a decrease of 45 basis-points.
cent coupons. As dealers’ inventories began to climb,
F a c t o r s in t h e O u t l o o k f o r N e w B o r r o w in g
substantial price concessions were again necessary to move
the floating supply into investors’ portfolios.
The evidence at hand for the period ahead points to a
continuation of the long-term trend toward more spending
M arket T urnaround
by State and local governments. Behind this trend—which
Municipal bond yields for high-grade seasoned issues has accelerated in the postwar years— are such factors as
reached the year’s high of 3.45 per cent near the end of general population growth, expansion of the school popula­
August (see Chart I I ). Although the last stage of this tion, and the migration from city to suburbs which fre­
advance occurred at the same time that the short-term quently entails large capital outlays on new school




C h a r t II

27

FEDERAL RESERVE BANK OF NEW YORK

buildings, streets, and water and sewer facilities. Thus, a
significant proportion of the added spending will probably
be needed for investment projects of the type usually
financed, at least in part, through bond sales.
On the other hand, any further slackening in business
activity can be expected to have adverse effects on State
and local revenues. With a smaller margin of revenues
over operating expenses, these governments may be faced
with a choice between relatively heavier reliance upon

borrowing to finance capital facilities and, on the other
hand, deferment of some capital projects. But for many
localities, postponement of capital projects will be a diffi­
cult decision; some of them are already committed to
building new facilities while others may find that they
cannot delay for very long the investment required to
meet the pressing demand for additional services. On the
whole, therefore, a continued high volume of State and
local borrowing may be necessary.

TRENDS IN FOREIGN GOLD AND DOLLAR HOLDINGS IN 1957
The strengthening of foreign gold and dollar holdings,
which had proceeded at an annual rate of some 2 billion
dollars throughout most of the previous five years, came
to an end in 1957.1 It is true that aggregate foreign gold
and dollar holdings rose again last year— by an estimated
650 million dollars, to about 30 billion dollars; this in­
crease would not have occurred, however, except for draw­
ings of some 900 million dollars on the International
Monetary Fund by foreign countries.
This change in the trend in aggregate foreign gold and
dollar holdings reflected a turnabout in the balance of
payments of the United States. In contrast with the pre­
vious five years when foreign countries had acquired gold
and dollars through transactions with the United States,
in 1957 they lost about 600 million dollars to this country.
This, however, was due not to any decline in United States
purchases and other payments abroad— these actually were
higher in 1957, for the fourth successive year—but rather
to a sharp rise in foreign countries’ expenditures on United
States goods as well as to an influx of short-term capital.
Furthermore, the loss of gold and dollars by foreign
countries to the United States equaled less than 2.5 per
cent of their aggregate gold and dollar holdings, which
have more than doubled during the past ten years.
Viewed in this perspective, such a loss to the United States
could hardly have had a marked over-all effect on interna­
tional liquidity. In the world today, however, the dollar
is used for settling balances not only with the United
States, but also among foreign countries themselves. For
an individual country, therefore, an over-all external pay­

ments deficit results, as a rule, in a decline in dollar
holdings— as well as in gold reserves— and is thus apt to
be regarded as a “dollar gap” even though the gold and
dollar losses are to third countries, and not to the United
States. Global external payments deficits requiring settle­
ments in United States dollars— as well as in gold—
resulted at various times during 1957 in particularly large
gold and dollar losses by such countries as the United
Kingdom, France, and the Netherlands; the main counter­
part of these losses was the substantial gold and dollar
gains of the Federal Republic of Germany.
The strains in foreign balances of payments reached a
climax during the summer. In the closing months of the
year, partly in response to monetary and other restraint
measures,2 the payments position of many countries ap­
peared to be moving into better balance. In particular,
there were indications that the loss of gold and dollars
to the United States had sharply declined. At the same
time, the disequilibrating short-term capital movements
within Western Europe abated and the margin of trade
imbalance was substantially reduced.
T he F lo w

of

G old and D ollars

About three fifths of last year’s 650 million dollar
increase in the total gold and dollar holdings of foreign
countries consisted of gold. Beside adding to their mone­
tary gold stocks, foreign countries sold, on balance, 170
million dollars’ worth of gold to the United States and
made gold payments of some 85 million to the Interna­
tional
Monetary Fund either as part of certain members’
1
"G o ld ” includes reported or estimated official gold reserves of
foreign countries (excluding the USSR) and of the Bank for Interna­
subscriptions or in fulfilment of repurchase obligations.
tional Settlements and the European Payments Union (but not other
Among the countries that sold gold to the United States
international institutions). "Dollar holdings” comprise both official
and private holdings and consist primarily of sight and time deposits,
were Argentina, Spain, the Netherlands, and the Philip­
short-term United States securities, bankers’ acceptances and estimated
pines; on the other hand, a few countries, including
holdings of United States Government notes and bonds. Detailed data
on foreign gold and dollar holdings are regularly reported in the
Federal Reserve Bulletin. Changes in foreign gold and dollar holdings
in earlier years were surveyed in the Monthly Review for January 1951,
and for February in each of the following years.




2
For a discussion of recent monetary conditions and policies in
foreign countries, see "Survey of Foreign Monetary Policies in 1 9 5 7 ’ '.
Monthly Review, January 1958.

28

MONTHLY REVIEW, FEBRUARY 1958

El Salvador and Indonesia, purchased small amounts of
gold from the United States. In 1956, foreign countries
had sold to the United States 80 million dollars’ worth
of gold; these had been the first net sales after a period of
three years during which foreign countries purchased from
the United States a net total of 1,559 million dollars
of gold.
Gold added to foreign monetary gold stocks, together
with gold sold by foreign countries to the United States
or paid in to the International Monetary Fund, thus
reached some 660 million dollars. This gold was derived
partly from new production abroad, which according to
preliminary data amounted to 975 million dollars, and
partly from other sources outside the United States, includ­
ing gold reportedly sold by the USSR in markets in the
rest of the world, which was put by various reports at
over 200 million. Of this aggregate supply of gold, some­
what over half thus appeared in the gold stocks of mone­
tary authorities and of international institutions. The
remainder went to meet gold requirements in the arts
and industry, and to satisfy other private demand.
As in earlier years, a large portion of last year’s foreign
gold production was sold on the London gold market.
South Africa and other sterling area producers sold most
of their output there, as in part did a number of nonsterling
producers. The principal buyers continued to be the West­
ern European central banks, but some gold was also pur­
chased by private operators, particularly in the Middle
and Far East. The dollar equivalent of the London gold
price remained during most of last year within the range
of the United States buying and selling prices of $34.9125
and $35.0875 per fine ounce ($ 3 5 plus or minus V4 per
cent), at which this Bank, acting on behalf of the United
States Treasury, deals with foreign monetary authorities.
Sellers thus received a slightly higher price in London,
while foreign monetary authorities generally found it
cheaper to buy gold there rather than from the United
States Treasury.
As a result of these various gold transactions, the offi­
cial gold reserves of foreign countries rose last year by
some 400 million dollars to 15.1 billion. At the same
time, the monetary gold stock of the United States rose
by 799 million to 22.9 billion; this was attributable mainly
to the purchase of the 170 million dollars from foreign
countries, as already noted, and of 600 million dollars from
the International Monetary Fund for reasons that will be
mentioned later. The International Monetary Fund held
1.2 billion dollars’ worth of gold. The United States
thus held at the end of 1957 some 58 per cent of the
world’s monetary gold reserves (excluding those of the
USSR).




Chart I

GOLD AND DOLLAR HOLDINGS
OF SELECTED COUNTRIES
B illionsofdollars

B i l l i o n s of d o ll a r s

d o l l a r h o ld in g s (p ri m ar ily ba nk de po si ts , U n it e d Stat es G o v e rn m e n t
securities, a n d b a n k e r s’ac ceptances). For France, the g o l d h o l d i n g s of
the E x c h a n g e S ta b il i z a ti o n Fu nd ar e not inc luded. En d -o f- q u ar t er date
ar e used throughout.

Total foreign dollar holdings rose by some 250 million
dollars in 1957 to 14.9 billion. Of this amount, about three
fifths was held by foreign monetary authorities, in part
to meet current exchange requirements or for use in inter­
vening in foreign exchange markets. The remainder was
held by foreign commercial banks and firms and indi­
viduals largely for carrying out international transactions.
Of the 14.9 billion dollars of foreign holdings, 13.6
billion consisted of short-term dollar assets. Some 55 per
cent of these were in the form of demand and time deposits
and 35 per cent in the form of United States Treasury
bills and certificates; the remainder was primarily in the
form of bankers’ acceptances. In addition to these short­
term dollar assets, foreign countries held approximately
1.3 billion in United States Government bonds and notes
with original maturities of more than one year; these were
held mostly by Canada and certain Western European
countries.
R eserve

P o s it io n s

of

F o r e ig n

C o u n t r ie s

Another distinctive feature of last year’s trends in for­
eign gold and dollar holdings was the fact that only rela­
tively few countries— the Federal Republic of Germany
and Venezuela in particular— gained reserves; indeed,
these two countries together gained about twice as much
as the 650 million dollar aggregate increase in foreign
gold and dollar holdings noted above. Most foreign coun­
tries incurred reserve losses, which were especially large
in France and Japan; these two countries together lost
almost 1 billion (see Chart I ).

FEDERAL RESERVE BANK OF NEW YORK

During the first nine months of 1957 (the latest period
for which complete data were available at the time of writ­
ing), Germany’s gold and dollar holdings rose by 734
million, on top of a 961 million rise in 1956. Germany’s
reserve gains were atttributable partly to its continued
merchandise trade surplus and partly to a speculative in­
flow of funds which was particularly marked during the
summer—itself the outcome of market expectations re­
garding a possible depreciation of certain European curren­
cies and a possible appreciation of the German mark.
From October on, however, the speculative flows of funds
abated, and toward the year end Germany’s reserves
actually fell somewhat. Elsewhere in Continental Western
Europe, Italy and Austria added to their gold and dollar
holdings (1 8 3 million and 55 million, respectively);
the Scandinavian countries likewise showed moderate
gains. Switzerland’s gold and dollar holdings remained
about unchanged.
On the other hand, reserves were lost by several Con­
tinental Western European countries that had balance of
payments deficits on both current and capital account.
France lost a particularly large amount—over 500 million
dollars, despite a drawing of 262 million on the Interna­
tional Monetary Fund, which will be noted later. France’s
difficulties were a compound of excessive internal demand,
the direct and indirect foreign exchange costs of the
Algerian campaign, and speculative capital outflows. Fol­
lowing the readjustments in the franc exchange rate last
August and October, the tightening of import controls,
and the adoption of more restrictive domestic policies,
there was a considerable slackening in the drain on French
reserves. The Netherlands and Belgium also sustained
sizable reserve losses during the first nine months of the
year (9 7 million and 66 million respectively), but in the
last quarter both countries regained some of the reserves
lost earlier.
The central gold and official dollar assets held by the
United Kingdom as the sterling area’s banker, which rose
during January-June by 248 million dollars, declined by
531 million during July-September.3 Unlike other coun­
tries that lost reserves, however, the United Kingdom had
last year as in 1956 an international current-account sur­
plus, globally as well as with the United States. The over­
seas sterling countries ran sizable trade deficits with
nonsterling countries, but the major factor behind the
severe reserve losses sustained by the United Kingdom
3
The monthly data released by the British Chancellor of the
Exchequer cover, in addition to gold, official United States and
Canadian dollar holdings. They differ, therefore, from the data used
elsewhere in this article in that they include the official Canadian
dollar holdings but exclude the private holdings of United States
dollars.




29

during the third quarter of 1957 was the speculative out­
flow of funds from sterling, set off by market fears of wage
and price inflation in Britain and by the uncertainties
regarding the European exchange rate structure noted
earlier.
Following the rise to 7 per cent in the Bank of England
discount rate in September and the adoption of the other
measures indicating Britain’s determination to defend the
pound, sterling staged a notable recovery and Britain
strengthened its gold and dollar reserves, which increased
by 423 million dollars during October-December to 2,273
million at the year end. It is true that this increase was
partly accounted for by the British Government’s drawing
of 250 million on the Export-Import Bank line of credit
in October. Moreover, Britain deferred the 176 million
dollar payment of interest and principal due at the year
end on the postwar United States and Canadian loans.
This should not, however, obscure the notable improve­
ment in Britain’s dollar position in recent months as a
result of which a substantial part of the third quarter
reserve losses were regained.
Canada’s gold and United States dollar holdings rose
by 236 million during January-September but fell moder­
ately during the last three months of the year. The state
of the Canadian balance of payments vis-a-vis the United
States is, however, reflected not only in gold and dollar
reserves but also in the fluctuations in the United StatesCanadian dollar exchange rate; the latter, after rising to
over U.S. $1.06 in August, gradually fell to less than $1.02
at the year end as the inflow of the United States capital
into Canada was greatly reduced during the second half
of the year.
In Latin America, Venezuela added greatly to its gold
and dollar holdings (5 4 6 m illion). Colombia and Cuba
also increased their reserves (3 4 million and 69 million
respectively), but most other countries sustained losses
(Brazil 92 million, Mexico 67 million, and Argentina 47
m illion). Many Asian countries also lost reserves. Japan’s
gold and dollar holdings during the first nine months of
1957 fell by 447 million dollars; toward the year end,
however, its trade and payments position showed notable
signs of improvement. Indonesia and the Philippines also
suffered reserve losses.
F a c t o r s B e h in d
and

the

C h a n g e s in

F o r e ig n

G old

D o l l a r H o l d in g s

Last year’s changes in aggregate gold and dollar hold­
ings of foreign countries, as well as in each individual
country’s holdings, were brought about by several factors.
Among these, the accrual of gold from new production
and other sources has already been mentioned. Another

30

MONTHLY REVIEW, FEBRUARY 1958
Ch art II

UNITED STATES BALANCE OF PAYMENTS
WITH FOREIGN COUNTRIES
B ill io ns of d o lla r s

1954

Q u a rt e r ly to ta ls

1955

19 56

B i l l i o n s of d o ll a r s

1957

Nofe.*Data e x c l u d e m il it a r y g r a n f s - i n - a i d as wel l as t r a n s a c t io n s
with in te rn a ti o n a l institutions.
S o u rc e ; D e pa rtm en t of Commerce, S u r v e y of Cu rre nt Business.

factor— and in 1957 a very important one—that made
possible an increase in foreign gold and dollar holdings
was the massive drawing on the International Monetary
Fund by many foreign countries. On the other hand,
transactions with the United States, which from 1952 to
1956 had been the largest single factor in the build-up of
foreign monetary reserves, last year resulted in transfers
of gold and dollars by foreign countries to the United
States. Finally, the gold and dollar position of individual
countries was affected by transfers of reserves among the
foreign countries themselves.
Net drawings by foreign countries on the International
Monetary Fund totaled some 900 million dollars in 1957,
following drawings of nearly 600 million during the last
quarter of 1956. Among countries that drew particularly
large amounts last year were France (2 6 2 million dollars),
India (2 0 0 million), Japan (1 2 5 million), Argentina (7 5
million), and the Netherlands (6 9 million). Assistance
obtained from the Fund is, of course, essentially of a short­
term character and can best be regarded by the countries
concerned as a temporary addition to their reserves, per­
mitting them to adopt and carry out, within a limited
period of time, measures to restore stability and balance
to their respective economies. The Fund’s business activity
necessarily varies a great deal from one period to another;
however, the Fund was particularly active during the fif­
teen months ended December 1957, when drawings ex­
ceeded the amount drawn during the entire postwar period
through September 1956. The International Monetary
Fund, in turn, obtained the dollars to finance these draw­




ings partly by redeeming the noninterest-bearing notes that
it holds as part of the United States subscription, and
partly from the sale of gold to the United States Treasury
mentioned above.
The losses of reserves by foreign countries to the United
States were not the outcome of any decline in United
States payments for imports, United States investment
abroad, or United States government outlays; on the con­
trary, such payments were larger in 1957 than in any
earlier year. Rather, they were due to a large rise in United
States receipts from foreign countries, in turn the result
of a sharp increase in foreign purchases of United States
merchandise and, to an extent that cannot be accurately
measured, of short-term capital inflows (Chart I I ). In the
second half of the year, it is true, United States capital
outflows were reduced, but United States merchandise im­
ports were well maintained; on the other hand, foreign
purchases in the United States declined and this, together
with the abatement of speculative capital movements dur­
ing the last quarter of 1957, enabled foreign countries to
restore an approximate balance in their financial relation­
ships with the United States.
During the first three quarters of 1957 aggregate United
States payments to foreign countries amounted to 20.2
billion dollars, as against 18.9 billion during JanuarySeptember 1956. Payments for merchandise imports set
a new record of 9.9 billion, slightly above the previous
year’s peak of 9.6 billion, and outlays on tourism, trans­
portation, and other services were also moderately higher.
United States economic aid remained, on the whole, un­
changed. Private capital outflows increased markedly to
2.4 billion dollars, as against 1.9 billion in 1956, with in­
vestments in Venezuela and Canada accounting for about
one half of the total.
The increase in aggregate United States payments to
foreign countries during January-September 1957 was,
however, more than offset by the rise in receipts from for­
eign countries. United States receipts from merchandise
exports rose to 14.7 billion dollars or 18 per cent above
1956. This rise was attributable, in part, to several special
or temporary factors— increased shipments of oil because
of the Suez crisis, of cotton because of export sales at a
price below the domestic level, and of wheat because of
poor crops in a number of countries in Europe and Asia.
Fundamentally, however, it was due to the sharp increase
in demand for American raw materials and manufactures,
which was, of course, the by-product of inflationary pres­
sures that were greatly intensified in late 1956 and early
1957. Toward the year end, however, United States
merchandise exports declined markedly; in SeptemberNovember, they were running at an annual rate of over

FEDERAL RESERVE BANK OF NEW YORK

2 billion less than during the first quarter of 1957. The
rise in United States receipts from foreign countries was
also due to the inflow of speculative funds, as can be
inferred from the sizable increase in the so-called “errors
and omissions” in the United States balance of payments.
These unrecorded capital movements obviously reflected
the reduced confidence in certain foreign currencies, and
were an accompaniment of inflationary pressures and the
attendant expectations of exchange depreciation. As
already noted, this inflow subsided during the last quarter
of the year.
The excess of receipts by the United States from foreign
countries over its outpayments to them resulted in trans­
fers of foreign gold and dollars that may be estimated at
some 600 million dollars for the entire year. The actual
reserve gains or losses of individual countries were, of
course, the result not of their transactions with the United
States alone, but also of those with many other countries
as well. Indeed, with the growing importance of the United
States dollar in settlement of nondollar trade and other
transactions, changes in foreign dollar holdings— as well
as in gold reserves— tend to reflect increasingly the over­
all payments position of a particular country rather than
its position vis-a-vis the United States or the dollar coun­
tries alone. In Western Europe, in fact, the deficits of
countries like France and the United Kingdom had their
counterpart in the payments surplus achieved by Germany.
The latter thus received last year about 1 billion in gold
and dollars from the European Payments Union, while




31

France and Britain paid into the Union some 650 million
and 2 70 million dollars, respectively.
C o n c l u d in g C o m m e n t

At various times during last year, concern was expressed
abroad over the reemergence of a “dollar gap”. To be
sure, the state of the balance of payments of the United
States is a matter of great importance to many foreign
countries, and a decline in United States import expendi­
tures and other United States external payments would,
no doubt, affect them adversely. Last year, however,
United States payments to foreign countries were larger
than in any earlier year, and the loss of gold and dollars
by foreign countries to the United States was mainly the
outcome of a pronounced increase in foreign purchases in
the United States, partly temporary in character, and of an
influx of short-term foreign funds into the dollar. Many
individual countries lost, of course, large amounts of gold
and dollars, but those that experienced the most serious
payments strains encountered such difficulties not merely
with the United States, but with other countries as well.
These difficulties in turn reflected maladjustments linked
primarily to excessive internal expenditures and the at­
tendant inflationary pressures that gave rise to heavy
imports and undermined confidence in the nations’ cur­
rencies. By the turn of the year, however, many countries
had made determined efforts to bridle inflation and were
approaching a more sustainable external position.

A N A L Y S IS OF R E C E N T D E P A R T M E N T STORE T R E N D S
SECO ND F E D E R A L R E SE R V E D IS T R IC T

An article on recent trends in department store
trade in the Second Federal Reserve District is avail­
able upon request from the Financial and Trade
Statistics Division, Research Department, Federal
Reserve Bank of New York, New York 45, N. Y.

32

MONTHLY REVIEW, FEBRUARY 1958
SELECTED ECONOMIC INDICATORS
United States and Second Federal Reserve District

Item

1957

Unit
December

U NITED STATES
Production and trade
Industrial production*......................................................................
Electric power output*.....................................................................
Ton-miles of railway freight*..........................................................
Manufacturers’ sales*.......................................... .............................
Manufacturers’ inventories*............................................................
Manufacturers’ new orders, total*.................................................
Manufacturers’ new orders, durable goods*................................
Retail sales*.........................................................................................
Residential construction contracts*...............................................
Nonresidential construction contracts*........................................
Prices, wages, and employment
Basic commodity prices f ..................................................................
Wholesale prices f ................................................................................
Consumer prices f .............................................................................
Personal income (annual rate)*......................................................
Composite index of wages and salaries*.......................................
N onagricultural employment * .......................................................

Manufacturing employment*........................................................
Average hours worked per week, manufacturing f .....................

Unemployment....................................................................................
Unemployment %..................................................................................
Banking and finance

Total investments of all commercial banks................................
Total loans of all commercial banks.................................... ..
Total demand deposits adjusted...................................................
Currency outside the Treasury and Federal Reserve B anks*..
Bank debits (337 centers)*............................................................
Velocity of demand deposits (337 centers) * ...............................
Consumer instalment credit outstanding t1f...............................
United Stales Government finance (<other than borrowing)

Cash income.........................................................................................
Cash outgo........................................................................................

National defense expenditures......................................................

1947-49 = 100
1947-49 = 100
1947-49 « 100

billions
billions
billions
billions
billions

of
of
of
of
of

$
$
$
$
$

1947-49=* 100
1947-49 = 100

1947-49 = 100
1947-49 - 100
1947-49 = 100
billions of $
1947-49 = 100
thousands
thousands
hours
thousands
thousands
millions of $
millions of $
millions of $
millions of $
millions of $
1947-49 = 100
millions of $
millions of $
millions of $
millions of $

136 p
227
—
—
—
—

—
16. Ip
—
—

1956

November

October

139
229
96p
2 7 .4p
5 3 .8p
2 6 .2p
1 2 .3p
1 6 .6p

141
228
97
28.1
54.1
26 .2
12.2
16.7

December

147
224
97
2 8 .8
52.3
2 9 .0
14.5
16.3

Percentage change
Latest month Latest month
from previous from year
month
earlier

- 2
- 1
1
- 2
- 1

-

§

+ 1
+ 1
n.a.

- 7
1
- 9
- 4
+ 3
-1 3
-2 2
+ 2
n.a.
- 1
+

n.a.

n.a.

n.a.

8 4 .5
118.1
121.6
3 45.4
160p
52,237p
16,474p
39.3
2,989
3,188

8 4 .8
117.8
121.1
345.9
159
52,469
16,604
3 9 .5
2,277
2,508

92 .9
116.3
118.0
334.8
153r
52,541
17,106
4 1 .0
2 ,479
n.a.

75,560p
94,280p
1 0 8 ,900p
3 1 ,092p
80,826
148.1
34,127

7 4,260p
93,010p
1 0 7 ,190p
30,963
78,567
139.4
33,596

74,900p
9 3 ,OOOp
1 0 7 ,160p
31,016
81,708
142.5
33,504

74,821
90,302
111,391
3 0 ,940r
76,576
138.1
31,827

+ 2
+ 1
+ 2
#
+ 3
+ 6
+ 2

+ 6
+ 7
+ 7

6,622
7,203
3,694

6,463
6,553
3,277

3,410
6,930
3,806

5,899
7,448
3 ,448

+ 2
+ 10
+ 13

+ 12
- 3
+ 7

157
n.a.
n.a.
118.6
7 ,7 2 8 .1
2 ,5 4 7 .4
76,241
4,984
197.3
124
138

165
n.a.
n.a.
118.4
7 ,7 3 0 .7
2 ,5 6 5 .3
76,664
5,388
196.2
119
138

156
n.a.
n.a.
115.5
7 ,8 7 2 .5
2 ,6 9 9 .4
65,674
5,042
174.8
123
139

+ 1
n.a.
n.a.
#
- 1
- 1
- 2
+ 1
+ 1
+ 3

+ 2
n.a,
n.a.
+ 3
- 3
- 7
+ 14

84.7
1 18.4p
121.6
3 4 2 . 8p
—

5 1 ,895p
16,281p
3 9 .3p
3,140
3,374

269

262

311

+ 3

+
-

§
#
§

1
1
1
1

#

+
+

5

6

9
2
+ 3
+ 2
+ 5
- i
- 5
- 4
+ 27
n.a.
+

+ 1
+ 4
—2
i

SECOND FEDERAL RESERVE DISTRICT
Electric power output (New York and New Jersey)*..................
Residential construction contracts*..................................................
Nonresidential construction contracts*...........................................
Consumer prices (New York C ity )t.................................................
Nonagricultural employment*...........................................................
Manufacturing employment*.............................................................
Bank debits (New York City)*...........................................................
Bank debits (Second District excluding New York City) * .........
Velocity of demand deposits (New York C ity )* ............................
Department store sales* §...................................................................
Department store sto c k s*!.................................................................

1947-49 - 1 0 0
1947-49 = 100
1947-49 = 100
1947-49 = 100
thousands
thousands
millions of $
millions of $
1947-49 = 100
1947-49 = 100
1947-49 = 100

159
—
—
118.7
7 ,6 6 2 .Op
2 ,5 1 9 .3p
75,071
5,057
198.9
128
138

i

§

+ 14
+ 4
- 1

Note: Latest data available as of noon, February 3, 1958.
p Preliminary.
X New basis. Under a new Census Bureau definition persons laid off temporarily and *those
r Revised.
waiting to begin new jobs within thirty days are classified as unemployed; formerly these
n.a. Not available.
persons were considered as employed. Both series are available for 1957.
* Adjusted for seasonal variation.
t
§ Revised series. Back data available from the Financial and Trade Statistics Division
t Seasonal variations believed to be minor; no adjustment made.
Federal Reserve Bank of New York.
i Change of less than 0 .5 per cent.
1 Revised series. Back data published in Federal Reserve Bulletin, December 1957.
Source: A description of these series and their sources is available from the Domestic Research Division, Federal Reserve Bank of New York, on request.