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18

MONTHLY REVIEW, FEBRUARY 1959

The Business Situation

Although the usual post-Christmas “breathing spell” has
slowed business activity in some parts of the economy, the
vigorous upswing that characterized the last part of 1958
has continued in early 1959. Record holiday sales left
many merchants and some manufacturers with shelves
bare, and reordering is said to be brisk. Rebuilding of
automotive and steel inventories may have accelerated,
and inventory accumulation appears to be beginning in
several other lines. In addition, construction activity ad­
vanced further (except as hampered by poor weather),
reflecting the increases in housing starts and road-building
contracts in late 1958. Moreover, the recent flow of in­
dustrial and other business construction awards, and a rise

Cha rt I

INDICATORS OF TOTAL BUSINESS ACTIVITY
S e a s o n a l l y ad jus te d
B i l l i o n s of 1958 dcjllars

B illie ms of 1958 do lla r s

45 5

455
450 —
445 —
44 0

A n n u a l rates

435 —

440
435

-

430

1 1 1

425

430 —
1 1 1 1 1 1 1 1 1 !

425

445

-

/
Real gross
/
n a t i o n a l p ro du c t r f

\

45 0

~

V

—

~
-

P

\

i°

1

T

i i

i

i

i

i

Per cent

145

145
140 _ T
135

*

X

I
I n dus trial p r o d u c t i o n

140

^

1947-49=100

_

— 135

130

130
125

I I

1 1 1 _L_ I

M ill io ns of p e r s o n s

! 1 1. 1.

i

r V

r i 1 1 1 1

1 1

125

M ill io ns of persons

53

53

52

N o n fa r m em pl oy m en t

51

I I I I I

50

llions of d o ll a r s

315
310
305
30 0
B il li o n s of do lla rs

45
40

i i i i i t i i i' r . . . I i t i i i L
1957

1958

Source: Econ omic R ep or t of the Pr es id en t, J a n u a r y 20, 1959.




35
30

in machine tool orders, tend to indicate that the long de­
cline in business outlays on plant and equipment may now
be over, as was earlier suggested by surveys of business
spending plans.
Most of the comprehensive measures of output and
income closed the past year with rises to record or near­
record levels. The total physical output of goods and serv­
ices (real GNP) rose 3 per cent from the third to the
fourth quarters, and reached a level nearly matching the
previous peak in mid-1957 (see Chart I). Manufacturing
and mining output, as measured by the Federal Reserve
index of industrial production, increased 1 point further
in December, the eighth consecutive monthly rise. The
total index was still 3 per cent below its all-time high,
largely reflecting the incomplete recovery in the capital
goods industries and in mining, but output of nondurable
goods was well ahead of its pre-recession peak. Privately
financed housing starts jumped in December to a seasonally
adjusted annual rate of over 1.4 million units, more than
50 per cent above the February low and very close to a
new record. Retail sales, which had been relatively sluggish
for several months, also spurted in December, with auto,
department store, and apparel store sales increasing
sharply. According to preliminary data, total retail dollar
volume (seasonally adjusted) set a new record by a sub­
stantial margin.
While personal income dipped slightly in December
from the record November rate, this was due to a largely
statistical drop in the seasonally adjusted rate of dividend
receipts, as year-end “extras” for the third straight year
were substantially less than was usual in most earlier years.
Receipts from government benefits also declined. Labor
income continued to expand, however, mainly as the re­
sult of rising pay-scales and more overtime. Meanwhile,
corporate profits advanced by 16 per cent in the fourth
quarter, according to early estimates, to reach a seasonally
adjusted annual rate approaching that of the record years
1955 and 1956.
As has been the case since late summer, gains in em­
ployment failed to match the pace of expansion in output
and demand. Nonfarm employment rose less than sea­
sonally in December; trade and post office employment
increased by the usual large amount, but construction
employment dropped more than normally because of un­
usually bad weather. In seasonally adjusted terms, the
total number of nonfarm wage and salary workers was still

19

FEDERAL RESERVE BANK OF NEW YORK

13 million below the July 1957 high. Moreover, the
A
number of private nonfarm jobs was actually more than
2 million short of the pre-recession peak, government
employment having expanded by 400,000 in the interim.
The poor weather in December was also a factor in
the slight rise in unemployment, to 6.1 per cent of the
labor force (seasonally adjusted) from 5.9 per cent in
November. In 1958, as in 1957, the growth of the labor
force (people at work or looking for work) was smaller
than long-run population trends would imply. On the
average, the total labor force in 1958 was about half a
million persons larger than in 1957, compared with an
average annual rise of one million during the preceding
decade. The number of people not now looking for work
who might re-enter the job market as employment oppor­
tunities improve may therefore be relatively large.
Despite the slow improvement of the labor market,
the exceptional buoyancy of consumer buying during the
holiday season testifies to the strengthening of public con­
fidence in the economic outlook. Consumption outlays
increased in the fourth quarter by substantially more than
the gain in disposable personal income (personal income
less income taxes). A large part of the increased spending,
moreover, went for autos, household durables, and other
nonroutine (“discretionary”) purchases. Such purchases
were particularly strong in December. Since 1955, how­
ever, sales have shown an unusually pronounced tendency
to sharp, but short, spurts around holiday and vacation
periods. This apparently occurred again in late 1958; in
January 1959, according to partial data, auto and depart­
ment store sales fell back from the high rates achieved
during the December sales burst.
The reduction in the rate of personal saving, as outlays
rose far more than income, naturally cannot be repeated
indefinitely. At some point, any further substantial in­
crease in consumer buying will be dependent on gains in
real family income. It is significant that real per capita
income after taxes is still about 2 per cent below the peak
reached in mid-1956. Moreover, the portion of such in­
come set aside for credit repayment and other fixed com­
mitments has increased. Of course, even if per capita
incomes did not expand but instead remained stable, the
total volume of sales would expand along with the growing
population. While there is no doubt that many businesses
would prosper under these circumstances, there is general
agreement that the economy is capable of providing not
merely a stable, but a rising standard of living.
Given the rather ample capacity now existing in many
industries, there is room for an appreciable increase in
per capita income and consumption over the coming




months. But to achieve this without touching off another
round of inflation, the gains in real income should be
brought about through lower prices for at least some
products, which would stimulate increases in the over-all
volume of sales and hence in output, employment, and
profits—a sequence which did much to launch the vigor­
ous upswings that began in 1949 and 1954.
THE OUTLOOK FOR PRICES

During the second half of 1958, the consumer price
index held virtually unchanged (see Chart II). Develop­
ments during this period may be summarized as follows.
Food prices were declining about seasonally, after having
advanced sharply more than seasonally earlier in the year.
Prices of manufactured goods were rising, probably some­
what more than seasonally, after having declined about
seasonally earlier in the year. Service prices, meanwhile,
continued to advance, but at a distinctly slower pace than
in the preceding two years.
Looking ahead, food prices—which represent some 30
per cent of the cost of living (see Chart III)—seem to
offer the best prospects for some decline. Some drop could
occur merely if the weather in farm areas turns out to be
better this year than in 1958. The harsh winter last year
sharply reduced fruit and vegetable crops and resulted in
a steep run-up in prices of fresh produce as well as sub­
stantial price rises for some frozen and canned goods.

C h a r i II

CONSUMER PRICES AND MAJOR COMPONENTS
1947 - 49=100

Per cent

S ou rc e :

Per c e n »

Un ited Stat es Bureau of l a b o r St at ist ics .

20

MONTHLY REVIEW, FEBRUARY 1959

Hopefully, this pattern may not be repeated this year,
although the reduced stocks of many frozen and canned
goods may continue to exert some upward pressure. The
other major source of higher food prices in 1958 was the
sharp advance in meat prices; meat rose much more than
seasonally in the first half of the year, and declined only
about seasonally in the second half. Farmers have been
sending fewer animals to market, partly because they have
been building up their cattle herds. A period of increased
marketings and lower prices is almost bound to follow
eventually, however. Pork prices are expected to decline
this year, while beef prices are likely to decline by 1960,
and possibly sooner.
In contrast to the outlook for food prices, the rise in
the cost of services and shelter (about a third of family
budgets) seems likely to persist. This rise, which has con­
tinued almost uninterruptedly since before World War II,
has slowed down substantially since early 1958, however
—from a rate of about 4 per cent annually in the previous
two years to about 2 per cent currently. While fully
detailed data are not available beyond September, the
slowing-down apparently reflects partly a leveling-off in the
cost of scattered items such as movie admissions, beauty
shop charges, and some repair and maintenance services,
as well as a decline of mortgage interest rates. Prices of




other services, such as utilities, transit fares, and medical
services, continued to advance rapidly, although in some
cases not so fast as before. Recent developments in the
mortgage market suggest the possibility of some renewed
increase in mortgage rates.1
The remaining part of consumer budgets—more than
a third—consists of manufactured goods. With food prices
possibly declining and service prices rising, the behavior of
prices of manufactured goods may in effect determine the
trend of consumer prices over the coming months. Price
developments in this sector in 1957-58 contrast markedly
with the changes that occurred in the previous postwar
recessions. In 1948-49, retail prices of both durable and
nondurable manufactured goods declined. In 1953-54,
nondurable goods were more or less steady in price, but
durable goods declined—reflecting the spread of the dis­
count practice. In 1957-58, however, apart from seasonal
fluctuations, both durable and nondurable goods prices
were steady—except for automobiles, a major component
of this group, for which prices increased.
As expansion continues, upward pressures on consumer
goods prices may intensify. Since midyear, wholesale prices
have increased for a number of key industrial products
and the price rise, while slow, appears to be broadening
somewhat. In addition, the most recent labor agreements
have included wage increases that seem on the generous
side, compared with the average gain in productivity in
the economy as a whole (although to a lesser extent than
in 1955-57), and profit margins also have been rising.
Finally, the increases in various sales and excise taxes
now proposed at all levels of government, if enacted, are
likely to be passed along at the retail level.
On the other hand, there are also strong counterforces.
Recent surveys of consumer attitudes and spending plans
concur in reporting a ground swell of resentment at higher
prices. The feeling that prices are high, some analysts
believe, leads to the deferral of buying plans for durable
goods—people may consider it cheaper to get maximum
use out of what they already have than to pay prices they
regard as exorbitant for new replacements. The price
reductions put into effect by the large mail order firms,
various press reports that some retailers plan to hold the
price line, and the relatively strong showing of economy
cars all suggest that the consumer is expressing his resist­
ance to higher prices in the market place.

1 In principle, the consumer price index should not be affected by
price changes which reflect simply changes in the quality of the prod­
uct. Accordingly, the Bureau of Labor Statistics draws up detailed
specifications in an effort to ensure that the products priced from
month to month are of comparable quality. However, a completely
satisfaaory adjustment for quality may not always be feasible, especially
for some service items.

FEDERAL RESERVE BANK OF NEW YORK

Interpretation of recent developments in prices at the
wholesale level is more difficult than of retail price changes,
due to differences in the methods used to compile the offi­
cial indexes. The consumer price index attempts to meas­
ure the prices people are actually paying. Reporters are
sent to the stores to note the prices marked on merchandise
or to obtain quotations from salesmen or managers. The
wholesale price index, on the other hand, relies to a very
great extent on list prices and consequently may not fully
reflect unpublicized discounts and other forms of price
shading. Unquestionably, discounts on industrial goods
were relatively common in early 1958, but have subse­
quently narrowed considerably or disappeared. However,
the size of the discounts and the proportion of transactions
involved are not easy to ascertain.
According to the official wholesale price indexes, raw
materials prices in 1958 as always were highly respon­
sive to changing business conditions; on the other hand,
prices of fabricated materials and finished goods, and par­
ticularly of metal products, were relatively inflexible (see
Chart IV). Prices of crude industrial materials and fuels
dropped sharply during the business contraction, reflecting
enlarged capacity, inventory liquidation, and reduced con­
sumption. Following the business upturn in May, these

Cha rt IV

INDUSTRIAL WHOLESALE PRICES
AND MAJOR COMPONENTS
19 47 -4 9 = 1 00
Per cent

No te :

A ll d a ta e x cl ud e farm an d fo od products.

Sour ce s: Un ited States Bureau of Lab or St at is t ic s a nd
Boar d of G ov e rn or s of the F e d e r a l Rese rve System.




21

prices advanced rapidly for a time, not only because of
improved demand, but also because of measures to re­
strict certain basic commodity imports and because of
a strike that curtailed African copper production. More
recently, however, the rise has come to a halt, with average
prices still at a level below that of mid-1957 and consider­
ably below the high reached during the Suez crisis in late
1956. Prices of fabricated materials and especially of
durable materials, on the other hand, responded only
slightly to the recession (discounts aside) and have been
advancing since the steel price increase in midsummer.
Even though prices of many nondurable materials such as
textiles, chemicals, and petroleum are still below earlier
peaks, the average for all fabricated materials is back to
the pre-recession high. Wholesale list prices of finished
consumer and capital goods, like prices of semimanufac­
tures, also remained virtually unchanged during the reces­
sion, but have tended to rise in the last few months,
principally reflecting higher prices on automobiles and sev­
eral types of machinery.
PRICES AND FOREIGN TRADE

The contrast between the sharp drop in our exports
during the recession and the steadiness of imports has led
to some apprehension that United States producers may
be pricing themselves out of the world market. Of course,
factors other than prices have played the principal part
in reducing our exports. These include the reopening of
the Suez Canal and the fall in our petroleum exports, the
decline in subsidized exports of surplus farm commodities,
the decline in foreign demand associated with business
recessions abroad, and the payments difficulties experi­
enced by many underdeveloped countries as a result of
price declines for their principal raw materials exports.
However, foreign competition has certainly grown more
intense, both at home and abroad. Furthermore, sales in
international markets appear to be turning more and more
on price. The advantage of large capacity and advanced
techniques, held by the United States because of the war
destruction in other industrial countries, has been largely
whittled away, and foreign producers now are frequently
able to offer the same quick delivery and high quality as
United States firms. The increasing attractiveness of lower
costs abroad also may tip the scales in cases where Ameri­
can firms may be considering shifting overseas some of
their manufacturing operations for foreign markets.
On the other hand, the fact that many countries still
apply discriminatory restrictions to imports from the dollar
area suggests that there are many products in which the

22

MONTHLY REVIEW, FEBRUARY 1959

United States retains a considerable competitive advantage.
The recent extension by most West European countries
of convertibility privileges to nonresidents was accompanied
by the further relaxation of discriminatory import restric­
tions on American goods only in France, which had lagged
behind other West European countries in this respect. The
relaxation of such restrictions more or less generally, how­
ever, would appear to be a logical consequence of a suc­
cessful transition to the new currency system. But even if
our exports were to increase substantially, it must be
recognized that the gradual freeing of restrictions on inter­
national trade will tend to promote greater regional spe­
cialization, in the same way as does the large market area
within our own borders. While this is a process that con­
fers important economic benefits—on an international just
as on a domestic scale—it is also one that may have very
uneven impacts on different industries and areas, favoring
some and requiring painful adjustments in others. But this
is probably an inevitable consequence of industrial growth,

and will have to be accepted if the United States is to share
in the improvement of standards of living that the free
world expects to achieve through freer trade and payments.
CONCLUSION

With the advent of the new year, the economy’s total
output has once more begun to set new records, and the
vigorous expansion in demand has of course also increased
upward pressures on some prices. A major question mark
in the outlook for 1959 is whether these pressures will
become so strong as to disrupt the current stability in the
cost of living. The outcome may well hinge on the many
critical policy decisions, public and private, that must be
taken during the coming months. The more general adop­
tion by business and labor of policies aggressively aimed
at “high volume at lower prices” would go far toward
helping the nation to realize its full potential for economic
growth.

Money Market In January

The money market retained a firm tone during January.
System open market operations absorbed the seasonal re­
lease of reserves by market factors and maintained a mod­
erate degree of pressure on bank reserve positions. The
effective rate for Federal funds generally held at the 2Vi
per cent ceiling, although there were occasional reports
of trading at slightly lower levels.
Government securities prices declined further over the
month, extending the downward movement that had begun
in December. Market sentiment was bearish over much
of the period, reflecting both the uncertainties connected
with the Treasury’s $15 billion February refunding opera­
tion and the expectation that the continued improvement
in business activity would lead to further tightening of
credit. In mid-January the Treasury sold $3 Va billion of
securities for cash, a somewhat larger amount than had
been anticipated. Despite their initially attractive yield,
the unfavorable market climate soon caused the two new
securities to fall slightly below their original offering price.
Toward the end of the month the market tone improved
somewhat in response to rumors suggesting that the Febru­
ary exchange offering, originally expected to include a
longer bond, would be confined to shorter maturities.




Moreover, market opinion turned to the view that any
credit-tightening measures in prospect for the near future
had already been discounted. Yields on corporate and
municipal bonds moved higher over the month in response
to the influences affecting the Treasury market and to
the substantial calendar of new municipal financing for
the months ahead.
On January 29 the Treasury announced the terms of its
February refunding operation. Holders of $14.9 billion of
the maturing securities were offered a choice of a 33 per
4
cent one-year certificate of indebtedness to be dated Feb­
ruary 15 and due February 15, 1960 or a 4 per cent
three-year Treasury note to be dated February 15 and
maturing February 15, 1962. The maturing securities in­
clude $9.8 billion of 2Vi per cent certificates of indebted­
ness due on February 14 and $5.1 billion 1% per cent
notes due on February 15. Holders of the certificates elect­
ing to exchange into the new securities will be allowed a
discount on the price of the new issues equivalent to one
day’s interest. Subscription books for the exchange will be
open on three days, February 2 through February 4. The
exchange offering met with a favorable initial response in
the market.

23

FEDERAL RESERVE BANK OF NEW YORK
MEMBER BANK RESERVE POSITIONS

Reserve positions of member banks were under steady,
though moderate, pressure throughout the month of Janu­
ary, as a sizable net reduction in System holdings of
Government securities was employed to absorb large re­
serve gains accruing from the seasonal currency return
and other influences. From time to time, repurchase agree­
ments were extended to moderate localized pressures, par­
ticularly around the time of payment for the new issues
of Treasury notes and bonds. Net borrowed reserves for
the four statement weeks ended in January averaged $64
million, slightly higher than the $41 million average for
December. Average excess reserves, at $503 million,
were $13 million lower than in December, while average
borrowings rose by $10 million to $567 million.
System securities sales or redemptions were made in
fairly substantial volume during the first three statement
weeks of January, when currency was rapidly pouring
back into the banking system and seasonal repayments of
bank loans were releasing required reserves. The reduc­
tion in System securities holdings in the third statement
week offset only part of the unexpectedly large midmonth
expansion of float, and free reserves emerged, on one day
exceeding $250 million. Nevertheless, reserve pressures
failed to lift from banks in the money centers, and the
money market remained tight.
The System sold only a moderate amount of securities
in the final statement week of the month, when the return
flow of currency slowed, float receded, and required reMEMBER BANK RESERVE POSITIONS, 1958-59
M o n t h ly a v e r a g e s of d a i l y figures
Mil lio ns of do lla rs

Mil lio ns of do ll a r s

Table I
Changes in Factors Tending to Increase or Decrease Member
Bank Reserves, January 1959
(In millions of dollars; ( + ) denotes increase,
(—) decrease in excess reserves)

Factor
Operating transactions
Treasury operations*...................................
Federal Reserve float..................................
Currency in circulation...............................
Gold and foreign account............................
Other deposits, etc.......................................
Total............................................
Direct Federal Reserve credit transactions
Government securities:
Direct market purchases or sales.............
Held under repurchase agreements..........
Loans, discounts, and advances:
Member bank borrowings........................
Bankers’ acceptances:
Bought outright.......................................
Under repurchase agreements..................
Total.............................................
Total reserves.................................................
Effect of change in required reserves f ...........
Excess reserves f............................................
Daily average level of member bank:
Borrowings from Reserve Banks.................
Excess reserves!..........................................

Daily averages—week ended

Net
change*

Jan.
7

Jan.
14

Jan.
21

Jan.
28

+
+
+
+
+

+
+
+
-

+
+
+

19
277
325
71
25
485

+
+
+
+

- 151 - 273 - 102 + 11 - — + —87 164
+
+ 1 + 1 - 1 - 2 - 418 - 177 - 36 - 230 - 61 + 219 +
- 97 - 11 -

237
105
275
1
1
1
617
132
70
62

770
- 109
— — 196
+ —51 _ 301
+ 1
- 2 _ 1
— — 4
- 60 -1,272
+ 48 _ 350
- 181 + 47
- 133 - 303

70
217
448
61
20
382

626
575

53
390
298
26
12
53

713
564

438
502

4
214
235
59
30
108

489
369

100
+ 544
—
+1,306
+ 23
+ 37
+ 922

5671
5031

Note: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
t These figures are estimated.
t Average for four weeks ended January 28.

serves increased. The rise in required reserves late in the
month reflected the expansion of deposits on January 21
and 23, when banks made payment for their purchases of
the new Treasury securities by crediting Treasury Tax and
Loan Accounts.
Over the four statement weeks ended January 28, cur­
rency in circulation fell by $1.3 billion, or by approxi­
mately the amount of the increase since last July. The
effect of this flow was partially cushioned by a $544 mil­
lion seasonal drop in float. System holdings of short-term
Treasury obligations declined by $910 million between
December 31 and January 28, including $815 million sold
or redeemed from the System Account and $95 million
under repurchase agreements.
GOVERNMENT SECURITIES MARKET

1958

1959

^ The J a n u a r y a v e r a g e is for the four w e e k s en de d J a n u a r y 28.




Activity in the market for Treasury notes and bonds
during January was largely confined to tax-switching trans­
actions, the volume of which expanded markedly after the
turn of the year. During much of the month, attention
was centered on the Treasury’s $3% billion cash-financing
operation, the terms of which were announced after the

24

MONTHLY REVIEW, FEBRUARY 1959

close of the market on January 8. Later in the month,
speculation about the terms of the Treasury’s February
refunding dominated market developments.
The January cash offering included $2.5 billion of 3J4
per cent sixteen-month notes, dated January 21 and to
mature May 15, 1960, issued at a price of 99.75 per cent
of face value (equivalent to a yield of 3.45 per cent) and
$750 million of 4 per cent 21-year bonds, dated January
23 and due February 15, 1980, issued at a price of 99.0
per cent of par (equivalent to a 4.07 per cent yield).
The flotation was the second recent instance in which
Treasury securities were issued at a discount from face
value; similar pricing had been used in last November’s
refunding. While the size of the offering was larger than
had earlier been indicated, the Treasury at the same time
made it known that for the time being it was suspending
its program, which had been expected to continue through
March, of raising $200 million of new money through
Treasury bill auctions each week.
In order to discourage speculative subscriptions to the
new securities, the Treasury required a cash downpayment
of 15 per cent with all nonbank subscriptions for the
bonds. Also, the Treasury reserved the right to make
preferential allotments of the bonds to savings-type inves­
tors and, in order to encourage subscriptions from these
investors, offered them the option of making payment in
four monthly instalments through April 23. The savingstype investors specified by the Treasury include insurance
companies, pension and retirement funds, savings deposi­
tories other than commercial banks, and several others
as well. Subscription books for the notes were open on
January 12 only, and on January 12 and 13 for the bonds.
The 47 per cent allotment on the notes, announced on
January 14, was about in line with market expectations,
while allotments of the bonds, announced on January 16,
were larger than had been expected. The bonds were
awarded on a 70 per cent basis to savings-type investors,
on a 35 per cent basis to commercial banks, and on a 15
per cent basis to all other subscribers.
The new 3*4 per cent notes began trading on a “whenissued” basis at 992%2, Vs2 of a point below the issue
price, and subsequently the quotation declined moderately
to 99iy32, equivalent to a yield of 3.67 per cent, where
it stabilized. In contrast, the quotation on the bonds fluc­
tuated irregularly. After trading briefly at the issue price
or higher, the price of the bonds dropped to 98x%2 and
then rose to close the month at 98 2%2, equivalent to a
yield of 4.09 per cent. Both new issues were generally
under selling pressure; offerings of notes, originating
mainly from banks, were partly absorbed on tax swaps,




while the rising yield on the bonds generated some out­
right investment demand for these securities.
Prices of outstanding notes and bonds drifted downward
in the first part of January, extending the sharp declines
which had taken place in December. The downward move­
ment accelerated around mid-January in a general adjust­
ment to the yields being established on the new Treasury
securities, but prices steadied and recovered somewhat
toward the close of the month. For the month as a whole,
bonds maturing in more than ten years generally lost about
1 point, while shorter issues were off about V2 a point.
The average yield on long-term Treasury securities rose to
3.92 per cent at the end of the month from 3.83 per cent at
the end of December.
The Treasury bill market tended to be somewhat heavy
during early January, reflecting the shrinkage of nonbank
demand from its unusually high December level and the
absorption by the market of a seasonal decline in System
holdings of bills. Later, however, investment demand
picked up and dealers were able to reduce their relatively
high inventories of these issues. Generally, little en­
thusiasm was evidenced in the weekly auctions of new
bills, and yields rose steadily. In the last January auction,
however, bidding for the 91-day bills was rather aggres­
sive, evidencing anticipation of increased demand for
these issues around the time of the Treasury refunding.
The 91-day bills were awarded at an average issuing
rate of 2.678 per cent on January 5, 2.808 per cent
on January 12, 3.035 per cent on January 19, and
2.975 per cent on January 26 (compared with 2.690 per
cent in the last December auction). Average issuing rates
of 2.959 per cent, 3.034 per cent, 3.233 per cent, and
3.337 per cent were established in the respective auctions
of 182-day bills (against a rate of 2.920 per cent on
December 30). The Treasury continued to offer $400 mil­
lion of 182-day bills in each bill auction held during
January. Beginning on the January 19 auction date, how­
ever, the offering of regular 91-day bills was cut to $1.4
billion from $1.6 billion.
OTHER SECURITIES MARKETS

The volume of new financing in the corporate and
municipal bond markets expanded seasonally after the
turn of the year. New corporate bond flotations for new
capital purposes totaled an estimated $375 million in Janu­
ary, compared with $430 million in January 1958 and
$260 million in December 1958. Municipal bond issues
marketed during the month totaled an estimated $525 mil­
lion, against $670 million a year earlier and $360 million

25

FEDERAL RESERVE BANK OF NEW YORK

in December. Most larger flotations were quickly sold
out, but dealers made little progress in distributing unsold
balances of earlier offerings. Not infrequently, the cor­
porate issues which sold well carried a stipulation that
the debt would not be refunded at a lower interest rate
for five years. Many new corporate issues attained pre­
mium bids in the secondary market.
Prices of seasoned corporate and municipal bonds de­
clined moderately over the month in light trading. The
average yield on seasoned Aaa-rated corporate bonds rose
by 6 basis points to 4.16 per cent, and that on similarly
rated municipals advanced by 8 basis points to 3.20 per
cent. Corporate bond prices tended to fluctuate irregularly
in sympathy with the Treasury market, while prices of
municipals held relatively steady after an initial decline
early in January.
Several changes took place in rates on other short-term
debt instruments. On January 20 one major finance com­
pany raised its rates by varying amounts for different
maturities and, at the same time, split its 30- to 89-day
paper into two maturities: 30- to 59-days, on which the
old 2% per cent rate is still in effect, and 60- to 89-days,
on which a new 3 per cent rate will be applied. Rates were
lifted by V* of 1 per cent to 3Va per cent for 90- to 179day paper and by Vs of 1 per cent to 3¥s per cent on 180to 270-day paper. Rates of the other major finance com­
panies were unchanged at the old levels. On January 21
commercial paper dealers raised their rates by Vs of 1 per
cent, offsetting a decrease of similar size in December.
The dealer rate on prime four- to six-month paper is now
3Vs per cent.
MEMBER BANK CREDIT

Total loans and investments at weekly reporting mem­
ber banks dropped by $308 million over the four weeks
ended January 21, reflecting a substantial decline in loans
and a relatively moderate net increase in securities hold­
ings. Loans adjusted declined by $696 million in the
period, while portfolios of investments were increased by
$388 million.
The $709 million decline in business loans was about
half of the $1,434 million business loan contraction in
the corresponding period last year and somewhat smaller
than that of the same weeks two years ago. Most
of the broad industrial borrowing groups repaid loans, on
balance, but in most instances the reductions were less
than in the comparable weeks ended in 1958 and 1957.
Metals and metals products firms, moreover, increased
their borrowings contraseasonally by $71 million in the
current period. The largest declines occurred in loans to




Table II

Changes in Principal A ssets and Liabilities of the
W eekly Reporting Member Banks
(In millions of dollars)

Item
Assets
Loans and investments:
Loans:
Commercial and industrial loans..........
Agricultural loans................................
Securities loans....................................
Real estate loans..................................
All other loans (largely consumer).,
Total loans adjusted*................
Investments:
U. S. Government securities:
Treasury bills...................................
Other securities....................................
Total investments............................
Total loans and investments adjusted*.......
Loans adjusted* and “ other’’securities........
Liabilities
Demand deposits adjusted..........................
Time deposits except Government..............
U. S. Government deposits.........................
Interbank demand deposits:
Domestic.................................................

Statement week ended
Jan.
14

Jan.
21

Four
weeks
ended
Jan. 21,
1959

Dec.
31

Jan.
7

+
+
+
+
+

269
1
217
5
154
603

+
-

578
15
129
9
67
783

+
-

169
5
307
25
27
483

- 231 - 709
- 6 - 27
+ 160 - 59
+ 21 + 60
+ 20 + 80
- 33 - 696

+
+
+
+
+
+

44
36
8
58
66
669
541
661

- 145
- 225
- 370
+ 28
- 342
-1,125
+ 856
- 755

-

39
219
258
14
272
755
84
497

+ 21 - 119
+1,003 + 523
+1,024 + 404
- 88 - 16
+ 936 + 388
+ 903 - 308
9 + 222
- 121 - 712

+ 544
+ 180
+ 130
+1,390
+ 22

- 296
- 139
-1,479
- 698
- 65

+
-

56
33
515
42
66

+ 499
+ 35
+1,564
- 993
- 11

+
+
-

691
109
300
343
120

* Exclusive of loans to banks and after deduction of valuation reserves; figures for the individual
loan classifications are shown gross and may not, therefore, add to the totals shown.

food, liquor, and tobacco processors, which dropped by
$198 million, and in loans to trade firms, which were off
$177 million; both of these reductions were less than might
be expected on seasonal grounds. Similarly, sales finance
companies, which had repaid over $350 million of their
bank indebtedness last year, reduced borrowings by only
$29 million in the latest four weeks.
The reporting banks5 holdings of Government securities
increased by $404 million, reflecting a $119 million decline
in Treasury bills and a $523 million net increase in other
types of issues. In the January 21 statement week, when
the banks took delivery of the new 3Va per cent Treasury
notes, portfolios of securities other than bills rose by
$1 billion, but this increase was partly offset by a preced­
ing sharp liquidation of certificates, notes, and bonds. The
banks reduced their holdings of non-Government securities
slightly over the period.
Demand deposits adjusted rose by almost $700 million
at the weekly reporting banks in the four-week period
ended January 21, a much larger increase than in com­
parable weeks in other recent years. However, the expan­
sion in time deposits of about $100 million fell far short
of the rise of $452 million recorded in the comparable
weeks of last year and was also less than half the expan­
sion of $276 million recorded in 1957.

26

MONTHLY REVIEW, FEBRUARY 1959

International Monetary Developments

MONETARY TRENDS AND POLICIES

Foreign monetary and credit developments in January
generally followed the pattern established in 1958. In the
industrial and financially developed countries, the trend
toward credit relaxation and easier money that got under
way about a year ago continued last month. The central
banks of Belgium, West Germany, the Netherlands, and
the Union of South Africa reduced their discount rates,
bringing to over thirty the number of foreign discount
rate reductions since the beginning of 1958 (see table);
in addition, in Finland the central bank lowered the rate
it charges to private nonbank customers. On the other
hand, in the primary-producing countries, where inflation­
ary pressures generally persist, the tendency to maintain
or strengthen credit restrictions continued. In January, the
Central Bank of Argentina raised commercial bank reserve
requirements, and the State Bank of Pakistan increased its
discount rate.
The extent to which the industrial countries have moved
in the direction of monetary ease is indicated not only by
Changes in Foreign Central Bank Discount Rates in 1958-59

(In per cent)

Date of
change
1958: January 17
January 24
March 20
March 25
March 27
March 28
April 9
April 19
May 3
May 22
May 31
June 5
June 7
June 14
June 18
June 19
June 27
July 3
August 14
August 15
August 28
September 2
September 5
October 1
October 16
November 15
November 20
November 28
1959: January 5
January 8
January 10
January 15
January 21

Country
Germany
Netherlands
United Kingdom
Netherlands
Belgium
Ireland
Brazil
Denmark
Sweden
United Kingdom
Ireland
Belgium
Italy
Netherlands
Japan
United Kingdom
Germany
Belgium
United Kingdom
Denmark
Belgium
Ireland
Japan
Finland
France
Netherlands
United Kingdom
Ireland
Union of South Africa
Belgium
Germany
Pakistan
Netherlands

New rate
3 34
434
6
4
4^
5H
8
5
434
534
5
4
334
334
7.665*
5
3
3H
434
434
334
4H
7.3*
7Ht
4K
3
4
4M
4
3M
2M
4
2%

* “ Basic” rate for commercial bills.
t Rate applicable to rediscounting for commercial banks.




Amount of
change
—34
-3
- l4
-3 4
-3
+24
-3 4
-3 4
-3 4
-3 4
-H
-3 4
-3 4
-0.73
-H
-3 4
M
-M
-3 4
—34
— A
X
-0.365
-M
-3 4
-3 4
-3 4
-3 4
-M
M
+1
-H
—

—

the frequency of discount rate decreases in the past thirteen
months, but also by the relatively low levels reached by
last month’s reductions. Thus, the German Federal Bank’s
new 2% per cent rate is the lowest in the history of Ger­
man central banking; the Dutch rate of 2% per cent and
the Belgian rate of 2>Va per cent are the lowest since 1956;
and the decrease to 4 per cent in the South African rate
marks the first change in over three years and reduces it
to the level in effect in 1952-55.
While there are, of course, broad differences between
the financial and economic climates of the various coun­
tries, certain common elements characterized last month’s
cuts in discount rates. In each case, the reduction pri­
marily reflected a continued increase in gold and foreign
exchange reserves and an accompanying rise in market
liquidity. In the three Western European countries, the
lowering of discount rates at this particular time also attests
to the basic strength of their currencies in the foreign
exchange markets, following the advent of nonresident
convertibility and the implementation of the European
Monetary Agreement at the end of December. The Ger­
man Minister of Economic Affairs, in fact, welcomed the
German move as helping to overcome any difficulties that
might be encountered by Germany’s European trading
partners as a result of the convertibility measures. In both
West Germany and the Union of South Africa, moreover,
the rates were lowered with the express intention of influ­
encing the yield differentials between the financial centers
in these and other countries—the purpose in Germany
being to stimulate the outflow of private capital, and in
South Africa to avoid an inflow of short-term funds that
might lead to embarrassing withdrawals in the future.
Concern over domestic economic conditions seems to
have been generally absent in Germany and the Nether­
lands, but may have played a role in the decisions of the
Belgian and South African central banks. In Belgium,
industrial production remains below the level of last winter
and unemployment continues relatively high, reflecting
partly some weakening of Belgium’s export position. In
South Africa, appreciable slackness has appeared in sev­
eral primary and secondary industries, and the pace of
over-all economic activity has slowed down in the wake
of the restrictive measures taken in the first half of 1958
to correct the country’s external deficit. A beginning was

FEDERAL RESERVE BANK OF NEW YORK

made in reversing the restrictive policy last November,
when the central bank reduced to 6 per cent from 8 the
commercial banks’ supplementary cash-reserve require­
ments, instead of raising them to 10 per cent as originally
scheduled.
The measures adopted last month in Argentina and
Pakistan represent efforts to deal with the severe economic
stress that both countries have been suffering for the past
few years. Argentina has embarked on a comprehensive
stabilization program with the aid of credits from the
United States Treasury, the Export-Import Bank, the
Development Loan Fund, United States commercial banks,
and the International Monetary Fund. As part of this pro­
gram, minimum reserve requirements for most commercial
banks were raised to 30 per cent from 20 as of January 1.
The banks also were requested to pursue a more selective
lending policy and to restrict nonessential loans. The dis­
count rate increase in Pakistan marks the first change in
the rate since the central bank was established in 1948. At
the same time, control over all foreign exchange earnings
was lodged with the central bank, and an export bonus
plan, designed to increase foreign exchange earnings, was
introduced. These moves follow indications that the au­
thorities will speed up various agricultural development
projects that had been subordinated to industrial expansion.
In addition to the foregoing measures, steps further
liberalizing external payments were taken in January by
two countries—West Germany and France. These steps
followed in the wake of the convertibility for nonresidents
announced by twelve European countries at the close of
1958.1 The German authorities on January 13 extended
virtually full convertibility privileges to German residents
as well, thus giving formal recognition to de facto arrange­
ments that had already been in effect for some time. Cer­
tain nominal restrictions remain, however, on some types
of capital transactions as well as on some transactions in
goods and services.
The French authorities on January 21 abolished the
“capital franc” and thereby granted convertibility to the
proceeds from the sale of most foreign investments in
France—specifically those made by residents of the dollar
area, of most European countries, and some countries of
Latin America. Convertibility and repatriation privileges
had already existed for authorized foreign investments in
dollars and certain other currencies that had been made
in France since September 1949. The proceeds from all
other foreign investments, however, had to be credited to
1 For a fuller discussion of the convertibility measures, see "Inter­
national Monetary Developments”, Monthly Revieiv, January 1959.




27

the now abolished “capital franc” accounts, and could only
be reinvested in France or sold at a substantial discount.
The abolition of the “capital franc” followed upon a con­
siderable improvement in France’s international reserve
position, which in the first three weeks of January swelled
French gold and foreign exchange holdings by some $300
million equivalent, or some 30 per cent.
EXCHANGE RATES

As expected, the nonresident convertibility of most
Western European currencies announced at the end of
December has resulted in an increase in exchange activity
not only in sterling but also in the Deutsche mark, the
Scandinavian currencies, and the Swiss, French, and
Belgian francs. There was considerable trading in sterling
for spot delivery in New York, representing operations by
commercial interests (oil, diamonds, rubber, and grain)
and arbitrage transactions. Lower quotations prevailed
during early January, occasioned by demand for United
States dollars in London and some speculative selling of
sterling in New York. However, as the month progressed
the rate for spot sterling advanced from $2.80% to
$2.81 y16, the highest level since June 1958. On January
30 the rate stood at $2.81.
There was also a marked pickup in activity in the
forward-sterling market. Reflecting some speculative sell­
ing pressure, however, the discounts on three and six
months’ deliveries widened from %2 and %2 cent to
%2 and 1%2 early in the month, but subsequently leveled
off at about 732 and 1:H2- At the month end the spread
/
again widened to %2 and xi cent.
/
Rather persistent interest in certain British stocks firmed
the securities-sterling quotation from $2.80%6 to a re­
portedly all-time high of $2.80%. On January 30 such
sterling was quoted at $2.80%.
Heavy demand for United States dollars from Canadian
commercial interests weakened the Canadian dollar from
$1.034%4 to $1.0317/64 during early January. After re­
covering to $1.033%4 on buying by grain interests and
some short covering, the quotation moved erratically lower
to the month-end quotation of $1.03%6. Official inter­
vention to maintain an orderly movement of the rate was
in evidence on both sides of the market in Canada.
Trading in the Argentine peso, suspended on December
29 by the Argentine Government in preparation for the
introduction of a free market, was resumed on January 12
with the peso quoted at 65 to the United States dollar
(or $0.01538 per peso). This compares with the Decem­
ber 29 quotation of 69.25 to the dollar ($0.01444).

28

MONTHLY REVIEW, FEBRUARY 1959
Cooperation of Monetary Policy in a Growing Economy

By A lfred H ay es *
President, Federal Reserve Bank of New York
Today I would like to make a few remarks on the place
of monetary policy in the kind of world we live in — a
world characterized mainly by rapid change, either evolu­
tionary or revolutionary, both in our own country and
in virtually all other nations. Now, unfortunately, there
seems to have grown up around the concept of monetary
policy an aura of ultra-conservatism, which suggests in
the minds of some people that monetary policy is essen­
tially negative, and hence obstructive of the more pro­
gressive elements in our society. To my mind this view
is wholly misguided. In fact, monetary policy has con­
tributed strongly to economic progress in recent years,
and those who have been given the responsibility of
shaping monetary policy in this country are genuinely
interested in seeing to it that it should continue to be a
factor in building a dynamic, viable, and growing domestic
and world economy.
Doubtless a principal reason for this unfortunate public
image of monetary policy is the degree of emphasis it has
necessarily placed on fighting inflationary tendencies.
There are critics who accuse the Federal Reserve System,
for example, of being so obsessed with inflation that it has
neglected equally important objectives in a one-sided effort
to achieve price stability at all costs. My reply is that our
greatest interest lies in achieving economic growth over
a period of years at a sustainable rate, and that our close
interest in price stability reflects mainly our belief that
any appreciable degree of inflation is very likely to cause
speculative distortions and to render unsustainable almost
any rate of growth.
I do not mean to imply by “sustainable” that we can
expect a completely smooth and steady growth, for some
moderate fluctuations are not only probable in a free
economy where millions of individual decisions are being
made at all times, and where expectations are bound to
range widely between optimism and pessimism, but such
moderate fluctuations may even be a necessary condition
for maximum average growth. Occasional lean periods
seem to be necessary to increase incentives to eliminate
waste and achieve greater efficiency, and thus to spur
productivity. We must be firmly opposed to those super­
* An address by Mr. Hayes before the Thirty-first Annual Mid­
winter Meeting of the New York State Bankers Association, New York
City, January 26, 1959.




ficial appearances of rapid growth which are so unsound
as to carry the seeds of severe declines entailing heavy
social losses in the form of large unemployment and large
unused capacity. It has been argued that a higher rate of
growth can be achieved if prices are allowed to “creep”
upward. But I think that without this “creep” we are
much more likely to avoid excessive spurts and severe
declines and thus to attain the best average growth—and
it is average growth that will count in the long-term
competition between the free world and the Communist
bloc.
I know of no way of setting a percentage figure on the
annual rate of growth we should expect to attain. But it
is clearly desirable to set our sights high in the competitive
world we live in, always with this major proviso as to
“sustainability”. To cite specific figures, I cannot feel
complacent with unemployment still around the four
million mark, with our index of industrial production
slightly lower now than in the autumn of 1955, and with
per capita real disposable personal income virtually static
for the past three years. Even after allowance for the con­
siderable growth in population, dollar figures have given
an illusory impression of growth because of the rise in
prices.
The social injustices wrought by inflation have been
depicted so often and so ably, that I shall pass over this
phase of the problem, pausing only to repeat what has
been said many times but has not yet sunk into our
mentality deeply enough, i.e., that the consumers, the
most numerous group in our population, are the least ably
represented in political and market arenas. I should like
to stress rather the importance of price stability as a corner­
stone of growth, both national and international. I have
already mentioned the danger that inflationary distortions
tend eventually to collapse and to be followed by exces­
sively sharp and severe declines in business activity, as
history has demonstrated on many occasions. But there
is another aspect we should not lose sight of. Essentially,
economic growth depends on the orderly flow of savings
into productive investments. There is nothing so likely
to interfere with an adequate flow of savings, or to drive
savings into unproductive uses, as a public conviction that
the dollar will be worth much less after a few years because
of erosion of its purchasing power. I am sure that the

FEDERAL RESERVE BANK OF NEW YORK

huge aggregate demand for capital, arising mainly from
the investment programs of the past few years, would have
been covered much more easily out of current savings if
there had been complete confidence in a stable dollar in
the years to come.
Let us consider also the relation of inflation to our
vast international obligations. In the kind of world in
which we live, a major contribution by the United States
to the further development of the less developed nations
is vital. Whether this takes the form of public aid or the
more desirable form of private investment (and in fact
it must include a good measure of both), the successful
transfer of resources to carry out this assistance requires
above all a cost structure in this country adequately com­
petitive with foreign costs. If the large gold outflow of
1958 brought any benefits to this country (over and above
the obvious benefits to international liquidity), perhaps
the greatest was to impress on American business at least
—and one would hope on American labor also—the fact
that foreign competition is growing apace, both abroad and
in our own markets, and that we can no longer conduct
our affairs, monetary or otherwise, on the comfortable
assumption that the international balance of payments is
something that foreigners must worry about, but not we
Americans. Now that European industries have rebuilt
their capacity to supply export markets readily, we must
place more emphasis on restraining cost increases and
keeping competitive if we are to avoid a loss of jobs to
many American workers.
The very fact that as a nation we have learned to cope
more successfully than in earlier years with the problems
of recession has tended to eliminate the “shake-out” in
prices and wages which used to characterize periods of
low business activity. Because of this it has been suggested
that perhaps we should do less to limit recessionary ten­
dencies. I find myself unwilling to accept that suggestion,
with its implication that we must sit by and accept heavy
economic and social losses—but certainly the condition
I have outlined does point to a much greater need than
in decades past for vigilance against sizable average price
increases during the upward phase of the business cycle.
I hope you will agree that these various considerations
make price stability an extremely important objective in
our economy. You would think Hie case was so clear that
all segments in our economy would join forces enthusi­
astically to achieve it. Yet in fact there has been a
deplorable tendency to leave most of the burden to mone­
tary policy—a burden which it is by no means equipped
to carry alone. Even many of those who approve highly
of monetary policy as a means of “fighting inflation” are




29

all too prone to neglect their own spheres of responsibility
where the fight on inflation can and must be effectively
waged.
It is little wonder, under these circumstances, that a
good deal of the monetary authorities’ time and effort has
been absorbed by efforts to hold inflationary tendencies
in check. For one thing, monetary measures can be taken
promptly, and without regard for the clamor of pressure
groups; also their effects are probably more general and
impersonal than any other type of Governmental control.
They can be applied with a minimum of interference with
the free market principles on which most of our economy
is based. Both law and central banking tradition support
a determination on our part to do what we can to protect
the dollar’s value. Certainly we would very much like to
be able to spend less of our time worrying about this ob­
jective and to be able to devote more time and effort to
promoting more rapid economic growth. The greater the
cooperative effort by other elements in our economy to
accomplish price stability, the less would be the need for
restrictive credit policies.
The current situation is a good example of the kind of
dilemma which credit policy is called upon to face.
Although recovery is proceeding at a gratifying pace, the
existence of very considerable unemployment and excess
plant capacity in a good many industries would suggest
that our policies should be encouraging further growth
in production. On the other hand, while the general price
level has shown considerable stability for a number of
months, and the near-term outlook is fairly good, the seeds
of renewed upward pressures are clearly visible and cannot
be ignored. These include the increased liquidity effected
in the economy in the past year, the continuing threat of
further upward cost-price adjustments, the difficulty of
bringing the budget back into balance, and the prevalence
of “inflation” psychology as exemplified in the level of
stock prices, all of which have led to apprehensions abroad
as to what the future may hold for the value of the dollar.
Taking all these considerations into account, our problem
has been to keep a sufficiently close rein on bank reserves
to discourage expectations or fears of inflationary develop­
ments in credit and the money supply, and yet to avoid
interference with orderly recovery and a resumption of
growth.
I believe one of the most effective ways to focus atten­
tion on this problem would be to amend the Employment
Act of 1946 to provide specifically that preservation of
stable value for the dollar is a major economic objective
of all branches of the Government. This specific responsi­
bility could not fail, I believe, to focus attention on the

30

MONTHLY REVIEW, FEBRUARY 1959

need for better coordination of Federal spending and tax
policies, debt management, and credit activities of various
other Government agencies. It could provide them a
clearer common link with the Federal Reserve System,
and with our own credit policies.
Despite the very considerable help which our activities
have had from budget surpluses in some recent years, the
Federal fiscal position all too frequently has complicated
the problem of conducting an effective credit policy. A
bias in favor of deficits seems to be inherent in our methods
of budget formation, in the inability of the Executive
branch to eliminate individual expenditure items from
aggregate spending bills, and the lack of any very close
tie between the voting of expenditures with the voting of
revenues provide the necessary funds. Thus, there is an
understandable leaning on the part of the monetary
authorities toward economy and restraint in Federal
spending.
I should emphasize, however, that it is not for the
monetary authorities to presume to decide how the nation
should divide the use of its resources between private and
public activities. That decision must be made by the
people as a whole, both individually, and collectively
through their elected representatives. However, it is, I
think, quite appropriate for the monetary authorities to
urge that, except in unusual circumstances such as a period
of recession, whatever public expenditures are decided
upon should be covered by taxes or other revenues, and
that when boom conditions develop revenues should ex­
ceed expenditures. The current effort to produce a bal­
anced budget in fiscal 1960 is a contribution of the greatest
importance, not only toward fiscal responsibility, but also
to monetary stability.
But it would be far from correct to say that the Federal
Reserve System is opposed to useful and necessary public
expenditures in themselves, whether for defense, foreign
aid, or for such domestic programs as urban and highway
improvements, school and housing development, etc. The
argument may certainly be made that the nation needs
more of such useful public expenditures. The key question
is, however: “If the nation wants more of these items, is it
willing to give up something in order to pay for them?”
In other words, is it willing to shift more of the national
resources from private to public use through a heavier
tax program? With personal consumption accounting for
the great bulk of private expenditures, such a shift would
in all probability require a reduction in consumption of
privately purchased goods and services through appro­
priate forms of taxation (unless, of course, the economy
as a whole is growing fast enough to permit both public




and private spending to expand). The reluctance of the
American people to face this choice objectively, and the
reluctance of many of our country’s leaders to place the
choice squarely before them, is one of the most disappoint­
ing features of our present economy. We might do well
to look at the performance of various European countries,
most recently France, where the people have been asked
to face similar problems frankly and to make whatever
sacrifices are called for in the public interest.
Monetary policy needs allies in the private sector of the
economy just as much as it needs allies in the Government.
I hope that management and labor are growing increasingly
aware of their very real stake in price stability. The prac­
tice of restraint in pricing and wage settlements can be of
inestimable value in furthering the national interest. As
has been said so often in recent years, the granting of wage
increases in excess of average productivity gains for the
economy as a whole can only lead to the kind of in­
flationary pressures we are all seeking to avoid. Certainly
the rate of improvement in national productivity should be
considered an upper limit for the pace of wage increases.
The granting of wage rises within this limit would mean
that more of the productivity gains could be shared by the
consumer, and still permit an adequate return on invested
capital, both of which, it can be argued, have a legitimate
claim to a portion of the gains. And the holding of wage
increases within this limit would check the dilution of the
purchasing power of wage earners and retired workers
caused by rising costs and prices. While further study
is perhaps needed before any figure can be relied upon
as this upper limit for annual wage increases (including
fringe benefits), it seems much more likely on the basis
of past experience that it will turn out to be in the neigh­
borhood of 2 per cent or 3 per cent on average than in the
range of some of the major increases sought and achieved
in the 1955-57 period. It is, in any case, gratifying that
some of the major wage settlements in 1958 seemed to
embody less inflationary fuel than those in earlier years.
Restraint in wage settlements of course implies a responsi­
bility for corresponding restraint in the price policies of
industry.
At this point a word about interest rates may be in
order. There is a popular tendency, even among some
financial observers, to point to the Federal Reserve System
as the arbiter of interest rate levels. Actually the System
is operating on the periphery of our vast economic enter­
prise, exerting a marginal influence, it is true, but one
which shrinks into relative insignificance in comparison
with the over-all effect of aggregate capital and credit de­
mands and the aggregate flow of savings—or with expecta­

FEDERAL RESERVE BANK OF NEW YORK

tions of movements therein. This is especially true in the
case of long-term rates, since the Fed is not ordinarily a
direct participant in long-term securities markets and since
the banks’ activities in this field are more limited than in
the short-term area. But even in the short-term area, the
Fed is by no means the only influence, although admittedly
it is an important one. Interest rates, in any case, are just
symptoms of what is happening to affect the demand for
and supply of funds in the various parts of the credit
markets.
Above all, I should stress the fact that, while the Fed
can modify the natural swings in rates, there are limits
beyond which such action can only mean undue expansion
of the money supply, if the effort is to prevent a rate rise;
or undue credit restriction, if the effort is to prevent a
drop in rates. In a free enterprise economy, interest rates
are the simplest and most impersonal means of allocating
savings among various demands for funds. And in order
to have freely responsive rates, we are bound to have
fluctuating bond prices, including Government bond prices.
All of us would like to damp down the price movements
which reflect excessive bond speculation, such as we ex­
perienced last summer; but there will always remain a
certain range of movement reflecting basic business
changes and the public’s expectations of such changes. And
no apparatus of controls can obscure these basic forces
without impeding the adjustment mechanisms that a mar­
ket economy must have.
Incidentally, the Treasury has certainly made a contri­
bution to sound monetary conditions by demonstrating
clearly its willingness to pay going interest rates on its
new securities offerings.
I have been speaking purposely in very general terms.




31

We all know that it is sometimes a complex and difficult
problem to move from sound general principles to effec­
tive day-to-day practices. I would be the first to admit
that there is a vast amount we don’t know about the
detailed techniques of monetary policy—about adequate
measures of liquidity, in and out of the banking system,
about the effect of varying liquidity upon our own mone­
tary measures, about the extent to which nonbank credit
agencies, private and Government, may lie beyond the
effective range of our activities. These and many other
problems deserve the kind of long-range disinterested
study which the Radcliffe Committee is devoting to them
in Britain, and which the C.E.D. is endeavoring to initiate
in this country.
In the meantime, I fervently hope that as a nation we
can achieve more general and widespread understanding
of the role which monetary policy is trying to play—of the
close interrelationship of our monetary activities and the
other economic policies of Government, as well as the
policies of management and labor. Above all, what we
need is a clearer appreciation of the fact that we are all
engaged in a common enterprise, seeking essentially the
same inspiring goal of maximum sustainable economic
growth and a stable dollar. It is an enterprise in which
each of us can be really successful only if we obtain the
wholehearted cooperation of the others. The ground I
have been over is pretty familiar—but it seemed to me
that sound principles are always worth restating. I trust
that in the future, as in the past, the banking community
can be counted on to do its part to further this common
enterprise and to use its position of vantage to create
better understanding of these matters in all segments of our
growing economy.