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FEDERAL RESERVE BANK OF NEW YORK 19 In fla tio n a n d t h e D e f e n s e o f t h e D ollar* By A l f r e d H a y e s President, Federal Reserve Bank of New York A year ago I spoke of the difficulties of 1966 and ex pressed the hope that in 1967 the stresses and strains would be less severe, and the problems less perplexing, than in the year we had just lived through. That hope was only partially fulfilled. In domestic banking matters the year, while not without its problems and challenges, was far more manageable than 1966. But in the international financial sphere the late fall of 1967 brought new crises of almost unprecedented severity. The crises appear to have been surmounted, through a forceful United States balance-of-payments program designed to underline the firm determination of the United States to defend the fixed relationship of the dollar to gold at $35 per ounce coupled with an impressive show of solidarity among the major industrial countries in recognition of their mutual interest in preserving the existing world financial structure. But, while we have made an excellent start, a great deal remains to be done before we can say that we have grappled effectively with this nagging balance-of-payments problem and that we have laid the necessary foundations for restoring unquestioned faith in the dollar, both here and abroad. Perhaps the critical developments of November and December have served a very useful purpose in one regard if they have convinced more Americans than before that our record of persistent balance-of-payments deficits con stitutes a problem that must be dealt with in a compre hensive and conclusive fashion. During recent years we * An address before the fortieth annual midwinter meeting of the New York State Bankers Association, New York City, January 22, 1968. have had frequent assurances of our need and determina tion to reduce or eliminate the deficit, and we have had a good many programs to attack specific elements in our payments problem. But, as gains were made on one or another front, new problems continually opened up and we made no progress overall. Moreover, the whole pay ments problem remained distant and esoteric to the great majority of Americans. It was of course the devaluation of sterling which, not unexpectedly, triggered the violent onslaught against the dollar as the basis of the international monetary system. This attack took the form of a huge rise in speculative purchases of gold on the London market. Fear of just such a sequence of events had been a major motive for the various cooperative actions to defend sterling under taken by the principal industrial nations over the past three or four years. And even in the final crisis there was no lack of willingness to provide enough international credit to back up a strong effort to preserve the former parity. The decision to devalue was a deliberate one on the part of the British government. Naturally it was up to the British to make a judgment, after due consideration of their domestic problems and the probable world re action, as to whether devaluation was necessary or desir able, or both. But there is no doubt whatever that it was a highly disturbing move from the standpoint of world financial stability. There are, of course, worlds of difference between the position of sterling and the position of the dollar. The dollar is vastly stronger as the currency of the world’s largest and technologically most advanced economic unit —a nation with a huge excess of total foreign assets over its foreign liabilities. Nevertheless, the experience of sterling should serve as a salutary warning that a country whose currency is widely used for reserve purposes has 20 MONTHLY REVIEW, FEBRUARY 1968 some special aspects of vulnerability, and thus some special responsibility for even more scrupulous financial behavior than those countries whose currencies are less widely used internationally. Although individuals are bound to differ somewhat in their judgment with respect to the particular features of the President’s balance-of-payments program, the pro gram as a whole deserves the nation’s full support, both because the Administration now seems determined to con quer this hitherto intractable problem and because there is an evident desire to spread the burden of remedial measures as widely as possible rather than concentrating it on only a few shoulders. I can well understand the initial reluctance of some to accept a program of controls on the free flow of international capital and on spending abroad by American tourists, for this seems a violation of the very trends we have been trying so hard to nurture since World War II. But it seems to me that this re luctance overlooks two facts of great importance: (1) We are in a war economy, with military expenditures accounting for much of our balance-of-payments deficit as well as for much of our Federal budget deficit. “Busi ness as usual”, or even “travel as usual”, is not consistent with the needs of a war economy. (2) The payments crisis had reached a point where immediate and dramatic action was essential to break the back of a violent and concerted attack on the dollar. And the consequences of failure to defend the dollar as the keystone of the international monetary structure would have been far more disruptive of international payments flows than any of the measures proposed in the program. International confidence in the continued ability and willingness of the United States to sell gold at the $35 price is, of course, crucial to the dollar’s role as a reserve currency. The gold reserve re quirement on Federal Reserve notes should be eliminated immediately, as proposed by the President last week. I have mentioned the probable salutary effect of the crisis in alerting Americans to the need for forceful action. At the same time, I can see a risk that some Americans may mistake a necessary remedial crash program for a permanent cure. Interference with the free movement of capital and with tourist spending is certainly neither a desirable nor a practicable long-run solution of the prob lem. For this we must look mainly to a stronger trade surplus, which means improving our competitiveness in the world and avoiding an overheated economy that pulls in excessive imports. We should also take a more critical look at Government outlays abroad, especially military outlays, to make sure that their heavy economic cost is still justified in the light of political and military condi tions of today. Foreign aid is in a different category, for genuinely productive expenditures in less developed coun tries are called for not only for moral and humanitarian reasons but also because they will contribute to a sounder world structure, political and economic, from which the United States will clearly benefit. This does not mean, however, that aid outlays should not also be subject to careful review to make sure that they really are soundly programmed. And I believe we should continue to press the major European industrial nations to give more effec tive recognition to their own responsibilities for help to the less developed areas. Moreover, countries with balance-of-payments surpluses must be mindful of their own responsibilities to follow fiscal, monetary, trade, and capital export policies which contribute to international equilibrium. Mention of the vital importance of our competitive position in the world leads us squarely to an examination of how well or how poorly the United States has lived up to one of its major economic goals, i.e., cost and price stability. During the early sixties the record was quite creditable, for we enjoyed a much more stable cost-price structure than did most of the other leading industrial countries—and as a result we were making considerable progress toward a smaller overall payments deficit. All this changed radically for the worse after the Vietnam fighting accelerated in mid-1965. A rapid burgeoning of Federal defense outlays, coupled with a failure of fiscal policy to meet this increase through higher taxes, was largely responsible for upsetting the earlier record of costprice stability, and inflationary pressures became quite severe in the overheated economy of 1966. Higher prices and high profits in that boom year, coupled with low unemployment and scarcities of skilled labor, in turn laid the groundwork for wage demands—and wage settlements —far in excess of national average productivity gains. Thus, our country was caught up in the familiar infla tionary spiral in which cost-push and demand-pull are mutually reinforcing. In much of 1967 there was some letup on the demand-pull side (although none on the side of excessive wage increases), but more recently, as the business expansion has resumed speed, both elements are again operating with great force. I am acutely troubled by the evidence on all sides that many of our citizens, while recognizing that a rather sizable pace of inflation—say at a 3 to 4 per cent rate— is undesirable, nonetheless regard it as inevitable. This view has found expression recently in speculative excesses in stocks, real estate, and corporate acquisitions. I hardly think it necessary to dwell on the dangers and inequities of inflation before this audience. Bankers are character istically much more alert to them than is the public at FEDERAL RESERVE BANK OF NEW YORK large. But somehow a way must be found to bring these risks and injustices more forcefully to the attention of those who are in the strongest position to do something about it—and here I am thinking especially of leaders in labor, business, and government. Cost-price stability and the closely related goal of pay ments equilibrium are, of course, not our only major national economic goals. Others are maximum sustainable economic growth and high use of resources, particularly of manpower resources. But I suspect that as a nation we have encouraged more rapid increases in aggregate de mand than have been consistent with reasonable wage and price stability. In saying this, I am not belittling the goal of high resource utilization—quite the contrary. But I would stress the importance of reducing unemployment through structural improvements in the labor force and in job markets. For example, close attention must be given to better education and job training and to elimination of discriminatory practices in employment and union mem bership. In recent years we have witnessed a profound change of public psychology with respect to economic growth and cyclical swings. There is much more confidence in the Government’s ability to avoid recessions by means of various stimulative measures in the event of need. The counterpart of this should be a widespread acceptance of public policy measures designed to avoid inflation; but here we seem to face some kind of cultural lag. There is grudging recognition that monetary policy has to pay attention to inflationary as well as recessionary dangers. However, the past two years’ experience suggests that the American people and their elected representatives are still a long way from accepting fiscal policy as a means of promoting economic stability in a time of inflation. Perhaps we should have been warned that this might be the case when in the early sixties even a tax cut to pro mote economic growth took some two years to come to fruition. Now, after two and a half years of rapidly expand ing Federal expenditures, we have not yet used a tax increase to apply suitable brakes to the economy. A few years ago many economists, as well as many of us in the Federal Reserve, were hopeful that fiscal policy might become a much more flexible instrument— although it could never be as flexible as monetary policy— so that a suitable “mix” of fiscal and monetary policy could be developed to meet whatever specific problems might occur. To some extent, this was actually accom plished at the time of the 1964 tax cut, when monetary policy was thereby enabled to be firmer than it could otherwise have been, with consequent benefits to our balance of payments. However, it has emphatically not 21 been accomplished in the reverse direction since mid-1965, with the result that monetary policy has had to bear most of the burden when a public policy of restraint has been called for. What this could mean in terms of rapid interest rate increases and fears concerning credit availability was vividly demonstrated in the summer of 1966. In the last few months, it has become clear that a key reason tax rate changes are a less flexible instrument than had been hoped is that legislators are unwilling to consider restrictive tax measures without also considering the pos sibilities of reducing Federal expenditures. In general this is as it should be, and economy in Federal spending is especially desirable in the present setting. But, in my view, reductions in Federal spending that would be large enough to deal with our present problems are simply not feasible. Under current circumstances, characterized by rapidly rising prices and accelerating business activity, a tax increase along the lines proposed by the President is essential to achieve fiscal restraint on the scale needed. Without such an increase, we run the risk of increased price pressures, more trouble for our balance of pay ments, and a recurrence of the mid-1966 credit condi tions. I am hopeful that the sheer necessity of a tax rise will bring it into being without further delay. While it is true that long-term interest rates have moved back to or beyond the peak levels of the summer of 1966, fortunately banking conditions are now quite different from those prevailing at that time. Since then bank liquidity has grown very appreciably, and I have the impression that loan demands, while substantial, have been rather less than most bankers had expected. Doubtless this is due in part to the record volume of offerings in the bond market which prevailed through 1967. The general pub lic has also added a good deal to its liquid assets in the past year or so. The Federal Reserve System has been criticized for permitting bank credit to grow in 1967 at a rate of about 11 per cent, and I confess that we in the System have felt some concern on this score for several months. However, very unsettled conditions in the financial markets, the uncertain outlook for a tax increase, worries over the sterling situation, and the massive financing requirements of the Treasury all posed strong constraints on monetary policy until late in the year. Moreover, a somewhat higher than average growth of bank credit was to be expected after the unusually severe liquidity squeeze of 1966. It should also be noted that banks accounted for an increased share of total credit growth in 1967, and the unusually rapid pace of bank credit expansion was not matched by an equivalent rate of expansion of total credit. Bank credit grew much more slowly on average in the last four months of 1967 than in the first eight months, 22 MONTHLY REVIEW, FEBRUARY 1968 and the slowdown was most pronounced in November program has to be buttressed, and eventually supplanted and December. While the vagaries of seasonal adjustments by more permanent remedies, including above all the and Treasury financing schedules make analysis of the elimination of inflationary pressures. Success will call for actual statistics unusually difficult, the general tendency a concerted attack by appropriate public policies, espe toward more modest bank credit growth seems clear, and cially a tax increase coupled with economies in Federal it is most welcome. Obviously monetary policy is not seek spending, strengthening of efforts to discourage inflationary ing a cessation of bank credit expansion, but merely a wage and price increases, and maintenance of an appro pace more in keeping with the economy’s potential for priately firm monetary policy. But the degree of success sustainable growth. that these public policies can achieve will depend very As we look ahead to the new year, the gravest ques largely on the extent to which they are backed by a co tion in the economic sphere is whether we can reduce the operative attitude on the part of labor, business, and the inflationary tendencies that are now so painfully apparent. general public. The stakes are high enough so that such Let me stress again that price stability is not only urgently cooperation should be forthcoming without hesitation. I needed to protect the value of the dollar at home. It is trust that the country’s bankers will use their position also most urgently needed to maintain and improve our of influence in the business and financial community to competitive position in world markets. Our success in support this many-pronged attack on the greatest present riding out the recent gold crisis is no cause for com threat to sustainable economic growth and survival of our placency. The Administration’s new balance-of-payments international financial system. 23 FEDERAL RESERVE BANK OF NEW YORK T h e B u s in e s s S itu a tio n The economy posted strong gains in the closing months of 1967 and continues to move ahead vigorously. Gross national product (GNP) rose substantially in the fourth quarter of 1967 despite cautious spending on the part of the consumer and a relatively small advance in Federal Government spending. While a substantial portion of the fourth-quarter increase in GNP was accounted for by a jump in the rate of inventory accumulation, virtually all the components of aggregate demand rose. The continuing strength of the economy is clearly evidenced by the strong December advance in industrial production, the sharp rise in new orders for durable goods, and the substantial growth of employment. At the same time, prices on both the consumer and wholesale levels continued to rise, re flecting persisting demand and cost pressures. Indeed, about half of the fourth-quarter increase in GNP repre sented price increases rather than a larger volume of real output. Fourth-quarter inventory growth reflected increases in trade stocks, as auto inventories were rebuilt, as well as a tem porary increase in farm inventories. In contrast, business spending on structures and equip ment rose by a modest $1.0 billion in the fourth quarter of 1967 to an annual rate of $83.8 billion. The increase appears to have reflected higher prices for capital equip ment, so that business fixed investment spending in real terms was stable at the third-quarter pace. Chart I RECENT CHANGES IN GROSS NATIONAL PRODUCT AND ITS COMPONENTS Seasonally adjusted annual rates Change from second quarter to third quarter 1967 ■■ Change from third quarter tofourth quarter 1967 G N P IN T H E F O U R T H Q U A R T E R The nation’s total output of goods and services in creased by $16.4 billion in the final quarter of 1967 (see Chart I) to a seasonally adjusted annual rate of $807.6 billion, according to preliminary estimates by the Depart ment of Commerce. This advance was the largest for any quarter since the beginning of 1966. During the second half of 1967, real output grew at a 4.5 per cent annual rate, sharply higher than the 1.1 per cent growth rate in the first half of the year. The substantial gain in real output in the second half was accompanied by accelerating price pressures. The GNP price deflator rose at an annual rate of 4.0 per cent in the period, nearly twice the first half’s rate of increase and the sharpest six-month advance in the GNP deflator in more than a decade. An unusually large rise in inventory investment ac counted for more than 30 per cent of the fourth-quarter growth in GNP. Inventory accumulation increased to a $9 billion annual rate from a $3.8 billion pace in the preced ing quarter. This gain was in marked contrast to the sharp drop in the rate of accumulation in the first half of 1967. —5 0 5 10 Billions of dollars Source: United States Department of Commerce. 15 20 24 MONTHLY REVIEW, FEBRUARY 1968 The continued growth of GNP has received only mod erate support from consumer demand. The $6.1 billion fourth-quarter increase in consumption expenditures was slightly larger than the quite modest rise in the preceding quarter. More than half of the advance was attributable to the growth of spending on services, with purchases of both durable and nondurable goods showing only small increases. The strike-related slowdown in purchases of new auto mobiles was one factor restraining consumer spending. Auto sales in the fourth quarter were at an annual rate of only 7.3 million units, well below the 7.7 million annual sales pace during the first nine months of 1967. For 1967 as a whole, sales were 7.6 million units, considerably below the 1966 and 1965 sales figures of 8.4 million and 8.8 million, respectively. January sales, however, moved up substantially from the December level to an annual rate of over 8 million units. Disposable personal income expanded by a healthy $9.3 billion in the fourth quarter, and this in conjunction with the relatively slow growth in consumer spending meant that the savings rate climbed to 7.5 per cent, the highest since 1953. Contributing to the growth in income was a substantial year-end pay increase for both military and civilian employees of the Federal Government. The raise was retroactive to October 1, 1967, though it was not received by Government workers until late in Decem ber. This surge in income probably contributed to the sharp fourth-quarter rise in the savings rate, since it is likely that only a relatively small part of the retroactive increase was spent by the year’s end. Demand for housing has remained strong, and residen tial construction expenditures rose $2.3 billion in the fourth quarter, reaching the highest level since the final quarter of 1963. To be sure, private nonfarm housing starts, which had risen rapidly in October and November, fell precipitously in December to 1.2 million units at a seasonally adjusted annual rate. However, housing starts are often erratic, and much of the December decline in starts may have been due to abnormally cold weather and snowstorms in the South and West. This explanation appears the more likely in view of the sharp December rise in the number of residential building permits issued, an activity which would not be significantly slowed down by adverse weather conditions. Total government spending for goods and services boosted GNP by $3.3 billion in the fourth quarter. How ever, Federal Government expenditures rose by only $1.1 billion as the marked slowdown in the growth of defense spending, which became evident in the third quarter, continued in the final three months of 1967. Defense expenditures rose by a relatively modest $1 billion, fol lowing an increase of only $0.8 billion in the third quar ter; the increase in the first and second quarters averaged, in contrast, $3.5 billion. At the same time, the fourth quarter saw only a negligible rise in Federal Government purchases of nondefense goods and services. Indeed, the fourth-quarter increase in Federal spending is more than accounted for by the pay rise granted to Government employees late in the year. State and local government expenditures continued to expand in the fourth quarter at the high rate evident in the first three quarters. Net exports of goods and services fell by an unusually large $1.4 billion in the fourth quarter. Imports rose sharply, reflecting the rapid growth of aggregate demand as well as special factors such as the long copper strike. Exports, on the other hand, did not rise during the quarter. PR O D U C T IO N , P E R S O N A L IN C O M E , AND EM PLOYM ENT In December, the Federal Reserve’s seasonally adjusted production index jumped 2.3 percentage points to a new high of 161.6 per cent of the 1957-59 average, after show ing a 2.7 percentage point gain in November. The strong upsurge in industrial production in the closing months of 1967 was in striking contrast to the performance of earlier months when production had been dampened, first by the largest inventory adjustment on record and later by labor disputes. Nearly half of the December increase in industrial production was accounted for by the motor vehicle and parts component, as auto producers tried to make up for production lost during the earlier strikes at Ford and Chrysler. In December, auto production reached 8.9 mil lion units at an annual rate, but in January strikes at Gen eral Motors held back output so that auto production slipped back to an annual rate of 8.4 million units. Pro duction of other consumer goods and of business equip ment continued to expand in December. Materials production rose strongly, buoyed by the continuing surge in steel output. Increased production caused the manufac turers’ utilization rate to edge up to 84.3 per cent of capacity in the fourth quarter, the first increase since the second quarter of 1966. The volume of new orders received by manufacturers continues to increase. In December, new orders for durable goods shot up 12 per cent, the strongest advance since 1956. The December increase was broadly based, but gains in the steel, auto, equipment, and defense industries were particularly vigorous. Though durables shipments reached a record high in December, they were exceeded by the volume of new orders, and the unfilled orders backlog FEDERAL RESERVE BANK OF NEW YORK C h a rt II DURABLES MANUFACTURERS’ SALES AND ORDERS Billions of dollars Seasonally adjusted Billions of dollars Source: United States Departm ent of Commerce. increased by another $1.1 billion (see Chart II). Rising economic activity as well as the Federal pay increase boosted December personal income, measured at a seasonally adjusted annual rate, by $5.7 billion. While the main factor in the month’s income growth was the pay rise, the brisk pace of industrial activity also led to higher employment and earnings and longer hours. The unemployment rate in December fell to an eight-month low of 3.7 per cent. The decline in unemployment was widespread, with the rates for adult men and women as well as teen-agers all dropping back to the levels of early 1967. The December decline brought the unemployment rate for the full year to 3.8 per cent, unchanged from the thirteen-year low set in 1966. Part of the December increase in civilian employment was due to a greater than normal rise in farm employment, caused by a late harvest ing season. In addition, the number of persons on the payrolls of nonagricultural establishments advanced in December by 200,000 to reach 67.1 million (seasonally 25 adjusted), following an even larger increase in November. Civilian employment grew by 1.5 million persons in 1967. As indicated by the nonfarm payroll survey, nearly all the 1967 rise in nonagricultural employment occurred in the nonmanufacturing sector. However, factory employ ment in both the durables and nondurables sectors showed strong gains in the fourth quarter, after declining through out the first nine months of the year. The civilian labor force rose by a record 1.6 million persons in 1967 to an average level of 77.3 million. In contrast to the experience of the past few years, when much of the increase in the labor force resulted from the entrance of teen-agers, all the 1967 increase was ac counted for by adults— about 600,000 men and 1.0 mil lion women. The teen-age civilian labor force was virtually unchanged because of increased military demands. The sizable expansion in the adult labor force in 1967 reflected the combined effects of population growth and a heavy de mand for additional workers. The big population group bom soon after World War II has now moved out of the teens into the early twenties. Approximately one third of the 1967 labor force growth took place in this age category. The sizable increase in the number of adult women in the labor force during 1967 was in part attributable to a change in the definition of the labor force as well as to the heavy demand for additional workers. The labor force participa tion rates of women, in contrast to those of adult men, tend to be responsive to overall demand conditions— rising in good times when the employment situation is favorable and declining somewhat in periods of slack. C O S T A N D P R IC E P R E S S U R E S Labor costs continue to rise. According to the Bureau of Labor Statistics, collective bargaining settlements concluded in 1967 involved median wage and fringe benefit increases totaling 5.6 per cent a year, compared with an increase ot 4.5 per cent in 1966. The rapid advance in labor compen sation during 1967 was accompanied by a leveling-off in productivity growth, reflecting the sluggish behavior of manufacturing output during most of the year and the consequent decline in the utilization of manufacturing capacity. Output per man-hour in manufacturing in 1967 was only 1.0 per cent larger than in 1966, the smallest increase in the present expansion, and capacity utilization averaged only 85.1 per cent, the lowest level since 1963. The combination of sizable wage gains and modest growth in output per man-hour resulted in a sharp increase in labor costs per unit of output. In December, the index of unit labor costs in manufacturing stood at 106.7 per 26 MONTHLY REVIEW, FEBRUARY 1968 cent of the 1957-59 average, 3.6 per cent above Decem ber 1966. Between mid-1958 and mid-1966, unit labor costs in manufacturing were essentially stable. This was a major factor behind the general price stability of that period. The rise in unit labor costs over the past year and a half has generated pressures on businessmen to raise prices or to suffer declining profits. While productivity can reasonably be expected to move upward as the econ omy expands more vigorously, it is unlikely that the growth in output per man-hour will be adequate to offset mounting labor costs. Increasing demand and cost pressures have already had an effect on the broad index of wholesale prices. In Decem ber, the wholesale price index jumped 0.6 percentage point to 106.8 per cent of the 1957-59 average, the sharpest rise in eighteen months. While industrial wholesale prices rose by only 1.8 per cent over 1967 as a whole, price in creases have been accelerating and industrial wholesale prices advanced at a 3.4 per cent annual rate in the fourth quarter. Preliminary figures for January indicate a continu ing rise in wholesale prices. The total index is expected to increase another 0.3 percentage point as all the major components register advances. In the consumer area, widespread price increases caused the consumer price index to advance a sharp 0.4 percent age point in December, the eleventh consecutive monthly increase. The consumer price index in December rose to 118.2 per cent of the 1957-59 base, a gain of 3.1 per cent over the year and the second largest annual increase since 1951. T h e M o n e y a n d B on d M a r k e ts in Jan u ary The money market was firm throughout January, with the effective rate for Federal funds remaining generally above the discount rate. Member bank borrowings at the Reserve Banks were reasonably steady after the first state ment week, in which borrowings reflected the usual bank adjustments prior to the year-end statement date. Net free reserves were allowed to ride up and down to compensate for the shifting amounts of reserves retained by “country” banks. By contrast with the firm rates in the market for overnight funds, rates for most short-term debt instruments declined, reflecting an unusually large seasonal expansion in the volume of funds available for investment. Treasury bill rates declined sharply, despite the sale of an additional $2.5 billion of June tax anticipation bills early in the month. Large commercial banks lowered their posted offering rates on new negotiable time certificates of deposit (C /D ’s), dealers in bankers’ acceptances and in prime commercial paper reduced their offering rates, and major finance com panies lowered rates for most maturities of paper which they place directly with investors. Prices of intermediate- and long-term Government se curities scored large gains during January. The market de veloped a buoyant tone at the beginning of the month, as hopes for peace negotiations on Vietnam blossomed and President Johnson announced a program designed to bring the nation’s international payments into balance. Prices rose sharply until midmonth, when market hopes for early prog ress toward peace faded and the domestic fiscal and credit situation was interpreted as generally unfavorable. The brief downward movement of prices at midmonth was reversed toward the close of the month despite a variety of disquieting developments, including new tensions in Korea. The corporate and tax-exempt bond markets also displayed considerable strength early in January, softened around midmonth, and firmed near the close of the month. BANK RESERV ES AND THE MONEY MARKET The money market was somewhat firmer, on average, in January than it had been in December, and the effective rate for Federal funds was generally at the 45A per cent level attained late in the preceding month. Wide week-toweek variations in nationwide net reserve availability did FEDERAL RESERVE BANK OF NEW YORK not alter the tone of the Federal funds market, which re mained consistently firm during the period. Aggregate free reserves rose to an average level of $405 million in the second statement week (see Table I). How ever, the increase compensated for extraordinarily large excess reserves held by country banks in that week. At the same time, the large banks in New York City and other major money centers sustained sharp losses of reserves, and the money market remained firm. During the follow ing statement week, the maintenance of a firm tone was consistent with net borrowed reserves of $70 million, as the large accumulated reserve surpluses of the country banks were released to the Federal funds market. Over the balance of the month the money market remained generally firm in spite of a pronounced improve ment in the basic reserve positions of the New York City banks and other major money market banks (see Table II). While reserve positions of country banks were under some pressure, the New York City banks moved into a position of basic reserve surplus near the end of January, as C/D and Euro-dollar liabilities were maintained at declining interest rates and loans and investments decreased. Short-term debt instruments were in strong demand during January, as savings banks, corporations, and state and local governments sought to invest a plentiful supply of funds. Dealers in bankers’ acceptances lowered their offer ing rates on ninety-day paper on four occasions, by a total of Vi per cent, to 5Vs per cent. Commercial paper dealers reduced their offering rates on prime four- to six-month paper by Vs per cent to 5V2 per cent, and major finance companies lowered their rates on directly placed paper by Vk per cent to 5 X A per cent for paper maturing in two to six months. Moreover, market yields on Treasury bills declined sharply, by as much as 55 basis points on matu rities of six months. The New York City money market banks lowered their posted offering rates on negotiable time C /D ’s from the flat 5V2 per cent on all maturities that had prevailed at the turn of the year. At the end of January, one- to threemonth maturities were generally available at 5 per cent, and three- to six-month maturities at 5V a- per cent, while longer maturities continued to be quoted at the ceiling rate. At a lower pattern of offering rates, large com mercial banks throughout the country succeeded in roll ing over unusually heavy C/D maturities of $5.9 billion, more than one third of the total outstanding. Moreover, C/D liabilities of these banks rose by $565 million, net, over the four statement weeks ended on January 24. Much of the improvement in C/D sales during January reflected purchases of certificates maturing in more than three months. 27 T H E G O V E R N M E N T SE C U R IT IE S M A R K E T The market for Treasury notes and bonds was buoyant until mid-January, and prices rose by as much as 4 points. While the earlier optimism of market participants faded around midmonth, it revived later so that, for the month as a whole, prices of some coupon issues recorded gains of 3 points or more. In the initial surge of prices, yields on intermediate- and long-term issues were driven down roughly 35 basis points from end-of-December levels and 50 basis points from yields at mid-November, prior to the devaluation of the pound sterling. At the month end, long-term Treasury yields were still about 20 basis points below year-end levels. Investors and professionals alike reacted very favorably to President Johnson’s announcement on January 1 of a broad program to bring the nation’s international pay ments into balance. This event, following on the heels of the December 27 increase in member bank reserve requirements, had a beneficial effect on market psy chology. Subsequently, the market was given additional encouragement by a series of reports that North Vietnam was taking a more conciliatory position with regard to peace negotiations. Moreover, the declining yield trend in the corporate bond market and the rapid sellout of some key corporate issues favorably affected the Treasury cou pon market. In the market atmosphere that prevailed early in the month, announcements of sizable cash financings by the Treasury and the Federal National Mortgage Asso ciation (FNMA) had no adverse effect on the coupon sector. From January 12 through 22, Treasury coupon prices dropped sharply and a considerable part of the earlier gains was lost. Market participants registered some dis appointment over the failure of the hoped-for peace nego tiations to materialize and over the President’s State of the Union Message on January 17, which they had hoped would contain specific proposals for the achievement of peace and a lower level of Federal spending. The market was further sobered by the realization that the President’s proposed 10 per cent income tax surcharge seemed no closer to enactment into law now that the Congress was reconvened than it had before the Congressional adjourn ment in December. After a brief interval, the market re sumed its uptrend, though on a more cautious note than earlier. Peace hopes were stirred by further press reports, while new tensions in Korea had little adverse impact. The market also displayed little apprehension about the approaching Treasury refunding operation and, in fact, began to build up a favorable sense of anticipation as the announcement date approached. After the close of the 28 MONTHLY REVIEW, FEBRUARY 1968 Table I Table n FACTORS TENDING TO INCREASE OR DECREASE MEMBER BANK RESERVES, JANUARY 1968 RESERVE POSITIONS OF MAJOR RESERVE CITY BANKS JANUARY 1968 In millions of dollars; (+) denotes increase, (—) decrease in excess reserves In millions of dollars Daily averages—week ended on Factors affecting basic reserve positions Changes in daily averages— week ended on Jan. 3 Jan. Jan. Jan. X0 17 — 550 + 456 — 79 29 + 207 — 53 — 229 — 449 + 659 1 — 347 — 98 4 - 23 — 13 6 + 34 4-381 + 279 -f 11 — + — + 68 + 445 Total “market" factors— — — 34 — 147 — 51 — 261 4- 90 4 - 186 — 102 — 284 — 161 + 5 — -}- 278 4-384 11 — 164 50 — 134 4 - 72 — 946 — 375 — 462 4-1,736 -f 4- Total ................................... Excess reserves* .................. . 4 - 195 — 1 4 - 65 — 409 — — 4 - 133 4 - 44 4 - 33 4-150 — 140 — 83 — 40 — 315 1 5 — 17 + 6 + 1 4- 44 — 57 4- 49 — 1 4- 9 4- 34 — 30 + § Jan. Jan. 17 Jan. 24 31* Reserve excess or 85 15 deficiency(—) | ..................... 7 15 14 Less borrowings from Reserve B anks..................... 55 51 156 27 Less net interbank Federal funds purchases or sales(—).. 831 518 — 126 — 190 407 Gross purchases .............. 1,127 1,381 1,246 883 840 Gross sales ....................... 550 720 728 1,009 1,030 Equals net basic reserve surplus or deficit(—) .......... -4 7 8 - 8 8 0 — 554 140 177 Net loans to Government securities dealers.................. 1,284 1,299 1,152 974 1,301 27 58 288 1,095 807 — 319 1,202 Thirty-eight banks outside New York City 4- 87 — 10 — 47 — 14 — 7 — 104 - 403 | 4- 554 | — 513 4 - 211 I — 1 10 120 84 4-405 — Jan. Eight banks In New York City 31 Direct Federal Reserve credit transactions Open market instruments Outright holdings: Government securities Bankers* acceptances Repurchase agreements: Government securities . . . . Bankers’ acceptances Federal agency obligations Member bank borrowings........ Other loans, discounts, and advances .................................... 3 Jan. 24 “ Market” factors Member bank required reserves* .................................... Operating transactions (subtotal) .................................. Federal Reserve flo a t........... Treasury operations! ........... Gold and foreign account... Currency outside banks* . . . Other Federal Reserve accounts (net)t ................... Jan. Net changes Factors Average of five weeks ended on Jan. 31* Reserve excess or _ 99 14 deficiency(—)t ..................... 15 22 Less borrowings from Reserve B anks..................... 181 20 77 63 43 Less net interbank Federal funds purchases or sales(—).. 659 532 840 926 308 Gross purchases .............. 1,631 1,958 1,981 1,798 1,664 Gross sales ....................... 972 1,118 1,055 1,267 1,356 Equals net basic reserve surplus or deficit(—) .......... -7 4 1 -8 4 6 — 975 — 587 — 351 Net loans to Government securities dealers.................. 719 404 693 737 703 30 77 653 1,806 1,153 — 700 651 Note: Because of rounding, figures do not necessarily add to totals. * Estimated reserve figures have not been adjusted for so-called “as of” debits and credits. These items are taken into account in final data, t Reserves held after all adjustments applicable to the reporting period less re quired reserves and carry-over reserve deficiencies. 4- 205 j — 74 68 Table HI AVERAGE ISSUING RATES* AT REGULAR TREASURY BELL AUCTIONS Daily average levels In per cent Member bank: Total reserves, including vault c ash *..................... Required reserves*........ Excess reserves* ........... Borrowings ..................... Free reserves* ............... Nonborrowed reserves* . 26,448 25.795 653 495 158 25,953 25.924 25,339 585 180 405 25,744 25,572 25,418 154 224 — 70 25.348 25,924 25,565 359 233 126 25,691 25,664 25,379 285 241 44 25,423 25,906§ 25,4991 407§ 275§ 133§ 25,632§ Weekly auction dates—Jan. 196S Maturities Three-month................................ Jan. 8 Jan. 5.080 5.376 Jan. Jan. 5.072 5.068 4.846 5.238 5.335 4.957 22 15 29 Changes in Wednesday levels Monthly auction dates— Nov. 1967-Jan. 196S System Account holdings of Government securities maturing in: Nov. Less than one y e a r ___ More than one year . . . . 4-342 Total ....................... + 342 -1,032 4-508 — 56 4- 78 4 - 47 4 - 508 + 4- 47 Note: Because of rounding, figures do not necessarily add to totals. * These figures are estimated, t Includes changes in Treasury currency and cash. t Includes assets denominated in foreign currencies. § Average of five weeks ended on January 31. — 191 4- 78 22 Dec. 26 Jan. 25 5.422 5.555 5.254 5.430 5.544 5.267 * Interest rates on bills are quoted in terms of a 360-day year, with the dis counts from par as the return on the face amount of the bills payable at maturity. Bond yield equivalents, related to the amount actually invested, would be slightly higher. FEDERAL RESERVE BANK OF NEW YORK 29 SELECTED INTEREST RATES Per cent M O N E Y M A RK ET RA TES N o vem b er D ecem ber 1967 N o vem b er 1 9 6 7 - J a n u a ry 1968 Jan u a ry 1968 Note: Data are shown for business days only. MONEY MARKET RATES QUOTED: Daily range of rates posted by major New York City banks on new call loans (in Federal funds) secured by United States Government securities (a point indicates the absence of any range); offering rates for directly placed finance company paper; the effective rate on Federal funds (the rate most representative of the transactions executed); closing bid rates (quoted in terms of rate of discount) on newest outstanding three- and six-month Treasury bills. BOND MARKET YIELDS QUOTED: Yields on new Aaa- and Aa-rated public utility bonds are plotted around a line showing daily average yields on seasoned Aaa-rated corporate bonds (arrows B O N D MARKET Y IE LD S D ecem ber Novem ber 1967 Jan u a ry 1968 point from underwriting syndicate reoffering yield on a given issue to market yield on the same issue immediately after it has been released from syndicate restrictions); daily averages of yields on long-term Government securities (bonds due or callable in ten years or more) and of Government securities due in three to five years, computed on the basis of closing bid prices; Thursday averages of yields on twenty seasoned twenty-year tax-exempt bonds (carrying Moody’s ratings of Aaa, Aa, A, and Baa). Sources: Federal Reserve Bank of New York, Board of Governors of the Federal Reserve System, Moody’s Investors Service, and The Weekly Bond Buyer. Market yields on Treasury bills declined during January, market on January 31, the Treasury announced a refund ing and prerefunding of five issues of notes and bonds as a generally strong investment demand—which persisted maturing on February 15, August 15, and November 15, through the close of the month—frequently encountered a 1968. Holders of 55/s per cent notes due February 15, AVk thin supply of offerings. The strength elsewhere in the per cent notes and 33A per cent bonds due August 15, securities markets also contributed to the downward rate and 5V4 per cent notes and 3% per cent bonds due No adjustments. Demand centered largely in issues with matu vember 15 may exchange their holdings for new 5% per rities of more than three months, and rates on these bills cent seven-year notes to be dated February 15, 1968 and fell 19 to 55 basis points. Shorter issues, on the other hand, to mature on February 15, 1975. Of the $24.3 billion of were subjected to some selling pressure by commercial the maturing securities outstanding, approximately $12.1 banks, reversing purchases of these bills which had been billion is held by the public. Subscription books for the ex made for statement purposes prior to the year-end. The market took in stride the sale by the Treasury on change will be open February 5 through 7. The Treasury also announced that it will offer about $4 billion of fifteen- January 9 of an additional $2.5 billion of tax anticipation month notes for cash on February 13. Terms of the offer bills maturing on June 24, 1968 and acceptable at face value in the payment of Federal income taxes on June 15. ing will be announced on February 8. 30 MONTHLY REVIEW, FEBRUARY 1968 (June tax anticipation bills in the amount of $3 billion were to the seemingly more concrete hopes for peace that per already outstanding.) Commercial banks were permitted to vaded the capital markets early in January. Corporate bond make payment for the bills on January 15 by crediting the prices extended their December gains, and pressures lifted full amount of purchases to Treasury Tax and Loan Ac from the tax-exempt market. The Blue List of dealers’ ad counts. This feature of the offering was estimated by the vertised inventories of tax-exempt bonds plummeted to market to have been the equivalent of roughly 40 basis $311 million near midmonth from $506 million at the end points in yield to commercial banks. The bills were awarded of December. By the close of January, however, the Blue in strong bidding at an average issuing rate of 5.058 per List figure had risen to $444 million, as a result of the cent. Average issuing rates on the regular issues of three- mild deterioration in market sentiment around midmonth and six-month bills trended lower over the month. In the and a sharp increase in the volume of tax-exempt offerings final weekly auction held on January 29, average issuing in the final week of the month. New corporate bonds were offered at sharply lower in rates on the three- and six-month issues were set at 4.846 per cent and 4.957 per cent (see Table III), respectively, terest rates in early January (see chart), and a few 26 and 64 basis points lower than in the last December offerings that had been postponed previously were brought to market during this period. However, issues for which auction. Prices of Federal agency securities followed movements underwriters had bid very aggressively encountered some in other sectors of the capital market during January. On resistance from investors. At midmonth, a large offering January 16, the FNMA sold $1,250 million of participa of Aaa-rated long-term telephone debentures carrying fivetion certificates, $800 million to the public and $450 mil year call protection received only a fair reception at a re lion to Government investment accounts. The public offer offering yield of 6.25 per cent, 40 basis points less than ing consisted of $500 million of three-year certificates, the yield on a similar offering early last December. At the priced to yield 6 per cent, and $300 million of twenty-year month end, a comparable utility issue, priced to yield 6.20 certificates, priced to yield 6.084 per cent, about 32 basis per cent, received only a lukewarm response from in points lower than the yield offered on a FNMA long-term vestors. The average yield on Moody’s Aaa-rated seasoned cor financing in November 1967. porate bonds declined by 12 basis points to 6.12 per cent during January, while The Weekly Bond Buyer's series for O T H E R SE C U R IT IE S M A R K E T S twenty seasoned tax-exempt issues, carrying ratings rang The corporate and tax-exempt bond markets reacted vig ing from Aaa to Baa, fell by 19 basis points to 4.25 per orously to the President’s balance-of-payments program and cent. FEDERAL RESERVE BANK OF NEW YORK 31 B a n k in g an d M o n e ta r y D e v e lo p m e n ts in t h e F o u rth Q u a rter The fourth quarter of 1967 witnessed a moderation of During December, daily average free reserves declined to the bank credit and deposit expansion in progress since $103 million, after having ranged generally between $250 late 1966. While the growth of most banking and mone million and $300 million since March. tary indicators declined for the quarter as a whole, the slowdown was uneven. The growth of total commercial BA N K C R E D IT bank credit dropped sharply during November and De cember and was negligible in the latter month. The money The growth of total commercial bank credit slowed to supply—privately held demand deposits plus currency out a seasonally adjusted annual rate of 5.8 per cent in the side banks—continued to advance in October and No fourth quarter (see Chart I), well below the 12.6 per cent vember at about the same high rate as over the first nine growth rate for the first nine months of the year. months of the year, but grew very little in December. Dur Quarterly bank credit growth rates varied substantially ing the quarter, both long- and short-term interest rates throughout 1967, and—as in other quarters—the change on Government and private debt issues reached peaks for in bank credit in the fourth quarter reflected in large part the year. Treasury bill rates attained their highs in early changes in bank holdings of United States Government December and receded slightly over the balance of the securities and securities loans—loans made primarily for month. Yields on intermediate- and long-term Treasury the financing of securities dealers. In contrast, the growth securities peaked in mid-November and declined gradually of the sum of all other components of bank credit (other throughout the second half of the quarter. On the other securities plus total loans minus securities loans) was hand, corporate bond yields reached a 1967 high near the quite even from quarter to quarter during 1967. end of December. During the fourth quarter, bank holdings of Government These developments emerged against a background of securities declined at a 10.4 per cent annual rate. The movement toward a firmer monetary policy during the reduction was concentrated in December, when a net latter part of the September-December period. On Novem liquidation of $1.8 billion was recorded. At the beginning ber 19 it was announced that the Board of Governors of of the month, banks were still distributing the fifteen-month the Federal Reserve System had approved an increase in and five-year notes acquired in the mid-November Trea the discount rate from 4 per cent to AV2 per cent, effective sury financing. In addition, the banks apparently liquidated the next day, at ten Federal Reserve Banks. (The same ac some intermediate- and longer term Governments for tax tion was approved for the two remaining Reserve Banks purposes during December. To some extent, the December shortly thereafter.) This action was taken after the devalu decline may also have reflected the larger than anticipated ation of the pound sterling and the concurrent increase in gain in business loans and sizable outflows of funds from the British bank rate. On December 27 the Board of Gov maturing certificates of deposits (C /D ’s). ernors announced an increase of V2 percentage point in The decline in bank holdings of United States Govern reserve requirements on demand deposits in excess of $5 ment securities in the fourth quarter was more than offset million, effective in January.1 The effective rate on Federal by acquisitions of other securities—primarily in the taxfunds moved up to about AV2 per cent from 4 per cent exempt sector—so that total investments showed a modest after the discount rate increase, and Federal funds generally rise. Bank acquisitions of securities other than Govern traded at 45/s per cent in the second half of December. ments rose at an annual rate of 18.7 per cent in the fourth quarter, almost twice the rate of growth in the previous quarter, in spite of the fact that such additions were negligible in December. In part, the slowdown in that month may be attributed to a somewhat lighter volume 1 See this Review (January 1968), page 6. of new tax-exempt offerings. 32 MONTHLY REVIEW, FEBRUARY 1968 Chart I QUARTERLY RATES OF CHANGE IN BANK CREDIT AND COMPONENTS AT ALL COMMERCIAL BANKS DURING 1967 Sea so n ally adjusted annual rates Percent Percent the weakness in sales on liquidity positions of retail firms was reflected apparently in a greater than seasonal De cember rise in bank credit to this sector. Real estate loans posted a strong 10 per cent gain in the fourth quarter, and net additions on a seasonally adjusted basis equaled those for the entire first half. This faster growth was also evident in the third quarter, when additions of other securities and business loans were mod erate. Much the same pattern applied to extensions of consumer credit by commercial banks. The 9 per cent fourth-quarter expansion was slightly above the thirdquarter increase, and both were well above consumer loan growth rates in the first two quarters of the year. M O NEY S U P P L Y AND D E PO SIT S Although the expansion of the daily average money sup ply slowed substantially in the fourth quarter of 1967, it nevertheless averaged a relatively high annual rate of 5.1 Chart If QUARTERLY RATES OF CHANGE IN LIQUIDITY INDICATORS DURING 1967 Source: Board of Governors of the Federal Reserve System. Sea so n ally adjusted annual rates Per cent Per cent Money supply* Time deposits* Money supply plus time deposits* Deposits at thrift institutions + 20 The sharp decline in securities loans in the fourth quar ter exerted a moderating influence on the growth of total loans, which expanded at a 6.9 per cent annual rate over the quarter as compared with an 8 per cent rise during the first nine months of the year. The demand for bank credit by business, which had been weak from July through November, was very strong in December. Indeed, the rate of growth of business loans for that month was the high est in almost eighteen months and carried the quarterly gain in business loans to 8.6 per cent annually, only slightly below the 9.3 per cent rate for the first nine months. Although corporate tax payments on December 15 were not unusually large, borrowings during the tax week were much larger than in the same period of previous years. There was also a very large volume of special loans to firms in the extractive industries (e.g. mining, petro leum)—often referred to as “carve-out” loans—during December. These transactions, secured by assignments of production, often involve tax benefits. Moreover, prelimi nary data indicate that, on a seasonally adjusted basis, retail sales dropped slightly in December. The impact of I II III IV I III IV II III IV I II III ♦Average of daily figures. 1*Computed from levels at the beginning and end of each quarter for savings and loan associations and mutual savings banks. Source: Board of Governors of the Federal Reserve System. IV FEDERAL RESERVE BANK OF NEW YORK per cent (see Chart II). In October and November, the money supply expanded at a 6.7 per cent annual rate— the same as that for the first nine months of the year—but in December the rate of increase fell to 2.0 per cent. Erratic movements in the money supply are not unusual in December, and developments in that month should be viewed in the context of a longer period. In fact, the money supply grew very rapidly again in January 1968. The growth of daily average time deposits at commer cial banks during the fourth quarter also fell short of the rapid pace of expansion over the first nine months. This development was significantly influenced by changes in outstanding amounts of large negotiable C /D ’s. During October and November, C /D ’s outstanding at large weekly reporting banks rose more than in the same months in earlier years, while in December the decline in outstand ings appeared to be somewhat larger than seasonal. By the end of November, interest rates on certificates with maturities of ninety days or more were at the 5V2 per cent Regulation Q ceiling. Rates in the thirty- to eighty-nineday sector ranged from 5Vs per cent to 5V2 per cent dur ing December, and new issues of C /D ’s were predom inantly in this maturity sector. On balance, large com mercial banks lost $731 million of C /D ’s during the December 15 tax week, about $200 million more than in the September tax week. However, the December outflow was somewhat smaller than had been anticipated by the banks, and no unusual money market pressures resulted. Movements of savings deposits and other time deposits, although less volatile than C /D ’s, generally followed sim ilar patterns throughout the period. For the quarter as a whole, the growth rate was 10 per cent, down from the 13.5 per cent expansion of the first nine months, and this slowdown reflected in part the increasing attractiveness of yields on alternative forms of investment. 33 N O N B A N K L IQ U ID A S S E T S Liquid asset holdings of the nonbank public rose at a seasonally adjusted annual rate of 8.4 per cent in the fourth quarter, slightly above the IV 2 per cent growth rate for the first nine months of 1967. However, for the first time since the second quarter of 1966, expansion of de posits and share accounts at mutual savings banks and sav ings and loan associations failed to keep pace with the aggregate gain in other liquid assets: commercial bank de posits, Government savings bonds, and other Government securities maturing within one year. The growth in holdings by the nonbank public at savings banks and savings and loan associations slowed to 5.3 per cent in the fourth quarter, about one half of the increase during the preceding three quarters. In fact, the advance of deposits and share accounts with thrift institutions in December (on a sea sonally adjusted basis) was the smallest on a monthly basis since the critical period in mid-1966. The sharpest relative increase in components of non bank liquid assets in the fourth quarter was in holdings by the public of Government securities maturing within one year. The growth of $2.3 billion (seasonally adjusted) during the fourth quarter—or 19 per cent—was in sharp contrast to the decline of $5.7 billion over the first nine months of the year. Indeed, in December alone holdings rose by $1.4 billion. This reversal was undoubtedly in fluenced by the increasingly attractive yields on these issues—particularly in relation to rates offered on bank C /D ’s and consumer-type thrift deposits. The ratio of total liquid assets to GNP, a measure of relative liquidity of the nonbank public, was 79.5 per cent in the fourth quarter. This level was little changed from the previous quarter and close to the average of 79.4 per cent for all quarters of 1967. MONTHLY REVIEW, FEBRUARY 1968 P u b lic a tio n s o f t h e F e d e r a l R e s e r v e B a n k o f N ew Y ork The following is a selected list of publications available from the Public Information Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, N. Y. 10045. Copies of charge pub lications are available at half price to educational institutions, unless otherwise noted. 1. c e n t r a l b a n k c o o p e b a t i o n : 1924-31 (1967) by Stephen V. O. Clarke. 234 pages. Dis cusses the efforts of American, British, French, and German central bankers to reestablish and maintain international financial stability between 1924 and 1931. ($2 per copy.) 2. e s s a y s i n m o n e y a n d c r e d i t (1964) 76 pages. Contains articles on select subjects in bank ing and the money market. (40 cents per copy.) 3. k e e p i n g o d r m o n e y h e a l t h y (1966) 16 pages. An illustrated primer on how the Federal Re serve works to promote price stability, full employment, and economic growth. Designed mainly for sec ondary schools, but useful as an elementary introduction to the Federal Reserve. ($6 per 100 for copies in excess of 100.*) 4. m o n e y a n d e c o n o m i c b a l a n c e (1967) 27 pages. A teacher’s supplement to Keeping Our Money Healthy. Written for secondary school teachers and students of economics and banking. ($8 per 100 for copies in excess of 100.*) 5. m o n e y , b a n k i n g , a n d c r e d i t i n e a s t e r n e u r o p e (1966) by George Garvy. 167 pages. Reviews recent changes in the monetary systems of the seven communist countries in Eastern Europe and the steps taken toward greater reliance on financial incentives. ($1.25 per copy; 65 cents per copy to edu cational institutions). 6. m o n e y : m a s t e r o r s e r v a n t ? (1966) by Thomas O. Waage. 48 pages. Explains the role of money and the Federal Reserve in the economy. Intended for students of economics and banking. ($13 per 100 for copies in excess of 100.*) 7. o p e n m a r k e t o p e r a t i o n s (1963) by Paul Meek. 43 pages. Describes and explains the Sys tem’s use of open market purchases and sales of Government securities to influence the cost and avail ability of bank credit. ($17 per 100 for copies in excess of 100.*) 8. t h e n e w y o r k f o r e i g n e x c h a n g e m a r k e t (1965) by Alan R. Holmes and Francis H. Schott. 64 pages. Describes the organization and instruments of the foreign exchange market, the techniques of exchange trading, and the relationship between spot and forward rates. (50 cents per copy.) 9. t h e s t o r y o f c h e c k s (1966) 20 pages. An illustrated description of the origin and develop ment of checks and the growth and automation of check collection. Primarily for secondary schools, but useful as a primer on check collection. ($4 per 100 for copies in excess of 100.*) * Unlimited number of copies available to educational institutions without charge. Subscriptions to the m o n t h l y r e v i e w are available to the public without charge. Additional copies of any issue may be obtained from the Public Information Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, N. Y. 10045.
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