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FEDERAL RESERVE BANK OF NEW YORK

23

Central Banking in a Time of Stress*
By A l f r e d H a y e s
President, Federal Reserve Bank of New York

The past year has been a difficult one for monetary
policy, both at home and abroad. It began with the Fed­
eral Reserve seeking to restrain a boom, while hoping
that the Congress would soon extend a helping hand by
enacting a tax increase. The Federal Government had been
running a huge budget deficit, and its financing severely
limited the room for maneuver for monetary policy. Inter­
nationally, we had to deal with the aftermath of the ster­
ling devaluation, a rush for gold that verged on panic,
then a heavy blow at the French franc two months later.
Meanwhile, our own trade balance was deteriorating badly,
chiefly as a direct result of the inflation at home.
A major development of the past year was, of course,
the enactment of the tax surcharge and expenditure con­
trol bill. The initial fears of “overkill”, as well as the
hopes of a prompt moderation of excessive demand, did
not survive for long. The subsequent inflationary devel­
opments and expectations have served to emphasize the
need for fiscal restraint. Without the shift from a budget
deficit of more than $25 billion in the last fiscal year to
approximate balance this year, a shift aided substantially
by the tax surcharge and expenditure restraints, it is diffi­
cult to imagine what would have developed. For that rea­
son, I would like to commend all those bankers who
worked tirelessly for this fiscal policy measure, and who
— as much as any group— succeeded in persuading a
Congress facing election to increase the tax burden.
Bankers, in that effort, were carrying on in their best tra­
dition of civic responsibility.
Monetary policy also had to grapple with the inflation­

*An address before the forty-first annual midwinter meeting of
the New York State Bankers Association, N ew York City, Janu­
ary 20, 1969.




ary surge of 1968. During the first half of the year, the
rate of growth of bank credit was brought down from the
high level of the preceding six months. The demands of
the Treasury and other borrowers pushed interest rates
up, while the Federal Reserve maintained restraint as the
tax bill worked its way through the Congress. After the
midyear enactment of fiscal restraint, and the quick re­
sponse of financial markets to the promise of a lower
level of credit demands, the System shifted to accom­
modate the market’s move to lower interest rates. With
the benefit of hindsight, we can now regret that too-hasty
reaction, for it is clear that the growth of money and
credit was excessive in an economy marked by undimin­
ished momentum and powerful inflationary forces. To­
ward the end of the year, there was an appropriate tight­
ening of policy.
I have merely touched on some of the difficult prob­
lems of the past year; it is already clear that there will be
more of them to face before 1969 is ended. What I pre­
fer to speak about today, however, is the structure of
the Federal Reserve System and its position in our Gov­
ernment, and how these features lend themselves to an
effective way of developing answers to these difficult
problems. I certainly do not intend to argue that the
present structure of the System or its formulation of
policy is perfect. But I do wish to examine critically some
suggestions for radical change, and to call your attention
to some elements of strength in our present arrangements.
All of you, I am sure, know in your own organizations
occasions when equally intelligent and concerned men
facing the same facts come to different policy conclusions.
This happens, of course, as votes are counted at meetings
of the Federal Open Market Committee and the Federal
Reserve Board, whether the policy problem be one of
open market operations, discount rates, or bank mergers.
No one has a monopoly of wisdom, and the more able

24

MONTHLY REVIEW, FEBRUARY 1969

minds that can be effectively brought to bear on these
difficult questions, the better. A special strength of the
System is its regional structure that brings it close to the
day-to-day life of the whole country. In the Federal Re­
serve System we especially recognize the great value of
the views of the Reserve Bank directors, developed as
they are all around the country and in experience with
business conditions and financial markets. In a somewhat
narrower context, we in the Reserve Banks are aware
how much we owe our directors in their decisions and
advice on developing and managing an efficient organi­
zation and on introducing new methods and techniques.
The idea is sometimes advanced that it would be desir­
able to concentrate monetary authority in Washington
still further. I would like to point out, however, that such
a move would not only reduce the part played by the
Reserve Banks in the policy formation process, but might
also risk the loss of the valuable participation by the Re­
serve Bank directors. The member banks have a fine
record of electing as directors outstanding businessmen
and bankers who contribute both sound judgment and in­
timate knowledge of the current state of the economy to
the formulation of monetary policy. The Federal Reserve
Act, of course, requires these elected directors— together
with other leaders of the community appointed as direc­
tors by the Board of Governors—to establish, or reestab­
lish, the discount rate every two weeks. Their action, as
you know, is subject to the approval of the Board of
Governors, but it seems to me clear that there is an ad­
vantage in having discount rate action reflect these com­
bined judgments. Although I probably do not have to tell
you so, I must note at this point that the directors de­
liberate and vote in the broad public interest, whatever
their positions in private life.
At every meeting the directors express views on busi­
ness and credit conditions that are useful to each Reserve
Bank president at meetings of the Federal Open Market
Committee. I cannot exaggerate the value of the collective
judgment of the Reserve Bank directors, expressed as they
carry out the responsibilities imposed on them by the
Congress. And it seems to me most unlikely that we
could continue to attract men of the same high quality
if they were to be deprived of a meaningful role in for­
mulating monetary policy.
Another suggestion advanced in recent years is that
discretionary judgment with respect to monetary policy
is undesirable. Instead, it is argued, there ought to be
a fixed rule that would guide the monetary authorities.
Under this approach the stock of money would be in­
creased by a uniform percentage each quarter or month.
I certainly believe that monetary policy can and should




be improved and that its record during the past year has
been something less than perfect. But I am not persuaded
that we should aim at a fixed percentage growth in the
money supply month in and month out regardless of
what else is going on in the economy: whether Federal
spending is rising rapidly or slowly, whether business
capital spending is lively or sluggish, whether labor is in
short supply or abundantly available, and whether price
increases are negligible or staggeringly large. Moreover,
in some circumstances steady growth in the money stock
would, in my judgment, entail wild gyrations in interest
rates and financial values that could threaten economic
stability. I cannot refrain from noting also that advocates
of a fixed rule with respect to money have reached no
agreement either as to the definition of money or as to the
appropriate growth rate of money, however defined.
Turning now to the coordination of System policies
with other Government measures, we in the Federal Re­
serve like to emphasize that the System is not independent
of the Government, but independent within the Govern­
ment. Naturally, the System is responsible to, and must be
responsive to, the Congress, from which all its powers
derive. But there is, and there should continue to be, close
and frequent consultation with the Administration, espe­
cially such bodies as the Treasury Department and the
Council of Economic Advisers. The public interest re­
quires the frankest exchange of information and views. In
the final analysis, the Federal Reserve must be able to
determine monetary policy free from the day-to-day pres­
sure of partisan politics, and the structure of the System
helps to attain this end.
I should like to turn now to the area of the System’s
relations with its member banks. The fact is, of course,
that any monetary policy to be effective must work on and
through banks. The Federal Reserve can do a great deal
just by its control of the cash reserves of the banking
system. But it can do a great deal more, and do it more
effectively, if banks understand and support its policy. It
is not easy, on the face of it, for bankers to approve a
policy that restrains their ability to extend credit when
interest rates are high. Nonetheless, bankers generally do
support such a policy if they are persuaded that it is in
the country’s best long-run interest, because they then see
that it is in their interest as well. Indeed, I was impressed
last year with the large number of bankers who criticized
the Federal Reserve because it was not still tougher on
credit expansion.
It is not easy, to take another example, to support a
voluntary program that requests an actual reduction in
profitable loans to creditworthy foreign borrowers, risking
a loss not only of today’s earnings but a handicap in de­

FEDERAL RESERVE BANK OF NEW YORK

veloping future attractive business. Yet bankers have sup­
ported this policy, and I hope will continue to do so as
long as the need is so urgent, for a strong dollar is in their
best long-run interest, as it is in every American’s. I
believe that one reason for wide support among bankers
for policies such as these is the structural relationship
between member banks and the Federal Reserve, and the
channel of communication which that relationship pro­
vides.
I am aware that from time to time some matters come
to the fore on which there may be honest differences of
opinion. Bankers rightfully feel free to criticize Federal
Reserve actions, in both the regulatory and monetary
policy fields. Generally, the criticism is constructive, re­
flecting an active banker participation in the discussion
of what is good for the economy and the nation. Not infre­
quently the criticism is deserved as well and has helped
to bring about improvements. For example, there has
been a growing feeling that inequitable treatment has de­
veloped as between national banks and state-chartered
members; one such inequality related to the establishment
of operating subsidiaries. Recently the Federal Reserve
Board withdrew its objection to the establishment of bank
subsidiaries to conduct activities that may be handled
more effectively in this way than as a department of the
bank itself. This, of course, applies only where state law
permits the use of such subsidiaries, as it does in New
York State. Progress in eliminating such inequalities and
in coping with other problems may not have been as swift
or on as broad a front as some of us may wish, but prog­
ress is being made and, I hope, will continue to be made.
The best way to foster such progress is for you, as bankers,
to maintain your interest and participation in System
affairs and to let us have your suggestions for improve­
ment.
The Federal Reserve, as I have indicated, is aware of
these problems and is seeking ways to eliminate many of
the causes of dissatisfaction. We have, as you know, com­
pleted a comprehenive study of the discount mechanism
on which your views were solicited. A primary purpose
of the proposed changes in discount administration is to
make the privilege of membership more useful to banks.
The System has recently organized a vigorous effort to
focus upon some of the supervisory matters which may
give rise to dissatisfaction by bankers. Perhaps I should
mention, too, that we are at the moment studying closely
the implications of the blossoming of one-bank holding
companies. With these efforts as evidence, I can assure
you that the System is concerned about these supervisory
matters and is moving steadily toward improvement.
I have devoted some time to questions about the struc­




25

ture and the policy-making methods of the Federal Re­
serve System because I think these matters are of sub­
stantial and lasting importance. But they take on added
significance at this time when our economy and our bank­
ing system are being subjected to serious inflationary pres­
sures that distort their effective working. Credit demands
are high because of inflation, but the System is trying to
limit the growth of bank credit for the same reason. Banks
are being pinched by the Regulation Q ceiling, which
causes funds they might otherwise attract to be diverted
to marketable instruments yielding more than CD’s can.
Yet, the stubborn fact is that inflation must be resisted
and that monetary policy must be in the front line. One
can also admit, in this connection, that even the tem­
porary period of “accommodation” during last summer
has made our present problems more difficult.
As we look ahead, I still believe we can count on last
year’s fiscal measures, now supplemented by the increase
in the social security tax, to cool down our overheated
economy somewhat. We can also look forward to a reduc­
tion of Treasury debt between mid-March and June of
some $8 billion, in marked contrast to the experience of
last spring. Nevertheless, there will surely be a long and
arduous way to go before we return to a satisfactory de­
gree of price stability. Yet such a return is essential, not
only for the health of our economy at home but for the
preservation of confidence in the dollar abroad. It is im­
possible to repeat too often the warning that continued
inflation distorts business judgments on policies involving
investment in plant and equipment or in inventories, on
wage and price policies, and that decisions that turn out
to be unsound and unsustainable will make the neces­
sary correction so much the more painful. I am deeply
disturbed, therefore, by the prevalence of inflationary psy­
chology as evidenced by excessive speculation in com­
modity, security, and real estate markets.
While it is illusory to suppose that we can somehow
squeeze all the inflation out of the economy in a few
short months, or that the necessary adjustments will be
painless for everybody, it is nonetheless true that a con­
tinued and successful effort is essential. The alternative,
demonstrated again and again in other countries that have
had to adopt harsh measures of austerity, is surely less
attractive; the problem does not get easier to grapple with
if it is pushed away into the future.
It may also be worth reminding ourselves what it is we
are trying to achieve. At home, we ought to aim at a
gradual reduction in the rate of piice inflation, and to do
so with a minimum rise in oveiall unemployment. To
reduce the rate of price inflation to 2 percent a year might
be a practicable interim goal. To those who fear that this

26

MONTHLY REVIEW, FEBRUARY 1969

might mean an excessive rise in unemployment, I would
point out that at present we face a situation of extreme
labor scarcity in most parts of the country, combined
with a serious unemployment problem in certain fields,
and especially with respect to the nonwhite population. I
would hope that we could make continued progress in
cutting unemployment in these special areas, while at the
same time moderating the more general situation of ex­
treme labor shortage. What we should seek now is a bet­
ter balance between production and aggregate demand;
monetary and fiscal policies can help greatly to achieve
that balance. If we do so, we will be mounting a success­
ful attack on the discouraging outlook that now confronts
those savers who provide the capital for economic growth
by putting their funds in thrift accounts or bonds. We
will also be restoring our international trade surplus,

largely by reducing the recent unsustainable surge in im­
ports; that improvement, in turn, will strengthen the in­
ternational monetary structure in which the dollar is the
keystone.
This formidable task cannot be accomplished by Gov­
ernment fiscal policy and Federal Reserve monetary mea­
sures alone. It needs the cooperation of management and
labor, and indeed of all elements in the economy. I have
tried to suggest that in banking we have developed a
framework in which such cooperation has worked effec­
tively. You, as bankers, advising your corporate and
individual customers, can do much to extend that co­
operation by fostering understanding during the difficult
months ahead as we try to slow down the economy’s un­
sustainable pace to a growth rate that will produce greater
real gains for all of us over the long run.

The Business Situation
Concrete signs of a needed moderation in the rate of
economic expansion have remained meager thus far in
1969. Recently received information indicates that de­
mand continued to be excessive and inflationary as the
old year ended, although pressures in the consumer sector
tended to ease somewhat. The gross national product
advanced vigorously in the October-December quarter,
the labor market tightened further, and prices continued
to soar. The relatively small increase in personal con­
sumption expenditures was apparently responsible to
some degree for a substantial accumulation of inventories
at the retail trade level. The 10 percent tax surcharge was
very likely an influence on consumer behavior, but the
fundamental trend of consumer demand was obscured by
the dampening effects of the widespread outbreak of flu.
The magnitude of the fourth-quarter advances in indus­
trial production, business fixed investment, residential
construction, employment, and prices left little doubt re­
garding the exuberance of the economy as 1968 drew
to a close. It is clear that the task of restoring a satis­
factory degree of price stability will be long and dif­
ficult.




GROSS NATIONAL PRODUCT
IN THE FOURTH QUARTER

The nation’s total output of goods and services (GNP)
increased by $16.8 billion in the final quarter of 1968
(see Chart I) to a seasonally adjusted annual rate of
$887.8 billion, according to preliminary estimates by the
Department of Commerce. This represented only a very
modest slowing from the previous quarter’s $18.1 billion
advance. Of the total fourth-quarter expansion in demand,
a bit more than half reflected simply higher prices. The
implicit GNP price deflator— a broad, summary measure
of price developments in all the components of national
output— increased at an annual rate of just under 4
percent, exceeding the third-quarter pace of V /2 percent
and equaling that recorded during the first half of 1968.
The proportion of GNP growth consisting of real expan­
sion— that is, the rise in output excluding the effect of
price changes— diminished quarter by quarter through
the year, giving clear evidence of the disturbing grip of
inflationary forces. In the final quarter, real GNP
increased at an annual rate of 3.8 percent.

FEDERAL RESERVE BANK OF NEW YORK

Chart I

RECENT CHANGES IN GROSS NATIONAL PRODUCT
AND ITS COMPONENTS
Seasonally adjusted annual rates
k \v x i
\

Change from second quarter to
third q uarter 1968

Change from third q uarter to
fourth quarter 1968

■ ■

GROSS NATIONAL PRODUCT

Inventory investment

Final expenditures

Consumer expenditures for
durable goods
Consumer expenditures for
nondurable goods
Consumer expenditures for
services
Residential construction

Federal Governm ent purcfi
State and local governmei
purchases
N et exports of goods and
services

-5

0

5

10

15

20

25

Billions of dollars
Source: United States Departm ent of Commerce.

The composition of the fourth-quarter gain in GNP
differed markedly from that of the third-quarter increase.
Generally speaking, private investment displaced consumer
spending as the primary source of growth. Personal
consumption expenditures rose by only $5.2 billion,
considerably less than the third-quarter advance of $13.2
billion and the smallest since a like increase in the
third quarter of 1967. Meanwhile, business increased its
investment outlays for both fixed capital and inventories
by $6.6 billion. Inventories were accumulated at a rate
$2.5 billion above the pace of the third quarter, when
there had occurred a decline of $3.3 billion in the rate of
accumulation due to the working-off of strike-hedge
steel inventories. The growth of final expenditures in all
sectors— i.e., total expenditures less inventory accumula­
tion— amounted to $14.3 billion, substantially below the
$21.4 billion increase recorded in the previous quarter.




27

Consumers spent in the fourth quarter only a little over
half of the $9.8 billion increase in disposable personal in­
come. This cautious behavior marked a sharp shift from the
third quarter, when income growth had been severely
curtailed by the imposition of the tax surcharge and yet
consumer spending had advanced by more than double
the increase in disposable income. The savings rate rose
in the fourth quarter to 6.9 percent from the preceding
quarter’s 6.3 percent, although it remained below the
unusually high rates of late 1967 and early 1968. It seems
quite possible that consumers were finally reacting to the
effects on spendable income of the tax surcharge, and they
may also have been anticipating the higher social security
payments that started this January. The impact of these tax
increases on recent expenditures is difficult to assess, how­
ever, especially since the widespread outbreak of flu toward
the end of the year probably cut into retail buying. What­
ever the causes, consumer demand for goods, as distinct
from services, was on a plateau in the fourth quarter. Ex­
penditures for durable goods declined slightly and expendi­
tures on nondurable goods rose modestly, leaving a net gain
of only $0.5 billion. The reduction in demand for durables
was the first in five quarters, with a dampening in the
pace of auto sales contributing significantly to the decline.
Moreover, the increase in demand for nondurables was
the smallest since an actual decline occurred in the final
months of 1963. Most of the $5.2 billion rise in con­
sumption during the quarter was in services. Such expen­
ditures rose by $4.6 billion, an increase in line with the
trend over the past few years.
Sales at retail outlets dropped about 2 percent in
December, according to the preliminary report; this
brought sales down to the lowest level since May. The
weakness in sales was widespread, as it was for the quarter
as a whole. It was particularly marked in the auto sector.
In terms of the number of units sold, auto sales slid from
a seasonally adjusted annual rate of just over 9 million
in October, which was close to the average for the third
quarter, to a bit under 9 million in November, and then
to a rate of 8 V2 million units in December. Despite this
slackening in the sales pace, over 8.6 million new
domestic-model cars were sold in the United States market
during the year, the highest annual total since 1965. In
the early weeks of 1969, however, sales were running
below the December pace.
The record increase in investment spending was the
major factor propelling the economy in the fourth quarter.
In addition to the $2.5 billion rise in the rate of inventory
accumulation, fixed investment advanced by $6.4 billion, in
dollar volume a record and in percentage terms the largest
gain since early 1959. Of this increase, almost two thirds

28

MONTHLY REVIEW. FEBRUARY 1969

($4.1 billion) comprised business capital investment; this
RECENT DEVELOPMENTS IN PRODUCTION
latter gain resulted primarily from a record $3.1 bil­
AND EMPLOYMENT
lion surge in spending for equipment. According to a
recent McGraw-Hill survey, the strength of demand for
Industrial output registered another substantial gain in
capital goods has rested partly on a desire to beat price December. The Federal Reserve Board’s index of indus­
rises, partly on anticipation of growing demand, and also trial production climbed 0.9 percent to a seasonally ad­
—in significant degree— on a need to cut labor costs.
justed 168.9 percent of the 1957-59 average. Reflecting
Expenditures for residential construction in the fourth the strength of capital goods demand, production of busi­
quarter grew by $2.3 billion, the largest quarterly advance ness equipment again increased more rapidly than total
of the year. At a seasonally adjusted annual rate of $31.8 output. Indeed, output of business equipment rose by 5
billion, such outlays were some $3 Vi billion above the percent between August and December while total in­
year-earlier pace and more than $10 billion above the dustrial production gained 2 Vi percent. This surge in busi­
low reached in early 1967 at the depth of the slump in ness equipment followed several quarters of virtual stability.
home building. Although outlays for residential construc­ It contrasted with the output of defense-oriented equip­
tion in December registered another large gain, private ment, which fell 5 percent during those months after
housing starts plummeted that month to an annual rate about three years of steady growth. Consumer goods out­
of 1.45 million units, more than offsetting the sharp rise put rose in December by only 0.3 percent. The modest size
in November to the extraordinary rate of 1.72 million of the increase was largely attributable to cutbacks in auto
units. This is a highly volatile series, however, and both and television production. The seasonally adjusted annual
the November and December movements may have largely rate of auto assemblies had run for several months at a
reflected statistical aberrations. Data on building permits high plateau of about 9 lA million units, but in December
showed a milder jump in November and but little softening slid off to below 9 million units. In January, as the sales
in December, with the permit rate in the latter month ex­ pace declined and inventories swelled, production was
ceeding the pace in all but two other months of the year. cut back further and schedules for February call for addi­
Some observers are concerned regarding the prospects for tional reductions.
residential construction activity in 1969, as heavy business
The production of materials recorded a sizable advance
demands for funds threaten to put increasing pressure on in December. The steel industry continued its swift re­
the supply of mortgage funds. Housing industry spokes­ covery following the depletion of strike-hedge stockpiles,
men, however, remain guardedly optimistic. Last month, and it appears that steel production is now at a rate close
in order to improve the flow of funds into the mortgage to that which prevailed before the strike-anticipating
market, the interest rate ceilings on home loans insured by inventory buildup. In January, steel production con­
the Federal Housing Administration as well as on loans tinued to move up, perhaps partly as a result of the strike
guaranteed by the Veterans Administration were raised to by East and Gulf Coast longshoremen which has curbed
A
IV 2 percent from 6 3 percent.
imports. An increase in coal production, reflecting fur­
Government purchases of goods and services increased ther recovery from the October strike, also contributed
by $2.9 billion in the September-December period, the significantly to the December gain in materials output.
smallest rise since the third quarter of 1967. State and
The volume of new orders received by manufacturers
local government expenditures accounted for most of the in December increased very slightly. A small drop in orders
increase. The Federal Government was responsible for for nondurable goods was more than offset by a rise in
only $0.4 billion of the gain, largely representing defense orders for durables, principally a result of an increase in
spending. Thus, Federal Government expenditures con­ electrical machinery orders. At the same time, the backlog
tributed very little to the increase in inflationary pressures of unfilled orders registered its sixth successive gain, partly
in recent months.
due to a sizable drop in shipments. Manufacturers’ inven­
The remaining component of GNP, net exports of tories also increased again, but the magnitude of the
goods and services, declined $0.3 billion during the quar­ accumulation was by no means inordinate. While the
ter, compared with a $1.3 billion advance in the third inventory-sales ratio of manufacturers rose substantially,
quarter. During the year as a whole, net exports of goods the ratio was close to the average for the year.
and services dropped precipitously, from $4.8 billion in
At the year-end, the manpower required for continued
1967 to $2.4 billion. This was the smallest surplus since expansion of production was placing a heavy strain on the
1959, a consequence of the disturbing deterioration in nation’s labor resources. The seasonally adjusted unem­
our merchandise trade position.
ployment rate held in December at the fifteen-year low of




FEDERAL RESERVE BANK OF NEW YORK

3.3 percent that was reached in November. At that level, it
is true, the rate was almost one percentage point above the
low of 2.5 percent attained in May and June 1953 during
the Korean war; the average for the entire year of 1968
(3.6 percent) was 0.7 percentage point higher than the
1953 average (see Chart II). Nonetheless, a breakdown
of the total into various groups suggests that in some re­
spects the economy may currently be experiencing the
greatest excess demand for labor since World War II. The
unemployed in today’s labor market do not form a reser-

Charf II

UNEMPLOYMENT RATES
IN 1953,1968, AND DECEMBER 1968

29

voir that serves to dampen in any effective way the upward
surge in wages. Especially significant in December was the
further tightening of the labor market for men 20 years
of age and older, as their unemployment rate sank to a
post-World War II low of 1.8 percent. For the full
twelve months of 1968 their unemployment rate averaged
only 2.2 percent, compared with 2.5 percent in 1953.
While the 1968 unemployment rate for adult women, 3.8
percent, was considerably above the 2.9 percent prevail­
ing in 1953, the December rate was down to 3.5 percent.
Most striking was the unemployment rate for teen-agers,
which was very much higher than in the Korean war
period. This three-way breakdown, as well as other evi­
dence, indicates that at the present time the unemployed
consist largely of those seeking part-time or temporary
work or who lack the skills required for the types of jobs
that are open.
PRICE DEVELOPMENTS

Source: United States Deportment of Labor, Bureau of Labor Statistics.




Wholesale prices advanced steeply in January, accord­
ing to preliminary data, with the wholesale price index
increasing by 0.8 percent, the largest rise since July 1953.
Prices of industrial commodities continued to soar, climb­
ing 0.5 percent; this was the biggest monthly jump since
August 1956. A sharp boost in nonferrous metals prices
coupled with another sizable increase in lumber and ply­
wood prices accounted for most of the gain. Final Decem­
ber data indicate that the wholesale price index was 2.8
percent higher than in December 1967. The rise in the
index of industrial commodities was nearly as large.
The consumer price index in December was 4.7 percent
above the year-ago figure, the biggest December-toDecember increase since early in the Korean war. The
month’s gain in the index was the smallest since September
1967 but nonetheless was at an annual rate of 3 percent. A
partly seasonal drop in the prices of nonfood commodities,
led by a decline in new and used car prices, was responsible
for the deceleration. According to the Bureau of Labor Sta­
tistics, the January rate of increase was probably up again.

30

MONTHLY REVIEW, FEBRUARY 1969

The Money and Bond Markets in January
In the first month of the new year, following the sharp
upward adjustments in interest rates that had occurred
in December, market psychology improved considerably
for a time and the money and bond markets showed in­
creased rate stability. Late in the month, however, a
cautious atmosphere reappeared as the cumulative effects
of increased monetary restraint became more visible.
After a brief reaction to the rise in the prime lending
rate of commercial banks on January 7, prices of Gov­
ernment coupon issues were steady to higher over a large
portion of the month. Contributing to the better tone
were forecasts of Federal budget surpluses for fiscal 1969
and 1970, progress in procedural matters at the Vietnam
meetings in Paris, and the absence of large-scale liquida­
tion of securities by commercial banks.
Late in the month, caution revived as monetary indi­
cators pointed to sustained monetary restraint. In addi­
tion, nervousness grew in the corporate and tax-exempt
bond markets when investors exhibited lackluster interest
in new offerings. At the same time, market activity con­
tracted in the Government coupon sector and prices
moved irregularly as participants awaited an announce­
ment from the Treasury concerning its February refund­
ing. The market reacted with some restraint when the
Treasury offered either a fifteen-month note (priced to
yield about 6.42 percent) or a seven-year note (priced to
yield about 6.29 percent) as alternative replacements for
the $14.5 billion of outstanding coupon issues maturing in
mid-February. As the month drew to a close, prices of
Treasury notes and bonds declined in quiet trading.
The money market displayed a firm tone through the
major part of January, and most trading in Federal funds
occurred in a 6V4 to 6 5 percent range. Large commer­
/s
cial banks continued to experience sizable runoffs of cer­
tificates of deposit (CD’s) during the month, as rates on
Treasury bills and other competing short-term money
market instruments remained more attractive. The major
banks adjusted, in part, to the CD drain by increasing
their borrowings in the Euro-dollar market.




THE GOVERNMENT SECURITIES MARKET

An atmosphere of caution persisted in the market for
Treasury notes and bonds in early January. There was
concern on the part of market participants over the pos­
sible severity and duration of monetary restraint. The Jan­
uary 7 increase in the prime rate briefly generated some
nervousness over the interest rate outlook. Prices of Trea­
sury notes and bonds consequently fluctuated in the first
few days of January and then declined sharply in initial
response to the prime rate action.
Subsequently, a continuing strong demand for short­
term securities contributed to the view that near-term in­
terest rate pressures might prove less severe than some
observers had forecast. In addition, market sentiment was
encouraged by an improvement in the technical position
of the coupon sector, by the absence of any alarming
amount of investment selling, particularly by banks, and
by a steady demand— especially for intermediate-term is­
sues—from a variety of investor sources. The market
was also buoyed by the predictions of a Federal budget
surplus and by the announcement that there had been
a surplus in this nation’s balance of payments in 1968.
As a result, prices throughout the maturity range gen­
erally moved higher from January 8 through midmonth.
(Associated yield declines are illustrated in the right-hand
panel of the chart.)
On January 16 it was announced that negotiators in
Paris had reached an agreement on certain procedural
matters that had delayed the start of expanded Vietnam
peace discussions. This news strengthened market hopes
that interest rates might already have reached their peaks,
and triggered a fairly sharp rise in prices of coupon issues.
Subsequently, the market tone became less buoyant when
commercial bank selling of intermediate-term issues de­
veloped, accompanied by some investor switching out of
long-term Treasury securities into corporate and Federal
agency issues. Moreover, overall activity contracted as
attention began to focus on the Treasury’s approaching

FEDERAL RESERVE BANK OF NEW YORK

31

SELECTED INTEREST RATES
M O N E Y MARKET RATES

N o v e m b er

D ecem ber
1968

N ovem b er 196 8 -January 1969

Jan u a ry

BO ND MARKET YIELDS

N ov e m b er

1969

D ecem ber
1968

Ja n u a ry
1969

No te: D ata are shown for business d ay s o n ly .
M O N E Y MARKET RATES QUOTED: D aily range of rates posted by m ajor N ew York City banks

im m ediately after it has been released from syndicate restrictions); daily averages o f yields on

on new call loans (in F ed eral funa's) secured by United States G overnm ent securities (a p oint

seasoned A a a -ra te d co rporate bonds; d a ily averages o f yields on long-term G overnm ent

indicates the absence of any range); o ffering rates for directly placed finance com pany pap er:

securities (bonds due or calla b le in ten years or more) and on G overnm ent securities due in

the effective rate on Federal fu n d sithe rate most representative of the transactions executed);

th ree to five years, computed on the basis of closing bid prices; Thursday averages of yields

closing bid rates (quoted in terms of rate of discount) on newest outstanding three- and six-month

on twenty seasoned twenty -year tax-exem pt bonds (carrying M o o d y ’s ratings of A a a , A a ,

Treasury bills.

A , and Baa).

BOND MARKET YIELDS QUOTED: Yields on new A a a - and A a -ra te d public utility bonds (arrows point
from underwriting syndicate reo ffering yield on a given issue to m arketyieid on the same issue

refunding. Thus, from January 21 onward, prices of
intermediate- and long-term coupon issues generally
edged irregularly lower.
On January 29, the Treasury announced that holders
of the 5% percent notes and 4 percent bonds maturing
on February 15 could, if they wished, convert their
holdings into new 6% percent notes of May 1970 which
were priced to yield about 6.42 percent and/or into new
6Va percent notes of February 1976 which were priced to
yield about 6.29 percent. The public holds approximately
$5.4 billion of the maturing securities, while an additional
$9.1 billion is held by the Federal Reserve and Government
accounts. (Subscription books for the exchange offerings
were open from February 3 through February 5.) In the
closing days of the month, activity was fairly light in the




Sources: Federal Reserve Bank of N ew York, Board of Governors of the Federal Reserve System,
M o o d y’s Investors Service, a n d The W e e k ly Bond Buyer.

coupon sector. Prices of outstanding issues of short- and
intermediate-term maturity receded slightly in adjustment
to the refunding offerings. At the same time, longer term
issues, which were affected by the heavier tone of the
corporate and tax-exempt bond sectors, declined fairly
sharply.
A good tone prevailed in the Treasury bill sector as the
new year commenced. A broadly based demand for bills
was evident from both professional and investor sources,
while offerings were moderate and readily absorbed. News
of the prime rate increase triggered a sharp but brief
upward adjustment in bill rates on January 7. Subse­
quently, however, a steady investment demand for bills and
some professional short covering spurred a rapid market
recovery, and bill rates generally declined (as illustrated

32

MONTHLY REVIEW, FEBRUARY 1969

in the left-hand panel of the chart). Good commercial
bank interest emerged at the January 14 auction of
$1% billion of additional June tax anticipation bills for
which commercial banks were permitted to pay through
credits to Treasury Tax and Loan Accounts. The tax bills
were sold at an average issuing rate of 5.940 percent.
More optimistic reports concerning the Paris peace talks
generated lively professional demand and produced a
relatively sharp drop in bill rates on January 16. Over the
next few days, rates continued to move lower in response
to persisting investment and professional demand. From
January 22 through the end of the month, however, a
more cautious tone emerged in the bill sector. Investment
activity in outstanding bills contracted somewhat, and con­
cern over monetary restraint began to revive. Market par­
ticipants appeared hopeful, however, that the Treasury’s
approaching refunding would generate demand for bills
from holders of the maturing coupon issues who chose not
to take on the Treasury’s exchange offerings. Nevertheless,
in the closing days of January, the refunding operation
appeared to be producing little demand for bills. Moreover,
bank offerings of the June tax anticipation bills expanded.
At the final regular weekly auction of the month, held
on January 27, average issuing rates for the new threeand six-month bills were set at 6.167 percent and 6.255
percent, respectively, 3 and 8 basis points below the
average rates established a month earlier. At the first
monthly auction of the new year, on January 28, average
issuing rates on the new nine- and twelve-month bills
were set at 6.195 percent and 6.144 percent, respectively,
29 and 27 basis points lower than the record average
rates at the comparable December auction (see Table III).
OTHER SECURITIES MARKETS

In the markets for corporate and tax-exempt bonds,
yields continued to rise during the first few days of Jan­
uary, in some cases to record highs. Nonetheless, some
new flotations encountered investor resistance. The un­
dertone of caution was reinforced by the prime rate
increase announced early in the month. Subsequently,
however, a steadier tone emerged in both sectors. A fairly
good investor interest in new and recently issued taxexempt securities developed before midmonth. At the same
time, underwriters in the corporate sector probed for new
trading levels. While some corporate offerings were
marketed at slightly lower yields, they often drew mixed
receptions from investors.
In the final third of the month, prices of corporate and
tax-exempt bonds moved lower on balance in relatively
light trading. A more cautious undertone again emerged




in both sectors during this period, reflecting some con­
cern about the lack of investment interest in these securi­
ties as well as uncertainty over the outcome of the
Treasury’s refunding operation.
At the end of January, The Weekly Bond Buyer's yield
index of twenty seasoned tax-exempt issues was quoted
at 4.91 percent, 6 basis points higher than a month earlier.
Moody’s index for seasoned Aaa-rated corporate bonds
closed the month at 6.59 percent, 4 basis points higher
than a month earlier. The Blue List of advertised dealer
inventories of tax-exempt securities totaled $601 million at
the end of the month as against the December 31 level of
$547 million.
BANK RESERVES AND THE MONEY MARKET

The tone of the money market was generally quite firm
during January. In the January 8 statement period, reserve
distribution favored banks outside the major money cen­
ters. As banks in the central money market came under
heightened reserve pressures, largely because of a sizable
contraction in demand and time deposits, the average
basic reserve deficit of the eight major New York City
banks deepened to $1.4 billion (see Table II). Most
Federal funds transactions during the week were effected
in a 6 V2 percent to 6% percent rate range.
A firm tone persisted in the January 15 statement pe­
riod. The average basic reserve deficit at the eight major
New York City banks grew by $130 million to almost
$1.6 billion, while the deficit of the thirty-eight major
banks in the money centers outside New York City rose
by $206 million to almost $2.1 billion. This deterioration
resulted primarily from a further contraction in deposits
coupled with an increase in required reserves— an increase
which, because of the two-week lag under the new reserveaccounting method, reflected earlier deposit growth. On a
nationwide basis, average member bank borrowings from
the Federal Reserve Banks rose during the January 15
week by $189 million and net borrowed reserves increased
fairly sharply (Table I). The large money market banks
also continued to purchase a substantial volume of Federal
funds (see Table II), at rates which were predominantly
in a 6% to 6% percent range during the statement
period.
A steadily firm tone was evident in the money market
during the January 22 statement week. A pronounced
shift in reserve distribution in favor of the major money
market banks occurred, as evidenced by a sharp improve­
ment in the basic reserve positions of the eight major
New York City banks and a slight improvement in the
reserve positions of the thirty-eight money market banks

33

FEDERAL RESERVE BANK OF NEW YORK
Table I

Table II

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

RESERVE POSITIONS OF MAJOR RESERVE CITY BANKS
JANUARY 1969

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

In millions of dollars
Daily averages—week ended
Factors affecting
basic reserve positions

Changes in daily averages—
week ended on
Net

Factors
Jan.

Jan.

1

S

Jan.
22

Jan.

i

1
5

Jan.
29

“ Market” factors
— 328

+
+

128
24
119
2
84

+ 135
— 331
— 19
— 2
4-365

—

120

+ 123 —

-

753

—

573

+ 257

+ 668

+ 169

601

Operating transactions
_

Federal Reserve float ............
Treasury operations* ............
Gold and foreign account...
Currency outside b a n k s ........
Other Federal Reserve
Total “market" fa cto rs....

+
—

+
+
+
+

43
18
15
15

—
—
—
+
+

42

+

78

— 95

—

56

193 | - i - 209

+

426

+ 310

-

Direct Federal Reserve
credit transactions

+
+

576
1

+
+
+
+

+ 398
+

— 2

166
21
7
459

—

— 54

_ 172
_ 1 29

+
+

5

175
2

— 480
4

— 503
— 2

_

+ G O O
—1,154
—
270
85
+
+ 1,995

_

—

- 205

4

475

—

660

+

112

+

—

393

-

229

—

83

-

230

92

+

—

392

+

34

_

467 |

i +

60
— 7
— 4

+

—
—

184
7

—

—
—

16
189

—

— 819 +

+1,228

Jan.
29

60
131
882
1,844
962
— 953
788
39

Thirty-eight banks outside New York City

33

!
Reserve excess or
deficiency (—) * .....................
205 — 48 21 8j —
41
17
Less borrowings from
346
260
237
302
Reserve Banks .......................
483
186
Less net interbank Federal
1,625 1,083
funds purchases or sales(—).. 1,518 1,626 1,807
1,532
2,919
Gross purchases .............. 2,792 3,141 3,235 2,872 2,554 \
1,387
Gross sales ........................ 1,274 1,515 \ 1,428 1,247 1,471
Equals net basic reserve
—1,817
surplus —or deficit(—) ......... -1,796 -1,859 -2,065 —1,979 -1 ,3 8 4
Net loans to Government
—
172
360
280
383
318
securities dealers .................
396
Net carry-over, excess or
22
21
33
22
97
3
deficit (—) t ...........................

—

Note: Because of rounding, figures do not necessarily add to totals.
* Reserves held after all adjustments applicable to the reporting period less
required reserves and carry-over reserve deficiencies,
t Not reflected in data above.
Table III

Daily average levels

AVERAGE ISSUING RATES*
AT REGULAR TREASURY BILL AUCTIONS

Member bank:
Total reserves, including
Required reserves ........................
Excess reserves ............................
Borrowings ....................................
Free, or net borrowed (—)
reserves ..........................................
Nonborrowed reserves ................
Net carry-over, excess or
deficit (—)§ ................................

Jan.
22

|

i

Open market instruments
Outright holdings:
Government securities . . . . +
Repurchase agreements :
Government securities . . . .
Bankers' acceptances ........
Federal agency obligations.
Member bank borrowings ........
Other loans, discounts, and

+

358
558
166
69
393

Jan.
15

Reserve excess or
deficiency (—) * .....................
36
18
291 — 29 — 16
Less borrowings from
Reserve Banks .......................
434 _
86 — 1 136
t
Less net interbank Federal
635 — 128
funds purchases or sales(—).. 1,090 1,403 1 1,410
Gross purchases .............. ! 1,634 2,166 2,333 1,735 1,353
544
764
923 1,100 1,481
Gross sales ........................
Equals net basic reserve
146
surplus or deficit(—) ......... —1,232 -1,432 -1,562 — 685
Net loans to Government
732
706 !
securities dealers .................
837
828
838
Net carry-over, excess or
8
12 29
deficit ( - ) f ...........................
67
94

1

782
332
16
1
1,138

+
1 —

Jan.
S

Eight banks in New York City

Member bank required
625

Jan.
1

Averages of
five weeks
ended on
Jan. 29

28,295
27,433
862
1,318
— 456
26,977
191

27,963
27,761
202
499

28,540
28,334
206
688

28,317
28,077
240
780

27,566
27,409
157
892

— 297 — 482
27,464
27,852

— 540
27,537

In percent

— 735 — 502$
26,674 27,301$

298

117

69

115

28,136t
27,803$
333$
835$

158$

Weekly auction dates—January 1969
Maturities
Jan.
6

Jan.
13

Jan.
20

Jan.
27

Three-month..

6.227

6.215

6.076

6.167

Six-month......

6.365

6.375

6.233

6.255

Changes in Wednesday levels
Monthly auction dates—November 1968-January 1969

System account holdings
of Government securities
maturing in:
Less than one y e a r ....................
More than one y e a r ....................

+

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

+

331

—

— 215 — 535

+ 297

— 159

Nov.
22

— 281

—

—

—

—

-

— 215

— 535

+ 297

— 159

— 281

Dec.
23

Jan.
28

Note: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
t Includes assets denominated in foreign currencies.
$ Average for five weeks ended January 29, 1969.
§ Not reflected in data above.




Nine-month....................................

5.693

6.483

6.195

One-year..........................................

331

5.568

6.412

6.144

* 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.

34

MONTHLY REVIEW, FEBRUARY 1969

outside New York City (see Table II). At the same time,
however, nationwide reserve availability contracted some­
what, largely as a result of System open market operations
which more than absorbed the reserves released by market
factors. Against this background, Federal funds traded pre­
dominantly in a 6V4 to 6 5 percent range, while average
/8
member bank borrowings from the Federal Reserve Banks
rose by an additional $92 million to $780 million.
In the final statement period of the month, the reserve
positions of the forty-six major reserve city banks improved
dramatically, partly as a result of a sharp contraction in
required reserves and expanded borrowings from foreign
branches. The large New York City banks actually ac­
cumulated an average basic reserve surplus (see Table
II) for the first time in almost a year, and their net sales of
Federal funds averaged $128 million. Accordingly, most
Federal funds transactions took place in a 6Va to 6V2
percent rate range. At the same time, nationwide reserve

availability contracted by $195 million as average net
borrowed reserves rose to $735 million. With reserve dis­
tribution sharply favoring money market banks, pressures
on the reserve positions of banks outside the money cen­
ters intensified. As a consequence of heightened reserve
pressures at the relatively smaller banks, member bank
borrowings from the Federal Reserve Banks rose by $112
million to $892 million.
Offering rates posted by the major New York City
banks on the various maturities of CD’s generally re­
mained at the Regulation Q ceiling levels in January, while
the outstanding volume of CD’s continued to fall. CD’s out­
standing at the weekly reporting banks in New York City
declined by $810 million between December 31 and Jan­
uary 29, compared with a $1 billion contraction in Decem­
ber. At the same time, however, liabilities of United States
banks to their foreign branches rose by $2.6 billion, more
than offsetting the $1.2 billion contraction in December.

Subscriptions to the m o n t h l y r e v i e w are available to the public without charge. Additional
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35

FEDERAL RESERVE BANK OF NEW YORK

Banking and Monetary Developments in the Fourth Quarter
Bank credit continued to expand in the fourth quarter
although more moderately than in the third, the money
supply grew at an accelerated pace, and member banks
experienced increased pressure on their reserve positions.
With economic activity extremely strong and an infla­
tionary psychology prevalent, it became increasingly clear
that the growth of money and credit was excessive. On
December 17 the Board of Governors of the Federal Re­
serve System approved actions by the directors of nine of
the Federal Reserve Banks raising the discount rate by X
A
percentage point to 5 Vi percent. Similar increases voted by
the directors of the other three Reserve Banks were ap­
proved two days later. This restored the rate to the level
prevailing from mid-April to mid-August, the highest in
nearly forty years.
INTEREST RATES AND RESERVE POSITIONS

Money market rates rose substantially during the fourth
quarter, with very sharp increases being registered in the
closing weeks of the year. The rate for three-month Trea­
sury bills, a key short-term rate that had fluctuated around
5.20 percent in September, peaked at a record high of
6.26 percent on December 24 and thereafter declined
only slightly. As a result of the rise in rates, banks found
it increasingly difficult to compete for funds through the
issuance of large certificates of deposit (CD’s). By early
December, most banks were paying the CD ceiling rates
established in mid-April under Regulation Q. These
range from 5Vi to 6lA percent, depending on matur­
ity. In December, CD liabilities at large weekly reporting
banks declined substantially, and the net gain for the
quarter was quite small.
Reserve positions of member banks came under
growing pressure as the quarter progressed, and net
borrowed reserves rose to an average of $354 million in
December from a September average of $132 million.
Member bank borrowings at the discount window increased
slightly over the quarter as a whole. The effective rate on




Federal funds fluctuated irregularly during most of the
period but tended sharply upward during the last two
weeks of December; in September it had averaged 5.78
percent, in December the average was 6.02 percent, but in
the last two weeks of December the rate rose to an average
of 6.10 percent. Rates on Euro-dollar funds increased
throughout the quarter and were unusually high toward
the end of December when a large number of United
States corporations repatriated funds they had previously
held on deposit in foreign banks. Thus, the New York City
banks, who had made extensive use of this market as a
source of funds during the third quarter, found it more
costly to do so at a time when reserve pressures were in­
tensifying.
With banks facing sustained strong loan demand and
funds becoming more difficult to raise, the prime rate was
moved up in December in two successive X percentage
A
point steps to 63 percent. The initial round of increases
A
was started on the first business day of December and the
second on December 18, the day the increase in the dis­
count rate took effect. On January 7, 1969, the prime rate
was raised again, to 7 percent. This is the highest rate in
more than four decades.
BANK CREDIT

The growth of total commercial bank credit slowed to
a seasonally adjusted annual rate of lOVi percent during
the fourth quarter, after having accelerated sharply to a
19 percent rate during the third. However, this decline
in the rate of expansion, which became evident during
November and was even more pronounced in December,
was largely the result of a sizable reduction in bank hold­
ings of United States Government securities together with
a sharp decline in securities loans. The composition of the
quarter’s seasonally adjusted $9.7 billion credit growth
reflected the strong loan demand that was associated with
the continued rapid rate of economic expansion. Although
the overall growth in loans moderated somewhat, there was

36

MONTHLY REVIEW, FEBRUARY 1969

a record rise in loans other than securities loans. Bank in­
vestments, meanwhile, expanded by only $1.2 billion, sea­
sonally adjusted. The modest size of this increase seems
to have reflected the hesitancy of the banks to advance their
holdings of securities at a time when loan demand was
strong and the banks were anticipating a sizable attrition
of maturing CD’s.
Commercial banks reduced their Government securities
portfolios during the quarter by 14Vi percent, seasonally
adjusted annual rate. In the preceding quarter, seeking to
rebuild liquidity, they had acquired substantial amounts
of Government securities as well as of other investments.
All of the fourth-quarter liquidation occurred in November,
when banks were anticipating participation in a $2 billion
Treasury tax anticipation bill (TAB) issue for which they
could make full payment by credits to Treasury Tax and
Loan Accounts. The issue was paid for on December 2.
During December, banks sold intermediate- and long­
term Governments as well as many of the newly acquired
bills, but largely as a result of the TAB issue they were
left with a net increase in holdings of Government securi­
ties that partly offset the November liquidation. Despite
the fourth-quarter reduction, banks increased their
holdings of Government securities during the last half of
1968 by a substantial amount.
The fourth-quarter decline in holdings of Government
securities was more than offset by purchases of “other
securities”— principally tax-exempt obligations issued by
states and municipalities—which were added to bank
portfolios at a 21 percent seasonally adjusted annual
rate. The rise constituted the largest quarterly increase in
“other securities” in 1968. In December, however, the
rate of increase, seasonally adjusted, moderated substan­
tially.
Loans to securities dealers declined in the fourth quarter
from the record level reached in the third. The large thirdquarter increase had reflected financing of the record level
of inventories built up by United States Government
securities dealers over the summer, and the fourth-quarter
decline in such loans largely reflected the reductions dur­
ing the quarter in the average level of dealers’ holdings.
Loans to Government securities dealers were nonetheless
high during the final quarter. Loans to stock market
brokers and dealers also remained strong, probably owing
to the heavy volume of stock market activity.
The growth rate of business loans—by far the largest
single loan category— accelerated quarter by quarter in
1968 and reached a seasonally adjusted annual rate of
just over 12 percent in the final quarter, though the pace
of expansion moderated somewhat in December. The
strong fourth-quarter increase can be related to increases




in the rates of business inventory accumulation and fixed
investment. Inventories rose in that quarter at an esti­
mated $10 billion seasonally adjusted annual rate, up
from the $7.5 billion rate of accumulation in the third
quarter, and business fixed investment increased at a rec­
ord rate of $4.1 billion, considerably more than the thirdquarter rise.1 Perhaps there was also some stimulus to busi­
ness loans as a result of a slight easing in loan rates for
part of the quarter. This temporary easing was exemplified
by the changes in the prime rate, which was lowered in
late September but raised again in December.
Real estate loans posted a strong 14 percent gain,
continuing the marked strengthening that began in
September. Contributing to this expansion were the large
increases during the quarter in construction outlays and
private housing starts; the latter reached a seasonally ad­
justed annual rate of nearly 1.6 million units in the fourth
quarter, the highest in almost five years. Moreover, real
estate loans became more attractive after the liberalization
of usury law ceilings in a number of states during the
summer of 1968.
Consumer loans rose during the fourth quarter by 11
percent, seasonally adjusted annual rate. Although this
was a large increase, it was considerably below the third
quarter’s 14 percent advance. That was the period, how­
ever, when the income tax surcharge went into effect,
cutting heavily into the growth of disposable income.
Consumption expenditures had nonetheless increased
sharply that quarter, financed heavily by credit. In the
fourth quarter, the growth of disposable income was
stronger, but the rise in consumption expenditures slowed
dramatically. This was reflected in an increase in the savings
rate. However, consumer indebtedness to all types of lend­
ers (bank and nonbank) continued to grow rapidly.
Although the rate of increase in loans extended to con­
sumers by banks slowed a bit, at the same time the overall
credit demands in the consumer sector affected banks in­
directly by giving rise to a record increase in bank lending
to nonbank financial institutions. The major borrowers in
this category are sales and personal finance companies. The
increased volume of such lending may indicate that these
borrowers were finding banks a relatively more attractive
source of funds as the money markets firmed. Along with
rates on other market instruments, those on paper directly
issued by finance companies increased throughout the
quarter.

1 For a more detailed discussion of third-quarter developments
in business investment, see “The Business Situation”, this R eview ,
pages 27-28.

FEDERAL RESERVE BANK OF NEW YORK

37

MONEY SUPPLY AN© TIME DEPOSITS
C hart II

The growth rate of the money supply—privately held
demand deposits plus currency in circulation outside
banks— accelerated in the October-December period to
a seasonally adjusted annual rate of 7V2 percent (see
Chart I ). This represented a sizable increase over the
third quarter’s AV2 percent expansion rate. The recent
acceleration, which was especially strong in November, was
in part a result of a substantial reduction in Treasury de­
posits at commercial banks, which added funds to the
private sector. In November, Treasury deposits, which had
been built up over the summer and early fall, declined by
almost $2 billion. The net decline for the quarter is esti­
mated at $1.4 billion. The rapid growth of the money stock
may also have reflected increased needs for transactions
balances due to the continuing high level of economic and
financial activity.
The steep climb in time and savings deposits at com­
mercial banks that began last July and resulted in a thirdquarter rise of 18 percent (seasonally adjusted annual rate)
continued into the fourth quarter. However, the increase,

LARGE CERTIFICATES OF DEPOSIT OUTSTANDING
A N D YIELD A D VA N TA G E
Billions of dollars

Chart I

1968 QUARTERLY CHANGES !N
LIQUIDITY INDICATORS
Seasonaily adjusted annual rates

Percent

Percent

" 1 Monthly average of most often quoted new issue rates on 90- to 179-day
J
large certificates of deposit atnine large New York City banks less average

20

yield on six-month Treasury bills.
Source: Board of Governors of the Federal Reserve System.

15

10

5

0
I

II

III

IV

I

II

lil

IV

I

II

III

IV

I

II

III

IV

Note-. Percentage changes are based on the averages of daily figures for the last
month of each quarter, except for thrift institutions. Percentage changes at the
latter are based on the amount outstanding on the last day of each quarter.
Source: Board of Governors of the Federal Reserve System.




which amounted to 15Vz percent for the quarter, seemed
to be moderating toward the end of the year. Most of the
third-quarter advance had reflected heavy inflows in the
form of large CD’s. During October and November, banks
were still quite successful in attracting CD’s, but as market
rates continued to rise, the offering rates on such deposits
ran into the limitations imposed by Regulation Q ceil­
ings. By early December, most banks were quoting the
ceiling rates on all CD maturities, but these rates were
generally lower than those on competing financial instru­
ments and banks began to lose a substantial volume of
deposits as the CD’s reached maturity. At weekly reporting
banks, which include the institutions most active in the CD
market, outstanding large CD’s grew in October and No­
vember by a total of $2 billion and then fell in December
by $1.5 billion (see Chart II). These data are unadjusted

38

MONTHLY REVIEW, FEBRUARY 1969

for seasonal variation, but the December decline was
considerably larger than seasonal. Consumer-type time and
savings deposits at weekly reporting banks increased by a
total of $1.4 billion during the fourth quarter, most
of the rise occurring in the month of October. This
quarterly gain was virtually the same as the $1.5 bil­
lion increase during the third quarter. Although no data
are available on the components of time and savings
deposits at all commercial banks, the weekly reporting
bank figures suggest that the rapid fourth-quarter increase
in total time deposits reflected in part an increase in per­
sonal savings (which swung from a decline in the third
quarter of $6.9 billion, seasonally adjusted annual rate, to a
$4.3 billion increase in the fourth) and in part an increase
in state and local government time deposits.
THRIFT INSTITUTIONS

The rate of growth of savings flows into thrift institu­
tions advanced moderately in the October-December pe­
riod, rising to 6.3 percent from the previous quarter’s 6.1
percent. Share capital at savings and loan associations
continued to grow at approximately the same 6.0 percent
rate as in the third quarter, but deposits at mutual savings
banks increased their growth from a 6.3 percent rate to
an estimated 7.0 percent rate. The continued widening of
the spread between rates on deposits at the thrift institu­
tions and rates on comparable money market instruments




presumably tended to retard flows to these institutions,
but this development was apparently more than offset by
gains reflecting the increased rate of personal savings. How­
ever, the largest monthly increase in flows occurred in Octo­
ber. As the year drew to a close, these institutions seemed to
be having difficulty attracting new funds. The December
growth in total deposits and shares at thrift institutions was
the smallest, in absolute and relative terms, of the quarter.
The sharp rise in the number of odd-lot purchases of Gov­
ernment securities in late December may have indicated
that individual savings were being placed increasingly in
money market instruments instead of in thrift institutions.
The thrift institutions increased their net acquisitions
of mortgages during the fourth quarter by just over IV 2
percent, up from 6 percent in the third quarter. Mutual
savings banks added to their mortgage portfolios at a 6
percent annual rate, compared with a AV2 percent rate in
the third quarter, while savings and loan associations in­
creased their new mortgage lending even more sharply, the
rise mounting from an annual rate of 6 V2 percent in the
third quarter to 8 V2 percent in the fourth. The step-up in
mortgage lending was partly a result of the demand for new
housing, which remained strong in the fourth quarter
despite increased financing costs. At the same time, build­
ers and homeowners may have been accelerating their
takedown of the large outstanding backlog of mortgage
commitments in order to avoid the possibility of having to
renegotiate terms at a later date.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102