Full text of Economic Policy Review (Federal Reserve Bank of New York) : January 1, 1974, Vol. 56, No. 1

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FEDERAL RESERVE BANK OF NEW YORK

The Business Situation
The economy has continued noticeably less buoyant in
recent months than in the early part of 1973. More sub­
dued consumer demand, capacity limitations, and supply
bottlenecks have all contributed to the slower rate of
economic expansion. As the effects of the embargo on
Arabian oil exports to the United States begin to make
themselves felt, the productive capacity of the economy
will be further constrained. Although Administration esti­
mates of the petroleum shortage during the next few
months have been revised downward, the projected short­
fall is still large and its impact on the economy remains
uncertain. Much depends on the duration of the embargo,
the extent to which nonessential energy consumption can
be curtailed, and the overall efficacy of the Government’s
oil allocation program.
The latest available data on the business situation cover
a period when there was still little adverse effect from the
Mideast oil embargo— aside from that on prices and auto­
mobile sales. Industrial production increased only slightly
in November, with the magnitude of the gain as well as of
those in the two previous months considerably smaller than
the advances recorded earlier. The less rapid growth in
production in recent months has been, to a considerable
extent, the result of capacity limitations and shortages of
materials, as evidenced by the high backlog of unfilled or­
ders and the unusually lengthy lead times between orders
and deliveries. However, the less vigorous demand for con­
sumer durables has also contributed to the slower growth.
This ebbing in demand for consumer durables, especially
noticeable with regard to automobiles, resulted in the ad­
vance estimates of retail sales for November remaining vir­
tually unchanged, even before making allowance for rising
prices. New car sales declined further during December,
owing partly to a rapid shift in demand for gas-economizing
models, which were not available in sufficient number.
The housing slump remained quite evident in November,
despite a small rise in starts. Unemployment rose to 4.9
percent of the labor force in December, the second straight
monthly increase from the 3 Vi-year low of 4.5 percent




reached in October. The December data were gathered
too early to have been significantly affected by the oil
embargo.
The price situation reflects widespread upward pres­
sures, with no relief in sight. In November, the consumer
price index was rising at an annual rate of around 9Vi
percent. Soaring prices of gasoline, motor oil, fuel, and
utilities, along with large increases for food commodities,
accounted for much of the jump. In December, the whole­
sale price index surged at an annual rate of over 26 per­
cent, seasonally adjusted. The increases were particularly
large for fuels and power, but they were also very sizable
for other industrial commodities and for farm products.
INDUSTRIAL PRODUCTION, ORDERS,
AND INVENTORIES

The Federal Reserve Board’s index of industrial pro­
duction, seasonally adjusted, posted a modest 2 percent
annual rate of advance in November. By comparison, this
measure of the output of the nation’s factories, mines,
and utilities had increased at a 3.3 percent annual rate in
the previous four months, at a 7.4 percent annual rate
during the first half of the year, and at a 12 percent rate
during 1972.
Decreases in the production of energy, materials, and
automotive products contributed to the stunting of the
November advance in the overall index (see Chart I).
The energy component encompasses the fuel extractive
industries, the gas and electric utilities, and the petroleumand coke-refining industries. Crude oil deliveries from the
Mideast had not been unduly interrupted in November; the
decline in energy production reflected, rather, a marked
cutback in electricity consumption, apparently because of
conservation measures as well as the unusually mild
weather. Widespread shortages of raw materials seem to
have been mainly responsible for the slight dip in the pro­
duction of materials. In recent months, capacity limitations
that have prevented further expansion of output by ma-

4

MONTHLY REVIEW, JANUARY 1974

C h art I

INDUSTRIAL PRODUCTION
Se a so n a lly ad justed ; 1 967=100

larged bookings for nondefense capital goods, amounted
to a 10.7 percent annual rate of increase. In the year ended
May 1973, new bookings had expanded 25 percent. Be­
tween May and October of this year, however, the annual
growth rate slowed to 9 percent. Moreover, much of the
increase since May has centered in orders placed for capi­
tal goods, defense as well as nondefense items. Indeed, ex­
cluding nondefense and volatile defense capital goods
orders, the growth rate in new bookings amounted to 25.9
percent for the year ended May 1973 and to only a 4.6
percent annual rate for the May-November period.
Despite the recent slowing in orders and continuing
additions to capacity, the lag between the placement and
the delivery of orders still is unusually long. In November,
the increment to the backlog of unfilled durables orders
amounted to $2.5 billion on a seasonally adjusted basis,
about the same as the increase averaged in the first ten
months of the year. The ratio of unfilled durables orders to
sales rose to 2.62, the highest level in recent years. Data
gathered from other sources also suggest that the delivery
lag is still lengthy. For example, the National Association
of Purchasing Management’s survey for December showed
that the percentage of its respondents reporting commit­
ments of at least sixty days to buy production materials was

S o u r c e : B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s te m .

C h a r t II

terials producers have constituted bottlenecks for the
rest of the economy, severely limiting the overall rate
of economic expansion. The developing energy short­
age is likely to exacerbate this situation in coming
months. At present, however, it is the automotive industry
that has been most affected by the uncertainties engen­
dered by the oil embargo. Although declines in truck, bus,
and parts output accounted for the big November drop in
the production of motor vehicles and parts, a weakening
in demand for passenger cars has been very apparent.
While auto assemblies rose to a 9.6 million unit pace in
November, they fell to an 8.2 million unit rate in Decem­
ber according to preliminary estimates. The temporary
closing of a number of automobile assembly plants, in part
to reorient production toward the smaller-sized models,
will serve to hold down production in the near-term future
as well.
In November, the seasonally adjusted flow of new
orders received by durable goods manufacturers rose by
$400 million, less than one fourth of the spurt of the pre­
vious month. The November gain, attributable mainly to en-




PERCENTAGE OF CO M PANIES REPORTING COMMITMENTS OF
60 DAYS OR LO N GER TO BUY PRODUCTION MATERIALS
Percent

N ot ^ aso n Q "v a d ius»ed

S o u r c e : N a t i o n a l A s s o c ia t io n o f P u r c h a s in g M a n a g e m e n t , In c .

Percent

5

FEDERAL RESERVE BANK OF NEW YORK

again at its post-Korean-war high, initially reached in
October (see Chart II).
Throughout the first ten months of the year, the book
value of total business inventories has grown at a rate
about double that of 1972. Much of this acceleration,
however, reflects the faster pace of inflation rather than a
buildup of physical stocks. Because business sales are af­
fected by inflation in much the same way as the book value
of inventories, the inventory-to-sales ratio tends to be a
more accurate indicator of inventory conditions than the
change in inventories alone. In past business expansions,
the inventory-to-sales ratio fell during periods of rapid
real growth and started to climb when growth slowed, as
growth has over the second and third quarters of 1973. The
ratio declined to a post-Korean-war low of 1.41 this past
July, hesitantly rose in the next two months, but then fell
back to the July level in October, the latest month for
which data are available. Widespread shortages of mate­
rials have been in part responsible for businesses being un­
able to build up desired buffer stocks of inventories.
In November, the book value of manufacturers’ inven­
tories rose at a $13.4 billion seasonally adjusted annual
rate, about the same as the gain in the previous month but
somewhat above the pace recorded during the first nine
months of 1973. A fairly rapid increase in shipments re­
sulted in a trimming of the manufacturing inventory-sales
ratio to 1.54, a post-Korean-war low. While the stock-sales
ratio for durables remained essentially unchanged, the ratio
for nondurables sank to 1.16, the lowest reading on record.

PERSONAL INCOME, CONSUMER DEMAND,
AND RESIDENTIAL CONSTRUCTION

Personal income advanced in November at a seasonally
adjusted annual rate of $8.7 billion, off slightly from the
$9 billion gain of the previous month. Though sizable,
the recent increase marked the third consecutive month
that the rate of growth in personal income has slowed.
The November rise was diffused across all the major
income categories. Wage and salary disbursements ex­
panded at a $5.6 billion pace, similar to the monthly gain
averaged during the first ten months of 1973. Over the
twelve months ended November, personal income grew
by about 10 percent, slightly less than the gain recorded
during 1972. The slowdown in real personal income has
been larger as a result of accelerating inflation.
Prior to the Arab oil embargo, automobile sales had
been expected to moderate from the hectic and presum­
ably unsustainable pace of earlier this year. With the
imposition of the oil embargo, the decline in automobile
sales has been even severer than had been anticipated.




C h art III

A U TO M O BILE SALES
S e a s o n a lly ad justed
M illio n s of cars

S o u rce s:

M illio n s of cars

D o m e s t i c a u t o m o b i le s o l e s : B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e

S y s t e m ; im p o r t e d a u t o m o b i le s a l e s : U n it e d S t a t e s D e p a r t m e n t o f C o m m e r c e ,
B u r e a u o f E c o n o m ic A n a l y s i s .

In response to the sudden and unexpected changes in
gasoline cost and availability, both the level and the
composition of demand for autos have been markedly
altered. Retail sales of large cars have fallen substantially,
while sales of smaller, gas-economizing models have gone
up. During December, sales of domestic cars declined to a
seasonally adjusted annual rate of 7.9 million units. This
was well below the rate of 10 million units averaged over
the first three quarters of the year (see Chart III). The
decline reflects both a fall in the total demand for new
cars and a shift in the composition of demand toward
smaller domestic and foreign models, which are in short
supply.
Activity in the housing sector is continuing at much the
same sluggish pace as during the past few months. Through­
out this period, the mortgage market has remained tight.
Housing starts in November were running at a 1.7 mil­
lion unit seasonally adjusted annual rate, up slightly from
the previous month but substantially below the 2 V
e­
rmilion unit rate posted in the eight months preceding
the large September decline. Over the past three months,
single-family and multifamily starts have been about 25
percent below their respective average monthly rates

6

MONTHLY REVIEW, JANUARY 1974

during the first half of 1973. Building permits continued
the steady decline that began in the second half of the
year, and by November stood at 1.3 million units, down
only slightly from the previous month but 0.8 million
units below the monthly average of the first half of the
year.
Sales of new one-family homes declined in October to
523.000 units, down 26 percent from the first-half average
and the lowest monthly figure in over three years. The
sluggish October sales rate sent the inventories of unsold
one-family homes to a record 10.7 months of sales,
measured by the October level. Mobile-home sales fell for
the third consecutive month, amounting in October to
444.000 units, 19.4 percent less than a year earlier and the
slowest pace since March 1971.
PRICES

Inflationary pressures were undiminished in November,
as the consumer price index rose at the extraordinarily
high seasonally adjusted annual rate of 9.4 percent. Over
the first eleven months of the year, consumer prices in­
creased at a 9 percent annual rate, more than double
the rate of growth that occurred in 1972. Much of the
large November advance was attributable to the skyrock­
eting prices of energy items and to the resurgence of food
price increases. The rise in the prices of nonenergy, non­
food consumer commodities was quite modest.
The enormous hikes in the prices of energy-related
items accounted for about one third of the November
advance in consumer prices. Recent decisions by the
Cost of Living Council have allowed retailers to pass on
higher wholesale costs of many refined petroleum products.
Fuel oil and coal prices jumped at a 10 percent seasonally
adjusted monthly rate, gasoline and motor oil prices rose
4.5 percent, and the increase in gas and electricity rates
amounted to 1 percent. Further advances in energy
prices are in the offing as a result of the intensifying
effects of the Arabian countries’ continuing embargo of
oil to the United States and the steep increases in prices
posted by members of the Organization of Petroleum Ex­
porting Countries as well as by other oil-exporting na­
tions. The combination of energy-related shortages and
higher prices of energy items is likely to exert additional
inflationary pressures elsewhere in the economy in coming
months.




Inflation continues to be a most serious problem in the
food sector also. In November, consumer food prices
jumped at a 17 percent seasonally adjusted annual rate
as declining prices for meat, poultry, and eggs were more
than offset by rising costs of other foods and of restau­
rant meals. The November increase was the largest in
three months and pushed food prices to a level 20 per­
cent higher than a year ago.
EMPLOYMENT

According to the December household survey, the
unemployment rate registered its second consecutive
monthly increase of 0.2 percentage points. This brought
the seasonally adjusted jobless rate to 4.9 percent, com­
pared with the 3 Vi-year low of 4.5 percent reached this
past October. During December, as in November, employ­
ment edged down and the labor force grew by a small
amount. Because the timing of the survey was such as to
include only those individuals who were unemployed during
the first week of the month, the December data were little
affected by the repercussions of the oil embargo. Layoffs
at automotive plants and among airline personnel, for ex­
ample, have been concentrated in the weeks since the sur­
vey was taken.

A DAY AT THE FED

A Day at the Fed, a new 28-page booklet, takes
the reader on a behind-the-scenes “what”, “how”,
and “why” tour of the New York Fed. The
documentary-type narrative provides a panoramic
view of the Bank’s varied operations and its role in
the Federal Reserve System and the economy.
A Day at the Fed is available without charge
from the Public Information Department, Federal
Reserve Bank of New York, 33 Liberty Street, New
York, N.Y. 10045.

FEDERAL RESERVE BANK OF NEW YORK

The Money and Bond Markets in December
Short-term interest rates edged upward early in Decem­
ber but then drifted generally lower through the remain­
der of the month. Longer term rates moved within a nar­
row range and finished the month somewhat higher than
at the end of November. Throughout the period, the dom­
inant concerns in the financial markets were the eco­
nomic implications of the energy shortage and the likely
response of monetary policy to the anticipated slower
pace of economic activity. Early in the month, increases in
the prime lending rates of several major commercial banks
and a statement by Federal Reserve Chairman Arthur
Burns that “the shortage we have is a shortage of oil, not
a shortage of money”, caused interest rates to move sharply
higher. However, a subsequent reduction in the reserve re­
quirement on large negotiable certificates of deposit (CDs)
and a series of Treasury bill purchases by the Federal Re­
serve were interpreted by the market as presaging a more
lenient monetary policy. As a result, short-term rates re­
versed direction and long-term rates temporarily halted
their advance. For the month as a whole, the rates on most
maturities of commercial paper were Vs percentage point
lower to V* percentage point higher, while the secondary
market yield on CDs fell 11 basis points. During the week
ended January 2, the effective rate on Federal funds was
9.87 percent, 22 basis points below the rate for the last
week of November (see Chart I).
The yields on Treasury securities were mixed in De­
cember. Six-month and 52-week yields declined, while
three-month, intermediate-term, and long-term yields rose.
Investors appeared to be waiting for some indication of
the direction monetary policy would take in 1974. While
they apparently expected rates to be falling as a conse­
quence of slower economic activity, buying of securities
was constrained by the high Federal funds rate and the
high cost of financing dealers’ inventories. In the corpo­
rate market, a steady supply of new issues contributed to
a downward movement in prices. Federal agency securi­
ties prices showed little change in a moderately active
market. In December, the narrow money supply (MO—
demand deposits adjusted plus currency outside banks—




grew at a moderately rapid pace, although less steeply
than in November. M2, which includes time and savings
deposits other than large CDs, also expanded at a more
moderate pace. The adjusted bank credit proxy— which
consists of daily average member bank deposits subject to
reserve requirements plus certain nondeposit liabilities—
grew slowly in December. In the past three months,
the growth of the credit proxy has fallen well below the
average for the earlier months of 1973.
BANK RESERVES AND THE MONEY MARKET

With few exceptions, interest rates on most money mar­
ket instruments registered small net declines in December.
The rate on 120- to 179-day commercial paper fell Vs
percentage point to 9 percent, while the rate on 30- to
59-day paper rose Va percentage point to 9 3 percent. The
A
rates on bankers’ acceptances were unchanged. The aver­
age effective rate on Federal funds in December was 9.95
percent, 8 basis points below the November average. At
the same time, the use of the discount window by member
banks declined, and the average level of borrowings fell in
December to $1.3 billion (see Table I). This decrease is
the fourth successive monthly decline in member borrow­
ings since September.
The secondary market rate on large CDs closed out De­
cember slightly below its opening level, while the volume
of CDs outstanding increased by a small amount. The
Board of Governors of the Federal Reserve System an­
nounced on December 7 a reduction in the marginal re­
serve requirements on large CDs and on bank-related com­
mercial paper and finance bills with maturity of thirty days
or more. The change, which lowered the marginal reserve
requirement from 11 percent to 8 percent, took effect on
deposits in the week beginning December 13. Because of
lagged reserve accounting, the level of required reserves
was not affected until two weeks later. The Board had im­
posed a marginal reserve requirement of 8 percent on May
16, 1973, applying it to any increase in CDs, commercial
paper, and finance bills above the outstanding level. The

8

MONTHLY REVIEW, JANUARY 1974

C h art I

SELECTED INTEREST RATES
O cto b e r - D e ce m b e r 1973

1973
Note:

197 3

D a ta are shown for business d ays only.

M O N EY MARKET RATES Q U O TED: Bid rates for three-m onth Euro -d o llars in London; offering
rates (quoted in terms of rate of discount) on 90- to 119-day prim e com m ercial p ap er

stan dard A a a -ra te d bond of at least twenty years' maturity; d a ily a v e ra g e s of
yields on seaso n ed A a a -ra te d co rporate bon d s; d a ily a v e ra g e s of yields on lo n g ­

quoted by three of the five d e a le rs that report their rates, or the midpoint of the ran ge

term G overnm ent securities (bonds due or c alla b le in ten ye ars or more) and

quoted if no co nsensu s is availa ble; the effective rate on Fed eral funds (the rate most
representative of the transaction s execu ted ); clo sin g bid rates (quoted in terms of rate of
discount) on newest outstan din g three-month T rea su ry bills.

on G overnm ent securities due in three to five y e a rs , com puted on the b a s is of
clo sin g bid p rices; T hu rsd ay av e ra ge s of yie ld s on twenty seaso n ed twenty-year
tax-exem pt bon d s (carryin g M oody's ratin gs of A a a , A a , A , and Baa).

BO N D MARKET Y IELD S Q UO TED: Y ie ld s on new A aa -ra te d pub lic utility bonds are b ased
on p rices aske d by u nderw riting syn d icates, ad justed to m ake them equivalent to a

requirement was raised to 11 percent on September 6 in
an effort to restrict the growth of bank credit. The initial
requirement was restored in December in recognition of
the slower credit growth during October and November.
Early in December, several large commercial banks raised
their prime lending rate Va percentage point to 10 percent.
However, the move was not followed by all commercial
banks, and during the first full week in January the banks
that had raised their prime rates returned them to 9%
percent.
The latest available data indicate that the monetary ag­
gregates expanded at a more moderate pace in December
than they did in November. The seasonally adjusted an­




Sources: Fed eral Reserve Banjc of New York, Bo ard of G o v e rn o rs of the Fe d e ra l
Reserve System, M oody's Investors Se rvice, Inc., and The Bond Buyer.

nual growth rate of M t in December was about 5Vi per­
cent. This brought the pace of monetary growth for the
fourth quarter of 1973 to 6 V2 percent, compared with
about V4 percent during the third quarter (see Chart II).
The increase during the entire year amounted to 5 percent.
The data for the monetary aggregates do not reflect the an­
nual bench-mark revisions of nonmember bank deposits.
Because deposit data for nonmember banks are available
from call reports for only two dates each year (typically
June 30 and December 31), deposits at these institutions are
estimated initially from data for “country” member banks.
The monetary aggregates are usually revised once each
year to incorporate data from the latest available call re­

FEDERAL RESERVE BANK OF NEW YORK

ports from nonmember banks and new seasonal factors.
The broad money supply (M 2) grew at a seasonally ad­
justed annual rate of about IV 2 percent in December,
resulting in a fourth-quarter average annual rate of 10
percent. For the year as a whole, M 2 expanded by 8 percent.
The adjusted bank credit proxy increased at a 5Vi percent
rate in December. In the past few months, business firms
have shifted to open market instruments as a means of
raising funds. Consequently, the growth of the credit proxy
fell well below the pace it had set earlier in the year. How­
ever, the expansion during the entire twelve months came
to IQVi percent. Although the volume of CDs outstanding
declined much more slowly in December than in the pre­
vious few months, the volume of reserves available to sup­
port private deposits (RPD) declined at a slightly faster
pace. In December, RPD decreased at about a 2 percent
rate, compared with an average decrease of 13 percent
A
during the previous two months.

9
Table I

FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, DECEMBER 1973
In millions of dollars; (+ ) denotes increase
and (— ) decrease in excess reserves
Changes in daily averages—
week ended

Net
changes

Factors
Dec.
5

Dec.
26

Dec.
19

Dec.
12

“ Market” factors
391 -

Member bank required reserves ..................

— 126

+

Operating transactions (subtotal) ..............

— 480

- f 490 -

375

Federal Reserve float ................................

— 821

+

741 +1,664

Treasury operations* .............. ...................

— 34

-1- 311 -

Gold and foreign a c c o u n t..........................

-f. 211

+ 143 -

100 -

134

+

Currency outside banks ............................

+ 120

— 224 -

792 -

579

—1,475

1 -

57 +

84

47 -

— 600

192

+

— 173

591

+1,641
— 361
120

Other Federal Reserve liabilities
+ 42

f- 203 -

176 -

169

— 100

cm

+ 491 -

766 +

108

— 773

- f 710

— 825 +

873 +

609

+1,367

Treasury securities ......................................

— 187

— 160 +

692 +

490

+

835

Bankers' accep tan ces..................................

+

3

6

+

18

Federal agency obligations ......................

+

15

9 +
24

+

3

30

+

272

87

+

148

4

+

91

and capital ..................................................
Total "m arket” factors ............................

_

THE GOVERNMENT SECURITIES MARKET

The yield on three-month Treasury bills rose in Decem­
ber, while the six-month and 52-week yields adjusted to
lower levels. Throughout the period the market was very
sensitive to Federal Reserve actions, as investors sought
to gauge the response of monetary policy to the incipient
fuel shortage. Early in the month, expectations that
monetary policy would follow an easier course were
discouraged by the statement of Chairman Burns on
December 5 that monetary devices could be of “very
limited usefulness” in taking up economic slack caused
by an insufficient energy supply. Rates on all maturities
of Treasury bills rose quickly. However, the rise in yields
did not last, and a somewhat firmer tone developed during
the second week of the month. The Board’s December 7 an­
nouncement of a reduction in the marginal reserve require­
ment on CDs caught the market by surprise. Despite the
small initial impact of the change, the accompanying ex­
planation pointing to the recent slowing in bank credit
expansion was interpreted by many market participants as
signaling a move toward an easier monetary policy. Bill
rates— especially those on six-month and 52-week issues—
dropped sharply. Bidding in the regular weekly auction of
December 10 was aggressive; rates on three- and sixmonth bills were set at 7.39 percent and 7.53 percent,
respectively (see Table II). Bidding was also active in
the 52-week bill auction of December 12. The average
issuing rate on the 52-week bill was 6.88 percent, 83
basis points below the rate set in November’s monthly
auction.
Later in the month, bill purchases by the Federal




Direct Federal Reserve credit
transactions
Open market operations (subtotal) ..........
O utright holdings:

-

+

— 36 +

Repurchase agreements:
Treasury securities ......................................

+ 713

— 562 +

91

Bankers' accep tan ces..................................

+

61

— 20 +

20

Federal agency o b lig atio n s........................

+ 105

— 47 +

Member bank borrowings ..............................

+ 189

— 175 +

Seasonal borrowings! ................................
Other Federal Reserve a s s e t s j ......................

— 27

+

+
37 —

187 — 447
5 —

— 12 -

+

71

74 +

20 +

....................................................................

+ 970

— 980 +1,133

Excess reserves}: .......................................

4- 364

— 489

Total

+

367

+

5
72

— 246
—

49

+

237

+

234

+1,357

+

342

+

584

Monthly
averages§

Daily average levels

Member bank:
Total reserves, including vault cashf ........

34,856

34,366

35,124

35,554

34,975

Required reserves ............................................

34,475

34,474

34,865

34,949

34,691

Excess reserves .....................................................

381

— 108

259

605

284

Total borrowings .................................................

1,477

1,302

1,489

1,042

1,328

Seasonal b o rro w in g s! ......................................

57

45

40

35

44

Nonborrowed reserves ........................................

33,379

33,064

33,635

34,512

33,647

Net carry-over, excess or deficit (—-)ll •••

78

277

53

137

136

Note: Because of rounding, figures do not necessarily add to totals.
# Includes changes in Treasury currency and cash,
t Included in total member bank borrowings.
t Includes assets denominated in foreign currencies.
§ Average for four weeks ended December 26, 1973.
I Not reflected in data above.
I

MONTHLY REVIEW, JANUARY 1974

10

Reserve for both System and customer accounts were
interpreted as further confirmation of a less restrictive
monetary policy. Consequently, rates continued to edge
lower until the last week of the month. The rates on threeand six-month Treasury bills closed at 7.46 percent and
7.43 percent, respectively, 16 basis points above and 29
basis points below their levels at the end of November. The
yield on 52-week bills fell 36 basis points to 6.86 percent.
In the market for Treasury coupon securities, the
prices of both intermediate-term and long-term securities
declined in December as the prospect for an easing of
monetary policy dimmed early in the month. The general
tone of the market was further weakened by the report in
midmonth that the wholesale price index had risen 1.8
percent in November. However, many participants con­
tinued to hold the view that a business slowdown would,
of its own weight, ease credit demand and lead to lower

C h a r t II

C H A N G ES IN M O NETARY A N D CREDIT A G G R EG A TES
S e a s o n a lly a d ju s t e d

a n n u a l ra te s

P e rce n t

N o te :

P e rce n t

Table II
AVERAGE ISSUING RATES
AT REGULAR TREASURY BILL AUCTIONS*
In percent

Weekly auction dates—December 1973
Maturity
Dec.
4
Three-month
Six-month ..

Dec.
10

Dec.
17

Dec.
21

Dec.
28

7.358
7.766

7.386
7.530

7.366
7.164

7.346
7.315

7.406
7.371

Monthly auction dates— October-December 1973

Oct.
17

Nov.
14

Dec.

12

Fifty-two weeks
* Interest rates on bills are quoted in terms of a 360-day year, with the discounts
from par as the return on the face am ount of the bills payable at m aturity. Bond
yield equivalents, related to the am ount actually invested, would be slightly higher.

interest rates. The optimistic elements in the market were
encouraged by the reduction in the marginal reserve
requirement on CDs, and market prices moved higher
following the Board’s announcement of this reduction.
For the month as a whole, rates on most three- to fiveyear issues rose by an average of 5 basis points to 6.82
percent, while rates on longer term issues increased 23
basis points to 6.49 percent.
Price movements in the market for Federal agency
securities were similar to those recorded in the Treasury
coupon sector. The volume of new issues was not so large
as it had been in recent months. Among the more note­
worthy new issues was a package offered by the Federal
Intermediate Credit Banks (FICB) and the Banks for
Cooperatives totaling $1.43 billion. The offering consisted
of $462 million of 7.95 percent Banks for Cooperatives
bonds that mature July 1, 1974, $561 million of 7.95
percent FICB bonds maturing October 1, 1974, and $406
million of 7.10 percent FICB bonds that will fall due
January 3, 1978. All three securities were accorded an
excellent reception.

D a t a fo r D e c e m b e r 1 9 7 3 a r e p r e l i m i n a r y .

M l = C u r r e n c y p lu s a d j u s t e d d e m a n d d e p o s i t s h e l d b y th e p u b lic .
M 2 - M l p lu s c o m m e r c ia l b a n k s a v i n g s a n d tim e d e p o s i t s h e ld b y th e p u b li c ,
l e s s n e g o t i a b l e c e r t if ic a t e s o f d e p o s i t is s u e d in d e n o m i n a t i o n s o f $ 1 0 0 ,0 0 0

OTHER SECURITIES MARKETS

o r m ore.
A d j u s t e d b a n k c r e d it p r o x y = T o ta l m e m b e r b a n k d e p o s i t s s u b je c t to r e s e r v e
r e q u ir e m e n t s p lu s n o n d e p o s it s o u r c e s o f f u n d s , s u c h a s E u r o - d o lla r
b o r r o w i n g s a n d th e p r o c e e d s o f c o m m e r c ia l p a p e r is s u e d b y b a n k h o l d in g
c o m p a n i e s o r o t h e r a f f i li a t e s .
S o u rce s:

B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s t e m a n d th e

F e d e r a l R e se rv e B a n k o f N e w Y o rk .




The prices of corporate securities slipped lower in
December, while the prices of tax-exempt issues registered
small increases. After sagging early in the month, prices
of both corporate and municipal issues staged a small

FEDERAL RESERVE BANK OF NEW YORK

rally on the basis of a reported rise in the unemployment
rate in November and apparent signs of an easier mone­
tary policy. However, the prospect of a large calendar of
new issues in January and subsequent months kept prices
below their opening levels.
There were $1.76 billion of new corporate issues in
December. Among the more important issues was a $300
million offering by a member of the Bell System. The
Aaa-rated debentures were priced to yield 8 percent in
thirty years. They sold quickly and were soon trading at
a premium. Later in the month, an Aa-rated utility bond
was sold at a yield of 8.05 percent. This thirty-year bond
got only a fair reception despite its 8 Vs percent coupon,
which was the highest rate offered on a straight Aa utility in
several months.
The new issue market in tax-exempt securities was
moderately active in December, but prices changed very
little from their late-November levels. Sales of new issues
totaled $2 billion, slightly below the average of the pre­
vious few months. The Bond Buyer index of twenty
municipal securities, at 5.16 percent in the last week of
December, was down 1 basis point from the end of




11

November. The Blue List of dealers’ advertised inven­
tories rose to $1.13 billion.

PERSPECTIVE ’73

Each January this Bank publishes Perspective, a
brief review of the major domestic and international
economic developments of the previous year. A more
comprehensive treatment is presented in our Annual
Report, which will be available toward the end of
February.
Perspective ’73 can be obtained without charge
from the Public Information Department, Federal
Reserve Bank of New York, 33 Liberty Street, New
York, N.Y. 10045. Copies are being mailed to
Monthly Review subscribers.

12

MONTHLY REVIEW, JANUARY 1974

Britain’s New Monetary Control System
By

D

orothy

B.

During the past few years, the United Kingdom has
undertaken a major reform of its monetary control sys­
tem. This has resulted from a recognition that, to be effec­
tive, controls must be adapted to changes in the environ­
ment in which they operate. Although changes in the
controls have been introduced gradually, and continue to
be made, the bulk of the reform was proposed to the
banks and other affected financial institutions in a Bank
of England consultative document entitled “Competition
and Credit Control”[8]1 that was published in May 1971
and implemented in September 1971.
The reform to date has consisted of several related
parts. First, there was a reorientation of the targets of
monetary policy. Bank credit to the private sector, a prime
concern in the 1960’s, was de-emphasized and greater
attention was given to the broad monetary aggregates,
which were believed to provide a better indication of the
impact of monetary policy on the real economic variables
that are the ultimate objectives of monetary policy. Sec­
ond, direct controls on bank advances were eliminated.
Third, the bank cartel arrangements, which had tied many
interest rates to the official bank rate, were terminated.
These latter moves were designed, in part, to promote freer
competition in financial markets in the expectation that
this would increase the efficiency of financial intermedia­
tion. They also paved the way for greater reliance on what
were expected to be more efficient market-related mone­
tary controls, namely, reserve requirements, discounting,
and open market operations. The changes were accompa­
nied by a more flexible interest rate policy and a shift in
official debt management strategy.
The greater dependence on market-related control de­
vices and the new emphasis on broad monetary aggregates

* Economist in the Foreign Research Division of the Inter­
national Research Department.

C

h r is t e l o w

*

as operational indicators have brought the British mone­
tary control system closer to the United States control sys­
tem than at any previous time in the postwar period. Never­
theless, differences remain, notably the role of the discount
mechanism, the coverage of reserve requirements, the
nature of reserves, and the relation of reserve require­
ments to debt management objectives.
This article will describe the main influences leading
to the British reforms, the monetary objectives and tech­
niques of the new control system, and the principal differ­
ences and similarities between the current British and
United States systems of monetary control. No attempt is
made to deal with central bank problems other than do­
mestic monetary control objectives and techniques. Left
aside, for example, are questions about the extent to which
domestic monetary policy can be independent of interna­
tional monetary developments and domestic fiscal policy.
The central bank’s operations in foreign exchange markets
are also excluded from consideration.
INFLUENCES CONTRIBUTING TO REFORM

The 1950’s and 1960’s constituted a period of renais­
sance for monetary policy in Britain as in other developed
countries.- Prior to 1951, when monetary policy was rein­
stated as an instrument of government policy, the central
bank’s discount rate, known as the “bank rate”, had re­
mained unchanged at 2 percent for nineteen years, with
the exception of a brief episode during August-October
1939. Over these years, fiscal policy and, during the war,
price control and rationing had been the main instruments
of economic control. In a recent review of monetary policy
between 1959 and 1969 [3], the Bank of England noted
that monetary policy, even after its reinstatement, initially

- Readers interested in the development of British monetary
1 Numbers in brackets refer to bibliography listings at end of policy during the 1950’s and 1960’s should consult Goodhart [24],
article.
Griffiths [26], Kareken [29], Nobay [36], and Rowan [40].




FEDERAL RESERVE BANK OF NEW YORK

occupied “a somewhat subsidiary role” in implementing
the government’s main objectives: full employment and
balance-of-payments equilibrium. When policy was ex­
pansionary, the thrust came from fiscal policy, with
monetary policy “having primarily a permissive role”.
When balance-of-payments problems imposed a need
for domestic restraint, monetary measures were in­
cluded as supporting elements in general packages of
various measures. A sharp increase in the bank rate was
included in such packages rather more to demonstrate the
government’s resolve to deal with its economic problems
than for its expected effect on international capital flows,
domestic investment, or consumption ([15], page 38).
Aside from crisis episodes, the Bank of England in­
creasingly devoted its traditional market-oriented tools —
discounting, open market operations, and reserve require­
ments— to management of the government debt. The par­
ticular way in which these tools were used for debt man­
agement purposes often interfered with their effective
use for monetary management. In its discounting and
open market operations, the Bank sought to “maintain
market conditions that will maximize, both now and in
the future, the desire of investors both at home and abroad
to hold British government debt” ([2], page 142). Salesmaximizing market conditions, especially for the longerdated securities which the authorities most wished to sell,
were judged those in which interest rate fluctuations were
moderated by official “leaning against the wind” opera­
tions. Official support of this kind permitted banks and
others to sell government securities on a falling market
at only moderate loss. The official policy of stabilizing
short-term interest rate fluctuations was also supported by
the London clearing bank interest rate cartel, which tied
deposit and loan rates to the official bank rate, and by con­
ventions governing the relationship between the Treasury
bill rate and bank rate.3
Given its interest rate policy, the Bank of England found
itself unable to use discounting and open market opera­
tions to squeeze the banks’ cash positions (currency and
balances with the Bank of England) and thereby impose
monetary restraint. As late as 1969, the Bank stated that
it had “not attempted to achieve this [restraint of bank
lending] by acting to reduce the cash base of the system
. . . [since this] must involve conscious manipulation of
interest rates primarily to that end. But in the short run

13

at least the market’s reaction to interest changes can be
perverse in the sense that the public will sell as rates rise
— expecting worse to come— and is generally unpredict­
able” ([3], page 2 2 1 ).4
Debt management objectives also led to an innova­
tion in reserve requirements. In the early 1950’s, the
liquid asset ratio previously observed by the London and
Scottish clearing banks for prudential purposes was for­
malized by the banks’ agreement to maintain the ratio at
a stipulated level ([14], page 119)— initially set at 30
percent but reduced in 1963 to 28 percent. Qualifying liq­
uid assets were currency, balances with the Bank of En­
gland, Treasury bills, commercial bills (negligible in
1951), and call money placed with the discount houses.
The discount houses, peculiarly British institutions, have
long played an important part in British money markets.5
They are financed in large part by call loans from banks.
Their assets are mostly short term, but maturities range
up to five years. The houses have long been valued by the
Bank of England for their services in covering the weekly
tender of Treasury bills and dealing in other short-term
government securities. The Bank reciprocated by accord­
ing them exclusive and unconditional discounting privi­
leges. The discount houses are valued by the banks as
a convenient means of adjusting liquidity and as an
indirect source of central bank credit. The inclusion in
the banks’ liquid asset ratio of call money placed with
the houses assured the latter of a source of relatively
cheap finance and, in this somewhat roundabout way,
probably reduced the interest cost of the government debt.
In the early 1950’s, virtually all of the discount houses’
assets were in government securities. The resulting pre­
dominance of Treasury bills in the banks’ liquid assets,
held directly or indirectly through the banks’ financing
of the discount houses, inspired the “new orthodox” theory
that originated in the late 1950’s, namely, that the supply
of Treasury bills determined the supply of liquid assets
and, consequently, that bank credit could be reduced by
selling long-term government debt; using the proceeds to
retire Treasury bills.6
The Bank of England, however, was just as unwilling

4 There is an interesting discussion of the Bank’s views in
Goodhart [24].
5 The discount houses are described in Radcliffe [14], pages
58-64 and Garvy [23], pages 271-73.
GProfessor Sayer’s original statement of this theory is included
3 Griffiths [26] contains an account of the historical develop­ in [43], especially pages 104fF. For later ccmmentary, see Coppock and Gibson [19] and Kareken [29].
ment of these practices.




14

MONTHLY REVIEW, JANUARY 1974

to manipulate the supply of Treasury bills for monetary
purposes as it was to manipulate the banks’ cash. The
reason was, of course, similar, namely, that pressing long­
dated government bonds on a possibly reluctant market in
order to reduce the supply of Treasury bills might be ex­
pected to lead to a sharp increase in interest rates. In­
stead, it developed a variable cash ratio called “special de­
posits”, consisting solely of deposits at the central bank.
This ratio was applied the first time in 1960. In the Bank’s
view, calls for special deposits put pressure on the banks’
liquid assets, since the banks were expected to sell liquid
assets to obtain the needed deposits at the central bank,
but left the Bank free to offset any undesired interest rate
effects ([3], page 222). These early experiments with
special deposits were not uniformly successful. Generally,
the banks made good any reductions in their holdings of
Treasury bills by expanding their loans to the discount
houses, since these loans also counted as liquid assets;
and the discount houses in turn expanded their holdings
of commercial bills.7 The cost to the banks of this liquid
asset substitution was minimized by the Bank of England’s
efforts to smooth interest rate fluctuations.
When it was becoming clear during the 1950’s that
constraints on interest rate policy foreclosed the effective
use of the traditional market-oriented control instruments,
the brunt of the burden of monetary restraint began to be
shifted to credit ceilings. The ceilings were initially insti­
tuted only for the clearing banks, but in the 1960’s they
were extended to the nonclearing banks— the accepting
houses, the British overseas banks, and foreign banks—
whose domestic banking business was growing very rap­
idly and also to the major finance houses (which special­
ize in consumer credit).
As the need to impose severe credit restraint became
more frequent during the 1960’s, the authorities became
increasingly aware of the ineffectiveness of direct controls
when maintained for prolonged periods. During the late
1960’s, the credit ceilings came to be exceeded fairly regu­
larly. Moreover, the fast-growing nonclearing banks greatly
expanded their foreign currency loans to domestic bor­
rowers, a loan category not covered by credit ceilings.
The establishment of new foreign banks in the 1960’s,
each with a loan limit, further increased bank advances.
As a result, between the fourth quarter of 1967 and the
first quarter of 1971, the nonclearing banks’ advances to
the private sector more than doubled despite credit ceil­
ings that set the maximum permissible increase in sterling

7 This is discussed in Crouch [211, [221, and in Goodhart [24].




advances by any given bank at about 9 percent.8 Other
drawbacks, which became more serious as the ceilings
were applied over long periods during the 1960’s, in­
cluded the stifling of initiative and competition between
banks, base date inequities, the diversion of lending ac­
tivities into uncontrolled channels, and structural distor­
tions of balance sheets.
At about the same time that the drawbacks of credit
ceilings were becoming very apparent, the validity of the
long-held assumption that a policy of smoothing market
fluctuations in long-term government securities maximized
the sales of such securities also came to be questioned.9 By
1971 the Bank had concluded that its increasingly exten­
sive operations to support bond prices had “probably
contributed to the attrition of the market’s resources” in
that it discouraged market-making by private securities
dealers. It also concluded that permitting market opera­
tors to sell government securities with minimal losses dur­
ing periods of rising interest rates “had made the specula­
tive management of portfolios altogether too easy” [6].
With the effectiveness of credit ceilings as a monetary
control device and the usefulness of interest stabilization
as a debt management device both in doubt, the authori­
ties decided on a complete overhaul of monetary control
objectives and techniques. The rationale of the change was
expounded in a speech by the Governor of the Bank [5] in
the spring of 1971. He noted that “financial systems are
infinitely adaptable and the channels whereby money and
credit end up as spending are many and various”, and he
pointed to the danger “of believing that if we do succeed
in restraining bank lending we have necessarily and to
the same extent been operating a restrictive credit pol­
icy”. In view of these problems the Bank, in selecting
monetary objectives, had “increasingly shifted [its] empha­
sis” away from bank lending in sterling to the private
sector “towards the broader monetary aggregates . . . the
money supply under one or more of its many defini­
tions, . . . or domestic credit expansion”. The change in
control techniques involved the abandonment of direct
controls over bank credit and interest rates and a return to
an indirect market-oriented control system “under which
the allocation of credit is primarily determined by its cost”.
The change in monetary objectives had occurred gradu­

8 The calculation of the maximum permissible increase is based
on the assumption that ceilings set in May 1968 had not been ex­
ceeded by April 1970, when credit ceilings were rebased. The
ceiling base data refer to midmonth, while the data for bank
advances pertain to the end of the month.
9 See White [45], for example.

FEDERAL RESERVE BANK OF NEW YORK

ally beginning in 1969, when the authorities were seri­
ously concerned about the slowness of the balance-ofpayments reaction to the devaluation of 1967 and to
related monetary and fiscal restraint measures. Reflecting
increased official interest, the Budget Message of 1969 in­
cluded a statement of monetary objectives expressed in
terms of money supply growth. Further, beginning in
1970, the Bank of England Quarterly Bulletin published a
number of articles dealing with the role of money and in­
terest rates in financial markets and their relationship to
real economic variables.10 The changes in monetary con­
trol techniques followed in 1971 and thereafter. These
changes incorporated many of the recommendations that
had been made by special committees of inquiry over
the preceding twelve years. Specifically, a flexible interest
rate policy had been advocated by the Radcliffe Committee
Report on the Working of the Monetary System in 1959
[14]. The elimination of the London clearing bank interest
rate cartel and of official ceilings on bank advances had
been advocated by the Prices and Incomes Board [35] and
by the Monopolies Commission [32] in the late 1960’s on
the grounds that these control devices led to monopoly
profits as well as inefficient financial intermediation.
THE MONETARY CONTROL SYSTEM SINCE 1971

Since 1971, Britain’s monetary control system has been
keyed to new and broader monetary indicators, and now
places prime reliance on market-oriented control tools.
Nevertheless, direct controls have not been entirely aban­
doned and continue to play an important supplementary
role. This section discusses the new monetary indicators,
the use of market-oriented control tools, the part played
by direct controls, and some problems that have arisen in
connection with the new control system.
in d ic a t o r s .
In Britain, as elsewhere, the choice of
monetary indicators is governed by the predictability of the
relationship between the indicators and the government’s
ultimate objectives— especially control over output, prices,
and the balance of payments— and the susceptibility of
the indicator to a predictable central bank influence, how­
ever indirect.
As already noted, the monetary aggregates now occupy
a fairly prominent role as indicators of monetary policy.
This was recently reaffirmed in a speech by the Deputy

15

Governor [7] in which he described the monetary aggre­
gates currently receiving attention. These are: Mi, which
includes currency in circulation plus sterling demand de­
posit liabilities to the United Kingdom private sector
(minus an allowance for transit items); and M3,11 which
consists of M 1 plus time deposit liabilities to the United
Kingdom private sector in both sterling and foreign cur­
rencies plus deposits of the United Kingdom public sec­
tor. Deposit liabilities to nonresidents are excluded from
both aggregates.
m a r k e t -o r i e n t e d c o n t r o l t o o l s . The Bank of England
views of the process whereby its use of the available tools
is transmitted, via a series of portfolio adjustments, to the
desired growth rates in the monetary aggregates was out­
lined by the Governor of the Bank in a speech delivered
shortly after the intended reforms were proposed [5]. He
said, “It is not expected that the mechanism of the mini­
mum asset ratio and Special Deposits can be used to
achieve some multiple contraction or expansion of bank
assets. Rather the intention is to use our control over
liquidity, which these instruments will reinforce, to influ­
ence the structure of interest rates. The resulting changes
in relative rates of return will then induce shifts in the as­
set portfolios of both the public and the banks.”12
The basic market-oriented control tools— reserve re­
quirements, discounting, and open market operations— are
not new. However, returning to prime reliance on these
instruments after years of relying heavily on direct con­
trols has necessarily involved experimentation and adjust­
ment to arrive at a workable control system applicable to
contemporary financial institutions and problems.
In establishing reserve requirements, the authorities
elected to adapt the traditional fixed liquidity ratio and the
variable special deposit, extending their application to all
banks and to finance houses, rather than to start anew.
The decision to adapt the old reserve ratios, despite ear­
lier control problems with the liquidity ratio, may have

11 M2 has been rendered obsolete by institutional changes asso­
ciated with monetary reforms. It had consisted of Mi plus time
deposits at the clearing banks, certain other domestic deposit banks,
and the discount houses, but not time deposits at the accepting
houses, British overseas banks, and foreign banks. Prior to 1971,
time deposits at the first group of institutions were of very short
maturity, generally seven days’ notice, whereas time deposits at
the second group were for longer maturities. Beginning in 1971,
the clearing and other deposit banks offered deposit facilities
similar to those offered by other banks, destroyng the validity of
the distinction between M2 and Ms.

10 Goodhart and Crockett [25], Crockett [20], Price [39], Town12 This statement appears to be in harmony with the models of
end [42], and Hamburger [27]. Other pioneering studies, some pre­ portfolio adjustments in financial markets developed by, among
ceding those made at the Bank, are Barrett and Walters [18],
others, Tobin [41] in the United States and Parkin, Gray, and
Barrett [37], [38] in the United Kingdom.
Kavanagh and Walters [30], and Laidler and Parkin [31].




16

MONTHLY REVIEW, JANUARY 1974

cause of a sudden loss of external reserves. In the second
place, when the Bank sought to offset unwanted or unduly
large declines in the availability of reserve-eligible assets, it
found its traditional open market operations in Treasury
bills unsuited to the purpose. Such operations merely ex­
changed one reserve asset for another without relieving
the squeeze on discount house liquidity.
The Bank also found that the public sector lending
ratio “produced distortions in short-term money mar­
kets” [12]. Because they were much in demand as reserve
assets, the yield on Treasury bills tended to move per­
versely relative to other short-term rates during periods
of monetary stringency. For example, when liquidity
conditions tightened between December 1972 and March
1973, the yield on Treasury bills actually fell from 8.3
percent to 7.9 percent, while the three-month interbank
lending rate (a reliable money market indicator) climbed
from 8.4 percent to 10.8 percent.
To overcome these difficulties, the authorities in July
1973 abolished the public sector lending ratio that had
been applied to the discount houses, replacing it with two
flexible and discretionary limits on discount house lend­
ing. One is encompassed in the stipulation that debt of the
private sector held by the houses should never exceed
twenty times capital and reserves. (The houses’ actual
holdings of such debt were then only fourteen times capital
and reserves). The second limit consists in the require­
ment that a discount house’s total assets bear an “appro­
priate relation to capital and reserves” [12].
Under the new system, the rate of expansion of the
discount houses’ assets, and hence the call money ele­
ment in bank reserves, is likely to be governed mainly
by interest rate considerations. For example, when interest
rates are being pushed upward, the discount houses may
have little enthusiasm for expanding their holdings of as­
sets whose market value they expect to decline. Thus,
the expansion of the banks’ call loans may be effectively
limited by Bank of England open market operations af­
fecting interest rates and discount house liquidity. How­
ever, the new flexible guidelines for discount house assets
provide backup limits to the expansion of the call money
element in reserves, should such limits prove necessary.
The variable special deposits requirement retains the
same general form that it has had since first applied in
1960. Unlike minimum reserve assets, special deposits
13 Eligible liabilities are, basically, sterling deposits of two years
or less from outside the banking sector plus foreign currency de­
consist entirely of deposits at the central bank and, in ef­
posits that have been switched into sterling (see [10]).
fect, permit the authorities to alter this element of the
14 Local authority bills eligible for rediscount at the Bank of
banks’ overall reserve requirements. The required ratio can
England (only a small amount of such eligible bills is outstand­
be varied without limit in proportion either to total eligible
ing), commercial bills (but newly limited to 2 percent of eligible
liabilities), and tax reserve certificates (which will cease to exist
liabilities or to eligible liabilities to overseas residents.
after 1974). For a full discussion of reserve requirements, see
Until recently, special deposits generally bore interest at
[10] and Morgan and Harrington [34].

stemmed from continuing concern with debt management
problems and the desire to assure the discount houses a
continuing source of cheap finance. No doubt this seemed
desirable because the discount houses still play a crucial
role in making a market for short-term government debt.
Moreover, despite the recent development of an interbank
loan market, similar to the Federal funds market in the
United States, the discount houses continue to play an im­
portant role in the adjustment of bank liquidity.
In any event, the banks’ new minimum reserve assets,
which must total at least HV 2 percent of eligible liabili­
ties,13 are defined to include noninterest-bearing deposits
at the central bank (the London clearing banks have
agreed to hold W 2 percent of their net deposits in this
form), government securities within a year of maturity, a
strictly limited quantity of certain other bills,14 and money
at call with the discount houses. Thus far under the new
reserve system, the call money component of the banks’
reserve assets has ranged from 60 percent to 70 percent of
total reserve assets. When the new system was launched in
1971, it was thought necessary to limit the expansion of
the call loan segment of bank reserves by requiring the
discount houses to maintain a public sector lending ratio,
i.e., to invest at least 50 percent of their borrowed funds
in public sector debt of five years or less to maturity.
Despite the greater leeway as to the maturity of govern­
ment debt they might hold, compared with the banks’
minimum reserve requirements, the houses preferred to
concentrate their investments in the shorter maturities,
since the new flexibility of interest rates increased the
potential for capital losses on longer maturity debt.
Experience with this new dual reserve system soon re­
vealed that it “tended to complicate the Bank’s task of se­
curing adequate influence over credit extended by . . .
the discount market” [12]. In the first place, short-term
government debt in the reserves of the discount houses and
the banks was greatly affected by changes in the govern­
ment’s domestic borrowing requirement, which of course
was not under control of the central bank. This was es­
pecially true of sharp decreases that occurred in the gov­
ernment’s requirement either for seasonal reasons or be­




FEDERAL RESERVE BANK OF NEW YORK

the Treasury bill rate, although occasionally the Bank of
England paid less than the bill rate.15 In December 1973
an additional scheme of supplementary special deposits
on marginal increases in banks’ interest-bearing eligible
liabilities was introduced. This scheme provides for the
banks to place noninterest-bearing liabilities with the Bank
of England at progressively higher ratios according to the
growth of the banks’ interest-bearing deposits in excess of
a specified percentage (8 percent in the six months ended
May 1, 1974), based on a three-month moving average.
From the first post-reform call for special deposits in
December 1972 to December 1973, the calls for special
deposits aimed to tighten the liquidity position of the banks
and to exert an upward pressure on interest rates by forc­
ing banks to sell securities at falling prices in order to
obtain the necessary deposits at the Bank of England [5].
While this aim was fulfilled, the cost to the banks of
making special deposits was not especially onerous so
long as the deposits bore interest at the Treasury bill rate.
Thus, the restraining effect of special deposits depended
largely on market reactions to rising interest rates. On the
other hand, the new noninterest-bearing special deposits
are designed to be prohibitively costly to the banks. This
can be expected to curb the banks’ efforts to seek deposits,
thereby limiting their ability to expand credit.
Discounting is a lender-of-last-resort facility offered only
to the discount houses, essentially in exchange for their
agreement to cover the weekly Treasury bill tender. While
the Bank of England also accommodates the market’s
need for cash by short-term advances to the discount
houses at market interest rates, as well as by open market
transactions with the banks or the discount houses, dis­
counting proper is done at a penalty rate (i.e., higher than
the prevailing rates for Treasury bills). The mere fact that
the discount houses are forced to borrow at the official
penalty rate is taken as a sign of monetary restraint.16
Prior to 1971, when the authorities were following a
policy of minimizing short-term interest rate fluctuations,
a bank rate was officially announced and maintained for
considerable periods of time, and a change in this rate
implied a change in monetary policy. With the recent
shift to a flexible interest rate policy aimed at achieving
some desired growth in the monetary aggregates, it became
clear a bank rate that retained a penalty relationship to
the bill rate would also have to fluctuate freely without

necessarily implying constant changes in monetary objec­
tives. Hence, the bank rate was superseded in October
1972 by an official “minimum lending rate”, announced
weekly, and pegged V2 percentage point above the Treasury
bill rate17 and fluctuating with it. In consequence, forcing
the discount houses to borrow at the minimum lending
rate remains a warning signal, but changes in this
official rate do not necessarily indicate changes in mone­
tary policy. The Bank reserves the right, however, to an­
nounce a change in the minimum lending rate that is not
preceded by a change in the bill rate, when it wishes to call
attention to the fact that its policy has changed signifi­
cantly. This device was used recently in November 1973,
when the minimum lending rate was jumped from 11.25
percent to 13 percent to call attention to a significant
tightening of monetary policy.
Open market operations are confined largely to central
government debt, although the Bank also operates in local
authority obligations and bankers’ acceptances. Needless
to say, open market operations in government debt under­
taken in pursuit of monetary objectives necessarily affect
the management of the public debt; conversely, operations
undertaken in pursuit of debt management objectives nec­
essarily have monetary consequences. The reconciliation
of the two sets of objectives is an ongoing problem for
the Bank of England as for other central banks. To under­
stand the British variant of the problem and the way it is
currently being resolved, it may be helpful to review very
briefly both the monetary control and debt management
aspects of the Bank’s operations in government securities.
In pursuit of strictly monetary objectives, the Bank
apparently prefers to operate in the short end of the gov­
ernment debt maturity spectrum, selling Treasury bills to
reduce liquidity and buying bills to increase liquidity. As
already noted, the public sector lending ratio previously
required of the discount houses sometimes frustrated these
operations inasmuch as the Bank’s exchange of Treasury
bills for its own deposit liabilities was merely an exchange,
with the banks and/or the discount houses, of one reserve
asset for another. This problem was acute in June 1972,
when a <£ 1 billion loss of external reserves in ten days’ time
produced a severe liquidity squeeze. The squeeze occurred
as the sterling proceeds of the official sale of foreign ex­
change reserves were applied to the retirement of a cor­
responding volume of the government’s domestic debt,
most of it held as reserves by the banks and dis­
count houses. On that occasion, the Bank relieved the

15 One case is described in the section on direct controls.
16 For a full description of the traditional discount mechanism,
see Garvy [23].




17

17 Rounded upward to the nearest V percentage point.
a

18

MONTHLY REVIEW, JANUARY 1974

liquidity squeeze by purchasing directly from the banks
<£360 million of longer term government securities, with
the proviso that the banks repurchase them in a few weeks’
time.
As manager of the debt of the central government, the
Bank of England operates in government debt of all matur­
ities. The Bank offers Treasury bills at a weekly tender
and, generally, three “tap” issues— short-, medium- and
long-dated— on a continuous basis. The tap offerings are
new issues to which the Bank initially subscribes in full and
resells gradually to the market. The Bank also continuously
“buys in” government debt that is close to maturity, and
trades in outstanding issues of all maturities of government
debt with the general objectives of lengthening its maturity

and that funding, by reducing the supply of Treasury bills,
would reduce the banks’ reserves and push up long-term
interest rates. As noted earlier in this article, the supply of
Treasury bills did not determine bank reserves in the
1960’s, and in any event such a policy ran counter to the
official interest rate policy. However, since October 1971,
the authorities have pursued a more flexible interest rate
policy. Hence, the stage seemed to be set for a more ag­
gressive use of funding as a means of monetary restraint.
In fact, however, the Bank has concentrated its funding
operations in periods when interest rates were falling1* and
has not used the funding tool to push interest rates up-

[2 ].
In the past few years, the volume of official transac­
tions (i.e., transactions on the London Stock Exchange
by the Bank of England, the National Debt Commission­
ers, and various government departments) in government
“stocks” (market obligations other than Treasury bills)
has been of the same general order of magnitude as the
Bank’s intervention in the money market. Official opera­
tions in stocks have been fairly evenly distributed between
securities that have less than five years to maturity and
those that have more than five years to maturity. Until
1971, these substantial operations in government stocks
were often for the purpose of stabilizing short-run fluctu­
ations in securities prices. As an unintended by-product,
they provided the banks with a ready source of liquidity,
often at times inappropriate from the monetary policy
point of view. Under the new flexible interest rate policy,
most support operations are ruled out, but the Bank
continues to pursue vigorous funding operations when­
ever conditions are favorable. In explaining the new
approach, the Governor said that the Bank
no longer felt obliged to provide, as in the past, out­
right support in the gilt-edged market in stocks hav­
ing a maturity of over one year. This does not mean
that we have discontinued our normal operations of
selling longer-dated gilt-edged against purchases of
short-dated stocks, as a technically efficient way of
refinancing. But . . . we shall not normally be pre­
pared to facilitate movements out of gilt-edged by the
banks even if their sales should cause the market
temporarily to weaken quite sharply. [5]
The Radcliffe Committee and a number of academic
observers had recommended that funding operations of the
sort described in the passage quoted above should be used
as an instrument of monetary policy. This recommenda­
tion was based on the assumption that bank reserves were
effectively tied to the volume of Treasury bills outstanding




18 Regression of net official sales of long-term government
securities on (1 ) changes in interest yields on those securities and
(2) changes in the domestic borrowing requirement— for the first
quarter of 1963 through the second quarter of 1973 and for two
subperiods before and after the adoption of a more flexible inter­
est rate policy— yield the following results:
Change in official
sales of securities
associated with:
Time period covered
by regression

|

£1 billion 1 percent­ Adjusted
increase in age point coefficient
of
domestic increase in
interest
determi­
borrow­
rates*
ings*
nation

Durbin- F statistic
Watson relevant
statistic to Chow
test

£ millions

Securities with 5 to 15 years to maturity
1963-Q1 to 1973-Q2
1963-Q1 to 1970-Q4
1971-Q1 to 1973-Q2

11
(0.3)
5
(0.1)
— 78
(0.1)

—

— 191
(3.4)
— 168
(2.3)
— 212
(1.8)

.22

1.75

.10

1.54 ^0.1208f

.20

1.93

L

Securities with more than 15 years to maturity
and undated securities
1963-Q1 to 1973-Q2

29
(0.8)
1963-Q1 to 1970-Q4
30
(1.0)
1971-Q1 to 1973-Q2 — 111
(2.4)

— 296
(4.8)
— 190
(4.0)
— 484
(6.3)

.39

1.28

.35

1.66

.81

2.80

►
30.442

* t value in parentheses.
t Indicates no significant difference between the computed re­
lationships for the two subperiods.
It will be seen that the inverse relationship between changes in
interest rates and official securities sales was strong in all cases.
Since 1971 there has been a weak inverse relationship between
the total domestic borrowing requirement and official sales of se­
curities with more than fifteen years to maturity. The Chow test
indicates no significant change in the computed relationship be­
tween the two subperiods for securities in the five to fifteen years
to maturity range but a significant change for the longer maturity
securities. For the longer term securities, the Durbin-Watson sta­
tistic and the Chow test suggest that some new and unspecified
factors were influencing official securities sales.

FEDERAL RESERVE BANK OF NEW YORK

ward. Although some recent commentators still advocate
funding to raise interest rates,19 it is clear that the Bank
prefers to apply upward pressure on interest rates by ex­
erting pressure on the discount houses or by calling for
special deposits.
d i r e c t c o n t r o l s . Since September 1 9 7 1 ,
the British
monetary control system has depended primarily on the
indirect market-oriented controls just described. How­
ever, the authorities have occasionally moved to temper
the impact of these controls on the strongest and weakest
borrowers as well as to modify them in other ways thought
desirable. In August 1972, the Governor requested that
banks “make credit less readily available to property
companies and for financial transactions not associated
with the maintenance and expansion of industry”. This
request was repeated in September 1973 with the added
request that personal loans (other than for house pur­
chases) also be limited. In early 1973, when inflationary
trends and monetary restraint measures combined to push
market interest rates well over 10 percent, the govern­
ment offered the building societies a temporary threemonth subsidy on condition that they hold mortgage in­
terest rates under 10 percent. In October 1973, when in­
terest rates were again rising, the authorities moved to
protect building societies and mortgage borrowers from
the full impact of market forces. An upper limit of 9 X
A
percent was set on the interest rates banks could pay for
consumer-type deposits, and the building societies were
urged to help first-time house buyers by deferring pay­
ments of principal for five years.
Export finance, which had long received favored treat­
ment, continues to do so. Formerly, some long-term export
bills had been directly refinanced by the Bank of England,
and short-term export bills had been included as liquid
assets in calculating the banks’ liquid asset ratios. Under
the current preferential system for long-term export loans,
the clearing banks are expected to make governmentguaranteed loans to their customers, hold in their own
portfolios a portion of such loans equal to 18 percent of
their demand deposits over the preceding twelve months,
and refinance the rest with the government’s Export Credit
Guarantee Department. The interest rate received by the
banks on the export paper they retain is calculated accord­
ing to a formula based on the Treasury bill rate and on
their own base lending rate, whereas the rate actually paid
by the borrower is determined by the government. As for
short-term government-guaranteed export loans, the Bank

19 For example, Morgan [33].




19

has agreed that, in an emergency situation, it would pro­
vide refinancing facilities in amounts and on terms to be
determined.
As the government’s prices and incomes policy entered
Stage II in April 1973, the authorities were faced with
another new problem. While the anti-inflation program
called for direct interference with the market pricing mech­
anism for wages and for prices of goods and services, re­
liance was continued on market forces in financial mar­
kets for pushing up interest rates, in order to discourage
inflation-breeding expansion of the monetary aggregates.
Because it was considered undesirable that banks should
profit unduly from their unique situation, bank charges,
but not interest rates on bank loans and deposits, were
placed under margin controls. It was also stipulated that
should the banks’ net profit margins on interest-earning
business exceed certain levels, the government could re­
duce interest paid, or even establish negative interest rates,
on the banks’ special deposits with the Bank of England.
Following these general rules, the rate of interest paid on
special deposits was reduced in October 1973 by eliminat­
ing the interest paid on special deposits held against the
banks’ noninterest-bearing eligible liabilities.
Finally, in December 1973, consumer credit terms,
namely, downpayment and payment period, were once
more made subject to direct government control, as they
had frequently been prior to 1971.
a n u n r e s o l v e d p r o b l e m . As was to be expected, the
first two years of experience with the new control sys­
tem have revealed a number of problems. One related
to the public sector lending ratio established for the dis­
count houses, which tended to complicate control of dis­
count house operations and distorted short-term rates.
This problem has now been resolved in the manner al­
ready described.
A second problem, on which progress is now being
made, has been that of correctly forecasting the relation­
ship between interest rates and the monetary aggregates
serving as indicators. An understanding of these compli­
cated relationships is extremely important, since the
Bank’s influence on the monetary aggregates is viewed as
the indirect result of its ability to influence market interest
rates. Late in 1972, Governor O’Brien indicated that the
rates of expansion of the monetary aggregates in the first
nine months of the new control system (a 24 percent an­
nual rate for M3 and a 13 percent rate for M x) were
greater than had been expected to result from the interest
rate policy followed [5a]. The fact that in 1973 the growth
of Mi fell to less than 6 percent while the growth of M3
remained unacceptably high at around 28 percent, even
though interest rates climbed from under 5 percent in the

20

MONTHLY REVIEW, JANUARY 1974

spring of 1972 to over 10 percent in January 1973 and,
after easing in the summer, to about 15 percent at the end
of 1973, serves to illustrate the complexity of the relation­
ships between interest rates and money.
Factors contributing to the continuing strong growth
of M3 appear to have included inflationary expectations,
fed by monetary expansion and price increases in im­
mediately preceding periods, and a structure of interest
rates conducive to interest arbitrage. Inflationary expecta­
tions, fueled by such developments as a 42 percent in­
crease in the price of basic materials in the year ended
November 1973, undoubtedly spurred the demand for
bank loans and increased the banks’ willingness to offer
high interest rates for additional large deposits. Then,
because market rates for large deposits moved up more
quickly than bank overdraft loan rates, the banks’ large
customers borrowed considerably in excess of current
needs, placing balances in high-yield bank CDs.
The new, very steep noninterest-bearing special deposit
requirements, applicable to increases in interest-bearing
deposits in excess of a specified amount, should effectively
counter both the pressure of growing demand for bank
credit and the interest arbitrage problem. This new type
of special deposit greatly increases the marginal cost to the
banks of accepting additional deposits and expanding loans
above certain prescribed limits, and give them a strong
incentive to alter the structure of interest rates in order
to eliminate interest arbitrage based on relatively cheap
bank loans. In fact, encouraged by the authorities, the
banks are apparently shifting to a dual loan rate system.
Under it, large borrowers are charged interest rates keyed
to going money market rates, while smaller borrowers
continue to be accommodated at fixed rates.
BRITISH AND UNITED STATES MONETARY
CONTROL SYSTEMS COMPARED

As a result of the extensive changes in the British
monetary control system since 1971, the similarities be­
tween the British and United States monetary control sys­
tems can perhaps be regarded as now outweighing the
differences. Still, there remain important differences be­
tween the two.
One long-standing difference is the role of discounting.
In Britain, discounting is available only to discount houses
and not to banks. On the other hand, the Federal Reserve
discounts only for member banks and not for dealers in gov­
ernment securities, whose residual liquidity needs are essen­
tially met by the banks. Further, in Britain, discounting
at the minimum lending rate is always penal, in the sense
that it is higher than the going market rate for Treasury




bills, and is primarily a means of sharpening the authorities’
control over market interest rates. In the United States, on
the other hand, discounting serves to meet cyclical and sea­
sonal needs and as a buffer against what might otherwise
be the uneven impact of open market operations or other
factors on the position of individual banks— a function
not performed by Bank of England discounting at the
minimum lending rate. Moreover, the Federal Reserve
discount rate does not keep as closely aligned with the
Treasury bill rate or other market rates as is the case in
the United Kingdom, although in recent years System dis­
count rates have followed market rates more closely most
of the time.
The most visible remaining differences in the two con­
trol systems stem from differences in reserve requirements.
In the first place, Bank of England reserve requirements
now apply to all banks in Britain and to a few nonbanks
as well but, in this country, Federal Reserve requirements
apply only to members of the Federal Reserve System.
The latter account for about three fourths of all bank de­
posit liabilities to nonbanks. A system of universal reserve
requirements is, of course, more equitable than partial
coverage and is especially important for Britain, which
has relied very heavily on changes in reserve requirements
in its attempts to influence interest rates and the mone­
tary aggregates.20 It is interesting to note that the extension
of reserve requirements to all banks in Britain in 1971
was generally accepted as a constructive move.
There are also differences between the nature of the
reserve assets in the two systems. At the present time,
however, some of these differences seem more formal than
real and are of only minor consequence in determining
the operation of the two control systems. In both systems,
deposits at the central bank are includable in required re­
serves, and they constitute the only reserve assets countable
as variable special deposits in Britain. Some of these
special deposits bear interest, whereas in the United
States none of the banks’ deposits with the Federal
Reserve Banks bear interest. In the United States, cur­
rency held by member banks also qualifies as required re­
serves; member and nonmember banks held currency equal
to about 13 percent of the currency held by the public out­
side banks in June 1973. In Britain, currency does not
qualify as a reserve asset but British banks nevertheless

20 For comments on the inequity of the United States system,
see Waage [44]. For a comprehensive comparison of reserve re­
quirements abroad, see Garvy [23a].

FEDERAL RESERVE BANK OF NEW YORK

held currency equal to 22 V2 percent of the currency in
circulation outside banks in June 1973. This difference re­
flects, at least in part, the greater use in Britain of cur­
rency relative to checks.
In Britain, assets eligible as bank reserves also include
government securities within a year of maturity, certain
other paper, and call loans to the discount market. These
and the ratios applied to discount houses have no counter­
part in required reserve of members of the Federal Re­
serve System. However, large weekly reporting banks in
the United States, the only group for which this informa­
tion is available, keep about AV2 percent of their total as­
sets in government obligations within five years to matu­
rity, not greatly different from the roughly 6 V2 percent
that the London clearing banks keep to meet current and
prospective reserve requirements and general liquidity
needs. On the other hand, the large United States banks’
loans to brokers and dealers, the closest approximation
to the British banks’ call loans to discount houses, are in
the vicinity of 1 percent of their total assets, whereas
London clearing banks keep about 5 percent of their assets
in call loans. It would appear, then, that the most signifi­
cant difference between reserve requirements in the two
countries are: (1 ) the payment of interest on some of the
banks’ reserve deposits at the central bank in Britain but
not in the United States; and (2) the privileged position
accorded discount houses in Britain, compared with the
position of dealers in government securities in the United
States, as a result of call loans being included in the British
banks’ required reserves.
Turning to the similarities between the two monetary
control systems, one major similarity is the newly awakened
interest in money, variously defined, as an intermediate
policy target or as an indicator of the thrust of monetary
policy. In both countries this interest crystalized at the turn
of the decade: in Britain in the traditional budget message
statement of monetary policy in 1969; in the United States
in the regular monthly instructions to the manager of the
System Open Market Account by the Federal Open Mar­
ket Committee early in 1970. In practice, the behavior
of the broader monetary aggregates, M3 in Britain and M 2
in the United States, has occasionally proved difficult to
interpret since the aggregates have swung widely in re­
sponse to the imposition and removal of restraints on
interest rates paid for time deposits by banks. The basic
reason for these gyrations is, of course, that time deposits
in banks are closely competitive with a broad range of
other short-term financial assets. Hence, small changes
in relative interest rates can lead to large shifts in the
public’s holdings of bank deposits. In this connection, it
is interesting to note that the relative importance of the




21

main types of short-term liquid assets held by domestic
nonfinancial investors is fairly similar in the two coun­
tries (see table).
A second broad similiarity is, of course, a prime reliance
on indirect market-oriented controls to achieve these mone­
tary objectives. In both countries, the monetary authority
adds to or subtracts from the banking systems’ excess
reserves by discounting or open market operations or by
changing the banks’ reserve requirements. These actions
induce changes in interest rates and set in motion a series
of portfolio adjustments on the part of banks and non­
banks which, assuming the monetary authorities are cor­
rect in their expectations of the likely consequences, even­
tually bring about the desired changes in the monetary
aggregates. It is worth observing that both monetary
authorities have recently made use of reserve require­
ments against increments in certain types of bank de­
posit liabilities. This attempt to control directly the banks’
marginal lending costs has been carried further in Britain
than in the United States, where the marginal reserve re­
quirements applied in June 1973 to increments in large
CDs and certain other liabilities are now only 8 percent,
compared with a range that goes as high as 50 percent
in Britain.
In both countries, the monetary authorities have found
it necessary to temper the impact of market-oriented con-

DISTRIBUTION OF SELECTED LIQUID ASSETS HELD BY
PRIVATE DOMESTIC NONFINANCIAL INVESTORS, JUNE 1973
In percent
Asset

United Kingdom

United States

Currency ..................................................................

6.9*

5.8

Demand deposits ..................... ..............................

15.1*

17.4

Time deposits in b a n k s..........................................

24.3*

26.7

Time deposits in private thrift institutions

29.9

32.6

Savings bonds and deposits in government
savings institutions ............................................

19.6

5.7

Certificates of deposit issued by banks .............

1.8

5.5

Short-term marketable government securitiesf

0.4

4.4

Other short-term obligations^ .............................

2.0

1.9

Total selected liquid assets ..............................

100.0

100.0

* Estimated on the assumption that the ratio of the holdings of this asset by
domestic nonfinancial investors to the holdings by all domestic investors
other than banks is the same as the ratio regarding total bank deposits.
t In the United Kingdom, Treasury bills, tax reserve certificates, and tax de­
posit accounts; in the United States, all government issues due in one year
or less, plus a sliding proportion of issues due in thirteen to twenty-four
months.
t In the United Kingdom, local authority deposits and finance house deposits;
in the United States, commercial paper.
Sources: United Kingdom Central Statistical Office, Financial Statistics (No­
vember 1973), and Board of Governors of the Federal Reserve System.

22

MONTHLY REVIEW, JANUARY 1974

trols on some strong borrowers, generally speculators, or
on weak borrowers in need of support, generally home
mortgage borrowers. The Bank of England requests to
banks to make credit “less readily available” for financial
and large-scale real estate speculation is somewhat simi­
lar in intent to Federal Reserve Regulations U, T and G,
which set margin requirements on loans extended by banks,
brokers and dealers, and others to finance securities trans­
actions. The recent British limitation on the interest rate
banks can pay on small deposits and the other measures
taken to help home mortgage borrowers are similar to
United States limitations on deposit rates for personal
deposits in banks and savings institutions and on Federally
insured mortgage interest rates.
In still further departures from market-oriented control
mechanisms, attempts have been made in both countries to
resolve the anomalies inherent in anti-inflationary programs




that combine price and wage controls with rising interest
rates by placing some limits on bank operating margins
and on bank profits.
Monetary authorities in the United Kingdom, no less
than in the United States, recognize the limitations of the
contribution that monetary policy can make to the attain­
ment of the overall economic objectives of the country.
In a recent speech, answering in the affirmative the ques­
tion “Does the money supply really matter?”, the Deputy
Governor of the Bank of England concluded: “In other
words, we see monetary policy as only one among a num­
ber of influences— budgetary, economic, social, and politi­
cal (in the widest sense of that word)— which together
shape the economy. If you do not like the results, we are
ready to accept our share of the blame. But remember that
while, like the legendary pianist, we do our best, it is only
a part of the keyboard that comes within our reach.”

[See bibliography on pages 23 and 24.]

FEDERAL RESERVE BANK OF NEW YORK

23

BIBLIOGRAPHY

Abbreviations of publications repeatedly cited:
BEQB — Bank of England Quarterly Bulletin
MS — The Manchester School (a quarterly published by the Man­
chester School of Economic and Social Studies)
Readings — Readings in British M onetary Economics, edited by
H. G. Johnson and Associates (Oxford, England: Clarendon Press,
1972)

Official Statements and Documents:

Other References

[ 1] “The Management of Money Day by D ay”, BEQB (March
1963).

[16] Artis, M. J., “The Monopolies Commission Report”, Bankers
Magazine (September 1968), reprinted in Readings.

[ 2] “Official Transactions in the Gilt-Edged Market”, BEQB
(June 1966).

[17] Artis, M. J., and Nobay, A. R., “Two Aspects of the Monetary
Debate”, National Institute Economic Review (August 1969),
reprinted in Readings.

[ 3] “The Operation of Monetary Policy since Radcliffe”, a paper
prepared by the Bank of England in consultation with the
Treasury, BEQB (December 1969). Reprinted in M oney in
Britain 1959-69, edited by David R. Croome and Harry G.
Johnson (Oxford University Press, 1970).

[18] Barrett, C. R., and Walters, A. A., “The Stability of the
Keynesian and Monetary Multipliers in the United Kingdom”,
Review of Economics and Statistics (November 1966), re­
printed in Readings.

[ 4] “Monetary Management in the United Kingdom”, Jane Hyde
Memorial Lecture by the Governor of the Bank of England,
BEQB (March 1971) and in Readings.

[19] Coppock, D. J., and Gibson, N. J., “The Volume of Deposits
and the Cash and Liquid Asset Ratios”, MS (September 1963),
reprinted in Readings.

[ 5] “Key Issues in Monetary and Credit Policy”, a speech by the
Governor of the Bank of England, delivered in Munich, BEQB
(June 1971).

[20] Crockett, A. D., “Timing Relationships between Movements
of Monetary and National Income Variables”, BEQB (Decem ­
ber 1970).

[5a] Speech by the Governor of the Bank of England, BEQB
(December 1972).

[21] Crouch, R. L., “A Re-examination of Open Market Oper­
ations”, Oxford Economic Papers, new series (June 1963),
reprinted in Readings.

[ 6] “Competition and Credit Control”, extract from a lecture by
the Chief Cashier of the Bank of England, BEQB (December
1971).

[22] Crouch, R. L., “The Inadequacy of the ‘New Orthodox’
Methods of Monetary Control”, Economic Journal (December
1964), reprinted in part in Readings.

[ 7] “Does the Money Supply Really Matter?”, a speech by the
Deputy Governor of the Bank of England to the Lombard As­
sociation, BEQB (June 1973).

[23] Garvy, George, “The Discount Mechanism in Leading Indus­
trial Countries since World War II”, in Reappraisal of the
Federal Reserve Discount Mechanism, Vol. I (Washington,
D. C.: Board of Governors of the Federal Reserve System,
August 1971).

[ 8] “Competition and Credit Control”, text of a consultative
document issued on May 14, 1971, BEQB (June 1971).
[ 9] “Competition and Credit Control: The Discount Market”,
BEQB (September 1971).

[23a] Garvy, George, “Reserve Requirements Abroad”, Monthly
Review (Federal Reserve Bank of New York, October 1973),
pages 256-62.

[10] “Reserve Ratios and Special Deposits”, supplement to BEQB
(September 1971).

[24] Goodhart, C. A. E., “Monetary Policy in the United King­
dom”, in M onetary Policy in Twelve Industrial Countries
(edited by K. Holbik, Federal Reserve Bank of Boston, 1973).

[11] “Reserve Ratios: Further Definitions”, BEQB (December
1971).

[25] Goodhart, C. A. E., and Crockett, A. D., “The Importance of
Money”, BEQB (June 1970).

[12] “Competition and Credit Control: Modified Arrangements for
the Discount Market”, BEQB (September 1973).

[26] Griffiths, Brian, “The Development of Restrictive Practices in
the U. K. Monetary System”, MS (March 1973).

[13] “The Finance of Medium and Long-term Export and Ship­
building Credits”, BEQB (June 1972).

[27] Hamburger, M. J., “Expectations, Long-term Interest Rates
and Monetary Policy in the United Kingdom”, BEQB (Sep­
tember 1971).

[14] Committee on the Working of the Monetary System (the Rad­
cliffe Committee), Report, (London: Her Majesty’s Stationery
Office, 1959).

[28] Johnson, H. G., “The Report on Bank Charges”, Bankers
Magazine (August 1967).

[15] Ibid., Principal Memoranda of Evidence. Volume I contains
evidence presented by the Bank of England and H. M. Trea­
sury.

[29] Kareken, John, “Monetary Policy”, in Britain’s Economic
Prospects, edited by Richard E. Caves and Associates, (Wash­
ington, D. C.: Brookings Institution, 1968), reprinted in part
in Readings.




24

MONTHLY REVIEW, JANUARY 1974

[30] Kavanagh, N. J., and Walters, A. A., “The Demand for Money
in the United Kingdom, 1877-1961: Preliminary Findings”,
Bulletin of the Oxford University Institute of Economics and
Statistics (May 1966), reprinted in Readings.

[38] Parkin, J. M., Gray, M. R., and Barrett, R. J., “The Portfolio
Behavior of Commercial Banks”, The Econometric Study of
the United Kingdom, edited by K. Hilton and D. F. Heathfield
(London and New York, 1970).

[31] Laidler, D., and Parkin, J. M., “Demand for Money in the
United Kingdom, 1955-67”, M S (September 1970).

[39] Price, L. D., “The Demand for Money in the United King­
dom”, BEQB (March 1972).

[32] Monopolies Commission, Barclay's Bank, Ltd., L loyd’s Bank
Ltd., and Martins Bank Ltd., a R eport on the Proposed Merger
(London: Her Majesty’s Stationery Office, 1968).

[40] Rowan, D. C., “The Monetary System in the Fifties and Six­
ties”, MS (March 1973) .

[33] Morgan, E. V., “The Gilt-Edged Market under the New Mone­
tary Policy”, Bankers Magazine (January 1973).

[41] Tobin, J., “A General Equilibrium Approach to Monetary
Theory”, Journal of M oney, Credit and Banking (February
1969).

[34] Morgan, E. V., and Harrington, R. L., “Reserve Assets and
the Supply of Money”, MS (March 1973).

[42] Townend, J. C., “Summary of a Research Paper on Substitu­
tion among Capital-Certain Assets in the Personal Sector of
the U. K. Economy, 1963-71”, BEQB (December 1972).

[35] National Board for Prices and Incomes, Report on Bank
Charges, (London: Her Majesty’s Stationery Office, 1967).

[43] Sayers, R. S., Central Banking after Bagehot, (Oxford: Claren­
don Press, 1957).

[36] Nobay, A. R., “The Bank of England, Monetary Policy and
Monetary Theory in the United Kingdom, 1951-1971”, MS
(March 1973).

[44] Waage, T. O., “The Need for Uniform Reserve Requirements”,
M onthly Review (Federal Reserve Bank of New York, Decem­
ber 1973), pages 303-306.

[37] Parkin, J. M., “The Discount Houses’ Role in the Money
Supply Control Process under the Competition and Credit
Control Regime”, MS (March 1973).

[45] White, W. R., “Expectations, Investment and the U. K. GiltEdged Market— Some Evidence from Market Participants”,
MS (December 1971).




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