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MONTHLY REVIEW, JANUARY 1962
2
Foreign Exchange M arkets, July-D ecem ber 1961
The heavy flows of short-term capital among major
financial centers that had dominated the foreign exchange
markets during the first six months of 19611 continued to
exert a strong influence on these markets during the third
quarter, owing mainly to the repercussions of the Berlin
crisis and the especially sharp changes in the circumstances
affecting the pound sterling. Cooperative exchange opera
tions by the monetary authorities of the leading financial
centers thus continued to be necessary and, by calming the
markets, helped to moderate the effects of large movements
of short-term capital and particularly of occasional specula
tive attacks. In the fourth quarter, speculative capital
flows and those motivated chiefly by a desire for political
safety tapered off appreciably. Exchange rate movements in
that quarter chiefly reflected the various countries’ under
lying balance-of-payments conditions or the movements of
capital funds by foreign commercial banks for balancesheet “window dressing” in conjunction with the approach
ing year end, or other technical operations. Nevertheless,
the exchange markets remained jittery and easily influenced
by rumors throughout the second half of the year. One prin
cipal reason for this was that the basic payments balances
underlying the two key currencies—the dollar and sterling
—continued to be in substantial deficit in spite of note
worthy improvements for 1961 as a whole.
In general, the direction and intensity of exchange rate
movements will be influenced primarily by the state of the
current and long-term-capital accounts of the balance of
payments. However, in a world of convertible currencies
and freedom for short-term capital flows, such flows may
temporarily overwhelm these basic balance-of-payments
forces and result in exchange rate developments that are
significantly different from what might be expected solely
on the basis of longer term influences. This is what
occurred during substantial parts of 1961.
Any large-scale international movement of funds is
bound to affect the dollar, partly because of its pivotal
role as a reserve currency and partly because most coun
tries are obligated by international agreements to keep
the value of their currencies within certain limits with
respect to gold or the dollar.2 Since the participants in
the exchange markets know that central banks always
stand ready to buy or sell dollars for their own currencies
at the fixed intervention points (thus adding to, or re
ducing, their international reserves), the market for dol
lars is almost always the broadest and most active. Con
sequently, even when funds are transferred from one
nondollar financial center to another, they generally move
“through” dollars as the most readily acceptable means
of payment. It was the enormous volume of transfers of
this kind that pushed the dollar to its lower limit against
some Continental currencies for prolonged periods during
the past year, thus making desirable official United States
action in the exchanges to defend the dollar.
The defense of exchange rate stability among major
currencies took a variety of forms, including most impor
tantly the extension of inter-central-bank credits and large
IMF assistance to the United Kingdom. In addition,
operations in the exchange markets by the United States
Treasury (functioning through this Bank as fiscal agent),
in cooperation and close consultation with the German,
Swiss, and other European central banks, were of help.3
Such exchange market operations were designed to reduce
the abnormally large premiums on forward deliveries of
foreign currencies (especially German marks and Swiss
francs) that had developed following the March revalua
tions, thereby discouraging speculation and inducing some
reversal of the earlier capital flows to Continental countries.
They also were aimed at easing the downward pressure on
dollar spot rates against these currencies. Frequent occa
sion to observe developing needs and to consult about
appropriate action was provided by the continuing monthly
meetings of central bankers in Basle— in which the Fed
eral Reserve System is now taking an active part— as well
2 All countries that are members of the International Monetary
Fund and that have adopted par values, except the United States,
define their currencies in terms of the dollar. Foreign countries
thus have to hold their exchange rates within 1 per cent above or
below the dollar parity under IMF rules (in practice, 3A of 1 per
cent for most signatories of the European Monetary Agreement).
The United States, of course, complies with its obligation by stand
ing ready to buy and sell gold f reely at a fixed price in transactions
with foreign monetary authorities.
3 For the background of these operations, see the M onthly
1 For a review of the first half of 1961, see the Monthly Review
Review for July 1961, p. 114.
for July 1961, p. 114.
3
FEDERAL RESERVE BANK OF NEW YORK
as by the regular consultations by Treasury and Federal
Reserve officials with their opposite numbers within the
Organization for Economic Cooperation and Development.
By early summer, more normal exchange market condi
tions had been restored. In particular, a narrowing of
the spread between spot and forward rates for several
major Continental currencies had taken place. Moreover,
at the end of July the United Kingdom had announced a
variety of measures of domestic restraint (including a 7
per cent discount rate) designed to halt the short-term
capital outflow and to improve the country’s balance on
current and long-term-capital accounts. These steps, com
bined with a record-breaking $1.5 billion British drawing
and $0.5 billion stand-by credit from the IMF, announced
in August, resulted in a reversal in the timing of com
mercial payments, which had previously been adverse
to sterling. This brought about a strong recovery of ster
ling and enabled Britain to begin paying back the credits
it had received. Between July 24 and August 9, spot
sterling rose from $2.7855 to $2.8057, and it remained
above par for the rest of the year.
The darkening shadow of the Berlin crisis, however,
produced a new wave of capital flows in the summer
months. As a result, and despite a deterioration in the
United States balance of payments relative to the first
half of the year, there was a decline in the mark, the
Dutch guilder, and the French franc from their upper
limits against the dollar as investors shifted funds to
Switzerland for safe haven (see chart). The United
States authorities thus found it necessary to intensify the
Swiss franc operations that had been initiated earlier in
the summer. They were, however, at the same time able
to reduce the volume of transactions in Deutsche marks.
The Swiss franc operations continued through the re
mainder of the year and helped significantly not only in
calming the market but also in reducing the flow of dollars
to Switzerland. The United States Treasury’s ability to
engage in these operations was enhanced by a SF200
million borrowing from the Swiss National Bank (acting
as agent for the Swiss Confederation).
As the flow of funds tapered off during the fall months,
following an easing of tensions over Berlin, exchange
rates once again began to reflect more basic balance-ofpayments conditions. The increase in the United States
payments deficit after midyear, already noted, was par
ticularly significant in this regard. In the third quarter,
the seasonally adjusted annual rate of the United States
deficit reached $3.1 billion, owing principally to sharply
increased imports. Moreover, there appears to have been
no improvement in the fourth quarter, when commercial
bank lending to foreigners increased. In the United King-
EXCHANGE RATES IN 1961
M o n th ly a v e ra g e s o f noon b u y in g ro tes; cents p e r u n it o f fo re ig n cu rren cy
U S. cents
2.01511------------------------------- ;-------------------------------------------------
1.9851
i
J
I
F
-l___ J___ I___ I___ !___ i___ I___ !___ I___
M
A
M
J
J
A
S
O
N
D
N o te ! Except for C a n a d a , outside b o u n d aries rep re s e n t o ffic ia l suppo rt levels.
__ _ . — =
p ar v a lu e o f c u rren cy set w ith IM F , e x c e p t fo r S w itz e r la n d .
Source: B oard o f G o vernors of the Fe d e ra l Reserve System .
4
MONTHLY REVIEW, JANUARY 1962
dom, meanwhile, there was a considerable improvement
in the trade balance in the third quarter, but over-all
progress toward bringing the combined current and longterm-capital accounts into balance proved slow. In Japan,
the deficit grew rapidly until restrictive monetary meas
ures were adopted in the fourth quarter. Meanwhile,
Switzerland’s trade deficit increased so sharply that there
was an over-all deficit on current account for the first
time in many years. Germany’s payments position, on the
other hand, remained strong, although there was a sig
nificant decline in the size of the current account surplus.
France, the Netherlands, Italy, and Belgium all main
tained or further improved their positions of underlying
strength. In Canada, there was a slight decline in the
current account deficit in the third quarter.
In response to these underlying conditions, most Con
tinental currencies as well as sterling showed continued
strength vis-a-vis the dollar in the early fall months.
Dutch guilder, French franc, and Belgian franc quotations
rose, while the Italian lira remained at its ceiling against
the dollar. The Swiss franc and the German mark, on
the other hand, both weakened somewhat, the mark prin
cipally because of further capital outflows. In the for
ward markets, three-month premiums on the Deutsche mark
and the Swiss franc declined to under 1 per cent per annum.
Sterling, still bolstered by capital inflows, did not weaken
at all until late October, and then only slightly. Forward
sterling discounts meanwhile were steadily decreasing; by
the end of October, for example, the three-month for
ward rate was down to about 2.7 per cent per annum
from over 4 per cent at the end of August, and it remained
around that lower level for the rest of the year. The decline
in these discounts largely reflected an adjustment to re
duced interest rate differentials between London and
other financial centers, as the British discount rate was
lowered in two steps to 6 per cent.
As the year drew to a close, short-term capital move
ments again began to dominate exchange developments in
several currencies. These developments, however, reflected
principally portfolio adjustments by foreign commercial
banks rather than speculative or arbitrage flows, and
their potentially disturbing exchange market effects were
greatly ameliorated through central bank action. The Swiss
franc, the Dutch guilder, the French franc, and the
German mark rose because of repatriation of funds
held abroad by commercial banks. In Switzerland and
France, the commercial banks temporarily increased their
liquid domestic assets for year-end statement purposes
— a traditional procedure — and thus provided a large
supply of dollars. Sterling, however, weakened relative
to the dollar, since a good part of the funds going to the
Continent were being withdrawn from London.
The Canadian dollar was not affected by the various
factors influencing European exchange rates. The rate
hovered just around $0.97 throughout the third quarter in
a quiet market. The lack of activity in that period was
attributable to the hurried operations to cover future com
mitments which were undertaken in June— when it was
announced that the government would act to lower the
rate— and to a slowing-down in capital movements as in
vestors awaited further exchange rate developments. In
late October, with renewed activity, the rate began to
decline further; by the end of November, in fact, as heavy
Canadian demand for United States dollars for year-end
dividend payments was bolstered by some speculative sell
ing of Canadian dollars, it dropped below $0.96, the
lowest since 1951. To steady the rate, the Canadian
authorities were active on both sides of the market at
various times during this period.
The Japanese yen remained under considerable pres
sure throughout the second half of the year, due to
Japan’s continuing balance-of-payments deficit, and the
rate was held at $0.002762 with substantial declines in
official reserves. In Brazil, there was a “temporary” re
version to multiple currency practices in an attempt to
insulate trade transactions from speculative capital flows.
Separate exchange markets were re-established on Octo
ber 27 for commercial and financial transactions, with a
50 per cent cruzeiro deposit required for financial ex
change purchases. In addition to these two markets (in
which rates in November were about 310 cruzeiros per
dollar for trade and 315 for financial exchange), a nonofficial market for financial transactions seems to have
developed where spot dollars are quoted at lower cruzeiro
values.
Toward the year end, further action to strengthen the
instruments of international monetary cooperation was
pending. It was announced that ten main industrial
countries (including the United States, the United King
dom, the Common Market members, and others) had
agreed with the IM F to provide facilities for quickly
mobilizing large resources beyond those presently available
to the Fund. These resources would be available for pro
tecting the convertibility of currencies in the event that
developments affecting one or more of the major currencies
might threaten to impair the functioning of the international
monetary system. Although detailed arrangements had not
yet been announced as this Review went to press, it is antici
pated that the exact size and composition of any special
credits would be decided upon by agreement among the
prospective lending countries and the Fund at the time such
credits are required. This new plan (with which it is hoped
FEDERAL RESERVE BANK OF NEW YORK
Switzerland—not a Fund member—may become asso
ciated) evolved in response to the need to offset the
potentially disruptive effects of large-scale capital flows in
a world of convertible currencies. Together with the
further active use of inter-central-bank cooperation, such
as has been practiced during the past year, the plan should
5
significantly improve the chances for the stability of the
foreign exchange markets in the future. In the long run, of
course, exchange stability will depend not only on such
temporary cooperative actions but also on broader policy
adjustments by individual countries to correct imbalances
in their fundamental balance-of-payments positions.
The Business Situation
Increased spending by business, consumers, and gov
ernment during the final months of 1961 brought new
strength to the economic expansion. Business invest
ment, both in plant and equipment and in inventories,
appeared to be on the rise and was expected to move up
further in the first quarter of 1962. Consumer buying,
which had spurted markedly in October, rose even more
sharply in November, and seemed to be holding near that
new high level in December. Defense orders and spending
continued to exert an expansionary influence. Partly due to
this new strength in demand, industrial production in No
vember advanced for the second month in a row; moreover,
gains in steel and automobile output in December suggested
a further increase in total industrial production was likely.
At the same time, the seasonally adjusted rate of unemploy
ment moved sharply downward, to just above 6 per cent in
November, after eleven consecutive months near the 7 per
cent level.
R IS E
IN
DEMAND
The latest survey of businessmen’s capital spending
plans and actual outlays, conducted in October and early
November by the Commerce Department and Securities
and Exchange Commission, showed that plant and equip
ment expenditures were expected to rise to $35.9 billion
(seasonally adjusted annual rate) in the final quarter of
1961, up 3 Vi per cent over actual outlays in the preced
ing quarter. The estimated gains were widespread, with only
spending by railroads due to decline. While both manufac
turers of nondurables and mining firms had apparently
scheduled somewhat smaller outlays than had been antici
pated in last August’s survey, such shortfalls are not un
common during the early stages of a business upturn.
Total capital outlays were scheduled to increase further,
by XVi per cent to $36.5 billion, in the first quarter of
1962; only public utilities and transportation industries
other than railroads planned to reduce their spending. The
outlays expected for the first quarter of 1962 were almost 8
per cent above the level of capital spending four quarters
earlier (i.e., in the first quarter of 1961), when the busi
ness cycle reached its trough. At similar stages of both
of the two preceding business expansions, capital spending
schedules for the fourth quarter after the trough showed
a somewhat smaller gain from the level that had prevailed
during the trough quarter (see Chart I). In those two
previous cycles, moreover, the total outlays that were
actually realized four quarters after the trough were higher
than had been anticipated, even though a few individual
industries spent less than originally planned.
That capital expenditures might again rise beyond the
indicated levels is suggested by the recent gains in busi
ness sales— gains which may well have exceeded the ex
pectations held when the survey was taken. At the time
of the survey, sales were just recovering from the thirdquarter slowdown which had culminated in the September
sales decline. In October, however, total business sales
moved up nearly 2 per cent to a record $63 billion (sea
sonally adjusted), mainly on the strength of advances in
sales by manufacturers and retailers of durable goods.
In November, seasonally adjusted sales by manufacturers
of durables increased an additional 3Va per cent, with
almost all industries sharing in the gain.
In retail establishments, cash registers rang up a record
$19.3 billion in November— 3 Vi per cent more than in
October and the first monthly sales volume to surpass the
pre-recession peak. Continued strength in retail sales ap
peared to be evident in December, as Christmas shoppers
pushed department store sales up by more than 1 per cent,
seasonally adjusted. Sales of new automobiles, which nor
mally decline in the pre-Christmas season, did so last
month (although perhaps somewhat more than is cus
MONTHLY REVIEW, JANUARY 1962
6
tomary), but dealers expected a strong demand to reemerge in the new year. Further gains in retail sales in
1962 may be foreshadowed by the steady expansion in
consumer incomes, which advanced another 1 per cent in
November. The sharp October rise in newly extended
consumer credit highlights the recent increase in the con
sumer’s readiness to spend.
In addition to the possibility of further gains in final
demand, the rate of inventory accumulation, particularly
by manufacturers, may be increasing. According to a Com
merce Department survey taken in November, manufac
turers expected their (seasonally adjusted) inventories to
reach $55.3 billion by the end of December— $0.9 billion
above the end-of-September level— and were scheduling an
additional $.1 billion increase by March 1962. Manufac
turers of durable goods account for the major portion of the
planned first-quarter 1962 increase. This probably in
part reflects hedging against a possible steel strike in mid-
C hart I
PLANT AND EQUIPMENT SPENDING PLANS
IN THREE EXPANSIONS
P erce n tag e increase fro m trough q u a rte r to four q u arters la te r
S e a s o n a lly ad ju sted
------------------- Plans* for--------------------- 1
■
^1954-55
[11958-59
Acfual
-------
01961-62
10
15
20
Per cent
* P l a n s a cc o rd in g to survey taken three q u arters a fte r trough q u a rte r. Trough
q u a rte rs are those in d ic a te d by the N a tio n a l Bureau of Economic Research
c h ro n o lo g y : 111-1954, ii-1 9 5 8 , a n d 1-1961.
Sources: U n ite d States D e p a rtm e n t of Com m erce; Securities an d E xch an g e
C om m ission.
year. Such hedging may already have been in evidence
in December, after the survey was taken, as steel users
began to hop on the “order now” bandwagon, causing an
appreciable rise in backlogs of unfilled orders in the steel
industry.
EFFECTS ON PR O D U C T IO N A N D E M P L O Y M E N T
Responding to higher levels of demand, the index of
industrial production in November moved up 1 per cent
to a record 114 per cent of the 1957 average. Output by
manufacturers of nondurable goods and by mining and
utilities firms each advanced about V2 of 1 per cent. The
largest gain, a 2 per cent rise over October, was scored by
durables manufacturers. This resulted primarily from an
increase in automobile output, which was no longer ham
pered by strikes and was spurred on by the sharp rise in
the demand for new cars. More automobiles were pro
duced this past November than in any November since
1955. In December, when auto production normally
slows down, output in the first three weeks continued at
the high November level, as producers sought to augment
dealer’s relatively modest inventories. For the month as a
whole, auto output rose more than 9 per cent (seasonally
adjusted) above the November pace. Also pointing to a
December increase in industrial production was a rise in
steel output. Toward the end of the month, unofficial esti
mates showed steel producers operating at about 75 per
cent of capacity— up from around 70 per cent estimated for
the end of November.
In contrast to the expansionary trend in most major
sectors as 1961 drew to a close, total construction activity
in December declined about 2 per cent (seasonally ad
justed). The decrease reflected sharp reductions in highway
outlays and in construction for military purposes, which
more than offset a fairly substantial gain in private resi
dential construction. Outlays for private residential build
ing have now advanced for ten consecutive months and
in December were higher than at any time since Sep
tember 1959. According to Department of Commerce
forecasts, private housing starts are expected to show an
increase in 1962 over the average for 1961. The predicted
1962 average, however, is not much different from the
rate of starts reached this past October, thus implying a
possible leveling-off in outlays for residential construction
in the coming months.
The general expansion in business activity helped to
push up seasonally adjusted total employment in November
by about 1 per cent (see Chart II) to 67.2 million persons.
This was only fractionally below the record level of em
ployment reached last June. The unevenness of November’s
FEDERAL RESERVE BANK OF NEW YORK
C h art II
RECENT TRENDS IN EMPLOYMENT AND UNEMPLOYMENT
S e a s o n a lly a d ju s te d
T o ta l e m p lo y m e n t'*
n
1
m
1 i i1 i i I ii1 i l 1i i 1 l
►103.8
i
ii 1 n
1 i i 1 ii
tinued its long-term upward trend. In contrast, fewer per
sons were employed in trade, construction, and public
utilities, while mining employment increased only slightly.
The civilian labor force showed only a small rise in
November. As a result, the substantial gain in employment
brought seasonally adjusted unemployment down to 4.3
million persons; since December 1960 unemployment had
been near the 5 million mark. The drop in unemployment
—which, if alternative seasonal adjustment techniques are
used, appears to have begun earlier and proceeded more
gradually— pushed the unemployment rate (unemploy
ment as a percentage of the civilian labor force) down to
6.1 per cent in November, the lowest rate reported since
September 1960 (see Chart II). The November decline in
unemployment was fairly widespread geographically. The
Labor Department reduced to 60 the number of the coun
try’s 150 major labor market areas classified as having
substantia] unemployment (an unemployment rate of 6.0
per cent or higher). In October the number had been 68.
It is interesting to note, however, that in November 1958
(which came at roughly the same stage of the business
expansion) the unemployment rate also dropped sharply,
from 6.9 to 6.1 per cent, but that it was not until six
months later, in May 1959, that the rate fell another per
centage point to 5 per cent.
* Census Bureau househ o ld s u rv e y ,
t Bureau of L abor S ta tistics p a y r o ll su rvey.
Sources: U n ite d S tates D ep a rtm e n ts of Com m erce a n d L ab o r.
P E R S P E C T IV E O N 1961
improvement was highlighted by the fact that a gain of
more than 500,000 persons in nonfarm employment (as
measured by the Census Bureau’s household survey) was
partly offset by a decline in the number of persons at work
in agriculture. Nonfarm employment according to the
Bureau of Labor Statistics payroll survey rose only slightly
in November and was similarly characterized by divergent
movements in major components. The largest gain came in
manufacturing employment, which advanced to 3 per cent
above last February’s figure. There were also increases in
the number of persons at work in finance, services, and
government, as employment in each of these sectors con
Each year in February the Federal Reserve Bank
of New York publishes Perspective, a 12-page illus
trated review of economic and financial develop
ments in the preceding year. Many businessmen find
Perspective useful as a layman’s summary of the
economic highlights treated more fully in the Bank’s
Annual Report. If you would like to receive without
charge Perspective on 1961 when it appears in midFebruary, write to the Publications Section, Federal
Reserve Bank of New York, 33 Liberty Street, New
York 45, N. Y. For those who are not familiar with
this publication, copies of Perspective on 1960 are
available upon request as long as the supply lasts.
a
MONTHLY REVIEW, JANUARY 1962
The M oney M ark et in D ecem ber
The money market remained generally easy through
the first three weeks of December, but in the fourth
week year-end portfolio adjustments and the aftereffects
of the reserve impact of tax and other borrowing in money
center banks sharply increased market pressures. Thus
the effective rate for Federal funds fluctuated in a fairly
narrow range between 2 and 2% per cent through De
cember 22, but generally held at the 3 per cent “ceiling”
thereafter. Similarly, dealer loan rates posted by major
New York City banks were in the neighborhood of 2%
per cent during the first three weeks, but rose as high as
3% per cent in the fourth.
Rates on short-term money market instruments tended
toward firmness through the entire month. Treasury bill
rates rose to new highs for the year when average auction
rates on December 29 climbed to 2.70 per cent and 2.94
per cent, respectively, for the three-month and six-month
issues. As Treasury bill rates moved into higher ground
and as the outstanding volume of other money market
instalments increased, rates on these instruments moved up
as well. The rate increases on short-term instruments fol
lowed the change in Regulation Q announced by the Board
of Governors of the Federal Reserve System after the close
of the securities markets on December 1. Under the Regu
lation as amended, effective January 1, 1962, member
banks are permitted to pay up to 3 Vi per cent on all savings
deposits and on time deposits having a maturity of at least
six months, and up to 4 per cent on savings deposits left in
the banks for one year or more and on time deposits having
a maturity of at least one year. The maximum rate pre
viously in effect was 3 per cent. In the announcement of the
change in Regulation Q, the Board stated that its action
was designed to increase the freedom of member banks to
compete for savings and time deposits, including foreign
deposits that might otherwise move abroad in search of
higher returns. During December a substantial number of
banks in New York and elsewhere announced that they
would be paying higher rates in 1962.
Interest rates on longer term securities tended to rise
somewhat during the first half of the month, as the mar
kets reacted to the revision of Regulation Q, the improved
tone of business, and the relatively heavy overhang of un
sold corporate and municipal as well as Government se
curities in dealers’ hands. By mid-December, however,
following a month-long decline of prices, investor senti
ment improved somewhat, bonds released from syndicate
agreements found better investor acceptance at moderately
higher rates, and dealer inventories were worked down. On
December 18, the Treasury announced the results of its
exchange offering made in November to holders of $970
million of Series F and G Savings bonds maturing in 1962.
Holders of $320 million of Savings bonds accepted the
Treasury’s offer to exchange them into 3% per cent Treas
ury bonds maturing May 1:5, 1968.
M EM B E R B A NK RESERVES
Operating transactions absorbed some $600 million
reserves during the first two statement weeks of the month,
as a decline in float during the first week was followed by a
sizable pre-Christmas outflow of currency in the second.
In the second half of the month, however, operating trans
actions added $860 million reserves, particularly in the third
week when a record-high increase in float provided nearly
$900 million reserves. This more than offset the sharp rise
in required reserves that resulted from the midmonth and
year-end bulges in loans to corporations making tax and
dividend payments and to Government securities dealers.
The pressures of year-end loan demand tended to be con
centrated in the money center banks. As a result, these
banks acquired sizable amounts of Federal funds and, in
addition, borrowed fairly substantial sums from their Fed
eral Reserve Banks. Such borrowings averaged more than
$100 million and $200 million, respectively, in the third
and fourth statement weeks of December.
System open market operations in December generally
offset the fluctuations in reserves stemming from market
factors. During the first two statement weeks, System
operations supplied $460 million of reserves, while absorb
ing about $440 million in the second half of the month.
Between Wednesday, November 29, and Wednesday,
December 27, System holdings of securities rose by $265
million, with holdings maturing within one year increasing
by $471 million and holdings in the more-than-one-year
category declining by $206 million. The maturity distri
bution of System holdings during the month was influenced
by the passage of one issue held by the System Account
from the more-than-one-year to the less-than-one-year
category.
FEDERAL RESERVE RANK OF NEW YORK
Changes in Factors T ending to Increase or Decrease Member
Bank R eserves, December 1961
9
at 99.) Liquidation by investors also developed in the
2V2 per cent “tap” issues, one of which fell as much as
In m illions of d o llars; (-{-) denotes increase,
(— ) decrease in excess reserves
a point by mid-December.
In the latter part of the month, liquidation tapered off
Daily averages—week ended
and
prices tended to stabilize. A feeling developed in the
Net
F a c to r
changes
Dec.
Dec.
Dec.
Dec.
market that, after four weeks of price declines, the levels
6
27
13
20
reached in mid-December might be sustainable for a
Operating transactions
time.
This view was buttressed by a stronger tone in other
Treasury operations* .............................. — 40 - f 38 — 143 4- 88 — 88
_ 213 + 84 4-877
4- 286 4-1034
bond
markets and by weakness in the stock market. From
Currency in circulation......... ............... — 74 — 360 — 136 — 99 — 668
Gold and foreign account...................... — 8 — 45 — 9 — 23 — 83
mid-December
to the month end, prices of Treasury notes
12
Other deposits, etc................................... — 45 + 42 4- 38 — 23 +
and
bonds
moved
generally 20/32 higher to 8/32 lower.
Total ....................................... — 384 — 241 4- 627 4-231 + 238
Trading
volume
during
most of December was light,
Direct Federal Reserve credit transactions
Government securities:
although
activity
picked
up
a bit in the latter part of the
85
Direct market purchases or sales---- + 514 4 . 60 — 327 — 162 +
—
4- 48
66
—
Held under repurchase agreements... — 114
month
as
commercial
banks
and others switched the ma
Loans, discounts, and advances:
4- 69 4-107 + 115
Member bank borrowings..................... — 66 +
6
turity
composition
of
their
portfolios,
primarily for tax
1
—
—
Other ................................................... — 1
+
2
Bankers* acceptances:
purposes.
Bought outright .................................. +
2 4- 2 + 7
2 +
1 +
—
Under repurchase agreements.............
—
—
In the Treasury bill market, rates held at a generally
Total ....................................... -4- 334 4 . 65 — 256 — 2 + 141
higher level than during any prior month of the year, with
Member bank reserves
outstanding three-month bills fluctuating narrowly around
With Federal Reserve Banks................. — 50 — 176 4- 371 4-229 + 374
30
Cash allowed as reservest....................... — 127 + 153 4.110 — 106 +
2.60 per cent and six-month bill rates holding to a range
4 - 481 4 . 123 + 404
Total reservest ........................................ ............. — 177 — 23
between
2.85 and 2.90 per cent for most of the month.
—
475
—
140
568
Effect of change In required r e se r v e st...
+ 4
7
During
the
last week of the month, rates moved up further
—
17
164
Excess reservest ................................................. — 177 + 24
4- e
to
reach
2.72
per cent and 2.97 per cent, respectively, for
Daily average level of member bank:
loot
109
216
Borrowings from Reserve Banks...........
40
36
the
two
maturities.
The upward movement of bill rates,
574
661$
568
557
Excess reservest .....................................
544
465
461$
528
341
Free reserves! .........................................
509
which began in November, followed from expectations of
increased credit demands, the change in Regulation Q, and
Note: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
a tighter money market toward the end of December.
t These figures are estimated.
t Average for four weeks ended December 27, 1961,
Rates on other short-term instruments also rose during
the month as a result of the growth in outstanding volume
of these instruments in late 1961, as well as the rise in
TH E G O V E R N M E N T SE C U R ITIES M A R K E T
Treasury bill rates. The volume of bankers’ acceptances
A heavy tone developed in the market for Government outstanding rose by more than $60 million in November,
notes and bonds during the first half of the month, as to reach another record high (nearly $2.6 billion), while
the announcement of the revision of Regulation Q was commercial paper outstanding rose by more than $200
interpreted by some market participants as perhaps set million, reaching a record for the month ($5.3 billion).
ting the stage for less easy credit conditions and a general In the first half of December, the major sales finance
rise in interest rates in the future. A similar interpretation companies selling paper directly to investors raised rates
was placed on the growing volume of optimistic business on two- to eight-month maturities by Vs to lA per cent,
news, including the rise in the Federal Reserve index bringing the rate on 60- to 89-day maturities to 2% per
of production for November, the rising level of consumer cent. On December 15, dealers raised their rates on com
spending, the increased demand for steel, and the surge mercial paper by Va per cent, making the rate on fourof stock market price indexes to all-time highs on De to six-month paper 3V4 per cent. Dealers in bankers’
cember 12-13. Fairly sizable offerings by investors and acceptances raised their rates by Vs per cent on December
professionals of intermediate- and long-term issues ap 14, and again on the 19th, bringing the rate on maturities
peared on the market intermittently during early Decem up through 90 days to 3 per cent (offered).
ber, with selling pressure centered on relatively new or
O TH ER S E C U R IT IES M A R K E T S
recently reopened issues still in the process of market
absorption. The 3% per cent bonds of 1974, for example,
The market for tax-exempt securities showed some
which had begun the month at 98%2 traded as low as heaviness early in the month, and a number of issues
97 on December 13 before closing at 97%2- (This issue offered in preceding months and not fully distributed were
was reopened by the Treasury in a November refunding “cut loose” from syndicate price restrictions. Subse
10
MONTHLY REVIEW, JANUARY 1962
quently, the tone of the market improved in line with lion in December 1960. Investor response to new taxdevelopments in other sectors of the capital markets, and exempt offerings ranged generally from fair to good. The
in response to buying by commercial banks trying to largest tax-exempt issue of the period was a $157 million
improve their earning power in the light of anticipated Florida Turnpike Authority 43A per cent revenue bond
higher rates on savings deposits permissible after the first issue which will mature in 2001 and is noncallable for
of the year. The Blue List of advertised dealer offerings twelve years. Reoffered to yield 4.81 per cent, the issue
was worked down from a near-record high of about $550 was fairly well received.
million early in the month to less than $400 million on
The market for seasoned corporate bonds generally
December 19— the lowest level since September. Follow followed the same pattern as the market for tax exempts,
ing the usual lull in new offerings in the final week of the steadying in the second half: of the month following some
year, the Blue List total was cut back further to $330 price markdowns early in December. Although the an
million at the year end. As the tone of the market im nouncement on December 20 of a $300 million utility
proved, prices of issues released from syndicate restric flotation in February 1962 turned the market a bit easier,
tions early in the month rose from the levels reached prices subsequently recovered. Over the month as a whole,
immediately following syndicate terminations. Moody’s Moody’s average yields on seasoned Aaa-rated corporates
average yield on seasoned Aaa-rated tax exempts stood rose by 6 basis points to 4.44 per cent. The volume of
at 3.31 per cent at the year end, unchanged for December. new offerings declined to $165 million in December,
The volume of new tax-exempt offerings during De compared with $400 million in November and $300 mil
cember remained relatively heavy at $555 million; this lion in December 1960. Most issues received a favorable
compares with $725 million in November and $440 mil investor response.
Turnover of B usiness Loans at N e w Y o rk City Banks*
At one time a bank’s loan portfolio was regarded as
sound only if it consisted largely of short-term “selfliquidating” business loans. This view is no longer widely
held, as indicated by the sizable volume of term loans now
outstanding. Nevertheless, there has been some concern
that the trend toward longer term bank lending may entail
certain drawbacks. In particular, term lending on an
unduly large scale by commercial banks might eventually
deprive some classes of borrowers of their only source of
short-term credit. Some questions are also being raised
as to whether the emergence of too large a proportion of
long-term commercial bank loans might reduce the mo
bility of credit among industries and regions, and hamper
the ability of the financial mechanism to make possible the
rapid shifts of resources required in a dynamic economy.
This article presents new information on actual turn
over rates and maturity patterns of bank loans. These
data have been derived from the statistics on business
loans outstanding and on loan extensions and repay
ments that are reported weekly by the large New York
City banks. Similar information for certain other types of
loans is also included.
M E A S U R E M E N T OF L O A N M A T U R IT IE S
At least three different concepts of loan maturity are
relevant for analytical purposes. These might be labeled
as (1) original term, (2) effective time to maturity, and
(3) actual duration of a loan. The original term concept
is now employed in the series on “Commercial and Indus
trial Loans Outstanding at Large New York City Banks
by Industry and by Term” issued weekly by this Bank.1
Loans are classified in these statistics on the basis of the
term of the loan at the time it was made. If, for instance,
the original term of a note is one year or less, the loan is
classified as a short-term loan; if the original term is more
than one year, the loan is regarded as a term loan. It then
remains in that category throughout its life.
Effective time to maturity may be defined as the length
*
George Budzeika, Economist, Financial and Trade Statistics
1 These statistics were described in an article “Term Lending by
Division, had primary responsibility for the preparation of this
New York City Banks” in this Bank’s Monthly R eview for Feb
article.
ruary 1961, p. 27.
FEDERAL RESERVE BANK OF NEW YORK
of time remaining till the due date of the loan. If repay
ment has been scheduled in instalments, there will be a
series of due dates, and the time to maturity of the loan
as a whole will be an average calculated on the assumption
that each instalment represents full repayment of a sepa
rate and distinct loan.2 The effective-time-to-maturity
concept thus refers to the anticipated life of loans out
standing as of a given date. Changes in effective maturity
are a useful index of changes in maturities of new loans
and in the volume of repayment flows. Effective time to
maturity differs from the concept of original term, which
similarly refers to the anticipated life of loans, in two
major ways. First, the passage of time affects the remain
ing time to maturity of a given loan, but not its original
term. A loan originally contracted for, say, five years
would after four years have only one year left to run; its
original term, in contrast, would remain five years. Sec
ondly, original term on an instalment loan is determined
by the due date of the last repayment, while effective
maturity recognizes that the average maturity of an instal
ment loan is shorter than that of a single-payment loan
of identical term.
The actual duration of a loan may be described as the
length of time for which the loan actually stayed on the
books.3 This is determinable, of course, only after the
loan has been repaid. As far as an individual loan is
concerned, calculation of the actual duration is relatively
simple. It is, however, a much more complex matter, both
conceptually and statistically, with respect to an entire loan
portfolio, chiefly because during any period of reasonable
length the same dollar may be lent, repaid, and relent
several times, possibly to several different borrowers. A
rough indication of average actual duration is given by
the loan turnover rate. This rate is derived by dividing
the volume of loan repayments over a given period by the
average level of loan balances during that time. Thus, if
loans outstanding over a year averaged $200 million,
while total repayments amounted to $100 million, the an
nual loan turnover rate would be one half and the average
actual duration of a loan dollar approximately two years.
Average loan duration, as calculated from the turnover
figures, of course refers to the average life of loans in a
past period. It does not necessarily indicate the time to
maturity of loans outstanding at the end of the period or
2 The average time to maturity for a given loan or loan port
folio is calculated by multiplying (i.e., weighting) each scheduled
loan instalment by the length of time to its due date, summing
the results, and dividing the total by the outstanding loan volume.
3 Again, account has to be taken of any partial repayments that
may have preceded the final due date.
11
the typical or average term for which loans have been
extended during the period.4 The average duration of
loans is a useful indicator, however, of changes in the
over-all maturity structure of loans. For example, if the
average duration of loans has been declining for some years,
the over-all maturity structure of the loan portfolio has
probably shortened during that period. On the other hand,
if the actual duration of loans has been rising, the average
maturity of the loan portfolio has presumably lengthened.
The present article is primarily concerned with the
actual duration of loans, since this is the most useful
concept for historical analysis of changes in the business
loan maturity structure.
THE M A T U R IT Y A N D T U R NO VER STR UCTUR E OF
L O A N S A T N E W Y O R K C I T Y B A N K S IN 19 6 1
s h o r t -t e r m b u s i n e s s l o a n s . The rate of turnover of
short-term business loans (i.e., loans with an original term
of one year or less) at large New York City banks in
1961 was calculated at about 6.5 times a year (Table I ) .5
This figure was arrived at by dividing the reported an
nual total of loan repayments by average weekly out
standings for all short-term loans. The loan repayment
figures used include what might be called “bookkeeping”
repayments: repayments of short-term loans that are
immediately renewed.
As can be seen from the table, the turnover rates for a
few categories of business loans were much greater than
those for most others. Loans to commodity dealers and
holdings of bankers’ acceptances were calculated as having
a turnover rate of fifteen times a year and an average
duration of twenty-four days; loans to tobacco manufac
turers were turned over about twenty-nine times a year
and had an average duration of only thirteen days. The
relatively high turnover rate for loans to tobacco manu
facturers reflects semimonthly borrowings from banks for
payment of the excise taxes. These loans are then repaid
from sales receipts.
* The actual duration of a loan may differ from its original
term or from the effective time to maturity, because some bor
rowers may repay loans ahead of schedule while others receivc
extensions or renewals beyond the originally set repayment dates.
In some instances, the right to renew the loan is given to the
borrower in a formal agreement. Loans granted under such agree
ments are usually referred to as revolving credit loans and are
classified in this Bank’s weekly statistics as term loans. In many
instances, however, renewals of short-term loans are granted more
or less routinely even though no formal agreement exists. Because
of the difficulty of identifying such loans, they are classified ls
short-term loans in the weekly statistics.
5 The turnover estimate actually refers to a 52-week period
starting with the week ended October 5, 1960 and terminating
with the week ended September 27, 1961.
MONTHLY REVIEW, JANUARY 1962
12
When loans to these few groups were excluded from
the calculation of over-all turnover, the average for the
remaining 86 per cent of business loans amounted to 4.7
times a year, giving an average duration of seventy-eight
days. The turnover rates and loan durations ranged from
3.1 times and 118 days for loans to construction concerns
to 5.4 times and sixty-eight days for loans to food and
liquor producers.
“ G EN U IN E” VERSUS “ CONTINUOUS” SHORT-TERM BUSINESS
The reported rate of turnover of somewhat over
four times annually for most loan groups conforms to the
standard description of short-term loans as typically having
a maturity not exceeding ninety days. In fact, however,
the actual duration of these loans appears to average con
siderably longer than ninety days because many of these
nominally short-term loans are continuous— that is, they
are immediately renewed whenever they come to maturity.
For the purpose of this discussion, a continuous loan
is defined as a loan with an original term of one year or
loans.
Table I
RATE OF TURNOVER OF SHORT-TERM BUSINESS LOANS
BY INDUSTRY GROUPS, AT LARGE NEW YORK CITY BANKS
OCTOBER 1960 — SEPTEMBER 1961
Average amount
outstanding
Annual
volume of
Annual Average
repayments
rate of duration
In
(in millions millions As per cent turnover in days
of
total
of dollars)
of
dollars
Industry group
Manufacturing and mining:
Food and liquor ...................
Tobacco ........................... ......
Textile, apparel, and leather
Metals and metal products.
Petroleum, coal, chemicals,
and rubber .........................
Other manufacturing and
mining .................................
1,250
3,430
2,320
4,790
230
120
520
970
5
3
11
21
1,020
230
1,420
340
3,110
.................
Public utilities (including
transportation) .........................
Trade
........... ...............................
Commodity
dealers
5.4
28.6
45
4.9
68
13
81
75
5
4.4
83
7
4.2
87
620
13
5.0
73
4,290
280
6
15.3
24
2,210
450
10
4.9
75
..............................
440
140
3
3.1
118
All other business loans:
Bankers’ acceptances held...
Ail other ................................
3,740
2,020
250
450
5
10
15.0
4.5
24
81
Total classified loans ....... .
30,040
4,610
100
6.5
56
Memorandum item:
All loans excluding those to
tobacco manufacturing and
commodity dealers, and hold
ings of bankers' acceptances
18,580
3,950
86
4.7
78
Construction
Note: Because of rounding, figures do not necessarily add to totals.
Source: Weekly reports by large New York City banks to the Federal Reserve
Bank of New York.
less that has actually remained continuously on the books
for more than a year. In principle, the way to determine
whether an individual loan account is continuous is to
inspect the daily loan balances in the account over a whole
year. If the loan account has been fully “cleaned up” at
least once, then the loan is not a continuous short-term
loan. If, however, the loan account was not cleaned up
during the one-year period* the lowest balance observed
during the year is said to represent the amount of con
tinuous borrowing.
Direct measurement of the actual amount of continuous
loans by inspection of individual loan accounts would be
a statistical undertaking of major magnitude. However,
rough approximations of the order of magnitude of con
tinuous loans at New York City banks in 1961 are
derivable from data for extensions and repayments of
business loans, which in turn permit inferences as to the
volume of renewals. Once an approximate figure for the
dollar volume of renewals is obtained, the dollar volume
of continuous loans can be estimated by dividing the
volume of renewals by the number of renewals, which
is related to the rate of turnover of short-term loans
generally.6 If, for example, an outstanding loan of $100
is renewed four times during a year at evenly spaced
intervals (so that total renewals for the year amount to
$400), then $100 can be said to have been outstanding
in continuous loans.
On the basis of this method, an amount approaching
half the average volume of short-term loans outstanding at
the City banks during 1961 appeared to be continuous.
The highest proportion of continuous loans was found to
occur in wholesale trade, metal manufacturing, and “other”
manufacturing. The proportion seems to be negligible for
such borrower groups as tobacco manufacturers and
6 The volume of loan renewals was estimated by juxtaposing
the loan extension data reported in the Weekly Reporting Bank
Series with data for loan extensions shown in the Quarterly Inter
est Rate Survey. Loan renewals were not added to extensions (or
repayments) in the Weekly Reporting Bank Series prior to 1960.
Beginning with January 1960, however, reporting procedures were
changed, so that renewals were included in both the loan repayment
and extension figures. On the other hand, loan renewals have al
ways been reported among extensions in the Quarterly Interest Rate
Survey. A comparison of loan extension figures of both series for
comparable periods in 1958 and 1961 provided the basis for esti
mating the dollar volume of renewals in 1961.
The average number of renewals per year of continuous loans
was assumed to be four times per year, in accordance with the
findings for the annual rate of turnover of all short-term loans.
Short-term loans consist of genuine short-term and continuous
loans. Given a turnover rate of close to four times a year for the
aggregate of all short-term loans, and assuming the typical dura
tion of genuine short-term loans to be close to ninety days, the
nominal maturity of continuous loans must also be close to ninety
days.
13
FEDERAL RESERVE BANK OF NEW YORK
commodity dealers.7
Because of this large volume of continuous loans, the
average duration of short-term loans (excluding holdings
of bankers’ acceptances and loans to commodity dealers
and tobacco manufacturers) is in actuality about six
months or more, rather than seventy-eight days.8
t e r m b u s in e s s l o a n s .
It was not feasible to make a
separate calculation of the turnover of term loans outstand
ing at New York City banks by the same method, because
the available statistics for term loan repayments are in
flated by the inclusion of repayments of revolving credits.
More detailed data covering a few of these banks suggest
a turnover rate for term loans of less than Vz times per
year, indicating an average duration of two to three years.
The results of these turnover and
maturity calculations for business loans at New York City
banks may be summarized as follows. The average dura
tion for the bulk of short-term loans appears to be about
six months. The remainder of short-term loans, comprising
about one seventh of the total, shows a duration of about
fifteen to thirty days. Assuming that the comparable figure
for term loans is in fact two to three years, the average
duration for all business loans, short term and long term,
probably lies in the range of 1V4 to 1% years.9
all
b u s in e s s l o a n s .
The turnover of consumer instalment
loans at the City banks in 1961 was estimated at slightly
more than once a year.10 The average turnover rate for
loans to nonbank financial institutions— a category that
includes loans to sales and commercial finance companies,
mortgage firms, and other business finance companies—
was estimated at about three times a year during 1952-58.
No estimates were feasible for later years.
other
loans.
7 These estimates refer to the dollar volume of loans outstand
ing only. The number of borrowers who borrow continuously in
the form of short-term loans evidently is much smaller than the
number of genuine short-term borrowers. Thus, if the active
portion of loans turns over four times a year, and we assume that
each extension is to a different borrower, then four times as many
borrowers are involved per dollar of active loans outstanding than
for a dollar of continuous loans.
8 Largely similar findings were developed by the Federal Re
serve Bank of Chicago in a recent study of large commercial
banks in the Seventh District. These were reported in an article
entitled “Liquidity of Business Loans” in the Chicago Bank’s
Business Conditions for March 1961.
9 The average duration for all business loans was calculated by
multiplying (i.e., weighting) the average duration o f short-term
and term loans by the corresponding dollar volumes of outstand
ings, summing the results, and dividing the total by the volume of
all business loans outstanding.
10 The reported turnover estimate was calculated on the basis
of data for all commercial banks in the Second District. These,
however, are heavily weighted by the large New York City banks.
Since no repayment figures are available, turnover rates
for securities loans were estimated on the basis of weekly
and daily changes in outstandings at individual New York
City banks. The 1961 turnover rate of bank loans for
purchasing or carrying United States Government securi
ties was estimated as at least forty times a year, while the
rate for all other securities loans appeared to be five times
or more a year, implying loan durations of, respectively,
at most nine and seventy-five days.
a l l l o a n s . The results of the loan turnover estimates
for New York City banks are summarized in Table II. As
Table U
RATE OF TURNOVER OF LOANS AT WEEKLY REPORTING
MEMBER BANKS IN NEW YORK CITY, 1961
Average amount outstanding
Type of loan
In millions
of dollars
As per cent
of total
Annual
rate of
turnover
Loans for purchasing or carrying
United States Government secu370
2
more than 40
1,510
8
more than 5
Short-term business loans:
Tobacco manufacturing .................
Commodity dealers .........................
Bankers' acceptances .....................
110
280
300
1
2
2
29
15
15
Subtotal ......... .................................
2,570
14
about 15
Other short-term business loans ....
4,010
22
about 2
Term business loans ..........................
5,830
32
less than V6
Loans for purchasing or carrying
other securities ............... ..........
Loans to nonbank financial institu
tions ...................................................
1,420
8
about 3
Consumer instalment loans ..............
1,080
6
about 1
............................ ............
12,340
67
about VA
Agricultural loans ..............................
10
*
t
Real estate loans ................................
780
4
t
Loans to foreign banks .....................
330
2
t
Loans to domestic commercial banks.
480
3
t
All other loans .....................................
1,880
10
t
Subtotal ..........................................
3,480
19
t
18,390
100
t
Subtotal
Note: Because of rounding, figures do not necessarily add to totals. The aver
ages of loans outstanding were calculated on the basis of weekly figures for
January through November 1961. The turnover figure for term loans is
based on data for only a few banks. The figure for outstandings of con
sumer instalment loans is partially estimated. Figures for business loans
presented in this table are slightly larger than those presented in Table I
because of inclusion here of a few additional banks of relatively small size.
* Less than 0.5 per cent.
t Not estimated.
Source: Weekly reports by New York City banks to the Federal Reserve Bank
of New York.
H
MONTHLY REVIEW, JANUARY 1962
ESTIMATED TURNOVER OF BUSINESS LOANS AT
LARGE NEW YORK CITY BANKS, 1952-61
F o u r-q u o rte r m o v in g a v e ra g e s
A n n u a ! ra te
A n n u a l ra te
M illio n s of d o lla rs
1952
1953
M illio n s of d o llo rs
1954
1955
1956
1957
1958
1959
1960 1961
N o te: Business le a n figures in clu d e loans to concerns in m a n u fa c tu rin g e n d
m in in g (ex cluding fo o d , liq u o r, a n d tobacco m a n u fa c tu re rs ), w h o le s a le
e n d r e t a il tra d e (e xclu d in g co m m o d ity d e a le rs ), p u b lic u tilitie s , a n d
co n struction. Shaded areas represent recession perio d s, according
available statistics on outstanding business loans classified
according to original term. These show a rise in the pro
portion of term loans in the business loan total from 52
per cent in October 1955 to 55 per cent in October 1957,
and 64 per cent in October 1959, followed by a drop to
61 per cent in October 1961.12
The failure of the average duration of business loans to
rise in spite of the reported increase in the proportion of
term loans can be explained by a combination of factors.
First, the average duration of term loans may well have
declined over these years, thus counteracting at least par
tially the effects of the rising proportion of term loans.
Fragmentary information available for a few banks, as
well as interviews and contacts with commercial bankers,
tends to confirm that some shortening of the average dura
tion of term loans has taken place on balance over the
period as a whole, although probably not in every year.
A further factor is the apparent conversion in recent
years of some continuous short-term loans into formalized
term loans or revolving credits (which are counted as
term loans in existing statistics). Such conversion would
not affect turnover, but would raise the proportion of
loans which are classified as term loans on the basis of
original term.13
to ch ro n o lo g y of the N a tio n a l Bureau of Economic Research.
c y c l i c a l b e h a v i o r . As can be seen from the chart, the
turnover rate of the total of all business loans has risen
during each of the last three business recessions, as well
as during some periods immediately preceding or follow
ing the recession. In 1953-54 the rise was confined to
the recession period, with the turning points in both the
turnover rate and in general business activity occurring
at about the same time. As regards the 1957-58 and the
1960-61 recessions, however, the rise in the turnover rate
started prior to the downward turning points in business
activity (by about six and two quarters, respectively).
Moreover, the rise in the turnover rate of 1957-58 con
B U S I N E S S L O A N T U R N O V E R , 19 5 2 -6 1
tinued after the recession had ended. The chart also
t r e n d . Available historical information for loan turn
over at the City banks suggests that there has been no reveals that the turnover rate began to decline in the early
major change in the average duration of business loans stages of the 1955-57 business expansion. The turnover
between 1952 and 1961, apart from cyclical swings (see rates for business loans to individual industry groups (not
chart).11 This contrasts with the impression given by the shown in the chart) also revealed a definite cyclical pat
tern. This was most pronounced for loans to manufac
turers of metals and metal products and to concerns in
11 Turnover rates for 1952 through 1961 were calculated for the petroleum, chemical, coal, and rubber industries. For
loans to the following industry groups: manufacturing and mining
can be seen in this table, about two thirds of the loan
total (comprising the bulk of business loans, loans to
nonbank financial institutions, and consumer instalment
loans) was estimated as having been turned over about
\ lA times during 1961. About one seventh of the total
revealed a very high turnover rate— about fifteen times
per year. For about one fifth of the loan total, turnover
estimates were not feasible, due to gaps in statistical
reporting.
(excluding food, liquor, and tobacco); retail and wholesale trade;
public utilities; and construction. Loans to food, liquor, and
tobacco producers; commodity dealers; and “all other” borrowers
as well as holdings of bankers* acceptances all had to be excluded
from the calculations, because their turnover figures displayed
highly irregular behavior. The excluded categories accounted for
about one fifth of all business loans outstanding at the City banks
during 1961.
12 These figures refer to the same industry groups for which the
turnover estimates were calculated.
13 A shortening of the over-all average duration of continuous
short-term loans is another possible factor, but it is not known
whether such a shortening has in fact occurred.
FEDERAL RESERVE BANK OF NEW YORK
other industry groups, cyclical movements were much
narrower.
The cyclical changes in the turnover of business loans
primarily reflect the behavior of loan repayments. The
rate of turnover, it may be recalled, is the ratio of loan
repayments to loans outstanding. Changes in the volume
of outstanding loans are determined by the relative size
of loan extensions and repayments. In the case of busi
ness loans, cyclical fluctuations have on the whole been
sharper for repayments than for extensions. Fluctuations
in turnover, therefore, primarily tend to reflect the swings
in repayments.
In general, the major factor underlying cyclical changes
in business loan repayments and turnover appears to have
been the strength of the business situation and, conse
quently, of business loan demands. The earlier stages of
business expansions have been accompanied by rapid de
clines in repayments and thus in loan turnover. In the
later stages of expansion, however, the rise in loan ex
tensions and loans outstanding tends to slow down. At
the same time, loan repayments bottom out and begin to
rise, reflecting the higher volume of loans outstanding as
a result of the preceding credit expansion. As repayments
increase relative to loan extensions and outstandings, the
turnover rate starts to rise.
With the onset of recession, the demand for business
loans slackens or declines. With reduced investment in
new equipment and inventories, business funds are re
leased for the repayment of bank loans. As a result, loan
15
extensions level oS or turn down while repayments con
tinue to rise, so that the volume of loans outstanding
eventually starts to recede. With repayments continuing
to rise and outstandings falling, the rise in the rate of
turnover thus becomes more rapid. Finally, more or less
coinciding with the end of the business contraction, re
payments level off and credit once more begins to expand.
The cyclical pattern starts all over again.
C O N C LU D IN G R E M A R K S
On the whole, these results suggest that the actual dura
tion of short-term loans made by New York City banks
has perhaps been longer, and that of term loans shorter,
than is commonly believed. The actual duration of the
bulk of short-term business loans appears to be about six
months, reflecting the fact that nearly half the dollar vol
ume of these loans seems to be continuous. The dura
tion for term loans, estimated on the basis of very limited
data, appears to be on the order of two to three years.
While subject to sizable cyclical variations, the average
duration of loans seems to have remained about the same
over the past ten years, despite a substantial rise in the
proportion of term loans. To some extent, the rise in the
proportion of long-term loans shown by the statistics may
simply reflect the conversion into revolving credits and
formal term loans of what were previously continuous
short-term loans. Moreover, maturities on formal term
loans may have shortened on balance over the period as
a whole.
@FedFRASER