Full text of Economic Policy Review (Federal Reserve Bank of New York) : January 1964, Vol. 46, No. 1

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FIFTIETH A N N IV E R S A R Y

1964

M O N TH LY R E V I E W
JANUARY

1964

Contents
Monetary Policy and the Balance of
Payments: A n Address by
William M cChesney Martin, Jr...
Recent Developments in the Defense
of the Dollar: A n Address by
Alfred Hayes .........................
Foreign Exchange Markets,
July-December 1963 ................
The Business Situation .................
The M oney Market in December...
Fiftieth Anniversary of the
Federal Reserve System ...........

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2

MONTHLY REVIEW, JANUARY 1964

M onetary Policy and the B alan ce o f Paym ents*
By W il l ia m M c C h e sn e y M a r t in , J r .
Chairman, Board of Governors of the Federal Reserve System
In a world as dangerous and uncertain as ours, we are
fortunate to live in a country whose people and institu­
tions consistently rise to their greatest heights in times
of greatest strain.
Just as twenty-two years ago this nation withstood the
shock of a savage bombing attack at Pearl Harbor and
then moved forward with strength of purpose, so two
weeks ago it withstood the shock of an assassin’s fire and
now— in determination as well as in anguish— is moving
forward once again.
The continuity of this movement, as a new President
has taken over from the old and pledged himself to carry
onward the national course, attests the solidity of our
constitutional foundations and the continuing vitality of
the institutions we have built upon them.
It is a matter of some pride to me that the Federal Re­
serve System, which I have the honor to represent here
tonight, is one of those institutions. And on this date so
near the fiftieth anniversary of the signing of the Federal
Reserve Act on December 23, 1913, it is also a matter
of some pride to all of us in the Federal Reserve that the
System was able to be of some service to its country in this
most recent moment of crisis, as in other crises over half a
century.
Within minutes after the first news flashes out of Dallas,
the Federal Reserve moved into the foreign exchange
markets in defense of the dollar, and began offering for­
eign currencies at prior prevailing exchange rates. With
that offer, and the market’s knowledge of the magnitude
of the resources available, the immediate crisis was safely
passed.
That is good, so far as it goes. But it does not, of
course, go very far. The problem of our international
balance of payments did not spring into being overnight,
and it cannot be resolved overnight by any single stroke,

’“Remarks before the Annual Dinner Meeting of the United
States Council, International Chamber of Commerce, New York
City, December 9, 1963.




however dramatic. It is a serious, a complex problem, and
it continues.
Four months and four days before his life was tragically
ended, President Kennedy—whose programs President
Johnson has vowed to continue— sent a special message to
the Congress on the international payments problem and
the steps to be taken to meet it. In that message, he de­
clared:
. . . continued confidence at home and coopera­
tion abroad require further administrative and
legislative inroads into the hard core of our con­
tinuing payments deficit— augmenting our longrange efforts to improve our economic perform­
ance over a period of years in order to achieve
both external balance and internal expansion—
stepping up our shorter run efforts to reduce our
balance-of-payments deficits while the long-range
forces are at work— and adding to our stockpile
of arrangements designed to finance our deficits
during our return to equilibrium in a way that as­
sures the continued smooth functioning of the
world’s monetary and trade systems.
In that same message, President Kennedy also said:
. . . this nation will continue to adhere to its his­
toric advocacy of freer trade and capital move­
ments, and . . . will continue to honor its obliga­
tion to carry a fair share of the defense and de­
velopment of the free world. At the same time,
we shall continue policies designed to reduce un­
employment and stimulate growth here at home
—for the well-being of all free peoples is inex­
tricably entwined with the progress achieved by
our own people. I want to make it equally clear
that this nation will maintain the dollar as good
as gold, freely interchangeable with gold at $35
an ounce, the foundation stone of the free world’s
trade and payments system.

FEDERAL RESERVE BANK OF NEW YORK

No one could miss the firmness of that commitment to
“maintain the dollar as good as gold”. Neither could any­
one who heard or read President Johnson’s message to the
Congress on November 27 miss the equal firmness of his
“rededication of this Government” to “the defense of
the strength and stability of the dollar”.
Likewise, no one could miss the emphasis upon such
principles as “freer trade and capital movements”, nor the
stress upon the need to pursue simultaneously the inter­
related policy objectives of internal expansion and external
balance without assignment of priority.
The Federal Reserve, for its part, is deeply engaged in
the simultaneous pursuit of those interrelated policy ob­
jectives, and it is to that engagement I should like to turn
now.
As many of you are aware, basic Federal Reserve poli­
cies, both domestically and internationally, are reviewed
and determined every three weeks in the nation’s capital
by the Federal Open Market Committee, a statutory body
representing the entire Federal Reserve System.
At a meeting twelve months ago— on December 18,
1962, to be exact— the Committee came to the conclusion
that it would be dangerously inappropriate to continue
further the extensive degree of credit ease that had been
long prevalent— since at least the beginning of the 1960’s.
Accordingly, it redirected its policy toward lessening that
degree of ease and toward “accommodating moderate fur­
ther increases in bank credit and money supply, while
aiming at money market conditions that would minimize
capital outflows internationally”.
Over the past twelve months, the wording of the Com­
mittee’s over-all policy directive has been changed a num­
ber of times but only, and always, to advance policy goals
that have, themselves, remained fundamentally the same.
Some thoughtful people would contend that there is an
incompatibility between monetary and credit conditions
that will help promote sustainable domestic economic ex­
pansion and those that will foster balance in our interna­
tional payments, and that it is not possible for monetary
policy at one and the same time to aim at both success­
fully. But it would be unavailing for a central bank,
or for government in general, to do less than attempt to
accomplish both. Monetary and credit conditions that
are inconsistent with long-run payments balance could
hardly serve to promote sustainable economic expansion
domestically. And monetary and credit conditions that are
inconsistent with sustainable domestic economic growth
could hardly serve to promote long-run balance in inter­
national payments.
Policies designed to combine orderly economic growth
with external equilibrium are appropriate for every coun­




3

try, large or small. They are vital, however, for a country
such as the United States, the currency of which is exten­
sively used by the traders, bankers, and investors of many
other countries as well as of its own in settlement of inter­
national transactions.
Any country suffering from persistent erosion of its
monetary reserves faces a threat that confidence may de­
cline in the value of its currency internationally. But when­
ever any country’s currency lacks acceptability and circu­
lation in world markets, its residents can avoid some of
the consequences of currency instability by using a more
stable currency as their unit of account. The dollar, for
instance, is so used in many countries whose currencies
are suffering loss of purchasing power at home and depre­
ciation in value abroad. In such cases, the currency de­
preciation will scarcely affect nonresidents at all because
their commercial and financial transactions with that coun­
try will generally be denominated and settled in one of
the two main international currencies, the dollar or the
pound sterling.
In the case of our country, however, neither the United
States nor even foreign traders, bankers, and investors can
easily switch from their use of the dollar to another cur­
rency. Moreover, the predominant position of the dollar
in international trade and finance means that uncertainty
about the dollar generates uncertainty about all other cur­
rencies of the free world. In 1931, the troubles of sterling
led, either immediately or within a few years, to troubles
for every other currency.
Today, the dollar is more widely used in international
economic relations than sterling was thirty-two years ago,
and any trouble of the dollar would under present condi­
tions generate trouble for all other currencies— and in turn
more trouble for the dollar itself.
Thus, uncertainties about the dollar affect not only the
United States economy but the world economy as a whole.
Therefore, the Federal Reserve cannot look at the dollar
solely from the point of view of its function as a domes­
tic currency. It must also consider the role of the dollar
as the main international currency of the free world.
The basic strength of the dollar, of course, lies in the
health of the United States economy, in the stability of
the dollar’s purchasing power, in the variety and com­
petitiveness of United States goods and services available
in international markets, in the size of United States
markets for foreign short- and long-term capital— and in
the fact that, adhering to a commitment involving the
faith and credit of the United States, we stand ready to
sell gold on demand at the fixed rate of $35 an ounce to
foreign monetary authorities for legitimate monetary pur­
poses. This gold convertibility permits foreign central

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MONTHLY REVIEW, JANUARY 1964

banks to treat dollars as the equivalent of gold and there­
fore to keep sizable working balances and reserves in dol­
lars. These foreign dollar holdings have become an essen­
tial part of our own and of the world’s financial system.
In order to fulfill its commitment to gold convertibility,
the United States needs adequate gold reserves. These re­
serves need not be so large as to cover all dollar holdings
of foreign monetary authorities; in this respect, the United
States position is like that of a bank, and banks do not
— and need not—hold cash balances equal to their liabili­
ties. But the gold reserves must be large enough to give
full assurance that even under adverse circumstances the
United States would at all times remain able to fulfill all
legitimate requests of foreign monetary authorities for gold
purchases. That we stand ready to use our gold to meet
our international obligations— down to the last bar of
gold, if that be necessary— should be crystal clear to all:
the Federal Reserve itself, let me remind you, has ample
power under the Federal Reserve Act, should the neces­
sity arise, to suspend the statutory reserve requirements
against Federal Reserve deposits and notes, and to make
any needed part of our gold stock available for sale to
foreign monetary authorities.
The dollar not only needs protection from any suspicion
that the United States might fail to live up to all its mone­
tary commitments to foreigners, but it must be guarded
against exchange market disturbances stemming from any
deficit in our international payments as well as from defi­
cits experienced by other leading countries. The most im­
portant contribution of the Federal Reserve to the solu­
tion of this second problem has been its decision to engage
again in foreign exchange operations, including the crea­
tion of a network of interchanges of currencies, commonly
called “swap arrangements”, with foreign central banks.
These arrangements by now have added more than $2
billion to the sums potentially available for the defense of
the dollar and of other leading currencies in case of need.
Their value has become particularly clear during the two
great crises of recent years: the very recent one, to which
I referred earlier, and the Cuban missile crisis of October
1962. Apart from actions of the kind already mentioned,
it appears on the basis of experience that the mere exist­
ence of the facilities has prevented any large-scale attack
on the dollar from developing.
This network seems to be complete for the time being,
although from time to time the maximum amounts in­
volved in individual arrangements may be altered to con­
form to changed conditions. For instance, on the day of
the President’s assassination the maximum amounts of two
such arrangements that might have proved insufficient
were raised by 50 per cent within a few hours— although




in the circumstances it actually proved unnecessary to use
those two agreements at all.
And I should refer here to the supplementary step
taken by our Treasury to offer to foreign official holders
of dollars nonmarketable medium-term Treasury obliga­
tions denominated, if desired, in the holder’s currency and
with maturities flexibly tailored to the holder’s needs.
These bonds provide foreign monetary authorities an al­
ternative opportunity to invest accumulated dollars in­
stead of converting them into gold. Thus they help to
conserve our gold resources.
The Federal Reserve’s arrangements for the interchange
of currencies are designed to protect our reserves against
adverse effects from temporary dollar outflows that are
expected to be reversed in the very short run. The Treas­
ury’s new-type bonds are designed to prevent repercus­
sions from movements of dollars that may not be reversed
until our payments balance is more nearly restored to
equilibrium, at least in relation to the foreign country in­
volved. But valuable and important as these arrange­
ments are, they cannot deal with the hard core of the
payments problem.
This brings us to consideration of monetary actions to
help reduce and eventually eliminate our payments deficit
without hampering sustainable economic growth. Let us
see how this year’s monetary experience agrees with the
contending claims about the possibility of successfully
achieving the combined goals.
During 1963 the Federal Reserve has gradually les­
sened the monetary ease that had been prevalent for sev­
eral years. The only dramatic step was that taken in July,
when the discount rate of the Federal Reserve Banks was
raised from 3 per cent to ZVi per cent and the maximum
rates payable on time deposits with a maturity of three to
twelve months were raised to 4 per cent. But over the pre­
ceding months, the banking system had been permitted
gradually to absorb its margin of uninvested reserve
funds.
What happened to the money market, to the domestic
economy in general, and to the United States payments
balance in the past year?
The gradual curtailment of reserve availability during
1963 was first reflected in a modest uplift in short-term
rates but between May and November the rise was more
pronounced. All told, rates on money market paper—
Treasury bills, bankers’ acceptances, finance paper, and
prime commercial paper— increased by about % of 1 per­
centage point.
In contrast, the movement in long-term rates was
smaller and mixed. Average yields on Government bonds
and high-grade state and local bonds rose by about X
A

FEDERAL RESERVE BANK OF NEW YORK

of 1 percentage point; those on lower grade state and
local bonds and on high-grade corporate bonds rose much
less. But mortgage rates and rates on lower grade cor­
porate bonds declined slightly. And stock prices ad­
vanced enough to reduce the dividend-price ratio for
common stocks significantly, despite the substantial rise
in corporate profits and dividends.
The moderate lessening of credit ease had apparently
little restrictive effect this year on the availability to the
economy of money and bank credit. The money supply,
computed on the basis of currency outside banks and
adjusted demand deposits, rose at an annual rate in
excess of 3 per cent in the first ten months. In only one
out of the past ten years, 1958, a year of revival from
recession, was there a higher rate of increase. This year’s
growth, moreover, has followed two years of noninflationary economic expansion.
Because time and savings deposits at commercial banks
are in practice readily convertible without penalty into
demand deposits or currency, many observers believe—
and I agree with them—that for purposes of policy deter­
mination these deposits should be counted as part of the
money supply. Counting the money supply on this basis,
the annual rate of increase this year has been IV 2 per
cent, a pace of expansion approached only once in the
past decade— and that was last year.
In the field of bank credit, the expansion this year has
been equally striking. While there has been some slowing
in the second half of the year, total bank loans and invest­
ments so far have risen nearly 7 per cent; bank loans
alone, more than 10 per cent. These rates of increase
have been exceeded in very few of the ten previous years.
The data cited suggest that there has been no lack of
money or bank credit to finance the expansion of business
activity and the making of new investments. Over the
past four quarters, both industrial production and the
gross national product rose 6 per cent. In contrast, con­
sumer prices rose only about 1 per cent and wholesale
commodity prices did not rise at all. Thus, virtually the
entire growth in the national product has reflected real
increases in goods and services available for consumption
and investment.
It seems reasonable to conclude that monetary policy,
during the past twelve months, was consistent with a
policy goal of sustainable economic expansion at stable
prices. But what about the international payments situa­
tion?
The lessening of monetary ease was hardly enough to
have a significant effect either on our surplus of exports
of goods and services over imports or on the volume of
direct investment abroad by United States corporations.




5

And obviously it could not affect our Government expen­
ditures abroad. The only practical impact on our pay­
ments balance in the short run could occur through
changes in bank credit to foreigners, in money market
investment abroad, and perhaps in some other types of
short-term capital movements.
But such an impact could be quite important. A rise
in the outflow of short-term capital was largely respon­
sible for the serious increase in the United States payments
deficit during the second quarter of 1963. In that quarter,
the net outflow of short-term capital from the United
States exceeded $500 million. In contrast, the thirdquarter outflow, after allowing for a reflux of the so-called
window-dressing funds in July, was apparently less than
$200 million. The improvement was partly due to a
shift in United States money market investments abroad,
mainly in flows of United States funds in the so-called
Euro-dollar market. A substantial outflow in the second
quarter was replaced in the third quarter by a modest
reflow.
This change in flows of short-term funds was instru­
mental in cutting the payments deficit in half between the
second and the third quarter. While the remaining deficit
is still too large, it is lower than in any other quarter dur­
ing recent years.
I have not reviewed these data to claim sole credit for
Federal Reserve policy as the cause either of the rise in
our national production or of the decline in our payments
deficit. My purpose has been merely to affirm that mone­
tary policies and credit market conditions consistent with
sustainable growth in our domestic economy were also
consistent with a significant improvement in the capital
account of our payments balance.
All of us recognize, of course, that monetary policy,
while indispensable, is only one of many influences affect­
ing attainment of national goals. Many market factors
and many other Government policies were at work that
had a more decisive impact, both on our domestic eco­
nomic growth and on our balance of payments, than the
modest change in monetary policy could possibly have
had. In addition, labor and management have cooperated
in keeping costs from rising, thus helping to maintain the
stability of average prices and consequently the United
States competitiveness in international markets that is so
essential to the steady improvement of our export balance.
Nevertheless, this year’s experience indicates that mone­
tary measures favorable to the restoration of payments
equilibrium can be formulated and carried out in a way
that precludes harm to orderly domestic economic growth;
and that monetary measures favorable to orderly domestic
economic growth can be formulated and carried out in a

6

MONTHLY REVIEW, JANUARY 1964

way that precludes harm to the attainment of payments
equilibrium.
The experience of the past year also points to another
lesson, familiar to students of monetary policy but per­
haps worth repeating. The great advantage of monetary
policy action lies in its flexibility: it is capable of gradual
application through a succession of steps, each of which
may be as small as deemed prudent at the time.
And, if there had been reason to conclude that the
gradual reduction in the availability of bank reserves was
having an adverse effect on domestic economic activity,
it would have been possible to halt or reverse the process.
Such action would be difficult in the case of other tools of
national financial policy.
It is this gradualness and flexibility which permits the
Federal Reserve to be at the same time cautious and
experimental. In recent years, the Federal Reserve has
amply demonstrated that it is not bound by preconceived
ideas and precedents, and that it is prepared to embark
on new and uncharted courses in adapting its activities to
meet changing needs. In its domestic open market opera­
tions, it extended its operations throughout the maturity
range of Government securities, despite the many advan­
tages of the “bills only” or “bills preferably” practice,
when the extension seemed to offer somewhat greater
advantages in dealing with new economic developments.
And internationally, it re-entered the foreign exchange
market after an absence of thirty years when it became
convinced that open market operations in foreign exchange
were needed to deal with new problems.

The battle against our international payments deficit
produced relatively satisfactory results during the third
quarter. But we cannot be sure that this progress will
prove lasting. Some factors that explain the relatively
small size of the deficit in recent months have been clearly
temporary. And even if we succeed in maintaining the
deficit at the third-quarter rate, we will still have a long
way to go before achieving equilibrium. We have become
prematurely optimistic before, as in early 1961 and again
in early 1962, when it looked for a while as if we had
been successful in reducing the payments deficit to toler­
able levels. We should not make the same mistake again.
This is not the time to relax our efforts.
As there are others far more able to speak for the
Government itself, I have sought deliberately tonight to
confine myself to monetary policy and operations— and
principally, in recognition of the interest you have in
international matters, to the impact of monetary policy
and operations upon the balance of payments.
In so doing, I have been mindful, as I am sure you
have, that even the best efforts and wisest decisions of
the Federal Reserve System could not alone insure the
integrity of the dollar. In this, as in other matters, help
is needed.
President Johnson’s message has given us the assurance
that we shall continue to get that help from the Govern­
ment. But we must also get help from the economy, from
both labor and management. And we must get it not only
when our actions are popular, but also, and more urgently,
when they are not.

Recent D evelopm ents in the D efen se of the Dollar*
By A l fr e d H ayes
President, Federal Reserve Bank of New York

Although the tragic death of President Kennedy has
darkened our thoughts for the past two weeks, we have
had to continue to grapple with those problems and
duties that are still our concern. One of the matters that

*Remarks in a panel discussion on the United States balance of
payments under auspices of United States Council, International
Chamber of Commerce, New York City, December 9, 1963.




he saw clearly as a primary concern to the nation is our
balance of payments and the maintenance of unchallenged
confidence in the dollar as a keystone of the international
financial structure. In discussing our balance of payments
in this distinguished company, I think I can take for
granted that we are all generally familiar with the essential
facts, which have been worked over ad nauseam in the
course of the past five years. This afternoon I would like
to philosophize on the role that monetary policy can be

FEDERAL RESERVE RANK OF NEW YORK

expected to play and in fact has played in approaching a
solution. In a way this is a good moment to take stock on
these matters. The third-quarter figures of course show a
tremendous improvement over the second quarter—yet, if
carefully examined, they also indicate that the hard core
of our deficit still remains to be dealt with. The thirdquarter deficit, an annual rate of around $1V2 billion,
compared with a very disturbing $5 billion rate in the
second quarter. A part of that excellent gain reflected
certain special and nonrecurring items, however, and it
remains to be seen whether we are continuing to do as
well. Current indications are that our goal of payments
equilibrium is still not in our grasp, and I hope that
euphoria over the third-quarter achievement will not give
any American the idea that we can afford to relax our
efforts in this area.
Ever since our payments problem emerged in 1958, or
at least since it became a recognized problem a year or so
later, there has been no doubt that we have had the power
to cure it. The difficulty has lain in selecting a cure that
would not jeopardize either our own economy or the
gradual development of a world economy and payments
system embodying maximum freedom both of private
trade and of private investment. In the decade and a half
after World War II the United States strove mightily, along
with some of our principal Allies and former enemies, to
build this kind of world economy. High standards were
set which none of us could really wish to reject or even
to weaken. And it is against these standards that any
program to restore balance in international payments
should be measured.
Recently, I have become concerned over what I take
to be an increasingly nationalistic approach all over the
world to foreign trade and investment problems, instead
of an approach in keeping with these broad postwar
objectives. I say this even though we clearly enjoy closer
international cooperation than ever before in the field of
technical currency defenses, such as the Federal Reserve’s
swap arrangements, the Treasury’s foreign currency bor­
rowing, more effective use of the International Monetary
Fund, and the cooperative approach to the problems of
the London gold market.
Let us consider our own approach to the problem.
Some items in our payments could safely be attacked
through very specific measures without endangering over­
riding principles. For example, net military outlays abroad
could be cut gradually but substantially as our Allies have
become better able to share the mutual defense burden.
The same is true of our foreign economic aid program.
Furthermore, tying of aid could be pursued without doing
too much violence to our general goal of freer trade, since




7

we were dealing with a special Government spending pro­
gram outside the normal channels of private trade. But
it was clear at the outset that more generalized and im­
personal Government policies would have to be used if
our over-all balance-of-payments program was to have
enough impact on private transactions without supplant­
ing our longer run goals. I have in mind here fiscal and
monetary policy, and also what might be called “wageprice” or “incomes” policy. First, to touch briefly on this
third area of policy, which might be described as the use
of Government influence to help prevent cost increases
that could do severe damage to our trade balance, this is
a new and experimental field in the United States and
accordingly there is a lack of tried and effective instru­
ments to be used. There is also the ever-present risk that
measures may become too specific and encroach unduly
on the private decision-making processes of business man­
agement and of labor. Nevertheless, we have seen interest­
ing progress in this field.
With respect to fiscal policy, I must confess to a feeling
of keen disappointment with the showing of the past two
years. During all this time competent observers have re­
peatedly stressed the promising possibilities in a better
“mix” of fiscal and monetary policy. A tax cut, by reduc­
ing an unduly heavy burden on businesses and individuals,
could strengthen incentives and stimulate business activ­
ity. The consequent growth of credit demand and of
pressure toward firmer interest rates, as well as the im­
proved investment opportunities in this country, would
presumably have a significant effect on net capital out­
flows. At the same time the burden on monetary policy
of stimulating domestic expansion would have been re­
duced. In my judgment this is a logical line of argument
and a desirable policy move. But some two years after
this program was proposed, and despite a wide measure
of support from most sectors of the economy, taxes have
not yet been cut. For those who had hopes that fiscal
policy might gradually become a more flexible instrument
offering interesting possibilities for better meshing with
monetary policy, the experience has been most disillusion­
ing; and we find ourselves thrown back on the necessity
of relying heavily— too heavily in fact— on monetary pol­
icy, which remains by far the most flexible and adaptable
means for wielding a variable and generalized Govern­
mental influence on the course of economic events.
In a broad sense monetary policy may be considered
to cover Treasury debt management as well as Federal
Reserve policy. During the past few years balance-ofpayments considerations have played an important part in
both these areas. The Federal Reserve has tried to en­
courage a firm short-term interest rate structure while still

8

MONTHLY REVIEW, JANUARY 1964

aiding business expansion by accommodating a very sub­
stantial growth of bank credit. This growth is still con­
tinuing. Debt management has contributed significantly
to firm short-term rates by a strategic placing and timing
of new issues in the short-term area, while achieving a
desirable lengthening of the national debt through the
imaginative use of advance refunding techniques.
As for monetary policy, even though detailed balanceof-payments data are not yet available for the third quar­
ter, it seems highly probable that the rise in short-term
market interest rates since the July discount rate increase
and the accompanying increase in Regulation Q ceilings
on time deposit interest rates has been a major cause of
the recent shrinkage in the payments deficit. So far, so
good. It would be rash, however, to conclude that the
heavy net outflow of short-term capital has been eliminated
and that we are in more or less comfortable equilibrium
with the rest of the world. I think too much attention
tends to be directed at the so-called “covered” spreads
between rates on United States three-month Treasury bills
and rates on comparable investments in the United King­
dom or Canada. In the first place, there are countless
other channels for short-term capital to flow out of the
country— bank loans, placements of deposits in the socalled Euro-dollar market, acceptance financing, purchase
of foreign finance paper, to mention only a few. Un­
covered spreads may be of more practical influence than
covered spreads in some areas, and in many instances
uncovered spreads still favor foreign markets. Secondly,
we must bear in mind that our persistent balance-ofpayments deficit has been reflected in sizable surpluses
built up by the European Continent, rather than by the
United Kingdom or Canada. To some extent, sterling and
the Canadian dollar may be considered parts of a bloc of
currencies, including the United States dollar, that have
shared some degree of vulnerability as against the major
Continental currencies.
At this point the question may well be raised whether,
despite the rise in United States short-term rates, credit
has not remained so freely available that more dollars
have been lent abroad than our payments deficit would
warrant. Certainly the shifting of policy toward somewhat
lessened ease has had some beneficial effect in this area,
but I find a good many bankers who believe that their
readiness to lend money to good customers, either here or
abroad, has been little affected to date. Beyond this, we
may also ask whether monetary policy and debt manage­
ment might have done more for the balance of payments
if domestic considerations had left us free to encourage
an upward tendency in long-term, as well as short-term,
rates. Granted that long rates are always determined




primarily by the underlying forces of savings and invest­
ment demand, there is still considerable room for influ­
ence by Federal Reserve or Treasury action. It has been
pointed out many times that comparative rates are only
one factor, and perhaps a relatively minor one, affecting
foreign long-term borrowing in this country, because of
our large and highly organized capital market which per­
mits transactions on a scale that would be impossible in
any other country. This does not mean, however, that
comparative rates are of no consequence.
A serious complicating factor has been introduced into
this picture by the resurgence of strong inflationary tend­
encies on the European Continent in the past year. In a
number of countries these tendencies have been strong
enough to force rather severe Government counteraction,
including restrictive action in the credit area. The French
discount rate increase in November was a case in point.
For a long time now the European authorities have real­
ized that credit moves of this kind involve a risk not only
of damaging the United States efforts toward payments
equilibrium, but also perhaps of being self-defeating if
they serve to attract funds from abroad which would
merely fan the inflationary flames. Hence, the major
European countries have been most cautious in taking
such steps and have tried to accompany them with tech­
nical measures designed to check the inflow of foreign
funds—but it has long been apparent that, if the domestic
inflationary problems should become acute enough, the
authorities would feel forced to act, regardless of the con­
sequences to the United States. Any acceleration of this
trend in Europe toward higher interest rates would of
course pose just that much more serious a problem for
United States monetary policy and could conceivably call
for defensive countermoves on our part. I would like to
point out again, however, that recent European rate in­
creases have been rooted in internal factors in those coun­
tries rather than a response to higher rates here.
Let’s return to the domestic scene and see how the mild
lessening of monetary ease of the last year or so has
affected the domestic credit structure and the domestic
economy. The most striking aspect is the almost con­
tinuous steep growth of total bank credit, and of total
liquid assets of the nonbank public. These rates of growth
have been very little affected so far by the mild policy
changes to which I have alluded. Furthermore, bank
credit and liquid assets have risen faster than gross na­
tional product and are now higher in relation to GNP
than at the trough of the recession in early 1961. This
contrasts sharply with the experience in earlier postwar
expansion periods, when these ratios tended to decline.
They suggest that ample credit has been provided for the

FEDERAL RESERVE BANK OF NEW YORK

economy and that there is no validity to the contention
that monetary policy has been “restricting” domestic
growth. Actually, the rate of increase in real GNP since
early 1961 has been more than 5 per cent per annum— a
very sizable rate of gain, and one comparing favorably
both with earlier periods in this country and with recent
gains abroad. Furthermore, it has been achieved with a
much more modest change in the price level than in pre­
vious years.
In my judgment, the very real gains in over-all per
capita output in the last few years deserve as much atten­
tion as the stubborn problem of unemployment, which
continues to move in the 5 to 6 per cent range. We pay
too little attention to the detailed composition of aggre­
gate unemployment, and we know far too little about the
extent of unfilled job vacancies. It seems significant to
me, for example, that unemployment among married men
has declined rather steadily in the past two and a half
years, dipping below 3 per cent in September. All of us
agree that it is highly desirable to reduce unemployment
to a frictional level, although I am not sure that we know
how to translate this level into statistical terms. I suspect,
however, that specific measures in the direction of im­
proved training and greater labor mobility are a most
promising avenue toward reducing unemployment. Cer­
tainly, many jobs can be found for people once they
acquire the proper training or move to localities where
jobs are available. In tackling our unemployment prob­
lem through measures aimed at a general increase in over­
all demand, we should be mindful of the fact that at a
certain point an intensification of demand may begin to
jeopardize the remarkable record of price stability that
the economy has enjoyed now for about five years. An
atmosphere of very intensive demand could make it much
harder to maintain the balance between wage increases
and productivity gains that has characterized the last few
years and that deserves much of the credit for stable
prices. The monetary authorities must always be alert to
signs of serious bottlenecks in the productive process or
of excessive wage demands that could bring renewed cost
and price pressures, just as we are also mindful of the
need to foster real growth and expanding employment
opportunities.
There is another reason for taking a careful look at
the recent rates of growth in credit and liquidity. With
industry tending to generate savings big enough to take
care of a large share of investment requirements, there
has been a tendency for credit standards to be lowered
and for ample credit to find its way into speculative chan­
nels, as, for example, certain types of real estate, com­
modity, and securities transactions. To some extent, this




9

is characteristic of any period of business expansion; and
I don’t want to convey the impression that I see evidence
of widespread abuse of credit. I do, however, believe that
this kind of consideration suggests the need for a careful
look at the rate of credit expansion from here on.
To sum up, I feel that monetary policy has given a
fairly good account of itself, granted the absence of more
effective coordination of fiscal policy. I believe we have
been of some assistance in the balance-of-payments area
while maintaining an appropriately helpful attitude to­
ward the domestic economy. But as I look ahead, I see
little likelihood that our problems will be much easier
than they have been in the recent past. Nevertheless, I
am optimistic on the possibility of our finding a sensible
approach to our monetary problems, as I believe we have
up to this time. I can only hope for a broader public
understanding of our role and of the practical difficulties
confronting us.
Now for just a word on the tortured subject of inter­
national liquidity, which seems to exercise a peculiar
fascination on the minds of so many of our economists
and journalists. Several points seem especially worth
making at a time when both the “Group of Ten” headed
by Under Secretary Roosa and the International Monetary
Fund have embarked on studies of longer range liquidity
needs. In the first place, there is very general agreement
that there is no shortage of international liquidity at the
moment— in fact a number of countries may be suffering
from some overabundance. Second, it seems premature
to do too much worrying about the consequences for
world liquidity when the United States ceases to run a
deficit. Our major worry is the more urgent problem of
eliminating the deficit. Third, no brilliant scheme for
some new international financial mechanism can relieve
us of the pressing obligation to solve our payments deficit
problem. The greatest weakness of nearly all such schemes
lies in their tendency to diminish, for everybody, dis­
ciplines and incentives toward maintaining payments
equilibrium. Fourth, international liquidity is not a new
subject that is only now receiving the attention it deserves
from the Treasuries and monetary authorities of the
world. On the contrary, it has been very much in the
forefront of discussion for several years now at the
monthly meetings of central bankers at Basle, the Paris
meetings of various OECD committees, and at the Inter­
national Monetary Fund. Not only has there been discus­
sion of the subject, but a great deal has been done to add
to international liquidity through the arranging of large
credit facilities, involving the Federal Reserve and Treas­
ury along with counterparts in other countries and the
IMF, that can be quickly mobilized to cover sudden heavy

10

MONTHLY REVIEW, JANUARY 1964

swings in the various countries’ balance of payments.
Fifth, the most promising avenue for adding further to
international liquidity would appear to lie in this area of
credit extension both by the Fund and on a bilateral basis.
It seems to me probable, and certainly desirable, that the
findings of the study groups now working on the liquidity
problem will favor progress in this direction rather than
in the direction of grandiose new mechanisms that would
tend to perpetuate imbalances. Central bankers are some­
times accused of excessive conservatism and lack of
imagination. However that may be, I am quite willing to
stand on the record of the last few years, which has shown
a remarkable advance in cooperative international credit
facilities— and I am sure we can look forward with con­
fidence to important future advances along the same lines.
In this connection, I’d like to digress just a moment to
say a word about the most recent demonstration of the
effectiveness of these credit facilities and the speed with
which they can be mobilized. I refer, of course, to the
tragic events of Friday afternoon, November 22, when the
world was rocked by the news of the incredible shooting
of President Kennedy. The shock waves of the first report
from Dallas had immediate repercussions in both the
securities and the exchange markets and, in the case of
the latter, there was a clear risk that panic selling of dol­
lars might suddenly develop. To forestall any such re­
action, the Federal Reserve Bank of New York, acting on
behalf of the Federal Reserve System, immediately moved
into the market with sizable offerings of five major foreign
currencies. The ability of the System to react so quickly
and so decisively in exerting this stabilizing influence on
the stunned exchange markets depended mainly on the
existence of a tried and tested network of reciprocal credit
arrangements with the major foreign central banks of the
world. The market knew that our offers to sell foreign
exchange were backed under these so-called swap facili­
ties by resources— available at a moment’s notice—
amounting to nearly $2 billion, in addition to whatever
balances of foreign currencies we had on hand. Needless
to say, we were very quickly in contact with our colleagues
in Canada and in Europe— even though it was past the
closing hour in European markets—to work out a co­
ordinated approach for official intervention in the major
exchange markets during succeeding days. In the event,
the markets’ awareness of the vast resources available to
the authorities here and abroad, and the knowledge of
their ability and determination to use these resources in
a concerted and effective fashion, made sizable interven­
tion unnecessary.
The ability of the authorities to deal successfully with
situations— in this case the most sudden and unforesee­




able situation imaginable— that in the past might well have
led to exchange market crises demonstrates, it seems to
me, the role that mutual credit facilities have played and
can continue to play in providing international liquidity in
a meaningful sense.
Just one final word about the dollar and its role in the
world. The dollar’s position as the leading reserve cur­
rency, as one of the major instruments for the conduct of
international trade and investment, and as the official
yardstick for all other currencies in the International
Monetary Fund, did not result from any deliberate or
official campaign to urge other countries to give it such
recognition. These developments resulted from such basic
facts as the enormous economic strength of the United
States, virtually complete freedom for foreigners and
Americans to use dollars for any purpose they liked, and
our readiness at all times to convert officially held foreign
dollars into gold at a fixed price of $35 per ounce. If for­
eign countries continue to hold dollars as a major part of
their reserves, as I believe they will, it will not be because
of any effort on our part to persuade them that this would
be a nice thing to do, nor will it be because of any tech­
nical innovations related to the manner of holding re­
serves. The reason will remain what it is now, a basic
belief in the strength of the United States economy and
in the existence of the will on the part of the American
authorities and the American public to maintain un­
questioned the dollar’s integrity. For my part, I am con­
fident that we shall continue to merit this belief.

P E R S P E C T I V E O N 1963

Early each year the Federal Reserve Bank of New
York publishes Perspective, an illustrated review of
economic and financial developments in the preced­
ing year. Many businessmen find the booklet useful
as a layman’s summary of the economic highlights
treated more fully in the Bank’s Annual Report,
available in mid-March. If you would like to re­
ceive without charge Perspective on 1963 when it
appears in mid-February, write to the Public Infor­
mation Department, Federal Reserve Bank of New
York, 33 Liberty Street, New York, N. Y. 10045.
(If you are on the mailing list for our Monthly
Review, you will receive a copy of Perspective with
the Review.)

FEDERAL RESERVE BANK OF NEW YORK

11

Foreign Exchange M ark ets, July-D ecem ber 1963
Reflecting the reduction of the United States balanceof-payments deficit during the second half of the year,
the dollar’s exchange market position came into somewhat
better balance during the July-December period.1 Several
foreign currencies still remained strong or even advanced
against the dollar, others closed with little net change
after fluctuating in response to temporary factors, but the
dollar also strengthened in some cases (see chart). Except
for Germany, moreover, the reserve gains even of those
countries whose currencies remained strong against the
dollar were generally smaller than during the first half of
the year. Hence, the markets for most currencies, includ­
ing for example that for the French franc, appeared to be
more nearly in equilibrium than they had been in earlier
periods.
The decline in the United States payments deficit and
the attendant improvement in dollar exchange rates can
be traced primarily to a reduction in recorded capital out­
flows from the United States after the middle of the year.
As regards short-term flows, the reduction in part re­
flects the gradual rise in United States money market
rates— highlighted in July by the Federal Reserve discount
rate increase, to 3 Vi per cent from 3 per cent, and the
accompanying increase in Regulation Q ceilings—bringing
domestic rates into closer alignment with short-term rates
in other financial centers. With respect to long-term funds,
the outflow from the United States has been curbed pri­
marily by the July proposal of the Administration for an in­
terest equalization tax on United States purchases of certain
foreign securities. Thus, the latest available figures show
that, although the United States balance-of-payments sur-

plus on current account narrowed somewhat in the third
quarter, the over-all payments deficit on regular transac­
tions declined in that quarter to $1.6 billion (seasonally
adjusted annual rate) from $5.0 billion and $3.9 billion
in the second and first quarters of the year, respectively.
The third-quarter improvement appears to have carried
over into the fourth quarter.
While some progress was being made toward a closer
balance of supply and demand among major currencies,
central bank cooperation continued to play a key role in
moderating— and, in some cases, nipping in the bud—
actual and potential disturbances. The most dramatic

EXCHANGE RATES IN SECOND HALF OF 1963
Noon buying rales on Wednesday of each week; cents per unit of foreign currency
Cents

Cents

20.408
France

United Kingdom

282.00

20.255

280.00

20.104

278.00

23.283

25.189
Switzerland

25.000
G erm any
_ I _ _ _ _ 1_ _ _ _ L _

22.869

24.814
27.836
27.624

22.472
93.425

1 1 __ 1__ !_

Netherlands

—

_1____ I____ I____ 1

Canada

27.416
.1612

92.500

.1600
Italy
_J_____I___

91.575

1 For developments in the first half of 1963, see “Foreign Ex­
change Markets, January-June 1963”, this Review, July 1963, pp.
104-7. Official United States exchange operations, and exchange
market developments in 1963 as they relate to such operations,
are discussed in “Treasury and Federal Reserve Foreign Exchange
Operations”, this Review, October 1963, pp. 147-52, the latest
semiannual report by Charles A. Coombs, Vice President of the
Federal Reserve Bank of New York and Special Manager, System
Open Market Account. The present article deals mainly with ex­
change market developments and not with official operations and
policies.




2.0151

B elgiu m

Japan

.1589
.2799

2.0000

.2778

1.9851

.2757

S O N
N o te : U p p e r a n d lo w e r b o u n d a r ie s o f charts re p re se n t o fficial b u y in g a n d
s e llin g rate s for d o lla r s a g a in s t the v a r io u s currencies.
__________ p a r v a lu e o f currency.

MONTHLY REVIEW, JANUARY 1964

12

such instance occurred when the Federal Reserve Bank
of New York immediately moved into the exchange mar­
kets following the assassination of President Kennedy and
succeeded, in cooperation with other central banks, in
completely preventing any disturbing market conse­
quences.2 It is clear that the exchange markets are now
aware of the massive and readily usable resources avail­
able to the United States and other countries whenever
there is a need to repulse speculative attacks on any of the
major currencies.
C A N A D IA N DOLLAR

The Canadian dollar fluctuated more widely than other
major currencies during the second half of the year. A
reduction in the net long-term capital inflow to Canada
was the primary factor in the decline of the rate early in
the period, and the subsequent recovery can be attributed
mainly to an improvement in Canada’s trade balance dur­
ing the third quarter, bolstered later in the year by mas­
sive wheat sales to Russia.
The Canadian dollar eased somewhat after the an­
nouncement of the Federal Reserve discount rate boost
on July 16 and briefly became subject to heavy pressure
following the Kennedy Administration’s proposal of the
interest equalization tax on July 18. The rate dropped
sharply and momentarily touched its low of $0.92109 for
the period. Most of the selling of Canadian dollars re­
flected commercial “leads and lags”, although a virtual
halt in purchases of Canadian securities by United States
residents also contributed to the decline. After the United
States and Canadian authorities reached an understanding
that would substantially modify the impact of the pro­
posed tax on Canadian issues in the United States,3 the
Canadian dollar advanced, temporarily rising above its
par value of $0.92500. The exchange market then turned
quieter through the end of August and into September,
with the spot rate moving within a range somewhat be­
low par while the forward Canadian dollar was quoted
at moderate discounts. The Canadian dollar did strengthen
slightly, however, following the rise in the Bank of
Canada’s discount rate to 4 per cent from ZVi per cent
on August 11.
The market entered a new phase in September, with
the Canadian dollar moving up in response to favorable

2 See “The Money Market in November”, this Review, Decem­
ber 1963, p. 179.
3 For a description of the understanding, see “The Money Market
in July”, this Review, August 1963, p. 124.




export developments. On September 16, it was announced
that the Soviet Union had contracted to buy about $500
million worth of Canadian wheat. In connection with
these sales, substantial amounts of Canadian dollars were
purchased for immediate and future delivery, and the
rate advanced strongly in both spot and forward markets.
Furthermore, the change in market sentiment resulted in
anticipatory buying of Canadian dollars by other com­
mercial interests. Under these pressures, the spot rate
reached a peak of $0.92938 on September 26, and dis­
counts on forward Canadian dollars disappeared. In
tempering the advance, the Bank of Canada was able to
recoup some of its earlier reserve losses.
Grain exports continued to be an important factor in
the market thereafter, but by mid-October the Canadian
dollar rate settled around the $0.92813 level, where it
remained virtually unchanged in very quiet trading
through the end of November. In December, the rate
eased somewhat as United States dollars were being pur­
chased in connection with year-end payments— particu­
larly to the United States— of interest and dividends on
loans to Canada and on foreign-held Canadian securities.
ST E R LIN G

The pound sterling declined slightly over the second
half of the year, although the rate remained steady for
prolonged periods. Trading was relatively quiet and or­
derly, without the speculative influences that had troubled
the market earlier in 1963. One factor contributing to the
decline in the rate was a partly seasonal increase in
British imports, which was however in good part offset by
strength in the balance of payments of the overseas ster­
ling area. The reserves of the United Kingdom— which
serves as banker for the sterling area— declined by $56
million in July-December, as a modest increase resulting
from regular market transactions was more than offset by
special British payments, including particularly the usual
year-end repayments on official indebtedness to the United
States and Canada.
The sterling rate fluctuated just above par during July,
touching its high for the period— $2.8020— on July 9.
The change in the Federal Reserve discount rate had
little immediate effect on sterling, which remained above
par through early August. With the gradual rise in United
States short-term rates, however, the gap between New
York and London money market rates steadily narrowed,
and some banking funds from the United States and the
Continent were reportedly switched from sterling into
dollars beginning in August. The sterling rate moved
slightly below par in mid-August.

FEDERAL RESERVE BANK OF NEW YORK

From then on through the remainder of the year, ster­
ling fluctuated narrowly in that range in a very steady
market. Both the sudden retirement of Prime Minister
Macmillan (announced on October 10) and the assassi­
nation of President Kennedy tested that steadiness, but
incipient speculative pressures quickly vanished in both
cases. Although sterling declined further in December,
reaching its low for the year of $2.7959 on December 23,
this development reflected largely the usual year-end po­
sitioning of Continental banks. At the year end, the rate
had recovered and sterling was firm at just above that
level.
Discounts on forward sterling became smaller over the
half-year period, primarily in adjustment to the narrow­
ing of gross differentials in money market rates between
New York and London. The discount on three-month
forward sterling, which stood at about 0.5 per cent per
annum early in July, closed the year at 0.2 per cent.

13

French securities issues took place. Meanwhile, in Au­
gust, the French authorities were taking steps to curb in­
flows of short-term funds through tighter controls on
French bank borrowing abroad. They also took antiinflationary measures, including a boost in the discount rate
from 3 Vi per cent to 4 per cent on November 14. In De­
cember, the franc rate again dipped below its ceiling on
several occasions.
Switzerland continued to attract capital inflows that
tended to offset the large Swiss trade deficit and thus to
give strength to the franc rate during much of the second
half of 1963. Swiss commercial banks occasionally con­
tributed to the inflow when they repatriated funds from
abroad, especially to meet a domestic liquidity squeeze in
July and August and to provide for their quarter-end
and large year-end needs. Funds also moved into Switzer­
land from time to time in response to various uncertainties,
such as those that often accompany the Internationa]
Monetary Fund meetings in the fall of the year and those
that stemmed from domestic political developments in
C O N T IN E N T A L CUR R ENCIES
Italy prior to the formation of a new Italian government
Among the major Continental currencies, the German in December. As a result, the Swiss franc advanced late
mark was particularly in demand during the second half in July and remained at or near the Swiss National Bank’s
of 1963. After easing somewhat in July, the mark rate buying rate for dollars during the rest of the year.
advanced fairly steadily during the remainder of the year.
The Dutch guilder declined gradually during July and
The advance was tempered by the German Federal Bank’s August. At that time, the Dutch trade deficit was widen­
purchases of dollars in the market, which contributed to ing and Dutch commercial banks were placing funds
official German reserve gains of $333 million in July- abroad on a covered basis, except for a short period of
November. The major source of strength for the mark stringency in the Amsterdam money market in July. By
was a renewed sharp rise in German exports— mainly to September, however, the guilder rate had begun to turn
other Common Market countries— which once more upward, and a general debate in the Netherlands over
brought about large German trade surpluses. Also, the credit and wage policy gave rise to rumors that the guilder
net inflow of long-term capital to Germany continued, might be appreciated. This set off brief but heavy specu­
although on a reduced scale. Late in November and lative purchases of guilders and the rate rose sharply
through most of December, additional demand for marks until early in October when the revaluation rumors died
developed in connection with the usual repatriation of funds down. Thereafter, the market became generally quieter
by German commercial banks and firms for year-end and, with moderate fluctuation, the guilder rate gradually
firmed through the year end.
positioning.
The French franc continued at or near its ceiling during
The Belgian franc moved within a narrow range above
the six-month period under review; the net demand for its par value, reflecting a market that was essentially in
francs, however, tapered off in a somewhat irregular pat­ balance for most of the six-month period. Both to re­
tern. The franc was very strong during most of the third strain domestic credit expansion and to keep its own rates
quarter, when the French trade balance improved. In in line with those of the Belgian market, the National
late September, French demand for foreign exchange in­ Bank of Belgium raised its basic discount rate from SVi
A per
creased under the influence of rising raw material im­ per cent to 4 per cent on July 18 and further to 4 X
ports and of repayments of earlier foreign-currency bor­ cent on October 31. After each of these moves, the Bel­
rowings by commercial interests. As a result, an active gian franc advanced somewhat in the exchange markets
two-way market for francs developed and the rate moved and closed the year on a firm note.
The Italian lira advanced close to its ceiling late in
marginally below its upper limit. By the end of October,
the franc returned to its ceiling, as substantial direct in­ July, reflecting renewed heavy borrowing abroad by
vestment in France continued and some inflow into new Italian banks as well as receipts from tourism—-a seasonal




14

MONTHLY REVIEW, JANUARY 1964

factor that normally provides strength to the lira during
the summer months. Until they diminished in September,
these influences essentially offset the large underlying
Italian trade deficit, which was widening during the year
partly as a result of price and wage pressures in that country.
In September and October, a significant capital outflow
from Italy occurred, primarily in connection with continued
domestic political uncertainties, and the lira rate began to
decline. The rate soon steadied— at some cost in offi­
cial Italian reserves— and the capital outflow gradually
diminished toward the year end after the new cabinet had
been formed.
OTHER CU R R E N C IE S

The Japanese yen remained close to its lower limit
against the dollar throughout the second half of the year.
Small fluctuations in the rate reflected mainly variations
in Japanese borrowing abroad to help finance both
new domestic investment and the country’s currentaccount deficit. During the period, a considerable part of
these borrowings was effected through the Euro-dollar
market, but when that market tightened late in the year

some Euro-dollar funds were withdrawn from Japan. In
response to this development and to domestic inflationary
pressures, the Bank of Japan in December permitted selec­
tive increases in ceiling rates on Euro-dollar borrowings
and imposed higher reserve requirements against domestic
demand and savings deposits. In response to these meas­
ures, the yen strengthened toward the year end.
In October, the government of China (Taiwan) uni­
fied the Formosan exchange rate system by abolishing the
complicated system of exchange certificates and by estab­
lishing an official selling rate of NT$40.10 to the dollar;
the official buying rate was held at NT$40.00 to the
dollar, which had been in effect since early 1961. Also in
October, the Government of Thailand established a par
value for the baht— B20.80 to the dollar— in agreement
with the International Monetary Fund. The new par value
corresponds to what had been the prevailing rate against
the dollar for over a year. In November, the Republic of
the Congo (Leopoldville) devalued the Congolese franc
from CF64 to the dollar to buying and selling rates of
CF150 and CF180, respectively. The spread between the
buying and selling rates is designed to provide additional
revenue to the Congolese government.

T he Business Situation
Economic activity continued to advance as 1963 came
to a close. Industrial production and nonfarm payroll em­
ployment both edged up in November. Steel and auto­
mobiles continued to show strength in December, and
retail sales appear to have recovered following the small
decline a month earlier. The December evidence is, of
course, still fragmentary. Nevertheless, the statistics now
available confirm the view that the change in the Presi­
dency has had little effect on underlying business perform­
ance and expectations.
Prospects for further gains in business activity in 1964
remain good. At the same time, however, the business
outlook is not completely unequivocal. Housing starts
and new orders for durable goods both fell off in No­
vember; however, movements in these series are often




erratic, and the November declines were from very
high levels. One factor boosting payrolls in the fourth
quarter—the rise in military pay scales—will not, of
course, provide any further upward push in 1964. The
latest Department of Commerce-Securities and Exchange
Commission survey of businessmen’s capital spending
plans is also somewhat disappointing, since it implies a
leveling-off in outlays for plant and equipment in the first
quarter of the new year. On the other hand, the survey
points toward a marked increase in such expenditures
during the second quarter, which may indicate that there
has been some upward revision in over-all spending plans
for 1964, compared with those reported by the McGrawHill survey a month earlier. The outlook for such an up­
ward revision would be improved if consumer spending

FEDERAL RESERVE BANK OF NEW YORK

turns out to be as strong as current buying intentions sug­
gest and, of course, by an early enactment of the pro­
posed tax reduction.
PR O D U C T IO N , E M P L O Y M E N T , A N D RETAIL S A L E S

Industrial production, as measured by the Federal Re­
serve’s index, edged further ahead in November (see
Chart I) to 126.9 per cent of the 1957-59 average (sea­
sonally adjusted). Steel provided most of the push, as out­
put in this industry moved up for the first time in six
months, but other durable goods industries— including
those producing business equipment— also showed some
gains. Steel ingot production advanced further in Decem­
ber and, for the year as a whole, is estimated at 109 mil­
lion tons. This level of output—higher than any year
since 1957—was reached despite record steel imports in
recent months. Moreover, steel inventories appear to be
about in line with desired levels and only a little higher
than a year earlier, and industry reports suggest that the
orders picture is strong. Thus, prospects would seem to be
favorable for a prolonged high level of steel output in the
months ahead. December automobile assemblies remained
at the high November level on a seasonally adjusted basis.
This brought total 1963 output to 7.6 million units, the best
year since 1955. Preliminary schedules for January point
to some decline in output from the high December level.
In November, one indicator giving some information
on future production— new orders received by manu­
facturers of durable goods— did decline. Most of this fall
off, however, was attributable to a drop in orders for trans­
portation equipment. Orders received by other durables
industries edged down only slightly, on balance. These
orders had shown an unusually large gain in the previous
month and therefore were still at relatively high levels in
November. The November decline in orders for durables
was offset in part by a recovery in orders for nondurables
to record levels, following three months of decline.
Nonfarm payroll employment (seasonally adjusted)
rose by 41,000 persons in November, largely reflecting
increases in the number of persons at work in the trade,
finance, services, and government sectors. At the same
time, there was some contraction in manufacturing em­
ployment despite increases in industrial production. Dur­
ing the first eleven months of last year, unemployment
averaged 5.7 per cent of the civilian labor force, a level
that was slightly above the 1962 average. Indeed, the
only previous postwar years to show such a high over-all
unemployment rate were years directly associated with
economic recession. The rise in over-all joblessness in
1963 reflected somewhat higher unemployment among




15

adult single males and adult women, and a substantial rise
in unemployment among teen-agers. On the other hand,
the employment situation for married men improved fairly
steadily throughout 1963 despite a November setback; the
unemployment rate for this group through November thus
averaged 3.3 per cent, compared with 3.5 per cent in
1962. This suggests that cases of pressing economic hard­
ship may possibly have been somewhat less widespread
than a year earlier.

MONTHLY REVIEW, JANUARY 1964

16

In contrast to the November gains in production and
employment, retail sales slipped about 1 per cent on a
seasonally adjusted basis in that month. This decline,
however, was in large part attributable to the sluggishness
of sales in the several days immediately following Presi­
dent Kennedy’s assassination. Most stores were, of course,
closed on November 25, the national day of mourning,
and total retail sales in that week fell 8 per cent below
the comparable period a year earlier. Weekly totals during
the early part of December suggested a virtually complete
recouping of the late November declines, and sales for
December as a whole appear to have risen about 3 per
cent (seasonally adjusted) from November while also
setting a new Christmas season record. Part of the De­
cember push came from a rise in sales of new automobiles
that brought total car sales in the United States (including
imports) for the year to more than IV i million units, an
all-time high.

Chart II

RECENT DEVELOPMENTS IN PLANT AND EQUIPMENT
SPENDING

H O U S I N G A N D P L A N S FOR C A P I T A L S P E N D I N G

In the housing sector, a decline in the number of starts
in November appears to be at least in part simply an
aftermath of the surge that occurred in September and
October. Unusually warm weather permitted outdoor
work to continue at more than the normal pace, with the
result that some September and October starts were prob­
ably “borrowed” from later months. In spite of the sharp
drop in November, the average level of starts for the last
three months was at a record for any three-month period,
suggesting that residential construction activity over the
next few months should be at a high level.
The latest survey of capital spending plans, conducted
in November by the Commerce Department and the Se­
curities and Exchange Commission, shows a somewhat
mixed picture. Although the survey reported an estimated
rise in total outlays for plant and equipment of $750
million (seasonally adjusted annual rate) in the final quar­
ter of the year—from $40 billion to $40% billion—this was
appreciably less than the amount of increase for the fourth
quarter that had been indicated by the August survey
(see Chart II). The downward revision in fourth-quarter
outlays planned earlier is largely attributable to a shortfall
in spending by commercial and communications firms.
This category includes outlays for construction of new
shopping centers, which according to some observers is
now passing its peak. Manufacturers’ estimated capital
spending in the fourth quarter, however, was also slightly
less than planned earlier.
The survey also pointed toward a leveling-off in total
capital outlays in the first quarter of the new year, with




sluggishness rather widespread among all industries. A
more encouraging sign, on the other hand, is the fact that
preliminary plans for the second quarter call for about a $1
billion increase in total capital expenditures over the firstquarter level. To be sure, manufacturers anticipate only
a small rise in outlays in the second quarter— an increase
that appears to be about in line with their full-year plans
as reported in the recent McGraw-Hill survey. This sur­
vey, it will be recalled, suggested that manufacturers were
planning 1964 outlays about 8 per cent over the 1963
average, but had indicated marked weakness in capital
spending by the nonmanufacturing sector for 1964 as a
whole. The new Commerce-SEC survey, in contrast, found
that the nonmanufacturing sector is planning on a sharp
rise in the second quarter following a first-quarter decline.
This latest survey would thus seem to suggest that the
capital spending plans of the nonmanufacturing sector may
have been revised upward since the McGraw-Hill survey
was taken. It must be recognized, however, that the De­
partment of Commerce and the Securities and Exchange
Commission have for the first time undertaken to release
projections of spending plans so far into the future. There
is as yet limited experience for assessing the outcome of
this welcome attempt to extend a key statistic in the ap­
praisal of business prospects.

FEDERAL RESERVE BANK OF NEW YORK

17

The M oney M ark et in D ecem ber
The money market came through the December period
of tax and dividend payments with no appreciable strain,
in contrast to some other years when that period has been
marked by considerable pressure on liquidity and reserve
positions. Indeed, the money market eased at the begin­
ning of December when banks in the leading money cen­
ters adjusted their reserve positions in preparation for
enlarged credit demands over the midmonth corporate
tax and dividend dates. As a portion of the substantial
excess reserves previously lodged in the “country” banks
began to converge on the principal money markets, banks
in the money centers were able to reduce their borrowings
from the Federal Reserve Banks and to become, for a
limited time, net sellers of Federal funds. Consequently,
some Federal funds trading occurred at rates well below
the 3V2 per cent ceiling on each of the first eight business
days of the month.
In the latter part of December, reserve distribution re­
turned to its more usual pattern and the money market
ended the month with about the same degree of firmness
that had prevailed in recent months. Federal funds again
traded almost exclusively at 3 Vi per cent, while borrow­
ings at Federal Reserve “discount windows” expanded
moderately until the final days of the month when the
customary bulge (and subsequent sharp decline) in bor­
rowings occurred around the year-end bank statement
date. A similar intramonthly pattern was reflected in the
rates posted by the major New York City banks on call
loans to Government securities dealers. These were quoted
in a 3 to 3% per cent range through December 11, and
rose to a 3% to 4 per cent range in the last half of the
month. Rates on prime four- to six-month commercial
paper increased by Vs of a per cent to 4 per cent (offered),
while rates on other short-term money market instruments
were little changed during the month.
Treasury bill rates moved in a narrow range during
December, ending the month at a slightly higher level
than at the start. Seasonal pressures in this market were
comparatively mild and were taken in stride. On the other
hand, there was also no marked downward rate move­
ment in response to the easier money market early in the
month. This easiness was generally regarded at the time
as a temporary phenomenon, an appraisal that turned out
to be correct.
As time passed after the shock of President Kennedy’s




assassination, basic market influences began to reassert
themselves in the longer term market. Favorable views
on the business outlook for next year, prospects for a
tax cut, and indications that the balance-of-payments
problem is far from solved, all contributed to a feeling
that interest rates may move higher in the new year. Prices
of Treasury notes and bonds declined irregularly through
most of the month, reaching new lows for the year just
before Christmas. A steadier atmosphere emerged in the
closing days of the year, and prices recovered slightly.
Prices of corporate and tax-exempt bonds, which had
adjusted lower earlier in the autumn, remained com­
paratively steady.
B A N K RESERVES

Market factors absorbed reserves on balance from the
last statement period in November through the final state­
ment week in December. Reserve drains—largely reflect­
ing a seasonal outflow of currency into circulation and an
expansion in required reserves—more than offset reserve
gains from a seasonal expansion in float.
System open market operations largely offset the
absorption of reserves through market factors. System
outright holdings of Government securities expanded on
average by $534 million from the last statement period in
November through the final statement week in December,
while holdings under repurchase agreements declined by
$59 million. An appreciable volume of reserves was also
supplied through the acceptance market, as acceptances
came into seasonally increased supply. Net System out­
right holdings of bankers’ acceptances rose by $14 mil­
lion, and holdings under repurchase agreements increased
by $56 million. From Wednesday, November 27, through
Wednesday, December 25, System holdings of Govern­
ment securities maturing in less than one year rose by
$270 million, and holdings maturing in more than one
year increased by $76 million.
THE G O V E R N M E N T SECURITIES M A R K E T

Prices of Treasury notes and bonds declined irregularly
through most of December. A cautious undertone has been
prevalent in the bond market for some time, as market
observers have been weighing the potential effects of a

MONTHLY REVIEW, JANUARY 1964

18

CHANGES IN FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, DECEMBER 1963
In millions of dollars; (40 denotes increase,
(—) decrease in excess reserves
Daily averages— week ended
Factor
Dec.
4

Dec.

11

Operating transactions

Net
changes

Dec.
IS

Dec.
25

45
4 - 520

O ther deposits, etc ............................................

+ 181
— 495
__401
— 15
— 12

__
-j—
-f
—

40
268
214
23
9

__ 59
+ 572
— 134
— 15
4 - 80

— 131
— 26
— 28

+ 87
4 -86 5
— 880
— 33
+ 31

T o ta l.................................

— 742

+

29

+ 444

4 -3 3 9

4 - 70

+ 572
- f 112

4 - 169
— 115

— 177
—
7

— 30
— 49

4-534
— 59

-f- 307

— 392

-f- 157
+
2

+ 45
__ 2

4 - 117

_

1

4+

12

4 - 39

+

1

+
+

+

+

10

4 - 13

4 -6 6 3

Direct Federal Reserve credit
transactions
G overnm ent s e c u ritie s :
D irec t m ark e t purchases or s a le s ...........
H e ld u n d e r rep u rch ase a g re e m en ts----L oans, d iscounts, a n d a d v an ces:
M em ber b a n k b o r ro w in g s .........................
O ther ................................................................
B a n k e rs’ ac ce p ta n c es:
B o ught o u trig h t ..........................................
U n d er rep u rch ase a g r e e m e n ts ................

2

4

4

^

I4

4 - 56

T o ta l.................................

+ 993

— 333

—

Member bank reserves
W ith F e d e ra l R eserve B a n k s ......................
C ash allow ed as r e s e r v e s t .............................

- f 251
+ 34

— 304
— 26

4 - 434
4 -24 1

4 -3 5 2
— 19

4 - 733
4 - 230

Total reservesf .....................................................
Effect of change in required reservest.........

+ 285
— 34

__330
— 70

4 - 675
— 373

4 -33 3
— 313

4 -9 63
— 790

Excess reservest ...................................................

+ 251

— 400

4 - 302

4 - 20

4 . 173

D aily average level of m em ber b a n k :
B orrow ings from lteserve B a n k s ................
Excess reservest ...............................................
F re e reservest ...................................................

507
58G
79

115
186
71

272
488
216

317
508
191

303$
442$
139$

N ote: Because of ro u n d in g , figures do n o t necessarily ad d to to tals.
* In clu d es changes in T reasu ry currency a n d cash,
t These figures are estim ated .
t Average for four weeks ended D ecem ber 25.

possibly more favorable business outlook on prices of fixed
income securities. This hesitant mood was clearly in evi­
dence during December and was reinforced by discussion
of the possibility that a rise in interest rates might follow a
tax cut should that measure contribute to a further rise in
economic activity. In this atmosphere, investor interest in
intermediate- and longer term coupon issues was quite
limited and selective throughout the month. A substantial
share of trading occurred in connection with switching
operations, as some investors sought to establish gains or
losses for tax purposes. There were also some outright
purchases and sales, with dealers more willing to sell than
buy and managing to lighten their positions in longer issues
over most of the month. In the final week of the month,
the atmosphere steadied and prices recovered slightly, as
higher yields attracted some investment buying and as
dealers covered short positions to some extent. Over the
period as a whole, declines centered in the intermediateand longer term maturity areas, where prices were gen­




erally 10/s 2 to 2%2 lower; prices of short-term Governments
receded by about V32 to UM.
In the market for Treasury bills, rates fluctuated narrowly
during the month, closing the period slightly above rate
levels prevailing at the end of November. In the opening
days of December, limited offerings from commercial banks
and from other sources exerted a modest upward pressure
on rates. From December 4 through December 10, however,
rates declined slightly in the temporarily easier money mar­
ket. Commercial banks purchased Treasury bills during
this period, while additional demand came from public
funds— and from corporations despite the imminent quar­
terly corporate dividend and tax dates. Against this back­
ground, the System sold some bills to absorb reserves and
help restore a firm tone to the money market. Subsequently,
as the midmonth tax date drew near, investor demand
tapered off and some limited corporate selling developed.
Consequently, bill rates turned upward from December 11
to 16 and then moved narrowly during the remainder of the
month. At the last regular weekly auction of the month,
held on December 27, average issuing rates were 3.524 per
cent for the new three-month issue and 3.651 per cent for
the new six-month issue— 4 and 2 basis points, respec­
tively, above the rates established in the final auction in
November. The December 30 auction of $1 billion of new
one-year bills resulted in an average issuing rate of 3.707
per cent, compared with an average issuing rate of 3.590
per cent set at the preceding month’s one-year bill auction.
Most of the rate difference was accounted for by the
fact that banks were not permitted to pay for the new
bills partially through direct crediting to Treasury Tax
and Loan Accounts, as they had been allowed to do the
month before. The outstanding three-month bill closed the
month at 3.53 per cent (bid) as against the end-ofNovember rate of 3.50 per cent (bid), while the outstanding
six-month bill was quoted at 3.65 per cent (bid) on
December 31, compared with 3.64 per cent (bid) on
November 29.
After the close of business on Thursday, January 2, the
Treasury announced that on January 9 it would auction
$2.5 billion of 159-day tax anticipation bills dated Jan­
uary 15, 1964 and maturing on June 22, 1964. Only cash
payments will be accepted for the new bills, which will
replace a corresponding amount of one-year bills coming
due on January 15.
OTHER SECURITIES M A R K E T S

In the market for corporate and tax-exempt bonds, the
early December release from syndicate of several slowmoving issues, with resulting upward adjustments in re­

FEDERAL RESERVE BANK OF NEW YORK

offering yields of from 4 to 10 basis points, generated an
improved tone in both sectors of the market. Throughout
the remainder of the month, seasoned corporate and taxexempt bonds were steady to slightly higher in price, with
the better tone particularly apparent in the tax-exempt
sector. Over the period as a whole, the average yield on
Moody’s seasoned Aaa-rated corporate bonds rose 4 basis
points to 4.37 per cent and the average yield on similarly
rated tax-exempt bonds declined by 6 basis points to 3.11
per cent.
The total volume of new corporate bonds reaching the
market in December amounted to approximately $590
million, compared with $200 million in the preceding
month and $245 million in December 1962. The largest
new corporate bond issue publicly marketed during the
month consisted of $150 million A-rated 4.60 per cent
oil company sinking fund debentures. The issue, which was
reoffered at par and is not refundable for five years, was
very well received, and traded at a small premium soon

19

after the offering. Considerable attention in the corporate
market was also given to the flotation of a $100 million
issue of long-term notes by a major New7York City bank.
The notes, which are not rated by Moody’s, carry a 4Vi
per cent coupon; reoffered at par, they were well received.
New tax-exempt flotations during the month totaled ap­
proximately $405 million, as against $665 million in No­
vember 1963 and $455 million in December 1962. The
Blue List of tax-exempt securities advertised for sale de­
clined by $39 million during the month to $514 million on
December 31. The largest new tax-exempt issue during the
period was a $53 million state flotation consisting of $40.6
million refunding bonds reoffered to yield from 2.10 per
cent in 1965 to 3.10 per cent in 1983, and $12.8 million
school bonds reoffered to yield from 2.80 per cent in 1973
to 3.10 per cent in 1983. Both offerings were Aa-rated
and were well received by investors. Other new corporate
and tax-exempt issues marketed in December were ac­
corded mixed receptions by investors.

Fiftieth Anniversary of the Federal R eserve System
December 23, 1963, marked the fiftieth anniversary of
President Wilson’s signing of the Federal Reserve Act.
This action by the President followed many years of con­
cern over the problem of freeing our growing and increas­
ingly complex economy from the inflexible currency and
credit structure that existed under the National Banking
Act. The money panic of 1907 underscored the problem
and the need for action. Less than seven months after the
peak of the crisis, Congress passed the Aldrich-Vreeland
Act, which created a commission to study and report on
central banking systems. By 1912 a commission proposal
— the Aldrich Bill— was introduced into Congress. This
first legislative effort was unacceptable, primarily because
it called for a single central bank.
In 1913 Representative Carter Glass, Chairman of the
House Banking and Currency Committee, introduced
what became the Federal Reserve Act— providing for a
system of regional reserve banks with supervisory power
vested in a Board in Washington. On September 18, 1913,
this bill passed the House, and on December 19 it received
approval of the Senate.
The work of organizing the Federal Reserve System
took almost the full year 1914. By April 2, a committee




consisting of the Secretary of the Treasury, the Secretary
of Agriculture, and the Comptroller of the Currency had
determined that there were to be twelve Reserve Banks,
had designated the twelve cities in which the Reserve
Banks would be located, and had defined their districts.
The district to be served by the New York Bank
originally included only the State of New York (the north­
ern counties of New Jersey were added in 1915 and Fair­
field County, Connecticut, in 1916). By mid-August 1914,
the national banks in New York had elected six directors
of the full nine-man board of the New York Bank. The re­
maining three directors of the New York Bank were
appointed by the Federal Reserve Board on September 30.
The Federal Reserve Board had been fully constituted
on August 10, following Senate approval of five members
appointed by the President; the other two members were
the Secretary of the Treasury and the Comptroller of the
Currency.
All the Reserve Banks opened on November 16, 1914.
At the close of business on that first day the ^alance sheet
of the New York Bank showed assets of $105 million,
consisting of $103 million in gold and lawful money and
$2 million in bills discounted for member banks.