Full text of Economic Policy Review (Federal Reserve Bank of New York) : January 1967, Vol. 49, No. 1

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2

MONTHLY REVIEW, JANUARY 1967

The Business Situation
At the turn of the year, demand pressures in the
economy appear to have eased on balance, but cost in­
creases continue to threaten both the maintenance of or­
derly economic expansion and the country’s balance-ofpayments position. Industrial production has advanced only
slightly since August. Retail sales have remained on a high
plateau since last spring, even though personal income has
continued to grow vigorously. At the same time, the ex­
pansion of business fixed investment spending—while it
has moderated—is continuing and defense expenditures
are rising. Moreover, the economy is operating with only a
narrow margin of unutilized resources. Unit labor costs are
increasing sharply, thus seriously threatening the recent
stability of industrial wholesale prices. As for consumer
prices, the substantial advances in the prices of services and
nonfood commodities show no sign of abating. To be sure,
food prices have recently declined at both the wholesale and
retail levels, but this is likely to be only a temporary lull.
PRODUCTION, ORDERS, AND INVENTORIES

Industrial output eased in November, returning to a
level only barely above that of midsummer (see Chart I).
The Federal Reserve Board’s seasonally adjusted produc­
tion index, after having increased by 0.5 per cent in
October, declined by 0.2 per cent in November to 158.3
(1957-59 = 100). The small November decline was largely
the result of substantial cutbacks in automobile assem­
blies and in iron and steel production. At the same time,
however, the output of all other goods, on balance, in­
creased more slowly than earlier in the year.
Automobile production, which had jumped ahead by
20 per cent in October, fell back 6 per cent in November.
Assemblies reached a seasonally adjusted annual rate of
8.5 million units during that month, and this rate was
maintained in December as well. The recent softening
of new domestic auto sales—which contrasts with the con­
tinued brisk sales of imported cars—has led producers to
lower their sights for the coming months. Although the cur­




rent levels of auto assemblies are well below those recorded
throughout 1965 and early in 1966, they still compare most
favorably with prior years. The moderation in the rate of
automobile assemblies— along with the housing slump, in­
ventory cutbacks, and stronger competition from abroad—
has contributed significantly to the continued decline in
iron and steel output. Such output was cut back by 2Vi
per cent in November, bringing the cumulative decline in
iron and steel production from the July peak to almost 7
per cent.
The output of goods other than automobiles and iron
and steel, on the other hand, edged up further in Novem­
ber. Defense equipment production, in particular, again
rose steeply, while business equipment output also showed
a strong advance in November; both rises were, indeed,
sharper than in the preceding month (see Chart I ). The
production of consumer goods other than autos also in­
creased in November, but the output of raw and semi­
finished materials declined, even after the exclusion of the
iron and steel group.
The volume of new orders received by durables manu­
facturers fell by $1.1 billion in November, to $23.1 billion
— the lowest level in a year. As in the preceding month,
when new orders had dropped by $1.0 billion, the decline
reflected to a large extent a reduction in the volatile series
covering defense orders, with a particularly sharp drop in
aircraft and parts. The substantially lower volume of new
orders resulted in a fractional decline in unfilled orders—
the first decline in the orders backlog in three years. The
backlogs of transportation equipment and primary metals
producers declined, but other manufacturers— notably of
machinery— registered a further lengthening of their un­
filled orders. The overall backlog, which has risen by $33
billion or 77 per cent since this expansion began, remains
of course extremely high and represents the equivalent
of 3.3 months of sales at present rates of shipment.
Recent data indicate that inventory accumulation has
been proceeding at a high rate. Total manufacturing and
trade inventories rose by as much as $1.3 billion (seasonally

FEDERAL RESERVE BANK OF NEW YORK

C h a rt I

INDUSTRIAL PRODUCTION
S e a s o n a lly a d ju s te d ; 1 9 5 7 -5 9 = 1 0 0

3

by producers of transportation equipment and of machinery
increased sharply, and durables manufacturers’ stocks of
finished goods expanded significantly. The rise in inven­
tories of materials and supplies, in contrast, was moderate.
Even though inventory-sales ratios are currently relatively
high, further— albeit slower— increases in inventories ap­
pear likely. A recent Department of Commerce survey indi­
cates that durables manufacturers foresee further substan­
tial additions to their stocks in the first quarter of 1967.
There are indications that the downtrend in housing con­
struction may be bottoming out even though private resi­
dential construction outlays declined further in Novem­
ber. Indeed, residential construction contracts rose sharply
in November, by 13 per cent, building permits for new
private housing units edged up, and private nonfarm hous­
ing starts— a highly erratic series—jumped 20 per cent
after having dropped 22 per cent in October. For October
and November combined, both permits and starts indicate
a relatively small rate of decline— as against the very con­
siderable drop recorded over the spring and summer
months— while residential construction contracts increased.
CONSUMER DEMAND, EMPLOYMENT, AND PRICES

Note: Index for defense equipment was calculated at the Federal Reserve Bank of New York
from data published by the Board of Governors of the Federal Reserve System.
Source: Board of Governors of the Federal Reserve System.

adjusted) or 1 per cent in October, as wholesalers’ and re­
tailers’ inventories rose sharply. The growth of manufactur­
ing inventories, which had been very steep during the sum­
mer months— notably in work-in-process stocks at du­
rables manufacturers— on the other hand, moderated in
September and October but still remained substantial. In
November, however, inventory accumulation rose again
to the July-August rate. Work-in-process inventories held




Personal income advanced by $3.2 billion in November,
to a seasonally adjusted annual rate of $597.6 billion. This
increase, the smallest one since July, falls well below the
average monthly rise of $4.8 billion recorded in the three
months August to October. About one third of the easing
from the August-October average increase reflected a lower
growth in Government transfer payments; these had, of
course, increased very rapidly in the months immediately
following the introduction of the Medicare program. Fully
half of the slowdown in personal income growth, however,
represented a slower expansion in wage and salary dis­
bursements. The November advance in these payments
was the smallest monthly increase since April. Neverthe­
less, the November rise in personal income was substantial,
and fully equal to the advances registered in the first half
of 1966.
Despite the continuing large rises in consumer in­
comes, retail sales have changed only little since last
spring. In December, sales dropped by about 1 per cent
to a $25.4 billion seasonally adjusted level, according
to preliminary data subject to major revisions. The De­
cember decrease, which followed a smaller increase in
November, was apparently the outcome of declines in most
sales categories. Paralleling the relative stability of retail
sales over the last months, the growth of instalment credit
outstanding had slowed substantially, reaching in October
a low for the last two years. In November, however, there

4

MONTHLY REVIEW, JANUARY 1967

C h a rt II

CONSUMER PRICES
(1 9 5 7 -5 9 = 1 0 0 )
P e rc e n t

P e rc e n t

Source: United States Bureau of Labor Statistics.

was a significant acceleration dominated by an increase in
automobile credit.




Even though demand pressures have moderated, the
labor market remains tight. The overall unemployment
rate, which had dropped by 0.2 percentage point in No­
vember, increased by 0.1 percentage point in December
to 3.8 per cent. For the entire fourth quarter, the unem­
ployment rate averaged 3.8 per cent— a level equal to that
of the first quarter of 1966 and the lowest since 1953. Re­
flecting continuing manpower shortages, as well as lower
productivity gains, labor costs per unit of output in manu­
facturing have risen sharply month after month since July.
At the same time, wage increases in excess of productivity
gains have also been characteristic in other sectors of the
economy, and notably in service industries.
Wholesale prices declined in November, by 0.3 per
cent, after having fallen by 0.6 per cent in October. The
declines in both months are entirely ascribable to reduc­
tions in the prices of farm products and processed foods.
Industrial wholesale prices, in contrast, edged up by 0.1
per cent in both October and November. Further rises in
the prices of furniture and other household goods, metal
and metal products, and machinery were largely offset by
continued declines in the prices of lumber and wood prod­
ucts and of hides, skins, and leather products.
In November, a more than seasonal drop in food prices
held the overall increase in consumer prices to 0.1 per
cent— the smallest advance since May (see Chart II).
However, the bulk of this slowdown reflected seasonal
factors. Food prices in grocery stores fell by 0.9 per cent
in November, and total food prices, which include res­
taurant prices, by 0.7 per cent. Outside the food area,
however, prices continued to advance briskly. The prices
of services, led again by those for medical care, rose at
the same rapid pace as in the last few months. The in­
crease in the prices of commodities other than food mod­
erated somewhat; however, apparel prices and housing
costs advanced substantially.

FEDERAL RESERVE BANK OF NEW YORK

The Money and Bond Markets in December
The improved tone that had emerged in the money and
bond markets in November strengthened further in De­
cember when the conviction spread among market par­
ticipants that monetary policy was moving in a somewhat
less restrictive direction. Some indications that the pace
of economic expansion might be slowing also bolstered
market hopes that credit demands would eventually relax
and that the apparent shift in monetary policy would be
prolonged. In this setting, observers became quite opti­
mistic about the outlook for lower interest rates, and al­
most every market development during the month was in­
terpreted in a way that reinforced this optimism. Toward
the end of the period, the money and bond markets took
further encouragement from the announcement that, due
to changed circumstances, the special factors referred to in
the Federal Reserve System’s September 1 policy statement
on business loans and discount administration were no
longer applicable.1
In the market for Treasury obligations, a very strong
and broadly based demand for all maturities prevailed dur­
ing the month. A lively professional demand developed as
dealers entered the market to replenish their inventories,
especially since funds were readily available to finance their
positions. At the same time, investment demand was quite
spirited. Against this background, prices of Treasury notes
and bonds advanced sharply, rising by as much as 3%
points in December. The three-month Treasury bill rate
declined to as low as 4.78 per cent, its lowest level since
early August, and sharply below the 5.59 per cent level to
which it had climbed in September. In the corporate and
tax-exempt bond sectors, where a large volume of new
issues reached the market in December, keen investor buy­
ing interest developed and prices of most new and sea­
soned bonds rose steadily.
The money market displayed a generally comfortable
tone during the month. In this environment, the churn­

1 For the full text of the September
Review (September 1966), page 209.




1 policy

statement, see

this

ing associated with the quarterly corporate dividend and
tax payments was accommodated without strain. Thus,
most Federal funds trading occurred in a 5 to 5 V2 per cent
range during the month, compared with the SVi to 6 per
cent rate range which had predominated in November, and
by the end of December several other short-term money
market rates were below their late November levels. Both
net borrowed reserves and member bank borrowings from
the Federal Reserve Banks also declined somewhat on
average during the month. Total bank credit expanded at
a fairly rapid pace in December, after a sluggish perfor­
mance in the autumn.
THE GOVERNMENT SECURITIES MARKET

After having declined sharply in late November, Trea­
sury bill rates fluctuated narrowly in early December and
then resumed their downward trend. Early in the month,
investment demand temporarily slackened somewhat at the
lower prevailing yield levels, and offerings from professional
sources increased. During this period, dealers cautiously
awaited the approaching quarterly corporate dividend
and tax payment period, when a large portion of their
repurchase agreements with corporations would mature
and market supplies of bills would increase. On balance,
however, dealers remained fairly optimistic about the gen­
eral outlook in the bill sector. Consequently, bidding was
quite aggressive at the December 6 auction of $800 mil­
lion of additional June tax anticipation bills, which were
sold at an average issuing rate of 5.246 per cent.2
Subsequently, the tone of the bill market again
strengthened markedly. Demand from a broad spectrum
of investors— including public funds, corporations, and
commercial banks— expanded sharply, stimulating lively
professional demand as well. Both the heavy corporate
dividend payments over the December 9-12 period and the

2 For the details of the offering, see this Review (December
1966), page 267.

MONTHLY REVIEW, JANUARY 1967

6

SELECTED INTEREST RATES
M ONEY MARKET RATES

O ctober

November

O c t o b e r-D e c e m b e r 1 9 6 6

December

BOND MARKET YIELDS

October

November

December

N ote: D ata are shown for busine ss d a ys only.
* M O N EY MARKET RATES QUO TED: D aily ran ge of rates posted by major New York C ity banks
on new call loans (in Fed eral funds) secured by U nited States G overnm ent securities (a point
ind icates the ab sen ce of an y ran ge); offering rates for directly p la ce d finance com pany pap er;
the effective rate on Fed eral funds (the rate most representative of the transactions executed);

point from underw riting syn d icate reo fferin g yield on a given issue to m a rke tyie ld on tha
sam e issue im m ediately after it has been rele ased from syndicate restrictions); d a ily
a v e ra ge s of yields on long -term Governm ent securities (bonds due or c a lla b le in ten years
or more) and of G overnm ent securities due in three to five ye a rs, computed on the b asis of

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

clo sing bid prices; T hursday av e rage s of yields on twenty seasoned twenty-y e c r tax-exem pt

T reasury b ills.

bonds (carrying M oody’s ratings of A a a , A a , A , and Boa).

BO N D MARKET Y IELDS Q UO TED: Y ie ld s on new A a a -a n d A a-rated p ublic utility bonds are plotted
around a line show ing d a ily av e ra ge yie ld s on seasoned A aa-ra ted corporate bonds (arrows

midmonth quarterly corporate tax date passed without
giving rise to any real pressure in the bill market, and
dealers were able to refinance with little difficulty the bills
returned to them when a large volume of corporate repur­
chase agreements matured. The underlying tone of the bill
market became progressively more bullish through most
of the month, and very aggressive bidding took place at
most of the bill auctions. In the last half of the month, com­
mercial bank demand for Treasury bills expanded con­
siderably when banks actively added bills to their port­
folios in preparation for the publication of their year-end
statements. Against this background, bill rates declined
steeply from December 9 until late in the month, when they
fluctuated narrowly. (See the left-hand panel of the chart.)
At the regular monthly auction of new nine- and twelve­




Sources: Fe d e ra l Reserve Bank of New York, Board of G overno rs of the Federal Reserve System,
M oody’s Investors Service, and The W eekly Bond Buyer.

month bills on December 27, average issuing rates were set
at 4.920 per cent and 4.820 per cent, respectively, some 63
and 70 basis points below average rates set a month earlier
(see Table III on page 8). At the final regular weekly auc­
tion of the month on December 30, average issuing rates
were set at 4.822 per cent and 4.911 per cent, respectively,
38 and 43 basis points below average rates at the compa­
rable auction a month earlier.
In the market for Treasury notes and bonds, the more
confident undertone that had emerged in November car­
ried over into early December. To be sure, the coupon
sector was somewhat restrained at the beginning of the
month by the prospect of the very large volume of
new corporate and tax-exempt bonds scheduled for sale
in December, by talk that the sale of participation cer­

FEDERAL RESERVE BANK OF NEW YORK

tificates might soon be resumed, and by the continuing
uncertainty surrounding the outlook for Federal fiscal
action. Activity was dominated by sizable year-end switch­
ing transactions by commercial banks and other investors.
Prices moved irregularly, with some gains recorded by
high-coupon issues maturing in five to ten years, which were
in strong demand during the first statement week of the
month. During the same period, offerings of longer term
coupon issues expanded, partly reflecting sales by investors
switching into new corporate bonds.
Around December 9, a very strong tone began to ap­
pear in all sectors of the coupon market. Sentiment was
buoyed by the growing belief that monetary policy was
in the process of shifting toward a posture of somewhat
less credit restraint. Some market observers also felt that
the rate of domestic economic expansion might be slow­
ing, which might portend an easing of credit demands. In
addition, the coupon sector was very much encouraged by
the good investor receptions being accorded the heavy
December volume of new corporate and tax-exempt bonds,
even at their rising price levels. Against this background,
an aggressive professional demand developed as dealers
eagerly attempted to add to their inventories. A strong
investment demand for many issues of Treasury notes
and bonds also arose from commercial banks, mutual
funds, corporations, and public funds, and substantial
switching activity for tax purposes persisted. At the same
time, market participants seemed to be optimistically
awaiting an expected Treasury announcement that the sale
of participation certificates would soon be resumed. In­
deed, when this announcement was actually made on De­
cember 19, market sentiment became even more buoyant,
and dealers reported that customers were showing strong
interest in the forthcoming certificates. In this setting,
prices of notes and bonds generally surged higher through­
out the maturity spectrum from December 9 through the
end of the month. (The right-hand panel of the chart
illustrates the decline in yields which accompanied the
rise in prices.) Late in December, some profit taking
occurred and prices occasionally edged slightly lower.
These setbacks were short-lived, however, and market
sentiment quickly recovered. At the close of December,
yields on three- to five-year coupon issues were at,
or close to, their lows of the year, and more than 1 full
percentage point below their midsummer peaks. At the
end of the year, yields on long-term issues were also close
to their 1966 lows and roughly 45 basis points below
their August highs.
A buoyant atmosphere also emerged in the market for
Government agency issues in December, when demand
from commercial banks and others expanded, and prices




7

generally advanced. New offerings during the month to­
taled approximately $750 million and were accorded
good receptions. In December, the Federal Reserve Bank
of New York, acting for the first time under authority re­
cently granted, purchased Government agency issues under
repurchase agreements with securities dealers. On Decem­
ber 19, it was announced that the Federal National Mort­
gage Association would on January 5 sell $1.1 billion of
participation certificates, of which $600 million would be
publicly offered— less than had generally been expected by
the market— and $500 million would be placed directly
with Treasury trust accounts. The public offerings included
$150 million of five-year maturities, $150 million of tenyear maturities, and $300 million of fifteen-year maturi­
ties— considerably less than the amount anticipated in this
maturity area. Market reaction to the announcement was
quite enthusiastic. When considerable stress developed in
the capital markets during the summer, offerings of partici­
pation certificates were temporarily suspended. Thus, the
January sale of participation certificates represented the
first since June.
OTHER SECURITIES MARKETS

The markets for corporate and tax-exempt bonds
opened the month anticipating a heavy supply of new
flotations in December. Market sentiment soon became
quite confident, however, that the offerings could be
digested without great difficulty. Subsequently, investors
bid aggressively for all of the new securities and prices of
most issues rose steadily during the month. As was the
case in the Government securities market, the corporate
and tax-exempt bond sectors drew encouragement from
the view that monetary policy might be shifting toward
somewhat less restraint, and that a possible slowdown in
the rate of economic growth might ease demand pressures
in the credit markets. In the corporate sector, underwriters
bid quite aggressively for the new bonds which reached
the market in December and, even at resulting lower re­
offering yields, readily placed the new securities with
investors. In subsequent trading, many of these issues
quickly moved to premium prices. Demand for tax-exempt
bonds from commercial banks and other sources also ex­
panded in December, and investors generally accorded the
substantial volume of new offerings fairly good receptions.
However, a more restrained tone prevailed in the taxexempt sector than was evident in the corporate sector
during the period.
Over the month as a whole, the average yield on
Moody’s seasoned Aaa-rated corporate bonds rose slightly
by 2 basis points to 5.39 per cent. The Weekly Bond

MONTHLY REVIEW, JANUARY 1967

8
Tabic I

Table II

FACTORS T E N D IN G TO INCREASE OR DECREASE
M EM BER B A N K RESERVES, DECEM BER 1966

RESERVE POSITIONS OF MAJOR RESERVE CITY BA NK S
DECEM BER 1966

In millions o f dollars; (+ ) denotes increase,
(—) decrease in excess reserves

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

Changes in daily averages—
week ended

Dec.
14

Dec.
7

— 227
— 108

4-112
4-115
— 72
— 289
- f 26

4-

21

4

4 . 325
+
+
—
—
4-

18
345
19
214
195

28

— 685
4 . 601
4- 639
— 57
4 - 26
— 35

+

+s

Total “ m arket" factors ........................

Dec.
14

Dec.

Dec.
28

21

Dec.

Dec.

Eight banks in N ew York City

“ Market” factors
Member bank required reserves* ............
Operating transactions (subtotal) ..........
Federal Reserve float .............................
Treasury operations! .............................. .
Gold and foreign account .................... .
Currency outside banks* ......................
Other F ederal Reserve accounts ( n e t ) t

Dec.
7

Net
changes

Factors

Average
of four
weeks
ended
Dec. 28

84

— 42
— 253
4 - 106
— 146
— 186
— 29

_ 950
4 - 565
4 - 875
4 - 257
— 63
— 724
4 - 219

— 295

— 385

+ 2

Reserve excess or deficiency( —) *......
Less borrowings from Reserve Banks
Less net interbank Federal funds
purchases or sales ( —) ..........................
Gross purchases ..................................
G ross s a le s .............................................
Equals net basic reserve surplus
or deficit ( —) ...........................................
N et loans to Government
securities dealers .....................................

20
—

31
121

36
75

17
183

26
95

455
1,261
806

319
1,390
1,071

586
1,527
941

735
1,520
786

524
1,425
901

-4 3 4

-

294

410 -

626 - 9 0 1

440

688

— 593

869

573

Thirty-eight banks outside N ew York City
Direct Federal Reserve credit
transactions
Open market instrum ents
O utright holdings:
Government securities ........................
Bankers’ acceptances..........................
Special certificates ..............................
Repurchase agreements:
Government securities ........................
Bankers' acceptances..........................
Federal agency o b ligations................
Member bank borrowings ..........................
Other loans, discounts, and advances...
Total ......................................................
Excess reserves* .......................................

4-141

—

120

+ 4 + »
~f 115

—

-f

1

66

— 72

— 154
— 27

4 - 26

4 - 198

4-

4-

44

4 - :302
4- 54
4 - 26

3

4 - 76

— 2

96

- 239

8

4-315
4 - 22

7 4-

— 175

i 92
4- 17

4-137

5 4-

4- 72

+ 15
+ 9 + 7
— 187

—

4*

4- S19

4.554

4" 402

4-259

4 - 17

Reserve excess or deficiency(—) * .......
Less borrowings from Reserve Banks..
Less net interbank Federal funds
purchases or sales ( —) ...........................
Gross purchases ....................................
Gross s a le s ..............................................
Equals net basic reserve surplus
or deficit ( —) .............................................
N et loans to Government
securities dealers ......................................

10
85

14
237

41
148

231
130

74
150

776
1,773
997

1,130
1,773
642

1,413
1,986
573

774
1,597
823

1,023
1,782
759

— 852 -1 ,3 5 3 -1 ,5 2 1
234

329

— 674 -1 ,1 0 0

394

300

242

N ote: Because of rounding, figures do not necessarily add to totals.
* Reserves held after all adjustments applicable to the reporting period less
required reserves and carry-over reserve deficiencies.

Table III

Daily average levels

AV ERAGE ISSU IN G RATES*
AT R EGULAR TREASURY BILL AUCTIONS

Total reserves, including vault cash*..........

Borrowings ........................................................

In per cent

|

Member bank:
23,197
22,998
199
449
_ 250
22,748

23,512
22,994
518
647
— 129
22,865

23,875
23,679
196
472
— 276
23,403

24,176
23,721
455
548
— 93
23,628

23,6905
23,3485
3425
5295
— 1875
23,1615

Ghanges in Wednesday levels

Weekly auction dates— December 1966
Maturities
Dec.
5

Dec.
12

Dec.
16

Dec.
23

Dec.
30

Three-month ..............................

5.198

5.048

4.842

4.747

4.822

Six-month ....................................

5.281

5.129

4.939

4.856

4.911

Monthly auction dates— October-December 1966
System Account holdings of Government
securities maturing in:
Less than one year ..................................
More than one y e a r ..................................
Total ....................................................

— 143

8

4 . 31
4 - 12

4 - 382

4 - 43

+ 374

4-

Note: Because of rounding, figures do not necessarily add to totals.
* These figures are estimated,
t Includes changes in Treasury currency and cash.
+ Includes assets denominated in foreign currencies.
§ Average for four weeks ended December 28.




October
25

November
23

December
27

Nine-month .

5.567

5.552

4.920

One-year ....

5.544

5.519

4.820

4- 54
4 - 20

* Interest rates on bills are quoted in terms of a 360-day year, with the dis­
counts from par as the return on the face amount of the bills payable at
maturity. Bond yield equivalents, related to the amount actually invested,
would be slightly higher.

FEDERAL RESERVE BANK OF NEW YORK

Buyer's series for twenty seasoned tax-exempt issues, car­
rying ratings ranging from Aaa to Baa, declined by 23
basis points to 3.77 per cent, considerably below the 4.24
per cent peak reached in late August (see the right-hand
panel of the chart). These indexes are, however, based on
only a limited number of seasoned issues and do not
necessarily reflect market movements fully, particularly in
the case of new and recent issues.
THE MONEY MARKET AND BANK RESERVES

A relatively comfortable tone prevailed in the money
market in December. Federal funds traded mainly in a 5
to 5 Vi per cent range, somewhat below the 5 Vi to 6 per
cent range which had predominated in November (see the
left-hand panel of the chart). From December 21 through
December 23, dealers in bankers’ acceptances reduced
their rates by Vs of a percentage point, making the rate on
ninety-day unendorsed acceptances 5% per cent (bid).
Both the average level of net borrowed reserves of all mem­
ber banks and average member bank borrowings from the
Federal Reserve Banks contracted moderately from the
month before (see Table I).
A substantial volume of funds flowed through the
money market in December in connection with quarterly
corporate dividend and tax payments, year-end switching
transactions in the securities markets, and commercial
bank portfolio adjustments in preparation for the publica­
tion of their December statements. However, this activity
produced very little pressure in the money market. The
banking system readily accommodated the credit demands
of securities dealers, commercial and industrial borrowers,
and nonbank financial intermediaries which converged
upon the major money market banks over the December
9-12 popular dividend payment period and the midmonth
tax date. During the two-week interval ended December
21, which included both the dividend and tax payment
periods, total loans3 and investments at the weekly report­
ing banks increased by approximately $4 billion, with the
rise in loans accounting for about two thirds of the gain.
For the month as a whole, bank credit at all commercial
banks expanded much more than seasonally, in contrast
to the relatively weak September-November performance.

3 Exclusive of loans to banks and after deduction of valuation
reserves.




9

Banks in the major money centers accumulated fairly
large basic reserve deficits during the four December
statement periods, mainly reflecting an expansion in their
dealer lending operations (see Table II). In general, these
banks managed to fill the bulk of their enlarged reserve
needs in the Federal funds market, where a fairly good
supply of reserves was usually available, and satisfied their
residual reserve needs through moderate borrowing from
the Federal Reserve Banks.
An estimated $5 Vi billion of negotiable time certificates
of deposit matured at large commercial banks over the four
statement periods ended December 28. As yields on some
competing money market instruments—notably Treasury
bills and bankers’ acceptances— declined during the period,
the 5 Vi per cent ceiling rate generally being offered on new
time certificates became somewhat more attractive to in­
vestors. Consequently, banks were able to replace a sub­
stantial amount of the certificates which matured in De­
cember. Indeed, after declining for eighteen consecutive
statement weeks, the amount of certificates outstanding at
the large reporting banks in New York City expanded by
approximately $100 million in the final statement period
of the year. Moreover, a fair amount of the new certificates
sold in December will not mature for three or four months,
in contrast to the autumn sales pattern when many of the
new certificates sold by banks were in the shortest maturity
area. As a result, commercial bankers generally seemed
much more optimistic about their ability to replace the
large amount of certificates which will reach maturity in
January.

PERSPECTIVE ’66

Every January the Federal Reserve Bank of New
York publishes Perspective, a brief, informative re­
view of the economy’s performance during the pre­
ceding year. This nine-page booklet serves as a
layman’s guide to the economic highlights of the
year. A more comprehensive treatment is presented
in this Bank’s Annual Report, available in early
March. Perspective ’66 is available without charge
from the Publications Section, Federal Reserve Bank
of New York, 33 Liberty Street, New York, N. Y.
10045. A Spanish version of Perspective is also avail­
able upon request.

10

MONTHLY REVIEW, JANUARY 1967

The Maturity of Loans at New York City Banks*
The business of commercial banking has traditionally
been viewed as one in which the banker accepts deposits
and places these funds in short-term liquid assets—pri­
marily Government securities and short-term business
loans. It is now recognized that the banker fulfills a much
broader financial function; in particular, he is looked upon
as a source of finance for a wide range of business activity.
As a result, banks have increasingly engaged in mediumand long-term lending. Such lending has, however, raised
questions regarding bank liquidity and solvency. This
article seeks to provide some of the information needed to
explore these questions by reviewing the maturity struc­
ture of loans at large banks in New York City.1 The re­
view has been confined to city banks, owing to the limited
availability of nationwide data.
The average effective time to maturity of the total loan
portfolio of the city banks has lengthened by about one
quarter of a year (to about IV 2 years) since 1961. How­
ever, this lengthening does not reflect longer maturities in
individual loan categories, since the maturity of individual
loans within each broad classification appears to have re­
mained about unchanged. Instead, the composition of the
loan portfolio has shifted. The volume of long- and
medium-term loans has risen faster than short-term loans,
resulting in a lengthening in the average maturity of the
loan portfolio taken as a whole. This increase in the vol­
ume of medium- and long-term lending appears to be
attributable primarily to the mounting demand for mediumterm credit by business in the mid-1960’s, reflecting the
rapidly growing capital expenditures of corporations. The
sharp rise in time deposits may also have been a factor
affecting maturity considerations, inducing some of these
banks to enter the long-term residential mortgage market
on a limited scale.

THE MATURITY STRUCTURE OF LOANS
A T NEW YORK CITY BANKS IN 1966

Term loans to business, the largest single loan category
at New York City banks, account for more than one third
of total loans (see table). Ordinary term loans make up
about five sixths of the term loan total, and revolving cred­
its account far the balance.2 Real estate loans, which con­
stitute about one tenth of total loans, represent another
significant type of predominantly medium-term lending by
city banks. All other loans are primarily short term, with
an original term of less than one year (or, in the case of
consumer loans, of somewhere around two years).
o r d i n a r y t e r m l o a n s . Commercial and industrial loans
with an original term of more than one year, and repayable
in a lump sum or in periodic instalments, are defined as
ordinary term loans. (The original term of a loan is the
length of time from the date the loan was made to the date
of the final repayment scheduled in the loan agreement.)
At New York City banks these loans are made for periods
of up to ten years, but most of them are found in the fiveto eight-year range. While the average original term indi­
cates the time period over which a bank is willing to
commit funds to borrowers, it does not provide much in­
formation about the average maturity or liquidity of the
bank’s loan portfolio. For this purpose, a more useful con­
cept is the average effective time to maturity, which mea­
sures the average remaining life of the loans in a bank’s
portfolio as of a given point in time, taking into account
the due date of each individual loan instalment.3
The average effective time to maturity of the ordinary

2 Term loan statistics currently released by this Bank include
both ordinary term loans and revolving credits. These statistics
were described in “Term Lending by N ew York City Banks”, this
Review (February 1961), pages 27-31. The city banks classify
*
George Budzeika, Economist, Statistics Department, had pri­ term loans in their internal reports in the same manner.
mary responsibility for the preparation of this article.
3 The average effective time to maturity for a loan portfolio
* A review of loan maturity and turnover developments in the
is calculated by multiplying (i.e., weighting) each scheduled loan
1950’s was presented in “Turnover of Business Loans at New York
instalment by the length of time to its due date, summing the re­
City Banks”, this R eview (January 1962), pages 10-15.
sults, and dividing the total by the outstanding loan volume.




FEDERAL RESERVE BANK OF NEW YORK
LOANS O U T ST A N D IN G AT W EEKLY R EPORTING M EM BER BA NK S
IN NEW YORK CITY
September 1961 and 19 66
Averages o f W ednesday figures
Loans outstanding
(billions of dollars)

Percentage
distribution

Loan category

Compound
annual
rate of
growth
(per cent)

1961

1966

1961

1966

Long- and medium-term
loans:
Commercial and industrial
loans with an original term
of more than one year*....

5.70

11.97

31.2

35.0

16.0

Real estate loanst
Secured by residential
property ............................ .

.52

2.11

2.9

6.2

32.3

Secured by nonresiden­
tial property .....................

.26

1.13

1.4

3.3

34.2

Subtotal ....................

6.48

15.22

35.5

44.5

18.6

Other loans:
Commercial and industrial
loans with an original term
of one year or less ............

4.74

1.51

25.9

22.1

9.8

Loans for purchasing or
carrying securities ..............

1.98

2.74

10.8

8.0

6.7

Loans to foreign banks...

.27

.84

1.5

2.4

25.5

Loans to domestic banks....

.36

.91

2.0

2.6

20.4

Loans to nonbank finan­
cial institutions ..................

1.47

3.07

8.0

9.0

15.9

Agricultural loans ..............

$

.01

§

§

21.1

All other loans|| ................
Total

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

2.97

3.90

16.3

11.4

5.6

18.27

34.25

100.0

100.0

13.4

* The breakdown of commercial and industrial loans into those with an original
term of more than one year and those with one year or less was estimated
for 2 per cent of the total on the basis of the breakdown available for
98 per cent of the total.
t The breakdown of real estate loans into those secured by residential and
nonresidential property was estimated on the basis of Report of Condi­
tion data for June 1961 and June 1966.
± Less than $5 million.
§ Less than 0.5 per cent.
11 The “ all other loans” category for September 1966 is subdivided as follows
(in billions of d ollars): consumer instalment loans $1.28; loans to foreign
goverments $0.75; all other loans $1.87.
Source: Weekly reports of N ew York City banks.

term loan portfolio at New York City banks was estimated
in 1966 at about three years.4 This is substantially lower
than the average original term because, at any given point
in time, the remaining life of most loans has shortened
somewhat due to the passage of time. In addition, the in­
stalment repayment feature, which characterizes the bulk
of ordinary term loans at city banks, further reduces the

4 The maturity figures given in this article were derived from
bank examination reports and from reports by city banks to this
Bank’s Statistics Department. Figures on loans outstanding were
obtained from weekly reports of New York City banks published
in the Federal Reserve Bulletin.




11

effective time to maturity: at the time an instalment loan
is put on the books, it will have an average effective time
to maturity about one half its original term. On the other
hand, the three-year estimate for the average effective time
to maturity is somewhat longer than would be true for a
loan portfolio consisting exclusively of instalment loans.5
This reflects the inclusion in term loan portfolios of socalled “balloon” notes—loan arrangements in which the
last repayment of an instalment loan is substantially larger
than the others. It is estimated that balloon notes account
for about 10 to 20 per cent of the amount outstanding of
ordinary term loans at city banks.6
r e v o l v i n g c r e d i t s . Although loans extended under re­
volving credit agreements are of short-term maturity—
usually ninety days— the agreement underlying such loans
permits the borrower to renew the note at maturity for the
next ninety-day period, and so on, with the credit remain­
ing on the books for as long as two or more years. Since
revolving credit agreements are legally binding commit­
ments of banks and since the borrower typically enjoys
relatively long-term use of bank credit, such loans are
usually classified as term loans.7 The original term of a re­
volving credit is measured from the date the loan agree­
ment was signed to its expiration date, at which time the
revolving credit is assumed to be repaid in a lump sum or
converted into an ordinary term loan. (The original term
of these agreements was estimated somewhere between
two and three years in 1966.) The effective time to matu­

5 The average effective time to maturity approximates one third
of the original term if the term loan portfolio of a bank consists
of loans which have an identical original term and are paid off in
equal instalments and if the bank has been extending term credit
for several years.
6 Another maturity concept that is frequently used is final term.
This concept measures the length of time from a given point in
time to the due date of the loan. However, the due date is not the
repayment of each individual loan instalment, as is the case in the
measurement of the effective time to maturity, but the due date
of the last instalment. The final term concept is less useful analyti­
cally than the effective time to maturity, since it does not take
into account the instalment repayment feature of loans. Neverthe­
less, it is used frequently, probably because of the ease with which
it can be employed in statistical surveys. It was employed in the
1955 and 1957 Commercial Loan Surveys and the 1966 Agricul­
tural Loan Survey conducted by the Federal Reserve System.
The average final term of ordinary term loans at New York City
banks is estimated roughly in the range of AVi to 5Vi years.
7 Informal line-of~credit arrangements are not classified as term
loans even though they resemble the formal revolving credit in
some respects. For one thing, they are not legally binding on the
bank. Moreover, informal line-of-credit arrangements are usually
reviewed once a year, placing them in a category of agreements
with an original term of one year or less.

12

MONTHLY REVIEW, JANUARY 1967

r e a l e s t a t e l o a n s . About two thirds of total real estate
loans at New York City banks were classified in June 1966
as residential mortgage loans. The original term of many
THE CASH FLOW OF THE TERM LOAN PORTFOLIO. Cash flow
of these loans ranges up to twenty-five years or more but,
—which measures repayments of outstanding loans over a since practically all of them are repayable in frequent in­
period of time— is another loan maturity measure. It may stalments, the effective time to maturity is considerably
be expressed either as the percentage of the dollar volume less. Furthermore, a significant proportion of the residen­
of outstanding loans that is expected to be repaid or, tial mortgage loans held by city banks are in the “ware­
alternatively, as the percentage that has been repaid during house” for only six to twelve months as institutional in­
a one-year period. The cash flow figures for New York vestors “store” them temporarily with commercial banks
City banks are currently available only on the basis of the under repurchase agreements.
The remaining one third of real estate loans at city
scheduled repayments flow for the entire term loan port­
folio and thus combine into one figure the expected flow banks is accounted for by loans secured by nonresidential
originating in the ordinary term loan and the revolving properties. A significant portion of these loans consists of
credit portfolios. In 1966, the cash flow on term loans, so construction loans, the effective time to maturity of which
defined, was estimated at about 25 per cent to 30 per is relatively short, probably somewhere around one year.
cent of the total amount of such loans outstanding. A cash Another significant portion of nonresidential real estate
flow of that size implies repayments during 1966 of about loans is made to business, and is akin to ordinary term
$3 billion to $3.5 billion out of the $11.6 billion average loans in respect to both purpose and maturity. The aver­
of term loans outstanding during the year.
age effective time to maturity of the entire real estate loan
This cash flow appears to be relatively large in light portfolio at New York City banks appears to be somewhat
of the widely held notion that term loans are “long-term” longer than the effective time to maturity of the ordinary
loans which “freeze” bank funds for prolonged periods of term loan portfolio.
time. As noted above, the relatively large size of cash flows
o t h e r l o a n s . The original term of short-term commer­
at city banks reflects the instalment repayment feature
built into virtually all term loans, which, in turn, stems cial and industrial loans was generally reported in 1966
from the principle of tailoring the maturities of term loans at about ninety days or less. Many of these loans, how­
to the projected flow of earnings of the borrower, provided ever, remain on the books for longer than the original
such terms meet the broad maturity requirements of banks. term since they are frequently renewed when they come
Generally, the city banks now require that all term loans to maturity. Some of these nominally short-term loans
be put on an amortization schedule and that this schedule are thus, in effect, continuous loans. It was estimated in
1961, for instance, that the existence of continuous loans
be firmly adhered to by the borrower.
in the short-term business loan category had lengthened
TERM LO A N M ATURITIES B Y IN D U ST R Y . The mOSt Striking
the average duration of short-term loans to some six
feature of the maturity distribution of term loans by in­ months or more.8
No specific estimate is available regarding the average
dustry is a lack of any really large variability in the ma­
turity of ordinary term loans. However, some differences maturity of loans to nonbank financial institutions— a
in maturities by industry arise from the greater use of category which includes loans to sales and commercial
revolving credit by some borrowers.
finance companies, mortgage firms, and other business
The longest effective time to maturity was recorded in finance companies—but the information that is available
loans to petroleum extracting and refining businesses. This suggests that they fall in the short-term area, with an
was due in part to the longer maturity of ordinary term original term well below one year. Loans for purchasing
loans (by about half a year) but primarily reflected the and carrying securities are of very short maturity. The
limited use of revolving credit facilities. The shortest effec­ average original term of consumer instalment loans at city
tive time to maturity was evident in loans to manufacturers banks appears to be somewhere around two years, and
of transportation equipment: these borrowers are heavy their effective time to maturity less than one year.
users of revolving credit facilities with about three quarters
of their term loans outstanding in such form. Term loans to
public utilities also were of shorter maturity than the over­
all average due to the shorter effective time to maturity
8 See “Turnover of Business Loans at New York City Banks”,
of their ordinary term loans (by about half a year).
this Review (January 1962), page 13.

rity of revolving credits at New York City banks was cal­
culated in 1966 at about one and one-half years.




FEDERAL RESERVE BANK OF NEW YORK
a l l l o a n s . Although specific estimates of the effective
time to maturity are not available for several loan cate­
gories, enough is known about their order of magnitude
to estimate the maturity of the total loan portfolio of New
York City banks. (The missing figures refer to short-term
loans, where the range of the possible error is small in
relation to the maturity of term loans.) Thus, it appears
that the average effective time to maturity of the entire
loan portfolio of large New York City banks in 1966 was
in the range of 1% to 1Vi years.

13

acceleration of the rate of growth of the portfolio itself.
The average effective time to maturity (given the original
term) is longer for a growing loan portfolio than a sta­
tionary one, since a growing portfolio is more heavily
weighted with recently made loans which, for this reason
alone, have a relatively longer time to maturity. The term
loan portfolio of New York City banks grew slowly be­
tween late 1957 and late 1961— 3 per cent a year
on the average. After 1961, however, term loans of city
banks grew at a rate of about 9 per cent a year, and accel­
erated to a rate of almost 30 per cent during 1965 and
early 1966. The transition from the slow-growing to the
MATURITY CHANGES, 1961-66
rapidly expanding portfolio could have added about one
While average maturities in individual loan categories tenth of a year to the average effective time to maturity of
have apparently shown very little net change over the the entire term loan portfolio over the period from 1961 to
past five years, the average effective time to maturity of 1965.
Still another factor contributing to the rise of the aver­
the total loan portfolio is estimated to have risen by about
one quarter of a year. This increase resulted mainly from age maturity was the decline in the proportion of revolv­
changes in the composition of the loan portfolio, with ing credits— which generally carry shorter maturities than
long- and medium-term loans growing faster than short­ ordinary term loans— in the term loan total. In 1962,
revolving credits constituted about 20 per cent of the term
term loans.
loan total at city banks, but by 1965 the proportion had
t e r m l o a n p o r t f o l i o . The average effective time to
declined to an estimated 15 per cent and remained at this
maturity of the term loan portfolio at large New York level in 1966.
City banks, combining both ordinary term loans and
The reversal of the upward trend in the average effec­
revolving credits, was estimated in the range of 2% to tive time to maturity in 1966 was brought about by the
23A years in 1961-62 and at about 2% years in 1966.9 shortening of the original term of new loans in the latter
Because of the large element of uncertainty involved in part of 1965 and 1966 in response to tighter credit condi­
obtaining these figures, the slight difference between these tions. The maximum maturity the city banks were willing
averages is probably not significant. There were, how­ to allow on newly made term loans declined to an average
ever, some significant changes in average maturities in of six years in 1966 from an average of nine years in
the intervening years. In the early 1960’s the maturities 1964.
of term loans lengthened, with the effective time to matur­
Information on maturity changes in other loan cate­
ity rising to about three years by 1965. However, in late gories is scanty, but suggests that average maturities in
1965 and during 1966 the upward trend was reversed, individual loan categories remained about unchanged be­
and the average dropped by about one quarter of a year tween 1961 and 1966.
to return to the level prevailing five years ago.
t o t a l l o a n p o r t f o l i o . The maturity of the total loan
A combination of factors accounted for the maturity
rise in the early part of the 1961-66 period. One of these portfolio of city banks has risen in the past five years, with
factors was the lengthening of the original term of new the average effective time to maturity in 1966 estimated
loans. Faced with a relatively plentiful supply of funds about three months longer than in 1961. This lengthen­
in the early 1960’s, New York City banks were willing ing was brought about primarily by changes in the com­
to allow somewhat longer maturities on new loans than position of the portfolio, with long- and medium-term loans
in the preceding years. Beginning in 1962, another factor rising faster than short-term loans. Long- and mediumcontributing to the rise in the average maturity was the term loans as a proportion of total loans advanced from 35
per cent in September 1961 to 44 per cent in September
1966.
The most significant factor contributing to the increase
9 The average for ordinary term loans was estimated at about in the share of long- and medium-term loans was the rise
three years in both 1961-62 and 1966, but the average for revolv­ in the proportion of term loans— from 31 per cent to 35 per
ing credits appears to have lengthened slightly over the period
cent. The share of real estate loans also has risen— from 3
as a whole.




14

MONTHLY REVIEW, JANUARY 1967

per cent to 6 per cent for residential mortgage loans and
from 1 per cent to 3 per cent for nonresidential real estate
loans. The increase in the proportion of residential mort­
gage loans reflected primarily the decision of several city
banks to enter the long-term residential mortgage market in
the early 1960’s.10 This decision appears to have been influ­
enced by the sharp rise in time deposits and the need to
earn a higher return— real estate loans usually carry higher
interest rates than other loans— in order to pay higher in­
terest on time deposits after the change in Regulation Q in
1962.
FACTORS AFFECTING MATURITY OF TERM LOANS

The sharp increase in the proportion of term loans at
city banks was brought about mainly by the surging de­
mand for medium-term credit by business in the mid1960’s. The large banks in New York City are oriented
mainly toward lending to business. Such lending (both
short- and medium-term) accounts for nearly three fifths
of the city banks’ outstanding loans, compared with about
one third at banks outside New York and Chicago. By vir­
tue of their long-time preoccupation with business lending,
the city banks have acquired great skill and experience
in this type of activity and have developed close customer
relationships with corporate borrowers throughout the
country. Many of these customers, moreover, maintain
sizable deposit balances with city banks. Thus, whenever
the demand for funds on the part of these customers rises,
the city banks are under strong competitive pressure to
satisfy their needs. The mid-1960’s was such a period.
The rapid growth of business investment in 1963 and the
following years generated a heavy demand for medium-

and long-term funds by business. This was particularly
true in 1965 and the first half of 1966, when corporate
capital expenditures (including inventories) exceeded
internal cash flows (retained earnings and depreciation
allowances) by nearly $3 billion and by $9 billion (annu­
al rate), respectively.11 It was in this period that term
loans were expanding at New York City banks at an un­
precedented rate of nearly 30 per cent a year. Conse­
quently, the proportion of term loans in the city banks’
business loan total rose to 62 per cent by mid-1966, from
an average 58 per cent in 1964 and an average 55V2 per
cent in 1961.12
While the heavy business demand for medium-term
funds from the city banks has brought about a sharp rise
in the proportion of term loans and thus has contributed
to the lengthening of the average maturity of the entire
loan portfolio of these banks, the maturity of the term
loan portfolio itself, as emphasized in the preceding para­
graphs, has remained about unchanged between 1961 and
1966. In general, the city banks in the 1960’s followed
policies similar to those in previous cyclical swings: they
lengthened maturities of new loans in the easy money
conditions of the early 1960’s but shortened them with
the tightening of credit in the mid-1960’s. Apparently,
there was no dearth of demand in the mid-1960’s for
bank credit in the medium-term area, which is traditionally
preferred by city banks, so that there was no real pressure
on city banks to lengthen, as a matter of policy, the ma­
turities on individual term loans.

11 The figures are from the flow-of-funds statistics of the Board
of Governors of the Federal Reserve System.
12 The responsiveness of N ew York City banks to financial
needs of corporations engaging in capital expenditures was also
illustrated by the developments in the mid-1950’s. At that time, as
10 Prior to the 1960’s, the city banks generally did not purchase in the mid-1960’s, a sharp increase in capital expenditures by busi­
residential mortgages for permanent holding. The residential mort­ ness was accompanied by a rapid acceleration of term lending by
gages that were reported in their portfolios at that time were pri­ city banks— between October 1955 and October 1957, term loans
marily of the “warehousing” type acquired for brief periods from
advanced at a 23 per cent annual rate and the share of term loans
institutional investors under repurchase agreements.
in the business loan total increased from 47 per cent to 51 per cent.




FEDERAL RESERVE BANK OF NEW YORK

15

New Central Banks *
The desire to help build up a soundly based banking
system and develop an active and independent monetary
policy has continued to encourage the establishment
of central banks, particularly in the newly independent
countries. During the last three years alone, fifteen such
institutions have opened their doors. Ten of these began
operations in 1964: the Bank of Lebanon, the Central
Bank of Jordan, the Bank of Sierra Leone, the National
Bank of the Congo (Kinshasa), the National Bank of
Rwanda, the Bank of the Republic of Burundi, the Reserve
Bank of Rhodesia, the Reserve Bank of Malawi, the Bank
of Zambia, and the Central Bank of Trinidad and Tobago.
In 1965 the list was extended by the opening of the Bank of
Guyana and the Central Bank of the Republic of Brazil. The
Central Bank of Kenya, the Bank of Tanzania, and the
Bank of Uganda were set up in 1966.
These banks are indeed new, in that they are operating
under new statutes and have an expanded arsenal of mon­
etary policy instruments at their disposal. But each of
them is the successor to one or more institutions that pre­
viously exercised some form of monetary authority. Thus,
in two of the countries, commercial banks formerly carried
out many central banking functions. The Central Bank
of the Republic of Brazil has taken over powers hitherto
held by the Bank of Brazil, with a new policy-making body
— the National Monetary Council— replacing the previous
Superintendency of Money and Credit (SUMOC). Leb­
anon’s new central bank has assumed responsibilities
formerly discharged by the largely foreign-owned Bank of
Syria and Lebanon. Six of the new institutions are derived
from former central banks in territories or political units
that were subsequently split up: the dissolution of the
Federation of Rhodesia and Nyasaland in late 1963 led to

the separate central banks of Zambia, Malawi, and Rho­
desia,1 and new central banks have replaced the former
Bank of Issue of Rwanda and Burundi and the Congo’s
temporary Monetary Council (both of which had super­
seded the Central Bank of the Belgian Congo and RuandaUrundi in 1961). The seven other new central banks in the
group grew out of currency boards, which issued currency
and conducted foreign exchange operations. In this cate­
gory are the new central banks in Kenya, Tanzania, and
Uganda (which replace the East African Currency Board)
and those in Guyana, Sierra Leone, Trinidad-Tobago, and
Jordan.
The new central banks in Lebanon, the Congo, Rwanda,
and Burundi— as well as several others established in
1959-63— have been analyzed in a previous article, and
their statutes will not be dealt with here.2 The functions,
powers, and organization of the remaining eleven banks
are discussed below.
BACKGROUND

All these new central banks have been established in
less developed countries, where overseas trade and for­
eign capital play a large role in the economy; furthermore,
many of them operate in areas where the existing com­
mercial banks are often branch offices or subsidiaries of
major banks based elsewhere. However, the financial and
monetary environments of these countries differ consider­

1 On December 3, 1965, after Rhodesia’s unilateral declaration
of independence, the United Kingdom dismissed the existing Board
of Governors of the Reserve Bank of Rhodesia and named a new
Board domiciled in London. The Reserve Bank of Rhodesia con­
tinues to operate in that country, however, with a Board appointed
locally. In this article, discussion of the bank is confined to a
description of its statutory powers as they are set forth in the
1964 law.

* John S. Stockton, Assistant Economist, International Research
Department, had primary responsibility for the preparation of this
2 See “New Central Banks”, this Review (July 1964), pages
133-37.
article.




16

MONTHLY REVIEW, JANUARY 1967

ably in structure and stage of development. Financial du­
alism—wherein sophisticated and advanced mechanisms
are found side by side with the most rudimentary facilities
—is a common situation. The wide diversity in the extent
to which banking habits have developed is evident in the
variation of the ratio of currency to total money supply,8
which ranges from 70 per cent in Sierra Leone to 20 per
cent in Brazil (the current figure for the United States is
22 per cent). Population per banking office, another
measure of the development of banking, ranges from
19.000 in Trinidad-Tobago to 45,000 in Jordan and
137.000 in Tanzania (the figure for the United States is
6,400).
The nature of a central bank in any country is, in part,
determined by its relationship to the government, both as
defined in the statutes and in actual practice. Among the
major issues involved in this relationship are the degree of
independence the central bank exercises vis-a-vis execu­
tive and legislative authority and the extent to which the
government is limited in using central bank credit to fi­
nance its operations. The nature of the central bank is
shaped also by its relationship to the financial community.
Here a balance must be struck between the needs to assure
the stability of the banking and financial system and to
foster the growth of that system— so necessary for the
evolution of less developed countries. Finally, there is the
problem of external monetary stability, which calls for the
maintenance of an orderly exchange market for a country’s
currency and the attainment of a level of international
reserves which is adequate to meet the swings in the coun­
try’s balance of payments. Because financial institutions
and experience vary so greatly among nations, the theory
and practice of central banking do not provide a single
set of prescriptions which deals with all these issues. Thus,
the statutory provisions reviewed here describe a variety
of techniques by which the new central banks will en­
deavor to resolve these and related problems within the
context of their own environment.
OBJECTIVES, FUNCTIONS, AND STRUCTURE

The statutes of the new central banks often specify
economic and social goals to be served by the monetary
authorities. In line with the trend of central banking legis­
lation since World War II, most of the new banks stress

economic growth and development as the primary goal.
The statute of the Central Bank of Trinidad and Tobago
specifies this goal most concretely, emphasizing the ex­
pansion of production, trade, and employment. More
conventional objectives are internal monetary stability, set
forth in all the new banks’ charters, and stable exchange
rates, which only Guyana does not specifically include.
While all the banks maintain research facilities, the statute
of Trinidad-Tobago underscores the role of the central
bank in aiding development by requiring continuous eco­
nomic, financial, and monetary research.
To serve these objectives, the new central banks are
given the following powers: the sole right of note issue,4
authorization to buy and sell gold and foreign exchange,
and freedom to engage in open market operations. All the
institutions serve as banker and financial adviser to their
respective governments and, with the exception of Brazil,5
act as government fiscal agent. Moreover, to aid in the
control of credit and the supervision of commercial banks,
the new banks are vested with at least some of the following
powers: implementation of minimum reserve require­
ments; establishment of minimum liquid asset ratios; direct
control of the volume, terms, and conditions of commer­
cial bank credit; regulation of interest rates charged or
paid by banks; and examination of bank records.
The central banks in this discussion are legally defined
as corporate bodies, with authorized capital ranging from
$1.4 million equivalent for Malawi to $5.6 million equiv­
alent for Uganda. This capital is fully held by the respec­
tive governments, except in Brazil where the central bank
owns its equity capital outright. In all cases provision is
made for reserve funds, from one to three times the
authorized capital, to which a varying percentage of cen­
tral bank profits is allocated. Beyond the maximum limit
of these reserve funds, profits accrue to the governments,
except in Brazil, where the central bank keeps all earnings
from its operations.
In most cases responsibility for bank policy and ad­
ministration is vested in a board of governors, ranging in
size from five members in Sierra Leone, Malawi, and
Guyana, to nine members in Uganda, Zambia, and Rho­
desia. The governor and deputy governor are usually
appointed by the executive head of government, and serve

4 In Guyana, however, a subsidiary of Barclays Bank Limited re­
tains the right to issue bank notes so long as certain United King­
dom laws continue to apply as part of the banking code of the
country.

3 The money supply definition used here is that of the Inter­
national Monetary Fund, which includes currency outside banks
5 In that country, the Bank of Brazil continues in its former
and demand deposits; government deposits are excluded.
capacity as fiscal agent of the government.




FEDERAL RESERVE BANK OF NEW YORK

terms of three to seven years. Exceptions are Jordan, where
appointments are made by the government’s Council of
Ministers, and Tanzania, where the length of term for
governor and deputy governor is not specified by statute.
In Brazil central bank policy is set by the autonomous
National Monetary Council. This body has nine members:
the finance minister, who acts as chairman, the presidents
of the Bank of Brazil and the National Economic Develop­
ment Bank, and six Brazilians of financial and banking
background. Four of these last six serve as directors, with
one acting as president, of the central bank and have the
responsibility of implementing decisions of the National
Monetary Council.
RELATIONS WITH THE GOVERNMENT

Along with their powers and duties, the new central
banks’ relations with the government are usually closely
defined in the founding statutes. Important sections of
these concern the coordination of monetary policy with
the government’s general economic policies. In Kenya and
Tanzania, a Treasury representative is a voting member
of the central bank’s board of governors. In Tanzania he
may postpone any of the board’s decisions, and in Kenya
he may suspend a vote by the board and refer the matter
to the finance minister, whose decision is binding. In
Trinidad-Tobago, Zambia, and Guyana, the minister of
finance or his representative attends board meetings but
does not vote; however, after consulting the central bank’s
governor he may, except in Guyana, issue general direc­
tives that bind the bank to implement government mone­
tary and fiscal policies. Brazil provides for close govern­
ment supervision through the fact that central bank policy
is determined by the National Monetary Council headed
by the finance minister.
A number of the statutes require government approval
for specific operations by the central bank. Approval of
the finance minister is needed by the central banks of
Zambia, Malawi, Uganda, Tanzania, Sierre Leone, and
Trinidad-Tobago if they wish to hold, sell, or subscribe to
shares of any registered corporation.8 Although the Rhode­
sian central bank may buy and sell foreign currencies out­
right, it may borrow them only with the finance minister’s
consent.
As fiscal agents to their governments, the central banks

6 The Reserve Bank of Rhodesia may also buy and
of registered corporations, but endorsement by the finance
is not required.




17

(except that of Brazil) have responsibility for adminis­
tering government accounts, managing the public debt, and
acting as depository for government funds. As bankers to
their governments, all of them may grant short-term loans
or advances to offset temporary deficiencies in budget
revenues. Most of the statutes set limitations on these
advances in respect to both maturity (usually a maximum
of three months) and amount (figured as a percentage of
estimated revenues for the current year). Sierra Leone,
which limits advances to 5 per cent of current government
budget revenues, appears to be the most stringent in this
respect; in most of the other countries, the figure is 15
per cent to 20 per cent. The major exception is Brazil,
which requires the National Monetary Council to authorize
the central bank to cover, by direct purchase of Treasury
bills, any portion of the government deficit not financed
through other means.
RELATIONS WITH THE BANKING SYSTEM

Each of the new central banks has the power to control
the supply of money and credit in its economy. The means
for exercising this control include rediscount and open
market operations, reserve requirements and minimum
liquid-asset ratios, direct controls over commercial bank
credit, and licensing, supervision, and inspection of com­
mercial banks.
All the statutes except those of Jordan and Sierra
Leone contain authorization to require the commercial
banks to maintain a percentage of their deposit liabilities
in the form of reserves at the central bank. In some of the
countries, this reserve ratio—which must be uniform for
all commercial banks— can be freely determined by the
central bank, up to a given percentage of the banks’ deposit
liabilities. In Kenya, Tanzania, Uganda, and Guyana, the
maximum is 20 per cent. In Brazil, where the National
Monetary Council sets the ratio, it is 25 per cent, of which
half may be required in the form of Treasury bills or public
debt certificates. Trinidad-Tobago, on the other hand, sets
only a minimum reserve requirement (5 per cent). In
Zambia, Rhodesia, and Malawi, neither a ceiling nor a
floor is established in the statutes. Rhodesia’s central bank
appears to have statutory authority to impose reserve re­
quirements against the assets of commercial banks.
The bank statutes of Malawi, Jordan, Rhodesia, Guyana,
and Zambia allow the central bank to require commercial
banks and other financial institutions to maintain minimum
liquid-asset ratios. Rhodesia’s statute permits these per­
centage requirements to differ as between banks and ac­
sell shares ceptance houses.
minister
All the new central banks can buy, sell, discount, and

18

MONTHLY REVIEW, JANUARY 1967

rediscount securities of their governments but, except in
Brazil, limitations are placed on the amount of such pur­
chases. Three of the statutes set an absolute limit: those
of Kenya and Trinidad-Tobago (both of which apply to
total lending to government) and that of Jordan (which
applies only to securities). In Uganda, Malawi, Sierra
Leone, and Zambia, the limitation on holdings of gov­
ernment securities is a specified percentage of the bank’s
deposit liabilities; in Rhodesia it is defined as the bank’s
paid-in capital and general reserve fund plus 20 per cent
of its deposit liabilities; and in Tanzania and Guyana it
is a specified percentage of average government revenues
over the preceding three financial years. In two countries
—Brazil and Rhodesia—the central banks also may deal
in securities issued by themselves.
All the statutes empower the central banks to purchase,
sell, and rediscount credit instruments of commercial
banks, generally including bills of exchange and promis­
sory notes for commercial transactions involving the stor­
age and movement of goods and for agricultural and in­
dustrial production. A number of the banking laws spell
out in detail the permissible maturities for various cate­
gories of eligible paper. Instruments for financing agricul­
tural or industrial production are usually acceptable for
longer maturities than those covering commercial trans­
actions— a differentiation through which the central banks
can encourage the development and financing of certain
sectors in their economies, while limiting credit flows to
other sectors. Thus, Sierra Leone and Uganda rediscount
paper for commercial transactions with maturities of up
to 90 days and allow maturities of up to 180 days for
paper financing the movement and marketing of agricul­
tural or mineral products. In Jordan, the respective maxi­
mum maturities are three and nine months. Kenya, Tan­
zania, Guyana, and Trinidad-Tobago allow maturities of
180 days for all types of paper, but the first three of these
countries provide that the limit may be extended to 270
days for paper financing agricultural or industrial produc­
tion if it fosters the development of the economy. Brazil
does not specify the types of assets that can be redis­
counted, bought, or sold by the central bank. The latter has
taken over the functions of the rediscount department of
the Bank of Brazil, but the policy governing such opera­
tions is decided by the National Monetary Council.
All the central bank statutes specify the conditions
under which loans and advances, backed by adequate
collateral, may be extended to commercial banks. In
Uganda, Jordan, Sierra Leone, and Malawi the maximum
maturity is three months, while in Kenya, Tanzania,
Trinidad-Tobago, and Guyana it is six months. Zambia,
Rhodesia, and Brazil set no maximum. In Brazil, policy




governing loan operations is established by the National
Monetary Council.
Several of the new central banks have the power to
establish interest ceilings. Those of Kenya, Uganda,
Tanzania, and Guyana, and also the National Monetary
Council in Brazil, are authorized to limit the interest rate
that commercial banks may pay on deposits and other
liabilities. With the exception of the central banks in
Kenya and Tanzania, these same institutions may set
minimum or maximum rates also on bank charges for
loans, advances, and other forms of credit, including the
establishment of preferential rates to encourage or limit
credit to any particular sector of the economy.
Authority for direct controls on the amount and avail­
ability of commercial bank credit exists in a number of
the statutes. The central banks of Kenya, Tanzania,
Uganda, Zambia, Guyana, and also Trinidad-Tobago with
the approval of the finance minister, may all prescribe
ceilings— either general or selective— on the amount of
loans and advances that commercial banks may grant
during any period. These same banks, except that of
Zambia, may issue instructions specifying the purposes
and conditions under which loans, advances, or invest­
ments may be made. In Zambia and Rhodesia, it may be
required that a specified percentage of any increase in
total advances and bills discounted be deposited with the
central bank.
Trinidad-Tobago, as well as Zambia with ministerial
consent, has statutory provisions whereby the central bank
may set a minimum ratio of commercial banks’ local assets
to their local liabilities, to go into effect six months from
official notice. Any variation in this ratio shall not exceed
10 per cent (Trinidad-Tobago) or 5 per cent (Zambia),
during a given six-month period. Thus, these two coun­
tries could gradually require that foreign banks operating
in their territories increase their proportionate holdings of
domestic assets.
INTERNATIONAL RESERVES

All the countries hold international reserves as a means
of maintaining the exchange value of their monetary units.
Thus, the statutes for their new central banks require that
a certain part of the banks’ assets be held in some inter­
nationally acceptable form to constitute these reserves.
Gold is listed for this purpose by all the central bank acts
and, except in Brazil and Guyana, foreign currencies that
are freely convertible into gold are also specifically in­
cluded. Brazil and Guyana include all types of foreign
exchange, convertible or not, as part of their international
reserves. Again with the exception of Brazil, holdings of

19

FEDERAL RESERVE BANK OF NEW YORK

foreign Treasury bills and of securities denominated in
convertible currencies qualify as external reserves.7 A num­
ber of the central bank statutes allow inclusion of foreign
bills of exchange. Other assets that may qualify are securi­
ties of international financial institutions (Trinidad-Tobago,
Guyana, Tanzania, and Kenya) and automatic drawing
rights at the International Monetary Fund (Guyana and
Trinidad-Tobago).
Uganda, Jordan, Sierra Leone, and Malawi set specific
limits on the maturities and amounts of the foreign instru­
ments that may be held for international reserve purposes.
In general, three-month bills of exchange, six-month Trea­
sury bills, and medium-term securities meet the require­
ments.
All the countries except Brazil state the level below
which these international reserves may not fall, but the
level is expressed in varying ways. Most of the countries
express it as a percentage of central bank demand liabili­
ties: in Jordan, 100 per cent; in Trinidad-Tobago, Guyana,
Sierra Leone, and Malawi, 50 per cent; in Uganda, 40 per
cent; and in Rhodesia, 25 per cent. In Zambia the require­
ment is 50 per cent of total liabilities held in June 1965,
when the Bank of Rhodesia and Nyasaland was dissolved,
and 25 per cent of all increases in liabilities since that time.
Kenya and Tanzania, the two other countries that have
central bank reserve requirements, relate the level to
balance-of-payments needs: their international reserves

7 The statutes of Tanzania and
require that the securities be issued in




may not fall below the value of four months’ imports as
recorded and averaged for the three preceding years.
Special provision is made in Rhodesia and Zambia for
the temporary suspension of these reserve requirements.
In those countries, the finance minister may waive the
statutory conditions for as long as six months, and even
longer if legislative approval is given.
CONCLUSION

In general, the new central banks have been asked to
help create an atmosphere conducive to economic devel­
opment in their respective countries, while at the same
time maintaining monetary stability. The majority of these
countries lack fully developed financial institutions that
could effectively channel available savings into productive
investment, and hence the central banks’ basic objectives
include the responsibility of encouraging the development
of such institutions. In fact, rather than being involved
primarily with the implementation of monetary policy in
the more narrow sense, many of the recently established
central banks have come to concern themselves also with
the broader goals of economic policy. In particular,
some of the new central banks have been conceived as
organs for financing— or arranging the finance for—
long-term basic economic development, as well as for
building up a tightly knit and comprehensive system of
banks and related financial institutions. In addition, the
new banks should aim to manage foreign financial and
monetary relations in such a fashion that the inflow of
foreign
capital is encouraged and balance-of-payments
Guyana do not specifically
crises are avoided.
convertible currencies.