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FEDERAL RESERVE BANK OF NEW YORK

3

P rio r it ie s fo r t h e In tern atio n al M o n e t a r y S y s t e m
B y P a u l A. V o l c k e r
P resident, Federal R eserve B ank o f N ew Y o rk

R em arks before the N ational Foreign Trade Council
in N ew Y o rk City on M onday, N ovem ber 17, 1975

It was three years ago when, in a different capacity, I
last spoke before this forum . My purpose then was to
explain and defend the official U nited States proposals for
reform of the international m onetary system that had been
presented shortly before to the annual m eeting of the
International M onetary Fund.
The U nited States and other countries then looked
tow ard an am bitious restructuring of the IM F articles,
resolving in one set of com prehensive negotiations an out­
line for a m onetary system suitable for today’s world.
Events have forced a different and less sweeping approach.
Some m ajor issues have been settled, at least tem porarily,
by m arkets and governm ents responding to the pressures
of new events. O thers have been left partly or wholly
unresolved. T oday, speaking not for the U nited States
G overnm ent or for the Federal Reserve System as a whole,
I would like to address a few of these problem s again, in
the light of w hat has happened in the intervening period.
In approaching the job of rebuilding the international
m onetary system, perhaps the first thing th at strikes a
“reform er” is the num ber, severity, and essential unpredict­
ability of the shocks th at have struck the w orld econom y
in these past four years. Since the B retton W oods system
broke dow n and the C om m ittee of T w enty launched its
efforts, there has been a w orldw ide boom , an o utburst of
two-digit inflation, enorm ous fluctuations in basic agricul­
tural prices, the oil crisis, and then sharp recession. M ean­
while, the process of negotiation h ad clearly reflected
m arked differences in perspective am ong countries about
the priorities for a new m onetary system, and these dif­




ferences could not be quickly resolved.
In the circum stances, it is not surprising— and perhaps
m ore realistic— th at we have adopted a m ore piecem eal
approach tow ard change and reform . N otably, while
specific exchange rate practices vary widely am ong coun­
tries, the floating of m ajor currencies has becom e a dom i­
nant fact of life. Q uestions of international control of
reserve creation and of reserve “consolidation” , which
had earlier been a preoccupation of m any reform ers, have
been for the tim e put aside.
This is not a neat, intellectually satisfying picture.
M any feared that resort to floating w ithout clearly defined
rules of behavior would underm ine international economic
integration and interfere with trade and investm ent. Some
went further. They felt th at w hat they saw as a total break­
down of the m onetary order was responsible fo r m uch of
the instability in the w orld econom y and carried the seeds
of political and econom ic chaos.
B ut the w orst has plainly not happened. Flows of inter­
national trade and investm ent— while recently affected by
recession— have been well m aintained. C ontrols on trade
and paym ents have not proliferated. R esort to “beggar
my neighbor” policies— one source of concern to those
pushing com prehensive reform — is so far notable m ostly
by its absence.
H ave the fears been unjustified, or have we simply
been lucky— at least in this area?
I don’t w ant to discount entirely the possible role of
good fortune in hum an affairs. B ut I suspect it has been
three other, m ore identifiable, factors th at have m ade the

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MONTHLY REVIEW, JANUARY 1976

m ajor contribution to the reasonably effective functioning
of the system.
P rivate m arket m echanism s have proved to be m uch
m ore resilient th an the pessim ists feared, or perhaps even
than the optim ists hoped. B oth business firms and finan­
cial institutions have dem onstrated rem arkable ability to
adapt to the new circum stances.
F o r their p art, the national governm ents of the indus­
trialized w orld, influenced by the habits of decades of
successful international econom ic cooperation, have not
retreated into overtly nationalistic and autarchic policies.
T o be sure, negotiations on trade, m oney, energy, and
developm ent have been proceeding at a frustratingly slow
pace. But, the fram ew ork and platform for forw ardlooking negotiations have been m aintained.
N ot least, the new flexibility of exchange rates— in tro ­
duced not by agreed design but under the force of events
— has helped us cushion and absorb the successive blows
to econom ic stability while facilitating some longer run
balance-of-paym ents adjustm ents th at had eluded us so
long.
T here is room for satisfaction in this experience. B ut
it would, in my judgm ent, be a m istake to conclude all is
well— th at the essential job of reform has been done in,
as it were, a fit of absentm indedness.
Exchange rates have at times been highly volatile. P rac­
tices with respect to reserve creation and com position
have becom e m ore diverse and less predictable. M ore
broadly, the international m onetary system has been func­
tioning with only rath er vaguely understood “rules of good
behavior” and guidelines of uncertain status.
In a period of radical change and transition, the
absence of a well-defined structure and agreed rules has
perhaps been inevitable and even useful in helping us to
break out from outm oded patterns. C ertainly, to accom ­
m odate to the turm oil surrounding us, a larger degree of
flexibility has been essential.
N evertheless, there are, in my view, dangers and diffi­
culties in this situation— in continuing indefinitely w ithout
a greater sense of structure or an identifiable set of codes
of conduct in international m onetary affairs. V olatile
exchange m arkets feed uncertainty. Diversity in m anage­
m ent of official reserves, w hile undoubtedly welcome from
the point of view of som e individual countries, could
degenerate into a lack of consistency and predictability
contributing to furth er instability. A sense of drift, or
worse, p otential conflict, in the policies and purposes of
m ajor countries could arise, eroding instincts for co­
operative policies and m utual confidence. A ll of this sup­
ports the thesis th at m onetary reform should rem ain high
on the intern atio n al agenda.




T H E A M E R I C A N I N T E R E S T IN R E F O R M

N o reform effort will be successful th at does n o t take
into account som e simple truths of international eco­
nom ic and political life. A m ong these is the fact th at the
U nited States is still by all counts the largest single eco­
nom ic force in the w orld. F oreign concern with, and
sensitivity to, ou r econom ic health rem ains high. O ur
financial m arkets are unm atched in their b read th and
strength. T he dollar is still by far the w orld’s leading cur­
rency.
H ow ever, the U nited States is not nearly so predom i­
nant in the world econom y as it was in the heyday of
B retton W oods. T he econom ic and political strength of
our trading partners has grown, in relative as well as
absolute term s. T hey are bound to look at some issues
from a different perspective, and their differing views will
need to be blended into a coherent whole.
It is not just th at econom ic situations of individual
countries differ— for instance, their relative dependence
on external trade and capital m arkets and their degree
of developm ent. Intangible, but strongly felt, m atters of
national prestige som etim es develop, and there is a strong
desire for the form and substance of sym m etry and
equality.
Faced with these com plications and difficulties, the
tem ptation can always arise for a large continental pow er
like the U nited States to retreat from the process of nego­
tiation and reform and to limit involvem ent in the w orld
econom y. B ut th at is not today, if it ever was, a realistic
course. T he objective circum stances point in quite the
other direction.
The growing strength of your organization reflects the
fact that, even as the relative size and dom inance of the
U nited States in the w orld econom y has been reduced,
our econom y has also becom e m uch m ore open. O ur ex­
ports, in little m ore th an a decade, have increased from
8 percent of the output of dom estic mines and factories
to 15 Vi percent. W e are dependent on im ported energy
and other m aterials for a large fraction of our needs and
on foreign m arkets for similarly large fractions of our
agricultural output. O ur m ajor financial institutions have
increasing proportions of their assets and liabilities over­
seas; some of our leading banks, generating half or m ore
of their profits from international business, illustrate the
point dram atically.
Inevitably, with few sectors of the U nited States econ­
omy insulated from external influence, our approach to
m onetary reform , as that of other countries, has to take
account of our im m ediate econom ic interests. B ut the
broader goals m ust rem ain as well, the larger vision of a

FEDERAL RESERVE BANK OF NEW YORK

developing w orld order, in w hich all countries— large
and small, rich and p oor— can prosper. T he essential
requirem ent is th at we find ways to safeguard our legiti­
m ate interests in a fram ew ork th at reconciles those in­
terests with those of others.
T he C om m ittee of Tw enty faced th at issue on a large
scale in attem pting to deal w ith all aspects of the m one­
tary system sim ultaneously. P erhaps it tried too m uch
too soon. N ow , we have a chance to proceed in a m ore
evolutionary way, testing the results as we go and learn­
ing from the turbulent experience of recent years.
In this process, two priorities suggest themselves. F o r
the longer run, we will need to take up again the old
issue of how to achieve some control over international
liquidity and to develop a stable and acceptable w orld
reserve asset. M ore im m ediately, we need to see how,
within the b ro ad fram ew ork of the m ore flexible exchange
rate practices achieved in recent years, we can achieve
greater stability in m arket perform ance.
IN T E R N A T IO N A L LIQ U ID ITY

O n the face of it, arrangem ents for international liquid­
ity— its creation and com position— appear m ore haphaz­
ard today than ever. In the context of B retton W oods, it
was already com plicated enough; the balance-of-paym ents
positions of the reserve currency countries, the balance
betw een the production of gold and private dem ands and
official convertibility policies all played a part. T oday,
gold neither flows into nor out of reserves in substantial
volum e, but its price fluctuates widely in the m arket. In ­
tervention practices, leading to the creation or destruc­
tion of reserves, vary greatly am ong countries, and there
has been m ore desire for currency diversification in re­
serve holdings. The attraction of E uro-currency m arkets,
w hether for the placem ent of reserve assets o r for offi­
cial borrow ings, has added to the avenues of reserve cre­
ation and opened new options for reserve holdings.
W ith other reserve com ponents expanding so rapidly,
the SD R— the chosen instrum ent for “ratio n al” interna­
tional reserve m anagem ent— has understandably been
held at a fixed and relatively sm all total. The revised valu­
ation and interest rate form ulas have m ade the SDR a
usable asset once m ore in the context of a floating system,
and it has received m ore attention as a unit of account.
But, as m atters stand, SD R creation is not a significant
factor in determ ining the supply o r com position of re­
serves. G old is still im portant for some countries as a
kind of residual n ational asset. B ut it stands, convicted
by its own price instability, as an inactive com ponent of
international reserves.




5

A ll of this has raised two im portant questions. T he
first concerns the aggregate volum e of reserves. T he ob­
servable statistic is th at a m assive volum e of new reserves
has been generated by the present system— or m ore ac­
curately out of the breakdow n of the old. T here is con­
cern th at this creation of international liquidity has
contributed to strong inflationary forces in the past, and
the process may be repeated.
T he second question grows out of the possibility of
sizable shifts in the com position of reserves am ong p ar­
ticular currencies. If such shifts developed on an im por­
tant scale, they w ould add to exchange m arket instability
in general and, in the view of some, to system atic u n der­
valuation of the dollar should “diversification” out of
dollars prove a lasting phenom enon.
B efore approaching possible solutions to these prob­
lems, it is im portant to keep them in perspective. In the
four and one-half years since the end of 1970, w orld re­
serves, as usually calculated keeping gold at the official
price, have m ore th an doubled in dollar term s, rising
from $94 billion to over $225 billion this sum m er. T he
m ost rapid growth took place during the earlier p a rt of
the period, before floating exchange rates were general­
ized, and therefore should not be associated with that
system. In fact, in 1971-72, the ratio of reserves to trade,
one simple though incom plete m easure of reserve ade­
quacy, sharply reversed the long decline th at had per­
sisted over the postw ar period. B ut the ratio of reserves to
w orld im ports then dropped again in the two years after
1972. F o r a sam ple of sixty countries, th at ratio at the
end of 1974 stood at 24 percent. T h at was the lowest
point ever recorded since the series started in 1954, w hen
the ratio stood at just over 70 percent.
The oil-related paym ents im balances have, of course,
affected the distribution of reserves. In fact, over the past
two years, holdings of reserves by other than O P E C coun­
tries have experienced virtually no growth.
It is questionable in my m ind w hether the $40 billion
of “reserves” accum ulated by O P E C nations during that
period should be considered, w ithout qualification, as a
p art of the w orld total. Those O P E C reserves by and
large are not considered by their holders as balances held
against short- or m edium -term contingencies— the usual
function of reserves— but rath er as an im portant elem ent
of longer term national savings, w hatever the precise n a­
ture of the investm ent m edia used. O ver a m ore distant
tim e horizon, as their surplus oil incom e is curtailed, the
funds m ay be spent. B ut it does not necessarily follow
th at reserves of other countries will then increase, since
their surpluses might be used for the repaym ent of debt.
To put the point another way, if the objective were to

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MONTHLY REVIEW, JANUARY 1976

hold the recorded total of w orld reserves unchanged, the
accum ulation and subsequent liquidation of O P E C re­
serves w ould force sharp contraction and then rebuilding
on o ther countries. F o r oil-im porting countries, their will­
ingness in m any cases to engage in substantial official
borrow ing to m aintain reserve holdings does not support
the idea of an enorm ous surfeit of w orld reserves.
T he parallel concern, about the possible instability of
reserve currency holdings, seems to wax or wane with
the perform ance of the exchange m arkets and particularly
confidence in the dollar. W hile the statistics are not really
adequate, the central banks of the leading industrial coun­
tries have n o t shifted any significant am ounts of funds.
P ractices of countries th at have been accum ulating new
reserves are m ore varied, however, and some have m ade
placem ents in a num ber of different currencies.
A ltogether, I do not see here cause for great im m ediate
alarm . N evertheless, the degree of rem aining uncertainty
about reserve creation and com position m akes it appro­
priate to study techniques designed to deal w ith the pro b ­
lem. In particular, a num ber of proposals have been m ade
for “consolidation” of holdings of dollars and other re­
serve currencies, a technique which contem plates individual
countries depositing currencies w ith the IM F in retu rn
for an equivalent am ount of SD Rs. To achieve control
over future reserve additions, further acquisitions of cur­
rency balances w ould presum ably need to be limited.
In approaching these questions, I see no issue of n a­
tional pride. N o r do I see any overwhelm ing national
purpose o r com m ercial advantage served by clinging to
an exclusive reserve currency role for the dollar— a role
th at developed originally not out of deliberate national
choice b u t out of a long evolution of m arket and reserve
practices.
T he real issue is w hether so heavy a use of national
currencies as at present contributes to the stability and
adaptability of the m onetary system as a whole. C onsoli­
d ation of reserve currencies in concept w ould rem ove one
source of instability in exchange rates and, if in fact the
alternative w ould be some diversification out of dollars,
the perform ance of the dollar in the exchange m arket
m ight be strengthened. H ow ever, the case can easily be
overstated in both respects.
M arkets are affected by transactions at the m argin. N o
consolidation plan in any relevant tim e horizon will dis­
pense w ith a sizable volume of reserve currency holdings.
Such holdings are necessary, ap art from all other attrac­
tions, fo r intervention purposes and to provide some
m argin of elasticity for reserve creation o r destruction. So
long as a substantial volum e of reserve currencies rem ains
in th e system, m arginal shifts in these balances could still




be a potential m arket factor. M oreover, continued use of
the dollar as an intervention currency by others would
m ean th at its value at times will be affected by changes
in the paym ents position of other countries, just as at
present.
M ore broadly, even com plete elim ination of reserve
currencies w ould not insulate us or others from flows of
funds in private m arkets inspired by swings in confidence,
by differentials in interest rates, or by other factors. P ri­
vate holdings of dollars— w hether in the U nited States or
abroad— are, after all, both larger in the aggregate and
potentially m ore sensitive than official holdings.
C onsolidation of reserve currencies can at best be only
a step tow ard the further objective of regaining control
over the grow th of international liquidity. T h at objective
could indeed be facilitated by w ider use of a com m on
international reserve asset on the SD R prototype. A few
contingencies— such as a drain on w orld reserves from a
persistent U nited States surplus som etim e in the future—
w ould then be dealt with directly. B ut consolidation
w ould not by itself help w ith the larger problem of con­
trolling future grow th in reserves. N o r can it resolve the
interesting question of just how m any reserves we need
or w ant in a new w orld m onetary order.
Finally, a host of practical problem s w ould need to be
handled in any consolidation proposal, problem s no less
difficult because they are sometimes term ed technical. F o r
instance, w hat specific obligations would the U nited States
or others assume if dollar balances were to be taken over
by the IM F and SDRs em itted as a substitute? If SDRs
are to becom e a m uch larger proportion of reserve assets,
w hat new undertakings and obligations might be required
to ensure their usability on a large scale on short notice?
In raising these questions, I w ant only to em phasize
that the problem of controlling the size and com position
of reserves will not yield to quick and easy answers. I do
not m ean to suggest that these issues should be rem oved
from the agenda for reform . Indeed, the incentive for
giving m ore concentrated attention to the problem is not
entirely economic. Suspicion and concern th at the U nited
States, despite a decline in its relative econom ic strength,
w ants to m aintain special and inequitable advantages for
itself through a dom inant role for the dollar continue to
lurk in the background of m onetary negotiations. T hat
suspicion will be rem oved only by dispassionate study of
the real issues.
THE EXCHANGE RATE SY ST E M

T here is one further, and fundam ental, reason why the
p ro p er approach to the problem of international liquidity

FEDERAL RESERVE BANK OF NEW YORK

will take tim e to resolve: the answer, in im portant re ­
spects, will be dependent on the kind of exchange rate
system we w ant. E xchange rate practices are m uch m ore
directly relevant to the w orld’s business— and in the past
have been a m atter of high controversy. Fortunately, there
are signs th at a b ro ad consensus m ay be com ing w ithin
reach.
I have already alluded to the constructive role of
flexible exchange rates in dealing w ith some of the chronic
paym ents im balances of earlier years and in coping with
other strains on the w orld economy. B ut along with the
good, the degree of turbulence in exchange m arkets from
tim e to tim e has been a cause for concern. A large m ea­
sure of responsibility m ust be assigned to the violent
shocks to the system, and to the w eakening of confidence
in currency values generally during a period of inflation.
A s econom ies stabilize, exchange rates m ay as well.
Nevertheless, there is room for questioning w hether a
system of com pletely free floating rates— if individual
countries are led to believe such a system perm its full
autonom y in national policy— will continue to be prone
to sizable fluctuations in currency values, with adverse
consequences for trade and investm ent over time.
Analytically, floating rate theorists have typically em pha­
sized the benign role th at “stabilizing” speculators should
play in m aintaining the stability of floating exchange rates.
As exchange rates begin for w hatever reason to deviate
substantially from some anticipated longer term equilib­
rium , theory suggests the speculator will step in and con­
tain the movement.
But observation shows the opposite som etimes hap ­
pens; a kind of bandw agon psychology can develop as
an exchange rate begins to move, say, because of a change
in relative interest rates or other factors. W hen there is
considerable uncertainty in the m arket about w hat ex­
change rate is broadly appropriate in the future, m arket
pressures can cum ulate and for a tim e feed upon them ­
selves. T he friendly “ stabilizing” speculator is reluctant
to step in.
L ooking back, we have avoided the atm osphere of
crisis and the sharp discontinuities in exchange rates th at
characterized the later years of the B retton W oods sys­
tem . H ow ever, with floating rates, actual exchange rate
swings am ong som e leading currencies have been very
sizable. T he typical daily fluctuation is m uch larger than
before and, m ore im portant, changes have cum ulated to
as m uch as 15 to 20 percent over a relatively short period
of tim e only to be largely o r entirely reversed in ensuing
m onths.
T he evidence is n o t yet all in as to the consequences.
B anks and trad ers have by and large coped well— sub­




7

stantially better than if w idespread controls had been
introduced in a probably futile effort to prom ote greater
stability. H ow ever, speculative excesses have also p ro ­
duced some strains, and surely swings so large as we
have seen in key exchange rates can have little to do
with com parative advantage and the efficient allocation
of real resources. In the background, the larger danger
rem ains that fear of overvalued or undervalued exchange
rates, com bined w ith the absence of m ore clearly defined
rules of good behavior, m ay tem pt one country or an­
other to take refuge in trade and paym ents restrictions.
Different countries will naturally attach different weight
to these problem s, depending on their degree of depend­
ence on foreign trade and the structure of their trad e and
other paym ents flows. T he U nited States, which still has
a relatively sm aller foreign trade sector than m ost other
industrialized countries, will naturally weigh the gains
from dom estic autonom y m ore heavily w hen a choice
exists. B ut we have had am ple reason to learn in recent
years that exchange rate changes are not an insignificant
m atter to our own economy.
TO W A R D G R E A T E R ST A B IL IT Y

T he exchange rate issue has long been approached as
a m atter of doctrine. It is som ehow m ore satisfying to
argue for the extrem es of fixed and freely floating rates—
both have a long intellectual history and lend them selves
to rath er clear rules of conduct. The trouble is neither,
pressed to an extrem e, fits the reality of the w orld we
have. M aintenance of fixed rates implies a degree of in­
ternational econom ic integration we do not have and
m ost governm ents do not w ant or, alternatively, heavy
use of controls th at w ould them selves dam age trade and
capital m ovem ents. Com pletely free floating by all im ­
po rtan t currencies, w hen com bined w ith the exercise of
com plete autonom y in econom ic policym aking, could risk
over tim e a degree of econom ic disintegration we cannot
afford. T he ground in betw een— while perhaps less satis­
fying intellectually— does not seem to me a vacuous com ­
prom ise. It fits the w orld we have.
There is some evidence th a t is the way the debate is
moving. Some countries— as in the C om m on M arket—
will seek a large degree of “fixity” am ong them selves
but appear willing to float vis-a-vis others. O ther im por­
tan t countries— including the U nited States— seem likely
to retain floating rates for as long ahead as we can see.
T here is recognition, w ithin the context of a system in
which m ajor currencies will rem ain floating, of the de­
sirability of greater stability. B ut stability cannot be arti­
ficially im posed. T he aim m ust be to achieve a stability

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MONTHLY REVIEW, JANUARY 1976

consistent with m arket forces, not a rigidity im posed by
official action.
T here are also signs, as yet inconclusive, that the m ar­
kets themselves are m oving tow ard m ore stability. A fter
all, exchange rate flexibility is a very new elem ent in
post-W orld W ar II m onetary arrangem ents, and the m ar­
ket and the authorities have benefited from a learning
period. I am optim istic th at the extrem e instability of
recent years will prove to have been— in retrospect— just a
historical episode.
B ut I d o n ’t w ant to sit back and rely on hope alone.
T he chances for stability will im prove as m arket expecta­
tions about an ap propriate range of equilibrium exchange
rates are m ore firmly established. A nd I believe the au­
thorities have a role to play in the process.
Q uestions of confidence are param ount. Confidence in
currency values is inexorably linked to confidence in the
soundness of our econom ies, our institutions, and in the
policies follow ed by governm ents to assure dom estic sta­
bility.
A t a m uch m ore technical level, official intervention is
som etim es useful in sm oothing disturbed m arkets. In ­
deed we have seen periods when the m ere knowledge
th at the authorities were ready to move in steadied the
m arket. W hen m arkets move to extrem es clearly out of
keeping with m ore fundam ental factors, m ore forceful
approaches have at times been helpful.
Conversely, any favorable effects will soon be dissi­
pated if there is disarray in tactics or purposes among
the principal trading nations. M oreover, no am ount of
intervention will be useful if it runs against fundam ental
m arket forces or if it is viewed as a substitute for other
action to bring m onetary and other econom ic conditions
into closer alignment.
In o ther words, intervention is a tactic— sometimes
useful, som etim es not. By itself, it will accom plish little
if not accom panied by appropriate dom estic policies, by
internal stability, and by some willingness to take account
of international considerations in policym aking. Floating
rates are attractive precisely because they give us a bene­
ficial new degree of freedom in reconciling our dom estic
policies with open international m arkets. B ut to act as
though nations can have com plete independence in n a ­
tional policy in an in terdependent w orld w ould be to
abuse the system. T he result w ould be to dim inish the
chances for greater stability in exchange m arkets.
T hese are obvious points, and so are the difficulties in
approaching b etter coordination of policies. All those old
dilem m as and conflicts in dom estic and external policy
rear their heads. T he U nited States and other nations will
often find it difficult to give international considerations




heavy weight. A nd because the exchange m arket is m ulti­
sided, the difficulties are increased w hen several countries
are involved.
Nevertheless, there is ground on which to build. T he
central problem prim arily concerns a small num ber of
m ajor countries— if their currencies are reasonably stable,
the rest can fall in place. Indeed, there is room in practice
for a considerable variety of specific exchange rate prac­
tices; these can be m anaged w ithout great difficulty so
long as the exchange rate relationships betw een the U nited
States, its E uropean C om m on M arket trading partners, and
Japan provide a reasonably stable focus.
We have already gone a long way in developing infor­
mal consultative arrangem ents am ong these countries, and
I hope an atm osphere of m utual trust and respect. G rad­
ually, at least around the edges of econom ic policy, deci­
sions can take into account the m utual desirability of
relatively stable exchange m arkets. This seems to me
possible, for instance, in shaping the precise mix of fiscal
and m onetary policies and their timing. Eventually, a
com m on view can emerge as to an acceptable broad range
of exchange rates— possibly deliberately fuzzy around the
edges— consistent with m utual balance-of-paym ents equi­
librium and adjustm ent.
T hat view cannot be static and rigid if we are to retain
the flexibility afforded by floating rates. O ver time, it is
the m arket that has to tell us w hat is realistic and w hat is
not. But we also have seen the m arket move to extrem es,
and it is those extrem es that could usefully be dam pened.
T hat will happen w hen expectations in the m arketplace
about an appropriate range of exchange rates becom e
firmer. In the end, those expectations will need to find
support and justification in the stability and predictibility
of our econom ic policies.

C O N C L U SIO N

We have come through these turbulent years, not un­
scathed, but with our m onetary system operating and
trade strongly flowing. In the process, we have all learned
a good deal about m arkets, about the limits on official
action, and about ourselves.
W e have learned again th at no international system
will w ork well except on the bedrock of strong internal
econom ic policies and dom estic stability.
We have learned, too, th at policies th at m ay be fully
responsible and adequate in a purely dom estic context
are not enough. W e need to see how those policies fit and
m esh with those abroad to assure the stability of any
m onetary system.

FEDERAL RESERVE BANK OF NEW YORK

We have learned that large elem ents of flexibility in the
international system are essential in today’s world.
W e have developed new habits and m achinery for con­
sultation, building on the old.
W hat rem ains is to distill from this experience the new
codes of conduct necessary to strengthen the system and
to assure its durability, to fill in the obvious gaps, and to
bring the whole m ore clearly w ithin the orbit of the In te r­
national M onetary Fund.
By definition the international m onetary system has to
serve the needs of all nations. Success is dependent on
the reconciliation of national views and m utual adjustm ent.




9

In the end, those qualities can only be m aintained by
understanding and im petus from the highest levels of
governm ent. T h at is one reason— w ithout personally having
been engaged in the planning or privy to its results— why
I can see an extrem ely useful purpose in the Summit C on­
ference now ending. Perhaps my view is parochial, but
it seems to me a good thing for heads of governm ent of
the principal trading nations to get together and discuss
econom ic issues, and to understand each other’s problem s
in a way that only face-to-face discussion can achieve.
Econom ics after all is going to have a lot to do w ith how
well we get along on this increasingly small planet.

10

MONTHLY REVIEW, JANUARY 1976

P e t r o -D o lla r s , L D C s , and In tern atio n al B a n k s
B y R ic h a r d A . D e b s
First Vice President and Chief A dm inistrative Officer
Federal Reserve B ank of N ew Y o rk

A n address before a m eeting of
The F O R E X A ssociation of N orth A m erica
in N ew Y o rk City on Friday, January 9 ,1 9 7 6

F O R E X and the Federal R eserve B ank of New Y ork
have a great m any com m on interests— a healthy world
econom y, a well-functioning international financial m ech­
anism, a sound international banking system, and a
sm oothly operating foreign exchange m arket. In view of
this, I am pleased to have this opportunity to be with you
to review some of the m ajor developm ents that have
a bearing on those interests and to look ahead at problem s
and prospects for the future. As you well know, one
of the m ost significant developm ents of the past couple
of years has been the advent of the “petro-dollar”— a re­
cent and m ost significant addition to the vocabulary of
international finance. T oday I w ould like to focus in p ar­
ticular on some of the issues arising in connection with
the accum ulation and disposition of petro-dollar balances
and their im pact on international financial developm ents.
I would also like to have a look at the position of the less
developed countries (L D C s) and the role of the interna­
tional banking system in dealing w ith these m atters. These
issues are timely today as we begin the new year, particu­
larly in the light of the agreem ents reached in Jam aica
yesterday. They are also tim ely for m e personally since
I have just returned from a trip to the M iddle East, visit­
ing central banks and m onetary authorities there, and have
some fresh im pressions of the area th at I w ould like to
share with you.
As a very general observation, I will start by saying that
my recent visit confirm ed im pressions of earlier trips— and
impressions of oth er travelers to th at area— th at the m one­
tary authorities of the oil-exporting countries are contin­




uing to follow a responsible and constructive course in the
handling of the massive am ounts of petro-dollar balances
accum ulated by their respective countries. H ow ever dis­
ruptive the oil price increases have been for the world
economy in general, the m onetary authorities of the O P E C
countries, in m anaging the flows of funds through their
central banks, have been m ost careful to avoid disruptive
actions that, merely because of the huge am ounts involved,
could have unsettling effects on the international financial
m arkets. T he m agnitude of that task can best be illustrated
by the fact that these authorities have to invest— and rein­
vest— at a rate of several hundred million dollars each
week, every week of the year.
In carrying out their responsibilities, the m onetary au­
thorities in the oil-exporting countries have also recognized
the desirability of cooperation with the central banks of
other countries of the world. The need for central bank
cooperation has been recognized, notw ithstanding the basic
disagreem ent on the question of oil prices betw een the
oil-exporting and oil-im porting countries. I am pleased
to report in this regard th at close cooperation has been
developed betw een the Federal Reserve and the central
banks of the O P E C countries aimed at avoiding disruptive
flows of funds within our own m arkets, and ensuring that
m arket m echanism s continue to function efficiently in han ­
dling such flows. T he lines of com m unication and coordi­
nation th at we have established for these purposes have
been m ost effective and m utually beneficial.
A nother general observation w orth m aking is th at the
investm ent strategies of the various oil-exporting countries

FEDERAL RESERVE BANK OF NEW YORK

vary greatly. As a general rule, the O P E C countries have
as a com m on objective the developm ent of their internal
economies as rapidly as possible, recognizing the finite
nature of their petroleum resources and the necessity to
build a b road econom ic base for future developm ent. They
also have as a com m on objective the preservation of their
financial assets, pending the time when they will be needed
for purposes of internal econom ic developm ent. In this
sense, they look upon their financial assets as savings, to
be used at a later date— some sooner than later. Here,
however, the sim ilarity am ong the countries ends, and
there are great differences among them in their investm ent
strategies in attem pting to achieve these com m on objectives.
These differences reflect in large p art the differences
am ong them with respect to their internal developm ent
needs and absorptive capacities, as well as their gross oil
receipts. Obviously, a country like Saudi A rabia, with a
relatively low population density, low absorptive capacity,
and relatively high oil production, will have a larger sur­
plus than a country with a lower level of oil production or
a higher absorptive capacity. Perhaps not so obvious, but
just as im portant, is the fact that the investm ent strategies
of these two countries will differ greatly in the light of
those factors.
PETRO DOLLAR SU R P L U SE S

Turning now for a look at the figures, as we all know,
the overall paym ents surplus of the oil exporters fell
sharply in 1975. Some observers now believe that the
overall surplus is likely to disappear completely in a few
years. In any event, it is quite clear th at the m agnitude of
the surplus— and the m agnitude of the problem s arising
from the surplus— are m uch smaller than predicted earlier.
W hatever the case, I don’t think we should devote too
much tim e attem pting to predict with any precision the
eventual size of the cum ulative surplus and the time of
its peaking. T here are too m any im ponderables to rely
heavily on such long-range forecasts. The future course
of oil prices, of oil production, of oil dem and, as well as
the level of O P E C im ports, all of which are crucial ele­
ments in the equation, will be influenced by m any factors,
each of which can be perceived only dimly at this time.
To emphasize too heavily th at the total O PE C surplus is
likely to disappear in the not-too-distant future m ay di­
vert attention from the problem s th at we still face. In the
same vein, the earlier forecasts of huge and never-ending
surpluses may well have w eakened efforts to tackle the
im m ediate issues by m aking the problem s seem unm an­
ageable.
In 1975, the sharp reduction of the O P E C surplus re­




11

flected a num ber of factors. First of all, on the dem and
side, the steep recession in the industrial countries reduced
industrial use of all forms of energy.1 In addition, the
relatively w arm 1974-75 w inter helped reduce fuel con­
sum ption for heating. A t the same time, the natural m ar­
ket dem and response to higher prices finally began to
appear in significant degree. Both industrial users and
individuals particularly the form er, m ade serious efforts to
economize in their energy consum ption. The price elas­
ticity of dem and for oil is no doubt considerably larger in
the longer run than we at first surmised, or than we have
seen so far. Thus we should have some further effects
along this line. Beyond the m arket reaction, governm entled energy conservation program s have also begun to
dam pen oil demands. So far, these have been m ore effec­
tive abroad, especially in Europe and Japan, than in this
country.
As a result of all these factors, O PE C oil production in
1975 fell to 70 percent of capacity,2 the volume of O PE C
oil exports declined by m ore than 10 percent from 1974,
and the value of oil shipm ents fell by about 5 percent,
even in the face of increased oil prices in the course of
the year.3
O n the other side of the ledger, the surge of O PE C
im ports was also a m ajor factor in diminishing the surplus.
L ast year O P E C m erchandise im ports probably exceeded
$60 billion, com pared with some $37 billion in 1974 and
$20 billion in 1973. A rise in im port prices contributed
to this increase in dollar am ount, although the rate of
price increases appears to have slowed down last year.
The rate of increase in the volume of O PE C im ports, on
the other hand, continued unabated; in 1975 the volume
of im ports was m ore than double that of two years previ­
ously.
Given the lim ited port facilities of the O PE C countries,
this jum p in their im ports has been rather rem arkable.
H eadlines emphasize the port congestion in these coun­
tries, and a visitor can indeed see the long lines of freight­

1 The extent o f the recession is illustrated by the fact that the
volum e o f world trade in 1975 showed the first significant drop
(estim ated at 6-7 percent) since the end o f World War II.
2 OPEC oil production apparently amounted to a little more
than 26 m illion barrels per day, as against the 1973 peak o f more
than 30 m illion barrels per day.
3 The 1975 figure for oil shipments is estimated at about $100
billion on a transactions basis. This estim ate differs from estimated
cash revenues because oil paym ents lag shipments. This difference,
which appears to have been more than $10 billion in 1974 be­
cause o f the large price increase at the end o f 1973, was substan­
tially smaller last year.

12

MONTHLY REVIEW, JANUARY 1976

ers in the harbors waiting to unload. B ut a visitor to some
of the O PE C countries also becom es aware of the ingenu­
ity beginning to be shown in speeding the unloading of
shipm ents from abroad. The use of containerized barges,
floating docks, and other sim ilar devices is spreading,
although serious problem s of congestion rem ain.
A m erican inventiveness is playing an im portant role
in resolving m any of these problem s, just as A m erican
industry is contributing to the upsurge in O P E C im ports
in general. O n my latest visit, I was a little disappointed
to observe scattered indications th at U nited States m anu­
facturers may not be holding their own against those of
other industrial countries. U ntil recently at least (current
figures are hard to com e b y ), the already large U nited
States share in O PE C im ports had risen som ew hat further.
B ut I w onder w hether we are m aking as m uch of an effort
to participate in these rapidly growing m arkets as we
could. A visitor to these countries is struck by the grow­
ing inroads m ade there by Japanese and E uropean
products and services.
W ith the continuing rapid grow th of O P E C im ports
and the decline in their oil exports in 1975, the O PE C
current-account surplus— on a transactions as distinct
from a cash basis— appears to have been alm ost halved
in 1975, perhaps to $35 billion from the alm ost $70
billion level of 1974.4 F o r 1976, the prospect would
seem to be for little change in this net surplus. Unless the
recovery in the industrial countries gathers speed con­
siderably faster th an is now generally anticipated, O PE C
oil incom e is likely to grow no m ore than some 15-20
percent (ab o u t $15-20 b illio n ), assum ing the present
level of oil prices.
A t the same tim e, it w ould be surprising if total O PE C
im ports in 1976 increase significantly m ore than the
increase in their oil income. E ven though it seems clear
that the long-run im port capacity of these countries is
substantial,5 a slow dow n in the grow th of O PE C im ports
is likely. W orldwide inflation has lessened, and this will
keep down the rise in O PE C im port prices and thus in
im port values. M ore fundam entally, a num ber of the
“high absorber” countries are close to balance in their

external accounts and are already taking steps to m oder­
ate their im port expansion. F urtherm ore, all O P E C coun­
tries are finding that their internal developm ent efforts are
creating dom estic inflationary strains th at will probably
cause them to slow down their developm ent plans.
Looking at last year’s surplus on a cash basis (rath er
than a transactions b a sis), the total for 1975 came in
at about $30 billion. This com pares with $55 billion in
1974 <
;
am ount of the “investable surplus”—
the am ount that O P E C countries actually have available
to make new investm ents abroad. F or obvious reasons,
it is a figure of great interest to all of us involved in the
international financial m arkets.
The disposition of the O P E C investable surplus— or
the com position of O PE C investm ents— has now changed
greatly, both in geographic term s and in the types of
assets utilized. In the first place, the accrual of the surplus
itself has becom e m uch m ore concentrated. Saudi A rabia,
Kuwait, and the U nited A rab E m irates accounted for the
bulk of the O P E C cash surplus in 1975. Several of the
O PE C countries— A lgeria, E cuador, Indonesia— swung
into deficit. A few others, including Iran and V enezuela,
were coming close to balance. A num ber of O PE C coun­
tries have in fact already entered the international finan­
cial m arkets as borrow ers rather than investors— Algeria,
E cuador, Indonesia, Iraq, and Iran. T he desire to solidify
their credit standing at this early stage has been an im por­
tant reason behind these moves.
As for the area distribution of O PE C investm ent funds,
new sterling investm ents in the U nited K ingdom — as
opposed to the E uro-sterling m arkets— appear to have
stopped, although apparently there has not been any sub­
stantial disinvestment. A ccording to the B ank of E ng­
la n d ,7 O PE C sterling investm ents in the U nited K ingdom
are estim ated to have actually declined by $0.8 billion in
the second and third quarters of 1975, after having risen
the same am ount in the first quarter. In 1974 such invest­
ments had risen by $6 billion.
O PE C placem ents in the E uro-currency m arkets have
continued, but at a slower pace. F o r 1975 they may be
roughly estim ated at less than $10 billion, or about 30
percent of the investm ent total. In 1974, in contrast, the
E uro-currency m arkets had received the prim e share of

4 Current account defined to include transactions in goods and
services and private transfers.
5 On this point, we should be paying more attention to the
ability o f the industrial countries to satisfy the growing demands
for imports by these countries and to the possible strains on ca­
pacity in the industrial countries that could well develop as time
goes on.




GOPEC grants to the LDC s are not included as part o f this
investable surplus; that is, they are counted as an outflow before
the line is drawn to calculate the size o f the surplus. Grants and
other aid to the LDC s are discussed below.
7 Quarterly Bulletin (D ecem ber 1975).

FEDERAL RESERVE BANK OF NEW YORK

O P E C investm ents, estim ated at $23 billion or over 40
percent of the total.
T he U nited States share in the placem ent of O PE C
funds in 1975 appears to have stayed close to the 20
percent of 1974; in absolute term s such placem ents may
be put at about $6 billion in 1975, as against $1114 bil­
lion in 1974. A t the same time, there have been signif­
icant changes in the portfolio distribution of O PE C
placem ents in the U nited States, in the share of individual
O P E C countries in aggregate investm ents, and in the
m aturity pattern of O PE C holdings here.
As to changes in O PE C portfolio preferences, last year
there was a pronounced shift from tim e deposits in U nited
States banks to investm ents in G overnm ent and Federal
agency securities. In 1974, as m uch as 40 percent of
O P E C placem ents in the U nited States took the form of
time deposits. In 1975, such holdings appear to have
rem ained about stationary. A ggregate holdings of G ov­
ernm ent and Federal agency securities, on the other hand,
increased by m ore than $4 billion in 1975. The great
bulk of these securities are held by the Federal Reserve
Bank of New Y ork. T he Bank, as you know, m aintains
accounts for all of its foreign central b ank correspondents
and provides investm ent facilities for them in U nited
States T reasury and agency securities.8
A n even m ore significant change in O P E C investm ent
patterns is reflected in the dram atic surge of equity
purchases by a small num ber of O P E C countries in the
M iddle East. D uring the first ten m onths of 1975, re­
ported purchases of equities by residents of O PE C coun­
tries exceeded $1 billion, and no doubt additional
am ounts were indirectly acquired through E uropean
ban k s.9 I have the general im pression— which cannot be
substantiated by reported statistics— th at for 1975 as a
whole total O P E C equity investm ents in the U nited States
may well be double th at figure. W hile our statistics do
not give any indication as to w hether these securities have
been acquired by official agencies or private investors, it
is likely th at the bulk of these purchases were for official
accounts. T hese are portfolio investm ents and have not
been m ade for the purpose of acquiring control of indi­
vidual com panies. T hey appear to be spread am ong a
range of securities, and aggregate holdings of the shares

13

of individual corporations appear to account for only
a negligible proportion of their outstanding stock. I
should add that these official equity purchases in the
m arket on this scale are w ithout precedent in the adm in­
istration of the financial reserves of central banks and
governm ents. They would appear to be a not in appropri­
ate innovation on the part of countries such as these,
who wish to find a profitable outlet for their national
savings which they do not plan to draw on for m any
years to come. Such investm ents, m oreover, also con­
tribute to the basic strength of our stock m arket.
A nother significant aspect of O PE C investm ents in the
U nited States during 1975 is the increasing concentration
of placem ents here by a relatively few countries in the
Gulf area. A ctually, the acquisition of securities by these
countries— as reflected in holdings at the Federal Reserve
Bank of New Y ork— exceeded by a substantial m argin the
aggregate increase in O PE C holdings in this country. In
other words, during 1975 several O PE C countries in areas
outside the M iddle E ast drew down their holdings as one
would have expected in the light of well-publicized
changes in their financial position.
The com position of securities held in custody for O PE C
countries at the Federal Reserve Bank of New Y ork also
indicates a substantial lengthening of m aturities. This is
in line with an apparent lengthening of m aturities of
O PE C investments generally. O f the total O PE C invest­
m ent portfolio in the U nited States at the end of 1975,
long-term Treasury, Federal agency, and private securities
accounted for m ore than one third. A t the end of 1974,
the com parable proportion was a little more than 10 per­
cent.
O PE C investm ents in the U nited States, the U nited
Kingdom, and E uro-currency m arkets com bined thus
came to about one half of the total O PE C surplus in 1975.
Of the rem aining $15 billion— the other half— an esti­
m ated $2 billion was “diversified” as investments in the
dom estic m arkets of countries other than the U nited King­
dom or the U nited States, such as G erm any or Switzer­
land. The am ounts of these placements are rough approxi­
m ations because we have no detailed statistics on such
figures.
The rem ainder— approxim ately $ 13 billion— was placed
with international institutions, such as the IB R D and the
IM F, and as financial assistance in the form of loans to
other countries.10

8 At the end of 1975, securities held in custody for about 130
foreign and international accounts held at the Federal Reserve
Bank o f N ew York totaled $68 billion.
9 In 1974 the reported purchases amounted to only a few hun10 Details o f financial assistance to the LD C s are discussed
dred m illion dollars.
below.




14

MONTHLY REVIEW, JANUARY 1976

in oil im port prices. The worldwide inflation also eroded
the real value of the econom ic aid they received and re­
As the paym ents surplus of the O P E C countries fell duced the purchasing pow er of their external reserves.
sharply, its counterpart— the overall paym ents position of This cost to them was only partly offset by the reduction
all of the oil-im porting countries— changed substantially.
in the real costs of their debt burden th at inflation brings
The current-account balance of the industrial countries as about.
a group swung abruptly from a deficit of about $11 billion
The situation of the LD Cs is serious, but one can no
in 1974 to a surplus estim ated at m ore than $15 billion in longer regard them uniformly. W ithin this group, a sig­
1975.11 This change reflected the rise in the industrial nificant num ber of countries— ranging from Brazil to T ai­
countries’ exports to O P E C and the influence of recession wan— have been able, through a com bination of circum ­
in keeping down their overall im ports. A second group of stances since the 1960’s, to m ake significant breakthroughs
relatively well-off countries, the so-called m ore developed
in their economic development. Their industrialization and
prim ary-producing countries ranging from A ustralia to
export diversification has brought them to the point where
Yugoslavia, apparently saw little change in their large
their annual rates of growth in real incomes approach or
current-account deficit, which in 1974 had approached
even surpass 10 percent. T he oil crisis and the recession
$15 billion.
sharply slowed their growth in 1974 and 1975. B ut they
In contrast, the poorest group of the w orld’s countries,
have a cushion of external reserves and have retained
the oil-im porting LDCs, suffered yet another deteriora­ their internal m om entum . As the world econom y recovers,
tion in their already large balance-of-paym ents deficit.
it is a reasonable expectation that these so-called
In 1975 their deficit approached about $35 billion, com ­ middle-incom e LD Cs will be able to resum e their rela­
pared with $28 billion in 1974 and $9 billion in 1973. tively rapid growth.
This serious deterioration of these countries’ external posi­
The situation is quite different for the low-income LDCs
tion reflects a com bination of adverse developm ents— the
that have per capita incomes of less than $200 per annum .
rise in oil prices and worldwide inflation raised the price
These countries, ranging from Bangladesh to Zaire, have
of their im ports, and the recession w eakened the m arkets
a total population of one billion. Unlike the m iddle-incom e
for their exports, with exports falling both in value and
countries, most of them did not benefit from the 1973-74
volume terms.
com m odity boom, and their growth, slow as it had been
The quintupling of oil prices since 1973 added an esti­ previously, came to a com plete stop in 1974 and 1975.
m ated $12 billion to these countries’ annual oil im port T heir prospects, internal and external, are critical. A c­
cording to W orld Bank estim ates, even if total economic
costs. The higher prices of their other im ports, w hether
essential raw m aterials like fertilizer, or food or m anufac­ aid to these countries increases in m oney term s sufficiently
tures, added some further $25 billion to the cost of their to m aintain its real value, the real per capita annual in­
come growth will hardly exceed 1 percent in the rem ainder
im ports. In 1974 the LD Cs had been able to more than
of this decade. This is indeed a grim outlook. The longer
offset the higher costs of their im ports from the developed
oil-im porting countries through higher prices of their ex­ term outlook is particularly problem atical, given the im ­
ports, as they reaped the benefits of the 1973-74 com ­ m ediate difficulties these countries face in the financing of
their swollen external deficits.
m odity boom . But in 1975, as the com m odity boom
In 1975 the oil-im porting LD Cs as a whole m anaged
collapsed, their export prices fell. The prices of their
im ports, however, continued to rise. As a result, their to finance their deficits with only a m oderate drawingdown of their external reserves, an estim ated $3 billion
term s of trade— the change in export prices relative to
out of a total of some $30 billion at the beginning of the
the change in im port prices— deteriorated sharply in 1975
by m ore than 10 percent. This deterioration followed a 4 year. They had to cut back the volume of their im ports,
apparently by m ore than 5 percent, but they obtained larger
percent deterioration in 1974 that stem m ed from the jum p
am ounts of international assistance which may be esti­
m ated at about $17 billion, and were able greatly to in­
crease their borrow ing from private lenders, possibly to
as much as $14 billion. As the recovery in the industrial
11 The current account is defined to include goods and service countries takes hold and they increase their im ports, the
transactions and private transfers. The current-account positions
general expectation is that the overall deficit of the LD Cs
of all the major industrial countries, except Canada and Germany,
strengthened in 1975. The United States experienced the largest
will decline. This is a reasonably safe assum ption, but it
change, as its surplus rose from $2 billion to an estimated $15
is unlikely that this decline will be very great. D espite the
billion.
THE P R O B L E M S OF THE LDCS




FEDERAL RESERVE BANK OF NEW YORK

hazards of forecasting, one can estim ate th at LD Cs will
face a current-account deficit in 1976 of around $30 bil­
lion, as against an estim ated $35 billion in 1975.
W hat are the prospects for the two m ain sources of
financing the L D C s’ deficits: official assistance and private
lending?
Official financing, as I indicated, may have reached $17
billion last year, and of this IM F financing cam e to about
$2 billion. This took place partly through the special oil
facility, to which both O PE C and O E C D countries con­
trib u ted ,12 and partly through regular IM F channels. The
oil facility is due to be phased out, and therefore prim ary
reliance will have to be placed on the basic IM F quota
facilities— which were expanded by the Jam aica agree­
m ent yesterday— and the new plans for an IM F trust fund
and an expanded com pensatory financing facility. It seems
clear th at IM F financing will have to play an im portant
role, as was recognized at the Jam aica meetings.
T he prospects for fu rther growth in total assistance
provided by both the O E C D and the O P E C countries,
bilaterally or m ultilaterally, are not very bright. The
O EC D countries as a whole appear to have som ew hat
increased their total aid in m onetary term s, although as
a propo rtio n of their G N P their aid rem ains substantially
below the target agreed upon for the 1970’s.13 Little
change appears on the im m ediate horizon.
The O PE C countries expanded their total assistance
to over $9 billion in 1975 from $7 billion in 1974,
including their actual contribution ($2 .6 billion in 1975
and $1.8 billion in 1 9 7 4 )14 to the IM F oil facility, which
is utilized by developed as well as developing countries.
This total assistance in 1975 came to about 5 percent of
their G N P and 9 percent of their oil exports. A bout a
third of this aid total was in the form of grants and loans
at concessionary interest rates. B ilateral aid appears to

15

be an increasing proportion of the total, accounting for
about one third. W ith respect to m ultilateral aid, not
counting the IM F oil facility, O P E C resources appear to
be increasingly channeled through special institutions
set up and adm inistered by O P E C countries.15 W hile the
bulk of total concessionary aid by O PE C countries con­
tinues to be given to a few A rab countries, the p roportion
directed to non-A rab low -incom e developing countries is
rising.
As O PE C surpluses diminish, only a few O P E C coun­
tries will be in the position of being able to provide
assistance out of external revenues th at are not im m edi­
ately needed domestically. In 1975 the larger p a rt of
O P E C concessionary aid was provided by three countries,
Saudi A rabia, Kuwait, and the U nited A rab Em irates.
T he concentration is less if loans at m arket rates are
included. Several O PE C countries, including Iran, have
now scaled down their external assistance. W hile the
O PE C countries by and large recognize their international
responsibilities in this regard, their foreign-aid program s
will undoubtedly come under increasing pressure from
com peting dom estic needs. In 1976 their total aid dis­
bursem ents are likely to rise som ewhat further, simply
because their aid com m itm ents continued to rise through
the first p a rt of last year. B ut beyond that, it would
hardly be realistic to expect further substantial growth.

T H E RO LE O F T H E IN T E R N A T IO N A L
BA N K IN G S Y S T E M

The other m ain source of financing the LD Cs deficits
is the private sector. W hen the w orld com m unity first
faced the problem of financing the greatly enlarged pay­
m ents deficits of the oil-im porting countries in early 1974,
there were serious questions of how large a role the
private m arkets could play. A reas of concern included
the possible instability of the new O P E C deposits, the
restraints on banks of declining capital-deposit ratios,
the creditw orthiness of borrow ers, and the advisability of
private lenders engaging in large balance-of-paym ents

12 For 1974 and 1975 total contributions, not all drawn down,
to the IM F oil facility totaled $714 billion, of which alm ost $6
billion came from OPEC countries.
13 Grants and concessionary loans, so-called official develop­
ment assistance, appear to be about V3 percent o f G N P for the
O ECD countries as a whole, as against the 0.7 percent target.
14 These figures are based on estimates o f actual disbursements;
total com mitm ents for financial assistance are considerably greater.
Total com mitm ents by the OPEC countries to provide financial
assistance of all form s— concessional and nonconcessional— to
the nonoil LDC s, according to a report by U N C T A D , amounted
to $14.9 billion in 1974 and $10.7 billion in the first six m onths
o f 1975. ( “Financial Cooperation between OPEC and Other D e ­
veloping Countries”, October 29, 1975.)




15
By latest count the follow ing official institutions have been
established: Arab Bank for Econom ic D evelopm ent in Africa,
Arab Bank for Investment and Foreign Trade, Arab Fund for E co­
nom ic and Social Developm ent, Arab Fund for the Provision of
Loans to African Countries, Arab Investment Com pany, Arab
Fund for Technical A ssistance to Arab and A frican Countries,
Arab Petroleum Investm ent Company, Inter-Arab Investment
Guarantee Corporation, Islam ic D evelopm ent Bank, Islam ic Soli­
darity Fund, League o f Arab States Emergency Fund.

16

MONTHLY REVIEW, JANUARY 1976

financing.16 T he international banking system did indeed
experience some serious strains in the m iddle m onths of
1974, b u t these stem m ed largely from the turm oil and
excesses in the foreign exchange m arkets at th at time. In
any case, the shock of a few b an k failures (F ranklin,
H erstatt) led to an im provem ent in m arket practices in
general. M argins in the E uro-currency m arkets, w hich
com petition had reduced to abnorm ally low levels, were
w idened and lending term s were tightened generally. The
role of some m arginal lenders was reduced and a m ore
careful appraisal of credit risks becam e a general practice.
A t the same tim e O P E C countries’ deposits did not tu rn
out to be volatile and the creditw orthiness of m any bo r­
row ers was strengthened by enlarged official financing
facilities and by their constructive dom estic policies.
International bank credit expansion in the E uro-currency
m arkets and by banks in the U nited States slowed down
m arkedly in 1975. The total of publicly announced new
E uro-currency credits cam e to some $20 billion in 1975
(as against $29 billion in 1 9 7 4 ), and loans extended to
foreigners by U nited States banks totaled some $3 billion
(as against alm ost $12 billion in 1 9 7 4 ). In contrast, ac­
tivity in the international bond m arkets accelerated to
some $18 billion in 1975, from only $7 billion in the
preceding year.
W ithin the reduced total of international bank credit
in 1975 the oil-im porting LD Cs were able to expand
their international borrow ings quite substantially. They
obtained over $8 billion in publicly announced E u ro ­
currency credits, as against some $ 4 Vi billion in 1974.
From banks in the U nited States these countries borrow ed
some $5 billion, about the same as in the preceding year.
T he oil-im porting LD C s also m arketed about %Vi billion
in international bonds in 1975.
F ro m now on private lending to the LD Cs will come
under increasing restraints, and it appears doubtful that
they will be able to raise anywhere near the same record
am ounts in 1976. The restraints are likely to come both
from the position of the borrow ing countries and from
the side of the lenders. T he current debt service pay­
m ents of the LD Cs are already very high; they may be
estim ated at over $10 billion a year on public and publicly
guaranteed debt alone. T he indebtedness of some of these
countries is now so large th at their interest and debt

161 reviewed these in an address on “International Banking”
before the Banking Law Institute in N ew York City on M ay 8,
1975. See M o n th ly R eview (June 1 9 75), pages 122-29.




repaym ents exceed 20 percent of their total foreign
exchange receipts. In some cases there is a clear need for
debt restructuring and, as you know, discussions along
these lines have in a few cases been under way for some
time. A large num ber of these countries undoubtedly can
now expect little if any help from private lenders. They
are entirely dependent on official financing.
Some of the m iddle-incom e LD C s retain their relatively
good credit ratings and will in all probability w ant to
continue to raise funds from private lenders. In 1976,,
however, they may face increasing com petition from other
borrow ers. These will include private borrow ers in the
industrial countries as the recovery proceeds, some of
the O PE C countries that are returning to the borrow ing
side, the various com m unist countries th a t entered the
m arket in large volum e last year, and finally some of the
O EC D countries themselves.
The international banking system can thus expect a
growing dem and for loans from various types of borrow ers this year. A nd the question has been raised as to the
extent to which it will be able to accom m odate these
dem ands. As far as the E uro-currency m arkets are con­
cerned, it w ould seem that a loan expansion of about the
same m agnitude as in 1975 is entirely possible. Because
of increased dom estic dem ands in the U nited States, banks
may not wish to channel as m uch of their funds to the
E uro-m arkets through their branches. B ut as happened
so often before, a reduction in the flow from the U nited
States is likely to be replaced by other inflows. All in all,
despite some continuing problem s, the E uro-banks should
be able to continue to accom m odate good borrow ers.
The m aturity of deposits has lengthened, equity positions
have strengthened, and earnings rem ain in general rea­
sonably healthy, notw ithstanding increased provisions fo r
loan losses. D ata for some of the m ajor U nited States
banks illustrate this position. Thus for the N ew Y ork
m oney m arket banks the capital-funds-to-deposits ratio,
which turned up in 1975 after having declined sharply in
the two preceeding years, reached 6.6 percent at the end
of Septem ber 1975, as against 5.9 percent at the end of
1974. M oreover, the net incom e of these banks for the
first nine m onths of 1975 increased by a rem arkable
18.2 percent, notw ithstanding record charges against
incom e to provide for possible loan losses. T he earnings
picture for the fourth q u arter has, of course, been m uch
w eaker as actual loan charge-offs and loan loss provisions
have increased sharply. N evertheless, m ost of the m ajor
U nited States banks have recorded substantial earnings
gains for 1975 as a whole, and have entered 1976 with
stronger loan loss reserves than a year earlier.

FEDERAL RESERVE BANK OF NEW YORK

TH E S O U N D N E S S OF BA N K IN G S Y S T E M S

Banking systems throughout the w orld have rem ained
sound despite the recent tests to their resilience and the
possibility that lending problem s may arise in the future,
w hether with respect to the LD Cs or to som e other source
in this uncertain world. These tests have spurred bank
m anagem ents and national supervisory authorities to take
actions to ensure th at operating procedures will provide
for adequate liquidity and solvency in the face of a con­
stantly changing banking environm ent. A num ber of
countries are revising their banking laws or otherwise
m odernizing their supervisory apparatus in the light of
the increasing im portance that international transactions
have assum ed in the banking business. In this country,
for exam ple, our exam iners’ training now gives added
em phasis to the international aspects of b ank operations,
and our supervisory authorities have been working with
banks to develop m inim um standards for operational safe­
guards in foreign exchange trading.
C entral banks of the G roup of T en countries, along
with other supervisory authorities from these countries,
have also been working as a com m ittee to provide m ore




17

secure banking systems. The com m ittee, in meetings at
the B ank for In ternational Settlem ents, has agreed on
the need for international cooperation in the supervisory
field; representatives have exchanged and discussed infor­
m ation on national supervisory developm ents and have
agreed to cooperate in an “early w arning system ” to
heighten official awareness of banking difficulties.
I think we can all agree that the health of the inter­
national banking system is vital for the health of the w orld
econom y as a whole. W e have m anaged to overcom e
some difficult obstacles in the last few years. W ith the
newly developed cooperation of the m onetary authorities
in the oil-producing countries, we have been able to cope
with the financial problem s of petro-dollar accum ulations
and flows. So far, we have m anaged also to cope with the
problem s of financing the LD C s; while we may be ap­
proaching the limits of these efforts by the private sector
for some of the LD Cs, the Jam aica agreem ents provide
for further official financing possibilities for these coun­
tries. All of us involved, private and central bankers alike,
and w hether in O E C D , O PE C , or LD C areas, m ust
strive to ensure that the international banking system re­
tains its basic strength and soundness, while adapting to
the changing needs of changing times.

18

MONTHLY REVIEW, JANUARY 1976

T h e B u s in e s s S itu a tio n
The pace of the econom ic recovery apparently picked
up tow ard the year-end, following a m arked slowdown in
the fall. In D ecem ber, there were sizable gains reported in
nonagricultural em ploym ent, the average workweek, and
overtim e hours. To be sure, the unem ploym ent rate held
steady at 8.3 percent, but this reflected an outsized D e­
cem ber increase in the civilian labor force. A t the same
time, retail sales surged ahead on a wide front, including
an advance in dom estic car sales. R etail sales had ex­
hibited only m odest increases betw een July and N ovem ­
ber, while autom otive sales were virtually flat. In coming
m onths, continued grow th in consum ption spending seems
likely now th at a com prom ise has been reached on tax
legislation betw een President F o rd and the Congress.
U nder this agreem ent, the 1975 tax cuts will be extended
to the end of June of this year, and the Congress issued a
prom ise to consider limits on Federal G overnm ent spend­
ing in fiscal 1977.
In the price area, a m ajor source of near-term , uncer­
tainty was also cleared up when the President signed the
Energy Policy and C onservation A ct into law on D ecem ­
ber 22. T he new legislation establishes an upper limit on
the average price of dom estically produced oil which is
m ore than $1 per barrel lower than the average price pre­
vailing at the end of 1975. It also provides for some rather
m odest increases in dom estic oil prices over the longer
term . A t the sam e time, the A dm inistration has rem oved
the $2 p er b arrel duty on im ported oil. T he near-term
im pact of these actions will probably be a reduction in
crude oil prices; in the absence of the new legislation,
there w ould have been a m ajor inflationary shock as a
result of im m ediate decontrol.
The recent price news has been reasonably favorable
on balance. In D ecem ber, w holesale farm and food prices
fell substantially for the second consecutive m onth; in­
dustrial w holesale prices continued to rise m ore rapidly
th an earlier in the year but sharply below 1974 rates of
advance. In N ovem ber, retail prices of com m odities
o ther than food continued their recent, quite m oderate
perform ance. R etail food prices, however, while rising less




than in O ctober, still showed a som ew hat disappointingly
rapid advance. L ooking ahead, the current projections of
the D epartm ent of A griculture indicate a relatively m odest
4 to 5 percent annual rate of increase in retail food prices
in the first half of 1976, less than half the rise recorded in
the second half of 1975. O f course, these estim ates are
subject to substantial change because of w eather conditions
and other unforeseen developm ents.

C O N SU M E R SPE N D IN G A N D
R E SID E N T IA L C O N ST R U C T IO N

A fter a brief respite in the fall, consum ption spending
has lately shown renewed signs of vigor. Indeed, season­
ally adjusted retail sales spurted 3.5 percent in D ecem ber,
the sharpest m onthly advance since July 1973. By com ­
parison, from July to N ovem ber the rate of growth in
consum ption spending had am ounted to a sluggish 1.4
percent, virtually all of which was attributable to higher
retail prices. The D ecem ber surge in retail sales was
paced by the huge 11.3 percent increase in the autom otive
sector. Sales of dom estic autom obiles in D ecem ber totaled
8.2 m illion units at a seasonally adjusted annual rate, up
7.9 percent from the preceding m onth and the highest
rate since A ugust 1974. Sizable gains were also recorded
in D ecem ber in sales of both departm ent stores and fu r­
niture and hom e-furnishings stores.
C onsum ers can now look forw ard to a continuation of
the 1975 tax cut, at least for a while, as a result of the
recent com prom ise w orked out betw een the Congress and
the President. U nder the com prom ise, P resident F o rd
agreed to extend the tax cut through June 30, 1976. In
return, the Congress prom ised that, should it continue the
tax cut beyond this date, it w ould consider reducing ex­
penditures by an equal am ount. H ad this agreem ent not
been reached, consum ers’ tax liability for the first half
of 1976 w ould have jum ped by approxim ately $7 billion.
Also scheduled for this year is another increase in social
security taxes under legislation th at was passed at the
end of 1973. In 1975 social security taxes were collected

FEDERAL RESERVE BANK OF NEW YORK

on only the first $14,100 of wages and salaries, b u t in 1976
these taxes will be collected on the first $15,300. T he
higher ceiling will low er spendable incom e in 1976 by
about $ 1 billion, m ost of w hich will take effect in the sec­
ond half of the year.
R esidential construction seems to be gradually recover­
ing from the b attered condition it was in at the end of 1974.
In N ovem ber, housing starts slipped by 82,000 units to
a seasonally adjusted annual rate of 1.38 m illion units,
but this was greatly overshadow ed by the increase of al­
m ost 200,000 units in the previous m onth. Indeed, despite
the N ovem ber decline, the level of starts in th at m onth
rem ained significantly above the average level for the third
quarter. Building perm its rose in N ovem ber, reaching
their highest level in eighteen m onths. W hile housing
starts rose substantially in the third quarter, the increase
proceeded from a very low level, and the industry rem ains
in a depressed state. The very high levels of m ortgage
interest rates currently prevailing m ay continue to exert
a considerably dam pening influence on the near-term
housing recovery.

19

C h a rt 1

INDUSTRIAL P R O D U C T IO N
S e a s o n a lly a d ju ste d : 1 9 6 7 = 100
P e rce n t
130

P e rce n t
13 0

125 -

- 125

120 -

- 120

1 /
vy

115 -

110 -

\/

105

1 00

. 110

- 1 05

1 1111l l 1111 l l l l l l l l I I I
1970

115

1971

lllllllllil

lllllllllil

lllllllllil

1972

1973

1974

ii

I m I m I i 100
1975

S o u r c e : B o a r d o f G o v e r n o r s of the F e d e ra l R e se rv e S y ste m .

IN D U S T R IA L P R O D U C T IO N A N D IN V E N T O R IE S

The F ederal R eserve B oard’s index of industrial pro ­
duction posted a m odest increase in N ovem ber. A lthough
production was up for the seventh consecutive m onth,
the N ovem ber advance am ounted to a m ere 0.2 percent,
only one-fifth as large as the average gain of the previous
six m onths (see C hart I ) . A t this point, the pace of the
current recovery is com parable to that of m ost previous
postw ar recoveries. How ever, while industrial production
has risen 6.3 percent above the trough of A pril 1975, it
still rem ains 8.4 percent below the N ovem ber 1973 peak.
Thus, if production were to continue to expand at the
average rate of the past seven m onths, it w ould take an
additional nine m onths before the previous peak would
again be attained. O utput of consum er durables, which has
been a bulw ark of the recovery, continued to climb in N o­
vem ber despite a drop in the output of autom obiles. A t the
same time, p roduction of consum er nondurables was m ar­
ginally higher. The o utput of business equipm ent rose
slightly in N ovem ber following a decline in the previous
m onth. W hile equipm ent production has edged up from its
July trough, it currently rem ains well below the peak levels
of late 1974. T he output of m aterials rose in N ovem ber for
the sixth consecutive m onth but by the sm allest am ount
in this period.
The inventory adjustm ent process appears to be now
largely com pleted, and some businesses have even begun
to rebuild their inventory stocks, albeit at a fairly cau­




tious pace. In the retail trade sector, w herein the inventory
liquidation had com m enced at the beginning of 1975, phys­
ical stocks actually rose in the third quarter. M oreover,
in O ctober, the m ost recent m onth for which data are
available, book value accum ulation was about double the
average gain in the three previous m onths. In fact, the
ratio of retailers’ book value inventories to retail sales has
risen three m onths in a row. W hile there are conceptual
problem s in interpreting book value data (an d book value
to sales ratios) in inflationary periods, the m ost recent fig­
ures suggest a pickup in inventory investm ent in the retail
sector. In the wholesale trade sector, the aggregate book
value of inventories has risen in the past three m onths fol­
lowing declines in all but one of the previous seven
m onths. B ook value inventories for m anufacturing inched
up for the second m onth in a row in N ovem ber after seven
m onths of decline. A lthough inventories in the durable
goods sector continued to slide, there seems to be an eas­
ing in the rate of liquidation. T he N ovem ber drop was the
sm allest in seven m onths and was m ore than offset by the
buildup in nondurable goods m anufacturing.
N EW O R D E R S A N D C A P IT A L S P E N D IN G

The flow of new orders received by durable goods
m anufacturers declined in N ovem ber, after rising in the
previous m onth. To a large extent, this seesaw pattern
has reflected the m onthly m ovem ents in export orders for

20

MONTHLY REVIEW, JANUARY 1976

nonautom otive durable goods. Excluding new defense
bookings, durable goods orders fell $1.4 billion in N ovem ­
ber, which was m ore th an enough to offset the $1 billion
increase in the preceding m onth. L ooking at the record of
the current recovery, total durables orders bottom ed out
last M arch, spurted $6.7 billion from then until August,
and declined $1.4 billion from then until N ovem ber. This
pattern is not at all unusual inasm uch as similar ones
occurred in the 1955, 1961, and 1971 recoveries. Since
shipm ents in N ovem ber exceeded new orders, the backlog
of unfilled orders edged dow nw ard, further continuing the
p attern evidenced throughout m ost of 1975.
C apital spending rem ains weak, and there are no signs
of any exuberance in this sector. A ccording to a recent
survey conducted by T he C onference B oard, net new ap­
propriations for new plant and equipm ent by the nation’s
1,000 largest m anufacturers continued to fall in the third
quarter, although the decline was the smallest of four con­
secutive drops beginning in the fourth quarter of 1974 (see
C h art I I ) . A ctual capital outlays by large m anufacturers
were up slightly and exceeded net new appropriations,
so th at the backlog of unspent appropriations declined
for the fourth consecutive quarter. D espite these declines,
the backlog rem ains at a relatively high level, suggesting

C h a r t II

M A N U F A C T U R E R S’ EXPENDITURES A N D A P P R O P R IA T IO N S
FOR NEW PLANT A N D EQ UIPM ENT
. . . .
B illio n s o f d o ll a r s

1971




. . ..
B il l i o n s o f d o ll a r s

S e a s o n a lly a d ju st e d

1972

1973

1974

1975

that m any projects m ight have been postponed rath er than
canceled. F o r the econom y as a whole, real capital spend­
ing leveled off in the third quarter, and the O ctoberN ovem ber D epartm ent of C om m erce survey points to at
least some real growth in capital spending over the first
two quarters of the year. O n the other hand, a m ore recent
Com m erce D epartm ent survey indicates a m odest decline
in real spending for the year as a whole, a developm ent
which would be highly unusual at this stage in the recovery.
LABOR M ARKET

L abor m arket conditions strengthened appreciably in
D ecem ber, thus ending the year on a positive note. A c­
cording to the establishm ents survey, about 240,000
w orkers were added to the payrolls of businesses in the
private nonfarm sector in Decem ber. This advance was
fairly widely based, and was about one-third larger than
the average m onthly increm ent recorded in earlier m onths
of the recovery. Besides hiring m ore workers, businesses
also extended w orking hours. T he average w orkweek
for the private nonfarm econom y lengthened in D ecem ber
for the third consecutive m onth. W ithin the key m anufac­
turing sector, the average w orkweek increased 0.4 hour
to 40.3 hours, an unusually large m onthly advance. In
the separate survey of households, the gain in em ploy­
m ent am ounted to about 230,000 w orkers, following the
slight decline of the previous m onth. Nevertheless, because
of the proportionately equal increase in the civilian labor
force, the overall unem ploym ent rate held steady at 8.3
percent. Since peaking at 9.2 percent in M ay, the unem ­
ploym ent rate has varied betw een 8.3 percent and 8.6
percent in subsequent m onths. F o r the year as a whole,
the unem ploym ent rate averaged 8.5 percent, up 2.9 per­
centage points from the previous year.
A lthough unem ploym ent certainly rem ains high by his­
torical standards, the overall unem ploym ent rate appears
to overstate to some extent the current degree of labor
m arket slack, com pared with earlier years in the postw ar
period. O ver the past two decades, w om en and teen-agers
have constituted an increasing proportion of the labor
force. These w orkers change jobs m ore frequently than
adult males do and also tend to enter and leave the labor
force m ore often. Because an unem ployed person is de­
fined as one w ho is jobless b u t is looking for work, the
relatively frequent spells of looking for new jobs result
in higher unem ploym ent rates for w om en and teen-agers.
As the labor force share of these groups rises, so too does
the overall unem ploym ent rate. C hart III com pares the
official unem ploym ent rate with a fixed-weight m easure
which weights the unem ploym ent rates of the m ajor age-sex

FEDERAL RESERVE BANK OF NEW YORK

21

Chart III

A COMPARISON OF OFFICIAL AND FIXED-WEIGHT RATES OF UNEMPLOYMENT
Seasonally adjusted

N o te :

T h e fix e d -w e ig h t u n e m p lo y m e n t ra te w a s c a lc u la t e d b y the sta ff o f the F e d e r a l R e se rv e B a n k o f N e w Y ork,

u s in g a s re la tiv e w e ig h t s the 1956 a g e - s e x c o m p o sit io n o f the la b o r force.
S o u rc e :

U n ite d S t a t e s D e p a r t m e n t o f L a b o r, B u r e a u o f L a b o r S tatistic s.

groups by their relative im portance in the labor force in
1956. This latter m easure provides a com parison over time,
w hich abstracts from those changes in the overall unem ­
ploym ent rate th at arise from relative shifts in the labor
force. B ased on the age-sex com position of the labor force
in 1956, the peak unem ploym ent rate in 1975 was not
very m uch higher th an the m axim um rates in 1958 and
1961. A t the sam e time, the jobless rate for m en aged
twenty-five and older has been about equal to the peak
rate in 1961 b u t below the 1958 rate. A t least in some
respects then, the curren t degree of labor m arket slack is
roughly com parable to the 1958 and 1961 experiences.
P R IC E S

The latest readings on inflation are m oderately encour­
aging on balance. A t the wholesale level, prices declined
0.6 percent in D ecem ber. This decline entirely reflected
the large drop in the prices of farm p roducts and of p ro ­
cessed foods and feeds. A t the sam e time, the rate of
grow th of industrial wholesale prices stood at 0.6 percent.
This was essentially unchanged from the N ovem ber ad­
vance but rem ained below the increases recorded in the




preceding three m onths. A m ong industrial comm odities,
the largest price increases were posted for lum ber and
wood products, pulp, paper, and allied products, and
cigarettes. The grow th in prices of fuel and pow er con­
tinued to be m oderate after their sharp m idyear flare-up.
C onsum er prices rose at a 0.7 percent seasonally
adjusted rate in N ovem ber, a rate of gain about the same
as the O ctober advance but som ew hat faster than the
two previous m onths. Prices of consum er services rose
1.1 percent in the m onth, reflecting higher prices for auto­
mobile insurance, telephone service, parking, and hospital
care as well as higher m ortgage interest rates and p ro p ­
erty taxes. W hile the pervasiveness of these increases is
som ew hat disturbing, services prices had been rising at
m ore m oderate rates in recent m onths— apart from the
Septem ber spurt which largely reflected the New Y ork
City subway fare increase. N onfood com m odity prices
continued the very m odest p attern of increases exhibited
in recent m onths. The N ovem ber m onthly increase of 0.3
percent brought the three-m onth grow th rate of these
prices to a seasonally adjusted annual rate of 3.7 percent.
Food price increases m oderated to a 0.6 percent season­
ally adjusted rate after increasing m ore rapidly in the

22

MONTHLY REVIEW, JANUARY 1976

previous m onth. A ccording to the D epartm ent of A gricul­
ture, retail food price gains are expected to slow to a 4
to 5 percent annual-rate range in the first half of 1976.
This would be about half as fast as the rate of growth
recorded for the second half of 1975, com pared with the
first six m onths of the year.
In D ecem ber, the C ongress passed the new Energy P ol­
icy and C onservation A ct, and the m easure was signed into
law at the end of the m onth. M any of the provisions of the
new law will have a direct bearing on the cost of crude oil
to dom estic refiners. First, the bill imposes a ceiling on the
average price of dom estically produced crude oil of $7.66
per barrel, which is m ore than $1 below the average price
prevailing at the end of last year. U nder the Em ergency
Petroleum A llocation A ct, there had been a price ceiling
of $5.25 per barrel on dom estically produced “old” oil—
i.e., oil produced from dom estic wells b u t not exceeding
the 1972 rate of output from these wells. If President
F o rd retains this ceiling, then the ceiling price for “new ”
oil would have to be set at about $11 per barrel. Sec­
ond, subsequent to the initial rollback, the legislation
provides for m odest increases in the average price of
dom estically produced oil. The new law allows the Presi­
dent to raise the ceiling on dom estic crude oil prices by at
m ost 10 percent per year until February 1977. From then
on, the President can propose increases in the ceiling of




up to 10 percent per year, but the Congress has the power
to limit the hikes to the overall rate of inflation. T hird, to
prevent dom estic oil producers from taking advantage of
the currently higher world price of oil, the new legislation
directs the President to establish export restrictions on oil.
A t the same time the President signed the legislation, he
also removed the $2 per barrel duty on im ported oil. In
the very near term , it is clearly this latter action that will
have the dom inant im pact on the price and quantity of
im ported crude oil. The physical volume of im ported crude
oil is likely to rise, and the cost to refiners should fall but
perhaps by an am ount less than the $2 per barrel im port
fee. Thus, the im m ediate im pact on the new energy bill
will be a reduction in the average price of oil as a result
of both the im position of a ceiling price on new domestic
oil and the rem oval of the im port duty on im ported oil.
Over the longer haul, however, the supply of dom estic oil
might be reduced in response to additional dom estic con­
trols. F or one thing, dom estic oil suppliers might well
expect higher oil prices at some future point when controls
would be ended. In this case, there might be some im plicit
capital gain earned by merely “ sitting” on the oil. Hence,
domestic oil refiners would have to im port additional oil
from abroad, and the attendant increase in the effective
price of crude oil would no doubt be passed on to con­
sumers.

FEDERAL RESERVE BANK OF NEW YORK

23

T h e M o n e y and B o n d M a r k e t s in D e c e m b e r
Interest rates rose at the beginning of D ecem ber, but
declines later in the m onth m ore than offset earlier in­
creases. U pw ard pressure on rates em erged early in D e­
cem ber, when m arket participants becam e concerned that
the F ederal R eserve might tighten m oney m arket condi­
tions if N ovem ber’s rapid grow th of the m onetary aggre­
gates continued. A t the same time, a large volume of new
corporate and U nited States G overnm ent issues also
contributed to these increases. A dding to supplies, several
New Y ork City pension funds sold corporate and agency
securities in the secondary m arkets to raise m oney to in­
vest in M unicipal A ssistance C orporation (M A C ) bonds.
The m arkets rallied around the middle of D ecem ber when
reports of weakness in the growth of the m onetary aggre­
gates, coupled with private forecasts that new corporate
borrow ing would be lower in 1976, fostered the belief
that interest rates could well decline in the n ear term .
As a result, yields on corporate and T reasury issues fell
over the balance of D ecem ber, closing the m onth below
their end-of-N ovem ber levels.
Yields on highly rated tax-exem pt issues also m oved
dow nw ard on balance in D ecem ber, b u t yields on lower
rated issues continued to advance. Investors rem ained con­
cerned about the financial backing of issues offered by
municipalities and continued to show unusually strong
preference for safer, highly rated issues. A N ew Y ork State
court upheld the deferral of principal and reduction of in­
terest paym ents to holders of certain New Y ork City notes.
This decision is to be appealed, b u t it cleared the way by
D ecem ber 29 for an exchange of these notes for M A C
bonds. In other developm ents, a package of business and
bank taxes designed to help balance the state budget was
passed by the N ew Y o rk State legislature and enacted
into law.
A ccording to prelim inary estim ates, the narrow ly de­
fined m oney stock (M i) fell in D ecem ber after advancing
rapidly in N ovem ber. G row th of the m ore broadly defined
m oney stock (M 2) was m odest, since consum er-type
tim e and savings deposits expanded m oderately. T he bank
credit proxy also grew at a m odest pace.




THE M ONEY M ARKET AND THE
M ONETARY AGGREGATES

Interest rates on m ost m oney m arket instrum ents de­
clined in D ecem ber after rising in the early p art of the
m onth (see C hart I ) . The rate on 90- to 119-day dealerplaced com m ercial paper dropped about Vs percentage
point to 5.63 percent. R ates on bankers’ acceptances fell
lA percentage point over the m onth, while the average
yield in the secondary m arket on ninety-day large negoti­
able certificates of deposit (C D s) declined V2 percentage
point to 5.68 percent. In com parison, the effective rate on
Federal funds was relatively stable during the m onth and
averaged 5.20 percent, com pared with a 5.22 percent aver­
age in Novem ber. Federal funds continued to trade at rates
substantially below the discount rate, and thus m em ber
bank borrowings from the discount window rem ained m od­
est, although borrowings rose on C hristm as eve in response
to settlem ent day pressures (see Table I ) .
T he dem and for bank loans by businesses rem ained
w eak in D ecem ber. Com m ercial and industrial loans at
large com m ercial banks rose by $1.1 billion in the four
statem ent weeks ended D ecem ber 31. A portion of this,
however, reflected a rise in holdings of ban k ers’ accep­
tances. Business loans excluding ban k ers’ acceptances
increased by $0.5 billion. O ver com parable periods in the
preceding two years, these loans excluding b an kers’ accep­
tances showed an average increase of $2 billion. A t the
beginning of the m onth, a num ber of large banks lowered
their prim e lending rates V* percentage point to IV 4 per­
cent after a few m oney center banks had reduced their
prim e rates to this level at the end of N ovem ber. Following
m idm onth, one large bank that had been quoting 7 p er­
cent raised its prim e rate V\ percentage point to the
prevailing IVx percent. The volum e of nonfinancial com ­
mercial paper outstanding fell by $1.4 billion in the
four weeks ended D ecem ber 31. Y ear-end declines are
norm al in this series, w hich showed an average decrease of
$471 m illion over the sim ilar period in the preceding tw o
years.

24

MONTHLY REVIEW, JANUARY 1976

Prelim inary d ata suggest th a t
declined in D ecem ber,
w hile the b ro ad er m onetary aggregates advanced at a
m odest pace. M x— private dem and deposits adjusted plus
currency outside com m ercial banks— fell at an annual
rate of 3.2 percent in D ecem ber, after rising by 12.2 per­
cent in the previous m onth. This brought the grow th in
M x in the four-w eek period ended D ecem ber 31 from its
average level in the four weeks ended thirteen weeks
earlier to 1.6 percent at an annual rate (see C hart II).
C onsum er-type tim e and savings deposits at com m ercial
banks grew at a m oderate rate in D ecem ber. C onse­
quently, M 2—
pl us tim e deposits other than large nego­
tiable C D s— registered a m odest gain of 3.2 percent. The
average level of CDs also rose m oderately in D ecem ber,

and the adjusted bank credit proxy— total m em ber bank
deposits subject to reserve requirem ents plus certain non­
deposit sources of funds— increased at a 4.2 percent
annual rate.
O n D ecem ber 24, the B oard of G overnors of the Federal
Reserve System announced a reduction from 3 percent to
2.5 percent of reserve requirem ents on tim e deposits m a­
turing in 180 days to four years. T he new reserve require­
m ent ratio is subject to the condition th at in no case may
the average of reserves on the total of tim e and savings
deposits at any m em ber bank be less than 3 percent, the
minimum level specified by law. T he action, which initially
affected required reserves of m em ber banks in the week
that began January 8, 1976, low ered required reserves by

Chart I

SELECTED INTEREST RATES
October-Decem ber 1975
M O NEY

M ARKET

B O N D M A R K E T YIELD S

RATES

O c to b e r
N o te :

Novem ber

D e ce m b e r

D a t a e r e s h o w n f o r b u s i n e s s d a y s o n ly .

M O N E Y M AR K ET RATES Q U O T E D :

P r im e c o m m e r c ia l lo a n ra te a t m o s t m a j o r b a n k s ;

o f f e r in g r a t e s (q u o te d in t e rm s o f ra t e o f d is c o u n t ) o n 9 0 - to 1 1 9 -d a y p r im e c o m m e r c i a l

s t a n d a r d A a a - r a t e d b o n d o f a t l e a s t t w e n ty y e a r s ' m a t u r it y ; d a i l y a v e r a g e s o f
y ie ld s o n s e a s o n e d A a a - r a t e d c o rp o ra te b o n d s ; d a ily a v e r a g e s o f y ie ld s on

p a p e r q u o t e d b y th r e e o f the fiv e d e a l e r s t h a t r e p o r t t h e ir r a t e s , o r th e m i d p o i n t o f

lo n g -te rm G o v e r n m e n t s e c u r i t i e s ( b o n d s d u e o r c a ll a b le in ten y e a r s o r m o re )

the r a n g e q u o t e d if n o c o n s e n s u s is a v a i l a b l e ; the e f fe c t iv e r a t e o n F e d e r a l f u n d s

a n d o n G o v e r n m e n t s e c u r i t i e s d u e in th re e to fiv e y e a r s , c o m p u t e d o n th e b a s i s

(the ra t e m o s t r e p r e s e n t a t iv e o f th e t r a n s a c t i o n s e x e c u t e d ) ; c l o s i n g b id r a t e s (q u o t e d

o f c l o s i n g b i d p r ic e s ; T h u r s d a y a v e r a g e s o f y i e l d s o n t w e n ty s e a s o n e d tw e n ty -

in t e r m s o f ra t e o f d is c o u n t ) o n n e w e s t o u t s t a n d i n g t h r e e - m o n t h T r e a s u r y b ills.
B O N D M A R K E T Y IE L D S Q U O T E D :

Y i e l d s o n n e w A a a - r a t e d p u b l i c u t ilit y b o n d s a r e b a s e d

o n p r ic e s a s k e d b y u n d e r w r i t in g s y n d i c a t e s , a d j u s t e d to m a k e t h e m e q u i v a le n t to a




y e a r t a x - e x e m p t b o n d s (c a r r y i n g M o o d y ' s r a t in g s o f A a a , A a , A , a n d B a a ) .
S o u rce s.-

F e d e r a l R e s e r v e B a n k o f N e w Y o r k , B o a r d o f G o v e r n o r s o f th e F e d e r a l

R e s e r v e S y s t e m , M o o d y ' s In v e s t o r s S e r v ic e , In c ., a n d T h e B o n d B u y e r.

FEDERAL RESERVE BANK OF NEW YORK

about $340 million. In com m enting on its m ove, the B oard
noted th at the decision was in line w ith previous actions
encouraging m em ber banks to lengthen the structure of
their tim e deposit liabilities. Since the last half of 1974,
reserve requirem ents on tim e deposits have been changed
on two previous occasions. T hese changes involved an in­
crease in reserve requirem ents on tim e deposits with a
m aturity of less than six m onths and a reduction of reserve
requirem ents on tim e deposits of various m aturities of six
m onths o r longer.
TH E G O V E R N M E N T SE C U R IT IE S M A R K E T

Yields on U nited States G overnm ent securities m oved
upw ard early in D ecem ber, b u t subsequent declines m ore
th an offset earlier increases. A t the beginning of the
m onth, dem and by investors was restrained, as they
aw aited announcem ents regarding the T reasury’s borrow ­
ing plans and noted the sizable volum e of planned cor­
porate financing. O n D ecem ber 9, the T reasury announced
that $3 billion of new cash w ould be raised through
coupon-bearing obligations during D ecem ber. This financ­
ing involved an auction of $2.5 billion of tw o-year notes
on D ecem ber 16— to replace $1.5 billion of publicly
held m aturing notes and to raise $ 1 billion in new cash—
and an auction of $2 billion of four-year notes on D ecem ­
ber 22. The offerings were larger th an some participants
had expected, and yields edged upw ard in the wake of
the announcem ent. T ow ard m idm onth, sentim ent was
buoyed by private forecasts th at interest rates would de­
cline early in 1976. M arket participants were also en­
couraged by a large unexpected drop in M x. Yields of
securities throughout the m aturity spectrum adjusted
dow nw ard, retracing earlier rises and ending the m onth
generally 5 to 55 basis points lower.
R ates on T reasury coupon issues inched upw ard
through m id-D ecem ber, as dealers reduced their inven­
tories of securities in prep aratio n for the auctions of
two- and four-year notes. R esponse to the $2.5 billion of
tw o-year notes sold at m idm onth was favorable, w ith
tenders from the public totaling $4.3 billion. The notes
were offered at an average yield of 7.28 percent, 27 basis
points below the yield on a sim ilar issue auctioned in
m id-O ctober. D em and by investors strengthened in
m id-D ecem ber and, reflecting this, the average issuing
yield on the four-year notes was 7.50 percent. O ver the
m onth as a whole, the index of yields on interm ediate-term
G overnm ent securities fell 34 basis points to 7.28 percent.
The index of long-term bond yields declined 19 basis points
to 7.05 percent.
M ovem ents in the yields of T reasury bills paralleled




25
Table I

FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, DECEMBER 1975
In millions of dollars; (+) denotes increase
and (—) decrease in excess reserves

Changes in daily averages— week ended
Net
changes

Factors
Dec.
31

Dec.
24

Dec.
17

Dec.
10

Dec.
3

“ M arke t” factors

Member bank required reserves.. — 19 4 - 267 — 631 + 298 — 591
Operating transactions
( subtotal) ......................................... + 1,04 4 +1,936 — 423 —3,899 + 195
Federal Reserve float ................ 4 - 398 — 344 + 275 + 536 + 1,51 6
Treasury operations* ................. 4 - 901 + 2,26 4 — 72 —3,603 —1,240
1 —
10 — 39
62 —
Gold and foreign a c c o u n t........ — 28 +
99
Currency outside banks ............ — 71 — 256 — 452 — 740 +
Other Federal Reserve
liabilities and capital

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

— 155 +

Total “ m arket” factors .......... + 1,02 5

—1,147
+ 2,38 1
—1,750
—

16

—1,420

8:2 — 141

— 341

—1,054

—3,601 — 396

—1,823

+ 1,04 9

+ 3,64 3

+ 1,61 6

+ 1,95 5

209 — 172

+ 2,20 3

— 676

—

Direct Federal Reserve credit
transactions

Open market operations
(subtotal) ........................................... —1,064 —2,536
Outright holdings:
Treasury securities ..................... — 105 —1,878
Bankers’ acceptances .................
Federal agency obligations . . . .
Repurchase agreements:
Treasury securities .....................
Bankers’ acceptances ................
Federal agency obligations . . . .
Member bank borrowings ............
Seasonal borrowingsf ................

5 +

— 888 — 488 — 472
— 28 — 108 — 49
— 38 — 64 — 50
—
7 — 37 +
15
1
_
4 —
7 —

Other Federal Reserve assetst .. 4- 163
Total ............................................... — 908
Excess reserves^ .........................

4 +

2 +

+

+

207

—2,366

117 — 163

3

+ 1,446
+
+
+

131
108
175

+

453

+ 1 ,5 4 5

+

398

+ 1,98 6

+

5

— 77
+ 114
+
13
+

37

+

9

— 479
+
60
— 31
+ 183
— 14
+ 352

—
2
71 — 204

+

115

+ 1,13 5

+ 3,61 4

+

606

+ 2,08 1

+

+

13 +

210

+

+

81

258

Monthly
averages!

Daily average levels

Member bank:

Total reserves, including
vault cashj .......................................

34,860

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

34,531

34,430
34,264

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

329

166

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

67

Seasonal borrowingsf .................
Nonborrowed reserves .....................

22

30
15

34,793
117

35,142

34,857
34,597

35,658
35,188

34,989

34,895
247

260

470

294

220

257

124

12

12

34,400

45
14
35,097

34,637

35,401

15
34,866

195

140

148

119

144:

34,695

Net carry-over, excess or
deficit ( —) | | .....................................

Note: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
t Included in total member bank borrowings,
t Includes assets denominated in foreign currencies.
§ Average for five weeks ended December 21, 1975.
| | Not reflected in data above.

MONTHLY REVIEW, JANUARY 1976

26

those of coupon obligations. In the second weekly bill auc­
tion held on D ecem ber 8, the average issuing rate for
three-m onth bills was set at 5.63 percent, about 10 basis
points above the rate established in the last weekly auction
in N ovem ber. T he shift to m ore optim istic m arket senti­
m ent just before m idm onth increased investor dem and, and
rates m oved dow nw ard. A t the weekly auction on D ecem ­
ber 29, the average yields on three- and six-m onth bills
were 5.21 percent and 5.51 percent (see T able I I ) , down
31 and 43 basis points, respectively, from the last auction
in N ovem ber. O ver the m onth as a whole, yields on m ost
bills fell 32 to 55 basis points.
Y ields on F ederal G overnm ent agency securities re­
sponded in a sim ilar m anner to m any of the factors which
affected the m arket for T reasury obligations during D e­
cem ber. Prices on Federal agency issues declined m odestly
in the first half of the m onth as the volum e of borrow ing
rose. O n D ecem ber 11, the G overnm ent N ational M ort­
gage A ssociation (G N M A ) offered $200 million of
thirty-year m odified pass-through securities, of which
$69 million was for new cash. These issues are backed by
pools of Federal H ousing A dm inistration-insured or V et­
erans A dm inistration-guaranteed mortgages. T he principal
and interest collected on the m ortgages are transm itted to
the holders of pass-through securities, and G N M A guaran­
tees th at these paym ents ultim ately will be m ade. In m odi­
fied pass-through securities, G N M A insures th at these
transm ittals are m ade on norm al paym ent dates, even w hen
actual collections are late. T he tw o-part offering consisted
of $131 m illion and $69 m illion of securities bearing cou­
pons of l lA percent and IV 2 percent, respectively. B oth of
these securities w ere priced to yield 8.70 percent, about 27
basis points above the yield on a sim ilar offering sold in
m id-N ovem ber. Initial sales w ere slow, b u t m arket condi­
tions im proved during the week as dem and strengthened
and rem aining issues were sold. O n D ecem ber 18, the
F ederal Interm ediate C redit Banks, in a tw o-part offering,
successfully sold $1,330 million of bonds, redeem ing $10
m illion m ore of securities than was offered. R ates of return
on this tw o-part financing were 6.55 percent on $898 m il­
lion of nine-m onth bonds and 7.90 percent on $432 m il­
lion of five-year bonds. A t the sam e time, the B anks for
C ooperatives successfully sold $589 m illion of 6.25 per­
cent six-m onth bonds, of w hich $155 m illion was for
new cash.

firms and utility com panies and, in addition, five New
Y o rk City em ployee pension funds sold in the secondary
m arket corporate and agency securities w ith face values
of about $340 million. A round $280 million was raised
to help m eet the city’s cash needs until F ederal loans be­
came available. Prices in the secondary m arket m oved
dow nw ard, and a num ber of offerings were postponed.
However, at m idm onth, investor dem and was bolstered by
the same factors that were supporting the T reasury m arket
and by private forecasts of lower corporate bond flotations
in 1976 than in 1975. B ond prices m oved upw ard, offset­
ting earlier declines, while underw riting and trading activity
tapered as is typical near the end of the year.
R ate m ovem ents on corporate securities w ere reflected

C h a r t II

C H A N G E S IN M O N E T A R Y A N D CREDIT A G G R E G A T E S
S e a s o n a lly a d ju s t e d a n n u a l ra tes
P e rce n t

N o te :

P e rce n t

G ro w th ra te* a re c o m p u t e d on the b a s is of fo ur-w eek a v e r a g e s o f d a ily

f ig u re s for p e r io d s e n d e d in the sta tem e n t w e e k p lotted, 13 w e e k s ea rlie r a n d
5 2 w e e k s ea rlie r.

The la s te s t statem ent w eek p lo tte d is D e c e m b e r 31, 1975.

M l = C u rre n c y p lu s a d ju ste d d e m a n d d e p o s its h e ld b y the public.
M 2 = M l p lu s c o m m e rc ia l b a n k s a v in g s a n d tim e d e p o s its he ld b y the p u b lic , le ss

O TH ER SE C U R IT IE S M A R K E T S

n e g o tia b le c e rtifica te s o f d e p o s it iss u e d in d e n o m in a t io n s o f $ 1 0 0,000 o r m ore.
A d ju s t e d b a n k c re d it p ro x y = Total m em b er b a n k d e p o s its su bject to re se rve
req uire m ents p lu s n o n d e p o s it so u rc e s o f fund s, su ch a s E u ro -d o lla r

A large volum e of borrow ing weighed heavily on the
m arket for corp o rate securities in the first half of D ecem ­
ber. A nu m b er of large issues w ere offered by industrial




b o r r o w in g s a n d the p r o c e e d s o f c o m m e rc ia l p a p e r iss u e d b y b a n k h o ld in g
c o m p a n ie s or other affilia te s.
S o u rce :

B o a r d o f G o v e rn o rs of the F e d e ra l R e se rv e S y ste m .

FEDERAL RESERVE BANK OF NEW YORK

by the yields on several m ajor issues sold during D ecem ­
ber. E arly in the m onth a credit com pany offered $225
m illion of notes and bonds, rated A a by M oody’s and A
by Standard & P o o r’s. The 26-year bonds were priced to
yield 9.82 percent, about 3A percentage point above the
yields on com parably rated industrial issues sold in m idN ovem ber. The m ajor offering of the m onth was an A aarated $750 m illion three-p art issue of an international
organization, w hich consisted of equal dollar am ounts of
five-year notes, ten-year notes, and 25-year bonds. T he
bonds were priced to yield 9.35 percent, slightly above
the rate on a sim ilar issue offered by a foreign govern­
m ent in m id-N ovem ber, and were favorably received. A
num ber of issues, including a $150 million A a-rated
offering by a finance com pany, were postponed until 1976
w hen the volum e of new offerings was expected to be
lighter. A Bell System m em ber offered $100 million of
A aa-rated forty-year debentures w hich sold quickly at a
yield of 9.35 percent. Investor dem and im proved in m idD ecem ber, and a $150 m illion offering of A a-rated 25year debentures by an industrial com pany was well re­
ceived at a yield of 8.85 percent shortly after m idm onth.
By the end of the m onth the yield on the telephone de­
bentures sold three weeks earlier had declined about 40
basis points.
T he volum e of new offerings was m oderate in the m ar­
ket for tax-exem pt securities in D ecem ber. Investors con­
tinued to stress safety, and dem and favored highly rated
issues. Y ields on these securities declined from their endof-N ovem ber levels, but yields on lower rated m unicipal
securities m oved upw ard, as dem and for these obligations
continued to be affected by the financial problem s of New
Y ork City, New Y ork State, and its agencies.
T hree N ew Y ork State agencies— H ousing Finance
Agency, D orm itory A uthority, and M edical C are Facilities
— narrow ly avoided default at m idm onth when the state
legislature voted to liquidate about $200 million in securi­
ties held by the State Insurance Fund, a special reserve set
aside by the state to insure the paym ent of w orkm en’s
com pensation claims to private employees in the state.
Proceeds from the sales were then used to purchase securi­
ties issued by the three agencies. T he N ew Y ork State
legislature passed, and G overnor C arey signed into law,
a package to raise $600 million in new taxes to help re­
duce the state budget deficit. The m easures provide for a
perm anent increase in the corporate franchise tax and




27
Table II

AVERAGE ISSUING RATES
AT REGULAR TREASURY BILL AUCTIONS*
In percent
Weekly auction dates— December 1975
Maturity

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

Dec.
1

Dec.
8

Dec.
15

Dec.
19

Dec.
29

5.550
5.995

5.633
6.144

5.491
5.914

5.340
5.678

5.208
5.507

Monthly auction dates— October-December 1975

Fifty-two weeks ...................................

Oct.
15

Nov.
13

Dec.
10

6.601

6.010

6.439

* Interest rates on bills are quoted in terms of a 360-day year, with the discounts
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.

bank tax, in addition to a one-year surcharge on income of
corporations and banks. A ll taxes are retroactive to
January 1, 1975. Also, the collection schedule for the
state sales tax was changed from a quarterly to a monthly
basis.
In m id-D ecem ber, a New Y ork State court ruled that
the m oratorium which perm its New Y o rk City to defer
for at least three years the paym ent of principal and to
reduce the interest paid on notes m aturing before June 30,
1976 does not violate either the state or national consti­
tutions. The decision is being appealed. In the m eantim e,
the decision perm itted the optional exchange of these m a­
turing New Y ork City notes for ten-year 8 percent M A C
bonds to occur as scheduled on D ecem ber 29. A bout 30
percent of the eligible notes were exchanged. T he prices
of these bonds dropped sharply at the end of the m onth,
w hen they began trading in very light volume. A t the same
time, prices of previously issued M A C bonds were gen­
erally unchanged.
T he B ond B uyer index of tw enty bond yields on twentyyear tax-exem pt bonds fell 10 basis points from the end
of N ovem ber to 7.29 percent on D ecem ber 31. T he Blue
L ist of dealers’ advertised inventories rose by $4 million
and closed the m onth at $635 m illion.