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MONTHLY REVIEW
O f Credit and Business Conditions

F E D E R A L R E S E R V E B A N K OF N E W Y O R K
V

olum e

39

J U L Y 19 5 7

No. 7

MONEY MARKET IN JUNE
Member bank reserve positions remained under steady
pressure in June. The increase in business borrowing over
the tax payment date on June 17 set a record for such
periods, as business loans at the weekly reporting member
banks rose almost 1.3 billion dollars over the two weeks
ended June 19. The midmonth expansion of float sup­
plied a large amount of reserves to the banking system,
as required reserves rose and the heavy volume of tax pay­
ments passed through the banking system. Later, as float
receded and the usual outflow of currency began in ad­
vance of the Independence Day holiday, the further inten­
sification of pressures was moderated by other factors,
including repurchase agreements and outright purchases
by the Federal Reserve.
Federal funds stayed at the 3 per cent ceiling through
the month, and virtually all interest rates reached new
postwar highs. Dealers in commercial paper and in
bankers’ acceptances announced rate increases during the
month, and Treasury bill yields generally maintained the
rise to 3V4 per cent that had occurred over the last half
of May. At the same time, capital market yields continued
the orderly upward adjustment which had been taking
place during most of the second quarter. New issue rates
on long-term corporate obligations moved upward by
about V2 to 1 per cent over the mid-May rates, with the
month-end reoffered rates ranging from about 4% per cent
on Aaa issues to 6 per cent on A-rated offerings. By the
end of June, the Treasury 3’s of 1995 were bid at 872%2>
the equivalent of a 3.59 per cent yield, 19 basis-points
above the yield in mid-May.
The Treasury announced on June 20 that it would offer
3 billion dollars of 264-day tax anticipation bills for cash
in a special auction on June 26, the bills to be dated July
3, 1957 and to mature March 24, 1958. They will be




accepted at face value in payment of income and profits
taxes due on March 15, 1958. The new bills were awarded
at an average issuing rate of 3.485 per cent.
Member Bank R eserve P o s i t i o n s
Movements in the various factors affecting member
bank reserves offset each other to a large extent during
June. In the first part of the month, a heavier-than-usual
increase in currency in circulation drained a large
volume of reserves from the banking system, but these
were more than replaced by funds stemming from a
decline in the Treasury’s balances at the Reserve Banks
and by the reserve effects flowing from the sale of 300
million dollars of gold by the International Monetary
Fund to the Treasury on May 28. Similarly, while aver­
age required reserves increased by 217 million dollars in
the week ended June 19, in large part as the result of
heavy business loan demands over the tax period, the mid­
month rise in float added a somewhat larger amount to
reserve balances during the same week. Toward the end
of the final statement week of the month float declined,
after having expanded unexpectedly earlier in the week,
and currency started to flow into circulation in the usual

CONTENTS
Money Market in J u n e ........................................
International Monetary Developments ..........
Earnings and Expenses of Commercial Bank
Trust Departments in New York and New
Jersey in 1956 .....................................................
The Postwar Development of Money Markets
Abroad ..................................................................
Selected Economic In d icato rs............................

85
89
90
92
100

MONTHLY REVIEW, JULY 1957

86

pre-Independence Day pattern. However, over the week
as a whole, Treasury operations and System purchases of
short-term Treasury obligations, including both outright
and under repurchase agreements, moderated the build-up
of reserve pressures.
Although fluctuations in aggregate reserve positions
were moderate for the member banks as a group, there
was a pronounced shift in the distribution of reserve bal­
ances during the period. The country banks were under a
greater-than-usual degree of pressure late in May and early
in June, with the central money market institutions rela­
tively comfortable. The reserve positions of the New York
central reserve city banks came under increased pressure
through the first three weeks of June, however, in part as
the result of heavy borrowing over the tax period, while at
the same time the country banks acquired reserves. In the
aggregate, member bank borrowings from the Reserve
Banks averaged close to 1 billion dollars in each of the
statement weeks ended in June, somewhat higher than in
May but about the same as in April, with the New York
central reserve city banks responsible for an increasing
proportion of these borrowings during the weeks ended
June 12 and June 19.
Table I

Changes in Factors Tending to Increase or Decrease Member
Bank Reserves, June 1957
(In millions of dollars; ( + ) denotes increase,
(— ) decrease in excess re s e rv e s)

Daily averages—week ended
Factor

j une
12

June
5

Operating transactions

Treasury operations*..........................
Federal Reserve float..........................
Currency in circulation.......................
Gold and foreign account....................
Other deposits, etc.............................
Total....................................

80
+
— 25
— 176
+ 215
— 43

4—
—
—
+

June
19

June
26

Net
changes

26
18
67
21
50

— 46
+ 448
1
_
10
— 66

+

47
64
55
17
70

107
341
189
+ 167
11
“T

+

326

+

S9

+

435

+

+
+

_j_

51

31

4+

49
131

— 24
— 114

—
+

46
4

t
"f-

8
13

—
+

13
34

+
—

5

+ 163
—
5

+

38
8

—

86
—

+

120
20

+

1
__

—

4_

—
1

Direct Federal Reserve credit transactions

Government securities:
Direct market purchases or sales. . .
Held under repurchase agreements..
Loans, discounts, and advances:
Member bank borrowings...............
Other...............................................
Bankers’ acceptances:
Bought outright..............................
Under repurchase agreements.........
Total....................................

Total reserves.............................. ...........
Effect of change in required reservesf .......
Excess reservesf .......................................
Daily average level of member bank:
Borrowings from Reserve Banks.........
Excess reservesf..................................

4.

7

1
—

—
1

—
—

179

+

19

-

12

—

68

+

120

+ 230
— 114

_
+

12
65

+

314
217

4_

23
•5
5

+

555

116

+

53

4-

97

—

32

-'r

+

888
442

1,051
495

Note: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
f These figures are estimated.
X Average for four weeks ended June 26.




-

1,089
592

1,003
560

321

234

1,008?
522$

System holdings of short-term Government securities
declined by 103 million dollars between May 29 and June
26, of which 40 million represented a reduction in outright
holdings of Treasury bills and 63 million was accounted
for by a decline in short-term Treasury obligations held
under repurchase agreements. System outright holdings
were increased by 40 million dollars in the last statement
week of the month, but these fell short of sales and re­
demptions totaling 80 million dollars during the three prior
weeks. Repurchase agreements were extended from time
to time during the month to alleviate incipient strains on
the money market, but for the most part they were mod­
erate in amount and of short maturity. By the end of the
period the outstanding balance in that account had been
reduced to zero.
G o v e r n m e n t S e c u r it ie s M a r k e t

The prices of Treasury notes and bonds continued to
decline during the month, with many longer issues losing
about 2 points between May 31 and June 28. Trading
was extremely light over most of the month; little out­
right selling pressure was evident and, although there was
a marked lack of general buying interest despite the higher
yields available, sufficient demand was available to move
small blocks of bonds as they appeared. The price erosion
was in large part a direct reaction to the sharp upward
yield adjustments taking place in the corporate bond mar­
ket, and to the related opinion that the current strength
of business conditions and sentiment would continue to
call for credit policies oriented toward the restraint of
inflationary pressures.
The yield adjustment accelerated during the third week
of the period, but a tendency toward leveling-off appeared
near the month’s end, suggesting the possibility that rates
might be reaching a new plateau. Over the month as a
whole, the prices of most Treasury bonds and notes matur­
ing through 1962 fell by %2 to 2%2 of a point. Issues
due after 1962 through 1972 fell by 1%2 points to
2%2 points, and the 3Vi’s of 1978-83 and 3’s of 1995
fell by 2 points and 23%2 points, respectively. On a
yield basis, issues throughout the list of Government se­
A
curities were generally up by about Vs to Y of 1 per cent.
Yields on Treasury bills also increased until the last
week of the month, but at a slower and more irregular
pace than longer term Government obligations. Bill yields
rose slightly at the start of the month, declined somewhat
for a brief period, increased sharply around midmonth,
and then fell back to earlier levels once more. Thus the
longest outstanding regular Treasury bill rose from 3.31

FEDERAL RESERVE BANK OF NEW YORK
MAR K ET YIELDS O F SELECTED O U T S T A N D IN G SECU RIT IES
A N D N EW ISSUES
5.00

x- O r i g i n a l reoffering yiel ds
on selected n e w A a a - r a t e d
cor porate issues.

2.00

2.00
J

1950

A

S

O

N

D

J

F

M

A

M

!9 5 7

Note: Latest date plotted is w e e k en d ed June 22. Da ta are w e e k ly a v e r a g e s
for the corporate and Treasu ry se rie s, W e d n e s d a y close for municipal
ser ies. The yie ld s on ne w corporate issues (x} a r e o r ig i n a l reoffering yields
of selec ted in d i v i d u a l flotations plotted as of the w e e k in which in itial ly
marketed.
So u rce s: Board of Go ve rn or s of the F ed er a l R e s e r v e System and M o o d y ’s
Investors Se rvic e.

per cent (bid) on May 31 to 3.34 per cent on June 5,
fell back to 3.24 per cent by June 11, and then climbed
to 3.38 per cent by June 20. Over the remainder of the
month, however, it remained close to 3.25 per cent as
bank liquidation diminished and nonbank demand ex­
panded moderately, in part due to the reinvestment
demand arising from the holders of tax anticipation bills
and certificates which matured June 24. The sharp mid­
month rise was primarily attributable to substantial com­
mercial bank selling, basically the cumulative result of a
prolonged period of monetary restraint combined with the
credit demands of the tax period. The average issuing rate
in the regular weekly bill auction rose to 3.374 per cent
on June 3 (the highest since the week of March 6, 1933),
fell back to 3.256 per cent one week later, and then surged
to a new post-1933 high of 3.404 per cent on June 17. In
the last regular auction of the month, held on June 24 for
bills dated June 27, the average issuing rate dipped to
3.231 per cent as demand arose from the reinvestment of
proceeds of the maturing tax anticipation obligations.
On June 26, as mentioned above, the Treasury auc­
tioned 3 billion dollars of new 264-day tax anticipation
bills dated July 3. Commercial banks were permitted to
pay for their own and their customers’ allotments by credit
to Treasury Tax and Loan Accounts, the value of which
was partly reflected in the average issuing rate of 3.485




per cent. By the end of the month the new tax anticipation
bills were quoted at 3.82 per cent (bid) in “when-issued”
trading.
O t h e r S e c u r it ie s M ark ets

A a a corporate bonds— — ^
o utstanding

J

87

The corporate and municipal bond markets were again
featured by unusually sharp rate increases during the
month as heavy demands for capital pressed hard upon
the supply of funds available for investment purposes.
Underwriters priced new offerings to yield successively
higher rates to investors in order to encourage buying in­
terest, and dealers similarly cut the prices of outstanding
issues in an attempt to move their inventories. Once the
rise in rates had gathered momentum, investors held back
in the expectation of still more favorable terms, but as the
end of the month approached investor response strength­
ened. Thus Moody’s index of seasoned Aaa-rated corpor­
ate bonds rose from 3.80 per cent on May 31 to 3.97 per
cent by the end of June, and the long-term Aaa-rated
municipal bond index rose from 3.10 per cent to 3.23 per
cent; in both cases the levels at the end of June represented
new postwar highs.
The yield increases on seasoned corporate bonds re­
flected the sharp upward yield adjustment in the new cor­
porate issue market. In the latter part of May, for exam­
ple, a large flotation of Aaa-rated public utility bonds was
priced to yield investors 4.40 per cent; although this issue
moved slowly—the underwriting syndicate disbanded in
early June and the unsold portion quickly dropped in price
to yield about 4.55 per cent—the 4.40 per cent had been
the highest original reoffering yield on such an issue in
the postwar years. However, the lack of demand soon
forced progressively more attractive terms: new long-term
Aaa-rated corporate bonds were successively priced to
yield investors 4.53 per cent, 4.80 per cent, and by midJune 4.85 per cent—plus, as an added feature in the last
case, a five-year noncallable provision designed to assure
investors that they would earn this rate for at least that
long. At 4.85 per cent plus the five-year provision, in­
vestor response was favorable and the securities quickly
went to a premium.
The volume of public offerings of corporate bonds for
new capital purposes is estimated to have been about 705
million dollars in June, 280 million dollars above the pre­
vious month and 440 million higher than in June of 1956.
During the first half of this year such offerings are esti­
mated at 3.1 billion dollars, compared with 1.9 billion
during the first six months of 1956. (During the second
half of 1956 approximately 2.1 billion dollars of corporate

MONTHLY REVIEW, JULY 1957

88

bonds were publicly offered for new capital purposes, of
which 560 million dollars was marketed in the month of
July. At the end of June the supply expected during the
coming month was estimated at about 305 million.)
On the other hand, the volume of new public municipal
offerings during the month was only about 330 million
dollars, compared with 430 million in May. (Thus far
in 1957 the volume is estimated to have been about 3.0
billion dollars, 360 million above the amount in the first
six month.s of 1956.) The relatively light volume of new
offerings during the month aided dealers in reducing their
advertised inventories moderately over the period, but this
was generally accomplished only by means of substantial
price concessions. Part of the reason for the light volume
of municipals was the postponement or cancellation, be­
cause of unfavorable market conditions, of fifteen offer­
ings (totaling 56 million dollars) previously announced for
June. Several corporate offerings, aggregating 47 million
dollars, were similarly withheld.
In the wake of higher yields on other short-term securi­
ties, commercial paper and bankers’ acceptance dealers
also announced rate increases during the month. Com­
mercial paper rates were raised by Vs of 1 per cent on
June 5 and again on June 18; these were the first changes
in commercial paper rates since last September, and they
brought the rate on prime four-to-six months’ paper to
3% per cent. Dealers in bankers’ acceptances announced
a rate increase of Vs of 1 per cent on June 6, bringing
quotations on 90-day acceptances to 3Vi per cent bid and
3% per cent offered. In addition, rates on directly placed
finance company paper were also advanced Vs of 1 per
cent on June 14 and again by June 27, the first changes
since October 1956; thus at the end of June the rate on
the 30 to 89-day paper of these companies was 3Vi per
cent, compared with 3Va per cent a month earlier.
M e m b e r B ank C redit

Total loans and investments at the weekly reporting
member banks increased 2,044 million dollars during the
four weeks ended June 19. Loans rose 1,508 million dol­
lars, primarily owing to a record expansion of business
loans over the two tax-period weeks, June 12 and 19, and
investments increased 536 million, mainly in the form of
Treasury bills acquired in the special auction for tax
anticipation bills held on May 22.
The loan increase included a 277 million dollar rise in
security loans and a net increase of 1,133 million dollars
in business loans. Among the borrower categories account­




ing for the bulk of the rise in business loans were sales
finance companies, public utilities and transportation
firms, and metals and metal products concerns. The sales
finance companies were forced to borrow heavily from the
banks in the week ended June 19 in order to pay off their
finance paper which came due near the tax payment date.
The sharp increase in business loans at the reporting
banks over the two weeks ended June 19 was evidently
attributable in large part to business borrowing to meet
tax payments due June 17; the 1,289 million dollar expan­
sion in these two weeks exceeded the former record 1,263
million dollar rise at the reporting banks which had oc­
curred in the two-week tax period in March 1956. (In
June of 1956 tax-period borrowing at the reporting banks
amounted to 955 million dollars, while in March of this
year it was 1,142 million.) For the first twenty-five state­
ment weeks in 1957, however, the rise in business loans
amounts to only 1.2 billion dollars as compared with a
rise of 2.3 billion in the similar weeks of 1956.
The rise of 536 million dollars in total investment hold­
ings during the four weeks ended June 19 was mainly due
Table II
W eekly Changes in Principal A ssets and Liabilities of the
W eekly Reporting Member Banks
(In millions of dollars)
Statement weeks ended
Item

May
29

June
5

Change
from Dec.
26, 1956
to June
19, 1957

June
19

June
12

Assets
Loans and investments:
Loans:
245
Commercial and industrial loans...
6
Agricultural loans.......................... —
59
Security loans................................ +
3
Real estate loans...........................
23
All other loans (largely consumer). +

—

89
4
9
12
10

+
+
+
+
+

344
5
178
18
33

+

78

+

579

+ 815
— 51

—

27
61

—

53
47

—

88
22

+

100
65

—

Total loans adjusted*................
Investments:
U. S. Government securities:
Treasury bills.............................

-

170

+
+
+

—

_

_

4—
+
+
+

945
1
31
8
33

+ 1,191
41
277
177
+ 138

+ 1,021

+

657

—

44
13

-

395
626

-

57
43

- 1,021
+ 109

_

Other securities.............................

+
+

764
22

Total investments......................

+

786

-

110

-

35

-

105

-

912

Total loans and investments adjusted*.

+

616

-

32

+

544

4-

916

-

255

-

101

+

197

-

531

+

162

-

225

-

148

+

56

+

644

+

973

+

766

+
+

2
150
878

+
+

171
50
846

+ 1,128
29
+
—
856

342
90

+

767
12

+
+

Loans adjusted* and “ other” securities.

Liabilities
Demand deposits adjusted....................
Time deposits except Government.......
U. S. Government deposits...................
Interbank demand deposits:

—

157
1

172
— 94
+ 1,288

_

+

3
68

- 1,938
+ 1,405
+ 418
-

999
94

* Exclusive of loans to banks and after deduction of valuation reserves; figures for the individual
loan classifications are shown gross and may not, therefore, add to the totals shown.

FEDERAL RESERVE BANK OF NEW YORK

to an 815 million dollar increase in Treasury bill holdings
in the week ended May 29, the result of the acquisition
during that week of the special Treasury tax anticipation
bills that had been auctioned on May 22 and issued May
27. Since the banks were allowed to pay for these bills by
crediting Treasury Tax and Loan Accounts, a large frac­
tion of the 1.5 billion dollars of the bills auctioned on
May 22 was initially acquired by commercial banks. In
subsequent weeks, these holdings were drawn down. Thus
far this year the reporting banks have lowered their invest­
ment portfolios by 912 million dollars, compared with a
decrease of 3.4 billion in the first twenty-five weeks of
1956.
Since total investments at the weekly reporting banks
have declined 912 million dollars thus far in 1957, while
total loans have risen 657 million, loans and investments

89

taken together have fallen 255 million dollars. In the
comparable period last year, investments had declined 3.4
billion while loans rose 3.0 billion, so that the two taken
together fell 400 million— 145 million dollars more than
the decline this year. In both periods the drop in invest­
ment holdings was primarily in the form of Government
securities, but last year a much larger volume of such
securities was sold by the reporting banks. The difference
in the loan expansion is primarily attributable to the 1.1
billion dollar shortfall in business loans in 1957, compared
with 1956. In addition, real estate loans have declined
177 million dollars thus far in 1957, while they increased
435 million in the same weeks last year, and “all other
loans” (mainly consumer) have risen only 138 million dol­
lars thus far this year as contrasted with a 687 million
dollar increase in the similar weeks last year.

INTERNATIONAL MONETARY DEVELOPMENTS
M o n e ta r y T r e n d s

and

P o licies

U n ited Kingdom. There was a further sizable increase
of 78 million pounds in bank advances during the three
months to mid-May, according to the British Bankers’
Association; while partly seasonal, the increase was sub­
stantially greater than a year ago. Bank lending rose more
than 7 per cent in the six months to mid-May, but, largely
owing to an offsetting reduction in the banks’ Treasury bill
holdings, there has been no expansion of total bank
credit; actually, the money supply has declined slightly.
However, the latest analysis of advances reveals that,
while the upward trend continued in bank borrowing by
the engineering and other “essential” industries, the bulk
of the increase during February-May was accounted for
by the food, drink, and tobacco industries, retail trade,
and the financial sector; the only major decrease was one
of 11 million pounds in lending to the public utilities
(other than transport). The sharp increase in bank bor­
rowing by the hire-purchase finance companies, which
reached a total of 34 million pounds, compared with a
low of 23 million last November, largely reflects the re­
covery in automobile sales that followed the relaxation of
consumer credit restrictions last December; however, at
the end of May, the minimum downpayment required on
cars, motorcycles, and light trucks was increased to 33Vs
per cent from 20.
British interest rates last month remained at or near the
high levels reached in May. The average Treasury bill
tender rate slipped slightly during the month and stood at
3.85 per cent on June 28. The weakness in the gilt-edged




market continued, with the yield of 2 l/ i per cent Consols
exceeding the record level established during the height of
the Suez crisis and reaching a new postwar peak of 5 per
cent on June 26.
Canada. The upward trend of long-term interest rates
extended into June, with Canadian Government bond
yields again reaching new highs. The average Treasury
bill tender rate edged upward during the month and on
June 27 stood at 3.81 per cent, equal to the all-time high
attained last February. The moderate seasonal expansion
of the chartered banks’ business loans continued; however,
during the three months to mid-June business loans rose
only about 5 per cent during 1957, compared with a 10 per
cent increase a year ago. The money supply (excluding per­
sonal savings deposits), which has been expanding season­
ally since March, rose toward the end of June above the
1956 level for the first time since early this year. There
was a further small reduction in the banks’ holdings of
government bonds, which in mid-June were equivalent to
16 per cent of their deposits compared with 18 per cent
a year previous. On June 26 the banks’ cash and liquid
assets ratios stood at 8.4 and 16.7 per cent, respectively,
comfortably above the required minima of 8 and 15
per cent; there was, however, some commercial bank bor­
rowing at the Bank of Canada during the final week of
the month.
Latin America. Two South American central banks
have recently taken measures to tighten the reserve posi­
tion of the banking systems as part of their efforts to

MONTHLY REVIEW, JULY 1957

90

restrain inflationary pressures. In Bolivia, commercial
bank reserve requirements were redefined more restrictively to consist exclusively of deposits in the monetary
department of the central bank, and new minimum require­
ments were set for each bank equal to its reserves in midMay but not less than 30 per cent of deposits. In addition,
a new supplementary reserve requirement of 75 per cent
against any net increase in deposits above the March 18-30,
1957 average was established. In Colombia, the central bank
has also tightened its credit policy by: (1) raising reserve
requirements for sight deposits to 18 per cent from 14;
(2) requiring the banks to maintain a supplementary re­
serve equal to 80 per cent of any increase in deposits
above the June 18 level, or the average level of deposits
during the preceding thirty days, whichever the individual
banks prefer; and (3) directing the commercial banks to
transfer to the central bank all peso equivalents of import
payments in arrears from the period June 15 to September
1, 1956, thus reducing the banks’ reserves accordingly.
E xch ange R a tes

American-account sterling weakened somewhat during
the early part of June in the New York foreign exchange
market, falling to $2.782%2 on June 7 despite fairly sub­
stantial offerings of dollars in London. The rate appeared
to be unaffected by the announcements that during the
previous month Britain’s gold and dollar reserves had risen
25 million dollars and that a deficit of nearly 20 million
had been recorded with the European Payments Union.
Increased commercial demand then began to strengthen

the rate which, following the announcement of a lower
trade deficit in May, rose as high as $2.791%2 on June 18.
Subsequently, with increased offerings of sterling the rate
eased to $2.79 y16 on June 25. After recovering to
$2.79%2 on June 26, the rate again moved lower, slipping
to $2.79%2 on June 28. In the forward market, discounts
on three and six months’ sterling moved within the narrow
ranges of 1%6"1%6 and 1 2%2“12%2 cents, respectively,
with oil and metal interests active buyers on occasion.
Transferable-sterling quotations fluctuated between
$2.7715 and $2.7785, with the higher quotations reflect­
ing in part demand from the Far East early in June,
some commercial buying at midmonth, and interest by
Continental European countries at the month end. The
quotation on June 28 was $2.7775. Securities sterling
moved from $2.56^ to $2.60^ in the first part of the
month, as some interest developed in British oil stock
investments. The rate then eased before rising sharply to
as high as $2.63% on June 26. At the month end, securi­
ties sterling was quoted at $2.6214.
/
The Canadian dollar continued to display pronounced
strength in a relatively active market during June. Except
for a brief weakening in the rate on June 11 and 12 fol­
lowing the Canadian elections, quotations were generally
higher. Demand for Canadian dollars by British and
American investors and further offerings of new issues of
Canadian securities were again major factors bringing
higher quotations which, on June 26, reached $1.05%4,
the highest rate since November 1933. On June 28, the
Canadian dollar stood at $1.045%4.

EARNINGS AND EXPENSES OF COMMERCIAL BANK TRUST DEPARTMENTS
IN NEW YORK AND NEW JERSEY IN 19561
1956.2 At New York City banks, where the great bulk
of the dollar volume of trust accounts is centered, the in­
crease amounted to 2.1 million dollars, or 22 per cent,
and at banks outside the City it amounted to a little
over $200,000, or 13 per cent. These increases reflected
a rise both in the volume of trust business and in the legal
scale of allowable commissions and fees for banks in New
York State.
The 1956 trust department survey included reports
An analysis of trust department earnings and expenses with a num­ from 102 banks in New York, New Jersey, and Fairfield

Profits of commercial bank trust departments in New
York and New Jersey continued to increase in 1956,
although not so rapidly as they had in 1955, but a larger
proportion of banks showed losses on trust operations than
had done so a year earlier. According to the fourth annual
survey of trust department earnings and expenses recently
completed by the Federal Reserve Bank of New York, net
profits after income taxes and allowed credits for deposits
rose by about 2.3 million dollars, or 21 per cent, during

1
ber of additional tables may be obtained free of charge by writing to
the Bank Examinations Department, Federal Reserve Bank of New
York, New York 45, N. Y.




2 Based on trust department net earnings for 68 banks that reported
in both 1955 and 1956.

FEDERAL RESERVE BANK OF NEW YORK

County, Connecticut,3 all of which had annual commis­
sions and fees in excess of $10,000. Aggregate com­
missions and fees earned by these banks were 92 mil­
lion dollars in 1956, nearly 80 per cent of the total amount
of commissions and fees received by all banks in the area
surveyed. The survey banks serviced in 1956 about
85,000 personal trust accounts and about 10,000 cor­
porate trust accounts. Sixty-eight of the banks reported in
both 1956 and 1955, and their consolidated returns pro­
vided the basis of this analysis.
N e w Y ork C ity B a nk s

The accompanying table shows a comparison of 1955
and 1956 trust department earnings for seven banks in
New York City and 61 banks outside the City. Commis­
sions and fees earned by the New York City banks rose
from 59 million dollars in 1955 to nearly 69 million dollars
in 1956— an increase of nearly 17 per cent. Over 40 per
cent of the rise in commissions and fees came from ex­
panded corporate trust and agency business, but in relative
terms income from estates expanded the most, recording
a gain of nearly 27 per cent. Expenses at the New York
City banks increased about 12 per cent in 1956, a smaller
amount than in 1955. Net income from the trust opera-

91

tions of these banks, after taxes but before allowed credits
for deposits,4 rose 53 per cent above 1955 levels. How­
ever, while allowed credits for deposits rose substantially in
the case of estates and pension and profit-sharing trusts,
credits allowed both for personal and for corporate trusts
and agencies either declined or increased only slightly, and
allowed credits for all trust business rose only 6.3 per cent
above 1955. Consequently, net earnings after adjustment
for deposit credits were up 22 per cent, compared with a
rise of 41 per cent the year before.
A factor contributing to increased earnings in 1956 was
a rise in fiduciary commission rates charged by banks in
New York. The New York State legislature authorized
an increase in fiduciary commissions effective July 1, 1956.
Under the new statute the commissions of executors, ad­
ministrators, testamentary trustees, guardians, and com­
mittees for incompetents were increased. Although the full
impact of the rate changes will not be felt until 1957, no
doubt the higher rates enabled some banks to expand their
1956 earnings.
Five of the seven New York City banks reported a
limited breakdown of expenses by type of trust account.
Expenses other than salaries showed only minor changes
in 1956. However, salaries and wages (including related

3 Banks in Fairfield County, Connecticut, were grouped with New 4 Allowed credits for deposits represent income credited to the trust
York banks. Two mutual savings banks in New Jersey were included department as earnings on uninvested trust balances deposited with
with commercial banks in that State.
the commercial banking department.
Earnings and Expenses of Commercial Bank Trust Departments in New Jersey and New York State, 1955-56*
(D o lla r am ounts in th ou sa n d s)

Item

Banks outside New Y ork City
with commissions and fees
under $100,000
(33 banks)

1955
Commissions and fees from :
Estates..................................................
Pension and profit-sharing trusts. .
Personal trusts....................................
Personal agencies...............................
Corporate trusts and agencies.........

1956

398.6
32.1
485.7
225.3
50.1

456.4
34.6
502.3
248.5
46.5

Banks outside New Y ork City
with commissions and fees of
5100,000 and over
(28 banks)

Per cent
change

1955

1956

+ 14.5
7.8
+
3.4
+
+ 10.3
— 7.2

1,921.2
202.8
3,103.7
1,639.9
688.7

2,264.9
243.2
3,244.6
1,868.0
622.0

Per cent
change
+
+
+

All banks
outside New Y ork City
(61 banks)

1955

1956

17.9
19.9
4.5
13.9
9.7

2,319.8
234.9
3,589.4
1,865.2
738.8

2,721.3
277.8
3,746.9
2,116.5
668.5

Seven New Y ork C ity banks

Per cent
change
+
+
+
+

17.3
18.3
4.4
13.5
9.5

1955

1956

3,725.2
2,999.4
12,657.7
15,187.0
24,273.7

4,728.4
3,499.7
14,784.4
17,165.5
28,604.2

Per cent
change
+
+
+
+
+

26.9
16.7
16.8
13.0
17.8

Total incom e..............................

1,191.8

1,288.3

+

8.1

7,556.3

8,242.7

+

9.1

8,748.1

9,531.0

+

8.9

58,843.0

68,782.2

+

16.9

Total expense.............................

1,381.9

1,457.9

+

5.5

6,745.8

7,318.0

+

8.5

8,127.7

8,775.9

+

8.0

51,776.7

57,797.7

+

11.6

Net earnings before income taxes___

- 190.1

- 169.6

+

10.8

810.5

924.7

+

14.1

620.4

755.1

+

21.7

7,066.3

10,984.5

+

55.4

Income tax charges ( —) or credits ( + )

- f 110.6

+

-

34.0

- 319.6

- 372.4

-

16.5

- 209.0

- 299.4

-

43.3

-3 ,8 0 4 .0

-5 ,9 9 5 .6

-

57.6

Trust department net earnings...........

-

-

+

52.9

73.0
96.6

-

21.5

490.9

552.3

+

12.5

411.4

455.7

+

10.8

3,262.3

4,988.9

Allowed credit for deposits..................

237.2

243.5

+

2.7

939.3

1,091.6

+

16.2

1,176.5

1,335.1

+

13.5

6,328.4

6,728.6

Trust department net earnings
(adjusted for allowed credit for
deposits)...............................................

157.7

146.9

-

6.8

1,430.2

1,643.9

+

14.9

1,587.9

1,790.8

~r

12.8

9,590.7

11,717.5

79.5

N ote: The algebraic signs indicate the effect of the item on final net profits, except in the case of “ total expense” .
* This table includes data for only those 68 banks which reported in both the 1955 and 1956 surveys.




6.3

+

22.2

MONTHLY REVIEW, JULY 1957

92

expenses), which accounted for the largest portion of ex­
penses, continued to rise in 1956, largely because rates
of pay increased. Nevertheless, they were only 65 per cent
of commissions and fees in 1956, compared with 67 per
cent in 1955. Salary expense allocated by these five City
banks to pension and profit-sharing trusts reached a level
of over 86 per cent of gross income from these accounts,
the highest percentage for any type of trust business.
However, substantial declines occurred in salary and wage
costs allocated to personal trust accounts. This drop, to­
gether with a relative decline in overhead expenses at these
five City banks, accounted in large part for the decline in
total expenses from 90 per cent of commissions and fees
in 1955 to only 86 per cent in 1956.
B ank s O u t sid e N e w Y ork C ity

Commissions and fees of the 61 banks outside New
York City which are included in the table totaled 9.5 mil­
lion dollars in 1956, an increase of 9 per cent over the
previous year, and expenses rose 8 per cent to 8.8 million
dollars. Net income (after taxes but before allowed credits
for deposits) from trust operations of these banks rose
nearly 11 per cent; after adjusting for deposit credits, net
profits were up nearly 13 per cent above 1955 levels. A
rise in commissions and fees from estates, amounting to
over 17 per cent or more than $400,000, was the most
important factor contributing to their increased gross earn­
ings. Income from pension and profit-sharing trusts ex­
panded more rapidly than income from any other type of
trust business, rising over 18 per cent in 1956. In dollar
terms, however, these accounts still provide the smallest
share of trust income.
Although all banks outside New York City taken
together reported net profits on their trust department

business (after taxes but before allowed credits for de­
posits), the banks with trust incomes of over $100,000
fared better than the smaller banks. The 33 banks outside
New York City with gross trust department incomes of
less than $100,000 continued, in the aggregate, to sustain
a net loss on their trust business before income taxes and
allowed credits for deposits, but their net losses were
reduced nearly 11 per cent from those recorded in 1955.
Nevertheless, these banks recorded a drop of 6.8 per cent
in 1956 adjusted net earnings, compared with 1955, be­
cause income tax credits declined more than the cut in net
losses and allowed credits for deposits rose less than 3
per cent.
In contrast, the banks outside New York City with
gross trust incomes over $100,000 showed a rise in net
earnings before taxes and allowed credits of 14 per cent
over 1955. In addition, this group of banks boosted al­
lowed credits for deposits 16 per cent, and they recorded
nearly a 15 per cent gain over 1955 in adjusted net earn­
ings.
O pe r a t in g L osses

In spite of the continued rise in trust earnings for all
banks in the aggregate, a larger proportion of the banks
surveyed reported net losses on trust operations in 1956
than in 1955. Over 53 per cent of banks outside New
York City reported net losses before allowance for deposit
credit in 1956, compared with 44 per cent in 1955 and
43 per cent in 1954. Moreover, after allowed credits for
deposits, 24 per cent of the banks outside New York City
still reported losses, a considerable increase over the 14
per cent reporting losses on this basis in 1955. Four of the
New York City banks included in the survey reported net
losses in 1956 before making allowance for credits on
deposits, but only one after allowance for this credit.

THE POSTWAR DEVELOPMENT OF MONEY MARKETS ABROAD
The increasing reliance on monetary policy in much of
the world today has emphasized the importance of foster­
ing short-term money markets. Central banks have long
endeavored, of course, to develop active local money mar­
kets, and at present numerous foreign countries, with more
developed as well as with less developed financial systems,
are taking steps in this direction. The rapid broadening of
the Canadian money market has been the most notable
example of these efforts in the last few years. Other for­
eign markets—with the exception of London—remain, it




is true, relatively narrow, but a number of them have
gained much in scope and flexibility since the war.
T h e F u n c t io n s

of a

M o n e y M ark et

The developing of money markets may seem a rather
technical matter that mainly concerns the commercial
banks. In reality, however, it is of much wider importance,
even when the money market is defined in a narrow sense,
as in this article. In this present narrow sense, the term
may be defined as the center for organized dealings in

FEDERAL RESERVE BANK OF NEW YORK

93

able size without undue price fluctuations, and thus makes
an effective open market policy possible. Such a market
also enlarges the scope for flexibility in the use of open
market operations and helps to spread the intended effects
of such operations throughout the economy. The widening
of the market also may increase the influence of open mar­
ket operations in another way: the facilities for ready shift­
ability of secondary reserve assets make it possible for the
commercial banks to operate with smaller excess reserves
and with relatively stable cash ratios, rather than with
widely fluctuating excess reserves; and the maintenance of
stable cash ratios in turn provides an effective base for
open market operations. As a result, the changes in bank
reserves effected through such operations can substantially
and promptly affect the availability of credit from the com­
mercial banks.2
Since an efficient money market for the most part oper­
ates with a relatively narrow margin of excess bank re­
serves, the need frequently arises in the normal course of
day-by-day fluctuations in money payments for resort to
central bank credit. The discount rate thus acquires a posi­
tive influence on commercial bank lending policy. This is
true, moreover, whether the actual use of the central bank’s
discount window is by the commercial banks themselves,
as in the United States, or whether that use is limited to
intermediaries, like the discount houses in the United King­
dom. At the same time, because the commercial banks
can rely on the market as a “buffer” for the adjustment of
their positions, the central bank becomes truly a lender of
last resort, and excessive injections of central bank credit
can be avoided. The influence of the central bank is likely
to be further enhanced by a decline in the commercial
banks’ dependence on secondary liquid assets held in for­
eign centers as the banks increase their dependence on the
local market.
Finally, a money market in which all suppliers and users
of liquidity actively participate will necessarily provide
facilities in which the government’s own short-term financ­
ing requirements can be met more efficiently. It reduces
the need for direct central bank loans to the government,
and thus minimizes the kind of threat that historically has
been the most serious cause of undesirable expansion in
bank reserves and the money supply. A developed money
market can also help accommodate short-term swings in
the government’s borrowing requirements without the risk
1 For a more extensive discussion of the various definitions of the of creating sharp changes in the commercial banks’ liquid­
money market, as well as for a description of the United States market,
see Money Market Essays, by Harold V. Roelse and others, Federal ity, such as would make the banks extremely short of liquid

monetary assets that provides the liquidity needed by
lenders and at the same time satisfies the short-term re­
quirements of borrowers.1
A well-functioning market of this kind has important
advantages not only for a country’s commercial banks, but
also for other financial institutions, businesses, and indi­
viduals, and for the economy as a whole. For the com­
mercial banks, such a market makes possible a rapid and
relatively inexpensive evening-out of their reserve posi­
tions, by helping to match off among the banks the excesses
and deficiencies of reserves that result from shifts of de­
posits from one bank to another in the normal course of
trade. It also enables the banks to employ a part of their
reserves in income-earning assets, since it assures the
liquidity of such secondary reserves. As a result, the banks
are able to operate on a narrower margin of nonearning
assets. A developed money market, moreover, provides a
convenient outlet for the short-term investment of any
surplus funds of corporations and other nonbank investors
over and above the cash balances maintained on deposit in
the banks. Such a market also helps to satisfy the needs
of short-term borrowers, and tends to facilitate short-term
borrowing by business firms and others in the form of mar­
ketable instruments such as bankers’ acceptances, com­
mercial paper, finance company paper, or loans collateral­
ized by stock exchange securities.
A flourishing and flexible money market not only leads
to a more economical allocation and more intensive use of
short-term capital, but by supplying temporary financing
for the holding of securities it also facilitates the shiftability
of liquid assets that is essential if there are to be smooth
functioning markets for securities in general. By providing
diversified, competitive facilities that reach into all other
markets for credit and capital, an efficient money market
helps to assure the channeling of funds into the uses most
needed for the expansion of the economy, and facilitates
the most efficient utilization of domestic savings.
A developed money market also makes a major con­
tribution to the effectiveness of monetary policy. It pro­
vides a sensitive barometer of monetary conditions gener­
ally, and is a natural point of contact between the central
bank and the financial sectors of the economy. A market
with a broad distribution of short-term government securi­
ties, for example, is able to absorb transactions of reason­
Reserve Bank of New York, March 1952 (fourth printing, November
1954, currently out of print but being revised), and Federal Reserve
Operations in the Money and Government Securities Markets, by
Robert V. Roosa, Federal Reserve Bank of New York, July 1956.




2 See ''Open Market Operations Abroad”, Monthly Review, March
1957.

94

MONTHLY REVIEW, JULY 1957

assets at one time and perhaps dangerously liquid at term funds. Markets for interbank loans also exist in
another.
Burma, Ceylon, Japan, and Pakistan; in Japan and Paki­
stan, the loans may be made through brokers, while in the
other countries they take place directly between the banks,
T h e S t r u c t u r e o f M o n e y M ark ets A broad
as they do in most European countries which have such
markets. In some of these countries, as well as elsewhere,
Few countries have broad enough money markets to
reap all, or even most, of the advantages just described. In there are also markets on a relatively small scale in other
fact, London probably is the only foreign center that can short-term instruments, sometimes with nonbank investors
be said to have a highly developed market of long standing. as participants. Thus there appears to be a minor market
Many foreign countries, especially in Continental Europe, in Treasury bills in West Germany and Pakistan; in short­
have, of course, well-organized and active capital markets. term government securities in Ceylon, Japan, and a few
In general, the development of such longer term markets Latin American countries; in bankers’ acceptances in
precedes the growth of money markets and brings with it Switzerland; and in commercial paper in the Union of
some of the advantages of the latter; moreover, it is also South Africa. There is also a growing market in finance
essential for its own sake in a country’s balanced economic company paper in Australia and in short-term government
expansion. The two kinds of markets are naturally closely securities in New Zealand.
interconnected and the existence of the long-term market
Broader markets exist in a number of other countries
is helpful in the establishment of the short-term one, just and, in these, intermediaries play an important role. As a
as a broad money market is of great benefit for the opera­ rule, call loans or their equivalent are at the heart of such
tion of the capital market.
markets. In Belgium and the Union of South Africa, the
intermediaries are semiofficial institutions. The South
Despite the general absence abroad of highly sensitive
and well-integrated money markets with specialized sub- African National Finance Corporation accepts money at
markets, a number of foreign countries have organized call, mainly from nonbank investors, financial and other
money markets of some kind, and many of them quite corporations, but also the banks, and invests it primarily
understandably are much more closely intermingled with, in short-term government securities. In addition, a private
and dependent upon, the markets in foreign exchange and firm has recently been established in South Africa to act
foreign short-term assets than is the money market in the as an intermediary in the market for commercial bills. The
United States. The money markets of foreign countries Belgian Rediscount and Guarantee Institute borrows call
vary widely, of course, in size, complexity, types of partici­ money from banks and from various semipublic financial
pants, and the kinds of instruments used. Some function institutions, relends some call money to other semipublic
with intermediaries, whether dealers (discount houses) or institutions, and invests the bulk of the remainder in
brokers; others operate without them. Some markets deal bankers’ acceptances. In addition, it resells bankers’ ac­
primarily in a single kind of instrument, such as call ceptances from its own portfolio and also acts as a broker
money; others in several instruments, such as call money, in the market for bankers’ acceptances and commercial
Treasury bills and/or other short-term government securi­ bills.
ties, and various kinds of private paper. As would be ex­
In India, the intermediaries are private brokers of vari­
pected, however, in all of those markets the commercial ous kinds, there being no discount houses or their equiva­
banks are the main participants, and the central banks are lent in the market to undertake transactions as principals.
the lenders of last resort, with varying responsibilities for Nevertheless, the Indian money market seems compara­
regulating over-all conditions in the money market.
tively well developed in terms of organized relationships
In several European countries — West Germany, and specialization of function, although the links among its
Sweden, and Switzerland—money market transactions are principal sectors—the two main central markets, Bombay
mainly or entirely confined to interbank loans, usually on and Calcutta, and the bazaar markets—are rather weak.
a day-to-day or on a call basis. These loan markets are The core of the central markets is the call money market,
essentially similar to the Federal funds market in this coun­ which is mainly an interbank market usually functioning
try in that they are markets in deposits held at the central with brokers as intermediaries; these central markets con­
bank, although with a few exceptions the interest rates are tain, however, no true market for bills, whether commer­
much less sensitive than in the United States. In West cial or Treasury. On the other hand, the bazaar sections
Germany, in addition, insurance companies and other non­ of the market, which are also highly organized, deal in a
bank investors are also important lenders of such short­ wide variety of commercial paper; these bazaar markets




FEDERAL RESERVE BANK OF NEW YORK

are grouped around the indigenous bankers, who represent
a long Indian banking tradition.
In Canada, France, and the Netherlands the markets
resemble the London market,3 even though they are nar­
rower and their detailed arrangements are different. While
these four markets vary greatly in breadth, they are similar
in that they hinge on the operations of dealer-intermediaries
(discount houses in France and the United Kingdom).
These intermediaries carry portfolios of short-term securi­
ties (mainly government securities) and help to make mar­
kets in them; they finance their portfolios through short­
term loans obtained largely from the banks, usually at rates
below those earned on the securities they carry. They have
access to central bank credit in the form of advances in
the United Kingdom and the Netherlands, of repurchase
agreements in Canada, and of both in France; in fact, in
the United Kingdom borrowing from the central bank is
done entirely by the discount houses and not by the banks.
The money market loans generally are secured loans, al­
though in France repurchase agreements (so-called “en
pension” operations) predominate, while in Canada such
agreements are important in the case of short-term funds
obtained by dealers from nonbank investors. Not only are
these loans an increasingly important outlet for the tem­
porarily surplus funds of such investors in some of these
countries, but they also are a source of short-term funds
for others, such as the banks in France and the local
authorities in the Netherlands.
Short-term government securities are the most important
instruments traded in these markets, and are held for
the most part by banks and dealers, although holdings by
other investors are also significant; the extent of such non­
bank holdings varies from country to country and appears
generally to be much less than in this country. These
securities include short-term bonds in Canada, the Nether­
lands, and the United Kingdom, while in France they com­
prise only bills with maturities of up to two years. Treas­
ury bills are issued at regular weekly tenders in Canada
and the United Kingdom, as in this country, and at irregu­
lar tenders in the Netherlands; in France, however, they
are placed “on tap”, that is, are issued continuously, at
rates fixed by the Treasury.4 The smaller markets in paper
of borrowers other than the Treasury include markets in

95

bankers’ acceptances in France, the Netherlands, and the
United Kingdom; in other commercial or trade paper (in­
cluding finance company paper) in Canada, France, and
the United Kingdom; in paper of local authorities in the
Netherlands; and in National Railroads bills in France.
T h e B r o a d en in g

o f the

C a n a dia n M a rk et

The foregoing survey of the existing foreign money
markets points up the fact that, despite the long-standing
efforts to develop such markets, few of them approach the
markets in this country or England in inclusiveness, or
even in terms of organized relationships and variety of
instruments. In the interwar period, a number of central
banks endeavored to encourage the growth of a market in
private commercial paper, but these attempts were not very
successful, mainly because of the continued decline in this
form of financing. After World War II, on the other hand,
following the general expansion of government debt, the
efforts to develop money markets more often centered on
the market for Treasury bills and for short-term loans with
such bills as collateral. The most notable advance along
these lines in recent years has taken place in Canada.
When the Bank of Canada began operations in 1935, a
short-term market was almost nonexistent, although there
was a reasonably good market for middle and longer term
government securities. The bank, shortly after its estab­
lishment, instituted in cooperation with the government a
regular fortnightly tender of Treasury bills, but their vol­
ume remained relatively small, they were held largely
within the banking system, and a trading market failed to
develop. This, however, changed rapidly after 1953, when
the authorities began taking further major steps to pro­
mote a short-term market. The government changed its
regular issue of Treasury bills to a weekly from a fort­
nightly tender, and for a time began issuing nine months’
as well as three months’ bills, enlarging the total volume
of bills and increasing the number of maturities available
to the market. The Bank of Canada then introduced
repurchase agreements involving Treasury bills and other
short-term government securities, with those government
securities dealers who had demonstrated a capacity to
maintain more or less continuous jobbing positions in the
short-term market.5 To encourage the development of

5 The agreements, which are now applicable to government and
government-guaranteed securities with maturities up to three years,
3 For a brief discussion of the London market arrangements, see provided for the payment of interest at the bank rate. The bank rate
Roosa, op. cit., pp. 14-16 and 51.
is at present adjusted weekly to maintain it at a level of ^4 of 1 per
4 The tender method for issuing Treasury bills is also used in cent above the average rate on Treasury bills at the most recent tender
Ceylon, Egypt, India, Pakistan, and Thailand, while issues at fixed for auction of Treasury bills. Repurchase agreements run up to thirty
rates, whether on tap or on an irregular basis, are made in Belgium, days, and the dealers may terminate them at any time. To date, the
Burma, Denmark, Italy, Norway, Sweden, Switzerland, and the Union average period of borrowing has been two and one half days. The
of South Africa. In all these countries, however, Treasury bill mar­ dealers to whom this facility is extended may draw upon it at their
kets as already noted are very small or nonexistent, the bills ordinarily own initiative but must stay within their borrowing limits as set by
the Bank of Canada.
being held to maturity by their original purchasers.




96

MONTHLY REVIEW, JULY 1957

market intermediaries, the Bank of Canada in its market
transactions in Treasury bills progressively widened the
spread between its buying and selling levels, established
a minimum for its individual buying transactions, and
discontinued making payment in immediately available
funds at the Bank of Canada for bills purchased from
banks, paying instead in clearing house funds on the day
following purchase as it had been doing in its transactions
with dealers. Moreover, the bank instituted wire transfer
facilities to dealers to help them avoid transit costs or
interest charges in transferring bills and short-term bonds
between cities.
In mid-1954 two more important changes were made.
First, the minimum required reserves of the chartered
banks were altered, as part of a revision of the banking
legislation, from a fixed daily ratio of 5 per cent to a daily
average of 8 per cent during each calendar month.
Secondly, the chartered banks were encouraged to make
day-to-day loans to those government securities dealers
who were prepared to act as jobbers in short-term govern­
ment securities. Rates on these loans are determined
through over-the-counter negotiations on a competitive
basis. Since these loans could be called for payment at any
time, banks were provided with the convenience and effi­
cient means of adjusting surplus or inadequate cash reserve
positions. This facility, combined with the new cash re­
serve requirement, encouraged the banks to work down
from the 10 per cent ratio which they had customarily
maintained to a figure closer to the 8 per cent minimum,
and fostered more active trading in money market instru­
ments. Late in 1955 the banks agreed to endeavor to
maintain a 15 per cent daily average ratio of cash, Treas­
ury bills, and day-to-day loans to deposits.
Over the period, the interest in the Treasury bill mar­
ket has grown rapidly and nonfinancial corporations and
other investors have become important participants. The
dealers, in addition, have increased the number of partici­
pants in the money market and have provided an alterna­
tive to the outright holding of short-term government
securities by nonbank investors by drawing on such in­
vestors for the financing of their portfolios. Moreover,
the volume of private paper has risen markedly; this
paper is issued mainly by finance companies, but also
by nonfinancial corporations, and is placed either directly
or through dealers, the purchasers apparently being mostly
corporations with temporary surpluses of funds.

number of countries had already broadened their markets
earlier. The London market has, of course, long been con­
sidered a classic market model and has remained the most
developed financial center abroad. Since this article is
concerned with the establishing and developing of money
markets since World War II, the London market will not
be described further; it need only be noted that, with the
postwar revival of monetary policy that began in Novem­
ber 1951, the London market has regained much of its
earlier rate flexibility.
On the Continent, the monetary authorities of a number
of countries have either taken or proposed a variety of
measures to establish or further develop money markets,
perhaps the most noteworthy example occurring in Bel­
gium. This country had had an acceptance market before
1914, but the efforts to revive it in the interwar years were
only partly successful. In the postwar years, however, the
market began to develop on these earlier foundations, in
particular around the Rediscount and Guarantee Institute,
which was established in 1935 in part to help rebuild the
acceptance market. Since the commercial banks were anxi­
ous not to disclose their business to their competitors, the
institute’s first step in 1945 was to start acting as a trustee
for bankers’ acceptances and commercial bills, so that the
buyers of acceptances would know only the name of the
acceptor and not the name of the originating business
“customer”. The central bank, for its part, started giving
its approval to acceptances it had inspected and found
satisfactory, thus guaranteeing their eligibility for redis­
count with it; at the same time it encouraged the market
by refusing to discount directly from the accepting bank,
limiting its discounts for any given bank to paper accepted
by other banks. The institute in turn began to operate as
a buyer and seller of such acceptances, and subsequently
also as a broker for other private paper. Aided by these
facilities, the volume of acceptances has more than dou­
bled since 1946 and trading activity has greatly increased;
market rates, however, have remained somewhat inflexible.
Since 1945, in addition, the institute has been the center
of the day-to-day money market; it has thus provided the
banks with an outlet for their temporarily surplus funds,
while at the same time it has obtained funds to finance
its acceptance portfolio. Its policy has until recently
been to change its rates only rarely, and it has almost
always taken all day-to-day money offered to it. In early
1956, however, its rates became flexible and began to reflect
market conditions; at the same time the institute started
W e st e r n E u r o p e a n M ark ets
taking five and ten-day, as well as day-to-day, money.
In Western Europe, the postwar expansion of money Belgium, however, has no trading market in Treasury bills,
markets has not been so far-reaching, partly because a which are issued on tap at fixed rates only to banks (in




FEDERAL RESERVE BANK OF NEW YORK

contrast to a short-lived interwar system of tenders) and
which are nonmarketable; under existing securities-reserve
requirements the banks are required to hold these bills in
certain proportions to their deposits. In 1956, in addition,
there was introduced a new type of Treasury bills of five
to fifteen-day maturity, which are sold to the banks and
public financial institutions at rates varying with the mar­
ket, but the volume of these has generally been rather
small. It is in this area of government financing that the
governor of the central bank has suggested that changes
are essential for the establishment of a truly flexible money
market.
Unlike Belgium, four other Continental countries—
France, West Germany, the Netherlands, and Norway—
have since the war concentrated on broadening their mar­
kets in Treasury bills and other short-term government
securities. In France, the major postwar change in the
Treasury bill market concerned the form of such bills,
which remain continuously on tap at fixed rates. In 1945
the monetary authorities established a special bookkeeping
system for all Treasury bills held by banks and other finan­
cial institutions, under which such bills were no longer
represented by actual certificates, but rather by entries in
special accounts administered by the central bank for the
Treasury. In this manner important cost savings were real­
ized, not only for the Treasury but also for the holders of
bills, and the functioning of the market was altered by this
simplification of the physical handling of bill transactions.
In West Germany, the central bank and the government
agreed in 1955 to transform certain nonmarketable securi­
ties held by the bank (the so-called “equalization claims”
created during the 1948 currency reform) into short-term
marketable securities, in order to obtain suitable securities
for the bank’s open market sales. This procedure not only
created a large central bank portfolio of Treasury bills and
short-term bonds but in addition, with the sizable open
market sales that followed, led to large holdings of these
securities outside the central bank, which until then had
been insignificant. So far, however, a true market has not
developed, and the commercial banks, which are the prin­
cipal purchasers, generally either hold these securities to
maturity or resell them to the central bank at its published
buying rates. These buying rates, together with the central
bank’s selling rates, are in turn altered from time to time
in line with changes in money market conditions.
In the Netherlands, the Treasury until mid-1952 issued
short-term government securities (bills up to twelve
months’ maturity and notes up to five years’) on tap at
fixed rates regardless of its immediate needs; during the
following four years it issued such paper only at irregular
intervals, but continued the practice of fixing the rates. In




97

1956, however, it resumed its more flexible prewar prac­
tice of issuing Treasury bills by tender at rates determined
by the market, although on occasion it still places Treasury
bills on tap; the tenders, however, do not take place at
regular intervals. The central bank, for its part, added
some flexibility to the market in December 1956 when it
offered to the commercial banks the facility of repurchase
agreements on short-term government securities; the initia­
tive for such operations comes from the central bank, and
the interest charge is determined either by it or by auction
with participation by the prospective borrowers.
In Norway, the central bank has been trying to establish
a money market both by having the commercial banks bor­
row from each other and by developing a Treasury bill
market. In 1954 Treasury bills were changed from regis­
tered to bearer securities, and the central bank declared its
readiness in principle to purchase Treasury bills from the
banks at a rate that would ensure them interest for the time
they held such bills. In 1955 the Finance Ministry made
nonbank investors eligible for the purchase of Treasury
bills, and instituted a weekly offering of such bills at a fixed
rate; the amount outstanding, however, has remained
small. The banks regard Treasury bills as competing with
their time deposits and, in order to avoid withdrawals by
their customers, raised their rates when the new Treasury
bill system was introduced. Although legislation exists
which would enable the government to impose maximum
interest rates that the banks may charge, the power was
not used in retaliation for this action by the banks.
In Austria, in contrast, a proposal has been put forward
to establish a money market, not on the basis of Treasury
bills, but by encouraging the use of the commercial bill.
A few years ago a special commission under the chairman­
ship of the governor of the Belgian central bank, which
the Austrian Government requested to study the country’s
banking system, proposed a scheme, along the lines of the
Belgian practice discussed above, for the establishment of
a special agency that would buy bills from commercial
banks, to hold or resell. These bills would first have to be
approved by the central bank, thereby becoming eligible
for possible rediscount, and then would be retained by the
agency, which in order to ensure secrecy with respect to
the names on the acceptances would issue deposit receipts
against the acceptances to the purchaser. The agency
would finance its own bill portfolio by borrowing money at
call from the banks.
M a rk ets

in

O th e r A reas

The commercial bill is also the basis of plans to broaden
the money market that have recently been adopted in India
and proposed in Pakistan. In India, the central bank in

98

MONTHLY REVIEW, JULY 1957

1952 introduced a so-called “Bill Market Scheme” under
which commercial banks lacking eligible commercial paper
for temporary borrowing at the bank were enabled to ob­
tain central bank credit in the form of advances against
the collateral of ninety-day notes. These notes were to be
created by the conversion of a part of a bank’s overdraft
to a customer—the preferred form of commercial bank
lending in India. At first, these advances were made at a
preferential rate, and the central bank bore a part of the
cost of the tax incurred in converting bank loans into bills.
The scheme has proved to be very popular, and by provid­
ing a domestic source of funds for the banks has imparted
greater elasticity and wider autonomy to the Indian money
market. Apart from sales to the central bank, market trans­
actions in commercial bills have, however, not developed.
In Pakistan, where a similar effort has been under way
but apparently with much less success (as also in Burma),
the Government Planning Board recently proposed to go
a step further by establishing discount houses that would
operate a commercial bill market. The board has been
assured that various firms and individuals with adequate
financial resources would be willing to establish such dis­
count houses, which would discount commercial bills. The
commercial banks, on their part, would not only contribute
to the discount houses’ capital, but would also stand ready
to rediscount the bills at concessional rates; the central
bank in turn would backstop the market by offering its own
rediscount facilities.
Somewhat similar private money market intermediaries
have recently been established in the Federation of Rho­
desia and Nyasaland and in the Union of South Africa.
These institutions, two in Rhodesia and one in South
Africa, accept bills and arrange for their financing, thus
mobilizing local funds and assisting in the development of
short-term money markets. This latter function since 1949
has been entrusted in the Union of South Africa to a semi­
official intermediary as well—the National Finance Cor­
poration. The corporation, which is in part publicly owned
and controlled, operates with a central bank guarantee of
its liquidity. By accepting deposits at call and investing
most of its funds in short-term government securities, it
seems to have already brought about some of the advan­
tages of a money market, at least insofar as concerns the
borrowing demands of the government. It has facilitated
a nation-wide flow of funds, and has succeeded in drawing
idle balances from the various parts of the country. In this
it has been helped by the central bank, which transmits
funds for it from any of the central bank’s branches to the
corporation’s head office free of exchange charges. The
corporation has also attracted South African funds from




overseas, has acted as a buffer between the market and
the central bank, and has enabled the commercial banks
to work with closer reserve margins, thus tending to make
them more sensitive to changes in monetary conditions
and policies. In addition, the authorities more recently
have taken another step toward a more active market by
introducing Treasury bills in bearer form and in smaller
denominations.
In Japan, recent efforts to broaden the money market
have centered on short-term government securities. These
securities had until recently been issued only to the central
bank for possible resale to the commercial banks which,
however, could not deal in them among each other. As of
May 1956, the government began to issue such securities
directly to banks, insurance companies, and other financial
institutions, and permitted trading in them among such
buyers. The central bank, for its part, has stood ready to
repurchase such securities at the issuing rates—a form of
interest-rate pegging with potentialities for impairment of
an effective monetary policy, but presumably judged im­
portant as giving transitional assistance to the current
broadening of holdings of government securities. In addi­
tion, the central bank has recently started extending limited
credit to three short-term loan-brokerage firms in order to
assist them in their operations in the call-loan and dis­
count markets.
In New Zealand, the government last fall turned down
proposals from various quarters for the establishment of
a Treasury bill market even though it approved them in
principle, saying that such a market was impracticable for
the immediate future. Instead, the government stated that
it would enter the government bond market at appropriate
times in order to reduce short-term price variations and
to increase the attractiveness of government securities.
The government also announced its intention to make
available a wider range of government securities so as to
suit more closely those who wanted special maturity dates.
The rejected proposals included one by a Royal Commis­
sion,6 which suggested the offering, at appropriate rates,
of three and six months’ Treasury bills to all types of in­
vestors. The central bank, for its part, stated that it was
prepared to offer rediscount facilities for these bills with­
out penalty. A more limited scheme for a specialized mar­
ket has, however, received legislative approval, providing
for a pooling of short-term funds of local authorities in a
special agency for investment in local-authority bonds.
A number of other countries with less developed finan­
cial systems, including many in Latin America, have taken
6 For a discussion of the commission’s other recommendations, see
"Monetary Control in a Rapidly Developing Economy: The New
Zealand Royal Commission Report”, Monthly Review, October 1956.

FEDERAL RESERVE BANK OF NEW YORK

measures to broaden their capital markets rather than
attempting to establish money markets. In this endeavor,
these countries have concentrated on the market for long­
term government securities; and some of them, notably
Mexico, Cuba, Ceylon, and the Philippines, have already
made considerable headway in this direction.
C o n c l u d in g R em a rk s

A country’s money market is naturally a product of its
local institutions, and the fact that certain markets have
grown up in a particular fashion does not imply any rea­
son for others necessarily to do the same. Nevertheless,
the foregoing survey of recent foreign experience reveals,
amidst a great variety of national settings, some common
lines along which the development of short-term markets
might be expected to proceed.
A short-term loan market, usually centering on loans
against the collateral of marketable obligations, is a feature
of almost all money markets. In countries where such a
market exists on an interbank basis it tends to spread to
include other participants. The monetary authorities of
some countries have found it possible to help in establish­
ing such a market simply by obtaining the cooperation of
the parties concerned, where conditions were otherwise
suitable. In other countries, they have been able to encour­
age it by permitting money market loans to be included in
commercial-bank liquidity ratios where such ratios have
existed, by helping to ensure the liquidity of the underly­
ing collateral or by establishing semiofficial intermediaries
that would pool idle funds and hold other liquid or shiftable
assets. Where such intermediaries function, however, ex­
perience has shown the advantages of introducing fairly
promptly a flexible rate policy. Otherwise such arrange­
ments may retard progress toward a more effective market
and may even become merely a syphon for drawing funds
into government obligations—thereby stifling instead of
encouraging competitive forces.
While call money markets fulfill some of the money
market’s functions, many countries have found it desirable
to proceed to the establishment of a market for commer­
cial or Treasury bills. Even though the commercial bill
has generally declined in importance, a few countries have
concentrated on this form of short-term paper in develop­
ing their markets, both because they have considered it a
useful form of short-term financing and because the alter­
native of establishing a Treasury bill market may have
posed special problems. In such endeavors much help
has been obtained from the activities of semiofficial inter­
mediaries that ensure secrecy for the originating bank, and
from the operations of central banks that help to assure




99

the liquidity of such instruments. While the revival of the
market in bankers’ acceptances and commercial paper has
shown signs of becoming important at various times in the
postwar period, this development has not yet become a
factor of major significance on a world-wide scale.
Unlike the period before World War II, therefore, the
Treasury bill since the war has generally been the preferred
basis for the establishment of a bill market. For such a
market to succeed, the central banks have, in order to pre­
vent unduly sharp increases in time deposit rates by the
commercial banks, sometimes had to persuade the banks
that any increased competition of Treasury bills with their
time deposits as an outlet for short-term funds need not,
on balance, be harmful to their interests. More important
perhaps, the central banks have found the cooperation of
the Treasury necessary. Where the Treasury has gradually
increased the volume of bills, evened out the flow of ma­
turities, and enlarged their variety, it has contributed a
great deal to a broadening of the market. In this endeavor
the issue of bills by regular tender, instead of on tap at
rates fixed by the Treasury, has been found preferable; in
particular, the determination of issue rates by tender has
helped to give the market a certain amount of flexibility
even from the start. For widening the distribution of bills,
the removal of restrictions limiting their ownership to any
one category of holders has often been considered the nec­
essary first step, and the readiness of the central bank to
buy and sell such bills has been useful in stimulating active
trading. In some instances the central banks have given
special inducements by posting purchase prices close to
each tender rate, but, as the markets have widened, it has
been found best to withdraw these more or less automatic
facilities in order to avoid undesirable distortions or “pegs”
in the market.
Finally, the existence of market intermediaries holding
money market securities, making markets in them, and
seeking out idle short-term funds from all parts of the
economy, has generally proved of great help in the devel­
opment of money markets, even though it may not have
been found essential in all cases. Such intermediaries have
been either semiofficial institutions or private firms. Where
private, they have either been firms already in existence,
which had been operating in other markets such as those
for long-term government securities or for foreign ex­
change, or new firms established with or without official
encouragement. In any case, provision for such dealer
intermediaries to have access to central bank credit, in
some form, has been found to be almost essential to their
smooth functioning as a helpful part of the money market.

MONTHLY REVIEW, JULY 1957

100

The development of broad and flexible money markets,
as recent experience shows, is a slow and often difficult
process. A country’s economy must first expand and
diversify, and a money market must be able to draw not
merely upon a well-organized banking system but also on
a supply of short-term funds from nonbank sources inter­
ested in a relatively low return in exchange for high liquid­
ity. Nevertheless, while an effective money market cannot
be created in the absence of the necessary fundamental

conditions, central banks and governments have had con­
siderable success in developing such markets since World
War II. The development of these markets has in turn
helped the various countries to adapt their financial re­
sources to their own needs for liquidity and investment,
and has provided facilities through which the selection
among alternative uses of funds could be resolved in
greater degree by reliance upon competitive market forces.

SELECTED ECONOMIC INDICATORS
United States and Second Federal Reserve District
Percentage change
1957
Item

1956

Unit
M ay

April

March

M ay

Latest month Latest month
from previous from year
month
earlier

U N IT E D STATES

Production and trade

145r
226
112
28.8
52.3
27.7
13.5
16.3
n.a.
282

141
216
106
27.8
48.6
28.8
14.7
15.7
286
237

— 1
#
— 7
— 1
#
#
— 2
+ 1
n.a.
+ 2

88.8
117.2
119.3
339.3
154p
52,567p
16,952p
39.8
2,481
2,690

88.7
116.9
118.9
338.1
154
52,522
16,962
40.1
2,700
2,882

90.4
114.4
115.4
322.8
148
51,799
16,919
40.0
2,608
n.a.

— 1
#

7 3 ,970p
90,990 p
107,250p
30,922
82,457
143.8
31,532

72,230p
90,630p
105,230p
30,846
77,414
141.3
31,273

73,730
85,960
104,190
30,629
79,351
138.1
29,763

7,487
7,017
3,166

4,804
6,726
3,280

12,235
7,203
3,873

6,879
6,200
3,444

156
—
—
117.2
—
—
73,245
5,393
184.4
115
131

154
n.a.
n.a.
116.9
7 ,8 3 0 .8
2 ,6 6 9 .8
73,059
5,340
181.7
109
131

Industrial production*......................................................................
Electric power o u tp u t* !...................................................................
Ton-miles of railway freight*§........................................................
Manufacturers’ sales*.......................................................................
Manufacturers’ inventories*............................................................
Manufacturers’ new orders, tota l*.................................................
Manufacturers’ new orders, durable good s*................................
Retail sales* ^f....................................................................................
Residential construction contracts*...............................................
Nonresidential construction contracts*........................................
Prices , wages, and employment
Basic commodity prices f ..................................................................
Wholesale prices f ...............................................................................
Consumer p rices}...............................................................................
Personal income (annual rate)*......................................................
Composite index of wages and salaries*.......................................
Nonagricultural employment* f f ..............................................
Manufacturing employment* f f ................................................
Average hours worked per week, manufacturing f .....................
Unemployment...................................................................................
Unemployment t .................................................................................

1947-49 = 100
1947-49 = 100
1947-49 = 100
billions of $
billions of $
billions of $
billions of $
billions of $
1947-49 = 100
1947-49 = 100

143p
228
—
—
—
—
—
16 A p

1947-49 = 100
1947-49 = 100
1947-49 = 100
billions of $
1947-49 = 100
thousands
thousands
hours
thousands
thousands

88.2
117 . Ip
119.6
3 40.4p
—
5 2 ,569p
16,868p
39.7 p
2,489
2,715

Total investments of all commercial banks.................................
Total loans of all commercial banks..............................................
Total demand deposits adjusted....................................................
Currency outside the Treasury and Federal Reserve Banks*. .
Bank debits (337 centers)* § ...........................................................
Velocity of demand deposits (337 centers)*................................
Consumer instalment credit outstanding f ...................................

millions of $
millions of $
millions of $
millions of $
millions of $
1947-49 = 100
millions of $

73,6802)
9 1 ,180p
104,770/?
30,95 5p
85,408
147. 5p
—

Cash incom e........................................................................................
Cash ou tgo...........................................................................................
National defense expenditures........................................................

millions of $
millions of $
millions of $

1947-49 = 100
1947-49 = 100
1947-49 = 100
1947-49 = 100
thousands
thousands
millions of $
millions of $
1947-49 = 100
1947-49 = 100
1947-49 = 100

Banking and finance

United States Government finance (other than borrowing)

—

144
227
104p
2 8 . 5p
52.5 p
27. Sp
13.2 p
16.3 p
n.a.
287

+

#
#
#
#
#
#
#
1

#
#

— 2

+
+
+

#

4
3
1

+

+
+
+

1
5
8
5
9

§

- 6
+ 4
n.a.
+ 14
—
+
+
+
+

+

2
2
4
5
4
1

#

- 1
- 5
n.a.

+
+
+
+
+
+

#

6
1
1
8
7
7

+ 56
+ 4
3

+ 9
+ 13
- 8

+

+

SECOND F E D E R A L R ESE RV E D IS T R IC T
Electric power output (New York and New Jersey)* § ...............
Residential construction contracts*...................................................
Nonresidential construction contracts*.............................................
Consumer prices (New York C it y )f ..................................................
Nonagricultural em ploym ent*............................................................
Manufacturing em ploym ent*.............................................................. 1
Bank debits (New York C ity)* § .......................................................!
Bank debits (Second District excluding New Y ork C ity)* § . . . . !
Velocity of demand deposits (New York C it y )* ............................
Department store sales*.......................................................................
Department store stocks*....................................................................

155
n.a.
n.a.
116.0
7 ,8 2 0.3
2 ,6 6 5 .8
69,893
4,997
181.3
115
131

153
259
310
113.0
7 ,8 2 9 .8
2 ,7 1 3 .4
70,869
5,165
180.2
110
123

1
n. a.
n.a.

#
*

+
+
+

#
#
1
1
6

#

2
n.a.
n.a.
+ 4

#

- 1
+ 3
+ 4
+ 2
+ 5
+ 7

those
these

N ote: Latest data available as of noon, June 28, 1957.
t New basis. Under a new Census Bureau definition, persons laid off temporarily and
Preliminary.
waiting to begin new jobs within thirty days are classified as unemployed; formerly
Revised.
persons were considered as employed. Both series will be published during 1957.
n.a. Not available.
§ Seasonal factors revised. Back data available from the Domestic Research Division,
* Adjusted for seasonal variation.
^
Federal Reserve Bank of New York.
f Seasonal variations believed to be minor; no adjustment made.
If Revised series. Back data available from the U. S. Department of Commerce.
§ Change of less than 0.5 per cent.
f t Revised series. Back data available from the U. S. Bureau of Labor Statistics.
Source: A description of these series and their sources is available from the Domestic Research Division, Federal Reserve Bank of New York, on request.

p
r