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MONTHLY REVIEW
JULY 1960
Contents
Time and Savings Deposits at Member
Banks ........................................................
118
Money Market in the Second Quarter . . 123
Volume 42
The Business Situation
129
International Developments
131
m. 7
MONTHLY REVIEW, JULY 1960
118
Time and Savings Deposits at Member Banks
The substantial growth of time and savings deposits in
the past fifteen years has drawn attention to the expanding
role of these deposits in commercial banking. By the end
of 1959 such deposits at all member banks had grown
to $54 billion, almost 2Vi times the volume of June 1945
(see Table I). Since demand deposits rose only 35 per
cent over this period, the share of time and savings de
posits in total deposits has climbed impressively—reach
ing 29 per cent of all deposits at the end of 1959, compared
with only 18 per cent in 1945.
The growth of time deposits has been much faster, but
also more irregular, than that of savings deposits. In June
1958, time deposits accounted for 24 per cent of total time
and savings deposits as compared with only 7 per cent
In June 1945; time deposits had increased eightfold, while
savings deposits had doubled. Savings deposits, on the
other hand, have shown a much steadier growth pattern
than time deposits over the postwar years, especially in
recent years when time deposits have fluctuated rather
widely.
The rise in time and savings deposits reflects of
course the usefulness of these deposit facilities to the
holders of funds as well as the increase in the rates paid
on them and the over-all growth of the economy. How
ever, the steady rise in savings deposits, compared with
the more irregular increases in time deposits, suggests
that time depositors are motivated by different considera
tions in the allocation of funds than are savings depositors.
T I M E A N D S A V I N G S D E P O S I T S IN T H E
F IN A N C IA L . P R O C E S S
Time and savings deposits at member banks are part
of the broad spectrum of financial instruments, ranging
from Treasury bills and commercial paper to long-term
bonds, stocks, and even life insurance, in which funds that
are not needed for current expenditures may be invested,
Consequently, the growth and fluctuations of these deposits
are determined by their attractiveness, in terms of interest
yield and many other factors, compared with other invest
ment outlets, and by the growth of savings and liquid
assets generally.
In much of the writing on the subject, the term “time
deposit” has been used to mean “time plus savings de
posits”. Time and savings deposits, however, are not
ordinarily held for the same reason or by the same owners
and, therefore, are subject to rather different competitive
influences. Funds are placed in time deposits for a speci
fied period of time (i.e., 30, 60, or 120 days or more);
the deposit may be “firm” for an agreed duration, or the
contract may provide for earlier withdrawals before the
stipulated time at the cost of partial or total loss of inter
est. Savings deposits, on the other hand, do not have
specific maturities, and are in practice withdrawable on
demand. The holders of time deposits are primarily
knowledgeable investors who are able to predict with some
assurance the timing of their needs for cash. Savings de~
Table I
T im e and S av in g s D ep o sits a t A ll M em ber B anks
Selected call dates
Holder and/or type of deposit
June 30,
1945
June 6,
1957
June 23,
1958
I
Dec. 31,
1959
In millions of dollars
T im e d e p o sits, t o t a l........................................................
States and political subdivisions...................................
Domestic b a n k s.................................................................
Foreign b an k s.....................................................................
U nited States G overnm ent and postal savings........
Individuals, partnerships, and corporations..............
1,618
392
44
16
102
1,064
8,946
2,128
46
1,323
302
5,147
12,575
3,296
139
2,127
259
6,754
S avin gs d e p o sits..................................................................
20,190
35,737
39,585
T o ta l tim e a n d sav in g s d e p o sits.................................
21,809
44,682
52,160
N ote: Because of rounding, figures do not necessarily add to totals.
* N ot available.
Less th an ^ of 1 per cent.
Source: B oard of Governors of the Federal Reserve System.
June 30,
1945
June 6,
1957
June 23,
1958
Dec. 31,
1959
As a percentage of to ta l tim e.and savings deposits
*
2,383
81
1,257
259
r1
\ 50,185
1
54,165
7
2
t
t
t
5
20
5
t
3
1
11
24
6
t
4
1
13
93
80
76
100
100
100
*
4
t
2
1
f
{93
1
100
FEDERAL RESERVE RANK OF NEW YORK
119
T able II
posits, in contrast, are held largely by individuals and,
M axim um In terest R ates P ayab le on T im e and S a v in g s D ep osits
indeed, are by law restricted to individuals and non
Per cen t per annum
profit institutions.
Time deposits compete most directly with short-term
Effective
Nov. 1,1933- Feb. 1, 1935- Jan. 1, 1936Type of deposit
Jan. 31,1935 Dec. 31,1935 Dec. 31,1956 Jan. 1, 1957
market instruments, such as short-term United States
3
Savings deposits..........................
3
2^
Government obligations, commercial and finance com
3
3
Postal savings deposits...............
m
m
pany paper, and bankers’ acceptances. Investment in
Other time deposits payable:
3
3
these competing instruments, a transaction that is con
In 6 months or more...............
2H
2M
2
3
m
In 90 days to 6 months...........
m
1
1
3
In less than 90 days................
ducted in a comparatively impersonal manner, requires
2H
the buyer to maintain a somewhat greater familiarity with Note: Maximum rates that may be paid by member banks as established by the Board of Gover
nors under the provisions of Regulation Q. Under this regulation the rate payable by a member
money market conditions than does investment in time
bank may not in any event exeeed the maximum rate payable by State banks or trust com
panies cm like deposits under the laws of the State in which the member bank is located.
deposits. Time deposits, on the other hand, are arranged
Since February 1,1936, maximum rates that may be paid by insured nonmember commercial
banks{ as established by the Federal Deposit Insurance Corporation, have been the same as
through personal negotiations between the banker and the
those m effect for member banks.
depositor, and the actual deposit contracts often take into Source: Board of Governors of the Federal Reserve System.
consideration the many other aspects of the bankerdepositor relationship. While time deposits at member
banks have increased eightfold since World War II, the
The main purpose of the regulation of interest rates
volume of short-term Government obligations held by the on member bank savings and time deposits is to prevent
public has doubled, and somewhat smaller percentage banks from reaching for deposits by offering interest rates
gains occurred in the volume of other competing types of that they could afford only if they invested the funds
obligations.
in high-yielding instruments which may involve excessive
With regard to savings deposits, on the other hand, illiquidity and risk. In accordance with the authority
member banks compete primarily with other savings granted to it under Regulation Q, the Board of Governors
media, ranging from savings deposits at mutual savings has made three changes in the maximum interest rates
banks and accounts at savings and loan associations to which member banks may pay on time and savings de
United States Government bonds, life insurance, pension posits (see Table II); the most recent amendment to Regu
and investment trusts, and corporate stocks and bonds. lation Q, effective January 1, 1957, was the first in
Although savings deposits at member banks have doubled twenty years.
since 1945, their growth has nevertheless been slower than
that of their closest competitors; deposits at mutual savings
banks have risen by 128 per cent, while savings at savings T H E H O L D E R S O F T I M E A N D S A V I N G S D E P O S I T S
and loan associations have grown sevenfold.
The major holders of time and savings deposits in
Time deposits are also more sensitive to interest rate order of importance are: individuals; States and political
differentials than savings deposits, since the holders of subdivisions; foreign banks; and business firms. The be
time deposits are more keenly aware of, and frequently havior of each of these holders is influenced by somewhat
have better access to, alternative investment opportunities. different factors.
At the same time, rates on time deposits frequently have
not adjusted immediately or fully to changes in market
i n d iv id u a l s .
The deposits of individuals consist pri
rates of interest. When market rates decline, time deposit marily of savings accounts, which are normally evidenced
rates may lag, thereby increasing the relative attractiveness by a passbook. For these accounts, the banks may, but
of these deposits. Sizable changes in the other direction in rarely do, require a thirty-day written notice of any in
the yield differentials between time deposits and other in tended withdrawal. Some savings-type deposits of indi
vestments have also occurred quite frequently, partly be viduals are also included in time deposits, which are
cause the maximum rates that member banks may pay on evidenced either by certificates of deposit or by “time
time or savings deposits are fixed by the Board of Governors deposit-open accounts”, established subject to a written
of the Federal Reserve System under Regulation Q and agreement between the depositor and the bank. As of
by the Federal Deposit Insurance Corporation for insured June 1958, savings deposits (including Christmas savings
nonmember commercial banks. In recent years these rates and savings accumulated for the payment of personal
have not been so high as the peak levels reached by market loans) and savings-type time deposits of individuals ac
counted for 78 and 4 per cent, respectively, of total time
rates on competitive instruments.
120
MONTHLY REVIEW, JULY 1960
and savings deposits.1
In electing to place savings in a commercial bank sav
ings account, many savers are motivated more by conven
ience and other nonfinancial factors than by the rates paid
on savings deposits. In 1959, for example, despite yield
advantages favoring alternative forms of savings, savings
deposits at commercial banks continued to increase
(although at a reduced rate), while time deposits declined
as holders switched into other assets. These “uneconomi
cal” actions are largely explained by certain characteris
tics of savings depositors. Some depositors utilize savings
deposit facilities, not to accumulate a backlog of savings,
but rather as a convenient way to build up funds for an
anticipated future expenditure. To such individuals, yield
considerations are secondary, since the period of deposit
accumulation is likely to be short. Their selection of a
savings institution is motivated more by its location and
the types of services it offers than by rates paid. Many
depositors prefer savings accounts to other investments
because of the ease with which these accounts may be
liquidated without risk of loss. A number of other invest
ment alternatives involve the contractual commitment of
funds for long periods of time as well as risks and bene
fits that do not attach to savings deposits. Still other sav
ings depositors own small balances that are below the
minima required for an investment in money or capital
market instruments.
There is some evidence that the savings deposits at
commercial banks include a larger proportion of small
accounts, whose holders have only limited alternative
investment opportunities, than do savings accounts at
other savings institutions. There was, for example, a
marked difference in the response shown by the savings
depositors of savings banks and of commercial banks to
the 5 per cent Treasury notes issued in October 1959.
Savings banks, which have higher average individual sav
ings deposit balances (presumably indicating a higher pro
portion of more investment-conscious depositors) than
commercial banks, experienced larger withdrawals during
the first two weeks of October 1959 than did the commer
cial banks. However, the large withdrawals from both
types of institutions did reveal that many savings deposi
tors become keenly aware of investment alternatives as
yield differentials widen significantly. Indeed, it is prob
ably the higher interest rates offered by some savings
banks and savings and loan associations that have at
tracted larger depositors to these institutions. Yet, the
steady growth in savings accounts at member banks, even
in those years when yields on alternative thrift media
surpassed the maximum rates permitted on savings de
posits, reflects the fact that savings deposits are less re
sponsive to yield differentials than time deposits. To some
extent, this growth may reflect the fact that in many com
munities commercial banks provide the sole local savings
deposit facilities, except for postal savings.
s t a t e s a n d p o l it ic a l s u b d i v i s i o n s .
The amount of
liquid assets held by States and political subdivisions de
pends among other factors, on the size and time pattern of
their tax receipts and operating expenditures, as well as on
the pattern of their financing and construction programs.
Construction expenditures in particular have been an im
portant factor in the size of the liquid assets held by States
and political subdivisions. These expenditures usually rise
to a peak in the third quarter of the year and then fall to
a low in the first quarter of the next year. Since tax re
ceipts and new securities issues do not often follow the
same seasonal pattern as construction outlays, State and
local governments draw down liquid assets at times when
these outlays are greatest and build them up at other times.
Partly because of legal restrictions that in many areas re
quire them to have all funds on hand before contracts are
negotiated on construction programs, many States and
political subdivisions raise funds in the capital markets in
advance of contract payment dates. The idle funds are
then temporarily held in cash or invested in time deposits
or short-term marketable obligations, and they tend to be
drawn down as construction programs are paid for.
Yield considerations are a strong influence on decisions
as to whether the liquid funds of States and political sub
divisions should be placed in time deposits or in Govern
ment securities. Thus, time deposits rose during the first
half of 1957, a period in which the yield differential be
tween time deposits and alternative investments was very
small. As yield differentials widened in favor of other
investments later in the year, however, time deposits
tended to level off while holdings of United States Gov
ernment securities continued to advance, though at a
slower pace than earlier in the year (see Chart I). In con
trast, States and political subdivisions added substantially
to their holdings of time deposits in early 1958, when yield
1
Only occasionally, as in June 1957 and June 1958, have balances differentials favored time deposits, and simultaneously re
for savings deposits and savings-type time deposits of individuals been
duced their holdings of United States Government obliga
required separately on member bank call reports. Recently savings
deposits have been shown separately in the data for the weekly report
tions. In the second half of 1958 their holdings of both
ing banks in the Atlanta, Boston, Dallas, Minneapolis, New York,
time deposits and Government securities declined, but
Richmond, and San Francisco Reserve Districts.
121
FEDERAL RESERVE BANK OF NEW YORK
Chart 1
TIME DEPOSITS AND UNITED STATES GOVERNMENT
SECURITIES HELD BY STATES AND POLITICAL
Billions of dollars
SUBDIVISIONS, 1957-59
Billions
of dollars
Sources: Tima deposits*. Board of Governors of the Federal Reserve System*
holdings of United States Government securities: Treasury Bulletin,
since the yield differentials that had previously favored
time deposits narrowed and finally disappeared, the larger
part of the reduction fell on time deposits. Yield differen
tials then turned sharply against time deposits in 1959,
and States and political subdivisions shifted funds out
of time deposits and into United States Government
obligations,
f o r e ig n b a n k t im e d e p o s it s .
The potential availabil
ity of foreign bank time deposits has been significantly
increased in recent years, as foreign banks have accumu
lated substantial dollar holdings above their day-to-day
operating requirements. Because of liquidity needs, for
eign banks have invested most of these funds in short-term
dollar claims, primarily in time deposits, Treasury bills,
and bankers’ acceptances.
But the proportion invested in time deposits has fluc
tuated widely. When foreign banks weigh the acquisition of
time deposits against other short-term dollar claims, they
are mainly guided by yield considerations, as is demon
strated by the recent fluctuations in their holdings of time
deposits.2 In the first half of 1958, when the rates on
2
In this connection, it should be noted that the income earned
from time deposits and from bankers’ acceptances by all nonresident
aliens and foreign corporations is exempt from Federal income tax.
Some foreign central banks are exempt from tax on Treasury bills
because of special rulings by the Treasury Department, and others
have obtained exemption status through tax conventions. However,
not all foreign banks enjoy such tax immunity on income from Treas
ury bills. As a result, some time deposits remain "protected” against
competition from Treasury bills unless the differential widens suffi
ciently to wipe out the tax advantage.
Treasury bills fell very rapidly while the rates on time
deposits tended to be more “sticky”, a sizable yield
premium resulted in favor of the latter. This induced
foreign banks to add substantial sums to their time deposit
accounts with member banks, principally with New York
City banks (see Chart II). Short-term dollar claims in
vested in Treasury bills and certificates by foreign banks
and official institutions declined by $1.1 billion during this
period. However, as bill rates rose rapidly after June 1958
and eventually exceeded the maximum rates permitted on
time deposits, time deposits of foreign banks declined pre
cipitously. Newly available funds were placed in bills
rather than time deposits, and time deposits were not
renewed as they matured. In 1959, foreign banks and
official institutions increased their total holdings of short
term United States Government obligations and reduced
their holdings of time deposits, in each case by substantial
amounts. Thus, in recent years time deposits of foreign
banks have fluctuated more widely than time deposits of
either States and political subdivisions or savings deposits
of individuals, reflecting primarily the greater sensitivity
of foreign banks to rate differentials between yields on
time deposits and other short-term instruments.
b u s i n e s s a n d o t h e r t im e d e p o s it s .
Business time de
posits accounted for 4 per cent of total time and savings
deposits in June 1958 and were mostly in member banks
Chart H
FOREIGN BANK TIME DEPOSITS AT MEMBER BANKS
AND TREASURY BILL RATES, 1957-59
Billions of dollars
Source: Beard of Governors ©f the Federal Reserve System.
Per cent
122
MONTHLY REVIEW , JULY 1960
outside New York City. These deposits are also quite
volatile in response to changing rate incentives. Thus the
$959 million or 92 per cent increase in these deposits
between June 1957 and June 1958 may be attributed
principally to the more attractive rates being paid on time
deposits as compared with money market investments.
Partial data suggests that these deposits have declined
since mid-1958, as rates on money market instruments
have risen. The decline in business time deposits, how
ever, has apparently not been so sharp as in time deposits
of States and political subdivisions or of foreign banks,
partly because in recent years an increasing proportion
of time deposits recorded for business firms seems to rep
resent compensating balance arrangements required for
loan accommodations. By placing his compensating bal
ance in the form of a time deposit—usually noninterestbearing in such cases—the borrower obtains a time certifi
cate of deposit which he may sell at a discount for cash
to an investor. He thus realizes that part of the loan pro
ceeds that would have been tied up in compensating
balances.
The remaining time deposits are held primarily by the
banks’ own or another bank’s trust department. A rela
tively small amount is held by the United States Gov
ernment and the Postal Savings System. These deposits
are less sensitive to yield differentials than most other
deposits.
iIM P A C T O F T I M E D E P O S I T F L U C T U A T I O N S
Over the postwar period, the share of total time deposits
held by the more rate-conscious investors—foreign banks,
States and political subdivisions, and business firms and
individuals accumulating funds for investment purposes—
has increased markedly relative to the less sensitive
“savings” sector. Accompanying the growing importance
of more rate-conscious depositors has been the appear
ance from time to time of advantages favoring investments
other than time deposits. As a result of these develop
ments, fluctuations in the total volume of time and savings
deposits held at member banks have become wider.
The role of these rate-sensitive investors in time deposit
fluctuations has been particularly pronounced for central
reserve New York City banks. As Chart III shows, a rela
tively larger proportion of time and savings deposits at
these banks is held in forms that are very sensitive to inter
est rate differentials. Thus, in June 1958 time deposits
Chart tii
COMPARISON OF TIME AND SAVINGS DEPOSITS HELD AT CENTRAL RESERVE NEW YORK CITY
MEMBER BANKS AND AT ALL OTHER MEMBER BANKS ON JUNE 23, 1958
ALL OTHER
CENTRAL RESERVE N EW YO RK CITY
Savings-type
time deposits
of individuals
0.5 %
Savings-type
time deposits
of individuals
States and political
subdivisions
4.2 %
BusinessN
4.7 %
3.8 5
^posits
* Includes Christm as savings for central reserve N ew York City banks and Christmas savin g s
and deposits, accum ulated for tbe paym ent of personal loans# for aH other banks.
Includes prim arily open accounts of banks’ ow n trust departments ond some deposits of
domestic banks, United States Governm ent, and postal savings.
Source:
Board of Governors of the Federal Reserve System.
Tim e d ep o *'
FEDERAL RESERVE BAN K OF NEW YORK
at central reserve New York City banks accounted for 35
per cent of all time deposits at member banks, while sav
ings and savings-type deposits at central reserve New York
City banks amounted only to 4 per cent of the total savings
deposits at all member banks. Between the June 1957
and June 1958 call report dates, an interval during which
yield differentials on balance moved in favor of time de
posits, time and savings deposits at the New York City
banks rose by 40 per cent as compared with an increase
of 15 per cent for all other member banks. But from
June 1958 to December 1959, during which period yield
differentials shifted in favor of other investments, the New
York City banks lost 16 per cent of their time and savings
deposits while banks outside New York City gained 6
per cent. During both periods, the swings in the volume
of total time and savings deposits held by the New York
City banks were mainly due to the substantial fluctuations
In time deposits of foreign banks. To a lesser extent, they
also reflected the shifts in time deposits of States and
political subdivisions.
The structure of time and savings deposits at a com
mercial bank is, therefore, an important consideration in
its lending and investing policies. Time deposits tend to
be invested in shorter dated loans and securities than the
funds derived from savings deposits. For example, the
large volume of savings deposits in member banks outside
the money centers has enabled these institutions to finance
many real estate transactions.
It has been suggested that banks would be in a better
position to prevent shifts in time and savings deposits if
m
they were allowed to adjust rates, particularly on time
deposits, beyond the present Regulation Q ceiling when
they are losing these deposits. Greater rate flexibility
would enable the banks to eliminate or reduce the rate
differentials to which holders of time deposits are so ex
tremely sensitive. Some member banks also are of the
opinion that they could maintain their share of total sav
ings deposits, which are less responsive to rate differentials
than time deposits, if they were permitted to raise rates
closer to those currently offered by other thrift outlets. On
the other hand, it has been questioned whether, if Regula
tion Q were lifted, commercial bank competition on a
rate basis with other financial institutions and instruments
—and with each other—would remain within the bounds
of prudent banking practices.
Difficult issues are raised in considering the extent to
which commercial banks should be permitted to compete
freely for time and savings deposits. Banks have come a
long way from the traditional view of acting solely as
lenders of working capital and depositaries for short-term
balances. In addition to the customary seasonal loans*
banks now provide a multitude of financing arrangements,
including consumer loans, revolving credits, real estate
financing, and term loans. Over the past decade, time
and savings deposits have supplied a large part of the
funds needed by individual banks in order to operate
within this larger framework of commercial banking. Thus,
the question of time deposit rate regulation is, in essence,
really one aspect of the larger issues concerning the appro
priate role of commercial banks in the financial process.
Money Market in the Second Quarter
The second quarter of 1960 witnessed a succession of
divergent influences that brought frequent reversals in
investor sentiment, resulting in irregular fluctuations in
stock and bond prices and sharply lower rates on short
term market instruments. These influences, which were
reflected in the varying receptions given to Treasury offer
ings during the quarter, included data bearing on the
business outlook that were interpreted as pointing first
in one direction and then in another. Uncertainties arose
out of a sudden heightening of international tensions with
the collapse of the Paris summit talks, but then dissipated
almost as quickly as they arose. It became clearly evident
that the Federal Reserve System was moving toward an
easier credit policy, a movement that was “confirmed” by
the discount rate reduction from 4 per cent to
per
cent at the Federal Reserve Banks of Philadelphia and
San Francisco, effective June 3, which was followed soon
thereafter by identical reductions at the other ten Reserve
Banks. The reserve position of member banks eased con
siderably over the period, as net free reserves emerged in
late May and persisted through June. The money market
was correspondingly easier, and Federal funds frequently
traded below the discount rate ceiling.
R E C E N T C R E D IT D E V E L O P M E N T S
In the second quarter of 1960, as in the first quarter,
the Treasury enjoyed a comfortable cash surplus that per
mitted the retirement of marketable debt and, conse
124
MONTHLY REVIEW, JULY 1960
quently, the provision of funds to the capital markets.
However, a smaller part of the surplus in the second quar
ter was used to retire debt, and a larger part was used to
increase the Treasury’s deposit balances at commercial
banks. Retirement of marketable debt amounted to $1.6
billion in the second quarter, while deposit balances rose
by $2.7 billion. In contrast, $2.9 billion of debt was re
tired during the first quarter, and Treasury deposits fell by
$0.4 billion. The Treasury’s repayment of debt during
the second quarter came toward the end of the period,
when $4.0 billion of June tax anticipation bills were re
deemed. Early in April the Treasury borrowed $2.6 bil
lion, including $370 million in 25-year bonds. About
$600 million was paid out in attrition in the mid-May
refunding, but about $300 million was subsequently raised
by the Treasury through expanded offerings of 182-day
bills.
A relatively moderate volume of securities offerings was
placed on the market by Federal Government agencies,
State and local authorities, and corporations during the
second quarter. The amounts were larger than in the first
quarter in each category, but except for agency offerings,
where volume had been unusually low early in the year,
the increases were of roughly seasonal proportions and
probably did not alter appreciably the over-all demandsupply balance in the securities markets.
New capital issues of Federal Government agencies rose
to about $550 million in the second quarter, roughly twice
the first-quarter volume but well below the $640 million
total registered during the second quarter of last year.
Securities offerings for new capital by State and local
authorities increased by about $0.3 billion to roughly $2.3
billion during the second quarter. This increase left the
second-quarter volume somewhat short of last year’s high
$2.5 billion second-quarter total.
Corporate issues for new capital, estimated at $2.4
billion, were about $0.3 billion higher than in the first
quarter but somewhat below the volume of offerings in
the second quarter of 1959 and substantially lower than
the high of $3.1 billion raised in the same period of 1957.
In fact, the volume of corporate securities offered during
the quarter was the lowest for that period since 1955.
New securities issues are, of course, only one of the chan
nels through which corporations make their impact felt
on the capital markets. Another important channel is their
demand for bank loans, which has been moderately strong
but far from buoyant. Business loans at commercial banks
(which, of course, include loans to noncorporate as well
as corporate borrowers) increased by $0.4 billion during
April and May, which was about in line with the increase
in previous years of business expansion with the exception
of 1959, when an unusually large increase was registered.
Thus, external financing needs by business—as reflected in
new securities issues and the banks’ business loans—
appear moderate by past standards, although it is not yet
clear to what extent businesses supplemented these sources
of funds through liquidation of their Government securities
holdings.
Total loans, adjusted, of all commercial banks increased
by $2 billion during April and May, a larger increase for
this two-month period than in ainy year of the last decade
except 1959. The gain in business loans noted above was
supplemented by a $0.7 billion rise in consumer loans,
which matched last year’s record expansion in this cate
gory, and by moderate increases in farm, securities, and
“all other” loans. Real estate loans, however, continued
to be weak relative to prior years. Data covering the
weekly reporting banks through the first four statement
weeks ended in June indicate a continuation of the pattern
of moderately strong loan demands. However, the business
loan category, which is frequently subject to erratic influ
ences during short periods, registered smaller gains than in
similar periods of recent years, as corporations apparently
financed their tax payments to an increased extent through
the runoff of liquid assets.
The liquidation of commercial bank securities holdings
that had been under way since early 1959 was interrupted
during April 1960, when the banks added $1.6 billion of
Governments to their portfolios. This largely reflected
acquisitions of the notes offered in the Treasury’s April
financing, for which banks were permitted to make 75 per
cent of their payments with credits to Treasury Tax and
Loan Accounts. Liquidation was resumed in May, how
ever, with holdings falling by $0.7 billion in that month.
Liquidation of other securities also continued during April
and May. In June the rate of portfolio liquidation was
apparently somewhat diminished.
Total loans, adjusted, and investments of commercial
banks, which had declined by an unusually large $6 billion
during the first quarter, were much stronger during the
April-May period. The rise of $2.7 billion in total
bank credit, although falling short of 1958’s postwar rec
ord increase for this period, was about in line with 1957
and 1959 and well in excess of all prior years. The season
ally adjusted money supply (publicly held demand de
posits plus currency outside banks), on the other hand,
after holding steady in April, fell by $1.8 billion in May to
$137.6 billion; this was $3.6 billion below the peak
reached in July 1959 (see Chart I). The May money
supply decline, however, largely reflected an unusual $2.4
billion increase in Government deposits. If Government
deposits in that month had risen by an amount equal to
125
FEDERAL RESERVE BANK OF NEW YORK
Chart I
LIQUID ASSETS HELD BY THE NONBANK PUBLIC
Billions of dollars
Seasonally adjusted
liquid assets has—like income velocity—tended to rise,
showing a 1.7 per cent increase between the first quarter
of 1959 and that of 1960. Information for April shows
that total liquid assets continued to rise into the second
quarter of 1960.
M EM BER BANK RESERVES
The reserve position of member banks, which had eased
somewhat in the first three months of this year, became
even more comfortable during the second quarter. Net
borrowed reserves fell from an average of $219 million
in March to $194 million in April, and to $33 million in
May. In the final statement week of May, member banks
had average free reserves for the first time since February
1959, and in June they enjoyed free reserves in every
statement week, the average for the month amounting to
$40 million. As usually is the case when reserve positions
undergo a substantial shift, most of the change occurred
in borrowings from the Reserve Banks, which declined
Note: Latest data plotted are as of end of April for total liquid assets,
end of May for money supply.
Source: Board of Governors of the Federal Reserve System.
Table I
the average increase for May over the preceding five years
($0.7 billion), the seasonally adjusted money supply would
have been about unchanged. The rate of use of the money
supply, meanwhile, increased during April and May, as it
has in nearly all months since its recession low in February
1958. The turnover of demand deposits in centers outside
New York City and the other large financial centers rose
by 7.8 per cent in the year ended May 1960.
The fairly steady rise in the turnover of demand deposits
has been accompanied, as one would expect, by an increase
in the ratio of gross national product to the money supply
—i.e., income velocity. This ratio rose by 6.2 per cent
between the first quarter of 1959 and 1960, resulting in
large measure from a marked growth in public holdings
of other liquid assets as supplements to or substitutes for
demand deposits and currency. Thus, the nonbank public’s
holdings of short-term Government securities increased
very rapidly during the first half of 1959 and somewhat
less rapidly thereafter, while holdings of other liquid assets,
such as time and savings deposits in commercial banks
and in mutual savings banks and savings and loan shares,
have been on a persistent uptrend. As a result, the total
of public liquid asset holdings—including nonmoney liquid
assets as well as the money supply*—has continued to rise,
reaching by the end of the first quarter of 1960 a level
4.0 per cent above a year earlier. The rise in GNP was
more rapid, however, so that the ratio of GNP to total
Changes in Factors Tending to Increase or Decrease Member
Bank Reserves, June 1960
In millions of dollars; ( - f ) denotes increase,
(—) d e c re a s e in e x cess re s e rv e s
Daily averages—week ended
Net
changes
Factor
June
1
June
8
Operating transactions
Treasury operations*..................... + 78
Federal Reserve float.................... - 168
Currency in circulation................. - 127
5
Gold and foreign account.............. - 99
Other deposits, etc................... .
Total...............................
+ 15
+ 18
- 106
+
7
+ 28
- 319
-
+ 223
+ 177
June
15
June
22
June
29
33
18
59
— 8
29
+
- 56
+ 515
+ 49
- 24
- 41
-f 53
- 376
+ 60
- 45
+ 21
+ 57
+
7
- 183
- 75
- 62
54
+ 445
- 288
- 255
58
- 165
+ 118
-f 411
-
27
+ 176
1
- 138
+
-
10
1
_
39
Direct Federal Reserve credit trans
actions
Government securities:
Direct market purchases or sales
Held under repurchase agreeLoans, discounts, and advances:
Member bank borrowings.........
+
-
34
1
-
11
-
36
+
16
_
26
1
—
_
+
+ 257
+ 130
+
With Federal Reserve Banks.........
Cash allowed as reserves t .............
+
62
15
+
-
91
59
+
39
Total reservesf.....................................
Effect of change in required reserves f
+
47
32
+
-
32
8
+
Excess reserves f ..................................
-
15
+
24
Bankers’ acceptances:
Bought outright.........................
Under repurchase agreements...
Total...............................
_
Member bank reserves
Daily average level of member bank:
Borrowings from Reserve Banks...
Excess reserves f ............................
Free reserves f ................................
436
437
1
400
461
61
_
1
_
+
1
-
20
+ 394
+ 456
9
- 308
+ 29
+ 139
+ 15
1
37
+ 447
- 313
- 279
+ 189
+ 154
- 137
36
+ 134
-
+
374
425
51
550
559
9
16
— 38
-Z_
—
Note: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
t These figures are estimated,
t Average for five weeks ended June 29, 1900.
+
11
90
412
469
57
17
434 %
4701
36 %
MONTHLY REVIEW, JULY 1960
126
from $635 million in March to $424 million in June. Ex
cess reserves increased only moderately from $416 million
to $464 million. Over the quarter as a whole, the principal
factor adding to member bank reserves was System open
market operations. Between the last week of March and
the last week of June, holdings of Government securities
in the System Open Market Account rose by $890 million,
more than offsetting reserve losses from an outflow of cur
rency into circulation and other influences and allowing
member banks to repay part of their borrowings at the
Reserve Banks.
During April and May, through the statement week of
May 25, the aggregate market influences on member bank
reserve positions were largely offsetting. Reserves pro
vided during this period from System open market opera
tions, amounting to about $500 million net, were well in
excess of the amount absorbed by net changes in required
reserves and by other factors.
During the last five statement weeks in the quarter,
through June 29, member banks lost reserves through the
usual market factors, but these changes in reserves were
largely offset by System open market operations. From
May 25 to June 29, System outright holdings of Govern
ment securities increased by $501 million, while holdings
under repurchase agreements were about unchanged.
As the reserve position of member banks, measured by
average free reserves, became increasingly easier during
the second quarter, total reserves rose, showing a greater
increase over the quarter than in any recent year. Other
measures of bank liquidity during the quarter, however,
showed divergent tendencies. The loan-deposit ratio for
the New York City weekly reporting banks declined from
the March high of 69.8 per cent to about 68.6 per cent in
June. In contrast, the ratio for reporting banks outside
New York increased from 60.5 per cent in March to about
61.1 per cent in June. The ratio of short-term liquid
assets (including Treasury bills and certificates and loans
to Government securities dealers) to deposits increased
from 9.6 per cent in March to about 11.6 per cent in
June for the New York City weekly reporting banks;
over the same period the ratio for banks outside New
York City rose from 7.0 per cent to about 7.3 per cent.
TH E B O N D A N D STO C K M A R K E T S
The markets for interest-bearing securities went through
several periods of rise and decline during the second quar
ter following the pronounced yield declines of the first
quarter (see Chart II). Yield fluctuations on short-term
instruments were unusually sharp, as transitory influences
came to bear with the greatest severity on this sector. After
Chart U
STOCK AND BOND YIELDS
Per cent
Per cent
1958
1959
1960
Note: Latest data plotted week ended June 24, 1960.
Sources: Aaa corporate bonds: Moody’s Investors Service;
Treasury issues: Board of Governors of the Federal Reserve System;
dividend/price ratio: Standard and Poor’s.
&series of movements in opposite directions over the threemonth period, yields on intermediate- and long-term se
curities were somewhat below levels prevailing at the
end of March, while those on shorter maturities were
down by about 50 to 80 basis points.
For Treasury notes and bonds, the first half of April
saw a reversal of the upward price trend of the first quar
ter, as the feeling grew that the market’s response to the
slackened pace of economic expansion might have been
overdone. Only moderate interest was shown in the Treas
ury’s April cash offering of a 25-year bond callable after
fifteen years and carrying an interest rate of AVa per cent,
the maximum permitted for marketable Treasury bonds
under existing legislation. Public subscriptions to the $1.5
billion bond offering aggregated only $370 million. By
contrast, the $2.0 billion of a 4 per cent 25-month note also
included in the financing attracted $6.7 billion in subscrip
tions; $2.2 billion of the note was allotted on a 30 per cent
of subscription basis. Subsequently, prices of notes and
bonds continued to drift downward in increasingly light
trading.
Following the announcement on April 28 of the terms
of the Treasury’s refunding, the market atmosphere im
proved for a time. The operation was successfully com
pleted on May 4 with all but $627 million of the $6.4
FEDERAL RESERVE BANK OF NEW YORK
billion maturing securities exchanged into a 4% per cent
one-year certificate and a 4% per cent five-year note, both
issued at par. With the Treasury expected to be out of
the market until July, prices of notes and bonds during
early May recovered some of the losses sustained in April.
This firming in the market was short-lived, however, and
market sentiment again shifted in response to a combina
tion of factors. These included the uncertainties arising
from international tensions over the summit talk failure
and their possible implications for the domestic economy;
newly released data suggesting a strengthening in general
business; and an announcement by the Treasury that it
would raise additional funds in the weekly bill auctions by
expanding offerings of 182-day bills in order to reduce
the need for borrowing in July. These factors dominated
the market until the final week in May, when their force
began to dissipate and a new set of influences and expecta
tions emerged.
Toward late May it began to appear to many market
observers that, contrary to expectations, recent interna
tional developments, and particularly the summit failure,
were not to have any significant immediate repercussions
on the domestic economy. With the economy still seeming
to be moderately strong but without inflationary overtones,
attention came to focus on Federal Reserve policy and on
the degree to which it was being relaxed, particularly
in late May, as the emergence of free reserves generated
an easier tone in the money market. The moderate eas
ing of credit restraint was then “confirmed” by reduc
tions in the discount rate from 4 per cent to
per
cent at the Federal Reserve Banks of Philadelphia and San
Francisco, effective on June 3. Eight other Reserve Banks,
including the Federal Reserve Bank of New York, moved
to the new discount rate on June 10, with the Atlanta
and Boston Banks following suit effective June 13 and 14,
respectively.
Against this background, and with bond prices rising
sharply, the Treasury announced after the close of the
market on June 6 an advance refunding, in line with
authorizing legislation passed last September. Holders of
the $11.2 billion outstanding of the IVi per cent Treasury
bonds of November 15, 1961 were given the option of
exchanging them at face value for up to $3.5 billion of
a 33A per cent Treasury note maturing on May 15, 1964
and up to $1.5 billion of a 3% per cent Treasury bond
maturing on May 15, 1968. Both new issues were to be
dated June 23, 1960, with subscription books open June
8-13. Initially, the uncertainties and complexities attach
ing to a new type of financing operation led to a cautious
appraisal of the refunding by investors and to a hesitation
127
in the downward yield trend on notes and bonds. This
setback proved temporary, however, and growing confi
dence in the persistence of an easier credit environment
contributed to an increasingly more favorable appraisal of
the refunding while the books were still open, and to a re
sumption of the general yield decline. After the close of the
market on June 15, the Treasury announced that applica
tions for the 33A per cent note aggregated $4.6 billion,
or $1 billion more than the limit, and that subscriptions
exceeding $25,000 would be subject to an 85 per cent
allotment. Applications for the bond, however, amounted
to only $321 million of the $1.5 billion offered.
In the final weeks of June, the market moved irregularly
lower in light trading and then turned upward once more
with press reports of the Treasury’s favorable cash and
debt position. After the close of business on June 30,
the Treasury announced that it would auction, on July 6,
$3.5 billion of a 252-day tax anticipation bill to be dated
July 13 and to mature March 15-22, 1961. Commercial
banks may make payments for the bill through credits to
the Treasury’s Tax and Loan Accounts. About $500
million of the funds raised, the Treasury said, would be
used to retire part of the $2.0 billion of one-year bills
maturing July 15, so that the volume of new one-year bills
to be offered in the special quarterly auction on July 12
would be held to $1.5 billion.
Yield fluctuations on seasoned corporate and tax-exempt
securities tended to move with those on United States
Government securities during the quarter, but within a
much narrower range. As measured by Moody’s Investors
Service, the average yield on Aaa corporate bonds at the
end of June was just 1 basis point below the March 31
level of 4.45 per cent, while similarly rated tax-exempt
securities were 2 basis points higher at 3.30 per cent.
Offering yields on new corporate issues ranged somewhat
more widely. The monthly average of 4.69 per cent for
June was 3 basis points higher than in March.
Common stock prices also fluctuated within a fairly
wide range during the second quarter, partly reflecting
shifts in investor sentiment concerning the economic out
look. The modest rally begun toward the end of March
was reversed in mid-April, principally by the disappoint
ing first-quarter earnings reports. Prices, as measured
by Standard and Poor’s 500-stock index, reached a low
for the quarter early in May. Subsequently, as busi
ness news grew more encouraging, prices began an irregu
lar rise which picked up steam in early June following the
reduction in the discount rate at two Federal Reserve
Banks and optimistic reports from the steel and automo
bile industries. At the end of the quarter, Standard and
128
MONTHLY REVIEW, JULY 1960
Poor’s 500-stock index was 2.9 per cent above the end of
March but still 5.7 per cent beneath the January 5 high
for the year. The volume of trading increased somewhat
during the period and, on May 18, 5.2 million shares were
traded; this was the highest daily trading volume since
October 17, 1958.
T R E A S U R Y B IL L S A N D O T H E R S H O R T -T E R M
IN S T R U M E N T S
The market for Treasury bills during the second quarter
was subject to the same shifting winds of investor senti
ment as the market for notes and bonds, but special factors
in the short-term market led to much sharper yield
changes. The first bill auction of the period, held on
April 4, resulted in rates of 2.73 per cent and 2.93 per
cent on 91-day and 182-day bills, respectively, the lowest
auction rates of the year to that point. In the following
week, however, yields increased by as much as 90 basis
points. With the approach of the regular bill auction of
April 11 and the April 12 auction of $2 billion of one-year
bills to replace a like amount maturing April 15, nonbank
demand had dried up. Contributing to this heavy market
atmosphere was the fact that the payment date for regular
bills—April 14—coincided with that for the issues in
volved in the Treasury’s April cash financing, while that
for the new one-year bills fell on Good Friday when many
of the market’s financing sources were closed.
The yield levels emerging from this unusual conjuncture
of events were generally considered out of line by the mar
ket, and renewed nonbank buying interest brought a fairly
persistent downward tendency in bill yields extending to
early May. The improvement was abruptly terminated,
however, by a general shift in market sentiment arising
from the summit collapse, reports of better business, and
the Treasury’s plans to expand its weekly offerings of
182-day bills. By mid-May yields had risen to levels only
slightly below their mid-April highs.
After the middle of May, the market reversed itself once
again as apprehensions related to the international scene
faded into the background and expectations of an easing
in credit policy came to the fore. Between mid-May and
mid-June, bill yields plummeted, as a moderate but steady
nonbank demand was augmented intermittently by de
mands from banks investing reserve surpluses. The aver
age issuing rates established in the weekly auctions de
clined in four consecutive auctions, reaching lows for
the year on June 13. Rates on the 91- and 182-day bills
established in that auction were 2.29 and 2.50 per cent,
respectively, or 150 basis points below the highs reached
Table II
Short-Term Interest Rates
Date
Sales finance
Average issuing rate
on new Treasury bills Bankers' acceptances Commercial paper company paper
60- to 89-day
4- to 6-month
90-day unendorsed
offered rate
offered rate
bid rate
3-month 6-month
1960
Mar. 28
2.792
3.187
3%
4H
April 4
April 11
April 18
April 25
2.731
3.622
3.308
3.317
2.927
3.854
3.705
3.705
3H
3%
4H
4H
4
4H
4K
3X
3H
3%
3H
May
May
May
May
May
2
9
16
23
27*
3.003
3.274
3.793
3.497
3.184
3.349
3.521
4.000
3.867
3.495
4M
4 tf
4H
4X
3H
3%
3%
3H
3H
June
June
June
June
6
13
20
27
2.716
2.292
2.613
2.399
2.871
2.497
2.877
2.806
3%
3H
3H
3K
4H
4
3%
3K
3%
3H
3H
3%
3%
2%-3%
2H
2%
•Because of the Memorial Day holiday on May 30, the Treasury bill auction was held on May 27,
in the auction of May 16. Rates turned upward by about
35 basis points the following week under pressure
associated with the tax date but declined once more
in the last auction of the quarter, on June 27, to 2.40
per cent on the 91-day bills and 2.81 per cent on the
182-day bills.
Rates on other short-term market instruments—bankers’
acceptances, commercial paper , and sales finance company
paper—generally moved in line with Treasury bills during
the second quarter (see Table II). As usually is the case,
however, rates on private short-term paper tended to lag
behind changes in bill yields. Thus, following the rise in
bill yields to their peak on April 11, commercial paper
rates were raised by Vs per cent on April 12, and again on
April 18. Similarly, bankers’ acceptance rates, after being
adjusted upward in line with bill yields early in April,
were unchanged between April 12 and May 3, while
bill yields were falling. Acceptance rates finally were re
duced by Vk per cent in two stages on May 4 and May 9,
though by that time yields on Treasury bills were on the
way up once again. However, the most pronounced down
ward movement in bill yields, extending from mid-May
to mid-June, was accompanied by corresponding reduc
tions on the other short-term instruments. During June,
commercial paper rates were reduced by Vs per cent in
three stages, bringing the offered rate on 4- to 6-month
paper to 3% per cent. Rates on bankers’ acceptances
declined by % per cent in four steps, bringing the bid
rate on 90-day unendorsed acceptances to 3% per cent.
And rates on sales finance company paper were reduced
by 1 per cent, bringing the ofl’ered rate on 60- to 89-day
paper to 2% per cent.
FEDERAL RESERVE BANK OF NEW YORK
IS*
The Business Situation
As the second quarter of 1960 ended, the economy
appeared to be moving along a high plateau. While the
current crop of indicators has yielded signs of both
strength and weakness, the outlook remains favorable for
some further expansion of economic activity. One of the
most encouraging pieces of news on the immediate situa
tion appears in the latest survey of plant and equipment
expenditures. Business plans for expanded capital outlays
were almost exactly realized in the first quarter of 1960,
and plans for even higher outlays in the second quarter
were unchanged from what business had expected three
months earlier. Although consumer purchases in May
were not fully sustained at the record April level, they
nevertheless surpassed all other preceding months. It now
seems likely that this sales rate was at least maintained in
June. Thus two important components of final demand
appear to be at near-record levels, and probably served
to keep June employment at the May high. On the other
hand, the absence of a strong expansionary thrust in any
important sector of the economy has raised the question
in many analysts’ minds whether over-all production will
expand sufficiently during the months ahead to cut down
on the still large number of unemployed and, at the same
time, to absorb the net additions to the labor force that
are expected.
The increase in business spending for fixed capital so far
this year has been substantial. The survey conducted by
the United States Department of Commerce and the Secu
rities and Exchange Commission during late April and May
put actual outlays in the first three months of the year at
a seasonally adjusted annual rate of $35.2 billion, $1.6
billion above the fourth quarter of 1959 (see chart). Plans
for a further $1.8 billion rise to $37.0 billion in the second
quarter, reported in the January-February survey, were
found to be about unchanged in the recent sampling.
Plans for the rest of the year, however, point to a much
slower rate of advance in plant and equipment outlays.
The increase expected in the third quarter is considerably
smaller than in the second, and the projected rate of
spending for the entire year implies only a minor further
increase in the fourth quarter. If this latest estimate of
spending for the year as a whole ($36.9 billion) is realized,
it will exceed 1959 expenditures by about 13 per cent,
rather than the 14 per cent margin originally anticipated.
There are some other signs that capital outlays may lose
momentum later in the year. Machinery orders have
slipped to a somewhat lower level in recent months, after
a rapid expansion during most of 1959 that foreshadowed
the growth in actual spending during the first half of this
year. Also, the recent study of capital appropriations in
manufacturing industries—i.e., spending plans formally
approved by business management for some time in the
BUSINESS INDICATORS
'Billions of dollars
38
Billions of dollars
38
36 34
32
36
_^
Plan) and equipment
expenditures
Seasonally adjusted
annual rates
34
^
J Anticipations
reported in second 32
quarter
30
I
I
I
”
__J J
30
Per cent
■ ' *
“
-------------------------------!
^
110 - Industrial production
Seasonally adjusted
■
1
9
5
7
*
1
0
0
~
100
i
90
t ! 1 1 1 1 1
11 1 1 1 1 t i 1 i i 1 i i
Millions of persons
67
T/
65
64
J
*
66
f
^
- 65
ii 1 i i 1 i i I i j
220
64
■JL.J.I 11 1 I l "
Billions of dollars
230
, ^ V \ W
A X Retail sales
210
A
220
210
Seasonally adjusted
annual rates
200
:
1 9 0 ______________ L.L.I... L..1_L.
Millions of units
i I i i I i i 1i i
200
190
Millions of units
1.6
1.6
New series
1.4
1.4
Old s e r i e s , , ^ Housing starts ^
Seasonally adjusted
J? 0 *
annual rates
1.2
1.0
a
J N iL 1.
^
V
/
1.2
.i.I 1.6
..L_1_L. 1.1,1,,1,1 I
Per cent
120
Per cent
120
____ ‘
119
W holesale prices
118
90
67
J
»
Billions of dollars
2301-----------------
m
...
Millions of persons
i
Total employment *
Seasonally adjusted 3 "
66
110
100
-l—
i—
1—
L..1.1n
1958
i t... W M W l . . 1 1 1 1 I » 1 » » 1 1 I
1959
118
1960
& Census Bureau Household Survey Series.
Sources: Board of Governors of the Federal Reserve System; United States
Departments of Commerce and Labor, and Securities and Exchange Commission,
130
MONTHLY REVIEW, JULY I960
future—conducted by the National Industrial Conference the new series shows a higher level of starts than did the
Board, revealed a 5 per cent decline in new appropriations old series—about 11 per cent higher for the year 1959;
in the first quarter of the year, after seasonal adjustment. month-to-month fluctuations may also be larger since cur
As appropriations usually precede actual outlays by six rent information on the actual start of construction is used
to twelve months, sustained strength in business sales instead of estimates based on a fixed lag between the
could, of course, lead to an upward revision in these plans issuance of housing permits and start of construction.)
Spending on private nonresidential and public construc
by the time actual spending gets under way.
Total business sales did rise in April by almost 2 per tion is estimated to have declined slightly in June.
Foreign spending for United States goods has been an
cent (seasonally adjusted), reversing the March decline
and carrying the level to a new record. More than half of element of strength in the domestic business picture. In
this increase resulted from the 3.5 per cent rise in retail May, merchandise exports declined from an unusually
sales, as consumers “caught up” after unusually bad high April level but remained above the earlier months
weather had curtailed their purchases earlier in the year. of this year. The trade surplus, which had increased quite
The largest relative increases were in durable goods associ sharply in April, also edged down in May but appears
ated with home furnishing and repair—the sectors that to have remained about equal to the first-quarter average
had been the weakest earlier this year. In May total busi after seasonal adjustment.
ness sales receded slightly, as manufacturers’ sales main
The recent higher levels of domestic and foreign sales
tained the April rate but retail sales declined by 2.0 per and the firm demand in the investment sector were un
cent. Retail sales, however, remained above the volume doubtedly factors in the small but widespread gains in
of either March or the previous peak in October 1959. industrial production in May. The total production index
A substantial part of the May decline was statistical, re (seasonally adjusted) rose by one point to 110 per cent
flecting the absence of the usual upsurge in automo of the 1957 base, just one point short of the all-time record
bile sales. The daily average rate of car sales of 22,666 set in January. The largest increase was in the business
units (excluding the Memorial Day holiday) about equaled equipment component which rose two points to 105 per
the April rate. A smaller volume of department store cent, matching the January peak. Production of con
sales accounted for another large part of the decline. The sumer goods, which moved up for the second month,
late date of Easter, which is taken into account in adjust also returned to its January peak as the output of con
ing sales for seasonal influences during the preceding but sumer durables recovered markedly. The automobile in
not subsequent weeks, may have accounted for some of dustry contributed substantially to this expansion, with the
the decrease. Preliminary indications suggest that the number of units produced rising almost 5 per cent from
rate of consumer outlays may have been sustained at April to May in contrast to the usual seasonal decline.
a high level in June. The daily average rate of automo A further step-up was scheduled in June, before producers
bile sales early in the month did not show quite so much begin the expected sharp summer cutback in order to re
strength as in May but was expected by industry spokes duce inventories of 1960 models. The June expansion
men to show a spurt in the last ten days as sales contests in auto output, if realized, should have done much to
closed (data are not yet available). Department store offset the decline that apparently occurred in the ap
sales appear to have risen from the May rate after seasonal pliance industry.
adjustment.
Output of materials, however, moved down again in
Spending for residential construction, seasonally ad May for the fourth successive month, reaching a level
justed, edged up very slightly in June after a four-month 2.7 per cent below January. A major influence in this
decline, and recent movements in the number of starts of component was, of course, the continued decline in steel
private nonfarm dwelling units also offer the prospect of production which dropped by one third from 93.1 per
a leveling-out in this sector. As measured in a revised cent of rated capacity at the beginning of March to 60.6
series, housing starts advanced from a low level of 1.1 per cent at the end of May. Subsequently the operating rate
million units (seasonally adjusted annual rate) in March leveled off in the low 60’s for three weeks before falling
to 1.3 million units in April, and maintained the same to about 55 per cent at the end of June. Some increase is
rate in May. (These statistics have recently been revised generally expected later in the summer, for it now appears
on the basis of a more inclusive definition—which now that users’ inventories of steel are being depleted at a
covers vacation houses and other “low cost” units—and rate that cannot continue for long without stocks reaching
more information from current surveys; as a consequence, inconveniently low levels. In this industry, as elsewhere
FEDERAL RESERVE BANK OF NEW YORK
in manufacturing, however, any major future expansion
of output will depend heavily on growth in the sales of
finished goods, since order backlogs have declined steadily
throughout the year and businessmen apparently continue
to aim at minimum efficient levels of inventories.
The increase in production and the renewed strength
in some components of construction resulted in a slight
rise in employment in May, despite layoffs in some manu
facturing industries and the termination of temporary
government jobs for census takers. Total employment,
according to the household survey of employment con
ducted by the Census Bureau, rose to the record level of
67.1 miHion persons (seasonally adjusted). While this
was a gain of less than y10 of 1 per cent, nonagricultural
employment rose by a full percentage point. The payroll
survey conducted by the Bureau of Labor Statistics (which
does not include self-employed persons and domestics)
showed a very slight decline in nonagricultural employ
ment, partly due to small losses in manufacturing but
primarily attributable to reductions in government em
ployment. Unemployment (seasonally adjusted) fell by
2 per cent in May to 3.5 million, and the seasonally ad
justed unemployment rate fell to 4.9 per cent of the
civilian labor force, only y10 of a point above the
2V2 -year low reached in February.
Personal income, reflecting the small gains in employ
ment, edged up %0 of 1 per cent in May to a seasonally
adjusted annual rate of $399.4 billion. Slightly more
than one third of the $1.6 billion increase was in labor
income. Construction payrolls continued to rise sharply
from the unusually depressed levels of late winter, and
average hours worked rose. Farm income rose for the
second month, after having declined sharply from De
cember through March, and small increases also occurred
in the other major components of income, with the ex
ception of rental income which was steady and of transfer
payments which declined slightly.
131
Consumers supplemented the high level of income in
April with large additions to consumer credit to finance
their record purchases. Total consumer credit outstand
ing rose to $52.2 billion in April, carrying the ratio of
credit to annual personal income slightly above 13 per
cent for the first time since January. On a seasonally
adjusted basis, the increase of $692 million in credit out
standing was not only the largest this year but was sur
passed in only one month last year. In May, although the
ratio of credit to personal income rose somewhat further,
the addition to credit outstanding was relatively small on
a seasonally adjusted basis.
The rise in economic activity in recent months has
been coupled with relatively stable prices. Although whole
sale prices in general rose about %0 of 1 per cent from
December through April, the index of all commodities
other than farm products and foods rose less than %0
of 1 per cent. In May the total index declined by %0 of
a point to 119.7 per cent of the 1947-49 base— %0 of a
point below a year ago—as prices of farm products edged
down and the index of industrial prices dropped by Vz
of a point, the largest month-to-month decline in over five
years. Some further decline seems to have occurred
in June.
The total consumer price index continued to creep up
ward in May despite a decline in the index for all com
modities other than foods. The rise of y10 of a point,
the fourth consecutive month-to-month increase, resulted
from increases in the prices of foods, which appear to
be largely seasonal, and of services, which have risen
steadily since October 1958. At 126.3 per cent of the
1947-49 base, the total index in May was %0 of 1 per
cent above the level at the end of 1959 and almost 2 per
cent above a year ago. Average prices of goods other
than foods, however, have declined %0 of 1 per cent
during the current year and were less than 1 per cent above
a year ago.
International Developments
TH E LO NDO N GOLD M ARK ET
The closing of the London gold market in 1939 de
prived the international economy for fifteen years of one
of its major institutions. Since the market’s reopening on
March 22, 1954, however, it has been gradually resuming
its prewar functions, and now is again providing a center
through which the bulk of the non-Communist world’s
gold output is flowing.
The first steps toward reopening the market were taken
by the British authorities in 1952. In that year specified
London firms were given permission to act as agents for
the sale against United States dollars of newly mined
British Commonwealth gold to buyers outside the sterling
132
MONTHLY REVIEW , JULY 1960
area. These firms were thereby enabled to maintain con
tact with the world’s free gold markets, but they were
still barred from transacting business as principals in these
markets. It was only after sterling had recovered from
its early postwar difficulties and gold prices in free markets
abroad had declined from the levels reached during the
Korean war that the British Government considered it
feasible to authorize the formal reopening of the market.
Since its reopening in 1954 the market has operated in
very much the same manner as it did before 1939. The
prewar custom of “fixing” the London gold price daily
was immediately resumed. Participating in the “fixing”
are the representatives of the five member firms of the
London bullion market who meet every working day at
10:30 a.m, in the offices of N. M. Rothschild & Sons in
St. Swithins Lane. Earlier in the day, each of the firms
has matched as many as possible of the buying and sell
ing orders received from its clients. Then at the meeting
the firms “fix” a price for gold in terms of shillings and
pence at which their net offerings or demands can best
be brought together. However, a great deal of business
is usually done outside the fixing at prices that may differ
somewhat from the fixing price.
While the 1954 reopening widened the scope for gold
dealings in London, the market has from the beginning
been subject to a number of restrictions. Gold transac
tions are under the general supervision of the Bank of
England, and transactions are conducted only by the bank
itself and by authorized dealers. The latter include not
only the five members of the London bullion market but
also all banks that are authorized to deal in foreign ex
change. Residents of the sterling area have only limited
access to the market. They may sell gold freely, but their
purchases are restricted to the limited amounts authorized
for approved industrial and export purposes. This is in
sharp contrast to prewar arrangements, when sterling-area
residents had free access to the market.
Since the reopening, nonresidents of the sterling area
have had complete freedom to buy or to sell gold on the
London market, provided payment is made in dollars or
convertible sterling. Since the British exchange controls at
the time of the reopening permitted such sterling to be
held only by dollar-area residents, the British authorities
acted at that time to facilitate operations in gold by
nondollar-area residents by introducing a new type of
sterling account called a “registered account”, which could
be held by any nonresident of the sterling area and could
be opened or replenished by the sale of dollars or gold.
However, when Britain, along with other Western Euro
pean countries, moved to nonresident convertibility in
December 1958, the need for registered sterling ceased.
Accordingly, such sterling was merged with other types
of sterling into a single exteraal-account sterling that is
freely convertible into dollars and other currencies. Non
resident convertibility has increased the attractiveness of
the London gold market, and has apparently brought
about the transfer of a substantial volume of transactions
from Continental markets; this was reportedly a major
factor behind the sharp increase in turnover on the London
market last year.
From the date of the reopening, gold could be traded
in London in both coin and bullion form. Gold purchased
by nonresidents could be either exported to destinations
outside the sterling area or set aside in special accounts
established in London by authorized dealers. During the
first five years of operations the dealers were granted gen
eral authority to conduct only spot transactions, i.e., with
delivery and payment within two working days; overbought
or oversold positions in gold could be carried only within
limits specifically authorized by the Bank of England. This
restriction on forward dealing was removed in March 1959.
While the London gold price reflects market forces,
including the operations of the Bank of England, the United
States Treasury’s buying and selling prices of $34.9125
and $35.0875,1 respectively, tend to keep the London gold
price within a relatively narrow range. As a matter of
fact, the London gold price has; remained within the range
of the Treasury’s buying and selling rates during most of
l $35 per ounce minus or plus V4 per cent handling charge.
FEDERAL RESERVE BANK OF NEW YORK
the period since the market’s reopening, as the chart indi
cates. However, for substantial periods during 1958 and
1959 the price was above the Treasury’s $35.0875 selling
price. This was possible partly because private foreign
demand for gold is not met by the Treasury which (apart
from supplying domestic artistic and industrial needs) sells
only to foreign governments and monetary authorities for
legitimate monetary purposes. In addition, foreign central
banks may buy gold in London—despite the fact that the
price exceeds the Treasury’s selling price—because they
sometimes prefer for reasons of convenience or economy
to hold gold in London rather than New York.
Dealings on the London gold market have been advan
tageous to both buyers and sellers because of the narrow
spread (usually one cent per ounce or less) between the
buying and selling prices. For this reason and because of
the facilities it affords, the London market has won the
bulk of the world’s gold business. Since the reopening,
virtually all of South Africa’s gold production—almost
three fifths of the Free World’s total—has been handled
by the Bank of England acting as agent for the South
African Reserve Bank. In this capacity, and as an oper
ator on its own account, the Bank of England has normally
been by far the largest single factor in the market. In addi
tion, the London market receives supplies from other
sterling-area producers, and much of the not inconsider
able amount of gold sold by the Soviet Union in Western
Europe has been marketed in London. Foreign central
banks and the Bank for International Settlements operate
both as buyers and sellers in the London market, account
ing during some years for between one third and one half
of the total turnover. Finally, private individuals and non
official institutions have normally weighed heavily on the
buying side of the market, the flow of gold on this account
to Continental Western Europe and the Middle and Far
East being particularly significant.
The fact that buyers and sellers of gold could generally
obtain better prices in London than in New York con
tributed, along with an improvement in the United States
balance of payments, to the decline in the Treasury’s pur
chases and sales of gold during 1954-57. Net United
States gold sales to foreign countries, which had totaled
$1,164 million in 1953, fell to $327 million and $69 mil
lion in 1954 and 1955, respectively, and were followed by
relatively small purchases in the next two years. In 1958
and 1959, however, the demand for gold by foreign mone
tary authorities increased to a level that exceeded by wide
margins the supplies available both from new production
and from sales out of the existing holdings of countries
other than the United States. This change in the market
situation largely stemmed from the substantial strengthen
133
ing in the balance of payments of the United Kingdom and
other European countries that traditionally hold the bulk
of their reserves in gold. Whereas in earlier years the Bank
of England sold gold to acquire United States dollars, in
1958 and 1959 it became a net buyer of gold in substan
tial amounts. This, combined with demand from other
sources, helped to keep the dollar equivalent of the London
gold price above the United States Treasury’s selling price
during most of 1958 and 1959. Under these circum
stances, a large part of the world’s official demand for
gold was, until the latter part of 1959, satisfied by the
United States. Even at this time, however, central banks
bought gold in London from time to time, especially when
the London price was equal to or under the United States
price.
In reopening and supervising the London gold market,
the British Government has remained conscious of its
position as a member of the International Monetary Fund.
From the earliest postwar years the Fund has urged mem
bers to “take effective action to prevent external transac
tions in gold at premium prices” and to support policies
that, to the maximum extent practicable, would bring gold
into official reserves rather than let it disappear into
private hoards. However, the Fund has realized that, in
view of the widely varying conditions among countries, it
would be “impracticable to expect all members to take
uniform measures in order to achieve the objectives” of
this policy, and the Fund has accordingly left to its mem
bers the “practical operating decisions” involved in its
implementation.2 In this spirit the British Government
stated in March 1954 that the reopening of the London
gold market was not to be taken as implying that the gov
ernment questioned the “wisdom of the principle that gold
should, as far as possible, be canalized into monetary
reserves where it would readily serve payments purposes”.
However, the statement went on to affirm the government’s
belief that “the continued closure of the London market
would serve no useful purpose internationally and would
be damaging to the interests of the United Kingdom and
the sterling area”.
The extent to which member countries—including espe
cially Britain, because of the overriding importance of the
London gold market—have implemented the Fund’s gold
policies has been kept tinder review by the Fund. In its
1958 Annual Report, the Fund indicated that the general
easing of restrictions on gold transactions in recent years
had not led to any substantial increase in private hoarding.
On the contrary, the incentives to hoard have been weak
2 "Statement on Premium Gold Transactions”, September 28, 1951,
published by the International Monetary Fund in the Annual Report
of the Executive Directors for the fiscal year ended April 30, 1952,
MONTHLY REVIEW, JULY 1960
134
ened by the progress made toward currency convertibility
and toward the control of inflation. Indeed, the “disappear
ance” of Free World gold production into the arts and
industry and into private hoarding has generally been
lower since 1954 than in earlier years.
Despite the decline in private hoarding, it continues to
be a problem, albeit one to which the solution has long
been known, A brief summary of the means for deal
ing with the problem of private gold hoarding was given
in the Fund’s 1952 Annual Report, which observed that,
insofar as such hoarding reflected lack of confidence
in the value of a currency, the best way to reduce “dis
appearance” was “to adopt budget and credit policies that
will restore or maintain this confidence”. The Fund recog
nized that, where hoarding was a matter of social tradition
rather than a safeguard against the risks of currency
instability, the hoarding habit could not be changed
quickly, but might be gradually weakened by “the spread
of banking and the growth of financial institutions which
may lead to a wider preference for bank deposits, securi
ties or investments in productive enterprises”.
EXCHANGE R A TES
In the New York foreign exchange market, spot sterling
generally appreciated during most of June, in part reflect
ing technical adjustments to money rate changes. Good
commercial demand in New York and demand from the
Continent tended to maintain a firm undertone in the rate
throughout the month. The more substantial upward move
ments in the quotation, however, followed the Vi per cent
reduction to 3 V2 per cent in the discount rate of two
Federal Reserve Banks announced on June 2 and the 1
per cent rise to 6 per cent in the British bank rate on
June 23. The more advantageous short-term interest yields
in London attracted funds from the Continent and in the
latter half of June also from New York. By June 24 the
quotation advanced to $2.8067 from the month’s low of
$2.7988 on June 2, and on June 30 was $2.8066.
In the forward market the discounts on three and six
months’ sterling generally widened, but not sufficiently to
prevent the yield incentive for moving funds to London
on a covered basis from rising further. At the month end
three and six months’ sterling were at discounts of 121
and 186 points, respectively, compared with 42 and 80
points on June 1.
The Canadian dollar fluctuated rather erratically during
the month, although the trend was upward. Early in June
substantial demand for the Canadian dollar from Conti
nental sources firmed the rate from $1.011%4 to
$1.016%4 by June 3. After a slight easing, the quotation
rose irregularly to $1.021%4 near the month end, pri
marily under the influence of the placement in the New
York market of a Canadian Provincial bond issue and the
offering in Canada of two Canadian utility bond issues
attractive to foreign interests. The quotation closed at
$1.02% 2 for the month.
Widespread rumors of an upward revaluation of the
German currency led to increased demand for the mark
during the middle of June. At the midmonth, when the
German banks were closed for a four-day holiday week
end, sales of Deutsche marks in fact were effected above
the official upper support limit of 4.17 to the dollar
(1 Deutsche mark = $0.239808). Following the categori
cal denial by the German Government and the central
bank of any intention to revalue, however, the quotation
reverted to approximately the upper limit. At the same
time, the premium on forward marks narrowed after
having risen sharply earlier in the month.
@FedFRASER