Full text of Economic Policy Review (Federal Reserve Bank of New York) : June 1960, Vol. 42, No. 6

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94

MONTHLY REVIEW, JUNE 1960

N ew Y o rk S t a t e ’s 1 Om nibus B an k in g L a w ”
1
Significant changes in New York State’s banking struc­
ture have been made possible by the so-called “Omnibus
Banking Law” enacted on March 22, 1960. The new law,
which takes effect July 1, 1960, marks the first major
revision in New York State law relating to banking struc­
ture since 1934 when the State was first partitioned into
nine banking districts.
This article is intended to provide readers with back­
ground information on the new law; to set forth some of
the issues leading up to its enactment; and to consider
generally the statutory standards which, for the first time,
must be applied by the State bank supervisory authorities
in passing upon bank mergers and the operations of bank
holding companies.

(2) For the first time, mergers and purchases of assets
must now meet express statutory standards.
(3) The “freeze” on the formation of bank holding
companies or their expansion across district lines in effect
since 1957 is terminated as of June 30, 1960. The forma­
tion of new, and the expansion of existing, bank holding
companies within the State are again permitted, but
are now subject to regulation by the bank supervisory
authorities.
Under the new law, then, commercial banks located in
New York City may expand, subject to the approval of
the State bank supervisory authorities, across district lines
by any of three means: they may establish branches within
Nassau or Westchester Counties; they may merge with
banks in those counties; or they may affiliate with an exist­
TH E M AJOR P R O V IS IO N S
ing bank holding company or participate in forming a
The new law has as its purpose the furthering of orderly new bank holding company. Similarly, Nassau or West­
development of banking within New York State in re­ chester commercial banks may expand into New York
sponse to economic changes that have occurred since City by the same methods, /dthough the branching and
World War II. At the outset, the law declares State merger privileges of commercial banks located elsewhere
policy to include the prevention of “statewide control in the State are not changed by the new law, such banks
of banking by a few giant institutions” and the foster­ may form or participate in bank holding companies.
ing of “healthy and non-destructive competition . . . among
Approval of the provisions briefly summarized above
all types of banking organizations within natural economic climaxed a number of years of effort on the part of the
and trade areas”. At the same time, however, the law State Legislature. Complete re-study of New %ork State’s
grants certain new branching and merger privileges to com­ banking law was authorized in 1955, for the purpose of
mercial banks in New York City, Nassau, and Westchester revising the law in the light oi: changes that had occurred
Counties,1 and authorizes the formation and regulation of since the last major revision. The creation of a Joint
Legislative Committee for Revision of the Banking Law
bank holding companies within the State.
Briefly, the principal provisions of the new law are as followed quickly, setting the stage for the subsequent
follows:
years of study and debate.
(1)
Subject to approval by the appropriate bank super­ The committee was confronted almost at the outset
visory authorities, New York City commercial banks are with issues going beyond merely technical amendments:
permitted to operate branch offices outside that city in broadly, the need to strike a balance between one set of
the two suburban counties of Nassau and Westchester. views favoring the widening of branching powers and
Commercial banks in those counties are likewise allowed another concerned primarily with protecting the smaller
to operate branches within the five boroughs of New York community-type organization. The committee was also
City. Also, subject to such approval, interdistrict mergers faced with the conflicting interests of commercial banks
are permitted between New York City and Nassau or and savings institutions in the competition for savings
Westchester commercial banks. With these exceptions, accounts. Until this year, however, neither the committee
any branch system must remain within one of the nine nor the Legislature seemed able to resolve the underlying
issues. The only step taken was hurriedly to enact in 1957
banking districts established in 1934.
the now-expiring “freeze” on bank holding companies,
1
Savings banks, State-chartered savings and loan associations, and
when it appeared that far-reaching changes in New York’s
industrial banks are also accorded wider brandling privileges. Much
of the controversy prior to passage of the Omnibus Law involved the
banking structure might occur before the committee’s
future role of savings institutions in relation to commercial banks.
investigations were completed and new legislation enacted.
These aspects are not treated in any detail in this account, which con­
centrates on developments relating to commercial banking.
Opinion concerning the new law is by no means all




FEDERAL RESERVE BANK OF NEW YORK

favorable. While some New York City bankers hail the
Legislature’s action as a constructive step in developing
the economy of the city and State, a number of Nassau
and Westchester leaders have voiced fears of the conse­
quences of large New York City commercial banks branch­
ing into their counties. The issues involved may perhaps
be better understood when the new law is viewed against
a broader historical perspective of the evolution of the
structure and regulation of banking in New York State.
H IST O R IC A L B A C K G R O U N D

In a sense, the current debate had its beginnings at
least twenty-five years ago in 1934 when the State Legis­
lature made the first important breach of a century-old
tradition against branch banking in New York State. From
1836, when the charter of the Second Bank of the United
States expired, to almost the turn of the century there
had been little or no branch banking in the State. In 1898
branch banking was permitted within New York City,
and in 1919 this was extended to cities with over 50,000
population, but neither of these actions permitted a bank
to establish branches outside its home community. In
1934, however, the Legislature voted to partition New
York State into nine banking districts (see map) within
each of which commercial banks might establish branches
so long as the branch was not established in a city or
village in which the head office of another bank was
already located. Branch banking within New York City
continued to be permitted, even though its counties are
split between two districts.

The division of the State into nine banking districts for
branching purposes was part of a great widening of
branch privileges that took place in many parts of the
country during the twenties and early thirties. In New
York State, as elsewhere during the Great Depression,
bank failures had been most numerous among the smaller
sized independent banks upon which local business credit
largely depended. The pattern of failures revealed, among
other shortcomings, a frequent lack of loan diversification
in the home community that reflected the limited variety
of local credit demands. Moreover, bank failures had left
a great many communities without any banking facilities,
while many other small communities had always been
bankless simply because local citizens could not raise
sufficient capital to organize an independent bank.
It was agreed that branch systems, through diversifica­
tion, might more easily withstand the shock of general
economic downswings; might produce new facilities to
replace those destroyed in the banking crisis; and might
bring banking offices to localities where they had hereto­
fore been lacking. Governor Lehman summed up the
majority sentiment of the time in his memorandum of
May 21, 1934 approving the district line law of 1934.
He wrote that
This bill is the only means open to the people
and commercial business interests of these com­
munities to obtain banking facilities. Many of
them are in dire need of banking facilities. The
lack of them has not only inconvenienced the
people, but has handicapped the tradesmen and
businessmen of these communities. In large

B A N K IN G DISTRICTS




95

Counties in each banking district:
1. Kings, Queens, Nassau, and Suffolk.
2. Richmond, New York, and Bronx.
3. Westchester, Rockland, Putnam, Dutchess, Orange, Ulster, and Sullivan.
4. Columbia, Rensselaer, Washington, Greene, Albany, Schenectady, Saratoga, Warren,
Essex, Schoharie, Montgomery, Fulton, Hamilton, Otsego, and Clinton.
5. Jefferson, Lewis, Saint Lawrence, and Franklin.
6. Herkimer, Madison, Oneida, Onondaga, Oswego, Cayuga, and Seneca.
7. Chemung, Schuyler, Tioga, Tompkins, Broome, Delaware, Cortland, and Chenango.
8. Monroe, Wayne, Livingston, Ontario, Yates, and Steuben.
9. Chautauqua, Cattaraugus, Allegany, Erie, Niagara, Wyoming, Genesee, and Orleans.

MONTHLY REVIEW, JUNE 1960

96

measure all the activities of those communities
have been seriously curtailed.
He added, however, that the new branch law would
not “permit the unjustified establishment of numerous
branches nor . . . unnecessary competition. . . . This bill
should in no way injure the sound unit banks in this
State.” In fact, the law represented a compromise between
extreme viewpoints, one favoring State-wide branch bank­
ing, the other strongly opposing any action that might
lead to the concentration of power in big city banks at the
expense of independent unit banking.
ST A T E -W ID E D E V E L O P M E N T S S U B S E Q U E N T
TO

1934

After the passage of the 1934 district line law, the
role of independent local banks in New York State began
to diminish. Regional branch banking grew and spread
within each of the banking districts of the State. New
York was not unique in this respect. The same results
were found wherever State laws permitted branch bank­
ing. The number of commercial banks in the United
States was declining slowly but steadily even before the
well-publicized “merger movement” after World War II.
Postwar developments in New York State’s economy,
particularly the shift of population and business from the
central cities toward the neighboring suburbs, tended to
accelerate tendencies already in evidence before World
War II. Institutions that had previously emphasized
“wholesale banking”, servicing primarily the needs of large
business borrowers, turned more toward consumer lending
and other forms of “retail banking”. Banks competed
vigorously for savings deposits, as retail banking became
more profitable and deposits harder to get relative to lend­
ing opportunities.
It was this desire to expand retail banking operations,
in particular, that induced banks to open new branches
wherever possible or to absorb other institutions. At the
same time, commercial banks also tried to increase their
capital resources through merger. Since, in most cases,
a commercial bank may not make loans to a single bor­
rower in excess of 10 per cent of its capital accounts, the
increase in the capital accounts generally resulting from
mergers helped banks to accommodate the expanding
credit needs of their larger business customers who were
experiencing sizable growth during the generally prosper­
ous postwar period.
The pattern of banking outside New York City rapidly
assumed the shape of district-wide branch banking, mainly
involving a handful of large banks whose head offices were
in the largest cities of New York State. The number of
branch banks more than doubled from 56 in 1945 to 121




in 1959, and their total number of offices more than
tripled. In 1959, branch banks controlled well over 75
per cent of total bank assets outside New York City,
contrasted with 55 per cent at the end of World War II.
Of course, branch banks vary wdely in size, and not all
of them are “giants”. But New York State (outside New
York City) in 1945 had only 5 banks with 10 or more
branches each— all of them in Buffalo and Rochester. By
1959 there were 21 such banks. Hence, certain objectives
of district line legislation designed to protect and preserve
unit banking were realized only in part. The number of
independent community banks operating within the State
declined substantially, their remaining strongholds narrow­
ing to the smaller towns. Between the close of World
War II and the beginning of 1960, the number of com­
mercial banks in the State outside New York City de­
clined from 603 to 360. During the same period, the
number of branch offices increased from 197 to 723
(see Chart I). Some idea of deposit and banking concen­
tration within the various banking districts of the State
can be obtained from Chart II.
Attracting little public attention until a few years ago,
was an allied development in group banking— the growth
and spread of the bank holding company.2 These com­
panies had not been regulated by the 1934 law. Indeed,
2
Bank holding companies are sometimes referred to as "group
banks’* Both names refer to a situation in which a number of sep­
.
arately incorporated banks are controlled by a corporate holding
company.

Chart I

GROWTH OF BRANCH BANKING IN NEW YORK STATE
Excluding New York City
Number

Number

900
800
700
600
500
400
300

200
100

0
1945

1959

FEDERAL RESERVE BANK OF NEW YORK

Chart It

DEPOSITS AND NUMBER OF BANKING OFFICES
OF THE LARGEST COMMERCIAL BANK IN EACH
NEW YORK STATE BANKING DISTRICT
Excluding N«w York City
Per cent

Per cent

Banking district
Note: Top panel refers to largest banks in terms of deposits; bottom to
largest banks in terms of number of offices.
* £xelucTmg counties w ithin N ew Yortc City limits.

with the exception of the past three years during which
the bank holding company “freeze” law has been in
effect, holding companies have been free to operate on
a State-wide basis. Thus, during approximately the same
period in which the rise of branch banking occurred, New
York became the leading bank holding company State in
the nation measured by affiliated offices— 192, comprised
of 21 banks and 171 branches. While the Marine Mid­
land Corporation has held the limelight, other group
banks have also been developing in the State. Under the
definitions established in the Federal law (The Bank Hold­
ing Company Act of 1956), there are now 9 holding com­
panies operating within the State, of which 5 are New
York companies and the remaining 4 are out-of-State
companies.

D E V E L O P M E N T S IN T H E N E W Y O R K
M E T R O PO L IT A N A R E A

The transformation in banking structure took place in
all banking districts throughout the State. But nowhere
have postwar changes aroused greater interest than in the




97

counties immediately adjoining New York City. It is these
areas that are chiefly affected by the new legislation.
Nassau County furnishes an outstanding example.
Shortly before World War II the county was served
almost wholly by independent unit banks. There were
only 4 banks whose deposits exceeded $5 million, and
their combined deposits accounted for only 19 per cent
of the county’s total. The largest bank at the time had
but $6.5 million in deposits; 29 of the 53 commercial
banks had deposits of less than $2 million, and 9, of less
than $1 million. The war brought many changes, but not
even by 1947 had the metamorphosis of the county pro­
ceeded very far. The next decade, however, witnessed the
sweeping changes that transformed the structure of Nassau
banking from one comprised almost exclusively of com­
munity banks to one consisting of a few large banks
with numerous branches throughout the county. Recent
data show only 7 of Nassau’s communities served solely
by a local bank (including its branches within the com­
munity); 9 other communities served by both head offices
and one or more branches of other banks existing side
by side; and 58 served solely by branch offices of banks
with head offices elsewhere.
The trends exhibited in Nassau have been generally
characteristic of Westchester County as well. It merits
emphasis, however, that postwar changes in banking struc­
ture in Nassau and Westchester Counties only paralleled
those already noted within other banking districts through­
out upstate New York— as well as within New York
City itself.
N EW Y O R K CITY V S . TH E S U B U R B S

One major difference characterized the developments
downstate. Banks in the major upstate cities had been
able to expand along with their metropolitan areas. There
were slight declines in the number of commercial banking
offices within the six largest upstate cities (as a group)
during the first postwar decade—but new branch openings
in the outlying areas more than offset this, and indeed
rapidly outpaced the rate of population growth.
New York City banks, however, were barred by law
from duplicating the upstate pattern. The 1934 law had
deliberately restricted these banks to branches within the
City of New York. The Governor’s signing message had
highlighted the “solid, strong safeguards” written into the
law, stating that “the banks in Manhattan are given no
power additional to that which they possess to open
branch banks”. The provision reflected the widely held
fears that the large New York City banks would come
to dominate the entire commercial banking system of New
York State if not severely restricted.

MONTHLY REVIEW, JUNE 1960

98

This limitation began to loom more significantly in the
postwar years. A number of New York City banks felt
that, despite their unique advantages and proven ability
to attract nation-wide customers, the long-term prospects
facing them were unpromising. The financial center’s
share in nation-wide bank deposits has been declining.
From the outset of World War II through the end of 1959,
deposits of all commercial banks tripled, increasing from
approximately $71 billion to $216 billion. By contrast,
deposits of the large downtown banks of New York City
expanded only 67 per cent, from $18 billion to $30 billion,
and most of this increase occurred during the war. As
a corollary of the disparate rates of expansion, the share
of the New York central reserve city banks in the deposits
of all commercial banks declined from 25.4 per cent to
13.9 per cent between 1941 and 1959. The virtual ab­
sence of any growth of deposits at the City banks in the
postwar period has raised doubts concerning the long-run
ability of the New York City banks to keep pace with the
rising credit needs of their traditional customers, the
nation’s largest corporations.
Many New York City institutions felt that there were
compelling reasons to regard the adjoining suburban coun­
ties as part of an integrated metropolitan region rather
than as self-contained regions detached from their central
city. In this view, New York City was seen as the nucleus
of a trade area similar to the regions comprising upstate
banking districts. But on the opposite side of the fence,
suburban banks were equally vocal in rejecting economic
integration with New York City— and pointed to local
industry and employment that were making the suburban
counties increasingly self-sufficient. There were also fre­
quent appeals to the Legislature’s basic policy that com­
munity banking in the State be protected from onslaughts
of New York City “giants”.
The Legislature decided the outcome in March of this
year, thereby breaking the long-standing deadlock between
the New York City and suburban bankers.
THE NEW

LAW A N D B A N K SU P E R V IS IO N

There are a number of safeguards written into the new
law to protect existing institutions and the public. Statu­
tory standards covering both banking and competitive fac­
tors, as well as the public interest, must be considered by
the State bank supervisory authorities in approving or
disapproving bank mergers and bank holding company
operations. While there has been no change as to the
requirements for approval by the State bank supervisory
authorities of branch establishments, it should be remem­
bered that such establishments have always required a




showing that the public convenience and advantage would
be promoted.
During the three-month interval elapsing between the
date of enactment and the effective date of July 1, 1960,
both bankers and supervisory authorities have been study­
ing the alternatives and considering the outcome of action
under the new law. Despite suburban opposition to their
expansion plans, some New York City banks appear
certain to attempt to obtain the benefit of the new
provisions.
bank mergers.
Of the issues raised, perhaps none
have proved more difficult in the past than bank mergers.
The new law for the first time gives explicit recognition to
the risks of overconcentration that may arise out of bank­
ing consolidations. Heretofore, New York State’s banking
law was explicit only in its general statement of policy to
guard against “unsound and destructive competition . . .
and thus to maintain public confidence”. Now the law in­
cludes explicit statutory standards which must be taken
into account by the State bank supervisory authorities. In
passing upon bank mergers, the authorities must consider:
(1) The new declaration of policy, including the state­
ment that “competitive as well as banking factors be
applied by supervisory authorities in approving or dis­
approving bank mergers”;
(2) Whether the effect of the proposed action will
result in the expansion of the size or extent of the result­
ing bank beyond limits consistent with adequate or sound
banking; or in a concentration of assets beyond limits
consistent with effective competition;
(3) Whether the proposed action may result in such
lessening of competition as to be injurious to the interest
of the public or tend toward monopoly; and
(4) The public interest.
It is a commonplace that banking factors and competi­
tive standards, both of which seem desirable on the sur­
face, are not always easy to reconcile. The Board of
Governors of the Federal Reserve System has had to cope
with these and similar issues in the past in passing on ap­
plications before it. Indeed, the Board has been guided by
standards extending beyond the so-called “banking fac­
tors” and has adhered to the spirit and intent of the anti­
trust laws even when not required to do so by any literal
interpretation of the applicable banking statutes. More­
over, the Board of Governors’ role has recently been con­
siderably expanded by the enactment on May 13, 1960 of
the Federal bank merger law (P.L. 86-463, 86th Cong.).
This law requires Federal approval of every merger or
consolidation of insured banks. In acting upon mergers
covered by this law, the appropriate Federal bank super­

FEDERAL RESERVE BANK OF NEW YORK

visory authority is required to consider specified banking
factors and, in addition, “the effect of the transaction on
competition (including any tendency toward monopoly)”,
and cannot approve any transaction, unless, after consid­
eration of all the factors, the transaction is found to be in
the public interest. Despite differences in the language of
the New York and Federal statutory standards, it is clear
that under both laws the competitive aspects of a proposed
merger will be an important consideration.
In practice, the State and Federal bank supervisory
authorities have in the past considered such factors in
connection with merger proposals. The new State and
Federal laws now make consideration of such standards
mandatory.
bank h o lding c om panies.
July 1, 1960 is also a
significant date for bank holding companies in New York
State. At that time, the “freeze” law having terminated,
the situation existing before 1957 is restored, but subject
to restraints written into the new legislation. The major
distinction between the new circumstances and those ante­
dating the “freeze” lies in those sections of the Omnibus
Banking Law which, for the first time, make bank holding
company operations subject to State regulation and estab­
lish standards for the State to consider in determining
whether or not to approve an application for bank hold­
ing company formation or expansion.
In acting on these applications, the State banking super­
visory authorities are required to consider substantially
the same standards as those established for bank mergers
under the State law set out above. Essentially, these stand­
ards conform, with certain exceptions, to those set forth
in the Federal Bank Holding Company Act of 1956 and
repeated in the Board of Governors’ Regulation Y. Under
both Federal and State law, major emphasis in the bank
holding company field— as in the merger field—is placed
upon the fostering of competition and prevention of mo­
nopolistic control.
Removal of the “freeze” may encourage some banks to
affiliate with existing holding companies or to join in
establishing new ones. The major advantages and draw­
backs of the holding company form of organization, from




99

the institutions’ standpoint, are quite familiar. Weighed
against certain tax disadvantages, for example, are the
broad gains of sharing in the benefits of large-scale bank­
ing while retaining individual corporate existence.
Holding companies in New York State are subject to
both the Federal and State laws. The Federal Bank Hold­
ing Company Act of 1956 authorizes the formation of
bank holding companies and vests responsibility for the
act’s administration in the Board of Governors. The act
lists five factors that the Board must consider before grant­
ing an application to establish or expand a bank holding
company:
(1) The financial history and condition of the
applicant and the bank or banks concerned;
(2) The prospects of the applicant and the bank
or banks concerned;
(3) The character of the management of the
applicant and the bank or banks concerned;
(4) The convenience, needs, and welfare of the
communities and the area concerned; and
(5) Whether or not the effect of the proposed
transaction for which approval is desired
would be to expand the size or extent of the
bank holding company system involved be­
yond limits consistent with adequate and
sound banking, the public interest, and the
preservation of competition in the field of
banking.
Of the five factors cited above, the last was attributed the
greatest weight by the Board in denying the only applica­
tion for the formation of a new bank holding company
thus far considered in New York State under the Federal
act— the affiliation of the County Trust Company of White
Plains and the First National City Bank of New York
under the proposed First New York Corporation.
The standards considered here will have a major role to
play in future applications now that New York State law
once more permits holding company formation and ex­
pansion. The various supervisory agencies concerned have
the task of establishing a body of regulatory practice that
will conform to the principles established in Federal and
the new State legislation.

100

MONTHLY REVIEW, JUNE 1960

A B re a th in g S p e ll fo r M o n e ta ry P o licy*
By A l f r e d H a y e s
President, Federal Reserve Bank of New York

When I spoke to you two years ago, the nation’s
economy was just starting to emerge from a brief but
relatively sharp recession. The paramount task facing
monetary policy accordingly was to assist in every way to
bring about a speedy and sound recovery. As the recov­
ery proceeded—far more swiftly in most respects than
had seemed likely at the outset— the appropriate role of
monetary policy quickly shifted from one of active stimu­
lation of credit growth to moderate and then rather firm
restraint. This was designed to hold the credit formation
associated with the expansion of business activity within
sustainable bounds, avoiding the inflationary bursts that
are, no less than recessions, the inveterate enemies of real
growth. Even when the economy’s advance was inter­
rupted by last summer’s steel strike, there were widespread
expectations that settlement of the strike would launch a
powerful new burst of expansion, attended by renewed
inflationary pressures, and this meant that a rather taut
rein had to be maintained on bank credit expansion even
through the period of the shutdown.
Let me add immediately that this relatively taut rein did
not mean that credit expansion was held to small pro­
portions. The total expansion of credit of all types in
1959 was at a peacetime record of $62 billion, and the
only sense in which this was small was in comparison with
the even larger rise that would have occurred had all
demands for funds been met—no doubt with severe infla­
tionary consequences. I would point out, too, that some
of those sectors of the economy that are often singled out
as faring relatively badly at the hands of restrictive mone­
tary policy came out rather well. Some $19 billion of the
$62 billion total went into residential and other mortgages,
a towering increase that eclipsed the previous record by
nearly one fifth. State and local government debt, includ­
ing provision for schools, increased by a near-record
$5 billion. And at the same time the Federal Govern­
ment had to finance a cash deficit of about $8 billion
during the calendar year. The sharp rise in interest rates
during 1959 was the dramatic result of the strength of
these and other credit demands (including, incidentally,
a rise of more than $6 billion in consumer credit).
* An address before the Fifty-seventh Annual Convention of the
New Jersey Bankers Association, Atlantic City, New Jersey, May 19,
1960 .




In the past several months, for reasons that I want to
discuss further in a moment, some of these exceptional
pressures on the financial markets have abated. Interest
rates have receded from the thirty-year high levels reached
in late 1959 and early 1960, along with a tempering of
overexuberant business expectations and an apparent sub­
stantial lessening of prevalent expectations of inflation.
The downward adjustment in stock market prices has been
another manifestation of the psychological turnaround.
This change in atmosphere has been based on a number
of factors. One is that recent business developments, while
indicative of well-sustained strength in the economy, have
lacked the boomy quality that many had rather auto­
matically associated with the resumption of steel produc­
tion and, perhaps, with the onset of the “soaring sixties”.
This is not at all to say that we are in a slack period;
the gross national product rose to a record annual rate
of $500 billion in the first quarter of this year, while per­
sonal income and employment: also set new records (after
seasonal adjustment). While unemployment continues to
be a problem, recent surveys indicate that business outlays
for new plant and equipment ^vill be markedly higher this
year than last. In essence, however, what has happened
is that the special stimulus provided by the end of the
strike has been shorter lived than some had expected;
steel needs have been filled quickly and the pace of total
inventory accumulation has abated, with widespread effects
on new orders and sales; but, over all, demand remains
strong.
Another reason for the recent change in the financial
atmosphere— and it is a highly gratifying one— is that the
price level has been essentially stable for some time. Aver­
age wholesale prices have barely changed in two years
(though there have been some offsetting movements among
major components along with seasonal swings), and aver­
age consumer prices have been virtually steady for about
the past seven months. Without making immodestly large
claims on behalf of monetary policy, I believe that some
of the credit for this good performance belongs to the
timely application of monetary restraint in the earlier
phases of expansion. Of great help, too, has been the
much keener recognition on the part of both industry and
labor of the dangers of inflation and the value of reason­
ably stable prices, not only because of their immediate

FEDERAL RESERVE BANK OF NEW YORK

interest in expanding output, employment, and incomes,
but also because of the broader need in the national inter­
est to meet the challenge of ever more effective foreign
competition. Whatever may be the ultimate results of
the steel settlement reached in the first few days of this
year, it has at least not been followed promptly by price
boosts, or by large pay increases in other industries— as
had been the past pattern. And some credit for domestic
price stability must, of course, also be given to the
generally ample supply of most international commodities.
Still another force contributing to the changed atmos­
phere of recent months— and this one has had decisive
effects on the financial markets— has been the changing
Federal cash position. For years, monetary policy has had
to carry much the greater part of the burden that fiscal
and monetary policy should share. As a result, the effects
of needed restraint have been sterner for the economy as a
whole than would otherwise have been necessary. Federal
cash surpluses were too small, or nonexistent, or were
instead transformed into deficits, at times when restraint
on aggregate demand was called for. Clearly, the massive
shift from a $13 billion cash deficit in the fiscal year 1959
to a position of approximate balance in the fiscal year now
drawing to a close has exerted a major influence upon the
relation between the supply and demand for funds, par­
ticularly in these current months when the concentrated
effects of a seasonal cash surplus are being felt. A fiscal
policy that proved to be flexible only in providing deficits
at times of recession would clearly be out of step with the
realities of the modern American economy. Equally nec­
essary are the surpluses in relatively prosperous times
that can ease the pressure on capital markets and supply
resources to support real growth at home and elsewhere
in the world.
Taken together, these changes in market atmosphere
and the related underlying developments in the domestic
economy— along with the recent moderate improvement
in our international payments position—have provided
something of a breathing spell for monetary policy. It
has thus been possible to relax somewhat the degree of
monetary restraint which had been maintained in the
second half of 1959. While the central bank can never
allow the problems of coping with potential boom or
recession to recede very far into the background, this
more relaxed setting gives us a valuable opportunity for
focusing on some of the longer range problems that are
facing our monetary system. Indeed, it is only by giving
close attention to these questions that we can hope to fash­
ion the kind of flexible monetary policy that is required
in a continuously changing economy. Many of these
problems have been, and are being, subjected to close




101

scrutiny from such quarters as the Joint Economic Com­
mittee of Congress and the Commission on Money and
Credit— and this is most welcome, although, of course,
it is no substitute for continuous appraisal by the rest of
us as well. Naturally, I cannot hope to do more than
touch on a few of these problems. The implications of
an apparent tendency toward increasing structural (or, if
you will, “technological”) unemployment disturb me con­
siderably, for example, but I will not try here to make
even a beginning toward the searching study which that
key problem deserves. Nor will I go into the question of
consumer credit, and the need I sense for a new approach
in methods of regulation if stand-by legislation should at
some time be considered. Instead, but really only by way
of illustrating the range of questions that deserve attention,
I shall discuss some aspects of the issues that arise in
relating the money supply to economic growth, in influ­
encing the liquidity of the banks and others, in providing
greater scope for flexibility of some of our more rigid
interest rates— while noting the unusual volatility of some
of our market rates— and in relating our domestic mone­
tary policies to the international financial position of the
United States.
One matter of obvious concern for the long run is the
relationship between the money supply and the nation’s
economic growth. It is sometimes suggested that our
obligation toward fostering growth could be fulfilled by
mechanically augmenting the money supply in line with
the long-term average increment in the nation’s output—
say, by 3 or 4 per cent each year. But adherence to
such a rigid formula would mean foregoing all the advan­
tages that flexible monetary policy can have in coping
with actual or anticipated swings in economic activity.
To illustrate: during 1958 and 1959 taken together, the
money supply increased about 5 per cent, but four fifths
of this increase took place in 1958. Now surely it was
more appropriate that the money supply grew by 4 per
cent in 1958, when expansion was needed to foster recov­
ery, and by just 1 per cent in 1959 when restraint was
called for, than that each year’s increment be fixed at a
constant figure.
A policy of invariant addition to the money supply,
year after year, would also mean ignoring significant
changes in habits of spending and holding liquid assets
throughout the economy. These changes in liquidity and
velocity can sometimes be just as important as move­
ments in the money supply itself, in determining the
course of financial markets. The expansion of other sav­
ings institutions apart from the commercial banks, the
growth of the Federal funds market, and the increasing
tendency of corporate treasurers to invest temporarily idle

102

MONTHLY REVIEW, JUNE 1960

funds in money market instruments may all be cited as
striking examples of how the supply of bank reserves and
deposits can be economized in a dynamic economy, bring­
ing about significant increases in the velocity of circula­
tion of the money supply. Recently there has been con­
siderable evidence, in the form of higher velocity, that
the economy has come a long way toward “growing up”
to the larger money supply created during the recession of
1957-58— and indeed, from a longer perspective, to the
excessive money supply created during World War II.
The question of just how high the velocity of money
can go is an intriguing one theoretically, but of more
immediate practical concern is the process by which ve­
locity increases are brought about, and the effects of this
process on financial markets. For while the efficacy of
monetary policy has sometimes been challenged on the
ground that increases in velocity can nullify efforts to
achieve credit restraint, many of these critics fail to take
into account that a rise in velocity may entail a simul­
taneous shift or reduction in liquidity which can have
quite potent restraining effects. In the Federal Reserve
we try, of course, to appraise just what those effects are,
in the changing circumstances of each new situation.
Nowhere in the financial system is this impact of chang­
ing liquidity demonstrated more dramatically than in the
case of the commercial banks themselves. At a time of
strong business expansion, when reserve positions are
under pressure and the release of new reserves by the
monetary authorities is limited, the banks either meet loan
demands by disposing of relatively liquid investments, or,
reluctantly, they turn down some part of their customers’
requests for additional credit, and often they do both. In
the process, their liquidity positions come under increasing
strain. Thus, in the recent cyclical experience we have
seen the ratio of loans to deposits for all member banks
rise from about 50 per cent in the summer of 1958 to
about 58 per cent in recent months, and in the money
market banks in New York from 57 per cent to 69 per
cent.
In making this sizable shift in the distribution of their
earning assets, the banks have inevitably found them­
selves holding back some of the expansion of loans that
might otherwise have fed an inflationary burst of spending
— thereby helping materially to bring effective monetary
restraint into play during the expansion phase of the past
two years. Theirs has been a hard role, but an essential
one, and generally well performed. In one sense, it is
true, they have had little choice, because of the Federal
Reserve’s control over total reserve availability, but their
strong and understanding support has made the task of
the monetary authorities much easier.




At some point, banks and their customers quite natu­
rally feel a bit uneasy with their high loan-deposit ratios,
raising a question as to whether the banks can contribute
their share toward needed further growth of the economy.
This is especially so where hea\y loan holdings are cou­
pled with bond portfolios that *ire frozen in by declines
in capital values. The Federal Reserve is not at all un­
mindful of this concern, even though we do in fact rely
upon the “loaned-up feeling” to help limit further bank
credit expansion at times over the business cycle. I think
it is just inherent in the nature of commercial banking
that its over-all growth, so far as demand deposits are
concerned, must be irregular. That is because the actual
process of creating new money has, in itself, a stimulating
influence— an influence that should be maximized by
using more of it in periods when other forms of credit
expansion are lagging, and when the economy may be
in recession. Instead of merely creating money to serv­
ice the transactions mechanics oiE a growing economy, the
monetary system must utilize the full potential of the
money-creating process to help tiring about the conditions
of economic stability upon which lasting growth depends.
Another aspect of the liquidity question to which we
have been giving attention is the relatively sharp growth
of term loans in recent years. For the large New York
City banks, for example, this growth has reached the
point where term loans account for more than half of the
outstanding volume of all business loans. In itself, this
is not necessarily questionable, and in fact the develop­
ment of the term loan in the past quarter century has
undoubtedly filled a very real need in the field of corpo­
rate finance; but I do believe we should avoid a situation
in which banks become so heavily committed in the form
of longer term advances that they cannot adequately meet
legitimate short-term needs for which commercial banking
characteristically provides rather unique facilities. Of par­
ticular concern to me is the tendency, during a period of
restraint, for large corporations to defer public capital
offerings and to finance their expansion programs instead
through longer term bank loans. When the banks take
on large amounts of such longer term loans, they may
find that they have less opportunity to meet the short­
term needs of smaller borrowers who have fewer open
alternatives for raising funds. Another related factor that
deserves more attention in the composition of bank loan
portfolios is the eligibility of loans for rediscounting with
the Federal Reserve. Now that some banks are close to
the point at which borrowing from the Reserve Bank
might have to take the form of advances on commercial
paper, this question of eligibility has become one of
practical significance.

FEDERAL RESERVE BANK OF NEW YORK

In short, I am suggesting that there must be some
happy mean between the outmoded and purist concept
of confining bank lending to “self-liquidating”, “com­
mercial” loans, and the development of an unduly frozen
position in longer term advances. Perhaps, in locating
and maintaining that happy mean, some thought should
be given to the possibility of setting different rates of in­
terest on loans of similar quality, on the basis of differ­
ences in maturity or eligibility. For example, a higher
rate on term loans might help to channel such borrowing
into the long-term capital market. The variations in rate
would not have to be large, and at times they might nar­
row down to the vanishing point, but just the possibility
of such variations might add a useful dimension of flexi­
bility to the setting of credit terms.
Another area where I believe we ought to be thinking
through the possible advantages to be gained from greater
flexibility is in the Federal Reserve’s regulation of maxi­
mum interest rates on deposits. Certainly, we are well
aware that these regulations have sometimes placed the
commercial banker at a disadvantage in the competition
for deposits. The original purpose of such regulations
was to protect the soundness of bank assets from destruc­
tive competition, and I believe there is still a good deal
to be said for this position, particularly as it relates to
the prohibition of interest payments on demand deposits.
Still, it would be surprising if some of the underlying con­
ditions had not changed in the nearly three decades since
these regulations were established. One obviously rele­
vant development is the enormous growth of other insti­
tutions competing for savings—institutions which are regu­
lated as to rate much less stringently or not at all. And
there are the greatly expanded markets for Treasury bills
and commercial paper of various sorts, which tend to be
close substitutes for time deposits as a means of holding
funds for various domestic and foreign accounts.
Now as a general rule, I am in favor of imposing as
little regulation as possible on our economy, consistent
with such broad aims as the promotion of a healthy ex­
panding economy served by sound financial institutions—
and I am sure that most of us could agree on this general
philosophy. In line with this, I would prefer that indi­
vidual interest rates be set by free competitive forces in
the financial markets, whether these be rates on new
issues of Treasury bonds or rates on bank deposits. But
I also recognize that, given the great multiplicity of banks
and other financial institutions which would be potentially
competing with one another for funds, possibly reaching
out for riskier assets in order to provide the income to
meet higher payments to depositors or shareholders, there
is good reason for proceeding cautiously here. Perhaps




103

a useful first step in this area, which might be given wider
general consideration, would be to draw a clearer line
between savings deposits and those other time deposits
of commercial banks which are basically different in func­
tion. Such distinctions have been made by many banks,
to be sure, under various circumstances, but without any
widespread understanding among depositors of the differ­
ences in the nature of the deposits involved. It is the
closer study of such possible differences in basic char­
acteristics, and of their implications for bank portfolios
and for the interest payable on these deposits, that I am
suggesting here.
In pursuing my theme of the need for continuous re­
view of the methods and the principles of monetary policy,
I would like to touch on one area of concern that I found
mentioned rather widely during a recent visit to Europe.
There was a feeling of some bewilderment over the wide
swings, both upward and downward, that have occurred
in our market rates of interest over recent months. While
our friends abroad can, I gather, understand in terms of
supply and demand factors some easing off from the high
interest rates of late 1959, they have difficulty in grasp­
ing the significance of the gyrations we have been having,
particularly in the short-term market. Of course, I do
not claim to have a full explanation, but surely one im­
portant aspect is that “nonbanks” ordinarily play a much
larger role than the banks in the securities markets of this
country, and that in the shorter term part of the market
nonfinancial corporations have been a major, and at times
dominant, factor. Thus short-run shifts in corporate cash
positions that might in other countries be largely absorbed
within the banking system itself are, in this country,
thrown more directly upon the open market. More
broadly, there has been a great increase in this country
over recent years in the number and variety of professional
investors, each intent on anticipating before anyone else
the effects of any substantial change that may be coming
into the market—whether this be an expected reversal in
economic conditions, or in the absorption or release of
funds by the Federal Government, or even a presumed
change in Federal Reserve policy.
Now there is undoubtedly room for closer study of the
timing and techniques of fiscal operations, debt manage­
ment, and monetary policy, with a view to minimizing
some of the recent causes of extreme fluctuations without
impairing the responsiveness that is essential for full re­
flection of basic supply and demand conditions in the
money and capital markets. But pending such an evolu­
tion, it is important to understand that interest rate
changes, in the free market conditions of this country,
are the resultant of a much wider range of influences,

MONTHLY REVIEW, JUNE 1960

104

reflecting a much greater variety of participation, than
exists in the money and capital markets of any other
leading country. By the same token it is not possible,
therefore, to read the same significance into market rate
fluctuations here that might attach to similar fluctuations
in markets abroad.
Finally, just a word as to the implications for United
States monetary policy of the relatively new situation in
which we find other powerful industrial countries able
to compete with us on even terms in international trade,
with international capital flowing more freely than in
several decades in response to relative levels of interest
rates. I have no doubt whatever of our ability to cope
with this new set of facts successfully. So far as any
short flows are concerned, as the result of swings back
and forth in interest rate differentials between New York
and foreign financial centers, our reserves are certainly
more than ample to absorb them. Doubtless the monetary
authorities must give closer attention than in past years
to balance-of-payments problems, with careful analysis
of international flows of funds to detect any pointed im­
plications that they may carry for the domestic economy
— and these implications then become part of the over­
all appraisal which determines general monetary policy.

Although requirements of domestic stability must come
first, in the working-out of actual policy decisions, capable
management of our domestic affairs carries the key to
the attainment of that reasonable equilibrium in interna­
tional payments which will preclude any long-persisting
drain on our reserves. It is on such considerations that
confidence in the dollar as the world’s key currency has
been and must be based.
My remarks to you today have ranged quite widely
over a number of rather distinct topics, including long­
term growth in the money supply, the significance of
changes in liquidity ratios, the desirability of greater flexi­
bility of interest rates on bank loans and deposits, the
recent behavior of market interest rates in this country,
and the general problem of adapting American monetary
policy to a more competitive world. Running through
our consideration of all these questions, however, is the
central theme that monetary policy can never be reduced
to a static, inflexible set of rules in a dynamic market
economy. But that kind of economy, intended to provide
the maximum degree of freedom of choice for the con­
sumer and the producer, for the borrower and the lender,
is one that all of us, bankers and nonbankers alike, should
find most stimulating and rewarding.

International D evelo p m en ts

B U SIN E SS T R EN D S ABROAD

After a year of economic boom in most major indus­
trial countries abroad, the pace of the advance appears to
have slowed somewhat in early 1960, although the under­
lying expansionary forces generally remain strong. In
some countries, the slower rate of expansion in the first
quarter seems to have reflected increasing pressures on
plant capacity and the spread of labor shortages. Nearly
everywhere in Western Europe, moreover, the rapid rise
in activity at the year end, which had reawakened fears of
inflationary pressures in many quarters, called for a period
of readjustment and consolidation. In most countries,
however, it is expected that a continuation of the current
pattern of rising wages and multiplying labor shortages
will swell the demand for consumer goods and induce fur­
ther investment in coming months. While seasonal in­
fluences have contributed to an easing in the threat of
price pressures since last fall, the danger remains that the
expansionary process may generate excessive demand. As




a result, there has been no substantial departure from the
policies of fiscal and monetary restraint that had been
adopted earlier.
The less rapid pace of the expansion after the turn
of the year is indicated by the slower growth of industrial
output in the first quarter in a number of countries (see
Chart I). In Western Europe as a whole, industrial pro­
duction (seasonally adjusted) showed an estimated in­
crease of only about 2 per cent above the fourth quarter
of 1959, after a rise of over 4 per cent from the third to
the fourth quarter of last year. The advance continued
to be marked in Italy and in the Netherlands, where firstquarter output expanded by about 4 and 5 per cent, re­
spectively. In the United Kingdom, the expansion pro­
ceeded at only a slightly slower pace than last year. In
most other parts of Western Europe, notably in Germany
and the Scandinavian countries, industrial output expanded
little beyond the high levels achieved in late 1959, while
in France there was even a decline from the December
1959 peak. In Japan, the expansion continued at a very
rapid pace in the first quarter. In Canada, where the cycli-

FEDERAL RESERVE BANK OF NEW YORK

Chart I

INDUSTRIAL PRODUCTION IN SELECTED COUNTRIES
. cent

Season ally adjusted, 1953*100

p0r cent

Sources* Organization for European Economic Cooperation, G eneral
Statistics; national statistics.

cal upswing has so far been modest, the economy since
the beginning of the year has apparently been moving side­
ways, although above the level of the fourth quarter of
1959.
The most rapid production advances in manufacturing
continued to be in the basic industries and in automobile
production. Iron and steel output abroad showed little or
no sign of slackening after the settlement of the United
States steel strike, and set new all-time records in March.
In the United Kingdom and West Germany, first-quarter
production was running 30 and 35 per cent ahead of a year
earlier. Moreover, new orders for iron and steel were still
flowing in at a rapid rate; in March, they were reported at
about 15 per cent above their year-earlier level by the
steel industries of the European Coal and Steel Commu­
nity. The chemical industry also continued to expand rap­
idly in most industrial countries—particularly in Italy,
where output by February had risen nearly 20 per cent
above December. Automobile output showed substantial




105

further gains in the first quarter, topping year-earlier levels
by 30 and 50 per cent in West Germany and the United
Kingdom.
On the other hand, although production in most of the
other consumer durables industries remained high, a num­
ber of these industries experienced a decline in new orders.
In some countries, a similar situation prevailed in the
textile industry, which may be facing a softening of con­
sumer demand.
In the capital equipment industries, the expansion of
production continued to proceed at rates which varied
widely from country to country. In some countries, where
a capital equipment boom was already under way last year,
the high level of activity in these industries has continued
unabated; in Japan, machinery output in early 1960 was
still over 50 per cent ahead of a year earlier; and in West
Germany, although the output of capital equipment rose 15
per cent in the first quarter, new orders in March were still
running about 25 per cent ahead of deliveries. In the
United Kingdom, where a pickup in these industries has
been under way only for a few months, machine-tool
orders rose in February to a record level, double that of a
year earlier and pointing to a continuation of the upturn.
On the other hand, in Belgium and France, where invest­
ment was still expanding only slowly in the first quarter,
the rise in activity of the equipment industries has been
quite small.
The boom in the construction industry has if anything
gathered further steam in most Western European coun­
tries. In the early months of this year, this industry was
subject to increasingly serious strains in several of these
countries, as a rise in business investment in new plant
was superimposed on high levels of residential construc­
tion. In West Germany, where the estimated value of
business construction approved in January and February
was about 30 per cent higher than a year earlier, an 8
per cent rise in building costs within a year and an acute
shortage of construction workers are slowing the expan­
sion of the building sector. In the United Kingdom, the
Minister of Housing expects that the number of houses
to be completed this year will be the largest since 1954.
Elsewhere, the building boom reached such proportions
as to evoke restrictive government action (described below)
— in Denmark at the end of February, in the Netherlands
in March, and in Sweden in April. In Switzerland, where
the industry was already under considerable strain at the
year end, a government spokesman expressed the view that
construction plans for 1960 could not possibly be car­
ried out.
Both in the construction industry and elsewhere, the
labor markets continued to tighten in most of Western

106

MONTHLY REVIEW, JUNE 1960

Europe. The relaxation of pressures on employment which
usually develops toward the end of the year lasted only
a few weeks into 1960, so that by the end of the first
quarter labor shortages were generally as great or greater
than during the seasonal peak in industrial activity in the
second half of last year (see Chart II). In West Germany,
the labor market has not been so tight since 1945; by the
end of March, job vacancies were almost double the num­
ber of persons seeking work and, with an accentuation of
this trend in April, efforts were made to recruit labor from
Spain and Greece. Unemployment also returned to well
below vacancies in the Netherlands in March. In the
United Kingdom, the localized shortages of skilled labor
noted last year were reportedly spreading, and by May
the rapidly narrowing gap between registered unemploy­
ment and unfilled vacancies had almost disappeared.
The shortage of skilled workers, notably in the metal and




construction industries, also increased in the Scandinavian
countries, as well as in Switzerland, where the employ­
ment of foreign workers rose to record levels for this time
of the year. In Canada, by contrast, employment im­
proved but little in the first quarter of this year, and un­
employment rose above its year-ago level in February
and March.
Last year’s business expansion abroad, which in general
had initially been supported by rising domestic consump­
tion and exports and was subsequently reinforced by a
pickup of business investment in plant and equipment, ap­
parently owed some of its year-end exuberance also to an
unusual rate of inventory accumulation. A subsiding of
the flurry of stockbuilding activity in some cases con­
tributed to the slowing-down of the expansion in the early
weeks of 1960. Nevertheless, all major components of
demand remained high in the first quarter, and sustained
growth is generally expected for the remainder of this year.
Exports, on a sharp upward trend since last year in
most industrial countries, generally declined less than sea­
sonally after the year end. The exports of most Western
European countries and those of Japan continued at record
or near-record levels in the first quarter. Canadian ex­
ports, which had been increasing steadily through Febru­
ary, declined somewhat in March and April on a sea­
sonally adjusted basis.
Business fixed investment has remained strong. Plans for
investment generally continue to be revised upward, as
dwindling excess capacity, spreading labor shortages, and
keener international competition make it imperative to
expand capacity, modernize equipment, and rationalize
production. The capital investment boom has, if any­
thing, intensified in West Germany, and also in Japan
where it is expected to continue in 1960 at the same lively
pace as last year. In the United Kingdom, first-quarter
figures on industrial-building approvals and machine-tool
orders confirm earlier impressions that 1960 will see an
investment boom rivaling that of 1955, with the auto­
mobile industry, steel, and to a lesser extent chemicals
playing a major role in the expansion. In France, where
industrial capacity is still ample and private investment
plans therefore remain relatively cautious, an official sur­
vey disclosed that in February businessmen were planning
to expand their investments in 1960 by about 8 per cent
over 1959.
Consumer demand, supported by the 1959 rise in earn­
ings and employment, generally remained high in the first
quarter of 1960. Although consumption briefly showed
signs of softening in a few countries after the year-end
peak in consumer spending had passed, substantial wage
increases are generally expected to assure a steady uptrend

FEDERAL RESERVE BANK OF NEW YORK

107

this year. In France, department store sales and automo­ increase averaging over 3 per cent, which was decreed by
bile demand, which had been reported weak in January the government to offset a general increase in rents as of
and February, apparently picked up in March. In West that date. In France, where the government has attempted
Germany, retail sales in the first quarter were about 4 per to restrain labor’s demands in order to preserve the bene­
cent above a year earlier. In the United Kingdom, where fits of last year’s stabilization program, wage claims con­
consumer spending showed no signs of slackening, retail tinue to be pressed vigorously and minor strikes are re­
sales in the first quarter were 5 per cent higher than a year portedly multiplying. A seasonal decline in the cost of
ago. In Canada, retail sales in the first quarter were run­ living in March averted a 2.5 per cent increase in the
index-tied minimum wage; nevertheless, during the first
ning at about the same level as last year.
In most industrial countries, prices in general changed quarter, average hourly rates in private industry and trade
only slightly in the early months of 1960. Both consumer are estimated to have increased by about 1.5 per cent, with
and wholesale prices, which had been on the uptrend workers in the nationalized industries and the civil service
nearly everywhere in the second half of last year, gen­ being awarded raises that will aggregate 8 and 5 per cent,
erally leveled off in January, largely owing to a seasonal respectively, by the end of the year.
decline in food and fuel prices. However, prices of manu­
M O N E T A R Y T R E N D S A N D PO L IC IE S
factured products and services continued to edge up in
Against this background of further expansion of eco­
most countries. In West Germany, wholesale prices of
manufactured consumer goods rose by 1 per cent during nomic activity and emerging labor shortages, the mone­
the first quarter. In the United Kingdom, the consumer tary authorities in most foreign industrial countries con­
price index remained stable in the first quarter but rose tinued to pursue the policies of monetary restraint that
by Vi per cent in April, partly as a result of the excise- had been adopted last fall and strengthened during the
tax increases in the new budget. In France, where last winter. During the past three months, however, new mone­
autumn’s upward drift in prices was most pronounced, tary measures were less numerous than toward the end of
and where the consumer price index climbed another IV2 1959 and in early 1960. In some major countries, more­
per cent in January, there was little further change through over, the banking system managed to remain fairly liquid
April. However, the French wholesale price index rose — thanks largely to the continued inflow of foreign ex­
by nearly 1 per cent in April as a result of higher farm change— and interest rates either rose little or actually
prices and a recent rise in steel prices.
declined. In a number of instances, the efforts of the
Although the stability of prices in the first quarter has monetary authorities to curb credit expansion received
considerably eased fears of renewed inflationary pressures, the support of other official anti-inflationary measures.
during the remainder of this year prices in a number of
In the United Kingdom, the Chancellor of the Ex­
countries will be subjected to considerable pressure from chequer in his April 4 budget message had foreshadowed
the continued upward movement of wages. In West fresh credit control measures. These were announced on
Germany, wage increases granted so far this year have April 28, when the Bank of England issued a call for
been appreciably in excess of the 3 to 4 per cent average “special deposits”, equal to 1 per cent of the London
productivity increase recently mentioned as probable for clearing banks’ (and V per cent of the Scottish banks’)
6
1960 by the German Federal Bank. Most recently, gov­ gross deposits, to be made with the Bank of England by
ernment employees have won increases ranging from 7 to June 15. This call is the first under an arrangement an­
12 per cent, effective June 1, and negotiations scheduled nounced in July 1958, according to which the deposits
this month are expected to lead to wage boosts in indus­ are to carry interest based on the going rate for Treasury
tries employing about one fourth of the country’s labor bills, but are not to be eligible for inclusion in the banks’
force. In the United Kingdom, where contracts so far minimum holdings of cash and other liquid assets. The
concluded have provided for sizable increases, weekly Bank of England’s move followed in the wake of a steady
wage rates rose by about 1 per cent during the first increase in clearing bank advances (see Chart III); during
quarter. British railway workers, who received a 5 per the five-week statement period ended April 20 alone, such
cent interim wage increase in February, are expected to advances rose by £ 8 8 million, the largest such rise for
secure a total gain of 8 per cent when a final settlement any statement period since mid-1959. (In the subsequent
is reached. Dutch unions, which have now concluded four-week period, the rise in advances slowed down to
most of their major contracts for this year, generally ob­ £ 3 9 million.) Furthermore, following a rapid increase in
tained a 5 per cent wage increase as well as other benefits; hire purchase debt in recent months to a new peak of
to this has been added, beginning April 1, a general wage £ 9 2 0 million at the end of March, the authorities re-




MONTHLY REVIEW, JUNE 1960

103

Chart III

BRITISH BANKING AND CONSUMER CREDIT TRENDS
M illions of £
32QU

M illions of £

LONDON CLE/W .N G BANKS

X

3000

— 3000

2800

2800
Advances
2600 -

2600

2400 -

2400

-

2200

2000

2000

Government
bond holdings

1800

1800
"

1600
1400
1000

\

-

1600

\
i

i

i

i

i

1

1

t

1

I

1 t

1

!

1

!

I

1400

1

A

1000
HIRE PURCHAJ>E DEBT OUTSTANDING
800

800 600 400

2200

-

i

i

1 i
1958

i

i

i

1

i

i

!

1959

i

i

1

i

i

1

1

1.

600
400

1960

Note: Banking data are for third W ednesday of months other than June and
December, when they are for end of month. Hire purchase data cover only
credit outstanding at household appliance stores and sales finance_ com pa­
nies; d ata are for end of month.
Source:

Central Statistical Office, Monthly Digest of Statistics.

imposed controls over consumer instalment credit; the new
regulations call for a 20 per cent minimum downpayment
and a maximum two-year repayment period on instalment
purchases of a wide range of consumer durables, including
cars, radios, television sets, and household appliances.1
Elsewhere in Western Europe, the German Federal
Bank as of June 1 raised commercial bank reserve require­
ments by 15 per cent, the fourth increase since last
November. The new ratios range from 10.8 to 20.1 per
cent against sight deposits, 9.3 to 13.9 against time de­
posits, and 7.5 to 9.0 against savings deposits— the appli­
cable rate depending on the individual bank’s reserve
classification. The National Bank of Austria, in its first
move to tighten credit during the current economic expan­
sion, on March 17 raised its discount rate to 5 per cent
from 4Vi. Effective April 1, moreover, the bank increased
the larger banks’ reserve requirements against sight and
savings deposits to 9 and 7 per cent from a uniform 5
1 For a more detailed discussion of recent British financial policies, see
'International Developments”, Monthly Review, May I960, pp. 86-8.




per cent— the first such change since variable reserve re­
quirements were established in the fall of 1955. With these
moves by the Austrian National Bank virtually all West­
ern European central banks have now acted— either by
concrete measures or by warnings— to curb credit expan­
sion. In some countries, moreover, the introduction of
new credit controls is being considered. In the Nether­
lands, negotiations have been reported under way between
the central bank and representatives of the commercial
banks and agricultural credit cooperatives concerning the
possible introduction of special compulsory noninterestbearing deposits at the central bank during periods of ex­
cess liquidity of the banking system. According to the
Netherlands Bank’s annual report for 1959, such deposits
— which would be in addition to the prevailing minimum
reserve requirements—would be linked to credit ceilings
that the central bank would establish; the special deposits
would be required whenever a bank’s lending exceeded its
ceiling. The Bank of France in its 1959 annual report
similarly indicated that it was currently studying new
methods of controlling commercial bank liquidity, to be
used if presently available weapons proved insufficient.
But beyond such actual or proposed measures, central
banks in the industrial countries abroad also continued to
issue strongly worded warnings against the perils of eco­
nomic overexpansion and often called for closer coopera­
tion by the various economic sectors with the financial
authorities, as well as between the monetary and fiscal
authorities. Thus, the German, Federal Bank in its annual
report for 1959 warned in late April that it would make
even stronger use of its credit control powers if demand
continued to outrun growth in output. The bank also
appealed to the public authorities to re-examine their
spending plans and to reduce their borrowing to a mini­
mum. In Sweden, the governor of the central bank at a
meeting with the commercial banks in April, reiterated
his warning against further credit expansion and called on
the banks to show greater restraint in their lending opera­
tions. The National Bank of Denmark similarly appealed
to the banks to exercise restraint in granting consumer
credit, while in Switzerland banks and other financial insti­
tutions heeded the National Bank’s earlier request by put­
ting a halt to the setting-up oi: new investment trusts.
In several of the industrial countries, these and earlier
moves in the money and credit fields were supplemented
in the past three months by other official anti-inflationary
measures. Thus, in Australia—where earlier this year
almost all import restrictions had been abolished and com­
mercial bank reserve requirements had been increased—
the official Arbitration Commission in April rejected at
the behest of the government the unions’ demands for a

109

FEDERAL RESERVE BANK OF NEW YORK

further substantial raise in the basic wage and for the
restoration of automatic quarterly cost-of-living adjust­
ments. The commission’s decision, which contrasted with
a number of substantial wage awards during the past few
years, was followed by an official suggestion that manu­
facturers, now virtually assured of wage stability in 1960,
should concentrate on translating productivity gains into
lower prices.
Steps to slow the pace of construction activity were
taken in three European countries. The Danish govern­
ment ordered a one-month freeze on the issuance of build­
ing permits in Copenhagen and several other large
cities, and the Swedish authorities suspended governmentsubsidized residential projects until the fall; in the Nether­
lands, following a 5 per cent wage increase in the construc­
tion industry, the authorities froze the prices charged by
builders. The Dutch and Swedish fiscal authorities are
also attempting to moderate business investment dur­
ing the current phase of high-level economic activity. In
the Netherlands, special investment allowances and accel­
erated depreciation privileges have been reduced, while in
Sweden tax concessions, applicable in 1961, have been
proposed for business firms that before November 1 de­
posit with the central bank additional investment reserves,
to remain blocked until the end of 1961.
In Canada, in contrast to Western Europe, monetary
and credit conditions generally eased further during most
of the period under review. While chartered bank loans
turned up slightly, mainly for seasonal reasons, in midMay they still were 5.3 per cent below last September’s
peak. Throughout most of the period, the Bank of Canada
remained a heavy purchaser of Treasury bills, thus helping
to cushion money market pressures. The average Treasury
bill tender rate dropped by a record 160 basis points
to 3.01 per cent during the five weeks ended March 31
and declined further during April and May (see Chart IV).
In view of the prospects for further expansion in economic
activity this year, the new budget for the fiscal year that
began on April 1 avoids providing an additional stimulus
to the Canadian economy. With expenditures estimated
at $5,880 million—only $173 million above those of
1959-60— and revenues expected to rise by $591 million
to $5,892 million, the fiscal year is expected to close with
a small surplus, as against a $406 million deficit in
1959-60. In mid-March, the government undertook a
refunding operation that for the first time featured com­
petitive bidding for part of the new bond issue; a similar
refunding, with the whole amount of the new securities
sold at competitive tender, was made last month. In both
instances, tenders were accepted for the full amounts
offered at average rates close to current market yields.




Chart IV

INTEREST RATES IN SELECTED COUNTRIES
*

THREE-MONTH TREASURY BILLS *

Per cent

7

C anad a
i 1 i i 1 l i I i i

; —

—

Ii

i 1

W est Germ any t

^

Netherlands

*-*1*,
S w ifz e rla r
i*—
..1
1 .1 ! . 1 -I__1. -1.... 1 . L .J .. 1 Li .
— ...

**

—
i

f

l....j

_

------------,1 1 l .... 1.,

.J

1 1

B m
elgiu
1959

1958
Note:

... 1 i

1960

M ay 1960 d a ta p a rtia lly estim ated.

* Treasury billsr C a n a d a and United Kingdom, a vera g e tender rates for
three-month b ills; W est G erm an y, central bank selling rates for 6 0- to
9 0-d a y b ills; Netherlands^ market rotes for three-month bills,
t Rates on mortgage bonds.
Sources: International M onetary Fund, International Financial Statistics;
national statistics.

The starting of operations by the Bank of the Republic
of Guinea on March 1 marked the debut of the world’s
youngest central bank. The new institution, which has
taken over in Guinea the central banking functions of the
French-organized Central Bank of the West African
States, thus joins other central banks that have recently
been created (in some cases succeeding existing institu­
tions) in a number of newly independent countries. In
addition to Guinea, new central banks have begun opera­
tions since the beginning of 1959 in Malaya, Morocco,
Nigeria, and the Sudan.
EXCHANGE RATES

In the New York foreign exchange market, both the
pound sterling and the Canadian dollar were under pres­
sure during May. Although there was occasional good

no

MONTHLY REVIEW, JUNE 1960

commercial demand for spot sterling, it was more than
offset by persistent sterling offerings from the Continent.
After the cancellation of the summit conference in Paris
at the midmonth, these offerings increased substantially,
causing a marked decline in the spot quotation. Follow­
ing a brief partial recovery in the rate, Continental offer­
ings were renewed and, with some commercial selling of
sterling and commercial demand for dollars in London,
depressed the quotation by May 31 to $2.8019, a decline
of about 75 points for the month.
In the forward market the discounts on three and six
months’ sterling generally narrowed to 39 and 76 points,
respectively, by mid-May. Subsequently, they tended to
widen and at the month end were 46 and 86 points.
Although there was some commercial activity, the dis­
counts continued to reflect primarily adjustments to the
short-term interest rate differential between London and
New York.
The Canadian dollar, quoted at $1.03%6 at the begin­
ning of May, steadily weakened, reaching its lowest level
since January 1958. Market reaction to the withdrawal
from registration of a Canadian municipal bond issue

scheduled for the New York market (subsequently mar­
keted in New York toward the month end) brought about
an initial easing in the Canadian dollar quotation. There­
after, short-term interest yields declined in Canada,
and Canadian dollars were ofiEered as short-term funds
began to move to the Continent . This, together with sub­
stantial offerings of Canadian dollars by United States
commercial interests and demand for United States dollars
by Canadian commercial interests, forced the rate for the
Canadian dollar down to a low of $1.01 % 4 by May 25.
After recovering to $1.012%4 on covering of short posi­
tions, the Canadian dollar again moved lower to $1.01%2
at the month end.
The quotation for the Swiss franc, which had been de­
pressed for some months, began to appreciate at the
beginning of May, as investment capital was repatriated,
and by May 24 stood at $0.2318%, the highest quotation
this year.
The Russian ruble, it was announced early in May,
would be revalued next year on the basis of one new ruble
for ten old. Currently, tourists are receiving ten rubles
for one United States dollar.

T h e B u sin e ss Situ atio n
Economic activity in May appears to have steadied at
the high levels achieved in April. Automobile sales, which
had risen in April, contributing much to that month’s better
tone, maintained the same pace during the first twenty days
of May as during the comparable period of April. Early
information on department store sales suggests, however,
that in a number of other lines there may have been some
declines from the very high April sales figures. Total fac­
tory output in May does not seem to have been pushed up
by the substantial April expansion in consumer demand.
Still, not all consumer purchases were met by further
drawing-down of inventories, and production in some in­
dustries— including automobiles— registered further gains.
The prospect, moreover, of later increases in production
elsewhere was indicated by a recent survey of consumer
buying plans, which showed buying intentions for many
items to be stronger than a year earlier.
The information that has now come in for April con­
firms that most over-all measures of economic activity
improved substantially during that month, but in some
cases the advance seemed to be in large measure only
an offset to the disappointing performance of the pre­
ceding month or two.




In mid-April, total employment (as computed by the
Bureau of the Census, and including farm workers, the
self-employed, and domestic workers) moved up sharply
to a new all-time high, seasonally adjusted (see chart).
The increase resulted primarily from a more-than-seasonal
rise in agricultural and construction employment—prob­
ably making up for the slow hiring of workers for these
outdoor industries during the unusually wintry March. The
figure was also pushed up by the hiring of more than
150,000 temporary workers to take the decennial Census.
Manufacturing employment (as estimated by the Bureau
of Labor Statistics) was unchanged from mid-March, on
a seasonally adjusted basis (see chart). This stability con­
cealed important divergent movements, however; employ­
ment in durable goods industries declined by 66,000 per­
sons, while in nondurables it increased by an equal
amount.
Many of the people hired in April were seasonal or
temporary workers who had nol: been listed as unemployed
at the time of the previous Census Bureau survey in the
middle of March. Therefore, the decline in unemployment
was not so large as the rise in employment, and the number
of unemployed remained fractionally higher than a year

FEDERAL RESERVE BANK OF NEW YORK

INDICATORS OF ECONOMIC ACTIVITY
S e a so n ally adjusted
Per cent

Per cent

M illions of persons

Millions of persons

1958

1959

1960

$ Reflects payment of retroactive salary increases to Federal em ployees.
*)* Bureau of the Census, United States Department of Commerce.
Bureau of Labor Statistics, United States Department of Labor.
Sources: Board of Governors of the Federal Reserve System and
United States Departments of Coer.rnerce arvd labor.

earlier. As a proportion of the civilian labor force, how­
ever, unemployment fell from 5.4 per cent to 5.0 per cent,
seasonally adjusted. This brought it close to the 2 Vi-year
low of 4.8 per cent reached in February this year.
With total employment up sharply in April, personal
income showed a larger gain, seasonally adjusted, than in
any other month in 1960 (see chart). Indeed, the $3.4
billion rise was almost double the increase over the entire
first quarter. All major components either rose or at least
remained unchanged. The largest improvement was in
wages and salaries, although manufacturing wages and
salaries fell for the third consecutive month. The April
decline in manufacturing income apparently reflected
mainly a reduction in hours worked and in overtime, pre­




111

mium pay, but it may have been partially a result, too, of
the contraction in factory employment in durable indus­
tries, where wages are relatively high.
Retail sales in April increased, seasonally adjusted, by
3V2 per cent (based on the advance report). This rise was
far better than the increases during February and March
(see chart), and a similarly sharp advance had occurred
in just three other months since the business upturn in
1958. Even more significant, the increase was more than
twice as large as the April advance in personal income.
This resulted in a substantially higher spending-income
ratio, and thus helped make up for the retarding effect
on economic activity of a currently slowed rate of in­
ventory accumulation.
In May, total retail sales may have remained at about
the high April level. Automobile sales during the first
twenty days of the month were about equal to the first
twenty days of April, maintaining the relatively high level
reached in the latter period. Department store sales dur­
ing the first three weeks of May were slightly below the
levels achieved a year ago, suggesting that for the month
as a whole seasonally adjusted department store sales may
have fallen below the very high April figure.
The climb in retail sales during April pushed up orders
for nondurables received by manufacturers, but orders for
durables declined by an equal amount, possibly largely as
a result of the continued drop in steel orders. The MarchApril level of total new orders was 1 per cent (seasonally
adjusted) below the February total.
Industrial production also leveled off in April, at 109
(1957 = 100), seasonally adjusted, following a small twomonth decline (see chart). Substantial increases were reg­
istered in mining, in petroleum products, and in such
consumer durables as autos and furniture. As a result,
the index moved sidewise despite a further decline in the
output of iron and steel, fabricated metal products, elec­
trical machinery, and transportation equipment.
Automobile production, which had fallen off about 15
per cent between the January peak and April, rose in May,
in response to strong sales during the preceding weeks.
Although automobile inventories were still at the high
level of about one million units at the end of April—
partly reflecting larger inventory requirements associated
with the greater variety of models— the faster sales pace
apparently convinced producers that inventories were not
too large for this time of year. In contrast, steel produc­
tion continued its sharp decline into the fourth successive
month, with mills utilizing less than 70 per cent of rated
capacity, compared with the above 95 per cent levels pre­
vailing at the turn of the year when steel inventories were
being rebuilt following the steel strike. Officials of the top

112

MONTHLY REVIEW, JUNE 1960

steel companies, however, are of the opinion that steel
consumers are using up more steel than is being currently
produced. They consequently foresee an upturn in produc­
tion after the usual summer lull, during which steel users’
inventories are expected to fall to minimum levels com­
patible with efficient production.
Prices at the wholesale level seem to have moved
slightly downward in May after remaining unchanged, on
the whole, in April. The monthly index of all prices
stood in April at 120.0 (1947-49 = 100), exactly the same
as a year ago. The industrial commodity prices component
had nudged up %o °f a point from March, to a level
%0 of 1 per cent above April 1959. Of the two other
major components, farm products moved up and proc­
essed foods down; both, however, were below year-earlier
levels. The weekly figures thus far available for May show
movements in the indexes of farm products and of proc­
essed foods that approximately offset each other, while the
industrial commodities component remained steady at a
level a bit below the April monthly figure.
Although the wholesale price index was steady in April,
the consumer price index set another record high, advanc­
ing to 126.2 per cent of the 1947-49 average, %0 of 1 per
cent above March and almost 2 per cent more than the
previous April. The major reason for the March-to-April
increase was a sharp rise in food prices, apparently attrib­
utable in part to seasonal advances and unusually bad
spring weather. Partially counteracting the hike in food
prices was a decline in the transportation component, the
fifth in as many months; the April drop resulted entirely
from a further decline in used-car prices. All other major
components of the consumer price index advanced slightly.
The prospect that economic activity may be spurred
by a further pickup in consumer demand is suggested by
the continuing survey of consumer buying plans conducted
by the National Industrial Conference Board with the

financial sponsorship of Newsweek magazine. A recently
published analysis of February and March interviews indi­
cated that more consumers plan to buy new automobiles,
new and old houses, and certain major appliances this
spring and summer than had been the case a year ago.
For a few items, namely used cars, television sets, and
clothes dryers, buying plans were below a year ago.
These plans are of considerable interest in the light
of the developments in retail sales and home building dur­
ing the last several months, Sales by “furniture and
appliance” stores have constituted one of the weakest
components in retail sales; in March (when bad weather
may have contributed to the low level), they were 8 per
cent, seasonally adjusted, below their August 1959 high.
The softness of the furniture and appliance markets would
seem to have been associated in part with the decline
since last spring in home completions, and an improve­
ment may therefore depend upon an upturn in residential
construction. It is probable, moreover, that retail sales of
“lumber, building, and hardware” outlets— the one other
component that in recent months has been considerably
below last year’s peak—would also benefit from the rise
in the purchase of homes that is indicated by the survey.
A further positive influence on economic activity is also
to be expected from business spending for new plant and
equipment. The actual volume of outlays does not yet seem
to have reached the levels indicated by surveys of business
capital plans taken a few months ago, and new orders
for machinery have shown little tendency to rise. There
is no evidence, however, that business spending plans have
been scaled down in the aggregate. Contract awards for
private nonresidential construction appear to have risen in
April for the second consecutive month by more than is
usual at this time of year. In addition, preliminary May
figures show construction outlays in this sector unchanged
from April, following a two-month decline.

M o n ey M a rk e t i n M a y
Aggregate reserve positions of all member banks eased
perceptibly in May, although the extent of the easing was
not wholly reflected in the money market. Banks in the
money market centers in particular were under diminished
immediate reserve pressures, and Federal funds trading
frequently took place below 4 per cent. Rates on loans to
Government securities dealers at the New York City banks
were generally in a 4Va -4Vi per cent range until the tenth




of the month and then in a AV2 -4% per cent range until
the final week, when they were a uniform 4V2 per cent.
In the Government securities market, yields continued
the zigzag pattern of the previous month— moving down
steadily in the early part of May, turning up again to offset
these losses, and then declining once more toward the
close of the period. The early decline in rates reflected
in part the Treasury’s completion of its $6.4 billion re-

FEDERAL RESERVE BANK OF NEW YORK

funding but, in addition, the reduction of bank rates on
loans to brokers and dealers secured by customers’ stock
exchange collateral was interpreted by some observers as
a harbinger of easier credit conditions. Subsequently, how­
ever, encouraging news on the business situation, the col­
lapse of the Paris summit talks, and news of the Treasury’s
plans to raise more funds through increased offerings at
the weekly bill auctions tended to push yields up. Toward
the end of the month rates again eased off, and rates
generally showed a net decline over the month.
M EM BER BANK RESERVES

Federal Reserve open market purchases during May
more than offset losses of reserves experienced by member
banks as the result of regular market factors, so that over­
all reserve availability increased. The chief factors with­
drawing reserves were an increase in currency in circula­
tion and Treasury interest payments to the Federal Re­
serve Banks— the latter reflected in an increase in the item
"
‘other deposits, etc.” shown in the table—which together
overbalanced the influence of a decline in required re­
serves. Contributing to the greater availability of reserves

Changes in F acto rs T ending to Increase or D ecrease M em ber
B ank R eserves, M ay 1960
In millions of dollars; (-}-) denotes increase,
(—) decrease in excess reserves
Daily averages—week ended
Net
changes

Factor
May
4

May

May
18

11

May
25

Operating transactions
Treasury operations*.........
Federal Reserve float.......
Currency in circulation__
Gold and foreign account.,
Other deposits, e tc.............

-

13

-

201

-

-

34

-

-

11

-

Total.

+

22

281

-

62

97
+ 209
51
-

1

93

11

-f
+
+
-

-

120

20

+

+

60
28
90
13
77

12

+ 2
-

103
36
192

-

317

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..................
T otal..............................................

+ 113
+ 26

+ 118
11
-

+ 59
+ 149

+ 91
- 107

+ 274
50

-

153

-

+ 102

122

+ 1 + 1
+ 1
-f- 166

+ 206

-

100

-

170

-

115
34

+ 113
49

-

120

48

+

93
24

-

+

149
7

+ 64
+ 109

+

72
37

+

51

- 226
+ 190

156

- f 173

-

35

-

18

-

36

549
498
51

-

555
463
92

402
445
43

-

515*
4331
821

Member bank reserves
With Federal Reserve B anks..
Cash allowed as reserves f .......

Total reservesf....................................
Effect »f change in required reservesf..
Excess reservesf.................................

-

Daily average level of member bank:
Borrowings from Reserve Banks...................
552
Excess reserves f ...............................................
325
Free reservesf........................................ ..........I — 227

-

Note: Because of rounding, figures do not necessarily add to totals.
* Includes ohanges in Treasury currency and cash,
f These figures are estimated,
t Average for four weeks ended May 25,1960.




-

215
11

113

at the larger city banks were heavier than expected Treas­
ury tax receipts which resulted at times in large temporary
redeposits to the Treasury’s accounts with “Class C” de­
positary banks. These deposits were subsequently drawn
down by the Treasury.
System Account operations over the first two statement
weeks ended in May supplied about $350 million in re­
serves to prevent undue monetary tightness during the
Treasury’s refunding operations. During the remainder of
the month reserves were absorbed on balance, as the re­
purchase agreements made earlier by the Federal Reserve
System ran off. Federal Reserve holdings of Government
securities were increased by $228 million from April 27
to May 25, as outright holdings of the System Account
rose by $260 million and repurchase agreements decreased
by $32 million. Net borrowed reserves of all member
banks declined from the $178 million April average to
$82 million for the four statement weeks ended in May.
G O V E R N M E N T SE C U R IT IE S M A R K ET

The Treasury’s successful refunding of $6.4 billion of
notes and certificates maturing May 15 was the center
of market attention in the early days of the month. Sub­
scription books were open from May 2 to May 4, with
delivery on May 16. Market reaction to the announce­
ment was favorable, and both the maturing issues and the
new securities (4% per cent one-year certificates and 45
/a
per cent five-year notes, both offered at par) were bid at
modest premiums, of up to Vs of a point, throughout the
subscription period. The new notes and certificates
reached bids of 1 0 0 and 100%2>respectively, in whenissued trading by the close of the subscription period.
Attrition on the refunding was only $627 million, or about
10 per cent of the publicly held maturing issues, as $4,615
million of the maturing notes and $1,171 million of the
maturing certificates were exchanged for $2,113 million
of the new notes and $3,673 million of the new certificates.
With the Treasury out of the market and not expected
to return until July, a confident atmosphere developed in
the intermediate- and long-term sectors of the market early
in May. The market was further buoyed by the May 6
reduction to 5 per cent—from the 5 Vi per cent level
in effect since early January—of bank rates on loans
to brokers and dealers secured by customers’ stock ex­
change collateral. As a result of these developments,
prices of most intermediate- and long-term securities made
substantial gains, with some issues rising as much as l s
/s
points by May 9 and the new notes and certificates ad­
vancing to bids of 100Vi and 100%2. respectively.
Subsequently, however, the international crisis, the ap­
pearance of several indicators suggesting a stronger busi-

114

MONTHLY REVIEW, JUNE 1960

ness picture, and a stock market rally— together with the
Treasury announcement of plans to raise new funds
through expanded offerings of 182-day bills at weekly
auctions— shifted market sentiment away from earlier ex­
pectations of credit ease. As investor demand dried up and
dealers sought to lighten their inventories, irregular price
declines generally erased most of the month’s earlier gains.
Later in the month prices recovered considerably, as
higher yields attracted modest investor demand. In addi­
tion, as the summit collapse receded into the background,
market observers apparently became less certain that the
episode would greatly stimulate defense spending. Prices
of intermediate notes and bonds were generally Vs to %6
higher for the month as a whole, and long-term bonds
were mostly %6 to I 1H e higher. At the end of the
month, the average yield on long-term Treasury bonds
was 4.11 per cent, compared with 4.20 per cent on April
29, while the average yield on 3- to 5-year issues had
declined to 4.36 per cent from 4.40 per cent.
Market rates for Treasury bills followed the same gen­
eral pattern as the longer issues over most of the month.
Rates moved lower during the first week of May, as mod­
erate investor demand was supplemented by swaps out
of “rights” in the refunding. The average issuing rates
on 91- and 182-day Treasury bills, which had dropped
by 31 and 36 basis points to 3.003 and 3.349 per cent,
respectively, in the May 2 auction, turned up by 27 and
17 basis points the following week, reflecting a lack of
broad demand. This upward movement of rates, for
outstanding bills and in the bill auction, was acceler­
ated sharply on May 16, apparently in reaction to the
unsettling news from the summit conference and to the
additional $100 million offering of 182-day bills. The
rates on the 91-day and 182-day bills in the auction on
that day jumped 52 and 48 basis points, respectively, to
3.793 and 4.000 per cent—the highest levels since early
March. Subsequently, a general feeling that the market
had overreacted brought a downward adjustment in
rates, as some demand appeared from nonbank in­
vestors, with bills maturing through July especially in
demand. Although an atmosphere of caution developed
during the regular bill auction on May 23, the average
issuing rates on both the 91- and 183-day bills were
lower than a week earlier, at 3.497 and 3.867 per cent,
respectively. Scarcities of most issues and continued non­
bank demand, as well as a Treasury announcement that
an additional $100 million of bills in the final May auction
would probably wind up its new borrowing operations for
fiscal year 1960, pushed rates down further over the re­
mainder of the month. In the May 27 auction, held that




day because of the Memorial Day holiday on May 30,
the average issuing rates were established at 3.184 and
3.495 per cent on the 91- and 182-day bills, respectively.
On balance over the month, rates on bills due through
mid-July were down 29 to 52 basis points, while longer
bills generally declined by 5 to 22 basis points.
O TH ER SE C U R IT IE S M A R K E T S

Outstanding corporate and tax-exempt bonds experi­
enced much the same price pattern as long-term Govern­
ment securities, tempered somewhat, however, by the over­
hang of heavy dealer inventories — especially of taxexempts. Confidence bom of the May 6 reduction in
brokers’ loan rates brought a short period of brisk investor
demand which raised prices ;md reduced dealers’ and un­
derwriters’ inventories somewhat. But demand slackened
and prices turned downward toward the middle of the
month, reportedly reflecting in part some investor switch­
ing from the bond market into equities. Toward the end of
the month, price movements were mixed. Over the month,
Moody’s average yields on Aaa corporate bonds moved
up from 4.46 to 4.48 per cent, and on Aaa tax-exempts
rose from 3.34 to 3.38 per cent.
The volume of new tax-exempt offerings totaled $494
million, a decrease from the April total of $633 million
but about the same as the $490 million sold in May 1959.
Receptions accorded the new tax-exempt issues were selec­
tive. A $133.4 million serial offering comprising thirty
issues of Aaa-rated local housing authority bonds, due
1961-2000, was reoffered to yield from 2.40 per cent to
3.90 per cent, and was given an excellent reception with
some of the longer maturities moving to premium bids.
Flotations of new corporate bonds amounted to $182 mil­
lion, less than either the $340 million sold in April
or the $345 million marketed in May 1959. New cor­
porate issues generally moved slowly. New United States
Government agency flotations aggregated $987 million, of
which approximately two tiiirds represented refundings,
and most of the offerings met with good receptions.
Rates on bankers’ acceptances, which had not declined
in line with the reduction in Treasury bill rates since midApril, were lowered in Vs per cent steps on May 4, on
May 9, and again on May 31, bringing the rate on 90-day
unendorsed acceptances to 3% per cent bid. Except for
the May 6 reduction from SVi per cent to 5 per cent in
the rate on New York City banks’ loans to brokers and
dealers secured by customers’ stock exchange collateral,
already noted, other short-term money market rates were
unchanged during the month.