Full text of Economic Policy Review (Federal Reserve Bank of New York) : March 1957, Vol. 39, No. 3

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MONTHLY REVIEW
O f Credit and Business Conditions

FEDERAL
V

olum e

RESERVE

39

BANK

MARCH

OF

NEW

YORK

1957

No. 3

MONEY MARKET IN FEBRUARY
T h e m o n e y m a rk et w as u n d er relatively steady pressu re

d esp ite the 1 0 0 m illio n d o lla r in crea se in the a m ou n t o f

in F eb ru a ry , ev en in the F e b ru a ry 2 0 statem ent w e e k w h en

n e w bills o ffe re d in the first tw o w e e k ly a u ction s o f the

reserve p o s itio n s eased tem p ora rily .

O n the oth er h an d,

m on th . R a tes su b seq u en tly d rifted b a c k u p , h o w e v e r, re­

the securities m arkets, d espite ex ten siv e T rea su ry fin an cin g

flectin g in p a rt th e fu rth er e x p a n sio n o f w e e k ly offerin g s to

op e ra tio n s

and the h ea v y flo w

m u n icip a l offerin g s,

co n tin u e d

of
to

n ew
m ove

and

1.8 b illio n d o lla rs, an in crea se o f 2 0 0 m illio n d olla rs o v e r

h igh er

th e m a tu rin g issues. R a te s o n the lon g est ou tstan d in g reg u ­

c o r p o r a te
to w a rd

p rices an d lo w e r rates th rou g h the first h a lf o f the m on th

lar b ills fe ll fr o m 3 .1 2 p e r cen t o n Janu ary 31 to a lo w

b e fo r e reactin g m o d e ra te ly in the s e c o n d h alf.

p o in t o f 2 .9 8 p e r cen t o n F e b ru a ry 13, b u t b y the en d o f

M em ber

ba n k reserve p o s itio n s, w h ich h a d b e e n eased in January

the m o n th h a d risen again to 3 .2 8 p e r cen t.

b y u nu su ally stron g sea son a l in flu en ces, w ere tigh ten ed

A t the en d o f Janu ary, o n e b a n k ers’ a c c e p ta n c e d ea ler

o v e r the m on th b y a co n tin u in g r e d u ctio n in the quantity

h ad r e d u c e d rates b y Vs p e r cen t, fo llo w in g a gen erally

o f G o v e rn m e n t secu rities h e ld b y the F e d e ra l R e s e rv e

sharp ru n d o w n in d ea ler p o r tfo lio s fr o m the u n u su ally h igh

System and, to a lesser d eg ree, b y th e sh ifting im p a ct o f

p ea k r e a ch e d at the y ea r en d .

regular m a rk et in flu en ces.

d ealers rem a in ed u n ch a n g ed , h o w e v e r, an d o n F e b ru a ry 6,

System

sales

of

sh ort-term

R a te s q u o te d b y oth er

T reasu ry issues, in clu d in g n otes an d certificates, a m ou n ted

w ith a su p p ly o f n e w a cce p ta n ce s co n tin u in g to a p p ea r at

to 5 7 4 m illio n d olla rs o v e r th e fo u r w eek s en d ed F e b r u ­

th ose rates, the o n e dea ler w h o h a d cu t his rate ca m e b a c k

ary 2 7 .

in lin e w ith the rest o f the m a rket. A t the en d o f the m on th

In the first h a lf o f the m on th , these sales w ere

partly offset b y rep u rch a se agreem en ts d esign ed to aid

the b id o n 9 0 -d a y a c ce p ta n ce s thus s to o d at 3 V i p e r cen t

G o v e rn m e n t securities dealers in their u n derw ritin g fu n c ­

fo r all dealers. O n F e b ru a ry 19, rates o n tim e loa n s m a de

tion du ring the p e r io d o f T rea su ry fin an cin g . T h e effectiv e

to secu rity dealers against sto ck e x ch a n g e colla tera l w ere

rate o n F ed era l fu n d s h eld to the 3 p e r cen t “ ceilin g ” o n

re d u ce d b y Vs p e r cen t.

ea ch d a y, b u t m o n e y m a rk et pressures w ere at n o tim e

w h ich h a d b e e n 4 Vi p e r c e n t (b id ) sin ce D e c e m b e r 2 1 ,

u n d u ly severe.

w as thus lo w e re d to 4 3/s p e r cent.

T h e rate o n 9 0 -d a y tim e loa n s,

In the G o v e r n m e n t secu rities m a rket, atten tion early
in the m on th w as fo c u s e d o n T rea su ry b o r r o w in g o p e r a ­
tions in v olv in g the refu n d in g o f
n otes and certificates,

1 0 .7 b illio n dollars o f

M e m b e r B a n k R e s e r v e P o s it io n s

M e m b e r b a n k b o r r o w in g s at F ed era l R e s e rv e B a n k s

m atu ring v a riou sly in F eb ru a ry ,

rose substantially in F e b ru a ry to an average lev el o f 6 4 3

M a rch , and A p r il, and the refin a n cin g o f the sp ecia l 1.7 5

m illion d ollars, c o m p a r e d w ith an average o f 4 1 3 m illion

b illion d olla r issue o f F e b ru a ry 15 bills floa ted in N o v e m ­

in the p r e ce d in g fo u r w eek s. In con tra st to the p re ce d in g

ber.

A lth o u g h the attrition o n the e x ch a n g e o f n otes and

m on th , w h en m e m b e r ba n k s h eld net free reserves th rou g h

certificates w as relatively la rge— 8 7 0 m illio n d ollars, o r

m ost o f the p e r io d , average b o r r o w in g s in F eb ru a ry e x ­

17 p e r cen t o f h old in g s ou tsid e the F ed era l R e s e rv e System

c e e d e d average e x cess reserves in ea ch o f the fo u r w eek s.

an d G o v e rn m e n t a g en cies— the fin an cin g w as a b so rb e d
w ith ou t significantly in terru ptin g the steady c lim b in p rices
o f b o n d s and n otes that h a d b eg u n o n Janu ary 8.

L a ter

in the m on th , there w ere sharp m a rk d o w n s o n several days
(a lth o u g h generally fo llo w e d b y m od era te r e c o v e r y ) a p p a r­
en tly reflectin g som e m a rk et o p in io n that p rices h ad m o v e d
to h igh er levels than w ere w arra n ted b y the o u tlo o k fo r
business c o n d itio n s an d cred it p o lic y .
V ig o r o u s n o n b a n k d em a n d fo r T rea su ry bills b rou gh t
d o w n w a rd pressu re o n yields in the first h a lf o f F eb ru a ry ,




CONTENTS

Money Market in February.................................25
International Monetary Developments ............ .28
Open Market Operations A broad.......................30
Earnings and Expenses of Second District
Member Banks in 1956 .....................................36
Selected Economic Indicators............................ .40

MONTHLY REVIEW, MARCH 1957

26

P ressu re o n reserves w as relatively ev en d u rin g the first

M e m b e r ba n k s c a m e u n d er re n e w e d p ressu re to w a r d the

h a lf o f th e m on th , b e fo r e easin g in th e th ird w e e k and

en d o f the m on th , m a in ly as th e result o f a re d u c tio n in

tigh ten in g again to w a rd the en d o f the m on th .

floa t an d an in crea se in T rea su ry b a la n ces.

In ea ch o f the first tw o statem ent w eek s in F eb ru a ry ,

The

h ea v y

d ra in

on

T rea su ry

d e p o s its

p ersisted

a v erag e b o r r o w in g s r o s e b y a b o u t 1 0 0 m illio n d olla rs, r e ­

th rou g h m o s t o f F e b ru a ry , at tim es ad d in g su bstantially

flectin g p rim a rily th e n e e d f o r fu n d s t o re p la c e reserves lost

to b a n k reserves.

as a resu lt o f

sales o f G o v e r n m e n t secu rities.

R e s e rv e B a n k s in th e first statem ent w e e k o f F e b ru a ry ,

R e s e rv e s w e re a lso a b s o r b e d , o n b a la n ce , b y a d e c lin e in

w h ich o rd in a rily w o u ld h a v e w ith draw n reserves, resu lted

floa t an d a rise o f c u rre n cy in circu la tio n . T h e se o p era tin g

fr o m b o o k k e e p in g tran sfers that o b s c u r e d an actu al o u t­

d rain s w ere la rg ely offset, h o w e v e r, b y a r e d u c tio n in

flo w o f fu n d s to the m a rk et.

T rea su ry ba la n ces at F ed era l R e s e rv e B a n k s, an in crease in

T rea su ry b a la n ces reflected the n ew d ep osits cre a te d b y

g o ld sto ck , an d som e fu rther r e d u c tio n in req u ired reserves.

the R e s e rv e B a n k s u p o n r e ce ip t o f cred its to th eir g o ld

T h e e ffe ct o f ou trigh t sales o f G o v e r n m e n t secu rities b y

certificate a cco u n ts b y th e T rea su ry . T h e se g o ld certificate

the F e d e ra l R e s e rv e S ystem w as te m p e re d b y an ex p a n sio n

credits w ere b a se d u p o n the p u rch a se b y the T rea su ry o f

S ystem

E v e n the rise in T rea su ry d e p o s its at

In this case, th e in crea se in

in rep u rch a se agreem en ts ou tstan din g, bu t o n b a la n ce the

3 0 0 m illio n dolla rs o f g o ld fr o m the In tern a tion a l M o n e ­

re d u c tio n o f S ystem h old in g s w as substantial.

tary F u n d

n ear

th e

en d

of

Ja n u a ry

in

e x ch a n g e

fo r

T o w a r d the m id d le o f th e m o n th th ere w as a m a rk ed

n on in terest-b ea rin g n otes to in crea se the d o lla r assets o f

rela x a tion o f p ressu re o n b a n k reserve p o s itio n s, a llow in g

the I M F . H a d the n ew d ep osits n o t b e e n crea ted , T rea su ry

m e m b e r b a n k s to r e d u c e som ew h a t th eir in d eb ted n ess to

b a la n ces at R e s e rv e B a n k s w o u ld h a v e d e clin e d .

R e s e rv e B a n k s.

a d d ition a l T rea su ry d ep osits w e re

M u c h o f the easin g w as attribu table to

soon

T h e se

expended, but

th e m id m o n th p e a k in floa t, w h ich w a s som ew h a t h eigh t­

to w a rd th e en d o f the m o n th T rea su ry b a la n ces w e re

e n e d b y dela ys in the p r o ce s sin g o f c h e ck s resu ltin g fr o m

p a rtly rep len ish ed fr o m m o r e n o rm a l sou rces o f fu n d s,

the o b s e rv a n c e o f L in c o ln ’ s B irth d a y at a n u m b er o f F e d ­

in clu d in g the sale o f a d d ition a l T rea su ry b ills.

eral R e s e rv e o ffices.

m o n th as a w h o le , h o w e v e r, T rea su ry o p e ra tio n s resu lted

T rea su ry b a la n ces co n tin u e d to fall,

releasin g reserves to the m a rk et, an d th ere w ere oth er gains
fr o m

g o ld an d fo r e ig n a c c o u n t o p e ra tio n s an d fr o m

F o r th e

in a d d ition s to b a n k reserves.

a
G o v e r n m e n t S e c u r it ie s M

retu rn flo w o f cu rren cy . A b o u t h a lf o f the a d d e d reserves

arket

w ere a b s o r b e d b y System o p e n m a rk et sales an d the ru n o ff

T h e c o n tin u e d b u o y a n c y o f the G o v e r n m e n t secu rities

o f rep u rch a se a greem en ts w ritten earlier in the m on th .

m a rk et early in F e b ru a ry greatly fa cilita ted th e T re a su ry
fin an cin g o p e ra tio n s u n d erta k en in th e o p e n in g w e e k o f
the m on th .

T able I
C hanges in F a ctors T ending to Increase or D ecrease M em ber
B ank R eserves, February 195 7

and certificates, an d ten ders w ere r e ce iv e d o n F e b ru a ry 7

(In m illions o f d o lla rs; ( + ) denotes increase,
( — ) decrease in excess reserves)

fo r 1 .7 5 b illio n dolla rs in n ew ta x a n ticip a tion b ills d e ­
sign ed to r e p la ce the sp ecia l 9 1 -d a y bills issu ed in N o v e m ­

Daily averages;— week ended
Net
changes

Factor
Feb.
6

Feb.
13

Feb.
20

Feb.
27

-1 2 1
- 38
+ 12
+167
-1 1 7

+155
- 78
- 46
- 32
- 38

+210
+226
+ 36
+110
- 36

-1 2 2
+ 29
+ 61
- 27
-1 7 4

+122
+139
+ 63
+218
-3 6 5

T o ta l............................................

-

-

+546

-2 3 2

+178

an d m a tu rin g F e b ru a ry

15.

In

the first o f th ese

p er cen t certificates m atu rin g F eb ru a ry 15 an d o f 3 .0 b il­

95

41

Direct Federal Reserve credit transactions
Government securities:
'“ '‘T :
Direct market purchases orsales. .
Held under repurchase agreements.
Loans, discounts, and advances:
Member bank borrowings................
Other.........................................................
Bankers’ acceptances:
Bought outright....................................
Under repurchase_agreements.........

b er

fin an cin g op e ra tio n s , h old ers o f 7 .2 b illio n d olla rs o f 2 %

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

S u b scrip tion b o o k s w e re o p e n o n F e b ru a ry 4

an d 5 fo r refu n d in g 1 0 .7 b illio n d olla rs o f m a tu rin g n otes

lio n d olla rs o f 2 % p e r cen t n otes m atu rin g M a r c h 15 w ere
given the o p t io n o f ex ch a n g in g their secu rities f o r either o f
tw o n ew issues— 3 %

p e r cen t certificates o f in d eb ted n ess

d u e F e b ru a ry 14, 1 9 5 8 , o r 3 V 2 p e r cen t n otes m a tu rin g
M a y 15, 1 9 6 0 . H o ld e r s o f 53 1 m illion d olla rs o f

39
24

-2 2 1
+ 50

-2 3 2
- 63

-1 0 4
- 11

-5 9 6
—

+113
—

+101
—

-1 6 4
—

+ 136
—

+186
—

__

__

-

-

-

+

1

1

2

cen t n otes

d u e A p r il

1,

1957

(p r im a rily

IV 2

per

th e F e d e ra l

R e s e rv e B a n k s ) w ere a llo w e d to ex ch a n g e o n ly in to the
n ew o n e -y e a r certificates.
F eb ru a ry 15 , 1 9 5 7 .

B o th n ew issues w e re da ted

T h e n ew ta x a n ticip a tion bills, also

T o ta l............................................

+

97

-

-4 5 9

+

20

-4 1 3

d a ted F e b ru a ry 15, w ere o ffe re d in e x ch a n g e f o r either

Total reserves....................................................
Effect of change in required reserves^-----

+
+

2
67

-1 1 2
+205

+
-

87
53

-2 1 2
+ 76

-2 3 5
+295

cash o r fo r the sp ecia l b ills m atu ring o n F e b ru a ry 1 5 . T h e

+

69

+

+

34

-1 3 6

+

552
505

688
369

Daily average level of member bank:
Borrowings from Reserve B anks. . . .
Excess reservest........................................

71

93

60

n ew ta x issue w ill m a tu re Ju n e 2 4 , 1 9 5 7 , an d m a y b e
o ffe re d at fa c e v a lu e in p a y m en t o f in c o m e an d profits
taxes d u e Ju n e 15 , 1 9 5 7 .

615
378

716
471

643*
431*

B o th fin an cin g o p e ra tio n s p r o c e e d e d sm ooth ly .
o f the m atu rin g 2 %

N ote: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
t These figures are estimated,
t Average for the four weeks ended February 27.




p e r cen t n otes an d

2%

P rices

p e r cen t c e r ­

tificates, the p rin cip a l “ righ ts” to the fin an cin g, m o v e d to
slight p rem iu m s after the initial T rea su ry a n n ou n cem en t

27

FEDERAL RESERVE BANK OF NEW YORK
o f term s an d h e ld th ere du rin g the refu n d in g.

T h e n ew

issues also w ere q u o te d a b o v e p a r in “ w h en -issu ed ” trad­
ing.

MARKET YIELDS OF SELECTED SECURITIES

R esu lts o f the ex ch a n g e , relea sed b y th e T rea su ry

later in the m on th , sh o w e d that h o ld e rs o f 2 8 2 m illion

We ekl y*

|

d ollars o f the F e b ru a ry n otes, 5 7 9 m illio n d olla rs o f the
M a r ch n otes, an d 9 m illio n dolla rs o f the A p r il n otes h a d

A a a corporate b on d s

elected to presen t their h o ld in g s f o r cash r e d e m p tio n . T h e
rem ain in g 9 .9 b illio n d olla rs o f m atu ring secu rities w ere
ex ch a n g ed f o r 8 .4 b illio n d olla rs o f the n ew o n e -y e a r c e r ­
tificates an d 1.5 b illio n d olla rs o f the n otes o f 1 9 6 0 .
T h e co n tin u in g a d v a n ce o f p rice s o f ou tstan d in g T r e a s­

f

Long-term Treasury issues*

u ry b o n d s an d n otes d u rin g the first p a rt o f th e m o n th

j

ap paren tly w as su stained prim a rily, as in Janu ary, b y a
g en eral fe e lin g in the m a rk et that the v ig o r o f th e e c o n o m ic

f

Sy

A a a municipal b on ds

b o o m h a d ab ated fo r the tim e b ein g . In a d d ition , the c o n ­
1

tinu in g su ccess o f u n derw riters in distribu ting ra p id ly the

J

large v o lu m e o f n ew c o r p o r a te issues w as ta k en b y som e

F

1

1

1

M

A

M

1
J

1

1

J
1956

A

I

1
S

O

!

1

N

D

..J.
J

1
F

L...L..... 1.......

M A
19 57

M

J

* W e e k l y a v e r a g e s , ex ce p t W e d n e s d a y clo se for municipal bon ds.
Latest da te pl otted is February 21.
+ Old series.
Sources: Board of Go ver nor s of the F ede ral Reserve System and
M o o d y ’s Investors Service.

ob serv ers to m ea n that in terest rates h a d re a c h e d th eir
p ea ks. Y ie ld s o n lo n g e r term G o v e r n m e n t issues, as sh ow n
in the a c c o m p a n y in g ch a rt, w ere thus ca rried d o w n to the
lo w e st lev els sin ce last O c t o b e r .
B y the m id d le o f the m o n th , h o w e v e r, m a rk et o p in io n
h ad ap paren tly b e c o m e in crea sin gly c o n c e r n e d o v e r the
sustainability o f the h igh er p r ic e structure, sin ce little ev i­
d e n ce h a d d e v e lo p e d o f an y fu n d a m en ta l shift in F ed era l
R es e rv e p o lic y o r in bu sin ess c o n d itio n s.

A lim ited su p­

p ly o f 3 1A '>s o f 1 9 7 8 -8 3 an d 3 ’ s o f 1 9 9 5 h e lp e d to to u c h
o ff a d o w n w a rd m o v e m e n t, a n d th e T rea su ry a n n o u n c e ­
m en t o n F e b ru a ry 1 4 that C on g ress w o u ld b e ask ed fo r
au th ority to raise to 3V\ p e r cen t the in terest rate p a y a b le
o n Series E an d H b o n d s a d d e d so m e fu rth er pressu re.
T h e se in flu en ces, a lo n g w ith o p tim istic statem ents b y G o v ­

the rein vestm en t o f p r o c e e d s fr o m sales o f “ righ ts” b y som e
in vestors a n ticip atin g cash n eed s w ith in a sh ort p e r io d .
A v e r a g e issuing rates in the first tw o w e e k ly au ction s
m o v e d d o w n steadily, fr o m 3 .2 8 3 p e r c e n t o n Ja n u a ry 2 8
to 3 .1 3 2 p e r cen t o n F e b ru a ry 4 an d to 3 .0 5 7 p e r cen t
o n F e b ru a ry 11. O v e r the rest o f th e m on th , average issu ­
in g rates r o se som ew h a t, m o v in g u p to 3 .1 8 2 p e r cen t in
the a u ctio n o f F e b r u a r y 18 an d 3 .2 8 8 p e r cen t o n F e b r u ­
ary 2 5 , as som e signs o f a sea son al sla ck en in g o f d em a n d
d e v e lo p e d in the m a rk et w ith the a p p ro a ch o f th e M a r c h 15
ta x date.
O t h e r S e c u r it ie s M

ern m en t officials o n the e c o n o m ic o u tlo o k , g en era ted som e
irregu lar d e clin es in th e latter h a lf o f F e b ru a ry .

arkets

A t the

T h e firm to n e that h a d a p p e a re d in th e c o r p o r a te an d

en d o f the m on th , p r ic e s o f m o s t b o n d s ca lla b le after 1961

m u n icip a l b o n d m ark ets in Janu ary w as e x te n d e d in to

w ere m o r e than 2 fu ll p o in ts b e lo w their earlier F eb ru a ry

F e b ru a ry desp ite th e co n tin u in g la rg e flo w o f n e w secu rity

pea ks an d as m u c h as 1 %

offerin g s. In the latter p a rt o f the m on th , a slightly h eavier

p o in ts lo w e r than at the en d

o f January. T h e d eclin es w e re m u ch less p r o n o u n c e d fo r
the

3 V4 ’ s

an d 3 ’ s, w h ich fe ll % 2 and

a tm osp h ere d e v e lo p e d , esp e cia lly in th e m u n icip a l m a r­

resp ectiv ely ,

ket, b u t y ield s g en era lly rem a in ed steady at th e lev els to

o v e r the m on th as a w h o le . T h ro u g h o u t F eb ru a ry , trad ing

w h ich th ey h a d d e c lin e d in th e p r e v io u s several w eek s.

in the in term ediate and lo n g -te rm area w as v e ry light, so

A v e r a g e y ield s o n ou tstan d in g h ig h -g ra d e c o r p o r a te b o n d s ,

that the relatively sh arp p r ic e m ov e m e n ts d id n o t reflect

as reflected in M o o d y ’ s A a a -r a te d in d e x , m o v e d d o w n 6

m a jo r ch a n ges in su p p ly an d d em a n d .

b a sis-p oin ts o v e r the m o n th to 3 .6 6 p e r cen t, w h ile fo r

Y ie ld s o n T rea su ry bills m o v e d d o w n steadily in the first

m u n icip a l issues w ith a sim ilar rating average rates at the

tw o w eek s o f F e b ru a ry desp ite the a d d e d su p p ly resulting

en d o f F eb ru a ry w ere 4 b a sis-p oin ts b e lo w th e 2 .8 7 p er

fr o m

cen t lev el establish ed at the c lo s e o f th e p r e ce d in g m on th .

su ccessiv e in creases o f 1 0 0 m illio n d olla rs in the

regu lar bill issues d u rin g the p e r io d .

T h e m a rk et also

T h e w id est p r ic e flu ctu a tion s w e re e x p e rie n c e d b y c o r ­

h ad little difficu lty in a b so rb in g the 1 .7 5 b illio n d ollars

p o ra te co n v e rtib le issues, reflectin g th e sh arp b rea k in

o f n ew tax bills a u ctio n e d o n F e b ru a ry 7 ; the average issu­

the sto ck m a rk et o n F e b ru a ry 11 an d p a rtial re co v e ry

ing rate w as 3 .2 3 1 p e r cen t an d b id q u ota tion s h eld clo s e

th ereafter.

to this lev el th rou g h m u ch o f the rem a in d er o f the m on th .

T h e v o lu m e o f p u b lic offerin g s o f c o r p o r a te b o n d s fo r

H o w e v e r , w h en the regu lar w e e k ly o fferin g w as in crea sed

n ew ca p ita l is estim a ted to h a v e b e e n 4 6 5 m illio n dolla rs

b y a n oth er 1 0 0 m illion to 1.8 b illio n dolla rs in the a u ction

in F eb ru a ry , c o m p a r e d w ith 6 2 0 m illio n dolla rs in Janu ­

o f F eb ru a ry 18, a som ew h a t sluggish to n e a p p ea red in the

ary.

m arket. T h e n o n b a n k b u y in g in the first h a lf o f F eb ru a ry

m illion dolla rs o f n ew offerin g s a y ea r earlier, an d since

in clu d ed a substantial c o rp o r a te d em a n d , b a se d pa rtly o n

F eb ru a ry h a d a relatively sm all n u m b er o f bu siness days.




It w as c o n s id e r a b ly in ex cess, h o w e v e r, o f the 1 2 0

28

MONTHLY REVIEW, MARCH 1957

the a b so rp tio n o f the n ew issues req u ired ex ten siv e m ark et
activity.

N ev erth eless, m o s t o f the n ew issues w ere w ell

T o ta l in vestm ents o f w e e k ly rep ortin g m e m b e r b a n k s
d e c lin e d b y 4 0 7 m illio n d olla rs d u rin g th e fo u r w e e k s

re ce iv e d an d q u o te d at p re m iu m p rice s in the se co n d a ry

e n d ed F e b ru a ry 2 0 , a m u ch sm aller d r o p th an in 1 9 5 6 .

m ark et.

A s a result, d ea ler in ven tories o f n ew c o rp o r a te

B a n k h o ld in g s o f G o v e r n m e n t securities fe ll b y 5 2 1 m illio n

b o n d s a p p aren tly rem a in ed relatively lo w , desp ite the large

dolla rs, b u t this d e clin e w as o n ly h a lf as la rg e as a y ea r

v o lu m e that p a ssed th rou g h th eir h an ds du rin g the m on th .

earlier, reflectin g the ex ten siv e T rea su ry refin a n cin g d u rin g

In the m u n icip a l m a rket, d e m a n d w as less brisk. T o ta l

F e b ru a ry 1 9 5 7 . P o r tfo lio s o f oth er secu rities r o se b y 1 1 4

p u b lic offerin g s fo r n ew ca p ita l w ere again la rge— 4 7 4 m il­

m illion , c o m p a r e d w ith an in crease o f 8 m illio n th e y ea r

lio n d olla rs— a lth ou gh som ew h a t sm aller th an in the p re ­

b e fo r e . T o ta l loa n s an d in vestm ents thus d e clin e d b y o n ly

v iou s m on th o r in F e b ru a ry 1 9 5 6 .

In v e s to r interest in

m a n y o f these offerin g s w as relatively lim ited , h ow e v e r,

5 1 3 m illion , in con tra st to a d r o p o f 1 ,1 3 7 m illio n in the
co rr e s p o n d in g fo u r w eek s a y ea r earlier.

p a rticu la rly in th e latter p a rt o f the m on th , an d the slow
d istrib u tion o f som e issues in to the h an ds o f u ltim ate in ­
v estors resu lted in so m e in crea se in d ea ler p o r tfo lio s .
M

em ber

Table II

Weekly Changes in Principal Assets and Liabilities of the
Weekly Reporting Member Banks

B a n k C r e d it

(In m illions o f dollars)

T h e d eclin e in total lo a n s at w e e k ly re p o rtin g m em b er

Statement weeks ended

ba n k s le v e le d o ff in th e fo u r w eek s en d ed F e b ru a ry 2 0 ,

Item
Jan.
30

fo llo w in g u nu su ally h ea v y n et rep ay m en ts in the op e n in g
w eeks o f 1 9 5 7 .

B o r r o w in g at th ese ba n k s w as r e d u ce d

b y 1 0 6 m illio n d olla rs o v e r th e fo u r -w e e k p e r io d , c o m ­

m illio n dolla rs in the tw o w eek s e n d ed F eb ru a ry 6 , bu t
in crea sed b y 191 m illio n in the tw o fo llo w in g w eek s. R e a l

Total loans adjusted*-----

p a re d w ith d eclin es o f 1 ,9 2 2 m illio n dolla rs d u rin g the
p a ra b le p e r io d a y ear earlier.

B u siness loa n s fe ll b y 1 7 4

estate loa n s, “ all o th e r ” loa n s (la rg ely to c o n s u m e rs ), an d
loa n s to secu rity b r o k e rs an d dealers w ere som ew h a t lo w e r
o n b a la n ce.
T r a d e c o n c e rn s, c o m m o d ity dealers, co n s tr u c tio n firm s,
an d p r o ce s s o r s o f f o o d , liq u o r, an d t o b a c c o c o n tin u e d to
m a k e n et rep ay m en ts o n b a la n ce , w h ile the p u b lic utility
an d tran sp ortation g ro u p r e d u c e d b o r r o w in g s after h aving

Feb.
13

Feb.
20p

Assete
Loans and investments:
Loans:
Commercial and industrial.
loans........................................
Agricultural loans...................
Security loans..........................
Real estate loans....................
All other loans (largely
consumer)..............................

p r e ce d in g fo u r w eek s an d 65 m illion dollars in the c o m ­

Feb.
6

Change
from Dec.
26, 1956
to Feb.
20, 1957p

- 84
5
4- 29
- 17
+

2

-

79

+

90
8
45
20

+
+
+

91
4
71
12

+100
4
- 14
— 15

—
—
—

931
29
585
85
254

35

+

10

-

30

-

-

112

+

48

+

37

-2 ,0 2 8

Investments:
U.S. Government securities:
Treasury bills......................
Other.......................................

-2 2 6
3

+

238
58

-1 8 6
- 63

+169
- 32

—
-

510
335

T otal...................................
Other securities.......................

-2 2 9
+ 22

_
+

180
64

-2 4 9
- 40

+137
+ 68

+

845
18

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

-2 0 7

116

-2 8 9

+205

-

827

228

-2 4 1

+242

- 2 ,8 5 5

143

+377

— 275

-

+

8

+105

- 2 ,0 1 0

Total loans and investments
-2 8 6
_

Loans to banks.................................

-1 4 4

offset b y sm aller-th a n -u su al rep a y m en ts b y sales fin an ce

Loans adjusted* and “ other”
securities.........................................

— 57

48

c o m p a n ie s an d b y substantial in creases in b o r r o w in g b y

Liabilities

m a n u factu rers o f m etals an d m etal p r o d u c ts , textile p r o ­

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

-2 2 0

-1 .2 0 2

-4 5 1

-1 3 2

-1 ,9 2 3

4- 39
+ 167

4+

69
80

+
-

30
29

+ 62
+675

+
-

-6 8 3
— 57

+

484
12

+162
- 35

— 350
+ 61

-1 ,1 7 6
147

in crea sed th em earlier in the year.

T h e se d eclin es w ere

d u cers, an d firm s in the p etro le u m , c o a l, ch em ica ls, and
ru b b e r g ro u p .

L a rg e ly b e ca u se o f the h ea v y repaym en ts

in Janu ary, total bu siness loa n s at the w e e k ly rep ortin g
ba n k s h a v e d e c lin e d 9 3 1 m illio n d olla rs sin ce th e b e g in ­
n in g o f the y ear, c o m p a r e d w ith a c o n tra ctio n o f 4 3 9
m illio n d olla rs in the sam e p e r io d a y ea r earlier.

144

476
863

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

INTERNATIONAL MONETARY DEVELOPMENTS
tiveness o f m on eta ry p o lic y ” . T h e re d u c tio n c a m e against

M o n e ta r y T re n d s an d P o lic ie s
T h e B a n k o f E n g la n d r e d u c e d its d is co u n t rate to 5

a b a ck g ro u n d o f r e ce d in g in flation ary pressu res an d a d e ­

p e r cen t as o f F eb ru a ry 7, fr o m the 5 V i p e r cen t rate in

clin e in the liq u id ity o f the b a n k in g system an d in interest

fo r c e since F eb ru a ry 16, 1 9 5 6

rates.

(s e e c h a r t ).

A c c o r d in g

T h e indu strial in vestm en t b o o m , the m a in fa c to r

to the B a n k ’ s G o v e r n o r , the m o v e ca rried “ n o im p lica tion

b eh in d the in flation ary pressu res o f 1 9 5 5 -5 6 , has b een

o f a ch a n g e o f p o li c y ” , an d the B ritish C h a n c e llo r o f the

lev elin g o ff, w h ile residen tial b u ild in g has actu ally b e e n

E x ch e q u e r stated that the re d u c tio n w as d esign ed sim ply

d eclin in g. M a in ly as a result o f a d r o p in a u to m o b ile o u t­

“ to en a b le the B a n k o f E n g la n d to m ain tain the fu ll e ffe c ­

put, the industrial p r o d u c tio n in d e x tow a rd the en d o f 1 9 5 6




29

FEDERAL RESERVE BANK OF NEW YORK

years h a d w e a k e n e d the B a n k o f E n g la n d ’ s m o n e ta ry c o n ­
trol, an d n ecessitated the relia n ce o n directiv es b y th e

BRITISH INTEREST RATES
Per cent

au th orities to the c o m m e r cia l ba n k s. In lin e w ith th e fa ll

Per cent

in m a rk et in terest rates, th e rate o n n ew loa n s w ith a
m atu rity o f m o r e than five years, m a d e b y the P u b lic W o r k s
L o a n s F u n d to the lo c a l au th orities, has b e e n r e d u ce d

Va p e r cen t to 5V i.
T h e R e s e rv e B a n k o f In d ia raised to 4 p e r cen t fr o m

3 V2 ,

as o f F e b ru a ry 1, its interest rate o n ad va n ces to

c o m m e r c ia l b a n k s against g ov e rn m e n t an d oth er elig ib le
secu rities.

W h ile the B a n k ’ s rate o n

ad va n ces granted

u n d er the B ill M a r k e t S ch em e w as left u n ch a n g ed at 3 Vi
p e r cen t, the stam p du ty o n bills o f e x ch a n g e w as in crea sed
to V i p e r cen t, as a result o f w h ich the c o s t o f su ch b o r ­
r o w in g w as also b ro u g h t to 4 p e r cen t.

T h e se ch a n g es

t o o k p la c e in the w a k e o f a 16 p e r cen t rise in w h olesa le
p rices d u rin g 1 9 5 6 and a loss in ex tern a l reserves o f a b o u t
o n e th ird du rin g the last n in e m on th s o f the year. In o r d e r
to h elp alleviate th ese strains, th e au th orities h av e also
taken d isin flation ary fisca l m easu res.

O n N ovem ber 30,

the g ov e rn m e n t in tr o d u ce d a su p p lem en tary b u d g e t that
p r o v id e d in ter alia fo r the r e im p o s itio n o f a ca p ita l gains
tax, an in crea se in the “ su p erta x ” rates, a d d ition a l ex cise
b o n d s , 1 9 6 5 - 7 5 , mon th ly a v e r a g e s . Treasury b i l l s : w e i g h t e d monthly
a v e r a g e s o f w e e k l y a ll ot me n t rates. February data pa rtl y e st i m a t e d .
S o ur ce : Bank of England.

du ties o n certain d o m e stic p r o d u c ts , an d a rise in th e c u s ­
tom s du ties o n m a n y im p orts. D e sp ite the an ticip ated in ­
crea se in ta x reven u es, h o w e v e r, th e g ov ern m en t still plan s
a substantial a m ou n t o f d eficit fin an cin g .

w as slightly lo w e r th an a y ea r earlier.

F u rth erm ore, fo r

the first tim e sin ce early 1 9 5 4 , v a ca n cie s in in du stry w ere
fe w e r than the u n e m p lo y e d , a lth ou gh the latter still re­
m a in ed a v ery sm all fr a c tio n o f th e la b o r fo r c e .

T h e se

re d u c e d d em a n d p ressu res in the U n ite d K in g d o m also
co n trib u te d to a n o ta b le im p ro v e m e n t in th e c o u n tr y ’ s
b a la n ce o f p a ym en ts o n cu rren t a c c o u n t; th e latter sh o w e d
a surplus o f 1 4 4 m illio n p o u n d s in Ja n u a ry-Ju n e 1 9 5 6 ,
and despite th e cu rren t difficu lties c o n n e c te d w ith the
M id d le E a st crisis, “ a sm all b u t b y n o m ea n s u nsubstan tial
su rplu s” f o r the y ea r en d in g Ju n e 1 9 5 7 is a n ticip ated ,
a c c o rd in g to an o fficia l statem ent.
T h e im p ro v e d e c o n o m ic b a la n ce in the U n ited K in g d o m
F rom D ecem ­

b e r 7 to F eb ru a ry 1 th e average T rea su ry b ill ten d er rate
d e clin e d fr o m 5 .0 4 p e r cen t to 4 .5 4 an d, after the d iscou n t
rate w as cut, fell fu rth er to 4 .1 5 o n F e b ru a ry 2 2 . C o n s o l
p rices h ave risen m a rk ed ly du rin g the last th ree m on th s,
an d o n F eb ru a ry 2 8 y ie ld e d 4 .5 5 p e r cen t, as against 4 .9 8
at the en d o f N o v e m b e r .

im p o rt licen sin g sch em e that h a d b e e n in effe ct sin ce 1 9 5 5 .
H e a v y cuts w e re m a d e in im p o r t q u ota s f o r su ch c o n ­
su m er an d p r o d u c e r g o o d s

as th e au th orities b e lie v e d

c o u ld b e re p la c e d b y in crea sed d o m e stic p r o d u c tio n . N e w
restraints w ere also p la c e d o n th e sp en d in g o f fo r e ig n
ex ch a n g e fo r travelin g a b ro a d .
In C a n a d a , the T re a su ry b ill rate c o n tin u e d to rise du r­
in g m o s t o f F e b ru a ry ; at the th ird ten d er in the m on th the
av erag e T rea su ry b ill ten d er r e a c h e d 3 .8 1 p e r cen t, an alltim e high , bu t fe ll to 3 .7 6 at the fo u rth ten der. L o n g -te rm
g o v e rn m e n t b o n d yield s, o n the oth er h an d, d e clin e d d u r­

set the stage f o r a d e clin e in sh ort-term m a rk et interest
rates an d a r e c o v e r y in th e b o n d m a rk et.

In a d d ition , o n

Janu ary 1, the In d ia n G o v e r n m e n t term in a ted the lib era l

in g F e b ru a ry to the lev els that h a d p re v a ile d at th e turn
o f the y ear, w h ile sh ort an d m e d iu m -te rm yield s fe ll ev en
fu rth er. D u rin g F e b ru a ry , the c o m m e r c ia l b a n k s’ bu siness
loa n s rem a in ed at a ro u n d th e y e a r -e n d lev el, w h ile their
h o ld in g s o f g ov e rn m e n t b o n d s in crea sed c o n s id e ra b ly ; the
b a n k s’ ratio o f liq u id assets (c a s h , d a y -to -d a y loa n s, and
T rea su ry b ills ) to d ep osits r o se to 17 p e r cen t, as against
th e agreed m in im u m o f 15 p e r cen t.

In the co u r se o f these d e v e lo p ­

m ents in the m o n e y an d b o n d m arkets, the au th orities o n
F eb ru a ry 14 floa ted a 3 0 0 m illio n p o u n d 3 Vi p e r cen t
F u n d in g S tock , 1 9 9 9 -2 0 0 4 , p r ic e d to g iv e a g ross re d e m p ­

E xchange R ates
Sterling rates m o v e d som ew h a t lo w e r du rin g F eb ru a ry ,

T h is d eb t o p e r a tio n w as d e ­

as u n certain ty o v e r the M id d le E a stern situ ation con tin u ed

sign ed to fu rther th e g ov e rn m e n t’ s d eb t fu n d in g p r o g r a m

to b e a dep ressin g fa c to r in a relatively qu iet m a rket.

and to facilitate a r e d u ctio n in the b a n k s’ liq u id ity ratios

A m e r ic a n -a c c o u n t sterling w as q u o te d as h igh as $ 2 . 8 0 % 2

tion y ield o f 4 .5 0 p e r cen t.

(c a s h , ca ll loa n s, an d T rea su ry an d c o m m e r cia l bills to

as it m et w ith fa ir c o m m e r cia l d em a n d early in th e m on th .

total d e p o s it s ) ; the in crease in these ratios in th e last tw o

A ft e r th e a n n ou n cem en t that B rita in ’ s g o ld a n d d o lla r




30

MONTHLY REVIEW, MARCH 1957

reserves h a d d e cre a se d 4 9 m illio n d olla rs d u rin g Janu ary,

fo r w a r d sterling, d iscou n ts w ere again n a rrow er at %

h o w e v e r, an d w ith substantial b id d in g fo r d olla rs in L o n d o n

1 2%2

an d

cents at the m o n th ’ s en d.

— p rin cip a lly b y o il interests— the rate d e c lin e d ; b y F e b r u ­

T ra n sfera b le sterling m et w ith r e d u c e d d e m a n d , p a r­

ary 6 it h a d slip p ed to $ 2 . 7 9 1% 6 , a b o u t the lev el p rev a il­

ticu larly o n th e p a rt o f sugar interests, an d d e c lin e d to

in g d u rin g the rem a in d er o f the m on th . O il interests w ere
im p orta n t b o th as b u y ers a n d su ppliers o f sterling in the
N e w Y o r k m a rk et w h ile, in the latter p a rt o f the m on th ,
d ia m o n d dealers w ere n o te w o rth y p u rch asers.

O n F ebru ­

ary 2 8 A m e r ic a n -a c c o u n t sterling w as q u o te d at $ 2 . 7 9 % .
A lth o u g h the d eclin e in th e B ritish b a n k rate fr o m 5 Vi
p e r c e n t to 5 p e r cen t a n n o u n c e d o n F e b ru a ry 7 h a d v ir­
tu ally n o e ffe ct in the sp o t m a rk et, the c h a n g e w as n o tic e ­

$ 2 .7 6 2 0 at m id m o n th .

B y F e b ru a ry 2 8 the rate h a d r e ­

c o v e r e d o n ly slightly to $ 2 .7 6 3 5 . Securities sterling flu ctu ­
ated b etw een $ 2 .64V 4

an d $ 2 .6 1 V i, w ith rates ten d in g

to w a rd the lo w e r p a rt o f the ran ge.
T h e C a n a d ia n d o lla r w e a k e n e d slightly fr o m $ 1 . 0 4 1% 2
to $ 1 .0 4 Vi in a rath er q u iet m a rk et du rin g th e first h a lf
o f F eb ru a ry . S u b sequ en tly g o o d d e m a n d fo r th e C a n a d ia n

ab le in th e fo r w a r d m a rk et w h ere d iscou n ts o n three an d six

d o lla r d e v e lo p e d la rg ely as a resu lt o f v a riou s secu rity

m o n th s’ sterling d r o p p e d to 11/1Q a n d l 5/s cen ts— th e n ar­

issues a n n o u n c e d b y C a n a d ia n c o m p a n ie s , m o s t n o ta b ly

r o w e s t sin ce F e b ru a ry a n d M a y 1 9 5 5 , resp ectiv ely . A fte r

the T ra n s-C a n a d a P ip e L in e s, L td ., a n d d irect in vestm en t

w id en in g to 1 y16 an d 2 y22 cen ts o n g o o d offerin g s o f

n eed s; o n F e b ru a ry 2 8 the rate again s t o o d at $ 1 . 0 4 1% 2 -

OPEN MARKET OPERATIONS ABROAD
O p e n m a rk et o p e ra tio n s o f s o m e fo r m are c o n d u c te d

oth ers th ey c a n d ea l in an y b o n d s that th ey th em selv es

b y th e cen tra l ba n k s o f m o s t cou n tries w h ich h av e, o r are

d e cla re suitable

d e v e lo p in g , a ctive m o n e y m ark ets.

th ey c a n u n derta k e o p e ra tio n s in sp ecia l m o rtg a g e b o n d s

T h e k in d an d exten t

(A u s tr ia , G u a te m a la ); som etim es, t o o ,

o f su ch op e ra tio n s , an d their relative im p o rta n ce a m on g

(B o liv ia , E l S a lv a d or, N o r w a y ) .

th e to o ls o f m o n e ta ry c o n tro l, v a ry w id ely .

In this c o u n ­

cen tra l ba n k s, p a rticu la rly in the fin an cially le s s -d e v e lo p e d

try o p e n m a rk et o p e ra tio n s— i.e ., p u rch a ses an d sales o f

cou n tries, h av e p o w e r to issue their o w n secu rities f o r

G overn m en t

m on eta ry p o lic y p u r p o s e s .2

secu rities

(a n d

b a n k ers’

a c c e p ta n c e s )

as

F in ally, a n u m b e r o f

d ire cte d b y the O p e n M a r k e t C o m m itte e o f the F ed era l

In m a n y cou n tries, h o w e v e r, the p u rch a se o f g ov e rn m e n t

R e s e rv e System — h a v e b e c o m e the c h ie f in stru m en t o f

secu rities b y the cen tra l b a n k is circ u m s c r ib e d b y leg isla ­

cred it c o n tr o l, p r o v id in g a flex ib le m ea n s o f in flu en cin g

tion as to the tota l a m ou n t, th e w ays in w h ich th e p u rch a ses

the v o lu m e o f b a n k reserves an d th ereb y h elp in g to m a in ­

m a y b e c o n d u c te d , an d the m atu rity o f the secu rities that

tain a p p rop ria te cred it c o n d itio n s .1 O u tsid e th e U n ited

m a y b e p u rch a sed .

States, h o w e v e r, o p e n m a rk et o p e ra tio n s are a fu ll-fled g ed

g ov e rn m e n t secu rities, w h eth er a cq u ire d in the m a rk et o r

cred it p o lic y in stru m en t in o n ly a fe w cou n tries, n ota b ly

d irectly fr o m the g ov ern m en t, som etim es are stipu lated in

L im its o n cen tra l b a n k h old in g s o f

the U n ited K in g d o m an d C a n a d a . E lsew h ere, su ch o p e r a ­

a b solu te am ou n ts (B e lg iu m ) o r are related to th e b a n k ’ s

tion s are lim ited in s c o p e ; th ey are n o t alw ays u n derta k en

ca p ita l a n d /o r d e m a n d liabilities (P a k ista n , V e n e z u e la ).

at the cen tra l b a n k ’ s in itiative; th ey are in so m e in stan ces

S u ch p ro v isio n s are g en erally d esign ed to lim it th e re co u rs e

e ffe cte d d ire ctly w ith b a n k s o r oth er in vestors; an d th ey

o f g ov ern m en ts to cen tra l b a n k cred it.

m a y b e c o n d u c te d in secu rities oth er th an g ov ern m en t

son , the leg islation o f a n u m b er o f cou n tries, n o ta b ly

o b lig a tio n s o r b a n k ers’ a cce p ta n ce s.

F o r th e sa m e rea ­

D esp ite th e institu­

F ra n ce, p roh ib its d irect p u rch a ses o f secu rities fr o m the

tion a l d ifficu lties e n co u n te re d in m a n y fo r e ig n cou n tries,

g ov ern m en t, w h ile in C u b a the cen tra l b a n k is n o rm a lly

o p e n m a rk et o p e ra tio n s a b ro a d are n everth eless rap id ly

p erm itted to b u y o n ly g ov ern m en t secu rities that h a v e b een

g a in in g in im p o rta n ce .

ou tstan din g fo r m o r e th an o n e year. Sim ilarly, so m e c e n ­
tral b a n k law s p r o v id e in effect that o p e n m a rk et o p e r a ­

T he L egal

and

tion s m a y n o t b e ca rried o u t to h elp in the fin a n cin g o f

In s t it u t io n a l Se t t in g

B e fo r e the thirties, o n ly a fe w fo r e ig n cen tral ba n k s had
leg a l a u th ority to c o n d u c t o p e n m a rk et o p era tion s, bu t
to d a y p ra ctica lly all are e m p o w e r e d to dea l in g ov ern m en t
an d g o v ern m en t-g u a ra n teed secu rities. M a n y fo r e ig n c e n ­
tral b a n k s also h av e au th ority to p u rch a se an d sell b a n k ers’
a cce p ta n ce s an d c o m m e r c ia l b ills.
m o r e o v e r,

th ey

ca n

o p e ra te

in

In certain cou n tries,
n o n g o v e rn m e n t

(A u stra lia , D e n m a rk , Ja pan , M e x i c o ) ,

bonds

w h ile in a fe w

g ov ern m en t deficits, an d s p e cify that su ch o p e r a tio n s m a y
ta k e p la ce o n ly in o r d e r to “ regu late the m o n e y m a rk e t”
(A u s tria ,

F ran ce)

or

fo r

“ m on eta ry

p o lic y

pu rposes”

(C h ile , K o r e a , the P h ilip p in e s ). In a d d ition , s o m e cen tra l
b a n k law s e n jo in the cen tra l b a n k fr o m p u rch a sin g secu ri­
ties

du rin g

in flation ary p e r io d s

(C e y lo n ,

C h ile,

C uba,

K o re a , the P h ilip p in e s ).
In som e cases th ere are leg a l restriction s o n the m a x i­
m u m m atu rity o f g o v e rn m e n t secu rities that c a n b e in ­

1 For a description of techniques in the United States, see Robert V.
2 E.g., Ceylon, Chile, Cuba, the Dominican Republic, Ecuador,
Roosa, Federal Reserve Operations in the Money and Government
El Salvador, Honduras, Korea, Mexico, Paraguay, and the Philippines.
Securities Markets, Federal Reserve Bank of New York, July 1956.




31

FEDERAL RESERVE BANK OF NEW YORK
S u ch restriction s either

It is thus n o t su rprisin g that o p e n m a rk et op e ra tio n s

p r o v id e that th e secu rities m u st b e sh ort term w ith ou t

are rarely u sed a b ro a d in the sam e c o n tin u o u s an d b r o a d

defin in g the m atu rity

m a n n er as in this c o u n tr y ; o n ly in the U n ited K in g d o m and

elu d ed in cen tra l b a n k p o r tfo lio s .

sp e cify

m a x im u m

(F r a n c e , V e n e z u e la )

m atu rities,

ran gin g

fr o m

or

actu ally

tw o

years

C a n a d a , as alrea dy n o te d , are su ch o p e ra tio n s e m p lo y e d

(S w itze rla n d ) to five years ( M e x i c o ) o r ev en ten (G u a te ­

as a fu ll-fled g ed cred it p o lic y in stru m en t.

m a la ).

In oth er cou n tries, su ch as C e y lo n , the statute

tries, su ch o p e ra tio n s are relied u p o n fo r m o r e lim ited p u r­

requ ires the cen tral b a n k to m a in tain a d eq u a te h old in g s o f

p o s e s : the e v e n in g -o u t o f d a ily m o n e y m a rk et flu ctu a tion s

In oth er c o u n ­

sh ort-term secu rities to en a b le it m o r e rea d ily to co n tra ct

(F r a n c e ) o r the offsettin g o f sea son al an d oth er “ te m p o ­

its cred it if su ch a c o n tra ctio n b e c o m e s n ecessary .

ra ry ”

L e g a l lim ita tion s o n th e g ov e rn m e n t secu rities h old in g s

ch a n g es in b a n k liq u id ity

(G e r m a n y , Japan , the

N e th e r la n d s ). C en tra l b a n k o p e n m a rk et o p e ra tio n s h ave

o f cen tra l ban ks, h o w e v e r, are less freq u en t to d a y than

also served in m a n y fo r e ig n cou n tries m erely as a m eans

s om e years a g o . T h u s, th ey w ere rela x ed in S ou th A fr ic a

to su p p ort g ov e rn m e n t b o n d p r ic e s; su ch o p e ra tio n s , h o w ­

in 19 41 an d in S w itzerlan d in 1 9 5 3 ; th ey w ere r e m o v e d

ev er, h a v e in recen t years b e e n a b a n d o n e d o r e m p lo y e d

c o m p le te ly in N e w Z e a la n d in 1 9 3 6 , th e N eth erlan ds in

m o r e flex ib ly in m o s t E u r o p e a n a n d B ritish C o m m o n ­

1 9 4 5 , In d ia in 1 9 4 8 , an d C a n a d a in 1 9 5 4 . In so m e c o u n ­

w ealth cou n tries in o r d e r to r e in fo r c e oth er m o n e ta ry m ea s­

tries, su ch as D en m a rk , N o r w a y , S w ed en , an d th e U n ited

ures su ch as d is co u n t rate in creases.

K in g d o m , su ch leg a l restriction s h a v e n ever ex isted.

le s s -d e v e lo p e d fin an cial system s, cen tra l b a n k o p e n m ark et

L e g a l au th ority a lo n e is, o f co u r se , n o t su fficien t to
en a b le a cen tra l b a n k to c o n d u c t m ea n in g fu l o p e n m a rk et

op e ra tio n s h a v e b e e n u sed p rim a rily as p a rt o f the o v er-a ll
effo rt to b r o a d e n th e cou n tries’ ca p ita l m arkets.

o p era tion s. A n a p p rop ria te in stitu tional fr a m e w o r k is re­

T h e U n it e d K in g d o m

q u ired , a n d in m a n y fo r e ig n cou n tries th e la c k o f such
a fr a m e w o r k is a seriou s ba rrier to th e d e v e lo p m e n t o f
o p e n m a rk et o p e ra tio n s as an e ffe ctiv e in stru m en t o f m o n e ­
tary p o lic y .

T h e m o s t im p orta n t an d m o s t fre q u en t o b ­

stacle is the la c k o f a b r o a d an d a ctive m a rk et fo r the kin ds
o f secu rities u su ally co n s id e r e d

a p p rop ria te f o r cen tral

b a n k o w n ersh ip . In the a b se n ce o f a flex ib le m o n e y m a r­
ket, m o r e o v e r, the c o m m e r c ia l ba n k s ten d to o p e ra te w ith
am ple e x cess reserves an d th eir ca sh ratios ten d to flu ctu ­
ate w id e ly (s in c e th e b a n k s h a v e n o oth er re a d y w a y o f
adju sting their p o s it io n s ); u n d er su ch circu m sta n ces, c e n ­
tral b a n k sales o r p u rch a ses o f secu rities la c k a fu lcru m in
the fo r m o f a stable ca sh ra tio o n w h ich to g et lev era ge,
so that ch a n g es in b a n k reserves fo llo w in g u p o n su ch trans­
a ction s m a y n o t m aterially a ffect the a vailab ility o f cred it
fr o m the c o m m e r c ia l ba n k s.
A som ew h a t le s s -c o m m o n an d less-seriou s d ifficu lty is
the risk that ch a n g es in c o m m e r c ia l b a n k reserve p o s itio n s
b rou g h t a b o u t b y o p e n m a rk et o p e ra tio n s m a y in som e
in stan ces b e so rea d ily o ffse t b y ch a n g es in b o r r o w in g
fr o m the cen tra l b a n k th rou g h d iscou n ts an d ad va n ces, as
to lea ve the av ailab ility o f cred it fr o m th e ba n k s la rg ely
u n a ffected .

T h is risk is m in im ized , o f c o u rse , in sofa r as

c o m m e r cia l ba n k s are relu cta n t to in cu r in d eb ted n ess o r

In cou n tries w ith

In the U n ited K in g d o m , th e in stitu tion al c o n d itio n s fo r
e ffectiv e o p e n m a rk et o p e ra tio n s h a v e lo n g b e e n presen t.
T h e L o n d o n m o n e y an d ca p ita l m arkets are a m o n g the
m o s t d e v e lo p e d in the w o rld , a n d th e c o m m e r c ia l ba n k s
o p e ra te w ith stable ca sh ratios.

D ir e c t b o r r o w in g at th e

cen tra l b a n k th rou g h th e “ d is co u n t w in d o w ” is n o t avail­
a b le to the c o m m e r c ia l b a n k s, an d th e b o r r o w in g d o n e b y
d is co u n t h ou ses ten ds to b e lim ited b y th e p en a lty effect
o f the d is co u n t rate, w h ich rem ain s con sisten tly a b o v e m ost
m o n e y m a rk et rates.4 F in a lly , th e B a n k o f E n g la n d has
u su ally h a d an am p le secu rities p o r t fo lio fo r its o p e ra tio n s ,
a n d its p u rch a ses an d sales are k n o w n to b e su p p lem en ted
b y the o p e ra tio n s o f the la rg e g o v e rn m e n t fu n d s.
T h e B a n k o f E n g la n d ’s o p e n m a rk et o p e ra tio n s , w h ich
orig in a ted

in

the

last

cen tu ry,

w ere

d e v e lo p e d

m ore

fu lly in the tw enties an d thirties. D u r in g the w a r an d the
early p o s tw a r years, h o w e v e r, th e B a n k k ep t the T rea su ry
bill rate rigid ly p e g g e d , an d thus su p p lied fu n d s to the
m a rk et at the la tter’ s in itiative.

It w as o n ly in N o v e m b e r

19 51 that the T rea su ry b ill rate w as fin ally “ fr e e d ” an d the
B a n k ’ s c o n tr o l o v e r th e c o s t an d av ailab ility o f credit
th ereb y stren gth ened.
In gen eral, the B a n k ap p ears to c o n fin e its o p e n m arket

rem ain lo n g in d e b t; in m a n y cou n tries, m o r e o v e r , central

o p e ra tio n s to sh ort-term secu rities.

U p o n o c c a s io n , h o w ­

b a n k d iscou n t rates are m a in tain ed as “ p en a lty rates” in

ev er, the B a n k in terven es also in the m e d iu m and lon g -term

o r d e r to r e d u ce the in cen tiv e to b o r r o w fr o m the central

m a rk et.

b a n k , o r else su ch b o r r o w in g is lim ited d irectly b y fo r m a l

c o m p o s itio n o f the B a n k ’ s h o ld in g s are n o t p u b lish ed ,

o r in form a l d is co u n t ce ilin g s .3 F in ally, in so m e fo re ig n

it is difficu lt to d eterm in e w h eth er th e sh ort-term tran sa c­

cou n tries the cen tra l ba n k s d o n o t p ossess a su fficien t v o l­

tion s are la rgely f o r the “ B a n k in g D e p a r tm e n t” , and the

u m e o f secu rities suitable f o r o p e n m a rk et op era tion s, o r

P artly b e ca u se data o n ch a n g es in the detailed

4 Since this borrowing is done entirely by the discount houses, the
commercial banks adjust their positions by calling in their loans to the
discount houses. Changes in the volume of borrowing from the central
central b a n k p u rch a se are v ery sm all.
bank, however, do not have the same direct and immediate influence
on the availability of bank credit as in some countries where the banks
3 See "Discount Policies and Techniques Abroad” , Monthly Review, borrow directly from the central bank and where such borrowing affects
June 1956.
their own willingness to extend credit.
the n o n -ce n tra l b a n k p o r tfo lio s o f secu rities elig ib le fo r




MONTHLY REVIEW, MARCH 1957

32

C anada

lo n g e r term m o r e la rg ely fo r the “ Issu e D e p a rtm e n t” . In
an y event, d u rin g recen t years it seem s to b e agreed b y
ob serv ers

that the

Bank

has

c o n d u c te d

o p e ra tio n s

A lth o u g h the B a n k o f C a n a d a w as estab lish ed o n ly in

in

1 9 3 5 , its o p e n m a rk et o p e ra tio n s h a v e alrea dy b e c o m e its

lon g er term securities o n ly in o r d e r to sm o o th o u t u n d u e

m a in instrum ent o f m o n e ta ry p o lic y . T h e b a sic c o n d itio n s

d ev ia tion s fr o m w h a t the au th orities h av e ta k en to b e the

f o r effectiv e o p e n m a rk et op era tion s seem to h a v e b e e n

u n d erly in g cu rren t tren d o f p rice s.

larg ely fu lfilled .

T h e re has b e e n little,

if an y, su ggestion b y m a rk et ob serv ers that the B a n k w as

T h e C a n a d ia n b o n d m a rket, w h ich w as

a lrea dy qu ite active at the tim e o f th e B a n k ’ s estab lish m en t,

attem ptin g to lea d o r to d eterm in e the actu al le v e l o f p rices

has sin ce w id e n e d c o n s id e r a b ly , an d in 1 9 5 4 a g en u in e

an d rates fo r g o v e rn m e n t secu rities o f an y m atu rity ca te ­

m o n e y m a rk et b eg a n to d e v e lo p , cen terin g a rou n d a b r o a d ­

g o ry .

It sh ou ld also b e p o in te d o u t that th e “ g ov ern m en t

en in g m a rk et fo r C a n a d ia n T rea su ry bills. T h e C a n a d ia n

b r o k e r ” — o n e o f the p rin cip a l b ro k e rs in th e g ov ern m en t

c o m m e r cia l ba n k s h av e f o r so m e tim e b e e n op e ra tin g w ith

b o n d m a rk et— op era tes in m e d iu m an d lo n g -te rm g o v e r n ­

stable cash ratios, p a rticu la rly sin ce th e b ro a d e n in g o f th e

m en t secu rities o n b e h a lf n o t o n ly o f the B a n k o f E n g la n d

m o n e y m ark et. B o r r o w in g at the B a n k o f C a n a d a th rou g h

b u t also o f the g ov ern m en t departm en ts, as w ell as o f his

discou n ts an d a d va n ces b y th e ba n k s an d th rou g h sp ecia l

o w n regu lar p riv ate cu stom ers.

T h e B a n k ’ s tran sa ction s

rep u rch a se agreem en ts b y g o v e rn m e n t secu rities dea lers is

in the sh ort-term secu rities m a rk et are e x e cu te d b y an oth er

in term ittent and o n a sm all scale, b e c a u se th e b a n k s re­

firm , its “ bill b r o k e r ” — o n e o f the L o n d o n d is co u n t h ou ses.

m a in relu cta n t to b o r r o w , an d b e c a u se the d is co u n t rate

T h is b r o k e r n orm a lly effects tran sa ction s w ith all o f the

rem ains a b o v e sh ort-term m a rk et ra tes5 a n d thus ten ds

oth er d is co u n t h ou ses as w ell as w ith the b a n k s.

to d iscou ra g e su ch b o r r o w in g .

In view

o f the n eed to ev en o u t o r offset the fre q u e n t an d large
sw ings in T rea su ry cash tran sa ction s, as w ell as oth er d is­

T h e B a n k o f C a n a d a b e g a n its o p e ra tio n s in the m a rk et
s o o n after it w as estab lish ed.

D u rin g th e w a r a n d im m e ­

tu rban ces in the m o n e y m a rk et, th e B a n k ’ s o p e ra tio n s are

diate p ostw a r years, h o w e v e r, it u n d e r to o k su p p o rt o p e r a ­

co n tin u o u s an d thus en a b le it to m a in tain c lo s e tech n ica l

tion s in the g ov e rn m e n t secu rities m a rk et to m in im ize the

su rveillan ce o v e r the m arket.

interest costs o f th e w a r effort.

T h e first d ep a rtu re fr o m

T h e B a n k o f E n g la n d ’ s o p e ra tio n s defin itely h a v e a

this p o lic y o c c u r r e d in Janu ary 1 9 4 8 w h en it a b a n d o n e d

d ire ct b ea rin g o n m o n e y m a rk et co n d itio n s. F o r in stan ce,

its earlier p r a c tic e o f su bm ittin g d a ily lists o f b id s an d

w h en the B a n k desires to b rin g a b o u t a tigh ten in g o f p res­

o ffers to the m a rk et.

sures o n the availability o f fu n d s, it m a y ( b y shrinking its

K o r e a n ou tb re a k in m id -1 9 5 0 the B a n k , a c c o r d in g to o ffi­

H o w e v e r , u p to th e tim e o f th e

p u rch a ses o r m a k in g sales o r red eem in g m a tu rities) “ lea ve

cia l statem ents, w as still p rim a rily c o n c e r n e d w ith en su ring

th e m a rk et sh ort o f ca sh ” , thus fo r c in g it “ in to the b a n k ” —

a rea son a b le stability o f b o n d p rice s, ev en th ou g h it w as

that is, fo r c in g the d is co u n t h ou ses to b o r r o w at the d is­

also aim in g at k e e p in g c o m m e r cia l b a n k reserves fr o m ris­

c o u n t rate w h ich , as n oted , is a p en a lty rate. S u ch b o r r o w ­

ing.

in g at the B a n k o f E n g la n d in turn ten ds to in d u ce the

rates.

d is co u n t h ou ses to b u y fe w e r an d sell m o r e sh ort-term

h ad b e e n that, b e c a u se o f the a b sen ce o f a sh ort-term m o n e y

secu rities, th ereb y raising the rates o f interest o n these

m arket, the c o m m e r c ia l b a n k s u sed sales o f T rea su ry b ills

secu rities an d ex ertin g a restrainin g in flu en ce o n the m o n e y

to the central b a n k fo r ad ju stin g their reserve p o s itio n s,

S u b sequ en tly, the B a n k “ fr e e d ” sh ort-term interest
O n e o f the difficu lties in the earlier p o s tw a r years

m a rk et as a w h o le . T h e fr e q u e n c y w ith w h ich the m a rk et

a n d the central b a n k , w h ile n o t co m m itte d to b u y in g su ch

is fo r c e d “ in to the b a n k ” an d, o f c o u rse , the a m ou n t o f

bills, actu ally n ever re fu s e d to d o so at fa v o r a b le p r ic e s

su ch b o r r o w in g b e c o m e im p orta n t in flu en ces u p o n the

in o r d e r to en su re, in the circu m sta n ces th en p reva ilin g ,

sp rea d b e tw e e n the m arket rates an d the d is co u n t rate.

the c o m m e r cia l b a n k s’ liq u id ity.

D u rin g the first years fo llo w in g the u n p eg g in g o f the T re a s­

ever, g ra du a lly m o d ifie d an d finally a b a n d o n e d w ith the

T h is p r a c tic e w as, h o w ­

u ry b ill rate o f 1 9 5 1 , this sp rea d w as relatively w id e, bu t

in trod u ction o f n ew arran gem ents fo r d a y -to -d a y lo a n s b y

in the tw o years en d ed D e c e m b e r 1 9 5 6 it w as substantially

ba n k s to g ov ern m en t secu rities dealers in 1 9 5 4 an d w ith

n a rro w e d . N everth eless, the B a n k o f E n g la n d ’ s op era tion s

the

h a v e du rin g the in flation ary p e r io d s o f recen t years m et

m a rk et in stru m en ts.6

fu rther d e v e lo p m e n t

of

trad in g

a ctivity

in

m oney

w ith certain difficulties, as the T rea su ry fa c e d la rg e cash

T h e B a n k o f C a n a d a ’ s o p e n m a rk et o p e ra tio n s take

deficits an d resorted to substantial issues o f T rea su ry bills

p la ce o v e r the w h o le m atu rity ran ge o f the g o v e rn m e n t

p la c e d in great p a rt w ith the b a n k in g system .

A s the

G o v e r n o r o f the B a n k p o in te d o u t last O c t o b e r :
Unfortunately, at some periods during more recent years, it
has not proved possible to match the total requirements of
Government and public bodies by the sale of long-term secur­
ities. Floating debt has again at times become excessive, bank
deposits too high and technical pressures more difficult to
maintain.




secu rities m a rk et an d h a v e th ree m a jo r o b je ctiv e s .

T h e re

is, first o f all, the d a ily activity d esign ed to m in im ize m a r­
5 Since November 1956, the Bank of Canada has set the discount
rate each week at lA per cent above the Treasury bill rate; see ''Inter­
national Monetary Developments” , Monthly Review, December 1956.
Prior to this arrangement, the bill rate rose above the discount rate
only on rare occasions.
6 For a discussion of the Canadian money market, see "Monetary
and Banking Developments in Canada” , Monthly Review, August 1956.

33

FEDERAL RESERVE BANK OF NEW YORK
ket d istu rb an ces, as w ell as op e ra tio n s to offset season al

k eta b le in to m a rk eta b le secu rities.

and oth er tem p ora ry ch a n g es in m a rk et liq u id ity. S e co n d ly ,

also, o n o c c a s io n , o p e r a te d in th e lo n g -te rm b o n d m a rket.

T h e cen tra l b a n k has

the B a n k has the task o f k eep in g b a n k reserves at the lev el

T h e N eth erlan ds B a n k fa c e s som ew h a t sim ilar p r o b le m s

d e e m e d a p p rop ria te f o r m on eta ry p o lic y p u rp o s e s. F in ally,

in its o p e n m a rk et op e ra tio n s . U p to 1 9 5 2 , it is true, th ere

the B a n k ’ s o p e ra tio n s are d ire cte d at b r o a d e n in g the g o v ­

h a d b e e n an a d d ition a l o b s ta cle to o p e n m a rk et sales in

ernm ent secu rities m a rket. T h e B a n k ’ s o p e ra tio n s are best

that the T rea su ry w as c o n tin u o u sly selling sh ort-term secu r­

su m m ed u p in a 1 9 5 4 statem en t o f the th en G o v e r n o r o f

ities o n tap at fix ed rates w ith ou t rega rd to its o w n im m e ­

the B a n k o f C a n a d a , M r . T o w e rs , to the b a n k in g c o m m it­

diate fin a n cin g n e e d s; h o w e v e r, in m id -1 9 5 2 the T rea su ry
su sp en d ed su ch sales.

tee o f the C a n a d ia n H o u s e o f C o m m o n s :

S in ce then, the N eth erlan ds B a n k

h as en tered the m a rk et fr o m tim e to tim e, b o th as a seller

As part of our programme to improve and broaden the money
market for the benefit of lenders and borrowers and of our
financial structure as a whole, the Bank of Canada has been
a constant trader in Government of Canada securities since
we opened our doors in 1935. While the total amount of our
holdings of Government securities is necessarily determined
by considerations of monetary policy, we have endeavored to
help make a market for all Government issues and have been
very substantial buyers and sellers. In a sense, we perform
a jobbing function, holding the inventories which are indis­
pensable to a good market. Investment dealers and banks
also operate in this way, although naturally on a smaller
scale. We would be glad to see both dealers and banks
extend their operations of this character, and have the Bank
of Canada play a smaller part, although we would always
expect to be a substantial participant in the market.

an d as a b u y e r; o n o c c a s io n it h as rep len ish ed its securities
p o r tfo lio b y tra n sform in g th e T re a su ry ’ s b o o k d eb t, in ­
h erited fr o m the O c c u p a tio n , in to m a rk eta b le securities
w ith m aturities o f u p to five y ears. B y n o w , h o w e v e r, the
b o o k d e b t has b e e n grea tly r e d u c e d , a n d sin ce the B a n k ’ s
cu rren t secu rities p o r t fo lio is a lso rela tively sm all, the
B a n k ’s p oten tia l a m m u n ition f o r o p e n

m a rk et sales is

lim ited . T h e n a rrow n ess o f th e m a rk et— desp ite the o p e r a ­
tion s o f g ov e rn m e n t secu rities dealers— has lik ew ise ten d ed
to restrict th e s c o p e o f o p e n m a rk et op e ra tio n s . U p to the
en d o f 1 9 5 5 the B a n k h a d c o n fin e d itself to a n n ou n cin g
fr o m tim e to tim e its w illin g n ess t o sell o r b u y , at sp e cific
rates, secu rities o f v a ryin g m atu rity, an d w o u ld th en w ait
u p o n the r e a c tio n o f the m a rk et.

C o n t in e n t a l E u r o p e

S in ce th en , h o w e v e r, it

has m a d e its o p e n m a rk et sales m o r e flex ib le b y d ecla rin g

O n the E u r o p e a n C on tin en t, cen tra l b a n k o p e n m arket

its w illingness to sell secu rities o f sp ecified m atu rity at rates

op era tion s h av e so fa r rem a in ed lim ited , c o m p a r e d w ith

to b e d eterm in ed th rou g h b id s fr o m the m arket, p r o v id e d

th ose in the U n ited K in g d o m an d C a n a d a , b o th b e ca u se

the rates are a c c e p ta b le to it; the in itiative as regards the

o f n a rrow er m ark ets an d f o r oth er rea son s. In W est G e r ­

am ou n ts w h ich the B a n k m a y b e a b le to b u y still rem ains

m any, the o p e ra tio n s o f the B a n k d eu tsch er L a n d e r in

la rg ely w ith the m a rk et.

In a d d ition , to w a r d the en d o f

their presen t fo r m b e g a n o n ly in 1 9 5 5 w h en the B a n k w as

1 9 5 6 the B a n k resorted to sh ort-term rep u rch a se ag ree­

c o n fr o n te d w ith a g ro w in g n e e d to r e d u c e the liq u id ity o f

m en ts w ith b a n k s an d a p p a ren tly also w ith g ov ern m en t

the ba n k in g system b e ca u se o f the la rge in flo w o f g o ld and

securities dealers at rates set b y itself.

foreig n ex ch a n g e, an d y et h a d o n ly a n egligib le securities
p o r tfo lio .

In F ra n ce, w h ere ba n k s an d d is co u n t h ou ses pa rticip ate

In o r d e r to ob ta in su itable secu rities fo r the

in a fa irly w ell estab lish ed m o n e y m a rk et, th e cen tra l

B a n k , the B a n k an d the g ov e rn m e n t a g reed to tra n sform

b a n k ’ s op era tion s are lim ited to sm o o th in g -o u t th e p e r io d ic

certain n on m a rk eta b le secu rities h eld b y th e B a n k (th e

distu rb an ces in the flo w o f fu n d s in the m a rk et. T h e b u lk

so -c a lle d “ eq u a liza tion cla im s” crea ted d u rin g the 1 9 4 8

o f the B a n k ’s tran sa ction s, ou trigh t as w ell as u n d er rep u r­

c u rre n cy r e fo r m )

ch a se agreem en ts, is in T re a su ry b ills issu ed w ith m aturities

in to

sh ort-term

m a rk eta b le securities

w ith m aturities o f u p to tw o years. T h e op e ra tio n s o f the

o f u p to tw o years, a n d takes p la c e th rou g h a sp ecia l b ro k e r.

B a n k deu tsch er L a n d e r in the sh ort-term m a rk et are p r i­

T h e lim ited s c o p e o f the B a n k o f F r a n c e ’ s o p era tion s, as its

m arily d esign ed to o ffse t flu ctu a tion s in th e liq u id ity o f

G o v e r n o r stated in a recen t an nual rep ort, is the result o f

the ba n k in g system .

tw o fa c to r s : first, the g ov ern m en t, c o n fr o n t e d w ith a large

H o w e v e r , in the a b sen ce o f a b r o a d

sh ort-term m arket, the B a n k ’ s op era tion s are rather p a ssive

deficit, is cu rren tly issu in g T rea su ry bills o n tap at net yield s

sin ce it restricts itself to a n n ou n cin g , an d fr o m tim e to tim e

h igh er th an th e d is co u n t rate, w ith th e result that c o m m e r ­

ch a n gin g, the selling an d bu y in g rates fo r the securities it

cia l ba n k s are e n co u ra g e d to b o r r o w at the B a n k o f F r a n ce ;

deals in. T h e actu al tran sa ction s th en d e p e n d o n the d e ­

s e co n d ly , th e B a n k o f F r a n ce is u n d er leg al o b lig a tio n to

c ision s o f the ba n k s w ith w h ich the cen tra l b a n k deals.

b u y at its d is co u n t rate all T rea su ry bills o ffe re d to it in the

N everth eless, the B a n k ’ s o p e n m a rk et sales h a v e b e e n v ery

m a rk et w h en th ey are th ree m on th s o r less fr o m m aturity.

large du ring recen t m on th s w h en it has e n d e a v o re d to offset
the effects o f the h e a v y in flo w o f fo r e ig n ex ch a n g e.

In the S can d in a via n cou n tries, o p e n m a rk et op era tion s

At

h ave b e e n c o n d u c te d la rg ely in lo n g e r term g ov ern m en t

the beg in n in g o f this year, after net sales o f su ch secu ri­

securities. In D en m a rk , w h ere the cen tra l b a n k h a d alrea dy

ties h a d alm ost rea ch ed the a u th orized lim it o f 2 b illio n

b e e n o p era tin g in the b o n d m a rk et in the in terw ar p e r io d ,

D eu tsch e m arks, the B a n k n eg otia ted an agreem en t w ith

the B a n k is k n o w n to b e fa irly active an d to ex ert an im ­

the g ov ern m en t to tran sform a fu rther b illio n o f n o n m a r­

porta n t in flu en ce o n b o n d p rices. D u rin g m o s t o f the p o s t­




MONTHLY REVIEW, MARCH 1957

34

O t h e r C o u n t r ie s

w a r years, h o w e v e r, it has n o t su p p o rte d lo n g -te rm y ield s
rigid ly , b u t in stead has c o n d u c te d its tran sa ction s m a in ly

In oth er cou n tries o f the B ritish C o m m o n w e a lth , cen tral

o n the basis o f gen era l m o n e ta ry p o lic y con s id e ra tio n s . In

b a n k o p e n m a rk et o p e r a tio n s , w h ile n o t v e ry ex ten siv e,

N o r w a y , th e cen tra l b a n k d id n o t en ga ge in o p e n m arket

h a v e g en erally h e lp e d to b r o a d e n th e ca p ita l m a rk ets an d

op era tion s until qu ite recen tly , an d its tran sa ction s h ave

at the sam e tim e h a v e ex e rte d s o m e in flu en ce o n th e b a n k ­

m a in ly b e e n o n th e b u y in g side.

In 1 9 5 5 it re p la c e d its

in g system s. In th e U n io n o f S ou th A fr ic a , th e stated aim

fo r m e r rigid su p p orts b y m o r e flex ib le secu rities pu rch ases,

o f the cen tra l b a n k ’ s o p e n m a rk et p o lic y has p rin cip a lly

an d last y e a r it actu ally r e d u c e d , o n b a la n ce , its p o r tfo lio .

b e e n to m ain tain o r d e rly c o n d itio n s in the g o v e rn m e n t

S in ce th e B a n k ’ s secu rities p o r t fo lio is lim ited , it recen tly

b o n d m a rk et a n d to estab lish a p p ro p ria te rela tion sh ip s

p r o p o s e d to th e F in a n ce M in istry to c o n v e r t a p a rt o f

b etw een the rates fo r d ifferen t m aturities. T h e B a n k q u o te s

th e g o v e r n m e n t’ s b o o k d eb t, in h erited fr o m th e w artim e

b u y in g an d selling p r ic e s fo r g o v e rn m e n t secu rities, ba sed

O c c u p a tio n , in to sh ort-term b o n d s that w o u ld thus b e

o n a p a ttern o f rates that it d e c id e s o n fr o m tim e to tim e

a v ailab le to the B a n k fo r sale in its m a rk et op e ra tio n s .

a c c o r d in g to

T h e op e ra tio n s o f the S w edish cen tra l b a n k h a v e b e e n a

T h u s , th e B a n k in S ep tem b er 1 9 5 5 , b esid es in crea sin g the

m a jo r fa c to r in the b o n d m a rk et d u rin g the p o s tw a r years.

d is co u n t rate, a n n o u n c e d that it w o u ld o p e r a te in the

U p to O c t o b e r 1 9 5 4 , th ey h a d b e e n g ea red to the g o v e r n ­

b o n d m a rk et in o r d e r to b rin g th e y ie ld s o n sh ort an d lo n g ­

circu m sta n ces

an d m o n e ta ry p o lic y

m en t’ s ch e a p m o n e y p o lic y ; at that tim e, h o w e v e r, the B a n k

term g overn m en ts u p to certain lev els.

a n n o u n ce d , as p a rt o f its m o n e ta ry restraint p o lic y , that it

cen tra l b a n k ’ s o p e r a tio n s t o

aim s.

In A u stra lia , the

su p p o rt g o v e rn m e n t b o n d

n o t o n ly w o u ld abstain fr o m su p p ortin g g ov e rn m e n t b o n d s

p rices h av e until recen tly b e e n relatively rigid, an d h ave

b u t also w o u ld , if n ecessa ry , sell secu rities in the m arket

at tim es in v o lv e d v e ry la rg e a d d ition s to b a n k reserves.

in o rd e r to in crease the e ffect o f its cred it restraint m ea s­

H o w e v e r , in the sp rin g o f 1 9 5 6 , as p a rt o f the g o v e r n m e n t’ s

ures. S in ce th en the R ik s b a n k has b e e n in the m a rk et b oth

restraint m easu res, the B a n k r e d u c e d its su p p ort o f the

as a seller a n d a b u y e r, an d ap p aren tly has n o t su pp lied

b o n d m a rk et “ to a m o r e n o rm a l le v e l” , and lo n g -te rm yield s

the ba n k s w ith the fu ll a m ou n t o f reserves that w o u ld h ave

r o se b y V2 p er cen t. It sh o u ld a lso b e n o te d that th e B a n k

b e e n n e e d e d to m eet all cred it d em a n d s.

has a ttem pted to im p ro v e th e m a rk etab ility o f g o v e rn m e n t

In oth er E u r o p e a n cou n tries, cen tra l b a n k o p e n m ark et

b o n d s b y b e in g a rea d y b u y er o f su ch b o n d s in sm all

o p e r a tio n s are n egligib le. T h u s , in B elg iu m , officia l o p e r a ­

am ou n ts, an d a lso b y fa cilita tin g tran sa ction s in th e m ark et

tion s in the lo n g -te rm m a rk et are c o n d u c te d b y the F o n d s

w h en la rg e b u y in g o r sellin g o rd ers w ere in v o lv e d .

des R en tes, a g ov ern m en t fu n d estab lish ed in 1 9 4 5 to su p ­

In In d ia , h ea v y b o n d -s u p p o r t o p e ra tio n s b y th e cen tra l

p o r t g ov ern m en t b o n d p r ic e s ; th e cen tra l b a n k itself d o e s

b a n k w ere a b a n d o n e d as fa r b a c k as N o v e m b e r 19 51 w h en

n o t op era te in the m a rk et. In v ie w o f th e la rg e fin an cin g

the B a n k a n n ou n ced that, in stead o f m a in tain in g th e lo n g ­

n eed s o f the g ov ern m en t, th e u n u tilized m a rg in o f the g o v ­

term rate b y b u y in g a n y g o v e rn m e n t secu rities that w ere

ern m en t’ s leg a l cred it ce ilin g at the cen tra l b a n k — w h ich

o ffe re d to it, it w o u ld refra in , e x c e p t in sp ecia l circu m sta n ­

ap p lies b o t h to d irect b o r r o w in g a n d to in d irect b o r r o w in g

c es, fr o m b u y in g secu rities to m eet sea son al n eed s o f the

th rou g h th e B a n k ’ s secu rities p u rch a ses— has b e e n so sm all

ba n k s, w h ich w o u ld th e n ce fo r th h a v e to b e m et m a in ly

as to g iv e little le e w a y fo r o p e n m a rk et p u rch a ses; an d

th rou g h the “ d is co u n t w in d o w ” . T h is c h a n g e in the cen tra l

o p e n m a rk et sales h av e b e e n th w arted b y the la rge b o r r o w ­

b a n k ’ s o p e n m a rk et p o lic y w as in ten d ed to m a k e e ffe ctiv e

in g o f th e g ov ern m en t an d its a g en cies in th e m ark et.

the n e w ly in crea sed d is co u n t rate, a n d to assure that a sea­

T h e se fa c to r s, a c c o rd in g to the 1 9 5 5 annual re p o rt o f the

son a l c o n tra ctio n w o u ld take p la c e w h en th e p e a k o f th e

cen tra l b a n k , h a v e d e p r iv e d it o f an im p orta n t field o f

sea son a l n eeds fo r fu n d s w as ov e r. T h e cen tra l b a n k ’ s se c u ­

a ction . C o n sid e ra tio n is n o w b e in g g iv en to establish in g a

rities tran sa ction s, w h ich take p la c e either d ir e c tly w ith the

m o r e fle x ib le m o n e y m a rk et w ith in w h ich the B a n k c o u ld

ba n ks o r th rou g h b r o k e rs , h a v e also b e e n in ten d ed to h e lp

op era te m o r e effectiv ely .

the b a n k s secu re a better d istrib u tion o f th eir secu rities

In S w itzerlan d, w h ere the e c o n o m y has b e e n v ery liq u id

p o r tfo lio s , as w ell as at tim es to p rep a re the m a rk et f o r n ew

d u rin g the p o s tw a r years, it is the sm allness o f the central

g o v e rn m e n t lo a n issues.

b a n k ’ s secu rities p o r tfo lio that has p rev en ted the B a n k

o p e ra tio n s , w h ile rela tiv ely sm all, h av e b e e n m a in ly c o n ­

In C e y lo n , the cen tra l b a n k ’ s

fr o m en ga gin g in m a jo r o p e n m a rk et sales.

F o r this rea­

c e rn e d w ith h elp in g to regu late the b a n k in g sy stem ’ s liq u id ­

son , the B a n k at tim es has m a d e lim ited sales o f g o ld

ity rather than w ith a rig id an d o ften in fla tion a ry su p p ort

c o in s to the p u b lic to a b s o r b e x cess liq u id ity o f the b a n k in g

o f g ov ern m en t b o n d p r ic e s, as in m a n y oth er fin a n cia lly

system ; h o w e v e r, relia n ce has b e e n p rim a rily p la c e d o n

le s s -d e v e lo p e d cou n tries. O n o c c a s io n , h o w e v e r, th e B a n k

g en tlem en ’ s agreem en ts fo r sp ecia l reserve requ irem en ts

a id ed in stab ilizin g th e m a rk et d u rin g the issue o f g o v e r n ­

and fo r oth er m easu res, b e tw e e n the au th orities and the

m en t loa n s. In F e b ru a ry 1 9 5 6 , w h e n the B a n k ’ s p o r tfo lio

ban ks an d oth er fin an cial institutions. In a d d ition , the a c ­

w as alm ost exh a u sted bu t the e c o n o m y u n u su ally liq u id ,

cu m u la tion o f large cash b a la n ces b y the T rea su ry an d the

the B a n k issu ed its o w n o n e an d tw o -y e a r secu rities—

issu an ce b y the T rea su ry o f sp ecia l secu rities h ave h elp ed

the first in stan ce o f an issu e o f cen tra l b a n k b o n d s in m a n y

a b sorb ex cess liqu id ity.

a year.




In P akistan, the cen tra l b a n k in fo rm s its b r o k e r

FEDERAL RESERVE BANK OF NEW YORK

35

that it is p r e p a r e d to b u y o r sell secu rities, an d lea ves

In spite o f th e sev ere lim ita tion s o n o p e n m a rk et o p e r a ­

it to the m a rk et to m a k e u se o f the fa cilities thus o ffe re d .

tion s, m u c h h as b e e n a c h ie v e d in the b ro a d e n in g o f th e

In this w a y , the B a n k has b e e n a b le to relie v e p e r io d s o f

ca p ita l m ark ets in a n u m b e r o f these cou n tries, n o ta b ly

stringency w hile g u a rd in g against w h olesa le u n lo a d in g o f

C u b a , C o s ta R ic a , M e x ic o , a n d the P h ilip p in es. B u t ev en

secu rities, a n d at th e sam e tim e has p r o v id e d a m o r e o r

w h ere cen tra l b a n k o p e r a tio n s h a v e h e lp e d to w id e n th e

less con sisten t d e m a n d f o r secu rities.

ow n ersh ip o f g ov e rn m e n t secu rities, o ffic ia l com m itm en ts

In Japan , after a la p se o f m a n y years, th e cen tra l b a n k
reinstituted o p e n m a rk et o p e ra tio n s in N o v e m b e r 1 9 5 5
in a setting o f grea tly in cre a s e d b a n k liq u id ity .

S o fa r,

to su p p ort g o v e rn m e n t b o n d s h a v e o fte n ten d ed to im p e d e
efforts to p rev en t t o o ra p id an ex p a n sio n in the m o n e y
su pply.

h o w e v e r, th e B a n k ’ s sales h a v e b e e n sm all, an d the B a n k
has a greed to su sp en d th em

L esson s

several da ys p r io r to the

and

P rospects

m atu rity dates o f th e p a rticu la r secu rities. M o r e o v e r , th e

T h e e n d e a v o r o f m a n y fo r e ig n cou n tries to d e v e lo p

B a n k stands rea d y , f o r a sh ort p e r io d after th e sales, to

fa cilities fo r cen tra l b a n k p u rch a se an d sale o f secu rities

rep u rch a se at th e sam e p r ic e the secu rities that it has sold .

in th e m a rk et reflects th e n e e d b e in g fe lt th ere to im p r o v e

It sim ilarly stands rea d y to rep u rch a se as w e ll th e secu rities

th e flex ib ility a n d stren gth en the im p a c t o f m o n e ta ry an d

so ld b y th e T rea su ry u n d er th e re ce n t a rran gem en t o f p la c ­

c re d it c o n tro ls . It is a lso cle a r that th ere are m a n y in stitu­

in g n ew secu rities d irectly w ith the c o m m e r c ia l ba n k s rather

tion a l ob s ta cle s to b e o v e r c o m e in m o s t cou n tries. D e sp ite

than w ith th e cen tra l ba n k .

the a d v a n ce a c h ie v e d in a n u m b e r o f cou n tries, the o p e n

In oth er cou n tries o f A s ia as w e ll as in L a tin A m e r ic a ,

m a rk et in stru m en t is still o n ly ra rely th e m a jo r cre d it-

the s c o p e o f cen tra l b a n k o p e n m a rk et o p e ra tio n s has re ­

c o n t r o l to o l. W h e re it is u sed, w ith the n o ta b le e x ce p tio n s

m a in ed ev en m o r e lim ited b e c a u se o f th e ex trem e n a r ro w ­

o f the U n ited K in g d o m , C a n a d a , an d th e U n ited States, it

ness

th ese

g en era lly serves to su p p lem en t oth er in stru m en ts su ch as

cou n tries, m o r e o v e r , su ch o p e ra tio n s g en era lly co n s ist o f

d is co u n t rate an d reserve req u irem en t ch a n g es. N ev erth e­

p u rch ases o n ly , an d o n the rare o c c a s io n s w h en sales are

less, in the last fe w years sale o f g o v e rn m e n t secu rities

or

virtu a l a b se n ce

of

ca p ita l

m ark ets.

In

m a d e, ca re is u su ally taken n o t to d epress secu rities p rices.

by

M o r e o v e r , the p u rch a ses h a v e o fte n b e e n in ten d ed to su p ­

liq u id ity has b e c o m e an im p o rta n t in stru m en t o f m on eta ry

v a riou s cen tra l b a n k s in
F u rth erm ore,

o r d e r to
in so fa r

m op

as

up

cen tra l

e x cess

p ly n e e d e d fu n d s d ire ctly o r in d ire ctly to the g ov ern m en t

m a n a gem en t.

o r the v a riou s g o v e rn m e n t a g en cies. T h e o p e ra tio n s o f the

a b ro a d are still su p p ortin g g o v e r n m e n t b o n d p r ic e s, su ch

ba n k s

cen tra l

o p e ra tio n s are n o w b e in g e ffe cte d m o r e fle x ib ly , an d at

b a n k law s, as in th e P h ilip p in es, the D o m in ic a n R e p u b lic ,

in terest rates that reflect m o r e rea listica lly the b a sic su p p ly

secu rities
E cu ador,

sta b iliza tion
an d

fu n d s

H o n d u ra s ,

esta b lish ed

h a v e lik ew ise

u n d er

rem a in ed

v ery

sm all. In th e fa c e o f n a rro w c a p ita l m a rk ets, th e au th ori­
ties in th ese fin an cially le s s -d e v e lo p e d cou n trie s n o t o n ly

and

dem and

c o n d itio n s

p re v a ilin g

on

th e m o n e y

an d

ca p ita l m arkets.
T h e g ro w in g e x p e rie n c e o f fo r e ig n

cen tra l ba n k s is

h av e resorted to cen tra l b a n k re p u rch a se guarantees fo r

d em on stra tin g that m a n y o f th e o b s ta cle s to p r a c tic a b le

n ew ly

and

use o f o p e n m a rk et o p e r a tio n s ca n b e o v e r c o m e . T h e la ck

M e x ic o , b u t o fte n h a v e a lso e m p lo y e d m ea su res o f a m o r e

o f a su itable cen tra l b a n k secu rities p o r t fo lio is, as a rule,

issu ed

g o v e rn m e n t

secu rities,

as

in

Cuba

o r less c o e r c iv e n atu re in o r d e r to r e d u c e b a n k in g liq u id ity,

the easiest to r e m e d y ; w h en a cen tra l b a n k has n o b o o k

h elp b r o a d e n the m a rk ets, a n d a id in th e fin a n cin g o f g o v ­

cla im s o n th e g o v e rn m e n t that ca n b e tra n sfo rm e d in to

ernm ent deficits. T h u s , in M e x ic o th e c o m m e r c ia l b a n k s’

m a rk etab le secu rities, it m a y ob ta in the p o w e r to issue its

reserve requ irem en ts, w h ich h a v e lo n g in clu d e d g o v e r n ­

o w n secu rities in o r d e r to secu re the n e e d e d am m u n ition .

m ent securities, w ere recen tly tigh ten ed so as to requ ire

A m u c h m o r e seriou s o b s ta c le is t o b e fo u n d in the la ck

the ban k s to p u rch a se a d d ition a l g o v e rn m e n t securities

o f a p p rop ria te fisca l an d d e b t m a n a gem en t p o lic ie s ; still,

fr o m the cen tra l b a n k .

In H o n d u ra s , a recen t in crease in

there is g ro w in g rea liz a tion in m a n y cou n tries o f the n eed

the ba n k s’ reserve requ irem en ts p r o v id e d that it m igh t b e

f o r a better b a la n c e d b u d g e t an d f o r the c o v e r in g o f deficits

fu lfilled b y

th rou g h n o n in fla tion a ry m ea n s, a n d a n u m b e r o f cou n tries

p u rch a sin g g ov e rn m e n t secu rities fr o m

cen tra l b a n k ’ s secu rities stab ilization fu n d .

the

In the P h ilip ­

are

alrea d y

ad ju stin g

th eir

p o lic ie s

a c c o rd in g ly .

The

pin es, the c o m m e r c ia l ba n k s ca n in p a rt m eet their reserve

a b sen ce o f su fficien tly b r o a d m o n e y a n d ca p ita l m arkets is

requ irem ents b y h o ld in g g ov e rn m e n t secu rities, and in

a n oth er fu n d a m en ta l p r o b le m ; certa in cen tra l ba n k s, h o w ­

C u b a the c o m m e r cia l ba n k s h a v e rece n tly b e e n requ ired

ev er, h av e alrea d y c o n trib u te d sign ifican tly to the d e v e lo p ­

to invest in g ov ern m en t secu rities a certain p ercen ta g e o f

m en t o f su ch m a rk ets, b o th b y h elp in g to crea te a p r o p e r

their dep osits in o rd e r to b e elig ib le to a c c e p t officia l d e ­

in stitu tional fr a m e w o r k

posits. In P aragu ay, G u a tem a la , and E c u a d o r , the au th ori­

g row th o f th ese m arkets.

ties

have

co m p a n ie s

in tr o d u ce d

sp ecia l

law s

req u irin g

an d

b y n o u rish in g

the further

in su ran ce

B u t m u ch rem ains to b e d o n e . In gen eral, it is essential

an d oth er fin an cial in stitu tions to in vest in

that central b a n k op era tion s to b r o a d e n m o n e y and c a p i­

g ov ern m en t an d oth er o fficia lly fa v o r e d securities.




tal m arkets d o n o t b e c o m e m erely a m ea n s fo r fa cilita t­

MONTHLY REVIEW, MARCH 1957

36

in g g o v e rn m e n t-d e ficit fin a n cin g ; g o v e r n m e n t-b o n d -s u p p o r t

g row th an d d iv ersifica tion .

op era tion s m a y h a v e in flation ary rep ercu ssion s ev en as

v e lo p e d system s, fu rth er p rog ress hinges m a in ly o n th e

m arkets b r o a d e n .

o v erh a u lin g o f g o v e rn m e n t d e b t p o lic ie s an d tech n iq u es,

In cou n tries w ith le s s -d e v e lo p e d finan­

In cou n tries w ith m o r e d e ­

cial system s, the b ro a d e n in g o f fin an cial m ark ets, h ow e v e r,

an d o n im p ro v e m e n ts in the fu n ctio n in g o f th e m o n e y

is d ep en d en t n o t o n ly o n su itable m on eta ry , fiscal, and

m a rk et; su ch r e fo r m

d eb t-m a n a g em en t p o lic ie s , b u t also o n co n tin u e d e c o n o m ic

sid ered in a n u m b er o f W estern E u r o p e a n co u n tries.

m ea su res are alrea d y b e in g

con­

EARNINGS AND EXPENSES OF SECOND DISTRICT MEMBER BANKS IN 1956
N e t cu rren t op era tin g earnings o f m e m b e r b a n k s in the
S e c o n d F ed era l R e s e rv e D istrict in crea sed 1 0 0 m illio n d o l­

losses in 1 9 5 6 .

L o ss e s o r c h a rg e -o ffs o n loa n s also h a v e

in crea sed , e sp ecia lly du rin g the last tw o years. In a d d ition ,

lars, o r 1 8 .8 p e r cen t, in 1 9 5 6 to an all-tim e h igh o f 6 3 5

in fo u r o f the six years sin ce 1 9 5 0 the b a n k s su stained

m illio n d olla rs.

losses o n sales o f secu rities; in 1 9 5 6 , th ese losses o n secu ri­

E x p a n d e d lo a n v o lu m e an d h igh er rates

o f interest o n loa n s w ere p rim a rily re sp o n sib le f o r th e im ­

ties tota led o v e r 71 m illio n dolla rs.

p ro v e m e n t in earn ings.

in c o m e h a v e in crea sed m o r e ra p id ly than n et p rofits b e fo r e

O p era tin g ex p en ses also r o se bu t

F in a lly, ta xes o n net

n o t so ra p id ly as in co m e . A ft e r d e d u ctio n o f in c o m e taxes,

in c o m e taxes, o w in g in la rge p a rt to a d ecrea se in h old in g s

losses an d ch a rg e -o ffs, an d ch a rg es against op era tin g earn ­

o f ta x -e x e m p t in vestm ents.

ings to au gm en t reserves f o r losses o n loa n s, h o w e v e r, net

to restrain an y substantial rise in n et profits, th e ba n k s

p rofits b e fo r e d iv id en d s o f 2 5 3 m illio n dolla rs w ere less

h a v e sim u lta n eou sly au g m en ted th e size o f the reserve

than 1 p e r cen t h igh er th an in 1 9 5 5 .

T h e failu re o f net

p rofits to reflect th e substantial rise in n et cu rren t o p era tin g

“ cu s h io n ”

that

th ey

are

W h ile th ese fa c to r s te n d e d

m a in tain in g

against

p oten tia l

losses.

earn ings w as th e result b o th o f losses o n the sale o f secu ri­

P r o p o rtio n a te ly , the in creases du rin g 1 9 5 6 in b o t h ea rn ­

ties an d o f a g ro w in g v o lu m e o f c h a rg e -o ffs o n loa n s. T h e

ings an d ex p en ses w ere greater fo r m e m b e r b a n k s in the

lo a n ch a rg e -o ffs w ere p a rticu la rly im p orta n t at the central

S e c o n d D istrict than fo r m e m b e r ba n k s elsew h ere in the

reserve N e w Y o r k C ity ba n k s.

co u n try . N et cu rren t op era tin g earn ings o f S e c o n d D istrict

T o ta l cu rren t earn ings an d ex p en ses o f S e c o n d D istrict

m e m b e r ba n k s ro se 1 8 .8 p e r cen t in 1 9 5 6 , c o m p a r e d w ith

m em b er ba n k s h a v e risen con sta n tly since 1 9 5 0 , as sh ow n

1 5 .2 p e r cen t fo r all m e m b e r ba n k s.

in C h art I, an d sin ce in c o m e has in crea sed m o r e than

flects the fa c t that ba n k s h ere e x p a n d e d their loa n s m o r e

T h e differen tial r e ­

o u tg o , n et cu rren t earn ings h av e risen ea ch year to n ew

than the ba n k s in oth er parts o f the co u n try . A ft e r losses

pea ks. F o r several rea son s, h o w e v e r, net p rofits after taxes

o n secu rity sales and oth er n on recu rrin g ch a rges, net p rofits

h ave n o t k ep t p a c e w ith the rise in n et earn ings. N e t a d d i­

b e fo r e taxes fo r the S e c o n d D istrict ba n k s ro se 5 .6 p e r cen t,

tion s to v a lu a tion reserves f o r lo a n losses h av e risen su b ­

c o m p a r e d w ith 4 .2 p e r cen t fo r all m e m b e r banks.

stantially in ea ch year o f this p e r io d e x ce p t 1 9 5 2 and 1 9 5 3 .

A lm o s t 63 p e r cen t o f the o p era tin g earnings o f S e c o n d

N ea rly 9 8 m illio n dollars w ere a d d e d to reserves fo r lo a n

D istrict ban k s in 1 9 5 6 w as d eriv ed fr o m interest an d d is­




cou n ts o n loa n s, as sh ow n in C h art II.

B o th the cen tra l

reserve city ba n k s an d th e reserve city an d c o u n tr y b a n k
g ro u p s d eriv ed a b o u t th e sam e p r o p o r t io n o f their earn ings
fr o m loa n s. H o w e v e r , the reserve city an d co u n tr y b a n k s
re ce iv e d a b ou t 2 3 p e r c e n t o f th eir earn ings fr o m in v est­
m en ts c o m p a re d w ith 18 p e r cen t fr o m the N e w Y o r k C ity
b a n k s, an d 7 p e r c e n t fr o m serv ice ch a rg es o n d e p o s it
a cco u n ts against a b o u t 2 ¥2 p e r cen t fo r the C ity b a n k s.
T h e cen tra l reserve city b a n k s, o n the oth er h an d , d e r iv e d
m o r e than 10 p e r c e n t o f their in c o m e fr o m th eir trust
d epa rtm en ts, c o m p a r e d w ith a b o u t

2 V2

p e r cen t fo r b a n k s

elsew h ere in the D istrict.
B y fa r the largest item o f e x p en se in op e ra tin g a b a n k
is salaries and w ages. T h e C ity b a n k s’ ex p en ses f o r salaries
an d w ages in

1 9 5 6 a m o u n te d to 51

p e r cen t o f tota l

ex p en ses, b u t at the oth er D istrict b a n k s this item r e p re ­
sen ted o n ly 4 3 p e r cen t o f the total, reflectin g in la rg e pa rt
the lo w e r average w ag es p reva ilin g in n o n m e tro p o lita n
areas.

T h e s e c o n d m a jo r item o f ex p en se, interest o n

tim e d ep osits, is m o r e th an tw ice as la rge an ex p en se f o r
sm all b a n k s as it is fo r the la rg e C ity ba n k s, sin ce the

37

FEDERAL RESERVE BANK OF NEW YORK

Chart li
PERCENTAGE DISTRIBUTION OF SEC O N D DISTRICT M EM BER BA NK E A R N IN G S A N D EXPENSES IN 1956
EXPENSES

E A R N IN G S
N e w York central I
Reserve city
reserve city banks
and country banks
Total earnings

100.0

Interest and discount on b an s

Interest and dividends on United
States Government securities

Trust department

Interest and dividends
on other securities

Service charges on deposits

Other current earnings

v o lu m e o f tim e d ep osits at reserve city and cou n tr y ba n k s

c e n t ) , b u t in d o lla r term s it a d d e d o n ly 1 5 8 m illio n to

represents a m u ch la rger p r o p o r t io n o f total d ep osits, 38

the in crea se in tota l loa n s. T h e o n ly sign ifican t lo a n ca te ­

per cen t, c o m p a r e d w ith o n ly a b o u t 12 p e r cen t at C ity

g o r y to d e clin e at th e C ity b a n k s w as “ lo a n s to b ro k e rs
an d d ea lers in secu rities” w h ich c o n tra cte d 5 0 5 m illion

bank s.

d olla rs, o r 2 0 .3 p e r cen t, p r o b a b ly reflectin g in p a rt sm aller

O p e r a t in g I n c o m e
In 1 9 5 6 , b a n k earn ings reflected h igh er average interest
ch a rg es o n loa n s, h igh er y ield s o n G o v e r n m e n t secu rities,
an d, as sh ow n in C h art I II, the con tin u in g shift fr o m rela ­
tively lo w e r y ield in g in vestm ents to h igh er y ield in g loa n s.
A s a result, tota l cu rren t op e ra tin g earn ings o f m e m b e r
ba n k s in the S e c o n d D istrict attained a p e a k o f 1 ,5 2 3 m il­
lio n d olla rs, 2 0 6 m illio n dolla rs o r 1 5 .7 p e r cen t a b o v e
1955.

T h e c o n tin u a tio n o f cred it restraint th rou g h 1 9 5 6 ,

h o w e v e r, h a d a greater im p a ct o n the cen tra l reserve N e w
Y o r k C ity ba n k s th an it h a d o n oth er ba n k s in the S e c o n d

average in ven tories h e ld b y b r o k e rs an d dea lers du rin g
1 9 5 6 an d in p a rt a shift o f secu rity fin an cin g to o u t-o f-to w n
ba n k s an d n o n b a n k len d ers.

In the aggregate, th e ra tio

o f loa n s to total lo a n s an d in vestm ents at th e C ity ba n k s
rose fr o m 5 8 .3 p e r c e n t in 1 9 5 5 to 6 6 .3 p e r cen t in 1 9 5 6 .
A t reserve city a n d c o u n tr y ba n k s, c o m m e r c ia l loa n s also
rose, b u t an e x p a n sio n in real estate an d c o n s u m e r lo a n s
co n trib u te d sign ifican tly to

the tota l in crease.

O u tsid e

N e w Y o r k C ity , the ra tio o f loa n s to total earn in g assets
rose fr o m 4 9 .7 p e r cen t in 1 9 5 5 to 5 4 .3 p e r cen t in 1 9 5 6 .

D istrict. A lth o u g h b o th the C ity ba n k s an d the reserve city

Chart III

an d c o u n try ba n k s e x p a n d e d their lo a n p o r tfo lio s , the C ity

L O A N S A N D U N IT ED STATES G O V E R N M E N T SECURITIES
H O L D IN G S OF S E C O N D DISTRICT M E M B E R BA N K S, 1954-56

ban k s h ad to co n tra ct their in vestm ents b y n early the sam e
a m ou n t as their lo a n ex p a n sion .

O n the oth er h an d, the

reserve city and co u n tr y ba n k s in the aggregate g en erally
h eld som e ex cess reserves d u rin g the c o u r se o f the year,
an d the in crease in their lo a n s req u ired less secu rity liq u i­
d a tion . T h e average a m ou n t o f loa n s o n the b o o k s o f the
C ity ba n k s an d o f the reserve city an d c o u n try ba n k s d u r­
ing the y ear r o se 1.9 b illio n d olla rs ( 1 4 .3 p e r c e n t ) an d
0 .7 b illion dollars ( 1 3 .7 p e r c e n t ) , resp ectiv ely , w hereas
investm ents d e clin e d 1.8 b illio n dolla rs ( 1 8 .9 p e r c e n t ) in
the C ity banks and o n ly 0 .3 b illio n dolla rs ( 5 . 4 p e r c e n t )
in the ba n k s ou tsid e the C ity .

C on seq u en tly , total loa n s

an d investm ents in crea sed o n ly 0 .4 p e r cen t in the C ity
ban ks bu t 4.1 p e r cen t ou tsid e the C ity .
M o s t o f the lo a n ex p a n sion at the C ity ba n k s o c c u r r e d
in c o m m e r cia l an d industrial loa n s w h ich av era g ed 2 ,1 6 2
m illion dollars, o r 2 6 .1 p e r cen t m o r e than in 1 9 5 5 .

The

rise in c o n s u m e r loa n s also w as relatively large ( 1 1 . 3 pe r




Billions of dollars

Billions of dollars

MONTHLY REVIEW, MARCH 1957

38

N e w Y o r k C ity ba n k s in crea sed their rate o n “ p r im e ”

N e w Y o r k C ity ba n k s salary an d w a g e p a ym en ts rose 8 .6

loa n s to bu siness b o r r o w e r s fr o m 3 Vi p e r cen t, e ffectiv e at

p e r cent, w h ereas in the reserve city an d c o u n tr y b a n k s

the b eg in n in g o f the yea r, to 3 % p e r cen t in A p r il, an d to 4

th ey w ere u p 1 0 .2 p e r cen t; in b o th g rou p s the in creases

p er cen t in A u g u s t.

reflected the c o m b in a tio n o f h igh er w a g e rates and an in ­

T h e se ch a n g es p a ra lleled the rise in

the d iscou n t rate at the F ed era l R e s e rv e B a n k o f N e w Y o r k

crea se in the n u m b er o f p e o p le e m p lo y e d .

fr o m 2 Vi p e r cen t to 2 %

p e r cen t o n A p r il 13 and to 3

entire p o s tw a r p e r io d , 1 9 4 5 to date, salary an d w a g e p a y ­

p e r cen t o n A u g u s t 2 4 . A v e r a g e rates o n sh ort-term b u si­

m ents at the C ity ba n k s h a v e risen 135 p e r cen t an d at

ness loa n s at the N e w Y o r k C ity banks, as re p o rte d in the

th ose ou tsid e the C ity 2 2 8 p e r cen t.

q u a rterly interest rate surveys c o n d u c te d b y the R e s e rv e
System , r o se som ew h a t less, fr o m

D u rin g the

R e fle ctin g an in crea se in rates p a id tog eth er w ith an

3 .7 5 p e r cen t at the

ex p a n sio n in the average v o lu m e o f tim e d ep osits in 1 9 5 6 ,

beg in n in g o f 1 9 5 6 to 4 .2 2 p e r cen t at the en d o f the year.

interest p a ym en ts o n tim e d ep osits— the se c o n d largest

T h e ratio o f total in c o m e fr o m lo a n s to the average v o lu m e

single item o f ex p en ses at D istrict ba n k s— ro se 31 m illio n

o f lo a n s ou tstan din g du rin g the y ea r at the C ity ba n k s in

d ollars, o r 2 8 .7 p e r cen t. T h e av erag e e ffectiv e rate p a id

1 9 5 6 eq u a led 4 .0 8 p e r cen t, c o m p a r e d w ith 3 .5 6 p er cen t

o n tim e d ep osits in the C ity ba n k s r o se fr o m 1 .2 3 p e r cen t

in 1 9 5 5 .

in 1 9 5 5 to 1 .7 4 p er cen t in 1 9 5 6 an d in the reserve city

are

In D istrict ba n k s ou tsid e the C ity, w h ere rates

g en erally

som ew h a t h igh er

an d less resp on siv e

to

an d c o u n try ba n k s fr o m 1 .4 6 p e r cen t to 1 .7 2 p e r cen t.

m o n e y m a rk et d ev elop m en ts, th e e ffectiv e rate o n total

A s a result o f the h igh er rates o n a d va n ces fr o m

loa n s w as 5 .3 5 p e r cen t in 1 9 5 6 an d 5 .1 4 p e r cen t in 1 9 5 5 .

F e d e ra l R e s e rv e B a n k an d o n “ F ed era l fu n d s ” p rev a ilin g

the

A lth o u g h S e c o n d D istrict ba n k s d e cre a se d th eir secu ri­

du rin g 1 9 5 6 , interest p a id o n b o r r o w e d m o n e y d o u b le d

ties h old in gs, interest an d d iv id en d s earn ed o n securities

in the C ity ba n k s and sh o w e d o n ly a slightly sm aller rise

d id n ot d e clin e p r o p o rtio n a te ly b e ca u se the ba n k s so ld rela­

in the D istrict ou tsid e the C ity .

tively m o r e o f their sh ort-term , lo w e r y ield in g securities

co n tin u e d to rep resen t o n e o f the sm aller ex p en ses in cu rred

T h is item , n everth eless,

a n d also r e p la c e d m atu ring o b lig a tio n s at h igh er rates.

du rin g the year, a m ou n tin g to 2 .5 p e r cen t o f total ex p en ses

A v e r a g e tota l in vestm ents co n tra cte d 2 ,1 2 7 m illion d olla rs

in the C ity ba n k s an d

( 1 4 . 1 p e r c e n t ) fr o m the p r e v io u s y ear to 1 2 ,9 1 1 m illion

the C ity .

6/10

o i l p e r cen t in the b a n k s ou tsid e

d o lla rs, w hile interest an d d iv id en d s earn ed o n secu rities

R e c u rr in g d e p r e cia tio n o n b a n k in g prem ises, fu rn itu re

fe ll o n ly 2 5 m illio n dolla rs, o r 7 .8 p e r cen t. T h e N e w Y o r k

an d fixtu res also r o se sh arp ly in 1 9 5 6 , esp e cia lly at the

C ity b a n k s’ secu rities p o r tfo lio s d e clin e d 1 8 .9 p e r cen t an d

N e w Y o r k C ity ba n k s w h ere the in crease a m ou n ted to 3 7 .0

ea rn in gs fe ll 1 3 .2 p e r cen t.

A lth o u g h oth er ba n k s in the

p e r cen t. T h e m a rk ed rise in d e p r e cia tio n ch a rg es in 1 9 5 6

D istrict r e d u c e d their secu rities p o r tfo lio s 5 .4 p e r cen t,

w as d u e in p a rt to fu rth er m o d e rn iz a tio n o f qu arters an d

their earn ings o n secu rities r o se 2 .0 p er cen t b eca u se the

in pa rt to a ch a n g e in a c c o u n tin g p r o ce d u r e s at so m e

in crea se in interest ea rn ed m o r e than offset the d eclin e in

ba n k s.

the v o lu m e o f secu rities h eld .

bu sinesses, b a n k s h av e o fte n fo llo w e d the con se rv a tiv e

C o n tr a r y to th e p r a c tic e c o m m o n

a m o n g oth er

E arn in gs fr o m trust d ep a rtm en t op e ra tio n s o f C ity ba n k s

a cco u n tin g p r o c e d u r e o f ch a rg in g to “ oth er cu rren t o p e r a t­

in crea sed 1 9 .2 p e r cen t to 1 0 5 m illio n dollars, and at oth er

in g ex p e n s e s” the fu ll c o s t o f m o d e rn iz a tio n o f p rem ises

ba n k s trust earn ings ro se 4 .8 p e r c e n t to 13 m illio n dolla rs.

and the c o s t o f n ew e q u ip m en t p u rch a se d ev en th ou gh , fo r

H ig h er trust dep a rtm en t earn ings reflected a co n tin u e d

tax p u rp o s e s, th ey set u p a d e p re cia tio n sch ed u le and

g ro w th o f trust bu siness and h igh er secu rity yield s an d d iv i­

c h a rg ed o ff the e x p en se o v e r a n u m b er o f years.

d e n d s.

I n c o m e fr o m serv ice ch a rg es o n d e p o s it a cco u n ts

this p r o c e d u r e these co sts w ere reflected in “ oth er cu rren t

rose sh arply at b o th la rge an d sm all ba n k s, b y 2 0 .6 p er

o p era tin g ex p e n s e s” rather than “ recu rrin g d e p r e cia tio n ”

c e n t at C ity b a n k s an d 1 5 .7 p e r cen t at oth er banks.

in the “ R e p o r t o f E arn in gs an d D iv id e n d s ” .

U nder

H ow ever,

b e ca u se the co sts o f m o d e rn iz a tio n an d n ew eq u ip m en t
O

p e r a t in g

( f o r e x a m p le, e le c tr o n ic e q u ip m e n t) h a v e b e c o m e su bstan ­

E xpen ses

tial, in 1 9 5 6 so m e ba n k s a d o p te d the p r o c e d u r e o f m a k in g

E x p e n se s o f b o th classes o f b a n k s in the D istrict c o n ­
tin u ed to c lim b steadily in 1 9 5 6 .
1950

S in ce the beg in n in g o f

recu rrin g d e p re cia tio n ch a rg es rather than w ritin g o ff the
fu ll c o st im m ed ia tely .

S e c o n d D istrict b a n k s’ tota l ex p en ses h av e risen

8 2 .2 p e r cen t, o r an average o f 1 0 .5 p e r cen t p e r y ear.

N o n r e c u r r in g I t e m s

In 1 9 5 6 , ex p en ses in crea sed 1 3 .5 p e r cen t a b o v e the 1 9 5 5

S e c o n d D istrict m e m b e r ba n k s h ad n et losses o n secu ri­

levels, an d th ere w as little d ifferen ce b etw een the in crea sed

ties am ou n tin g to 71 m illio n dolla rs in 1 9 5 6 , o f w h ich 53

c o s ts o f op era tin g cen tra l reserve o r reserve city an d c o u n ­

m illio n dolla rs rep resen ted the lo s s su stained b y the cen tra l

try ba n k s. E x p e n se s w ere u p 1 3 .7 p e r cen t at N e w Y o r k

reserve N e w Y o r k C ity ba n k s.

C ity ba n k s in 1 9 5 6 an d 1 3 .3 p e r cen t elsew h ere.

3 2 .6 p e r cen t at C ity b a n k s an d 2 6 .0 p e r cen t at oth er

L o s s e s o n secu rities ro se

W a g e s an d salaries, w h ich con stitu te n early h a lf o f total

D istrict b a n k s. B e ca u se o f the con tin u in g pressu re o n re­

ex p e n s e s f o r S e c o n d D istrict m e m b e r ba n k s, d id n o t in ­

serves, p a rt o f the losses resu lted fr o m the sale o f secu ri­

c rea se so fast in 1 9 5 6 as oth er item s o f ex p en se.

ties to o b ta in fu n d s to ex p a n d loa n s, bu t so m e also resu lted




In the

FEDERAL RESERVE BANK OF NEW YORK

39

fr o m “ sw itch in g o p e r a tio n s ” u n d erta k en to establish losses

p a re d w ith 2 0 m illion d olla rs in 1 9 5 5 .

fo r ta x p u rp o s e s.

S in ce ba n k s are p erm itted to d e d u ct

a d d ition s to reserves fo r lo a n losses, o n ly m in o r ch a n ges

losses fr o m secu rity sales fr o m n et p rofits b e fo r e in c o m e

w ere m a d e in reserves fo r secu rity losses. C ity ba n k s a d d ed

In con tra st to the

taxes, it is o fte n ad va n ta g eou s, w h en secu rity p rice s h av e

a n et o f 2 .2 m illio n d olla rs to th eir reserves f o r secu rity

fallen, f o r a b a n k to sell so m e o f its in vestm ents an d esta b ­

losses, b u t the oth er D istrict b a n k s d e cre a se d th eir reserves

lish a loss w h ich w ill b e d e d u cte d fr o m n et p rofits an d thus

a n et o f 1 m illio n d olla rs.

r e d u ce the in c o m e ta x lia bility .

T h e b a n k c a n sim u l­
T a x e s , D iv id e n d s ,

ta n eou sly b u y oth er secu rities to m ain tain its in vestm en t

and

R

E a r n in g s

e t a in e d

P rofits b e fo r e in c o m e ta xes o f S e c o n d D istrict m em b er

p o r tfo lio .

ba n k s r o se to 4 4 7 m illio n d olla rs, an a m ou n t 5 .6 p e r cen t

T h e n et a m ou n t o f loa n s ch a rg e d o f f b y S e c o n d D istrict
ba n k s in crea sed sh arply in 1 9 5 6 to 3 4 .7 m illio n d olla rs,

o r 2 4 m illio n a b o v e 1 9 5 5 . In th e C ity b a n k s p rofits b e fo r e

an a m ou n t m o r e th an tw o an d o n e h a lf tim es th e c h a rg e -

taxes in crea sed 8 .4 p e r cen t, b u t in th e rem ain in g D istrict

o ffs in cu rred in 1 9 5 5 . In N e w Y o r k C ity , larger losses o n

ba n k s th ey d e c lin e d 3.1 p e r cen t. C o r re s p o n d in g ly , in c o m e

loa n s w ere su stained b y m a n y o f the ba n k s, and their total

taxes, p a id o r a ccru e d , in crea sed sh arply in th e C ity ba n k s

lo a n ch a rg e -o ffs o f 3 0 .0 m illion d olla rs c o m p a r e w ith o n ly

and d e clin e d m o d e ra te ly elsew h ere in th e D istrict.

1 0 .5 m illio n a y ea r a g o .

m a gn itu d e o f th ese ch a n g es in ta xes w as accen tu a ted b y a

The

re d u c tio n in h o ld in g s o f ta x -e x e m p t m u n icip a l o b lig a tio n s

In a p re ca u tio n a ry m o v e , stim u lated in p a rt b y the rise
in lo a n ch a rg e -o ffs an d in p a rt b y th e ta x d e d u ctib le fe a ­

o n the pa rt o f th e N e w Y o r k C ity b a n k s an d an in crease

tures o f a d d ition s to b a d d e b t reserves fo r lo a n losses, th e

in the h old in g s o f th ese secu rities b y oth er D istrict ba n k s.

C ity ba n k s a d d e d 6 5 m illio n d olla rs to th eir v a lu a tion r e ­

C a sh d iv id e n d p a ym en ts b y b o th g ro u p s o f ba n k s r ose

serves f o r lo a n losses, n ea rly tw ice th e a m ou n t a d d e d d u r­

du rin g 1 9 5 6 d esp ite the c o m p a ra tiv e stability o f net profits

R e s e rv e city a n d co u n tr y ba n k s,

after ta xes. In fa c t, d iv id e n d p a y m en ts in crea sed 11 . 0 p er

alth ou gh their lo a n ch a rg e -o ffs w ere c o m p a ra tiv e ly sm all,

cen t at the reserve city an d c o u n tr y b a n k s an d 7 .5 p er

a d d ed 33 m illio n d olla rs to their v a lu a tion reserves, c o m ­

cen t in N e w Y o r k C ity . R e la tiv e to tota l ca p ita l fu n d s at

in g the p r e v io u s y ea r.

Earnings and Expenses of Second District Member Banks, Selected Years
(In m illions of dollars)
Reserve city and country banks

New York central reserve city banks
Item
1945

1950

1955

1956

1945

1950

1955

1956

Number of banks.........................................................................................................

37

23

18

18

777

728

608

569

Earnings:
On United States Government securities......................................................
On other securities..................................................................................................
On loans (including service charges and fees on loans)..........................
Service charges on deposit accounts...............................................................
Trust department earnings.................................................................................
Other current earnings..........................................................................................

2 22.1
2 4 .2
105.6
7 .5
4 0 .7
3 2 .1

144.6
3 1 .3
215.1
16.3
5 7 .5
4 7 .4

156.2
5 0 .9
48 3 .9
2 0 .4
8 8 .0
6 7 .2

132.9
4 6 .9
6 3 3 .3
2 4 .6
104.9
7 1 .5

8 1 .5
10 .3
4 5 .2
9 .0
5 .3
1 2.9

7 2 .9
1 6 .0
142.2
1 9.6
8 .5
1 6 .3

8 7 .5
2 6 .2
2 7 0 .0
3 1 .9
1 2 .4
2 2 .2

8 7 .1
2 8 .9
3 1 9 .7
3 6 .9
13 .0
2 3 .5

Total current operating earnings...................................................

4 3 2 .2

51 2 .2

8 6 6 .6

1 ,0 1 4 .1

164.2

2 7 5 .5

4 5 0 .2

5 09.1

Expenses:
Salaries and wages— officers and employees.................................................
Interest on time deposits (including savings deposits)............................
Interest and discount on borrowed m oney...................................................
Taxes other than on net income.......................................................................
Recurring depreciation on banking house, furniture, and fixtures. . .
Other current operating expenses.....................................................................

1 16.8
5 .6
1 .0
1 0 .2
4 .2
7 8 .6

169.7
9 .7
1 .9
11 .8
3 .5
1 01.3

25 2 .7
4 2 .5
6 .6
14 .0
7 .3
148.5

2 7 4 .5
5 9 .1
1 3 .2
1 4 .2
1 0 .0
1 65.4

4 6 .4
2 3 .8
0 .2
6 .0
3 .7
3 2 .3

8 7 .4
3 1 .7
0 .3
8 .3
5 .6
5 6 .3

137.9
6 6 .4
1 .2
11.1
9 .6
8 4 .6

152.0
8 1 .1
2 .2
1 2 .0
1 1 .3
9 3 .4
3 5 2 .0

Total current expenses........................................................................

2 1 6 .4

2 97.9

4 7 1 .6

5 3 6 .4

1 12.4

189.6

3 1 0 .8

Net current operating earnings before income taxes....................................

2 1 5 .8

2 1 4 .3

3 9 5 .0

4 7 7 .7

5 1 .8

8 5 .9

139.4

N et recoveries ( -f-) or charge-offs ( —) on loans.............................................
Security profits and recoveries ( + ) or charge-offs ( —) ..............................
All other recoveries (-}-) or charge-offs ( —), net............................................
Net additions to ( —) or deductions from ( + ) valuation reserves for:
Loan losses.............................................................................................................
Security losses......................................................................................................

+
1 .3 *
+ 1 0 0 .2 f
- 12 .4

Net profits before income taxes.............................................................................
Taxes on net income...................................................................................................

+
-

2 .7
1 3.5
3 .8

-

1 0.5
3 9 .9
0 .3

-

+

1 4.2
6 .9

- 3 6 .4
-r 11.1

-

3 0 4 .9
9 0 .7

21 4 .0
6 8 .6

31 9 .0
132.5

Net profits after income taxes........................................................

2 1 4 .2

145.4

Cash dividends paid or declared............................................................................
Retained earnings........................................................................................................

7 3 .0
141.2

8 9 .4
5 6 .0

—

—

+

3 0 .0
5 2 .9
1 8.4
6 5 .2
2 .2

+
+
-

157.1

1 .2 *
2 6 .lt
2 .7

+
-

1 .2
6 .8
0 .6

-

2 .8
1 4 .6
3 .1

-

4 .7
1 8.4
1 .5

—

+

12.1
0 .2

-

1 9 .8
5 .0

+

3 2 .6
1 .0

—

7 9 .0
2 3 .2

104.1
3 8 .8

3 4 5 .8
156.8

7 6 .4
1 6 .0

100.9
3 7 .4

1 86.5

189.0

6 0 .4

5 5 .8

6 5 .3

6 3 .5

123.9
6 2 .6

133.2
5 5 .8

1 3.9
4 6 .5

2 0 .2
3 5 .6

3 1 .0
3 4 .3

3 4 .4
2 9 .1

• Includes transfers to or from valuation reserves for loan losses,
Includes transfers to or from valuation reserves for losses on securities.

t

Sources: Board of Governors of the Federal Reserve System, 1945-55; figures for 1956 are preliminary and are compiled by the Federal Reserve Bank of New York.




40

MONTHLY REVIEW, MARCH 1957

h a n d at the beg in n in g o f 1 9 5 6 , cash d iv id e n d p a ym en ts

sh o w e d a d eclin e, retain ed earn ings w ere sm aller at b o th

d u rin g the y ear rep resen ted an average retu rn o f 4 .9 p er

g rou p s o f ba n k s.

cen t f o r the C ity ba n k s and o n ly 3 .7 p e r cen t fo r the reserve

d e clin e d 6 .8 m illio n d olla rs, o r 1 0 .9 p e r cen t, to 5 5 .8 m il­

c ity an d c o u n try ba n k s.

S in ce larger ca sh pa ym en ts w ere

lio n dollars, w h ile in the oth er D istrict ba n k s th ey fe ll 5 .2

m a d e in 1 9 5 6 w h ile n et profits in crea sed o n ly m o d e ra te ly o r

m illio n d olla rs, o r 1 5 .2 p e r cen t, to 2 9 .1 m illio n d olla rs.

In N e w Y o r k C ity retain ed earn in gs

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

1956

Unit
January

December

November

January

Latest month Latest month
from previous from year
month
earlier

U N IT E D ST A T E S

Production and trade
Industrial production*.............................................................................
Electric power output*............................................................................
Ton-miles of railway freight*................................................................
Manufacturers’ sales*...............................................................................
Manufacturers’ inventories*..................................................................
Manufacturers’ new orders, to ta l*......................................................
Manufacturers’ new orders, durable goods*...................................
Retail sales*.................................................................................................
Residential construction contracts*...................................................
Nonresidential construction contracts*............................................
Prices , wages, and employment
Basic commodity pricesf........................................................................
Wholesale pricesf.......................................................................................
Consumer pricesf.......................................................................................
Personal income (annual rate)*............................................................
Composite index of wages and salaries*...........................................
Nonagricultural employment*..............................................................
Manufacturing employment*................................................................
Average hours worked per week, manufacturingf.......................
U nemploy ment............................................................................................

1 9 47 -49 =
1 9 47 -49 =
1947-49 =
billions of
billions of
billions of
billions of
billions of
1 9 47 -49 =
1 947 -49 =

100
100
100
$
$
$
$
$
100
100

1 9 47 -49 =
1947 -49 =
1947-49 =
billions of
1947 -49 =
thousands
thousands
hours
thousands

100
100
100
$
100

9 1 .7
1 1 6 .9p
118.2
—
—
5 2 , 112p
17,033p
4 0 .2 p
2 ,9 4 0

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

73,660p
89,010p
109,210p
30,916p
82,754
13 9 .4p

146p
226 p
—
—
—
—
—
—
—
—

147
220
lllp
2 6 . 7p
5 1 .4p
2 8 .8 p
1 4 .4p
1 6 .5p
n.a.
311

146
218
104
2 8 .7
5 1 .4
2 9 .4
15.1
1 6 .4
197
272

9 2 .9
116.3
118.0
3 3 3 .5p
153p
52,071p
17,079p
4 1 .0
2 ,4 7 9

9 2 .7
115.9
117.8
3 3 3 .5
153
5 1,950
17,043
4 0 .6
2 ,4 6 3

143
211
112
2 7 .0
4 6 .3
2 8 .1
1 4 .7
1 5 .7
290
306
8 9 .4
111.9
114.6
316.7
145
51,080
16,944
4 0 .7r
2 ,8 8 5

Banking and finance
Total investments of all commercial banks.....................................
Total loans of all commercial banks...................................................
Total demand deposits adjusted..........................................................
Currency outside the Treasury and Federal Reserve B anks*. .
Bank debits (337 centers)*.....................................................................
Velocity of demand deposits (337 centers)*...................................
Consumer instalment credit outstandingf.......................................
United States Government finance (other than borrowing)
Cash income.................................................................................................
Cash outgo....................................................................................................
National defense expenditures..............................................................

millions of $
millions of $
millions of $

4 ,8 8 6
5,599
3 ,651

74,450p
91,240p
110,650p
3 0 ,9 7 0
76 ,5 7 6
138.1
31,5 5 2

74,360p
8 9 , 580p
108,210p
3 0,859
7 8 ,7 9 4
140.0
3 1,024

87,430
81,980
108,900
30,498
74,728r
134.4
28,886

5 ,8 9 9
7 ,4 4 8
3 ,4 4 8

6 ,3 3 2
6,5 7 7
3 ,4 5 0

4 ,7 2 9
5 ,3 2 3
3 ,3 9 4

+
+
-

1
3
7
7
#
- 2
- 5
+ 1
-1 4
+14

+ 2
+ 7
+ 5
- 2
+ 12
- 2
- 8
+ 4
-2 2
- 3

+

+
+
+
+
+
+
+
+

1
1

#
#
#
#
- 2
+ 19
+
+
+

1
2
1
#
8
1
2

3
4
3
5
6
2
1
1
2

-1 6
+ 9
#
+ 1
+11
+ 4
+ 9

-1 7
-2 5
+ 6

+
+
+

+ 5
-1 2
+14
#
#
#
+ 13
+ 8
+ 5
+ 3
#

+ 3
-1 8
+ 11
+ 3
+ 1
+ 1
+10
+10
+ 6
+ 4
+ 7

3
5
8

S E C O N D F E D E R A L R E S E R V E D IS T R IC T
Electric power output (New York and New Jersey)*.....................
Residential construction contracts*........................................................
Nonresidential construction contracts*.................................................
Consumer prices (New York C it y )t .......................................................
Nonagricultural employment*...................................................................
Manufacturing employment*....................................................................
Bank debits (New York C ity )* ................................................................
Bank debits (Second District excluding New York C ity )* .........
Velocity of demand deposits (New York C ity )* ...............................
Department store stocks*...........................................................................

1 9 47 -49 = 100
1947 -49 = 100
1947-49= 100
1947 -49 = 100
thousands
thousands
millions of $
millions of $
1947 -49 = 100
1947 -49 = 100
1947 -49 = 100

163p
—
—

115.6
7 ,8 4 1 .8 p
2 , 6 9 6 . Ip
74,233
5,4 7 0
183.6
119
131

155
n.a.
n.a.
1 15.5
7 ,8 6 0 .2
2 ,6 9 8 .3
65 ,6 7 4
5 ,0 7 0
1 74.8
116
13 lr

155
141p
30 5p
115.6
7 , 8 5 8 . lr
2 ,6 8 6 .2r
72,031
5 ,1 1 5
186.3
120
131

159
222
373
112.1
7 ,7 6 2 .8
2 ,6 8 2 .3
67,646
4 ,9 8 9
173.7
114
123r

N ote: Latest data available as of noon, March 4, 1957.
p Preliminary.
* Adjusted for seasonal variation.
r Revised.
t Seasonal variations believed to be minor; no adjustment made,
n.a. N ot available.
# Change of less than 0.5 per cent.
Source: A description of these series and their sources is available from the Domestic Research Division, Federal Reserve Bank of New York, on request.