View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

MONTHLY REVIEW, MARCH 1960

39

T h e B u s in e s s S itu a tio n
Economic activity in February appears to have con­
tinued at a high level, sustaining the gains made in January
after the first impulse from the reopening of the steel
mills had spent its strength. Indeed, expansion over the
four-month period of renewed steel output has been
broadly based and, on the whole, rapid—although the
pace recently has not been fully satisfactory to those who
had expected the “soaring sixties” to produce immediate
miracles. While steel production in February was slightly
below the January record, preliminary data suggest that
output in many other industries was steady or rising. Auto
assemblies, however, were cut back from the very high
rate reached in the preceding month, as inventories piled
up. Sales of consumer goods maintained high levels and
the rate of investment in fixed capital also appeared to be
firm. Weekly figures on bank credit corroborated the im­
pression of generally sustained strength, as business loan
demand picked up in February following a somewhat weak
performance earlier in the year.
THE POST-STRIKE REBOUND

accumulating stocks at a pace that they considered satis­
factory. Steel ingot production edged below 95 per cent
of capacity in February for the first time since the beginning
of December (with the exception of Christmas week), but
industry sources expect it to remain above 90 per cent of
capacity through March.
Automobile inventories began to rise rapidly after the
turn of the year, and dealers were expected to have almost
400,000 more domestically produced cars on hand by the
end of February than at the end of December. This would
bring inventories close to an all-time record. With stocks
accumulating so rapidly, some producers sought to adjust
output more closely to current levels of sales and conse­
quently curtailed production during much of February.
Although auto production in January had set a new record
for that month, it is highly unlikely that the industry’s
earlier prediction of a quarterly output of 2.2 million cars
will be fulfilled. The first-quarter total will still be quite
high, however, and the sales figures for February (dis­
cussed below) are more encouraging than the January
results which led to production cutbacks.

The most pressing needs of the economy in the months
MODERATE BUT WIDESPREAD GAINS
immediately after the steel strike were to restore a steady
Chiefly because of the sharp rise in output of automo­
flow of steel products to durable goods manufacturers and
to rebuild automobile inventories so as to remove the biles and steel, but also reflecting production gains in ma­
restraint upon car sales imposed by limited dealer stocks. chinery and other metal-working industries and in certain
By the end of February, it appeared that the rapid rate of nondurable goods industries and utilities as well, total
production since early November had fully met these industrial production rose 3 points in January to 112 per
immediate needs. Output had already risen sufficiently by cent of the 1957 average. This was 2 points above the
the end of 1959, according to new United States Depart­ previous peak, set last June, just before the steel strike
ment of Commerce figures, to carry fourth-quarter gross (see Chart I). Substantial movements in the index are
national product to a seasonally adjusted annual rate of not likely in February, in view of the declines in steel
$483.5 billion ($1.5 billion higher than the preliminary and automobile output that offset the moderate gains
estimates of the Council of Economic Advisers). This which appear to have continued in some other lines.
level was almost $5 billion above the preceding quarter,
Along with the new production record set in January,
although still $1 billion below the second-quarter 1959 nonfarm employment also reached a new high, rising
peak. The largest movement within the total was the by nearly 150,000 persons to 52.8 million (seasonally
change in nonfarm inventories, which had been liquidated adjusted Bureau of Labor Statistics series). The increase
at a seasonally adjusted annual rate of $1.8 billion in the was concentrated in the auto industry and in retail and
third quarter and were replenished in the fourth quarter at wholesale trade. There was a largely seasonal decline in
a rate of $2.3 billion.
total employment, according to the Census Bureau, reflect­
The brisk pace of industrial production continued into ing such factors as the termination of holiday jobs. These
the new year, permitting further inventory building, and estimates, based on a population sample survey rather than
by early February a number of industries that had antici­ on reports from employers (and which include farm
pated tight steel supplies for some months to come were workers, self-employed persons, and domestic workers),




40

MONTHLY REVIEW, MARCH 1960

Chart I

CONTINUING BUSINESS STRENGTH
Per cent

Per

M illions of persons

M illio n s of p e rso n s

5 3 -------------------

53

s

I

52

N o n fa rm employment*^*
Seaso n ally adjusted

JV

cent

J- l —

.I

occurred despite a $1.1 billion increase in personal con­
tributions for social insurance, arising primarily from the
recent increase in contribution rates (such personal con­
tributions are deducted in computing personal income).
The upward course of personal income, but more par­
ticularly the spurt in auto production that alleviated short­
ages of new cars in dealers’ showrooms, pushed total retail
sales in January 2 per cent above the reduced December
level, after seasonal adjustment (see Chart I). At $17.8
billion, the January sales total was somewhat below the
previous 1959 peak, possibly because income lost in strikeaffected areas was still retarding sales in certain lines.
The daily average rate of automobile sales in January
was 31 per cent higher than the previous month and almost
11 per cent above a year earlier. Year-to-year gains in­
creased further during the first twenty days of February.
If the February pace were to continue through the year,
allowing for seasonal variations, total 1960 sales of domes­
tic autos would be above 6 million units—although less
than the 6.5 million figure appearing in many forecasts

51
50

1 , 1 .1 , 1 ...I,- 1 .1 I

C h a r t II

Per cent

low
128

130

1
q

_

W holesale prices
of industrial m aterials
1947-49=100

126
_ i i

1 iM i t i t i i
1958

t t 1 i t 1 i i 1 i i
1959

_

CONSTRUCTION OUTLAYS AND HOUSING STARTS
Season ally adjusted ann ual rates

128

B illions of dollars

B illions of dollars

126

17.5 I-----------------

17.5

i i
1960

^ Reflects paym ent of retroactive sa la ry increases to Fed eral Governm ent
em ployees.
United States Bureau of Labor Statistics series.
Sources: Board of G overnors of the Federal Reserve System , United States
Bureau of Labor Statistics, and United States Department of Comm erce.

Private
nonresidential outlays

15.0

12.5

J ___ 1
___ I

B illio n s of d o lla r s

I

I
____I
___ 1
____I Billions of
___ L
Private
residential outlays

22.5




— 22.5

20.0

20.0
B illio n s of d o lla r s

Source:

12.5
d o lla rs

----------------- 25.0

25.0

indicate that total employment fell about 3 per cent in
January to 63.8 million persons. The seasonally adjusted
unemployment rate remained at the December level of 5.2
per cent of the civilian labor force, close to the 4.9 per
cent level prevailing before the steel strike.
Average hourly and weekly earnings in manufacturing
rose to new highs in January, and average hours worked
receded less than is usual for that month, with the result
that personal income derived from wages and salaries
moved up again. Smaller increases also occurred in some
other nonagricultural components of personal income, but
no further gains were registered in farm income which had
been recovering in the preceding three months. Total per­
sonal income rose to a record $393.3 billion (seasonally
adjusted annual rate), 2.5 per cent above the pre-strike
peak of last June. The gain of $1.2 billion over December

15.0

United States Department of Commerce.

Billions of d o llars

FEDERAL RESERVE BANK OF NEW YORK

late last year. Consumer purchases of other goods, both
durable and nondurable, were sustained in January at the
levels of the preceding month.
Wholesale prices remained relatively stable during the
period of sharply expanding production in December and
January. The wholesale price index was unchanged in
December and then edged up in January by f 10 of a per­
centage point. Half of the January increase was in farm
products and processed foods, however, which usually
move up at this time of year. The index of industrial
materials prices—which includes all the unfinished goods
in the wholesale price index, except for farm products,
and is particularly responsive to movements in the prices
of metals and minerals—might have been expected to
show some upward movement as the production of dur­
able goods rose rapidly. But this index rose only %0 of a
point in January, following a drop of %0
December.
Although the January level was a new high, the net rise
since mid-1959 has been slight (see Chart I), and there
were no signs of any further advance in early February.
CONSTRUCTION TRENDS

Both public and private construction outlays (seasonally
adjusted) increased in February for the third consecutive

41

month, carrying total outlays almost 10 per cent above
November. In the private sector, expenditures for new
nonresidential construction expanded through most of
1959 (see Chart II) but fell in September and October as
a result of steel shortages. While some part of the renewed
expansion in the subsequent months was undoubtedly a
reaction to this interruption and therefore temporary in
character, the accelerated expansion in February seems
to indicate basic strength in this area.
Outlays for private residential construction had been
falling for six months before turning up in December, with
strong competition for funds from other borrowers one
major cause of the decline. Probably no great significance
should be attached to the marked January increase in
outlays, as the sharp jump in seasonally adjusted housing
starts in December was followed by an equally sharp
decline in the following month (see Chart II). The Federal
Housing Administrator has characterized the December
increase in housing starts as a “freak figure”. The con­
tinued, though smaller, increase in outlays in February
does suggest, however, that the 1959 decline may be level­
ing out. This tends to confirm other indications that the
availability of mortgage funds is at least not tightening
further.

M o n e y M a rk et in F eb ru a ry
The money market remained moderately tight during
February. Member bank reserve positions in the aggregate
continued under pressure, despite a decline in required
reserves resulting from a further seasonal reduction in
bank credit. Irregular fluctuations among a number of
factors influencing bank reserves caused intermittent re­
laxation of reserve pressures on the large New York City
banks. There was occasional easing in the money market
as a result, and some trading in Federal funds occurred
at such times at rates below the 4 per cent discount rate.
However, there were only three days during the month
when the bulk of the trading in Federal funds took place
at rates below 4 per cent. Rates on new and renewal loans
to Government securities dealers at the New York City
banks, which were 5 per cent at the start, ranged from
4 V per cent to 5Va per cent during the course of the
2
month, closing at 4 ^ - 5 per cent. Treasury bill rates
extended their sharp decline of January into the early




part of February, but moved higher during the balance
of the month.
The market for Treasury notes and bonds, particularly
longer term issues, continued during the greater part of
the month to react to expectations that the expansion in
business and credit would be more moderate than had
been anticipated earlier and that there was less danger
of an inflationary boom. In the final week of the month,
however, rates increased sharply on long-term issues and
declined on intermediate issues, in response to legislative
developments described below.
MEMBER BANK RESERVES

Average excess reserves of all member banks, at $423
million, were $95 million below the average for the four
statement weeks in January, while average borrowings at
the Federal Reserve were $90 million lower at $813
million. A sharp drop in net borrowed reserves during

42

MONTHLY REVIEW, MARCH 1960

the last statement week reflected mainly an unexpected
increase in float, resulting from heavy snowstorms that
delayed check collections.
Weekly reserve changes from operating factors were
of moderate size during the first three statement weeks,
as fairly wide swings in float were counterbalanced by
changes in other factors. In the third week, for example,
an increase in float of more than $300 million was offset
by an increase in Treasury deposits at the Federal Reserve
and by Treasury interest payments to the Federal Reserve
System (this last item is included in the category “other
deposits, etc.” in the table). In the final statement week,
member banks gained a substantial volume of reserves
as the unexpected rise in float was added to moderate
gains from most other operating factors. Over the four
weeks, operating transactions largely balanced out, absorb­
ing $12 million of reserves. Total required reserves, on
the other hand, continued to decline seasonally in each
week, releasing $451 million of reserves over the fourweek period.

C hanges in F a cto rs T en ding to In crease or D ecrea se M em ber
B ank R eserv es, February 1960
(In m illion s o f d o lla rs; ( + ) denotes increase,
(—) d ecrease in e x ce ss r ese rv e s)
Daily averages—week ended
Factor
Feb.
3

Feb.
10

Feb.
17

Feb.
24

Net
changes

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

-f
+
+
+

1
5
84
31
1

+ 88
- 255
- 33
+ 24
- 11

- 180
+ 314
- 32
- 22
- 240

4+
+
+
—

Total...........................................

+

60

- 187

- 161

+ 276

— 12

8
5

+

87
29

+

55
21

— 47
— 55

— 197

35

+

42

+ 123
1

— 353
— 2

— 153
— 3

1

-

2

-

1

_

Direct Federal Reserve credit transactions
Government securities:
Direct market purchases or sales.............. Held under repurchase agreements........... +
Loans, discounts, and advances:
Member bank borrowings......................... +
Other..........................................................
Bankers' acceptances:
Bought outright......................................... Under repurchase agreements...................

70
157
69
9
29

—
+
+
—
—

—

21
221
88
20
279

4

Total...........................................

+

31

-

16

+

86

— 457

— 356

Member bank reserves
With Federal Reserve Banka........................
Cash allowed as reserves f .............................

+
-

91
47

- 203
- 16

+

75
26

— 181
— 4

— 368
— 41

Total reserves f ................................................. +
Effect ef change in required reserves f . ........... +

44
59

- 219
+ 211

+

49
94

— 185
+ 87

— 409
+ 451

8

+

45 — 98

Excess reserves f ..............................................

+ 103

Daily average level of member bank:
Borrowings from Reserve Banks..................
Excess reserves f ............................................
Net borrowed reserves f ................................

808
431
377

-

850
423
427

Note: Because of rounding, figures do not necessarily add to totals.
• Includes changes in Treasury currency and cash,
t These figures are estimated,
t Average for four weeks ended February 24, 1960.




973
468
505

620
370
250

+

42
8131
4231
3901

Federal Reserve holdings of Government securities were
reduced in each statement week during February, but the
amounts involved were small relative to the extensive net
sales and redemptions in the previous month, when the
return flow of currency was of massive proportions.
Between January 27 and February 24, securities held out­
right by the System Open Market Account were reduced
by $257 million, principally as a result of redemptions.
GOVERNMENT SECURITIES MARKET

Early in the month, the attention of the Government
securities market was focused on the Treasury’s refunding
of $11,363 million of 3% per cent certificates maturing
February 15 and $198 million of W 2 per cent notes due
April 1, 1960. In exchange for these securities the Treas­
ury offered a one-year certificate and a four-year ninemonth note, both bearing a 4% per cent coupon; the
certificate was offered at par and the note at 99% to yield
about 4.93 per cent. The refunding terms were announced
on January 28, with subscription books open from Febru­
ary 1 to February 3 and settlement as of February 15.
During the subscription period, the maturing certificates
were bid at a premium, with prices ranging from 100 y32
to 100%4, which encouraged holders who had planned to
redeem at maturity to sell their holdings in the market. As a
result, by the subscription date a large proportion of the
maturing issues was in the hands of investors who wished
to take advantage of the exchange. Holders of $10,982
million of the maturing certificates and $141 million of the
notes elected to exchange into $6,935 million of the new
certificate and $4,188 million of the new note. In “whenissued” trading, both the certificate and the note were
generally quoted at small premiums over the Treasury’s
offering price. This exchange included $5.5 billion of the
maturing securities held by the Federal Reserve System,
of which $2 billion was exchanged for the note and the
balance for the certificate. Attrition on the offering
amounted to only $438 million, about 8 per cent of the
publicly held portion of the maturing securities.
Toward the end of the month the market for Govern­
ment notes and bonds was heavily influenced by action
taken by the Ways and Means Committee of the House
of Representatives. The committee approved a bill that
would, if enacted by Congress, permit the Treasury to
engage in advance refunding, as well as to undertake other
long-term financing in an amount not to exceed 2 per
cent of the outstanding marketable debt annually, at yields
in excess of the 4V4 per cent statutory interest rate ceiling.
Underlying the strong market for Treasury notes and
bonds early in February, and for longer term issues until
the final week of the month, was the growing feeling that

FEDERAL RESERVE BANK OF NEW YORK

the rate of economic expansion might be slower than had
been expected earlier, that in any event inflationary
pressures seemed to be easing, and that as a consequence
the credit markets might not tighten further. The lessened
optimism concerning the general business outlook was un­
derscored by continued weakness in the stock market
through the first half of February. The bond market
was further buoyed by the excellent reception accorded
the Treasury’s refunding early in the month. The new
4% per cent note of 1964 traded at a premium over
offering price throughout the month, closing at 100.14 on
February 29. This note and longer term issues as well
were in fairly steady demand by small investors and insti­
tutional buyers.
Toward the end of the month, prices of most notes and
bonds weakened as investors awaited some clearer indica­
tion of the prospects for economic activity and credit de­
mands. This tendency was resisted, however, by issues
maturing in 1961-62 and certain other issues, which the
market considers most eligible for possible advance re­
funding. Conversely, the prices of long-term Treasury bonds
were marked down sharply. Over the month as a whole,
the average yield on long-term Treasury bonds had
declined to 4.27 per cent by February 29 from 4.34 per
cent on January 29. On three- to five-year issues, the yield




43

decline was from 4.77 per cent to 4.66 per cent.
Treasury bill rates moved sharply lower through Febru­
ary 8, when the second weekly bill auction of the month
was held (see chart). Strong demand from nonbank inves­
tors during this period was reinforced by switching out of
rights to the new Treasury issues into bills. The bill market
was further strengthened by expectations that funds released
by a sizable net redemption of Government agency obliga­
tions and by attrition in the refunding would swell the
demand for bills. Under aggressive bidding, the average
issue rates in the February 8 auction declined to 3.563 per
cent on the 91-day bills and 4.094 per cent on the 182-day
bills. These rates were about 1 percentage point lower
than those established in the first weekly auction of 1960.
Following the February 8 bill auction, the downward
movement in Treasury bill rates was reversed and rates
moved sharply higher in response to liquidation by corpo­
rations and banks. Moreover, the Government agency
redeeming its own securities liquidated bills to obtain the
needed funds while the reinvestment demands for Treas­
ury bills arising from this redemption, and from attrition
on the Treasury refunding, were smaller than had been
expected earlier. In the auctions on February 15 and 22
the average issuing rates on 91-day bills rose to 4.045
per cent and 4.168 per cent, respectively, while the 182day bills climbed to 4.294 per cent and then to 4.396
per cent. Although the auction held on the last day of
the month resulted in rates of 4.278 per cent and 4.458
per cent on 91-day and 182-day bills, respectively, these
rates quickly declined in subsequent market trading.
OTHER SECURITIES MARKETS

The market for seasoned corporate and State and local
government securities retained a firm tone until the latter
part of February, under the same influences that were
operative in the Government securities market. Although
the volume of new securities flotations was comparatively
light, toward the end of the month investor resistance to
the current price and yield level appeared to be developing,
as new issues were slow in moving from dealer portfolios
and the calendar of forthcoming issues, particularly mu­
nicipals, built up. The average yields on Moody’s indexes
of seasoned Aaa bonds declined over the month from
4.60 to 4.54 per cent for corporates and from 3.47 to 3.39
per cent for tax-exempt securities.
Flotations of new tax-exempt securities during February
totaled only $523 million, lower than the total for either
January 1960 or for February 1959, when volume
amounted to $610 million and $791 million, respectively.
Receptions accorded the new issues were mixed, ranging
from poor—in cases where yields were measurably below

M

MONTHLY REVIEW, MARCH 1960

recent going levels for comparable outstanding securities—
to excellent. Included in the new flotations was a group
of eighteen issues of Aaa-rated Housing Authority bonds,
totaling $102.8 million and due 1960-2000. These issues,
which were reoffered to yield from 2.60 per cent to 3.90
per cent, were very well received, and some of the longer
maturities moved to premium bids as much as W a points
above the issuing price.
The volume of new corporate bond offerings continued
to be relatively small during February. Flotations of
$240 million fell short of the $324 million in January,
but exceeded the meager $184 million total in February
1959. The few sizable corporate issues also encountered
mixed receptions.
One of the largest issues marketed during the month,
not included in the preceding totals, was $125 million of
25-year 5 per cent bonds of the International Bank for
Reconstruction and Development (Aaa rated). This issue,
offered at par, quickly moved to a premium but by the
end of the month was priced close to par. The initial
announcement of the flotation indicated that it would be
for $100 million, but the amount subsequently was raised
to $125 million on the evidence of strong investor inter­
est. The market for United States Government agency
obligations continued strong during the month, and new

issues had enthusiastic receptions. Of the $625 million
total of agency flotations, more than three quarters repre­
sented refundings. Refundings fell considerably short of
total agency redemptions, however, as the agency referred
to earlier in this article refunded only $162 million of
$509 million of maturing securities.
Following the sharp drop in Treasury bill rates early
in the month, interest rates on bankers’ acceptances, sales
finance company paper, and commercial paper were re­
vised downward, but in the two latter cases rates were
increased after midmonth. Dealers in bankers’ acceptances
reduced rates on all maturities by V* per cent on Febru­
ary 8, bringing the new bid rate on 90-day unindorsed
acceptances to 4 Vi per cent. Rates on directly placed sales
finance company paper were cut by Vi to % of a percent­
age point the following day, and at the same time the 30- to
89-day paper was split into maturities of 30 to 59 days
and 60 to 89 days. Paper in the latter category was re­
duced V2 per cent to 33 per cent. On February 17 and
A
18, these companies raised their rates Va to V2 per cent,
returning the 60- to 89-day paper to the 4V4 per cent level.
Rates on prime 4- to 6-month commercial paper were
reduced from 4% per cent to 4% per cent on February 9,
but this was nullified by advances of Y4 per cent on Febru­
ary 16 and Vs per cent on February 23.

I n te r n a tio n a l D e v e lo p m e n ts
BUSINESS TRENDS ABROAD

The economic advance in the major industrial countries
abroad has quickened perceptibly in recent months. The
expansion, which had been supported in its earlier stages
by a rise in consumption and exports, was reinforced by
a distinct pickup of business investment in plant and equip­
ment toward the end of 1959. As a result, the vigorous
upswing broadened in the closing months of the year,
and in most countries industrial production rose far above
the previous peaks of the 1956-57 boom. In 1960, with
all major components of demand expanding, it is widely
expected that Western Europe, Canada, and Japan will
attain new records in output, incomes, and employment.
So far, the expansion has generally been orderly, but the
danger of excesses has recently begun to loom larger. In
several countries, prices have risen somewhat, signs of
strain have multiplied in the labor markets, and increases
in imports have tended to reduce earlier large surpluses
in external payments.




The rising tempo of the business expansion abroad is
most apparent in the upsurge of industrial production
(see Chart I). In Western Europe, industrial production
in the fourth quarter of 1959 rose about 5 per cent above
the third quarter on a seasonally adjusted basis, and more
than 10 per cent above the last quarter of 1958. The
advance was greatest in France and Italy, where industrial
output increased by about 6 per cent from the third to
the fourth quarter. The expansion also continued at a
rapid pace in West Germany, and gathered momentum in
Belgium where the revival had been slow earlier in the
year. In the United Kingdom industrial production, after
reaching a new peak in the fourth quarter of 1959, rose
further in January 1960. In Japan, the year’s advance
was even more rapid than in Europe, with industrial pro­
duction at the year end a striking 30 per cent above a
year earlier. In Canada, industrial expansion was tem­
porarily hampered in late 1959 by steel shortages result­
ing from the United States steel strike. However, the
tendency of the Canadian expansion to level off in mid-

FEDERAL RESERVE BANK OF NEW YORK

45

way during most of 1959, the output of machinery at the
year end was running about 50 per cent ahead of a year
INDUSTRIAL PRODUCTION IN SELECTED COUNTRIES
earlier.
S e a io n a lly ad ju sted , 1953=100
Per cen*
Per cent
Vigorous export and consumer demands have persisted
as major elements in the economic expansion in most
industrial countries abroad. Nearly everywhere exports
attained record levels in 1959. The strong uptrend in
consumer expenditures has reflected rising earnings and
employment, and also in some countries — notably the
United Kingdom—more ample consumer credit facilities
and some tax reductions in early 1959.
A new expansionary force appearing in a number of
countries at the year end was the pickup in business in­
vestment that accompanied the fuller utilization of pro­
ductive capacity. The acceleration of business investment
plans in the United Kingdom has been striking. A
recent Board of Trade survey reveals that at the year end
capital outlays by British manufacturing firms were ex­
pected to be 14 per cent higher in 1960 than in 1959,
and those by nonmanufacturing firms 20 per cent higher,
although a similar survey last August had anticipated virtu­
ally no change. Fixed investment also picked up in Italy
in the final months of 1959, and plans for the first quarter
of 1960 indicated a continuation of this trend. In France,
although business investment programs were generally re­
ported as cautious toward the end of 1959, a number of
important industries, such as steel and aluminum, were
planning a substantial expansion of capacity. In Canada
Sources* O rg an isa tio n for lu ro p e a n Economic Cooperation,
G en eral Statiaticsi no tion al *tati»flc$.
a recent survey of investment plans indicates that total
fixed investment, which in 1959 was about the same as in
1958, may rise by about 4 per cent in 1960, chiefly reflect­
1959 had clcarly been reversed by the end of the year, ing an expansion of private investment in plant and
when industrial output exceeded the year-ago level by equipment.
In view of the high rates of fixed investment widely
about 8 per cent
Although production had advanced in most branches planned for 1960, and with unused production facilities
of industry by the end of 1959, the largest increases were still prevailing in many industries, it appeared at the end
generally concentrated in the basic industries and in con­ of 1959 that sufficient capacity for continued increases
sumer durables production. The Western European chemi­ in output would generally be available in 1960. In the
cal industry showed particularly sharp gains, notably in United Kingdom, for example, only the automobile and
France and Italy. The advance in steel production was some other consumer durable industries had approached
pronounced everywhere but was especially large in West the limits of their capacity in 1959, and new investment
Germany, while the increase of aluminum output over was expected to lift these limits in 1960; in the capital
1958 reached 17 per cent in Italy. Automobile output goods industries, in the meantime, unused capacity was
rose rapidly in all major car-producing countries; in Italy, still widespread. In France, too, the capital equipment
indeed, it expanded by 25 per cent in 1959. There were sector was still operating well below capacity at the end of
also substantial gains in textile output in a number of 1959. On the other hand, pressures on capacity were evi­
countries. The capital equipment industries experienced dent in varying degrees in some countries, particularly in
a marked pickup only in the final months of 1959 in West Germany, where producers of capital goods were
most of Western Europe, except in West Germany where reporting rapidly rising order backlogs and construction
the output of these industries expanded throughout the contracts were outrunning the capacity of the building
year. In Japan, where an investment boom was also under industry.




Chart I

46

MONTHLY REVIEW, MARCH 1960

A more immediate source of difficulties for 1960, how­
ever, appeared to be the state of the labor markets in
a number of economies. Employment has continued to
advance in most industrial countries, though relatively less
than production owing to productivity gains. Seasonally
adjusted unemployment showed little change in Canada
in the latter part of 1959, but continued to recede in
Western Europe. By late 1959, unemployment in West
Germany, Denmark, Austria, and Switzerland was lower
than at any other time since the Korean war. In the United
Kingdom, although unemployment remained substantially
higher than job vacancies, the margin narrowed in the
latter part of 1959 and regional labor shortages developed.
Nation-wide shortages, notably of skilled labor, had be­
come a serious problem in several countries by the year
end. In West Germany and Switzerland, in particular, the
inadequacy of the labor supply threatens to be a strong
limiting factor this year, especially since the reserves of
foreign labor that might have been relied upon to alleviate
domestic shortages are dwindling as a result of expanding
activity throughout Europe.
With the growing tightness of the labor markets, pres­
sure for wage increases has intensified in Western Europe.
Although wage rates generally rose slowly through most
of 1959, there was a more pronounced upward movement
in a number of countries in the final months of the year.
This trend may be expected to continue in 1960, for
nearly everywhere the renegotiation of expiring labor con­
tracts has been bringing forth demands for substantially
higher wages and shorter hours. In the United Kingdom
a national railway strike was averted last month by grant­
ing the railway workers an immediate 5 per cent wage
increase, to be followed by additional increases in the final
settlement. Also last month, British construction workers
received a 4 per cent wage increase, and the shipbuilding
and engineering unions settled for a two-hour shortening
of the standard workweek without loss of pay. In West
Germany, demands for wage increases had originally run
up to 10 and 15 per cent; although these claims now
appear to have been scaled down somewhat, a nation-wide
contract for workers in the construction industry has
recently provided for a 5.6 per cent wage increase, and
this may set a pattern for the other wage contracts to be
negotiated this year. A number of negotiations pointing
to sizable increases in wage levels have also been con­
cluded in France and the Netherlands.
Price increases in Western Europe were generally small
in 1959 (see Chart II), but there was some upward move­
ment in the second half of the year. In the United King­
dom, after declining through most of the year, consumer
prices inched up in the fourth quarter. On the Continent,




the price rise in the summer and early fall of 1959 was
largely attributable to the impact of the severe drought
on food and other farm product prices. In a number of
countries, the price indexes in December 1959 were up
2 to 3 per cent from their midyear levels, but at the turn
of the year the uptrend in both wholesale and consumer
prices had generally leveled off. However, expectations of
more pronounced price increases for certain industrial
products and for services, coupled with an upward trend
in import prices, have aroused concern. In the United King­
dom, France, and the Netherlands, the governments have
been advocating voluntary price cuts by manufacturers
and merchants. Nearly everywhere, a desire to preserve
the price stability of the 1958-59 period has evoked official
declarations or countermeasures indicating a firm intent to
prevent renewed inflationary pressures that would jeopard*
ize the continued expansion of economic activity.
MONETARY TRENDS AND POLICIES

In most industrial countries abroad, the current expan­
sion in economic activity has been accompanied by a sub*

47

FEDERAL RESERVE BANK OF NEW YORK

Chart III

COMMERCIAL BANK LOANS AND ADVANCES
IN SELECTED COUNTRIES
UNITED KINGDOM ( £ )

B illio n s

SWEDEN (KR)

3.0

B illio n s

13.0
^*1959-60

12.0
*1958-59

2.044 -4 - 4*4

i 1 1 1 1

WEST GERMANY (DM)

...L I

I'.IJ

11.0

NETHERLANDS (GUILDER)
3.0

22.0

1959-60 /

20.0

—
1958-59

1...! .1
_LJ_

1

'

1 1 1 1

2.5

1959-60

j

1958-59

I 1 1 1 1

.1 .1.....L.,t J ... 2.0

Note! D ata exclud e interbank loans and loans to central and m unicipal
governments. D ata are as of end of month, except for United Kingdom,
which uses third W ed nesd ay of months other than June and December.
Source!

ures to tighten credit or warned the commercial banks
to exercise caution in their lending, thus generally acting
more vigorously than at the comparable stage of previous
expansions. In addition, some central banks made it
clear that they stood ready to take further action to prevent
the current expansion from spilling over into an inflation­
ary boom. These developments generally reflected the
authorities’ concern over threats to domestic price stability
(as in West Germany and Switzerland), the weakening of
the country’s balance of payments and the attendant re­
serve losses (as in Belgium), or both (as in Denmark,
Sweden, and the United Kingdom). At the same time,
several of the primary-producing countries tightened their
credit policies—generally in order to counter the pressure
on the balance of payments (as in El Salvador and
Guatemala), but in some cases (e.g., Peru) also to sharpen
monetary instruments which had not been used for many
years and which as a result had lost touch with current
credit conditions.
The renewed recourse to monetary restraint in foreign
industrial countries in recent months is evidenced most
vividly, perhaps, by the number of discount rate increases
(see table). Following such increases in Denmark, Ger­
many, and the Netherlands during September-November—
the first since the summer of 1957—-rates have been raised
by the central banks of Belgium, Denmark (for a second
time), Iceland, Ireland, Japan, Sweden, and the United
Kingdom. In Denmark and Sweden, these rates now are
back to where they stood in late 1957, and in Belgium
and the United Kingdom back to their levels of mid-1958.

N ation al statistics.

Changes in Foreign Central Bank Discount Rates Since September 1959

stantial increase in commercial bank lending (see Chart
III). There has been an especially large rise in such credit
in the United Kingdom, where advances of the London
clearing banks increased by 31 per cent during 1959.
Much of the British increase has reflected the continued
rapid growth of consumer instalment credit, which rose by
53 per cent during the same period.1 In Continental West­
ern Europe, too, there has been a rise in instalment credit,
including personal loans which are now being offered by
commercial banks.
In this setting, the trend toward monetary restraint that
had first emerged last autumn became more widespread.
During the past three months, the authorities in a number
of industrial countries abroad either adopted strong meas1 It should be noted, however, that consumer instalment credit in
the United Kingdom still is much less widespread than in the United
States; in other Western European countries, it is even less important.




(In per cent)
D ate of
change
1959

Sept.
Sept.
Oct.
Oct.
Oct.
Nov.
Nov.
Nov.
Nov.
Dec.
Dec.
Dec.
Deo.

4
19
1
19
23
5
6
12
16
2
16
24
24

C ountry*
W est G erm any
D enm ark
Greece
New Zealand
W est G erm any
Peru
South Korea
Venezuela
N etherlands
Japan
Ceylon
Belgium
Ceylon

New rate

Am ount of
change

3
5
9

+M

4

+1

7.3

+ 0 .7 3

m
7.3

+ M
+0.365

3
4

+H

5
5

+l

6
4y2

m

+V
2

-1

+sy2

1960

Jan.
Jan.
Jan.
Jan.
Jan.
Jan.
Feb.
M ar.

15
21
25
25
26
29
22
1

Sweden
U nited Kingdom
C uba
E l Salvador
D enm ark
Ireland
Iceland
Greece

6

m
534

4M

1
1
7

+ y2
+

ih

+4

-2

* Sinoe N ovem ber 1956, the discount ra te of the B ank of C anada has been set each
week a t M per cent above the la test average tender rate for T reasury bills.
T he rate stood a t 5.89 per cent on Septem ber 3, 1959 and a t 4.86 per cent on
F ebruary 25, 1960.

48

MONTHLY REVIEW, MARCH 1960

These discount rate increases have generally been accom­
panied by a rise in interest rates (see Chart IV). While
the rate pattern has differed from country to country, the
advance has been most pronounced at the short end of the
market. The sharp increases in medium- and long-term
rates in the United Kingdom since late February appear
to reflect the Bank of England’s backing away from offer­
ings of government bonds in the market—a policy that
should discourage the commercial banks from financing
new loans by selling such securities.
Other foreign central banks also have taken additional
tightening measures. The German Federal Bank (which
in the current phase of restraint was the first central bank
to raise its discount rate) increased commercial bank re­
serve requirements one tenth as of January 1, and by

Chart IV

INTEREST RATES IN SELECTED COUNTRIES
.

THREE-MONTH TREASURY BILLS *

Per cent

7

LONG-TERM GOVERNMENT BONDS

Per cent

6 -----

Per cent

6

Canada

..■ ■I
"■■
ll
Unifed Kingdom

___---------------------

I, I
~

_ i_ i JLx j JL

I 1

------------

l —JL.

t t -L JUL.

W est G erm an y*

-

____

Netherlands

Switzerland

-*-4

—

^

- J —1 I __1 l._ 1...L
—

in

Italy

—

—
F fa n c o *~ *
Belgium
i t ? i r 1 t r T r . r r - T - 1- K - r + M r t r r - i f ...
1959
1958
I960
Note:

Febfwcuy >960 d a ta p a rtia lly estim ated.

♦ Treasury b ills: Ca n a d a and United Kingdom , a v era g e tender rates for
three-month b ills; West G erm an y, central bank selling rates for 6Q- to
9 0-d ay b ills; Netherlands, m arket rates for three-month bills,

t Rates on mortgage bonds.
Sources: International M onetary Fwnd, International Fin a n cia l Statistic*!
national statistics.




another one fifth effective March 1. These moves, which
followed an earlier increase in November, brought the
ratios to 9.8-18.2 per cent against sight deposits, 8.4-12.6
against time deposits, and 7.0-8.4 against savings de­
posits—the applicable rate depending in each case on the
individual bank’s reserve classification. As of March 1, the
Federal Bank also reduced further the commercial banks’
rediscount ceilings, which had been cut last October.
Moreover, in view of the inflow of foreign funds attracted
by higher domestic interest rates, all increases in foreignowned sight, time, and savings deposits above their Novem­
ber 30 level were made subject, as of January 1, to reserve
requirements of 30, 20, and 10 per cent—the maxima per­
mitted by law. In Sweden, the January discount rate in­
crease was similarly bolstered by an increase of 5 percent­
age points, effective at the end of February, in the
commercial banks’ liquidity requirements (which must be
met by cash and government securities); accordingly, these
ratios now stand at 45 per cent for the five largest banks,
and 35 and 30 per cent for the two other groups of
banks. In Finland, the amount of discounting permissible
at the basic rate was reduced from 60 per cent of a credit
institution’s capital and reserves to 30 per cent (above this
ratio the central bank’s penalty rates become applicable).
In Australia, the trading banks’ statutory reserve require­
ments were raised in February to IIV t. per cent from
16Vi \ such requirements, which are uniform for all trading
banks, had been introduced in January when they had
replaced the trading banks’ “special accounts” with the
central bank.
But beyond such concrete measures, a number of these
central banks (as well as others that have not yet taken
any action) issued strongly worded warnings against the
perils of overexpansion, and often suggested specific areas
where greater restraint, or closer cooperation with the
financial authorities, seemed indicated. Thus the governor
of the Bank of England warned sifter the January discount
rate increase that the bank would not hesitate to take
further restrictive measures to ward off any threat to
price stability. In France, where in the current expan­
sion the authorities have not yet taken any restrictive
measures, the governor of the central bank late in February
urged the commercial banks to be more selective and cau­
tious in granting new credits. Greater restraint on commer­
cial bank lending also was called for by the central banks
of Finland, Sweden, and Switzerland. In Norway the
banks were urged to give preference to the financing of
specific investment projects, such as power stations, and
exports.
In Canada, where in recent months commercial bank
reserve positions have been easier than during the sum­

FEDERAL RESERVE BANK OF NEW YORK

mer and early fall of last year, but where the banks have
continued to reduce their outstanding loans, the governor
of the central bank in January called for closer coordina­
tion of the government’s fiscal operations with monetary
policy. He stressed that the maintenance of monetary
stability was not sufficient by itself to assure sound growth
or prevent inflation, but required
action in many other fields besides monetary
policy. For example, all levels of government
can assist by holding down their spending pro­
grammes, including lending programmes, during
the buoyant phase of private business expendi­
tures. Taxation policy can also make an impor­
tant contribution. The anticyclical modulation of
government spending and taxing can have the
double effect both of moderating the fluctuations
in private business itself . . . and of offsetting to
some degree those fluctuations in the private
sector which are not directly so influenced.
Other central banks also have taken a more emphatic
stand than in previous periods of marked business growth
and credit expansion, and in a number of instances have
not hesitated to urge on their governments their concern
over the current economic climate and their views as to
appropriate action. At the end of November, the German
Federal Bank appealed to the authorities at all govern­
mental levels to draw up their 1960-61 budgets in such
a way as to support the bank’s monetary policy and, if
possible, to relieve the bank of some of the burden of
applying credit restraint. More recently, at the express
request of the government the Federal Bank drew up a
memorandum on price and wage developments in 1959
and on the possible impact of pending wage increases on
the domestic price level. In this memorandum, which
appears to have had some effect in softening recent wage
demands, the bank stated that, if high-productivity indus­
tries had translated their productivity gains to a larger
extent into lower prices during the past two years, the
unions’ wage demands undoubtedly would have been more
moderate. The bank emphasized that, in order to maintain
the growth in economic activity, it was necessary both to
keep wage demands from becoming excessive and to re­
duce prices whenever cost conditions make this feasible.
Much, the bank concluded, could also be achieved by
government measures, such as a liberal import policy,
greater streamlining of the distribution system, and stronger
action against monopolistic pricing practices.
EXCHANGE RATES

The New York foreign exchange market was quiet dur­
ing February. Commercial activity in spot sterling was on




a reduced scale, with most of the activity apparently center­
ing on interbank transactions and on dealings with the
Continent. Thus, in the early part of the month the quo­
tation moved only between $2.8025 and $2.8035. How­
ever, following the interim settlement of the British rail
strike threat at the midmonth, the rate advanced appre­
ciably to $2.8050. Thereafter, it eased off gradually, and
on February 29 stood at $2.8039.
In the forward market, the discounts on three and six
months’ sterling widened from 2 and 4 points, respectively,
to 23 and 35 by February 10, reflecting an adjustment
in the short-term interest rate differential between London
and New York. Subsequently, as the United States Treas­
ury bill yield increased, the spreads narrowed and at the
month end were 8 and 18 points.
The Canadian dollar, with commercial activity at mini­
mum levels, fluctuated for most of the month somewhat
erratically between $1.048%4 and $1.051%4. The latter
quotation, reached shortly after the middle of February,
resulted primarily from the repatriation of the proceeds
of a Canadian bond issue previously placed in the New
York market. At the month end, however, following the
announcement that an additional issue would shortly be
placed in the New York market, the quotation reached
$ 1.05Vi, the high for the year.
Except for the Swiss franc, which declined somewhat,
most European currencies firmed slightly against the dollar
during February.

ANNUAL REPORT-1959

This Bank has just published its forty-fifth Annual
Report, which reviews the 1959 business and financial
scene in the United States and abroad and also com­
ments on some of the developments of the past decade
and their implications for the 1960’s. The Report gives
considerable attention to the immediate impact of the
1959 steel strike and to the special problems it posed in
framing suitable credit policies for an otherwise pros­
perous economy. The Report also focuses attention on
the changing role of the United States in the world
economy, forcefully revealed in the sizable balance-ofpayments deficits of the past two years. Copies of the
Annual Report are available, upon request, from the
Publications Division, Federal Reserve Bank of New
York, New York 45, N. Y.

MONTHLY REVIEW, MARCH 1%0

50

T h e B e h a v io r o f C o n su m e r C red it
The rapid increase in consumer spending during 1959
was a major force in the general recovery and expansion
of business activity. This spending, in turn, was stimu­
lated and supported by a sharp expansion in consumer
credit. The pace of the advance in consumer credit
during 1959 rivaled that of the previous consumer bor­
rowing boom in 1955 and, as in the earlier period,
aroused a widespread sense of uneasiness. It is of timely
relevance, therefore, to compare the growth of con­
sumer credit in the two periods and to consider some
of the problems that rapid growth of consumer credit
may raise.
THE CHANCES IN TOTAL CONSUMPTION
AND CONSUMER CREDIT

The broad contour of the growth in consumer credit
during 1959 was remarkably similar to 1955. In
each of the preceding years— 1954 and 1958—the rate
of growth in consumer credit outstanding had been
sharply reduced; and during some months repayments
on outstanding debt actually exceeded new extensions. In
fact, the $0.3 billion growth in 1958 and the $1.1 billion
growth in 1954— both years of recession and the early
beginning of recovery—were the smallest increases for
any year since 1945. The recession-induced reduction in
consumer credit, in both cases, had run its course by
the time broad business recovery began, and in both 1954
and 1958 consumer credit outstanding was moving steadily
higher during the last half of the year (see Chart I). But
the real burst, again in both cases, was reserved for the
following year of strong recovery. In both 1955 and 1959
total consumer credit outstanding shot up by about $6Vi
billion, although in 1959 this increase represented a
smaller percentage rate of growth since it began from a
higher base.
The rapidity of the advance was, in both periods, closely
associated with increased personal spending, especially for
durable goods. Ordinarily, consumer credit may be con­
sidered as simply a device to help translate consumer
wants into effective demand, and changes in consumer
credit as no more than reflections of the changing size
and composition of consumer wants. But even when
viewed in this way, as a passive factor, the extreme vari­
ability over the business cycle of consumer demand for
durable items, on which the bulk of consumer credit is
used, implies that the ready availability of such credit
facilitates wide swings in consumer spending. Moreover,




when lending terms are liberalized as part of an aggressive
sales campaign—for example, through a lengthening of
repayment periods— credit can be an active factor in en­
couraging consumers to increase their instalment purchases
and other credit purchases. Terms involving maturities
of three years on new automobiles are now quite common,
while only a relatively small portion ran this long in 1955.
However, there apparently has not been any marked move
toward further lengthening of maturities this time. Maturi­
ties extending beyond three years must be accompanied by
fairly large downpayments, if the lender is not to find
himself overexposed during the earlier months—because
the value of the collateral would for some time decline
faster than the size of the note.
The consumer-credit burst in 1955 had played itself out
by the end of the year. Credit extensions continued to
exceed repayments, but for the rest of the business expan­
sion the margin was narrower than in 1955. Whether the
more recent consumer-credit boom has reached this point
of diminishing vigor is not yet clear. In the last quarter

Chart I

CHANGES IN CONSUMER CREDIT
S e a so n ally a d ju sted , q u a rterly d a ta
Billions of d o lla rs

Billions of dollars

2 ------

N e t c h a n g e s in total
co n su m er c re d it

2

U lllb

-1 I I I I I I I I
B illio n s of d ella rs

Source:

I I

1 1

I I I

I I 1 I

Billions of d o lla rs

Board of Governors of the Fed eral Reserve System.

1 I

I

I

FEDERAL RESERVE BANK OF NEW YORK

Chart II

CONSUMER FINANCIAL RATIOS

101 1 I I

1952

I t

1 1-1-1

1953

I

I

1954

1 I I

I

1955

I I I I

1956

1 l

i

I

1957

1 I I

I

1958

1 l

I

I

10

1959

Sources: Board of G overn ors of the Federal Reserve System and
United States Department of Commerce.

of 1959 the margin of credit extensions over repayments
narrowed slightly, but this largely reflected shortages of
durable consumer goods, particularly automobiles, result­
ing from the steel strike. And in January the margin again
widened, although it was still smaller than last summer.
What has accounted for these sharp bursts of consumer
credit that have arisen during the revival stage of the busi­
ness expansions? Undoubtedly, a number of factors, not all
of them well understood, have interacted to produce this
result. Strangely enough, the recessions themselves prob­
ably helped set the stage. During recession periods
consumers, as a precautionary or defensive reaction, typi­
cally reduce their “postponable” outlays—which nowadays
include such items as vacations in Bermuda as well as
spending on durable goods. However, they continue to
add to their holdings of liquid assets or to repay debt, so
that the ratio of debt to assets declines.
Chart II shows that the post-World War II rise in the
ratio of debt to liquid assets1 was interrupted during each
of the last two recessions. Basic wants and needs for
durable goods were, of course, piling up steadily at the
same time that liquidity positions were being improved.
Then, as the economy emerged from recession, con­
sumers became more optimistic about their financial
future. Fears that they might lose their jobs lessened, and
they may have begun to anticipate a rise in income—thus
setting the stage for a burst of spending on credit. Un­
employed workers found jobs, and those on short hours

51

began to draw full pay. Further encouragement, if any
was needed, was provided by the generally easy credit
conditions that arose during the recessions and the willing­
ness of lenders to liberalize terms. Consumer enthusiasm
for the newest model automobiles also was an important
factor in 1955, and the reception of the new models may
be an important influence this year.
Apparently, these credit splurges have some selflimiting tendencies. After a while, unfilled consumer needs
become less pressing at the same time that repayments
of outstanding debt become increasingly burdensome. Also
as monetary ease gives way to restraint, and as other credit
demands press hard on available sources of credit, com­
mercial banks and other lenders find it more difficult to
divert large amounts of funds from other possible uses
to consumer credit. New credit extensions, therefore, may
tend to decline or to grow more slowly, although they
are not likely to fall below repayments so long as the
business expansion continues. Once a recession appears,
however, with personal income leveling off and a growing
atmosphere of caution, a sharp drop in new extensions
may occur. In both 1954 and 1958 a point was reached
where extensions fell short of repayments (see Chart I).
THE COMPONENTS OF CONSUMER CREDIT

Historically, the extension of instalment credit has been
closely associated with sales of durable goods, particularly
automobiles. These outlays rose considerably less in
1959 than in 1955; yet instalment credit (and total con­
sumer credit) increased by about the same amount as in
the earlier period. How did this happen? The smaller
increase in automobile sales during 1959 was indeed re­
flected in a smaller expansion of automobile instalment
loans (see Table I), even though a slightly larger propor­
tion of new cars was bought on credit than in 1955. How­
ever, other types of instalment credit expanded more and
faster than in 1955. As a result, the share of automobile
paper in the total increase in consumer credit fell to 36 per
cent in 1959 from 57 per cent in 1955.
Instalment credit of all types gave rise to about the same
proportion of the total increase in consumer credit in both
periods. The larger increase in 1959 than in 1955 in non­
automobile instalment credit, which occurred despite a
smaller rise in durable goods sales, probably reflected a
number of interrelated factors. There has been growing
acceptance in recent years of the practice of purchasing
nondurable goods, and services as well, on credit, and sales
of such items increased rapidly during 1959. More­
over, various developments in the credit field may have
1 Liquid assets include currency and deposits, savings and loan encouraged people to buy a larger proportion of all types
shares, credit union shares, and United States Savings bonds held by
of goods on credit. Bank revolving credit plans, which pro­
the consumer sector.




52

MONTHLY REVIEW, MARCH 1960

vide what amounts to an automatic line of credit for con­
sumers, took a leap forward in 1959. With this type of
credit, consumers can buy anything from vacuum cleaners
to vacations. Revolving credit plans of retail stores, which
have been in operation longer than the bank plans, appar­
ently are being used more actively than ever before. These
plans permit consumers to pay in instalments, if they pre­
fer to do so. Repair and modernization loans rose con­
siderably more in 1959 than in 1955 both in dollar and
percentage terms, in line with the increased emphasis on
the qualitative improvement of housing and the need for
larger living quarters to accommodate bigger families.
Changes in the relative importance of the various types
of instalment credit have been accompanied by shifts in
the relative importance of lending institutions. Most strik­
ing, as Table II shows, was the smaller part played by
sales finance companies. In 1955, instalment loans of
these companies accounted for 36 per cent of the increase
in total consumer credit, whereas in 1959 their share
dropped to 22 per cent. Sales finance companies fell
behind primarily because of the smaller increase in auto­
bile paper, which comprises almost three quarters of their
consumer loans. Moreover, these companies acquired a
smaller share of the available automobile paper in the
recent credit boom, as a larger proportion of consumers
financed their purchases at banks.
Lenders who rely less heavily than finance companies
on automobile financing were, as a consequence, more
important in the recent expansion than in 1955. This was
true of commercial banks and other financial institutions.
And it was also true of retail stores, in part because of the
stronger performance of consumer goods paper. However,

T able I
Increase in C onsum er Credit, by M ajor C om ponents
Millions of dollars

Percentage of total increase

Major components
1959

1955

1959

1955

Instalment credit....................

5,402

5,390

83.6

84.0

Automobile paper..............
Other consumer goods
paper..................................
Repair and modernization
loans..................................
Personal loans...................

2,353

3,663

36.4

57.1

1,320

883

20.4

13.8

354
1,375

73
771

5.5
21.3

1.1
12.0

Noninstalment credit.............

1,058

1,028

16.4

16.0

Single payment loans........
Charge accounts................
Service credit.....................

530
291
237

594
310
124

8.2
4.5
3.7

9.3
4.8
1.9

Total consumer credit...........

6,460

6,418

100.0

100.0

Note: The 1959 increase Includes the addition of the amount of credit outstanding in Alaska
and Hawaii which was about $200 million. Because of rounding, figures do not necessarily
add to totals.
Source: Board of Governors of the Federal Reserve System.




CONSUMER CREDIT DEFINITIONS

Instalment credit: Consumer credit scheduled to be repaid in a
number of instalments.
Automobile paper: Instalment credit extended to purchase
automobiles.
Other consumer goods paper: Instalment credit extended to
purchase consumer goods other than automobiles (includes
revolving credit plans of retail stores).
Repair and modernization loans: Instalment credit extended to
finance maintenance and improvement of owner-occupied
dwelling units.
Personal loans: All other instalment loans, mostly for consolida­
tion of consumer debt, medical and other emergency expenses,
education, travel, etc. (including bank revolving credit plans).
Noninstalment credit: Consumer credit scheduled to be repaid at
one time.
Single payment loans: Noninstalment loans to individuals. (For
most of the period covered here, bank charge-account plans
presumably were included in single payment loans, although
they often could be repaid in instalments. New call report
instructions issued in November 1959 provide directions on
when to include these plans in other consumer goods paper.)
Charge accounts : Balances owed to retailers and on credit cards.
Service credit: Amounts owed by consumers to professional
men and service establishments, primarily for medical expenses
and public utility services.

the larger share of instalment credit of retail outlets in the
over-all rise may have resulted partly from greater rela­
tive gains in revolving credit plans of retail stores, com­
pared with the customary noninstalment retail charge plans.
THE BURDEN OF DEBT

Consumer credit performs a valuable economic function.
When used to acquire durable goods, for example, the
availability of credit makes it possible for consumers to
pay for these goods as they are used. Indeed, outlays
on such items as electrical appliances and automobiles
often represent substitutes for expenditures that, in an
earlier day, would have been directed toward domestic
services or public transportation—on a “pay-as-you-go”
basis. Borrowing often can be used advantageously to
smooth out a family’s expenditure stream over time so as
to coincide more closely with its consumption needs. This
is of particular importance in the case of young families,
which are more likely to be borrowers than older families.
In early 1959, for example, eight out of ten families where
the head was from 25 to 34 years of age, had some per­
sonal debt,2 whereas for families where the head was 55
to 64 years of age, only four out of ten had such debt.
Yet it is obvious that there is a very real reason for con­
cern that a sharp rise in consumer debt may, if continued,
2 Personal debt includes all short- and intermediate-term debt other
than charge accounts; mortgage and business debt are excluded.

53

FEDERAL RESERVE BANK OF NEW YORK
Table II
Increase in Consumer Credit, by Lender

Millions of dollars

Percentage of total increase

Lender
1959
Instalment credit...................

Commercial banks.............
Sales finance companies. ..
Other financial institutions.
Retail outlets.....................

1955

1959

1955

5,402

5,390

83.6

84.0

2,142
1,405
1,194
661

1,805
2,299
896
390

33.2
21.7
18.5
10.2

28.1
35.8
14.0
6.1

Noninstalment credit.............

1,053

1,028

16.4

16.0

Total consumer credit...........

6,460

6,418

100.0

100.0

Note: The 1959 Increase includes the addition of the amount of credit outstanding in Alaska
and Hawaii which was about $200 million. Because of rounding, figures do not necessarily
add to totals.
Source: Board of Governors of the Federal Reserve System.

result in an unduly heavy burden on borrowers—particu­
larly in the event of more serious economic recessions
than those experienced in recent years. Since the end of
World War II, consumer debt has increased at a substan­
tially faster rate than consumer liquid assets, while the
rate of growth of debt repayments has outstripped that
of disposable income (see Chart III). These develop­
ments do not in themselves indicate that consumer debt
has become “excessive”. Clearly, a large part of the postWorld War II increase in consumer credit has been a
natural recovery from the abnormally depressed levels of
the war years. Scarcities of goods and credit controls
during the war resulted in a sharp decline in consumer
credit at the same time that incomes and liquid assets were
increasing rapidly. The exceptionally rapid rise in con­
sumer credit during the early postwar years, when con­
sumer goods began to appear in volume, in large part
reflected the necessary restocking of “consumer inven­
tories” in established families, as well as the rapid pace
at which new families were being formed.
The rate of growth of consumer debt has slowed notice­
ably since 1950, after the initial postwar rebuilding of
consumers’ inventories of goods was completed, and in
recent years it has been more nearly in line with the
growth of disposable personal income and liquid assets.
The ratio of instalment debt repayments to disposable
income has been close to 13 cents per dollar for the last
four years (see Chart II). The ratio of debt to liquid
assets also has increased more slowly since 1950 than in
earlier postwar years, although in the past year the rise
has been sharp. Many families that have increased their
indebtedness over the past several years perhaps have now
reached the point where the burden of repayments dis­
courages further borrowing. In addition, the proportion
of borrowing families seems to have stabilized. According




to the Survey of Consumer Finances conducted by the
Board of Governors of the Federal Reserve System in
cooperation with the Survey Research Center of the Uni­
versity of Michigan, in 1949 about seven tenths of all
families were nonborrowers. By early 1957, nonborrow­
ing families had fallen to about four tenths of the total,
but in the next two years this ratio changed very little.
These figures should be interpreted cautiously, however,
since the 1959 survey on which they are based was made
early in the year, before the rapid growth in total con­
sumer debt was fully reflected.
Any realistic appraisal of the “burden” of consumer
debt should take account not only of consumers’ ability to
service debt—usually measured by the relation of pay­
ments to disposable personal income—but also of other
fixed commitments which represent an inescapable drain
on income. The National Industrial Conference Board
has combined payments on instalment debt, mortgage debt
(including property taxes), insurance and pension pay­
ments, and rent into a total of “major fixed commitments”.
The ratio of these commitments to disposable income has
increased rapidly during the post-World War II period,
but not so rapidly as payments on instalment debt alone.
Nor is the ratio of major fixed commitments to disposable
income very much higher today than immediately prior
to World War II. Unfortunately, these data are available

Chart III

TRENDS IN CONSUMER CREDIT, INCOME,AND
LIQUID ASSETS, 1939-59
B illions of d ollars

20l I I I I I
1939 41
43

Billions of d o lla rs

I I I I
45
47

I I I
I I I
49
51
53

I I I I I4
55
57
59

Sources: Board of G o ve rn o rs of the Fed eral Reserve System and
United States Department of Commerce; 1939-45 liquid assets
estim ated by the Fed eral Reserve Bank of New York.

54

MONTHLY REVIEW, MARCH 1960

only on an aggregative basis and fail to reveal anything holds, delinquencies generally have not been high. In
concerning the distribution of the burden, which is all recent years, “delinquent instalment loans” of commercial
important.
banks—loans having an instalment thirty days or more
The Survey of Consumer Finances throws some light overdue—have been less than 2 per cent of their total
on the distribution of the burden among individual fami­ outstanding loans; this was true even in the 1958 reces­
lies, although the estimates probably understate consumer sion. The experience of consumer finance companies and
liabilities. In early 1959, instalment payments alone sales finance companies has also been relatively favorable.
accounted for 20 per cent or more of disposable income Nevertheless, there has been a tendency for delinquencies
in the case of about 13 per cent of all spending units; and losses to rise during periods of recession, a clear indi­
a few units had committed themselves to instalment pay­ cation of the potential cumulative danger if a more severe
ments amounting to 40 per cent or more of their income. economic contraction should occur.
Perhaps more significant is the fact that in the “lower
CONCLUSIION
middle-income” group, with annual income of $3,000 to
$5,000 per family, close to 20 per cent of all spending
The discussion and comment on consumer debt have
units were devoting 20 per cent or more of their dispos­ grown in pace with the growth of the debt itself in recent
able income to instalment payments. This is the group years. Part of the discussion has “viewed with alarm”,
in which so many younger families are found.
warning that the profligacy of .American consumers has
Using a broader concept of “regular payments”, which led to ever-larger debt burdens which will, in time, become
includes (in addition to instalment payments) mortgage a strong force in precipitating, or gravely accelerating, eco­
and rent payments, life insurance premiums, and payments nomic recessions. Others have viewed the whole process
into social security and retirement funds, about one half with complacency, suggesting that consumer debt is doing
of all spending units in early 1957, the latest date for no more than facilitating the attainment of higher stand­
which information is available, had committed 20 per cent ards of living from which everyone benefits. It is, of
or more of their income, while somewhat less than one course, unnecessary to accept either extreme. Consumer
fifth were committed for 40 per cent or more. The latter credit has played a valuable role in the postwar economy
group was heavily concentrated, moreover, in the lower and, hopefully, will give an assist to the growing economy
income brackets. Although it would be necessary to know that is confidently expected in the 1960’s. But the pro­
much more about the characteristics of these units before liferation of new opportunities and methods for consumers
valid inferences could be drawn as to whether or not they to borrow—and new enticements to encourage them to do
were overcommitted, these tentative estimates suggest that so—lead naturally to concern as to where all of this will
a significant proportion of the population has committed lead. The real question is whether the growth of this
itself to an extremely heavy burden of regular fixed genuinely useful aid to better living and greater employ­
ment will proceed at a pace and magnitude consistent
payments.
Despite the weight of instalment debt on some house­ with reasonable stability in the American economy.