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n

MONTHLY REVIEW, MAY 1960

The Business Situation
Preliminary information for April suggests that the
economy has begun to pull out of its weather-influenced
late-winter doldrums, although the evidence continues
mixed. Consumer purchasing, in particular, brought a
breath of springtime to businessmen. Automobile sales
advanced smartly, and department stores reported a record
Easter season. Industrial production may have steadied
after two months of slight decline, a further downward pull
of steel output from the very high post-strike level possibly
being counterbalanced by firmness in some other lines.
Hiring of workers for outdoor activities, postponed in blus­
tery March, probably was made up in part in April, as
winter turned abruptly into spring. Finally, a new survey
of business investment spending plans, taken at the “high
point of uncertainty” in March and early April, showed
even larger planned outlays for 1960 than an earlier
survey made only a few months ago.

automobiles and of appliances and other house furnish­
ings; only the production of consumer staples remained
unchanged. During April, steel output was much below
March levels, and there were scattered reports of contrac­
tions in other manufacturing fields. However, these move­
ments may have been largely countered by increases else­
where.
The decline in industrial production during March
played some part in depressing employment, contraseason-

Chart I

MEASURES OF ECONOMIC ACTIVITY
Seasonally adjusted
Billions of dollars
500

Billion* of dollars
500

480 -

480
Gross national
product
Annual rates
I
1
1

460

THE PA T T E R N OF D E V E LO PM E N T S

Billions of dollars

.

IU

\

1

-5

\

0
.
|

5

\
\

5

460
440

Billions of dollars

business inventories
Annual rates
j

V

j

— -5

Per cent

Per cent

110 -

110

100

100

| Industrial production

90

I 1 1 1 i l l
L

1957=100

1

1

Billions of dollars
390 -

11

1

1 1 1 l~ 90
Billions of dollars
—— “ 390

O

380

Personal income
Annual rotos

0




440

$

During the first quarter of the year, despite the slight
weakness in industrial production in February and March
following the January record high, and in the face of a
decline in stock market prices, gross national product
rose 3 per cent to a seasonally adjusted annual rate of
$498.0 billion (preliminary estimate; see Chart I). Meas­
ured in constant dollars, this was about IV 2 per cent above
the previous peak, reached in the second quarter of 1959,
just before the steel strike. Slightly more than half of the
$14.5 billion advance in the first quarter this year was in
investment. Accumulation of business inventories ac­
counted for most of this investment, the bulk comprising
steel, automobiles, and other durables. The January-March
quarter witnessed gains in the government, international,
and consumer sectors of the economy, too. Of these, con­
sumer spending showed the largest increase— $3.8 billion
—with the major part being for services.
The industrial production index slipped again in March
by one point, as it had in February, dropping to 109
(1957 = 100) compared with the January peak of 111 (see
Chart I). The output of equipment remained unchanged
at last summer’s record level of 103, and the materials
index was steady at 109. But the production of consumer
goods edged downward again, the one-point decline bring­
ing the series 2 V2 per cent below the record 116 attained
in January. Reductions were recorded in the output of

-

370

360

— 360

350 9m l T ^ T i
Billion* of dollars
220 r

1 1

1

1 1

L_1 1 1 1 1 1 1 1 1 1 L l 1 . 350
Billions of dollars
220
1

210

190 f t S L J - L l . 1 1 1 1 1 - i - i - 1 1 1 I
Millions of units

1.0 ^ ^
3

200

1 1 1 1 1

zr

1.4

1.2

— 210

Retail sales
Annual rates

200

^
jf'

jT

1

Private nonfarm
housing starts
Annual rates

* 1 1 1 1 1 1 1 1 1 1 i i 1 1 1 1 .1 1
. .1

190
Millions of units

jv

1.4
V

_

1 JL-L
1958
1959
1960
Reflects payment of retroactive salary increases to Federal employees.
Sources: Board of Governors of the Federal Reserve System, Council of
Economic Advisers, United Stotes Department of Commerce, and
United States Bureau of labor Statistics.

*

1.2
1.0

80

MONTHLY REVIEW, MAY 1960

ally, by slightly more than a quarter of a million persons
to 64.3 million, and in raising the rate of unemployment
(percentage of the civilian labor force) from February’s
4.8 per cent to 5.4 per cent, seasonally adjusted. Much
more important, however, was the disruptive effect of the
inclement March weather on agriculture and construction.
Construction employment alone dropped by 224,000 per­
sons, seasonally adjusted, more than the net decline in
total nonfarm employment (Bureau of Labor Statistics
series) of 214,000 persons. Employment in manufacturing
and other sectors fell more moderately than in construc­
tion. And the contraction in private employment was
partly offset by a rise in government employment, mainly
because of temporary hirings for the 1960 Census. The
more seasonable weather of April probably brought a
larger-than-usual increase in employment, as work got
under way on delayed outdoor activities, but it did not
seem likely that unemployment would recede to the level
reached in February, when the seasonally adjusted rate
had for the first time in nine months dipped to (and even
slightly below) the 1959 low.
The March drop in employment was accompanied by
a slight shortening of the workweek (partly because of
storms and partly because of reduction of overtime—
mostly in automobile and other consumer goods plants).
These factors, together with a further decline in farm
income, served to hold personal income to a relatively
small increase. The seasonally adjusted gain of $0.5 bil­
lion (annual rate) was larger than the previous month’s
advance of $0.2 billion (see Chart I), but smaller than
any other monthly increase since 1958. (In mid-1959
there were of course two months when income declined
because of the steel strike.) Wage and salary dis­
bursements in the manufacturing and other commodityproducing industries actually fell, for the second succes­
sive month and by twice the loss in February. The de­
creases in personal income were slightly more than offset
by advances in unemployment insurance and other transfer
payments, in interest income, and in government wages
and salaries (which included payments to temporary
Census workers).
Accompanying the increase in total personal income,
and despite the effects of bad weather, total retail sales
moved a little higher in March to virtually regain the
record level of last October (see Chart I). The gain in
March was attributable entirely to an increase in non­
durables. A very slight decline in durables seems to have
been largely associated with the fall in home building that
began last spring. Purchases at lumber, building, hard­
ware, and furniture and appliance stores continued to fall
off in March, while concurrently there were gains at food




and general merchandise stores. Sales of automobiles in
March rose markedly over February in number of units,
although the gain in dollar value was probably less strong.
An increasing share of sales consisted of the lower priced
compacts; moreover, effective prices of practically all lines
of cars seem to have been reduced as more generous dis­
counts were offered in an effort to boost sales.
In April, the available evidence suggests, total retail
sales took an even more favorable turn. Department store
sales advanced during the first three weeks of the month—
even after allowing for the special boost given to sales by
the Easter holiday. Auto sales moved up more than sea­
sonally during the first ten days of the month, compared
with the parallel period of March, and again during the
second ten days. Further surveys of consumer spending
expectations confirmed a favorable outlook.
Spending still is unusually low relative to income, how­
ever. This lends support to expectations of an improve­
ment in demand, although the ilattening-out of income in
the past few months, and particularly the weakness of wage
and salary incomes, could have a dampening effect. The
apparent slowing of the downward movement of resi­
dential construction that has been under way, with only a
brief interruption, since last summer may also be inter­
preted as a sign of potential strengthening of demand for
home furnishings and appliances. Although March and
April residential construction outlays declined again, the
seasonally adjusted level of housing starts in March re­
mained steady despite the harsh weather (see Chart I).
Continuing easing of mortgage funds and the lowering of
downpayment requirements for mortgages insured by the
Federal Housing Administration contributed to the ex­
pectation of an actual improvement in this sector. At the
same time, there have been indications that the number
of apartment vacancies has increased somewhat.
While it is unlikely that inventory accumulation will
provide as great a stimulus to economic activity in the
current quarter as in the first three months of the year,
businesses will probably continue adding to stocks. In
particular, stepped-up consumer demand may prompt
businesses to increase their holdings, for in recent months
inventory-sales ratios have been near last spring’s low
levels, which were the lowest since 1950. Several fac­
tors, however, militate against a very large increase
in inventories unless demand surges strongly upward.
There is, first, an apparently rapidly spreading trend,
aided by electronic computing devices, toward better
control of inventory levels. Secondly, relatively high in­
terest rates may reinforce management’s determination
to keep inventories down to minimum levels. Thirdly,
increased capacity in various producer goods fields en­

FEDERAL RESERVE BANK OF NEW YORK

courages firms in the more advanced processing stages to
expect rapid filling of their orders. Such inventory policies
probably force the manufacturers of materials and other
producer goods to keep somewhat larger inventories than
they otherwise would, especially if they must compete for
customers. Nevertheless, this more or less hand-to-mouth
inventorying must be expected, if practiced on a wide
enough scale, to lead to a more immediate, closer relation­
ship between unforeseen changes in demand for final
products and changes in demand for materials than would
otherwise be the case.
Business plans for plant and equipment expenditures
provide another encouraging note. The latest McGrawHill survey indicates that their respondents are now plan­
ning outlays for 1960 at a rate 16 per cent above the
1959 level. This compares with a much smaller 10 per
cent rise in planned expenditures reported by McGrawHill in its preliminary survey last fall, and a 14 per cent
increase projected in the recent Securities and Exchange
Commission-Commerce Department survey. The latest
McGraw-Hill survey was taken in late March and early
April. This was a time when widespread disappoint­
ment about the pace of economic activity could have been
expected to dampen spending intentions. The survey was
also favorable in that it indicated a continued concentra­
tion of planned expenditures on modernization equipment
as against expansion of capacity. This augurs well for the
future, since modernization expenditures are likely to be
maintained even if ample or excess capacity should de­
velop at some time in certain sectors. Additional support
for capital expenditures may come from the fact that
profits in the first quarter of 1960 were, according to
reports published thus far, close to the record level
reached in the second quarter of 1959.
The industrial commodities component of the whole­
sale price index has remained relatively stable. The
index for such commodities inched downward in Febru­
ary and March from the January record high of 128.8
(1947-49 = 100) to 128.6 at the end of the quarter, and
during the first half of April prices changed little. The
index of all wholesale prices, however, rose %0 of a point
in March to regain the April 1959 record high of 120.0—
a result largely of higher farm and food prices. These
price increases were in part seasonal, but March’s un­
usually wintry weather helped push up livestock, meat,
and egg prices. The consumer price index rose y 0 of a
1
point in March to a new high of 125.7. As with whole­
sale prices, there was a more-than-seasonal increase in
food prices, and most other components of the index
also advanced. Automobile prices, however, declined
substantially.




81

T H E L O N G -R U N U N E M P L O Y M E N T P IC T U R E

Total employment was at an all-time high in February,
seasonally adjusted, before the raw March weather con­
tributed to a sharp decline (see Chart II).1 But unemploy­
ment remained relatively high in both months. In Febru­
ary, the number of jobless workers seeking employment
was still 30 per cent larger than at the low point of the
prior expansion (see Chart II), and more than twice as
high as at the low point of the Korean war. The unem­
ployment rate, which measures unemployment as a pro­
portion of the civilian labor force, has continued for
almost two and a half years at levels in excess of 4.7
per cent.
Some observers have suggested, in fact, that unemploy­
ment rates have drifted higher over the past decade as part
of a long-term trend. If there is such a trend, it would
appear to be somewhat more pronounced for periods of
recovery and expansion than for the months of recession.
1 See the March 1959 issue of this Bank's Monthly 'Review for a
description of the technical features of the various statistical series of
employment and unemployment.

Chgrt II

EMPLOYMENT AND UNEMPLOYMENT CHANGES
SINCE 1953
Seasonally adjusted
M illions of persons

1953

1954

M illions of persons

1955

1956

1957

1958

1959 1960

Note; Data include Alaska and Haw aii beginning January I960.
The inclusion of these two States added 266,000 persons to total
employment in that month, mostly in nonagriculturat industries.
Unemployment level and rate were virtually unaffected.
Sources: United States Bureau of the Census and United States Bureau
of labor Statistics.

A

82

MONTHLY REVIEW, MAY 1960

An upward movement is apparent in Chart III, which
shows the unemployment rates in each of the last three
postwar recovery-expansion periods. The principal aber­
ration from the indicated upward cycle-to-cycle trend,
which occurred during the second half of 1954 and early
1955, can perhaps be explained by the large number of
men in the armed forces who, if they had been mustered
out earlier, would have swelled the total of unemployed;
but this must at best remain conjecture. Indeed, we prob­
ably do not have sufficient evidence to establish either the
presence or absence of a clear-cut trend. The period in­
volved is relatively short, and in any case interpretation
of the years in it is clouded by the beginning and ending
of a major military conflict.
Whether or not there is an upward trend in the rate
of total unemployment, a rather striking change within
the total may be seen in the rising number of long-term
unemployed, i.e., those idle for fifteen weeks or more
at a time (see Chart IV). In 1953, this group was 15 per
cent of the total unemployed. In the seven years since
then the rate of long-term unemployed has never fallen
below 22 per cent of the total, and in four of those years
has actually accounted for between 28 and 35 per cent. In
addition, those who were out of work for more than
twenty-six weeks rose from 5 per cent of the total unem­
ployed in 1953 to as high as 18 per cent in 1959.

Chart III

UNEMPLOYMENT RATES
IN RECENT RECOVERY-EXPANSION PERIODS
Seasonally adjusted
Per cent

P*r cent
8

8 *

JL

l

i

7

7
•

I A P rjI 1958-March 1960
I

K

i

i

?

5

6

l

6«

5

i

4

^

\

\

1

October 1949-May 1952

3

M
C
>

l I il

2

4

6

l i I ! M

8

^

4

August 1954-March 1957 ^

\
%

^

I l I 1 1TV i Y t

/-■*
/
\
1 1 l

3

10 12 14 16 18 20 22 24 26 28 30

Number of months after cyclical trough
Note: Cyclical troughs are from the National Bureau of Economic Research
chronology. Data shown do not cover the full expansion periods.
* Rate exaggerated by misclassification of certain workers.
Sources: United States Bureau of the Census and United States Bureau
of Labor Statistics.




Chart. IV

STRUCTURE OF UNEMPLOYMENT BY DURATION
...
#
Millions of persons

March of each year

Millions of persons

6

More than 26 weeks
15-26 weeks
5

5-U weeks
Less than 5 weeks

4

3

2

1
0

1953

1954

1955

1956

1957

1958

1959

1960 *

♦ Data (or 1960 Include Alaska and Hawaii.
Sources? United States Bureau of the Census and United States
Bureau of lobor Statistics.

Who are these long-term unemployed? Many of them
are workers forty-five years and older, or members of
nonwhite minorities. In terms of their economic position,
many are workers who have experienced “structural”
unemployment. The causes of such dislocations exist in
years of prosperity as well as in years of recession; they
include long-term declines of industries and of occupa­
tions, the displacement of old products by new ones,
changing consumer tastes and changing Government de­
fense programs, and automation and other technological
developments. The effects of structural dislocations are
particularly strong in areas where a formerly dominant
industry has declined. Such areas may even become
chronically depressed, with ramifying influences on local
service, construction, and transportation industries. The
more mobile, younger workers can migrate from the area
on relatively short notice, and many do. Older workers,
probably most of them heads of families and many of
them possessing skills for which there is no longer much
demand, are less quick to move and tend to try to wait out
what may sometimes appear initially to be a temporary
shutdown. In the high employment period of June 1956June 1957, unemployment in chronically depressed areas
accounted for at least one fifth of total unemployment;
and more than one fourth of the unemployed in these areas
were out of work for six months or more, compared with
only about half that percentage elsewhere. In May 1959,

FEDERAL RESERVE BANK OF NEW YORK

before the steel strike, almost 15 per cent of the nation­
wide unemployed were located in such areas. Most of
these areas were concentrated in eight states, with Penn­
sylvania and Massachusetts topping the list.2
Areas with relatively high levels of unemployment are
not, of course, limited to the chronically depressed areas.
In March 1960 there were 33 major labor market areas,
out of a national total of 149, that were designated “sur­
plus labor market” areas by the Bureau of Labor Statistics.
These surplus areas had high unemployment (i.e., more
than 6 per cent of the civilian labor force) primarily for
reasons other than seasonal or temporary influences, and
either had experienced these levels for more than four
months or were expected to do so. A year earlier there
had been 72 such areas, so that by March of this year the
number of communities still in this condition had been
reduced by more than half. It is well to recognize, how­
ever, that these remaining pockets of “surplus” labor rep­
resent close to one fourth of the country’s major labor
market areas.
The relatively short-term unemployed, i.e., those who
were unemployed for less than fifteen weeks in any one
spell, accounted in the prosperous years 1955-57 for about
75 per cent of the unemployed. About a fifth of the short­
term unemployed were workers who were voluntarily
shifting from one job to another. Many of these, however,
were “repeats”, indicating that a much smaller number of
individuals were involved in such voluntary shifts than the
2 The criterion used by the Department
whether an area is chronically depressed is, in
of unemployment rates 50 per cent or more
erage for four of the preceding five years.

proportion might suggest. About another 40 per cent of
the short-term unemployed represented new workers just
entering (or re-entering) the labor market. And 40 per
cent or more were workers affected by seasonal fluctua­
tions in employment. As Chart IV shows, short-term un­
employment has grown in absolute level during the 1950’s,
comparing recession year with recession year and pros­
perity year with prosperity year—even though declining as
a percentage of the unemployed.
The future may well bring other problems. During the
1960’s, according to Department of Labor projections, 26
million young people will enter the labor force, 37 per
cent more than entered during the 1950’s, and 3 million
women will return to the labor force. Withdrawals from
the labor force are expected to offset only about half
of this total increase. The new entrants to the labor force
will of course be consumers too, and perhaps aggressively
so if the current practice of early marriage and house­
hold formation continues. Nevertheless, it is quite clear
that employment opportunities will have to be expanded
considerably more rapidly than heretofore, if the number
of unemployed is to be kept from swelling. The country
will also be confronted with the special unemployment
problems arising from the need for higher labor skills to
cope with the more complex machinery that is being
widely introduced, the need to retrain older workers who
are a major part of the long-term unemployed, and the
need to ameliorate conditions in chronically depressed
areas. None of these problems, however, should be viewed
as a cause for grave alarm. They are, in fact, the problems
of Labor in determining
of a society that not only is expanding in size but also is
general, the persistence
above the national av­ growing in technology, extending its life span, and develop­
ing increasing recognition of social responsibilities.

M oney M arket in April
The money market tone was somewhat easier in April
than in other recent months, while member bank reserve
positions, in the aggregate, were under moderate restraint.
Partly because of the easier availability of funds at the
money market banks, Federal funds traded at rates be­
low the 4 per cent discount rate during part of each state­
ment week. Rates on loans to Government securities
dealers at the New York City banks ranged from 4 per
cent to 5 per cent during the month.
Market rates of interest on most obligations moved




significantly higher in the first half of April, after declin­
ing almost steadily during the first three months of the
year. Later in the month, rates moved irregularly lower
again, although most issues showed a net rise in yield over
the month as a whole. The rate advance probably was
attributable to a number of influences. Treasury financing
was an important factor, as the Treasury marketed $2.6
billion of notes and bonds to raise new money and sold
$2 billion of one-year bills to replace a maturing issue.
Offerings of new tax-exempt securities also expanded. And

84

MONTHLY REVIEW, MAY 1960

of some importance in influencing interest rate develop­
ments was the apparent improvement in the business
climate during the month.
M EM B E R B A N K RESERVES

Member bank borrowing from the Federal Reserve
Banks averaged $615 million during the four statement
weeks ended in April, compared with $661 million the
previous month, while average excess reserves were vir­
tually unchanged at $427 million. As a result, net bor­
rowed reserves averaged $188 million, somewhat lower
than the $235 million for the five statement weeks ended
in March.
During the first two statement weeks, reserve drains
resulting from the pre-Easter expansion of currency in
circulation were offset by the effects of lower required
reserves and by System open market operations. A sharp
increase in required reserves during the third statement
week—reflecting heavy bank purchases of the new Treas­
ury notes—plus reserve drains from some operating fac-

Changes in Factors Tending to Increase or Decrease Member
Bank Reserves, April I960
(In millions of dollars; ( + ) denotes increase,
(—) decrease in excess reserves)
Daily averages—week ended
Factor

April
6

April
13

April
20

April
27

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

14
—
- 119
+ 38
- 26

-f*
+
+

53
12
174
49
32

- 196
+ 481
1
+
4
- 46

+
+
+

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

- 122

-

127

+ 242

+
+

30
15

+
+

21
91

+ 102
+ 25

+

33
31

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...............

-

_
—

—

111
232
246
11
180

Net
changes

—
+
—
+

46
261
48
18
140

+ 295

+

288

+ 132
+ 173

+ 27
- 207

+
+

210
72

- 110
- 62

-

—

78
6

+

—
—

2
7

37
—
1
7

_
_

3
—

+ 111

+ 136

— 224

+

195

50
76

+

16
18

+ 378
+ 32

+
-

71
8

+

483
34

Effect of change in required reserves f ........

- 26
+ 102

+
+

2
27

+ 410
- 512

+
+

63
15

+

449
368

Excess reserves t ............................................

+

+

29

- 102

+

78

+

81

671
466
205

561
364
197

Total................................................... + 172
Member bank reserves
With Federal Reserve Banks....................
Cash allowed as reserves f .........................

+
-

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

76
704
437
267

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 eaded April 27, 1960.




524
442
82

615J
427 J
188*

tors were only partially offset by a larger-than-usual
midmonth rise in float. System open market operations
provided $305 million of reserves during this statement
week, of which $173 million was through repurchase
agreements. In the final statement week the termination of
these repurchase agreements and a decline in float—which
remained, however, at an unusually high level—served to
offset reserves released by the post-holiday reduction of
currency in circulation and a decline in Treasury deposits
at the Federal Reserve Banks.
Over the four statement weeks, from March 30 through
April 27, Federal Reserve holdings of Government securi­
ties rose by $224 million, as securities held outright by
the System Account were increased by $194 million and
repurchase agreements rose by $30 million.
G O V E R N M E N T S E C U R IT IE S M A R K E T

The main feature of the Government securities market
during April was a reversal in the first half of the month of
the upward trend of securities prices that had predomi­
nated since early in the year. Prices were mixed in the
last half of the month, with intermediate- and long-term
issues moving slightly lower while most shorter maturities
recovered part of their earlier losses.
Early in the month attention centered on the Treasury’s
cash offering of about $2 billion of a 4 per cent 25-month
note and of up to $1.5 billion of a 4V4 per cent 25-year
bond callable after fifteen years; subscription books were
open April 4 and 5 with delivery on April 14. The new
bonds, offered at the maximum interest rate for marketable
Treasury bonds permitted under present legislation, at­
tracted only $370 million in public subscriptions, all of
which were allotted in full. An additional $100 million
was allotted to Government investment accounts. The
bonds reached a low of 98V2 bid in when-issued trading
on April 12 and closed the month at 99.
Interest in the new notes was far stronger, particularly
among the commercial banks, which were permitted to
make 75 per cent of their payments with credits to Treas­
ury Tax and Loan Accounts. Public subscriptions totaled
$6.7 billion, and allotments—which were made in full for
subscriptions up to $100,000 and on a 30 per cent basis
above that amount—came to $2.2 billion. An additional
$27.4 million was allotted to Government investment
accounts. Moderate liquidation of the new notes during
the balance of the month met with little offsetting demand
in the secondary market, however, and the price dropped
below par, reaching a low of 99 %6 and closing the month
at 99%.
The minimum response to the new bonds, plus a
growing feeling that the market may have overdiscounted

FEDERAL RESERVE BANK OF NEW YORK

the slackened pace of economic expansion during the
first quarter, brought an atmosphere of heaviness to the
market. Contributing further to this atmosphere was the
oncoming April 12 auction of $2.0 billion in one-year
Treasury bills to replace the bills maturing April 15. In
these circumstances, the regular weekly auction on April
11, for bills requiring payment on the same day as the new
notes and bonds, resulted in issuing rates well above those
obtained a week earlier. From eleven- and fifteen-month
lows—of 2.731 per cent for 91-day bills and 2.927 per
cent for 182-day bills—reached the previous week, av­
erage issue rates jumped by 89 and 93 basis points, re­
spectively, to 3.622 and 3.854 per cent. Dealer resistance
in the following day’s auction of one-year bills was height­
ened by concern over the Good Friday payment date,
which was a legal holiday in many States, with many of
the dealers’ regular financing sources scheduled to be
closed. The one-year bills were auctioned at an average
yield of 4.608 per cent, with awards at yields as high as
4.740 per cent.
With the Treasury’s cash financing out of the way, short­
term rates moved irregularly downward as substantial non­
bank demand appeared for the new higher yielding bills.
Later in the month, additional demand appeared on
“swaps” out of issues maturing in mid-May. The one-year
bills were trading at 4.37 per cent on a when-issued basis
on April 14, and in the April 18 auction the average
issuing rates declined to 3.306 per cent on 91-day bills
and to 3.705 per cent on 182-day bills. The 91-day
bill rate rose slightly to 3.317 per cent in the April 25
auction, while the rate on the 182-day bills showed no
change. Market rates for bills, for the entire month, were
generally 5 basis points lower to 25 basis points higher.
Three-month and six-month bills closed at 3.04 and 3.42
per cent, respectively, while the new one-year bills ended
the month at 4.07 per cent.
Prices for intermediate- and long-term Government se­
curities, correspondingly, declined considerably by mid­
month but were relatively stable thereafter, with price
movements confined to a narrow range. Trading was very
light, as the market marked time awaiting announcement
of the Treasury’s May refunding. For the month, prices
of intermediate notes and bonds were mostly %2 to 1%6
points lower while long-term bonds, which are competi­
tive with the new AVk per cent bonds, generally were
lower by W a to 2 points. The average yield on long­
term bonds had climbed to 4.20 per cent by the close of
the period from 4.04 per cent at the end of March, while
the average yield on issues due in three to five years had
risen to 4.40 per cent from 4.06 per cent.
The Treasury announced after the close of business on




85

Thursday, April 28, that holders of $6.4 billion of Treas­
ury notes and certificates maturing May 15 will be offered
in exchange a 4% per cent certificate of indebtedness ma­
turing in one year and a 4s per cent Treasury note ma­
/s
turing in five years. Subscription books for the exchange
will be open on May 2 through May 4, and delivery of
the new issues will be made on May 16. The announce­
ment met a generally favorable market reception.
O T H E R S E C U R IT IE S M A R K E T S

The markets for corporate and tax-exempt bonds fol­
lowed roughly the same pattern during April as the mar­
ket for Governments. Prices of seasoned corporate and
tax-exempt securities tended downward during the month,
reflecting, in addition to the influences that were opera­
tive in the Government securities market, an inventory
of recently offered corporate issues still available from
underwriters and an increased supply of new State and
local government offerings. Activity in these markets was
irregular, as investors appeared first to hesitate and then
to return aggressively in response to more attractive yields
on new issues and on recent issues repriced following the
termination of their underwriting syndicates. Over the
month, the average yields on Moody’s indexes for Aaa
bonds rose from 4.45 to 4.46 per cent for corporates and
from 3.28 to 3.34 per cent for tax-exempt securities.
Flotations of new tax-exempt securities totaled $633
million during April, more than the $491 million total in
March but below the $831 million sold in April 1959.
The new tax-exempts were accorded mixed receptions.
Included among the new issues was an offering of revenue
bonds by the Triborough Bridge and Tunnel Authority,
consisting of $74 million of 4 per cent bonds maturing in
1985 and $26 million of 3Vi and 3% per cent bonds due
1970-75. Reoffered at par, this issue was very well
received.
The volume of new corporate securities offerings during
April was $340 million, about the same as the $338 mil­
lion offered in March but more than the April 1959 total
of $298 million. Most issues were accorded poor recep­
tions until late in the month when demand picked up
considerably in response to higher yields.
In the market for short-term debt instruments, rates
were adjusted upward following the sharp rise in Treasury
bill rates. Dealers in commercial paper, who had reduced
rates by Vs per cent on April 6, increased rates in two
Vs per cent steps on April 12 and 18, bringing the offered
rate on prime 4- to 6-month paper to 4Va per cent.
Dealers in bankers’ acceptances raised their rates by Vs
per cent on April 11 and by another Va per cent the fol­

MONTHLY REVIEW, HAY 1960

lowing day, making the new bid rate on 90-day unendorsed
acceptances 4V% per cent. Rates on directly placed sales
finance company paper were increased by Va to % per
cent on April 12, with the new rate on 60- to 89-day
paper at 3% per cent. These rates were unchanged over
the remainder of the month.
On April 18, the Federal National Mortgage Associa­
tion launched a new program for the sale of short-term

discount notes having flexible maturities to supplement its
existing longer term debenture financing. Investors are
allowed to select their own maturity dates within four des­
ignated series of notes ranging in term from 30 to 270
days. The notes were sold initially at discounts of 3.43
per cent for 30 to 59 days, 3.70 per cent for 60 to 89 days,
3.80 per cent for 90 to 179 days, and 4.05 per cent for
180 to 270 days.

International Developments

C H A N G E S IN B R IT IS H F IN A N C IA L

P O L IC IE S

After more than a year of rapid economic growth and
nearly two years of virtual price stability, Britain is again
confronted with rising inflationary pressures. Since the
beginning of 1960 the authorities have accordingly been
shifting their financial policies from ease toward restraint.
In this, their aim has been to help assure the continuance
of Britain’s economic growth by moderating the expansion
to a rate that is consistent with the maintenance of both
internal price stability and the strength of sterling. This
shift toward restraint is being continued under policies
that were proposed to Parliament by the Chancellor of the
Exchequer in his April 4 budget address and that were
implemented in part toward the end of that month.
The Chancellor presented the budget against a mixed
economic background of rising domestic prosperity and a
weakening in Britain’s balance of payments. Pardy as
a result of official measures adopted in 1958 and 1959
to stimulate the domestic economy, the seasonally adjusted
index of industrial production had risen 13 per cent in the
sixteen months ended February 1960 to a level 9 per
cent above the previous all-time peak (see Chart I). The
production rise was associated with a relatively small
increase in total industrial employment and a large rise
in labor productivity. At the same time, wage rates rose
very little and the increase in earnings, while significant,
was in the Chancellor’s view “much nearer than in any
other recent year to the rate at which increased produc­
tivity could enable us to continue expansion in the long
term without inflation”. Indeed the sharp rise in produc­
tivity combined with the moderate earnings increase was,
the Chancellor said, “the biggest single contributory factor
in the price stability of the past year”. Emphasizing the
“tremendous benefit” of price stability not only to those
who live on small fixed incomes but “in the success of




Chart I

BRITISH ECONOMIC INDICATORS
Per cent

Quarterly averages; 1954=100

per cent

Note: Industrial production: seasonally adjusted industrial production index,
first-quarter 1960 figure based on January-February only. Productivity:
seasonally adjusted index of output per person in industry. Wage rates:
index of weekly wage rates, first quariter 1960 based on January-February
only. Retail prices: index of retail prices.
Source? National Institute of Economic and Social Research, Economic Review,
September 1959 and March 1960.

our exports”, the Chancellor affirmed that its “continuance
must be one of the main objectives of our policy”.
While the Chancellor expressed satisfaction with do­
mestic economic developments, he described the 1959
balance-of-payments result as “disappointing”. This out­
come was largely attributable to an 8 per cent increase in
imports which, as the Chancellor said, was “a natural
consequence . . . of the expansion in domestic activity”
and which, one may add, undoubtedly contributed signifi­

FEDERAL RESERVE BANK OF NEW YORK

cantly to the maintenance of price stability. Since exports
expanded much less rapidly than imports and since net
earnings from overseas operations of oil companies were
reduced, the current account surplus in Britain’s balance
of payments dropped from £349 million in 1958 to
£145 million in 1959 and actually changed to a small
deficit in the final quarter of the year. Moreover, while
Britain’s current account surplus was declining, outflows
of British capital increased. In large part this rise was
nonrecurrent in character, some £232 million being paid
on account of Britain’s increased subscription to the Inter­
national Monetary Fund and £8 9 million in repayment
of its Export-Import Bank loan. In addition, however,
British investment abroad and aid to Commonwealth
countries remained at a high level, higher indeed (as the
Chancellor said) than could be covered by the reduced
surplus on current account. In consequence, Britain’s gold
and convertible currency reserves declined £119 million
during 1959 while its overseas sterling liabilities rose
£227 million. Mainly as the result of these changes,
Britain’s international monetary position deteriorated,
taking into account both special and ordinary transac­
tions, by £363 million or, excluding the special transac­
tions, by about £ 100 million—a result that the Chancellor
regarded as “most unwelcome”.
Assessing the prospects for the year ahead, the Chancel­
lor foresaw a continuation of many of the past year’s
trends. Spending by the public authorities (including both
central and local governments) would expand somewhat
more rapidly than in 1959, while private investment would
be substantially higher. On the other hand, inventory
accumulation was likely to be reduced and a slowing-down
in the rise of instalment credit might dampen the growth
of personal consumption. As against this, the prospects
were for a somewhat slower rate of increase in output than
in 1959 because many of the industries on which demand
is now being concentrated are working close to full capac­
ity and because of spreading shortages of labor and even
of certain materials. On balance, the Chancellor’s judg­
ment was that:
the prospective increase in demand arising from
the factors I have mentioned is likely at least
fully to absorb, and might even involve a danger
of outrunning, the increase in production which
can be expected.
Against this background the Chancellor formulated the
government’s financial policies, his main concern being
to preserve both domestic price stability and the strength
of sterling as the underpinning for further expansion. In




87

the monetary policy field, he noted that a growth in bank
credit had been making a significant contribution to stim­
ulating the economy but that “we have reached the stage
where we should be cautious” about further credit expan­
sion. Observing that the first steps in restraining private
credit had already been taken through the 1 per cent in­
crease in the Bank of England’s discount rate to 5 per cent
on January 21, 1960 and subsequently through open mar­
ket operations, the Chancellor gave warning that additional
steps would be taken, if necessary, to restrain the expan­
sion of private credit. Such steps were in fact announced
on April 28. Instalment credit controls, which had been
removed in October 1958, were reimposed. Moreover, in
a move to slow an expected rise in commercial bank
liquidity and thereby to restrict the banks’ capacity to
expand credit, the Bank of England directed the London
clearing banks to place with it, by June 15, special de­
posits equivalent to 1 per cent of each bank’s gross de­
posits. A corresponding call of V2 per cent was made on
the Scottish banks. This call for special deposits is the
first under an arrangement announced in July 1958. The
special deposits are to carry interest based on the going
rate for Treasury bills but are not eligible for inclusion
in the banks’ minimum holdings of cash and other
liquid assets.
In the field of fiscal policy, the Chancellor in his April 4
address indicated that budgetary expenditures were ex­
pected to total £6,730 million in the year that began
April 1, 1960, £400 million higher than in the year before
(see Chart II), mainly because of increased spending on
defense, education, roads and on hospitals and other health
services. On the other hand, even with taxes unchanged
at their 1959-60 rates, the prospective rise in British eco­
nomic activity was expected to bring an almost commen­
surate increase in revenue, so that the over-all budgetary
deficit would increase only £ 1 7 million to £331 million.
However, since even such a modest rise in the deficit
was inconsistent with the government’s policy of moving
toward financial restraint, the Chancellor proposed tax and
other policy changes that would act to withdraw some
purchasing power from the economy. Apart from various
minor tax concessions and measures to eliminate inequities
and plug loopholes, the Chancellor proposed two major
tax changes: (1) a 5 per cent increase in the duty on
tobacco and tobacco manufactures that was expected to
raise revenue by £ 3 9 million during the current fiscal
year, and (2) an increase to YlVi per cent from 10 per
cent in the surtax on corporate profits, the existing stand­
ard rate on corporate income being left unchanged at
38.75 per cent. Although the increase in the profits tax
was expected to raise revenue significantly only in 1961-

88

MONTHLY REVIEW, MAY 1960

Chart II

THE BRITISH BUDGET
Millions of pounds
/vw

Millions of pounds

65 00

65 00

S

Total expenditures

6000

60 00

Total revenue
55 00

5500

1

!

5000
1956-57

1957-58

.......... 1
1958-59

1
1959-60

5000
1960-61

Note: Fiscal years extend from April 1 to March 31. Figures for 1960-61
are budget estimates.
Source; United Kinadont Government. Financial Statements, 1957-58
through 1960-61.

62 and thereafter, the Chancellor held that the increase
would not “be without its influence on consumption and
expenditure” in the current fiscal year, presumably be­
cause he expected that it would curb dividend payments
and depress equity values. All told, the Chancellor’s pro­
posals aimed to reduce the over-all budgetary deficit to
£318 million in 1960-61, only slightly higher than in the
fiscal year just ended. In addition, the Chancellor pro­
posed to offer more generous returns on the government’s
various small savings securities, net sales of which in
1959-60 had brought the Treasury an amount of new
money almost equivalent to its over-all budgetary deficit.
In the course of his comments on the prospects for the
British economy generally and for the budget in particular,
the Chancellor alluded to the numerous uncertainties with
which the government was faced in formulating its finan­
cial policies. There was the question whether the restraint
on personal consumption that might be exerted by a slower
rise in instalment credit would not be offset (given the
tighter labor market conditions that now prevail) by ac­
celerated increases in spendable income. Moreover, the
Chancellor’s own observation that ordinarily one would
expect inventories to be “run down in the early stages of
a recovery and to be rebuilt in the later stages” casts
some doubt upon his estimate that inventory accumulation
would be smaller this year than last. The Chancellor also
noted a number of factors not taken into account in the
budget estimates themselves. On the revenue side, no ac­
count was taken of any receipts that might accrue from




the resale to the public of various iron and steel com­
panies that are still to be denationalized. An underesti­
mation of the rise in expenditures may be even more
significant. No provision was made for the salary in­
creases that are to be granted to doctors and dentists work­
ing under the health service. Moreover, although provi­
sion was made for the financing of the National Transport
Commission’s deficit, including the 5 per cent interim wage
increase awarded to the railroad workers in February,
none was made to cover the additional increases that are
in prospect under the terms of the Guillebaud report on
railroad workers’ pay.
The government is clearly aware both of these uncer­
tainties and, on a broader plane, of the relatively smaller
shift toward restraint in its fiscal policy than in its
monetary policy. Apparently it was this awareness that
prompted both the Chancellor’s warning of a further tight­
ening of monetary policy and also the credit restraint
measures that were announced toward the end of April.
The Chancellor concluded his budget address to Parlia­
ment with the declaration that the government’s financial
policies would have “just that moderating influence on the
rate of expansion that we need in existing circumstances”.
Britain, he concluded, would thus be able to “advance in
the year ahead at a pace which will not endanger the
stability upon which our whole prosperity depends”.
EXCHANGE RATES

Activity in the New York foreign exchange market
increased substantially during April. Spot sterling gen­
erally was strong during most of the month, owing mainly
to commercial demand. About midmonth, however, and
again toward the month end Continental selling of sterling
caused temporary downward adjustments in the sterling
quotation. Thus, after advancing to $2.8121 early in
April—the highest since August 1959—the rate moved
somewhat lower at midmonth. Thereafter, the quotation
partially recovered but on April 26, under substantial
pressure, dropped to $2.8073., the low for the month. On
April 29 spot sterling was quoted at $2.8091.
In the forward market, the discounts on three and six
months’ sterling widened appreciably early in the month,
reaching 71 and 99 points, respectively, on April 8, the
largest spreads since November 1958. A subsequent con­
traction in the spreads, continuing to midmonth, was later
offset, the discounts moving to 61 and 98 points at the
month end.
The rate for the Canadian dollar, reflecting substantial
commercial demand for United States dollars in Canada,
declined from $1.042%2 at the beginning of April to

FEDERAL RESERVE BANK OF NEW YORK

$1.032%4 on April 11—the lowest quotation in a year.
Thereafter, although moving somewhat erratically, the rate
advanced to $1.03% on April 29.
The Swedish krona, reportedly reflecting the repatriation

89

of foreign assets by Swedish nationals, advanced from
$0.19331/4 at the beginning of the month to $0.1940Va
by April 19, then eased slightly. Most other European
currencies were steady and firm against the dollar.

United States Cotton Export Program
The substantial contribution of increased exports of
raw cotton to the recent rise of total merchandise exports
has drawn attention to this country’s cotton export pro­
gram. In the seven months from August 1959—when the
current marketing year for raw cotton began—through
February 1960, total United States exports excluding
military-aid goods were $790 million higher than in the
corresponding period a year earlier, and $270 million of
this increase was accounted for by larger shipments of
raw cotton.
The sharp recovery in raw cotton exports—representing
a doubling as compared with the depressed level of the
first half of the 1958-59 marketing year—was stimulated
by lower domestic prices and by the rise in the export sub­
sidy for the current marketing year. Without the subsidy,
United States producers of cotton would be unable to
compete in international markets because the Govern­
ment’s price support program keeps the domestic prices
of raw cotton above current world prices. Whenever world
cotton prices are below the Government-supported domes­
tic price “floor”, United States exporters are unable to
compete unaided in international markets. As world cot­
ton prices declined sharply in 1955-56 and again in 195859, our exports were undersold by foreign growths, and
consequently cotton exports were exceptionally low in both
these periods.
To offset these price differentials, the Commodity Credit
Corporation (CCC) began, effective August 1, 1956,1 to
subsidize cotton exports, using the “competitive-sales”
method. Under that program, which was used in the mar­
keting years 1957 and 1958, the CCC auctioned cotton
to exporters from its own stocks, accepting bids that fell
short of the United States spot prices by around 6 to 8
cents per pound. In 1958-59, that method was supple­
mented by the “payment-in-kind” method, which is the
only one in effect during the current marketing year.
Under this new program the exporters purchase cotton on
1 Earlier, in January and February 1956, the CCC had sold for
export at reduced prices one million bales of short staple cotton. A
number of programs for subsidizing cotton exports had been employed
in the 1940’s.




the open market and register their export sales with the
CCC. They are then issued cotton export payment certifi­
cates which can be redeemed by withdrawing from CCC
stocks an amount of cotton equivalent in value to the
subsidy to which they are entitled. This year’s subsidy
rate is 8 cents per pound, compared with 6.5 cents in
1958-59.
Subsidy payments are also granted on Governmentfinanced cotton exports under the Agricultural Trade
Development and Assistance Act of 1954 (Public Law
480) and Section 402 of the Mutual Security Act. Under
P.L. 480, surplus agricultural products are sold for foreign
currencies (which are mainly loaned back to the purchasing
country), bartered for strategic materials, or given as out­
right grants. In addition, Section 402 of the Mutual
Security Act requires that at least $175 million of our
foreign-aid appropriations be extended in the form of farm
products; these are either directly granted or sold abroad
for local currencies that are then used for the purposes of
the act. Cotton exports under these two programs aver­
aged two fifths of our total cotton shipments during the
fiscal years 1956-57 to 1958-59.
Because United States manufacturers must purchase raw
cotton at domestically supported prices while their foreign
competitors can obtain United States cotton at the lower,
subsidized prices, the CCC also initiated in August 1956
its Cotton Products Export Program. By registering with
the CCC their foreign sales of cotton products, the ex­
porters receive an “equalization payment” so calculated
as to offset fully the cost differential due to the raw cotton
export subsidy; contrary to the latter subsidy, which is
paid in kind, the equalization payment is in cash. Under
this program, cotton products are classified into fourteen
export categories, the equalization payment rate varying
with their raw cotton content.
Although the Cotton Products Export Program offsets,
on the export side, the price handicap of United States
textile manufacturers who cannot purchase the subsidized
cotton available to their foreign competitors, no corre­
sponding equalization has been attempted in the case of
imported cotton products sold in competition with do­

90

MONTHLY REVIEW, MAY 1960

mestic goods in the United States market. However, at
recent hearings of the Tariff Commission the Administra­
tion proposed the imposition of an “import fee” on cotton
textile manufactures, to cancel out the effect of the cheaper
raw cotton available to foreign producers.
Revising upward the forecasts of an excellent crop it
made last fall, the Department of Agriculture now expects
our raw cotton exports in the current marketing year to
reach 6.5 m illio n bales, more than twice last year’s 2.8
m illio n bales and second only to the postwar record of 7.6
million bales exported in die marketing year 1956-57.
Both export sales registrations with the CCC and actual
cotton shipments to date seem to confirm this new fore­
cast. Indeed, reversing the depressed trend of the previous
two years, foreign demand is now soaring, under the im­
pact of a boom in textile production abroad and the neces­
sity of replenishing inventories that had been drawn down
partly in anticipation of the rise in the United States export
subsidy. The raw cotton production of our foreign com­
petitors, on the other hand, has fallen off for the first time
in a number of years, partly because of acreage reductions




abroad in anticipation of this year’s more competitive
United States export prices. United States cotton exports
are reacting so strongly to this improved world situation
because exporters are able to quote much lower prices to
foreign purchasers than last year. Apart from the 1.5
cent per pound subsidy increase mentioned above, there
has also been a significant reduction in domestic prices,
made possible by a lowering of the support prices and of
the CCC’s m in im u m domestic sales prices.
The Department of Agriculture has announced that sup­
port prices and minimum domestic sales prices will be
further reduced in the 1960-61 marketing year. By next
August 1, this will permit the reduction by 2 cents, to
6 cents per pound, in the raw cotton export subsidy
and yet leave the competitiveness of United States cotton
on world markets substantially unchanged. The subsidy
will continue to be granted under the payment-in-kind
method. The Cotton Products Export Program has also
been renewed for 1960-61, but the equalization payment
rate will be reduced by 25 per cent because of the lower
export subsidy.