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MONTHLY REVIEW O f C r e d it a n d B u s in e s s F E D E R A L V o lum e 38 R E S E R V E C o n d itio n s B A N K NOVEMBER O F N E W Y O R K No. 1956 11 MONEY M ARKET IN OCTOBER Th e money market continued generally tight throughout October despite temporary fluctuations in member bank reserve positions. W ide swings in the level of float alter nately drained reserves from or supplied reserves to the The announcement of the Treasury’s new money offering of a 1.6 billion dollar special bill issue resulted in higher yields on regular issues of Treasury bills in the first half banking system as a whole. Th e central reserve city banks of the month, but the successful completion of the financ ing and a re-emergence of strong nonbank demand later in were largely unaffected by these flows, however, and their the month brought yields to somewhat lower levels. The reserve positions remained under relatively constant pres average issuing rate at the regular weekly bill auction rose sure during most of the month. In fact, average borrow from 2 .8 9 9 per cent in the auction held on October 1 to 3 . 0 1 3 per cent on October 8 and to 3 .0 2 4 per cent one ings by the central reserve city banks from the Federal Reserve Banks were somewhat higher during October than week later. On October 2 2 , however, the average issuing in the previous month, whereas borrowings from the Reserve Banks by other member banks were smaller than rate decreased to 2 .9 0 7 per cent, and in the last weekly auction of the month, held on October 2 9 for bills dated in September. The effective rate for Federal funds fluc tuated between 2 15/16 per cent and 3 per cent during most of the month. Novem ber 1 , the average issuing rate declined further to 2 .8 8 9 per cent. System open market operations over the period were designed both to mitigate swings in reserve balances that were primarily attributable to fluctuations in float, and to enable the banking system to meet seasonal credit de mands, including Treasury borrowing, without imposing undue strains on the money and securities markets. Total System holdings of Government securities increased by 1 7 5 million dollars between September 2 6 and October 3 1 , as outright holdings of Treasury bills increased 1 3 6 million dollars and holdings of short-term Government securities under repurchase agreements rose 3 9 million dollars. The capital markets showed considerable irregularity in October, with some weakness stemming from international developments late in the month. Prices of certificates and shorter Treasury notes and bonds rose on balance over the M em ber B ank R eserve P o s it io n s M em ber bank net borrowed reserves averaged 1 9 1 mil lion dollars during the five weeks ended in October, slightly lower than the 2 0 7 million dollar average for the four weeks ended in the preceding month. Pressure on reserve positions increased during the first part of the month as float decreased and the volume of currency in circulation expanded. Reserve balances were then augmented over the midmonth period by a large increase in float. In the final week of October, however, average net borrowed reserves returned to approximately the level that had prevailed during the first week of the month as float again declined sharply. During the week ended October 3 member bank re serves were depleted by a substantial decline in float and month, as a strong nonbank demand absorbed the supply reaching the market. B ut in the longer-term area prices declined, with some institutional and commercial bank liquidation taking place in the latter part of the period. N ew corporate and municipal offerings also met with mixed reception during October, as a continued heavy volume of new flotations was not so readily absorbed by investors as in September. CONTENTS Money Market in October .......................... , , International Monetary Developments ... A Year of Monetary Restraint Abroad ,., Selected Economic Indicators .................. .. , . 153 156 158 164 154 MONTHLY REVIEW. NOVEMBER 1956 an increase in currency in circulation, which together more than offset additions to reserves attributable to other Treasury’s balance at the Reserve Banks also supplied reserves to the banking system, so that by October 1 7 the operating transactions and System purchases of G overn member banks had free reserves of 4 3 million dollars as ment securities. A s a result, member bank borrowings compared with net borrowed reserves of 3 0 5 million dol from the Federal R eserve Banks rose from a 7 0 5 million lars on the previous W ednesday. dollar average in the last statement week in September to over 800 million dollars in the week ended October 3 and net borrowed reserves increased from 2 0 1 million to close bank borrowings from the Federal Reserve Banks were to 30 0 million dollars. In the following week float con tinued to fall and the seasonal outflow of currency into circulation was accelerated by the approach of the O cto Concurrently, member reduced to about 4 5 0 million dollars from 5 7 9 million a week earlier. Nevertheless, the reserve position of central reserve city banks remained tight through most of the week, and their average borrowings from the R eserve Banks declined only slightly from the level reached the preceding ber 1 2 Columbus D a y holiday. Th e impact of these and week. Flo at rose to its midmonth peak during the early other contractive factors upon reserve positions was more part of the week ended October 2 4 , but the reserves thus than offset, however, by a decline in required reserves and released were partially offset by Federal Reserve open increases in reserve balances attributable to Treasury operations and System open market transactions. Although the net borrowed reserves of banks throughout the nation market operations, and by the large increase in required reserves reflecting commercial bank payment through thus decreased somewhat, the banks in the N ew Y o rk cen cial issue of bills. tral money market continued under pressure, and their average borrowings from the Federal Reserve B ank of N ew Y o rk and their net borrowed reserves both rose above the levels of the previous week. toward the end of the week, member banks held average free reserves of 3 2 million dollars for the week. O n O cto The regular midmonth expansion in float occurred largely in the week ended October 1 7 and was compounded as the pile-up of checks following the holiday week end resulted in processing delays. In addition, a decline in the In the final week of the month, further losses of reserves C hanges in F actors T ending to Increase or D ecrease M em ber B ank R eserves, October 1 956 Daily averages—week ended Treasury operations*............................ Federal Reserve float............................ Currency in circulation......................... Gold and foreign account...................... Other deposits, etc............................... Total...................................... changes Oct. 17 Oct. 24 Oct. 31 + 98 -327 - 53 + G 4“ 3 + 70 - 77 -113 — 58 - 18 + 97 +225 - 73 + 36 -202 -118 +332 + 89 + 79 + 140 - 35 -485 + 70 “h 8 + 30 + 112 -332 - 80 + 71 - 47 -272 -197 + 83 + 523 -412 —275 + 47 + 74 +164 - 21 + 80 - 60 -110 - 14 - 68 + 40 + 113 + 19 + 105 + 47 -143 -150 + 110 - 31 the month, renewed drains on member bank reserves were 2 — _ — _ — _ 1 4- 2 + 1 System ’s outright security holdings and of 7 9 million dol _ + — + +226 + 191 -122 -276 + 85 + 104 Total reserves........................................... Effect of changein requiredreserves^........... Excessreserves^...................................... — 46 + 21 - a + 86 - 39 + 13 +247 -222 -327 + 114 —17i + 12 - 25 + SO - 26 + 25 -213 -159 714 571 564 596 674 383 810 517 857 597 Note: Because of rounding, figures do not necessarily add to totals. * Includes changes in Treasury currency and cash, t These figures are estimated. t Average for five weeks ended October 31. by 2 8 1 million dollars between September 2 6 and O cto ber 10 , as the System partially offset depletions of reserve balances stemming primarily from declines in float and the outflow of currency into circulation during those two weeks. Similarly, in the following two weeks the large expansion in float was offset in part by System sales or redemptions of securities; between October 1 0 and O cto ber 2 4 , outright holdings of Treasury bills declined 1 5 0 million dollars and securities held under repurchase agree Oct. 10 Total...................................... Daily average level of member bank: Borrowings from Reserve Banks............ Excess reserves!................................... through a continued contraction in float were offset in part by Federal Reserve security purchases, but member bank borrowings from the Reserve Banks rose and average net Oct. 3 Direct Federal Reservecredit 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............. ber 2 4 , however, their net borrowed reserves amounted to 3 7 3 million dollars. Throughout the month, System open market operations were used to moderate the fluctuations in member bank reserve positions. Outright holdings of Treasury bills rose (In m illions of d o lla rs; ( + ) denotes increase, (— ) decrease in excess reserves) Operatingtransactions Although float was reduced rapidly borrowed reserves returned to about the level that had prevailed in the first week of the month. Table I Factor Treasury T a x and L o a n Accounts for the T reasury’s spe 724J 533| ments decreased 3 2 million dollars. In the final week of alleviated by an increase of 5 million dollars in the lars in securities taken from dealers under repurchase agreements. G o v e r n m e n t Se c u r it ie s M arket The prices of Treasury securities showed mixed changes over the month, with price rises in the shorter-term area and declines among most intermediate issues and at the longer end of the list. Prices of certificates and shorter notes and bonds generally rose as a persistent non 155 FEDERAL RESERVE BANK OF NEW YORK bank demand for certain of these issues met with a limited supply. Although there was further commercial bank liquidation of holdings in this maturity range, dealers frequently had difficulty in prom ptly satisfying the de mand. The supply of tax anticipation certificates, which special auction, and then generally declined over most of the rest of the month, closing at 2 .8 6 per cent on October 3 1 . had previously been readily available from commercial Th e corporate and municipal bond markets exhibited an uncertain tone over the month, as offerings of new banks, diminished in October. O ther S e c u r it ie s M arkets bonds securities were large and a heavy calendar continued in remained quiet during most of the month, but commercial prospect. A verage market yields on seasoned high-grade Th e market for intermediate and long-term bank and institutional liquidation in the last part of corporate issues, as reflected in M o o d y’s A aa-rated cor October resulted in lower prices for most of these issues. porate bond index, rose 8 basis-points over the month A n important element in this selling was the wide spread between yields on new high-grade corporate securities to 3 .6 5 per cent, and yields on similarly rated outstanding municipal issues rose 1 2 basis-points to 2 .7 4 per cent. and those on long-term Governments. Short-term psycho Th e estimated volume of public offerings of corporate logical influences were also important in determining daily price movements in the long-term area from time to time. O ver the month as a whole, changes in the prices of Treas bonds for new capital declined to about 3 1 0 million dollars in October, compared with 4 8 0 million dollars in September. On the other hand, offerings of preferred ury notes and bonds maturing through 1 9 6 1 ranged from stock increased somewhat. increases of 2 % 2 of a point to a decrease of 1 j /3 2 of a point, while longer issues through 1 9 7 2 declined by 1 % 2 to selective in their reception of new bond issues. E a rly in S1/S2 of a point. The 3 V i’s of 1 9 7 8 - 8 3 and the 3 ’s of 1 9 9 5 each declined 30/3 2 of a point over the month. Investors continued to be the month, a large new A aa-rated public utility issue of 2 7-y e a r debentures was reoffered to yield 3.9 0 per cent and received a poor initial reception. The previous simi Th e market for Treasury bills was dominated during larly rated public utility issue had been successfully m ar much of the month by the Treasury’s new money financing keted in m id-August at a reoffering yield of 3 .9 4 per cent. in the form of a special bill issue to raise part of the funds it will need during the remainder of the year. On In midmonth, the syndicate on the new issue was broken and the underwriters reported success in moving the still October 4 the Treasury announced that it would auction unsold portion at prices that resulted in a yield of 3 .9 9 1.6 per cent. billion dollars of special 9 1-d a y Treasury bills on A number of other new issues met with varying October 10 , with the bills dated October 1 7 and maturing reception, depending in part upon the relative scarcity of on January 16 , 1 9 5 7 . Com m ercial banks were permitted to pay for purchases of the special issue for their own and the “ names” involved. Th e secondary market for corpo customers’ accounts by credit to T a x and Lo an Accounts. with prices tending somewhat lower. Trading was somewhat more active in the municipal The opportunity to pay for the new bills in the form of credits to Treasury deposit accounts, rather than cash, encouraged commercial bank subscriptions, and bids for the new issue totaled 4 .8 billion dollars, of which 4 2 1 million dollars were noncompetitive tenders. A w ard s to successful bidders were made at an average rate of 2 .6 2 7 per cent. “ W hen-issued” trading opened on O cto ber 1 1 at a rate of about 3 Vs per cent (bid), but as trading developed the rate fell to close that day at 3 .0 6 per cent. B y October 16 the rate on the special issue had fallen below 3 per cent, as a moderate nonbank demand rate securities remained quiet over most of the month, bond market. P e rc e n t Th e volume of new public offerings in- M ARKET YIELDS OF SELECTED SECURITIES emerged and commercial bank liquidation proved to be gradual and limited in volume. Th e successful completion of the Treasury’s financing program resolved a number of uncertainties that had been overhanging the bill market, and was followed by a general downward trend in bill rates as a strong nonbank demand encountered limited offerings of many issues. ^ W e e k ly a v e r a g e s , e x c e p t W e d n e s d a y close fo r m u n ic ip a l b o n d s , The longest outstanding issue of Treasury bills, which f had closed at 2 .9 1 per cent (bid) at the end of September, Sources: B o ard of G o v e rn o rs a n d M o o d y 's In v e s to rs S ervicc. L atest d a t e rose to 3 .0 1 per cent by October 10 , the date of the O id series. p lo t t e d is O c to b e r 2 6 . P e rc e n t 156 MONTHLY REVIEW, NOVEMBER 1956 Table II Weekly Changes in Principal Assets and Liabilities of the Weekly Reporting Member Banks The change in commercial and industrial loans over this period included increases of 3 1 0 million dollars in bor (In m illions of dollars) rowings by food, liquor, and tobacco firms, 1 8 5 million Statement weoks ended Item Sept. 26 Oct. 3 Oct. 10 Oct. 17 Oct.. 24 Change from Dec. 28, 1955 to Oct. 24, 1956 dollars in takings by commodity dealers, and 1 2 3 miilion in loans to wholesale and retail trade establishments. In all the above cases except wholesale and retail trade, the rise in such borrowings since m idyear has been larger Assets Loans and investments: Loans: Commercial and industrial loans— Agricultural loans.......................... + 26 + 4 Real estate loans............................ All other loans (largely consumer).. than in the comparable period in 1 9 5 5 . Loans to public utilities and to petroleum, coal, chemicals, and rubber -138 - 6 }+2,985 + 33 - 915 + 15 + 702 - 12 + 717 producers also increased during the five-week period, but + 93 -111 +3,357 lion dollars, and loans to metals and metal products firms -119 + 2 -139 —108 +723 - 63 -161 -174 - 626 -3,439 -287 - 9 -117 + 26 -247 — 37 +660 - 25 —335 — 36 —4,065 - 444 Total investments....................... -296 - 91 -284 -t~6i}5 -371 —4,509 F o r the year thus far total loans at the weekly reporting Total loans and investments adjusted*.. —166 — 22 -317 +728 -482 -1,152 banks have increased 3 .4 billion dollars, considerably less Loans to banks.................................... -160 -328 +299 +200 —459 - 128 than the 5 . 1 billion dollar expansion in the similar period Loans adjusted* and “other” securities.. + 121 + 95 - 70 + 68 -147 +2,913 last year, but business loans (including agricultural loans) -534 + 17 +713 -459 + 14 -388 -1-374 + 3 -746 +334 - 14 +488 +583 - 6 —638 —2,iVTfi + 302 - 140 of 2 .4 billion in the like period last year. The increase in business loans since the middle of the year, however, has -569 - 20 +437 - 30 + 32 - 28 +498 + 11 -947 + 10 — 491 + 62 been substantially less than last year; since the end of June + 12 — 8 + 125 0 - 69 - 16 + 36 - 15 - 1 — 34 + 21 - 1 — + + + + + 130 + 69 - 33 -155 -132 Total...................................... Total loans adjusted*................. Investments: U. S. Government securities: Treasury bills............................. Other......................................... 7 10 49 19 18 borrowings by sales finance companies declined 4 1 5 mil decreased 1 6 5 million in continuation of the decline begun in July. M ainly as a result of the declines in loans to these last two borrower groups, business loans in the aggregate decreased 9 million dollars in the five-week period. have risen 3 .0 billion dollars as compared with an increase Liabilities Demand deposits adjusted.................... Time deposits except Government......... U. S. Government deposits.................... Interbank demand deposits: Domestic.......................................... Foreign............................................ business loans at the reporting banks have risen 0.8 billion * Exclusive of loans to banks and after deduction of valuation reserves; figures for the individual loan classifications are shown gross and may not, therefore, add to the total shown. dollars, compared with an increase of 1 . 3 billion in similar weeks in 1 9 5 5 . Ban k borrowings by sales finance com creased sharply to an estimated 5 2 5 miilion dollars from 30 0 million in September. Sm all issues m oved rather panies have decreased 0 .5 billion since midyear, and loans slowly, however, as investor interest continued selective in this area. On the whole, investor reception was mixed and somewhat less favorable than that which had gener ally greeted new issues during the previous month. M em ber B a n k C r e d it Total loans and investments at all weekly reporting member banks contracted 2 5 9 million dollars during the five weeks ended October 2 4 , as a decline of 4 0 7 million dollars in investment holdings more than offset a 14 8 mil lion dollar loan expansion. to metals and metal products firms have declined 0 .4 bil lion dollars. The decline in investment holdings of the reporting banks during the five-week period ended October 2 4 con sisted prim arily of a net reduction in holdings of United States Governm ent securities. During the week ended October 1 7 , Treasury bill holdings increased sharply, re flecting awards of the Treasury’s special new issue, but the decline was resumed subsequently. F o r the year thus far, total investments have declined 4 .5 billion dollars; such holdings decreased 6.0 billion dollars in the comparable period in 1 9 5 5 . INTERNATIONAL MONETARY DEVELOPMENTS M onetary T rends and P o l ic ie s 3 . 3 7 per cent at the fourth October tender. Th e rise in Th e trend to tighter credit policies abroad, discussed interest rates has accompanied the continued rapid expan elsewhere in this Review, was accentuated in October in sion of domestic demand in C an ada; business investment several countries. The Bank of Canada raised its discount rate from 3 lA to 3 V2 per cent, effective October 1 7 ; this (including inventories) during Jan u ary-Ju n e 1 9 5 6 was 5 0 per cent greater on an annual basis than in 1 9 5 5 , and con was the third increase this year, and the sixth since August sumer spending rose 7 per cent, while the consumer price 1 9 5 5 when the rate wras IV2 . M arket interest rates rose index advanced 2 per cent from M a y to August. Strong further in October; the average Treasury bill tender rate, domestic inflationary pressures are also reflected in the which had risen above the discount rate in the week pre unprecedented trade deficit, which during January-August ceding the October 1 7 increase, reached a new high of was running at an annual rate of over 1 billion dollars* FEDERAL RESERVE BANK OF NEW YORK more than twice as large as in 1 9 5 5 . There was some bor rowing from the Bank of Canada during the week ended October 10 , for the first time in seven weeks; at the end 157 substantial increase in the “ ordinary” deficit, although the over-all deficit was slightly smaller than a year ago. The rate on prime loans to 5Vi per cent from 5 X A. favorable reception accorded the new issue of savings cer tificates launched early in A ugust will aid the government’s efforts to secure funds from noninflationary sources (in the eleven weeks to October 2 2 net sales of savings certificates In the Netherlands, the discount rate was raised for the third time this year, to 3 % per cent from 3 lA , effective with net repayments of 2 9 million in the same period last October 2 2 . y e a r ) . Another step in this direction is the latest increase, of the month the banks’ liquidity ratios increased slightly. On October 2 2 the chartered banks raised their interest The Dutch economy has been expanding rapidly for some time, and as the limits of capacity have been approached the threat of inflation has grown. Invest and defense bonds totaled 3 7 million pounds, compared to 53A per cent from 5Vi, in the interest charged by the ment and consumption in 1 9 5 6 have substantially exceeded Public W orks L o a n B oard on advances to the local author ities of more than five years’ duration. The government’s last year’s peak levels; on the other hand, the growth of policy of encouraging the local authorities to meet their industrial production has slackened. Th e rapid expansion borrowing requirements on the market and thus reduce of domestic demand has put a severe strain on the balance the drain on the Exchequer has already shown results; in the first half of this fiscal year only 3 4 million pounds was of payments; the January-A ugu st foreign trade deficit was more than 40 per cent larger than a year earlier, and from lent by the Public W orks L o a n Board, compared with 2 0 1 January through October 1 5 official gold and net foreign million during the same period of 1 9 5 5 . Government bond exchange reserves declined by almost 1 4 0 million dollars’ prices rose steadily during the first half of October, but equivalent. B ank credit rose 9 .3 per cent during the first eight months, and conditions on the Dutch money market have recently tightened further; commercial bank bor rowing from the central bank was very heavy in September and October. The stringency on the money market is declined during the latter part of the month; the average tender rate for three months’ Treasury bills declined to 4 .9 9 per cent at the fourth October tender. In N ew Zealand credit policy was tightened further; effective October 1 , the minimum cash reserve require expected to increase in the next few weeks, and the Nether ments of the trading banks, which on September 1 4 were lands B ank has reduced the cash reserve requirements of increased by 3 per cent to 3 0 per cent of the banks’ demand the banks to 7 per cent from 9 in order to prevent the liabilities, were raised to 3 4 per cent. Fresh anti-inflationary pressure on bank reserves from becoming too great. The measures have also been announced in N orw ay, including market rate for Treasury bills with three months to matu a tightening of the lending policies of the State Housing Bank, additional restrictions on consumer credit, and rity reached a new postwar peak of 3 % per cent in October; the rate was IV2 at the beginning of the year. budget cuts to offset the cost of higher food subsidies. Th e governor of the Ban k of England stated at the However, the government also stated that no increase in annual bankers’ dinner at the M ansion House (noted else the Bank of N o rw a y’s discount rate was being considered where in this Review) that the battle against inflation was now. In September, the Ban k of Spain raised certain of “ certainly not yet won” , even though monetary policy had become increasingly effective since A p ril 1 9 5 5 — first in preventing more serious inflationary developments last year, and subsequently in reducing the strains on the econ om y. The governor stressed the importance of harmoniz ing monetary and fiscal policy, reaffirmed his confidence in the policy of emphasizing personal savings, government economy, and debt funding, and underlined the significance of changes in the banks’ liquidity ratios as a “ warning bell” its lending rates in the face of a rapid rise in the cost of living and renewed balance-of-paym ents difficulties; the rate for the discount of commercial paper from the public has been increased to 4 .2 5 per cent from 3 .7 5 , and the rate applicable to the rediscount of commercial paper from the banks to 3 .4 0 per cent from 3.0 . E xchange R ates when bank lending to private borrowers is increasing too Sterling was under less pressure during most of October fast or short-term government borrowing is “ mounting than in the preceding months, as seasonal demand for dol dangerously” . In the four weeks ended in mid-September, lars in London slackened; late in the month, however, the clearing banks’ liquidity ratio rose again, reaching 36 .9 further disturbances in the M iddle E a st depressed rates. per cent compared with 3 3 . 5 per cent a year ago, as a Am erican-account sterling in early October reflected m ar further sharp reduction in advances (which apparently was ket disappointment at the announcement that Britain’ s halted in the period to m id-O ctober) and a large increase gold and dollar reserves had risen only 5 2 million dollars in the banks’ holdings of Treasury bills continued the trend in September despite Britain’s receipt of some 1 7 7 million of recent months. The Exchequer accounts for the first from the sale of the Trinidad Oil Com pany, the rate slip half of the current fiscal year revealed that there was a ping to as low as $ 2 . 7 8 % on October 5 . Subsequently, it MONTHLY REVIEW, NOVEMBER 1956 158 moved somewhat erratically, rising to $ 2 . 7 8 2 % 2 on O cto ber 9 and 1 5 as purchases of sterling for commercial pur poses and for covering short positions became important rate from $ 2 , 5 9 Vi to $ 2 .6 3 early in the month; subse quently, demand was intermittent and generally lower, the strengthening factors. decline when sterling positions were reduced prior to the The rise in the Canadian dollar rate from $ 1 . 0 2 1 % 2 on October 1 to as high as $ 1 . 0 3 3 % 4 on October 3 0 re October 1 2 holiday week end in the N ew Y o rk market, flected further strong investment demand along with good and again shortly after the midmonth when there were fairly substantial purchases of dollars in the London m ar commercial activity. E a rly in the month, the rate advanced to $ 1 . 0 2 5 % 4 on demand from investors, commercial ket. In the final days of the month, the rate declined to sources (particularly grain interests), and various interests $ 2 . 7 8 1/4. In the forward market three and six months’ sterling Canadian oil leases. On the other hand, it tended to fluctuated within rather narrow limits, at discounts of about l 5/s and 3% 2 cents, until October 1 0 when substantial quotation failing to $ 2 .5 9 V i at the month end. seeking short forw ard Canadian dollars for bidding on On October 5 , however, the rate began to decline, subsequently continuing lower at about $ 1 . 0 2 1 % 6 until the final week of the month. The October 3 V2 offerings of forward dollars in London began to reduce the 18 announcement of an increase to spreads; by October 2 2 the discounts had dropped to 1 i y S2 Bank of C an ad a’s discount rate had little immediate effect and 2 2 y 32 cents. Subsequently, however, the London m ar on the quotation; this factor, along with the knowledge ket again became a buyer of forward dollars, and discounts that several bond issues would be in the market in the near at the month end were again higher. Transferable sterling, future, nevertheless contributed to the later strengthening on the other hand, weakened during October, with the of the rate. On October 3 1 , however, the rate slipped to rate declining from $ 2 . 7 7 to $ 2 .7 5 0 5 . $ 1 .0 2 2 % 2 at ^ e m arket’s close, reportedly because of un easiness over M iddle E a st developments. G ood investment demand for securities sterling led to a sharp rise in that per cent in the A YEAR OF MONETARY RESTRAINT ABROAD During the past twelve to fifteen months foreign coun tries have turned increasingly to credit restraint in order to counter the continued rapid growth in domestic demand, which in m any cases has adversely affected the balance of paym ents.1 In most of Western Europe as well as in Canada, inflationary pressures have reappeared after three or four years of monetary stability; and since these pres sures originated, at least partly, in an expansion of private expenditure financed by credit, country after country has put great emphasis on restrictive monetary policy to help restore a better balance in the economy. In many of the primary-producing countries, too, where inflationary strains have prevailed throughout the postwar years, new monetary measures have been taken to slow down exces sive domestic credit expansion or prevent additions to increase in expenditures for plant and equipment, although a rise in outlays by the public for consumer durable goods has also been important. Extensive resort to bank credit has accentuated the effective demand for goods, which has become a growing source of concern as spare industrial capacity has been progressively absorbed and labor short ages have developed. Substantial wage increases, often in excess of productivity gains, have further inflated con sumer demand as well as costs, and have been accompanied by price rises that in some countries have been quite sharp. There are, of course, m any differences in the recent monetary and economic experience of the various E u ro pean countries. In some of them, the expansion of indus trial production has now slowed down, and in the United Kingdom has actually ceased; but in others, notably foreign exchange reserves from automatically enlarging France, the increase in output has accelerated further in the money supply. recent months. Prices have risen substantially in Italy, N orw ay, Sweden, and the United Kingdom, while the T h e E c o n o m ic Se t t in g increase in the money supply has been most noticeable in France and W est Germ any. This increased use of monetary restraint must be viewed against the background of strong business confidence, of a persistent demand for goods, and of expansionary forces that in m any countries have brought about a business boom of unprecedented magnitude. In Western Europe, where the economic expansion has been particularly pro nounced, the main accelerating factor has been the rapid l For an earlier discussion, see "Monetary Trends and Policies Abroad” , Monthly Review, June 1955. Bank credit expansion has, as a rule, been the principal factor in the increases in the money supply, but in W est Germ any the accretions of gold and foreign exchange have also been important. A still further difference is that the balance of payments of a number of countries has weakened while that of certain other countries has strengthened; thus, at various times during 1 9 5 5 - 5 6 , France, the Netherlands, Sweden, and the United Kingdom have lost reserves, while Belgium and W est Germ any have added to theirs. 159 FED ERAL RESERVE B A N K OF N E W Y O R K Changes in Foreign Central B ank D iscount R ates in 1 9 5 5 -5 8 (In per cent) Date of change I ncreases Amount of Country New rate Increase Decrease 1955: 1956: Jan. Jan. Feb. Feb. Feb. Apr. M ay M ay June July Aug. Aug. Aug. Aug. Sept. Sept. Oct. Oct. Nov. Nov. Dec. 1. 27. 14. 14. 24. 10. 20. 25. 28. 1. 4. 4. 5. 10. 5. 29. 12. 19. 17. 18. 19. G reece*................................... United K in gdom ................. N orw ay................................... Canada.................................... United K ingdom ................. Sweden.................................... Austria..................................... Denmark................................ Turkey..................................... New Zealand......................... Belgium................................... W est Germ any..................... Canada.................................... Japanf. ................................. New Zealand......................... Union of South Africa. . . . Canada.................................... New Zealand......................... Austria.................................... Canada................................... Ireland..................................... Feb. Feb. M ar. Apr. Apr. M ay M ay M ay June Aug. Aug. Sept. Sept. Oct. Oct. 7. 16. 8. 4. 19. 1. 19. 26. 6. 9. 25. 6. 10. 17. 22. Netherlands.......... United K ingdom . West G erm any.. . C anada................... Finland*................. Greece*................... W est G erm any.. . Ireland.................... Turkey.................... Canada.................... Netherlands.......... W est G erm any.. . Spain*..................... Canada................... Netherlands.......... 9 3H Vl 3H l'A 4H 3% 5H 4H 4^ 5 3 2 7 .3 6 4H 2 'i four months five further raises have been reported. H lH l \4 six took place in Canada, three each in W est Germ any, the Netherlands, N ew Zealand, and the United Kingdom, and two each in Austria, Ireland, and Turkey. In Sweden, the United Kingdom, and the Union of South A frica, cen H 1^2 1 tral bank discount rates are now the highest since the 2H early thirties; in Denmark, Ireland, and N orw ay, they stand at postwar peaks; in C anada and N ew Zealand, they have 4 3 5 K> 3 10 6 3H 311 5 4H 3'A 3% Of these thirty-three increases since the beginning of 1 9 5 5 , 7 5 4H D is c o u n t R a t e s had been seven such increases, in the twelve months ended in June 1 9 5 6 the number rose to twenty-one; in the past 1 1 1 3'A in The spread and strengthening of monetary restraint abroad is evidenced perhaps most vividly by the number of central bank discount rate increases since m id-1 9 5 5 (see table). W hereas in the first six months of 1 9 5 5 there 1 1 reached the highest levels since the establishment of central banks in these countries in the mid-thirties. In Germ any, it is true, the discount rate was reduced in 1 Y2 1 1 1 1H /-i H H Vi * Rate charged to private nonbank borrowers, t “ Basic” rate for commercial bills. $ Minimum rate in range. In Canada, the economy surged forward rapidly in 1 9 5 5 and expanded further this year. B y the latter part of 1 9 5 5 a large number of Canadian industries were beginning to strain against the limits imposed by plant capacity and the availability of materials and labor, and in recent months prices have begun to rise noticeably. M oreover, commer cial bank credit expanded very rapidly until m id-19 5 6 . The foreign trade deficit has steadily increased, and during January-August 1 9 5 6 was more than twice as large as in the corresponding period of 1 9 5 5 ; at the same time capital inflow has expanded substantially. September 1 9 5 6 but, as was officially stated, this step was taken in response to a calming in the economic climate, and did not reflect a basically new appraisal of the coun try’s economic position.2 Frequently, discount rate changes have been effectively joined with broader, officially sponsored changes in the entire interest rate structure. In some countries— including Australia, N orw ay, Sweden, and the Union of South A frica — the support of the government bond market has been withdrawn or made more flexible, with the result that government bond yields have risen markedly. The authori ties elsewhere, especially in W est Germ any, Japan, and the Netherlands, have made greater use of open market opera tions primarily to influence the liquidity of the money market. In many instances, rates on savings deposits and savings-type bonds have been raised in order to stimulate savings. Under the impact of these various measures, and be supply has continued to rise at a rate that is undoubtedly much faster than the growth of the economy. The main factor behind this rise has been persistent expansion of bank credit, particularly to finance governmental develop cause of the generally higher demand for funds under the prevailing boom conditions, interest rates abroad have risen markedly since 1 9 5 4 (see c h a rt). In Western Europe, large increases in short-term yields have taken place in the Netherlands, the United Kingdom, and W est Germ any; in the United Kingdom some long-term rates have reached ment programs. The rate of increase in the money supply the highest level since the early thirties. Long-term bond In many of the primary-producing countries, the money would have been even faster in a number of these coun yields also have risen appreciably in Italy and the Nether tries if the expansion in domestic assets of the banking lands. In some other countries, the rise in long-term rates system had not been offset by losses of gold and foreign has been less pronounced; in W est Germ any these rates exchange reserves, as in the Philippines and certain Latin generally began to rise within the last year or so, and in Am erican countries; such losses were mainly the outcome France they are now only slightly higher than a year ago, of large import surpluses. On the other hand, in a few but in both these countries the levels of rates are indeed countries, including M exico and Ceylon, the sizable in high in comparison with the United States. In Switzerland, crease in the money supply was mainly attributable to the accumulation of foreign exchange reserves. 2 For a fuller discussion of the discount instrument, see "Discount Policies and Techniques Abroad” , Monthly Review, June 1956. MONTHLY REVIEW, NOVEMBER 1956 160 INTEREST RATES IN SELECTED FOREIGN COUNTRIES Percent Per cent TREASURY BILLS* 6 although fluctuations there have been less marked, govern ment bond yields this September reached the highest level since early 19 4 9 . In Canada, where Treasury bill rates as well as yields on long-term government bonds had reached three-year lows in early 1 9 5 5 , both have since surged sharply upward, with Treasury bill rates reaching an alltime peak and long-term yields reaching the highs of m id -19 5 3 . In Australia, N e w Zealand, and the Union of South A frica, long-term yields have by now likewise pushed to levels well above those of early 1 9 5 5 . R e s t r a in t M e a s u r e s in th e U n it e d K in g d o m The restraint measures taken in the United Kingdom in 1 9 5 5 - 5 6 have commanded particular attention, not only because of the country’s role in international trade and payments, but also because they have by now covered vir tually every sector of the British money and credit struc U n i t e d K in g d o m ture. Between January 1 9 5 5 and February 1 9 5 6 the Bank of England’s discount rate was advanced in three steps from 3 per cent to per cent, the highest level since February 1 9 3 2 . C anada ..,1-LL-L-I-Lu I I I L I .1 I 1,1 1 1 1.1 1 1 .1 I .1..L..L . L l _ L J - L . 1 . L These successive raises in the bank rate were accompanied by increases in the whole interest rate pattern, but were most pronounced at the short-term end of the market. Simultaneously with the second discount rate increase, in February 1 9 5 5 , controls over consumer Ita ly credit, which had been abandoned the previous summer, were reimposed; these controls were tightened further in Ju ly 1 9 5 5 and again in February of this year. F ra n c e In Ju ly 1 9 5 5 , the Chancellor of the Exchequer requested S w itz e r la n d I I i i I ii I I i I I I I I 1i I ii that the banks effect “ a positive and significant reduction” in advances, and also indicated that the Capital Issues i i I I n n i i I 1i i I Committee would be more critical in passing on applica tions; in February 1 9 5 6 , the committee was instructed to set an even more stringent policy, and in the following month the exemption from capital-issue control was re D e n m a rk N o rw a y I I I 1 I I I I I I 1 1 I I 1 I 1 1 I I 1 1 1 1 I I I I I I I 1 I 1 I- duced from £ 5 0 , 0 0 0 to £ 1 0 , 0 0 0 . In Ju ly 1 9 5 6 , the Chancellor once more urged on the banking community that the policy of credit contraction be “ resolutely pur sued” . Furthermore, during the fiscal years 1 9 5 6 - 5 7 and 1 9 5 7 - 5 8 the long-term borrowing needs of the nationalized industries will be met by the Exchequer, in order to give the authorities greater technical control over such borrow ing. Finally, the authorities have substantially increased government-controlled interest rates, including those on new loans by the Public W orks L o a n Board. Since the fall of 1 9 5 5 , part of the disinflationary pro Note: October figures are based on incomplete data. * Treasury bills: United Kingdom and Canada, average of tender rates; Netherlands, average of market rates; West Germany, selling rate of the central bank. Sources: National stotistics;and International Monetary Fund, International Financial Statistics. gram has taken the form of fiscal measures intended not only to reduce the budget deficit but also to restrain invest ment and consumption. These measures have comprised efforts to reduce the outlays of public authorities (includ ing investment by the nationalized industries), as well as measures like the suspension of the special tax allowances FEDERAL RESERVE BANK OF NEW YORK on investment expenditures by industry, increases in the purchase tax and in the taxes on business profits, tobacco, and some beverages, and the curtailment of certain food subsidies. M oreover, local authorities were advised to finance as large a part of their capital requirements as pos sible in the capital market rather than from the Public 161 statutes or under agreements between the authorities and the credit institutions.3 Thus, the B an k of C anada and the Canadian chartered banks agreed late last year on a mini In addition, the Chancellor an mum monthly average ratio of 1 5 per cent of liquid assets (cash, day-to-day loans, and Treasury bills) to deposits; this ratio incorporates the existing statutory 8 per cent cash reserve, and became effective in June 1 9 5 6 . Although in nounced a series of measures to stimulate private savings, including certain tax privileges on a new savings-type bond toward tighter credit control, it was officially stated that W orks L o a n Board. issue and on interest from Post Office Savings, as well as the creation of a novel small-denomination bond with lot tery features. troduction of the ratio itself was not intended as a move the new ratio would make future measures of restraint more rapidly effective, since the banks would be less free to liquidate Treasury bill holdings to meet new loan Britain is still facing, however, the problem of meeting demands.4 In Austria, the discount rate increase of last the Treasury’s financial needs through noninflationary means. A s the governor of the Ban k of England pointed Novem ber was accompanied b y the imposition of a 5 per cent cash reserve requirement against deposits, for com out last month at the annual banquet given by the L o rd mercial and other banks (these banks under a previous M ayo r to the bankers and merchants of the C ity of London at the M ansion House: “ Unfortunately, at some periods informal agreement were already required to maintain minimum liquid-asset ratios); the action was taken under during more recent years, it has not proved possible to match the total requirements of Governm ent and public the new 1 9 5 5 central bank law, which enables the central bank to set reserve requirements up to 1 5 per cent. In bodies by the sale of long-term securities. Floating debt W est Germ any, the A ugust 1 9 5 5 discount rate raise like has again at times become excessive, bank deposits too wise was followed by an increase in cash reserve require high and technical pressures more difficult to maintain.” ments. In the Netherlands, the cash reserve requirements Britain’s problem is summed up in the governor’s statement were adjusted several times to maintain the banks’ reserve that “ the determining events lie in the fields of industrial costs and public finance, but the banking system can help positions at the level desired by the authorities. The French National Credit Council last Ju ly set commercial by holding fast to present policies” . These policies have bank securities-reserve requirements at a minimum of 2 5 resulted in a reduction in bank advances and in a levelingoff of the money supply; consumer credit outstanding has also fallen. per cent of demand liabilities; previously these require During recent months the excessive rate of expansion of any increases in deposits also to be invested in such securities. In Switzerland all m ajor banks agreed in mid- in total demand has slowed down; personal consumption is only slightly higher than last year, personal savings are increasing, and the rate of investment in inventories and plant seems to be slackening. R etail prices have ceased to rise since early summer. Th e reduction in the pull of the home market on British resources not only has prevented imports from rising but has made possible a marked ex pansion of exports, particularly to the dollar area, with the result that Britain has again a current-account surplus in its international transactions. C r e d it C o n t r o l s in O t h e r I n d u s t r i a l C o u n t r ie s ments had called for holdings of government securities at 9 5 per cent of the September 19 4 8 level, with 2 0 per cent 1 9 5 5 to keep, in special accounts at the Swiss National Bank, amounts up to 3 Vi per cent of their short-term lia bilities. This agreement was followed by similar accords with the mortgage banks and insurance companies. It was initially concluded for one year but was renewed last June for another year. In Finland, a similar agreement, which had been in force since February 1 9 5 5 and called for hold ing balances with the central bank equal to 2 5 to 4 0 per cent of increases in bank deposits, was allowed to lapse at the end of June 1 9 5 6 . There have also been certain changes in discounting pro In the other countries of W estern Europe, as well as in cedures or rules. In Denmark, the central bank eliminated industrial countries elsewhere, monetary restraint has like in m id -19 5 5 the privilege, enjoyed by the commercial wise prevailed in 1 9 5 5 - 5 6 . In view of the economic, insti banks since 1 9 3 9 , of discounting commercial paper at Vi tutional, and other differences, the measures adopted in per cent below the discount rate. the various countries have, of course, not followed any conjunction with the discount rate increase of last M ay, uniform pattern. A p a rt from the official discount rate in 3 See ''Commercial Bank Reserve Requirements Abroad” , Monthly Review, October 1955. 4 For a fuller discussion of this and other recent Canadian measures, see "Monetary and Banking Developments in Canada” , Monthly Review, August 195(5. creases and open market operations already noted, a num ber of countries have introduced, changed, or broadened their commercial bank reserve requirements, either un<Jer In W est Germ any, in 162 MONTHLY REVIEW, NOVEMBER 1956 the B a n k d eu tsch er L a n d e r b rou g h t e x p o r t bills w ith in the in g lev el o f loa n s. T h is type o f c o n tro l has b e e n b o t h selec c o m m e r cia l b a n k s’ red iscou n t ceilin gs; fu rth erm ore, it w ith tive— i.e., im p o s e d o n in d iv id u a l cred it sectors su ch as d rew the p riv ileg e g iv en to G e rm a n ba n k s to re d isco u n t in stalm ent sales, co n s tru ctio n , o r h ou sin g — and c o m p r e fo r e ig n bills an d e x p o r t drafts at the o fficia l d is co u n t rates h ensive, i.e., a p p lied to the aggregate o f b a n k loa n s as su ch. in fo r c e in the cou n tries to w h ich e x p orts w ere sent. In C a n a d a , w h ich has raised its d is co u n t rate six tim es Japan , m o v e s h a v e b e e n u n d er w a y fo r som e tim e to m a k e sin ce A u g u s t 1 9 5 5 , fu rn ish es an in teresting e x a m p le o f the d is co u n t rate in to a m o r e efficien t cen tra l b a n k to o l; h o w su ch “ d irectiv es” c a n su p p ort th e m o r e trad ition al as a step in this d ire ctio n , the m argin b etw een the c o m w e a p o n s o f m o n e ta ry c o n tro l. L a st N o v e m b e r , sim u ltane m ercia l b a n k s’ o w n le n d in g rates and their b o r r o w in g rates o u sly w ith the agreem en t o n the n ew 15 p e r cen t liq u id - at the cen tra l b a n k w as n a rrow ed substantially last year, asset ratio n o te d a b o v e , the B a n k o f C a n a d a c o n c lu d e d w h ile the B a n k o f Ja pan stated that th en ceforth the m o n e y an agreem en t w ith th e ch a rtered b a n k s to refra in fr o m m a rk et w o u ld ch a n g es in the m a k in g n ew com m itm en ts f o r “ ca p ita l lo a n s ” — i.e ., term “ b a s ic ” d is co u n t rate rather than, as in the past, b y altera loa n s to c o rp o r a tio n s fo r m o r e th an o n e y e a r; in a d dition , tion s in the b a n k ’ s p rog ressiv e rate structure. it su ggested that a p p lica tion s be regu lated m a in ly b y (I n A u g u s t o f this year, h o w e v e r, the b a n k a n n ou n ced it w as tightening “ fo r n ew an d in crea sed credits sh ou ld b e e x a m in ed v e ry ca refu lly , and existing its cred it p o lic y b y h a lvin g the loa n s a llo w e d in the tw o cred it lim its su rvey ed w ith a v ie w to m a in tain in g c o n tro l lo w e r tiers o f that stru ctu re.) o v e r fu tu re g ro w th ” . Sim ilarly, g en era l “ d irectiv es” to W ith the m a rk ed in crea se in recen t years in con s u m e r c o m m e r cia l ba n k s to sh ow p r u d e n c e in th eir len d in g o r instalm ent cred it a b ro a d — w h ich in total a m ou n t con tin u es, to slo w d o w n su ch le n d in g w ere issu ed d u rin g the past h o w e v e r, to b e m u c h less significant th ere th an in the year in the N eth erlan d s an d Ja pan , w h ile in F in la n d the U n ited States— fo r e ig n authorities h av e b e e n ba n k s w ere w a rn ed that fu n d s relea sed th rou g h term in a su b jectin g su ch cred it to sp ecia l c o n tr o ls .5 In a n u m b er o f tion o f the cash reserve agreem en t, n o te d a b o v e , sh ou ld cou n tries, in clu d in g A u stria , F ra n ce, Irelan d , the N eth er n ot fin d their w a y in to n ew loa n s. In oth er cou n tries, su ch lands, an d N o r w a y , th e term s o f instalm ent sales h ave b e e n in stru ction s o fte n h av e b e e n c o u c h e d in m o r e ex p licit m a d e su b ject to c o n t r o l o r existing regu lation s h av e b e e n term s. tigh ten ed; fu rth erm ore, in so m e o f these cou n tries as w ell b a n k loa n s ou tstan din g, u su ally b e lo w a k e y -d a te lev el, as in oth ers, the au th orities h av e req u ested the c o m m e r c ia l w ere req u ested o r ag reed u p o n in A u stria an d S w ed en ; in m on eta ry A c tu a l red u ction s in the aggregate o f c o m m e r cia l b a n k s to cu rtail in stalm ent cred it fin an cin g. In S w ed en the a d d ition , the S w edish au th orities a n n o u n c e d that, u nless au th orities h av e r e a c h e d an agreem en t w ith the v e n d o r s ’ the c o m m e r cia l b a n k s m et b y a g iven date the m in im u m a ssocia tion u n d er w h ich the term s o f in stalm ent sales h ave liq u id -a sset ratios that h a d b e e n a g reed u p o n earlier, the b een tigh ten ed, w h ile in B elg iu m legislation has b e e n u n der g ov ern m en t w o u ld in v o k e the statutory reserve req u ire c o n s id e ra tio n that w o u ld en able the authorities to im p o se m ents, at that tim e su sp en ded . an d v a ry co n s u m e r in stalm ent cred it term s. c o m m e r cia l b a n k cred it du rin g 1 9 5 6 -5 7 w as set o n the A n o th e r m o n e ta ry -co n tr o l instrum ent o n w h ich in crea s ing relian ce ap pears to h av e b e e n p la ce d in m a n y fo r e ig n fin an cial centers sin ce m id -1 9 5 5 takes the fo r m o f “ d ir e c tives” to c o m m e r cia l b a n k s an d oth er in fo rm a l arran ge m ents b e tw e e n a c o u n tr y ’ s m on eta ry authorities an d its cred it in stitu tions. W ith fe w ex ce p tio n s, these h av e b e e n u sed o n ly in c o n ju n c tio n w ith in creases in the d is co u n t rate an d oth er m easu res o f a quantitative nature, so that “ d irectiv es” curren tly are serving in m a n y cases to su p p le m en t an d r e in fo r c e the m o r e trad ition al to o ls. “ D ire c tiv e s” is o f c o u rse a b r o a d term , ap p lied lo o s e ly ; actu ally, the c ir cu m sta n ces h a v e v a ried in ea ch in d iv id u al case, as h av e the ten or and th e ex p licitn ess o f the in stru ction s th em selves. T h u s, the a ctio n o n the part o f central ba n k s has ran ged all the w a y fr o m ex p ression s o f c o n c e r n o v e r cred it d e v e lo p m ents, and m ild ad m on ition s that cred it trends b e w a tch ed , to fu ll-fled g ed agreem en ts w ith , o r ou trigh t requ ests to, the ba n ks either to m ain tain u n ch a n g ed o r to r e d u c e the ex ist 5 See "Consumer Credit Abroad” , Monthly Review, January 1956. In N o r w a y , the ceilin g fo r basis o f the 1 9 5 5 le v e l; in a d d ition , the b a n k s are to c o n vert in to n ew issues su ch o f their g o v e rn m e n t b o n d h o ld ings as m atu re in 1 9 5 6 and 1 9 5 7 , an d are to in vest in g ov ern m en t secu rities all fu n d s o b ta in e d fr o m in creases in d ep osits. M onetary P o l ic y M e a s u r e s in O ther A reas E lsew h ere, to o , m on eta ry p o lic y has m o v e d in creasin gly in the d ir e c tio n o f restraint du rin g the past tw elv e to fifteen m on th s. T h e m o s t c o m p r e h e n siv e set o f m easu res w as a d o p te d in N e w Z e a la n d an d in clu d e d , b esid es th ree d is c o u n t rate raises sin ce m id -1 9 5 5 an d the im p o sitio n o f c o n tro ls o n in stalm ent cred it, a n u m b er o f in creases in c o m m e r cia l b a n k cash reserve requ irem en ts. F u rth erm ore, the greater latitude a llo w e d the N e w Z e a la n d trad in g ba n k s in the setting o f rates o n ov erd ra fts, w h ich h a d b e e n c o n fin ed w ith in a n a rrow ran ge sin ce 1 9 4 1 , o p e n e d the w ay fo r a g en eral u p w a rd r ev ision o f rates o n sight and tim e d ep osits an d o n lo a n s to lo c a l au th orities. In A u stra lia , the cen tral b a n k last y ear req u ested the c o m m e r cia l ba n k s FEDERAL RESERVE BANK OF NEW YORK to ex ercise restraint in n ew len d in g (e s p e cia lly fo r fin a n c 163 ary difficulties, bu t rather to k e e p d e v e lo p in g e c o n o m ic ing in stalm ent sales, im p orts, and ca p ita l ex p en d itu res) and and to r e d u ce ou tstan d in g lo a n s ; in ad dition , a series o f fu ll u tilization o f av ailab le re so u rce s—- f r o m getting ou t o f fin an cial strains-— la rg ely en g en d ered by w ell-n ig h an ti-inflationary m easu res, m a in ly in the fo r m o f in crea sed h an d and thus w ea k en in g a c o u n tr y ’ s in ternal and external in direct taxes, w as a d o p te d last M a r ch , a lon g w ith an in e c o n o m ic p os itio n . crease in o fficia lly c o n tr o lle d interest rates. T h e 1 9 5 5 -5 6 W h ile d iscou n t rate in creases— o fte n to the high est levels m on eta ry m easu res in the U n io n o f S ou th A fr ic a h ave, since the w ar o r ev en the early thirties— h av e b e e n the aside fr o m a d is co u n t rate in crease, taken the fo r m p r i m ost ta n gib le as w ell as the m o s t p u b liciz e d e v id e n ce o f a m arily o f su ccessiv e u p w a rd adju stm ents in T rea su ry bill tighter cred it p o lic y , th ey h a v e b e e n m a d e m o r e effectiv e tap rates an d oth er sh ort-term m o n e y rates an d in y ield s b y the sim u ltaneou s a p p lica tio n o f a series o f oth er m o n e o n g ov ern m en t secu rities. tary to o ls. In a d d ition , instalm ent cred it term s h av e b e e n tigh ten ed. T h e se h av e in clu d e d the in crea sed use and flexibility o f o p e n m a rk et o p era tion s, restriction s o n r e F r o m so m e o f the cou n tries w ith less d e v e lo p e d m o n e d iscou n tin g fa cilities, th e in tro d u ctio n , raising, o r general tary an d b a n k in g system s, v a riou s m easu res o f m on eta ry b ro a d e n in g o f c o m m e r cia l b a n k reserve requ irem en ts, the m i d -1 9 5 5 , setting o f o v e r-a ll cred it ceilin gs, the im p o sitio n o f selective alth ough h ere the s c o p e o f m on eta ry p o lic y , as su ch, tends co n tro ls o n p a rticu la r cred it sectors, an d finally, agree co n tr o l lik ew ise h av e been r e p o rte d since to b e som ew h a t m o r e lim ite d .6 T h e R e s e rv e B a n k o f In d ia m ents w ith, o r “ d ire ctiv e s” to , fin an cial institutions that in July 1 9 5 6 ob ta in e d statutory au th ority to v ary the ex ist h av e served to su p p lem en t these oth er, m o r e fo r m a l instru in g fix ed c o m m e r cia l b a n k cash reserve requ irem en ts fo r m en ts. In ad d ition , in a great n u m b er o f cou n tries m o n e the p u rp o s e o f en ablin g it to a b so r b som e o f the in crease tary p o lic y m easu res h a v e b e e n stren gth ened sin ce late in the b a n k s’ liq u id r esou rces an ticip ated fr o m the fin a n c 1 9 5 5 b y fiscal m easu res in ten d ed to d a m p en c o n s u m p tio n ing o f the S e c o n d F iv e -Y e a r P la n . an d in vestm ent, as w ell as b y v a riou s in cen tives fo r p r i T h e C e y lo n central b a n k , in v ie w o f the h igh liq u id ity o f th e e c o n o m y , earlier this year p la c e d o n the m a rk et its o w n o n e -y e a r 1 Vk p er vate savings. D esp ite the d ifferen ces in a p p ro a ch , the ov errid in g aim s p e r c e n t securities, to a total o f o f the authorities e v ery w h ere h ave b e e n to m ain tain m o n e 10 m illio n r u p ees; this m a rk s the first in stan ce fo r a n u m tary stability and to p rev en t in flation ary d em a n d fr o m b er o f years in w h ich use has b e e n m a d e o f the b on d -issu in g breed in g p o w e r an yw h ere. an d at the sam e tim e to en su re the steady ex p a n sio n o f cen t and tw o -y e a r 1 % ( T h e a u th ority itself is o fte n p r o v id e d a su bsequ en t d ow n tu rn in e c o n o m ic activity, in the statutes o f cen tra l b a n k s fo u n d e d in the p ostw a r the e c o n o m y . p e r io d .) gen erally to h ave p r o v e n a cce p ta b le to the p u b lic at large, In L a tin A m e r ic a , c o m m e r cia l b a n k reserve req u ire m en ts w ere in crea sed c o n s id e r a b ly in B o liv ia , w h ile su p p le m en tary reserve requ irem en ts against in creases in d ep osits o v e r the lev el o n a g iven date, o r du rin g a g iven p e r io d , w ere in tr o d u ce d in B razil, tigh ten ed in P eru , and im p o s e d o n a te m p o ra ry basis in C o lo m b ia . D ifferen tia l d iscou n t rate sch edu les w ere ad ju sted u p w a rd b y the authorities in C o lo m b ia , P eru , U ru g u ay , and C h ile ; in the latter cou n try , m a x im u m perm issib le rates o f cred it e x p a n sio n f o r ea ch h a lf o f 1 9 5 6 also w ere a n n ou n ced . If the resu ltin g restraint m easu res ap p ear this a p p ro v a l ca n p r o b a b ly b e ex p la in e d b y the in creasin g con cern o v e r rising p rice s and b y the aw areness that e m p lo y m e n t has rem a in ed h igh and is n o t b e in g im p aired b y the an ti-inflationary p o licie s . N everth eless, the qu estion persists w hether in certa in cou n tries a la ck o f a p p rop ria te fiscal a ction , and the resu ltin g h ea v y g ov ern m en t and g o v e r n m e n t-sp o n so r e d ex p en d itu res, has n o t b e e n p e r m itted to exert t o o h ea v y a p ressu re o n the e c o n o m y . M o r e o v e r , the task o f m on eta ry authorities in m a n y c o u n tries m a y w ell h av e b e e n r en d ered m o r e difficu lt b y the substantial w ag e in creases that o fte n h ave b e e n an im p o r tant fa c to r in the in flation ary strains. C o n c l u d in g R em arks A ll in all, h o w e v e r, the p u rsu it o f a p o lic y o f m on eta ry F r o m this su rvey o f the m o n e ta ry restraint m easu res restraint a b ro a d du rin g th e past year has u n d ou b ted ly a d o p te d in the m a jo r fo r e ig n fin an cial centers du ring the m od e ra te d in flation ary pressu res, alth ou gh in in dividu al past fifteen m on th s, it is ap p aren t that m on eta ry p o lic y cases it is difficu lt, an d som etim es t o o early, to appraise a b ro a d has rega in ed a h igh d eg ree o f flex ibility. F u rth er its effectiven ess m o re , in con tra st to 1 9 5 0 -5 2 — the m o s t recen t p rev iou s crea sed , in m a n y in stan ces sign ifican tly; ev en m o r e im p o r ph ase o f m on eta ry restraint— the m easu res a d o p te d in tant, the availability o f cred it has b een tigh ten ed. 1 9 5 5 and 1 9 5 6 w ere taken n ot to dea l w ith acu te in fiation - g row th o f d em a n d has thus b een k ept m o r e n early in fu lly . B o r ro w in g costs h ave been in The lin e w ith p h y sica l ca p a b ilities; bu sin essm en h a v e ten d ed 6 For a discussion of central banking in these countries, see "Mone to scale d o w n in vestm en t plan s and in ven tories, an d c o n tary Policy in Latin America” and "Central Banking in Asia: Policies sum ers h ave slo w e d d o w n their sp en din g, p a rticu la rly o n and Techniques” , Monthly Revieiv, April and September 1956. 164 MONTHLY REVIEW, NOVEMBER 1956 d u ra b le g o o d s , and at the sam e tim e h a v e in crea sed their readju stm en t. M o r e o v e r , it rem ains true that in so m e c o u n savings. T h e pressure o n p rice s has le v e le d o ff, and in a tries the real test o f the restraint p o licie s has o n ly b eg u n . n u m b er o f cou n tries w h o s e extern a l fin an cial p o s itio n h a d B u t th ere is g o o d e v id e n ce that tim ely cred it restraint, b e e n deterioratin g th e b a la n ce o f p a ym en ts has im p ro v e d . p a rticu la rly w h ere it has b e e n u sed in c o n ju n c tio n w ith T h is better m a tch in g o f d em a n d w ith the av ailab le su pply fiscal an d d eb t-m a n a g em en t p o licie s an d w h ere it has b een o f g o o d s an d serv ices h as, o f cou rse, n o t b e e n th e result a llo w e d to o p e ra te th rou g h ou t the entire e c o n o m y , is m a k o f m on eta ry restraint a lo n e ; m on eta ry p o lic y c a n n o t b e in g a vital co n trib u tio n to w a rd a better b a la n c e d e x p e cte d b y itself to ca rry the b u rd en o f n e e d e d e c o n o m ic sturdier e c o n o m ic g row th . an d S E L E C T E D E C O N O M IC IN D IC A T O R S U nited S tates and Second Federal R eserve D istrict Percentage change 1956 Item 1955 Unit September August July September Latest mcnth Latest month from previous from year month earlier U N I T E D ST A T E S Production and trade Industrial production*............................................................................. Electric power output*............................................................................ Ton-miles of railway freight*................................................................ Manufacturers’ sa le s*.............................................................................. Manufacturers’ inventories*.................................................................. Manufacturers’ new orders, to ta l* ...................................................... Manufacturers* new orders, durable goods*................................... Retail sales*.................................................................................................. Residential construction contracts*................................................... Nonresidential construction contracts*............................................ Prices , wages , and employment Basic commodity pricesf........................................................................ Wholesale prieest....................................................................................... Consumer pricesf........................................................................................ Personal income (annual rate)*............................................................ Composite index of wages and salaries*........................................... Nonagricultural employment*.............................................................. Manufacturing employment*............................. .................................. Average hours worked per week, manufacturingf....................... Unemployment............................................................................................ 1 947 -49 = 1947 -49 = 1947 -49 = billions of billions of billions of billions of billions of 1 947 -49 = 19 47 -49 = 100 100 100 $ S $ $ $ 100 100 19 47 -49 = 1947 -49 = 19 47 -49 = billions of 1947 -49 = thousands thousands hours thousands 100 100 100 S 100 144p 217 — — — — — — 251p 256p 9 1 .6 1 1 5 .3 v 117.1 — — 5 1 ,5 5 5 p 1 6 ,840p 4 0 . 5p 1,998 142 220 102 p 4 9 . 4p 2 9 .0 p 15 .1 p 16 .2 p 264 257 136 219 96 2 6 .2 4 9 .2 2 7 .0 13 .5 16 .0 265 249 142 202 106 27, 2 4 4 .7 28,, 3 14,.9 15,.8 256 246 + + + 9 0 .6 114.7 116.8 3 2 8 .2 p 149 p 51,707/3 16,895p 4 0 .2 2 ,1 9 5 8 8 .6 114.0 117.0 3 2 4 .3 149 51,003 16,460 4 0 .1 2,8 3 3 89.,9 111.,7 114.,9 311. .0 143 5 0,448 16,683 40. 9 2,1 4 9 + + 1 1 + 1 # # # 1 9 73,560p 8 7 ,4 7 0 p 1 0 4 ,500p 30,7 4 2 80 ,7 5 6 141.3 3 0 ,6 4 4 72,440p 8 7 , 140p 1 0 5 ,200p 30,782 78,323 141.9 30,297 78,8 7 0 78,3 9 0 104,900 30,3 9 0 71,649? 1 30.0 2 7 ,7 0 2 # 1 1 # -1 1 - 4 • — 7 + 13 + 1 + 1 + 1 + 4 + 11 6 ,5 7 9 6 ,8 5 5 3 ,5 4 5 3 ,701 5,6 0 3 3 ,8 2 2 5 ,9 8 8 5 ,9 0 4 3 ,2 9 2 + 5 -1 8 - 8 +15 - 4 - 1 -1 + + + 27 .bp 1 1 6 5 a + 7 + 12 + 1 — 5 It + - Banking and finance Total investments of all commercial banks..................................... Total loans of all commercial banks.................................................. Total demand deposits adjusted.......................................................... Currency outside the Treasury and Federal Reserve B a n k s * .. Bank debits (337 centers)*..................................................................... Velocity of demand deposits (337 centers)*................................... Consumer instalment credit outstandingf § ..................................... millions of $ millions of 8 millions of S millions of S millions of $ 194 7 -4 9 = 100 millions of $ 73,530p 8 8 , 520p 1 0 5 ,440p 30,772p 72,235 1 3 5 .6p 30,707 + + United States Government finance (other than borrowing) Cash outgo.................................................................................................... National defense expenditures.............................................................. millions of $ millions of $ millions of $ 6 ,8 7 7 5,6 4 9 3 ,2 6 5 + + 1 7 4 + 1 + 12 + I # + 3 - 2 + 4 + + -1+ + ++ - 2 3 2 6 5 2 1 1 7 SE C O N D F E D E R A L R E S E R V E D IS T R IC T Electric power output (New York and New Jersey)*...................... Residential construction contracts*........................................................ Nonresidential construction contracts*................................................. Consumer prices (New York C it y ) f ....................................................... Nonagricultural employment*................................................................... Manufacturing employment*.................................................................... Bank debits (New York C ity )* ................................................................ Bank debits (Second District excluding New York C it y )* .......... Velocity of demand deposits (New York C ity )*............................... Department store sales*............................................................................... Department store stocks*........................................................................... 1 9 47 -49 = 100 1 9 47 -49 = 100 1 947 -49 = 100 1947 -49 = 100 thousands thousands millions of $ millions of S 1947 -49 = 100 1947 -49 = 100 1947 -49 = 100 149 — — 1 15.1 — — 61,841 4 ,7 0 2 166.8 120 123 155 197 235 114.4 7 ,7 1 9 .1 2 ,6 6 7 .9 77,3 3 2 5 ,1 3 5 195.8 117 127 150 205 280 1 14.6 7 ,6 9 2 .6 2 ,6 4 8 .5 67,910 5,157 179.8 116 127 150 169 253 112. 6 7 ,6 4 1 . Ar 2 ,6 5 5 . 6 r 63,1 8 2 4 ,8 1 0 161. 8 109 116 4 4 6 1 + 1 -2 0 - 8 — 15 + 3 - 3 N ote: Latest data available as of noon, November 1, 1956. p Preliminary. t Seasonal variations believed to be minor; no adjustment made. r Revised. # Change of less than 0.5 per cent. * Adjusted for seasonal variation. § Revised series. Back data published in Federal Reserve Bulletin, October 1856. Source: A description of these series and their sources is available from the Domestic Research Division, Federal Reserve Bank of New York, on request. 1 2 8 2 1 ■H - 2 — 2 + 3 + 10 + 6
@FedFRASER