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MONTHLY R E V IE W
NOVEMBER

1963

Contents
The Question of International
Liquidity at the Fund Meeting
The Business Situation ....................
The Money Market in O ctober ...

Volume 45




FEDERAL RESERVE BANK OF NEW YORK

167

The Question of International Liquidity at the Fund Meeting
The question of international liquidity was the main
theme of this year’s annual meeting of the International
Monetary Fund held in Washington during the week be­
ginning September 30. The general consensus of the
participants was that liquidity is at present adequate to
satisfy the needs of the world economy, and is likely to
remain so in the immediate future. However, lest the
growth of world economic activity be hampered by a pos­
sible liquidity shortage at some future date, it was thought
useful to study ways in which the international financial
system could be further improved and strengthened. A
series of actions to reinforce the international payments
mechanism through cooperative measures has, of course,
been taken over the last few years. Furthermore, the
mechanism has been under constant study and review by
a number of official bodies, including the IMF, the central
bankers who meet regularly at the Bank for International
Settlements in Basle, Working Party 3 of the Economic
Policy Committee of the Organization for Economic Co­
operation and Development (O EC D ) in Paris (which
deals particularly with financial policies of member coun­
tries), and national treasuries and central banks. Two new
studies, however, will now be undertaken on a somewhat
more formal basis.
A comprehensive study of the future of the international
payments system will be undertaken by the so-called Group
of Ten— a group of ten countries whose combined inter­
national reserves account for 80 per cent of the world
total. These countries have been associated since 1961
under the General Agreements to Borrow, which are de­
signed to augment the IM F’s resources in case of need.1
The IMF—whose broad membership (1 0 2 countries) and
wealth of experience make it a center of the international
financial world— will also be conducting an examination of

the subject, with a special report on the potential contribu­
tions of the IMF. The Fund’s analyses will be utilized by
the Group of Ten as their comprehensive study proceeds.
World liquidity, as understood in this context, refers
to the generally accepted official means of settling imbal­
ances in international payments. Thus, it comprises the
gold and foreign exchange holdings of monetary authori­
ties, plus such additional means of payment as may be
available to them through international and bilateral credit
facilities. An appropriate level and distribution of world
liquidity are essential to the attainment of a continuous
and stable expansion of world trade and investment, which
is in turn a major stimulus to world-wide economic
growth. In this respect, the present international financial
system has performed very satisfactorily. International re­
serves, including credit facilities, have proved adequate
to meet the difficult problems posed by an unprecedented
expansion of world trade and by large shifts in the di­
rection and structure of trade, and to meet the equally
difficult problems arising from very substantial increases
in the movement of short-term and long-term capital
across national frontiers. In the recent past international
liquidity has been bolstered, and its effectiveness increased,
by cooperation among the central banks and treasuries of
the major industrial nations and by an enlargement of the
resources, and greater use of the facilities, of the IMF.
These developments have included the resumption of
United States intervention in the exchange markets, the
development and rapid expansion of inter-central-bank
credit facilities, and the issuance by the United States
Treasury of certificates and bonds denominated in foreign
currencies. The IMF, strengthened by a general increase in
quotas in 1959 as well as by the 1961 Paris agreement, has
expanded its activities in support of the major currencies,
including the provision of large stabilization credits to the
United Kingdom in 1961 and to Canada in 1962. In
July 1963, the United States also entered into a stand-by
1 These agreements—concluded in Paris in December 1961, rati­ agreement with the Fund.
fied by the United States Congress in June 1962, and effective
As a result of these arrangements, the international
since October 1962—established a network of facilities under
which the IMF can borrow up to $6 billion equivalent of group- monetary system has been able to absorb both the strain
member currencies. The group consists of Belgium, Canada,
France, West Germany, Italy, Japan, the Netherlands, Sweden, of persistent heavy imbalances in payments among major
the United Kingdom, and the United States. For background of the countries— including especially the United States deficits
agreements, see “The Vienna Meeting of the Internationl Mone­
since 1958— and the successive shocks of such events as
tary Fund”, this Review, October 1961, pp. 167-69.




168

MONTHLY REVIEW, NOVEMBER 1963

the revaluation of the German mark and the Dutch guilder
in March 1961, the Berlin crisis in the fall of 1961, the
attack on the Canadian dollar prior to and following the
re-establishment of a fixed par value for that currency in
May 1962, the Cuban crisis in the fall of 1962, and the
rejection of the British application for membership in the
Common Market early this year. The evolution of the
present international monetary system and its capacity to
cope with crises were reviewed by four central bankers in
a recent issue of this Review.2
In dealing with the financing of future swings in pay­
ments accounts, the central bankers noted that they saw
no effective alternative to reliance upon a further develop­
ment of mutual credit facilities among the major trading
nations. At the same time, however, the central bankers
emphasized that even strong currency defenses cannot be
a substitute for the eventual correction of major underly­
ing payments imbalances— a point heavily stressed at the
IMF meetings as well. In this respect, the continued
balance-of-payments deficits of the United States have
been a source of concern. The delegates at the IMF meet­
ing noted the efforts undertaken by the United States to
re-establish balance in its foreign accounts, and also the
reaffirmation by both President Kennedy and Secretary of
the Treasury Dillon that the United States does not regard
a possible enlargement of the methods of providing world
liquidity as relieving this country of the task of solving its
payments deficit. In fact, one of the important reasons for
studying future world liquidity needs is the prospect of an
improvement in the United States balance of payments.
President Kennedy underlined this point graphically in
his address to the Fund, when he said: “We recognize
that the reserve position of other countries is a mirror
image of our own— and that as the United States moves
toward equilibrium, it will be more difficult for others to
increase their reserves.”
The Fund’s inquiry will be conducted by its staff, and it
is hoped that some conclusions may have emerged by the
time of next year’s annual meeting in Tokyo. In speaking
of its aims, Pierre-Paul Schweitzer, the Fund’s new Man­
aging Director, said in his address to the meeting:

and prudent to look into the future to consider
what difficulties might arise and to devise ways of
meeting them. This has been the habit of the
Fund. All the main developments in the policies
and practices of the Fund . . . have been preceded
by long periods of study which have laid the
foundation for positive action. In the coming year
the Fund will develop and intensify its studies re­
garding international liquidity, the functioning of
the international monetary system, and the effec­
tive role of the Fund in this field.
This initiative of the Fund was widely endorsed by the
participants at the meeting. Among them, Governor Holtiop of the Netherlands Bank expressed his approval and
pointed to an important reason for such a study:
International liquidity has of late become so much
of a subject of public controversy, upon which
such a variety of highly contradictory opinions
are being held and propagated, that one often is
reminded of the saying that “money has made
even more people mad than love”. Under these
circumstances there is great need for authorita­
tive answers to a great number of questions. I am
happy that a body like the Fund will give con­
centrated attention to this subject.

At the same time, Mr. Schweitzer stated in his address
that “there is a wholly understandable interest in this im­
portant range of problems which extends beyond the
Fund” and hence “other bodies, groups of countries, and
individual members will be engaged on similar inquiries”.
The study conducted by representatives of the Group
of Ten will be a broad-ranging one. These representa­
tives, who intend to cooperate closely with the Fund, will
include high-ranking officials from the ten countries, with
United States Under Secretary of the Treasury Robert V.
Roosa acting as chairman and Emile van Lennep, Treas­
urer General of the Netherlands Finance Ministry, as vice
chairman. The results of their investigation will be re­
ported to the ministers and central bank governors of the
In my view the members of the Fund, taken as a
Ten. The study is to encompass “a thorough examination
of the outlook for the functioning of the international
whole, are not at present being prevented from
adopting or carrying out desirable policies by any
monetary system and its probable future needs for liquid­
shortage of international liquidity. But it is wise
ity”. It will also evaluate various alternatives for covering
such needs. Two possible courses were ruled out ex­
plicitly: a change in the present price of gold and the
adoption of a system of fluctuating exchange rates.
2 See “Conversations on International Finance” by C. A.
Individual countries, of course, have made it clear that
Coombs, M. Ikle, E. Ranalli, and J. Tiingeler, this Review, August
inquiry into certain other matters— the transformation of
1963, pp. 114-21.




FEDERAL RESERVE BANK OF NEW YORK

the IMF into a supranational central bank, for example—
may not be especially fruitful. Another such matter is that
of generalized “guarantees” of the gold value of the pres­
ent official holdings of foreign currencies. In the view of
the United States, such guarantees cannot provide any
meaningful assurance. Instead, the real basis for con­
fidence in a currency is to be found in the strength, per­
formance, and stability of the issuing country’s financial
system.3
The discussion at the IMF meetings, on the other hand,
did point to certain general areas of widespread interest
for these studies. It was unanimously held, for example,
that any study of the question of international liquidity
should consider ways of strengthening incentives for in­
dividual countries to rectify imbalances in their interna­
tional payments. To be sure, ample reserves must be
readily available to finance temporary deficits, so that
the flow of international trade and payments will not be
disrupted. But as Reginald Maudling, the British Chan­
cellor of the Exchequer, put it:
. . . the availability of liquid resources should not
be such as to promote, or encourage countries to
tolerate, the continuance of basically unsound do­
mestic or international positions in the guise of
temporary fluctuations. The basic dilemma is clear.
If adequate resources are not available auto­
matically or nearly automatically, their usefulness
in times of trouble may be problematic; but, to the
extent to which they are automatically available,
they may present a temptation to refrain from the
necessary corrections of policy.

169

In addition to such general areas, certain concrete ques­
tions relating to the composition of international liquidity
were suggested for examination by some of the participants.
What are the possibilities for international reserves to be
held in currencies other than the dollar and sterling?
What are the implications of the existing discrepancies in
the ratio of gold to total reserves among the major coun­
tries? Changes are conceivable that would potentially in­
crease total world liquidity and would also meet the
criticism that the current system is not fully reciprocal in
the sharing of currency risks between countries which hold
uneven proportions of gold and foreign exchange. The
last point was stressed by the French Finance Minister
Valery Giscard d’Estaing:
Within the monetary system itself, certain coun­
tries maintain a policy of keeping their reserves in
gold, and of holding foreign currency only to the
minimum extent required by current transactions.
Other countries, the list of which varies, hold large
amounts of foreign currencies, at times as much
as half their total reserves. This situation certainly
does not reflect an equitable distribution of the
burdens of international monetary cooperation.

Thus, a broad range of subjects will be reviewed by
both the IMF and the Group of Ten. But, as Under Secre­
tary Roosa pointed out shortly before this year’s meeting,
there is not any reason to assume “that daring or revo­
lutionary approaches will in fact emerge for the future.
The process of evolution may very well take us where we
want to go.” 4 In actual fact, of course, evolutionary
changes of the type that have taken place over the last few
In fact, insufficient balance-of-payments discipline alone years — including both the increase in the IMF quotas
may create a shortage of liquidity by destroying confi­ and the Paris agreement — already add up to major re­
dence in currencies that supplement gold in official re­ forms of the international financial system. Similarly, the
serves. It is therefore important, in the words of various cooperative arrangements concluded among the
Ludger Westrick, the German delegate, that
central banks and treasuries of the major industrial coun­
tries have been striking innovations, creating new sources
any improvements that might be thought out for
of international liquidity. Furthermore, the distinct ad­
our international monetary system— and there is
vantage of these cooperative measures has been that they
always room for improvements— should not be
did not necessitate either radical institutional changes or
concentrated only on the question of how best to
complex new operating mechanisms and have thus been
finance balance-of-payments deficits, but also on
capable of rapid implementation while also gaining wide­
the even more important question of how to pro­
spread acceptance. The commanding questions now are
vide sufficient incentives for curing them.
whether, and how, these achievements in cooperation can
be flexibly adapted to meet the needs in the years ahead.
3 See Robert V. Roosa, “Assuring the Free World’s Liquidity”,
Federal Reserve Bank of Philadelphia, Business Review (Supple­
4 Robert V. Roosa, “Reforming the International Monetary Sys­
ment), September 1962.
tem”, Foreign Affairs, October 1963, p. 121.




170

MONTHLY REVIEW, NOVEMBER 1963

The Business Situation
The economy posted another significant advance in the
third quarter of the year. The rise in gross national prod­
uct was the largest for any quarter in nearly two years,
with a particularly heavy gain being scored by consumer
purchases of nondurable goods. To be sure, there was
some sluggishness in the statistical measures in August,
but most September business indicators showed more
strength, as the automobile industry experienced a pickup
and the decline in iron and steel production virtually ceased.
With the fourth quarter getting under way, moreover, avail­
able data suggest that retail sales, sparked by heavy sales of
new car models, advanced substantially more than season­
ally in October. At the same time, there appears to have
been a significant increase in auto output in October—
even after allowing for the normal seasonal rise— while
steel output held about unchanged.
Prospects for the fourth quarter as a whole appear en­
couraging. The Department of Commerce-Securities and
Exchange Commission’s August survey of businessmen’s
plans for plant and equipment spending suggests a substan­
tial further gain in such spending over the third quarter.
The outlook for the realization of such a gain appears to
have received support in September, both from a substan­
tial rise in new orders for machinery and equipment follow­
ing two months of decline and from a considerable advance
in the output of business equipment. At the same time,
some increase in spending by the Federal Government—
due particularly to the military pay rise— and by state and
local governments appears likely, while the sharp recovery
of housing starts and new home permits in September has
improved the outlook for residential building activity. One
major area of uncertainty is the prospective strength of
consumer spending, which has been increasing less rapidly
this year than in 1962. According to a recent survey,
however, consumer plans to buy houses, household goods,
and cars remain strong.

annual rate (see Chart I ). Only a small part of the ad­
vance was due to a rise in the rate of inventory accumula­
tion, indicating that the expansion in final demand was a
bit larger than the already substantial second-quarter in­
crease. Most components of final demand contributed
significantly to the rise in GNP. Major gains were scored
by consumer purchases of nondurables, which had shown
only a small increase in the second quarter, and by spend­
ing of state and local governments. Outlays by these gov­
ernments, which normally show a fairly steady growth,
had declined in the second quarter, owing to a temporary
curtailment of some highway construction, but rebounded

Chart I

RECENT CHANGES IN GROSS NATIONAL PRODUCT
AND ITS MAJOR COMPONENTS
Seasonally adiusted annual rates
Change from first quarter to
second quarter 1963

■ ■Change from second quarter to
■ third quarter 1963

G R O S S N A T I O N A L P R O D U C T IN T H E
T H IR D Q U A R T E R

According to preliminary estimates by the Council of
Economic Advisers, GNP rose by a sizable $8.9 billion in
the third quarter to a $588.5 billion seasonally adjusted




Billions of dollars
Sources: United States Department of Commerce; Council of Economic Advisers.

FEDERAL RESERVE BANK OF NEW YORK

171

sharply in the third quarter. Total spending for goods and
services by the Federal Government, on the other hand,
was virtually unchanged, and two components of GNP—
net exports and consumer purchases of durable goods—
edged down. As regards consumer purchases of durable
goods, a concentration of car model change-overs and
the relatively low remaining inventories of 1963 models
resulted in reduced automobile sales in the latter part of
the third quarter.
In line with businessmen’s plans as reported in the Gov­
ernment’s plant and equipment spending survey, business
outlays on fixed investment during the third quarter showed
one of the sharpest advances of recent years, actually
exceeding somewhat the large second-quarter gain. The
rise in nonfarm residential construction in the third quar­
ter, on the other hand, was only about half the secondquarter increase— a slowdown which had been clearly
apparent in the monthly data on construction activity.
D E V E L O P M E N T S IN S E P T E M B E R
AND OCTOBER

The Federal Reserve Board’s index of industrial produc­
tion was virtually unchanged in September at 125.7 per
cent (seasonally adjusted) of the 1957-59 average (see
Chart I I ). It will be recalled that during August sharp
declines in the production of both steel and new cars had
resulted in a drop of nearly a point in the over-all index.
In September, on the other hand, a further small reduction
in the iron and steel component was about offset by a
small rise in the output of motor vehicles and parts. Gains
and losses in the output of other goods also about offset
each other in September, whereas there had been some
rise on balance in August and fairly sizable increases in
most earlier months of the year. Incomplete data for Octo­
ber point to little change in steel ingot production, after
allowing for seasonal factors, but auto output rose sharply
and very preliminary production schedules for November
appear to suggest continued strength. Large car produc­
tion and sales are in turn supporting steel production, al­
though steel inventories remain fairly high.
One particularly favorable factor in the near-term out­
look for production is the 4 per cent September rise (sea­
sonally adjusted), to the highest level since May, in new
orders received by manufacturers of durable goods. The
August decline in these orders had largely reflected re­
duced deliveries of automobiles, which are recorded as new
orders when delivered to dealers. To be sure, a substantial
part of the September gain was due to renewed heavy
deliveries as new car models came off the assembly lines.
Nevertheless, orders of other durable goods also posted a




good advance. With new orders exceeding sales in Septem­
ber, the backlog of unfilled orders received by manufac­
turers of durable goods increased by 1.1 per cent (sea­
sonally adjusted), after declines in the three preceding
months, while total orders received by all manufacturers
advanced to record levels.
Following a slight August decline, nonfarm payroll em­
ployment resumed its upward movement in September, but
the increase of 100,000 persons was small and was con­
centrated mainly in the public sector. Payroll employment
in manufacturing recouped less than half its August de­
cline. In October, total employment showed virtually no

172

MONTHLY REVIEW, NOVEMBER 1963

change after seasonal adjustment, according to the Census
Bureau’s household survey, nor did the seasonally adjusted
unemployment rate, at 5.5 per cent, change significantly.
One encouraging development in the unemployment pic­
ture is the reduced rate of unemployment among married
men. Unlike the aggregate unemployment rate, which has
shown little net change in the past year, the unemployment
rate for this group has trended generally downward
throughout most of the current business expansion. At 2.9
per cent in September and October, it was at its lowest
level since August 1957.
Recent gains in residential construction represent a
marked improvement from the summer performance. Fol­
lowing a substantial decline in August, the seasonally
adjusted annual rate of private nonfarm housing starts
advanced by 17 per cent in September to the highest
level since the current series became available in January
1959. Large— and quickly reversed—movements in hous­
ing starts are, of course, not uncommon. Nevertheless, the
September gain was sufficient to pull the third-quarter
average to within less than 2 per cent of the very high
second-quarter average and is an encouraging develop­

ment. Moreover, the seasonally adjusted index of new
home permits, after two months of decline, also rose
sharply in September and reached a new high. In October,
outlays on residential construction rose only slightly— a
leveling-off in activity associated with low housing starts
in August.
Total retail sales dropped 1 Vi per cent in September.
Although shortages of new cars were responsible for some
of the weakness, there were declines in other groups as
well—in contrast to some growth, apart from auto sales, in
August. Preliminary data suggest that retail sales in Oc­
tober may have substantially recovered these losses.
Consumer spending on durables, which has remained
relatively sluggish so far in 1963, is receiving support
from a rising level of disposable income. The favorable
outlook for such spending is supported by a study made
in August and early September by Michigan University’s
Survey Research Center, which indicates that consumer
plans to buy houses, household goods, and cars are strong.
Heavy sales of new cars in October suggest, moreover,
that the public’s initial reaction to the new models was
favorable.

The Money Market in October
The money market continued to exhibit in October
about the same degree of firmness as in August and Sep­
tember. Federal funds traded largely at the 3 Vi per cent
ceiling (equal to the Federal Reserve discount rate), with
a sizable margin of demand for reserves being satisfied by
member bank borrowings at this rate from the Federal
Reserve Banks. Rates posted by the major New York City
banks on call loans to Government securities dealers were
quoted in a 35 to 4 per cent range during the month, but
/s
dealers found financing from nonfinancial corporations
readily available at more attractive rates much of the time.
Over the first two thirds of October, rates on Treasury
bills maturing in 1964 moved generally higher, as the
market adjusted to enlarged supplies and as some un­
easiness developed over the near-term outlook for interest
rates, while rates on scarce shorter maturities declined.
Later in the month, bill rates generally declined on strong
corporate demand in a more confident atmosphere,
although in the final days rates edged up again to close
not far from their earlier high points. The increased avail­




ability of corporate money apparently also prompted the
major sales finance companies to reduce their rates during
the month by Vs to V* of a percentage point on various
maturities of their directly placed paper, but rates were
increased again by about Vs of a percentage point near
the month end. Leading New York City banks increased
during the month their offering rates for new time cer­
tificates of deposit, while the range of rates at which such
certificates were offered in the secondary market rose
from 10 to 15 basis points and from 10 to 20 basis points
on three- and six-month maturities, respectively.
After the close of business on October 23, the Treasury
announced that it would offer at par about $7.6 billion of
eighteen-month 3% per cent notes dated November 15,
1963 and maturing on May 15, 1965, replacing a cor­
responding amount of certificates and notes maturing on
November 15. Subscription books for the refunding were
open only on October 28, with payment in the form of
either cash or the two maturing securities due on Novem­
ber 15. The new offering was well received with sub­

FEDERAL RESERVE BANK OF NEW YORK

scriptions totaling $20.1 billion. On October 31, the
Treasury announced that total allotments of about $8.0
billion would be made, including full allotments to official
accounts and to subscriptions up to $100,000, and partial
allotments of 21 per cent to all other subscribers but with
no subscriptions in excess of $100,000 allotted less than
that amount.
Hesitancy also pervaded the market for Treasury notes
and bonds in the first two thirds of the month. Distribution
to investors of the longer term issues arising from the Sep­
tember advance refunding continued amid an atmosphere
of caution, as some signs of strength in the economy gen­
erated uncertainty over the outlook for long-term interest
rates. The erosion in prices over the first two thirds of the
month led to some subsequent increase in investor de­
mand, and prices firmed. As in the bill market, however,

CHANGES IN FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, OCTOBER 1963
In millions of dollars; (+ ) denotes increase,
(—) decrease in excess reserves
Daily averages — week ended
Factor
Oct.
23

Oct.

Oct.
2

Oct.
9

Treasury operations* ...........
Federal Reserve float ...........
Currency in circu lation .......
Gold and foreign account--Other deposits, etc..................

— 53
— 392
— 5
— 14
+ 15

— 9
— 18
— 206
+
1
— 28

—
+
—
+
+

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

— 450

— 259

— 122

16

Operating transactions

24
40
174
3
33

+
+
+
—
+

Oct.
30

Net
changes

14
363
70
23
53

+ 12
— 514
+ 99
+
5
+
3

— 60
— 521
— 216
— 28
+ 76

+ 477

— 395

— 749

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

+ 409

+ 168

— 96

— 295

+ 187

+

+ 357

— 156

— 263

+

49
—

— 83
—

+

52

+

1

—

— 162
1

— 189
—

1

+

3

+

1

+

4

2

—

9

+

2

+

2

62

— 45
—

+

—

+

+

2
1

+

1
6

+
+

61

+ 373
+

61

+ 425

+ 581

— 333

— 511

+

88

+ 250

With Federal Reserve Banks.
Cash allowed as reservest---

— 25
+
2

+ 322
— 305

— 455
+ 248

— 34
— 12

— 307
+ 107

— 499
+ 40

Total reservest ............................
Effect of change in required
reservest .......................................

— 23

+

17

— 207

— 46

— 200

— 459

— 85

+

69

+ 152

+

91

+

99

+ 326

86

— 55

+

45

— 101

— 133

392
438
46

309
383
74

361
428
67

199
327
128

Total................
Member bank reserves

Excess reservest ..........................

— 108

Daily average level of member
bank:
Borrowings from Reserve Banks
Excess reservest ....................
Free reservest .......................

343
352
9

+

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 30, 1963.




321$
386$
65$

173

a more cautious atmosphere developed in the final days of
the period and prices declined again. Prices of corporate
and tax-exempt bonds held steady in the first half of Octo­
ber but moved down later in the month when the volume
of new issues increased.
BANK RESERV ES

Market factors absorbed reserves on balance from the
last statement period in September through the final state­
ment week in October. Reserve drains—primarily reflect­
ing a seasonal contraction in float and an outflow of
currency into circulation— more than absorbed reserves re­
leased by a decline in required reserves and by the effects
of movements in other factors. System open market opera­
tions during the month more than offset the net reserves
drained by changes in market factors. System outright
holdings of Government securities expanded on average by
$373 million from the last statement period in September
through the final statement week in October, while hold­
ings under repurchase agreements rose by $61 million.
Net System outright holdings of bankers’ acceptances in­
creased by $4 million, and such holdings under repurchase
agreements rose by $2 million. From Wednesday, Septem­
ber 25, through Wednesday, October 30, System holdings
of Government securities maturing in less than one year
increased by $570 million, while holdings maturing in
more than one year expanded by $102 million.
TH E 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 market for Treasury bills was the focal point of
attention during the month, as the Treasury auctioned bills
to raise $1.5 billion of new money after having already
added $2 billion to the supply of bills outstanding by two
earlier auctions of one-year bills in August and Septem­
ber. A hesitant tone prevailed in the market at the begin­
ning of October, reflecting expectations that the supply of
outstanding issues would soon be augmented by an offer­
ing of March tax anticipation bills, by a possible “strip”
issue, and by another in the series of monthly one-year
bills. At the same time, an early-month contraction in the
level of nation-wide reserve availability led to market dis­
cussion about the possibility of a further shift toward less
ease in monetary policy. Rates edged generally higher
through October 7, although scarce shorter bill maturities
moved down in yield on good demand. Subsequently,
through midmonth, demand picked up at the higher rate
levels and rates on shorter bills moved down, while yields
were narrowly mixed in the 1964 maturity area where
additional bill supplies were expected to be forthcoming.

174

MONTHLY REVIEW, NOVEMBER 1963

Demand was fairly good in the October 9 auction of $2
billion of March tax anticipation bills— an issue which
partly replaced $2.5 billion of one-year bills maturing
October 15— and an average issuing rate of 3.537 per
cent on the new bills was established.
On October 16, the Treasury announced after the close
of business that it would auction on October 22 a $1 bil­
lion strip of bills for payment on October 28, representing
additions of $100 million each to ten outstanding bill
issues maturing from February 6 through April 9, 1964.
(Commercial banks were not permitted to pay for the
bills through credit to Treasury Tax and Loan Accounts.)
Market observers— already concerned about the implica­
tions for interest rates of what was judged to be a strength­
ening economy and of lower levels of net reserve
availability—tended to interpret the strip offering as in­
dicating an official desire for higher bill rates, and rates
rose from 2 to 5 basis points for 1964 maturities following
the announcement. Subsequently, however, market par­
ticipants became more confident with regard to the current
level of short-term rates. Corporate demand for bills was
quite strong, and rates tended to move lower until the end
of the month when corporate selling contributed to a rise
in rates on near-term maturities.
An average issuing rate of 3.601 per cent was set on
the strip issue, somewhat below earlier market estimates.
At the final regular weekly auction of the month held on
October 28, average issuing rates were 3.452 per cent for
the new three-month issue and 3.586 per cent for the new
six-month bill— about 4 and 7 basis points, respectively,
above the rates established in the final auction in Septem­
ber. An average issuing rate of 3.633 per cent was set at
the October 30 auction of $1 billion of new one-year bills,
compared with an average rate of 3.586 per cent at the
preceding month’s auction. The outstanding three-month
bill closed the month at 3.48 per cent (bid) as against the
end-of-September rate of 3.37 per cent, while the out­
standing six-month bill was quoted at 3.60 per cent (bid)
on October 31, compared with 3.51 per cent (b id ) on
September 30.
In the market for Treasury notes and bonds, a cautious
tone developed early in the month, reflecting the view of
some in the market that a further strengthening of the
business situation might portend a rise in the level of
long-term interest rates. In this setting, the upward price
movement which had been under way in the Government
bond market since mid-September came to a halt. Ex­
panded offerings of the 4 per cent bonds of 1973 and the
4Vs per cent bonds of 1989-94, which had been available
in the September advance refunding, were absorbed at de­
clining prices. Investor interest in other issues maturing




in five years or more was quite limited, and prices of notes
and bonds maturing beyond 1968 generally moved lower
through October 18. In the shorter maturity area, how­
ever, where a portion of the proceeds of a recent large
tax-exempt flotation was reinvested, prices were little
changed during this period.
In the latter part of October, a more confident atmos­
phere developed for a time in the market for Treasury
notes and bonds when investors were attracted by the
lower prices that had emerged. This interest was not sus­
tained, however, in part because of the rise in corporate
bond offerings, and prices edged downward again as the
month closed. The 3% per cent eighteen-month note
offered in the Treasury’s refunding operation— a relatively
short-term offering, as many had expected— was accorded
a favorable reception and was quoted at a slight premium
in “when-issued” trading. Over the month as a whole,
prices of short- and intermediate-term issues were gener­
ally % 2 to 1/s 2 lower while prices of longer term obliga­
8
tions were generally 2% 2 to 2% 2 lower.
O T H E R SE C U R IT IE S M A R K E TS

In the market for seasoned corporate and tax-exempt
bonds, prices held generally steady in the first half of the
month as a fairly good investment demand developed at
prevailing price levels. In the latter part of October, how­
ever, prices tended lower in both sectors, largely in re­
sponse to an expanding calendar of forthcoming corporate
and tax-exempt offerings. The tendency toward lower
prices was reinforced in the tax-exempt sector by price
cutting on recent slow-moving issues, as dealers sought to
reduce the accumulation of issues on their shelves. Over
the month as a whole, the average yield on Moody’s
seasoned Aaa-rated corporate bonds was unchanged at
4.32 per cent, while the average yield on similarly rated
tax-exempt bonds rose by 1 basis point to 3.16 per cent.
The total volume of new corporate bonds reaching the
market in October amounted to approximately $510 mil­
lion, compared with $280 million in the preceding month
and $540 million in October 1962. The largest new cor­
porate bond issue publicly marketed during the month
consisted of $150 million of A-rated AV2 per cent finance
company debentures maturing in 1985 and not redeemable
for eight years. The debentures were reoffered to yield
4.54 per cent and were well received. New tax-exempt
flotations during the month totaled approximately $1,245
million, as against $415 million in September 1963 and
$600 million in October 1962. The Blue List of taxexempt securities increased by $132 million during the
month to $626 million on October 31. The largest new

FEDERAL RESERVE BANK OF NEW YORK

tax-exempt offering during the period was a $184 million
Baa-rated hydroelectric revenue bond. The issue, which
was well received, consisted of $144 million of 4 per cent
term bonds maturing in 2018, reoffered to yield approxi­




175

mately 3.96 per cent, and $40 million of serial bonds which
were reoffered to yield from 3.15 per cent in 1974 to 3.75
per cent in 1991. Other new corporate and tax-exempt
issues marketed in October were accorded mixed receptions.