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O f Credit and Business Conditions

V o lu m e








19 5 5

No. 10


The pressures on the banking system that have resulted
from the heavy demand for loans and the restricted availability
of reserves over recent months were generally maintained dur­
ing September. Aggregate indebtedness of member banks to
the Federal Reserve Banks remained substantially above excess
reserves for the second successive month. Despite further
heavy demands for bank credit, however, the sustained reserve
pressures were not accompanied by any marked intensification
of the prevailing degree of tightness in the money market.
With few exceptions short-term rates of interest, after rising
rapidly in late August, tended to stabilize, and shorter-term
Government securities even declined moderately in yield until
late in the month. Yields of longer-term bonds, particularly
United States Government issues, also moved somewhat lower.
The condition of tightness without serious strain that charac­
terized the money market during September was at least partly
attributable to the open market operations of the Federal
Reserve System. By alternately supplying, withdrawing, and
again supplying funds to the market, these operations offset a
substantial portion of the fluctuations in bank reserves arising
from the wide changes in the other factors affecting them.
Establishment of 2V4 per cent discount rates during the first
part of the month at the Federal Reserve Banks that had not
gone to that rate in August had been widely anticipated, and
thus did not provoke any sharp reactions in the money market.
Four of the Reserve Banks had announced 2*4 per cent dis­
count rates between August 3 and September 1. As a conse­
quence, the major adjustments to the new discount rate, as
well as to the sustained reserve pressures, had been largely
completed by the beginning of September. The announcement
on September 8 that six additional Reserve Banks, including
those in the major financial centers of New York and Chicago,
had raised their rates from 2 to 2 lA per cent was, however,
followed by a lA per cent increase in rates for bankers’ accept­
ances and a few other rate adjustments. The remaining two
Reserve Banks had increased their discount rates to 2 lA per
cent by September 13.

Declining yields for short-term Government securities over
a substantial portion of September reflected mainly the impact
of a strong demand from nonbank investors. In the first Treas­
ury bill auction of the month on September 2, the average issu­
ing rate edged upward, reaching a two-year peak of 2.134 per
cent. Thereafter, as corporations became more aggressive
buyers, rates tended to move gradually downward until the last
part of the month, and the average issuing rate dipped below
2 per cent for the issue dated September 22. The rate for the
issue dated September 29 rose again to 2.122 per cent.
At the end of the month, the Treasury announced that the
bulk of its cash needs over the remainder of the year would
be met through a 2,750 million dollar issue of 2 lA per cent
tax anticipation certificates maturing June 22, 1956—an offer­
ing designed to be attractive to corporations seeking invest­
ment outlets for tax reserves. Subscription books for the new
certificate, which may be redeemed at par for the payment of
income taxes due June 15, 1956, will be open on Monday,
October 3, with payment required on October 11. As usual
in an offering of tax anticipation certificates, payment by
banks for their own and customer subscriptions may be made
through credit to Tax and Loan Accounts. The terms of the
announcement were closely in line with market expectations.
Money Market in September...............................121
International Monetary Developments............ .125
A Year of Expansion............................................126
Commercial Bank Reserve Requirements
Abroad ................................................................130
Department Store Trade......................................135
Selected Economic Indicators..............................136



M ember Bank R eserve P ositions
The reserve positions of member banks have been gradually,
but fairly steadily, tightening since late in 1954, bringing
about a transition from pronounced ease to persistent firm­
ness in the money market. In September, average borrow­
ings of member banks increased to about 840 million dollars,
almost 90 million above the August figure and the highest
average level for any month since the spring of 1953. Excess
reserves rose only slightly over August levels, and they aver­
aged almost 250 million dollars less than borrowings for all
member banks. Week-to-week changes in aggregate reserve
positions were moderate during September and reflected largely
seasonal influences.
As usual in September, variations in reserve positions within
the month were strongly influenced by wide fluctuations in the
levels of float, in Treasury balances at the Reserve Banks, and
in the amount of currency in circulation. A seasonal increase
in the volume of check collections brought a midmonth bulge
in float that was both greater and more prolonged than in
other recent months. As shown in Table I, this factor alone
contributed about 575 million dollars to bank reserves over
the two statement weeks ended September 21. A return flow
of currency from circulation augmented the flow of funds to
the banking system at the middle of the month, as the currency
needs of individuals and businesses receded after absorbing
reserves around the Labor Day holiday on September 5. Dur­
ing the final statement week of the month, a sharp decline in
float withdrew 303 million dollars from member bank reserves.
Table I
Changes in Factors Tending to Increase or Decrease Member
Bank Reserves, September 1955
(In millions o f dollars; ( + ) denotes increase,
(—) decrease in excess reserves)
Daily averages— week ended


Operating transactions
Treasury operations*...........................
Federal Reserve float...........................
Currency in circulation........................
Gold and foreign account....................
Other deposits, etc................................
Direct Federal Reserve credit transactions
Government securities:
Direct market purchases or sales..
Held under repurchase agreements.
Loans, discounts, and advances:
Member bank borrowing.................
Bankers’ acceptances:
Bought outright................................
Under repurchase agreements........




+ 29
+ 16
-1 6 8
+ 21


+ 20
- 84
- 39

-1 3 9
+ 43
- 42

-1 0 7
-3 0 3
+ 78
+ 7

-1 9 7
- 55
+ 32
- 36


+ 28


-3 1 7

+ 32

+ 65

- 17
+ 4

-1 8 0
- 69

+ 23
+ 11

-1 7 4
+ 11

+ 98

+ 53

-1 5 0

- 13

- 17














+ 37

-4 0 1



Total reserves...............................................
Effect of change in required reservesf . . . .

+ 71
+ 30

+ 65
- 36

+ 17
- 20

-1 4 9
+ 59

+ 33

Excess reservesf...........................................


+ 29



+ 37

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




Note: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
f These figures are estimated.
X Average for four weeks ended September 28.


597 X

The principal factor tending to offset the effect of these
fluctuations on reserve positions was a series of purchases and
sales or redemptions of Government securities by the Federal
Reserve System. When the pressures in the market threatened
to become unduly severe at times during the statement weeks
ended September 7 and 14, a limited volume of reserves was
released through repurchase agreements with Government secu­
rity dealers. As the reserve base expanded around the middle
of the month, these repurchase agreements were terminated,
and additional reserves were absorbed through a net reduction
of nearly 200 million dollars in Treasury bills held on an out­
right basis by the System Open Market Account. The largest
part of these bills was replaced through market purchases
during the final statement week of the month, and at the same
time a small amount of funds was supplied temporarily
through renewed use of the facilities for extending repurchase
These offsetting actions by the System were supplemented
by Treasury operations. Over the first half of the month, the
Treasury’s balances at the Federal Reserve Banks were held
fairly stable, partly through the first use of the new arrange­
ments for immediate calls on Class C depositaries on Friday,
September 9. On Thursday, September 15, another special call
was made on Class C depositaries for payment that day, thus
helping to prevent the substantial net accretion to reserves that
would otherwise have resulted from heavy disbursements in
connection with interest payments and redemptions of Savings
notes. Reflecting the rapid collection of nonwithheld individual
and corporate quarterly income tax checks after the middle of
the month, the Treasury’s balances at the Federal Reserve Banks
increased sharply during the week ended September 21, thus
absorbing reserves at about the same time the banks were gain­
ing funds from float and the currency return flow. Working


balances had risen substantially above normal levels by the end
of that week, and, as a rapid contraction in float was then get­
ting under way, the Treasury arranged to redeposit in Class C
depositaries on September 22 and 23 a total of 192 million
dollars, an amount equivalent to the special calls made earlier
in the month. Still another redeposit of 105 million dollars
in these depositaries on September 27 lowered the Treasury’s
balances at the Reserve Banks to more usual levels by the close
of the week ended September 28.
As a result of the Federal Reserve security transactions and
the Treasury’s operations, the actual fluctuations in reserve
positions from week to week were held within moderate
bounds. The smallest average volume of member bank bor­
rowings during September was 741 million dollars, in the week
ended September 21. At that level, borrowings were 116 million
dollars above excess reserves. The largest amounts of borrow­
ing were in the weeks ended September 14 and 28 when
indebtedness to the Federal Reserve Banks averaged about 890
million dollars. Reflecting the steady reserve pressures, Federal
funds were seldom traded at a rate more than
cent below the discount rate at the Federal Reserve Bank
of New York and were frequently available only at a rate equal
to the discount rate, if at all. The exceptions were isolated
periods at the close of several statement weeks, when some
banks employed accumulated reserve surpluses in the Federal
funds market.
G overnment Securities M arket
Trading activity in the Government securities market tended
to increase during September. Until the last week of the
month, however, when reactions to the President’s sudden ill­
ness spread through all the capital markets, prices were gen­
erally less volatile than in July or August. While day-to-day
price fluctuations were usually moderate, the firm tone that
prevailed in the market over most of the month resulted in
a substantial, but irregular, price advance. Between the end of
August and the close on September 30, most longer-term bond
prices were up by Ya of a point to a point, with somewhat
smaller increases for intermediate issues. Yield quotations for
the longest-dated Treasury bill issue outstanding had declined
11 basis-points through September 19, but were above the
August 31 level by the end of the month.
The resumption of a strong demand for short-term Treasury
issues by nonbank investors, which had temporarily slackened
late in August, was related to a number of factors. To some
extent, buying interest was encouraged by the higher structure
of yields established late in August and during the first few
days of September. Furthermore, cash redemptions of Savings
notes on September 15, aggregating over 750 million dollars,
led to a sizable reinvestment demand around that time. This
demand was further supplemented by the investment of the
proceeds of recent new security issues by large corporations
and public bodies. Meanwhile, commercial bank liquidation


of bills in the market remained sporadic, particularly in the
first half of the month, although substantial sales of short-term
notes and bonds were undertaken as a means of adjusting
reserve positions.
Treasury bill yields showed little change during the first
few days of September. Shortly after the Labor Day week end,
however, market rates for the longer-dated bills turned down­
ward, as only a limited supply reached the market to offset
the resumed nonbank demand. Under these conditions, dealers
were able to dispose readily of their heavy awards of the bills
dated September 8. Bidding in the following auction, on
Monday, September 12, was very aggressive, reflecting the
firm tone in the market, the fact that the issue date for the
bill (September 15) coincided with the redemption date for
the Savings notes, and the convenience of the maturity date
(December 15) for corporations anticipating dividend or tax
payments at that time. Aggregate tenders were the largest for
any regular bill auction in eight years, and the average issuing
rate declined to 2.104 per cent. A brisk demand for the issue
in the secondary market resulted in a decline in the market
bid quotations for the longer issues to below 2 per cent by
September 19. In this atmosphere, the average issuing rate
again declined (to 1.981 per cent) in the auction on that day.
Market yields temporarily stabilized at about that level, but
rose toward the end of the month partly because commercial
bank selling increased. Also, nonbank demand tapered off, a
characteristic development of recent month-end periods. The
longest-dated Treasury bill closed the month at 2.15 per cent
(bid), 6 basis-points more than at the end of August. Price
increases in other short-term issues were limited by bank liqui­
dation, but gains ranged up to Yz of a point or more for
certain issues maturing in 1959 or before.
Switching for tax purposes continued to be responsible for
most of the activity in the intermediate and long-term areas
of the market. To some degree, the price rises during the
month seemed to stem from suggestions from various quarters
that the pace of the current economic expansion showed signs
of slowing down, that credit demands over the remainder of
the year might not prove to be so large as had previously been
expected, and that further intensification of quantitative restric­
tions on credit expansion therefore might not prove necessary.
Confidence in the level of bond prices was also stimulated by
the firm tone of the short-term market. In addition, occasional
sizable purchases of the 3 per cent bond of 1995 by insurance
companies or public funds led to fairly steady price increases
for that issue; however, some selling interest developed at the
higher price level, particularly around par.
Prices throughout the bond list fluctuated sharply late in the
month, reflecting the uncertainty generated in all securities
markets by the announcement of the Presidents illness.
Although investment activity was limited, sharp increases rang­
ing up to Ys of a point for longer-term issues were recorded
on September 26 and 27. Roughly half of these gains were



lost on the following day, but the market then stabilized. reporting member banks (exclusive of loans to banks) in­
Previous to these fluctuations, prices of long-term issues were creased by 798 million dollars during the last week of August
quoted Va to Ys of a point over their end-of-August levels. and the first three weeks of September, bringing the net
increase for the year thus far to 4,261 million, a record expan­
O ther M arkets
sion for the first nine months.
Loans to commodity dealers, wholesalers and retailers, and
The markets for both corporate and municipal securities
food, liquor, and tobacco concerns, which together account for
were steadier during September than they have been for sev­
eral months past. Although a few less attractively priced most of the seasonal increases in business loans toward the
issues initially encountered buying resistance, investors were end of each year, rose by a total of 232 million dollars over
generally receptive to the terms on the moderately increased the four-week period, a figure roughly in line with that for
volume of new offerings. Yields for outstanding municipal the equivalent weeks of 1954 and 1953. Every other category
issues generally declined. Prices of corporate bonds moved of business borrower, with the single exception of sales finance
within a narrow range, except for convertible issues which companies (which in the aggregate replaced some of their
bank loans with other forms of financing), also increased their
dropped with stock prices late in the month.
Total new public bond offerings were about evenly divided indebtedness to the reporting banks. In the two previous
between municipals and corporates and amounted to 640 mil­ years, by way of contrast, loans to those borrowers showed a
lion dollars in September, 150 million more than in August. net decline. As a result, the total increase in business loans
The largest single offering was a 100 million dollar issue by over the four weeks amounted to 520 million dollars this year,
a finance company, priced to yield 3.75 per cent with a maturity as against only 232 million in 1954 and 144 million in 1953.
Meanwhile, the aggregate investment portfolios of the
of 1970. The issue was oversubscribed on the September 15
weekly reporting banks decreased by 380 million dollars. Total
offering date and soon went to a premium in the second­
ary market. Similarly, the largest new tax-exempt offering, Government security holdings continued to decline, reflecting
a 69 million dollar issue of forty-year turnpike authority bonds, principally the liquidation of notes, shorter-term bond issues,
was reported as “all sold” on the offering date, with a premium and to a lesser extent certificates. This decrease was offset only
bid thereafter.
Table II
W eekly Changes in Principal A ssets and Liabilities of the
The sharpest rate adjustment among money market instru­
W eekly Reporting Member Banks
ments during the month took place in the bankers’ acceptance
(In millions of dollars)
market. Buyers largely withdrew from the market at the begin­
Statement weeks ended
ning of September, in anticipation of an imminent rate in­
29, 1954
crease and because of the relative attractiveness of Treasury
to Sept.
21, 1955
bill yields. Consequently, dealers’ portfolios rose sharply,
A ssetss
although the supply coming into the market also diminished.
In this situation, dealers’ rates were raised by Va per cent on Loans and investments: and
Commercial, industrial,
September 8, accompanying the increase in the discount rates
- 91
agricultural loans.............. +121
+ 2,147
+ 24
- 71
— 7
Security loans........................ + 49
at six Federal Reserve Banks announced on that day. Subse­
+ 53
+ 28
Real estate loans................... + 20
+ 15
+ 1,040
All other loans (largely
quently, demand recovered and, with the supply remaining
+ 20
consumer)........................... + 64
+ 62
+ 21
+ 1 ,3 5 5
-1 2 6
limited at the higher rate to borrowers, dealers’ inventories
Total loans adjusted*----- +253
+ 4 ,2 6 1
declined temporarily. Federal Reserve participation in the Investments:
U. S. Government securities:
-1 4 1
+ 69
— 95
acceptance market was limited largely to the extension of small
Treasury bills....................
- 1 ,5 3 4
-2 5 3
- 93
-1 1 1
- 62
-4 ,8 2 2
amounts of repurchase agreements at times when funds were
-3 9 4
- 24
-1 5 7
- 6 ,3 5 6
- 23
also being supplied through System transactions in Govern­
- 37
+ 85
Other securities.
+ 21
-4 3 1
-1 3 6
ment securities.
+ 61
-6 ,2 5 1
Total investments.
M ember Bank Credit
The most recent data for loans of weekly reporting member
banks reflect the seasonal demands for business credit that
normally arise at this time of the year. The total expansion in
commercial, industrial, and agricultural loans over the four
weeks ended September 21, however, was considerably greater
than has been typical of similar periods in other years. More­
over, both real estate and “all other” (mostly consumer) loans
continued to rise at rates close to the pace established earlier
in 1955 (see Table II). As a result, total loans of the weekly

Total loans and investments


-2 6 2


-2 1 9

-1 ,9 9 0

Loans to banks.




+ 50

-2 8 7


Loans adjusted* and “ other”


-1 0 5


+ 175

+ 4 ,3 6 6


-3 7 6



- 2 ,1 8 2

+ 45
+ 91

- 13
-7 3 4

+ 42
-4 2 5

+ 34





+ 19

-8 7 7





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

* 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.


in small part by a 46 million dollar rise in "Other securities”.
Holdings of Treasury bills increased slightly over the period,
apparently reflecting some absorption of bills from corpora­
tions raising funds for tax payments prior to September 15.


Bill portfolios, however, have fluctuated around 1 billion dol­
lars since July of this year, only about one third of the amount
held during the summer of 1954, when reserves were in
abundant supply.


M onetary T rends and P olicies
The policies of monetary restraint that many foreign coun­
tries had begun to pursue earlier this year were continued or
further emphasized during September. In the United King­
dom, the authorities for the fourth time this year increased the
rates charged by the Public Works Loan Board on new loans
to local governments. This increase to the highest level since
the early thirties brought the rates more in line with market
yields, and is expected to have a significant effect on housing
and certain other capital expenditures by local governments.
The government also raised the rate on tax reserve certificates;
this was the fourth rise this year and carried the rate to the
highest level since the introduction of the certificates in 1941.
Market rates, however, did not increase further after the first
few days of the month. The average Treasury bill tender rate,
which had risen to 4.07 per cent on September 2 from 4.00
per cent where it had been maintained throughout August,
remained unchanged at the next three tenders in September.
Most government bond yields reached new highs for the year
in early September, the yield of 2Vi per cent Consols even ris­
ing to a new postwar high of 4.56 per cent on September 2;
subsequently, however, most bond prices staged a good re­
covery. Bank advances declined further in the five weeks
to mid-September, continuing the downtrend that had begun
in July; this decrease reflected a reduction of loans to the
private sector of the economy and also repayments by the
nationalized gas and electricity industries. On the other
hand, bank holdings of Treasury bills continued to rise. Instal­
ment sales of private cars and certain other consumer durables
fell in August, partly as a result of the end-of-July tightening
of controls on instalment buying.
In the Netherlands, which is one of the few Western Euro­
pean countries where monetary restraint measures have not
been adopted this year, bank credit expansion during recent
months has been more rapid than in the corresponding period
of 1954. The president of the central bank has suggested that
it would be advisable for the commercial banks to slow
down their lending, especially the financing of instalment
credit and fixed capital expenditures.
In the Union of South Africa, the central bank raised its
discount rate from 4 to AVi per cent effective September 29;
the earlier level had been maintained since March 27, 1952.
This change brought to eleven the number of foreign central
banks that have increased their discount rates since the
beginning of 1955. In addition, the Treasury announced an
increase in tap rates of three and six months’ Treasury bills

from 2Vi to 3 and 2 Ys to 3 Vs per cent, respectively. The
Treasury bill tap rates had been raised earlier this year,
following the increases in money market rates in the United
Kingdom, primarily in order to prevent an unduly broad
disparity in rates from developing with consequent adverse
effects on the flow of funds between the two countries. In
the event, the attraction of higher London rates has been only
a small factor in the reduction in net capital inflow that, with
the rise in imports, led to a moderate balance-of-payments
deficit in the first half of 1955. During the first seven
months of this year bank loans and advances rose 11 per
cent, and in August the central bank accordingly requested
the commercial banks to avoid a further net increase in their
lending and, in particular, to restrict their commitments for
the financing of consumer credit and of fixed capital expendi­
tures. The reduced liquidity of the banking system, stemming
primarily from the loss of official gold and foreign exchange
assets, led to an increase in commercial bank borrowing from
the central bank during the first half of 1955, and has re­
portedly already resulted in a more restrictive lending policy.
In New Zealand, the central bank discount rate was in­
creased from 5 to 6 per cent effective September 5. This rise,
the second this year and the fourth since April 1954, was the
latest step in the policy of monetary restraint that was begun
at that time; other measures have included increases in the
cash reserve requirements of the commercial banks and the
imposition of controls on instalment buying. Meanwhile, in
the three months ended August 30, bank advances declined
by 3 per cent, against a 6 per cent increase in the corresponding
period of 1954, and the fall in net overseas assets in July and
August was apparently no larger than would be expected for
purely seasonal reasons.
In Australia, where import restrictions are being tightened
to counter the continuing balance-of-payments difficulties, the
governor of the central bank requested the commercial banks
to exercise restraint in new lending, especially for financing
imports and capital expenditures, and to reduce outstanding
loans. Businesses were asked to revise their expansion plans
in order to reduce their dependence on the banking system.
In addition, "hire-purchase” companies have agreed to tighten
the terms of their instalment-sales financing and to limit the
volume of their operations.
Exchange R ates
During September, the New York foreign exchange market
continued rather quiet without much change in the rates for



various currencies. The Canadian dollar moved to moderately
lower quotations, while sterling, after an initial period of weak­
ness, tended to firm and to command higher rates in the latter
part of the month.
The slackening demand for sterling evident in the two pre­
ceding months continued through the first part of September;
rates tended to move lower, with the quotation for American
Account sterling easing slightly to around $2.78V2 and trans­
ferable sterling moving downward from $2.7 6 Vs to as low
as $2.75%p>. At the same time, the discounts on sterling for
forward delivery increased; the discount on three months’
sterling, for example, rose from 1Vi cents on September 1 to
1% cents on September 7. Owing to a modification of British
exchange regulations, the rate for securities sterling dropped
sharply on September 6 from $2.78Y% to $2.7614. Under the
new regulations, sterling bearer securities owned by nonresi­
dents may be freely exported from the United Kingdom; funds
eligible for credit to a blocked sterling account may be invested
in a security payable in the currency of any sterling area coun­
try and with a minimum maturity of five years rather than the
ten years previously required; and balances in blocked sterling
accounts may be freely transferred among nonresidents.

Securities sterling has subsequently been quoted at about the
rate for transferable sterling.
Since about mid-September, however, commercial demand
for sterling has increased noticeably and rates have strength­
ened, while official support operations have reportedly de­
clined. Thus, American Account moved upward to as high as
$2.78% on September 27, while the discount on three months’
sterling declined to 1% 6 cents. An important factor in ster­
ling’s improved position was Chancellor Butler’s September
14 address to the Istanbul meeting of the International Mone­
tary Fund. In his statement, Mr. Butler said that the British
Government does "not contemplate any early move on any . . .
aspects of the exchange front”, and that "all discussions and
rumors about impending changes of the parity for, or margins
for, sterling are unrealistic and irrelevant”.
The market for the Canadian dollar had a generally easy
undertone during the period, with quotations moving down­
ward from $1.01% 6 on September 1 to $1.01% 6 on Septem­
ber 30. While the turnover was reportedly small, there was
a rather persistent demand for United States dollars on the
part of investment interests in Canada, as well as a demand for
United States dollars for commercial payments.


During the past year the United States economy has staged
a truly impressive recovery and expansion of business activity.
Earlier records have been surpassed by a considerable margin,
and, while the pace of expansion slowed perceptibly during
the quarter just ended, the immediate outlook generally
appears good. Gross national product (GNP) rose from a
seasonally adjusted annual rate of 359 billion dollars in the
third quarter of 1954 to 385 billion in the second quarter of
1955 and probably rose further, perhaps to about 390 billion,
during the third quarter. The level attained during the second
quarter of this year was 7 per cent above that of the July-toSeptember quarter last year and 4 per cent higher than in the
peak second quarter of 1953. On the other hand, the recent
advances are somewhat less striking when viewed in the per­
spective of population growth. The country’s population has
increased by about 3.5 per cent in the past two years, and the
Department of Commerce has estimated that the increase in
total output in physical terms, after correction for price in­
creases from the second quarter of 1953 to the second quarter
of 1955, may have been somewhat less than this amount.
With the notable exception of agriculture, the economy’s
year-long expansion seems to have proceeded in a fairly wellbalanced fashion; increases have been recorded for all major
categories of consumer and business spending. There
have been differences in the timing and extent of gains in
various parts of the economy, however, and certain industries
and geographical areas have shown considerably greater im­
provement than others. There have been price increases for

industrial materials and finished goods, particularly in recent
months, mainly reflecting higher costs in some cases and larger
demand in others. For the most part, increases so far have
been moderate, suggesting that the economy’s expansion, ex­
cept for a few areas of sharply increased demand, has been
within its capacity. The larger and more widespread price
increases since June perhaps indicate that output in a num­
ber of industries may be approaching capacity, but it also
seems clear from the high and rising level of capital outlays
that productive capacity is continuing to grow. The level of
unemployment (between 3 and 4 per cent of the labor force),
while down sharply from a year ago and somewhat below the
postwar average, also indicates that there is some room for
further expansion.
In contrast to the moderately rising price trend for indus­
trial commodities, prices received by farmers declined further
by about 5 per cent from the summer of 1954 to the summer
of 1955. Mainly as a result of lower prices, farm income
this year has been running somewhat below last year and, in
fact, lower than in any postwar year. While total farm income
has been falling during the past few years, the individual
farmer, on the average, has not fared so badly as might seem
indicated, since the exodus of the farm population to cities
and the consolidation of farms has resulted in considerably
smaller declines on a per capita basis. Falling prices and
income appear to be part of a long-term adjustment process
which has, along with expanding opportunities for industrial
employment, encouraged migration from the farms. The symp­


toms of this adjustment process are, of course, particularly
conspicuous at a time when the rest of the country is enjoying
high and increasing income.
Broad P roduction G ains
The pervasiveness of expansion in the economy during the
past year is revealed clearly by the Federal Reserve Board's
index of industrial production and its major components.
During the year ended in August, the total index rose by 17
points (14 per cent) to 140 per cent of the 1947-49 average,
advancing most rapidly in the last quarter of 1954, somewhat
more slowly during the first several months of 1955, and slower
still during the summer months. Rising output of primary
metals and transportation equipment led the way in the early
stages of recovery, but, as may be seen in the accompanying
chart, there also have been substantial increases during the
year in output of nondurables, such as chemicals and allied
products and textiles and apparel (the latter lost ground after
May, however). Much of the continued upward push in the
index since last spring has come from rising machinery out­
put, which had tended to lag earlier in the recovery. Primary
metal and transportation equipment output, although continu­
ing to show strength, have tended since early this year to
increase parallel to the rise in total production, rather than at
a greater rate. No major group in the index has failed to rise
during the past year, and increases among major components
have ranged from 4 per cent for food production to more than
30 per cent for primary metals and lumber. On the whole,
output of durable goods has risen at a more rapid rate than


total production during the year ended August, while non­
durables and minerals have each increased by less than the
Output of minerals rose rapidly in late 1954 and early this
year to a peak in February but has declined somewhat since
then, mainly because of smaller crude oil and natural gas pro­
duction. Nondurable goods production also receded slightly
during the summer from the record spring level, principally
because of declines in textile and apparel output. Durable
goods production failed to rise in July, after seasonal adjust­
ment, owing in part to a brief work stoppage in the steel mills
and a more extended one in the copper refineries, but advanced
again in August to a record level. As a result of these devel­
opments in the principal components of industrial production,
the total index has shown comparatively small gains since May.
The broad extent of the gains throughout the economy
is also revealed in the national product accounts. Higher
consumption and increased domestic investment contributed
roughly equal amounts to the 26 billion rise in GNP (at a sea­
sonally adjusted annual rate) from the third quarter of 1954
to the second quarter of 1955, although the relative increase
in investment was much larger. Total government spending
for goods and services showed little net change over this period,
as the further increases in State and local outlays were counter­
balanced by lower Federal expenditures.
At different stages of the expansion during the past year,
one and then another type of spending has shown particular
strength. Early in the recovery, in the fourth quarter of 1954,
the rise in investment outlays outweighed increases in con­
sumer spending in contributing to recovery, mainly because of
the cessation of inventory liquidation. During the first quarter
of this year the principal factor in the expansion was consumer
spending, particularly for automobiles and other durable goods.
Construction expenditures also rose significantly under the
impact of sharply increased residential building, and a small
amount of inventory rebuilding took place. Consumer spend­
ing continued to increase during the second quarter, with most
of the rise occurring in outlays for nondurable goods, but
increases in investment expenditures again exceeded the rise
in consumption. Inventory accumulation during the second
quarter accelerated to an estimated annual rate of 4.3 billion
dollars from 1.5 billion in the first quarter, business equipment
outlays rose by about 10 per cent (the first increase since
1953), and construction spending also advanced.
During the third quarter, higher consumption and invest­
ment have both appeared to contribute to a further rise in
total GNP, but it is still too early to estimate their relative
strength. Business spending for new plant and equipment rose
substantially, according to a survey by the Department of Com­
merce and the Securities and Exchange Commission (SEC).
Business inventories continued to build up during July at about
the same monthly average rate as in the second quarter.
Residential construction outlays, seasonally adjusted, increased
in July but declined in August. The decline in the number



of housing starts and in the value of contract awards for home
building during the summer suggested that residential con­
struction outlays may have dropped slightly on an adjusted
basis from the second to the third quarter. At the same time,
increased strength was indicated for consumer buying as retail
sales rose, after seasonal adjustment, to a record 15.5 billion
dollars in July and were maintained at about this rate during
Expansion in Employment
Gains in employment tended to lag behind the rapid ad­
vances in production during the earlier stages of recovery last
autumn and winter, and only small inroads were made into the
number of unemployed persons. In part, this reflected the fact
that the increased demand for labor was met to some extent
by a lengthening in the workweek. In addition, gains in pro­
ductivity seemed to be especially large—a development that
frequently accompanies the early phase of business recovery.
In the spring and early summer, employment expanded rapidly
along with continued substantial production gains, while un­
employment declined sharply and the length of the workweek
underwent only small (mainly seasonal) changes. More re­
cently, during the midsummer months, both production and
employment expanded more slowly and the number out of
work changed primarily in response to seasonal influences.
The largest increases in employment occurred between
March and July when seasonal gains strongly reinforced the
business expansion; total employment rose by 4.5 million per­
sons during this interval, according to the Bureau of the Census
estimates. Nearly half of this rise was in agricultural employ­
ment and was mainly seasonal in nature. There was a further
employment rise of half a million persons in August, which
brought the total number at work to 65.5 million, a record
that exceeded the year-earlier figure by 3.2 million persons.
Seasonally adjusted nonfarm employment, reported by the
Bureau of Labor Statistics, showed its largest gains in the
February-to-June period, rising by more than one million per­
sons in four months. Most of the increase occurred in manu­
facturing, especially durable goods production. From June to
August, seasonally adjusted nonfarm employment rose more
slowly, with gains concentrated in various service occupations
(including government), while factory payrolls showed a
slight decline. Compared with a year previous, total nonfarm
employment in August was larger by about 1,650,000 persons,
but it was still more than 200,000 persons short of the July
1953 peak, mainly because of the smaller number of factory
workers employed.
Along with employment gains this year, there have been
steady increases in average wage rates. The average hourly
wage in manufacturing, for example, rose by more than 5 per
cent from August 1954 to August 1955; gains in most other
occupations appear to have been somewhat smaller. As a result
of increases in employment, hours of work, and wage rates,
total wage and salary payments, at seasonally adjusted annual

rates, advanced from 196 billion dollars in August 1954 to
about 212 billion a year later.
Seasonally adjusted unemployment, as reported by the
Bureau of the Census, declined steadily throughout the spring
and early summer. In August the estimated number actually
out of work dropped to 2.2 million persons, or 3-3 per cent of
the civilian labor force. The decline in August was, however,
slightly less than seasonal. August unemployment was about
30 per cent less than a year ago, but was approximately one
million above the unusually low level estimated for August
1953. The decline from a year ago in the number out of work
has been achieved despite large additions to the labor force.
The year-to-year increments in the civilian labor force reported
for July and August averaged more than 2 million persons,
substantially larger than the average annual increase during the
postwar decade.
The declines in unemployment have also been reflected in
the Department of Labor’s classification of labor market areas
throughout the country. The report for this July characterized
only 31 of the nation’s 149 major labor market areas as having
fairly substantial unemployment, while a year earlier there
were 53 major areas in this group. To a considerable extent,
the major areas that still had substantial unemployment in July
this year (as well as the smaller labor markets in this classifi­
cation) were concentrated in the textile-producing regions of
New England and the coal-mining regions of Pennsylvania,
West Virginia, and Kentucky. A significant portion of the
nation’s unemployment thus seems to be centered in a few
areas where the major industry is in the process of long-term
adjustment to fundamental changes in market conditions,
rather than being subject merely to the shorter-run fluctuations
of general business conditions.
A rea P atterns
Recovery and expansion in output and employment has been
most pronounced in those sections of the country with large
concentrations of "heavy” industry (which has shown particu­
lar strength during the past year), and in those favored with
rapid growth of population and industrial development. Thus,
business activity has displayed particularly marked improve­
ment in the Great Lakes region, a center of durable goods pro­
duction, in the rapidly industrializing South, and in the south­
western and far western portions of the country. In contrast,
the northeastern States and midwestern agricultural areas have
tended to show much smaller gains than the nation as a whole.
The Second Federal Reserve District has made definite prog­
ress but perceptibly less than the national average. Seasonally
adjusted nonfarm employment in this District, for example,
declined throughout 1954 and did not turn upward until early
this year, while nonfarm employment in the country as a whole
began to rise a year ago. By July, nonfarm employment in
the Second District was 1.1 per cent above the first-quarter
level, but for the country at large the gain during this period
was 2.4 per cent. A variety of other indicators, such as depart­


ment store sales and construction contract awards also point to
greater gains in the nation than in the District. Only in the
case of agriculture does this years record for the District com­
pare favorably with the country at large. Farmers’ income
seems to have held steady here for the past year, in contrast to
declines reported on a national basis, reflecting the lesser im­
portance of major field crops in the agriculture of this District.
P otential W eak Spots in the Outlook
As the recovery has matured into an expansion that has
topped previous records of production and economic activity,
business analysts have pointed to several areas in which devel­
opments might interfere with the economy’s course of generally
balanced growth. Earlier in the year, for example, the market
for automobiles was frequently singled out as one that might
weaken during the second half, with possible unsettling effects
for the entire economy. Retail sales of automobiles and acces­
sories during the first half of the year were larger than in any
previous six-month period and 18 per cent greater than during
the first half of 1954, accounting for a substantial part of the
rise in retail sales. Sales of new cars alone totaled 3,850,000,
as against 2,825,000 a year earlier, an increase of 36 per cent.
The increase was supported by a record half-year growth in
outstanding automobile instalment credit of 2.2 billion dollars,
which accounted for most of the 2.4 billion rise in total instal­
ment credit outstanding during the first half of the year. Of
particular concern to some observers was the evidence of easier
credit terms—especially a considerable lengthening of maturi­
ties—on automobile loans, since this supported the view that
there might be "borrowing” from future sales. In addition,
production of new cars was much greater than sales and record
inventories built up in dealers’ hands during the spring.
New car sales continued very high during the third quarter,
and inventories were reduced somewhat in August and more
substantially during September as production was cut back to
permit retooling for new models. Sales during the summer
months also have been financed to a large extent by instalment
credit, and have been fostered by intensely competitive selling.
These factors, as well as the indications that model changes are
not so great as last year and that prices may be higher, have led
a number of analysts to question whether next year’s sales will
match the high rate achieved this year.
The increasing volume of residential construction earlier in
the year also received special attention as a potential weak
spot in the economy’s armor. Some observers had felt that
certainly the rate of increase and perhaps even the current level
of building were not sustainable. Encouraged by a ready avail­
ability of mortgage commitments early this year and a marked
easing of maturity and downpayment terms, particularly for
loans guaranteed or insured by the Federal Government, out­
lays for residential construction rose to record levels during
the first half of the year, surpassing the like period of 1954
by 31 per cent. The rising trend in expenditures leveled off
and seasonally adjusted housing starts declined slightly during


the spring, as the initial stimulus of the easy borrowing terms
then available wore off. There appeared to be a further decline
in the rate of new housing starts during the third quarter,
although August showed an increase over July.
At the end of July, the Federal Housing Administration
and the Veterans Administration acted to tighten slightly the
maturity and downpayment terms on loans that they insure
or guarantee; meanwhile, the availability of funds for mort­
gage commitments has been reduced somewhat, owing to the
large volume already committed and the competing demands
on the long-term capital market from other borrowers. Since
early August, a number of the Federal Home Loan Banks have
raised their interest charges for loans to member savings and
loan associations, and last month the Loan Banks cautioned
member associations against acquiring mortgages at a faster
rate than the increase in their available funds. These develop­
ments have caused many observers to expect some declines in
residential construction, at least in the short run.
Elements of Strength
The areas of potential weakness in the economy that have
been noted above have received a great deal of attention, par­
ticularly because those factors had made such important con­
tributions to the earlier stages of recovery. Nevertheless,
because of the significant broadening of recovery, the over-all
picture contains many elements of current and prospective
strength. This strength is manifested, for example, by the plans
for an increased rate of investment in plant and equipment
during the final quarter of this year, as indicated by the recent
Department of Commerce and SEC survey referred to earlier.
According to this survey, businessmen are planning fourthquarter expenditures at an adjusted annual rate of 29.7 billion
dollars, or 0.7 billion higher than the record rate indicated for
the third quarter. Capital outlay by State and local govern­
ments is another area where increases are widely anticipated,
especially if a comprehensive highway program can be agreed
upon. But perhaps the most impressive indications of under­
lying strength are given by the continued rising trends in per­
sonal income, employment, and retail sales, and by the surveys
that show consumer and business confidence to be at high
levels. To be sure, some concern has been expressed over the
fact that consumer instalment debt repayments, which have
risen much less than new extensions during the year, may tend
to catch up with extensions, with a corollary reduction in the
stream of consumer spending. Nevertheless, it is noteworthy
that disposable personal income has risen steadily throughout
the year and has made the required debt payments relatively
less burdensome.
Prospects for a further build-up of inventories also constitute
an important area of strength in the immediate outlook, so long
as too rapid or speculative accumulation, which would lead to
unbalanced, unsustainable expansion for the economy, is
avoided. Developments so far are partially reassuring. Some



rebuilding of stocks was to be expected after the fifteen-month
period of liquidation that ended last December. Moreover,
with accumulation proceeding quite moderately during the
first half of this year and total business sales rising rapidly to
new peaks during the spring, the ratio of total business stocks
to sales declined to the lowest point in several years. These de­
clines earlier in the year probably were "involuntary” for a
number of firms, in the sense that buinessmen might have
preferred to hold larger stocks but rapid sales increases delayed
This is not to say that the relationship between stocks and
sales is tending to return to the much higher ratio that pre­
vailed during the preceding few years. The inventory-sales
ratio has been considerably below the 1951-54 average mainly
because of changes in the manufacturing component; manu­
facturers are now holding smaller stocks of purchased materials
in relation to sales. This, in turn, has seemed to reflect the
transition to a prompt-delivery economy rather than a devia­
tion from a "normal” relationship; manufacturers apparently
have not found it necessary to carry the large supplies that
they carried during the Korean war period. At the same time,
there also are reasons for not expecting the ratio of total
business stocks to sales to fall to the low levels of the im­
mediate post-World War II years. That period was marked
by shortages in many lines, especially durable goods, and it is
not surprising to find that sales were high in relation to inven­
tories. For the current period, some rise in businessmen’s stocks
along with improving sales might be considered "normal”.
P rice D evelopments
The evident strength and momentum of the expansion has,
in fact, been so great that some concern has developed over
the inflationary potentialities in the current business situation.
Concern with prices has been stimulated also by the continued
upward pressure from higher wage and other costs, as the
rate of use of the labor force and of industrial capacity mounts.
Thus far, the average increase for industrial goods has been
moderate, and for the most part the advance in these prices has
been offset by declines in costs of farm products and processed
foods, so that the index for all wholesale prices has changed
little. But the increases for other than farm and food products
have been persistent, and recently (since mid-August) farm
and processed-food prices have also edged up. As a result, the
wholesale price index advanced from 110.5 in July to 110.8
in August and to more than 111.0 in September. Prior to

September the index had remained in the range between 109.4
and 111.0 since October 1952. The wholesale price index for
other than farm and food products reached 117.4 in August
and about 118 in September, a record level that was 2 per cent
above last June and 3 per cent higher than a year ago. The
over-all increase since the start of the general business upturn
in 1954 has not been large, especially when compared with
other periods of rising prices since World War II, but the rate
of increase since June clearly has been significant. While the
largest increases have been in metals and rubber, nearly all the
major nonfarm commodity groups have shown some rise in the
past few months. There have been substantial price increases
for lumber and other structural materials during the past year,
as might be expected in a period of greatly increased con­
struction activity.
Price increases have resulted both from higher costs (espe­
cially labor costs) and enlarged domestic and foreign demand.
In a few instances, such as copper prices, tighter supply situa­
tions, accentuated by work stoppages here and abroad, seemed
to be among the leading causes for increases. While continued
upward pressure on prices of industrial goods may be antici­
pated as a result of further wage increases and expanding
demand, there are still stabilizing forces in evidence. Most
notably, there are wide market areas of keen competition
that may induce many businessmen to absorb some of the cost
increases that confront them. Moreover, there have been gains
in productivity that should help to offset the effects of higher
costs for labor and materials.
Retail prices, which characteristically are slower to change
than those at the wholesale level, have risen only slightly in
recent months and in August were a little below the average
level one year earlier. Costs of food, apparel, and most other
goods have been lower recently than they were last year, while
rent and prices of other services have risen.
In summary, the economy achieved a further expansion dur­
ing the third quarter, although the rate of advance appeared to
be somewhat slower than it was earlier in the year. But earlier
fears of an actual weakening of economic activity during the
second half of this year seem to have been largely set aside.
Present indications are that business and consumer confidence
are at high levels, and total economic activity this year prom­
ises to exceed the 1953 record by a wide margin.


W ith the revival in recent years of monetary policy abroad,1 instrument. New reserve requirements have been established,
commercial bank reserve requirements in foreign countries or existing requirements recast, in many foreign countries, and
have been assuming increasing importance as a credit control changes in required reserves have been made with increased
frequency. Today only a few countries do not have some
1 For a discussion of recent monetary trends and policies abroad, form of reserve requirements against commercial bank deposit
see this Bank’s Monthly Review of October 1954, June 1955, and sub­
sequent months.

R e c e n t T r en ds

in t h e

E s t a b l is h in g

R eserve R e q u ir e m e n t s


Until some twenty years ago only the United States, South
Africa, New Zealand, India, and certain Latin American coun­
tries had legislation requiring the commercial banks to main­
tain minimum balances with the central bank. Elsewhere, the
commercial banks frequently maintained such balances volun­
tarily; furthermore, in certain countries they were subject to
minimum cash reserve requirements, which included vault cash
as well as balances with the central bank. Originally these re­
serve requirements were regarded almost exclusively as a means
of ensuring that funds would be available, when needed, for
depositors’ drawings; they were thus intended primarily to help
safeguard the liquidity of the commercial banking system and
to protect depositors.
It was not until the mid-thirties that commercial bank cash
reserve requirements (as a rule, in the form of balances held
with the central bank) began to be regarded as a general mone­
tary policy instrument for influencing the availability of funds
for new bank loans and investments and hence the aggregate
money supply. A clear indication of this new concept was the
granting to the central bank of statutory authority to vary the
requirements in accordance with its general monetary policy.
Such authority was given to the Federal Reserve System in
limited form in 1933, and on a broader basis in 1935, to the
Reserve Bank of New Zealand in 1936, and the central banks
of Ecuador in 1937 and Venezuela in 1939.
Since the early forties, however, statutory authority for the
central bank to establish and vary cash reserve requirements
has become a common feature of central banking legislation.
Such provisions were incorporated during the war and early
postwar years in the monetary laws of many Latin American
and Asian countries. The West German central banking sys­
tem likewise was given such statutory powers when it was
established in 1948.
During the last two years, this trend toward variable cash
reserve requirements appears to have become even more pro­
nounced. Canada and Norway have introduced such require­
ments by statute, while in Finland, the Netherlands, and
Switzerland gentlemen’s agreements to this effect have been
negotiated between the central bank and the commercial and
other banks. In Denmark, a bill to make the existing cash
reserve requirements variable has been presented to Parliament.
Altogether apart from the spread of variable cash reserve
requirements, various types of special requirements—combin­
ing, as a rule, cash and government securities or certain other
bank assets—were established in a number of countries in the
early postwar years. In Belgium, France, and Italy such special
requirements were introduced soon after the war to reduce the
excess liquidity of the banking system; in Sweden somewhat
similar requirements were temporarily put into force by statute
during the post-Korea inflationary outburst. On the other
hand, certain countries in Latin America and Asia, such as
Mexico and the Philippines, presumably had recourse to such


special reserve requirements as a part of selective credit con­
trols; in these countries, the assets required to be held as
reserves include specific types of loans and investments that
the authorities wish to promote. The inclusion of government
securities in such reserves, which in effect results in the lodging
of a portion of the government debt in commercial bank port­
folios, is sometimes regarded as a means of helping develop a
market for government securities.
P r e s e n t St a t u s

Variable cash reserve requirements—the most important
type of commercial bank reserve requirements—are in force
in twenty-six foreign countries, either by statute or by agree­
ment between the monetary authorities and the commercial
banks.2 Of these countries, seven are in North America and
Europe ( Canada, Finland, West Germany, Greece, the Nether­
lands, Norway, and Switzerland);3 nine in Latin America
(Bolivia, Brazil, Colombia, Ecuador, Guatemala, Honduras,
Paraguay, Peru, and Venezuela); and ten elsewhere (Australia,
Burma, Ceylon, Egypt, Korea, New Zealand, Pakistan, Thai­
land, the Union of South Africa, and Vietnam).
Special reserve requirements that include government securi­
ties and other earning assets, as well as balances with the cen­
tral bank and vault cash, have been established or may be
imposed in four European countries (Austria, Belgium, Italy,
and Sweden), six Latin American countries (Chile, Costa Rica,
Cuba, the Dominican Republic, Mexico, and Uruguay), and
three Middle and Far Eastern countries (Iraq, Israel, and the
Philippines). In France, such requirements consist entirely of
government securities; in the Netherlands, which maintains
variable cash reserve requirements, there are also, on a stand-by
basis, variable special reserve requirements that include short­
term government securities and other liquid assets.
The United Kingdom is a case apart. In that country, there
are no requirements established by law or by formal agreement
between the authorities and the commercial banks, but the
latter are in general guided by custom regarding minimum
ratios of both cash and liquid assets (including Treasury bills)
to deposits. Presumably because of the small number of banks
and the tradition of close cooperation between the authorities
and the banks, it has not been found necessary to formalize
these arrangements.
Statutory reserve requirements exist also in Denmark, India,
Portugal, Turkey, and certain Central American republics, but
they cannot be varied except by legislation and are designed
primarily for the protection of depositors. Such fixed require­
ments, which generally include, besides cash, other liquid assets
2 The present status of reserve requirements in foreign countries is
necessarily discussed here in the light of available documentation
which, of course, may not in all cases be complete.
3 In Finland and Switzerland, the agreements under which the re­
serve requirements were established earlier this year are temporary; in
Finland the required reserves are to be gradually freed after the end
of September 1955, and in Switzerland the requirements are to expire
in mid-1956. These agreements have not specifically provided for vari­
ations in the reserve ratios, but they could presumably be altered to
set new ratios.



such as short-term government securities, have continued in
force in several other countries that also have variable cash
reserve requirements.
In about a dozen countries, there are no commercial bank
reserve requirements. With the exception of Argentina, Japan,
and Spain, most of these are countries with relatively unde­
veloped banking systems; in Japan, however, the central bank
does have the power, which it has so far not exercised, to
establish and change reserve requirements, while in Argentina
the commercial banks may accept deposits only on behalf of
the central bank.
P rincipal Features
The principal features of reserve requirements of course
vary from country to country, but certain common traits can
be discerned. Most foreign countries have legislation, as in
the United States, requiring higher reserves against demand
than against time deposits; under the laws in a few countries,
unused overdrafts are counted with demand deposits. No
existing statute appears to provide for special reserve require­
ments against interbank deposits, although proposed legislation
in Denmark would establish such requirements.
A single ratio for all types of deposits exists in the reserve
requirements of a number of countries, particularly in those
that have established reserve requirements in the last two years.
The distinction between demand and time deposits usually
had its roots in the earlier legislation aimed at protecting bank
depositors; however, it may now be based more largely, in
some instances, on the use of reserve requirements to limit
credit expansion and the fact that extensions of bank credit
usually result in a growth of demand deposits, rather than
time deposits.
Cash reserve requirements against increases in deposits alone,
rather than against total deposits, are in force in Australia and
in Finland. Supplementary reserve requirements against in­
creases in deposits—consisting as a rule, in addition to cash,
of securities or other earning assets—exist, or under current
legislation may be imposed, in France and several Asian and
Latin American countries.
Most foreign countries have not established special classes
of banks for reserve requirement purposes, unlike the United
States whose geographical classification owes its origin to the
banking structure existing at the time that nation-wide reserve
requirements were first introduced. Mexico and West Ger­
many are the only foreign countries that have adopted special
geographical classifications. West Germany in addition pro­
vides for different reserve ratios for banks of different size,
as in various ways do Belgium, Finland, the Netherlands,
Norway, Sweden, and Switzerland.
In some countries vault cash may be included in required
cash reserves, but in most countries these must consist entirely

of interest-free deposits with the central bank. This more par­
ticularly is the case in those countries like Canada and certain
Western European countries which have established reserve
requirements during the last two years. Although the exclusion
of vault cash in a country that has unit banks discriminates
against those banks which have to keep relatively large
amounts of vault cash because of their distant location, in
most foreign countries this problem does not seem serious.
While in a few countries there is no limitation on the range
within which reserve requirements may be varied, in the
majority the range is limited, depending in part on the struc­
ture of the banking system and the likely fluctuations in its cash
base. In addition, legislation in several countries provides that
changes in the requirements must be gradual and that advance
notice has to be given. The lower and upper limits for per­
mitted variations of cash reserve requirements differ widely.
The minimum level is as low as zero in the Netherlands and
as high as 12^/2 per cent in Cuba; the permitted maximum is
lowest in Canada (12 per cent) and reaches its highest (50
per cent) in a number of countries in Latin America and Asia.
Supplementary cash requirements against increases in deposits
may, as a rule, be set as high as 100 per cent.
Requirements currently in force likewise vary greatly. Cash
reserve requirements are as low as 2 Vi per cent for some banks
in Switzerland and as high as 35 per cent for demand deposits
in Honduras. Within these extremes, ratios are currently set,
for example, at 8 per cent of total deposits in Canada and at
10 per cent in the Netherlands; they range between 9 and 12
per cent for demand deposits in West Germany, and are at
21V^ per cent in New Zealand.
In most countries, the authority to vary the reserve require­
ments is given to the central bank. In a few countries, for
example Colombia, the government, or one of its represen­
tatives on the central bank’s governing board, has the power
to veto the decision of the central bank or to determine the
changes. In some countries the power to make changes is vested
in special bodies like the Banking Commission in Belgium
and the Currency Committee in Greece.
Various methods are used for administering the reserve
requirements. In most countries, reserve balances and deposit
liabilities for each day are averaged over periods that range
from one week to one month. Special averaging rules are
provided for in Canada, the Netherlands, and Sweden, under
which reserve balances or deposit liabilities on only certain
days in the month are taken into account. However, a few
countries, including New Zealand, permit no averaging of
reserves, generally specifying that the reserve requirements
have to be observed daily. Most countries provide for penal­
ties for reserve deficiencies determined on the basis of these
computations, but the severity of these penalties varies greatly
from country to country.

C h a n g e s in

R e se r v e R e q u ir e m e n t s

The trend in cash reserve requirement changes reveals the
increasing recourse in recent years to this monetary instrument
as a part of flexible policies designed to ease or tighten general
credit conditions. Variations in reserve ratios have become
more frequent not only in countries that have established vari­
able reserve requirements in recent years, but also in those that
have had such statutory power for some time but had not
exercised it. Among the countries that have varied the ratios
most frequently are West Germany, the Netherlands, Colombia,
Mexico, Australia, and New Zealand. In Germany, ratios
have been changed eight times since they were established in
July 1948, and in the Netherlands seven times since their
introduction in March 1954. In Colombia, ordinary reserve
requirements have been changed and supplementary reserve
requirements imposed and removed many times since 1951
when the present legislation came into effect, while in Mexico
frequent changes have been made in both the ratios and the
composition of the requirements. Reserve requirements in
Australia—the so-called "special account” system—have been
adjusted periodically since their establishment in 1941; and
the New Zealand requirements have been altered nine times
in the three years since August 1952 when they were first raised
from their original 1933 level.
Most countries, however, either have so far changed their
requirements only infrequently or have left them at their initial
levels. In the first place, a number of countries with devel­
oped banking systems, such as Canada and Norway, have
introduced variable cash reserve requirements only recently.
Secondly, in a number of Latin American and Asian countries
that have variable cash reserve requirements, the role of a
flexible monetary policy, and thus the scope for reserve ratio
changes, may well be limited because the monetary systems
are as yet relatively undeveloped. Finally, the varying of
reserve requirements is regarded in some countries as appro­
priate mainly for effecting major adjustments in the volume
of available bank reserves in response to fundamental changes
in the reserve position of the banking system or in monetary
Nevertheless, reserve requirements have often served a
useful purpose also in countries that have not actually had
recourse to such variations. A given level of reserve require­
ments provides an effective basis for the regulation of the credit
and money supply through open market operations, since it
imposes a limit on the potential growth of bank deposits that
could be supported by any given amount of reserves. When
outside factors, such as changes in gold and foreign exchange
holdings, are not enlarging or are actually reducing the reserve
base, the unchanged requirements may have an important
restraining influence by themselves if not offset by central
bank operations.


R ecent Experience with Variable
R eserve R equirements
The experience of foreign countries with reserve require­
ments necessarily differs from that of the United States, since
the structure of their banking system and their money and
capital markets vary greatly and many of the problems they
have faced are dissimilar. A brief survey of the use of reserve
requirements in a few selected countries throws some light
on the role of this instrument abroad.
In Colombia, variations in primary reserve requirements,
and the imposition and removal of supplementary require­
ments against increases in deposits, have until recently been
mainly motivated by changes in the country’s external position,
with higher requirements intended to offset the expansionary
effects of gold and foreign exchange accretions upon the money
supply, and vice versa. However, last April, following a sharp
decline in gold and foreign exchange holdings, reserve requirments were increased. Domestic credit had continued to
expand, and the authorities apparently decided to restrain
credit in order to reduce the need for stringent import controls
as well as to alleviate the risk of exchange depreciation.
In Mexico, changes in cash reserve requirements were uti­
lized during the war years mainly to offset the expansionary
impact of a gold and foreign exchange inflow. After the war,
the requirements were altered, and various government securi­
ties and specified types of bank loans were included in the
required reserves. The requirements thus became largely a
tool of selective credit control designed to encourage the
extension of bank credit for purposes regarded as being in
the national interest; they appear to have been used less as
a quantitative instrument to prevent a rise in total bank credit.
As a qualitative instrument, the requirements appear to have
had the usual weaknesses of selective credit controls, especially
in so far as the end-use of various bank loans cannot always
be clearly determined. Recently, however, these requirements
have been used to restrain an over-all credit expansion by
including in the required reserves certain assets that are avail­
able only from the central bank.
In Australia, special cash reserve requirements called "special
accounts” are the main instrument of central banking control.
This system is a variant of the usual cash reserve requirements
against increases in deposits, in that no over-all ratios are estab­
lished but the ratios instead may differ from bank to bank.
The system was established in 1941 to lessen the wartime
increases in bank liquidity consequent upon the Treasury’s
deficit financing and balance-of-payments surpluses. After the
war, during periods of declining foreign exchange holdings*
the special accounts were used mainly to help offset the effects
of foreign exchange losses upon bank liquidity, rather than
as a means of credit restraint to correct balance-of-payments
deficits. However, since the beginning of 1955, a year during
which foreign exchange reserves have been falling, the special



accounts have been reduced by less than the decline in foreign
exchange holdings, with the result that bank liquidity has been
diminished; this restraining effect has in part been offset by a
reduction in the commercial banks’ government security hold­
ings. Earlier, the selling of government securities by the banks,
in order to meet the required reserves and to continue increas­
ing their advances, had already prompted the central bank in
1954 to propose that the banks observe a ratio of 25 per cent
between their liquid assets and government securities and their
total deposits. The central bank’s conduct of an appropriate
monetary policy, the bank had added, would thereby be made
New Zealand provides an illustration of the use of variations
in reserve requirements as a substitute for open market opera­
tions in a country where the banking system is well developed,
but where the market for government securities is very narrow.
Although reserve requirements had been made variable as
early as 1936, it was not until 1952 that the first change was
made. The cash reserves of the New Zealand banks are chiefly
influenced by the country’s balance of payments and by changes
in the government accounts at the central bank, and are subject
to marked seasonal fluctuations. In 1952 and 1953, the central
bank’s stated policy had been to raise the reserve ratios when­
ever necessary to offset increases in bank balances at the central
bank. With the recent reappearance of excess demand in the
New Zealand economy and the continuing growth of bank
loans, monetary policy, however, has been assigned a more
important role.
The present policy of the New Zealand authorities, accord­
ing to an official statement, is to make frequent small changes
in the reserve requirements, depending on the movements in
the banks’ balances at the central bank, the movements in their
loans, and general economic conditions. After long years of
inaction the discount rate has been brought into play, increases
in reserve requirements have been used to exert pressure on
bank reserves, and the banks have found it necessary to increase
their borrowing at the central bank to obtain the needed
reserves. Some banks have reportedly also acquired reserves
at the central bank through sales of London balances, since they
hold only very small amounts of government securities and
the liquidation of such securities could not provide them with
the needed reserves. To what extent the sale of foreign
exchange balances has limited the effectiveness of the reserve
requirement increases in New Zealand is as yet difficult to say.
The pressure on bank reserves seems already to have been
reflected in the recent movement of bank advances.
West Germany and the Netherlands are the two countries
with variable cash reserve requirements that most resemble the
United States, both in having well-developed banking systems
and money and capital markets, and in having central banks
that can carry out relatively effective open market operations.
The central banking authorities of the two countries, however,
have defined the purpose of reserve requirement changes in
somewhat differing ways.

In West Germany, as already noted, variable reserve require­
ments were established in 1948 by the legislation that created
the present central banking system; furthermore, the Bank
deutscher Lander in 1951 requested the commercial banks to
observe a liquidity ratio of 20 per cent, including Treasury
bills. Large-scale open market operations, however, did not
become possible until the recent arrangements under which
the Bank deutscher Lander obtained a large portfolio of mar­
ketable government securities. The reserve requirements in
West Germany were varied frequently during the first years
after their establishment, but after February 1953 no change
was made until September 1955, when they were raised fol­
lowing an increase in the discount rate. As was officially stated
earlier this year, the role that the authorities envisage for vari­
able reserve requirements calls for only rare changes, intended
as a rule to correct structural changes in the liquidity of the
banking system.
In the Netherlands, on the other hand, the reserve require­
ments seem to have been assigned a somewhat more flexible
function. Cash reserve requirements were established in 1954,
primarily in order to offset the increased liquidity of the bank­
ing system that had resulted from a sizable gold and foreign
exchange inflow, and to give the central bank leverage for its
open market operations. Later, the central bank stated that
changes in the country’s official gold and foreign exchange re­
serves would not always call for similar changes in the reserve
requirements. It added, however, that it might find it desirable
to change the reserve ratios in preference to undertaking open
market operations even if the country’s gold and foreign ex­
change reserves remained unchanged. In effect, the central
bank has used open market operations and changes in reserve
ratios both together and separately.
The Nederlandsche Bank, in addition, has stand-by powers
to supplement cash reserve requirements by imposing, within
a range of 30 to 45 per cent of deposit liabilities, liquidity
requirements including specific government securities. This
provision is generally considered in the Netherlands as of great
potential importance, since the commercial banks hold large
portfolios of short and medium-term government securities
with well-spaced maturities. It seems to have been motivated
by the desire of the monetary authorities to be able, if the
need arises, to make the discount rate effective and to prevent
the commercial banks from offsetting the effects of a policy
of credit restraint by liquidating government security holdings.
Concluding R emarks
Certain trends and typical problems emerge from the experi­
ence with commercial bank reserve requirements abroad. In
the first place, it is worth noting that many foreign countries
have introduced or strengthened variable cash reserve require­
ments during recent years, in preference to adopting the type
of requirements that includes holdings of government securities
or other earning assets as well as cash. This development
reflects a world-wide trend from selective credit controls


toward primary reliance on monetary controls of a general
character; it is also indicative of the growing importance of
monetary policy.
Variations in cash reserve requirements are a powerful tool
for increasing or decreasing the available supply of bank re­
serves when monetary policy is called upon to help keep the
economy on an even keel. However, unlike the United States
where commercial bank reserve requirements are altered pri­
marily to make major changes in the volume of available bank
reserves, a number of foreign countries seem to regard this in­
strument as a relatively flexible one, and have accordingly
varied requirements fairly often. In countries where open
market operations are not feasible because of the narrowness
of the government security market, changes in reserve require­
ments appear to be the principal way of making the official
discount rate effective. On the other hand, in a number of
foreign countries where open market operations are possible,
reserve requirements are altered in conjunction with such
operations, thereby increasing both the force and the flexibility
of monetary policy. Even in countries where cash reserve re­
quirements have been kept unchanged, or have been changed
only infrequently, the requirements can and, indeed, often do
serve a useful purpose by providing a fulcrum upon which
central bank discount and open market operations can secure
the necessary leverage.
The employment of commercial bank reserve requirements
gives rise to some difficult problems. The impact of a general
increase in reserve requirements on individual banks may well
be uneven since excess reserves are often unevenly distributed,
especially in countries without nation-wide branch banking


systems. For this reason, many of the present arrangements
provide for advance notice of changes in requirements, and
permit changes to be made only gradually. A related problem
exists in certain countries greatly dependent on foreign trade,
where large seasonal swings in the cash balances of the banking
system may well necessitate frequent changes in reserve require­
ments even during a neutral phase of monetary policy. Still
another common problem arises in countries where banks hold
large amounts of government securities and, by selling them or
letting them run off, may be able to obtain additional reserves.
However, in many countries this has been less of a problem
during recent years when the banks have not been able to count,
as in the earlier postwar period, on a ready market at virtually
unchanged prices for government securities that they might
wish to sell. The abandonment of central bank support of
government security prices has thus greatly contributed to
the efficacy of changes in reserve requirements as an instrument
of credit policy.
By and large, the commercial bank cash reserve requirements
and the changes in the reserve ratios, along with discount rate
and open market operations, have played an important part
in the conduct of effective monetary policy in countries with
developed money markets and banking systems. In countries
with less developed monetary arrangements, they have also
contributed significantly to the effectiveness of monetary con­
trols. Altogether, therefore, this particular instrument of mone­
tary policy has proved of much value to the monetary authori­
ties of many countries in their endeavor to help preserve a
workable economic and financial balance, both domestically
and externally.


Daily average department store sales in the Second District
during September reached the highest level on record for that
month, according to preliminary estimates. After adjustment
for seasonal variation, sales were 2 per cent higher than in
August and also 2 per cent higher than in September 1954.
This Bank’s sales index is expected to equal 107 per cent of
the 1947-49 average.
For the first eight months this year, department store sales
in the Second District exceeded January-August 1954 sales by
2 per cent. This compares with a country-wide, year-to-year
gain of 7 per cent in net sales and gains in other Districts,
ranging from 4 per cent for the Minneapolis and Boston Dis­
tricts to 11 per cent in the Dallas and Atlanta Districts. In
comparison with 1954, therefore, Second District department
store sales have lagged behind the rest of the country. In
1954, however, sales in this District held up better than those
in most other parts of the country. Cumulative sales figures
for the first eight months of that year were the same as in 1953
in this District, while in every other District but Boston they

were lower, averaging 3 per cent below for the United States
as a whole.
C o n t in u in g

R is e i n

C r e d i t S a le s

As the accompanying table indicates, credit sales accounted
for a somewhat higher proportion of total department store
sales in the first eight months of 1955 than they did in 1954.
Department Store Sales by Type of Transaction
in the Second Federal Reserve District
January-August, 1955 and 1954

(A s a percentage o f to ta l sales)
Credit sales

Cash sales

Charge account
























onth total...






This is a continuation of a trend evident in both the Second
District and the country as a whole since 1947. Instalment
sales accounted for 13 per cent of total sales in this District
during these months, compared with 12 per cent in the same
months of 1954, while charge account transactions continued
to account for about 32 per cent of the total. Since there is
an observable seasonal pattern in the use of credit (with
charge account sales falling off in the summer months, while
instalment sales increase), the table should be used mainly to
compare the same months from year to year.
Indexes of Department Store Sales and Stocks
Second Federal Reserve District*
(1947-49 average=100 per cent)


Sales (average daily), unadjusted.................
Sales (average daily), seasonally adjusted..
Stocks, unadjusted............................................
Stocks, seasonally adjusted.............................












* As noted last month, sales and stock indexes have been revised to improve
coverage by including several additional stores. Revised tabulations of the
sales index from 1947 and the stock index from 1952 to date and the revised
seasonal factors are available upon request from the Financial and Trade
Statistics Division of this Bank,
r Revised.

Department and Apparel Store Sales and Stocks, Second Federal Reserve
District, Percentage Change from the Preceding Year

Net sales

on hand
Aug. 31,
Aug. 1955 Jan.through Feb. through 1955
Aug. 1955
Aug. 1955


Departm stores, Second District......
N York—N
ortheastern New Jersey
etropolitan Area.....................
New York City.............................
assau County.............................
estchester County......................
orthern New Jersey....................
Fairfield County..............................
Low H
er udson River Valley..............
Upper H
udson River Valley..............
etropolitan Area..................
Central New York State...................
Utica-Rom M
e etropolitan Area......
Syracuse M
etropolitan Area..........
Northern New York State................
Southern New York State.................
Bingham M
ton etropolitan Area___
estern New York State..................
Buffalo M
etropolitan Area............
iagara Falls............................
ochester M
etropolitan Area.........
Apparel stores (chiefly New York City).



+ 5

+ 9
+ 7


+ 9
- 4
+ 3

+ 4
+ 8

+ 7

+ 7


+ 1

+ 7

+ 5
+ 4
+ 3

+ 5
+ 5

+ 4
+ 3


+ 5


+ 7

+ 1

+ 9
+ 4

+ 4

- 3
+ 12

+ 4
+ 3
+ 3
+ 1

+ 3
+ 9

+ 3
+ 3

+ 5



+ 1
+ 1


+ 3

United States and Second Federal Reserve District
Piercentage change







Latest month Latest month
from previous from year

Production and trade
Industrial production*......................................................................
Electric power output*......................................................................
Ton-miles of railway freight*..........................................................
Manufacturers’ sales*........................................................................
Manufacturers’ inventories*............................................................
Manufacturers’ new orders, total*.................................................
Manufacturers’ new orders, durable goods*................................
Retail sales*.........................................................................................
Residential construction contracts*...............................................
Nonresidential construction contracts*........................................
Prices, wages, and employment

Personal income (annual rate)*t....................................................
Composite index of wages and salaries*§.....................................
Average hours worked per week, manufacturing t .....................
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 Banks*.
Bank debits (337 centers)*..............................................................
Velocity of demand deposits (337 centers)*................................
Consumer instalment credit outstanding!.......... .........................
United States Government finance (other than borrowing)

billions of
billions of
billions of
billions of
billions of
1947-49 1947-49“


2 7 .4p
4 4 .3p
29.0 p
15 .4p

1 5 .5p


9 .8

1947-49= 100
1947-49 - 100
1947-49 - 100
billions of $
1947-49= 100

4 0 .8p

3 04.7p
4 9 ,654p




millions of $
millions of $
millions of $
millions of $
millions of $
1947-49= 100
millions of $

7 7 ,340p
3 0 ,380p


8 0 ,080p

6 3 ,569r


3 ,350r

3 ,694r


millions of $
millions of $
millions of $




+ 21
+ 3
+ 8
+1 6


+ 6
+ 4
+ 3
+ 6
+ 3
-3 1


- 4
+ 5
+ 1
+ 8

+ 112
+ 36
+ 13

— 7

+ 12

+1 7
- 1
+ 1
+ 1
- 4




Electric power output (New York and New Jersey)*...................
Residential construction contracts*...................................................
Nonresidential construction contracts*.............................................
Consumer prices (New York C ity)f..................................................
Manufacturing employment*..............................................................
Bank debits (New York City)*..........................................................
Bank debits (Second District excluding New Y'ork City)*..........
Velocity of demand deposits (New York City)*............................

1947-49 = 100
1947-49 = 100
1947-49 = 100
1947-49= 100
millions of $
millions of $
1947-49= 100

2 ,6 1 8 .9p

7 ,5 2 8 .7p
2 ,629.6

7 ,5 2 0 .0
2 ,64 2 .9

7 ,4 6 3 .2r
2 ,6 2 0 .8r


Note: Latest data available as of noon, September 30, 1955.
p Preliminary.
# Change of less than 0.5 per cent.
r Revised.
J Revised series. Back data available from U. S. Department of Commerce.
* Adjusted for seasonal variation.
§ Revised series. Back data available from Financial and Trade Statistics Division, Federal Reserve
t Seasonal variations believed to be minor; no adjustment made.
Bank of New York.
Source: A description of these series and their sources is available from the Domestic Research Division, Federal Reserve Bank of New York, on request.