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FEDERAL RESERVE BANK OF NEW YORK 207 The Business Situation Economic activity continued to expand as the third quarter ended. The August statistics gave some evidence of a slowing, primarily as a result of reduced production, orders, and shipments in the steel industry, as steel users began to work down their large strike-hedge inventories accumulated earlier in the year. The sharp drop of steel demand during August was reflected in a decline in in dustrial production. Output in other industries continued at a high level, however, in part due to a large buildup of manufacturers’ inventories other than steel. M ore over, most other indicators of business activity re mained strong. Retail sales, spurred by steadily increasing personal income and by a reduction in the savings rate, moved substantially higher in July and apparently remained at a high level over the balance of the summer. Record in creases in consumer credit have made it possible, at least temporarily, for consumers to absorb the tax surcharge and still increase their retail purchases. At the same time, lead ing indicators of residential construction are considerably stronger than most observers had expected. With significant effects of the recently enacted fiscal restraint program yet to be felt, inflationary pressures have remained, and the rise in prices has continued little changed from earlier months. PRODUCTION, INVENTORIES, AND CONSTRUCTION Industrial output fell sharply in August, largely as a re sult of rapidly declining steel production. The Federal Reserve Board’s index of industrial production dropped 1.6 percentage points to 164.0 per cent of the 1957-59 average. Aside from steel, output in most industrial sectors changed only marginally from very high July levels. In deed, the overall production index excluding iron and steel rose by a modest 0.3 percentage point. Production of auto mobiles as well as other consumer goods declined slightly, with offsetting gains recorded in the output of both busi ness and defense equipment. The August decline in iron and steel production— which amounted to roughly 23 per cent— was severe. After both the 1962 and 1965 contract settlements, it took about four months for output to decline by comparable magnitudes. Steel production fell again in September but apparently by less than half the August drop. Judging from the depleted order books, the industry’s operations will remain at a de pressed level for several months. An important factor in hibiting recovery in the domestic steel industry is the heavy volume of orders for foreign steel which were placed in anticipation of a strike. M anufacturers’ inventories surged by $1 billion in A u gust to a seasonally adjusted level of $86.9 billion, record ing the largest monthly increase of 1968. The gains were spread fairly evenly through most manufacturing sectors, led by the primary and fabricated metals, transportation, food, and textile industries. On the other hand, manufac turers’ shipments fell $1.7 billion to a seasonally adjusted annual rate of $49.4 billion. Nearly 70 per cent of the decline was accounted for by reduced shipments from steel mills, with only marginal changes in other industries. As a result of the opposite movements in the two series, the ratio of inventories to shipments in manufacturing increased from 1.68 in July to 1.76 in August, an unusually large one-month rise. New orders received by durable goods manufacturers rose in August by $200 million to a seasonally adjusted $26.8 billion. The entire gain was accounted for by sharply higher orders to the producers of transportation equip ment, especially aircraft and shipbuilding companies. The orders flow in other durable goods industries was gen erally off a bit. The primary metals industries showed the largest decline, reflecting the depressed state of the steel industry. Orders for machinery were down about 3Vi per cent, although they remained quite high relative to earlier this year. Private housing starts edged down in August by about IV 2 per cent, but remained at a strong seasonally adjusted annual rate of 1.51 million units. The fact that housing starts changed so little from the high July level suggests that the sharp surge in that month was not due to tem porary factors. The number of housing units authorized by new building permits also declined slightly in August. Though the num ber of permit authorizations has been 208 MONTHLY REVIEW, OCTOBER 1968 edging down in recent months, a new data series recently published by the Departm ent of Commerce indicates that there is a very sizable backlog of unused permits. The drop in housing starts back in M ay and June prom pted a wave of pessimism about the near-term out look for residential construction. By the same token, the July and August recovery has given rise to a fresh wave of optimism. In view of the well-known volatility of hous ing starts, such sharp swings in expectations are clearly unwarranted on the basis of starts behavior over a very short time span. INCOME, CONSUMER DEMAND, AND EMPLOYMENT Personal income rose by $5.1 billion in August to a seasonally adjusted annual rate of $694.3 billion (see Chart I ) . Although slightly less than the $5.5 billion gain registered in each of the three preceding months, the A u gust increase was right in line with the average gains of the last fifteen months. In July, wage and salary income Chart I PERSONAL INCOME AND RETAIL SALES Billions of d o llars 1966 Billio n s of d ollars 1967 1968 Source: United States Department of Commerce, Bureau of the Census. was pushed up by the pay raise for Federal Government employees. The August increase was primarily due to larger payrolls in the nondurables manufacturing and service in dustries. Other sources of personal income— such as divi dends, interest, and transfer payments— rose in August by amounts generally in line with those recorded in the last few months. Although personal income has continued to grow strongly, the income tax surcharge that became effective in July has of course had the effect of cutting back disposable income. In response to this, consumers have the option of cutting back on consumption or alternatively on savings, which has been accounting for an unusually high share of income during the past year or more. It will be some time before the consumer’s reaction to the surtax is clearly established, but so far consumer spending has been re markably strong. Retail sales edged up by a further 0.3 per cent in August, according to preliminary estimates, following an unexpectedly large July surge. The total dollar volume of durable goods sales was unchanged, while pur chases at nondurables outlets were up by 0.4 per cent. Sales of new domestically produced cars fell about 5 V2 per cent in August to a seasonally adjusted 8.6 million unit sales rate. Total consumer credit outstanding expanded by a rec ord $880 million in July and by an extraordinarily large $1.12 billion in August. The July increase was based on a continued heavy demand for durable goods, particularly automobiles, but also included a sharp upturn in the expan sion of noninstalment credit. The August increase was unusual in that all categories of consumer credit expanded at extremely high rates. Since August retail sales increased only fractionally from the high July levels, it would appear that the proportion of consumer purchases made on credit was larger than in preceding months. Some consumer credit m arket analysts think that con ditions favor a continued rapid expansion of credit: con sumers are quite solvent— outstanding debts appear to be low relative to financial assets— and they are devoting a somewhat smaller share of disposable income to instalment repayments than they did in the period of rapid credit expansion in 1965-66. W hether or not consumers continue to avail themselves of this borrowing capacity will have an important bearing on the strength of consumer demand in the months ahead. The civilian labor force declined in August by about 300,000 persons, as sizable numbers of women and teen agers left the labor force. The unemployment rates for these two groups dropped, returning to the levels which had prevailed last spring. Consequently, the overall unemployment rate fell from 3.7 per cent to 3.5 per cent, FEDERAL RESERVE BANK OF NEW YORK marking the fourth month this year in which that very low rate has been registered. The jobless rate for adult men remained at the very low level of 2.2 per cent. The num ber of jobs in nonfarm establishments rose by just over 200,000 in the month, led by increased employment in the trade, services, and government sectors. 209 Chart II CONSUMER AND WHOLESALE PRICES PRICE AND COST DEVELOPMENTS The consumer price index rose in August at a 4 per cent annual rate to 121.9 per cent of the 1957-59 base (see Chart II ). The price gains were widespread, affecting virtually all commodity and service groups. Housing costs rose at a 6 per cent annual rate, pushed up mainly by higher mortgage interest charges. Prices of food and ap parel also increased more rapidly than did the overall index. Medical care costs, however, were up only 0.3 per cent, equaling the smallest monthly increase in over two years. According to preliminary estimates, the wholesale price index jumped 0.4 percentage point in September, re bounding to the July level of 109.1 per cent of the 1957-59 average. M ost of the increase was accounted for by sharply higher prices of farm products and processed foods and feeds, which often fluctuate considerably from month to month. The index of industrial wholesale prices also moved higher, after several months of relative stability. However, this index has been significantly influenced by strike-related movements in copper prices since late last year. The very large drop in the prices of copper and copper-based products since the April labor settlement in the copper industry has held back the overall index, hiding somewhat the continuing upward movement in the wholesale prices of other industrial commodities. Copper prices had returned to pre-strike levels by August, and the September increase in the industrial wholesale price index reflected, in part, the reemergence of the underlying up- Note: Consumer prices are plotted through August; wholesale prices are plotted through September (preliminary). Source: Unifad States Department of Labor, Bureau of Labor Statistics. ward trends in the prices of many industrial commodities. Labor costs per unit of output jumped 1.6 per cent in August, the largest monthly increase since January 1967. The combination of increased labor costs in manufacturing and a sharp decline in productivity raised the index of unit labor costs in manufacturing to 112.0 per cent of the 195759 average. The productivity decline was mostly the result of the substantial drop in steel output without a commen surate reduction of hours worked in the industry. 210 MONTHLY REVIEW, OCTOBER 1968 The Money and Bond Markets in September The capital markets functioned effectively in Septem BANK RESERVES AND THE MONEY MARKET ber, distributing to investors a substantial share of the The money m arket operated smoothly during Sep overhang of unsold securities on hand when the month opened and a sizable volume of new issues. Interest rates tember, despite extraordinary pressures on the major in the several sectors of the bond m arket continued to rise banks, uncertainties resulting from a shift to new re in the first part of the month, but then moved lower or serve accounting procedures, and the usual seasonal stabilized over the remainder of the period. M arket partici churning of funds in connection with quarterly corporate pants, like most other observers of the economy, found the dividend and tax payments. Net reserve availability at economic indicators suggesting greater strength than they member banks expanded during the month, both in reflec had expected, but most continued to believe that fiscal re tion of the difficulties of reserve management in the face of straint would slow the pace of activity in the months ahead. abnormally large swings in reserve factors and in accom Moreover, at midmonth, Government securities dealers modation of the period’s special strains. M ember bank tended to take heart from the decline in day-to-day money borrowings from the Reserve Banks were little changed, rates. Also at work was widespread expectation that major averaging $492 million (see Table I) as compared with commercial banks would reduce their prime lending rate $577 million in August. Heavy flows of Federal funds once mid-September seasonal borrowing needs had been occurred on most days as major day-to-day reserve swings met. On September 24, after action earlier by a few smaller were accommodated. banks, a large New York City bank lowered its prime rate System open market operations were presented with by Vi percentage point to 6 per cent. Other major banks unusual problems during September because of large across the country subsequently took action, but limited swings in member bank reserve positions imposed by their reduction to lA percentage point. Reflecting some operating factors. After the usual decline in reserves disappointment in the m arket over the size of the prime brought about by the outflow of cash to the public over the rate reduction and the strengthened business outlook, bond Labor Day holiday, reserves mounted sharply as a result prices declined during the last few days of the month. of an $800 million decline in average Treasury balances at Money market rates edged higher early in September the Reserve Banks in the week ended on September 11 but moved irregularly lower thereafter. The Federal funds and a strong increase in float and gains from other factors rate fluctuated widely around 53A per cent during the in the week ended on September 18. Subsequently, re month. In contrast, this rate had held generally within a serves were heavily drained by a rebuilding of Treasury narrow range of 5% to 6 per cent in the latter half of balances in the last statement week of the month. In view August after the reduction in Federal Reserve discount of the short-lived nature of the reserve bulge, System open rates to 5 lA per cent began. New York City bank lending market operations made extensive use of matched salerates on new overnight loans against Government securi purchase transactions to absorb reserves temporarily. A ties collateral rose briefly in early September to a 6Vi to maximum of $1.8 billion of these transactions, whereby 6 3A per cent range, but then declined to about 6 X A per securities are sold and simultaneously repurchased for cent. Treasury bill rates rose during the first third of the delivery one or more days later, was outstanding on Sep month and declined irregularly thereafter. The bid rate tember 18. on three-month bills attained a high of 5.30 per cent The forty-six banks in the major money centers came around September 10 but fell back to close the month at under very heavy reserve pressures during the month. In 5.16 per cent. During the latter half of September, rates the first statement week, these banks had a relatively on prime commercial paper and directly placed finance high average basic reserve deficit of $2.5 billion (see company paper were lowered by Vs percentage point. Table II ), reflecting in part substantial loans to Gov- FEDERAL RESERVE BANK OF NEW YORK 211 Table I Table H FACTORS TENDING TO INCREASE OR DECREASE MEMBER BANK RESERVES, SEPTEMBER 1968 RESERVE POSITIONS OF MAJOR RESERVE CITY BANKS In m illions o f dollars; (-f) denotes increase, (—) decrease in excess reserves In m illions of dollars S E PT E M B E R 1968 Daily averages—week ended on Sept. 4 Sept. 11 Sept. IS Sept. 25 4 . 16 — 59 4 780 4- 205 4 - 801 444. — 59 691 270 62 — 59 — 400 + 17 — 659 — 43 - f 768 + 470 4 - 230 « 143 4 - 333 + 5 4-217 4 . 21 + — 275 4- 343 4 - 750 — 459 4 - 725 — 303 — 22 4- 150 0 — 15 + — 350 ! — 285 — 63 4 - 52 — 287 + 4- 721 2 Reserve excess or deficiency(— )*.... Less borrow ings from R eserve B anks ...................................... Less net interbank F ederal funds purchases or sales ( —) ......................... G ross p u rc h a se s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G ross sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total .......................................................... Excess reserves .............................................. Sept. IS Sept. 25 25 129 19 — 14 27 104 225 86 84 125 976 1,478 1,495 519 1,781 302 1,416 1,123 1,905 490 1,248 1,635 512 1,704 456 E quals net basic reserve surplus or deficit ( —) .......................................... -1 ,1 0 5 —1,575 —1,483 —1,221 N et loans to G overnm ent 1,094 1,104 1,340 securities dealers ................................. 1,303 N et carry-over, excess or deficit(—) t 22 Direct Federal Reserve credit transactions Open market instrum ents Outright holdings: Government securities ............................ Bankers’ acceptances ............................ Special certificates ................................ Repurchase agreements: Government securities ............................ Bankers' acceptances ............................ Federal agency obligations .................. Member bank borrowings ............................ Other loans, discounts, and ad v a n ces.... Sept. 11 E ight b anks in N ew Y ork City “ Market” factors Total “ m arket" factors ........................ Sept. 4 Net changes Factors Member bank required reserves ................ Operating transactions (subtotal) ............ Federal Reserve float ................................ Treasury operations* ................................ Gold and foreign account ........................ Currency outside banks ............................ Other .Federal Reserve accounts (n et)t- Averages of four weeks ended on Sept. 25 Factors affecting basic reserve positions Changes in daily averages— week ended on — 1,346 1,210 — Thirty-eight banks outside N ew Y ork City - f 312 — 2 — 698 — 647 — — + 13 — — | | . - f 80 1 4-180 — 1 — 13 _ _ __ — __ — 229 — — 941 4- 392 ! — 455 4 - 214 — 1 — — 819 „ 4 _ — ! 1 _ — — + 70 __ 4 - 101 Reserve excess or deficiency (— )*.... Less borrow ings from Reserve B anks ...................................... Less net interbank F ed eral funds purchases or sales(—) ......................... 38 84 90 201 1.322 2,095 G ross p u rch a ses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G ro ss sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,636 1,314 3,117 ! 1,022 j 5 32 213 158 2,533 ! 2,235 2,046 3,166 931 3,120 1,074 128 3,562 i 1,029 Equals net basic reserve surplus or deficit ( —) .......................................... -1 ,3 7 4 —2,211 —2,661 —2,442 N et loans to G overnm ent 929 1,092 1,215 | 1,006 securities dealers .................................. 1 | N et carry-over, excess or deficit(—)f 4- 284 — 720 4 105 1 4 266 | — 191 I — 175 j + 5 1,061 4 — ! —2,172 N o te: Because of rounding, figures do not necessarily add to totals. * F o r statem ent weeks p rior to the week ended on September 25, reserves held after all adjustm ents applicable to the reporting period less required reserves and carry-over reserve deficiencies, t N o t reflected in data above. | T able IH Daily average levels A V E R A G E IS S U IN G R A TES* A T R E G U L A R TR E A S U R Y B ILL A U C T IO N S Member bank: Total reserves, including vault cash ........ Required reserves .......................................... Excess reserves ................................................ Free (-)-) or net borrowed (— ) reserves.. Nonborrowed reserves .................................... N et carry-over, excess or deficit (—) § . . . . In p er cent 25,871 25,599 272 454 — 182 25,417 — 26,196 25,658 538 634 — 96 25,562 — 25,946 25,599 347 405 _ 58 25,541 — 25,830 25,658 172 475 — 303 25,355 115 25,961$ 25,629$ 332$ 492$ — 160$ 25,469$ Weekly auction dates— September 196S Maturities Sept. 9 Sept. 16 Sept. 23 Sept. 30 T hree-m onth.................................... 5.246 5.218 5.151 5.182 Six-m onth......................................... 5.277 5.248 5.230 5.283 — Changes in Wednesday levels Monthly auction dates—July-September 196S System Account holdings of Government securities maturing in: 4-110 —1,844 4 - 68 — — 557 42,010 — — 281 + G8 4- 178 —1,844 — 557 + 2,010 — 213 Note: Because of rounding, figures do not necessarily add to totals. * Includes changes in Treasury currency and cash, t Includes assets denominated in foreign currencies. t Average of four weeks ended on September 25, 1968. § Not included in average levels of excess or free reserves. July 24 Aug. 27 Sept. 24 N ine-m onth.. 5.342 5.245 5.202 O ne-year....... 5.309 5.151 5.108 * Interest rates on bills are quoted in term s of a 360-day year, with the discounts from p a r as the re tu rn on the face am ount of the bills payable at m aturity. Bond yield equivalents, related to the am ount actually invested, w ould be slightly higher. 212 MONTHLY REVIEW, OCTOBER 1968 ernment securities dealers and continued acquisitions of investments apparently in the expectation of lower interest rates during the month ahead. Seasonal credit de mands and a rapid rundown of Treasury Tax and Loan Account balances before the September 16 tax date led to an increase in the basic deficit to $4.1 billion in the week ended on September 18. This was a considerably larger deterioration in position than normal for the season. Sub sequently, the rebuilding of Government deposits at the major banks, a decline in loans, and other seasonal factors led to a marked relaxation of pressure. By the end of the month, the daily basic reserve deficit of the forty-six banks had fallen sharply. The major money market banks managed their reserve positions cautiously during the September 11 statement week. Confronted with a sharp increase in their basic reserve deficit to an average of $3.8 billion for the week, they bid heavily in the Federal funds m arket and borrowed in volume at the “discount window” . Federal funds traded predominantly at 6 per cent during the early part of the week, but transactions took place at rates as low as 2 per cent on Wednesday when cumulative excesses flooded into the market at the close of the last biweekly period for “country” banks. The initiation of new reserve accounting procedures by the Federal Reserve System in the week ended on Sep tember 18 exerted a significant influence on the reserves and behavior of banks during the month. Under the new procedures, all member banks are required to meet their daily average reserve requirements on a weekly basis, whereas country banks had previously had a biweekly statement period. In addition, beginning in that week the reserve requirements of all banks are based on average de posits two weeks earlier rather than on current deposits. The vault cash component of the banks’ total reserves is recorded with the same two-week lag. An additional ele ment of the new system permits member banks to carry forward into the following reserve week excesses or deficits up to a limit of 2 per cent of average required reserves. The transition to the new accounting procedures in the September 18 statement week compounded the uncertain ties normally present in the banking system around the cor porate tax date. As the average basic deficit of the forty-six banks mounted to a record high, the major banks bid heavily for funds and also borrowed from the Reserve Banks. Nevertheless, the money market remained relatively steady, with Federal funds trading primarily at 5% per cent. In the final statement week of the month, the money market banks experienced a m oderate improvement in their basic reserve positions. At the same time, they were able to carry over about $25 million of average excess reserves from the preceding week under the new reserve account ing rules. In consequence, the banks appeared willing to accumulate sizable reserve deficiencies through much of the week, contributing to a somewhat more comfortable tone in the Federal funds market. However, when these banks scrambled to cover their deficiencies on the final day, the Federal funds rate rose as high as 6 V4 per cent, and member bank borrowings from the Federal Reserve bulged to $1.6 billion. The experience of the first two weeks under the new procedures suggests that reserve city banks were able to economize considerably on excess reserves, but that country banks were less quick in adapting to obtain the full benefits of the new system. The reductions in rates on commercial and finance company paper, which occurred on September 18 and 26, respectively, brought the rate on prime four- to six-month commercial paper to 5% per cent and that on directly placed finance company paper maturing in sixty days or more to 5 V2 per cent. Offering rates posted by the New York City banks on new large-denomination negotiable certificates of deposit (C /D ’s) were largely unchanged dur ing September at levels well below Regulation Q ceilings. A t these rates, the weekly reporting banks experienced a mild net erosion of their C /D liabilities, amounting to $81 million for the four statement weeks ended on September 25. This loss of funds was more than compensated for by an increase in liabilities to the banks’ own foreign branches. The apparent preference of the banks for Euro-dollars was related in part to the easing in rates on these funds during most of September. THE GOVERNMENT SECURITIES MARKET Prices of Treasury coupon securities drifted lower dur ing the first part of September, but recovered before the middle of the month when the prevailing mood over the future trend of interest rates shifted from pessimism to optimism. Nevertheless, caution again emerged near the end of the period, as it became evident that the econ omy remained more robust than had been expected by many observers. A t the beginning of the month, market opinion seemed inclined to the view that further declines in yields would be dependent upon definite signs of slacken ing in business activity. With a majority of economic indi cators pointing to a continued strong upward movement of the economy, prices of coupon securities came under downward pressure. Additional price depressants in the Treasury m arket came from the unrelieved congestion in the markets for corporate and tax-exempt debt issues and from an announcement at the start of the month of a sizable financing by the International Bank for Recon- 213 FEDERAL RESERVE BANK OF NEW YORK SELECTED INTEREST RATES M O N EY MARKET RATES Ju ly A u gu st July-Septem ber 1968 Septem ber B O N D M ARKET YIELD S Ju ly A u gu st Sep tem b e r Note: Data are shown for b usiness d ays oniy. M O N EY MARKET RATES QUOTED: D aily ran ge of rates posted by major New York City banks on new coll loans jin Federal funds) secured by United States G overnm ent securities (a point point from underw riting syn d icate re offerin g yield on a given issue to market yield on the sam e issue im m ediately after it has been rele ased from syndicate restrictions); daily indicates the ab sen ce of any ran ge); offering rates for d irectly p laced finance com pany paper; the effective rate on Fed eral funds (the rate most representative of the transactions executed); av e rage s of yields on lo n g -term Governm ent securities (bonds due or ca lla b le in ten years clo sing bid rates (quoted in terms of rate of discount) on newest outstanding three- and six-month clo sing bid prices; Thursday av e rage s of yields on twenty seasoned twenty-year tax-exem pt T rea sury b ills. B O N D MARKET YIELDS Q UO TED: Y ie ld s on new A a a - and A a-rated public utility bonds are plotted around a line show ing d a ily a v e ra g e yield s on seasoned A aa-ra ted c o rporate bonds (arrows struction and Development (IB R D ) scheduled for later in September. Isolated instances of reductions in prime lend ing rates of commercial banks outside New Y ork City had no market effect, since these moves were widely re garded as premature. In the climate that prevailed, inves tors generally preferred to sit on the sidelines awaiting further interest rate developments, and trading was largely professional. Toward midmonth, m arket sentiment was buoyed by the publication of weekly reserve statistics, revealing a sub stantial reduction in the level of net borrowed reserves during the September 11 statement week. This event sparked a technical price rally which generated a revival of investment demand, mainly for intermediate-term cou pon securities. Encouraged by this demand, and also by or more) and of G overnm ent securities due in three to five years, computed on the b asis of bonds (carrying M oody’s ratings of A a a , A a, A, and Baa). Sources: F e d eral Reserve Bank of New York, Board of G overno rs of the Federal Reserve System. M oody's Investors Service, and The W e e kly Bond Buyer. some temporary easing of the money market and a reduc tion in their financing costs, dealers were reluctant to reduce their own holdings of coupon issues. Subsequently, the upward price movement was given further impetus by the bullish content of m arket advisory letters and by a marked improvement in the condition of the corporate and tax-exempt bond markets. Added factors in the m ar ket strength were the successful distribution of the new IBRD issue, the lowering of the British bank rate, and the report of an August decline in industrial production, all of which occurred soon after midmonth. Announce ments of a reduction in the prime rate at major New York City banks on September 24 and 25 had little net impact on the market, since rumors concerning this move had cir culated widely after midmonth and the emergence of a MONTHLY REVIEW, OCTOBER 1968 214 split rate proved a disappointment to m arket participants. As the month drew to a close, m arket enthusiasm tended to be dampened by fresh evidence of continuing strong inflationary pressures in the economy. Prices of interme diate coupon maturities, in strong demand around mid month, closed Vs point lower to V4 point higher for the month, while long-term issues closed about V A points lower. M arket rates on Treasury bills moved in a pattern similar to that of yields on coupon securities during Sep tember, rising early in the month and declining thereafter. Throughout the period, there was a strong demand for issues maturing in the tax months of December 1968 and M arch 1969. The relative scarcity of these maturities was gradually relieved over the month, as the supply increased with each regular weekly auction of three- and six-month bills. Bidding in these auctions was generally quite ag gressive. In the first auction of the month, the three- and six-month bills were awarded at average issuing rates of 5.25 and 5.28 per cent, respectively, 5 and 3 basis points higher than rates established in the preceding auction (advanced to Friday, August 30, because of the Labor Day holiday). In two subsequent auctions, average issu ing rates also moved lower, but in the final weekly auction rates rose slightly (see Table I I I). Around midmonth, as a better atmosphere began to emerge in the Government coupon market, the Trea sury bill sector was given an added lift by a sharp easing of money m arket conditions, which spurred professional buying, and by a contraseasonal tax-period investment demand. Toward the latter part of the month, commercial banks made purchases prior to the September 30 statement publishing date. On balance for the month, m arket rates on outstanding Treasury bills changed only slightly, de clining to 5.16 per cent for the three-month issue and rising to 5.28 per cent for the six-month issue. OTHER SECURITIES MARKETS During the first half of September, the corporate and tax-exempt bond markets labored under heavy pressure, reflecting the carry-over of large unsold balances of August debt offerings and a continuing heavy volume of new financing. The tax-exempt m arket was in a particularly poor technical position as the month opened, with the Blue List of dealers’ advertised inventories at a near record high of $794 million. Despite the rapid flow of new offerings and the release of a substantial volume of re cently floated securities through syndicate terminations, dealers succeeded in reducing inventories steadily over the first half of the month. Price concessions on older issues were deep, however, and new issues were m arketed at a higher pattern of reoffering yields. The relatively large num ber of syndicate terminations during the period resulted in upward yield adjustments of as much as 30 basis points on tax-exempt securities and 16 basis points on corporates. One corporate termination occurred on September 17, when the m arket felt the impact of the highly successful sale of long-term bonds by the IBRD. The $250 million issue, carrying 121^-year call protec tion, sold out rapidly at a yield of 6.435 per cent, 11 basis points lower than that on the last previous offering by the same borrower in late M arch but somewhat higher than many observers had expected. A t mid-September, the six-week decline in prices of tax-exempt securities came to a halt, and pressures on the corporate market also lifted, though less dramatically. Rumors of an impending decline in the prime lending rate in New York City, which began to circulate around midmonth, had a relatively greater effect on tax-exempt securities, generating an active demand from commercial banks and dealers alike. Trading in tax exempts remained brisk over much of the month, and the larger part of the m onth’s heavy new offerings was distributed without dif ficulty at a moderately reduced level of reoffering yields. A fter declining to a September low of $584 million, the Blue List rose to close the month at $663 million, still well below its starting level. The W eekly Bond Buyer’s average yield on twenty seasoned tax-exempt issues (car rying ratings from Aaa to B aa) declined from a monthly high of 4.44 per cent in early September to 4.30 per cent near the month end (see chart on page 21 3 ). In contrast, yields on seasoned corporate issues registered an increase for the month, the average yield on M oody’s Aaa-rated bonds closing at 6.00 per cent as compared with 5.96 per cent at the end of August. FEDERAL RESERVE BANK OF NEW YORK 215 Commercial Banks and the Government Securities Market B y J o se p h S c h e r e r * Commercial banks are a dominant force in the market for United States Government securities. They are still the largest single ownership group, even though their hold ings have declined in the postwar years, both absolutely and as a percentage of the total Federal debt outstanding. And, aside from dealers and brokers, banks are also the heaviest participants in the Government securities market, buying and selling for their own account and as agents for their customers. Moreover, the United States Government securities market is itself the largest and most active financial market in the country. For instance, in 1967 the dollar value of total trading in Government securities far exceeded the volume of trading on the registered stock exchanges. M arketable Government obligations serve a variety of purposes in the portfolios of commercial banks. Most obviously, these investments are an im portant source of income. In 1967, for example, the interest earned by com mercial banks on their portfolios of Government securi ties exceeded $2x/ i billion, almost 14 per cent of bank earnings from total loans and investments. In addition to providing income, Government securities— especially short and intermediate maturities— provide liquidity because they are the most readily marketable of all fixed-income securities. Consequently, the United States Government securities market is a principal avenue by which banks adjust their reserve positions. Moreover, as a m atter of con venience, commercial bank borrowings from the Federal Reserve “discount window” in recent years have been se cured chiefly by Government obligations rather than by rediscounting commercial paper. Government securities are also used as a temporary haven for funds in order to secure income at times when demand for bank loans is low, either for seasonal or cyclical reasons. Finally, they serve * Economist, Domestic Research Division. as collateral to secure governmental (Federal, state, and local) bank deposits, which typically require such protec tion. Over time, of course, there is considerable shifting in the relative importance of each of these motives for pur chasing and holding United States Government securities. Banks, of course, also invest and trade in these securities for their trust accounts, but this article deals only with banks’ direct holdings. In managing its portfolio of Government securities to serve these various objectives, the individual bank must constantly reassess its position and decide what avenues, singly or in combination, it will choose to achieve its objectives. Thus, the passage of time automatically shortens the maturity composition of a bank’s holdings without any overt action by the bank. On the other hand, deci sions must be made, and implemented, if a bank wishes to acquire new issues offered for cash and exchange by the Treasury. Finally, a bank must weigh the relative attractiveness of making adjustments in its portfolio through the purchase or sale of outstanding issues in the secondary market. This article does not explore the decision-making process of an individual bank; rather it is concerned with explaining the observed variations in the holdings of United States Government securities of the commercial banking system as a whole. Unfortunately, the standard published data on bank holdings of Government securities are inadequate for properly identifying the factors which, in the aggregate, explain the changes in bank holdings. A retabulation of the available data, however, makes it possible to assess the relative importance of new Treasury borrowings, of the progression of outstanding issues toward maturity, and of secondary m arket activity of commercial banks on changes in the level of total bank holdings and in the level of holdings in particular maturity classes. Failure to account explicitly for these influences— in particular the passage of time— may introduce significant errors. Some of the highlights of this study are briefly sum marized here. The most important single factor influenc 216 MONTHLY REVIEW, OCTOBER 1968 ing the level of total bank holdings of Government securi ties since 1951, as well as holdings in broad maturity sec tors, has been bank acquisition of new securities in Trea sury financings in both cash operations and exchange operations. Acquisition of new issues has averaged about $8 billion per quarter. Second in importance has been the passage of time, which has operated to reduce hold ings by about §5V2 billion per quarter on the average. Third in importance is net m arket transactions of outstand ing issues, which have averaged about $2 billion of sales per quarter. The relative importance of these three factors in each of the broad maturity classifications— short, inter mediate, and long— is approximately the same, although the dollar magnitudes drop off sharply in the intermediate and long sectors as compared with the short sector. Net m arket transactions (purchases less sales) typi cally have been negative; that is, on balance, commercial banks sell more Government securities in the secondary m arket than they buy. Several factors help explain this statistical finding, including the special tax position of banks, the underwriting role played by banks in some Treasury operations, and the tendency of banks to liquidate holdings of Governments to undertake other bank credit activities. The timing and magnitude of bank sales of Gov ernment securities is, of course, also influenced by market conditions as they are affected by other participants in the market, including the Federal Reserve System’s conduct of open m arket operations. However, the overall result is due entirely to net selling in the short- and intermediateterm sectors. Net m arket transactions in the long maturity sector, by contrast, typically have been positive; that is, on balance, the banking system buys outstanding issues over five years to maturity. The different pattern in the long sector probably stems from the relative infrequency of new issues in this maturity sector, so that banks must acquire securities in the secondary market to maintain a balanced portfolio as the erosion of time reduces their holdings in this area. In addition, the special tax position of the banks prob ably provides an incentive to acquire those longer issues in the market which are selling appreciably under par. Among the three maturity classes (short, intermediate, and long) the most regular cycle-related pattern— an inverse relationship— is found in the long maturity sector, where holdings increase during the recession period and are reduced during the recovery. This pattern has been modified since the advance refunding technique was intro duced in 1960. The reduction in holdings of long-term securities in the recovery period stems primarily from the movement of large amounts into the intermediate maturity classification as time passes, rather than from m arket sales out of banks’ portfolios. CYCLICAL. PATTERN OF COMMERCIAL BANK HOLDINGS OF GOVERNMENT SECURITIES p a t t e r n s b a s e d o n p u b l i s h e d d a t a . For banks included in the Treasury’s Survey of Ownership,1 there has been no strong secular trend in total commercial bank holdings of Government securities in recent years. Since 1954, holdings have fluctuated within a band some $14 billion wide, ranging from $45 billion to $59 billion (see Chart I) . Fluctuations within this band, however, display a pronounced cyclical pattern, with total holdings attaining a peak about two or three quarters after the cyclical troughs and bottoming out approximately at the cyclical peaks. Total bank holdings of Government securities tend to trace a cyclical path roughly the inverse of that traced by bank loans. In periods of recession when loan demand is weak relative to deposit flows, banks seek other incomeproducing uses for their available funds and therefore add to their investment portfolios, particularly United States Government securities. Then, when business activity picks up and loan demands grow stronger, holdings of Govern ment securities are partially liquidated to provide ad ditional funds for financing the growing demand for loans. To pinpoint more precisely the avenues whereby these cyclical adjustments take place, it is necessary to examine changes in the components of total bank holdings. The conventional grouping of Government securities is by years to maturity in three categories— less than one year, one to five years, and five years or more— as shown in Chart I. While these series provide valuable information, at times they are subject to misinterpretation. In subsequent sec tions, the interpretation of these data will be discussed, and new data will be presented to picture more accurately some of the factors that influence the level of commer cial bank holdings of Government securities. The component displaying the strongest cycle-related pattern, again an inverse relationship to business activ ity, is the long-term maturity sector (five years or more to m aturity) in which holdings increase for about four quar ters after each cyclical peak, and then as the next cycli cal peak is approached bank holdings of these long-term 1 Although the survey includes only about 6,000 out of an ap proximate 14,000 commercial banks, the marketable Government securities held by these reporting banks represent about 90 per cent of the total held by commercial banks. Consequently, the survey data are a good proxy for the holdings of the entire commercial banking system. FEDERAL RESERVE BANK OF NEW YORK 217 tion in the amount of bank holdings of such securities is often interpreted as a market sale of these securities when COMMERCIAL BANK HOLDINGS OF MARKETABLE UNITED STATES GOVERNMENT SECURITIES in fact this is not the reason for the decline in holdings. B illio n s of d o lla rs Billio n s of d o lla rs Some observers of this cyclical pattern of increase in bank holdings of long-term Governments in periods of reces sion and of reduction of holdings as a cyclical peak ap proaches have wondered whether such behavior is not questionable from a profit-maximizing point of view. This view, that banks frequently liquidate large amounts of long-term Government securities at a loss to finance their loan expansion, is examined critically in a later section. The cyclical pattern of holdings becomes less regular when bank holdings of Government obligations in other than the long maturity sector are examined. For the years just prior to the cyclical peak in 1957, the decline in Government securities, which was concentrated mainly in the long sector, appears to have been partially offset by additions to bank holdings in the intermediate maturity sector (one to five years to m aturity) and to a lesser extent in the short maturity sector (less than one year to m aturity). On the other hand, in the years just prior to the 1960 cyclical peak, bank liquidation of Government securities was concentrated about equally in the short Note: Shaded areas represent recession periods, according to the National Bureau sector and the long sector, while the intermediate sector of Economic Research chronology. showed substantial, though irregular, increases. In sum Source: United States Department of the Treasury, Treasury Bulletin. mary, then, only the long maturity category regularly shows consistent declines as the cyclical peak is ap proached (except for the period when advance refundings have modified the pattern for this maturity sector). Government securities decline. Two factors work in tan What lies behind this diversity of movement among the dem to create this pattern. First, during the postwar period three maturity sectors? In part, different patterns reflect the Treasury confined most of its offerings of long-term the special influences in each maturity sector as, for securities to recession periods, because at that time the example, those already mentioned for the long maturity supply of long-term funds seeking investment outlets was sector. But these special influences do not account for all large as compared with the demand for such funds. the differences. Some of the alleged differences can be Long-term rates tend to be low, thus minimizing the attributed to the data which are not always in the appro longer run cost of carrying the debt. Second, as already priate form for the problem under investigation. noted, during periods of recession banks are eager to find Bank holdings of Government securities, as shown on investment outlets for idle funds, since the demand for Chart I, give the level of bank holdings of these securi bank loans is relatively slack at such a time. While this ties. But changes in the levels for any maturity sector, or pattern has been modified to some extent with the introduc for the total, do not necessarily reflect m arket activity, tion by the Treasury of the advance refunding technique i.e., purchases and sales of outstanding securities. To in 1960, the basic contour remains essentially unchanged.2 analyze properly the changes in the level of holdings in A problem arises, however, in using the standard series each of the standard maturity classifications, data in the for the outstanding long-term securities, because a reduc Treasury’s Survey of Ownership must be reclassified to separate three different factors: (1 ) changes due to purchases and sales of outstanding issues, (2 ) changes due to new issues acquired through Treasury cash financings and exchange operations, and (3 ) changes due to the 2 In an advance refunding, the Treasury offers owners of a given inevitable impact of the passage of time which moves issue which still has some time to run the opportunity to exchange outstanding issues into ever-shorter maturity classifications their holdings for securities of longer maturity. C h art I MONTHLY REVIEW, OCTOBER 1968 218 until the issues reach final maturity and are redeemed. Such a reclassification of the available data can be made by tracing what happens over time to each individual issue as reported in the Treasury’s Survey of Ownership. PATTERNS BASED ON RECLASSIFIED DATA. The results of such a reclassification of the data for total holdings are summarized in Chart II. Almost invariably, the acquisition of new issues in Treasury financings for cash and exchange has constituted the largest single factor affecting the size of bank holdings. In most quarters, purchases of new is sues (for cash and exchange) run between $6 billion to $10 billion; occasionally, such purchases have totaled $14 billion. To a considerable extent, purchases on such a scale are inevitable, even when the banking system is reducing its total holdings, because the passage of time carries large blocks of securities to final maturity and banks generally do not want to reduce their holdings by the full amount of the maturing issues. Runoffs of issues due to the passage of time, on the C hart i! SOURCES OF CHANGES IN COMMERCIAL BANK HOLDINGS OF TOTAL MARKETABLE UNITED STATES GOVERNMENT SECURITIES Billions of dollars iillio n s of d ollars Note: Shaded areas represent recession periods, according to the National Bureau of Economic Research chronology. Source: United States Department of the Treasury, Treasury Bulletin. other hand, generally range from $4 billion to $8 billion per quarter. These include, not only Treasury bill issues, but also large amounts of coupon issues which have reached maturity. Finally, market sales of outstandings usually are greater than purchases, so that net secondary market activity (purchases less sales) is almost always negative— that is, on balance, the banking system is almost always selling in the m arket for its own account. Such sell ing generally ranged between $1 billion to $3 billion per quarter prior to 1958 and from $2 billion to $4 billion from 1958-67. In a broad overview, then, the portfolio of Government obligations is continuously subject to large-scale reductions in size and to marked shortening of the maturity structure because of the automatic erosion stemming from the pas sage of time. New Treasury financings and the passage of time frequently account for a larger share of the changes in the level of bank holdings than secondary market purchases and sales. Nonetheless, market trans actions play a critical role in the management of the port folio. The ready marketability of Government securities provides the most flexible avenue for portfolio adjustments to meet the varying needs of banks responding to their own changing situations— changes which are related not only to local influences but also to developments in the economy as a whole, including monetary policy develop ments. Without an efficient secondary market in Govern ment securities, the role of these securities as a liquidity instrument would be appreciably reduced. Short maturity sector. A complex picture emerges from an examination of specific maturity sectors. The pat terns in the short maturity sector (less than one year to m aturity) are generally similar to those already described for the total, except that the dollar totals in each category are somewhat smaller than those for the same category of total holdings. Acquisition of new issues in Treasury financings— cash and exchange— is the largest single vari able (see Chart II I). Activity in bill issues is always heavy, even in periods when total holdings of Governments are unchanged, or declining, because large amounts of bills are maturing every week. Banks are likely to replace maturing bills, at least to some extent, by new purchases in the bill auctions. During most of the period since 1950, purchases of new short-term issues for cash and in ex changes have ranged between $4 billion to $8 billion per quarter, although at times they have fallen as low as $3 billion and risen as high as $11 billion. On the other hand, the banking system, on balance, sells more short-term securities in the secondary market than it buys, generally supplying (net) from $1 billion to $3 billion per quarter. Passage of time in the short maturity sector typically 219 FEDERAL RESERVE BANK OF NEW YORK C hart III SOURCES OF CHANGES IN COMMERCIAL BANK HOLDINGS OF MARKETABLE UNITED STATES GOVERNMENT SECURITIES LE S S T H A N O N E Y E A R T O M ATURITY Billions of d ollars Billions of d ollars 12f ^ A cq u isitio n s of new issues ' (cash an d e xch an ge ) , * , , '1 vy\J * \! i* \ A / vV - maturity sector, as in the short maturity sector, passage of time is two directional: that is, large blocks of issues periodically fall out of the long maturity sector adding to the intermediate sector, while at the other end large blocks of intermediate issues move into the short sector. The interplay of these two forces in the intermediate sector produces results much more varied from those shown in the short sector. Passage of time has a very irregular influence, at times adding and at times subtracting large or small amounts (see Chart IV ). Passage of time usually ranges from losses to the intermediate sector of more than $4 bil lion to gains of the same amount. In one instance, gains almost reached $7.5 billion. A change of $4 billion from one quarter to the next is not at all unusual. Indeed, in many quarters passage of time is the most im portant single influence on the level of intermediate-term holdings. Passage of time also accounts for much of the apparent anomaly noted earlier— that, even though total bank hold ings of Government securities were declining as the 1957 cyclical peak was approaching the normal pattern for total P a s s a g e of tim e \\\ 1951 52 53 54 i m i l l l l l l i m M l M l l l l l l l l i l l lllMllMI 55 56 57 58 59 60 61 62 63 64 65 66 67 Note: Shaded areas represent recession periods, according to the National Bureau of Economic Research chronology. Source: United States Department of the Treasury, Treasury Bulletin. C h e rt IV SOURCES OF C H A N G E S IN COMMERCIAL BANK HOLDINGS OF MARKETABLE UNITED STATES GOVERNMENT SECURITIES Millions of d o llars operates to run off securities in amounts ranging from $1 billion to $5 billion per quarter, although the actual spread varies from a gain of billion to a runoff of more than $9 billion. The wide variability of passage of time, with fairly wide fluctuations from one quarter to the next, stems from two opposing forces at work in this sector. There are always large amounts of securities reaching maturity, both bills and coupon issues; but as time passes there are also large amounts of securities dropping into this maturity sec tor from the intermediate maturity sector (one to five years to m aturity). Occasionally, therefore, passage of time ac tually adds to the total holdings in the short sector because the drop-ins exceed the runoffs. Thus, specific allowance must be made for the impact of the passage of time if all the im portant factors at work influencing the size and maturity distribution of these holdings are to be identified. This factor, however, is generally more important for analyzing the changes taking place in the longer maturity sectors, as noted below. Intermediate maturity sector. In the intermediate Source: Unifed States O N E T O FIVE Y E A R S T O M A TU R ITY Billions of dollars Treasury Bulletin. 220 MONTHLY REVIEW, OCTOBER 1968 holdings over the cycle, bank holdings of intermediate Government securities were increasing. The increase in holdings of intermediate securities at that time stemmed from the unusually large block— almost $7.5 billion— of long-term securities which dropped into the intermedi ate sector just a few quarters before the 1957 peak. It is to be expected that secondary m arket activity in the intermediate sector should run considerably smaller than in the short sector. Similar to the short maturity sector, purchases of outstanding issues are typically much smaller than sales, so that net market activity is almost always on the selling side and generally amounts to less than $1 billion per quarter. However, net market sales ranged between $1 billion to $2 billion during 1959 and 1960, coinciding with the period when total outstandings in this maturity sector were at a peak. Long maturity sector. The long maturity sector often attracts much attention because the cyclical pattern of total bank holdings of Government securities seems to be reflected most strongly and regularly in this sector. It was noted earlier that banks increase their holdings of long Government securities for several quarters after the cycli cal peak and then reduce their holdings during the business expansion. As shown in C hart V, the increase in holdings occurs primarily through the acquisition of new issues, either for cash or exchange, via Treasury financings, fol lowed by long periods of inactivity during which the Treasury offers no further new issues in this maturity category (again, with the exception of the period since the advance refunding technique was introduced). Contrary to widely held views, the reduction in holdings in this sector as the business expansion proceeds is not accomplished primarily by sales of outstanding issues in the secondary market. Instead, the reduction mainly arises from the heavy shift of securities from this sec tor to the intermediate sector due to the passage of time, which inexorably shortens the maturity of every security once it is issued. Generally, large blocks of securities, often totaling more than $2 billion per quarter, move out of this sector in at least two quarters of each year and drop into the intermediate maturity classification. It is now possible to explain why banks buy long-term Government securities during recession when interest rates are low to earn some income and then appear to sell them at a loss during the recovery when they seek additional funds to help finance loan expansion. The evidence cited for this seemingly irrational behavior is the decline in bank holdings of long-term securities— those classified as five years or more to maturity. But, in fact, the bulk of the reduction of bank holdings in the long maturity sector does not come through m arket sales but through the passage of time. Liquidation of total bank holdings through market sales takes place primarily in the short and intermediate maturity sectors, as shown above. Despite the overriding importance of Treasury financ ings and the passage of time, market purchases and sales do play a significant role. In part, the amount of market activity is a function of the total amount outstanding in the sector, so that activity tended to be smaller during the midfifties when the amount outstanding was particu larly small as compared with the years preceding or follow ing the midfifties. Unlike the other maturity sectors, how ever, net market activity is frequently on the buying side, which probably reflects, at least to some extent, the relative infrequency of new long-term Treasury offerings. Market purchases and sales of long-term Treasury issues, as in other maturity sectors, provide an avenue whereby banks can adjust their portfolios whenever they find that their holdings are not at desired levels or well balanced in their maturity distribution. A bank may use the market to adjust its position when securities acquired Chort V SOURCES OF CHANGES IN COMMERCIAL BANK HOLDINGS OF MARKETABLE UNITED STATES GOVERNMENT SECURITIES Note: Shaded areas represent recession periods, according to the National Bureau of Economic Research chronology. Source-. United States Department of the Treasury, Treasury Bulletin. FEDERAL RESERVE BANK OF NEW YORK in a new financing exceed its needs— a situation which may prevail when a new financing for cash allows a bank to pay for its purchases by crediting its Tax and Loan Account. Likewise, a bank may use the m arket to increase its holdings when it acquires less than it desires of a security because the allotment turns out to be smaller than anticipated. In addition, if banks wish to restore the pre vious maturity mix, which has been shortened by the pas sage of time, there are periods when it can be accom plished only through m arket transactions, if no additional long-term securities are being offered by the Treasury. A portion of the m arket activity recorded in Chart V (as well as the market activity in the intermediate sec tor, shown in Chart IV ) may also arise from the fact that securities in this maturity sector at times sell at large discounts below par. Some m arket transactions in this sector (and in the intermediate sector) undoubtedly can be traced to the special tax position of banks. Unlike other financial institutions, banks may use the capital gains tax rate for their net long-term capital gains on Government securities and deduct losses on these securities against ordinary income subject to regular tax rates. With such tax flexibility, they can minimize the tax bite in years when sales of Government obligations are profitable by choosing the capital gains option, but in years of losses banks can deduct the full loss against other income by treating transactions in Government obligations as ordi nary income. This tax option makes long-term Government securi ties an attractive investment whenever a coupon issue is selling significantly below par and there still is sufficient time to run on the issue so that it may again be quoted at or near par. The tax option on Government securities also is likely to increase the total amount of gross market 221 activity above that which otherwise might take place because it encourages “tax swaps”. Thus, a bank might sell a particular issue of Government securities at a loss, deducting it against ordinary current income. A t the same time, by simultaneously purchasing a different, though similar, issue of Government securities, which is also selling below par, the bank maintains an approximately unchanged asset position. This swap establishes the base for realizing potential capital gains in the future if the securities should rise in price because of interest rate changes. Tax swaps do not change the total amount of long-term securities held by commercial banks as a group, and consequently such transactions are not reflected in the statistics on “net market activity” by maturity classifi cation. CONCLUDING COMiViENTS This article has dealt with only selected aspects of the relationships between commercial banks and the United States Government securities market. It has, for instance, largely ignored the mechanisms by which policy actions of the Federal Reserve System influence the behavior of the commercial banking system in the market. Also, as noted earlier, commercial banks buy and sell Government securities for their customers, but such transactions, in cluding those made by a bank’s trust department, were not considered in this article. Instead, this article has empha sized some neglected aspects of bank operations for their own account in the Government securities market. The fact that a reworking of the available published data reveals new empirical generalizations suggests that additional insights might be obtained by further examinations of the data at a more detailed level than has been customary. MONTHLY REVIEW, OCTOBER 1968 Publications of the Federal Reserve Bank of New York The following is a selected list of publications available from the Public Information Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, N. Y. 10045. Copies of charge pub lications are available at half price to educational institutions, unless otherwise noted. 1. c e n t r a l b a n k c o o p e r a t i o n : 1924-31 (1967) by Stephen V. O. Clarke. 234 pages. Dis cusses the efforts of American, British, French, and German central bankers to reestablish and maintain international financial stability between 1924 and 1931. ($2 per copy.) 2. e s s a y s i n m o n e y a n d c r e d i t (1964) 76 pages. Contains articles on select subjects in bank ing and the money market. (40 cents per copy.) 3. k e e p i n g o u r m o n e y h e a l t h y (1966) 16 pages. An illustrated prim er on how the Federal R e serve works to promote price stability, full employment, and economic growth. Designed mainly for sec ondary schools, but useful as an elementary introduction to the Federal Reserve. ($6 per 100 for copies in excess of 100.*) 4. m o n e y a n d e c o n o m i c b a l a n c e (1967) 27 pages. A teacher’s supplement to Keeping Our M oney Healthy. Written for secondary school teachers and students of economics and banking. ($8 per 100 for copies in excess of 100.*) 5. m o n e y , b a n k i n g , a n d c r e d i t i n e a s t e r n e u r o p e (1966) by George Garvy. 167 pages. Reviews recent changes in the monetary systems of the seven communist countries in Eastern Europe and the steps taken toward greater reliance on financial incentives. ($1.25 per copy; 65 cents per copy to edu cational institutions.) 6. m o n e y : m a s t e r o r s e r v a n t ? (1966) by Thomas O. Waage. 48 pages. Explains the role of money and the Federal Reserve in the economy. Intended for students of economics and banking. ($13 per 100 for copies in excess of 100.*) 7. p e r s p e c t i v e (January 1968) 9 pages. A layman’s guide to the economic and financial highlights of the previous year. ($7 per 100 for copies in excess of 100.*) 8. t h e n e w y o r k f o r e i g n e x c h a n g e m a r k e t (1965) by Alan R. Holmes and Francis H. Schott. 64 pages. Describes the organization and instruments of the foreign exchange market, the techniques of exchange trading, and the relationship between spot and forward rates. (50 cents per copy.) 9. t h e s t o r y o f c h e c k s (1966) 20 pages. An illustrated description of the origin and develop ment of checks and the growth and automation of check collection. Primarily for secondary schools but useful as a primer on check collection. ($4 per 100 for copies in excess of 100.*) * Unlimited number of copies available to educational institutions without charge. Subscriptions to the m o n t h l y r e v i e w are available to the public without charge. Additional copies of any issue may be obtained from the Public Information Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, N.Y. 10045.
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