Full text of Economic Policy Review (Federal Reserve Bank of New York) : October 1975, Vol. 57, No. 10

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FEDERAL RESERVE BANK OF NEW YORK

235

The Business Situation

T he pace of the econom ic recovery seems to have picked
up a b it in recent m onths, b u t the upw ard th ru st is still
com ing from only a few sectors of the econom y. In A u ­
gust, large and broadly based gains w ere registered in
industrial production, em ploym ent, new durables orders,
and personal income. In Septem ber, m oreover, there was
a healthy advance in payroll em ploym ent and the overall
unem ploym ent rate inched down to 8.3 percent. O n the
other hand, retail sales posted an outright decline in A u ­
gust, while autom otive sales have been sluggish since July.
In any event, it appears th at the stepped-up rates of p ro ­
duction and em ploym ent in A ugust were outgrow ths p ri­
m arily of reduced inventory liquidation. Elsew here in the
economy, there w ere some tentative signs of further
strengthening. T he m odest recovery in residential construc­
tion is continuing, as housing starts advanced further. In
addition, production of business equipm ent m oved ahead
in the m onth. However, capital spending levels seem likely
to rem ain depressed until there is less idle capacity in the
economy.
O f late, the erratic m onthly m ovem ents in the price
data have m ade it unusually difficult to analyze the under­
lying inflationary situation. This irregular pattern has in
part reflected the abrupt spurts and halts in the prices of
energy and food. H ow ever, it does appear th at nonfood,
nonenergy prices have been rising at a som ew hat faster
clip recently than they had in earlier m onths of the year.
This suggests that, while the slowdown in inflation in the
current year has been considerable, it had been overstated
as some of the earlier d ata had been heavily but tem po­
rarily influenced by the determ ined efforts of businesses
to elim inate their inventory overhangs.
Looking ahead, increases in food and oil prices are
likely to play a m ajor role in determ ining the near-term
situation. A m ong the factors shaping the near-term outlook
for food prices are the extent of w orld dem and for U nited
States crops, including the Soviet grain purchases, and the
continued adjustm ents in the livestock feed sector of the
agricultural economy. The $1.05 per barrel hike in the
price of crude oil instituted by the O rganization of P etro­




leum Exporting C ountries (O P E C ) at the beginning of
O ctober may provide a m odest tem porary boost in infla­
tion. Also, while price controls on domestically produced
oil have been extended through m id-N ovem ber, the cost
of dom estic oil to oil refiners will rise further if these con­
trols are lifted, with the timing of the im pact of course
depending upon w hether decontrol is sudden or gradual.
It should be noted, nevertheless, th at the inflationary im ­
pact of these prospective increases in food and oil prices
will alm ost surely be m uch sm aller than those increases
which occurred and contributed to the inordinately rapid
inflation in 1973 and 1974.

PERSONAL INCOME, CONSUMER SPENDING,
AND RESIDENTIAL CONSTRUCTION

Propelled by a record expansion of factory payrolls,
personal income jum ped by 1.5 percent in A ugust. W age
and salary disbursem ents shot ahead at an $11.6 billion
annual rate, com pared with an average increase of $2.2
billion in the first seven m onths of 1975. A lm ost half of
the A ugust increase was in m anufacturing payrolls, which
had also shown a healthy rise in the previous m onth.
T ransfer paym ents rose at a $2 billion annual rate, follow­
ing a large drop in July caused by the sizable one-shot
June paym ent to Federal G overnm ent pension recipients.
In the first three m onths of 1975, increases in transfer
paym ents exerted an im portant stabilizing influence on
personal incom e, as wage and salary disbursem ents re­
m ained below their D ecem ber 1974 level. Since M arch,
however, increases in wage and salary incom e have been
the m ainstay of the revival in personal income, with wage
and salary disbursem ents increasing alm ost three times as
m uch as transfer paym ents.
A lthough retail sales declined in A ugust, they had been
advancing strongly. F rom M arch to July, total sales grew
at a 26.3 percent annual rate, alm ost quadruple the rise
in consum er prices. In the four m onths ended in July,
m ore than 40 percent of the increase in retail sales was
attributable to a rebound in autom otive sales. Since July,

236

MONTHLY REVIEW, OCTOBER 1975

of funds to the housing m arket, but their deposit rates
are constrained by the legally set ceilings.

INDUSTRIAL PRODUCTION, INVENTORIES,
AND CAPITAL SPENDING

however, auto sales have been essentially flat. Sales of
dom estic m odels in Septem ber were 7.4 m illion units at a
seasonally adjusted annual rate, slightly below the levels
recorded in July and A ugust (see C hart I ) . It rem ains to
be seen to w hat extent a prospective rebound in autom o­
bile sales will follow the typically strong p attern of past
recoveries.
H ousing starts edged up to 1.26 million units at an
annual rate in August. H ow ever, perm its slipped below
the 1 m illion unit annual-rate m ark, though they were
still above the levels recorded from A ugust 1974 through
the first six m onths of this year. T hus far, the m oderate
housing recovery w hich began in M ay has been concen­
trated prim arily in single-fam ily units, as m ultifam ily
starts have rem ained at very low levels. T he inventory of
unsold hom es in July rose to 8.8 m onths of sales, the high­
est level in four m onths b u t still below any reading in the
2 1 -m onth period ended in M arch 1975.
To some extent, further recovery in housing m ay well
be lim ited by the recent run -u p in interest rates. Steep
m ortgage interest costs discourage potential hom e buyers.
A t the sam e tim e, savings flows to thrift institutions are
restrained by higher rates on com peting financial instru­
m ents. T h rift institutions are, of course, a m ajor source




D uring A ugust, the F ed eral Reserve B o ard ’s index of
industrial production registered a 1.3 percent increase,
m arking the fourth consecutive m onthly increase and the
largest advance since O ctober 1972 (see C hart I I ) . The
A ugust rise was broadly based across both industry cate­
gories and m arket groupings. Iro n and steel production
rose for the first tim e since Jan uary of this year. In part,
the latter pickup m ay reflect attem pts by steel mill cus­
tom ers to “bun ch ” purchases prior to the price hikes
announced by steel com panies for this autum n. N o n d u ­
rable goods output m oved ahead strongly once again,
following sizable gains in the previous four m onths.
A cross m arket groupings, production of consum er goods
in both the durables and nondurables categories contin­
ued a pattern of steady increases. Business equipm ent out­
put posted a sizabld^advance in A ugust, following ten
m onths of uninterrupted declines. P roduction of m ate­
rials advanced for the third straight m onth after falling
w ithout interruption since Septem ber 1974. This m ove­
m ent provides some support for the view th a t the paring
of inventories which has been going on throughout the cur­
rent year is m oderating.
New orders for durable goods m anufacturers moved
ahead by $0.9 billion or 2.1 percent in A ugust, m arking
the fifth consecutive m onthly increase. T he rise in book­
ings since M arch has exceeded production grow th by a
wide margin. As a result, the backlog of unfilled orders
posted its second straight m onthly advance.
Businesses are still trim m ing their inventories on b al­
ance, but the cutbacks have eased considerably in recent
m onths. B ook value inventories in the retail trad e sector
advanced for the second straight m onth in July, following
declines in book value in the first five m onths of the year.
A t wholesale outlets, book value inventories registered a
decline in July, after increasing in June and falling in the
previous five m onths. T he book value of m anufacturing
inventories fell in A ugust, the sixth consecutive m onth of
decline. U nlike past m onths, however, all of the A ugust
reduction was concentrated w ithin the durables m anufac­
turing sector.
In inflationary periods, book value data tend to give a
distorted picture of the inflationary situation. H ow ever,
the m ost recent m onthly m ovem ents in book value inven­
tories are consistent w ith the p attern of the ratios of real
inventories to real sales in the first half of 1975. R eal

FEDERAL RESERVE BANK OF NEW YORK

inventory figures for these sectors are available on a
quarterly basis through the first half of this year. In the
retail trade sector, the real inventory-sales ratio m oved
down considerably in the first half of the year from the
peak attained in the fourth quarter of 1974. W hen com ­
bined with positive book value accum ulation in June and
July, these data suggest th at inventory paring in the retail
sector is over. In the wholesale trade sector, the real
inventory-sales ratio hardly retreated at all during the first
two quarters of this year from its la te -1974 peak. T here­
fore, it is probable th at the inventory correction in the
wholesale trade sector has not yet been com pleted, al­
though it has lately been proceeding at a substantially
reduced rate. In the m anufacturing sector, the ratio of
real inventories to real sales had backed off only slightly
in the second q uarter from the exceedingly high firstquarter level. Thus, the latest m onthly book value data
suggest th at the process of liquidation is continuing un­
abated for durables m anufacturers but has dim inished
substantially for nondurables m anufacturers.
R ecent surveys point to continuing declines in the level
of real capital spending. T he Com m erce D epartm ent sur­

237

vey of planned plant and equipm ent outlays taken in July
and A ugust showed a projected rise in nom inal capital
outlays over the second half of 1975 of only 1.9 percent
at an annual rate. If this increase in nom inal capital
outlays is realized, it will m ean a further drop in the
level of real capital spending over the rem ainder of the
year. In addition, a recent survey by Lionel D. Edie &
C om pany projects an increase in nom inal capital spending
of only 5 percent for all of 1976. T he latter survey p ro b ­
ably implies a further reduction in the real capital spending
level next year. In previous business cycles during the post­
war period, troughs in real capital spending either have
been coincident with troughs in industrial production or
have lagged the industrial production trough by one quar­
ter. The m ost recent contraction in industrial production
bottom ed out in A pril. H ence, if real capital outlays do
in fact fall further in 1976, there would be a significantly
m ore sluggish response for investm ent than has occurred
in past business-cycle upturns. U nquestionably, the course
of capital spending will depend on the overall pace of
economic recovery, particularly in the crucial consum er
spending sector. H owever, real capital spending is not
likely to expand vigorously until there are less slack and
idle capacity in the economy.
LABOR MARKET DEVELOPMENTS

Chart II

INDUSTRIAL PRODUCTION
Se a so n a lly ad justed ; 1967=100
Percent

Source: Board of Governors of the Federal Reserve System.




Percent

A lthough the evidence is som ewhat mixed, it appears
that labor m arket conditions showed some further signs of
strengthening in Septem ber. A ccording to the payroll sur­
vey of establishm ents, seasonally adjusted payroll em ploy­
m ent expanded by 182,000 w orkers in Septem ber, on the
heels of the large 350,000 advance in August. The entire
Septem ber increase was attributable to higher payrolls in
the m anufacturing sector, while other sectors were little
changed on balance. M anufacturing payrolls had shown
a sim ilar gain in the previous m onth and have accounted
for almost two thirds of the payroll gains since July. In
the separate survey of households, labor m arket condi­
tions were essentially unchanged as nonagricultural em­
ploym ent edged dow n slightly in the m onth. Nevertheless,
the civilian unem ploym ent rate fell to 8.3 percent of the
labor force, down from 8.4 percent in July and A ugust.
Large gains in payroll em ploym ent in the two m ost recent
m onths have helped reduce the discrepancy that had de­
veloped since M arch betw een the recorded increases in
em ploym ent in the two surveys. W hile such divergences
are not uncom m on on a m onthly basis, they do tend to be
close to zero over longer periods. O n the other hand, the
increases in the unem ploym ent rate for adult males as well
as in the num ber of job losers were disquieting signs of

MONTHLY REVIEW, OCTOBER 1975

238

C h a rt III

CO N SU M ER PRICES
T w elve-m on th gro w th rate

1

-2

Note: Sh ad ed a re a s represents recession periods, indicated by the N atio n al Bureau of Economic Research (IslBER) chro no lo gy.
The latest recession has not yet been dated by the NBER.
Source: United States Department of Labor, Bureau of Labor Statistics.

w eakness in the Septem ber household survey.
T he pace of w age-rate increases in the private nonfarm
econom y has rem ained m oderate in recent m onths. Since
m ovem ents in the average hourly earnings series reflect
not only w age-rate changes but also changes in m anufac­
turing overtim e and interindustry shifts in em ploym ent, a
better m easure of w age-rate changes is the adjusted hourly
earnings index. A djusted for changes in overtim e in m anu­
facturing and interindustry em ploym ent shifts, average
hourly earnings in the private nonfarm econom y advanced
at a 6.0 percent annual rate betw een July and September.
This recent rate of gain com pares favorably with increases
of 8.0 and 6.9 percent posted in the first and second quar­
ters of this year, respectively.
PRICES

L ately there has been a good deal of uncertainty and
uneasiness over the near-term inflationary outlook. Indeed,
the sudden flare-up in the rate of inflation in the m id­
sum m er m onths at both the wholesale and retail levels
prom pted concern th at a resurgence in inflation was in
the offing. M oreover, the recent oil price hike by the
O PE C cartel, the possibility of some form of domestic




oil price decontrol before the end of the year, and the
Soviet grain sales have added to the w orry about the price
outlook. H ow ever, several considerations suggest th at a
return to the inordinately high rates of inflation experi­
enced in 1974 is not likely. O n the one hand, such an
eventuality at the current stage of the business cycle
w ould be a m arked departure from past experience. D u r­
ing the first year of recovery in the past four postw ar
recessions, the grow th of consum er prices did not accel­
erate from the rates experienced during the latter p art of
the recessions (see C hart I I I ) . In addition, analysis of
the special factors relating to food and energy suggests
that any acceleration in inflation coming from these
sources is likely to be m uch m ore m odest than last year’s
experience.
Following the acceleration in consum er prices in June
and July, the consum er price index inched up a m ere
0.2 percent in A ugust, the slowest rate of advance this
year. F ood prices were unchanged in the m onth, reflecting
offsetting increases and decreases for various food cate­
gories. Prices of m eats, poultry, and fish registered sizable
increases, while prices of fruits, vegetables, cereals, and
bakery products fell. N onfood com m odity prices posted a
m oderate rise, following a rapid increase in the previous

FEDERAL RESERVE BANK OF NEW YORK

m onth w hich was spurred by gains in consum er energy
prices. Prices of consum er services also registered a bit
sm aller gain.
W holesale prices rose at a 0.6 percent seasonally adjusted
rate in Septem ber. Fuel and pow er prices m oved ahead at
about a 1.6 percent rate, only slightly below the average
rate of increase posted over the three previous m onths.
Excluding the fuel and pow er com ponent, industrial com ­
modity prices rose about 0.6 percent. T he latest advance
for nonfuel industrial com m odities was well above gains in
the previous six m onths and m arked the fifth consecutive
m onth of accelerating price increases. In part, the rela­
tively m oderate price increases posted from M arch through
A ugust may have reflected the elim ination by firms of a
substantial inventory overhang. Prices of farm products
and processed foods and feeds jum ped 2.3 percent after
having fallen nearly 1 percent in the previous m onth. The
increase was paced by higher prices for hogs, cattle, wheat,
milk, and eggs.
W ere it not for questions about the food and energy
areas, the near-term outlook for inflation w ould alm ost
surely have entailed rates of inflation well below the
double-digit range. T he sharp run-up in inflation during
1973 and 1974 can be traced, in large part, to excep­
tional factors, such as depreciation of the U nited States
dollar in the foreign exchange m arkets, the term ination
of wage and price controls, the quadrupling of foreign
oil prices, and worldwide crop failures. M ost of these
factors have now run their course and have had their full
im pact on inflation. In addition, in early stages of past
recoveries, the excess capacity and slack within the econ­
omy have tended to restrain the rate of growth of prices.
In the current recovery, however, it does seem as though
consum er prices outside the food and energy areas have
lately tended to rise at som ew hat faster rates than those
experienced earlier in the year, despite the pronounced
slack. Considering the unusually heavy inventory liquida­
tion that was occurring at th at time, perhaps businesses
were tem porarily keeping a very tight lid on price increases
until they had m anaged to elim inate the inventory over­
hangs. In that event, the rates of inflation recorded earlier
in the year would have been below the levels consistent
with the underlying cost trends. This would explain the
current anom alous situation in which nonfood, nonenergy
prices appear to be accelerating som ew hat in the face of
the high unem ploym ent rate and low rates of capacity
utilization.
The July sale of 9.8 million tons of grain to the Soviet
U nion plus possible G overnm ent approval of further sales




239

later this year has triggered fears of food inflation similar
to that experienced after the 1972 Soviet purchases. H ow ­
ever, the overall agricultural situation is quite different
from 1972 when in addition to the Soviet purchases there
were poor crops here and abroad, a sharp cutback in
the output of Peruvian fish meal, and a burst in agricul­
tural exports. T he w heat harvest this year is a record,
while the corn crop recovered sharply from last year’s
disappointing perform ance. T herefore, before the Soviet
grain sales, there had seemed to be a good chance that
food price rises w ould m oderate m arkedly from those re­
corded in the past few years. Since then, however, the
U nited States D epartm ent of A griculture has estim ated
that already consum m ated export sales might add 1.5 per­
centage points to retail food inflation in 1976. The im pact
of such a rise in the price of food, which constitutes around
one fourth of the total consum er price index, on overall
consum er price inflation would am ount to less than 0.5
percent. W ith respect to the timing of the increase, higher
w heat prices could put pressure on retail prices for cereal
and bakery products in coming m onths. H igher corn prices
could raise feed costs and stim ulate the slaughter of beef.
In that event, m eat price increases w ould tem porarily m od­
erate, followed by some reacceleration when beef supplies
tighten in early 1976.
Presently, it is far from certain that energy prices will
experience any sustained rapid rise. The recent O PE C
decision to raise foreign oil prices by 10 percent or $1.05
per barrel, effective O ctober 1, is a far cry from the ap­
proxim ately $7 run-up th at occurred in late 1973 and
early 1974 w hen energy prices soared in response. In ad­
dition, the im pact of the m ost recent O PE C price hike on
dom estic oil prices m ay be blunted to some extent by price
shading by some m em bers of O PEC . F urtherm ore, in
view of the recent weak dom estic dem and for some refined
oil products, it is unclear how m uch and how fast the in­
crease in crude oil prices will be passed along to consum ­
ers. Of course, a good deal of uncertainty also exists about
the exact nature of possible dom estic oil price decontrol
after the recently extended N ovem ber 15 term ination of
controls. Sudden decontrol w ould concentrate the price
im pact over a short time span, while phased decontrol
w ould spread the im pact over a longer period. In the event
that the $2 duty on im ported oil is rem oved, some of the
im pact from the O PE C oil price rise and the possible te r­
m ination of controls w ould be offset. Clearly then, the
outcom e with respect to dom estic price controls and tariffs
is one of the m ajor uncertainties of the near-term inflation
outlook.

240

MONTHLY REVIEW, OCTOBER 1975

The Money and Bond Markets in September

Short-term interest rates were little changed over the
m onth, although some upw ard pressure em erged around
the quarterly statem ent date. T he continued m oderate
growth reported for the m onetary aggregates reduced the
concern of m arket participants over a near-term tightening
of m oney m arket conditions by the Fed eral Reserve. N ev­
ertheless, further signs of a strengthening econom y and
prospects of heavier credit dem ands weighed on m arket
sentim ent.
In the G overnm ent and corporate securities m arkets,
opposing forces left yields som ew hat higher on balance
by the m onth end. Fears of renew ed inflation deepened
with news of the developing econom ic recovery. A n an­
nouncem ent by the T reasury of enlarged borrow ing needs
with m ore em phasis on selling longer term issues to finance
them also was a depressing influence. O n the other hand,
the consum er price index for A ugust showed a low rate of
increase, and substantial dem and em erged in the auctions
for T reasury securities. D evelopm ents in the corporate
m arket were also greatly aided by a relatively small
am ount of new issues offered during the m onth and ex­
pected in the near future. This partly reflected the massive
corporate debt financing earlier in the year and the can­
cellations or postponem ents of issues due to current levels
of interest rates.
M eanwhile, yields in the m unicipal m arket rose sharply
in Septem ber to record levels, as New Y o rk City’s fiscal
crisis continued to weigh heavily on this sector. Legisla­
tion to provide additional revenues for the city was passed
by the New Y ork State legislature early in Septem ber, but
investors rem ained concerned over the financing needs of
state and local governm ent borrow ers and their access to
the m arket. Investor concern deepened at the close of the
m onth when a section of the legislation which required
the use of pension funds of state employees was declared
unconstitutional by New Y ork State’s highest court.
A ccording to prelim inary data, which now reflect recent
bench-m ark revisions, grow th in the narrow m oney stock
(M x) rem ained m oderate in Septem ber for the third
straight m onth. G row th of the m ore broadly defined
m oney stock (M 2), though m ore rapid th an that of M l5




was also m oderate w hen com pared with recent historical
patterns. The bank credit proxy halted its recent decline
and grew m odestly during the m onth.

THE MONEY MARKET AND THE
MONETARY AGGREGATES

The Federal funds rate and other short-term rates were
stable over m ost of the m onth, although increased churn­
ing in the m oney m arket put some upw ard pressure on
rates tow ard the m onth end (see C hart I ) . M any large
banks apparently sought to add to certificates of deposit
(C D s) before the quarterly statem ent publishing date, and
rates on these instrum ents started rising around the m iddle
of the m onth. F o r Septem ber as a whole, the effective rate
on Federal funds averaged 6.24 percent, com pared with a
6.14 percent average in August. M em ber bank borrowings
from the discount wdndow continued to be m odest on
average over the m onth (see T able I ) , as the rate on F ed ­
eral funds rem ained only slightly above the discount rate.
R ates on 90- to 119-day dealer-placed com m ercial paper
were raised during the m onth Vx percentage point to 6%
percent, while rates on ban k ers’ acceptances w ere approxi­
mately unchanged. In the secondary m arket, the rate on
large negotiable CDs m aturing in ninety days closed the
m onth at 7.03 percent, up 8 basis points from the end of
August.
T he dem and for bank loans by businesses, in decline
since last D ecem ber, rem ained weak during Septem ber.
Com m ercial and industrial loans at large com m ercial
banks rose only $4 m illion in the first four statem ent weeks
in Septem ber, com pared with a $1,330 million average in­
crease over sim ilar periods in the previous four years.
Nevertheless, m ost m oney center banks raised their prim e
lending rate V \ percentage point to 8 percent.
D uring the m onth, the B oard of G overnors of the F ed ­
eral R eserve System released revised estim ates of the
m oney stock m easures for the period beginning January
of this year for
— private dem and deposits adjusted
plus currency outside com m ercial banks— and beginning
O ctober 1974 for M 2—
pl us tim e deposits other than

FEDERAL RESERVE BANK OF NEW YORK

241

Chart I

SELECTED INTEREST RATES
July-Septem ber 1975
Percent

M O N E Y M ARKET RATES

Ju ly

A ugust

B O N D M ARKET YIELDS

Septem ber

Ju ly

A u gu st

Percent

Septem ber

Note.- D ata are shown for b usiness d ays only.
M O N E Y MARKET RATES Q U O TED : Prim e com m ercial loan rate at most m ajor banks;
offerin g rates (quoted in terms of rate of discount) on 90- to 119-day prime co m m ercial
p a p e r quoted by three of the five dealers that rep ort their rates, or the m idpoint of
the ran ge q uoted if no consensus is a v a ila b le ; the effective rate on F e d e ra l funds
(the rate most representative of the tra nsa ction s execu ted ); clo sing bid rates (quoted
in terms of rate of discount) on newest o u tstan d in g three-m onth Treasury bills.
B O N D M ARKET YIELD S Q U O TED : Yield s on new A a a -ra te d p u b lic utility b on d s are b ased
on prices a sk e d by u nd erw riting syn d icates, adjusted to make them eq u iv ale n t to a

large negotiable CDs. T he revisions reflect data obtained
from the A pril 16 call rep o rt for nonm em ber banks and
from reports from foreign agencies and branches. T he
m ajor effect of the revisions was to low er the average level
of M i during 1975 by about $1 billion. As a result, grow th
of M x from 1974 has been low ered slightly. A ll m oney
stock data in this article reflect these revisions.
Prelim inary d ata indicate th at grow th in the m onetary
aggregates rem ained m oderate in Septem ber. D uring the
four-w eek period ended Septem ber 24, seasonally adjusted
M i averaged 2.6 percent at an annual rate above its aver­
age during the four statem ent weeks in A ugust. This
brought the grow th in
from its average level in the four
weeks ended thirteen weeks earlier to 3.0 percent at an




stan d a rd A a a -ra te d bond of at least twenty ye a rs' maturity; d aily a v e ra g e s of
y ie ld s on sea so n ed A a a -ra te d corporate b o n d s; d a ily a v e ra g e s of y ie ld s on
long -term G overnm en t secu rities (bonds due or ca lla b le in ten ye ars or more)
and on G overnm ent secu rities due in three to five ye a rs , com puted on the b a s is
of c lo sin g bid prices,- Thu rsd ay a v e ra g e s of yie ld s on twenty sea so n ed twentyye ar tax-exem p t b on d s (carryin g M oody's ratings of A a a , A a , A , an d Baa).
Sources: Fed eral Reserve Ban k of New York, Bo ard of G overno rs of the F e d e ra l
Reserve System , M o ody's Investors Se rvice , Inc., and The Bond Buyer.

annual rate (see C hart I I ) . Consum er-type tim e and sav­
ings deposits at com m ercial banks continued to grow
som ew hat m ore slowly than their rapid pace in the first
half of the year, partly in lagged response to the run-up
in m arket interest rates in recent m onths. D uring the first
four statem ent weeks of the m onth, these deposits aver­
aged 6.9 percent at an annual rate above their level in the
period ended four weeks earlier. O ver the same period,
M 2 increased at a 5.0 percent rate. CDs, reversing a steady
decline since January, grew at a 3.3 percent annual rate in
Septem ber. T he bank credit proxy— total m em ber bank
deposits subject to reserve requirem ents plus certain non­
deposit sources of funds— rose in Septem ber for the first
tim e in three m onths.

242

MONTHLY REVIEW, OCTOBER 1975
Table I

THE GOVERNMENT SECURITIES MARKET

FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, SEPTEMBER 1975

In millions of dollars; (+ ) denotes increase
and (—) decrease in excess reserves
Changes in daily averagesweek ended

Net
changes

Factors
Sept.
3

Sept.

Sept.
24

Sept.
17

10

“ Market” factors
Member bank required reserves . . .

— 42

-f

118

— 188

— 293

—

Operating transactions (subtotal) .

— 899

4 1.15 3

— 257

—3,381

— 3,384

546

— 194

4

4 - 433

+ 245

—3,829

Federal Reserve float ....................

_

Treasury operations*

— 607

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

62

4

Gold and foreign a c c o u n t .............

— 62 —

Currency outside banks ................

+ 9

51

— 115

4

158

26 +

— 73

41

4 - 208

+

405

448

—3,758
—

46

+

29

Other Federal Reserve liabilities
and c a n i t a l ............................................
Total “ market” factors ..................

+ 1 .2 7 1

—3,674

Direct Federal Reserve credit
transactions
Open market operations (subtotal)

- f 748

4 - 677 4-3,399

+ 3 .0 6 7

+ 116

— 186

+ 1 ,9 0 7

+ 1 .7 8 2

+ 1°

—

7

+

—

1

Outright holdings:
Treasury securities ...........................
Bankers’ acceptances ......................
Federal agency obligations ...........

+

15

—

32

24

Repurchase agreements:
Treasury securities ...........................

4 - 474 — 1,410

+ 783

+ 1 ,1 7 3

+

+1,020

Bankers' acceptances ......................

+

+

123

+

94

Federal agency obligations ...........

4- 85 — 106

4 - 37 +

164

+

180
123

Member bank borrowings ....................
Seasonal borrowings! ......................
Other Federal Reserve
Total

setst

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

Excess reserves! ...........

_
+

86

— 166

50

4 - 163

11

+

4 . 265 4 .
+ 963

+

3
27

— 1.567

22

—

+
4

51

58

+

68

+

7

+

3

+

24

88 —

35

+

345

4 - 707 + 3 ,4 3 2
+ 262

+ 3 .5 3 5
254

Monthly
averages§

Daily average levels

Member bank:
Total reserves, including vault c a s h t .........

34,544

34,130

34,580

34,631

34,471

Required reserves ................................................

34,223

34,105

34,293

34.586

34,302

Excess reserves .....................................................

321

25

287

45

170

Total borrowings ................................................

222

385

327

395

332

Seasonal borrowings! ...................................

51

54

61

64

58

Nonborrowed reserves ........................................

34.322

33,745

34,253

34,236

34,139

Net carry-over, excess or deficit (— )|| . . .

177

170

4

108

115

Note: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
t Included in total member bank borrowings,
t Includes assets denominated in foreign currencies.
5 Average for four weeks ended September 24, 1975.
1 Not reflected in data above.
1




Yields on coupon-bearing Treasury obligations rose on
balance during Septem ber, while rates of retu rn on T rea­
sury bills fluctuated in a narrow range. D uring the first
half of Septem ber, investors becam e increasingly con­
cerned about inflation and the financing needs of the
Treasury. W ith these considerations weighing on the
m arket, prices of longer m aturity issues w eakened sub­
stantially. A fter m idm onth, some good news on the price
front and massive retail interest in a T reasury auction
precipitated a short rally, but m ost coupon issues ended
the m onth with higher yields on balance. Relatively stable
dealer financing costs supported the Treasury bill m arket
and, with supply pressures potentially easing, rates
were fairly steady over m ost of the m onth.
On Septem ber 10, the Treasury announced its overall
cash needs for the rem ainder of the year and its financing
plans for September. W ith expenditures continuing to run
above earlier projections, with the possible suspension
of oil im port fees, and with a decision to m aintain a
higher average cash balance, the Treasury raised its esti­
mates of needed financing. Borrow ing requirem ents in
the second half of 1975 are now expected to total $44
billion to $47 billion, up from the $41 billion figure esti­
m ated in August. The T reasury also indicated th at its
financing plans w ould place less em phasis than previously
on the bill m arket in order to minimize any disinterm edia­
tion effects of the borrow ing program . The Septem ber
com ponent of the T reasury’s borrow ing was $4 billion in
new cash raised by the auction of an additional $1 billion
of two-year notes (p art of a $3 billion financing) on Sep­
tem ber 16, by the addition of $1 billion to the auction of
52-week bills on Septem ber 17, and by an auction of $2
billion of 29-m onth notes on Septem ber 24.
The Treasury announcem ent had a depressing effect
on the coupon m arket which was still assimilating the
news of a bulge in energy and food prices in July and
August. However, in the Septem ber 16 auction of twoyear notes, an unexpectedly large am ount of noncom ­
petitive tenders resulted in about 45 percent of the $3 bil­
lion issue being purchased by individual investors and
smaller financial institutions. A t 8.44 percent, the average
yield on these notes was less than anticipated although
19 basis points above the average yield at the auction
of similar notes on August 14. The relatively small p ro ­
portion of the issue taken by dealers left the notes in a
favorable technical position. The im proved m arket tone
following the auction was reinforced on Septem ber 18 by
the release of the consum er price index for A ugust which
rose at only a 2.0 percent annual rate, the smallest

FEDERAL RESERVE BANK OF NEW YORK

m onthly increase in three years. In the auction of
$2 billion of 29-m onth notes on Septem ber 24, aggressive
bidding resulted in an average yield for the notes of 8.10
percent, w ith a sizable portion aw arded to noncom petitive
tenders.
In the final week of the m onth, the m arket resum ed
the dow nw ard course th a t h ad been followed during the
first half of the m onth. A ccom panying this decline was a
request by T reasury officials, in testim ony before the C on­
gress, to extend to ten years the m aturity on securities th at
can be issued w ithout restrictions on the interest rate and
to provide authority to sell longer term issues w ithout
regard to the interest rate ceiling. O ver the m onth as a
whole, the index of yields on interm ediate-term G overn-

C h art II

CH A N G ES IN M ONETARY AND CREDIT A G G REG A TES
S e a s o n a lly ad ju ste d a n n u a l rates
Percent

Percent

243

m ent securities rose 26 basis points to 8.28 percent. The
yield on the 8 V2 percent T reasury bond of 1994-99 rose
to 8.64 percent at the end of Septem ber, up 21 basis points
from its level at the end of A ugust. Low er coupon bonds
showed a m ore pronounced trend. The yield on the 4V4
percent Treasury bond of 1987-92 rose to 6.42 percent,
up 54 basis points from the end of A ugust.
W ith short-term rates rem aining relatively stable over
m ost of the m onth, inventory financing costs did not apply
significant pressure on G overnm ent securities dealers. In
addition, the outlook for supply in the bill m arket was im ­
proved by the T reasury’s stated intention to rely to a lesser
extent on short-term issues to finance the deficit. As a
result, bills traded in a narrow range until the last two
days of the m onth when yields on three-m onth bills rose
15 basis points. A t the weekly auction of Septem ber 29,
the average yields on three- and six-m onth bills were 6.55
percent and 6.98 percent (see T able I I ) , com pared with
6.38 percent and 6.87 percent, respectively, in the last
auction of August. O ver the m onth as a whole, yields on
m ost bills rose 10 to 29 basis points.
O n Septem ber 4, the T reasury auctioned $1.5 billion
of cash-m anagem ent bills, with $800 million to m ature
on Septem ber 18 and $700 million to m ature on Septem ­
ber 25. Like a similar issue in A ugust, these thirteen- and
twenty-day bills were designed to dam pen fluctuations in
the T reasury’s balances at Federal Reserve Banks.
In the m ajor agency issue of the m onth, the Federal
N ational M ortgage A ssociation (F N M A ) issued $400
m illion of four-year debentures at 8 V2 percent and $300
million of seven-year debentures at 8.60 percent. B oth
issues were well received. In A ugust, F N M A had issued
$650 m illion of five-year debentures at 8 3 percent.
A
THE OTHER SECURITIES MARKETS

Note: Growth rates are computed on the basis of four-week averages of d aily
figures for periods ended in the statement week plotted, 13 weeks earlier and
*52 weeks earlier. The lastest statement week plotted is Septem ber 24, 1975.
Ml - Currency plus adjusted demand deposits held by the public.
M2 = Ml plus commercial bank savings and time deposits held by the public, less
negotiable certificates of deposit issued in denominations of $100,000 or more.
Adjusted bank credit proxy = Total member bank deposits subject to reserve
requirements plus nondeposit sources of funds, such as Euro-dollar
borrowings and the proceeds of commercial paper issued by bank holding
companies or other affiliates.
Source: Board of Governors of the Federal Reserve System.




Com petition from the T reasury for long-term funds
and uncertainty about the outlook for inflation dom inated
sentim ent in the corporate bond m arket during September.
Few new issues w ere brought to m arket, and the calendar
was lightened further by postponem ents due to m arket
conditions. Prices eroded steadily in light trading over
the first half of the m onth. H ow ever, after m idm onth the
good reception in a T reasury note auction and the small
increase in the consum er price index were viewed very
favorably, and a short, sharp rally ensued. Some profit
taking occurred later in the m onth, but corporate prices
generally held steady as the forw ard calendar for new
debt financing appeared m anageable.
Developm ents in the corporate m arket in Septem ber
were reflected in the bellw ether financing of the m onth,

244

MONTHLY REVIEW, OCTOBER 1975

a tw o-part offering of A aa-rated telephone utility debt.
The financing totaled $200 m illion: $75 million of six-year
notes yielding 8.70 percent and $125 million of forty-year
bonds yielding 9.70 percent. A lthough the return on the
bonds com pared very favorably with a similar issue yield­
ing 8.80 percent w hen brought to m arket in mid-July,
the m arket h ad d eteriorated significantly before the offer­
ing date of Septem ber 17. D ealers encountered initial in­
vestor resistance to the term s set for the bonds. H ow ever,
after the results of the T reasury auction becam e known,
the bonds quickly sold out. W ith the additional im petus of
the small increase announced for the consum er price
index, the bonds traded above their issue price when
released from syndicate restrictions on Septem ber 22. D u r­
ing the ensuing week, the m arket retreated again so that,
at the m onth end, the price of the bonds was lV i points
below their high of the previous week.
T he financial problem s of New Y o rk City dom inated
the m arket for state and local governm ent debt issues in
Septem ber. D uring the first week of the m onth, the in­
creasing difficulties in arranging a tim ely aid package for
New Y o rk City caused price quotations on M unicipal
Assistance C orporation (M A C) issues to drop sharply.
T he tax-exem pt m arket received som e respite on Sep­
tem ber 9 when the New Y ork State legislature provided
additional funds for the city and established an E m er­
gency Financial C ontrol B oard to oversee the city’s fiscal
operations. U nder the legislation, the state would provide
$750 m illion (to be financed by state borrow ing) to the
city by purchasing $250 m illion of M A C bonds and $500
m illion of city and M A C notes. A nother $725 million was
to have been obtained from city and state em ployee pen­
sion funds, with the rem ainder com ing from tax prepay­
m ents, net new purchases or underw ritings of $250 million
of M A C issues by New Y ork banks, and other sources.
Shortly after the enabling legislation passed, the 9 per­
cent M A C bonds due in 1985, which h ad fallen to 84 at
the end of the preceding week, rose to 89V2. N evertheless,
considerable uncertainty still prevailed. O n the day after
the passage of the legislation, N ew Y o rk State, presum ably
because of the increased burd en of its financial com m it­
m ent to N ew Y ork City, encountered investor hesitancy
w hen it offered $755 m illion of short-term notes in a
negotiated offering. Of those notes, $105 million due in
D ecem ber was offered to the public at a 6 percent yield,
$400 million due in six m onths was offered to yield 7 Vi
percent, and $250 million of one-year notes was priced
to yield 8 percent. D uring the following week, two other
New Y ork State borrow ers also encountered considerable
reluctance from lenders and could borrow only at very




Table n
AVERAGE ISSUING RATES
AT REGULAR TREASURY BILL AUCTIONS*

In percent
Weekly auction dates— September 1975
Maturity

Sept.
12

Sept.
22

Sept.
29

6.389

6.444

6.316

6.547

6.889

6.901

6.824

6.980

Sept.
8

Monthly auction dates— July-September 1975
July
24
Fifty-tw o

weeks

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

Aug.
20

Sept.
17

6.782

7.331

7.338

* Interest rates on bills are quoted in term s of a 360-day year, w ith the discounts from
par as the return on the face am ount of the bills payable at m aturity. Bond yield
equivalents, related to the am ount actually invested, would be slightly higher.

high yields through private placem ents. Interest charges
on one-year notes were reported to be 9.5 percent for the
New Y ork State H ousing Finance Agency and 9 3 percent
A
for the N ew Y ork State D orm itory A uthority.
A t the close of the m onth, the highest court in New
Y ork State declared unconstitutional the m andated invest­
m ent of state em ployee pension funds to aid N ew Y ork
City. The decision affected the use of $125 million of
funds, which was p art of the aid package passed earlier
by the state legislature. In the wake of the court decision,
price quotations on M A C issues plunged to new lows
as concern developed over w hether enough funds to stave
off a default by the city would be forthcom ing.
T he problem of dwindling investor confidence extended
to other state and local governm ent borrow ers as well.
In m id-Septem ber, the M assachusetts H ousing Finance
Agency was able to sell about $128 million of bond an­
ticipation notes only after the full faith and credit of the
state was placed behind the notes, which were priced to
yield from 5.75 percent for D ecem ber 1975 m aturities to
6.75 percent for Septem ber 1976 m aturities. W hen m ar­
keted at the end of the m onth, $50 million of A aa-rated
bonds of the State of C alifornia encountered investor re­
sistance despite generous yields. The B ond Buyer index of
tw enty bond yields on tw enty-year tax-exem pt bonds on
O ctober 1 rose to a record 7.67 percent from its level of
7.18 percent on A ugust 28. The Blue List of dealers’
advertised inventories rose by $4.5 m illion and closed the
m onth at $635 million.

FEDERAL RESERVE BANK OF NEW YORK

245

A Primer on Federal Reserve Float
B y A r l in e H o e l *

Federal R eserve float arises in connection with collec­
tions and transfers of funds through the Federal Reserve
System w hen credit is passed to an institution receiving
funds on a different day than the corresponding charge
is m ade to the institution m aking paym ent. This can occur
for a variety of reasons, b u t generally the cause is a slow­
dow n or speedup vis-a-vis the usual tim e schedule in the
com plex processing of check collections and funds transfers.
B oth the Federal Reserve System and Federal Reserve
m em ber banks are keenly interested in F ederal Reserve
float because it influences the am ount of reserves available
to m em ber banks to support outstanding deposit liabilities,
and it is subject to wide short-run variations which som e­
times are difficult to anticipate and interpret. In 1974,
for exam ple, Federal Reserve float provided a daily aver­
age of $2.3 billion in m em ber b ank reserves— about 6 to 7
percent of the roughly $36 billion of total m em ber bank
reserves— and day-to-day m ovem ents averaged over $500
million.
Since the specifics of the arrangem ents for collections
and transfers through the F ederal Reserve are continually
evolving to m eet the needs of the econom y, F ederal R e­
serve regulations and practices th at bear on F ederal R e­

*Arline H oel is an econom ist in the M oney and Finance D ivision
o f the Federal Reserve Bank o f N ew York. The author wishes to
acknowledge gratefully the contribution to this work made by her
colleagues at the Federal Reserve Bank o f N ew York: A nton S.
Nissen, Assistant V ice President in the Research and Statistics Func­
tion, Charles M. Lucas, M anager o f the Statistics Departm ent, John
F. Sobala, C hief o f the A utom ated Check Processing D ivision, Ed­
ward J. Regan, C hief o f the M arket Statistics D ivision, and John C.
Partlan, an econom ist in the Market Statistics D ivision. Lorin S.
Meeder, Program Manager for Conventional Check Operations in
the D ivision o f Federal Reserve Bank Operations at the Board of
G overnors o f the Federal Reserve System, also provided substantial
assistance.




serve float are continually being reviewed and adjusted.
Changes in recent years have resulted in a sharp decline
in the level of Federal Reserve float and shifts in the p at­
tern of day-to-day changes. This article describes some of
the m ain mechanics of Federal R eserve float to provide a
background for evaluating ongoing events. In addition, it
describes some of the broad developm ents recently in the
behavior of Federal R eserve float.
WHAT IS FEDERAL RESERVE FLOAT?

E ach day the Federal Reserve System transfers m any
billions of dollars on behalf of depositors at Federal R e­
serve Banks. These deposits are held prim arily by the
com m ercial banks that are m em bers of the Federal R e ­
serve System and also by the U nited States T reasury,
various U nited States G overnm ent agencies, foreign gov­
ernm ents, foreign central banks, and international organi­
zations. Similar to the way in which custom ers at com ­
m ercial banks deposit funds into and m ake paym ents
out of their checking accounts, depositors at Federal R e­
serve Banks transfer funds into and m ake paym ents out
of their accounts at F ederal Reserve Banks.
In the m ajority of transfers through the Federal Reserve,
a depositor receiving funds is credited on the same day
th at the institution paying the funds is charged. F o r a
variety of reasons, however, the crediting and charging
m ay not be accom plished on the same day. In these
circum stances, F ederal Reserve float is created. D epend­
ing on w hether the receiving institution is credited before
or after the paying institution is charged, the Federal R e­
serve float created m ay be either positive or negative. If
the receiving institution is credited before the paying
institution is charged, debit (o r positive) Federal Reserve
float results. If the receiving institution is credited after
the payor is charged, then there is credit (or negative)
Federal Reserve float. A t any time, of course, both

246

MONTHLY REVIEW, OCTOBER 1975

circum stances are occurring. In the aggregate, therefore,
F ederal Reserve float is the difference betw een two quan­
tities— positive Federal Reserve float and negative F ed ­
eral Reserve float. In practice, positive Federal Reserve
float is alm ost always m uch larger than negative Federal
Reserve float.1
W hile this general explanation of F ederal Reserve float
generation is quite simple, in practice float is created by
a wide variety of specific and different problem s which
affect various aspects of the collection and transfer pro­
cesses. The F ederal R eserve collection process is con­
cerned prim arily with checks draw n on com m ercial banks,
while the m ain transfer processes are for wire transfers of
deposits at Federal Reserve B anks and U nited States G ov­
ernm ent and Federal agency securities. The following
sections, therefore, describe first the check processing
system and then the wire transfer netw ork, showing the
relevant details that b ear on float creation. W here appro­
priate, brief historical descriptions are included.

m only accom plished through a netw ork of correspondents.
B anks sent out-of-tow n checks to their correspondents
and received paym ent through credits to their accounts
at the correspondent banks. T o cover expenses, corre­
spondents charged custom er b a n k s-fe e s for collection
services. A n alternative for collecting banks was to mail
the checks directly rather than presenting them through a
correspondent. In such cases, the bank on which the check
was draw n acted as its own collection agent and rem itted
slightly less than the full face value of the check as a
service charge. This latter practice was know n as nonpar
check collection. In attem pting to minim ize these charges,
banks frequently developed lengthy, circuitous clearing
routes. In one notable instance, a southeastern bank in col­
lecting paym ent for checks draw n on a bank four miles
away routinely shipped the checks over a 2,250-m ile route.
W hen the F ederal Reserve System was form ed, check
collection was one of the m ajor responsibilities assigned
to it, with the objective of providing efficient, centralized
paym ent at par for checks draw n either locally or on
distant banks. A fter the first few years, no charges were
CHECK PROCESSING AND FEDERAL RESERVE
m ade for check collection, even for checks traveling across
FLOAT CREATION
the country. T he m echanism for clearing checks am ong
P rior to the establishm ent of the Fed eral R eserve Sys­ local banks followed the p attern set earlier by some clear­
ing associations; paym ents and charges were m ade to
tem in 1913, there existed no centralized check-clearing
m echanism . M any banks were affiliated with local clear­ m em ber banks’ accounts with the D istrict Federal R eserve
Bank.
ing associations and cleared checks draw n on m ore dis­
F o r checks draw n on banks in other F ederal Reserve
tant banks through correspondent banks or by means
of direct presentation. A ll these arrangem ents were com ­ Districts, a new m echanism was created w here settlem ent
plicated and had draw backs. F o r checks cleared locally, am ong Federal Reserve Banks was m ade through the
G old Settlem ent Fund, which was adm inistered by the
settlem ent was accom plished in a variety of ways. In
some clearing associations, for exam ple, settlem ent had B oard of G overnors of the Federal Reserve System. Each
Federal Reserve B ank deposited gold with the U nited
to be in gold or with drafts draw n on one large bank
States Treasury, and gold certificates were issued in re­
doing business with other local banks. In other cases,
local clearing associations perm itted banks to carry ac­ ceipt. O w nership in the G old Settlem ent Fund, subse­
counts with the association itself.
quently called the Interdistrict Settlem ent A ccount, was
T he clearing of checks outside local areas was com ­ m aintained by entries on the books of the B oard of G over­
nors and on the books of each F ederal Reserve Bank.
Initially, the F ederal Reserve attem pted to avoid all
float on local items by establishing a voluntary plan in­
volving sim ultaneous credits and charges. This plan had
a m ajor shortcom ing, however, in th at checks were
1
From an accounting point o f view, Federal Reserve float does charged to paying banks before physical presentation was
not appear as a separate item on the consolidated balance sheet
m ade. This m ade it necessary for paying banks to hold
o f the Federal Reserve Banks. Rather, it is calculated as the dif­
ference between the asset account “Cash items in process of
greater reserve balances than desired in order to avoid
collection” and the liability account “Deferred availability cash
overdrafts as a result of unanticipated check paym ents.
item s”. In addition, any balance in another liability account en­
titled “D ue to other Federal Reserve Banks— collected funds”
Few banks joined the plan, therefore, and the system was
also is deducted. This account does not appear separately on the
replaced in 1916 by a countryw ide clearing arrangem ent
Federal Reserve Banks’ Consolidated Statement o f Condition as
reported in the Federal Reserve Bulletin but is included in “Total
which is the basis of today’s system.
deposits”. The balance in this account is zero except, for the m ost
T he new arrangem ent was based on the principle of
part, in circumstances where som e Federal Reserve offices are
open and others are closed.
deferred credits and charges. T he depositing bank re­




FEDERAL RESERVE BANK OF NEW YORK

ceived delayed credit, and the paying b an k was allowed
time to rem it. T he delays set on b o th sides of the tran s­
action allow ed sufficient tim e for the paying ban k to
receive notice th at paym ent was due. E ach F ederal R e ­
serve B ank developed its own tim e schedule for deferred
credits covering the entire country, based on shipm ent
times betw een F ederal Reserve B anks and banks on which
the checks were draw n. A s shipm ent times changed, the
deferm ent schedules were appropriately adjusted.
As in the past, to d ay ’s check collection cycle is initi­
ated by the deposit of a check at a com m ercial bank. If
a check is draw n on the sam e b an k at which it is deposited,
the collection cycle is com pleted internally. If the check
is draw n on another bank, however, one or m ore other
procedures m ust be em ployed to com plete the collection
cycle.
U n d er one com m on arrangem ent, checks are sent di­
rectly to the b an k on w hich they are draw n and the banks
settle with each other. A lternatively, checks may be sent
to correspondents which provide clearing services or m ay
be cleared through a clearing association of w hich the
b ank is a m em ber. Finally, the checks m ay be cleared
through the F ederal R eserve System. T o dem onstrate how
m ost check-related F ederal R eserve float is generated,
only the fourth m ethod— clearing through the F ederal R e­
serve System— is described.
A F ederal R eserve office receives checks from other
F ederal R eserve offices and directly from com m ercial
banks both in its own territory and in other territories.2
The checks received from senders in other territories are
payable at banks in its own territory, while checks re­
ceived from banks in its own territory m ay be payable at
banks either within or outside its territory.
C om m ercial banks usually sort checks into categories
as specified by each Reserve office, according to availa­
bility of credit and condition. T ransm ittal letters— called
cash letters— are prepared indicating the total dollar
am ount for each category and are sent w ith the checks by
first-class mail, messenger, or courier service. On arrival
at Federal Reserve B anks, the cash letters are m arked to
indicate the date on w hich the depositing b an k will re­
ceive reserve credit according to published tim e schedules.
This can range from the same business day the items are
received to two business days later.
D epending on their physical condition, checks are

247

processed either on com puters or on m anually operated
proof m achines that list and cum ulate the values of the
checks in a deposit and sort the checks according to the
banks on which they are draw n. Checks draw n on banks
in other territories are simply sorted to the Federal R e­
serve offices serving those territories. The cum ulated totals
are verified against the am ounts calculated by the deposit­
ing banks and discrepancies are resolved. A ccounting
data, indicating the dates and am ounts by which depos­
itors are to be credited and payors are to be debited, are
generated during the processing cycle and are subm itted
to a com puter for final entry to m em ber bank reserve
accounts. O n the day credit is due, the depositors’ reserves
are autom atically increased and, on the day that paym ent
is m ade, the payors’ reserves are reduced.
Checks draw n on banks in the sam e territory are de­
livered to paying banks by first-class m ail or courier
service, while those draw n on banks in other territories
are dispatched to the appropriate F ederal Reserve offices
w here they are further processed and delivered to the
paying b anks.3 Separate daily statem ents are delivered to
each bank showing the items th at the F ederal Reserve
office has received from and sent to the bank. W hen dis­
crepancies of significant m agnitude arise, the banks notify
their Federal Reserve offices so that adjustm ents can be
m ade to their reserve accounts.
As noted earlier, credit for item s deposited at Reserve
offices is passed on a deferred basis in accordance with
published schedules. T he credit availability date is estab­
lished to correspond to the date paym ent is expected to be
received, assuming the collection process goes smoothly.
However, it is im portant to note that credit is passed re­
gardless of w hether or not the collecting Reserve office
actually has received paym ent. Consequently, on those
occasions when credit is passed before paym ent has been
received, float is generated.4

3 A bout 55 percent o f the checks (72 percent o f the dollar
volum e) shipped between Federal Reserve offices is directly con­
trolled by the Interdistrict Transportation System. This organiza­
tion, headquartered at the Federal Reserve Bank o f Chicago, was
formed in 1971 to improve interterritory check deliveries. As a
result o f its investigations, an air charter service was made avail­
able to Federal Reserve offices in 1973. The organization also col­
lects com prehensive data on interterritory check shipments and
maintains close contact with the Federal Reserve Bank o f N ew
York, informing forecasters when possible o f major transportation
delays which can affect daily m ovem ents in float.

4A s m entioned above, paym ent alternatively may be collected
2 A “territory” is the area assigned to a particular Federal R e­ before credit is extended, creating credit (or negative) float. In prac­
tice, however, credit float is much smaller than debit float.
serve office within a Federal Reserve District.




248

MONTHLY REVIEW, OCTOBER 1975

T here are, of course, a variety of substantive reasons
why paym ent m ay not be received on the day credit auto­
matically is passed. Thus, Federal Reserve float associated
with check collection can be broken down into various
com ponents related to the underlying reason for the dis­
ruption of the check collection cycle. The categories which
are useful to the Federal R eserve in m onitoring float are
described briefly below. The overall behavior of Federal
Reserve float prim arily reflects the com bined behavior of
these categories.
h o l d o v e r f l o a t . H oldover float arises from delays in
processing checks at F ederal Reserve offices. These de­
lays can arise from unexpected volum e peaks, unusually
high staff absences, com puter m alfunctions, and a variety
of other causes. W hatever the cause, however, credit for
the value of cash letters as calculated by depositing banks
is passed as specified in published schedules. Thus, de­
positing banks receive reserve credit as scheduled, but
before paym ent is collected. As a result, F ederal Reserve
float occurs, lasting until the processing cycle is com pleted.

t r a n s p o r t a t i o n f l o a t . T he tim e schedules specified
by F ederal R eserve offices in passing credit for checks
depend critically on shipping times betw een Federal R e ­
serve offices and com m ercial banks. W hen checks do not
reach their destinations as scheduled, paym ent is m ade
after credit is extended to depositors, creating float. T ran s­
portatio n delays which cause bulges in F ederal Reserve
float can arise from a variety of causes, such as bad
w eather, strikes, m echanical breakdow ns, fuel shortages,
and other problem s.

r e j e c t e d it e m s f l o a t . A m ong
checks deposited as
qualified for processing on high-speed com puter sorting
equipm ent, some may for various reasons be rejected by
this equipm ent, necessitating handling on slow er m anu­
ally operated m achines. T he result is th at all the rejected
items may not be processed as norm ally scheduled on the
day they are deposited at a F ederal Reserve office. C on­
sequently, paym ent for the rejected items which are not
processed will be m ade after credit has been passed,
thereby generating F ederal R eserve float.

INTRATERRITORY DELAYED PRESENTMENT FLOAT. In SO m e
circum stances, a Federal Reserve office and some com ­
m ercial banks in a F ederal Reserve territory m ay be open
while other com m ercial banks in the same territory are
closed. F o r exam ple, in the F ederal R eserve B ank of
C hicago’s territory, some Illinois banks close regularly
on W ednesdays and rem ain open on Saturdays. T he F ed ­




eral Reserve B ank of Chicago extends credit as scheduled
to depositing banks th at are open for checks draw n on the
closed banks but does not collect paym ent until the fol­
lowing business day. As a result, Federal Reserve float
occurs until the banks on which the checks are draw n
reopen on the next business day and paym ent is collected.
The practice of passing credit despite the fact that a
paying bank is closed is followed because of the cost of
sorting and processing separately the checks draw n on
closed banks. P atterns of sim ultaneously closed and open
banks within a territory occur both on a regular basis, as
described in the example, and also occasionally due to
differential patterns of state holidays in F ederal Reserve
territories that cross state lines.
Intraterritory delayed presentm ent float also arises in
several territories in which there are some rem otely located
banks where the com bination of high transportation costs
and low volume m ake uneconom ic the regular overnight
delivery of checks from Federal Reserve offices to the
banks on which they are draw n. As in the case of closed
banks noted above, the costs of sorting and processing
separately checks draw n on these banks cannot be justified
economically. As a result, paym ent cannot be collected
until after credit is given to depositors.
INTERTERRITORY DELAYED PRESENTMENT FLOAT. F loat alSO
occurs w hen one or m ore Federal Reserve offices are
closed for a holiday while other Federal R eserve offices
rem ain open. This category of float has both positive and
negative com ponents that are significant. Checks draw n
on com m ercial banks in territories w here the F ederal R e­
serve offices are closed, but which are deposited prior to
the deposit deadline in open Federal Reserve offices,
generate positive Federal R eserve float. C redit is ex­
tended to depositor banks in open territories, even though
the open F ederal R eserve offices cannot collect paym ent
from closed F ederal R eserve offices until the next busi­
ness day.
Conversely, checks which are draw n on open banks and
are deposited prior to the deposit deadline in closed F ed ­
eral Reserve offices generate negative F ederal R eserve
float. Paym ent is collected from banks in open territories
as scheduled, but credit cannot be extended to banks in
closed territories until the next business day w hen the F ed ­
eral Reserve offices reopen. T he relative m agnitudes of the
positive and negative float depend both on the patterns
of Federal Reserve office closings and on the alternate
routing patterns that com m ercial banks use w hen closings
in some territories occur during the week.
O n January 1, 1976, this category of F ederal Reserve
float should be reduced significantly. A t th at time, new

FEDERAL RESERVE BANK OF NEW YORK

procedures are scheduled to be im plem ented, under which
an open F ederal R eserve office generally will defer the ex­
tension of credit for checks draw n on banks in a closed
territory one business day longer th an otherw ise w ould be
the case. Conversely, to reduce the incentive for m em ber
banks in a closed territory to use alternate routing p at­
terns, adjustm ents will be applied to their reserve accounts
for credit which would have been granted to them if the
Federal R eserve office of the territory in w hich they are
located had been open.
m i x e d c a s h l e t t e r f l o a t . Some cash letters delivered
to Federal Reserve offices for collection are not sorted
according to credit availability. These “mixed cash let­
ters” are m ade up of checks ordinarily entitled to dif­
ferent credit availability, ranging from im m ediate to two
business days. T hus, if uniform credit availability is
assigned to a m ixed cash letter, Federal Reserve float
arises since the credit and paym ent dates for at least some
checks in these letters differ.
To encourage depositor banks to sort checks into cash
letters that have uniform credit availability, a num ber
of Federal R eserve offices assign credit availability to
mixed cash letters according to the items in the letters that
have the longest collection time. F o r example, if a mixed
cash letter consists of some checks for which credit is
norm ally given immediately and others for which credit is
given in two business days, all items in the letter are as­
signed a deferred availability of two business days. Since
paym ent for' some items in the m ixed cash letter is col­
lected immediately, negative Federal Reserve float is pro­
duced in the am ount of these items since credit is given
two business days later.
Special provision has been m ade for Federal Reserve
offices to accept m ixed cash letters from G overnm ent
agencies and m em ber banks with very small volum es of
check deliveries, since it would be quite costly for such
senders to acquire the staff and m achinery necessary to
sort checks according to credit availability. T o m inimize
the effect of these letters on daily fluctuations in Federal
Reserve float, they are assigned autom atic credit in one
business day. Checks draw n on banks for which paym ent
is collected im m ediately generate negative F ederal R eserve
float, since credit is extended on the next day. B ut this
negative float is offset by the effect of checks draw n on
banks for which paym ent is collected in two business days.
These generate positive F ederal R eserve float since credit
is extended in one business day.

t im e s c h e d u l e f l o a t . P rio r to N ovem ber 9,
1972,
reserve credit for item s draw n on “country” banks in other




249

F ederal Reserve territories was extended to banks in a
m axim um of two business days following the day of
deposit with a F ederal R eserve office. B ut F ederal R eserve
offices norm ally did not collect paym ent for these checks
until the third business day, usually one day after present­
ment. C onsequently, float was created on the second busi­
ness day following deposit. H owever, an am endm ent to
R egulation J, which becam e effective on N ovem ber 9,
1972 and was directed at elim inating time schedule float,
provided that paying country banks w ould be debited on
the business day of presentm ent in order to coincide with
the day on w hich F ederal R eserve offices extended credit
to depositors.

THE FEDERAL RESERVE WIRE TRANSFER
NETWORK AND FEDERAL RESERVE FLOAT

W hile the largest p art of F ederal R eserve float is associ­
ated with the clearing of checks draw n on com m ercial
banks, occasionally large am ounts also are associated
with transfers of F ederal R eserve deposits and U nited
States G overnm ent and F ederal agency securities by the
F ederal Reserve. These transfers are accom plished over
the F ederal R eserve’s nationw ide wire transfer netw ork.
This section describes how such transfers are effected
between m ajor com m ercial banks that have access to the
netw ork and the m anner in which they sometimes affect
F ederal Reserve float.
Suppose th at a business firm or individual wishes to
w ithdraw some funds from an account at a N ew Y ork
City bank and have them transferred to an account at
a bank in San Francisco th at sam e day. In the m orning,
the firm telephones its New Y ork City bank and requests
that the funds be transferred to the San Francisco bank.
A fter verifying the caller’s authority to w ithdraw funds
from the account, an operator in the b an k ’s wire transfer
division, if the bank is directly “on line” , typically punches
inform ation onto perforated paper tape indicating the banks
involved in the transfer, the am ount of m oney, and the
custom er’s account to which the m oney should be cred­
ited. If the bank is not “on line” , an operator at the bank
telephones the F ederal R eserve B ank of New Y ork, which
processes and transm its the message for the bank. W hat­
ever the procedure followed, the message is verified and
entered into a com puter term inal which is linked directly
by wire to a com puter switch at the Federal R eserve
B ank of New Y ork. This switch, in turn, is linked directly
to the Federal Reserve System’s interdistrict com puter
switching facility at C ulpeper, Virginia.
O nce the message is entered, com puters located in the
F ederal Reserve B ank of New Y ork autom atically reduce

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MONTHLY REVIEW, OCTOBER 1975

the New Y ork City com m ercial b an k ’s deposit or reserve
account, credit the “D ue to the F ederal Reserve B ank of
San F ran cisco ” account for the account of the receiving
bank, and route the message to the C ulpeper facility.
T he m essage is received by the C ulpeper com puters
and, w hen a line becom es available, is transm itted to the
F ed eral R eserve B ank of San Francisco. T here the re­
ceiving com m ercial b a n k ’s deposit or reserve account is
autom atically credited, an account “Due from the F ed ­
eral Reserve Bank of New Y o rk ” is debited, and the infor­
m ation is routed through the com puter switch to the San
Francisco com m ercial bank. H aving these funds, the San
Francisco com m ercial b ank then credits the account for
which the funds are intended. T hat evening the Federal
Reserve B ank of San Francisco receives paym ent from
the Federal Reserve B ank of New Y ork through the In te r­
district Settlem ent A ccount.
In 1974, about 14.5 million of the foregoing types of
m oney transfers involving about $30 trillion were p ro ­
cessed through the Federal R eserve wire transfer netw ork.
Typically, they have no im pact on Federal Reserve float
since the receiving bank is credited and the sending bank
is debited on the same day. D espite extensive precautions,
however, from tim e to time there arise operational pro b ­
lems within the transfer netw ork. In such circum stances,
the C ulpeper facility is im m ediately alerted, transm issions
to and from the affected office are term inated, and in­
coming transfers to the affected office are stored by the
com puters at C ulpeper until the problem is eliminated.
In m ost cases, the problem s are resolved before the end
of the day and norm al operations are com pleted still
w ithout any im pact on F ederal Reserve float.
Occasionally, however, problem s cannot be resolved
before the Reserve offices not experiencing difficulties
m ust close for the day. In these instances, credit (or
negative) Federal Reserve float typically is created. This
occurs because the office experiencing difficulty generally
rem ains open until all w ork, both incom ing and outgoing,
is processed. W ith other R eserve offices closed, however,
all outgoing w ork from the affected office is not received
until the next day. Thus, the reserve accounts of the send­
ing com m ercial banks at the affected office are reduced as
scheduled, but the accounts of the receiving banks at the
offices th at experienced no problem are not increased.
Similarly, F ederal R eserve B anks do not com plete settle­
m ent through the Interdistrict Settlem ent A ccount. The
level of net F ederal R eserve float plunges, therefore, until
the following day when the funds transferred and inter­
district settlem ent are com pleted. In practice, m em ber
banks with accounts at unaffected offices are usually
com pensated for reserves lost through such interferences




by appropriate reserve adjustm ents.5
T he transfer of U nited States G overnm ent and Federal
agency securities over the F ederal Reserve com m unica­
tions netw ork can also create float on occasion. T he m e­
chanics of a securities transfer closely parallel those just
described for the m ovem ent of Federal Reserve deposit
balances. Similar messages are prepared by banks wishing
to send securities, usually a bank selling or acting on behalf
of a dealer, corporation, individual, or other bank wishing
to sell a security. These messages contain inform ation con­
cerning the security in addition to norm al accounting data.
W here the transfer crosses Federal Reserve D istrict lines,
paym ent is accom plished through the Interdistrict Settle­
ment A ccount, exactly as in the case of a money transfer.
W hen problem s arise that prevent securities transfers
from being com pleted on a sam e-day basis, Federal R e­
serve float occurs. However, in contrast to the money
transfer case, delayed securities transfers create positive
float. Since the seller initiates the transaction and receives
sim ultaneous paym ent, a delay means that the buyer is not
charged on a timely basis. Such float continues until settle­
m ent is com pleted through the Interdistrict Settlem ent
A ccount. Because the dollar volum e of securities transfers
is very large, breakdow ns can create sizable bulges in net
float. However, because the entire netw ork is autom ated,
such bulges seldom occur and even then rarely last more
than one day.

5A reserve adjustment is an after-the-fact correction to the amount
considered as “maintained reserves”— vault cash, balances on
the books of the Federal Reserve, and prior reserve adjustments
— for an individual bank for a particular reserve period. A
reserve adjustment is never made as an accounting entry on the
Federal Reserve books. A m ember bank meets its reserve require­
ments by having adequate “maintained reserves”. In som e cases,
reserve adjustments affect Federal Reserve float, and in other cases
they do not. Because o f the small size of many adjustments and
the cost involved, it is not feasible to determine in all cases
whether float is affected.
Reserve adjustments create certain statistical problems. The
most important o f these involves the level o f float as calculated
from the “Consolidated Statement of Condition of A ll Federal
Reserve Banks” and in a table titled “M ember Bank Reserves,
Federal Reserve Bank Credit, and Related Items”, both published
m onthly in the Federal Reserve Bulletin. The former never in­
cludes reserve adjustments, while the latter usually does, creating
a discrepancy between the alternative float numbers. The dis­
crepancy persists because the two tables serve different purposes.
The Consolidated Statement of Condition reflects book balances
and is prepared on the basis o f standard accounting principles,
while the Member Bank Reserves table is for statistical purposes
and is adjusted where possible to remove known distortions. F ed­
eral Reserve float data from this table also are used in m oney supply
calculations and are occasionally adjusted for this purpose when
large reserve adjustments are known not to have affected float.

FEDERAL RESERVE BANK OF NEW YORK

FEDERAL RESERVE FLOAT AND
EXTENDED DISBURSEMENT FLOAT

The foregoing discussion of Federal R eserve float p ro ­
vides a useful background for viewing a phenom enon
sometimes term ed “extended disbursem ent float” , which
has been the subject of recent business and financial com ­
m unity discussion. Briefly stated, extended disbursem ent
float arises from the practice, apparently followed by some
corporations, of writing checks on banks distant from the
creditors to whom they are sent. T he purpose of this prac­
tice is to maximize the tim e it takes for the checks to clear
against a co rporation’s accounts and thus to defer as long
as possible the date on w hich it is necessary to provide
funds to cover its checks. This, in turn, enables the firm to
stay invested in interest earning assets or to delay borrow ­
ing as long as possible. T he key to this scheme, it has been
asserted, lies in a “structural defect in the F ederal Reserve
System ” , w herein the Federal Reserve grants “good
m oney”— i.e., gives deposit or reserve credit to the bank
presenting the check for collection— before paym ent is
received from the bank on which it is drawn.
C ontrary to the foregoing view, Federal R eserve float
is not the “key” in any meaningful sense to extended
disbursem ent float. R ather, the essence of extended dis­
bursem ent float lies in the fact th at it generally takes
longer to collect paym ent for checks draw n on banks re­
m ote from the banks in w hich the checks are deposited.
This is true because checks draw n on distant banks
typically pass through additional hands and processing
steps and are transported greater distances. M oreover,
there is the possibility of additional delays at every addi­
tional step in the collection process. F ederal Reserve float
may or m ay not be involved in extended disbursem ent
float, but even if it is its contribution is unlikely to be
large. F o r the m ost part, extended disbursem ent float de­
pends on a com bination of w hat are usually term ed “mail
float” , “b ank float” , and delays in processing by creditors
receiving paym ents.
M ail float arises w hen a corporation draws a check
to the order of a creditor and dispatches it through the
mails. In m any transactions, the draw er considers itself—
subject to successful collection of the check— to have
discharged its obligation. So long as the check is in the
mails, however, the issuing corporation can defer the
funding of the check since the bank on which it is draw n
has not yet had to m ake paym ent for it through a re­
duction of its deposits at a Federal Reserve B ank or
correspondent bank. F loat arises in the sense th at the firm
has discharged its obligation but has not yet had to provide
funds to do so. M ail float persists until the check is deliv­




251

ered to the creditor by the postal service, which may be
several days or m ore after the check is written. T he F ed ­
eral Reserve, of course, is not at all involved in mail float.
A fter a check is delivered to a creditor, it ordinarily
takes some period of time for the creditor to process and
deposit the check in its com m ercial bank. D uring this
interval, the draw er continues to have the use of its funds,
and in this sense float continues, even though it typically
is not categorized as a particular type of float. This addi­
tional period of processing time, which again could
am ount to several days or m ore, contributes to extended
disbursem ent float, but again the Federal Reserve is in
no way involved.
Once the creditor deposits the check in its commercial
bank, there arises w hat typically is referred to as “bank
float” , which persists until the bank w here the check
is deposited (o r its correspondent bank, if the check is
forw arded for collection) either receives credit from the
Federal Reserve or collects for it in some alternative m an­
ner. B ank float again may extend for several days, since
the draw er continues to have the use of its funds. The
Federal Reserve System may be involved while bank
float persists, in the sense that it may be in the process of
collecting paym ent for the check. However, Federal R e­
serve float does not arise during this period.
Federal Reserve float m ay arise only after so-called
bank float has disappeared, when the commercial bank
sending a check to the Federal Reserve for collection
receives reserve or deposit credit before the Federal
R eserve collects paym ent. D uring any such period, of
course, the corporation that issues the check continues
to have use of its funds. It is unlikely, however, that F ed ­
eral R eserve float, if it does happen to arise, would
persist for m ore than a day or two at most, a relatively
short period com pared with the overall period of extended
disbursem ent float. Thus, while Federal Reserve float
conceivably can be involved in the extended disburse­
m ent sequence, it does not constitute the key to the
scheme.
R egardless of w hether Federal R eserve float is involved
in extended disbursem ent float, the F ederal Reserve is
interested in curtailing the developm ent of the practice.
T he reason is th at the entire procedure leads to an unnec­
essary use of resources. The draw ing of checks on banks
in distant locations results in higher collection costs than
if the checks were draw n on banks in closer proxim ity
by using m ore labor, equipm ent, and transportation fa­
cilities. Ultim ately, of course, these higher costs are
paid by the general public through increased expenditures
by the postal service, com m ercial banks, and the Federal
Reserve.

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MONTHLY REVIEW, OCTOBER 1975

FEDERAL RESERVE FLOAT AND
OPEN MARKET OPERATIONS

F ro m the view point of m onetary policy, F ederal Reserve
float is of interest prim arily because it bears on the conduct
of F ed eral R eserve open m arket operations. These opera­
tions consist of purchases and sales of U nited States G ov­
ernm ent and F ed eral agency securities in the open m arket
for the purpose of providing an appropriate supply of re­
serves to the banking system. It is through this m eans that
the F ed eral R eserve influences financial liquidity in the
econom y generally and im plem ents its m onetary policy
objectives. In addition to being influenced by open m arket
purchases and sales, how ever, the supply of reserves avail­
able to the banking system also is affected by other factors
n o t u nder direct F ederal R eserve control. F ederal Reserve
float is prom inent in this group, w hich also includes cur­
rency in circulation and balances at the F ederal Reserve
B anks of the U nited States T reasury, other G overnm ent
agencies, and foreign and international agencies. A t times,
shifts in these factors coincide with desired open m arket
operations, b u t at other times they change to the contrary
and m ust be offset. Indeed, a substantial share of day-today operations are for this purpose. F lo at is am ong the
m ost variable and least predictable of the factors affecting
reserves, the com bination of which can at tim es create for­
m idable operational problem s.
T he variability and unpredictability of F ederal R e­
serve float has long been a problem and has been at
least one of the factors considered in the efforts initiated
over the years to reduce the level of float. O ne such effort
was u n dertaken in 1972, w hen R egulation J was am ended
to speed paym ent to the F ederal R eserve for checks draw n
on banks outside F ed eral R eserve cities. This am endm ent
h ad the effect of largely elim inating the tim e schedule com ­
ponent of float. T otal float fell from its 1972 peak of $3.3
billion to about $2.3 billion in 1974. In addition, an ex­
p anded air charter service to speed check delivery to m ost
F ed eral R eserve offices was im plem ented in 1973 by the
Interd istrict T ran sp o rtatio n System, helping to reduce the
average volum e of tran sp o rtatio n float.
D espite these reductions in the average level, daily and
weekly F ederal R eserve float fluctuations have rem ained
large. Indeed, the weekly variability of float appears to
be no low er now th an before R egulation J was changed
and the new air charter service was introduced. Similarly,
seasonal and intram onthly m ovem ents in F ederal Reserve
float, w hich are related to corresponding p atterns in the
volum e of paym ents in the econom y, have rem ained
roughly stable in recent years despite these changes.
Intraw eekly m ovem ents in float, how ever, changed sig­




nificantly with the virtual elim ination of tim e schedule float
in N ovem ber 1972. Tim e schedule float accounted for a
significant portion of total float, and m ore im portant it
m oved in a highly predictable m anner. M ost other float
com ponents were then and have rem ained m uch m ore ran ­
dom in their m ovem ents, arising as they do from events
such as com puter breakdow ns, severe w eather, labor
strikes, concentrated episodes of staff illness, and the like.
Such events have the potential of causing float unexpectedly
to rise or fall by $1 billion or m ore from one day to the
next.
Such considerations bear heavily on the problem of
forecasting float, w hich is necessary in planning open
m arket operations. The elim ination of time schedule float
rem oved m uch of the predictable elem ent in intraw eekly
m ovem ents, leaving the forecaster the problem of dealing
prim arily with the results of random events. Some basis
for attacking this seemingly impossible problem does exist,
however, since the deferred availability feature of check
collection m eans th at the float im pact of m any events will
be delayed a day or two. H ence, timely notification of
events know n to disrupt the clearing process can aid the
forecaster in m aking quick adjustm ents to near-term float
projections.
CONCLUDING COMMENTS

This article has described the present status of the F ed ­
eral Reserve collection and transfer m echanism s as they
bear on Federal Reserve float and has explained relevant
aspects of changes in those mechanism s over time. To
date, the volume of collections and transfers processed has
grown steadily from about $17 trillion in 1970 to about
$38 trillion in 1974, with correspondingly rapid grow th in
capacity. E xpansion of capacity has brought com puteriza­
tion, establishm ent of Regional Check Processing Centers,
specialized transportation facilities, autom ated com m uni­
cations facilities, and changes to the regulations under
which collections and transfers are effected. A lthough the
details are uncertain, the future probably will bring con­
tinued growth in volume, significant adjustm ents to p ro ­
cessing facilities, and m ore Regional Check Processing
Centers.
The check has been around for a long time, and its form
and use have developed in an evolutionary ra th er than
revolutionary way. N o doubt it will continue to evolve.
However, the future of autom ated funds and securities
transfers seems less predictable and potentially m uch m ore
volatile. W hile the transfer of funds and securities by wire
has been an operational reality for over fifty years, both
dom estic and international use of this technique has

FEDERAL RESERVE BANK OF NEW YORK

grown with the em ergence of the com puter and m ore
sophisticated com m unications equipm ent. T oday, tens if
not hundreds of billions of dollars change hands daily
through the various public and private autom ated com ­
m unications netw orks, w ith the vast m ajority of transfers
having no im pact on Federal R eserve (o r o th er) float
except w hen breakdow ns occur. These netw orks are used
alm ost exclusively by large corporations, governm ents,
banks, and sim ilar sizable institutions transferring very
large sums in each transaction. O n the horizon, however,
are similarly autom ated paym ents mechanism s oriented
tow ard the small com m ercial transaction at present largely
handled by cash, credit card, or check. The appearance
and acceptance of such systems should significantly reduce
the use of checks.
As a larger p roportion of all transfers becom e auto­
m ated so th at credit is extended im m ediately and sim ulta­
neously as paym ent is collected, seasonal and intram onthly
variations in Federal Reserve float m ost likely will becom e
less pronounced. W ith a growing portion of transfers re ­
ceiving im m ediate credit and a sm aller portion receiving
deferred credit, the num ber of float-producing events
whose effects can be incorporated into the forecasts with




253

early notification will diminish. H ence, float m ovem ents
can be expected to becom e even m ore random in charac­
ter, and the forecaster’s problem will therefore becom e
m uch m ore difficult. In effect, to forecast float it will be­
come increasingly necessary to anticipate such random
events as com puter breakdow ns and other problem s which
cause interferences in autom ated transfer systems.

THE CULPEPER SWITCH

T he C ulpeper Sw itch, a new nontechnical twentypage booklet, explores six decades of com m unica­
tions developm ent and expansion, culm inating in the
establishm ent of the Federal R eserve System’s com ­
m unications netw ork.
Single copies of the publication are available w ith­
out charge from the Public Inform ation D epartm ent,
Federal Reserve B ank of New Y ork, 33 Liberty
Street, New Y ork, N .Y . 10045.




MONTHLY REVIEW, OCTOBER 1975

Per Jacobsson Foundation Lecture
The P er Jacobsson F oundation in W ashington, D .C., has m ade available to the
F ederal R eserve B ank of New Y ork a lim ited num ber of copies of the 1974 lecture
on international m onetary affairs. The F o u ndation sponsors annual lectures on this
topic by recognized authorities in honor of the form er M anaging D irector of the
International M onetary F und, who died in 1963.
T he eleventh lecture in this series was held in Tokyo on O ctober 11, 1974 in the
h eadquarters building of the F ederation of B ankers A ssociations of Japan. Two
papers were presented on the subject “Steps to In ternational M onetary O rd er” ,
one by C onrad J. O ort and the other by Puey U ngphakorn. D r. O o rt is T reasurerG eneral at the D epartm ent of Finance of the N etherlands G overnm ent and was
for over ten years Professor of Econom ics at the U niversity of U trecht. D r. Puey,
P rofessor of Econom ics at T ham m asat U niversity in B angkok, is C hairm an of the
C ouncil of E conom ic Advisers to the Prim e M inister of T hailand and was form er
G overnor of the B ank of T hailand. C om m entaries were offered by Saburo O kita
of Japan, who is President of the O verseas E conom ic C ooperation F und, and W il­
liam M cChesney M artin, form er C hairm an of the B oard of G overnors of the
F ederal R eserve System.
This B ank will m ail copies of the lecture w ithout charge to readers of the
M o n th ly R eview w ho have an interest in international m onetary affairs.
R equests should be addressed to the Public Inform ation D epartm ent, Federal
R eserve B ank of New Y ork, 33 L iberty Street, New Y ork, N .Y . 10045. French
and Spanish versions are also available.