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MONTHLY REVIEW
SEP TEM B ER

1960

Contents
The Emerging Common Markets in
Latin A m e rica ...................................... 154
International Developments .................... 160
The Business Situation.............................. 163
Money Market in A u g u st........................ 165

V o lu m e ^




Ho. 9

MONTHLY REVIEW, SEPTEMBER 1960

154

The E m e r g in g C o m m o n M a r k e ts in L atin A m e r ic a
The drive toward regional economic integration, already
a major force in Western Europe, has in recent years also
made itself felt in Latin America. Ineffective attempts at
partial economic union dot Latin American history, but
the current integration movement is based on discussions
of a union embracing all Latin America which began
shortly after World War II. While it was not until 1958
that some of the countries of the area moved from discus­
sion to treaty making, events have progressed swiftly since
then. In the past two years treaties have been signed estab­
lishing two regional groupings, together encompassing
twelve of the twenty Latin American republics (see map).
Regionalism has advanced farthest in Central America,
where five countries—Costa Rica, El Salvador, Guatemala,
Honduras, and Nicaragua—have agreed to eliminate bar­
riers to trade among themselves, establish a common
tariff vis-a-vis third countries, and take measures to co­
ordinate their industrial development. But, in terms of
the size of the nations involved, a more far-reaching step
was the signing last February of the Montevideo Treaty,
in which seven countries — Argentina, Brazil, Chile,
Mexico, Paraguay, Peru, and Uruguay— agreed to free
their trade with each other.
MOTIVES FOR INTEGRATION

The formation of the six-country European Common
Market undoubtedly set an example for the Latin
American countries. However, integration by under­
developed countries, whether in Latin America or else­
where, obviously entails problems that are in many ways
both very different from and more difficult than those
faced by the European nations. In Europe, integration in­
volves essentially the sweeping-away of artificial barriers
to an increase in trade for which there is already a natural
basis in the existing economic structure. The European
Common Market is geographically compact and possesses
a superb transportation and communication network; the
six nations are highly industrialized, and trade between
them has long comprised a significant part of their total
trade. Moreover, a strong interest in closer political ties in
Western Europe has greatly facilitated the formation of a
common market.
The conditions that favor economic integration in West­
ern Europe do not, by and large, exist today in Latin
America. There is little basis for intraregional trade in




the present economic structure of the Latin American
countries. They are largely self-sufficient in foodstuffs
and export chiefly agricultural products and minerals. The
trade of these countries has therefore been directed to the
industrial nations that need Latin America’s primary
products and can supply Latin America with the manu­
factured goods it requires. While manufacturing has ex­
panded rapidly in some Latin American countries in the
postwar period, it is generally on a scale at most sufficient
only to meet domestic requirements and characterized by
high production costs. Moreover, the limited opportuni­
ties for trade between the Latin American countries has
provided little incentive for bridging the region’s great
expanses and rugged terrain with adequate transport facili­
ties, with the result that freight costs within the region are
often prohibitively high.
Trade between the twenty Latin American republics
grew faster than their total trade during World War II, but
since 1948 intra-Latin American trade has not increased

FEDERAL RESERVE BANK OF NEW YORK

Chxirt I

INTRAREGIONAL EXPORTS
AS PERCENTAGE OF TOTAL EXPORTS
MONTEVIDEO TREATY COUNTRIES
Average 1957-59

Regional average
Argentina
Brazil
Chile
Mexico
39.3

Paraguay
Peru
Uruguay
CENTRAL AMERICAN COUNTRIES
A ve ra g e 1957-58

Regional average
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
12
Sources.*

14

16

United Nations, Direction of International Tra d e ; a nd national

foreign trade statistics.

in relative importance and has accounted on the average
for only about 9 per cent (about $700 million in 1959) of
total Latin American exports. (By contrast, even in 1948,
before the liberalization of intra-European trade had be­
gun, the European Common Market countries did more
than 25 per cent of their total trade with each other.)
Within the two groups seeking integration there are sub­
stantial differences in the relative importance of intraregional trade to individual countries, but such trade is not
large for any of them except Paraguay (see Chart I). More­
over, intra-Latin American trade has been concentrated
on a few commodities; Venezuelan petroleum has in recent
years accounted for as much as one third of trade within
Latin America, and the rest has been made up mostly of
a relatively small number of foodstuffs and raw materials.
Trade in manufactured goods has been very small.
In these circumstances, integration is looked upon by
its advocates primarily as a framework for the future
development of the region’s production and trade, and is
based on the belief that a sweeping reorientation of the
Latin American economy is necessary for an adequate




155

rate of growth. Indeed, a slowing-down in Latin Ameri­
ca’s economic growth in the past several years accounts
in large measure for the accelerated pace of the integra­
tion movement. The United Nations Economic Commis­
sion for Latin America—which has played a major role
in the integration movement—estimates that in the first
postwar decade real income per capita in the area as a
whole expanded at an estimated average annual rate
of some 3.3 per cent. But in recent years, as many inter­
national commodity prices have declined and Latin Ameri­
ca’s foreign exchange earnings have fallen sharply, eco­
nomic expansion has little more than kept pace with the
very rapid population increase. Since commodity prices
cannot be expected to recover to the abnormally high
levels of the earlier postwar years, many Latin American
countries fear that in the future they will find themselves
chronically short of the foreign exchange necessary for
maintaining an adequate rate of development.
Most Latin American countries have been seeking
to end their overdependence on exports of primary prod­
ucts and to stimulate the growth of national industries
to produce substitutes for imports. These infant industries
have generally been established behind high tariff walls,
and their vulnerability to competition from the more ad­
vanced industrial nations means that the Latin American
countries do not regard the freeing of trade on an over-all
basis as a realistic alternative to national protectionism.
However, the proponents of integration argue that even
in the larger countries national markets are too small to
support production on an economic scale in many indus­
trial lines, and that market limitations are likely to make
industrialization behind national tariff walls far too costly
a way of establishing the more complex capital goods
industries. They therefore believe that the only alternative
is the creation of broader regional markets which, it is
hoped, will enable Latin America to allocate its scarce
resources more rationally through intraregional specializa­
tion and by establishing large-scale, low-cost industries.
Regional economic integration, its proponents argue, is
also needed to enhance the bargaining power of the Latin
American countries vis-a-vis third areas. The Latin
American countries fear that they may lose important
European markets because of the preferential position of
some African countries in the European Common Market,
and believe that they must band together in order to deal
on a basis of equality with other regional groups.
CENTRAL AMERICAN INTEGRATION

The twin problems of overdependence on one or two
agricultural exports, and of national markets too small

156

MONTHLY REVIEW, SEPTEMBER 1960

to support industrialization, are especially pressing in
Central America. The countries of this region are small
and poor; they have a combined population of less than 11
million, a total area not very much larger than that of
California, and an average per capita national income es­
timated at less than $200 per year. Agriculture is of course
the predominant industry, with bananas, coffee, and cotton
accounting for more than 80 per cent of the region’s total
exports. Trade has therefore been directed preponderantly
toward the United States and Western Europe. Intraregional
trade, while tending to increase in relative importance
during the postwar period, still accounted for only about
4 per cent of the countries’ exports on the average in 195758 (see Chart I). Adequate transportation has been par­
ticularly lacking, but with the construction of the Pan
American Highway an important breakthrough has been
made toward linking up the five countries.
The Central American countries took their first specific
steps toward regional integration in June 1958 when
they signed an “Agreement on the Regime for Central
American Integrated Industries” and a “Multilateral
Treaty on Central American Free Trade and Economic
Integration”.
Under the first agreement, which provides for an
industry-by-industry approach to economic integration,
manufacturing plants that require access to the full
Central American market may be jointly planned and
established as “integrated industries”. The products of
these plants are to be granted immediate free entry to the
markets of all five countries; if any plants in the same in­
dustries are established independently of the integration
program, their products will initially be fully dutiable and
will receive free entry only gradually. In order that the
benefits of the “integrated industries” may be distributed
more equitably among the five countries, it is provided
that a second “integrated industry” may not be established
in any of the countries until at least one “integrated in­
dustry” has been established in every country. This pro­
gram is to go into effect when the treaty is ratified by all
five countries; so far, it has been ratified by El Salvador,
Guatemala, Honduras, and Nicaragua, but not by Costa
Rica.
The trade treaty provides for the immediate elimina­
tion of intraregional tariffs and other charges on 200 com­
modity groups, and calls for the removal of all other
barriers to mutual trade within ten years and for the even­
tual establishment of a common external tariff. This treaty
is already in effect for all the signatories except Costa
Rica, which has not yet ratified. The five-nation common
market was spelled out in greater detail in September
1959, when a treaty was signed setting a five-year deadline




for the establishment of the comruon external tariff; so far,
El Salvador and Guatemala have ratified this treaty. At
the same time, a protocol providing for an immediate 20
per cent reduction in tariffs on all goods produced within
the region was also signed, but it has not yet been ratified
by any of the five countries.
Finally, this year three of the Central American
countries—El Salvador, Guatemala, and Honduras—acted
to move more rapidly toward a common market by sign­
ing and ratifying a “Tripartite Treaty of Economic Asso­
ciation”. This treaty, which commits the signatories to
work toward the free circulation of goods, persons, and
capital within Central America, provides specifically for
the immediate freeing of intra-area trade in all commodi­
ties (except about fifty specified items on most of which
tariffs are to be eliminated gradually over a five-year pe­
riod) and the establishment of a common external tariff
within five years. The treaty also provides for the creation
of a Development and Assistance Fund to assist in fi­
nancing development projects and in facilitating any re­
adjustments that the opening of the common market
might necessitate. In June, the Tripartite Treaty coun­
tries reportedly decided to contribute an initial capi­
tal of $5.5 million to this fund and also agreed to the
creation of a permanent secretariat to administer the
treaty. The Economic Commission for Latin America has
been requested by the Economics Ministers of the five
countries to prepare a draft treaty that would bring Costa
Rica and Nicaragua together with the other three coun­
tries in a joint program to create a common market along
the lines laid down in the Tripartite Treaty.
THE MONTEVIDEO TREATY

The signing of the Montevideo Treaty early this year
was an outgrowth of studies, initiated by the Economic
Commission for Latin America in 1956, that looked
toward the creation of a common market embracing all
Latin America. In April 1959 Argentina, Brazil, Chile,
and Uruguay began to discuss the immediate creation of
a free-trade area among themselves, and negotiations pro­
gressed rapidly thereafter. Bolivia, Paraguay, and Peru
joined in negotiating the project, Mexico was invited to
become a charter member, and last February a treaty was
signed by Mexico and six of the South American coun­
tries (Bolivia decided not to adhere immediately). When
the treaty is ratified by three signatories, it is to come into
effect for them, and for the other countries after their rati­
fication. There is apparently no major organized opposi­
tion, and it is expected that all the participating countries
will have ratified by the end of this year.

FEDERAL RESERVE BANK OF NEW YORK

The interest of the six South American countries in
economic integration reflects in part the desire to preserve
their existing trade with each other. Intraregional trade
has generally been more important between these countries
than elsewhere in Latin America, although it has been
limited to a few primary commodities, principally wheat
from Argentina, coffee and fresh fruits from Brazil, metals
and petroleum from Chile, cotton from Peru, and lumber
from Brazil and Paraguay (see Chart II). Until recently
this trade, because of inconvertibility and rigid import re­
strictions, was conducted largely through bilateral clearing
arrangements in which the countries granted preferential
treatment to each other’s products. However, in recent
years all of these countries except Brazil and Uruguay
have, with the assistance of the International Monetary
Fund, undertaken stabilization programs, aimed at estab­
lishing more realistic exchange rates, removing exchange
and quantitative trade controls, and placing their trade on
a multilateral basis. When Argentina, which accounts for
a large part of the trade between the six countries, made
its currency convertible in January 1959, these countries
were impelled to search for a new framework that would
preserve the trade that they had built up among them­
selves on a bilateral basis.
But the adherence of Mexico to the Montevideo Treaty,
despite the negligible size of its trade with the South Ameri­
can countries, shows that these seven Latin American
countries were brought together by the desire not only
to maintain existing trade, but also to develop new trade.
Mexico, as well as Argentina, Brazil, and Chile, has been
a leader in industrial progress among the Latin American
countries. While manufactured products have not so far
entered significantly into their mutual trade, these coun­
tries are now able, or expect shortly to be able, to export
to each other an increasing number of manufactured prod­
ucts if they eliminate tariffs and other restrictions on each
other’s goods while maintaining protection against the
products of the older industrial nations.
The ultimate goal of the seven countries, as the pre­
amble to the Montevideo Treaty makes clear, is to achieve
“complementarity and the integration of their national
economies” in the fullest sense. However, the treaty itself
actually seeks only the more limited goal of a free-trade
area. The heart of the treaty is the agreement by the signa­
tories that over the next twelve years “they will eliminate
gradually, for substantially all their reciprocal trade,
charges and restrictions of all types that bear upon the
importation of goods originating in the territory of any
contracting party”. There is no provision in the treaty
for the formation of a full customs union through unifica­
tion of the external tariffs of the seven countries. The




157

Chart II

TRAM BETWEEN MONTEVIDEO TREATY COUNTRIES
Exports, 1957-58 average

COUNTRY SHARES

COM M ODITY COMPOSITION

Sources; Estimated from United Nations. Direction of International Trade
and Yearbook of International Trade Statistics, a n d national foreign
trade statistics.

re-export within the region of goods imported from out­
side countries is prohibited, except by special agreement
or where the goods have undergone some processing by
the importing country.
The actual reduction of tariffs, quotas, and other restric­
tions is to be achieved through annual negotiations in
which the seven countries will draw up national lists of
tariff reductions for each country, together with a common
list of products upon which all the countries must elimi­
nate their tariffs. On the national lists each country must
show successive annual reductions of 8 per cent in the
weighted over-all average of its tariffs on the goods that it
actually imported from other treaty countries in the pre­
ceding three years. In addition, under the common-Hst

MONTHLY REVIEW, SEPTEMBER 1960

158

procedure each country will be required by the end of the
twelve-year period to eliminate tariffs on goods that have
been traded anywhere in the region, even if they have not
entered into its own intraregional trade. At the end of
three years the common list must include goods that
account for 25 per cent of all intra-area trade; 50 per cent
must be included after six years, 75 per cent after nine
years, and substantially all trade by the end of the twelfth
year.
It should be noted that the Montevideo Treaty coun­
tries’ obligation to reduce tariffs and other trade barriers
under this procedure is limited in two important respects.
In the first place, the seven countries are apparently
specifically committed to include on the national and
common lists only goods actually traded within the region.
Secondly, the rate at which tariffs on individual commodi­
ties are to be reduced is, in effect, left up to each country.
The 8 per cent annual reductions that must be shown on
the national lists apply only to the average tariff level,
and presumably a country may meet this requirement in
any given year during the transition period by substantially
reducing some duties while leaving other products fully
protected. In addition, the placing of a commodity on
the common list will apparently mean only that duties on
it must be eliminated by the end of the twelve-year period.
Escape clauses in the treaty authorize the temporary
withdrawal of concessions on a nondiscriminatory basis
where imports “threaten to cause serious damage to speci­
fied productive activities of significant importance” or
when restrictive measures are necessary for over-all
balance-of-payments reasons.
The Montevideo Treaty establishes a Latin American
Free Trade Association with two principal organs—an
annual Conference of the Contracting Parties and a Per­
manent Executive Committee. The conference will be the
association’s supreme authority, empowered to take all
actions requiring joint decisions. A two-thirds vote is re­
quired for action by the conference and, during the first
two years at least, all countries will have the power of
veto. The Permanent Executive Committee, composed
of one representative from each country, will exercise
continuous supervision over the implementation of the
treaty with the aid of a permanent secretariat.
PROSPECTS AND PROBLEMS

The Central American and Montevideo Treaty countries
are thus about to embark on the enormously difficult task
of putting economic integration into practice. The agree­
ments that have been signed provide frameworks for deal­
ing with the practical problems of integration, but much
will depend on the actual implementation of the treaties.




However, certain basic considerations about economic in­
tegration provide bench marks for estimating both the po­
tentialities and the problems that the Latin American
countries face.
Economic integration may be presumed to offer the
greatest possibilities where it results in the establishment
of a market large enough and sufficiently well endowed
with a variety of natural resources to permit significant
economies through specialization and large-scale produc­
tion. Integration in Central America will not bring to­
gether important natural resources, and even a common
market of all the five countries would be smaller, for
example, than that of Colombia. Nevertheless, the Central
American common market appears large enough to make
possible the establishment of m;my lighter industries that
could not function within the sheltered national markets
of the participating countries. Moreover, many of the
proponents of Central American integration view it pri­
marily as a means of strengthening the economies of the
five countries so that they may eventually join in a wider
Latin American common market, just as the Benelux
union preceded the entry into the European Common
Market of the latter’s smallest members.
On the other hand, there can be little doubt about the
potential advantages over national protectionism of the
formation of so large a single market as that contemplated
in the Montevideo Treaty. The seven countries’ huge and
diverse natural resources offer ample scope for the division
of labor; and the opportunity of serving a combined mar­
ket of some 140 million persons should make it possible
for even the more complex and capital-intensive modem
industries to operate in the region on an efficient scale.
The extent to which the possible economic gains will be
realized in practice is likely to depend on the completeness
of the integration of the Latin American markets. Produc­
tion can be fully rationalized only where all sectors of the
economies of the participating countries are opened to
competition so that the allocation of resources can be
determined in a genuinely free market. Partial economic
integration is likely to exclude just those hard-core pro­
tected products from whose liberalization the most impor­
tant benefits can be obtained. Substantially complete free
intraregional trade is, as noted above, the avowed goal
of both groups of countries, but its achievement will de­
pend upon the actual effectiveness of the procedures
adopted for freeing trade.
The Montevideo Treaty, in particular, leaves much to
future negotiations. In this treaty the seven member gov­
ernments sought to establish a procedure for tariff reduc­
tion that would allow them a maximum of flexibility when
exposing their highly protected industries to competition.

FEDERAL RESERVE BANK OF NEW YORK

159

This is clearly reflected in the treaty’s important special exacerbating the unevenness of economic development in
provisions for the agricultural products that account for a region. Much of the discussion leading up to the
the bulk of the existing trade between the seven countries. Montevideo Treaty was concerned with the need to secure
During the twelve-year transition period, the treaty coun­ balanced economic development, and the treaty calls for
tries will be permitted to restrict agricultural imports the conducting of the annual negotiations on the basis of
to the amount needed to cover deficits in national pro­ a “reciprocity of concessions” that will offer each of the
duction and to take measures to equalize the prices seven countries the opportunity to expand its trade. In
of imported and domestic agricultural products. The particular, special concessions are granted to Paraguay, by
treaty urges that intraregional trade in agricultural prod­ far the least developed of the seven countries.
Progress toward Latin American economic integration
ucts be expanded by the negotiation of agreements in
which the seven countries will give priority to each other’s may depend increasingly on the ability of the participating
countries to pursue the internal financial policies necessary
products in meeting their import requirements.
The completeness of the free-trade area may also be for maintaining balance-of-payments equilibrium. Contro­
prejudiced by the two limitations to the Montevideo versy over the necessity of measures to insure balance in
Treaty’s tariff-reduction mechanism previously noted. The intraregional trade (as well as over the need for a pay­
fact that the treaty countries are free to determine the rate ments union) was for a time a major stumbling block to
at which they will reduce their tariffs on individual prod­ agreement among the Montevideo Treaty countries. The
ucts contrasts with the European Common Market coun­ treaty actually does not mention this subject, the par­
tries’ agreement to make a fixed minimum reduction on ticipating countries having agreed only to continue dis­
all tariffs at each stage in their program for creating a cussing the payments question. Imbalances in the Monte­
common market. The danger in the flexibility permitted video Treaty countries’ trade with each other cannot cause
under the treaty is that it may in practice make the gov­ difficulties so long as they maintain over-all balanceernments of the seven countries more susceptible to do­ of-payments equilibrium and are able to cover their intra­
mestic protectionist pressure, and thus compound the prob­ regional deficits with surpluses earned elsewhere. And
lem of reducing hard-core tariffs. There may be a tendency initially, while intraregional trade remains small, deficits
to put off the most difficult tariff reductions to the latter in intraregional payments may not be large enough to
part of the twelve-year period, when there will no longer deter even countries whose over-all payments are not in
be time under the treaty to make them gradually enough balance from reducing their barriers to intraregional trade.
to cushion the impact on national industries.
However, if trade between the Montevideo Treaty coun­
The fact that goods that are not actually traded be­ tries should increase in the future relative to their total
tween the seven countries need not enter into the annual trade, countries with over-all balance-of-payments deficits
negotiations may permit the exclusion from the free-trade might well become reluctant to move toward complete
area of the most highly protected products—those on free trade within the area.
which existing tariffs are so high as to shut out imports
completely—and of goods that have not entered into trade
CONCLUDING COMMENTS
by the end of the twelve-year period because they are
The short-run impact of a reduction of trade barriers
still not being manufactured in sufficient quantity in the
region. The participating countries’ intention of includ­ among the Latin American countries is likely to be no
ing products not already traded within the area in the more than marginal in view of the existing low level of
liberalization program is stated in the treaty, but since intraregional trade. Over the longer run, however, the
the implementation of this goal is left entirely to future broadening of Latin American markets can serve to stimu­
negotiations, the Montevideo Treaty could fall short of late industrialization and give it a more rational basis than
the limited national markets. But the pace of economic
its major goal of clearing the way for new trade.
While a complete freeing of intraregional trade is most development cannot be stepped up without a sharp rise
likely to realize the potential benefits of economic integra­ in investment, not only in manufacturing itself, but also
tion for the region as a whole, there is no guarantee that in such essential supporting activities as power production
each of the seven countries will receive benefits sufficient and transportation. Common markets could contribute
to make its participation appear worthwhile. Indeed, the to increasing investment by opening up profitable new
more underdeveloped countries may be the least able to business opportunities in manufacturing that might attract
compete for the benefits of free trade, and the reduction of Latin American capital away from investment in real
tariffs might grind to a halt if it should appear to be estate and construction and that might induce Latin Ameri­




160

MONTHLY REVIEW, SEPTEMBER 1960

can investors to repatriate some of the very substantial
amounts of capital they now hold abroad. In addition, its
proponents hope that the possibilities of investment in in­
dustries serving Latin American common markets will
stimulate the inflow of foreign capital into the region, just
as the formation of the European Common Market has
led to stepped-up United States and other outside invest­
ment in the six Common Market countries.
However, the low incomes of the Latin American coun­
tries limit domestic savings, while in many instances
fundamental fiscal and other changes are needed in order
both to improve savings and investment habits and to
attract a larger inflow of foreign capital. The extent to

which Latin American countries will be able to take ad­
vantage of the opportunities offered by economic integra­
tion is, moreover, linked to the solution of other basic
economic problems, such as the maintenance of internal
and external economic balance, as well as to the develop­
ment of an adequate regional transportation network.
The gains from economic integration will also depend
on the ability of the participating countries, when im­
plementing their respective treaties, to make the difficult
transition from national protectionism to an economic
environment in which the nature and direction of indus­
trial growth and trade expansion are determined by the
forces of competition.

In te r n a tio n a l D e v e lo p m e n ts

BUSINESS TRENDS ABROAD

After a year of rapid economic growth in the major
industrial countries abroad, the advance tended to mod­
erate in the first half of 1960. The expansion appears to
have leveled off in Canada and Japan, and in Western
Europe it has slowed down slightly. In much of Western
Europe, the earlier rapid rise in export demand and
inventory accumulation seems to be abating. Although
in a number of countries anti-inflationary policies have
tempered domestic demand pressures, consumer demand
on the whole still remains quite buoyant and fixed invest­
ment shows a rising tendency. In several countries, nota­
bly West Germany, Britain, and Sweden, the slightly
reduced tempo of this year’s expansion also reflects grow­
ing labor shortages and strains on productive capacity.
To date, however, although persisting domestic inflation­
ary pressures have contributed to a deterioration in the
foreign trade position of many of these countries, the
expansion has proceeded against a background of price
stability and ample foreign exchange reserves.
Industrial production in Western Europe as a whole
rose by 2 to 3 per cent over the preceding quarter in
both the first and second quarters of 1960, somewhat less
than the 4 per cent rise recorded in the last quarter of
1959. While vigorous advances continued to be scored in
Italy, Austria, and the Netherlands, the expansion in
Germany and particularly in Britain lagged somewhat be­
hind last year’s (see Chart I). In France, although the firstquarter decline in industrial production was reversed in
April and May, the upswing brought industrial output




for the second quarter only slightly above the record
fourth-quarter 1959 level. In Japan, on the other hand,
there are indications that the industrial expansion may
have leveled off: following a 56 per cent advance from
the May 1958 low through March 1960, Japanese indus­
trial output rose only 1 per cent during the second quarter.
In Canada, industrial production has continued to fluctuate
below its January peak.
Consumer demand, which provided a major stimulus
to the 1959 boom, showed some signs of tapering off in
the early months of 1960 but generally has remained at
high levels. Moreover, in several countries, particularly
France, Germany, and the United Kingdom, consumer
spending is expected to climb in coming months as a re­
sult of continuing wage and salary increases. In Britain
there are indications that this process has already largely
offset the impact of the instalment credit controls intro­
duced last April; although sales of consumer durables
continued to weaken, by July total retail sales (seasonally
adjusted) had regained their April peak. In Germany, too,
consumer spending has recently shown more strength. In
Canada, on the other hand, although the first-quarter de­
cline in retail sales (seasonally adjusted) was reversed in
April-June, total sales for the three months were only
1 per cent above their corresponding 1959 level.
While the winter spurt in inventory accumulation may
have begun to subside in a number of countries, a major
expansionary push has been coming from the investment
outlays induced in most countries by dwindling reserves
of physical capacity and labor and by increased inter­
national competition. The investment booms continued

FEDERAL RESERVE BANK OF NEW YORK

Chart I

INDUSTRIAL PRODUCTION IN SELECTED COUNTRIES
Seasonally adjusted; 1953=T00
Per cent

Note:

Per cent

Latest 1960 data partia lly estimated.

Sources:

Organization for European Economic Cooperation,

General Statistics; national statistics.

throughout the first hall of the year in Italy and Germany.
In Britain, real fixed investment in the first quarter of the
year rose 3 per cent (seasonally adjusted) over the fourth
quarter of 1959; while public sector investment is leveling
off, business plant and equipment expenditures and private
housing outlays are continuing to rise rapidly. In Japan,
plant and equipment outlays are estimated to have risen
about 16 per cent over the previous three months in the
first quarter of 1960 and at an even higher rate in the
second quarter.
Although export demand has remained generally firm, in
some major trading nations exports no longer seem to be
rising at their spectacular 1959 rate. Seasonally adjusted
exports from several countries—notably Austria, Italy,
and Switzerland—it is true, continued to rise rapidly in
recent months. On the other hand, on the same basis,
the expansion of French, German, and Japanese exports
slowed down somewhat, and British exports in May-July




161

actually fell 5 per cent below their February-April levels.
Seasonally adjusted Canadian exports also continued to
decline through June, reflecting primarily a reduction in
sales to the United States.
Perhaps the most important check on further rapid
expansion of output in Western Europe in the near future
will prove to be spreading shortages of skilled—and in
some cases even unskilled—labor. In West Germany un­
employment continued to fall rapidly to a new postwar
low in July of 0.6 per cent of the labor force, while
vacancies rose to over four times the number of people
seeking work. In Britain, also, labor scarcities have spread
in recent months, although the labor market eased slightly
more than seasonally in August. A similar pattern ap­
plied in the Netherlands, Sweden, Switzerland, Austria,
and Denmark where labor shortages, already severe in the
construction sector, intensified in other sectors of indus­
try as well. In Canada, in contrast, unemployment has
remained high; in July it rose contraseasonally to 4.7 per
cent of the labor force, the highest July level in many years.
In Western Europe the tightening of labor markets
against a background of buoyant corporate profits has
touched off a steady rise in salaries and wages this year.
Significant wage increases have been granted in Germany,
Austria, and Denmark. In the United Kingdom wage
rates rose 1 per cent in both the first and second quarters,
and substantial new pay demands are expected during the
autumn round of wage negotiations. In France wage rates
are estimated to have risen about 1.5 per cent in each
quarter, and the high incidence of strikes and labor dis­
turbances before the summer holidays suggests that here,
too, labor may press vigorously for further wage increases
in the fall. Civil servants, in particular, have asked for
changes in the salary structure involving sizable pay in­
creases. Moreover, due to the recent rise in the cost of
living induced by government price measures, the mini­
mum wage is to be raised 2-3 per cent on October 1.
Despite this upward pressure of wages, however, with
few exceptions, the price stability achieved in the major
industrial countries abroad has been maintained in 1960.
This price stability reflects in part the steadiness of world
commodity prices. In several countries, also, productivity
has continued to rise very rapidly, and earlier measures of
trade liberalization have permitted rising domestic demand
to be met to an increased extent by imports.
MONETARY TRENDS AND POLICIES

The monetary restraint policies that have been adopted
in most Western European countries since last autumn
were strengthened further in the past three months. On

MONTHLY REVIEW, SEPTEMBER 1960

162

the other hand, in Japan, the authorities took their first
easing measure in August, and in Canada credit conditions
continued relatively easy.
In many Continental European countries, where the
current economic expansion is being accompanied by
balance-of-payments surpluses, general liquidity remained
high and interest rates were stable or tilted slightly down­
ward (see Chart II)—although generally at higher levels
than in this country. The monetary authorities of these
countries are lacing the problem of having to deal with
additions to bank liquidity resulting from inflows of
funds from abroad, as restraint measures have led both
to the repatriation of funds held abroad by domestic
commercial banks and to an influx of foreign capital at-

Chart II

INTEREST RATES IN SELECTED COUNTRIES
THREE-MONTH TREASURY B U IS *

—
^

(

..

..

....

^

! i i 1 i i.I i i l i t

1 i
..

United Kingdom
.^ ........
hi

_

Canada
■ t l i i
i

1 I 1 t ! 1 I I 1 i

1958

1

\i

t - i .. l

—
i

t Li . i_

1 1 ) 1 1 1 1 1 \ 1 1 1 1 1 1 » 1 t t l.l A r .t .4—
:

|

. 1 ..jl. L i ._l J I 1 i l l
Note:

|

Belgium

i
i**) i i i i i n
1

11

rni

1959

i i t i
T960

f

August 1960 data partially estimated.

* Treasury bills'. Canada and United Kingdom , average tender rates lo r
three-month bills; West Germ any, central bank selling rates for 60 - to
90 -d a y bills; Netherlands, market rates far three-month bills.
+ Rates on mortgage bo«ds.
Sources: International Monetary Fund, International Financial Statistics:
national statistics.




tracted by higher interest rates. In addition, German and
Swiss official international reserves were swelled during
the summer months by other capital flows—in the case of
Germany the result of Deutsche-mark appreciation ru­
mors, and in the case of Switzerland the result of inter­
national political disturbances.
In Germany, where the problem of liquidity-increasing
capital inflows has been particularly serious, the Federal
Bank continued to move energetically to restrain the do­
mestic boom and slow the inflow of funds. On June 3,
the bank raised its discount rate for the third time since
the beginning of the current business expansion—to 5
per cent from 4. Effective July 1, it raised to the legal
maxima the reserve requirements for increases in deposits
of residents above their March-May average, sharply cut
back the commercial banks’ rediscount ceilings, and took
other steps to tighten reserve requirements. At the same
time, German credit institutions were prohibited from
paying interest on foreign-owned deposits and from sell­
ing money market paper to nonresidents. The inflow of
foreign exchange continued, however, and bank liquidity
remained high. In August, therefore, the Federal Bank
reached an agreement with the commercial banks under
which the latter agreed to purchase DM 1 billion of
nonnegotiable two-year 5Vi per cent government notes,
thus in effect raising required reserves while keeping that
instrument available for future use. Later in the month,
in a further effort to stem the inflow of funds, the bank
announced its willingness to enter into dollar swap trans­
actions with German banks—under which it will buy for­
ward dollars at a 1 per cent premium—for periods up
to six months.
In Switzerland, where the expansionary strains seem to
have been somewhat less pronounced and where the au­
thorities have fewer monetary instruments at their dis­
posal, the central bank acted forcefully to discourage the
inflow of capital from abroad. In August, the Swiss
National Bank announced an agreement with the com­
mercial banks under which no new nonresident Swiss
franc sight deposits are to be accepted, a 1 per cent annual
charge is to be made on all foreign franc deposits of six
months or less (except for specified working balances and
certain other accounts) that have been established since
July 1, and no interest is to be paid on new foreign
franc holdings except in small savings deposits. In addi­
tion, the banks agreed to do their utmost to see that foreign
funds are not invested in Swiss securities, real estate, or
mortgages. In the Netherlands, the central bank, which
earlier had warned the commercial banks against the re­
patriation of funds held abroad, on July 22 raised reserve
requirements from 7 to 8 per cent in an effort to prevent

FEDERAL RESERVE BANK OF NEW YORK

too rapid an expansion of domestic credit, and in Finland,
where credit also has been expanding rapidly, the central
bank in August increased its penalty rate to 3 per cent
above the discount rate on rediscounts for commercial
banks.
In the United Kingdom, the authorities have not had
to contend with similar difficulties—partly because the
institutional framework is more suitable for dealing with
the liquidity effects of foreign exchange flows, and partly
because the inflow of short-term funds seems to have as­
sumed sizable proportions only recently. Thus, they have
been able to concentrate on curbing the domestic factors
in the expansion. On June 23, in the third of a series of
restraint measures begun early this year, the Bank of
England raised its discount rate to 6 per cent from 5 and
also doubled its original April call for “special deposits”
from the London clearing banks and Scottish banks (to 2
and 1 per cent of gross deposits, respectively). At the same
time, the Chancellor of the Exchequer announced the
government’s intention to hold public capital expenditures
in fiscal year 1961-62 to the current year’s level. The
severity of the new measures had not been anticipated by
the market in view of the strength of the pound and of the
sharp drop in the expansion of clearing bank advances in
May and the first part of June. Bank advances again rose
sharply in the following five-week period, but dropped
—for the first time since August 1958—in the statement
period ended August 17.
The classic problem of falling foreign exchange re­
serves accompanying inflationary pressures has been faced
in Sweden, where the government acted to tighten bank
liquidity by raising the statutory liquidity reserve require­
ments against sight liabilities and by authorizing the cen­
tral bank to negotiate with the commercial banks for an
increase in the voluntary variable liquidity reserves ap­
plicable to total deposits. An increase in the latter re­
quirements would be especially important since time de­

163

posits in Sweden account for the bulk of bank deposits.
Another country under pressure was Belgium, where the
effect of the Congo situation in weakening the franc
was a major factor behind the increase in the central
bank’s discount rate to 5 per cent from 4 on August 4.
In contrast to these credit tightening measures, the Bank
of Japan on August 24 lowered its discount rate to 6.935
per cent from 7.3 (reversing its December increase), as
domestic business conditions showed weakening tend­
encies following two years of very rapid economic ex­
pansion. In Canada, meanwhile, where business condi­
tions continued hesitant, the government relaxed its terms
for low-income housing loans and increased its grants for
public works. In spite of the general uncertainty, how­
ever, the chartered banks’ business loans have continued
to expand somewhat more than seasonally. Although
there was some tightness in the money market in early
July, interest rates have since declined further.
EXCHANGE RATES

In the New York foreign exchange market, spot sterling
gradually advanced during the first part of August as
short-term funds continued to flow to London. Following
the August 11 announcement of the reduction to 3 per
cent in the discount rate of certain Federal Reserve Banks,
the quotation moved abruptly to $2.8123, the highest in
over a year. It then turned lower, reflecting substantial
offerings from the Continent and a reduced movement of
capital to London as the result of the rising interest yields
on United States Treasury bills. At the month end it
closed at $2.8114. In the forward market the discounts
on three and six months’ sterling moved somewhat er­
ratically, in a relatively narrow range.
The Canadian dollar, principally as the result of move­
ments of long-term capital to Canada, appreciated ap­
proximately one cent, to reach $1.031 /32 by August 15. By
7
the end of the month, however, it had eased to $1.026%4.

T h e B u s in e s s S itu a tio n
The economy apparently has continued to edge sidewise
in recent weeks. Comprehensive measures of economic
activity such as employment and industrial production
remained in July at or near the high June levels, and per­
sonal income advanced a bit. Private nonresidential con­
struction outlays showed a small gain in August, after vir­




tual stability in July, but outlays for residential construction
declined further. Some weakness appeared in consumer
demand during July, principally in sales of new automo­
biles, and incomplete auto and department store data
suggest that consumer demand did not improve in August.
The hesitant business atmosphere has been reflected in a

MONTHLY REVIEW, SEPTEMBER 1960

164

further decrease in manufacturers’ new orders and also
in price declines for certain industrial commodities. On
the other hand, efforts to hold back inventory accumu­
lation, and to effect actual reductions in durable goods
lines, are meeting with a measure of success. Such efforts
have been a prime factor hindering expansion in output,
and their easing could add strength to employment and
to economic activity generally. Over all, the summer
months, traditionally a sluggish period, have thus far done
little to clarify the business situation.

THE DIVERGENT INDICATORS

In July, the Federal Reserve index of industrial pro­
duction remained, after allowing for the usual seasonal
dip, at the June level of 109 (1957=100). The manufac­
turing component of the index was also unchanged in July,
as sharp cutbacks in automobile assemblies and a slightly
more-than-seasonal decline in iron and steel output were
offset by small increases throughout a wide range of prod­
ucts, both durable and nondurable. In terms of “market”
classification, some strength was shown in (nondefense)
business equipment output, which rose to a record level.
Consumer goods output, however, slipped a little—a result
of the deep cut in automobile assemblies and of a small
reduction, for the second consecutive month, in the “home
goods and apparel” group. Production of materials was
stable, as a rise in the output of nondurable materials
compensated for a continued, although more gradual,
decline in durables.
Steel production, which had dropped to 50 per cent of
capacity in July, was close to 55 per cent of capacity
throughout August, despite two railroad strikes in the

sons. The increase was entirely a result of the employ­
ment of young people newly out of school; the number
of adults employed actually declined. The total was sus­
tained, moreover, by farm employment, which usually
falls in July but this year remained at about the June level
because of a late planting season. Still, after seasonal
adjustment, total employment was down 300,000 from the
June peak. The Bureau of Labor Statistics payroll survey
of nonfarm employment (which differs in some significant
respects from the household survey) showed a seasonal
decline of almost 400,000, so that after adjustment this
series was about equal to the previous month’s 53.4 million total (see chart). More-than-seasonal contractions in
employment in automobile and steel manufacturing and—
because of the reduced pace of steel output—in the coal
mining and transportation industries were offset by gains
in construction, trade, finance, and services. Unemploy­
ment as a proportion of the civilian labor force was down
in July by a scant %0 of a point to 5.4 per cent, seasonally
adjusted.
The maintenance of high levels of employment helped
push up personal income in J uly to a record annual rate
CURRENT ECONOMIC MEASURES
Seasonally adjusted

Billions of dollars

for some time. Industry sources continued to express dis­
appointment with the level of incoming orders, and it was
reported that the industry did not anticipate a significant
improvement before October. Most steel orders during
August were for “quick” delivery, suggesting that steel
users had worked down their inventories and were now
operating hand to mouth. But there were also reports
that other steel users had not yet reduced inventories as
much as intended. The principal source of disappoint­
ment for steel producers has been the automobile industry.
Although auto assembly plants were closed for model
change-over earlier than usual this year, the expected
large-scale orders for steel for the new models have not
yet materialized.
Total employment (as measured by the Census Bureau
household survey) inched up in July to 68.7 million per-




410
400
390
380
370

—

Billions of dollars

- 410
—400

Persortal income
Annual rates f

390
380

_
1 1 1.1 1 1 l-1—
.
l-l.-l-j | | 1 I |

360
Bi Ilions of dollars

Billions of dollars

230

---------------- <
------ 230

220

\ . ■ A n

^ — V

21Q

220
210

Retail sal<r* V
A nnual ratos

200
190

370
360

200

1.,1 1 1 I
—
1958

1 1- I - 1 1

1 J

I

I

I

1

1959

J - L -i- l

l

- L l- l- t. I.

190

1960

N ote : Alaska and H a w a ii included in u onagri cultural employment »uice
N ovem ber 1959 and in retail sates since Jan u ary I9 60 .

* Bureau of la b o r Statistics payroll m v « y k
Sources: Beard -of Governors of the fed«rol Reserve System; United States
Departments of Coafcneece end lotbor.

FEDERAL RESERVE BANK OF NEW YORK

of $407.1 billion, seasonally adjusted. This was, however,
just $1 billion more than in June, and with a single
exception was the smallest monthly advance since last
year’s steel strike. About half of the gain was in wages
and salaries; increased payments in the construction in­
dustry plus the effects of the recently enacted pay rise for
Federal Government employees more than offset a reduc­
tion in the manufacturing sector. Interest income also
rose. However, about one quarter of the month’s total
income gain resulted from an increase in unemployment
insurance benefits. Meanwhile, farmers’ income dropped
for the first time in four months as a result of a decline in
meat prices.
At the same time that personal income has been post­
ing new records, retail sales have been sluggish. In July,
sales slipped for the second time in three months— falling,
according to the advance report, IV 2 per cent below the
June total and 3 per cent under the April peak, seasonally
adjusted. Most of the July decline reflected slower auto­
mobile sales, but purchases of nondurables also decreased
somewhat. The data so far available for August on auto­
mobile and department store sales do not suggest an
upturn in consumer expenditures. These developments
may possibly reflect some lessening of consumer optimism
regarding the business and employment outlook.
Probably as the combined result of the lack of spark
in consumer demand and the absence of increased strength
in investment demand, new orders received by manufac­
turers, which had risen slightly in April and May, season­
ally adjusted, declined in June and again in July, falling
back close to the November 1959 level. The June de­
crease was entirely in durables and covered several impor­

165

tant industries. In July, durables declined somewhat
further but nondurables accounted for almost three fourths
of the total drop. New domestic orders for machine tools,
which had risen in June after two months of decline, fell
sharply in July to mid-1958 levels, although industry
sources continued hopeful that orders would pick up after
the Machine Tool Exposition in Chicago this month.
Order backlogs, which had declined in June to the
lowest level since December 1958, increased a bit in
July, principally as a result of a small growth in unfilled
orders in the durable goods industries. Data for unfilled
orders are not seasonally adjusted, however, and an in­
crease in backlogs is normal for July—but this time it was
unusually small. Backlogs in nondurable goods industries
fell, meanwhile, to early 1959 levels. Manufacturers’ in­
ventories, seasonally adjusted, fell slightly in July after
rising for eight successive months, although recently at
a declining pace. Stocks held by producers of durable
goods declined from the record level reached the previous
month, while stocks in the hands of nondurable goods
producers remained unchanged from the high June total.
The inventory-sales ratio of all manufacturers was at its
highest point since November 1958—although not so high
as it had been during most of the 1956-58 period.
Data on construction activity have been mixed. Outlays
for private nonresidential construction, which had fallen
for four consecutive months through June, seasonally
adjusted, remained almost unchanged in July and advanced
in August. Moreover, nonresidential contract awards rose
in July. Private residential construction outlays, however,
declined in both July and August, and July residential
contract awards were also down.

M o n e y M a rk et in A u g u st
The Board of Governors of the Federal Reserve Sys­
tem on August 8 announced several actions liberalizing
member bank reserve requirements. From August 25
country banks may include in their reserves vault cash
in excess of 2Vi per cent (instead of 4 per cent) of their
net demand deposits, and effective September 1 reserve
city and central reserve city banks may count as reserves
vault cash in excess of 1 per cent (rather than 2 per cent)
of their net demand deposits. Also effective September 1,
the reserve requirement against net demand deposits of
central reserve city banks was reduced from 18 to 17V^
per cent. After the close of business on August 11, this




Bank and three other Reserve Banks announced a re­
duction in the discount rate from 3 V2 to 3 per cent effec­
tive the following day. During the remainder of the month
six other Reserve Banks followed suit.
Bank reserve positions eased somewhat further in
August. While New York City and Chicago banks con­
tinued to be net purchasers of Federal funds on most
days, the effective rate prior to the August 12 discount
rate reduction was often below the 3 Vi per cent “ceiling”.
After August 12 the effective rate for Federal funds traded
by New York City banks on most days stood at or close
to the new 3 per cent “ceiling”, although some trading

166

MONTHLY REVIEW, SEPTEMBER 1960

occurred at higher rates in centers where the discount rate
had not yet been reduced. Rates posted by major New
York City banks on loans to Government securities deal­
ers varied generally within a range of 3% to AVa per cent.
On August 22-23 leading commercial banks announced
cuts in their prime lending rates from 5 to AV2 per cent.

MEMBER BANK RESERVES

Reserve positions of member banks, which had come
under gradually lessening pressure during the first seven
months of this year, eased further in August. While op­
erating factors, on balance, absorbed a substantial amount
of reserves during the month, decreases in required re­
serves released funds to the member banks. At the same
time, reserves were augmented by System open market
operations and, toward the close odt the month, by a large
increase in allowable vault cash. In the five statement
weeks ended in August, the average level of excess re­
serves was $22 million higher than in July and average
free reserves rose by $115 million to $225 million.

Changes ia Factors Tending to Increase or Decrease Member
Bank Reserves, A ugust 1960
la millions of dollars; ( + ) denotes increase,
(-— decrease in excess reserves
)
Daily averages—
week ended
Factor

Aug.
3

Aug.
10

Aug.
17

Aug.
24

Aug.
31

Net
changes

Operating transactions
Treasury operations*..............
Federal Reserve float...................
Curreney in circulation................
Gold and foreign account
.........
Other deposits, etc.......................

+ 17
— 197
— 3
— 63
+
2

-f
—
—
—
+

22
68
85
20
8

— 104
+ 154
— 55
— 57
- 43

+ 82
+ 38
+ 97
— 18
- 106

+
6
— 226
+ 107
— 50
— 2

+ 23
— 299
+ 61
— 208
- 141

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

- 244

- 142

- 105

+

94

- 166

- 563

-

+ 160

Direct Federal Reserve credit trans­
actions
Government securities:
Direct market purchases or sales
Held under repurchase agree­
ments ..................................
Loans, discounts, and advanees:
Member bank borrowings... . . .
Other................................. .
Bankers’ acceptances:
Bought outright.......................
Under repurchase agreements...

+ 238

+

46

+

6

-

40

+

93

+ 123

-

64

-

9

-

36

-

22

+ 123

+

1

+
+

2
1

90

- 114

+

29

- 223

+

80

-

78

+~ 3

+
+

-

2
12

+
+

4
1

+ 149

+

69

- 262

- 137

+ 116

53
13

+
-

7
74

+

36
75

- 168
+
8

+ 307 + 303

- 303

- 447

Total reservesf.............................. 4- 40
Effect of change in required reserves f - 27

+

67
86

+
+

39
36

- 160
+ 43

+
4
+ 105

- 144
+ 243

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

+

19

+

75

- 117

-f 109

+

416
582
166

193
465
272

273
574
301

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

+ 297

Member bank reserves
With Federal Reserve Banka___ +
Cash allowed as reserves t ............ -

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

+

13
315
488
173

293
507
214

Note: Because of rounding, figures do not necessarily add to totals.
* Includes changes in Treasury currency and cash,
t These figures are estimated.
t Average for five weekB ended August 31,1960.




3
9

90
2981
5231
2251

The effect of these developments upon the reserve
situation was, however, moderate on the whole, and the
atmosphere in the money market tended to be somewhat
tighter than might have been expected. The different dis­
count rates prevailing at the various Federal Reserve
Banks during the middle weeks of the month tended to
interfere with the flow of reserves through the Federal
funds market, and the shifts of funds arising from the
settlement of the Treasury’s financing on August 15 pro­
duced additional reserve pressures on the banks in the
New York money market.
From July 27 to August 31, System Account holdings
of Government securities increased by $78 million. The
purchases were concentrated ia the first part of the month,
offsetting the absorption of reserves by operating factors
and permitting member banks to reduce somewhat their
borrowings at the Reserve Banks.

GOVERNMENT SECURITIES MARKET

The market for Government securities began the month
on a tone of firm confidence based on several factors:
(1) the expectation of a substantial reinvestment demand
resulting from a net Treasury debt redemption of $1.5
billion during the month, (2) the absence of a long ma­
turity issue in the Treasury’s! new offerings, (3) the re­
duction in stock margin requirements in late July, and
(4) widespread expectations of somewhat easier credit
conditions—associated with uncertainty about near-term
business prospects. As the month progressed, however,
market confidence gave way to caution in spite of some
general encouragement provided by the easing in reserve
requirements and the reduction in the discount rate.
Broad reinvestment demand did not develop as expected,
and dealer inventories reportedly had to be carried at
relatively high interest costs. Another dampening influ­
ence affecting longer issues was the market expectation
that advance refunding would put more issues in the
long-term area.
The August refinancing operation was generally con­
sidered successful. The refunding offer, which did not
give pre-emptive rights to the holders of the maturing
securities, was heavily oversubscribed. Allotments of the
new 3 Vs per cent certificates were only 13 per cent of
subscriptions, except for certain types of subscribers who
were allotted 100 per cent. Allotments of the new 3%
per cent bonds ranged from 15 to 25 per cent for the
various types of subscribers.
For the month as a whole, prices of notes and inter­
mediate bonds were generally %2 higher to 1%2 lower
and longer term bonds declined by V\ point to 12%2

FEDERAL RESERVE BANK OF NEW YORK

points. The average yield on three- to five-year issues
closed at 3.50 per cent on August 31, up 4 basis points
from July 29, while the average yield on issues due in ten
years or more rose by 9 basis points to 3.83 per cent.
The atmosphere in the Treasury bill market also
changed from one of strong confidence to somewhat more
caution during August. Following the Treasury announce­
ment in late July of its August debt operations, bill rates
declined sharply in view of the prospective reduction in
the outstanding short-term debt. In the regular Monday
auctions on August 1 the average issuing rate of 2.131
per cent for 91-day bills was the lowest since August
1958, while the 2.409 per cent rate for 182-day bills was
the lowest in the history of this series. Issuing rates rose
steadily in the next four auctions, reaching 2.550 and
2.825 per cent for the 91-day and 182-day bills, respec­
tively, in the final auction of the month (August 29).
OTHER SECURITIES MARKETS

In the markets for corporate and tax-exempt bonds the
month opened on a firm tone, largely reflecting influences
similar to those that affected the Treasury bond market.
While this early enthusiasm faded to some extent in re­
spect to some corporate issues, price gains of tax-exempts
generally were fairly well retained during the month. The
announcements of liberalization in reserve requirements
and reductions in discount rates gave further strength
to these markets, particularly in the tax-exempt sector.
Moody’s series of average yields for seasoned high-grade
tax-exempt and corporate bonds both declined to new
lows for the year. The average yield on Aaa-rated taxexempt bonds fell from 3.28 per cent on July 27 to 2,99
per cent on August 31, and the average yield on similarly
rated corporates declined from 4.35 per cent at the end
of July to 4.23 per cent at the end of August.
New corporate bond flotations in August amounted to
$587 million, an increase over both the July total of $422
million and the August 1959 total of $411 million. Most
corporate issues were well received, but the response to
some utility offerings was slow. Offerings of new taxexempt bonds aggregated $554 million (including one
offering of $200 million), compared with $462 million in
July and $454 million in August 1959. Tax-exempt issues
generally were well received.




167

The cut in prime loan rates was followed on August 24
by a Vs per cent reduction of rates on bankers’ accept­
ances, which brought the bid rate on 90-day unendorsed
acceptances to 3 Vs per cent, Earlier in the month, dealers
had lowered their rates on acceptances by Va per cent, but
the cut had been restored a week later. On August 23, the
New York City banks reduced from 5 per cent to 416
per cent the rate on loans secured by customers’ stock
exchange collateral. On August 25, dealers in commer­
cial paper reduced rates on all maturities by V per cent,
&
setting the new offered rate on prime 4- to 6-month paper
at 3 Va per cent. Sales finance companies increased vari­
ous rates by Vs to Va per cent, effective August 31, bring­
ing the rate on 60- to 89-day paper to 234 per cent.

SELECTED PUBLICATIONS OF THE
FEDERAL RESERVE BANK OF NEW YORK

The following selected Federal Reserve Bank of
New York publications may be of particular interest
to educational institutions. These booklets are avail*
able from the Publications Division of the Federal
Reserve Bank of New York, New York 45, N. Y.
Where a charge is indicated, remittance should in­
clude New York City sales tax, if applicable.
Deposit Velocity and Its Significance by George
Garvy. 60 cents per copy; 30 cents per copy on
orders from educational institutions.
Federal Reserve Operations in the Money and Got*
eminent Securities Markets by Robert V. Roo#a.
Foreign Central Bankings The Instruments of Mgimv
tary Policy by Peter G. Fousek.
Monetary Policy Under the International Gold Standi
aid: 1880-1914 by Arthur I. Bloomfield. 50
cents per copy; 25 cents per copy on orders from
educational institutions.
Hie Mosiey Side of “The Street” by Carl H. Madden.
70 cents per copy; 35 cents per copy on order*
from educational institutions.
The New York Foreign Exchange Market by Alan
R Holmes. 50 cents per copy; 25 cents per copy
.
on orders from educational institutions.