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MONTHLY REVIEW, SEPTEMBER 1961

150

T he Business Situation
The economy is now moving up to new high ground.
The recovery in output to pre-recession peaks is completed,
and a period lies ahead in which the economy’s ability to
advance rapidly to a reasonably full utilization of resources
will be tested. In the second quarter, the nation’s output
of goods and services rebounded sharply and reached a
level some 1 per cent, in real terms, above the pre-recession
peak of a year before. Since midyear, the pace of the ad­
vance has been somewhat more moderate than during the
recovery phase.
So far the economy appears to be taking in its stride the
heightening of world tensions and the plans for further
increases in defense spending. There is no evidence as yet
that consumers or businessmen have drastically revised
their attitudes. This generally restrained reaction undoubt­
edly stems from the fact that the economy is still not using
available manpower and physical resources to the full. The
steel, automobile, and residential construction industries,
for instance, are all operating well below capacity. The
number of unemployed has been at about five million
(seasonally adjusted) for fully nine months, and approxi­
mately one million of these have been out of work for at
least six months.
THE ADVANCE BRO AD ENS

In July the Federal Reserve’s seasonally adjusted index
of industrial production rose two points to 112 per cent
of the 1957 average, breaking past the pre-recession record
of 111 per cent (see Chart I). Increases in the output of
materials and of equipment were larger than in June, and
consumer goods production continued to rise although less
than in the previous month. Furthermore, new orders
received by manufacturers of durable goods advanced
another 1 per cent, seasonally adjusted, and covered a
wide range of both defense and civilian goods, in contrast
to a rather limited range the previous month. The ad­
vance in industrial activity has thus clearly broadened,
suggesting the establishment of a firm base for a strong
economic rise.
Inventory accumulation—which in the spring was heav­
ily concentrated in the auto industry—is one factor stimu­
lating production. Total inventories rose Vi of 1 per cent
in July, the largest gain since mid-1960, with a major part




of the increase occurring in durables manufacturers’ stocks.
This had been foreshadowed in a quarterly survey taken
by the Commerce Department in May, when manufacturers
of durables reported that they intended to accumulate
inventories at a rather substantial pace during the JulySeptember quarter. Evidence of further inventory accu­
mulation is contained in the latest survey by the National
Association of Purchasing Agents. The survey showed
that by August the vast majority of the association’s mem­
bers had shifted from a policy of inventory liquidation to
a policy of inventory stability or accumulation, and that
about one fourth of the members were planning to add
to inventories in September and October.
In construction as in manuf acturing, activity appears to
be not only advancing but also broadening. Although
total construction outlays toned up in March, several
sectors continued weak. One of these, the Government
sector, has moved up during the last three months, how­
ever, and should continue strong. With regard to the
private sector, private housing starts (which often indi­
cate the strength of residential outlays some two months
later) were down slightly in July. Nonetheless, the JuneJuly total for this erratic series was almost 10 per cent
higher, seasonally adjusted, than that for April-May. In
addition, requests for Government-backed mortgages,
which usually also are a guide to residential construction
trends, remained firm.
E M P L O Y M E N T A N D C O N S U M E R S P E N D IN G

The employment picture is mixed. The improvement in
construction and manufacturing activity and a continuing
expansion in the service industries nudged up July’s non*
agricultural employment, as measured by the Bureau of
Labor Statistics payroll survey, by V2 of 1 per cent, sea­
sonally adjusted, to a new record (Chart I). At the same
time, the household survey conducted by the Census
Bureau showed nonagricultuiral employment dropping
almost 1 per cent and remaining at that level in August.
(This latter series, which has a wider coverage than
the payroll survey and includes domestic workers, the
self-employed, and nonpaid family workers, is generally
considered a less useful guide for month-to-month fluc­
tuations.) Total employment., seasonally adjusted, also

FEDERAL RESERVE BANK OF NEW YORK

Chart I

RECENT ECONOMIC INDICATORS
S e a so n a lly adjusted
Per cent

Per cent

120

120

Billions of d ollars

Billions of dollars

1 -------6

i 16
N e w o rd e rs fo r d u ra b le goods
14

i i I i i I i i I i i i
Billions of dollars

Billions of d ollars

5.0

5.0

4.5

4.5

Construction a ctiv ity

1 I 1 I
4.0
M illio n s of persons
54 ----------------------

I 1 I

J

I 1 I

—_ 1_ 1. 1 1

.1

52

N o n a g ric u ltu ra ! e m p lo y m e n t*

1 I 1 I I I I I 1 I

I

1

4.0
M illio n s of p ersons
, 54

111I

50

U nem ploym ent ra te

I I

I I

1I

I I 1I I 1I I

1960

151

in percentage terms, than did disposable income—despite
the slight decline, relative to income, in the second quarter
of 1961. In July, retail demand for goods continued to
be sluggish. Sales of durables declined by almost 2 per
cent, seasonally adjusted, and nondurables by almost 1
per cent. The weakness in durables was actually limited,
however, to the automotive sector, where sales fell sharply.
Appliances and furniture and a number of other durables
lines that had been weak earlier showed strength for the
second month in a row.
More recent data suggest that in the first weeks of
August automobile sales held up reasonably well con­
sidering the shortages of many models, and the Federal
Reserve Board’s latest Quarterly Survey of Consumer
1 Buying Intentions, taken during the third week of July,
points to a rather promising sales outlook for automo­
biles over the next half year. The survey reveals a de­
clining interest, on the other hand, in household appli­
ances. It is very possible, however, that the continuing
improvement in the outlook for business and for job op­
portunities may prompt consumers to spend more than
they foresaw7 a month and a half ago.

J_L

1961

Payroll survey.
Chart II

Sources: Board of G overnors of the Federal Reserve System; United States

CONSUMPTION EXPENDITURES

Departm ents of Commerce and Labor.

C O N S U M P T IO N AS A PERCENTAGE
C H A N G E IN C O N S U M P T IO N
O F DISPOSABLE IN C O M E
OVER THE YEAR
P ercent_____________ ____________ ______________________________________ Per cent

fell slightly in July, according to the household survey, but
recouped about half of that loss in August. The lower
levels of employment in these two months were only
partly offset by a contraction of the labor force—even
though many young people dropped out because they
were unable to find summertime jobs—and the unem­
ployment rate was 6.9 per cent in both July and August.
The rate has now been hovering around that level for nine
straight months.
Personal income was another series that pushed up to
a new record in July. However, if the special life insur­
ance dividends received by veterans are left aside, the
month’s rise amounted to only Vi of 1 per cent. As personal
income has moved upward, disposable income (personal
income after taxes) has also increased. In the April-June
quarter, disposable income was about 3 per cent higher
than a year earlier. The percentage of disposable income
spent for goods and services, however, was lower (Chart
II), mainly reflecting a 7 per cent decline in sales of dura­
ble goods. Expenditures on nondurables also failed to
keep pace with disposable income and, in dollar terms,
rose only slightly. Services, however, actually rose more,




T otal cons;umption expenditui

1

1

1
Services

1

1

....... 1

Noi ndurable goods

**'■>*
1

1

1

D u ra b le goods

-5
1

1
III
1960

......... .. 1
I
II
i p £1

Note: Based on se a so n a lly adjusted data.
Source: United States Department of Commerce.

Second quarter 1960—
second quarter 1961

MONTHLY REVIEW, SEPTEMBER 1961

152

The International Economic and Financial S cen e
The economies of Western Europe and Japan continue
to enjoy boom conditions, but the very rapid expansion
of the past year and a half has begun to slow down in a
few countries. In addition to vigorous domestic growth,
most of these countries have benefited from a steady in­
crease in their exports, and have been able to achieve and
maintain a high level of international reserves. The United
Kingdom, however, has recently been faced with severe
balance-of-payments difficulties that required not only ex­
tensive domestic measures but also large-scale assistance
from the International Monetary Fund. Great Britain’s
drawing from the Fund—the largest in that institution’s
history—underscored the importance of the approaching
IMF annual meeting in Vienna and the continuing discus­
sions regarding the further adaptation of the Fund to
the changing pressures on the international payments
mechanism.
T H E B R IT IS H

PAY M EN TS PROBLEM

Britain’s balance of payments on current and long-term
capital account has been in substantial deficit since 1958.
In 1960, this deficit was hidden by a record inflow of short­
term funds. Early in 1961—partly as a result of the uncer­
tainties following the revaluations of the German mark and
the Dutch guilder—this inflow was reversed, and Britain’s
over-all payments position began to weaken, despite some
improvements in the trade accounts. In spite of several
nonrecurring receipts, and the substantial temporary as­
sistance rendered by various foreign central banks to help
support sterling, Great Britain’s international reserves fell
$792 million from the end of January to the end of July,
when they totaled $2,453 million (see chart).
Great Britain’s payments difficulties reflected the con­
junction of a number of basic problems. Perhaps most
critical were renewed pressures on costs and prices arising
from spreading labor shortages and a faster rise in demand
than in output. The resulting increase in the trade deficit
in 1960 was aggravated by the stimulus to imports from
the dismantling of import controls and by the cyclical
weakening of North American demand for British exports.
At the same time, there was some question as to whether
a number of industries were making the technological
improvements necessary to meet foreign competition.
Finally, Britain’s traditional surplus on service transactions




dwindled as earnings from shipping and oil fell and
overseas military outlays rose, and foreign-aid commit­
ments increased.
To buttress the country’s international financial position,
the British Government at the end of July and the begin­
ning of August announced a new “austerity” program
employing both monetary and fiscal policy weapons, rather
than relying as in recent years primarily on monetary re­
straint. The series of measures to be implemented this
year and next was designed to curb domestic demand,
hold the line on costs, reduce overseas expenditures, and
bolster the pound against further short-run pressures, thus
establishing a base from which the economy can make the
necessary longer term adjustments in productivity, prices,
and the composition of industrial output.
With respect to monetary policy, Chancellor of the
Exchequer Selwyn Lloyd said that the government’s aim
was “to make credit more expensive and more difficult to
get . . . particularly . . . credit for personal consumption
and property development”. To accomplish this, and at
the same time to curb short-term capital outflows, the bank
rate was raised to the so-called “crisis” level of 7 per cent
from 5, and the requirement for special deposits by the
English and Scottish banks was increased (to 3 per cent from
2 for the former and to lYz per cent from 1 for the latter).
The government and the Bank of England made it clear
they expected the banks to respond to the restraint meas­
ures by curtailing their lending (especially for personal
consumption and speculative purposes) rather than by
reducing their government securities holdings. In addi­
tion, for the first time in history the Bank of England
issued a direct request to sales finance companies (which
in Britain obtain a good deal of their resources by accept­
ing deposits) not to seek nonbank funds as a means of
escaping the effects of the credit tightening.
In the area of fiscal policy, Chancellor Lloyd’s major
step was to invoke to the full his new power to raise the
existing rates of purchase taxes and certain customs and
excise duties by 10 per cent. If the rates are kept at the
new level for the remainder of the current fiscal year, they
are expected to raise revenue by some 2 per cent, enough
to more than offset the deficit in the current budget. More­
over, Mr. Lloyd announced his intention to present legis­
lation to tax gains from short-term trading in securities
and real estate.

FEDERAL RESERVE BANK OF NEW YORK

The government also declared that it would curb the
expansion of its own expenditures and, where possible,
would reduce projected outlays. Most of this restraint,
however, is not to take effect until the fiscal year beginning
April 1962, as the government believes that it is too late
to cut current fiscal-year expenditures significantly with­
out undue waste of resources. Strong efforts will be made
to reduce overseas military spending, to hold foreign aid
down to current levels, and to curb diplomatic spending
abroad. On the domestic front, government programs to
encourage house buying will be eliminated and investment
in nationalized industries is to be sharply curtailed. In
addition, the Chancellor announced that private overseas
investment outside the sterling area is to be reduced
through closer governmental review and that private busi­
ness is to be encouraged to repatriate more of its overseas
earnings.
The government’s major effort to hold down costs in
industry is an attempt to restrain wage boosts and to dis­




153

courage increases in dividends. In his July statement, the
Chancellor particularly urged labor and management to
hold wage rises in abeyance “until productivity has caught
up [with previous increases] and there is room for further
advances”. Shortly thereafter, the government imposed a
temporary wage and salary freeze in many areas of public
employment and requested that this lead be followed
throughout the economy.
For the longer term, the government announced its in­
tention to enter into negotiations toward British member­
ship in the European Economic Community (Common
Market), a decision that of course is potentially of the
greatest economic and political significance. Should the
difficult consultations that will soon commence prove suc­
cessful, the challenge of European economic integration
may be expected to stimulate Britain to make substantial
investment in new production facilities as well as to adapt
production and sales techniques to the expanded market
and more intense competition of the EEC.
Finally, in order to bolster the country’s reserve posi­
tion and to demonstrate decisively its ability to defend the
value of the pound, on August 8 Britain drew $1.5 billion
from the International Monetary Fund, with an additional
$0.5 billion made available to it for one year on a stand-by
basis. This drawing was made in nine currencies—only
about one third of the total being dollars—and was in­
tended both to bolster British reserves (which, in fact, rose
sharply in August) and for the repayment of the credits
granted Britain under the foreign central bank coopera­
tive arrangements. The significant strengthening of ster­
ling that followed the announcement of the drawing,
together with some signs later in August that domestic
inflationary pressures might be easing, gave ground for
hope that Britain was moving toward its immediate
economic policy objectives.
T H E L E N D IN G A C T IV I T IE S O F T H E IN T E R N A T I O N A L
M O NETARY FUND

The $2.0 billion equivalent ($1.5 billion in cash and
$0.5 billion stand-by) of financial assistance extended
by the International Monetary Fund to the United
Kingdom last month is a dramatic example of the contri­
bution that the Fund can make to the strengthening of
the reserve position of a major trading nation and inter­
national financial center in a time of stress. Such assist­
ance not only enables countries with temporary balanceof-payments disequilibria to execute well-conceived cor­
rective programs, but may also prevent international
financial difficulties from spreading from one currency to
another. These objectives are in line with the purposes
of the Fund as set forth in its charter: (1) to promote ex­

154

MONTHLY REVIEW, SEPTEMBER 1961

change stability, to maintain orderly exchange arrange­
ments among its members, and to avoid competitive ex­
change depreciation; (2) to assist in the establishment of
convertibility on current account and in the elimination
of exchange restrictions; (3) to facilitate the expansion
and balanced growth of international trade; and (4) to
promote international monetary cooperation by way of
consultation and collaboration. To these ends, the Fund
makes its resources available to any member that is ex­
periencing temporary payments difficulties and that is seek­
ing to redress its position “without resorting to measures
destructive of national or international prosperity”.
The Fund has enjoyed a considerable measure of suc­
cess in fulfilling its stated purposes. Among the reasons
for its success have been its willingness to make financial
assistance available promptly and on an adequate scale,
its insistence that borrowers adopt programs designed
speedily to correct their payments difficulties, and its readi­
ness to adjust its operations, within the limitations of its
charter, to changing international payments conditions and
problems. Such changes have been especially pronounced
during the past year or two, and it is expected that the
need to make further modifications in Fund policy will
be discussed at the Fund’s forthcoming annual meeting
this month in Vienna.
The Fund’s resources, contributed by its seventy-one
member countries, totaled $15.0 billion equivalent at the
end of July 1961, of which some $3.3 billion was in gold
and $6.4 billion in dollars and other convertible cur­
rencies. Each member has a quota which is related to its
importance in world trade and its international reserve
position. The quota fulfills two major functions: (1) it
defines the amount of a member’s subscription to the
Fund (25 per cent of which is normally in gold and the
balance in the member’s currency) and (2) it determines
the amount of other member country currencies that a
member may draw (borrow). (Under the articles of agree­
ment, member countries may not draw gold from the
Fund.) Each member’s drawing rights consist of a “gold
tranche” (which is equivalent to the member’s gold con­
tribution to the Fund) and four “credit tranches”, each
one equal to 25 per cent of the member’s quota.1 Draw­
ings are made by the borrowing country depositing with the
Fund the equivalent amount of its own currency. Draw­
ings must generally be repaid in no more than three to

five years, the payment being made through the repurchase
of the member’s currency with gold or convertible foreign
exchange. These requirements ensure the revolving nature
of the Fund’s resources. All told, forty-six members have
drawn a total of about $6 billion from the Fund since its
inception in 1947. Most of the drawings have been made
since 1956, and the $1.5 billion British drawing last month
plus aggregate cash drawings by about twenty other
countries will mean that the Fund’s assistance in 1961
will be the highest for any year since the Fund began
operations.
The Fund’s relative inactivity in the earlier postwar
years was due in part to the Fund’s decision to abstain
from providing assistance to recipients of Marshall Plan
aid, to the activity of the European Payments Union in
helping to finance payments imbalances among the West­
ern European countries, and to generally good reserve
positions of underdeveloped countries during the period
when commodity prices were still relatively high. Also in
this early period Fund policy on use of its resources had
not yet been reformulated along the lines indicated below.
During this period, the Fund made a series of important
decisions that provided most useful guidelines for later
Fund assistance and also reflected the Fund’s willingness
to adapt itself to changing circumstances. In the first of
these decisions, announced in 1952, the Fund recorded
its readiness to extend stand-by arrangements under
which a member, once its request for assistance has been
approved, is authorized to draw a specified amount of
foreign exchange from the Fund within a limited period
without further application to the Fund. Even if no
drawings are made—and this is frequently the case—
these arrangements serve the useful function of giving
reassurance that, in times of potential or actual stress,
additional assistance is available if needed while the
member incurs a much smaller charge for the authoriza­
tion than for an actual drawing. Some twenty of these
arrangements are currently in effect with unused draw­
ing rights of about $1.2 billion.
Concurrent with this 1952 decision, the Fund expressed
its readiness to grant a member the overwhelming benefit
of any doubt in requests for drawings through its “gold
tranche”. These decisions were later followed by: (1)
the adoption of a liberal attitude regarding requests for
drawings within the first credit tranche, provided the
members seeking such assistance are “making reasonable
efforts to solve their problems” and (2) sympathetic con­
1 A member may augment its drawings to the extent that the Fund’s sideration of additional drawing requests extending be­
holdings of its currency are less than 75 per cent of its quota. Such a
situation would arise where the Fund had previously lent the member’s yond the first credit tranche, provided the member is
currency and had not yet re-established its position in the currency, undertaking a comprehensive program designed to main­
either because the drawing was still outstanding or because it had
tain or restore sound monetary conditions. In practice,
been repaid in gold or a different currency.




FEDERAL RESERVE BANK OF NEW YORK

155

creased. Indeed, since 1958 an increasing proportion of
drawings on the Fund has been in nondollar currencies,
notably in German marks, sterling, French francs, and
Italian lire. Last year, for example, only about 50 per
cent of total drawings was in dollars, and this year the
proportion promises to be even smaller.
The significant changes in international trade and pay­
ments growing out of the adoption of convertibility by the
major Western European countries have given rise to new
problems for the Fund. Perhaps the most striking of
these stems from the sharp increase in investor sensitivity
to the relative attractiveness of major international finan­
cial centers. Movements of funds between major countries
have consequently expanded in volume and have at times
become so large as to exert strong pressures on principal
currencies.
In dealing with such pressures, the monetary authorities
of the countries concerned have acted simultaneously on
a number of fronts. Through informal consultations with
their opposite numbers abroad, sometimes within the
forums provided by the Fund, the Bank for International
Settlements, and the Organization for Economic Coopera­
tion and Development, they have analyzed these pressures
and have exchanged views on how to cope with them.
Beyond this, when the pressures grew to critical propor­
tions in the weeks following the revaluations of the mark
and the guilder last March, a group of central banks, at
their monthly meeting in Basle, Switzerland, issued a pub­
lic declaration of mutual cooperation and support. They
implemented this declaration not only by extending short­
term credits, but also through coordinated operations in
the foreign exchange markets.
However successful these operations have been in re­
storing orderliness to the foreign exchanges, it is clear
that central bank cooperation cannot be a substitute for
the type of assistance that can and should be provided
by the Fund. Inter-central bank credits are normally of
a short-term character, whereas the speculative capital
flows that require their use may not always be reversed
promptly. In dealing with such problems the credit facili­
ties of the Fund can perform a vital service. The Fund has
clarified its interpretation of the articles of agreement so
as to eliminate any doubt that its resources can be used
for capital transfers. Efforts are also being made to ensure
that the Fund’s role in this area will not be impeded by
possible inadequacies in its holdings of certain currencies.
The Fund’s Managing Director, Mr. Per Jacobsson, has
proposed that the major industrialized countries should
2 Often other financial institutions ( international, governmental, and
private), confident of the soundness of a stabilization program ap­ agree to lend stated amounts of their currencies to the
proved by the Fund, will enter into "parallel arrangements” that may Fund under conditions to be specified. As to the United
provide the country in question with assistance of longer duration
States position, Secretary of the Treasury Dillon has stated
than that available from the Fund.

since 1953 the Fund has increasingly waived the limita­
tion on drawings in excess of 25 per cent of a member’s
quota in any twelve-month period, and in the recent past
most drawings and stand-by arrangements have involved
a waiver.
Within the framework of these decisions, the Fund has
extended assistance for four main purposes, which cannot,
of course, always be clearly distinguished in practice. One
has been to assist members to meet seasonal balance-ofpayments deficits: many Latin American countries have
benefited from such aid, which usually has been repaid
within six to twelve months. A second purpose has been
to strengthen the international reserves of members that
are undertaking stabilization programs. Such programs
are often formulated with Fund help and are designed to
remove long-standing inflationary pressures or to elimi­
nate multiple exchange rate practices.2 Fund assistance
has also been extended to relieve temporary payments
strains stemming from a variety of other difficulties, ranging
from inflationary booms in the borrowing countries to
recessions in their major export markets. Finally, Fund
assistance has been extended to major currencies to
meet emergency situations which, if allowed to continue,
could result in serious international payments disruptions.
The most noteworthy example of this last type of assist­
ance was that extended to the United Kingdom in 1956
and again this year to support sterling, which had in
each instance come under strong speculative pressures.
The Fund’s resources have been considerably bolstered
in recent years to meet the growing needs of the interna­
tional economy. In 1959-60, the board of governors of
the Fund agreed to a general 50 per cent rise in quotas,
with larger increases in a number of cases. As a result,
the Fund’s gold and dollar holdings, which had been
severely taxed by heavy drawings in 1956-57, were raised
by $2.3 billion, and its holdings of other currencies were
augmented by another $2.9 billion. At the same time,
each member was henceforth assured, because of its in­
creased quota, of being able to obtain proportionately
greater assistance than previously.
The quality of the Fund’s resources was likewise given
a substantial boost when, at the end of 1958, fourteen
European countries made their currencies externally con­
vertible. Through this move, which increased the Fund’s
holdings of convertible currencies from $1.2 billion equiva­
lent to $4.4 billion, the usefulness of the institution’s hold­
ings of the major European currencies was greatly in­




156

MONTHLY REVIEW, SEPTEMBER 1961

that “the United States is participating in exploratory dis­
cussions which we hope will lead to an agreement among
the industrial countries to provide stand-by credits to sup­
plement the Fund’s resources of needed currencies”. An
agreement along these lines would constitute a further salu­
tary step in the progressive adaptation of the Fund to

changing conditions. It is hoped that the negotiation of
such an agreement will be given encouragement at the
Vienna meeting and that all details can be worked out by
the end of the year so that the United States and other
industrial countries can obtain whatever legislative ap­
proval may be necessary in early 1962.

International Developm ent Lending Institutions
In recent years the efforts of major industrial nations
to provide more economic assistance to the less developed
countries have proceeded along two separate but related
lines. Not only have they enlarged their bilateral aid pro­
grams, but they have also taken steps to increase both
the number and the activities of international institutions
designed to finance economic development.
The first, and for some years after World War II the
only, international long-term lending institution was the
International Bank for Reconstruction and Development
(IBRD), whose fifteenth anniversary will be observed this
month in Vienna where the annual meetings of the bank
and the International Monetary Fund are being held. The
IBRD was organized to supply capital-hungry parts of the
world with the long-term funds needed for economic re­
construction or development at a time when there was
little hope that private capital, unaided, would risk inter­
national investment outside the Western Hemisphere.
Although the IBRD’s original capital was doubled in 1959,
thus adding substantially to its capacity to mobilize capital
resources for the developing countries, it had become clear
even earlier that its lending facilities needed to be supple­
mented by other forms of development finance. Accord­
ingly, two supplementary institutions were set up as IBRD
affiliates—the International Finance Corporation in 1956
and the International Development Association in 1960.
In addition, another major institution, the Inter-American
Development Bank, was established in 1960 to promote
development on a regional basis.1
1 There are, of course, a number of other important official organi­
zations, both world-wide and regional in scope, that provide funds for
economic development. Some of these are international institutions,
such as the European Common Market’s Overseas Development Fund;
others are national agencies, such as the Development Loan Fund and
the Export-Import Bank in the United States and broadly similar bodies
in several European countries. All these agencies, however, are outside
the focus of this article.




T H E I N T E R N A T IO N A L B A N K F O R R E C O N S T R U C T I O N
AND DEVELOPM ENT

Among international institutions, the IBRD has not
only the longest experience in the field of development
financing, but also by far the largest resources. On June
30, 1961, its subscribed capital amounted to $20 billion,
and the aggregate of the loans it had extended totaled more
than $5V2 billion. The bank, which now has seventy
member countries, is governed by a board of directors
chosen by its members, with the voting power of each
director determined by the size of the capital subscription
of the country or countries he represents. The United States
subscription of $6.4 billion is slightly less than a third
of the total.
The IBRD was designed to stimulate the flow of long­
term investment capital across national frontiers and there­
by to contribute to the development of economic resources
and growth of production and income, particularly in the
nonindustrial areas of the world. According to its charter,
its purpose is to “promote private foreign investment by
means of guarantees or participations in loans and other
investments made by private investors; and when private
capital is not available on reasonable terms, to supple­
ment private investment by providing, on suitable condi­
tions, finance for productive purposes out of its own capi­
tal, funds raised by it, and its other resources”. As matters
turned out, the IBRD found it neither practical nor pru­
dent to give its guarantee to loans raised in private capital
markets by borrowers with widely varying credit ratings.
Consequently, from the beginning it concentrated on mak­
ing, from its own resources., direct long-term loans for
productive projects.
The IBRD’s funds have be:en derived from three major
sources which have varied in relative importance over
the past fifteen years (see Chart I). Initially, the IBRD

FEDERAL RESERVE BANK OF NEW YORK

relied heavily on its own subscribed capital, of which
$2 billion has been paid in. Second, the IBRD has raised
funds by issuing its own bonds and notes, which are of
course backed by the capital subscriptions of its members.
A third source, which has lately become quite important,
has been the sale of participations in IBRD loans to pri­
vate investors. In addition, in more recent years the
IBRD’s available funds have been swelled by its sizable
earnings and, at the same time, loan repayments have
freed resources for new loans. All in all, from the start
of its operations through mid-1961 the IBRD had avail­
able for lending a gross total of almost $6 billion.
i b r d b o n d is s u e s .
The most important single source
of IBRD’s funds today is the sale of its obligations on the
world’s capital markets. Some $2.2 billion of its bonds
and notes were outstanding at the end of June 1961.
Once the bank had overcome the initial investor re­
sistance to a new type of security as well as legal barriers
to the purchase of its bonds by various institutional in­
vestors, it became extremely successful in floating large
and frequent issues in the United States. Moreover, a
rising amount of dollar bonds and notes, originally sold




157

in the United States, soon found their way into the port­
folios of individual and institutional investors outside
this country.
It has taken longer, on the other hand, to gain direct
access on a substantial scale to financial markets else­
where. In the immediate postwar period, the United States
market was the only one that could provide funds.
With the strengthening of the foreign industrial countries’
economies over the past decade, however, the IBRD was
gradually able to broaden the geographical base for its
securities issues. During the early 1950’s, as capital mar­
kets abroad were opened up, small issues began to be
sold both publicly and privately in Western Europe and
Canada. In more recent years, borrowing in Western
Europe was stepped up sharply.
While the IBRD’s debt is now denominated in seven
currencies, its United States dollar securities account for
three fourths of the total (see Chart II). However, a sub­
stantial proportion of the dollar debt—upward of 40
per cent—is estimated to be held outside the United
States, so that the institution now owes more than half
of its total funded debt to investors abroad.
ib r d l o a n o p e r a t io n s .
Although access to capital
markets abroad has not always been easy, the IBRD has
not been hampered in its lending activities by lack of
funds. Any limitation on its loan operations has come
rather from a dearth of loan projects that are suitable
under the IBRD’s standards. These standards are, in cer­
tain respects, similar to those of the private investor,
except that on loans to private entities the IBRD charter
requires a government guarantee. The productive charac­
ter of the projects submitted by would-be borrowers is
appraised, and repayment prospects are assessed accord­
ing to exacting criteria. The IBRD does not normally
lend for projects involving social overhead cost, such
as schools, housing, or hospitals, which do not produce
revenue and cannot be expected to lead to direct and
prompt increases in the borrowing country’s produc­
tive potential and foreign-exchange earning capacity. It
may also find it impossible to finance worthy and pro­
ductive projects in cases where the borrowing country’s
over-all ability to service the loan is in doubt because of an
already-heavy foreign debt burden or poor balance-ofpayments prospects. It is indicative of the rigorousness
of the IBRD’s standards that there has never been a de­
fault among the approximately 300 loans made since 1946.
Except for some $500 million of war reconstruction
loans to Western Europe in 1947 and 1948, IBRD lend­
ing has been devoted to stimulating economic develop­
ment. Until the early 1950’s its loan operations remained

158

MONTHLY REVIEW, SEPTEMBER 1961

Chart II

IBRD: OUTSTANDING FUNDED DEBT
JUNE 30,1961
In m illions of U.S. dollcjrs
T o ta l: $ 2 ,2 2 8

Source: International B ank for Reconstruction and Development.

fairly modest, but the pace has since then quickened
considerably and new loan commitments have for sev­
eral years averaged about $700 million annually (see
Chart III). A certain slackening has become noticeable
of late, however, in part because some of the IBRD’s
borrowers have by now established a sufficient credit
standing with private investors so as to be less dependent
on its loans. At the same time, other borrowers have
accumulated heavy foreign debt burdens which are likely
to make difficult the servicing of additional loans.
IBRD loans have been heavily concentrated in public
utilities, particularly in two major categories that are
usually the prerequisites of industrial expansion—power
and transportation facilities (see Chart IV). Next in im­
portance in the IBRD portfolio are loans for the construc­
tion or development of basic industrial facilities, followed
in turn by loans for agricultural improvement, irrigation,
and the like. The projects assisted by the IBRD have
touched every corner of the globe and have included con­
struction of some of the world’s largest dams, whole net­
works of roads to open up isolated regions to industrializa­
tion and agricultural development, huge port installation
projects, and the rehabilitation of entire national railway
systems. IBRD funds have also helped finance the estab­
lishment and expansion of steel, cement, fertilizer, and
numerous other heavy and light manufacturing industries,




as well as the development of mineral and other natural
resources.
IBRD loans are medium or long term, mostly in the
15- to 25-year range, depending on the nature of the
project financed. They are repayable in semiannual in­
stalments, normally beginning after a grace period of two
to five years. The interest rate they carry (currently 53
A
per cent) is based upon the rate at which the IBRD raises
funds in the market, to which is added a W a per cent serv­
ice charge. Because of the nature of the projects financed,
most IBRD development loans are quite large, ranging
in size from several million up to as much as $100 million.
For the same reason, many sire extended to governmentowned or government-controlled sectors of the economy.
When making industrial loans, however, the IBRD prefers
to finance privately owned concerns, in the belief that
manufacturing is usually best left to private enterprise.
While the government-guarantee requirement and the rela­
tively modest scale of private industrial undertakings in
underdeveloped countries make it difficult to administer
such assistance directly, the IBRD has found ways to
channel funds to private industry through local develop­
ment banks, many of which have been created at IBRD
initiative.

159

FEDERAL RESERVE BANK OF NEW YORK

The IBRD generally limits its financial assistance on
an investment project to the foreign exchange portion of
the cost of the project. This limitation cannot, of course,
be applied rigidly in the case of countries, such as Japan,
that are already producers of capital equipment and
where the direct import costs of a development project
may therefore be small in relation to the total cost. The
main objective of the policy has been to ensure that the
borrowing country, through taxation or by other means,
mobilizes local resources to make a significant contribu­
tion of its own to the investment effort. Until now, how­
ever, progress toward this objective has been rather modest
and some borrowers have consequently failed to secure
maximum possible results from the use of IBRD resources.
Also, in order to ensure maximum benefits from the aid
granted, the use of the proceeds from an IBRD loan is
not tied. Procurement can be effected in any IBRD mem­
ber country or in Switzerland which, without being a mem­
ber, has cooperated closely with the IBRD. In general,
on any sizable project, the IBRD requires competitive
bidding on contracts under its credits.

Chart IV

IBRD: LOANS BY PURPOSE
JUNE 30, 1961
Gross totals in millions of U.S. dollars
Total: $5,669

* These represent loans made to local development institutions and reloaned
by the latter.

THE IBRD, PRIVATE CAPITAL, AND ECONOMIC DEVELOPMENT.

The IBRD remains faithful to its mission of not competing
with, but on the contrary encouraging, private foreign in­
vestment. In the first place, it has made relatively few
loans to the more industrialized countries of the world,
where funds can usually be secured on private capital
markets. Until recently, to be sure, it has been lending
heavily to two industrial countries that are considered
rather special cases—Italy, whose southern half remains
underdeveloped, and Japan, where industrialization is still
proceeding at an extremely rapid pace. However, the
IBRD is now encouraging these two countries to raise
elsewhere the funds needed to continue their development
programs.
At the same time, to help broaden the market for its
borrowers’ obligations, the IBRD has frequently arranged
to sell to private investors portions of the loans held in
its portfolio or to have private lenders participate in
some of its new loans. In most cases, the IBRD has
kept the longer maturities, while private institutions have
bought or participated in the shorter ones, without re­
quiring a formal guarantee from the IBRD. As the credit
standing of IBRD borrowers has improved, some of them
have supplemented IBRD loans with funds raised simul­
taneously by the public issue or private placement of
their own securities in the United States. Finally, the
IBRD has laid the groundwork for expansion of private
foreign investment not only through its loan operations
but also through its technical assistance to the develop-




Source: International Bank for Reconstruction and Development.

ing countries.
The IBRD’s technical assistance to its member coun­
tries has been an invaluable part of its operations. This
assistance has taken many different forms and has covered
almost all aspects of development planning and execution,
from engineering advice on problems of specific projects
to help in the organization of domestic development banks
and in broad-range development planning. Sometimes, as
in the case of the Indus and Mekong river basins, these
projects have crossed national borders.
T H E I N T E R N A T IO N A L F IN A N C E C O R P O R A T I O N

The International Finance Corporation (IFC) was
created in 1956 to supplement the IBRD’s activities by
providing finance for private undertakings under riskier
circumstances than the IBRD and without the latter’s
government-guarantee requirement. It acts as a catalytic
agent in the process of development, securing as much pri­
vate participation in its investments as possible and eventu­
ally revolving its own funds by turning its successful in­
vestments over to private investors.
The IFC’s financial resources are limited and its opera­
tions have been modest in scope. Although it is allowed

MONTHLY REVIEW, SEPTEMBER 1961

160

by its charter to raise funds in the market, until now it
has relied solely on its $97 million of capital funds. So
far, the IFC has committed $45 million to forty industrial
ventures in eighteen countries. The IFC confines its in­
vestment activities to privately owned and managed en­
terprises engaged in productive industrial activities —
manufacturing, processing, or mining. The enterprises
financed are usually of medium scale, the IFC’s invest­
ments ranging in size from $100,000 up to as much as
$4 million. Generally, the IFC provides no more than half
of the finance required for a project, expecting the re­
mainder of the required capital to come from private
sources, domestic or foreign. Private interests have, in
fact, supplied about three fourths of the total capital used
in the various IFC development projects.
Although the IFC, like the IBRD, is prohibited from
investing in equities, it has developed ways of providing
venture-type capital. The IFC is instructed by its charter
to obtain a return on its investment commensurate with
the risks undertaken and comparable with the returns
obtained by private investors. This has led it to negotiate
with its borrowers complex investment formulas that add
some equity features—such as stock options and participa­
tions in profits—to what are formally fixed-interest loans.
On the whole, the use of these devices has vastly com­
plicated the IFC’s operations and has constituted a serious
obstacle to its expansion. Moreover, equity capital is
often badly needed in new and expanding enterprises,
which may already be overburdened with debt in their
initial years of operation. To meet this need, a charter
amendment has been proposed that would allow the IFC
to make nonvoting equity investments. If the amend­
ment is ratified by the member governments, the IFC hopes
to be better able to promote the expansion of private en­
terprise and to induce more local and foreign private
investors to join in such activities.
T H E IN T E R N A T IO N A L D E V E L O P M E N T
A S S O C IA T IO N

all of the external capital which they require to carry out
their priority programs”. IDA credits, like those of the
IBRD, are to be repaid in the? currency borrowed, in order
to avoid the accumulation of large quantities of local cur­
rencies with little or no international usefulness. However,
the debt servicing burden is to be minimized by very lenient
repayment terms. The IDA is empowered to finance
projects of high developmental priority, whether or not
they are directly productive. Its activity may therefore
be spread over a broader range of investments than the
IBRD’s, including those of a primarily social character,
such as housing or sanitation works.
The IDA, whose membership consists of about three
quarters of IBRD member countries, is to receive sub­
scriptions in instalments over the next four years of over
$900 million. However, only the industrialized countries
—including, besides Western Europe and the United
States, Canada, Australia, Jaipan, and the Union of South
Africa—are being required to make their subscriptions
available in gold or freely convertible currencies. Hence
IDA’s effective resources will amount to only about 80
per cent of its total subscriptions.
The IDA’s charter provides that the adequacy of the
institution’s resources will be reviewed periodically with
a view to increasing the members’ subscriptions. Initially,
the IDA’s convertible-currency resources are expected to
support a lending rate of about $150 million a year. Sub­
sequently, the institution’s ability to help meet the de­
veloping countries’ financing needs will largely depend
upon the willingness of the developed member countries
to provide additional fund::;—upon their willingness, in
effect, to internationalize a greater part of their development
aid. Discussing the IDA’s prospects at the United Nations
Economic and Social Council recently, Mr. Black said:
It is to be hoped that in due course the obvious
need, and IDA’s record of performance, will
together justify a substantial increase in IDA’s
financing capacities, and also that countries
contemplating an expansion of their aid pro­
grams may see fit to channel a part of the addi­
tional funds through the IDA. Such a pooling
of resources is by far the most effective and sat­
isfactory means of coor dinating development aid.

The International Development Association (IDA) was
established in the fall of 1960 to fill a gap of a different
nature in IBRD’s operations: to make long-term develop­
ment loans on more flexible terms than are possible for
T H E IN T E R -A M E R I C A N D E V E L O P M E N T B A N K
the IBRD. In the words of Eugene Black, who is president
The Inter-American Development Bank (IDB) differs
both of the IBRD and of the new institution, the IDA,
is to assist “countries whose foreign exchange situation is from the IBRD and its two affiliates in that it is a regional,
such that they cannot borrow abroad at all on conven­ rather than world-wide, institution. It was organized early
tional terms” and “those whose foreign debt service bur­ in 1960 by the members of the Organization of American
den over the short and medium term is already so high States and aims to promote the general economic develop­
that they cannot prudently borrow, on conventional terms, ment and economic integration of Latin America. Its




FEDERAL RESERVE BANK OF NEW YORK

membership includes the United States and nineteen Latin
American republics.
The IDB is divided into two financially distinct entities:
an Ordinary Banking Operations component that makes
loans on approximately commercial terms to finance im­
mediately remunerative projects in countries capable of
bearing the debt-servicing burden; and a Fund for Special
Operations which provides credit to countries in special
need and which also finances undertakings that will in­
crease the recipient’s productive capacity only indirectly
and slowly (including, in particular, investments in
health, housing, and the like). Loans from the latter fund
are repayable in part or entirely in the borrower’s own
currency and are made at relatively low rates of interest
and for long periods, with amortization beginning only
after a generous grace period.
By using its ordinary capital only for commercial-type
loans, the IDB should be able to supplement its members’
subscriptions by mobilizing private capital in much the
same way as has the IBRD. The ordinary capital, like
that of the IBRD, includes a paid-in portion of about
$400 million and a callable portion of $450 million to
serve as backing for bond issues. The groundwork for
such issues is already being laid in both the United States
and Western Europe. In addition, the IDB has already
obtained participations by United States banks in a sub­
stantial number of the regular loans it has extended so far.
The Fund for Special Operations, on the other hand,
is to obtain its resources solely from the $150 million sub­
scribed by member countries. As the fund’s convertiblecurrency holdings may be quickly depleted, owing to the
local-currency repayment feature to be used in most of
its loans, provision has been made for eventual increases
in the members’ contributions.
Because the IDB aims to supplement rather than re­
place existing sources of development finance in Latin
America, it is expected to make special efforts to co­
ordinate its activities with those of other lending institu­
tions. A beginning has already been made in this direc­
tion with a highway loan to Honduras in cooperation with
the IDA, and a housing credit to Colombia in collabora­
tion with the United States Development Loan Fund.
The regional character of the IDB offers good opportuni­
ties for working out a coordinated approach to develop­
ment lending on both the hemisphere and the country
level. Of the more than $115 million of loans authorized
to date, approximately $79 million have been extended
to banks and local development institutions, which will
relend the funds generally for small-scale projects in agri­




161

culture, industry, and mining, in accordance with over-all
plans worked out with the IDB’s assistance.
The IDB is also administering, at the request of the
United States, the larger part of the $500 million appro­
priated by the Congress last May for social development
projects in Latin America. Loans under this program are
to be on flexible terms, to finance important social projects,
such as land improvement, water supply, and low-cost hous­
ing, and to foster the adoption by the recipient countries of
the basic tax, land, and other reforms that will make
rapid economic development possible.
C O N C L U S IO N S

While the supply of development capital available from
international development lending institutions will un­
doubtedly remain only a small fraction of total require­
ments, the contribution of these institutions has already
been significant. Through its loans, the IBRD has helped
greatly in laying the foundations for economic growth in
many countries. Moreover, the economic and technical
advice offered by the IBRD, as an international institu­
tion, has sometimes been accepted more readily than if
the advice had come from any national source.
Beyond this, it has become clear that international lend­
ing institutions can effectively enlist the help of private
capital to assist in the task of development financing. The
experience of the IBRD, in particular, has shown that
such institutions can very usefully play, in the international
sphere, a role similar to that of financial intermediaries in
national capital markets.
Finally, it is now widely recognized that the current
multiplication of lending agencies at both the government
and the intergovernmental levels calls for ever-closer co­
ordination of aid-giving activities. The specific type of
financing offered by some of the agencies, or the nature
of their approach, may in themselves define broad areas
of specialization. There may nevertheless be instances
when the various lenders find themselves in competition
with one another, or even working at cross purposes, if
they do not reach agreement on common principles, con­
sistent with the over-all development objectives of those
receiving assistance. The feasibility of effective interagency cooperation has been demonstrated many times
in the past in the joint ventures of the IBRD with lending
agencies of the United States and other governments,
including the consortium of nations providing assistance
to India and Pakistan, as well as in some of the first un­
dertakings by newcomers like the IDA and the IDB.

162

MONTHLY REVIEW, SEPTEMBER 1961

T he M oney M ark et in August
The money market turned gradually firmer during the
first half of August. A number of market factors com­
bined to produce a lower level of total free reserves, and
available funds tended to be concentrated at the country
banks. After midmonth, however, aggregate free reserves
expanded and reserve balances moved to the money
centers, bringing declines in most money market rates.
Reflecting these developments, the effective rate for Federal
funds was generally at 1% to 2% per cent during the
first half of the month, but thereafter declined to a range
of 1 to 2 per cent. Dealer loan rates posted by the New
York City banks similarly moved from a 2 Vi to 3 per
cent range to IVi to IV i per cent after midmonth.
Activity in the market for Government securities was
generally light. A cautious atmosphere prevailed early in
the month, as the market pondered the possible impact of
international tensions and of stepped-up defense expendi­
tures on an economy already advancing at a good pace.
In this atmosphere, the decline of intermediate- and long­
term prices, which began in late July, continued through
the first third of August, carrying some issues to new price
lows for the year. As the month progressed, however, the
feeling grew that this adjustment had run its course, while
the light calendar of new corporate and tax-exempt bonds
also helped to strengthen the Government market. Later
in the month, price trends were dominated by anticipa­
tions of a “senior” advance refunding, which served to
strengthen some of the 2V2 per cent intermediate bonds
while dampening the long end of the market. In the
Treasury bill market, bank selling in the firming money
market over the first half of August, along with dealer
attempts to reduce inventories in response to higher
financing rates, contributed to a rise of Va percentage
point or more in most bill rates. This rise was largely
erased during the balance of the month, however, as the
easier money market and dealer attempts to rebuild in­
ventories brought increasing demand and a pronounced
decline in rates.
M EM BER BANK RESERVES

A substantial volume of reserves was absorbed during
the first two weeks of the month by market factors, par­
ticularly a decline in float, an expansion in currency in
circulation, and an increase in required reserves follow­
ing the Treasury’s July cash borrowing operation. Dur­




ing the following two weeks, market factors—primarily
the midmonth rise in float—supplied reserves on balance
and, in the final week, absorbed reserves once more as
float again dropped sharply. Over the five weeks as a
whole, market factors absorbed $571 million of reserves
on a daily average basis.
System open market operations largely offset swings
in reserve availability arising from fluctuations in market
factors throughout the month. On balance, open market
operations supplied some $545 million in reserves over
the five weeks, on a daily average basis. On a Wednesdayto-Wednesday basis, between July 26 and August 30, Sys­
tem holdings of Government securities maturing within
one year decreased by $1,108 million, those maturing in
one to five years rose by $1,389 million, and maturities in
the over-five-year categories increased by $54 million.
These changes reflected, in addition to operations, the
exchange of maturing System holdings in the Treasury’s
July refunding.
Free reserves of all member banks averaged $502 mil­
lion during the five statement weeks ended August 30,
compared with $586 million in the four weeks ended
July 26. Average excess reserves declined by about $67
million to $569 million in August, while borrowings from
the Federal Reserve Banks rose by $17 million to $67
million.
TH E G O V E R N M E N T SE C U R IT IE S M ARK ET

In the market for Treasury bills, rates climbed steadily
over the first half of the month, with the three-month bill
rate rising a full Va percentage point to 2.54 per cent bid,
the highest level since last March. Contributing to the
rise were a midsummer lull in nonbank demand, a grow­
ing supply of bills offered by banks reacting to the firm­
ing money market, and a lightening of inventories by
dealers faced with higher carrying costs and an uncertain
outlook. Bidding in the weekly auctions during this
period was slack, with average rates on the three- and
six-month bills rising to 2.519 and 2.765 per cent, re­
spectively, in the August 14 auction. These rates were
22 and 21 basis points higher than in the auction two
weeks earlier and, together with the easing of money
market conditions in the second half of the month, stimu­
lated an increased interest in bills. As the market supply
diminished, rates moved steadily lower, and in the final

FEDERAL RESERVE BANK OF NEW YORK
Changes in Factors Tending to Increass or Decrease Member
Bank Reserves, August 1961
In millions of dollars; ( + ) denotes increase,
(—) decrease in excess reserves
Daily averages—week ended
Factor

Net
changes

Aug.
30

Aug.
2

Aug.
9

Aug.
16

Aug.
23

+ 83
- 395
+ 27
+ 15
- 57

+ 27
- 75
- 115
+ 25
- 53

- 28
+ 103
- 100
+ 30
+ 14

+ 13
+ 301
+ 70
+ 15
- 86

+

1
309
+ 120
— 10
7

96
+
— 375
2
+
75
+
— 189

TotsI...................... - 327

- 191

+

+ 311

- 203

-

+

Operating transactions

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

19

391

Direct Federal Reserve credit
transactions

Government securities:
Direct market purchases or
sale*..........................................
Held under repurchase agree­
ment!.............. ...................
Loans, discounts, and advances:
Member bank borrowings_
_

+ 509

+ 255

- 209

-

+

79

+

40

+

66

- 190

+

25
—

+

48

-

+

1

—61
_

+ 614

+ 344

- 204

With Federal Reserve Banks.. .
Cash allowed as reserves f........

+ 287
8

+ 153
- 231

Total reservesf.............. ................
Effect of change in required res e r v e s f ...'......................................

+ 279

-

- 452

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

- 173

+

Daily average level of member
bank:
Borrowings from Reserve Banki.
Excess reserves t ......................
Free reserves f ..... ...................

75
477
402

Other.........................................

Bankers’ acceptances:
Bought outright...................
Under repurchase agreements.
Total,....................

84

85
6

+ 556
__ 11

_
—

2

13
—
■

_

1

_

- 296

+

75

+

533

- 185
+ 174

+
-

15
10

+

128
85

+
+

142
10

78

-

11

+

5

_

43

+

152

+ 158

+

58

-

12

+

58

-

190

+

47

-

7

+

15

-

38

Member bank reserves

80

123
557
434

+

62
604
542

25
2

37
597
560

37
612
575

67 J
569 %
5021

Note: Because of rounding, figures do not necessarily add to totals.
• Includes changes in Treasury currency and cash,
t These figures are estimated,
t Average for five weeks ended August 30,1961.

weekly auction of the month, on August 28, average issu­
ing rates were 2.321 and 2.617. At the month’s close*
the three-month bill rate was 2*35 per cent bid, 7 basis
points higher for the month,
In the market for Treasury notes and bonds, under­
lying psychology remained cautious, reflecting the brighten­




16S

ing business picture, the budget implications of plans for
greater defense spending, and expectations of sizable
Treasury financing operations. However, after prices had
declined by midmonth to their lowest levels of the year
for some issues, there was a feeling that the adjustment
might have been overdone, and some professional shortcovering developed. Losses were reduced particularly for
the 2V2 per cent tap issues, which were strengthened by
widespread reports that they might shortly be open to
conversion in an advance refunding by the Treasury. For
/a
the month, most intermediate issues were y1Q to 3 of a
point lower while long-term issues, affected adversely by
the same discussions of a possible “senior” refunding, were
% to 1% points lower.
O T H E R S E C U R IT IE S M A R K E T S

In the corporate and tax-exempt bond markets, prices
moved moderately lower over the first half of the month.
The factors depressing Government bond prices made
themselves felt in these markets also, but their influence
was partly offset by the low summertime volume of new
offerings following the high second-quarter pace. The
$215 million volume of new publicly offered corporates
was only half the $425 million July total and one fifth the
$1.0 billion volume reached in June, while the $525 mil­
lion of new tax-exempt offerings rose only slightly from
the $420 million July low and was still far below the $980
million June pace. Soon after midmonth, moreover, the
virtual clearing of the corporate calendar and the rejection
of the bid on $125 million of a scheduled $225 million
State of California offering signaled a temporarily lightened
current supply of new issues and prices firmed. Over the
month as a whole, Moody’s index of yields on seasoned
Aaa-rated corporates was unchanged at 4.45 per cent,
while the average yield on similarly rated tax-exempts
rose 1 basis point to 3.34 per cent.