Full text of Economic Policy Review (Federal Reserve Bank of New York) : September 1962, Vol. 44, No. 9

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118

MONTHLY REVIEW, SEPTEMBER 1962

Current Issues o f United S tates Financial Policy*
S t a t e m e n t by A l f r e d H a y e s

President, Federal Reserve Bank of New York

The United States has achieved, thus far in 1962, a
substantial expansion in domestic economic activity as well
as a further improvement in its international payments
position. During the first half of 1962, production, em­
ployment, and incomes all achieved record levels. Avail­
able data for July clearly indicate that the expansion is
continuing. Nevertheless, it must be admitted that progress
in speeding up the country’s rate of economic growth has
been less rapid than many of us considered possible at the
beginning of the year, and in our international accounts
we cannot be satisfied until the balance-of-payments gap
has been eliminated.
Economic performance must be appraised, not only
against the past, but also against what might be achieved
if we made reasonably full use of human and material
resources. Measured by this latter yardstick, our recent
performance cannot be rated wholly satisfactory. Although
the percentage of people out of work has dropped sub­
stantially during the current upswing, I do not question
that we must aim for a more ambitious target. In short,
unemployment has been and remains too high.
Business outlays on new plant and equipment must ex­
pand sharply if the economy is to move into higher
ground. Business investment has in fact rebounded
smartly from its recession lows, but in this vital area, too,
the rate of improvement has been short of the need. An
important stimulus has now been given to business invest­
ment by a revision in the depreciation schedule, and
another would be provided by the enactment of the in­
vestment credit proposal now before Congress. These
changes, and the promise of reduced corporate tax rates
next year, are desirable not only as likely to produce
expansion in the economy but also as a means to achieve
greater productivity and lower costs in an increasingly
competitive world market.

* Statement before the Joint Economic Committee of the Con­
gress of the United States, August 16, 1962, during hearings on
the state of the economy and on policies for achieving maximum
employment, production, and purchasing power.




We are concerned that the forward thrust of the econ­
omy has been losing some of its force, even if one ex­
cludes from consideration the temporarily depressing ef­
fects of the unraveling of the steel situation. On the other
hand, the generally stable level of prices, coupled with
unused industrial capacity at home and ready availability
of goods from abroad, has militated against the accumula­
tion of large inventories as a hedge against shortages and
higher prices. The fact that we have avoided excessive
inventory accumulation during the current expansion is
encouraging, since it diminishes the danger that such
accumulation might set off a recessionary movement or
contribute to such a movement if the business tide should
turn for other reasons.
Throughout the current business expansion, and despite
some criticism at home and abroad, the Federal Reserve
has maintained conditions of monetary ease. As a matter
of fact, an examination of business annals is unlikely to
produce another example of a strong recovery proceeding
so far in an atmosphere of ready availability of credit.
Large amounts of bank reserves have been made available,
more than offsetting the losses resulting from the gold
outflow. Banks remain comfortably liquid and anxious
to lend. Bank holdings of mortgage loans and municipal
obligations spurted by a total of $6 billion over the first
seven months of the year, more than during any other
similar span of time. Instalment lending has also increased
substantially. At the same time, loan demand and securi­
ties flotations by business borrowers have been disappoint­
ing, despite the fact that interest rates for such credit are
little changed from those prevailing at the trough of the
recession. One important reason for the lackluster per­
formance of bank lending is the moderate business demand
for inventories. A look at the volume of reserves sup­
plied by the System together with the maintenance of a
relatively high level of free reserves since the beginning
of the recession should be persuasive evidence that the
Federal Reserve authorities have been consistently replen­
ishing reserves which the banks have put to work. It is
true that the money supply—narrowly defined as checking

FEDERAL RESERVE BANK OF NEW YORK

accounts and currency—has increased comparatively
slowly of late, but this development has to be viewed
together with an unprecedented spurt in commercial bank
time and savings deposits. Such deposits, which for most
holders provide almost as much financial maneuverability
as checking accounts, have spurted by $10 billion, or
12 per cent, so far this year. The public’s holdings of
short-term United States Government securities, which can
be readily turned into cash, have also expanded sub­
stantially.
So long as the shortfall of economic activity from what
I regard as a reasonable goal persists, it seems to me that
monetary policy should properly remain concerned with
maintaining the maximum degree of credit ease consistent
with its other objectives.
At the same time, we must keep in mind that attainment
of our economic goals depends on many factors, of which
credit and monetary conditions, over which the central
bank exerts direct influence, represent only one—though
an important—element. The job of instilling new vigor
into the business expansion must, I believe, be done
largely by means other than monetary policy.
I should like to turn now more specifically to develop­
ments in our international position.
The balance of payments, as you know, has shown some
needed improvement in the first half of 1962. However,
a part of the improvement, although by no means all of it,
has occurred because of a temporary flow of funds, now
reversed, from Canada to the United States as pressures
developed on that country’s currency. It is therefore clear
that unremitting efforts to make further progress in reduc­
ing the over-all deficit remain the order of the day. The
Administration, as you are aware, is pursuing a multi­
pronged attack on the problem, including an export pro­
motion program, reduction of military spending abroad,
negotiations for both additional foreign defense purchases
in this country and a wider sharing of aid to underdevel­
oped countries, and further “tying” of United States aid to
those nations. Right now, as well as over the longer term,
emphasis must be kept upon increasing the competitiveness
and productivity of the United States economy. For this
reason, the recent record of lower unit wage costs has
been most welcome, especially at a time when wage pres­
sures continue strong in Western Europe and elsewhere.
Bringing our international payments into balance and
keeping them under close control is a necessary condition
for protecting the dollar’s position as the world’s leading
currency and as the keystone of a stable international cur­
rency and payments system. The rebuilding of foreign
monetary reserves and the redistribution of international
gold reserves have resulted in a decline in our gold stock




119

and in a rapid rise of foreign short-term claims on the
United States. These short-term claims are like money in
the bank to those that own them; and, just as any of us
would, they look to the banker, the United States, to pro­
vide assurance that the bank is being managed wisely. If
we expect people to keep their money in United States
dollars, we must give them both confidence in the sound­
ness of our currency and some inducement to stay with
us, rather than moving to another currency or to gold. It
is for this reason that the System has cooperated in efforts
to avoid unnecessarily low short-term interest rates and
thus to reduce disruptive short-term capital outflows and
their actual or potential effects on our gold stock. In this
connection, I should like to emphasize my strong convic­
tion that, if we achieve a balance in international payments
and avoid actions that damage confidence, our gold stock
is ample for our requirements both as a major trading
nation and as bankers for the world.
I was surprised, by the way, that several witnesses have
proposed to this Committee that the United States extend
a “gold guarantee” to foreign holders of dollars. I wish
to emphasize my strong conviction that such a “guarantee”
would be an exceedingly harmful measure, besides being
ineffective. In my judgment, this type of “protection”
would be illusory and, in any case, is not warranted in
view of the Government’s determination to maintain the
gold price and to take the basic measures needed to assure
attainment of this objective. Indeed, a guarantee would
merely becloud this larger issue.
The potential of monetary policy in protecting a cur­
rency against sudden speculative pressures is well recog­
nized; hence Federal Reserve policy must remain flexible
and prepared to deal with any contingency. We should
try to avoid conditions of excessive credit ease that make
reserves so ample that our banks and other lenders are
induced to seek more remunerative outlets abroad because
credit availability greatly exceeds domestic loan demands.
Rate differentials are an important, but not the only,
reason for international capital movements. For instance,
the sheer size, efficiency, and ease of access of our capital
and short-term credit markets constitute a strong attrac­
tion to foreign borrowers. And, as you know, a variety of
rate differentials are involved, both hedged and unhedged,
while their respective significance in pulling in or repelling
money may change over time. The Federal Reserve Sys­
tem has to be continuously alert to the pressures on the
dollar which may arise from rate and credit developments,
or from any other cause. In essence, the challenge to
monetary policy in recent years has been to provide an
adequate availability of credit to support a sustainable
growth of our economy while guarding against a spilling

120

MONTHLY REVIEW, SEPTEMBER 1962

over of excess liquidity into channels that would weaken
the international position of the dollar or renew infla­
tionary pressure domestically.
Meanwhile, the external defenses of the dollar have
been strengthened so that monetary policy will not be
overburdened while more basic balance-of-payments ad­
justments are still taking place. Such a strengthening
would have been required, it might be added, even with­
out a United States payments problem. Convertibility has
greatly increased the volume and volatility of interna­
tionally movable funds; this is a natural consequence of the
considerable degree of our success in approaching the
kind of world we have been seeking to achieve since World
War II. Nevertheless, it does mean that proper resources
must be at hand to meet sudden shifts of funds and pres­
sures that may be expected to be temporary. There is
encouraging evidence that this problem can be handled
through such avenues as the activity of the Treasury and
the Federal Reserve in the exchange markets, the increas­
ingly close central bank cooperation of the past eighteen
months, and the IMF expansion agreement (still requiring
final Congressional action, of course), which will vasdy
enlarge our access to currencies that we may need. Offi­
cial United States exchange operations undertaken so far
have basically been designed to protect the United States
dollar against disturbingly large pressures at a time when
we are making steady progress toward bringing our bal­
ance of payments into equilibrium.
Treasury operations in convertible currencies began in
the spring of 1961 when the Federal Reserve Bank of
New York, acting for the Treasury, undertook operations
in the market for German marks designed to deal with the
abnormal conditions that had developed following the
revaluations of the German and Dutch currencies in
March 1961. This operation was followed by other Treas­
ury transactions in Swiss francs, Italian lire, and Dutch
guilders, which are continuing up to the present. The
Federal Reserve System, with the full concurrence of the
Treasury, concluded that the central bank of this country
should play a more active and direct role in defending the
international value of the dollar. The Federal Open Mar­
ket Committee therefore authorized the Federal Reserve
Bank of New York on February 13, 1962 to undertake
transactions in foreign currencies for System Open Market
Account in accordance with the Committee’s instructions.
Since that time the System has acquired a substantial
amount of convertible foreign currencies, primarily through
a series of reciprocal currency agreements with foreign
central banks, and has begun to use these resources in
defense of the dollar.




The possibility of acquiring substantial amounts of
foreign currencies through such currency swaps with for­
eign central banks rests upon a mutuality of interest. That
interest is to make the present international financial sys­
tem, under which world trade and investments are expand­
ing rapidly, work reliably and efficiently. Therefore coun­
tries relying upon the dollar as an important part of their
international reserve assets are glad to participate in ar­
rangements that reduce the possibility of temporary and
capricious pressures on the dollar. Furthermore, since
currency swaps and stand-by agreements are tantamount
to a mutual credit facility, foreign countries as well as
ourselves obtain access to additional resources in case of
need. Over the years ahead, these arrangements can also
make a useful contribution to world liquidity needs.
In carrying out exchange transactions for both the
Treasury and the System, we have made a point of estab­
lishing the closest and most harmonious possible relations
with foreign central banks—an indispensable requirement
when working in the exchange markets for their currencies.
We have found that, with this cooperation, our use of
foreign currency resources has in fact been effective; we
have helped to strengthen the dollar in the exchange
markets, reduced cumulative or snowballing speculative
flows, and eased the immediate impact upon the United
States gold stock of foreign central bank accumulations of
dollars.
You will realize that official United States exchange
operations rest upon the assumption that the pressures they
have to meet are of a temporary and transitional nature.
In a number of important instances, this has already
turned out to be the case so that the commitments under­
taken could be liquidated without a gold loss. Such suc­
cess, however, cannot be taken for granted. In particular,
an indefinite continuation of large United States payments
deficits would assure that the pressure upon the dollar
becomes permanent rather than temporary. Hence, these
exchange operations in no way detract from the urgency
of our task in correcting the payments deficit. Further­
more, while the initial development of close international
cooperation has clearly been stimulated by the very strains
it is designed to combat, foreign countries are counting
upon us, as we are counting upon them, to take the na­
tional actions necessary to make certain that such strains
upon any one currency will in fact pass.
Thus far we have met to a remarkable degree the chal­
lenge of harmonizing the domestic and international as­
pects of our financial policies. I believe we have the
needed flexibility to continue to meet this challenge under
the changing conditions that may confront us.

FEDERAL RESERVE BANK OF NEW YORK

121

The B usiness Situation
The pace of economic activity picked up somewhat after
midyear. In July, industrial production, nonfarm employ­
ment, personal income, retail sales, and new orders for
durable goods all increased. Early signs suggest little change
in the over-all economic picture in August. To some extent,
of course, the improvements which have recently been
registered in various statistical series merely reflect the re­
moval or lessened influence of special factors that had
depressed the June results, such as the heavy liquidation
of steel stocks, the Ford strike, slower Government order­
ing, and—possibly—reaction to the stock market decline.
Relatively little progress has been made in recent months
toward the goal of fuller utilization of the economy’s
capacity. Nevertheless, the currently available data do
seem to confirm that the economy has, at least for the
time being, weathered an unusual combination of adverse
influences better than many people had expected.
New information on spending plans of consumers
and businesses largely reflects views formed before the
July improvement in the business situation had become
evident, and before the President had announced that he
would not seek a tax cut until early next year. Consumer
spending intentions, according to the Federal Reserve’s
July survey, were well sustained but not buoyant. Business­
men have not revised upward their earlier plans for a mod­
erate rise in capital outlays in the latter half of 1962, but
neither have they cut them back, according to the Govern­
ment’s latest quarterly survey taken in early August. Thus,
private spending plans have been maintained, despite the
steep stock market decline in May and June and the prob­
able tendency to postpone spending and investment deci­
sions because of the uncertainties in the business and fiscal
outlook.
The Government sector is likely to provide increased
support to total demand in the near-term future, even with­
out an immediate tax cut. While the President has stated
that he does not intend to ask for any increase in appro­
priations beyond those already requested from Congress,
the fact remains that the budget already calls for some rise
in Federal spending over the months ahead. Furthermore,
the rate of outlays under the budget can to some extent be
speeded up should economic conditions warrant. Finally,
a substantial additional sum has recently been freed from




trust funds for the highway program, which may permit
the placing of contracts at a somewhat faster rate than
had originally been scheduled.
G A I N S IN P R O D U C T I O N ,
E M PLO Y M E N T , AND ORDERS

The Federal Reserve’s seasonally adjusted index of
industrial production rose by almost 1 percentage point in
July, somewhat more than in June. The better showing in
July was attributable mainly to developments in the steel
and automobile sectors, but gains continued to be scored
in a wide range of industries. Output of motor vehicles and
parts reversed the June decline (see chart), as Ford
accelerated its schedules following the settlement of its
labor dispute. Even more significant was the fact that
steel production showed only a slight decline for the month
as a whole, in contrast to the substantial decreases during
the three preceding months. The weekly series on steel
output actually started to move upward after the first week
in July, and in August production of steel ingots appears
to have risen substantially, after seasonal adjustment.
According to steel industry reports, however, steel inven­
tories, though down markedly from their levels earlier in
the year, are still somewhat higher than desired and thus
are likely to continue to restrain steel production for some
time to come. In the auto industry, most assembly lines
were shut down for at least part of August for model
change-over, but production, after seasonal adjustment,
was apparently not much below the high July levels.
Total nonfarm employment (as measured by the Bureau
of Labor Statistics payroll survey) also advanced in July,
on a seasonally adjusted basis, slightly bettering the mod­
erate rise in the previous month. The gains, however, were
centered in the service, trade, and construction industries
—the improvement in construction mainly reflecting the
termination of several major strikes in California. In the
manufacturing sector, both employment and average
weekly hours declined slightly.
An encouraging development during July was the 5 per
cent (seasonally adjusted) rebound in new orders received
by manufacturers of durable goods. This “leading” series
had declined in four of the preceding five months. An

MONTHLY REVIEW, SEPTEMBER 1962

122

RECENT DEVELOPMENTS IN INDUSTRIAL PRODUCTION
S e a s o n a lly a d ju s te d

1961
S o u rce :

1962

B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s t e m .

important part of this downtrend, however, had apparently
been caused by the fall-off in steel orders and, in June, by
a failure of Government orders to show their usual fiscalyear-end bulge. Although it is not known to what extent
the July recovery merely reflected a “catching up” in mili­
tary orders, the fact that gains were recorded by most
major industries may indicate some strengthening in orders
not related to military activities.
D E V E L O P M E N T S IN K E Y D E M A N D S E C T O R S

Recent data covering actual and planned spending by
consumers and business firms present a mixed picture.
Consumer spending rebounded in July, as retail sales rose
more than 3 per cent, seasonally adjusted. The gain, which
brought total retail volume to a level slightly above the
previous all-time peak registered in April, largely reflected




a sharp increase in sales by durable goods retailers. Auto­
mobile dealers had a particularly good month, and sales
of most other durable items also moved upward. In the
first twenty days of August new car sales appear to have
declined from the high July rate, but August department
store sales continued close to the previous month’s near­
record level.
The central question in the consumer sector is whether
spending, after having increased considerably since early
spring, can be expected to show much further forward
push in the months ahead. According to the Federal Re­
serve’s quarterly survey referred to earlier, buying inten­
tions in July followed a mixed pattern. Since the survey
was taken only shortly after the stock market low, it is
encouraging that there was no significant evidence of any
deterioration in purchase plans. Moreover, there was
apparently more-than-usual strength in intentions to buy
household durables. On the other hand, reports of plans
to buy new cars within six months were unchanged from
April to July of this year, in contrast to increases in the
corresponding period of the expansion years 1959 and
1961. Plans to buy used cars declined in July, but they
had been abnormally high in April.
In the private housing sector, demand has apparently
fallen off somewhat from the high levels attained earlier
this year. The number of private nonfarm housing units
started declined sharply in June and failed to recover in
July. However, the number of building permits issued,
though below the high levels reached earlier this year,
increased somewhat in both June and July, and there
continues to be a sizable backlog of unused permits;
normally, only a small proportion of permits fails to
eventuate into starts. Furthermore, demand continues to
be supported by a relatively easy mortgage market.
Perhaps the sector of demand most subject to uncer­
tainty in the months ahead is business expenditures for new
plant and equipment. The August Commerce DepartmentSecurities and Exchange Commission survey of plans for
business capital outlays points to a moderate rise in plant
and equipment spending throughout the balance of the
year. Spending plans for the second half of 1962 showed
little revision, in the aggregate, from those reported three
months earlier. In July, capital spending appears to have
continued upward. On the other hand, new orders received
by machinery and equipment manufacturers and contract
awards for commercial and industrial construction (ex­
pressed in dollar terms) registered little change on a sea­
sonally adjusted basis. Moreover, the National Industrial
Conference Board’s July survey showed a 14 per cent drop
in net capital appropriations of large manufacturing cor­
porations in the second quarter, the first decrease in the

123

FEDERAL RESERVE BANK OF NEW YORK

current cyclical upswing. Past experience with this survey
indicates that turns in the appropriations series tend to
precede turns in capital expenditures by the same firms by
six to nine months. Part of the spring decline in appropria­
tions, of course, may have reflected the uncertainties
created by the steel situation, the stock market break, and

other factors that caused a “wait and see” attitude on the
part of businessmen. It remains to be seen whether the
stronger showing of the economy than many had expected,
as well as the promulgation of new depreciation rules and
a more definite prospect of tax reform next year, will bring
about a strengthening of outlay plans.

The M oney M ark et in August

Operating factors absorbed a substantial amount of re­
serves during the month, attributable mainly to a large
decline in float, changes in “other deposits” (largely re­
flecting a midmonth Treasury interest payment to System
Account), and movements through gold and foreign ac­
counts. Reserve drains due to market factors were, how-




In millions of dollars; (-{-) denotes increase,
( — ) decrease in excess reserves

Daily averages— week ended

Factor

Net

Aug.
1

Operating transactions

Treasury operations* ........... - f 113
Federal Beserve float .......... — 622
Currency in circulation . . . . 4- 90
Gold and foreign account . . — 114
Other deposits, etc................. _ 28
Total.....................

—

Aug.
8

Aug.
15

Aug.
22

— 63
196
127
— 3
— 37

— 102
4- 129
— 121
- f 19
— 55

+ 51
4-405
4- 56
4- 8
— 74

425

— 130

4- 449

—
—

563

—

362

- f 602

Aug.
29

changes

4. 48
397
4- 133
— 38
18

4 47
— 681
4 31
— 128
— 176

— 238

— 907

4- 789

—

+

Direct Federal Reserve credit
transactions

Government securities:
Direct market purchases or
+

Held under repurchase
agreements ........................
Loans, discounts, and
advances:
Member bank borrowings..
Bankers' acceptances:
Bought outright ...............
Under repurchase
agreements ........................
Total.....................

—

+

—

21

+

86

---

+

3

+

1

—

3

—

1

34

—

270

4- 129

4 . 17

—

5

— 12

- f 26

— 83

—

—

26
—

3

—
—

_

+

3

—

—

^

4 14
44
r

3

—

5

—

4

—

—

- f 373

+

689

— 46

— 252

4- 35

4 799

With Federal Reserve Banks. — 190
Cash allowed as reserves! .. 4 26

+
_

264
287

— 176
4 176

4- 197
— 4

—

203
4- 90

+

4- 193

— 113

—

107

- f 85

— 205

4- 45

4

27

+

85

— 12

— 68

— 80

130
575
445

156
563
407

73
495
422

Member bank reserves

— 164
+

24

Excess reservest

—

140

+

55

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

Daily average level of member
bank:
Borrowings from Beserve Banks
Excess reservest ...................
Free reservest .......................

70
435
365

_

— 23

Total reservest ..........................
Effect of change in required

+

M EM BER BA N K RESERVES

CHANGES IN FACTORS TENDING TO INCREASE OR DECREASE
MEMBER BANK RESERVES, AUGUST 1962

00

The money market continued moderately firm over most
of August. Federal funds traded mainly at 2% and 3 per
cent, with the effective rate at 3 per cent on most days.
Rates posted by the major New York City banks on call
loans to Government securities dealers were quoted within
a 3 to 3 Vi per cent range throughout the period. Nation­
wide reserve availability was somewhat lower on average
than in other recent months.
Prices of Treasury notes and bonds rose over the month,
as market sentiment was influenced by the results of the
Treasury’s August refinancing and by the growing expecta­
tion that the Administration would not seek a tax cut this
year, confirmed in the President’s address of August 13.
The market for Treasury bills was firm during most of
August, but rate movements for the month as a whole were
small, in part due to continuing additions to the supply
of bills by the Treasury in the weekly auctions. The mar­
kets for corporate and municipal bonds strengthened in
active trading, reflecting many of the same factors that
were responsible for upward price movements in Treasury
issues as well as a light calendar of new offerings.
The Treasury announced on August 14 that it was call­
ing for redemption on December 15, 1962 the partially
tax-exempt 23A per cent Treasury bond of 1960-65, dated
December 15, 1938. There are about $lV i billion of these
bonds—the last remaining tax-privileged Treasury issue.

156
490
334

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 fire weeks ended August 29, 1962.

— 108
1

117*
512t
395t

124

MONTHLY REVIEW, SEPTEMBER 1962

ever, partly offset by the effects of System open market
operations. From the last statement week in July to the
final week in August, System Account average outright
holdings of Government securities rose by $789 million,
while average holdings under repurchase agreements re­
mained unchanged. From Wednesday, July 25, through
Wednesday, August 29, System holdings of Government
securities maturing within one year rose by $1,173 million,
while holdings maturing in more than one year declined
by $210 million.
Over the five statement weeks ended August 29, free
reserves averaged $395 million, compared with $457
million in the four statement weeks ended July 25. Average
excess reserves fell by $45 million to $512 million, while
average borrowings from the Federal Reserve Banks rose
by $18 million to $117 million.
T H E G O V E R N M E N T S E C U R IT I E S M A R K E T

In the market for Treasury notes and bonds, prices
moved sharply upward on August 2 in response to the
Treasury’s announcement that allotments would be only
12.5 per cent on the new 3Vi per cent certificates of
August 1963 and 22 per cent on the new 4 per cent bonds
of February 1969. Subscriptions for these issues were
larger, and allotments lower, than most market observers
had expected. By contrast, the $316 million of public sub­
scriptions for the new 414 per cent bonds of 1987-92 was
smaller than the market had generally anticipated. Never­
theless, this news also tended to have a strengthening
effect, since it involved a less-than-expected addition to the
supply of long-term issues.
Prices drifted somewhat lower over the next few days,
partially in response to the dampening effect on market
psychology of banking statistics for the statement week
ended August 1, which revealed a further gold outflow and
a fairly substantial increase in business loans at New York
City banks. The underlying tone of the market remained
firm, however, due in part to a low volume of offerings of
both “when-issued” and outstanding securities throughout
most of the period preceding the August 15 payment date
for the new issues. The growing expectation that the Ad­
ministration would not ask for a tax cut this year also
tended to contribute to market firmness. With this back­
ground, the market turned up again on August 8, and
prices continued to work higher through August 23, as
additional strength—particularly in long-term issues—was
imparted by the improved tone in the corporate and taxexempt markets. Over the balance of the month, price
changes were generally small and mixed in a quiet market.
For the month as a whole, prices of Treasury notes and




bonds ranged from %2 lower to 2% points higher, with the
largest gains in long-term issues which benefited from the
strength in the corporate bond market.
Rates on Treasury bills moved lower during the first
few days of the month (see chart) under the pressure of a
fairly strong investor demand, the effects of which were
reinforced by the announcement of the small allotments of
the new one-year certificate. At the regular auction on
August 6, average issuing rates for the three- and sixmonth bills were set at 2.802 and 2.990, down about 7 and
9 basis points respectively from the previous week. Al­
though bidding was rather cautious at these lower rate
levels, dealers nevertheless found themselves with un­
expectedly large awards and, with demand tapering off,
rates on most issues moved up over the next two days,
erasing much of the previous decline*
While a firmer tone subsequently reappeared, rate move­
ments were irregular and average issuing rates in the
August 13 auction were set about 7 basis points above
those of the preceding week for both three- and six-month
bills. Following the auction, rates again edged somewhat
lower under the impact of a continuing nonbank demand,
particularly for longer maturities. Thus, in the August 27
auction, average issuing rates declined by 7 basis points

RECENT M OVEMENTS IN BOND YIELDS
AND TREASURY BILL RATES
P e r cen t

Pe r cent

4.60

4.0U

^

4.40

M o o d y’s A a a corp orate bonds

4.40

---4.20

4.20

4.00 _

3.80

'

-

U.S. G overnm ent bonds

S '

"

_ 4.00

Lo n g te rm

..111

1 1 11

I 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

3.00

\

/

i\

\

\

-

Six-m onth Treasury bills

AV/

2.80

2.60

3.80
3.20

3.20

//

--s

3.00

\

V s

2.80

Three-month Tre a su ry bills — 2.60

—
.1 1 1 1 I I

Jan

Feb

1 I 1 II

M ar

1 I 1 I 1 1 1 1 1 1 1 II

Apr
M ay
1962

Jun

1 1 1 1 1 1 1 1 1

Ju 1

Aug

N o te : Bo n d y ie ld s a re w e e k ly a v e r a g e s of d a ily fig u re s . T re a s u ry b ill rates
a re a v e r a g e iss u in g rate s. La te st d a t a p lo tte d : w e e k en d e d A u g u s t 25
for b o n d s , a u c tio n h e ld on A u g u s t 2 7 for T re a s u ry b ills .

FEDERAL RESERVE BANK OF NEW YORK

from the previous week for the six-month bills, although
by only 3 basis points for the three-month bills. In this
auction, the Secretary of the Treasury invoked his author­
ity to reject any subscription, in whole or in part, by re­
ducing the amount awarded to a subscriber who had bid
for an exceptionally high proportion of the three-month
bills. In the final auction of the month, held on August 31
in view of the Labor Day holiday, average issuing rates
for the three- and six-month bills were set at 2.834 per cent
and 2.977 per cent, up 3 and 6 basis points respectively
from the previous week but down 4 and 10 basis points
from the last auction in July.
O T H E R S E C U R IT IE S M A R K E T S

Against the background of a relatively light calendar of
current and forthcoming issues, prices of corporate and
tax-exempt bonds worked generally higher over the month
in the wake of a succession of firming influences. Thus
both markets began to strengthen early in the month under
the impact of the results of the Treasury’s refinancing and
the growing conviction that the Administration would not
seek a tax cut. The highly successful marketing of a large
telephone issue on August 7 was an additional strengthen­
ing factor, and the corporate market in particular re­
sponded with fairly sharp price advances and a marked
step-up in volume. The announcement on August 14 that
the Treasury would call for redemption in December the
last of its outstanding partially tax-exempt bonds had a
buoying effect on the market for tax-exempt issues, as
some market observers apparently felt that a significant
part of the funds obtained through the call might be re­
invested in this market. Over the month as a whole, the
average yield on Moody’s seasoned Aaa-rated corporate

125

bonds fell by 3 basis points to 4.33 per cent (see chart),
while the average yield on similarly rated tax-exempt issues
fell by 8 basis points to 3.03 per cent.
With a strong tone prevailing in the market for seasoned
bonds, new corporate and tax-exempt issues marketed
during the month were generally well received. At the same
time, the Blue List of advertised dealer offerings of taxexempt issues was reduced by $97 million to $382 mil­
lion at the end of August, the lowest end-of-month level
since January. New tax-exempt securities reaching the
market in August amounted to approximately $537 mil­
lion, compared with $592 million in July 1962 and $527
million in August 1961. The largest new offering of the
month was the $106.2 million Aaa-rated new Housing
Authority bonds of thirty-four local housing authorities.
Awarded to several syndicates at an average interest cost
of 3.183 per cent (compared with an average cost of 2.963
per cent at the previous sale in April), the bonds were re­
offered by the various syndicates at yields ranging from
1.40 per cent for 1963 maturities to 3.50 per cent for
bonds maturing in 2003. The issue was very well re­
ceived. The total volume of new corporate bonds floated
during the month came to $438 million, as against $219
million in July 1962 and $214 million in August 1961.
The largest new corporate offering during August was an
issue in the early part of the month of $100 million 4Vi
per cent telephone debentures. Reoffered to yield 4.45 per
cent, these Aaa-rated bonds, which are nonredeemable
for five years, were promptly sold out and moved to pre­
mium bids in market trading. In the latter part of August,
a $50 million issue of similarly rated utility bonds was
reoffered to yield 4.27 per cent. Although it met some
initial investor resistance, the issue was largely sold out by
the end of the month.

Recent M onetary Policy M e asu re s A bro ad

In recent months, the monetary authorities in the ma­
jor industrial countries abroad continued their efforts
to correct imbalances in their countries’ payments posi­
tions and to mitigate swings in domestic economic and
credit conditions.1 In countries with strong balances of

payments and little or no danger of domestic inflation,
the authorities generally sought to reduce domestic in­
terest rates in order to bring them more closely into line
with rates elsewhere and thereby moderate the interna­
tional movement of short-term funds. But even where
monetary policy decisions were taken against the back­
ground of domestic inflationary pressures, the authorities
1 For a discussion of monetary policy abroad during December generally sought measures that would be least likely to
1961-March 1962, see “Recent Monetary Policy Measures in
aggravate short-term capital inflows.
Western Europe”, this Review, April 1962, pp. 64-66.




MONTHLY REVIEW, SEPTEMBER 1962

126

CHANGES IN FOREIGN CENTRAL BANK
DISCOUNT RATES SINCE MID-1961
In per cent
Date of
change
1961:

1962:

Country

July 1
July 22
July 25
August 24
September 29
October 5
November 2
December 7
December 28

Turkey
Japan
United Kingdom
Belgium
Japan
United Kingdom
United Kingdom
South Africa
Belgium

January 9
January 18
March 8
March 22
March 22
March 30
April 6
April 25
April 26
May 26

Philippines
Belgium
United Kingdom
Belgium
United Kingdom
Finland
Sweden
Netherlands
United Kingdom
Rhodesia and
Nyasaland
Sweden
South Africa
Canada
Belgium

June 8
June 13
June 25
August 9

New rate

Amount of
change

7*4
6.94*
7
434
7.3*
6*4
6
4*i
4*4

-1 * 4
+0.37
+2

6

+3
-* 4
—*4
_ l/4
-* 4
+1*4

41/4

5*4
4
5
8
4*4
4
4*4
5
4
4
6
334

—Va

+0.37
—*4
—*4
-* 4
-* 4

-V i

+*4
—*4
—*4
-* 4
-* 4
t
-* 4

* “Basic” rate for commercial bills.
t From November 1956 through June 21, 1962, the discount rate of the Bank of
Canada had been set at X
A per cent above the latest average tender rate for
Treasury bills. The rate stood at 5.17 per cent on June 21, 1962.

In the United Kingdom, Belgium, Sweden, and South
Africa, the authorities in recent months reduced discount
and other interest rates (see table). The Bank of England
on April 26 lowered its discount rate to 4Vi per cent
from 5, the third such cut this year. The reduction was
aimed primarily at restraining the inflow of foreign funds,
which was estimated by the Bank of England at $560 mil­
lion in the first quarter of 1962. Although this latest reduc­
tion represented another step toward more normal levels
from the peak 7 per cent of July 1961, it was generally
not interpreted as evidence of a definite change in the
direction of monetary policy. Subsequently, however,
there were some signs of a moderate easing of credit.
On May 31, the Bank of England announced a reduction
in the special deposits required of commercial banks—to
2 per cent from 3 for the London clearing banks and to
1 per cent from IVi for the Scottish banks. Three days
later, the authorities reduced the minimum downpayment
on instalment purchases from 20 to 10 per cent for all
goods except automobiles.
Effective August 9, the National Bank of Belgium lowered
its basic discount rate to 33A per cent from 4, the fifth V a
per cent reduction in less than a year. By cutting the dis­
count rate and allowing short-term rates to fall, the Belgian
central bank continued to move toward a closer alignment of
the Belgian discount rate with those of the other Common
Market countries, while discouraging foreign short-term
funds from contributing further to the already easy money
market conditions. The two reductions in the Swedish dis­




count rate—to 4 Vi per cent from 5 on April 6 and to 4
per cent on June 8—were part of the reversal of the antiinflationary policy that had been adopted in early 1960
when an excessive rate of capital investment, together with
other factors, had generated inflationary pressures and
adversely affected the country’s balance of payments. Since
then, the pace of advance in economic activity has
slackened and balance-of-payments deficits have given way
to surpluses that have raised official gold and foreign ex­
change reserves to a new peak. On June 13, the South
African Reserve Bank reduced its discount rate to 4 per
cent from AVi in the light of the continuing favorable
balance-of-payments developments that brought further
gains in the country’s international reserves and financial
liquidity.
In France and Italy, monetary policy in recent months
has mainly sought to encourage funds to shift from the
money market into longer term investment and, more
particularly, to induce the banks to shift out of govern­
ment paper into private medium- and long-term credits.
In France, the National Credit Council on April 11 re­
duced by V a per cent the interest rates on one- to five-year
publicly offered Treasury securities. It also cut from YIV2
per cent to 15 the ratio of deposits that banks must hold
in short-term Treasury bills. In Italy, the authorities have
abandoned the “tap” issue of Treasury bonds in unlimited
quantities, which had sometimes led to cash receipts in
excess of the Treasury’s requirements. Future flotations
will be restricted to the Treasury’s cash needs, and in­
terest rates will be set each time to conform with current
market conditions. The Bank of Italy will, moreover, pre­
scribe the proportion between cash and Treasury bonds
in the banks’ compulsory reserve requirements.
Monetary measures introduced by the German authori­
ties have reflected a German external position that is
noticeably less strong than last year and a “basic” balance of
payments (current account and long-term capital account)
that has been in deficit since mid-1961. These measures were
designed to induce the credit institutions to hold their liquid
reserves more in domestic rather than in foreign short­
term assets. In the view of the German Federal Bank, the
banks’ recent practice of using their foreign short-term
assets as their primary liquidity reserve and the resulting
fluctuations in these assets had tended to “impair the
informative value of data concerning changes in the cen­
tral monetary reserves and to cause a certain disturbance
in foreign money markets”. Accordingly, the German cen­
tral bank increased the rate charged German banks on
31- to 60-day dollar swaps to 1 per cent from the V2 per
cent which prevailed earlier this year. Between the end of
March and August 1, the Federal Bank also increased its

FEDERAL RESERVE BANK OF NEW YORK

selling rates for open market paper in five steps of V% per
cent each, thereby raising yields to 2 V i per cent on 60- to
90-day Treasury bills and to a range of 2 ¥ s to 3 3/ s per
cent on other open market paper. These measures have
clearly been rather moderate in nature, apparently in view
of some slackening in private investment and in order to
avoid creating incentives for a renewed inflow of funds
from abroad.
In Austria, the Netherlands, and Switzerland, the au­
thorities have acted to restrain continuing inflationary pres­
sures in recent months. In Austria, the liquidity of the
economy increased further as a result of large balance-ofpayments surpluses, substantial increases in government
expenditures, and a reduction in personal income taxes
effective July 1. Following similar measures taken in
February, the Austrian National Bank on August 1 raised
the credit institutions’ minimum reserve requirements by
V i per cent to 10 per cent for time and sight deposits and
to 8 per cent for savings deposits. In addition, the central
bank placed 200 million schillings ($8.5 million) of 3Vi
per cent Treasury bills with the banks for one year, follow­
ing a similar sale of 560 million ($21.5 million) earlier
this year. Moreover, the National Bank cautioned that the
continued large balance-of-payments surpluses might well
occasion further restraining measures this fall.
In the Netherlands, the authorities acted to offset the
expansion of bank credit, which had exceeded the ceilings
set under the gentleman’s agreement between the central
bank and the commercial banks. On April 25, the Nether­
lands Bank raised its discount rate to 4 per cent from 3Vi,
the first rate change since November 1959. The increase
reportedly was also prompted by the desire to bring Dutch
money market rates more closely into line with those then
prevailing in other Western European countries. In addi­
tion, the July 1961 credit agreement, due to expire at the
end of April, was extended through August, with the per­
missible rate of credit expansion remaining unchanged at
V i per cent per month.2 At the same time, the authorities
moved to reduce some of the strain on the country’s tight
capital market by limiting new foreign borrowing in the
Netherlands during the balance of 1962.
In Switzerland, faced since June with a renewed influx
of foreign funds, credit continues to be regulated mainly
by last April’s gentleman’s agreement between the Swiss
National Bank and the leading banks and banking asso­
ciations. Under the terms of the agreement, which expires

127

at the end of 1963, banks with a balance-sheet total of
SF 10 million ($2.3 million) or more are to restrict new
loans granted during April-December to a certain per­
centage of the increase in credits in either 1960 or 1961.
For the whole of 1962, the expansion of business credit
must not exceed 65 per cent, and that of mortgage credit
85 per cent, of the increase in the chosen base year. More
recently, the Swiss National Bank, in the process of making
funds available under the reciprocal currency agreement
with the Federal Reserve System,3 reduced the liquidity
of the Swiss commercial banks. The $50 million received
by the Swiss National Bank under the July 16 swap was
passed on to the banks in exchange for Swiss francs, with
the banks in turn investing the dollars in United States
Treasury bills. Swiss francs advanced by Swiss banks also
had a role in the currency swap executed under the Federal
Reserve System’s arrangement with the Bank for Inter­
national Settlements. Thus, from the Swiss point of view,
these operations provided a means to absorb excess liquid­
ity from the Swiss banks.
In both Canada and Japan, monetary policy was tight­
ened in midyear, primarily in response to external factors.
As part of a series of measures in defense of the Canadian
dollar—which included temporary surtaxes on a wide
range of imports and a reduction in the budget deficit and
which were bolstered by $1 billion in foreign credits—the
Bank of Canada moved toward higher interest rates on
June 25 by reintroducing a fixed discount rate, at 6 per
cent; since November 1956, the rate had fluctuated at rA
per cent above the weekly Treasury bill rate. However, for
loans to money market dealers the rate is to be deter­
mined as heretofore. In Japan, the Ministry of Finance
as of June 11 requested the foreign exchange banks to keep
a 20 per cent reserve (the rate is variable at the discretion
of the authorities) against such short-term foreign liabilities
as deposits in foreign currencies (e.g., Euro-dollars), un­
secured borrowings from foreign banks, and nonresident
yen deposits. The reserves must be kept in the form
of liquid foreign assets such as cash, deposits, call loans,
and short-term bills of foreign governments. The measure,
mainly intended to curb inflows of foreign short-term
capital, should also help to reinforce the tightness of
Japan’s current domestic monetary policy. At the same
time, the authorities asked the foreign exchange banks not
to guarantee foreign borrowing by foreign branches and
subsidiaries of Japanese firms in excess of the amount out­
standing on May 24.

2 A reduction in reserve requirements to 7 per cent from 8 on
August 22 was merely intended to facilitate the take-over by a syn­
3 For a discussion of this and other agreements, see “Foreign
dicate of Dutch banks of a $70 million United States bank credit Exchange Markets, January-June 1962”, this Review, August
to KLM, the Dutch airline.
1962, pp. 106-109.