Federal Reserve Bank of Richmond. "March 1963," Economic Quarterly (Federal Reserve Bank of Richmond) (March 1963). https://fraser.stlouisfed.org/title/960/item/37555, accessed on March 25, 2025.

Title: March 1963

Date: March 1963
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image-container-4 Chart V III reveals, however, bank holdings of these issues have increased at a rem arkable rate over the past two years. From the trough of the recession through 22 months of upswing, banks expanded their holdings of these securities by 36% as compared with 5 r /o increases in each of the two previous expansion periods. About 22% of the increase in the latest expansion came in 1962. LOANS Loans at commercial banks in the present cyclical expansion have lagged behind earlier e x perience. As shown in Chart IX , the behavior of total loans, seasonally adjusted, in the early months of the latest upswing paralleled the 1958-60 exp eri ence. They soon fell behind earlier expansion rates, however, and after 22 months of recovery loans at all commercial banks had risen only 16%, as compared with increases of 19% and 29% , respectively, in the two earlier upswings. Several factors account for the slower loan growth in the latest experience. In the first place, the latest business expansion has been more moderate and ex penditures for inventories and plant and equipment have increased more slowly. Moreover, corpora tions have lately enjoyed large cash flows and an easier availability of low-cost funds in the capital market. A s a result, business loans, as shown in Chart X, increased only 13% over the first 22 months of this recovery as against gains of 35% and 16%, respectively, in the preceding two cyclical expansions. In addition, the demand for consumer credit at commercial banks has been w eaker in this expansion than in the previous ones. A s shown in Chart X I, consumer loans actually declined during the first seven months after the February 1961 trough and were below the trough level for the first full year of recovery. A fter 22 months, these loans had grown only 9% as compared with a 32% increase in 1954- 56 and a 24% increase in 1958-60. F inally, real estate loans have not increased as rapidly in the current as in previous expansions. Despite a sharp rise after the revision in Regulation O, Chart X II shows that the percentage increase in these loans in the current expansion still lagged slightly behind increases in the previous upswings. SUM M ARY M onetary policy remained basically easy in 1962. The degree of ease was considerably great er than in the comparable stage of earlier cyclical movements and this greater ease wras reflected in money and capital m arkets and in the behavior of im portant banking statistics. U ntil late 1962, growth of the money supply was slow, with the total increase since the latest cyclical trough lagging behind the in crease in the comparable period of earlier business recoveries. On the other hand, expansion in bank credit, commercial bank time deposits, and the pub lic’s holdings of liquid assets continued w7ell in ad vance of previous cyclical upswings. The composition of bank credit changed signifi cantly in 1962, with banks moving more heavily into investments, p articularly tax-exem pt securities, and into real estate loans. T his w7as attributable in part to a rapid increase in time deposits and in part to sluggish loan demand in other areas. Interest rate movements in 1962 displayed some notable departures from normal patterns. Y ields on m ortgages, tax-exem pts, corporates, and long- and interm ediate-term Governments declined, while mon ey m arket rates remained stable or rose slightly. This divergent movement of long and short yields resulted prim arily from a record inflow of savings into finan cial institutions, including time deposits at commer cial banks, and from upw ard pressure on short rates exerted by the Federal Reserve and the T reasury. X. BUSINESS LOANS (SEASONALLY ADJUSTED) Cumulative Percentage Change +•35 XI. CONSUMER LOANS (SEASONALLY ADJUSTED) XII. REAL ESTATE LOANS (SEASONALLY ADJUSTED)
image-container-5 WHO HOLDS THE NATION|_ 0&6 $ Billion 300 250 200 150 100 50 23.1% 8.6% 18.4% 23.7% 19.3% 9.2% 19.3% I sS I#K ■4 ■ 21 .8% 9.9% 18.9% .1 8% ■ ......... 1950 1955 1960 1962 □ Com m ercial I | ____I Federal Reserve Banks U. S. Govt. Investment Accounts Individuals Insurance Com panies Mutual Savings Banks I _ H State and C °rp0rIi Local Governm ents Foreign and International Other The relative im portance of classes of Federal G ov ernm ent creditors has undergone some interesting changes in the past dozen years. The acco m pan y ing chart shows the growth of the national debt from the end of fiscal 1950 to the end of fiscal 1962, with each bar divided to indicate the am ount held by principal lender classes. The numbers within each division show the percentage of the national debt w hich that division represents. The proportion held by several classes of Federal Governm ent creditors declined over the period. Com m ercial banks, for exam ple, liquidated G o v ernment securities through most of the 1950's in order to m ake higher yielding loans. Since 1960, how ever, the proportional im portance of bank hold ings of Governm ent debt has increased som ew hat, reflecting relatively easy m onetary policy and the absence of strong loan dem and. A ll this increase cam e in 1961. The proportion held by insurance com panies and mutual savings banks declined steadily after 1950 as these institutions moved more heavily into real estate loans. The share held by in dividu als also declined, due in part to shifts out of saving s bonds and other Governm ent securities into stocks and higher yielding bonds. By contrast, several lender groups increased their proportional holdings. Federal Reserve Sys tem holdings grew steadily, from $18.3 billion or 7.1% of the total in 1950 to $29 .7 billion or 9.9% at the end of fiscal 1962. Foreign and internation al investors also becam e increasingly important holders of Federal debt through the investment of large quantities of liquid funds acquired as a result of persisting deficits in the United States balance of paym ents. The growing relative im portance of United States Governm ent investment accounts reflects chiefly the expansion of Social Security and Civil Service pen sion funds up to 1957. State and local governm ents have become relatively larger holders of Federal debt chiefly as a result of two developm ents. In the first place, they have them selves raised large volum es of borrowed funds to finance capital im provements and other outlays and have invested the proceeds in short-term Governm ent securities pending their use. M oreover, rapid ly growing State and local trust funds have been h eavy buyers of G overnm ent issues.
image-container-6 THE INTERNATIONAL MONETARY FUND Among the crucial institutional props of the present international paym ents system is the International M onetary Fund, a cooperative financial venture in which more than 80 nations participate. Born in 1944 prim arily of the m onetary chaos that followed the breakdown of the gold standard in the early 1930’s, the Fund has emerged in the postwar years as an important key to the successful functioning of the modern substitute for the old gold standard—the gold exchange standard. The International M onetary Fund is committed to the goals of expanding the volume of world trade and thus the domestic prosperity of member countries. Its vast resources of gold, national currencies, and borrowing rights in member countries, and its m a chinery for consulting with countries and collaborat ing with other international organizations are directed toward these ends. B y providing needed support to distressed currencies, by actively w orking for realistic and stable exchange rates, and by seeking to elim i nate restrictions on payments among countries, it has contributed to a grow ing volume of world trade and prosperity. HISTORICAL BACKG RO U N D After the gold stand ard broke down in the early 1930’s, chaos developed in the system of international payments. In an effort to restore domestic prosperity, to insulate themselves from foreign economic disturbances, and to maintain balance in their international accounts in the face of drastic m onetary changes, countries adopted num er ous controls and devices designed to allow m anipula tion of paym ents to and from foreigners. These measures seriously disrupted the flow of international trade and investment and, on balance, probably ham pered recovery from the Great Depression. Sentiment for an institution like the International M onetary Fund represented in large measure a re action against nationalistic fetters on foreign com merce. The Fund and its sister institution, the In ternational Bank for Reconstruction and Develop ment, were established at the United Nation’s Mone tary and Financial Conference held at Bretton W oods, New Ham pshire, in Ju ly 1944, as a founda tion on which international cooperation in the field of economic and monetary policy could be built in the postwar period. SPECIFIC O B JECTIVES The specific objectives spelled out in the F und’s A rticles of A greem ent reflect the conviction that the monetary nationalism of the 1930’s could only diminish, over the long run, the level of world prosperity. Among these objectives are the elim ination of exchange controls and of such practices as competitive exchange rate depreciation, the achievement of stable exchange rates, and the restoration of m ultilateralism in international p ay ments among the important trading countries. Although these objectives have not been fully achieved, important progress has been made, especial ly over the past five years. A gainst a background of stepped-up international m onetary cooperation, wT orld trade has expanded, and relatively high levels of employment have been maintained. W hile m any exchange rates have been altered, sometimes w ith out the Fund’s approval, widespread rate m anipula tion as an instrument of trade policy has been sub stantially elim inated. M any countries continue to m aintain some controls over capital movements, and some countries even continue to lim it current tran s actions in goods and services. But since 1958, especially among the more important trading nations, giant strides have been taken toward greater freedom in both trade and foreign payments. Financial a s sistance to countries having balance of paym ents problems has perm itted this to be achieved with measures less severe and more gradual than would have been necessary otherwise. The Fund has not been solely responsible for this progress but its con tribution has been significant. O RG A N IZA TIO N The Fund has a membership of more than 80 nations, each represented on its policy m aking Board of Governors. The Fund’s basic pow ers are vested in the Board. Among them are the power to adm it new' members, the authority to re quire members to w ithdraw , the right to approve changes in quotas, and the authority to perm it uni form changes in the par values of currencies of all member countries. V oting rights of member countries are roughly proportional to their contributions to the F und’s capital. Contributions in turn are related to various factors including the size of national income and foreign trade of members. Sm all nations are slight ly favored in voting rights since each nation has a 8 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis
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