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MONTHLY
IN THI S I S S U E
FEDERAL RESERVE BANK of CLEVELANDThe Federal Debt in Review................... 2
A Year of Cross Currents in Banking........8
0
?ej6n€iaruf, t96f
The Federal government debt as a percent
age of GNP has fallen from its wartime
peak to a position only slightly above that
of the late 'thirties
.
PERCENT
PERCENT
150 -------------------------------------------------------------------------------------------------------------------------- 150
wartim e peak
FEDERAL GOVERNMENT DEBT
AS PERCENT OF
GROSS NATIONAL PRODUCT
G ro ss debt at y e a r end a s percent of GNP during y e a r
The Federal Debt in Review
the sharp upswing du ring
World W ar II, the total magnitude of
the Federal Government debt has changed
relatively little during the postwar period.
The deviation in any one year from the war
time peak of $279 billion, reached in 1945,
has amounted at most to only 9 percent (the
decline to the postwar low in 1948).
o l l o w in g
F
While the rate of growth of the Federal
debt has slowed down appreciably during the
postwar period, the nation’s ability to service
the debt has increased markedly. This is re
vealed most clearly in the fact that the Gross
National Product — the measure of the na
tion’s current output of goods and services —
has more than doubled since 1945 (partly due
to rising prices), whereas the gross Federal
debt has grown by only 4.2 percent. Conse
quently, the burden of the debt on the econ
omy has become relatively smaller, so that
at the end of 1960 such debt amounted to
about 58 percent of GNP, as compared with
131 percent at the end of 1945.(1) Such a way
of measuring the debt burden is depicted by
the chart shown on the cover of this issue.
Composition of the Federal Debt
Although the magnitude of the Federal
debt has shown relatively little change in the
postwar period, since 1950 the portion of such
debt consisting of securities that can be
bought and sold in the market or that are
convertible into marketable securities has
increased. (See chart.) As a result, a larger
relative amount of the gross debt is now
subject to such influences as price variation
and market demand. On the other hand, a
portion of the debt not subject to market
factors — special issues made available to
Government investment accounts — has in
creased very slightly in the past decade.
Concurrently, two other segments of the
gross debt have declined in size. Since 1950,
“ other” debt has become relatively less im
portant; this grouping includes nonmarketable issues such as investment bonds, deposi
tary bonds, non-interest-bearing debt, and
debt not subject to the statutory limit set by
Congress. In addition, the remaining portion
of the gross Federal debt — the volume of
nonmarketable savings bonds outstanding —
has declined.
It is noteworthy that the general composi
tion of the gross debt in 1960 showed little
1916 ’2 0
’2 5
’3 0
’35
’4 0
’4 5
’50
’5 5
’6 0
Since the wartime peak, the Federal debt hat
shown relatively little change In magnitude.
2
(1 ) One factor that has contributed to holding down the
total gross public debt is the statutory limit set by Congress.
At present, the maximum aggregate debt is limited to a
base of $285 billion; to this base has been added a temporary
increase of $8 billion. (The temporary addition is in force
until its authorization expires on June 30, 1961.) Thus the
total debt limit is set currently at $293 billion. At the end
of December 1960, the gross debt subject to the statutory
limit amounted to $290.5 billion, leaving a margin of $2.5
billon of presently allowable debt.
COMPOSITION OF THE
FEDERAL GOVERNMENT DEBT
by Type of Debt, for Selected Years
B illio ns of dollars
3 0 0 I—
{ OTHER DEBT
{ S P E C I A L ISSUES
250
{S A V IN G S BONDS
200
150
MA RK ETA BLE and
{CO NVERTIBLE
ISSUES
100
- // J m //J
1950
1955
1959
1960
•Includes investment bonds, depositary bonds, noninterest-bearing debt, and debt not subject to the
statutory limit
The marketable portion of the debt and the amount
of special issues have increased since 1950, while
the volume of savings bonds and other debt has
declined.
change from the previous year. It may be
suggested that the lack of change was not
happenstance, but instead was the result of
planned Treasury debt operations.
The savings bonds segment of the public
debt in 1960 is an example of holding-the-line
by type, especially since 1960 was preceded
by a four-year period of steady and often
substantial declines in the volumes of such
securities outstanding. Savings bonds are
tailored to fit the investment needs of indi
viduals, with the Treasury hoping that the
bonds will be held until maturity and, to the
extent that they are not, that redemptions will
be balanced by new sales. Beginning in 1955,
however, more savings bonds have been re
deemed for cash than have been sold as new
issues.(2) To offset this development, the
Treasury in 1959 increased the rate of interest
paid on some savings bond issues. In addition,
two advance refunding operations dealing
with savings bonds were undertaken, one in
1959 and one in November 1960.
An advance refunding of this type can be
best explained by an illustration. In Novem
ber 1960, the owners of F and G savings bonds
maturing in 1961 were allowed to exchange
such issues for comparable amounts of mar
ketable bonds maturing in 1969. (The 1969
bonds were an addition to the issue first sold
in 1957.) By offering a nine-year bond in ex
change, the Treasury was attempting to re
fund some of the savings bonds outstanding
in advance of their maturity date, thereby
lengthening the average maturity of the
Federal debt. A t the time, nearly $800 million
of the F and G bonds were outstanding; of
this amount, about 19 percent was exchanged
under the terms of the offering. The owners
of the savings issues who subscribed to the
marketable issue not only increased their
interest return but also extended the term
length of their investment portfolios.
Maturity Structure of the Federal Debt
Problems in debt management often resolve
around the maturity structure of the market
able portion of the Federal government debt.
Although part of the debt must be in the form
of short-term instruments, it is advantageous
to have a substantial amount in long-term se
curities. A relatively large amount of long
term debt is desirable in that it (1) makes
frequent market interruptions for refinancing
unnecessary, especially when market demand
may be unfavorable, (2) helps to stabilize
interest costs, (3) prevents too much debt
liquidity, and (4) provides an outlet for
investors preferring a longer-term security.
In the past decade, the portion of market
able debt maturing within one year, i.e., the
floating debt, has ranged, within narrow
limits, around 40 percent of the total. There
are clear indications that the debt managers
feel that the economy needs this relatively
large amount of highly liquid securities for
its everyday business. Issues such as Treas(2 ) It should be pointed out that only two issues of out
standing sayings bonds, i.e., E and H, are currently being
sold. The remaining issues are being redeemed as they mature
or approach maturity, to be replaced by the E and H savings
bonds or by marketable securities.
3
ury bills and certificates, as well as notes
and bonds maturing within a year, are used
by corporations for investing temporarily
excess funds without the danger of possible
large capital losses; they are also used in some
circumstances as security for short-term bank
loans, especially in connection with Federal
funds transactions and with loans to Govern
ment securities dealers. Moreover, a special
type of Treasury bill has been developed
as a short-term investment that can be used
by corporations to meet quarterly income tax
payments.
The proportion of the debt which takes the
form of intermediate-term or long-term issues
has often represented a problem for debt
management. Since 1950, long-term issues,
defined as debt maturing in more than five
years, have declined from 40 percent of the
total marketable issues outstanding to only
23 percent of the total. (See chart.) Concomi
tantly, the intermediate segment has increased
in size. The process of declining maturity
takes place automatically, unless it is prevent
ed from doing so by some counter measures,
AVERAGE MATURITY OF THE
MARKETABLE DEBT
Selected Years
Number of months;
100
80
60
40
20
1950
1955
1959
1960
(at y e a r e n d )
The average maturity of the marketable debt has
declined from 97 months at the end of 1950 to 55
months at the end of I960.
4
MATURITY DISTRIBUTION OF THE
MARKETABLE DEBT
Percentage Distribution,
for Selected Years
P arcen t
100
DEBT MATURING
IN MORE THAN
10 YEARS
IN 5-10 YEARS
60
IN 1-5 YEARS
WITHIN 1 YEAR
1950
1955
1959
1960
The portion of the Federal debt maturing in 1-5
years has been increasing at the expense of debt
maturing in more than 5 years.
because long-term securities with stated ma
turities become ‘ ‘ younger ’ ’ as maturity dates
approach; sequentially, a long-term bond thus
becomes first an intermediate bond, and then
a short-term issue and part of the floating
debt. The declining age of the marketable
debt is brought out in an accompanying chart,
where the average maturity can be seen to
have declined from nearly 100 months at the
end of 1950 to about half as much at the
end of 1959.
During 1960, the Treasury was able to
extend slightly the average maturity of the
debt. Although by the end of September the
average maturity had dropped to 50 months
(the lowest level in many years), an advance
refunding operation in October boosted the
average to 55 months. The extension of
average maturity was not reflected in a
larger share of debt maturing in more than 5
years, however. Instead, the intermediate seg
ment of the debt during 1960 increased in size
at the expense of all the other maturity
classes, as is shown in a chart.
Ownership of the Federal Debt
Another continuing problem which is faced
in the management of the Federal government
debt is that of the pattern of ownership, in
relation to potential effects on the money
supply. Some kinds of debt ownership have
a greater inflationary potential than others.
As a case in point, the Treasury often prefers
to place as many securities as possible outside
the portfolios of commercial banks because of
the “ money-creating’ ’ aspects of bank opera
tions. The ability of the commercial banking
system to create demand deposits, and thus
in turn to influence the money supply, tends
to increase the inflationary potential of bankheld Federal debt. Also, owners of the
Federal debt who look upon such investments
as temporary outlets for idle funds might
be inclined to sell their “ governments” very
quickly if a need for funds arises or if another
more profitable, but still dependable, invest
ment form appears. These investors might also
be less inclined to reinvest automatically in
Government securities when their present
holdings mature.
Some of the changes that have occurred
in the distribution of debt ownership in the
past decade have contributed clearly to facili
tating the management of the existing debt.
For one thing, the relative share of the gross
debt held by commercial banks has declined,
due in large part to the heavy demand for
bank loans in recent years. Many banks, in
order to meet loan demand, have liquidated
some of their investments, transferring the
released funds into their loan portfolios. As
a result, the inflationary potential of the
debt has been lessened because the share
held by the banks has been reduced.
On the other hand, holdings of Govern
ment securities by insurance companies have
tended to decline. Since the insurance com
panies are usually long-term investors, this
turn of events has not helped the Treasury
to keep maturities stretched out to the point
desired. Holdings of individuals as a per
centage share of the gross debt have also
declined slightly since 1950, again reducing
the amount of debt in long-term ownership.
OWNERSHIP OF THE
FEDERAL DEBT
Percentage Distribution,
for Selected Years
Percent
100
(OTHERS
80
(IN DIVIDU ALS
60
BANKS AND
(INSURANCE
COMPANIES
40
G O V ’T. AGENCIES
fA N D FUNDS, AND
f FEDERAL RESERVE
BANKS
20
0
1950
1955
1959
1960
*Includes nonfinancial corporations, state and local
governments, pension funds, savings and loan asso
ciations, and securities dealers
In the past decade, public agencies have increased
their share of the ownership of the Federal debt,
while the shares held by Individuals, banks, and
insurance companies have decreased.
Two groups of debt owners have increased
in relative importance in recent years. In
1950, Government agencies and trust funds
and the Federal Reserve banks held 23 per
cent of the public debt; by 1959 the combined
share had grown to nearly 28 percent. The
Government agencies and trust funds, (in
particular the social security trust funds)
have become a more important outlet for
securities. Another group, shown on the chart
as “ other” investors, is made up of non
financial corporations, state and local gov
ernments, pension funds, savings and loan
associations, and securities dealers. Such
owners increased their share of the total debt
from 15 percent in 1950 to 22 percent in
1959; some are long-term investors (pension
funds) while others (securities dealers) em
ploy their funds only temporarily.
During calendar year 1960, the change
from the the previous year in the distribution
5
of debt ownership was nominal. Fractional
gains in the share of the debt held by Govern
ment funds and agencies and Federal Reserve
banks, in the share held by commercial banks,
and the share held by insurance companies
were offset by corresponding declines in the
shares of the debt held by individuals and
“ other’ ’ investors. The increase in the hold
ings of Government securities by the Federal
Reserve banks resulted from open market
operations in 1960. Commercial banks en
larged their investment portfolios in reaction
to a declining loan demand during the
year. On the other hand, nonfinancial cor
porations moderately reduced their invest
ment in Government securities, thus provid
ing a counterbalancing effect to the increases
in debt ownership by the other groups.
Debt Operations in 1960
It is clear that during 1960 the Treasury
held the composition of the Federal debt
fairly steady, and was able, at least tem
porarily, to slow the net decline in the dollar
amount of savings bonds outstanding. In
addition, the average maturity of the mar
ketable debt was extended slightly while the
ownership pattern of the debt was relatively
unchanged.
In the course of 1960, the Treasury re
deemed in cash nearly $17 billion of maturing
bills and notes. Most of the cash redemptions
occurred in the first half of the year. In
addition, in the process of turning over the
volume of Treasury bills issued on a regular
weekly basis, about $800 million more in bills
were redeemed than were reissued. Total cash
redemptions of marketable Government se
curities therefore amounted to $17.4 billion,
an amount slightly less than new cash bor
rowing in 1960, which totaled $18.2 billion.
The new borrowing took three forms: (1)
$6.5 billion in one-year Treasury bills, which
were issued on a quarterly basis in January,
April, July, and October and were actually
a rollover of a larger volume of maturing
bills; (2) $9 billion in three separate issues
of tax anticipation bills sold in January, July,
and October, with maturities of 6-9 months;
6
and (3) a somewhat longer-term offering in
April amounting to $2.7 billion. The latter
borrowing took the form of a Treasury note
due in 25 months and a long-term bond due
in slightly more than 25 years. It is signifi
cant that the bond was the first long-term
security offered by the Treasury in a year.
The other debt actions carried out by the
Treasury in 1960 involved two advance re
fundings and four refinancing operations. A
refinancing takes place when the owners of
maturing securities are offered the oppor
tunity to convert their holdings at maturity
into new issues. The refinancings occurred
in February, May, August, and November,
involving a total of $38.4 billion of maturing
securities that were mainly certificates and
notes. The new exchange issues were also
predominantly certificates and notes.
In any refinancing, the owners of the
maturing issues also have the option of con
verting their holdings into cash; this conver
sion results in “ attrition” . The attrition on
the refinancing operations in 1960 was gen
erally quite moderate, ranging from 4 percent
to 9 percent, if the special refinancing in
August is excluded. As a result, the maturing
securities were replaced with $33 billion of
new debt with maturities ranging from ap
proximately one to eight years.
Special Techniques
To bring about the favorable changes in
the structure and composition of the Federal
debt in 1960, the Treasury employed some
special techniques or types of financing. One
important technique was that of advance
refunding. In addition to the refunding of
the F and G savings bonds already mentioned,
the Treasury in June undertook to refund
in advance a portion of $11.2 billion of
Government bonds due to mature in late 1961.
It was announced that offers of up to $5
billion for either a 4-year note or an 8-year
bond would be accepted by the Treasury.
About $4.2 billion, or 38 percent, of the 1961
bonds were exchanged, mainly into the
Treasury note that was offered. In this opera
tion, the Treasury was trying not so much
to lengthen the debt as to prevent an un
usually heavy concentration of securities from
maturing in late 1961. This debt operation
has been described as a “ junior” advance
refunding, with intermediate debt being ex
changed for short-term debt.
The June experience, in effect, served as
a trial run for a larger advance refunding
operation that took place in September and
October. At that time, the owners of four
separate issues of bonds originally sold during
World War II were offered an exchange of
three new bond issues maturing from 1980 to
1998. The Treasury’s announced purposes
were to lengthen the average maturity of the
debt as well as to supply the needs of long
term investors. The advance refunding was
aided by the fact that declining interest rates
enabled the new bonds to be attractively
priced; it was also aided by a change in the
tax law with the result that no capital gains
or losses are charged at the time of an ex
change of an old security issue for a new one.
The response of the owners of the bonds,
or “ tap” issues as they were called, was
quite favorable, considering the fact that
about one-fourth of the holders were com
mercial banks whose interest in the exchange
was limited. About $3.4 billion of the tap
issues, or a little less than half of the amount
held by financial institutions and individual
investors, was exchanged. In addition, the
small portion held by Government accounts
was wholly refunded. Since the tap bonds
would not have matured until 1967-1969, the
operation constituted a “ senior” advance
refunding, with intermediate debt being re
placed by long-term debt. The operation
lengthened the average maturity of the Fed
eral debt by five months. (See chart.)
Another special technique employed by the
Treasury in 1960 was that of “ cash refund
ing.” New securities issued by the Govern
ment to replace maturing securities usually
have been available only to owners of the
maturing debt. In other words, the previous
owners have pre-emptive rights for the new
issues. In August, the Treasury departed from
tradition when an issue of notes amounting to
$9.6 billion matured. In effect, the notes were
redeemed for cash, and the new exchange
issue of a Treasury certificate and a re-opened
bond were available for cash purchase by any
interested party, not just by the owners of
the maturing notes. The owners of $5.8 billion
of the notes used their cash refunds to pur
chase the new issues. In addition, $3.1 billion
of the new issues were purchased by other
“ outside” investors.
There are many advantages to the Treasury
in this type of cash refunding. Speculation
in new Government issues is discouraged be
cause of the cash payment required. The
allotment of the new issues can be controlled
in terms of both the type of ownership and
the dollar amount of each issue making up
the total offer. An exact amount of funds
can be raised, and no allowance has to be
made for the possible attrition of an ordinary
refinancing. Finally, a cash refunding might
attract additional investors who otherwise
would be closed out because they were unable
to acquire the rights of maturing issues.
The new techniques used by the Treasury
in 1960 will probably not replace the older
methods of Government borrowing. Rather,
they will serve, as they were intended to
serve, as supplementary techniques that are
appropriate because of special market condi
tions.
7
A Year of Cross Currents in Banking
(Fourth District)
c o u b S e of banking activity during
1960 was shaped by general business
conditions, which showed substantial strength
during the first half of the year and sub
sequent slackening during the second half.
Banking activity during the past year was
also affected by the fact that the Federal
budget showed a surplus for the calendar
year, which was in marked contrast to the
relatively large deficits incurred in both 1958
and 1959. Another factor bearing on the
course of banking activity during 1960 was
the easier monetary policy of the Federal
Reserve System which evolved as the year
T
he
An expansion in loans during the first half of I960
was offset by a reduction of investment holdings.
In the second half, loans remained practically un
changed, while holdings of securities were enlarged
appreciably.
Billions of do llars
progressed. The interaction of the above
developments contributed to a downtrend in
interest rates from the peaks reached early
in the year.
Let us see how these developments were
reflected in Fourth District banking activity.
Total Bank Credit Rose
During 1960, as shown in the accompany
ing chart, total loans and investments of
member banks in the Fourth District ad
vanced $580 million, or slightly more than
4 percent, which was about in line with the
trend at all member banks in the nation.
The growth of bank credit in the District in
1960 showed the largest annual percentage
increase of the past six years, except for 1958.
Reflecting changes in business and finan
cial conditions, the increase in bank credit
during 1960 occurred entirely in the second
half of the year. During the January-June
period, the total of bank credit extended by
the District member banks remained un
changed, as a normal seasonal decline in the
first quarter was offset by a corresponding
increase in the second quarter. A t the end of
June, total loans and investments of District
banks had returned to the 1959 year-end
level of $13.2 billion.
Although most of the credit expansion at
commercial banks usually takes place during
the last half of the year, it was the first time
in recent years that total credit of District
banks failed to move up in the first half. A
$275-million expansion in loan portfolios was
offset by a nearly similar reduction in the
amount of investment holdings. Consequently,
while total loans expanded in the JanuaryJune period to a new high, holdings of
government securities fell under the $4-billion
8
mark, the lowest level for Fourth District
banks in the postwar period.
Responding to a number of Federal Re
serve actions designed to promote easier credit
conditions in the economy, total bank credit
extended at District member banks in the
second half of 1960 rose by about 4.5 percent
from the midyear level.(1) The rise in the sec
ond half of the year, which was larger than
corresponding increases in any other recent
year, showed up in enlarged bank holdings of
investments. While holdings of securities of
all member banks in the District rose $580
million during the second half of the year,
total loans remained unchanged. On the other
hand, for the year as a whole, the advance
of bank credit included both an expansion in
loans and a rise in security holdings, with
each sharing about equally in the increase.
The slight increase In deposit balances tor the year
as a whole resulted chiefly from the growth of time
deposits.
Billions of dollars
MEMIBER BANKS
Fouirth District
f
j
Indicative of deposit developments in 1960
was the fact that a larger-than-seasonal de
cline in deposits which took place during the
first two months of the year was not made up
until the end of October. The slight increase
in deposit balances for the year as a whole
resulted chiefly from the growth of time
deposits. In fact, the rate of growth in
time deposits during the last half of the year
was larger than in any other like period in the
postwar era.
Demand deposits at all member banks in
the District fell for the second straight year,
and at the end of 1960 were about 1 percent
(1 ) The easing actions included: (1 ) lowering the discount
rate in June from 4 percent to 3% percent, and then in
August and September to 3 percent, at all Federal Reserve
Banks; (2 ) reducing the percentage of reserves required
against demand deposits for banks in New York and
Chicago; and (3 ) liberalizing vault cash requirements in
two steps, so that beginning November 24 member banks
were permitted to count all vault cash in meeting reserve
requirements. At country banks, which hold the largest
amounts of vault cash, the counting of all cash was partly
offset by an increase of reserve requirements from 11 to 12
percent.
TOTAL C>EPOSITS
V . '. v . ' \ / <
W
4►
DEMAND DEPOSITS
*
Deposits Up Slightly
Total deposits at member banks in the
Fourth District at the end of 1960 were only
a shade above the year-ago level. The increase
of less than 2 percent compares with a 3percent increase in 1959 and an increase of
nearly 4 percent in 1958.
4
w w ^1
\ j^
a .M .n -*"*"
n / Y \t
u t r v z lid
_____L _____L
■ I
1957
r ~ ~ ~ ..... i .................... :
1958
1959
I9 6 0
1961
♦Addition of large new member bank
below the 1959 year-end level. Increases in
demand deposits during the latter part of the
year were not sufficient to offset the morethan-seasonal decline during the first half.
The decline of demand deposits at District
member banks, however, was accompanied by
a sharp rise in deposit turnover. In the first
six months of 1960, the amount of checks
written against demand deposits, other than
those of U. S. Government and interbank
balances, was about 11 percent greater than
in the corresponding previous-year period. In
the second half of 1960, the rate of deposit
turnover declined somewhat but still remained
substantially above a year ago.
Loan Trends Mixed
The $275-million upswing in loans by Dis
trict banks in 1960 was the smallest annual
increase since 1954, with the exception of
9
Following midyear, the demand for bank loans
tended to slacken.
Billions of dollars
4.8
4.6
4.4
1958. The rise in total loans conceals, however,
the divergent movements in various types of
loans which occurred during the course of
the year. Detailed information on loans is
available from a sample of 17 large weekly
reporting member banks, and is shown in an
accompanying chart.(S) These highlights of
bank lending in the District give some insight
into the shifting nature of the forces at work
in 1960.
During the first half of 1960, the trend
of bank lending in the Fourth District reflect
ed expansionary influences. Following the
usual seasonal decline after the turn of the
year, total loans adjusted(3) turned upward
in February and continued a steady rise,
reaching a record high of nearly $4.5 billion
by the end of June. The net increase during
the first six months amounted to $170 million.
All loan categories except security loans
shared in the increase.
4.2
4 .0
3.8
3.6
3.4
3.2
The largest loan expansion by type oc
curred in commercial and industrial loans.
Such loans outstanding at the end of the first
half of the year amounted to $2,173 million,
which was $144 million above the 1959 yearend level and $258 million above the 1959
midyear position.
2.2
2.0
1.8
The use of bank credit in the January-June
period was especially heavy among the metals
and metal products industries, in response to
an inventory buildup. Between the end of
1959 and midyear 1960, the metals and metal
products group increased its borrowing (at
the fourteen District banks which report the
distribution of loans by type of business) by
$104 million, or to about two-and-one-half
times borrowings in the same period of 1959.
1.6
1.2
1.0
.8
.6
Manufacturers of petroleum, coal, chemi
cals, and rubber products also increased their
borrowing during the first half of 1960, while
borrowing by trade firms and manufacturers
of textiles, apparel, and leather goods was
somewhat less than in the same period of 1959.
.4
.2
0
1957
1958
1959
1960
1961
*Ineludes commercial and industrial loans, agricultural
loans, and loans to sales finance companies
10
In expected seasonal fashion, commodity
dealers and food processors reduced their
(2 ) These banks, located in 6 cities, hold about 62 percent
of the total resources of all member banks in the district.
(3 ) Exclusive of loans to banks
C H A N G E S IN LARGE B U SIN ESS L O A N S O U T S T A N D IN G
14 W e e k ly R e p o rtin g M e m b e r B a n k s
Fourth District
.5 0
FIRST HALF 1960
M illions of d o llars
0
+50
+100
(by types of borrowers)
-100
LAST HALF 1960
M illio ns of d o llars
-5 0
0
+50
METALS AND METAL PRODUCTS
PETROLEUM, COAL, CHEMICALS,
AND RUBBER
TRADE
CONSTRUCTION
TEXTILES, APPAREL, AND LEATHER
MISCELLANEOUS MANUFACTURING
AND M IN IN G
PUBLIC UTILITIES
COMMODITY DEALERS
FOOD, LIQUOR, AND TOBACCO
ALL OTHER
Less than $1,000,000
bank debt during the first six months of the
year, although the reduction was larger than
in other recent years. On the other hand, net
repayments of bank loans by public utilities
were about the same as in the first half of
the preceding year.
After midyear, the demand for bank loans
slackened for most categories of borrowers.
Although the second half of the year is a
period when bank loans are expected to pick
up, total loans at the 17 weekly reporting
banks by the end of December were $109
million below the midyear level.
porting banks in the Fourth District over
the September tax payment period were the
smallest in recent years. In addition, some of
the business groups which had been borrowers
in the first half of the year made substantial
repayments in the second half. As a case in
point, cumulative net repayments of loans by
the metals and metal products group amount
ed to $73 million in the second half of 1960.
That was the largest net reduction of bank
loans outstanding by this group for any sixmonth period since the first half of 1954 and
it stood in sharp contrast to the corresponding
$13-million increase in the last half of 1959.
The debt reduction stemmed from the rela
tively low rate of steel mill activity as well as
substantial liquidation of steel inventories.
Business loans fell in the third quarter,
and recouped only part of the drop in the
fourth quarter. In contrast to the national
showing, business borrowings at weekly re
Among other business groups, loans to food
processors, commodity dealers, and public
utilities increased in the second half of the
year about in line with seasonal expectations,
By and large, the Fourth District pattern
of borrowing by business groups during the
first half of 1960 paralleled the national
pattern.
11
while loans to trade concerns did not rise as
would be seasonally expected. Other loan
categories, which include security loans, loans
to nonbank financial institutions, and con
sumer and all other loans, declined in the
July-December period; only real estate loans
increased in the second half of the year,
although only half as much as in 1959.
pared with one-eighth of the total at midyear.
Holdings of “ other securities,” such as
municipal and corporate securities, by Fourth
District member banks rose appreciably more
than in other recent years. A net increase of
$110 million, or 8 percent, in such holdings
was the largest since 1954, accounting for
about one-third of the increase in investment
holdings in 1960.
Bank Investments Down, Then Up
Member banks in the Fourth District, as
elsewhere in the nation, on balance, liquidated
some of their holdings of government securi
ties during the first six months of the year,
mainly in order to finance expansion of loan
portfolios. Holdings of U. S. Government se
curities of all member banks in the District at
the end of June were down by nearly $320
million from the 1959 year-end level, or
about one-third less than the liquidation in
the same period in 1959. The largest decline
in investment holdings of banks was in U. S.
Government short-term issues. The spread
between the market yields on such issues and
the discount rate which prevailed during
much of the period tended to favor liquida
tion of such securities as compared with bor
rowing from the Federal Reserve bank.
The liquidation of holdings of U. S. Gov
ernment securities in the first half of the
year was followed by a substantial expansion
of such holdings in the second half, as pre
viously mentioned, with large increases con
centrated in the second week of July and in
the last two weeks of October. A t year-end
1960, total holdings of U. S. Government
securities by the member banks in the District
had reached $4,466 million, or $513 million
above the midyear figure. Usually holdings
of such securities decline or increase only
slightly during the last half of the year.
Nearly all of the increase in holdings of
Governments by weekly reporting banks in
the second half of 1960 took place in Treasury
bills and other short-term issues. As a result,
such short-term issues comprised more than
one-fourth of total bank holdings of U.
Government securities at year end as com
S.
12
Bank Liquidity Improved
In the Second Half
The expansion of bank loans in the first
half of the year, coupled with a reduction of
investment holdings and a decline in deposits,
tended to reduce appreciably the liquidity
position of member banks in the Fourth Dis
trict. The reverse trend which set in after
midyear, however, as loans fell while invest
ments rose, soon brought about an improve
ment in liquidity positions. The ratio of short
term assets (less borrowings) to total deposits
(less cash items and reserves) at weekly
reporting member banks, which at the end of
May was down to 8.9 percent, was up to 16.7
percent by year end. Conversely, the ratio of
loans to deposits for all District member
banks, which is an inverse measure of bank
liquidity, after rising steadily from mid-1958,
declined from a high of 59.6 percent at mid
year 1960 to 56.8 percent by the end of 1960.
Reserve Position Eased Substantially
A concomitant of easier monetary policy in
1960 was a gradual downtrend in member
bank borrowings at the Federal Reserve bank.
Borrowing by the District member banks
continued to be substantially below that of
the preceding year, while excess reserves,
after declining somewhat in the first half of
the year, moved up sharply after midyear to
the highest level since 1954. Throughout the
entire year, member banks in the District, on
balance, were in a net free reserve position.
In fact, net free reserves of all member banks
increased from about $30 million in the second
biweekly period in December 1959 to $64 mil
lion in the similar period of December 1960.
@FedFRASER