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NOVEMBERDECEMBER 1 9 6 9
IN THIS ISSUE
Repurchase Agreements:
T heir Role in Dealer
Financing and in
Monetary P o lic y ............3
Corporate Stocks .............. 16
Recent Economic
Developments in
West Germany .............. 35
Annual Index to
Economic R e vie w ......... 47
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land, Ohio 44101. Permission is granted to reproduce
any material in this publication providing credit is
given.
N O V E M B E R -D E C E M B E R 1969
REPURCHASE AGREEM ENTS: THEIR ROLE IN
DEALER FINANCING AND IN M ONETARY POLICY
Repurchase agreements (RPs) are more special
ized than other money market instruments, such
Treasury bill w ith
any m a tu rity , e.g., 90 days,
keep it fo r three days and then resell it in the
as Treasury bills or commercial paper. Moreover,
market. The problem here is risk; during the three
RPs are not used by a particularly large number of
day interval, bill prices m ight have fallen, in which
individual participants in the market. RPs are, in
case the investor w ill realize a capital loss. Finally,
fact, designed to meet the needs o f a lim ited
the investor can buy a 90-day Treasury bill w ith
number o f investors and an even more lim ited
the co n d itio n th a t three days later the seller w ill
number o f borrowers. However, the im portance o f
repurchase it at a certain price. The risk o f capital
RPs in the money m arket should n o t be under
loss is bypassed, and the investor is assured a
estimated. Much o f th e ir significance lies in th e ir
certain return in much the same way as if he had
special characteristics and the types o f institutions
obtained his firs t investment choice. This arrange
that use such arrangements.
ment is a repurchase agreement.
In practice, a repurchase agreement involves the
S tric tly speaking, then, a repurchase agreement
sale o f securities (usually other money market
is n o t really a "n e w " or a "separate" instrum ent,
instruments) w ith the co n d itio n th a t after a stated
but rather the end result o f an act under w hich the
period o f tim e the original seller w ill buy back the
original m a tu rity o f an already existing money
same securities at a predetermined price or yield.
market instrum ent is changed (shortened) to meet
The essence o f these arrangements is to adjust the
the requirements o f the lender and to avoid the
original m a tu rity o f the particular instrum ent to
risk o f changing yields. In this sense, RPs are
suit the needs o f buyers and sellers (i.e., investors
certainly d iffe re n t fro m other short-term invest
and borrowers). For example, an investor may be
ments.
seeking to place funds th a t he knows are only
tem porarily available— say, fo r three days. As a
From the standpoint o f the tem porary seller o f
the
securities,
an
RP
represents a source o f
first choice, he may a tte m p t to buy a Treasury bill
borrowed funds th a t can in effect be used to
m aturing three days later. Often, however, such
finance the same securities or to acquire other
bills may not be available. Second, he can buy a
types o f securities. U. S. Government securities
3
ECONOMIC REVIEW
dealers have utilized such borrowing arrangements
they use very little o f th e ir own capital. The
extensively. Such arrangements often provide a
relationship between dealer (net) positions and
large part o f the funds needed to finance dealer
dealer financing
inventories.
A ppendix) and reflects the heavy reliance th a t
In addition other financial in s titu
is indeed close
(see chart in
tions— most notably, commercial banks— use RPs
securities dealers place on
to raise short-term funds, but the extent to which
finance inventory positions. Nonbank dealers can
these
usually
institu tio n s
rely
on
RPs fo r
borrow ing
purposes cannot be precisely established because
borrow
borrowed funds to
money fro m
banks on a 2-3
percent margin o f equity capital when purchasing
data on RPs other than those related to U. S.
intermediate-
Government securities dealers are extrem ely lim
issues and on a margin closer to zero fo r Treasury
ited.
bill purchases.1
A n other aspect o f RPs th a t is discussed later is
and
long-term
Treasury
Dealer sources o f short-term
coupon
funds vary in
their use as a technique through which the Federal
terms o f type and location o f lender. Moreover,
Reserve
tem porary
the relative share contributed by each source o f
changes in member bank reserves. Clearly then,
funds also varies. During the 1961-1968 period,
System
can
bring
about
much o f the im portance o f RPs is derived fro m the
dealers— both
type o f public and private institutions th a t use
average o f $3.3 b illio n per day to finance securities
these arrangements.
held
Thus,
an understanding o f the
nature and
significance o f RPs in the nation's financial system
requires the discussion o f several functions. Tw o
in
bank and
inventory.
In
nonbank— borrowed an
1968 alone, borrowings
averaged nearly $4.0 b illio n a day, compared w ith
$2.7 b illio n in 1961 (see Table I).
The bulk
o f dealer funds are supplied
by
of these— RPs in dealer financing and RPs in
commercial banks, w hich, as a group, accounted
m onetary p o lic y — are associated w ith the instru
fo r about one-half o f dealer borrowings during
ment per se. A noth er significant aspect o f RPs is
1961-1968. Other im p o rta n t lenders include non-
in stitutio nal and covers the dealer market fo r U. S.
financial corporations, insurance companies, state
Government securities. The discussion should, o f
and local governments, and the Federal Reserve
course, also include the role of RPs at financial
System. As shown in Table I, during the 1960's,
institutions, such as commercial banks, b u t as
commercial banks increased th e ir share o f dealer
already
financing, w hile corporations became less im p o r
noted,
inform a tio n
in
this
regard
is
lim ited. Therefore, this article is confined to a
ta n t as a source o f dealer funds.
discussion o f the role o f RPs in dealer financing
Bank dealer positions are financed in large part
and in m onetary policy. The in stitutional fram e
through funds allocated to the dealer departm ent
w ork o f the dealer m arket is reviewed in the
A ppendix.
^W illiam
G.
Colby, Jr.,
"Dealer
Profits and
Capital
A va ila b ility in the U. S. Government Securities Industry,
THE ROLE OF RPs
IN DEALER FINANCING
A lthough U. S. Government securities dealers
act as principals in buying and selling securities,
4
1955-1965," S ta ff study prepared fo r the Report o f the
Jo in t
Treasury-Federal
Reserve
S tudy
o f the
U. S.
Government Securities M arket, (Washington, D. C.: Board
of Governors o f the Federal Reserve System, May 5,
1967), p. 52.
TABLE I
Sources o f Dealer Financing
1 9 6 1 -1 9 6 9
Commercial Banks
Year
1961
1962
1963
1964
1965
1966
1967
1968
19 6 9 t
Average
1961-1968
^
, _
T otal From
A ll Sources
Total
--------------------------------Am o u n t
Percent
(m il. o f $)
(m il. o f $)
$2,725
3,359
3,559
3,503
3,546
2,666
3,366
3,985
2,810
$1,289
1,542
1,705
1,812
1,738
1,238
2,014
2,145
1,085
3,339
1,685
New Y o rk City
---------------------------Am ount
Percent
(mil. o f $)
47.3%
45.9
47.9
51.7
49.0
46.5
59.9
53.8
38.6
50.2
$
675
888
942
979
959
668
995
1,049
643
894
24.8%
26.4
26.5
27.9
27.0
25.0
29.5
26.4
22.9
26.7
* A ll business corporations, except commercial banks and insurance companies,
t Through August.
A m ount
Percent
(m il. o f $)
NOTE: Data are averages o f daily figures based on the number of calendar days in
the period.
Source: Federal Reserve B ulletin
Outside
New Y ork City
$
614
654
763
833
782
570
1,019
1,096
442
791
Corporations*
A m ount
Percent
23.6
$1,177
1,461
1,465
1,317
1,336
1,018
854
1,142
1,012
1,221
Am ount
Percent
(m il. o f $)
(m il. o f $)
22.5%
19.5
21.4
23.8
22.0
21.4
30.3
27.5
15.7
A ll Others
43.2%
43.5
41.2
37.6
37.7
38.2
25.4
28.6
36.0
36.9
$259
356
389
374
471
411
499
698
714
432
9.5%
10.6
10.9
10.7
13.3
15.4
14.8
17.5
25.4
12.8
ECONOMIC REVIEW
by the parent in s titu tio n , w ith some funds raised
banks th a t make markets in Government securi
through RPs. Nonbank dealers, who account fo r
ties) averaged nearly $1 b illio n a day, or about 37
well over half o f the inventories and transactions
percent
of
the
funds
used to
finance dealer
in the market fo r Treasury issues,2 rely m ainly on
positions. In 1968, the average dollar volume had
bank loans and RPs fo r th e ir borrowing needs.
grown to $1.5 b illio n a day. RPs accounted fo r the
Collateralized Bank Loans. During the 1930's
remainder o f dealer financing needs— averaging 63
and 1940's, dealers relied heavily on bank loans
percent o f the to ta l fo r the 1961-1968 period (see
fo r financing, reflecting in part the greater avail
Table II).
a b ility o f credit in th a t period than in the 1950's
and 1960's. Most o f the funds were obtained from
New Y o rk C ity banks. During the 1950's, how
CHARACTERISTICS OF
REPURCHASE AGREEMENTS
In general, RPs are arranged w ith corporations
ever, as other demands fo r bank credit increased,
dealers turned
to
borrowed funds fro m
banks
outside New Y ork C ity and from corporations.
and certain banks outside New Y ork C ity; New
Y ork C ity banks rarely provide RPs to dealers.
Bank loans to dealers are collateralized; th a t is,
Payments fo r
RPs are usually made in Federal
the dealer generally uses the securities th a t are
funds. T hat is, if the buyer o f the securities under
being financed
as collateral. The title fo r the
a repurchase agreement is a commercial bank, the
securities stays w ith the dealer. Bank loans are
dealer receives a check drawn on the commercial
usually arranged
on a daily basis and can be
bank's account w ith the Federal
term inated either by the dealer or the bank. There
corporation
are about six
Reserve; if a
is the buyer, the dealer receives a
th a t
check on the Federal Reserve account o f the bank
make loans to nonbank dealers. The
in w hich the corporation maintains balances. In
banks post tw o types o f interest rates daily: one
either case, the dealer has ''im m e d ia te ” (same day)
regularly
banks in
New
Y o rk
C ity
rate fo r renewal o f outstanding dealer loans and
another fo r new loans. These banks rarely refuse
money rather than clearing house funds, w hich are
o
"n e x t-d a y " money.
to grant a loan; instead, they can discourage dealer
Types and Maturities. There are tw o distin ct
loans by adjusting the loan rates, particularly the
types o f repurchase agreements: those contracted
rate fo r renewals.
for a specified period o f tim e and those w ithout a
As shown in Table II, in 1961, the volume o f
fixed m aturity date. RPs w ith a fixed m a tu rity
bank financing o f dealers (either in the fo rm o f
cannot be term inated before the date stated in the
collateral loans to nonbank dealers, or in the form
contract, although the dealer often has the right to
of allocations to the dealer departments o f the
substitute another issue fo r the one in itia lly sold in
3
2
Paul
Meek, "T h e
In clearing house funds the dealer receives a check th a t
Changing Structure o f the Dealer
must go through the IMew Y o rk clearing house, and the
Market in G overnm ent Securities," S ta ff study prepared
reserves o f the member bank are not reduced u n til the
fo r the R eport o f the J o in t Treasury-Federal Reserve
fo llow in g
S tudy
cannot be used u n til a day later. Bank loans to dealers by
of
the
U.
S.
Government Securities M arket,
day.
For this reason, clearing house funds
(Washington, D. C.: Board o f Governors o f the Federal
New Y o rk banks are made in either Federal funds or
Reserve System, August 1967), p. 22.
clearing house funds.
6
N O V E M B E R -D E C E M B E R 1969
T A B LE II
Dealer Financing By Type
1 9 6 1 -1 9 6 8
Outstanding Volum e (m il. o f $)
Year
Collateral Loans
and
Own Bank Funds
1961
1962
1963
1964
1965
1966
1967
1968
Average
1961-1968
$
Percent o f Total Financing
Repurchase Agreements
Total
997
1,230
1,318
1,314
1,342
937
1,358
1,480
$1,716
2,129
2,241
2,162
2,203
1,729
2,008
2,504
1,310
2,087
Short
$
902
1,063
1,099
1,304
1,346
1,048
1,438
1,722
1,332
Long
$
Collateral Loans
and
Own Bank Funds
Total
Short
Long
36.7%
36.6
37.0
38.3
37.9
35.1
40.3
37.1
63.2%
63.4
63.0
61.7
62.1
65.8
59.6
62.8
33.2%
31.6
36.8
37.2
38.0
39.3
42.7
43.2
30.0%
31.7
26.2
24.5
24.2
25.5
16.9
19.6
37.2
62.8
37.9
24.9
814
1,066
932
858
857
681
570
782
876
Repurchase Agreements
NOTE: Data are annual averages of daily figures. Short repurchase agreements are
defined as those w ith m aturities o f 15 days or less; long repurchase
agreements are those w ith m aturities o f more than 15 days.
Source: Federal Reserve Bank o f New Y o rk
the agreement. Most RPs w ith fixe d m aturities
trend tow ard shorter RPs. In 1968, the volume o f
(varying in duration fro m overnight to several days
short
or even months in some cases) are made w ith
accounted fo r nearly 70 percent o f outstanding
corporations.
RPs.
RPs
averaged
$1.7
b illio n
a day
and
RPs w ith o u t specific m aturities are, in effect,
The reverse RP is another type o f transaction.
demand obligations in much the same way as bank
Reverse RPs, w hich are employed less frequently
loans to dealers. Either party can term inate the RP
than
w ith o u t advance notice. Such borrow ing agree
securities and a concurrent dealer com m itm ent to
regular
RPs, involve dealer purchases o f
ments bypass the need to renew overnight RPs as
sell the securities to the original owner at a fu tu re
long as both parties have a continuing interest in
date. The dealer, o f course, can tu rn around and
the arrangement. Many banks outside New Y ork
sell a sim ilar issue under an RP o f the same
C ity and some corporations use RPs w ith o u t fixed
m a tu rity and thus "hedge” the resale agreement
m a tu rity dates.
against changes in price or yield.
The m a tu rity d istrib u tio n of outstanding RPs at
Relative
Merits
of
Repurchase Agreements.
U. S. Government securities dealers is shown in
Perhaps the unique and most interesting feature o f
Table II. During 1961-1962, the dollar volumes o f
an RP is th a t it can be used to m o d ify (shorten)
short (m aturing
15 days or less) and long
the actual m a tu rity o f a particular security to meet
(m aturing after 15 days) RPs were similar. A l
an investor's m a tu rity needs. This feature makes
in
though the d istrib u tio n between the tw o m a tu ri
RPs particularly attractive fo r corporations and
ties has varied in recent years, there has been a
commercial banks outside New Y o rk C ity. These
7
ECONOMIC REVIEW
investors could, o f course, buy an issue w ith a
purchases in this market, although one-day m a tu ri
period to m a tu rity th a t was longer than the period
ties are n o t generally available. Therefore, RPs
the
often are the o n ly alternative investment fo r very
funds
w ould
be
available,
and
in
many
instances, the issue could be sold in the secondary
short-term idle corporate funds.
market before m a tu rity . However, the investor
From the dealer's standpoint, RPs are a source
w ould risk the possibility o f a capital loss if the
o f funds that, apart fro m cost considerations, also
price o f the issue were to decline in the interim .
helps
W ith an RP th a t fixes the selling price at the
potential
to
m a tu rity o f the contract, the investor knows his
im p o rta n t
rate o f return at the tim e the agreement is made.
securities.
develop and
customers.
investors
maintain
Most
in
contacts w ith
RP buyers are also
U.
S.
Government
For most banks, an alternative to investing in
Cost and Return Considerations. Interest rates
RPs w ould be to sell the surplus funds in the
on RPs are determined through negotiation be
Federal funds market. In addition to rate d iffe r
tween the dealer and the customer. As a result,
ences between RPs and Federal funds, however,
data on this subject are quite lim ited. U nlike rates
Federal funds are usually traded in blocks o f $1
on other money
m illio n ; therefore, a bank w ith less than $1 m illio n
Treasury bills, Federal funds, etc., th a t are pub
in excess reserves m ight fin d it d iffic u lt to use the
lished daily, there is no regular series on RP rates.
Federal funds market.
The
m arket instrum ents, such as
in fo rm a tio n th a t is available on
RP rates
Corporations have several outlets fo r short-term
comes fro m reports th a t individual dealers have
funds— notably, Treasury bills, commercial paper,
periodically subm itted fo r special studies o f the
and CDs— bu t such alternatives generally require
U. S. Government securities market. Lim ited data
investment longer than one day. In addition, these
indicate th a t, in general, rates on RPs are lower
outlets
than rates charged fo r collateral loans by New
have
tim in g
lim itations.
For example,
regular three- and six-m onth Treasury bills mature
Y o rk banks.4
The range w ith in
every Thursday; thus, corporations have a lim ited
w hich
RP rates must be
o p p o rtu n ity to match investment in bills w ith an
confined
can, however, be readily determined.
expected or contracted cash o u tflo w during other
A lthough
RPs o ffe r some unique advantages to
specific days in the week. The investor can choose
borrowers and lenders, RPs must also be com peti
the investment period in commercial paper, but
this choice is usually lim ited to m aturities o f five
days or longer. The corporation can also choose
4
One special study, fo r example, presented data regarding
rates on RPs and collateral loans based on reports by a
CD m aturities, but Federal Reserve Regulation D
"small num ber” o f nonbank dealers. The data im plied an
does not allow member banks to issue CDs w ith
average rate o f interest on RPs a little short o f 1/2 o f 1
m aturities o f less than 30 days. Moreover, because
percent lower than the average rate on collateral loans fo r
o f Regulation Q ceilings, banks fin d it impossible
the period 1948-1958. The same study also suggested that
at times to issue CDs in any m a tu rity. U nlike most
commercial paper, however, CDs are traded in the
secondary
m arket, and an investor can w ith in
lim its obtain the desired final m a tu rity through
8 FRASER
Digitized for
rates charged on RPs by commercial banks and corpor
ations are about the same. See, U. S., Congress, Jo in t
Economic Com m ittee, A S tudy o f the Dealer M arket fo r
Federal Governm ent Securities (Washington, D. C.: Gov
ernment Printing O ffice, 1960), pp. 87-89.
N O V E M B E R -D E C E M B E R 1969
tive w ith other short-term investments. The terms,
source o f RPs. The most im p o rta n t difference
therefore, under which RPs are contracted must
between RPs fro m the Federal Reserve Bank o f
bear certain relationships to alternative money
New Y o rk and RPs fro m other lenders is th a t the
market contracts.
jr
Commercial banks, fo r exam
prime m otive behind corporate and bank RPs is
ple, do not usually provide RP funds to dealers
generally profit-m aking, w hile RPs emanating fro m
unless the banks can earn at least as much interest
the Federal Reserve Bank o f New Y o rk are based
as they w ould by selling th e ir surplus reserves in
entirely on m onetary policy considerations. These
the Federal funds market. S im ilarly, RPs must
transactions are undertaken at the in itia tive o f the
norm ally carry lower rates than bank collateral
Federal
loans, not on ly because such loans are generally
sources th a t usually involve tw o-w ay negotiation.
more convenient to obtain, but also because the
The Securities Departm ent in the Federal Re
Reserve Bank, unlike
RPs fro m
other
dealer incurs additional costs w ith RPs, such as
serve Bank o f New Y o rk — com m only know n as the
telephone
Trading Desk— carries o u t RP transactions, and
charges
in
negotiating w ith
lenders
in
only
nonbank dealers can participate in Desk
clearing the securities transactions through a clear
RPs.
A lthough Desk RPs may carry m aturities
ing bank.
that vary up to 15 days, either party can term inate
outside
New Y o rk
C ity
and fees involved
Rates paid on RPs contracted w ith corporations
the agreement at any tim e before m a tu rity. More
are closely related to Treasury bill rates, partic
over, unlike many corporate RPs, the Desk does
ularly rates on RPs w ith maturities o f several days
not allow the dealer to substitute another issue fo r
or longer since, w ith such maturities, Treasury bills
the one in itia lly involved in the agreement.
Desk
are a feasible investment alternative fo r short-term
RPs
involve
a repurchase
price th a t
corporate funds. In some cases, however, the rate
affords a return to the Federal Reserve System— or
on corporate RPs may d iffe r considerably fro m
a cost to the dealer— th a t is usually equal to the
prevailing Treasury bill rates, depending upon the
discount rate o f the Federal Reserve Bank o f New
dealer's need fo r funds or upon the specific terms
Y ork. However, Desk RPs have been transacted at
of the individual agreement; fo r example, whether
rates below and above the New Y o rk discount
or not the dealer is perm itted to substitute another
rate. In the late 1950's and early
issue fo r the one sold originally in the repurchase
System made RPs at less than the discount rate,
contract.
w hile in recent years, some RPs have been made at
REPURCHASE AGREEMENTS IN
OPEN MARKET OPERATIONS
a yield above the discount rate. (D uring periods
The Federal Reserve Bank o f New Y o rk (oper
ating fo r the Federal Reserve System) is also a
5
For a thorough discussion fro m both the theoretical and
in stitutional standpoints o f dealer financing rates and
their relationships in the
money
1960's, the
when such RPs were made, money m arket rates
were generally substantially higher than the dis
count rate.)
0
From the standpoint o f the dealers. Desk RPs represent
m arket, see Louise
a means o f borrowed funds. Thus, an im po rta n t reason
Freeman Ahearn, The Financing o f U. S. Government
fo r the exclusion o f bank dealers fro m Desk RPs is that
Securities Dealers 1960-1963, (Unpublished Ph.D. disser
banks can borrow at the discount w in d o w o f the Federal
ta tion , Columbia University, 1965).
Reserve Bank.
9
ECONOMIC REVIEW
T A B LE III
Federal Reserve System Repurchase Agreements and
Dealer Financing
1 9 6 1 -1 9 6 8
System
Repurchase
Agreements
As Percent of
A ll Repurchase
Agreements
Volum e o f
System
Repurchase
Agreements
Year
System
Repurchase
Agreements
As Percent o f
A ll Dealer Financing
(m il. o f $)
1961
1962
1963
1964
1965
1966
1967
1968
Average
1961-1968
$ 50
59
115
102
159
118
138
108
5.1
4.7
7.2
6.8
6.9
4.3
1 . 8 °/
1.7
3.2
2.9
4.5
4.4
4.1
2.7
106
5.1
3.2
2.9%
2.8
NOTE: Figures include U. S. Government securities and
Federal agency issues. Data are annual averages o f
daily figures.
Source: Federal Reserve B ulletin
The magnitude o f System RPs in overall dealer
through o u trig h t purchases o f securities in the
financing is relatively small. As shown in Table III,
open market or through repurchase agreements.7
the
The tw o methods o f adding to bank reserves are
average daily
volume
o f outstanding
RPs
originating from the Trading Desk amounted to
not considered perfect substitutes, especially in
about 5 percent o f the daily volume o f all dealer
terms o f the supposed effects on interest rates. As
RPs in the 1961-1968 period. For individual years,
Table IV indicates, the Trading Desk has relied
the average ranged fro m 2.8 percent in 1962 to 7.2
heavily (b u t n o t system atically) on RPs to im ple
percent in 1965. In terms o f total dealer financing.
m ent
m o n e ta ry
policy
objectives.
In
the
System RPs accounted, on average, fo r o n ly 3.2
1961-1968 period, the volume o f Desk RPs ex
percent o f daily financing requirements during the
ceeded the volume o f o u trig h t transactions during
1961-1968 period. Because only nonbank dealers
are eligible fo r System RPs, and the data in Table
III are based on the financing requirements o f all
dealers, the significance o f Desk RPs to nonbank
dealers is probably greater than the data suggest.
Federal
provide
Reserve open market operations can
reserves to
10
the
banking system either
^System purchases, either o u trig h t or under RPs, are paid
by crediting the bank dealer's account at the Federal
Reserve Bank or the reserve account o f the nonbank
dealer's clearing bank. System sales, therefore, reduce
member bank reserves.
N O V E M B E R -D E C E M B E R 1969
T A B LE IV
d iffe re n t impacts
Federal Reserve System
Open Market Transactions
1 9 6 1 -1 9 6 9
relation
Year
O utright
(Purchases plus Sales)
m arket, especially in
expectations
and dealer inventory
positions. Therefore, some observers believe th a t
o u trig h t purchases provide greater dow nward pres
Repurchase
Agreements
(Purchases plus Sales)
(bil. o f $)
(bil. o f $)
$15.2
16.6
13.3
15.9
14.1
25.9
16.2
51.2
37.9
$ 9.5
1961
1962
1963
1964
1965
1966
1967
1968
1969*
to
in the
12.0
18.1
18.0
30.0
19.2
34.1
31.8
31.1
sure on m arket yields than do RPs.9
Matched Sale-Purchase Transactions. The tech
nique know n as a "m atched sale-purchase" is a
relatively recent (July 1966) innovation in Federal
10
Reserve open m arket operations.
Matched salepurchases are conditional sales o f Government
securities fro m
the System's Open Market A c
count. Parties to the transaction agree in advance
th a t the System w ill repurchase the securities at a
predetermined price w ith in a few days o f the
original sale. The original buyers are the securities
NOTE: Transactions data are fo r U. S. Government
securities only and do not include redemptions.
* Through August.
dealers w ith w hom the Federal Reserve System
Source: Federal Reserve B ulletin
Trading Desk sells securities, the dealers pay, in
conducts its open market transactions. When the
fo u r years.
O
effect, w ith
Whether bank reserves are supplied by
outrig h t purchases o f Government securities or
member bank reserves th a t are re
turned to the banking system when the matched
sale-purchase contract expires.
In many respects, matched sale-purchase trans
through RPs largely depends on conditions in the
and on the objectives o f the
actions are the opposite o f RPs. The form er are
Federal Reserve System. The System usually en
designed to w ith d ra w reserves fro m the banking
gages in o u trig h t transactions when it wishes to
system te m p o ra rily, w hile the latter aim to inject
money
m arket
provide or absorb bank reserves on a long-term
reserves fo r specified and short periods o f tim e. In
basis. In contrast, RPs are designed to supply
addition, the methods o f allocating the tw o types
reserves fo r a lim ited tim e only. O u trig h t System
of transactions among the dealers d iffe r. Matched
purchases follow ed after a few days by System
transactions are entered in to w ith all dealers, bank
sales o f equivalent volume w ould have the same
as well as nonbank; in contrast, o n ly nonbank
effect on bank reserves as RPs contracted fo r the
dealers are eligible fo r RPs. Moreover, RPs are
same tim e interval. However, in an o u trig h t trans
action, the securities dealers and other market
See,
fo r
example,
Stephen
H. A xilro d
and Janice
participants do not know , as they do w ith an RP,
Krumm ack,
if the transaction w ill be reversed. Consequently,
1954-63," Federal Reserve B ulletin, July 1964, p. 828.
RPs and o u trig h t purchases are like ly to have
10
"Federal
Reserve
Security
Transactions,
For a broader discussion o f this technique, see "Federal
^This also suggests th a t RPs are probably more im portant
Reserve
as an instrum ent o f m onetary policy than as a means of
Purchases," Econom ic Review, Federal Reserve Bank of
dealer financing.
Cleveland, May 1968, pp. 2-6.
Open
Market
Operations:
Matched
Sale-
11
ECONOMIC REVIEW
contracted at a fixed rate, w hile matched sale
capital loss if he has to sell at lower prices. In
transactions involve com petitive b idding.11
matched sale-purchase agreements, the price fo r
Matched sale-purchase operations were o rig i
fu tu re delivery is fixe d and the risk o f capital loss
nally employed to elim inate the reserve effects of
on the part o f the dealer is accordingly removed.
increased
a labor strike
The dealer's task is instead to fin d a profitable
against five major airlines in 1966. A t th a t tim e,
source fo r financing his tem porary holdings— and
the
this is usually feasible at some rate close to the
flo a t
usual
associated w ith
method
of
w ithdraw ing
reserves—
ou trig h t sales— was not considered suitable. A c
Federal funds
cording to
autom atically fo r the replenishment o f reserves
the
Manager o f the Open
Market
rate. Furtherm ore, by providing
A ccount "...Treasury bill rates were rising sharp
after a fixe d interval, the matched sale-purchase
ly... [therefore] the market was not expected to be
transaction avoids the
receptive to
large o u trig h t sales o f bills...[and
purchases o f securities th a t m ight a rtific ia lly drive
moreover] any such sales might have had to be
prices up and rates down in a th in or uncertain
follow ed
market.
q u ickly
by o u trig h t purchases if the
need fo r large o u trig h t
Thus, the System
The dollar volume o f matched sale-purchase
decided to u tilize matched operations to maintain
contracts has varied considerably fro m year to
monetary restraint at a tim e when o u trig h t sales
year. In the second half o f 1966— the era o f the
strike were suddenly settled.'
could not have been carried o u t in the necessary
"c re d it c ru n c h "— the System undertook more than
volume in such a short period o f tim e.
$4 b illio n o f matched sale-purchases. As credit
The main advantage o f matched sale-purchase
conditions improved somewhat in 1967, the vo l
contracts is th a t the disruption in interest rate
ume o f matched transactions fe ll to a to ta l o f $1.3
levels associated w ith
b illio n fo r the year. However, after the resum ption
a given change in bank
reserves is though t to be smaller than it w ould be
of
if the reserves were reduced or added through
matched sale-purchases increased and, in 1968,
restrictive
m onetary
policy
in
late
1967,
o u trig h t open market transactions. In a weak or
totaled more than $17 b illio n — an am ount th a t, fo r
weakening market, when a dealer buys securities
the firs t tim e, exceeded the annual volume o f
ou trig ht, he undertakes the risk th a t prices m ight
System
decline fu rth e r, in which case he w ill suffer a
matched contracts up to mid-September 1969 has
purchases under
RPs. The volume
of
amounted to $27 billio n .
11 Under matched sale-purchase contracts, the Desk in
effect sets the price at which it is prepared to sell the
particular securities and then asks the dealers to subm it
bids on the price at w hich they w ould be w illin g to sell
Much o f the increased use o f matched salepurchases in 1968 and 1969 can be a ttrib u te d to
restrictive monetary policy in the presence o f high
and volatile interest rates th a t resulted in the need
back the securities a few days later. The Desk in tu rn
to absorb bank reserves fre q u e n tly w ith a m in i
chooses to do business w ith those dealers th a t o ffe r to
mum im pact on m arket rates. On the other hand,
resell the securities at the lowest prices.
if monetary policy had been expansionary, the
System w ould have been supplying reserves (i.e.,
12
buying securities), in w hich case matched sale-
Reserve System, 1966, p. 241.
purchases w ould have played no role. The causes
A n n u a l Report, Board o f Governors o f the Federal
N O V E M B E R -D E C E M B E R 1969
or sources o f redundant reserves during this period
serve variation in 1969 was changes in Treasury
have varied. Unexpected increases in flo a t and
cash
changes in the procedures fo r calculating member
September 1969, Treasury direct borrow ing fro m
bank required reserves have contributed to unan
the Federal Reserve System te m p o ra rily supplied a
ticipated changes in reserves. However, a major
considerable am ount o f bank reserves th a t had to
cause o f short-term and partly unanticipated re
be absorbed through matched transactions.
balances.
During
A p ril
and especially
in
APPENDIX
THE DEALER MARKET FOR U. S. GOVERNMENT SECURITIES
The U. S. Government securities m arket— and
the dealers in th a t m arket— provides im p o rta n t
A lthough the main offices o f most dealer firm s are
in
New
Y o rk
C ity ,
several
dealers
m aintain
services to both private and public institutions. On
branches in leading m etropolitan areas th roughout
the public side, both the U. S. Treasury and the
the country.
Federal Reserve System use the assistance o f the
dealers, the Treasury in connection w ith marketing
The
dealer
m arket
fo r
U.
S. Government
securities is an over-the-counter-market—as op
and refinancing the national debt and the Federal
posed to an organized m arket such as the New
Reserve in connection w ith open m arket oper
Y o rk Stock Exchange. Transactions are consum
ations. A t the same tim e, private institu tio n s, such
mated
as commercial banks, insurance companies, savings
between the dealer and the buyer or seller o f the
and loan associations, and nonfinancial co rp o r
securities or some agent fo r the buyer or seller,
ations, among others, rely heavily on the dealers to
such as a commercial bank or a securities broker.
on
the
basis o f
individual
negotiation
execute transactions in U. S. Government securi
A lm ost invariably, transactions are firs t contracted
ties.
through telephone or teletype and then confirm ed
A t present, there are approxim ately 20 firm s
in w ritin g . The terms the dealers quote fo r buying
acting as prim ary dealers in U. S. Government
or selling securities are the m arket— hence the
securities. The number o f firm s has expanded since
expression
the beginning o f W orld War II, largely as a result o f
terms are constantly readjusted and, in general,
the $200 b illio n increase in the volume o f o u t
tend to reflect the desire o f dealers to add to or to
"th e
dealers make
m arkets." Such
standing marketable U. S. Government obligations.
reduce positions in light o f th e ir reading o f current
Some o f the dealer firm s are special departments
business and financial developments. Dealer q uota
of commercial banks and are accordingly classified
tio n terms d iffe r according to the issue under
as bank dealers. The rest are securities houses th a t
consideration. Treasury
are designated as nonbank dealers. In addition to
discount or yield basis; e.g., a three-m onth issue
handling U. S. Government securities, some non
may be quoted 5.85 " b id " and 5.80 "asked,"
bank dealers trade other types o f securities, such
which means th a t a dealer is w illin g to purchase
as negotiable CDs and
three-m onth bills w ith a given m a tu rity value at a
Federal Agency issues.
bills are quoted
on a
13
ECONOMIC REVIEW
price th a t w ould yield him 5.85 percent fo r the
declining (and rates are rising), or when there is
holding period, or to sell the same bills at a price
uncertainty about the fu tu re course o f interest
that w ould yield 5.80 percent to the buyer. The
rates in general.
difference, or spread, between the buying and
Dealer transactions, positions, and financing
selling price constitutes a source o f income fo r the
during the
1961-1968 period are shown in the
dealer. In contrast, coupon issues, such as Treasury
accompanying chart. As the chart shows, the
bonds and Treasury notes, are quoted in terms o f
volume o f transactions experienced considerable,
prices rather than yields. For example, a 10-year
b ut irregular grow th during the period. In 1968,
bond may be quoted at 81.24 bid, 82.8 asked. The
the to ta l o f dealer purchases and sales averaged
figures after the decimal p o in t are thirty-seconds,
$2.4 b illio n a day, compared w ith $1.5 b illio n a
i.e., the above quota tio n should be read as 81
day in 1961. To support the increased volume o f
24/32 bid and 82 8/32 asked, w hich in dollars is
transactions, dealers were required to ca rry— and
$81.75 bid and $82.25 asked, respectively, per
finance— substantially larger inventory levels. In
$100 o f m a tu rity value o f the particular bond.
ventories increased fro m an average o f $2.7 b illio n
In general, most dealer firm s stand ready to
execute transactions in some size in all m a tu rity
in 1961 to $3.8 b illio n in 1968. As the chart
shows, flu ctu a tio n s
in dealer positions are o f
ranges o f U. S. Government securities. Some—
greater magnitudes than those in transactions. The
usually the smaller firm s — confine most o f th e ir
actual trend o f interest rates as well as expecta
trading to
tions about fu tu re interest rate trends generally
short-term
issues, p rim a rily because
they cannot a ffo rd the capital risk involved in
influence
dealer
positions. This p o in t can
be
longer m aturities and prefer instead to concentrate
understood better by considering the technical
in the most active sector o f the m arket in which
aspects o f dealer positions.
there is less risk o f large capital losses.
The volume o f dealers' transactions and inven
A dealer may take tw o types o f positions: a
tories are w idely recognized as key measures o f the
long position and a short position. A dealer takes a
performance
of
long position when he buys securities o u trig h t fo r
Government
securities.
the
dealer m arket fo r
A
large and
U. S.
increasing
volume o f transactions suggests an active market
his own account. In a short position, the dealer
sells securities
th a t he does n o t have in
his
w ith "d e p th and breadth." Dealer inventories or
account. The dealer borrows the securities fro m a
positions also reflect the dealers' appraisals o f
customer and, o f course, must buy back the
prospective interest rate trends. U nlike brokers fo r
securities and return them to the lender at a later
registered
as
date. N ot surprisingly, risks are involved in both
stocks
w ho
as a rule act o n ly
middlemen, dealers in U. S. Government securities
types o f positions. For example, if a dealer takes a
also buy and sell fo r th e ir own account; th a t is,
position and securities prices rise (interest rates
they act as principals rather than brokers. As a
fa ll), capital gains w ill be realized on securities in
result, dealer holdings o f securities are subject to
the long position and capital losses in the short
capital gains and losses due to changes in interest
position. In the latter case, the dealer w ill have to
rates. Therefore, dealers are reluctant to carry
pay a price th a t is higher than his original selling
inventories in periods when security prices are
price to buy back the borrowed securities.
Digitized 14
for FRASER
N O V E M B E R -D E C E M B E R 1969
TRANSACTIONS, POSITIONS, and FINANCING of DEALERS in U. S. G O V E R N M E N T SECURITIES
B illio n s o f d o lla rs (Par Value)
NOTE:
T ra n s o c tio n s and p o s itio n s d a ta are a verages o f d a ily fig u re s based on th e num b e r o f tra d in g
averages o f d a ily fig u re s based on th e num b e r o f co lendar days in th e m o n th .
and sales, but do not include RP's or reverse RP's.
days in th e m onth; fin a n c in g d a ta are
T ra n sa ctio n s d a ta represent com bined to ta ls o f dea le r purchases
P ositions fig u re s are on net basis, Le., sho rt sales have been deducted from
R P \ unless m otched by e q uivalent a m ounts o f reverse RP's, are included in long positions and, th e re fo re , a r e
Lost e ntry:
in
long positions;
net
p o s itio n s .
A ugust 1969
Source o f data:
F e d e r a l R e s e r v e B u lle tin
If interest rates are rising and are expected to
continue to
re fle c te d
rise, dealers tend
to
reduce long
dealer's need to hedge. To avert possible losses
from
changes
in
interest
rates,
dealers often
positions and increase short positions in a n tici
attem pt to cover a long position in a certain issue
pation o f capital gains. The dealer cannot, how
having a given
ever, always fin d a source fro m which he can
another issue o f sim ilar m a tu rity. In this way, if
borrow the securities needed to make a short sale.
interest rates change in the fu tu re — either up or
In addition, the dealer must pay interest on the
dow n— the dealer's capital losses in one issue w ill
m a tu rity
w ith
a short sale of
borrowed securities (usually 1/2 o f 1 percent). It
be at least partially offset by capital gains in the
is, instead, easier fo r the dealer to co n tro l co m m it
other. By hedging, the dealers n o t o n ly protect
ments in long positions. Nevertheless, the chart
themselves against capital losses, but they also
clearly indicates th a t in periods o f rising interest
con trib u te to
rates, dealers do in fa ct reduce th e ir net— the
effect, dealers sell an issue th a t they do not have
difference between long and sh o rt— position (see,
against one th a t they do and thereby satisfy a
fo r example, the period o f summer-fall 1966 in the
customer's need. In fact, many o f the hedged
chart).
A nother im p o rta n t influence on positions is the
positions
im provem ent
result
fro m
in the
security
market. In
swaps
w ith
customers.
15
ECONOMIC REVIEW
CORPORATE STOCKS
A t the end o f 1968, the estimated m arket value
Preferred Stocks. Preferred stockholders have
o f outstanding corporate stocks amounted to $761
prior claim over common stockholders to d iv i
b illio n , or 80 percent greater than the value at the
dends and assets if the company is dissolved.
end o f 1960. Corporate stocks account fo r the
Preferred stocks generally pay a stated dividend,
largest share o f individuals' holdings o f all financial
frequently
assets as well as an increasingly im p o rta n t share o f
percent o f the par value o f the stock. For example,
the assets o f financial institutions. A lthough stocks
a 5 percent preferred ($100 par value) is equiva
are an im p o rta n t financial asset, few investors are
lent to a $5 dividend. In contrast, dividends on
expressed as an equivalent rate or
aware o f all the factors influencing share prices.
common stocks are not stated. A lthough preferred
This article examines the basic characteristics of
stockholders are owners o f the corporation, fre
stocks as well as th e supply o f and
quently they do not have the right to vote on
c o rp o r a te
demand fo r stocks. The article also reviews the
corporate matters.
stock m arket and technical factors in the market.
The discussion focuses on equities during the
Several characteristics o f preferred stocks are
1960's.
similar to those o f bonds. In addition to fixed
BASIC CHARACTERISTICS
conversion, and sinking fund features. Because the
dividend rates, some preferred stocks have call,
There
are
tw o
general
types o f corporate
securities, debt instruments and equities or co rp o r
dividend
rate
is fixed, the
m arket price and
interest rate behavior o f preferred stocks is sim ilar
ate stocks. Debt instruments are obligations o f the
to th a t o f bonds; th a t is, the m arket price tends to
corporation, in contrast to equities which repre
vary inversely w ith the trend in interest rates. As
sent ownership o f the co rp o ra tio n .1 There are tw o
shown in Chart 1, both preferred stock yields and
classes o f equities— preferred stocks and common
corporate bond yields moved in a sim ilar fashion
stocks.
and were at about equal levels u n til 1967, when
yields on corporate bonds outpaced yields on
i
For a discussion o f corporate debt, particularly corpor
ate bobds, see "C orporate Bonds, 1960-1968," Econom ic
preferred stocks. Corporations th a t hold stocks
enjoy certain
tax
advantages on the
dividend
Review, Federal Reserve Bank o f Cleveland, September
income fro m preferred stocks. As a result, pre
1969, pp. 3-16.
ferred stocks o ffe r such investors some o f the
16
N O V E M B E R -D E C E M B E R 1969
C h a r t 1.
STOCK PRICES and S EL EC T ED C API TAL M A R K E T YIELDS
INDEX 1941-43=10
* S ta n d a rd & P o o r's C o rp o ra tio n p re fe rre d stock y ie ld s
(14 issues b efore 1965), in c lu d in g both u t ilit y
Last e n try :
S e p t. '6 9
Sources o f d a ta :
S ta n d a rd & P oor's C o rp o ra tio n and
benefits o f tax exempt municipal bonds.
2
are an a v e ra g e o f y ie ld s on 10 h ig h -g ra d e n o n c a lla b le issues
and in d u s tria l issues.
B oard o f G o ve rn o rs o f th e F ederal Reserve System
o
By law, corporate investors can deduct 85 percent o f the
U nlike bonds, however, preferred stocks have
no m a tu rity date or principal am ount to be repaid.
dividends received on certain preferred stockholdings. The
Dividends
on
preferred
stocks
are paid after
85 percent deduction is applied to issues o f public u tility
corporate taxes; in contrast, the interest on bonds
operating companies if the preferred stock was issued on
is paid before taxes. If the dividends are not paid,
or after October 1, 1942. These preferreds are referred to
the preferred stock goes in to arrears rather than
as “ new m oney” issues. If the preferred was issued prior
into default. That is, some preferred stockholders
to th a t date ("o ld m oney” ), the tax deduction amounts
to about 62.5 percent. Preferred stock o f all other issuers
receives the fu ll 85 percent deduction. For fu rth e r details,
see "Preferred Stock Guide, 1969 E d itio n " (New Y ork:
Salomon Brothers & Hutzler).
have a claim on the company fo r the dividends
that were o m itted.
Common Stocks. The comm on stockholder is a
residual
claim ant,
because
both
creditors and
17
ECONOMIC REVIEW
preferred stockholders have senior claims on the
issuing stock as much as possible.4 The difference
corporation. Thus, the common stockholder pro
in corporate tax treatm ent o f bond interest and
vides risk capital. If the corporation is successful,
dividend payments is an im p o rta n t factor. Baumol
the comm on stockholder may benefit fro m d iv i
offers some other com pelling reasons w hy co rp o r
dends (which are n ot contractual) and stock price
ations avoid the issuance o f stocks.5 First, there
appreciation. As shown on Chart 1, dividend yields
are heavy flo ta tio n costs associated w ith "going
on comm on stocks are substantially lower than
p u b lic ," and the company may be required to
yields on preferred stocks. The difference between
divulge confidential in fo rm a tio n . Moreover, there
the
investors hold
may be a six-m onth delay between the tim e the
common stock principally fo r capital appreciation,
issue is decided upon and the date o f issuance.
w hile they may hold preferred stocks p rim a rily fo r
A d d itio n a lly,
yield.
because they are used to raise large sums o f money
yields
suggests th a t
many
stock
financings
are
" lu m p y ,"
Common stockholders generally have the right
infrequently, rather than to meet day-to-day fin a n
to vote on matters o f corporate im portance, such
cial needs. Finally, existing stockholders may not
as electing directors, approving mergers, etc. How
w ant to d ilu te th e ir equity by having additional
ever, some classes o f comm on stock do n o t have
shares issued.
voting rights. Frequently, when comm on stocks of
Stock Offerings. As shown in Table II, during
a company are classified A and B, the Class B
the 1960-1968 period, the dollar volum e o f to ta l
stock does n ot have the right to vote, whereas the
gross proceeds o f corporate stock offerings varied
Class A stock does have voting power.
w idely
fro m
year
to
year.
Common
stocks
accounted fo r 78 percent, on average, o f to ta l
A SOURCE OF CORPORATE FUNDS
stock offerings. The large dollar volume o f com
Corporate nonfinancial businesses meet most o f
mon stock offerings in 1961, 1964, and 1968
their financial needs through internal sources of
surpassed the volumes in other years by a wide
funds th a t include retained earnings and deprecia
4
tio n . They fu lfill the remainder o f th e ir financial
needs through external funds obtained by issuing
stocks, bonds, and other forms o f debt.3 During
the 1960-1968 period, stocks accounted fo r an
average 1.6 percent o f to ta l sources o f funds and
This is the p o in t o f view expressed in the fo llo w in g
works:
G ordon
Donaldson, Corporate D ebt Capacity
(Boston: Division o f Research, Harvard Business School,
1961), p. 56; Roger F. Murray, "Inte re st Rates and Their
Influence on E quity Prices," Readings in Financial Man
agement, Eugene M. Lerner, ed. (Hom ewood, Illinois:
5.1 percent o f external sources o f funds raised by
Richard D. Irw in, Inc., 1963), pp. 63-68; W illiam J.
corporate nonfinancial businesses (see Table I).
Baumol,
Because stocks represented such a small po rtio n
o f the funds raised by corporations, some observ
ers conclude th a t corporations apparently avoid
o
Other form s o f debt include mortgages, bank and other
The Stock M arket and Econom ic E fficie n cy
(New Y o rk: Fordham University Press, 1965), pp. 66-83.
An additional explanation is th a t nonfinancial co rp o r
ations are at a m ature stage o f development and can rely
less on stock issues and more on internal sources o f funds.
5
Baumol,
ibid.
O nly
the
more obvious reasons are
loans, trade debt, p ro fits tax liabilities, and other lia
presented here. Baumol also discusses the issuance o f
bilities.
stocks in terms o f cost o f capital and retained earnings.
Digitized 18
for FRASER
N O V E M B E R -D E C E M B E R 1969
TA B LE I
Sources o f Funds Raised by Nonfinancial Business Corporations
1 9 6 0 -1 9 6 8
1960
1961
1962
1963
1964
1965
1966
1967
1968p
Total
Sources*
External
Sourcest
Stocks
(bil. o f $)
(bil. o f $)
(bil. o f $)
$ 47.3
54.7
63.3
65.9
70.2
88.4
99.2
94.1
101.7
$12.9
19.1
21.5
22.0
19.7
32.7
38.1
32.5
37.7
$1.6
2.5
0.6
- 0.3
1.4
X
1.2
2.3
- 0.3
Stocks
As Percent of
Total Sources
Stocks
As Percent of
External Sources
3.50%
4.57
0.94
12.40%
13.08
2.79
-
7.10
1.99
-
Average
1.20
2.44
—
3.14
7.07
1.63%
5.06%
* External and internal sources o f funds.
t External sources o f funds include: stocks, bonds, mortgages, bank and other
loans, trade debt, p ro fits tax liabilities, and other liabilities.
$ Less than $50 m illio n .
Source: Board of Governors o f the Federal Reserve System, F lo w o f Funds
Accounts
margin. However, stock offerings by one company,
1960-1968 period. M anufacturing industries, how
American Telephone and Telegraph, accounted fo r
ever, did account fo r the largest dollar volume in
28 percent o f the comm on stock offerings in 1961
fo u r
and 45 percent in 1964. There are also some
industry, p rincipally due to the Am erican Tele
of
the
nine
years. The com m unications
interesting sim ilarities between 1961 and 1968. As
phone and Telegraph offerings, and real estate and
shown in Table III, a large number o f new issues
financial industries issued the largest p o rtio n o f
were sold
the volume in fo u r o f the remaining years. In
in both years. (These data actually
understate the
number o f issues because only
stocks registered under the Securities A c t o f 1933
are included. The Investment Dealers' Digest esti
1968, commercial firm s accounted fo r the largest
share o f the offerings.
The dollar volume o f preferred stock offerings
mated th a t nearly 1,200 common stock issues
increased m arkedly during the 1960-1968 period.
were offered in 1961.) In addition to the large
Because there were wide swings in the dollar
number o f
volume
common
issues and
stock
large d o llar volume o f
offerings,
1961 and
o f com m on
stock offerings, preferred
1968 also
stocks accounted fo r as little as 12 percent o f
stand o ut as years when there was strong demand
corporate stock offerings (1961), or as much as 32
and speculation in the new issue market.
percent (1965). On average, new preferred issues
The data in Table II reveal th a t no single type
of issuer dom inated comm on stock offerings in the
accounted fo r 22 percent o f corporate offerings
during the period reviewed.
19
ECONOMIC REVIEW
TA B LE II
Estimated Gross Proceeds o f New Corporate Stock Issues*
1 9 6 0 -1 9 6 8
(Mil. of $)
Total
Transportation
Public
U tilities
280
388
274
156
220
251
257
466
1,579
$ 16
20
14
9
38
60
116
117
116
$568
692
562
419
620
604
549
718
873
586
666
354
271
186
593
1,136
933
1,246
271
360
261
140
202
230
228
438
1,552
15
16
14
9
38
60
105
107
107
47
75
50
47
42
112
73
231
65
9
28
13
16
18
21
29
28
27
1
4
-0 -0 -0 -0 11
10
9
M anufacturing
Commercial
and Other
Com munication
Financial i
Real Esta'
Common and Preferred Stock
1960
1961
1962
1963
1964
1965
1966
1967
1968
$2,073
3,722
1,754
1,364
3,091
2,272
2,513
2,844
4,583
$
633
741
404
318
228
705
1,209
1,164
1,311
$
$
74
1,128
43
152
1,520
139
189
193
43
$502
753
458
309
466
514
193
186
662
314
442
250
218
300
138
160
181
357
58
1,088
26
93
1,514
92
136
123
40
421
700
413
290
440
435
174
177
644
254
250
312
201
320
466
389
537
516
16
40
17
59
6
47
53
70
3
81
53
45
19
26
79
19
9
18
Common Stock
1960
1961
1962
1963
1964
1965
1966
1967
1968
1,664
3,273
1,318
1,022
2,679
1,547
1,939
1,959
3,946
Preferred Stock
1960
1961
1962
1963
1964
1965
1966
1967
1968
409
449
436
342
412
725
574
885
637
* Offered fo r cash in the United States,
t Excludes investment companies.
Source: Securities and Exchange Commission
20FRASER
Digitized for
N O V E M B E R -D E C E M B E R 1969
T A B LE III
dollar o f assets.7 Nevertheless, public u tilitie s are
Number o f Common Stock Issues
1 9 6 0 -1 9 6 8
becoming less dependent on preferred stocks as a
source o f funds. A t yearend 1967, preferred stocks
accounted fo r
646
878
603
280
324
376
324
466
1,009
1960
1961
1962
1963
1964
1965
1966
1967
1968
9.6
percent o f the capital and
surplus o f privately owned electric u tilitie s in the
United States, down tw o percentage points from
the same p o in t in tim e ten years earlier.8
M anufacturing
concerns
issued
the
second
largest, but smaller, dollar volume o f preferred
stocks. In 1965 and 1967, the volume o f these
Source: Securities and Exchange Commission
offerings increased sharply, reflecting in part the
increased use o f convertible preferreds to finance
A lthough the dollar volume o f preferred stock
corporate
mergers and acquisitions.
In
1968,
offerings has increased in recent years, preferred
however, convertible preferred stocks were used
stock
issues have become less im p o rta n t as a
less intensively fo r th a t purpose because an O pin
source o f corporate funds. One reason is interest
ion o f The A ccounting Principals Board suggested
cost. Some preferred dividend rates exceed the
yields on some corporate bonds.6 More im p o r
ta n tly, as mentioned earlier, preferred dividends
are paid after corporate taxes, w hile interest on
bonds
is paid before taxes. Thus, it costs a
corporation more than tw ice as much to pay a
7 For a discussion of this p o in t see: Plum, Hum phrey, and
Bowyer, Investment Analysis and Management (Home
wood, Illinois: Richard D. Irw in, Inc., 1961), Chapter 12.
Part o f the argument centers on the fact that the cost of
obtaining new money should be lower than the rate o f
return th a t the company is allowed to earn. The cost of
dividend on preferred stock as it costs to pay
issuing
interest on bonds.
payments, is freq u e n tly more expensive than the cost of
preferreds,
in
terms
of
yields
and dividend
issuing bonds. Thus, the expected rate o f return has to be
As shown in Table II, public u tilitie s consis
te n tly
stocks.
issued
the
largest volume o f
preferred
Interestingly, this industry issued more
preferred stock
than
common stock in recent
years. Public u tilitie s are a regulated industry and
are only allowed to earn a lim ited am ount on each
raised to cover the increased cost o f the new money. For
a fu rth e r
discussion
financing,
see Hussein
on the
H.
use o f
Elsaid,
preferred stock
"T h e
Function
of
Preferred Stock in the Corporate Financial Plan," Finan
cial Analysts Journal (July-August 1969), pp. 112-117.
g
Statistics o f Privately Owned Electric U tilitie s in the
U nited States, 1967, Federal Power Commission (Septem
ber 1968), p. xx.
6 For example, during the 1960-1968 period, the average
yields on preferred stocks o f utilitie s (both new and old
g
Corporate merger a ctivity increased sharply in 1965 and
money issues) exceeded the average yield on discounted
1967. For a discussion o f merger a ctivity, see "C orporate
Aa u tility bonds. See "Preferred Stock Guide,” op. cit.,
Merger A c tiv ity in the Fourth Federal Reserve D istrict,
pp. 8-9. The data were calculated by Salomon Brothers &
1950-1967," Econom ic Review, Federal Reserve Bank of
Hutzler and are not s tric tly comparable w ith the preferred
Cleveland, October 1968, and other articles contained in
stock yield series shown in Chart 1.
the Econom ic Review, January, March, and May 1969.
21
ECONOMIC REVIEW
th a t comm on stock earnings per share after con
TAB L E IV
version o f the convertible preferred stock should
Net Change in Outstanding Domestic
Corporate Stock
1 9 6 0 -1 9 6 8
(M il. o f $)
be reported.10 From the corporations' p o in t of
view, this change in accounting procedure w ould
result
in
reporting
the d ilu tio n
of
per share
earnings, w hich in turn might depress stock prices
and displease some comm on stockholders. A ccord
ingly, the dollar volume o f convertible preferred
issues declined in 1968.
Retirements. Each year, corporations retire a
substantial
shares.
volume
of
common
and
preferred
Frequently, this occurs as a result of
1960
1961
1962
1963
1964
1965
1966
1967
1968
$1,696
2,650
697
249
1,432
37
1,170
2,268
900
Source: Securities and Exchange Commission
mergers and acquisitions. In other cases, co rp o r
ations may reacquire th e ir own comm on stock fo r
retirem ent or pension plans, stock options, invest
or closed-end. The major d istin ctio n between the
ment purposes, or to increase earnings per share.
tw o types is th a t the mutual funds w ill redeem
They may also " c a ll'' or purchase preferred issues
their shares at asset value but the closed-end
to reduce costly dividends and to remove preferred
investment companies w ill not. The objectives o f
stocks fro m th eir balance sheets. Because o f these
the investment companies vary w idely and range
retirements, there is a substantial difference be
from concentrating on achieving speculative capi-
tween the gross volume o f stock offerings and the
tal gains to preserving capital and income.
11
net change in outstanding corporate stocks (see
During the 1960-1968 period, the number o f
Table IV ). In three o f the years shown, retirements
registered investment companies increased from
exceeded the gross volume o f new stock offerings;
570 to 967.
as a result, there was a reduction in the dollar
60 percent o f the to ta l in 1968. The dram atic
value o f shares outstanding.
growth in the number o f investment companies is
Investment
Companies.
Because
investment
Mutual funds accounted fo r nearly
reflected in the volume o f th e ir own new issues. As
companies are the largest issuers o f stocks in terms
shown
o f dollar volum e, and because o f th e ir unique
company offerings increased fro m $2.7 b illio n in
nature, they are treated separately in this article.
1960 to $9.9 b illio n in 1968. These numbers are
in
Table
V, the volume o f investment
In broad terms, investment companies invest their
particularly impressive when compared w ith the
shareholders' funds in other securities to achieve a
gross proceeds fro m all other new corporate stock
specific
offerings shown in Table II. For example, in 1960,
investment goal. Investment companies
may be open-end (com m only called mutual funds)
11 For greater detail, see Investment Companies (New
10
Y ork: A rth u r Wiesenberger Services), published annually.
See Frank J. Weston, “ Increased Emphasis on Report
ing
Earnings
Per Share," Financial Analysts Journal,
12
Data are fo r yearend and are fo r investment companies
July-August 1967, pp. 45-53 fo r a discussion o f Opinion
registered w ith the Securities and Exchange Commission
No. 9 ["R e p o rtin g the Results o f O p e ra tio n s "].
under the Investment Company Act.
Digitized for
22 FRASER
N O V E M B E R -D E C E M B E R 1969
TA B LE V
institutions have increased substantially in recent
Volume o f Investment Company Stock Issues and
Net Change in Outstandings
1 9 6 0 -1 9 6 8
(Bil. o f $)
years. In 1968, fo r example, noninsured pension
New Issues
Net Change In
Outstandings
$2.7
3.9
3.4
3.1
4.4
5.6
6.5
7.0
9.9
$1.9
2.7
2.3
1.6
2.5
3.5
4.5
4.3
6.1
funds, investment companies, and life insurance
companies purchased $10.3 b illio n o f corporate
stock, or more than three times the volume o f
their purchases eight years earlier. Increased acqui
sitions in recent years were associated w ith the
1960
1961
1962
1963
1964
1965
1966
1967
1968
growth o f the institutions, the desire to hedge
against in fla tio n , and the o p p o rtu n ity fo r capital
gains.
In contrast, individuals consistently sold co r
porate stocks during the period under review. In
fact, 1968 was the eleventh consecutive year fo r
which individuals were reported as net sellers of
Source: Securities and Exchange Commission
stocks. Because the data fo r "in d iv id u a ls " include
college endowm ent funds and n o n p ro fit organi
the gross dollar volume o f investment company
zations th a t were probably net buyers o f stocks,
issues exceeded the tota l dollar volume o f other
actual liquidations by individuals were probably
corporate stock offerings by about 35 percent; in
even larger than the data suggest. Available data
1968, investment company issues were more than
indicate th a t estates and large trusts accounted fo r
double
dollar volume o f corporate stock
most o f the sales.13 Individuals dispose o f stocks
offerings. Even when mutual fund redemptions
fo r several reasons, such as to raise funds to pay
were considered, the net change in outstandings
taxes, to take advantage o f rising stock prices, to
the
fo r investment companies far surpassed the gross
reinvest funds in tax-free issues, and to diversify
proceeds o f other corporate stock issues.
p ortfolios.
A t the same tim e, the number o f
individual
shareholders is increasing, suggesting
INVESTORS
greater public participation in the stock market.
Net A cquisitions. During the 1960-1968 period,
For example, the Securities and Exchange Com
financial institutions were the dom inant buyers o f
mission and the New Y o rk Stock Exchange report
corporate stocks. As shown in Table V I, private
th a t there were about 24 m illio n individual stock
noninsured pension funds acquired more corporate
holders in 1968, compared w ith
stock than any other type o f buyer, w ith the
1962 and 6.5 m illio n in 1952.14 Individuals have
17 m illio n in
dollar volume increasing sharply after 1964. In
fact, in 1968, pension funds acquired more com
13
In s titu tio n a l Shareownership, a research report by the
mon stock than the remaining financial in s titu
New Y o rk Stock Exchange, 1964.
tions
14
and
foreigners,
as a group.
Investment
companies and life insurance companies were the
Securities and
next most im p o rta n t investors in corporate stock.
Stock Exchange,
Moreover, net acquisitions by all three types o f
p. 43.
Exchange Commission. 34th Annual
R eport (Washington, D. C., 1968), p. 3. Also, New York
1969 Fact Book (New Y ork, 1969),
23
ECONOMIC REVIEW
T A B LE VI
Net Change in Ownership o f Corporate Stock
1 9 6 0 -1 9 6 8
(Bil. o f $)
Type o f Buyer
1960
Private noninsured pension funds
Investment companies*
Life insurance companies
Property and casualty
insurance companies
Other financial in s titu tio n s !
Foreigners
Individuals
TOTAL
1961
1962
1963
1964
1966
1965
1967
1968
$1.9
1.0
0.3
$2.3
2.1
0.4
$2.2
0.9
0.4
$2.2
0.9
0.2
$2.2
0.7
0.5
$3.1
0.2
0.7
$3.7
1.2
0.3
$5.2
2.8
1.1
$ 6.1
2.9
1.3
0.3
0.2
0.2
2.0
0.3
0.3
0.3
2.6
0.2
0.4
0.1
3.4
0.2
0.5
0.2
4.3
0.2
0.5
0.4
2.4
0.2
0.7
- 0.5
- 4.3
0.5
0.6
0.3
4.9
0.4
1.0
0.8
8.7
1.0
1.3
2.3
15.7
$1.2
- $ 0 .3
-
$1.8
-
-
$3.0
$0.8
-
-
- $ 0 .2
-
-
-
$2.5
- $ 0.5
pension fund
reserves
$0.9
NOTE: Details may not add to totals because o f rounding. Totals include net
foreign stock issues.
* Open-end and closed-end.
t Includes state and local trust funds, mutual savings banks, and fraternal
organizations.
Source: Securities and Exchange Commission
offset a substantial part o f their direct stock sales
insured
by
amounted to $10.4 b illio n in 1968. A b o u t one-
acquiring
investment company
shares and
and
noninsured
corporate bonds, many o f which are convertible
half o f
into
corporate stocks.
com m on
stocks.
In
1968,
fo r example,
pension fund
reserves are invested in
Individuals also added about
individuals acquired $5.7 billion o f investment
$4.7
company
shares and $4.2 billio n o f corporate
Therefore, individuals' direct and indirect invest
bonds.
In contrast, individuals acquired o n ly
ment in the stock market may have actually risen
b illio n
to
private
life
insurance reserves.
$2.7 b illio n o f investment company shares and
because th e ir
$1.6 b illio n o f corporate bonds in 1967. In d iv id
investment companies and other financial in s titu
uals have also increased th e ir indirect investments
tions more than offset th e ir sales o f d ire ctly held
in corporate stocks in recent years. Specifically,
corporate stock.
they
indirect stock purchases through
have increased th e ir deposits in financial
institutions, such as life insurance companies and
Holdings o f Outstanding Stock. As shown in
pension funds, th a t invest heavily in corporate
Table V II, individuals held $582 b illio n , or 76
stocks.
individuals' additions to
percent, o f the corporate stock outstanding in
For example,
1968. A lthough
individuals were net sellers o f
15 Data are fro m the Securities and Exchange Commission
stocks in 1968, the dollar value o f th e ir stock
report "T h e Volum e and Com position o f Individuals'
holdings increased substantially because o f higher
Savings."
stock prices. During the 1960-1968 period, indi-
24
N O V E M B E R -D E C E M B E R 1969
T A B LE V II
Ownership o f Corporate Stock*
Yearend 1 9 6 0 -1 9 6 8
(Bil. o f $)
Private noninsured pension funds
Investment companies
Life insurance companies
Property and casualty
insurance companies
Banks
State and local trust funds
Foreigners
Individuals!
TOTAL
1960
1961
1962
1963
1964
1965
1966
1967
1968
$ 16.5
20.5
5.0
$ 22.9
29.3
6.3
$ 21.9
26.3
6.3
$ 27.7
30.8
7.1
$ 33.5
34.6
7.9
$ 39.7
41.2
9.1
$ 38.5
37.4
8.8
$ 49.5
51.0
10.8
$ 59.6
59.6
12.8
7.5
1.0
0.6
13.4
356.9
9.3
1.1
0.8
16.2
435.9
8.6
1.3
1.0
14.9
380.9
9.9
1.5
1.3
17.3
452.2
11.4
1.6
1.7
18.9
510.2
12.0
1.8
2.4
19.9
549.3
11.0
1.9
2.8
18.1
469.9
13.0
2.1
4.2
21.5
555.7
14.7
2.3
4.8
25.5
582.0
$421.2
$521.4
$461.0
$547.3
$619.2
$674.6
$587.3
$707.8
$761.3
NOTE: Details may n o t add to totals because o f rounding.
* Estimated market values o f preferred and common stock. Excludes investment
company shares but includes foreign issues outstanding in the United States,
t The term individuals includes fraternal organizations, certain trust funds, and
n o n p ro fit organizations.
Source: Securities and Exchange Commission
viduals' corporate stock holdings appreciated by
example, price appreciation o f stocks accounted
$177 b illio n .16
fo r
Investment companies held the next largest
dollar volume o f corporate stock. However, in
a much
greater
investment com pany
share
o f the grow th
of
holdings than o f pension
fund holdings. During the 1960-1968 period, the
1968, private noninsured pension funds held the
market value o f
same dollar volume o f stock as investment com
appreciated by $26.9 b illio n , w hile pension fund
investment company holdings
panies. The data reveal some interesting d iffe r
holdings appreciated by $16.2 billio n . That is, net
ences
acquisitions o f corporate stock accounted fo r a
over
tim e
between
pension funds and
holdings o f
private
investment companies. For
16 An approxim ation of the total appreciation of corpor
larger
share
of
the
grow th
of
pension fund
holdings than o f the grow th o f investment com
ate stocks equals the m arket value o f total outstanding
pany holdings. These differences, o f course, reflect
shares in 1968 (yearend), less the m arket value o f total
the d iffe re n t investment objectives o f pension
outstandings in 1959 (yearend), less net new issues. The
funds and some investment companies.
data used in this article were com piled by the SEC and
probably understate the m arket value o f equities because
of the methods o f com putation. A sim ilar, but not s tric tly
comparable, series appears in the Federal Reserve Sys
Property and casualty insurance companies and
life insurance companies accounted fo r slightly less
than 2 percent o f the corporate stock outstanding
tem's " F lo w o f Funds A cco u n ts." The values used fo r
in the 1960-1968 period. Banks and municipal
equities in the Flow o f Funds Accounts exceed those used
tru st funds accounted fo r the smallest proportions
by the SEC by a wide margin.
o f corporate stock holdings.
25
ECONOMIC REVIEW
T A B LE V III
Registered and Exempted Stock Exchanges
Registered
American Stock Exchange
Boston Stock Exchange
Chicago Board o f Trade
Cincinnati Stock Exchange
D e tro it Stock Exchange
Midwest Stock Exchange
National Stock Exchange
New Y o rk Stock Exchange
Pacific Coast Stock Exchange
Philadelphia-BaltimoreWashington Stock Exchange
Pittsburgh Stock Exchange
Salt Lake Stock Exchange
Spokane Stock Exchange
Exempted
International Stock Exchange
(form erly Colorado Springs Stock Exchange)
Honolulu Stock Exchange
Richmond Stock Exchange
THE MARKETPLACE
years. In 1968, the Am erican Stock Exchange
Corporate stocks are traded on organized stock
accounted fo r 17.7 percent o f the dollar value o f
exchanges or in the over-the-counter market. A t
all sales and 29.6 percent o f the volume o f shares
yearend 1968, there were thirteen stock exchanges
sold, an increase o f 8 percentage points and 7
registered under the Securities Exchange A c t o f
percentage points, respectively, over 1960 pro
1934 and three th at were exempt fro m registration
portions.
(see Table V I I I ) . 17 The New Y o rk Stock Ex
The over-the-counter (OTC) market consists o f
change (NYSE) is, o f course, the largest exchange.
a large number o f securities firm s located thro u g h
A t yearend 1968, the market value o f outstanding
o ut the c o u n try th a t act as brokers and dealers. (A
stocks listed on the NYSE amounted to $692.3
broker acts as an agent, whereas a dealer also buys
b illio n and constituted more than 90 percent of
and sells fo r his own account.) There are no recent
the market value o f stocks listed on all stock
data on the dollar value or volume o f shares traded
exchanges. In addition, the NYSE accounted fo r
in the OTC m arket.18 In
the bulk o f both the dollar value and share volume
Securities and Exchange Commission reported th a t
of sales effected on stock exchanges, although
OTC sales accounted fo r about 35 percent o f the
both proportions have been shrinking. For exam
dollar value o f stock transactions (OTC and all
ple, the NYSE accounted fo r 73.8 percent o f the
exchanges) and were equivalent to 75 percent o f
dollar value and 62.1 percent o f the volume o f
all exchange sales.19
1961, however, the
shares sold in 1968, down 10 percentage points
and 6 percentage points, respectively, fro m 1960
proportions. In contrast, trading a c tiv ity on the
American
Stock
Exchange, the second
largest
18
Some lim ite d data are available in Over-the-Counter
Markets Study, prepared by Booz, Allen, and Ham ilton,
Inc., fo r the National Association o f Securities Dealers,
Inc., August 22, 1966.
stock exchange, has picked up noticeably in recent
19
17During
fiscal
year
1968,
registration
Francisco M ining Exchange was term inated.
26
of
the
San
U. S., Congress, House, Securities and Exchange Com
mission, R eport o f Special S tudy o f Securities Markets,
Part 2, 1963, 88th Cong., 1st Sess., p. 714.
N O V E M B E R -D E C E M B E R 1969
C h a r t 2.
MA RK E T V A L U E and STOCK S A L E S V O L U M E *
B illio n s o f d o lla rs
* V o lu m e
o f s a le s
L a st e n try :
e ffe c te d
on
a ll
s to c k
exchanges;
d a ta
in c lu d e
r ig h t s
and w a rra n ts .
19 6 8
S o u rc e o f d a ta :
S e c u r itie s
a n d E x c h a n g e C o m m is s io n
During 1960-1968, trading
value o f stockholdings at the beginning and end o f
activity on all stock exchanges increased substan
the year). As shown in Chart 3, the a ctivity rate
tia lly , particularly in the last three years o f the
fo r
period. As shown in Chart 2, 5.4 billio n shares
funds) remained v irtu a lly unchanged during the
Trading A c tiv ity .
open-end
investment
companies
(mutual
were traded in 1968, or nearly fo u r times the
1960-1965 period and then increased sharply. In
volume traded in 1960. The m arket value o f the
1968, the mutual funds' a ctivity rate was nearly
b illio n . The
47 percent, or more than double the 1965 rate.
volume and dollar value of shares traded rose
The a ctivity rate o f member firm s o f the New
shares traded
in
1968 was $197
considerably more in the 1966-1968 period than
Y o rk Stock Exchange also increased appreciably
in previous years, largely reflecting the increased
after 1965, due in part to the influence o f trading
emphasis th a t financial institutions put on pe rfo r
by mutual funds. In 1968, the a ctivity rate on the
mance— buying and selling stocks to take advan
New Y o rk Stock Exchange was 22 percent. This
tage o f short-term price changes.
a ctivity rate was slightly lower than the rate in
The com m on stock a c tiv ity rates o f market
participants are another indicator o f trading activ
ity
and
also
reflect
recent
1960-1965
period.
During the
1960-1968
emphasis on
period, the a c tiv ity rate fo r other financial in s titu
performance. (The a ctivity rate is the average o f
tions (private noninsured pension funds, life insur
purchases and sales divided by the average market
ance companies, and property and casualty insur-
the
1967, b u t substantially higher than the average fo r
the
27
ECONOMIC REVIEW
C h a r t 3.
C O M M O N STOCK ACTIVITY RATES FOR S E LE C T E D F IN A N C IA L INSTITU TIO NS
P e rc e n t
60
50
40
30
20
10
AN N U ALLY
0
1
1
1960
* Da ta
’ 62
f o r O th e r F in a n c ia l
an d c a s u a lty
Last
I
1
I
I
I
---------------------- ----------------------- _____________ I_____________ _____________ I_____________ _____________ _____________ _____________ _____________ I_____________
e n tr y :
S o u r ce o f
in s u r a n c e
'6 4
In s t it u t io n s
a re th e
a v e ra g e
'6 6
o c t i v it y
ra te s
fo r p r iv a te
’ 68
n o n in s u r e d
p e n s io n
fu n d s , l if e
'7 0
in s u ra n c e
c o m p a n ie s ,
c o m p a n ie s .
1968
d a ta :
S e c u r itie s
and
E x c h a n g e C o m m is s io n
ance companies) averaged 12 percent, a rate th a t
to nearly one-third o f the total volume in 1966.
was substantially lower than the rate fo r mutual
NYSE member firm s accounted fo r the remaining
funds and fo r New Y o rk Stock Exchange firm s.
p ro p o rtio n o f the volume o f trading.
Data on dollar volume fo r selected dates in the
A NYSE study gives some indication about the
com position
of
trading
ex
1960-1966 period show sim ilar patterns to th a t o f
discloses th a t individuals
share volume. In 1966, individuals accounted fo r
accounted fo r the largest p roportion o f the volume
38 percent o f the dollar value o f transactions, and
o f shares traded on the Exchange on selected dates
financial
change.20 The study
a ctivity
on
th a t
in stitu tio n s and NYSE member firm s
in the 1952-1966 period. Nevertheless, the propor
accounted fo r 35 percent and 27 percent, respec
tio n o f trading volume accounted fo r by in d ivid
tive ly. In tu rn , mutual funds accounted fo r about
uals declined markedly over the period. In 1966,
one-fourth o f the in stitu tio n a l activity.
During the
fo r example, individuals accounted fo r 43 percent
1960-1968 period, stock market
of the volume, in contrast to about 57 percent in
credit, which is the am ount borrowed to finance
1952. On the other hand, financial in stitu tio n s'
stock transactions w ith New Y o rk Stock Exchange
share o f trading a ctivity increased about 8 percent
member firm s, also increased. In December 1966,
age points during the period studied and amounted
customers' net debit balances amounted to $5.3
21
90
"1 4 th Public Transaction Study, October 19, 1 9 6 6,"
New Y o rk Stock Exchange, 1967.
28 FRASER
Digitized for
Institu tio n a l A c tiv ity : Week o f October 24-28, 1966
on the New Y ork Stock Exchange," New Y o rk Stock
Exchange (July 1967).
N O V E M B E R -D E C E M B E R 1969
b illio n , or an increase o f 65 percent over Decem
the firs t quarter o f 1966.23 Since the firs t quarter
ber 1960. (Net debit balances exclude balances
o f 1966, the Dow Jones Industrial Average (repre
By
senting "b lu e c h ip " securities) has remained below
yearend 1968, customers' net debit balances had
secured
by
U. S. Government securities.)
the level reached in th a t quarter. In fact, in the
risen to $9.8 b illio n , or 85 percent greater than the
th ird quarter o f 1969, the Dow Jones Industrial
1966 level. As a general matter, the increases in
Average was substantially below the level o f the
stock m arket credit, a ctivity rates, and trading
firs t quarter o f 1966. If the recent emphasis on
volume are indicative o f the increased demand fo r
glamour stock issues is considered, the lackluster
corporate equities.
performance o f blue chip securities should not be
surprising. The New Y o rk Stock Exchange Com
RECENT PERFORMANCE OF
SELECTED INDEXES
posite
Index, w hich
measure
provides a comprehensive
o f all com m on
stocks listed
on the
It is reasonable to conclude th a t in recent years
Exchange, had the same general con to u r as, but
strong demands fo r equities, increased emphasis on
outperform ed, the Dow Jones Industrial Average.
performance, and other factors, such as the grow th
In the th ird quarter o f 1969, the New Y o rk Stock
o f corporate earnings, have benefited some groups
Exchange Index was 4 percent higher than the
of stocks more than others. To examine this p oint
level it had reached in the firs t quarter o f 1966.
in detail, the analysis focuses on developments
Unseasoned and somewhat speculative securi
since January 1966, when the Standard & Poor's
ties are fre q u e n tly associated w ith the American
Index reached an interim peak (see Chart 4).
on
Stock Exchange. During the 1966-1969 period,
The January 1966 peak ended a rise in the stock
the
market th a t began in 1962, and in the months
form ed the seasoned issues on the New Y ork
follo w in g the
peak, a substantial "c o rre c tio n ”
Stock Exchange by a wide margin. In the th ird
occurred. The market did not tu rn around u n til
quarter o f I969, the Am erican Stock Exchange
late 1966. Follow ing a marked recovery in stock
Index was 175 percent higher than its level in the
prices
during
1967, a fa irly
Exchange
Index
o u tp e r
sizable
firs t quarter o f 1966, 81 percentage points higher
than the Dow Jones Industrial Average, and 71
market advanced irregularly u n til late th a t year.
percentage points higher than the New Y o rk Stock
Stock prices moved in a narrow range in early
Exchange Index. The National Q uotation Bureau
1969
Index o f selected over-the-counter stocks almost
then
of
Stock
adjustment occurred early in 1968, and then the
and
most
Am erican
declined sharply, reaching an
interim low in August.
Chart 4 also shows how various segments o f the
23
The various indexes and averages were converted in to
an index using the firs t quarter o f 1966 as the base
stock m arket, measured by fo u r popular stock
period. Dow Jones Industrial Average is a weighted price
market indexes and averages, have performed since
average fo r 30 industrial stocks listed on the New Y o rk
Stock Exchange. National Q uotation Bureau Index repre
sents
price
averages
fo r
35 q u a lity
over-the-counter
industrial stocks. The New Y o rk Stock Exchange Index
22
See “ An Economic Evaluation o f the Stock M arket,”
includes all stocks listed on the exchange. The American
Economic Review, Federal Reserve Bank o f Cleveland,
Stock Exchange Index includes all stocks traded on the
August 1968.
exchange, expressed in dollars.
29
ECONOMIC REVIEW
C hart
4.
S T OCK M A R K E T I N D E X E S
INDEX 1941-43=10
130
110
90
70
M O N TH LY
50
in d e :
NATIONAL
Q U O T A T I O N BUREAU
'
N E W YORK
STOCK E X C H A N GE
D O W JO NES
Q U AR TER LY
1 966
L a s t e n try :
S o u rc e s
’ 67
'6 8
S e p t. '6 9 ; 3Q '6 9
o f d a ta :
B a r r o n 's
and
F e d e ra l
R e s e rv e
Bank
o f C le v e la n d
94
matched the performance o f the Am erican Stock
was the basis o f the popular "D o w T h e o ry ."^
Exchange Index in 1967, but was much lower than
There is some foundation fo r this belief. A study
the American Stock Exchange Index in the fo u rth
by the National Bureau o f Economic Research
quarter o f 1968 and the firs t three quarters of
reveals th a t stock prices led three-fourths o f the
1969.
business cycle turns during the 1871-1966 period,
In summary, the data suggest th a t in the
past few
years investors and speculators have
by an average (median) o f fo u r months.
favored unseasoned grow th stocks over the well-
oc
Exam ination o f stock market performance d u r
seasoned blue chips; th a t is, the emphasis was on
ing the 1960-1969 period, however, raises some
performance.
question
24
FACTORS AFFECTING
THE STOCK MARKET
Stock prices have been considered an indicator
about the use o f the
m arket as an
A discussion o f the origins of the Dow Theory can be
found in George L. Leffler and Loring C. Farwell, The
Stock M arket (New Y o rk: The Ronald Press Co., 1963),
pp. 534-535.
of business activity fo r many years. Specifically, it
25
is believed th a t changes in stock price averages
Business
anticipate changes in business activity. In fact, this
National Bureau o f Econom ic Research, 1967), p. 39.
30 FRASER
Digitized for
G eoffrey H. Moore and Julius Shiskin, Indicators o f
Expansions
and
Contractions
(New
Y o rk:
N O V E M B E R -D E C E M B E R 1969
economic indicator. As shown in Chart 4, the
stock market prices— the money and credit situa
Standard & Poor's Index, which is a broad measure
tio n ,
o f stock market a ctivity, rose at the end o f 1960,
psychology.
the
extent
of
in fla tio n ,
and
investor
There is some question if these factors can be
dipped noticeably in 1962, showed a brie f adjust
ment in 1965, declined sharply in 1966, showed
identified
precisely
enough to
avoid
m isinter
another brief adjustm ent in 1968, and declined
preting th e ir effects as a warning o f a change in
sharply in 1969. If stock prices are accepted as a
business a ctivity. One study attem pted to deter
reliable business indicator, the recent record w ould
mine the link between m onetary grow th and stock
suggest th a t there were six business recessions in
prices.26 It was found th a t changes in monetary
the last nine and a half years. During this period,
growth led changes in stock prices by about 15
how ever,
months before a bear market and by about 2
the
NBER
recognized
o n ly
one
the false
months before a bull m arket, over the long run.
signals in stock prices in 1962, 1965, 1966, 1968,
One way in w hich m onetary policy affects stock
recession— th a t
in
1960-1961.
Thus,
and 1969 should be explained in order to evaluate
prices is by influencing corporate cash flo w and,
the usefulness o f stock prices as an economic
u ltim a te ly, dividend payments.27
indicator.
TECHNICAL FACTORS IN
THE STOCK MARKET
Clearly,
developments
other
than
business
cycles can seriously affect stock m arket prices.
Many observers rely on technical indicators o f
Often, these developments are exogenous and/or
the stock m arket to help forecast the d irection and
noneconomic. Some o f the reasons given fo r stock
extent o f stock price movements. As discussed
market weakness in recent years can be used as
earlier, investor psychology, w hich is perhaps the
examples. Many observers believe th a t in 1962 the
single most im p o rta n t technical fa c to r affecting
market was in a technically weak position because
stock
o f high price-earnings ratios, a concurrent squeeze
cannot be measured precisely. In d ire ctly, however,
on corporate
profits, and dim inishing concern
about in fla tio n . A ll three factors tend to depress
m arket performance
in
the short term ,
investor psychology can be observed in short-term
changes in the level o f stock prices.
stock prices, other things being equal. The brief
Four w idely used technical indicators o f the
market dip in 1965 was also blamed on over
stock m arket are shown in Chart 5. The mutual
pricing, as well as public reaction to the increases
funds' cash ratio, w hich relates liq u id assets to
in United States m ilita ry strength in Vietnam. The
total (net) assets o f these institu tio n s, gives some
drop in stock m arket prices in 1966 coincided
indication o f the a b ility o f mutual funds to invest
w ith
in
a change in expectations about business
conditions and the now famous credit squeeze. It
the stock
m arket, w ith
a high cash ratio
2 6 Beryl W. Sprinkel, M oney and Stock Prices (Home
is generally held th a t the Vietnam situation caused
wood, Illinois: Richard D. Irw in, Inc. 1964). The d e fin i
the break in stock prices in early 1968 and th a t
tion o f the money stock used includes demand deposits
expectations about business and credit conditions
adjusted and currency (seasonally adjusted).
contributed to the sharp break in 1969. It appears
27
th a t at least three additional influences should be
Gramlich, "T h e Channels o f M onetary P o licy," Federal
considered when reviewing the recent behavior o f
Reserve B ulletin, June 1969, pp. 481-482.
See, fo r example, Frank de Leeuw and Edward M.
31
C h a r t 5.
STOCK MARKET TECHNICAL INDICATORS
IN D EX 1 9 4 1 - 4 3 = 10
L a s t e n t r y : S e p t. '6 9 ;
S o u rc e s
o f d a ta :
J u ly
'6 9 ; 3Q '6 9
B a r r o n 's ; In v e s tm e n t C o m p a n y I n s t i t u t e ;
S ta n d a r d &
P o o r's C o r p o r a tio n ; F e d e r a l
R e s e rv e B a n k o f C le v e la n d
N O V E M B E R -D E C E M B E R 1969
The short interest ratio relates the to ta l number
considered bullish fo r the market. There is little
doubt
th a t
m utual
funds and other financial
oo
of shares sold short on the New Y o rk Stock
As shown
Exchange to the average stock volume fo r about a
in Chart 5, there appears to be a strong inverse
30-day period (fo r example, February 15 to March
institutions can influence share prices.
relationship between the cash ratio and stock
15). The logic behind this technical indicator is
prices. That is, there is a tendency fo r the cash
th a t speculators and others sell stocks "s h o rt” at
ratio to decline when stock prices increase. The
high prices in anticipation o f buying them back at
peaks in the cash ratio in 1960, 1962, 1966, and
lower prices.
1968 coincided w ith the troughs in the Standard &
sold short atte m p t to maximize p ro fits (or m in i
Poor's Index, and the troughs in the cash ratio
mize losses) by buying stock— or covering short
almost coincide w ith the peaks in the Index.
on
When stock prices rise, those who
positions— at the lowest possible prices, w hich in
On balance, mutual funds are net buyers of
tu rn forces stock prices to rise fu rth e r. A short
common stocks, w hich lends support to a secular
interest ratio
rise in stock prices. Nevertheless, periodically the
bullish, and a ratio below 100 percent is consid
funds
are
net
sellers
of
stock.
During
above 150 percent is considered
the
ered bearish. As shown in Chart 5, there have been
1960-1968 period, mutual funds were net sellers in
wide swings in the level o f the short interest ratio
five o f the th irty -s ix quarters.29 Specifically, the
in recent years. Nevertheless, several im p o rta n t
funds were net sellers in the th ird quarter o f 1962,
features are clearly discernible. First, the peaks in
the th ird quarter o f 1966, the fo u rth quarter o f
the short interest ratio in 1960, 1962, 1966, 1968,
1967, the firs t quarter o f 1968, and the th ird
and 1969 v irtu a lly coincided w ith the low points
quarter o f 1968. The level o f stock prices declined
in the Standard & Poor's Index. In contrast, the
during three o f those five quarters. Moreover, fo u r
short interest ratio was o n ly bearish tw ice, signal
of the five quarters occurred in the last tw o years
ing the declines in the stock m arket in 1960 and
(1967 and 1968), reflecting the funds' increased
1962. The behavior o f the short interest ratio
willingness to trade stocks actively. Perhaps this
before the stock m arket declines in 1966, 1968,
also explains w hy the cash ratios o f mutual funds
and 1969 was, however, by no means bearish.
peaked at substantially higher levels in 1966 and
1968 than in earlier years.
The odd-lot ratio, w hich relates od d -lo t sales to
odd-lot purchases, is a th ird technical indicator.
Some stock market technicians believe th a t the
28
on
For discussions o f the effects o f in stitutio n a l investors
share prices, see Sidney
Robbins,
The Securities
Markets (New Y o rk: The Free Press, 1966), Chapter 7.
Also, U. S. Congress, House Com m ittee on Interstate and
Foreign Commerce, R eport o f Special S tudy o f Securities
small investors do the right things, b u t at the
wrong times. Available data do n o t com pletely
support th a t
position.
As shown
in
Chart 5,
odd-lotters bought when the Standard & Poor's
Markets o f the Securities and Exchange Commission, Part
Index declined in 1960, 1962, 1966, 1968, and
2, 88th Cong., 1st. Sess., 1963, Chapter 8.
1969. Moreover, they sold heavily in the early
oq
30
Data on net purchase o f common stock by mutual
A short sale is the sale o f a security that the seller does
funds are available in the 1969 M utual Fund Fact Book
not have, or a sale affected by the delivery o f a borrowed
(New Y o rk: Investment Company Institute, 1969), pp.
security. A t some tim e, the short seller must buy the
84-85.
stock, or deliver his own stock to cover the short position.
33
ECONOMIC REVIEW
stages o f the subsequent advance in stock prices,
the fo u rth quarter o f 1966, 34 times earnings one
particularly in 1963 and 1967. In the latter cases,
year later, and 11 times earnings in the fo u rth
it can be argued th a t small investors sold too soon
quarter o f 1968. More im p o rta n tly , price earnings
because the stock price index continued to rise
ratios measure risk, w ith high ratios suggesting
and the o dd-lot ratio declined. As shown in the
high risks. As shown in Chart 5, during the period
chart, the stock price index declined in the firs t
reviewed, there were wide swings in the level o f
half o f 1969. Thus, odd-lotters sold at the right
the price earnings ratio o f the Standard & Poor's
tim e in 1968.
500 Stock Index. In the th ird quarter o f 1969, the
The usefulness o f these three technical in d i
ratio was 17 times earnings, w hich was appreciably
cators as indicators o f changes in stock prices is
higher than the low o f 13.9 times earnings reached
questionable. Statistical analysis th a t used the
in
1966, b u t well below the record 23 times
mutual funds' cash ratio, the short interest ratio,
earnings reached in 1933 and, more recently, in
and the od d-lot ratio as independent variables and
1962.
the Standard & Poor's 500 Stock Index as the
CONCLUDING COMMENTS
dependent variable revealed little association be
tween stock prices and the technical indicators.
A nothe r technical indicator— the price earnings
ratio — shows
grow th
how
potential
some
of
investors appraise the
individual stocks.
In the
The fundam ental determ inant o f share prices is,
of course, supply and demand. During the 1960's,
the supply
of
new corporate stocks increased
moderately, w hile the demand fo r such instru
ments rose sharply; by d e fin itio n this resulted in
fo u rth quarter o f 1968, fo r example, investors
higher
paid an average o f 43 times earnings fo r office and
stemmed fro m the increased number o f in s titu
business equipm ent stocks and less than 12 times
tional investors th a t had become equity oriented.
levels
of
share
prices. Strong demand
earnings fo r retail food store stocks.31 Aside from
Underlying the demand fo r stocks was the w ide
the possibility th a t one group o f stocks may have
spread belief th a t corporate stocks are a good
been overvalued and the other undervalued, these
hedge against in fla tio n and o ffe r exceptional op
ratios im p ly
portunities fo r capital gains. A long this line, there
o ffice
and
th a t
investors expected prices of
business stocks to
grow at a sub
has been considerable emphasis on performance in
stantially higher rate than retail food store stocks.
recent years. Equally im portant, this article was
In add ition,
investors' valuations o f the same
w ritte n against a background o f the longest eco
group o f stocks change over tim e. For example,
nomic expansion in United States history. Thus,
investors
nine times earnings fo r
continued economic grow th and higher corporate
autom obile stocks— excluding General M otors— in
earnings were im p o rta n t factors th a t influenced
paid
nearly
the demand fo r stocks. More subdued economic
31
The price earnings ratios are the high price earnings
growth
and
ratios o f the Standard & Poor's industry stocks fo r the
co n trib u te
fo u rth quarter o f 1968.
stocks.
34
price s ta b ility
to
in the fu tu re may
a slackening in the demand fo r
N O V E M B E R -D E C E M B E R 1969
RECENT ECONOMIC DEVELOPMENTS IN WEST GERMANY
In a relatively short tim e, West Germany has
June 1948. An overriding concern o f the national
emerged from a state o f collapse at the end o f
government since then has been to preserve the
W orld
the strongest economy in
sta b ility o f the Deutschemark to avoid a repetition
War
II
w ith
Europe. Rapid economic growth, accompanied by
o f the runaway in fla tio n th a t had severely dis
exceptional s ta b ility in domestic prices, enabled
rupted the German economy after both w o rld
West German businesses to improve th e ir e ffi
wars. The exte n t to w hich this public po licy has
ciency and compete effectively in foreign markets.
been successful is illustrated by the performance
The nation's balance o f payments has generally
of the nation's cost o f living index shown
shown large surpluses. In addition, massive inflow s
Chart 1. From 1949 to 1968, the West German
o f short-term capital have periodically threatened
cost o f living rose 37 percent, or 1.7 percent a
in
to add to domestic infla tio n a ry pressures, often at
year. (This compares w ith an average annual rate
critical economic and political junctures. Reflect
o f increase o f just over 2 percent in the United
ing the high national p rio rity on m aintaining price
States Consumer Price
stability, the West German authorities raised the
period.) Average annual rates o f gain in industrial
Index during the same
exchange parity o f the Deutschemark in 1961 and
wholesale prices and e xp o rt prices were even
again in October 1969. This article traces the
smaller, am ounting to slightly more than 1 per
economic developments th a t have contributed to
cent.
the persistent and, at times, outstanding strength
The d iffic u ltie s o f keeping in fla tio n in check
o f the West German economy and considers some
w hile prom oting high rates o f grow th since W orld
im plications o f the latest revaluation.
War II have been readily apparent in many major
PRICE STABILITY AND
ECONOMIC GROWTH
nation's real Gross National Product (GNP) rose
industrial
countries,
including
Germany.
The
by an impressive average o f nearly 4 1/2 percent a
West Germany's rapid economic recovery in the
year between 1950 and 1968, b u t GNP tended to
postwar period began w ith a currency reform in
fo llo w a cyclical pattern th a t averaged fo u r to five
35
ECONOMIC REVIEW
C h a r t 1.
WE ST G E R M A N Y : PRICES, E A R N I N G S , and O U TPU T
IN D E X 1 9 5 8 = 1 0 0
L a s t e n tr y :
2Q '6 9
S o u rc e o f d a ta :
I n t e r n a t io n a l M o n e ta r y Fund
years in length. The cyclical pattern was,in part,
a b ility o f West Germany to attra ct and absorb
the result o f public policy actions to counter the
large numbers o f workers from Southern E u ro p e -
recurring emergence o f in fla tio n a ry pressures. For
over 1.3 m illio n at the seasonal peak in both 1966
example, grow th in industrial production leveled
and 1969, or 6 percent o f the to ta l labor fo rce —
in 1953 and 1958 as a result of rigorous d e fla tio n
has not prevented large increases in wage rates.
The existence o f this reservoir o f foreign labor
ary policies designed to restore domestic sta b ility
(see Chart
1).
A
sim ilar plateau
in industrial
partly explains w h y Germany can operate at much
lower average rates o f unem ploym ent than other
o u tp u t is apparent in 1966-1967.
U n til 1955, postwar increases in West German
industrialized countries before pressures on avail
wages were fa irly moderate and were held down in
able resources become a serious problem. That is,
part
persons and
the to ta l supply o f labor in West Germany has
Eastern Europe th a t prevented an
tended to be more elastic than in most other
early occurrence o f labor shortages. A t first, wage
industrial countries. West German officials regard
gains more or less kept pace w ith advances in
an
p ro d u c tiv ity and thus did not constitute an infla
indication
1
reached.
by
the
refugees fro m
tio n a ry
threat.
in flu x
o f displaced
Since 1955, however, wage in
unem ploym ent
creases have averaged almost 8 percent a year,
i
outstripping annual gains in o u tp u t per employee
ton,
by a substantial margin. In more recent years, the
307-309.
36FRASER
Digitized for
th a t
rate o f 0.8
fu ll
percent as an
em ploym ent
has
been
Edward F. Denison, Why G row th Rates D iffe r (Washing
D.
C.:
The
Brookings
In stitu tio n ,
1967),
pp.
N O V E M B E R -D E C E M B E R 1969
West Germany
Percent D istrib u tio n o f Gross National Product
at Current Prices
1961-1968
GNP by Sectors
1961
1962
1963
1964
1965
1966
1967
Consumer expenditures
Government current expenditures
Gross domestic fixed investment
Private
General government
Change in inventories
Exports of goods and services
Less: Im ports o f goods and services
57.3%
14.1
24.7
(21.3)
( 3.5)
1.8
20.2
18.1
57.6%
15.0
25.4
(21.4)
( 4.0)
1.0
19.4
18.4
57.2%
15.7
25.2
(20.9)
( 4.4)
0.6
19.9
18.5
56.3%
14.9
26.4
(21.7)
( 4.6)
1.1
20.2
18.9
56.5%
15.4
26.3
(21.8)
( 4.5)
2.0
20.2
20.3
57.2%
15.7
25.4
(21.1)
( 4.2)
0.4
21.4
20.1
58.0%
16.6
22.8
(18.8)
( 4.0)
- 0 .7
23.0
19.6
56.2%
15.7
23.1
n.a.
n.a.
1.6
23.8
20.3
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
326.2
354.5
377.6
413.8
452.7
480.8
485.1
528.8
Total GNP
GNP in billions o f Deutschemarks
1968
n.a. Not available.
Sources: Bundesbank, Reports fo r the years 1967 and 1968 and Organization fo r
Economic Cooperation and Development, National Accounts o f OECD
Countries, 1958-1967
A lthough
the
increase
in
the
number
of
employed persons was the major source o f eco
United States or the other major countries o f
o
Europe.
The higher rate o f business
western
nomic grow th in West Germany between 1950 and
investment enabled West Germany to reduce the
1955, since then, capital investment in plant and
average age o f its capital equipm ent to a greater
o
Gross
extent than in the United States,4 and the more
fix e d c a p ita l f o r m a t io n has g e n e ra lly e xce e de d 25
m o d e rn p la n ts in tu r n have probably im p ro v e d th e
equipm ent has assumed the dom inant role.
percent o f GNP (see table). If, fo r the sake o f
co u n try's p ro d u c tiv ity relative to th a t o f other
com parability w ith United States statistics, govern
countries.
ment investment is excluded, the average annual
ratio was 21 percent o f GNP fro m 1961 to 1967
FINANCIAL INVESTMENT
A second aim o f recent financial public policy
(latest data available); the United States ratio
this tim e.
in West Germany— second to the maintenance o f
Residential structures accounted fo r 5/4 percent,
price s ta b ility — has been to ensure adequate fin a n
on average, o f total capital investment in West
cing fo r the high rate o f capital investment and the
Germany, compared w ith 4 percent in the United
expansion o f production. Nevertheless, the greater
averaged
about
14
percent
during
States. Investment in business plant and equip
part o f business investment was financed through
ment, particularly after 1955, contributed more to
depreciation
and
retained earnings. During the
economic grow th in West Germany than in the
3
Denison, op. cit., pp. 310-328.
2
Annual Econom ic R eport o f the Federal Government
fo r 1969, the Federal Republic of Germany, Bonn, 1969.
4 lb id., p. 147.
37
ECONOMIC REVIEW
1960's, fo r example, gross savings o f businesses,
The West German banks are also im p o rta n t as
including depreciation allowances, equaled more
underw riters and traders in securities. They both
than 70 percent o f tota l business investment. In
buy or sell securities fo r th e ir customers and trade
1967, gross business savings exceeded total busi
fo r th e ir own accounts; the banks are also free to
ness investm ent.5 Fiscal incentives fo r businesses
purchase an ownership participation in a nonfinan-
to provide fo r the expansion o f capacity o u t o f
cial co rp o ra tio n .6 In flo a tin g new capital issues,
their own resources were im portant factors. On
underw riting syndicates are headed by a bank and
the other hand, because labor costs have risen
joined by other banks to d istribute the new shares.
faster than p ro d u ctivity since 1955, p ro fit margins
However, there are a number o f practical d iffic u l
have been eroded; this, along w ith other develop
ties in raising new capital through stock issues, one
ments including some tax changes, tended to hold
being the comparative thinness o f the West Ger
down the grow th in retained earnings and th re a t
man stock markets. Therefore, direct bank fin a n
ened to c u t back this type o f financing corporate
cing
investment.
business funds to be used fo r additions to produc
The large dollar volum e o f consumer savings,
remains
as the chief external source o f
tive capacity.
typical o f many European countries, constitutes a
potential source o f business investment funds, but
FISCAL AND MONETARY POLICY
the greater part o f personal savings finds its way
Since 1961, fiscal and m onetary policy in West
into the deposits o f financial in stitu tio n s rather
Germany have shared the long-term goal o f pro
than
being placed d ire c tly
in to
the securities
m oting rapid but stable grow th in a free m arket
markets. Recently, individuals have placed some o f
e c o n o m y . H o w e v e r, o n o c c a s io n , th e re have been
their savings in investment funds th a t specialize in
conflicts between the tw o types o f policies in the
West German fixed interest securities, b u t personal
short run. Such a c o n flic t arose between 1965 and
savings are usually deposited in savings banks th a t
the second quarter o f 1967. Federal taxes were cut
tra d itio n a lly do n o t lend d ire ctly to industry. In
and expenditures increased fo r the election year o f
contrast, commercial banks provide large amounts
1965, even though an economic boom had pre
o f capital to industry, not only by making bank
vailed th roughout 1964. In contrast, the Bundes
loans b ut also by purchasing an equity interest in
bank (the West German central bank) pursued a
industrial enterprises. Some savings are placed in
restrictive
m onetary
p o licy
th ro u g h o u t
1965.
tim e deposits at commercial banks, although the
Rediscount quotas fo r commercial banks were
largest owners o f such deposits are corporations.
reduced, and both the bank rate and the Lombard
In fact, tim e and savings deposits constitute over
rate at w hich the Bundesbank purchases securities
70 percent o f total bank deposits and help to
from the commercial banks were raised. However,
explain the relatively long-term com m itm ents the
the Bundesbank found th a t cre d it policy measures
banks make in financing business and industry.
were being "th w a rte d by trends in the public
5"O EC D Econom ic Surveys: G erm any," Organization fo r
6 David E. Spray, E ditor, The Principal Stock Exchanges
Economic
o f the W orld (Washington, D. C.: International Economic
Cooperation and Development, Paris, A p ril
1969, p. 42.
33
Publishers, Inc., 1964), pp. 117-140.
N O V E M B E R -D E C E M B E R 1969
finances" th a t tended to delay cre d it restraint,7
Thus, from 1965 to early 1967, fiscal actions,
and the commercial banks were able to expand
especially at the state and local government levels,
credit at a rapid
strong
tended to accentuate the business cycle. W ith the
demand. A t the same tim e, the money supply
adoption o f the Law fo r Prom oting S ta b ility and
increased
rate,
more slow ly
in
in
response to
1965 than in 1964
G rowth
of
the
Economy
in June
1967, the
because an overall balance of payments d e fic it
government obtained a number o f instruments
depleted foreign currency balances held by West
th a t enabled it to give greater counter-cyclical
German banks.
fle x ib ility to both fiscal and m onetary p o lic y .8
During 1966, the effects o f fiscal and m onetary
policy were reversed. The federal spending stim u
BALANCE OF PAYMENTS
lus to the economy was progressively reduced
The success o f m onetary and fiscal policy in
during the year. The Bundesbank continued to act
prom oting relative price s ta b ility, as well as condi
during the
1966 to contain the
tions favorable to rapid economic grow th, has
in flationary pressures th a t persisted. As late as
firs t half o f
contributed to large and persistent surpluses in
May 27, 1966, the Bundesbank raised its bank rate
West Germany's merchandise trade w ith the rest o f
by a fu ll percentage p o in t to 5 percent. Market
the w orld. T hat is, the surpluses reflect the a b ility
interest rates peaked around m id -1966. The com
o f the West German economy to produce large
bined fiscal and m onetary restraint culm inated in a
quantities o f q u a lity goods at attractive prices. In
recession th a t reached a trough in the firs t half o f
turn, the overall balance o f payments has derived
1967.
much o f its strength fro m the trade surpluses (see
In the second half o f 1966, the West German
Chart 2).
balance o f payments moved into surplus as the
trade balance recovered sharply, and the Bundes
The service account, w hich
was in surplus
during the 1950's, has since reflected net outpay
bank allowed the resulting increase in commercial
ments. Transfer payments have shown a fa irly
bank
through the economy
substantial d e fic it since 1953 fo r several reasons.
liq u id ity
to
w o rk
instead o f neutralizing the increase in available
West Germany paid large sums under W orld War II
funds. However, the banks were slow to react to
indem nification agreements w ith European coun
the increase in th e ir lending capacity; as a result,
tries and international organizations; u n til 1965,
the Bundesbank gave an overt indication o f a
payments were made under an agreement w ith
reducing bank
Israel fo r re stitu tio n to individuals. The payments
reserve requirements in December 1966 and again
made under the Common A gricultural Policy o f
in February-March
change in
m onetary
po licy
by
1967. Between January and
the European Economic C om m unity (EEC) have
May 1967, the Bundesbank also reduced the bank
also added to the d e fic it in recent years. F urther
rate in fo u r stages o f one-half o f 1 percent to a
more,
level o f 3 percent.
workers employed in West Germany have tended
7R eport o f the Deutsche Bundesbank fo r the Year 1965,
F ra n kfu rt, 1966, p. 22.
the
homeward
remittances
of
foreign
O
Report o f the Deutsche Bundesbank fo r the Year 1967,
F ra n kfu rt, 1968, p. 25.
39
ECONOMIC REVIEW
C hort 2.
WEST G E R M A N Y : B A L A N C E of P A Y M E N T S
B illio n s
o f D e u ts c h e m o rk s
+20 --------------------------------------------------------------
-10
■
C U RREN T A C C O U N T
E3
LONG- TERM CAPI TAL
-
A N N U A LLY
-15 ----------------------------------------------------------------------------------------------------------------------------------------------------------------------1950
’52
’54
’56
’58
'60
’62
’64
'66
'68
L o s t e n tr y :
1968
S o u rc e o f d a ta :
D e u ts c h e B u n d e s b a n k
to be very large. On the other hand, the balance o f
man merchandise trade surplus has been the main
payments (and the federal budget) has benefited
factor
in the postwar buildup o f the nation's
because a major part o f West Germany's defense
officia l reserves and has had an im p o rta n t in flu
costs are borne by
ence on short-term capital movements. The up
its partners in the N orth
A tla n tic Treaty Organization.
ward revaluation o f the Deutschemark in March
In regard to capital flows in the balance o f
1961 was intended to reduce domestic in fla tio n a ry
payments, long-term capital moved o u t o f West
pressures (1) by encouraging im ports and (2) by
Germany in 16 o f the 19 years between 1950 and
discouraging
1968, m ainly because o f large outflow s o f o fficia l
short-term capital th a t had surged in 1960. The
funds to other countries. Short-term capital move
response o f merchandise trade to the 1961 revalua
ments
both
exports
and the in flo w
of
fo r
tio n can be seen in the to p panel o f Chart 3.
example, short-term flows swung from an o u tflo w
Specifically, in 1962, the value o f im ports rose by
of over 6 b illio n D.M. in 1967 to an in flo w o f
5 b illio n D.M., or about 3 1/2 b illio n D.M. more than
nearly 5 billion D.M. in 1968. As a result o f all
in 1961; at the same tim e, exports rose o n ly 2
balance o f payments transactions, West German
b illio n
D.M., compared w ith an increase o f 3
officia l reserves (including gold, foreign exchange,
b illio n
D.M.
and the IMF position) have increased since 1950,
capital flowed o u t o f West Germany in 1962.
have
tended
to
be very
volatile;
reaching a level o f $12 b illio n by September 1969.
Merchandise Trade. The persistent West Ger
40 FRASER
Digitized for
in
1961.
In a ddition, short-term
U n fortunately, the effects o f the 1961 revalua
tio n gradually subsided during
1962.
In 1963,
N O V E M B E R -D E C E M B E R 1969
exports resumed a strong upward trend, w hile
C h a r t 3.
W ES T G E R M A N Y : M E R C H A N D I S E T R A D E
By A re a
B illio n s o f D e u ts c h e m a rk s
im ports increased
relatively little .
Even in the
domestic boom w hich ended in the firs t half o f
1966, im ports did not grow substantially. They
declined during the 1967 recession (see Chart 3).
On balance, in the past eight years im ports rose
faster than exports o n ly in 1965. Even at the very
high level o f economic a ctivity th a t was achieved
in 1968-1969, the accompanying substantial in
crease in im ports was outpaced by the rise in
exports. This occurred despite tax measures taken
in November 1968, th a t in effect taxed exports
and subsidized im ports. (The significance o f the
leveling in both exports and im ports in the th ird
quarter o f 1969 remains to be judged.)
The areas m ainly responsible fo r the recent
growth o f the West German trade surplus were the
European Free Trade Area and N orth America (see
Chart 3). W ithin the E FT A , West Germany in
creased its trade surpluses w ith , in descending
order o f increase, Switzerland, Portugal, and the
United Kingdom. The increase in West Germany's
surplus w ith
N orth
Am erica was concentrated
entirely in trade w ith the United States.
The
Bank
fo r
recently
concluded
German
exports
in
International
Settlements
th a t the strength
1968 largely
in West
reflected
an
unexpected expansion o f w orld demand during the
year.9 The overall
demand arose p a rtly
from
abnormal influences, including the threatened and
actual strikes in U nited States metals industries, a
spurt in British consumer spending before the
United Kingdom 's fiscal restraints were imposed
early
in the year, and a steep rise in French
im ports in the second half o f 1968. The rapid
expansion o f w o rld economic a ctivity in general
Last e n try :
9 T hirty-N in th A nnual Report, A p ril 1, 1968-March 31,
1 96 8
S o u rc e o f d a ta :
D e u ts c h e B u n d e s b a n k
1969, Bank fo r International Settlements, Basel, 1969,
p. 8.
41
ECONOMIC REVIEW
intensified
demand
fo r West German exports.
C h a rt 4.
Speculation in the fo u rth quarter o f 1968 about
an upward revaluation o f the Deutschemark added
impetus to rising exports. Moreover, as mentioned
earlier,
the
announcement o f the e xp o rt tax
EX POR T PRICES of M A J O R I NDUSTRI AL
COUNTRI ES
In T e rm s o f U n ite d S ta te s D o lla r s
IND EX 1 9 6 3 = 1 0 0
speeded up export deliveries from West Germany
tow ard the end o f the year; in turn, exports
dropped
sharply,
b u t tem porarily, in the firs t
quarter o f 1969.
The general expansion in w orld trade has been
o f more benefit to West Germany than any other
major exporter because o f the greater com petitive
ness o f the nation's industry. In 1968, the produc
tiv ity
gains th a t accompanied the
increase in
o u tp u t exceeded the rise in labor costs, and much
higher profits per u n it o f o u tp u t were realized
10
during the year.
In addition, industrial w hole
sale prices and export prices declined in the firs t
L a st e n tr y :
half (see Chart 1). A d m itte d ly , Chart 4 shows th a t
S o u rc e o f d a ta :
2Q ’ 69
In te r n a t io n a l M o n e ta r y
Fund
export prices o f the United Kingdom and Italy
(expressed in terms o f United States dollars and
computed as an index) declined to a greater extent
step.
In
late
1967
and
1968,
West German
in early 1968 (compared w ith 1967) than West
production revived strongly, m ainly because o f the
Germany's, b u t the British price changes reflected
surge in exports. The resulting rise in incomes
the devaluation o f the pound in November 1967.
helped m aintain strong economic a c tiv ity in the
By the second quarter o f 1969, o nly West German
election
and B ritish e xport prices had not surpassed the
situation
levels th a t existed in 1966 and early 1967.
period th a t preceded the national elections in
PRESSURES IN FOREIGN
EXCHANGE MARKETS
fiscal policy had been altered after the passage o f
year o f
in
1969.
In some respects, the
1968-1969
resembled th a t o f the
1964-1965, b u t the design and im plem entation o f
the S ta b ility
and
G row th
Law
in
1967.
The
A critical period in international finance fo r
situation culm inated in an upward revaluation o f
West Germany and the rest o f the w orld began in
the Deutschemark in October 1969. Consequently,
1968 and continued in to 1969. The West German
it may be valuable to examine the West German
economy experienced a recession in 1966-1967,
economy and
and fiscal and m onetary policy began to move in
provide a meaningful background to the change in
public policy in some detail to
the parity value o f the mark.
10
O rganization fo r Economic Cooperation and Develop
ment, op. c it., p. 17.
42
Under the requirements o f the S ta b ility and
G row th Law, the federal and provincial authorities
N O V E M B E R -D E C E M B E R 1969
drew up fiscal plans th a t incorporated declining
May and June o f 1968 encouraged the rumors th a t
budget deficits after 1968. Moreover, the federal
the
budget fo r 1968, according to the OECD's assess
Deutschemark revalued.
French
franc w ould
be devalued and the
ment, turned o u t to be "neutral or even slightly
West German o fficia ls convened a meeting o f
restrictive” in im pact, even though more unused
the Group o f Ten ministers in Bonn in November
productive capacity was available than
1968 in an a ttem pt to resolve the foreign exchange
previous economic expansion in 1964.
in the
11
crisis th a t had developed in Europe. The day
The Bundesbank was in accord w ith this fiscal
before the conference convened, the West German
policy, and m onetary policy was varied in line
government
w ith changes in the domestic economy. To acceler
taxes on exports o f nonagricultural products.
ate the recovery from
the same tim e, the m onetary authorities imposed a
the 1967 recession, the
Bundesbank had allowed an increase in the liq u id
100
announced
percent
reserve
adjustments
requirem ent
in
border
12
At
(noninterest
ity o f credit institution s in the firs t half o f 1968,
bearing) on new bank deposits owned by fo r
th a t m ainly originated fro m the large balance o f
eigners.
payments surplus. In the second half o f 1968
On November 23, 1968, French o fficia ls an
however, when a massive in flo w o f short-term
nounced th a t the franc w ould not be devalued.
capital developed in response to expectations o f a
This announcement and the West German border
revaluation and threatened the s ta b ility o f domes
tax adjustments quieted foreign exchange markets
tic costs and prices, the Bundesbank tried to check
fo r a short tim e. In fact, in December 1968 and to
the in flo w o f capital and encouraged the repatria
a much greater e xtent in January 1969, short-term
tion
funds le ft the c o u n try, probably moving in to the
of
foreign-owned
funds
th a t
had
been
deposited in West Germany.
E urodollar market. West German o ffic ia l reserves
were made to
actually declined in the firs t quarter o f 1969,
encourage additional long-term capital ou tflo w s
reflecting capital o u tflo w s and a tem porary decline
from West Germany. In the firs t nine months o f
in the merchandise trade surplus from the unusual
the year, the o u tflo w o f long-term capital v irtu a lly
level reached at the end o f 1968.
T hrou ghou t
1968,
attem pts
offset the combined current account surplus and
in flo w
o f short-term
nation's
o fficia l
capital.
reserves
Nevertheless, the
increased
during the
The West German authorities became increas
ingly concerned th a t in fla tio n w ould develop in
1969 as it had in 1965, even though the federal
period because o f enormous inflow s o f unrecorded
budget moved
funds. These funds probably were associated w ith
turers' new orders rose sharply through the firs t
rumors o f a revaluation o f the mark th a t were, in
quarter, outpacing industrial production and ship
turn ,
ments (see Chart 5). In a ddition, a substantial
based on
the continuing surge in West
in to surplus in 1969. Manufac
German exports and the rapid buildup o f official
signs o f weakness in the
12 According to a law o f December 1, 1968, w hich was to
French economy after the domestic disorders in
apply u n til March 31, 1970, a 4 percent rebate was
reserves.
A d ditional
allowed on im ports and a 4 percent special turnover tax
11
was to be imposed on exports. However, the exp o rt tax
Organization fo r Econom ic Cooperation and Develop
ment, op. cit., p. 12.
was n o t actually imposed u n til after December 22, 1968,
a concession th a t led to a surge in exports th a t m onth.
43
ECONOMIC REVIEW
aid and dire ct investment. Thus, capital exports
C h a rt 5.
had
WEST G E R M A N Y : N E W ORDERS and
had a "b o om erang" effect on the trade
balance.13 The Bundesbank also argued that, in
DE LI VE RI ES in M A N U F A C T U R I N G
view
IN D EX 1 9 6 3 = 1 0 0
o f domestic investment and consum ption
requirements, capital
o u tflo w s from West Ger
many were probably n o t sustainable in a size
sufficient to offset the basic trade surplus fo r the
long run. W ith these views, plus the central bank's
emphasis on m aintaining domestic price stability,
the Bundesbank appeared to favor revaluation o f
the
mark
in
preference to
a m ild
degree o f
domestic price in fla tio n to stim ulate im ports and
discourage exports. The M inister fo r Economic
L a s t e n tr y :
A u g . '6 9
S o u rc e o f d a ta :
and
O r g a n iz a t io n
A ffairs, w ho was one o f the leaders o f the Social
fo r E c o n o m ic C o o p e ra tio n
Democrat (SPD) m in o rity party in the coalition
D evelopm ent
government, also favored revaluation in 1969. On
the other hand, the Chancellor and the M inister
increase in the number o f foreign workers to a new
fo r
record level only pa rtly alleviated the growing
Democrat (CDU) m a jo rity party, firm ly opposed
Finance,
b oth
members
of
the
Christian
tightness in the labor market. The upward trend o f
revaluation.
wage and salary payments became steeper. There
crisis developed in late A p ril and early May, the
fore, in March 1969, the West German financial
West German
authorities
mark's pa rity value w ould not be changed.
demand
by
acted
in
concert
to
curb
internal
Thus,
when
another
international
Federal Cabinet decided th a t the
accelerating corporate tax prepay
The financial crisis abated, but the division o f
ments, deferring some federal expenditures, and
opinion among the West German authorities sug
cu ttin g rediscount quotas fo r commercial banks.
gested th a t the final revaluation decision had not
In m id-A pril, the Bundesbank raised both the bank
yet been made. However, the approach o f national
rate and the Lombard rate by a fu ll percentage
elections on September 28, 1969, precluded any
point. In order to reduce strains in the relatively
change in pa rity value u n til after th a t date. In the
th in
interim ,
capital
market,
new
foreign
issues were
postponed.
the
Bundesbank
tightened
monetary
policy fu rth e r by raising commercial bank reserve
The financial authorities also had to cope w ith
requirements on both June 1 and August 1, and by
the persistent strength in the balance o f payments,
increasing both the bank rate and the Lombard
reflecting a basic merchandise trade surplus. How
rate in July by a fu ll percentage p o in t to levels o f
ever, there were disagreements among the nation's
6 percent and 71/2 percent, respectively.
policym akers about the duration o f the payments
Widespread expectations o f a revaluation trig
surpluses. The Bundesbank held the view th a t
gered a heavy in flo w o f short-term funds in the
some West German merchandise exports were the
1^R e p ort o f the Deutsche Bundesbank fo r the Year 1968,
result o f ou tflow s o f capital in the fo rm o f foreign
F ra n kfu rt, 1969, p. 18.
44
N O V E M B E R -D E C E M B E R 1969
week
before the elections, and West German
persistent com petitive strength o f West Germany
foreign exchange markets were closed on Septem
as an exporter, the large and co n tin u in g trade
ber 26. Because neither the CDU nor the SPD
surplus, the recurring inflow s o f short-term capital,
received an absolute m a jo rity in the federal elec
and the growing pressure on domestic resources
tion,
argued
a new coalition
government had to
be
strongly
fo r
revaluation
on
economic
form ed. In the intervening period, the mark was
grounds. For example, in November 1968, condi
traded in the foreign exchange m arket w ith o u t
tions seemed very appropriate fo r raising the value
officia l support, and the exchange rate q u ic k ly
o f the mark because the West German economy
rose to a prem ium o f about 5 to 6 percent above
was experiencing a cyclical upswing.
the form er p a rity level. One o f the firs t actions o f
The use o f a flo a tin g rate in the fall o f 1969
the new coalition government th a t to o k office on
was a short-term expedient, b u t one th a t was
October 21 was to revalue the mark upward by 9.3
unpopular
percent, effective at m idnight October 26, 1969.
nations. Under the Common A gricultural Policy of
At
the EEC, a policy hammered o u t after years o f
its
new
value,
one
Deutschemark
equals
$0.27322 at par.
w ith
the
other
Common
M arket
negotiation, agricultural products were to be sold
The im mediate effects o f the revaluation were
at
prices
quoted
in
terms o f an unchanging
to trigger substantial outflo w s o f funds fro m West
comm on u n it o f account. The West German action
Germany and to introduce w hat appears to be a
seems to have undercut the com m on policy th a t
period
and sta b ility in in te r
had already been weakened by the effect o f the
national foreign exchange markets. The capital
French devaluation. Moreover, West Germany fe lt
of
relative calm
o u tflo w proceeded to such an exte n t th a t early in
it necessary to provide special compensation to its
November,
agricultural
in
an e ffo rt to
balance tightening
sector, w hich
w ould have suffered
liq u id ity pressures, the Bundesbank reduced the
from the revaluation in comparison w ith the other
m inim um
reserve
sectors o f the economy. Thus, the federal govern
banks by
an average of 10 percent; a sim ilar
requirem ent
fo r
commercial
ment imposed a tax
on
all
im ports
o f farm
reduction was put into effect in December. The
products, thereby o ffse ttin g the effects o f the
central bank also removed the 100 percent reserve
floating
rate o f exchange and protecting West
requirem ent on foreign-owned bank deposits. Effe
German farm income. In subsequent negotiations
ctive December 5, 1969, the Lombard rate was
w ith in the Common Market, adjustments through
increased
fro m
7%
percent to
9
percent to
discourage investment by the commercial banks in
the Eurodollar market; the bank rate was not
direct subsidies to West German farmers were
agreed upon.
Indeed, the revaluation o f the Deutschemark
seemingly was undertaken not o n ly as a means o f
changed.
easing tensions in international finance and trade,
THE IMPLICATIONS
OF REVALUATION
but also because this was the most effective way o f
pursuing the key West German objective o f in te r
In summary, the unwillingness to revalue the
nal price sta b ility. As in 1961, revaluation offered
Deutschemark before October 1969 seemed to
the prospect o f reducing pressures in the domestic
have been p o litica lly
economy w ith o u t producing severe deflation and
determined. That is, the
45
ECONOMIC REVIEW
the risk o f recession. The clear im plication is th a t
policies have w orked more harm oniously to coun
the maintenance o f price sta b ility continues to be
teract cyclical fluctuations. The prospects are fo r a
the guiding policy principle.
co n tinuation o f a high rate o f economic growth
The im mediate effect o f establishing a higher
under even more stable conditions than in the
parity fo r the Deutschemark has been to improve
past. In brief, unless the main trading nations o f
West German terms o f trade, autom atically raising
the w orld hasten to use the realignment o f the
the
as a whole.
value o f the mark to obtain lasting im provem ent in
underlying characteristics o f the
th e ir own trade positions, the whole problem o f
real
income
However, the
nation's economy
o f the co u n try
remain unchanged. Industry,
West Germany's surpluses may reoccur as it did
supported by high rates o f capital fo rm a tio n , w ill
after 1961. To preserve a reasonable e q u ilibrium in
probably
Over
international trade and w orld payments, the major
tim e, the means o f m obilizing and channeling the
nations w ill have to tr y to match, each taking
remain
com petitively
efficie n t.
large volumes o f personal savings in to productive
account o f its own circumstances, the success in
investment may improve further. Since the re
co n tro llin g in fla tio n th a t has been achieved in
design o f fiscal policy in 1967, fiscal and m onetary
West Germany.
NEW P UBLICA TION S
The second editions o f
Statistical Profile: Counties o f the Fourth Federal Reserve D istrict and
Statistical Profile: Standard Metropolitan Statistical Areas o f the Fourth Federal Reserve D istrict are
available from the Federal Reserve Bank o f Cleveland. Statistical Profile: Counties o f the Fourth Federal
Reserve D istrict presents data fo r all Fourth D istrict counties on population, em ploym ent, unem ploy
ment,
prod uction, d is trib u tio n , banking,
income, agriculture, natural
resources, and government.
Statistical Profile: Standard Metropolitan Statistical Areas o f the Fourth Federal Reserve D istrict presents
data fo r all Standard M etropolitan Statistical Areas in the F ourth D istrict on population, em ploym ent,
unem ploym ent, production, d istrib u tio n , construction, finance, income, government, and transportation.
Copies o f the books are available fro m the Research Departm ent o f the Federal Reserve Bank o f
Cleveland, P. 0 . Box 6387, Cleveland, Ohio 44101.
46FRASER
Digitized for
A N N U A L INDEX TO ECONOMIC R E V IEW -19 6 9
ARTICLE TITLE
MONTH
JA N U A R Y
Some Reflections on Recent M onetary Policy
Corporate Merger A c tiv ity in Selected F ourth D is tric t Cities, 1950— 1967
FEB R U A R Y
Much A do A b o u t International M onetary Reform
Money Market Instruments: Characteristics and Interest Rate Patterns
in the Current Economic Expansion
MARCH
Bank Merger A c tiv ity in the F ourth Federal Reserve D istrict, 1960— 1967
A Note on Corporate Merger A c tiv ity in Selected F ourth D istrict Cities, 1950— 1967
A P R IL
The Changing Structure o f Bank Holding Companies
The Paper and A llied Products Industry in the Fourth D istrict
MAY
Recent Economic Developments in the United Kingdom
Some Financial Aspects o f Corporate Merger A c tiv ity in the
Fourth Federal Reserve D istrict
JUNE
The Role o f U. S. Government Demand Deposits in the M onetary Process
Capital Spending in Major Areas o f the Fourth D istrict
JU LY
Negotiable Certificates o f Deposit
J o in t V enture A c tiv ity , 1960— 1968
AUGUST
Economic Trends and Fluctuations in a Heavy
Industry Area— The Case o f Cleveland
SEPTEMBER
Corporate Bonds, 1960— 1968
The Municipal Bond Market, 1960— 1968
OCTOBER
Regional Trends in Steel Production
Securities o f U. S. Government Agencies
NOVEM BERDECEMBER
Repurchase Agreements: Their Role in Dealer Financing and in M onetary Policy
Corporate Stocks
Recent Economic Developments in West Germany
Fourth
Federal
Reserve
District
@FedFRASER