Full text of Economic Review (Federal Reserve Bank of San Francisco) : October 1961

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TWELFTH

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1961

J n U l i ii *Qi5ue
Review of Business Conditions....................page 190
The Search For Certainty In An Uncertain World
PART III:

UTAH

The Present Position of Gold
and the D o lla r........................................page 197

EGON

C A LIF O R N IA



The Current Role of the Dollar
The /iBasic,/ Payments Deficit
Short-run Liquidity
Longer Term Liquidity
Summary and Conclusions

- J
A R IZO N A

NEVADA

Review of Business Conditions
G ains in the nu m b er at w ork w ere rep o rted
activity continued to ex p an d in
both the n atio n and the Tw elfth D istrict
for m etal and m achinery industries and in re­
during the latter p a rt of the sum m er, b u t the ta il tr a d e e s ta b lis h m e n ts . E m p lo y m e n t in
r a te o f e x p a n s io n w as le s s th a n in e a r lie r
financial business and state and local govern­
m onths. T he n atio n ’s o u tp u t of goods and
m ent rose to new highs. T h e seasonally ad ­
services rose $ 1 0 billion to a seasonally ad ­
justed rate of unem ploym ent stayed at 6.9
ju sted an n u al rate of $526 billion in the third
p ercen t in A ugust, m aintaining th e level es­
tablished last D ecem ber, b u t p relim in ary m idq u arter, according to a prelim inary estim ate
Septem ber d ata indicated a slight d ro p in the
by the D ep artm en t of C om m erce. T he in­
percentage unem ployed.
crease from the second to th ird q u arte r was
T h e v a lu e o f n ew c o n s tr u c tio n a c tiv ity
only tw o-thirds as large as the $15 billion
totaled $57.8 billion in A u g u st at a seasonally
gain from the first to second quarter, which
adjusted annual rate. This was dow n som e­
was a reco rd am ount for the first q u arte r of
w hat from July figures, b u t p relim inary d ata
any recovery in the postw ar period. P ersonal
indicate some increase in Septem ber. A ctivity
incom e, at a seasonally adjusted annual rate
in A u g u st was ab o u t 2 p ercen t above the av­
of $419.3 billion in A ugust, rose som ew hat
from July after su btraction of the special July
erage for the second q u arte r of this year and
equaled the reco rd high o f m id -1 9 59. H igh­
paym ent of dividends to holders of W orld
way construction increased for th e third co n ­
W ar II governm ent life insurance.
secutive m onth and residential building con­
Industrial p ro d u ctio n rose 1 index p o in t to
tinued the rise w hich began in M arch. O n the
113 percen t of the 1957 average in A ugust.
W hile this is a co n tinuation of the increase
negative side, construction of m ilitary facili­
from the low p o in t of 1 0 2 p ercen t recorded
ties declined som ew hat, follow ing a rise in
July. H ousing starts, as distinct from ex pend­
last w inter, it is the sm allest m o n th-to-m onth
itu r e s o n new r e s id e n tia l c o n s tr u c tio n ,
gain since M arch. G ains in the o u tp u t of com ­
m ercial and industrial eq u ip m en t and m a­
declined in A ugust and also fell below the
chinery w ere responsible for the bu lk of the
num ber in the sam e m o n th of 1960 fo r the
increase, while consum er goods p roduction
fir s t tim e in th r e e m o n th s . T h e A u g u s t d e ­
held steady at the record levels of July. M an u ­
clines occurred prim arily in th e N o rth east and
factu rers’ new ord ers and sales rose in A u ­
in the W est, while housing starts rose in the
gust above the July level, w ith m ost o f the
Southern an d N o rth C en tral regions. F ederal
industry groups except autom obiles c o n trib u t­
H o u sin g A d m in is tra tio n fo re c a s ts o f to ta l
ing to the gain. A utom obile sales fell in A u ­
h o u sin g sta rts fo r 1961 h av e b e e n rev ised
gust in anticip atio n of the early m odel changes
dow nw ard som ew hat to 1.3 m illion units but
this year, b u t d ealer inventories of new cars
rem ain ab o u t 3 p ercen t above last y e a r’s level.
at the end of the m onth w ere well below those
O utlays of business firms for new p la n t and
of A ugust 1960. T he auto m odel change­
equipm ent are expected to rise in the la st six
over, w ith its associated effects on steel and
m onths of this year above th e low secondo th er m aterials o u tp u t, also co n trib u ted to the
q u arte r levels. D ep artm en t of C om m erce es­
lack of change in the industrial production
tim ates indicate th a t in the th ird q u a rte r gains
index for Septem ber.
will be shown in outlays by p rim ary iron and
E m ploym ent in nonfarm business estab ­
steel producers, in all categories of n o n d u ra ­
lishm ents in the nation rose som ew hat in A u ­
ble goods m anufacture, no n rail tra n sp o rta ­
gust, despite reductions at autom obile plants
tio n , p u b lic u tilitie s , a n d a m is c e lla n e o u s
9 0FRASERassociated w ith the m odel change-over period.
g ro u p . C a p ita l s p e n d in g by d u r a b le g o o d s
Digitized 1
for

B

u s in e s s



October 1961

MONTHLY REVIEW

m an u factu rers as a w hole, how ever, are ex­
pected to show som e decline from the second
q u arter. Since spending in the first half of the
year was low er than had been anticpiated,
the earlier estim ate of $34.5 billion in total
capital spending for the year as a whole has
not been changed despite the increase m en­
tioned above.
R etail sales as a w hole rose 1 p ercen t in
A ugust, and d ep artm en t store sales rem ained
close to the high level reached in July. R etail
sales of autom obiles, how ever, fell in antici­
p ation o f the forthcom ing 1962 models. T o tal
consum er credit outstanding rose som ew hat
in A ugust over July, after seasonal ad ju st­
m ent. Instalm ent loans for autom obile p u r­
ch ases d eclin ed fu rth e r in A u g u st, b u t all
o th e r c o n su m e r lo an c a te g o rie s in c re ased .
A uto sales continued to lag badly in the first
tw o-thirds of Septem ber, b u t sales picked up
in the last third of the m onth and d ep artm en t
store sales also im proved.
The slack in over-all loan d em an d at com ­
m ercial banks has been m ainly offset by se­
curities acquisitions. T otal bank cred it de­
clined $300 million in A ugust, after a su b stan ­
tial rise in July in response to th a t m o n th ’s
T reasury financing operations. T o tal loans re­
m ained unchanged, while the A ugust decline
in th e U n ite d S tates G o v e rn m e n t secu rity
portfolios of banks was partly offset by an in­
crease in their holdings of oth er securities. N o
change occurred in the seasonally adjusted
m oney supply betw een the second half of July
and the second half of A ugust, but tim e d e­
posits rose substantially in A u g u st as in p re­
v ious m o n th s. L o a n s a d ju ste d an d in v e st­
m ents increased nearly $3 billion at weekly
reporting m em ber banks during Septem ber.
In late Septem ber banks bought large am ounts
of a new issue of tax anticipation bills, and
som e of the loan increase during the m onth
was associated with T reasu ry financing o p er­
atio n s. P re lim in a ry e stim a te s also in d ic a te
th afort the
m oney supply rose significantly in the
Digitized
FRASER


first half of Septem ber. M em ber b an k reserve
positions continued to be easy in A ugust and
Septem ber.
A fter the record p ace of co rp o rate offerings
in the first half of this year, the capital m ar­
kets have recently been d om inated by T rea s­
ury financing operations. In the last half of
Septem ber, the T reasu ry raised $2.5 billion
in new funds through the sale of tax anticipa­
tion bills and com pleted an exchange of two
w artim e “ ta p ” issues m aturing in 1970 and
1971 for reopened 3 Vi p ercen t bonds m a tu r­
ing in 1980, 1990, and 1998. O f the $7.6
billion of ou tstan d in g issues eligible for ex­
change, nearly one-half was converted into
the longer term securities, with the am ounts
ab o u t equally divided am ong the three ex­
change issues. O n S eptem ber 28, the T reas­
ury announced the sale on O ctober 11 of an
additional $ 2 billion of the outstanding 3Va
p ercen t T reasu ry notes which m ature M ay 15,
1963. A s a final step in its autu m n financing
program , the T reasu ry will offer $2 billion of
one-year T reasu ry bills to replace $1.5 billion
of outstanding one-year bills which m ature
on O cto b er 16. Y ields on m edium and long­
term T reasu ry bonds have been fairly stable
in recent weeks, while T reasu ry bill yields
have shown som e dow nw ard trend, reflecting
in p art the continued ease in m em ber bank
reserve positions.

District employment situation
improved in August
D istrict nonfarm em ploym ent rose nearly
one-half percent in A ugust, com pared with a
one-ten th p ercen t increase natio n ally .1 M an u ­
facturing em ploym ent was up 1.1 p ercen t for
the m onth, the largest gain in any industry,
category. G overnm ent and m ining em ploy­
m ent rose 0.5 percent, while trad e and finance
both gained 0.3 percent. E m ploym ent fell in
the construction and service industries, both
of which have been relatively w eak th ro u g h ­
out the entire recovery period. W ithin m anu1All employm ent data are seasonally adjusted.

FEDERAL RESERVE BANK OF SA N F R A N C IS C O

facturing, no n d u rab les em ploym ent registered
the sharpest advance, p artly reflecting recov­
ery from a n onseasonal decline the previous
m onth in the typically erratic food and kin­
d re d p r o d u c ts g ro u p . F a irly s h a rp g ain s
o ccu rred in tran sp o rta tio n eq u ip m en t and
fab ricated m etals, while lu m b er and w ood
products and nonelectrical m achinery w ere
the only groups to reco rd actual declines d u r­
ing the m onth.
E m ploym ent developm ents in th e D istrict
in A ugust m easu rab ly narro w ed the gap be­
tw e e n re g io n a l an d n a tio n a l e m p lo y m e n t
gains w hich has been a characteristic of the
recen t recovery. Since the tu rn aro u n d in gen­
eral business last F eb ru ary , nonfarm em ploy­
m ent nationally has risen half again as fast as
in the D istrict. A lthough the regional lag is
largely a reflection of slack in a few m anufac­
tu rin g industries, the D istrict’s construction,
finance, and m ining sectors have also fallen
behind the n atio n al pace. In A ugust, how ever,
m ost nonfarm em ploym ent categories showed
greater im provem ent in the D istrict th a n in
the n atio n as a whole.
In contrast, D istrict unem ploym ent— p a r­
ticularly in term s of the unem ploym ent rate
— show ed no im provem ent. A s of m id-A ugust, unem ploym ent in the three Pacific C oast
states was up 12 p ercen t from last F eb ru ary ,
com pared with only a 0.3 p ercen t increase
nationally. F ro m July to A ugust, unem ploy­
m ent in the D istrict rose nearly 3 percent,
m ore th an twice the relative gain in the nation
as a w hole. A t m id-m onth, the unem ploym ent
rate rem ained slightly above the 7 percent
level, co m p ared with 6.9 p ercen t nationally.
In A ugust, the U nited States B u reau of
E m ploym ent Security reclassified San Jose,
C alifornia from an area of substantial un em ­
ploym ent to one of m oderate unem ploym ent
(3 .0 to 5.9 p e rc e n t). T he im provem ent re­
su lte d p rim a rily fro m th e u su a l se a so n a l
expansion in food processing and an accel1 9for
2 FRASER
eration in du rab le goods m anufacturing, p arDigitized


D istrict rate of u n em p loym en t
e x c e e d s national rate
Percent

Seasonally A d j u s t e d

N ote: D ata represent unem ploym ent as a percentage of the
civilian labor force.
Source:U nited States D epartm ent of Labor and state departm ents
of employment.

ticularly o rd n an ce and electrical m achinery.
O f the fifteen m ajor lab o r m ark et areas in the
D istrict, 60 p ercen t w ere still classified in A u ­
gust as having substantial u n em p lo y m ent ( 6 . 0
to 8.9 p erce n t) co m p ared w ith 57 p ercen t for
the nation. Seventeen sm aller areas in the D is­
trict w ere sim ilarly classified; eight of these
w ere also designated as “ areas of substantial
and p ersistent un em p lo y m en t” and are eligi­
ble for assistance u n d er th e provisions of the
A rea R edevelopm ent A ct recently en acted by
Congress.

Construction contract aw ards
rose in August
T he dollar value o f co n stru ctio n contracts
a w a r d e d in th e D i s t r i c t d u r in g A u g u s t
am ounted to $665 million. T his w as 7 p ercen t
above A ugust 1960 co m p ared w ith an 8 p e r­
cent gain fo r the natio n . R esidential contracts
rose 6 p ercen t above A u g u st last y ear because
of increased co n tracts for m ulti-fam ily units.
C o n trary to the natio n al p a ttern , n onresidential activity also increased in the D istrict d u r­
ing A ugust, rising 7 p ercen t above the co r­
responding m onth of a y ear ago. In creased

October 1961

MONTHLY REVIEW

contracts for industrial building con trib u ted
m ost of the gain. F rom Jan u ary through A u ­
gust, the volum e of this type of co nstruction
has been m aintained at a relatively higher level
in the D istrict th an in the nation. H eavy en­
gineering activity rose 12 p ercen t above A u ­
gust 1960, owing to som e pickup in contracts
fo r both public w orks and utilities co n stru c­
tion.
A pplications for F H A m ortgage insurance
on new housing in the D istrict co n tin u ed to
increase in July. T he total n u m b er received
was alm ost one-third greater th an in July
1960, raising the y ear-to -d ate to tal 1 2 percent
above the corresponding 7 -m onth period last
year. L ater d a ta from several larger m etro­
p o litan areas suggest th a t the D istrict will
follow the national p a tte rn of increase in F H A
applications in A ugust.
L arger discounts on F H A -in su red m o rt­
gage have apparently been em erging in D is­
trict residential m ortgage m arkets. T he latest
survey by the F ederal H ousing A d m in istra­
tion in its W estern region, w hich includes
W yom ing and M ontana in addition to Tw elfth
D istrict states, showed th a t secondary m ar­
k et prices on F H A -in su red 5X
A p ercen t new
hom e m ortgages on S eptem ber 1 were slightly
below the A ugust level. Secondary m arket
purchases in the D istrict by the F ed eral N a­
tional M ortgage A ssociation picked up sh arp ­
ly in A ugust, although the increase was som e­
w hat less than th a t from July to A ugust 1960.

Lumber orders failed to pick up
in early September
New orders for D ouglas fir, w hich had
slipped perceptibly during the la tte r p a rt of
A ugust, failed to pick up during the first half
of Septem ber. A s a result, fir p ro d u ctio n co n ­
tinued to rem ain above the level of new busi­
ness. This is n o t uncom m on at this season,
b u t it is reported to have dim m ed the indus­
try ’s hopes for the rem ain d er of the year. F ir
inventories held steady during this period.
O rd ers
fo r w estern pine item s also lagged



through the first half of S eptem ber and con­
tinued to ru n below pine o u tp u t. L u m b er
prices continued to decline th ro u g h the last
half of A ugust, b u t by no m ore th a n the usual
seasonal am ount. A ccording to C row ’s lu m ­
b er price index, the average price fell by ap ­
proxim ately $0.50 during th e last two w eeks
of A ugust, w hich was in line w ith recen t expe­
rience. In early O ctober, prices for bo th fir
plyw ood ( Va -inch san d ed ) an d green fir lum ­
ber d ro p p ed significantly. T h e new $60 price
for plyw ood equaled the post-W orld W ar II
low reach ed early in 1961 and the $57 price
for green fir ran d o m length tw o-by-fours was
below the year-ago level. In bo th cases, the
price reduction reflects the m ark et effects of
a volum e of pro d u ctio n w hich has been con­
siderably in excess of d em an d in recent weeks.

District steel production down;
copper output up
Steel p ro d u ctio n in the Tw elfth D istrict for
the m onth of A ugust co n tinued its decline
from the high point in M ay, and w eekly fig­
ures indicated a fu rth er decrease fo r Septem ­
ber. H ow ever, a stronger d em an d from the
co nstruction industry resulted in the relight­
ing of a furnace by a m ajor p ro d u cer in n o rth ­
e rn C a lifo rn ia , w h ich w as re fle c te d in an
increase in W estern steel pro d u ctio n during
the w eek ended S eptem ber 23.
Shipm ents and new orders of copper fab ri­
cators reb o u n d ed sharply in A ugust from
July, and industry officials expect Septem ber
an d O ctober to show fu rth er increases. R e ­
fined copper p ro d u ctio n for A ugust was at its
highest level since M ay, while inventories in ­
creased fo r the first tim e this year in spite
of a rise in shipm ents from July. P roducers
and custom sm elters rep o rted th at the de­
m an d fo r co p p er eased som ew hat in Sep­
tem ber, b u t the price of refined copper held
steady at 31 cents p er pou n d . H ow ever, set­
tlem ent of lab o r disputes involving both do­
m estic and foreign m ine p roducers ap p ear to

193

FEDERAL RESERVE BANK OF SAN F R A N C IS C O
have co n trib u ted to th e series of reductions in
scrap copp er prices in recen t weeks.

D istrict new car re g istra tio n s

Retail sales generally continue to lag

T h o u sa n d * o f R e g is t r a t io n s

less than last year

Sales o f G ro u p I retail stores 1 in the Tw elfth
D istrict during July d ro p p ed 3 p ercen t from
Ju n e. H ow ever, for the second consecutive
m o n th they w ere above th e year-ago level.
T h e only types of stores w hich show ed in­
creases from Ju n e to July w ere eating and
drinking establishm ents and gasoline service
s ta tio n s , refle ctin g v a c a tio n sp e n d in g . D e­
creases fro m Ju n e levels w ere sp read am ong
all o th er types of retail establishm ents, al­
though h ard goods stores experienced sharper
declines th a n did others.
D istrict d ep artm en t store sales declined 6
p erce n t from July to A ugust, after adjustm ent
for seasonal factors. P relim inary figures taken
from the w eekly series indicate th a t Septem ­
ber d ep artm en t store sales rose m ore th an
seasonally. F o r the 4 w eeks en d ed S eptem ber
23, d ep artm en t store sales w ere 7 p ercen t
above the year-ago level in the D istrict com ­
p ared w ith 2 p ercen t nationally. In creased
sales w ere fairly general th ro u g h o ut the D is­
trict, although San D iego, S acram ento, Salt
L a k e C ity, an d S p o k an e h a d c o n sid e ra b ly
larg er th a n average gains.
N ew passenger car registrations in th e D is­
trict during July w ere at the low est m onthly
level since A pril, falling 8 p ercen t below the
Ju n e n u m b er and 2 p ercen t below July 1960.
C alifornia new car registrations in A ugust
w ere 14 p ercen t below the July daily average.
In the last tw o-thirds of A ugust, they fell to
the low est daily average since the end of Ja n u ­
ary of this year reflecting low inventories, and
consequently a lim ited selection, as well as an ­
ticipation of the new m odels.

Farm receipts continue to strengthen
F o r the th ird consecutive m onth, receipts
from m arketings by D istrict farm ers in July
‘ Stores of firms operating 1-10 stores at the time of the 1958

1 9FRASER
4
Census of Business.
Digitized for


w ere slig h tly h ig h e r th a n in c o m p a ra b le
m onths of 1960. N evertheless, receipts from
farm sales d uring the first seven m onths of
the year lagged behind the reco rd -setting pace
in 1960. B ased on S eptem ber 1 p ro d u ctio n
estim ates, cro p o u tp u t in th e D istrict is ex­
pected to be at least equal to th a t of 1960.
Such a large supply of crops m ay raise D istrict
farm m arketing receipts above th e $5 billion
level again this year.
S ubstantial an n u al increases in gross cash
incom e are necessary to offset th e effects o f a
steady rise in farm ers’ p ro d u ctio n expenses.
Since 1954, the p ro d u ctio n ex penditures of
D istrict farm ers have risen on the average
m ore th an $ 1 0 0 m illion p er year, w ith the
bulk of the increase going to n o n farm recipi­
ents. R ealized net incom e in 1960, despite
the rise in costs, was ab o u t th e sam e as in
1954. In the first seven m onths of 1961, cash
receipts of D istrict farm ers totaled $50 m il­
lion less th an in co m p arab le perio d last year.
W ith a continued rise in p ro d u ctio n costs and
low er cash incom e, farm ers have h ad to b o r­
row m ore heavily. In the first half of 1961,
the extension of p ro d u ctio n cred it loans to
farm ers by D istrict m em ber ban k s was $40

October 1961

MONTHLY REVIEW

m illion larger than in the corresponding peri­
od of 1960. In addition, the dollar volum e of
loans m ade by P roductio n C redit A ssociations
also was greater.

District bank loans have risen
from m id-year level
In the first two m onths of the third q u a r­
ter m em ber banks in the Tw elfth D istrict in­
creased their loans and investm ents by $544
million, about $ 2 0 m illion less than the ex­
p ansion in total bank credit in the co rresp o n d ­
ing period last year. T he distribution of the
increase betw een loans and investm ents, how ­
ever, clearly indicates the difference in busi­
ness c o n d itio n s th a t p re v a ile d in th e tw o
periods. This year, when business was ex p an d ­
ing in July and A ugust, m ore th an one-third
of the grow th in bank credit was accounted
for by loans, w hereas in the depressed condi­
tions of a year ago loans w ere responsible for
only 2 percent of the increase. D uring July
and A ugust of this year, there was little varia­
tion between reserve city and country banks
in the percentage increases in loans and in­
vestm ents. M em ber banks in A rizona, how ­
ever, had small declines in both loans and in­
vestm ents during this period.
D ata for w eekly reporting m em ber banks
in th e D istric t in d ic a te th a t lo a n volum e
continued to rise in the first three weeks in
Septem ber. E xcept for loans to dom estic com ­
m ercial banks, the increase was general, with
every loan category showing a gain. B orrow ­
ing to m e et m id -S e p te m b e r ta x p a y m e n ts
p robably accounted for a m ajo r p o rtio n of
the rise in business loans th a t o ccu rred just
p rio r to the m iddle of the m onth. D em ands
for funds by the food processing industry in
connection with the canning season was also
a supporting factor in the recent rise in busi­
ness borrow ing as was a m odest increase in
construction loans. T he increase in loans to
sales finance com panies th a t occu rred in the
week ended S eptem ber 20 is typical around

corporate tax dates as firms holding sales


finance com pany p ap er allow it to run off and
finance com panies tu rn to banks for tem p o ­
rary accom m odation.
In the first three w eeks of Septem ber, D is­
trict weekly reporting b anks increased th eir
to tal holdings of U nited States G overnm ent
securities as sales of T reasu ry bills were m ore
than offset by gains in holdings of certificates
of indebtedness, and of notes and bonds with
m aturities w ithin less th an one year. These
banks also added substantial am ounts to their
o th e r secu rity h o ld in g s. T h e la tte r actio n
p ro b ab ly reflects the b an k s’ desire to obtain
higher rates of retu rn on their investm ents as
a m eans of m eeting generally rising costs,
which have been accen tu ated by the increased
costs resulting from daily co m p u tatio n of in­
terest on tim e deposits.
T h a t banks in the D istrict had, on balance,
excess reserves during the first th ree weeks of
Septem ber was evidenced by the fact th a t they
w ere unusually heavy net sellers of F ederal
F unds. F o r several days in the w eek ended
Septem ber 13 net sales of F ed eral F unds by
D istrict banks w ere m ade in record am ount,
but the rates at which funds w ere sold aver­
aged only X
A to Vi. p ercen t below the discount

V o lu m e o f b a n k lo a n s c o m p a r a ­
t iv e ly s ta b le while investments rise
BilEiont of D o llart

N ote: D ata are for Twelfth D istrict weekly reporting member
banks.

195

FEDERAL RESERVE BANK OF SAN F R A N C IS C O
C H A N G E S IN S E L E C T E D B A LA N C E S H E E T IT E M S O F
W E E K L Y R E P O R T IN G M EM B ER B A N K S IN L E A D IN G C IT IE S
(dollar amounts in millions)
Twelfth District

From Aug. 23, 1961
to Sept. 20,1961
Dollars
Percent

j

From Sept. 21, 1960
to Sept. 20, 1961
Dollars
Percent

United States

From Aug. 23, 1961
to Sept. 20, 1961
Dollars
Percent

From Sept. 21, 1960
to Sept. 20,1961
Dollars
Percent

ASSETS:
Total loans and investments
Loans adjusted and investments!
Loans adjusted1
Commercial and industrial loans
Real estate loans
Agricultural loans
Loans tor purchasing and
carrying securities
Loans to non-bank financial
institutions
Loans to domestic commercial
banks
Loans to foreign banks
Other loans
U. S. Government securities
Other securities

1.53
1.46
1.18
1.79
0.41
1.48

+ 1872
+ 1876
+ 203
+
98
12
+
62

+ 379
+ 359
+ 182
+ 95
+ 22
+ 11

+
+
+
+
+
+

—

22

— 10.09

—

+

37

+

—

4.81

+

8.02
8 .1 5
1.31
1.84
0.22
8 .9 6

+ 1602
+ 16 9 6
+ 1321
— 372
+
88
+
29

+
+
+
—
+
+

20

___

9 .2 6

+

481

43

__

5 .0 6

+

+
+
+
+

—

1.39
1.48
1 .90
1.18
0.67
2 .6 0

+ 7631
+ 7779
+ 976
— 644
+ 249
+
78

+
+
+
—
+
+

+ 12.81

+

557

+ 1 5 .1 4

252

+

4 .9 5

—

669

— 11.13

6 .9 6
7 .1 9
1.39
2 .03
1.93
7.31

+ 20
+ 21
+ 19
+ 63
+ 114

+ 7.14
+ 11.54
+ 0 .6 0
+ 0.93
+ 5.01

—
4
+
4
+ 130
+ 1265
+ 408

_

1.32
+ 2.01
+ 4.27
+ 2 2 .6 4
+ 20 .5 7

—

94

+
+
—
+

1
29
141
516

—
+
+
—
+

6 ,6 0
0 .1 8
0 .1 8
0.42
4.61

— 148
— 141
+ 868
+ 4824
+ 1979

—
—
+
+
+

+ 176
+ 105
+ 64

+
+
+

+ 293
+ 1662
+ 954

+ 2 .5 9
+ 14.54
+ 10.06

+ 1286
+ 389
+ 148

+
+
+

2 .0 9
0 .9 6
0.51

+ 1521
+ 66 5 5
n.a.

+ 2 .4 9
+ 19.43
n.a.

10.01
2 0 .3 5
5 .6 4
17.01
2 0 .3 3

LIABILITIES:
Demand deposits adjusted
Time deposits
Savings accounts

1.54
0.81
0 .6 2

n.a. N ot available.
‘ Exclusive of loans to domestic commercial banks and after deduction of valuation reserves; individual loan items are shown gross.
Sources: Board of Governors of the Federal Reserve System and Federal Reserve Bank of San Francisco.

rate, indicating th a t D istrict banks w ere in a
c o n s id e ra b ly e a sie r reserv e p o s itio n th a n
banks in the rest of the nation. In the last p art
of the m onth, how ever, the reserve positions
o f D istrict b anks w ere less easy, and sales
and pu rch ases of F ed eral funds w ere m ore
nearly in balance.

Borrowing costs on business
loans decline
T h e q u a rte rly in te re s t ra te su rv ey c o n ­
ducted by the F ed eral R eserve B ank of San
F ran cisco in Septem ber disclosed som e d e­
cline from the second q u arter in the rate of
interest business firms paid fo r both short- and
long-term funds borrow ed from Tw elfth D is­
trict banks, b u t loans of m ore than one year
in m aturity accounted fo r alm ost all of the
d e c re a se . T h e u n w eig h ted av era g e in te re s t

ra te on short-term loans of one year and less
196


m ade during the first half of Septem ber was
5.34 percent, a decrease of 2 basic points
from the rate of 5.3 6 in June. T his contrasts
with the 8 basic p oint increase th a t o ccurred
in the second q u arter of 1961, b u t the aver­
age interest rate was still slightly above th a t
prevailing in M arch. A s in the second q u a r­
ter, nearly o ne-third o f the do llar am o u n t of
sh o rt-term loans was m ade at th e prim e rate
of 4V2 percent. T h e m ajor change in the p a t­
tern of rates was a decline in the p ro p o rtio n
of loans bearing rates over 6 p ercent. T he
average rate on business loans of over one
year fell from 5.51 p ercen t in Ju n e to 4.89
p ercen t in Septem ber. This change in the n o r­
m al interest relationship— low er in terest rates
on sh ort-term th an on long-term business b o r­
row ing— was acco u n ted for by the large per­
c e n ta g e o f lo n g -te rm lo a n s m ad e w ith 18
m o n th s’ m aturity at or n ear the p rim e rate.

October 1961

MONTHLY REVIEW

The Search for Certainty in
An Uncertain W orld
Part III
THE PRESENT POSITION OF GOLD AND THE DOLLAR
* S we have seen from the two preceding articles in this series , 1 gold evolved from a
m etal of prim arily orn am en tal value into the
predom inant m onetary stan d ard of value and
m edium of exchange bo th for internal and ex­
ternal transactions and then, m ore recently,
into its principal function today as p art of the
international paym ents system . G old serves
now m ore as a “ cu sh io n ” o r “ buffer” against
disturbances em an atin g from ab ro ad although
it still transm its in tern atio n al influences as it
did under the old gold stan d ard system. It
is now only one of several com ponents of the
international paym ents m echanism . T he U n it­
ed States dollar, the pou n d sterling, In te rn a ­
tional M onetary F u n d quotas and subsidiary
paym ents arrangem ents such as the E u ro p ean
Paym ents U nion have supplem ented gold in
providing international liquidity. A t the end
of June 1961, gold accounted for ap p ro x i­
m ately 55 percen t of total official holdings of
international reserves of m onetary authorities
and international institutions, com pared with
63 percent in 1951 and 76 percent at the end
of 1946. T hus gold has becom e a sm aller p art
of international reserves in the postw ar period.

THE CURRENT ROLE OF THE DOLLAR
Since the collapse of the gold stan d ard in
the 1930’s and particu larly after W orld W ar
II, the U nited States do llar — and to a lesser
extent the pound sterling — has constituted
the largest source of additions to international
liquid assets. Increases in the supply of gold
from new productio n , dishoarding, and R u s­
sian gold sales com bined have accounted for
l M onthly Review of the Federal Reserve Bank of San Francisco,

May and July 1961.


G old has becom e a sm a lle r part
of international reserves

a sm aller p ro p o rtio n of the increase in in ter­
national reserves th an dollars o r sterling. A t
the end of 1960, U nited States liabilities to
foreign official holders totaled alm ost $ 1 2
billion — o r m ore th a n half of the foreign
exchange reserves of foreign official institu­
tions, po u n d sterling com prised about 35 p er­
cent, and liabilities of others such as the B ank
for In tern atio n al Settlem ents and the E u ro ­
pean Paym ents U nion accounted for the rest.
The Intern atio n al M o netary F u n d held about
$11.7 billion in foreign exchange, m ore than
half consisting of convertible currencies. The
use of “key” currencies as in tern atio n al re­
serves and m eans of paym ent has p erm itted
econom ization of gold and the relatively
sm ooth expansion of w orld trade and p ro d u c­
tion. W ithin the past ten years, foreign offi­
cial dollar balances (excluding In ternational
M onetary F u n d holdings of do llars) have
risen by alm ost $ 8 billion while official gold

]97

FEDERAL RESERVE BANK OF SA N F R A N C IS C O

holdings increased by only $5 billion and
sterling balances declined by $1 billion. A t
the p resen t tim e, th e U n ited States d ollar is
m ore w idely held as official reserves th a n the
p o u n d sterling.
T h e d o llar is also used extensively in in te r­
n atio n al trad e an d fo r settlem ent of oth er
in tern atio n al paym ents. Since 1951, fo r ex­
am ple, private holders such as foreign co m ­
m ercial banks, businesses, and individuals
have added ab o u t $3.5 billion to th eir sh o rt­
term d o llar balances in this country fo r a
to tal of over $7 billion in sh o rt-term claim s
on U n ited States b anks at th e end of 1960.
D uring the sam e p erio d U nited K ingdom lia­
bilities to foreign nonofficial holders grew by
alm ost $2 billion to $3.8 billion, b u t $1 billion
of the increase o ccu rred in 1960 alone b e­
cause of the attractive yields obtainable in the
U nited K ingdom o n sh o rt-term m oney m arket
assets such as T reasu ry bills.
T h e rise of th e U nited States dollar to a
p osition of pre-em inence as an in tern atio n al
reserve currency in th e postw ar perio d was
m ade possible by the fact th a t this country
em erged from W o rld -W a r II econom ically
and politically strong an d physically u n ­
scathed. T he U n ited States is now the lead ­
ing in tern atio n al b an k er, providing bo th longand short-term finance to th e rest of the w orld,
and perform ing m any of the essential fu n c­
tions th a t the position of b an k er to th e w orld
entails. T h ere is an active foreign exchange
m a rk e t in N ew Y o rk w here all the m ajo r c u r­
rencies are boug h t an d sold; b an k ers’ accep t­
ance financing has increased sharply; U nited
S tates com m ercial ban k s have ex p an d ed th eir
foreign an d in tern atio n al operatio n s; and the
U nited States T rea su ry ’s policy of selling gold
to foreign official institutions at $35 p er fine
ounce is the corn ersto n e of in tern atio n al cu r­
rency stability. T he U nited States has sup­
p lanted the U nited K ingdom as the principal
supplier of capital to the w orld since the o u t­
flow fro m L o n d o n was significantly reduced
Digitized
198 for FRASER


U. S. d o lla r m ost w id e ly held
cu rren cy in official reserves

Source: International M onetary Fund.

by the loss of a large p o rtio n of th e U nited
K ingdom ’s overseas assets d uring W orld W ar
II. T his long-term cap ital has ta k e n th e form
of G overnm ent grants an d credits and private
investm ents. T he U nited States p o sitio n is
fu rth er em phasized by the role th a t this co u n ­
try occupies in the political aren a th ro u g h its
assum ption of w orld-w ide m ilitary an d p oliti­
cal responsibilities.

Postwar international institutions
facilitate international
payments mechanism
A nu m b er of in tern atio n al institutions w ere
set up in the p o stw ar p erio d to assist in the
adjustm ent process of the in tern atio n al p ay ­
m ents m echanism , supplem enting the func­
tions of the U nited States d ollar in evening
o u t sh o rt-term disturbances and in providing
longer term finance. T he In tern a tio n a l M one­
tary F u n d extends sh o rt-term financial help to
countries in tem p o rary balance of paym ents
difficulties. Its resources consist of gold and
currencies of the individual m em b er co u n ­
tries p aid in by each m em ber as its subscrip­
tion. E ac h c o u n try ’s q u o ta is determ in ed by
its relative im portance in in tern atio n al trad e ,
p o p u latio n , and n atio n al incom e. O n e-fo urth
of each m em b er’s q u o ta (o r 1 0 p ercen t of
total gold and do llar reserves fo r m em bers
joining before 1948, w hichever was sm aller)

MONTHLY REVIEW

October 1961

was paid into the F u n d in the form of gold
an d the rem ainder in the m em b er’s currency
(actually nonm arketable non-interest-bearing
G overnm ent o b lig a tio n s). D raw ings from the
F u n d (pu rchases of ano th er currency from
the F u n d by deposits of the borrow ing m em ­
b e r’s cu rren cy ) are alm ost autom atically a p ­
p roved for the first 25 percent of a co u n try ’s
qu o ta (th e so-called gold tra n c h e ), with sub­
sequent draw ings contingent upon p resen ta­
tion of evidence th a t the country concerned is
taking the necessary steps to elim inate the
paym ents im balance. R ep ay m en t generally is
in the form of “rep u rch ase” of the co u n try ’s
ow n currency with gold and convertible c u r­
rencies, in m ore o r less the sam e p ro p o rtio n
as the com position of the increase in the b o r­
row ing co u n try ’s reserves. T he obligation in ­
cu rred by a draw ing m ust be discharged w ith­
in a period not exceeding 3 to 5 years.
Because of the postw ar im portance of the
U nited States dollar in in ternational pay­
m ents, 90 percent of the gross draw ings from
the F u n d from 1947 through 1959 — o r $3.1
billion out of $3.4 billion — consisted of
U nited States dollars. As o th er currencies
have becom e convertible, how ever, less than
40 p ercent of the $780 m illion in draw ings
from Jan u ary 1960 through July 1961 has
been in U nited States dollars, 25 percent has

Most of Internatio nal M onetary
Fund d ra w in g s have been in dollurs
Billio n s of Dollar*
15 —

Drawings

Resources

Other
Convertible
Currencies

in'*

N ote: Data as of June 30, 1961.
Digitized
for International
FRASER
Source:
M onetary Fund.



Deutsche Marks

(

Pound Sterling
U.S Dollars

been in deutsche m arks, and 15 percent in
pounds sterling. By providing such short-term
financial assistance, the F u n d has m inim ized
the need for a country in balance of paym ents
difficulties to im pose trade and exchange re­
strictions o r restrictive dom estic m easures to
co u n ter sh o rt-ru n balance of paym ents pres­
sures and has thus con trib u ted to the m ainte­
nance and expansion of m ultilateral trade.

The World Bank provides
longer term finance
To m eet the need fo r long-term develop­
m ental capital, the In tern atio n al B ank for
R eco n stru ctio n and D evelopm ent ( also know n
as the W orld B an k ) was established in 1946
at the sam e tim e as the In tern atio n al M one­
tary F u n d . It was designed to prom ote eco­
nom ic developm ent and stim ulate the grow th
of productive capacity in m em ber countries
by providing a dependable source of invest­
m ent capital. C redits are extended to m em ber
governm ents o r to private borrow ers who
have o b tained a governm ent guarantee. If
countries can rely on access to long-term
funds from abroad w hen needed, especially
underdeveloped countries with a relatively
low level of savings and undeveloped capital
m arkets, they can o b tain additional resources
currently to devote to econom ic grow th and
industrial developm ent and at the sam e time
m aintain gold and foreign exchange reserves
sufficient to m eet tem porary drains. O ne of
the m ajor problem s of the interw ar period
was the unreliability of long-term capital ex­
ports from the U nited States and the U nited
K ingdom , which im peded econom ic develop­
m ent, particularly fo r the prim ary-producing
countries which are otherw ise highly d ep en d ­
en t upon sharply fluctuating receipts from
exports for the foreign exchange to finance
needed im ports.
T he W orld B ank utilizes funds derived
from the paid-in portion of m em ber co u n ­
tries’ subscriptions and from the proceeds of

199

FEDERAL RESERVE BANK OF SAN F R A N C IS C O

L a rg e part of W o rld B a n k ’s lo a n ­
a b le funds and disbursements in
dollars
Billion* of Dollars
Loanabls Funds

6-

Othsr

---

Loan D isburtom tnts

5Subscriptions

N ote: D ata as of Ju n e 30, 1961.
Source: International Bank for Reconstruction and Development.

its ow n bonds sold in the capital m arkets of
m em ber countries and Sw itzerland. E ach
m em ber o f the W orld B ank was required to
pay in 2 p ercen t of its q u o ta in gold or U nited
States dollars at the time it joined the o rg an i­
zation and 18 p ercen t in its ow n currency;
the rem aining 80 percent was subject to call
only to m eet obligations of the B ank if neces­
sary. In 1959 the authorized capital of the
B ank was increased from $10 billion to $21
billion. N o p a rt o f the increase in each m em ­
b er’s q uota was p aid in at the tim e, except for
m em bers w hose subscriptions w ere m ore than
doubled, although all of the increase is su b ­
ject to call. By the end of 1960, m ore than 40
p ercen t of the funds available fo r W orld B ank
loans h ad been obtained from sales of B ank
bonds, w ith an o th er 23 p ercen t from sale of
B ank loans to private lenders and repaym ents
on p rio r loans and 28 p ercen t from subscrip­
tions. M ore th a n th ree-fourths of the B an k ’s
bonds have been denom inated in U nited
States dollars. T he m axim um lending au th o r­
ity of the B ank is 100 p ercen t of unim paired
subscribed capital, reserves and surplus—
o r $21 billion. A t the end of June 30, 1961
the W orld B ank h ad disbursed to m em ber
nations $4.3 billion of the $5.7 billion in
authorized credits and received $850 m illion
200


in repaym ents. A lm ost tw o-thirds of the
B a n k ’s disbursem ents have been in U nited
States dollars, w hile 20 p ercen t have co n ­
sisted of p o u n d s sterling, Swiss francs, and
G erm an m arks.
A ugm enting the long-term credit facilities
of the W orld B ank are tw o affiliates: the In ­
tern atio n al F in an ce C o rp o ratio n , w hich cam e
into o p eratio n in 1956, an d the In tern atio n al
D evelopm ent A ssociation, w hich was a p ­
p roved by the req u ired n u m b er o f m em ber
nations in 1960. T h e In tern a tio n a l F inance
C o rp o ratio n specializes in investing in p ri­
vate enterprises in developing m em ber co u n ­
tries through long-term loans w hich carry
ad d itio n al rights to share in profits o r grow th
o f the enterprise an d w hich do n ot require
a governm ent g uarantee. O f th e authorized
cap ital of $ 1 0 0 m illion, $ 9 6 .6 m illion has
been subscribed and $42 m illion has been
com m itted to various projects. T h e In te rn a ­
tional D evelopm ent A ssociation provides c a p ­
ital fo r developm ent projects from its $ 1 bil­
lion in authorized capital if financing is not
available from private sources o r the project
is n o t eligible fo r a W orld B ank loan. T h e In ­
tern atio n al D evelopm ent A sso ciatio n ’s c re d ­
its are extended on easier term s th a n those
of the W orld B ank, w ith longer m aturities,
som ew hat low er rates o r even interest-free,
and repaym ent in the currency borrow ed. R e ­
gional organizations have also been estab ­
lished to provide investm ent cap ital to m em ­
bers, such as the E u ro p ea n Investm ent B ank
and the O verseas D evelopm ent F u n d for the
E u ro p ean C om m on M ark et, the C entral
A m erican B ank fo r E conom ic In teg ration for
the C en tral A m erican C om m on M arket, and
the In ter-A m erican D evelopm ent B ank.
T he in ternational paym ents system today is
thus based on gold and the U nited States dol­
lar, supplem ented by the p o u n d sterling and
the In tern atio n al M o n etary F u n d w hich o p ­
erated until recently largely in dollars. In
contrast, the paym ents m echanism in the days

October 1961

MONTHLY REVIEW

of the old gold stan d ard revolved around gold
and the pound sterling. T he U nited States
dollar becam e the dom inant in ternational c u r­
rency only in the interw ar perio d u nder the
gold exchange standard w ithout, how ever, the
additional support now provided by in tern a­
tional organizations.

An altered trading environment
confronted the United States
in 1958-60
T he experience of the U nited States with
sizable balance of paym ents deficits in the
three years 1958-60, sharply em phasized by
the increase in the L o n d o n gold price to $40
p er ounce in O ctober 1960 and speculative
outflows of privately-held funds from the
U nited States, and the recent problem s en ­
countered by the U nited K ingdom following
the M arch 1961 revaluation of the G erm an
m ark and the N etherlands guilder have stim ­
ulated discussion concerning the w eaknesses
and strengths of the cu rren t paym ents sys­
tem. Initially, m uch of the discussion cen­
tered on the U nited States balance of pay­
m ents position alone; b u t because short-term
capital m ovem ents affected oth er countries
such as the U nited K ingdom and G erm any, as
well, the discussion expanded into the m ore
general topic of international liquidity. T he
problem s arising out of the recent pressures
on the U nited States dollar (a n d also the
pound sterling) can be sep arated into three
fairly distinct categories: ( 1 ) the resto ra­
tion of balance betw een the external receipts
and paym ents of a country in deficit, such as
the U nited States o r the U nited K ingdom , or
of a country in surplus, such as G erm any; (2 )
the ability to control o r offset disruptive ef­
fects of sudden and large flows of “ hot m oney”
betw een countries, particularly from “ key
curren cy ” countries; ( 3 ) the adequacy of in ­
ternational liquidity in the future.
T he $11 billion in U nited States balance
Digitized
FRASER
offorpaym
ents deficits in 1958-60 aroused


doubts in som e q uarters ab o u t the strength
of the dollar. U p until 1950 U nited States
G overnm ent and p rivate capital exports, and
from 1950 onw ards the over-all balance of
paym ents deficits, co n trib u ted to the reco n ­
stru ctio n and recovery of the w ar-torn coun­
tries overseas and to the b etter distribution of
gold and foreign exchange reserves am ong
the various trading nations. B ut from 1958
through 1960, U nited States deficits jum ped
sharply to $3.5 billion o r m ore each year, a
level th at obviously could n o t be sustained
for any extended perio d of tim e. E u ro p ean
countries, w hich were the principal gainers,
m oreover, no longer needed financial assist­
ance fo r reconstruction o r the build-up in re ­
serves. Foreign-ow ned short-term d ollar bal­
ances in this country had risen to $15 billion
by the end of 1957 and to taled m ore than
$21 billion by the end of 1960. T he U nited
States gold stock fell to $17.8 billion by D e­
cem ber I9 6 0 , causing som e to question the
adequacy of U nited States gold reserves in
relatio n to short-term liabilities to foreigners
and in view of the requirem ent th at 25 p e r­
cent of F ed eral R eserve B ank note and d e­
p o sit liabilities h ad to be b acked by gold.
The reasons behind the striking increase
in the excess of U nited States paym ents to
foreigners over receipts, w hich resulted in the
accum ulation of these large foreign-ow ned
dollar balances, were p artly stru ctu ral in n a ­
ture and partly due to tem porary develop­
m ents. T he Suez crisis and its aftereffects in
1956-57, cro p shortages in E urope, and large
cotton shipm ents ab ro ad boosted exports to
unusually high levels in 1957, follow ed by
a sharp decline in 1958 as these special cir­
cum stances ceased to affect o u r trade. In a d ­
dition, the lag in U nited States conversion to
jet aircraft p roduction and the 1959 steel
and co p p er strikes were in p art responsible
fo r keeping o u r exports down, while the
strikes and sizable im ports of foreign passen­
ger cars in 1958-59 o p erated to swell im ports

FEDERAL RESERVE BANK OF SAN F R A N C IS C O
and reduce o u r surplus on
U. S. p aym en ts deficits in 1958-60 due to both
m erchandise trade. A t the
temporary and structural developments
B illio n s of D o lla rs
sam e tim e, th e full im pact
o f th e re c o v e ry o f G e r­
T rad e Ba la n ce
m a n y , J a p a n , a n d o th e r
S e r v ic e s
industrial countries began
to be felt in U n ited States U n ila te ra l T r a n sfe rs
U.S. Governm ent and Private
m a rk e ts a t h o m e an d
L o n g -T e r m C a p ita l ( N e t )
a b ro a d . T h e s e c o u n trie s
Private Short-Term Capital
c z
w ere now able to com pete
Unrecorded T ra n sa ctio n s
e f f e c t i v e l y w ith m a n y
U n ited States p ro d u cts on
O ve ra ll D eficit
th e b asis o f p ric e , style,
"T-4
-2
0 -4
0 -4
0
q u a lity , serv ice, d eliv ery
1958
1959
I9 6 0
tim e , a n d c r e d it te rm s .
Source: U nited States D epartm ent of Commerce*
T h e m o b ility o f s h o r t­
assistance of industrialized countries w ith im ­
term funds, and their responsiveness to in ter­
p ro v ed reserve positions to help th e U nited
est rate differentials o r speculative prospects,
States achieve a b etter paym ents b alance
was also en h an ced by the ad o ption of non­
th ro u g h continuing liberalization o f in te rn a ­
resid en t curren cy convertibility by a num ber
tional trad e and cap ital m ovem ents, assum p­
of leading countries at the end of 1958.1
tion of a large p a rt of the b u rd en of m utual
In additio n to the p art played by the altered
defense, and increased aid to less developed
trad in g env ironm ent and the g reater sensi­
areas of the w orld.
tivity o f sh o rt-term funds in increasing the
deficit in 1958-60, U nited States policies had
Large short-term capital outflow
n o t adjusted fully to the changed circum ­
after m id-1960
stances. T he em phasis of U nited States G ov­
F ro m 1958 th ro u g h m id-1960, the U nited
ern m en t long-term foreign aid p rogram s had
States balance of paym ents deficit was caused
shifted largely fro m W estern E u ro p e to the
prim arily by w eakness in th e trad e balance;
countries of A sia, A frica, and the N e a r E ast.
the outflow of G overnm ent an d p rivate cap i­
U nited States G overnm ent m ilitary expendi­
tal from the U nited States did n o t differ sig­
tures ab ro ad , on the oth er h an d , still tended
nificantly from th at of previous years. In the
to be co n cen trated in countries w ith high and
latter half of 1960, how ever, the w idening
rising levels of gold and foreign exchange re­
of the deficit could be ascribed to sizable in­
serves; a large p a rt of recent private direct
investm ent has been in the industrial co u n ­
creases in the o utw ard m ovem ent of both fo r­
tries o f E u ro p e, encouraged p artly by fav o r­
eign an d U nited States p rivate sh ort-term
able ta x treatm en t fo r earnings of foreign
capital, which led to a gold outflow, rath e r
subsidiaries an d partly by the establishm ent
th an to the sm allness of o u r m erchandise trad e
of the E u ro p e a n C om m on M ark et; and fo r­
surplus, w hich rose to an an n u al rate of $5
eign travel in the U nited States has n o t been
billion in the th ird q u a rte r of the y ear and to
actively prom oted. R ecently, the U nited
$ 6 billion in the last q u arter. P a rt of the
States has stepped up its efforts to enlist the
sh o rt-term capital exports was due to diver­
gent
econom ic conditions in the U nited States
iF o r a more detailed discussion of the whole postwar period, see
“
Our
Balance
of
Paym
ents
in
Perspective,”
M
onthly
Review,

and in W estern E u ro p e and Jap an , w hich at202
Federal Reserve Bank of San Francisco, August 1960.


October 1961

MONTHLY REVIEW

trac ted funds to those countries w here yields
w ere higher and encouraged foreign sh o rt­
term borrow ing in the U nited States, w here
interest costs w ere low er and credit m ore
readily available. F unds also m oved out of
the U nited States into foreign stocks and
bonds because the prospects of capital ap ­
preciation under boom conditions were bright.
P a rt of the outflow, how ever, was attrib u ta ­
ble to distrust of the do llar created by the
continuing balance of paym ents deficits, the
conversions of dollars into gold, an d fear of
inflation in the U nited States. Speculation
against the dollar was also evident in the
sharp rise in the L o n d o n gold price in the fall
of 1960, the influx of funds into Sw itzerland
and the N etherlands w here interest rates were
no higher than in the U nited States, and in
the unaccustom ed outflow of funds from the
U nited States through lags in paym ent for
goods and services and possibly tem p o rary
investm ent of corporate cash in foreign m oney
m arkets instead of rep atriatio n to the U nited
States as investm ent incom e. S peculation in
favor of an upw ard revaluation of the G er­
m an m ark because of G erm an y ’s persistent
balance of paym ents surplus was also in stru ­
m ental in the m ovem ent of p rivate liquid
capital abroad.
D oubts about the com petitiveness of U nited
States products in dom estic and foreign m arkets, w hich had been suggested by th e decline
in o u r surplus on goods and services in 1958
and 1959, were to som e extent dispelled by
the im provem ent in the trad e balance th ro u g h ­
o ut 1960. V arious price indexes for the
U nited States and o th er industrial countries
provided little support fo r the view th a t U nited
States prices as a whole h ad risen faster th a n
those of her com petitors, although it is true
th a t productivity increases have been som e­
w hat greater abroad. Special sh o rt-ru n fac­
tors th a t held dow n A m erican exports and
swelled im ports in 1958 and 1959, such as
Digitized
FRASER
thefor dem
and fo r the sm aller foreign passen­


ger cars and delays in jet aircraft deliveries,
h ad disappeared by 1960. T he satisfactory
showing of oth er U nited States exports also
did n o t indicate th a t U nited States products
w ere over-priced. B ut the situation of the
p ast three years has u n derlined th e im por­
tance of keeping U nited States goods and
services com petitive w ith those of o th er in­
d ustrial nations.
Some o f the rise in the trad e surplus in
1960, like th a t of sh o rt-term capital exports,
was due to the strength of econom ic activity
in W estern E u ro p e and Jap an , w hich stim u­
lated U nited States exports, and to the reces­
sion at hom e, w hich caused im ports to drop
off. T hus the conjuncture of a recession in
the U nited States an d boom conditions in
E u ro p e was responsible fo r b o th a larger
trad e surplus and the o utw ard m ovem ent of
short-term funds.

THE “BASIC” PAYMENTS DEFICIT
M easures to reduce o r elim inate the “basic”
balance of paym ents deficit 1 should include
the p ro p er m onetary and fiscal policies th a t
iT h e “basic’’ balance of paym ents position refers to the balance
between exports of goods and services and imports of goods and
services (including m ilitary expenditures overseas) and net
long-term capital movements (both Government and private).

“ B asic” U. S. p aym en ts deficits
siza b le in 1958-60 but small surplus
recorded in first half of 1961
D e fic it

Bi 11io n * of D o lla rs
S u rp lu s

Note: D ata for 1961 are figures for the first half of the year on
the basis of seasonally adjusted annual rates.
Source: United States D epartm ent of Commerce.

203

FEDERAL RESERVE BANK OF SAN F R A N C IS C O
will help to co n tro l inflationary pressures and
still contribu te m ost effectively to dom estic
stability and econom ic grow th. N ot only is it
im p o rtan t th a t the U nited States rem ain com ­
petitive in o rd er to export, b u t a substantial
surplus on goods and services is essential if
the U nited States wishes to achieve certain
vital econom ic and political objectives. C on­
tinuing deficits of the size recorded in 195860, even after excluding the ex trao rd in ary
sh o rt-term capital flows, suggest, m oreover,
an im balance in o u r “basic” paym ents p osi­
tion w hich can n o t be ignored in the interests
o f general econom ic stability and in tern a­
tio n al m o netary stability. O u r “ basic” bal­
ance o f paym ents position should therefore
be kept u n d er co n stan t surveillance and not
lost am ong o th er m ore im m ediate problem s
such as “ h o t m oney” flows o r longer run p ro b ­
lem s concerning the adequacy of international
reserves.

Various steps have been taken
to reduce the basic
United States deficit
Some steps have already been taken to in­
crease o u r surplus on cu rren t transactions,
such as ex p o rt p rom otion program s, the re­
quired utilization of the proceeds of U nited
States G overnm ent credits in this country, re­
ductions in m ilitary expenditures overseas
w herever possible, encouragem ent of foreign
travel in this country, and the tem p o rary low ­
ering of the duty-free exem ption for A m eri­
can tourists from $500 to $ 100. F oreign co u n ­
tries in tu rn have continued to rem ove quota
restrictions on trad e and have virtually elim ­
in ated discrim ination against d o llar goods.
T he m em ber countries of the N orth A tlantic
T reaty O rgan izatio n have agreed to assum e
a larger share o f the o rganization’s expenses,
while stepped-up program s of foreign aid
announced by various countries should ease
any additional financial load th at the U nited

204
States m ight assum e in this direction. A d ­


vance repaym ents of postw ar debt w hich have
been m ade to the U nited States provide only
tem p o rary relief and do n o t reduce o u r “ b a ­
sic” deficit position.
O th er m easures, how ever, rem ain to be
tak en by both sides to restore a b etter in te r­
n ational paym ents balance. W hen the boom
in E u ro p e tap ers off and a vigorous recovery
in the U nited States boosts im ports, o u r su r­
plus on goods and services will decline. F rom
the first to the second q u arte r o f 1961, the
surplus h ad already fallen from $6 .4 billion
(a t a seasonally adjusted an n u al ra te ) to $5.4
billion. Since every paym ents deficit is
m atch ed by a surplus elsew here, action by
the surplus countries to resto re b alan ce in
their ow n in tern atio n al paym ents w ould ease
the adjustm ent process fo r th e deficit co u n ­
tries an d m inim ize th e need fo r deflationary
m easures by the la tter countries. T he con­
tinued accum ulation of gold an d foreign ex­
change reserves by the surplus country, m ore­
over, constitutes consum ption and investm ent
foregone.
T he actions tak en so far to achieve a b et­
ter balance in in tern atio n al paym ents have in
general been those w hich have co n trib u ted to

U. S. tra d e surplus m a y be
sm a lle r as economic activity rises here
and tapers off abroad
B illio n s of D o lla rs

E ip o r t i

20

16
/

Imports

TR A D E S U R P LU S

N ote: Quarterly data a t seasonally adjusted annual rates.
Source: U nited States D epartm ent of Commerce.

October 1961

MONTHLY REVIEW

the fu rth er extension of m ultilateral trad e,
with its attendant benefits of optim um allo­
cation of resources. T he proposals th a t have
been rejected, such as trad e and exchange
restrictions, deflation, and devaluation of the
dollar, would, on the oth er hand, have been
restrictive of trade and unsuited to the situ­
ation. A brief look at the discarded solutions,
listing som e of their claim ed advantages and
som e of their pitfalls, m ight prove useful.

Trade and exchange restrictions,
deflation, and devaluation are
alternatives that have been rejected
T rade and exchange restrictions, such as
higher tariffs, quotas, and exchange controls,
would place artificial restraints on the m ove­
m ent of resources and cap ital betw een co u n ­
tries, thus preventing the best use of these
factors by each country and curtailing the
volum e of trade. T rad e and exchange con­
trols m ay perm it a country to pursue an in ­
dependent dom estic policy, provide a m eans
of controlling the volum e of foreign trade or
the outflow of “hot m oney,” and on occa­
sion can be. justified as a stopgap device
w here reserves are in adequate and short-term
credits unavailable. O n the o th er hand, such
restrictions reflect the inability of a country
to balance its accounts in a free m arket at
existing exchange rates. E xchange controls in
p articu lar tend to be subject to abuse, to en­
courage bilateralism despite the fact th a t they
m ay not be adm inistered along bilateral lines,
and to underm ine confidence in a currency.
A reserve center w hich im poses exchange
controls is liable to find its position d eteri­
o rating sharply.
D eflation as a m eans of correcting a p ay ­
m ents im balance m ight be ap p ro p riate if the
im port surplus was caused by the existence
o f inflationary pressures which encouraged
im ports and discouraged exports. Restrictive
m onetary and fiscal policies w ould reduce
prices,
m aking exports cheap er and im ports



d earer and thus increasing the m erchandise
trade surplus. C red it restrain t w ould help to
check the outflow of sh ort-term capital — in
the absence of speculation. D eflation, how ­
ever, could increase unem ploym ent and d e­
press p ro d u ctio n and incom e so th at the
external balance attained at a low er level
m ight not be a true equilibrium position.
Strong social resistance w ould also probably
be encountered. F o r an econom y in reces­
sion, deflationary action w ould be even m ore
in ap propriate.
D evaluation, o r an increase in the price
of gold in term s of dollars, was also proposed
as a solution to the U nited States paym ents
im balance. A side from any co ntribution to
longer run international liquidity th at such a
m ove m ight m ake (w hich will be discussed
la te r), larger gold reserves in term s of dol­
lars m ight give the U nited States m ore tim e
in which to restore over-all balance. B ut the
p roposal has serious disadvantages. D evalua­
tion of the dollar w ould ten d to underm ine
confidence in the in ternational paym ents sys­
tem centered on the do llar and could aggra­
vate the difficulties of the situation by in­
creasing the outflow of gold from this country
if it w ere felt th a t the do llar was no longer
a strong reserve currency. It w ould reduce
in tern atio n al liquidity by w eakening the d o l­
lar, and it w ould possibly stim ulate h o a rd ­
ing. T he structure of U nited States costs and
prices in relation to h er m ajor trading p a rt­
ners, m oreover, does not indicate the need for
any fundam ental realignm ent of currencies.
A ny advantage for m erchandise exports th a t
the U nited States m ight reap from devaluation
w ould also be quickly erased if oth er coun­
tries follow ed suit, as would probably be the
case. In addition, the principal beneficiaries
w ould be Soviet R ussia and South A frica. But
the m ost telling argum ent against an increase
in the price of gold as a m eans of correcting
the paym ents im balance is the fact th at a
change in the gold price would not attack the

205

F E D E R A L R E SE R V E B A N K OF S A N F R A N C I S C O
basic causes o f m alad ju st­
ment. Deficits w ould recur
once the additional re ­
serves w ere ex h au sted b e­
cause the sym ptom rath e r
th a n the cause of the im ­
balance was treated.

Pre-1914

Balance of paym ents con sid era­
tions often principal policy gu id e

Balance of payments
discipline reappears
in m any countries
T he situatio n in 1960
and 1961, w hen the U n it­
ed States an d W estern
E u ro p e fo u n d them selves
in different phases o f the
business cycle, was n o t
1946-51
the first o f its k in d in the
A nd a g a in im m ediately
ing W o rld W a r II.
p ostw ar perio d b u t was
the first in w hich there was
relative freedom of m ove­
m ent for short-term fu n d s.
A s a consequence, differ­
ential interest rates affect­
ed capital flows an d thus
the dom estic econom ies of
the respective countries.
In tern a l dom estic policy
in these countries and elsew here has thus been
com pelled to tak e balance of paym ents con­
siderations into account to a greater extent
th an ever before in the p ost-W orld W ar II
period. B ecause the U nited States is a key
currency country, m oreover, policies co n d u c­
ive to stability o n b o th the dom estic and in ­
te rn atio n al fro n ts are essential to a sm ooth
functioning o f the in tern atio n al paym ents
system .

1920-39

They were subordinated to do­
mestic p olicy in the Interw ar
period.

follow

1952-61

Recently they have been p la y ­
ing an in creasin gly im portant
p a rt in p o licy determ ination.

“ B alance of paym ents discipline” th e re­
fore has re-em erged as a m ore conscious part
of national econom ic policy in m any co u n ­
trie s . 1 O ver the years, the relative weight of

internal and external considerations in the
fo rm ulation of econom ic policy has varied.
B efore 1914, u nder the gold stan d ard , no
sh arp distinction was d raw n betw een in ter­
nal and external requirem ents, although the
state of the n atio n ’s balance o f paym ents was
often the principal policy guide. In the in ter­
w ar period, adherence to the “ rules of the
gold sta n d a rd ” resulted in u nfavorable rep er­
cussions on incom e, em ploym ent, and p ro ­
duction. C onsequently, in tern al co nsidera­
tions assum ed to p priority in the 1 9 3 0 ’s, and
in ternational currency policy was m ade to
conform to dom estic policy ra th e r than the

l “ Balance of paym ents discipline” can be defined as “ a set of
constraints imposed on the internal and external policies” of a
country “ by the need to m aintain long-run equilibrium in its
external balance of paym ents, under a system of international


trade that is largely unrestricted except by internationally-agreed
tariffs.” Ralph C. Wood, “ The Discipline of th e Balance of
Paym ents"-Postw ar Experience in Europe,” The Journal oj
Finance, M ay 1961.

206



October 1961

MONTHLY REVIEW

other way around. D uring m uch of the p eri­
od im m ediately following W orld W ar II, the
insulation of dom estic from foreign develop­
m ents was generally the rule, since m any
countries were either unable o r relu ctan t to
expose th eir econom ies to external influences.
R ecently, how ever, balance of paym ents co n ­
siderations have been playing an increasingly
im p o rtan t p a rt in policy d eterm in atio n in a
num ber o f countries. H istory has show n that
internal and external stability can n o t be eas­
ily separated, especially w here there is rela­
tive freedom of m ovem ent of goods and cap ­
ital betw een countries.

SHORT-RUN LIQUIDITY
T he discipline exercised by the balance of
paym ents can be illustrated by the recent ex­
perience of the U nited States in dealing with
short-term capital flows. These shifts of sh o rt­
term funds were due both to interest incen­
tives and to speculative forces and have been
popularly called “ hot m oney.” T echnically,
“ hot m oney” refers to m ovem ents of funds
th a t are not justified by econom ic co n sid era­
tions, such as higher yields, and th a t tend to
intensify an existing im balance in a co u n try ’s
international paym ents; political disturbances
and speculation are two of the principal
causes of “ hot m oney” flows. B ut since it is
often difficult to distinguish betw een the two
types until som e tim e after th eir occurrence
— if at all— the problem of coping with the
m ovem ent of both kinds of liquid funds will
be considered at the sam e tim e. It m ight be
noted, how ever, th a t m easures th at m ay prove
effective in checking o r reversing one type
of short-term capital m ovem ent m ay be to­
tally ineffective against the other.
Because of the leveling off in econom ic ac­
tivity in the U nited States and the dow nturn
which began in M ay 1960, a policy of greater
m onetary ease was adopted. F ed eral R eserve
Bank discount rates and m em ber bank re­
serve
requirem ents were reduced in several



stages, and their influence com bined w ith
o p en m ark et operations p erm itted m em ber
ban k free reserves to increase from an aver­
age of $424 m illion in net borrowed reserves
at the end of D ecem ber 1959 to $682 m il­
lion in net free reserves by D ecem ber 1960.
In the first eight m onths of 1961, free reserves
averaged alm ost $550 m illion. F ro m the end
of 1959 sh ort-term interest rates fell, w ith
the m ark et yield on U nited States three-m onth
T reasu ry bills declining from an average of
4.49 percent p er annum in D ecem ber 1959
to 2.46 p ercen t in June 1960 and to 2.30
percent in the follow ing tw o m onths. O n the
o th er hand, the pressure of rising econom ic
activity and high levels of em ploym ent abroad,
especially in the U nited K ingdom and G er­
m any, led to the adoption of restrictive m one­
tary policies in those countries. T he U nited
K ingdom increased its B ank R ate from 4 to
5 percent in Jan u ary 1960 and to 6 percent
in June, while G erm any raised the B undes­
b a n k ’s discount rate from 4 to 5 p ercen t in
the la tter m onth. G erm any also increased re­
serve requirem ents several tim es and reduced
rediscount quotas. T h e divergent m ovem ent
of sh o rt-term interest rates in the U nited
States and in the m ajo r industrial countries
thus presented som ething of a dilem m a to the
U nited States. T he decline in o u tp u t and the
increase in unem ploym ent in this country
called fo r the easing o f credit and low er in­
terest rates, b u t the substantial outflow of
sh ort-term funds m ade it desirable th a t short­
term rates not co ntribute fu rth er to such an
outflow. A t the end of M ay 1960, fo r exam ­
ple, three-m onth T reasu ry bills of the U nited
K ingdom yielded 0.79 p ercen t per annum
m ore th an a com parable U nited States T reas­
ury bill after covering fo r foreign exchange
risk. T he incentive in favor of U nited K ing­
dom T reasu ry bills rose as high as 1.95 p e r­
cent on a covered basis on July 1 and re­
m ained above 1 p ercen t for m ost of the re­
m ainder of 1960.

207

FED ER A L R E SE R V E B A N K O F SA N F R A N C I S C O

D iv e rg e n t interest rates encour­
aged private short-term capital exports
P»rc«nt Per Annum

I96 0

1961

Source: Board of Governors of the Federal Reserve System.

United States policies adapted
to meet short-term capital
outflows and recession
Some m odification of econom ic policy was
clearly called fo r u n d er the circum stances —
bo th here and ab ro ad . In the U nited States,
the F ed eral R eserve System began purchases
in late O ctob er and in N ovem ber 1960 of
short-term U nited States G overnm ent securi­
ties o th er th a n T reasu ry bills in accordance
w ith an am endm ent of the directive to the
F ed eral O pen M ark et C om m ittee to conduct
open m ark et operations not only with due
regard to “ fostering sustainable grow th in
econom ic activity and em ploym ent” b u t also
“ tak in g in to consideration cu rren t in tern anatio n al developm ents .” 1 U nder the term s
of legislation enacted in 1959 perm itting
banks to coun t all of their vault cash as re­
serves by 1962 at the latest, the System co m ­
pleted the process in the late sum m er and fall
of 1960 partly in o rd er to supply the seasonal
need for reserves, rath er th an purchase T rea s­
ury bills, w hich w ould have fu rth er depressed
sh o rt-term rates. In F eb ru ary 1961, the Sysl Forty-Seventh A nnual Report of the Board of Governors of the

Federal Reserve System.


tem announced a fu rth er bro ad en in g of its
open m arket op eratio n s to include longer term
securities, som e of w hich w ould exceed five
years. In this w ay it was ho p ed th a t sh o rt-term
rates w ould not be fu rth e r depressed as re ­
serves could also be supplied to th e m ark et
by System purchases of longer te rm securities.
F u rth erm o re, by o p eratin g in longer term se­
curities, longer term rates m ight be low er than
otherw ise w ould have been the case and w ould
thus tend to encourage expansion. F ro m the
tim e the policy was in au g u rated in F eb ru ary
th ro u g h the end of A ugust, the net change in
System holdings of securities m atu rin g in over
a y ear am o u n ted to ab o u t $ 2 billion, after
adjustm ent fo r changes in the m atu rity d istri­
bution of the System ’s portfolio arising from
the exchange of issues in T reasu ry refundings
and the shift of securities into the sh o rt-term
category as they ap p ro ach ed m aturity.
D ebt m anagem ent policy was also fo rm u ­
lated with regard to balance of paym ents co n ­
siderations. T he G o v ern m en t cash budget
pum ped funds into th e econom y, partly b e­
cause of recession-depressed receipts, partly
because of som e u n an ticip ated increases in
spending on special p rogram s, and because
of som e deliberate acceleration of G o v ern ­
m ent disbursem ents, such as the advance
release of funds for highw ay construction. B ut
refunding of m atu rin g G overnm ent security
issues and new cash offerings w ere largely
concen trated in the sh o rt end of the m arket,
w hich had the effect of increasing sh o rt-term
interest rates. T he ad ap tatio n of b o th m one­
tary and debt m anagem ent policy to the p ro b ­
lem posed by the recession and the balance
of paym ents points up the im p o rtan ce of using
an ap p ro p riate “ m ix” of policies; eith er one
could not have been expected to carry the
burden alone.
T he U nited States G o vernm ent, in ad d i­
tion, carried out o th er policies designed to
ease fu rth er the balance of paym ents p ro b ­
lem created by the sh o rt-term capital o u t­

October 1961

MONTHLY REVIEW

flows. T ax exem ption was extended to the
interest incom e of all foreign official holdings
of U nited States G overnm ent securities to
reduce the incentive to official holders to shift
into higher earning assets abroad. Private
ow nership of gold ab ro ad by U nited States
citizens was prohibited, a step th a t should
rem ove a reported source of pressure on L o n ­
d o n gold prices in the fall of 1960. T he F e d ­
eral R eserve B ank of N ew Y o rk also began
o p erations in the foreign exchange m arkets
fo r the account of the T reasu ry , a m odifica­
tion of previous policy u n d er w hich the T reas­
ury supported the dollar only by its willing­
ness to buy and sell gold to foreign official
institutions at $35 p er ounce. T he T reasury,
through arrangem ents w ith G erm any, sold
forw ard m arks fo r the purpose of low ering
the prem ium on the forw ard m ark and th ere­
by narrow ing the spread betw een the spot
and forw ard dollar-m ark rate. T he sm aller
spread betw een the spot and forw ard ex­
change rates reduced the incentive to move
funds ab ro ad on a covered basis. S ubsequent­
ly, the N ew Y ork F ed eral R eserve B ank,
again acting as agent for the T reasury, u n d er­
took operations in spot m arks. In addition,
p a rt of the postw ar G erm an debt was repaid
to the U nited States in M arch in m arks in
o rd er to perm it the U nited States to p artici­
p ate m ore actively in the exchange m arkets in
the future, while certain o th er convertible
currencies have been acquired in “ relatively
sm all am o u n ts .” 1 A t the end of July 1961, the
in tern atio n al reserves of the U nited States
included $105 m illion in convertible foreign
currencies.

Foreign countries have cooperated
in dealing with short-term
capital flows
W hen short-term funds began to m ove in
u nprecedented volum e from this country in
ITestim ony of Secretary of the T reasury Dillon and M r. Charles
Coombs of the Federal Reserve Bank of New York before the
Subcommittee on International Exchange and Paym ents of the
JointforEconomic
Digitized
FRASERCommittee, Congress of the United States, May
16, June 1 9 - 2 1 , 1 9 6 1 .



the latter half of I9 6 0 , principally to the
U nited K ingdom , G erm any, and Sw itzerland,
these countries took steps to cu rb the inflow.
In G erm any, credit restrictions w ere relaxed
by low ering reserve requirem ents against do­
m estic deposits and reducing the discount rate
and o th er official interest rates, prim arily for
balance of paym ents reasons. T he restrictive
credit policy th at had form erly been in effect
encouraged the large influx of both G erm an
and foreign m oney, w hich nullified the a t­
tem p t to im pose restrain ts on the expanding
econom y. In addition, efforts were directed
tow ard reducing the paym ents surplus by e n ­
couraging the export of both long- and sh o rt­
term funds and by the up w ard revaluation of
the deutsche m ark in M arch, which w ould
tend to stim ulate im ports and discourage ex­
ports. T he revaluation was also designed to
en d speculation about ap preciation of the
m ark, which had been responsible for a large
p a rt of the funds m oving into G erm any.
M uch of the sh o rt-term funds m oving into
Sw itzerland, on the o th er hand, were seeking
safety because of unfavorable econom ic and
political conditions abroad. N evertheless,
Sw itzerland took m easures to discourage the
influx of foreign capital by prohibiting p ay ­
m ent of interest on new deposits, by increas­
ing the notification tim e required for w ith­
draw al of deposits, and by authorizing ad d i­
tional foreign stock and bond flotations on
the Swiss m arket.
D uring the sam e period, the U nited K ing­
dom was experiencing a substantial inflow of
funds attracted by the high interest rates
w hich were a p art of the G o v ern m en t’s p ro ­
gram to keep expansionary forces un d er con­
trol. The inflow of sh o rt-term funds m asked
the w eakness in B ritain ’s balance of paym ents
on cu rren t transactions and increased her in­
ternational reserves. B ut the m onetary au th o r­
ities greeted the influx with m ixed feelings
because they feared possible disruptive ef­
fects on B ritain’s paym ents position when the

209

FEDERAL RESERVE BANK OF SAN F R A N C IS C O

funds w ere rep atriated . C onsequently, the
B an k o f E n g lan d reduced its B ank R ate twice
— in O cto b er and D ecem ber — since “ co n ­
tinuing large m ovem ents of m oney to L o n d o n
were n o t in th e interests eith er of this country
o r of the U nited S ta te s . . . . b u t also because
by the end of 1960 th ere were signs of som e
easing in the pressures of hom e d em an d .” 1
T h e B an k of E n g lan d also intervened in the
L o n d o n gold m ark et in late O cto b er 1960 to
check th e rise in the gold price, w hich was
w eakening confidence in the U nited States
dollar.
In so far as these liquid funds were im pelled
by interest incentives, the m easures tak en by
various foreign countries pro b ab ly helped to
stem the outflow from the U nited States. V ari­
ation of interest rates to effect international
econom ic adjustm ent, how ever, h ad rep ercu s­
sions on th e use of interest rate changes to
affect dom estic econom ic activity. W here
speculation ra th e r th an in terest arbitrage is
the p rin cip al reason fo r capital m ovem ents,
such m easures m ay prove only p artially effec­
tive unless the underlying econom ic situation
is sound.
T h e U nited States situation was rep eated
on a som ew hat larg er scale — and w ithin a
sh o rter sp an of tim e — by the U nited K ing­
dom in M arch 1961 w hen the G erm an m ark
and D utch guilder were revalued upw ard by
5 percent. T h e heavy m ovem ent of private
short-term funds from the U nited Kingdom
to G erm any and oth er continental E u ro p ean
countries reach ed sizable p ro p o rtio n s in the
weeks im m ediately following the revaluation,
despite declaratio n s by the G erm an au th o ri­
ties th a t additional appreciation was n o t in
prospect. In o rd e r to m inim ize the rep ercu s­
sions of these flows o n the U nited K ingdom ’s
reserve position, the central banks of E u ro p e
m eeting at Basle, Sw itzerland agreed to hold
sterling balances fo r a certain period instead
l-Annual Report of the Bank of England for the year ended Feb­
ruary 28, 1961.

210



of converting them into gold. In effect, the
sterling balances relinquished by private h o ld ­
ers were shifted into official holdings. This
action was accom panied by a jo in t an n o u n ce­
m ent by the G ov ern o rs of th e central banks
th a t they were satisfied “ th a t th e rum ours
w hich circulated last w eek in the m arkets
about possible fu rth er cu rren cy adjustm ents
have no fo u n d atio n an d they w ish it to be
know n th at the C en tral B anks co n cerned are
cooperating closely in the exchange m a r­
k ets.” !
W ithin the p ast year, therefore, in te rn a ­
tional co o p eratio n and co o rd in atio n of po li­
cies have developed out of the paym ents p ro b ­
lem s of various countries. D om estic econom ic
policies have been m odified to accom m odate
o th er countries an d relieve balance o f p ay ­
m ents pressures, and in ter-cen tral bank
agreem ent to m inim ize the unfav o rable im ­
pact of large, volatile m ovem ents of sh o rt­
term privately held funds has p ro ved suc­
cessful.
T he m ain p ro b lem involved in the m ove­
m ent of private sh o rt-term funds from country
to country is w hether m eans are available to
any country o r group of countries to co u n ­
teract o r m inim ize the im pact of such flows
in the sh o rt run. It is a p roblem th a t m ay be
of increasing concern as o th e r m oney and
capital m arkets are freed. In o th e r w ords,
should a co u n try ’s in tern atio n al liquidity p o ­
sition be adequate to cope w ith this type of
paym ents problem ? O r, should there be other
arrangem ents in existence to handle these
sudden m ovem ents of liquid capital? A d e­
quacy of in tern atio n al reserves has been the
subject of m uch h eated debate in recent
m onths, with equally vehem ent voices claim ­
ing on the one h an d th a t in tern atio n al liquidi­
ty is “ ad eq u ate” and, on the oth er, th a t it is
“ in ad eq u ate.”
iCom m unique issued by the Bank for International Settlements
on M arch 12. 1961, Bank for International Settlem ents Press
R eview, M arch 13, 1961.

October 1961

MONTHLY REVIEW

International liquidity cannot be
measured in quantifiable terms
In the short run, adequate liquidity im plies
the availability of, o r access to, the m eans
to cushion tem porary and possibly rath er
large fluctuations in the balance of paym ents
due to im balances of a seasonal o r cyclical
nature. U nited States gold holdings are p a t­
ently adequate at the p resent tim e to m eet
any tem porary drains from tran sactio n s in
goods and services. H ow ever, reserves do n o t
p erm it a country to p erp etu ate a so-called
fundam ental im balance in its paym ents stru c­
ture, such as a chronic discrepancy betw een
dom estic and foreign costs and prices; no
am ount of reserves is ad eq u ate fo r such a
task.
In tern atio n al reserves of a country are gen­
erally defined to include gold, U nited States
dollars, pound sterling, and o th e r convertible
currencies held by foreign central banks and
o th er official institutions. O th er assets can
serve as secondary reserves, such as credits
u n d er regional paym ents arrangem ents, In ­
ternational M onetary F u n d quotas, swing
m argins under bilateral paym ents agreem ents,
o th er private and official sh o rt-term credits,
and longer term capital channeled through
the W orld B ank and sim ilar institutions. R e­
course to the “ second line of defense,” how ­
ever, is not always feasible o r easy. T he avail­
ability of draw ing rights on the Intern atio n al
M onetary F u n d , for exam ple, becom es m ore
lim ited as its facilities are m ore extensively
utilized.
T h e am ount of reserves necessary depends
on the types of drains to w hich the country
m ay be exposed and on the relative im portance
of the country in the in tern atio n al paym ents
system. In general, in tern atio n al reserves do
not have to increase at the sam e rate as the
volum e of trade, although the sam e relative
m agnitude of fluctuations with a larger vol­
ume of transactions m ay result in larger
absolute swings each way. A lthough the value



o f im ports of any trad in g natio n m ight be
considered, m oreover, to indicate roughly the
m axim um p o ten tial reserve d rain from cu r­
ren t account transactions, the bulk of in te r­
national paym ents is actually cleared in the
foreign exchange m arkets and only the re ­
m aining balance has to be settled by changes
in reserve holdings. F o r a co u n try acting as
in tern atio n al b an k er, how ever, sh o rt-term lia­
bilities and capital m ovem ents m ust also be
considered. T he sh o rt-term liabilities of key
currency countries constitute th e reserves of
o th e r countries and are subject to greater vari­
ation un related to the reserve co u n try ’s own
paym ents. R eserve currencies, m oreover, are
m ore subject to speculative pressures. A high
level of confidence in the over-all econom ic
and political stability of a “ key cu rren cy ”
country dim inishes a reserve cen ter’s need
fo r reserves. A s in the case of a com m ercial
bank, d ep o sito rs’ confidence in the sound­
ness of the b an k reduces the chances of a
“ru n on the b a n k ” an d therefore its need fo r
vault cash and oth er liquid assets. O n the
o th e r hand, instability of a reserve country
m ay increase the difficulties o f obtaining
sh o rt-term assistance, m uch in the sam e way
th a t b an k lending officers are som etim es al­
leged to be willing to extend credit m ost read ­
ily to borrow ers w ho are not really in need
of funds!
C ertain types of reserves m ay be m ore effi­
cient th an others in enhancing the ability of
a country to w eather p articu la r types of re­
serve drains. In tern atio n al M onetary F u n d
quotas, fo r exam ple, m ight be m ore easily
ad ap ted to the problem s of individual co u n ­
tries. T he same volum e of reserves could go
fu rth er if fluctuations in in tern atio n al p ay ­
m ents could be reduced o r m inim ized through
synchronization of dom estic policies in re­
gard to incom e, em ploym ent, and prices;
through achievem ent of greater internal sta­
bility in each co u n try ; o r through diversifi­
cation of the econom ies of prim ary-produc-

FEDERAL RESERVE BANK OF SAN F R A N C IS C O

ing countries. In tern atio n al liquidity can thus
be im proved by reducing the need fo r reserves
as well as by increasing the supply.
T h e intern atio n al liquidity position of a
country m ight be co m p ared w ith th a t of a
business co rp o ratio n . A co rp o ratio n keeps
on h an d cash and various liquid assets with
w hich to m eet certain definite com m itm ents
in the n ear future o r unforeseen contingencies.
If the d rain on cash holdings is large and hold­
ings o f liquid assets insufficient, the com pany
can seek sh o rt-term b an k credit o r oth er sh o rt­
term financing. O nce the em ergency situation
has passed, the loan can be repaid and cash
balances rebuilt. B ut if cash on hand, liquid
assets, and o th e r sh o rt-term credits are too
sm all, the com pany m ay be forced to restrict
operations o r sell investm ents at a loss in o rd er
to m eet the drain. T he co rp o rate cash position
w ould be considered adequate if short-run
needs for liquidity did n o t necessitate the cu r­
tailm ent of operations. In tern atio n al reserves
sim ilarly should be large enough to perm it
absorption of fluctuations in the paym ents
balance w ithout disturbance to either the
co u n try ’s econom y o r the econom ies of other
countries.

Short-run liquidity can be
increased by increasing the supply
In tern a tio n a l liquidity can be increased in
the sh o rt run by increasing the supply of
eligible liquid assets available to m eet drains
from cu rren t tran sactio n s or from sh ort-term
cap ital flows. O ne m ethod w ould be to in ­
crease the to tal dollar value of gold held as
in tern atio n al reserves. A n increase in the price
of gold (o r devaluation of the d o lla r), subsi­
dies fo r gold producers, and an em bargo on
gold exports from the U nited States have all
been proposed as m eans of im proving the
liquidity position of the U nited States. A side
from the general observation th at all these
p roposals m ight lessen confidence in the d o l­
Digitized212
for FRASER


lar, they m ay be open to o th er objections. A s
m en tio n ed earlier, an increase in the price of
gold would increase U n ited States reserves in
term s of dollars and provide a larg er buffer
stock b u t w ould n o t help to rem ove the causes
o f the basic paym ents im balance o r check
the sh o rt-term capital outflow. This criticism
also holds true fo r gold subsidies, w hich w ould
also be vulnerable to the criticism s directed
against subsidies in general and doubts about
the efficacy of subsidies in adding significantly
to supplies of gold. A n em bargo on exports
of gold o r on sales by the T reasu ry w ould of
course have an extrem ely harm fu l effect on
foreign and dom estic confidence in the dol­
lar, sim ilar to the refusal of a com m ercial
bank to allow w ithdraw al of deposits.
E lim ination of the gold certificate req u ire­
m ent of 25 p ercen t against F ed eral R eserve
B ank note and deposit liabilities has also been
suggested as a m eans of augm enting o u r in ­
tern atio n al reserves. T he abolition of the gold
certificate cover req u irem en t w ould release
all of o u r gold to serve as in tern atio n al m eans
of paym ent, a logical m ove since gold no
longer circulates dom estically and gold ex ­
p o rts and im ports do n o t necessarily affect
the m onetary system . T he U nited States, inci­
dentally, is one of the few m ajo r countries in
the w orld m aintaining statu to ry gold req u ire­
m ents in its dom estic m onetary system . O n
the o th er hand, the gold certificate req u ire­
m ent m ay act as a desirable disciplinary in ­
stru m en t against inflationary tendencies in
the econom y. If the ratio of gold certificates
to note and deposit liabilities is well above
the m inim um , how ever, as has been the case
fo r m any years, the req u irem en t exerts little
o r no restraining influence and th erefore is of
little p ractical effect. T h e tim ing of any such
action could also be im p o rtan t; repeal during
periods w hen confidence in the d ollar is weak
m ight stim ulate instead of dam p en speculative
pressures.

October 1961

MONTHLY REVIEW

It has been suggested that the
United States draw on the Fund

Short-run liquidity can also be
increased by reducing the need

It has been suggested th at the U nited States
— and any other countries th a t m ight be sub­
ject to “ hot m oney” flows — draw on the
In tern atio n al M onetary F u n d . B ut A rticle VI
of the F u n d ’s A rticles of A greem ent states
that the F u n d ’s resources should not be used
by any m em ber “to m eet a large o r sustained

In addition to supplem enting the p resent
sources of liquidity, sh o rt-ru n liquidity could
in effect be increased by reducing the need for
liquidity, such as the fu rth er refinem ent of
som e of the m ethods th at have been tried o ut
in the past. G u aran tees of the gold value of
existing reserves held in key currencies have
been suggested, sim ilar to those incorporated
in the E u ro p ean M onetary A greem ent that
w ent into effect in 1958, in the T rip artite
A greem ent of 1936, and in the Basle A gree­
m ent of 1 9 6 1.1 If a gold value guarantee p ro ­
vision were in effect, dollar balances m ight
be p referred because they w ould be an e a rn ­
ing asset. As do llar balances pile up beyond
cu rren t needs for paym ent and liquidity, how ­
ever, the exchange rate for dollars w ould
w eaken, although with a g uarantee foreign
countries m ight be m ore willing to accum u­
late dollars. A n exchange guarantee m ight be
likened to a “ bew are o f the dog” sign in the
absence of a dog, how ever; effective if u n ­
tested and ineffective if tested! If used, it
w ould im pose a cost on the guaranteeing
country in term s of additional real resources
an d w ould tend to w eaken the position of the
reserve currency as a m eans of in tern atio nal
paym ent. If speculative pressures were strong,
m oreover, the exchange rate guarantees w ould
p robably be ineffective. U n d er certain lim ited
circum stances, exchange guarantees m ight be
an addition to the arsenal of w eapons availa­
ble to the authorities of a country.
A greem ent am ong central banks to hold
each o th e r’s currencies w hen liquid funds are
m oving betw een countries in large volum e
and not to convert them into gold, as u nder
the B asle A greem ent of M arch 1961, indi­
cates a line of action th a t m ight be useful
again in the future, especially if the m ovem ent

outflow of cap ital.” A rticle V II (th e so-called
scarce currency provision w hich perm its the
F u n d to borrow additional supplies of scarce
currencies) could possibly be invoked to off­
set the flight of capital from one country to
another. B ut use of this A rticle w ould allow
m em bers to discrim inate against the “ scarce
currency” country and be detrim ental to in­
ternational trade and paym ents.
Standby credits are an o th er alternative th a t
could be adopted to deal w ith sh o rt-term cap ­
ital flows, arranged u nder the sponsorship of
the F u n d o r other in tern atio n al organizations.
U nder such an arrangem ent, countries ru n ­
ning a paym ents surplus w ould lend their cu r­
rencies to countries experiencing a su b stan ­
tial loss o f short-term funds, thus m inim izing
the disturbing effects of these m ovem ents.
M r. P er Jacobsson, M anaging D irector of the
International M onetary F u n d , has advanced a
proposal of this ty p e ,L while M r. E dw ard
B ernstein, form erly on the staff of the F und,
and G o vernor X enophon Zolotas of the Bank
of G reece have presented suggestions fo r “ res­
cue o p eratio n s” som ew hat along the sam e
lines .2 These proposals w ould have the ad ­
vantage of providing a relatively uncom pli­
cated m eans of handling sh o rt-term capital
flows w ithin the fram ew ork of present in ter­
national financial arrangem ents.
iF o r further discussion, see page 217.
^Edward M. Bernstein, “ International Effects of U.S. Economic
Policy,” Study Paper No. 16, Joint Economic Committee Print,
United States Congress, January 25, 1960; Xenophon Zolotas,
Towards a Reinforced Gold Exchange Standard, Bank of Greece
and Lectures, 1961.
Digitized for Papers
FRASER



iG uarantee of the gold value of the dollar, for example, is gen­
erally taken to mean th at in event of devaluation the U nited
States guarantees foreign official holders of dollars th at their
dollar holdings will be w ritten up in value by the am ount of
the devaluation.

213

FEDERAL RESERVE BANK OF SA N F R A N C IS C O

is expected to reverse itself shortly. Such
agreem ents could be concluded for relatively
short periods o f tim e, with the In tern atio n al
M onetary F u n d o r o th er agency tak in g over
if the outflow is p ro tracted . O p eratio n in the
foreign exchange m arkets could also be em ­
ployed to reduce the incentives to m ove funds
from cen ter to center, although operations
m ight be ineffective against strong speculative
anticipations. C onsultation am ong central
banks and coord in atio n of credit policies may
also be a fruitful avenue of approach.

LONGER TERM LIQUIDITY
United States payments deficit
brings longer term liquidity
requirements into question
N ot only did the U nited States balance of
paym ents deficit pose problem s concerning a
“ basic” im balance in o u r paym ents situation
and substantial shifts of private short-term
m oney, but it brought to the fore the role of
the U nited States dollar in supplying the long­
er term liquidity requirem ents of the in tern a­
tional paym ents system . If the U nited States
deficit w ere reduced, w here would the rest of
the w orld obtain liquid assets to add to their
international reserves, outside of gold, w ith­
ou t depriving som e o th er country? A t the
p resen t tim e, th ere is no over-all shortage of
international liquidity despite the fact th a t a
n u m ber of the underdeveloped countries have
extrem ely sm all reserves. If these countries
h ad larg er reserves, they m ight be able to
m aintain im ports at desired levels w ithout
trad e and exchange restrictions. Som e of the
less developed countries, how ever, have m ade
the deliberate choice to forego the “ luxury”
of larger “ no n p ro d u ctiv e” reserves in favor of
w hat they feel is a m ore rap id rate of eco­
nom ic grow th and developm ent. T he low
level of th eir reserves reflects in usual cases,
m oreover, a lack of balance in their econom y
so th at any volum e of reserves w ould soon be

exhausted. O th er countries, on the o th er hand,
214


continue to accum ulate reserves in possible
excess of needs. B ut this is essentially a p ro b ­
lem either of m aldistribution of external re ­
serves am ong countries o r the failure to reco n ­
cile the requirem ents of in tern al an d external
stability rath e r th an a shortage of liquidity.
F reely fluctuating exchange rates o r a w id­
ening of the m argins fo r exchange rate m ove­
m ents have been frequently advanced as a
m eans of reducing o r even elim inating the
need fo r reserves by placing the b u rd en of a d ­
ju stm en t to the balance of paym ents on e x ­
change rates. U n d er a regim e of freely fluctu­
ating exchange rates, rates are theoretically
left free to find th eir “ eq u ilib riu m ” level
through the interplay of n atu ral m ark et forces
of supply and dem and. T he advantages
claim ed for such a system are g reater m an eu ­
verability for the m onetary authorities in m a r­
ket operatio n s, m ore realistic rates, and an
effective and econom ical m eans of resisting
and sm oothing o u t tem p o rary fluctuations in
the balance of paym ents and com bating the
explosive effects of speculative cap ital m ove­
m ents. O n the o th er h an d , freely fluctuating
exchange rates, w ith th eir elem ent of risk,

O v e ra ll in tern atio n al liq u id ity
ad e q u ate at present although sharp
variations exist in the positions of
individual countries.
B illio n s of U.S. D o lla rs
0
5
10

15

20

25

United S tate s

United Kingdom

Continental Europe

C a n ad a

O thtr S tarlin g Area

R est of W orld

N ote: Figures refer to June 30, 1961 except for “other sterling
area” and “ rest of world,” which refer to M arch 31, 1961.
Source: International M onetary Fund,

October 1961

MONTHLY REVIEW

w ould tend to discourage in tern atio n al trade
by increasing uncertainty and w ould im pede
adjustm ent to changes in the trad e balance.
T he fluctuations m ight also tend to be cum u­
lative and self-aggravating. W hen exchange
rates are flexible and psychological factors
dom inate o r w hen the underlying econom ic
situation is suspect, disequilibrating rath er
th an balancing capital m ovem ents may occur,
as in the case of F ran ce in 1924-25 and 1937
and the U nited States in 1933. A system of
fluctuating exchange rates w orks best when
there is in tern al financial stability and ex ter­
nal balance, in which case there is little need
fo r flexibility and thus little difference from a
fixed exchange rate policy.

Better balance and international
cooperation can increase liquidity
O ver the longer run, a significant body of
opinion has held that a larger supply of re­
serves will be necessary to take care of the
anticipated expansion in w orld trad e and p ro ­
duction. B ut there is no fixed relation betw een
the volum e of transactions financed betw een
countries and the volum e of paym ents m edia.
It is possible to reduce the need fo r reserves
— and m uch can still be accom plished in this
direction— as well as increase the supply to
m eet future needs. By w orking tow ard a bet­
te r balance in intern atio n al paym ents, for
exam ple, the dem and fo r in ternational liq­
uidity can be reduced. If deficits and surpluses
are m inim ized, the am o u n t of reserves re­
quired by each country w ould be co rresp o n d ­
ingly sm aller.
T he continuation of in tern atio n al co o p era­
tion and consultation also can contribute to
a reduction in the dem and for reserves, both
fo r the short run and the long run. C o o p era­
tion am ong central banks and governm ents
can facilitate the achievem ent of b etter bal­
ance betw een internal and external stability
and help to distribute m ore evenly the burden
of foradjustm
Digitized
FRASERent betw een deficit and surplus


countries and betw een countries experiencing
inflationary and deflationary pressures. The
closer coordination of m onetary and fiscal
policies, d em onstrated by the actions of gov­
ernm ents in dealing with the outflow of sh o rt­
term funds from the U nited States and the
U nited K ingdom in the latter p a rt of 1960
and early in 1961, can thus be a useful ad d i­
tion to each co u n try ’s range of econom ic p o l­
icy instrum ents. T h e extension of In tern a­
tional M onetary F u n d consultations to co u n ­
tries th a t have adhered to A rticle V III (th e
so-called “convertible” c o u n tries), in ad d i­
tion to the regular an nual discussions w ith
A rticle X IV m em bers (th o se th at still m ain ­
tain restrictions on trad e and paym ents fo r
b alance of paym ents re aso n s), is another con­
structive step by w hich the F u n d can keep it­
self inform ed of developm ents in various
countries and the policies being followed. T he
initiation of intergovernm ental talks u nder
the auspices of the O rganization for E u ro ­
p ean E conom ic C o operation (O E E C ) and its
E conom ic P lanning C om m ittee during the
period of “ hot m oney” m ovem ents furnished
an ap p ro p riate forum fo r discussions on m u ­
tual problem s and possible solutions. T he as­
sociation of the U nited States and C an ad a as
full m em bers in the O rganization fo r E co ­
nom ic C o o p eratio n and D evelopm ent, suc­
cessor to the O E E C , should keep o p en this
channel of com m unication betw een the lead­
ing industrial countries of the w orld. In te r­
central b an k cooperation u nder the aegis of
the B ank for In tern atio n al Settlem ents has
also proved w orkable, as illustrated by the
Basle A greem ent of M arch 1961. A n observer
from the U nited States has been attending
m eetings of the B ank fo r In tern atio n al Settle­
m ents, providing another point of contact be­
tw een countries. T he co n tinued interchange
of views through these various organizations
should prove helpful in the fo rm ulation of
fu tu re international econom ic policy and in
efforts to im prove international liquidity.

215

FEDERAL RESERVE BANK OF SAN F R A N C IS C O

In te rn a tio n al cooperation and
consultation between governments
can be facilitated through the O ECD

T he members of the OECD are:
Austria
Germ any
Luxembourg
Belgium
Greece
Netherlands
Canada
Iceland
Norway
D enm ark
Ireland
Portugal
France
Italy
Spain
Source: Organization for Economic Cooperation

Sweden
Switzerland
T urkey
United Kingdom
United States
and Development.

C loser co o p eratio n am ong countries in co o r­
dinating m onetary and fiscal policies and reg­
u la r consultatio n can assist nations to guard
against the em ergence of sh arp divergencies
in national policies w hich m ight exert strong
pressures against p articu lar countries o r areas.

The supply or av ailab ility of
international reserves
could be increased
A n u m b er of suggestions have been p u t for­
w ard to enhance longer run in tern atio n al liq­
uidity either by increasing the availability of
p resen t reserve holdings o r by increasing the
supply. A t one end of the spectrum is the
proposal fo r an increase in the price of gold,
w hich has been advanced as a solution to
all the problem s arising from the balance
o f paym ents. T he advocates of a rise in the
w orld price of gold as a m eans of providing
Digitized21(5
for FRASER


fo r additional liquidity in the long run base
their su p p o rt on the follow ing p o ints: ( 1 )
th a t the p resent in tern atio n al paym ents im ­
balance is due prim arily to a shortage of gold,
thus encouraging b ilateralism and d iscrim ina­
tion in trad in g arran g em en ts; ( 2 ) th a t w orld
trad e has ex p an d ed m uch faster th a n the
m eans of p ay m en t and th a t the gap will w iden
in the fu tu re; ( 3 ) th a t w orld gold p ro d u ctio n
has lagged because of low gold prices; ( 4 )
th at an increase in th e price of gold is the
necessary first step p rio r to th e resto ratio n of
the gold stan d ard system , w hich w ould elim i­
nate m ost of the cu rren t paym ents problem s.
If the price of gold w ere doubled, fo r ex am ­
ple, official gold reserves as of M arch 1961
w ould rise in value to $81.3 billion.
O bjections, how ever, have been voiced to
the view th a t a higher gold price is the best
way to bolster in tern atio n al liquidity over the
longer run. All the “ profits” of th e gold re ­
valuation w ould theoretically be available to
su p p o rt higher levels of trad e and econom ic
activity. But such a step w ould tend to d im in­
ish confidence in the p o u n d sterling and the
dollar as in tern atio n al currencies if it were
felt th a t g reater liquidity could be m et sim ply
by periodic increases in the gold price. C o u n ­
tries m ight therefore reduce th eir foreign ex­
change reserves and hold m ore gold so th a t
the increased liquidity arising from a higher
gold price w ould be p artly offset by the d e­
cline in their holdings of the two key cu rren ­
cies. A stan d ard of value, such as gold and
the dollar, the value of w hich was altered as
com m odity prices or the volum e of tran sac­
tions rose, w ould be a co n trad ictio n in term s.
M oreover, a higher gold price w ould leave
fundam entally unchanged the p resent d istri­
bution of gold reserves am ong foreign co u n ­
tries. C ountries w ith large gold reserves— o r
with m ost of th eir in tern atio n al reserves in
the form of gold— and gold-producing co u n ­
tries w ould benefit m ost, while those with
sm all gold reserves or a high p ro p o rtio n of

October 1961

MONTHLY REVIEW

their reserves in foreign exchange w ould find
that their relative position h ad deteriorated.
In addition, countries w ith currently in ad e­
quate reserves w ould be liable to spend any
increm ent to their holdings.
A n increase in the gold price has also been
opposed on o th er grounds. By expanding the
m onetary reserve base o r th ro u g h the incom e
effects of larger dom estic gold p roduction or
gold im ports, a rise in the gold price w ould
tend to be inflationary unless the m onetary
authorities neutralized its im pact. F ro m a po­
litical standpoint, a higher gold price w ould
boost the value of both the cu rren t o utput
and stock of gold in R ussia and o th er Iron
C urtain countries. A s stated earlier, an in­
crease in the price of gold w ould not affect
the basic causes of im balance an d m ight only
postpone needed corrective m easures. T h ere
is also no consensus at the p resen t tim e th a t
present paym ents arrangem ents will be u n ­
able to supply the dem and for increased liq­
uidity in the future.
International liquidity could be augm ented
by expanding the functions of existing insti­
tutions o r utilizing existing facilities m ore ex­
tensively. F u ller utilization of International
M onetary F u n d quotas, enlargem ent of the
num ber of convertible currencies held by the
F u n d through adherence to A rticle V III, or
increase of F u n d quotas w ould increase in ter­
national liquidity w ithout necessarily adding
to the reserves of countries now holding ad e­
q uate reserves. G reate r use could also be
m ade of F und facilities in the ordinary course
of m eeting tem porary balance of paym ents
deficits, as has been proposed, instead of lim ­
iting their use to em ergency situations, and
draw ings on the F u n d could also be m ade
m ore autom atic and not contingent upon a
p articu lar course of action approved by the
F u n d . 1 Tw o rath er sim ilar proposals to m eet
prospective increases in the need for reserves
lE dw ard M. Bernstein, “ The Reserve Centres and the Interna­

Digitized tiona]
for FRASER
M onetary F und,” The Irish Banking Review, June 1961.


have been advanced, b o th of w hich can also
be used to deal w ith the problem s caused by
the erratic m ovem ent of sh o rt-term funds.
O ne of these proposals, outlined in principle
by the M anaging D irecto r of the In tern atio n al
M o n etary F u n d , M r. P er Jacobsson, and
presented to F u n d m em bers at th eir annual
m eeting in V ienna in S eptem ber 1961, w ould
set up a netw ork o f standby arrangem ents
with the m ain industrial countries, u n d er
w hich the F u n d w ould be able to borrow their
currencies w henever the need for them arose
in excess of cu rren t F u n d holdings .1 T he o th er
p ro p o sal m ade by M r. E d w ard M . B ernstein
w ould establish a R eserve Settlem ent A ccount
as a subsidiary institution to the F u n d w hich
w ould specialize in tran sactio n s connected
with capital m ovem ents and conversion of re ­
serve currencies. F u n d m em bers w ould p u r­
chase, up to stated am ounts, interest-bearing
notes of the R eserve Settlem ent A ccount,
w hich could be used by the deficit countries in
the exchange m ark et o r to m eet conversions
out of its currency. A t the F u n d m eeting, the
Jacobsson p lan was accepted in principle,
with the details to be w orked out by the p e r­
m an en t directors representing the F u n d m em ­
bership.

New international institutions
have been suggested to meet
long-term liquidity needs
Some inform ed observers of the present
scene feel, how ever, th a t existing institutions
are not equipped to cope with the anticipated
expansion in the dem and fo r international
liquidity and th a t new institutions m ust be
form ed. O ne of the m ore widely discussed
proposals has been P rofessor R o b ert T rillin ’s
proposal fo r a su p ran atio n al institution in
w hich gold and foreign exchange reserves
w ould be co n ce n trate d .2 U nder this proposal,
the U nited States dollar and the pou n d sterIT he Subcommittee on International Exchange and Paym ents of
the Jo in t Economic Committee of Congress has also recom*
mended a plan of this type.
2Robert Triffin, Gold and the Dollar Crisis, 1960.

217

FEDERAL RESERVE BANK OF SAN F R A N C IS C O

ling w ould eventually lose their status as
reserve currencies. Triffin’s plan resem bles in
som e respects L o rd K eynes’ proposal for an
In tern atio n al C learing U nion, w hich was su b ­
m itted by the British d uring W orld W ar II
in the course of discussions concerning the
postw ar intern atio n al financial structure. This
“in tern atio n al central b a n k ” w ould be en ­
dow ed w ith the au th o rity to extend credits
on a discretionary basis to m em bers, and b a l­
ances with the bank w ould be freely usable in
settlem ent of all international transactions.
C reation of liquid assets by the new in stitu ­
tion w ould provide for the grow ing req u ire­
m ents of intern atio n al trad e, p roduction and
paym ents. In tern atio n al liquidity would be
increased as needed, according to som e p re­
determ ined form ula. U n d er this plan, pres­
sures on the do llar and sterling w ould su p ­
posedly be elim inated, and the flow of in ter­
national capital facilitated.
A n o th er blu ep rin t for a new international
financial institution has been draw n up by
M r. M axw ell Stam p of the U nited K ingdom . 1
Briefly, the p ro p o sal calls for the issuance of
gold certificates by the In tern atio n al M one­
tary F u n d — o r its successor — to countries
in exchange fo r th eir ow n currency. These
certificates w ould be given to an international
econom ic developm ent agency which would
allocate these certificates to the less developed
countries fo r im p o rt of capital equipm ent
from the industrialized nations. T he certifi­
cates could also be used to finance deficits and
therefore w ould end up with the countries in
over-all surplus in their balance of paym ents.
T hus arrangem en ts w ould be set up to link
the surpluses of countries in a favorable p ay ­
m ents position w ith aid to underdeveloped
areas.
C ritics discount som e of the advantages
claim ed for the proposed credit-creating insti1A. M . Stamp, “ Sterling and International L iquidity
m ents,” in International Paym ents Imbalances and
Strengthening International Financial Arrangements,
before the Subcommittee on International Exchange
Digitized
218for FRASER
ments, U nited States Congress, M ay and June 1961.



Arrange­
N eed for
Hearings
and Pay-

tutions and question w hether they w ould be
b etter able to w ithstand acute balance of p ay­
m ents pressures and general econom ic dis­
turbances than the p resen t m ech an ism . 1 Some
feel th a t confidence w ould be w eakened and
th a t the p resent discipline exercised by gold
m ovem ents m ight be lost. O th er criticism s
are directed against the possibly illiquid n a ­
ture of the new in stitu tio n ’s p ro p o sed invest­
m ents and oth er technical details of o rg an i­
zation an d o p eratio n . T h e price to the key c u r­
rency countries u n d er th e Triffin p lan has
also been held to be excessive, entailing am ong
o th er things intervention in th eir m oney m a r­
kets through tran sfer of ow nership of dollar
and sterling balances to the in tern atio n al cen­
tral bank.

SUMMARY AND CONCLUSIONS
By tracing the role of gold th ro u g h the ages,
we can see how it rose to a position of p ro m i­
nence in dom estic m onetary affairs, as B ritain
becam e the d o m in an t political and econom ic
pow er, and in in tern atio n al trad e th ro ugh its
use as the p referred m edium of settlem ent by
the principal trading nations in tu rn : G reece,
the R om an E m pire, the B yzantine E m pire,
the M oslem E m pire, the Italian city-states,
and G reat B ritain. G old, how ever, was not
the p rim ary dom estic m edium of p aym ent and
stan d ard of value until relatively recently—
in the late 19th century w hen m ost of the
m ajor countries follow ed B ritain ’s exam ple
and w ent on the gold stan d ard . F ro m th a t
tim e onw ard, how ever, the position of gold d e­
clined, both internationally and dom estically.
Internally, the developm ent of p a p e r m oney
and the banking system and various credit
instrum ents soon o u tstrip p ed gold, while cer­
tain “ key” currencies supplem ented gold in
international settlem ents: first the po u nd ster­
ling and later the U nited States dollar. E ven
before the dem ise of the gold stan d ard , gold
tSee, for example, Oscar L. Altman. “ Professor Triffin on In ­
ternational L iquidity and the Role of the Fund,” International
M onetary Fund Staff Papers, M ay 1961.

October 1961

MONTHLY REVIEW

had becom e less im p o rtan t in dom estic eco­
nom ic policy as fractional reserve system s
were introduced and gold flows w ere n eu tral­
ized, as in the 192 0 ’s. T hus, although gold
rem ains a p a rt of o u r m onetary econom y, it
is no longer an overriding elem ent in the fo r­
m ulation of our dom estic econom ic policies,
and it has becom e relatively less im portant
in the international financial m echanism .
As gold declined in im portance— with the
eventual collapse of the gold stan d ard in the
1930’s, m onetary m anagem ent rose in im por­
tance. By the 1930’s, m onetary m anagem ent
e n c o m p a sse d in te rn a tio n a l e co n o m ic r e la ­
tions as well, and external developm ents w ere
insulated from the dom estic econom y by the
deliberate actions of national authorities. T he
balance of paym ents discipline th at had been
exercised under the “ rules of the gold stan d ­
a rd ” was replaced by the tw in objectives of
high levels of em ploym ent and price stability.
In the postw ar period, on the other hand, bal­
ance of paym ents discipline has reap p eared
as a factor in national econom ic policy, b u t it
is discipline of a different kind. A utom aticity,
such as th a t under the gold standard when
gold flows affected interest rates, credit, and
the m oney supply, is no longer desired be­
cause of its possible perverse effects and its
unpredictability. T he discretion of m onetary
and fiscal authorities and th eir m anagem ent
decisions perm it the use of m ore adaptable
m ethods of dealing w ith the m ultiplicity of
problem s th a t arise in the dom estic and in ter­
national econom y.
T he U nited States do llar in p articu lar has
com e to dom inate m uch of the international
m onetary scene, augm ented by the pound
sterling and the facilities of international insti­
tutions. W ithin the p ast several years and
particularly in the past year, international
cooperation and consultation has em erged as
a potentially useful w eapon of international
econom ic policy. C loser international co o p ­
eration
 and coord in atio n of n ational eco­


nom ic policies has helped to reduce the U nited
S ta te s ’ b asic b a la n c e o f p a y m e n ts d efic it,
check sh ort-term capital flows (d u e both to
interest rate differentials and to sp ecu latio n ),
and also to increase in ternational liquidity for
the longer ru n by reducing the need for liquid­
ity. E arlier experience with various form s of
in ternational co o p eratio n — some of them u n ­
s u c c e s s fu l— p ro v id e d th e g ro u n d w o rk o n
w hich p resent m ethods have been built and
im proved.
In tern atio n al financial co o p eratio n was first
tried on a large scale im m ediately following
W orld W ar I when the U nited States supplied
long-term developm ent capital to o th er co u n­
tries. B ut the outflow was u n fortunately e r­
ratic. U n d er the gold exchange standard, in
addition, reserves w ere often supplied through
short-term lending, w ith the result th a t re ­
serves w ere extinguished as soon as the credits
w ere w ithdraw n, thereby producing an u n d e­
p endable credit foundation. In ternational fi­
nancial assistance was also extended during
the 1931 banking panic, first from E ngland
and F ran ce to G erm any and A u stria and
then, as the disturbances spread, from the
U nited States and F ran ce to E ngland. These
efforts w ere unsuccessful, how ever, because
they w ere u n d ertak en in a w orld based on a
highly unstable and w eak underlying credit
s tru c tu re an d in a p p ro p ria te d o m e stic e c o ­
nom ic policies. T h e T rip artite A greem ent,
concluded in 1936 after the “gold bloc” co u n­
tries left gold, proved som ew hat m ore suc­
cessfu l a n d h elp e d to m a in ta in ex ch an g e
stability until the o u tb reak of W orld W ar II.
Since W orld W ar II, the various in tern a­
tional institutions, such as the In ternational
M onetary F u n d and the W orld B ank, have
g r a d u a lly e x p a n d e d th e ir o p e r a tio n s an d
ad ap ted th eir policies to m eet challenges as
they appear. T h eir flexibility in dealing with
various situations prom ises well for the future.
A t the sam e time, regional and international
co o p eratio n , such as through the E u ro p ean

219

FEDERAL RESERVE BANK OF SAN F R A N C IS C O

P aym ents U nion, the G eneral A g reem en t on
Tariffs and T rad e (w hich pro m o tes the re ­
duction of tariffs and trad e b arriers aro u n d
the w o rld ), the O rganization fo r E u ro p ea n
E conom ic C o o p eratio n (a n d its successor,
the O rganization fo r E conom ic C o o p eratio n
and D ev elo p m en t), and arrangem ents sim i­
lar to the B asle A greem ent, furnishes an o th er
likely ap p ro ach for dealing w ith in ternational
econom ic problem s.
T h e p resent in tern atio n al paym ents system ,
revolving aro u n d the U nited States dollar and
to a decreasing ex ten t gold, thus has w orked
fairly well in the p ast year or so in handling
problem s created by sh o rt-term flows and
“basic” im balances. T h e arrangem ents co n ­
cluded to deal w ith “ h o t m oney” m ovem ents,
the steps tak en by the U nited States and oth er
co untries to reduce “ basic” paym ents im bal­
ances, and the possibility of reducing the
need for liquidity before increasing th e supply
seem to provide a varied enough assortm ent
of alternatives to cope with paym ents p ro b ­
lem s in the n ear future. A s in the case o f m ost
“ m an -m ad e” institutional arrangem ents, grad ­
ual progress and evolution m ay oftentim es
be the “ b etter p a rt of v alo r.”
It m ight be n oted in conclusion th a t the
problem s en co u n tered by the U nited States
dollar in the p ast few years have involved to
a significant ex ten t a decline in the liquidity
position of the U nited S tates ,1 b u t this w eak’ As m easured by the ratio of Our gold holdings plus other
short-term claims against foreign countries and draw ing rights
on the International M onetary Fund to foreign liquid claims
on the U nited States.

Digitized
220 for FRASER


ening does n o t im ply a d eterio ratio n in the
w ealth of th e U nited States. In tern a tio n a l
assets of the U nited States (in clu d in g gold)
of $89.2 billion at the end of 1960 exceeded
foreign investm ents in the U n ited States by
alm ost $45 billion. A lth o u g h o u r in tern atio n al
assets rose by approxim ately the sam e am ount
as foreign assets and investm ents in the U nited
States in th e th ree years 1958-60, o u r n et
foreign position im proved by m ore th a n $ 7
billion in the preceding five years.
In addition, th e large m ovem ents o f sh o rt­
term capital th a t w ere d etrim en tal to o u r p ay ­
m ents position in 1960 need n o t alw ays be
adverse. S hort-term cap ital flows can greatly
facilitate the sm ooth functioning of in tern a­
tional trad e and the investm ent process, d e ­
spite the fact th at g reater freedom o f m ove­
m e n t o f s h o rt-te rm fu n d s h a s in tro d u c e d
a d d itio n a l c o m p lic a tio n s. T h e b e n e fits of
closer in tern atio n al co n su ltatio n and co o p er­
ation am ong various cou n tries in w eathering
the im m ediate im pact o f sh o rt-term capital
m ovem ents and o th er paym ents problem s has
also been d em o n strated w ithin th e p a st year.
B ut the degree of success achieved should n o t
o bscure the fact th a t the prin cip al b u rd en of
co rrectio n for paym ents im balances and for
the establishm ent of lasting in tern al and ex ­
ternal stability still lies in im proving general
econom ic efficiency.

MONTHLY REVIEW

October 1961

BANKING AND CREDIT STATISTICS AND BU SINESS IN D EX ES— TWELFTH DISTRICT 1
(In d e x e s: 1947-1949 = 100. D ollar a m o u n ts in m illio n s of d o lla rs)
C ondition item s of all m em b er ban ks1' 7
Bank debits
index
31 cities1' 5

D em an d
deposits
a d ju s te d 3

T otal
tim e
deposits

495
720
1 ,4 5 0
6 ,4 6 3
6 ,6 1 9
6 ,6 3 9
7 ,9 4 2
7 ,2 3 9
6 ,4 5 2
6 ,6 1 9
8 ,0 0 3
6 ,6 7 3
6 ,9 6 4

1 ,2 3 4
951
1 ,9 8 3
9 ,9 3 7
1 0 ,5 2 0
1 0 ,5 1 5
1 1 ,1 9 6
1 1 ,8 6 4
1 2 ,1 6 9
1 1 ,8 7 0
1 2 ,7 2 9
1 3 ,3 7 5
1 3 ,0 6 0

1 ,7 9 0
1 ,6 0 9
2 ,2 6 7
6 ,7 7 7
7 ,5 0 2
7 ,9 9 7
8 ,6 9 9
9 ,1 2 0
9 ,4 2 4
1 0 ,6 7 9
1 2 ,0 7 7
1 2 ,4 5 2
1 3 ,0 3 4

42
18
30
132
140
150
153
173
190
204
209
237
253

1 6 ,9 2 3
1 6 ,9 5 8
1 6 ,8 9 8
1 7 ,1 3 9

6 ,3 3 9
6 ,6 2 6
6 ,6 9 7
6 ,9 6 4

1 2 ,5 7 5
1 2 ,8 4 8
1 2 ,9 0 7
1 3 ,0 6 0

1 2 ,5 4 7
1 2 ,6 2 8
1 2 ,6 1 6
1 3 ,0 3 4

253
263
248
258

1 6 ,7 5 1
1 7 ,5 2 5
1 7 ,5 1 7
1 7 ,6 3 7
1 7 ,6 3 2
1 7 ,5 7 8

6 ,9 8 4
6 ,9 9 1

1 3 ,0 1 0
1 2 ,7 5 0

1 3 ,1 2 1
1 3 ,6 3 9
1 3 ,7 5 4
1 3 ,9 9 9
1 4 ,2 8 9
1 4 ,3 7 1

254r
273r
273t
266r
265r

Year
and
M o n th

Loans
and
discounts

1929
1933
1939
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960

2 ,2 3 9
1 ,4 8 6
1 ,9 6 7
7 ,8 6 6
8 ,8 3 9
9 ,2 2 0
9 ,4 1 8
1 1 ,1 2 4
1 2 ,6 1 3
1 3 ,1 7 8
1 3 ,8 1 2
1 6 ,5 3 7
1 7 ,1 3 9

U .S .

G o v 't
securities

B ank rates

T otal

nn1
Ul

ni iui
n niu
a nyriii”

sh o rt-te rm
business
loans6’ 7

cultural
em ploy­
m ent

3 ^6 6
3 .9 5
4 .1 4
4 .0 9
4 .1 0
4 .5 0
4 .9 7
4 .8 8
5 .3 6
5 .6 2

Total
m f'g
em ploy­
m ent

60
112
118
121
120
127
134
139
138
146
150

57
121
130
137
134
143
154
160
155
166
166

150
150
150
150

164
164
163
163

15 1

162
162

C ar­
loadings
(n u m b e r )5
102
52
77
101
100
100
96
104
104
96
89
94

88

D e p 't
store
sales
(v a lu e )6

R etail
food
prices

30
18
31
112
120
122
122
132
141
140
143
157
156

64
42
47
113
115
113
113
112
114
118
123
123
125

156r

126
126
126
127

i. s

1960

S eptem ber
O ctober
N ovem ber
D ecem ber

5 .5 3

5 .5 0

86
85
85
87

161r
153r
159

1961

Ja n u a ry
F ebruary
M arch
A pril
M ay
June
Ju ly
A ugust
Septem ber

17,504
17,779r
1 8 ,0 3 9 p

6,916

12,860
13,222

7 ,4 3 6
7 ,3 9 3
7 ,5 7 1

1 2 ,8 6 5

1 3 ,2 1 2

14,492
14,656

268r
267r
262r

13,222j>

1 4 ,7 8 1 p

277

12,935
13,206

7,935
7 ,8 6 3 r
7 ,9 5 4 p

151

88

162
163
164
164
165

152
152
153

5 .5 0

81

85
80
84

154
164
160
164

153
162
167
157

127
127
127
127
127
126
126
125

W a te rb o rn e Foreign T ra d e In d e x 1- »■ 10

In d u strial production (physical volum e )6
Y ear
and
m onth

162r

15 1
151
151

548

84
83
83

P etro leu m 7

Exports
Electric
power

Im p orts

S te e l 7

Copper 7

T otal

D ry Cargo

Tanker

T o tal

D ry Cargo

1929
1933
1939
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960

95
40
71
114
113
115
116
115
122
120
106
107
116
110

87
52
67
98
106
107
109
106
106
105
101
94
92
91

78
50
63
103
112
116
122
119
124
129
132
124
130
134

55
27
56
112
128
124
131
133
145
156
149
158
174
161

29
26
40
120
136
145
162
172
192
209
224
229
252
271

190
110
163
92
186
171
141
133
166
201
231
176
188
241

150

247

7

i07
80
194
201
138
141
178
261
308
212
223
305

243
108
175
130
145
123
149
117
123
123
138
149

124
72
95
144
162
204
314
268
314
459
582
564
686
808

128

24
125
146
139
158
128
154
163
172
142
138
154

103
17
80
115
116
115
113
103
120
131
130
116
99
129

97
145
140
141
163
166
187
201
216
221
263
269

57
103
733
1,836
4,239
2,912
3,614
7,180
10,109
9,504
11,699
14,209

1960
A ugust
S eptem ber
O ctober
N ovem ber
D ecem ber

109
106
103
100
99

90
90
91
91
91

138
136
131
135
137

164
143
159
155
151

125
131
127
129
133

121
141
144
141
137

275
279
275
276
274

227
250
244
220
271

280
3*7
347
306
338

153
113
97
97
175

1,025
885
779
826
1,046

261
284
238
254
245

20,948
16,550
9,240
15,744
21,919

101
101
103
114r

91
91
92
92
92
91

134
134
131
135
143
142

159
176
178
168
169
188
157
160

111
152
162
172
191
187
183
180

139
134
137
133
143
143r
129p

277
276
285
283

235
248
264
261
265

318
362
363
331
331

118
95
124
163
171

779
666
952
759
865

218
233
252
286
292

15,394
11,985
19,268
13,139
15,856

1961
Ja n u a ry
F eb ru ary
M arch
A pril
M ay
June
Ju ly
A ugust

L u m b er

C ru de

lllr
11 l r

110

R efined

C em en t

Tanker

1 A djusted for seasonal variatio n , except w here indicated. E x cep t for b an k in g a n d credit a n d d e p a rtm e n t store sta tistics, all indexes are based upon
d a ta from outside sources, as follows: lum ber. N atio n al L um ber M a n u fac tu rers’ Association, W est C o ast L um berm an's A ssociation, and W estern
Pine Association; petroleum , cem ent, and copper, U.S. B ureau of M ines; steel, U.S. D e p artm en t of Com m erce and Am erican Iron a n d Steel In stitu te ;
electric power, Federal Pow er C om m ission; non ag ricu ltu ral and m anu factu rin g em ploym ent, U.S. B u reau of L ab o r S ta tistic s and cooperating sta te
agencies; re ta il food prices, U.S. B u reau of L abor S ta tistics; carloadings, various railro ad s a n d railroad associations; and foreign trad e , U.S. D ep artm en t
of Com m erce.
2 A nnual figures are as of end of year, m onthly figures as of last W ednesday in m o n th .
3 D em and deposits, excluding
in te rb an k a n d U.S. G overnm ent deposits, less cash item s in process of collection. M onth ly d a ta p a rtly estim ated.
4 D ebits to to ta l deposits
except in te rb a n k p rio r to 1942. D eb its to dem and deposits except U.S. G overnm ent a n d in te rb a n k deposits from 1942.
6 D aily average.
8 A verage ra te s on loans m ade in five m ajor cities, w eighted by loan size category.
1 N ot a d ju ste d for seasonal variation.
s Los Angeles,
San Francisco, and S eattle indexes com bined.
* C om m ercial cargo only, in physical volum e, for th e Pacific C o a st custom s d istric ts plus A laska
and H aw aii; sta rtin g w ith Ju ly 1950, “ special c ateg o ry ” exports are excluded because of secu rity reasons.
10 A laska and H aw aii are included
in indexeB beginning in 1950.
p— Prelim inary.
r — Revised,




220A