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M O N T H L Y

eview'
FEDER AL RESERVE BANK
OF ST. LOUIS

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• P . O . B O X 4 4 2 • S T . L O U IS 6 6 f MO.

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1 9 6 0

This issue relea sed on January 27

VOL. 43 * No. 1 • JANUARY *61




Financial Highlights o f 1960

B u sin ess ACTIVITY was at a high level during
most of I960, although it was declining in the latter
half of the year. Production, employment, and incomes
set new records, and average prices showed only
modest net changes. Nevertheless, economic problems
arose, and it is generally believed that the perform­
ance of the economy fell short of its capabilities.

Introduction
At the beginning of the year there was widespread
optimism. Total output of goods and services was
rising rapidly, and many industries were approaching
capacity. Since the prolonged steel strike had ended
only a few weeks before the year commenced, it was
thought by many economic analysts that there was a
huge reservoir of unsatisfied demands for the output
of factories- The major economic problem seemed to
be how to contain the boom and to avoid general
price rises. Reflecting the pace of economic activity
and the great expectations, demands for funds bid up
interest rates to postwar peaks. The money supply
was contracting, but money substitutes and the veloc­
ity of money were rising.
The boom, however, never materialized. After the
spurt in activity from November 1959 through Jan­
uary 1960, total output of goods and services rose only
modestly during the spring and early summer. Indus­
trial production remained virtually unchanged at a
level about 2 per cent below the high attained in Jan­
uary. The general economic plateau was a resultant
of a contraction in the output of durable goods offset
by rises in other sectors. Bank reserves changed only
slightly, bank credit expanded, but the money supply
continued to contract. Interest rates declined markedly
as the demand for credit decreased.
Around midyear total business activity began to
contract. Purchases of goods and services declined
slightly, inventories became burdensome, production
schedules were cut back, and unemployment rose. The
fourth postwar recession had begun, although the con­
traction through early January 1961 was still milder,
according to most measures, than in any of the other
postwar recessions.
Page 2




Monetary actions were taken to stimulate domestic
economic activity. Bank reserves were increased,
commercial bank credit rose, and the earlier decline
in the money supply was reversed. Interest rates in
the last half of 1960 remained at their midyear level.
A complicating problem was that during the last
half of 1960 the country was faced with a persistent
and substantial gold outflow. A major cause of the
large movement of gold out of the country, it was
thought by many, was the relatively low short-term
interest rates in this country compared with those in
other nations. Actions designed to stimulate domestic
economic activity might have a depressing effect on
short-term interest rates and thus stimulate the net
outflow of capital.
This article, reviewing financial highlights of 1960,
is divided, chronologically, into three principal parts.
The first section deals with the short period early in
the year when economic activity was high and rising.
The second section covers the period of hesitation
during the spring and early summer. Finally, the
third section focuses on the economic contraction
marking the last two quarters of 1960.
Gross National Product
A n n u a l R a te s
B il lio n s o f D o ll a r s

A n n u a l R a te s
B il lio n s o f D o l l a r s

Arrows indicate National Bureau of Economic Research estimates of business cycle peaks
and troughs.
Latest d a ta p lo t 'e d s4 t h Qtr. 1 9 6 0 e stim a te d

Early 1960
Economic activity was vigorous and improving as
the year 1960 began. From as far back as the second
quarter of 1958, when the last recession had bottomed
out, there had been a strong underlying upward push
to business activity. From April 1958 to July 1959,
industrial production rose at an annual rate of 19 per
cent. Total output of goods and services rose 11%
per cent from the second quarter of 1958 to the second
quarter of 1959. However, before the recovery was
complete, the nation suffered one of its severest work
stoppages in history, the steel strike, lasting from July
to November of 1959.

5 per cent of the civilian labor force was unemployed
compared with about 6 per cent in the fall of 1959
and roughly 7 per cent in 1958. Also, the average
hours worked per week in manufacturing had risen
slightly, from about 39 in 1958 and 39.9 in November
1959 to 40.3 in January 1960.
Unemployment
As a per cent of the civilian labor force
Per Cent

Seasonally Adjusted

Por Cen#

During the strike economic activity naturally con­
tracted; industrial production decreased 5.6 per cent
from July to October. However, optimism about fu­
ture activity remained high during the strike. Not
only was economic recovery from the 1957-58 reces­
sion incomplete, but because certain commodities
were unavailable during the work interruption, there
developed an increasing backlog of unsatisfied de­
mands for many industrial products.
Industrial Production
The 5 per cent level of unemployment in January,
although well below the level reached during 1958
and again during the 1959 steel strike, was above
any nonrecession year since the end of World War
II. This rather high level of unemployment may
reflect the fact that the economy did not fully recover
from the effects of the 1957-58 recession and the 1959
steel strike. The existence of this untapped reservoir
of labor was taken as another sign that business ac­
tivity could continue to expand.

1954

1955

1956

1957

1958

1959

1960

Latest d a ta plotted: D e ce m b e r

After the strike was settled, business activity rose
rapidly. As a result, by January 1960 business activity
had reached a new high and was rising. Industrial
production in January was 8.8 per cent above October
1959, the low point of the strike. More importantly,
production had already surpassed the pre-strike peak
and was up at an average annual rate of 15.8 per
cent since April 1958.
Reflecting the rise in production, utilization of the
labor force was more intensive. In early 1960, roughly




Reflecting the increase in employment as well as
a rise in wage rates and gains in profits, rents, interest
and other income, total personal income rose to $396
billion in January 1960. This was a rise at a rate of
6.7 per cent per year from April 1958. With expanded
personal incomes, greater business activity, and state
and local governments expanding their role, the total
demand for goods and services was rising rapidly.
In real terms (that is, after adjustment for price
changes), gross national product in the first quarter
of 1960 was up at an average annual rate of 6.6 per
cent from the low point reached during the second
quarter of 1958.
Despite the existence of a rather high level of un­
employment, prices rose on balance in 1959. During
the last six months of 1959 the consumer price index
rose at an annual rate of 1.6 per cent. Although the
Page 3

Prices
1947-49=100

Money Supply
Semi-Monthly A ve rages of Daily Figures

1947-49=100

S eason ally Adjusted
Billions of Dollars

Billions of Dollars

Latest d a ta plotted: Second half o f Decem ber

wholesale price index remained about stable through­
out the year, industrial commodities moved upward
while farm products and processed foods declined.
In early 1960, as more and more firms were approach­
ing capacity and as order backlogs rose, there was a
broad consensus that the major economic problem of
the nation was how to avoid the evils of inflation.
Bank reserves were maintained at approximately a
constant level during 1959 and early 1960 while total
economic activity improved substantially in this pe­
riod. Total reserves of member banks, adjusted for
seasonal influences, averaged $18.7 billion during
January 1960, virtually the same level that had existed
since mid-1958.
The total volume of commercial bank loans and
investments (adjusted for seasonal) was about $187
billion in January 1960. Bank credit (loans and invest­
ments) had remained at this level for 8 months. Bank
loans had been rising sharply, but since total reserves
of banks remained virtually unchanged, banks sold a
sizable amount of investments.

ment) at reporting banks outside the large financial
centers turned over at the rate of 25.8 times per year,
up 7.9 per cent from a year earlier.
Among the factors encouraging a more rapid use of
money were a rise in interest rates and an increase in
the volume of near money substitutes. Higher interest
rates available to investors made the alternative cost
of holding idle cash greater. More money substitutes,
such as savings accounts and short-term Government
securities, may have reduced the need for holding
cash. During 1959 the liquid asset holdings of the
public rose markedly, about 7.5 per cent, with a large

Yields on U.S. Government Securities
Per Cent

W eekly Averages of Daily Figures

The money supply of the country (seasonally ad­
justed) averaged $141.3 billion during January 1960.
This was nearly the same as a year earlier, a rise in
the first half of 1959 being matched by a decline in
the last six months. From the peak of the previous
boom (August 1957) to January 1960, the money
supply rose at an annual rate of only 1.4 per cent.
In sharp contrast to the lack of growth in the money
supply, there had been a rapid increase in the rate of
turnover of money. In the first quarter of 1960, de­
mand deposits (except interbank and U. S. GovemPage 4



Latest d ata plotted: W e e k E n d in g J a n u a ry 20, 1961

Rer Cenf

share of the gain in the form of short-term U. S. Gov­
ernment securities. The Treasury operated at an $8
billion cash deficit, and with the going level of interest
rates and the 4Va per cent maxiipum on long-term
issues, the Treasury expanded the volume of short­
term issues substantially.

1960 there was relatively little spread between short­
term rates in the United States and in the money
market centers of Western Europe.

Interest rates after having risen markedly since
mid-1958 reached their highest level in several decades
during early January 1960. The rise in rates reflected
strong demands for funds by businesses and consum­
ers together with a limited rate of saving and credit
creation.

During the first few months of 1960 the bright
prospect of the beginning of the year faded away.
The economy commenced moving sidewise, and
many uncertainties developed. Industrial production
remained at a level 9 or 10 per cent above the 1957
average from February to mid-summer, compared
with a peak of 11 per cent above in January. Output
of durable goods declined; other sectors of the econ­
omy registered modest gains.

Average yields on three-month Treasury bills were
4.35 per cent in January 1960, as against 2.82 per cent
a year earlier and about 1 per cent in the spring of
1958. Long-term Government bonds were at a high
of 4.37 per cent, compared with 3.90 per cent a year
earlier and a previous postwar peak of 3.73 per cent in
October 1957. The prime bank rate on business loans
had risen to 5 per cent from the recession low of
3/2 per cent and from the previous postwar high of
4& per cent in 1957. The discount rate at the Federal
Reserve Banks, which was 1% per cent in mid-1958,
had been raised in five successive steps to 4 per cent
by early 1960.
Interest rates in Western Europe also rose during
1959. However, the rise in these nations did not begin
until about mid-1959 (see chart). The varying move­
ments in rates in the United States and in other
countries reflects in part the differences in the timing
of the business cycle. However, at the beginning of
Yields on 3-Month Treasury Bills

Spring and Early Sum mer

Total demands for goods and services in real terms
crept up slightly (annual rate of 1.2 per cent) from
the first quarter to the second. By contrast, the gross
national product in constant prices had risen over 4
per cent in the previous year. A smaller rate of in­
ventory accumulation by businessmen was a principal
factor in the decreasing rate of growth in demands.
Too, the Federal Government shifted from a large
($8 billion) cash deficit in calendar 1959 to a cash
surplus ($3 billion annual rate, seasonally adjusted)
in the first half of 1960.
The ratio of unemployed in the civilian labor force
remained at or about the 5 per cent level through
mid-1960. Although this was an improvement from
roughly 7 per cent in 1958 and 5J£ per cent in 1959,
it was considered by most as unsatisfactory and was
considerably above the roughly 4 per cent rate pre­
vailing in the 1955-57 period.
Consumer prices continued to inch up somewhat
but wholesale prices remained about unchanged. The
fear of great upward pressure on prices gradually
subsided during the period. At the same time, concern
increased over the large numbers of unemployed and
the lack of dynamic growth of the economy. There
was, to be sure, a substantial measure of prosperity,
but an economic problem emerged as to how to
stimulate activity to rise from the plateau.

1 M o n th ly A v e r a g e s o f W e e k ly Figures
Latest d a t a plotted: Decem ber, p re lim in a ry
2 End o f M onth F ig u re s on 60<90 D a y Treasury Bills
Latest d a ta plotted) D e ce m b e r, p re lim in a ry
3

M onthly A v e r a g e s o f D a ily Figures
Latest d a ta plotted: D e cem be r




Almost from the beginning of 1960, there was a
marked decline in interest rates. Average yields on
three-month Treasury bills fell from about 4.50 per
cent in December 1959 to 2.30 per cent in July. The
decline in yields of other Government securities was
large but somewhat less pronounced. Intermediateterm issues decreased from 4.95 per cent in December
to about 3.70 in July, and the rate on long-term bonds
declined from over 4.25 per cent to about 3.85 per cent.
Page 5

This was the first time since World War II that
interest rates had declined so much and for such an
extended period while business activity remained at
a fairly high level. In the two previous recessions,
1953-54 and 1957-58, interest rates did decline more
sharply. One feature distinguishing the early 1960
decrease in interest rates from those that occurred
during the recessions of 1953-54 and 1957-58 was the
fact that the yields on corporate and municipal issues
and on mortgages declined only slightly.

Member Bank Borrowings from Reserve Banks
M onthly A v e ra g e * of D a ily Figu re*

Millions of Dollars

Millions of Dollars

A major cause of the decline in rates was a change
in the Federal Government’s position. During 1959
it was a large net borrower to finance the sizable defi­
cit, but in early 1960 as receipts exceeded outlays,
the Government retired a substantial volume of debt.
The Federal Reserve System increased its average
holdings of Government securities from a seasonally
adjusted level of $25.7 billion during January 1960 to
about $26.3 billion in June. Nevertheless, total re­
serves of member banks (seasonally adjusted) declined
from an average of $18.7 billion during January to
$18.3 billion in June. A sharp contraction from Janu­
ary through mid-April was only partially offset later.
The decline in reserves resulted primarily from net
repayments of borrowings from Reserve Banks (see
chart). At the same time market interest rates fell
below the discount rates (see charts). Even after the
Vz of 1 percentage point reduction in discount rates
in early June, discount rates were relatively high com­
pared with yields on short-term market issues, and
borrowings continued to decline.
Total commercial bank credit (seasonally adjusted)
rose only modestly during the first half of 1960. Loans
continued to increase, but with a limited supply of
reserves, banks reduced their portfolios of securities.
As a result, the loan-to-deposit ratio of commercial
banks in May and June 1960 reached 55 per cent, com­
pared with 52% per cent at the beginning of the year,
47 per cent in mid-1958 and a previous postwar peak
of 49% per cent in September 1957. Hence, many
bankers felt less liquid in June than in January, de­
spite a substantial reduction in member bank indebt­
edness at Reserve Banks over the period.
Despite the modest expansion in total bank credit,
the money supply declined from $141.3 billion in
January 1960 to $139.4 billion in June. This decline
was at an annual rate of 3.2 per cent. The contrac­
tion in the money supply in view of a modest growth
in bank credit reflected a large increase in time de­
posits (not included in the money supply as defined).
According to bank debits reports, the turnover of
money rose rapidly in early 1960 but from March
Page 6




Latest data plotted: Decem ber

Money Rates

*M onthly A v e ra ge s of D a ily Figures
Latest d a ta plotted: D e cem be r

Commercial Bank Credit
B illions

S e a s o n a lly A d ju s te d

Bj Mion$

through June leveled off at a rate just over 26 times
per year. A decline in interest rates and a reduced
volume of liquid assets in the hands of the public
(especially short-term Government securities as the
Treasury retired debt) may have had some influence
on the velocity of money.

Early Summer to Year-end
Sometime around early summer, business activity
slackened and the economy entered into the fourth
postwar recession. Real product of the economy (in
1959 dollars) decreased from over $497 billion in the
second quarter to less than $493 billion in the third
quarter and probably drifted lower in the fourth quar­
ter. A major factor in the decline was the shift from
business inventory accumulation to inventory con­
traction. Also, consumer purchases of goods declined
slightly.
The Federal Government increased its seasonally
adjusted cash surplus from an annual rate of $3 bil­
lion in the first half to nearly $7 billion in the third
quarter. In the fourth quarter4 the cash surplus de­
clined sharply to an estimated $2 billion annual rate
as a result of increased expenditures and declining
revenues induced by the so-called automatic stabiliz­
ers. Government receipts declined chiefly from lower
taxes received on corporate profits, and some outlays,
especially unemployment compensation, rose.
Industrial production declined over 6 per cent from
July 1960 to December, and there was a further con­
traction in early January 1961. There were weak­
nesses in the production of both durable and non­
durable goods. Total new construction, however, reOutlays for N ew Construction

mained virtually unchanged during 1960. Although
private residential construction drifted steadily lower,
the decreases were substantially matched by increases
in public, commercial, and industrial construction.
Unemployment as a share of the civilian labor force
rose from 5 per cent in late spring of 1960 to 5%
per cent in mid-summer to about 6% per cent in
October, and to nearly 7 per cent at year-end. In
addition the average factory work-week for those em­
ployed was shortened from about 40 hours in the
early summer to 38% hours in December.
Personal income grew at a modest (2% per cent)
annual rate from June 1960 through October but ap­
parently changed little in the last two months of the
year. In terms of dollars of constant purchasing
power, personal income may have contracted from
June to December. Wage and salary disbursements
in current dollars were practically unchanged in the
period. However, unemployment compensation and
other transfer payments rose markedly.
Despite widespread weakness in expenditures and
a large amount of idle productive capacity, prices of
some goods and services worked up and prices of
other items remained steady. On the average, prices
changed moderately; in the consumer area they ap­
peared to work up slightly. The consumer price
index increased from June through December, re­
flecting markups in the prices of some food items and
in the cost of services. Commodities other than food
rose slightly in price, a reduction in durable goods
being more than offset by increases in nondurable
goods. However, price indices do not fully reflect
hidden price concessions which are normally made
during periods of weak demand.

S e a s o n a lly A d ju s te d A n n u a l Rates
B illio n s o f D o lla rs

Latest d a t a plotted: D e c e m b e r




B illions o f D o lla rs

The recession, however, was not the only economic
problem faced by the nation during the last half of
1960. For about a decade, the United States has had
a deficit in its net balance of payments, reflecting the
fact that U. S. surplus receipts on current account
have been more than offset by U. S. Government out­
lays abroad and private capital outflows. While "nontrade” payments (Government grants, loans, and mili­
tary expenditures related to defense establishments
abroad) have been substantial in recent years, it was
the shrinkage in the U. S. merchandise trade surplus
that boosted the deficit above the $3 billion level in
1958 and 1959. In the late summer of I960, gold
began flowing out of the country in large volume. In
the last half year the gold outflow totaled $1.5 billion
as against $134 million in the first half.
The net foreign balance of payments deficit be­
came larger beginning last summer when short-term
Page 7

U. S. Balance of Payments
Billions of Dollars

Billions of Dollars

in August-September 1960 and again in the November-December 1960 period.2 These measures were
taken pursuant to a 1959 Act of Congress which was
designed in part to reduce the inequities in reserve
requirements.
Offsetting in large measure the release of reserves
through the actions relating to vault cash and open
market operations were the outflow of gold and
a continued reduction in member bank borrowing.
The movement of gold abroad of roughly $1.5 billion
meant a reduction of a like amount in member bank
reserves. The impact of the gold movement was con­
centrated in the last half of the year.

1960 data by quarters, seasonally adjusted at annual rates.
* Net goods and services; Totals from 1946 to date exclude military
supplies and services transferred under grants.
* * Minus figures indicate balance of payments deficits, settled by net gold
sales and increases in foreign-held dollar assets.

interest rates in the United States declined markedly,
and rates in other industrialized countries continued
to rise. The spread in rates made it profitable for
individuals and businesses to move short-term funds
from this country to others, increasing this country’s
net payments deficit, despite the fact that our export
surplus was rising. The net payments deficit gave
foreign central banks and other official institutions
claims to dollar balances. These institutions elected
to take less than the usual share of their funds in the
form of a buildup in short-term balances in the Unit­
ed States. They chose to take a larger proportion in
the form of gold. However, at the end of December,
the United States still owned $17.8 billion or 47 per
cent of the world’s monetary gold reserves (exclud­
ing communist bloc nations and the holdings of
international institutions).
From June 1960 to December daily average effec­
tive reserves1 of member banks expanded by $816
million, or at an annual rate of about 9 per cent. This
expansion was due in part to System open market
purchases of securities which added on balance about
$1.1 billion to member banks or about $200 million
more than seasonal.

Member bank borrowing continued to decline in
the latter half of the year. From a high of $905 mil­
lion in January, borrowings were $425 million in June
and reached the lowest level of the year when they
Member Bank Borrowings from Reserve Banks
M illions of D o lla rs

w «*kly Av*rag«i of Daily Fijur**

M illio n s of D o lla rs

averaged only $87 million in December. In the
previous two recessions as well as in the current con­
traction, the drop in bank borrowing was a major
contributing factor to an absolute decline in total re­
serves which occurred in those periods.

In addition to open market operations the System
in the last six months of 1960 released approximately
$1.9 billion of additional reserves by allowing mem­
ber banks to count cash in vault as part of their re­
serve requirements. This action was made effective

Besides using a part of the reserves supplied by
the System to reduce their borrowings, member banks
also increased their holdings of excess reserves. Ex­
cess reserves, which averaged $466 million in June
1960, rose to $775 million by December 1960. This
same set of circumstances accompanied the easing
measures employed by the System in the two previous
recessions. Before using reserves to expand credit,
banks generally seek to improve their liquidity posi­
tion. At some point when the banks "feel” that they
are liquid “enough” the additional reserves are used
to expand credit, usually by buying securities.

1 E ffective reserves are total reserves of mem ber banks adjusted
for seasonal and for changes in legal reserve requirements.

2 T h e System had previously perm itted some cash in vault to
count as reserves beginning in D ecem ber 1959.

Page 8




Excess Reserves of Member Banks

Ratio of Loans to Deposits
A ll C om m e rcial B a n ks in U. S.

M illio ns of Dollar*

w ..kly Av.ro9« of Doily Figur..

M illions of D o llar*

The change in Federal Reserve regulations which
allowed banks to count vault cash as reserves may
have contributed to the growth in excess reserves
during the past year. To the extent that this is ex­
plained by the fact that banks had to reorient their
thinking as to the relationship between vault cash
and their required reserves, the increase may be
temporary. However, the reserve accounts of some
banks constitute a highly active "working balance”
and the permission to count vault cash did not alter
the minimum balance needed to avoid overdrafts at
the Reserve Banks. To this extent, the general level
of excess reserves may have moved to a permanently
higher level.
With a greater volume of reserves during the sec­
ond half of 1960, commercial banks not only held
more excess reserves but also increased bank credit
significantly. Loans, adjusted for seasonal, which
had been rising during the first half of the year, ex­
panded at a slower pace during the third quarter.
During October and November loans declined but
they rose in December. The behavior of loans dur­
ing the latter half of 1960 shows a strong similarity
to the 1953-54 and 1957-58 recessions. The pattern
of loan behavior during or preceding a recession is
first a decline in the rate of expansion followed by a
leveling off or absolute decline. Bank investments
which had declined on balance during the first half of
the year expanded over $8 billion from the end of
June to the end of December.
As a result of the shift in the composition of earn­
ing assets of commercial banks, the banking system
has become more liquid, as measured by the loan-todeposit ratio (see chart). The ratio of loans to de­
posits, which rose almost steadily during 1959 and
the first quarter of 1960, leveled off during AprilJune, and has since been declining. Nevertheless, the




Per Cent

Semi-Annually

p9r Cent

ratio of loans to deposits is presently higher than at
any recent period before 1960.
As the liquidity position of the banking system im­
proves, commercial banks become more receptive to
new loan demands. The behavior of the banking
system in this respect is similar to the actions of in­
dividuals. As a person’s cash position improves, he
tends to be more willing to spend any additional
funds rather than to hold more idle cash balances.
During periods of recession, particularly in the early
stages, banks and individuals attempt to improve
their liquidity positions.
Since midyear the seasonally adjusted money sup­
ply has worked up slowly to an average level of
$140.4 billion in December. This increase recovered
less than half of the decline which occurred in the
first six months of the year and only one quarter of
the decline which had occurred from July 1959 to
June 1960.
The net decline in the money supply during 1960
when bank reserves and bank credit were expanding
raises some interesting questions. The causes behind
this development lie largely in two directions. First,
excess reserves, a part of total effective reserves, are
reserves which do not directly support the money
supply. As was pointed out earlier, excess reserves
have expanded significantly in recent months. Sec­
ondly, time deposits of commercial banks grew at an
unusually rapid rate during 1960. Since time deposits
do not constitute part of the money supply as defined,
the reserves which support time deposits have no di­
rect relationship to the quantity of money.
Page 9

Money Supply*
S e m i-M o n th ly A v e ra g e s of D a ily Figures S e a s o n a lly Adjusted

Billions of Dollars

Billions of Dollars

growth in the quantity of liquid assets other than
money held by individuals and corporations. This
was, in large measure, due to the decline in Govern­
ment securities maturing in one year, which began
last spring. The issuing of longer term Government
securities and the shift from a large Government defi­
cit in the previous year to a surplus in 1960 were the
primary forces behind this trend. Offsetting this
decline in the short-term Government securities was
the continued rise in time and savings accounts.
Liquid Assets Held by the Non-Bank Public
Ratio Scale

Ratio Scale

^D em and D e p o sits and Currency
Latest data plotted: Last half of Decem ber

The accompanying chart attempts to demonstrate
the relationship between reserves and the money sup­
ply. While effective reserves were working up, effec­
tive reserves less excess reserves and reserves behind
Effective Reserves*
Billions of Dollars

Weekly Averogei of Doily Figures Seasonally Adjusted

Billions of D ollars

Latest data plotted: December estimated.
* Time deposits of commercial banks and mutual savings banks, savings
and loan shares, U.S. Government savings bonds, and U.S. Government
securities maturing within one year.

* Effective reserves are total reserves adjusted for seasonal and for changes
in legal reserve requirements.

time deposits showed little net change over the year.
These two factors accounted for a large part of the
slippage between differences in the changes in total
member bank reserves and the money supply.3
The net decline in the money supply for the year
was accompanied by a leveling-off in the rate of
3 Other slippages include changes in reserves required to sup­
port U. S. Treasury deposits and changes in required reserves
due to shifts in deposits among banks with different reserve
requirements. Also, movements of currency into or out of
circulation and changes in demand deposits at nonmember
banks may at times represent important slippages.

Page 10




The turnover of money, after rising rapidly during
the first three months of 1960 and leveling off in the
second quarter, declined during the last half year.
This may have been influenced by the lower level of
interest rates and the decrease in the quantity of
short-term Treasury obligations outstanding. A de­
crease in the velocity of money generally accompanies
a fall in economic activity reflecting attempts by in­
dividuals and corporations to improve their liquidity
position. Also, since interest rates generally fall dur­
ing such periods, the alternative cost of holding idle
money declines.
Interest rates showed little net change during the
latter part of 1960 after having declined earlier in the
year. From July through December, yields on Treas­
ury bills fluctuated about the 2.35 per cent level. In
early January 1961, rates continued to stay in the

Turnover of Money
S e a so n a lly Adjusted
Annual Rate of Turnover

A nn u al Rate of Turnover

and 3.80 per cent in August. Yields on these secur­
ities worked up to the 3.90 per cent range during the
fourth quarter. In mid-January 1961 they were yield­
ing 3.92 per cent. Long-term corporate bond rates also
have been rising, after declining earlier in the year.
Mortgage rates drifted downward after reaching a
peak in January, reflecting in large measure the de­
cline in the demand for residential construction. How­
ever, mortgage rates are still higher than at any time
before late 1959. As was pointed out in the November
issue of this Review, there was very little decline in
interest rates since the recession began, whereas in
the two previous recessions rates fell markedly.

Summary

Latest d a ta plotted: D e c e m b e r 1960, w hich includes
estim ated J a n u a r y 1961 d a t a

same range. Other short-term rates, notably rates on
commercial paper and bankers acceptances, showed a
similar movement. The prime rate, that is, the rate
banks charge their preferred business customers, was
reduced in August from 5 per cent to 4/2 per cent.
The discount rates at each of the twelve Federal
Reserve Banks were lowered from 4 per cent to 3
per cent in two successive stages during the summer
months.
Yields on long-term bonds which also fell during
the first half of 1960 averaged 4.00 per cent in June




The year of 1960, which began with activity so
vigorous and so promising, ended with business de­
clining. The boom that was developing in January
quickly disappeared and was replaced by a high-level
economic plateau during the spring. In early summer
a recession set in and continued through the end of
the year and into early 1961.
Interest rates declined in the first half of the year,
an unusual development for a period of prosperity.
On the other hand, most interest rates changed only
slightly in the second half of 1960, whereas in previ­
ous recessions interest rates have decreased. Both
total member bank reserves and commercial bank
credit rose over the year, but the gains were moderate.
The money supply of the nation declined net about
1 per cent during the year, and at the end of 1960
money was turning over at about the same rate as at
the beginning of the year.

Page 11

FEDERAL RESERVE SYSTEM ACTIONS DURING 1960
Discount Rates

In effect January 1, 1960
June 3 through June 14, 1960 lowered to
August 12 through September 9 lowered to
In effect January 25, 1961

4 %
3%%
3 %
3 %

Reserve Requirements
Percentage Required
_________ Demand Deposits______ Tim e Deposits
Central Reserve Reserve City Country
City Banks
Banks
Banks

In effect January 1, 1960
September 1, 1960
November 24, 1960
December 1, 1960
In effect January 25, 1961

18
17%

16%

All Member
Banks

11
12

16%
16%

16%

12

Open Market Operations
Net Purchases ( + ) or Net Sales (—)
Changes in D aily Average Figures
(millions of dollars)
Unadjusted

Seasonally Adj.

$■—1102
— 612
— 12
+ 178
-|- 330
+ 306
+ 495
+ 364
— 330
+ 403
+ 815
— 624
+ 211

$——570
— 50
+ 40
+ 210
-f 360
40
-f 230
+ 470
— 354
-f 215
+ 754
—1142

January
February
March
April
May
June
July
August
September
October
November
December
Total

Cash in Vault
Cash in Vault Allowable as Reserves
Central Reserve
and Reserve
City Banks

In effect January 1, 1960

Over 2% of net
demand deposits

August 25, 1960
September 1, 1960
November 24, 1960
In effect January 25, 1961
Page 12




Over 1% of net
demand deposits
All
All

Country
Banks

Over 4% of net
demand deposits
Over 2%% of net
demand deposits

All
All

Margin Requirements

In effect January 1, 1960

90%

July 28, 1960 lowered to

70%

In effect January 25, 1961

70%