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O F S T . L -O U tS

* P. O. B O X 4 4 2 * S T

L O U !S 6 6

M O.


Changes since the Steel Strike
— Inventory Fluctuations


— Financial Developments


The Seasonal Pattern of Interest Rates


A New Money Supply Series


Changes in Required Reserves


7*h;'s issue re/eased on November 2 9

VO L. 4 2

N o . 1!



— iw u en to ry
important factor in Huctuations in business activity.
In each of the three postwar recessions the magnitude
of dec!ine in total goods and services produced was
almost completely matched by the decline in inven­
tories— can be seen in Chart I. In view of the imas

Changes in GNP and in the Rate of NonFarm inventory investment*
BiHions of D o itars


< GN P
N o n -F arm in v e n to rie s

portance of changes in inventories in reHecting and
contributing to changes in total economic activity, an
examination of inventory movements during the recent
past and an appraisal of the current situation may be
In the long run the supply of a product is adjusted
to the Bnal demand for that product. However, at
times the How of certain goods through the produc­
tive processes may exceed the rate of Bnal sales of
those goods, and at times the How may be less than
the rate of Bnal sales. Consequently, inventories
throughout the many stages of production tend to
accumulate or to be drawn down. In an eHort to
maintain inventories appropriate to their understand­
ing of the unfolding economic situation, Hrms, depart­
ments, and other decision-making units within the
economy make adjustments in their purchasing and
production plans, the consequences of which are trans­
mitted throughout the economy.
Page 2

In some instances inventories are accumulated or
drawn down in a planned eHort to provide for or to
take advantage of current or prospective economic
developments. At other times there are unplanned
changes in inventories resulting from unanticipated
changes in demand. Hence, an analysis of inventory
movements conHned simply to an examination of the
amount of changes in inventories would be unlikely
to reveal the full economic signiHcance of the changes.
In a complex and interdependent economy changes in
one sector may necessitate adjustments in other sec­
tors. For example, small swings in sales at the retail
level may induce wide swings in inventories of dis­
tributors and manufacturers. Indeed, a comprehensive
analysis of the relationship between changes in sales
and changes in inventories would also need to take
account of the inHuence of the rate of change in sales
on changes in inventories.
The period following the steel strike of 1959 pre­
sents an interesting and convenient period for an
analysis of inventory movements. As the steel strike
moved into its Hnal stages there was a substantial con­
sensus that one effect of the strike would be to
lengthen the period of prosperity growing out of the
1957-1958 recession. A major premise of this ex­
pectation was the belief that inventories were due
for prolonged expansion.
During the Brst quarter of 1959 inventories in­
creased at an annual rate of 9 per cent. In anticipa­
tion of the strike the rate jumped to 12 per cent dur­
ing the second quarter and by July inventories had
been built up to a seasonally adjusted level of $89.9
billion. During the strike, from July to November,
inventories were drawn down by $1.5 billion. All of
the decline occurred in the durable goods categories.
Between July and November of 1959 durable goods
inventories fell $2.1 billion. These declines were
oHset partially by a $0.6 billion increase in nondur­
able inventories.
Following settlement of the strike, inventories re­
bounded sharply, but expansion had nearly ended by
April of this year. In the Bve-month period from the
end of November 1959 to the end of April 1960,
inventories rose $4.2 billion, or an annual rate of 11.5
per cent. In Bve months following April they rose by
only $0.6 billion— annual rate of 1.4 per cent. In
fact, there was some liquidation of inventories in July,
August, and September.

A?^ Znt^f^oW&s Too Lot^ or Too Hig7i?
Even though in June of this year inventories at­
tained a record level of $93.4 billion (and currently
remain near this level), it is important to note that this
level was well below what might have been expected
on the basis of past performance. It was, for example,
below a trend line projected through observations of
inventory levels from 1950 to the present (see Chart
II). That any given observation was below this proj-

Their inventory levels are adjusted, for example, to the
level of sales and to expected future demands upon
their productive capacities, as well as to expected
price developments and supply prospects. Stockssales relationships for durable goods at the retail,
wholesale, and manufacturers' levels are shown on
Chart III.

Stocks-Saies Retationships


I o ta ! inventories
Bi tt ion s o f D o N a rs

By Q u a r t e r s

R a t io

ected line is not surprising in itself since one-half the
observations lie below this line. It is surprising, how­
ever, that at the peak of what was expected to be a
prolonged boom inventories did not attain the level
that would have been produced by the average in­
crease per quarter during the decade of the 1950's.
Because inventories have either failed to grow ap­
preciably or have fallen off somewhat for a number
of months it has been suggested that inventories are
getting "too thin." On the other hand there has been
an effort to explain these lower levels in terms of basic
changes in inventory practices occasioned by the
growth of self-service chain stores with central ware­
house facilities, and by the application of scientific in­
ventory control practices through the use of high­
speed data processing and computational equipment.
Without resolving such arguments, it appears that
some evidence may suggest that inventories are still
in excess of current requirements. It is not at all clear
that inventories are low.
An examination of movements in aggregate inventory
levels may not adequately reveal the nature of under­
lying forces for expansion or contraction. Individual
businessmen seek to relate their inventory levels to
their needs rather than to arbitrary inventory levels.

S e a s o n a N y A d ju s t e d

^ ,,
BtH ton s o f Do N a rs

In response to declines in retail sales during the
steel strike, retailers' inventories were reduced through
the final months of 1959. Even so, the retailers stockssales ratio grew sharply in November and December.
Both sales and inventories expanded from the begin­
ning of the year through April. Sales declined steadily
from April through September, but inventories con­
tinued to expand through July. Slight inventory liq­
uidation between July and August of this year re­
duced the stocks-sales ratio. Nonetheless, stocks are
still somewhat higher in relation to current sales than
they have been on the average for the past few years.
Sales of wholesalers picked up in November of
1959 but the period of expansion lasted only two
months. Sales have drifted downward since the be­
ginning of the year. Wholesalers' inventories rose
steadily from November 1959 to May of this year,
but have declined slightly through September from
May's high. Reflecting these movements, the stockssales ratio declined during the last two months of
1959 and then rose steadily through July of 1960.
It declined slightly through September from July, but
is currently well above "normal" levels.
Manufacturers expanded their inventories rapidly
in the period between November 1959 and March
1960. Bouyant sales reduced the stocks-sales ratio to
relatively low levels until February. Since this time,
Page 3

however, the ratio has risen steadily—
despite success
in recent months in checking inventory growth.
The prevailing rather high stocks-sales relationships
suggest that inventories may not be low in a sense
meaningful to businessmen. In this view, a sizable
expansion in inventories would be unlikely unless
preceded by a surge in 8na! demand.

It is appropriate, therefore, to assess the immediate
prospects for expansion in final demand. Although
total business sales have declined steadily since May
of this year, retail and wholesale sales steadied during
August and September. The decline in total business
sales during August and September has therefore
been confined to the manufacturers' level.

plbyed in the civilian labor force attained a seasonally
adjusted level of 5.9 per cent. Following a slight de­
cline in this ratio during September it rose in Octo­
ber to 6.4 per cent, its highest post-strike level.
Expansion in personal income since the steel strike
has been moderate. There was a sharp increase in
November and December of 1959 following the strike's
termination, and there was an upturn in April. How­
ever, since April personal income has grown slowly.
Its major component, wage and salary disbursements,
actually declined in September, but offsetting in­
creases in transfer payments, including unemployment
benefits, prevented the total from declining. In Oc­
tober, payrolls in construction, retailing, and govern­
ments offset a decline in manufacturers' wages and
salaries, and an increase in unemployment compen­
sation contributed to an increase in total income.

Retail sales in October are estimated to have risen
2 per cent over September levels, with most of the
strength in durable goods sales. Department store
sales in October were up slightly over September
levels; however, November sales appear to have slack­
ened somewhat. Although manufacturers' sales de­
clined through September, new orders picked up
sharply in August and September. There are indi­
cations that new orders in October may have declined.

Increases in expenditures for new construction during September may have contributed to favorable in­
ventory adjustments since construction is a major user
of steel and other materials and many manufactured
items. Both private and public construction improved,
with strength in the private sector being shown in
commercial and industrial construction. Residential
construction, however, continued to decline through

Whether the recent strength in sales can be main­
tained rests to some extent on future developments
regarding employment, income levels, and consumer
desires. Unemployment since the strike has remained
at high levels compared with periods of relative pros­
perity. In August of 1960 the proportion of unem-

Business fixed investment in the third quarter
reached a seasonally adjusted annual rate of $30.0
billion. While this represents an increase of $0.5 bil­
lion over the second quarter, the rate of change has
slowed. The second quarter witnessed a $2.4 billion
increase over first-quarter rates.

T H E MONEY SUPPLY of the nation, seasonally
adjusted, declined from the end of the steel strike last
November to late spring 1960 but has been rising in
recent months. Total bank loans and investments
declined slightly from November 1959 to February
1960. Since March, bank credit has risen substantially.
The general level of interest rates has been falling
since the beginning of the year.

M oney Supp!y

M oney Supply
The daily average money supply, seasonally ad­
justed, declined from $142.2 billion in November 1959
to $139.5 billion in June 1960. Since June the money
supply has worked up to an estimated $141 billion
for the last two weeks of October.^ The rise in the
money supply from the last half of June to the first
* See "A New Money
Page 4

S u p p ly

Series" in the current issue of

BiNions o f D o t t a rs

BiHions o f DoHars

half of November was at the annual rate of 2.9 per
cent. Time and savings deposits, which are not inclu­
ded in the traditional concept of the money supply,
rose modestly during the latter part of 1959 and the
Srst few months of 1960. Since March, time deposits
have expanded sharply and continuously, at an annual
rate of about 7.5 per cent.
The growth in time deposit balances explains in
part the anomaly that bank credit expanded while the
money supply contracted from November 1959 to
June 1960. Since banks need a smaller portion of
reserves to support time deposits than demand de­
posits, a shift from demand to time deposits allows
member banks to expand total bank credit while
total reserves as well as the money supply are
contracting. A shift in demand deposit balances
from central reserve city and reserve city banks, where
reserve requirements are relatively high, to country
banks occurred during the 12-month period under
discussion. This explains in part how bank credit
expanded since the steel strike while reserves of
member banks showed little net change.
The turnover of demand deposits at reporting cen­
ters outside the seven large financial centers increased
from an annual rate of 25.0 in November 1959 to 26.1
in March. This was equivalent to an annual rate of
increase in the turnover of money of 13 per cent. Since
March there has been very little change in this meas­
ure of the velocity of money. The income velocity of
money, i.e., total output of goods and services (Gross
National Product) divided by the money supply, de­
clined moderately in the third quarter of 1960 after
having risen during the previous three quarters.
The rate of growth in quantity of liquid assets
other than money held by the nonbank public (sea­
sonally adjusted) declined during the last few months
of 1959. Since March of this year the volume of
liquid assets has leveled off at roughly $251 billion.
The change in the rate of growth of the public's
liquidity position is due primarily to a decline in the
volume of U. S. Government securities maturing with­
in one year. During November the Treasury ex­
changed $10.3 billion of securities maturing Novem­
ber 15 for $9.1 billion 3% per cent 15-month notes and
$1.2 billion 3% per cent 5%-year bonds. A continued
growth in other liquid assets, principally time deposits
at commercial banks, offset some of the decrease in
short-term Governments. The public's holdings of
liquid assets is one factor which may affect the
velocity of money.

Liquid Assets He!d by the Non-Bank Public
BiHions of DoHars

BiHions of DoHars

S e a s o n a H y A d ju s t e d






U.S. Go vernm en t Securit ies
tg Withir ^ O ne Ye a r









* 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.

From the end of the steel strike in November 1959
to the end of October this year, total commercial bank
credit expanded by about $7 billion, or 3.7 per cent.
Commercial bank loans rose about $6 billion while
investment portfolios increased about $1 billion.
In the period from November last year to the end
of March this year total bank loans and investments
decreased $2.6 billion. This decline was largely sea­
sonal in nature. During the four-month period bank
Io ta ! Loans an d !nvestm ents
A!! C om m ercia! Banks
B i l l i o n s o f D o t t a rs

BiHions o f D o t t a r s

Page 5

bans rose nearly $2 billion in contrast to a typical
decline at this time of year. Large net sales of securi­
ties ($4.5 billion) more than offset the expansion in
loans. Funds obtained from liquidating securities were
used in large part to satisfy loan demands and to re­
duce indebtedness at the Reserve Banks.
Commercial bank credit rose over $9 billion from
the end of March 1960 to the end of October accord­
ing to preliminary data. Usually bank credit rises
much less sharply during this period of the year.
Loans rose about $4 billion, and banks, with an in­
crease in reserves available, bought roughly $5 billion
of securities on balance. The rise in bank credit was
particularly pronounced around mid-September, pre­
sumably as a result of large borrowing for tax


Member B%n&s

Since April, total reserves, seasonally adjusted, have
been increasing. Federal Reserve open market opera­
tions added about $1.6 billion to member bank re­
serves. Offsetting in part the System's purchases was
the continued decline in member bank borrowing as
well as a further outHow of gold.
All told, member bank borrowing declined from
about $900 million in November 1959 to about $175
million in early November this year. In this same
period roughly $1.2 billion of bank reserves were
absorbed by a net sale of gold by the U. S. Treasury.
Excess reserves of member banks rose slightly dur­
ing the last two months of 1959, declined during Janu­
ary, and in recent months have risen again. Excess
reserves averaged $650 million in October and early
November this year compared with $453 million in
November 1959. Most of the increase in excess re­
serves has occurred at country banks, apparently re­
flecting the changes in Federal Reserve Regulations
pertaining to vault cash.

Total effective reserves of member banks have
undergone three distinct phases from the end of the
steel strike until early November 1960. From Novem­
In terest R ates
ber 1959 to late January 1960 total reserves averaged
The general level of interest rates, seasonally ad­
about $18.7 billion. This general level of reserves
justed, rose during November and December 1959
and then declined.^ From a seasonally adjusted rate
had been maintained since mid-1958. From January
of this year to April, reserves declined by $585 million,
of 4.49 per cent in December 1959, yields on threean annual rate of decline of about 9 per cent. Since
month Treasury bills fell to 2.19 per cent in early No­
vember of this year.
April, reserves have worked up to a level of about
$18.9 billion in early November, or at an annual rate
Yields on Treasury bills, seasonally adjusted, de­
of 7 per cent. Underlying the movements in total
clined by 48 per cent from February to early Novemreserves have been changes in member bank borrow­
^See "The Seasonal Pattern in Interest Rates" in the current
ing, a net gold outflow, and System open market
issue of this Revtew.
('Contmtieii on page 9)
Total reserves remained about
level from November of last year
Iota! Effective Reserves of Member Banks*
to late January 1960. Federal Re­ Bittions of Do!)ar$
Bittions of DoHars
serve holdings of Government se­
curities, seasonally adjusted, de­
clined and gold drains reduced
reserves by about $130 million. In­
creases in Federal Reserve float
and an inflow of currency largely
offset open market operations and
the gold movement. Member bank
borrowing remained about un­
changed during these months.
The decline in reserves which
occurred from the end of January
through April resulted largely from
a decrease in member bank bor­
* For data previous to September 1, Rgures are total reserves less $125 million for estimated
rowing and a decline in float. Gold
change in reserve requirements. Data after September 1 are total reserves.
also continued to drain reserves
** Seasonal adjustment factors were obtained roughly by averaging daily Rgures for each
from banks in this period. Federal
calendar day for the Rve years 1955-59. These were divided by the average level for the
Reserve holdings of Government
entire Rve years. The seven calendar date factors were then averaged to obtain the weekly
factors. Unadjusted data were divided by weekly average factors to obtain the seasonally
securities remained about constant.
adjusted data.
Page 6

?%e Seasonal Pattern
I N AN EARUER ISSUE of this Reotetc, some of
the underlying causes of movements in interest rates
were discussed and an attempt was made to put these
changes into perspective with those of other times and
other places.* This article continues the discussion
of interest rates and focuses on the seasonal move­
ments of rates. It points out the seasonal pattern in
some leading rates and analyzes yield changes during
19S9 and the Rrst nine months of 1960 in light of these
forces. It is believed that an understanding of sea­
sonal influences aids in analyzing movements in inter­
est rates.

A Dentition
Interest rates are prices paid for the use of loan
funds. Like all prices in our market system, interest
rates serve as allocators, apportioning a limited sup­
ply of the commodity concerned among competing
demands. Movements in market interest rates reRect changes in the relationship between the amount
of funds available and the amount of funds sought.
Rising market rates result from a decrease in supply
or a strengthening in demand. Conversely, falling
rates reRect an increase in supply or a weakening in
F acto rs

R ate C hanges

Demands for credit Ructuate widely during the
year. In the latter half of the year, there is usually
a sharp rise in the amount of credit sought, par­
ticularly short-term credit. The Federal Government,
which receives a sizable portion of its income in
March, April, and June, typically operates with a
surplus during the Brst half of the calendar year and
with a deRcit during during the second half. Hence,
it usually borrows funds during the third and fourth
quarters to Rnance its deRcit operations. At the same
time, many businesses seek additional funds to move
the harvest and to build their inventories in prepara­
tion for Christmas. Consumers, who borrow more
* See article on "Interest Rates in Perspective," in the August
1960 issue of this
pp. 2-5.

Interest Rates

during the summer months and December than at
other times, intensify the demand for credit during
the second half.
During the Rrst six months of the year, demands for
funds usually diminish. With the taxes it receives in
the spring, the Government can carry on its operations
and frequently reduce its debt. Some businesses re­
duce inventories in the late winter and the spring and
as a result reduce their indebtedness. Consumer de­
mands for credit also decline temporarily after the
Brst of the year.
To avoid seasonal changes in market interest rates,
the supply of loanable funds would have to vary with
credit demands. The supply of funds comes from
saving and bank credit creation. In 1959, the How of
saving amounted to an estimated $60 billion and the
money supply rose $0.6 billion. Individuals, busi­
nesses, and governments may all save; however, the
Sow of net saving comes primarily from individuals
and retained earnings of businesses. It is believed
that the rate of saving changes only modestly from
season to season.
On the other hand, bank credit, which may be ex­
panded to supplement the Row of saving, varies sea­
sonally and acts as a partial offset to Ructuations iii
credit demand. Loans and investments of all com­
mercial banks tend to contract during the Rrst half of
the year, reaching their lowest point in February and
growing very slowly for several succeeding months.
They expand rapidly during the second half, par­
ticularly during the fourth quarter. Although the sup­
ply of funds, primarily bank credit, varies with the
demand for funds, changes in the amount of funds
available are usually more modest than changes in
the amount of funds sought. Therefore, some market
interest rates Ructuate seasonally.


a% Seasonal F% d% a%
M M ions
An examination of seasonal interest rate patterns is
complicated by relatively large cyclical and other
nonseasonal movements in interest rates. Cyclical
Page 7

fluctuations in yields on short-term money market in­
struments are quite pronounced. During the cyclical
decline from April 1953 to June 1954, three-month
Treasury bill rates fell 70 per cent, from a level of
2.19 per cent to .64 per cent. During the ensuing 39
months they more than quintupled, rising to 3.58 per
cent. In October 1957 another decline set in and
yields on Treasury bills fell 77 per cent to a level of
.83 per cent during June 1958. From June 1958 to
December 1959, they again rose substantially, climb­
ing to 4.49 per cent.^ Less pronounced than such
cyclical changes are the other nonseasonal movements
in interest rates. Nevertheless, these day-to-day move­
ments may be comparatively large: daily rises and
falls in Treasury bill yields often exceed 5 per cent.s
Seasonal fluctuations in market yields have been
much more important in recent years than they were
in the forties. Before the 1951 Federal Reserve System-Treasury "accord," the System's "pegging" op­
erations largely prevented seasonal movements in
yields. Further, as the general level of interest rates
has risen over the past decade, a given seasonal pat­
about 25 per cent from trough to peak for
Treasury bills—
has meant an increasing seasonal
change in percentage points.
When random and cyclical movements are elim­
inated, seasonal patterns in some interest rates can be
observed (Table 1 and Chart 1).^ There is a rather
large and fairly consistent seasonal pattern in the
yields of three-month Treasury bills, s Bill rates usually
decline sharply during January and February from
their December level. They rise during March and
April (partially because of borrowings to pay taxes)
and then decline to their lowest point in June. Rates
on bills turn upward in July and rise sharply during
August and September. After hesitating for two
months, bill yields in December reach their highest
level, about 25 per cent above their low point.
2 A large change in yields on short-term instruments accompa­
nies a small change in price. The quintupling of Treasury bill
yields from June 1958 to December 1959 was associated with
a 1 per cent decrease in price.
s A 7 per cent rise in Treasury bill yields that occurred on Octo­
ber 4, 1960, accompanied a .08 of 1 per cent price decline.
4 The Investment Bankers Association of America has devel­
oped semi-monthly seasonal factors for municipal government,
Federal Government, and corporate bond yields and for threemonth Treasury bill yields. "A Survey of the Municipal Bond
Market," /ZL4
Vol. 16 (September, 1960).
s Seasonal adjustments of monthly averages of daily market
rates for the 1951 to mid-1960 period were computed by re­
lating the original data to a centered twelve-month moving
average. Adjustment factors for each month were obtained by
eliminating the two extreme values and averaging the remain­
ing ratios. The seasonally adjusted series was then calculated
by dividing the original data by the adjustment factor for that
Page 8


Seasona! Adjustment Factors for Setected Yie!ds
Monthty A v e r a g e * of Da!)y Figures
P .rC .n to f
A v e r a g e Month


?<" C * " ' " '
A v e r a g e Month

Tab!e 1

Seasona! Adjustment Factors for Se!ected Yie!ds
Based on 1951 through M id -1960 Data
Monthty Averages of Daiiy Figures
Treasury Bit!
Market Yieid

9 5 .7
99 .3
9 1 .0

Paper Rate

Bond Yieid

97 .9
9 7 .5
97 .8
97 .4
1 03.7

9 9 .4
9 8 .9
99 .3
99 .3

Yields on prime 4- to 6-month commercial paper fol­
low a similar seasonal pattern, although the magnitude
of the variations is smaller (Chart 1). They reach
their annual peaks in September rather than in De­
cember, however. Interest rates on long-term U. S.
Government securities follow a modest seasonal pat­
tern (Chart 1). Yields on corporate and municipal
bonds as well as interest rates on mortgages have
shown only a slight seasonal movement. Rates on
most loans from financial institutions to their cus­
tomers probably have not varied seasonally. Thus,
the greatest seasonal fluctuations appear to occur in
money market rates and primarily affect financial in­
stitutions and others that supply funds to the money
market and a few large borrowers, notably corpora­
tions that can deal in the money market, and the Fed­
eral Government.

Reoiett) o? SaasonaHy
j!959 fo D afe

D aM —

During the Rrst six months of 1959 economic ac­
tivity was recovering rapidly from the recession of
1958. Demands for funds were vigorous, and interest
rates on three-month Treasury bills rose from an aver­
age of 2.77 per cent in December 1958 to 3.21 per
cent in June 1959. This was an increase in rates of
about 16 per cent. However, adjusting the rise for
the seasonal contraction in the Rrst half, bill rates
rose nearly three times as much, or 44 per cent
(Chart 2).
Chart 2
Yieids on Three-Month Treasury BiHs











In the last half of 1959, when the steel strike oc­
curred, unadjusted Treasury bill rates rose sharply,
from an average of 3.21 per cent in June to 4.49 per

cent during December. This was a jump of 40 per
cent. Much of this rise reRected seasonal inRuences;
when these were eliminated the rise amounted to only
12 per cent.
The recent peak in the unadjusted three-month
Treasury bill rate on a monthly average basis was
reached last December. But when seasonal inRuences
were eliminated it appears that rates were higher in
both January and February this year (Chart 2). From
February through July of this year both seasonally
adjusted and unadjusted data declined markedly,
falling to about half their former level. However,
from July through September, unadjusted Treasury
bill rates reversed their trend again, rising from 2.30
per cent to 2.48 per cent Adjusted for seasonal,
yields continued to decline, from 2.50 per cent to 2.33
per cent. Both unadjusted and adjusted yields aver­
aged lower in October than in September.
C o n c is io n
There is a deRnite seasonal pattern in the move­
ments of some market yields, primarily money market
rates, although cyclical and other nonseasonal move­
ments largely obscure them. This seasonal pattern
arises from regular variations in demands for credit
which are only partially matched by changes in the
supply of loanable funds. Analysis of recent interest
rate data, adjusted for seasonal variations, seems to
give a clearer picture of developments in market rates
than a review of the unadjusted data alone.

jFwMZHCtaZ D evelopm en ts
ber 1960. During the other two most recent periods
of monetary ease, 1957-58 and 1953-54, the bill rate,
seasonally adjusted, declined by about 70 per cent.
During both of the previous periods of ease bill rates
fell for approximately 12 months.
Other short-term market rates, notably rates on com­
mercial paper and bankers' acceptances, have also de­
clined since early 1960. The discount rate, which had
remained at 4 per cent since June 1959, was lowered
one-half a percentage point in June and again in
August. The prime rate, that is, the rate which banks
charge their largest and most preferred customers,
was reduced from 5 per cent to 4.5 per cent in late

page 6)
Rates on intermediate- and long-term Government
bonds have also showed a decline during most of 1960.
Intermediate-term Government bonds, which aver­
aged 4.95 per cent in December, averaged 3.50 per cent
in August and September. During October and early
November, rates on these issues increased to about
3.60 per cent. Long-term Governments declined from
4.37 per cent in January to 3.79 per cent in August.
Since August, rates on these maturities have shown a
slight increase. Yields on municipal and corporate
bonds have Ructuated similarly to long-term Govern­
ments. Mortgage rates have declined slightly, since
reaching a peak in January 1960.
Page 9

v4 N e w A f o n e y
A HE QUANTITY OF MONEY in the nation is an
important economic variable since changes in the
money supply influence business activity and prices.
The Federal Reserve System has responsibility for
bringing about changes in the money supply appro­
priate to economic growth, a high level of employ­
ment, and price stability. Although the immediate
effects of most System actions are on the member
bank reserves, the actions are designed to affect the
quantity of money. Recently, the System has devel­
oped a more refined measure of the money supply
which will be released semi-monthly.*
The Federal Reserve System has published monthly
for many years data on the money supply based on an
estimated consolidated statement of the banking and
monetary system as of the last Wednesday in the
* For a more detailed discussion of this new series see "A New
Measure of the Money Supply", FeJera/ Reserve
1960, pp. 1102-1123.

S e rte s
month, and for call report dates.^ The definition of
the money supply in both the old and the new series
includes most demand deposits at commercial banks
plus currency outside of the banking system. The new
money supply series differs from the old in two re­
spects. In the new series demand deposits of member
banks are computed on a daily average basis, thus
reducing the random fluctuations which were present
in the one-day-a-month series. The definition of the
money supply has also been modified, raising the
general level of the new series.
The old series was considered deficient by many
economic analysts because of the random errors
associated with a one-day-a-month Rgure.s For ex^ Since November 1958 this information is available twice a
month in the Federal Reserve release "Assets and Liabilities
of All Banks in the United States" (G.7).
s See "A New Measure of the Money Supply" in the July 1959
issue of this Rev^ei*?.

Money Suppiy Measures

; Board of Governors of the Federal Reserve System.

Page 10

ample, movements of demand deposit balances be­

garded as not being a part of the money supply since

tween private accounts (which are considered part of

they must Brst be converted into either demand de­

the money supply) and the U. S. Treasury account

posits or currency before they can be used in business

(not treated as a part of the money supply) would,


at times, greatly affect the one-day-a-month Bgure.

ful to combine time and savings deposits in commer­

The new series, which is based on averages of daily

cial banks and the money supply.

Bgures, reduces this type of statistical error.

deposits will continue to be made available.


member bank demand deposit component, which
makes up about two-thirds of the total money supply,
consists of daily averages instead of the one-day-amonth measure of deposits. The daily average mem­
ber bank deposits are drawn from reports made by
member banks in connection with their required re­

Daily average Bgures on currency outside

banks are estimated largely from the records of the
Reserve Banks and from daily information on member
bank vault cash.
In both the new and old series, demand deposits of
nonmember banks and cash held in their vaults are

However, for many purposes it is use­
Figures on time

Deposits of the U. S. Government are excluded in
the new as in the old series because such deposits do
not represent money in the hands of the public and
it is widely felt that funds held by the Treasury do
not have the same economic impact as funds held by
the public.

Figures on these deposits will be avail­

able, however, for analysis purposes. Deposits of state
and local governments are considered as part of the
money supply in both series.

The currency compo­

nent is handled much the same way in the new series
as in the past.
The general level of the new daily average series

largely estimated. Reports of deposits for these banks

is about $1.5 billion higher than the end-of-month

are received only infrequently. Estimates for non­

series (see chart). This difference is due primarily to

member banks are based primarily on changes in the
country-member-bank Bgures.

the net effect of adding demand deposits due mutual

The daily average method of computing the money
supply provides the monetary authorities with a more
useful tool for policy purposes.

Elimination of the

savings and foreign banks and deducting Federal
Reserve Boat.
Although the long-term movements of both series
are highly correlated, short-term differences in the

random Buctuations as well as the semi-monthly nature

two series are from time to time of important signif­

of the series may make turning points in this import­


ant economic variable more easily discernible.

part to the random forces which affect the end-of-

The new series also differs from the old series in the
deBnition of money.

The new series includes in its

measure of demand deposits those demand deposits
in commercial banks due to mutual savings banks and
foreign banks. This change was made since such de­
posits are comparable to balances of other Bnancial

In arriving at the Bgure for demand

deposits adjusted, "Federal Reserve Boat" has been
subtracted in the new series in order to reduce double

These short-run differences are due in large

month Bgures.

The institution of a daily average

series has the advantage of removing most of these
random factors and thus makes the new measure of
the money supply a more useful tool in implementing
monetary policy.
Current data on the money supply will be available
in the Federal Reserve publication Demand Deposits,
Currency and Related Items" (J.3 ). Two releases of
this document will appear monthly, seven to ten days
following the semi-monthly period. This release may
be secured by writing the Publications Section, Board

The changes mentioned above represent the basic

of Governors of the Federal Reserve System, Washing­

differences between the old and the new series. Time

ton 25, D.C. The series will also appear monthly in

and savings deposits of commercial banks are still re­

the FeJeraf Reseroe

Page 11

^ H E BOARD OF GOVERNORS of the Federai
Reserve System on October 26 amended its Regula­
tion D, relating to bank reserves and reserve require­
ments, in three respects, the amendments to be effec­
tive November 24 and December 1, 1960.
The changes, made in further implementation of a
1959 Act of Congress relating to vault cash and reserve
requirements, will make available to the System's
6,200 member banks about $1,300 million of additional
reserves as the economy enters, between Thanksgiving
and Christmas, the peak season of rising cash and
credit needs. The changes are as follows:
1. Effective November 24, all of the System's
6,200 member banks were authorized to count
all their vault cash (i.e., all the coin and currency
they hold) in meeting their reserve requirements.
2. Also effective November 24, the reserve re­
quirement of "country" banks (i.e., banks not
classified as central reserve city or reserve city
banks) against their net demand deposits, which
were 11 per cent, became 12 per cent.
3. Effective December 1, the reserve require­
ments of central reserve city banks against their
net demand deposits, now 17% per cent, will
become 16% per cent. This change is in accord­
ance with a provision of the 1959 Act to elim­
inate the differential between the requirements
of central reserve city banks and reserve city
banks by July 28,1962.
These actions are the third in a series taken over
the course of a year to implement the legislation cited.
The previous actions, both authorizing member banks
to count specified portions of vault cash in meeting
reserve requirements, were made effective December
1 and 3, 1959, and August 25 and September 1, 1960.
The recent actions will release, for loans, invest­
ments, and for provisions of seasonal cash needs, a net
amount of approximately $1,050 million of reserves on
November 24 and $250 million on December 1. Of
Page 12

the $1,300 million total, $400 million will be released
at central reserve city banks, $380 million at reserve
city banks ($18 million in the Eighth District), and
$520 million at country banks ($25 million in the
Eighth District). The net amount of additional re­
serves to be made available to country banks reflects
the result of a release of $900 million of vault cash,
partly offset by an increase of $380 million in their
reserve requirements.
All member banks are required to set aside a por­
tion of their deposits to meet basic reserve require­
ments established by the System. Before the 1959
Act of Congress, member banks had to meet these
requirements with balances kept at their respective
Federal Reserve Banks. They were not permitted to
count, as reserves, cash in their own vaults. However,
the amount of cash that banks have found it necessary
to hold, in relation to their deposits, varied bank by
bank, depending upon the daily needs of their cus­
tomers. The legislation adopted by Congress was de­
signed to smooth out the inequities resulting from
these operating differences. When the new changes
become effective, all member banks will be permitted
to count all cash on hand, as well as balances kept at
their Federal Reserve Bank, in meeting their basic
reserve requirements.
Before the 1959 Act, country banks, on the average,
were in the position of having 14.5 per cent of their
net demand deposits immobilized in the form of re­
serve balances and needed vault cash. In consequence
of the legislation and the series of actions over the
last year in relation to it, this amount will be changed
to a uniform 12 per cent, after the effective date of
The corresponding percentages for reserve city
banks will be reduced from an average of 18.2 per
cent to a uniform Rgure of 16.5 per cent. For central
reserve city banks, the comparable figures are 18.7
and 16.5 per cent.