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8 th v





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


Current Business— Forces of Expansion
in the Economy


Strength of dem and which supported recovery from
the recession is obscured by industrial conflict.

The Interest Rate Ceiling
on the Federal Debt


— complicates the problem of monetary policy and debt
m a n a g e m e n t a nd may mean higher interest costs—
but increased liquidity of the debt may for the time
being be avoided.

Is the Balance of Payments Improving?


The recent improvement does not warrant unqualified
This issue released on O ctob e r 30

Current Business
Forces o f Expansion in the Economy
A s


spread like an out-of-season cold wave, they domi­
nate most discussions of current economic conditions.
At the same time they make appraisal of the situation
exceptionally difficult by distorting the usual meas­
ures of activity, such as industrial production, rail­
road freight carloadings, manufacturers' sales and
orders, and the like. Of necessity then, discussion
turns to speculation about underlying sources of de­
mand and the forces which make for the recurring
expansions and contractions of activity that have long
characterized the American economy. It therefore
seems timely to review the recovery from the most
recent recession, in order to discern expansionary
forces which might be expected to persist or to sub­
The recovery from the spring of 1958 through June
of this year brought an increase of $53 billion in the
seasonally adjusted annual rate of gross national prod­
uct, or 12 per cent. Since the price level was relatively
stable over the period the gain in physical output was
about as great as the gain in output measured in dol­
lar terms. Industrial production rose 23 per cent in
the 14 months ending in June, reaching a level about
7 per cent above the prerecession peak. In the third
quarter gross national product is estimated to have
slipped back $4-5 billion or so in annual rate from
the peak of $484.5 billion reached in the second quar­
ter. The industrial production index declined from
155 per cent of the 1947-49 average in June to 148 in
September despite increases in output of some indus­
tries not affected by the strikes in the steel and
copper industries.
The general outlines of the forces for recovery from
the recession are now obvious in retrospect; a large
increase in consumer spending, a rise in residential
construction, a shift from liquidating business inven­
tories to building up inventories, and growth in gov­
ernment expenditures. These were joined several
months after the recovery began by an upturn in
Page 106

business spending for plant and equipment. Ques­
tions to ask now are: Have any of these major types
of demand stopped growing? Will they be as strong
after the strike as before it?

Consumer Demand
Although total spending of consumers declined very
little during the recession, purchases of durable goods,
particularly automobiles, contracted sharply. Between
the third quarter of 1957 and the second quarter of
1958 consumer purchases of durable goods declined
by $4.2 billion in seasonally adjusted annual rate, or
about 10 per cent. Purchases of automobiles and
parts accounted for $3.7 billion of the drop in total
durables purchases, falling more than 20 per cent. The
volume of outstanding consumer instalment credit
contracted during most of 1958, reflecting the reduc­
tion in financing of automobiles.
This year, consumer spending for durable goods
has risen again, with autos accounting for a consid­
erable part of the increase. Sales of domestically pro­
duced autos reached a seasonally adjusted annual rate
of 5.6 million in the third quarter, as compared to
total sales of 4.3 million in 1958. Total auto sales,
including imports, reached an annual rate of 6.2 mil­
lion units. In 1955, when imports were a negligible
factor, total auto sales reached a peak annual rate
of 7.4 million.
A rise in consumer instalment credit has accom­
panied the increase in consumer buying of durable
goods. The total increased in July and August at a
seasonally adjusted annual rate of about $6 billion,
approximately the same rate as in the third quarter of
1955. Although the rate of repayments on instalment
credit rose about 7 per cent from the second quarter
of 1958 to August 1959, it remained at about 13 per
cent of disposable income, a ratio which has been
roughly the same since 1956.

It is interesting to note, however, that automobile
credit has accounted for a smaller part of the growth
of instalment credit thus far this year than it did in
the comparable period of 1955. Through August of
this year about 45 per cent of the increase in instal­
ment credit was in auto loans as compared with near­
ly 70 per cent in the same period of 1955.
In the great expansion of consumer credit in 1955
a major development was a lengthening of maturities.
There has recently been some increase in the propor­
tion of 36-month contracts on new cars and 30-month
contracts on used cars but this change is not as sig­
nificant as the lengthening in 1955.
Consumer spending has been noticeably resistant
to decline in the postwar recessions and has grown
rapidly in each of the recoveries. Currently, the
strength of consumer demand is being put to another
test. The strike and its associated layoffs are affect­
ing consumer income much as a recession does. There
are, of course, important differences; the steel workers
and the other people laid off still have jobs and pre­
sumably expect a period of high output after returning
to work. Nevertheless, the income loss has been
Between June and September wages and salary
income declined by $3.5 billion in seasonally adjusted
annual rate, or 1.3 per cent. Since September, growing
shortages of steel have probably reduced wage and
salary income further. In St. Louis alone, for example,
the number of men laid off because of steel shortages
is estimated to have reached about 10,000 in late
October from less than a thousand in September.
The maximum decline in wage and salary income
during the past recession was $7.9 billion in season­
ally adjusted annual rate, or 3.3 per cent, and occurred
between August 1957 and April 1958. This year’s
strike-related decline in wages and salaries was by
September more than one-third as great as the decline
resulting from the recession. During the recession a
large part of the $7.9 billion decline in wages and
salaries was offset by an increase of $2 billion in the
net income of farm proprietors and a $4.7 billion in­
crease in transfer payments, including unemployment
compensation, social security benefits, and veterans’
benefits. These offsets cannot be expected to be near­
ly so effective this year. Net farm income in fact has
been declining this year; part of the increase in trans­
fer payments last year was the result of changes in
scale and coverage of social security benefits; and
unemployment compensation payments are limited to

The influence of such a decline in consumer income
upon spending is extremely difficult to weigh. Con­
sumer spending has generally declined less than in­
come in each of the recessions. Furthermore, the
length of time in which incomes are reduced is ob­
viously an important factor; if people believe a drop
in current income is a temporary matter they are more
apt to attempt to maintain customary rates of spend­
ing than they would if the drop was believed to be
permanent. They may draw upon savings or borrow
to tide themselves over a period of reduced income.
While the strike is expected to be a temporary inter­
ruption, it may be significant that its income effects are
concentrated upon the same classes of people who
were most affected by the recession little more than
a year earlier, production workers in durable goods
manufacturing, miners, and railroad employees. Some
of these people probably have not had time to rebuild
financial resources depleted by the recession.
For whatever reasons, growth of retail sales came
to a halt in the third quarter after rising at an aver­
age rate of more than 2.5 per cent per quarter, or
10 per cent per year, since the third quarter of last
year. Retail sales declined 1 per cent in August and
2 per cent in September after reaching a record level
in July. Most types of retail stores had declines in
sales in September. Sales in the automotive group
were down 5 per cent and sales at other durable goods
stores were also off, causing sales of the durables
stores as a group to be off 4 per cent. Sales in non­
durables lines were down 1 per cent.
Despite the decline in retail sales total consumer
expenditures as estimated in the national income and
product accounts may well show a small increase
from the second quarter to the third, largely because
of a continuing increase in expenditures for services
which are not included in the retail store series. The
expenditures for services are heavily weighted by rent
payments and imputed rent on owner-occupied
houses so are considerably less volatile than expendi­
tures for goods. Furthermore, changes in tastes and
living standards have been conducive to steady growth
of expenditures for personal services, such as medical
care and travel, for the whole postwar period.

Expenditures for new construction rose sharply
from the spring of 1958 until March of this year; held
steady for two more months; and then began to de­
cline again. Private homebuilding accounted for
more than three-fourths of the increase in construc­
tion spending as the seasonally adjusted annual rate
Page 107

Construction Contracts Aw arded
(Millions of dollars)
June, July, A u g u s t

First Eight M o n th s


U n ited State s

Public works and utilities.................


Per Cent


Per Cent


$ 2,189.2

$ 3,389.9

— 35.4

$ 5,617.2

$ 6,674.1

— 15.8




+ 14.4



+ 27.6









T o t a l............................................












+ 15.2




Eighth District

Public works and utilities.................





— 21.7




+ 2 3 .0



+ 27.3

Nonresidential ...............................



+ 10.8






$ 1,242.9

$ 1,112.6


T o t a l............................................







+ 11.7

F. W. Dodge Corporation.

of housing starts rose from less than one million in
March 1958 to a peak of 1.43 million in April of
this year. Part of the early rise in home-building was
spurred on by special Federal programs to provide
financing assistance for low-cost housing as a counter­
recession measure. The low interest rates obtainable
on government securities in the first half of 1958 also
made mortgages, particularly those underwritten by
the FHA and VA, relatively attractive to investors.
Residential mortgage markets have recently been
under considerable pressure as demands for funds
have increased on all sides. Despite the rise of inter­
est rates and the competing demands for funds total
mortgage debt increased by a record $5.5 billion in the
second quarter of this year to $181 billion. Home
mortgage debt rose by a record $4 billion with fourfifths of the rise in the form of conventional mort­
gages. The increasing costs of financing and declining
availability of credit have probably been factors in
a gradual decline of new housing starts to a seasonally
adjusted annual rate of 1.33 million in September.
Applications for FHA mortgage insurance and re­
quests for VA appraisals declined in September also,
suggesting that home starts may continue to go down
in the near future.
Recent legislation may tend to support demand for
residential construction. The Housing Act of 1959
increased the FHA general mortgage insurance au­
thorization by $8 billion and authorized a reduction
in minimum statutory downpayments on FHA-insured
home mortgage loans. The authority has not been
used, however. It also permitted Federal savings
and loan associations to make loans for acquisition
Page 108

and development of raw land under certain con­
ditions. Several steps were taken in the Housing Act
and other legislation to facilitate mortgage lending
by banks also. The Housing Act excluded FHAinsured home mortgages held by national banks from
Federal Reserve Act limitations on the amount of
real estate loans that a national bank may hold in
relation to its capital and surplus or its time and
savings deposits. Other legislation expanded mort­
gage lending powers of national banks by increasing
the maximum loan-to-value ratio on conventional
mortgage loans to three-fourths from two-thirds.
The Eighth District as a whole appears to have
fared a little better than the nation in volume of con­
struction contracts let during the summer, according
to reports of the F. W. Dodge Corporation. The total
for June, July, and August, was up 3.7 per cent from
the volume in the same period of 1958, as compared

Contracts for Residential Construction
in Eighth District Metropolitan Areas
(Millions of dollars)
First Eight M o n th s

Per Cent




Springfield (Mo.)............. ........
S ix - a r e a t o t a l.......... . .



F. W. Dodge Corporation.

$ 83.4

+ 5 4 .6





+ 5 0 .3











+ 4 7 .3



+ 11.1



+ 4 3 .0


to a decline of 4.5 per cent for the nation. Residential
awards appear to account for the difference in be­
havior of the district and national contract volumes.

in preparation for the strike. By October steel stocks
were down to such low levels that production of
many items had to be curtailed.

For the year through August the total volume of
construction contracts awarded in the Eighth District
was 11,7 per cent higher than the volume of awards in
the same months of 1958. The corresponding gain
for the nation was 7.5 per cent.

Business expenditures for new plant and equipment
had been rising at the time the strike began, and
surveys of business plans indicated that the rise would
continue for a time. Currently there are some indica­
tions that fixed investment programs may be delayed
by difficulties in obtaining steel. Another factor that
may revise the timetable is the impact of the strike
upon business revenues. The loss of income experi­
enced by some companies may reduce their internal
resources for financing capital spending, at least for
a while.

Business Investment
Business inventories probably changed little during
the third quarter, after building up at a $10 billion
annual rate in the second quarter. Users and distrib­
utors of steel drew on the stocks they had built up

Agricultural Conditions
Total output from the nation's farms this year is
expected to exceed the record level of 1958, according
to the United States Department of Agriculture. Pro­
duction of livestock and livestock products may ex­
ceed 1958 production by about 2 per cent and produc­
tion of crops is expected to equal last year’s level.
Pork production estimated at 11.7 billion pounds
may exceed last year’s output by 10 per cent but will
be less than the previous record of 13.6 billion pounds
in 1943. Milk, beef, and poultry production is ex­
pected to approach record levels.
Com production estimated at 4.4 billion bushels is
17 per cent more than the previous record of last year
and 36 per cent more than the 1948-1957 average.
Soybeans output is estimated at about 8 per cent less
than last year but 62 per cent more than the 1948-57
average. Oats and wheat each are expected to be
down about 24 per cent.
A feed grain crop of 167 million tons is expected,
topping the 1958-59 record by 6 per cent and almost
30 per cent greater than the 1953-57 average. Carry­
over from former crops is estimated at 68 million
tons, 9 million more than a year earlier and a further
increase in carryover is expected in 1960.
Cash receipts from farm marketings were down
2 per cent in the first 8 months of this year compared
to the same months last year. Increased marketings

this year have nearly offset lower prices. Gross income
has declined somewhat more. Government payments
to farmers this year have been lower with the end of
the Acreage Reserve portion of the Soil Bank Program.
Net income to farmers has also declined as expenses in
the first half of the year were up about 3 per cent
from year-earlier levels.
Prices received by farmers on September 15 aver­
aged about 6.3 per cent below levels of a year ago.
The greatest reductions occurred in prices received
for hogs, sheep, and poultry. Prices of beef cattle and
most crops have held near 1958 levels. Most crop
prices were near support levels in both periods.
Farm conditions in the Eighth District generally
parallel those of the nation. Crops are good to excel­
lent throughout the district and with the exception of
some recent rains (which were needed for fall seeded
crops) harvesting conditions have also been good.
The corn crop is expected to exceed the production
last year by about one-third in Missouri, 17 per cent in
Kentucky, and 16 per cent in Illinois. Output of oats
and soybeans is down somewhat from 1958 levels in
most district states.
Burley tobacco production in Kentucky is estimated
at 6 per cent above that of last year. Increased burley
production is also estimated in other district states.

(Continued on Page 114)
Page 109

The Interest Rate Ceiling on the Federal Debt

issue of the Treasury “Fives” has introduced in the
money market a note of optimism in marked contrast
to the “all is now lost” feeling generated initially by
Congress’ refusal to raise the interest ceiling on market­
able Government bonds (issues of five years or more).
What this recent Treasury success means for debt
management and the related problems of monetary
policy is a question that will be debated for some
time to come.
This article attempts to put the problem of the in­
terest rate ceiling in perspective. First, it explains
the reasoning of those who regard the interest ceiling
as extremely dangerous under present market condi­
tions. Secondly, it examines the conditions under
which the interest ceiling problems might be mini­
mized. It concludes that, despite the problems created
by the statutory limit on interest rates, the present
lack of balance in the maturity of the debt need not
increase substantially the immediate pressures of in­
flation during the next several months.

Dangers Inherent
in the Interest Ceiling
The alarm occasioned by the unsuccessful attempt
of the Treasury to have the interest ceiling raised or
removed is based on the conviction that the concen­
tration of Treasury securities in the short end of the
market not only poses difficult problems of debt man­
agement, but more importantly, introduces a new in­
flation potential in that the purchase of such securi­
ties may lead to the creation of new bank credit and
an increase in the money supply. The inflationary
force may also become apparent if the growing sup­
ply of short-term instruments of high liquidity leads
to a further increase in velocity of circulation of de­
posits and currency.
Page 110

Debt Management Becomes More Difficult
The magnitude of Treasury financing and the re­
quirements of sound debt management make it de­
sirable that all sectors of the credit market be acces­
sible to the Treasury. Treasury needs, even within
the framework of a balanced budget, involve financ­
ing to cover both seasonal and refunding operations.
Sound financing would dictate a variety of maturities
-short-, intermediate-, and long-term— reflect the
variety of Treasury needs and to appeal to the variety
of investment needs of the lenders.
Because of the higher structure of interest rates ( see
chart) and the 4% per cent ceiling on Government
Yields on U. S. Governm ent Securities
Per C e n t

W e e k l y A v e r a g e s o f D a i l y F ig u re s



Per C en t

i t

/ ■
L o n g -T e rm Bonds


3 - 5 Years

/ T r e a s u r y Bil Is 3 - M o n t h s








L a te s t d a t a p l o t t e d : W e e k E n d i n g O c t o b e r 2



i i


bonds (issues over five years) the Treasury is now
forced to do all its financing in relatively short-term
securities. Under present conditions when the de­
mands for credit by businesses, real estate owners, con­
sumers, municipalities, and others are heavy, most
investors have more attractive places to utilize their
limited funds than to purchase long-term Government
securities at yields of 4Mper cent or less.
Forced to rely solely on shorter term securities, the
Treasury will find that the funds of the "savings type”
investor are more difficult to obtain. Many savers and
savings institutions prefer to invest substantial por­
tions of their funds in longer term obligations. To the
extent that these investors do not face relatively large
needs for cash within a brief period, they can place a
large share of the funds in longer term securities.
Most of the time since the early thirties the long-term
securities had given investors a higher yield than
short-term securities of similar qualities. Even under
present interest rate structures marked by relatively
high yields on short-term issues, savings institutions
may prefer the longer term issues, if they feel that
the general level of interest ^ates is comparatively
high, because the yields can be received over the
longer period of time.
Because the Treasury is now unable to secure its
financing from long-term credit markets, it faces a
prospect of making more frequent trips to the short­
term markets. On June 30, the Treasury had $73
billion of marketable securities maturing within one
year, $57 billion in 1-5 years and $19 billion in 5-10
years. As the most important borrower of short-term
funds, the Treasury may subject this market to dis­
ruptive credit tensions evidenced by sharply rising
interest rates influenced in part by the uncertainty in
the market as it awaits the terms and conditions sur­
rounding each new Treasury issue. Short-term ma­
turities also increase the frequency of the debt man­
agement problems of the Treasury as it attempts to
design each issue to insure the best possible market

Monetization of Debt
May Be Difficult to Avoid
An increasing concentration of Government debt in
shorter maturity obligations may increase inflationary
pressures through several avenues. On the one hand,
since shorter term securities have greater appeal to
those interested in holding assets in "near-money”
form, there is great danger that such securities might
find their way into commercial bank portfolios. If

banks buy the new short-term securities, payment
will be made by expanding bank credit and deposits
(i.e., money).
Banks can increase their credit only if they have
reserves, but it is argued that the central bank may
feel more impelled to provide reserves if the de­
mands for bank credit increase sharply, causing short­
term interest rates to rise and credit availability to
decline. A rapid increase in the money supply in­
duced by the requirements of Treasury financing
Money Supply
Billions of Dollars

Billions of Dollars

Demand Deposits adjusted and Currency outside banks seasonally
adjusted for last W edn e sday of month.
Latest data plotted: August

would prove to be a serious setback in the battle
against inflation, in view of the fact that the money
supply rose so very rapidly in the early stages of this
expansion. From the end of April 1958 to the end of
August 1959, demand deposits adjusted and currency
outside banks, seasonally adjusted, rose 4.7 per cent.
In the corresponding 16 months of the 1954-55 revival
the money supply rose 4.1 per cent.

Growth of Liquid Assets May Accelerate
Velocity and Total Spending
On the other hand, even if Government securities
are not bought by commercial banks, it may be that
the individuals and businesses that buy the short­
term debt assume a more liquid position than they
would have if they had bought longer term issues.
The securities which holders consider close alterna­
tives to cash are those with less than one, or maybe
two, years left until they mature. Interest rate fluctua­
tions have a relatively minor effect on the prices of
Page 111

these issues, so they can be converted to cash at al­
most anytime with less significant losses. Then, too,
these securities will become cash within a relatively
short period. As a result, holders of Government
securities with maturities less than one year usually
feel that they are close substitutes for cash.
In the current cyclical expansion the volume of
short-term Government securities in the hands of the
public (that is, outside the Federal Reserve and U. S.
Government agencies and trust funds) has already
increased substantially. Those securities within one
year of maturity increased from $49 billion in April
1958 to about $56 billion at the end of July this year.
In the corresponding 15 months of the 1954-55 busi­
ness upturn public holdings of Government securities
within one year of maturity decreased $3.5 billion to
a level of about $42 billion. Public holdings of the
somewhat less liquid Government securities in the
one- to five-year maturity range rose from $42 billion
to $51 billion in the 15 months ending with July of this
year as against an increase from $21 billion to $34 bil­
lion in the comparable period in the previous cyclical
Other holdings of liquid assets of varying degrees
of “moniness” in the form of time deposits in com­
mercial banks, shares in savings and loan associations,
accounts in mutual savings banks, and holdings of
savings bonds rose to an estimated $202 billion by the
end of August this year. By comparison, these assets
aggregated $188 billion in April 1958, the bottom of
the recent recession. This rise of 7.4 per cent during
the current upswing in business activity has roughly
paralleled that in the like 16 months' period of the
previous business recovery when such savings rose
7.1 per cent to a level of $167 billion.
The significance of this growing volume of liquid
assets and the possibility of further growth with addi­
tional short-term Treasury financing is that the growth
of money substitutes, by permitting an economizing
of cash balances, is one of several factors underlying
the increase in the activity of the money supply.1
The turnover of money has been rising rapidly and
is currently at a postwar peak (see chart). During
June, July, and August demand deposits (excluding
interbank and U.S. Government) at reporting centers
1 It is generally believed that rising interest rates also tend to
increase velocity, since at higher rates of interest the cost of
holding idle cash balances rises. Growing optimism regarding
the future may also prompt people to spend more rapidly. It
may also be noted that in the long run changes in velocity may
reflect structural or institutional changes in methods of pay­
ment, credit mechanisms, and so forth.

Page 112

outside the seven large financial centers were turning
over at the seasonally adjusted rate of 24.9 times per
year. By comparison, turnover of demand deposits
reached a recession low rate of 22.4 times per year in
the three months ended with May 1958 and a pre­
vious postwar peak rate of 23.5 times during the third
Turnover of Demand Deposits
Reporting Centers (outside seven large financial cities)
A nnual Rate

A nnual Rate

Three— month moving a ve rage s of se a so n a lly adjusted data.
Latest data plotted: July, which includes A u g u st data.

quarter of 1957. In 1950 deposits at these banks
turned over 17.2 times, and in 1945 they were used
13.5 times.
From the recession low (March, April, and May
of 1958) to the summer of 1959 deposit turnover has
increased from 22.4 times to 24.9 times per year, a
rise of 11 per cent. In the like period of the previous
recovery the velocity of deposits rose 9 per cent to a
level of 20.9 times per year.
Since individuals, businesses, and others have been
accelerating the use of their money, and since the
growth in the money supply has been greater, total
outlays have been rising more rapidly during the
current improvement in business activity than during
the previous boom. In the early stages of the recov­
ery, the increased pace of spending was welcomed as
a stimulant to business activity. More spending at
that time was predominantly reflected in a larger
physical volume of sales, more production, greater
employment, and higher incomes. As business activity
in many lines approaches capacity, however, an in­
crease in spending may not necessarily be reflected
primarily in a greater volume of output but in higher

The reliance of the Treasury on short-term financing
is likely to build up an even larger volume of liquid
assets and an activation of otherwise idle balances.
Such a development would contain a serious inflation­
ary threat in an economy already showing signs of
excessive money expenditures reflecting both in­
creasing money supplies and a rising rate of turnover

What Can Be Done
under the Interest Rate Ceiling
While freedom to market long-term Treasury secu­
rities on realistic terms will sooner or later be neces­
sary if we are to avoid inflation, appropriate proce­
dures within the present limitation may avoid infla­
tion during the next few months. The Federal debt
cannot be monetized without additional bank reserves,
and by extending maturities on the debt as far as
legally possible the economy should not become un­
duly liquid.

Monetization of Debt Is Not Inevitable
The issuance of more short-term, rather than long­
term Government securities, does not necessarily mean
that the commercial banks will hold any more securi­
ties. As mentioned above, legal requirements prevent
banks from expanding credit (which creates deposits)
without obtaining the necessary reserves. Hence, if
monetary actions of the Federal Reserve System are
conducted so as not to provide the commercial banks
with additional reserves to facilitate the short-term
financing of the Treasury, the only way the banks can
buy Government issues is to liquidate a like amount
of loans or other securities.
If bank customers continue to seek loans in large
volume and if the Treasury offers short-term securi­
ties, the demand for the limited volume of bank credit
may be intense. Loan applications may be screened
more carefully, and borrowers may have to pay higher
interest rates. Nevertheless, without additional bank
reserves there can be no net credit creation, and the
money supply cannot be expanded.
It is unlikely, however, that banks will be large
net buyers of Government securities in periods of
booming economic conditions and restraint on their
reserve positions. In fact, it is more likely that com­
mercial banks in attempting to satisfy their custom­
ers’ demands for loans will be net sellers of Govern­
ment securities, as they have been over the past year.
Holdings of Government securities by commercial

banks declined from $57.5 billion in mid-1958 to $53.5
billion in mid-1959.

Liquidity of Federal Debt Can Be Limited
An interest rate ceiling which prevents the Treas­
ury from offering bonds of over five years will prob­
ably cause the average length of the Federal debt
to decline further, but this does not necessarily mean
that the debt must be significantly more liquid. Al­
though ‘liquidity” is a relative term and impossible to
measure precisely, it is believed that a four- or fiveyear obligation is only slightly more liquid than a
20- or 30-year bond. Institutions holding four-year
obligations realize that they are subject to price de­
clines as interest rates rise, and as a result these securi­
ties are not considered as virtually the same as cash.
Cash balances may not be kept quite as large as they
would be if investments were in 20-year issues, but
they should not be much less.
If savers and savings institutions are offered some­
what higher rates on four- or five-year issues, how­
ever, there is no reason to believe that they would not
buy such obligations despite a preference for 20- or
30-year bonds. It should be noted that the institu­
tional savings group was awarded over $670 million
of the 4-year 10-month Treasury “Fives,” about 45 per
cent of the $1.3 billion for which this group subscribed.
In order to attract sufficient funds into the short­
term obligations the Treasury may have to incur
greater current interest expense than it otherwise
would (defeating one purpose of the interest rate
ceiling), since the ceiling effectively prevents the is­
suance of securities with maturities that many inves­
tors prefer. But, experience indicates that intermediate-term Treasury securities can be readily sold if
priced attractively.
Average Maturity of M arketable Federal Debt


Latest data plotted: September 30, 1959, Preliminary

Page 113

At the present time about one-third of the market­
able Government debt held by the public is concen­
trated in the very short-term area of roughly one year
or less to maturity. By extending the maturities on a
portion of these obligations to five years as they come
due, the liquidity of the economy could be reduced.
In fact, vigorous actions to decrease the volume of
debt in the under-one-year-to-maturity category might
offset the increase in the liquidity of the debt which
comes with the passage of time as obligations become
progressively shorter term. As noted earlier, the Treas­
ury took a big step in holding down the amount of
very short-term debt by selling to investors about $2.3
billion of 5 per cent 4-year 10-month notes in its Octo­
ber financing. Subscriptions to this issue totaled $11.1
billion, indicating that there is large demand for in­
termediate-term securities if the interest rate is attrac­

8 years 11 months to 7 years 9 months which should
make savings bonds more attractive to investors.
Whether the 3% per cent rate will do more than pre­
vent further deterioration in the savings bond pro­
gram, however, is not clear.

The Federal debt might also be made less infla­
tionary by placing more of it in savings bonds. Al­
though Series E savings bonds can be readily cashed
at fixed prices after the first two months, most holders
do not usually consider them as close an alternative
to cash as short-term marketable Government securi­
ties. Recent legislation raising maximum interest rates
which the Treasury can pay on savings bonds to 4/4
per cent (from 3.26 per cent) permits the Treasury to
be more competitive in seeking savings. Under this
authority the Treasury has already marked up maxi­
mum interest rates from 3% per cent to 3% per cent
by reducing maturities on new Series E issues from

Under booming economic conditions bank reserves
can be limited to the point that there is not an infla­
tionary bank credit expansion. Then, too, the short­
term securities can be priced so that they are attrac­
tive to savers and to those who invest the funds of
savers, and a substantial share can be placed at the
four- to five-year maturity range to avoid a large in­
crease in the volume of close money substitutes. It
seems likely that one of the chief effects of an inter­
est ceiling is to prevent the Treasury from giving in­
vestors those maturities they wish. Accordingly, the
ceiling is likely to increase the total interest payments
which the Treasury must make.

The interest rate ceiling of 4U per cent on Treasury
bonds of five years or more seems unwarranted from
an economic point of view. It increases the inflation­
ary potential by making it more difficult to avoid
monetizing the Federal debt and to avoid an increase
in the turnover of money because the volume of near
monies is increased. Nevertheless, it does not appear
that a serious inflation is a necessary immediate con­
sequence of this limitation if proper monetary and
debt-management actions are taken.

Agricultural Conditions —Continued from Page 109
Cotton production in the district this year may
exceed that of last year by 50 per cent. Percentage
increases over 1958 production estimated for the var­
ious states, partially in the district, are as follows:
Tennessee 41 per cent, Mississippi 66 per cent, Mis­
souri 64 per cent, and Arkansas 53 per cent. Cotton
production estimates for most of these states are also
well above the 10-year (1948-57) average.
Prices of major Eighth District farm commodities
have trended downward most of this year. On October
16, district agricultural prices averaged about 8 per
cent below the level on October 16 last year. Hog
prices were down 33 per cent at St. Louis National
Stock Yards. Cattle prices were down 3 per cent and
eggs 30 per cent. Broilers were up 1 per cent. Prices of
Page 114

most crops were down some, but price supports gen­
erally held such declines to modest percentages.
Cash farm income in the district for the first 8
months of this year was down about 2 per cent from
levels in the same months last year. As in the nation,
increased production has offset reduced prices for
most district farm commodities. Cash receipts in Ar­
kansas and Kentucky were ahead of those in 1958 for
the period. Other district states were down slightly.
However, with the excellent cotton crop moving to
market in Missouri, Arkansas, Tennessee, and Mis­
sissippi, Eighth District marketings may exceed 1958
levels for the entire year. Part of such increased
marketings will be offset by increased expenses, but
net farm income in the district may also be as great
or greater than in 1958.

Is the Balance of Payments Improving?
T h e RECENT IMPROVEMENT in the export
volume of the United States has elicited from some
observers a strong optimism with respect to our
balance of payments in the future. Their cheerful
predictions that our foreign payments deficit
would be reduced sharply or eliminated are in
marked contrast to the equally strong opinion that
the deficit in the balance of payments has not only
been persistent but that it is growing.
For many years until 1959, United States ex­
ports of goods and services exceeded imports.
One of the great international problems in the
early postwar period was how the rest of the
world could secure the wherewithal to pay for
the goods and services which they bought from
us. The answer to this problem centered in the
grants and loans provided by the United States.
Since the early 1950’s, however, the volume of
dollars acquired by the rest of the world from
public and private United States sources has gen­
erally exceeded the amounts needed to cover the
export surplus, and thus foreign countries were
able to add to their gold and dollar reserves.
Since the beginning of 1958, U. S. exports de­
clined substantially while imports have increased.
The decline in U. S. exports is particularly note­
worthy in view of the continued large volume of
grants and loans by the U. S. Government and the
substantial export of private capital. The United
States export surplus of goods and services, ex­
cluding military exports financed by grants, was
reduced from $5.8 billion in 1957 to $2.2 billion in
1958. The surplus became a deficit of about $200
million in the first half of this year.

country and building up of short-term dollar hold­
ings in the form of deposits, Treasury bills and
certificates, and other short-term debt instruments.
Since the beginning of 1958 the gold stock of the
United States has declined from $22.8 billion to
$19.5 billion, or by about $3.3 billion. In 1958
the outflow amounted to $2.3 billion reflecting,
among other factors, the relatively low interest
rates in the United States during the first half of
1958 and uncertainty as to the strength of the
dollar. In 1959, when the marked rise in United
States interest rates made dollar holdings increas­
ingly attractive, the gold outflow was reduced to
a rate of $1.2 billion during the first nine months.
Short-term dollar holdings of foreign countries
increased $1.0 billion in 1958, and in the first
seven months of this year were growing at a rate
of $1.4 billion per year. The rate of acquisition of
short-term balances and the decline in the United
States gold stock is shown by months in the
accompanying chart.
U.S. Gold Stock and Short-Term Dollar Liabilities
to Other Countries
Billions of Dollars

(End of Month)

Billions of Dollars

Our Gold Has Declined and Our ShortTerm Debts Have Increased
The excess of the supply of dollars over the
demand for United States goods and services
has taken two chief forms, a flow of gold from this

Latest data plotted: G old Stock>September
Dollar Liability-July

Page 115

In the face of this record of the past year and
three quarters, opinions differ regarding the sig­
nificance of these developments, probable future
developments, and appropriate public policy.
There is probably agreement that some decline
in the proportion of the world monetary gold
stock held by the United States was desirable.
In 1952 the United States held about two-thirds
of the monetary gold of the free world compared
with about one-half today. Likewise some building up of short-term dollar holdings of other coun­
tries from the $9 billion holdings of 1952 and
$12.8 billion in 1957 (they are about $16 billion
today) has probably been desirable for the free­
dom of trade and international payments which
is so necessary for a free world.
It seems quite evident that the loss of gold and
building up of dollar balances which has been
proceeding at a rate of almost $4 billion per year
in the first nine months of this year cannot con­
tinue indefinitely. This adverse balance must
some time be reduced or eliminated either by nat­
ural forces or by public action. Consequently,
interested analysts bend every effort to discern
whether the forces promoting the adverse bal­
ances continue unabated or whether there are
signs of a reversal of trend.

Neither of those extreme views appears justi­
fied on the basis of developments to date. Pre­
liminary estimates for the period July-September
of this year suggest that the over-all balance-ofpayments deficit for that period was still in the
neighborhood of $4 billion. The previously rapid
rise in merchandise imports leveled off this sum­
mer, while seasonally adjusted exports were at
least $1 billion higher at an annual rate than ear­
lier this year. This improvement in trade seems
so far to have been offset by shifts in other items
of the balance of payments.
Although the outflow of private loans and in­
vestments abroad has been held down markedly
by relatively high interest rates in this country
for more than a year, currently rising interest rates
abroad and expanding investment opportunities
are likely to result in an increased outflow of
United States private capital. The trade accounts
are only part of the whole balance of payments
picture, and there is no firm evidence that export
developments in the near future will reduce the
over-all deficit to negligible proportions. It be­
hooves us to concern ourselves with public pol­
icies which will help to alleviate further the bal­
ance of payments trend which was so adverse in
1958 and the first half of this year.

Two Contrasting Views

What Should Be Done?

Some commentators have been urging that the
deficit in the balance of payments has not only
been persistent but that it is growing. On the
other hand, it has been said that if the rate of
recent improvements in our exports keep up,
“with luck, exports next year could easily rise to
the $20 billion lever1 and that “at that level the
United States payments deficit would probably
be reduced markedly or possibly even eliminated.”2

Changes in policy which have been recently
most prominently mentioned pertain more to the
policies of other countries than to ours. It has
been urged at the recent meeting of the Interna­
tional Monetary Fund and of the International
Bank that there is need for elimination of discrim­
ination against imports from the United States to
countries now in sound financial condition. Fur­
ther, it has been suggested that these countries
can and should rapidly increase their role relative
to the United States in the field of aid and capital
exports to countries in need of such funds.

x Neu> York Times, September £0, 1959, p. 19.
2 Ibid.

Page 116