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REButLDlt«i lff:RICA'S FINANCIAL UQUIDllY
fe~ OF Rme« p, ~YO,
Pft::SIIENT Of TI£ FEIEIW..
' t£s
, •~. BMK OF CHJCMO
BEFORE TI£ lNVE~~:ffl7i'IElY OF CinCMO
IN HIS LETTER TO rt£ Fllf11NG
lP ntE
ARfWl<B£NTS FOR
nus TAU<,
~~.
fiEEN INDICATED lHAT 1HE ltNES1>£NT lfw..YSTS SoclElV OF UIICPOO /OIAYS
I tNilES SPEAKERS TO USE VISLW.. AIOO AND PR>Il.CT DISPLAYS,
ntE PR>Il.CT DISPLAYS OF nfE
feERAL. 1£sERVE
As I REPU Bl,
~ OF Oita«J ~ HEAVILY
QWUED-PND WE tw'T GIW: SAtf>LES.
Bur SINCE I OOll.IJi 'T BR1f«3 A Pr«>Dlrr DISPLAY,
OnER 1liAN n£ FIVE
CWE OOLLAR BIU.S IN t'tl WALLET WHIOi Mi WIFE LET t-£ HAVE AS THIS WEEl<'S
Al.l..()WCE,
I THOl&tT niAT I Oll.LD AT ~T STAY
IN 1l£ TPJ\DITICW OF VWR
SPEAKERS BY SAYING S0£1}flfG ABOtrr OlR EARNI~ Nm EXPENSES,
BRIEFLY BECAUSE
Bur ~LY
1 OON'T WANT YOU TO BE JEAL.OlB,
WT YEAR OlR BN41< HAD TOTAL
aJRREHT EARNINGS OF S<M ffJ-S, MIU.ICN
MD Willi OPERATING EXPEN-SES OF CJ.ILY $4'2 MJWOO, THERE WERE A FEW <miER
$595 MIU.Im--A
Me.KE, A PR>FIT, tlJR
93 PERCENT-
ADJUS1TEN1S Bt.rr NET EARNIM» WERE
PR>FIT ~IN OF
AND WE WEREN'T EVEN TRVING TO
DIVIDENOO TOTALED $6 MIWai,
TI£ STATUTORY
6 PERCEm' DISTRIBUTIOO
TO OUR STOCKHCUERS, a»PRISING
943
retlER BANKS IN Iu.tr«>IS, INDIANA, MtotIGAN, WIS<nlSIN, #ID IOdA. AFTER A
t6 MIU.to.
ADDITICIW.. 10 OUR CAPITAL NID SURPUJS, lHE Jf":W\INIER,
werr BACK TO THE GREATEST GfllflH
Bur \'IE WERE
IS WHAT
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
$583 MIWa.,
INIXSTRV OF AU.: THE H!I:EP>L GovERNM:NT.
TRYING TO 00 SCM:THING ElSE ~ MAKE A PR'.>FJT--AND TiiAT
I WJWr TO TAU< ABOUT Wint YOO 1HIS
AFTEJJo:lf.
-2IN 1HE PIESENT ATimPHEfl: OF <XlflroVERSY a'4 VITAL ISSlES--FOREIGN Nm
OOM:STIC, SOCIAL AND E<D01IC-ntERE IS U,E Mf!.A. OF AU. BUT ~IVERSAL. PGREB-ENT,
IT IS TiiAT
1971 SHCll.D SEE A ~mNlkllS,
QI.W{TER-BY-o.»\RTER, RISE IN Bl.SltESS
ACTIVI1Y, Sws'rANTIH.. DISAGRE&£NT EXIS"IS, HOIEVER, AS TO 1l£ EXTENT OF 'THE
REa>\'ERV, MD 1liE lEGREE OF SOCCESS lliAT WIU. BE /OIIEVED IN mIERATING ntE
lliIN EVILS OF PRICE INFLATICJi AND t.Je,PU>YM:NT,
IT IS MV Plff>CSE TODAY TO Otm..JNE TI-IE EVIIENCE n-tAT n£ FINANCIAL
R>IMDATICJiS HAVE ftJEAIN BEEN LAID FOR A SI.STAINED RECOVERY.
~ IER t+ffiETARV
PCLI Cf PURSlED IlRI NG 11-iE P~T VEAR HAS NOT VET ACCD4>USHED ITS PURPCSE •
A, LOOG AS n-tERE IS SlBSTNffIIJ.. tfil.Sf:1> CN'fte.lTY IN THE FC>ff1 OF fiW-jPCl'JER
Nm FACILITIES, FEI£RAL J£5ERVE PtLICf PCTICNS WILL <DNTINl.E 10 ENCDURNiE
1liE l10fl1i OF ~K IEPmlTS, OTHER LIQUID ftSSElS, IMJ 11-£ AVAILABIU1Y
OF CREDIT. AccEPTJK:E OF
nus VIEW,
H<liEVER, IDES NOT I~J>LY 11-fAT ~mE-
TN« EASE CNt BE Pt.SHED TONN l..ENGru WI1liOUI" SERIOUS a>NSEQlENCES,
THOOl&iOltr niE PAST Ql.MTER cerrtJRY, ·FelEw.. ·1£sERVE POLI Cf HAS
NEVER LACKED VIOOR>l.6 CRITICS. THESE
auncs cm BE DIVIIED BROAll..Y
1WO Gr«>l.PS-THOOE Wt-kl IESIRE A KJf£ STUUATIVE Ptt.ICf PND THOOE
INTO
WK)
PREFER A KJf£ RESTRICTIVE PCUCi • THE FORER TEND 10 Bf>HASIZE THE
PR'JBLEM OF RJLL. Eli>l.DvrENT, 1HE LATTER THE PREI..E/t1 OF INFLATl()i,
CERTAINLY IS Nl SECRET, NOi lHAT 'THE PRlCEEDlf(;S OF n£
fEIEw..
IT
CPEN
~ fa.NITIEE NE PlBUSl£D, lHAT BOlli POINTS OF VI&l N£ POlAYS
PR:SENT tf.l]:UN 11-IE OOI.NCILS OF 1HE SYSTEM, Q..ENLy I G?AVE IW«ERS EXIST
IN RlJ..()1100 OOE OBJECTI\1: TO niE EXOJ.SI 00 OF -rnE aJHER,
UKE 1l£
Y/tNG AND YIN OF ORIBrrAL PHILOSCPHV, TiiE JOINT OBJECTIVES OF KlIERATING
lJEtf>LOYM:NT AND 11:STRAINlNG INR.ATI~ Af£ CJ'J>OOED, Bl.IT ALSO awt...EM:NTARV,
As
WE HAVE SEEN SEVERAL TU/ES SINCE \tlfl.D WAR
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
II,
EXCESSIVE PRICE INCRE~ES
-3IN:VJTABLY CAlBE lr13AI...NiCES, fEll:ED PFCDt.CrtVl1Y, Nm ADIE) ~Ef4>L.OVM:NT,
IT IS 1liE R:SPCH>IBIU1Y OF 11-iE f/ONETARV AUTHORITIES TO FIND TI£ f,U,T
APPr«lPRIATE PA1li TO STABLE GIDl'JH AND Pll:SPERilY,
I SfGl.D ADD,
INSOFAR
fb£TARY PCLICY IS NOT ~IParENT, THERE NE
AS IT IS IN 11-tEIR POER,
r«> PFECISE R:lATICl'SHlPS BE"IWEEN miETARY lE\IELOPM!NlS, HCWEVER fv£1\SURED,
AND TiiE ~ E OF E<l'X-011 C ACTJVIlY,
0uR MARKETS
AND I NSTITIJrt ~ NE.
FAR TOO Clff>UCATED 10 BE FINELY lmED BY CJ£ OR t'0RE <DNTR:lllr«i LEVERS,
DPEN r-MKET f.cM.1ITTEE, oF WH1~ 1 AM N()l A
1970 IT WM APPARENT 1liAT THE EOONCfff AS A WHl..E
~ 1liE FEIERAL
reBER, MIT IN JANUARY
HAD LE\JEl.fD OFF, !Ea.INES WERE ocet.mit«i IN S0'1:
secroRS, PARTICllAR.Y
11
HClSING MD IEFEtSE, BUT PRICES WEA: <DmNUING TO RISE AT A RAPID
PACE," IN Aca>RD WI1H
nns
l.NERSTNlllt«i, lHE
11
TiiE 1ESK" AT 'THE FErERAL. IESER\E
RANK
RJ'C aJ.tUUCATED TO
OF NEW YORK, WHIQ-f roNDlCTS OPEN
MARKET <PERATl<ffi IN GO\'Elff£NT SECURITIES fUR THE ENTIRE SvsTEM~ ITS
''IESIA: TO SEE A '1JEST GRl'l1H IN rOEY
PAR#nllf C&JECTIVE, IN FeBRUARV
TO
~
"f«>IEPAlE
1970.
PM)
B,6NK CREDIT • • •II /tS
lHIS DIRECTIVE WAS STRENmlENED
GfDffli OF Ma£Y JWD BNiK CREDIT • •
•
I WILL NOT TAKE TUE HERE TO
ns
I t
"
REVIEW PU. OF 11£ STEPS TAKEN BY
1liE SYSlEM TO Et«:OllU\GE GIOffli OF m£Y MD CREDIT IN
L.970.
/'lstIE FRCJ-1
OPEN MARKET OPERATI0\6, 11-iESE INCL.lJlE) A:IlJCTIOOS IN 1liE DISCOI.Nf RATE,
ClJl'S IN MARGIN REQUIRe£N1'S 00 STOCK PUROfMES, A1l.JUS1l£KTS OF RESERVE
fEQUifeENTS, AND UBERALIZATICN OF THE RATES tn+ERCI/JL BANKS CPH PAY
04 Tit€ IEPOOITS,
RAntER,
I SHALL IWHASIZE lHE QUJWTITATI\IE
EVltENCE
OF lHE YFAR-1...00G TIEND TO ~IER to~ETARV IWD CREDIT CDNDITI<JiS,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
IN lHE WEEK ENDING J.aNUARV
27, 1971,
f"Ell:RAL RESE.JM CREDIT
-41£6,6 BIU..I~,
ItefEASE OF 8 PERCENT,
$5 BILLIOO
OUFSTRWING AVERAGED
lP Al.K)ST
FR04 A VEAR
EAR..IER-AN
SvslcM HCl.DI~ OF 00\IErftEHT SECtJUTIES,
WHIOi ACOOlNT FCR 11-fE Lt <Jj 'S SHARE OF RESER\€ BANK CREDIT, WERE IJ> $6 ,3
BIW~, OR
11 PERCENT,
rMER BANK BORJU-IINGS, ALSO INa..UIED IN ~ER\JE
BANK CREDIT, WERE LESS 1lWf $LOO MIWCJ.l, OOLY <JaE-1l·tlRD AS LARGE AS
A VEAR EAfUER, THE LCWER LEVEL OF BORIIMINGS, OF OOURSE, REFLECTS
REru:ED f£SER\JE PRESSURES 00 BANKS, ~ THE 01ltER SIIE OF THE SYSTEM'S
BAL.>NCE SHEET, FEIERAL 1£SER\'E NOTES OOiot NOi AC<Dt.m fOR VIRTUAU..V
ALL OF 11iE NATI 00 'S PAPER Ct..RRENCV) WERE lP
f£SERVES OOSE
7 PERCENT,
f·tMlER BANK
6 PERCENT, THESE RESERVES, NHI Gi POERED OOlJ..ARS, 11 PFDVI IE
11iE RASE FOR EXP#ISICJi, Nar OOLV OF a>t£RCIAL BANK Cf£DIT, Bl!T TI£
ENTJ fE FI NANCI H.. STROCTI.R:: OF TI-tE NATI <JJ.
INCRfAC>INGLV, TiiE RATE OF CiANGE IN 1l£ t-OIEY SlOCK (IEFJNED
NARfDILV /iS CURll:NCY ~ IeWm IEPOOITS IN THE HN400 OF THE PlllLIC)
IS USED AS A SYrfla. FOR n-lE 0\IERftil. 'lliRt.ST OF K>NETARV PCl.lCf, SCJETIM:S
TERED "THE FRIEIJW4 EFFECT,"
IN f.ECEKJER,
11-fE t-oEY SlFPLV WAS $215
BJW(J\J (SEMOOAU..Y ArulBlED, MILY AVEPN£ B.6SIS), lP
5,4
PERCENT FR04
A VEAR EAII..IER, THIS INCREASE CXff>ARES WITH A 3,1 PERCENT RISE IN
<wrrn
1$9
PRACTICALLY NO INCfEASE IN ntE SE~D HN..F OF niAT VEAR). THE
RISE IN lliE tmEY SlOCK IN
II~ LARGER D:fAN lti H«
]970 WAS
LESS ntNi IN
1$7 OR 1968,
eews ewr::\teJl WAaJJ
BUT
YEAR, EXCEPT J,9S]..
lJsEFUL AS nfE rffiEY STOCK a:J4CEPT MAY BE AS AN NW.VrIC.AL TOOL,
IT t1JST BE 1&&8Ef£D 1HAT IT IS NlT OOLV OVEFl.Y Slt'PUFIED--BUT IT
JS ~O A HETEROGEf£0lS QI.W4TI1V,
FOR EXNf>LE,
11-iE PAST IECAIE HI'S
Wl1NESSED A SlBSTANTtALLY GREATER m:>PORTJ()tAL RISE IN CURRENCY ·oursT#mlfG
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-51HPN IN IEMNID IEPOOITS, FOR F£4Safi 1liAT N£ t«1r aM>L.ElELY a..EAR,
IN INDIVIIlW.. YEARS, HOiEVER, ~ IEPOSITS HAVE INaEASED FPSTER
1rU'N 0.Rl£NCV,
WtlHIN 11-tE CURRENCY CXM>CNENT, RlR EXN1'LE, THE RISE
IN $]I) Bill$ IN THE PAST IECAT.E H.4S BEEN 1WICE 1HE RISE FOR 11£ TOTAL
fvl:NEY S100<,
OlJTSTRmlr«i.
AT PRESFNT, AIJOST
fbre:, I 00 NOT' SAY
$]2 BIWOO WCJrrH OF $]I) BILLS AF£
"IN CIRCll.ATIO'l" BECAlBE S<l1E OF lliESE
BIU.S APPAREtm..Y Af£ HELD NJ, A SlORE OF V~, THERE AFE. Al.MOOT
l20
MIU.lai HlfID1£D IXUAR BIU..S OUTSTNIDING, BUT TiiERE PRCBABLV ARE NO£
AT ALL IN nfE WAI.LETS OF
nns AWIENCE!
You MIGfT ALSO BE INTERESTED IN THE FACT 1HAT N30UT $6 BIU..100
OF OJIN IS fOI OtrrSTNIDtNG-ABOOf $:{) IN CiN~GE FOR EAOi OF lS,
AGAIN,
I OOl.ST IF ANY<11E IN 11iE AUDIENCE IS lrlAT 11l.OAIED," Olns OUTSTANDING
It«:11:~ED FOUR Tlt£S
~
F~T ftS 1ME TOTAL f.UiEY S100< IN TiiE Pl$T JECAIE,
THE KErt-EDV HALF OOl.J..ARS AfE ONE FACTOR,
1.3 BILLICJ'4 KBN:m
Ffta.1
1934 THR>t.Gi !E9,
Al.MOOT
HPL.VES WEJE COINED Nm ISSlED, ABOOT ~ MNN HALF
OOl.J..ARS AS HAD BEEN lSSlED IN 1liE ENTIRE PERI OD OF
U, S,
001 NAGE AU4
li92 THml&t .1$3 • J\sour JD PERCENT OF ntE KENNEDY HALVES WERE ISSLED
lHROLGt lHE faEw.. 1£sERVE iw« OF Ou CPSJ, lH.1 KE 1HE EARLIER FRANKLIN
HALVES, THEY SELI01 aM: BACK TO lS RlR Ff!CI RCll.ATI Cli. SIM>LE ARint£TI C
TELLS US lHAT SIX
l<ENNeIN HALVES HAVE BEEN
N-JD CHILD IN THE i..NITED STATES.
ISSI.ED FOR EVERY~, WO,W.,,
(I KtOi MNN HAVE OCNE ABRlAD,) Ver«
SCO'i lliE PlBUC'S APPETilE R>R EtSEttDER OOl.J..ARS IS TO BE TESTED,
[awm lEPOSllS ACOOLtfT RlR t-D?E THPN 1Hf£E-RlJR11iS OF 11£ PmEY
SlOCK,
IT JS OFTEN SAID 1HAT g) PERCENT OF NJ.. ~ACTIOOS IR:. Mc\lE
BY OiECK,
Bur 11-fAT IS <JiLY A WILD Gl.ESS, PRoBABLY BY FAR 'THE LARGEST
SHARE OF Pt.ROiASES, O::RTAINLY Bl.SUESS PUROfASES, ARE~ 00 CREDIT,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-6~D ME SETitED LATER BY OtECK,
Bur QUALIFICATICN IS If1>CSSIBLE CW
THE ~IS OF PFESENT KtOILEOOE.
A SlSSTANTIAL SHAR:
OF
J)LL
IE-WID IEPOOilS IS fl:PRESENTED BY
~ATING BALNCES IN BANKS, HELD lO R::Ir'13URSE 1HESE BANKS FOR SERVICES
F£NIERED. WE 00 Nor KrO# n£ TOTAL PMOlNT OF <DMPENSATING BALANCES,
HOil STRICl1...Y REQUIREf.ENTS ARE ENFORCED, OR lHE EXTENT TO ii-410-f 11-fESE
Bur ~PENSATING
ARRAN<EENTS VN« Willi 0-IANGES IN CREDIT OJNDITIOOS,
BALANCES la:. PART OF TiiE tmEY STOCK, AS IEFINED, OFTEN R:FERRED m
AS lHE "ACTIVE fOiEV Sl.PPLY, u AT lliE an-tER END OF TI-iE SPECTRlf4 N£
1liE OVERDRAFT ARRANGEl'ENTS NCW OFFEPJ:D BY MNN BANKS.
EtCDt.RA<ED DY lliOOE BANKS TO KEEP TI-IEIR IDW~D
~
INDIVIDlW.S NIJ!
IN 1HE l'ED,
THE ~UIE.Y STOCK OF PE<PLE l.SING StX:H ARRANGeerrs IS NEGATIVE,
ScH:Tit1;S <Drff!RCIAL BANK TlfE ACCOlt.ffS AJE INCl.UIE) IN A BROAIER
ca«:EPT OF n-tE M.JtJEY STOCK, cn+r:NLY IEFERRED TO AS
''r-~. 11 THE
l.SERJLNESS
OF 1liIS OH:EPT HAS BEEN ltD:FNINED BY lHE RAPID IEVELOPfeIT AND RECENT
SHARP FUJCTUATICJ.S IN TI£ NEOOTIJBLE CERTIFICATES OF IEPOSITS ((Tu)
ISSLED BY L.AR€£ BANl<S, FRN PN INVESTOR'S STNdPOINT, Q)s AfE CLOSELY
AKIN TO 011-tER LIQUID ~SETS SUOi PS T~URY BIU.S OR CJJ+ERCIAL PAPER,
IN
1969,
TOT/$L. TU£ AND SAVINGS IEPCSITS OF aJ-M?:RCIAL BANKS lECLINED
5 PERCENT,
MAINLY BECAI.SE BANKS WERE PR:VENTED BY REGULATI~ Q CEIUM»
FID1 PAYING <Dt'PETlTlVE ~ PATES FOR (J) MJNEY • &:CAI.SE RESTRICTI<JiS
WERE EMED IN
1970,
AND BECALSE SHORT-1Eff4 MARKET RATES IECLINED SHARPLY,
TI-IE A:BOLtID IN TlflE AND SAVINGS ACCOUfl'S WM DRN1t\TIC,
FoR lHE YEAR
AS A \tU..E, a:M£RCJ>L BANK Tttf:: #ID SAVIt«iS ACCOLNTS WERE lP t ~ THRI
18 PERO:NT,
A fECDRD INCJBSE, THE f£00VERY IN OllrST/.NDl~G Q)s WAS
AOOENTED BY /IN lJ>SURGE IN OTiiER Tit.£ Nm SAVINGS ACOOUfl'S,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-71£POOITS AT SAVINGS RID LONi ~SOCIATIOOS ROSE
8 PERCENT IN
$11 BIU..100 RISE
1970, OJ,PAffl:D TO 3 PERCENT IN THE PREVIOl.5 VEAR, THE
IN S&l IEPmlTS SET A N&I RECDRD. IlEPos1,s. OF N.mJAL SAVING.S ~ ,
Irf>ORTPHT IN 1HE EAsr, mse 7 PERCENT IN 1970, aff>ARED TO 4 PERCENT
1liE Pf£VIOLS YEAR,
AT tmT BANKS
#jD
IN
OTHER SAVINGS INSTinnlCNS INFLCWS
OF TUE AND SAVINGS FlMS WERE ESPECIALLY Sm:>NG IN 1HE FINAL tmlHS
OF
1970,
APPAt£N1t.Y, THIS TREND OlNTINlED IN JNJUARV
1971,
THE n>RE PAP ID INCREASE IN IEPCS IlS OF FI NANCI AL I NSTIWTI Q\JS
IN 1970 WPS ACCCff>ANIED BY CDlf>ARABLE INCREASES IN 11~EIR Em4ING ~SETS,
IN 11-JE CASE OF OlffRCIN... BJ.NKS, TOTM.. LOANS AND INVESlM:NlS (All.Jl6TED
FOR SAL.ES OF LOANS TO AFFILIATES) INCREASED
7,4
PERCENT LAST YEAR, JlLMlST
TWICE PS MJOi AS IN ]969. loAN I&WID WAS VERY WEAK IN iHE FIN.AL QUARTER
OF TiiE VEAR PARTLY BECAl.SE OF THE SUliER PAC£. OF 11iE Ea:>NCMf, N-JD 1HE
AlfR> STRIKE, Blll' PRJf.W<ILY BECAl.SE OF IEFLtIDING.S OF I.DANS 11i00l.Gi SALES
OF SECl.JRI TIES,
FoR lHE YEAR AS A \i-0.E, BANK LOJ\NS
PERCENT, aM>AR::D 10 A ID PERCENT RISE IN ]969,
GOVfffM:NTS N'ID ttJNICIPlt.S ROOE
12 NID 20
rose
LESS nwi
Bur BANK HCl..DINGS
PERCENT, fESPECfIVELY,
4
OF
lN
]$9, BANKS LIQUIDATED l£ PERCENT OF lliEIR oovmre-rrs, AND riERELY
MAINTAINED HCl..DINGS OF flUIICIPAI..S, TO t£tP 1rlEM TO AOOlff)DATE t-E.AW
~bsT OF TiiE INCREASE IN tEPOOITS AT
IN IEPOOITS AT f1'.fll.W.. SAVINGS BANKS,
OF N>RTGAGE LOANS.
REs~S OF
S8J..s
RISE IN BORRCMINGS Ff01 "n1E faERAL
CJRQ.M;TJ.N~S IN
J967 BCJRRO'IIN<E
~~
IN
S&ls,
~D HALF OF lHE INCRE~E
fl:fl.ECTED IN LARGER Ha.DINGS
1970 WERE
SlPPL.BvENTED BY A
fbE loAN ~HKS, (IJNJ:ER SIMILAR
AD1 TiiE
JM I.om BAN~
ll:aJNED.)
THE lr1'R>VErl£NT IN 11-IE l.EfIDING PQt/ER OF niRIFr INSTITIJTICJ6 CDNTRIBUTED
TO TI-IE SHARP lPTIEND IN Ha.Sit-Ii STMTS IN lHE SEa:r-JD HALF OF
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1970.
-8fos YOU AU. KNOI, ntE SEClRITIES W\RKETS .ABSOftiED #4
\QJ1-£
ENOJM)lB
OF NBi ISSlES IN ]970, DEsPI1E ESPECIAU..Y HEAW FLOATATI<m IN
11-IE FCUmt QUARTER, UX~G-TERM INTEREST RATES r.EQ.INED SI~IFICANTI.Y
LATE IN lHE YEAR,
l~I OORPORATE CAPITPL ISSLES; ,.,me THPl'l
70
45
PERCENT f'OJCONVERTIBLE
$39 BIWOO LAST YEAR, lP PERCENT FR0-1 1HE
REa:>RD lOTAL OF 1969. NEw ISSlES OF LOOG-TER-1 KJNICIPALS ~E 50 PERCENT
1t> $18 BIWO!, A TOTAL 11iAT EXCEEIS lHE 1968 fECX)RD, THUS FAR IN 1971,
BO-JOO, TOTALED ALMl>T
OFFERINGS OF B011i <X>RPORATE AND ~ICtPAL SECURITIES HAVE SlBSTANTIALLV
EXCEEIED 1HE LEVELS OF EAILY
sa.D IN
1970 HELPED TO
fWtf FifM>,
J970, THE
~ Vtl..lt£ OF OORPORATE SEO.JUTIES
lfVPOOVE lHE BAI..PNCE SHEET UQUIDllY RATIOS OF
IT NCW APPEARS lliAT 1HE l.OiG-TEFti J:EQ.INE IN 11:iE RATIO
OF OORPORATE LIQUID ASSETS 10 SHORT-l'Eff1 U/JJlIUTIES WAS HALTED RID
REVERSED I.MT YE.AR.
~TELV, 1liE AVAILABLE MTA CJ~ CORPORATE
Ha...Dltm OF LIQUID ~ETS LEAVE MJOi TO BE IESIRED.
A 1£CENT SURVEY
OF Bt.SINE.SS Ha...Dltl» OF LIQUID MSETS IS amENTLV BEING EVAI.J.U\TED BY
STATISTICI~ AT 1tlE
SEC,
HoPEAJLLY, 1HE lf~T!C}J IEVELOPED Will.
SHED NEEIED U GIT 00 lliIS SECTOR,
ATm1PTs TO
NW..YlI:. THE VMIOlS ASPECTS OF THE FI~CIAL M6.RKETS
OFTEN LEAD OOE lO WNaR ltiROl&f TI£ TfEES LOO<ING FOR THE FOREST.
fi:>R11.NATELY, lliE STAFF OF THE
P.oARo OF 6-M:mms
OF ntE FEl:ERAL RESERVE
SYSTEM, <DNSTRlCl'S A BOIN OF O\TA lt«ER THE HEADING, 11--JE
11
Fl.cM
OF
H.M:8,"
lHAT RELATES TiiE NATl<JW.. 1Nm4: ACCOl.HlS TO IE\ELOPMENTS IN "lliE FirwlCIAL
SEClnRS OF lliE ECD'4('J,ff, t.sTIMATES OF FlrwJCIAL. FLCl'4S-~DS RAISED
RID MOS INVESTED-ARE NOT YET AVAILABLE FOR 11-tE FOURTH QUARTER OF
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-91970.
NEVERlHELESS, DATA FOR ™E FIR>T lrl~E QUARTERS OF lHE YEAR POOVIIE
NJ INSTRlX:TIVE OVERVIEW OF FINANCIAL rEVELOPr-1:NTS IN 11-IE CRUCIAL PERIOD
I.MER fEVIEW.
TOTAL ·Fll'Jm RAISED BV ntE t,O!FINN~CIAL SECTO~ OF TI1E E~CMf
(1 ,E., EXWJDING HlTElftEDIARlES), BOlH PUBLIC AND PRIVATE, TarALED $88
BILLI04 IN
1969,
IOIN FRCV l
1
$97 BILLIGl
IN
1968,
THE PEAK QUARTERLY RATE
FOR THIS AGGREGATE IN 1§9, $93 BILLIOO, WAS REAOiED IN lliE lliIRD
QUARTER,
CDUCIIENT WI1H niE PEAK OF BUSINESS ACTIVI1Y,
TOTAL Fl.MS RAISED BY niE tmFI f'W!CIN... SECTORS lEQ..1 NED TO PN
ANNUAL RATE OF $8) BILLICJJ IN lliE FI~T QUARTER OF
1970,
IN lHE SE~D
QUARTER, HOiEVER, ntE RATE Jl.M'ED TO t'DRE 1liAN $100 BIU..l~, #ID IT
IEAOiED
$103 BIU...100
OF lliE (i1 STRIKE,
IN lHE THIRD QUARTER, fxcEPT R)R lliE EFFECTS
nus
EXfREMELY HI Gi RATE OF FI rw4CI NG POOBABLY (X)NTI NlED
IN 11-fE FOURTH QUARTER.
THE f"mT PRONOU;a .D SHIFT lN 11-iE
1969-70
PERIOD tN 'THE ~ OF
A.tu:s fEFLECTED THE SHIFT IN ™E FEIEPAL SECTOR,
FIRST HALF OF
1969 1l1E
FElEPJ\L OOVEIM1:NT
FRJM A Slff>LlS IN lHE
K)VE1) TO
A IEFlCIT P05JTIOO,
MAINLY BECAUSE OF fEllttD J£VENlES 1HAT REQUIRED RAISHG R.NIS AT A
$19 BIU.IOJ
N.JNUAL RATE IN 1HE llilRD QUARTER OF
1970,
(}fe OOES NOT
11
11
1
HAVE 1tl BE 11::ENTIFIED El1HER ftS A Ml'4ETARIST' OR AS A FISCALIST TO
FOfESEE PN EXPMSIO~ IN BL6INESS ACTIVI1Y IN
A REVI tW
J971.
OF lliE OOURSE OF ImEREST J?ATES IN THE PMT YEAR SUG<i:SlS,
CKE N3AIN, 11-tE NEED FOR CAUTIOO CDNCcRUNG GENERALIZATirn IN nus ~ .
SHarr-iEm
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
RATES IECUNED 1HFnJG-t ~T OF
]970,
BUT Ul'JG-TERM RATES
- ID REAOiED PEAKS ABotrr MI INEAR.
THE RATE ON THFEE-r11rn1 T~URV Bl U..S, 11-IE
NF.Af£ST MARKET APPfllXIMATia-4 TO A PURE" INTEREST RATE, WAS AT ~ PU-Tit,£
11
HlGt OF
8 PERCENT
AT TI-IE START OF
RATE HAD IEQ..I NED TO
1970, BY
4.2 PERCENT--1HE
]971,
LATE JN4UARV
TI-iE DIU.
Ulr/EST SINCE MID-1967. THE DOOP
IN THE RATE BANKS PAY TO BORR>W EAGI OntER'S EXCESS RESERVES--n-tE FEJERAL
run:s
RATE--WAS EVEN SHARPER, FRa4
0:J.t.ERCI M... PAPER RATES, AT
~Oil BELOt-1
5 PERCENT,
9 PERCENT TO
8 PERCENT /1S
LESS THAN
4 PERCENT,
f£CEN11...V PS ~T Sl.MJER, NE
W'tf!RCIAL BANKS MA\/E CUT lHElR PRUE RATE AU1
8.5 PERCENT IN feBRUARV 1970 TO 6 PERCENT CURRENTLY, Willi 14-J l.NPRECEIENTED
FLURRY OF REDLCTICNS SINCE LAST SEPTEMBER.
HIGJ-GRAIE CORPORATE BCM'S DROPPED RU1
9.2
RL\TES ON NEW ISSl£S OF
PERCENT L>ST Jt.tJE TO /4BOOf
7,5 PERCENT fECEfffl.V,
INTEREST
RATES AF£ 11-IE PRICE OF CREDIT, N'-JD R;FLECT, LIKE OTiiER
PRICES, ruE INTERACTICN OF SLPPLV AND~.
IN ££CENT f'iDNlHS, f"OOT OF
THE txl41FiiARD PRESSURE APPAfam..Y HM CX>ME FR01 niE Sl.PPLV Sill!, BECAUSE
11iE TOTAL VCLUE OF FIJIDS RAISED 1--IAS BEEM LARGE,
Bur ONE
SHOllJ) NOT
ASStJ£ TiiAT 1HE f.ffiETARV AU1HORITI ES CAN IETER~I NE 1HE CO~E OF I NTEl£ST
RATES lrfROUGi LONG PERiom OF TIME,
Ui1UKE PRICES OF GOODS, n£ PRICE OF
CREDIT CANNOT BE FORCED lnlN INIEFINITELY BY INCfE/eING ntE SlPPLY,
BECAL6E OF PRICE tNFLATICJi, L.ENDE~ rewm, AND BORR()JERS AF£ ~llWNG
TO PAY, A PREMI t.f.1 TO W1PENSATE FOR EFllS Ia'i OF Tt-iE PUR01ftS ING Pa~ER OF
THE OOLLAR,
You MA.Y HAVE
OOTED THAT IN THIS DISClBSIOJ OF LlQUIDl1Y
I HAVE
MAJE OOLY PASSING REFERENCE TO RATJ~ 1HAT PURPORT TO f~URE LIQUIDI1Y
IN NJ OBJECTIVE SBBE. THIS IS BECAlSE
1 REGARD UQUIDI1Y f·\1RE
STATE OF MIND 1HAN A CDNCEPT SlBJECT 10 QLWffiFICATICJI,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
AS A
UQUIDl1Y IS
-11N1PLE WHEN
ftN
INDivtDUI\L, BlBINESS, OR INSTinJflGJ IS OONFIDENT TiiAT
FUNOO WIU. BE AVAILABLE TO PAV BIU.S WHEN TiiEY
OJ,£
DlE. UJRRENT AND
POOSPECTI VE I NOJ1:, TI'iE CDLLECTI Clt RATE 00 RECEI VA'f3LES, NID
OF LNUSED LINES OF CREDIT ARE ALL It1POITTNff OONSIIERATIOOS,
1liE
EXTENT
A ~W~
Willi
A SlBSTANTIAL. BANK ACOJU'IT WHO 11-IINKS HIS JOB IS IN JEOPARm' 1S .LESS
WIU..ING TO SPEND N'JD TO J\SS!..M! NEW OOl+1ITI'EN1S {FEEL$ LESS LIQUID) '1l-lHJ
A rw~ WI1H A NEGATIVE BANK BALANCE \ffl MAS JlST BEEN PEU-DTED.
THE SNOCK TO THE OONFilENCE OF tffiV INDIVIDlW..S AtJ1I NI STEREO
BY 11-fE R:CESSICN <MILD PEl¼IAPS,
~
HAD FAR
f()P£
TO 00
wrm
aur
1£CESSia NOOE11iEL.ESS) OF
1969-70
1lfE Em5IO~ OF UQUIDilY TifAN OiAUGES
It~
AW FitffiCIAL AGGJEGATES, THE PSYOiCl.DGICAL Ifi>ACT OF THE ff:CENT
BUSINESS IEQ.INE,
I BELIEVE,
WAS t.mE SEVERE ~ IN /VN OF lliE PREVIOI..S
POS1WAR JECESSI(}JS, WHICH FEATURED
f ·lf0-1
L\RGER IEC.INES IN ACTIVI1Y Nm
·nns IS BECAl.SE lliE BAWX1N OF ENDLESS e:<J>ANSI<l~
n FLATED IN niE 1965-68 PERIOD HPS BURST. PARTI...v, IT IS THE DROP IN
1liE STOCK MARKET 11-fE PENN CENTRAL FAILURE' JlND 1HE PROBI...&$ OF niE
Er-Pl.DYr'ENT.
PARTLY'
I
BFOKERAGE lNLUSTRY--ProBl.£1-S WHIQ-f ~ff OF YOO IR:.. AU.. TOO A!W'E OF.
PARTLY, IT IS 11-iE PERSISTENCE OF INFLATIOO IN 1HE FACE OF Ul'IER POOFITS AND
SIDIER GRO'fJH IN INCOMES •
U)NFI!ENCE WILL BE REJlNENATED ONLY \•./HEN IT BECD·1ES EVIIENT
niAT A ProNOt.NCED REOOVERY IN Bt.SINESS ACTIVl1Y IS lJiERYIAY. THERE ARE
ENOOURAGt NG SIGNS TiiAT SUOi EVUENCE IS NEAR AT tWJD,
~SI DBm AL
CONSTRUCTICN ACTIV11Y IS EXTIE4ELV VIGOROlS, PErAIL SAL.ES IMPROVED UJ
DEce• ER AND JMUARV •
THE END OF TI·IE Al.ITO SlRI t<E H~ fEVIVED AFFECTED
SEC1'0RS OF lHAT INLUSTRV, TOTAL 81'1..00'ENT CEASED TO IEO...INE IN LATE 19701
PND PIU3ABLY IS RISING IN EARLY
il971,
PERSGW... INOM: CDNTINlED TO RISE
QlW{l'ER-10-<lJARTER lHRlLGt lHE SUMIXMN IN ACTIVITY, UWSIJtERS HAVE
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-12 BEEN SAVING AT HtSllJRlCPU.Y HIG-i PATES, THE GRO. i OF LI UID PS ETS, ~D
1HE AVAILABIUT'f OF <mSlf-ER CREDIT, INDICATES lliAT ™E POTEITTII-\L lO
SPEND IS \IERV LARS.:, THE OJSlM:R IS lHE ·FEPL l~ TO S0LtID ECCJffiIC
REVIVAL IN
197it,
EAAi.lER IN MV TPL.K
I IESCRIBED THE ~NNJCiftt. IEVEL!ftBffS THAT
_,
HAVE LAI6 THE FOlf'1DATICNS roR A 1£nffl m PROSPERITY ,
rtsr
OF IB ARE
DISAPPOINTED 'THAT CLEARER SIGNS OF Ni Iftf>R0\11:MENT IN ECDN0 1IC CONDITiaG
1
HAVE WOT pJ.JE.MJf APPFARED, THE FACT 1HAT THERE NE LAGS BE1WEEU .fffiETARV
POLICY AC11CJJS AND lHEIR EFFECTS IS WELL KNOit ~•
Tr£ LAGS AP ·tJE~ffi..Y
LA~ IS STILL S013411-fAT lt~PREDICTftBLE ,
i-
nns Titi;-cERTAINLY LONGER llWJ
Btrr 1HE TIMU
il.%7
WHEN 111E
~=,
IN
OF TI-IE
N'£ LONGER
SL.OroiN IN ACTIVI1Y
WAS REVERSED Wl1liIN A SIX-ttONlli PERIOD,
DISAPPOINTM::NT WITH lHE RESULTS OF fO.ETARY POLICY THLE FAR
•{BtST NOT LEND TO INCAUTIOUS EXCESSES 11-iAT MAY BE HARv1FtL RA11iER
BENEFICIAL TO E<DNCMI C REOOVERV,
TI·➔.AN
~N EVEN SHARPER INCREftSE I THE GOOmt
OF tffiEY NID CfEDIT AT 1HI TIM: WIU... t~ QUICKLY f£VI'IE 11iE NATI OO '
IEPRESSED PSYCHOl.DGY ~I<li IS N....f£ArN ON 1HE ~END. liiAT WIU. TAKE TU·E,
THE ~AIL.ABLE R.NOO ARE 1HEJ£ TODAY,
ftm
IF CREDIT tt,JAVAtl.A8ILI1Y IS
1HREATENING TO HN-1PER R!CD~R'f' ~ YOU O\N BE SURE 11-iAT THE ruETARV
AlffiiORITIES WILL Acr SWIFTLY AND SURELY •
l:Aa;
OF l6 OOtl.D DRA'I lP A LIST OF EPtS0JES OF THE
1969-70
PERIOD lliAT MIGtT HAVE BEEN RECALLED PS HARBINGERS OF DISASTER IF THE
ECGJG1t C ADJt.SllENT HAD SNO'IEW.l.ED
11-IAT
ltffl)
.
IEEPER ~CESS I CN. THE FACT
sua-r A PFOSPECT w~ NOT IEAL.IZED BEARS TESTU·U·N TO 1liE BASIC
STREtmH OF 0lR BLSINESS AND Fl~CIN.. STRUCTIJI£, Willi A PRCPER BALANCE
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- ]3 OF FISCAL NID r-ttfETARY Pa..ICIES, PUS RESPCJSI LE lfUOO NID
Pa.J Cl ES IN lNllSTRY,
l
Fl FM.Y BEU EVE TiiAT lHE
GREATEST IECAIE IN PIERI~ HISTORY•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
~
70s ~'1 LL 00 IX>WN
AS niE