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The original documents are located in Box C2, folder "Brimmer, Andrew, Oct. 1969 - April
1971 (2)" of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Arthur Burns donated to the
United States of America his copyrights in all of his unpublished writings in National Archives
collections. Works prepared by U.S. Government employees as part of their official duties are in
the public domain. The copyrights to materials written by other individuals or organizations are
presumed to remain with them. If you think any of the information displayed in the PDF is subject
to a valid copyright claim, please contact the Gerald R. Ford Presidential Library.
NATIONAL ARCHIVES AND RECORDS SERVICE
WITHDRAWAL SHEET (PRESIDENTIAL LIBRARIES)
FORM OF
CORRESPONDENTS OR TITLE
DATE
RESTRICTION
DOCUMENT
1. memo case, Brimmer to Board of Governors, 4/15/70
la. memo
Federal Reserve Bank of Chicago to Board of
3/16/70
B
Governors re Northern Trust Co., Chicago
FILE LOCATION
Arthur Burns Papers
SRM
Federal Reserve Board Staff Files, Box C2
3/19/85
Brimmer, Andrew (2)
RESTRICTION CODES
(A) Closed by Executive Order 12356 governing access to national security information.
(B) Closed by statute or by the agency which originated the document.
(C) Closed in accordance with restrictions contained in the donor's deed of gift.
GENERAL SERVICES ADMINISTRATION
GSA FORM 7122 (REV. 5-82)
For Release on Delivery
Wednesday, April 1, 1970
12 noon, P.S.T. (3 p.m., E.S.T.)
points are marked
Key policy
THE BANKING STRUCTURE AND MONETARY MANAGEMENT
with paper chips
Remarks by
- moting
Andrew F. Brimmer
Member
points on
Board of Governors of the
Federal Reserve System
pp 26-33
Before the
San Francsico Bond Club
Fairmont Hotel
San Francisco, California
April 1, 1970
GERALD FORD LIBRARA
THE BANKING STRUCTURE AND MONETARY MANAGEMENT
By
Andrew F. Brimmer*
The campaign against inflation has undoubtedly reached a
troublesome phase, and the appropriate role for monetary policy is one
of the principal questions on the minds of many observers. I agree that
the task of monetary management is a difficult one under the present
circumstances. But, in my personal opinion, monetary policy still has
a contribution to make in our national efforts to check inflation. I
will comment further on this task in the closing section of these remarks.
Before doing that, however, it might be well to review the
impact of monetary restraint on the banking system and credit flows
during the last year. A comprehensive analysis of that experience has
convinced me that the time has come for a thorough reexamination of the
main tools and techniques of monetary control in the United States.
Also in these remarks, I will sketch the broad outlines of an alternative
approach which appears to be quite promising. In fact, the key element
on which this possible new direction is based -- a more flexible use of
reserve requirements -- has been relied on increasingly by the Federal
Reserve Board in recent years to accomplish objectives requiring a
special focus on particular segments of the banking system.
* Member, Board of Governors of the Federal Reserve System.
I am grateful to several members of the Board's staff for
assistance in the preparation of these remarks. Mr. Frederick M.
Struble had principal responsibility for the analysis of port-
folio adjustments by banks, given their differential access to
sources of funds. Mr. Peter J. Feddor designed and carried out
the difficult computer programming tasks on which the analysis
depended so heavily. Miss Harriett Harper, my assistant, also
helped with the statistical analysis.
GERALDO FORD LIBRART
-2-
The reasoning behind these conclusions is set forth in some
detail in the sections which follow. However, it might be helpful to
summarize here the main points of the analysis:
- In 1969, despite the severity of monetary
restraint, the volume of funds raised in
the capital markets by borrowers other than
the Federal Government rose moderately
compared with the previous year. However,
the distribution among sectors changed some-
what. The share obtained by both households
and State and local governments declined
slightly, while the business sector (par-
ticularly corporations) got a larger share.
- The Federal Reserve System, on balance,
provided a slightly larger volume of credit
(in both absolute and relative terms) last
year than it did in 1968.
- Commercial banks supplied a drastically
reduced proportion of the credit advanced
in 1969 compared with the previous year
(just over one-tenth vs. two-fifths in 1968).
The banks experienced an actual loss of
deposits last year in contrast to a sizable
gain the year before. Their net acquisition
of financial assets fell by over three-quarters
from the 1968 level.
- Nevertheless, through heavy sales of securities
and reliance on nondeposit sources of funds,
the banks were able to expand funds avail-
able for loans. In particular, business loans
on the books of commercial banks rose almost
as much as they did in 1968. When the volume
of loans sold by the banks is added to the
total, the increase in business loans last year
was even greater than that registered the year
before.
- The pattern of portfolio adjustment differed
markedly among banks, depending on their access
FORD & LIBRARY 071470
to nondeposit sources of funds. Banks with
ready access to Euro-dollar inflows or with the
-3-
ability to sell commercial paper were much
more successful in cushioning the impact of
monetary restraint than were other banks
which did not tap these sources of funds.
Again, the greater were the availability of
nondeposit sources of funds to the banks --
the greater also was the rate of expansion
of business loans.
-
The differential response of commercial banks
to monetary restraint in 1969 becomes even
more sharply focused when the banks are re-
grouped and viewed in the context of the
strategic roles they play with respect to
different types of financial transactions.
For this purpose three groups can be identi-
fied: (1) a handful of multi-national banks
active in the domestic money market on a
national scale and also heavily involved in
international finance; (2) a sizable number
of institutions which play a dominant role
in their regions, and (3) other banks which
concentrate mainly on their local markets.
Among these three groups of banks, the first
was the most successful in expanding its total
loans and the second group was next in line.
This was especially true of business loans at
the first group where the rate of increase
exceeded the average -- while the rate of
expansion in their consumer loans was below
the average -- for all banks covered in the
analysis. Sales of business loans were pro-
portionately the heaviest at the multi-national
banks, and adjusting for such sales raises
significantly the rate at which they supplied
credit to their corporate customers.
When I reflect on the results of the analysis summarized
above, I find it far from comforting. As emphasized many times, one
objective -- although certainly not the only one -- of monetary
restraint in 1969 was a sizable moderation in the expansion of business
loans. Such a moderation in turn was sought as a means of dampening
GERALD LIBRARY FORD
-4-
excess demand and inflationary pressures in the economy. In retrospect,
it is obvious that the Federal Reserve was not completely successful
in its effort as far as business loans are concerned.
I am fully aware of the views of some observers who argue
that a central bank should not concern itself with the composition of
bank credit, but only with its rate of growth -- and better still only
with the rate of growth of the money supply (however defined). Yet, in
my own view, a central bank should not be indifferent to the changing
composition of bank credit; to adopt such a posture would mean that
drastic variations in the availability of credit in important sectors
could occur -- and persist -- with seriously adverse consequences for
the economy as a whole. In my opinion, we need a better way to assure
that the overall objectives of monetary policy can be achieved without
having a few sectors bear a disproportionate share of the burden of
adjustment, while other sectors escape or significantly moderate its
impact.
I will return to this point below. In the meantime, we can
turn to the body of the analysis.
Credit Flows in 1969
The volume of credit raised in the capital markets in 1969 was
obviously restrained severely by the restrictive monetary policy followed
by the Federal Reserve System as part of the campaign to check inflation.
Nevertheless, after allowing for the market activities of the Federal
BERALD FORD LIBRARY
-5-
Government, there was a modest increase in the amount of funds raised.
According to the preliminary flow of funds statistics compiled by the
Federal Reserve Board, the net volume of funds raised by all nonfinancial
sectors in 1969 amounted to about $85.7 billion, a decrease of $11.7 bil-
lion (or 12 per cent) compared with the level in the previous year. (See
Table 1 attached.) However, this decline in the total was more than
accounted for by the change in the position of the Federal Government.
In calendar year 1969, the latter made net repayments of $5.4 billion --
compared with net borrowings of $13.4 billion the year before. Thus,
the year-to-year change was a decrease of $18.9 billion. Well over
two-thirds of the swing centered in direct public debt securities, and
the rest in Government agency issues.
Allowing for the experience of the Federal Government, total
funds raised by other nonfinancial sectors in 1969 amounted to $91.0
billion. This represented an expansion of $6.9 billion (or 8 per cent)
over the level raised in 1969. However, the share of the total funds
received by the principal groups of borrowers changed noticeably.
State and local governments raised $9.2 billion ($1.0 billion
or 11 per cent less than in 1968), and their share of the total also
declined slightly (from 12.1 per cent to 10.1 per cent). In contrast,
net funds raised by these State and local units rose by $2.2 billion
(or by 28 per cent) in 1968. Moreover, the decline of $1.0 billion in
net funds raised by State and local governments last year represented
over four-fifths of the decline of $1.3 billion in net debt financing
FORD & LIBRARY GERALD
-6-
in the long-term capital markets. In fact, obligations of these
units were the only issues among the three principal types of capital
market instruments to register a significant decline in 1969. While
a number of factors contributed to this reduced borrowing by State and
local governments, the lessened interest of commercial banks in tax-
exempt issues was undoubtedly of considerable importance. As shown
in Table 2, commercial banks expanded their holdings of such obligations
by only $1.2 billion in 1969, compared with an increase of $8.7 billion
in the previous year. Such issues represented about 10 per cent of the
net acquisition of financial assets by banks in 1969 -- only half the
proportion recorded in 1968. Moreover, last year the change in the
banks' holdings represented only 14 per cent of the net funds raised
by these governments in contrast to 90 per cent of the total in the
preceding year.
The consumer sector raised about $31 billion in the capital
market in 1969, or roughly $1. billion less than in 1968. This was a decline
of just under 3 per cent. Since this occurred while the total volume
of funds raised was expanding moderately, the household sector's share
of the total also declined somewhat -- from just under two-fifths to
just over one-third. This sector, on balance, also borrowed less at
commercial banks. This can be seen in net change in the volume of home
mortgages held and the amount of consumer credit extended by the latter.
In 1969, their household mortgages rose by $2.5 billion, compared with
$3.5 billion the previous year. The corresponding changes in consumer
FORD & LIBRARY QERALD
-7-
credit were $3.1 billion and $4.9 billion. So the growth in these
forms of bank credit eased off by one-third (from $8.4 billion to
$5.6 billion).
The principal sector which expanded its share of total funds
raised both in the overall capital market and at commercial banks was
nonfinancial business. In the capital markets (as shown in Table 1),
this sector raised $47.4 billion in 1969, compared with $39.1 billion
the year before. This was an increase of $8.3 billion, or more than
one-fifth. Whereas businesses accounted for 47 per cent of the total
funds raised in 1968, their share rose to 52 per cent last year.
Industrial and commercial corporations were mainly responsible for the
rise. In 1969, they raised $37.2 billion, or $6.2 billion more than
in the year before. Consequently, their share of the total climbed
from 37 per cent to 41 per cent. Business firms also accounted for a
sizable share of the expansion in commercial bank credit. As shown in
Table 2, while the net acquisition of financial assets by the banks
amounted to $9.6 billion in 1969, bank loans (other than mortgages,
consumer credit and credit extended to purchase or hold securities)
rose by $13 billion. Loans in this category consist mainly of funds
supplied to businesses. Consequently, commercial bank loans to the
business sector expanded by more in 1969 than did total credit at these
institutions. In 1969, loans to business had accounted for just under
two-fifths of the total.
FORD is LIBRARY GERALD
-8-
Sources of Funds and Bank Behavior
Experiencing substantial deposit declines in the face of
strong demands for loans in 1969, banks attempted to maintain -- or
expand -- their earning assets in two principal ways: by tapping
nondeposit sources of funds or by selling a large volume of existing
financial assets -- loans as well as securities -- or some combination
of both. While they also made increasingly serious attempts to ration
credit, they devoted their energies primarily to a search for ways to
meet their customers' demands.
These various methods of adjusting to credit restraint are
clearly apparent in data reflecting developments at large banks in the
United States. About 340 of these banks report weekly to the Federal
Reserve System, showing their assets and liabilities in some detail.
Although they constituted only 2-1/2 per cent of the 13,464 insured
commercial banks as of June 30, 1969, they control a substantial pro-
portion of the total banking resources. They hold about three-fifths
of the total assets, total loans and investments, and demand deposits.
They hold three-quarters of total business loans, about half of consumer
and real estate loans, and about the same proportion of total time and
savings deposits. However, they hold nearly 90 per cent of the large
denomination certificates of deposit (CD's), and they account for virtually
all of the Euro-dollar borrowings and commercial paper sold by banks via their
affiliates. While most of these weekly reporting banks are members of
the Federal Reserve System, some insured nonmembers are also included.
All of the 340 have total deposits of $100 million or more.
FORD & LIBRARY GERALD
-9-
Thus, a study of the behavior of these institutions under
conditions of monetary restraint provides valuable insights into the
behavior of the banking system as a whole. The broad changes in bank
credit at the weekly reporting group and at all commercial banks were
quite similar in 1969, as shown in the following figures (annual per-
centage rates of change) :
All Commercial
Weekly Reporting
Banks
Banks
Total loans and investments
2.4
0.6
U.S. Government securities
-15.9
-20.4
Other securities
-1.1
-8.4
Total loans
7.7
5.6
Business loans
9.4
9.7
Time and Savings deposits
-5.3
-14.7
The noticeable differences among the two sets of growth rates
are these: the weekly reporting banks expanded their earning assets
somewhat more moderately, they experienced a much heavier attrition
in time deposits (especially CD's), and they liquidated securities at
a much faster rate. While total loans at the weekly reporting banks
rose less rapidly, their business loans increased somewhat more rapidly
than at all banks in the country.
As indicated in Tables 3 and 4, total deposits declined sharply
at the weekly reporting banks in 1969. A substantial decline in CD's,
FORD & LIBRARY GERALD
-10-
combined with a more moderate drop in other time and savings deposits,
considerably offset a slight rise in demand deposits. The decline in
these deposit liabilities was more than counterbalanced, however, by
expansion in other forms of liabilities. Total borrowings (principally
in the federal funds market and at Federal Reserve Banks) and other
liabilities (largely Euro-dollar borrowings from foreign branches) both
advanced sharply.
Although the funds obtained from these alternative liability
sources were large enough to finance a modest expansion in total earn-
ings assets, they were clearly not sufficient to enable the weekly
reporting banks to meet the demands of their loan customers. To gain
additional funds, large blocks of security holdings were liquidated.
In addition, a large volume of loans was sold, primarily to bank hold-
ing companies and affiliates. (These latter transactions are reflected
in the large volume of commercial paper sales which supplied the funds
to finance the purchase of these loans.)
The expansion in loans maintained on bank books, made possible
by sale of securities and tapping of alternative liability sources of
funds, was quite substantial -- and again it should be remembered that
this gain is net of the loans sold from bank portfolios. Yet, some
evidence of loan rationing is reflected in the data. The growth in
total loans, even with loans sales accounted for, fell somewhat short
of the expansion which occurred in 1968, when these banks were well
supplied with funds. The change in volume alone, of course, does
GERALD FORD LIBRAN
-11-
not permit one to distinguish between a change in supply and a change
in demand for credit, but it seems a reasonable assumption that loan
demands were at least as strong in 1969 as in 1968.
Most of the loan rationing which occurred appears to have
been focused on nonbusiness borrowers. Business loans on the books of
weekly reporting banks, on the other hand, increased by as much in 1969
as they did in 1968. Moreover, since business loans comprise the major
proportion of loans sold, total business credit extended through weekly
reporting banks in 1969 was significantly higher than in 1968. How
much difference these loan sales disguise the growth of bank credit
extended to business firms is indicated in one of the following sections
of these remarks.
Behavior of Euro-Dollar Banks
As may be seen in Table 3, the 19 weekly reporting banks that
are major borrowers in the Euro-dollar market experienced a large
deposit drain. However, they were more than able to compensate for
this loss by drawing funds from alternative liability sources. Similar
adjustments can be seen in the case of all other weekly reporting banks.
However, the Euro-dollar banks relied much more heavily on the Euro-
dollar market, while the other banks mainly utilized domestic sources
of funds.
Whether the Euro-dollar banks were able (by using alternative
liability sources) to make a more substantial compensation for their
deposit drains than were other weekly reporting banks is difficult to
FORD & LIBRARY GERALD
-12-
discern from an examination of the absolute change figures in Table 3.
To overcome this difficulty, the changes in the banks' balance sheet
can be converted to percentage terms. The figures are presented in
Table 4. These data show that the deposit decline at Euro-dollar banks
was nearly twice as large in relative terms as at the other weekly
reporting banks. However, despite this sharp difference in deposit
experience, growth in total earning assets at Euro-dollar banks was
relatively quite similar to that at the other weekly reporters. This
was due, of course, to the strong advance which the Euro-dollar banks
were able to achieve in nondeposit sources of funds. (The percentage
changes in these nondeposit figures are not particularly revealing
because the outstanding levels for some of these items were quite small
compared with their change.)
What is perhaps of even greater interest is the relative
growth in total loans at these two groups of banks. As may be seen,
the Euro-dollar banks recorded somewhat larger gains in both total
loans and in business loans than did the other weekly reporting banks.
The differences were quite small, however, so that perhaps the best
generalization is that both groups of banks made about the same kind of
adjustments to the problem of meeting strong loan demands during a
period of heavy deposit drain. In this regard, it is worth restating
that, although the percentage increases for 1969 indicated in the
table for each groups of banks fell well below those recorded in 1968,
these data do not reflect the considerable volume of loan sales made
in 1969.
FORD & GERALD LIBRARY
-13-
Behavior of Commercial Paper Issuing Banks
As is generally known, a number of banks resorted to the
sale of commercial paper, mainly through one-bank holding companies
but also to some extent through affiliates, to raise funds in an effort
to compensate for the loss in deposits. Some of the banks active in
the Euro-dollar market have also issued commercial paper. As indicated
in Table 3, at the end of last year, $4.3 billion of commercial paper
was outstanding at weekly reporting banks. Of this amount, $2.4 bil-
lion (or 56 per cent) had been issued by Euro-dollar banks. The
remainder ($1.9 billion) had been sold by banks which do not rely on
Euro-dollar inflows to supplement their deposits.*
It is evident that the banks which relied only on commercial
paper did not register a growth in their earning assets as did
either the Euro-dollar banks or the banks which did not resort to non-
deposit sources at all. While the differences among the groups were small,
those banks relying on commercial paper had expanded their assets more
rapidly in 1968. Last year, these banks had a percentage decline in
time deposits about as large as that for all weekly reporting banks
(although smaller than that recorded at Euro-dollar banks), and their
sales of U.S. Government securities were proportionately almost as
large as for the other banks. While Euro-dollar banks increased their
indebtedness to their foreign branches by $7.0 billion last year, those
*Trends in bank sales of commercial paper through mid-March, 1970,
are shown in Table 7.
FORD & GERALD LIBRARY
-14-
banks relying on commercial paper increased the volume of the
latter by only $1.9 billion. Yet, the two groups came out not very
far apart when their sales of securities and the expansion in non-
deposit sources are set against the attrition in total deposits.
The Banking Structure and the Differential Impact of
Monetary Restraint
To obtain a different -- and more informative -- perspective
on banking developments in 1969, another grouping of weekly reporting
banks was made. On the basis of a considerable number of criteria,
20 banks were identified and labeled "Multi-National Banks. " The
criteria used included size, volume of business loans, importance in
the Federal Funds market in particular and the money market in general,
the volume of foreign lending and participation in the Euro-dollar
market. Using similar criteria but stressing domestic activities
and relative importance in one area of the country, an
additional 60 banks were designated as "Major Regional Banks. " The
remaining 260 banks were designated "Large Local Banks. " The changes
in balance sheet items at these groups of banks in 1968 and 1969 are
presented in Table 5 and 6. As one would expect, this information
presents a roughly similar picture to that provided by the other group-
ings of banks. Yet, the experience is put into much sharper focus.
The Multi-National Bank group, which is heavily comprised of large Euro-
dollar banks, was subject to the largest percentage decline in deposits.
FORD & 076870 LIBRARY
-15-
The decline at Major Regional Banks nearly matched that recorded at
the Multi-National Banks, while a much smaller deposit reduction
occurred at the Local Bank group. But despite this disparity in
deposit flow, the percentage advances in total earning assets at these
groups of banks were essentially similar. This suggests that the
imbalances in deposit flows were offset by an opposite imbalance in
the growth of nondeposit sources of funds.
The noticeable differences are evident with respect to earn-
ing assets. Total loans and business loans expanded more sharply at
the Multi-National Banks than at the other two groups of banks. This
is particularly true when compared with the Local Banks. So that there
is some suggestion that the Multi-National Banks were more successful
in avoiding the restraints of a tight monetary policy. This conclusion
is further supported by the fact that loan sales which were heaviest at
the Multi-National Banks were not included in the computation. The expansion
of real estate loans, which include a sizable proportion of non-
residential property along with home mortgages, was also considerably
larger at the Multi-National Banks than at either of the other two
groups. On the other hand, both of the latter expanded their consumer
loans more rapidly than did the Multi-National Banks.
Finally, at the end of 1969, the Multi-National Banks had a
somewhat larger share of total loans, of business loans and of real
estate loans -- and a slightly smaller share of consumer loans -- than
FORD & GERALD LIBRARY
-16-
they had at the end of 1968. The Regional Banks made a modest gain
in their relative share of business loans, about held their place in
the case of real estate loans, and experienced a slight decline in the
proportion of both total loans and loans to consumers. The Local
Banks' share of all of these asset categories declined moderately.
The general conclusion which emerges from this analysis can
be expressed succinctly: The largest banks with both national and
international customers -- and which mobilize funds in both the domestic
and international capital markets -- are able to avoid a substantial
proportion of the impact of monetary restraint. In doing so, they can
maintain -- or even expand -- their earning assets. The large regional
banks can succeed almost as well in following a similar course. The
larger local banks, although also much larger than the average bank
in the country, can do so to a much lesser extent.
Loans Sales and the Growth of Business Loans
As indicated at several places in this discussion, the
expansion of business loans at commercial banks during 1969 was
considerably obscured by sales of loans to obtain funds to meet new
demands. Trends in such loan sales are shown in Table 7. At the
end of last October, 143 banks were involved in such loan sales, and the
amount sold outright totaled $5.7 billion. More than four-fifths of
this total represented sales to the banks' affiliates and subsidiaries
and the rest to the nonbank public. Most of the loans sold to bank
subsidiaries and affiliates reflect acquisitions by the latter for which
FORD & GERALD LIBRARY
-17-
payment was made from the proceeds of their sales of commercial paper
to the public. However, some of the loans were sold by banks to their
foreign branches, with the latter paying for the transfer out of the
proceeds of Euro-dollar deposits. As of March 11, 1970, the volume of
loans sold had climbed to $7.8 billion; the distribution between affiliates
and the nonbank public was about the same as it was at the end of October.
As mentioned earlier, the loans sold by the commercial banks
consist mainly of loans to business borrowers. If these sales are added
to the volume of business loans outstanding on the books of the banks,
the rate of growth in business loans in 1969 is raised substantially,
as shown in the following statistics (1968 data need no adjustment):
Annual Percentage Rate of Change in
Business Loans After Adjustment for
Loan Sales
Before
After
Classification of Banks
1968
Adjustment
Adjustment
Difference
All Weekly Reporting Banks
11.4
9.7
13.7
4.0
Euro-dollar Banks
10.6
9.9
15.4
5.5
Commercial Paper Issuers
16.4
7.8
10.2
2.4
All Other Banks
9.8
10.6
12.6
2.0
Multi-National Banks
11.2
10.4
16.0
5.6
Major Regional Banks
11.3
9.9
12.3
2.4
Large Local Banks
11.9
7.6
8.0
0.4
Clearly the loan sales have been heaviest at the largest
banks, and the understatement of the rate of growth of business loans,
shown in the published statistics, has also been greatest at these
institutions. When the loans sold are folded back into the figures,
it appears that the rate of expansion of business loans at the weekly
FORD & LIBRARY GERALD
-18-
reporting banks was more than two-fifths higher than originally shown.
At the Euro-dollar banks, the expansion was more than 50 per cent higher.
Among those issuing commercial paper only, it was about one-third larger,
and at other banks it was one-fifth higher. When the banks are classified
according to the strategic roles they play with respect to different
types of financial transactions, the same pattern emerges -- but with
sharper focus. The growth rate is raised by more than one-half at the
Multi-National Banks; by one-quarter at the Regional Banks, and by
only 5 per cent at the Local institutions.
But what is even more striking, except for commercial paper
issuers and the local banks, the growth rate for business loans in
1969 -- once the sales are accounted for -- was considerably higher
than that recorded in 1968. The unadjusted figures, except for one
group of banks, would have suggested a noticeably lessened pace of
expansion in business loans in 1969 compared with 1968.
Thus, the ability of some of the strongest commercial banks
to sell part of their existing portfolios to obtain funds to meet new
demands for funds is another way open to them to escape -- or at least
lighten - - the impact of monetary restraint.
Long-Run Task of Monetary Management
As I reflect on the differential impact of monetary policy
as mirrored in the behavior of different segments of the banking
structure, I become more and more convinced that the Federal Reserve
FORD i LIBRARY GERALD
-19-
System should give serious consideration to revamping its instruments
of monetary control. I personally see no need to cast aside any of
the traditional tools -- i.e., the discount rate, open market operations,
and reserve requirements. These have been used -- and can continue to
be used -- to influence the cost and availability of credit.
But, in my opinion, neither of these instruments has been
the cutting edge of monetary policy during the last few years. This
has been provided by the ceilings set by the Federal Reserve Board
under Regulation Q, limiting the rates of interest which member banks
can pay on time deposits. This has been particularly true of the
ceilings on negotiable certificates of deposit of $100,000 and above --
frequently referred to as CD's. From early December, 1965, until mid-
April, 1968, the maximum rate payable was set at 5-1/2 per cent. In
1966, as yields rose on other short-term money market instruments
(especially U.S. Treasury bills), the maintenance of the ceiling
induced a sharp attrition in bank CD's outstanding. From the end of
July to the end of November of that year, CD's at the weekly reporting
banks shrank by $2.8 billion -- from $18.3 billion to $15.6 billion, a
decline of 15 per cent. In early 1968, when a more restrictive monetary
policy was in force, the banks again lost CD's. Between the end of
February and the end of June in that year, the volume outstanding declined
by $1.8 billion -- from $21.1 billion to $19.3 billion, a decrease of
9 per cent. But the sharpest cut-back occurred during the period of
LIBRARY GERALD ? FORD
-20-
severe monetary restraint last year. At the end of 1968, the weekly
reporting banks had $22.8 billion of CD's outstanding. By February 4,
1970, the amount had declined to $10.3 billion, a loss of 55 per cent.
Underlying the decision of the Federal Reserve Board to
allow this attrition to take place -- and, in fact, to encourage it by
restrictive open market operations -- was the assumption that banks
would become less willing to make new commitments to lend as they became
less assured of their ability to obtain deposits to meet such commitments.
The results would be a moderation in the growth of bank credit, a lessen-
ing in excess demand for real resources, and a dampening of inflationary
pressures. I believe that assumption was a reasonable one, and I
supported the actions based on it. I think that the perception of
bank behavior which it implied was also reasonable. In retrospect, it
is evident that in both 1966 and 1969 -- as the Federal Reserve System
attempted to employ monetary policy to restrain the availability of
credit -- the banks did not modify their lending policy appreciably
until it became obvious that they would see substantial attrition in
deposits. Moreover, in early 1967 and again in the second half of
1968, the banks quickly recovered their previous CD losses as monetary
policy became easier - - and they also quickly expanded loans and rapidly
built up a sizable backlog of commitments to lend to their business
customers. With the increase in the ceilings in January of this year
(to a maximum of 7-1/2 per cent) the possibility of a quick recovery of
CD losses will again exist if market yields decline sharply.
FORD i LIBRARY 93
-21-
In my judgment, the spreading tendency on the part of banks
to accept commitments is a development which may pose a serious problem
for monetary management in the future. While I have no quantitative
estimate, I do have the impression that such commitments are increasingly
pinned down by the payment of a fee. To the extent that this practice
spreads -- and the banks are thus locked into binding agreements to
lend -- the ability of the Federal Reserve to influence the rate of
growth of bank loans would be reduced.
However, the limitation on maximum interest rates payable on
time deposits has become part of the Federal Reserve's kit of policy
tools. On several occasions in the past, I have said that -- in my
judgment -- the Federal Reserve should take the first opportunity it
has to lift such ceilings and to put them on a standby basis. Unfortu-
nately, such an opportunity has not arisen -- mainly because the move
would probably stimulate a new round of intense competition among banks
and savings intermediaries, some of whom (particularly savings and loan
associations) are not in a good position to bear the full impact of
such competition. However, this reasoning applies primarily to the
rate ceilings on consumer-type time deposits and to a much lesser extent
to the ceilings on CD's -- which are really money market instruments in
competition with Treasury bills and other short-term investment outlets.
Thus, I am still personally hopeful that this possibility will not be
forgotten.
FORD i LIBRARY 936870
-22-
Evolution of Reserve Requirements in Recent Years
In the meantime, I think it would be well to explore the
possibility of reordering the way in which the traditional instruments
of monetary policy are employed to influence the cost and availability
of credit. In particular, I think more emphasis should be focused on
reserve requirements. As a matter of fact, the Federal Reserve Board
has shown considerable flexibility in the use of reserve requirements
in the last few years. For the most part, this has involved tailoring
changes in such requirements to differentiate the impact by size of
bank -- as implied by deposit size. For example, in July, 1966, the
requirement on time deposits over $5 million was raised from 4 per cent
to 5 per cent -- and kept at 4 per cent on deposits below that amount.
In September of the same year, the percentage was raised further to
6 per cent on the $5 million and over category; again no change was
made for amounts below that figure. In March, 1967, in two 1/2 percentage
point steps, reserve requirements were cut from 4 per cent to 3 per cent
on savings deposits and on time deposits under $5 million. The require-
ment was left at 6 per cent on time deposits over $5 million. That
resulting structure of reserve requirements has remained unchanged for
the last three years.
In January, 1968, the Federal Reserve Board also began to
differentiate reserve requirements on demand deposits. At that time,
the requirement was raised from 16-1/2 per cent to 17 per cent on
FORD is GERALD LIBRARY
-23-
deposits over $5 million at Reserve City banks, while the requirement
on amounts below this figure was left unchanged. At country banks, the
corresponding increase was from 12 per cent to 12-1/2 per cent for
demand deposits over $5 million, while it remained at 12 per cent on
amounts below that cutoff. In April last year, a 1/2 percentage point
increase was made effective at both Reserve City and country banks and
on demand deposits both above and below $5 million.
But undoubtedly the most imaginative use of reserve require-
ments in recent years has been their application on Euro-dollar borrow-
ings by American banks. In March, 1969, I suggested that such a step
be considered as a means of making domestic monetary policy more efficient.
Effective last October, a 10 per cent marginal reserve requirement was
set on member bank liabilities to overseas branches and on assets
acquired by such branches from their head offices in excess of outstand-
ings during a base period -- the four weeks ending May 28, 1969. A
10 per cent marginal reserve requirement was also set on loans extended
to U.S. residents by overseas branches of member banks in excess of
outstandings during a given base period. A similar 10 per cent reserve
requirement was fixed on borrowings by domestic offices of member banks
from foreign banks; in this instance, however, only a 3 per cent reserve
is required against such borrowings that do not exceed a specified base
amount. The reserve-free bases are subject to automatic reduction --
unless waived by the Board -- when, in any period used to calculate a
FORD is 938870 LIBRARY
-24-
reserve requirement -- outstanding amounts subject to reserve require-
ments fall below the original base.
In the same vein, the Federal Reserve Board published for
comment a proposal to apply reserve requirements to commercial paper
when offered by a bank-related corporation and when the proceeds are
used to supply funds to the member bank. Last October, the Board
published for comment a proposal to apply interest rate ceilings to
commercial paper used in this way. Late in February, the Board
announced that consideration of the issue was being put aside at that
time because of a desire to avoid exerting additional restraint on
money and credit markets. However, the question is still open, and
the possibility of applying a reserve requirement along with -- or in
lieu of -- an interest rate ceiling also remains open for the Board
to decide.
Extending the Range of Reserve Requirements
It was against this background that I suggested in February
that consideration might be given to applying a supplemental reserve
requirement on loans extended by U.S. banks to foreign borrowers as a
replacement for the present voluntary foreign credit restraint program.
At the time, I emphasized that such a market-oriented approach would be
superior to one based on ceilings fixed by administrative decision --
and at the same time it would offer meaningful protection to our balance
of payments.
GERALD ? FORD
-25-
In my judgment, thought might also be given to the possibility
of adopting such a requirement for domestic purposes as well. The
objective of the supplemental reserve on domestic loans would be to
raise the cost of bank lending by reducing the marginal rate of return
to the bank making the loan -- and thereby dampen the expansion of bank
loans. The basic purpose of the supplemental reserve would not be
simply to levy new reserve requirements on the banking system. If it
were thought that its adoption would raise the average level of reserves
required beyond what the Board thought was necessary for general stabiliza-
tion purposes, the regular reserve requirements applicable to deposits
of member banks of the Federal Reserve System could be reduced.
In suggesting that this possibility be explored, I am
convinced that the Federal Reserve needs a better means of influencing
the availability of credit in different sectors of the economy. At the
same time, I am keenly aware of the desirability of assuring that -- as
far as possible -- the instrument used would minimize interference with
normal business decisions and the economic forces of the market place.
The banking community -- within whatever outer limits of credit expansion
the central bank considers are consistent with stabilization policy --
can best allocate financial resources among individual borrowers. There-
fore, banks should be assured as much freedom of choice as the basic
objectives of maintaining a balanced economy would permit.
Since, during a period of inflation, the object would continue
to be to restrain the growth of bank lending, rather than to burden the
FORD & LIBRARY GERALD
-26-
amount of lending achieved by some date in the past, the reserves might
apply only to the amount of lending above some determined volume. That
is, the cash reserves would constitute marginal, rather than average,
required reserves.
Solely for the sake of illustration, let us assume that such
a supplemental reserve requirement had gone into effect at the end of
1968. Let us take $220 billion as the amount of loans on the books of
member banks on that date. Suppose further that a bank were required
to set aside cash reserves equal to 20 per cent of the amount by which
its outstanding loans exceeded the amount of such loans outstanding just
before the reserve program went into force. Since loans at member banks
rose by about $20 billion last year, they would have been required to
put up an additional $4 billion -- under these assumptions. Since their
required reserves averaged about $27 billion in 1969, this would have
represented an increase of roughly 15 per cent.
This formulation might be varied so that a cash reserve require-
ment might be applied against whatever new loans the bank might extend
rather than apply a marginal reserve against the amount of loans above
the amount outstanding on a particular date.
To illustrate, a bank that extended a loan during 1969 would
have been required to set aside cash reserves of 20 per cent of the amount
of that loan. Loans already outstanding as of the beginning of 1969 would
have required no reserves nor would they have been under any quantitative
FORD & GERALD LIBRARY
-27-
restraint. Any extension of those outstanding loans, as well as any
drawdowns of then-existing lines of credit, would have been treated
as new loans and would have been subject to the reserve requirement.
This variant would be especially attractive in being free of any
relationship represented by differing volumes of loans outstanding among
individual banks at a given base date.
Under either variant of this approach, the percentage reserve
requirement would be set on the basis of the Federal Reserve's determina-
tion of the degree of influence to be applied, for domestic stabilization
reasons, against unchecked bank loan expansion. The restraint would be
levied in proportion to the lending. The approach would not require
immediate asset adjustments by each bank; instead it would leave the
decision to individual banks to adapt their lending to the circumstances
at the time.
The loans that would be subject to the supplemental reserve
requirement could be defined in a way that would take account of what-
ever set of priorities that might be established from time to time. For
example: if the objective of public policy were to give priority to
loans to meet the needs of State and local governments, it could be
given effect through a reserve ratio against such loans smaller than
the ratio for other loans. Loans to acquire homes could be exempted --
if public policy calls for giving housing the highest priority -- by
setting the requirement at zero. In contrast, if policy called for
GERALD R. FORD LIBRARY
-28-
substantial restraint on consumer credit or on loans to business, the
reserve ratio applicable to such loans could be set quite high. In
fact, any array of loan priorities could be adopted and the reserve
requirement scaled accordingly -- depending on the changing needs of
public policy.
Such a supplemental cash reserve requirement system sketched
above would have the effect of restraining bank lending, both in total
and to particular sectors of the economy. However, it would do SO with-
out any direct interference by the Federal Reserve in lending decisions
by individual banks. The new reserve requirement, being a fairly small
proportion of the reserves now required against deposit liabilities,
would not cause a significant disturbance of domestic monetary policy.
While there would be an impact on the required reserves of member banks,
if the Federal Reserve wished, this could be easily offset by an
appropriate reduction in reserve requirements on deposits or by open
market operations.
I have stressed consideration of the supplemental reserve
requirement against loans as a long-run approach. Aside from the time
that would be needed to explore its ramifications, the Federal Reserve
Board does not now have the authority to apply reserve requirements to
domestic loans of member banks, although it does appear to have such
authority with respect to their foreign loans. Moreover, to avoid add-
ing further to the already existing inequities between nonmember and
LIBRARY GERALD ? FORD
-29-
member banks of the Federal Reserve System, all commercial banks should
be made subject to the new provision. Thus, if the system were to be
adopted for domestic purposes, enabling legislation would have to be
passed by Congress. It might be recalled that, for several years, the
Board has urged in its Annual Report that legislation be passed which
would permit the establishment of a system of graduated reserve require-
ments, while extending the coverage to nonmember banks -- who would also
be given access to the Federal Reserve Banks' discount window. If
Congress ever gets around to taking up that earlier proposal, it might
also consider an even further broadening of the scope of reserve require-
ments to include the option to impose such requirements on particular
types of bank loans or investments.
Short-Run Tasks of Monetary Management
The prospective course of monetary policy over the months
ahead is obviously the main topic of interest to many observers. While
I recognize and understand such interest, I must refrain from trying to
satisfy it. By long-standing tradition, members of the Federal Reserve
Board try to avoid commenting on future policy action. The Federal
Open Market Committee has clearly stated rules specifying the length
of time (currently 90 days) which must elapse before the considerations
underlying its policy decisions are made public. I believe that the
tradition of the Board and the rules of the Open Market Committee are
both well-founded. Moreover, there is also a long tradition that,
R.
FORD
GERALD
LIBRARY
-30-
when Board members do speak on monetary matters -- and when they do so
without explicit delegation from the Board -- the views expressed are
those of the speaker -- and should not be attributed to his colleagues.
With that background, I do have a personal assessment of the
requirements of monetary policy at the present juncture of the fight
against inflation. In my opinion, the time has certainly not come to
lay aside the effort to achieve and maintain a reasonable degree of
price stability in this country. And we should remind ourselves that
the attainment of that objective was the mission on which the Federal
Reserve set out in December, 1968.
It is obvious that the effort to date -- involving both
fiscal and monetary policy -- has not been wasted. The over-hang of
excess demand which had plagued the economy for several years has been
eliminated. In particular, the defense sector, which became a major
source of inflationary pressures in mid-1965 when the Vietnam War was
accelerated and taxes were not increased to pay for it, is no longer
playing the same role. The nondefense component of the Federal budget
also rose much more slowly in the last year; and in the current calendar
year, a further slowing seems in prospect. Personal consumption expen-
ditures (particularly for durable goods) expanded just over half as
rapidly in 1969 as they did in 1968, and the slower pace seems likely
to persist through the rest of this year. Last year outlays by State
and local governments rose somewhat less in percentage terms than they
GERALD FORD LIBRARY
-31-
did in the previous year -- and here also the current year may see a
still smaller rate of growth. In the housing sector, while the backlog
of potential demand remains strong, actual spending has declined more
or less steadily since the second quarter of last year. Moreover, no
substantial pickup appears on the horizon in the months immediately
ahead. The one area still showing considerable strength is business
fixed investment. Last year, expenditures for this purpose rose almost
twice as rapidly as they did in 1968, and recent forecasts of plant and
equipment outlays suggest that another sizable gain can be expected
this year -- although perhaps not as large as some of the surveys might
imply.
But taken as a whole, the rapid pace of expansion in economic
activity evident in 1968 and through much of 1969 has moderated substan-
tially. Moreover, when the rise in the general price level is allowed
for, real output -- as measured by the GNP -- grew very little after
the first quarter of last year, and a slight decline occurred in the
fourth quarter. The downtrend in industrial production since last
August tells the same story. The rate of capacity utilization in
manufacturing has also declined noticeably from the levels reached in
the spring of 1969, and the excessive accumulation of inventories seems
to have moderated. Above all, the recent rise in the unemployment rate
to just over 4 per cent clearly suggests that the pressures on real
resources have slackened in the last several months.
GERALD FORD LIBRARY
-32-
Unfortunately, the same cannot be said about the pressures on
prices. The simple fact is that -- so far -- these developments in the
real economy have had little impact on the rate of increase in prices,
and there is no basis for concluding that the battle against inflation
has been won. It is true that in March wholesale prices advanced by
1/10 of 1 per cent, according to the preliminary estimates. The
advance in February was 3/10 of 1 per cent, and it was 8/10 of 1 per
cent in January. While these trends might suggest that the return of
stability in prices may become more evident in the months ahead, that
outcome remains to be achieved. Currently, the wholesale price index
is 4.3 per cent above the level in March, 1969. Measured in terms of
the GNP deflator (the most broadly based of the various price indexes),
the persistence of inflation is even more clear. Last year, this index
rose by 4.7 per cent, compared with 4 per cent the year before. During
the fourth quarter of 1969, the annual rate of increase was 4.5 per cent,
and the current quarter may register a gain almost as large. In fact,
by the end of this year, this comprehensive measure of the pace of infla-
tion may still be rising at a rate well above what most Americans would
find acceptable in the long-run.
In stressing that inflation is still a problem, I fully
recognize that one should expect a lag between the time stabilization
measures are taken and the time when their impact on the general price
level can be seen. I am also aware that risks are inherent in an attempt
LIGRARY GERALD ? FORD
-33-
to exert enough restraint through stabilization policies -- and to
maintain it long enough -- to bring inflation under control. I am
not blind to the possibility that the cumulative effects of fiscal
and monetary restraint could reduce the rate of growth of real output
so much -- with its consequent impact on resource use and the level
of unemployment -- that the public would find the costs unacceptable.
On the other hand, I am also fully aware of how deeply imbedded infla-
tionary expectations have become. So, given the continued strength
in business investment and the strong pent-up demand for housing, I
think it is extremely important that national stabilization policies
be conducted in a way that will avoid providing so much stimulus that
a new burst of inflation will be generated before we have succeeded
in checking the inflationary pressures we still face.
GERALD R. FORD LIBRARY
Table 1.
Amount and Sources of Funds Raised in
Capital Markets by Major Sectors, 1968 and 1969
(Amounts in billions of dollars)
1968
1969
SECTOR
Amount
Per Cent
Amount
Per Cent
of total
of total
Total funds raised by nonfinancial
sectors
97.4
100.0
85.7
100.0
U.S. Government
13.4
13.5
-5.4
-6.3
Public debt securities
10.3
10.6
-2.8
-3.3
Budget Agency issues
3.0
2.9
-2.6
-3.0
All other nonfinancial sectors
84.1
86.5
91.0
106.3
Distribution among sectors
84.1
100.0
91.0
100.0
State and local governments
10.2
12.1
9.2
10.1
Households
31.8
37.7
30.9
34.0
Nonfinancial business
39.1
46.5
47.4
52.0
Corporate
31.0
36.8
37.2
40.9
Nonfarm noncorporate
5.2
6.2
6.6
7.3
Farm
2.9
3.5
3.5
3.8
Foreign
3.0
3.6
3.6
3.8
Sources of funds advanced
97.4
100.0
85.1
100.0
Federal Reserve System
3.7
3.8
4.2
4.9
U.S. Government
5.0
5.1
2.3
2.7
Direct
5.2
5.3
2.5
2.9
Credit agencies (net)
-0.2
-0.2
-0.2
-0.2
Commercial banks
39.0
40.0
9.5
11.2
Private nonbank finance
33.5
34.4
31.5
37.0
Private domestic nonfinancial
13.8
14.2
38.2
44.8
Foreign
2.5
2.6
-0.1
-0.1
Source: Flow of Funds Accounts
Division of Research and Statistics
Federal Reserve Board
is
FORD
GERALD
LIBRARY
Table 2.
Sources and Uses of Funds by
Commercial Banks, 1968 and 1969
(Amounts in billions of dollars)
1968
1969
SOURCE OR USE
Amount
Per cent
Amount
Per cent
of total
of total
Net acquisition of financial assets
43.2
100.0
11.5
100.0
Total loans and investments
39.2
90.5
9.6
83.5
Credit market instruments
38.0
85.0
10.9
94.5
U.S. Government securities
2.8
6.5
-11.5
-100.0
State and local obligations
8.7
20.2
1.2
10.4
Corporate bonds
0.3
0.7
-0.3
-2.6
Home mortgages
3.5
8.1
2.5
20.4
Other mortgages
3.2
7.3
2.5
20.4
Consumer credit
4.9
11.3
3.1
27.0
Bank loans (n.e.c.)
15.7
36.4
13.0
113.0
Open market paper
-1.1
-2.6
0.5
0.4
Security credit
1.3
3.0
-1.2
-10.4
Vault cash and member bank reserves
2.1
4.8
0.2
1.7
Miscellaneous assets
1.9
4.4
1.6
13.9
Net increase in liabilities
41.4
100.0
9.6
100.0
Demand deposits, net
9.3
22.4
7.3
76.0
Time deposits
20.6
49.8
-11.2
-116.5
Large negotiable CD's
2.5
6.0
-12.0
-125.0
Other
18.1
43.8
0.8
8.5
Federal Reserve float
1.0
2.4
-0.1
1.0
Borrowing at Federal Reserve Banks
-
-
-
-
Security Issues
0.2
0.4
0.1
1.0
Other liabilities
10.3
24.8
13.4
139.0
Discrepancy
0.9
-
1.1
-
Current Surplus
3.3
-
3.7
-
Source: Flow of Funds Accounts
Division of Research and Statistics
Federal Reserve Board
&
FORD
GERALD
LIBRARY
Table 3
FORD
GERALD
LIBRARY
ANNUAL CHANGES IN MAJOR BALANCE SHEET ITEMS, WEEKLY RFPORTING BANKS
1968 and 1969
(In billions of dollars, not seasonally ad justed)
Banks With Selected Nondeposit Sources of Funds
All Weekly
Euro-dollar
Commercial
All Other
Reporting Banks
Total
Borrowing
/
Paper Only9/
Banks
1969
1968
1969
1968
1969
1968
1969
1968
1969
1968
Items
Total loans and investments 2/
1.4
19.7
- .3
13.5
.2
8.6
- .5
4.9
1.7
6.2
U.S. Treasury secutiries
- 5.8
1.0
- 3.1
.8
- 2.0
.7
- 1.1
.1
- 2.7
.2
Other securities
- 2.9
5.6
- 2.5
3.6
- 2.2
2.7
- .3
.9
- .4
2.0
Total loans 2/
10.5
17.1
5.6
11.2
4.5
6.8
1.1
4.4
4.9
5.9
Business loans
7.5
7.5
4.9
5.6
3.9
3.8
1.0
1.8
2.6
1.9
Real estate loans
2.1
3.4
1.3
1.6
1.0
.5
.3
1.1
.8
1.8
Consumer loans
1.8
2.3
.3
1.1
.2
.3
.1
.8
1.5
1.2
Total deposits 3/
-15.5
15.1
-11.7
7.2
- 8.6
2.6
- 3.1
4.6
- 3.8
8.9
Demand deposits 3/
.9
5.2
.9
2.3
1.2
.7
- .3
1.6
--
2.9
Time and savings deposits
-15.5
9.9
-12.7
4.9
- 9.8
1.9
- 2.9
3.0
- 2.8
5.0
Large CD's 4/
-12.3
3.2
- 9.4
1.4
- 6.9
.1
- 2.5
1.3
- 2.9
1.8
Other
- 3.2
6.7
- 3.3
3.5
- 2.9
1.8
- .4
1.7
.1
3.2
Total borrowings 5/
+10.1
3.7
6.3
3.3
4.0
2.3
2.3
1.0
3.8
.4
Other liabilities
9.3
5.0
8.2
4.5
7.2
4.2
1.0
.3
1.1
.5
Euro-dollars
7.6
2.7
7.0
2.7
7.0
2.7
--
--
.6
:
MEMO:
Commercial paper
4.3
n.a.
4.3
n.a.
2.4
n.a.
1.9
n.a.
--
--
1/ Changes for 1969 are from December 25, 1968, to December 24, 1969. Comparable dates were used to compute
1968 changes.
2/ Exclusive of loans and Federal funds transactions with domestic commercial banks and net of valuation reserves.
3/ Less cash items in the process of collection.
4/ Negotiable time certificates of deposit in denomination of $100,000 or more.
5/ Largely borrowing in the Federal funds market and from Federal Reserve Banks.
6/ Bank liabilities to foreign branches.
71 Issued by a bank holding company or other bank affiliate.
8/ 19 major banks that account for approximately 90 per cent of borrowing from foreign banks.
9/
banks that do not borrow in Eurodollar market but whose affiliates or holding company sell commercial paper.
NOTE: Figures may not sum exactly due to rounding.
R.
FORD
Table 4
GERALD
Annual Changes in Major Balance Sheet Items,
Weekly Reporting Banks
1968 and 1969
(In per cent, not seasonally adjusted)
Banks With Selected Nondeposit Sources of Funds
All Weekly
Euro-dollar
Commercial
Reporting Banks
Total
Borrower 8/
paper only
9/
All Other Bank
1969
1968
1969
1968
1969
1968
1969
1968
1969
1968
Total loans and investments
0.6
11.5
--
11.0
.3
11.7
- 0.8
14.5
--
9.
U.S. Treasury securities
-20.4
3.7
-19.6
5.1
-18.9
7.1
-21.3
1.0
-21.2
2.6
Other securities
- 8.4
16.8
-11.3
19.2
-14.3
21.2
- 5.2
15.6
- 4.4
13.7
Total loans
5.6
11.8
5.5
12.4
6.4
10.6
5.8
14.1
5.8
10.7
Business loans
9.7
11.4
9.4
12.0
9.9
10.6
7.8
16.4
10.6
9.8
Real estate loans
5.5
11.7
7.9
10.6
10.1
6.0
4.5
18.6
3.0
12.8
Consumer loans
8.4
14.2
3.8
14.3
5.4
8.6
2.4
20.8
12.4
14.1
Total deposits
- 7.6
7.5
- 9.4
6.1
-10.3
3.2
- 7.6
12.2
- 5.2
9.5
Demand deposits
--
5.3
1.5
3.9
3.0
1.8
- 1.3
8.3
- 2.0
7.2
Time and savings deposits
-14.7
9.6
-19.7
8.2
-22.8
4.7
-13.4
16.0
8.0
11.6
Large CD's
-53.2
16.0
-57.9
9.2
-60.1
1.3
-52.7
35.2
-42.9
34.3
Other
- 4.5
8.1
- 6.8
7.8
- 9.1
5.9
- 2.5
11.6
- 1.8
8.4
Total borrowings
-71.6
48.8
+72.0
60.6
-84.0
58.4
-59.7
66.4
54.0
21.0
Other liabilities
52.1
38.9
56.2
44.9
55.7
46.7
60.1
31.7
32.7
16.4
Eurodollars
109.4
63.0
100.0
64.0
100.0
63.0
--
--
600.0
--
Changes for 1969 are from December 25, 1968, to December 24, 1969. Comparable dates were used to compute 1968 changes
Exclusive of loans and Federal funds transactions with domestic commercial banks and net of valuation reserves.
Less cash items in the process of collection.
4/ Negotiable time certificates of deposit in denomination of $100,000 or more.
5/ Largely borrowing in the Federal funds market and from Federal Reserve Banks.
6/ Bank liabilities to foreign branches.
7/ Issued by a bank holding company or other bank affiliate.
8/ 19 major banks that account for approximately 90 per cent of borrowing from foreign banks.
9/
banks that do not borrow in Eurodollar market but whose affiliates or holding company sell commercial paper.
NOTE: Figures may not sum exactly due to rounding.
R.
GERALD
FORD
TABLE 5
ANNUAL CHANGES IN MAJOR BALANCE SHEET ITEMS, WEEKLY REPORTING BANKS
1969 and 1968
(In billions, not seasonally adjusted)
20 Multi-
60 Major Re-
260 Large
Total
Nat'l Banks
gional Bks.
Local Banks
Items
1969
1968
1969
1968
1969
1968
1969
1968
Total loans and investments
1.4
19.7
.5
11.6
- .1
5.9
1.0
2.2
U.S. Treasury securities
-5.9
1.0
-2.1
.9
-1.7
.1
-2.1
.1
Other securities
-2.9
5.6
-2.6
2.8
- .4
1.2
.1
1.6
Total loans
10.5
17.1
5.3
7.9
2.0
4.5
2.2
4.7
Business loans
7.5
7.5
4.4
4.2
1.6
1.6
1.1
1.6
Real estate loans
2.1
3.4
1.1
.9
.4
1.1
.6
1.4
Consumer loans
1.8
2.3
.3
.5
.4
.7
1.1
1.1
Total deposits
-15.5
15.1
-8.9
4.0
-4.5
4.6
-2.1
6.5
Demand deposits
.9
5.2
1.2
1.0
- .5
1.6
- .6
2.5
Time and savings deposits
-15.5
9.9
-10.0
3.0
-4.0
2.9
-1.5
4.0
Large CD's 4/
-12.3
3.2
-7.2
.5
-3.4
1.4
-1.7
1.3
Other
-3.2
6.7
-2.9
2.5
- .6
1.5
.3
2.7
Total borrowings
10.1
3.7
5.0
2.2
3.0
1.3
2.0
.2
Other liabilities
9.3
5.0
7.4
4.1
1.2
.5
.7
.3
Euro-dollars
7.6
2.7
6.7
2.6
.6
.1
.3
--
MEMO:
Commercial paper
4.3
n.a.
2.4
n.a.
1.3
n.a.
.6
n.a.
Changes for 1969 are from December 25, 1968 to December 24, 1969. Comparable data were used
to compute 1968 changes.
2/
Exclusive of loans and Federal funds transactions with domestic commercial banks and net of
valuation reserves.
Less cash items in the process of collection.
4/ Negotiable time certificates of deposit in denomination of $100,000 or more.
5/ Largely borrowing in the Federal funds market and from Federal Reserve Banks.
6/
Bank liabilities to foreign branches.
7/
Issued by a bank holding company or other bank affiliate.
These banks were selected on the basis of a number of criteria including size, volume of business
loans, relative participation in Federal Funds market, Euro-dollar market and commercial paper market.
The same criteria as those listed in footnote 8 were used to select these 60 banks. However, these
banks, in general, are smaller and each region of the country was given representation.
NOTE: Figures may not sum exactly due to rounding.
R.
FORD
Table 6
GERALD
LIBRARY
ANNUAL CHANGES IN MAJOR BALANCE SHEET ITEMS, WEEKLY REPORTING BANKS
1968 and 1969
(In per cent, not seasonally adjusted)
20 Multi-
60 Major Re-
Total
8/
260 Large
Nat'l Banks
gional Bks.
Local Banks
Items
1969
1968
1969
1968
1969
1968
1969
1968
Total loans and investments
.6
9.5
.5
12.1
-0.2
11.9
1.3
3.8
U.S. Treasury securities
-20.4
3.7
-17.9
7.8
-24.1
1.3
-20.6
.8
Other securities
-8.4
16.8
-15.6
19.7
-4.6
14.8
-1.5
14.6
Total loans 2/
5.6
11.8
6.7
11.2
5.2
13.4
4.1
11.5
Business loans
9.7
11.4
10.4
11.2
9.9
11.3
7.6
11.9
Real estate loans
5.5
11.7
9.0
8.3
5.4
17.1
2.0
12.2
Consumer loans
8.4
14.2
5.6
9.4
8.1
16.8
10.5
15.9
Total deposits
-7.6
7.5
-9.4
4.4
-8.2
9.2
-4.6
10.5
Demand deposits 3/
--
5.3
2.6
2.4
-1.7
6.5
-1.9
8.3
Time and savings deposits
-14.7
9.6
-20.1
6.3
-14.7
12.1
-7.1
12.7
Large CD's 4/
-53.2
16.0
-59.0
4.8
-53.1
27.3
-39.1
36.0
Other
-4.5
8.1
Total borrowings
-71.6
48.8
68.0
6.8
76.0
8.1
95.0
9.7
Other liabilities
52.1
38.9
-75.1
52.5
-70.6
61.6
-59.7
16.9
Euro-dollars
109.4
63.0
98.0
45.9
600.0
--
--
--
1/
Changes for 1969 are from December 25, 1968, to December 24, 1969.
Comparable dates were used to compute
1968 changes.
2/
Exclusive of loans and Federal funds transactions with domestic commercial banks and net of
valuation reserves.
3/ Less cash items in the process of collection.
4/
Negotiable time certificates of deposit in denomination of $100,000 or more.
5/
Largely borrowing in the Federal funds market and from Federal Reserve Banks.
6/
Bank liabilities to foreign branches.
7/
These banks were selected on the basis of a number of criteria including size, volume of business
loans, relative participation in Federal Funds market, Euro-dollar market and commercial paper market.
The same criteria as those listed in footnote 7 were used to select these 60 banks. However, these
banks, in general, are smaller and each region of the country was given representation.
NOTE: Figures may not sum exactly due to rounding.
R.FORD
GERALD
LIBRARY
Table 7.
Selected Nondeposit Sources of Bank Funds
By Number of Banks and Amounts Outstanding
(Amounts in billions of dollars)
Oct. 29, 1969
Jan. 7, 1970
Mar. 11, 1970
Change:
Change:
Change:
No. of
No. of
No. of
Oct. 29, 1969
Oct. 29. 1969
Jan. 7, 1969
Banks
Amount
Banks
Amount
Banks
Amount
Mar. 11, 1970
Jan. 7, 1970
Mar. 11, 1970
Commercial paper
58
3.7
62
4.4
65
5.6
2.4
.8
1.7
Issued by subsidiaries
9
.4
10
.5
10
.15
.0
.0
.0
Issued by other affiliates
49
3.3
52
4.0
55
5.4
2.4
.7
1.7
Loans sold outright
143
5.7
145
6.0
151
7.8
2.3
.3
2.0
To affiliatesl/
72
4.7
73
4.7
74
6.3
1.8
0.0
1.8
To nonbank public
71
1.1
72
1.4
77
1.5
.5
.3
.2
Most of the loans sold to subsidiaries and affiliates reflect acquisitions by those subsidiaries and affiliates
out of the proceeds of their sales of commercial paper to the public or other methods of financing, but they also
include some acquisitions by foreign branches of the bank out of the proceeds of Euro-dollar deposits.
BOARD OF GOVERNORS
OF THE
For Release on Delivery
FEDERAL reserve system
Wednesday, April 1, 1970
12 noon, P.S.T. (3 p.m., E.S.T.)
SPECIAL
Chairman Burns
THE BANKING STRUCTURE AND MONETARY MANAGEMENT
Remarks by
Andrew F. Brimmer
Member
Board of Governors of the
Federal Reserve System
Before the
San Francsico Bond Club
Fairmont Hotel
San Francisco, California
April 1, 1970
FORD & LIBRARY GERALD
THE BANKING STRUCTURE AND MONETARY MANAGEMENT
By
Andrew F. Brimmer*
The campaign against inflation has undoubtedly reached a
troublesome phase, and the appropriate role for monetary policy is one
of the principal questions on the minds of many observers. I agree that
the task of monetary management is a difficult one under the present
circumstances. But, in my personal opinion, monetary policy still has
a contribution to make in our national efforts to check inflation. I
will comment further on this task in the closing section of these remarks.
Before doing that, however, it might be well to review the
impact of monetary restraint on the banking system and credit flows
during the last year. A comprehensive analysis of that experience has
convinced me that the time has come for a thorough reexamination of the
main tools and techniques of monetary control in the United States.
Also in these remarks, I will sketch the broad outlines of an alternative
approach which appears to be quite promising. In fact, the key element
on which this possible new direction is based -- a more flexible use of
reserve requirements -- has been relied on increasingly by the Federal
Reserve Board in recent years to accomplish objectives requiring a
special focus on particular segments of the banking system.
* Member, Board of Governors of the Federal Reserve System.
I am grateful to several members of the Board's staff for
assistance in the preparation of these remarks. Mr. Frederick M.
Struble had principal responsibility for the analysis of port-
folio adjustments by banks, given their differential access to
sources of funds. Mr. Peter J. Feddor designed and carried out
the difficult computer programming tasks on which the analysis
depended so heavily. Miss Harriett Harper, my assistant, also
helped with the statistical analysis.
FORD is LIBRARY GERALD
-2-
The reasoning behind these conclusions is set forth in some
detail in the sections which follow. However, it might be helpful to
summarize here the main points of the analysis:
- In 1969, despite the severity of monetary
restraint, the volume of funds raised in
the capital markets by borrowers other than
the Federal Government rose moderately
compared with the previous year. However,
the distribution among sectors changed some-
what. The share obtained by both households
and State and local governments declined
slightly, while the business sector (par-
ticularly corporations) got a larger share.
- The Federal Reserve System, on balance,
provided a slightly larger volume of credit
(in both absolute and relative terms) last
year than it did in 1968.
- Commercial banks supplied a drastically
reduced proportion of the credit advanced
in 1969 compared with the previous year
(just over one-tenth VS. two-fifths in 1968).
The banks experienced an actual loss of
deposits last year in contrast to a sizable
gain the year before. Their net acquisition
of financial assets fell by over three-quarters
from the 1968 level.
- Nevertheless, through heavy sales of securities
and reliance on nondeposit sources of funds,
the banks were able to expand funds avail-
able for loans. In particular, business loans
on the books of commercial banks rose almost
as much as they did in 1968. When the volume
of loans sold by the banks is added to the
total, the increase in business loans last year
was even greater than that registered the year
before.
- The pattern of portfolio adjustment differed
markedly among banks, depending on their access
to nondeposit sources of funds. Banks with
ready access to Euro-dollar inflows or with the
FORD & LIBRARY GERALD
-3-
ability to sell commercial paper were much
more successful in cushioning the impact of
monetary restraint than were other banks
which did not tap these sources of funds.
Again, the greater were the availability of
nondeposit sources of funds to the banks --
the greater also was the rate of expansion
of business loans.
- The differential response of commercial banks
to monetary restraint in 1969 becomes even
more sharply focused when the banks are re-
grouped and viewed in the context of the
strategic roles they play with respect to
different types of financial transactions.
For this purpose three groups can be identi-
fied: (1) a handful of multi-national banks
active in the domestic money market on a
national scale and also heavily involved in
international finance; (2) a sizable number
of institutions which play a dominant role
in their regions, and (3) other banks which
concentrate mainly on their local markets.
Among these three groups of banks, the first
was the most successful in expanding its total
loans and the second group was next in line.
This was especially true of business loans at
the first group where the rate of increase
exceeded the average -- while the rate of
expansion in their consumer loans was below
the average -- for all banks covered in the
analysis. Sales of business loans were pro-
portionately the heaviest at the multi-national
banks, and adjusting for such sales raises
significantly the rate at which they supplied
credit to their corporate customers.
When I reflect on the results of the analysis summarized
above, I find it far from comforting. As emphasized many times, one
objective -- although certainly not the only one -- of monetary
restraint in 1969 was a sizable moderation in the expansion of business
loans. Such a moderation in turn was sought as a means of dampening
GERALD FORD
-4-
excess demand and inflationary pressures in the economy. In retrospect,
it is obvious that the Federal Reserve was not completely successful
in its effort as far as business loans are concerned.
I am fully aware of the views of some observers who argue
that a central bank should not concern itself with the composition of
bank credit, but only with its rate of growth -- and better still only
with the rate of growth of the money supply (however defined). Yet, in
my own view, a central bank should not be indifferent to the changing
composition of bank credit; to adopt such a posture would mean that
drastic variations in the availability of credit in important sectors
could occur -- and persist -- with seriously adverse consequences for
the economy as a whole. In my opinion, we need a better way to assure
that the overall objectives of monetary policy can be achieved without
having a few sectors bear a disproportionate share of the burden of
adjustment, while other sectors escape or significantly moderate its
impact.
I will return to this point below. In the meantime, we can
turn to the body of the analysis.
Credit Flows in 1969
The volume of credit raised in the capital markets in 1969 was
obviously restrained severely by the restrictive monetary policy followed
by the Federal Reserve System as part of the campaign to check inflation.
Nevertheless, after allowing for the market activities of the Federal
GERALD ? FORD
-5-
Government, there was a modest increase in the amount of funds raised.
According to the preliminary flow of funds statistics compiled by the
Federal Reserve Board, the net volume of funds raised by all nonfinancial
sectors in 1969 amounted to about $85.7 billion, a decrease of $11.7 bil-
lion (or 12 per cent) compared with the level in the previous year. (See
Table 1 attached.) However, this decline in the total was more than
accounted for by the change in the position of the Federal Government.
In calendar year 1969, the latter made net repayments of $5.4 billion --
compared with net borrowings of $13.4 billion the year before. Thus,
the year-to-year change was a decrease of $18.9 billion. Well over
two-thirds of the swing centered in direct public debt securities, and
the rest in Government agency issues.
Allowing for the experience of the Federal Government, total
funds raised by other nonfinancial sectors in 1969 amounted to $91.0
billion. This represented an expansion of $6.9 billion (or 8 per cent)
over the level raised in 1969. However, the share of the total funds
received by the principal groups of borrowers changed noticeably.
State and local governments raised $9.2 billion ($1.0 billion
or 11 per cent less than in 1968), and their share of the total also
declined slightly (from 12.1 per cent to 10.1 per cent). In contrast,
net funds raised by these State and local units rose by $2.2 billion
(or by 28 per cent) in 1968. Moreover, the decline of $1.0 billion in
net funds raised by State and local governments last year represented
over four-fifths of the decline of $1.3 billion in net debt financing
LIBRARY GERALD ? FORD
-6-
in the long-term capital markets. In fact, obligations of these
units were the only issues among the three principal types of capital
market instruments to register a significant decline in 1969. While
a number of factors contributed to this reduced borrowing by State and
local governments, the lessened interest of commercial banks in tax-
exempt issues was undoubtedly of considerable importance. As shown
in Table 2, commercial banks expanded their holdings of such obligations
by only $1.2 billion in 1969, compared with an increase of $8.7 billion
in the previous year. Such issues represented about 10 per cent of the
net acquisition of financial assets by banks in 1969 -- only half the
proportion recorded in 1968. Moreover, last year the change in the
banks' holdings represented only 14 per cent of the net funds raised
by these governments in contrast to 90 per cent of the total in the
preceding year.
The consumer sector raised about $31 billion in the capital
market in 1969, or roughly $1.0 billion less than in 1968. This was a decline
of just under 3 per cent. Since this occurred while the total volume
of funds raised was expanding moderately, the household sector's share
of the total also declined somewhat -- from just under two-fifths to
just over one-third. This sector, on balance, also borrowed less at
commercial banks. This can be seen in net change in the volume of home
mortgages held and the amount of consumer credit extended by the latter.
In 1969, their household mortgages rose by $2.5 billion, compared with
$3.5 billion the previous year. The corresponding changes in consumer
GERALD FORD VIBRARY
-7-
credit were $3.1 billion and $4.9 billion. So the growth in these
forms of bank credit eased off by one-third (from $8.4 billion to
$5.6 billion).
The principal sector which expanded its share of total funds
raised both in the overall capital market and at commercial banks was
nonfinancial business. In the capital markets (as shown in Table 1),
this sector raised $47.4 billion in 1969, compared with $39.1 billion
the year before. This was an increase of $8.3 billion, or more than
one-fifth. Whereas businesses accounted for 47 per cent of the total
funds raised in 1968, their share rose to 52 per cent last year.
Industrial and commercial corporations were mainly responsible for the
rise. In 1969, they raised $37.2 billion, or $6.2 billion more than
in the year before. Consequently, their share of the total climbed
from 37 per cent to 41 per cent. Business firms also accounted for a
sizable share of the expansion in commercial bank credit. As shown in
Table 2, while the net acquisition of financial assets by the banks
amounted to $9.6 billion in 1969, bank loans (other than mortgages,
consumer credit and credit extended to purchase or hold securities)
rose by $13 billion. Loans in this category consist mainly of funds
supplied to businesses. Consequently, commercial bank loans to the
business sector expanded by more in 1969 than did total credit at these
institutions. In 1969, loans to business had accounted for just under
two-fifths of the total.
GERALD
FORD is LIBRARY
-8-
Sources of Funds and Bank Behavior
Experiencing substantial deposit declines in the face of
strong demands for loans in 1969, banks attempted to maintain -- or
expand -- their earning assets in two principal ways: by tapping
nondeposit sources of funds or by selling a large volume of existing
financial assets -- loans as well as securities -- or some combination
of both. While they also made increasingly serious attempts to ration
credit, they devoted their energies primarily to a search for ways to
meet their customers' demands.
These various methods of adjusting to credit restraint are
clearly apparent in data reflecting developments at large banks in the
United States. About 340 of these banks report weekly to the Federal
Reserve System, showing their assets and liabilities in some detail.
Although they constituted only 2-1/2 per cent of the 13,464 insured
commercial banks as of June 30, 1969, they control a substantial pro-
portion of the total banking resources. They hold about three-fifths
of the total assets, total loans and investments, and demand deposits.
They hold three-quarters of total business loans, about half of consumer
and real estate loans, and about the same proportion of total time and
savings deposits. However, they hold nearly 90 per cent of the large
denomination certificates of deposit (CD's), and they account for virtually
all of the Euro-dollar borrowings and commercial paper sold by banks via their
affiliates. While most of these weekly reporting banks are members of
the Federal Reserve System, some insured nonmembers are also included.
All of the 340 have total deposits of $100 million or more.
LIBRARY GERALD R. FORD
-9-
Thus, a study of the behavior of these institutions under
conditions of monetary restraint provides valuable insights into the
behavior of the banking system as a whole. The broad changes in bank
credit at the weekly reporting group and at all commercial banks were
quite similar in 1969, as shown in the following figures (annual per-
centage rates of change) :
All Commercial
Weekly Reporting
Banks
Banks
Total loans and investments
2.4
0.6
U.S. Government securities
-15.9
-20.4
Other securities
-1.1
-8.4
Total loans
7.7
5.6
Business loans
9.4
9.7
Time and Savings deposits
-5.3
-14.7
The noticeable differences among the two sets of growth rates
are these: the weekly reporting banks expanded their earning assets
somewhat more moderately, they experienced a much heavier attrition
in time deposits (especially CD's), and they liquidated securities at
a much faster rate. While total loans at the weekly reporting banks
rose less rapidly, their business loans increased somewhat more rapidly
than at all banks in the country.
As indicated in Tables 3 and 4, total deposits declined sharply
at the weekly reporting banks in 1969. A substantial decline in CD's,
LIBRARY GERALD GERALD R. road
-10-
combined with a more moderate drop in other time and savings deposits,
considerably offset a slight rise in demand deposits. The decline in
these deposit liabilities was more than counterbalanced, however, by
expansion in other forms of liabilities. Total borrowings (principally
in the federal funds market and at Federal Reserve Banks) and other
liabilities (largely Euro-dollar borrowings from foreign branches) both
advanced sharply.
Although the funds obtained from these alternative liability
sources were large enough to finance a modest expansion in total earn-
ings assets, they were clearly not sufficient to enable the weekly
reporting banks to meet the demands of their loan customers. To gain
additional funds, large blocks of security holdings were liquidated.
In addition, a large volume of loans was sold, primarily to bank hold-
ing companies and affiliates. (These latter transactions are reflected
in the large volume of commercial paper sales which supplied the funds
to finance the purchase of these loans.)
The expansion in loans maintained on bank books, made possible
by sale of securities and tapping of alternative liability sources of
funds, was quite substantial -- and again it should be remembered that
this gain is net of the loans sold from bank portfolios. Yet, some
evidence of loan rationing is reflected in the data. The growth in
total loans, even with loans sales accounted for, fell somewhat short
of the expansion which occurred in 1968, when these banks were well
supplied with funds. The change in volume alone, of course, does
GERALD R. FORD
-11-
not permit one to distinguish between a change in supply and a change
in demand for credit, but it seems a reasonable assumption that loan
demands were at least as strong in 1969 as in 1968.
Most of the loan rationing which occurred appears to have
been focused on nonbusiness borrowers. Business loans on the books of
weekly reporting banks, on the other hand, increased by as much in 1969
as they did in 1968. Moreover, since business loans comprise the major
proportion of loans sold, total business credit extended through weekly
reporting banks in 1969 was significantly higher than in 1968. How
much difference these loan sales disguise the growth of bank credit
extended to business firms is indicated in one of the following sections
of these remarks.
Behavior of Euro-Dollar Banks
As may be seen in Table 3, the 19 weekly reporting banks that
are major borrowers in the Euro-dollar market experienced a large
deposit drain. However, they were more than able to compensate for
this loss by drawing funds from alternative liability sources. Similar
adjustments can be seen in the case of all other weekly reporting banks.
However, the Euro-dollar banks relied much more heavily on the Euro-
dollar market, while the other banks mainly utilized domestic sources
of funds.
Whether the Euro-dollar banks were able (by using alternative
liability sources) to make a more substantial compensation for their
deposit drains than were other weekly reporting banks is difficult to
R.
FORD
GERALD
LISA
-12-
discern from an examination of the absolute change figures in Table 3.
To overcome this difficulty, the changes in the banks' balance sheet
can be converted to percentage terms. The figures are presented in
Table 4. These data show that the deposit decline at Euro-dollar banks
was nearly twice as large in relative terms as at the other weekly
reporting banks. However, despite this sharp difference in deposit
experience, growth in total earning assets at Euro-dollar banks was
relatively quite similar to that at the other weekly reporters. This
was due, of course, to the strong advance which the Euro-dollar banks
were able to achieve in nondeposit sources of funds. (The percentage
changes in these nondeposit figures are not particularly revealing
because the outstanding levels for some of these items were quite small
compared with their change.)
What is perhaps of even greater interest is the relative
growth in total loans at these two groups of banks. As may be seen,
the Euro-dollar banks recorded somewhat larger gains in both total
loans and in business loans than did the other weekly reporting banks.
The differences were quite small, however, so that perhaps the best
generalization is that both groups of banks made about the same kind of
adjustments to the problem of meeting strong loan demands during a
period of heavy deposit drain. In this regard, it is worth restating
that, although the percentage increases for 1969 indicated in the
table for each groups of banks fell well below those recorded in 1968,
these data do not reflect the considerable volume of loan sales made
in 1969.
FORD = GERALD LIBRARY
-13-
Behavior of Commercial Paper Issuing Banks
As is generally known, a number of banks resorted to the
sale of commercial paper, mainly through one-bank holding companies
but also to some extent through affiliates, to raise funds in an effort
to compensate for the loss in deposits. Some of the banks active in
the Euro-dollar market have also issued commercial paper. As indicated
in Table 3, at the end of last year, $4.3 billion of commercial paper
was outstanding at weekly reporting banks. Of this amount, $2.4 bil-
lion (or 56 per cent) had been issued by Euro-dollar banks. The
remainder ($1.9 billion) had been sold by banks which do not rely on
Euro-dollar inflows to supplement their deposits.*
It is evident that the banks which relied only on commercial
paper not register a growth in their earning assets as did
either the Euro-dollar banks or the banks which did not resort to non-
deposit sources at all. While the differences among the groups were small,
those banks relying on commercial paper had expanded their assets more
rapidly in 1968. Last year, these banks had a percentage decline in
time deposits about as large as that for all weekly reporting banks
(although smaller than that recorded at Euro-dollar banks), and their
sales of U.S. Government securities were proportionately almost as
large as for the other banks. While Euro-dollar banks increased their
indebtedness to their foreign branches by $7.0 billion last year, those
*Trends in bank sales of commercial paper through mid-March, 1970,
are shown in Table 7.
FORD i GERALD LIBRARY
-14-
banks relying on commercial paper increased the volume of the
latter by only $1.9 billion. Yet, the two groups came out not very
far apart when their sales of securities and the expansion in non-
deposit sources are set against the attrition in total deposits.
The Banking Structure and the Differential Impact of
Monetary Restraint
To obtain a different -- and more informative -- perspective
on banking developments in 1969, another grouping of weekly reporting
banks was made. On the basis of a considerable number of criteria,
20 banks were identified and labeled "Multi-National Banks." The
criteria used included size, volume of business loans, importance in
the Federal Funds market in particular and the money market in general,
the volume of foreign lending and participation in the Euro-dollar
market. Using similar criteria but stressing domestic activities
and relative importance in one area of the country, an
additional 60 banks were designated as "Major Regional Banks." The
remaining 260 banks were designated "Large Local Banks." The changes
in balance sheet items at these groups of banks in 1968 and 1969 are
presented in Table 5 and 6. As one would expect, this information
presents a roughly similar picture to that provided by the other group-
ings of banks. Yet, the experience is put into much sharper focus.
The Multi-National Bank group, which is heavily comprised of large Euro-
dollar banks, was subject to the largest percentage decline in deposits.
FORD & GERALD LIBRARY
-15-
The decline at Major Regional Banks nearly matched that recorded at
the Multi-National Banks, while a much smaller deposit reduction
occurred at the Local Bank group. But despite this disparity in
deposit flow, the percentage advances in total earning assets at these
groups of banks were essentially similar. This suggests that the
imbalances in deposit flows were offset by an opposite imbalance in
the growth of nondeposit sources of funds.
The noticeable differences are evident with respect to earn-
ing assets. Total loans and business loans expanded more sharply at
the Multi-National Banks than at the other two groups of banks. This
is particularly true when compared with the Local Banks. So that there
is some suggestion that the Multi-National Banks were more successful
in avoiding the restraints of a tight monetary policy. This conclusion
is further supported by the fact that loan sales which were heaviest at
the Multi-National Banks were not included in the computation. The expansion
of real estate loans, which include a sizable proportion of non-
residential property along with home mortgages, was also considerably
larger at the Multi-National Banks than at either of the other two
groups. On the other hand, both of the latter expanded their consumer
loans more rapidly than did the Multi-National Banks.
Finally, at the end of 1969, the Multi-National Banks had a
somewhat larger share of total loans, of business loans and of real
estate loans -- and a slightly smaller share of consumer loans -- than
GERALD R. FORD LISRAPA
-16-
they had at the end of 1968. The Regional Banks made a modest gain
in their relative share of business loans, about held their place in
the case of real estate loans, and experienced a slight decline in the
proportion of both total loans and loans to consumers. The Local
Banks' share of all of these asset categories declined moderately.
The general conclusion which emerges from this analysis can
be expressed succinctly: The largest banks with both national and
international customers -- and which mobilize funds in both the domestic
and international capital markets -- are able to avoid a substantial
proportion of the impact of monetary restraint. In doing so, they can
maintain -- or even expand -- their earning assets. The large regional
banks can succeed almost as well in following a similar course. The
larger local banks, although also much larger than the average bank
in the country, can do so to a much lesser extent.
Loans Sales and the Growth of Business Loans
As indicated at several places in this discussion, the
expansion of business loans at commercial banks during 1969 was
considerably obscured by sales of loans to obtain funds to meet new
demands. Trends in such loan sales are shown in Table 7. At the
end of last October, 143 banks were involved in such loan sales, and the
amount sold outright totaled $5.7 billion. More than four-fifths of
this total represented sales to the banks' affiliates and subsidiaries
and the rest to the nonbank public. Most of the loans sold to bank
subsidiaries and affiliates reflect acquisitions by the latter for which
FORD & 93V830 LIBRARY
-17-
payment was made from the proceeds of their sales of commercial paper
to the public. However, some of the loans were sold by banks to their
foreign branches, with the latter paying for the transfer out of the
proceeds of Euro-dollar deposits. As of March 11, 1970, the volume of
loans sold had climbed to $7.8 billion; the distribution between affiliates
and the nonbank public was about the same as it was at the end of October.
As mentioned earlier, the loans sold by the commercial banks
consist mainly of loans to business borrowers. If these sales are added
to the volume of business loans outstanding on the books of the banks,
the rate of growth in business loans in 1969 is raised substantially,
as shown in the following statistics (1968 data need no adjustment):
Annual Percentage Rate of Change in
Business Loans After Adjustment for
Loan Sales
Before
After
Classification of Banks
1968
Adjustment
Adjustment
Difference
All Weekly Reporting Banks
11.4
9.7
13.7
4.0
Euro-dollar Banks
10.6
9.9
15.4
5.5
Commercial Paper Issuers
16.4
7.8
10.2
2.4
All Other Banks
9.8
10.6
12.6
2.0
Multi-National Banks
11.2
10.4
16.0
5.6
Major Regional Banks
11.3
9.9
12.3
2.4
Large Local Banks
11.9
7.6
8.0
0.4
Clearly the loan sales have been heaviest at the largest
banks, and the understatement of the rate of growth of business loans,
shown in the published statistics, has also been greatest at these
institutions. When the loans sold are folded back into the figures,
it appears that the rate of expansion of business loans at the weekly
&
FORD
GERALD
LIBRANA
-18-
reporting banks was more than two-fifths higher than originally shown.
At the Euro-dollar banks, the expansion was more than 50 per cent higher.
Among those issuing commercial paper only, it was about one-third larger,
and at other banks it was one-fifth higher. When the banks are classified
according to the strategic roles they play with respect to different
types of financial transactions, the same pattern emerges -- but with
sharper focus. The growth rate is raised by more than one-half at the
Multi-National Banks; by one-quarter at the Regional Banks, and by
only 5 per cent at the Local institutions.
But what is even more striking, except for commercial paper
issuers and the local banks, the growth rate for business loans in
1969 -- once the sales are accounted for -- was considerably higher
than that recorded in 1968. The unadjusted figures, except for one
group of banks, would have suggested a noticeably lessened pace of
expansion in business loans in 1969 compared with 1968.
Thus, the ability of some of the strongest commercial banks
to sell part of their existing portfolios to obtain funds to meet new
demands for funds is another way open to them to escape -- or at least
lighten -- the impact of monetary restraint.
Long-Run Task of Monetary Management
As I reflect on the differential impact of monetary policy
as mirrored in the behavior of different segments of the banking
structure, I become more and more convinced that the Federal Reserve
LIBRARY GERALD ? FORD
-19-
System should give serious consideration to revamping its instruments
of monetary control. I personally see no need to cast aside any of
the traditional tools -- i.e., the discount rate, open market operations,
and reserve requirements. These have been used -- and can continue to
be used -- to influence the cost and availability of credit.
But, in my opinion, neither of these instruments has been
the cutting edge of monetary policy during the last few years. This
has been provided by the ceilings set by the Federal Reserve Board
under Regulation Q, limiting the rates of interest which member banks
can pay on time deposits. This has been particularly true of the
ceilings on negotiable certificates of deposit of $100,000 and above --
frequently referred to as CD's. From early December, 1965, until mid-
April, 1968, the maximum rate payable was set at 5-1/2 per cent. In
1966, as yields rose on other short-term money market instruments
(especially U.S. Treasury bills), the maintenance of the ceiling
induced a sharp attrition in bank CD's outstanding. From the end of
July to the end of November of that year, CD's at the weekly reporting
banks shrank by $2.8 billion -- from $18.3 billion to $15.6 billion, a
decline of 15 per cent. In early 1968, when a more restrictive monetary
policy was in force, the banks again lost CD's. Between the end of
February and the end of June in that year, the volume outstanding declined
by $1.8 billion -- from $21.1 billion to $19.3 billion, a decrease of
9 per cent. But the sharpest cut-back occurred during the period of
GERALD FORD LIBRAPY
-20-
severe monetary restraint last year. At the end of 1968, the weekly
reporting banks had $22.8 billion of CD's outstanding. By February 4,
1970, the amount had declined to $10.3 billion, a loss of 55 per cent.
Underlying the decision of the Federal Reserve Board to
allow this attrition to take place -- and, in fact, to encourage it by
restrictive open market operations -- was the assumption that banks
would become less willing to make new commitments to lend as they became
less assured of their ability to obtain deposits to meet such commitments.
The results would be a moderation in the growth of bank credit, a lessen-
ing in excess demand for real resources, and a dampening of inflationary
pressures. I believe that assumption was a reasonable one, and I
supported the actions based on it. I think that the perception of
bank behavior which it implied was also reasonable. In retrospect, it
is evident that in both 1966 and 1969 -- as the Federal Reserve System
attempted to employ monetary policy to restrain the availability of
credit -- the banks did not modify their lending policy appreciably
until it became obvious that they would see substantial attrition in
deposits. Moreover, in early 1967 and again in the second half of
1968, the banks quickly recovered their previous CD losses as monetary
policy became easier -- and they also quickly expanded loans and rapidly
built up a sizable backlog of commitments to lend to their business
customers. With the increase in the ceilings in January of this year
(to a maximum of 7-1/2 per cent) the possibility of a quick recovery of
CD losses will again exist if market yields decline sharply.
FORD & LIBRARY 938870
-21-
In my judgment, the spreading tendency on the part of banks
to accept commitments is a development which may pose a serious problem
for monetary management in the future. While I have no quantitative
estimate, I do have the impression that such commitments are increasingly
pinned down by the payment of a fee. To the extent that this practice
spreads -- and the banks are thus locked into binding agreements to
lend -- the ability of the Federal Reserve to influence the rate of
growth of bank loans would be reduced.
However, the limitation on maximum interest rates payable on
time deposits has become part of the Federal Reserve's kit of policy
tools. On several occasions in the past, I have said that -- in my
judgment -- the Federal Reserve should take the first opportunity it
has to lift such ceilings and to put them on a standby basis. Unfortu-
nately, such an opportunity has not arisen -- mainly because the move
would probably stimulate a new round of intense competition among banks
and savings intermediaries, some of whom (particularly savings and loan
associations) are not in a good position to bear the full impact of
such competition. However, this reasoning applies primarily to the
rate ceilings on consumer-type time deposits and to a much lesser extent
to the ceilings on CD's -- which are really money market instruments in
competition with Treasury bills and other short-term investment outlets.
Thus, I am still personally hopeful that this possibility will not be
forgotten.
FORD & GERALD LIBRARY
-22-
Evolution of Reserve Requirements in Recent Years
In the meantime, I think it would be well to explore the
possibility of reordering the way in which the traditional instruments
of monetary policy are employed to influence the cost and availability
of credit. In particular, I think more emphasis should be focused on
reserve requirements. As a matter of fact, the Federal Reserve Board
has shown considerable flexibility in the use of reserve requirements
in the last few years. For the most part, this has involved tailoring
changes in such requirements to differentiate the impact by size of
bank -- as implied by deposit size. For example, in July, 1966, the
requirement on time deposits over $5 million was raised from 4 per cent
to 5 per cent -- and kept at 4 per cent on deposits below that amount.
In September of the same year, the percentage was raised further to
6 per cent on the $5 million and over category; again no change was
made for amounts below that figure. In March, 1967, in two 1/2 percentage
point steps, reserve requirements were cut from 4 per cent to 3 per cent
on savings deposits and on time deposits under $5 million. The require-
ment was left at 6 per cent on time deposits over $5 million. That
resulting structure of reserve requirements has remained unchanged for
the last three years.
In January, 1968, the Federal Reserve Board also began to
differentiate reserve requirements on demand deposits. At that time,
the requirement was raised from 16-1/2 per cent to 17 per cent on
FORD & GERALD LIBRARY
-23-
deposits over $5 million at Reserve City banks, while the requirement
on amounts below this figure was left unchanged. At country banks, the
corresponding increase was from 12 per cent to 12-1/2 per cent for
demand deposits over $5 million, while it remained at 12 per cent on
amounts below that cutoff. In April last year, a 1/2 percentage point
increase was made effective at both Reserve City and country banks and
on demand deposits both above and below $5 million.
But undoubtedly the most imaginative use of reserve require-
ments in recent years has been their application on Euro-dollar borrow-
ings by American banks. In March, 1969, I suggested that such a step
be considered as a means of making domestic monetary policy more efficient.
Effective last October, a 10 per cent marginal reserve requirement was
set on member bank liabilities to overseas branches and on assets
acquired by such branches from their head offices in excess of outstand-
ings during a base period -- the four weeks ending May 28, 1969. A
10 per cent marginal reserve requirement was also set on loans extended
to U.S. residents by overseas branches of member banks in excess of
outstandings during a given base period. A similar 10 per cent reserve
requirement was fixed on borrowings by domestic offices of member banks
from foreign banks; in this instance, however, only a 3 per cent reserve
is required against such borrowings that do not exceed a specified base
amount. The reserve-free bases are subject to automatic reduction --
unless waived by the Board -- when, in any period used to calculate a
R.
FORD
GERALD
LIBRARY
-24-
reserve requirement -- outstanding amounts subject to reserve require-
ments fall below the original base.
In the same vein, the Federal Reserve Board published for
comment a proposal to apply reserve requirements to commercial paper
when offered by a bank-related corporation and when the proceeds are
used to supply funds to the member bank. Last October, the Board
published for comment a proposal to apply interest rate ceilings to
commercial paper used in this way. Late in February, the Board
announced that consideration of the issue was being put aside at that
time because of a desire to avoid exerting additional restraint on
money and credit markets. However, the question is still open, and
the possibility of applying a reserve requirement along with -- or in
lieu of -- an interest rate ceiling also remains open for the Board
to decide.
Extending the Range of Reserve Requirements
It was against this background that I suggested in February
that consideration might be given to applying a supplemental reserve
requirement on loans extended by U.S. banks to foreign borrowers as a
replacement for the present voluntary foreign credit restraint program.
At the time, I emphasized that such a market-oriented approach would be
superior to one based on ceilings fixed by administrative decision --
and at the same time it would offer meaningful protection to our balance
of payments.
LIBRARY GERALD ? FORD
-25-
In my judgment, thought might also be given to the possibility
of adopting such a requirement for domestic purposes as well. The
objective of the supplemental reserve on domestic loans would be to
raise the cost of bank lending by reducing the marginal rate of return
to the bank making the loan -- and thereby dampen the expansion of bank
loans. The basic purpose of the supplemental reserve would not be
simply to levy new reserve requirements on the banking system. If it
were thought that its adoption would raise the average level of reserves
required beyond what the Board thought was necessary for general stabiliza-
tion purposes, the regular reserve requirements applicable to deposits
of member banks of the Federal Reserve System could be reduced.
In suggesting that this possibility be explored, I am
convinced that the Federal Reserve needs a better means of influencing
the availability of credit in different sectors of the economy. At the
same time, I am keenly aware of the desirability of assuring that -- as
far as possible -- the instrument used would minimize interference with
normal business decisions and the economic forces of the market place.
The banking community -- within whatever outer limits of credit expansion
the central bank considers are consistent with stabilization policy --
can best allocate financial resources among individual borrowers. There-
fore, banks should be assured as much freedom of choice as the basic
objectives of maintaining a balanced economy would permit.
Since, during a period of inflation, the object would continue
to be to restrain the growth of bank lending, rather than to burden the
FORD & GERALD LIBRARY
-26-
amount of lending achieved by some date in the past, the reserves might
apply only to the amount of lending above some determined volume. That
is, the cash reserves would constitute marginal, rather than average,
required reserves.
Solely for the sake of illustration, let us assume that such
a supplemental reserve requirement had gone into effect at the end of
1968. Let us take $220 billion as the amount of loans on the books of
member banks on that date. Suppose further that a bank were required
to set aside cash reserves equal to 20 per cent of the amount by which
its outstanding loans exceeded the amount of such loans outstanding just
before the reserve program went into force. Since loans at member banks
rose by about $20 billion last year, they would have been required to
put up an additional $4 billion -- under these assumptions. Since their
required reserves averaged about $27 billion in 1969, this would have
represented an increase of roughly 15 per cent.
This formulation might be varied so that a cash reserve require-
ment might be applied against whatever new loans the bank might extend
rather than apply a marginal reserve against the amount of loans above
the amount outstanding on a particular date.
To illustrate, a bank that extended a loan during 1969 would
have been required to set aside cash reserves of 20 per cent of the amount
of that loan. Loans already outstanding as of the beginning of 1969 would
have required no reserves nor would they have been under any quantitative
FORD & LIBRARY GERALD
-27-
restraint. Any extension of those outstanding loans, as well as any
drawdowns of then-existing lines of credit, would have been treated
as new loans and would have been subject to the reserve requirement.
This variant would be especially attractive in being free of any
relationship represented by differing volumes of loans outstanding among
individual banks at a given base date.
Under either variant of this approach, the percentage reserve
requirement would be set on the basis of the Federal Reserve's determina-
tion of the degree of influence to be applied, for domestic stabilization
reasons, against unchecked bank loan expansion. The restraint would be
levied in proportion to the lending. The approach would not require
immediate asset adjustments by each bank; instead it would leave the
decision to individual banks to adapt their lending to the circumstances
at the time.
The loans that would be subject to the supplemental reserve
requirement could be defined in a way that would take account of what-
ever set of priorities that might be established from time to time. For
example: if the objective of public policy were to give priority to
loans to meet the needs of State and local governments, it could be
given effect through a reserve ratio against such loans smaller than
the ratio for other loans. Loans to acquire homes could be exempted --
if public policy calls for giving housing the highest priority -- by
setting the requirement at zero. In contrast, if policy called for
FORD & GERALD LIBRARY
-28-
substantial restraint on consumer credit or on loans to business, the
reserve ratio applicable to such loans could be set quite high. In
fact, any array of loan priorities could be adopted and the reserve
requirement scaled accordingly -- depending on the changing needs of
public policy.
Such a supplemental cash reserve requirement system sketched
above would have the effect of restraining bank lending, both in total
and to particular sectors of the economy. However, it would do so with-
out any direct interference by the Federal Reserve in lending decisions
by individual banks. The new reserve requirement, being a fairly small
proportion of the reserves now required against deposit liabilities,
would not cause a significant disturbance of domestic monetary policy.
While there would be an impact on the required reserves of member banks,
if the Federal Reserve wished, this could be easily offset by an
appropriate reduction in reserve requirements on deposits or by open
market operations.
I have stressed consideration of the supplemental reserve
requirement against loans as a long-run approach. Aside from the time
that would be needed to explore its ramifications, the Federal Reserve
Board does not now have the authority to apply reserve requirements to
domestic loans of member banks, although it does appear to have such
authority with respect to their foreign loans. Moreover, to avoid add-
ing further to the already existing inequities between nonmember and
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member banks of the Federal Reserve System, all commercial banks should
be made subject to the new provision. Thus, if the system were to be
adopted for domestic purposes, enabling legislation would have to be
passed by Congress. It might be recalled that, for several years, the
Board has urged in its Annual Report that legislation be passed which
would permit the establishment of a system of graduated reserve require-
ments, while extending the coverage to nonmember banks -- who would also
be given access to the Federal Reserve Banks' discount window. If
Congress ever gets around to taking up that earlier proposal, it might
also consider an even further broadening of the scope of reserve require-
ments to include the option to impose such requirements on particular
types of bank loans or investments.
Short-Run Tasks of Monetary Management
The prospective course of monetary policy over the months
ahead is obviously the main topic of interest to many observers. While
I recognize and understand such interest, I must refrain from trying to
satisfy it. By long-standing tradition, members of the Federal Reserve
Board try to avoid commenting on future policy action. The Federal
Open Market Committee has clearly stated rules specifying the length
of time (currently 90 days) which must elapse before the considerations
underlying its policy decisions are made public. I believe that the
tradition of the Board and the rules of the Open Market Committee are
both well-founded. Moreover, there is also a long tradition that,
LIBRARY GERALD R. FORD
-30-
when Board members do speak on monetary matters -- and when they do so
without explicit delegation from the Board -- the views expressed are
those of the speaker -- and should not be attributed to his colleagues.
With that background, I do have a personal assessment of the
requirements of monetary policy at the present juncture of the fight
against inflation. In my opinion, the time has certainly not come to
lay aside the effort to achieve and maintain a reasonable degree of
price stability in this country. And we should remind ourselves that
the attainment of that objective was the mission on which the Federal
Reserve set out in December, 1968.
It is obvious that the effort to date -- involving both
fiscal and monetary policy -- has not been wasted. The over-hang of
excess demand which had plagued the economy for several years has been
eliminated. In particular, the defense sector, which became a major
source of inflationary pressures in mid-1965 when the Vietnam War was
accelerated and taxes were not increased to pay for it, is no longer
playing the same role. The nondefense component of the Federal budget
also rose much more slowly in the last year; and in the current calendar
year, a further slowing seems in prospect. Personal consumption expen-
ditures (particularly for durable goods) expanded just over half as
rapidly in 1969 as they did in 1968, and the slower pace seems likely
to persist through the rest of this year. Last year outlays by State
and local governments rose somewhat less in percentage terms than they
FORD & GERALD LIBRARY
-31-
did in the previous year -- and here also the current year may see a
still smaller rate of growth. In the housing sector, while the backlog
of potential demand remains strong, actual spending has declined more
or less steadily since the second quarter of last year. Moreover, no
substantial pickup appears on the horizon in the months immediately
ahead. The one area still showing considerable strength is business
fixed investment. Last year, expenditures for this purpose rose almost
twice as rapidly as they did in 1968, and recent forecasts of plant and
equipment outlays suggest that another sizable gain can be expected
this year -- although perhaps not as large as some of the surveys might
imply.
But taken as a whole, the rapid pace of expansion in economic
activity evident in 1968 and through much of 1969 has moderated substan-
tially. Moreover, when the rise in the general price level is allowed
for, real output -- as measured by the GNP -- grew very little after
the first quarter of last year, and a slight decline occurred in the
fourth quarter. The downtrend in industrial production since last
August tells the same story. The rate of capacity utilization in
manufacturing has also declined noticeably from the levels reached in
the spring of 1969, and the excessive accumulation of inventories seems
to have moderated. Above all, the recent rise in the unemployment rate
to just over 4 per cent clearly suggests that the pressures on real
resources have slackened in the last several months.
LIBRARY GERALD R. FORD
-32-
Unfortunately, the same cannot be said about the pressures on
prices. The simple fact is that -- so far -- these developments in the
real economy have had little impact on the rate of increase in prices,
and there is no basis for concluding that the battle against inflation
has been won. It is true that in March wholesale prices advanced by
1/10 of 1 per cent, according to the preliminary estimates. The
advance in February was 3/10 of 1 per cent, and it was 8/10 of 1 per
cent in January. While these trends might suggest that the return of
stability in prices may become more evident in the months ahead, that
outcome remains to be achieved. Currently, the wholesale price index
is 4.3 per cent above the level in March, 1969. Measured in terms of
the GNP deflator (the most broadly based of the various price indexes),
the persistence of inflation is even more clear. Last year, this index
rose by 4.7 per cent, compared with 4 per cent the year before. During
the fourth quarter of 1969, the annual rate of increase was 4.5 per cent,
and the current quarter may register a gain almost as large. In fact,
by the end of this year, this comprehensive measure of the pace of infla-
tion may still be rising at a rate well above what most Americans would
find acceptable in the long-run.
In stressing that inflation is still a problem, I fully
recognize that one should expect a lag between the time stabilization
measures are taken and the time when their impact on the general price
level can be seen. I am also aware that risks are inherent in an attempt
R.
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LIBRARY
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to exert enough restraint through stabilization policies -- and to
maintain it long enough -- to bring inflation under control. I am
not blind to the possibility that the cumulative effects of fiscal
and monetary restraint could reduce the rate of growth of real output
so much -- with its consequent impact on resource use and the level
of unemployment -- that the public would find the costs unacceptable.
On the other hand, I am also fully aware of how deeply imbedded infla-
tionary expectations have become. So, given the continued strength
in business investment and the strong pent-up demand for housing, I
think it is extremely important that national stabilization policies
be conducted in a way that will avoid providing so much stimulus that
a new burst of inflation will be generated before we have succeeded
in checking the inflationary pressures we still face.
GERALD R. FUNC )
Table 1.
Amount and Sources of Funds Raised in
Capital Markets by Major Sectors, 1968 and 1969
(Amounts in billions of dollars)
1968
1969
SECTOR
Amount
Per Cent
Amount
Per Cent
of total
of total
Total funds raised by nonfinancial
sectors
97.4
100.0
85.7
100.0
U.S. Government
13.4
13.5
-5.4
-6.3
Public debt securities
10.3
10.6
-2.8
-3.3
Budget Agency issues
3.0
2.9
-2.6
-3.0
All other nonfinancial sectors
84.1
86.5
91.0
106.3
Distribution among sectors
84.1
100.0
91.0
100.0
State and local governments
10.2
12.1
9.2
10.1
Households
31.8
37.7
30.9
34.0
Nonfinancial business
39.1
46.5
47.4
52.0
Corporate
31.0
36.8
37.2
40.9
Nonfarm noncorporate
5.2
6.2
6.6
7.3
Farm
2.9
3.5
3.5
3.8
Foreign
3.0
3.6
3.6
3.8
Sources of funds advanced
97.4
100.0
85.1
100.0
Federal Reserve System
3.7
3.8
4.2
4.9
U.S. Government
5.0
5.1
2.3
2.7
Direct
5.2
5.3
2.5
2.9
Credit agencies (net)
-0.2
-0.2
-0.2
-0.2
Commercial banks
39.0
40.0
9.5
11.2
Private nonbank finance
33.5
34.4
31.5
37.0
Private domestic nonfinancial
13.8
14.2
38.2
44.8
Foreign
2.5
2.6
-0.1
-0.1
Source: Flow of Funds Accounts
Division of Research and Statistics
Federal Reserve Board
FORD
GERALD
LIBRARY
Table 2.
Sources and Uses of Funds by
Commercial Banks, 1968 and 1969
(Amounts in billions of dollars)
1968
1969
SOURCE OR USE
Amount
Per cent
Amount
Per cent
of total
of total
Net acquisition of financial assets
43.2
100.0
11.5
100.0
Total loans and investments
39.2
90.5
9.6
83.5
Credit market instruments
38.0
85.0
10.9
94.5
U.S. Government securities
2.8
6.5
-11.5
-100.0
State and local obligations
8.7
20.2
1.2
10.4
Corporate bonds
0.3
0.7
-0.3
-2.6
Home mortgages
3.5
8.1
2.5
20.4
Other mortgages
3.2
7.3
2.5
20.4
Consumer credit
4.9
11.3
3.1
27.0
Bank loans (n.e.c.)
15.7
36.4
13.0
113.0
Open market paper
-1.1
-2.6
0.5
0.4
Security credit
1.3
3.0
-1.2
-10.4
Vault cash and member bank reserves
2.1
4.8
0.2
1.7
Miscellaneous assets
1.9
4.4
1.6
13.9
Net increase in liabilities
41.4
100.0
9.6
100.0
Demand deposits, net
9.3
22.4
7.3
76.0
Time deposits
20.6
49.8
-11.2
-116.5
Large negotiable CD's
2.5
6.0
-12.0
-125.0
Other
18.1
43.8
0.8
8.5
Federal Reserve float
1.0
2.4
-0.1
1.0
Borrowing at Federal Reserve Banks
-
-
-
I
Security Issues
0.2
0.4
0.1
1.0
Other liabilities
10.3
24.8
13.4
139.0
Discrepancy
0.9
-
1.1
I
Current Surplus
3.3
-
3.7
-
Source:
Flow of Funds Accounts
Division of Research and Statistics
Federal Reserve Board
&
FORD
GERALD
LIS8894
Table 3
GERALD
ANNUAL CHANGES IN MAJOR BALANCE SHEET ITEMS, WEEKLY REPORTING BANKS
1968 and 1969
FORD
(In billions of dollars, not seasonally ad justed)
LIBRARY
Banks With Selected Nondeposit Sources of Funds
All Weekly
Euro-dollar
Commercial
All Other
Reporting Banks
Total
Borrowing
Paper Only9
Banks
1969
1968
1969
1968
1969
1968
1969
1968
1969
1968
Items
Total loans and investments 2/
1.4
19.7
- .3
13.5
.2
8.6
- .5
4.9
1.7
6.2
U.S. Treasury secutiries
- 5.8
1.0
- 3.1
.8
- 2.0
.7
- 1.1
.1
- 2.7
.2
Other securities
- 2.9
5.6
- 2.5
3.6
- 2.2
2.7
- .3
.9
- .4
2.0
Total loans 2/
10.5
17.1
5.6
11.2
4.5
6.8
1.1
4.4
4.9
5.9
Business loans
7.5
7.5
4.9
5.6
3.9
3.8
1.0
1.8
2.6
1.9
Real estate loans
2.1
3.4
1.3
1.6
1.0
.5
.3
1.1
.8
1.8
Consumer loans
1.8
2.3
.3
1.1
.2
.3
.1
.8
1.5
1.2
Total deposits
-15.5
15.1
-11.7
7.2
- 8.6
2.6
- 3.1
4.6
- 3.8
8.9
Demand deposits 3/
.9
5.2
.9
2.3
1.2
.7
- .3
1.6
--
2.9
Time and savings deposits
-15.5
9.9
-12.7
4.9
- 9.8
1.9
- 2.9
3.0
- 2.8
5.0
Large CD's 4/
-12.3
3.2
- 9.4
1.4
- 6.9
.1
- 2.5
1.3
- 2.9
1.8
Other
- 3.2
6.7
- 3.3
3.5
- 2.9
1.8
- .4
1.7
.1
3.2
Total borrowings 5/
+10.1
3.7
6.3
3.3
4.0
2.3
2.3
1.0
3.8
.4
Other liabilities
9.3
5.0
8.2
4.5
7.2
4.2
1.0
.3
1.1
.5
Euro-dollars 6/
7.6
2.7
7.0
2.7
7.0
2.7
--
--
.6
--
MEMO:
Commercial paper 7/
4.3
n.a.
4.3
n.a.
2.4
n.a.
1.9
n.a.
--
--
Changes for 1969 are from December 25, 1968, to December 24, 1969.
Comparable
dates
were
used
to
compute
1968 changes.
2/ Exclusive of loans and Federal funds transactions with domestic commercial banks and net of valuation reserves.
3/ Less cash items in the process of collection.
4/ Negotiable time certificates of deposit in denomination of $100,000 or more.
5/ Largely borrowing in the Federal funds market and from Federal Reserve Banks.
6/ Bank liabilities to foreign branches.
71 Issued by a bank holding company or other bank affiliate.
8/ 19 major banks that account for approximately 90 per cent of borrowing from foreign banks.
banks that do not borrow in Eurodollar market but whose affiliates or holding company sell commercial paper.
NOTE: Figures may not sum exactly due to rounding.
Table 4
GERALD
?
Annual Changes in Major Balance Sheet Items,
FORD
Weekly Reporting Banks
1968 and 1969
LIBRARY
(In per cent, not seasonally adjusted)
Banks With Selected Nondeposit Sources of Funds
All Weekly
Euro-dollar
Commercial
Reporting Banks
Total
Borrower 8/
paper only 9/
All Other Bank
1969
1968
1969
1968
1969
1968
1969
1968
1969
1968
Total loans and investments
0.6
11.5
--
11.0
.3
11.7
- 0.8
14.5
--
9.8
U.S. Treasury securities
-20.4
3.7
-19.6
5.1
-18.9
7.1
-21.3
1.0
-21.2
2.0
Other securities
- 8.4
16.8
-11.3
19.2
-14.3
21.2
- 5.2
15.6
- 4.4
13.7
Total loans
5.6
11.8
5.5
12.4
6.4
10.6
5.8
14.1
5.8
10.7
Business loans
9.7
11.4
9.4
12.0
9.9
10.6
7.8
16.4
10.6
9.8
Real estate loans
5.5
11.7
7.9
10.6
10.1
6.0
4.5
18.6
3.0
12.8
Consumer loans
8.4
14.2
3.8
14.3
5.4
8.6
2.4
20.8
12.4
14.1
Total deposits
- 7.6
7.5
- 9.4
6.1
-10.3
3.2
- 7.6
12.2
- 5.2
9.5
Demand deposits
--
5.3
1.5
3.9
3.0
1.8
- 1.3
8.3
- 2.0
7.2
Time and savings deposits
-14.7
9.6
-19.7
8.2
-22.8
4.7
-13.4
16.0
8.0
11.6
Large CD's
-53.2
16.0
-57.9
9.2
-60.1
1.3
-52.7
35.2
-42.9
34.3
Other
- 4.5
8.1
- 6.8
7.8
- 9.1
5.9
- 2.5
11.6
- 1.8
8.4
Total borrowings
-71.6
48.8
+72.0
60.6
-84.0
58.4
-59.7
66.4
54.0
21.0
Other liabilities
52.1
38.9
56.2
44.9
55.7
46.7
60.1
31.7
32.7
16.4
Eurodollars
109.4
63.0
100.0
64.0
100.0
63.0
--
--
600.0
:
Changes for 1969 are from December 25, 1968, to December 24, 1969. Comparable dates were used to compute 1968 changes
2/ Exclusive of loans and Federal funds transactions with domestic commercial banks and net of valuation reserves.
3/ Less cash items in the process of collection.
Negotiable time certificates of deposit in denomination of $100,000 or more.
5/ Largely borrowing in the Federal funds market and from Federal Reserve Banks.
6/ Bank liabilities to foreign branches.
7/ Issued by a bank holding company or other bank affiliate.
19 major banks that account for approximately 90 per cent of borrowing from foreign banks.
9/
banks that do not borrow in Eurodollar market but whose affiliates or holding company sell commercial paper.
NOTE:
Figures may not sum exactly due to rounding.
TABLE 5
ANNUAL CHANGES IN MAJOR BALANCE SHEET ITEMS, WEEKLY REPORTING BANKS
1/
1969 and 1968
(In billions, not seasonally ad justed)
20 Multi-
60 Major Re-
260 Large
Total
Nat'l Banks8/
gional Bks.
9/
Local Banks
Items
1969
1968
1969
1968
1969
1968
1969
1968
Total loans and investments 2/
1.4
19.7
.5
11.6
- .1
5.9
1.0
2.2
U.S. Treasury securities
-5.9
1.0
-2.1
.9
-1.7
.1
-2.1
.1
Other securities
-2.9
5.6
-2.6
2.8
- .4
1.2
.1
1.6
Total loans
10.5
17.1
5.3
7.9
2.0
4.5
2.2
4.7
Business loans
7.5
7.5
4.4
4.2
1.6
1.6
1.1
1.6
Real estate loans
2.1
3.4
1.1
.9
.4
1.1
.6
1.4
Consumer loans
1.8
2.3
.3
.5
.4
.7
1.1
1.1
GERALD
Total deposits
-15.5
15.1
-8.9
4.0
-4.5
4.6
-2.1
6.5
P.
Demand deposits 3/
.9
5.2
1.2
1.0
- .5
1.6
- .6
2.5
Time and savings deposits
-15.5
9.9
-10.0
3.0
-4.0
2.9
-1.5
4.0
FORD
Large CD's 4/
-12.3
3.2
-7.2
.5
-3.4
1.4
-1.7
1.3
Other
-3.2
6.7
-2.9
2.5
- .6
1.5
.3
2.7
LIBRARY
Total borrowings
10.1
3.7
5.0
2.2
3.0
1.3
2.0
.2
Other liabilities
9.3
5.0
7.4
4.1
1.2
.5
.7
.3
Euro-dollars
7.6
2.7
6.7
2.6
.6
.1
.3
--
MEMO:
Commercial paper 7/
4.3
n.a.
2.4
n.a.
1.3
n.a.
.6
n.a.
1/ Changes for 1969 are from December 25, 1968 to December 24, 1969. Comparable data were used
to compute 1968 changes.
2/
Exclusive of loans and Federal funds transactions with domestic commercial banks and net of
valuation reserves.
Less cash items in the process of collection.
4/
Negotiable time certificates of deposit in denomination of $100,000 or more.
5/ Largely borrowing in the Federal funds market and from Federal Reserve Banks.
6/
Bank liabilities to foreign branches.
7/
Issued by a bank holding company or other bank affiliate.
These banks were selected on the basis of a number of criteria including size, volume of business
loans, relative participation in Federal Funds market, Euro-dollar market and commercial paper market.
9/ The same criteria as those listed in footnote 8 were used to select these 60 banks. However, these
banks, in general, are smaller and each region of the country was given representation.
NOTE: Figures may not sum exactly due to rounding.
GERALD
Table 6
R.
FORD
ANNUAL CHANGES IN MAJOR BALANCE SHEET ITEMS, WEEKLY REPORTING BANKS
1968 and 1969
LIBRARY
(In per cent, not seasonally adjusted)
20 Multi-
Total
7/
60 Major Re-
8/
260 Large
Nat'l Banks
gional Bks.
Local Banks
Items
1969
1968
1969
1968
1969
1968
1969
1968
Total loans and investments 2/
.6
9.5
.5
12.1
-0.2
11.9
1.3
3.8
U.S. Treasury securities
-20.4
3.7
-17.9
7.8
-24.1
1.3
-20.6
.8
Other securities
-8.4
16.8
-15.6
19.7
-4.6
14.8
-1.5
14.6
Total loans 2/
5.6
11.8
6.7
11.2
5.2
13.4
4.1
11.5
Business loans
9.7
11.4
10.4
11.2
9.9
11.3
7.6
11.9
Real estate loans
5.5
11.7
9.0
8.3
5.4
17.1
2.0
12.2
Consumer loans
8.4
14.2
5.6
9.4
8.1
16.8
10.5
15.9
Total deposits
-7.6
7.5
-9.4
4.4
-8.2
9.2
-4.6
10.5
Demand deposits 3/
:
5.3
2.6
2.4
-1.7
6.5
-1.9
8.3
Time and savings deposits
-14.7
9.6
-20.1
6.3
-14.7
12.1
-7.1
12.7
Large CD's 4/
-53.2
16.0
-59.0
4.8
-53.1
27.3
-39.1
36.0
Other
-4.5
8.1
Total borrowings
-71.6
48.8
68.0
6.8
76.0
8.1
95.0
9.7
Other liabilities
52.1
38.9
-75.1
52.5
-70.6
61.6
-59.7
16.9
Euro-dollars
109.4
63.0
98.0
45.9
600.0
:
--
--
Changes for 1969 are from December 25, 1968, to December 24, 1969. Comparable dates were used to compute
1968 changes.
Exclusive of loans and Federal funds transactions with domestic commercial banks and net of
valuation reserves.
Less cash items in the process of collection.
4/
Negotiable time certificates of deposit in denomination of $100,000 or more.
5/
Largely borrowing in the Federal funds market and from Federal Reserve Banks.
6/
Bank liabilities to foreign branches.
7/
These banks were selected on the basis of a number of criteria including size, volume of business
loans, relative participation in Federal Funds market, Euro-dollar market and commercial paper market.
8/
The same criteria as those listed in footnote 7 were used to select these 60 banks. However, these
banks, in general, are smaller and each region of the country was given representation.
NOTE: Figures may not sum exactly due to rounding.
GERALD
R.
FORD
LIBRARY
Table 7.
Selected Nondeposit Sources of Bank Funds
By Number of Banks and Amounts Outstanding
(Amounts in billions of dollars)
Oct. 29, 1969
Jan. 7, 1970
Mar. 11, 1970
Change:
Change:
Change:
No. of
No. of
No. of
Oct. 29, 1969 Oct. 29. 1969 Jan. 7, 1969
Banks
Amount
Banks
Amount
Banks
Amount
Mar. 11, 1970
Jan. 7, 1970
Mar. 11, 1970
Commercial paper
58
3.7
62
4.4
65
5.6
2.4
.8
1.7
Issued by subsidiaries
9
.4
10
.5
10
.15
.0
.0
.0
Issued by other affiliates
49
3.3
52
4.0
55
5.4
2.4
.7
1.7
Loans sold outright
143
5.7
145
6.0
151
7.8
2.3
.3
2.0
To affiliatesl/
72
4.7
73
4.7
74
6.3
1.8
0.0
1.8
To nonbank public
71
1.1
72
1.4
77
1.5
.5
.3
.2
Most of the loans sold to subsidiaries and affiliates reflect acquisitions by those subsidiaries and affiliates
out of the proceeds of their sales of commercial paper to the public or other methods of financing, but they also
include some acquisitions by foreign branches of the bank out of the proceeds of Euro-dollar deposits.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date
April 6, 1970.
Chairman Burns.
To
Subject: Market Effects of Governor
From
Chas. Molony.
em
Brimmer's San Francisco speech.
Press accounts give only mild support to the state-
ment in our Government Securities Market Report for Thursday,
April 2, that "The weaker tone (in Treasury note and bond prices)
was attributed in part to Governor Brimmer's remarks yesterday
(before the San Francisco Bond Club).
The observation in our internal market report was, of
course, based upon statements made by dealers in Government securi-
ties to the New York Federal Reserve Bank's trading desk in conversa-
tions April 2 and reported by the trading desk to our staff here
during the daily call on Government bond market developments.
Two factors may have influenced the mildness of press
references to the market impact of the Brimmer speech: 1. The
market for corporate and tax-exempt bonds, and the stock market as
well, moved UP a little, and the press gave more stress to that than
the fact that, as our market report put it, "Treasury note and bond
prices drifted lower in very quiet trading." 2. At the same time
that Governor Brimmer was saying in San Francisco that "there is no
basis for concluding that the battle against inflation has been won,"
Herbert Stein was predicting in a New York speech a "significant
reduction" in inflation this year.
The New York Times' bond and stock market stories
paired the Brimmer and Stein speeches, and the bond market story
said outright: "The two talks seemed to offset each other (as
market influences).
In addition, the New York Times' April 2 story (by
Ed Dale) on the Brimmer speech itself gave prime attention to the
proposal for differential reserve requirements on loans in order to
influence allocation of credit. The Brimmer comment relating to
current monetary policy was not mentioned until the 8th paragraph,
and then it was set out in this fashion: "On the immediate issue of
monetary policy Mr. Brimmer gave no predictions. But he said,
'There is no basis for concluding that the battle against inflation
has been won. 111
The Wall Street Journal's bond market story April 2 was
much more pointed, when it got around to mentioning the Brimmer
speech in paragraph 14. This story said:
is GERVID LIBRARY
-2-
"Apprehensions about inflation were fanned yesterday
by a Federal Reserve Board member's statements that 'the policy of
economic restraint so far has had little impact on the rate' of
price increases, traders said. In addition, Andrew Brimmer, a
Reserve Board Governor, suggested new credit-tightening moves might
be imposed to better control bank-lending power.
"Mr. Brimmer's remarks had only a limited impact yester-
day on bond prices, with some traders waiting for amplification before
adjusting quotes. Corporate bond price levels generally remained firm,
while Government issues slipped a token 1/8 to 1/16 lower, in response
to Mr. Brimmer's comments. " (underlining supplied)
Neither the speech comments nor the bond market movements
on April 2 were memorable enough to be mentioned in the week-end
reviews of the market over the preceding five days. Nor was either
mentioned in the only (Goldsmith-Nagan) bond letter received today.
The pertinent New York Times and Wall Street Journal
accounts are attached, with relevant parts marked for convenience
should you wish further detail.
Attachments.
LIBRARY GERALD FORM
Determined to be an
GEAL
Administrative Marking
By TMV
NARA, Date 4/18/22
CONF IDENTIAL (FR)
Board of Governors
Government Securities Market
Paul L. Kelty 14th
Thursday, April 2, 1970
Highlights
Treasury bond market weaker
Bill yields slightly higher, with 3-
month issue up 1 basis point to 6.35 per cent.
Stock prices narrowly mixed
Federal funds trade mostly at around 8 per cent.
System makes $434 million
of repurchase agreements.
Market Report
Treasury note and bond prices drifted lower today in very quiet trad-
ing activity. The weaker tone was attributed in part to Governor Brimmer's remarks
yesterday. Very little demand was noted. At the close of trading, intermediate
term issues were mostly 2 to 10/32 lower, while long-term bonds were 2/32 higher
to 4/32 lower.
Activity was also very quiet in the Treasury bill market. Yields tended
to back up, however, with dealers expressing concern over their very large finan-
cing needs today. Most issues closed 1 to 4 basis points higher in rate. The
6-month bill rose 2 basis points to 6.40 per cent bid, while the 1-year issue
advanced 1 basis point to 6.31 per cent.
The corporate bond market was quiet and firm, while municipals were
quiet and mostly unchanged. Today's $40 million A-rated Columbia Gas financing,
yielding 8.75 per cent with 5-year call protection, is around 80 per cent sold.
The $30 million Aa-rated Kentucky Utilities Co. bonds, yielding 8.60 per cent with
5-year call protection, are only around 35 per cent sold. Stock prices closed
narrowly mixed. The Dow-Jones industrial average gained .33, while the Standard
and Poor index lost .28 on a volume of 10.5 million shares.
Federal funds traded mainly in a 7-1/2 to 8-1/4 per cent range, with an
8 per cent effective rate anticipated. Nonbank dealers had new financing needs of
nearly $2.3 billion, partly reflecting the payment date for weekly bill awards as
well as maturing Rp's with the System. They found some out-of-town money at
around 8-1/4 to 8-1/2 per cent, while the major New York banks made loans to
dealers in an 8-1/2 to 9 per cent range. None of the large New York banks
borrowed from the System.
Desk Action
The Account Management made $434 million of repurchase agreements for
one day, comprising $374 million against Governments and $60 million against
acceptances.
Lending of Securities The System lent dealers $17 million of Treasury securities,
mostly for five days, including $13.2 million of notes and bonds. Repayments
totaled $16 million, leaving a balance of $36 million.
Some items in this folder were not digitized because it contains copyrighted
materials. Please contact the Gerald R. Ford Presidential Library for access to
these materials.
BIG BOARD STOCKS
NOW York Times
APR 2 1970
UP WITH VOLUME
Dow Adds 6.47 to Close at
792.04 as Turnover
Rises to 9.81 Million
COPPER SHARES IN GAINS
Memorex Jumps by 61/2 and
Phelps Dodge was the vol-
Telex Surges 91/₈-789
ume leader among the resur-
Issues Climb, 535 Off
gent copper issues with trades
of 147,000 shares, compared
with 5,000 shares on Tuesday.
The stock closed at 55%, up
By JOHN J. ABELE
13/4 after trading as high as
The stock market picked up
Price advances led declines
56½.
some speed and strength yes-
by a comfortable margin
Trading activity in Phelps
terday with prices at the close
throughout the session. At the
Dodge included a block of
of trading near the highest
close, there were 789 winners
98,000 shares at 55.
levels of the day.
and 535 losers, slightly below
No other major copper
Copper stocks were a feature
the widest margin of the day.
producers had joined the move
Tc
Reflected
to increased prices bv the time
FORD
New York Timos
APR 2 1970
CREDIT MARKETS
SHOW PRICE RISES
Lower Yields on Corporate
and Tax-Exempt Offerings
Broaden Week's Trend
By JOHN H. ALLAN
LIBRARY GERALD ? FORM
The credit markets moved
nearly unanimously yesterday
toward higher prices and
lower interest rates, broaden-
ing a trend that had concen-
trated largely in corporate
bonds earlier in the week.
In the most significant test of
the tax-exempt bond market
this week. Tennessee sold $53-
million of bigh-grade bonds
outstanding securities moved up
New York Times
NEW TOOL URGED
He emphasized that his plan
APR 2 1970
could
to re-direct the flow
of crb. "without any direct
interference by the Federal Re-
IN MONEY POLICY
serve in lending decisions of
individual banks." The new
system would, in effect, make
some loans less profitable to
banks than others, but they
Federal Reserve's Brimmer
could make any loans they
chose.
Wants Credit Channeled
On the immediate issue of
to High-Priority Areas
monetary policy Mr. Brimmer
gave no predictions. But he
said, "There is no basis for
concluding that the battle
CITES HOUSING PLIGHT
against inflation has been
won."
He added, "Given the con-
Says His Plan Would Avoid
tinued strength in business in-
vestment and the strong pent-
Interference in Individual
up demand for housing, I think
it is extremely important that
Banks' Loan Decisions
national stabilization policies
be conducted in a way that
will avoid providing so much
By EDWIN L. DALE Jr.
stimulus that a new burst of
WASHINGTON, April 1-A
inflation will be generated be-
member of the Federal Reserve
fore we have succeeded in
Board proposed today a sweep-
checking the inflationary pres-
ing change in the way the na-
sures we still face."
tion conducts its monetary
Mr. Brimmer gave an example
policy.
of his proposed system of dif-
Andrew F. Brimmer, the
ferential reserve requirements,
board member, said that the
applied against bank assets:
Federal Reserve policy of se-
"If the objective of public
vere restraint on credit and
policy were to give priority to
money last year had almost
loans to meet the needs of state
completely failed in its aim of
and local governments, it could
dampening the flow of loans to
be given effect through a re-
business while housing and
serve ratio against such loans
state and local government bor-
smaller than the ratio for
rowing were hurt.
other loans.
GERALD R. FORD LIBRARY
Calling the 1969 results "far
Details Explained
comforting he proposed
"IT
homes
Wall Street Journal
APP 2 1970
The Bond Markets
Pacific Telephone's
syndicate bought the $15.6 million of securities
due 1981-87, traders said.
The relatively good reception given Tennes-
Debentures Mopped Up,
see's issue, following the excellent sales results
of $25 million Washington bonds, sold earlier
Quoted at Premium
this week, helped to stabilize prices of older se-
curities, observers said.
At the same time, dealers expressed fears
Prices of Seasoned Industrials,
about the heavy supply of long-term, tax-ex-
empt securities remaining on Wall Street's
Utilities Also Benefit as
shelves.
$1.57 Billion Offer Awaited
"We've seen good retail business in bonds
due from one-to-10 years, but issues due in 15
years or more are posing marketing prob-
By IVAN SILVERMAN
lems," one underwriting executive said.
Staff Reporter of THE WALL STREET JOURNAL
"These long bonds, picked up by dealers over
NEW YORK-A $150 million offering of Pa-
the past two weeks, have been marked up but
cific Telephone & Telegraph Co. securities,
haven't been sold," he added.
about 90% sold after reaching the market Tues-
Investors are said to be avoiding long-term
day, was mopped up by purchasers early yes-
commitments for a variety of reasons, includ-
terday morning and pushed to a premium from
ing fears that inflation will severly erode the
the offering price.
value of their purchases over the coming dec-
ades.
Originally, the American Telephone & Tele-
graph Co. unit's issue was priced at 100 with an
Apprehension on Inflation
FORD is LIBRARY GERALD
Wall Street Journal
(
Art 2 1970
Abreast of the Market
By VICTOR J. HILLERY
The firming tendency evident in the stock
market late Tuesday blossomed yesterday
into a surprise rally on a broad front. Trading
expanded but remained relatively light.
Some brokers had expected the lackluster
drift generally characteristic of the action
week continue for - but
FORD is BENALD LIBRARY
April 7, 1970.
TO:
Chairman Burns
m
FROM: Robert C. Holland
SUBJECT: Brimmer speech.
I have read carefully through Governor Brimmer's speech
of April 1, 1970 in San Francisco, and am led to the following
conclusions.
1. His comments on general monetary policy - clearly identified
as his own views - are indicative of his general policy
emphasis, but are not sufficiently explicit, argumentative
or future-oriented to extend beyond acceptable bounds
(pp. 30, 32-33).
2. His comments on the desirability of lifting Regulation Q
ceilings at the first opportunity also do not exceed
commonly accepted bounds (p. 21).
3. His comments on loan asset reserve requirements are
introduced with an appropriately diffident wording:
"
thought might. .be given to the possibility
"
I think his subsequent presentation is subject to criticism
only in two related respects, insofar as its propriety
is concerned: (1) the proposal is presented in such great detail
and with so many illustrations that it invites the judgment
that Board consideration of it is far advanced; and (2)
there is no explicit cautioning statement that the proposal
i
FORD
GERALD
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Chairman Burns
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April 7, 1970.
is not being actively considered by the Board and is not
being put forward in its behalf.
Attachment
FORD is LIBRARY GERALD
BOARD OF GOVERNORS
Chairman Burns
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date April 15, 1970
To
Board of Governors
Subject: Foreign investments
From
Governor Brimmer
Attached are summary memoranda on certain proposed foreign
investments that I mentioned at today's Board meeting. One
involves applications of Northern Trust Company, Chicago, and
Chemical International Banking Corporation, New York, to acquire,
in combination, 50 per cent of the stock of a bank being formed in
England. The other involves the application of Irving Internation-
al Financing Corporation, New York, to acquire, in company with
Crocker-Citizens International Corporation, San Francisco, 50 per
cent of the stock of an international financing corporation to be
formed in Australia. (The Crocker application is in the pipeline.)
Applicants contend that in neither case will majority control
or management direction be furnished by the U.S. interests, either
individually or in combination. Accordingly, the Board's staff
recommends that the so-called standard conditions relating to cases
where control is exercised not be included in these instances.
Pursuant to the understanding at the Board meeting, these
files are being made available to the other members of the Board
for review. Unless members indicate to me by Friday, April 17, a
desire to have the applications placed on the Board agenda for con-
sideration, I will act upon them under delegated authority. My
inclination is to approve them.
FORD & GERALD LIBRARY
FR 439
APPLICATION FOR APPROVAL UNDER DELEGATED AUTHORITY
Date
March 27, 1970.
Federal Reserve District 2.
By: Irving International Financing Corporation ("IIFC"), New York, New York,
a Section 25(a) Corporation.
For: Permission to acquire 25 per cent of the capital stock of a proposed
international financing corporation, Australian International Finance
Corporation ("AIFC"), Melbourne, Australia, at a cost of approximately
$2,800,000.
Recommendations for Approval:
Federal Reserve Bank 3-24-70
Division of Supervision and Regulation er.
Clearances:
State Department (informal) 3-18-70
Comptroller of the Currency
:
Legal Division (Board)
AIFC is to be organized under Australian law by four founding share-
holders: Australia and New Zealand Banking Group, Ltd., a merchant bank head-
quartered in London, England; Bank of Montreal, a commercial bank domiciled in
Montreal, Canada; Crocker-Citizens International Corporation, San Francisco,
California, an Edge Act subsidiary of Crocker-Citizens National Bank; and IIFC.
Each of the foregoing shareholders will have a 25 per cent interest in AIFC and
each will appoint two members to AIFC's board of directors and one representative,
resident in Australia, to a management committee responsible for the daily opera-
tions of AIFC. In its letter of application, IIFC contends that, as no action
may be taken at any meeting of shareholders, the board of directors, or of the
management committee unless a quorum is present and unanimous consent is obtained,
there is no possibility for IIFC, either alone or together with the other Edge
Act Corporation shareholder, to control the actions or policies of AIFC. Con-
sequently, it does not appear necessary that the letter of consent to IIFC con-
tain the standard conditions. Additional details concerning the proposal appear
in the attached memorandum from the Federal Reserve Bank of New York.
IIFC reports in combination with its parent, Irving Trust Company, and
with its parent's other Edge Act subsidiary, Irving International Banking Corporation.
FCRP: 1-31-70 ; Outstandings, $316.6 million ; Ceiling, $319.6 million
Attachments - Memorandum from the FRB of New York dated 3-23-70.
Proposed letter.
GEBALO FORD FIBRARY
FEDERAL RESERVE BANK OF NEW YORK
TO:
BEX Files
March 23, 1970
FROM:
Richard C. Penn, Analyst
SUBJECT: Proposed investment by Irving Inter-
national Financing Corporation, New
York, New York, in Australian Inter-
national Finance Corporation,
Melbourne, Australia.
PROPOSAL
Irving International Financing Corporation (IIFC), New
York, New York, requests consent of the Board of Governors to
invest up to approximately us$2,800,000 in the purchase of 25 per-
cent of the capital stock of Australian International Finance Cor-
poration (AIFC), Melbourne, Australia.
The proposed investment would represent 140 percent of
IIFC's capital (no surplus) of US$2,000,000 as of December 31,
1969. Therefore, the Board's consent would be required for the
purchase and holding of shares of AIFC by IIFC in excess of the
applicable limitations set forth in the provisions of paragraph
5(c) of Section 25 (a) of the Federal Reserve Act and Section
211.9 (b) of Regulation K.
It should be noted that this Bank authorized IIFC
(under delegated authority) on February 19, 1970 to increase
its capital from US$2,000,000 to US$5,000,000. However, we
have been informed that the additional capital will be paid in
at the time the proposed investment in AIFC is consummated; such
investment would then represent 56 percent of IIFC's increased
capital.
AUSTRALIAN INTERNATIONAL FINANCE CORPORATION (AIFC)
Organization and Operations
IIFC states that the decision to establish AIFC is in
response to the growing importance of the Pacific Area to world
trade and the need for medium term financing in the growing
Australian economy. AIFC is to be organized under Australian
law by four founding shareholders: Australia and New Zealand
Banking Group Ltd., a merchant bank headquartered in London,
England; Bank of Montreal, a commercial bank domiciled in Mon-
treal, Canada; Crocker-Citizens International Corporation
(Crocker), San Francisco, California, an Edge Act subsidiary
of Crocker-Citizens National Bank, also headquartered in San
Francisco; and IIFC.
GERALD FORD LIBRARY
FEDERAL RESERVE BANK OF EW YORK
TO:
BEX Files
AIFC would engage in medium and long term lending,
investments, underwriting and other related financial services,
essentially operating in a merchant banking capacity. Initially,
AIFC's activities would be concentrated in Australia in order to
serve United States and other international corporations which
are establishing manufacturing and extractive operations there.
However, IIFC contemplates that AIFC will ultimately conduct a
global operation with emphasis on the entire Pacific Area. We
are informed by IIFC that AIFC would not engage in any business
within the United States.
IIFC indicates that AIFC would rely on both the Euro-
dollar and Euro-currency markets as well as on the Australian
money market for the funds needed to conduct its lending acti-
vities, which would constitute the major portion of its busines
(AIFC's investment activities would consist largely of equity
participations incidental to the company's lending activities).
IIFC also indicates that, to the extent it is feasible, loans
would be matched substantially by deposits or borrowings in the
same currency and with matching maturities. However, IIFC anti-
cipates that, at least in the initial period of its operations,
the new corporation will not be able to obtain medium and long
term deposits to match all of its loans. Consequently, it is
planned that each of the shareholders of AIFC will arrange a
standby undertaking" to provide AIFC with additional funds as
needed (as more fully described in the "Capitalization" section
of this report) to the extent of ten times the respective share-
holder's investment "to purchase loans from AIFC or to lend AIFC
funds against its loan portfolio in the unlikely event that at
some future time funds are not available to AIFC from the Austra-
lian or Euro-markets". AIFC would be allowed to make loans un-
matched by deposits or borrowings only to the extent that such
loans are covered by the proposed standby facilities.
Capitalization
AIFC would have an authorized capital of Australian
(A)$50,000,000 (approximately US$56,000,000 at the exchange rate
of A$1 = US$1.12), comprised of 50,000,000 shares having equal
rights and having a par value of A$1 (US$1.12) per share, of
which A$5,000,000 (US$5,600,000), or 5,000,000 shares, would be
paid in initially.
Initially, IIFC intends to purchase and hold 1,250,000
shares of the outstanding capital stock (representing 25 percent
ownership) of AIFC at a cost of approximately US$1,400,000. How-
ever, we understand that, according to the purchase agreement,
FORD
GERALD
LIBRARY
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FEDERAL RESERVE BANK OF NEW YORK
TO:
BEX Files
IIFC would make a further investment of like amount in common
shares, and/or subordinated debt and/or other form to be deter-
mined. The remaining capital stock would be equally divided
among Australia and New Zealand Banking Group Ltd., Bank of
Montreal, and Crocker. (It should be noted that Crocker is
submitting a similar application through the Federal Reserve
Bank of San Francisco.) IIFC indicates that the four share-
holders of AIFC intend to offer an equal participation in AIFC
to at least one major bank headquartered in the Far East through
the issuance of an additional 1,250,000 shares of AIFC, thereby
reducing the proportionate interest of each founding shareholder
(we understand that informal discussions have already been held
in this regard). In addition, equity participations in AIFC may
be offered to other Australian institutions.
IIFC's participation in the previously mentioned
"standby undertaking" to provide AIFC with additional funds as
needed will be arranged through IIFC's parent organization,
Irving Trust Company (Irving Trust), New York, New York. Under
the proposed arrangement, Irving Trust would be prepared to
provide up to US$14,000,000 initially (ten times IIFC's initial
investment in AIFC) and up to US$28,000,000 eventually (ten times
IIFC's total proposed investment in AIFC), as additional capital
is contributed by each shareholder.
Management
IIFC states that each of the founding shareholders
will appoint two members to AIFC's board of directors and one
representative, resident in Australia, to a management committee
responsible for the daily operations of AIFC, with the repre-
sentative of Australia and New Zealand Banking Group Ltd. acting
as General Manager. At least five directors must be present at
meetings of the board to constitute a quorum, including one
appointee of each shareholder, and all resolutions passed at
meetings of AIFC's board of directors and management committee
must receive unanimous approval of the quorum present and voting.
In addition, the presence of all shareholders is required for a
quorum at any meeting of shareholders. A resolution may be passed
at such a meeting only if it is proposed unanimously and receives
unanimous approval.
In its letter of application, IIFC contends that, as
no action may be taken at any meeting of shareholders, the board
of directors, or the management committee unless a quorum is
GERALD
LIBRARY
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FEDERAL RESERVE BANK OF NEW YORK
TO:
BEX Files
present and unanimous consent is obtained, there is no possibility
for IIFC, either alone, or together with Crocker, to control the
actions or policies of AIFC. IIFC further states that if the
Board imposes its standard condition on the proposed investment,
in all probability, it would not be acceptable to the other
shareholders and "the project would either be abandoned or
reorganized with non-U.S. shareholders".
OTHER APPROVALS
We understand that the approval of the Reserve Bank
of Australia is necessary for IIFC to make the proposed invest-
ment in AIFC. However, IIFC does not contemplate any difficulty
in obtaining such approval.
VOLUNTARY FOREIGN CREDIT RESTRAINT PROGRAM
IIFC states, in effect, that the proposed investment
would be made within the guidelines set forth under the Adminis-
tration's voluntary foreign credit restraint program. In this
connection, the Foreign Department of this Bank has indicated
that it has no objection to the proposed investment, either
under the voluntary foreign credit restraint program, or other-
wise.
COMMENTS AND RECOMMENDATION
The proposed investment appears to be consistent with
the purposes of Section 25 (a) of the Federal Reserve Act. Ac-
cordingly, I recommend that the Board of Governors grant its
consent for Irving International Financing Corporation (IIFC),
New York, New York, to invest up to approximately US$2,800,000
in the purchase of 25 percent of the capital stock of Australian
International Finance Corporation (AIFC), Melbourne, Australia,
provided that at least US$1,400,000 is invested within one year
from the date of the Board's approval.
In this connection, I also recommend that the Board
grant its consent to the purchase and holding of shares of AIFC
by IIFC in excess of the applicable limitations set forth in the
provisions of paragraph 5 (c) of Section 25 (a) of the Federal
Reserve Act and Section 211. (b) of Regulation K.
FORD & 07V839 LIBRARY
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F.R. 439
APPLICATION FOR APPROVAL UNDER DELEGATED AUTHORITY
Date
April 1, 1970.
Federal Reserve Districts 2&7.
By: The Northern Trust Company ("Northern"), Chicago, Illinois; and
Chemical International Banking Corporation ("CIBC"), New York, New York,
a Section 25(a) Corporation.
For: Permission to acquire 800,000 shares (20 per cent) and 1,200,000 shares
(30 per cent), respectively, of the capital stock of London International
Bank Limited ("LIB"), London, England, at a cost of approximately
$1,920,000 and $2,880,000, respectively.
Recommendations for Approval:
Federal Reserve Banks Chicago - 3-16-70; New York - 3-24-70.
Division of Supervision and Regulation gg. JRS
Clearances:
State Department (informal) 3-18-70
Comptroller of the Currency
Legal Division (Board)
As described in the attached memoranda from the Federal Reserve Banks
of Chicago and New York, LIB is being organized by two United States interests,
namely, Northern and CIBC, and by two European interests, namely, Credit Suisse:
("CS"), Zurich, Switzerland, the third largest Swiss commercial bank, and
Baring Brothers and Co., Ltd. ("BBC"), London, England, a leading English
merchant bank. Northern and BBC will each own 20 per cent of the capital stock
of LIB, while CIBC and CS will each own 30 per cent. LIB will have a Board
of Directors consisting of two representatives of each of the four founding
shareholders, a Chairman who is at present the Senior Managing Director of BBC,
and a tenth member, a British citizen reported to be highly experienced in
international operations, who will function as Managing Director of the bank
and be responsible for its daily affairs. Neither majority control nor manage-
ment direction will be furnished by the United States interests, either individ-
ually or in combination.
LIB will be similar to other banks (such as Atlantic International
Bank Limited) that have been formed in Europe by consortia of European and
American interests. Initially, it will offer loans in Euro-currencies, will
underwrite, syndicate, sell and distribute long-term debt and equity securities,
and will deal in foreign exchange as required. It is anticipated that more
sophisticated financial services will be subsequently developed.
FORDO is 077839 LIBRARY
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FOREIGN CREDIT RESTRAINT PROGRAM
Northern reports in combination with its Edge Act subsidiary,
Northern Trust International Banking Corporation. As of February 28, 1970,
its General Ceiling was $47,876,000 and outstandings charged against this
Ceiling totaled $43,809,000.
CIBC reports in combination with its parent, Chemical Bank, as
well as with Chemical New York Corporation and Chemical International Finance,
Ltd. As of February 28, 1970, its General Ceiling was $610 million and out-
.
standings charged against this ceiling totaled $533 million.
In its application, CIBC reports that it has $3,000,000 on deposit
in the Euro-dollar market which will be used to make its proposed investment,
thereby preventing a capital outflow from the United States.
Northern, in its application, states that its projections indicate
that its proposed investment will be made within the foreign credit restraint
guidelines.
Attachments - Memoranda from FRB of Chicago dated March 16, 1970, and from
FRB of New York dated March 23, 1970.
Proposed letters.
GERALD LIBRATU FORD GERALDRA
GERALD R. FORD LIBRARY
This form marks the file location of item number
la
as listed on the pink form (GSA Form 7122, Withdrawal Sheet)
at the front of the folder.
FEDERAL RESERVE BANK OF NFW YORK
TO:
BEX Files
March 23, 1970
FROM:
Cathy E. Jones, Analyst
SUBJECT: Proposed investment by Chemical
International Banking Corporation,
New York, New York, in London
International Bank Ltd., London,
England.
PROPOSAL
Chemical International Banking Corporation (CIBC), New
York, New York, requests consent to purchase and hold, at a cost
of approximately us$2,880,000, 30 percent of the capital stock of
London International Bank, Ltd. (LIB), to be incorporated under
the laws of the United Kingdom and headquartered in London.
The proposed investment would represent 72 percent of
CIBC's capital (no surplus) .of US$4,000,000 as of December 31,
1969. Therefore, the Board's consent would also be required for
CIBC to purchase and hold shares of LIB in excess of the appli-
cable limitations set forth in the provisions of paragraph 5 (c)
and Section 211.9 (b) of Regulation K.
LONDON INTERNATIONAL BANK LIMITED (LIB)
Organization and Operations
LIB is being organized by CIBC in participation with
Credit Suisse, Zurich, Switzerland, described as the third largest
Swiss commercial bank; Baring Brothers and Co., Ltd., London,
England, described as a leading English merchant bank; and The
Northern Trust Co., Chicago, Illinois, a general commercial bank
offering international as well as domestic and trust services.
The proposed investment will operate as an independent institution
capable of generating business with its own customers as well as
handling referrals from its shareholders.
CIBC indicates that LIB will initially: (1) offer loans
in Euro-currencies, primarily dollars, with tenors of three to
seven years; (2) underwrite, syndicate, sell, and distribute
long-term debt and equity securities; and (3) deal in foreign
exchange as required. It is anticipated that more sophisticated
financial services such as multi-national merger and acquisition
work, international portfolio management and financial counselling
will be subsequently developed.
GERALO FORD LIBRARY
FEDERAL RESERVE BANK OF NEW YORK
TO:
BEX Files
With the rapid rise in the significance and depth of
the Euro-currency market, CIBC feels that specialized medium-term
financing companies such as LIB are necessary to meet the longer-
term financial requirements of major European corporate firms,
particularly in the developed countries. We are informed that
LIB will conduct no business either direct or indirect in the
United States.
Copies of the Articles of Association and By-laws were
forwarded to the Board by this bank on March 10, 1970.
CAPITALIZATION
It is expected that LIB will have a capital of pound
sterling (I) 5,000,000 (approximately US$12,000,000 at the exchange
rate of I 1 = US$2.40), consisting of 5,000,000 shares of a par
value of E 1 per share. The initial issued capital is to be
E 4,000,000 (approximately US$9,600,000), of which 50 percent will
be paid in on the first call. Subsequent calls on the remainder
will be at future dates as required by the Bank's growth.
As previously mentioned, CIBC proposes to purchase and
hold 30 percent of the capital stock of LIB at a cost of approxi-
mately US$2,880,000. Of the remaining capital stock, Credit Suisse
will own 30 percent while Baring Brothers and Co. and The Northern
Trust Co. will each own 20 percent.
Each of the shareholders would be expected to participate
on a prolrata basis in the issuance of the equivalent of E 5,000,000
of subordinated debt capital having a possible ultimate maturity of
ten years. This subordinated debt is not expected to be needed im-
mediately; however, it will probably be called down within a year,
dictated by the growth of LIB. In this connection, CIBC's propor-
tionate share (a maximum of approximately US$3,600,000) will be ad-
vanced by its parent, Chemical Bank, New York, New York.
Management
The proposed bank is expected to have a Board of
Directors consisting of two representatives of each of the four
founding shareholders; a Chairman who is at present the Senior
Managing Director of Baring Brothers and Co. (and who, we under-
stand, is expected to continue in that capacity); and a tenth
member, a British citizen reported to be highly experienced in
international operations, who will function as Managing Director
of the bank, responsible for its daily affairs.
GERALD
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EDERAL RESERVE BANK OF NEW YORK
TO:
BEX Files
It is stated that neither majority control nor management
direction will be furnished by CIBC or American interests in com-
bination. Accordingly, CIBC feels that the Board of Governors
should refrain from imposing the standard condition on this in-
vestment as such imposition would severely limit LIB's competitive
aims.
OTHER APPROVALS
We are informed that the corporate name of LIB will have
to be submitted to the Board of Trade of England for necessary
formal approval. In addition, it is stated that the proposed
Chairman of the Board is contacting the Governor of The Bank of
England with respect to the views of the regulatory authorities
in the United Kingdom.
VOLUNTARY FOREIGN CREDIT RESTRAINT PROGRAM
CIBC informs us that it currently has US$3,000,000 on
deposit in the Euro-dollar market which will be used to make the
proposed investment thereby preventing a capital outflow from the
United States. Accordingly, the Foreign Department of this Bank
has indicated that it has no objection to the proposed investment,
either under the revised voluntary foreign credit restraint pro-
gram, or otherwise.
COMMENTS AND RECOMMENDATION
The proposed investment appears consistent with the
purposes of Section 25 (a) of the Federal Reserve Act. Accordingly,
I recommend that the Board of Governors grant its consent for
Chemical International Banking Corporation (CIBC), New York, New
York, to purchase and hold, at a cost of approximately US$2,880,000,
30 percent of the capital stock of London International Bank, Ltd.,
London, England. I further recommend that the Board of Governors
grant consent for CIBC to purchase and hold the aforementioned
capital stock in excess of the limitations set forth in the pro-
visions of paragraph 5 (c) of Section 25 (a) of the Federal Reserve
Act and Section 211.9 (b) of Regulation K.
Cachfornow
LIDERAY GERALD ? FORD
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