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Research Papers in Economics

Interest Rates in Leading Countries
EARLY THIS YEAR interest rates declined
rapidly in the United States as the Federal
Government shifted from net borrowing to
net repaying of marketable debt and as busi-
ness expanded more slowly than had been
expected following the steel strike. In Can-
ada the sharp decline in short-term rates
that started in August 1959 continued, and
bond yields also declined. In 1959 public
and private demands for credit had pushed
interest rates in these countries to postwar
peaks. Higher rates, together with restraint
on bank credit expansion, were accompanied
by an increased flow of savings into financial
assets to meet record credit demands.
In West European industrial countries in-
terest rates turned up in the fall of 1959
as a result of the growing demands for funds
that accompanied rapid expansion in indus-
trial output. In early 1960 interest rates
rose further as additional credit restraint
measures were put into effect.
In the second half of 1959 long-term in-
terest rates in North America and West
Europe were closer together than in any
earlier postwar year. Short-term rates, as
reflected in Treasury bill yields in the United
States and Canada, were appreciably above
corresponding rates in Britain and Ger-
many, as the table shows.
The relative movements in interest rates
since the spring of 1958 have reflected in
large measure the difference in timing of
expansion in economic activity. Expansion
did not begin in West Europe until early
1959, whereas by that time business re-
covery in the United States had been under-
way for nine months. For about a year
INTEREST RATES IN LEADING COUNTRIES
SELECTED DATES
[Per cent per annum]
Type of issue,
and country
1960,
May
Treasury bills
United States 3.29
Canada 2.87
United Kingdom 4.58
Germany 4.00
France
1
 P4.24
Long-term Government
bonds
United States 4.16
Canada 5.22
United Kingdom 5.30
Germany
 3 6.4
France n.a.
Switzerland
 P3.11
1959
Dec.
4.49
5.02
3.61
3.75
4.07
4.27
5.56
4.99
6.2
5.27
3.29
July
3.20
5.23
3.46
2.00
4.27
4.11
5.05
4.74
5.6
5.36
3.14
1958,
May
0.91
1.53
5.02
3.25
210.04
3.14
4.02
5.03
6.7
7.15
3.20
n.a. Not available. v Preliminary.
1 Day-to-day money rate, private collateral.
2 Abnormal figure due to political crisis in France in May 1958.
3 April 1960.
NOTE.—Treasury bills, monthly average market yields for 3-month
bills, except end-of-month selling rate for Germany.
Bonds, monthly average yields—unless otherwise noted—for the
following: United States, marketable Treasury bonds maturing or
callable in 10 years or more; Canada, quotations for third Wednesday
of month for 3% per cent bonds maturing in 1978; United Kingdom,
2Vi per cent Consols (undated); Germany, average of loans of public
authorities (except May 1958 when only those with 6 per cent coupon
were included); France, average of quotations for last business day
of the month for Government bonds (excluding indexed bonds);
and Switzerland, weighted average yield on 12 Confederation and
Railway bonds.
after United States rates turned up in mid-
1958, European interest rates continued to
decline. Moreover, central government
sales of new marketable securities domi-
nated money markets in both the United
States and Canada in 1959 but did not
dominate those in West Europe, as they
had in some earlier postwar years.
With enhanced confidence in European
currencies, stabler domestic prices, and
605
Federal Reserve Bulletin: June 1960606 FEDERAL RESERVE BULLETIN • JUNE 1960
INDUSTRIAL PRODUCTION
1957 = 100, seasonally adjusted
WEST
EUROPE
I I
UNITED
KINGDOM
120
80
130
110
100
1956 1958
NOTE.—Federal Reserve index for United States. Other in-
dexes shifted to 1957 base by Federal Reserve. Organization
for European Economic Cooperation (OEEC) indexes for
West Europe and Germany. National indexes for other coun-
tries. Latest figures shown (preliminary): April, except West
Europe and Canada (March).
large balance-of-payments surpluses, a rec-
ord volume of savings moved into financial
assets through European financial institu-
tions and capital markets during 1959. The
continental countries were net exporters of
physical resources for consumption and in-
vestment outside Europe. The financial
counterpart of these export surpluses was
a build-up of medium- and short-term claims
on the rest of the world, in part because the
capacity of European financial markets to
provide long-term foreign financing was in-
adequate.
After January 1960 interest rate trends in
North America and West Europe diverged.
Rates in the United States and Canada
declined sharply. In May, as the table on
the preceding page shows, long-term bond
yields in Britain and Germany were appre-
ciably above their mid-1959 levels and
Treasury bill rates were substantially above
those in North America.
NORTH AMERICA
Long- and short-term interest rates reached
postwar highs in both the United States and
Canada in the latter half of 1959 or early
1960. From mid-195 8 through the first
week of 1960, average yields on long-term
Government bonds rose by more than one
percentage point in the United States and
by 1.5 percentage points in Canada while
rates on Treasury bills rose by 3.5 percent-
age points in each country. During the first
half of 1960 bond and Treasury bill yields
declined appreciably in both countries.
United States. The rise in interest rates
that accompanied the cyclical upswing in
business activity in the United States in the
spring of 1958 continued throughout 1959.
Borrowing by the Federal Government was
at a record peacetime level, and financing
in the private sectors of the economy in
1959 reached a new peak one-third above
that for 1958.
Both private and public borrowings were
particularly heavy in the short- and inter-
mediate-term area (maturities up to five
years), although there was also a record
increase in home mortgage credit. Private
credit demands in the shorter maturities
were for financing consumer durable goods
purchases and business working capital.
With market yields on its outstanding bonds
close to or above the A
lA per cent legal
ceiling on new Treasury issues of more than
five-year maturity, the Federal Government
borrowed almost entirely on short- and in-
termediate-term issues.
Average yields on intermediate-term
Federal Reserve Bulletin: June 1960INTEREST RATES IN LEADING COUNTRIES 607
Government securities rose above long-term
rates early in 1959, as they had in 1956
and 1957, and the spread became consider-
ably larger last year than in the earlier pe-
riod. The Treasury bill rate advanced rela-
tive to long-term rates throughout 1959, and
rose above them late in the year, which it
had not done in 1956-57.
The advance in yields on Government
securities accelerated in the second half of
1959 when Treasury demands reflected nor-
mal seasonal requirements for funds and a
deficit in the Federal Budget. Expectation
that private demands for credit would ex-
pand after steel operations were resumed in
November was a factor in the further rise
of yields in the closing weeks of the year.
The concentration of Treasury financing
in short- and intermediate-term maturities
and heavy sales by banks contributed to
the rise in rates for these maturities during
the latter half of the year. At the higher
yields prevailing after midyear, Treasury
intermediate-term issues were more compet-
itive with alternative investments and at-
tracted buying from both institutional and
individual investors.
Private short-term rates, including those
on prime bank loans, bankers' acceptances,
and commercial paper, also rose in 1959,
particularly during the second half. To
restrain bank credit expansion under the
circumstances prevailing, discount rates at
Federal Reserve Banks were raised from
2 yi to 4 per cent in three steps of one-half
per cent each, in March, May—June, and
September.
Early in 1960 there was an abrupt re-
versal of trends in interest rates. A number
of factors contributed to this reversal.
After a sustained period of record deficit
financing, the Treasury became a substan-
tial net repayer of debt in the first quarter
INTEREST RATES IN NORTH AMERICA
LONG-TERM GOVERNMENTS
1958 1960
NOTK.—For description of series see note to table on p. 605.
Latest figures shown: May.
of the year. With Treasury budget sur-
pluses forecast for the remainder of fiscal
year 1960 and also for fiscal 1961, the
prospective role of the Federal Government
in credit and capital markets changed con-
siderably. Also, business activity and pri-
vate credit demands did not expand so
rapidly after the steel strike as had been
widely anticipated.
Stock prices dropped early in the year
as inflationary expectations were modified
and private demand shifted from equities to
fixed-interest obligations. With total de-
mand for funds in better balance with sup-
ply, with wholesale prices relatively sta-
ble, and with output in some industries
below expanded capacity, Federal Reserve
policies were adjusted to the lessened de-
mand pressures in the economy, thus con-
tributing to easier credit conditions.
Yields on all maturities of Government
securities declined through March. The
spread between intermediate- and long-term
issues was virtually eliminated and Treasury
Federal Reserve Bulletin: June 1960608 FEDERAL RESERVE BULLETIN • JIJNE 1960
bill rates fell well below long-term yields.
Although yields in April and May were
generally somewhat above first-quarter
lows, these advances were erased in early
June. Beginning June 3, discount rates at
Federal Reserve Banks were reduced from
4 to ZVi per cent.
Canada. Demand for credit in Canada
increased rapidly through the summer of
1959. The Government borrowed substan-
tial amounts, although less than in 1958
when it undertook not only to lengthen debt
maturities on a broad scale but also to fi-
nance a record peacetime budget deficit. A
heavy demand for private credit was con-
centrated at banks, which met the demand
in part by selling Government bonds. Sales
of securities by the Treasury to finance the
large deficit and by the chartered banks
brought an unprecedented volume of Gov-
ernment securities to the capital market.
Interest rates moved to record highs. At
these levels the nonbank public added sub-
stantially to its holdings of Government
securities.
Upward pressures on shorter term interest
rates reached a climax in mid-August 1959.
Rapid growth in bank credit, financed in
part by sales of Treasury bills, and larger
offerings of bills by the Treasury pushed
yields on bills and short-term bonds above
6 per cent. The 90-day bill rate reached
a peak of 6.16 per cent in the week of
August 12, 1959, compared with 0.87 of
one per cent a year earlier. At the next
tender of bills the Finance Minister accepted
only 77 per cent of the bids on the ground
that "the recent rise in Treasury bill rates
had gone farther and faster than conditions
warrant."
After mid-August short-term money rates
declined rapidly as demands in Canadian
financial markets shifted. The chartered
banks ceased to expand their loans and to
liquidate their holdings of Treasury securi-
ties. Their loans leveled off in September
and then declined more than seasonally un-
til March 1960. The volume of new pri-
vate security offerings also declined in the
second half of the year. The Treasury's
cash position improved with a reduced defi-
cit and with cash receipts from a 5Vi per
cent bond issue in October and from the
1959 Canada Savings Bond campaign a
month later.
The sharp decline in short-term rates
continued in 1960. Bond yields also de-
clined. On June 9 the 90-day Treasury bill
rate reached a low of 2.65 per cent.
WEST EUROPE
Interest rates in leading West European
markets declined until mid-1959. By that
time Treasury bill rates in these countries
had approached or fallen below similar
rates in North America. In most European
countries long-term bond yields were sub-
stantially below those of a year earlier.
The low level of European money rates
in mid-1959 reflected in part a lag in Euro-
pean industrial activity. Whereas output
did not begin to expand in Europe until
February 1959, it had turned up in May
1958 in the United States. Furthermore,
large balance-of-payments surpluses, pro-
duced by expansion in exports and by fav-
orable import prices, increased liquidity in
financial markets. In addition, central gov-
ernment financing needs were limited.
The low interest rates also reflected prog-
ress in rebuilding continental capital mar-
kets. Domestic private capital issues were
in postwar record volume during 1959 in
West Germany and France and were ap-
preciably above 1958 levels in Switzerland
and Britain.
Federal Reserve Bulletin: June 1960INTEREST RATES IN LEADING COUNTRIES 609
In the second half of 1959 interest rates
in West European countries began to rise
as expanding output pressed against avail-
able resources and the authorities turned
from expansionary to restrictive monetary
policies. In the period September 1959-
January 1960 seven central banks raised
their discount rates. In addition, reserve re-
quirements were raised in several countries
and other financial measures were taken to
moderate credit expansion.
United Kingdom. Interest rates in Great
Britain, which showed only a slight upward
tendency during the first phase of the rapid
expansion in British industrial output in
1959, began to rise rapidly toward the end
of the year. With internal demands in-
creasing and with a current-account deficit
recorded in the fourth quarter, the authori-
ties took steps in early 1960 to check a
record expansion in bank loans, financed
by heavy sales of Government bonds. In
January the Bank of England's discount rate
was raised from 4 to 5 per cent. In Feb-
ruary the Bank, which throughout 1959
had helped the market absorb the heavy
volume of Government bonds offered by
banks, dropped its buying prices for bonds.
When the clearing banks continued to
sell securities and increase their loans, the
authorities announced on April 28, 1960,
the imposition for the first time of a special
supplementary reserve requirement. Con-
trols over instalment credit terms were re-
imposed at the same time.
London clearing banks were directed to
place in Special Deposits at the Bank of
England by June 15 an amount equal to
one per cent of their total deposits. This
amount is in addition to the 8 per cent
minimum that the banks traditionally keep
as vault cash and as deposits at the Bank.
Moreover, the Special Deposits may not
INTEREST
Per cent
RATES
LONG-TERM
GOVERNMENTS
TREASURY
w
s—^\
X
BILLS
1 >
f
I
IN WEST EUROPE
y'V- W.FRANCE
/'
VGERMANY
SS,»,
>^ ^•
UNITED KINGDOM
SWITZERLAND -~»»-/
1 __... .
/ \ UNITED
I \KINGDOM
/ \
<1. V
GERMANY v^
1 1
1
I
i
1960
NOTE.—For description of series see note to table on p. 605.
Latest figures shown: May, except bonds for Germany (April)
and France (January).
be considered liquid assets for computing
the liquid-asset ratio of more than 30 per
cent customarily held in the form of cash
reserves, call loans, and Treasury bills.
By early June interest rates in the United
Kingdom were substantially above end-of-
1959 levels. The yield on Treasury bills
had risen from 3.39 per cent in November
1959 to 4.56 per cent on June 3 and the
yield on IVi per cent Consols from 4.83 to
5.44 per cent.
Germany. Interest rates in Germany
reached their postwar lows in mid-1959.
At 2 per cent the Treasury bill rate was
the lowest in major financial centers. Long-
term bond yields at 5.5 per cent in August
were not greatly above those of other lead-
ing countries. For several years the central
bank had actively encouraged lower inter-
est rates to aid in expanding activity in the
capital market and to stimulate an outflow
Federal Reserve Bulletin: June 1960610 FEDERAL RESERVE BULLETIN • JUNE 1960
of capital that would offset the continuing
substantial surpluses in international trans-
actions on current account.
The volume of domestic fixed-interest
securities placed in Germany in 1959 ex-
ceeded the record in 195 8. Exports of long-
term capital in the form of net purchases of
foreign equities and fixed-income securi-
ties were five times as large as in 1958.
In the autumn interest rates started to rise
rapidly as the boom in economic activity
gathered strength. The German Federal
Bank increased its discount rate from 2%
to 3 per cent on September 4 and to 4 per
cent on October 23. In addition, it raised
reserve requirements on five occasions be-
tween September 1959 and June 1960.
Conditions in German financial markets
continued to tighten in late 1959 and early
1960. A Federal Government bond offered
in November 1959 at a 6.12 per cent yield
was oversubscribed, but one offered in mid-
January 1960 at 6.36 per cent was not sold
out. During the spring capital market ac-
tivity was at reduced levels as the market ex-
pected further increases in rates. On June 3
the central bank raised its discount rate to 5
per cent and the Treasury bill rate to 4.87
per cent.
France. A balance-of-payments surplus
and the restoration of economic stability
were overriding influences on money and
credit developments in France in 1959.
There was a large return of capital from
abroad during the year.
Actions taken by the monetary authorities
in 1959 were all in the direction of easing
credit conditions. Early in the year the
Bank of France reduced its rediscount rate
on two occasions. In February the ceilings
on credit at commercial banks, imposed a
year earlier, were removed. Penalty rates
on above-ceiling rediscounts at the Bank of
France were reduced three times.
Capital market conditions eased despite
the sharp growth in industrial output. Long-
term interest rates at 5.3 per cent in Decem-
ber 1959 were one percentage point lower
than a year earlier. The volume of new in-
dustrial security issues in 1959 was 40 per
cent larger than that in 1958.
Late in 1959 bank credit expanded rap-
idly. In February 1960 the Bank of France
cautioned commercial banks against over-
extension of credit.
Switzerland. The Swiss money market
was extremely liquid in early 1959. In
January the central bank reduced its dis-
count rate and in April long-term interest
rates reached a low of 2.83 per cent.
As business activity began to pick up in
the spring of 1959, interest rate trends were
reversed. By December long-term rates
were one-half percentage point above the
April low. Growing demands for credit and
some outflow of short-term funds in response
to higher interest rates abroad contributed to
the rise. The central bank stated that it did
not raise its discount rate during the year
because it wished to keep Swiss rates below
those in other countries to encourage an out-
flow of liquid funds.
The Swiss capital market absorbed a rec-
ord volume of financing in 1959. Gross
issues of bonds and shares were 37 per cent
larger than in 1958. The two-year ban on
borrowings by foreigners was lifted in Au-
gust 1958, and foreign flotations reached a
postwar high in 1959.
By the end of 1959 the Swiss authorities
began to take cautionary steps in the credit
field. In December, and again early in 1960,
they warned commercial banks about infla-
tionary factors. However, long-term bond
yields have eased in recent months.
Federal Reserve Bulletin: June 1960

Interest rates in leading countries

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Interest rates in leading countries

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Research Papers in Economics