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Research Papers in Economics

ADVANCE IN ECONOMIC ACTIVITY to new
highs in the United States and Canada has
engendered an upward movement of interest
rates in these countries over the past year.
Growing needs to finance private investment
and government deficits have made the de-
mand for all forms of credit rise faster than
savings. Expectations of further economic
expansion, coupled with fears of renewed in-
flationary pressures, have lessened the will-
ingness of lenders to commit funds on fixed
interest at existing yields. These forces have
generated pressures for continued monetary
expansion. The problem of monetary man-
agement here and in Canada has been to
limit monetary expansion to growth needs so
as to avoid inflationary effects.
In West Europe, where economic reces-
sion in 1957-58 and recovery in 1958-59
were less pronounced than in North
America, reduced internal demand for funds
to finance investment outlays, together with
large balance-of-payments surpluses, in-
creased the liquidity of financial markets.
European central banks relaxed earlier credit
restraints and encouraged some increase in
the volume of bank credit and money. Under
these conditions, interest rates declined from
late 1957 through early 1959. In recent
months, interest rates in Europe have re-
mained stable or in some cases have in-
creased slightly.
Postwar differentials between interest
rates in the United States and West Europe
have narrowed. In mid-1959, average
yields on long-term U. S. Government bonds
exceeded 4 per cent, more than one percent-
LONG-TERM
Per cent
INTEREST RATES
FRANCE ,''"
--' UNITED
,.
r KINGDOM t
UNITED STATES
to
1955 1957 1959
NOTE.—For details concerning these series, see subscripts to
charts on following pages.
age point above yields on similar securities
in Switzerland and close to those prevailing
in the Netherlands. Although remaining
well below rates in France, Germany, and
the United Kingdom, yields in the United
States were nearer to them than at any
other time in recent years.
NORTH AMERICA
Both long- and short-term interest rates have
risen in the United States and Canada. Be-
tween mid-1958 and mid-1959, rates on
long-term Government securities advanced
about one percentage point in both countries.
Rates on three-month Treasury bills rose
more than 4 percentage points in Canada
and about 2Vi percentage points in the
687
Federal Reserve Bulletin: July 1959688 FEDERAL RESERVE BULLETIN • JULY 1959
United States. The spread between bill rates
in the two countries reached a record of more
than 2 percentage points in early May and
narrowed moderately in June.
United States. The rise of interest rates in
the United States began in the summer of
1958 in connection with large sales of inter-
mediate- and long-term Government securi-
ties by temporary holders. Some holders
had built up thinly margined speculative
positions in anticipation of continued in-
creases in bond prices, by acquiring new
bonds in an exchange offer and thereby
greatly increasing the market supply of these
issues. As expectations of recovery became
more general and the large volume of Treas-
ury borrowing more widely recognized, they
acted to take profits or limit losses.
From June to October, yields on long-
term Government and high-grade municipal
and corporate bonds rose by about half a
percentage point. Yields on intermediate-
term Government bonds advanced nearly
1 Vi percentage points in this period, reflect-
ing in part the efforts of investors to increase
liquidity by shortening the maturities of their
holdings. During the remainder of 1958,
yields on all these securities fluctuated within
narrow ranges.
Short-term rates climbed in August and
September, reflecting the general rise in in-
terest rates and to some extent the less easy
monetary policies. Their rise, however, was
relatively greater than in past periods of
similar monetary action. During the re-
mainder of 1958, short-term securities were
in demand by purchasers seeking to main-
tain liquid positions, and short-term rates
rose little further.
In August, Reserve Bank discount rates
were raised from 1
34 per cent to 2 per cent
and in October, following the steady advance
of short-term market rates, to 2Vi per cent.
These actions reflected the need for aligning
the speed of monetary expansion more
closely with the pace of economic recovery.
Rates on both long- and short-term U. S.
Government securities advanced somewhat
around the turn of the year, but changed little
further until April 1959. By that time it had
become clear that the pace of the upswing
was carrying output and national income to
new record levels. By mid-1959, average
rates on long-term Government bonds had
risen above 4 per cent, the highest yield since
the early 1930's, and those on some medium-
term Government securities to nearly A
l/i
per cent. Short-term rates had advanced al-
most to the peaks reached in 1957 prior to
the recession. In May commercial banks
raised the rate on prime loans to 4Vi per
cent. Reserve Bank discount rates were
established at 3 per cent in March and 3V
/2
per cent late in May.
The rise in yields on intermediate-term
Government securities above those of longer
term bonds in 1959 restored a rate pattern
that had prevailed during the second half of
1956 and most of 1957. Spreads between
short- and intermediate-term rates, however,
have been wider than in 1957.
During most of the second quarter of 1959
the rate on three-month Treasury bills re-
mained below the 1957 peak, and below the
Federal Reserve discount rate. This be-
havior reflected in part large purchases of
short-term Government securities by non-
financial corporations, whose profits had in-
creased. Other investors also may have pur-
chased such securities in preference to
longer term investments in anticipation of
further increases in long-term rates.
In June 1959 the President proposed to
the Congress the elimination of the statutory
maximum interest rate of AVA per cent on
U. S. Treasury issues with a maturity of
Federal Reserve Bulletin: July 1959INTEREST RATES IN LEADING COUNTRIES 689
more than five years. The change would
enable the Treasury to issue some long-term
securities and not depend entirely on the
short-term market.
Canada. Between July and September
1958, the Canadian Government undertook
a major debt management operation aimed
at converting securities nearing maturity into
bonds with interest rates up to 4Vi per cent
and maturities up to 25 years. The con-
version affected more than half of the Gov-
ernment's marketable debt and greatly ex-
panded the supply of intermediate- and long-
term bonds.
Purchases of bonds by the Bank of Can-
ada provided support for Government bond
prices in connection with this operation.
After the conversion, yields on long-term
bonds rose as the Bank of Canada reduced
and then discontinued its purchases, and the
increase of half a percentage point during
the last half of 1958 was about the same as
that on Government bonds in the United
States.
The Canadian three-month Treasury bill
rate reached its lowest level in July 1958, as
shown in the chart. At that time the Ca-
nadian rate fell below the U. S. bill rate for
the first time since 1955. It remained below
the U. S. rate until mid-October 1958.
In the first half of 1959 yields on long-
term Canadian Government bonds edged
above 5 per cent. Treasury bill and other
short- and intermediate-term rates rose
sharply, reflecting the increase in private
credit demands on the chartered banks, the
concentration of Government borrowing at
the short end of the market, and the Bank of
Canada's prevention of any increase in the
money supply since October 1958.
At mid-June 1959 the bill rate reached
nearly 5
lA per cent, and yields on other
short- and intermediate-term Government
UNITED STATES
INTIMST DATES
LONG - IERM GOVT.
CANADA
INTEREST
P*r cent
— IONG -
' DISCOUNT
/^
• ATES
tlKM Govr .
*"•* r
1
Inf ¥
i i i
- 2
INDUSTRIAL
TV S 3 : 100
PRODUCTION
r ^\
+^s~*—\ ~v \
UNITtD STATES
1
CANADA
/
1
- 120
NOTE.—United States: Long-term government, monthly aver-
ages of daily yields on fully taxable, marketable bonds matur-
ing or callable in 10 years or more; Treasury bills, monthly
average market yields on 90-day issues. Canada: Long-term
government, monthly averages of weekly quotations on 3%
per cent bonds maturing in 1978; Treasury bills, average of
weekly quotations on 3-month issues.
Industrial production seasonally adjusted. Federal Reserve
index for the United States; Bank of Canada index, converted
to 1953 = 100, for Canada.
Latest figures: June, except industrial production for Canada
(April).
Federal Reserve Bulletin: July 1959690 FEDERAL RESERVE BULLETIN • JULY 1959
securities ranged from 5Vz to 5
3A per cent.
The increase in the Treasury bill rate pushed
the Bank of Canada's discount rate, which
is set every week automatically one-fourth of
one per cent above the average tender on
bills, to a record of nearly SVz per cent.
Later in June the bill rate dropped slightly,
and in early July it stood at about 5 per
cent.
WEST EUROPE
Interest rates in West European markets fell
until the spring of 1959, continuing declines
that began in late 1957 or early 1958. In
several countries the decline came after the
restoration of financial stability. Easing of
domestic demand pressures and the strong
balance-of-payments positions of most Euro-
pean countries increased liquidity in finan-
cial markets.
Industrial production in most West Euro-
pean countries did not exceed previous peak
levels during most of 1958. Reduced in-
vestment spending by business led to a de-
cline in corporate security offerings. Efforts
to adjust inventories to declines in sales, or
at least to less rapid increases, reduced de-
mands for short-term credit. However, pro-
duction turned upward before the end of the
year. In 1959 the upswing gained mo-
mentum in many countries, and carried pro-
duction to new highs.
Most West European countries had large
surpluses in their over-all balances of inter-
national payments in 1958. Lower imports
and well maintained exports, as well as cap-
ital inflows, increased their net receipts from
abroad. Acquisitions of foreign exchange
by central banks and Governments led to
increased market liquidity.
In order to expedite the upturn in eco-
nomic activity, central banks responded to
the easing in financial markets in 1958 by
further relaxing credit restrictions and lower-
ing discount rates. Declines in long-term
rates, however, have been limited in many
countries by the continuing strength of
private and Government demands for long-
term funds. In recent months the resump-
tion of a more rapid upswing in economic
activity has been accompanied by a stop-
page, and in many countries a reversal, of
the decline in interest rates.
United Kingdom. Continued decline in
short-term rates in 1958 from the peak
reached during 1957 reflected increased
liquidity in the United Kingdom. In mid-
1958, measures to promote business expan-
sion included elimination of ceilings on com-
mercial bank loans, removal of instalment
UNITED KINGDOM
INTIRESf BATES
Pwcmt
_
": 3 A PER
DISCOUNT
CENT WAR
RATE
i
LOAN
i""* 1
TREASURY
:
BILLS
INDUSTtlAl MODUCTION
110
too
1955 1957 1959
NOTE.—Bank of England data for monthly average yields,
based on daily figures for 3Yi per cent War Loan and weekly
tenders for 3-month Treasury bills. Industrial production sea-
sonally adjusted, from Central Statistical Office. Latest figures:
June, except for production (May).
Federal Reserve Bulletin: July 1959INTEREST RATES IN LEADING COUNTRIES 691
credit controls, and liberalization of controls
on capital issues. A rapid rise in bank loans
followed, particularly in loans to individuals
and to sales finance companies.
The Bank of England discount rate was
reduced in several steps from 7 per cent in
March 1958 to 4 per cent in November, as
shown in the chart on the preceding page. In
June 1959 Treasury bill rates stood at about
3.45 per cent, 0.35 percentage point higher
than the lows of early 1959.
Rates on long-term Government securities
have changed little since mid-195 8; in June
1959 they were only about 0.6 percentage
point below the 1957 high. The yield on
Consols was nearly 4.9 per cent in June,
while yields on other long-term Government
bonds were about 5.3 per cent. The Gov-
ernment sold substantial amounts of bonds
to nonbank investors during 1958 and has
announced its intention to continue its policy
of keeping bond yields attractive to private
investors.
France. After several years of inflation,
France has moved to economic stability,
having reinforced anti-inflationary measures
twice in 1958 and devalued the franc by 15
per cent at the end of the year. Interest rates
in the spring of 1959 were well under the
levels of a year earlier.
Rates on long-term Government bonds
declined by 1% percentage points to less
than 5V^ per cent between May 1958 and
March 1959, and rose slightly thereafter.
Day-to-day money rates fell from an aver-
age of more than 10 per cent in May 1958
to about 4 per cent in May 1959, as shown
in the accompanying chart. In October 1958
the Bank of France lowered both the basic
discount rate and the penalty rates for dis-
counts exceeding the established ceilings.
FRANCE
INTIttST lATIf
Per cent
LONG-TERM
GOVT.
DAY-to-DAY MONEY. DISCOUNT RATE
INDUSTRIAL PRODUCTION
- iaa
19S5 1957
NOTE.—Long-term government, average yields based on end-
of-month data for various maturities, excluding indexed bonds,
from Institut National de la Statistique et des Etudes Eco-
nomiques. Day-to-day money, end of month; beginning with
19S7, rates on advances based on private securities.
Industrial production seasonally adjusted, from Organization
for European Economic Cooperation.
Latest figures: Discount rate, June; day-to-day money, May-
other series, April.
Further reductions in February and April
1959 brought the basic discount rate to 4
per cent. Many commercial rates, which are
usually set with reference to the discount
rates, declined as a result of these changes.
Germany. Rates on new issues of long-
term fixed-interest securities in the German
market have fallen about 3 percentage points
since mid-1958, as shown in the chart on the
following page. In April 1959 a 5 per cent
bond issue of the International Bank for Re-
construction and Development was floated in
Germany at par; domestic bonds have been
issued at slightly higher yields. Long-term
rates on new issues in recent months have
been close to those of other leading coun-
tries.
Federal Reserve Bulletin: July 1959692 FEDERAL RESERVE BULLETIN • JULY 1959
Treasury bill rates have declined from
3VA per cent to 2 per cent since early 1958.
The German Federal Bank lowered the dis-
count rate in three steps to 2-24 per cent. In
the spring of 1959, most short-term rates
were below those in many other leading
countries.
The decline in long-term rates has re-
flected a continuing rise in private savings
and a greater willingness to invest them at
long term. Falling short-term rates have
made investment in long-term securities
more attractive. The Federal Bank en-
couraged the decline in interest rates pri-
marily in order to discourage the inflow of
foreign funds and thus to moderate further
increases in liquidity and at the same time to
facilitate Germany's transition from a capital
importing country to a capital exporting
country.
GERMANY
INTEREST RATES
Per cent
LONG-TERM BONDS '*'.
DISCOUNT RATE
INDUSTRIAL PRODUCTION
1955 1957 1959
NOTE.—German Federal Bank data. Rates on long-term
bonds represent yields on new issues. Treasury bills, rates on
latest 60- to 90-day issues in month.
Industrial production, Federal Statistical Office (with sea-
sonal adjustment and conversion to 1953 = 100 by Federal Re-
serve).
Latest figures: June, except long-term rates (April) and pro-
duction (May).
Federal Reserve Bulletin: July 1959

Interest rates in leading countries

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Interest rates in leading countries

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Research Papers in Economics