Fiftieth Anniversary of the Federal Reserve System -- Immediate

resistance to further markups developed and prices eased yield 4.967per cent and are not refundablefor eight years, back from the higher levels reached in January. Over the were well received. New tax-exempt bond flotations in period as a whole, the average yield on Moody's seasoned February totaled approximately $740 million, as against Aaa-rated corporate bonds declined by 2 basis points to $915 million in January 1964 and $710 million in Feb- 4.35 per cent and the average yield on similarly rated tax- rualy 1963. The Blue List of tax-exempt securities ad- exempt bonds rose by 1 basis point to 3.09 per cent. vertised for sale rose by $124 million to $633 million The total volume of new corporate bonds reaching the on February 28. The largest new tax-exemptbond issue market in February amounted to approximately $270 mil- marketed in February was a $100 million Aa-rated issue lion, compared with $335 million in the preceding month of state water bonds. Reoffered to yield from 2.85 per and $275 million in February 1963. The largest new cor- cent in 1973 to 3.625 per cent in 2012, the bonds at- porate bond flotation marketed during the month was a tracted broad investor demand and were quickly sold. $75 million Baa-rated issue of sinking fund debentures Other new corporate and tax-exempt bonds floated in maturing in 1992. The debentures, which were offered to• February were accorded mixed receptions by investors.

Fiftieth Anniversary of the Federal Reserve System— !• Immediate Origins of the System .j.

In the decades prior to the establishment of the Federal rency from New York, moreover, banks would withdraw interestrates would rise lR Reserve System, it became increasingly apparent that the funds from stock market financing, of stocks and bonds country's financial system failed to meet fully the needs of to extraordinary levels, and prices -4- a These shortcomings were most dra- would drop sharply. growing economy. conditions revealed in "money panics". The nation experienced some or all of these matically fairly frequent each New York was the fulcrum of the banking system in 1873, 1884, 1893, 1901, 1903, and 1907, but City the last led to minor operating under the National Bank Act. Many out-of- occurrence except only legislative with banks, changes. In 1907, the economy was in a recession and town banks kept large deposits New York 'p. were downward. over much of the which in turn employed a large part of these funds in stock prices trending seasonal demand for currency and credit stock market call loans. In most seasonal currency year. As the ;•n. years, trust in withdrawals from the New York banks duringthe autumn built up at crop-harvesting time, a large company difficulties and opera- harvest time were met without major difficulty. Occa- New York experienced suspended 23. Runs on two other New 'Ii sionally, however, the withdrawals were so great or came tions on October developed In the York trust companies, and correspondentbanks stepped 'dr. at such a time that they triggered a money panic. from nationalbanks. The of "lender of last resort", the New York banks, up their withdrawals of currency absence a from New York banks to the rest demands for currency—which consti- net losses of currency undergoing heavy the increased fourfold over seasonal norms tuted their required reserves against demand de- of country legally October and remained at peak levels through No- posits—would restrain withdrawals by their correspondent during for vember. New York banks strongly discouraged or even banks. Failure by out-of-town banks to meet demands the cur- rationed currency payments to correspondents, and cash would then often follow. With the outflow of followed. Call usual widespread disruption of payments loan rates at one point were reported at 125 per cent per markets annum, and price declines in the securities duringthe * The third in a series of historicalvignettes appearing worsenedrapidly. System's anniversary year.

.1 62 MONTHLY REVIEW, MARCH 1964

Eventually, the panic was stemmed. Gold flowed in emergency currency to stem panics had been providedin from abroad, partially reflecting a balance-of-trade un- the Aldrich-Vreeland Act. This act of Congress also provement and higher interest rates. Treasury deposits of established the National Monetary Commission, to consist currency in New York banks reduced the pressure on the of nine Senators and nine Representatives, for the purpose central money market. Clearing houses served as self- of examiningthe monetary and banking systemand report- assistance groups for local banks by placing the credit of ing on needed changes. The monumental study of this com- the group behind each member.Nevertheless, in New York mission (twenty-four volumes of published material) and City alone three nationalbanks, eight state banks, and four its recommendationsfor a central banking system became trust companies, with total deposits and other liabilities of —in a greatly modified form—the basis for the Federal about $110 million, had eitherfailed or temporarily sus- Reserve Act of 191.3 which was "to furnish an elasticcur- pended operations. rency, to afford means of rediscounting commercial paper, The panic of 1907 spurred serious study of the basic [and] to establish a more effective supervision of banking problem. By May 30, 1908, a means of creating an in the United States".

ANNUAL REPOR1—L903 The FederalReserve Bank of New York has just published its forty-ninth Annual Report, which re- views the economic and financial developments of 1963. The Report discussesthe shift toward less ease in monetary policy last year and relates this shift to domestic economic developmentsand the balance of payments. The broadening and strengtheningof in- ternationalfinancial cooperationis also discussed. Ma- jor attention is devoted to the economictasks that lie ahead at home and in the internationalarena. Copies of the Annual Report are available from the Public Information Department, Federal Reserve Bank of New York, 33 Liberty Street,New York, N.Y. 10045.