Chapter 5 Developments in the Industrial Countries
Author: International Monetary Fund
Language:
English
Keywords:
AR; AREA; sc; balance of payments position; debt management policy; bank liquidity; credit squeeze; balance of payments repercussion; Wages; Securities markets; Discount rates; Wage adjustments; Income; Europe
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Abstract

IN international financial relations, 1964 was marked by somewhat greater strains than had been experienced for some time. This was in contrast to the immediately preceding years, during which the structure of international payments had appeared on the whole to be improving. The strong pressures on the lira in March, and on sterling in November 1964—both of which were allayed by drawings on the Fund and by support from central banks and other financial institutions—were dramatic symptoms of these strains. Another was the activation of the General Arrangements to Borrow.

IN international financial relations, 1964 was marked by somewhat greater strains than had been experienced for some time. This was in contrast to the immediately preceding years, during which the structure of international payments had appeared on the whole to be improving. The strong pressures on the lira in March, and on sterling in November 1964—both of which were allayed by drawings on the Fund and by support from central banks and other financial institutions—were dramatic symptoms of these strains. Another was the activation of the General Arrangements to Borrow.

A general climate of prosperity continued to prevail in the industrial countries, but there were indications after mid-year that, while still strong, the expansionary forces in the world economy were not as powerful as they had been earlier. The very high rate of growth in world trade prevailing in 1963 and the early part of 1964 showed a tendency to moderate, as the rate of growth of imports of several industrial countries was slowing down. The measures taken by the United Kingdom to protect its balance of payments position, together with the less direct policies of restraint adopted by the United States, may accentuate this deceleration. Moreover, while the year witnessed an intensification of efforts in a number of countries to contain upward pressures on wages and prices, there was some relaxation toward the end of the year in the financial policies that several major countries had been following.

One significant corollary of the policies followed by individual countries to protect their balance of payments positions or to maintain domestic stability was a generally upward drift in the structure of interest rates. Some rates of international importance rose to levels which were quite high by the standards of the present century. Further, the narrowing of the spreads between rates in different countries, which seemed to be apparent early in the year, was replaced by a growing divergence in later months.

Production, Wages, and Prices

In most of the industrial countries, output continued to expand during 1964 at rates comparable to, even if somewhat less than, those prevailing in 1963 (Chart 3 and Table 6). In the United States, economic expansion continued for the fourth year in succession; but there was no further acceleration in the rate of advance. While unemployment declined, labor force time lost through unemployment and part-time work stubbornly remained above 5 per cent. On the other hand, the rise in output in the United Kingdom was quite small until late in 1964, when there was a marked advance; unemployment continued to decline. In Japan, where the rise in output in 1963 had been greater than elsewhere, the rate of advance decelerated during 1964 as a result of measures mainly directed toward protecting the balance of payments. For the European Economic Community as a whole, the index of industrial production has hardly risen since the first quarter of 1964, but there have been marked differences between individual countries (Chart 4). In the course of 1963, the main forces of expansion were operating in France and Italy. The excessive demand pressures in both these countries, which stimulated a rapid rise in domestic output but also appeared to threaten price stability, spilled over into Germany, where they contributed significantly to an acceleration of the rise in output. In Italy, where these developments had led to a major balance of payments deficit, measures were introduced progressively after May 1963 to restrain inflationary forces and to redress the balance of payments. These effectively restricted domestic demand and, in spite of a sharp rise in exports, brought about a slowdown in economic activity and a dramatic fall in imports. In France, measures to curb excessive domestic demand similarly resulted in a slowdown; industrial production in that country fell in the third quarter of 1964 below the level reached in the last quarter of 1963. On the other hand, the upswing in Germany continued with increased vigor in 1964 and through the balance of payments helped, in turn, to moderate the slowdown in Italy and France. Where output continued to expand rapidly, domestic demand usually provided the main stimulus. Investment demand was particularly strong in Germany. Elsewhere, both investment and consumption have been exerting upward pressures.

Chart 3.
Chart 3.

Selected Areas and Countries: Industrial Production, Seasonally Adjusted, 1961–April 1965

Chart 4.
Chart 4.

Selected Countries of the European Economic Community: Industrial Production, Seasonally Adjusted, 1961–April, 1965

Table 6.

Gross National Product at Constant Prices: Percentage Increases from Quarter to Quarter, 1962–First Quarter 1965

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Not seasonally adjusted.

Gross domestic product.

The situation at the end of 1964 and early in 1965 was rather unclear, as shown by Table 7. A comparison of quarter-to-quarter changes in industrial production during this period is made difficult by the effect of strikes, the possibility of a major steel strike in the United States, and some statistical problems of measurement (e.g., the one apparent in the French series). The data in the table show that output in a number of industrial countries was continuing to rise; yet, with the exception of the United States, the increases in the fourth quarter of 1964 and the first quarter of 1965 were less than in the corresponding quarters of 1963 and 1964, respectively.

Table 7.

Industrial Production: Percentage Changes from Quarter to Quarter, 1962-First Quarter 1965

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The general upward movement of wages persisted, particularly in continental Western Europe (Chart 5). Increases were especially rapid in the Netherlands, where the wage rate index for the fourth quarter of 1964 was 18 per cent above that for the comparable period in 1963. However, this overstates the increase in actual wage rates because in 1963 the so-called black wages, paid in addition to the rates set by collective bargaining, diminished. The wage agreement made late in 1964 envisaged a rise in wage rates of 5 per cent in 1965. Italy also experienced strong wage pressures, which, in combination with the slackening in the rate of advance, undoubtedly led to a marked increase in labor costs per unit of output; there are, however, signs that these pressures are now declining. Rising productivity, particularly in industry, appears to have offset the effect of rising wages on costs in Japan and Germany (Chart 6), but in Germany wages rose more than 7 per cent in the first half of 1965 over the first half of 1964, and this may endanger the stability of wage costs. In Canada and the United States, wage rates have continued to rise only slowly. Although some recent labor contract settlements in the United States have involved increases in hourly labor costs (including the effects of benefits other than higher wages) in excess of the “guideposts” outlined in the 1962 Annual Report of the Council of Economic Advisers, average labor costs per unit of output in manufacturing have thus far shown little change. In the United Kingdom, the authorities are concerned at the size of recent wage agreements although they realize that it will be some time before such agreements can be made consistent with government policy on incomes and prices as set out in a White Paper in April 1965.

Chart 5.
Chart 5.

Selected Areas and Countries: Wage Rates, 1961–April 1965

Chart 6.
Chart 6.

Selected Countries: Wage Costs per Unit of Output in Manufacturing, 1961–64

These domestic pressures, together with some increase in import prices (Chart 7), contributed in 1964 to a continuation of the upward movement of prices. Changes in wholesale prices largely reflect changes in wage costs (i.e., the effect of rising wage rates offset by rising productivity). For this reason, wholesale prices moved upward in Europe more slowly than wages, and they continued to be remarkably stable in the United States and Canada (Chart 8). Only in Japan (where wage costs in manufacturing have been tending to fall) was there evidence of a downward movement. Cost of living indices, which are more responsive to changes in wage rates, continued to rise somewhat more rapidly than wholesale prices (Chart 9). This increase was greatest in Italy and the Netherlands; rising money wages also contributed to a rather rapid increase in Japan. U.S. and Canadian export prices, on the whole, remained stable, but for the first time in several years there was a marked rise in the index for the EEC countries (Chart 10).

Chart 7.
Chart 7.

Selected Areas and Countries: Import Prices, 1961–First Quarter 1965

Chart 8.
Chart 8.

Selected Areas and Countries: Wholesale Prices, 1961–April 1965

Chart 9.
Chart 9.

Selected Areas and Countries: Cost of Living, 1961–April 1965

Chart 10.
Chart 10.

Selected Areas and Countries: Cost of Living, 1961-April 1965

Incomes Policies

The fairly strong pressures on costs encountered in a number of countries in 1964 led to continued interest in the development of incomes policies, i.e., policies intended to ensure that the rate of increase of money income per capita should not outstrip the rise in average productivity per capita over the economy as a whole. The increasing integration of national economies makes it of growing importance that rises in domestic prices and costs, such as wages, remain in line with those in competing countries. At the same time, wages and other costs cannot be kept below international levels, as is evidenced by the strong pressures in the Netherlands, which contributed to the recent marked increases in wages there. Furthermore, no incomes policy can be maintained unless accompanied by appropriate financial policies.

Progress during 1964 and the early part of 1965 toward the effective implementation of incomes policies was essentially limited to the development of institutional arrangements in the United Kingdom. These arrangements, which were set out in a White Paper published in February 1965, may be regarded as a prerequisite for further progress. Changes in wages and prices will be reviewed from time to time by the National Economic Development Council, assisted by government departments (which will in practice supply most of the necessary statistical data). The review of specific cases is to be the responsibility of a National Board for Prices and Incomes, comprising two divisions dealing, respectively with prices and with incomes. This Board, which was set up in April 1965, replaces the National Incomes Commission. The Government will retain direct responsibility for all cases referred to the Board, whether such referrals are made at the request of one or both parties involved, or of individuals, or on the initiative of the Government itself. The White Paper states that the Government will give the voluntary method every opportunity for success, but that it may resort to other methods if it becomes convinced that the voluntary method has failed. In particular, it will use its fiscal powers or other appropriate means to correct any excessive growth in aggregate profits, compared with the growth of the total of wages and salaries.

In a number of other countries, the vital task of persuading both sides of industry and other sectors of the economy of the need for an incomes policy has been undertaken. This, in itself, represents an important step toward the implementation of a policy. However, the specific policies to be followed have as yet been enunciated only in the most general terms. It is still too early to judge whether these developments will prove to be effective in countering cost inflation.

Financial and Other Policy Developments Before November 1964

Discount Rates

The most obvious sign of increasing financial restraint in some industrial countries is to be found in the rather general upward movement of central bank discount rates (Chart 11), the following changes being made prior to November:

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These increases, together with the maintenance of relatively low rates in Italy, Germany, and the United States, served to widen the spread between central bank rates which had been narrowing during 1963.

Monetary and Debt Management Policies

In many respects, the upward shifts in European discount rates and their stability in the United States and Canada were symptoms of the somewhat disparate monetary, debt management, and fiscal policies followed during the year. These in turn reflected the disparate positions of the two areas. There was continued economic progress in the United States during the first part of 1964, leading to a rising demand for investment resources, but tax reductions and rising business and personal savings would probably have led to a decline in interest rates. This would have accentuated the undesirable balance of payments repercussions to which the rising interest rates and reduced credit availability abroad already tended to lead. Consequently, the authorities made policy adjustments that served to maintain a marked stability in the structure of rates (Chart 12). The free reserves of the commercial banks were kept relatively low, and debt management was directed to a lengthening of the average maturity of the government debt, so that the demand for securities by nonbank holders was satisfied, with very little change in bond prices.

Chart 11.
Chart 11.

Selected Countries: Central Bank Discount Rates, 1961-April 19651

(In per cent per annum)

1 Data for end of quarters, 1961-62; for end of months, 1963-65.
Chart 12.
Chart 12.

Term Structure of Interest Rates

(In per cent)

In the United Kingdom, the authorities adopted policies in the early part of 1964 aimed at limiting the expansion of output to a rate which they believed could be sustained in the longer run.

The increase in the bank rate from 4 per cent to 5 per cent in February 1964, and the policies of debt management pursued, served to raise the yields on government securities, particularly at the short end of the range. Monetary policy was intended to permit only a moderate increase in bank lending, but bank advances rose by 14 per cent in the 12 months ended in November. There were some declines in the banks’ holdings of Treasury bills and British Government stocks.

In Italy and Japan, pressures on the balance of payments had led to a tightening of monetary policies late in 1963 and early in 1964, as reviewed in last year’s Annual Report. These policies were continued and in both countries contributed to a change from deficit to surplus in the current account and to a moderation of the pace of wage and price increases. In March, Italy made an additional swap agreement with the U.S. Treasury, arranged for credit facilities with other U.S. agencies and with European central banks, and some weeks later drew the equivalent of $225 million from the Fund. The facilities thus mobilized totaled approximately $1 billion. One important effect of the restrictive policies was a slowing down of the pace of industrial activity and a consequent relaxation of policies, starting in May.

Belgium, Denmark, Japan, the Netherlands, Sweden, and Switzerland increased their discount rates, and, with France and Germany, took other steps to restrict the liquidity of the commercial banks or to restrain the expansion of credit by them. On previous occasions, rising interest rates following restrictive changes in monetary policy have induced inflows of foreign funds which have served to augment the banks’ liquidity and hence to offset the effects of monetary policy. For this reason, Denmark, Germany, Italy, Japan, and the Netherlands, among other countries, put limits on the increases of banks’ foreign indebtedness or made provision for the neutralization of bank liquidity arising from this source. The Swiss National Bank established a new type of short-term security that it hoped would provide a basis for a domestic money market. Hitherto, the Swiss banks have held most of their liquid assets in the form of money-market balances in financial centers outside Switzerland, which has resulted in periodic movements of short-term funds occasioned by the banks’ seasonal needs to obtain cash at the National Bank. It is hoped that the availability of this rather attractive new security, will eliminate or reduce these movements.

Fiscal Policy

A number of countries also made use of fiscal policy as an instrument of general economic policy. In the United States, the most important fiscal change was the reduction in income and corporation taxes approved in February, which will result in reductions of $14 billion in tax liabilities in 1965. However, reductions in certain expenditures and the favorable effect of rising national income on government-revenue and expenditure have served to limit the effect of reduced tax rates on the Government’s cash deficit. In the United Kingdom, the fiscal outturn for the first half (April to September 1964) of the new financial year was considerably more favorable than had been expected from the estimates. Fiscal policy in Italy continued to be restrictive for a period after the pressures of monetary policy had been eased. In the Netherlands, the authorities tried to limit the growth of some categories of public expenditure by postponing investments and by imposing ceilings on long-term borrowing by local authorities who were already subject to ceilings on short-term borrowing. In Belgium, to counter inflationary pressures, the rising trend of government current expenditures was curtailed and some investment expenditures were postponed. There was a dramatic improvement in the budgetary situation in France. Expenditures rose at a slower rate than revenues, and revised estimates for the 1964 budget indicate an over-all deficit of F 850 million, compared with an original estimate of F 4,740 million. The 1965 estimates submitted by the Government envisaged a balanced budget for the first time in decades.

Subsequent Events

The Problems

From early in 1964, sterling was under intermittent pressure (Chart 13) and the United Kingdom had recourse to outstanding credit arrangements with the Federal Reserve Bank of New York, and to facilities arranged in September with the central banks of Belgium, Canada, France, the Federal Republic of Germany, Italy, the Netherlands, and Switzerland. In the fortnight of November 16-27, there was a large increase in the flow of international capital, particularly from the United Kingdom. This was associated with a loss of confidence and erratic movements in the international money markets. Not only did exchange rates move sharply, but wide spreads developed between comparable interest rates, even after allowance is made for the effects of forward cover (Charts 14 and 15). As the speculation continued, the central banks referred to above, together with those of Austria, Japan, and Sweden, the Bank for International Settlements, and the Export-Import Bank of Washington entered into arrangements with the United Kingdom, whereby the equivalent of $3 billion was made available to defend the parity of the pound. Early in December, the United Kingdom drew the full amount ($1 billion) of its outstanding stand-by arrangement with the Fund, using this, inter alia, to repay the credits arranged in September. These mainly short-term operations were designed to provide a breathing space during which more fundamental steps could be taken to correct the underlying disequilibrium. On February 10, it was announced that the November credits had been prolonged, and on May 25 the United Kingdom drew from the Fund the equivalent of $1,400 million, primarily to repay outstanding central bank credits. In connection with the two U.K. drawings, a total equivalent to $930 million was obtained by the Fund under the General Arrangements to Borrow, and the equivalent of $650 million by the sale of gold to members.

Chart 13.
Chart 13.

Selected Countries: Exchange Rates, 1961–April 19651

1 The premium or discount shown for each currency except the dollar is the difference between its premium or discount from par against the dollar and the average of the premiums or discounts against the dollar of the other members of the General Arrangements to Borrow and Switzerland. For the dollar, the discount is the inverse of the average of the premiums or discounts of the other ten currencies.
Chart 14.
Chart 14.

Covered Short–Term Interest Rates, 1961–April 1965

(In per cent)

Chart 15.
Chart 15.

United Kingdom: Term Interest Differentials, 1963–April 1965

(In per cent per annum)

Changes in Policy

As early as October 25, the new U.K. Government had announced that it was taking steps to meet its balance of payments difficulties. On November 11, the Government introduced measures imposing a temporary charge of 15 per cent on most imports other than foodstuffs, unmanufactured tobacco, and basic raw materials, and providing for rebates of indirect taxes averaging 1.9 per cent of the value of exports. The surcharge was reduced to 10 per cent from April 27, 1965. A number of tax increases were also announced in November.

The announcement of these measures did not serve to prevent a further outflow of capital. Consequently, on November 23, the bank rate was raised from 5 per cent to 7 per cent; interest rates rose sharply and have remained high (Chart 16). To make the “credit squeeze” more effective, on December 8 the Governor of the Bank of England requested the banks and other financial institutions to limit advances for purposes other than exports and productive investment in manufacturing. Advances by the London clearing banks, seasonally adjusted, declined in January and February 1965 but turned upward again in March and April; on April 29, a call for special deposits by the domestic banks with the Bank of England was announced (for the London clearing banks the amount called was equivalent to 1 per cent of deposits). The Governor of the Bank of England asked the banks to limit the expansion of credit to 5 per cent in the 12 months to March 1966; he also requested a comparable degree of restraint from other financial institutions. The budget statement of April 6 outlined the Government’s plans for restoring a balance in external payments by the second half of 1966. Its two key points were that, by the early months of 1966, the Government intended to reduce the pressure on resources by £250 million at an annual rate, and to reduce, by changes in the exchange controls, the outflow of long-term capital by at least £100 million at an annual rate. On June 3, the bank rate was lowered to 6 per cent, but the other elements of financial restraint remained in force, and hire-purchase regulations were tightened.

Chart 16.
Chart 16.

Selected Countries: Long–Term Government Bond Yields, 1961–April 1965

(In per cent per annum)

The deterioration of the structure of international payments during November 1964 induced a further general rise in interest rates. Immediately after the increase in the Bank of England discount rate, the discount rates of the Federal Reserve Banks in the United States were raised from 3.5 per cent to 4.0 per cent, and the ceilings on interest rates payable on savings and time deposits with commercial banks in that country were raised. These steps were taken to offset the attractiveness of foreign short-term rates for internationally volatile funds. The Bank of Canada responded to the rise on November 23 in the U.K. bank rate and the Federal Reserve discount rate by increasing its bank rate from 4.0 per cent to 4.25 per cent later the same day. The Sveriges Riksbank’s rate had been raised from 4.5 per cent to 5.0 per cent on November 6. These various measures served to push some rates, particularly the Euro-dollar rate, to markedly higher levels. Throughout the early part of 1965, the Federal Reserve maintained rather tight bank liquidity positions. During this period, also, the U.S. Government proposed a two-year extension of the Interest Equalization Tax, its broadening to cover bank credit with maturities of one to three years, and its extension to cover nonbank credit. The Government also appealed for a program of voluntary restraint on international lending operations by U.S. financial institutions and other businesses. On January 22, the Bundesbank raised its discount rate from 3 per cent to 3.5 per cent in order to counteract persistent excessive demand and the danger of price increases. As a consequence, the high cost of domestic short-term finance prevailing at the end of 1964 was pushed even higher.

France, Italy, and Japan were the most important countries to show signs of moving against this tide. From October, public sector investment in Italy has been increased, in order to encourage a renewal of economic growth, and interest rates have been declining. The Japanese authorities, faced with an improved balance of payments position based on rising exports, turned to more expansionary policies in order to impart a new impetus to economic expansion. The reserve requirements for bank deposits other than time deposits were cut in half, returning them to their level in December 1963. The Bank of Japan’s discount rate was lowered on January 9 from 6.57 per cent to 6.205 per cent, and on April 3 to 5.84 per cent. On April 8, the Bank of France’s discount rate was reduced to 3.5 per cent. It is possible that these changes may indicate that the general levels of international interest rates have passed their peaks. In February and March, rates in several countries were lower than they had been in the immediately preceding months.

Foreign Exchange Markets

Whereas 1963 could be described as a year of relative calm in the international exchange markets, 1964 and the early part of 1965 covered a period of fairly severe stress. In March, the lira was under heavy pressure. In the second half of the year, sterling was generally weak; and after a temporary recovery early in 1965 it suffered a second setback, which was not overcome until after the budget statement in April. Early in 1965 the dollar also weakened, but this tendency was reversed by the announcement of the new balance of payments program. Together, these movements provide the main explanation for the apparently rather erratic changes in the quotations for other currencies, which tended to be the inverse of those of the two reserve currencies. Sharp movements in rates in November provided the most dramatic events in the markets in 1964.

In part, these movements in exchange rates were associated with rather considerable changes in foreign nonofficial sterling holdings (Chart 17) and dollar balances (Chart 18). It is possible that the high interest rates prevailing in the Euro-dollar market may well serve to make these tendencies persist by acting as an attraction for the transfer of foreign bank and other nonresident balances from the United States to Europe while remaining denominated in dollars.

Chart 17.
Chart 17.

U.K. External Sterling Liabilities, 1961–March 1965

(In billions of pounds sterling)

Development of Securities Markets

Last year’s Annual Report drew attention to the desirability of improving the structure of securities markets in Europe, partly to make easier the role of capital movements in facilitating balance of payments adjustment. There has been little integration of the individual European capital markets, although the problem is being intensively studied.

As indicated in Table 8, the total issues of new securities on markets other than those of the borrowing country were slightly higher in 1964 than in 1963; and in the early part of 1965 these offerings for other borrowers continued at close to their 1964 levels. The increase in 1964 was the product of substantial offerings in the United States and Germany, and increases in other important markets (see Table 9), of which London (where total new offerings of sterling and foreign currency securities rose from the equivalent of $280 million to $583 million) and Germany were the most important. The international market has been dominated by Canadian and European issues, although Japan, Australia (in 1963), and some European countries have also been important participants, as indicated in Table 10.

Chart 18.
Chart 18.

U.S. International Liquid Liabilities, 1961–March 1965

(In billions of U.S. dollars)

Tables 8 and 9 illustrate an important development during 1964: the increase in issues in currencies other than those of the markets where issued, referred to as foreign currency issues. These included all those made in Luxembourg, a large proportion of those in London, and a small proportion of those in New York.

Table 8.

Issues of Securities on Markets in Countries Other than That of Borrower

(In millions of U.S.dollars)

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Including issues denominated in external sterling and issues made optionally in London or Luxembourg. Excluding two issues made optionally in deutsche mark.

All issued in Luxembourg.

The effects of the U.S. Interest Equalization Tax, from the date (August 1963) of its impact on the New York market (the most important international center for the issue of long-term securities) were quite important. While the total value of foreign new issues in the United States was somewhat less in 1964 than in 1963, the main effect of the Tax, as indicated in Table 11, was to reduce the issues by borrowers from European countries (except Finland, to which the Tax does not apply) and Japan, but to make the New York market relatively more favorable for borrowers from the developing countries. It is to be expected that the program of voluntary balance of payments restraint announced in February 1965 will intensify this tendency, even though the height of European interest rates (e.g., the Euro-dollar rates) might encourage European borrowers to raise funds on the New York market. In 1964, the decline in foreign issues was more than offset by an increase in bank loans to borrowers who might otherwise have floated long-term bonds, but in February 1965 the Tax was also applied to bank loans for one year or more.

Table 9.

Foreign Issues of Securities in Currency of Market Where Issued

(In millions of U.S. dollars)

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Fund estimate.

Including Shell Funding Corporation, $115 million.

See footnote 1 to Table 8.

Table 10.

Amounts Raised by Issues of Securities on Markets in Countries Other than That of Borrower, 1963–March 1965

(In millions of U.S. dollars)

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Including $115 million for Shell Funding Corporation in New York.

In March 1964, Germany announced its intention of altering its tax policies, to bring them more into line with general practices, by imposing a 25 per cent withholding tax on remittances of interest to foreign holders of German fixed-interest securities. This had the prospective effect of reducing substantially the net yield on German securities held by foreigners who were unable to obtain relief under double taxation agreements. The announcement led to a sharp fall in the foreign demand for German securities. The tax took effect from July 1, 1965. It does not, however, apply to the income from foreign securities issued in the German market (a large proportion of which are normally purchased by foreign investors); this should assist in the development of an international capital market there. Meanwhile, early in May, the persistence of strong demand for capital pushed the yield on government bonds to 7 percent.

Table 11.

Sales of New Issues by Foreign Borrowers in the United States1

(In millions of U.S. dollars)

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Source:U.S. Department of Commerce, Survey of Current Business.

Purchases by U.S. residents, i.e., excluding purchases by non-U.S. residents of foreign issues in New York, included in Tables 9 and 10.

A second important change in the German securities market was the abolition, with effect from January 1, 1965, of the 2.5 per cent tax on all new issues; while the major part of German bond issues were already exempt from the tax, issues on behalf of industry and foreigners were not. The removal of the tax will, therefore, tend slightly to offset the high cost of borrowing in German markets. In fact, foreign issues in the German bond market increased from the equivalent of $45 million in the first four months of 1964 to $146 million in the first four months of 1965, of which the largest share was sold to nonresidents.

In addition to the foregoing changes in the international securities markets, a number of changes have been introduced in national markets with the intention of making those markets more accessible for purely domestic issues. Attempts are being made—e.g., in France, Germany, and Italy—to improve the operation of the local securities markets so as to stimulate investor interest and attract funds. In Italy, insurance companies are now permitted to invest a proportion of their reserves in long-term private securities, and a law has been passed permitting the establishment of investment trusts. These steps, taken to widen the base of investment in the market, may lead to greater stability of security prices. In France, the tax on income from dividends was modified to increase the effective yield of shares. There was also an easing of the tax on capital gains. In the United Kingdom, the imposition of such a tax may work in the opposite direction, although the existence in the United States of a tax on capital gains has not deterred the growth of securities markets. The reform of company law in Germany should strengthen the position of shareholders and thereby increase interest in the acquisition of shares. A new law in Italy, granting tax benefits to companies planning to merge, is likely to lead to a series of amalgamations and an increase in the average size of companies. A projected change in the law governing companies in France would also facilitate company mergers. And, of course, larger companies tend to rely rather more heavily on the new issue market than is typical of smaller companies. These developments will add to the importance of the measures described above to strengthen the domestic securities markets in some of the leading European countries.

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Cover International Monetary Fund Annual Report 1965
International Monetary Fund Annual Report 1965
Author: International Monetary Fund
ISBN:
9781616351779
ISSN:
2227-8915
Publication Date:
01 Sep 1965
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781616351779.011
Pages:
174
  • View in gallery

    Selected Areas and Countries: Industrial Production, Seasonally Adjusted, 1961–April 1965

  • View in gallery

    Selected Countries of the European Economic Community: Industrial Production, Seasonally Adjusted, 1961–April, 1965

  • View in gallery

    Selected Areas and Countries: Wage Rates, 1961–April 1965

  • View in gallery

    Selected Countries: Wage Costs per Unit of Output in Manufacturing, 1961–64

  • View in gallery

    Selected Areas and Countries: Import Prices, 1961–First Quarter 1965

  • View in gallery

    Selected Areas and Countries: Wholesale Prices, 1961–April 1965

  • View in gallery

    Selected Areas and Countries: Cost of Living, 1961–April 1965

  • View in gallery

    Selected Areas and Countries: Cost of Living, 1961-April 1965

  • View in gallery

    Selected Countries: Central Bank Discount Rates, 1961-April 19651

    (In per cent per annum)

  • View in gallery

    Term Structure of Interest Rates

    (In per cent)

  • View in gallery

    Selected Countries: Exchange Rates, 1961–April 19651

  • View in gallery

    Covered Short–Term Interest Rates, 1961–April 1965

    (In per cent)

  • View in gallery

    United Kingdom: Term Interest Differentials, 1963–April 1965

    (In per cent per annum)

  • View in gallery

    Selected Countries: Long–Term Government Bond Yields, 1961–April 1965

    (In per cent per annum)

  • View in gallery

    U.K. External Sterling Liabilities, 1961–March 1965

    (In billions of pounds sterling)

  • View in gallery

    U.S. International Liquid Liabilities, 1961–March 1965

    (In billions of U.S. dollars)

Selected Areas and Countries: Industrial Production, Seasonally Adjusted, 1961–April 1965

Selected Countries of the European Economic Community: Industrial Production, Seasonally Adjusted, 1961–April, 1965

Selected Areas and Countries: Wage Rates, 1961–April 1965

Selected Countries: Wage Costs per Unit of Output in Manufacturing, 1961–64

Selected Areas and Countries: Import Prices, 1961–First Quarter 1965

Selected Areas and Countries: Wholesale Prices, 1961–April 1965

Selected Areas and Countries: Cost of Living, 1961–April 1965

Selected Areas and Countries: Cost of Living, 1961-April 1965

Selected Countries: Central Bank Discount Rates, 1961-April 19651

(In per cent per annum)

Term Structure of Interest Rates

(In per cent)

Selected Countries: Exchange Rates, 1961–April 19651

Covered Short–Term Interest Rates, 1961–April 1965

(In per cent)

United Kingdom: Term Interest Differentials, 1963–April 1965

(In per cent per annum)

Selected Countries: Long–Term Government Bond Yields, 1961–April 1965

(In per cent per annum)

U.K. External Sterling Liabilities, 1961–March 1965

(In billions of pounds sterling)

U.S. International Liquid Liabilities, 1961–March 1965

(In billions of U.S. dollars)