ECONOMIC

inflation and thus to raise the demand for credit. However, both the demandand the supply also depend significantly on real factors which wouldmake for positive yields from investment even if these were estimated on thebasis of an unchanging general price level.Because the demand for credit continued to rise rapidly in 1973, upwardpressures on interest rates were strong and rates at year-end were wellabove their levels at the start of the year (Chart 5). From December 1972to December 1973 the Treasury bill rate rose from 5.1 to 7.4 percent, theprime commercial paper rate from 5.5 to 9.1 percent, and the rate on longtermbonds of the Federal Government from about 5.9 to 6.4 percent; theFHA mortgage yield from loans on new homes climbed from about 7.6 to8.9 percent. Until late August the stock market declined, then it rose untilOctober without fully recovering the earlier loss. After October, stock pricesfell again, leaving a substantial net decline for the year as a whole.It is hard to tell to what extent the reduction in the market value of stockequities was caused by rising interest rates and to what extent by the risinguncertainty about profits, an attitude at least partly occasioned by theenergy crisis late in the year.Monetary PolicyMonetary policy in 1973 applied somewhat more restraint than the yearbefore, since it was aiming for a gradual return to a sustainable rate ofgrowth in demand and output. According to preliminary estimates, fromthe fourth quarter of 1972 to that of 1973, Mi grew by 6.1 percent, M 2 by8.8 percent, and the stock of privately held liquid assets by 11.2 percent.For the preceding year these figures had been 7.7, 10.9, and 12.4 percentrespectively. By the last quarter of 1973 the current growth of money GNPwas reduced to about 9 percent at an annual rate from an 11.7 percent ratein the fourth quarter of 1972, a 15.2 percent rate in the first quarter of 1973,and rates of 9.9 and 10.6 percent in the second and third quarters of theyear.As market interest rates rose, deposits at commercial banks became lessattractive than alternative open market assets, a financial market conditionreminiscent of 1969. Contrary to the 1969 practice, however, whenceilings on large certificates of deposit (CD's) were set below open marketinterest rates—a move causing outflows of funds from commercial banks—measures were taken to ensure that commercial banks could compete forfunds in the open market. The ceilings on large CD's ($100,000 and over)maturing in less than 90 days had been removed in 1970, and the restrictionson large CD's maturing in 90 days or more were lifted in May 1973.In addition, the Federal Reserve Board in conjunction with other Federalregulatory agencies increased the maximum interest payable on time andsavings deposits in July. Ceilings on CD's with maturities of at least 4 yearsand minimum denominations of $1,000, but not more than $100,000, wereeliminated at the same time. In November, however, Congress passed legis-83