III

standing increased by only $2.7 billion in 1957, compared with $3.4 billionin 1956 and $6.4 billion in 1955. The amount of instalment creditextended was actually above that in 1956; but since repayments were high,the increase in total instalment credit outstanding was held down.Significant changes also took place in the supply of funds during 1957.First, in most of the year the capacity of the commercial bankingsystem to expand its loans and investments was more limited than in1956. The volume of member bank reserves was held roughly unchangedby the monetary authorities, and the already sharp reductionsin bank holdings of United States Government securities limited anyfurther shifts out of these securities in order to expand loans (Chart 9).Commercial banks sold $600 million of Government securities in 1957,compared with $3 billion in 1956 and $7.4 billion in 1955.With the level of bank reserves unchanged, and a sharp increase in timedeposits, there was no expansion in the money supply during 1957. Indeed,demand deposits and currency actually declined by $1.5 billion, whereas thevolume of money expenditures increased. The decline in the cash liquidityof businesses and individuals which is represented by this changed relationCHART 8Liquidity of Commercial Banks and NonfinancialCorporationsBank liquidity continued low in 1957.concerns was further reduced.The liquidity of businessPERCENT60ENO OF QUARTER5550COMMERCIAL BANKS-!/45NONFINANCIALCORPORATIONS-?/400I I 1 I I I1955 1956 1957**••• ,•••'I I I iU RATIO OF HOLDINGS OF U.S.GOVERNMENT SECURITIES (BOOK VALUE) TO DEMAND DEPOSITS.U RATIO OF CASH ASSETS AND HOLDINGS OF U.S. GOVERNMENT SECURITIES (PAR VALUE)TO CURRENT LIABILITIES.SOURCES: BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, SECURITIES ANDEXCHANGE COMMISSION, AND COUNCIL OF ECONOMIC ADVISERS.