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FEDERAL RESERVE BANK OF CHICAGO annual report 1966 M ACHINERY AND EQUIPM ENT key industries in the Midwest To the M em ber Banks o f the Seventh Federal Reserve D istrict: It is our pleasure to submit to you the Annual Report of the Federal Reserve Bank of Chicago for the year 1966. Last year combined public and private demands for goods and services pressed closely upon the nation’s economic resources and credit growth was restrained to dampen price inflation. The impact of these developments upon the Seventh Federal Reserve District is described briefly at the beginning of this report. A discussion of the machinery and equipment industries and their role in the economy of the Midwest and the nation is presented on pages 10-33. The financial statements are presented on pages 34 and 35. The volume of transactions in many departments of the Bank has continued to rise as business activity in the Seventh District has expanded further (pages 36 and 37). Official appointments and elections during the year are reported on pages 38-40. On behalf of the directors, officers and staff, 1 extend to you appreciation for your cooperation and counsel which has enabled us to provide continued high-quality financial services to the public. Sincerely, January 20, 1967 Economic Developments R fsnuiTf's of men and facilities were utilized more fully during 1966 than at any time since the Korean War, in both the nation and in the Seventh Federal Reserve District. As record demands of consumers, businesses and governments—aided substantially by credit expansion—pressed upon productive capacity, price increases were widespread and persistent. To prevent snowballing price inflation, monetary policy during 1966 was directed toward reducing the rate of credit growth, while the Government took steps to increase tax receipts and restrain the rise of expenditures. During the latter part of the year, in come and total output of goods and services were increasing at a more moderate pace than in earlier months and prices of some goods declined. Neverthe- Rise in m achinery output leads other in d u strie s in 1966 percent, 1957-59 =100 2 less, the economy retained substantial momentum, and prospects for a further increase in activity in 1967 remained favorable. D e fe n se an d b u sin ess in ve stm e n t Consumer outlays continued to rise, increasing about 8 percent from the 1965 level. The main im petus to overall business expansion, however, came from military outlays and business investments in new plant and equipment and inventories. As a result of the Vietnam conflict, national de fense outlays rose to a rate of 61.3 billion dollars in the third quarter, up 21 percent from a year earlier. Military orders, although important, did not play a dominant role in the Midwest economy where the prime movers in the expansion were the machinery and equipment industries. The five-state area of the Seventh District produces about one-third of all pro ducers’ durable equipment (see article, page 10). Output of machinery and equipment continued to rise throughout 1966 and was up about 15 percent for the year as a whole. Meanwhile total output of con sumer goods increased slowly early in the year and then leveled off. Virtually all producers of machinery and equipment operated at practical capacity limited by availability of facilities, floor space and, most com mon and most critical, manpower. Supplies of materi als and components tended to ease in the fourth quarter, but shortages of skilled workers, especially in the metalworking trades, remained severe. Orders for construction machinery were at a very high level until the fourth quarter when reductions in housing and commercial construction (and related industries such as logging) were reflected in a sharp decline. Farm equipment output remained strong throughout the year and, for the first time since the Korean War, total output was limited by productive capacity. Consum er prices continued to rise but the w holesale index declined in late 19 66 , m a inly reflecting low er fa rm percent, prices 195 7 -5 9 =100 continued strong throughout the year, but makers were prompted to adjust production schedules in favor of lower-priced models to tap a vast market potential. Steel output reached a record 134 million tons in 1966, compared with 131 million tons the year before, but shipments of finished steel were down slightly as mill inventories rose. Imports of steel totaled 10 million tons, about the same as in 1965 when these were stimulated by a strike threat. Steel output reached a peak rate in the spring as new facilities came into production and some older ones were re activated. The ingot rate declined gradually in the fourth quarter, more because steel users were liqui dating inventories than because of reduced consump tion. C onstruction slid es I9 6 0 SO U RC E: 1961 1962 1963 1964 1965 1966 U. S. Bureau o f Labor Statistics. New orders for total machinery and equipment reached a peak in the second quarter and then de clined somewhat. Nevertheless, these orders remained above rising shipments through October and unfilled orders continued to rise. Order lead times lengthened and prices of some types of capital goods increased sharply. A utos, a p p lia n c e s an d ste e l Auto sales were at an extremely rapid pace in the early months of 1966, allowing for normal seasonal patterns. When the rate of sales slackened in the spring, output schedules for the remainder of the model year were reduced. Planned production of 1967 model passenger cars was curtailed in the fourth quarter as sales proved somewhat disappointing after a fairly strong start. Passenger car output totaled 8.6 million in 1966, down from 9.3 million in 1965, but far larger than in any earlier year. Truck production was only slightly below 1965’s record level, and unfilled orders for heavy trucks remained large throughout the year. Large gains in sales and output were reported for most major household appliances and for furniture in 1966. Demand slackened in the fourth quarter, however, and layoffs were announced late in the year as some of the major appliance manufacturers moved to reduce inventories. Sales of color television sets Total construction activity declined steadily after a peak attained in March. Most of the drop was accounted for by residential building, but the nonresidential and government sectors also slowed moderately. Housing starts for the nation were off about 20 percent from 1965, mainly because of reduced avail ability of mortgage funds. For the Midwest the de cline was much smaller, reflecting the underlying Re sid e n tia l b uilding declined sha rp ly in 1 9 66 w h ile other construction leveled billion dollars vigor of housing demand and the low vacancy rates reported for certain leading centers. Total construction contracts for the first 11 months of 1966, as reported by F. W. Dodge, were up 5 percent in the Midwest from the same period a year earlier—slightly more than for the nation. For the January-May period, however, construction contracts had exceeded 1965 by 18 percent in the Midwest and 9 percent in the nation. Year-to-year declines in later months, first in the residential and later in the com mercial sectors, sharply reduced the margin of gain. Prices of fa rm commodities average w e ll above other recent years percent, 1957-59 = 100 Lab o r m a rk e ts tig ht Throughout the Midwest, demands for workers— skilled and unskilled, experienced and inexperienced —remained very strong in 1966. In late November rates of insured unemployment were 1 percent or less in Illinois, Indiana and Iowa, and 1.2 percent in Michigan, compared with 1.9 percent in the United States. These rates were the lowest on record in all states, except for a slightly lower rate in Michigan a year earlier. Increased draft calls aggravated labor shortages resulting from high level activity. Even building trades workers remained in short supply. Apparently, increases in some types of nonresidential construction and repair and modernization activity, together with opportunities in other industries and attrition through retirements prevented an appre- As em ploym ent rose, unem ploym ent w a s reduced to the low est level since the Korean W a r percent ciable increase in unemployment among construction workers, at least in the Midwest. Businesses increased recruiting efforts by extensive advertising, lowering of hiring standards, bounties and other measures. Training programs were activated or expanded. Nevertheless, lists of job vacancies con tinued to lengthen at many firms, and higher labor turnover, increased absenteeism and the use of less qualified workers tended to reduce efficiency. Farm incom e rise s The farm sector of the economy reported substan tial income gains during 1966. Net income from farm ing operations advanced further from the high level of 1965 and was the largest since the period immedi ately following World War II. The continued advance in agricultural prosperity can be attributed primarily to higher prices of farm commodities, virtually across the board. Prices received for farm products were substan tially above year-earlier levels during early 1966, reflecting both relatively small supplies of slaughter livestock, especially hogs, and the expectation that 1966 feed grains and soybean crops would be sub stantially short of expected consumption. Prices of dairy products and fruits and vegetables also rose sharply in response to reduced supplies and strong consumer demand. As a result of expanded meat pro duction and a larger than expected crop harvest, average farm prices declined in the fourth quarter but continued well above year-earlier levels. Deposits at most “agricultural” banks rose, reflect ing, in part, higher farm income. Demand deposits at these banks increased at about twice the rate of most recent years and in October were about 5 percent above the same month of 1965. Time deposits in October were 10 percent or more above the yearearlier level in each of the District states. The marked improvement in farm income, coupled with an optimistic outlook of farmers, led to increased spending for production and capital goods. Expendi tures for production items rose about 8 percent. Higher prices were partly responsible, but the physical volume of purchases of most production items such as fertilizers, insecticides, weed inhibitors, seeds and feed also rose. Outlays for most types of equipment increased substantially. For example, purchases of tractors by District farmers—their major equipment expenditure —increased 18 percent from the year-earlier level during the first 10 months of 1966. Meanwhile, de mand for farmland remained very strong as additional land was purchased to expand existing farms. Farm land prices in the District were about 9 percent above the previous year at the end of the third quarter. These developments were accompanied by in creased borrowing. At midyear, non-real estate farm loans outstanding at District member banks were up nearly 14 percent from 1965, more than double the increase in the preceding 12 months. Loans secured by farm real estate were about 12 percent higher, nearly equal to the large rise during the 1964-65 period. While demand for new credit continued strong, bankers in many areas reported that repay ments of outstanding loans had accelerated and that renewals and extensions had declined. Fa rm e rs1 cash receipts from m arketings rose sha rply, largely because o f higher prices percent increase Illin o is from 1965 Indiana Iowa Michigan W isconsin United States Deposits at agric ultura l banks rise sha rp ly as fa rm and other income rose in ru ra l areas percent, 1957-59=100 B ank g ro w th m o d e rate d Rising levels of expenditure continued to generate strong demands for credit, especially by the business sector. In the face of upward price pressures and near-capacity utilization of resources, monetary pol icy was designed to slow the rate of credit growth and at the same time to moderate the unduly heavy impact of monetary restraint on certain sectors of the economy. As credit demands exceeded limited sup plies, interest rates rose to the highest levels in 40 years. With yields in the money and capital markets well above the rates that banks and other intermedi aries were able to pay for funds, a smaller portion of the total volume of credit was accounted for by the commercial banks, reversing the trend that had prevailed during the preceding five years. Total loans and investments of all Seventh Dis trict member banks were 6 percent above the yearearlier level in early December, compared with a record 10 percent gain in the previous 12 months. Bank credit trends in the District roughly paralleled developments for the nation. In the first half of 1966, credit growth slowed slightly from the rapid 1965 pace, but in late summer both bank credit and money supply, seasonally adjusted, turned down and con tinued to decline through the fall months. The expan sion in aggregate loans and investments of District banks from August through November was only about 40 percent of the increase during the same period of 1965, mainly because of greater net pay-downs of loans at large banks in the major cities. Despite persistently strong credit demands, over- 5 all loan expansion in the District was relatively smaller in 1966 than in the previous year for both city and country banks. At the beginning of Decem ber, loans and discounts of all member banks were 10 percent above the year-earlier levels—well below the 17 percent gain recorded for 1965. While some easing of loan demand appeared in the fall, the slower pace of lending was attributable in large part to re strictive bank policies necessitated by the slower growth in bank reserves. The unusual strength in loan demand stemmed mainly from commercial and industrial firms seeking to finance an unprecedented expansion in working capital and facilities. At the large District banks for which information is available on the composition of loan portfolios, business loans increased very rapidly through July but leveled off thereafter. For the year as a whole, these loans rose about 15 percent, much less than the 23 percent gain in 1965 but significantly more than in any other recent year. Other types of borrowers also felt the impact of the squeeze on bank funds. Real estate and consumer loans continued to rise, but at a slower pace, while loans to finance com- G ro w th in past year less rapid than in 1 9 6 5 at both city and country banks in Seventh D istrict weekly reporting member banks percent change ‘ Excludes large country banks which reported weekly in both years. panies and securities dealers failed to show their normal expansion late in the year. Most banks accommodated loan customers, when ever possible, by further reducing their investments. Holdings of U. S. Government securities declined 7 percent at all District member banks, matching a similar liquidation in the previous year. The reduc tion at city banks was relatively smaller than in 1965 while at country banks it was greater. This difference reflects the relatively low liquidity positions of the large banks. City banks had only small amounts of Governments remaining in their portfolios that were not pledged against public deposits or required by “dealer” banks for trading purposes. Investments in securities other than Governments rose 8 percent dur ing the year. Acquisitions of these securities—mainly municipals—were concentrated in the early months of the year and were partly offset by later sales. The late 1966 halt in credit growth at member banks was the counterpart of a downturn in deposits, especially time deposits. For the year as a whole, time and savings deposits of all District member banks rose less than 7 percent compared with annual gains in the previous five years ranging from 12 to 20 percent. Banks continued to bid aggressively for funds in 1966, within the rate limits set by regulatory action. The maximum interest rate payable on time deposits other than savings had been raised to 5.5 percent in December 1965 (from 4.5 percent on maturities of 90 days or more and 4 percent on shorter maturi ties), but by midsummer yields on alternative invest ments, such as Treasury bills and commercial paper, had risen so sharply that even the new ceiling ham pered banks in competition for interest-sensitive funds. From mid-August to the end of November, CDs of $100,000 or more outstanding at the District’s large money market banks declined 450 million dol lars, or about 20 percent. Toward year-end, however, CD run-offs slowed as yields on alternative invest ments declined. Meanwhile, many banks attempted to attract funds by offering small denomination time certificates to individuals and others at rates well above the 4 per cent maximum rate permitted on passbook savings. These instruments accounted for a rising proportion of time deposit money. A large portion of the gains in these “other time” deposits represented shifts from passbook savings, often within the same institution. While such shifts were most significant at the Dis trict’s largest banks, smaller banks also reported net withdrawals of savings balances, especially during the second half of the year. Aggregate demand deposits at District banks in December were less than 2 percent above year-earlier levels—a smaller net gain than in 1965. The total dollar volume of time and savings balances combined exceeded demand deposits in February for the first time on record and remained higher through year-end despite the run-off of CDs at large banks in the fall months. The ratio of loans to deposits is a general indicator of bank liquidity; changes in this ratio strongly influ ence bank lending policies. Total loans of all District member banks exceeded 62 percent of gross deposits at year-end. Ratios of individual banks varied sub stantially, ranging up to 80 percent at a few large banks. C red it expansion slowed w ith decline in tim e deposits billion dollars M o n e ta ry po licy action Deposit trends, of course, reflected actions of the monetary authorities. The need to restrain aggregate demand in order to contain inflationary forces became persuasive in the late fall of 1965 and was marked by the discount rate increase in December of that year. In the early part of 1966, the Federal Reserve System maintained a restrictive posture by supplying reserves to the banking system less freely than would have been necessary to meet the burgeoning demands for credit as the pace of business accelerated. Under these conditions, although bank credit continued to expand, interest rates continued the rise which had begun in mid-1965. Moreover, the availability of credit was sharply curtailed in certain sectors—nota bly residential building—while business loans con tinued to rise. Concern over the uneven impact of reduced credit availability influenced the nature of monetary policy actions. High rates did not sufficiently deter business borrowing. In view of the objective of slowing the growth in bank credit, especially loans to business, with minimal impact on interest rates, the maximum rates payable on time deposits were not raised and the discount rate remained at the level established in December 1965. With yields on other investments continuing to advance, loan policies became more restrictive. In addition, a number of positive steps were taken that also reduced the banks’ ability and incentive to expand their loans. Percentage reserve requirements against time de posits other than passbook savings in excess of 5 mil lion dollars at any one bank were raised twice—first in July from 4 to 5 percent, and again in September to 6 percent. These changes absorbed reserves and increased the effective cost of time funds to the large banks. In July, the Board also amended Regulations D and Q (effective September 1) to include short term promissory notes under the definition of depos its, thereby making them subject to reserve require ments and regulations relating to the payment of interest on deposits. As a result, banks were pre vented from avoiding the restrictive effects of policy through the issue of promissory notes. Some banks had issued higher-yield notes in 1965 when the 4.5 percent ceiling on time deposit rates had become an impediment to their deposit growth. All such notes have now been retired. Another amendment to Regulation Q (effective July 20) reduced the maximum rates payable on “multiple-maturity time deposits” (deposits payable at the depositor’s option on more than one date) to 5 percent on such deposits maturing in 90 days or more and to 4 percent on those payable in less than 90 days. In still another amendment to Regulation Q, the maximum rate payable on single-maturity time deposits other than savings in denominations of less than $100,000 was reduced to 5 percent. This action immediately followed legislation approved September 21 which specifically authorized the Board to pre scribe different rate limitations for different classes of 7 deposits according to size, maturity, nature or loca tion of depositors or other “reasonable bases.” Con currently, the new ceilings were made applicable to insured nonmember banks by the FDIC and, under newly enacted legislation, the Federal Home Loan Bank Board established upper limits on dividend rates paid by savings and loan associations. These restrictive actions were designed especially to reduce the impact of overall monetary policy on the residential mortgage market. But it was recognized that with deposits leveling off or declining as invest ors sought more attractive returns elsewhere, the attempt by banks to adjust reserve positions through sales of securities also could have damaging effects on other financial institutions. Evidence of such a devel opment appeared in August when market prices of some long-term municipal obligations dropped pre cipitously. In these circumstances, the Federal Re serve on September 1 called upon all member banks to reduce lending to businesses in preference to fur ther liquidation of securities. The request reminded banks that discount facilities were available to assist them in case of a shrinkage of deposits and that the System was prepared to extend such accommodation over longer periods of time to the extent that adjust ments were made through loan curtailment. Tim e dep osit gains at D istrict banks shifte d to consumer-type certificates w e ek ly -600 -4 0 0 million dollars -2 0 0 0 +200 — i----- 1 ------ 1 — i-------1 — i— repo rtin g banks million dollars - 4 0 0 -2 0 0 0 +200 +400 + 4 0 0 +600 i------1 --------1 ------ 1 ------ 1 (-------1 ----- 1 — f i r s t h a lf sa vin g s i-------1 — i-------1 ------ 1 — +600 i----- 1 --------1 ------ 1 second h a lf (4 m onths) i i i M i i i L ' 9 6 5 - ------- 9 6 6 — | n e g o tia b le CDs L ilp m ■ other time deposits g M a _ Role of in te re s t ra te s i + 1091 o th e r b a n k s* *Banks in 51 Seventh D istric t urban areas tha t report IPC (individuals, partnerships and corporations) savings and time deposits m onthly. 8 The Federal Reserve discount rate was held con stant at 4.5 percent throughout 1966. In view of the already high level of interest rates and the problems encountered by some financial institutions, any fur ther upward pressure on rates which might flow from announcement of a further increase in the discount rate was not considered desirable. Despite the unusu ally wide spread between the discount rate and the cost of funds obtained through the money market (the Federal funds rate moved in the 5 to 6 percent range during the second half of the year) the volume of member bank borrowing rose only moderately through the summer and declined thereafter. Aggre gate borrowing of all member banks in the nation from the Federal Reserve reached a peak of 760 mil lion dollars on average for the month of July com pared with a 1965 peak of 560 million in August of that year. More than one-fourth of the Seventh Dis trict banks borrowed at the discount window during the past year, the largest proportion since 1960. The limited amount of reserves borrowed from the Federal Reserve despite the relatively low discount rate reflected, of course, discount administration closely aligned with the principles specified in Regu lation A. Except in emergencies, Federal Reserve discounts or advances are available only to cover very temporary needs—usually to adjust to short-run de posit drains. The net amount of total reserves supplied to the banking system by the Federal Reserve was in line with the slower growth of deposits. After rising at an annual rate of 4.6 percent during the first half of 1966, reserves declined (after adjustment for sea sonal factors and changes in reserve requirements) during most of the remainder of the year. For the year as a whole, reserve growth amounted to less than 2 percent compared with an expansion of more than 5 percent in 1965. Returns available on new issues of corporate and municipal securities and, to a lesser extent, U. S. Government obligations attracted both large and small investors. As usual in a period of rising interest rates, short-term rates moved up faster than long-term and with greater short-run variation. Fluctuations in rates were larger in all areas of the financial market than in previous years, partly reflecting uncertainties sur rounding the course of monetary and fiscal develop ments as pressures on the economy intensified and then abated somewhat toward year-end. Paradoxically, the reduction in availability of bank credit was itself a major factor influencing the pattern of rates. Finance companies—unable to get bank loans—increased sales of short-term notes. In the course of the year, commercial paper outstanding rose more than 20 percent. Corporate treasurers also turned to the capital markets for interim financing previously provided through bank term loans. The rates paid on prime commercial paper reached 5% percent, attracting funds not only from banks but from other financial intermediaries as well. The diffi culties banks encountered in rolling over their ma turing CDs last fall were evidenced by secondary market yields on three- and six-month prime bank CDs of 5.85 percent and 6.20 percent, respectively. As the availability of funds shrank and costs rose, rates charged borrowers were adjusted upward. The bank charge to prime business customers, which had been boosted from 4.5 to 5 percent in December 1965, was raised to 6 percent in three further steps in March, June and August. Rates to other borrowers were scaled accordingly, and non-rate terms were made generally more restrictive. Mortgage rates moved up sharply, and by autumn a 7 percent rate S tro n g credit demands and m onetary re stra in t raised interest rates percent SO U RC E: Federal Reserve Bulletin, Federal Housing Adm inistration, Salomon Brothers and H utzler, F irst National City Bank of New York. in conventional contracts on new homes was not uncommon in some areas. In a competitive market, interest rate movements and differentials should reflect relative costs and re turns on alternative uses of funds and assist in direct ing real resources into their most productive uses. However, rigidities that limit the effective competition for funds by some borrowers, the long-run importance of certain industries and institutions and anti-cyclical objectives at times argue for modification of the harsh impact of market forces. Much of the regulatory action of 1966 had its roots in these considerations. As the year drew to a close, pressures in credit markets eased somewhat although rates remained at relatively high levels and a large volume of issues was scheduled in the capital markets. An important factor in this improvement was the widespread change in expectations on the part of both borrowers and in vestors. With evidence that credit demands had al ready been effectively tempered by restraint and that fiscal policy would be called upon if further anti inflation measures proved to be necessary, there was lessened incentive for credit users to try to acquire funds in advance or for suppliers to defer commit ments. Lo o king to w a rd 1 9 6 7 Late in 1966, for the first time in four years, the view that the economy was at or near a cyclical peak became increasingly prevalent. A progressive slowing in the rate of rise of plant and equipment outlays, heavy and partly involuntary inventory accumula tions, declines in the construction, auto, appliance and steel industries were coupled with a reduction in bank credit, high interest rates and a weak stock market. All these appeared as “classic” signs heralding a gen eral business decline. Economic developments in 1967 are not likely to follow a classic pattern. Most important, a war effort involving the expenditure of many billions of dollars is taking a growing share of the nation’s resources of men and materials. Changes in prospective military requirements, up or down, could quickly overwhelm other recent developments. Moreover, most of the tendencies of recent months are the result, directly or indirectly, of actions to restrain credit growth, re duce non-military Government outlays and raise addi tional revenues, steps which would not have been taken but for the continued threat of further general price inflation. The emergence of substantial margins of unused resources of men and facilities would signal a reversal of these efforts. Machinery and equipment ke y in d u strie s in the M id w e st l d uring 1966 purchases of producers’ durable equipment by United States businesses reached a record total of more than 51 bil lion dollars—up 15 percent from the level of the previous year. To gether with rising defense spend ing, these outlays constituted the main driving force behind the de velopment of an extremely tight labor market and upward pressure on prices. The rise in equipment expendi tures has been of particular impor tance to the five states of the Seventh Federal Reserve District— Illinois, Indiana, Iowa, Michigan and Wisconsin. With 16 percent of the nation’s population, this area accounts for about one-third of total output of capital equipment. For some categories the proportion is much higher. These states pro duce two-thirds of the nation’s farm and construction equipment, more than half of the motor vehicles and two-fifths of the metalworking ma chinery. High-level activity in these industries was largely responsible for extremely low unemployment rates in the Midwest in 1965 and 1966, well below the national aver age. Virtually all machinery and equipment producers were working at practical capacity during 1966. Output would have increased even more but for limitations of re sources—especially, engineers and virtually all types of skilled man power. Orders for machinery and equipment reached a peak in the second quarter of the year and then declined slightly, but back logs continued to grow through October despite rising shipments. Demand pressures on capital goods industries in 1965 and 1966 resu lted in higher prices and lengthened lead times on new or ders. After an appeal for restraint on new investm ent spending, President Johnson, in September, asked Congress to suspend the 7 percent investment tax credit on equipment purchases. This measure had been enacted in 1962 to stimu late demand for capital goods at a time when orders were relatively sluggish. Prosperity and heavy demand for machinery and equipment go hand-in-hand. Rapid increases in output narrows margins of unused productive capacity. Rising profits provide both the incentive and the financial capacity for new invest ments. Business expansions, there fore, typically are accompanied by a more than proportionate growth in purchases of machinery and equipment. During recessions, con versely, capital spending usually declines more rapidly than the total economy. Purchases of producers’ dura bles were 80 percent higher in 1966 than in 1961 while total spending was up only half as much. From 1960 to 1961, when total spending increased only slightly, purchases of producers’ durable goods declined 6 percent. Clearly, the concentration of capital goods production in the Midwest gives this region a special stake in the maintenance of a vigorous national econom y and achievem ent of greater stability of demand for these goods. When capital expenditures are rising sharply, businesses bid vig orously for resources and contrib ute to inflationary pressures. As productive capacity is increased, however, shortages are eased and prospects for stable noninflationary growth are improved. In the final months of 1966, increased avail ability of goods and services—re flecting, in part, the large capital investments of recent years—ap peared to be gaining on the de mands of consumers, businesses and Government. M achines an d p ro g re ss A great Centennial Exposition was held in Philadelphia in 1876 to celebrate the 100th anniversary of the Declaration of Indepen dence. Although the largest share of the nation’s wealth still was pro duced in agriculture, the theme of the exposition was industrial prog ress. The principal exhibits were newly developed steam engines, dynamos, farm and railroad equip ment and the first workable tele phone. Motor vehicles and movies were still 20 years in the future, but the stage already was set for the steady advance in technology and industrial capacity that would re lieve men and women (and chil dren ) of unrelenting toil while pro viding them with an increasing abundance of necessities and lux uries. Half of all gainfully employed workers in 1870 were in agricul ture. Fifty years earlier the pro portion had been more than 70 percent. Already John Deere’s steel Rise in purchases o f producers7 durable equipm ent since 1961 has d w a rfed ea rlier p ostw a r expansions N ew o rd e rs fo r machinery and equipm ent rose fa ste r than shipm ents until last q ua rter o f 1 966 billion SO U RC E: U. S. Department o f Commerce. dollars plow and C yrus M cC orm ick’s reaper, supplemented by other ma chines for seeding and cultivating, were releasing farm workers for jobs in industry. Mainly as a result of the steady substitution of ma chines for human and animal power, this process has continued. Today, record production of crops and meat requires only about 5 percent of the civilian labor force. The nation’s total output—farm and nonfarm—was valued at about 10 billion dollars in the 1870s. Al lowing for higher prices, output since then has increased 30-fold. On a per capita basis, output has risen about seven times. Mechani zation in all sectors of the economy has been largely responsible for this gain. During most of the early history of the United States, too few work ers were available to fully exploit the nation’s abundant land and other resources. (Until the 1920s, immigration from Europe was not restricted.) A limited labor supply encouraged the mechanical inge nuity of farmers and craftsmen. Unencumbered by the restrictive customs and traditions of the old world, these innovators devised a large share of the labor-saving de vices introduced in the nineteenth century. Important new industries devel oped as a result of the dedicated work of individual men. The fore runner of these was Whitney with his cotton gin, and, later, the prin ciple of interchangeable parts em ployed first in the manufacture of firearms. He was followed by Ful ton and the steamboat, Morse and the telegraph, Howe and the sew ing machine, Goodyear and the vulcanization of rubber, Bell and the telephone, Eastman and the modern camera, and Westinghouse 12 and Edison — who developed a multitude of basic electrical and mechanical devices. Europeans took the lead in sci entific research, but the United States outdistanced other nations in the development and use of ma chinery and equipment. Combinations of machines and scientific management led to the great mass production industries of the twentieth century—the Ameri can system of manufacture. The individual inventor, working with few assistants and scanty resources, gave way to the great research lab oratories of industry, government and the universities, continually developing new products and tech niques, while utilizing advanced scientific information. P ro d u ctivity an d au tom ation At the turn of the century, the average workday in manufacturing and most other industries was 10 hours, and the average workweek was 60 hours. Paid vacations, moreover, were rare. As late as the mid-1920s, the 50-hour week was the norm in manufacturing. Gradually, the eight-hour day replaced the working day of 10 hours or more. With the growth of unionization and the minimum wage-maximum hour legislation of the 1930s, the five-day, 40-hour week with time-and-one-half for overtime spread throughout most industries. In only a few industries have standard workweeks been reduced below 40 hours. In fact, heavy de mands for workers have stretched the average workweek in recent years. Additional leisure has been provided, however, through longer vacations, commonly in excess of two weeks, additional paid holi days and earlier retirement. Never theless, the real earning power of most workers has increased virtu ally every year. This has been pos sible only because of increases in productivity — output per m an hour. The long-term increase in aver age output per man-hour of all United States workers has been estimated at slightly more than 2 Modern address-label p rin te r tu rn s out 135,000 labels per hour G ains in outp ut per man-hour La b o r costs per u n it o f output have been especially large in agriculture in m anufacturing rose in 1966 fo r the fir s t tim e since 1 9 60 percent, 1957-59=100 SO U RC E: percent, 1 9 5 7 - 5 9 = 100 U. S. Bureau o f Labor Statistics. percent annually. In the period since World War II, this rate of gain has accelerated. From 1947 through 1960, pro ductivity in the private economy increased at an average rate of 3.3 percent a year—6.5 percent in the farm sector and 2.7 percent in the nonfarm sector. For the 1960-65 period, the average rise was 3.6 percent—6.2 percent in agricul ture and 3.2 percent in other in dustries. Since 1964, with short ages of labor and most industries operating close to capacity, the rate of increase apparently has slowed to less than 3 percent. Productivity changes are the re sult of the interaction of several factors: better worker education, improved management techniques, absence of work stoppages, high rates of utilization of men and facilities and favorable climatic conditions. Of crucial importance, however, are increases in the quan tity and quality of capital equip ment developed and used by pri vate industry. Increases in produc tivity often are thought of as applying exclusively to manufac turing, utilities and agriculture. Some of the most impressive gains of the past 20 years, however, have been the mechanization, or com puterized automation, of whitecollar jobs in trade, finance and other service industries. Growth in productivity provides the only means whereby manage ments can pay higher wages while avoiding price increases and main taining profit margins. From 1958 until quite recently, labor costs per unit of output for all manufactur ing remained remarkably stable, even declining slightly in some years. In 1966 an acceleration in the rise of wage rates together with increased absenteeism and high labor turnover as well as the use of marginal facilities and less quali fied labor caused labor costs to rise to the highest level since early 1961. Payroll expense comprises only one, although often the most im portant, of the costs incurred by business firms. Costs of capital, taxes and prices of services and raw materials also must be considered. Nevertheless, stabilization of labor costs probably is a prerequisite to general price stability. More and better capital goods provide the major means of reducing or damp ening increases in labor costs. Capital invested in various in dustries sometimes is divided by the average employment to obtain fig ures that are represented as the “cost of creating a job.” Many capital expenditures, however, are undertaken to reduce labor require ments. Managements often are faced with competing equipment purchase plans, with the most ex pensive of the alternatives requiring the fewest operatives. A lm ost any p ro d u ctio n job could be mechanized further today by utilizing modern technology. In many cases, however, costs of such installations are prohibitive. If de mand declines, idle capital invest ments continue to be reflected in fixed costs. Moreover, highly auto matic facilities are not always readily adaptable to new products and therefore often have a high rate of obsolescence. In periods of recession or slow economic growth, excessive unem ployment commonly is attributed to increased use of labor-saving machines and equipment. Most re cently this view was emphasized in the early 1960s. Nevertheless, as the expansion accelerated in 1965 and 1966, widespread labor short ages, even of inexperienced and un skilled workers, developed. Unlike the situation in some industrialized nations, organized labor in the United States has not, as a general rule, attempted to hamper or prevent the introduction of m ore efficien t equipm ent. Unions, however, have insisted upon steps to ameliorate the im pact on workers during periods of transition. Mechanization, and its ultimate refinement automation, has per mitted the gradual elimination of many onerous, dangerous, dirty and tedious jobs that tended to de grade men and women physically and mentally. Moreover, in the long run, all workers benefit from in creased productivity through higher real wages and reduced prices of consumer goods that would have remained luxuries but for the in troduction of better machines. 14 P riv a te purchases o f producers7 durable equipm ent Distribution Industry 1960 1965 (billion dollars) T o ta l p riv a te purchases I9 6 0 1965 (percent) 3 0 .2 8 4 4 .8 2 En g in e s and tu rb in e s 0 .6 0 0 .4 5 2 .0 1.0 T ra c t o rs 0 .6 8 1.41 2 .2 3.1 A g ric u ltu ra l m a c hine ry (excep t tra c to rs) 1.11 1.64 3.7 3 .7 C o n stru c tio n m a c hine ry 0 .9 4 1.65 3.1 3 .7 M in in g and o ilfie ld m a c hine ry 0 .5 0 0 .8 0 1.7 1.8 M e ta lw o rk in g m a c hine ry 1.67 2 .9 3 5 .5 6 .5 S p e c ia l in d u s try m a c hine ry 2 .1 3 2 .6 7 7.0 6.0 5.9 1 0 0 .0 1 0 0 .0 N onelectrical machinery G e n e ra l in d u stria l (including m a te ria ls 1.91 2 .6 6 6.3 O ffic e , com puting and a ccounting m a c hine ry ha ndling equipment) 1.66 2 .8 6 5 .5 6.4 S e rv ic e in d u stry m a c hine ry 1.48 2 .0 7 4 .9 4 .6 12.68 19.14 41.9 4 2 .7 To ta l Electrical m achinery E le c tric a l tra n sm issio n , d istrib u tio n and in d u stria l a p p a ra tu s 2 .1 6 2.81 7.1 6.3 C om m unica tio n equipm ent 1.97 2 .4 9 6 .5 5 .6 O th e r e le c tric a l equipm ent 0 .2 9 0 .6 2 1.0 1.4 4 .4 2 5 .9 2 14.6 13.2 To ta l Tra n sp o rta tio n equipm ent T ru c k s, buses and truc k t r a ile rs 3 .6 4 5 .3 7 12.0 12.0 P a sse n g e r c a rs 3 .0 9 4 .4 7 10.2 10.0 A irc ra ft 0 .8 3 1.39 2 .7 3.1 S h ip s and b o a ts 0 .4 5 0 .5 9 1.5 1.3 R a ilro a d equipm ent 0 .7 5 1.16 2 .5 2 .6 8 .7 6 12.98 2 8 .9 2 9 .0 2 .8 To ta l O th e r Fa b ric a te d metal p ro d uc ts 0 .9 8 1.25 3 .2 F u rn itu re and fix t u re s 1.55 2 .3 5 5.1 5.2 In stru m e n ts 1.07 1.94 3 .5 4 .3 M isc e lla n e o u s equipm ent 0 .8 9 1.34 2 .9 3.0 4 .4 9 6.8 8 14.8 15.4 To ta l SO U RC E: U .S. Department o f Commerce. The cap ital goods p ro d u cers Producers’ durable equipment, as the term is used by the Depart ment of Commerce, includes ma chines and equipment for agricul ture, construction, manufacturing, mining and oil well drilling, com munications, public utilities, trans portation, commerce and the serv ice industries. Most of these goods are relatively long-lived and repre sent fixed assets that are depreciaated over some anticipated life span. Because of the large outlays in volved and because of the special requirements of individual pur chasers, more than half of all capi tal goods, by value, are produced to order rather than for stock. Order backlogs of the manufactur ers of these goods, therefore, usu ally are large relative to shipments. On the average, orders for custombuilt machinery and equipment must be placed about nine months in advance of delivery. If demand is strong and a given piece of equip ment is large and complicated, as for rolling mills or electrical gen erating facilities, two or three years may elapse from order to delivery —a portion of this time is required for the design stage. Most capital goods are produced by manufacturers classified in the electrical machinery (less house hold appliances and radio-TV), the nonelectrical machinery and the transportation equipment in dustries (less military aircraft and missiles and the 85 percent share of total passenger auto output pur chased by consumers). A large share of the production of steel and nonferrous metals is incorporated in producers’ durable equipment, often after fabrication by foundries or forging mills. Output of items classified as producers’ durable equipment is substantially in ex O u tp u t o f business equipm ent has increased much fa ste r than outp ut o f consumer goods since 1961 SO U R C E: Board of G o vernors of the Federal Reserve System. cess of the total purchases by pri vate business firms, as a sizable share is sold to governments or exported. Capital goods producers vary greatly in size and diversification, from small enterprises to such giant corporations as International Harvester, General Electric and General Motors. Some capital goods producers, such as Cummins (diesel engines), concentrate on a single product line. Others, such as Allis-Chalmers, make a wide vari ety of products, including in this case farm machinery, construction equipment, electrical generating equipm ent and cem ent kilns. Another example is A. O. Smith, producing motor vehicle frames, water heaters, line pipe, oil well casing and glass lined tanks for a variety of purposes. Still another is Link-Belt which produces excavat ing machinery but also engineers and manufactures processing and materials handling systems for vir tually all major extractive and manufacturing industries. The Midwest contains many relatively small firms that produce vital capital goods components— for example, fluid drives, speed re ducers, clutches, gears, bearings, pumps, valves and castings—that are sold to producers of finished goods. Some large corporations have divisions producing a portion or all of their requirements of similar components. Many of these were independent companies before acquisition. Some of the large capital goods producers also manufacture con sumer goods and have one or more divisions serving the defense and space establishments. The varied nature of these firms closely limits the usefulness of aggregative finan cial data, for analytical purposes, or composite stock price indexes. M idw est le a d s in output Capital goods producers employ directly about 3 million United States manufacturing workers and account for about 15 percent of the has advanced rapidly as a center of production, especially aircraft and electronic apparatus associated with the aerospace industries. At present the top 10 states pro ducing electrical and nonelectrical machinery, with the exception of value added by all manufacturing. A century ago the forerunners of these firms were concentrated in the northern states of the eastern seaboard. Even then, however, the center of gravity was shifting to the Midwest. In recent years California Em ploym ent and value added in m achinery and equipm ent ind ustrie s Average employment in 1 9 6 3 SIC code Industry United States Illinois Indiana Iowa Value added by manufacture in 1 9 6 3 Mich. W is. Five States (thousands) T o ta l m anufacturing 1 6 ,3 5 2 1,151 600 ill. Ind. Iowa Mich. W is. (percent o f United States) 178 879 448 13 17 2 2 .7 7 .7 4.1 1.2 6 .9 2 .8 M achinery (except electrical) 35 D * 24 5 22 5 12 2 12 53 4 6 12 16 50 10 85 9 352 Farm m a c hine ry and equipm ent 119 353 C o n stru c tio n and lik e equipm ent 351 E ng ine s and tu rb in e s D 9 .0 6 3 .6 2 1 .1 4 7 .0 2 7 .6 D t 17.0 18.6 3.6 2 1.0 7.6 10.3 2.1 3 .2 6.4 7 .7 3 .5 354 M e ta lw o rk in g m achinery 258 30 8 2 4 0 .9 12.0 2.9 0.6 2 1.9 355 S p e c ia l in d u stry m a chinery 171 14 3 2 7 9 2 2 .4 9.1 1.8 0 .7 5.2 5.6 356 G e n e ra l in d u stria l m achinery 232 20 9.9 7 .4 0 .8 7.6 5 .3 141 8 1 11 * 3 1 .0 O ffic e m a c hine ry 2 * 16 357 17 * 7.7 7 .5 t t 0 .2 t 358 S e rv ic e in d u stry m achinery 112 10 1 8 5 2 7 .2 8.4 3 .8 2 .3 8 .0 4 .7 3 59 M isc e lla n e o u s m a c hine ry 133 11 5 * 1 D D D 8.7 0 .5 D D t 1,463 179 55 35 10.6 5.9 140 15 4 To ta l 36 134 85 3 6 .7 13.4 4 .0 2 .8 Electrical m achinery E le c tric a l d istrib u tio n p ro d u c ts 361 362 E le c tric a l in d u stria l a p p a ra tu s * 161 10 12 * 3 4 17.8 10.0 3.1 t 1.8 2.9 8 21 31.4 6.0 6.7 t 4 .0 14.7 6 * 3 4 .5 14.0 7 .2 4.1 5.4 3 .8 17.2 11.0 5 .4 t 0 .8 t 5 4 .0 2 9 .7 2 2 .7 0 .8 t 11.3 2.7 0 .4 2 .3 363 H o u se h o ld a p p lia n ce s 145 24 9 4 8 364 Lig hting and w irin g d e vice s 142 16 7 * 2 365 Ra d io and T V re c e iv in g equipm ent 96 29 17 1 1 366 C om m unica tion equipm ent 414 44 13 367 E le c tro n ic com ponents 283 24 11 369 O th e r e le c tric a l com ponents 91 6 19 1,472 168 To ta l D * D 0 .8 D 2 9 3 * 3 3 13.9 6.6 3 .8 1.3 1.2 1.0 7 5 4 2 .6 6 .5 2 2 .9 t 8.1 5.1 91 20 32 50 2 5 .4 11.1 6.9 1.5 2 .3 3 .6 1 * 263 38 * 5 3.3 2.9 6.1 0.1 3 8 .7 5 .5 5.1 0 .8 3.0 t 1.3 2 * 2 4 .3 0 .4 1.1 t 1.2 3 5 .8 2 8 .0 7.8 t t 2 6 .6 0.3 14.1 1.8 9.9 0 .5 3 3 .2 2 .6 4.9 0.1 2 2 .4 3 .2 Tra n sp o rta tio n equipm ent 37 371 M o t o r v e h ic le s and equipm ent 697 22 60 372 A irc ra ft and p a rts 691 6 21 373 S h ip and b oa t b u ild ing 141 1 2 374 R a ilro a d equipm ent 45 10 * 4 5 1 4 * 41 91 3 282 43 3 7 5 , 3 7 9 O th e r tra n sp o rta tio n equipm ent 1,618 To ta l H e s s than 500 w o rke rs. 44 * * 10 * fLe s s than $500,000 value added. DW ithhe ld to avoid disclosing fig ure s fo r individual companies; amounts are included in tw o -d ig it in d u stry totals. SO U R C E: 1 9 6 3 Census o f Manufacturers. t t 1.6 California, form a solid block from Illinois and Wisconsin on the West to Massachusetts and New Jersey on the East. The top ranking state in the production of machinery, and also total capital equipment, is Illinois—followed by New York, Michigan and Ohio. Illinois, with 5.5 percent of the nation’s population, produces about 13 percent of all capital equipment. It accounts for 21 per cent of all farm machinery, 48 per cent of construction machinery and 28 percent of railroad equip ment. The state’s development as a great industrial area was based, in part, upon its advantageous loca tion with access to raw materials and markets. Water transportation was available on both the Great Lakes and the Mississippi. Chi cago’s position at the foot of Lake Michigan made inevitable its de velopment as a great railroad cen ter and as a producer of railroad equipment. Farm machinery production in Illinois began with the establish ment in the 1840s of McCormick’s first major factory in Chicago and John Deere’s plow works in Mo line. Gradually, Chicago became a center for the production of a wide variety of goods for use in agricul ture, construction, transportation and communications. The Chicago area now includes important plants of Western Elec tric (communication equipment), International Harvester (farm and construction machinery), Motorola (com m unication eq u ip m en t), Miehle-Goss-Dexter (printing presses) and many other capital goods producers. In the railroad equipment field, the Chicago area has G eneral M o to rs’ E lectro Motive Division (diesel locomo tives), Pullman-Standard, Union Tw o -third s o f all fa rm and construction equipment and a large proportion o f m aterials handling equipment is produced in the Seventh D istrict Tank Car, GATX and Thrall (all producers of freight cars) as well as manufacturers of signals, track components and other railroad supplies. Moline, along with Rock Island, East Moline and Davenport (the Quad Cities), became a center for farm equipment production with International Harvester, Deere and J. I. Case now represented. Peoria developed as a center for the manu facture of construction machinery, mainly because it happened to be the home of the small firm, Cater pillar Tractor, that developed the first crawler tractor and grew to be come the world’s largest producer of construction machinery, espe cially earthmoving equipment. Caterpillar also has important fac tories in Joliet, Decatur, Aurora and Mossville—all in Illinois. Wabco’s construction machinery division (formerly Le TourneauWestinghouse) also is in Peoria. Rockford became an important producer of machine tools and other equipment. Springfield has Sangamo Electric and an AllisChaimers plant. Michigan did not become a high ly industrialized state until the motor vehicle industry began to ex pand sharply after the turn of the century. With 4.2 percent of the nation’s population, Michigan now accounts for almost 40 percent of all motor vehicle output. This state also produces large numbers of engines for nonautomotive uses. Partly because of the requirements of the auto industry, Michigan also produces about 10 percent of the nation’s nonelectrical machinery and 21 percent of the metalwork ing machinery. In addition, Detroit has an important firm that makes office equipment and computers (Burroughs). M uskegon has C o n tin en tal Motors, Brunswick (automatic pinsetters) and some large foundries. Clark Equipment (construction equipment) has plants in Buchanan and other Michigan cities. Wisconsin, with only 2.1 per cent of the nation’s population, ranks sixth among the states as a producer of nonelectrical machin ery with almost 6 percent of the total. Like Michigan, Wisconsin does not possess the locational ad vantages and rich soil of Illinois. Wisconsin’s prosperity, like Michi gan’s, has been based on the initia 17 tive and ingenuity of firms that chanced to begin operations there. Once established, these plants at tracted satellite industries, skilled workmen and engineers—to a large extent from Europe. Among the larger industrial cen ters, none is so dependent upon producers’ durable equipment as Milwaukee. This city’s name often is associated with its breweries. Actually, the bulk of Milwaukee’s income long has been generated by plants that produce agricultural equipment, construction machin ery, machine tools and electrical apparatus. Milwaukee has the prin cipal plants of Allis-Chalmers, A. O. Smith, Falk, Harnischfeger, Rex Chainbelt, Nordberg, Koehring, Bucyrus-Erie, Louis Allis, Kearney and Trecker, Allen-Bradley, Cut ler-Hammer and many others with famous names. Other Wisconsin cities—Racine (J. I. Case and Massey-Ferguson), Fond du Lac, Madison and Beloit— produce capital goods, but the great center is Milwaukee. Indiana, with 2.5 percent of the nation’s population, produces more than 5 percent of all electrical and nonelectrical machinery combined. This state is relatively more im portant in electrical goods, with large establishments of Western Electric and General Electric lo cated in Indianapolis, where LinkBelt and General Motors’ Allison Division also have plants. Fort Wayne has a General Electric plant, a Fruehauf plant (trailers) and the heavy truck assembly facilities of International Harves ter. Bendix, with a wide variety of products for industry and aerospace industries, has its principal oper ations in the South Bend area. Cummins, the foremost producer of truck diesel engines, has its main plant in Columbus. Iowa, one of the richest farm states, is less heavily industrialized than other Midwest states. It is, however, a major producer of farm machinery, with 21 percent of the nation’s total. Major plants are located in Davenport, Waterloo and Des Moines. Cedar Rapids has the largest plant of Collins Radio, a leader in the production of ad vanced communication equipment for use in aviation, aerospace and industry. The concentration of producers’ durable equipment production in the Midwest has been largely re sponsible for the high-level pros perity of these states in recent years. With the unemployment rate nationally averaging about 4 per cent in 1966, most Midwest centers reported rates well below 3 per cent. Labor shortages, particularly of engineers and skilled workers in the metalworking and electrical trades, hampered output. To alle viate these strains, many firms in creased recruiting efforts (even in Europe) and activated or expanded training programs for less skilled employes. C a p ita l o u tla y m otives A basic force motivating busi ness capital investments is the de sire to maximize profits. The value of any machine or equipment to a purchaser is his estimate of the stream of earnings, net of all ex- O u tp u t o f all m ajor groups o f machinery and equipm ent have increased sh a rp ly in recent years percent. 1957-59=100 S O U R C E: Board of G o vern ors of the Federal Reserve System . Mechanized coal processing fac ility sharply reduces manpower requirements Sta tio n a ry rock crushing, screening and washing plant is made in Cedar Rapids penses, that will be generated through the facility’s useful life, discounted to present worth. This present value, of course, must equal or exceed the purchase price. In short, purchasers assess capital goods in much the same manner as buyers of bonds, common stock or real estate value these assets, but there are important differences. Evaluations of the desirability of prospective purchases of capital goods often involve personal judg ments of a type not involved in the selection of fixed income securities. The future dollar payments on a high-grade bond are known beyond a serious doubt. The profits to be derived from new capital goods, on the other hand, are frequently known only imperfectly. In fact, some purchases involve financial loss. Judgments of expected re turns on capital goods may prove to be far wide of the mark, because of faulty evaluations of the course of general economic activity, mar ket potentials, the actions of com petitors or the performance capa bilities of the facility. Some business firms use a rule of thumb that any new project should “pay out” in after-tax prof its and depreciation within five years. Fulfillment of this goal re quires net profits of 10 to 15 per cent a year, depending on the rate of depreciation taken for tax pur poses. The expected return on new in vestments sometimes is termed the “marginal efficiency of capital.” Investments are presumed to take place when the marginal efficiency of capital exceeds the interest rate paid on borrowed funds, or the rate that could be earned on high-grade investments. The great bulk of in vestments in machinery and equip ment, however, does not involve a close relationship between expected earnings and interest rates. For one thing, interest is tax deductible and must be halved for most corpora tions to be compared with after-tax earnings. More important, contract interest is a precisely known quan tity, quite unlike the uncertain prospective earnings on capital goods. Higher interest rates, of course, will tend to discourage investments —“other things equal.” This rela tionship, however, often is ob scured by other factors. Typically, capital investment and interest rates move in the same direction, up in prosperity, when profit prospects improve, and down in recession. During each postwar business cycle, capital expenditures have changed in the same direction as rates on new corporate bonds. Although interest as a cost can be placed in a subordinate role for most purchasers of capital goods, decisions of such firms are influ enced by the quantity of funds available to them. The great bulk of funds utilized by United States business are generated “internally” through retained earnings and de preciation. In prosperity, earnings tend to rise faster than dividends, thus increasing in tern al funds available for investment. But, as prosperity continues, capital ex penditures usually rise faster than internally generated funds, with the result that businesses turn increas ingly to the money and capital markets to supplement their finan cial resources. When credit demands are very large, new credit necessarily must be rationed by lenders. Profitable business firms are able to compete successfully for available funds in comparison to certain other activi ties, notably homebuilding and commercial construction. Never theless, businesses with unused credit potential may tend to re strict capital outlays under condi tions of “tight money,” either be cause of a reluctance to borrow for long terms at high rates or because of the increased uncertainty con cerning future prospects for the (continued on page 22) 19 Plastic milk containers are fille d , capped and cased automatically "M o ving sid e w a lk" carries men and tractors through assembly process in Racine, W isconsin Ta los guided missiles are assembled by prime contractor in M ishaw aka, Indiana Hydraulic clutches fo r heavy-duty construction equipment are manufactured in Rockford, Illin o is 21 economy that may accompany a period of rising interest rates. Capital expenditure projects often are classified as representing expansion or modernization and replacement. About two-thirds of estimated total plant and equip ment expenditures are for expan sion at the present time. In many cases this distinction is arbitrary. A new plant may represent expansion at the time it is conceived, planned and completed, but at a later time of slack demand, the existence of the new facility may permit retire ment of older installations. Expansion may mean either larger production of existing prod ucts or the initial production of new products. Modernization and replacement may be motivated by the possibility of reducing costs, increasing speed of operation or improving product quality. Each of these motives arises from the de sire to increase sales and profits over what these might have been in the absence of such investments. It is not enough that a new capi tal good represent an improve ment over an existing facility to warrant its acquisition. A prospec tive replacement for existing equip ment must be sufficiently superior in terms of lower operating costs, improved product quality, better customer service or reliability to indicate the desirability of scrap ping or selling older facilities. Sums realized from disposal of equip ment may be minimal compared to original cost or depreciated book value. Purchases of new equip ment, therefore, usually are desira ble only if total costs, including depreciation, compare favorably with out-of-pocket operating costs of existing units. A recent McGraw-Hill survey showed that 36 percent of all manu 22 P la n t and equipm ent expenditure plans often are revised su b sta n tia lly percent change from previous year +25r 1955 SO U RC E: 1956 1957 1958 1959 I960 1961 1962 1963 1964 1965 1966 1967 U. S. Departm ent o f Commerce, Securities and Exchanae Commission and McGraw- H ill. facturing capacity was less than five years old, compared with 33 percent in 1961. Even some of these relatively new facilities may be obsolescent at the present time, however. Only 24 percent of cur rent capacity was installed before 1950, compared with 40 percent five years ago. Some relatively ancient capital goods continue to perform adequately in various ap plications. For example, some ma chine tools and vessels 50 years or more old and long since fully de preciated, remain in service. History provides examples of modernization programs involving large investments that took place in times of depressed demand when the industries concerned were op erating well below capacity. In the 1930s, for example, steel mills converted to continuous rolling mill equipment, the railroads began quantity purchases of diesel loco motives, and motor vehicle firms introduced coordinated batteries of tools to perform a series of machin ing operations on engine blocks. In recent years basic oxygen furnaces have offered steel producers cost advantages sufficient to cause some firms to dismantle open hearth furnaces that had been modernized only a few years previously. A cyclical in d u stry During the postwar period, the Department of Commerce and the Securities and Exchange Commis sion (SEC) have surveyed nonfarm business firms quarterly concerning their past and prospective expendi tures on new plant and equipment. Because of the importance of these outlays and their impact on total business activity, the results of each new survey are analyzed with care by those seeking clues to future trends in economic activity. In some activities, notably oil well drilling, petroleum refining, chemicals and utilities, the line be tween construction and equipment is not clear. Many business firms do not attempt to separate these aggregates and report a total of plant and equipment in their finan cial statements. The CommerceSEC survey does not divide ex penditures between plant and equipment. Total plant and equipment ex penditures are estimated to have totaled almost 61 billion dollars in 1966, a rise of 17 percent from 1965. This followed increases of 15 and 16 percent in the two pre vious years. Preliminary soundings suggest that any gain in 1967 will be much smaller. Some firms have passed the crest of plans adopted one, two or more years ago. Suspension of the invest ment tax credit and accelerated de preciation on commercial buildings are tending to dampen certain new outlays. Some plans, particularly for commercial buildings, are be ing curtailed because of credit strin gencies. Certainly, the capital spending boom entered a new phase in late 1966, with the possi bility that a “turn” was in the making. Capital expenditures have been rising since the second quarter of 1961, following the mild 1960-61 recession. On an annual basis these outlays have risen five years in suc cession. The longest previous post war upswing was from 1949 to 1953, a period encompassing the Korean War. During 1966 capital expendi tures as defined in the CommerceSEC survey amounted to 8.2 per cent of total spending on goods and services—the gross national prod uct (GNP). The proportion of plant and equipment expenditures to total spending for 1966 is not a record, having been exceeded in 1947, 1948, 1956 and 1957. For equipment alone the 1966 propor tion was a record. From 1961 through 1963 the proportion of capital outlays to total spending remained at a post war low of 6.6 percent, instead of rising as in earlier expansions. This occurred despite the enactment of the investment tax credit and the issuance of new guidelines for fas ter writeoffs by the Treasury in 1962. Exp e n d itu re s fo r new plant and equipm ent by United States businesses Change Industry 1961 1965 1966 (billion dollars) 1 9 6 1 -6 6 1 9 6 5 -6 6 (percent) T o ta l a ll industries 3 4 .3 7 5 1 .9 6 6 0 .5 6 76 17 M anufacturing 1 3 .6 8 2 2 .4 5 2 7 .0 1 97 20 D ura b le goods P rim a ry iro n and ste e l 1.13 1.93 2 .1 6 91 12 P rim a ry n o n fe rro u s metal 0 .2 6 0 .6 8 0 .8 2 215 21 39 E le c tric a l m a c hine ry and equipm ent 0 .6 9 0 .8 5 1.18 71 M a c h in e ry (excep t e le c tric a l) 1.10 2.21 2 .8 9 163 M o t o r v e h ic le s and p a rts 0 .7 5 1.98 1.96 161 31 -1 T ra n s p o rta tio n equipm ent (except 0 .3 8 0 .5 8 1.10 190 S to n e , c la y and g la ss 0.51 0 .7 8 0 .8 9 75 14 O th e r d u ra b le g o o d s 1.45 2.41 3 .0 3 109 26 6.2 7 11.40 14.04 124 123 m o to r ve hic le s) To ta l 90 N o nd ura b le goods Fo od and b e ve ra g e 0 .9 8 1.24 1.39 42 12 T e x tile 0 .5 0 0 .9 8 1.18 136 20 34 Pap er 0 .6 8 1.12 1.50 121 C hem ical 1.62 2 .5 9 2 .9 5 82 14 P e tro le u m 2 .7 6 3 .8 2 4 .4 2 60 16 Rubber 0 .2 2 0 .3 4 0.41 86 21 O th e r no n d u ra b le g o o d s 0 .6 5 0 .9 6 1.12 72 17 7 .4 0 11.05 12.97 75 17 To ta l M ining 0 .9 8 1 .3 0 1 .4 7 50 13 R a ilro a d 0 .6 7 1 .7 3 1 .9 4 190 12 Tra n sp o rta tio n (except ra il) 1 .8 5 2.81 3 .4 8 88 24 Public u tilitie s 5 .5 2 6 .9 4 8 .31 51 20 Communication 3 .2 2 4 .9 4 ] Commercial and o ther 8 .4 6 1 1 .7 9 J > 1 8 .3 6 57 10 SO U RC E: U. S. Department o f Commerce and Securities and Exchange Commission. 23 Examination of the postwar rec ord does not reveal a clear rela tionship between changes in plant and equipment expenditures and changes in GNP. Cyclical peaks in total spending and capital spending were reached in the same quarter in both 1957 and 1960 but not in 1948 or 1953. At the low points, troughs in total spending and capi tal spending were coincident in 1949, but capital spending lagged by one to three quarters in the other cycles. Cyclical fluctuations in these outlays, however, consistently have been much greater than sim ilar changes in total spending. For example, in the sharp 1957-58 re cession, capital outlays dropped 21 percent while total spending declined less than 3 percent. Since early 1961, capital outlays have risen almost 90 percent while GNP increased 50 percent. Many capital expenditure pro grams, once initiated, are pushed through to completion despite any subsequent deterioration in eco nomic conditions because of losses that would be incurred in the event of cancellation. Often the rate of progress on such projects can be adjusted, however, through elimi nation of extra crews, overtime and other costly measures associated with speed. Other programs, as for example those involving the pur chase of trucks or office equip ment, can be changed very rapidly. A comparison of final results with first estimates of capital spend ing plans, made by the Department of C om m erce and the SEC in March and by McGraw-Hill in November of the previous year, reveal a fairly consistent “procyclical” pattern. Business firms tend to enlarge and accelerate their capital expenditure plans during expansions and reduce these plans in recessions. As a result, large order backlogs for capital goods and a heavy volume of advance planning do not necessarily assure continued growth in plant and equipment spending. Much has been written about the direction of the cause and effect relationship between capital P la n t and equipm ent expenditures sh o w much greater fluc tua tio ns than total spending on goods and services percent change from previous yeor SO U RC E: U. S. Departm ent o f Commerce, Securities and Exchange Commission. 24 spending and total activity. An ex planation of the linkage between business capital outlays and total spending is the principle of the “investment multiplier,” under which new investment has a more than proportional impact on total income. But the course of income clearly has an impact upon spend ing for equipment. This effect is described by the “acceleration prin ciple” under which given increases in spending on final products may induce much larger proportionate gains in output of machinery and equipment used in producing them. On the downside these tendencies, of course, are reversed. Obviously, the multiplier and accelerator in teract along with other factors to determine the course of general activity. C a p ita l o u tla ys b y in d u stry During the postwar period, the proportion of total plant and equip ment spending accounted for by manufacturing firms has been as high as 46 percent and as low as 36 percent. This ratio has tended to rise during economic expansions and to decline during recessions. Capital spending of durable goods manufacturers, at 14 billion dollars, in 1966 was somewhat higher than similar outlays of non durable goods manufacturers. In most recent years, total outlays for these industry groups have been approximately equal. During the 1962-66 period, for example, capi tal spending of durable goods firms exceeded nondurables by only 2 percent. Employment in durable goods manufacturing, how ever, averages about 30 percent more than in nondurable goods. Nondurable goods manufacturers as a group, therefore, have higher fixed c a p ital investm ents per Advanced numerically controlled machining center automatically changes tools fo r m ultiple boring, d rillin g , m illing and tapping w o rk worker than the durable goods group. The reason is that certain important nondurable goods facili ties—for example, in the petro leum, chemical and food process ing industries—consist of batteries of automatic machines manned by small numbers of operators and maintenance personnel. Many dur able goods industries, particularly machinery, have relatively high labor inputs. Outside of manufacturing, com mercial and service industries ac counted for about 23 percent of total plant and equipment expen ditures in 1966 with a large share of this, probably well over half, represented by buildings. Public utilities accounted for 13 percent of the total, and mining, railroads and non-rail transportation com bined for about 11 percent. All industry categories and all groups of manufacturers, except motor vehicles, reported record capital expenditures in 1966. This experience contrasts with the 1957 peak when outlays of such major industries as motor vehicles, foods, textiles and the railroads fell far short of levels reached earlier in the postwar period. The largest proportional in creases in the current capital goods expansion have been accounted for by the nonferrous metals, nonelec trical machinery, motor vehicles, aircraft, textile, paper and chemical industries. Outlays of most of these industries had lagged in prior years. In short, this capital expenditure boom has been better balanced than its predecessor of the mid1950s, which helps account for its longevity. From the end of World War II until the recovery from the second relatively mild postwar recession in 1955, it was widely believed in business circles that prosperity was a transient phase certain to be followed by a severe postwar ad justment similar to the setback after World War I. Many firms, therefore, hesitated to embark on costly expansion projects. As a re sult, successive supply bottlenecks were reached in such basic materi als as steel, nonferrous metals and cement. Shortages of these key products placed a damper on each business expansion that occurred during this period. The capital outlays of the 195457 expansion effectively removed the bottlenecks until the current upswing gathered momentum in the mid-1960s. Federal Reserve System estimates of the relation of total manufacturing to capacity in dicate that output reached 91 per cent of capacity in the second half of 1955, a rate not realized again until 1966. M achin es to m ak e m achin es Machine tools comprise a small but vital part of total producers’ durable goods. Although purchases of these tools account for only about 2 percent of the dollar value of all equipment purchases by United States firms, these “ma chines that make machines” are a prerequisite to the operation of modern industry. The basic types of machine tools include lathes and drilling, boring, milling, planing and grinding ma chines that remove metal in chips and shavings to produce parts to meet exacting dimensional toler ances. Machine tools may be used to produce parts on a custom basis or may be incorporated in mass production processes. Few industries, even in the capi tal goods fields, experience as large fluctuations in orders and ship ments as does the machine tool industry. During World War II 25 machine tool shipments reached a peak of 1.3 billion dollars in 1942 and then declined to a low of 250 million dollars in 1949. A Korean War peak of 1.2 billion dollars in shipments was reached in 1953. Two years later shipments were only about half this amount. From 1957 to 1958 shipments declined by somewhat more than half. The abortive recovery of 195860 witnessed only a moderate rise in machine tool shipments. Only when the expansion of the Sixties was well under way did machine tool shipments and orders begin to approach earlier peaks. Shipments in the first 10 months of 1966 were up 20 percent from the ad vanced level of the previous year and new orders were up 40 per cent. For 1966 as a whole, ship ments probably totaled more than 1.1 billion dollars, the largest vol ume since 1953. New orders proba bly exceeded 1.6 billion dollars, the highest level since 1942. The surge in machine tool orders and ship ments partly has reflected the gen eral prosperity, but also the tech nological progress, that has tended to outmode existing equipment. Among the major machine tool producers of the Seventh Federal Reserve District are Giddings and Lewis (Fond du Lac), Gisholt (Madison), recently merged with Giddings and Lewis, Sundstrand and Ingersoll (Rockford), Kearney and Trecker (M ilwaukee) and Ex-Cell-O (Detroit). Other im portant firms are located in Ohio and New England. Midwestern machine tool producers have been leaders in the development of numerically controlled units that operate from taped instructions and permit relatively unskilled oper ators to produce metal parts of a high degree of uniformity and pre 26 cise dimensions at high speed. M a c h in e ry in fo re ig n tra d e Exports of machinery and equip ment have been a major factor enabling the United States to main tain a favorable balance in mer chandise transactions with other nations. In recent years shipments of these goods to foreign customers have accounted for about 40 per cent of all nonagricultural exports. This proportion rose to 47 percent during 1965. The strong competitive position of United States capital equipment in world markets is of special inter est because wage rates here are by far the highest in the world and capital equipment contains a higher labor component (about 38 per cent) than total manufacturing (about 26 percent). The explana tion lies in the advanced technology employed by United States firms. In many sectors—particularly construction machinery, commer cial aircraft, computers and ad vanced types of machine tools— United States products have been markedly superior in efficiency, durability and quality of product to counterparts produced abroad. Were it not for limitations deter mined by availability of funds and import restrictions imposed by foreign governments, exports would be much larger. Exports of capital equipment totaled almost 10 billion dollars in 1965. During the first nine months of 1966, these exports rose 12 percent from the comparable yearago period. Imports of capital equipment also have risen in recent years but have been only about 15 percent as large as exports. Rapid acceleration of domestic demand in 1965 and 1966 together with sharply increased military re quirements have moderated one of the competitive advantages, rela tively short delivery times, offered by United States capital goods pro ducers to foreign buyers in the late 1950s and early 1960s. Large un- Mach ine tool orders in 1 9 66 exceeded the Korean W a r peak billion d o lla rs SO U R C E: N ational Association o f Machine Tool Builders. U nite d Sta te s exports o f capital equipm ent Dolla r Change, value Jan.-June 1965 1965 to 1966 (billions) Total (percent) 9 .8 7 13 1.04 18 A irc raft and parts (civilian) Auto parts and accessories 0 .9 9 Agricultrual machinery 0 .8 7 Engines (except aircraft) 0 .5 9 36 Instruments 0 .4 8 19 17 -1 Power machinery and switchgear 0 .4 7 1 O ffice machines 0 .4 7 19 0 .3 3 10 M aterials handling equipment Metalworking machinery 0 .3 3 Construction machinery 0 .3 2 1 Broadcasting equipment 0 .3 0 7 Trucks (civilian) 0 .2 8 13 -2 Te xtile machinery 0.21 26 Pumping equipment 0 .1 4 31 Miscellaneous 3 .0 5 13 SO U RC E: U .S. Department o f Commerce. used capacity had caused these firms to push exports vigorously. The reversal of this trend has been particularly marked in the case of machine tools during the past two years. The importance of exports to capital equipment producers was highlighted in the 1960-61 reces sion when output and shipments of these goods declined only slightly because a rise in exports partially offset a decline in domestic de mand. As a proportion of all ship ments of United States machinery and equipment producers, domestic and foreign, exports rose from about 15 percent in the late 1950s to more than 20 percent in 1965. Apparently this proportion de clined somewhat in 1966. An important aspect of the in ternational picture in capital goods concerns the large investments of United States firms in other nations in recent years, most prominently in Canada and Europe. According to the Department of Commerce, new foreign investments of busi ness firms totaled a record 9 billion dollars in 1966. In some cases, capital expenditures abroad by American firms or their affiliates involve shipments of capital goods manufactured in this country. A large proportion of United States machinery and equipment producers have become interna tional firms in the past decade, both through construction of new facili ties and acquisitions of existing foreign firms. Lower costs of labor and transportation have been par tially responsible, but, commonly, these foreign markets could be served more efficiently from domes tic plants. In the latter instances the principal motivation has been the desire to produce behind trade bar riers imposed by foreign govern ments either individually, or in combination, through the Common Market. Sales of foreign affiliates of ma chinery firms totaled more than 9 billion dollars in 1965. Only about 2 percent of these shipments were exported to the United States, compared with more than 4 per cent for all classes of manufactures. In addition to some return flow of goods, foreign investments also have resulted in a reciprocal ex change of technology and process ing techniques. Pricing cap ital goods Average prices of producers’ durable equipment were remarka bly stable during the 1959-63 period. As demand for these prod ucts accelerated, prices began to rise. The average for 1966 was up about 4 percent from 1963, an in crease that about matched the rise for all wholesale prices other than farm products and processed foods. During the 1954-57 expansion, prices of producers’ durables rose 16 percent while nonfarm whole sale prices increased 10 percent. Doubtless, some buyers were priced out of the market in the later stages of that expansion. Price trends have varied among the major types of machinery and equipment since 1963. While aver age electrical machinery and equip ment prices have remained virtually stable, farm equipment increased 7 percent, construction machinery 8 percent and metalworking machin ery about 12 percent. Price comparisons can be only rough guides in time periods when new products are introduced and existing lines are improved and modified. Few classes of goods change in quality, or performance characteristics as much as pro ducers’ durables. If earthmoving equipment were priced on the basis of capacity to move a given vol ume of material, electrical generat ing equipment on kilowatts of capacity and locomotives on horse power or tractive effort, some con temporary models would be found to be cheaper than their counter parts of 30 or 40 years ago. Quality changes in many cases cannot be measured in units of capacity. What is to be done with factors such as ease of loading and unloading, safety, durability or higher quality of goods produced by new equipment? Even more per plexing, how should such new de velopments as solid state electrical circuits and vacuum-degassed steel affect measures of price change? The Bureau of Labor Statistics Prices o f m achinery and equipm ent have increased less in the current upsw ing than in the 1 9 5 4 -5 7 period percent, 1957 -5 9 *1 0 0 attempts to make adjustments for quality change, but apparently these must be somewhat arbitrary. Probably existing price indexes overstate prices of capital goods, currently, in comparison with the past. Producers’ durable equipment purchases amounted to 7.0 percent of GNP in 1966, up from 5.5 per cent in 1961— a p ro p o rtio n equaled in only one year, 1948, since the series began in 1929. After adjustment for price changes in both series, producers’ durables outlays amounted to 7.5 percent of GNP in 1966, indicating an even sharper rise relative to total spend ing in recent years although not in comparison with the early postwar period. Financing cap ital o u tla ys A favorable evaluation of the profit prospects for a proposed capital investment is not followed automatically by negotiation of a contract to purchase. No less im portant is the expectation that suf ficient funds will be available from sales, liquidation of other assets, anticipated cash flow or borrowings that the firm is able and willing to undertake. Some firms make it a practice to restrict capital expenditures to the sums made available from internal sources, undistributed profits and depreciation, thus avoiding outside borrowings. More commonly, firms are willing to use long-term debt, within some limit, to undertake de sired capital outlays. As a result, long-term corporate borrowing typically rises when capital ex penditures increase. About two-thirds of all funds used by nonfinancial corporations throughout the postwar period have come from internal sources. During recent years depreciation has exceeded undistributed profits by about two to one and has con stituted by far the most important Th e p ro p o rtio n o f gross national product accounted fo r by producers7 durable equipm ent neared early p ostw a r peak in 1 966 percent SO U RC E: U. S. Department o f Commerce. C orporate p ro fits and purchases o f producers7 durables have follow ed sim ila r patterns in the p ostw a r period SO U RC E: U. S. Department o f Commerce. single means of financing United States business. Undistributed profits and depre ciation of nonfinancial corporations were approximately equal to plant and equipment expenditures of these firms in the first three quar ters of 1966. These sources of funds were 8 percent larger than capital outlays in 1965 and 15 per cent larger in the previous year, the highest ratio since 1950. That cash flow remained large relative to needs until 1965 reflects the main tenance of profit margins—in con trast to earlier expansions—and more rapid depreciation permitted for tax purposes after 1962. From 1955 to 1957 the ratio of cash flow to capital expenditures had dropped from 120 to 96 percent. Individual firms, of course, greatly vary their willingness and ability to rely upon internal funds for expansion needs. When capital expenditures rise in prosperity, working capital re quirements usually are increasing as well. Under these circumstances it is not feasible to relate particular sources of funds to particular uses. Businesses may list proposed capi tal expenditures as the reason for a new bond issue, for example, when the reason might as well be given as “higher financial require ments, beyond the scope of our internal sources of funds.” Plant and equipm ent ex p en d itures amounted to about 58 percent of total corporate uses for funds in 1965 and 1966, slightly less than the proportion of the early 1960s and much less than in several pre vious postwar years. The rate at which internal funds were acquired in the first nine months of 1966 declined sharply to 58 percent of total sources of funds, compared with 63 percent in 1965 and 72 percent the previous year. Security issues, net of repayments, and outstanding borrowings of corporations in creased 13.6 billion dollars in 1964 and 18.6 billion in 1965, with more rapid expansion of commercial bank loans accounting for virtually all of the difference between the two years. Total net borrowing in creased to an annual rate of 25.6 billion dollars in the first three quarters of 1966, with a rise in bond issues mainly responsible for the change from 1965. Some types of equipment financ ing arrangements are directly re lated to particular expenditures. When equipment trust certificates are offered by railroads, trustees retain title to rolling stock and re payments are scheduled to reduce the outstanding debt more rapidly than the decline in the depreciated value of the asset. Instalment sales contracts used in purchases of cars, trucks, trailers and farm and con struction equipment are similar. Often “unsecured” term loans, or revolving credits, from banks are used to purchase fleets of trucks, aircraft or construction equipment. These loan agreements contain various restrictive cove nants, including negative pledge clauses, that substitute for direct liens. Increasingly, businesses—espe cially smaller firms—have leased new equipment of a wide variety of types to conserve working capital and borrowing potential. Some lease agreements, most notably in N e t sources and uses o f fu n d s o f corporate nonfinancial business 1961 1962 1963 1964 1965 1966 * (billion dollars) Sources D e p re c ia tio n 25.4 2 9 .2 3 0 .8 3 2 .8 35.1 3 7 .2 U n d istrib u te d p ro fit s 10.1 12.6 13.1 18.1 2 0 .2 2 1 .0 S e c u rity issu e s 7.1 5 .2 3.6 5.4 5.4 12.5 Loans 2.2 6.1 6.9 8 .2 13.2 13.1 P a ya b le s 6.6 4 .5 6.0 3 .4 7.9 9.8 O th e r lia b ilit ie s 3.1 5 .8 5 .5 2.7 6.2 6.1 5 4 .5 6 3 .4 6 5 .9 70.6 8 8 .0 9 9.7 3 3 .2 3 7 .0 3 8 .6 44.1 51.3 5 8 .4 1.5 4 .7 4 .3 4 .4 6 .8 9.8 R e c e iva b le s 10.1 9.1 9 .2 10.1 14.9 16.8 Liq u id a sse ts 3.5 4 .2 4 .3 0 .8 0.6 3.4 O th e r a sse ts 6.6 6.7 9.4 7.9 13.9 10.9 5 4 .9 6 1 .7 6 5 .8 6 7.3 8 7 .5 9 9 .3 -0 .4 1.7 0.1 3 .3 0 .5 0.4 To ta l Uses Pla nt and equipm ent In v e n to rie s To ta l Discrepancy S o u rc e s le ss u se s *Based on rate fo r firs t three quarters. SO U R C E: Board o f Governors o f the Federal Reserve System. connection with commercial air craft, have enabled lessees to take advantage of the investment credit otherwise unavailable to them be cause of inadequate profits. Whatever the methods used, some purchases of machinery and equipment were deferred in 1966 because of credit stringencies. Pre sumably, many of these plans could be reactivated should funds be come more readily available. D ep re cia tio n ch an g es Until the enactment of the Fed eral income tax in 1913, business accounting records often were kept on a haphazard basis with little uniformity, even among firms en gaged in similar activities. Many firms made no provision for de preciation on fixed investments, taking the view that assets properly maintained do not depreciate. The need to recognize deprecia tion as a part of the cost of doing business—to reflect wear and tear and obsolescence—now has been firmly established. At times it has been argued that depreciation should be determined on some basis other than original cost, sub stituting some measure of replace ment or reproduction cost. This view was pressed with vigor in the early postwar years after the sub stantial upthrust of the general price level associated with World War II. But replacement cost de preciation gained little political support. Another plan for depreciation reform was incorporated by Con gress in the Revenue Act of 1954. Previously, only straight-line de preciation for the expected useful life of the asset was permitted. Starting in 1954, most businesses have been able to elect to take de preciation on the basis of the de- Portable diesel power units and mobile high frequency communications equipment aid the nation's e ffo rt in Vietnam dining balance and sum-of-theyears-digits methods. Accelerated depreciation calculated on these formulas permits much faster write offs for tax purposes in the early, and most profitable, years of an asset’s life, thereby reducing uncer tainty by providing a more prompt recovery of the cost of capital goods in depreciation and after-tax prof its. A further step to accelerate de preciation was taken in 1962 when the Treasury published new guide lines of suggested useful lives for broad classes of producers’ dur able equipment. In many cases these were much shorter than the lifespans in common use for tax purposes. The in vestm en t cred it Another 1962 step intended to stimulate capital outlays was the enactment of the Investment Tax Credit. Seven percent of the cost of fully eligible producers’ durable goods, with eight years or more of expected useful life, could be de ducted from the purchaser’s tax liability. Credits were limited to 25 percent of a firm’s tax liability, but liberal carry-forward and carry back provisions were provided. Originally, only 93 percent of the cost of an asset covered by the tax credit could be depreciated on the ground that the credit was equiva lent to a 7 percent Government sub sidy and reduced the initial cost of the investment by an equivalent am ount. In 1964 firm s were permitted to depreciate the full purchase price of covered assets, making the tax credit the equivalent of a price cut of more than 7 percent. During the 1962-64 period, busi nesses reduced their taxes by 4 billion dollars— 1.6 billion dollars in 1964 alone—as a result of the tax credit. Almost half of these credits were claimed by manufac turers and 80 percent by corpora tions. In September 1966 the Admin istration asked Congress to help relieve inflationary pressures by suspending the tax credit on equip ment and accelerated depreciation on new buildings that were ordered or delivered between that time and the end of 1967. As subsequently enacted by Congress, the effective date of the suspension became October 10, 1966, and purchases valued up to 20,000 dollars were exempted, thereby reducing the effect of the change on small firms which are important purchasers of farm machinery and trucks. In suspending the tax credit, Congress also provided that after 1967 the limit will rise to 50 percent of a firm’s tax liability, and the carry forward provision will be extended from five to seven years. Estimates of the effect of the suspension of the tax credit on capital spending are highly tenta tive, and the amount of any cut backs probably never will be known with precision. Too many other factors are involved in capital ex penditure decisions. Equipm ent n e e d s still la rg e An important feature of the postwar period has been the grow ing emphasis on Research and 31 Development (R and D) by United States businesses. R and D expen ditures of private industry grew rapidly after W orld War II, amounting to 3.6 billion dollars in 1953, according to the National Science Foundation. A decade later the total was estimated at 12.7 billion dollars and was still grow ing rapidly. A survey by McGrawHill indicates that private R and D outlays exceeded 15 billion dollars in 1966 and may rise a further 3 billion by 1969. Research work can be classified as basic, applied and product de velopment. Eastman-Kodak, Gen eral Electric, the Bell System Lab oratories and du Pont were among the pioneers in basic research not necessarily directed to the solving of immediate technical problems. During recent years virtually all businesses of substantial size have instituted similar programs. Efforts of business firms have benefited by research in the universities, gov ernment and private laboratories. The result has been a steady pro liferation of new and better prod ucts that often require large outlays on new equipment. The largest R and D spenders have been in the aircraft and mis sile, electrical equipment, commu nication, chemical, pharmaceutical, motor vehicle and nonelectrical machinery industries. A recent tabulation lists more than 60 im portant firms, in a wide variety of industries whose R and D expen ditures total 2 percent or more of annual sales volume. R and D affects three types of capital spending: first, facilities used directly in research; second, facilities necessitated by decisions to place new items in production, and, third, sufficiently superior new equipment to replace existing models. The day has long since passed when capital goods producers could “sit tight” with accepted products, expecting that customers would not be lured away by competitors. When new product lines are intro duced, one or more later genera tions already are in the develop ment stage to be introduced when matured and fully tested. The day is also past when im portant new scientific or technical discoveries are allowed to lie fallow for years awaiting exploitation. Recent dramatic examples of the swift adaptations of new technology are found in the use of computers, M issile components in an environm entally controlled w h ite room and an astro na ut's space su it illu stra te advanced technology o f M idw e st defense contractors micro-circuitry and lasers in indus trial applications. A number of reasons can be of fered for the more rapid pace of technological development of the postwar period. The cooperation of industry and government in main tain in g the n a tio n ’s m ilitary strength in the cold war has speeded the development of many types of research that have civilian applica tions. This process has been aided by the ever-growing number of scientists, engineers and technicians that have received advanced train ing in universities, industry and government. Technological progress also has been spurred by the highly compe titive nature of the United States business structure. Unlike some nations, where private cartels and government-sponsored firms are dominant, each major United States industry includes a number of in dependent firms, each striving to increase its share of the various markets. Anti-monopoly policies have been supplemented by court decisions that have gradually nar rowed the role of patents in restrict ing competition. Domestic compe tition also has been stimulated in the past decade by the growing im- Acknow ledgm ents Cover—Sangamo Electric Company, Barber the requirements of the war in Southeast Asia. Private capital out lays probably will be rising but at a slower rate than in 1966. Never theless, barring an unforeseen jolt to business confidence, the capital spending upsurge that began in 1961 retains substantial momen tum. During 1966 many planned private equipment purchases were delayed or postponed because of labor and material shortages, ex cessive costs or military priorities. The longer-run needs for pro ducers’ durable goods are immense. Huge outlays are contemplated in connection with projects of gov ernment and industry to reduce air and water pollution, to improve water supplies and for airports, highways and urban transport. Im plementation of these programs will coincide with an impending surge in family formation resulting from the maturing of those born in the early postwar years. Demands of these families together with pro grams to raise the economic status of disadvantaged groups will re quire continued growth in output of consumer goods and of the ma chinery and equipment used in pro ducing them. The future prosperity of the Seventh Federal Reserve District centers that concentrate on output of producers’ durable equip ment will be determined in large part by the degree of success achieved in meeting these goals. to improve product quality M anufacturing portance of imports of a wide variety of products. Capital outlays have been en couraged in the postwar period by favorable profit trends and the ready availability of credit. Under the circumstances, facilities to pro duce new products were not de layed because of an inadequate supply of funds. Large firms with surplus cash and borrowing power have acquired smaller firms of demonstrated profitability with noncompeting product lines. As semi-independent divisions of parent corporations, these merged firms have been supplied with am ple funds to help achieve their full growth potential. But technology and competition will not maintain capital outlays in the future in the face of declines in general activity. Major investment decisions involve extended commit ments that require confidence in the long-run economic growth of the nation. Any recession, even a moderate setback, could have a pronounced effect on sales of pro ducers’ durable goods. An ex tended period of recession or slug gish growth, as in the 1957-63 period, would be accompanied by a marked slowing of investment outlays resulting in a barrier to achievement of full growth poten tial when prosperity returned. In early 1967 the economic out look will continue to be clouded by Tool Company; Page 27 —Cummins Company, Link-Belt Com Instrum ents to test m aterials and posture studies to reduce w o rke r fatig u e — part o f the continuing e ffo rt Engine pany; Page 20 —Cummins Engine Company, Company, Incorporated, Electro-Motive D iv i sion, General M otors C orporation, Amsted Greene Company, Th ra ll Car M anufacturing Incorporated (Ezra Sto lle r Associates), Abex Company, Federal-Mogul C orporation; Page C orporation; Page 21— Hoover Ball & Bear Industries, Incorporated; Page 31—The Ben 12—A. B. Dick Company, Page 17— Interna ing Case d ix tional Company, Borg- Page 32 —The Bendix C orporation, Federal- 25—Ex-Cell-O M o g u l C o rp o ra tio n ; Page 3 3 — B ru n s w ic k Harvester Company, Le Tourneau- Company The W e s tin g h o u s e C o m p a ny, A llis - C h a lm e rs W a rn e r M anufacturing Corporation, Company; Page 19—Iowa (Levers' Studio), J. Bendix C orporation; G iddings I. C orporation, Page & Lew is Machine C orporation, C ollins Radio Company; C orporation, J. I. Case Company. 33 Assets December 3 1 , 1 9 6 6 G old c e rtific a te a c c o u n t ........................................... December 3 1 , 1 9 6 5 Red em p tion fu n d f o r Fe d e ra l Reserve notes 1 ,8 2 6 ,7 3 1 ,5 8 3 $ 2 ,2 0 9 ,4 9 5 ,0 4 7 3 3 1 ,4 3 3 ,9 2 7 $ 3 1 8 ,0 6 5 ,6 5 0 To ta l go ld c e rtific a te re se rv e s . $ 2 , 1 5 8 ,1 6 5 ,5 1 0 $ 2 ,5 2 7 ,5 6 .0 ,6 9 7 Fe d e ra l R e se rv e notes o f o th e r B a n k s . 8 6 ,0 3 5 ,0 0 0 8 4 ,8 8 5 ,0 0 0 4 5 ,9 9 4 ,2 1 0 2 1 ,6 8 1 ,9 0 5 O th e r c a s h ............................................................................. D isc o u n ts and advances: Secured by U. S. G o v e rnm e nt se c u ritie s O th e r $ 1 9 ,6 6 0 ,0 0 0 $ To ta l d isc o u n ts and advances . 1 5 ,1 5 0 ,0 0 0 5 ,8 2 2 ,0 0 0 .................................................................... $ 1 9 ,6 6 0 ,0 0 0 $ 2 0 ,9 7 2 ,0 0 0 7 , 3 2 2 ,1 4 4 ,0 0 0 6 ,7 4 1 ,8 3 5 ,0 0 0 . $ 7 , 3 4 1 ,8 0 4 ,0 0 0 $ 6 ,7 6 2 ,8 0 7 ,0 0 0 Cash ite m s in p rocess o f collection . 1 ,7 4 2 ,1 6 9 ,9 6 2 1 ,5 0 8 ,1 7 2 ,0 5 0 U. S. G o v e rn m e n t s e c u r i t i e s .................................. To ta l lo a n s and se c u ritie s B a n k p r e m is e s .................................................................... 1 9 ,5 8 4 ,6 5 1 2 0 ,4 9 0 ,5 1 7 O th e r a s s e t s .................................................................... 1 7 9 ,5 4 9 ,4 8 4 1 3 9 ,7 7 5 ,4 2 5 ............................................ $1 1 ,5 7 3 ,3 0 2 ,8 1 7 $1 1 ,0 6 5 ,3 7 2 ,5 9 4 Fe d e ra l R e se rv e n o t e s ................................................... $ 7 ,2 9 3 ,0 7 2 ,2 9 2 $ 6 ,8 9 0 ,6 4 2 ,1 4 5 $ 2 ,7 5 3 ,9 0 9 ,0 9 1 $ 2 , 8 1 4 ,2 8 2 ,4 5 3 5 2 1 ,2 6 3 4 9 ,2 6 4 ,8 9 2 Total assets Liabilities D e p o sits: M e m b e r b ank r e s e r v e s .................................. U. S. T re a s u re r—g e n e ra l account . F o r e i g n .................................................................... 2 2 ,8 8 0 ,0 0 0 2 1 ,3 0 0 ,0 0 0 O th e r .................................................................... 2 8 ,6 5 9 ,7 6 6 2 1 ,5 4 9 ,2 1 8 To ta l d e p o s i t s ................................................... $ 2 , 8 0 5 ,9 7 0 ,1 2 0 $ 2 ,9 0 6 ,3 9 6 ,5 6 3 1 ,2 7 0 ,1 3 5 ,9 6 9 1 ,0 8 0 ,0 7 6 ,2 4 3 D e fe rre d a v a ila b ilit y cash ite m s . O th e r l i a b i l i t i e s ........................................................... 3 8 ,8 9 0 ,2 3 6 3 0 ,9 3 0 ,8 4 3 Total l i a b i l i t i e s .................................... $1 1 ,4 0 8 ,0 6 8 ,6 1 7 $ 1 0 ,9 0 8 ,0 4 5 ,7 9 4 ........................................................... 8 2 .6 1 7 .1 0 0 7 8 .6 6 3 .4 0 0 ............................................................................ 8 2 .6 1 7 .1 0 0 7 8 .6 6 3 .4 0 0 $1 1 ,5 7 3 ,3 0 2 ,8 1 7 $1 1 ,0 6 5 ,3 7 2 ,5 9 4 $ $ Capital accounts C a p ita l paid i n S u rp lu s Total liabilities and capital accounts C o n tin g e n t lia b ilit y on acceptances purchased f o r fo re ig n c o rre s p o n d e n t s .................................. 2 7 ,4 2 7 ,4 0 0 2 0 ,3 9 1 ,2 0 0 R a tio o f go ld c e rtific a te re se rv e s to Fe d e ra l R e se rve note lia b ilit ie s 2 9 .6 % 3 6 .7 % 1965 1966 C u rre n t e a rn in g s: D isc o u n ts and a d v a n c e s ..................................................................................... $ 6 ,0 5 0 ,3 3 5 $ 3 ,9 3 3 ,3 9 6 U. S. G o v e rnm e nt s e c u r i t i e s ............................................................................ 3 0 9 ,9 9 8 ,0 7 6 2 5 3 ,9 5 8 ,4 6 6 F o re ig n c u r r e n c i e s ............................................................................................. 3 ,1 4 3 ,5 1 9 1 ,9 7 9 ,9 4 4 A ll o t h e r ....................................................................................................................... 1 0 8 ,5 3 8 6 8 ,9 9 7 To ta l c u rre n t e a r n in g s ..................................................................................... $ 3 1 9 ,3 0 0 ,4 6 8 $ 2 5 9 ,9 4 0 ,8 0 3 O p e ra tin g e x p e n s e s ............................................................................................. $ 2 9 ,0 7 0 ,3 0 2 $ 2 7 ,9 0 9 ,4 6 2 Fe d era l Re se rve c u rre n c y ..................................................................................... 4 ,0 7 8 ,1 13 4 ,0 0 3 ,9 4 6 A sse ssm e n t f o r e xp e n se s o f Board o f G o v e r n o r s .................................. 1 ,2 9 2 ,3 0 0 1 ,2 2 3 ,9 0 0 $ 3 4 ,4 4 0 ,7 1 5 $ 3 3 ,1 3 7 ,3 0 8 C u rre n t e xp e n se s: To ta l ....................................................................................................................... Le ss re im b u rse m e n t f o r certain fisc a l agency 3 ,8 0 5 ,1 3 1 3 ,7 2 4 ,8 2 3 C u rre n t net e x p e n s e s ..................................................................................... $ 3 0 ,6 3 5 ,5 8 4 $ 2 9 ,4 1 2 ,4 8 5 C u rre n t net e a r n i n g s ..................................................................................... $ 2 8 8 ,6 6 4 ,8 8 4 $ 2 3 0 ,5 2 8 ,3 1 8 $ $ and o th e r e x p e n s e s ..................................................................................... A d d itio n s to c u rre n t net e a r n i n g s ............................................................................ 2 6 7 ,2 2 9 1 9 5 ,2 3 0 Deductions fro m c u rre n t net e a rn in g s: Loss on sa le s o f U. S. G o v e rnm e nt se c u ritie s ( n e t ) .................................. 4 1 4 ,1 0 8 1,301 A ll o t h e r ....................................................................................................................... 1 ,2 2 9 4 0 ,3 5 9 N e t ded uctions fro m (—) o r a d d itio n s to c u rre n t net e a rn in g s . N e t e a rn in g s before p a ym e nts to U. S. T re a s u ry . . . . $ 4 1 5 ,3 3 7 $ 4 1 ,6 6 0 $ To ta l d e d u c t i o n s ............................................................................................. _ 1 4 8 ,1 0 8 $ 1 5 3 ,5 7 0 $ 2 8 8 ,5 1 6 ,7 7 6 4 ,8 5 5 ,8 3 8 Pa ym e nts to U. S. T re a s u ry (in te re st on Fe d e ra l R e se rve notes) . $ 4 ,6 2 6 ,2 8 4 2 7 9 ,7 0 7 ,2 3 8 D iv id e n d s p a i d .............................................................................................................. T ra n s fe rre d to s u r p l u s ...................................................................................................... $ 2 3 0 ,6 8 1 ,8 8 8 2 2 1 ,9 9 5 ,0 5 4 3 ,9 5 3 ,7 0 0 $ 4 ,0 6 0 ,5 5 0 Surplus account S u rp lu s , J a n u a ry 1 ...................................................................................................... $ 7 8 ,6 6 3 ,4 0 0 $ 7 4 ,6 0 2 ,8 5 0 T ra n s fe rre d to s u r p lu s —a s a b o v e ............................................................................ 3 ,9 5 3 ,7 0 0 4 ,0 6 0 ,5 5 0 S u rp lu s , December 3 1 ...................................................................................................... $ 8 2 ,6 1 7 ,1 0 0 $ 7 8 ,6 6 3 ,4 0 0 35 1966 1965 D o lla r am ount (in m illio n s) C o m m e rc ia l bank c h e c k s............................................................ 2 6 2 ,8 6 7 19,407 17,186 O th e r ite m s ......................................................................................... 682 1,127 C o m m e rc ia l bank c h e c k s............................................................ 810,381 745,431 G o v e rn m e n t c h e c k s * .................................................................... 9 4 ,1 8 4 9 4 ,6 9 2 O th e r ite m s ......................................................................................... 1,800 1,7 9 4 C u rre n c y re c e ive d and c o u n te d ........................................... 4 ,8 6 2 5 ,5 7 8 C o in re c e ive d and c o u n te d ..................................................... 98 38 C o in w ra p p e d ................................................................................... 30 83 U n fit c u rre n c y w ith d ra w n fro m c irc u la t io n ..................... 1,219 1,099 C u rre n c y re c e ive d and c o u n te d ........................................... 759 866 C o in re c e ive d and c o u n te d ..................................................... 913 536 C o in w ra p p e d ................................................................................... 256 969 U n fit c u rre n c y w ith d ra w n fro m c irc u la t io n ..................... 276 195 S e c u ritie s re c e iv e d ........................................................................ 14,739 15,957 S e c u ritie s re le a s e d ................................................................ '. . . 1 5,096 16,118 C o u p o n s d e ta c h e d ......................................................................... 271 260 In sa fe ke e p in g on D ecem b er 3 1 ............................................ 8 ,1 2 0 8 ,4 7 6 S e c u ritie s re c e iv e d ........................................................................ 364 383 S e c u ritie s re le a s e d ......................................................................... 365 350 C o u p o n s d e ta c h e d ......................................................................... 3 ,0 7 2 3 ,0 0 8 In sa fe ke e p in g on D ecem b er 3 1 ............................................ 1,5 2 5 1,526 T o t a l lo a n s made d u rin g y e a r ................................................ 15,908 11,033 D a ily a ve ra g e o u tsta n d in g ........................................................ 132 95 N u m b e r o f banks accom modated d u rin g y e a r ........................ 268 171 D o lla r am ount (in m illio n s ) ........................................................ 1,680 1,812 N u m b e r o f tra n s a c tio n s .............................................................. Clearing and collection 3 0 8 ,9 9 0 G o v e rn m e n t c h e c k s * .................................................................... 1 7,669 1 8,0 75 D o lla r am ount o f funds tra n sfe rre d (in m illio n s ) .................... 8 8 9 ,8 4 7 6 8 6 ,2 5 6 N u m b e r o f tra n s fe rs (in th o u sa n d s)................................................ 751 672 N u m b e r o f pie ce s (in thousa nds) D o lla r am ount (in m illio n s) Currency and coin N u m b e r o f p ieces (in m illio n s) D o lla r am ount (in m illio n s) Safekeeping of securitiesf N u m b e r o f p ie ce s (in thousa nd s) D o lla r am ount (in m illio n s) Discount and credit Purc ha se s and sa le s o f se c u ritie s f o r mem ber banks Investment Transfer of funds 'Includes postal money orders. flncluding collateral custodies. 1966 1965 13,929 15,513 M a rk e ta b le se c u ritie s D o lla r amount (in m illio n s) Issu e d ............................................................................................. S e rv ic in g : S e c u ritie s re c e iv e d .................................................... 17,297 18,021 S e c u ritie s d e liv e re d ................................................... 2 2 ,2 6 3 2 1 ,4 3 9 R e d e e m e d ................................................................................... 18,952 19,280 433 344 S e c u ritie s re c e iv e d .................................................... 242 212 S e c u ritie s d e liv e re d ................................................... 754 551 R e d e e m e d ................................................................................... 805 664 1,628 1,528 B o n d s re c e ive d f o r r e is s u e ................................... 150 154 Bo nd s d e liv e re d on re is s u e .................................. 150 154 Bo nd s d e liv e re d on re p la c e m e n t...................... 6 5 R e d e e m e d ................................................................................... 1,182 1,068 25,551 2 4 ,1 2 7 N u m b e r o f pieces (in thousa nds) Issu e d ............................................................................................. S e rv ic in g : S a v in g s bonds Services to the U.S. Treasury D o lla r am ount (in m illio n s) Is su e d ............................................................................................. S e rv ic in g : N u m b e r o f pieces (in thousands) Issu e d ............................................................................................. S e rv ic in g : B o n d s re c e ive d fo r r e is s u e ................................... 702 699 Bo nd s d e liv e re d on re is s u e .................................. 790 784 Bo nd s d e liv e re d on re p la c e m e n t...................... 68 70 R e d e e m e d ................................................................................... 17,319 16,393 10,891 8,201 2 ,1 3 2 1,937 Fe d e ra l ta x re c e ip ts p roc e sse d D o lla r am ount (inm illio n s ) ............................................................. N u m b e r o f pieces (in th o u sa n d s)............................................ R e q u e s ts f o r a d d itio n a l c o p ie s o f this A nnual Re po rt should be addressed to: Federal Reserve Bank o f Chicago Box 8 3 4 Chicago, Illin o is 6 0 6 9 0 FRANKLIN J. LUNDING C h a irm a n o f the Finance C om m ittee Je w e l C o m p a n ie s, Inc. Chicago, Illin o is Chairm an and F e d e ra l Reserve A g en t JOHN W. SHELDON, P re sid e n t C has. A . Ste v e n s & Co. Chicago, Illin o is D eputy Chairman JOHN H. CROCKER, C h a irm a n o f the Boa rd HARRY W . SCHALLER, P re sid e n t Th e C itiz e n s N a tio n a l B a n k o f Decatur Th e C itize n s F ir s t N a tio n a l Decatur, Illin o is B a n k o f S to rm Lake S to rm La ke , Iow a GERALD F. LANGENOHL, T re a s u re r ELVIS J. STAHR, P re sid e n t and A s s is ta n t Se c re ta ry (Retired) A llis -C h a lm e rs M a n u fa c tu rin g C om pany In d ia n a U n iv e rs it y M ilw a u k e e , W isc o n sin B lo o m in g to n , In d ia n a W ILLIAM E. RUTZ, D ire c to r JOSEPH O. WAYMIRE and M e m b e r o f the Exe cu tive C om m ittee Vice P re sid e n t and T re a s u re r G id d in g s & L e w is M achine To o l C om pany E li L illy and C om pany Fond du Lac, W isc o n sin In d ia n a p o lis, In d ia n a KENNETH V. ZW IEN ER, C h a irm a n o f the Boa rd H a r r is T r u s t and S a v in g s B a n k Chicago, Illin o is DETROIT BRANCH GUY S. PEPPIA TT, C h a irm a n o f the Boa rd Fe d e ra l-M o g u l C o rp o ra tio n D e tro it, M ic h ig a n Chairm an JOHN H. FRENCH, JR., P re sid e n t FRANKLIN H. MOORE C ity N a tio n a l B a n k o f D e tro it C h a irm a n o f the Bo a rd and P re sid e n t D e tro it, M ic hig a n Th e C om m ercia l and S a v in g s B a n k o f S t. C la ir C ounty S t. C la ir, M ic h ig a n MAX P. HEAVENRICH, JR., P re sid e n t RAYMOND T. PERRING, C h a irm a n o f the Boa rd H e a ve nric h B ro s. & C om pany Th e D e tro it B a n k and T r u s t C om pany S a g in a w , M ic hig a n D e tro it, M ic h ig a n JAMES W. MILLER, P re sid e n t B. P. SHERWOOD, JR., P re sid e n t W e ste rn M ic h ig a n U n iv e rs ity S e c u rity F ir s t B a n k & T r u s t Co. K a la m a zo o , M ic hig a n G ra n d H a ve n, M ic h ig a n MEMBER OF FEDERAL ADVISORY COUNCIL HENRY T. BODMAN, C h a irm a n o f the Boa rd N a tio n a l B a n k o f D e tro it D e tro it, M ic h ig a n Decem ber 31, 1966 CHARLES J. SCANLON, P re sid e n t HUGH J. HELMER, F ir s t Vice P re sid e n t OFFICERS ERNEST T. BAUGHMAN, Vice P re sid e n t HAROLD J. NEWMAN, Vice P re sid e n t JOHN J. ENDRES, G e ne ra l A u d ito r LELAND M. ROSS, Vice P re sid e n t ARTHUR M. GUSTAVSON, Vice P re sid e n t HARRY S. SCHULTZ, Vice P re sid e n t PAUL C. HODGE, Vice P re sid e n t, BRUCE L. SMYTH, Vice P re sid e n t G e ne ra l C ounsel and Se c re ta ry LAURENCE H. JONES, Vice P re sid e n t RUSSEL A. SW ANEY, Vice P re sid e n t RICHARD A. M OFFATT, Vice P re sid e n t JACK P. THOMPSON, Vice P re sid e n t CARL E. !, Ca s h ie r GEORGE W. CLOOS, S e n io r Econom ist W ILLIAM O. HUME, A s s is ta n t Vice P re sid e n t LE ROY A. DAVIS, A s s is ta n t Vice P re sid e n t WARD J. LARSON, A s s is ta n t G e n e ra l C ounsel and A s s is ta n t Se c re ta ry LE ROY W. DAWSON, A s s is ta n t Vice P re sid e n t JAMES R. MORRISON, C h ie f E x a m in e r FRED A. DONS, A s s is ta n t G e ne ra l A u d ito r KARL A. SCHELD, A s s is ta n t Vice P re sid e n t DANIEL M. DOYLE, A s s is ta n t Vice P re sid e n t ROBERT E. SORG, A s s is ta n t Vice P re sid e n t ELBERT O. FULTS, A s s is ta n t Vice P re sid e n t JOSEPH J. SRP, A s s is ta n t Vice P re sid e n t VICTOR A. HANSEN, A s s is ta n t Vice P re sid e n t LYNN A. STILES, S e n io r Econom ist EDWARD A. HEATH, A s s is ta n t Vice P re sid e n t CHARLES G. W RIG HT, A s s is ta n t Vice P re sid e n t and A s s is ta n t Se c re ta ry ERICH K. KROLL, A s s is ta n t C a sh ie r ARNOLD J. ANSCHUTZ, A s s is ta n t C a sh ie r HARRIS C. BUELL, JR., A s s is ta n t C h ie f E x a m in e r RAYMOND M. SCHEIDER, A s s is ta n t C a sh ie r JOHN J. CAPOUCH, A s s is ta n t C a sh ie r ADOLPH J. STO JETZ, A s s is ta n t C a sh ie r RUDOLPH W. DYBECK, A s s is ta n t C a sh ie r CARL W. WEISKOPF, A s s is ta n t C h ie f E x a m in e r FRANCIS C. EDLER, A s s is ta n t C a sh ie r DETROIT RUSSEL A. SW ANEY, Vice P re sid e n t GORDON W . LAMPHERE, A s s is ta n t Vice P re sid e n t BRANCH LOUIS J. PUROL, A s s is ta n t C a sh ie r W. GEORGE RICKEL, A s s is ta n t C a sh ie r and A s s is ta n t G e ne ra l C ounsel PAUL F. CAREY, A s s is ta n t C a sh ie r Decem ber 31, 1966 RONALD L. ZILE, A s s is ta n t C a sh ie r Appointments, Elections and Retirements i d uring 1966 the following appointments and elections were announced: Henry T. Bodman, Chairman of the Board, Na tional Bank of Detroit, Detroit, Michigan, was reappointed Member of the Federal Advisory Coun cil from the Seventh Federal Reserve District for 1967. William H. Davidson, President, Harley-Davidson Motor Co., Milwaukee, Wisconsin, was elected Direc tor for a three-year term beginning January 1, 1967, to succeed Gerald F. Langenohl, Treasurer and Assistant Secretary (Retired), Allis-Chalmers Manu facturing Company, Milwaukee, Wisconsin. John H. French, Jr., President, City National Bank of Detroit, Detroit, Michigan, was reappointed Direc tor of the Detroit Branch for a three-year term beginning January 1, 1967. Max P. Heavenrich, Jr., President, Heavenrich Bros. & Company, Saginaw, Michigan, was reap pointed Director of the Detroit Branch for a threeyear term beginning January 1, 1967. Emerson G. Higdon, President, Maytag Company, Newton, Iowa, was appointed Director for a threeyear term beginning January 1, 1967, to succeed John W. Sheldon, President, Chas. A. Stevens & Co., Chi cago, Illinois. Franklin J. Lunding, Chairman of the Finance Committee, Jewel Companies, Inc., Chicago, Illinois, was redesignated Chairman of the Board and Federal Reserve Agent for 1967. Guy S. Peppiatt, Chairman of the Board, FederalMogul Corporation, Detroit, Michigan, was redesig nated Chairman of the Branch Board for 1967. Elvis J. Stahr, President, Indiana University, Bloomington, Indiana, was designated Deputy Chair man of the Board for 1967. George L. Whyel, President, Genesee Merchants Bank & Trust Co., Flint, Michigan, was appointed Director for a three-year term beginning January 1, 1967, to succeed Franklin H. Moore, Chairman of the Board and President, The Commercial and Savings Bank of St. Clair County, St. Clair, Michigan. Kenneth V. Zwiener, Chairman of the Board, Harris Trust and Savings Bank, Chicago, Illinois, was reelected Director for a three-year term beginning January 1, 1967. Gordon W. Lamphere, Assistant General Counsel, was promoted to Assistant Vice President and Assist ant General Counsel at the Detroit Branch on Sep tember 1. Adolph J. Stojetz was appointed Assistant Cashier on August 1. Jack P. Thompson was appointed Vice President on October 1. Ronald L. Zile was appointed Assistant Cashier at the Detroit Branch on September 1. Gerald F. Langenohl, Franklin H. Moore and John W. Sheldon retired as directors on December 31, 1966. Mr. Langenohl was Director of the Bank since 1958. Mr. Moore was Director of the Detroit Branch since 1961. Mr. Sheldon was Director since 1961 and Deputy Chairman since 1966. Lester A. Gohr, Assistant Cashier, retired on Aug ust 1 after 47 years of service at the Bank. Clarence T. Laibly, Vice President, retired October 1 after 48 years of service at the Bank. Richard W. Bloomfield, Assistant Vice President, retired on September 1 after 37 years of service at the Detroit Branch. The employees listed below, all with service rec ords of more than 25 years, retired within the course of the year from the Head Office or Detroit Branch: Matt L. Donovan Hertha M. Moehlig Joseph H. McHale James I. Molloy Esther H. Martin John L. Reynolds Gregory J. Smith The following employees retired after more than 40 years association with the Head Office or Detroit Branch: Raymond Carroll Louise Harris Margaret E. Clapp Walter C. Schaack Marion L. Daus Zella E. Towne The 16 retired officers and employees of the Bank represent more than 618 years of service to this institution.