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Money and Output: Keynes and Friedman In Historical Perspective Sharing the Credit: A Quarter Century of Change Variable-Rate Mortgages: Boon or Bane? business review The Fed In Print FEDERAL RESERVE BANK of PHILADELPHIA 1973 Money and Output: Keynes and Friedman in Historical Perspective . . . The views of Keynes and Friedman re garding the effectiveness of monetary as opposed to fiscal policy can be traced to differences in approach as well as circum stances rather than any basic theoretical dis agreements over the role of money in the economy. Sharing the Credit? A Quarter Century of Change . . . Business and household borrowers now account for bigger chunks of the total credit picture while Uncle Sam's share has steadily declined. Variable-Rate Mortgages: Boon or Bane? . . . New-style home mortgages with fluctu ating interest rates may help reduce the stresses and strains on mortgage-lending in stitutions as well as benefit borrowers. On our cover: At Fifth and Arch streets, just a short walk from Independence Hall, is the United States Mint. Its modern pink granite structure covers three city blocks and houses the most modern coinage equipment in the world. The Mint's history dates back to the Presidency of George Washington and to the time Philadelphia was the nation's capital. The Mint was the first public building erected by the United States Government. It has grown from a small cluster of brick buildings dating from 1792, located at Seventh and Market streets, to the present location. The Philadelphia Mint is part of a nationwide Treasury agency known as the Bureau of the Mint, headquartered in Washington, D. C. BUSINESS REVIEW is produced in the Department of Research. Ronald B. Williams is Art Director and Manager, Graphic Services. The authors will be glad to receive comments on their articles. Requests for additional copies should be addressed to Public Information, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania 19101. Money and Output: Keynes and Friedman In Historical Perspective By ). H. Wood* The continuing debate among policymakers and economists on the role of money in the economy has been confined until a few years ago to technical journals. Recently, however, the business press has introduced the debate to the general public. The arti cle presented here is in keeping with this trend. It provides a fresh look at the his torical underpinnings of the current monetarist-fiscalist debate. Money—its quantity, importance, and ef ficacy—is the root of the squabble. Each camp, armed with logic, statistics, and other essential academic trappings, has dug in for a long and running battle—or debate—over the effectiveness of governmental monetary and fiscal policies as means of influencing economic activity. One clan—the Keynesians, self-styled fol lowers (or disciples) of )ohn Maynard Keynes—argues that money and monetary policy have little or no impact on income and employment, particularly during severe economic downturns; and that government taxation and spending are the most effective remedies for inflation and unemployment, especially the latter. It's not quite the Montagues and the Capulets, even the Hatfields and the Mc Coys, again, but a long-time feud has been raging between two prominent “families" of economists. * John Wood was the recipient of a fellowship from the Federal Reserve Bank of Philadelphia in 1968-69 and was a visiting economist at the Bank during the summer of 1971. He is currently a Professor of In vestment at the University of Birmingham (England). This article is adapted from an inaugural lecture delivered at the University of Birmingham, March 21, 1972. The author wishes to express his deep appreci ation to the Esmee Fairbairn Charitable Trust, whose generosity made possible the research leading to this lecture, and to Douglas Vickers for encouragement and helpful discussions in the early stages of that research. 3 SEPTEMBER 1972 BUSINESS REVIEW British economists as well. In short—and this may jolt some economists and non economists—there are no fundamental theo retical differences between Keynes and Friedman. As with such controversies, the differences between Keynes and Friedman on the employment of fiscal and monetary policies to achieve economic stability hinge on differences in economic conditions exist ing at the times that each economist wrote and from dissimilar political philosophies rather than from any theoretical differences over money's influence on output. More over, the genesis of most of these "differ ences” can be found in the positions taken by many British economists of previous centuries. The other group—the Monetarists, largely rallying around Milton Friedman of the Uni versity of Chicago—emphasizes money's role in the economic process. Spurning the notion that fiscal policy is paramount, they argue that a rule which requires the mone tary authorities to cause the stock of money to increase at some constant rate, say 3 per cent annually, would effectively reduce fluctuations in prices, output, and employ ment. It is curious that when the dust settles on this debate, the problems that have inter ested Keynes and Friedman, the policy tools each has used and the principal results each has obtained resemble not only each other but those of eighteenth-century WHO'S WHO RICHARD CANTILLON (1697-1734), Irish-born French economist, became a prosper ous financier in Paris and London and wrote the authoritative Essai sur la nature du commerce en general (1755), which in many respects anticipated Adam Smith and Thomas Malthus. MILTON FRIEDMAN (1912- ) is Paul S. Russell Distinguished Professor of Economics at the University of Chicago, where he began his academic career forty years ago. He has been a member of the research staff of the National Bureau of Economic Research since 1937. He was recently president of the American Economic Association. DAVID HUME (1711-1776), Scottish philosopher and historian, is one of the great British empiricists. His Treatise of Human Nature argued skeptically against the claims of metaphysicians that there are innate ideals and of theologians that we can know the ultimate reasons for anything. His arguments challenged the "natural law" and "social contract" theories of Thomas Hobbes, Richard Hooker, John Locke, and later Jean-Jacques Rousseau. In 1748 he published a simplified version of the Treatise entitled Enquiry concerning Human Understanding. His Political Discourses (1752) gave him a greater reputation as an economist in his lifetime than his contemporary, Adam Smith. JOHN MAYNARD KEYNES (1883-1946) pioneered the "New Economics" of employ ment and output. During both world wars he was an adviser to the British Treasury, which he represented at the Versailles Peace Conference but resigned in opposition to the terms of the draft treaty, inspiring his Economic Consequences of the Peace. The unemployment crises in England and Europe inspired his two great works, A Treatise on Money and the General Theory of Employment, Interest and Money. In 1943 he played a leading part in formulating the Bretton Woods agreements, thereby establishing the International Monetary Fund. 4 FEDERAL RESERVE BANK OF PHILADELPHIA JOHN LAW (1671-1729) made a study of the credit operations of the bank at Am sterdam but his proposals for a paper currency were unfavorably received by the Scottish Parliament. In Paris he and his brother William established a private bank. This was so prosperous that in 1718 the Regent Orleans adopted Law's plan of a national bank. The next year Law originated a joint-stock company for reclaiming and settling lands in the Mississippi Valley (called the Mississippi scheme) and in 1720 he became comptroller-general of finances. When the bubble burst he became an object of popular hatred, left France, lived in England for a while, then died forgotten in Venice. JOHN LOCKE (1632-1704) was the principal founder of philosophical Liberalism and, with Francis Bacon, of British empiricism. His Treatises on Government, considered his most important work in political philosophy, were a reply to the divine right theory and political philosophy of Thomas Hobbes. In economic theory Locke adopted many mercantilist principles. JOHN STUART MILL (1806-1873) wrote Principles of Political Economy (1848) which foreshadowed the marginal utility theory. Also his System of Logic with its four cele brated canons of induction influenced economists such as Jevons and Keynes. But Mill is best remembered for his essay “On Liberty" (1859), in which he argued not only for political freedom but for social freedom, not only against the “tyranny of the majority" but also against the "social tyranny" of the prevailing conventions and opinions. DAVID RICARDO (1772-1823) wrote The High Price of Bullion: a Proof of the De preciation of Bank-Notes (1809), in which he argued for a metallic basis to the money supply. His Principles of Political Economy and Taxation (1817) set forth his views on value, wages, and rent. HENRY THORNTON (1760-1815), banker, economist, and member of Parliament, became known as an astute financier, this reputation being confirmed by his An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. money and output. The most celebrated contributors to these discussions were John Locke and John Law. The superstructure supporting their view has the majestic sim plicity of a great idea. They began with the obvious. Total monetary payments must equal total monetary receipts; or, what amounts to the same thing, the number of dollars in circulation multiplied by the average number of times each dollar is paid out (total monetary payments) must equal the number of units of output multiplied by the average price of each sale (total mone tary receipts). LOCKE AND LAW Close examination of the views of eigh teenth- and nineteenth-century economists regarding the circumstances under which money does or does not influence economic activity reveals the connections between Keynes and Friedman. In the late seventeenth and early eigh teenth centuries, years of fluctuating prices and recurrent unemployment and depressed trade, there developed a substantial body of thought concerning the connection between 5 SEPTEMBER 1972 BUSINESS REVIEW the analyses of his predecessors. In his view, they tended to look at only two periods and to compare the state of prices and trade before the change in the money stock or its velocity with that state existing after the impact of a monetary disturbance had worked its way through the system (this type of analysis is labeled comparative statics). Cantillon's discussion of the processes by which variations in the quantity of money lead to variations in prices and in the direc tion and volume of production focused on dynamic monetary processes. His work was perhaps the most sophisticated dynamic analysis until the appearance of Keynes's Treatise on Money 200 years later. Toying with the possibilities of how an increased money supply could result (such as domestic gold discoveries, a favorable trade balance, and foreign borrowing), Can tillon concluded that in general more money causes "a corresponding increase of con sumption which gradually brings about increased prices." But in general a doubling of the money supply does not correspond ingly lead to a doubling of prices. So, some of the increases in monetary payments lead to increases in output. Cantillon also recognized what many economists would later point out. First, the increased quantity of money is beneficial to trade only during the period in which money is actually increasing. Once a new equilibrium is reached, output would return to its original or "normal" level, and only the price level would be higher. Second, the inflationary process cannot last forever, even with continued monetary expansion, because the increase in prices and incomes leads to an adverse balance of payments and an outflow of money. The trick is to keep the inflationary process going so as to gain the attendant benefits to output and employment, and yet harness it sufficiently to maintain a favorable balance of trade. Next we come to David Hume whose essay "On Money" (1752) stands as the watershed between the dynamic analysis of John Locke Now anyone knows that an increase in total monetary payments must be matched by an increase in total monetary receipts. As we shall see, however, there can be great disagreement of far-reaching implica tions as to whether total monetary receipts go up because prices rise or because output rises. Locke and Law contended that in creases in the quantity of money and in the velocity of circulation (that is, the rapidity with which money changes hands during a given period of time) not only raised prices but expanded output and employment. They proposed measures for increasing the supply and velocity of money, including the stan dard mercantilist policy of inducing inflows of money from abroad by means of a favor able balance of trade. CANTILLON, HUME, THORNTON Richard Cantillon agreed with Locke and Law that increases in either the money stock or its velocity caused both prices and output to rise, but he criticized the static nature of 6 FEDERAL RESERVE BANK OF PHILADELPHIA proportion with the new quantity of specie which is in the kingdom. In my opinion, it is only in this interval or intermediate situation, between the acquisition of money and rise of prices, that the increasing quantity of gold and silver is favorable to industry.1 The implication for monetary policy that Hume draws from his analysis is identical to Cantillon's—rising money or velocity af fects output only as the economy adjusts from one equilibrium to another. Like Cantillon, however, Hume had little con fidence that it would be possible to continue such a policy for long because of balanceof-payments constraints. Henry Thornton agreed with Hume that an increased quantity of money at first induces increases in output and employ ment. And, even more than Hume, he emphasized the transient nature of the beneficial effects of monetary expansions. According to Thornton, price increases which follow an increase in money would occur very rapidly and greatly exceed any increases in output. We see in Cantillon, Hume, and Thornton a progression toward the view that money does not matter in the sense that output is independent of money. Movement toward this view developed as economists shifted from a focus by persons like Cantillon on periods of transition to Hume, who dealt with both transitions and comparative equi libria but emphasized the former, to Thorn ton, who emphasized the latter. The next step is David Ricardo, who dealt almost exclusively with comparative statics. David Hume inflationists such as Cantillon and the em phasis on comparative statics of the nine teenth-century followers of David Ricardo. Like Cantillon, Hume tried to follow the economy's dynamic course during and after a disturbance. But he also anticipated later thinkers by comparing in detail the state of the economy before a disturbance with its state after the disturbance had completely run its course. He recognized the different roles played by money in the two types of analyses. To account, then, for this phenom enon, we must consider, that though the high price of commodities be a necessary consequence of the increase of gold and silver, yet it follows not immediately upon that increase; but some time is required before the money circulates through the whole state, and makes its effect be felt on all ranks of people. At first, no alteration is per ceived; by degrees the price rises, first of one commodity, then of another; till the whole at last reaches a just RICARDO AND MILL The shift in emphasis from transition periods to comparative statics was probably the result of events more than changes in academic fashions or even advances in eco-1 1 David Hume, "O f Money," Eugene Rotwein, ed., David Hume: Writings on Economics (Madison: Uni versity of Wisconsin Press, 1970), pp. 37-38. 7 SEPTEMBER 1972 BUSINESS REVIEW John Stuart Mill David Ricardo inclined to recommend monetary expansion as a means of curing unemployment. The most explicit "classical" statements of money processes are contained in John Stuart Mill's Principles of Political Economy (1848). In this work, he was not prepared to admit that changes in the quantity of money affected output, employment, and relative prices even during the transition from one price level to another. Blasting as unrealistic the policy of ever-increasing money and ever-rising prices suggested by Cantillon and Hume, he pointed out that people observe increases in money, foresee the effect on prices and make their plans, and draw up their contracts accordingly. A price rise that is expected by all parties has no impact on employment or output. In sum: . . . there cannot, in short, be intrin sically a more insignificant thing in the economy of society than money; except in the character of a contrivance for sparing time and labor. It is a machine for doing quickly and commodiously, nomic theory. Perhaps because of the breakdown of medieval price and wage regulations, advances in transportation and the communication of information, and the growth of financial markets, Ricardo's model — that is, output is independent of the quantity of money (see Box)—really was the one most appropriate to the nineteenth century; whereas, Cantillon's approach had been the one most applicable to the pre vious century. This view is not too far fetched if one really believes that there was such a thing as the Industrial Revolution— not only in methods of production but in the costs and speed with which materials and people could be transported and in the development of facilities for moving money and credit from one part of the country to another. Remember, too, that Thornton and Ricardo lived during a period of rising prices, especially a wartime inflation from 1797 to 1813 of nearly 4 percent per year. More acutely aware of the evils of inflation than Locke and Cantillon, they were less 8 FEDERAL RESERVE BANK OF PHILADELPHIA WHY MONEY DOESN'T MATTER . . . A LOOK AT RICARDO'S MODEL In the model developed by Ricardo and his successors, an increase in the quantity of money is associated with a fall in interest rates. This induces an increase in the demand for investment goods on the one hand and a decline in saving on the other; thus, the increased supply of money is matched by an increased demand for com modities. Upward pressures are exerted on prices, with the increased demand for commodities being financed by the increased quantity of money. As prices rise, people need more money for their transactions and the initial decline in interest rates is reversed. The rise in prices and interest rates continues until both the commodity and money markets are in balance at the original rate of interest. The inflation also will have disturbed the labor market since commodity prices will have risen relative to wage rates. Since labor is now cheap relative to the price of commodities, firms compete for labor, bidding wages up until the original wage-price ratio is reestablished. In this way, a doubling of the money supply leads to a doubling of both wages and prices with no long-run effect on interest rates or any other part of the system—except for an unfair redistribution of wealth from creditors to debtors. Such was the nine teenth-century quantity theory of "the classical economists." Even changes in productive techniques or the public's thriftiness, while influencing the direction of production and the rate of growth of the economy, will not cause unemployment. For example, if people decide to save more of their incomes, more money is made available at lower rates to firms that will use those funds to increase their productive capacity and benefit society in the long run. Abstinence and thrift directly increase the wealth of society no less than that of individuals. Relative prices, output, employment, interest rates, saving, investment, and consumption are deter mined by the state of knowledge of productive techniques, by institutional arrange ments and by the attitudes of the population toward work and leisure, consumption, and thrift. Money, although useful in carrying out transactions, changes none of these underlying forces. w hat w o u ld be done, though less quickly and commodiously, without it; and like many other kinds of machinery, it only exerts a distinct and independent influence of its own when it gets out of order.2 But, argued the nineteenth-century critics of Ricardo and Mill, this is no mean excep tion and it begs the whole question of trade cycles and other periods of monetary dis turbance. Rapid changes in the quantity of money are impossible without the "ma chinery getting out of order." And it is this argument that Keynes and Friedman stressed in the twentieth century. ENTER KEYNES In his Tract on Monetary Reform (1923), Keynes was highly critical of the pre-1914 theory of Ricardo, Mill, and others. Now "in the long run" this theory is probably true. If, after the American Civil War, the dollar had been stabilized and defined by law at 10 percent below its present value, it would be safe to assume that M [money] and P [prices] would now be just 10 percent greater than they actually are and that the present values of V [velocity] and T [volume of transactions] would be en- “John Stuart Mill, Principles of Political Economy, ed. W. J. Ashley (London: Longmans, Green and Com pany, 1909), p. 488. 9 BUSINESS REVIEW SEPTEMBER 1972 prices tripled, then dropped by nearly onehalf by 1922. He pointed out that the ar rangements of the nineteenth century could not work properly if money, the assumed standard, is not dependable. Unemployment, the precarious life of the worker, the disappointment of ex pectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer—all pro ceed, in large measure, from the insta bility of the standard of value.5 If businessmen are to develop their pro ductive capacity and if the savings of house holds are to be converted into investment projects, then businessmen must be able to foresee with a reasonable degree of assur ance the prices of the products coming out of their new plants and the costs of the inputs from which those products will be made. To Keynes, the overriding determinant of investment is price expectations. Ex pectations of price increases encourage in vestment; expected deflation discourages investment. Uncertainty is the worst of fender. If rapid monetary changes have occurred in the past and are expected to be repeated in the future—in which direction no one knows—businessmen will refuse to bear the risk of investment. The problems that Keynes considered as well as the remedies proposed in his Treatise on Money (1930) were the same as those analyzed and advanced in the Tract. Only his methodology had changed; it had be come more sophisticated. He traced in detail the effects of changes in the quantity of money on the level and composition of output. Some passages in the Treatise echo Cantillon. Like the latter, Keynes always John Maynard Keynes tirely unaffected. But this long run is a misleading guide to current affairs. In the long run we are all dead. Econ omists set themselves too easy, too use less a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.3 But things were different after 1914. Keynes began his Tract in the same way that he had begun the Economic Conse quences of the Peace (1919), discussing what he believed had been the extremely delicate, short-lived, and essentially unstable eco nomic system existing before 1914: For a hu ndred years the system worked throughout Europe with an extraordinary success and facilitated the growth of wealth on an unprecedented scale. To save and to invest became at once the duty and the delight of a large class.4 3John Maynard Keynes, The Collected Writings of Keynes (London: Macmillan Ltd., 1971), p. 6. 4 Ibid., p. xiv. s Ibid. Keynes wrote during a time of extraordi nary upheaval. Between 1914 and 1920 10 FEDERAL RESERVE BANK OF PHILADELPHIA carefully specified the source of an assumed monetary disturbance before discussing its effects. For him, most increases in money resulted from increases in bank loans to businessmen. He stressed that the failure of different prices to move together is the essence of short-period fluctuations and that an easier monetary policy that leads to low interest rates and rising prices results in higher profits and increases investment. The processes through which monetary disturbances lead to variations in output in the first instance are the same in the General Theory of Employment, Interest and Money as in the Tract and the Treatise: namely, through price changes and their influence on expectations of future prices. He argued that the relation between current and future prices influences investment decisions most. Keynes came to the conclusion that in a world of rapidly fluctuating prices uncer tainty on the part of businessmen would be so great that the state would have to under take the investment necessary for growth and economic stability. Since 1924 he had ad vocated public works in a supporting role to monetary policy as an antideflationary device. But, from the behavior of the Bank of England—from its determination to accept and enforce whatever price fluctuations were consistent, first with the return to gold at the prewar par and then with the main tenance of the gold standard at a fixed rate— Keynes became convinced that the nation would have to rely on means other than monetary policy to stabilize prices and output. Milton Friedman plicit statement of the processes through which, in their view, money affects eco nomic activity), they descend into a quag mire of algebraic manipulations. But, if we carefully examine the way in which Friedman handles the data in this and other historical discussions, we can get an inkling of how, in his view, money matters. In comparing the two periods 1865-1879 and 1879-1897 as well as other lengthy in tervals, Friedman and Schwartz conclude that over long periods “generally declining or generally rising prices had little impact on the rate of growth [of output], but the period of great monetary uncertainty in the early nineties produced sharp deviations from the long-term trend." They make this point again and again, concluding: . . . THEN FRIEDMAN Reading Milton Friedman and Anna Jacob son Schwartz's A Monetary History of the United States is a frustrating experience. On the one hand, the authors present a wealth of highly suggestive and expertly handled historical data. But, on the other hand, just as they seem to be on the verge of explaining causal relationships (that is, of giving an ex Apparently, the forces determining the long-run rate of growth of real income are largely independent of the long-run rate of growth of the stock of money, so long as both proceed fairly smoothly. But marked instability of 11 SEPTEMBER 1972 BUSINESS REVIEW money is accompanied by instability of economic growth.6 Surprise is the key word in all this. To the extent that changes in money and prices proceed smoothly and are foreseen, money does not influence economic activity. But sudden and unforeseen monetary disturb ances produce fluctuations in output. There is a close connection here and else where between Friedman's descriptions of historical periods and Mill's argument that changes in the money supply that people expect and upon which they can plan allow employment, output, and other economic variables to be determined by nonmonetary forces. output, and employment. But they part ways in approach and emphasis on how to achieve the benefits of monetary stability. Keynes, on the one hand, was pragmatic. He was a man of a thousand plans. If one was impractical, he would try another. To him monetary policy was important but not the "be-all and end-all." And so he moved from a reliance on monetary to fiscal policy when he thought it unrealistic on political or other grounds to expect a stable growth in the money supply. Friedman, on the other hand, has less con fidence than Keynes in the willingness or ability of the authorities—monetary or fiscal— to make the economy work smoothly. That is why Friedman wants to tie both the mone tary and fiscal authorities to certain specific rules—not because the people who would make the rules are more intelligent than those who formulate and implement dis cretionary policies, but because, whatever the rule, it will be known. People can for mulate plans on the basis of what they can expect the future money supply and price level to be. In such a way, Friedman hopes, as Keynes did with fiscal policy, that money CAN BE MADE not to matter. PARALLEL IN THEORY BUT PARTING IN PRESCRIPTION Both Keynes and Friedman, therefore, fear monetary instability. They both desire a stable growth rate in the money supply as a way of minimizing fluctuations in prices, "Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960 (Princeton: Princeton University Press, 1963), p. 678. 12 FEDERAL RESERVE BANK OF PHILADELPHIA 13 BUSINESS REVIEW CHART 1 BU SIN ESS AND HOUSEHOLD BOR ROWERS PICKED UP THE SLACK AS GOVERNMENT’S PORTION OF TOTAL CREDIT HAS SHRUNK SIN CE WORLD WAR II AND WITHIN THE GOVERNMENT S E C TOR, UNCLE SAM’S SHARE HAS TRENDED DOWNWARD Percent 100 ---------90 Share of total credit — Share of Government credit STATE AND LOCAL GOVERNMENT 70 — 60 50 j 30 — — 40 |— 40 50 FEDERAL GOVERNMENT — — 20 10 ’45 ’50 '55 ’60 ’65 — — 0 l--- 70 Source: Board of Governors, Federal Reserve System “ ’45 14 ’50 ’55 ’60 ’65 70 FEDERAL RESERVE BANK OF PHILADELPHIA CHART 3 AND B U SIN ESS BORROWERS HAVE RELIED SOMEWHAT LE S S ON CORPO RATE BONDS AS THEY UPPED THEIR USE OF OTHER CREDIT MARKET INSTRUMENTS ALTHOUGH HOUSEHOLDS HAVE AC COUNTED FOR A BIGGER PIECE OF TOTAL CREDIT, THE S LIC E S GOING TO CONSUMER DEBT AND MORT GAGES HAVE CHANGED LITTLE 80 — 40 — 30 ~ 20 10 — TOTAL MORTGAGES — ’45 ’50 ’55 ’60 ’65 ’70 ’45 15 ’50 ’55 ’60 ’65 70 BUSINESS REVIEW SEPTEMBER 1972 Variable-Rate Mortgages: Boon or Bane? By Alan ). Krupnick from their earnings on mortgages, most of which carry a fixed rate and which were con tracted in the past. As rising market rates push savers' demands upward, earnings on most S&L mortgages lag behind. And this is exactly when thrift institutions get pinched. Suppose Sunnyside Savings and Loan As sociation offers 4 percent interest on its savings deposits at a time when market rates are generally low. Savers attracted to this investment supply the S&L with plenty of funds for lending. Market-determined rates on fix e d -ra te m ortgages (FRM s) hover around 6 percent. The 2-percent difference goes toward covering Sunnyside's cost of doing business and return to its investors. This situation remains fairly stable unless market rates drift upward. In order to keep old savers and draw new ones, Sunnyside must offer higher rates. But, here the prob lem begins. Although Sunnyside can get a full 8 percent on its new mortgages, it still has all the old ones, contracted at 6 percent or lower, to worry about. Since most of Sunnyside's portfolio is made up of "old" mortgages its earnings limp while the rates A prospective homebuyer applies for a mortgage and gets only excuses. An account holder in a thrift institution occasionally finds his return well below that of the going market rate. An officer of a savings and loan association (S&L) or mutual savings bank sometimes has difficulty turning a profit. Troubling these three is the mortgage scene. Earlier this year the Hunt Commission (the President's Commission on Financial Struc ture and Regulation) suggested many re forms which might aid all parties. One suggestion favored by the Federal Home Loan Bank Board—widespread use of vari able-rate mortgages (VRMs)—may help alle viate the stresses and strains on the mortgage market every time that credit tightens. THRIFT INSTITUTIONS IN A BIND The problem starts when, quite reason ably, sophisticated savers expect their thrift institutions (such as S&Ls) to match rises in market interest rates. If S&Ls can't do it, savers may withdraw their deposits. The S&Ls' ability to meet savers' demands comes 16 FEDERAL RESERVE BANK OF PHILADELPHIA off lenders by providing a source of funds during tight periods. But, by dipping into the capital markets for their funds, they have helped perpetuate the credit squeezes caus ing the trouble. In 1966, ceilings on savings deposit rates at thrift institutions were imposed to help assume the heavy load. The ceilings were intended to end competition among these institutions for savers' funds which could send deposit rates soaring and profits plum meting every time market rates rose. Up ward pressure on rates could be relieved and the squeeze on profits could be reduced— or so the argument went. Of course, savers weren't too happy about this turn of events. In effect, policymakers forced them to accept a low return on their savings deposits so that S&Ls could maintain paid on its savings deposits climb. If Sunnyside were permitted to raise deposit rates heedless of its poor earnings picture, it could eventually fold. Yet, if it doesn't raise rates, savers may withdraw their funds. Without funds, Sunnyside can't make loans and may face insolvency. WAYS OUT Policymakers have long been aware of the mortgage lender's "plight." Initially, the Federal Home Loan Bank Board and the Fed eral National Mortgage Association (Fannie Mae) stepped in with cash for thrift insti tutions wanting it in a hurry, thereby es tablishing a secondary market for home mortgages (see Box). Most critics agree that these agencies have taken some pressure 17 SEPTEMBER 1972 BUSINESS REVIEW OPERATORS IN THE SECONDARY MARKET The Federal National Mortgage Association (Fannie Mae), a government-created "private" company, is the world's largest mortgage bank.* Fannie Mae's purpose is providing lenders and builders with mortgage money for housing when such funds are hard to get from S&Ls, banks, and insurance companies— conventional loans not backed by the Federal Housing Administration or the Veterans Administration. The Federal Fiome Loan Mortgage Corporation (Freddie Mac), a branch of the Federal Home Loan Bank Board— which supervises and lends S&Ls money that is raised in much the way Fannie Mae raises hers— is a competitor. Ending Fannie Mae's virtual monopoly in the secondary market is a newcomer from Milwaukee— the MC/C Mortgage Corporation (Maggie Mae), a wholly private enter prise. A subsidiary of the MGIC Investment Corporation, Maggie Mae can deal with privately insured, conventional 95 percent home mortgages that S&Ls make. Fannie Mae is refrained by law to 90 percent conventional loans. But Fannie Mae has an edge over Maggie Mae in that, as a government operation, she enjoys a privileged borrowing status, while her rival must pay a higher rate for borrowed funds. Another operator is the Government National Mortgage Association (Ginny Mae), a new agency created by Congress, which took over Fannie Mae's job of making mortgage loans with Treasury money for HUD's array of subsidized housing programs. These operators and others vie to reshape the residential-mortgage business by creating a market in conventional loans. * For a lively account of the activities of Fannie Mae and others in the secondary market, see George Breckenfeld, "Nobody Pours It Like Fannie Mae," Fortune 85 (June 1972): 86-89, 136, 140, 145-147. the flow of mortgage funds to borrowers at more favorable rates than would have other wise been possible. Many savers didn't like the one-sided deal. During the next tight money period, many withdrew their funds for more profitable uses. The squeeze left many S&Ls with depleted savings deposits and unable to make many loans to bor rowers. Now, it was the borrowers' turn to be unhappy. With thrift institutions short on funds to lend, many potential borrowers were frozen out of the mortgage market. tying the mortgage interest rate to some market "reference rate" (see Box).1 The mortgage interest rate would move up or down periodically to reflect changes in credit conditions. A borrower, rather than signing up to pay, say, 6 percent for 25 years, would 1 Last August the Federal Home Loan Bank Board endorsed just this proposal. Under its proposal the VRM would be tied to some nationally used interest rates. Good candidates for this are: the yield on three- to five-year Treasury securities, the average of the yield on these securities and the yield on long term utility bonds or high-grade corporate bonds, or the weighted-average cost of savings, borrowing and FHLBB advances for S&Ls in the system. Also, for examples of other types of VRMs, see New England Economic Review, March/April 1970. VRMs TO THE RESCUE Variable-rate mortgages (VRMs) may help to thaw the mortgage market. The VRM plan receiving the most attention is that 18 FEDERAL RESERVE BANK OF PHILADELPHIA SETTING IT UP We can go a long way toward insuring the VRM plan's smooth operation if we weigh the diverse interests of borrowers, S&Ls, and savers with an eye toward compromise and equity. Such issues as the choice of “ reference rate,” the proper number of rate changes per year, the means to adjust the borrowers' payments schedule to changing mortgage costs, figure crucially in a workable formula. Reference Rate. The choice of “ reference rate" lies at the heart of the plan. The rate must be well known, easily understood, and reported in the press so that the public can keep informed of its movements. To protect the lender from charges of collusion or conflict of interest that might arise after a sharp boost in rates, the indi cator should fall clearly outside the banking community's influence. It should be a stable indicator of credit and monetary trends, pliable enough to give the S&Ls' mortgage rate adequate flexibility while averaging out extraneous factors. Some experts feel the three-to-five-year Treasury-security rate best meets these qualifications. Others, fearful that any reference rate may suddenly send borrowers' mortgage costs soaring, favor legislation limiting the number of times per year the mortgage rate could be raised. California already has such a law. Another approach, though limited in scope, suggests ceilings on variable-rate movements to prevent a runaway market from crippling borrowers. Compromise may be difficult on how and when to adjust the borrower's payments to the change in his interest rate. Current literature suggests two basic options— a variable-payment plan where a borrower's monthly payments would vary with interest rates but his number of payments would remain the same, or a variable-maturity plan where the length of his mortgage obligation would vary but his monthly pay ments would be constant. Although some borrowers would view either variable-rate plan indifferently, most would probably prefer the variable-maturity plan. The typical borrower probably attaches relatively little value to a dollar that won't come due for 10 or 20 years— the prospect of a few monthly payments far into the future does not seem so terrible.* In contrast, he dislikes frequent changes in his monthly pay ments, because they make short-term financial planning difficult and can have a devastating impact on a family with a tight budget. * However, if interest rates rise quickly enough while monthly payments remain constant, all of the monthly payment may be needed to cover the interest cost, leaving none for the principal. The borrower, at this point, could never make enough payments. To guard against this occurrence, provision would have to be made to increase monthly payments temporarily until rates fall. agree to pay the going rate, whatever it may be. For the borrower, a rise in the reference rate would mean higher monthly payments, longer maturities with less equity buildup, or a combination of both (see Box). The lender would realize higher earnings and, possibly, large cash flows. If interest rates fall, the reverse would occur. With their earnings flexible and moving with market rates, S&Ls could meet market demand for higher, competitive rates on savings deposits without fear of financial strain or need of regulatory intervention. With savers content to leave their funds alone, "tight" credit conditions would be less likely to compel S&Ls to curtail their mortgage lending. So, savers would receive more competitive returns on their funds, 19 SEPTEMBER 1972 BUSINESS REVIEW DEPENDING ON TH E COURSE OF THE REFEREN CE RATE FRMs AND VRMs EFFECT BORROWERS IN RADICALLY DIFFEREN T WAYS Monthly Payment, Dollars AMOUNT OF MONTHLY PAYMENT FRM* £ .................. .... I960 61 62 63 64 65 66 67 i i i 68 69 70 71 Months to Maturity 400 NUMBER OF MONThLY PAYMENTS TO MATURITY FRM** 100 60 61 62 63 64 65 66 67 68 69 70 71 72 Based on contract rate of 61/4 percent, which was the average rate of FHA mortgages in the fourth quarter of 1959, and an original maturity of 25 years. Based on a rate of 200 basis points above the 3- to 5-year Treasury securities yield two quarters before and an original maturity of 25 years. Based on a rate of 200 basis points above the 3- to 5-year Treasury securities yield two quarters before and a fixed monthly payment of $6.60. Principal and months to maturity refer to the beginning of each quarter. 20 FEDERAL RESERVE BANK OF PHILADELPHIA S&Ls would become full partners in the credit market, and borrowers would face less severe cutbacks in available mortgages when money tightens. In the process, the complicated, sometimes clumsy, set of ceil ings meant to protect S&Ls from competition could be removed along with the plugs to stop savers from seeking higher returns else where. cent, $20,000 mortgage in 1960 to be repaid in 1985. By 1971 our FRM borrower's monthly payments are far less than those of the variable-payment plan borrower and the variable-maturity plan borrower (at the mo ment) makes twice the number of payments as the FRM borrower (see Chart). Yet, the drastic effect on borrowers when interest rates rise would become a bonanza should rates fall. Falling mortgage rates would either push down monthly payments or hasten the mortgage's maturity. Notice the first five years on the chart. Because in terest rates generally remained low through the first half of the '60s, VRM holders were actually in a better position than their FRM counterparts. Borrowers expecting falling market rates might not take, say, a 9 percent FRM, but a 9 percent VRM might look attractive. However, other borrowers, believing inter est rates might rise, would select a VRM. If VRMs and FRMs were offered side by side, borrowers could choose their mortgage based on their preferences and their expec tations of the future course of market rates.3 But, there's opposition to this idea. OPPOSITION TO VRMs Yet such a sweeping proposal for change in the way S&Ls and borrowers do business was bound to generate much opposition.2 Many question its feasibility, fairness to bor rowers, and impact on lenders. Little Protection for Borrowers. Since the 1960s, fixed-rate mortgages (FRMs) have cushioned most mortgage borrowers against the shocks of rising market rates. And, even if rates had fallen, borrowers would have been relatively safe. In most cases, these borrowers could take out a new mortgage at the lower market rate and use it to pay off the old, higher-rate mortgage. Prepaying a mortgage may be relatively expensive, but it provides the borrower with a way out of a high-rate mortgage when market rates drop significantly. Compulsory VRMs would deprive bor rowers of any protection against sudden rate rises. Compare, for example, the two types of VRM plans with the FRM plan held by most homeowners through the 1960s (see Chart). Our mythical VRM borrowers and their FRM counterparts take out a 61 perA Destabilizing Clashes. Some lenders be lieve that a "mixed system" could eventually stymie mortgage activity as borrowers would never want what the lenders have to sell and vice versa. They argue that during low interest periods borrowers might be under standably wary of entering into VRM con tracts if they believe interest rates appear to be rising. But, this is the time when lenders would most favor VRM contracts. If interest rates are high and on their way down, bor rowers will look more favorably on the VRM 2 Roadblocks abound on the path toward VRMs. while lenders might prefer to "lock-in" to a fixed-rate mortgage to bolster their earnings. Some states outlaw VRMs. Tied to this obstacle are those regulations establishing ceilings on mortgage rates— such as the 9 percent ceiling in Pennsylvania. For the mixed plan to work, VRMs should be legal in every state and both types of mortgages should be free of restrictions on their movements. Furthermore, regu lations limiting rates paid on savings deposits likewise deserve attention. 3 Many countries such as France, Germany, Italy, and Switzerland have VRMs and FRMs coexisting, but the use of VRMs is described as “ limited.'' Unfortunately, limited information makes judging their performance difficult. 21 SEPTEMBER 1972 BUSINESS REVIEW rates fluctuate according to the preferences and expectations of sellers and buyers. We can even say something about the direction of this differential. A "typical" borrower probably would rather protect himself against financial misfortune than gamble on riches or ruin. The fixed-rate mortgage commitment allows him this pro tection, regardless of interest rate move ments. "Typical" S&Ls have experienced the bind inherent in fixed-rate mortgage commitments financed through short-term savings deposits. The flexibility which VRMs can offer them should be welcome. There fore, if most borrowers favor FRMs and most lenders prefer VRMs, then the latter should go for a lower basic rate than the compa- Nothing is wrong with this reasoning ex cept that it does not go far enough. The "clashing" forces would hardly bring the market to a halt. Rather, they would work to establish a rate differential between FRMs and VRMs. If lenders favor the VRM and borrowers the FRM, the rate on the VRM will fall below that of the FRM to lure re luctant borrowers. At widening rate differ entials, more and more borrowers will be drawn to the VRM. During falling interest rate periods, when VRMs become attractive to borrowers, the rate differential may turn in favor of the FRM. There's really nothing mysterious about these movements. They occur daily in the nation's credit markets as the difference between long- and short-term mlllllP "Allowing VRMs and FRMs to coexist provides borrowers and lenders with another means of dealing with the uncertain course of interest rates." 22 FEDERAL RESERVE BANK OF PHILADELPHIA rable FRM, although other factors may widen or narrow the difference. In fact, at times either type of mortgage may be temporarily driven off the market because the differential gets too large. For instance, if borrowers are very nervous about taking a VRM, only a very low starting rate may quiet their fears. But, a mortgage lender may be unwilling to make a VRM contract at such a low rate. In this case, very little trading would take place in VRMs and the market resulting would be much like today's — with one important exception. At least an option would be present. Changes in conditions, preferences, or expectations could easily reverse the S&L's decision, and trading in both FRMs and VRMs could resume. vides borrowers and lenders with another means of dealing with the uncertain course of interest rates. But it may promise more than that. By allowing S&Ls' long-term earn ings to adjust to quick changes in their ex penses, VRMs can enable them to compete aggressively for savers' funds. Savers natu rally benefit by this courtship through higher rates on their savings deposits (assuming there are no ceilings). And, the faithful stream of savings into these institutions means mortgage money for the borrower even during tightest credit periods. While we can't be sure that long-term mortgage borrowers and lenders will accept VRMs, there appears to be little cost in trying them. Should the VRM become an integral part of the mortgage market, it could go a long way toward reducing the stresses and strains on mortgage-lending institutions that depend on short-term liabilities for making long-term loans. W HICH WAY? Allowing VRMs and FRMs to coexist pro 23 BUSINESS REVIEW SEPTEMBER 1972 NOW AVAILABLE BRO CHU RE AND FILM STRIP ON TRUTH IN LENDING Truth in Lending became the law of the land in 1969. Since then the law, requiring uniform and meaningful disclosure of the cost of consumer credit, has been hailed as a major breakthrough in consumer protection. But despite considerable publicity, the general public is not very familiar with the law. A brochure, "What Truth in Lending Means to You," cogently spells out the essentials of the law. Copies in both English and Spanish are available upon request from the Department of Bank and Public Relations, Federal Reserve Bank of Philadelphia, Phila delphia, Pennsylvania 19101. Available in English is a film strip on Regulation Z, Truth in Lending, for showing to consumer groups. This 20-minute presen tation, developed by the Board of Governors of the Federal Reserve System, is designed for use with a Dukane project that uses 35mm film and plays a 33 RPM record synchronized with the film. Copies of the film strip can be purchased from the Board of Governors of the Federal Reserve System, Washington, D. C. 20551, for $10. It is available to groups in the Third Federal Reserve District without charge except for return postage. Persons in the Third District may direct requests for loan of the film to Truth in Lending, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania 19101. Such requests should provide for several alternate presentation dates. 24 FEDERAL RESERVE BANK OF PHILADELPHIA The Fed in Print Business Review Topics Second Quarter 1972, Selected by Doris Zimmermann Articles appearing in the Federal Reserve Bulletin and in the business reviews of the Federal Reserve banks during the second quarter of 1972 are included in this compila tion. A cumulation of these entries covering the years 7969 to date is available upon request. If you wish to be put on the mailing list for the cumulation, write to the Publica tions Department, Federal Reserve Bank of Philadelphia. To receive copies of the Federal Reserve Bulletin, mail sixty cents for each to the Federal Reserve Board at the Washington address on page 30. You may send for business reviews of the Federal Reserve banks, free of charge, by writing directly to the issuing banks whose addresses also appear on page 30. BANK DEPOSITS Bank debits, deposits, and deposit turn over — revised series — F R Bull July 72 p 631 AGRIBUSINESS Brighter farm picture — San Fran April 72 P 3 Revolutions in American agriculture — Kansas City June 72 p 3 BALANCE OF PAYMENTS Closing Uncle Sam's trade gap — Phila April 72 p 13 U.S. balance-of-payments problems in 1971 — St. Louis April 72 p 8 BANK EARNINGS Member bank income, 1971 — F R Bull May 72 p 446 OPERATING RATIOS available - Phila May 72 p 23 Profit rate at District member banks de clines in 1971 — Atlanta June 72 p 105 BANK CREDIT CARDS What's in store for bank credit cards in the Southeast? — Atlanta June 72 p 99 BANK HOLDING COMPANIES Boom in multibank holding companies — Phila May 72 p 8 25 SEPTEMBER 1972 BUSINESS REVIEW BUCHER, JEFFREY M. Appointment to Board of Governors June 5, 1972 - F R Bull June 72 p 601 Registered in the District number 115 — Dallas June 72 p 7 BANK LOANS — BUSINESS Monthly series for commercial and indus trial loans — F R Bull July 72 p 683 BUDGET The full employment budget — its uses and limitations — Kansas City April 72 p 3 M eeting p u b lic need s: An a p p ra isa l (Mayo) — Chic May 72 p 2 The full-employment budget: A guide for fiscal policy — Rich May 72 p 2 BANK LOANS — CONSTRUCTION Construction loans at commercial banks — F R Bull June 72 p 533 BANK LOANS — CONSUMER Continue to grow — Atlanta May 72 p 89 BURNS, ARTHUR F. Some essentials of international monetary reform (Montreal) — F R Bull June 72 p 545 Some essentials of international monetary reform — N.Y. June 72 p 131 BANK LOANS — FARM Rural bank needs for external funds — Chic May 72 p 12 BANK MARKETS Defining the product market in commer cial banking — Cleve June 72 p 17 BUSINESS CYCLES Recovery accelerates — St. Louis June 72 P 2 BANK PORTFOLIOS Securities: A major outlet for District member banks — Atlanta April 72 p 69 BUSINESS FORECASTS & REVIEWS The trend of business — Chic April 72 p 2 Financial developments in the first quarter of 1972 - F R Bull May 72 p 435 Spring upsurge? — San Fran May 72 p 3 BANK SUPERVISION The Hunt Commission Report — an eco nomic review —St. Louis June 72 p 8 BANKING STRUCTURE District banking: Ten years of growth and change — Atlanta April 72 p 54 A newcomer's view of the U.S. banking industry (Winn) — Cleve April 72 p 3 Banking's widening limits (Eastburn) — Phila May 72 p 3 Changes in the '60s: A new financial cli mate — Phila May 72 p 11 The changing banking scene (Treiber) — N.Y. June 72 p 135 CALL REPORTS Banking data on magnetic tape — F R Bull July 72 p 683 CHECK COLLECTIONS Regional check processing centers — Rich April 72 p 10 Recent regulatory changes in reserve re quirements and check collection — F R Bull July 72 p 626 BRIMMER, ANDREW F. Characteristics of Federal Reserve bank directors — F R Bull June 72 p 550 COMMERCIAL POLICY International trade policies — the problem of nontariff barriers — Kansas City May 72 p 11 BROKERS Stock market commission fees: Competi tion or bust . . . or be busted — Phila April 72 p 3 CONTAINERIZATION Houston and Galveston bid for container trade — Dallas June 72 p 1 26 FEDERAL RESERVE BANK OF PHILADELPHIA CORPORATE FINANCE Financing corporate investment — F R Bull May 72 p 523 FARM INCOME Outlook for farm income and food prices — St. Louis April 72 p 16 CREDIT RATIONING A review — F R Bull June 72 p 531 FARM O UTLO O K What's ahead for agriculture in '72? — Rich April 72 p 14 CRIME Compensating victims of crime: Blunting the blow — Phila June 72 p 14 FARM REAL ESTATE Seventh District farmland values — Chic June 72 p 19 DISCOUNT RATES Problems and remedies — Atlanta June 72 p 94 FEDERAL FUNDS MARKET A market comes of age in the Eleventh District Part II — Dallas April 72 p 1 A market comes of age in the Eleventh District Part III — Dallas May 72 p 1 ECONOM IC DEVELOPMENT Social costs — the due bill for progress — Kansas City April 72 p 13 Financial analysts and the nongrowth cult — Phila May 72 p 3 FEDERAL RESERVE ACT Revised edition — F R Bull July 72 p 684 FEDERAL RESERVE BOARD Membership of the Board of Governors 1913-1972 - F R Bull June 72 p 560 ECONOM IC STABILIZATION Federal economic policies in perspective — Atlanta April 72 p 62 A look at ten months of price-wage con trols (Andersen) — St. Louis June 72 p 13 FEDERAL RESERVE SYSTEM — PUBLICATIONS The Fed in print — Phila June 72 p 21 FOREIGN EXCHANGE Devaluation of the dollar — San Fran June 72 p 3 EMPLOYMENT, FULL The path to full employment — Bost May 72 p 11 FOREIGN EXCHANGE RATES Exchange-rate flexibility and the forwardexchange markets: . . . The German mark — Bost May 72 p 2 EXPECTATIONS Curbing price expectations — St. Louis May 72 p 2 FORWARD EXCHANGE Nature and use of — Cleve April 72 p 7 EXPORTS Domestic international sales corporations — Rich June 72 p 2 The world trade matrix — Rich June 72 p 7 FARM EXPORTS Japan: U.S. agriculture's number one cus tomer — Kansas City May 72 p 3 27 SEPTEMBER 1972 BUSINESS REVIEW GOVERNMENT EMPLOYEES Government employment in the United States: 1952-1970 — Rich April 72 p 2 MUNICIPAL FINANCE Fiscal alternatives for Philadelphia — Phila April 72 p 17 GRANTS-IN-AID Federal aid to Fifth District states — Rich May 72 p 9 NEGROES Economic situation of blacks . . . — Phila June 72 p 9 INTEREST RATES On loans, monthly, in G.10 release — F R Bull May 72 p 510 ONE-BANK HOLDING COMPANIES In the Southeast — Atlanta May 72 p 82 OPEN MARKET OPERATIONS And the monetary and credit aggregates — 1971 - N.Y. April 72 p 79 Record of policy actions, Feb 15, 1972 — F R Bull May 72 p 455 Record of policy actions, March 21, 1972 - F R Bull June 72 p 562 Record of policy actions, April 17 and 18, 1972 - F R Bull July 72 p 640 JACOBSSON, PER FOUNDATION LECTURE available — N.Y. April 72 p 105 LOANS, DISASTER Assistance to banks in flooded areas — F R Bull July 72 p 682 MAISEL, SHERMAN J. Resignation May 31, 1972, from Board of Governors — F R Bull June 72 p 601 OVER-THE-COUNTER MARKET List of O TC margin stocks — F R Bull May 72 p 511 Changes in O TC margin stocks — F R Bull July 72 p 682 MANUFACTURING In West Virginia — Rich May 72 p 12 Virginia — Rich June 72 p 11 METROPOLITAN AREAS Eighth Federal Reserve District — St. Louis June 72 p 6 PRODUCTIVITY Productivity, labor costs, and prices — Rich April 72 p 6 MITCHELL, GEORGE W. Statement to Congress, June 19, 1972 (bank tax) — F R Bull July 72 p 636 RECREATION INDUSTRY Skiers: Their local economic impact — Kansas City June 72 p 10 MONETARY STABILIZATION Problems of the international monetary system and proposals for reform — 1944-1970 — St. Louis May 72 p 24 REGULATION D Amendment September 21, 1972 — F R Bull July 72 p 649 MONEY SUPPLY Recent monetary growth — St. Louis April 72 p 3 Measurement of the domestic monetary stock — St. Louis May 72 p 10 REGULATION G Amendment May 15, 1972 — F R Bull May 72 p 464 MORTGAGES, VARIABLE Variable rates on mortgages? — San Fran April 72 p 11 REGULATION J Amendment September 21, 1972 — F R Bull July 72 p 649 28 FEDERAL RESERVE BANK OF PHILADELPHIA REGULATION Q And the commercial loan market in the 1960's - F R Bull June 72 p 532 SAVINGS AND LOAN ASSOCIATIONS . . . In a changing economy — Atlanta May 72 p 74 REGULATION T Amendment May 15, 1972 — F R Bull May 72 p 464 SHIPBUILDING Boom in offshore drilling keeps rig build ers busy — Dallas April 72 p 7 REGULATION U Amendment May 15, 1972 — F R Bull May 72 p 464 TIME DEPOSITS Growing time deposits — at what cost to the small bank? —Chic April 72 p 8 Changes in time and savings deposits at commercial banks — F R Bull July 72 p 615 REGULATION Y Amendment June 6, 1972 — F R Bull June 72 p 571 UNEMPLOYMENT What happens when unemployment rate changes — Cleve June 72 p 3 REGULATION Z Brochure and film strip on TRUTH IN LENDING available — Phila June 72 P 8 VOLUNTARY FOREIGN LOAN CREDIT RESTRAINT 1965 Recent interpretations — F R Bull May 72 p 509 Interpretations — F R Bull June 72 p 602 RESERVE REQUIREMENTS Member bank reserve requirements — her itage from history — Chic June 72 p 2 NOW AVAILABLE The Fed in Print, a cumulative index to Federal Reserve Bank reviews, is avail able on a quarterly basis. It brings Selected Subjects up-to-date. To be placed on the mailing list, send your request to the Department of Public Services, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania 19101. 29 FEDERAL RESERVE BANKS AND BOARD OF GOVERNORS Federal Reserve Bank of Kansas City Federal Reserve Station Kansas City, Missouri 64198 Publications Services Division of Administrative Services Board of Governors of the Federal Reserve System Washington, D. C. 20551 Federal Reserve Bank of Minneapolis Minneapolis, Minnesota 55440 Federal Reserve Bank of Atlanta Federal Reserve Station Atlanta, Georgia 30303 Federal Reserve Bank of New York Federal Reserve P.O. Station New York, New York 10045 Federal Reserve Bank of Boston 30 Pearl Street Boston, Massachusetts 02106 Federal Reserve Bank of Philadelphia 925 Chestnut Street Philadelphia, Pennsylvania 19101 Federal Reserve Bank of Chicago Box 834 Chicago, Illinois 60690 Federal Reserve Bank of Richmond P.O. Box 27622 Richmond, Virginia 23261 Federal Reserve Bank of Cleveland P.O. Box 6387 Cleveland, Ohio 44101 Federal Reserve Bank of St. Louis P.O. Box 442 St. Louis, Missouri 63166 Federal Reserve Bank of Dallas Station K Dallas, Texas 75222 Federal Reserve Bank of San Francisco San Francisco, California 94120 30 FOR THE RECORD... 2 YEARS AGO YEAR AGO JULY 1972 Third Federal Reserve District July 1972 fr om mo. ago year ago YEAR AGO United States Percent change SU M M A R Y 2 YEARS AGO Manufacturing year ago July 1972 frc>m mo. ago year ago 7 mos. 1972 from year ago Payrolls Percent change July 1972 from LO CA L CHANGES Standard Metropolitan Statistical Areas' Percent change July 1972 from Electric power consumed ... - 6 - 3 Employment, total................... - 2 Wage income*.......................... - 3 CONSTRUCTIO N"..................... + 12 COAL PRODUCTION................... -1 6 - 2 - 2 - 3 + 4 +15 -2 1 + 2 —2 - 3 + 4 -2 4 - 6 7 + 6 + 6 Bridgeton.................. - -1 0 0 + 2 + lb - 3 + 3 N/A - 5 + 6 +13 -1 7 + 4 - 5 +12 + 13 + 15 + 13 + 10 + 14 - 2 0 +16 +22 +12f +13t + 3t N/A N/A Altoona...................... 5 - 3 - 1 N/A + 1 N/A - 4 + 1 + 7 + 8 + 6 + 2 + 8 + 1 +10 + 1 + 15 o + 7 - 1 0 0 +11 - 2 +11 +10 +12 + 10 + 1 +15 + 14 1 - - 2 - + 31 + 1 + 4 + 4 0 + 3 + 3 f 15 SMSA’s JPhiladelphia 4 + 12 - - 6 + 16 + 4 +21 1 - 7 + 11 + 1 +10 2 + 9 + 9 - 4 +12 + 3 +17 2 - 2 - 1 + 11 0 + 12 0 + 7 0 + 2 - 2 + 12 - 5 + 34 + 2 + 15 3 + 10 + 4 + 18 + 2 + 14 Lehigh Valley............ - 6 - 2 - Philadelphia.............. - 1 - 2 - 2 + 5 + 1 + 16 1 +13 4 + 5 3 + 1 + 6 + 4 + 1 +12 Scranton.................... - 3 + 1 - Williamsport.............. N/A York........................... - 8 - 4 - N/A 8 + 1 + 15 7 + 5 + 4 +22 N/A 1 + 1 - 9 - _ 3 - 2 Wilkes-Barre............. ot Percent change July 1972 from - 2 - Lancaster.................. 0 0 0 U.S. Govt, securities............ - 1 Other..................................... + 1 Check paym ents'"................. - It 0 + 1 +20 0 Atlantic City.............. Johnstown................. BANKING (All member banks) Deposits.................................... Loans........................................ Percent change July 1972 from 0 - 'Production workers only 'Value of contracts 'Adjusted tor seasonal variation Check Total Payments" Deposits'" month year montf year month year montf year ago ago ago ago ago ago ago ago MANUFACTURING PRICES Wholesale............................... Consumer................................. Banking Employ ment Percent change 7 mos. 1972 from JULY 1972 N/A + 6 +29 + 12 - 4 + 2 N/A 2 + 8 + 10 + 35 0 + 11 'Not restricted to corporate limits of cities but covers areas of one or more counties. " A ll commercial banks. Adjusted for seasonal variation. '"Member banks only. Last Wednesday of the month.
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