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FEDERAL RESERVE B A N K OF R I C H M O N D 1966 A N N U A L REPORT THE L O N G E S T PROS PE RI TY FEDERAL RESERVE BANK OF R I C H M O N D FIFTY-SECOND ANNUAL REPORT CONTENTS T H E L O N G E S T P R O S P E R IT Y S t r a t e g ic E le m e n ts o f a B u s in e s s E x p a n s io n ............................................... 4 A P a n o r a m ic V i e w .......................................................................................... 6 E m p lo y m e n t a n d P r o d u c t io n ............................................................................ 18 C o r p o r a t e P ro fits ............................................................................................ 24 D o m e s tic In v e s t m e n t ...................................................................................... 26 F isca l P o lic y .................................................................................................... 28 M o n e t a r y P o lic y .............................................................................................. 32 B a la n c e o f P a y m e n t s ...................................................................................... 3 6 P r o b le m s o f P r o s p e r i t y .................................................................................... 4 0 Su m m a ry ........................................................................................................ 4 4 S IG N IF IC A N T E V E N T S O F 1 9 6 6 ........................................................................ 4 6 S u m m a r y o f O p e r a t i o n s ................................................................................ 4 7 C O M P A R A T I V E S T A T E M E N T S .............................................................................. 4 8 F E D E R A L R E S E R V E B A N K O F R I C H M O N D — D ire c t o rs a n d O f f ic e r s ................... 50 B A L T IM O R E A N D C H A R L O T T E B R A N C H E S - D i r e c t o r s a n d O f f ic e r s ................. 5 2 TO OUR MEMBER BANKS: W e are pleased to present the Annual Report of the Federal Reserve Bank of Richmond for 1966. The report features an analysis of "The Longest Prosperity," the period of economic expansion from 1961 to the present. Also included are the Bank's annual financial statements, a brief summary of the high lights of the year's operations, and a current list of officers and directors of our Richmond, Baltimore, and Charlotte offices. On behalf of our directors and staff, we wish to thank you for the splendid cooperation and support you have extended to us throughout the past year. Sincerely yours, C h a i r m a n o f th e B o a r d P re s id e n t THE LONGEST STRATEGIC ELEMENTS OF A B U S I N E S S T h e b u s in e s s e x p a n s i o n w h ic h b e g a n in e a r ly 1 9 6 1 PROSPERITY h a s p e rh a p s been EXPANSION th e s t r o n g a n d s t e a d y g r o w t h o f G N P in b o th c u r re n t a n d c o n s t a n t d o lla r s . o b s e r v e d m o r e c lo s e ly t h a n a n y o t h e r Per in h ist o ry . c o m e in c o n s t a n t d o lla r s ro s e b y m o r e a ll le v e ls In it e ve ry has p hase a n d been at c a p it a d is p o s a b le d e s c rib e d , th a n a fifth w h ile d ia g n o s e d , a n a ly z e d , a p p r a is e d , a n d w as i n c r e a s in g e v a lu a t e d . t h a n a h a lf. T h is is n o t s u r p r i s i n g b e c a u s e it h a s b e e n a r e m a r k a b le p e r io d o f p ro s p e r it y . B y th e m id d le o f 1 9 6 6 T h is p e r io d by has p e rso n a l in n e t p r iv a t e debt som e w h at m o re been— b y a w id e m a r g i n — th e lo n g e s t e x p a n s i o n in o u r it h a d a d d e d n e a r ly s e v e n m illio n to p e a c e t im e h isto ry . th e r a n k s o f jo b h o ld e rs , r a is e d i n d u s p r o m is e o f b e in g th e id e a l e x p a n s i o n tr ia l p r o d u c t io n a n d G N P b y a b o u t a — one h a lf, a lm o s t d o u b le d c o r p o r a t e p ro fits, b a la n c e d and in f la t io n . b o o s t e d p e r c a p it a p e r s o n a l in c o m e b y a lm o s t a th ird . C h a r t I s h o w s w h ic h F o r a tim e it g a v e a ffo rd e d e c o n o m ic But th ro u gh o u t in 1966, la te in v o k e th e stro n g e st and i n f la it n e c e s s a r y a n t i-in fla t io n a r y m e a s u r e s u s e d in a tio n . w it h o u t 1965 g r o w in g t io n a r y p r e s s u r e s m a d e to s u b s t a n t ia l, g ro w th ge n e ra A t th is w r it in g th e e x p a n s i o n c o n tin u e s a lt h o u g h th e re s tra in t s a r e b it in g in s o m e se cto rs. It is still u n th e su b je c t o f m a n y e la b o ra t e , c o m p re h e n s iv e , a n d s o p h is t ic a t e d stu d ie s. c e rta in w h e t h e r, w h e n , a n d h o w th e T h is r e p o rt c o u ld n o t a im a t su c h a in f la t io n a r y fo rc e s g e n e r a lly c a n stu d y w e re cu rbe d w it h o u t d a m a g in g be p r e c ip it a t in g a even p r o p ria t e . if The th e tim e m uch m o re ap m od est g o a l is to m a k e a s u m m a r y r e v ie w o f re c e ssio n . B e c a u s e o f th e c lo se r a n g e a t w h ic h th e p a s t s ix y e a r s , to p o in t o u t th e th e e x p a n s i o n h a s b e e n f o llo w e d a n d m a j o r o r c h a ra c t e rist ic d e v e lo p m e n t s , th e g r e a t d e t a il in w h ic h it h a s b e e n to n ote, if p o s s ib le , th e fa c to r s w h ic h a n a ly z e d , ca u se d th e tre e s have re c e iv e d th e e x p a n s i o n to g e t o u t o f m o s t o f th e a tte n tio n a t th e e x p e n s e c o n tro l, a n d to tra c e th e p o lic y m o v e s o f th e fo re st. w h ic h a p p r o p r ia t e T h e p re s e n t m a y b e a n tim e to ta k e a lo n g e r w ere m ade fir s t to s tim u la t e a n d la t e r to r e s tr a in e x p a n s io n . lo o k a t th e w h o le p e r io d , g a i n s o m e p e rsp e c tiv e , and n o te la r g e r r e la t io n s h ip s . so m e of th e In fu t u re y e a r s , th is lo n g p e r io d w ill u n d o u b t e d ly b e G R O S S N ATIO NAL PRODUCT C h art I 1 > Cum . % C h an g e F ro m T r o u g h 50 40 C u r r e n t D o lla r s 30 — 20 C o n s t a n t D o lla r s 10 0 — in 1 1 ________ — 1------------------1----------------1966 1965 1962 1963 1964 U. S. D e p a r t m e n t o f C o m m e rc e . ....J 1961 S o u rc e : , V > A P A N O R A M IC V IEW i E c o n o m ic d e v e lo p m e n t s a r e c lo s e ly w o u ld o v e r e m p h a s iz e it. A n o t h e r a d The e c o n o m y 's in te rre la te d , a n d if t h e y a r e p re se n t e d van tage in tru e p e r sp e c t iv e t h e y s h o u ld b e d is p a r is o n o f o n e s e rie s w it h a n o t h e r a n d m a r k a b le c u s s e d in th e c o n te x t o f a la r g e p a n o of one p e r io d . r a m ic v ie w se c tio n of th e econom y. a tte m p ts to v ie w , c o v e r in g th e d e v e lo p p e r io d fir st q u a r t e r o f 1 9 6 1 q u arte r o f 1966. m o re T h is su ch fr o m L a te r s e c tio n s g i v e d e ta ils. For c o n v e n ie n c e , th e w h o le tim e th a t it e x p a n s io n w it h d o in g t h is fo r a ll se c to rs of of th e e c o n o m y a lt h o u g h , w it h s o m e lo g ic a l su p p o rt, th re e m a r k e d out. s u b p e r io d s m ay be T h e fir s t r u n s f r o m th e 1961 p e rfo rm a n c e c o n stitu te s th e fe a tu re S t a r t in g of th e a ft e r 15 s in c e m ost re p o stw a r y e a rs of q u it e r a p id g r o w t h , in d u s t r ia l p r o d u c tio n " t o o k o f f " in th e fir s t q u a r t e r o f For 1961 and o v e r th e n e x t f iv e a n d a h a lf y e a r s m a in t a in e d a g r o w t h ra te o f 6 . 9 p e r ce n t p e r y e a r — a d e x o f in d u s t r ia l p r o d u c t io n is u s e d m ost tw o as a p r e v io u s 1 5 y e a r s a n d f iv e tim e s th e p r o x y f o r th e b e h a v io r o f th e p e r io d s w ay e a r ly th is p u r p o s e , th e b e h a v io r o f th e in is s a t is f a c t o r y a n o t h e r. fu l in e v a lu a t in g th is e x p a n s io n . e c o n o m y a s a w h o le . e n t ir e ly com S o m e h ist o r ic a l b a c k g r o u n d is h e lp s p a n is d iv id e d in to s u b p e r io d s . T h e re no fa c ilit a te s BACKGROUND a th e to th e s e c o n d is each of a re T w o p e a c e t im e a p p ro x im a t e ly c o n s id e r e d , 20 each ye a rs s t a rt in g w it h th e fir s t q u a r t e r a ft e r th e e n d o f a m a jo r w a r . y e a rs fro m T h e f ir s t c o v e r s th e 1 9 1 9 to 1939 and th e t h ir d s p r e w a r rate. above ra te a l th a t of th e F u rth e r m o re , a f t e r th e fir s t y e a r , th e g r o w t h a c c e le ra t e d a s th e p e r io d advanced, r is in g b y 7 .8 p e r c e n t in 1 9 6 4 - 6 5 a n d 9 .2 p e r ce n t in 1 9 6 5 - 6 6 . The sm o oth a n d ste a d y e x p a n s i o n o n a q u a r t e r ly b a s is le n d s s t a r t in g p o in t in th e fir s t q u a r t e r o f s e c o n d r u n s fr o m th e e n d o f 1 9 4 5 to a d d it io n a l s ig n if ic a n c e 1961 m id - 1 9 6 6 . fo rm a n c e . W h i le th e re w e r e a f e w t h r o u g h th e s e c o n d q u a r t e r o f C h a r t II c o m p a r e s th e se p e r io d s, w it h th e e a r lie r p e r io d in th e d e c lin e s f r o m m id - 1 9 6 4 to m id - 1 9 6 5 , w h ile th e b o tto m p a n e l a n d th e la t e r p e r io d a t q u a r t e r ly t h ir d c o v e r s th e f o llo w in g y e a r . th e top . w it h o u t 1964. The second c o v e r s th e y e a r The lo g ic f o r th e d iv is io n is g i v e n a s e a c h p e r io d is d is c u s s e d . T h r o u g h o u t th e As th e b o tto m panel sh ow s, in a to th e p e r m o n th ly f ig u r e s , th e a ve ra g e s m oved up b re a k . th e tr e n d lin e o f th e in t e r w a r y e a r s w a s STARTING POINT s tu d y , q u a r t e r ly d a t a a r e u s e d a n d in q u it e fla t. n e a r ly a ll c a s e s th e c h a rt s s h o w c u m u to th e 5 0 p e r ce n t d r o p b e t w e e n 1 9 2 9 la t iv e p e r c e n t a g e c h a n g e s b y q u a r t e r s and in c e s s io n , it w a s a v e r y s h a l lo w t r o u g h f r o m th e s t a r t in g p o in t, w h ic h w a s th e 1 9 3 4 - 3 5 , a n d a s e c o n d la r g e d r o p in — th e s h a llo w e s t o f th e p o s t w a r p e r io d . b etw e e n p r e s e n t in g m a n y c a se s w o u ld in e m p h a s iz e q u a rte r change, p e rce n ta ge a b s o lu t e and th e s l u g g i s h re co ve ry th e f ir s t q u a rte r of 1961 1 9 3 7 -3 8 . T h e a v e r a g e a n n u a l g ro w th F ro m th e p e a k in th e s e c o n d q u a r t e r 1 .4 p e r ce n t b u t th e to ta l o f 1 9 6 0 to th e f ir s t q u a r t e r o f 1 9 6 1 , d ata , ris e f r o m th e lo w p o in t o f e a r ly 1 9 1 9 G N P , c iv ilia n e m p lo y m e n t , a n d w h o le u n d e r- to th e h i g h p e a k a t th e e n d o f 1 9 3 9 s a le w a s 8 4 p e r cent. change. T h is q u a r t e r-t o - ch a n ge s, 1933, W h i le m a r k e d th e t r o u g h o f th e 1 9 6 0 -6 1 re w a s o n ly t r o u g h o f th e 1 9 6 0 -6 1 re c e s s io n . m e t h o d w a s c h o se n a s a m id d le c o u rs e w h ic h T h is w a s d u e in la r g e p a r t THE w h ic h In s h a r p co n tra st, p ric e s show ed v ir t u a lly no T h e re w e r e s m a ll d e c lin e s in th e p o s t w a r p e r io d s h o w e d a n a n n u a l in d u s t r ia l p ro d u c t io n , in v e n to rie s , a n d gro w th m a n u f a c t u r e r s ' u n f ille d o r d e rs , b u t th e ra t e o f 4 .3 p e r cent, th re e tim e s th e p r e w a r ra te , a n d p o s te d a to ta l g a i n o f 1 7 1 p e r cent. The p re w a r p e r io d , o f c o u rs e , w o u l d m ade a m uch b e tte r re c o rd have except f o r th e lo n g a n d d e e p d e p r e s s io n o f th e th irtie s. d r o p s w e r e q u it e m o d e st. A s fu rth e r Chart II INDUSTRIAL PRODUCTION 1 9 5 7 -1 9 5 9 = 1 0 0 7 e v id e n c e o f th e m ild n e s s o f th e re M o n e ta ry p o lic y w a s e a se d even Well-Balanced G r o w t h P e r h a p s th e b e f o r e th e p e a k w a s re a c h e d in M a y m o s t s ig n if ic a n t g e n e r a l c h a ra c te ristic 1 9 6 0 , a n d b y J u n e fr e e r e s e r v e s a p o f th is p h a s e w a s a sm o o t h , s te a d y , c o n s u m e r p rice s, e x p e n d it u r e s f o r n e w p e a re d . and c o n stru c tio n , in c o m e . th e s e a m o u n t e d to a b o u t $ 5 0 0 in te re st lio n . c e ssio n , se ve ra l m a jo r te re d s m a ll in c re a s e s . F a rm and in c o m e s e rie s p e rso n a l and re g is T h e s e in c lu d e d p e rso n a l re c e ip ts ro s e a p p r e c ia b ly . The com B y th e fir s t q u a r t e r o f 1 9 6 1 w e ll- b a la n c e d g ro w th . Som e m il se c to rs d id e x p e r ie n c e a s la c k e n in g o f S t im u la t e d b y th e s e m o v e s , th e g r o w t h in th e la s t h a lf o f 1 9 6 2 , b u t m oney s u p p ly in c r e a s e d and bank o t h e r w is e th e e x p a n s i o n p r o c e e d e d a t a r e la t iv e ly s t e a d y p a c e . In v e n t o rie s p a r a t iv e s t a b ilit y o f p e r s o n a l in c o m e cre d it ro se . in d ic a t e d a s m u c h a s in e a r lie r re c e s s io n s . L o n g w e r e h e ld in c lo s e c o n tro l a n d u s u a l ly in ra t e s fe ll o n l y s lig h t ly , w h il e ra t e s o n grew c o u rs e o f th e e c o n o m y . s h o r t T r e a s u r y b ills d r o p p e d b y a b o u t m a n u fa c tu re rs7 u n f i l l e d a fo u rt h . cre ase d h a r d ly th a t m o re th e u p w a r d th e "r e c e s s io n " th a n a w as b r ie f p a u s e T w o m a j o r in d ic a t o r s s h o w e d s u b In te re st ra t e s fe ll, b u t n o t T h e F e d e ra l R e s e rv e S y s te m le ss r a p i d l y t h a n o n ly s a le s, w h ile o rd e rs m o d e r a t e ly . in E x p e n d i p ro f it s d id n o t s u p p l y r e s e r v e s a s g e n e r o u s l y tu re s f o r n e w p la n t a n d e q u ip m e n t re d r o p p e d b y 1 2 .2 p e r cent, w h ic h w a s a s it m ig h t h a v e d o n e o t h e r w is e a n d m a in e d m o d e r a t e in 1 9 6 1 n o t u n u s u a l f o r th is v o la t ile s e rie s in it t o o k s p e c ia l s te p s to but a p e r io d o f s la c k b u s in e s s . u n d e r sh o rt-te rm s t a n tia l ch an ge s. C o rp o ra te M o r e im put a f lo o r in te re st ra te s, b o th in e a r ly a n d s t e a d y rise . p o r t a n t w a s th e ris e in th e n u m b e r o f in a n e ffo rt to d is c o u r a g e th e f l o w o f su ffe re d u n e m p lo y e d f r o m fu n d s a b ro a d . and m illio n , or m o re 3 .7 m illio n to 4 . 9 th a n 30 In s u m m a r y , it w a s a v e r y b r ie f a n d p e r cent. m ild re c e ssio n . In 1963 any none and s ta rt e d a lo n g N o m a j o r in d u s t r y s u b s t a n t ia l w as 1962 re v e r se s t im u la t e d in to a s p e c u la t iv e b o o m . T h e ra te o f u n e m p lo y m e n t ro s e fr o m ve ry 5 .3 p e r ce n t to 6 .8 p e r cent. T o ta l e m a c t iv it y s la c k e n e d o r le v e le d o f f f o r m ost a re a s fo r e fr o n t o f th e e x p a n s i o n a n d p lo y m e n t r e m a in e d f a i r l y s t e a d y n e a r a v id e d m u c h o f th e im p e t u s f o r th e u p 6 7 m illio n , a n d th e s h a r p ris e in u n b a r ra s s in g e m p lo y m e n t w a s c a u s e d v e r y la r g e l y to rie s b rie f tim e b u t th e re w a s a c c u m u la t io n nor any of s ig n if ic a n t A t tim e s it a p p e a r e d to b e th e p r o d u c t io n o f p a s s e n g e r c a rs ro se d istre ss. fro m a n d th e e c o n o m y w a s in a s t r o n g a n d lio n in 1 9 6 4 . th e a v e r a g e annual la r g e r t h a n in c r e a s e in th e p r e c e d in g te n y e a r s . F isc a l p o lic y w as a r e s t r a in in g 5 .5 m illio n in 1 9 6 1 h e a lt h y c o n d it io n to r e s u m e th e a d th e re v a n c e w h e n th e t r o u g h w a s p a s s e d To in F e b r u a r y th e fo rc e d u r i n g th e e a r ly p a r t o f th e re c e ssio n . of 1961. no in v e n t o r y o b se rve rs m arke t w a s re c o rd s to 7 .7 m il B u t s a le s k e p t p a c e a n d it p ro b le m . seem ed in s a t ia b le w ere se t as and th a t new b ro k e n r e g u la r ly . T h e p e r io d c h o s e n to re p re s e n t th e th e F e d e ra l c a s h b u d g e t p r o d u c e d a w as m any s a le s T HE F I R S T P H A S E F o r th e c a le n d a r y e a r 1 9 6 0 , p ro o p e r a t in g a t a n u n s u s t a in a b le p a c e a s a d j u s t in g b u s in e s s o r in d i v id u a l d e b ts m uch p r o b le m s w in g . b y a n in c r e a s e o f o n e m illio n in th e n in e m o n t h s w a s no in v e n f in a n c ia l c iv ilia n la b o r fo rc e . T h is in c r e a s e in T h e re w a s no em T h e a u t o m o b ile in d u s t r y w a s in th e O n th e o t h e r h a n d , r e s id e n t ia l c o n a fir s t p h a s e o f th is e x p a n s i o n c o v e r s stru c tio n d id n o t s h o w la r g e d e fic it o f $ 8 . 0 b illio n in 1 9 5 9 . a p p r o x i m a t e l y th re e a n d a h a lf y e a r s h a d d is p la y e d in th e 1 9 5 0 's . F o r th e p e a k s e c o n d q u a r t e r o f I 9 6 0 , — fro m e a r ly v i o u s cycle s, h o u s i n g h a d f r e q u e n t ly th e s u r p lu s (u n a d ju s t e d ) w a s $ 4 . 5 b il 1964. It is lio n ; th is d e c lin e d r a p id ly a n d b y th e th e a v e r a g e fir st in th e p o s t w a r y e a r s . s u r p lu s o f $ 3 .6 q u a rte r of b illio n , f o l l o w in g 1961 d e fic it o f $ 2 .3 b illio n . th e re w as a p r i m a r i ly te n d e d 1961 so m e w h a t sp an In p r e th a n m o v e d c o n tra -c y c lic a lly , r is in g in re c e s s io n y e a r s b e c a u s e o f lo w in te re st It w a s c h o s e n it c o v e r s ex ra t e s a n d a b u n d a n t c re d it a n d th e n b e in g c h o k e d o f f in r e c o v e r y a s r is in g ra t e s a n d w it h s t a b le w h o le s a le p rice s. In m a n y s h u t o f f th e f l o w o f f u n d s . W h i le in re s p e c ts th is te rest ra t e s r e m a in e d s t a b le a n d f u n d s p h a s e w a s s im ila r to th a t in o t h e r u p w e r e r e a d il y a v a ila b l e , h o u s in g n e v e r s w i n g s , b u t th e re w e r e a n u m b e r o f th e le ss r e s p o n d e d o n l y s l u g g i s h l y a n d w h ic h usu al s u b s t a n t ia l an d e m a n d f o r c re d it r a is e d th e of lo n g e r of g ro w th of e x p a n s io n d iffe re n c e s , m ay le n g t h th is e x p a n s io n . m id d le o f p r e v io u s e x p a n s i o n s b ecause im p o r t a n t 8 to th e th e v it a lit y it d u r in g som e account fo r and or a ll th e un m a g n it u d e of p e a k e d o u t in e a r ly 1 9 6 4 . C h a r t III c o n s id e r a b le m a r g in of u n u sed p ro t e c h n iq u e s o f in v e n t o r y co n tro l a ls o s h o w s th e m o v e m e n t s in e x p e n d it u r e s d u c in g c a p a c it y in th e e c o n o m y . fo r c o r d in g to o n e m e a s u re , m a n u f a c t u r fis c a l a n d m o n e t a r y p o lic ie s p u r s u e d n o n fa rm r e s id e n t ia l a n d in h o u s i n g sta rts. c o n stru c tio n Ac c o n trib u te d P erh aps con in g p la n t s w e r e o p e r a t in g a t le ss t h a n d u rin g a sta g e w h ere 8 0 p e r cent o f c a p a c it y in e a r l y 1 9 6 1 . c o n t r ib u t io n s t h e y w a n t e d m a n y m o r e a u t o m o b ile s T h e c u s h io n p r o v id e d b y th is re s e rv e su m e rs h a d and re a c h e d o n l y a little m o r e h o u s in g . As c a p a c it y in m o s t re c o v e rie s, d e b t in its v a r io u s f o r m s in c r e a s e d e c o n o m ic a c tiv ity . fa ste r th a n F ro m d id m uch to d is c o u r a g e to th is th e se y e a rs to result. m ade o r d e r ly F in a lly , im p o r t a n t gro w th . a s c r a m b le to p la c e o r d e rs , a c c u m u la t e in v e n to rie s , a n d b id u p p ric e s. Better th e e n d o f 1 9 6 0 to th e e n d o f 1 9 6 3 ne t p r iv a t e d e b t g r e w a t a ra te s o m e 4 0 p e r ce n t fa s t e r t h a n G N P , w h ile th e c o n s u m e r a n d m o r t g a g e d e b t o f i n d i v id u a ls w a s r i s in g a t a ra te m o re t h a n o n e a n d a h a lf tim e s a s f a s t a s d is p o s a b le p e r s o n a l in c o m e . It is n o t f e a s ib le to a tt e m p t to g i v e h e re a d e f in it iv e e x p la n a t io n f o r th is m od erate a n d a fe w b a la n c e d g r o w t h , b u t re a so n s m ay be su g g e ste d . F irst w a s th e m ild n e s s o f th e 1 9 6 0 -6 1 re c e ssio n . d e c lin e su c h o r w id e s p r e a d as bounce T h e re h a d b e e n n o v io le n t o fte n back. re a d ju s t m e n t s t im u la t e s In a sh arp p a r t ic u la r, sh o rt te rm in te re st ra t e s h a d n o t d r o p p e d to ve ry p e r io d lo w le v e ls. o f p ric e p r e v a ile d w h o le cycle, s in c e Second s t a b ilit y e a r ly a lt h o u g h w as w h ic h 1958. a th e C h a r t III PRIVATE N O N F A R M CO NSTRU CTIO N A N D H O U SIN G STARTS % Cum . Change F ro m T r o u g h ________________________________ T h o us, 1700 had One sh o rt one, “ 1600 h a d p a s s e d w it h p r a c t ic a lly n o c h a n g e in w h o le s a le p rice s. T h is d id m u c h to 1500 d is p e l th e i n f la t io n a r y p s y c h o lo g y o f th e 1 9 5 0 's a n d to c re a te a c lim a te o f p ric e e x p e c t a t io n s m o r e f a v o r a b l e to s t a b le g r o w t h . T h ird , th e r e w as -1400 a -1300 -1 20 0 -1 1 0 0 1961 S o u rc e : 1962 1963 1964 U. S. D e p a r t m e n t o f C o m m e rc e . 1965 1966 9 Stable Prices and Interest Rates r e m a r k a b le p ric e s s t a b ilit y w h ic h c o n tin u e d had of th e In te re st ra t e s w e r e u n u s u a l ly s t a b le Corporate Profits and Capital Outlays f o r a p e r io d o f e x p a n s io n , a s c a n b e T h e b e h a v io r o f c o r p o r a t e p ro fits w a s s e e n f r o m C h a r t IV . a n o u t s t a n d in g fe a t u r e o f t h is p h a s e begun th ro u gh o u t A c t u a lly , The w h o le s a le ge n e ra l in th is 1958 p hase. in d e x w as w ere L o n g -te rm ra te s e s p e c ia lly s te a d y , s h o w i n g s u s t a in e d u p w a r d tre n d . no Se ve ra l fa c a n d o f th e w h o le e x p a n s i o n p e rio d . C h a r t V c o m p a r e s p ro f it s a f t e r t a x e s s lig h t ly lo w e r in m id - 1 9 6 4 t h a n it h a d to rs a c c o u n t e d f o r th e s ta b ilit y . R a te s in th is e x p a n s i o n w it h a c o m p o s it e o f been h a d d e c lin e d o n ly m o d e r a t e ly in th e t h e ir b e h a v io r in th e f o u r p r e c e d in g T h is lo n g p e r io d o f p ric e s t a b ilit y w a s s h o r t re c e s s io n o f 1 9 6 0 - 6 1 . p o s t w a r e x p a n s io n s . th e m o re r e m a r k a b le in v i e w o f th e w e r e h i g h a n d w e r e s u ffic ie n t to m e e t e a r lie r v i g o r o f th e e x p a n s i o n b e t w e e n 1 9 6 1 th e d e m a n d s o n th e c a p it a l m a r k e t s. r is e s in p ro fits la s t in g o n l y a y e a r o r and F u rth e r, a ll m a j o r c o m M o n e ta ry a little m o re , f o llo w e d b y a le v e lin g th e in d e x re s e n te d in p a r t b y " O p e r a t i o n T w is t , " o f f o r a d e c lin e . T h is tim e p r o f it s ro s e s h o w e d a b o u t th e s a m e p a tte rn , s o th e a tt e m p te d to k e e p sh o rt-te rm in te re st c o n s id e r a b ly s t a b ilit y o f th e g e n e r a l in d e x w a s n o t ra t e s m o r e s t e a d ily a n d th e u p w a r d m o v e in th e 1964. p o n e n ts of f ir s t q u a rte r of w h o le s a le 1961. up and fo r fis c a l b a la n c e S a v in g s p o lic ie s, of re p p a y m e n ts u p s w in g s m o re T y p ic a lly , th o s e had sh ow n s lo w ly sh arp but a ls o a c h ie v e d b y d iv e r g e n t m o v e m e n t s o f p u r p o s e s w h ile m a in t a in in g lo w l o n g m e n t c o n t in u e d m u c h lo n g e r . th e p ric e s te rm ra t e s to s tim u la t e th e d o m e s t ic e n d o f th e fir s t p h a s e , a f t e r - t a x p ro fits m o v e d u p a t a ra te o f 1.2 to 1.3 p e r e c o n o m y . In c o m b in a t io n th e s e fa c t o r s h a d ris e n b y m o r e t h a n 5 0 p e r ce n t ce n t p e r y e a r , d u e c h ie f ly to th e lo n g p r o d u c e d th re e y e a r s o f r e m a r k a b ly a n d b y th e m id d le o f 1 9 6 6 t h e y h a d s e c u la r ris e in th e p ric e s o f s e rv ic e s. s t a b le in te re st rates. a lm o s t d o u b le d . co m p o n e n ts. C o n su m e r C o r p o r a t e p ro f it s a r e d is c u s s e d in P rice s o f c o n s u m e r d u r a b le g o o d s ro s e q u it e s lo w ly , at an annual ra t e of s o m e d e t a il in a la t e r se c tio n , s o o n l y a fe w a b o u t 0 .5 p e r cent. B y th e w e re p o in t s a r e n o t e d h e re . s ig n if ic a n t b o th effect. t h e ir They a s cause a n d S e v e r a l fa c t o r s c o n t rib u t e d to s u b s t a n t ia l s t e a d ily r is in g gro w th : v o lu m e of (1) th e e c o n o m ic a c t iv ity ; (2 ) s t e a d y o r s lig h t l y d e c lin in g C h a r t IV Cum . % Change INTEREST RATES u n it la b o r co sts; a n d (3) lo w e r t a x a t io n . S o a r i n g p ro f it s w e r e a n im p o r t a n t fa c t o r in th e e x p a n s io n as t h e y p r o v id e d b o th a s t r o n g in c e n tiv e and a la r g e s t im u la t e la r g e am ount of fu n d s to p r o g r a m s o f c a p it a l o u t la y s . S t e a d y in te re st r a t e s a n d th e r e a d y a v a i l a b i l i t y o f in v e s t m e n t f u n d s w ere in th e im p o r t a n t c o n t r ib u t in g in v e s t m e n t boom fa c to r s w h ic h de v e lo p e d a ft e r th e e a r ly p a r t o f 1 9 6 3 to becom e a th e e x p a n s io n . S o u rc e : B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s t e m . d o m in a n t fe a t u r e of F isc a l and M o n e ta ry fis c a l a n d m o n e ta ry P o lic ie s p o lic ie s B o th p la y e d n e a r th a t le vel. T h e d is c o u n t ra te w a s s e c o n d m a j o r p r o b le m w a s u n e m p lo y r a is e d m e n t. in J u l y im p o r t a n t ro le s in p r o m o t in g b a la n c e d b ecau se e c o n o m ic th e b a la n c e o f p a y m e n t s . g ro w th d u rin g th is first of 1 9 6 3 , a lm o s t e n tire ly c o n s id e r a t io n s a ff e c t in g flu c t u a t e d M a jo r P r o b le m s o p e n in g m o n t h s t h r o u g h a n u m b e r o f p hase w as la r g e n e w e x p e n d it u r e p r o g r a m s . T h e g ro w th c lo s in g m o n t h s s a w th e e n a c tm e n t o f p r o b le m s p e rsis te d . o n e o f th e la r g e s t re d u c t io n s in i n d i la r g e v i d u a l a n d c o r p o r a t e in c o m e t a x e s in b a la n c e o f p a y m e n t s . T h is p r o b le m is o u r h isto ry . d is c u s s e d p hase. F isc a l p o lic y c o n trib u te d in th e In b e t w e e n w e r e th e s u b a and and A lth o u g h p e r io d a th e first s u b s t a n t ia l s e a s o n a lly c lo se to fiv e a d ju s t e d , m illio n B y th e s e c o n d q u a r t e r o f 1 9 6 2 it h a d d r o p p e d to a b o u t f o u r m illio n , o r 5 .6 T h e fir s t w a s th e p e r cent, a n d th e n r e m a in e d in th a t la te r tw o d e fic it in se ctio n . th e g e n e ra l r a n g e fo r a b o u t tw o ye a rs. The s t a n t ia l lib e r a liz a t io n o f d e p r e c ia t io n a llo w a n c e s a n d th e e n a c tm e n t o f th e in v e s tm e n t t a x cred it, b o th in 1962. T h e g e n e r a l p u r p o s e o f a ll th e s e m e a s u r e s w a s to r a is e th e ra te o f e c o n o m ic g ro w th and re d u ce u n e m p lo y m e n t . F e d e ra l c a s h p a y m e n t s ro s e s t e a d ily fr o m $ 9 9 .5 $ 1 2 0 .3 b illio n in fis c a l b illio n in fis c a l 1961 to 1 9 6 4 , w h ile c a s h re c e ip ts m o u n t e d f r o m $ 9 7 . 2 b il lio n to $ 1 1 5 . 5 b illio n . O n a s e a s o n a l ly a d ju s t e d b a s is , th e re w as a ca sh d e fic it e a c h q u a r t e r , r a n g i n g b e t w e e n $ 0 .7 b illio n and $ 2.1 b illio n . The to ta l d e fic it f o r th e 1 3 q u a r t e r s w a s $ 1 7 . 4 b illio n . The g e n e ra l p o lic y p o s it io n o f m o n e t a r y th ro u gh o u t th e p e r io d w as e a s y b u t th e d e g r e e o f e a s e d e c lin e d a ft e r 1 9 6 3 . T h e c o n s t r a in t w h ic h p r e v e n t e d m o re e a s e w a s th e la r g e d e fic it CORPORATE PROFITS AFTER TAXES in o u r b a la n c e o f p a y m e n t s a n d th e C h art V d e s ir e to p r e v e n t d o m e s t ic sh o rt-te rm Cum . % C h an ge F ro m T r o u g h in te re st ra te s f r o m g o i n g s o lo w as to e n c o u r a g e th e m o v e m e n t o f f u n d s ab roa d . T h ro u g h o u t c o u n t ra te w a s 1961 th e d is 100 3 p e r cent, fr e e re se rv e s a v e r a g e d so m e w h a t m o re th a n $400 m illio n , T re a su ry 2Va p e r cent. fr e e and th e t h r e e -m o n t h A v e r a g e o f F o u r P r e v io u s E x p a n s io n s b ill ra te flu c t u a t e d a r o u n d r e s e rv e s In th e fir s t h a lf o f 1 9 6 4 a ve ra ge d about 1 9 6 1 -1 9 6 6 E x p a n s io n $120 V m illio n , th e d is c o u n t ra te w a s 3 2 p e r cent, a n d th e T r e a s u r y b ill ra t e w a s 20 ± -2 0 1961 S o u rc e : or a b o u t 7 p e r c e n t o f th e la b o r fo rce. m a jo r p ro s p e r it y , c o n t in u in g in of In e a r ly 1 9 6 1 th e n u m b e r o f u n e m p lo y e d , 1962 1963 1964 U. S. D e p a r t m e n t o f C o m m e rc e . 1965 1966 T h e s t u b b o r n r e f u s a l o f th e s e f ig u r e s s ig n s o f im b a la n c e . to d e c lin e a s e c o n o m ic a c t iv it y ro se p lo y m e n t ro s e b y 2 .6 p e r cent, w h ile y e a r o f in c ip ie n t in fla t io n . T h e stim u li g a v e ris e to a g r o w i n g c o n c e rn a n d th e c iv ilia n la b o r fo rc e in c r e a s e d b y w e r e s e v e r a l. le ss t h a n 2 p e r cent; p e r s o n a l in c o m e bank to p o litic a l p r e s s u r e s f o r a c tio n . THE S E C O N D PHASE T h e s e c o n d p h a s e c o v e r e d th e y e a r f r o m th e m id d le o f 1 9 6 4 to th e m id d le of 1965. In t h is p h a s e e c o n o m ic a c t iv it y m o v e d ahead at a som ew hat m o re liv e ly p a c e , w it h s o m e e m e r g i n g T o ta l c iv ilia n e m w a s u p b y 7 .2 p e r cent; a n d in d u s t r ia l p r o d u c t io n w a s h ig h e r b y 8 .0 p e r cent. U n e m p lo y m e n t f i n a lly began to d e clin e , d r o p p in g f r o m a b o u t f o u r m il lio n to n e a r th r e e a n d a h a lf m illio n , o r fr o m 5 .4 to 4 .6 p e r c e n t o f th e la b o r fo rce. Ex c e ss D e m a n d A p p e a r s T h is w a s a T he m o n e y s u p p ly a n d c re d it g r e w S p e n d in g fo r c e le ra te d , r is in g at a fa s t e r p a c e . c a p it a l o u t la y s by 16 per ac cent. C a p a c ity u t iliz a t io n a p p ro a ch e d o p t im u m le v e l la b o r s h o r t a g e s d e v e lo p e d in and so m e se cto rs. th e In th e f is c a l a r e a , th e fu ll e ffe cts o f th e la r g e t a x cu t o f 1 9 6 4 w e r e r e a liz e d a n d a n u m b e r o f e x c is e t a x e s w e r e n a te d or s u b s t a n t ia lly la r g e num ber p e n d it u r e of A F e d e ra l ex new p ro g ra m s in e lim i re d u c e d . th e w e lf a r e , e d u c a t io n a l, a n d d e v e lo p m e n t a l a r e a s w ere in itia te d and som e o ld ones w e r e e x p a n d e d . T h e s e in c lu d e d s o c ia l s e c u rity b e n e fits, M e d ic a r e , h o u s in g a n d u r b a n d e v e lo p m e n t , a i d s to e d u c a tio n , m a n p o w e r a n d t r a in in g p ro g r a m s , A p p a l a c h i a n r e g io n a l d e v e lo p m e n t, a n d o th e rs. E v id e n c e Chart VI M A N U F A C T U R E R S ' IN V E N T O R IE S A N D O R D E R S % of g r o w in g p re ssu re s e m e rg e d fre q u e n cy as i n f la t io n a r y w it h th e year in c r e a s in g p ro g re sse d . M a n u f a c t u r e r s ' n e w o r d e r s c o n tin u e d Cum . Change F ro m T r o u g h 6 0 1---------------------------------------------------------------------------------------------------- th e ir r a p id b u t u n e v e n g r o w t h . Un fille d o r d e r s — a s ig n if ic a n t m e a s u r e o f e xce ss d e m a n d — tu rn e d s h a r p ly up w a r d a b o u t th e m id d le o f 1 9 6 4 a n d in v e n t o r ie s b e g a n a d is t in c tly fa s t e r ris e a b o u t th e s a m e tim e. M o v e m e n t s in th e s e s e rie s a r e s h o w n in C h a r t V I. W h o le s a le p ric e s a ls o b e g a n to c lim b a t th e m id d le o f 1 9 6 4 . it is c le a r a ggre ga te In re tro sp e c t, t h a t th e a c c e le r a t io n dem and in th is of second p h a s e , c o u p le d w it h th e p r o g r e s s iv e r e d u c tio n in id le c a p a c it y a n d u n e m p lo y m e n t , la id th e g r o u n d w o r k f o r th e in f la t io n w h ic h becam e in c r e a s in g ly e v id e n t in th e f o llo w in g p h a s e . S o u r c e s o f F in a n c in g th a t — 1ol_________ I_________ I_________ I_________ I_________ I______ 1961 S o u rc e : 1962 1963 1964 U. S. D e p a r t m e n t o f C o m m e rc e . 1965 1966 r e s id e n t ia l second p h ase s t a t io n a r y , w as gross D e s p it e th e fa c t c o n stru c tio n in th is a p p r o x im a t e ly p r iv a t e in v e s tm e n t r o s e a t a v i g o r o u s 1 3 p e r c e n t rate. T h e in c r e a s e c a m e m a i n ly in n o n r e s id e n t ia l c o n stru c tio n , b le s, a n d in v e n t o rie s . 12 p ro d u ce r d u ra M o s t o f th e se o u t la y s w e r e f in a n c e d b y n o n f in a n c ia l T h e rise w a s c o n c e n tra te d la r g e l y in c o r p o r a t io n s fa rm and d u rin g th is p e r io d p ro d u c t s a n d p ro c e s s e d th e re o c c u rre d a s ig n if ic a n t c h a n g e in w h ic h ro s e b y 6 .6 p e r cent; in d u s t r ia l fin a n c in g c o m m o d it ie s m eth od s. s h o w s , fr o m As C h art V II 1 9 6 1 to late 1 9 6 4 g r o s s cent. in N o v e m b e r 1 9 6 4 , v e r y la r g e l y fo r b a la n c e fo o d s o f p a y m e n t s c o n sid e ra tio n s . S h o r t ly a f t e r th is m o v e , s e v e r a l c o m per m e rc ia l b a n k s a n n o u n c e d in c r e a s e s in C o n s u m e r p ric e s in c r e a s e d th e ir th e ir p r im e ra t e s b u t r e s c in d e d th e ir w ere up o n ly 1 .6 s a v i n g s o f c o r p o r a t io n s (re ta in e d e a r n ra te o f a d v a n c e , r is in g b y 2 .0 p e r ce n t a c t io n s u n d e r c o n s id e r a b le in g s c o m p a r e d to 1.3 p e r c e n t in th e p r e T h e m a in t e n a n c e o f th e p r im e ra te a t v io u s ye a r. 4 p lu s d e p r e c ia t io n ) w ere about e q u a l to b u s in e s s c a p it a l e x p e n d it u r e s . A f t e r th a t, h o w e v e r , c a p it a l e x p e n d i tu re s o u t r a n g r o s s s a v in g s a n d co r p o lic y w as a d ju ste d p e r ce nt a t a tim e w h e n m a r k e t ra t e s h a d m o v e d m u c h h i g h e r te n d e d In th e fa c e o f th e se p rice p re ss u re s , m o n e ta ry Vi p re ssu re . to c h a n n e l p ro banks th e c a p it a l m a r k e t a n d to b a n k s f o r o u t th is p e rio d . F re e re s e r v e s d e c lin e d m a r k e t a n d t h u s to o ffse t th e re stra in t fu n d s. s t e a d ily As a re su lt, c o r p o r a t io n s i n p e r io d o f f i n a n c i n g f r o m s o m e $ 1 9 b illio n in p e a re d . 1 9 6 3 to $ 3 1 b illio n in 1 9 6 5 . crea se in bank fin a n c in g and ne t near th e b o rro w e d aw ay fr o m of th e on re se rve s ap e x e rt e d b y th e h ig h e r ra tes. end in v e s t m e n t th a t m a y T h e d is c o u n t ra te w a s r a is e d T h e in w a s fr o m $ 2 .8 b illio n to $ 8 . 6 b illio n . Dem and fo r fu n d s fro m other s o u c e s w a s i n c r e a s in g a ls o , a n d w h ile p e rso n a l s a v in g s w ere ris in g , th e y w e r e n o t g r o w i n g a s r a p id ly a s d e m and. It s o o n b e c a m e e v id e n t th a t u n le s s b a n k c re d it w a s in c r e a s e d a t an ever fa ste r m u s t rise . a c q u ir e d pace, in te re st ra te s C h a rt V II C O R P O R A T E N O N F IN A N C IA L B U S IN E S S $ Bil. In b rie f, th e e c o n o m y h a d a c o n s id e r a b le in th e fo r m of a la r g e m o m en tu m p ro g ra m of c a p it a l o u t la y s a n d a m o u n t in g b a c k lo g o f u n fille d o r d e rs . T o f in a n c e r is in g in v e n to rie s , l a r g e r c a p it a l o u t la y s , a n d o t h e r c a p it a l n e e d s, m o r e f u n d s w e r e r e q u ir e d t h a n w e r e s u p p lie d b y s a v i n g s . B a n k c re d it c o v e r e d th e d eficit. Price Pressures and Monetary Policy T h e e x c e s s d e m a n d e x e rt e d its e ffe c ts on p rice s. W h o le s a le p ric e s b ro k e th e ir lo n g s t a b ilit y a n d m o v e d u p f o r a ris e o f 2 .8 p e r c e n t in o n e y e a r . S o u rc e : th e in to the g r e s s i v e ly t o w a r d le ss e a s e t h r o u g h c r e a s e d th e ir u s e o f e x t e r n a l s o u rc e s and c re d it d e m a n d s p o r a t io n s h a d to tu rn in c r e a s in g ly to B o a r d o f G o v e r n o r s o f th e F e d e ra l R e s e r v e S y s te m . * 1 c a p ita l have been fo rc e s a n d THE T H I R D P H A S E T h is p h a s e c o v e r s th e p e r io d fr o m m id - 1 9 6 5 to m id - 1 9 6 6 , a year w h ic h in f la t io n e m e r g e d a s a p ro b le m . in m a jo r T he e c o n o m y re sp o n d e d a s it a l w a y s d o e s w h e n it is o p e r a t in g under th e in flu e n c e of in f la t io n a r y is a p p r o a c h i n g , but h a s n o t re a c h e d , th e u p p e r lim it o f p ro d u c tiv e c a p a c it y . T a b le 1 s h o w s h o w a r m e d fo rc e s. T o ta l c iv ilia n e m p lo y m e n t g r e w s lig h t ly fa ste r, w h ile b o th p a y r o ll a n d f a c t o r y e m p lo y m e n t g r e w s o m e o f th e m a j o r s e g m e n t s o f th e at e c o n o m y b e h a v e d c o m p a r e d to th e ir la tte r w a s p o s s ib le p a r t ly b e c a u s e o f a c t io n in th e p r e v io u s y e a r . a Changes c iv ilia n in la b o r a Boom fo rc e Period sh ow e d no The in c o n s id e r a b l y sh arp w h ic h d ro p in f a r m d e c lin e d 1 9 6 5 -6 6 . fa ste r by ra tes. T h is e m p lo y m e n t , 1 0 .5 p e r c e n t in T h is r e p re s e n t e d th e c o n c r e a s e in its g r o w t h ra te , p a r t ly b e tin u a t io n o f a tr e n d w h ic h h a d b e e n c a u s e o f la r g e r n u m b e r s e n t e r in g th e g o i n g o n f o r a lo n g tim e a n d w h ic h h a s c a u s e d , o v e r th e y e a r s , a la r g e c h a n g e in th e stru c tu re o f e m p lo y m e n t in C h a rt V III P R O D U C T IO N O F EQ U IPM EN T A N D C O N S U M E R G O O D S Cum . % C h a n g e F ro m T r o u g h 70 th e econom y. The in c re a s e in fa c t o r y e m p lo y m e n t w a s th e m o re re m a r k a b le in lig h t o f t h e great a d v a n c e s in a u t o m a t io n . In d u s t r ia l p r o d u c t io n gre w even fa s t e r in 1 9 6 5 - 6 6 t h a n in th e p re c e d in g y e a r , r i s in g a t a ra te o f 9 .5 p e r 60 cent. w as T h e in c r e a s e w a s g e n e r a l, b u t e s p e c ia lly stro n g in b u s in e s s e q u ip m e n t. D e f e n s e e q u ip m e n t b e g a n 50 a v e r y s h a r p ris e in e a r l y 1 9 6 5 . G a i n s in 40 fo o d , s t a p le s fu e l, w ere and oth e r c o n su m e r c o n s id e r a b ly m o re 30 20 Table 1 A N N U A L R A T ES O F C H A N G E 10 0 S e r ie s C iv ilia n la b o r fo rc e -10 T o ta l c iv ilia n e m p lo y m e n t P a y r o ll e m p lo y m e n t S o u rc e : B o a r d o f G o v e r n o r s o f th e F e d e ra l R e s e rv e S y s te m . F a c to ry e m p lo y m e n t N u m b e r u n e m p lo y e d In d u s t r ia l p r o d u c t io n P e r s o n a l in c o m e R e ta il s a le s W h o le s a le p ric e s C o n s u m e r p ric e s S o u rc e : B o a r d o f G o v e r n o r s o f th e F e d e ra l R e s e r v e S y s t e m , U. S. D e p a r t m e n t o f C o m m e rc e a n d m e n t o f L a b o r. U. S. D e p a r t m o d e st. T h e d iv e r g e n c e b e t w e e n b u s i crease n e ss e q u ip m e n t a n d c o n s u m e r g o o d s a c t u a lly a little le ss t h a n th e 2 .8 p e r in w h o le s a le p ric e s w as p a tte rn , r is in g fir s t b y d u s t r ia l c o m m o d it ie s re v e r se d th is 1.6 p e r cent w as s t rik in g , C h art cent in c re a s e o f th e p r e v io u s y e a r b u t a n d th e n b y 2 .3 p e r cent. V III. T h e g a p b e t w e e n th e t w o c a t e th e c h a n g e in th e b e h a v io r o f th e c o m p ric e s a ls o m o v e d u p a t a fa s t e r p ace, g o r ie s h a d as is s h o w n in b een w id e n in g fo r so m e p o n e n t s w a s s ig n if ic a n t . r is in g In 1 9 6 4 - 6 5 by 2 .5 per cent C on su m e r in 1 9 6 5 -6 6 tim e a s c a p it a l o u t la y s m o u n te d , b u t th e g r e a t e r p a r t o f th e a d v a n c e w a s a g a i n s t 2 .0 p e r c e n t in 1 9 6 4 -6 5 . it in fo o d s , w h ic h a n d s e r v ic e s s h o w e d the g r e a t e s t a d a ssu m e d s t r ik in g p r o p o r t io n s in fa rm p ro d u c t s and Food 1 9 6 5 - 6 6 a s th e o u t p u t o f e q u ip m e n t ro se b y 6 .6 p e r cent; in 1 9 6 5 - 6 6 th o s e v a n c e s w h ile p ric e s o f d u r a b le c o m ro s e b y 1 7 .2 p e r ce n t w h ile p r o d u c g r o u p s w e r e u p b y o n l y 4.1 p e r cent. m o d it ie s w e r e v ir t u a lly u n c h a n g e d in tio n o f c o n s u m e r g o o d s g a i n e d o n l y A s sh ow n b o th y e a r s . in C h a r t IX , p ric e s o f in 5 .6 p e r cent. P e r s o n a l in c o m e n o t o n l y c o n tin u e d to rise b u t in c r e a s e d its ra te o f g a i n to 8 .5 p e r cent. R e ta il s a le s m o v e d a b o u t in ste p , r is in g b y 8 .7 p e r cent. F e e lin g th e im p a c t o f in fla t io n , m a n u fa c t u r e r s s t e p p e d u p th e ir n e w o r d e r s b y 1 1 .8 p e r ce nt o v e r th e p e r io d w h ile s h ip m e n t s ro s e In v e n t o r ie s o n ly o r d e rs , g a i n i n g fille d 1 0 .3 m o u n te d o rd e rs 1 1 .5 m oved p e r cent. a lo n g w it h p e r cent. up fro m Un $ 6 0 .6 b illio n to $ 7 4 . 8 b illio n , a n in c r e a s e o f 2 3 . 4 p e r cent, o r a b o u t tw ic e th e ra te o f g r o w t h o f o r d e r s a n d s h ip m e n t s . As u s u a l ly happens w hen C h a r t IX Cum . % C h an ge F ro m T r o u g h PR IC ES th e e c o n o m y is o p e r a t in g u n d e r p re ss u re , p ric e s m o v e d u p . T h e 2 .5 p e r c e n t in - O F SE LEC TE D E C O N O M IC SE R IES June 1964June 1965 June 1965June 1966 1.9 1 .9 2 .6 2 .7 3.9 5 .3 4 .2 6 .4 -1 0 .3 -1 3 .4 8.1 9 .5 7 .2 8 .5 7.1 8 .7 2 .8 2 .8 2 .0 2 .5 S o u rc e : U. S. D e p a r t m e n t o f L a b o r. 1 'i V '” , * 4I’iV.* * J *' •# V., '’/V-i ? m '.*\ '-# . ‘* v ’ • ) ^ '•\ ’ *j' ;! ‘ 15 Sources of Imbalance In re trosp ect, c iv il s e rv ic e p a y s c a le s T h e d is c o u n t ra te c h a n g e w a s n o t w e c a n se e h o w im b a la n c e d e v e lo p e d w e r e r a is e d a n d a n u m b e r o f n e w e x fo llo w e d im m e d ia t e ly b y a n y r e d u c in th e e c o n o m y . m ilit a r y a n d A t th e m id d le o f p e n d it u r e p r o g r a m s w e r e sta rte d . T h e tio n in re s e rv e o r c re d it a v a ila b ilit y . 1 9 6 5 th e e c o n o m y w a s o p e r a t in g a t a b u d g e t f o r fis c a l 1 9 6 7 , p re s e n t e d in T h e F e d e ra l R e s e rv e S y s t e m p r o v id e d h ig h le v e l, a p p r o a c h i n g th e o p t im u m J a n u a r y 1 9 6 6 , p r o p o s e d o n l y lim ite d n e w r e s e rv e s lib e r a lly in o r d e r t o f a rate. and c ilita te a n o r d e r ly a d ju s t m e n t to th e U n e m p lo y m e n t w as lo w and te m p o ra ry f is c a l re stra in t, de a c c e le r a t in g t a x n e w ra te le vel. A s a re su lt, th e m o n e y la r g e a n d g r o w i n g p r o g r a m o f c a p it a l p a y m e n t s d a t e s a n d th e s a le o f a s s e t s s u p p ly , b a n k cred it, a n d re la t e d s e r ie s in v e s tm e n t w a s u n d e r w a y . E x p e n d i o r p a r t ic ip a t io n s b y F e d e ra l a g e n c ie s . g r e w f o r a tim e a t u n u s u a l ly p la n t a n d e q u ip m e n t , The F e d e ra l c a sh b u d g e t o p e ra te d la b o r s h o r t a g e s w e r e s p r e a d in g . tu re s f o r n e w w h ic h had s ta rt e d a sh a rp rise A in 1 9 6 3 , c o n t in u e d a n d g a t h e r e d sp e e d , a s can b e se e n fro m C h a rt X . As a p e n d in g w it h m a i n ly o n la r g e d e fic its in th e la st tw o ra te s. By la te s p r in g , r a p id h o w e ve r, m o n e y a n d c re d it e x p a n s i o n h a d b e e n q u a r t e r s o f 1 9 6 5 a n d th e fir st q u a r t e r b r o u g h t u n d e r fir m of 1966. e ffe cts o f m o n e t a r y re s t r a in t b e g a n to In th e s e c o n d q u a rte r of c o n tro l a n d th e p r o p o r t io n o f G N P t h e y e x c e e d e d 8 1 9 6 6 th e f u ll e ffe cts o f th e a c c e le r a t e d m a n if e s t th e m se lv e s . R e in f o r c in g th e p e r cent, w h ic h is o fte n r e g a r d e d a s t a x p a y m e n t s a n d th e s a le o f a s s e t s e ffe c ts se co n d q u a rte r a s ig n o f o v e r h e a t in g . In J u l y o u r w e r e fe lt a n d th e s u r p lu s in th e c a s h s u r p lu s in th e F e d e r a l c a s h b u d ge t, V ie t N a m s h a r p ly b u d g e t s o a r e d to o v e r $ 1 0 o f th e la r g e b illio n — t ig h t m o n e y w a s a l s o a m a j o r fa c t o r p r o b a b l y th e la r g e s t q u a r t e r ly s u r p lu s c o n t r ib u t in g to th e e c o n o m y 's r e d u c e d m o n t h ly d r a f t c a ll a n d h i g h e r d e f e n s e in h ist o r y . ra te o f g r o w t h in th e s p r in g q u a r te r. o u tla y s. N o re ve n u e m e a su re s w e re p o r a r y , n o n r e c u r r in g d e v e lo p m e n t b u t Second Half, 1966— A New Phase? a d o p t e d to m e e t th e a d d e d e x p e n d i it w a s a s ig n if ic a n t f a c t o r in c a u s i n g A f t e r th e s e c o n d q u a r t e r o f 1 9 6 6 th e p ro g ra m c re a se d , w it h a w as d o u b lin g of in th e T h is w a s la r g e l y a t e m In d e e d , a s u b s t a n t ia l re d u c tio n s o m e e a s i n g o f in f la t io n a r y p re s s u re s . e c o n o m y m o v e d in to w h a t a p p e a r e d in e x c is e t a x e s h a d ju st g o n e in to e f G r o w t h ra t e s o f e c o n o m ic a c t iv it y d e to b e a n o t h e r p h a s e . fect. c lin e d a n d p ric e s ro s e m o r e s lo w ly . i n g c o n tin u e d to a c c e le r a t e a n d Monetary Policy in the Third Phase boom 1 9 6 5 , b e c a m e e ffe c tiv e in S e p t e m b e r In th e s e c o n d h a lf o f 1 9 6 5 , m o n e y a n d ceeded unabated . w h ile cre d it n e ss ture s. M o r e o v e r , in c r e a s e d s o c ia l s e c u rity b e n e fits, re t ro a c t iv e to J a n u a r y in c r e a s e s in p a y r o ll taxe s to c o v e r th e m d id n o t s t a rt u n til J a n u a ry 1966. B e fo re th e e n d o f 1 9 6 5 p o lic y fir m e r. becam e p r o g r e s s iv e ly In D e c e m b e r th e d is c o u n t ra te in b u s in e s s advance D e fe n s e s p e n d in v e s t m e n t th e p ro T h e ra te o f b u s i p ic k e d up a g a in , a l t h o u g h it c o n tin u e d to f a ll s h o r t o f th e w a s r a is e d f r o m 4 to 4 .5 p e r cent, th e f e v e r is h fir s t q u a r t e r p a c e . fir st d is c o u n t ra te a c t io n in th e c u r s u m m e r it w a s c le a r th a t th e lo n g e x re n t e x p a n s i o n d ic ta te d p r im a r ily b y p a n s io n d o m e s t ic c o n s id e r a t io n s . T h is in c r e a s e s ig n if ic a n t c a m e a t a tim e w h e n w id e n i n g d is c o r o lla r y p ro b le m s . p a r it ie s b e t w e e n m a r k e t ra t e s a n d k e y in st itu t io n a l ra te s w e re c r e a t in g had f in a lly B y m id g e n e ra te d in f la t io n , w it h a ll a its T h e e ffe cts o f t ig h t m o n e y w e r e in c r e a s in g ly o b v io u s in th e t h ir d q u a r te r. s e r io u s d is t o r t io n s in th e f l o w o f f u n d s In te re st ra t e s m o v e d s t e a d ily u p w a r d , th ro u g h r e a c h in g th e h ig h e s t le v e ls s in c e th e th e n a t io n 's c a p it a l m a r k e t s. m oney and 1 9 2 0 's . C o n s t r u c t io n s p e n d in g w e n t in to a t a ils p in a s m o r t g a g e m o n e y b e c a m e v e r y sca rce . i n g fe ll o f f s h a r p ly . and R e s id e n t ia l b u il d A u t o m o b ile s a le s p r o d u c t io n s lo w e d s ig n if ic a n t ly . P rices, w h ile c o n t in u in g to m o v e u p g e n e r a lly , b e g a n to b e h a v e m o r e e r r a t ic a lly a n d d e c lin e s s h o w e d a f e w s ig n if ic a n t a r e a s . 16 up in F o r th e e n tire th ir d q u a r te r, m o n e t a r y p o lic y a lo n e b o r e th e b r u n t o f A g a i n s t th is b a c k g r o u n d , C o n g r e s s T h is a p p a r e n t d is p o s it io n o f th e A d in O c t o b e r e n a c te d le g is la t io n to s u s m in is t r a t io n to e m p lo y e ffe c tiv e fis c a l it p e n d f o r 1 8 m o n t h s th e 7 p e r ce n t i n p o lic y s te p s to c u r b th e b o o m s o o n b e c a m e c le a r th a t s e r io u s r is k s v e s tm e n t t a x c re d it a n d t w o f o r m u la e c ise d a s a lu t a r y e ffe ct o n m a r k e t e x w e r e i n v o lv e d p r o v i d i n g a c c e le r a t e d d e p r e c ia t io n a l p e c ta tio n s in m u c h o f th e s e c o n d h a lf. th e a n t i- in f la t io n a r y m oney and no e ffo rt. But in th is c o u rse . T ig h t h i g h in te re st ra t e s h a v e e ffe ct o n F e d e ra l s p e n d in g and lo w a n c e s . m e a su re W h e t h e r o r n o t th is fis c a l w ill p r o v id e s u ffic ie n t a d p r o b a b l y little o n s p e n d in g b y sta te d it io n a l re s t r a in t o n th e b o o m and th e lo ca l b u s in e s s S im ila r ly , in v e s t m e n t p la n s a re lo n g - r u n n a tu re and re la t iv e ly la y s go ve rn m e n ts. cannot be q u ic k ly e x e r p re s e n t w r it in g , is, a t p ro b le m a t ic a l. of a o u t c u r t a ile d in r e s p o n s e to t ig h t m o n e y . Y e t th e g o v e r n m e n t se c to r a n d th e b u s in e s s in v e s t m e n t se c to r p r o v id e d m u c h o f th e im p e t u s f o r th e a c c e le r a t in g a d v a n c e . M o r e o v e r , b y m id s u m m e r t ig h t m o n e y and r is in g e ra t e d in te re st e x p e c t a t io n s ra t e s had w h ic h gen p ose d th r e a t to th e s m o o t h f u n c t io n in g th e c a p it a l m a r k e t s. a C h a r t X EXPENDITURES Cum . % C hange F ro m T r o u g h FOR N E W PLANT A N D EQUIPMENT % of G N P of I n c r e a s in g ly it w a s n o te d t h a t to o m u c h r e lia n c e o n m o n e t a r y p o lic y w a s p r o d u c in g s e v e re d is lo c a t io n s in th e e c o n o m y . 1961 So u rc e : 1962 1963 1964 1965 1966 U. S . D e p a r t m e n t o f C o m m e rc e , 17 EMPLOYMENT A N D Two m a jo r m e a su re s o f th e p e r PRODUCTION to th e la b o r fo rc e . T h e g r o w t h s lo w e d to m o r e a n d m o r e c o n c e rn a n d , a l o n g so m e w h a t e a r ly w it h th e b a la n c e o f p a y m e n t s , c a m e p lo y m e n t it a f f o r d s a n d th e a m o u n t 1 9 6 6 , p a r t ly b e c a u s e o f th e in c r e a s in g to d o m in a t e m u c h o f e c o n o m ic p o lic y . of n u m b e r s g o i n g in to th e a r m e d fo rc e s. E ffo rt s to s o lv e th is s t u b b o r n p r o b le m f o r m a n c e o f a n e c o n o m y a r e th e e m goods and s e r v ic e s it p ro d u c e s . in la te 1965 and B o th m e a s u r e s m o v e d w e ll in to n e w E m p lo y m e n t a n d U n e m p lo y m e n t h i g h g r o u n d in th e p re s e n t e x p a n s io n . to ta l num ber T h is fro m 6 6 .8 se c tio n fu rth e r c o n s id e r s a sp e cts o f b r ie f ly som e e m p lo y m e n t and o u tp u t. e m p lo y e d m illio n in c r e a s e d 7 3 .7 d u r i n g t h is e x p a n s io n . in c r e a s e o f 6 .9 C iv ilia n L a b o r F o rc e to The m illio n T h is w a s a n m illio n , o r 1 0 .3 p e r re s u lte d in f is c a l a n d m o n e t a r y p o lic y m oves w h ic h e v e n t u a lly g e n e ra te d m u c h o f th e in f la t io n a r y p r e s s u r e o f 1965 and 1966. On a p r e lim in a r y a n a ly s is , f o u r fa c t o r s se e m to h a v e D u r i n g t h is e x cent, a n d w a s a b o u t e q u a l to th e net h e lp e d to m a in t a in u n e m p lo y m e n t o n p a n s io n th e c iv ilia n la b o r fo rc e g r e w g a i n d u r i n g th e w h o le d e c a d e o f th e a f r o m 7 1 . 7 m illio n to 7 6 . 7 m illio n , f o r 1 9 5 0 's . S in c e a to ta l in c r e a s e o f 7 p e r cent, o r a n w o rk e rs d e c lin e d annual th e n u m b e r o f n o n f a r m cent. a ve ra ge of about 1 .2 5 per T h e to ta l p o p u la t io n in c r e a s e d s lig h t ly m o re , 7 .6 crease d by th e 8 .4 num ber about o f fa rm 1 .5 m illio n , w o r k e r s in m illio n . C h art h ig h p la t e a u . A f t e r th e m id d le o f 1 9 6 2 th e c iv ilia n la b o r fo rc e g r e w m o r e r a p id ly , r is in g by m o re th a n a m illio n each y e a r. XI T h e g r o w t h ra t e o f th e e c o n o m y w a s p e r cent, b u t th e s h o w s in c r e a s e s in e m p lo y m e n t r e g u s u ff ic ie n t to re d u c e u n e m p lo y m e n t s o a n n u a l g r o w t h ra t e d e c lin e d s t e a d ily la r ly m o v i n g a h e a d o f th e ris e in th e lo n g a s th e la b o r fo rc e g r e w a n d fe ll to n e a r 1 p e r c e n t b y 1 9 6 5 . la b o r fo rc e a ft e r th e f ir s t y e a r . As a b u t n o t f a s t e n o u g h to d o s o w h e n re d u c e d th e la b o r fo r c e w a s g r o w i n g a t a ra te A s c a n b e s e e n f r o m C h a r t X I, th e re su lt, u n e m p lo y m e n t la b o r fo rc e c h a n g e d little d u r i n g 1 9 6 1 by and p e r cent. 1962. T h e to ta l g r o w t h f o r th e t w o y e a r s w a s o n l y a b o u t 0 .8 m illio n . w as n e a r ly t w o m illio n , or about 40 s lo w ly o f m o r e t h a n a m illio n p e r y e a r . A s e c o n d f a c t o r w a s th e m o d e r a t e T h e n u m b e r o f u n e m p lo y e d in e a r ly le v e l o f c a p it a l in v e s tm e n t , w h ic h is th e s o u r c e o f m o s t n e w job s. The e x T h e m a j o r r e a s o n f o r t h is w a s p r o b 1961 a b l y th e lo w th e p e r c e n t o f th e la b o r fo rc e . D u r i n g th e The f ir s t y e a r o f th e e x p a n s i o n th e n u m m a r g i n o f u n u s e d c a p a c it y , a n d th e re at b e r fe ll b y a b o u t a m illio n , b r i n g i n g w as th e ra te d o w n to 5 .6 p e r cent. But n e s s f ir m s to e x p a n d c a p it a l o u t la y s th e n th e im p r o v e m e n t h a lte d , a n d f o r u n til m o s t o f t h is c a p a c it y w a s b r o u g h t m o re in to u se . C a p it a l in v e s t m e n t d id n o t b e g in a la tte r y e a r s b a b ie s of " c i v i li a n b ir th ra t e s d u r i n g o f W o r ld th o s e w o rk in g 1962 and m uch la r g e r th e ir W ar y e a rs II. a rriv e d a g e " in 1961 n u m b e rs w ere th a n th e n u m b e rs t h o s e l e a v i n g th e la b o r fo rc e . 1962, h o w e ve r, and s o m e t h in g not of A fte r lik e of w a s c lo se to f iv e m illio n , o r 7 th a n tw o u n e m p lo y e d ye a rs th e flu c t u a t e d num ber n a rro w ly p a n s io n s ta rt e d w it h a n o stro n g on c o n s id e r a b le in d u c e m e n t f o r b u s i la r g e s c a le u n til 1963. O n e d e v e lo p m e n t w h ic h p r o b a b l y d e 1.3 a r o u n d t h e f o u r m illio n m a r k a n d th e m illio n p e o p le p e r y e a r w e r e a d d e d ra te o f u n e m p lo y e d m o v e d b e t w e e n la y e d its s ta rt w a s th e s h a r p d e c lin e 5 .6 a n d 5 .8 p e r cent. in sto c k p ric e s in th e s e c o n d q u a r t e r S in c e n e a r ly a ll o t h e r e le m e n t s o f th e e c o n o m y w e r e of m o v i n g u p s t r o n g ly , t h is s e e m e d a c o n siste n t. in A s it p e r s is t e d it g a v e rise 1962, w h ic h d is tin c t w as s lo w in g in se ve ra l th e econom y of f o llo w e d g ro w th im p o rta n t in th e by ra t e s s e c to rs second h a lf of of th a t y e a r . A s a n o t h e r fa c to r, C o n g r e s s in 1 9 6 1 r a is e d th e m in im u m w a g e f r o m $ 1 . 0 0 to $ 1 . 2 5 18 per hour and e xte n d e d its co ve ra g e . The p r o v is io n s w e n t in to e ffe ct a t d if f e r e n t tim e s, r a n g i n g u p to f o u r y e a r s . T h e in c r e a s e w a s u p w a r d o f 2 5 p e r ce n t f o r s o m e o f th o s e n e w l y c o v e re d . T h e s e m o v e s a ffe c te d a ls o th e w ages b ra ck e ts just of m any above in th e w age m in im u m . U n le s s it is a s s u m e d th a t th e d e m a n d f o r la b o r is e n t ir e ly in d e p e n d e n t o f th e w a g e s a t w h ic h it c a n b e h ire d , th e se in c r e a s e s m u s t h a v e h a d a re s t r a in in g e ffe ct on p e o p le e m p lo y e d g re w . At th e th e as sam e num ber th e of econom y tim e it q u it e lik e ly s t im u la t e d th e d e m a n d f o r m o re a u t o m a t ic , and la b o r - s a v in g e q u ip m e n t , w h ic h , C h art X I CIV ILIA N LABOR FORCE, EMPLOYMENT, UNEMPLOYMENT m a c h in e r y in tu rn , q u ir e d m o r e c a p it a l in v e s tm e n t. re That Cum . % C h an ge F ro m T r o u g h ( S e a s o n a lly A d ju s t e d ) 20 w a s a fa c t o r in th e in v e s t m e n t p r o g r a m d is c u s s e d a b o v e . B u t tim e w a s r e q u ir e d to p la n , fin a n c e , a n d a c t iv a te an in v e s t m e n t p r o g r a m , a n d 10 C iv i li a n E m p lo y m e n t in th e in te rim th e d e m a n d f o r la b o r l a g g e d C iv i li a n L a b o r F o rce 0 b e lo w w h a t it w o u l d h a v e b e e n w it h out th e in c r e a s e in th e m in im u m w age. T h is is in d ic a t e d e m p ir ic a lly by fa c t th e th a t u n e m p lo y m e n t -1 0 \ in th o s e g r o u p s w h ic h a r e m a r g i n a l w it h \ \ F a rm E m p lo y m e n t % -2 0 N u m b e r U n e m p lo y e d re sp e c t to th e m in im u m w a g e , m a i n ly te e n a ge rs and n o n w h it e s , has con s is t e n t ly b e e n s ig n if ic a n t ly h ig h e r t h a n ' - -3 0 in o t h e r g r o u p s . V -4 0 X _L -5 0 1961 So u rce : •• 1962 1963 1964 1965 1966 U. S. D e p a r t m e n t o f L a b o r. 19 F in a lly , th e s e c u la r d e c lin e in f a r m e m p lo y m e n t has c o n trib u te d to th e u n e m p lo y m e n t p r o b le m . A f t e r d e c lin i n g f o r m a n y y e a r s , f a r m e m p lo y m e n t fe ll fu r t h e r — f r o m 5 .7 m illio n in e a r ly 1961 to 4 .3 m illio n q u a rte r o f 1 966. clin e o f 4 . 5 in th e second F ro m a n a n n u a l d e p e r c e n t in 1 9 6 1 - 6 5 , it p lu n g e d to 1 0 .5 p e r c e n t in 1 9 6 5 - 6 6 . In th e f a c e o f th is r e m a r k a b le re d u c tio n , to ta l f a r m p r o d u c t io n w as not o n ly m a in t a in e d b u t in c re a s e d . The in d e x o f to ta l f a r m ro se p r o d u c t io n fr o m 1 0 7 in 1 9 6 1 to 1 1 5 in 1 9 6 5 . T h is fe a t w a s a c c o m p lis h e d , o f c o u rse , o n ly by e x t e n s iv e changes in fa rm siz e , e q u ip m e n t , t e c h n iq u e s , p la n t v a r ie t ie s , and c r o p p in g p a tte rn s. tio n in f a r m t e c h n o lo g y T h is r e v o lu re le a s e d at le a st 1.5 m illio n w o r k e r s f o r e m p lo y m e n t e ls e w h e r e in th e e c o n o m y . Employment Patterns E x c e p t f o r a g r i cu ltu re , n e a r ly a ll se c to rs of th e e c o n o m y s h o w e d in c r e a s e s in e m p lo y m en t. c iv ilia n R e la t iv e ly , a s C h a r t X I I s h o w s , g o v e r n m e n t e m p lo y m e n t le d th e list w it h a n in c r e a s e o f 2 7 . 5 p e r cent, f r o m 8 .5 m illio n to 1 0 .8 m illio n . NONAGRICULTURAL PAYROLL EMPLOYMENT T h is in c r e a s e w a s e q u a l to a p p r o x i Cum . % C h a n g e F ro m T r o u g h 301------------------------------------------------------------------------------------------------- m a t e ly o n e fo u r t h o f th e to ta l g a i n in C h art XII n o n a g r ic u lt u r a l e m p l o y m e n t . and lo c a l g o v e r n m e n t s , w it h S ta te an in c r e a s e o f 2 .0 m illio n , o r 3 2 . 5 p e r cent, a c c o u n te d f o r th e g r e a t e r p a r t o f th e in c r e a s e in th e p u b lic se ctor. M u c h o f th e in c r e a s e in e m p lo y m e n t by th e F e d e ra l G o v e r n m e n t c a m e in th e fir st tw o q u a rte rs o f 1966. P e rh ap s th e sh arp e st b re a k w it h p a s t p a t t e r n s o f e m p lo y m e n t o c c u rre d in m a n u f a c t u r in g . A f t e r s h o w i n g o n l y a w e a k a n d e rra t ic u p w a r d tr e n d f o r 1 5 y e a r s , f a c t o r y e m p lo y m e n t ro se b y 2 .9 m illio n , o r 18.1 e x p a n s io n . — 5 1____________ |____________ |____________ |____________ |----------------- 1-----------1961 1962 1963 1964 1965 1966 So u rce : U. S . D e p a r t m e n t o f L a b o r. 20 T h is p e r cent, in th is w as s u b s t a n t ia lly g re ate r th a n th e to ta l in c r e a s e g o o d s p r o d u c t io n w a s ra t h e r s h a r p l y be o f th e in d e x o f in d u s t r ia l p ro d u c t io n . t w e e n 1 9 4 6 a n d 1 9 6 0 . D u r a b le g o o d s It is p e rtin e n t, th e re fo re , to t a k e a d e p r e s s e d in th e fir st q u a r t e r o f 1 9 6 1 , in d u s t r ie s a c c o u n t e d f o r 7 7 p e r cent, c lo s e r lo o k a t m a n u f a c t u r in g p r o d u c a n d th e u s e o f th a t p e r io d a s a b a s e w o u ld o r 2 .2 m illio n , o f th e re ce n t rise , w h ile tio n . In th e c o m p a r is o n th e r e m a i n i n g 2 3 p e r cent, o r 0 .7 m il lo w s , th e lio n , m e a s u r in g g r o w t h in th e p r e s e n t e x w as in n o n d u r a b le goods in sta tistic a l p a n s io n m a n u f a c t u r i n g 's q u a r t e r o f 1 9 6 1 to th e a n n u a l a v e r a g e fo r 1960. th e in h o w e ve r, to ta l n o n f a r m p a y r o ll e m p lo y m e n t d e fro m f o l D e s p it e its g r e a t in c re a se , of s h if t e d u sed d u strie s. sh are is w h ic h b ase u n d u ly d is to rt so m e of th e c o m p a r is o n s . first T h e r e a s o n is th a t d u r a b le c lin e d s lig h t ly , a s T a b le 2 s h o w s . E ls e w h e r e in th e econom y, th e r e s id u a l c a t e g o r y o f f in a n c e , s e rv ic e s, and m is c e lla n e o u s sh o w e d g a in s s e c o n d o n l y to th o s e in th e g o v e r n m e n t se cto r, w it h a rise o f 2 .4 m illio n , o r 2 3 . 4 p e r cent. A l t h o u g h it i n v o lv e d a r e la t iv e ly s m a ll n u m b e r o f w o r k e r s , c o n tra c t c o n stru c tio n h a d a n in c re a s e o f 1 7 .5 p e r cent, r e p r e s e n t in g a little le ss t h a n a h a lf m illio n w o r k e r s . T h is, h o w e v e r , w a s a ft e r a s h a r p d r o p in th e s e c o n d q u a r t e r o f 1 9 6 6 . m e n t in grew w h o le s a le b y som e and E m p lo y re ta il t r a d e 1.9 m illio n , b u t th is c o n stitu te d a g r o w t h s o m e w h a t b e lo w DISTRIBUTION OF N O N FA RM PAYROLL EMPLOYMENT T a b le 2 1961 First Q u a r t e r th e a v e r a g e . In d u s t r ia l P r o d u c t io n d u c t io n ro s e by 12 In d u s t r ia l p r o Num ber (0 00 ) Per Cent Num ber (0 0 0 ) Per Cent T o ta l 5 3 ,4 6 5 1 0 0 .0 6 3 ,6 1 7 1 0 0 .0 M a n u f a c t u rin g 1 6 ,1 2 0 3 0 .2 1 9 ,0 3 1 2 9 .9 D u r a b le s 8 ,9 0 6 1 6 .7 1 1 ,1 3 6 1 7 .5 N o n d u ra b le s 7 ,2 1 4 1 3 .5 7 ,8 9 5 1 2 .4 2 8 ,8 8 8 5 4 .0 3 3 ,8 0 2 53.1 678 1.3 618 1.0 C o n t ra c t c o n stru c tio n 2 ,8 0 0 5 .2 3 ,2 9 0 5 .2 T r a n s p o r t a t io n a n d p u b lic u tilitie s 3 ,9 0 7 7 .3 4 ,1 3 0 6 .5 1 1 ,2 9 8 2 1 .1 1 3 ,1 7 0 2 0 .7 F in a n c e , in s u r a n c e , r e a l e sta te 2 ,7 0 4 5.1 3 ,0 7 8 4 .8 S e r v ic e a n d m is c e lla n e o u s 7 ,5 0 1 1 4 .0 9 ,5 1 6 1 5 .0 G o ve rnm e n t 8 ,4 5 7 1 5 .8 1 0 ,7 8 4 1 7 .0 F e d e ra l 2 ,2 2 9 4 .2 2 ,5 3 2 4 .0 S t a t e a n d lo ca l 6 ,2 2 9 1 1 .7 8 ,2 5 2 1 3 .0 p e r ce n t in th e fir s t y e a r o f r e c o v e r y b u t re g is t e re d little a d d it io n a l h a lf o f 1 9 6 2 . g a in in th e se con d T h e re a ft e r th e ris e w a s r e s u m e d a t a p a c e w h ic h a c c e le r a t e d f r o m a n a n n u a l ra te n e a r 4 p e r ce n t to o n e o f a b o u t 9 p e r cent. T h e to ta l in c r e a s e to th e s e c o n d q u a r t e r o f 1 9 6 6 w a s 4 9 .6 1966 Se co n d Q u a rte r p e r cent, o r a little m o re t h a n th e 4 5 p e r cent g a i n r e a liz e d in th e e n tire d e c a d e f r o m 1 9 5 0 to 1 9 6 0 . M a n u fa c tu rin g a cco u n ts fo r an N o n m a n u f a c t u r in g (p riv a te ) M in in g o v e r w h e l m i n g p a r t (o v e r 8 6 p e r cent) W h o le s a le a n d re ta il t r a d e S o u rc e : U. S. D e p a r t m e n t o f L a b o r. 21 T a b le 3 s h o w s th e in c r e a s e s in p r o d u c tio n f o r se le c te d c o m p o n e n t s o f in fe r e n c e w as second so m e w h a t p e r io d , le ss s u g g e s tin g a in th e s lo w e r d u s t r ia l p r o d u c t io n f o r th e 1 9 5 0 - 1 9 6 0 g r o w t h in p ro d u c t iv ity . In n o n d u r a b le d e c a d e a n d f o r th e p re se n t e x p a n s io n . lin e s, p r o d u c t io n in c r e a s e d Changes sh o w n in e m p lo y m e n t a ls o a re f o r th r e e m a j o r c o m p o n e n t s. as m uch 1950 as and q u a rte r strik e s. of 1964 cause d by F o r m u c h o f th e tim e t h e y 1 7 tim e s r a n a h e a d o f g a i n s in b o t h a ll m a n u b etw e e n f a c t u r in g e m p lo y m e n t I9 6 0 , m o s t o th e rs, e x c e p t f o r th e d r o p in th e fo u rth b u t le ss t h a n f iv e and d u r a b le go od s. The le v e lin g o f f in la te 1 9 6 5 a n d th e d e T h re e a s p e c t s o f th e d a t a a r e w o r t h y t im e s a s m u c h s in c e 1 9 6 0 . T h ird , th e clin e in e a r ly o f n ote. First, th e in c r e a s e s in p r o d u c fig u r e of le v e l o n l y a little a b o v e th a t f o r n o n fo r th e A s C h a rt X III A b r ie f a n a l y s i s o f th e m o v e m e n t s in c r e a s e s s h o w s , u n til th e e n d o f 1 9 6 5 g a i n s in o f th e m a j o r c o m p o n e n t s o f m a n u th is f a c t u r in g p r o d u c t io n m a y g i v e s o m e decade. S e c o n d , g a i n s in p r o d u c t io n com ponent w ere p re s e n t d u r a b le g o o d s . v e h ic le s p r e v io u s th e b r o u g h t it to a p e r io d is m is le a d in g . e n tire fo r 1966 th e s a m e o r d e r o f m a g n it u d e a s th e th e p a rts m o to r tio n in th e p re s e n t e x p a n s i o n a r e o f fo r and p r o d u c t io n greater th a n w e r e s e v e r a l tim e s th e g r o w t h in e m in d ic a t io n p lo y m e n t in b o t h p e r io d s , b u t th e d i f b a la n c e s d e v e lo p e d in th e in d u s t r ia l of w hen and se c to r o f th e e c o n o m y . w h ere im W h i le r e la t iv e in c r e a s e s d u r i n g th e 1 9 5 0 - 1 9 6 0 d e c a d e ca n n o t be re g a rd e d a s n o rm s o r s t a n d a r d s , th e f i g u r e s m a y h a v e s o m e v a l u e a s a b a s is o f c o m p a r is o n . T a b le 3 sh o w s, each of th e As m a jo r c o m p o n e n t s m o v e d u p in th e p r e v io u s d e c a d e b y a m o u n ts n ot f a r fro m 4 5 p e r cent. M a c h i n e r y d id s o m e w h a t better, b u t m o t o r v e h ic le s l a g g e d f a r b e h in d . D u rin g 1961 a n d e a r ly 1 9 6 2 d is t o rt io n s p r o d u c e d b y th e re c e s s io n w e r e c o rre c te d a n d th e ra t e s o f g a i n of th e v a r io u s co m p o n e n ts con v e r g e d , a s c a n b e s e e n in C h a r t X III. T h e re a fte r, f o r a b o u t t w o y e a r s , a ll s e rie s a d v a n c e d PER CENT C H A N G E S IN SELECTED CO M PO N EN TS OF INDUSTRIAL PRODUCTION A N D EMPLOYMENT T a b le 3 s a m e rate. a t s u b s t a n t ia ll y th e B e g i n n in g in e a r ly 1 9 6 4 th e ra t e s b e g a n to d iv e r g e a n d c o n tin u e d to d o s o a t a c c e le r a t in g ra te s, 1 9 5 0 to 1 9 6 0 1 9 6 0 to 2 n d Q 1 9 6 6 In d u s t r ia l P ro d u c t io n E m p lo y m e n t In d u s t r ia l P ro d u c t io n E m p lo y m e n t T o ta l p r o d u c t io n 4 5 .1 A l l m a n u f a c t u r in g 4 3 .7 1 0 .2 4 4 .8 1 3 .3 D u r a b le g o o d s 4 6 .4 1 6 .9 5 1 .3 1 7 .7 N o n d u ra b le g o o d s 44 .1 2 .6 3 6 .5 7 .6 M o t o r v e h ic le s a n d p a r t s 25.1 3 8 .4 M a c h in e ry 5 2 .4 6 3 .0 N o te : S o u rc e : 4 2 .8 C h a n g e s c o m p u t e d fr o m a v e r a g e s o f m o n t h ly d a t a . B o a r d o f G o v e r n o r s o f th e F e d e ra l R e s e rv e S y s t e m a n d U. S. D e p a r t m e n t o f L a b o r. except fo r m o to r 1965 a n d 1966. v e h ic le s , th ro u gh In th e fir st q u a r t e r o f 1 9 6 4 th e re m o re , d if fe r e n c e s m o re , t h a n a ll m a n u f a c t u r in g , w h ile gence b e t w e e h th e c u m u la t iv e g r o w t h ra te s n o n d u r a b le s h a d f a lle n b e h in d b y 1 9 n o u n c e d a t a b o u t th e s a m e tim e th e of p e r cent. w h o le s a le w ere o n ly in s ig n if ic a n t p r o d u c t io n d u r a b le in go od s, a ll m a n u f a c t u r in g , and n o n d u r a b le sh ow n and an m a c h in e r y 41 per ce n t D u r a b le g o o d s w o u ld h a v e e v e n g re a te r g a in excep t g o o d s , b u t m a c h in e r y s h o w e d a s u b f o r th e d e c lin e in a u t o m o b ile p r o d u c s t a n t ia lly tio n in 1 9 6 6 . m id d le q u a rte r goods greater of 1963. of 1966, had gro w th By a fte r th e h o w e ve r, advanced 15 th e d u r a b le per ce n t c h a r t X I I I PRODUCTION Cum . % C h an ge fro m 1 9 6 0 A v e ra g e It m a y n o t h a v e b e e n se cond OF MANUFACTURED G O O D S e n t ire ly c o in c id e n ta l th a t th is d iv e r in m o v e up . gro w th p ric e ra te s b e c a m e in d e x began p ro to CORPORATE T h e b e h a v io r o f c o r p o r a t e p ro fits 1960, w h ic h had a PROFITS p o s itio n a p p ro x im a te ly in th e c yc le p r o b a b l y o n e o f th e m o s t d y n a m ic , 1 9 4 9 , t h e y h a d ris e n to $ 2 6 . 7 b illio n . d o u b le d , d e v e lo p m e n t s o f th e p r e s e n t e x p a n T h is w a s a to ta l in c r e a s e o f 4 4 t h a n tw ic e th a t o f G N P a n d p e r s o n a l s io n . c e nt p r o f it s a a p p r o x im a t e ly g ro w th so m e w h a t annual in c o m e . D u rin g ro s e f r o m w ill a f f o r d som e th e s a m e p e r io d G N P g r e w b y 9 6 p e r d o ll a r e v a lu a t io n of c e nt a n d p e r s o n a l in c o m e b y 9 3 p e r ce n ts in th e fir st p a r t o f 1 9 6 6 . ance. re c e n t In th is d is c u s s io n p e rfo rm profits w ill cent. As a in h e r e n t ly 1 9 4 9 , ro s e to n e a r ly 1950, a n d th e n 12 ce n ts in d e c lin e d ir r e g u la r ly ce n t in 1 9 6 5 . to b e lo w 7 ce n ts in 1 9 5 8 a n d 1960. th e th e c o u rs e o f a b u s in e s s cycle. A s a re t u rn o n ne t w o r t h , p ro fits o f th e 15 y e a rs la r g e c o r p o r a t io n s a s c o m p ile d b y th e e x p a n s io n . p ro f it s o fte n d e F irst N a t i o n a l C it y B a n k o f N e w Y o r k w a s e s p e c ia lly tr u e in th e b e fo re 1 9 6 1 , w h e n c lin e d e v e n in p e r io d s o f b u s in e s s e x d e c lin e d r a t h e r s t e a d ily f r o m p a n s io n . end of to p ro fits d e c lin e d in 11 per In re la t io n to G N P t h e y tr e n d s 1 9 5 0 's w h ic h w ere had Thus p r e v a ile d re v e rse d in in th is B e c a u s e o f th e s lo w a n d ir r e g u l a r g r o w t h o f p ro fits b e t w e e n 1 9 5 0 a n d 1 9 6 0 , it m a y b e in st ru c t iv e to lo o k a t p ro fits o v e r a 1 8 a lt h o u g h G N P p e r io d flu c t u a t e d ir r e g u l a r ly b u t d e 1 9 5 0 to th e s e c o n d q u a r t e r o f 1 9 6 6 , c lin e d s ig n if ic a n t ly in re la t io n to G N P , th e p e r s o n a l in c o m e , s a le s, a n d n e t w o rt h . cent; p e r s o n a l in c o m e , 1 5 2 p e r cent; of 1 9 6 1 w a s a s h a r p ris e in p ro f it s d u r S in c e 1 9 6 0 th e t r e n d o f p ro fits h a s in g th e fir st y e a r o r s o o f re c o v e ry , been f o llo w e d b y a n i r r e g u l a r d e c lin e d u r p ared p ro d u c e d a n d ir r e g u l a r s e c u la r g r o w t h . s u b s t a n t ia ll y w it h e a r lie r d iffe re n t. Com u p s w in g s , th e y and Thus in c r e a s e s c o rp o ra te lo n g e r p e r io d . w ere : GNP, p ro fits, 9 6 o v e r th e w h o le sp an 157 F ro m per p e r cent. o f m o re t h a n 1 5 y e a r s p ro fits in c r e a s e d b y le ss T h is is g r e w m o r e s l o w l y in th e e a r ly m o n t h s t h a n t w o t h ir d s a s m u c h a s th e o t h e r O v e r th e o f th is e x p a n s io n , b u t th e n a c c e le ra te d t w o v a r ia b le s . in g th e re st o f th e e x p a n s io n . s h o w n c le a r ly in C h a r t V . a s lo w In 1 9 4 9 p ro fits a m o u n t e d to $ 1 8 . 5 b illio n . te n As a In b rie f, c o r p o r a t e p ro fits d u r in g th is end T h e g e n e r a l c y c lic a l p a t te rn b e f o r e p a t te rn n e a r ly ce n t in 1 9 4 9 to 9.1 p e r ce n t in 1 9 6 0 . th e d e c lin e d in o n l y e ig h t. y e a r s th is to I9 6 0 , In th e 4 0 q u a r t e r s f r o m th e 1950 1961 ro s e f r o m 5 .2 to 6 .5 p e r cent. v o la t ile a n d flu c tu a t e w id e l y d u r i n g T h is le ss t h a n s e v e n c e n ts p e r e a r ly re t u rn o n n e t w o rt h , p ro fits w e r e u p in a re in f r o m 8 .7 p e r c e n t in 1 9 6 1 to 11.1 p e r fe r e n t m e a n in g is in d ic a t e d . A s a m a r g i n o f s a le s , t h e y 8.3 cents p er d o lla r before taxes were p ro fits m o re m a r g i n o f s a le s, p ro fits m e a n p ro fits a ft e r t a x e s u n le s s a d i f C o rp o ra te to 1966, an t h e ir equal per of g r o w t h ra te o f 2 .8 p e r cent. p e r s p e c t iv e f o r a n w as to p ro fits in th e e a r lie r p o s t w a r y e a r s A b rie f lo o k a t th e b e h a v io r o f and c o m p a r a b le th e p e r io d a s a w h o le , to th e m id d le h a s b e e n o n e o f th e o u t s t a n d in g , a n d By and have m uch c o n t in u e d lo n g e r q u a rte rs a fte r u p w a rd fo r a p e r io d . In th e 21 th e q u a rte r of fir s t 1 9 6 1 , t h e y w e r e u n c h a n g e d in tw o , sh o w e d s m a ll ro s e in 1 7. d e c lin e s in tw o , a n d B y y e a r s , th e p e r c e n t a g e in c re a s e s , b e g in n i n g w it h 1 9 6 1 , w e r e : 1.9, 1 4 .7 , 6 .1 , 1 6.9 , a n d 1 5 .0 . O ver The lo n g , ste a d y , and v ig o ro u s tim e w age g r o w t h o f p ro fits in th e p re se n t e x m od e rate p a n s io n w a s th e re s u lt o f a o ffs e t o f fa c to rs . First, a n d num ber p e r h a p s m ost in c r e a s e s m o re m e n t in p r o d u c in g fa c ilitie s. A s a p a r t a p p r o x im a t e l y o f th e g e n e r a l t a x re d u c tio n o f 1 9 6 4 , g r o w in g p ro th e t a x ra te o n c o r p o r a t e in c o m e w a s T h ird , c o r p o r a t io n s r e a liz e d re d u c e d , in t w o ste p s, f r o m 5 2 to 4 8 and by a d u c tiv ity . w ere s t e a d ily w ere im p o r t a n t ly , it w a s th e n a t u r a l c y c lic a l la r g e r p r o f it s f r o m f o r e ig n o p e r a t io n s , p e r cent. re a c tio n an in p e r io d of of s t e a d ily p ro f it s b u s in e s s r i s in g to a p r o lo n g e d e x p a n s io n . v o lu m e of A a u t h o r it y b u s in e s s p er ye a r. s h o u ld n o r m a ll y p r o d u c e a s u b s t a n t ia l in c r e a s e in p ro fits. am ount In a d d it io n , c o r A now at e s tim a t e d m o re th a n by $3 one b illio n It h a s b e e n e s t im a t e d th a t 1 9 6 5 th e se th re e m e a s u r e s s a v e d c o r p o r a t io n s m o r e t h a n $ 6 b illio n . The stro n g g ro w th f in a l im p o r t a n t fa c to r in th e o f p ro fits w a s c a u s e a s w e ll a s effect. W h e n it b e g r o w t h o f p ro fits a ft e r t a x e s w a s t a x cam e e v id e n t th a t p o r a t io n s w e r e p r o d u c in g a s o m e w h a t re d u c tio n . D u r i n g W o r ld W a r II th e g o in g to re p e a t th e ir f o r m e r la r g e r p r o p o r t io n peak a p p lic a b le c o a s t e r p a tte rn t io n a l p ro d u c t. of th e Second, to ta l u n it na la b o r ra te p o ra te p ro f it s w a s to 40 m ost co r p e r cent but p ro fits w e r e and w hen n ot ro lle r C o n gre ss s h o w e d a d e fin it e in te n tio n to re d u c e c o sts in m a n u f a c t u r in g h e ld s t e a d y o r m a n y c o r p o r a t io n s w e r e su b je c t to a n th e d e c lin e d e x c e s s p ro f it s ta x . fid e n c e a n d o p t im is m ro se in th e b u s i s o m e w h a t o v e r a lm o s t th e T h e p e a k ra te w a s ta x lo a d on c o r p o r a t io n s , con w h o le p e r io d . In e a r lie r e x p a n s i o n s re d u c e d to 3 8 p e r c e n t a f t e r th e w a r n e ss c o m m u n it y . th is d e v e lo p m e n t u s u a l ly b u t w a s r a is e d to 5 2 p e r cent d u r i n g d u c tio n a p p r o a c h e d the o p t im u m le v e l m a r k e d th e fir s t y e a r o r s o o f th e e x th e K o r e a n W a r a n d a g a i n a n e x c e s s in p a n s io n a n d th e n w a s re v e r se d . p ro f it s sh o rt n e s s m e n w e r e e n c o u r a g e d to e m b a r k T h e r e g u l a r c o r p o r a t e t a x ra te s o n a m b it io u s p r o g r a m s o f c a p it a l o u t ty p e of T h is tim e . ta x w as le v ie d fo r a one In p a r tic u la r, a s p r o in d u s t r y a f t e r a n o t h e r , b u s i w e r e n o t lo w e r e d in th e t a x re d u c tio n la y s . o f 1 9 5 4 , b u t p r o v is io n s f o r a c c e le r a t e d c a u s e re t a in e d e a r n i n g s a n d d e p r e c ia d e p r e c ia t io n ye a r. p o ra te above W a r II. w ere T hus in ta x e n a c te d 1960 ra t e s the w e re in regular th a t tio n a llo w a n c e s p r o v id e d m u c h o f the co r f u n d s n e e d e d to f in a n c e th e o u t la y s , som ew hat th o s e in e ffe ct d u r i n g T h is w a s a ll th e m o r e tru e b e a t le a s t in th e e a r ly s ta g e s . W o r ld In 1 9 6 2 d e p r e c ia t io n s c h e d u le s f o r t a x p u r p o s e s w e r e lib e r a liz e d c o n sid e ra b ly and c o r p o r a t io n s w ere g r a n t e d a t a x cre d it, e q u a l in m o s t c a s e s to 7 p e r cent, f o r n e w in v e s t 25 D O M ESTIC INVESTM ENT W h ile in v e s t m e n t h a s b e e n a n im d r if t in g d o w n f r o m a n a n n u a l ra te o f It h a s b e e n c u s t o m a r y to a s s u m e p o rt a n t s o u rc e o f s t r e n g t h in t h is b u s i a b o u t 1 .6 m illio n u n its in e a r l y 1 9 6 4 th a t th e r e la t iv e ly lo w ra t io o f i n v e n n e ss e x p a n s io n , its t im in g a n d c o m to a b o u t to rie s to s a le s, in b o th m a n u f a c t u r in g p o s itio n 1966. fro m have d if fe r e d s ig n if ic a n t ly e a r lie r p o s t w a r e x p e r ie n c e . H o u sin g In p r e v io u s p o s t w a r cyc le s, r e s id e n tia l c o n stru c tio n m e a su re d by a c tiv ity , h o u s in g sta rts, as 1.5 m illio n u n its in e a r ly S in c e th a t tim e a s h a r p ris e in in a s t a b le e q u ilib r iu m . tr ib u t e d to a ro s e con th is e x p a n s io n . m o n th s in g s d e c lin e d in re la t iv e im p o r ta n c e , b u s in e s s a c tiv ity . S t a r t s g e n e r a lly d e c lin e d t h r o u g h o u t th e re st o f th e e x p a n s io n p h ase , p r o v id in g a p a r t ia l o ffs e t to o t h e r e x p a n s i v e fa c to r s . In w h ile h a s a ls o a been d if f e r e n t in S i n g l e f a m i l y d w e ll v ir t u a l boom o c c u rr e d a p a r t m e n t c o n stru c tio n . n o t e x c e s s iv e a n d a b ly been changed s ig n if ic a n t ly o d s o f in v e n t o r y co n tro l. In v i e w o f th is, a le v e lin g o f f o r a s lig h t u p t u r n in in in v e n t o r y - s a le s r a t io s m ig h t h a v e M u l t i f a m il y a s ig n if ic a n c e e q u a l to m u c h s h a r p e r sta rts a s a fr a c t io n o f th e to ta l ro se u p t u r n s in e a r lie r e x p a n s io n s . P la n t a n d E q u ip m e n t p e r c e n t in by th e s e c u la r tr e n d t o w a r d b ette r m e t h fr o m 21 a re T h e o p t im u m r e la t io n s h ip h e re , h o w e v e r , h a s p r o b p r e c ip it o u s d ro p . T h e c o m p o s it io n o f re s id e n t ia l c o n c o v e r y p e r io d s , p e a k i n g o u t a b o u t s ix ge n e ra l in d ic a t io n t h a t in v e n t o r ie s a r e c re d it h a v e s tru c tio n in tr a d e , is a n b ilit y o f m o r t g a g e s h a r p l y in th e re c e s s io n a n d e a r l y re a ft e r th e t r o u g h and m o r t g a g e y ie ld s a n d r e d u c e d a v a i l a 1 9 6 0 to 3 7 p e r ce n t in 1 9 6 3 , b u t d e c lin e d s o m e w h a t a c c e le r a t in g q u it e d iffe re n t ly . later. f o r p la n t a n d e q u ip m e n t h a s b e e n a c e rn ib le u p tu rn T h e re w a s n o d i s b e fo re th e ge n e ra l In v e n t o r ie s In v e n t o r y in v e s t m e n t a ls o g ro w th T h e lo n g a n d th is e x p a n s i o n h o u s in g s ta rt s b e h a v e d d o m in a n t fe a t u r e in of e x p e n d it u r e s th is e x p a n s i o n r e c o v e r y g o t u n d e r w a y , a n d th e u p h a s d if fe r e d fr o m e a r lie r c y c lic a l p a t s in c e e a r ly s w i n g w h ic h f i n a lly c a m e w a s q u it e te rn s. th e s e e x p e n d it u r e s h a v e in c r e a s e d a t m ild . to rie s ro s e s h a r p l y f r o m a b o u t th e b e a g in n in g q u a r t e r sin c e th e fir s t q u a r t e r o f 1 9 6 3 , th re e It la s te d ye a rs, fo r a p p ro x im a te ly h o w e ve r, p e a k in g in e x p la n a t io n of J a n u a ry 1964. W h ile no p re c ise In e a r lie r e x p a n s i o n s of g e n e ra l in v e n re c o v e ry u n til ra te 1963. of On n e a r ly th e a v e r a g e , $ 1 .8 a b o u t m i d w a y o f th e e x p a n s io n , w h e n fa r a a ve ra ge q u a r t e r ly 1 9 5 4 -5 7 e x p a n s io n , a n d m a r k e d f a ll o f f in t h e ra te o f a c th is d if fe r e n t b e h a v io r is p o s s ib le , a c u m u la t io n o c c u rre d . $ 1 .0 b illio n in c r e a s e in m o re th e th a n s io n , s h a r p l y in th e f ir s t y e a r o f re c o v e ry , 1 9 5 8 -6 0 a n d a d if fe r e n t m o n e t a r y p o lic y . W it h th e n le v e le d o f f a n d r e m a in e d o n a They th e t r e m e n d o u s p la t e a u u n til th e la tte r p a r t o f 1 9 6 4 . G N P in th e s e c o n d q u a r t e r o f 1 9 6 1 to h a v i n g b e e n w o r k e d o f f in th e 1 9 5 0 's , h o u s in g a c t iv it y in th e e a r ly 1 9 6 0 's The d u rin g s lo w e r ra t e m ost o f of th is ro se th e p a r t ia l e x p la n a t io n m a y b e a d e c lin e of d em an d in v e s t m e n t th a n per in th e u n d e r ly in g d e m a n d f o r h o u s i n g b a c k lo g in v e n to ry In th is e x p a n greater b illio n a c c u m u la t io n e x p a n s io n has tw ic e th e a ve ra ge and c lim b e d th e in c r e a s e s 1 9 4 9 -5 3 fro m 6 .5 in th e p e r io d s. p e r cent o f s lig h t ly m o r e t h a n 8 p e r ce n t in e a r ly 1 9 6 6 , th e h ig h e s t r a t io s in c e 1 9 5 6 - 5 7 . d id n ot s u r g e f o r w a r d a s m o n e y b e b e e n d u e to b o th s e c u la r a n d c y c lic a l ca m e e a sy . fa c to rs. O n th e s e c u la r sid e , th e g r o w e x p a n s io n in g u s e o f c o m p u t e r - b a s e d m e t h o d s o f C h a r t X , w e r e c o n c e n tr a t e d h e a v i ly o n in v e n t o r y m o d e r n iz a t io n , p e rie n c e , In c o n tra s t to e a r lie r e x m o n e ta ry la te st e x p a n s i o n a p o lic y r e m a in e d in th is e a sy fo r lo n g tim e , a n d th is p r o b a b l y c o n trib u te d to th e p r o l o n g e d ris e in h o u s v e n t o r ie s in g sam e a c tiv ity , d e s p it e ly in g dem and. w eaker The la tte r u n d e r fa c t o r c o n tro l h a s e n a b le d b u si n e s s m e n to o p e r a t e w it h r e d u c e d in r e la t iv e tim e , to s a le s . th e s e o u t la y s , sh ow n in b u t a ft e r th e m id d le o f 1 9 6 3 t h e y w e r e d e v o t e d in c r e a s At th e i n g l y to e n l a r g i n g c a p a c it y . c y c lic a l f a c t o r s en a n n u a l ra te o f $ 3 7 b illio n in th e first been q u a r t e r o f 1 9 6 3 , t h e y ro se to a le v e l w e a k e r . U n til 1 9 6 4 p ric e s w e r e s t a b le o f $ 6 0 b illio n in th e s e c o n d q u a r t e r o f e a s y m o n e y a n d h o u s in g s ta rt s b e g a n a n d e x c e s s c a p a c it y p e rm itte d p r o m p t 1 9 6 6 , a to ta l in c r e a s e o f 61 p e r cent. d e liv e r y o f o r d e rs . O v e r th e p a s t th re e y e a r s th e a n n u a l o u t w e ig h e d th e s t im u lu s a c c u m u la t io n have F ro m a n of f i n a lly c o u r a g in g th e In th e first t w o y e a r s o f th e p re se n t T h e s e c o n d it io n s b e g a n c h a n g i n g in 1 9 6 4 a n d f o r th e p ast tw o y e a rs tio n has fa s t e r p a c e . 26 in v e n t o r y a c c u m u la p roc e e d e d at a d is t in c tly in c r e a s e h a s ra n g e d fro m p e r cent. 17 to f in a l d e m a n d a n d c u t b a c k s in p la n t fu n d s T h is g r o w t h h a s p u t g r e a t 1 4 to a n d e q u ip m e n t e x p e n d it u r e s f o llo w e d m o v e d u p f r o m $ 3 5 . 6 b illio n in 1 9 6 1 by n o n f in a n c ia l c o r p o r a t io n s p r e s s u r e o n th e c a p a c it y o f m a c h in e r y a ft e r a c o n s id e r a b le la g . a n d e q u ip m e n t p ro d u c e rs , w h o in tu rn o f th is e x p a n s io n , c a p a c it y e x p a n s io n te r n a l f u n d s u s e d r e m a in e d s t e a d y a t have had to $ 5 1 .0 b illio n in 1 9 6 4 , w h ile ex th e ir fa c ilitie s. h a s b e e n m o re in line w it h d e m a n d , s lig h t ly b e lo w $ 1 9 b illio n . T h e ir e x p e n d i t u r e s fo r a n d u t iliz a t io n ra te s h a v e e d g e d u p p o r t io n o f to ta l f u n d s u se d , e x t e r n a l e q u ip m e n t in c r e a s e d 19 1964, 33 to e x p a n d O v e r m o st p e r ce nt in e s tim a t e d 31 p la n t and p e r c e n t in 1965, a n d an p e r ce n t in 1 9 6 6 . P la n t a n d e q u ip m e n t e x p e n d it u r e s a re s ig n if ic a n t fo r se ve ra l L ik e a ll f o r m s o f c a p it a l th e y a re in p a n s io n a r y . se rve of th e fir s t p r o d u c in g and in s t a n c e ex S o lo n g a s th e r e is a re e c o n o m y , th is is a m ent re a s o n s . f o r m a t io n , c a p a c it y and th e h e a lt h y d e v e lo p c o n trib u te s e m p lo y m e n t in to w a rd fu lle r F o r th e p a s t s e v e r a l q u a rte rs , h o w e v e r, u tiliz a t io n ra te s have re fu n d s d ro p p e d cent. B u t b y 1 9 6 5 o u t la y s w e r e f a r fr o m 35 to 27 per m a in e d o n a h ig h p la te a u . o u t s t r ip p in g c a s h f l o w s a n d th e u s e o f Financing Corporate Investment S in c e e x t e r n a l f u n d s in c r e a s e d s h a r p l y f r o m W o r ld W ar II, c o r p o r a t io n s in th is $ 1 8 . 6 b illio n to $ 3 3 . 4 b illio n — a n c o u n t r y h a v e o b t a in e d a m a jo rity o f c r e a s e o f 8 0 p e r cent. th e ir in v e s t m e n t f u n d s fr o m e x te rn a l in te rn a l fu n d s in In th a t y e a r r e p re s e n t e d 38 per so u rc e s; th a t is, fr o m th e ir c a s h f lo w ce n t w h ic h is c o m p o s e d a lm o s t e n tire ly o f la r g e r e t a in e d c o u n t e d f o r b y b a n k lo a n s , w h ic h ro s e e a r n in g s a llo w a n c e s . and d e p re c ia tio n O n l y m a r g in a l a m o u n t s of to ta l in v e s t m e n t fu n d s. p a r t o f t h is in c r e a s e A w as b y $ 6 . 5 b illio n , o r 1 9 0 p e r cent. ac T h is but h a v e h a d to b e f in a n c e d b y b o r r o w in g sp u rt w h e n d e m a n d is p u s h i n g c lo s e to c a in th e c a p it a l m a r k e t o r a t c o m m e rc ia l c o n s id e r a b le p a r t to th e fa c t t h a t th e p a c it y it c a n g e n e ra te t io n a r y p re s s u re s . a lo n g le a d t im e . " p r o d u c t io n , w ard . A s a p ro tim e, W hen stro n g in fla A ls o , t h e y in v o lv e or la r g e "tu rn a ro u n d p ro g ra m s b an ks. in bank le n d in g w as due in L ik e a ll m a r g i n a l fig u r e s , th is b a n k p r im e ra te r e m a in e d f o r n e a r ly e x t e r n a l f i n a n c i n g h a s te n d e d to flu c th e w h o le y e a r a t 4 .5 p e r ce n t w h ile tu a te w id e ly . m arke t It h a s g r o w n s h a r p l y in ra t e s w ere r is in g , in m any have th e p a s t t w o y e a r s a n d t h e r e b y c o n case s b e e n p la n n e d a n d s ta rt e d it is v e r y trib u te d s u b s t a n t ia lly to th e p re ss u re T h e la r g e in c r e a s e in b a n k lo a n s w a s d iffic u lt a n d c o stly to h a lt th e m b e f o r e o n c a p it a l m a r k e t s a n d h e lp e d to p r o a m a j o r fa c t o r c o n t r ib u t in g to th e 1 0 c o m p le tio n . d u c e h ig h in te re st rates. p e r c e n t in c r e a s e C o r p o r a t io n s w it h la r g e s p e n d in g p r o g r a m s w e ll a d v a n c e d a r e In e a r lie r e x p a n s io n s c o r p o r a t io n s o fte n p r e p a r e d to b id v e r y h ig h ra t e s w e r e f o r c e d to re so rt to e x te r n a l f i to g e t th e n e c e s s a r y f u n d s to c o m p le te n a n c in g f a i r l y e a r ly in th e u p s w in g . th e m . The re a so n T h e ir d e m a n d f o r f u n d s in th e w a s th a t p ro fits u s u a lly to w e ll beyond in 4 .5 p e r cent. bank c re d it in 1 9 6 5 — th e la r g e s t in c r e a s e s in c e W o r l d W a r II. C o r p o r a t io n s c o n t in u e d to r e ly h e a v i l y o n e x t e r n a l f i n a n c i n g in 1 9 6 6 . fa c e o f s t r o n g m o n e t a r y r e s tr a in t s c a n f a d e d o u t e a r ly , b e fo r e c a p it a l o u t At annual p r o d u c e s e r io u s d is lo c a t io n s in m o n e y la y s, w h ic h u s u a l ly la g b e h in d o th e r fir s t h a lf w e r e b u s in e s s a c tiv itie s, sta rte d u p w a rd . t h a n th e f i g u r e f o r th e w h o le o f 1 9 6 5 Thus th e c a p it a l s p e n d in g and c a p it a l m a rk e ts. F in a lly , c a p it a l o u t la y s a r e cy c lic a l. On th e b a s is of h ig h ly p ast ex by p ro g ra m s got tim e under w ay, re ta in e d but ra t e s th e f ig u r e s som e w h at $ 3 5 .4 b e lo w f o r th e b illio n , h i g h e r th a t fo r th e fo u r t h q u a r t e r o f th a t y e a r . C o r p o r a t e e a r n i n g s w e r e d e c lin in g a n d b o r r o w b o rr o w in g 1 7 p e r ce n t c a n n o t b e s u s t a in e d f o r in g T h is in c r e a s in g th e c a p it a l m a r k e t , h o w e v e r , a n d th e any In d e p e n d e n c e o n o u t s id e b o r r o w in g , a t g r o w t h o f b a n k lo a n s d r o p p e d s h a r p l y a d d i r is in g ra t e s o f interest, f a i r l y e a r ly in fr o m 3 5 . 9 p e r ce n t o f th e to ta l to 2 8 . 0 p e rie n c e , a n n u a l in c r e a s e s o f e x te n d e d p r e v io u s p e r io d p o stw a r of 1 4 to ye a rs. e x p a n s io n s , w as n e c e s sa ry . tio n s to c a p a c it y o u t r a n d e m a n d f o r th e u p s w i n g f in a l o u t p u t s o o n a ft e r e x p e n d it u r e s in v e s t m e n t o n p la n t a n d e q u ip m e n t b e g a n m o v w it h in lim its. in g up. D e c lin in g c a p a c it y u t iliz a t io n ra t e s s ig n a le d o v e r in v e s t m e n t r e la t iv e t e n d e d to d a m p e n s p e n d in g and keep the it p e r cent. m oved m o r e h e a v i ly in to T h is h e lp e d to h o ld d o w n th e g r o w t h o f b a n k c re d it to a n a n n u a l ra t e o f 8 .6 p e r ce n t f o r th e fir st In th is e x p a n s i o n it w a s d iffe re n t. s ix m o n t h s o f 1 9 6 6 . R e t a in e d e a r n i n g s g r e w o v e r a lo n g e r p e rio d , and p re c ia tio n a t th e sa m e a llo w a n c e s tim e w ere de s ig n i f i c a n t ly lib e r a liz e d . T h e u s e o f in te rn a l 27 FISCAL POLICY F isc a l p o lic y h a s s u b s t a n t ia ll y in f lu e n c e d e c o n o m ic d e v e lo p m e n t s d u r i n g th is e x p a n s io n . O n th e e x p e n d i tu re s id e , th re e t y p e s o f e x p e n d it u r e s have grow n r a p id ly : th o se fo r d e fe n s e , th o s e f o r s o c ia l s e c u rity a n d th e o ld e r w e l f a r e p r o g r a m s , a n d th o s e f o r new w e lf a r e and d e v e lo p m e n t p r o g r a m s . C h a r t X I V s h o w s th e q u a r t e r ly changes in cash p a y m e n ts and th e a m o u n t s o f th e q u a r t e r ly d e fic its o r s u r p lu s e s . O n th e r e v e n u e s id e , t w o i n n o v a tio n s fe a t u r e d th e p e r io d . im p o r t a n t m e a su re s First, t w o w e re d e s ig n e d s p e c if ic a lly to re d u c e b u s in e s s ta x e s . S e c o n d , th e re w a s a m a j o r re d u c tio n C h art X IV in in c o m e t a x e s a t a tim e w h e n b u s i FEDERAL CA SH TRANSACTIO NS WITH THE PUBLIC ^ gH ( S e a s o n a lly A d ju s te d ) n e s s w a s e x p a n d i n g a n d th e b u d g e t w as still s h o w in g a s iz a b le d e ficit. O t h e r s ig n if ic a n t d e v e lo p m e n t s in th e f is c a l a r e a in c lu d e d th e m o v i n g u p o f c e rt a in t a x p a y m e n t d a te s, a g r e a t e r u se of r e v o lv in g fu n d s, and la r g e r s a le s o f a s se t s b y F e d e ra l a g e n c ie s . Receipts, Payments, and Deficits T a b le 4 g i v e s a s u m m a r y s ta te m e n t o f th e F e d e ra l ye a rs ca sh 1961 budget to fo r 1966. p a y m e n t s e a c h in c r e a s e d cent, b u t p a y m e n t s a r e th e fis c a l R e c e ip ts by 38 and per u n d e rsta te d b e c a u s e o f th e s a le s o f a s s e t s w h ile re c e ip ts a r e o v e r s t a t e d b e c a u s e o f th e a c c e le r a t io n o f t a x p a y m e n t s in 1 9 6 6 . R e fle c tin g th e la r g e c o r p o r a t e p ro fits, -2 re c e ip ts fr o m th e c o r p o r a t e in c o m e t a x - 3 -4 _L 1961 S o u rc e : 1962 1963 1964 1965 1966 B u r e a u o f th e B u d g e t a n d U. S. T r e a s u r y D e p a rt m e n t . s h o w e d th e la r g e s t in c re a s e . th e V ie t N a m D e s p ite FEDERAL CASH RECEIPTS FROM A N D PAYMENTS TO THE PUBLIC T a b le 4 W a r , n a t io n a l d e f e n s e e x p e n d it u r e s ro s e p r o p o r t io n a t e ly le ss t h a n th e to ta l a n d d e c lin e d in re la t iv e im p o r ta n c e . F isc a l Y e a r s P a y m e n t s in th e g e n e r a l 1 96 1 1962 a r e a s o f h e a lth , e d u c a t io n , w e lf a r e , a n d la b o r e x p e r ie n c e d th e la r g e s t in c re a se , r is in g b y $ 7.1 b illio n , o r 2 4 p e r cent, in fis c a l 1 9 6 6 . T h e la r g e g e n e r a l t a x re d u c tio n o f 1 9 6 4 o n ly s lo w e d , a n d d id n o t sto p , th e in c re a s e in re ce ip ts. R e c e ip ts f r o m i n d i v id u a l in c o m e ta x e s w ere ap 1963 1964~ 1965 19611966 (b illio n s o f d o lla r s ) 1966 % Change R E C E IP T S In d i v id u a l in c o m e t a x 4 1 .3 4 5 .6 4 7 .6 4 8 .7 4 8 .8 5 5 .4 + 3 4 .0 C o r p o r a t io n in c o m e ta x 2 1 .0 2 0 .5 2 1 .6 2 3 .5 2 5 .5 3 0 .1 + 4 3 .5 O t h e r re c e ip ts 3 5 .0 3 5 .8 4 0 .6 4 3 .3 4 5 .4 4 8 .9 + 3 9 .9 9 7 .2 1 0 1 .9 1 0 9 .7 1 1 5 .5 1 1 9 .7 1 3 4 .4 + 3 8 .2 N a tio n a l d e fe n se 4 7 .7 5 1 .5 5 3 .4 5 4 .5 5 0 .8 5 8 .4 + 2 2 .5 E d u c a t io n , h e a lth , la b o r , a n d w e l f a r e 2 3 .3 2 5 .0 2 6 .9 2 8 .6 2 9 .8 3 6 .9 + 5 8 .2 O th e r p a y m e n ts 2 8 .5 3 1 .2 3 3 .4 3 7 .2 4 1 .8 4 2 .3 + 4 8 .2 T o ta l p a y m e n t s 9 9 .5 1 0 7 .7 1 1 3 .8 1 2 0 .3 1 2 2 .4 1 3 7 .6 + 3 8 .2 2 .3 5 .8 4.1 4 .8 2 .7 3 .2 T o ta l re c e ip ts p r o x im a t e ly u n c h a n g e d f o r o n e y e a r, b u t th e re w a s n o d is c e r n ib le e ffe ct o n re v e n u e ta x . fro m In th e 1966 c o rp o ra te re c e ip ts in c o m e fro m b o th s o u r c e s s h o w e d la r g e in c r e a s e s to th e h ig h e s t to ta ls o n re c o rd . D e fic its in th e c a s h b u d g e t , s h o w n in T a b le 4 re g is t e re d and C h art X IV , w e re in e v e r y q u a r t e r b u t t w o a n d u s u a l ly r a n g e d w e ll o v e r $1 b il lio n. EXCESS O F P A Y M E N T S O n a f is c a l y e a r b a s is , a n n u a l d e fic its r a n g e d and PAYM ENTS b e t w e e n $ 2 .3 b illio n $ 5 .8 b illio n . e ffe ct o f th e d e fic it w a s e s p e c ia lly im p o rta n t a n d t r o u b le s o m e in th e la st h a lf o f 1 9 6 5 a n d th e fir s t q u a r t e r o f 1966. O n a s e a s o n a l l y a d j u s t e d b a s is th e c a s h P e r C e n t D is t r ib u t io n T he e x p a n s io n a ry b u d g e t w a s a p p ro x im a te ly 4 2 .5 4 4 .8 4 3 .4 4 2 .2 4 0 .8 4 1 .2 C o r p o r a t io n in c o m e t a x 2 1 .6 20.1 1 9 .6 2 0 .3 2 1 .3 2 2 .4 O t h e r re c e ip ts 3 5 .9 35.1 3 7 .0 3 7 .5 3 7 .9 3 6 .4 1 0 0 .0 1 0 0 .0 1 0 0 .0 1 0 0 .0 1 0 0 .0 1 0 0 .0 I n d i v id u a l in c o m e t a x T o ta l re c e ip ts in b a la n c e in th e fir s t h a lf o f 1 9 6 5 . B u t in th e s e c o n d h a lf th e V ie t N a m N a t io n a l d e f e n s e 4 7 .9 4 7 .8 4 7 .0 4 5 .3 4 1 .5 4 2 .5 W a r w a s e s c a la t e d s h a r p ly , s o c ia l s e E d u c a tio n , h e a lth , la b o r , a n d w e lf a r e 2 3 .4 2 3 .2 2 3 .6 2 3 .8 2 4 .3 2 6 .8 c u r it y b e n e f it s w ere in c r e a s e d , a n d m ilit a r y a n d c iv il s e r v ic e p a y s c a le s w e r e r a is e d . A fte r se a s o n a l a d ju st O th e r p a y m e n ts T o ta l p a y m e n t s 2 8 .7 2 9 .0 2 9 .4 3 0 .9 3 4 .2 3 0 .7 1 0 0 .0 1 0 0 .0 1 0 0 .0 1 0 0 .0 1 0 0 .0 1 0 0 .0 m e n t th e d e fic it f o r th e h a lf w a s $ 3 .9 b illio n a n d th e " n e t fis c a l s t im u l u s " S o u rc e : B u r e a u o f the B u d g e t a n d U. S. T r e a s u r y D e p a rt m e n t . a s e s tim a t e d b y th e P r e s id e n t 's C o u n c il 29 o f E c o n o m ic A d v i s e r s w a s " a b o u t $ 7 T h e se m e a s u r e s s tim u la t e d in v e s tm e n t b il lio n . " in th re e w a y s . T h e tr e n d c o n t in u e d in the First, b y W h ile t h e s e r e d u c tio n s w e r e b e in g in c r e a s in g m a d e , e m p lo y m e n t t a x e s w e r e r is in g p rom ote d r a p id l y to c o v e r th e co sts o f th e e x fir s t q u a r t e r o f 1 9 6 6 w h e n th e s e a s o n c o rp o ra t e a l l y a d ju s t e d d e fic it w a s $ 3 .2 b illio n . o p tim ism a n d c o n fid e n c e . S e c o n d , th e p a n d i n g s o c ia l s e c u rity p r o g r a m . C o l C o m i n g a t a tim e w h e n th e e c o n o m y in v e s tm e n t le c tio n s w a s o p e r a t in g n e a r o p t im u m c a p a c it y s p e c ia l b o n u s f o r m a k i n g in v e stm e n ts. fro m th e s e d e fic its g e n e r a t e d s t r o n g in f la F in a lly , th e y p r o v id e d th e m e a n s , in $ 1 6 . 9 b illio n in fis c a l 1 9 6 5 . O n J a n u t i o n a r y p re ss u re s . the fo rm o f r e t a in e d e a r n in g s , to f i a r y 1, 1 9 6 6 , ra te in c r e a s e s b e c a m e e f Tax Reductions n a n c e a s u b s t a n t ia l p a r t o f th e co sts fe c tiv e o f th e in v e stm e n ts. t io n a l r e v e n u e s o f $ 6 b illio n p e r y e a r . A p r o m in e n t fe a t u r e o f t a x p o lic y s in c e 1 9 6 1 h a s b e e n th e r e d u c tio n o f t a x e s o n o r g a n i z e d b u s i n e ss, by b o th m e a su re s. s p e c ific and R e p r e s e n t a t iv e s ge n e ra l ta x a d d it io n th e y c re d it to p r o v id e d th e s e m e a s u re s , C o n g r e s s in tw o a sp e c ific 1 9 6 4 e n a c te d of e m p lo y m e n t $ 1 2 .4 b illio n e s t im a t e d C o lle c t io n s ta xe s in fis c a l to in f is c a l ro s e 1961 p ro d u ce to a d d i 1 96 6 w ere $20 b illio n a n d w e r e e s t im a t e d a t $ 2 4 . 3 b u s i a g e n e r a l a n d s u b s t a n t ia l re d u c tio n in b illio n in f is c a l n e s s h a d lo n g c o m p la in e d a b o u t in b o th in d iv id u a l a n d c o r p o r a t e in c o m e s t a n t ia l p a r t o f th e s a v i n g s o n in c o m e a d e q u a t e d e p r e c ia t io n a llo w a n c e s f o r ta x e s. and ta x i n a d e q u a c ie s ste p s, the l a r g e r o n e in 1 9 6 4 a n d th e c r e a s e s in e m p lo y m e n t ta x e s . w e r e a c c e n t u a t e d b y th e s h a r p p rice o th e r in 1 9 6 5 . T h e re d u c tio n t o o k th e Budgetary Practices r is e s a ft e r W o r l d W a r II a n d fo rm m a in ly o f lo w e r ra t e s o n a ll t a x fis c a l b ra c k e ts; b u d ge tary p u rp o se s. r a p id pace T h e se of In e a rn in g s o f t e c h n o lo g ic a l b y th e change It becam e th e e ffe c tiv e cu ts w ere in tw o e s p e c ia lly 1967. e x c is e t a x e s 1967 T h u s, a w as m ade sub o f fs e t b y in T he b u d g e t fo r e x t e n s iv e p ra c tic e s w h ic h u se of a ffe c te d w h ic h s p e e d e d o b s o le s c e n c e . N e w d e la r g e o n th e v e r y p r e c ia t io n th e c a b le to th e to p b ra c k e ts. T h e ra te o n e x p e n d it u r e s . su b m o s t c o r p o r a t e in c o m e w a s re d u c e d , not n e w , a llo w a n c e s , in t w o ste p s, f r o m 5 2 to 4 8 p e r cent. w id e l y in th e 1 9 6 7 b u d g e t t h a n b e fo re . T h e y a r e th e a c c e le r a t io n o f t a x g u i d e l in e s T re a su ry D e p a rtm e n t s t a n t ia lly in c r e a s e d is s u e d in by 1962 th e h ig h ra t e s a p p l i th e sta te d a m o u n t s o f re c e ip ts a n d / o r T he se p ra c tic e s w e r e b u t th e y w e re u sed m o re p r o d u c in g a n a n n u a l t a x s a v i n g s to At c o r p o r a t io n s e s t im a t e d a t th e tim e o f m a t e d th a t t a x s a v i n g s w o u ld a m o u n t p a y m e n t d a t e s, th e u s e o f r e v o lv in g $ 1 . 5 b illio n . to a b o u t $ 1 1 f u n d s , a n d th e s a le o f G o v e r n m e n t - To s t im u la t e new c a p it a l in v e s t 1964 in c o m e le v e ls, b illio n it w a s e sti f o r in d iv id u a ls a n d $ 3 b illio n f o r c o r p o r a t io n s . T h is m e n t fu r t h e r a s a m e a n s to c re a te n e w re d u c tio n g a v e a n o t h e r b o o s t to c o r job s, C o n g r e s s in 1 9 6 2 a m e n d e d the p o ra t e t a x l a w to a l l o w a c re d it a g a i n s t th e s t a n t ia lly to c o n s u m e r d e m a n d . in c o m e t a x e q u a l to a p o r t io n o f th e n ew investm ent property (thus in personal q u a lifie d e x c lu d in g re a l estate). p ro fits a n d T h e f in a l t a x a ls o added su b o w n e d a s s e t s o r p a r t ic ip a t io n s in th o s e a sse ts. T h e a c c e le r a t io n o f a t a x p a y m e n t d a t e d o e s n o t c h a n g e th e u lt im a te t a x re d u c tio n , a p p l y i n g lia b ilit y o f a t a x p a y e r , o r th e a m o u n t to a n u m b e r o f e x c is e ta x e s , c a m e in o f t a x e s e v e n t u a l ly co lle cte d 1965. G o ve rn m e n t. T h e to ta l re d u c tio n w a s a b o u t b y th e It m e r e ly a d v a n c e s th e T h e a m o u n t o f th e c re d it w a s 7 p e r $ 4 .6 b illio n , to t a k e e ffe ct in s e v e r a l tim e w h e n th e p a y m e n t is m a d e , a n d ce n t in m o s t c a s e s; p u b lic u tilitie s w e r e s t a g e s e x t e n d in g to 1 9 6 9 . t h u s is, in a s e n se , a b o r r o w i n g f r o m a llo w e d 3 p e r cent. A t th e 1 9 6 2 le v e l t w o s ta g e s , e ffe c tiv e in J u n e 1 9 6 5 a n d th e fu tu re . The o f in v e s t m e n t th e a n n u a l t a x s a v i n g J a n u a r y 1 9 6 6 , p r o v id e d cu ts o f $ 1 . 7 5 v id e d fo rm s b illio n e a c h . g r a d u a t e d w it h h o l d i n g o n i n d i v id u a l w a s e s tim a t e d a t a $1 b illio n ; by 1966 little m o r e th a n th e e s tim a t e d a m o u n t h a d ris e n to a b o u t $ 2 b illio n . T h e first E a r ly in 1 9 6 6 , h o w e v e r , of budget p ro a c c e le ra tio n : in c o m e ta x e s , s e m im o n t h ly in s t e a d o f t w o o f the ta x e s . m o n t h ly d e p o s it o f w it h h e ld t a x e s b y e m p lo y e r s , a n d e a r lie r d a t e s f o r p a y a c c o m p lis h e d b y t h e s e s e v e r a l m e a s m ent of co rp o ra te in c o m e u re s, m a d e a s o f th e tim e th e v a r io u s M uch of th e of a cts w e r e p a y m e n t s c a m e in th e s e c o n d q u a r t e r $21 p a s s e d , a m o u n t to a b o u t b illio n p e r y e a r . in c o m e and B u t le v e ls o f in v e s t m e n t have rise n c o n s id e r a b ly in th e in te rim , a n d th e annual s a v in g s in c o m e and at 1966 in v e s t m e n t s u b s t a n t ia lly h ig h e r . 1967 C o n g r e s s p a r t ia lly re s to re d th e cu ts in E stim a te s o f th e to ta l t a x s a v i n g s 30 th r e e le v e ls w o u ld of be im p a c t ta x e s . a c c e le r a t e d of 1966 w hen cash re c e ip ts ( u n a d ju ste d ) ju m p e d s h a r p l y to $ 4 6 .1 b il lio n , th e to p ro d u ce a q u a r t e r o f $ 1 0 .1 s u r p lu s b illio n . fo r O n a se a Fiscal Policy and Money and Capital Markets B u d g e t a r y d e fic its a n d s u r p lu s e s a ffe c t th e c re d it a n d total dem and fo r h e n c e in te re st ra te s, a n d th e y d iv e r t e d fu n d s fro m o t h e r im p o r t a n t m a r k e t se c to rs a n d c o n trib u te d v e lo p e d ra te e ffe cts. M o r e o v e r , th e p r o s p e c t o f c o n t in u in g $ 3 .8 b illio n . The u se 1967 b u d g e t m a d e e x t e n s iv e o f th e s a le a sse t, a F e d e ra l O v e r m o st o f th e c u rre n t th e F e d e ra l G o ve rnm e n t to th e e xtre m e in s t r in g e n c y th e th a t m o rtga ge de m a rk e t. la r g e a g e n c y d e m a n d s w a s p r o b a b l y p a r h a s b e e n a la r g e net b o r r o w e r in th e an In a s a le o f a n m a rk e t, m o s t ly in th e sh o rt-te rm e n d , k e t e x p e c t a t io n s o f fu r t h e r ra te rise s. o f a sse ts a n d t ic ip a t io n s in a sse ts. e x p a n s io n , be o fte n m a n a g e d to p r o d u c e d e s ire d in te re st s u r p lu s can is s u e s w it h in th e p o lic y agency $ 3 9 .6 and fis c a l th e se s o n a l l y a d ju s t e d b a s is , re c e ip ts w e r e b illio n lim its B e ca u se c a r r ie d y ie ld s w e ll a b o v e 6 p e r cent, agency m e n t s e lls to th e p u b lic or d e p a rt m o rtga ge s, a n d c h ie fly t h r o u g h the s a le o f T r e a s u r y b ills. T h is t e n d e d to c o n c e n tra te im p o r t a n t f a c t o r p r o m o t in g m a r The c o m b in a t io n c re d it d e m a n d s of and b u r g e o n in g a t ig h t m oney n ote s, o r o t h e r s im ila r a s s e t s w h ic h it th e u p w a r d ra te p re s s u re s in th e s h o r t p o lic y h o ld s in its p o rt fo lio . T h e p r o c e e d s o f te rm a r e a a n d a w a y f r o m th e l o n g m o n e y a n d c a p it a l m a r k e t s in A u g u s t p ro d u c e d s e r io u s s t r a in s on s u c h a s a le a r e n o t c o u n te d a s a re te rm a r e a , w h ic h w a s c o n sis te n t w it h a n d S e p t e m b e r. c e ip t b u t a s a re d u c tio n o f e x p e n d i th e p r o g r a m to re d u c e th e d e fic it in th a t m o n e t a r y p o lic y a lo n e c o u ld n o t tu re s. our T h o se p r o c e e d s c a n th e n be s p e n t o r r e lo a n e d w it h o u t s h o w i n g a n b a la n c e h a n d le d w it h b u d g e t to ta ls f o r b o th re c e ip ts a n d e x a lt h o u g h th e p e n d it u r e s a r e h e ld d o w n . t e c h n iq u e in c r e a s e in e x p e n d it u r e s . T h u s, F u rth e r, if of m anagem ent p aym e n ts. Debt b e c o u n te d o n to c o n t a in th e b u s in e s s a ls o b o o m , w it h o u t r i s k i n g s e r io u s d is lo c a v ie w , t io n s in th e m o n e y a n d c a p it a l m a r r e f u n d in g kets. F isc a l a c t io n w a s n e e d e d to s u p o p e r a t io n s th is w as w e re end advance o fte n T h e c o n v ic t io n g r e w in e m p lo y e d to p o rt m o n e t a r y re stra in t. In e a r ly S e p th e a g e n c y i n v o lv e d n o r m a ll y d r a w s a c h ie v e s o m e le n g t h e n in g o f a v e r a g e t e m b e r th e A d m in is t r a t io n a n n o u n c e d its f u n d s f r o m th e T r e a s u r y , a s a le o f m a tu ritie s. a t h r e e f o ld p r o g r a m to s lo w th e s p i- a s s e t s p e r m it s it to e n g a g e in a d d i By th e second h a lf o f 1965, in r a li n g d e m a n d f o r cred it. First, th e t io n a l o p e r a t io n s w it h o u t u s in g T r e a s c r e a s e s in th e T r e a s u r y 's d e m a n d s o n u r y f u n d s , w h ic h w o u l d c a u s e fu r t h e r th e m a r k e t w e r e s u p e r im p o s e d u p o n p o n e m e n t o f th e s a le o f p a r t ic ip a t io n s b o r r o w i n g b y th e T r e a s u r y a n d p u s h a s w o lle n b y th e F e d e r a l a g e n c ie s a n d th e to ta l d e b t c lo s e r to its s t a t u t o r y se c to r a n d fr o m sta te a n d lo c a l g o v tio n c e ilin g . e rn m e n t s . n a n c in g n e e d s . T h e s a le o f p a r t ic ip a t io n s in d e m a n d fr o m th e p riv a t e A s a re sult, in te re st ra te s of agency b o r r o w in g s lim it a to r e f i S e c o n d , th e P re sid e n t a s s e t s h a s e s s e n t ia lly th e s a m e e ffe ct ca m e u n d e r stro n g u p w a rd a s a s a le o f a sse ts. A F e d e ra l a g e n c y , d e s p it e c o n t in u in g in c r e a s e s in b a n k f e n s e s p e n d in g . in p u b lic , r e s e r v e s a n d b a n k credit. B y th e f in a l tr a tio n a s k e d C o n g r e s s to re s c in d te m p le d g i n g a s s e t s w h ic h it h o ld s a s c o l q u a r t e r o f 1 9 6 5 ra te s w e r e r is in g in p o r a r ily th e 7 p e r ce n t in v e s t m e n t t a x la te ra l. a ll se c to rs o f th e m o n e y a n d c a p it a l cre d it m a rk e ts. c e le ra te d effect, b o rro w s D e bts fro m in c u r r e d th e by F e d e ra l a g e n c ie s a r e n o t su b je c t to th e s t a t u to r y c e ilin g o n F e d e ra l in d e b t e d n e s s . M a rke ts in 1966 w e re p re ssu re T re a su ry a n n o u n c e d te m p o ra ry p o st a ffe c te d o r d e r e d a c u t b a c k in F e d e ra l n o n d e and F in a lly , th e A d m i n i s th o s e p r o v is io n s d e p r e c ia t io n re a l e sta te . of a p p ly in g ac to P a s s a g e o f th e r e q u e s t e d a ls o b y h e a v y b o r r o w in g b y F e d e ra l le g is la t io n a g e n c ie s . O c t o b e r b u t th e m a r k e t re a c te d im F ro m Ja n u a ry th ro u gh w as d e la y e d u n til e a r ly J u n e , F e d e ra l a g e n c ie s s o ld o v e r $ 1 1 m e d ia t e ly . b illio n o f n e w o n a s h a r p l y s t r o n g e r to n e a n d it w a s la r g e o b lig a t io n s , in c lu d in g a m o u n ts tific a te s. of p a r t ic ip a t io n O f th is total, $ 5.1 c e r b illio n re p re s e n t e d net n e w b o r r o w in g . C o m T h e c a p it a l m a r k e t t o o k s o o n c le a r th a t th e s t e a d y u p t r e n d o f in te re st ra t e s had been h a lte d , at le a s t t e m p o r a r ily . in g a t a tim e w h e n th e m a r k e t s w e r e a lr e a d y h e a v ily c o n g e s te d w it h c o r p o r a t e a n d m u n ic ip a l o f f e r in g s a n d a p o lic y o f m o n e t a r y re stra in t w a s effect, m arke t th e se ra t e s o f f e r in g s to re c o rd h e lp e d h ig h in p u sh le ve ls. 31 MONETARY 1960-1963: Active Ease M o n e ta ry su b s t a n t ia lly . POLICY T h e c o n t in u in g in c r e a s e Growth of Time Deposits The ex began in p o lic y in th e p a s t s i x y e a r s h a s ru n in b a n k re se rv e s, b a n k cre d it, a n d th e p a n s io n a ry th e g a m u t f r o m e a s y to v e r y tig h t. m o n e y s u p p ly in d ic a t e d c le a rly , h o w 1 9 6 0 b o r e f r u it in th e f o r m o f a n u n I 9 6 0 , th e F e d e ra l e v e r, th a t a n y f i r m i n g in c re d it w a s p re c e d e n t e d d u e to a n a c c e le r a t io n in th e d e m a n d th e n e x t f iv e y e a r s . f o r cre d it a n d p o sits, w h ic h ro s e little in S t a r t in g in M a r c h R e s e rv e m ade re se rve s m o re f r e e ly n o t to a re d u c tio n in n e t fr e e r e s e r v e s ro s e to o v e r $ 5 0 0 th e s u p p ly o f re s e rv e s . F e d e ra l R e m illio n a n d r e m a in e d n e a r t h a t f ig u r e se rve th rou gh o u t m a r k e t o p e r a t io n s c o n t in u e d a v a ila b l e . B e fo r e th e e n d o f th e y e a r 1961. C r e d it e x p a n s io n cre d it s u p p lie d th ro u g h open to rise d e p o s it e x p a n s i o n over T o ta l b a n k d e 1959 and 1 9 6 0 , in c r e a s e d b y m o r e t h a n $ 1 0 0 b illio n , o r n e a r ly 5 0 p e r cent, b y th e end of 1965. R e m a r k a b ly , about Ja n u a ry s te a d ily . Q w as s u p p lie d m o r e lib e r a lly , h o w e v e r , h a d crea se w a s pay it n o t b e e n f o r a s e r io u s a n d p e r s is p o sits, w h ic h m o r e t h a n d o u b le d . T h e h i g h e r ra t e s o n tim e a n d s a v i n g s d e tent b a la n c e o f p a y m e n t s d e fic it a n d e x p lo s iv e p o s its e x c e p t t h o s e w it h m a t u ritie s o f th e u r g e n t n e e d f o r a d d it io n a l m e a s m a r k e d a n e w a tt itu d e t o w a r d su c h w as 1962 s t im u la t e d w hen am ended fu rth e r in R e g u la t io n to p e r m it banks to R e s e rv e s m ig h t h a v e b e e n p o lic ie s w h ic h s ix m o n t h s o r le ss. T h is e n a b le d b a n k s u re s to to c o m p e te m o r e v i g o r o u s l y f o r th e e ls e w h e re . s a v i n g s o f i n d iv id u a ls . It a l s o f a c ili deal w it h it, a s p ly o f r e s e rv e s w a s ta te d th e m a r k e t in g o f n e g o t ia b le c e r s lo w e r tific a te s o f d e p o s it, w h ic h b y A u g u s t in te re st 1 9 6 6 s w e lle d in v o lu m e to m o r e t h a n t ig h t e n in g e x p la in e d F o r th a t r e a s o n th e s u p p ac e th a n ra te s in c r e a s e d th e ro se. w h ic h at a dem and The and grad u a l e n su e d w as r e in th re e f o u r t h s o f th is p h e n o m e n a l in d e p o s its . in tim e a n d g ro w th in s a v in g s d e tim e d e p o s it s B a n k s f o u n d th a t t h e y c o u ld se ll n e g o t ia b le c e rtific a te s o f d e p o s it in th e m o n e y m a r k e t . T h e su c c e ss o f th e se in s t ru m e n t s le d to a p r o lif e r a tio n o f s im i la r d e v ic e s, b o th a b le a n d n e g o t i n o n n e g o t ia b le , f o r s a le to $ 1 8 b illio n . A n a d d it io n a l in c e n tiv e to fo rc e d b y a n in c r e a s e in th e d is c o u n t i n d iv id u a l d e p o s it o r s a s w e ll a s to in so lic it tim e a n d s a v i n g s d e p o s it s w a s ra te fr o m stitu tio n s. p r o v id e d in O c t o b e r 1 9 6 2 b y a r e d u c 1963. tio n in r e s e r v e re q u ir e m e n t s o n su c h w a s re v is e d to p e r m it h i g h e r ra t e s o n d e p o s it s f r o m a ll tim e d e p o s it s w it h 1963-1964: 1963 5 to 4 p e r cent. Restrained Ease In e a r ly th e fir s t s ig n s of a d e p a rtu re 3 to 3Vfe p e r ce n t in J u l y A t th e s a m e tim e , R e g u la t io n Q m a t u ritie s o f le ss th a n o n e y e a r . In Novem ber g r e s s iv e Banks b e c a m e q u it e a g in th e c o m p e titio n f o r n e w d e p o s it s to p r o v id e f u n d s w h ic h c o u ld b e u s e d p r o f it a b ly in th e lo a n a n d s e c u r it y m a rk e ts. 1964 th e d is c o u n t The c o m p a r a t iv e l y s lo w ra te of f r o m th e a c t iv e e a s e o f a lm o s t th re e ra te w a s r a is e d fr o m 3Vfe to 4 p e r cent, g r o w t h o f d e m a n d d e p o s it s w a s u n y e a r s b e g a n to a p p e a r . b ut a g a in u s u a l f o r a p e r io d o f s u c h r a p id e x N e t fr e e re th e c h a n g e w as due a l s e r v e s b e g a n to fa ll, a n d b o r r o w i n g s m o s t e n tire ly to b a la n c e o f p a y m e n t s p a n s io n . a t F e d e ra l R e s e r v e B a n k s , w h ic h h a d p re s s u re s n a t io n a l b e e n s m a ll in r e s tr a in 1961 and 1 9 6 2 , ro se and w as d o m e s t ic n o t in t e n d e d e c o n o m ic to g ro w th . T h e m o v e f o llo w e d a ris e in b o t h o f fic ia l and m arke t ra t e s in London. T h e p u r p o s e o f th e in c r e a s e w a s to m eas m o re r a p id l y t h a n th e m o n e y s u p p ly . M a n y h o ld e r s f lu e n c e d of dem and p erh ap s by d e p o s its , r is in g in in te re st r a t e s o n tim e d e p o s it s a n d o t h e r e a r n lin e w ith f o r e ig n ra te s. in g T h e F e d e ra l a s se t s, t r im m e d th e ir d e p o s its R e s e rv e c o n tin u e d to s u p p l y re s e r v e s s h a r p l y in o r d e r to k e e p f u n d s f u lly su ffic ie n t to a llo w f o r th e e x p a n s i o n in v e s te d . and in te re st re la te d w hen u r e d in c o n s t a n t d o lla r s , g r e w m a in t a in d o m e s t ic sh o rt-te rm ra t e s in o f th e e c o n o m y a t a m o d e r a t e p a c e , 32 C h a r t X V s h o w s th a t g r o s s p ro d u c t, e v e n ra te p r im a r ily d e v e lo p m e n t s. m o ve m e n ts to w e re in t e r n a t io n a l As a re su lt, m oney w as u s e d m u c h m o re in te n s iv e ly . It c a n b e s e e n in C h a r t X V th a t m o n e y a c tiv ity , w h ic h is th e c o n v e n t io n a l m o n e y s u p p ly w it h ponent th e dem and m u ltip lie d d e p o s it by an com in d e x of v e lo c it y f o r ce n te rs o u t s id e N e w Y o r k C ity , b e g a n to o u t p a c e G N P e a r ly in 1963 a n d h a s c lim b e d m o r e r a p id l y e v e r sin ce . N o t a ll b a n k s w e lc o m e d th e s h if t in th e c o m p o s it io n o f d e p o s its . Som e f o u n d t h e m s e lv e s d r a w n in to th e in te n s e c o m p e titio n f o r d e p o s it s a g a i n t h e ir w ill, a n d m a n y o f th e m fe lt thj a n y in c r e a s e in to ta l d e p o s it s w a s la r g e e n o u g h to o ffs e t th e in c re a c o st of th e r is in g tim e d ep osi N e v e r t h e le s s , a t m o s t b a n k s tim e a s a v i n g s d e p o s it s g r e w in r e la t iv e i p o r t a n c e a n d a t s o m e b a n k s t h e y ro s w e ll a b o v e d e m a n d d e p o s its . 1965-1966: L a te in sh o w The Need for Restraint 1 9 6 4 th e e c o n o m y b e g a n to s ig n s o f o v e r h e a t in g . O ne of th e fir s t s i g n s o f fric tio n w a s a n in c r e a s e in w h o le s a le p rice s, w h ic h h a d r e m a in e d s t a b le f o r s ix y e a r s b u t b e g a n a d e fin it e ris e a s 1 9 6 4 d r e w a clo se . advanced C o n s u m e r p ric e s, w h ic h h s t e a d ily but not ra p i t h r o u g h o u t th e e x p a n s io n , b e g a n c lim b f a s t e r in 1 9 6 5 . S e r v ic e s , re a n d " f o o d a w a y fr o m h o m e " w e r e th ite m s on r a p id ly . w h ic h p ric e s ro s e m o st' B y 1 9 6 6 th e in c r e a s e s b e c a m e l a r g e r a n d m o r e g e n e r a l. 33 M o n e t a r y p o lic y h a d b e g u n to m o v e In th e f a c e o f s t r o n g lo a n d e m a n d ra t e s in th e f a c e o f th e r a p id l y g r o w t o w a r d re stra in t, h o w e v e r , b e fo r e th e even put con in g d e m a n d f o r c re d it p r o b a b l y h a d p ric e p r e s s u r e s o f 1 9 6 5 s id e r a b le u p w a r d p r e s s u r e o n m a r k e t th e e ffe ct o f s p e e d in g u p th e g r o w t h p arent. On F e b ru a ry becam e a p Open in te re st ra te s, M a r k e t C o m m itte e , p r i m a r i ly b e c a u s e m a in e d s ta b le , of C h a r t X V I. re ce n t s h a r p 2 , th e th is s lig h t t ig h t e n in g in c r e a s e s in c a p ita l but as bank can be ra t e s seen re o f th e m o n e y s u p p l y a n d b a n k cred it. in T h e b a n k s 7 p r im e ra te w a s b e lo w th e T h u s th e e ffe cts o f th e ra te a t w h ic h m o s t c o r p o r a t io n s c o u ld o u t flo w s , m o d if ie d its p o lic y b y m o v re strictive p o lic y w e r e n o t t r a n sm itte d se ll n e w b o n d s . T h is d iv e r t e d d e m a n d i n g g r a d u a l l y t o w a r d s lig h t l y fir m e r to b a n k b o r r o w e r s w h e r e t h e y w o u ld a w a y f r o m th e c a p it a l m a r k e t a n d in m o n e y m a r k e t c o n d it io n s . h a v e e x e rte d th e ir m a x im u m re s tr a in t c r e a s e d th e d e m a n d f o r b a n k lo a n s . T h is m o v e w a s s o o n re fle c te d in a s h a r p in c re a s e o n b o th in f la t io n a n d th e o u t f lo w o f B a n k s u s u a l ly m e t th is d e m a n d , th e r e in fu n d s. b y in c r e a s in g th e ir r e q u ir e d re s e rv e s . b o rr o w in g fr o m F e d e ra l R e se rv e In fact, th e s t a b ilit y o f b a n k B a n k s a n d a s u s t a in e d n e t b o r r o w e d T h e O p e n M a r k e t C o m m itt e e u s u a l ly r e s e r v e p o s it io n f o r m e m b e r b a n k s f o r se ts th e fir st tim e s in c e e a r l y g o a l in te rm s o f s p e c if ie d c o n d it io n s 1960. its sh o rt-te rm m o n e ta ry in th e m o n e y m a rk e t. bank lo a n s and p o lic y A r a p id ris e in d e p o s it s te n d s to t ig h t e n c o n d it io n s m o r e t h a n th e S y s t e m 's g o a l c a lls f o r a n d th e S y s t e m s u p p lie s a d d it io n a l re s e rv e s , th u s, in effect, v a l id a t i n g c o m m e r c ia l sh arp th e a c t io n s o f th e b an ks. In th is rise in th e d e m a n d w ay a fo r b a n k c re d it c a lls fo rth , in th e s h o r t ru n , a n a u t o m a t ic in c r e a s e in r e s e r v e s in s t e a d o f p r o v i d i n g a n a u t o m a t ic b r a k e o n th e e x p a n s i o n o f b a n k cred it. 34 E a r l y in 1 9 6 6 , h o w e v e r , a s th e d e T h e s t a b ilit y in b a n k ra t e s in la te 1964 and trib u te d e a r ly to s id e r a b le 1965 t w o fa c to rs . p re ssu re w as T h e s e d e v e lo p m e n t s a d d e d u p to a a t m a n d f o r c re d it c o n tin u e d to in c re a s e se ve re First, c o n a t a s p e c t a c u la r p ac e , th e S y s t e m in m o r t g a g e f u n d s in th e s p r in g o f 1 9 6 6 . c r e a s e d its re stric tive p olicie s. T h e e n s u i n g d if fic u lt ie s f o r p o t e n t ia l m ay be e x e rt e d on A s the sq u e e ze on th e m arke t fo r th e f e w b a n k s w h ic h a n n o u n c e d ra te v o lu m e o f r e s e r v e s s u p p lie d in c re a s e d h o m e b u ild e r s o r b u y e r s a n d f o r th e in c r e a s e s a n d th o s e m o v e s w e r e re m o r e s l o w l y t h a n th e b u r g e o n in g d e c o n st ru c t io n in d u s t r y le d to a n u m b e r m a n d , b a n k s t r im m e d th e ir e x c e s s re of c o u n t ra te in c re a s e , m o s t b a n k s still se rve s a d d itio n a l fu n d s c o u ld g e t s u ff ic ie n t r e s e r v e s to e n a b le w in d o w th e m f o r a ll m e m b e r b a n k s ro se r a p id ly to s c in d e d . S e c o n d , in s p it e o f t h e d is to e x p a n d in te re st lo a n s a t p r e v a i li n g ra te s. T o ta l R e se rve Bank c re d it s u p p lie d c o n t in u e d to ris e a t a o r b o rro w e d and net a t th e d is c o u n t b o rro w e d re s e rv e s m e a su re s d e s ig n e d in to th e In a d d it io n , C o n g r e s s e n a c t e d le g is la t io n e a r ly a g e n c ie s , in s e ttin g c e ilin g s o n in te re st 1960. to p e r m it F e d e ra l se t d if fe r e n t ra t e s b a s e d o f in te re st ra te in c re a s e s . s u p p ly d e p o s it s . In th e s e c o n d h a lf o f 1 9 6 5 , h o w th e dem and fo r bank c re d it o f fu n d s , G o ve rn o rs, s u r a n c e C o r p o r a t io n , a n d th e F e d e ra l w e ll a s fo r ra tes. r e la t iv e to bank B y la te 1 9 6 5 , b a n k ra t e s w e r e s o f a r o u t o f lin e w it h o t h e r ra t e s th a t w hen th e b re a k th ro u g h fin a lly oc c u rre d , a v e r y s te e p ris e t o o k p la ce . la r g e by th e F e d e ra l R e s e rv e th rou gh o u t m o s t o f 1 9 6 5 , b u t it w a s n o t u n til D e G o v e r n m e n t a g e n c ie s s a le s of m ade p a r t ic ip a t io n s at a t T h rif t in st itu t io n s g e n e r a lly s u ff e r e d th e c o m p e titio n ra te c o m m e r c ia l s t e a d ily of fu n d s . s a v in g s b an ks, sin c e s t a n t ia lly . fo r d e p o s it s a ft e r 1960, The at s lo w e d t h a t th e w as b a n k s a n d s a v i n g s a n d lo a n a s s o c ia tio n s s h o w e d a n e v e n s lo w e r g r o w t h n o t in itse lf b r i n g a b o u t tig h t e r m o n e y , and h o w e ve r. th e a b s o lu t e f o l l o w in g th e c o r p o r a t e se c u ritie s, sta te a n d R e se rve p ro p e r io d c o n tra ry, im m e d ia t e ly in c re a s e , v id e d th e th e an th ro u gh F e d e ra l abundance open m arke t of in re se rve s o p e r a t io n s in o r d e r to s m o o t h th e t r a n s it io n to a in a over c o m m e r c ia l d e p o s it s u p to $ 1 0 0 , 0 0 0 . T h is w a s p e t itio n w h ic h h a d d e v e lo p e d in th is a r e a , a n d r e d u c e th e d r a in o f f u n d s f r o m th e th rift in stitu tio n s. su b T h e h i g h e r d is c o u n t ra t e d id On a d v a n ta ge S a v in g s a t m utua l s a v in g s r a is e d . ra te H o m e L o a n B a n k B o a r d a c t e d to se t ra t e s w h ic h g a v e th rift in st itu t io n s a c lim b in g cem ber d is c o u n t In e x p e c t e d to lim it th e v e r y k e e n c o m tr a c tiv e y ie ld s . gro w th cent. in D e p o s it b a n k s in th e ra t e s t h e y c o u ld p a y o n 416 c re d it p o lic y w a s f o llo w e d r a is e d F e d e ra l s m a ll in f ir m b o r r o w e r s c o m p e te d G o ve rn m e n ts th e F e d e ra l ra te w a s ra is e d , in f o u r ste p s, f r o m to 6 p e r p r iv a t e fu n d s. G o ve rn m e n ts a s te re st ra t e s o n t h e ir o b lig a t io n s , a n d O v e r th e n e x t f e w m o n t h s th e p r im e A o n s iz e o f Im m e d ia t e ly th e B o a r d o f ro s e to re c o rd le v e ls a s b o r r o w e r s b id m o u n t e d a t a n a c c e le r a t e d p a c e , a n d ro s e in te re st ra te s a g a i n s t e a c h o th e r. m arke t ra t e s and re g u la to ry ra t e s to b e p a i d o n tim e d e p o s its , to R e stric tio n s o n cre d it e x p a n s io n in t e n s ifie d c o m p e titio n f o r th e a v a i la b l e e v e r, m o rtga ge le v e ls a p p r o a c h i n g th o se o f 1 9 5 9 a n d it u n pace, a n d b a n k s fo u n d channel m arke t. n e c e s s a r y to r a t io n c re d it b y m e a n s r a p id to fe w m o n th s a m o u n ts. d e c lin e d M o re g o ve rn m e n t issu e s, and agency p u lle d fu n d s is s u e s in a ttra c tiv e lo ca l F e d e ra l out of th e th r ift in st itu t io n s o r lu re d a w a y p o t e n t ia l d e p o s its . h i g h e r le v e l o f ra t e s a n d r e a s s u r e a n e rv o u s m arket. 35 B A L A N C E OF P A Y M E N T S th e a n d d e v e lo p m e n t s in t h is e x p a n s io n . U n ite d S t a t e s b a la n c e o f in t e r n a t io n a l A c o n t in u in g T h e siz e o f th e d e fic it d e p e n d s o n h o w liq u id it y b a s is a n d th e o f fic ia l r e s e r v e p aym e n ts it is m e a s u r e d . t r a n s a c t io n s b a s is . has la r g e d e fic it in a ff e c te d b o th p o lic y C h a r t X V I I s h o w s th e d e ficits in re ce n t y e a r s m e a s u r e d b y the t w o m e t h o d s p r e s e n t ly e m p lo y e d b y th e D e p a r t m e n t o f C o m m e rc e , th e O n th e o f fic ia l re s e r v e t r a n s a c t io n s b a s is , th e d e fic it is m e a s u r e d b y th e c h a n g e in U. S. o f fic ia l r e s e r v e a s se t s (g o ld , c o n v e r t ib le f o r e i g n c u rre n c ie s, a n d g o ld t r a n c h e p o s it io n a t th e In t e r n a t io n a l M o n e t a r y Fund) and changes in liq u id and c e rt a in n o n liq u id lia b ilit ie s to f o r e i g n official a g e n c ie s . On th e liq u id it y b a s is , th e d e fic it re fle cts c h a n g e s in U. S. o f fic ia l re s e r v e a s s e t s and in liq u id lia b ilit ie s to a ll fo r e ig n e r s , b o th C h a rt X V II U. S. G O LD STO CK A N D BALANCE OF PAYMENTS official a n d private. A l t h o u g h th e b a la n c e o f p a y m e n t s on a liq u id it y d e fic it in 1950, b a s is has e ve ry y e a r t h e s e d e fic its d id e s p e c ia lly s e r io u s sh ow n a b u t o n e s in c e u n til not becom e 1958. F ro m 1 9 5 8 t h r o u g h 1 9 6 0 , th e d e fic its o n a liq u id it y b illio n b a s is a v e r a g e d p e r y e a r. In a b o u t $ 3 .7 th e next fo u r y e a r s t h e y w e r e s m a lle r , r a n g i n g b e tw e e n $ 2 .2 b illio n a n d $ 2 .8 b illio n , b u t a c o n s id e r a b le p a r t o f th e r e d u c tio n w a s a t t r ib u t a b le to s p e c ia l G o v e r n m e n t tr a n s a c t io n s . T h e d e fic it d e c lin e d to $ 1 .3 b illio n in 1 9 6 5 a n d r a n a t a b o u t th e s a m e a n n u a l ra te in th e fir st h a lf o f 1 9 6 6 . v e r y la r g e f r o m and G o ld lo ss e s w e r e 1 9 5 8 th ro u gh 1962, a s tim e w e n t o n c r e a s i n g ly a c t io n w as c le a r it b e c a m e i n th a t r e q u ir e d m o re to d ire c t re d u c e th e s iz e o f th e s e d e fic its a n d c u rta il o u r g o ld The lo sse s. t r a d it io n a l p re sc rip t io n fo r a p e r sis te n t b a la n c e o f p a y m e n t s d e fic it is b a s e d o n th e id e a th a t d e fic its a r is e * A s o f e n d o f q u arte r. * * Q u a r t e r l y d a t a o n s e a s o n a l ly a d ju s t e d a n n u a l b a s is . S o u rc e : U. S. D e p a r t m e n t o f C o m m e rc e . o u t o f e x c e s s iv e d e m a n d p r e s s u r e s in U n d e r s u c h c o n d it io n s c o n sis te d p r im a r ily o f in c r e a s e d m ili in 1 9 5 8 to a b o u t $ 4 . 2 5 b illio n in 1 9 6 4 t ig h t m o n e y , h i g h in te re st ra tes, a n d th e e c o n o m y . t a r y p r o c u r e m e n t in th e U n ite d S ta te s and a ap a n d a tt e m p ts to p e r s u a d e U. S. a llie s M u c h o f th e in c r e a s e w a s in th e f o r m p r o p r ia t e f o r b o th d o m e s t ic a n d in te r to p u r c h a s e m o re m ilit a r y e q u ip m e n t o f lo a n s , a n d n a t io n a l he re . o f d e v e lo p m e n t a i d w a s tie d d ir e c tly re stric tiv e m and fis c a l p o lic y p u rp o se s. d id But a re e xce ss n o t e x is t d u r i n g th e fir st s e v e r a l y e a r s o f th e e x p a n s io n . s e q u e n tly , th e c la s s ic a l de Con Little w a s a c h ie v e d in r e d u c in g to n u a l m ilit a r y s a le s ro se a b o u t $ 3 5 0 a n d se rv ic e s . p re sc rip t io n m illio n f r o m 1 9 5 8 to 1 9 6 3 . U. S . G o v e r n m e n t g r a n t s a n d c a p it a l o u t f lo w s b a la n c e a c t u a lly An as f o r e ig n m ilit a r y e x p e n d itu re s , b u t a n w a s n o t f o llo w e d in th e a tt a c k o n th e o f p a y m e n t s p ro b le m . 1965, in c r e a s e d fro m $ 3.1 th e C h art an p u rch a se X V III in c r e a s in g p o r t io n of U. S. b illio n a tt e m p t w a s m a d e to k e e p sh o rt-te rm in te re st ra t e s u p f o r b a la n c e o f p a y m e n t s p u r p o s e s w h ile m a in t a in in g lo w lo n g -t e r m ra t e s f o r th e b e n e f it o f th e d o m e s t ic econom y, th e s o - c a l le d " O p e r a t i o n T w is t . " E a r ly A tte m p ts to R uce D e fic it E a r l y e ffo rt s to im p r o v th e p a y m e n t s b a la n c e in c lu d e d atte ts to re d u c e d o lla r c o sts o f o v e r s e m ilit a r y e x - C h a rt X V III M AJO R ITEMS IN U. S. BALANCE OF PAYMENTS $ Bil. (Q u a r t e r ly D a t a o n S e a s o n a l l y A d j u s t e d A n n u a l B a s is ) 8 p e n d it u a n d lo a n s ^ k fo re ig n e r p e n d it u r e s i w e re J f3 .4 b illio n in 1 9So^| ra te of and about 1960. $3. E ffo rt s o u t la y P r iv a t e C a p it a l O u t f lo w ] JL -1 0 1960 S o u rc e : _L 1961 ± JL X 1962 1963 U. S . D e p a rt m e n t o f C o m m e rc e . 1964 J1965 sh ow s. 1966 goods T h e s e m e a s u r e s m a d e little, if a n y , net c o n t r ib u t io n to w a rd e lim in a t in g th e b a la n c e o f p a y m e n t s d eficit. A t In te re st E q u a liz a t io n Tax T h is p ro A d d it i o n a l M e a s u r e s p o s a l w a s a d v a n c e d in J u l y 1 9 6 3 , b u t 1964 m o re t h a n p ro m p te d a year p assed b e fo re it s e v e r a l c h a n g e s in m o n e t a r y p o lic y in th e s e c o n d h a lf o f 1 9 6 4 . te n tio n w a s d ire c te d n e x t t o w a r d re b e c a m e la w . d u c in g th e o u t f lo w o f p r iv a t e c a p it a l a s to w h a t th e p r o v is io n s o f th e la w L a r g e d e fic its in th e s e c o n d a n d th ird w h ic h annual w o u ld be, h o w e v e r , a n d s in c e th e p r o q u a rte rs a v e r a g e o f $ 2 . 7 b illio n in 1 9 5 8 - 5 9 to v is io n s w e r e to b e e ffe c tiv e a s o f J u l y p o lic y , a n d fr o m m id - A u g u s t u n til la te Novem ber had ris e n fro m an T h e re w a s u n c e r t a in t y o f R e s t r a in t in I n t e r n a t i o n a l c o n s id e r a t io n s It m o v e d 1 9, 1 9 6 3 , the p r o p o s a l e v e n h i g h e r in e a r ly 1 9 6 3 . A lth o u g h m e d ia t e d ire c t in v e s t m e n t w a s th e m o s t im $ 3 .8 b illio n in 1 9 6 0 -6 2 . im p a c t on had an c a p it a l im flo w s . in d u c e d th e a s lig h t ly m oney f ir m e r m arke t w as k e p t u n d e r a little m o re p re ss u re . T h e F o r e ig n se c u ritie s n e w l y is s u e d in th e pound p o r t a n t ite m in th is f lo w , n e w is s u e s U n ite d S ta te s fe ll v e r y s h a r p l y , p r e s s u r e a n d in N o v e m b e r th e B a n k o f f o r e i g n se c u ritie s in th is c o u n t r y b e th is w a s p a r t ia lly o f fs e t b y a r a p id of c a m e a n in c r e a s in g ly im p o r t a n t c o m e x p a n s io n lo a n s , f r o m 5 to 7 p e r cent, f o llo w in g w h ic h p o n e n t. o f lo n g -t e r m bank but s t e r lin g E n g la n d cam e r a is e d under its in te n s e d is c o u n t ra te a s u b s t a n t ia l p o r t io n o f w h ic h p r o b F e d e ra l R e s e rv e B a n k s r a is e d th e ir d is o u t f lo w o f c a p it a l, P re s id e n t K e n n e d y a b ly c o u n t ra t e s f r o m p ro p o se d b a n k c re d it f o r b o n d f in a n c in g . In a n e ff o rt to h a lt th is la r g e an " in t e r e s t e q u a liz a t io n t a x " o n th e p u r c h a s e o f f o r e ig n s e c u ritie s b y A m e r ic a n s . A t a b o u t the re p re s e n t e d a T h e la w , f i n a l l y s u b s t it u t io n e n a c te d of in e a r ly S e p t e m b e r 1 9 6 4 , r e q u ir e d A m e r i c a n s se c u ritie s f r o m 3 Vi to 4 p e r cent. In a d d it io n , th e F e d e ra l R e s e rv e s u p la r g e a m o u n ts of re se rve s to m e e t s t r o n g s e a s o n a l d e m a n d s a n d to s a m e tim e d is c o u n t ra te s a t F e d e ra l b u y in g R e s e r v e B a n k s w e r e r a is e d f r o m 3 to p a y a t a x o f 1 5 p e r ce n t o n s to c k s a n d V o l u n t a r y F o r e ig n C r e d it R e s t r a in t 3Vfe p e r cent. a t a x r a n g i n g u p to 1 5 p e r c e n t o n th e la s t q u a r t e r o f 1 9 6 4 a n d th e first d e b t se c u ritie s w it h m a t u rit ie s b e y o n d tw o th re e y e a rs . r a p id v e lo p e d and f o r e ig n e r s to p lie d S e c u rit ie s o f c o u n trie s w e r e th o se pendent of U n ite d 1965, in th e re w as lo n g -t e r m a bank lo a n s to c o u n trie s a ffe c te d b y th e i n h e a v ily te re st e q u a liz a t io n ta x . State s de c a p it a l O n F e b ru a ry 10, P re sid e n t J o h n s o n o u t lin e d to C o n gress Canada e x e m p t io n w it h th is i n c r e a s in g ly s e r io u s p ro b le m . w as gran te d an a p ro g ra m d e s ig n e d to deal u n d e r th is p r o v is io n . B a n k lo a n s w e r e A m o n g o t h e r t h in g s , th is p r o g r a m e x a ls o e x e m p t, b u t th e P r e s id e n t w a s te n d e d th e e m p o w e r e d to e x t e n d th e t a x to b a n k to b a n k lo a n s w it h m a t u ritie s o f m o re one w it h year m a t u rit ie s if in cre d it w a s h is b e in g in excess ju d g m e n t in te re st e q u a liz a t io n t a x of t h a n o n e y e a r , e x c e p t lo a n s to b o r bank r o w e r s in le ss d e v e lo p e d c o u n trie s a n d s u b s tit u te d f o r s e c u rit y issu e s. lo a n s to f in a n c e e x p o rt s . The ta x on d e b t s e c u ritie s w a s b r o a d e n e d to in P a s s a g e o f th e le g is la t io n r e m o v e d u n c e r t a in t ie s and ca u se d fu r t h e r c lu d e th o s e w it h m a t u rit ie s o f m o re th a n one ye a r. In a d d it io n , th e P re s i c h a n g e s in c a p it a l f lo w s . In th e fo u rt h dent a q u a r t e r o f 1 9 6 4 , th e re w e r e c re d it re s tr a in t p r o g r a m . no new but a lm o s t is s u e s o f t a x a b le se c u ritie s, exem pt n a d ia n , ro s e iss u e s , sh a rp ly , e s p e c ia lly r e fle c tin g Ca th e b a c k lo g th a t h a d b u ilt u p . B a n k lo a n s and a c c e p ta n c e s h a r p ly , c re d its e s p e c ia lly to a ls o ro s e Japan and c o u n trie s o f W e s t e r n E u ro p e . of e x p a n s io n c o u ld be e x e m p t e d b y th e P re sid e n t. lo a n s 38 m on th s In not co ve re d c o u n trie s upon u n d e rd e r e a s s u r e a n u n se ttle d m o n e y m a rk e t. p ro p o se d v o lu n t a r y f o r e ig n T h is p r o g r a m c a lle d o n c o m m e rc ia l The b a n k s , n o n b a n k f in a n c ia l in stitu tio n s, s t r a in t a n d n o n f in a n c ia l b u s in e s s c o n c e r n s to a n d p r o n o u n c e d e ffe ct o n th e o u t flo w s t r o n g ly re d uce v o l u n t a r i l y o f c a p ita l. f o r e i g n c r e d it re s t r a in t p r o g r a m c a p it a l. th e o u t f lo w of v o lu n t a r y f o r e ig n p ro g ra m had c re d it an re T h e in c r e a s in g p r e s s u r e o n th e re im m e d ia t e s e r v e p o s it io n s o f c o m m e r c ia l b a n k s T h e to ta l p r iv a t e c a p it a l B a n k s a n d o th e r f in a n c ia l in o u t f lo w in 1 9 6 5 w a s o n ly $ 3 . 7 b illio n , r e in fo r c e d th e v o lu n t a r y and b r o u g h t a b o u t a s ig n if ic a n t re d u c tio n s titu t io n s w e r e a s k e d to f o llo w c e rta in o f w h ic h $ 1 . 6 b illio n w a s in th e first in th e o u t f lo w o f b a n k c re d it in th e g u id e l in e s in th e ir f o r e ig n l e n d in g a n d q u a r t e r , c o m p a r e d w it h $ 6 .5 b illio n in fir s t th re e q u a r t e r s o f 1 9 6 6 . in v e s t in g . 1964. r a p id B a n k s w e r e a s k e d to lim it In th e la s t th re e q u a r t e r s o f th e ir o u t s t a n d in g c re d its to f o r e ig n e r s 1965, in 1 9 6 5 to 1 0 5 p e r ce n t o f th e a m o u n t fo re ig n e rs o u t s t a n d in g a t th e e n d o f 1 9 6 4 . m illion C e il c la im s as i n g s f o r 1 9 6 6 w e r e th e 1 9 6 5 t a r g e t of p lu s 1 p e r ce n t e a c h q u a r te r. q u a rte rs A re of S. by banks about co m p a re d with a n $ 1 .8 b illio n of in la t e d p r o g r a m w a s a p p lie d to f o r e ig n s o n a l l y a d ju s t e d ). h o w e ve r, w ere th e on $540 increase la st th re e e conom y b ro u g h t a b o u t a crease in im p o r t s t r a d e s u r p lu s . d u r in g th e and B u t th e d o m e s t ic s h a r p in re d u ce d th e T h u s , f o r th e fir s t tim e cu rre n t e x p a n s io n , do D ire ct in v e stm e n ts, s e m b le t h o s e t r a d it io n a lly a s s o c ia t e d f ig u r e s $1 b illio n f in a n c ia l in stitu tio n s. A b o u t 5 0 0 la r g e g r e a t e r in 1 9 6 5 t h a n in 1 9 6 4 . Un n o n f in a n c ia l c o r p o r a t io n s w e r e a s k e d fo r t u n a t e ly , to se t u p a b a la n c e o f p a y m e n t s f o r im p r o v e m e n t 1 9 6 4 w h ic h w o u ld re fle ct t h e ir f o r e ig n w a s o ffs e t b y a d e c lin e in th e t r a d e o p e r a t io n s a n d th e n c o n s id e r w a y s to s u r p lu s . p art o f th e s u b s t a n t ia l th e c a p it a l a c c o u n t i m p r o v e th e b a la n c e b y 1 5 to 2 0 p e r General Credit Restraint In 1 9 6 5 th e c e n t in 1 9 6 5 . F e d e r a l R e s e rv e S y s t e m re d u c e d f u r th e m e stic e c o n o m ic c o n d it io n s c a m e to re (all a lm o s t in in se a 1964 c re d its a n d in v e s t m e n t s o f n o n b a n k U. declined e x p a n s io n w it h a b a l a n c e o f p a y m e n t s d eficit, a n d th e c la s s ic a l p re s c rip t io n o f t ig h t m o n e y a n d re stric tiv e fis c a l p o lic y b e c a m e a p p r o p r ia t e b o th f o r d o m e s t ic a n d b a l a n c e o f p a y m e n t s re a s o n s . t h e r th e a v a i l a b i l i t y o f r e s e rv e s to the b a n k in g s y st e m . Loan dem and re m a in e d s t r o n g a n d in th e s e c o n d h a lf of th e year th e p re ssu re s on th e e c o n o m y a n d th e b a n k i n g sy ste m in c r e a s e d s h a r p ly , r a is in g p ric e s a n d in te re st ra te s. T o d a m p e n in f la t io n a r y p r e s s u r e s a n d to co rre ct d is t o rt io n s in th e stru c tu re o f in te re st ra te s, th e F e d e r a l R e s e rv e d is c o u n t ra te w a s r a is e d fro m 4 to 4Va cem ber 1965. ra t e c e ilin g r a is e d to p e r ce n t in e a r ly D e A t the s a m e tim e th e on V 5 2 tim e per d e p o s it s cent. w as The tre m e n d o u s d e m a n d f o r c re d it w a s re fle c te d in m oney and in c r e a s in g t ig h t n e s s c re d it m a rk e ts, a n d in in te re st ra t e s r o s e to th e h ig h e s t le v e ls in s o m e 4 5 y e a r s . 39 PROBLEMS OF PROSPERITY " f is c a l d r a g " e x e rte d . N e w p r o b le m s s in c e th e K o r e a n W a r . i n g th e t a x cu ts o f 1 9 6 4 a n d 1 9 6 5 a n d w e re e c o n o m ic advanced th e e s c a la t io n o f th e V ie t N a m s e r v e r s w e r e c o m in g fa c e to fa c e w it h h a lf p r o g r e s s iv e ly r e d u c e d th e e c o n o m y 's th e r a p id l y o n e x p o r t s a n d th e la r g e t r a d e m a r g in f o r a ll its e n c h a n tm e n t, a l s o In c r e a s e d e c o n o m ic a c t iv it y f o llo w June of unused 1964 th e re so u rc e s. W ar A fte r u n e m p lo y m e n t rate, e m e r g in g ; fa c t th a t and h ig h le v e l ob p ro s p e r ity , h a s its Problems of an Expanding Economy th a n The per ce n t fo r 18 m o n th s, y e a r. Im p o r t s g a in e d s u r p lu s w h ic h th is c o u n t r y h a d p r o b le m s of an e x p a n d in g lo n g T h e p r o b le m s o c c a s io n e d b y th e se tre n d s d id d r o p p e d s h a r p ly , r e a c h in g 4 p e r cent e c o n o m y a r e lik e ly to c e n te r a r o u n d a c u t e in b y th e e n d o f 1 9 6 5 . th e re la t io n s h ip b e t w e e n th e g r o w t h te n tio n . S im u lt a n e o u s ly , m o re s t e e p ly in th e la tte r th e e n jo y e d w a s w h it tle d s t e a d ily a w a y . p itfa lls. w h ic h h a d a v e r a g e d s o m e w h a t m o re 5 .5 of In te re st ra t e s not 1965 becom e s ig n if ic a n t ly to c a tch p o p u la r a t B u t a s s p e n d in g c o n t in u e d to in ra t e s o f m o n e y e x p e n d it u r e s a n d th e o u t p a c e p r o d u c t io n in 1 9 6 6 , th e r is in g m a n u f a c t u r in g m o v e d u p a n d b y D e o u t p u t o f g o o d s a n d s e rv ic e s ; th a t is, co st o f li v i n g a n d e v e r t ig h t e r m o n e y c e m b e r 1 9 6 5 w a s e s tim a t e d a t 91 p e r b e tw e e n to ta l d e m a n d a n d to ta l s u p b e c a m e c o m m o n p la c e to p ic s o f c o n cent, p ly in the e c o n o m y . v e r s a t io n . th e ra te of a c a p a c it y le v e l o p t im a l. u tiliz a t io n w id e l y re ga rd e d as c a n e x p a n d r a p id ly w it h o u t c r e a t in g of on p r o b le m s if to ta l s u p p l y is in c r e a s in g tra c te d o u t la y s R e p o rt s o f la b o r b o ttle n e c k s m u ltip lie d and u p w a rd T o ta l d e m a n d p re ssu re th e T h e d r a m a t ic b r e a k d o w n w a g e - p r ic e "g u id e p o s ts " w id e s p r e a d a tte n tio n . a t the s a m e p a c e w it h o u t u n d u e i n s t e a d y d e c lin e f o r n e w p la n t a n d e q u ip m e n t , a lr e a d y c r e a s e s in cost. a n d c o n t in u e d g o ld lo s s e s to u c h e d o f f a t u n u s u a l ly h i g h le v e ls, w e r e fu rth e r c r e a s e s in to ta l s u p p ly d e p e n d o n th e r e n e w e d c o n c e rn o v e r th e s t r e n g t h o f a c c e le ra te d . a v a ila b ilit y th e d o ll a r a n d th e fu t u r e o f th e in te r w ages in c r e a s e d . By B u s in e s s su m m e r 1965, the of In th e s h o r t ru n , i n b a s ic p r o d u c t iv e re o f th e tra d e a t The s u r p lu s e c o n o m y c le a r ly w a s in th e m id s t o f so u rc e s. S o lo n g a s a s u b s t a n t ia l p o o l n a t io n a l p a y m e n t s sy st e m . th e o f u n e m p lo y e d , q u a lif ie d la b o r , p r o as 1 9 6 6 p r o g r e s s e d th e p r o b le m s o f d u c tio n fa c ilitie s, a n d an econom y greatest in v e s t m e n t b o o m sin c e W o r ld W a r II. A s 1 9 6 5 p r o g r e s s e d , th e u n e m p lo y m e n t a n d s lo w g r o w t h p r o b le m s re th e n e ce ssa ry m a t e r ia ls e x is t in the e c o n o m y , s u p p lie s c a n b e e x p a n d e d r a p id ly . But e x p a n d in g In b rie f, to o r a p id ly b e c a m e o b v io u s p r o b le m s , e v e n a t th e p o p u la r level. c e d e d in to th e b a c k g r o u n d . T h e q u e s once tio n ste p p e d u p to th e p o in t o f a b s o r b i n g Rates of Increase in Spending and Pro ducing In e a c h o f th e s ix y e a r s o f g a v e w a y to the th e p r e v io u s ly u n e m p lo y e d re so u rc e s, th e c u rre n t u p s w i n g , q u e s t io n o f w h a t u n e m p lo y m e n t rate th e ra te o f in c r e a s e in to ta l s u p p lie s a s m e a s u r e d b y G N P in c u r re n t d o l re p re s e n t e d b e lo w o f g o o d s a n d s e r v ic e s w ill t a p e r o ff. la r s g r e w fa s t e r t h a n r e a l o u t p u t a s w h ic h th e r is k o f s e r io u s in f la t io n b e U n le s s th e re is a c o r r e s p o n d in g t a p e r m e a s u r e d b y G N P in c o n s t a n t d o lla r s . cam e in g in th e g r o w t h o f to ta l s p e n d in g , M o r e o v e r , in e a c h y e a r th e c o n s t a n t p u b lic p o lic y . T h e F e d e ra l b u d g e t w a s a n e x c e ss o f d e m a n d w ill d e v e lo p in d o ll a r in c r e a s in g ly th e e c o n o m y . b e h in d th e c u rre n t d o ll a r f ig u r e . F ro m of w h e th e r th e ra te w a s to o h i g h th e u n e m p lo y m e n t m in im u m u n a c c e p t a b le as e v a lu a t e d a in m a tte r o f te r m s of " f i s c a l s t im u l u s " p r o v id e d r a t h e r t h a n p r o d u c t io n ra t e s have been la g g e d i n c r e a s in g ly It is r e a s o n a b l y cle a r, in re tro sp e c t, 1 9 6 0 to 1 9 6 4 th e in c r e a s e in G N P in th a t th e g r o w t h o f d o m e s t ic s p e n d in g c o n s t a n t d o lla r s w a s a b o u t o n e fo u r t h b e g a n to o u t s trip th e g r o w t h o f o u t le ss p u t b y a s ig n if ic a n t a m o u n t s o m e tim e d o lla r s . in 1 9 6 5 . th ir d less. P rice s b e g a n to a d v a n c e a t th a n th e In in c r e a s e 1965 it w as in c u rre n t about a F o r th e f ir s t th re e q u a r t e r s a n a c c e le ra te d p a c e , a n d la b o r m a r k o f 1 9 6 6 it w a s lo w e r b y m o r e t h a n ets tig h t e n e d a h a lf. sh a rp ly as th e unem p lo y m e n t ra te fe ll to th e lo w e s t le v e l 40 m e a su re to ta l s p e n d in g P ric e s a n d C o s t s The y e a rs 1 9 6 1 -6 4 w e r e r e la t iv e ly fr e e o f p ric e p re ss u re s . T h e c o n s u m e r p ric e in d e x ro s e 1 to p o lic ie s o f th e se p ro d u c e rs. out 1965 and 1966 T h ro u gh p ro d u c e rs in a d d it io n s to th e la b o r fo rc e . m id d le of 1965 th e B y th e u n e m p lo y m e n t c r e a s i n g ly c o m p la in e d o f r is in g costs, ra t e h a d b e e n cu t to 4 .5 p e r c e n t a n d 1.5 p e r ce n t in e a c h y e a r , w it h th e w h ile o r g a n iz e d la b o r w as in c r e a s e s c o n fin e d la r g e l y to th e s e r v r is in g co n su m e r p rice s ice s co m p on e n t. W h o le s a le p ric e s h ig h e r w a g e s . fir s t b e g a n to m o v e u p in th e la s t h a lf d u s t r ia l of 1964 ceeded b u t th e in d e x f o r th e y e a r w a s s lig h t ly b e lo w its 1 9 6 0 level. In 1 9 6 5 a ll p ric e in d e x e s r e g is te re d s u b s t a n t ia lly greater g a in s th a n in a n y o f th e p r e c e d in g f o u r y e a r s . The c o n su m e r per in d e x advanced 2 .0 In a re a s th e a rgu e d th a t d e c lin in g . A d m in is t r a t io n 's ex n u m b e r o f m a r k e t s it b e c a m e in c r e a s g u id e - i n g l y d if fic u lt f o r p r o d u c e r s to m e e t la b o r , fu r t h e r u p w a r d w as p re s s u re o n p ro d u c T h is in te ra c tio n o f w a g e s in a con a n d s a l a r y w o r k e r s a n d in a g r o w i n g in c r e a s e s t h e ir p ric e s w as m a n y c ru c ia l in w age p r o d u c t iv it y in c re a s e s , a n d th is a d d e d and ra te s id e r a b ly lo w e r f o r e x p e r ie n c e d w a g e p o sts, w h ic h a r e g e a r e d to e stim a te d tio n costs. The n e ce ssita te d r e la t io n s h ip under la b o r and in re q u ir e m e n ts . e s p e c ia lly an In s k ille d i n c r e a s in g ly b rie f, la b o r , fa v o r a b le s e lle r s ' m a r k e t t h r o u g h o u t 1 9 6 5 a n d 1966. cent, w h il e th e w h o le s a le in d e x ro s e w h ic h e a c h t e n d s to p u s h th e o th e r The n e a r ly 3 .5 p e r cent. u p w a r d , c o m m o n ly re fe rre d to a s th e tu rn e d w a g e - p r ic e s p ir a l, b e c o m e s o n e o f the q u e s t io n o f w h e n , a s a p r a c tic a l m a t o f th e w h o le s a le A ll co m p on e n ts in d e x g a i n e d su b s t a n t ia lly , b u t f a r m p ro d u c t s a n d p r o t h o rn ie s t p r o b le m s c e s s e d f o o d s ro s e a t a econom y. c o n s id e r a b ly in a n e x p a n d in g W h i le th e m u t u a l u p w a r d ter, e v e r - t ig h t e n in g a tt e n tio n fu ll once e m p lo y m e n t la b o r m arke t m o re to th e of th e fo r c e h a s b e e n a c h ie v e d . la b o r In a fr e e f a s t e r p a c e t h a n in d u s t r ia l m a t e r ia ls p r e s s u r e s d id n o t a s s u m e u n m a n a g e so c ie ty , th e re w ill a l w a y s b e a m a r g i n a n d p r o d u c e r f in is h e d g o o d s . T h e u p a b le o f w o r k e r s w h o a r e u n e m p lo y e d w ard in g r e d ie n t s p r o p o r t io n s w a g e - p r ic e by ch o ic e : th o s e m o v i n g o n to b e tte r jobs, F o r th e fir st th re e q u a r t e r s b o th c o n w e r e c le a r ly p r e s e n t in th e e c o n o m y . t h o s e w h o le a v e a jo b v o lu n t a r il y in s u m e r a n d w h o le s a le in d e x e s ro s e a t a n a v e r a g e a n n u a l ra te in e x c e s s o f The Labor Markets and Full Employ ment A fe a t u r e o f b a s ic s ig n ific a n c e T h e q u e s t io n o f th e m in im u m s iz e o f 3 .5 1966. a 1 9 6 6 , th e b a s ic s p ir a l m o v e m e n t q u ic k e n e d in of in th e h o p e o f f i n d i n g a b e tte r o n e , etc. in th e c u rre n t e x p a n s io n h a s b e e n the t h is w h o le s a le p ric e s s lo w e d in th e th ird u n u s u a l ly p o r t a n c e f o r th e p o lic y m a k e r b e c a u s e q u a r te r. t io n 's la b o r fo rc e . per cent, a lt h o u g h th e ris e B y c o n t ra s t w it h th e in 1965 la r g e in c re a s e in th e n a T h is r a p id g r o w t h any m a r g in is a tt e m p t of to fu n d a m e n ta l p u sh im e m p lo y m e n t m o v e m e n t, m o s t o f th e 1 9 6 6 in c r e a s e s o f th e m a n p o w e r p o o l a d d e d to the b e y o n d th is m a r g i n t h r o u g h m o n e t a r y in th e w h o le s a le i n d e x c e n te re d in the d if fic u lt y o f r e d u c in g a n d fis c a l a c t io n w ill a lm o s t in e v it a b ly in d u s t r ia l m a t e r ia ls a n d th e p r o d u c e r in f in is h e d g o o d s c o m p o n e n t s . B u t a s th e ra te o f s p e n d in g a c c e le r th is a te d a g re e m e n t. M a n y o f th e w h o le s a le p ric e s r e p th e e a r ly y e a r s in 1964 u n e m p lo y m e n t o f th e and 1965 u p s w in g . th e new c r e a t e i n f la t io n a r y p re ss u re . q u e s t io n re se n t, o f c o u rse , p r o d u c t io n c o st ite m s w o r k e r s b e c a m e o f v it a l im p o r ta n c e per in in o th e rs m any sta ge s of p r o d u c t io n and a d d in g to th e e c o n o m y 's ou tp u t. ce n t o f th e re no Yet on ge n e ra l S o m e a r g u e t h a t it is 5 th e co n te n d la b o r t h a t th e per w h ile can t h u s in c r e a s e s in th e s e p ric e s a ffe c t e ith e r th e p r ic in g in g in 1 9 6 4 - 6 5 w o u l d h a v e g e n e r a t e d e v e n 3 p e r ce n t w it h o u t s e r io u s ris k in f la t io n a r y p r e s s u r e s a t a c o n s id e r o f in fla t io n . to 4 fig u r e be p r o d u c t io n dow n fo rc e , W it h o u t th e m , th e a c c e le ra te d s p e n d o r th e p u sh e d is cent o r a b l y e a r lie r d a te . E n h a n c e d b y th e in c re a s e d m ilit a r y b u ild u p , th e e x p a n s io n in 1966 created la b o r 1965 and r e q u ir e m e n t s g r e a t e r t h a n c o u ld b e m et o u t o f net 41 T h e e m p ir ic a l re c o rd o n th is q u e s tio n is n ot a lt o g e t h e r c le a r. It is p o s s ib le , o f c o u rse , to m a k e Y e t in th e to o m u c h o f th is re c o rd . T h e m in im a l of th e p r iv a t e e c o n o m y o r o f th e p o lic y m a k e r s , to " o v e r e m p l o y " th e la b o r fo rc e . to in d ic a t e s o m e in v e r s e r e la t io n s h ip w it h p rice s t a b ilit y d e p e n d s o n a g r e a t b e t w e e n p ric e m o v e m e n t s a n d u n e m v a r ie t y o f fa c to rs , m a n y o f w h ic h a r e E c o n o m ic p lo y m e n t ra t e s w h e n th e la tte r d r o p s n o t e a s ily m e a s u r a b le . c h a ra c t e riz e 1 9 6 6 a s a y e a r o f b u s i b e lo w 5 p e r cent. a s p ir a t io n s o f th e la b o r fo rc e a n d in n e ss stitu tio n a l fa c t o r s t h a t b e a r o n p e r la b o r m a r k e t s . c o m p le te ly s t a b le in th e y e a r s 1 9 6 0 - s o n a l in c e n tiv e s, a s w e ll a s o n op w ill b e r e m e m b e r e d c h ie fly a s a y e a r 6 4 , w h e n th e u n e m p lo y m e n t ra te w a s p o rtu n itie s o f i n d i v id u a ls to a c q u ir e o f h i g h in te re st ra t e s a n d t ig h t m o n e y . 5 p e r ce n t o r h ig h e r . n e w sk ills, a ll p l a y a A s s h o w n in C h a r t p ric e s w ere a lm o s t A s th e latte r c o n siste n t be m a r g in w h o le s a le u n e m p lo y m e n t th e y c u rre n t e x p a n s io n , th e r e c o rd a p p e a r s X IX , of w hether T h e s k ills a n d ro le in d e t e r T ig h t M o n e y a n d C re d it M a r k e ts h is t o r ia n s boom , r is in g w ill no doubt p ric e s, a n d tig h t B u t th e y e a r p r o b a b l y In te re st ra t e s a c r o s s th e b o a rd ro s e m in in g th is le v e l, a n d th e re is n o t h in g to th e h ig h e s t le v e ls s in c e th e 1 9 2 0 's . 1 9 6 4 , the w h o le s a le i n d e x b e g a n to m a g ic a b o u t a M o r t g a g e m o n e y w a s a t a p r e m iu m m o ve u p w a rd . ce n t o r 3 p e r c e n t f ig u r e . ra te a p p r o a c h e d 5 p e r c e n t in late M o r e o v e r , th e ste e p 5 p e r ce n t o r 4 per B u t it is d e c lin e in th e u n e m p lo y m e n t ra te to c le a r th a t s u s t a in e d b u s in e s s e x p a n 4 s io n per cent c o m p a n ie d and by a lo w e r , w as s u s t a in e d rise ac can be th re ate n ed by e ffo rts. and y ie ld s o f 6 h ig h e r issu e s. E v e n th e 9 0 - d a y o b lig a t io n s o f th e T r e a s u r y in p e r ce n t o r w e r e c o m m o n p la c e o n F e d e ra l a g e n c y a p p ro a ch e d th e 6 c e n t le v e l o n s e v e r a l o c c a s io n s. w h o le s a le p ric e s. per The p r im e ra t e o f c o m m e rc ia l b a n k s w a s h ik e d to 6 p e r cent, th e h ig h e s t le v e l in th e h is t o r y o f th a t rate. Y e t t ig h t m o n e y m a y b e m o re a s y m p t o m t h a n a d is e a s e ; a n d it c a n b e s y m p t o m a t ic o f a b a s ic a ilm e n t , th e a p p r o p r ia t e p r e s c rip t io n f o r w h ic h is n o s im p le m a tte r. s it u a t io n o f th is c la ss. T h e t ig h t m o n e y 1 9 6 6 a p p e a r s to f a ll in T h a t it w a s a re su lt o f e x c e ss d e m a n d in th e e c o n o m y is c le a r fr o m th e d a t a . su m m e r, c h a rt XIX W HOLESALE PRICES A N D UNEMPLOYMENT 1 9 5 7 -1 9 5 9 = 1 0 0 and T h r o u g h th e s p r in g , au tu m n th e m oney s u p p l y a n d th e v o lu m e o f lo a n f u n d s P e rC e n t 108 grew at a th e r a p id p a c e o n l y s lig h t ly b e lo w 1965 ra te a n d at a con s id e r a b ly f a s t e r p a c e t h a n in th e e a s y m o n e y p e r io d o f 1 9 6 1 - 6 3 . 106 O v e r th e fir st th re e q u a r t e r s o f 1 9 6 6 , th e m o n e y s u p p l y g r e w a t a n a n n u a l ra t e o f just 104 - o v e r 4 p e r cent, c o m p a r e d w it h 4 .8 p e r ce n t in 1 9 6 5 a n d le ss t h a n 3 p e r 102 c e n t in 1 9 6 1 - 6 3 . F o r to ta l lo a n s a n d in v e s t m e n t s o f c o m m e rc ia l b a n k s th e ra te o f in c r e a s e w a s 9 p e r cent, c o m 100 p a r e d w it h 1 0 .2 p e r ce n t in 1 9 6 5 a n d W h o le s a le P ric e In d e x (Left S c a le ) 4 p e r c e n t in 1 9 6 1 - 6 3 . 98 The h ig h in te re st ra t e s and th e c re d it s t r in g e n c y t h a t d e v e lo p e d d e 96 - - t ± _L 1961 S o u rc e : 1962 JL 1963 U. S. D e p a r t m e n t o f L a b o r. 42 1964 1965 1966 3 sp ite th e s e la r g e in c r e a s e s in m o n e y a n d c re d it b e s p e a k a g r e a t s u r g e in th e d e m a n d f o r f u n d s . grew That dem and o u t o f th e a c c e le r a t e d ra t e o f s p e n d in g by c o n su m e rs, fo r so m e gro u p s. th e s e p r o b le m s F u n d a m e n t a lly re su lte d fr o m sh arp re c o rd $ 6 .7 b illio n , over g r e a t e r t h a n in 1 9 6 1 . $1 b illio n B u t in 1 9 6 5 im b u s in e s s e s , c h a n g e s in c re d it f lo w s t h r o u g h th e p o rt s g r e w b y n e a r ly $ 3 b illio n w h ile a n d g o v e r n m e n t a n d re p re s e n t e d e f n a t io n 's f in a n c ia l m a rk e ts. B e c a u s e o f e x p o r t s in c r e a s e d o n l y a b o u t $1 fo rt s o n th e ir p a r t to r a is e th e f u n d s le g a l lim it a tio n s o n s o m e in te re st ra te s lio n , r e d u c in g th e s u r p lu s to $ 4 . 8 b il n e c e s s a r y to f in a n c e e n la r g e d s p e n d and a lio n . T h e s a m e t r e n d s c o n t in u e d in g g e n e ra l o f c re d it u s u a lly 1966 and p la n s . The h ig h in te re st ra te s oth e r m arke t im p e rfe c tio n s, t ig h t e n in g w e r e s im p ly th e m a r k e t 's re fle c tio n o f m e a n s th a t s o m e m a r k e t ra te s m o v e th e fa c t t h a t th e s a v i n g s o f th e p u b lic up and n a t u r a l ly f l o w to th o s e m a r k e t s p a y th e new c re d it c re a te d b y th e fa ste r th a n o th e rs. C r e d it w ill b a n k i n g s y s t e m w e r e n o t su ffic ie n t to in g m eet m a r k e t s w ill a c c o r d in g ly b e s t a r v e d o f a ll th e s e dem ands and th a t s o m e r a t io n in g w a s r e q u ir e d . The t ig h t m oney th e greater re tu rn and som e f u n d s m o r e q u ic k ly th a n o th e rs. "p r o b le m " ob A t by th e t h ir d b il in q u a r t e r th e s u r p lu s o n a n a n n u a l ra te b a s is w a s o n ly $ 2 .8 b illio n , o r a b o u t h a lf its v a l u e in 1 9 6 4 . T h is d e c lin e h a n d ic a p p e d e lim in a t e in th e tra d e s u r p lu s th e c o u n t r y 's e ffo rt s to its b a la n c e of p a y m e n ts te m p ts to r e d re s s s o m e o f th e e ffe cts d e ficit, w h ic h h a d b e e n re d u c e d f r o m v i o u s l y w o u l d h a v e b e e n a lle v ia t e d if o f t ig h t m o n e y o n cre d it f l o w s in 1 9 6 6 $ 4 b illio n in 1 9 6 1 to o n l y a b o u t $ 1 . 5 th e s u p p l y o f lo a n f u n d s h a d g r o w n have b illio n in 1 9 6 5 . A t th is w r it in g th e fa st tio n s. In a d d it io n , th e F e d e ra l R e s e rv e p r o s p e c t is 1966 to ok d e fic it o n a liq u id it y b a s is o f a b o u t enough. H ig h e r ra t e s s h o u ld w o r k in th is d ir e c tio n b y r a is in g th e re w a rd f o r s a v in g s . B u t if th e d e m a n d c o n t in u e s t o o u t p a c e th e f u n d s been d is c u s s e d a c t io n d e s ig n e d in e a r lie r s e c to re d u c e th e r e la t iv e a m o u n t s o f b a n k c re d it g o i n g in to b u s in e s s lo a n s . th a t b e a lle v ia t e d o n l y b y in c r e a s in g th e tig h t m o n e y in 1 9 6 6 w a s a p r o b le m w e a k e n in g of N o n e t h e le s s , g e n e ra l o v e r s p e n d in g by con T h is w o u l d in c r e a s e b o t h th e v o lu m e s u m e r s , b u s in e s s e s , a n d g o v e r n m e n t , o f c re d it e x t e n d e d to b o r r o w e r s a n d t a k e n in th e a g g r e g a t e . th e m o n e y h o l d i n g s o f th e p u b lic a n d d u c tio n w o u ld a lm o s t fu r t h e r c e r t a in ly in c r e a s e in le a d to s p e n d in g . s ig n if ic a n t q u e s t io n w h eth e r a h ig h e r in ra te a The 1966 w as o f s p e n d in g c o u ld h a v e b e e n m a t c h e d b y a c o m p a r a b le in c r e a s e in o u t p u t . in th is O n l y a re a ggre ga te ra te of m a in e d stro n g 1966 th e th e o v e r a ll U. S. c o u p le d w it h d e s p it e tra d e w o r s e n in g p a ym e n ts th e th e s u r p lu s . of th e p o s it io n c o n t in u in g d if f i c u ltie s o f th e B ritis h p o u n d p o s e d im s p e n d in g c o u ld e lim in a t e th e d ile m m a p o r t a n t p r o b le m s o f c o n fid e n c e in th e of e x is t in g i n t e r n a t i o n a l f in a n c e m e h a v in g to cho ose b etw een tig h t m o n e y a n d in fla t io n . c h a n is m , w h ic h The Declining Trade Surplus R is in g d o ll a r a n d re sts h e a v i ly o n th e th e p o u n d . T h e se p ro b p ric e s, t ig h t la b o r m a rk e ts, a n d t ig h t le m s, in tu rn , h a v e a n im p o r t a n t b e a r i n g o n th e a b ilit y o f th e e x is t in g p a y The m o n e y a ls o c re a te d s e r io u s p r o b le m s f o r th e p o s it io n o f th e d o lla r a b r o a d m ents syste m a c c e le r a t io n o f p ric e ris e s in 1 9 6 6 a r e and t in u e d gro w th s t r o n g e v id e n c e th a t m o r e s p e n d in g tin u e d d o m e s t ic p ro s p e rity . c o u ld th e re w a s by a in in t ig h t e n in g o f la b o r m a r k e t s a n d th e not h a v e b e e n m atched a F o r e ig n c o n fid e n c e in th e d o ll a r re B a s ic a lly , h o w e v e r , th e p r o b le m o f b a n k c re d it c re a te d . sh ow $ 2 . 5 b illio n . o f fe re d , u p w a r d p r e s s u r e o n ra t e s c a n am ount of new w ill p ose d a a s e r io u s th r e a t to c o n sh arp to a c c o m m o d a t e in f o r e i g n con tra d e a n d In 1 9 6 6 in v e s tm e n t , w h ic h , in t h e ir tu rn , b e a r in th is h e a v i ly o n th e c o n t in u a t io n o f p r o s in c re a s e c o u n t r y 's im p o r t s a n d o n ly a re la t iv e ly p e r it y in th e e n tire fr e e w o r ld . M o re b u t in s t e a d w o u l d h a v e le d to la r g e r s m a ll g a i n in its e x p o rts. over U. p ric e in c r e a s e s a n d w as c o m p a ra b le in c r e a s e in r e a l o u tp u t, a f a s t e r ra te o f g r o w t h in c re d it d e m a n d s . T ig h t m o n e y in 1 9 6 6 c re a te d s e r io u s p r o b le m s fo r econom y. A s p i r i n g h o m e o w n e r s , th e c o n st ru c t io n k in d s of la r g e gro u p s in d u s tr y , f in a n c ia l in and in stitu tio n s th e a s ig n if ic a n t T h e re su lt d e c lin e in th is c a st n e g o t ia t io n s t o w a r d e lim in a t in g the d e fic it in th e U. S. b a la n c e o f p a y m e n ts . c e rt a in U s u a lly , w ere econom y in a r a p id ly m o re r a p id l y t h a n e x p o rt s . e x p a n s io n , c h o ic e g e n e r a lly k e p t p a c e w it h im p o r t g a i n s p r o b le m s o n f la t io n on th e o n e th e o th e r. t ig h t hand m oney and D u rin g in 1966 u n til 1965. h o w e v e r, dam per to p a ym e n ts of th e a p p e a rs to on S. have in t e r n a t io n a l re fo rm th e m e c h a n is m in t e r n a w it h a v i e w to a v o i d i n g th e d e v e lo p m e n t o f e x p a n d in g im p o r t s in c r e a s e t io n a l a a ls o a r r e s t e d th e p r o g r e s s m a d e sin c e 1 9 6 3 g e n e r a l d ile m m a in 1 9 6 6 in v o lv e d a th e se p o s it io n w o r s e n in g c o u n t r y 's t r a d e s u r p lu s w h ic h , in tu rn , e s p e c ia lly a ffe c te d . B u t th e e c o n o m y 's b etw e e n th e p u r e ly f in a n c ia l o b s t a c le s to t r a d e a n d in v e s t m e n t e x p a n s io n . In th e c u rre n t e x p o rt gro w th A c t u a lly , th e s u r p lu s o f e x p o r t s o v e r im p o r t s in 1964 w as a s o m e a c t io n s w e r e t a k e n to a lle v ia t e th e p r o b le m s w h ic h t ig h t m o n e y m a d e 43 H o w e v e r th e c u r re n t b u s in e s s e x p a n s io n m ay eventuate, it is c le a r ro se b y a b o u t 6 0 p e r cent, p r o v i d i n g w ere b o th m o n e t a r y e x p a n s io n . th e in c e n tiv e and th e m eans s u p p lie d to su p p o rt ste a d y M e a su re s w ere th a t it w ill c o m m a n d th e c lo se s t u d y fo r o f e c o n o m is t s a n d e c o n o m ic h is t o r ia n s W a g e s ro s e s t e a d ily b u t p r o d u c t iv it y b a la n c e fo r m a n y y e a rs. g a in s lo n g -t e r m ra t e s w e r e d e lib e r a t e ly h e ld It is o f h isto ric d i e f f ic ie n c y - im p r o v in g in v e stm e n t. kept pace and w it h credit, a n d to ta l s p e n d in g m oney, t a k e n to k e e p s h o rt -te rm ra te s u p f o r g r o w in g dow n h e ig h t, a n d in its d e t a il it w ill p r o b c o m m e n s u r a t e ly w it h o u tp u t, th e a d m ent. a b ly m e n s io n s in le n g th , b re a d t h , and vance w as p o r t u n it y to e v a lu a t e th e s u c c e ss o f w ard p re ssu re sp e c ific rates. p re s e n t an p o lic y u n p a r a lle le d a p p lic a t io n s in op o v e r a c h ie v e d on w it h little up of p a ym e n ts to e n c o u r a g e re a so n s but d o m e s t ic in v e s t O n th e f is c a l sid e , in v e s t m e n t in c e n tiv e s w ere p r o v id e d th ro u gh p ric e s o r in te re st m o r e g e n e r o u s d e p r e c ia t io n ru le s a n d M o s t o f th e u p w a r d ra te a d t h r o u g h in v e s t m e n t t a x c re d its to b u s i c o m in g c y c lic a l te n d e n c ie s in b u s in e s s ju stm e n ts w e r e in th e sh o rt-te rm a r e a ; n e ss. a c tiv ity . lo n g th e m a s s iv e t a x cu ts th a t p r o v id e d a F ro m th e s t a n d p o in t o f th e h is t o r y o f e c o n o m ic p o lic y , th e p e r io d is d o u b ly in t e re s t in g fr o n t e d b o th d o m e s t ic and p r o b le m s of in t e r n a t io n a l At The 1961 th e c u r re n t ju n c tu re it is, of e c o n o m y 's to 1964 w as th is c o u n t r y 's p erh ap s h ist o ry . co u rse , p r e m a t u r e to o f f e r a d e f in it iv e p ly in g to th e te rm Eu rop e a n fr o m as re Eu rop e an a c c u s t o m e d to a p " e c o n o m ic p o stw a r T h e n in 1 9 6 4 a n d 1965 cam e m a j o r n e w s t im u lu s to e x p a n s io n . p e rfo rm a n c e o b s e rv e rs , g r o w n a sse ssm e n t. Y e t c e rt a in fe a t u r e s o f so m e w h a t m a r k a b le a s in a n y f o u r - y e a r p e r io d of s ta b ilit y . a c t u a lly lo w e r in 1 9 6 4 t h a n in 1 9 6 1 . in th a t it c o n s im u lt a n e o u s ly ra te s w e r e m ir a c le " re c o v e ry , A t s o m e p o in t in 1 9 6 5 , th e ra te o f s p e n d in g began to s h a r p ly a w a y fro m put g ro w th . d iv e r g e m o re th e ra te o f o u t S o m e o v e r h e a t in g w a s e v id e n t in th e fir s t q u a r te r, b u t th is w a s w id e l y a tt rib u t e d to th e im p a c t in o f th e a u t o m o b ile s trik e o f la te 1 9 6 4 . th e p e r io d a l r e a d y s t a n d o u t in relief. c r e a s in g ly p o in te d o u t th e e c o n o m ic W h e n th is e ffe ct w o r e o ff, h o w e v e r , F irst is th e r e m a r k a b le s t a b ilit y a n d m ira c le o f U. S. e c o n o m ic g r o w t h w it h it b e c a m e o b v io u s t h a t th e o v e r h e a t e x te n t o f th e a d v a n c e in its first f o u r o u t in fla t io n in th e 1 9 6 0 's . in g ye a rs. o b s e r v e r s a t h o m e w e r e e m b o ld e n e d c a u s e s. to ta lk a b o u t th e o b s o le s c e n c e o f th e 6 5 w e r e f o llo w e d b y g r e a t in c r e a s e s fo u r t h w h il e in d u s t r ia l p r o d u c t io n in b u s in e s s cy c le a n d fo re c a s t e rs s h o w e d in c o n s u m e r o u t la y s . crea se d little h e sit a tio n in p ro je c tin g th e a d in g f o r n e w p la n t a n d e q u ip m e n t w a s of F ro m e a r ly 1 9 6 1 1964, GNP grew by to th e e n d over b y n e a r ly o n e th ird . one Som e f o u r m illio n n e w jo b s w e r e c re a te d in vance th e s u g g e s t e d b y e x p e r ie n c e . w e ll beyond S im ila r ly , th e o u t e r lim its w as due to m o re fu n d a m e n ta l T h e la r g e t a x cuts o f 1 9 6 4 - r a p id l y a s s u m in g B u s in e s s s p e n d boom p ro p o r tio n s . C o n f id e n c e T h e n in e a r ly 1 9 6 5 b e g a n a s te p -b y - t e c h n o lo g y , m u c h o f it o f th e la b o r - in the a b ilit y o f p o lic y m a k e r s to t a ilo r ste p e s c a la t io n o f t h e V ie t N a m W a r , sa v in g p o lic y m e a s u r e s to fit th e r e q u ir e m e n t s e a c h s te p i n v o l v i n g la r g e in c r e a s e s in fa c e of r a p id v a r ie t y . im p r o v e m e n t C o rp o ra te in p ro fits o f a n e v e r - a d v a n c in g econom y w as p r o b a b l y a t a h ig h p o in t. T h ro u gh o u t m o n e ta ry c lo s e ly th e and p e r io d fis c a l c o o r d in a t e d th is h a p p y e n d . to 1 9 6 1 -6 4 , p o lic ie s w e re b r in g about T h e p r o b le m s c o n d e fe n se P a r a lle lin g th e se e x p e n d it u r e s , C o n g r e s s p a s s e d in e a r ly 1 9 6 5 a se rie s of new and e x p e n s iv e d e v e lo p m e n t m e a su re s. dence of e n la r g e d w e lf a r e a n d The o u t la y s c o in c i by con s u m e r s , b u s in e s s e s , a n d g o v e r n m e n t , o f re so u rc e s a t h o m e a n d b a la n c e o f c o m in g a t a tim e w h e n th e m a r g in o f n a t io n a l sp h e re . p o lic y o u t la y s . fr o n t e d w e r e th o s e o f u n d e r u t iliz a t io n p a y m e n t s d is e q u ilib r iu m in th e in te r 44 d e fe n se a u gm en te d r e m a in e d M oney and e a sy and c re d it re s e r v e s u n u s e d re s o u r c e s w a s r a p id l y d w i n th e b a la n c e o f p a y m e n t s p ro b le m . d lin g , le d to a n a c c e le r a t io n in t h e ra te b rie f, it a p p e a r s O n th e o t h e r h a n d , a r a p id l y g r o w in g ra te o f s p e n d in g is lik e ly to g e n by b y o u t p u t g a i n s e v e n in th e f a c e o f o p e r a t in g i m p r o v i n g t e c h n o lo g y a n d a g r o w i n g c a p a c it y a n d th a t th e h ig h e r ra te o f la b o r fo rc e . T h e b a la n c e d g r o w t h o f p r e c e d in g fo u r y e a rs had q u it e d e f in it e ly b e e n in te rru p te d . fo rm e d u n d e r u t iliz a t io n in to a econom y near beyond c r e a s in g ly to th a t e n c o u n t e re d w as o p t im u m tim e p r o b le m s tra n s o f re so u rce s o v e r u t iliz a t io n is p r o b le m a t ic a l. That su b je c t to e ra te , a t le a s t f o r a tim e , a p o p u la r a i r o f e u p h o r ia . jo b s a n d to s e c u re p a y ra is e s ; m o r e of o v e r, t h e y p r o v id e a c lim a te c o n g e n ia l to th e o b je c t iv e s o f o r g a n iz e d la b o r. im p o r t a n t p o litic a l and E a s y m o n e y a n d lo w in te re st co sts fit w e ll n o t o n l y w it h th e e x p a n s i o n p la n s s o c ia l c o n st ra in ts w h ic h v a r y w it h th e o f b u s in e s s e s b u t a ls o w it h th e a i m s n a tu re o f th e o r d i n a r y h o m e o w n e r a n d th e of th e p r o b le m s c o n fro n te d . a n a c c e le r a t io n in th e ra te o f a d v a n c e D e m o c ra t ic so c ie tie s te n d to b e m o re c o n s u m e r. o f m o s t im p o r t a n t b u s in e s s in d ic a t o r s c o n g e n ia l to p o lic ie s d e s ig n e d to e n s p e n d in g t o o k p la c e in e a r ly co u ra g e th e fu lle r re so u rc e s oth e r d ire c t f r o m th e c h a rt s in th e p r e c e d in g s e c th a n th o s e to re s tra in o fte n a t io n s o f th is o v e ru tiliz a t io n . fo rm e r p o lic ie s s iz a b le fro m e a r ly 1966, la b o r 1965 re p o rt. 1965 In any th ro u gh m arke ts g r e s s i v e ly a n d is e v id e n t e v e n t, m ost tig h t e n e d o rd e r b a c k lo g s of p ro p ile d T ig h t la b o r m a r k e t s e n h a n c e th e a b ilit y o f w o r k e r s to f in d in P o lic y m a k i n g in a n o p e n so c ie ty is o f re w as p r o b le m s p e n d in g or o v e r e m p lo y m e n t . P re c is e ly w h e n th e p r o b le m s o u rc e s at th e In re tro sp e c t th a t o f s p e n d in g th a t c o u ld n o t b e m a t c h e d th e m id - 1 9 6 5 in se e k to to u se o f re q u ir e d The stim u la te , w h ile th e latter n e c e s s a r ily a im a t d a m p e n in g , s p e n d in g . H ig h ra t e s o f g o v e r n m e n t p le a s e p u b lic o f f ic ia ls a n d b e n e f ic ia r ie s , so u rc e of e le m e n t s and s a t is f a c t io n in th e a re to b u s in e s s c o m m u n it y . In any e v e n t, th e p r o b le m s con T o re d u c e th e ra te o f in c re a s e in f r o n t in g th e p o lic y m a k e r in a r a p id l y s p e n d in g , it is n e c e s s a r y to d o su c h e x p a n d i n g e c o n o m y a r e n o t e n t ir e ly t h in g s a s r a is e ta x e s , re d u c e g o v e r n e c o n o m ic m o n e y a n d c re d it c o n t in u e d to e x p a n d m e n t s p e n d in g , a n d the la r g e p o lit ic a l a n d s o c ia l c o m p o n e n t s a t a b o u t th e s a m e ra te a s in g r o w t h ra te s o f th e m o n e y s u p p ly a n d w h ic h p o s e a s e r io u s c o n st ra in t o n th e up. P r e s s u r e o n b o th co sts a n d p ric e s b e c a m e in c r e a s in g ly o b v io u s . W h i le 1964, s lo w dow n p r o b le m s . They c o n t a in e v e r - e n la r g i n g c re d it d e m a n d s p u s h e d bank re p o lic y m a k e r 's m a r k e t in te re st ra te s s t e a d ily h ig h e r . d u c tio n s in g o v e r n m e n t s p e n d in g a re , t io n a l s o lu t io n s . B y th e la s t q u a r t e r o f in s o c ia l e le m e n t s in th e o v e r a ll p r o b le m 1965 it w a s credit. T a x in c re a s e s a n d th e ir n a tu re , u n p o p u la r a n d a re a b ilit y The to adapt p o lit ic a l s h o u ld b e in c lu d e d a s a n ra and im p o r t a n t o b v io u s th a t th e d is p a r a t e m o v e m e n t lik e ly to a r o u s e o f ra te s, e s p e c ia lly o f In th e fa c e o f a g r o w i n g p r iv a t e d e p a r t o f th e c h a lle n g e o f m a in t a in in g m arket ra t e s p o litic a l o p p o s itio n . r e la t iv e to in st itu t io n a l ra te s, w a s d is m a n d , h e a v ie r g o v e r n m e n t b o r r o w in g s t a b ilit y in to r t in g th e f l o w o f f u n d s t h r o u g h th e a n d a re d u c e d ra te o f le n d in g b y th e econom y. T h e y c le a r ly p la y e d a n im c a p it a l m a r k e t s. b a n k i n g s y st e m w ill a lm o s t in e v it a b ly p o r t a n t ro le in d e t e r m in in g b o t h th e A t a b o u t th e s a m e a fu ll b e a c c o m p a n ie d b y tig h t m o n e y a n d c h a ra c t e ris t ic s s e r io u s h ig h a n d r is in g in te re st ra tes, w h ic h , m o n e t a r y a n d f is c a l p o lic y m e a s u r e s t h r e a t to c o n t in u e d p r o g r e s s in s o lv i n g in tu rn , b e a r h e a v i ly o n la r g e g r o u p s in 1 9 6 5 a n d 1 9 6 6 . tim e , th e s h a r p r e la t iv e to u p tre n d e x p o rts p ose d o f im p o r t s a and e m p lo y m e n t th e t im in g of o f b o r r o w e r s a n d a r e lik e ly to b e o n ly s lig h t ly le ss u n p o p u la r t h a n c re a se s. ta x in M o r e o v e r , b o th fis c a l a n d m o n e t a r y m e a s u r e s a r e lik e ly to ra is e s e r io u s q u e s t io n s o f s o c ia l e q u it y sin c e it is n o t c le a r th a t th e ir in c id e n c e a f fe cts a ll g r o u p s e q u a lly . 45 H IG H LIG HT S OF 1966 EARN INGS A N D CAPITAL ACCO U NTS Net to e a rn in g s th e ro se b e fo re U n it e d in th e o t h e r t h a n h a lf d o lla r s w e r e in s u f T re a su ry fic ie n t s u p p ly . A n a ll-o u t e ffo rt b y th e re c o rd B u r e a u o f th e M i n t p r o d u c e d a b o u t 1966. Mem ber 9 b illio n p ie c e s o f c o in in 1 9 6 6 c o m D istric t re c e iv e d $ 2 6 ,3 3 9 ,0 5 2 .9 0 banks in F ifth D u r in g th e latte r p a r t o f 1 9 6 6 , c o in s p a ym e n ts State s $ 1 1 5 ,5 2 5 ,6 2 8 .9 9 to a s t a t u t o r y d iv i d e n d s o f 6 p e r ce n t p e r a n n u m , t o t a lin g $ 1 ,7 4 7 ,4 3 7 .8 8 , $ 1 1 2 ,2 9 4 ,9 4 1 .1 1 T re a su ry a s w as w it h ro s e 3 .4 b illio n Bank, th e jo in e d th e J o h n s o n v il le J o h n s o n v ille , So u th S ta te C a r o lin a , b e c a m e a sta te m e m b e r . CH ANG ES IN DIRECTORS FUNCTIONAL COST ANALYSIS F e d e ra l Re D u r in g th e f a ll o f 1 9 6 6 th e B a n k $ 1 ,4 8 3 ,2 5 0 .0 0 and p ie c e s th e in itia te d s to c k o n ly to a n a t io n a l c h a r t e r a n d S y s te m , in 1 9 6 2 . to p a id in te re st o n p are d T h e W illia m s b u r g State B a n k, K in g s t re e , S o u t h C a r o lin a , c o n v e rt e d and s e r v e n ote s. C a p it a l 1966. THE C O IN SITUATION a F u n c tio n a l C ost A n a ly s is In th e f a ll of 1966 F ifth m e m b e r b a n k s e le cte d D istrict o n e C la s s A a n d o n e C la s s B d ir e c to r to t h r e e - y e a r te rm s o n th e B o a r d o f D ire c t o rs a t th e P ro g ra m fo r m e m b e r b a n k s. T h is is H e a d O ffic e . to $ 2 9 , 5 7 5 , 7 0 0 . 0 0 a n d th e s u r p lu s a c a s e rv ic e dent count d e s ig n e d to p r o d u c e cost a n d e a r n i n g s A m e r ic a n f ig u r e s f o r th e p a n y , W a s h in g t o n , D . C., w a s e le cte d w as in c r e a s e d $ 1 ,4 8 3 ,2 5 0 .0 0 to $ 2 9 , 5 7 5 , 7 0 0 . 0 0 . s im p lifie d d e p o sit, CHECK COLLECTION The num ber of checks p ro c e s s e d c o n tin u e s to c lim b e a c h y e a r . 1966 th e in c r e a s e w a s 11 w it h p o r a t io n A m e ric a n c a p it a l in v e s t in g , trust, a C la s s A d ire c to r, s u c c e e d in g R o b e rt tio n s o f e a c h p a r t ic ip a t in g b a n k a n d th e B o a r d , F irst & M e r c h a n t s N a t io n a l B a n k , R ic h m o n d , V i r g i n i a . Electe d a s a Thaddeus p a r t ic ip a t in g Stre e t, C o u r ie r C o r and b a n k s co lle ct th e d a t a fo rw a rd Bank, w h ic h th e m in w e re h e ld in banks to tu r n f in is h e d re p o rts. C h a rlo tte , a n d th e R e s e rv e p re p a re s th e O r ie n t a t io n s e s s io n s R ic h m o n d , B a ltim o re , R o a n o ke fo r m em be r in te re ste d in th e NEW CULPEPER FACILITY o u r c a s h le tte rs a n d re s u lt in a re d u c In la te S e p t e m b e r c o n st ru c t io n w a s tio n in b o t h c o lle c tio n tim e a n d flo a t. c h e c k h a n d l in g e q u ip m e n t w a s c o m p le te d a t th e B a lt im o r e a n d C h a rlo tte ye a r. B a ltim o re a c q u ir e d t w o I B M " 3 6 0 " s y ste m s, a n d C h a r lo t t e in s t a lle d tw o IB M "1 9 7 9 " begun a C o m m u n ic a t io n s tic ip a te d in 1 6 m o n th s. and T h e b u ild in g , la r g e ly u n d e r g r o u n d , w ill b e lo c a te d on a 1 6 -a c r e site near C u lp e p e r , V ir g in ia . w ho T h re e banks Head O ffic e . n e w ly fo rm e d e n te re d th e Fifth F e d e ra l F in is h in g C o m p a n y , fills th e H. d e s ig n a t e d C o lle g e R o c k H ill, S o u t h B o a rd U n iv e r s it y P ark, of G o ve rn o rs W i ls o n H. of E lk in s, M a r y la n d , M a r y la n d , as D e p u ty R e s e rv e C h a i r m a n o f th e B o a r d o f D ire c to rs, a p o s it io n p r e v io u s ly h e ld b y M r . G r ie r . Bank The Second N a o f G ra fto n , The P re sid e n t, of Bank Law so n G r ie r , P re sid e n t, R o c k H ill P r in t in g a n d a ls o D istrict M r. e x p ir a t io n o f th e te rm o f W i lli a m B lu e v ille R e se rve B a n k s B o a rd , v a c a n c y o n th e B o a r d c a u s e d b y th e tio n a l B a n k , R ic h m o n d , V i r g i n i a ; T h e 1 9 6 6 , th a t a s o f S e p t e m th e y e a r te rm a s a C la s s C d ir e c to r a t th e A u g u s t 8, 1, 1 9 6 7 , F e d e r a l of C h a r le s t o n O ffic e , S t e p to e & J o h n s o n , S y s te m m e m b e r s h ip . ber R o b e rt E. L. J o h n s o n , C h a ir m a n C h a r le s t o n , W e s t V i r g i n i a , to a th re e - in th e F ifth D istric t w e r e n o t ifie d o n to S h ip p in g T h e B o a r d o f G o v e r n o r s a p p o in t e d m e r n o n m e m b e r b a n k s c o n v e r t e d to e ff o r t C a r o l in a to n , D. C. S y s t e m d u r i n g th e y e a r , a n d t w o f o r fu rth e r w as W o o d w a r d & L o th ro p , Inc., W a s h i n g s t re a m lin e a su c c e e d s fo rm e r c h e c k c o lle c tio n o p e r a t io n s a ll b a n k s In d ire c to r P re sid e n t, C a r o lin a . NEW MEMBER BANKS w a s p la c e d in J u l y f o r th re e B u r r o u g h s s p r in g o f 1 9 6 7 . on R e c o rd s C e n te r, w it h c o m p le t io n a n c o n f ig u r a t io n s . A t R ic h m o n d a n o r d e r " 3 0 0 " s y s t e m s to b e in s t a lle d in th e B R o b e rt W . L a w s o n , Jr., S e n i o r P a rtn e r, w ill a s s u r e m o r e p r o m p t d e liv e r y o f e le ctro n ic C la s s C o m p a n y , C h a r le s t o n , S o u t h C a r o lin a , p ro g ra m . w h ic h w ill b e in it ia t e d e a r l y in 1 9 6 7 , th e Com T. M a r s h , Jr., H o n o r a r y C h a i r m a n o f o f o u t g o in g c a s h ite m s to v ir t u a lly a ll d u r in g B o a rd , sa fe b a n k s in th e F ifth District. T h is se rvice , o f fic e s th e T ru s t th e i n d iv id u a l b a n k is c o m p a r e d . T h e have a r of new of and p e r cent f o r m o t o r c a r r ie r t r a n s p o r t T h e in s t a lla t io n S e c u r it y c o m p u te r s e rv ic e f u n c d e p o sit, a n d fu n d s, R o b e rt C . B a k e r , P re si C h a ir m a n D u r in g In a n e ff o rt t o fu r t h e r im p r o v e th e ra n g e d le n d in g , and f ig u r e s f o r s im ila r b a n k s w it h w h ic h o v e r th e p r e v io u s y e a r . c h e c k c o lle c tio n s y s t e m w e co st a c c o u n t in g G ra fto n , B o a rd of D ire c to rs th e B o a rd , of N o rth F irst U n io n C a r o lin a , N a t io n a l C h a rlo tte , W e st V ir g in ia ; a n d a n y c h e c k s th a t a r e n o t in s c rib e d in tio n a l B a n k o f H u n t in g t o n , H u n t in g t o n , th e m a g n e t ic W e st m em ber o c c a s io n e d b y th e r e s ig n a t io n o f C a r l f o r th e first tim e in G . M c C r a w , f o r m e r C h a i r m a n o f First w it h r o u t in g s y m b o l- tr a n s it n u m b e r s o f d r a w e e b a n k s . 46 V irg in ia , b a n k s o p e n in g w e re th e Na R ic h m o n d w ill d is c o n t in u e h a n d l in g a s c a s h ite m s in k T he V a lle y The a p p o in t e d C . C . C a m e r o n , C h a i r m a n N o r t h C a r o lin a , to fill a v a c a n c y o n B o a rd of th e C h a r lo t t e B ra n ch Summary of Operations U n io n N a t i o n a l B a n k o f N o r t h C a r o lin a . The re cto rs R ic h m o n d a ls o B o a rd a p p o in t e d of J. D i W illis 1966 1965 C H E C K C L E A R I N G & C O L L E C T IO N D o l la r a m o u n t C a n t e y , P re sid e n t, C it iz e n s & S o u t h e r n C o m m e r c ia l b a n k c h e c k s * ................. 1 2 2 , 4 5 5 , 8 5 0 , 0 0 0 N a t io n a l B a n k o f S o u t h C a r o lin a , C o G o v e r n m e n t c h e c k s * * ....................... lu m b ia , S o u t h O th er C a r o lin a , to a th re e - y e a r te rm o n th e B o a r d o f th e C h a r lotte B ra n c h . M r . C a n te y succe e ds W . W . M c E a c h e r n , C h a ir m a n , T h e S o u t h C a r o l in a N a tio n a l Bank, G r e e n v ille , ite m s ....................................... 1 0 8 ,6 8 3 ,0 0 6 ,0 0 0 1 0 ,4 5 8 ,4 7 8 ,0 0 0 9 ,4 6 8 ,1 5 8 ,0 0 0 8 31 ,0 4 3 ,0 0 0 7 0 1 .1 9 1 .0 0 0 N u m b e r o f ite m s C o m m e r c ia l b a n k c h e c k s * ................. 3 8 5 ,8 4 4 ,0 0 0 3 3 9 .6 9 8 .0 0 0 ....................... 5 9 ,0 9 7 ,0 0 0 5 9 ,4 2 3 ,0 0 0 ....................................... 4 ,8 5 1 ,0 0 0 4 ,3 1 2 ,0 0 0 2 ,4 7 0 ,3 8 7 ,4 4 5 2 ,2 9 3 ,7 5 9 ,3 2 0 1 0 8 ,1 7 1 ,4 4 5 6 9 ,1 2 1 ,6 0 5 G o ve rnm e n t c h e c k s** O t h e r ite m s S o u t h C a r o lin a . C U R R E N C Y & C O IN FEDERAL ADVISORY COUNCIL T h e B o a r d o f D ire c t o rs se le c te d J. C u r r e n c y d is b u r s e d — D o lla r a m o u n t ....... C o in d is b u r s e d — D o lla r a m o u n t ........... of D o lla r a m o u n t o f c u r re n c y w it h d r a w n f o r d e stru c tio n ......................... 1 ,0 1 6 ,2 3 0 ,0 5 2 8 3 4 ,7 7 1 ,4 0 0 V ir D o lla r a m o u n t o f c u r re n c y b u r n e d ....... 4 7 9 ,3 3 7 ,6 0 0 5 9 ,9 4 8 ,4 0 0 g in ia , to s e r v e a s th e m e m b e r o f th e D a i l y a v e r a g e o f c u r re n c y b u r n e d ....... H a r v ie th e W ilk in s o n , B o a rd , C o m m e rc e Jr., C h a ir m a n S t a t e -P la n t e rs & T ru sts, Bank R ic h m o n d , of F e d e ra l A d v i s o r y C o u n c il r e p r e s e n t in g D o l la r a m o u n t ................................... 1 ,8 9 4 ,6 1 5 2 3 6 ,0 1 7 th e Fifth F e d e ra l R e s e r v e D istric t f o r N u m b e r ............................................... 6 6 4 ,4 3 5 1 8 0 ,6 6 7 th e y e a r 1967. ceeds Jo h n M r . W i lk i n s o n su c F. W a t lin g t o n , Jr., P re s i d e n t, W a c h o v i a Bank & T ru s t C o m p a n y , W in s t o n - S a le m , N o r t h C a r o lin a . CHANG ES IN OFFICIAL STAFF D I S C O U N T & C R E D IT D o l la r a m o u n t T o ta l lo a n s m a d e d u r in g y e a r ........... 4 ,7 4 4 ,1 7 3 ,0 0 0 4 ,6 1 0 ,8 3 6 ,6 6 7 D a i l y a v e r a g e lo a n s o u t s t a n d i n g ....... 2 9,3 3 0 ,2 1 6 2 4 ,9 6 9 ,6 6 9 N u m b e r o f b a n k s b o r r o w in g d u r i n g th e y e a r ................................... 120 95 D o l la r a m o u n t ................................... 7 ,6 5 3 ,3 1 0 ,1 8 2 8 ,2 7 6 ,8 8 0 ,6 6 8 N u m b e r ............................................... 1 9 8 ,4 3 1 1 7 4 ,5 9 3 R o g e r P. S c h a d , A s s is t a n t G e n e r a l A u d it o r , r e s ig n e d e ffe c tiv e A u g u s t 1, a n d J o s e p h M . N o w la n , V ic e P re s id e n t a n d C a s h ie r , re tire d o n S e p t e m b e r 1. E ffe c tiv e S e p t e m b e r 1, H a r m o n H. H aym es w ere and A u b re y e le cte d to th e N. S n e llin g s p o s it io n of A s F IS C A L A G E N C Y A C T IV IT IE S M a r k e t a b le se c u ritie s d e liv e r e d o r re d e e m e d C o u p o n s re d e e m e d s is t a n t V ic e P re sid e n t in th e R e s e a r c h D o l la r a m o u n t ................................... 1 0 6 ,2 0 8 ,8 8 0 1 0 0 ,1 0 9 ,8 6 0 D e p a rt m e n t , a n d W i lli a m N u m b e r ............................................... 3 7 2 ,8 4 0 3 7 1 ,7 6 3 D o l la r a m o u n t ................................... 3 8 5 ,7 3 3 ,0 9 2 3 4 8 ,9 1 0 ,3 7 2 N u m b e r ............................................... 8 ,8 2 7 ,4 5 9 8 ,4 1 8 ,4 4 9 F. U p s h a w jo in e d th e B a n k a s A s s is t a n t G e n e r a l C o u n s e l. gan, O n O c t o b e r 1, J o h n C . H o ri- f o r m e r ly C h ie f E x a m in e r , w as a p p o in t e d A s s is t a n t G e n e r a l A u d it o r , a n d L lo y d W . B o s t ia n , Jr., w a s e le cte d S a v i n g s b o n d iss u e s (in c lu d in g re issu e ) S a v in g s b o n d re d e m p tio n s A t th e e n d o f D e D o l la r a m o u n t ................................... 4 5 4 ,2 1 6 ,0 0 1 4 1 8 ,4 7 8 ,2 3 6 c e m b e r, H. E rn e st F o rd , A s s is t a n t V ic e N u m b e r ............................................... 9 ,1 9 5 ,4 6 2 8 ,7 2 6 ,8 5 7 E x a m i n in g O ffic e r. P re sid e n t, w a s p r o m o t e d to C a s h ie r ; D e p o s it a r y re c e ip ts f o r w it h h e ld ta x e s J. L a n d e r A llin , Jr., w a s a d v a n c e d to D o l la r a m o u n t ................................... 3 ,2 5 3 ,6 0 1 ,4 0 2 2 ,5 0 1 ,0 1 7 ,1 2 1 A s s is t a n t V ic e P re sid e n t; a n d A n d r e w N u m b e r ............................................... 9 3 7 ,3 6 7 8 5 9 ,1 0 8 D o l la r a m o u n t ................................... 1 8 7 , 2 5 6 , 2 0 2 , 9 4 3 1 5 9 ,0 3 9 ,4 7 0 ,2 9 5 L. T ilto n w a s e le cted A s s is t a n t C a s h ie r . M r . A l l i n 's d u tie s a r e in th e M o n e y , P r in t in g and S u p p lie s , a n d B u ild in g a n d E q u ip m e n t D e p a rt m e n t s , a n d M r . T ilto n is a s sig n e d to D e p a rt m e n t . th e T r a n s it TRA N SFERS O F FUNDS N u m b e r ............................................... 3 0 6 ,8 3 5 2 8 3 ,6 1 9 * Excluding checks on this Bank ** Includes postal money orders 47 COM PARATIVE Condition Decem ber 31, 1 96 6 D ecem b er 31, 1 96 5 ............................................. ....... ..................... .......... $ 1 ,0 4 3 ,5 4 9 ,1 5 7 .2 7 $ 1 ,0 1 2 ,4 8 6 ,4 3 6 .6 6 1 5 7 ,2 7 3 ,3 5 2 .0 0 1 4 2 ,5 1 2 ,5 5 0 .0 0 T o ta l G o l d C e rtific a te R e se rv e s .................................... .......... 1 ,2 0 0 , 8 2 2 , 5 0 9 . 2 7 1 ,1 5 4 ,9 9 8 ,9 8 6 .6 6 F e d e ra l R e s e r v e n o te s o f o th e r F e d e ra l R e s e rv e B a n k s ............ .......... .......... 8 6 ,9 8 8 ,5 8 3 .0 0 1 0 2 ,0 1 0 ,1 4 9 .0 0 1 5 ,8 4 6 ,1 1 9 .6 0 8 ,7 7 3 ,8 2 3 .5 2 D is c o u n t s a n d a d v a n c e s .............................................................. .......... 4 ,0 0 0 ,0 0 0 .0 0 2 ,6 5 0 ,0 0 0 .0 0 6 4 3 ,6 8 6 ,0 0 0 .0 0 G o ld c e rtific a te a c c o u n t R e d e m p t io n f u n d f o r F e d e ra l R e se rv e n o te s U. S. G o v e r n m e n t se cu ritie s: .......... 8 5 5 ,1 7 5 ,0 0 0 .0 0 .......... 3 1 5 ,2 3 1 ,0 0 0 .0 0 .......... 1 ,5 4 3 ,3 2 7 ,0 0 0 .0 0 1 ,7 5 6 , 0 1 5 , 0 0 0 . 0 0 .......... 4 4 9 ,1 0 0 ,0 0 0 .0 0 4 6 3 ,2 5 4 ,0 0 0 .0 0 ........................ .......... 3 ,1 6 2 ,8 3 3 ,0 0 0 .0 0 2 ,8 6 2 ,9 5 5 ,0 0 0 .0 0 T o ta l L o a n s a n d Se c u ritie s ................................. .......... 3 ,1 6 6 ,8 3 3 ,0 0 0 .0 0 2 ,8 6 5 ,6 0 5 ,0 0 0 .0 0 C a s h ite m s in p r o c e s s o f co lle ction ................................. .......... 8 1 1 ,1 4 5 ,0 8 2 .4 4 6 9 9 ,6 2 5 ,0 4 8 .5 9 T o ta l U. S. G o v e r n m e n t S e c u ritie s 5 ,5 1 4 ,7 6 9 .2 1 4 ,7 3 6 ,3 0 9 .2 7 .......... 6 8 ,1 6 7 ,2 5 8 .6 3 5 3 ,5 2 0 ,6 7 3 .8 0 T O T A L A S S E T S ................................................................ .......... $ 5 ,3 5 5 ,3 1 7 ,3 2 2 .1 5 $ 4 ,8 8 9 ,2 6 9 ,9 9 0 .8 4 LIABILITIES: F e d e ra l R e s e r v e n o te s ........................................................................... $ 3 ,6 8 0 ,4 0 8 ,1 5 1 .0 0 $ 3 ,3 8 8 ,3 0 0 ,6 1 6 .0 0 D e p o sits: M e m b e r b a n k — r e s e r v e a c c o u n ts ....................................................... 9 6 1 ,6 5 4 ,8 9 8 .4 9 8 2 4 ,9 1 5 ,0 7 0 .6 6 U. S. T r e a s u r e r — g e n e r a l a c c o u n t ..................................................... F o r e ig n ............................................................................................ 5 6 9 ,6 3 7 .2 3 8 ,1 6 0 ,0 0 0 .0 0 6 8 ,8 3 0 ,6 3 2 .6 4 7 ,5 0 0 ,0 0 0 .0 0 .............................................................................................. 1 4 ,5 2 0 ,3 5 0 .6 4 1 2 ,7 4 9 ,8 0 7 .2 6 T o ta l D e p o s it s ........................................................................... 9 8 4 ,9 0 4 ,8 8 6 .3 6 9 1 3 ,9 9 5 ,5 1 0 .5 6 D e fe rr e d a v a i l a b i l i t y c a s h ite m s ........................................................... 6 1 4 ,5 2 3 ,8 4 9 .6 1 5 1 8 ,0 5 2 ,2 1 5 .2 7 Q th e r O th er lia b ilit ie s ..................................................................................... T O T A L L IA B IL IT IE S ..................................................................... ....... 1 6 , 3 2 9 , 0 3 5 . 1 8 1 2 ,7 3 6 ,7 4 9 . 0 1 5 ,2 9 6 ,1 6 5 ,9 2 2 .1 5 4 ,8 3 3 ,0 8 5 ,0 9 0 .8 4 CAPITAL ACCO UNTS: C a p it a l p a id i n ....................................................................................... 2 9 ,5 7 5 ,7 0 0 .0 0 2 8 ,0 9 2 ,4 5 0 .0 0 S u r p lu s 2 9 ,5 7 5 ,7 0 0 .0 0 2 8 ,0 9 2 ,4 5 0 .0 0 ................................................................................................... T O T A L L IA B IL IT IE S A N D C A P IT A L A C C O U N T S ....................... C o n t in g e n t lia b ilit y o n a c c e p ta n c e s p u r c h a s e d f o r f o r e ig n c o r r e s p o n d e n t s .............................................................. 48 $ 5 ,3 5 5 ,3 1 7 ,3 2 2 .1 5 9,781,800.00 $ 4 ,8 8 9 ,2 6 9 ,9 9 0 .8 4 $ 7,180,000.00 STATEMENTS Earnings and Expenses E A R N IN G S : 1966 D is c o u n t s a n d a d v a n c e s ........................ $ In te re st o n U. S . G o v e r n m e n t s e c u ritie s ................................. 1 ,3 5 3 ,1 0 3 .8 3 1965 $ 1 ,0 4 8 ,5 9 1 .0 4 1 2 9 ,4 2 8 ,4 8 1 .0 5 1 0 3 ,1 2 0 ,7 6 0 .2 2 1 ,1 2 0 ,7 5 6 .8 9 6 9 9 ,2 1 0 .8 2 3 0 ,2 0 7 .6 9 2 0 ,5 3 8 .0 4 1 3 1 ,9 3 2 ,5 4 9 .4 6 1 0 4 ,8 8 9 ,1 0 0 .1 2 O p e r a t in g e x p e n s e s ( in c lu d in g d e p r e c ia t io n o n b a n k p re m ise s) a fte r d e d u c t in g re im b u r s e m e n t s re c e iv e d f o r c e rta in F isc a l A g e n c y a n d o t h e r e x p e n s e s ................................................................................. 1 3 ,7 2 1 ,3 0 8 . 5 1 1 2 ,8 4 4 ,8 1 1 .2 5 A s s e s s m e n t s f o r e x p e n s e s o f B o a r d o f G o v e r n o r s ........................... 4 6 2 ,0 0 0 .0 0 4 28 ,9 0 0 .0 0 C o s t o f F e d e ra l R e s e rv e c u r r e n c y ....................................................... 2 ,1 2 8 ,8 7 9 .5 9 2 ,5 2 1 ,5 2 2 .6 5 N E T E X P E N S E S ........................................................................... 1 6 ,3 1 2 ,1 8 8 .1 0 1 5 ,7 9 5 ,2 3 3 .9 0 C U R R E N T N E T E A R N I N G S ......................................................... 1 1 5 ,6 2 0 ,3 6 1 .3 6 8 9 ,0 9 3 ,8 6 6 .2 2 A d d it io n s to C u r r e n t N e t E a r n in g s ....................................................... 8 0 ,3 2 9 .7 2 9 7 ,8 6 0 .4 7 F o r e ig n c u r re n c ie s ................................................ O t h e r e a r n i n g s .................................................... T o ta l C u r r e n t E a r n i n g s ........................................................... EXPEN SES: D e d u c t io n s F ro m C u r r e n t N e t E a r n in g s : L o ss o n s a le s o f U. S. G o v e r n m e n t se c u ritie s (net) ........................... 1 73 ,2 4 4 .9 4 8 4 0 .2 7 A l l o t h e r ............................................................................................. 1 ,8 1 7 .1 5 4 ,3 1 0 .3 3 T o ta l D e d u c tio n s ....................................................................... 1 7 5 ,0 6 2 .0 9 5 ,1 5 0 .6 0 9 4 ,7 3 2 .3 7 9 2 ,7 0 9 .8 7 $ 11 5 ,5 2 5 ,6 2 8 .9 9 $ 8 9,1 8 6 ,5 7 6 .0 9 $ $ N E T A D D I T I O N S O R D E D U C T IO N S ........................................... N E T E A R N I N G S B E F O R E P A Y M E N T S T O U. S. T R E A S U R Y D iv id e n d s p a i d ................................................................................... - 1 ,7 4 7 , 4 3 7 . 8 8 1 ,6 2 9 ,6 3 2 .1 1 P a y m e n t s to U. S . T r e a s u r y (in te re st o n F e d e ra l R e s e rv e n o t e s ) ....... 1 1 2 ,2 9 4 ,9 4 1 .1 1 8 5 ,6 0 3 ,8 9 3 .9 8 T r a n s f e r r e d to s u r p lu s ............................................................ .......... 1 ,4 8 3 ,2 5 0 .0 0 1 ,9 5 3 ,0 5 0 .0 0 $ 1 1 5 ,5 2 5 ,6 2 8 .9 9 $ 8 9 ,1 8 6 ,5 7 6 .0 9 TOTAL ....................................................................................... SURPLUS ACCO U NT B a la n c e a t c lo s e o f p r e v io u s y e a r ................................................... $ 2 8 ,0 9 2 ,4 5 0 .0 0 $ 2 6 ,1 3 9 ,4 0 0 .0 0 A d d it io n a c c o u n t o f p ro fits f o r y e a r ............................................... 1 ,4 8 3 ,2 5 0 .0 0 1 ,9 5 3 ,0 5 0 .0 0 B A L A N C E A T C L O S E O F C U R R E N T Y E A R ................................. $ 2 9 ,5 7 5 ,7 0 0 .0 0 $ 2 8 ,0 9 2 ,4 5 0 .0 0 B a la n c e a t c lo se o f p r e v io u s y e a r ........................................................... $ 2 8 ,0 9 2 ,4 5 0 .0 0 $ 2 6 ,1 3 9 ,4 0 0 .0 0 Is s u e d d u r in g th e y e a r ........................................................................... 1 ,5 7 0 ,4 5 0 .0 0 1 ,9 7 8 ,2 0 0 .0 0 CAPITAL STOCK ACCOUNT ( R e p r e s e n t in g a m o u n t p a id in, w h ic h is 5 0 % o f a m o u n t s u b s c r ib e d ) 2 9 ,6 6 2 ,9 0 0 .0 0 2 8 ,1 1 7 ,6 0 0 .0 0 C a n c e lle d d u r in g th e y e a r ....................................................................... 8 7 ,2 0 0 .0 0 2 5 ,1 5 0 .0 0 B A L A N C E A T C L O S E O F C U R R E N T Y E A R ............................... $ 2 9 ,5 7 5 ,7 0 0 .0 0 $ 2 8,0 9 2 ,4 5 0 .0 0 49 FEDERAL RESERVE Directors (DECEMBER 31, 1966) E D W IN H Y D E C h a ir m a n o f th e B o a r d a n d F e d e ra l R e s e rv e A g e n t W IL S O N D e p u t y C h a i r m a n o f th e B o a r d H. E L K IN S CLASS A G E O R G E B L A N T O N , JR . P re sid e n t, F irst N a t i o n a l B a n k S h e lb y , N o r t h C a r o l in a (Te rm e x p ir e s D e c e m b e r 3 1 , 1 9 6 7 ) W IL L IA M P re sid e n t, P e o p le s B a n k o f M u l le n s M u lle n s , W e s t V i r g i n i a (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 8 ) A. D A V IS R O B E R T T. M A R S H , JR . H o n o r a r y C h a i r m a n o f th e B o a r d , F irst & M e r c h a n t s N a t i o n a l B a n k R ic h m o n d , V i r g i n i a (Term e x p ir e d D e c e m b e r 3 1 , 1 9 6 6 ) Succeeded by: R o b e rt C . B a k e r P re s id e n t a n d C h a i r m a n o f th e B o a r d A m e r ic a n S e c u r it y a n d T ru st C o m p a n y W a s h i n g t o n , D. C. (T e rm e x p ir e s D e c e m b e r 3 1 , 1 9 6 9 ) CLASS B R O B E R T R IC H A R D S O N C O K E R R O B E R T E. L. J O H N S O N P re sid e n t, C o k e r 's P e d ig r e e d S e e d C o m p a n y H a rtsv ille , S o u t h C a r o l in a (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 7 ) F o r m e r C h a i r m a n o f th e B o a r d (R e tire d), W o o d w a r d & L o th ro p , Inc. W a s h in g t o n , D. C. (Te rm e x p ir e d D e c e m b e r 3 1 , 1 9 6 6 ) Succeeded by: C H A R L E S D. L Y O N T h a d d e u s S tre e t P re sid e n t, C a r o l in a S h i p p i n g C o m p a n y C h a r le s t o n , S o u t h C a r o l in a (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 9 ) P re sid e n t, T h e P o t o m a c E d is o n C o m p a n y H a g e rsto w n , M a r y la n d (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 8 ) CLASS C W IL S O N H. E L K IN S W IL L IA M H. G R IE R P re sid e n t, U n iv e r s it y o f M a r y l a n d C o lle g e P a r k , M a r y l a n d (Te rm e x p ir e s D e c e m b e r 3 1 , 1 9 6 8 ) P re sid e n t, R o c k H ill P r in t in g & F in is h in g C o m p a n y R o c k Hill, S o u t h C a r o l in a (Te rm e x p ir e d D e c e m b e r 3 1 , 1 9 6 6 ) Succeeded by: E D W IN HYDE R o b e rt W . L a w s o n , Jr. S e n i o r P a rtn e r, C h a r le s t o n O ffic e , S t e p to e & J o h n s o n C h a r le s t o n , W e s t V i r g i n i a (Te rm e x p ir e s D e c e m b e r 3 1 , 1 9 6 9 ) P re sid e n t, M i l l e r & R h o a d s , Inc. R ic h m o n d , V i r g i n i a (Te rm e x p ir e s D e c e m b e r 3 1 , 1 9 6 7 ) MEMBER FEDERAL A DVISO RY COUNCIL JO H N F. W A T L I N G T O N , JR . P re sid e n t, W a c h o v i a B a n k a n d T ru st C o m p a n y W in s t o n - S a le m , N o r t h C a r o l in a (Term e x p ir e d D e c e m b e r 3 1 , 1 9 6 6 ) Succeeded by: 50 J. H a r v ie W ilk in s o n , Jr. C h a i r m a n o f th e B o a r d S t a t e -P la n t e r s B a n k o f C o m m e r c e & T ru sts R ic h m o n d , V i r g i n i a (T e rm e x p ir e s D e c e m b e r 3 1 , 1 9 6 7 ) B A N K OF R I C H M O N D Officers EDW ARD A . W A Y N E , P re sid e n t A U B R E Y N . H E F L IN , F irst V ic e P re sid e n t R O B E R T P. B L A C K , V ic e P re sid e n t J O H N L. N O S K E R , V ic e P re s id e n t J. G O R D O N D IC K E R S O N , JR., V ic e P re s id e n t J A M E S P A R T H E M O S , V ic e P r e s id e n t W E L F O R D S . F A R M E R , V ic e P r e s id e n t a n d G e n e r a l C o u n s e l B. U. R A T C H F O R D , V ic e P re s id e n t a n d S e n io r A d v is e r DO NALD R A Y M O N D E. S A N D E R S , JR., V ic e P re s id e n t F. H A G N E R , V ic e P re sid e n t E D M U N D F. M A C D O N A L D , V ic e P re s id e n t J O S E P H F. V IV E R E T T E , V ic e P re s id e n t U P T O N S . M A R T I N , V ic e P re sid e n t H. E R N E S T F O R D , C a s h ie r J. L A N D E R A L L IN , JR ., A s s is t a n t V ic e P re sid e n t J I M M I E R. M O N H O L L O N , A s s is t a n t V ic e P re sid e n t C L IF F O R D B. B E A V E R S , A s s is t a n t V ic e P re sid e n t A R T H U R V . M Y E R S , JR., A s s is t a n t V ic e P re sid e n t J O H N G . D E IT R IC K , A s s is t a n t V ic e P re s id e n t V . E. P R E G E A N T , III, A s s is t a n t V ic e P r e s id e n t a n d S e c r e t a r y W IL L IA M C . G L O V E R , A s s is t a n t V ic e P re sid e n t W I L L I A M B. H A R R I S O N , III, A s s is t a n t V ic e P re s id e n t A U B R E Y N . S N E L L IN G S , A s s i s t a n t V ic e P re sid e n t HARMON W I L L I A M F. U P S H A W , A s s is t a n t G e n e r a l C o u n s e l H. H A Y M E S , A s s is t a n t V ic e P re s id e n t E D W A R D L. B E N N E T T , E x a m i n in g O f f ic e r C H E S T E R D. P O R T E R , JR., E x a m i n in g O f f ic e r L L O Y D W . B O S T I A N , JR ., E x a m i n in g O f f ic e r R. H E N R Y S M A R T , E x a m i n in g O f f ic e r JO H N A N D R E W L. T IL T O N , A s s is t a n t C a s h ie r E. F R IE N D , A s s is t a n t C a s h ie r J A C K H. W Y A T T , A s s is t a n t C a s h i e r R O B E R T L. M IL L E R , A s s is t a n t C a s h ie r G. JO H N H ARO LD SN EAD, C . H O R IG A N , G e n e r a l A u d it o r A s s is t a n t G e n e r a l A u d it o r BALTIMORE BRANCH CHARLOTTE B R A N C H D O N A L D F. H A G N E R , V ic e P re s id e n t E D M U N D F. M A C A . A . S T E W A R T , JR., C a s h ie r S T U A R T P. F IS H B U R N E , V ic e P re s id e n t a n d C a s h ie r B. F. A R M S T R O N G , A s s is t a n t C a s h i e r W IN F R E D W . KELLER, A s s is t a n t C a s h ie r E. R I G G S J O N E S , JR ., A s s is t a n t C a s h ie r F R E D C. K R U E G E R , JR., A s s is t a n t C a s h i e r G E R A L D L. W I L S O N , A s s is t a n t C a s h i e r E. C L IN T O N D O N A L D , V ic e P re s id e n t M O N D Y , A s s is t a n t C a s h ie r 51 Directors (DECEMBER 31, 1966) B A L T IM O R E B R A N C H JO SEPH B. B R O W N E P re sid e n t, U n io n T ru st C o m p a n y o f M a r y l a n d B a ltim o re , M a r y l a n d (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 8 ) E. W A Y N E C O R R I N P re sid e n t, C o n s o lid a t e d G a s S u p p l y C o r p o r a t io n C la r k s b u r g , W e s t V i r g i n i a (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 8 ) L E O N A R D C . C R E W E , JR. C h a ir m a n o f th e B o a r d , M a r y l a n d S p e c ia lt y W ire , Inc. C o c k e y s v ille , M a r y l a n d (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 7 ) A R N O L D J. KLEFF, JR . M a n a g e r , A m e r ic a n S m e lt in g a n d R e f in in g C o m p a n y B a ltim o re , M a r y l a n d (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 9 ) A D R IA N L. M c C A R D E L L P re sid e n t, F irst N a t io n a l B a n k o f M a r y l a n d B a ltim o re , M a r y l a n d (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 7 ) M A R T IN P IR IB E K E x e c u tiv e V ic e P re sid e n t, T h e F irst N a t io n a l B a n k o f M o r g a n t o w n M o rg a n to w n , W e st V ir g in ia (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 7 ) JO H N P. S IP P E L P re sid e n t, T h e C it iz e n s N a t i o n a l B a n k La u re l, M a r y l a n d (Te rm e x p ir e s D e c e m b e r 3 1 , 1 9 6 9 ) CHARLOTTE B R A N C H W ALLA C E W . BRAW LEY P re sid e n t, N a t io n a l B a n k o f C o m m e r c e o f S p a r t a n b u r g ( O r g a n iz i n g ) S p a r t a n b u r g , S o u t h C a r o l in a (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 7 ) C. C . C A M E R O N C h a ir m a n o f th e B o a r d , F irst U n io n N a t io n a l B a n k o f N o r t h C a r o l in a C h a rlo tte , N o r t h C a r o l in a (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 7 ) JO H N E x e c u tiv e V ic e P re sid e n t, C a r o l in a F r e ig h t C a r r ie r s C o r p o r a t io n C h e r ry v ille , N o r t h C a r o l in a (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 8 ) L. F R A L E Y W. W . M cEACHERN C h a ir m a n a n d C h ie f E x e c u tiv e O f fic e r , T h e S o u t h C a r o l in a N a t i o n a l B a n k G r e e n v ille , S o u t h C a r o l in a (Term e x p ir e d D e c e m b e r 3 1 , 1 9 6 6 ) Succeed ed by: W IL L IA M B. M c G U I R E J. W i lli s C a n t e y P re sid e n t, T h e C it iz e n s & S o u t h e r n N a t io n a l B a n k o f S o u t h C a r o l in a C o lu m b ia , S o u t h C a r o l in a (Te rm e x p ir e s D e c e m b e r 3 1 , 1 9 6 9 ) P re sid e n t, D u k e P o w e r C o m p a n y C h a rlo tte , N o r t h C a r o l in a (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 7 ) J A M E S A . M O R R IS V ic e P re sid e n t, D iv is io n o f A d v a n c e d S t u d ie s a n d o f S o u t h C a r o l in a C o lu m b ia , S o u t h C a r o l in a (Term e x p ir e s D e c e m b e r 3 1 , 1 9 6 9 ) G. H ARO LD P re sid e n t a n d T ru st O f fic e r, F irst N a t i o n a l B a n k L in co ln to n , N o r t h C a r o l in a (Te rm e x p ir e s D e c e m b e r 3 1 , 1 9 6 8 ) M Y R IC K 52 R e se a rc h , U n iv e r s it y