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A review by the Federal Reserve Bank of Chicago Business Conditions 1969 December Contents Trends in the Midwest Is Megalopolis coming to the Midwest? 2 Midwest— A leader in production and export growth 7 Agency securities and the federal budget 12 Federal Reserve Bank of Chicago Trends in the Midwest— Is Megalopolis coming to the Midwest? A new period of urban history has opened for the United States. On the East Coast, in the Midwest, and along the Pacific large met ropolises are crowding together as towns and villages once did. Out of this mass of over lapping metropolises, a new kind of urban structure is being formed—megalopolis. Interest in the concept of megalopolis is growing. Thus, a look at the characteristics attributed to a megalopolis may help answer some questions about the emergence of this new level of urban concentration. Perhaps the United States’ first megalopolis is the 500-mile strip of northeastern shoreline containing six of the nation’s 13 largest met ropolitan areas and more than two dozen lesser ones. It houses nearly one-fifth of the U. S. population. Even rural areas within this urban web have acquired many character istics of metropolitan life. A study of recent patterns of county popu lation growth in the Seventh District1 reveals that major metropolitan communities, such as Chicago and Detroit, have become focal points for further rapid expansion. This de velopment could signal the emergence of a megalopolis in the Great Lakes region. The Pacific coast, although less populous than either the Northeast or the Great Lakes region, has been growing at a pacesetting rate and holds the promise of a third megalopolis. A megalopolis is a large number of metro politan areas that have an enormous com bined population and close proximity so that 2 'See Business Conditions, October, 1969. trading among member metropolitan centers is convenient and economical. Its large popu lation provides a market which permits sellers to operate on a large, efficient scale of pro duction, and the proximity of metropolitan centers allows firms in even small member metropolitan centers to participate in the market more easily than those in centers out side the area. Each megalopolis needs at least one na tional metropolitan area to serve as a core. A national metropolitan area is one with na tional, as opposed to strictly regional, influ ence. This implies that national centers participate in nearly every national market. In this way, they act as a bridge for trans mitting national economic changes to other member metropolitan centers. Only they are populous enough and dense enough to pro vide a market for nearly all kinds of goods and services. Along the Northeast seaboard, national metropolises are New York-Newark, Philadephia, Boston, Washington, and Baltimore. These form the skeleton of a megalopolis. In the Great Lakes region, Chicago, Mil waukee, Detroit, Cleveland, Pittsburgh, and Buffalo are major centers which form the skeleton of another megalopolis. Pittsburgh is included because of its strong trading ties to Cleveland, although it is not situated on one of the Great Lakes. Buffalo is included be cause it lies on the eastern edge of the Great Lakes, although its trading ties with the Northeast approximately equal its ties with other Great Lakes SMSAs. Business Conditions, December 1969 Another important region where national metropolitan areas are surrounded by clusters of lesser metropolitan areas is on the Pacific coast of California, where the skeleton of a megalopolis is formed by Los Angeles and San Francisco. Although widely separated compared to the urban centers of the North east and Great Lakes, Los Angeles and San Francisco are close relative to other centers of the Far West. Large sparsely-populated spaces separat ing metropolitan areas are often pointed to as evidence that a megalopolis does not exist for the region. For instance, there is much farm land between Chicago and Detroit, and con siderable open space between Los Angeles and San Francisco. But this probably has relatively little impact upon trading relation ships between Chicago and Detroit, and be tween Los Angeles and San Francisco, be cause of their relative proximity to each other when compared to their proximity to other major urban centers. These three regions—the Northeast, Great Lakes, and Pacific—are currently the only American candidates for the title of mega- Trade important to megalopolis N o rth e a st G re a t La ke s 3 0 .4 3 1 .0 C a lifo r n ia V a lu e a d d e d by m a n u fa c tu re 1 10.1 (b illio n d o lla rs ) G o o d s sh ip p e d b eyo n d c ity o r to w n o f f a b r ic a t io n 1 lopolis. Eighteen metropolitan areas not in cluded in the three regions had more than one million persons in 1966, but none have many smaller metropolitan areas for neigh bors. Thus, the population for the entire region is too small to be considered a mega lopolis. In time, however, other megalopolises may develop. For purposes of this study, any metropoli tan area contiguous to one of the skeleton areas, or to any other metropolitan area in a megalopolis, belongs to the same megalopolis. Also, counties with cities that are nearly large enough to become cores of metropolitan areas are included in a megalopolis. Contiguous nonurban counties are included if they are areas of rapid growth, indicating suburban potential. For simplicity, state boundaries are followed wherever possible and a few other wise ineligible counties are included to main tain geographic continuity, although this is not strictly necessary. In the case of the West Coast region, the entire state of California may be considered as a potential megalopolis without serious analytical consequences. Over one-third of all metropolitan areas in the United States are in the Northeast, Great Lakes, and Pacific regions defined above. Each region is large; even the smallest one— California—contains nearly 20 million per sons and 17 separate metropolitan areas. The Northeast and Great Lakes regions are nearly equal in the number of metropolitan areas they include, but the Northeast has 40 million inhabitants compared to 30 million in the Great Lakes area. (p ro p o rtio n ) W ith in o w n m e g a lo p o lis 0 .4 0.3 0 .5 To a n o th e r m e g a lo p o lis 0 .2 0 .2 0.1 E ls e w h e re 0 .4 0 .5 0 .4 S p e c i f ic a lly e x c lu d e s : to b acco p ro d u c ts, te x tile an d m ill p ro d u c ts, lu m b e r a n d w o o d p ro d u cts, p rin tin g an d p u b lis h in g , le a th e r p ro d u cts, a n d o rd n a n ce . S O U R C E : B u re a u o f th e C e n su s. E x p o r ts im p o r ta n t to M e g a lo p o lis . . . The capacity of each megalopolis to fabri cate goods is enormous: the Great Lakes and Northeast areas annually produce more goods than any European nation. Each megalopolis plays a significant role within the national 3 Federal Reserve Bank of Chicago economy as a producer and consumer of goods and services of all kinds. The Census of Transportation, taken for the first time in 1963, provides the most com prehensive data on the intermetropolitan flows of commodities by all modes of trans port. Although the data have some shortcom ings, they provide a valuable picture of major trading patterns. In each megalopolis at least half of all goods leaving the city or town of fabrication also leave the megalopolis. In California the proportion is 50 percent; in the Great Lakes area it rises to 70 percent; and the Northeast seaboard lies halfway between, at 60 percent. These are large proportions when compared with the proportions of total production ex ported across national boundaries by nations throughout the world. The highest proportion for any European nation is substantially lower. Considering only goods which leave the city or town of fabrication admittedly inflates the proportion exported from a megalopolis. Even if a more accurate measure could be computed, we would expect a high proportion of exports2 from each megalopolis because each one sells its goods and services in the world’s most important free trade area—the domestic United States market—and because an extensive transportation network reduces the physical problem of reaching the market. California’s relatively low level of exports as a proportion of production may be ex plained by its isolation from other large population centers and by relatively high per capita income, creating a high demand for consumption goods. Special problems are also connected with the analysis of California’s trade data. For 4 2“Exports” specifically refer to goods shipped from the megalopolis to other domestic markets. Exports to foreign markets are not considered. Almost half of U. S. population lives in three megalopolises N u m b er o f co unties N u m b er o f SM SA s N o rth e a st G re a t La ke s C a lifo r n ia 117 123 57 38 34 14 4 1 .8 2 9 .6 18.7 1.7 1.1 3.1 P o p u la tio n , 1966 (m illio n s) A n n u a l a v e ra g e g ro w th , 1960-66 (p e rcen t) S O U R C E : B u re a u o f th e C e n su s. instance, the data do not cover raw agri cultural produce, which is undoubtedly more important for California than for either the Great Lakes or Northeast regions. Also, military aircraft may be improperly counted as not exported if they are received by the Air Force at California air bases. . . . bu t so a r e im p o rts Each megalopolis is thus a massive ex porter but is each a net exporter? Data for trade flows between a megalopolis and the rest of the United States are not comprehen sive, but it is possible in some cases to infer whether or not each megalopolis is a net exporter on its trade account to the rest of the United States. The inference is based upon the basic balance-of-payments accounting identity arising from the fact that a flow of goods and services must be matched by a flow of cash or credit. Thus, a region which is a net exporter of goods and services must be increasing its financial claims on other re gions, or importing money, or both, unless it is an importer of investment capital. A recent study of capital movements in the United States revealed that the states from New England to Maryland along the Atlantic coast and westward across the Great Business Conditions, December 1969 Lakes region are net creditor states—that is, net exporters of capital. The data were collected for regions which are not identical with the Northeast and Great Lakes megalopolises but contain the largest portion of each. Each megalopolis dominates its respective region. Thus, both of these megalopolises are probably creditor regions. California, however, has been a heavy exporter of claims for some time—a debtor region. For the period 1960-66, demand deposits3 (net of interbank deposits), a proxy for money, in all three megalopolises expanded at a rate below that of the national average, implying a net export of money. Since New York, the center of the North3Data are not available on regional flows of cur rency and coin, but these are much less important than demand deposits for which such information is available. The data are adjusted for migration, assuming that each migrant transferred an account of average size, about $600, to his new location. Population growth rapid in Megalopolis' — • metropolitan boundaries metropolitan centers NEW HAMPSHIRE M ASSACHUSETTS ISLAND CONNECTICUT *T h e n a tio n a l p o p u la tio n g ro w th fo r 1960-66 w a s 9 .3 p erce n t. A re a s re p re se n te d in so lid co lo r g re w a t a ra te in e xce ss o f tw ic e th e n a tio n a l a v e r a g e . f G r e a t La k e s a n d N o rth e a s t m e g a lo p o lise s b o u n d a ry . 5 Federal Reserve Bank of Chicago east megalopolis, is the nation’s major finan cial center, it is likely that the export of capital from the Northeast is massive, leading to a net export of money in and of itself. To what extent this money deficit is eased (or intensified) by the positive (or negative) trade balance of the region, cannot be de duced from existing data. This same ambigu ity exists in the Great Lakes data. California, however, is an exporter of both claims (importer of capital) and money. This implies that the state is a net importer of goods and services. Thus, in spite of large agricultural and aircraft sector exports, California probably is a net importer on its trade account. This can be explained largely on the ground that popu lation growth has occurred so rapidly there that local production has been unable to keep pace with demand. Enough data are available, however, to determine trade balances between mega lopolises. California is a net importer with respect to the Northeast and Great Lakes megalopolises. The effect that isolation has on California’s trade is demonstrated also by those industries that sell the highest propor tion of their output to consumers—food, ap parel, furniture. The value of such goods produced and distributed locally plus imports from the other megalopolises, both expressed Trade among megalopolises specialized R atio o f e x p o rts to im p o rts 1.1 1.2 0 .6 2 .8 0 .4 0 .8 0 .8 1.8 0 .3 C o n su m er n o n d u ra b le s a n d s e m id u ra b le s P rod u cers g ood s a n d co n sum er d u ra b le s 6 S O U R C E : B u re a u o f the C e n su s. in per capita terms, is the same for the North eastern and Great Lakes areas, but 20 percent lower for California. Since per capita con sumption should be approximately propor tional to per capita income, the lower figure for California is probably due to imports re ceived from other western areas. With respect to each other, the Northeast and Great Lakes megalopolises maintain a nearly neutral balance of trade, neither ex porting nor importing on balance. The North east and Great Lakes tend to be highly specialized in their trade with each other. The Northeast region ships consumer nondurables and semidurables to the Great Lakes region and receives consumer durables and pro ducers’ goods. The future of M egalo po lis The Great Lakes region already has threequarters of the population of the Northeast and an equal proportion of its manufactured output. But the Northeast has been expand ing in population at a rate half again larger than the Great Lakes region. Furthermore, California is rapidly approaching the Great Lakes area in population size. If trends since 1960 continue to the year 2000, the Northeast will remain the most populous region with about 65 million per sons, 25 million more than at present. Both California and the Great Lakes basin will have approximately 40 million persons; how ever, California will probably not be able to maintain its past rapid growth rate. Over half of the increase in the United States’ popula tion will be in these three areas alone. The dominance of the Great Lakes area in durables manufacturing probably accounts for its relatively low population growth. While demand for durables will probably remain strong, increased productivity can satisfy the needs of an expanding economy for these Business Conditions, December 1969 kinds of goods. Increased productivity in services is much harder to obtain. Thus, relatively more human resources must be shifted into service industries in coming years, and those areas that specialize in services probably will have faster population growth. Unless the Great Lakes area shifts away from durable goods and into services, it probably will continue to have a relatively low rate of population growth. In time other megalopolises may develop —perhaps along the Gulf coast, or in the Piedmont region of the South. The entire Pacific coast may become a Pacific megal opolis, and the Northeast may join the Great Lakes megalopolis across an urban bridge already developing in upper New York State (they already touch in the Appalachains of Pittsburgh), but these developments will have to wait for the year 2000. Midwest — A leader in production and export growth J E a r ly in 1969 the President’s Committee on Export Expansion proposed a U. S. export goal of $50 billion by 1973. An increase of more than $3 billion per year will be needed if exports are to be raised to that level from the $34 billion of 1968. Short of a major upheaval in world trade, any substantial increase in exports will likely come from areas of the nation that are cur rently major producers of those kinds of ma terials, foodstuffs, and manufactured goods that already are exported in sizable volume. The United States exports only about 4 percent of its gross national product (GNP) and, unlike most other important exporting countries, does not specialize in exportoriented production. While some U. S. firms rely heavily on the export market, most pro duce primarily for the domestic market. Thus, areas with the largest production also tend to be the largest exporters. These areas probably will be the main source of export growth. Agricultural production is widely distrib uted throughout the nation, but the produc tion of export-oriented products is concen trated in relatively few states. The leading ten states in agricultural production supply 56 percent of the nation’s exported agricultural products. Seven of these states—Illinois, Iowa, Kansas, Indiana, Minnesota, Nebraska, and Ohio— are in the North Central Region and provide 35 percent of the nation’s agri cultural exports. The other three states— Texas, California, and North Carolina—pro vide an additional 21 percent. As with agricultural production, manufac turing exists throughout the nation, but manu facturing and related exports are concentrated in a few well-defined areas. Six states—New York, California, Ohio, Illinois, Pennsyl vania, and Michigan—account for nearly half of the value added by manufacturing and an equal proportion of manufactured exports. Essentially the same relative concentrations 7 Federal Reserve Bank of Chicago in value added and ex Major industrial states are major port origin occurred in source of exports, 1966 both 1960 and 1966, Percent V alu e added Percent V alu e of of U. S. by manu of U. S. indicating consider State Rank total Rank* facturing total exports able stability in this re (b illion dollars) (b illion dollars) lationship. N e w Y o rk $ 1.8 9% 2 $ 2 4 .6 1 10% 3 C a lifo r n ia 2 1 .3 9 2 1.8 8 Those states in the O h io 8 8 3 1.6 4 20.1 Middle Atlantic Re Illin o is 19.9 8 1.9 9 1 4 gion and those border P e n n s y lv a n ia 17.8 1.5 7 6 7 5 ing the Great Lakes, M ich ig an 17.6 7 6 1.6 7 5 specifically the East N e w Je rs e y 12.2 7 8 5 1.0 5 North Central Region, In d ia n a 10.1 4 8 3 0 .6 11 are the most promi Texas 9 .7 4 9 1.2 5 7 nent manufacturing M assach u se tts 8.4 3 10 0 .6 3 12 T o tal 1 61 .7 66 13.6 64 and export originating areas in the nation (see *T h e 9th a n d 10th ra n k e d e x p o rt sta te s, W isco n sin a n d W a s h in g to n , ra n k 11th an d 2 2 n d re s p e c tiv e ly in v a lu e a d d e d b y m a n u fa c tu rin g . map). They contribute S O U R C E : U. S . D e p artm e n t o f C o m m erce. 30 percent and 22 per cent respectively of U. S. value added by manufacturing, and 30 percent and 20 per 40 in number, individually are relatively un cent of exports. These two areas contain important when compared to U. S. totals. The seven of the largest manufacturing and ex average value added and value of exports for each state are less than 1 percent of the re porting states. States can be classified into two groups spective U. S. totals. In general, these states with respect to their importance in industrial do not have the industrial diversification of production and exports of manufactured the top ranking states, their transportation goods. Ten major states—the six noted above systems are not as well developed, and they plus New Jersey, Indiana, Texas, and Mas have fewer large population centers. sachusetts—account for approximately twoAlthough these minor industrial export thirds of total U. S. value added by manufac states individually contribute little to total ture and exports. These states are character national exports, there are nine states within ized not only by physical proximity but also this group whose individual economies rest by industrial diversification which broadens heavily on manufactured exports.1 The value their foreign market potential. They have of their exports as a percentage of value unusually well-developed nationally- and added by manufacturing ranges from 10 to 32 internationally-oriented transportation sys percent—considerably higher than the 6 to 9 tems. They have large population centers that percent range of most other industrial-export provide the labor supply required for pro states. While their manufacturing activity is duction, and a demand base to draw forth not large in relation to the major states and domestically-oriented production facilities Alaska, Arizona, Arkansas, Iowa, Louisiana, that also support exports. New Mexico, Virginia, West Virginia, and Wash ington. The remaining and second group of states, Business Conditions, December 1969 is not highly diversified, the activity that does exist has a relatively strong export orienta tion, especially in such industries as food processing, nonelectrical machinery, chemi cals, and transportation equipment. Com position v a rie s am ong sta te s . . . The most important industries in the major industrial states are nonelectrical and elec trical equipment, transportation equipment, processed food, printing and publishing, and chemical products. Exports tend to fall into the same categories, but the pattern across states varies considerably. While the exports that are relatively im portant to a state also tend to be relatively important items of production for that state, the important production categories are not always the important exports for the state. For example, in Indiana and Michigan the manufacturing of primary metals comprises 18 percent of their total production, while ex ports of primary metals are 5 percent or less of their total exports. Proportion of total value added and of exports by region Percent of total U. S. valu e added to m anufacturing contributed by geographic region (1966). S O U R C E : U. S . D e p a rtm e n t o f C o m m erce. Percent of total U. S. m anufactured exports originating from geographic regions (1966). Totals m ay not add due to rounding. 9 Federal Reserve Bank of Chicago Comparisons of pro M achinery and food products are duction and exports leading industries for individual states ________________ Distribution of value added by m anufacture, 1966 can only be made on a Export New category Illinois Indiana Iow a Michigan W isconsin Ohio York C alifo rn ia very rough basis. Data Food 12% 7% 25% 5% 13% 6% 9% 13% on production in indi N o n e le ctric a l vidual states are for m a c h in e ry 17 24 10 16 23 15 8 8 the value added by E le ctric a l manufacture while m a c h in e ry 13 16 12 3 11 10 14 12 data on exports are for T ra n sp o rta tio n the total value of the e q u ip m e n t 5 14 1 38 8 5 15 15 end products. Conse P rim a ry m e tals 9 18 3 18 7 14 5 4 quently, the data exag F a b ric a te d m e tals 9 6 5 9 7 9 7 6 gerate the importance In stru m e n ts 3 1 8 1 1 2 1 2 of exports for states O th e r 32 28 29 10 29 30 44 40 with production con T o tal centrated at the end of v a lu e ad d e d 100 100 100 100 100 100 100 100 the production chain. S O U R C E : U. S . D e p a rtm e n t o f Co m m erce. Nevertheless, exports as a p ercen tag e of value added by category of production do a lesser extent, transportation equipment and provide a rough indication of the relative instruments are a substantial portion of value importance of exports to production in the added in major industrial states—New York, various states. California, and Illinois—plus some lesser in Exports of nonelectrical machinery and, to dustrial states such as Iowa and Wisconsin. Future e x p o rt Exports are an important part of production for nonelectrical machinery Export category Illin ois Food 8% g ro w th . . . Exports as a percent of valu e added, 1966 New Ind iana Io w a M ichigan W isconsin Ohio York 11% 8% 6% 5% 4% 6% C alifo rn ia 8% N o n e le ctrical m ach in e ry 28 13 25 11 21 16 17 17 4 14 7 7 8 7 9 12 2 13 14 3 6 8 16 3 E le ctrical m ach in e ry 6 T ra n sp o rta tio n e q u ip m e n t 13 P rim a ry m etals 3 12 2 6 6 13 13 7 7 F a b rica te d 10 m etals 5 In stru m e n ts 9 7 S O U R C E ; U. S. D e p a rtm e n t o f C o m m e rce . 5 30 6 14 6 18 4 13 6 15 If U. S. exports are to meet a goal of $50 billion by 1973, they must increase at least 8 percent per year. This would be greater than the increase of 6 to 7 percent per year typical during most of the 1960s, but it may be achieveable. Exports grew at a 9 percent rate during 1968, but fo r th e f i r s t ni ne months of 1969 were Business Conditions, December 1969 only 7 percent over Nonelectrical m achinery, an important 1968 on an annual part of exports rate basis—partly be Distribution of 1966 exports cause of the dock New Export category Illin o is Indiana Iow a Michigan Wisconsin Ohio York C alifo rn ia strike early in the year. 3% 6% 13% 14% 18% 3% 6% Food 11% Agricultural exports N o n e le ctrical will continue to be m a c h in e ry 49 21 51 19 52 26 13 30 dominated by midE le ctric a l western states. There m a c h in e ry 8 11 15 3 9 11 10 11 is some question, how T ra n sp o rta tio n ever, as to whether e q u ip m e n t 7 29 1 51 12 27 7 27 agricultural exports P rim a ry m etals 2 5 2 3 5 2 5 2 will contribute signifi F a b rica te d 5 5 5 m etals 3 5 2 6 4 cantly to the increase In stru m e n ts 3 2 3 1 3 2 14 3 required to achieve the O th e r 15 13 9 13 11 16 27 30 1973 goal . A f t e r T o tal reaching a record level e xp o rts 100 100 100 100 100 100 100 100 in 1966, the value of S O U R C E : U . S . D e p a rtm e n t o f C o m m e rce . agricultural exports declined in 1967, again cent respectively. In only four of these manuin 1968, and apparently will decline still acturing states—Illinois, Michigan, Texas, further in 1969. Increasing world supplies of and Indiana—did manufacturing grow faster food and feed grains in particular, as well as than the 53 percent average rate for the na more severe restrictions on agricultural im tion. Similarly, in only four of the ten largest ports in many areas, do not augur well for a exporting states— Illinois, Michigan, New substantial increase in agricultural exports York, and Wisconsin— did exports increase over the next five years. faster than the 45 percent average rise for the If present trends continue, much of the in crease in manufactured exports will originate nation. Thus, over this period there has been in the Midwest and Middle Atlantic regions. rapid growth outside the major production From 1960-1966, the ten major manufactur and exporting areas. Nonetheless, the sheer ing states accounted for 61 percent of the size of the major states, as well as the rapid growth of a number of them, bodes well to increase in U. S. value added. These states accounted for 62 percent of the increase in maintain them in a dominant position for the foreseeable future. U. S. exports during the same period. Midwestern states—in particular Illinois But the rate of growth, both in value added and in exports, has varied considerably and Michigan, and to a lesser extent Indiana and Wisconsin—have been important in both among the states. Increases in value added for the major manufacturing states ranged from the production and export of manufactured goods during the 1960s. If the United States 37 percent in New York to 67 percent in is to reach its export goal of $50 billion by Texas. The range was even greater in export growth with New Jersey and Wisconsin in 1973, the Midwest will clearly have a major role in that achievement. creasing exports by 25 percent and 153 per 11 Federal Reserve Bank of Chicago Agency securities and the federal budget 12 I n measuring the impact of the federal sec tor on the nation’s credit markets, it is neces sary to examine both the public debt opera tions of the U. S. Treasury and the borrowing activities of certain other government agen cies. These agencies (e.g., Federal National Mortgage Association, Federal Land Banks, Export-Import Bank, Tennessee Valley Au thority, the Federal Home Loan Banks, etc.) are authorized to issue their own securities directly to the public. Proceeds finance the issuing agencies’ individual programs—pri marily lending. Each credit agency, in effect, operates as a middleman, entering the securi ties market to obtain funds that it rechannels to the economic sector it serves. Government agencies are playing an in creasingly important role in the securities market. The dollar volume of agency debt outstanding at the end of fiscal 1969 was almost four times its 1960 level. Although agency debt has increased substantially in recent years, federal budget totals do not fully reflect this development. This is a result of a change in the budgetary treatment of agency financing combined with the recent shift in ownership of certain major agencies from public to private hands. The activities—both borrowing and lending—of five of the largest agencies were eliminated from the budget during fiscal 1969. Such reclassification has had major ramifications for federal finance as it is presented in the government’s annual budget statement. In light of the importance accorded the federal government’s budget totals, the growth of agency debt and its relationship to government finance deserve continuing review. Im pact of a g e n c y b o rro w in g The combined debt of the U. S. govern ment agencies has been growing at a much faster pace than the public debt (securities issued by the Treasury). Between fiscal 1965 and 1969, public debt rose slightly more than 10 percent; however, agency debt outstanding more than doubled. Furthermore, the agencies are becoming much more prominent in the new issues mar ket. During calendar 1968, new borrowings by federal agencies totaled $7.7 billion, up from $1.2 billion only four years earlier. These agency issues rose from 3.2 to 11.6 percent of all new issues between 1964 and 1968. During the same period, Treasury bor rowing eased to 27.5 percent from 28.7 per cent of all new issues. The federal agencies have become a significant competitor for the public’s investment dollar. In some recent years, the agencies’ borrow ings from the public have exceeded the U. S. Treasury’s. The public’s holding of Treasury debt alone can be a rather misleading index of the government sector’s needs for credit to finance federal programs. In four of the last six years, Treasury debt held by the public declined, but these declines were more than offset by increase agency debt. A g e n cy issues an d issu ers Of the $38.3 billion total of agency debt outstanding at the end of fiscal 1969, $27.3 Business Conditions, December 1969 billion of securities were solely the obligation of the agencies themselves. They were not guaranteed by the U. S. Treasury. Payments on principal and interest are met solely from the issuing agencies’ own resources. Of the remaining agency debt, $10.4 bil lion were participation certificates (PCs)— securities that represent interests in pools of agency loans (federally-underwritten home mortgages, loans to small businesses, college dormitory loans, etc.) with a single agency acting as trustee. The Government National Mortgage Association (GNMA) administers $8.6 billion of these certificates and the Export-Import Bank nas issued $1.8 billion of PCs based upon loans supporting trans actions in foreign trade. The Federal Housing Authority is the other major issuer of guar anteed agency debt with $577 million of government-backed securities outstanding at the end of fiscal 1969. The budget treats guaranteed agency debt, including participa tion certificates, as part of the federal debt. Almost 90 percent of the total nonguaranteed agency debt, (and over 60 percent of all agency debt) or $24 billion, represents obli- Agency finance is an important part of federal borrowing from the private sector year T re a s u ry d eb t T o tal A g e n cy d eb t (b illio n d o lla rs ) 1961 + 1.1 — 0 .3 + 0 .8 1962 + 5 .8 + 2.3 + 8.1 1963 + 3.8 5.1 - 0 .3 1.3 2.3 + 1964 + + + 2 .0 1965 — 1.0 + 2 .0 + 1.0 1966 — 4 .0 + 6.1 + 2.1 1967 — 5.2 + 12.3 + + 1-4 5 .8 — 3.8 1968 1969 — 3 .2 + 4 .5 + billion dollars gations of the five privately-owned, govern ment-sponsored credit agencies—the Federal Land Banks, the Federal Intermediate Credit Banks, the Banks for Cooperatives, the Fed eral Home Loan Banks, and the Federal Na tional Mortgage Association (Fanny May). A g e n cy b o rro w in g in th e budget C h a n g e in p riv a te sector h old in g s Fiscal Agency debt has been growing more rapidly than public debt + 18.1 1.3 Starting with the fiscal year 1969, the federal government adopted a new unified budget format to present its fiscal program. Among other changes, privately-owned credit agencies were eliminated from the budget. Prior to fiscal 1969, the government had pre sented its budget in three different formats. Federal credit agencies had been included in the consolidated cash budget totals but ex cluded from the administrative budget figures as well as the federal sector of the national 13 Federal Reserve Bank of Chicago 14 income accounts. The immediate effect of this change was the exclusion from the federal budget pre sented for fiscal 1969 of the Federal Land Banks, which had been privately-owned since 1947, and the Federal Home Loan Banks, privately-owned since 1951. During fiscal 1969, the Federal Intermediate Credit Banks, the Banks for Cooperatives, and Fanny May retired the capital stock held by the U. S. Treasury. To reflect the shift of these three agencies out of the public sector, about $10 billion of their outstanding debt was sub tracted from the 1969 budget figures for total agency net borrowing from the public. For fiscal 1969, the Treasury reported an $11-billion reduction in federal debt—largely the shifted agency debt. During the fiscal year, the five agencies increased their debt by $4 billion. If the five agencies had been included, the 1969 federal budget would have shown a $3-billion growth in the combined agency and Treasury debt. Some observers question the propriety of this treatment. They regard it as a means of showing deceptively conservative indebted ness totals. Though the agencies are now privately-owned, many features of their oper ations support the contention that they re main part of the federal government. All five agencies were established by Con gress, and their operations can be modified or suspended by that body at any time. Federal charters specify the scope and scale of their activities. Each is an instrumentality of the federal government, concerned with specific national objectives. Each is supervised by an agency or department in the executive branch of the government. (Fanny May is subor dinate to the Secretary of Housing and Urban Development. The Federal Home Loan Banks are supervised by the Federal Home Loan Bank Board. The three agricultural The debt of each agency has increased sharply . . . ^billion dollars 7 - . . . to support a greater volume of loans billion dollars year-end figures credit agencies are all supervised by the Farm Credit Administration.) Although their se curities are not guaranteed by the govern ment, the agencies may, in certain circum stances, borrow from the Treasury or sell their securities to the government. In many ways, agency financing is a close substitute for Treasury borrowing. Investors regard agency obligations as nearly equal in quality to Treasury debt. The President’s Commission on Budget Concepts, which developed and recommended the unified budget format, dealt at some Business Conditions, December 1969 length with the question of budget coverage: To work well the governmental bud get process should encompass the full scope of programs and transactions that are within the Federal sector and not subject to the economic disciplines of the marketplace. This, however, poses practical questions as to precisely what outlays and receipts should be in the budget of the Federal Government. The answer to this question is not always as obvious as it may seem: the boundaries of the Federal establishment are some times difficult to draw. . . . What about privately owned agencies which were established by the Federal Government in pursuit of public policy objectives but from which all government capital has now been withdrawn, such as the Fed eral home loan banks or Federal land banks? It is difficult to draw a boundary line in some of these cases without hav ing programs included in the budget that do not seem greatly different from other excluded items. The Commission sought to develop a bud get format that would be meaningful and consistent as well as comprehensive. While recognizing that the ownership principle was somewhat arbitrary, the Commission con cluded that it was the most definitive criterion that could be applied. Although it is obvious that the agencies are not entirely private, they are at the same time only quasi-governmental. They are not subject to Congressional appro priation or budget review. A major motiva tion behind their conversion to private owner ship was to enhance the independence of their operations. Their security issues may be con sidered a substitute for private rather than public borrowing in that the agencies’ sole function is to pool the credit needs of their borrowers and enter the market in their stead —and, perhaps, more efficiently. Finally, the Commission made it clear that it specifically recommends that the total vol ume of loans outstanding and borrowing of these enterprises at the end of each year be included at a prominent place in the budget document as a memorandum item. Exclusion from the budget proper was not intended as a way to evade scrutiny. The five private agencies The first three agencies in this listing are concerned with agriculture and the latter two with housing. The Federal National Mortgage Association operates from a single location, the other agencies have regional banks around the nation. In lending, each bank acts alone, but in floating debt, all banks in an agency act as a group. The 12 Federal Land Banks extend long term mortgage credit to farmers through the Federal Land Bank associations, which are cooperative institutions organized by bor rowers. The associations, in turn, hold the stock of the Federal Land Banks. The Fed eral Land Banks’ obligations range in ma turity from 2 to 15 years. The Federal Intermediate Credit Banks (FICB) serve the seasonal and other shortand intermediate-term credit requirements of farmers. This agency functions as a bank of discount for agricultural paper from the pro duction credit associations and other financial institutions making agricultural loans. The Federal Intermediate Credit Banks enter the 15 Federal Reserve Bank of Chicago money market monthly, issuing nine-month consolidated debentures. The Banks for Cooperatives (COOP) en gage in two types of lending to farmers’ co operative associations. Short-term funds are advanced for seasonal needs. Term loans of various maturities and payable in instalments are made to cooperatives for construction and equipment purchases. To finance these opera tions, the Banks for Cooperatives issue sixmonth consolidated debentures. The Federal Home Loan Bank System (FHLB) was established in 1932 to provide credit to its member savings and loan associa tions for mortgage financing. The banks are authorized to make various types of loans— both secured and unsecured, long- and short term. They issue both consolidated notes that mature within a year and consolidated bonds with maturities up to five years. The Federal National Mortgage Associa tion (FNMA) provides increased liquidity to the mortgage market through its secondary market operations. It is authorized to pur chase or sell government insured or guaran teed home mortgages or to make short-term loans secured by such mortgages. To finance its operations, FNMA issues short-term dis count notes, which mature in 30 to 270 days at the option of the investor, and debentures with a maturity range of 1 to 15 years. Of the five government-sponsored agencies, Fanny May is the largest borrower. At the end of 1968, its debentures and notes out standing totaled nearly $6.4 billion, or about 30 percent of the combined debt of the five agencies. All five agencies, however, have expanded operations during this decade, with the loans and securities of each now equal to between two and four times their 1960 level. BUSINESS CO N DITIO N S is published m onthly by the Federal Reserve Bank of Chicago. H. Woods Bow m an is p rim a rily responsible fo r the article "Trends in M idw est—Is M egalopolis coming to the M id w e st?," Ja c k L. H ervey fo r "M id w est—A leader in production and export g ro w th ," and N ancy M. G oodm an fo r "A g en cy securities and the fe d e ra l budget." Subscriptions to Business Conditions are a v a ila b le to the public w ithout charge. For in fo rm a tion concerning bulk m ailin g s, address inquiries to the Federal Reserve Bank of Chicago, Box 834, Chicago, Illinois 6 0690. 16 A rticles m ay be reprinted provided source is credited. Business Conditions a review by the Federal Reserve Bank of Chicago Index for the year 1969 Month Pages February 5-11 A g ricu ltu re a n d fa rm fin a n ce Banks and PCAs—a comparison................................ Developments in the cattle industry Continued growth indicated.................................... Farm outlook............................................................... Larger farms—a continuing trend............................. Rise in farmland values slows in Midwest................. October January May September 12-16 11-16 7-13 5-9 December September November 12-16 12-16 6-16 September 9-12 B a n k in g , cre d it, an d m o n e ta ry policy Agency securities and the federal budget................... Bank float: by-product of collecting checks............... Changing styles in business finance............................. Consumer instalment loans A profile from Detroit............................................ Customers view a bank merger—before and after surveys.................................................... Measures of money and credit.................................... Ownership of demand deposits at large Chicago banks......................................................... Pension funds and capital markets............................. Regulation Z—truth-in-lending.................................. Strong rise in currency circulation............................. Trends in banking and finance.................................... July July 5-8 11-16 March August April August July 10-16 7-16 11-15 2-6 2-5 Month Pages Economic co nd itio n s, g e n e ra l Autos and trucks—output, sales, and credit............... Consumption Patterns shift with rise in income........................... Personal saving and inflation...................................... The trend of business.................................................. The trend of business New surge in capital expenditures......................... The trend of business.................................................. The trend of business.................................................. The trend of business Another 1966 for homebuilding?........................... What’s happening to take home pay......................... March 2-9 February May January 2-4 13-16 2-11 April June September 2-10 2-9 2-5 November May 2-5 2-6 In te rn a tio n a l t r a d e , fin a n c e , an d p a ym e n ts Eurodollars— an important source of funds for American banks...................................... Important stake in free trade...................................... International payments Further improvements needed in the system........ Midwest A leader in production and export growth............. Special drawing rights................................................ U. S. foreign trade surplus declines............................. June July 9-20 8-11 February 11-16 December October April 7-11 6-11 16-20 December 2-7 October 2-6 T ren d s in th e M idw est Is Megalopolis coming to the Midwest?..................... Population growth concentrated in suburban counties..................................................
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