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A review by the Federal Reserve B ank of Chicago Business Conditions 1962 Jan u ary Contents Municipal borrowing for industrial development 5 Government has big role in agricultural exports 9 The Trend of Business 2-5 Federal Reserve Bank of Chicago OF _ A u to s g iv e lift to a c tiv ity JL /uring the fourth quarter of 1961 a sharp increase in output and sales of automobiles helped raise business activity above the pla teau of the summer and early fall. While the improvement in autos has been a major factor in the national picture, it has been all-impor tant in strengthening the economies of many Midwest centers in which the assembly of cars or the production of components is the dom inant industry. New models were introduced in September, earlier than in most previous years. However, availability of these new cars was delayed by strikes at General Motors and Ford in Sep tember and October, which clipped about 250,000 units from production schedules. Nevertheless, from October through Decem ber over 1.8 million cars were assembled— 5 per cent more than in the same period of last year and second only to 1955. As production rose and dealer stocks be came more adequate, sales spurted. In No vember, 585,000 domestically produced cars were delivered to customers. On a daily rate basis this was 23,400, a level which has been exceeded only in the spectacular period from March through September in 1955. The stepup of sales was stronger than had been indi cated by various polls of consumers in recent months. It appears that consumers are prepared to use more credit in order to carry their plans into practice. In the first nine months of 1961 outstanding instalment credit extended for the BUSINESS purchase of automobiles declined 700 million dollars in contrast with a rise of 1.5 billion in the same period of 1960. In October 1961, however, new auto loans exceeded repay ments on a seasonally adjusted basis for the first time since November 1960. Sales in No vember and December indicate that the up trend in outstanding credit has continued. Im p o rts a n d com pacts In 1961 sales of imported cars declined as a proportion of the total for the second suc cessive year. Imports had averaged only about 30,000 in the years preceding 1955, but grew rapidly thereafter, reaching a peak of 600,000 Consum er expenditures for autos declined in 1961 despite fourth quarter upsurge Business Conditions, January 1962 units in 1959. In that year imports accounted for 10 per cent of the United States market. With the introduction of a variety of domesti cally produced compacts, imports were re duced to 500,000, or 7.5 per cent of total sales, in 1960 and 375,000, or 6 per cent, in 1961. Among the small imports only Volks wagen has been able to increase its penetra tion of the market, while others have lost ground. Industry experts believe that foreign cars can retain about 5 or 6 per cent of the American market. The number of different models of com pacts has increased sharply. In recent months about 35 per cent of all sales were compacts, up from 30 per cent last year. Actually the line between “compacts” and “standard-size” cars has become blurred as a variety of “in between” wheelbases have been introduced. A compilation made by Ward’s Automo tive Reports indicates that the proportion of cars with “suggested” retail prices under $2,000 rose from 3 per cent for the 1959 model year to 20 per cent in the 1961 model year. At the other extreme the proportion of cars selling for over $3,000 declined from 13 per cent in 1959 to 10 per cent in 1961. Increasing numbers of car buyers seeking lower-cost vehicles have turned to the used car market. Used car prices rose 20 per cent between January and September but declined in the fourth quarter. In v e n to ry control During 1960 inventories of domestically produced new cars rose 400,000 to a record of 1 million units at year-end. At the end of 1961, on the other hand, inventories were about 250,000 less than at the beginning of the year. Inventories—in terms of day’s sales —at the end of 1960 amounted to 53 days, but by the end of 1961 had dropped to about 35 days. The relatively slow inventory build-up after the introduction of 1962 models was not sim ply the result of strikes or larger-than-anticipated sales. Some of the producers deliber ately restricted production until consumer preferences clarified and the potential rate of sales became more evident. On more than one occasion in the postwar period, most recently in late 1960, dealers have become so heavily stocked that sharp cutbacks in production were necessary. In 1962 auto manufacturers have a powerful additional incentive to stabil ize production because, under the new wage contracts, any layoffs associated with subse quent changes in output will necessitate sub stantially increased payments of supplemental unemployment benefits. In most years in the past both production and sales have risen somewhat between the October-December and January-March pe riods. If the usual seasonal pattern prevails in the months ahead, the car inventory on hand Instalm ent credit extended to car buyers moved above repayments in October billion dollars, seasonally adjusted Federal Reserve Bank of Chicago at the beginning of 1962 need not presage a painful readjustment for auto centers. A u tos a n d steel The auto industry is steel’s largest custom er, purchasing about 20 per cent of all steel products. The impact of steel buying by auto producers, however, is even greater than this proportion suggests. First, steel orders by the auto industry tend to be volatile, often mov ing up or down quite sharply. Second, auto producers purchase a very large proportion of certain steel products, accounting for about 40 per cent of the combined tonnage of sheets, bars and strip. (These items account for 90 per cent of motor vehicle requirements, but less than half of all steel shipments.) A substantial increase in steel buying had N ew car prices leveled after 1958, while used car prices continued to show large changes per cent, 19 53 = 100 4 S O U R C E : Bureau of Labor Statistics. been expected after that industry’s vacation shutdowns in July. Actually, production rose only to the June level in September and changed little through early December. Dur ing this period many firms were increasing their consumption of steel, but with ample production capacity for all kinds of steel de livery schedules did not stretch out apprecia bly. The missing factor was the expected surge in buying by the auto manufacturers. In December the auto industry began to in crease orders substantially. Sales of new cars and trucks had been larger than expected, and auto firms began to show greater interest in building inventories in anticipation of a steel strike in mid-1962. This development also has influenced other steel buyers to increase their orders so as to assure adequate supplies. As a result, production of steel ingots is expected by industry experts to reach a near record annual rate of about 140 million tons during the first half of next year, but to decline in the second half. A u to sa le s in 1962 Forecasts of car sales in 1962 by industry analysts have ranged between 6.5 and 7 mil lion domestic sales of passenger cars, includ ing imports of about 400,000. The Depart ment of Commerce expects production of cars this year to be between 6.4 and 6.8 million. These figures, which include exports and changes in inventory, are generally consistent with industry sales projections. The banner year is still 1955 when 7.2 million new passenger cars were sold. In four of the six years since then sales have been close to 6 million units. The exceptions were 1958 which saw a drop to 4.7 million and 1960 in which sales reached 6.6 million. Total expenditures on autos depend upon prices as well as volume and the distribution of sales among price classes. The average Business Conditions, January 1962 price of all cars sold reached a peak in 1958 and 1959 before declining more than 3 per cent in 1960. This reduction reflected a larger proportion of sales of the less expensive cars. List prices for identical models have changed very little in recent years. From 1953 through 1961 consumer pur chases of autos and parts ranged between 5.2 and 5.5 per cent of personal income after taxes, except for three years. The exceptions were 1955 which saw the proportion leap to 6.7 per cent, 1958 which saw a decline to 4.4 per cent and 1961 when outlays were about 4.7 per cent of income. The “surge” in auto sales in the fourth quarter of 1961 merely brought dollar volume of expenditures back to the average relationship to “disposable” income of recent years. It appears that 7 million cars would be sold in 1962 if the average 1953-61 relationship between disposable income and automobile sales prevailed, even though income for the year as a whole averaged no higher than in the fourth quarter of 1961. But some additional rise in income is indicated by official forecasts and, as noted above, the relationship of auto sales to consumer income in individual years has varied greatly. Municipal borrowing fo r industrial development S in c e 1936, nearly 300 cities, counties and other local governments in nine states (mostly in the South) have borrowed almost 200 mil lion dollars to provide plant facilities for use by private firms. More than half of this financ ing has occurred in the last four years, a period in which many communities have been plagued by persistent and substantial unem ployment. C lim b in g but still sm a ll Although municipal borrowing for indus trial purposes has increased sharply, it is still small in relation to the total amount of state and local bonds issued. In 1960, for example, the 41 million dollars in financing for industrial purposes was less than 1 per cent of the 7.2 billion total borrowed by state and local governments for all purposes. Until now, relatively few of the 20,000 municipalities and counties in the nation have done any industrial financing at all, and most of these have been relatively small communities located in the southern states. In some instances borrowing of this kind has overshadowed financing for other purposes such as the provision of schools, roads and sewerage and water plants. A conspicuous example is that of an Alabama town of only 1,500 population which early in 1961 bor rowed 25 million dollars to build a fertilizer plant for lease to a major meat packing firm. O bjective o f the fin a n c in g As the interest paid on municipal securities is exempt from Federal income taxes, local Federal Reserve Bank of Chicago governments often can borrow funds in the capital market at lower interest rates than private borrowers, particularly small and newly established business firms. To an in vestor in the 50 per cent income tax bracket, for example, an industrial bond would need to return 7 per cent before taxes to have as much appeal as a tax-exempt security yielding 3V2 per cent. The tax advantage connected with municipal bond financing is reflected in the spread between market yields on munici pals and industrials. Yields on newly issued corporate debt securities recently have aver aged more than a full percentage point higher than on municipal bonds of comparable rat ing and maturity. Communities interested in encouraging industrial development, there fore, may be able to offer tempting induce ments to business firms seeking locations for new plants. Areas troubled by labor surpluses under standably have been motivated to use munici pal credit for industrial development. Among these have been communities adjusting to de clines in farm income and employment and towns historically dependent upon coal min ing, railroad operations and certain types of manufacturing. The main purpose in attract ing industry is simply to secure more jobs and income. The side effects that increased payrolls may be expected to have upon retail sales, service activities and property values often lead to broadly based support for mu nicipal sponsorship of business development. These incidental benefits in some cases have been the sole or primary incentive. Utilization of public borrowing to foster industrial devel opment has not been confined to towns in the labor-surplus category. The qu estion o f p u rp o se Municipal governments are of course lim ited to the exercise of powers and duties serving a clearly defined public purpose. Al though it may appear that promoting eco nomic development by helping to finance private firms meets the test, so might almost any other kind of commercial activity carried on by a public agency. In some cases the states have acted expressly to affirm the pro priety and constitutionality of municipal fi nancing to aid industrial development. Legis lation permitting the use of local credit for this kind of activity has been adopted in 17 states including Illinois and Wisconsin; authority apparently is available in several others as well. In many cases, the authority to borrow to support industrial development has been limited to the issuance of bonds repayable solely out of revenues from the projects fi nanced. Only 4 of the 17 states authorizing local industrial financing, 3 in the South and Wisconsin in the North, permit municipalities to use general obligation bonds—that is, debt supported by a claim on general tax revenues, for this purpose. Revenue bond financing is permitted by 16 of the states, including Illinois. A common arrangement is one under which a municipality sells bonds to purchase a site and build a plant meeting the specifications of a business firm. The plant is then leased for a term coinciding with the period of debt amortization, with rental payments sufficient to cover principal and interest on the bonds. In the event the tenant fails to meet its obliga tions under the lease, it is subject to eviction and another occupant is sought for the prem ises. If none can be found, the creditors must stand any resulting loss if revenue bonds were involved in the financing. Until the past few years, the part played by the state governments in connection with industrial development had been limited chiefly to the provision of legislation enabling Business Conditions, January 1962 Seventeen states have authorized local governments to borrow for industrial purposes Type of borrowing authorized Bonds issued* l" ll Alabama revenue, general obligation Arkansas $41 revenue, general obligation 9 Georgia revenue — Illin o is revenue — Kansas revenue — Kentucky revenue 24 Louisiana revenue, general obligation Maine 3 revenue — Maryland revenue — M ississip p i revenue, general obligation 79 M isso u ri revenue — Nebraska revenue — New Mexico revenue 4 N orth Dakota revenue 3 Tennessee revenue, general obligation 29 Vermont revenue — W isc o n sin ge n e ra l o b lig a tio n — Total $192 •Through October 1961. local units to borrow for that purpose. This, of course, was in addition to the fact gather ing, advertising and other promotional activi ties that the states had long carried on to attract new industries and tourists. But now several states have established programs of credit aid to industrial development that re semble the local industrial financing plans. Leading the way, New Hampshire in 1955 established an Industrial Development Au thority having the power to issue up to 1 mil lion dollars in revenue obligations. Oklahoma was next to move into the field, when in 1960 legislation was adopted permitting the state to borrow up to 10 million dollars in general obligation bonds for industrial purposes. In 1961 Connecticut, Illinois and New York joined the group. Connecticut and New York adopted the general obligation borrowing ap proach with ceilings of 25 and 50 million dollars, respectively. The Illinois program au thorizes revenue bond financing—at present up to 5 million dollars—for direct investment in industrial facilities. Under the other state plans, funds are to be channeled through local nonprofit industrial development agencies. Besides these programs that provide for direct state borrowing for development pur poses, several other aid plans are financed by appropriations out of tax funds or involve the guarantee of industrial mortgages, i.e., the assumption of contingent liabilities. The public credit aspect Any debt incurred by a local or state gov ernment is, of course, a use of public credit. But indebtedness backed solely by the rental earnings generated by a specific industrial facility is scarcely different from the direct borrowing done routinely by business firms, except for the tax-exemption feature (and perhaps an implied “moral” obligation of the public body). In effect, local or state revenue bond financing of business plant means that the sponsoring governmental body stamps its tax immunity upon debt that is essentially equivalent to private borrowing. If the financing represents general obliga tion borrowing, backed by the full faith and Federal Reserve Bank of Chicago credit of the issuing unit, the public credit aspect takes on a somewhat different mean ing. A transaction of this kind makes the tax base of the community at least contingently liable for the indebtedness. That is, if earnings of the enterprise prove insufficient to cover debt requirements, tax revenues must be drawn upon to cover the deficiency. In either case—but conspicuously with fi nancing of the revenue bond type—the use of public credit often holds considerable ap peal to communities as an avenue for spon sorship of industrial development. The sub sidy inherent in the financing—the income tax exemption of the interest—is borne by the U. S. Treasury, rather than by the local com munity. Yet, if the local community stands to benefit by the development, then presumably it possesses some capacity to supply the finan cial inducement itself, should any special in centive be needed at all. In many areas, wholly private, nonprofit corporations have sprung up in recent years to provide funds for industrial investment. An estimated 250 such agencies have been char tered in the five states of the Seventh District; about half of them have become active. Capi tal is furnished by local merchants and others immediately concerned with the economic well-being of the locality. Tax funds or prop erty tax concessions and other incentives have been provided, in other instances, to firms locating within or close to the community. Both the wholly private plans and arrange ments for local tax aids call for financial sup port essentially by the area within which resulting benefits may be expected to accrue. in d u strial fin a n c in g qu estione d 8 The use of public credit to aid industrial development has drawn serious criticism. One objection is that it involves public participation in an activity that is the proper responsi bility of private enterprise and initiative. An other, somewhat more specific criticism is that it amounts to a means of tax avoidance which, applied in a selective manner, tends to create unfair competition among business firms and areas. Popular resentment, it is contended, in time could build up to jeopardize the tax immunity provided by law for municipal obli gations in general. Considerations such as these appear to have been among the factors prompting the Investment Bankers Associa tion, the Municipal Law Section of the Amer ican Bar Association and the Municipal Fi nance Officers Association to take stands in opposition to the use of municipal borrowing for industrial purposes. Until recently, this opposition had been a deterrent to participa tion by the larger investment houses in the underwriting of municipal industrial bonds. Continued use of public credit for promot ing industrial development, nevertheless, ap pears likely. Local areas experiencing pro longed and severe unemployment understand ably will seek to attract new enterprises or expansions of existing operations that hold promise of additional jobs. The question remains, however, whether the provision of facilities for the use of private business firms is an appropriate use of public credit, given the tax exemption of interest on municipal securities. A further question is whether the use of credit aids to industrial development is consistent with attainment of the best possible geographical distribution of productive activity—which is so vital to max imum economic growth. Are the communities offering inducements of this kind, the places where industrial expansion “ought” to occur, particularly if such aid is available in some areas of labor surplus but not others and the inducements call for little, if any, direct finan cial effort on the part of the communities that stand to benefit? Business Conditions, January 1962 Government has big role in agricu Itu ral exports I P erhaps no activity has more diverse effects, is less understood by the American pub lic and arouses more controversy among other nations than the agricultural export programs of the U. S. Government. In the fiscal year ended June 30, 1961, our agricultural exports reached a record high of 4.9 billion dollars. About 1.5 billion was under “special” Gov ernment programs. An additional 1.3 billion, while being recorded as “commercial” ex ports, was subsidized by the Government through export payments, loans and sales of Government-owned stocks to private export ers below domestic market prices. All told, about 60 per cent of our agricultural exports last year were subsidized in one way or an other. Most of the increase in overseas shipments of United States farm products in recent years has been in the subsidized sectors. While total farm exports in fiscal year 1961 were 1.8 billion dollars above the level of fiscal 1955, exports subsidized by the Government had risen about 1.6 billion. The Government’s in creasing role in the agricultural export picture is largely an outgrowth of domestic price sup port programs which have held United States prices on many agricultural commodities above the world level while at the same time channeling massive stocks of agricultural commodities into the warehouses of the Com modity Credit Corporation (CCC). Although the “special” export programs were originally conceived as temporary measures for achiev ing rapid disposal of the farm commodities owned by the Government, they have gradu ally taken on the marks of an integral link between a permanent surplus disposal pro gram and our foreign aid effort under the ban ner of “Food for Peace.” B a c k gro u n d The United States has long evidenced a deep concern for poverty and hunger in many parts of the world. During World War I and the early 1920’s, American foodstuffs were shipped overseas to help alleviate hunger and threats of famine in the war-devastated coun tries of Europe. During World War II, food shipments were resumed under Lend-Lease. Following the war, the United States and Can ada donated large amounts of food to the United Nations Relief and Rehabilitation Administration for distribution among the nations of Europe and the Far East. Grants under the Marshall Plan (1948-51) and, sub sequently, under the Mutual Security Act enabled many countries to obtain food and fibers from the United States as well as ma chinery and other capital equipment needed to rebuild their economies. Throughout the postwar period, the Gov ernment has had the authority to subsidize exports of farm commodities through use of barter arrangements, credit, sales at less than domestic prices and other devices. Subsidized export programs originated in the 1930’s as a means of maintaining or expanding exports, which had tended to decline as domestic agri cultural support measures raised market Federal Reserve Bank of Chicago prices above the world level. Until 1954, however, exports under sub sidized programs were quite small in relation to the total. In July of that year, in response to a rapid build-up of agricultural commodi ties in Government warehouses, in part, at tributable to a tapering off in foreign demand associated with the recovery of European agriculture, Congress passed the Agricultural Trade Development and Assistance Act of 1954—commonly known as Public Law 480 —consolidating many of the various “spe cial” Federal export arrangements into one act with a greatly expanded budget. In addi tion, existing provisions in the Mutual Secur ity Act authorizing shipments of agricultural commodities to foreign countries were extend ed and broadened. However, MSA shipments have accounted for only a relatively small 10 part of the substantial increase in “special” exports in recent years. The P. L. 4 8 0 p r o g r a m s Public Law 480 provided for sales of sur plus farm products to “friendly” foreign gov ernments in exchange for their currencies which were not convertible into dollars and hence could not be used to purchase needed foodstuffs through normal commercial chan nels. Major emphasis was placed on this tech nique because it was widely believed that the “dollar shortage” was severely limiting ex ports of American agricultural products and economic development in many countries. Another section provided for donations of surplus agricultural commodities to “friendly” countries or to “friendly” people to avert threats of famine, associated with such disasters as droughts, earth quakes and floods, and for other humanitarian purposes such as the feeding of undernourished chil dren and war refugees. Donations Planned uses of foreign currency of surplus foods to private Ameri proceeds under sales agreements can charity groups and interna signed through June 30, 1961 tional relief agencies for distribu Amount Per cent tion to needy persons overseas M illion dollars were authorized. Also included was the authority for barter trans Loans to foreign governments 2,940 44 actions, under which surplus com G rants fo r economic development 1,127 17 modities could be exchanged for Loans to private enterprise 399 6 strategic raw materials and other Common defense 399 6 goods and equipment. United States uses* 1,753 27 At the outset, the program was limited to three years and had a Total 6,618 Too total budget of 2.3 billion dollars —2 billion for reimbursing the ‘ Includes expenses of U. S. Government agencies overseas; sponsorship of educational and cultural activities such as stu CCC for the cost of commodities dent exchanges; promotion of trade fa irs; etc. sold for foreign currencies and 300 million for donations to avert famine. No special budgets were Business Conditions, January 1962 required for the barter program or donations to relief organizations, since the CCC was al ready authorized to engage in these activities. Since mid-1954, Public Law 480 has been repeatedly extended and expanded in scope. In 1959, the act was amended to provide for long-term supply contracts (up to ten years) with foreign countries and dollar loans (up to 20 years) at low interest rates to finance purchases of United States surplus farm com modities under these contracts. In 1961 Con gress extended the life of the program through December 1964 and authorized an additional 4.5 billion dollars for foreign currency sales to “friendly” countries and 900 million for famine and relief donations. This brought the program’s total authorization for these two activities to 18 billion dollars since its incep tion in July 1954. Moreover, the Administration has an nounced it would place more emphasis on expanding exports of high-protein foods. These typically are among the higher price foods and, therefore, are often lacking in the diets of great numbers of people in the lowincome nations. In keeping with this objective, the Secretary of Agriculture has increased price supports on dry milk, soybeans, peanuts and cottonseed, relative to those for wheat and corn, to encourage greater production of these commodities. Consideration also is be ing given to promoting greater utilization of wheat and feed grains exports for production of livestock abroad. Fore ign currency sa le s d o m in a te By June 30, 1961, marking the end of seven years of P. L. 480 operations, soft cur rency sales agreements had been signed with 39 countries. Commodities included in these agreements represented a total estimated CCC cost of 9.5 billion dollars (6.5 billion in ex port market value), or roughly 70 per cent W h e a t and wheat flour dominate P. L. 480 foreign currency sales agreements fisc a l 1 9 5 5 -6 1 b illio n d o lla rs * Includes 700 million dollars of ocean transportation financed by C C C . Note: Amounts represent estimated C C C cost. of the cost of all programs drawn up under the act.1 The accompanying chart highlights the prime importance of wheat and wheat flour in this phase of the program. From the outset, the P. L. 480 foreign cur rency agreements were planned to “safeguard usual marketings of the United States” and not to “unduly disrupt world prices.” In September 1958, following vigorous protests from other agricultural exporting na tions about the “dumping” aspects of these exports, Congress amended the act to provide that future sales should not “unduly disrupt normal patterns of trade with friendly counJCCC cost for the commodities made available for export includes the corporation’s original price support payment (which is usually substantially higher than the estimated export market value) plus storage, interest, processing and shipping charges. 11 Federal Reserve Bank of Chicago tries.” The result was a temporary slowdown in this part of the program, but in fiscal years 1960 and 1961 exports rose 14 and 13 per cent, respectively, reflecting primarily heavy deliveries of wheat to India. In fiscal 1961 exports under soft currency sales agreements amounted to a record 935 million dollars, bringing the total for the seven-year period to 4.6 billion measured in terms of estimated export market value. About 56 per cent of the shipments have gone to five countries — India, Spain, Yugo slavia, Pakistan and Poland. India, which has received 23 per cent of the exports, will doubtless continue to be a major beneficiary of this phase of the program. A 1.3 billion dollar agreement with India was signed in May 1960, providing for the de livery of 16 million tons of wheat and 1 mil lion tons of rice over a period of four years. One-fourth of the wheat and all of the rice is to be used to build a national food reserve which, presumably, can be drawn upon to cover estimated food deficits in years of poor crops. An elaborate array of programs has been developed in cooperation with foreign gov ernments to utilize the local currencies re ceived under P. L. 480 sales agreements. The contracts specify the proportion of total pro ceeds to be used for grants and loans to the B u sin e ss C o n d itio n s is p u b li s h e d m o n th ly b y th e fed er a l reserve b a n k of Ch ic a g o . Sub s c r ip tio n s a r e a v a ila b le to th e p u b li c w it h o u t c h a rg e . F o r in f o r m a tio n c o n c e r n in g b u lk m a il in g s to b a n k s , b u s in e s s o r g a n iz a tio n s a n d e d u c a tio n a l in s titu tio n s , w r ite : R e s e a r c h D e p a r t m e n t, F e d e r a l R e s e r v e B a n k o f C h ic a g o , B ox 8 3 4 , C h ic a g o 9 0 , Illin o is . A r tic le s m a y b e re12 p r i n te d p r o v i d e d s o u r c e is c r e d i te d . purchasing government and for loans to pri vate business firms. The remainder may be used for payment of expenses of U. S. Gov ernment agencies incurred abroad, educa tional activities, trade fairs and exhibits to promote American exports, and common de fense. As of March 1961, the equivalent of about 4.6 billion dollars in local currencies had been acquired under the program and about 2.1 billion had been disbursed. Roughly half the disbursements represented development loans to foreign governments, primarily for irriga tion and water power development programs, rural electrification and industrial projects. Interest and amortization payments on these loans are expected to provide a sizable inflow of local currencies which may be loaned again.2 O th er p h a se s o f P. L. 480 Through June 30, 1961, the equivalent of about 3 billion dollars of surplus farm prod ucts had been shipped abroad under the do nation and barter phases of the program. During fiscal 1955-60, exports represent ing donations for famine relief and other emergency purposes averaged less than 100 million dollars per year. This may reflect the small amount of food which can be easily used to alleviate emergency food shortages. In fis cal 1961 these exports rose to 146 million dollars, primarily reflecting shipments under programs to combat famine in parts of Africa and the Near East as a result of severe drought in those areas. The food shortages in Africa 2Loan agreements were originally denominated in dollars, which meant that the exchange risk was assumed by the borrowing country; but in April 1959 this provision was removed. For loans made after that date, the United States “will receive re payment of the same amount of foreign currency as it lent without regard to changes, if any, which may occur in the exchange value of the currencies.” Business Conditions, January 1962 were further intensified O ve r half the shipments by fighting in the Con under P. L. 480 foreign currency go and Angola. agreements have gone to 5 countries Grants of surplus agricultural commodi fisc a l 1 9 5 5 -6 1 m illio n dollars ties were authorized for the first time in fiscal 1961 to promote eco nomic development in 3T* low-income countries. Under this program, «*» the United States has agreed to ship wheat to Morocco and Tunisia, most of which will be sh ip m e n ts per cent used either directly or fiv e c o u n try to ta l 2 ,5 4 5 56 o th e r c o u n trie s 2 ,0 1 8 44 indirectly through ex t o ta l 4 ,5 6 3 100 change for locally pro Shipm ents represent estim ated export market values. duced foods, to distrib ute as wages to people employed on road construction, sewer, water, ports has dropped off to an annual rate of less than 150 million dollars. irrigation and other development projects in those countries. Another portion of the grain The original barter program contained is to be sold locally and the proceeds used to some unique features. It did not involve the direct exchange of products between two buy domestically produced tools such as countries; instead, a private contractor—usu wheelbarrows, picks and shovels and other ally a metals importer—obtained Government materials needed to complete the projects. approval of a barter contract, e.g., copper for Donations of surplus foods to charity corn. The contractor then turned the surplus groups and international relief agencies for distribution to needy persons have been rather agricultural commodity over to a private ex steady, averaging just under 150 million dol porter and proceeded to buy the raw materials lars per year. for delivery to the Commodity Credit Corpo ration. The farm products could be sold for Exports under barter agreements, involv dollars as regular commercial exports in what ing the exchange of surplus foods and fibers ever markets the best prices could be ob for “strategic” raw materials and other goods tained. The bulk of the materials delivered and equipment, rose from about 200 million under barter agreements were transferred to per year during fiscal 1955 and 1956 to a a “supplemental” stockpile established by peak of 400 million in fiscal 1957. Then, in P. L. 480, with the CCC receiving reimburse response to criticism from private exporters ment under various appropriation acts. and foreign governments, restrictions were These initial barter agreements, moreover, placed on barter transactions to assure that contained no restrictions as to countries of they would not replace “normal” commercial origin or destination, other than that they had exports. As a result, the volume of barter ex 13 Federal Reserve Bank of Chicago to be “friendly.” This facilitated the shipment of larger quantities of wheat and corn under these agreements to Western European coun tries during fiscal 1955 and 1956 in direct competition with ordinary commercial ex ports from this country, Canada and other exporting nations. Under revisions introduced in May 1957 subsequent barter agreements were approved only after it had been deter mined that the transaction would “result in a net addition to United States exports” and would not “disrupt world market prices un duly,” A task force appointed last May is cur rently studying all aspects of the barter pro gram with a view toward making recommen dations for improving and expanding it. On August 21, 1961, the first contract pro viding for long-term credit sales of surplus agricultural commodities to “friendly” coun tries was signed. It called for the delivery of about 2 million dollars of wheat and flour to El Salvador, financed by a five-year dollar loan, bearing an annual interest charge of 3% per cent. "S h o t g u n w e d d in g ? " 14 The United States has a large inventory of farm commodities, accumulated under vari ous agricultural support programs, and wants to foster world peace in every honorable way. “Food for Peace,” therefore, is an apt char acterization of a desirable goal. But, getting one with the other is no simple matter as seven years of P. L. 480 operations have clearly demonstrated. As noted above, leading agricultural ex port nations—Canada, Australia, Argentina —have on occasion protested against the “dumping” aspects of the P. L. 480 programs, claiming that their traditional export markets were being usurped. The programs may also have disrupted trade in other ways which are not readily apparent. For example, have the large shipments of wheat and wheat flour to India and Pakistan enabled these countries to increase production and exports of rice, thereby intensifying competition for other rice exporting nations? Spain has received rather substantial deliveries of fats and oils under foreign currency sales agreements. To what extent has this enabled Spain to expand her own exports of olive oil at the expense of exporters in Italy and Greece? Successful use of P. L. 480 and similar programs in the recipient countries, at times, has been hampered by the inadequacy of local port, storage, processing and transportation facilities. Department of Agriculture nutrition experts estimate there are enormous protein deficiencies in the daily diets of many people in Central and West Africa, but acknowledge that in many countries a complete system of internal distribution “would have to be de vised” in order to move the food to interior villages. In addition, most foods purchased by for eign governments in exchange for their soft currencies are distributed locally through or dinary commercial channels. This does not always assure that the food will reach those in greatest “need.” Exports under P. L. 480 donation and barter programs Total exports fiscal 1955-61 (million dollars) Donations Emergency Through re lie f agencies Barter Tota l 621 1,037 1,341 2,999 Per cent of total P. L. 480 exports 40 Business Conditions, January 1962 Our surplus disposal "S p e c ia l" Government programs have boosted program s m ust be U. S. agricultural exports in recent years weighed carefully from the standpoint of their possible impact on the agricultural economies of the recipient nations. If local food prices de cline as a result of large, sustained ship ments of American foodstuffs, there is a risk that local agricul tural initiative may be stifled. This would not only enhance ru ral poverty and reduce lo cal production of food; it would also make the recipient country ex fiscal year ending june 30 tremely vulnerable if Includes exports under P. L. 480 programs and Mutual Security Act. the shipments stopped, owing to, say, an ex haustion of American people of low-income countries. In many of surpluses, disruption of shipping or a change these nations, local tastes and preferences do in foreign aid policies. not readily permit acceptance of wheat and Additional problems are posed by the ac com in daily diets. Yet, these two commodi cumulation of large amounts of foreign cur ties have comprised the lion’s share of Public rencies under P. L. 480, in some cases, about Law 480 shipments. Some studies have shown equal to the annual government budgets of that unbalanced diets and deficiencies in im the participating countries. If these funds are portant nutrients do not necessarily represent not used judiciously, they could generate se shortages of foodstuffs but are often symp vere inflationary pressures in the recipient toms of lack of knowledge concerning proper countries. Furthermore, the value of these dietary practices or deep-rooted customs counterpart funds to the foreign country is (worship of cattle in India, for example) and reduced if they are used for purposes which prejudices concerning certain kinds of foods. would normally generate dollar earnings, e.g., U. S. Government overseas military expendi Efforts are now being made to channel American agriculture into the production of tures. A further question is whether the types of foods believed to be more acceptable for for eign consumption as well as helpful in cor food that currently dominate the Government recting dietary deficiencies. While this will fa stockpile can be used effectively in helping to cilitate the Government’s surplus disposal efcombat hunger and improve diets among the 15 Federal Reserve Bank of Chicago forts, it can be a costly process. Price support relationships will have to be adjusted so as to provide an incentive to farmers to shift their production patterns in the desired direction. Indeed, higher supports on oil and protein crops in 1961 have materially boosted the cost of the domestic agricultural program. If further processing of commodities is required, additional expenses will be incurred since the greater the conversion, e.g., grain into live stock, the greater the expense. While it is generally agreed that the agri cultural surplus disposal programs of the United States have helped foreign countries to ride out such short-run problems as threats of famine associated with drought, floods, earthquakes and other disasters, the amounts of commodities which can be moved abroad for this purpose appear to be limited. The effectiveness of these programs in combating chronic malnutrition and in improving diets in low-income countries is less clear even though it provides a much broader opening for disposal of American surpluses. As noted above, malnutrition often results from lack of knowledge concerning the requirements for good diets. In such circumstances, raising educational levels, instituting health and sani tation programs and improving technology in agriculture and other industries may often be a more practical approach to the problem of improving human nutrition. These programs, however, require financial and technical assistance in addition to ship ments of surplus foodstuffs. In this connec tion, several experts have expressed the opin ion that too much emphasis may have been placed on the surplus disposal aspects of P. L. 480 operations and not enough on drafting constructive long-range development plans for utilizing the soft currencies received under the sales agreements. If development programs undertaken with these loan funds facilitate rapid economic growth in the recipient countries and bring substantial increases in their national incomes, then the aid has been of great benefit. With rapid progress, the countries involved could at some future date make the transition from continuing to receive further aid to repaying the loans without great shock. On the other hand, if the agricultural commodities exported to these countries have merely resulted in an upgrading of their diets instead of helping to further capital investment and increase pro ductivity, then there is real question whether these programs can facilitate vigorous eco nomic development. A great risk is that the “Food for Peace” program’s present emphasis on improving diets in low-income countries may be viewed as a convenient substitute for, instead of a complement to, needed economic develop ment aid and planning in these countries and agricultural adjustment in the United States. A n n ual Report The Annual Report of the Federal Re serve Bank of Chicago will be mailed to the member banks early in January. It includes a brief review of the major developments in business, agriculture and banking as they affected the Seventh Federal Reserve District during the past year, statement of condition as of De cember 31, 1961, and of earnings and expenses for the year. Copies may be obtained on request to the Bank.
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