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A review by the Federal Reserve B an k of Chicago Business Conditions 1963 July Contents Trends in banking and finance 2 G reat Lakes ports broaden Midwest links to w orld 5 The patterns of personal income 10 Defense of the dollar— a Midwest view, a speech by Charles J. Scanlon 15 Federal Reserve Ba nk o f Chicago in banking and finance ^ 3 a n k loans grew much more rapidly in the past year than in the preceding twelve months of the current business upswing. At member banks in the Seventh Federal Reserve District total loans have risen 25 per cent since the low point of the recent recession in February 1961, with almost two-thirds of the gain occurring in the past twelve months. The ac celerated growth in the later period was especially marked in the major cities. Detailed data available from the spring condition reports indicate that this pattern was general for all of the major loan categor ies. Real estate loans produced the biggest dollar gains over the period as a whole, ac counting for about 30 per cent of total loan growth in the two years ending last spring. At the same time, a substantial amount of funds was channeled into very liquid types of loans —to security dealers and brokers and to other banks and nonbank financial institutions. The largest gains in real estate loans in the 1962-63 period were in Chicago and Detroit and consisted mainly of Government-under written residential mortgages. Although Chi cago banks reported the largest percentage BUSINESS CONDITIONS increase in mortgages, their total holdings of real estate loans were still slightly less than 10 per cent of their total loans. In Detroit, last year’s acquisitions boosted mortgage loans from 30 per cent to almost 33 per cent of total loans. While mortgages have always been con sidered an appropriate outlet for time money, the recent move into mortgages by city banks reflects the absence of strong demand for business credit as well as the large growth in time deposits during the past two years. B o o st fro m a u to p a p e r Consumers stepped up their bank borrow ing sharply in the 1962-63 period, with the brisk pace of automobile purchases providing a major stimulus. As total automobile instal ment paper outstanding in the United States rose 13 per cent, such paper in the portfolios of District banks increased about 20 per cent. Strong gains were reported at banks in four of the five major cities and at other banks in all five of the District states. Loan trends are typically more stable from year to year in smaller communities than in is published monthly by the Federal Reserve Bank o f Chicago. D orothy M . Nichols was primarily responsible fo r the article "Tre n d s in Banking and Finance," W . Ernst Kuhn fo r "G re a t Lakes Ports Broaden M idw est Links to W o r ld " and G eorge W . C loos fo r “The Patterns o f Personal Income." Subscriptions to Business Conditions are available to the public w ithout charge. Fo r inform ation concerning bulk mailings, address inquiries to the Federal Reserve Bank o f Chicago, Chicago 90, Illinois. 2 Articles may be reprinted provided source is credited. B u sin e ss C o n d itio n s, J u ly 1963 market “firmed” on a broad front. Virtually all short-term interest rates— on Treasury bills, com mem ber banks other mercial paper, acceptances and in 5 c i t ie s m e m b e r banks dealer loans—rose to the highest p er cent change (sp rin g call dates) -10 0 +10 +20 0 +10 +20 levels in three years. The supply type of loan of Federal funds—reserves which are loaned by some member com m ercial and in d u s tria l banks to other banks on an over night basis—“dried up” at times and rates stuck close to the dis fa rm count rate of 3 per cent. Banks generally will not pay other banks more for reserves than the rate at re a l e s ta te which they can borrow from the Federal Reserve Banks. Excess reserves—the amount by which the total reserves held by all member banks exceed re lo a n s on s e c u ritie s and quired reserves — declined, and to fin a n c ia l in s titu tio n s the amount of reserves borrowed from the Federal Reserve Banks rose. As a result, free reserves— to ta l lo a n s excess reserves less borrowed re serves—declined to a three-year *P e r cent change n o t sh o w n due to sm a ll base. low. The relationship of these re serve measures is shown below the large cities. The cyclical variation in large for comparable periods of the past three cities reflects primarily the credit needs of years. large corporations. During the current busi First half of June ness expansion, however, commercial and 1961 1962 1963 industrial loans rose faster in the smaller (million dollars) cities. The relatively slow demand for busi Total reserves . . . . 18,184* 18,976* 19,424 ness credit at banks in the major cities may Less required reserves .......... . .17,584* 18,523* 19,054 reflect both smaller over-all credit needs due Equals excess to the rise in internally generated funds (as 600 reserves .......... . . 453 374 measured by retained earnings plus deprecia Less borrowed tion) and the fact that large businesses have 66 reserves .......... 51 232 access to other sources of credit, such as the Equals free commercial paper and securities markets. Loan gro w th accelerated in second year of business expansion Firm er m o n e y m a rk e t; ra te s rise In late May and early June, the money reserves .......... . . 534 402 *Adjusted to current requirements. 142 The rise in short-term rates was accompa- 3 Federal Reserve Ba nk o f Chicago the amount of borrowing is greater than ex cess reserves), it should be clear that free reserves are not a measure of the amount of reserves available as a base for credit expan sion. The amount of credit that can be ex tended in any given period depends not on free reserves nor even on the amount of ex cess reserves existing at the start of that period but rather on the reserves available during the period. The latter can rise (or decline) substantially with no effect on ex cess reserves if required reserves have changed by a like amount. The total amount of reserves in the bank ing system sets limits to the amount of de posits and, therefore, the amount of loans and investments that banks can accommodate. A rise in free reserves merely indicates that banks are not using the available supply of reserves as fully as in Auto loans up sharply the previous period. A fall in free in most District areas reserves, on the other hand, indi cates simply that unborrowed re serves were less than those needed auto commercial real to support deposits. instalm ent and in d u stria l estate per cent change Mar 1962-Mar. 1963 member banks in The important point is that 0 10 20 0 10 20 30 major cities ----20 30 0 10 bank credit can rise rapidly in a Chicago period when free reserves decline D e tro it and even when free reserves are M ilw aukee a negative quantity. Conversely, □ total bank credit can decline as Ind ia na p olis free reserves rise. This often hap no change Des M oines pens when business activity levels off or declines with the accom other member percent change Mar I962-M a r.l963 panying easing of credit demands banks 10 20 30 0 10 20 0 10 20 30 and with repayment of borrow Illin o is ings from the Federal Reserve M ichigan Banks. What, then, is the significance W isc o n sin of free reserves? In periods of Ind ia na rapidly expanding business activ Iowa ity and strong demands for credit, the Federal Reserve may not pro- nied by higher yields in all sectors of the securities markets despite the continued rapid accumulation of investment funds and moder ate volume of security issues. There is con siderable evidence that much of this acrossthe-board increase in yields was a reflection, not of a basic change in supply-demand rela tionships for funds but of investors’ expecta tions that credit supplies would be curtailed because free reserves had declined. The free reserve statistic has been interpreted by nu merous observers in the press and elsewhere, as a measure of the availability of credit, that is, the ability of the banks to make loans and purchase investments. That this view is erroneous is illustrated by the experience of the past two years. Since free reserves can be negative (when B u sin e ss C o n d itio n s, J u ly Bank credit has continued to rise while free reserves have declined billion dollars 1961 1962 1963 vide the full amount of reserves needed to support the continuation of rapid credit and 1963 deposit expansion. In such circumstances, the relative scarcity of reserves causes some banks to borrow at the discount window, thus reduc ing free reserves. Since such borrowing can be only a temporary source of reserves for indi vidual banks, those that are borrowing feel pressure to expand credit less rapidly or even to reduce the amount of credit they have out standing. This tends to be accompanied by rising interest rates. That a falling level of free reserves does not necessarily indicate a decline in “credit availability” is illustrated by recent experi ence. The accompanying chart shows the movements in free reserves and bank credit over the past two years. Free reserves have declined gradually since early 1962, yet bank credit grew more rapidly after mid-1962 than before. Reflecting the strength of credit de mands, loan growth was actually greatest in those months when free reserves showed the sharpest declines. Great Lakes ports broaden Midwest links to world T h e 1963 Great Lakes shipping season opened on a note of moderate optimism. Both imports and exports had risen substan tially in 1962 as a wide variety of goods flowed through the St. Lawrence Seaway to and from a large number of countries. Sea way revenues, however, continued to lag be hind long-term expectations, and this pattern seems certain to be maintained during 1963 despite expected further gains. Some 877 million dollars worth of exports to Canada and overseas countries left the United States via Great Lakes ports in 1962, an increase of 17 per cent over 1961. Imports through these ports amounted to 540 million dollars, or 19 per cent more than in the pre ceding year. Tonnages were up 15 per cent for exports and 33 per cent for imports. Almost half of the dollar value of Great Lakes exports and two-thirds of the imports move through Seventh Federal Reserve Dis trict ports. Measured by weight, the relative 5 Federal Reserve Ba nk o f Chicago Exports and im ports through Great Lakes ports located in the Seventh Federal Reserve District during the 1962 shipping season* Leading commodities M ajor sources and destinations (million dollars) (million dollars) Corn (41), machinery and parts (27), soybeans (26), Canada (52), Germany (28), United Great Lakes port C h ica go E x p o rts Value—$221 million W eight—4,202 million lbs. railway locomotives and parts (21), machine tools Kingdom (12), hides and skins—raw (10), animal oils and India (17), Italy (12), all other (66). (27), Netherlands (19), fa ts—edible (10), all other (74). Im p o rts Value—$169 million W e ight— 1,999 million lbs. and Canada (39), W est Germany (30), parts (18), distilled spirits, liquors and wines (17), United Kingdom (28), Federation of rolled-finished steel mill products (13), auto trucks Malaya (10), Japan (10), all other (11), all other (76). (52). Machinery and parts (15), machine tools (15), auto Argentina trucks and accessories (10), rolled-finished steel mill (11), India (7), W e st Germany (7), Standard newsprint paper (34), machinery Detroit E x p o rts Value—$81 million W e ig ht—888 million lbs. Im p o rts Value—$100 million W e ig ht—5,029 million lbs. (6), (13), United Australia products (9), auto trucks excluding parts (8), all Italy other (24). (32). Iron ore and concentrates (17), standard newsprint Canada (44), United Kingdom (17), (11), W e st (5), Kingdom all Germany other paper (15), rolled-finished steel mill products (12), Belgium iron-steel semi-finished products (11), all other (45). France (4), Japan (3), all other (16). (5), M ilw a u k e e E x p o rts Value—$52 million W e ight—903 million lbs. Machinery and parts (15), corn (8), dried milk (5), Canada wheat flo u r semolina (4), all other (20). W e st Germany (5), Italy (3), Nether- (8), United Kingdom (5), Im p o rts Value—$33 million W e ight—489 million lbs. Standard newsprint paper (9), barley and rye (4), Canada (15), United rolled-finished steel mill products (3), all other (17). Belgium (2), France (2), Netherlands lands (3), all other (28). Kingdom (3), (2), W e st Germany (2), all other (7). S a g in a w -B a y City, M ic h ig a n E x p o rts Value—$27 million W e ight—458 million lbs. Vegetables and preparations (7), synthetic resins Netherlands (9), Canada (8), United (3), wheat (3), chemical specialties (3), all other Kingdom (6), all other (4). Im p o rts Value—$10 million W e ight—367 million lbs. Pig iron (9), all other (1). Canada (9), all other (1). E x p o rts Value—$1 million W e ight—67 million lbs. Iron and steel scrap (0.4), all other (0.9). Italy (0.4), Canada (0.3), all other Im p o rts Value—$17 million W e ig ht—3,636 million lbs. Iron ore and concentrates (16), all other (1). ( ID . East C h icago , In d ia n a (0.6). Canada (15), all other (2). B u sin e ss C o n d itio n s, J u ly Great Lakes port ________________ Leading commodities________________ M ajor sources and destinations (million dollars) (million dollars) 1963 G re e n B a y, W isco n sin E x p o rts Value—$7 million W e ig h t— 106 million lbs. W heat flo u r other (1). semolina (3), dried milk Im p o r ts Value— $8 million W e ig h t— 171 million lbs. Wood pulp (6), sugar (1), all other (1). (3), all Algeria (1), Morocco (1), India (1), Egypt (1), Italy (1), all other (2). Canada (4), Sweden (1), Finland (1), all other (2). R acin e -K e n o sh a, W isco n sin E x p o rt s Value—$8 million W e ig h t— 104 million lbs. Auto trucks excluding parts (3), wheat flo u r semo United lina Netherlands (1), all other (4). Im p o r ts Value—$4 million W e ig h t—22 million lbs. Auto trucks (3), all other (1). W est Germany (3), all other (1). Wood pulp Canada E x p o rts Value $3 million W e ig h t— 108 million lbs. Iron and steel scrap (1), canned fru its except juices (1), a|| other (1). Netherlands (0.5), all other (1.2). Im p o r ts V a lu e - $ 4 million W e ig h t—53 million lbs. Standard newsprint paper (0.7), auto truck (0.6), wood pu|p (Q.5), a|| other (1 9) Canada Iron ore and concentrates Canada (2), animal oils and fats—edible (1), all Kingdom (2), Belgium (1), other (2). M arin e tte , W isco n sin I m p o r ts Value—$10 million W e ig h t— 172 million lbs. M u sk e g o n , M ic h ig a n Italy (0.9), W e st (1), Germany United Kingdom (0.6), (1), W e st Germany (1), all other (1). P resque Isle, M ic h ig a n E x p o rts Value— $6 million W e ig h t— 1,060 million lbs. P ort H uron, M ic h ig a n E x p o rts Value— $3 million W e ig h t—38 million lbs. Vegetables and preparations (2), all other (1). I m p o r ts Wood pulp (0.5), auto truck (0.3), all other (0.2) France (0.4), United Kingdom (0.4) Algeria (0.3), all other (1.5). Value— $1 million W e ig h t—68 million lbs. Sweden (0.3), W e st Germany (0.3), all other (0.4). South H a ve n , M ic h ig a n Im p o r ts Value— $3 million W e ig h t—7 0 million lbs. Wood pulp Canada (1), Sweden (1), all other ( 1). *A p ril to November. SO U RC E: Based on data prepared by U. S. Bureau of the Census, as compiled by Chicago Association of Commerce and Industry. 7 Federal Reserve Bank o f Chicago 8 importance of District foreign trade via the Great Lakes is considerably less than it is by value, although the difference is not as pro nounced for imports as for exports. In the table on pages 6-7, 1962 exports and imports are listed for the District ports which dispatched or received commodities valued in excess of 1 million dollars. These comprise the great bulk of all foreign trade movements through District ports. For each port the total value and tonnage of shipments are noted as well as the leading commodities. In addition, the main buyers of exports and the principal sources of imports are shown. Three cities—Chicago, Detroit and Mil waukee—accounted for 87 per cent of ex ports and 84 per cent of imports at District ports. The port of Chicago alone handled well over half of exports and nearly half of imports. While Chicago and Milwaukee were net exporters, Detroit had a net import balance. Generally, the more foreign trade cargo handled by a port, the greater the variety in the composition of the trade. For example, Chicago’s largest export commodity, com, contributed less than one-fifth to the total value of its exports, but more than nine-tenths of Port Huron’s exports consisted of one class of goods—vegetables and preparations. On the import side, the varying degree of commodity diversification may be illustrated by Detroit and Green Bay: iron ore and con centrates, the motor car city’s leading import, was less than one-fifth of the total; but wood pulp, the Wisconsin city’s foremost import, accounted for more than three-fourths of the total. Extremes of specialization are illus trated by one-commodity ports: Presque Isle, Michigan, exporting iron ore and con centrates only, and Marinette, Wisconsin, importing wood pulp exclusively. With regard to geographic orientation, exceptional is the port which ships to or re ceives from one country only; much more common is a wide variety of destinations and origins. Canada, the leading customer and supplier of the United States in over-all trade, was also prominent in both outbound and inbound waterborne District shipments. Canada ranked first in the imports received at almost all District ports and in the exports from two of the major ports—Chicago and Milwaukee. The United Kingdom occupied second or third place in shipments from the five largest and to the three largest ports. Several other European countries ranked high on both sides of the trade ledger. “Big th r e e ” p la y m ajor role Chicago has two developed areas 13 miles apart that form its port. Navy Pier and dock ing facilities in the mouth of the Chicago River are adjacent to the downtown business district (Loop) while Calumet harbor, Lake Calumet and the river joining them are in the southeast heavy industry area. Both com plexes are connected to the Illinois Waterway and Mississippi River system. During 1962 a total of 192 ships arrived at Navy Pier from overseas and 370 ships in the Calumet area. While the downtown fa cilities handle general cargo almost exclu sively, facilities at Lake Calumet and along Calumet River accommodate most of the bulk cargo as well as a large portion of the general cargo. Bulk cargo accounts for 95 per cent of Chicago’s total tonnage. More than 100 million dollars in public and private money has been invested in new port facilities in Chicago since the beginning of construction of the St. Lawrence Seaway in 1955. If the necessary additional funds are appropriated, the U. S. Army Corps of Engi neers over a four-year period will deepen the Calumet River and Lake Calumet to 27 feet B u sin e ss C o n d itio n s, J u ly throughout. More than 4 million dollars has been expended in clearing the outer ap proaches to Calumet River. In addition to its 41 regular-service over seas steamship companies, Chicago is pres ently served by 21 trunkline railroads and 20 scheduled airlines. Seven companies offer direct international service. Chicago is also the center of the greatest concentration of truck transportation in the world. At the port of Detroit, a channel-deepen ing project by the Army Corps of Engineers was virtually completed at the end of 1962 but, unfortunately, a dispute over private versus public port development has slowed the addition of new port facilities. Detroit has 42 steamship lines providing regularly sched uled service to ports in 61 countries and is served by 11 railroads and 15 airlines. Milwaukee is the only “big three” port whose export traffic declined in 1962. The drop-off from 1961 is attributed almost en tirely to the contraction of industrial scrap shipments. These fell to about 5 per cent of total export tonnage from 43 per cent in 1961 as such large buyers as Belgium, Italy and France began to meet their requirements from scrap produced in Europe. During 1961 Milwaukee completed a six-year, 14 million dollar port expansion program; it hopes to gain increased shipment of heavy commodities such as ferroalloys and lumber products. The city is served by 33 steamship lines, three railroads and seven airlines. F in an cin g p ro b le m s The United States and Canada together have invested more than 460 million dollars in the seaway—the United States invested 130 million dollars—and additional hun dreds of millions in improved port facilities. The initial debt had been scheduled to be paid off in 50 years, that is, by 2008. To 1963 meet the interest and amortization payments, ships using the seaway are assessed tolls for the use of the St. Lawrence River section. In its four years of operation, the seaway has failed to produce anticipated revenues. At the close of 1962, the St. Lawrence Sea way Development Corporation (SLSDC)— the United States seaway authority—reported a net “deficit”, relative to accumulated inter est obligation, of more than 8 million dollars. The deficit probably will increase further in 1963. A committee to review the seaway toll structure, appointed by the U. S. Secretary of Commerce, is to submit a report to the Secre tary of Commerce by July 1, 1964, dealing with traffic forecasts, a reevaluation of devel oping potential markets and producing areas and other factors which may make overhaul ing the rate structure advisable. A similar Canadian committee is working independently on the key questions pertain ing to the successful operation of the seaway. Many Canadians are arguing for a reduction in toll rates. Canada is much more dependent on the seaway for getting her raw materials into the world markets than is the United States with its many alternative means of transportation. The administration of the SLSDC regards refunding its debt as preferable to higher tolls. As a result, the governments of the two countries sharing the seaway may later be asked to refund their seaway debts at lower interest rates and to extend the maturities of the principal. If the United States and Canada should become deadlocked over the toll ques tion, Canada could quite easily develop her own seaway by building an additional lock in the Great Lakes. The o u tlo o k Undoubtedly, the seaway will continue to 9 Federal Reserve Bank o f Chicago be beset by important problems. It has failed to attract as much traffic in high-value goods as had been expected. Bulk shipments of grain also have not met early expectations. However, the great variety of products passing through the seaway and the large number of countries to which Midwest ex ports are moved and from which imports originate indicate that the seaway will play an increasingly important role in linking the Midwest even closer to markets throughout the world. The patterns of personal income T . postwar rise in personal income pro vides striking evidence of the continued ex pansion of the American economy. It has made possible the stable growth in consumer purchases that has played a large role in pre venting downturns in activity from develop ing into full-scale depressions. At the present time personal income is at an annual rate of about 460 billion dollars W h a t is personal income? Personal income, estimated monthly by the Department of Commerce, is the income received currently by individuals, unincor porated businesses and nonprofit institutions (including pension, trust and welfare funds). It consists of wages and salaries; other labor income (mainly employer contributions to pension, health and welfare funds); profits of unincorporated businesses and farms; dividends; interest and rents and transfer payments from government or business for which no service is rendered currently (mainly social insurance benefits, military pensions and relief). Personal income is the total of these components less individual con 10 compared with 189 billion in 1947. Through out the period income grew at a compounded annual rate of almost 6 per cent. Of course, part of the increase reflected higher prices and part rising population. After adjustment for these factors, it appears that per capita personal income rose almost 2 per cent a year during the postwar period. Personal income in the United States dur- tributions to social insurance funds. About 95 per cent of personal income is received in money; the remainder is imputed. The principal imputations consist of the rental value of owner-occupied dwellings net of depreciation, taxes and maintenance; pay ments “in kind,” such as employer-furnished meals, clothing and lodging; food and fuel raised and consumed on farms and “free” services furnished by financial institutions. Neither capital gains nor transfers from one person to another— such as gifts, insurance payouts and private pensions— are included in personal income. The theory is that such payments increase the total resources of in dividuals but not of the whole population. B u sin e ss C o n d itio n s, J u ly ing 1962 is estimated at $5,024 per full-time employee. Since many families contain more than one individual with an income, average income per family was $7,140. On a per capita basis, personal income has set a new record each year since 1954 and averaged $2,357 in 1962. New highs also were reached last year in each of the states of the Seventh Federal Reserve District. During the 16-year period 1947-62, total personal income more than doubled in the District. However, the per centage gain was somewhat less than in the nation. Partly, this is because population growth was slower in most of the District states. In the table on page 13 changes in income and population in this area are compared with the United States for three segments of the postwar period. Each time period selected begins and ends with a year of relatively high business activity. Also, 1947 was the first year of fairly “normal” production after World War II; 1953 marked the high tide of the Korean upswing, and 1957 saw the cul mination of the capital spending boom of the mid-Fifties. 1963 M id w e st share of personal income has declined since 1953 Rocky Mountains In co m e shifts During the postwar period all states and regions of the United States have had sub stantial and more or less continuous increases in personal income. But the relative rates of growth of income have shifted appreciably. In general, the states of the Southeast, Southwest, Rocky Mountains and West Coast have obtained larger shares of total income while the shares of the rest of the nation, in cluding the Midwest, have declined. Two principal, interrelated factors—the rate of population growth and the rate at which pri marily agricultural states have been indus trialized—have been at work leading to ac celerated gains in personal income. The basic pattern of the geographical shift in income outlined above was apparent in most regions for many years prior to the post war period. For example, the Far West, led by California, accounted for about 9 per cent of total personal income in 1929. By 1947 this share had increased to 12 per cent and it rose to more than 14 per cent in 1962. At the other extreme, the mideastem states, includ ing New York and Pennsylvania, accounted for 32 per cent of total personal income in 11 Federal Reserve Ba nk o f Chicago 12 1929, 27 per cent in 1947 and less than 25 per cent in 1962. The share of personal income accounted for by some regions has not followed a steady path. For New England, the proportion of the nation’s income, after declining for many years, has been quite stable since 1957. At about the same time, in the Southwest, where Texas is the largest state, a long rise in the proportion of income was halted, at least temporarily. Increases in total personal income have not always been accompanied by increases in average income per capita. In the fastest growing region, the Far West, per capita in come remains considerably higher than the national average, but the margin is lower now than in the early postwar period. On the other hand, per capita income has risen substan tially in the Southeast relative to that of the nation, although it remains well below the average, as the area has industrialized. At present, Illinois is the only Seventh District state with per capita personal incomes well above the national average. In 1962 it was $2,830 or 20 per cent above the average. This is because the Chicago area, like other large cities, includes a heavy proportion of relatively high-paid executives, professional people and skilled factory workers. In Michigan, incomes were substantially above the national average from the end of World War II to the mid-Fifties. Since then, there has been a relative decline in incomes largely as a result of changes in the automo tive industry in volume of output, degree of automation and location of new facilities. In 1962 per capita income in Michigan was $2,353, 2 per cent above the nation. Iowa, the District state most influenced by agricultural income, has seen sharp fluctua tions in its share of total personal income. Peaks were reached in the high farm income years of 1948 and 1954 but per capita in come was 7 per cent below the national aver age in 1962. In Indiana and Wisconsin the share of total personal income has been fairly stable in recent years at a level slightly below the nation. The regions shown in the accompanying charts were selected by the Department of Commerce for analytical purposes. Illinois, Indiana, Michigan and Wisconsin are in cluded in the “Great Lakes” region along with Ohio. Iowa is included in the “Plains” Per capita income in the Great Lakes area remains above national average 30 20 per cent U .S. -1 0 average per cent +10 20 — I---------- '---------- 1---------- -----------1---------- ----------- 1---------- '----------1— New England Mideast Great Lakes Plains c= Southeast Southwest U .S . average Rocky Mountains Far West = 1947— 1953— 1957— 1962— $ 1,316 1,788 2,048 2,357 B u sin e ss C o nd itio ns, J u ly ries and employers’ contributions to pri vate pension funds and similar fringe pay 1957-62 1947-62 1953-57 1947-53 ments. By 1947 this (per cent change) Personal income proportion was about + 132 + 26 United States. . + 50 + 23 65 per cent and in re + no + 20 + 44 + 22 Illin o is................. cent years about 70 + 125 + 20 Indiana............... + 15 per cent. + 105 + 20 Iow a................... + 38 Within the wage and salary component + 117 M ichiga n.......... + 17 + 13 of personal income, + 122 + 24 + 49 + 20 W isc o n sin ......... the most significant Population change has been in the + 29 United S ta te s .. + 9 government category, + 8 + 11 including civilians and + 22 Illin o is................. + 7 + 6 + 7 the armed forces. The + 25 Indiana............... + 4 proportion of govern Iow a................... + 4 + 11 + 5 + 1 ment wages and sala + 32 M ichigan.......... + 6 ries to all wages and + 26 W isc o n sin ......... + 8 + 8 salaries rose from less than 6 per cent in Per capita personal income 1929 to 13 per cent in + 15 + 15 + 36 United States. . + 79 1947 and increased + 34 + 13 + 73 Illin o is................. + 14 further to 19 per cent + 81 Indiana............... + 6 in 1962. Income from pay + 85 + 31 Iow a................... ments such as social + 65 M ichigan.......... + 7 + 5 security, welfare and W isc o n sin ......... + 76 + 10 unemployment com pensation — transfer paym ents— was less than 2 per cent of the total in 1929 but rose region where farm income is relatively larger to 6 per cent in 1947 and 8 per cent in 1962. than in the states east of the Mississippi. The relative rise in wages and salaries and So u rce s o f p e rs o n a l incom e transfer payments has been accompanied by a decline in the share of income accounted The postwar period has brought changes for by the net earnings of farms and unin in the proportion of personal income derived corporated, businesses and property income from various sources. For the most part these from rents, dividends and interest. But trends shifts represent a continuance of trends in in these segments have not been steady. The evidence since the late Twenties. proportion accounted for by property income In 1929 only 60 per cent of all personal dropped from 22 per cent in 1929 to 11 per income was accounted for by wages and sala 1963 M id w e st states gain less ra|pidly than the nation since the war 13 Federal Reserve Ba nk o f Chicago 14 cent in 1947 but by 1962 recov Factory e arn in gs largest source ered to 13 per cent. of personal income in all District Proprietors’ income for both states except Iowa farmers and other unincorporated proportion of personal income in 1 9 6 2 per cent businesses was a somewhat higher proportion of total personal in come in 1947 than in 1929. In fact, farm proprietors’ net income was at a peak both absolutely and relatively in 1948 when it was 8 per cent of the total. By 1962 this proportion had declined to 3 per cent. Other proprietors’ share dropped from 11 per cent to 8 per cent during the same period. When the decline in proprie tors’ income and property income is considered, it should be re membered that capital gains are not included in these estimates. Many owners of farms, small busi nesses, stocks and real estate have benefited from substantial in wages and salaries compared with about onecreases in wealth resulting from the rise in the fifth for the nation as a whole. prices of these assets. Whether or not gains have been realized in cash, they are not 1963 and beyond counted as personal income. Developments thus far in 1963 suggest that Sources of income in Iowa differ most personal income will be about 5 per cent among the District states from the national higher than last year. After adjustments for pattern. Only a little over half of Iowa per population growth and higher prices, the rise sonal income comes from wages and salaries. in per capita “real” income probably will be Income from farms and unincorporated busi about 2 per cent or slightly above the national nesses is more than twice as large relatively average for the postwar period. In the Mid in Iowa as in the nation. west the current trend in income is about in Within the wages and salaries component line with the national picture. of personal income, District states have a What of the future? Available evidence somewhat smaller proportion accounted for points to a continuance of the steady up by government wages and salaries than the rest of the nation. Manufacturing wages and trend in personal income in the years ahead. In fact, many analysts foresee an improve salaries are relatively more important in all ment in the economic growth rate during the District states except Iowa than in the nation. next five or ten years. Increases in activity In Indiana and Michigan one-third of all are not likely to be hampered by material or personal income is obtained from factory B u sin e ss C o n d itio n s, J u ly manpower bottlenecks, and vast opportuni ties exist in the exploitation of recent scien tific and technological advances in the pro duction of goods and services. There seems to be no reason to expect appreciable changes in the proportion of in come received from various sources in 1963 or subsequent years. If the pattern of income distribution since World War II has contrib uted to stability and growth, it can be expected to continue to do so in the future. 1963 The Seventh District now accounts for a somewhat smaller proportion of total per sonal income than in earlier postwar years when backlogs of demand for durable goods were being filled. But such trends are not irreversible. The advantages of location and availability of materials and skilled man power that enabled the Midwest to grow more rapidly than the nation in some periods of the past continue to be vital factors in any evaluation of prospects for the region. Defense of the dollar — a Midwest view A s p e e c h b y C h a rle s J. S ca n lo n , P re sid e n t, F e d e ra l R e s e r v e B a n k o f C h ic a g o , b e fo r e the a n n u a l m e e tin g o f th e In d ia n a B a n k e rs A s s o c ia tio n , F re n c h L ic k , In d ia n a , Ju n e 1 3 , 1 9 6 3 . X n 1962, for the fifth year in a row, the United States had a sizable deficit in its balance of international payments. So what! Here in the Midwest, and close to the population center of the nation, is it of any real concern that last year Americans spent, invested, loaned and gave away abroad more than other countries spent, invested or loaned in the United States? One’s natural instinct may be to say: “N o, the problem is far removed from us.” But we all know that is unrealistic. In the early postwar years, while the United States was engaged in a massive foreign aid pro gram to help get Europe and Japan back onto their feet economically, it was reasonable that we operate with a deficit in our balance of inter national payments. This helped to rebuild the reserves of European countries and, along with the recovery of their productive potential, ena bled the industrial nations of the free world to move more rapidly toward freer trade and con vertible currencies. But as the United States has continued to run deficits in its balance o f payments with the rest of the world, we have, in a sense, acquired a large “demand” liability. Deficit cau se s g o ld loss The amount of the deficit, as measured in our system of accounting, is the rise in foreign liquid dollar claims plus our net sales of gold to foreign countries. (A small offset occurs in the form of any increase in our holdings of foreign convertible currencies.) Last year, this deficit amounted to 2.2 billion dollars and in the past five years a total o f nearly 16 billion. Of this amount, nearly 7 billion is reflected in the de cline in United States holdings of monetary gold and about 9 billion in a rise in foreign liquid dollar claims. When foreign firms and individuals acquire more dollars than they desire to hold, the excess is converted into other currencies. In this pro cess the dollars gravitate to foreign central 15 Federal Reserve Bank o f Chicago banks and treasuries which can use the dollars to purchase gold from the U. S. Treasury if they desire to do so. As their holdings of dollars rise, foreign central banks tend to convert more of them into gold. Also, at any time the confidence in the future value of the dollar is shaken, the demand for gold rises. In each of the past two years the United States gold stock declined by roughly 1 billion dollars. Our total monetary gold stock is now somewhat less than 16 billion dollars. Of this amount, roughly 12 billion is held as reserve for the deposit and note liabilities of the Federal Reserve Banks. It may be recalled that in October 1960 the dollar was sold heavily and there was a surge of gold buying on the London market at prices far above the United States price of approxi mately $35 an ounce. This brought the problem into clear focus. Greater effort had to be di rected toward resolving the balance of payments deficit. Before discussing the actions that have been taken to help deal with this problem, it will be helpful to review briefly the structure o f the U nited States in tern ation al p aym ents and receipts. This reserve requirement can be suspended by action of the Board of Governors of the Federal Reserve System, or reduced or elim inated by action of the Congress. One or more of these actions presumably would be taken, if needed. But this would not provide any lasting solution for the payments deficit. At best, it would provide additional time to bring our cur rent international transactions into balance. The United States exports substantially more goods than it buys abroad. The net balance in our favor on commercial merchandise trade in 1962 was about 2 billion dollars— with exports of 18.3 billion and imports o f 16.2 billion. In addition, we had 2.3 billion of Governmentfinanced merchandise exports for a total balance on trade of about 4.4 billion dollars. We also had a net balance in our favor in another broad category of transactions which are lumped together under the general heading, services. This includes, for example, shipping, insurance, tourist expenditures, and the like. Included also are two items which merit specific mention. One is the income from private foreign investments— 3.7 billion dollars. The other is the outgo in the form of military expenditures abroad— about 3 billion dollars. Over-all, “services” showed a small net balance in favor of the United States. On trade and services combined, then, the United States had a net balance o f about 4.8 billion dollars. Another important group of transactions in cludes the grants and capital flows. Government grants and loans provided a net capital outflow of about 3 billion dollars. Private capital transactions also resulted in a net outflow o f about 3 billion dollars, of which 1.4 billion was net direct private investment abroad, largely in industrial and commercial facilities. A somewhat smaller amount was for long-term portfolio investment. Included in this The necessity for a shift in posture with respect to our balance of payments began to be recognized in 1959. In 1958, after a small sur plus in 1957— attributable largely to the surge in exports as a result o f the Suez crisis— the United States ran a deficit of 3.5 billion dollars in its international payments. Our gold reserves declined more than 2 billion dollars. In 1959 and 1960 the deficits were somewhat larger than in 1958 but the outflow of gold was smaller. 16 By the latter part of 1959 it was clear that additional steps were required to curb the deficit in our international payments and stem the build-up of foreign liquid dollar claims. The postwar shortage of dollars as a reserve currency had been largely filled, at least for the time being. European currencies were now convert ible and, as confidence in these currencies rose, the dollar weakened in some exchange markets. Occasionally the dollar declined to levels requir ing intervention by foreign central banks in order to hold their currencies within the range prescribed by the International Monetary Fund. Structure o f th e b a la n c e o f p a y m e n ts B u sin e ss C o n d itio n s, J u ly is the purchase by Americans of bond issues floated by foreign firms and governments in the United States capital markets as well as purchase o f stocks and bonds on foreign ex changes and the making of long-term loans abroad. (It may be of interest to note that the inflow of foreign long-term capital for invest ment in this country totaled about 1 billion dollars and the outflow of dollars for remit tances and pensions abroad was on the order of 900 m illion.) Over-all, the grants and capital category accounted for a net outflow of nearly 6 billion dollars. In addition, there was a net outflow of nearly a billion dollars in other transactions, about which very little is known. The over-all deficit, therefore, as noted at the beginning of my remarks, was about 2.2 billion dollars. Furthermore, and this is important, in the absence of some special transactions, including prepayment of debt by France, Sweden and Italy, borrowing of foreign currencies against non-negotiable bonds by the U. S. Treasury, Germany’s allocation of funds for military purchases in the United States, and United States subscriptions to international financial institutions, the deficit in the United States balance of international payments would have been around 3.7 billion dollars, or somewhat greater than in 1961. Although we had a sizable surplus on trade and sizable deficits on grants, capital and un recorded transactions, it is not possible to pin point the specific sources or causes of the bal ance of payments deficit. Both the receipts and the payments include a multitude of transactions and the deficit is the net result of all trans actions, not just one or a few in isolation. B a la n c in g th e account The export surplus on goods and services has not been great enough to cover the net outflow of private capital and Government expenditures on foreign military and economic aid programs. But this does not lead to the conclusion that 1963 reducing our foreign military expenditures by, say, a billion dollars would reduce our deficit by the same amount. Presumably most of the dollars acquired abroad under such programs are used to pay for United States exports. There fore, our surplus on exports would be expected to decline, although probably by less than a billion dollars, hence, leaving some net improve ment in the payments balance. Successive administrations and congresses have reviewed our foreign military and aid ex penditures and concluded that for the present at least these programs are necessary. Individ uals may agree or disagree with these findings. But in the absence of a larger cut-back in U. S. Government spending abroad, it has been con cluded that balance should be achieved, if pos sible, by boosting exports. Another possibility is to restrict the freedom of Americans to invest and travel abroad or the freedom of other countries to borrow from our banks or issue securities for sale in our capital markets. But private investment abroad in creases future earnings of foreign exchange and any move to provide arbitrary restrictions on capital flows would be inconsistent with the role o f the United States dollar as a key reserve currency and with our basic international ob jective of encouraging relatively free trade. Such action by us probably would cause some foreign holders of dollar assets to lose confi dence in the dollar as a freely convertible re serve currency with resulting increase in the outflow o f gold. Likewise, it probably would cause some Americans to place more funds abroad, anticipating that such restrictions on transfers of capital might be tightened in the future. Our Government’s policy, therefore, includes the promotion of exports by United States business, efforts to get restrictions against im ports of American goods removed abroad, and encouragement of further development and freeing-up of capital markets outside the United States. These moves are consistent with our basic international economic policy. But since 17 Federal Reserve Ba nk o f Chicago they require time to become effective, even if implemented successfully, a number of interim measures have been taken to help safeguard the dollar internationally while these basic shifts are accomplished. Beginning in 1959 foreign aid provided through the Development Loan Fund was “tied”, that is, the dollars had to be spent on goods purchased in the United States. In the summer of the same year the Secretary of the Treasury and Undersecretary of State (for Economic Affairs) visited Europe and urged such countries as Germany, France and Italy to assume part of the cost of extending aid to underdeveloped areas and to step-up their pro curement of military hardware from the United States. United States officials have also urged countries that restrict access to their capital markets by foreign borrowers, especially those countries that have acquired large reserves of foreign exchange, to remove such restrictions. Negotiations to reduce restrictions against im ports of American goods are being continued. Meanwhile, domestic policies have been shaped to help moderate the pressures on the dollar. The Federal Reserve System has adapted its monetary policies in response to the pay ments deficit. While providing ample reserves to commercial banks to encourage and support expansion in domestic business activity, short term interest rates have been supported so as to minimize large flows of funds abroad in search of higher interest rates. Undoubtedly, some of the liquidity provided to encourage domestic economic expansion has spilled abroad and worsened our payments sit uation. Also, an even easier monetary policy might have provided some additional stimulus to domestic business, although possibly at the cost of unsound speculative activity in securi ties and real estate markets. The problem has been to achieve proper balance. 18 That credit has been, and is, readily available is seen in the near-record rise— 19 billion dol lars— in the total bank credit last year and the slow downward drift of interest rates on mort gages and some other long-term credits. Short-term interest rates, as indicated by yields on 90-day Treasury bills, have been held within the relatively narrow range of about 2.6 to 3 per cent (slightly higher in recent w eeks). This was accomplished by a large amount of Treasury borrowing in the short end of the market, Federal Reserve open market purchases of securities of intermediate and long maturities, reduction of reserve requirements applicable to member bank deposits, raising the maximum permissible interest rates on time deposits and suspension for three years o f the interest rate ceiling on time deposits of foreign official insti tutions. These actions helped to limit short-term flows of funds abroad. But with large foreign holdings of liquid dollar claims, it is possible for the dollar to come under severe pressure at any time and for large and erratic demands for gold to develop. Sta b iliz in g th e e x c h a n g e m a rk e t The U. S. Treasury had begun limited opera tions in foreign exchange in March 1961, fol lowing the flight from sterling after revaluation of the German Mark and Dutch Guilder. In February 1962 the Open Market Com mittee of the Federal Reserve System authorized transactions in foreign currencies, utilizing re sources of the Federal Reserve System. These operations are undertaken to prevent disorderly movements in the rates at which the dollar is traded for other currencies and to cushion spec ulative flows of volatile capital which might cause gold losses that would tend to undermine confidence in the dollar. The foreign currencies operations of the Treasury and the Federal Reserve are closely coordinated. All the transactions are conducted by the New York Reserve Bank as agent for the Treasury and the Open Market Committee of the Federal Reserve System. One difficulty in initiating the operations was the absence of any significant inventory of foreign currencies, since the United States, un like most other countries, had held its reserves entirely in gold. Initially, the Federal Reserve B u sin e ss C o n d itio n s, J u ly purchased small amounts of some currencies from the Stabilization Fund of the Treasury and opened, or reactivated, accounts with the foreign central banks responsible for these currencies. Later the System entered into swap arrange ments with foreign central banks and the Bank for International Settlements. Under these ar rangements a central bank agrees to exchange on request its own currency for the currency of another country up to some predetermined amount over a specified period of time. The general outline of such arrangements may be described as follows, although the de tails of individual agreements vary somewhat. 1. A swap constitutes a reciprocal “line of credit” under which a central bank agrees to exchange on request its own currency for the currency of the other party up to a maximum amount over a limited period of time, such as three months or six months. 2. If such a standby swap between the Federal Reserve and the Bank of England, for example, were to be drawn upon by the Federal Reserve, the Federal Reserve would credit the dollar account of the Bank of England with 50 million dollars at a rate of, say, $2.80 to the pound while obtaining in exchange a credit on the books of the Bank of England of about 18 million pounds. Both parties would agree to reverse the transaction on a specified date, say, within three months, at the same rate of ex change, thus providing each with forward cover against the remote risk of a devaluation of either currency. 3. The foreign currency obtained by each party as a result of such cross credits to each other’s accounts would, unless disbursed in ex change operations, be invested in a time deposit or other investment instrument, earning an identical rate of interest of, say, 2 per cent and subject to call on two days’ notice. 4. After consultation with the other, each party would be free to draw upon the foreign currency acquired under the swap to conduct spot transactions or meet forward exchange obligations. 1963 5. Swap arrangements are renewable upon agreement of both parties. By the end of last year swap arrangements had been entered into with the central banks of eight major European countries, with the Bank for International Settlements in Basle, Switzer land, and with the Bank of Canada, for a total of 900 million dollars. Since then, the swap net work has been further enlarged to cover an additional European central bank and a total amount of 1,500 million dollars. At present, actual use of the reciprocal credit lines either by the Federal Reserve or the other countries amounts to only a minor fraction of the total facilities available. The Federal Re serve’s net debtor position was 61 million dollars as of the end of April. It would be erroneous, therefore, to assume that the United States has been building up a staggering debt position vis-a-vis the foreign central banks. But it has established a network o f arrangements which enable the various countries to utilize currencies of other countries on a moment’s notice to support existing official rates of exchange. In the meantime the Treasury has widened the scope of its foreign exchange operations through a series of short- and medium-term borrowings. These began before the end of 1962, but did not assume substantial dimensions until January of this year. During that month over 300 million dollars in special nonmarketable Treasury securities were sold to Germany, Switzerland, Canada and Italy. The securities are redeemable in the currencies of the respec tive countries. Interest rates have been around 3 per cent and maturities between one and two years. By June 1 the Treasury had borrowed some thing over 600 million dollars in this way. These Treasury issues provide foreign countries with an advantageous investment for balance-ofpayments surpluses which might otherwise raise their dollar reserves above traditional or legal limits and hence be sold to the U. S. Treasury for gold. 19 Federal Reserve Bank o f Chicago 20 The funds acquired through these new ar rangements have been used in System and Treasury operations to minimize disturbing fluctuations in both spot and forward exchange markets and to reduce the flow o f dollars into foreign official reserves. By mopping up tempo rary pools of dollars, large short-term drains on the gold stock o f the United States are mini mized— drains which might initiate large specu lative runs on the dollar. Another facet of the current international monetary arrangements is the almost continuous consultation that takes place in the regular meet ings of the Bank for International Settlements and the Organization for Economic Coopera tion and Development. There are contacts at both the technical and official levels. These as sure that each country is aware of possible re percussions of any actions it may take. One result of this type o f international co operation is the development of a “gold pool,” which came into being early in 1961. Managed by the Bank of England, it operates in the London gold market, absorbing or releasing gold when the price tends to fall below or rise above certain levels. The participating central banks share in these transactions on a pro rata basis. In dampening speculation in gold, the “pool” hopefully serves as a shock absorber and helps to stabilize currencies. If wide fluc tuations in gold prices can be prevented, the prestige of convertible currencies is enhanced. Supporting these first lines of defense of the convertible international currencies are the borrowing arrangements provided for member countries of the International Monetary Fund. These arrangements were supplemented last fall by a special agreement between 10 major indus trial countries which made available to the fund up to 6 billion dollars of additional reserves in case of need. The United States share in these standby facilities amounts to 2 billion dollars. If the dollar were to come under serious and sustained pressure, threatening the entire inter national monetary system, the United States could draw on a substantial amount of convertible currency reserves from this source as well. Conclusion It must be emphasized that— valuable though they may be, especially in emergencies— none of the dollar defense arrangements discussed here go to the root of the problem of how to bring our foreign receipts and payments into balance. N o Federal Reserve or Treasury official con cerned with these defensive arrangements has any illusions on this point. These arrangements are no substitute for actions to correct basic imbalances in the international payments o f the various countries. But it is equally recognized that such defenses against speculation and other short-term flows can, and do, provide a margin of time during which appropriate policy solu tions can be developed and carried out in an orderly manner. In the final analysis, we must be sufficiently competitive in world markets so that we earn abroad enough to finance our foreign expendi tures, investments and grants. Our goods and services must compete effectively with those offered by foreign producers— in our domestic market, in the home markets o f producers abroad and in third countries where the prod ucts of United States and foreign firms meet on “neutral” ground. This requires that our fac tories, farms, transportation and financing be highly efficient. Wage and price policies are especially important. Featherbedding, whether by labor, management, farmers, government workers, school teachers or others, must be tossed overboard. Any benefits of higher wages or prices are temporary and illusory if the result is lost markets, reduced profits or rising unem ployment. Our goal must be efficient as well as full use o f resources. Herein lies the long-run answer to the United States balance of inter national payments as well as many other eco nomic problems. Monetary and fiscal policies can facilitate the making of the necessary ad justments but alone they cannot solve the prob lem. This we, as responsible citizens, must bear in mind as we participate in the making of domestic monetary, fiscal, wage and price pol icies, in both the private and public sectors.
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