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A review by the Federal Reserve B an k of Chicago Business Conditions 1962 May Contents Time deposits at Midwest banks 4 Trade barriers coming down? 9 The Trend of Business 2-4 Federal Reserve Bank of Chicago OF J3usiness activity continued to rise in the first quarter of 1962, but at a substantially slower pace than prevailed during most of last year. Gross national product—the total spend ing on goods and services—was at an annual rate of nearly 550 billion dollars in the January-March period, slightly more than 1 per cent greater than in the fourth quarter of 1961 and 10 per cent above the first quarter low. This 10 per cent increase slightly exceeds the gains in the first year of business expansion beginning in 1949, 1954 and 1958. Total spending probably will rise less rap idly in the future than in the past year. Clearly, successive annual gains in spending approach ing 10 per cent would probably reflect sub stantial price inflation. About 11 billion dollars, or one-fifth, of the rise in activity between the first quarter of 1961 and the first quarter of 1962 was attributable to a switch from inventory liqui dation at a 4 billion dollar annual rate to accumulation at a rate of about 7 billion dol lars. In earlier postwar upswings the inven tory factor had accounted for one-third or more of the first year rise in activity. The passing of the steel strike threat largely removes the danger of an excessive build-up of steel inventories which would have been liquidated in the second half of 1962 whether or not a work stoppage occurred. At the end of February total business inventories were 3.3 billion, or 3.6 per cent, higher than a year earlier. Much emphasis has been placed upon higher steel and auto inventories. Neverthe BUSINESS less, only one-third of the rise in inventories during the past year has been in durable goods including the manufacturing, wholesale and retail levels, despite the fact that total inven tories of durable goods are larger than those of soft goods. Sales of virtually all types of goods have risen and inventories have been increased to accommodate this larger volume of business. Over-all sales rose more than inventories, as is typical during the first year of business re coveries, with the result that the ratio of stocks to sales for all business declined to 1.5, about the same as in the spring of 1955 and 1959. Steel output starts to slide Among major steel users, it is believed that the auto, machinery and appliance makers made substantial efforts to increase invento ries as a hedge against a possible steel strike. In November 1961, before the rush of orders developed, steel was being produced at a rate of 106 million tons per year. As production and orders increased, it was commonly antici pated that steel production would rise to a near record rate of about 140 million tons in March, a level well within the industry’s potential. Actually, the peak steel rate was reached in mid-February at 127 million tons. In April, after the strike threat had passed, output was declining toward 120 million tons and was expected to fall appreciably further. According to Iron Age, steel inventories in the hands of consumers and warehouses Business Conditions, May 1962 during March caused a number of producers to step up production by adding overtime, second shifts or Saturday work. As a result, the daily rate of production rose in March for the first time this year. Despite the rise in output, inventories declined somewhat dur Consumer buying strengthens ing the month for the first time since the model Retail sales in the first quarter were at a changeover period last fall. Inventories of domestically produced cars totaled almost 1 record annual rate of over 228 billion dollars. million on April 1, but based on March deliv This was 6.5 per cent above the same period of 1961 and was about the same as the in eries, dealers had only a 43-day supply in crease in personal income. stock, the lowest in five years. In March retail sales were boosted by a rise Total sales of automotive retailers (includ in deliveries of new cars. Including imports, ing new and used cars, parts, accessories and deliveries were at a seasonally adjusted annual other items) were at an annual rate of almost rate of about 6.9 million, the best performance 42 billion dollars in the first quarter. This was since last November when the new models a new high, 19 per cent above the same period were introduced. The excellent level of sales of 1961 and 16 per cent above the first quarter of 1955 when unit sales were at a substantially higher rate. All categories of retailing have Sp rin g sales of domestically produced been doing appreciably better than autos highest since 1955 record last year. For nondurable goods, which had declined very little dur thousands per selling doy ing the recession, sales increases 35 have been more modest than in the case of durables—first quarter sales being only 4 per cent higher than in the same period of last year. March and April sales of vari ous types of merchandise, espe cially items handled by department stores and clothing stores, must be interpreted against the later date of Easter. In 1961 Easter Sunday jo n feb mar apr may june ju ly aug sept oct nov dec was on April 2. This year it came ands a n n u a l a verage d o ily ra te o f s a le s three weeks later, on April 22. In view of this shift, the fact that fig u re s w ithin Seventh District department store k-/ b ars are sales in the four weeks ending annual to ta ls in m illio n s March 31 were 3 per cent higher 1955 1956 1957 1958 1959 I9 6 0 1961 than the comparable period of last reached a level of about 17 million tons in April, only 3.5 million more than last fall. In the first half of 1959, preceding a strike, it is estimated that steel stocks were increased by 12 million tons. Federal Reserve Bank of Chicago year was a remarkably strong showing. For the nation there was a year-to-year decline of 2 per cent in department store sales in the four weeks ending March 31. However, after adjustment for seasonal trends, includ ing the later date of Easter, sales of the na tion’s department stores were at a record level for the month of March, slightly above the previous high set in December and 8 per cent higher than in March 1961. Construction contracts higher Last fall a Government estimate pointed to an increase of about 5 per cent in construction outlays in 1962. Construction contract infor mation so far this year suggests that any revision in that projection will be up rather than down. For the first two months of the year, contracts reported by F. W. Dodge for the nation were 14 per cent above the high level of the same period of 1961 while in the Midwest contracts were up 17 per cent. Public works, particularly highways and sewerage systems, and large “high-rise” apartment buildings have shown the greatest gains in construction contract awards thus far. Contracts for new manufacturing plants also are running well ahead of last year. In contrast, builders’ plans for construction of single-family homes suggests little, if any, gain from last year, despite somewhat lower interest rates and increased availability of mortgage loans. This situation could change as the year moves on, but at present it appears that new home building, exclusive of apart ments, will not exceed the 1961 total. Time deposits rise at Midwest banks 4 ^JLime deposits, after rising rapidly at Mid west banks during 1961, registered especially large increases in the early months of 1962. The gain last year repeats the pattern of ear lier years when economic activity was in the early stage of recovery following mild reces sion. At the end of 1961, total time deposits of member banks in the Seventh Federal Re serve District had reached 11.2 billion dollars, an increase of 12 per cent from the yearearlier figure. In 1954 and 1958, similar years of recovery from recession, time deposits rose 5 and 9 per cent, respectively. The particularly vigorous rise in the early months of 1962 was associated with announcements by many banks of increases in interest rates paid on savings and other types of time deposits. At all member banks in the District, time deposits increased 3 per cent in January and an additional 2 per cent in Feb ruary. Based on evidence from a group of large banks in major metropolitan areas for which information is available weekly, the rise has continued in March and April (see chart). For all member banks in the United States the results were very similar although the gains varied by region. Would the faster growth of time deposits turn out to be a tem porary spurt or was it the beginning of a new era of bank expansion in the investing of savings? Past experience, while not providing a specific answer, may shed some light on Business Conditions, May 1962 of the fourth quarter, over onehalf of the banks were paying 2 per cent, but only about 1 in 20 was paying the existing ceiling rate of 2 Vi per cent. This situation contrasts sharply with the autumn of 1961, when 86 per cent of banks in District metro politan areas were offering the maximum of 3 per cent for savings deposits and nearly all were offer ing 3 per cent on other types of time deposits. Although the demand for bank credit has not been especially strong in the early months of 1962, a substantial number of member banks boosted rates on time de posits in January. Of all member *Date o f revision of regulation permitting higher rates to be paid on time deposits. Based on data fo r member and nonmember banks banks in the District, 39 per cent in D istric t metropolitan areas. raised rates on savings deposits, while two-thirds posted higher rates on other time deposits. Such increases were more common among this intriguing question. the larger than the smaller banks. Nearly 60 Effective January 1, the Federal Reserve per cent of the banks with total deposits of Board and the Federal Deposit Insurance 50 million dollars or more boosted rates, often Corporation permitted commercial banks to to the new maximum of 4 per cent on both raise interest rates on time deposits above savings and other time deposits maintained the previous maximum of 3 per cent, if they for one year or more. In the 10-50 million desired to do so, and state regulations did dollar size class, about one-half of the banks not specify lower limits. The new maximums are 4 per cent on deposits of one year or raised rates and among banks having less than 10 million of total deposits, about onelonger and 3X per cent on deposits of from A third instituted higher rates, but relatively few six months to one year. of these banks boosted them to 4 per cent, The rate ceiling had last been raised on January 1, 1957, from 2 Vi to 3 per cent. except on time certificates. Rate increases on savings deposits were Prior to this, relatively few banks were pay especially widespread in Illinois and Michi ing the maximum permissible rate on time gan. In Iowa and Wisconsin relatively few deposits. At the beginning of 1956, for exam banks raised rates on savings deposits but ple, the most frequent rate offered by banks about two-thirds increased rates on other time in metropolitan areas in the Seventh District deposits to the new maximum of 4 per cent. was 1 per cent. About midyear, however, many banks raised rates and by the beginning In Indiana, where state regulatory author- S a v in g s deposits have grown faster during recessions and following increases in interest rates paid by banks Federal Reserve Bank of Chicago cluding the rate of interest paid by banks. Some impression of the factors affecting growth of time deposits may be gained from data available for savings deposits of both member and nonmember banks in metropoli tan areas of the Seventh District (see chart). In early 1956, savings deposits in these banks The effect of interest rates began to rise rapidly. This was a period of high business activity and strong credit de The volume of personal savings—the ma mand, during which a large proportion of the jor source of time deposits—is affected by banks raised rates paid on savings deposits. many factors, including the level of personal Other thrift institutions also boosted their income and spending and expectations about rates during this period. the future. The share of the personal savings Effective January 1, 1957, the rate ceiling held in the form of time deposits is, in turn, influenced by many additional factors, in on time deposits was raised from 2 Vi to 3 per cent. In subsequent months, some banks posted higher rates Deposit g a in s have been greatest in areas and toward year-end business ac where banks raised rates on savings deposits tivity declined. Both of these de velopments appear to have stimu . demand 2 total2 lated further gains in the growth savings deposits' deposits deposits of savings deposits in the fourth dec.31,1961 as a percent of dec.31,1955 1 0 0 140 180 10 0 140 1 0 0 140 quarter of 1957 and the early months of 1958. rate increased during With business activity rising rap 1956-1958 only-to 3 % on savings deposits ©areas) idly in 1959, the rate of growth of savings deposits declined slightly in the third quarter and then rate increased on savings dipped sharply in the fourth quar deposits during both 19561958 and ©59-1961 (24areas) ter even though a significant pro portion of the banks had begun to offer higher rates in the third quar rate increased on savings ter. The slowdown in the growth deposits during 1 9 5 9 ©61 only (7a re a s) of savings deposits may be trace able largely to the effects of the no change in rate-or rate nationwide steel strike and, to a increase during 1956-1958 lesser extent, the sharp rise in only-to less than 3 % on yields on other debt securities. savings deposits (5 areas) The increase in savings deposit 1Includes both member and nonmember banks. Member banks in growth during the second quarter metropolitan areas hold over 85 per cent of savings deposits at all of 1961 reflects in part the trans D istrict member banks. fer of funds from time certificates in c lu d e s only member banks. Demand deposits are fo r individuals, to savings accounts in Detroit after partnerships and corporations. ities maintained the maximum permissible rate at 3 per cent, relatively few banks in creased rates on time deposits. Some banks which had been paying less than 3 per cent raised rates to that level, but the number was not large. Business Conditions, May 1962 several banks there began to offer 3 per cent on savings as well as on time certificates. A clearer indication of the effect of changes in interest rate on the growth of time deposits is obtained by comparing areas where the “prevailing rates” were different. Between the end of 1955 and the end of 1961, the largest over-all gains in savings deposits were gener ally reported by banks in areas where the prevailing interest rates were increased to the maximum of 3 per cent during 1956-58 (see chart on page 6). Moreover, in areas where Seventh District member bank time deposits Savings deposits account fo r more than four- per cent; 6 months to I year, 3*/2 P er cent; fifth s of Seventh D istric t member bank time and I year or more, 4 per cent. deposits. They consist of funds deposited to Open accounts include tim e deposits the credit of one or more individuals, or of a pledged fo r repayment of personal loans, corporation, association or other organiza time deposits o f a bank's own tru st depart tion operated p rim a rily fo r religious, philan ment, C hristm a s Club funds and sim ila r de thropic, charitable, educational, fra terna l or posits. They are evidenced by a w ritten con other sim ila r purposes and not operated fo r tract subject to term s somewhat sim ila r to p ro fit. Subsequent to January I, 1962, the those fo r certificates of deposit but are un maximum perm issible interest rate (except in like certificates in tha t funds may be added states having more restrictive laws or regu or withdrawn from time to time. Maximum lations) is 4 per cent on deposits held fo r perm issible interest rates are the same as one year o r more and 3 !/2 per cent fo r less fo r certificates o f deposit of comparable than one year. Depositors may be required m aturities. to give not less than 30 days' notice of in tended w ithdrawal. Certificates of deposit are fo r specified The d istrib utio n of Seventh D istric t mem ber bank time deposits as of December 31, 1961 is shown below: amounts o f funds and generally are issued Million dollars Per cent S a v in g s ........................ 9,458 84.3 O ther tim e* . 1,213 10.8 408 3.6 with specified m aturitie s. They are payable at expiration of the specified time, not less than 30 days from date o f deposit, or upon the expiration o f the specified time or upon notice in w riting given not less than 30 days before the date of repayment. Ownership is evidenced by a negotiable or nonnegotiable certificate. C orporations are substan tia l holders of C D 's because m aturities can be tailored to meet th e ir needs. N ego tia b il . . . State and local governments . Foreign governments, central banks, etc. . Domestic banks Foreign banks . . TO TA L . 0.9 0.2 . . 10 0.1 9 . ity enhances th e ir attractiveness as a liquid short-term investment. Maximum permissible 99 20 U. S. Government . 0.1 1 1,217 100.0 rates (except in states having more re stric tive laws or regulations) are: less than 90 days, I per cent; 90 days to 6 months, 2 ^ ‘ Includes certificates of deposit and open accounts held by individuals, partnerships c jnd corporations. Federal Reserve Bank of Chicago interest rates on savings deposits Time deposits have risen faster than demand were increased twice, that is, dur deposits at District member banks since 1955 ing 1956-58 and again in 1959-61, the gains in savings balances ex ceeded those in areas where rates were boosted only during the latter period. Declines in savings bal ances were confined largely to areas where the prevailing interest rate on savings deposits remained unchanged or was below 3 per cent at the end of 1961. Other time deposits, held mostly by corporations and state and local governments, while a small part of total time deposits, have fluc tuated much more than savings deposits. This reflects in part the greater sensitivity of these funds 1954 1955 1956 1957 1958 1959 I9 6 0 1961 1962 to yields obtainable on Treasury bills, commercial paper, bankers’ acceptances and similar invest trast, savings deposits rose 14 per cent. As a ments. During 1956-61, for example, the result, at the end of the year, corporate time amount of corporate time deposits at large deposits comprised about 8 per cent of the Seventh District banks declined when yields total time deposits at these banks compared on Treasury bills rose above the rate on time with less than 1 per cent at the beginning of certificates and fell when bill yields dropped 1961, while the proportion in savings deposits below that rate. In the second half of 1960, declined from 86 to 83 per cent. Treasury bill yields dropped below maximum Since the first of this year, corporate time permissible rates on time certificates of com deposits at large Seventh District banks have parable maturity and remained below these continued to rise. They increased 11 per cent rates throughout 1961. in January, 13 per cent in February and 17 This situation, together with increased com per cent in March. mercial bank promotion of negotiable time certificates of deposit figured importantly in Time d ep o sits a n d b a n k g ro w th a nearly tenfold rise in corporate time de From the end of 1955 to the end of 1961, posits, from about 40 million to 400 million time deposits at member banks in the District dollars, at large banks in Chicago, Detroit, rose 48 per cent, from 7.6 billion to 11.2 bil Milwaukee, Indianapolis and Des Moines lion dollars while demand deposits at these during 1961. (This increase excludes the is banks, exclusive of interbank deposits, in suance and subsequent redemption of a sub creased from 16.4 billion to 17.2 billion dol stantial amount of non-interest bearing time lars, or less than 5 per cent (see chart). The certificates to one large corporation.) In con Business Conditions, May 1962 corresponding increases for all member banks in the United States were 70 per cent for time deposits and 12 per cent for demand deposits, exclusive of interbank deposits. The experience of recent years contrasts sharply with that of the early postwar period when demand deposits grew more rapidly than time deposits. During 1947-51, for ex ample, time deposits accounted for only 24 per cent of the increase in total deposits at Seventh District member banks and 45 per cent during 1952-56. Since 1957, however, time deposits have accounted for nearly 78 per cent of over-all deposit growth. Bank growth in recent years, therefore, has reflect ed to a considerable extent their ability to attract time deposits. In addition to offering higher interest returns and advertising their services, many banks have vigorously pro moted additional types of time accounts. Most notable has been the increased pro motion of time certificates of deposit. The option of negotiability has made this type of time deposit especially attractive to corpora tions and other large investors seeking high quality short-term investments. This is re flected in developments at large District banks for which information is available weekly. Between the last Wednesday in December 1961 and the last Wednesday in March 1962, savings deposits at these banks grew 5 per cent but other types of time deposits, includ ing time certificates, rose 41 per cent. Also, numerous banks have added “fringe benefits” to savings accounts such as crediting interest monthly, instead of quarterly or semiannu ally, as well as for the full month on deposits received shortly after the first of the month. Trade barriers coming down? E a r ly in March the major trading nations of the West concluded one of the most successful rounds of tariff bargaining since the war. Con ducted under the provisions of the General Agreement on Tariffs and Trade (GATT), the talks marked the European Common Market’s initial participation in international tariff negotiations. Prior to the opening of the tariff conference in September 1960, the Common Market nations had offered to reduce by 20 per cent their proposed common external tariff on industrial products provided the other GATT participants would also lower their tariff bar riers. United States Government officials ap plauded the move and offered to negotiate roughly similar cuts in American tariffs. In 1958 Congress had approved a four-year ex tension of the Trade Agreements Act author izing the President during that period to reduce United States duties up to 20 per cent of the rates existing on July 1, 1958. Results e n c o u ra g in g Major interest has focused on the new trade concessions drawn up between the United States, the European Common Market and Britain—the leading industrial areas of the West. In essence, the three agreed to cut tar iffs on many industrial products by as much as a fifth over the next several years. Most of the new concessions, moreover, are expected Federal Reserve Bank of Chicago to be extended to the other GATT nations under the long-standing most favored nation principle which assures equal tariff treatment to imports of similar goods from all countries. The United States agreed to lower its im port duty on automobiles from 8 Vi to 6 Vi per cent in two equal steps. The European Common Market will reduce its proposed ex ternal automobile tariffs from 29 to 22 per cent, while Britain will lower its import duty on cars from 30 to 22 per cent. Significant rate reductions also were made on electrical machinery and equipment, business machines and office equipment, machine tools, textile machinery and materials handling equipment. Chemicals were the only major industrial category where bargaining failed to produce any important concessions. Little progress was made in the agricultural sector, but this had been expected mainly because of the diffi culties and delays encountered by the ComThe Am erican tariff wall has declined markedly since passage of the Trade Agreements Act in 1934 per cent 1929 10 1935 1940 1945 1950 S O U R C E : Department of Commerce. 1955 I9 6 0 mon Market nations in drawing up their com mon agricultural policy. In agreements signed thus far, the United States has obtained new concessions on about 1.1 billion dollars of annual exports in ex change for lowering tariffs on about 0.9 billion dollars of imports. Furthermore, the President announced that in order to avert possible collapse of the negotiations, he had agreed to lower American tariffs below the “peril point” recommendations of the United States Tariff Commission on a list of imports total ing roughly 80 million dollars in 1958.1 The United States tariff on industrial goods (as measured by the ratio of duties collected to the value of dutiable imports) averaged about 12 per cent in 1960, and the next few years should see a decline to nearly 10 per cent as the cuts resulting from the recent GATT meeting become effective. By com parison, in the Twenties and early Thirties, xThe “peril point” amendment to the Trade Agree ments Act is one of several measures designed to avoid serious injury to domestic industries as a result of trade agreements negotiated with other countries. Other measures include the “escape clause” and national security amendments. First adopted in 1948 the “peril point” amend ment requires the President to submit to the Tariff Commission a list of items on which tariff conces sions are being considered. The commission then advises the President as to how far he can go on each item “without causing or threatening serious injury” to the domestic industry. If a concession is granted which goes beyond the “peril point,” the action must be explained to Congress. An “escape clause” was first included in a trade agreement negotiated with Mexico in 1942 and in all agreements thereafter. It permitted the President to modify or withdraw tariff concessions extended to other countries if increased imports threatened “serious injury to domestic industries producing like or directly competitive goods.” In 1951 the Trade Agreements Act was amended to make the “escape clause” a permanent part of the program. The national security amendments of 1954 and 1955 authorized the President to impose import con trols in order to prevent injury to domestic indus tries deemed essential to national defense. Business Conditions, May 1962 effective United States tariff rates on many industrial imports ranged from 50-100 per cent and in some instances as high as 400 per cent. These duties, the highest in our his tory, were prescribed by the Fordney-McCumber and Hawley-Smoot Tariff Acts of 1922 and 1930, respectively. In 1960, the Common Market tariff on manufactured goods averaged about 14 per cent and the British tariff, about 17 per cent. Their future industrial tariffs, reflecting the recent GATT concessions, will average slight ly more than 11 and 13 per cent, respectively. As a result of this working down of tariffs, large sectors of the economies of all three areas have become more exposed to foreign competition. But there are important excep tions. In the United States, for example, the watch industry and woolen textile manufac turers continue to operate behind tariffs aver aging roughly 50 per cent, while sporting goods and many chemicals are protected by tariffs averaging more than 18 per cent. Ex amples of European tariff protection include the relatively high Common Market and Brit ish duties on automobiles—22 per cent—and rates of 15 per cent and more on certain chemicals and pharmaceuticals. In addition, the Common Market nations and Britain em ploy quotas to restrict imports of manufac tured goods to a much greater extent than the United States. These apply mainly to motor vehicles, textiles, aircraft and chemicals. T a riffs d o w n to z e ro? There is a growing feeling on both sides of the Atlantic that tariffs on industrial products traded in large volume between the major manufacturing countries are obsolete and should be removed entirely. One indication of this is the President’s request, embodied in the Trade Expansion bill now undergoing congressional review, for special authority to In I9 6 0 many manufacturing countries had higher tariffs than the United States per cent S O U R C E : Department of Commerce and U. S. T a riff Commission. bargain down to zero tariffs on those groups of products for which the United States and the Common Market account for 80 per cent or more of “free” world exports. In February the Department of Commerce submitted a list of 26 commodity groups that might be included in the final “zero” list. Alphabetically, the list runs from aircraft to tobacco products. Among the more important groups, in terms of estimated 1960 trade, are aircraft, motor vehicles, agricultural machin ery, power-generating equipment, metal working machinery, office equipment, elec trical machinery and industrial machinery. The President’s proposal, often described as the “dominant supplier formula,” is prin cipally aimed at establishing freer trade for those groups of goods produced by capital intensive industries and for which world de mand is expected to continue rising rapidly in 11 Federal Reserve Bank of Chicago 12 the future. M o to r vehicles and machinery There are, however, dominate "zero" list exports in 1960 other large segments of international trade "F re e " world Exports to "fre e " world exports from Common where little if any prog Common M a rket* Common M a rke t* and ress has been made Com m odity group and U. S. u .s. M arket* U .S . toward freer trade. In (per cent) (million dollars 1960, the total export M otor vehicles . . . . value of the 26 com91 1,237 2,671 3,908 Ind ustrial machinery . . modity groups includ81 1,817 1,966 3,783 Electrical machinery . . ed in the “zero” list 80 1,535 2,601 1,066 amounted to 19.2 bilA i r c r a f t .............................. 259 97 1,227 1,486 lion dollars, or only 17 A g ric ultura l machinery 414 934 85 520 per cent of the estimatPower-generating m a c h in e ry ........................ 649 929 82 280 ed value of total “free” O ffice machinery . . . 207 21 1 418 81 world exports (Soviet bloc excluded). 19 other groups . . . . 80 or The list embraces 2,449 5,139 2,690 over only a small part of the To ta l .............................. 19,198 8,803 10,395 industrial products— textiles, sporting goods, * Includes five other possible member countries: Britain, Denmark, Greece, toys and other light Ireland and Norway. S O U R C E : Department of Commerce. manufactures—exported in large volume by the low-wage countries of Asia. And it excludes agricultural food including the United States, have insisted upon retaining strict controls on agricultural stuffs and most industrial raw materials such imports. Each country argues that its agricul as mineral ores and petroleum. For many lowtural problems are unique and too complicat income countries, one or a few items in these ed to permit exposure to the competitive broad product classes represent their most im forces of the world market. But to a consider portant source of foreign exchange earnings. able extent controls are necessary only be K e y p ro b le m a re a s cause domestic agricultural support programs have raised agricultural prices in these coun Trade restrictions on agricultural commod tries substantially above world levels. ities, which account for about 18 per cent of The United States experience is a case in total “free” world exports, are doubtless the point. The web of Government controls over most difficult to reduce or remove. These in agricultural imports has tightened materially clude quotas, health and purity requirements since inception of the reciprocal trade agree and effective tariffs averaging as high as 54 ments program in 1934. This may seem per cent in Japan and 42 per cent in Austria. strange since at the outset agricultural inter In every GATT tariff bargaining session ests, especially in the South, were among the most vigorous supporters of the program. since the war the leading industrial nations, Business Conditions, May 1962 They felt that the rigorous protective tariff acts of 1922 and 1930 had hurt important sectors of American agriculture which de pended heavily on export markets, notably cotton, wheat and tobacco. But as the trade agreements program got under way, the Government’s depression-born domestic agricultural support programs began to raise the prices of many farm commodities above world levels. It was recognized that in creased imports of agricultural products would tend to reduce the effectiveness of the domes tic support programs and increase their cost to the Treasury. To guard against this possi bility, Congress in 1935 added Section 22 to the Agricultural Adjustment Act. This author ized the President to restrain by means of additional tariff duties or quotas the import H igh tariffs still exist on some U. S. imports I9 6 0 effective t a rif f rate* Com m odity ( per cent) Clocks, watches and parts . . 51 Finished woolens and worsteds 49 Jewelry 44 .................................... Synthetic fa brics and wearing apparel . . . . 40 A s b e s t o s .................................... C o a l-ta r products . . . To y s and sporting goods A ll dutiable im ports 32 . . . . . 31 . 31 12 * Ratio of duties collected to value of dutiable imports. S O U R C E : Department of Commerce. of any agricultural commodity whenever it was determined that such imports tended to interfere with any domestic agricultural pro gram operated by the Department of Agri culture. Quotas were applied to imports of cotton and wheat in 1940 and 1941, respectively; but then the disruptions of the war obviated the need to take any additional action under this authority for at least another decade, despite the fact that domestic agricultural sup port prices were raised substantially during the war to encourage increased production and were maintained at relatively high levels in subsequent years. In the early postwar period large exports of foodstuffs to Europe and the Far East, financed to a large extent by Marshall plan and other foreign aid programs, absorbed most of the increased domestic production at prices generally above the Government sup port levels. However, with the recovery of European agriculture by the late 1940’s, world prices declined and in 1950 American agri cultural exports dropped almost 20 per cent from the level of the previous year to 2.9 billion dollars. This placed the domestic agricultural sup port program in a difficult position. Domestic prices of some farm commodities now stood substantially above prevailing world market prices and foreign agricultural exporters were beginning to seek markets in this country. In the circumstances it was necessary to impose import controls on a much broader scale. In 1953 quotas were imposed on butter, cheese and other dairy products; flaxseed and linseed oil; peanuts and peanut oil; and in the follow ing year on rye and rye flour and meal. Meanwhile, the domestic support programs continued to funnel massive stocks of surplus agricultural commodities into the warehouses of the Commodity Credit Corporation. In an 13 Federal Reserve Bank of Chicago 14 effort to reduce these surpluses, the Govern ment has adopted a number of “special” ex port programs—involving barter arrange ments, sales for foreign currencies, sales below cost, credits, grants and other arrangements— collectively referred to as the “Food for Peace” program. Although these “special” export devices have provoked complaints on the part of several other leading agricultural exporting nations, they are indicative of the many kinds of special trading arrangements that have grown up, largely as a result of efforts to aid agriculture in various countries. The European Common Market’s common agricultural policy, the broad outlines of which were approved last January, represents a continuation of this trend. By far the most important feature of the new policy is an ex ternal tariff consisting of a sliding scale of duties that will serve to boost the cost of im ported farm commodities to a level equal to the generally higher prices prevailing in the Common Market. In substance, this is not unlike the author ity to adjust tariffs “to equalize differences in the cost of production in the United States and the principal competing foreign countries” contained in the tariff acts of 1922 and 1930. A possible objective, and certainly a probable result of such a tariff policy, would be to make the Common Market largely self-sufficient in many important agricultural products. A second problem concerns trade between industrial nations and the primary producing countries which export large quantities of in dustrial raw materials and agricultural food stuffs. The industrial countries maintain con trols over large segments of this trade; in many instances, to shield certain domestic industries from lower-cost foreign competi tion and, to a lesser extent, to preserve long standing trade relationships with former colonial possessions. Exports from "free" world countries — 1960 total: 112.3 billion dollars f.o.b. SO URC E: Nations. Department of Commerce and United The United States, for example, has long imposed quotas on imports of sugar to en courage domestic production of cane and beet sugar even though tropical producers could supply our requirements at substantially lower cost. Imports of cotton and peanuts also are restricted by quotas to prevent interference with domestic agricultural support programs. Imports of rice and meat, on the other hand, are limited by rigorous health and purity re quirements. Business Conditions, May 1962 In 1958 the President utilized the “escape clause” amendment to the Trade Agreements Act to impose quotas on imports of unmanu factured lead and zinc in order to prevent injury to domestic producers. The quotas lim ited subsequent lead and zinc imports to 80 per cent of the average annual volume during the five-year period 1953-57. For many years Britain has granted prefer ential treatment to imports from the Com monwealth nations in exchange for similar concessions on British exports. Raw cotton, rice and tea from India, Ceylon and Malaya, for example, enter Britain duty free, as do dairy products from New Zealand and Austra lia. Raw cotton and tea imports from nonCommonwealth members are subject to an effective tariff of 6 per cent; rice, 13 per cent; and dairy products, 10 per cent. France ac cords similar preferential treatment to raw material and tropical food imports from her former African territories. Controls such as these, despite their justi fication on grounds of hardship or long-stand ing commercial and political associations, are serious obstacles to the attainment of freer international trade. Indeed, the search for a satisfactory alternative to the elaborate sys tem of Commonwealth preferences is proving to be one of the major obstacles to Britain’s bid to join the Common Market. Business Conditions is published monthly by the C . Sub scriptions are available to the public without charge. For information concerning bulk mail ings to banks, business organizations and edu cational institutions, write: Research Depart ment, Federal Reserve Bank of Chicago, Box 834, Chicago 90, Illinois. Articles may be re printed provided source is credited. f e d e r a l r e s e r v e b a n k o f h ic a g o Under the Trade Expansion bill, the Pres ident has requested special authority to reduce or eliminate all restrictions on imports of tropical agricultural products supplied by un derdeveloped countries. His action would be conditional on similar steps by the Common Market and would be limited to those com modities not produced “in any significant quantity” in this country. In the circumstances present restrictions on imports of sugar, cot ton, rice and certain vegetable oils presumably would be continued, as would the export sub sidies which enable United States farmers to compete effectively with tropical producers of these commodities. A third problem concerns the restrictions of major industrial countries against imports from the low-cost manufacturing countries of Asia, notably Japan and Hong Kong. Fre quently, such controls are invoked on the grounds that wage rates in these countries are so low as to create “unfair competition.” About a dozen European countries and Australia maintain quantitative import re strictions against Japanese goods. In addition, the United States has an informal under standing with Japan under which that coun try voluntarily limits exports of certain items, including textiles, stainless steel flatware, elec trical appliances and canned tuna to the United States. In recent years, exports of cotton textiles from Asian countries have expanded rapidly. This is an industry in which developing na tions appear to have a decided comparative cost advantage over the advanced industrial countries. In fact, the textile industry was one of the mainsprings in the rapid industrializa tion of Europe and North America more than 150 years ago. Last July the United States and other major textile importers obtained, within the frame work of GATT, a temporary agreement with 15 Federal Reserve Bank of Chicago the leading exporting countries to stabilize cotton textile exports for a period of twelve months, starting October 1, 1961. In the in terim a special GATT committee was to de velop a long-term plan for “orderly expan sion” of international trade in cotton textiles that would assure an increase in export oppor tunities for underdeveloped countries and at the same time would avoid disruption of mar kets in importing countries. In February the exporting and importing nations approved a five-year agreement proposed by the commit tee which will go into effect when the tem porary arrangement expires next October. However, the new pact contains “escape clauses” permitting textile importing countries to invoke embargoes and other restrictions which will be binding even if the exporting nations feel they are unjustified. If countries like Japan are to remain orient ed toward the West, they must find markets for their textiles and other light manufactures in that part of the world in order to pay for M o re b a n k in g d a ta The second of a series of supplements to Banking and Monetary Statistics (1943) is now available. Section 15, "International Finance," contains a variety of statistical series from mid-1942 on a monthly basis, together with explanatory information. Supplement 15 costs 65 cents. Supplements 15 and 10 and the original volume (see Business Conditions, April 1962) can be obtained from: Division of Administrative Services, Board of Governors of the Fed eral Reserve System, Washington 25, D. C. 16 imports of food, raw materials and capital equipment vital to their long-range economic development. Another problem is the continuation of rigid controls on international trade in energy resources. In 1959 the President, under the national security amendments to the Trade Agreements Act, imposed quotas on imports of crude oil and petroleum products. These quotas have limited crude oil imports to about 10 per cent of total domestic demand. Euro pean countries, on the other hand, have long restricted coal imports from this country to protect their higher-cost producers. It is possible that the web of controls on energy resources may broaden further, inas much as France has strongly insisted that the Common Market maintain tight controls over “noncommunity” fuels. Presumably, this would give France’s newly developed Saharan crude oil fields a preferred position in supply ing the petroleum requirements of the Com mon Market. No easy solution is available for any of the foregoing problems. It is encouraging, how ever, that the major manufacturing countries are continuing to make headway in their efforts to lower trade restrictions on indus trial goods. As the benefits of progress in this area become increasingly evident, what now appears as at best a gloomy prospect in other important sectors could brighten considerably. Substantial compromises will be required from all countries and adjustments doubtless will have to be made by many firms in many areas if freer international trade is to continue to play an important role in helping men to wring more and “better” products from the resources available to them.
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