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rftw u a l d efian t *)44tte Federal Reserve B a n k of P h ila d e lp h ia Events of the past year have demonstrated that monetary policy can have strongly uneven im pacts. No one is particularly happy about this fact, least of all the Federal Reserve. For not only do these impacts raise obvious questions of equity, but they produce economic and political repercussions that make the Fed’s job more dif ficult. If monetary policy is to be of maximum [Editorial] effectiveness in the future, serious consideration will have to be given to the unevenness of its Uneven Impacts off Monetary Policy: What to Do About Them? by David P. Eastburn impacts. Three approaches might be explored: 1. Tolerate the uneven impacts 2. Remove market imperfections that help pro duce them 3. Deal with them selectively W hich of these approaches one takes depends to a great extent on his philosophy of monetary policy— the degree to which he would have it intervene in the market place to influence the allocation of resources. 1. Tolerate them. This is not simply a do-nothing position reflecting a callous disregard for the problem or for the human consequences of it. In its finest sense, this approach involves a care ful calculation of costs and benefits. Those who would take this approach believe that uneven impacts are a price for letting the market place work. They have no question about the trade-off. Although they might wish the market would allocate credit more evenly, they argue that intervention runs the risk of doing an (Continued on Page 21) BUSINESS REVIEW is produced in the Department of Research. Evan B. Alderfer is Editorial Consultant. Donald R. Hulmes prepared the layout and artwork. The authors will be glad to receive comments on their articles. Requests for additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania 19101. FISCAL-MONETARY POLICIES: WHAT MIX? by Clay J. A n de rso n Fiscal policy is too easy; monetary policy is too business firms are recipients of funds paid out by tight. This is a view frequently expressed in re the Treasury in its purchases of goods, services, cent months. The emphasis is on a different mix, and in social welfare benefits. Thus Treasury not on a general increase in restraint. operations affect the spendable income of millions The need for coordinating fiscal and monetary of consumers and business firms. It is useful to policies in order that one would not tend to offset distinguish two types of effects: the direct impact, the other has long been recognized. But varying and secondary reactions initiated by the original the blend better to achieve economic goals is of fairly recent origin. transactions. This article deals briefly with some of the prin cipal considerations involved in using the fiscalmonetary mix as a tool of economic stabilization: the mechanics of fiscal and monetary policies; problems of implementation; suggested mixes to achieve certain objectives; and limitations on the effectiveness of varying the mix. Direct. Treasury receipts transfer funds from taxpayers to the Government. Personal and cor porate income taxes now run around $100 billion a year. The immediate effect is apparent— the Government will have that much more to spend, and individuals and corporations less. Government cash payments put additional funds in the hands of the public; they directly add to disposable income. Moreover, the Federal MECHANICS OF FISCAL POLICY The Federal Government has become big busi ness. It is the largest spender, the largest taxer, the largest borrower, and the largest buyer of our total output of goods and services. Government is our largest buyer. It takes about 10 per cent of our total output of goods and services. Government purchases are a strong prop under total demand. With the Treasury siphoning in and paying out That operations of such magnitude have im many billions of dollars, the net over-all effect de portant effects on the economy is not debatable. pends on the relative magnitude of receipts and The crucial question is whether we use fiscal payments. If the Treasury takes in more than it operations to help achieve our economic objec pays out, the net direct effect is a reduction in tives. funds at the disposal of the public. With less money to spend, total demand for goods and General effects services should be less. If the Treasury pays out Treasury operations have far-reaching effects. more than it takes in, the public has more to Over 50 million people and hundreds of thou sands of corporations make income-tax payments spend. Thus a surplus tends to reduce spendable funds and total demand; a deficit tends to in to the Treasury. Millions of individuals and crease them. 3 busin e ss r e v ie w Actual results, however, may differ from the immediate impact. The final effect depends on only when accompanied by some monetary re disposition of the surplus or how a deficit is financed. It is equally important to note that the stimu lating effect of a deficit depends on how it is A surplus will have little, if any, restrictive financed. If financed by additional taxes or by effect if the excess receipts are returned to the selling securities to nonbank buyers, there is a straint. public or replaced by the creation of new funds. shift of funds but no change in the public’s dis Using a surplus to redeem Government securities posable income. The deficit results in an increase held by the public shifts funds from taxpayers to holders of the securities. There is likely to be a in total spendable funds only if the borrowing results in creation of new funds; i.e., if pur redistribution of funds available for spending chased directly or indirectly by the Federal Re but there is no change in the total. Redeeming securities held by commercial banks results in a decrease in deposits and bank holdings of serve and commercial banks; or if it activates funds which otherwise would have been idle. If purchased by commercial banks, more reserves Government securities. But it also frees reserves, and may result in somewhat lower market rates; would be required to support the newly created deposits; less reserves would be available for banks have sufficient reserves to expand loans extending credit to other borrowers. Therefore, and restore deposits to the former level. There is for a deficit to have a stimulating effect the sup a net reduction in deposits and spendable funds port of monetary policy is also required. only if the reserves released are held as excess Secondary. The direct effects are only the ini (which is unlikely), used to repay indebtedness tial impact of the Government’s financial opera to the Reserve Banks, or absorbed through Fed tions eral Reserve action. Redemption of securities held demand. The initial rise in income would touch by Federal Reserve Banks exerts the greatest re off more spending. Improved sales swell the flow straint because the net result is a reduction in of new orders to manufacturers. Manufacturers both bank reserves and deposits. A fiscal surplus is not necessarily restrictive. buy more supplies and use more labor. Higher levels of production and employment generate It is not restrictive if Congress is induced to more income, which in turn touches off another authorize a corresponding increase in expendi rise in total demand and business activity. A re tures. It is not restrictive if the surplus is used duction in disposable income would set in motion to redeem Government securities held by nonbank a contraction in demand and output. on disposable income and aggregate owners.* And it is not restrictive if used to retire The chain reaction to an initial rise or fall in bank-held securities unless monetary policy pre disposable income does not continue forever. vents use of the released reserves for additional There are leakages, so that the secondary effects loans and investments. In short, a surplus is likely are similar to the waves created by throwing a to bring a net reduction in disposable income rock into a pond— they spread in ever-widening and total demand below what it would have been circles but with diminishing intensity. Some of the increase in income, for example, may be used There could be som e net reduction in total demand if holders o f the redeem ed securities were less eager spenders than the taxpayers. * 4 to repay outstanding debt; taxes will siphon some back to the Treasury; and a part may be offset b u sin e ss rev iew by reduced unemployment benefits. As leakages proportion on consumer goods and services. divert funds from the income-spending stream, There are limitations, however. Those with a secondary effects gradually fade away. taxable income of less than $5,000 account for The secondary response of consumer expendi about one-third of total individual tax returns tures to an initial increase in disposable income but less than 10 per cent of total personal income is fairly prompt and predictable. The ratio of tax receipts. Individuals with taxable incomes consumer spending to disposable income has moved within a narrow range of 92 to 95 per under $10,000 account for less than one-half of cent for almost two decades. Some have estimated Tax changes can also be formulated to con total receipts. that the major part of the effect on consumer centrate the direct effect on investment. Changes expenditures occurs within the first quarter fol in the corporate income tax affect net earnings lowing the initial impact on disposable income. and the supply of internal funds available for Business investment is likely to be more sensi investment. They also alter net profit margins tive to economic conditions. Rising retail sales and incentive to invest. Changing individual tax may he met for a while out of topheavy inven rates on high- instead of low-bracket incomes is tories. If so, only after inventories have been more likely to affect the flow of personal savings reduced to desired levels will the larger flow of into investment. Investment tax credits and de new orders be matched by a rise in production. preciation allowances are other methods of alter ing the inducement to invest. Likewise, rising production may be met for a while by using existing productive facilities. Ex Only the initial impact of a tax change can be cess capacity, profit expectations, and availability and cost of financing are among the factors that directed toward certain parts of the economy. Once new dollars injected by fiscal policy get will influence the secondary effect on investment. into the hands of consumers and businessmen they lose their identity. They will be spent like Selective effects any other dollar. The secondary effects, therefore, Fiscal policy has considerable potential for in will reflect consumer and investor preferences— fluencing the composition as well as the aggregate not necessarily those of fiscal authorities. demand for goods and services. The direct impact can be varied somewhat by altering the tax structure and composition of federal expendi Composition of expenditures. Projects can be selected so that payments will go mainly to lowerincome groups. For example, old-age and retire tures. ment benefits, unemployment benefits, public Tax structure. Tax changes can be designed so assistance and relief, and bousing subsidies are as to put most of the direct effect on consump likely to go mostly to people with below-average tion or investment. incomes. In effect, such payments redistribute in The direct impact of raising or lowering the come from higher to lower income groups. But it personal income tax will fall mainly on consumer should be noted that expenditures of this type income and expenditures. The effect on con are usually determined largely by considerations sumption may be greater if tax changes are con other than cyclical stabilization. centrated in the lower income brackets. People Some types of expenditures are more closely with lower incomes are likely to spend a larger related to business investment. Government ex 5 busin e ss r e v ie w penditures for research and development may otherwise. If the lender puts newly created funds well create opportunities for private investment. at the disposal of the borrower, as in the case of Expenditures for education and job training im commercial banks, there is a net increase in prove the quality and skill of the labor force. checkbook money. Investment in human resources, as well as plant and equipment, tends to increase productivity. serves and the capacity of commercial banks to Monetary policy impinges directly on bank re Taxes vs. spending. Effectiveness in achieving create new deposits. Open market operations selective effects is one important consideration in supply or withdraw reserves; a change in the choosing between taxes and spending. Another factor that should not be overlooked is the allo discount rate makes it more or less expensive for banks to borrow additional reserves; and a cation of resources between private and public use. The restrictive effect of a surplus can be change in reserve requirements alters the amount of reserves banks are required to hold against achieved either by a reduction in Government spending or an increase in taxes or both. A re deposits. In short, Federal Reserve tools enable duction in Government spending tends to divert the System to alter the cost and supply of reserves, which in turn affects both ability and willingness resources from public to private use. A larger portion of total output goes to satisfy private of commercial banks to create new deposits by making loans and investments. The Federal Re wants and preferences, unless the surplus results serve can restrict deposit creation by making in a proportionate decline in private output. reserves less readily available and more expen Raising taxes to create a surplus does the oppo sive; it encourages credit and deposit expansion site. It diverts resources from private to Govern by increasing the supply of reserves and making ment use. The choice at stake is how much of our borrowed reserves less expensive. income we want to spend ourselves and how much we want the Government to spend for us. The impact of monetary policy extends beyond bank credit and money supply. Monetary restraint may cause banks to sell securities and compete MECHANICS OF MONETARY POLICY more aggressively for new deposits. Declining Tax and expenditure changes directly enlarge securities prices and possibly a reduced inflow or reduce disposable income; monetary policy of savings may cause nonbank as well as bank influences use of credit to supplement current lenders to be more cautious and selective in ex income. tending credit. Rising interest costs and less fav Credit is a means of drawing on future income orable terms discourage borrowing. Thus mone to pay for today’s purchases. The effect on total tary policy, by altering the cost, supply, and demand depends mainly on whether borrowing availability of credit, may encourage or discour results in the creation of new funds. If the lender age borrowing for consumer and investment advances to the borrower funds collected from expenditures. savers, as in the case of savings institutions, the Federal Reserve actions, except for authority net effect is a transfer from saver to borrower. to establish margin requirements on stock market There is no increase in total amount of spend credit, influence the total quantity of credit and able funds. Total demand is not increased unless spendable funds. Even though general monetary some borrowed funds would have been held idle instruments may have an uneven impact, mone 6 b u sin e ss re v ie w tary authorities can do little to regulate how have an important bearing on successful use of funds are allocated among competing borrowers. the fiscal-monetary mix. The impact is usually greater, however, where cost and availability of credit are more important Inflexibility of fiscal policy in spending decisions. Housing and business faxed Preparation and enactment of the federal budget investment, for which financing is usually long is currently a time-consuming process. Formula term, are likely to be more sensitive to interest tion of the budget for the fiscal year beginning rates and monetary policy. July 1, 1967, for example, has been under way In short, the operation of monetary policy has several months. The President submits his budget several significant features. First, Federal Reserve actions operate mainly on use of credit to supple recommendations to Congress in the latter part of January. Congressional committees conduct ment current income. They do not directly affect hearings and then the budget recommendations the level of existing income available for expendi are debated on the floors of the House and Senate. ture; however, unfavorable credit terms may en Action on all budget items is usually not com courage borrowers to use current income to re pleted until shortly before the beginning of the pay outstanding indebtedness instead of to pur new fiscal year. chase goods and services. Second, the Federal Re When the budget is being formulated and con serve can make additional reserves and deposits sidered by Congress no one can tell what eco available in a period of economic slack, but there nomic conditions will be during the coming fiscal is no increase in total demand unless someone is willing to spend. Third, the instruments of mone tary policy primarily affect the price of credit year. It is impossible to determine so far in ad and total supply of spendable funds. The pos plus or deficit should be. At present we cannot sibility of using existing general monetary tools approach the forecasting accuracy required much to attain certain selective effects is limited; how of the time so that enactment of the budget may ever, such use should be explored more fully. include such changes as are needed for purposes vance whether the budget will or should show a surplus or a deficit, much less how large a sur of economic stabilization. PROBLEMS OF IMPLEMENTATION Successful use and blending of fiscal and mone The time required for fiscal actions, once taken, to affect disposable income and the flow of tary policies require enough flexibility so that federal actions can be adapted to changing economic change that does not alter collection procedures conditions. Federal Reserve authorities can take may affect disposable income in a short time. action promptly once the need is recognized. This is especially true for withheld taxes. There One of the advantages of monetary policy is its is usually a considerable time lag between Con flexibility. gressional action on expenditure projects and expenditures varies. An income-tax Inflexibility is a serious weakness of fiscal the flow of payments to the public. The time lag policy. It is one of the main reasons this poten is less for actions altering expenditures such as tially powerful and useful stabilization tool has social security and unemployment benefits. It is been used little in actual practice. Whether the likely to be much longer for major defense and problem can be solved or at least mitigated will public works projects. Preliminary planning and 7 b usin e ss re v ie w awarding of contracts may consume considerable however, would create other problems. Built-in time before new orders are placed. For heavy stabilizers become restrictive as soon as an up durables and large construction projects, several turn in business activity begins. They tend to more months may elapse before payments start choke off expansion long before manpower and to flow in substantial volume. other productive resources are being fully util The time lag between monetary actions and the impact on spending and demand also varies ized. More potent automatic stabilizers would in crease the fiscal drag on expansion and growth. according to economic conditions; however, it is likely to be several months before the bulk of the impact is felt. More flexible discretionary action Built-in stabilizers are only a partial solution to the problem of better timing of fiscal policy. Automatic stabilizers Greater flexibility in discretionary actions is also Inflexibility inherent in the budget process has needed. long been recognized. A partial solution is to build into the budget, items that automatically gress give the President standby authority to respond to changes in production and employ make tax changes of limited amount. For ex ment. ample, the authority might be limited to a 5 per On the tax side, a recent proposal is that Con Progressive income-tax rates and employment cent across-the-board increase or decrease in in taxes exercise a stabilizing influence on dis dividual and corporate income taxes. Congress posable income. A decline in total income and would retain complete control over tax reform. employment results in more than a proportionate Even with such safeguards, however, Congress decrease in income and employment tax receipts. seems reluctant to delegate limited standby au thority to the President. The declining tax bite cushions the effect of a recession on disposable income. In periods of ex Another proposal that would avoid delegation pansion, rising business activity and income of authority is for Congress to plan in advance bring more than a proportionate increase in tax so that a tax change could be enacted more receipts. The slower rise in disposable income promptly. In anticipation that tax action might acts as a drag on business expansion. soon become desirable, a bill could be drafted Some Government expenditures also respond and hearings held by the appropriate Congres automatically in a stabilizing manner. Unemploy sional committees. If possible, agreement should ment benefit payments, for example, rise as em be reached on the type and perhaps the amount ployment declines; they decrease as business activity and employment expand. of a tax change so that only a joint resolution of Congress would be required to put the change Automatic stabilizers, although helpful, are into effect. Such advance legislative preparation only part of a solution to the problem of imple would enable Congress to act promptly once menting an effective fiscal policy. Some have the need for a tax change became reasonably estimated that currently automatic stabilizers off clear. There is a natural reluctance, however, to set about 30 cents of each dollar rise or fall in spend time preparing legislation for some pre G.N.P. sumed future need of uncertain magnitude. Strengthening the automatic stabilizing effects, 8 It is also difficult to achieve much flexibility b u sin e ss rev iew on the expenditure side of the budget. A major only a sluggish rise in fixed investment, a rela part of total expenditures is determined largely tively heavy dose of fiscal restraint on consumer by non-economic objectives. For instance, de income and expenditures could be combined with fense expenditures, interest on the debt, and monetary policy and possibly some fiscal actions, veterans’ benefits can hardly be deferred or ex designed to encourage a more rapid rise in in panded in order to exert a stimulating or re vestment and in productive capacity. If, on the strictive effect on the economy. For various rea other hand, an investment boom is threatening sons, only a small portion of the total is amen to create excess capacity, corporate tax changes able to variation in accordance with changing could be coordinated with a more restrictive economic conditions. And even this small part monetary policy to curb the rise in investment expenditures. may not be flexible as to timing. In periods of recession and economic slack, WHAT KIND OF MIX? the mix could be heavily weighted toward fiscal Different features and a close interrelationship action to lift the level of private disposable in offer opportunities to employ a varying fiscal- come. A rise in consumer income and spending monetary mix in order better to meet the needs would, of a particular economic situation. A few of the create an environment more favorable to an in more common recent proposals are used to illus crease in investment. Fiscal policy, as we have trate both the advantages and limitations of alter seen, can directly increase consumer disposable ing the fiscal-monetary mix. income both by personal income-tax reduction Selective effects and carefully selected increases in Government expenditures. The stimulative effect is likely to be considerably greater than making credit more In recent months, there has been considerable discussion of a tax increase which would make possible a less restrictive monetary policy. The by absorbing unused resources, help readily available at low rates. Consumers and business firms are reluctant to borrow as long intention is a change in mix, not in the over-all as employment and profit prospects are uncertain. degree of restraint. Monetary restraint in the face of vigorous credit demands helped lift inter As consumer expenditures and business activity rise, excess capacity will be reduced. With im est rates to levels that had not been reached for proving profit prospects and a dwindling margin many years. High rates and reduced availability of unused resources, policies designed to encour of credit hit certain sectors of the economy, such age investment will be more fruitful. As recovery as housing, especially hard. A tax increase com proceeds, and especially if investment lags, the bined with less monetary restraint would ease mix could gradually be shifted more toward stim some of the pressure on these sectors and possibly ulating investment. spread the impact more evenly over the economy. A mix heavily weighted toward fiscal action to The fiscal-monetary mix has often been sug stimulate consumption is also especially suitable gested as a method of altering distribution of for recession when a country is confronted with expenditures and resources between consumption a balance-of-payments problem. Fiscal action to and investment. In an inflationary situation pow swell disposable income probably puts less down ered mainly by strong consumer demand with ward pressure on short-term rates and hence is 9 b usin e ss re v ie w less likely to stimulate an outflow of short-term effects on current and prospective profits would capital. Financing a deficit primarily by issuing make them less willing to invest. Curbing con short-term securities would tend to increase the sumer demand might diminish inducement to in market supply and help keep short-term rates up. vest as much as or more than an easy money policy would increase it. Limitations on selective use There is a wide range of combinations in which monetary and fiscal policies conceivably could be employed. We should recognize, however, that there are limitations on what can be accomplished by changing the policy mix. For instance, com bining fiscal restraint and monetary ease in such a way as to divert resources from consumption to investment may be hard to accomplish in practice. First, because of the mobility of funds and close interrelation between fiscal and monetary policies, it is difficult to effect a restrictive fiscal policy with monetary ease. In theory a fiscal A third limitation is that only the direct effects of either fiscal or monetary policy can be slanted toward a certain type of economic activity such as consumption or investment. Dollars injected either by fiscal policy or monetary policy are just like any other dollars to those who receive them. The secondary response initiated by the direct effects cannot be regulated. Policies de signed to alter the proportion of total income used for consumption and investment are unlikely to be successful unless accompanied by a cor responding shift in preferences between consump tion, and saving and investment. policy directed toward curbing consumer expen ditures will release resources, and an easy money Short- vs. long-run stabilization policy will encourage their use in investment. But in practice these results may not be achieved. Hazards involved in forecasting together with the inflexibility of fiscal policy have led to proposals A fiscal surplus is not necessarily restrictive, as that we should rely primarily on automatic stabi we have seen. To be restrictive, the surplus must lizers and monetary policy to smooth out short be employed in such a way that excess receipts term fluctuations in business activity. Automatic are not returned to the public or replaced by new stabilizers, which respond promptly to changes funds created by credit expansion. If used to re in production and income, exert considerable deem securities held largely by commercial banks, cushioning effect. Monetary policy, which can be an easy money policy would permit banks to use quite flexible as to timing, could be used to supplement automatic stabilizers. the reserves released to extend credit and bring reduction in funds available for expenditure un less monetary policy is restrictive enough to pre Discretionary fiscal actions could then be directed toward longer-run stability and sus tained growth. Such actions would be taken vent creation of new funds to replace the excess mainly to help keep total demand in balance receipts siphoned from taxpayers. with expanding productive capacity instead of deposits up to the former level. There is no net Second, curbing consumer demand sufficiently to release resources for the production of addi being directed mainly toward counteracting busi ness fluctuations. tional capital goods may weaken the incentive Two guides have been developed in recent to invest. A slump in consumer spending is soon years to facilitate implementing this type of felt by merchants and manufacturers. Adverse fiscal policy. The “ high or full employment sur 10 b u sin e ss re v ie w plus” represents the excess of receipts over ex employment. penditures that the existing tax structure would It seems likely, however, that considerable dis yield with the economy operating at capacity. The cretionary action would still be needed to main “ production gap” is the difference between actual tain the desired surplus at full employment. The G.N.P. and G.N.P. at full employment. tax structure required would vary with changing The production gap shows how far below po conditions and could not be accurately deter tential capacity the economy is actually operating. mined far in advance. Changes in the level and It serves as a useful guide as to how much addi composition of income, for example, would affect tional stimulus may be needed. The surplus that income-tax yields. Population growth and inno would be produced at full employment is a useful vations might create a need for more Government indicator of whether the current tax structure is services and a higher level of expenditures than likely to be too restrictive or too expansionary. A anticipated. War and international tension might large surplus means the tax structure becomes require large increases in Government expendi restrictive before full employment is reached. tures. There is fiscal drag on continued expansion and sustained growth. A sizable deficit, on the other CONCLUDING COMMENTS hand, means the tax structure would continue to It would be a marked step forward if both fiscal provide a stimulus even after full employment is and monetary policies could be timed and coor reached. A tax increase would likely be needed dinated toward our general economic goals of as the economy approached full employment to full employment, sustained growth, and price stability. Both tools, impersonal and indirect in avoid excess demand and rising prices. A semi-automatic, long-range budget policy was suggested a few years ago by the Committee their operation, are especially suitable in a dem ocratic free enterprise society. for Economic Development. Government expen ditures, which determine allocation of resources effective use of fiscal policy. Proposals to im between public and private use, should be estab prove flexibility have some disadvantages, but lished at the level society prefers. The tax struc these are small compared with the loss arising ture should then be adjusted as necessary so as from not being able to time fiscal actions prop erly. to yield a moderate surplus when productive Greater flexibility is a prerequisite for more capacity and resources are being fully utilized. The next step, once we have improved flexibil It was believed that over a span of years such a ity, is use of fiscal policy to help curb inflationary policy would provide some net surplus for debt pressures as well as to stimulate expansion in retirement. periods of economic slack. Coordinated fiscal- This longer-range type of fiscal policy was monetary actions to curb excessive demand and expected to contribute to stability and growth rising prices are more effective than either used with only limited discretionary action. The policy alone and probably result in a more even dis would also retain some of the discipline imposed tribution of the burden among sectors of the economy. by the goal of an annually balanced budget. New expenditures would require additional taxes Altering the fiscal-monetary mix in order to in order to maintain the planned surplus at full meet more effectively the needs of a particular 11 b u sin e ss r e v ie w situation is a further refinement in implementa importance than overcoming the more funda tion. But the results that can be achieved are mental weaknesses of inflexibility and failure to limited. This refinement is of considerably less use fiscal policy as an instrument of restraint. BUDGET CONCEPTS The evolution of ideas as to how the federal budget should be used has been accompanied by a growing number of budget concepts— administra tive, consolidated cash, national income, and highlevel or full employment. Most of us are probably not interested in the technical details involved in the different concepts, but it is useful to see how they have been designed to serve different pur poses. Summary of Administrative, Cash, and National Income Accounts Budgets— 1965 (Fiscal year; in billions) Federal Receipts A dm inistrative budget r e c e ip t s ................... $ $ 93.1 Trust fund r e c e ip ts ........................................... 31.0 Deduct: In trago vernm ental transactions . ____4.4 _ _ Total, cash receipts from the public 119.7 Add: A djustm ent from cash to accrual b a s is ........................ ....................................... — 0.9 Deduct: Receipts from loans, property sales, and other adju stm ents .............................. T 9 _______ National income accounts receipts— Federal s e c t o r ....................................... 120.6 Federal Payments A dm inistrative budget e x p e n d itu re s .......... 96.5 Trust fund e x p e n d itu re s .................................. 29.6 Deduct: In trago vernm ental transactions and other adjustm ents (net) .......................... 3;7____ Total, cash paym ents to th e public . . ___________ 122.4 Add: A djustm ent from cash to accrual b a s is .......................................................................... 2.6 Deduct: D isbursem ents for loans, land purchases, and other adjustm ents . . . . ______ 6 T ______ N ational income accounts expenditures— Federal sector . . . . ___________ 118.3 rectly with the appropriate committees of Con gress. No over-all budget was prepared and each departmental request was acted on individually. Effective budget control was practically impossi ble under such a piecemeal procedure. The Budget and Accounting Act of 1921, estab lishing essentially the present budget procedure, was designed to provide much better control over the budget. The Act directed the President to pre pare and submit to Congress, annually, proposed budget receipts and expenditures for the coming fiscal year. In addition, the Act authorized crea tion of the Budget Bureau in the Executive Branch to assist the President in preparing the annual budget. It also provided for establishment of the General Accounting Office which, acting on be half of Congress, was to audit and control ex penditures in accordance with the appropriations made by Congress. The administrative budget is primarily an in strument for management and control of federal expenditures and receipts. It does not include all transactions between the Federal Government and the public, and therefore is not a good indicator of the impact of the Government’s financial oper ations on the economy. Cash consolidated budget Administrative budget Social legislation, especially in the thirties, estab lished a number of trust funds and Governmentsponsored agencies and enterprises. Some of the larger trust funds are: the Federal Old Age and Survivors Insurance Trust Fund, the Unemploy ment Trust Fund, and the Highway Trust Fund. Government-sponsored enterprises include the Farm Credit Administration, Federal home loan banks, and the Federal Deposit Insurance Corp oration. The administrative budget is the oldest concept. It is the one submitted to the Congress each January. Prior to 1921, each Executive department of the Government in its budget request dealt di Receipts and expenditures of the trust funds and Government-sponsored enterprises are not included in the administrative budget. A growing volume of transactions not included impaired ef Excess of Receipts ( + ) or Payments ( —) A dm inistrative budget .................................... Receipts from and paym ents to the public N ational income accounts— Federal sector 12 — 3.4 — 2.7 + 2 .3 b u sin e ss rev iew fectiveness of the administrative budget as an indicator of the economic impact of the Federal Government’s operations. In fiscal 1966, for ex ample, net trust receipts and expenditures totaled nearly $35 billion each. The cash consolidated budget was designed to overcome these deficiencies of the administrative budget. It shows cash receipts from and pay ments to the public during a given period— the public referring to all economic units other than the Federal Government, its trust funds, and sponsored enterprises. The cash budget records receipts and payments when the funds are re ceived or paid out. National income accounts budget A weakness of the cash budget is that it does not reflect promptly changing private economic activ ity. In the national income accounts budget, re ceipts— other than withheld income taxes— are recorded on an accrual basis instead of when cash is actually received; expenditures are re corded when goods are delivered instead of when payment is made. Net loans and other credit transactions of Government agencies are excluded. In periods of economic expansion, tax liabili ties rise more rapidly than the Treasury's cash tax receipts. To illustrate: corporate income-tax receipts recorded in the national income budget for fiscal 1965 totaled $2 7.8 billion, as com pared to $26.1 billion in the cash budget. An im portant advantage of the national income budget is that it reflects the impact of changing economic conditions more quickly than the cash budget. Full or high employment budget A budget surplus or deficit, regardless of which concept is used, reflects two things: discretionary fiscal actions with respect to taxes and expendi tures, and effects of changes in the volume of business activity. Tax receipts as well as some expenditures automatically rise and fall with levels of income and output. The full employment budget shows estimated receipts and expenditures (on a national income accounts basis) assuming the economy is operat ing at capacity, and under the existing tax struc ture and expenditure programs. If tax receipts rise too rapidly during a period of business expansion, a growing surplus may exert so much restraint that the uptrend is halted before full employment is reached. A large fullemployment surplus indicates a substantial fiscal drag on expansion and growth. A large deficit indicates the opposite— a substantial fiscal stim ulus, which with resources about fully utilized would probably generate excessive demand and rising prices. 13 A NEW SPENDING MIX by Kevin G. Woelflein As 1967 begins, the economy is set to start an other year in the longest expansion in our eco nomic history. This statement sounds much like ones made at the start of 1966. But important changes have occurred which may make con tinued prosperity more difficult to achieve. These changes are wrapped up in the spending mix. For better or worse, the present expansion shifted gears in 1966. Because of these changes, policymakers have an unusual challenge to pro long prosperity by selecting an appropriate com increased government spending will account for a larger portion of GNP growth in 1967.2 These published forecasts take for granted further in creases in defense spending. Uncertainty focuses on the question how much more. But in the private sector, many signs of weakness have developed. This combination— rising government and slowing consumer spending— will produce a basic shift in the spending mix, a basic shift in underlying forces providing upward thrust to the economy in 1967. bination of measures that will make the transition a smooth one. Government spending shifts are under way From 1961 through 1965, businesses and in The fresh upward thrust of government spending dividuals increased spending at a slightly faster in 1966 was caused by increased spending by pace than government. Thus, increasing percen the Federal Government. This was a new devel tages of GNP growth were rooted in the private opment, since Federal Government expenditures sector of the economy. But during 1966, U.S. had not increased so rapidly as outlays by state involvement in Vietnam accelerated, imposing and local governments for four years in this ex additional demands on a hustling economy. The pansion— 1961, 1963, 1964, and 1965. (See mid increase in government spending was double the dle section of Chart 1.) 1965 advance, outpacing the percentage rise in A large portion of these expenditures by state both private investment and consumer spending. and local governments has gone for education— As a result, the relative importance of Federal new schools as well as increased outlays for Government outlays in total expenditures, which teacher salaries. Recent studies show that the declined for four years, rose in 1966, as the top rate of increase of education outlays— especially portion of Chart 1 shows.1 new schools— will slow down. But increased This development is likely to continue as busi spending is needed for urban renewal, reducing ness, government, and bank forecasters predict air and water pollution, improving transportation services, and creating new recreation facilities. 1 The Federal G overnm ent also increased paym ents for social security, M edicare, veterans’ benefits, interest on the national debt, and grants to states, but these expendi tures only show up in G N P accounts when consum ers, businessmen, and local governm ents spend the m oney. 14 2 This statement and others in this article concerning 1967 forecasts are based on a consensus o f published forecasts com piled b y the Federal R eserve Bank of Philadelphia. b u sin e ss re v ie w CHART 1 THE GROWING ROLE OF GOVERNMENT IN THE EXPANSION OF AGGREGATE DEMAND Changes in Government spending at all levels.* Changes in Billions of Dollars ____________ Per Cent of GNP Growth This type change can be made gradually without sudden disturbing effects. The change in government spending that is having more serious economic impact is rising federal outlays. Federal spending for goods and services provided firm support, but it was not an important expansionary force until 1966 when defense spending shot up over $9 billion, 16 per cent of 1966 growth in GNP. This rapid rise of defense buying in 1966 came on top of brisk private spending for dur able goods, especially aircraft, machinery, nonferrous metals and fabricated metals. And a bigger armed force also siphoned young men from the labor force and helped empty caches of food; furthermore, the nature of the Vietnam war has required a shift in procurement from so phisticated missile systems to conventional arms— rifles, ammunition, helicopters, and tactical air planes. The 1967 forecasts assume that projected in creases in defense spending will offset slowness in the private sector of the economy. But the resources needed to produce these very different goods have not, in the short run, been readily shifted from consumer goods production to de fense. Adjustments like plant modifications take time. Retraining and relocating workers is a for midable practical problem also. And if new facili Federal: defense and other ties are needed, businesmen will have to gear up. This also takes time. The net economic effect of all this is not clear. It is safe to say, however, that equilibrium is disturbed. Where high levels of activity have prevailed— as in defense indus tries— immediate response has not been possible. Further increases in defense spending in 1967 will complicate the adjustment. Also in 1966, increased defense needs coincided with burgeoning capital expenditures in most major industries. Thus, pressure built up in 15 b usin e ss re v ie w CHART 2 THE WIDENING GAP BETWEEN EQUIPMENT AND CONSUMER GOODS PRODUCTION F R B index of industrial production by market category * * 1 9 6 7 estimated. capital goods industries at the same time con been preceded by this sort of imbalance. Will his sumer buying slowed. Producers of consumer tory repeat itself in 1967? Or can government goods slowed production after mid-1966, trying spending rise enough to offset declines in the to hold inventory in line with sales. But equip private sectors of the economy? ment production boomed upward, widening the gap with consumer goods production as shown Private spending pauses in Chart 2. If prevailing forecasts turn out to he A year ago businessmen viewed the outlook op right, the gap will widen further in 1967. timistically. The economic expansion was wide spread and demand from all sources advanced In the postwar period, all our recessions have 16 b usin e ss re v ie w with no significant changes apparent. Plans for increased capital expenditures in 1966 were made. And throughout most of the year, leading indicators— new appropriations, new CHART 3 THE DECLINING FORCE OF BUSINESS SPENDING Changes in Gross Private Domestic Investment * orders, Changes in Billions of Dollars________________________________________________ profits, margins, and the ratio of price to unit TOTAL labor cost— all showed favorable trends. There was little indication that consumer buying pat terns were about to change. Inventory accumulation, one of the most im portant forces in this expansion, kept pace with rising sales throughout most of 1966. The change in business inventories in 1966, when adjusted for building of defense goods, was only slightly higher than 1965. Nevertheless, by year-end, signs of change appeared. Some manufacturers were laying off workers, others were cutting overtime. Still, inventory-to-sales ratios moved higher in the fourth quarter. Thus, forecasters predicted a slowdown in the rate of increase for inventory in 1967. (See Chart 3.) And the investment climate for 1967 became less certain as businessmen saw each major in vestment consideration cloud up. As consumer optimism sagged, market opportunities went with them. Thus, the possibility of passing along rising costs as higher prices in 1967 also diminished with signs of softening demand. By fall 1966, new capacity coming on stream eased pressure on capacity utilization, showing that demand was no longer building up faster than ability to pro duce. Besides that, suspension of the investment tax credit took effect in the fourth quarter, thus reducing another incentive to invest. Operating costs began to rise faster than prices late in the year; the ratio of labor cost per unit of output started rising in September. But profits had already leveled off. And new appropriations for capital expenditures peaked in the second quarter. 1961 1962 ^As shown in GNP accounts 1963 1964 1965 1966 1967 17 b usin e ss re v ie w Surveys of 1967 investment intentions show far less enthusiasm than they did at this time a year CHART 4 ago. The forecasts we reviewed cluster around THE SHIFTING PATTERN OF CONSUMER BUYING a gain of 6 per cent in 1967 which will advance Changes in Personal Consumption Expenditures * Changes in Billions of Dollars GNP $3-4 billion. (See Chart 3 ). Analysis of the investment plans in greater detail shows that increased investments are planned by those in dustries affected by rising defense orders. In dustries supplying consumer goods plan less capital outlays than they made in 1966. Thus, the changing investment climate means fewer in dustries will participate in the 1967 capital goods expansion. In 1962 and 1963 about $4.4 billion was added to GNP by increased outlays for housing. (See bottom section of Chart 3 ). Housing starts peaked early in 1964 largely because apartment units were overbuilt. Nevertheless, the modest declines in starts did not prevent expenditures from ad vancing a little in 1964 and 1965 due to a com bination of higher prices and better quality. But as credit tightened in 1966, mortgage funds were first to feel the impact of monetary policy. Housing starts fell sharply after the first quarter, reaching 20-year lows by fall. Hope for the industry in 1967 hinges on greater availability of mortgage funds. Strength of potential demand seems certain because of ris ing family formations, family income, and falling vacancy rates. But it is questionable that mort gage funds, even if much more readily available, could have a significant impact on actual starts or on construction activity before mid-1967. Thus, few forecasters assume any expansionary thrust from residential construction for the year taken as a whole. Consumers spend about 92 cents of every after-tax income dollar. To predict total spend ing, therefore, is not difficult given estimates of income and taxes. What proves formidable is fore- 18 1961 1962 "As shown in GNP accounts 1963 1964 1965 1966 1967 b u sin e ss rev iew casting shifts in spending patterns and their eco shifts from private to military demands will be nomic impact. In 1966 more-than-usual amounts painful and will take time to achieve. Resources, of extra income were spent for nondurables and in terms of men and machines, are simply not so services, less on durables. If present trends con flexible as economists sometimes believe. Money tinue into 1967, the economic driving force not spent on appliances, autos, and housing causes derived from consumer spending will come only these producers to reduce output and employ from nondurables and services. (See Chart 4 ). ment. However, such slack in the 1967 economy Consumer pyschology will play an important would not do much to relieve pressure building role in economic activity. If the income and em up in the aircraft, machinery, electronics, and other defense-related industries. ployment outlook appears drab, consumers will go to the laundromat and make the family car Defense spending may enhance inflationary last a little longer. Further outlays for defense effects. Eventually spending, unless paid for by without any fundamental change in the war are increased taxes, tends to outrun supply because unlikely to alter consumer attitudes in the year defense outlays add to income but not to the ahead. But if the war escalates and we endure stock of consumer goods. To what extent these some military setbacks, fear of shortages might pressures will build in 1967 is unknown. But life develop as it did during the Korean War. No for such fear of shortages exists now. Consequently, could be sure budget estimates will turn out to consumers are likely to follow the normal pattern be right. Furthermore, no one knows how soon of holding back on durable goods purchases, increased government spending will stimulate consumers. spending more percentagewise on basic needs until fresh new stimulus appears. Government outlays the key to 1967 policymakers would be easier if they A forecast growth of $40-50 billion in GNP for 1967 is not pessimistic. However, the seeds of economic imbalance were planted in 1966. As 1967 begins, much of the upward thrust in Consequently the changing spending mix focuses the private sector therefore is directly tied to ris economic policy problems in 1967 on how to ing government spending. Forecasts for the year water the garden— one important section (hous ahead basically assume that increased government ing) is parched, another (business and consumer spending will offset weakness in the private sector. spending) drying out fast, and a third (defense) nearly saturated. But even if total expenditures are maintained, 19 Third District Business and Banking Conditions During 1966 by Henry A. Watson Business. Propelled by the escalation in Viet cost of living, as measured by the consumer price nam, business conditions during 1966 in the index, rose by 2.8 per cent for the year and food Third Federal Reserve District continued to ex prices threatened to go even higher in 1967. The pand. The labor supply was extremely short and the recruiting of skilled and even semi-skilled workers was intensified as help-wanted advertis struction which was off by 12 per cent from 1965. ing in the District reached a new all-time peak. The unemployment problem which had per sisted for years was now not one of generating one weak spot for the District was residential con It was clear as the year closed that most areas of business activities in the District had experi enced pressure and 1967 loomed on the horizon as a year of continued growth and expansion. Banking. During the first half of 1966 net UNEMPLOYMENT IN MAJOR LABOR MARKET AREAS — THIRD FEDERAL RESERVE DISTRICT Per Cent of Labor Force Unem ployed 1.5 3.0 6.0 9.0 12.0 to to to to or O ctober 1966 2 .9 % 5.9 8.9 11.9 more Total areas N um ber of Areas N ovem ber Novem ber 1964 1965 6 6 1 0 0 5 4 4 0 0 2 6 5 0 0 13 13 13 loans of all District banks forged ahead at a rate comparable to that in the nation. They leveled off during the second half and then expanded at a much slower rate than before. The growth rate at city banks fell somewhat behind that of country banks. To obtain funds for loans, both city and country banks liquidated securities on balance, with short-term Governments hardest hit. Time deposits in the District banks increased by 13.8 per cent during the year, about the same new j obs, but matching people to j obs. The unem rapid pace of 1965. Demand deposits, on the ployment rate was down to 2.7 per cent* of the total labor force, the lowest year for the District other hand, were subject to wide fluctuations and remained approximately at the same level. Total since 1953. The rate in all 15 of the major labor deposits were up about 7 per cent in both the market areas in the District dropped drastically District and the nation. in 1966 with only five remaining above the na tional rate of 3.4 per cent.* Increased productivity and capacity had helped offset the pressure of rising demand for goods and services. But prices continued upward. Factories were working on longer hours with wage incomes of workers increasing due to raises and overtime. Labor cost per unit of output, after remaining relatively stable during 1965, was rising both in the District and nation as the year closed. The BUSINESS INDICATORS THIRD FEDERAL RESERVE DISTRICT PER CENT CHANGE 1965 TO 1966* M anufacturing em p loym ent Factory p a y ro lls ** Factory w orking t im e * * Electric power consumed by m an ufactu rers Construction contracts: Residential N onresidential Public works and utilities Consum er Price Index Bank debits (20 cities) (s.a.) * First 11 months * * First 10 months * N ot adjusted for seasonal variation. 20 + 3 + 8 + 4 +10 — 0 — 12 + 1 +22 + 3 +14 b u sin e ss re v ie w (Continued from Page 2) reinforced the view of many that ceilings on such even worse job and severely damaging the econ omy in the process. The market works remark deposits impair the free flow of funds and should ably well considering all the impediments that strated the severe disruption of relationships have been put in its way. Despite our efforts to among savings institutions that can ensue from learn more about the monetary system, we could a freer flow of time and savings funds. It is not possibly know better than the market. much more painful to remove market imperfec be removed. But the past year also has demon Nor do those who take this approach neces tions to open up competition than simply to im sarily overlook the drift of public sentiment mobilize imperfections to preserve the status quo. toward intervention in markets. They feel the So even though this approach may be designed public is misguided in attempting to provide to make the market better able to do its job special supports for certain parts of the economy and trying to channel resources in one direction without producing severely uneven impacts, it is not so simple as it might seem. Who is willing to rather than another. If special support is deemed face the disruption of existing institutional pat politically or socially appropriate for some par terns that can ensue from removing impediments ticular part of the economy, say housing, this is to a free flow of funds? better provided directly by means such as sub sidies, rather than through monetary policy. Theirs is the purest form of non-interventionist philosophy of monetary policy. 2. Remove market imperfections. Since the market is not completely free and perfect, another approach would remove some of the imperfections which help produce uneven impacts. Examples suggested by recent events naturally 3. Deal selectively. This third approach has been the one most often used. In fact, a review of Federal Reserve history suggests that the selec tive approach to monetary policy has tended to recur whenever general instruments of policy have been under great pressure. For purposes of illustration: • “ Direct action” in the late 1920’s; designed tend to cluster in markets for mortgages and to deal selectively with the problem of credit flowing into the stock market. savings. Some have proposed that usury laws • Margin requirements; imposed in 1934 to be changed to permit rates on mortgages to com deal with the same problem. • Moral suasion; use of official pronouncements pete with those on alternative investments. Others have suggested that creation of a secondary from time to time throughout the past fifty market would improve the liquidity of conven years to encourage or discourage the flow of tional mortgages and make them more attractive. credit in certain directions. Still others have even raised the possibility • Regulations W and X ; for the purpose of re that rates on outstanding mortgages could fluc tuate as rates on other instruments move up and straining the expansion of consumer and realestate credit. down. Proposals such as these are designed to • “ Operation twist” ; designed in the early 1960’s alter the market mechanism so as to improve the to influence the structure of rates in order to competitiveness of mortgages. Another field for action is in rates on time and resolve conflicting objectives of domestic and international policy. savings deposits. Experience of the past year has • The September 1, 1966 letter from the Federal 21 busin e ss re v ie w Reserve System to member banks; intended to more and make fewer mistakes. Hopefully this has induce banks to curtail business lending in been happening in monetary policy up to now. return for longer accommodation at the dis count window. * * * Which of these approaches will be taken prob The case for a selective approach rests firmly ably will depend on which has the least disad on the fact that monetary policy does impinge on vantages. Of the three, the selective approach the economy selectively. Although general in departs most drastically from a philosophy of struments of policy purport only to regulate the total supply of credit and not various uses of non-intervention in the market place. Removing impediments to competition— the second ap credit, they do in fact affect some uses more than others.* This being the case, why not employ existing proach—would help the market work more freely but would require drastic changes in existing fluence uses.of credit in a desired manner? In re institutional relationships. To take the first ap proach— tolerating the uneven impacts— would run against the mainstream of public sentiment. buttal to those who say that this would interfere The public seems intolerant of the market place instruments of policy, or design new ones, to in with the free market, proponents of the selective if it frustrates their social or economic priorities. approach reply that operations of the market The public may be misguided in this attitude, place are not sacred. In the first place, the market but in a democratic society the public is always may not take into consideration the public’s “ right.” If this continues to be the nature of social priorities. And secondly, experience tells us that the market frequently permits imbalances public sentiment, some action will be needed to deal with uneven impacts of policy. to arise: consumer credit may be so plentiful as Perhaps the best approach is a combination to produce a boom in consumer durables; credit of the three. Free markets offer the unquestioned to business may be so readily available as to en advantage of allocating funds according to de courage over-investment. mands. The fact that markets generally are rela Monetary policy long since has been accepted as a way of preventing extremes— booms and tively free in our economy goes a long way toward explaining the rapid growth and high busts— in over-all economic activity. Shouldn’t standard of living we have enjoyed. To the extent the next evolutionary step be to influence parts possible, therefore, freedom of markets is a de sirable base from which to start. of the economy that produce these over-all ex tremes? We’ll never know as much as we’ d like This requires action to remove some market about how the economy works, and policy always will require human judgment, so mistakes will imperfections and impediments to the free flow of funds. However, it is unrealistic to think that be made. But surely, over time, we should learn this approach can go very far without running * In the past year, more effective fiscal measures could have enabled m onetary p olicy to have been less restrictive, thus lessening the uneven impact o f m onetary restraint. But fiscal p olicy also has its impacts on various parts of the econom y. The difference is that in fiscal policy these impacts can be consciously directed toward certain selected areas m ore readily than in m onetary policy. 22 into strong opposition. A selective approach may be needed to do the rest of the job. If this is so, some forward planning may be required. In ordinary circumstances, the impacts of monetary policy are even enough that an over-all approach presents no problem. But in b u sin e ss re v ie w exceptional periods of restraint, the selective ap including such troublesome aspects as the ad proach has tended to be an ad hoc expedient. ministrative burden and exposure of policy to Perhaps careful consideration of the advantages and disadvantages of the selective a p p roa ch - pressure groups— would place us in better posi tion to deal with uneven impacts in the future. New Release Forecasts for 1967. The Departm ent of Research has compiled and analyzed a number of predictions made by businessmen, economists, and Government officials. This com pilation includes a sum m ary of forecasts fo r the econ omy as a whole and p a rticu la r sectors of the economy. The more im portant indicators are presented in chart form . Copies of this release are available on request from Bank and Public Relations, Federal Reserve Bank of Philadelphia, Pennsylvania 19101. 23 D IR E C T O R S A N D O F F IC E R S On March 3, 1966, the Board of Governors of the Federal Reserve System designated Mr. Willis J. Winn as Chairman of the Board of Directors and Federal Reserve Agent of this Bank for the remainder of 1966, succeeding Mr. Walter E. Hoadley who re signed on February 14. Also, on March 3 Mr. Bayard L. England, a Class B Director since January 1, 1965, was appointed a Class C Director by the Reserve Board and was designated Deputy Chairman for the remainder of the year. In a special election, Mr. Philip H. Glatfelter III, President, P. H. Glatfelter Co., Spring Grove, Pennsyl vania, was elected by member banks in Electoral Group 1 as a Class B Director, to fill the unexpired term ending December 31, 1967 vacated by Mr. England. At regular elections held later in the year, Mr. Robert C. Enders, President, Bloomsburg Bank-Columbia Trust Co., Bloomsburg, Pennsylvania, was elected by member banks in Electoral Group 2 as a Class A Director for a three-year term beginning January 1, 1967. He succeeds Mr. Charles R. Sharbaugh. Mr. Edward J. Dwyer, President; The Electric Storage Battery Co., Philadelphia, Pennsylvania, was elected to a like term by member banks in Electoral Group 3 as a Class B Director, succeed ing Mr. Leonard P. Pool. Mr. Ralph K. Gottshall, Chairman of the Board and President, Atlas Chemical Industries, Inc., Wilmington, Delaware, resigned as a Class B Director on December 31, 1966. In December, the Board of Governors reappointed Mr. Bayard L. England as a Class C Director for a full three-year term beginning January 1, 1967. Mr. Willis J. Winn was redesignated as Chairman of the Board of Directors and Federal Reserve Agent, and Mr. England as Deputy Chairman for the year 1967. The Board of Directors of this Bank selected Harold F. Still, Jr., President, CentralPenn National Bank of Philadelphia, Philadelphia, Pennsylvania, to serve during 1967 as the member of the Federal Advisory Council from the Third Federal Reserve District. The Board of Directors of this Bank, with the approval of the Board of Governors, reappointed Mr. Karl R. Bopp as President and Mr. Robert N. Hilkert as First Vice President, each for a statutory term of five years, beginning March 1, 1966. During the year, three reductions occurred in the officer staff of the Bank: Mr. Bertram W. Zumeta, Economist, and J. C. Rothwell, Jr., Economist, resigned effective July 31 and December 16, respectively, to accept positions in private industry. Mr. Evan B. Alderfer, Economic Adviser, retired on December 31. 24 D IR E C T O R S A S OF J A N U A R Y 1, 1 9 6 7 Term expires December 31 Group CLASS A 1 HOWARD C. PETERSEN Chairman of the Board Fidelity-Philadelphia Trust Co. Philadelphia, Pennsylvania 1968 2 ROBERT C. ENDERS President, Bloomsburg Bank-Columbia Trust Co. Bloomsburg, Pennsylvania 1969 3 LLOYD W. KUHN President, The Bendersville National Bank Bendersville, Pennsylvania 1967 CLASS B 1 PHILIP H. GLATFELTER, III President, P. H. Glatfelter Co. Spring Grove, Pennsylvania 1967 EDWARD J. DWYER President, The Electric Storage Battery Co. Philadelphia, Pennsylvania 1969 2 3 CLASS C WILLIS J. WINN, Chairman Dean, Wharton School of Finance and Commerce University of Pennsylvania Philadelphia, Pennsylvania 1967 BAYARD L. ENGLAND, Deputy Chairman Chairman of the Board Atlantic City Electric Co. Atlantic City, New Jersey 1969 D. ROBERT YARNALL, JR. President, Yarway Corporation Philadelphia, Pennsylvania 1968 O F F IC E R S A S O F J A N U A R Y 1, 1 9 6 7 KARL R. BOPP President RALPH E. HAAS Assistant Vice President ROBERT N. HILKERT First Vice President W ILLIAM A. JAMES HUGH BARRIE Vice President Assistant Vice President WARREN R. MOLL Assistant Vice President JOSEPH R. CAMPBELL Vice President NORMAN G. DASH Vice President LAWRENCE C. MURDOCH, JR. Assistant Vice President and Assistant Secretary DAVID P. EASTBURN Vice President HENRY J. NELSON Assistant Vice President DAVID C. MELNICOFF Vice President KENNETH M. SNADER Assistant Vice President G. WILLIAM METZ Vice President and General Auditor RUSSELL P. SUDDERS Assistant Vice President WALTER J. BROBYN Assistant Counsel HARRY W. ROEDER Vice President JAMES P. GIACOBELLO Chief Examining Officer JAMES V. VERGARI Vice President and General Counsel THOMAS K. DESCH Examining Officer RICHARD G. WILGUS Vice President and Secretary WILLIAM L. ENSOR Examining Officer CLAY J. ANDERSON Economic Adviser JACK H. JAMES Examining Officer EDWARD A. AFF Assistant Vice President LEONARD E. MARKFORD Examining Officer JACK P. BESSE Assistant Vice President JAMES A. AGNEW, JR. Assistant Cashier JOSEPH M. CASE Assistant Vice President FRED A. MURRAY Director of Plant A. LAMONT MAGEE Assistant General Auditor 26 S T A T E M E N T O F C O N D IT IO N F e d e ra l R e s e rv e B a n k o f P h ila d e lp h ia End of year 1966 (0 0 0 ’s omitted in dollar figures) ASSETS Gold certificate reserves: Gold certificate account ....................................................... Redemption fund— Federal Reserve n o te s ...................... Total gold certificate reserves ....................................... 1965 $ 698,902 96,258 $ 787,149 93,751 $ 795,160 $ 880,900 Federal Reserve notes of other Federal Reserve Banks . . 48,058 65,516 ..................................................................................... 6,773 6,473 Loans and securities: Discounts and a d v a n c e s ....................................................... United States Government s e c u ritie s ............................... 545 2,289,202 3,8 26 2,114,399 Total loans and s e c u ritie s ................................................ $2,289 ,7 47 $2,118,225 Uncollected cash items ............................................................ 541,950 483,80 8 Other cash Bank premises ............................................................................. 2,5 10 2,587 All other a s s e ts ............................................................................. 64,123 51,052 Total a s s e ts ........................................................................... $3,748,321 $3,608,561 LIABILITIES Federal Reserve notes ............................................................... $2,305 ,9 67 $2,241,279 Deposits: Member bank reserve accounts ......................................... United States Government ................................................... Foreign ....................................................................................... Other d e p o s its ........................................................................... 896,033 505 8,640 8,599 858,408 38,326 8,400 6,307 Total deposits ...................................................................... $ 913,777 $ 911,441 Deferred availability cash i t e m s .............................................. 4 5 6,78 5 All other liabilities ...................................................................... 11,934 9,577 $3 ,688,463 $3 ,549,469 $ $ Total liabilities ................................................................... CAPITAL ACCOUNTS Capital paid in ........................................................................ Surplus ....................................................................................... 29,929 29,929 387,172 29,546 29,546 Total liabilities and capital accounts .......................... $3,748,321 $3,608,561 Ratio of gold certificate reserves to Federal Reserve note lia b ility .............................................. 3 4 .5 % 3 9 .3 % 27 E A R N IN G S A N D E X P E N S E S F e d e ra l R e s e rv e B a n k o f P h ila d e lp h ia (0 0 0 ’s omitted) 1966 Earnings from: United States Government securities ......................................... Other sources ..................................................................................... $95,513 1,862 $79,596 1,318 Total current earnings ................................................................. $97,375 $80,914 Net expenses: Operating expenses* ........................................................................ Cost of Federal Reserve c u rre n c y ................................................... Assessment for expenses of Board of G overno rs...................... 8,501 1,295 483 8,571 1,348 473 Total net e x p e n s e s ........................................................................ $10,279 $10,392 Current net e a rn in g s ................................................................................ 87 ,096 70,522 Additions to current net earnings: Profit on sales of U.S. Government securities ( n e t ) ................. All other ................................................................................................. Total additions ................................................................................ — Total d e d u c tio n s ............................................................................. Net additions — 93 $ Deductions from current net earnings: Loss on sales of U.S. Government securities ( n e t ) ................. Miscellaneous non-operating ex p e n ses......................................... 93 59 $ 127 3 $ 130 59 (a) 5 $ 5 ............................................................................................ —37 54 Net earnings before payments to U.S. T re a s u ry ............................. $87,059 $70,576 Dividends paid ............................................................................. $ 1,790 $ 1,753 84,886 68,392 Paid to U.S. Treasury (interest on Federal Reserve notes) . . . . Transferred to or deducted from (— ) S u rp lu s ...................... * A fter deducting reim bursable or recoverable expenses, (a) Less than $1 thousand, rounded. 28 1965 $ 383 $ 431 V O L U M E O F O P E R A T IO N S F e d e ra l R e s e rv e B a n k o f P h ila d e lp h ia Number of pieces (000's omitted) Collections: Ordinary checks* .......................................................... Government checks (paper and c a r d ) ...................... Postal money orders (card) ....................................... Non-cash items ............................................................... Food stamp coupons ................................................... Clearing operations in connection with direct sendings and wire and group clearing p lans** ............ Transfers of f u n d s ............................................................... Currency counted ............................................................... Coins counted ...................................................................... Discounts and advances to member b a n k s ................. Depositary receipts for withheld taxes ........................ Postal receipts (re m itta n c e s )........................................... Fiscal agency activities: Marketable securities delivered or redeemed . . . . Savings bond transactions— (Federal Reserve Bank and agents) Issues (including reissues) .................................... Redemptions ............................................................... Coupons redeemed (Government and agencies) . . . . Dollar amounts (000,000's omitted) Collections: Ordinary c h e c k s ............................................................... Government checks (paper and c a r d ) ...................... Postal money orders (card) ....................................... Non-cash items ............................................................... Food stamp coupons ................................................... Clearing operations in connection with direct sendings and wire and group clearing p lans** ............ Transfers of f u n d s ............................................................ Currency counted .......................................................... Coins counted ............................................................... Discounts and advances to member b a n k s ................. Depositary receipts for withheld t a x e s ........................ Postal receipts (re m itta n c e s )............................................ Fiscal agency activities: Marketable securities delivered or redeemed . . . . Savings bond transactions— (Federal Reserve Bank and agents) Issues (including reissues) .................................... Redemptions ....................................... Coupons redeemed (Government and agencies) . . . . 1966 1965 1964 2 7 6,64 3 30 ,800 18,200 832 9,766 262,90 0 29 ,5 0 0 17,800 836 3,685 244,500 28,700 17,200 863 3,572 697 233 29 7,50 0 4 0 3,80 0 1 662 280 679 20 8 268,40 0 159,400 1 609 28 6 702 193 269,600 136,800 1 606 309 621 538 539 9,512 6,956 1,072 8,867 6,745 1,074 8,759 6,334 1,141 $ 88,836 6,993 254 827 13 $ 79,445 6,004 246 563 5 $ 72,735 6,097 247 239 5 49 ,908 192,718 2,205 45 1,806 3,3 48 914 47 ,649 167,181 2,003 44 ,770 134,480 1,987 12 21 2,086 2,593 891 863 2,522 931 14,913 13,845 14,486 46 4 381 342 431 362 225 346 146 444 * Checks handled in sealed packages counted as units. * * D ebit and credit item s. 29
@FedFRASER