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June 22,1973

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On June 13, against the backdrop of
a consistent and rapid rise in prices,
President Nixon announced another
stage of controls in the Economic
Stabilization Program that began
almost 22 months ago to the day. In
this latest action, all prices were
frozen— effective immediately—at
levels no higher than those pre­
vailing in the first eight days of
June. The only exception to the
price freeze are rents and unpro­
cessed agricultural products at the
farm level. Wages, interest and divi­
dends are not included in the cur­
rent freeze but remain under Phase
III restraints, as enunciated last Jan­
uary.
Freeze II will last for a maximum of
60 days, during which time the
structure of Phase IV controls will
be devised. (Freeze I, the 90-day
freeze of August-November 1971,
was also designated Phase I; in
contrast, Freeze II has not been
assigned a phase number.) The
President described the forth­
coming Phase IV as being designed
to "contain forces which have sent
prices upward rapidly in the last few
months," but no one yet knows
exactly what the new program will
look like.
The major aim of Phase IV will be to
tighten existing standards and to
require more mandatory-compli­
ance procedures than existed under
Phase III. In particular, the Cost of
Living Council has been charged
with the task of developing mea­
sures to stabilize the price of food

at the retail counter and the price of
gasoline at the pump.
Why prices ...
By any of the usual measures, prices
have been rising since the turn of
the year at the fastest rate since
early 1951, in the darkest days of the
Korean War period. Food prices
have presented the most visible
problems, since they are something
that consumers are confronted with
on a daily basis. At the retail level,
food prices account for about 22
percent of the items in the Con­
sumer Price Index.
During the January-April (Phase III)
period, food prices rose at an av­
erage annual rate of 25.4 percent,
compared with a 5.1-percent rate of
increase for all other items in the
consumer's market basket. At the
wholesale level, the increase was
even more dramatic over this pe­
riod. Prices of farm products and
processed foods and feeds rose at a
37.3-percent annual rate, while in­
dustrial prices, although increasing
at a worrisome 14.8-percent rate,
lagged well behind the rise in food
prices.
. .. and not wages?
In 1973, major labor contracts af­
fecting 4J4 million workers expire
and come up for renewal. The con­
tracts which have been negotiated
in the year to date are suprisingly
moderate in the face of rising
prices. In the first quarter of the
year, the average annual wage ad­
justment amounted to 5.3 percent,
(continued on page 2)




m

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as compared with a 7-percent gain
for all of 1972. Contract settlements
arrived at in April and May were
similarly compatible with the 512/
percent guideline of Phase III.
These settlements, however, have
increasingly emphasized such con­
siderations as earlier retirement and
improved working conditions,
which can be costly but do not
show up in current wage adjust­
ments. They have also tended to
shorten the duration of new con­
tracts, making renegotiation pos­
sible whenever controls might be
terminated.
Viewed within the limited perspec­
tive of Phase III, normal collective­
bargaining procedures have suc­
ceeded, in the main, in producing
labor-contract settlements that have
not significantly affected the price
level. Here, then, is the justification
for the asymmetrical treatment of
prices and wages under the current
freeze and probably under Phase
IV as well.
The carrot. . .
The key to lower food prices, as the




President noted, is in greater sup­
plies of agricultural products. Prices
of food and farm products in the
short-run are largely dominated by
supply conditions. Consequently,
prices of unprocessed agricultural
products have never been frozen at
the farm level. Instead, in an at­
tempt to encourage increased out­
put, forty million acres have been
made available for crop production
in the past year.
The supply of farm products avail­
able to the domestic market in 1973
has been subject to two unusual
sets of conditions. Weather condi­
tions in many parts of the country
have been the worst within the
memory of living man, while at the
same time, crop failures abroad
have led to an unprecedented for­
eign demand for American farm
products. The combination of these
sets of circumstances has put up­
ward pressure upon the prices of
domestic farm products, and thus
has acutely affected the budgets of
American consumers.
In order to improve the allocation
of farm products as between do­
mestic and foreign markets, the
President has requested authority
from Congress to impose a new
system of export controls on food.
The principal purpose of these con­
trols would be to hold the price of
animal feedstuffs and other grains
in the American market to levels
that will make it possible to pro­
duce meat, eggs and milk at prices
the average citizen can afford. With

regard to export commitments, he
announced that we will honor those
that are now on the books, but that
we intend to seek the cooperation
of other countries in resolving the
worldwide problem of rising food
prices. The President promised that
"we will not let foreign sales price
meat and eggs off the American
table".
. .. and the stick
In another action, the President
ordered the Internal Revenue
Service to begin a "thorough-going
audit" of the books of those compa­
nies which have raised prices more
than 1 1
/2-percent above the ceilings
that existed on January 10, the last
day of Phase II controls. If these
increases are not justified by rising
costs, prices will be rolled back.
The President recommended to the
Congress that legislation be enacted
that would afford him greater lati­
tude in the adjustment of tariffs in
order to increase supplies of meat,
plywood and zinc. He specifically
requested the removal of the tariff
on meat. Also requested was the
authority to dispose of excess
commodities in government stock­
piles. Finally, he pleaded for quick
approval and construction of the
Alaska pipeline as a major solution
to our energy problem.
Something old . ..
Most of the restraints that will make
up the body of Phase IV controls
may simply be carried over from
Phase II by way of Phase III. Until
DigitiZfed for FRASER


otherwise indicated, it must be as­
sumed that the limits (Phase II) or
guidelines (Phase III) of 1 Vi percent
for annual price increases and 5V2
percent for wage settlements will
remain operative. As matters now
stand, the freeze will be limited to
prices, at least as long as normal
collective-bargaining processes re­
sult in contract agreements that are
in harmony with the wage guide­
lines. Agreements that cannot be
justified in terms of the guidelines
will continue to be subject to re­
view and possible reduction by the
Cost of Living Council.

O

The price freeze is, hopefully, a
period in which the various actions
taken to increase those items in
short supply will bear fruit, as well
as a period of preparation of new
standards and procedures. If Phase
IV is to be a transition from admin­
istrative control of resource alloca­
tion to determination by freemarket forces, it will require the
continued moderation of wage set­
tlements evident in recent months,
along with the improvement of
demand-supply relationships in
other markets.

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Herbert Runyon
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BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)

Weekly Averages
of Daily Figures
Member Bank Reserve Position
Excess reserves
Borrowings
Net free ( + ) / Net borrowed ( - )
Federal Funds— Seven Large Banks
Interbank Federal funds transactions
Net purchases (+ ) / Net sales ( - )
Transactions: U.S. securities dealers
Net loans (+ ) / Net borrowings ( - )

Change from
year ago
Dollar
Percent

Change
from
5/30/73

72,887
55,699
20,206
16,164
8,260
5,612
11,576
70,886
21,140
445
47,905
18,051
20,061
7,200
9,437

+
+
+
+
+
+
+
+
+
+
+
+

54
7
208
55
24
64
111
693
764
195
11
31
191
235
49

+
+
+
+
+
+
+
+
+
+
+
4-

9,935
00

Loans adjusted and investments*
Loans adjusted— total *
Commercial and industrial
Real estate
Consum er instalment U.S. Treasury securities
Other securities
Deposits (less cash items)— total *
Demand deposits adjusted
U.S. Government deposits
Time deposits— total *
Savings
Other time I.P.C.
State and political subdivisions
(Large negotiable CD 's)

Amount
Outstanding
6/ 6/ 73

o

Selected Assets and Liabilities
Large Commercial Banks

3,626
2,685
1,378
854
371
8,740
1,767
193
6,857
28
4,917
1,195
4,243

+
+
+
+
+
+
+
+
+
+
+
+

15.78
23.01
21.87
19.92
20.02
13.21
3.31
14.06
9.12
30.25
16.70
0.15
32.47
19.90
81.69

W eekended
6/ 6/ 73

W eekended
5/30/73

Com parable
year-ago period

114
193
- 79

16
439
-4 2 3

+

+ 487

+ 755

-

731

+ 116

+ 294

+

62

67
5
62

* Includes items not shown separately.
O pinions expressed in this newsletter do not necessarily reflect the views of the Federal Reserve
Bank of San Francisco.
Information on this and other publications can be obtained by callin g or w riting the
Adm inistrative Services Departm ent. Federal Reserve Bank of San Francisco, P.O . Box 770 2,
San Francisco, California 94120. Phone (415) 397-1137.



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