View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.


January/February 1978

Review and outlook: 1977-78


January/February 1978, Volume II, Issue 1

Single-copy subscriptions of Economic
Perspectives, a bimonthly review, are
available free of charge. Please send requests
for single- and multiple-copy subscriptions,
back issues, and address changes to Public
Information Center, Federal Reserve Bank of
Chicago, P. O. Box 834, Chicago, Illinois
60690, or telephone (312) 322-5112.

L a s t y e a r , a f t e r s u r m o u n t i n g the
winter fuel crisis, the economy scored
above-average gains in output,
employment, and income. The star
performer was residential building,
especially single-family homes. Price
inflation continued at a rapid pace. In
contrast to the general prosperity,
farm income declined as record
harvests depressed commodity
prices. Heavy oil imports were
associated with a record deficit in the
balance of foreign trade. Another
large deficit was recorded in the
federal budget. Interest rates moved
higher as all classes o f credit rose. Ear­
ly in 1978 the expansion retained sub­
stantial momentum. Nevertheless, a
reduction in federal taxes was widely
urged to provide additional stimulus.

B u s in e s s : u p s w in g re ta in s m o m e n t u m
A g ric u ltu re :

is s u e s o f t h e p a s t r e s u r f a c e


Controlled circulation postage
paid at Chicago, Illinois.


E c o n o m i c e v e n t s in 1 9 7 7 —a c h r o n o l o g y


G o v e r n m e n t : a n e w a d m in is tra tio n
ta k e s c o m m a n d


F in a n c e : c re d it d e m a n d s s tro n g


M a in ta in in g th e e x p a n s io n

Articles may be reprinted provided
source is credited and Public Information
Center is provided with a copy of the
published material.

In t e r n a t io n a l: n e w s tr a in s e m e r g e


Editorial: Sandra Cowen
Graphics: Roger Thryselius, Tom O'Connell
Typesetting: Nancy Ahlstrom, Shirley Harper,
Maryanne Lee, Rita M olloy

Review and outlook:
Business: upswing retains momentum
As 1978 gets under way, prospects appear
favorable that the expansion that began in the
spring of 1975 will continue through another
year. Developments in the states of the
Seventh Federal Reserve District—Illinois, In­
diana, Iowa, Michigan, and Wisconsin—have
paralleled national trends, allowing for
differences related to their mix of industries.
In 1977, for the second straight year, large
gains occurred in output, employment, per­
sonal income, and profits. Total agricultural
output was at a record level. Consumers again
increased spending substantially, especially
on durable goods, using instalment credit ex­
tensively. Construction activity was led by
residential construction, with single-family
home starts at a record level. Businesses in­
creased investments in inventories and capital
goods, but at a cautious pace. Government
spending on goods and services at the federal
and state/local levels combined rose
somewhat less than the gross national
product (GNP). All classes of credit expanded
substantially and interest rates rose, par­
ticularly short-term rates.
There are significant flaws in the general­
ly favorable economic picture. Most glaring is
the huge deficit in the nation's international
trade balance, reflecting heavy dependence
on imported oil. Incomes of most farmers are
sharply depressed, paradoxically because of
bountiful harvests of major crops. Many
observers are concerned over the failure of
business capital spending to rise more rapidly.
Some bankers are disturbed that large cor­
porations are not using credit lines more in­
tensively. Rising market interest rates are
Federal Reserve Bank of Chicago

tending to reduce the supply of funds
available to thrift institutions, the dominant
suppliers of residential mortgages. Some car
models have not been selling well recently,
and output schedules have been reduced.
Finally, there is a deep uneasiness over con­
tinued price inflation at a seemingly
"imbedded" rate of 6 percent annually, and
an unending string of large deficits in the
federal budget.
A fairly good year—but

Despite a bad start associated with severe
winter weather and natural gas shortages, the
performance of the economy in 1977, in
broad outline, was remarkably close to the
typical forecast made at the start of the year.
The gross national product totaled almost $1.9
trillion, 11 percent larger than in 1976. Ad­
justed for inflation of 6 percent, “ real” GNP
was up 5 percent.
The rise in real GNP last year followed a
gain of 6 percent in 1976, the first full year of
expansion. Both years exceeded the long­
term growth trend of about 3.5 percent, but
this improvement did not fully make up the
shortfall caused by year-to-year declines of
more than 1 percent in both 1974 and 1975.
In mid-January of 1977 the nation was
suddenly confronted with an unprecedented
energy crisis. Except in the West, the winter
had been abnormally cold starting in O c­
tober. January was the worst month, with
temperatures averaging 10 degrees or more
below normal in many major cities. Re­
quirements for natural gas to heat homes and


Output and prices are expected
to increase again in 1978
percent change,year to year


constant dollars
inflation measured
by price deflator










1972 1973


1974 1975


other structures seriously depleted reserves
in a number of areas. Utilities were forced to
sharply reduce gas deliveries to many in­
dustrial customers. Many schools were
closed, and hundreds of thousands of
workers were laid off temporarily. For a time it
was feared that sufficient gas would not be
available to heat residences in certain areas.
The situation was exacerbated by high winds,
heavy snows, and frozen waterways that im­
peded deliveries of oil and coal. The President
was granted special powers to deal with the
The winter fuel crisis subsided after midFebruary. Conservation measures, relaxation
of some restrictions on the use and pricing of
fuel, adjustments in production processes to
use alternative fuels, and a favorable turn in
the weather all played a part. Recovery in
most sectors hit by fuel shortages and
transportation problems was very rapid in late
February and March. Surprisingly, data subse­
quently available showed economic growth
in the first quarter to be at the fastest pace for
any quarter of the year!
The challenges of the severe winter were
met successfully and the worst consequences
feared did not occur. Nevertheless, the ex­
perience left an indelible impact. The rapid
rise in fuel costs, under way for years,
a cc e le ra te d sharply. Businesses and

households took steps, often
involving expensive capital
outlays, to reduce needs for
fuel in general and natural
gas in particular. Congress
began deliberations on farreaching legislation to en­
courage fuel users to con­
serve and, when possible, to
switch to coal, and to stim­
ulate development of new
fuel supplies. A Department
of Energy was established.
In the past the spec­
ta c u la r growth of the
American economy has been
based on abundant supplies
1976 1977* 1978*
of energy at relatively cheap
prices. The general public is
now more receptive to the warnings of ex­
perts who had been proclaiming for years that
the day of cheap energy was over. Intelligent
policies relating to the production and use of
energy will provide the key to the nation's
future growth and prosperity.
Consumers spend freely

Consumer spending on goods and ser­
vices accounts for about 65 percent of GNP.
Total consumer spending is closely related to
disposable personal income (DPI)—current
income from all sources less taxes. In the past
decade consumer outlays of all types have
ranged from 92 to 95 percent of DPI. The
residual amount, 8 to 5 percent, is called "per­
sonal savings." This residual is influenced by
the extent to which households supplement
current income by incurring instalment debt.
Consumer spending remained relatively
strong through the 1974-75 recession, when
business firms cut back sharply on in­
vestments in inventories and capital goods.
For 1975 as a whole consumer spending rose
10.2 percent in current dollars, while GNP
rose 8.2 percent. In both 1976 and 1977 con­
sumer spending increased at almost precisely
the same rate as GNP.
Last year consumer spending rose more

Economic Perspectives

Consumers increased instalment
debt sharply last year
billion dollars

larger income supplement was required. As
the economy showed adequate improvement
in the spring, however, these proposals were
Large retailers reported sales during the
Christmas season to be excellent, above
budgeted expectations in many cases. Many
of these companies reported a continuance
of strong sales after Christmas as well. Some
described their inventory positions as below
desired levels, indicating a need for in­
creasing orders to suppliers.
Consumer price rise accelerates

than 10.5 percent, while DPI rose 9.5 percent.
As a result, the savings rate dropped to 5 per­
cent, down from 5.6 percent in 1976, and well
below the 7.5 percent average for the years
1973-75. In part, the drop in the savings rate
last year reflected heavy purchases of autos,
appliances, and other durable goods, often
with the aid of instalment credit extended by
banks, sales finance companies, and credit
unions. Spending on durable goods rose 13
percent last year, while nondurables rose 8
percent and services, including rent, in­
creased 12 percent.
Extensions of consumer instalment credit
totaled about $225 billion in 1977, a record by
a wide margin. Liquidations of these debts
totaled about $195 billion. Outstandings,
therefore, rose $30 billion, compared to $21
billion in 1976. Liquidations of instalment
debt have been at a high rate relative to DPI
on the basis of past experience. Nevertheless,
most lenders report that delinquencies are at
a low rate, far below the levels of the reces­
sion. The continued willingness of consumers
to incur instalment debt freely will provide a
major clue to the nation's economic perfor­
mance in 1978.
Early in 1977 the Administration had ad­
vocated a $50 per capita tax rebate, and a
similar payment to nontaxpayers, to provide
consumers with additional purchasing power.
As fuel bills skyrocketed in January and
February, it was widely argued that an even
Federal Reserve Bank of Chicago

The government's consumer price index
(CPI) averaged 181.5 in 1977 (1967=100) up 6.5
percent from 1976. In 1976 the CPI had in­
creased 5.8 percent, down from 9 percent in
1975, and 11 percent in 1974. It had been
hoped that inflation would moderate again in
1977. However, prices shot up at a 10 percent
annual rate in the first quarter, partly because
of weather-induced increases for fuels and
foods. Prices of certain imported foods, in­
cluding coffee and cocoa, soared to record
The rate of inflation slowed after
midyear. Nevertheless, in December the CPI

The consumer price index
registered further increases
index, 1967=100

middle month of quarter


was 6.8 percent above the year-ago level.
Food was up 8 percent, medical care 9 per­
cent, and fuels and utilities 12 percent.
The performance of the CPI is of vital im­
portance. For millions of individuals wages,
salaries, pensions, and welfare benefits are
automatically “ escalated" in line with in­
creases in this index. Thus past inflation helps
to perpetuate itself. Although some of the
forces that pushed up prices last year were
temporary, most forecasters believe that the
CPI will rise at least as fast in 1978 as in 1977.
Experience of recent years has tended to
reduce the public's threshold of concern over
rapid price inflation, particularly for in­
dividuals who believe they are “ protected"
through income adjustments. But a 6 percent
rate of inflation means that the price level
doubles in 12 years. At a 7 percent rate dou­
bling occurs in 10years; at 10 percent in seven
years. For a large proportion of the popula­
tion price increases of such magnitudes may
cause severe hardship. Moreover, experience
in many countries suggests that rapid inflation
feeds on itself, thereby causing an ac­
celerating spiral with far-reaching social and
political consequences.
Employment and unemployment

In Decem ber total em ploym ent,
measured by the government's survey of
households, reached 92.6 million, up 4.2
million or 4.7 percent from the year-ago level.

Employment growth very rapid
since the spring of 1975

Since the recession low of March 1975,
employment has increased 8.4 million or 10
percent. Payroll employment, reported by
employers, has traced a roughly similar
pattern. Gains in employment have been fair­
ly steady throughout the expansion, but have
been concentrated in trade, service, and
government rather than in manufacturing.
Overall, the performance of the economy in
creating jobs for a growing labor force com­
pares favorably with earlier expansions.
Press accounts of labor market
developments tend to emphasize unemploy­
ment rather than employment. The number
of unemployed, defined as those without jobs
who are seeking work, has remained disap­
pointingly high despite the rapid rise in
Unemployment averaged 7 percent of
the total labor force in 1977, but was 6.4 per­
cent in December. At the worst of the 1974-75
recession the rate was 9 percent. Unemploy­
ment averaged 5 percent in 1973, and less than
4 percent in the late 1960s. Unemployment
has been particularly high among minorities
and the young generally.
Continued high unemployment is
related to the unexpectedly rapid growth of
the labor force in recent years. In late 1977,63
percent of people 16 and over were in the
labor force. This was a record high, up from 62
percent a year earlier and 61 percent in 1973.
The rapid rise in the labor force largely
reflects an acceleration in the number of
married women who have taken jobs in a job
market that is increasingly receptive to them.
Labor costs and prices

million workers

In the long run inflation can be contained
only if labor costs per unit of output are
reasonably stable, as was the case in the early
1960s. Stability in unit labor costs, in turn, can
be achieved only if increases in compensation
per hour, including employer contributions
for social insurance, do not exceed increases
in output per hour (productivity). This has not
been the case in recent years.
By Department of Labor calculations
productivity grew at an annual rate of 3.3 per-


Economic Perspectives

cent in the period 1947-66. In the 1966-73
period productivity gains averaged only 2.1
percent. In 1974, partly because of the oil em­
bargo and the recession, there was a decline
of almost 3 percent in 1974 followed by in­
creases of less than 2 percent in 1975 and 4
percent in 1976. Last year the rate of gain fell
back to about 2 percent.
While productivity gains have slowed, in­
creases in compensation have been main­
tained at a rapid pace. From an average rate of
rise of almost 7 percent in the 1971-73 period,
the increase in compensation jumped to 9
percent in the years 1974-77. Some con­
tracts negotiated by unions brought in­
creases well in excess of this average.
Largely because of the disparity between
increases in compensation and increases in
productivity since 1972, unit labor costs have
been rising at a rate of over 6 percent, closely
approximating the rate of price inflation.
With compensation gains expected to ap­
proach 9 percent again in 1978, and with little
hope for a substantial spurt in productivity, it
is widely accepted that inflation will again ap­
proach or exceed the 6 percent level.
Manufacturing output rises

autos, in response to softening demand.
In December total manufacturing out­
put, measured in physical units by the Federal
Reserve's Index of Industrial Production,
stood at 140 (1967=100). For 1977 as a whole
output was up 6 percent, following a rise of 10
percent in 1976.
Durable goods manufacturing, in the ag­
gregate, has lagged nondurables in recent
years. W ithin these broad categories,
however, there have been wide variations.
Among the nondurables, chemicals have
been very strong, while apparel, beset by im­
ports, has been weak. Among the durables,
the rise in business equipment and motor
vehicles has exceeded total manufacturing,
but activity in steel, aerospace, and ordnance
has remained well below earlier peaks.
S e l pa u d b i p r s
t e l ge
y m ot
Shipments from U.S. steel mills rose only
2 percent in 1977 to about 91.5 million tons,
instead of the 5 to 10 percent rise some
analysts had anticipated at the start of the
year. Last year's volume contrasted with the
industry's peak years of 1973 and 1974, w hen
shipments were at record levels of 111 and 110
million tons, respectively. Some steel-using
industries bought less steel than had been ex­
pected, particularly producers of heavy
capital goods, but the main reason for the

After declining more than 13 percent
from September 1974 to March 1975—one of
the sharpest drops since World War II—
manufacturing output began a gradual
recovery. In December 1976
the 1974 peak was regained.
Auto industry has led expansion
Severe weather caused a
of total manufacturing
decline in January 1977, but,
index, 1967=100
surprisingly, of less than 1
M an u factu rin g 's re ­
covery from the disruptions
of January was swift. Output
sn a p p e d b ack to the
December level in February.
Each month in the FebruaryDecember period saw at least
a slight rise in total manufac­
turing output, although some
industries cut production at
tim es, notably steel and
Federal Reserve Bank of Chicago


shortfall was rising imports.
Steel imports totaled a record 19 million
tons in 1977, while exports were only 2 million
tons. Since 1967, the lowest year for steel im­
ports was the recession year 1975, with 12
million tons. Imports accounted for about 18
percent of total domestic supplies last year,
approximately the same as in 1971 when users
were hedging against a possible domestic
steel strike. Twenty years ago imports were
less than 2 percent of domestic supplies.
Western European producers accounted for
most of the rise in steel imports last year. A
large share came into the Great Lakes region
via the Seaway.
In August a number of major steel
producers started a series of closings of their
less efficient facilities with resulting layoffs of
workers. The Administration pledged support
of moves to halt "dumping" of foreign steel in
U.S. markets at prices that do not cover full
costs of production. A court decision also
pursued the same end. In the fourth quarter
there were signs that some foreign producers
were easing efforts to sell in the United States.
The fall in the dollar may have been partly
responsible. In any case, U.S. mills reported
increases in orders in December, and a rise in
output was projected for the first quarter.

passenger cars last year, up 8 percent from
1976, but short of the 9.7 million built in 1973.
Truck output of almost 3.5 million far sur­
passed earlier years.
The auto industry is engaged in a massive
program to provide a mix of cars that will
meet government standards for improved
fuel economy. In December and January
some of the new intermediate-sized models
were selling below expected levels, and
production schedules were reduced.
Auto and truck prices have increased
sharply in recent years, partly because of
changes required to satisfy government rules
on economy, safety, and emission control.
The impact of higher prices has been softened
for some purchasers by longer maturities on
instalment loans with monthly payments
stretching out 42 to 48 months as opposed to
the 36-month maximum generally in effect
until three or four years ago.
Plant and equipment

Business outlays on new plant and equip­
ment located in the United States rose 14per­
cent in 1977, somewhat faster than GNP, to a
total of $137 billion. After adjustment for in­
flation the rise was about 8 percent. Spending
plans were increased slightly during the year,

Motor vehicles

Cars and trucks were prime movers of the
business expansion in both 1976 and 1977.
Some producers are confident that last year's
levels of output and sales can be equaled or
even exceeded in 1978.
Passenger car sales totaled 11.2 million in
1977, up 11 percent from 1976 and second
only to 11.4 million in 1973. A record total of
over 2 million of the cars sold last year were
imports, mainly from Japan. The share of the
market going to imports at 18.5 percent also
set a new high. Truck sales at about 3.5
million, including 300,000 small imports, set a
record by a wide margin. Well over a half
million of the trucks sold last year were vans
and other light trucks purchased by
households for personal and recreational use.
U.S. factories assembled 9.2 million


Nonresidential construction has
lagged spending in equipment
billions of 1972 dollars

Economic Perspectives

as indicated by the quarterly survey of the
Department of Commerce.
Most industries boosted capital outlays
significantly last year. Far in the lead were the
motor vehicle producers, who increased
spending 64 percent, mainly for new facilities
to produce down-sized autos to improve gas
mileage. Larger-than-average increases also
were reported by the machinery, oil, and air­
line industries and by gas and electric utilities.
Outlays by the steel and water transportation
industries declined even before adjustment
for inflation. Farmers also reduced spending
on machinery and other facilities.
Total spending on equipment has been
much more vigorous than spending on new
construction. The physical volume of output
of business equipment measured by the
Federal Reserve's index reached 153
(1967=100) in the fourth quarter, surpassing by
5 percent the rate reached in the third quarter
of 1974 at the peak of the boom. Despite a
modest pickup in 1977, nonresidential private
construction adjusted for inflation remained
well below the level of 1974 and earlier years.
The government's preliminary survey of
1978 plant and equipment spending plans
issued in January indicated an increase of only
10 percent—4.5 percent after inflation. I n past
expansions capital spending usually was out­
pacing GNP at this stage. Various economists
and business executives are strongly urging
reductions in corporate taxes or other
measures to stimulate fixed investments.
Housing and construction

Late in 1977 construction activity was at
an annual rate of $178 billion, about 18 per­
cent above the level of a year earlier. After ad­
justment for 10 percent inflation, activity was
up 8 percent. The residential sector again led
the rise in private construction, but commer­
cial building also was reviving. Public con­
struction was about 3 percent below the level
of a year earlier, despite an increase in outlays
for water supplies and sewers.

Federal Reserve Bank of Chicago

Single-family homes lead recovery
in housing starts
million units

1971 1972






Construction was started on 2 million
housing units in 1977, up from 1.5 million in
1976, but still well below the 1972 peak of 2.4
million. Single-family starts set a new record
in 1977 of over 1.45 million, up 25 percent. The
market was booming in most parts of the
country. Sales of existing homes totaled 3.6
million, up 20 percent from the record set in
1976. Prices increased 10 to 12 percent on
average and substantially more in some areas.
Multifamily starts totaled 535,000 in 1977, up
42 percent but still 40 percent below the rate
of the early 1970s.
Late in the summer home builders were
hampered by shortages of materials, especial­
ly insulation and gypsum board. With needs
for alterations also strong, material shortages
may be a problem again in 1978. Also, many
areas report a limited supply of developed
lots, partly because of stricter local building
Demand for housing remains strong, but
various analysts predict a decline in starts in
1978 of perhaps 10 percent. Usually, these
views are predicated on the belief that rising
market interest rates will significantly reduce
the availability of mortgage funds.


Agriculture: issues of the past resurface
The past year marked a return to conditions in
the agricultural sector that closely parallel
those prior to 1973. Agricultural production
rose to a record high, boosting "reserves" to
levels comparable to the "surpluses" ex­
perienced in the late sixties and early seven­
ties. Increased output dropped net income
per farm—adjusted for inflation—to levels
more typical a decade ago. Lower earnings
coupled with record-high production ex­
penses and debt-servicing obligations
rekindled concerns about farmers' "tight cash
flows" similar to past concerns about the
"cost-price squeeze." A "farm strike" late in
the year enhanced public awareness of the
deterioration in farm income but probably
will have no more impact on prices than past
"withholding" efforts. New legislation in 1977
propelled the federal government back into a
major role in supporting farm earnings at
potential costs likely to surpass previous
highs. The return of government has brought
a number of programs—such as "set-aside
acreage" and "extended Commodity Credit
Corporation (CCC) loans"—that embody
features similar to programs of a few years
ago. These parallels may ultimately be judged
as the bridging of a time span during which
the farm sector experienced a major debtfinanced boom in capital expenditures and
land values that may result in particularly dif­
ficult adjustments in the years ahead.

overwhelming desire for an increased
government role in supporting the farm sec­
tor. Although the debate was wide-ranging,
the compromise was struck in the omnibus
four-year Food and Agricultural Act of 1977,
which was signed in late September.
The new act retained the basic provisions
for supporting agricultural commodity prices
but mandated substantially higher levels of
support. Loan rates—which establish effec­
tive floor prices—for 1977 and 1978 crops of
corn were boosted to $2 per bushel, up from
the 1976 rate of $1.50 per bushel. Direct
government payments to wheat producers in
1977 were 17 percent higher than would have
been the case had the new legislation not
amended the expiring act.
A major feature of the new act was the
authorization for a long-term wheat and feed
grain reserve program. The program is
currently designed to accumulate 25 million
metric tons of grain in farmer-controlled
storage facilities. Farmers who participate in
the program receive three-year CCC loans on
the stored grain plus a payment to cover
storage costs. Overall, these and other
provisions of the new act materially expose
the federal budget to increased costs if the
farm economy continues to be saddled by
huge stocks. Although projections vary, the
U.S. Department of Agriculture has estimated
that the various farm programs covered by the
new act will cost $6.4 billion annually.

Expanded government role

A sagging farm economy, a new Ad­
ministration, and expiring legislation cover­
ing such diverse areas as the Food Stamp
Program, the Food for Peace Program, and
the various farm commodity programs made
1977 a bellwether year for agricultural policy
developments. The Administration under­
took several measures—many of which were
u ltim a te ly in c o rp o ra te d in to new
legislation—to prop up the farm economy.
Congressional deliberations also indicated an


Farm earnings decline despite increased
government support

Farm earnings from commercial market
sources declined markedly in 1977, particular­
ly for grain farmers. Although the composite
of farm commodity prices averaged only 2
percent lower, prices of feed grains and food
grains declined 20 percent. Prices received by
farmers for oil-bearing crops—primarily
soybeans—provided a partial counter­
balance, averaging about one-fifth higher in
Economic Perspectives

1977. Prices of meat animals—mostly cattle
and hogs—averaged 1 percent lower in 1977.
A larger volume of marketings and a
marked increase in government support
operations cushioned the overall decline in
net farm earnings despite the lower prices.
Cash receipts from farm marketings in 1977
were virtually unchanged from the yearearlier level of $94 billion, even though net
proceeds from crops placed under loan with
the Commodity Credit Corporation—which
are counted as market receipts—were up $3.5
billion. Total gross farm income, at an es­
timated $106 billion, was up about $2 billion
from the year-earlier level, with about onehalf of the gain due to the rise in direct
government payments to farmers. Since the
increase in gross farm earnings offset only
one-half of the estimated $4 billion rise in
production expenses, net realized farm in­
come fell to about $20 billion last year, down
nearly $2 billion from 1976.
Last year's marked decline in grain prices
sharply lowered returns to most District grain
farmers but improved operating margins of
livestock producers. Returns to dairy farmers
were high throughout 1977, buoyed by lower
feed costs and increased production. Earnings
of hog producers remained at a relatively high
level for the third consecutive year despite
somewhat lower hog prices. In contrast, the
prolonged financial squeeze on cattle feeders
continued throughout most of 1977, although
losses narrowed appreciably late in the year.
Earnings of District crop farmers were
sharply reduced by last year's drop in grain
prices. The extent of the reduced margins,
however, hinged largely on the crop mix of
individual farmers, the extent of weatherrelated crop losses, and farmers' land costs.
Soybean prices were exceptionally high dur­
ing the first half of 1977, offering excellent
returns to farmers who had stored their 1976
crop. On the other hand, drought conditions
over the past two years reduced the quantity
of crop marketings during 1977 for a number
of District farmers. Returns to corn farmers in
1977 were generally sufficient to cover all
non-land costs of production. But returns to
those whose production came largely from
Federal Reserve Bank of Chicago

acreage purchased during the height of the
land boom, or those who cash-rented most of
their land, were severely squeezed.
Last year's sag in farm earnings was evi­
dent in a number of related developments.
Although purchases of grain storage facilities
were strong, overall capital expenditures by
farmers slowed appreciably. Most evident
was the decline in farm machinery and equip­
ment purchases. Unit retail sales of farm trac­
tors declined 6 percent last year, while com­
bine sales dropped 11 percent. The reduced
farm earnings in 1977 also ended the boom
that had led to a near-tripling in District
farmland values during the four and one-half
years that ended in mid-1977. Surveys con­
ducted by the Federal Reserve Bank of
Chicago found that District farmland values,
on average, stabilized during the latter half of
1977. Nevertheless, large increases during the
first half were sufficient to hold year-ending
1977 farmland values more than one-tenth
above the ending 1976 level.
Among all the various developments
related to last year's decline in farm earnings,
perhaps the most evident was the deteriora­
tion in credit conditions. Farmers' cash flows
tightened substantially in 1977—particularly
during the third quarter—reflecting lower
grain prices, continuing losses to cattle
feeders, and the increased operating ex­
penses that were associated with the record
agricultural output in 1977. Repayment rates
on farm loans slowed considerably as a result.
Renewals and extensions of existing farm
loans rose sharply, as did refinancings of
short-term debt with longer maturities.
Simultaneously, the demand for new loans
remained at a very high level. Among District
agricultural banks, the strong farm loan de­
mand outstripped reasonably large increases
in deposits and resulted in substantially
tighter liquidity positions. Loan-to-deposit
ratios at District agricultural banks, for exam­
ple, averaged more than 62 percent at the end
of last year, nearly 4 percentage points above
the high year-earlier level.
The deteriorating credit situation was
also reflected in the national increase in farm
debt. Preliminary estimates indicate total farm

Food and commodity review

Consecutive bumper grain
harvests offset earlier calamities . . .
million metric tons

1961/62 '63/64


'67/68 ’’70/71

crop year
*USDA estimates.


'74/75 '76/77


Retail food prices increased more than
originally expected last year, in spite of lower
farm commodity prices. The upward
pressures were largely concentrated within
the first half, when escalating prices of im­
ported foods were joined by fruits and
vegetables reflecting the winter freeze in
Florida. Overall, food prices in grocery stores
averaged 6 percent higher last year, with
more than half of the rise due to higher prices
for fish, coffee, and other imported foods.
Retail prices of domestically produced farm
foods averaged about 2 percent higher as in­
creased costs of processing and distribution
more than offset the drop in raw material
Upward pressures on retail food prices
are expected to continue in the current year.
The bulk of the pressures will likely be evident
in processing and distribution costs, which ac­
count for two-thirds of the $180 billion spent
by consumers for U.S. farm foods in 1977.
Labor alone accounts for one-half of the
processing and distribution costs, and in
1977—for the first time—labor surpassed raw
food material costs to become the largest
component of the consumer food dollar. This
year's increases in the minimum wage and
social security withholdings may accelerate

debt rose to nearly $120 billion by the end of
last year, marking a huge increase that in a
historical perspective was uncharacteristic for
a year of declining farm earnings. In dollar
terms last year's increase of $16 billion in farm
debt was almost double the average for the
preceding five years, while in percentage
terms the increase marked a level exceeded in
only two other years since World War II.
Last year's increase in farm debt
culminated a five-year period during which
farm debt rose more than
four-fifths. In compar­
...easin g pressures on carryover stocks of grain . . .
ison, cash receipts from
million metric tons
farming rose by only a
half, while net realized
farm income in 1977 was
world total
only slightly more than
one-tenth above the 1972
level. These dispropor­
tionate growth rates
c o u p le d w it h the
rebuilding of grain stocks
and prospects that grain
prices will closely parallel
g overnm ent support
prices over the near term
suggest the financial
health of the farm sector
will likely beacontinuing
crop year
concern this year.
* USD A estimates.

Economic Perspectives

. . . and driving U.S. grain prices
down to C C C loan rates
dollars per bushel

labor costs, while increases in energy prices
will have an impact on most other processing
and distribution costs.
Dairy producers continued to expand
production last year, encouraged by com­
paratively low feed prices and an increase in
the support price of manufacturing grade
milk from $8.26 to $9 per hundredweight last
spring. Preliminary estimates indicate total
m ilk production exceeded 123 billion
pounds, up 2.5 percent from the year-earlier
level and the highest annual output since
1965. The output was well in excess of the
lackluster consumer demand, forcing large
government purchases of manufactured dairy
products in order to maintain the higher sup­
port prices. Net CCC purchases of manufac­
tured dairy products in 1977 exceeded 6
billion pounds (milk equivalent)—a fivefold
increase from the previous year and a level
exceeded in only two other years since 1965.
Prospects for dairy producers look
favorable again for 1978. High milk/feed price
ratios are expected to lead to another in­
crease in production. Support prices, by man­
date of the 1977 act, will likely be raised again
in April of this year, which would assure
higher milk prices to dairy farmers. Although
there has been some evidence of a pickup in
commercial sales, the gain is not likely to
offset the gain in production. Hence, govern­
ment support purchases of manufactured
Federal Reserve Bank of Chicago

dairy products will remain at exceptionally
high levels during the current year.
Total meat production in 1977—
including red meat and poultry—slightly ex­
ceeded the 1976 record. Beef production
declined nearly 3 percent, even though fed
cattle slaughter rose 3 percent last year. The
overall decline in beef production permitted
choice steer prices to average about $1 above
the $39 per hundredweight registered in 1976.
Slaughter of cows and nonfed steers and
heifers declined, but remained at a relatively
high level because of drought and prolonged
losses to cow/caif operators. In conjunction
with the high level of cow and nonfed steer
and heifer slaughter in recent years, the 1977
calf crop fell to the lowest level since 1970,
and the year-end inventory of all cattle and
calves declined to an estimated 118 million
head, down from 123 million a year earlier
and the 1974 peak of 132 million head.
Hog slaughter in 1977 fell short of expec­
tations, but nevertheless exceeded the yearearlier level by 5 percent. The increased pork
production pushed average annual hog
prices in 1977 about $2 per hundredweight
below the 1976 level of $43. Despite the
decline, favorable operating margins en­
couraged a buildup in the inventory of hogs
held for breeding purposes, portending
further increases in pork production for the
current year.
Meat production trends in 1978 are ex­
pected to parallel the 1977 experience. Beef
production, despite prospects for increased
fed cattle marketings, might decline roughly 5
percent if the reduction in nonfed slaughter
reaches current expectations. At present, the
vastly improved moisture situation, increased
feed supplies, and prospects for higher feeder
cattle prices all support expectations for a
marked decline in nonfed slaughter. Despite
lower beef output, pork production is ex­
pected to be up about one-tenth, which
coupled with larger poultry production
portends total 1978 per capita meat supplies
about equal to the highs of the past two years.
Within this scenario cattle prices are expected
to average somewhat higher during the
current year, while hog and poultry prices will

likely average considerably lower.
Grain supplies were in general abun­
dance last year, due largely to record
domestic and worldwide harvests in 1976.
Nevertheless, adverse weather conditions
provided ominous indications that the large
harvests might not be repeated in 1977. Inter­
nationally, harvests in the Soviet Union,
China, and the Southern Hemisphere were
hampered by drought and other weather
problems. Domestically, weather concerns
were so widespread in 1977 that approximate­
ly three-fourths of the agricultural counties in
the United States were declared a disaster
area—and, hence, eligible for government
and assistance loans—at some point during
the past year. Winter fruit and vegetable
production was reduced by a killing frost in
Florida. A summer drought sharply lowered
crop production in the Southeast. Drought in
the West raised dire predictions of a crop
failure in California. Critically low moisture
supplies were a major concern in the Midwest
and Plains States from the fall of 1976 until
widespread showers began to alleviate the
situation late last summer.
Despite the widespread weather con­
cerns, increased use of irrigation coupled
with timely rains during the growing season

Soybeans partially offset lackluster
year for grain exports in fiscal 1977
million metric tons

billion dollars


contributed to a record domestic harvest.
Preliminary estimates indicate the index of all
crop production rose to 129 (1967=100) in
1977, up from the previous high of 122 in 1976.
Among individual crops, new record highs
were established for corn and soybeans.
Wheat production, on the other hand, declin­
ed about 5 percent from the 1976 high, but
was still sufficient to meet projected needs.
The large 1977 crop harvest will be a ma­
jor influence on crop prices through most of
the year ahead. Exports and domestic utiliza­
tion of grains and soybeans are expected to
rise during their respective 1977/78 marketing
years. Nevertheless, total utilization is not ex­
pected to match last year's record harvests,
portending further accumulation of domestic
carryover stocks. In general, carryover stocks
of wheat and corn are expected to reach the
highest levels since the mid-sixties, while soy­
bean stocks may again approximate the
relatively burdensome level experienced in
late 1976. Barring another round of adverse
weather patterns, these large stocks will likely
hold 1978 corn prices close to the loan sup­
port rate of $2.00 per bushel and push soy­
bean prices well below the 1977 average of
nearly $7 per bushel.
Crop plantings in 1978 are again expected
to be very large, despite the reintroduction of
"set-aside" programs, which will remove
some acreage from production. There will be
some shift in acreage devoted to major crops
due to changed price relationships. Current
prospects point to reduced wheat and cotton
acreage and increased soybean plantings.
Corn acreage may decline slightly if set-aside
provisions—as tentatively announced—
remain in force. Overall prospects for large
plantings, coupled with the vast improvement
in moisture conditions, provide an initial
foundation for assuming 1978 crop harvests
may again be large. As usual, however,
weather conditions both here and abroad will
play an important role in determining final
output and pricing patterns.



Economic Perspectives

International: new strains emerge
The recovery of the world economy from the
1974-75 recession slowed down considerably
in 1977. Economic growth (as measured by
changes in real gross national product) in the
in d u s tria l co untries comprising the
m em bership of the Organization for
Economic Cooperation and Development
(OECD),1 declined from a 4 percent annual
rate in the first half to 314 percent in the sec­
ond half. This brought the growth for the year
to about 31 percent, compared to the ap­
proximately 514 percent recorded in 1976. The
slowdown in the aggregate rate of growth
between 1976 and 1977 was the result of a
leveling off of growth in Japan and the United
States, and a considerable reduction in the
rate of growth in virtually all of Europe.
With economic growth generally below
the 4V2 percent rate necessary to absorb new
additions to the labor force, total unemploy­
ment in the OECD countries rose to 16.3
million (about 5.4 percent of thecivilian labor
force) at the end of 1977, some half million
higher than the low point of the recession in
1975. The rise in unemployment was par­
ticularly marked in the European member
countries where, unlike in the United States,
unemployment has been rising steadily, from
4.7 million at the beginning of 1975 to over 7
million today.
The slow rate of growth was one of the
contributing factors to the easing of in­
flationary pressures in the OECD countries
during the year. The rate of increase in con­
sumer prices declined from an 11 percent an­
nual rate during the first four months of the
year to about 6 percent in the four months
ending October. But, for the year as a whole,
The United States, Japan, G erm any, France, the
United Kingdom, Canada, Italy, Australia, New Zealand,
Austria, Belgium , Denm ark, Finland, G reece, Iceland,
Ireland, Luxembourg, the Netherlands, Norway, Por­
tugal, Spain, Sweden, Switzerland, and Turkey.

Federal Reserve Bank of Chicago

the rate of inflation—averaging about 8 per­
cent for the industrial countries—was about
the same as in 1976.
The slow and divergent rates of
economic growth in the major industrial
countries accentuated some existing
problems in the world economy and con­
tributed to the emergence of new ones dur­
ing the year. The slow rate of growth in the in­
dustrial countries depressed their demand for
primary commodities produced largely in the
developing countries. As a result, balance-ofpayment deficits experienced by many of the
developing countries (particularly since the
sharp increase in energy prices) persisted and
led to further increases in their already large
international indebtedness as they attempted
to finance the deficits by borrowing abroad.
Commercial banks in the industrial countries
continued to be the main source of financing.
The growth of indebtedness of the develop­
ing countries, and of some smaller industrial
countries of the OECD group, to these banks
perpetuated concern of the regulatory
authorities both here and abroad about the
possible adverse consequences of the grow­
ing foreign “ exposure” and raised questions
about future financing.
The dollar declines in value

The relatively rapid rate of economic
growth in the United States as compared to
the rest of the industrial world was the major
contributing cause to the emergence of large
trade and current account deficits in the U.S.
international accounts (for details see below).
The excess supply of dollars on the foreign ex­
change markets associated with such deficits
was not being fully absorbed by demand for
dollars for private investment purposes. As a
result, by midyear the U.S. dollar began to
weaken against the currencies of certain ma15

Economic events in 1977- a chronology
Jan 3 Dow industrial stock average closes at 1,000, high
for the year.

Apr 11 United Steelworkers agree to pact raising com­
pensation more than 30 percent in three years.

Jan 4 President Ford proposes tax cut, $10 billion for in­
dividuals and $2.5 billion for business.

Apr 14 Carter withdraws his $50 per capita tax rebate
because the economy seems stronger.

Jan 10 Prolonged cold requires sharp emergency cu r­
tailments of natural gas to industrial users.

— Chicago area butchers union ends ban on meat sales
after 6 P.M.

Jan 16 Chicago has its coldest day of the century, low of
minus 19 and high of minus 7.

Apr 19 Act gives federal credit unions broader lending
powers, including authority to make 30-year mortgage

Jan 20 Dow Chem ical drops plans for large complex in
California because of environmental restrictions.
Jan 20 Freeze damages Florida’s citrus and vegetable
Jan 31 President Carter proposes econom ic stimulus, in­
cluding $50 per person tax rebate.
Feb 2 Carter addresses nation on energy problems after
signing emergency law to allocate natural gas.
Feb 3 Federal O pen M arket Com m ittee (FO M C ) an­
nounces retention of M-1 growth targets, but reduces
lower end of range for M-2 and M-3.

Apr 29 Carter unveils detailed proposed National Energy
May 3 FO M C announces retention of M-1 growth target
but reduces upper limit for M-2 and M-3.
May 7 Officials of major industrialized nations meet in
London to discuss mutual problems— sluggish growth
and high unemployment.
May 13 M ajor bank raises prime rate from 6.25 to 6.5 per­

Feb 9 Chicago ends record string of 43 subfreezing days.

May 27 M ajor bank raises prime rate from 6.5 to 6.75 per­

Feb 14 Electronic banking sytem begins operation in
Iowa, nation's first statewide system.

May 31 Ceiling on FHA home mortgages is raised from 8
to 8.5 percent.

Feb 22 Illinois Waterway reopens after being closed for

Jun 15 Spain holds first free elections since 1936.

five weeks because of heavy ice.

Jun 20 O il starts flowing into the Alaskan pipeline, com­
pleted after four years at cost of $7.7 billion.

— Carter proposes fiscal 1977 budget changes raising
deficit from $57 billion to $68 billion.
— Federal Reserve Board rules that bank holding com ­
panies cannot acquire savings and loan associations.

Jun 30 Carter announces decision not to develop the B-1
— Britain nationalizes its shipbuilding industry.

Mar 1 U.S. reserves 200-mile fishing zone for domestic

Jul 1 Social Security and welfare payments are increased
5.9 percent, based on escalation formula.

Mar 15 Detroit's Renaissance Center opens 73-story

Jul 13, 14 Power failure blanks out New York City.

Mar 23 Revised Regulation B to implement 1976
Amendments to Equal Credit Opportunity Act becomes
— Carter proposes boost in federal grants and loans to
victims of widespread drought.

Jul 15 Commonwealth Edison reports record load of 13.9
million kilowatts as temperature hits 99 degrees in
Jul 29 FO M C announces reduction of lower end of
growth range for M-1 but retains existing range for M-2
and M-3.

Mar 27 Two B-747s crash in Canary Islands with 600 dead.

Aug 3 Strip mining law requiring restoration of ex­
cavations approved.

Apr 1 Boost in price supports for milk becomes effective
and stimulates output.

Aug 4 Act establishes Department of Energy.

Apr 2 Drought forces San Francisco to impose water

Aug 15 King Tut exhibit closes in Chicago after four
months and 1,350,000 visitors.

Apr 4 Carter terminates natural gas emergency.

Aug 19 M ajor steel companies announce layoffs and
plant shutdowns.
— M ajor bank increases prime rate from 6.75 to 7 per­

Apr 6 Federal Home Loan Bank Board lifts ban on S&Ls
having savings accounts at banks.


Economic Perspectives

Aug 29 Administration announces 20 percent set-aside
of wheat acreage for 1978.

— Dow industrial stock average closes at 801, low for the

— Despite drought, total California farm output in 1977 is
expected to approximate 1976 level.

Nov 7 Carter uses first veto to reject funds for continuing
work on Clinch River Breeder Reactor.

— Sweden withdraws from the “ snake” (international
arrangement for maintaining currency values) because of
its growing payments deficit.

Nov 9 FO M C retains existing range for M-1 growth, but
reduces both upper and lower limits for M-2 and M-3.

Aug 30 Federal Reserve raises discount rate from 5.25 to
5.75 percent.
Sep 13 M ajor bank raises prime rate from 7 to 7.25 per­
Sep 14 Congress approves revised fiscal 1978 budget
targets with spending at $458 billion and deficit at $61
Sep 21 Bert Lance resigns as director of O ffice of
Management and Budget.
Sep 26 Trading in 90-day commercial paper futures
begins on the Chicago Board of Trade.
Sep 27 Zenith announces decision to halt color TV set
output in U .S., citing foreign competition.
Sep 29 Food and Agricultural Act of 1977 approved,
boosting commodity support prices.
Oct 1 General Pay Increase boosts pay of federal civilian
and military personnel by 7.05 percent.
O ct 4 Prime rate raised from 7.25 to 7.5 percent.
Oct 12 Housing and Com m unity Developm ent Act ap­
proved to stimulate residential construction.
O ct 13 Carter pledges federal action to curb “ dumping”
of foreign steel.
Oct 21 M ajor bank raises prime rate from 7.5 to 7.75 per­
Oct 24 Department of Energy expects no natural gas
shortage if winter is no more than 10 percent colder than
O ct 25 Canadian dollar sinks to .898 U.S. dollars, lowest
rate in over 40 years.
Oct 26 Federal Reserve raises discount rate from 5.75 to 6
Oct 27 Treasury reports fiscal 1977 spending at $402
billion and deficit of $45 billion, down from $61 billion in
fiscal 1976.

Nov 11 Governm ent reports record corn and soybean
Nov 16 Single-family home starts reported at 1.6 million
rate for O ctober, highest on record.
Nov 17 Boeing workers end strike that began October 4,
for a 7 percent wage boost and large gains in benefits.
Nov 19 Egyptian president Sadat becomes first head of an
Arab state to visit Israel.
— M ajor auto producers announce reduction in output
schedules as sales lag.
Nov 22 Two supersonic Concordes land at New York to
begin regular service after long delay.
Nov 29 East and G ulf Coast dockworkers end two-month
strike against container ships.
Dec 1 Conservative party gains in South African elec­
Dec 6 Soft coal strike begins idling 130,000 miners, main­
ly in Eastern underground mines.
Dec 14 Various farmer groups proclaim “ strike” to
protest low crop prices.
Dec 15 Most iron ore miners end strike that began Aug 1.
Dec 19 M ilw aukee Road files for bankruptcy under Sec­
tion 77.
Dec 20 Act approved raising Social Security tax sharply
starting in 1979. (Under existing law base rose to $17,700
and tax rate to 6.05 percent on Jan 1, 1978.)
Dec 21 Consumer Price Index reported up 0.5 percent in
Nov, 6.7 percent above year ago.
— OPEC semiannual m eetingadjournswithoutchanging
Oil price.
Dec 26 Last ship traverses St. Lawrence Seaway 11 days
after scheduled winter closing.
Dec 27 Carter names acting director James M cIntyre to
be director of O M B.

Oct 28 National Commission on Electronic Funds
Transfer issues final report recommending implementa­
tion with user safeguards.

Dec 28 Carter names G . W illiam M iller, industrialist, to
succeed A rthur Burns as chairman of the Federal Reserve

Nov 1 Law approved raising minimum wage from $2.30
to $2.65 on Jan 1, 1978, and to $3.35 by 1981.

Dec 29 U.S. dollar hits historic low relative to m ark, yen,
and other major foreign currencies.

Nov 2 Soviet Union announces 1977 grain harvest at 194
million metric tons, well below earlier estimates.

Dec 31 U.S. ends year with trade deficit estimated at $25
billion, a record by far.

Federal Reserve Bank of Chicago


jor countries, particularly those experiencing
large surpluses in their international ac­
counts. Initially, unlike the foreign central
banks, whose currencies were being affected,
the U.S. authorities refrained from actively
moderating the decline of the dollar. This
relative "inaction'’ reflected the U.S. policy of
intervening only to counter disorderly market
conditions; and the dollar's decline up until
the fourth quarter was not generally disorder­
ly. However, in the closing weeks of the year,
increasing doubts about the ability and
willingness of the United States to reduce the
deficit led to the emergence of a strong
speculative undercurrent in the foreign ex­
change markets that resulted in wide
gyrations and rapid movements of the ex­
change rates. To deal with the unsettlements
the U.S. Treasury and the Federal Reserve in
the early days of 1978 announced their inten­
tion to actively intervene in the markets. Their
action, together with forceful support pro­
vided by the European central banks, stabi­
lized the markets. At the time of the writing
of this report, the international monetary
system appeared to have weathered the
strains created by the disequilibrium in
the world payments situation.
U.S. balance of payments position

U.S. dollar declines relative
to most major currencies
percent change

showed especially strong gains of 20 percent
or more, while fuel imports were up nearly 33
percent over the year-earlier period. Exports
were up 4.5 percent from 1976, but secondhalf shipments were only marginally greater
than those in the first half.

U.S. trade deficit surges
billion dollars, census basis
exports (f.a.s.)

The strong economic growth in the
United States, accompanied by an increasing
reliance on foreign oil, led to rapid growth in
imports during 1977. This, combined with the
sluggish economic growth abroad that ham­
pered U.S. exports, served to extend the
deterioration in the U.S. balance of payments
observed in 1976 through 1977. The merchan­
dise trade balance (census basis), which had
shifted from an $11 billion surplus in 1975 to a
$5.9 billion deficit in 1976, plunged further in
deficit during 1977 with a shortfall of exports
to imports of $26.7 billion. A strong U.S. de­
mand for foreign goods, both petroleum and
nonpetroleum products, resulted in a surge in
imports by nearly 22 percent during the year.
Among nonfuel imports, the categories of
manufactured goods, machinery, and foods



automotive f |
other capital goods
machinery | |
agricultural H
nonagricultural |
industrial supplies

imports (f.a.s.)

gjg consumer goods
capital goods
J fuels

n o nfu el industrial supplies









♦Data based on January/November at annual rate.

Economic Perspectives

Trade flows, especially of exports, were
severely disrupted in the second half of the
year by an East and Gulf coast longshoremen's
strike against containerized shipping
operations which lasted from October 1
through November.
The deterioration in the U.S. trade
balance was reflected in trade patterns
between all major trading regions. While the
United States continues to run a trade surplus
with the European Economic Community, by
the end of October that surplus was $2.4
billion less than over the same period in 1976.
The United States recorded a trade deficit
with the developed countries of $2.9 billion
for January/October, a deterioration of $6.1
billion from a year ago. The U.S. trade deficit
with the Organization of Petroleum Exporting
Countries (OPEC) amounted to $16.5 billion
(an increase of some $6.4 billion) while the
deficit in trade with other developing coun­
tries reached $4.5 billion (an increase of some
$5.3 billion).
The excess of payments to foreigners
over the receipts from abroad implied by the
current account deficit has been more than
offset by financial flows recorded in the U.S.
capital account. During the third quarter of
1977 net acquisition of U.S. assets by
foreigners amounted to $12.9 billion, while

Foreign claims of the District
banks continue to rise
billion dollars
foreign claims of offices of foreign banks
foreign claims of overseas branches of District banks


foreign claims of indigenous banks


d DO







•As of November.

Federal Reserve Bank of Chicago

1975 1976


holdings of foreign assets by U.S. residents in­
creased $3.4 billion, leaving a net capital in­
flow of $9.5 billion during the quarter. This
followed net capital inflows of $2.8 billion in
the first quarter and $3.5 billion in the second
quarter. A major factor influencing the net
capital inflow was the purchase of U.S.
Government securities by foreign official in­
stitutions with dollars acquired by them
through intervention in foreign exchange
markets in an effort to moderate the rise of
their currencies relative to the dollar. A net
reduction in loans to foreigners by U.S. banks
as a result of improved lending opportunities
in the United States vis-a-vis foreign countries
also played a significant role.

International banking activities in the
District expand

International banking activity in the Dis­
trict during 1977 continued its expansion,
which began in the early 1960s. Over the last
five years the foreign assets of Seventh District
banks increased by over 200 percent, and the
total stood at $29.5 billion in November 1977.
There have been three major channels
through which District banks conducted their
international business: (1) head offices;
(2) foreign offices of District banks; and
(3) District branches and subsidiaries of
banks domiciled in foreign countries. The
domestic offices of District banks had claims
on foreigners of $6.0 billion towards the end
of 1977, a sizable increase over the $4.1 billion
in the same period a year ago. District banks
had liabilities to foreigners of $2.5 billion—an
increase of $300 million over the 12-month
period. Domestic offices of Seventh District
banks presently account for 10.2 percent of
the total claims on foreigners held by all
domestic offices of U.S. banks. This was a
significant increase over the District's share in
Over the last decade the major means by
which the Seventh District banks have en­
gaged in foreign lending has been through
their overseas branches. While in 1967 District
banks operated only six overseas branches, by


Assets of the District’s foreign
banks increase in 1977
total assets: $2,518 million*
all other assets
foreign securities

due from U.S,
due from

foreign loans
•As of November.


1977 there were 74 overseas branches main­
tained by 19 District banks. In November
these branches had total assets of $22.7
billion, an increase of $4.0 billion over the
prior 12 months.
The Seventh District's position as an in­
ternational financial center was strengthened
in 1973 when the Illinois General Assembly
passed legislation permitting foreign banks to
establish agencies, branches, and subsidiaries
in Chicago. In the four years since the passage
of that legislation, 30 offices of foreign banks
were opened in Chicago, including seven in
1977. The offices of foreign banking in­
stitutions in the District had assets of $2.5
billion as of theend of November,an increase
of $400 million in a 12-month period. Chicago
is presently the third largest foreign banking
center in the United States.

Economic Perspectives

Government: a new administration
takes command
During 1977 the operations of the federal
government proceeded, to a large extent, on
the momentum of programs and plans in­
itiated in earlier years. Although a new ad­
ministration took over in January, the process
of preparing new program plans is far from
complete. Several new programs were either
announced or were promised for early 1978.
However, little was done that changed the
course of federal action from the direction set
during the former administration.
The government's continuation along
the previous course was particularly true for
the first three quarters of the calendar year,
which were part of fiscal 1977. The new start­
ing date of the government's fiscal year from
July 1 to October 1 may actually have in­
creased the difficulty experienced by any new
administration in altering programs' direc­
tions early in its term of office. Decisions
made and embodied into legislation now
cover three-quarters of the new ad­
ministration's first year rather than two
quarters. On the other hand, there is more
time to alter the proposed budget for the next
fiscal year before it is implemented. The
budget for fiscal 1977 was presented to Con­
gress by the Ford Administration in January
1976. The outgoing administration also
prepared the budget for fiscal 1978, presented
in January 1977, together with some proposed
changes for fiscal 1977. While the Carter Ad­
ministration proposed still further changes in
the 1978 budget shortly after taking office, the
end results for fiscal 1977 were similar to the
Ford proposals. The first budget fully incor­
porating the Carter Administration's plans
will not take effect until October 1978,
some 20 months after the change of
Federal Reserve Bank of Chicago

The vanishing rebate

During the last few months of 1976 the
data on the economy were increasingly
negative in tone. The unemployment rate
rose sharply, and many economists forecast a
new recession. As the new year began, much
of the nation experienced record cold
weather. Shortages of fuel, particularly
natural gas, caused plants to close. The in­
coming administration felt that a substantial
increase in fiscal stimulus was necessary to
avoid a general economic decline. President
Carter proposed a three-pronged program to
stimulate the economy: tax reduction, public
works and increased public employment, and
a rebate on 1976 taxes. While the program was
being debated, it became evident that the
fears of a new recession were unwarranted.
Unemployment began a rapid drop, in­
dustrial production increased sharply, and
housing starts jumped back up to above a 2
million annual rate. As a result, while Con­
gress did pass legislation increasing public
service jobs and providing funds for sub­
sidizing hiring by state and local governments
as well as a modified form of the President's
proposals for tax reduction, the rebate was
Fiscal 1977—a surprising outcome

In January 1976 President Ford proposed
a fiscal 1977 budget with expenditures of $394
billion and a deficit of $43 billion.
These proposals were deemed too
austere by Congress, and the second Con­
gressional budget resolution proposed spend­
ing of just over $413 billion and a $50.6
billion deficit. In January 1977 the Ford-


prepared budget proposed broadening the
deficit to $57 billion, but Congress took no ac­
tion until President Carter's proposals had
been made. Then a third budget resolution
was adopted changing proposed spending to
$418 billion and allowing for a $70 billion
By late spring it was evident that spending
was still running below the levels anticipated
by Congress. At the same time receipts were
higher in part because the rebate had been
omitted from the stimulus program. The ad­
ministration's spending estimate was reduced
to about $408 billion with an expected $49
billion estimate for the deficit. By the time the
fiscal year ended, spending turned out to be
even lower, and the final figure for the deficit
was $45 billion, surprisingly close to the
original proposal made in January 1976.
Fiscal 1978— currently on schedule, but
changes to come.

The original budget proposals for fiscal
1978 were also prepared by the Ford Ad­
ministration. The Ford budget received little
attention from Congress until the Carter Adm in is tra tio n w as ab le to p re se n t
modifications. These modifications raised
spending about $20 billion above the Ford
proposal of $440 billion, estimated revenues
at about $402 billion, and proposed a deficit of
about $58 billion.
President Carter's new proposals were
basically those adopted in the second Con­
gressional budget resolution last September.
Spending was projected at $458.3 billion,
while revenues were expected to be $397.0
billion, giving a projected deficit of $61.3
billion. The principal difference in these Con­
gressional estimates is that they are based on a
slightly more pessimistic view of economic
conditions during fiscal 1978. The Con­
gressional estimate of revenues was several
billion dollars lower than the administration's
figure. Estimates of actual spending and
revenue during the first quarter of the fiscal
year (October-December 1977) are about
what would be expected so far, but it is too
early to forecast accurate final totals. Further­

more, the tax changes that will emerge from
the energy program and the tax reduction
program will have an unknown impact on
both revenues and the deficit for the coming
Social Security—a half-century reprieve

Each year since 1972, when Congress in­
corporated automatic increases in Social
Security benefits tied to the consumer price
index and increases in the wage base tied to
the change in average wages, it has been in­
creasingly evident that the trust funds sustain­
ing the system would be exhausted within a
few years. The revisions of 1972 inadvertently
adjusted benefits for inflation twice, since
benefits were raised periodically (for new and
future retirees) by both a wage and a price ad­
justment. In late December a new revision to
the Social Security law was enacted. This
change eliminated the double adjustment of
benefits by tying future increases to wages
only. In addition, the bill scheduled a series of
increases in both the tax rate and the level of
wages subject to the tax beginning in 1979 and
continuing through 1987. This change will in­
crease the tax paid by all covered workers
and, in addition, will impose substantial in­
creases on higher income workers. The max­
imum tax, matched by an equal tax on
employers, will go from $1,071 in 1978 to
$3,046 in 1987. The Congressional Conference
Committee estimates that the trust fund for
retirement benefits will remain in surplus for
50 years but that the disability trust fund will
need further funding in about 30 years. Some
committee members anticipate that the
solvency of the disability fund can best be
achieved by tightening eligibility re­
quirements rather than by further funding.
Energy—still unresolved

In April 1977 President Carter presented
his energy message to Congress. This program
was intended to reduce total energy con­
sumption growth to 2 percent a year or less as
rapidly as possible and to shift consumption—
Economic Perspectives

first from oil and gas toward coal and nuclear
power, and eventually to newer, essentially
inexhaustible resources such as solar energy.
Heavy stress was placed on conservation. A
series of taxes were proposed to increase the
price of petroleum to the world price, en­
courage coal use over oil or gas, increase the
cost of low-mileage automobiles, and in­
crease the cost of gasoline if consumption
were to rise above scheduled levels. Current­
ly unregulated natural gas in intrastate com­
merce was to be brought under the same
regulations as in interstate commerce, and gas
pricing was to be designed to encourage
home heating as its primary use. Accom­
panying the new taxes was a series of tax
refunds and credits designed to encourage
conservation measures by households and in­
dustry and to encourage industries to shift to
When Congress adjourned in December,
Senate-House Conference committees were
attempting to develop a program im­
plemented by two bills: one dealing with tax
aspects and one dealing with non-tax aspects
of the program. Several thorny problems in­
volving pricing and regulation of both oil and
natural gas and the amount and utilization of
taxes to be imposed remained to be resolved
at year-end.
The final form of the energy program to
emerge from Congress in early 1978 is uncer­
tain. Undoubtedly, however, the legislation
will have an important impact on both
businesses and personal lives in the years
ahead and will differ in substantial details
from the original proposals of last spring.

Federal Reserve Bank of Chicago

Federal expenditures—where the
money went

Total federal government expenditures,
as measured on the National Income Ac­
counts Basis, were about $422 billion in 1977,
more than 9 percent above 1976. This growth
was somewhat faster than had occurred the
previous year. As in the past several years,
only a little over one-third of this total—about
$147 billion—was spent on the purchase of
goods and services. Defense purchases were
about $95 billion, a smaller share of both total
purchases and total expenditures than in
either 1975 or 1976.
By far the largest claim on the federal
purse was for transfer payments to persons.
These payments totaled $170 billion, over 40
percent of all federal expenditures. About
$105 billion—$10 billion more than total
defense spending—was for Social Security
benefits. While many other programs in this
category—such as pensions to retired govern­
ment employees and unemployment in­
surance benefits—each resulted in expen­
ditures of $10 billion or more, even in the
aggregate they totaled substantially less than
Social Security expenditures.
Grants-in-aid to state and local
governments was one of the fastest growing
segments of federal expenditures during
1977, primarily as a result of the jobs and
public works programs aimed at stimulating
the economy. This grant totaled about $69
billion in 1977, up nearly 12 percent from
1976, and is scheduled to continue at a
high level into 1978.


Finance: credit demands strong
As economic expansion progressed, finan­
cing in the credit markets rose, along with the
demand for transactions balances. Growth in
the narrow money supply (M-1) was close to
71/2 percent for the year, the largest since 1972.
In an effort to reduce monetary growth to a
pace consistent with a lower rate of inflation,
the Federal Reserve supplied the reserves that
supported the deposit expansion at only a
slightly higher cost to the banking system.
Although short-term interest rates moved up
from, the cyclical lows reached late in 1976,
funds were in plentiful supply as evidenced
by the record amount raised in the credit
market. Intermediate-and long-term interest
rates ended the year at levels inside or below
their range of fluctuation in 1976.
Commercial banks supplied about onefifth of the total funds advanced—roughly the
same proportion of the total as in 1976.
However, there was a significant shift in the
use of bank funds. Credit provided to the
private nonbank sectors of the economy by
the banking system more than doubled in
1977 despite continued weakness in loan de­
mand by major national corporate customers
at the big money center banks.

on autos and houses. Record increases in
both consumer credit and home mortgage
credit accounted for two-thirds of the overall
increase over 1976 in credit market financing.
Businesses also borrowed almost two-fifths
more than in the prior year, especially
through short-term obligations.
Strong demand for single-family homes
and continued inflows of savings to
depository institutions, especially during the
first half of the year, produced record
mortgage lending activity. In the latter part of
the year, thrift institutions relied heavily on
advances from Federal Home Loan Banks and
on borrowings from other sources. Although
thrift institutions were again the major source
of home mortgage financing, their share
declined. The amount supplied by the com­
mercial banking system doubled as mortgage
interest rates remained relatively attractive at
historically high rates. The sale of securities
backed by pools of mortgages in the capital
markets by the federally sponsored agencies

Funds raised up sharply . . .
billion dollars
seasonally adjusted annual rates

Credit flows higher

Funds were raised in the credit markets
by individual businesses, nonfinancial
businesses, and governmental units at an an­
nual rate of nearly $330 billion during the first
three quarters of 1977 (seasonally adjusted)—
almost one-fourth higher than during 1976.
All of the increase was accounted for by the
private sector. Higher borrowings by state
and local authorities were more than offset by
lower borrowings at the federal level. Higher
prices increased financing needs for all
Within the private sector, consumer
borrowing led the pace in the credit area,
reflecting the large consumer expenditures


U.S. Treasuries
and agencies
state and local
consumer credit
residential mortgages
foreign and other

3 quarters

Economic Perspectives

. . . with household sector accounting
for most of the increase
billion dollars
seasonally adjusted annual rates


home mortgages

consumer credit

3 quarters

continued to be a growing source of
mortgage funds.
Commercial banks dominated the provi­
sion of consumer credit to households,
supplying about one-half of the total, the
same as in the prior year. Credit unions and
finance companies provided most of the
Nonfinancial corporate businesses ex­
panded their credit market borrowing in 1977
to almost the 1974 level. Funds were used to
finance increased capital expenditures not
covered by internally generated funds and
larger and higher cost inventories. New equi­
ty issues declined to 9 percent of net funds
raised after increasing from 5 percent in 1974
to 27 and 18 percent in 1975 and 1976, respec­
tively. Commercial bank loans to business
(excluding mortgages) represented almost
three-fourths of the increase in debt finan­
cing by business, but such bank loans were
still at only two-thirds of the 1973 and 1974
rates. The balance of the increase in business
debt was mostly in finance company loans,
primarily to finance automobile inventories,
and in commercial mortgages.
State and local governments refunded
substantial amounts of securities issued at ar­
Federal Reserve Bank of Chicago

tificially high rates in 1974 and 1975. Municipal
interest rates remained relatively low
throughout the year as commercial banks and
fire and casualty insurance companies,
buoyed by increased profitability, returned to
the tax-exempt market. Local governments
invested the proceeds in special Treasury
issues when the terms of the original issue
prevented immediate refunding. Local
governments raised about the same amount
as they supplied to the U.S. Government
Reduced borrowing by the federal
government and the purchase of Treasury
issues by state and local governments and
foreign accounts mitigated the impact of the
U.S. government on the credit markets. The
foreign sector was the largest purchaser of
Treasury securities in 1977, doubling the
amount purchased in 1976 and absorbing
two-fifths of the net increase. State and local
governments accounted for 29 percent.
Mixed demand at banks

Commercial bank credit rose more than
11 percent in the year ended November 30,
1977, compared with 8 percent in the previous

Savings institutions provide
bulk of home mortgage financing
billion dollars
seasonally adjusted annual rates


commercial banks

savings institutions

mortgage pools*

3 quarters

•G N M A, FHLMC, and Farmers Home Administration pools.


year. Bank loans accounted for the gain. Total
loans increased about 15 percent for the year,
while bank acquisition of securities was up
about 4 percent. The expansion in loans was
largely a reflection of the firmness in
household credit dem ands, although
business loan demands increased also. Con­
tinuing the uptrend that persisted throughout
1976, household credit demands at all com­
mercial banks increased markedly as the year
progressed and were up about 15 percent for
the year as a whole compared with an 11 per­
cent rise in 1976.
Real estate loans rose at a much faster
pace than in 1973 when construction activity
as reflected in starts and completions was
emphatically greater. Consumer instalment
loans increased faster than in any other year,
although the bulk of the rise was in the last
three quarters of the year.
Bank loans to business borrowers rose
more than 12 percent in 1977, after rising less
than 1 percent in 1976, with the rate of growth
accelerating during the year. In the fourth
quarter business loans were up 15 percent.
Business loans expanded more rapidly at
small- and medium-sized banks than at large

Commercial bank credit up
billion dollars
seasonally adjusted annual rates


3 quarters

banks. The contrast was much sharper earlier
in the year, but in the fourth quarter business
loan demands at large banks came on strong­
ly. In the fourth quarter of the year business
loans rose at an annual rate of about 16 per­
cent at the large banks and only 13 percent at
the smaller banks.
Bank acquisition of U.S. Governments
decreased sharply last year. Holdings of
Treasuries at all commercial banks declined
more than 3 percent, after rising 23 percent in
1976. By contrast, bank acquisition of other
securities, mainly obligations of states and
political subdivisions, rose more than 7 per­
cent in 1977 compared with a 2 percent rise in
the previous year.
While the banking industry enjoyed
rapid demand deposit expansion in 1977,
growth in total time and savings deposit in­
creased sharply. Time and savings accounts,
other than large certificates of deposits (CDs),
rose very rapidly in the first half of the year but
at a much slower rate thereafter. Large CDs
rose only moderately in the first half of the
year, reflecting the modest rise in business
loan demands. As the year drew to a close,
however, the growth in CDs was the fastest
since the recession. The faster growth in CDs
resulted, in part, from the expansion of
business loans and a decline in consumertype savings flows at the large banks.
The increase in the prime loan rate of the
large banks, which closed the year at the
highest level in two years, lagged the rise in
short-term market interest rates. During the
early part of the year major banks allowed a
large spread to develop between their prime
rate and the market rate on commercial
paper—an alternate source of funds for large
firms. As loan demand rose and banks com­
peted for customers, the spread was reduced.
At year-end the prime-paper rate spread had
narrowed to about 100 basis points compared
to 160 basis points earlier.
Although the prime rate rose about 150
basis points in 1977, competition for loan
business intensified as the year progressed.
N onprice terms were reported eased
somewhat, with more flexibility in compen­
sating balance requirements and some term

*U.S. securities were -1 billion dollars for first three quarters of 1977.


Economic Perspectives

loans made at fixed rates.
Before year-end some
aggressively seeking loan
business through belowprime commercial papertype arrangements. While
w ill
undoubtedly increase loan
volume, the strength of
business loan demands
will have an important
bearing on the flexibility of
lending terms.
Monetary aggregates and
interest rates

Growth in the broader aggregates was
in line with projections . . .

Actual projection

Actual projection Actual

(p e r c e n t , s e a s o n a l l y a d j u s t e d a n n u a l r a t e s )








As the econom y
NOTE: Annual data based on fourth-quarter averages.
moved into its third year of
economic expansion in
the spring of 1977, the
. . . but rapid rise of M-1 in second and third quarters
F e d e r a l R e s e r v e in
pushed it above lowered target ranges
c o n d u c t in g monetary
policy sought to sustain
economic growth and to
restore price stability.
Projected annual growth
ranges for the monetary
aggregates were gradually
reduced during the year to
d a m p e n i n fl a t i o n a ry
expectations and renew
public confidence both at
home and abroad. With
the income velocity of
money increasing at a
more normal rate than in
the first year of recovery
and credit expansion
proceeding at a brisk pace,
the Fe d e ra l Reserve
sought to restrain monetary growth to within includes currency and commercial bank de­
desired ranges by supplying reserves only at a mand deposits held by the public; for M-2,
w hich includes—in addition to M-1—
higher cost to the banking system.
In quarterly reports to Congress, the
commercial bank savings and time deposits
other than large CDs; and for M-3, which
Federal Reserve specifies annual monetary
growth ranges expected to be consistent with
includes—in addition to M-2—mutual savings
bank deposits and shares at savings and loan
achieving economic objectives. Annual
associations and credit unions. The projecgrowth projections are made for M-1, which
Federal Reserve Bank of Chicago


Not much change in long rates . . .

(Bond Buyer)
T I I I I I i i I I I I I ■■■!■■■■

U.S. Governments
■■■ I II


I I I I I I I I I I I I I I ^

. . . as money rates moved up
moderately . . .

. . . and banks kept prime above
market cost of funds

tions take account of developments that may
influence the expected rate at which money
balances will be used.
As the third year of the current expansion
progressed, the income velocity of M-1 (V1)—a measure of the intensity with which the
public uses transactions balances relative to
GNP—increased at a somewhat slower rate.
Over the last three quarters of 1977 V-1 in­
creased at about 3 percent, below the 3.5 per­
cent average annual postwar rate experi­
enced in the second year of the current

expansion and in sharp contrast to the
average 8.3 percent rate of the first year.
Actual growth in the monetary
aggregates over the year was near or above
the upper limits of projected ranges specified
in quarterly reports to Congress. The first
quarterly report of 1977 specified growth
ranges of 4V2-6V2 percent for M-1, 7-10 per­
cent for M-2, and 8V2-H percent for M-3 over
the fourth-quarter 1976 to fourth-quarter
1977 period. Actual M-1 growth over this
period was 7.4 percent, up from 5.6 percent in
1976 and the fastest since 8.4 percent in 1972.
In contrast, actual 1977 growth rates for M-2
and M-3 of 9.6 and 11.6 percent, respectively,
were somewhat slower than in 1976.
As it had done in 1975 and 1976, the
Federal Open Market Committee (FOMC)
progressively lowered annual monetary
growth ranges through 1977. By year-end the
ranges, applying from third-quarter 1977 to
third-quarter 1978, had been reduced to4-61
percent for M-1, 61 percent for M-2, and 8/2-9
IOV2 percent for M-3.
After the first quarter, as public demand
for transactions balances strengthened and
monetary aggregate growth—especially for
M-1—exceeded desired growth, the FOMC
became less accommodative in supplying
reserves to support the deposit expansion.
Rapid monetary growth in April and July
prompted the FOMC to allow the federal
funds rate—the market price of reserves—to
rise from the prevailing 45 to 4V a percent to
around 5Vb percent in early May, to 6 percent
by mid-August, and to 6V2 percent by midOctober. In addition, the discount rate—the
rate charged by the Federal Reserve on loans
to member banks—was increased 50 basis
points to 53 percent at the end of August and
an additional 25 basis points to 6 percent in
late October.
As the year progressed, short-term in­
terest rates moved higher mirroring the 191
basis point increase in the federal funds rate.
In contrast, borrowing costs in capital markets
changed little during 1977. The December
1977 new utility Aaa bond rate was but 40 basis
points higher than its cyclical low reached in
December 1976. The long-term municipal
Economic Perspectives

bond rate continued to decline through 1977
reflecting renewed investor confidence in the
tax-exempt market.
District banking

expand services available to customers.
Credit Unions in Wisconsin and Indiana
aggressively expanded share draft accounts,
while those in Iowa, Michigan, and Illinois
were hampered by litigation. The number of
Illinois S&Ls in the District offering NINOWS
increased to about 60 compared to 46 the
previous year.
Approximately 25,000 NINOW items
were processed daily during December,
representing an average volume of about $3
million. This was almost four times the daily
average number and dollar amount process­
ed during the same month in 1976. However,
the impact of NINOWS on commercial bank
deposits in Illinois was minimal.
The first statewide, shared electronic
funds transfer system was introduced by the
commercial banks in Iowa. The Iowa Transfer
System (ITS), owned by about 550 of the 650
banks in Iowa, had close to 40 banks par­
ticipating during the year. Because of Iowa's
sharing law, small banks have the same ITS op­
portunities as do the larger ones. Services
available through ITS include point-of-sale
terminals and both on- and off-premise
automated teller machines.

At Seventh District member banks credit
expanded more during 1977 than during the
previous year and kept up with the pace
nationally. Total loans and investments (ex­
cluding fed funds) of all District members rose
about 9 percent in the year ended November
30, 1977, compared to 6 percent in 1976. The
13 percent rise in loans accounted for most of
the 1977 credit increase whereas in 1976
emphasis was on U.S. Treasury securities.
Much of the growth in loans was concen­
trated in areas outside of the major cities.
Money center banks in Chicago felt the
effects of light loan demand by large business
customers, while agricultural-based banks ex­
perienced heavy loan demand and very tight
liquidity positions. In all District areas loan
growth in 1977 was stronger than in 1976.
Consumer-type savings inflows were
weak at District large weekly reporting banks
in 1977 compared to 1976. This was true dur­
ing the first half and
even more so in the
Loans dominate credit growth in 1977
third quarter when
“ wild cards" (4-year
U.S. Govt,
time certificates issued
in late 1974 without a
ceiling rate) were ma­
turing. Some of these
(p e rce n t ch a n g e)
funds left commercial
Large banks2
banks and flowed into
- 2.3
S&Ls primarily because
- 0.6
- 1.2
of the rate differential.
- 5.7
However, during third58.9
quarter 1977, District
Des Moines
banks acquired addi­
Other member banks
tional deposits through
- 7.8
stepped-up sales of
- 0.1
large CDs.
Nonbank financial
- 5.7
institutions continued
to offer more competi­
Excludes fed funds.
tion to commercial
2Large weekly reporting member banks.
banks as they sought to
Federal Reserve Bank of Chicago


District holding company activity

During the past year 63 of the District's
commercial banks became subsidiaries of
holding companies. Twenty-seven of these
banks became subsidiaries of one of the Dis­
trict's 55 multibank holding companies
operating in Iowa, Michigan, and Wisconsin,
where multibank holding companies are
legal. By year-end holding companies con­
trolled 774 banks or 23 percent of all commer­
cial banks in the Seventh District.
The Board of Governors and the Federal
Reserve Bank of Chicago, acting under
delegated authority, ruled upon 98 bank
holding company and merger applications
that involved District banks last year. Eightythree of the applications were approved and
15 (15.3 percent) were denied. Decisions on
applications stressed the financial and
managerial soundness of the bank holding
companies and their subsidiaries. Of the
applications denied by the Board, 11 were on
grounds that the proposals would have
created or added to strains on the financial
and managerial resources of the applicant
company or a bank or nonbank company in­
volved. Four applications were denied
because the acquisitions were judged to

eliminate or significantly diminish competi­
tion, without sufficient offsetting con­
venience and needs or public benefits. Of
these, two involved chain banking
relationships. The Board has stated that where
a proposed acquisition involves the use of a
holding company by a group of individualsto
acquire control of a bank that is a competitor
of another bank under the control of essen­
tially the same individuals, consideration
must be given as to whether the formation
would entail significant anti-competitive
effects.1 Only one of the 11 applications to
engage in permissible nonbanking activities
was denied; and that denial was incidental to
the denial of the formation of the one-bank
holding company. The most frequently
entered nonbanking fields during 1977 were
insurance and consumer finance.
See Board Order of M ay 11, 1977, denying the
application by Mahaska Investment Company, Oskaloosa, Iowa, to become a bank holding company
through the acquisition of 51.47 percent of the voting
shares of Farmers Savings Bank, Fremont, Iowa (63
F e d e ra l R e s e r v e B u lle tin 579). Also see Board Order of
November 18, 1977, denying the application by Citizens
Bancorp., Inc., Hartford City, Indiana, to become a bank
holding company through the acquistion of 80 percent or
more of the voting shares of the Citizens State Bank, Hart­
ford City, Indiana.

Bank holding company applications processed during 1977

Holding company



Multibank and
additional shares













































Merger proposals


‘ Excludes 23 4(c)(8) notifications by bank holding companies to engage in permissible nonbanking activities on a de
novo basis.



Economic Perspectives

Maintaining the expansion
M o s t in f o r m e d o b s e r v e r s e x p e c t 1978 to

w id e s p r e a d

sh o rta g e s



w e re

r e s e m b le 1977 in b ro a d o u t lin e in te rm s o f

a ss o c ia te d w ith e x t r e m e ly lo n g le a d tim e s,

b o th e c o n o m i c g ro w th a n d p r ic e in fla tio n . By

d o u b le

a n d la rg e th e sta te s o f t h e S e v e n t h F e d e r a l

b u ild u p s . W h e n g o o d s a r e r e a d ily o b ta in a b le ,

o r d e r in g ,


e x c e s s iv e

in v e n to r y

R e s e r v e D is tr ic t c a n b e e x p e c t e d to s h a r e in

it m a y a p p e a r th a t a n y rise in d e m a n d c a n b e

t h e n a tio n 's g a in s in o u tp u t a n d e m p lo y m e n t .

a c c o m m o d a t e d . A c t u a lly , m a rg in s o f u n u s e d

T h e c u r r e n t e x p a n s io n w ill b e t h r e e y e a rs

c a p a c it y


m o st

in d u s trie s



la rg e .

o ld th is sp rin g . A s a r e s u lt, s o m e a n a ly sts
b e lie v e th a t th e u p s w in g is " g r o w in g o ld ,”

V a r ia tio n s in d e m a n d th a t m a y c a u s e s h o rt­

b a s e d o n th e a v e r a g e o f p ast m o v e m e n t s , a n d

o t h e r , a r e o fte n n a r ro w . T h e b e st a s s u ra n c e

a g e s o n t h e o n e h a n d , a n d m a rk e t g lu ts o n th e

su g g e st th a t a d o w n t u r n m a y b e n e a r. B u t

a g a in st s u c h im b a la n c e s is p r o v id e d by th e

a v e r a g e s a r e o f little u s e in c h a r tin g t h e fu tu r e

sy ste m o f fr e e a n d f le x ib le m a rk e t p r ic e s .

p a th s o f b u s in e s s flu c t u a t io n s . In r e t ro s p e c t,


P r e s id e n t has p r o p o s e d

a n e t tax

e a c h e x p a n s io n a n d c o n t r a c t io n has h a d im ­

r e d u c t io n o f $25 b illio n fo r in d iv id u a ls a n d

p o rta n t u n iq u e c h a r a c t e r is t ic s . L o n g e v ity has

b u s in e s s e s to m a in ta in a n d a c c e le r a t e th e e x ­

v a r ie d su b s ta n tia lly . T h e r e c o r d e x p a n s io n o f

p a n s io n .

1960-69 w a s w id e ly b e lie v e d to b e r u n n in g o u t

o r g a n iz a tio n s h a v e u rg e d tax r e d u c t io n s o f a

o f ste a m in 1962 a n d in 1967.

s im ila r m a g n it u d e , a lth o u g h p ro p o s a ls d iffe r

M any

o th e r

in d iv id u a ls


V ir t u a lly all p a st b u s in e s s d e c lin e s h a v e

g re a tly in d e ta il. In p a rt, tax r e d u c t io n is u rg e d

f o llo w e d th e d e v e lo p m e n t o f e x c e s s e s a n d

as an o ffse t to in c r e a s e s in S o c ia l S e c u r ity an d


u n e m p lo y m e n t ta x e s, e f f e c t iv e th is y e a r, an d

ju s tm e n ts . In e a rly 1978 t h e r e a r e su r p r is in g ly

to th e rise in tax r e c e ip t s th a t o c c u r s as in ­

fe w s e r io u s e x c e s s e s a n d im b a la n c e s , at least

d iv id u a l

in t h e d o m e s t ic e c o n o m y . D u r in g th e past

b r a c k e ts , p a rtly r e f le c t in g in fla tio n .

im b a la n c e s ,

w h ic h

r e q u ir e d

p a in fu l

in c o m e s

m ove

in to

h ig h e r


y e a r m a n u f a c t u r e r s h a v e m o v e d p r o m p t ly to

W h ile in t e r e s t ra te s h a v e in c r e a s e d in r e ­

c u t p r o d u c t io n w h e n d e m a n d fa ile d to m a tc h

c e n t m o n th s in r e s p o n s e to risin g c r e d it d e ­

e x p e c t a t io n s a n d in v e n t o r ie s th r e a t e n e d to

m a n d , all ty p e s o f lo a n s h a v e c o n t in u e d to b e

b e c o m e b u r d e n s o m e . C o n v e r s e ly , e x c e p t fo r

r e a d ily a v a ila b le . T h e m o n e t a r y a u th o r it ie s

c e r t a in s p e c if ic ite m s — m a in ly n a tu ra l gas a n d

a re p le d g e d to fa c ilita te in c r e a s e s in m o n e y

m a te r ia ls fo r h o m e in s u la t io n — ra w m a te ria ls ,

a n d c r e d it o f a m a g n it u d e th a t w ill a ss u re a d e ­

c o m p o n e n t s , a n d f in is h e d g o o d s h a v e b e e n

q u a te liq u id it y , b u t n o t so g re a t as to a d d to

a v a ila b le

e x istin g in fla tio n a ry p r e s s u r e s .


n o rm a l

tim e

s c h e d u le s .

Federal Reserve Bank of Chicago