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Federal
Reserve Bank of
NewYbrk
Q u a r te r ly R e v ie w




Winter 1976
1

13

21
24

31
33

Volume 1

The New York City Budget:
Anatomy of a Fiscal Crisis
Measuring Capacity Utilization in
Manufacturing

Jam es F. Ragan

The business situation
Current developments
The changing composition of the
labor force

S haron P. S m ith

The financial markets
Current developments
Interest rate behavior in the current
economic recovery

40

Rona B. Stein

John P. J u d d

Treasury and Federal Reserve Foreign
Exchange Operations

A lan R. H olm es
S c o tt E. Pardee

The New York City Budget:
Anatomy of a Fiscal Crisis
by Rona B. Stein

This article is designed to provide background infor­
mation on some of the key developments that underlie
New York City’s recent budgetary difficulties. Its focus
is threefold. In particular, the city budget is examined
to identify those expenditure categories which are
large and which have grown rapidly, especially in re­
cent years. Second, per capita spending by New York
City is compared with that of other large municipalities
in this country to gain perspective on the total package
and costs of services provided by the city. Analysis of
some of the major economic, demographic, and politi­
cal factors which have contributed to the budget im­
balance, and therefore to the city’s ongoing difficulties,
constitutes the third principal area of focus. While
much of the information presented in this article is
available elsewhere, the objective here is to pull a
wide variety of statistics into a coherent framework to
facilitate informed discussion of the city’s difficulties.
It should be emphasized at the outset that only
some aspects of New York City’s complicated financial
situation are analyzed here. The article does consider
the budgetary impact both of demographic changes,
which led to a relatively heavy concentration of the
low-income aged in the city, and of nationwide reces­
sions and inflation. The fact that the city voluntarily
assumed responsibility for supporting services that
are not provided by most other municipal governments
is also considered. On the other hand, while various
municipal inefficiencies, including dubious accounting
practices and poor budgetary control procedures, un­
doubtedly played a role in precipitating the crisis, this
article does not delve into these topics.




In the first section of the article, the expense budget
is divided into its major components to identify areas
of rapid growth and to suggest factors which may
have contributed to this expansion. The second sec­
tion takes up the topic of “controllable” and “uncon­
trollable” spending, while the third examines city
outlays relative to spending by other municipalities.
Brief sections on the city’s revenue trends and on
certain previously proposed remedies for some of the
city’s fiscal ills follow, and concluding comments are
contained in the final section.

Composition of city spending
To examine the expenditure patterns which existed at
the onset of the fiscal crisis, it is necessary to analyze
the budget prior to austerity measures taken either by
the city administration alone or in conjunction with the
Municipal Assistance Corporation (MAC) or the Emer­
gency Financial Control Board. For this reason the
major expenditures outlined in Table 1 (and all other
calculations unless otherwise indicated) are based on
the authorized July 1975-June 1976 expense budget.1
The largest single area of expenditure, accounting
for 22 percent of the total, is for the Department of
1 Th e authorized budget was used in this analysis because it contains
detailed expenditure breakdowns for each departm ent or agency.
However, since revenues and expenditures can never be forecast with
perfect accuracy, budget figures change as the fiscal year
progresses. In fiscal 1975-76, the authorized expense budget was
alm ost $70 0 m illion less than actual outlays. A lthough such discrepan­
cies change the amounts of individual appropriations, they do not
substantially affect the relative proportions of the various
expense categories.

FRBNY Quarterly Review/Winter 1976

1

T able I

New York City’s Budgeted Expenditures
Fiscal year 1975-76

M illions of
dollars

Percentage of
total budget

D epartm ent of Social Services . . .
Board of Education ...........................
Health Services A dm inistration . . .
Police D e p a r tm e n t...............................
Board of H igher Education ............
Environmental Protection .................
Payments to charitable institutions.
Fire D e p a r tm e n t....................................
Hum an Resources P r o g r a m ............
D ebt s e r v ic e ...........................................
O ther .........................................................

2,937.5
2,468.0
1,165.3
943.7
597.9
495.1
586.3
410.5
164.9
1,885.6
1,577.7

22.2
18.7
8.8
7.1
4.5
3.7
4.4
3.1
1.2
14.2
11.9

Total e x p e n d itu re s ...............................
Less: Capital budget and special
funds used to finance operating
e x p e n d itu re s ...........................................

13,232.5

100.0

Expense budget ....................................

12,087.5

Expenditure category

1,145.0

Note: Because of rounding, figures do not necessarily
add to totals.
S o u rc e : New York City Expense Budget, 1975-76.

Social Services. Even this amount, however, does not
cover the full extent of welfare costs. The separate
allocation which is made for the Human Resources
Program2 must be added to this sum, raising total wel­
fare expenditures in New York City to more than $3.1
billion, about three fourths of which are Federally or
state funded. The second largest allotment is for total
educational services, i.e., for the Board of Education
as well as for the Board of Higher Education. More
than $3 billion goes for education. The Health Services
Administration, which includes the Health and Hospi­
tals Corporation, is the third major area of expendi­
ture, receiving 8.8 percent of budget funds. Together,
welfare, education, and health services account for
approximately 55 percent of New York’s budget.
Over the long run, education and health services
have each constituted a fairly constant share of the
total budget, but the relative allotment for social ser­
vice expenditures has grown significantly. Expendi­
tures in this category are approximately fourteen times
what they were in fiscal 1956, while the budget as a
whole is about seven times larger. It is this area which
has been responsible for the greatest part of the ex­
plosion in city spending. (The proportionate alloca­
2 The Hum an Resources Program provides direction, budgeting, and
coordination of city policy for com munity action, m anpow er and
career developm ent, social and youth services, public assistance,
and planning for and im plem entation of early childhood services.

2 FRASER
FRBNY Quarterly Review/Winter 1976
Digitized for


tions to social services, education, health services,
pensions, and debt service are illustrated in the chart.)
The actual allocations to the major budget areas
in selected fiscal years are shown in Table 2. The
extraordinary increases in social service and higher
education expenditures stand in sharp contrast to the
more moderate growth in other categories. The dra­
matic increase in the total welfare case load has been
a major cause of the growth in social service expendi­
ture. The number of persons on public assistance rose
from 339,000 in November 1961 to 998,000 in November
1975; in real terms, expenditures rose just as precip­
itously.3
In part, the exceedingly large social service alloca­
tions reflect demographic changes in the city’s popu­
lation. For example, services for the aged, a group which
tends to have the lowest income, increase as the propor­
tion of the old in the population grows. By 1970, those
aged 65 and over constituted 12 percent of all city resi­
dents, an increase of 4 percentage points since 1950.
During this same twenty-year period, the nationwide
increase was only 2 percentage points. Between 1970
and 1973, the proportion of the city’s older population
continued to rise, reaching 13 percent. Moreover, in
the three-year period ended in 1972, the real income
of elderly households declined by 12.6 percent.4 As
the number of young people has also been increasing,
the proportion between 25 and 64 years of age, the
bulk of the labor force, has fallen since 1960 and now
constitutes less than half of the city’s population.
Many of those presently receiving social service as­
sistance originally migrated to older industrial areas
like New York because there was a traditionally high
demand for unskilled labor in these urban manufactur­
ing centers.5 Lately however, the number of jobs in
these areas has declined considerably. Indeed, 1975
3 The number of persons on public assistance declined sharply
in N ovem ber 1974 because of the transfer of a significant number
to the Federally funded Supplem entary Security Income
Program (S S I). Under the SSI program, the Social Security
Adm inistration assumed all adm inistrative and financial respon­
sibility for the Aid to the Disabled, Aid to the Aged, and
Aid to the Blind programs. Although the basic SSI payments are
uniform throughout the country, some states a n d /o r localities
may supplem ent the minimum payment and make em ergency grants
for loans to recipients, owing to differences in living costs.
During 1975, New York City contributed about $58 million in
SSI payments.
4 These are the latest available data. See New York City Office for
the Aging [2 6 ].
5 It has been suggested that the problems in urban areas actually
associated with migration have been exaggerated. “ M igration to the
cities and out of the South is not significant enough nor are m igrants’
income experiences different enough from their urban and Northern
counterparts to warrant the considerable alarm the migration issue
stimulates. The most im portant policy im plication of this is that
programs to stem migration are not likely to have much im pact on
city problem s.” See W ertheim er [42, page 61 ].

manufacturing employment in New York City was only
55 percent of its 1960 level. Yet, immigration to the
older metropolitan centers did not completely halt. In
fact, there is some evidence that New York City and
other older industrial regions may have unintentionally
encouraged the poor to move in by offering relatively
generous levels of w elfare benefits. This can be seen
in Table 3. In the eight largest industrial states, the
average benefit distributed under the Aid to Families
with Dependent Children (AFDC) program amounts to
$270 per month. By comparison, in the eight states with
the lowest benefits, the average monthly AFDC payment
amounts to only $99. The problem is severe in New
York, which pays the highest benefits and has the sec­
ond largest number of recipients, both in absolute and
percentage terms.
Given these differentials, there is an incentive for
the poor to relocate to the older industrial regions,
and the evidence in Table 4 suggests that such relo­
cation has taken place. As can be seen, the incidence
of welfare-receiving mothers who were born out of
state is considerably higher in the older industrial

states than it is in the states that pay the lowest wel­
fare benefits.6 Moreover, in these industrial states, the
proportion of the total population born out of state is
less than half that of the welfare mothers, whereas in
the other states, the figures are about equal.
Yet it should be noted that, as available in New York,
neither AFDC payments alone nor a more inclusive
package of benefits— net cash, food, and public hous­
ing— appears to be out of line with those in some other
large cities. A comparison of benefits available to two
standard-size families in each of twelve cities is shown
in Table 5. The major differences which arise are for
the most part between the newer and older cities
rather than between New York and the other cities.
Nevertheless, the generous level of welfare payments
must be included with such factors as the availability of
low-cost rental housing and of cheap public transporta4 N either the birthplace nor the previous w elfare status of these
welfare-receving mothers is known. Therefore, there is a possibility
that these mothers, already dependent on w elfare in a high benefit
state, m erely relocated to another area of sim ilarly generous benefits
and did not m igrate from a low benefit area, as is suggested here.

New York City: Major Budget Appropriations
In selected fiscal years
Millions of dollars
3 ,5 0 0
Social services
3 ,0 0 0 —

$3,102

Millions of dollars
3 ,5 0 0
Education

2 ,5 0 0 -

2 ,0 0 0 -

2 ,0 0 0 -

1,500 -

1,500 -

1,000 —

1,000
$201
11%

o
1 9 5 5 -5 6

$494

0
1975-76

$353
$330
19%

|

195 5 -5 6

1 9 6 5 -6 6

1

1 9 6 5 -6 6

1975-76

1 9 5 5 -5 6

1 95 5 -5 6

I_1
1 9 6 5 -6 6

1975-76

1 9 6 5 -6 6

1975-76

Millions of dollars

Millions of dollars

Millions of dollars

1 9 5 5 -5 6

$1,165

_

500 -

|§ J 3 % J
196 5 -6 6

Millions of dollars
1,400
Health services

3 ,0 0 0 —

2 ,5 0 0 -

c
nn
DUU

$ 3 ,0 6 6

1 9 6 5 -6 6

197 5 -6 6

1 9 5 5 -5 6

Note: Base includes capital budget and special funds used to finance operating expenditures: 195 5 -5 6=$ 1 ,7 8 2 million,
1 9 6 5 -6 6 = $ 3 ,9 9 8 million, and 1 97 5-76=$13,233 million.
Sources: C itizens Budget Commission, Pocket Summary of N ew York City Finances, s elected fiscal years,
and New York City Expense Budget, 1975-76.




FRBNY Quarterly Review/Winter 1976

3

eral report has stated that “ under Federal law the state
determines eligibility requirements and benefit levels;
therefore, the city already has virtually no control over
its welfare budget although it must pay one fourth of
the cost”.8 The state legislature, however, has a mea­
sure of control over local welfare expenditures, insofar
as that body determines both the degree of local par­
ticipation in the funding of these expenses and the
amount of benefit payments above the Federally man­
dated minimum. Since New York City and other locali­
ties must by law comply with the statutes established
by the state legislature, welfare is probably “ uncontrol­
lable” in the short run. In the longer run, the city can
try to bring about changes in the state law. In addition,
the city does have discretionary control over the ad­
ministrative and personnel costs associated with the
welfare program. While budgeted funds for the Depart­
ment of Social Services and the Human Resources
Program exceed $3.1 billion, salary expenses con-

8 See C o n g re s s io n a l B u d g e t O ffice [9 , p ag e 2 7 ],

nected with the welfare program total $287 million,
or less than 10 percent. Of course, to the extent that
personnel savings are achievable, this would represent
a net gain to the city, assuming that efficiency is not
adversely affected.
It is important to note that, under state law, New York
City is obligated to assume an inordinately large share
of welfare costs relative to cities in other states. For
example, localities in New York State must pay 25 per­
cent of total welfare costs, while those in California
pay only 16 percent. Moreover, of the states that do not
take full responsibility for the non-Federal share, New
York State shifts the heaviest burden on to its localities.9
The states, in turn, receive varying contributions toward
their welfare costs depending on the Federal Govern­
ment’s assessment of each state’s ability to pay.
Thus, while Mississippi receives support for more
than 70 percent of its welfare and Medicaid programs,
New York State receives the minimum subsidy, i.e.,
9 In N ew Y o rk S tate th e re is a ls o a n o n -F e d e ra lly b acke d
h o m e -re lie f p ro g ra m s h a re d jo in tly by th e sta te a nd th e lo c a litie s .

T a b le 3

Aid to Families with Dependent Children (AFDC)
By state, J u ly 1975

G o v e rn m e n ta l u n it

N um ber of
re c ip ie n ts *

P e rcen tag e
o f to ta l

A v e ra g e fa m ily
m o n th ly p a y m e n t

P e rc e n ta g e o f to ta l
p o p u la tio n f

T o ta l U n ite d S t a t e s ............................................................

11,147,071

100

217.01

100

T o ta l, e ig h t la rg e s t in d u s tria l s t a t e s ..........................

54

270.26

45

C a lifo rn ia ...............................................................................
I l l i n o i s ^ ....................................................................................
M a s s a c h u s e tts ^ ................................................................... ..........
M i c h i g a n .................................................................................
N ew J e r s e y ............................................................................. ..........
N ew Y o rk ...............................................................................
O h io ........................................................................................
P e n nsylva nia ......................; ...............................................

12
7
3
6
4
11
5
6

239.75
286.70
317.32
268.95
274.13
336.67
174.33
264.23

10
5
3
4
3
9
5
6

Total, e ig h t states w ith low e st b e n e f it s ......................
A la b a m a

354,313
443,201

1,929,802

16

98.62

18

234,169
185,919
135,408
2 03,626
393,951

1
2
3
2
'2
1
2
3

97.33
117.59
101.63
119.88
49.79
89.23
106.36
107.13

2
3
2
2
1
1
2
5

.................................................................................

G e o rg ia ...................................................................................
L o u is ia n a . . . ....... ................................................................ ..........
M is s is s ip p i ..................................................
................... ..........
S outh C a r o lin a ..................................................................... ..........
..........

* In c lu d e s th e c h ild re n a nd o n e o r b oth p a re n ts o r o ne c a re ta k e r re la tiv e o th e r th a n a p a re n t in w h ic h th e re q u ire m e n ts
o f s u c h a d u lts w e re c o n s id e re d in d e te rm in in g th e a m o u n t o f a s s is ta n c e ,
f B ased o n 1970 C en su s a nd 1972 C en su s B u rea u e stim a te s, to ta l U n ite d S ta te s p o p u la tio n is e q u a l to 208,840,000.
f E x c lu d e s d a ta on A F D C c h ild ca re.
S o u rc e : S o c ia l S e c u rity B u lle tin (J u ly 1975) and B u rea u o f th e C e n s u s (1970), F o u rth C o u n t S u m m a ry Ta p e s, as re p o rte d in
S e n a to r D o n a ld H a lp e rin , F e d e ra liz a tio n o f W elfa re (N o v e m b e r 1975).




FRBNY Quarterly Review/Winter 1976

5

Table 2

Major Expenditures in the New York City Budget
S elected fiscal years; in millions of dollars and percentage of total expenditures

Category
Departm ent of
Social S e r v ic e s ........................
Board of E d u c a tio n .................
Health Services
A d m in is tra tio n ...........................
Police D epartm ent .................
Board of H igher
Education ..................................
Environmental
Protection ..................................
Fire D e p a r tm e n t......................
Pensions ....................................
D ebt service .............................
O ther ...........................................

1 955-56

1960-61

1965-66

1970-71

1974-75

Expenditure Percent

Expenditure Percent

Expenditure Percent

Expenditure Percent

Expenditure Percent

201
303

11.3
17.0

246
440

10.5
18.8

494
768

12.4
19.2

1,712
1,535

21.0
18.9

2,438
2,127

19.4
16.9

121
122

6.8
6.8

151
168

6.4
7.2

353
272

8.8
6.8

723
477

8.9
5.9

1,096
739

8.7
5.9

27

1.5

45

1.9

84

2.1

298

3.7

533

4.2

*

*

65
152
288
503

3.6
8.5
16.2
28.2

109
85
215
402
484

4.6
3.6
9.2
17.1
20.6

161
133
374
589
770

4.0
3.3
9.4
14.7
19.3

271
215
619
832
1,453

3.3
2.6
7.6
10.2
17.9

384
309
1,147
1,798
2,019

3.1
2.5
9.1
14.3
16.0

Total e x p e n d itu re s .................
Less: C apital budget and
special funds used to finance
operating e x p e n d itu re s ___

1,782

100.0

2,345

100.0

3,998

100.0

8,135

100.0

12,590

100.0

46

—

123

426

1,486

Expense budget ......................

1,736

2,345

3,875

7,709

11,104

* Not available.
S o u rc e : Citizens Budget Com m ission, P o cke t S u m m a ry o f N ew York C ity F in a n ce s, selected fiscal years.

tion in making New York a relatively attractive city for
those with little income. From this perspective, the in­
flux and permanent settlement by the poor can be viewed
as a rational response to economic incentives.

Controllable vs. uncontrollable expenditures
It is frequently noted that many of the city’s expendi­
tures are either mandated by state law or are under­
taken by so-called independent agencies, such as the
Health and Hospitals Corporation. Such expenses are
termed “uncontrollable” , at least in the short run. On
the other hand, since the legislation which established
the independent agencies and other programs can be
changed over time, the distinction between “control­
lable” and “uncontrollable” tends to blur in the longer
run. In Table 6, the city’s expenses for fiscal 1976 have
been divided into those that the city closely controls
and those that, at least in the short run, it does not.
With regard first to the independent agencies— i.e.,
the Board of Education, the Board of Higher Education,
and the Health and Hospitals Corporation— it should
be noted that they were set up under state legislation
at the city’s behest to circumvent local budgetary con­
trols which had supposedly hampered flexibility and
innovative management. As initially conceived, each
agency was governed by an independent board. The

4 FRASER
FRBNY Quarterly Review/Winter 1976
Digitized for


city made lump-sum allotments to each agency but
had little control over how the funds were spent. The
Mayor could reduce allocations to these agencies
within limits prescribed by state law, but the actual
distribution of funding cutbacks was up to the discre­
tion of the individual agency’s board. Besides legal
restrictions, the M ayor’s control over agency finances
was also circumscribed by the fact that, to receive
state or Federal aid for the agencies, the city fre­
quently had to come up with minimum or matching
amounts.
Since the onset of the New York City financial crisis,
the autonomy and independent authority of these agen­
cies has been altered somewhat by the Emergency
Financial Control Board. Hence, their expenses are
now more controllable than they w ere in the past,
and presumably new state legislation could be sought
if it were considered necessary to change the agency
budgets. In fact, the persistent deficit in the budget
of the Health and Hospitals Corporation recently
prompted the Mayor to set up a new finance com­
mittee to see that the deficit is elim inated.7
W elfare expenditures are the largest item among the
mandated “ uncontrollables” in Table 6. A recent Fed? See Sullivan [3 2, page 4 7 ],

Table 4

Table 5

Aid to Families with Dependent Children (AFDC)

Annual Public Welfare Benefits

By place of birth of mother; in percent

July 1972; in dollars

G overnm ental unit

Percentage
born in
sam e state

Percentage born in
another state or county
A FDC
mothers

Total
population

United States t o t a l ..........

52.2

47.8

30.8

City

New York City* ..............
Total, industrial states .

25.0
45.1

66.2
54.9

13.4
25.0

C alifornia ..........................
Illinois ..................................
M assachusetts .................
M ic h ig a n .............................
New J e r s e y ........................
N ew York State ..............
Ohio ....................................
Pennsylvania ...................

32.5
36.7
63.3
48.8
35.2
34.1
47.5
62.8

67.5
63.3
36.7
51.2
64.8
65.9
52.5
37.2

47.4
23.5
17.8
23.6
32.7
17.8
24.3
12.7

Total, states with
lowest b e n e f its .................

Baltim ore ................. .
.
.
.
.
.
Los Angeles .......... .
New York C i t y ___ .
P hiladelph ia .......... .
San Francisco . . . .
St. Louis ................. .
W ashington, D.C. . .

75.6

24.3

23.5

A labam a .............................
Florida ...............................
G e o r g i a ...............................
Louisiana ..........................
M ississippi ........................
South C arolina ...............
Tennessee ........................
Texas ..................................

84.5
46.6
84.0
82.4
89.6
t
70.9
71.8

15.5
53.4
16.0
17.6
10.4

15.5
56.7
21.3
16.7
14.9
19.0
21.1
22.4

t
29.1
28.2

* Th e birthplace of approxim ately 8.8 percent of A FD C mothers
in New York City is unknown.
t Not available.
S o u rc e s : D epartm ent of H ealth, Education, and W elfare, S o c ia l
S e c u ritie s S ta tiis tic s (1971) and Division of Policy Research, D e­
partm ent of Hum an Resources (January 1975), as reported in
Senator Donald Halperin, F e d e ra liz a tio n of W elfa re (N ovem ber
1975), and 1970 C en su s o f th e P o p u la tio n , T able 45, individual
state volumes.

50 percent.10 The differences in funding among the
eleven states which require local participation in the
AFDC program are shown in Table 7. As a percentage
of AFDC benefits, New York State receives 4 percent
less Federal aid than the average of the other ten
states and contributes 6 percent less to the welfare
expenses of its localities. Hence, from New York City’s
viewpoint, it must pay 10 percent more than do cities
in these other states. Indeed, this inequality looms
even larger when it is remembered that thirty-nine
10 Although New York State receives a com paratively low proportion
of Federal assistance, it is among the most generous of the states
in its overall level of w elfare payments. These differences in payment
levels arise because most program s receive Federal funding and
operate under Federal guidelines, but the states them selves retain
responsibility for their actual im plem entation and adm inistration.
Accordingly, the states retain a fair am ount of flexibility in apportioning
local responsibility, setting paym ent levels, etc. See Joint Economic
C om m ittee [2 0 ] and United States D epartm ent of H ealth, Education,
and W elfare [4 0 ].

6 FRASER
FRBNY Quarterly Review/Winter 1976
Digitized for


M other and
three children

Husband, wife, and
two children

AFDC*

Maxim um
benefit
p a c k a g e *!

AFDC*

M axim um
benefit
p a c k a g e *f

2,400
4,121
3,251
2,820
3,792
1,776
3,360
3,996
3,612
3,360
1,560
2,862

4,248
6,136
5,021
4,789
5,001
4,0 7 0
5,304
5,292
5,127
5,646
3,945
5,164

2,400
4,075
3,179
2,904
3,792
0
3,360
3,996
3,612
3,360
0
2,759

4,095
5,972
5,081
4,738
5,074
2,737
5,133
5,121
4,965
5,493
1,389
5,056

* Represents m aximum benefits a vailable to fam ilies in which
there is no incom e from either work or unem ploym ent insurance.
t N et cash, food, and public housing.
S o u rc e : Joint Economic Com m ittee, S tu d ie s in P u b lic W e lfa re:
W elfare in th e 7 0 's : A N a tio n a l S tu d y o f B e n e fits A v a ila b le in 100
L o c a l A re as (July 2 2 ,1 9 7 4 ).

states require no local contributions.
Debt service and pension benefits account for the
rest of the city’s mandated expenditures. The city is
legally bound to meet its debt obligations, under the
New York State constitution." Similarly, the city is under
a legal obligation to maintain pension benefits and con­
tributions.12 The existing pension structure, at least
insofar as it applies to current retirees and to those
presently on the payrolls, is practically impregnable.
Indeed, the state constitution forbids the reduction of
public employee pension benefits once they have been
extended. The one aspect of the city’s pension sys­
tem apparently subject to change is the “ increased
take home pay” program (ITHP). Under this program,
the city had been paying almost all of each em ployee’s
pension contribution, thus making the system virtually
noncontributory. Unlike other pension provisions, how11 In N ovem ber 1975, the state legislature enacted a three-year
moratorium on the payment of city notes, with provision for an
optional "s w a p ” of long-term bonds (which were issued by M A C).
However, the New York State Court of Appeals, the highest court in
the state, recently held the moratorium unconstitutional under
the New York State constitution.
12 The classification of pension costs as either m andated or controllable
depends upon the tim e horizon considered. Because fu tu re pension
costs are negotiable, a report prepared by Arthur Anderson and Co.
includes them with other controllable expenses. However, the report
notes that "past pension service costs may not be reducible, and
since the current city contribution to the pension funds is based on
prior actual payroll lagged two years, there is no real opportunity
for near-term reduction” . See Arthur Anderson and Co. [1 , page 31 ].

ever, ITHP was approved by the state legislature in
the early 1960’s only on a temporary basis. Hence, it
could be revised without changing or violating the
constitution. Effective January 1, 1976, the legisla­
ture decreased the city’s annual obligation under this
program by 50 percent. This share is now being picked
up by the employees who were, however, granted a
three-month grace period before beginning contribu­
tions. The Chief Actuary of New York City places cur­
rent annual ITHP costs at about half of the $170
million being spent prior to the change in legislation.
However, this $85 million saving will not affect the
city’s cash position until 1978. This is because pensions
have historically been funded with a two-year lag, and
so the city is presently paying for its 1974 obligations.
In sum, while a good portion of the city’s expense
budget may not be immediately controllable by city
officials, in the long run the major “uncontrollables”
seem to be debt service, pension benefits already
granted to past and present employees, and welfare
payments mandated by the state. It is, however, within
the power of the state, though not the city, to reduce
the welfare burden. Pensions, too, can be revised
over time, even if it takes an amendment to the state
constitution.

Perspective on city spending
To a large extent, the problems of New York City can be
traced to the fact that, as an administrative and budget­
ary entity, it has taken on the responsibility of support­
ing a wider range of services than most other municipal
governments. Although some of these “extra” responsi­
bilities are determined by the nature of the state-city
relationship, others have been voluntarily assumed by

the city. This drain on the city’s resources has been
especially pronounced in the fields of education, wel­
fare, and medical care. As already indicated, New York
City is required to shoulder a larger share of welfare
costs than most other municipal governments. At the
same time, it has had to provide direct funding for
education. In most other cities, the educational system
is supported by an independent school district which
is endowed with separate taxing powers and which
receives direct state support. These school districts
are not necessarily coterminous with city boundaries
and so may encompass a broader tax base than the city
alone. For many years, New York City voluntarily pro­
vided its residents with tuition-free university educa­
tion, a program that the city had to abandon in its
economy drive. Similarly, the city voluntarily established
its extensive hospital system.
In comparing the prevailing expenditure pattern in
New York with those of other cities, it is necessary to
examine both the range of services which are offered
and the level of government which is responsible for
the funding. In Table 8, the levels of expenditures and
public employment in twelve major cities are compared
for a common set of services for each of the munici­
palities listed in the table. In terms of total municipal
services, New York had the highest per capita expen­
ditures in 1973 and the largest number of city em­
ployees in 1974. However, when the comparison is
limited to those common services provided by all the
cities, New York’s payroll and outlays are not out of
line with those of other cities. In fact, on this basis,
several other cities spend higher amounts and employ
more workers per capita than does New York. Hence,
the unusually broad range of services directly pro-

Table 6

Composition of New York City Expense Budget
Fiscal year 1975-76; in billions of dollars and percentage of contribution

Budget expenses

Federal
Amount
Percent

State
Am ount
Percent

City
Am ount
Percent

Total
expense

M andated expenses:
Debt s e r v ic e ............................................................................
W elfare (excluding salary and a d m in is tra tio n ).......... ___
P e n s io n s .................................................................................... . . . .
Independent agency control:
Board of E d u c a tio n ..............................................................
Board of Higher E d u c a tio n ................................................ ____
Health and Hospitals C o rp o ra tio n .................................

1.4
—

50
—

0.7
—

25
—

1.5
0.7
0.5

100
25
100

1.5
2.8
0.5

0.5
-—
0.3

19
—
33

1.6
0.2
0.1

62
40
11

0.5
0.3
0.5

19
60
56

2.6
0.5
0.9

Total not directly controllable .........................................
C ontrollable e x p e n s e s .........................................................

2.2
0.2

—
6

2.6
—

—
—

4.0
3.1

—
94

8.8
3.3

Total expense b u d g e t .........................................................

12.1

S o u rce : New York City Expense Budget, 1975-76.




FRBNY Quarterly Review/Winter 1976

7

T able 8
T able 7

Per Capita Municipal Expenditures (Fiscal 1973)
and Employment (1974)

Government Funding of Costs of Aid to
Families with Dependent Children
In percentage of contribution

Per capita expenditures
Federal

State

Local

............

50

34

16

.................................... ............
...................................... ............
............

50

40

10

53

28

19

52

24

24

M o n t a n a ......................................

59

27

14

N ew J e r s e y ...............................

50

38

13

North C a r o lin a .......................... ..............

64

18

18

North Dakota ..........................
Ohio .............................................

53

35

12

45

5

Wyoming

..................................................

57

22

22

A verage ten s t a t e s ...............................

54

31

15

New York State

................... ..............

50

25

25

N ew York d iffe r e n c e ............ ...............

4

6

10

States

S tandard
All present
city
city
functions functions*

City

C olorado
Indiana

Note: Because of rounding, figures do not necessarily add to
totals.
S o u rc e s: Social and R ehabilitation Service, "State Assistance
Expenditures” , F e d e ra l R e g is te r (Septem ber 13, 1974), p. 33020;
Social and R ehabilitation Service, C h a ra c te ris tic s o t S tate P lan s
fo r A id to F a m ilie s w ith D e p e n d e n t C h ild re n u n d e r the S o c ia l
S e c u rity A c t Title IV -A (1974).

vided by New York accounts, at least in part, for what
is viewed in some quarters as an excessively large
budget.
To examine further the issue of whether New York
directly provides more financial support for services
than other localities, it would be helpful to have esti­
mates of the per capita cost of total services provided
by the major municipalities— estimates, that is, of the
total costs incurred at the local level regardless of the
local government or local governmental agency pro­
viding the services. The available evidence suggests
that per capita expenses in New York are above those
of most other major cities, particularly in the areas of
welfare, education, and health. Confidence in these
comparisons is limited, however, by the fact that the
data are not very good. It does appear, nevertheless,
that New York City’s provision of “extra” services not
paid for by many other municipal governments or, in
some cases, not provided by any local governmental
unit, has been a major cause of the recent series of
expense-budget deficits. But, considering that the city
has been supporting these services for many years,
their costliness in recent years has been aggravated
by changes in the demographic and economic makeup

8 FRASER
FRBNY Quarterly Review/Winter 1976
Digitized for


New York ___
C hicago

___ _

Los Angeles ..
P hiladelph ia ..
San Francisco
New Orleans .,
St. L o u i s ____
Baltim ore

1,224
858
267
692
242
415
751
241
310
473
806
357

435
441
383
449
408
395
488
260
360
375
470
396

City em ployees per
10,000 population
All present
city
functions

Standard
city
functions*

517.1
378.0
140.0
391.1
162.2
163.8
312.5
177.3
241.9
237.0
434.1
194.8

263.7
249.2
250.1
304.6
256.0
301.5
244.4
271.3
227.8
280.9
312.5
258.6

* Elem entary and secondary education, highways, police, fire,
sanitation, parks, general and financial adm inistration.
S o u rc e s : United States Bureau of the Census, C ity G o v e rn m e n t
F in a n c e s in 1972-73 (1974), United States Bureau of the Census,
L o c a l G o v e rn m e n t F in a n c e s in S e le c te d M e tro p o lita n A re a s a n d
L a rg e C o u n tie s 1974 (1975), United States Bureau of the Census,
L o c a l G o v e rn m e n t E m p lo y m e n t in S e le c te d M e tro p o lita n A re as
a n d L a rg e C o u n tie s 1974 (1975), and unpublished United States
C ensus Bureau data, as reported in Congressional B udget Office,
N ew Y o rk's F is c a l P ro b le m s : Its O rig in s , P o te n tia l R e p e rc u s s io n s
a n d S om e A lte rn a tiv e P o lic y R esp o n ses (W ashington, D.C.: O cto­
ber 10, 1975), page 16.

of the city.
Fueling the controversy over the appropriateness of
supplying particular services are charges that excessive
manpower costs have been incurred in their provision.
Unfortunately, it is nearly impossible to examine ade­
quately the frequent contention that to ta l compensation
of New York City employees, including fringe benefits
and pensions, is excessive relative to that of other
municipalities and to private industry. Data limitations
preclude comparison of total compensation packages
in which much confidence can be placed. It does ap­
pear, however, that at least some New York City office
and clerical workers receive higher wages than their
counterparts in private industry, as shown in Table 9.
It would also seem likely that, if anything, differences
in fringe benefits have exacerbated this gap.

Revenues
The responsibility for the provision of a comparatively
wider range of services has forced New York City to
strain its revenue-generating sources to a greater ex­
tent than have other central cities. New York City’s tax
base has lately been shrinking. Property taxes are the
city’s main local source of revenue. They provided about

one half of 1975-76 locally raised revenues. Yet total
tax arrearage for all properties (commercial, industrial,
and residential) has been rising and presently amounts
to more than $500 million.13 Hence, it is not surprising
that the proportion of locally raised revenues derived
from real estate tax receipts has been steadily declin­
ing. It can be seen in Table 10 that these receipts have
dropped from 61 percent of local revenues in fiscal
1966 to 50 percent in fiscal 1976.
The persistent declines in private sector employ­
ment in the city have also had an adverse effect on
locally raised revenues. The decline in nonagricultural
payroll employment amounted to about 500,000 jobs
between June 1969 and July 1975. Each job lost dimin­
ishes total tax receipts, particularly from personal in­
come taxes and sales taxes. It has been estimated that
each city-based job generated $820 in tax revenues
for the city in 1970.14
Inflation has also had a deleterious effect on the city’s
revenues. In the short run, expenditures respond quickly
to the upward movement of prices, as do sales and in­
come tax receipts to some extent. Property reassess­
ments, however, cannot keep pace with price surges,
in part because of the occurrence of unanticipated rates
of inflation during the relatively long time periods be­
tween the setting of assessments and actual collection
of taxes. This is not to say that New York alone among
municipalities has suffered from the distorting effects
of inflation. Although inflationary conditions lower the
real burden of outstanding municipal debt, they also
necessitate additional borrowing since, as noted, there
is evidence that city expenditures in general have been
more responsive to inflation than have its revenues.

Proposed remedies
The city’s ongoing financial problems have brought
forth a number of suggestions for easing the budgetary
squeeze. Some of these are economizing measures
which aim at increased reliance on private enterprise
to perform functions which have heretofore been pro­
vided by the city. Such measures, of course, involve
reductions in personnel on the city payroll. In addition,
a second set of proposals calls for transferring pro­
vision of certain services from the city to either the
state or the Federal Government. On the revenue side,
there are occasionally suggestions for higher taxes,
but the tax burden on local residents is already so high
u Th ere is evidence that the rent-control system has exacerbated the
housing problem in New York City. Landlords, receiving lower returns
in the face of rising costs, have neglected or, in the extrem e, entirely
abandoned their housing units. This, in turn, has dim inished the
city’s tax base and, thus, its revenue inflow. A ccording to one study,
the elim ination of rent control could raise city revenues by as much as
6 percent. S ee Lowry, De Salvo, and Woodfill [2 2 ].
M See Bahl, Jum p, and Puryear [3 , page 8 ] .




that the consensus is that any further tax increase is
likely to be self-defeating. Of course, reform of the
city’s accounting procedures— which is in progress—
is an essential part of any plan for resolving the city’s
problems.
Among the suggestions for a greater role for private
enterprise is the hiring of private haulage firms to re­
place, at least in part, the Municipal Sanitation Depart­
ment. It has been estimated that costs to the municipal
department are 68 percent higher than to the average
private contract firm to provide twice-a-week curbside
collection service. The many contributing factors to
this differential include higher employee absentee
rates, larger crews, fewer households serviced per
shift, more time per household, and smaller trucks, all
characteristic of municipal service.15 Limited experi­
mentation along these lines is beginning within the
Sanitation Department in the handling of garbage
collection by a worker cooperative under an indepen­
dent contract with the city. The motivation for improving
techniques is to be provided by the possibility of larger
paychecks. As a more extreme suggestion, it has even
been proposed that the responsibility for education be
transferred to the private sector under a government
subsidized voucher plan.16 The education benefits ex­
tended to eligible United States war veterans provide
a successful precedent of this type of program. Those
who were qualified were given a uniform sum to be
spent in any institution which met minimum Govern­
ment standards.
Many variations of these ideas are possible, all of
which could have exceedingly complicated political
and social, as well as economic, ramifications. Hence,
it is not surprising that many of the more drastic inno­
vations have not been attempted. However, the city has
achieved some budget economies through personnel
cutbacks and other austerity measures.
Besides cutbacks in expenditures, other proposals
call for transferring various elements of the burden to
some other level of government. Most recommenda­
tions of this type concentrate on the welfare system.17
The most common of these include (1) increasing the
state and Federal proportions of the payments and
consequently reducing the city’s share of the costs;
(2) federalizing the welfare system altogether; (3) in­
stalling a Federally based negative income tax system
which would replace welfare payments in their present
form; and (4) increasing noncash benefits, such as
food stamps, while reducing cash payments.
15 S ee Savas [2 9 , page V I]
14 S e e Friedm an [1 4 , pages 8 9 -9 0 ].
17 In this regard, bear in mind that, since the city’s contribution to w elfare
is 25 percent, savings here would am ount at most to about $700
m illion, excluding salary and adm inistration expenses.

FRBNY Quarterly Review/Winter 1976

9

T able 9

New York City— Average Weekly Earnings of
Men and Women Combined
In dollars; April 197 3 -7 4-7 5

Em ploym ent classification
April 1973:
S enior stenographers ..........
Typists— C lass B .................
Keypunch operators—
Class B .......................................
C om puter systems analysts—

April 1974:
Senior stenographers ..........
Typists— C lass B ...................
Keypunch operators—

Private
industry

M unicipal
workers

D ifference

1 49.00
114.00

165.00
131.25

+ 16.00
+ 17.25

126.50

145.75

+ 19.25

335.50

343.50

+

160.50
119.50

175.75
134.00

+ 15.25
+ 14.50

138.00

147.75

+

360.50

347.25

-1 3 .2 5

172.00
133.50

191.75
148.00

+ 19.75
+ 14.50

147.00

163.25

+ 1 6 .2 5

385.00

356.75

-2 8 .2 5

8.00

9.75

C om puter systems analysts—

April 1975:
S enior stenographers ..........
Typists— C lass B ...................
Keypunch operators—
C lass B .......................................
C om puter systems analysts—
C lass A .......................................

S o u rc e s : Bureau of Labor Statistics, A re a VJage S urvey, N ew
York, N ew Y ork M e tro p o lita n A rea (annual). Bureau of Labor
Statistics, W ages a n d B e n e fits o f N ew York C ity M u n ic ip a l G o v ­
e rn m e n t W o rke rs (S eptem b er 1975).

State and Federal takeover of services other than
w elfare has also been suggested. The proposals include
a Federal program to equalize energy costs; increased
aid to education, mass transit, and hospitals; regionali­
zation of such services as transportation or environ­
mental protection; Federal assumption of the security
costs incurred because of the United Nations and for­
eign consulates; and the conversion of city highways
into interstate arteries which would, in effect, make them
Federal responsibilities.
In addition to the numerous methods for both stream­
lining and transferring expenditures, there are pro­
posals which attack the problem from the revenue side.
Yet, due to the high level of taxes already paid by city
businesses and residents, a n y further taxes may have
detrimental rather than recuperative effects on the
city’s faltering economy.18 For the past nine years, New

’» A pproxim ately $200 million
by the A lbany legislature in
corporate bond transfer tax
has already been repealed.
brokerage houses from the

10

in New York City taxes was approved
N ovem ber 1975. However, the controversial
passed by the legislature in August 1975
It is blam ed for the exodus of several
city. See W a ll S tre e t J o u rn a l [41 ].

FRBNY Quarterly Review/Winter 1976




York State has led the nation in per capita state and
local tax payments, exceeding the national average in
fiscal 1973-74 by 54 percent and that of both New
Jersey and Connecticut by almost 40 percent.19 This
sizable tax differential is prominent among the reasons
cited by m ajor firms for abandoning New York for
locations in neighboring states in which it is felt that
the tax burden on the corporation itself a n d /o r its
employees would be smaller.20
When the tax burdens of individual cities are ex­
amined, it similarly appears that New York City is well
up on the list. The government of the District of Colum­
bia compared the tax burden of a family of four at dif­
ferent income levels in the nation’s thirty largest cities.
The “ burdens” include state and local income taxes,
state and local sales taxes, automobile taxes, and resi­
dential property taxes adjusted for intercity differences
in property values. A summary of these findings is
shown in Table 11. At each income level, the combined
state-local tax burden of New York City residents is
either second or third highest.

Summary
Overall, the evidence marshaled here indicates that a
broad array of factors, some of a fundamental eco­
nomic nature and some reflecting peculiarities specific
to the city, combined to create the financial problem
that emerged in 1975. The dramatic loss of jobs in the
city, stemming in part from the two recessions experi­
enced over the 1969-75 period, was one factor. The
virulent nationwide inflation with which city revenues,
particularly from the property tax, were unable to keep
pace was another. And demographic changes which
led to a concentration of the low-income aged in the
city and simultaneously reduced the proportion be­
tween the ages of 25 and 64, the primary labor force
group, also contributed to the ongoing budgetary and
financial strains.
Beyond this, New York City’s distress can be attrib­
uted to a measurable extent to the fact that it has re­
sponsibility for supporting a broader range of services
than are provided by most other municipal governments.
There are really two aspects to this problem. First, New
York City directly funds some services that are sup­
ported elsewhere by local instrumentalities other than
the municipal government. W hile it is not clear how
serious a problem this creates, it does suggest that
New York supports certain services from a relatively
narrow tax base compared with some other localities.
i ’ United States Bureau of the Census [3 4 , Table 2 2 ],
20 High taxes have existed for m any years, but other favorable factors
w hich once outw eighed the costs of locating in New York have
now becom e less im portant.

T able 10

New York City: Actual Receipts from Local Revenue Sources
In m illions of dollars and percent

1 965-66
R evenue
Percent

R evenue sources
R eal estate tax ................................................ .................
Sales tax ............................................................
...............
Personal incom e t a x ....................................... ..............
Business incom e t a x ....................................... ...............
Stock transfer tax ........................................... ..............
C om m ercial occupancy t a x ........................ ..............
Off-track betting ..............................................
W ater c h a r g e s ...................................................
Fines and fo r fe itu r e s .......................................

1,432

..............

2,202

31
—
214
94
72

1970-71
R evenue
Percent

1974-75
Revenue
P ercent

1 97 5 -7 6
R evenue
Percent

158
39

55.2
13.9
1.4
5.6
7.1
7.3
3.9
—
4.4
1.1

2,619
791
90
4 66
444
185
191
67
191
66

5 1.3
15.5
1.8
9.1
8.7
3.6
3.7
1.3
3.7
1.3

2,8 9 8
825*
93
528
688
270
198
65
174
85

49.8
14.2
1.6
9.1
11.8
4.6
3.4
1.1
3.0
1.5

3,551

100.0

5,1 1 0

100.0

5,8 2 4

100.0

60.9
17.3
1.4
—
9.7
4.3
3.3
—
2.2
0.8

1,960
494
50
199
252
259
140
—

100.0

* Includes $65 5 m illion in funds earm arked for the M un icipal Assistance Corporation.
S o u rc e : Citizens Budget C om m ission, P o cke t S u m m a ry o f N ew Y ork C ity F in a n c e s , selected fiscal years.

Tab le 11

Estimated Burden of Major Taxes* for a Family of Four
By adjusted gross incom e, 1974; in dollars and by rank

City
Atlanta ..................................
Baltim ore .............................
Boston ..................................
Chicago ...............................
Detroit ..................................
Houston ...............................
Los Angeles ......................
New York C i t y ...................
P h ila d e lp h ia ........................
San Francisco ...................
W ashington, D .C ................. ............
Average for thirty cities .

$5,000
Burden Rank
386
480
1,040
654
425
389
553
654
504
413
427
473

26
10
1
4
19
25
5
3
7
23
18
—

$ 10,000
Burden Rank
745
1,051
1,965
1,114
829
610
1,061
1,267
1,062
833
853
879

$ 15,000
Burden Rank

$20 ,00 0
Burden Rank

$30,000
Burden Rank

$40,000
Burden Rank

20
8
1
5
15
29
7
3
6
14
13

1,214
1,573
2,901
1,616
1,490
858
1,743
1,977
1,555
1,407
1,341

17
7
1
6
9
29
5
3
8
10
11

1,687
2,099
3,761
2,018
2,015
1,053
2,386
2,707
1,988
1,954
1,827

16
6
1
7
8
28
5
3
9
10
11

2,606
3,083
5,300
2,769
3,009
1,395
3,690
4,385
2,791
3,105
2,873

13
7
1
12
8
27
5
2
11
6
9

3,483
4,033
6,822
3,456
3,965
1,693
5,205
6,354
3,569
4,4 6 4
3,965

12
8
1
13
9
27
5
2
11
6
10

—

1,333

—

1,753

—

2,567

—

3,397

—-

* Includes income, sales, auto, and real estate taxes.
S o u rc e : D epartm ent of Finance and Revenue, Tax B u rd e n s in W a s h in g to n , D .C ., C o m p a re d W ith Those in th e N a tio n 's
T h irty L a rg e s t C itie s (W ashington, D.C.: G overnm ent of the D istrict of C olum bia, 1974).




FRBNY Quarterly Review/Winter 1976

11

Further, the city has attempted to provide more ser­
vices, in absolute terms, than are found in most other
urban areas. This provision of extra services is par­
ticularly evident in education, medical care, and wel­
fare. While tuition-free university education for city
residents has been dropped, vexing problems remain
in these areas.

Selected bibliography
[ 1] Arthur Anderson and Co. Report for the Secretary of the
Treasury Regarding Information Relating to the Financing Re­
quirements under the New York City Seasonal Financing Act
of 1975 (December 29, 1975).
[ 2] Bah I, Roy W.; Campbell, Alan K.; and Greytak, David. Taxes,
Expenditures and the Economic Base (New York: 1974).
[ 3] Bahl, Roy W.; Jump, Bernard; and Puryear, David. The Out­
look for State and Local Government Fiscal Performance.
Testimony Prepared for the Joint Economic Committee (Janu­
ary 22, 1976).
[ 4] Blanks, Vera J. Farm Population Estimates for 1974. United
States Department of Agriculture, Economic Research Service,
Agricultural Report, (No. 319) December 1975).
[ 5] Bernstein, Blanche, and Bondarin, Arley. “ Income Distribution
in New York City”. City Almanac (Center for New York City
Affairs, New School for Social Research, April 1975).
[ 6] Bernstein, Blanche, and Meezan, William. The Impact of Wel­
fare on Family Stability (Center for New York City Affairs, New
School for Social Research, June 1975).
[ 7] Citizens Budget Commission, Inc. Pocket Summary of New
York City Finances (New York: selected years).
[ 8] Citizens Budget Commission, Inc. The Scope of City Services:
The Local Share of Public Assistance Payments (New York:
November 1975).
[ 9] Congressional Budget Office. New York City’s Fiscal Problem:
Its Origins, Potential Repercussions, and Some Alternative Re­
sponses. Background Paper No. 1 (Washington, D.C.: United
6tates Government Printing Office, October 10, 1975).
[10] Day, Richard H. “The Economics of Technological Change
and the Demise of the Sharecropper”. American Economic Re­
view (June 1967).
[11] Department of Finance and'Revenue. Tax Burdens in Wash­
ington, D.C., Compared with Those in the Nation’s Thirty Larg­
est Cities (Washington, D.C.: Government of the District of
Columbia, 1974).
[12] Fantus Company. The Manhattan Outlook: A Projection to
1985 of Operating Conditions in New York City for Office
Employees (New York: December 10, 1975).
[13] First National City Bank. Profile of a City (New York: 1972).

[19] Joint Economic Committee. Studies in Public Welfare: Welfare
in the 70’s: A National Study of Benefits Available In 100
Local Areas (July 22,1974).
[20] Joint Economic Committee. Studies in Public Welfare. Nos.
1-4 (United States Congress, 1972).
[21] Levitt, Arthur. Audit Report on Medicaid Eligibility and Oper­
ating Practices New York City Human Resources Administra­
tion (Report No. NYC 77-75, June 1976).
[22] Lowry, Ira; De Salvo, Joseph; and Woodfill, Barbara. Rental
Housing in New York City (Vol. II). “The Demand for Shelter”
(New York City: Rand Institute, June 1971).
[23] Meyer, Herbert E. “Why Corporations are on the Move”.
Fortune (May 1976).
[24] New York City Council on Economic Education. Challenges
of the Changing Economy of New York City 1975 (New York:
April 16, 1975).
[25] New York City Expense Budget for Fiscal Year 1975-76.
[26] New York City Office for the Aging. Recent Developments in
the Economics of the Aging (June 1975).
[27] New York State Department of Social Services. Social Statis­
tics (March 11, 1976).
[28] Muller, Thomas. Growing and Declining Urban Areas: A Fiscal
Comparison (Washington, D.C.: The Urban Institute, November
1975).
[29] Savas, Charles S. Evaluating the Organization of Service De­
livery: Solid Waste Collection and Disposal (New York: Center
for Government Studies, Graduate School of Business, Colum­
bia University, October 1975).
[30] Shick, Allen. Central Budget Issues under the New York City
Charter (New York: December 1973).
[31] Social and Rehabilitation Service. Characteristics of State
Plans tor Aid to Families with Dependent Children under the
Social Security Act Title IV-A (1974).
[32] Sullivan, Ronald. "Beame Takes over Fiscal Control of Hos­
pitals Agency to Force Cuts”. New York Times (November 4,
1976).
[33] United States Bureau of the Census. City Government Fi­
nances in 1955-56, 1965-66, 1973-74 (Washington, D.C.: United
States Government Printing Office, 1957, 1967, and 1975).
[34] United States Bureau of the Census. Local Government Fi­
nances in 1973-74 (November 1975).
[35] United States Bureau of the Census. Local Government Fi­
nances in Selected Metropolitan Areas and Large Countries
1973-74 (1976).
[36] United States Bureau of the Census. Population Estimates and
Projections (July 1976).
[37] United States Bureau of Labor Statistics. New York City In
Transition: Population, Jobs, Prices and Pay in a Decade of
Change (1973).

[14] Friedman, Milton. Capitalism and Freedom (Chicago: 1962).

[38] United States Bureau of Labor Statistics. New York City: Tak­
ing Economic Stock: Eight Signs for the Eighties (April 1976).

[15] Ginzberg, Eli, ed,. The Future of the Metropolis: People, Jobs,
Income (Salt Lake City: 1974).

[39] United States Department of Commerce. Revisions to National
Income and Product Accounts, Table 6.7 (March 19, 1976).

[16] Halperin, Senator Donald. Federalization of Welfare (Novem­
ber 1975).

[40] United States Department of Health, Education, and Welfare.
Health Education and Welfare Funds, State Data, and State
Rankings (1967).

[17] Hirsch, Werner Z.; Vincent, Phillip E.; Terrell, Henry S.; Shoup,
Donald C.; and Rosett, Arthur. Fiscal Pressures on the Central
City (New York: 1971).
[18] Joint Economic Committee. New York City’s Financial Crisis
(Washington, D.C.: United States Government Printing Office,
November 3,1975).

12

FRBNY Quarterly Review/Winter 1976




[41] Wall Street Journal. “New York City Bond Tax on Transfers is
Repealed” (March 3, 1976), p. 27.
[42] Wertheimer II, Richard F. The Monetary Rewards of Migration
within the United States (Washington, D.C.: The Urban insti­
tute, March 1970).

Measuring Capacity Utilization
in Manufacturing
by James F. Ragan

Capacity utilization rates play an important role in
evaluating economic activity. They have been used,
along with other factors, to explain the behavior of
investment, inflation, productivity, profits, and output.
In addition, information on capacity utilization can aid
businessmen and economists in assessing current
economic conditions and forecasting future activity.
Unfortunately, alternative measures of capacity utili­
zation do not always tell the same story. There are
frequent discrepancies between the levels of the vari­
ous series as well as discrepancies in their movements.
The purpose of this article is twofold: (1) to examine
how well alternative measures of capacity utilization
seem to reflect the current availability of unused capi­
tal stock and (2) to assess the current capacity situa­
tion in manufacturing.
There are four principal measures of capacity utili­
zation in manufacturing— those of the Wharton School,
the Board of Governors of the Federal Reserve System
(FRB), the Bureau of Economic Analysis (BEA), and
McGraw-Hill.1 After a general discussion of the con­
cept of capacity, each of these measures is critically
evaluated. All have flaws but, provided one is aware
of their particular biases and shortcomings, valuable
information can still be gleaned from them. While
1 For purposes of com parison, all four m easures reviewed here
refer to m anufacturing utilization. Th e W harton School and
M cG raw -H ill also publish utilization rates for a broader industrial
classification, which includes m ining and utilities. In each
instance, the criticism s raised at the m anufacturing level carry
over to the industrial level. U tilization rates are available at
more disaggregated levels as w ell. The FRB publishes utilization
rates for both prim ary- and advanced-processing m anufacturing
and also releases a separate index for the m aterials sector.
Finally, W harton, M c G raw -H ill, and BEA utilization rates are available
for individual m anufacturing industries.




there is no one “best” measure for all purposes, over­
all the FRB utilization rate probably reflects current
utilization of capital stock most accurately, provided
that the statistical relationships on which it is based
are kept up to date. Finally, based on present utiliza­
tion rates, the prospects for capacity problems in
manufacturing over the next year or so appear remote.
This is true for key manufacturing subsectors as well
as for aggregate manufacturing.

Capacity—an elusive concept
Capacity refers to the quantity of output that can be
produced in a fixed period of time, given the existing
stock of capital. There are, however, a number of inter­
pretations for the expression “can be produced”. The
engineering interpretation relates to the quantity of
output that could be turned out if, apart from required
maintenance, plants and equipment were operated
around the clock seven days a week. Since most
plants and equipment are operated only a fraction of
that time, a more common interpretation of capacity
refers to the maximum quantity of output producible
under “normal conditions”. While the concept of nor­
mality is admittedly vague, it seems to be based on
the notion of average or typical conditions. According
to this interpretation, capacity describes the maximum
producible output when plants and equipment are
operated the average amount of time producing the
normal mix of output.2 One difficulty with this approach
is that the view of what is normal changes over time.
2 Specifying the output mix is im portant for any definition of capacity.
Th e rate and duration of m achine breakdow ns frequently
depend on w hat is being produced, and the longer a m achine
is down the less that can be produced.

FRBNY Quarterly Review/Winter 1976

13

As workers have gained shorter workweeks and greater
vacation time, the “normal operating period” has
apparently contracted. Furthermore, as discussed later,
the concept of normal production seems to change
over the business cycle.
Capacity has also been defined from a cost perspec­
tive.3 Some view capacity as the level of output where
average per unit cost is at a minimum, while others
see it as the level beyond which the cost of producing
additional ouput rises sharply. A practical problem
with the cost approach is that few firms maintain suit­
able cost data. Furthermore, studies of the relationship
between costs and output suggest that for some prod­
ucts there may be no unique level of output for which
average cost is smallest. Instead, per unit costs may
be about constant over wide ranges of production.
And for some other products, unit costs do not show
signs of rising even at very high levels of output.4
The McGraw-Hill and BEA measures of capacity
are tied to “normal” conditions. Although capacity is
not actually defined by McGraw-Hill and the BEA, most
companies surveyed by them indicate that this is the
concept they had in mind.5 Since the FRB utilization
rate is constructed from that of McGraw-Hill, it too is
linked to “normal” conditions. The Wharton utilization
rate, in contrast, is based on an entirely different
concept: observed production peaks. Capacity is
assumed to equal output at production peaks, and
between peaks capacity is estimated by linear inter­
polation.
A second distinguishing feature of Wharton capacity
is that it is a function of labor availability. Since pro­
duction depends on labor as well as capital, produc­
tion peaks are influenced by the supply of labor.6
The other three indexes of capacity are entirely capi­
tal oriented, i.e., they address the question of how
much output can be produced with a given stock of
capital, assuming labor, raw materials, and parts are
all readily available. Thus, the Wharton measure of
capacity is related to labor availability; the others
are not.
Because the concepts of capacity differ, as do the
construction techniques, it is not meaningful to com­
pare values of alternative utilization measures. The
Wharton utilization rate, for example, has always
exceeded the McGraw-Hill rate, frequently by 8 per­
centage points or more (see the chart). Clearly then,
a Wharton value of, say, 90 percent indicates lower
* S e e d e Leeuw [ 2 ] and Edm onson [ 4 ] .

capacity utilization than does a McGraw-Hill reading
of 90 percent. Furthermore, a given value of utilization
means very little per se. Only by comparing this value
with past values of the same measure, especially
those of previous troughs and peaks, is it possible to
assess the degree of capacity utilization.
Finally, since shortages and bottlenecks in key in­
dustries may effectively limit production, in spite of
substantial unused capacity elsewhere, it is clear that
conditions in the economy cannot be fully described
without considering utilization rates in important sub­
sectors. For this reason, industry utilization rates will,
in the final section, also be examined. International
conditions are relevant as well. For one thing, produc­
tion in the United States is less likely to be constrained
the more readily firms can import goods, materials,
and energy from abroad. Aggregate utilization rates
cannot, therefore, completely characterize an econ­
omy’s capacity situation; they are most valuable when
supplemented with additional information. Bearing in
mind these limitations, the principal measures of utili­
zation in manufacturing are reviewed in the following
section.

An analysis of four measures of
manufacturing utilization7
The Wharton index of capacity is based on the “trendthrough-peaks” method.' Output, as measured by the
Federal Reserve Board’s series on industrial produc­
tion, is plotted for each of the major manufacturing
industries, e.g., primary metals, electrical machinery,
and chemicals. Successive cyclical peaks are then
joined together with straight line segments. The re­
sulting series of connected linear segments is the in­
dustry’s capacity measure. To obtain the industry’s
utilization rate, output is simply divided by capacity.
The utilization rate for all manufacturing is derived by
summing the industry utilization rates, each weighted
by the fraction of total national income contributed by
the industry at full employment.
Because of the computational method employed, an
industry’s utilization rate equals 100 percent at all
major production peaks.9 This is both a strength and
a weakness of the Wharton technique. On the positive
side, capacity values are attainable. At each of the
7 There exist several other m easures of capacity utilization,
but none are more than a few years old. W ith so few observations,
it is difficult to say m uch about these series.
8 See Klein and Sum m ers [ 9 ] , Klein and Preston [ 8 ] ,
and A dam s and Sum m ers [ 1 ] .

* S ee W alters [ 1 7 ] .
5 See M atulis [1 3 ] and H ertzberg, Jacobs, and Trevathan [ 7 ] .
* Furtherm ore, production functions containing labor as an input are
som etim es used to adjust the W harton index.

14 FRASER
FRBNY Quarterly Review/Winter 1976
Digitized for


9 Not all production peaks are associated with utilization rates
of 100 percent. If a peak is judged to be "w e a k", i.e., associated
with unused capacity, the cap acity line will lie above the peak,
and capacity utilization w ill be less than 100 percent.

1953

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

Note: Shaded areas represent periods of recession as defined by the N ational Bureau of Economic R esearch e x c e p t for the latest
recession, which is tentatively judged to have ended in M arch 1975.
Sources: Wharton Econometric Forecasting Associates; Board of Governors of the Federal R eserve System; M cG raw -H ill Publications
Company, D epartm ent of Economics; United States D epartm ent of C om m erce, Bureau of Economic Analysis (BEA).

major peaks, the Wharton value of potential output is
known to be producible; indeed, this is the level of
output actually observed. Furthermore, output never
exceeds Wharton capacity but may, and sometimes
does, exceed alternative measures of capacity.10 Thus,
a capacity value of 100 percent has special meaning
for the Wharton index, and only for the Wharton index.
Assigning a capacity value of 100 percent to the
major peaks does, however, have a serious drawback:
there is no way to determ ine intensity of production
at different peaks. Instead, capacity utilization is
assumed to be identical at every major peak, an
assumption that is highly questionable. Another criti­
cism of the W harton technique is that it is not com­
pletely objective. W hether or not a production peak is
one of full capacity is sometimes difficult to determine.
In such situations, outside information, e.g., engineer­
ing data and industry surveys, is consulted. Still, the
choice may not be obvious.
The Wharton approach has also been faulted for its
assumption that capacity growth between peaks can
be represented by a straight line. Presumably, capacity
10 For exam ple, in 1973 production in the autom otive industry
was running at 111.5 percent of capacity, according to the
M c G raw -H ill index.




growth is related to productive investment, which need
not occur in equal increments each quarter. Better
estimates of capacity could probably be derived by
introducing investment data.
The final and most serious shortcoming of the W har­
ton capacity measure is that, because the next pro­
duction peak is not known, the current rate of capacity
growth can only be estimated. This is generally accom­
plished by extrapolating the capacity index at its cur­
rent slope. If the projected and actual growth rates
differ, however, the error will accumulate over time.
If projected capacity growth exceeds actual growth,
the utilization rate will become increasingly down­
ward biased; if actual exceeds projected growth, an
upward bias will develop. As the next major peak is
approached, the error will be corrected, but the revi­
sion required may be substantial. For example, the
aggregate industrial utilization rate for the first quarter
of 1962 was estimated to be 94 percent in 1962-1, 92
percent in 1963-1, 85 percent in 1965-1, and 82.8 per­
cent in 1967-I.11 Thus, in five years the estimate of
11 See Sum m ers [ 1 6 , page 3 3 ]. The numbers cited are for the
industrial sector, which includes mining and utilities as well as
m anufacturing. S eparate num bers for the m anufacturing
sector were not reported.

FRBNY Quarterly Review/Winter 1976

15

capacity utilization was lowered by 11.2 percentage
points. It is difficult to place much confidence in
current Wharton estimates of capacity utilization,
knowing they could be revised drastically in the future.
The FRB’s index of capacity utilization overcomes
most of the Wharton weaknesses but contains a flaw
of its own. The actual method of constructing this
index is quite complicated. Without elaborating on the
Board’s technique,12 suffice it to say that the FRB
index is derived from three series: (a) the December
McGraw-Hill operating rate series (to be discussed
later), (b) a separate and independent McGraw-Hill
capacity series, computed from surveys of annual
changes in capacity, and (c) a capital stock series
based on census data deflated for price changes.
The main criticism leveled at the FRB index is that
it relies on "historic statistical relationships that are
simple at best and that may change substantially”.13
Consequently, these relationships need to be con­
tinually reestimated. Otherwise, a bias is likely to
develop. The recent FRB revisions make this clear.14
Based on the statistical relationships which the Board
estimated in 1971, capacity utilization in 1976-111 was
originally placed at 73.6 percent, which was low by
historical standards. But, when the statistical relation­
ships for capacity were reestimated this year, sub­
stantially different results emerged. The Board now
estimates capacity utilization for 1976-111 to be 80.9
percent, which is about midway between the historical
high and historical low of the new series. Thus, the
Board has revised considerably its assessment of cur­
rent capacity utilization.
Perhaps the main reason for this change is that the
Board does not distinguish between spending which
augments capacity and spending which does not. In
recent years an increasing proportion of capital spend­
ing has been for environmental and safety factors,
,J Construction of the FRB index is detailed b y d e Leeuw [ 3 ] ,
Enzler [ 5 ] , and R addock and Forest [ 1 5 ] . Briefly, the FRB D ecem ber
value of output is divided by the M cG raw -H ill operating rate
to generate a prelim inary estim ate of capacity output. This capacity
output m easure is divided both by the annual M cG raw -H ill
capacity series and by the capital stock series derived from census
data. These two ratios are then each estim ated as a function
of one or m ore tim e trends, and this process generates two separate
estim ates of capacity. These two estim ates are averaged to
provide a new and ‘‘sm oother" cap acity series, which is hopefully
less subject to m easurem ent errors than the individual series.
Next, the new capacity series is interpolated, yielding quarterly and
monthly estim ates of capacity. This process is currently under­
taken at the industry level. (Prior to the recent FRB revisions, capacity
had been com puted for only two sectors: prim ary processing
and advanced processing.) C ap acity is then aggregated across
industries, using valu e-ad d ed w eights. Finally, the FRB production
index is divided by capacity to yield capacity utilization.
w Perry [1 4 , page 7 0 7 ].
M For a discussion of these revisions, see Raddock and Forest [ 1 5 ] .

16 FRASER
FRBNY Quarterly Review/Winter 1976
Digitized for


which do not add to capacity.15 Consequently, in this
decade, additions to capital stock increased capacity
by a lesser amount on average than was true over the
previous two decades. Therefore, using the pre-1971
relationship between capacity and capital stock re­
sulted in capacity being overstated in recent years
and capacity utilization being understated.
Prior to the recent revision, the FRB utilization rate
had been drifting lower, away from the other three
measures of capacity utilization. The Board’s revised
numbers, on the other hand, have no discernible bias,
which suggests that the FRB technique can provide
reasonable estimates of utilization. It is essential, how­
ever, that a given statistical relationship not be extrap­
olated too far beyond the sample period.
The final two measures of capacity utilization— the
BEA and McGraw-Hill operating rates— are closely re­
lated. Both are based on company surveys, and both
seem to measure the same concept of capacity.1* Each
spring, McGraw-Hill asks companies: (1) what percent­
age of their capacity was used the previous December
and (2) how much they expect to add to capacity in
the current year. Additions to capacity are assumed to
occur in equal monthly increments. Given the Decem­
ber operating rate, the projected monthly changes in
capacity, and monthly output data (as recorded by the
FRB production index), the operating rate can be esti­
mated for each month of the subsequent year.17
The operating rate series are “bench marked” an­
nually, which should prevent any measurement errors
from piling up. Bench marking is accomplished by
averaging the operating rate calculated in December
15 A ccording to M c G raw -H ill [1 0 ] and [ 1 2 ] , air and w ater pollution
control as a percentage of m anufacturers’ capital spending
rose steadily from 2.8 percent in 1967 to 9.1 percent in 1975.
Expenditures for worker protection have also becom e substantial.
In 1972, the first year for w hich M c G raw -H ill has data, they
accounted for 3.0 percent of capital spending, and current projec­
tions indicate that in 1976 the percen tag e will reach 3.3 percent.
A ccording to H ertzberg, Jacobs, and Trevathan [ 7 ] , both operating
rates are based on the concept of "m axim um practical
cap a city ” . This is defined to be the m aximum physical quantity
of output that can be produced under "norm al conditions” ,
i.e., assum ing “ the usual num ber of hours per shift, shifts per day,
days per w eek, overtim e, vacation, and dow ntim e for repair
and m aintenance” .
" T h i s technique is described in general term s by G ang [ 6 ] ;
the com putational procedure is detailed by M c G raw -H ill [11 ].
M c G raw -H ill calculates the operating rate in a given
month (O R 2) as a percen tag e of the previous m onth’s operating
rate (O R J . They then link the change in operating rate
to the form er m onth’s value but do so in an im precise m anner.
In their exam ple, the operating rate in the initial month is
68.0 percent, and in the second month it is 1.0 percent higher,
i.e., O R 2/O R ! = 1.010. O R 2 is then estim ated to be
68.0 percent 4- 1.0 percent = 6 9.0 percent. In reality,
OR 2 = 1.010 X 6 8.0 percent = 68.6 8 percent or, rounding as
M cG raw -H ill does to the nearest 0.5 percen tag e point, 68.5 percent.
Thus, by acting as if percen tag e and percen tag e point changes
were one and the sam e, M c G raw -H ill introduces a slight
m easurem ent error.

with the value actually reported in the subsequent
spring survey. The series are also revised each year,
to take into account recent information on actual as
opposed to expected additions to capacity. Annual
end-of-year operating rates are available from 1954,
and monthly operating rates from September 1964. The
all-manufacturing operating rate is obtained by weight­
ing industry operating rates with 1967 value-added
weights.
The BEA asks companies what percentage of their
capacity was in use during the final month of the
quarter.18 These surveys were conducted semiannually
between 1965 and 1967 and then, in March 1968,
switched to a quarterly basis. Operating rates are
published for eleven manufacturing industries, for
durables and nondurables, for primary and advanced
processing, for asset size (three categories), and for
all manufacturing. The all-manufacturing operating rate
is obtained by weighting industry operating rates with
1969 capacity weights.

Table 1

Magnitudes of Recent Cyclical Swings for
Various Manufacturing Utilization Rates
In percentage points

Series
W harton .
FRB ..........
M -H j
..
M -H mo f •
BEA

1 968-69 peak
to 1970-71
trough

1970-71
trough to
1973 peak

1973 peak to
1975 trough

Total
movem ent
1968-75

11.5
11.1
9.5
9.0
6

13.1
11.5
10.2
9.0
7

20.1
16.9
15.2
16.0
11

44.7
39.5
34.9
34.0
24

* M -H 1/4 is the quarterly average ot m onthly M cG raw -H ill operat­
ing rates.
t M -H mo. is the value of the M cG raw -H ill operating rate in the
final month of the quarter.
S o u rc e s : Wharton Econom etric Forecasting Associates; Board of
Governors of the Federal Reserve System (FRB); M cG raw -H ill
Publications Com pany, D epartm ent of Economics; United States
D epartm ent of C om m erce, Bureau of Econom ic Analysis (BEA).

Cyclical differences in capacity utilization rates
The various measures of capacity utilization differ in
their cyclical behavior. In particular, there is consider­
able disparity concerning the magnitude of cyclical
swings— movements from peaks to troughs or from
troughs to peaks. Table 1 compares recent cyclical
movements of the various utilization rates. The W har­
ton and FRB measures capture average conditions
throughout the quarter. So does the quarterly McGrawHill measure, which is the average of monthly operating
rates. The BEA operating rate, on the other hand,
reflects conditions in the final month of the quarter—
March, June, September, or December. Hence, the
timing of this operating rate differs somewhat from
that of the other utilization measures. To see whether
this timing difference is important, an end-of-quarter
M cGraw-Hill operating rate was also constructed. The
difference between the two McGraw-Hill operating
rates is therefore a measure of the effect of timing.
For all three time periods considered, the cyclical
swings are smallest for the BEA operating rate. This
cannot be attributed to a difference in timing since,
for all three cyclical swings, the difference between
M cGraw-Hill quarterly average and end-of-quarter
operating rates is about 1 percentage point or less.
Next to BEA, the McG raw-Hill operating rates exhibit
the least amount of cyclical variation.
The BEA and McGraw-Hill operating rates are both
based on surveys of the percentage of capacity which
firms report they are operating. One possible explana­
tion for these operating rates having smaller cyclical
18 The BEA technique is described by Hertzberg, Jacobs,
and Trevathan [ 7 ] ,




swings is that survey respondents change their con­
cept of capacity over the cycle. When conditions are
slack, firms may forget about, or at least fail to con­
sider explicitly, marginal plants and equipment. When
conditions tighten and firms are pushed to increase
production, they “ rediscover” these marginal facilities.
Secondly, as conditions tighten, extra shifts may be
added. If some firms calculate their operating rate on
the basis of a single shift when only one shift is run
but on the basis of two shifts when two shifts are run,
production will vary over the cycle by a greater per­
centage than the reported operating rate. In either
case, the reported cyclical swing will be more com­
pressed than the actual swing. Research by Perry in­
dicates that operating rates based on survey response
do indeed contain such a cyclical bias.19
Because the BEA and M cGraw-Hill operating rates
are derived from surveys, they are biased toward show­
ing too little cyclical variation. The magnitude of bias
19See Perry [1 4, page 7 1 1 ]. If the capital stock rem ains unchanged,
an increase in output should have no im m ediate im pact on
capacity. W hen the Wharton and FRB m easures of capacity were
exam ined, there was in fact no relationship between changes
in output and changes in capacity. If, on the other hand, survey
respondents “ rediscover” capacity as output expands, there
should exist a positive relationship between changes in output and
changes in re p o rte d c a p a c ity . W hen the M cG raw -H ill m easure
of capacity was used, a positive and statistically significant
relationship did appear; each 10 percent increase in current output
led to a 2.3 percent increase in reported capacity, even after
the im pact of changes in capital stock was netted out. Thus,
operating rates constructed from surveys apparently contain
a cyclical bias; reported swings in capacity utilization are less
than actual swings.

FRBNY Quarterly Review/Winter 1976

17

cyclical bias than M cG raw -Hill.21
To summarize, none of the major indexes of capac­
ity utilization are without fault. Because the Wharton
index is incapable of determining the current rate of
capacity growth, its current estimates of capacity utili­
zation are unreliable; they may be drastically revised
in the future. The FRB index appears to be reasonably
reliable as long as the statistical relationships on which
it is based are kept up to date. When a given statistical
relationship is extrapolated very far, however, a bias
is likely to emerge. The BEA operating rate contains
a cyclical bias, causing it to vary much less over the
cycle than the other measures of capacity utilization.
Finally, the M cGraw-Hill operating rate contains two
cyclical biases. These are partially offsetting, however,
so that the McGraw-Hill cyclical bias is less severe
than the BEA bias. W hile all four measures of capacity
utilization contain flaws, the FRB measure is perhaps
the best when it comes to estimating how much of the
economy’s aggregate capital stock is currently being
utilized. Unlike the McGraw-Hill and BEA rates, the
FRB measure has no apparent cyclical bias. Further­
more, its current values seem more reliable than those
of Wharton.

differs, however. The McGraw-Hill cyclical swings are
not very far below those of the FRB; the BEA cyclical
swings are. Thus, the M cGraw-Hill operating rate
apparently contains less of a cyclical bias than the
BEA operating rate. One reason for this may be the
difference in sampling techniques.20
Large firms are oversampled in the McGraw-Hill
survey, and small firms are undersampled. The BEA,
N on the other hand, has a somewhat more representa­
tive selection of firms. Thus, if the operating rate varies
more over the cycle for large firms than for small firms,
the McGraw-Hill operating rate should exhibit greater
variation than the BEA operating rate. Does the operat­
ing rate vary more for large firms? Apparently it does,
as Table 2 demonstrates. For total manufacturing, as
well as for the durables and nondurables subsectors,
there is a tendency for swings in capacity utilization
to be greater in large companies. M cG raw -Hill’s oversampling of large firms therefore causes its operating
rate to overstate the amplitude of cyclical swings, and
this offsets a portion of the survey-response bias,
which caused the amplitude of cyclical swings to be
understated. In other words, M cG raw -Hill’s large-firm
bias negates some of the bias arising from firms
“ losing” capacity in recessions and “finding” it in
recoveries. The BEA operating rate, in contrast, has
less of a sampling bias with which to cancel its
survey-response bias. As a result, the BEA has a larger

The current situation
Having discussed the various measures of capacity
utilization, a final question remains: W hat is the cur­
rent capacity situation in manufacturing? Now that the

20 A nother reason for expecting som e divergence between
M cG raw -H ill and BEA operating rates is that they do not rely on
survey data to the sam e extent. The M cG raw -H ill value is
derived from an annual survey of capacity utilization as well as
from figures on industrial production; the BEA value com es
exclusively from a quarterly survey.

21 From the perspective of current analysis, the M cG raw -H ill
operating rate has another advantage over the BEA rate: its values
are released much sooner. For exam ple, the BEA 1976-11 figures
were not available until Septem ber 29, w hereas those of M cG raw Hill were released on July 23.

Table 2

Magnitudes of Cyclical Swings in the BEA Operating Rate
By firm size;* in percentage points

Industry
Total m anufacturing:
Large f i r m s .................................................................................
Sm all f i r m s .................................................................................
Durables m anufacturing:
Large f i r m s .................................................................................
Sm all f i r m s .................................................................................
Nondurables manufacturing:
Large f i r m s .................................................................................
Small f i r m s .................................................................................

1968-69 peak to
1970-71 trough

1970-71 trough
to 1973 peak

1973 p e a k to
1975 trough

1975 trough
to 1976-11

8
7

9
7

13
9

9
5

39
28

12
9

13
10

14
13

11
6

50
38

4
5

5
5

14
6

6
3

29
19

* Large firms: com pany assets of $100.0 million and over; small firms: com pany assets of under $10.0 million.
S o u rc e : United States Departm ent of C om m erce, Bureau of Economic Analysis.

18

FRBNY Quarterly Review/Winter 1976




Total m ovem ent
1968-1976-11

FRB utilization numbers have been revised, there
emerges something approaching a consensus among
utilization measures. All four manufacturing series in­
dicate that approximately 40-60 percent of the decline
in utilization over the 1973-75 period has been re­
couped (see Table 3). By historical standards as well,
present capacity utilization appears to be somewhere
around midrange. The current McGraw-Hill and FRB
values indicate that capacity utilization is slightly
closer to the historical lows than to the historical highs
of their series; the current Wharton and BEA values
indicate the reverse. On an aggregate level then, the
manufacturing sector appears to possess ample unused
capacity. But, as noted earlier, it is important to con­
sider utilization at more disaggregative levels as well.
Capacity constraints could develop in certain sub­
sectors despite abundant capacity elsewhere.
Disaggregation reveals that capacity is not a prob­
lem in either durables or nondurables manufacturing.
The rebound in capacity utilization from the 1975
trough has been somewhat stronger percentagewise
in the durables sector according to BEA, somewhat
stronger in nondurables according to Wharton, and
about equally strong in both sectors according to
McGraw-Hill. But, while there is some discrepancy as
to the relative rebound in the two sectors, one con­
clusion that does emerge is that neither sector is cur­
rently approaching capacity.
The FRB utilization rates are not available for the
durables and nondurables categories but are available
along stage-of-processing lines. According to these
numbers, considerable untapped capacity remains in
both the primary-processing and advanced-processing
sectors. Since 1975, utilization rates in both sectors
have regained just over half of the decline registered
between 1973 and 1975.
The Board also publishes a separate series on utili­
zation in the materials sector because of “the strategic
importance of materials capacity in limiting overall
industrial production” .22 According to this index, mate­
rials capacity remains ample. As of 1976-111, just under
50 percent of the reduction in utilization between 1973
and 1975 had been regained (see Table 4). The in­
crease in utilization has been relatively stronger in
the nondurables sector, but there still remains substan­
tial capacity there. Indeed, utilization in nondurables is
lower now than it was last spring.
The finding of substantial unused capacity in manu­
facturing seems to hold at the industry level as well.
While the latest (1976-11) BEA readings suggested pos­
sible tightness in the automotive industry, recent data
on automobile production and sales indicate that auto-

T able 3

Past and Current Capacity Utilization Rates
S eries*

Historical
high

H istorical
low

Wharton ___ ____ 97.5
FRB ................. ........ 9 1.6
M cG raw -H ill .
89.5
B E A ................. ........ 86

Current
value

1973
peak

1975
trough

88.0
80.9
77.7
82

97.5
87.8
86.5
86

77.4
70.9
71.3
75

74.7
70.9
71.3
75

* The W harton historical series runs from 1947-1 to 1976-111, the
FRB series from 1948-1 to 1976-111, the M cG raw -H ill series from
1 96 4 -IV to 1976-111, and the BEA series from 1 9 6 7 -IV to 1976-11.

Table 4

Past and Current Federal Reserve Board
Capacity Utilization Rates for Industrial Materials
Series run from 1967-1 to 1976-111
H istorical
high
low

Sector
Total

........................

92.9

70.7

Durables ................. .....92.3
Basic m etals . . .
97.5
N o n d u r a b le s ...............94.0
Textiles ................... 93.9
P a p e r ................... .....99.5
C h e m ic a ls .............. 93.2

64.6
67.0
69.9
60.1
73.5
67.2

Current
value

1973
peak

1975
trough

81.3

92.9

70.7

92.3
97.5
93.9
9 3.9
99.5
93.2

64.6
67.0
69.9
60.1
73.5
67.2

78.3
81.7
85.2
81.9
90.2
83.0

Table 5

Past and Current McGraw-Hill
Capacity Utilization Rates
Monthly series run from S eptem ber 1964 to O ctober 1976
Selected
industries

Historical
Current
high
low
value

1973
peak

1975
trough

M a c h in e r y ........................
Electrical m achinery . .
Fabricated m etals ___
C h e m ic a ls ........................
Paper ...............................
Rubber and plastics . . .
Petroleum r e f in e r y ____
Nonferrous m e t a ls ___
Textiles .............................

94.5
93.5
91.0
85.5
95.0
103.5
98.0
101.5
98.0

86.0
82.5
81.5
85.5
94.5
9 7.0
97.5
90.5
91.5

71.0
60.5
68.0
68.5
70.5
66.5
85.5
60.0
62.0

71.0
60.5
67.5
68.5
70.5
66.5
85.5
60.0
62.0

74.5
71.0
76.5
77.5
82.5
93.5
88.0
83.0
79.5

22 Raddock and Forest [1 5, page 8 9 9 ],




FRBNY Quarterly Review/Winter 1976

19

motive capacity should prove sufficient over the com­
ing year. According to McGraw-Hill, no industry faces
impending capacity constraints. At first sight, the 88
percent utilization rate in petroleum refining might ap­
pear high, but utilization in this industry is always
above the manufacturing average. The utilization rate
for petroleum refining has never fallen below 85.5 per­
cent, and has reached 98 percent (see Table 5).
Rubber and plastics is the only other manufacturing
industry to have a McGraw-Hill operating rate above
83 percent in October, but its high current rate appears
related to the recent rubber strike. As soon as the
strike ended, companies sought to catch up on lost
production, and the operating rate for the rubber and
plastics industry shot up 11 percentage points. Once
the backlog of orders is reduced to more normal levels,
however, the operating rate is likely to decline. More­
over, its current value is still 10 points below its all-time
high. Although capacity utilization in the nonferrous
metals industry is not too far below its 1973 peak, it
remains well below its historical high.
Last spring some forecasts were made that capacity
problems might soon develop in a number of key in­
dustries. Among the industries most frequently men­
tioned were paper, textiles, chemicals, and steel. Since
that time, capacity in a majority of these industries has
been expanding faster than production. According to
monthly McGraw-Hill operating rates, capacity utiliza­
tion in the paper industry declined from 89.0 percent
earlier this year to 82.5 percent in October. Capacity
utilization in textiles fell from 84.5 percent to 79.5
percent, and capacity utilization in chemicals fell*from
80.5 percent to 77.5 percent. While capacity utilization
in the steel industry generally increased over the first
eight months of the year, it declined in September and
again in October. With new orders for capital goods not
picking up as expected, demand for structural steel
remains soft. Only the market for sheet steel has been
strong, and that is because of the pickup in automobile
production. Yet even for sheet steel, no capacity prob­
lems are anticipated in the near future. Thus, since
last spring the threat of impending capacity shortages
seems to have dissipated.
The conclusion to be drawn is that the manufacturing
sector is operating considerably below its productive
limits. How long before capacity will become a prob­
lem depends on future rates of production as well as
on the rate at which capacity-augmenting investment
is undertaken. But, at least for the near term, produc­
tion is unlikely to be hindered by capacity constraints.
While not ruling out the possibility of bottlenecks in
isolated product lines, capacity throughout the manu­
facturing sector should prove to be ample over the
next year or so.

20

FRBNY Quarterly Review/Winter 1976




Literature cited
[ 1] Adams, F. Gerard, and Summers, Robert. “The Wharton In­
dexes of Capacity Utilization: A Ten Year Perspective”. Pro­
ceedings of the Business and Economic Statistics Section of
the American Statistical Association (1973), pp. 67-72.
[ 2] de Leeuw, Frank. “The Concept of Capacity”. Proceedings of
the Business and Economic Statistics Section of the Ameri­
can Statistical Association (1961), pp. 320-29.
[ 3] de Leeuw, Frank. "A Revised Index of Manufacturing Capac­
ity”. Federal Reserve Bulletin (November 1966), pp. 1605-15.
[ 4] Edmonson, Nathan. "Production Relations at High Levels of
Capacity Utilization in the Steel Industry”. Proceedings of the
Business and Economic Statistics Section of the American
Statistical Association (1973), pp. 73-79.
[ 5] Enzler, Jared. “The Federal Reserve Board Manufacturing
Capacity Index: Comparisons with Other Sources of Capacity
Information”. Proceedings of the Business and Economic
Statistics Section of the American Statistical Association
(1968), pp. 35-40.
[ 6] Gang, Priscilla. “Another Look at the McGraw-Hill Measure
of Industrial Operating Rates”. Proceedings of the Business
and Economic Statistics Section of the American Statistical
Association (1973), pp. 64-66.
[ 7] Hertzberg, Marie; Jacobs, Alfred; and Trevathan, Jon. “The
Utilization of Manufacturing Capacity, 1965-73”. Survey of
Current Business (July 1974), pp. 47-57.
[ 8] Klein, L. R., and Preston, R. S. “Some New Results in the
Measurement of Capacity Utilization”. American Economic
Review (March 1967), pp. 34-58.
[ 9] Klein, L. R., and Summers, Robert. The Wharton Index of
Capacity Utilization. (University of Pennsylvania: Economics
Research Unit, 1966).
[10] McGraw-Hill Publications Company. Historical Pollution Con­
trol Expenditures and Related Data (1975).
[11] McGraw-Hill Publications Company. McGraw-Hill Measure of
the Industrial Operating Rate (April 1976).
[12] McGraw-Hill Publications Company. Ninth Annual McGrawHill Survey of Pollution Control Expenditures (May 1976).
[13] Matulis, Margaret. “Capacity and Operating Rates”. Proceed­
ings of the Business and Economic Statistics Section of the
American Statistical Association (1961), pp. 306-8.
[14] Perry, George. “Capacity in Manufacturing”. Brookings Papers
on Economic Activity (1973-111), pp. 701-42.
[15] Raddock, Richard, and Forest, Lawrence. “ New Estimates of
Capacity Utilization: Manufacturing and Materials”. Federal
Reserve Bulletin (November 1976), pp. 892-905.
[16] Summers, Robert. "Further Results in the Measurement of
Capacity Utilization”, Proceedings of the Business and Eco­
nomic Statistics Section of the American Statistical Association
(1968), pp. 25-34.
[17] Walters, A. A. “Production and Cost Functions: An Econometric
Survey”. Econometrica (January-April 1963), pp. 1-66.

The
business
situation
Current
developments
Chart 1

The Labor Market in Recession and Recovery

Total employment *

1974-76

A verage of postw ar cycles

I I I I I I

J_L

J_L

Total civilian labor f o r c e *
104
1974-76

102

A verage of postw ar cycles

I I I I I I I I I I
-1 2 -1 0 -8 - 6 - 4 - 2
0
Months before trough

2

4

6
8 10 12 14 16
Months after trough

18 2 0

Note: R ecession troughs are dated according to National
Bureau of R esearch chronology as occurring in May 1954,
April 1958, February 1961, Novem ber 1970, and (tentatively)
M arch 1975.
* Indexed as a p e rcen tag e of the trough-month level for each
respective cycle.
Source: United S tates D epartm ent of Labor, Bureau of
Labor Statistics.




The prolonged “pause” in the rate of economic advance
appeared to have continued into the fourth quarter. The
economy’s resistance to the resumption of a more vig­
orous rate of expansion has necessarily increased un­
certainties over the outlook. Nevertheless, the danger
of the economy moving into outright recession in the
near future seems small. The current recovery is still
relatively young by the standards of postwar business
cycles and thus far has been marked by few of the
stresses and strains that typically precipitate down­
turns. Indeed, the current episode of consolidation
could lay the foundation for a prolonged period of
gradually increasing prosperity.
The pace of the recovery from the 1973-75 recession
has not been abnormal, compared with other economic
recoveries since the Korean war. Measured from the
apparent trough in the first quarter of 1975, real gross
national product (GNP) increased 7.3 percent during
the first four quarters of recovery. This gain was slightly
faster than the average increase of 7 percent during
the first year of the four preceding cyclical recoveries—
those beginning in 1954, 1958, 1961, and 1970. Even the
much discussed “pause” in the rate of expansion dur­
ing the past two quarters was normal. The 4.1 percent
annual rate of real GNP growth during the second
and third quarters of 1976 was actually slightly faster
than the 3.7 percent increase averaged during the sec­
ond year of the four preceding recoveries. Hence, an­
other quarter or two of slowdown in the rate of economic
growth would not be at all unusual and would not
necessarily presage an early end to the expansion. Only
one of the four previous periods of expansion was as
short as eight quarters; the average length was seven­
teen quarters.
What is distinctive about the current recovery is the
relatively low rate of resources utilization. The newly
revised Federal Reserve Board index of manufacturing

FRBNY Quarterly Review/Winter 1976

21

Chart 3

Chart 2

Retail Inventories

Private Housing Starts

Seasonally adjusted

Seasonally adjusted annual rates

M onths of sale
1.65

Millions of units
3.0

________

inventory sales ratio

1.60-

11 1 1 111 I I 1 I I I I 1 1 11 1 1 11 1 1 1 111 1 I I 111
Billions of dollars
30
C hanges in book value
of retail inventories
2 0 — Annual rate

I nil
—201I I I I I I I 1.1.U
1973

□

I I 1 1 1 1 M 1I I 1

TO

i i I i i I 11 111
1974

1975

hW
m

1.0

11
l I I l I l i.Ll J
197
^6

Source: United States D epartm ent of Com merce, B ureau of
Economic Analysis.

capacity indicated a utilization rate of 79.8 percent in
October, 8 percentage points below the recent peak
in the third quarter of 1973. At a comparable stage of
the four preceding cyclical recoveries, capacity utiliza­
tion in manufacturing averaged close to 84 percent
according to this measure (see the article on pages 1320 of this R eview). Much more striking is the underutili­
zation of manpower. The unemployment rate was 8.1
percent in November, only 0.8 percentage point below
the recent high reached in the spring of 1975. After
twenty months of expansion in the four previous cycles,
the unemployment rate averaged 5.1 percent, which
represented an average decline of 1.6 percentage
points from the respective cyclical peaks in the unem­
ployment rate (see the top panel of Chart 1).
The persistence of high rates of unemployment has
not resulted from unusually slow growth of employment
during the current recovery. Indeed, as may be seen
in the middle panel of Chart 1, total employment has
increased somewhat more during the current recovery
than on average during the four preceding recoveries.
In large measure, the current high rate of unemploy­
ment reflects the severity of the last recession, which
pushed the jobless rate to the highest level since
World W ar II. It also reflects the unusually rapid growth
of the labor force during much of the current expan­
sion. As can be seen in the bottom panel of Chart 1,
the total civilian labor force increased 4.4 percent dur­

FRBNY Quarterly Review/Winter 1976
Digitized22
for FRASER


c;ingle famil

1.5

Multifamily

01i i I u 1il1.il
1971

iii

1972

n iiin in
1973

iiiin i

1974

i
1975

11 ' 11 1 111 1n 11 1 1
1976

Source: United States Department of Commerce, Bureau of
the Census.

ing the first twenty months of the current recovery,
which was much faster than the 2.7 percent average
increase during the comparable period of the last
four recoveries. Another influence contributing to the
high overall rate of unemployment has been the con­
tinuing shift in composition of the work force toward
groups that characteristically experience relatively high
rates of unemployment (see the article on pages 24-30
of this Review).
The stumbling of the economy early in the fourth
quarter was exemplified by developments in industrial
output. After advancing for seventeen consecutive
quarters, industrial production, as measured by the
Federal Reserve Board’s index, dipped slightly in Sep­
tem ber and then declined by a more pronounced 0.5
percent in October, according to preliminary data.
W hile the Septem ber dip largely reflected the effects
of the strike of the United Auto W orkers against the
Ford Motor Company, the October decline was more
generalized. Declines in production were common
among materials and manufactured products, including
business equipment and consumer goods. These pro­
duction cutbacks undoubtedly reflected attempts of
firms to trim inventories, or to keep inventories from
increasing, in the face of disappointing sales.
A periodic data revision released in November indi­
cated that the level of retail inventories was about 3 1/2
percent higher than previously thought. While the Sep­

tember rise in stocks was not unusually large, sales
slipped and the ratio of retail inventories to sales rose
to the level of April 1975 when the economic recovery
was just getting under way (see Chart 2). Inventory
excesses in some lines are suggested by scattered
indicators such as preseason sales of various con­
sumer goods and rebates on some subcompact auto­
mobiles. However, existing excesses appear neither
widespread nor overwhelming. Most firms seem to feel
they have their stocks under reasonable control, and
the swiftness with which firms cut back orders when
stocks appear to be getting out of line should help
prevent inventory excesses from cumulating. If demand
were to fall off drastically, however, the picture could
turn around abruptly— as happened in late 1974.
The likelihood of a sharp drop in demand appears
slim. Indeed, while there are no conclusive signs of a
rejuvenation of the economic expansion, a number of
indicators point in that direction. Retail sales rebounded
in October and November after several months of slug­
gishness. Nonfarm payroll employment posted a sizable
increase in November, as did hours of overtime and the
average workweek in manufacturing. Housing starts and
permits rose sharply in September and held on to most
of those gains in October. Especially impressive was the
performance of single-family home building. Single­
family home starts in October were only a shade below
the best months of 1972 and early 1973 (see Chart 3).
Ample funds are available to finance increased homebuilding activity, as banks and thrift institutions con­
tinue to enjoy large inflows of savings attracted by
deposit rates that are more generous than returns avail­
able on short-term market obligations such as Treasury
bills (see article on pages 33-39 of this Review). Capital
spending by business is another sector that may be
poised for a significant advance. Several early private
surveys indicate an increase in planned outlays for
plant and equipment of about 6 to 7 percent in real
terms in 1977. Continued sizable increases in new
orders for capital goods appear to be consistent with
these plans, although the Commerce Department’s
survey of plant and equipment spending plans for
the first half of 1977 suggests a smaller rate of
advance.
One development that could deal a severe blow to
the nation’s economic expansion would be a resurgence
of accelerating inflation, but it appears that such a
resurgence can be avoided. The United States has
made great strides during the past two years in reduc­
ing inflation. As measured by the consumer price index
(CPI), for instance, the rate of inflation has been re­
duced from 12 percent in 1974 to 5Vz percent during
the past year. To a considerable extent, however, this




impressive record reflects the winding down of a com­
bination of extraordinary developments that pushed
prices sharply higher in 1973 and 1974. Further prog­
ress in reducing inflation is likely to be much more
gradual and more difficult to achieve. The 0.3 percent
increase in the CPI in October probably understated
the ongoing pace of inflation. The overall index was
held down by stable food prices which translated into
a very modest price rise after seasonal adjustment.
Such stability in food prices cannot be expected to
continue indefinitely, although the Department of Agri­
culture foresees only a moderate rise at least through
mid-1977. The remainder of the CPI increased in
October at an annual rate of 51/2 percent, the same as
the growth rate of the overall index during the past
four quarters.
If the CPI numbers for October tended to understate
the ongoing rate of inflation, the wholesale price index
(WPI) for the past several months has almost certainly
exaggerated the strength of inflationary forces in the
marketplace. During the past three months, September
through November, prices measured by the industrial
wholesale price index have increased an average of
0.9 percent per month. It might be recalled that a sim­
ilar bulge at the same time last year was followed by
several months of much more modest increases. There
could be problems with the seasonal adjustment of
these data, relating in part to the annual increases in
new car and truck prices that accompanied the intro­
duction of the new models as well as other factors.
Nearly half the increase in industrial wholesale prices
in October and November was accounted for by power
and fuel. In large measure, these increases reflected
the effects on energy prices of regulatory changes—
the increase by the Federal Power Commission in
ceiling prices for natural gas sold across state lines
beginning in late July and the decontrol in September
by the Federal Energy Administration of crude oil
from certain marginal wells. Due to the usual reporting
lags, as well as continuing adjustments of prices to
these regulatory changes, the effects of these events
showed up in the WPI in October and November. Re­
ported prices of other industrial commodities rose an
average of 0.5 percent per month, seasonally adjusted,
during those two months. Because of the difficulties
inherent in measuring actual transactions prices in
periods of changing demand conditions, it is likely that
the effective prices at which a number of industrial
commodities actually traded— taking account of dis­
counts and special allowances— were somewhat weaker
than indicated by the WPI. Moreover, it is not certain
that recent increases in posted prices of some metals
and fibers will withstand the test of the market.

FRBNY Quarterly Review/Winter 1976

23

The changing
composition
of the
labor force
by Sharon P. Smith

The persistence of relatively high unemployment rates
through good times and bad in recent years raises the
question of whether some structural change in labor
supply may be adding to the unemployment created by
recession. It does appear that the composition of the
labor force1 has changed so that a larger proportion of
it now is composed of demographic groups (in par­
ticular, women and teenagers) who tend to experience
relatively higher rates of unemployment. The old image
of a labor force largely composed of adult men has
become increasingly inappropriate as differences in
labor force participation rates of different demographic
groups have narrowed. Thus, the labor force participa­
tion rates of females and teenagers have increased,
and that of males has decreased. Moreover, this rapid
rise of labor force participation among demographic
groups traditionally regarded as sources of “second­
ary” workers has continued during a period in which
high levels of cyclical unemployment might be ex­
pected to deter entrance into the labor force. The
recent and apparently continuing changes in the com­
position of the labor force seemingly have tended to
raise the average level of overall unemployment asso­
ciated with given cyclical conditions. A corollary ap­
pears to be that the level of unemployment associated
with a state of ‘full employment”— whatever that some­
what elusive concept may mean— is now somewhat
higher than in the earlier postwar period.
This article focuses on the major changes that have
occurred in the composition of labor force participants
1 Th e current definition of the total labor force is that it refers to all
noninstitutionalized individuals 16 years of age and over who are at
work, seeking work, or unem ployed. The labor force participation
rate is the proportion of the noninstitutionalized population that is
in the labor force; the participation rate can be determ ined
separately for the population as a w hole or for any particular
dem ographic group.

FRBNY Quarterly Review/Winter 1976
Digitized24
for FRASER


and the forces that have brought about these changes
during the postwar period. Attention also is directed
briefly to the impact of the changing patterns of labor
force participation on the size and composition of
unemployment.

Growth and changing patterns of
labor force participation
The overall labor force participation rate for all demo­
graphic groups, 16 years of age and older, remained
fairly stable from the late 1940’s through the early
1960’s, fluctuating between 57.0 percent and 58.3 per­
cent (see Chart 1). Since 1964, however, there has
been a persistent rise in the participation rate. In
1969 it reached a record 58.6 percent, and by 1975 it
had moved up further to 60.4 percent.
Although these figures do indicate that a steadily
rising proportion of the noninstitutional population is
counted in the civilian labor force, the overall increase
since 1947 has been a modest 3 percentage points.2
Nevertheless, this small overall increase masks changes
of much larger magnitude in the labor force participa­
tion patterns of the major component demographic
groups. The three groups exhibiting the most important
changes are married women living with their husbands
(“spouse present” in the language of the Census
Bureau), older men, and teenagers.

The changing role of women in the labor force
The participation of women in the labor force has

2 It should be noted that during this period there w ere som e changes
in definition so that the series are not always strictly com parable:
prior to 1967 the percentage of the population in the labor force was
reported for those 14 years of age and over, but beginning in 1967
this was reported for persons 16 years of age and over; beginning
in 1972, data refer to the noninstitutional population.

T a b le 1

Median Age at First Marriage
Y ear

1940
1950
1960
1965
1970
1972
1973
1974

Fem ale

M ale

21.5
20.3
20.3
20.6
20.8
20.9
21.0
21.1

24.3
22.8
22.8
22.8
23.2
23.3
23.2
23.1

..............................................................
..............................................................
..............................................................
..............................................................
..............................................................
..............................................................
..............................................................
..............................................................

Source: United States Departm ent
A b s tra c t o f the U n ite d S tates 1975.




of

Com m erce,

grown in recent years for all major groups regardless
of marital status and the ages of their children. As
might be expected, participation rates for married
women tend to be lower than those of unmarried
women, with rates for women who are married but not
living with their husbands falling in between. Inter­
estingly, however, while the participation rates of all
three groups have risen, the differences have nar­
rowed (see Chart 2). Thus, by far the largest increase
has occurred for married women living with their hus­
bands. Their participation rate rose from 20 percent
in early 1947 to 44.4 percent in early 1975.
Just as important as marital status in influencing
the probability of a wom an’s participation in the labor
force are the number and ages of her children. In par­
ticular, the presence of small children is obviously an
important deterrent to participation in the labor force.
Chart 3 shows labor force participation rates for mar­
ried women living with their husbands by the ages of
their children. The most important distinction here is
between those women with children under 6 years of
age and those with children over 6 years of age. As
with the breakdown by marital status, there has been
an increase in participation rates for all categories,
and again the distinctions among the major categories
generally have tended to shrink over the years. Thus,
the observed rise in labor force participation is not
concentrated among those who are childless. Nor has
it occurred only for women with children over age 6.
Rather, it appears that labor force participation of all
married women living with their husbands has in­
creased.
One possible explanation for this major rise in labor
force participation among married women is that the
younger generation has a significantly different out­
look toward market work (in contrast to housework)
than earlier generations. However, an examination of
changes in labor force participation rates by sex and
age, shown in Chart 4, indicates that these patterns
are consistent across the two younger age groups and
are not the result of unusual behavior of a particular
group as it ages.
Among females, labor force participation rates in­
creased enormously for each age category except
those 65 and over. The largest increase occurred
among women between 25 and 34 years old. Although
females between the ages of 20 and 24 remain the
group with the highest labor force participation rate,
the differences between the age groups generally have
narrowed between 1955 and 1976.3Therefore, it appears
that the increase in female labor force participation is

S ta tis tic a l
3 The only exception is the widened difference between the labor force
participation rate for the 55 to 64 age group and that for the 65 and
over age group.

FRBNY Quarterly Review/Winter 1976

25

a consequence of factors that affect all age groups and
not just one particular generation or one particular age
group.
Before considering some of the factors that have
brought about these changes in the participation of
women in the labor force, it is worthwhile to look at
the equally striking but quite different changes in the
labor force participation of men. First, there has been
a decre ase between 1955 and 1975 in the participation
rates of all age categories of adult men— i.e., other
than male teenagers. While the amount of the decrease
for those categories under age 55 has been fairly
slight, the decreases in the two oldest categories have
been quite large. The total labor force participation
rate for men 55 to 64 years old fell from 87.9 percent
in 1955 to 75.8 percent in 1975, while that for men 65
and over fell from 39.6 percent in 1955 to 21.7 percent
in 1975.

Why female labor force participation has increased
Several factors have been influential in the rise in
fem ale labor force participation. The increased willing­
ness of married women (with spouse present) to con­
tinue working can be attributed in part to a trend
toward later marriages and a decrease in the birth

C hart 2

Labor Force Participation Rates
By sex and m arital status, 1947-75
P ercent

Source: Employment and Training Report of
the President, (1976).

26

FRBNY Quarterly Review/Winter 1976




Table 2

Birth Rate 1940-73
Per 1,000 population
Y ear

Birth rate

1940 ............................................................. ............19.4
1950 ............................................................. ............24.1
1960 ............................................................. ............23.7
1965
............19.4
1970
............18.4
1971
............17.2
1972
........... 15.6
1973
........... 14.9
Source: United States D epartm ent
A b s tra c t o f th e U n ite d S ta te s 1975.

of

C om m erce,

S ta tis tic a l

rate (see Tables 1 and 2). With later marriages, it is
more likely that women will have obtained skills and
training that increase their expected wage and thus
the attractiveness of having a job. Similarly, the de­
crease in the birth rate reduces the probability of the
presence of young children to act as a deterrent to
married women’s labor force participation. Although
the median age of 21.5 at first marriage was quite high
in 1940, this was probably a consequence of the de­
pression. In 1950 the median age had dropped to 20.3
and remained at that level in 1960. The median mar­
riage age began to rise again in the 1960’s and by
1974 had reached 21.1. Meanwhile, the birth rate was
declining from a high of 24.1 (per 1,000 population)
in 1950 to 14.9 in 1973.
Another factor tending to raise fem ale participation
rates was the rise in education levels. Actually, educa­
tion rates rose for both men and women during the
period and the increase was greater for men (see
Table 3). There is good reason to expect increased
education to result in rising labor force participation.
The reason is simply that education tends to increase
attainable earnings levels and therefore increases the
attractiveness of holding a job relative to homemaking
and other nonmarket activities.
These three factors— an increase in age at first mar­
riage, a decline in the birth rate, and increased edu­
cational attainment— alone would have increased fe­
male labor force participation. In addition, however,
clearly there has been a marked change in social atti­
tudes and expectations toward women working. Thus,
for any given set of circumstances (particular marital
status, number and age of children, education level),
the probability that a woman is in the labor force is
greater today than it was twenty, or even ten, years ago.

Chart 4

Labor Force Participation Rates*

Chart 3

Labor Force Participation Rates of
Married Women, Husband Present

By age and sex, 1 950-75
Percent

110" M a le s

By p resen ce and age of children, 1 9 4 8 -7 5

100-

2 5 -5 4

90-

I I I i I I I I II
1948

50

55

I I I I I I I II

60

65

II
70

75

Source: Employment and Training R eport of
the President (1976).

Adult males and teenagers
The decline in the male labor force participation rate
already mentioned reflects a rise in age at first mar­
riage, an increasing trend to earlier retirements, and
an increase in disability. The last two factors are im­
portant in explaining why the fall in male labor force
participation rates has been concentrated in the older
age categories. Years in retirement appear to be in­
creasing in part because of a rise in longevity. In addi­
tion, there has been a decrease in male labor force
participation due to better pension plans, to more
liberal social security payments and other Government
benefits, and to the increase in working wives. It has
been estimated that, between 1960 and 1970, male life
expectancy rose from 66.8 to 67.1 years while “work
expectancy” fell from 41.1 to 40.1 years.4
It is not clear to what extent the rise in disability
might reflect an increase in debilitating illnesses and
to what extent it has resulted from the liberalization
of Government benefits. Amendments to the social
4 See Fullerton and Byrne [4 , page 3 2 ],




1950
1955
1960
* Includes arm ed forces.
Source: Employment and Training Report of
the P resident (1976).

security law in 1956 and 1960 extended disability
benefits to individuals under 50 years of age. More­
over, the definition of disability was changed in a 1965
amendment from an anticipated “ perm anent” or “long­
term ” disability to a disability with “expected duration
of at least 12 months” . As many as 78.3 percent of the
newly eligible recipients of disability benefits between
the ages of 25 and 50 may be in this category because of
these revisions in disability benefits (and not because
of an increase in the incidence of disability).5
A third major change in the pattern of labor force
participation has been the rapid rise in teenager par­
ticipation. Participation rates have risen for both sexes,
though the increase has been sharper for females. The
total labor force participation rate for males aged 16 to
19 actually fell between 1960 and 1970 (from 58.6 per
cent to 57.5 percent) but then rose to 60.9 percent in
1975. The labor force participation rate for teenage
females, on the other hand, grew irregularly from 39.1
percent in 1960 to 49.3 percent in 1975. This overall
5 See Gastwirth [5 , page 4 5 ],

FRBNY Quarterly Review/Winter 1976

27

growth in teenage labor force participation rates be­
tween 1960 and 1975 probably reflects, in part, the
recent drop in college enrollments.
Beyond this, part of the very recent rise in the labor
force participation of both married women and teen­
agers (of both sexes) may be due to the fact that un­
employment in the most recent recession has been
concentrated in the predominately male industries
(principally manufacturing) while the predominately fe­
male industries (principally service) continue to experi­
ence employment growth. The entrance of secondary
workers into the labor force under these circumstances
may reflect an effort to maintain the household’s cus­
tomary standard of living when the household head has
become unemployed.6
Overall, the changing rates of labor force participa­
tion for adult females, adult males, and teenagers have
occurred in the wake of higher market wage rates,
later marriages, lower birth rates, increased pension
and disability benefits, and the other changes discussed
earlier. In addition, however, the fact that the largest
increases in labor force participation have occurred
for the secondary workers (married women living with
their husbands and teenagers) suggests the possibility
of increased household preference for the pecuniary
rewards of market work (in place of the nonpecuniary
rewards to such activities as work in the home or
leisure). Such a shift in preferences wCtild be very
difficult to document, however.

Table 3

Median Years of School Completed
Y e a r*

Fem ale

M ale

1952 .......................................................................... 12.0
1957 .......................................................................... 12.1
1959 .......................................................................... 12.2
1962 .......................................................................... 12.2
1964
......... 12.3
1965
......... 12.3
1966
......... 12.3
1967
......... 12.3
1968
......... 12.4
......... 12.4
1969
1970
......... 12.4
1971
......... 12.5
19 7 2 f .............................................................. ......... 12.4
1973
......... 12.5
1974
......... 12.5

10.4
11.1
11.5
12.0
12.1
12.2
12.2
12.2
12.3
12.3
12.4
12.4
12.4
12.4
12.5

* O ctober survey for 1952 and M arch surveys for all other years,
t Beginning 1972, data refer to persons 16 years of a ge and over,
other years are aged 18 and over.
Source: United States D epartm ent of Labor, H a n d b o o k o l L a b o r
S ta tis tic s 1975— R e fe re n c e E d itio n .

Table 4

Composition of the Civilian Labor Force
Changing composition of the labor force
and unemployment
The result of these different patterns of labor force
participation of older men, married women, and teen­
agers has been continuing change in the composition
of the civilian labor force during the last twenty-five
years. Males, 16 years and older, constitute a steadily
decreasing proportion of the civilian labor force, fall­
ing from 70.4 percent in 1950 to 60.1 percent in 1975,
and females, 16 years and older, a correspondingly
increasing proportion, rising from 29.6 percent in 1950
to 39.9 percent in 1975 (see Table 4). Teenagers of
both sexes, of course, have become a larger propor­
tion of the labor force over this period. Moreover, the
Bureau of Labor Statistics projects a continuation of
6 The incom e earned by working wives constitutes a significant
proportion of total fam ily income, so that "secondary worker" may be
a som ew hat m isleading label. The exact percentage varies with
the w ife ’s work experience and status (full or part-tim e worker).
It has been estimated that in 1974 when the wife worked full
tim e for fifty to fifty-two weeks during the year, the m edian fam ily
incom e was $17,500, and the m edian proportion the wife contributed
to that income was 38 percent. Even where the wife worked part time
or full tim e for one to twenty-six weeks during the year, she con­
tributed 12 percent to a m edian fam ily income of $13,500.
See Hayghe [6 , page 1 7 ].

28

FRBNY Quarterly Review/Winter 1976




Actual percentage distribution

Sex and age group

1950

1960

1970

1975

Total men, 16 years and over . . . .

70.4

66.6

61.9

60.1

16 to 24 years ....................................
16 to 19 y e a r s ..................................
20 to 24 y e a r s ..................................
25 to 54 y e a r s ......................................
55 years and o v e r ...............................
55 to 64 y e a r s ..................................
65 years and o v e r ...........................

11.5
4.0
7.4
45.7
13.3
9.3
3.9

9.9
4.0
5.9
44.2
12.5
9.2
3.3

11.7
4.8
6.9
38.9
11.2
8.6
2.6

13.1
5.1
8.0
37.3
9.6
7.5
2.1

Total wom en, 16 years and over . . .

29.6

33.4

38.1

39.9

16 to 24 y e a r s .......................................
16 to 19 y e a r s ..................................
20 to 24 y e a r s ..................................
25 to 54 y e a r s ....................................... .
55 years and o v e r ............................... .
55 to 64 y e a r s .................................. .
64 years and over ........................

7.1
2.8
4.3
18.6
3.9
3.0
0.9

6.7
3.0
3.7
21.1
5.6
4.3
1.3

9.8
3.9
5.9
22.0
6.3
5.0
1.3

10.9
4.4
6.6
23.3
5.7
4.6
1.1

.

.
.
.

Source: United States D epartm ent of Labor, E m p lo y m e n t a n d
T ra in in g R e p o rt o f th e P re s id e n t (1976).

many of these patterns to 1990, although the projected
rates of change are slower than have occurred over the
past quarter century.
Thus, an increasing proportion of the labor force is
composed of those demographic groups that his­
torically have experienced relatively higher rates of
unemployment than adult males. Table 5 shows that
despite changes in the composition of the labor force,
the general structure of unemployment— i.e., the rela­
tive unemployment rates for different age and sex
groups— has remained fairly stable over time. Thus, in
all years the highest unemployment rates have
occurred for teenagers of either sex. However, while
the male teenage unemployment rate was the higher of
the two through the 1950’s and 1960’s, the rate for fe­
males now appears somewhat greater. These higher
unemployment rates for teenagers reflect in part their
relatively lower levels of skill and experience; teen­
agers are more likely to be laid off. They also are more
likely to be moving into and out of the labor force
because of discouragement with respect to job pros­
pects and because of more probable movement into
and out of school. Moreover, they may move among
jobs as they search for a satisfactory position.
In the adult categories, a consistent pattern appears.




In the youngest age group, 20 to 24 years, and in the
oldest age group, 55 and over, male unemployment
rates are generally higher than female rates while in
the middle ages, 25 to 54 years, fem ale unemployment
rates are higher. This pattern probably reflects the
typical discontinuous labor force participation of
women who periodically withdraw from the labor force
to engage in child care or because they have become
discouraged about finding a job. They then experience
additional difficulties in finding a job as reentrants
whose job skills may have depreciated during their
period of withdrawal from the labor force. In fact, it
has been estimated that the “ high rate at which em­
ployed women leave the labor fo rc e ... is the main factor
in the higher unemployment rates they experience” .7
Because of these changes in the composition of the
labor force, it appears that “full employment”— how­
ever this is interpreted— for the American economy is
likely to imply a higher level of total unemployment
today than it would have some years ago.8 This does
7 See M arston [8 , pages 1 7 9 -8 2 ],
8 It is im portant to note that this discussion abstracts from the effect
that liberal unem ploym ent com pensation may have in increasing
the level and duration of unem ploym ent. C onsideration of this factor
is beyond the scope of this analysis.

FRBNY Quarterly Review/Winter 1976

29

of the labor force in the same direction may be
expected to have similar effects on the average level
of the overall unemployment rate under given eco­
nomic conditions.

Table 5

Unemployment Rates by Sex and Age
Sex and age group

1950

1955

1960

1965

1970

1975

5.1

4.2

5.4

4.0

4.4

7.9

12.5
15.5
16.1
10.8 15.0
12.4
7.7
8.9
6.3
3.3
4.8
3.0
3.1
3.8
2.6
3.2
4.1
2.5
4 .3 4.6
3.3
4.0
4.2
3.5

16.9
13.4
8.4
3.4
2.4
2.4
2.8
3.3

21.6
19.0
14.3
7.0
4.9
4.8
4.3
5.4

Total men,
16 years and over . . .

16
18
20
25
35
45
55
65

to 17
to 19
to 24
to 34
to 44
to 54
to 64
years

y e a r s ............
y e a r s ............
y e a r s ............
y e a r s ............
y e a r s ............
y e a r s ............
y e a r s ............
and over . . .

Total women,
16 years and over . . .

16
18
20
25
35
45
55
65

to 17
to 19
to 24
to 34
to 44
to 54
to 64
years

y e a r s ............
y e a r s ............
y e a r s ............
y e a r s ............
y e a r s ............
y e a r s ............
y e a r s ............
and over . . .

Bibliography

13.3
12.3
8.1
4.4
3.6
4.0
4.9
4.8

5.7

4.9

5.9

14.2
9.8
6.9
5.7
4.4
4.5
4.5
3.4

12.0
9.1
6.1
5.3
4.0
3.6
3.8
2.3

15.4
13.0
8.3
6.3
4.8
4.2
3.4
2.8

5.5

5.9

9.3

17.2
17.4
21.2
14.8
14.4
18.7
7.3 7.9
12.7
5.5 5.7
9.1
4.6
4.4
6.9
3.2
3.5
5.9
2.8
2.7
5.1
2.8
3.1
5.1

Source: United States D epartm ent of Labor, Em ploym ent and
Training Report of the President (1976).

[ 1] B ow en, W illiam G ., and Finegan, T. A ldrich. The E cono m ics of
Labo r F o rce P artic ip a tio n (P rinceton, N.J.: P rinceton U niversity
Press, 1969).
[ 2] B ower, Leonard G. “ Labor Fo rce— C hanges in C om position
A ffect U n e m p lo y m e n t” . Business R eview (F e d e ral R eserve Ba’nk
of D allas, February 1973).
[ 3] C ain, G len G. M a rrie d W om en in the Labo r Fo rce (C hicago:
U niversity of C hic a g o Press, 1966).
[ 4] Fu llerton, H .M ., Jr., and Byrne, J.J. “ Length of W orking Life
for M en and W o m en, 1 97 0 ” . M on thly Labo r R eview (February
1976).
[ 5] G astw irth, Joseph L. “ On the D ec lin e of M a le Labor Fo rce Par­
tic ip a tio n ” . M o n th ly Labor R eview (O c to b er 1972).
[ 6] H ayghe, H ow ard. “ Fam ilies and the Rise of W orking W ives—
an O v e rv ie w ” . M on thly Labo r R eview (M a y 1972).
[ 7] Kreps, Juanita. S e x in the M a rk e tp la c e : A m erican W om en at
W ork (B altim o re: Johns H opkins Press, 1971).
[ 8] M arston, S tephen T. “ E m plo ym ent In stability and High U n­
em p loym ent R ate s ” . B rookings P apers on E conom ic A ctivity
(1, 1976).
[ 9] M in ce r, Jac o b . “ Labor Fo rce P articipation of M a rrie d W o m e n ” .
Aspects of Labo r Econo m ics (P rinceton, N .J.: P rinceton U ni­
versity Press, 1962).

not mean that presently high rates of unemployment are
solely or even largely attributable to changing labor
force participation. However, it is clear from Chart 5
(which shows actual unemployment rates and weighted
unemployment rates for constant labor force composi­
tion quarterly from 1957 through the third quarter of
1976) that an increasing proportion of the unemploy­
ment rate is due to the changing composition of the
labor force. The difference between the two measures
of unemployment was rather small until the late 1960’s.
It has now grown to almost 1 percentage point. In the
third quarter of this year the weighted unemployment
rate was 0.8 percentage point below the actual un­
employment rate. Further changes in the composition

30

FRBNY Quarterly Review/Winter 1976




[10] M in ce r, Jaco b, and P o lac h e k , S olom on. “ Fam ily Investm ents
in Hum an C ap ital: Earnings of W o m e n ” . J o u rn a l of P o litic a l
E conom y (82, Pt. 2, Supp. M arc h -A p ril 1974).
[11] R ees, A lbert. The Econo m ics
H arp e r and Row, 1973).

of W ork a nd Pay (N ew Y ork:

[12] U nited S tates D ep artm e n t of Labor, Bureau of Labor Statistics.
“ T h e U.S. Labor F o rce in 1990: N ew P ro je c tio n s ” , N ew s (S e p ­
tem b er 1 5 ,1 9 7 6 ).
[13] U nited S tates D ep artm ent of Labor, E m plo ym ent and Training
A dm inistration . E m plo ym ent a n d Training R ep ort of the P resi­
d ent. Transm itted to the C ongress 1976 (W ashington, D .C.:
U nited S tates G o vernm ent Printing O ffice, 1976).
[14] U nited States D ep artm e n t of Labor, M a n p o w e r A dm inistration .
M a n p o w e r R ep o rt of the P resident. T ransm itted to the C ongress
A pril 1975 (W ashington, D .C .: U nited S tates G o vernm ent P rint­
ing O ffice, 1975).

The
financial
markets
Current
developments

C hart 1

Recent Changes in Interest Rates
Percent

4 s n 1111 I I I I I I I I I I I I I I I I I I I I t I I I I I I I I I I I I I I I I I l 111 I
O
N
Sources: Federal R eserve Bank of New York, Board of
Governors of the Federal R eserve System, and M oody’s
investors Service, Inc.




The broad decline in interest rates which began early in
the summer extended into the fall. Growth in economic
activity has remained modest in recent months and,
under these circumstances, the Federal Reserve ac­
commodated a further easing in interest rates without
fundamentally altering the basic thrust of monetary
policy. While the debt markets were somewhat hesitant
in October, perhaps because of uncertainty associated
with the outcome of the election, interest rates across
the maturity spectrum moved down after the voting.
Long- and intermediate-term yields declined to their
lowest levels in more than two years despite both
exceptionally heavy new issue activity in the municipal
bond market and continuation of the Treasury effort to
lengthen the maturity of its outstanding debt. Short­
term market rates of interest, too, dropped further and,
at the end of November, reached their lowest levels
since late 1972. The Federal Reserve discount rate was
reduced late in November by V\ percentage point. The
change to 5 1/4 percent was the first lowering of this rate
since January. The action was taken to bring the dis­
count rate into better alignment with short-term rates
generally.
The persistent decline in most long-term interest
rates through the summer and fall (see Chart 1) may
have come as something of a surprise. Earlier, con­
siderable pessimism had been expressed about the
outlook for long-term yields. The view that such rates
would rise over the balance of the year apparently
was premised on the strong first-quarter perfor­
mance of the economy and the spring bulge in the
monetary aggregates. With the prolonged sluggishness
in economic growth over the second and third quar­
ters, however, concern that capacity problems would ^
soon lead to an acceleration in inflation diminished.
Moreover, the relatively modest expansion in the mon­
etary aggregates, particularly M lf over the summer

FRBNY Quarterly Review/Winter 1976

31

Chart 2

Growth in the Monetary Aggregates
From tw elve months earlier
Percent
14
M3

1975
Source:

1976

Board of Governors of the Federal R eserve System.

helped to allay fears of another inflationary burst.
The prolonged drop in intermediate- and longer term
yields came as the Treasury was in the process of
lengthening the maturity of its marketable interestbearing debt outstanding. Indeed, the average ma­
turity of privately held debt, which stood at slightly
over five years in mid-1967, fell consistently to a low
of twenty-nine months at the end of 1975. It then held
at about this level until the spring of this year, when
it started to rise. By the end of November, the T rea­
sury had succeeded in raising the average maturity to
about three years. This increase was accomplished
through heavy reliance on coupon offerings, especially
intermediate-term issues, and a concomitant reduction
in the use of Treasury bill auctions as a vehicle for
raising new cash. In the first three refunding operations
of the year, for example, the Treasury sold intermediateterm issues at par on a subscription basis. Demand for
these issues proved in general to be far stronger than
anticipated, with the Treasury ultimately selling con­
siderably more of the securities than it had originally
planned. Overall, through the first eleven months of this
year, the Treasury raised $49 billion of new cash
through coupon offerings but less than $6 billion in the
bill market.
In recent months, the slower rate of economic ex­
pansion has continued. At the same time, evidence
has accumulated suggesting that business loans at
large weekly reporting commercial banks finally may
have bottomed out. Over the thirteen-week period

32FRASER
FRBNY Quarterly Review/Winter 1976
Digitized for


ended December 1, business loans at these banks,
including loan sales to affiliates, rose $4.4 billion,
whereas they had fallen by more than $21 billion
from their peak at the end of 1974 to August of this
year. W hile some of the latest increase reflects bank
purchases of bankers’ acceptances, there nevertheless
has been some growth in business loans exclusive of
acceptances. The pickup appears to be. concentrated
in major money center institutions, where such loans
previously had been particularly weak. It should also
be noted that, despite recent signs of some firming,
overall business demand for short-term credit has still
been unusually soft thus far in the economic recovery.
And, with short-term market interest rates continuing
to move lower, a few commercial banks reduced their
prime lending rate 1A percentage point to 6 1/4 percent
in late November, following a 1A percentage point
reduction which became general early in the month.
The complete absence of a normal cyclical rise in
short-term interest rates at this stage in the business
cycle has preserved the competitiveness of time and
savings deposits at commercial banks and thrift insti­
tutions at a point when such deposits might typically
be feeling the effects of Regulation Q ceilings.1 This
factor, together with legal and institutional changes such
as NOW accounts, corporate and local government
savings accounts, and telephone transfers of funds
from savings to checking accounts, has enhanced the
attractiveness of savings relative to demand deposits
and has contributed to divergent growth in the mone­
tary aggregates over much of the year.2 Indeed, over
the first eleven months of the year, growth of
M 2 generally was running about 4-5 percentage points
above that of M 1( and the gap between the expansion
of M 3 and of M x was even wider (see Chart 2). In testi­
mony before the Congress in November, Federal Re­
serve Board Chairman Burns indicated that the longrun objectives for growth in the monetary aggregates
had been modified to take these factors into account.
The upper boundary of the desired growth-rate range
for M x was reduced V2 percentage point, with the
range set at AV2 to QV2 percent for the period extend­
ing from the third quarter of 1976 through the third
quarter of 1977. In contrast, the growth path ceilings
for the broader M 2 and M 3 measures were raised V2
percentage point, establishing new ranges of IV 2 to
10 percent and 9 to 11V2 percent, respectively.
1 For an explanation of the recent behavior of short-term interest rates,
see the article on pages 3 3-3 9 of this R eview.
1 For further discussion of these developm ents, see Laurence H. Meyer,
"A lternative Definitions of the M oney Stock and the Dem and
for M oney” , M o n th ly R evie w (Federal Reserve Bank of New York,
O ctober 1976), pages 266-74.

Interest rate
behavior in the
current economic
recovery
by John P. Judd

Nominal interest rates, and especially short-term rates,
are clearly behaving atypically when compared with
previous postwar economic recoveries in the United
States. The conventional wisdom is that yields can be
expected to move in a roughly procyclical pattern in
response to rising demands for money and credit
during economic upturns and reductions in these
demands in downturns, During the present recovery,
however, rates have not exhibited the expected up­
ward movement and, in fact, are now lower across
the maturity spectrum than they were at the onset of
the recovery in March 1975. This decline has gener­
ally been more pronounced in short-term than in long­
term rates, following the usual pattern of greater
cyclical fluctuation in yields at the short end of the
term structure.
This article focuses on short-term yields and sug­
gests several factors which may have contributed sig­
nificantly to their decline over the first year and a
half of the 1975-76 upswing. Emphasis is placed upon
the highly probable reduction in inflationary expecta­
tions associated both with the lessening of the actual
rate of inflation in the recovery and with the elimi­
nation of some highly visible supply side difficulties,
such as the oil embargo and certain crop failures.
There was, in addition, relatively little upward pres­
sure on interest rates stemming from the corporate
sector, as several factors apparently contributed to
atypical cyclical changes in the demand for and
supply of short-term credit by nonfinancial cor­
porations. These included a pronounced increase in the
demand for liquidity and an unusually slow pickup in
business spending (particularly on inventories), cou­
pled with a strong rise in corporate cash flow and
equity market financing. Finally, there is the possi­
bility that a shift in the public’s demand for money




balances played a role in depressing short-term inter­
est rates. In any event, the factors which produced the
atypical cyclical decline in short-term rates helped the
United States Treasury conduct extensive debt financing
without encountering increases in short-term rates.
Equally important, the Federal Reserve was able to
follow a policy of growth in the monetary aggregates
which was widely regarded as moderate within a
framework of declining short-term yields.
This article is divided into five sections. The first
section contrasts the current situation with past cycli­
cal behavior of interest rates in the United States. This
is followed by sections analyzing how the inflation
premium, the restructuring of corporate balance sheets,
and the possible shift in the demand for money af­
fected recent short-term interest rate movements.
Some comments on the relative importance of these
factors are contained in the final section.

Recent movements in interest rates
Until the beginning of the 1970’s, interest rates across
the maturity spectrum in the United States gen­
erally exhibited lagging procyclical movements.1 This
pattern is reflected in the four- to six-month prime
commercial paper rate in the recoveries beginning in
1954, 1958, and 1961 (see Chart 1). This representative
short-term rate reached a trough several months after
the trough in economic activity and then increased
fairly steadily through at least the first eighteen months
of recovery. By this point in these three upturns, the
yield on commercial paper was 79 percent higher on
average than it was at the respective troughs. This
pattern was not followed, however, in the two most
recent recoveries: by eighteen months after the Noi See C agan [ 2 ] .

FRBNY Quarterly Review/Winter 1976

33

of the impact of Phase One and also Phase Two (with
its Committee on Interest and Dividends) on price
and interest rate expectations is uncertain.
Movements in most other short-term market rates
and also in most medium- and long-term rates over the
business cycles under discussion paralleled those of
the commercial paper rate. The size of fluctuations,
however, was generally smaller the longer the term of
the security. For example, the average increase over
the first eighteen months of the recoveries beginning
in 1954, 1958, and 1961 was 157 percent for the yield
on three-month Treasury bills and 79 percent for the
four- to six-month prime commercial paper rate. At
the long end of the term structure, yields on constant
maturity long-term Government securities rose by only
17 percent on average and Moody’s Aaa corporate
bond rate increased by 12 percent. Similarly, interest
rates during the 1975-76 recovery also have exhibited
larger movements at the short end of the term structure
(see Chart 2). By Septem ber 1976 the three-month

vember 1970 trough the commercial paper rate had
fallen from 6.30 percent to 4.51 percent, a 29 percent
decline, whereas in the current upturn this rate has
fallen from 6.06 percent to 5.45 percent, a decline
of 10 percent.
It is difficult to interpret interest rate movements
during the 1970-72 recovery because of the announce­
ment and implementation of Phases One and Two of
the wage and price controls in the summer and fall
of 1971. The commercial paper rate behaved in its
usual fashion from the business-cycle trough in No­
vember 1970 until shortly after the enactment of
Phase One in August 1971 (see Chart 1). It then de­
clined sharply. This has been attributed to suddenly
reduced inflationary expectations following the an­
nouncement of the w age-price freeze.2 It seems appro­
priate, however, to exclude this episode from the
analysis because the precise magnitude and timing
J S e e C agan [2 , page 5 0 ].

Chart 1

Short-term Interest Rates in the First Eighteen Months after Cyclical Troughs
Four- to six-month prime com mercial paper rate
Percent
Percent
5 .0 0
3
195 4 -5 5

4 .0 0

---------------------------------

3 .0 0

P ercent
5 .0 0

1 9 5 8 -5 9

4 .0 0

4 .0 0

3 .0 0

3 .0 0

2.00

2 .0 0

W

S

M

1961-62

2 .0 0

r m

1.001I
May
1954

I I I I I I I I I I I I I I I I I
Nov
1955

1.00 I I I ! I I I I I I I I
Apr
1958

Percent

1970

I I 1 I 1
Oct
1959

Percent
8 .0 0 I

1971

1972

3 .0 0
M ar
1975

1.00 .1
Feb
1961

I II

I I

I I i II

1975-76

I I I I I I I I I I I I
Sep
1976

Note: Trough dates are those defined by the National Bureau of Economic Research except for the latest trough,
which is tentatively judged to have ended in M arch 1975.
Source:

Board of Governors of the Federal R eserve System.

34FRASER
FRBNY Quarterly Review/Winter 1976
Digitized for


I I I I I I
Aug
1962

C hart 2

Yields on Representative Short-term
and Long-term Securities

1973

1974

1975

1976

Note: Shaded a re a rep re s e n ts a period of econom ic
recession. The initial month is defined bv the N ational
Bureau of Economic R esearch to be N ovem ber 1973.
The final month is tentatively ju d g e d to be M arch 1975.
Sources: Board of G overnors of the Federal R eserve
System and M oody’s Investors Service, Inc.

Treasury bill rate and the commercial paper rate had
fallen to 93 percent and 90 percent of their March
1975 levels, respectively. Yields on both long-term
United States Government securities and seasoned
Aaa-rated corporate bonds, however, fell to only 97
percent of their trough levels. Hence, while interest
rates have generally fallen during this recovery, the
term structure of rates has behaved qualitatively the
same as in previous cycles; long rates moved in the
same direction but to a lesser extent than short rates.
In view of this, the rem ainder of this paper will focus
primarily on short-term yields.

to expect higher future inflation, implying a decline in
the anticipated purchasing power of debt maturing
in the future. Under this so-called “ Fisher” or “ price
expectations” effect, lenders will demand and bor­
rowers will be willing to provide compensation in the
form of higher nominal interest rates. Within a highly
simplified setting, a fully anticipated 3 percentage point
increase in the rate of inflation requires that (all else
being equal) the nominal rate of interest rise by 3
percentage points to equate the demand and supply
of credit.3
In addition to being an important elem ent in the
secular increase in nominal yields since the m id-1960’s,
the rate of inflation can be expected to play a role
in the cyclical behavior of interest rates as well. For
this role to be substantial, there must be a fairly short
lag between changes in actual inflation rates and the
associated expectations a n d /o r changes in actual
rates must be large. There is substantial evidence that
prior to the 1960’s both short-run and long-run infla­
tionary expectations adapted to actual inflation in­
completely and with a long lag, but that since then
the adjustment has been fairly rapid and more com­
plete.4 In addition, there is evidence that increasing
actual inflation rates were the dominant factor in
changes in the nominal Aaa bond yield from 1961 to
1971, whereas other factors were most important from
1954 to I9 6 0 .5
The increased role of inflation in the determination
of nominal interest rates since the mid-1960’s can be
traced substantially to the widely different behavior
of inflation in the two periods (see Chart 3). First,
from 1953 through 1964 the average annual inflation
rate (as measured by the percentage change in the
consumer price index) was 1.3 percent, whereas in
the period from 1965 through Septem ber 1976 this
average jumped to 5.2 percent. In addition, the cyclical
swings in these rates have been larger in the latter
period, and the trend in inflation has been upward,
unlike the earlier period. All in all, it would appear
that the cost of not closely considering future infla­
tion in economic decisions has risen significantly since
1964, providing a greater incentive for economic
agents to observe carefully and react quickly to price

The inflation premium
An important characteristic of short-term interest rates
during the first eighteen months of postwar upturns
is that, while they rose in the first three episodes and
fell in the latter two, rate levels were generally lower
in the earlier recoveries (see Chart 1). This situation
reflects the secular increase in interest rates over the
period usually attributed to the rapid runup in the rate
of inflation beginning in the mid-1960’s (see Chart 3).
Higher rates of inflation may cause market participants




3 This on e-to-one relationship between changes in anticipated
inflation and nom inal interest rates cannot, in fact, be expected
to hold precisely. For exam ple, progressive incom e taxation (all else
being equal) im plies that nominal rates will rise by more than the
increase in anticipated inflation. For a theoretical and em pirical
discussion of the inflation premium and nominal interest rates,
see LeRoy [ 6 ] .
< C ag a n [ 2 ] , Turnovsky [ 7 ] , and Y ohe and Karnosky [ 8 ] are
among those w hose research supports this position.
s See Feldstein and C ham berlain [ 4 ] ,

FRBNY Quarterly Review/Winter 1976

35

changes. Moreover, even if reaction time has not in­
creased materially since the mid-1960’s, the greater
size of cyclical price swings would have by itself in­
creased the role of actual inflation rates in nominal
interest rate movements.
W hile inflation may in general have become a
more important determinant of interest rates in
recent years, there is another reason, which is
peculiar to the 1975-76 episode, for the rapid incor­
poration of decreases in the rate of inflation into
expectations. It is widely held that the large price
increases in 1973-74 were greatly affected by cer­
tain special factors not related to aggregate demand,
such as the oil embargo and various crop failures.
It was, therefore, reasonable for many participants to
expect a diminution of inflation when these supply
difficulties were resolved. Hence, the recently ob­
served decline in the rate of inflation most likely
confirmed these expectations and was translated
quickly into a decline in nominal short-term interest
rates. Since these expectations related to phenom­

ena widely regarded as temporary, short-term rates
should have been affected to a greater extent than
long-term yields. The data are consistent with this
explanation, since three-month Treasury bill rates
declined from 8.96 percent at their August 1974
peak to 5.08 percent in Septem ber 1976, while long­
term Government bond yields dropped from 8.60 per­
cent to only 7.78 percent over the same period. It
should be noted, however, that this movement in
relative yields is also consistent with the typical cycli­
cal pattern described previously.
It is, of course, difficult to determ ine the exact
quantitative relationship between the rate of infla­
tion and a nominal rate of interest. The following
rather crude calculation may be useful, however, in
putting recent experience in perspective. If the com­
mercial paper rate had increased during the first
eighteen months of the 1975-76 recovery by the same
percentage that occurred on average in the upturns
beginning in 1954, 1958, and 1961, it would have
attained a level of about 11 percent in September

C hart 3
R a t e s o f I n f l a t i o n in t h e P o s t w a r P e r i o d
Percentage change in the consum er price index from one y ea r earlier
Percent
12.0

195C3-64

_ ? n In l ill i l ln
1953

1111iln 111 n l i i 1i i l n
1954
1955

t.l.L.t ! i ! ! ; . : i ! i 1! ! 1! 11 ! ! I ! I I I ! I I I i i 1i i l l i 1ii _n 1i . i l n i i i i i i a l i i i i ! _Lll 111 11II I i ] 111 11 LI J l i k i i n k i J
1956
1957
1958
1959
1960
1961
1962
1963
1964

14.U

196'5-76

n 1111111n 111 n 111111111 i , i ! 1! 1
1965
1966
1967
Source:

11i II 1J 111., 11111111111 I i ! I I i II I I i 11111111111 11111111111 11111111111 1111i i i ! 11 11 11 1I I I I
1968
1969
1970
1971
1972
1973
1974
1975

United States Departm ent of Labor, Bureau of Labor Statistics. *

36FRASER
FRBNY Quarterly Review/Winter 1976
Digitized for


ii

1111111i i 1
1976

1976. The level reached was in fact 5.45 percent, leav­
ing a difference of about 5V2 percentage points. The
rate of inflation, as measured by the percentage
changes in the consumer and wholesale price indexes,
declined over the same period by 4.8 percentage
points and 8.7 percentage points, respectively. Hence,
a large part of the atypical behavior of short-term
interest rates probably can be attributed to the diminu­
tion of the inflation premium.6

Corporate balance sheets
Another important element in the cyclical pattern
of interest rates is the behavior of the demand for
credit by nonfinancial corporations. The typical pattern
of increased credit demands in the early stages of re­
coveries is related to increases in business spending
during these periods. These increases have been, how­
ever, unusually small in the current upturn. During the
first five quarters of the recoveries beginning in 1954,
1958, and 1961, the book value of inventories increased
by roughly 3 1/2 to 5 percent, while the percentage in­
crease over a comparable period in the current upturn
was only a little over 1 percent. This modest advance
was probably related to the unusually high ratio of in­
ventories to sales attained in the 1974 downturn and to
the conservative approach to inventory spending taken
by business in the wake of that experience.7 Moreover,
during the first five quarters of the three previous up­
turns considered here, nominal business fixed invest­
ment rose by roughly 12.5 to 18 percent, but it was up
only by 7 percent in the current episode. This situation
may have been caused, in part, by the somewhat lower
levels of capacity utilization reached in the 1974 re­
cession than those in previous downturns. In light of
these developments, it would seem that part of the rea­
son that the credit market activities of the Treasury did
not induce increases in interest rates is that business
sector demand for credit has been unusually weak.
Even if business spending had increased in propor­
tions similar to previous upturns, several aspects of the
financial activities of nonfinancial corporations would
have, by themselves, contributed to declines in short­
term interest rates. These factors can be divided into
three categories: corporate cash flow, equity market

* It should be noted that the im portant role of the inflation premium
in nom inal interest rate m ovem ents raises a question as to w hether
rates will exhibit a typical cyclical pattern of any kind in the future.
This will, of course, depend heavily upon w h eth er or not inflation
rates resum e the roughly procyclical pattern which has been less
pronounced during the 1 97 0 ’s than in the prior postwar period.
7 Inventory investm ent m ay also have been sluggish in part because
the anticipated rate of inflation declin ed , m aking the holding of
physical assets less advantageous.




financing, and the demand for liquidity.8 As the partial
result of inflation and the tax cuts of 1975, increases in
nonfinancial corporate cash flow less inventory profits
in the current recovery have been larger than in any of.
the three previous recoveries being considered. During
the first five quarters of recovery, this measure in­
creased by 26 percent in 1954-55, 241/2 percent in
1958-59, and 24 percent in 1961-62, but by 45 percent
in 1975-76. This recent increase is especially telling
when compared with the rather modest growth in
capital expenditures (nominal business fixed invest­
ment plus changes in the book value of inventories)
over the same period. In addition, equity market financ­
ing by corporations was substantially larger in the
current recovery as compared with previous ones.
Over the first four quarters of recovery, net funds
raised through stock sales equaled about $1.0 billion
in 1954-55, $2.1 billion in 1958-59, and $1.5 billion in
1961-62 but equaled $9.8 billion in 1975-76. These
factors have contributed to unusual weakness in
growth of the demand for credit, and especially short­
term credit, in the current recovery.
Another financial factor which has been important
in reducing short-term nominal yields is the improve­
ment in corporate liquidity since late 1974. Through the
1960’s and the early 1970’s, there was a secular dete­
rioration in the liquidity position of nonfinancial corpo­
rations as measured by certain standard ratios. This
phenomenon may have been related to the almost un­
interrupted business-cycle upswing during that period.
The vulnerability of corporations to sudden changes in
credit market conditions was not really demonstrated
until the events of the most recent downturn in
1973-75. Toward the end of that recession, nonfinancial
corporations suddenly altered their previous behavior
in favor of increased liquidity. This situation is evident
in movements in the ratio of liquid assets to current
liabilities and in the ratio of short-term debt to bonds
(see Chart 4). The former ratio declined steadily from
a peak in 1959-111 of 55 percent to a low of 29 percent
in 1974-IV but has increased markedly since then. The
latter ratio reached a trough in 1958-111 of 36 percent,
then increased to 67 percent in 1974-IV, but subse­
quently has fallen substantially. Hence, the pattern
since late 1974 has been one of lengthening the matu­
rity structure of debt and placing greater emphasis on
liquid assets.9 Both of these factors have served to put
downward pressure on short-term interest rates.
8 These points are discussed in detail by Harris [ 5 ] (also see [ 1 ] in
connection with the dem and for business loans but a pply equally
well to recent short-term interest rate m ovem ents.
* T h e additional liquid assets have been m ainly in the form of
United States Treasury bills.

FRBNY Quarterly Review/Winter 1976

37

C hart 4

Selected Liquidity Measures for Nonfinancial Corporations

1953

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

Note: Shaded a re a s represent periods of recession as defined by the National Bureau of Econom ic R esearch except
for the latest recession, which is tentatively judged to have ended in M arch 1975.
Source:

Board of Governors of the Federal R eserve System.

The demand for money
The preceding discussion has attempted to explain
the unusual decline of short-term interest rates in
the current recovery by analyzing the behavior of
variables which normally would be expected to explain
fluctuations in nominal interest rates. It may be, how­
ever, that recently observed interest rate behavior
stems in part from a shift in the public’s demand for
money relative to that for other assets. This possi­
bility has been raised by recent difficulties with econometrically estimated money demand equations. Some
equations for M x have overestimated the demand for
money to a progressively greater extent since the
middle of 1974.10
These results at least raise the possibility of a yet
unexplained and undefined change in the relationship
between the demand for money and its explanatory
variables. Such a change would be important for
interest rate movements in the current upturn. If
money demand has shifted inward, this would most
likely imply simultaneous outward shifts in the sup­
ply of short-term credit. If the public demands less
money at any given interest rate level than formerly
was the case, it will presumably want to hold greater
quantities of other liquid assets such as Treasury
10 A recent paper by Enzler, Johnson, and Paulus [ 3 ] discusses these
difficulties and the authors’ numerous attem pts to correct for them,
none of which were particularly successful.

FRBNY Quarterly Review/Winter 1976
Digitized for38
FRASER


bills, commercial paper, and deposits at nonbank
thrift institutions. As demand shifts in favor of these
other assets, short-term interest rates tend to fall.

Conclusion
This article has traced the unexpected behavior of
short-term interest rates in the current economic re­
covery principally to changes in the inflation premium
and to other factors affecting demand and supply in
the market for short-term credit. Because it is difficult
to evaluate the precise size of these effects and
indeed even their relative importance, conclusions
necessarily must be tentative. Nevertheless, even if
allowance is made for fairly long lags in the response
of inflationary expectations to actual inflation rates,
a decline in the inflation premium since early 1975
would seem capable of explaining much of the recent
decline in rates. This factor alone, however, should
leave borrowers and lenders in about the same posi­
tion as prior to the change in inflationary expectations,
and should not affect the quantity of short-term credit.
Since nonfinancial commercial paper plus business
loans outstanding at all commercial banks declined
at an average annual rate of 3.7 percent from March
1975 through September 1976, it seems likely that fac­
tors other than the inflation premium have had an
effect. Among those proposed above, some have con­
tributed to an increase in the supply of credit and

others have produced a decrease in the demand for it.
Both effects result in lower interest rates, but only the
demand elements cause the quantity of short-term
credit to fall as well. This suggests that the factors
reducing credit demand— weak growth in business
spending relative to avattabfe-mternal funds, emphasis
on equity market financing, and the lengthening of the
maturity of the debt of nonfinancial corporations— have
played a somewhat greater role than the factors in­
creasing the supply of credit— greater demand for
liquid assets by nonfinancial corporations and a possi­
ble contraction in the demand for money balances.

[2] Cagan, Phillip. “The Recent Cyclical Movements of Interest
Rates in Historical Perspective". Business Economics (January
1972), pp. 43-52.
[3] Enzler, Jared; Johnson, Lewis; and Paulus, John. “Some Prob­
lems of Money Demand”. Brookings Papers on Economic Activ­
ity (1976:1), pp. 261-82.
[4] Feldstein, Martin, and Chamberlain, Gary. “Multimarket Ex­
pectations and the Rate of Interest”. Journal of Money, Credit
and Banking (November 1973), pp. 873-902.
[5] Harris, Maury N. “The Weakness of Business Loans in the
Current Recovery”. Monthly Review (Federal Reserve Bank of
New York, August 1976), pp. 201-14.
[6] LeRoy, Stephen F. “ Interest Rates and the Inflation Premium”.
Monthly Review (Federal Reserve Bank of Kansas City, May
1973), pp. 11-18.

Literature cited

[7] Turnovsky, S. J., "Empirical Evidence on the Formation of
Price Expectations”. Journal of the American Statistical Asso­
ciation (December 1970), pp. 1441-53.

[1] Board of Governors of the Federal Reserve System. “Recent
Shifts in Corporate Financing Patterns”. Federal Reserve Bul­
letin (September 1976), pp. 733-40.

[8] Yohe, W. P., and Karnosky, D. S. “ Interest Rates and Price
Level Changes, 1952-69”. Review (Federal Reserve Bank of
St. Louis, December 1969), pp. 18-36.




FRBNY Quarterly Review/Winter 1976

39

August-October 1976, Interim Report

Treasury and Federal Reserve
Foreign Exchange Operations
by Alan R. Holmes and Scott E. Pardee*

During the August-October period under review, foreign
exchange market activity reflected the large disparities
that persisted in actual and expected price performance
and in balance-of-payments positions of major Euro­
pean countries. Market participants were quick to react
to new events and to rumors or official statements
which reinforced their expectations of a rise or a fall
in a particular currency. In this atmosphere, markets
for several currencies were unsettled by large-scale
shifts in professional trading positions as well as in
commercial leads and lags.
Among those European currencies floating indepen­
dently vis-a-vis the dollar, the pound was driven down
11 percent during the period, the Italian lira declined
a net of 3 percent and the French franc slipped a net
of 2 percent. Meanwhile, within the group of currencies
joined together in the European Community (EC)
“snake” , speculative pressures had reemerged late
in July on expectations of an early upward adjustment
for the German mark against the other participating
currencies. Tensions within this arrangement continued
to build through the October 3 election in Germany,
and member central banks again intervened massively
while taking a variety of other measures— including in
some cases a sharp tightening of monetary policy— to
maintain their currencies within the limits of the snake.
After an October 17 meeting in Frankfurt, the partici­
pating governments announced an agreement by which

the mark’s parity was adjusted upward by 2 to 6 per­
cent against its partner currencies. After some initial
hesitancy in the market, a substantial unwinding of
dealers’ positions and reversal of commercial leads
and lags was in progress by the month end.
As in previous episodes of market stress, the dollar,
as the main vehicle currency in the market, was in­
evitably caught up in the cross fire, rising against
some currencies and falling against others. Against
the German mark, however, the dollar began to lose
some of its earlier resiliency to the heavy shifts into
marks which developed each time market participants
sought to switch out of other EC snake currencies or
out of currencies, like sterling, which were weakening
generally. This reduced buoyancy for the dollar in
part reflected market concern over the pause in the

Table 1

Federal Reserve System Drawings and Repayments
under Reciprocal Currency Arrangements
In millions of dollars equivalent

Transactions with
* Mr. Holm es is the Executive Vice President in charge of the
Foreign Function of the Federal Reserve Bank of New York and
M anager, System Open M arket Account. Mr. Pardee is
Vice President in the Foreign Function and Deputy M anager for
Foreign O perations of the System Open M arket Account. The
Bank acts as agent for both the Treasury and the Federal
Reserve System in the conduct of foreign exchange operations.

40

FRBNY Quarterly Review/Winter 1976




N ational Bank of
Belgium .............................
Swiss N ational Bank . . .

System
swap com ­
m itments,
July 31,
1976

Drawings ( + )
or repay­
ments ( — )
August 1
through
O ctober 31,
1976

System
swap
com m it­
ments,
O ctober
31, 1976

82.4
1,147.2

55.0
- 1 ,1 4 7 . 2

27.4
-0 -

1,229.6

- 1 ,2 0 2 . 2

27.4

lt«s
Federal Reserve System Drawings and Repayments
under Special Swap Arrangement with the Swiss
In m illio n s o f d o lla rs e q u iv a le n t

T ra n s a c tio n s w ith

S ystem
sw ap
c o m m itm e nts,
J u ly 31,
1976

Sw iss N a tio n a l B ank .

-0 -

Tota l

-0-

...............................

D ra w in g s ( - f )
o r re pa ym e n ts ( — )
A u g u st 1
th ro u g h
O c to b e r 31,
1976

System
sw ap c o m ­
m itm e n ts,
O c to b e r 31,
1976

+ 1,147.2
+ 1,147.2
------------------------

1,147.2
1,147.2

United States economic recovery, the relative decline
in interest rates here, and the further widening of
our trade deficit. Uncertainties surrounding the United
States elections also tended to weigh on market senti­
ment toward the dollar. In this atmosphere the dollar
declined by a net 6 to 7 percent against the mark and
other European currencies linked to it.
For the most part, this decline was orderly. The
occasionally sharp drops in dollar rates were mainly
confined to the European trading day, at which times
the German Bundesbank supplemented its intervention
in other snake currencies with small to moderate pur­
chases of dollars. On a few days, however, the bid­
ding for marks spilled into the New York market and
unsettled trading conditions here. On August 16-17,
when speculation over possible rate adjustments
within the EC snake triggered more generalized bid­
ding for marks, the Federal Reserve intervened in
New York, selling $15.9 million equivalent of marks
from balances. Again, in September and early October,
amidst uncertainties surrounding the general election
in Germany, the Federal Reserve operated on four days
(September 16 and 24, October 5 and 6) to sell a total
of $37.2 million of marks. Toward the end of October,
when the continued volatility in sterling kept the
markets generally unsettled, the dollar was again ad­
versely affected at times and the Federal Reserve sold
another $16.3 million of marks in operations on Octo­
ber 19 and 26, also from balances.
In summary, the Federal Reserve sold a total of
$69.4 million equivalent of marks from existing bal­
ances during the three-month period. These sales
were largely offset, however, by purchases of $63.4
million equivalent of marks, principally from corre­
spondents.
In other operations, as part of its program to repay




swap debt outstanding since August 1971, the Fed­
eral Reserve acquired sufficient Belgian francs in the
market and from correspondents to cover the remain­
ing $82.4 million of its swap drawings on the National
Bank of Belgium. Of this, the System had repaid $55
million by the end of October and had purchased
in the forward market francs sufficient for repayment
of the remainder in early November.
Moreover, in October, the Federal Reserve and
United States Treasury reached agreement with the
Swiss National Bank on an orderly procedure for re­
paying over three years the Swiss franc indebtedness
remaining from August 1971. This included $1,147.2
million equivalent of drawings under the Federal
Reserve swap line, as well as the $1,599.3 million
equivalent of United States Treasury Swiss francdenominated notes. In this connection, the Federal
Reserve’s drawings on the original swap arrangement
with the National Bank were repaid on October 29,
using Swiss francs drawn under a newly established
special swap facility which, in turn, will be reduced as
the swap is repaid over the three-year period.
In September, the Bank of England drew a further
$100 million each from the Federal Reserve and the
United States Treasury, raising total drawings in both
cases to $300 million under the standby facility es­
tablished in June 1976. These drawings were in pro­
portion to drawings on other countries participating
in the $5.3 billion package that terminates on Decem­
ber 9. In connection with the repayment of drawings
under this agreement, the United Kingdom authorities
initiated in October an application for a $3.9 billion
drawing on the International Monetary Fund (IMF).
On August 31, following persistent pressures on the
Mexican peso through much of the year, the Mexican
authorities announced that they would no longer sup-

T a b le 3

■■MM

Drawings and Repayments by Foreign Central
Banks and the Bank for International Settlements
under Reciprocal Currency Arrangements
In m illio n s o f d o lla rs

—

----------D ra w in g s
on Federal
R eserve
System
o u ts ta n d in g
J u ly 31,
1976

B anks d ra w in g on
Federal Reserve
System
B ank o f E n g la n d
B ank o f M e x ic o .

200.0

...
-------------------------------

5600

D ra w in g s { + )
o r re pa ym e nts ( — )
August 1
th ro u g h
O c to b e r 31,
1976

D ra w in g s
on Federal
Reserve
System
o u ts ta n d in g
O c to b e r 31,
1976

+ 100.0
-3 6 0 .0

300.0
-0 -

c + 1 0 0 .0
1 -3 6 0 .0

300.0

f i i s i i i i m i i ii i ii i i

FRBNY Quarterly Review/Winter 1976

41

port the previous fixed rate of $0.08, and over subse­
quent days the peso depreciated by almost 39 percent.
After some recovery, official intervention was resumed
to help steady the rate around $0.0505. By that time,
Mexico had applied for substantial medium-term assist­
ance from the IMF. In that connection, on September
20, the United States Treasury and the Federal Reserve
agreed to a special arrangement with the Bank of
Mexico, making available up to $600 million of interim
financing to Mexico. On this basis, the Bank of Mexico
drew $365 million on the United States Treasury in
early October and repaid that amount out of proceeds
of its first IMF drawing in early November. The Bank
of Mexico also repaid in early October the $360 million
of swap drawings on the Federal Reserve outstanding
for six months. In the market, however, selling pressure
against the peso remained heavy, and in late October
the authorities permitted the peso rate to depreciate
by a further 25 percent.

Swap network operations, 1962-76
As a supplement to this interim report, tables are
presented providing historical data on Federal Re­
serve swap operations over the entire 1962-76 period
in which the reciprocal currency arrangements have
been in existence. These summaries have been pre­
pared in response to a number of requests from both
the academic and financial communities for data on
System operations. Table I shows the changes in the
amounts available under each of the reciprocal cur­
rency arrangements. Table II presents Federal Reserve
drawings and repayments by quarter on those swap
lines for which there were operations, and Table III
gives drawings and repayments by others.

FRBNY Quarterly Review/Winter 1976
Digitized for42
FRASER


Table I

Federal Reserve Reciprocal Currency Arrangements
In m illio n s o f d o lla rs ; y e a rly in c re a s e s ( + ) a nd d e cre a se s ( — )
A m ount of
fa c ility
O rig in a l fa c ility
D ate A m o u n t 1 2 /3 1 /6 2

In s titu tio n
A u s tria n N a tio n a l B a n k ........................
N a tio n a l B ank o f B e lg i u m ...................
B ank o f C an a d a ......................................
B ank o f D e n m a r k ....................................
B ank o f E n g la n d ......................................
B a n k o f F r a n c e .........................................
G e rm a n Fed e ra l B a n k ..........................
B a n k o f I t a l y ..............................................
B a n k o f J a p a n .........................................
B ank o f M e x ic o .........................................
N e th e rla n d s B a n k ..................................

............
............

1 0 /2 5 /6 2
6 /2 0 /6 2

............

8 / 2 /6 2

............

1 0 /2 9 /6 3

............

6 /1 3 /6 2

B a n k fo r In te rn a tio n a l S e ttle m e n ts :
S w iss f r a n c s - d o lla r s ..........................
O th e r a u th o riz e d E urop e a n
c u r r e n c ie s - d o lla r s ...............................

50.0
50.0
250.0
100.0
50.0
50.0
5 0.0
5 0.0
150.0
130.0
50.0
100.0
50.0
100.0

50.0
50.0
250 .0
-0 50.0
50.0
50.0
150.0*
-0 -0 50.0
-0 -0 100.0

100.0

100.0

150.0

-0 900.0

1966

1967

1968

—
—
—

+
+
+

50.0
50.0
250.0

—

—
—

—
+250.Q >
—
—
—
—
—
+ 2 0 0 .0
—
+ 100.0

+

+

+
+
+

600.0
—
150.0
150.0
200 .0

1963
—
—
—

1965

1964
—

+
+
+

450.0
50.0
200.0
100.0
1 5 0 .0 f

+

50.0

—

—

+

50.0

+

+

5 0 .0 f
50.0

—
—

—
—

+
+

50.0
5 0.0

+
+

75.0
250.0
1 0 0 .0 f
150.0
—
350.0
150.0
300.0
130.O f
75.0
1 0 0 .0 f
100.0
200.0

+

50.0

—

—

+

50.0

+

+

50.0

+

+

50.0
—

1 5 0 .0 f
+ 1,150.0

+ 3 0 0 .0

+ 450.0

+ 1,700.0

+
+

+
+
+

+

+
+
+
+
+
+

250.0
—500.0
900.0
250.0
250.0
250.0
—

+
+

175.0
—
50.0
200.0

200.0

+

200 .0

400.0

+

400.0

+ 2 ,5 8 0 .0

+

+ 3 ,4 2 5 .0

* F a c ility in c re a s e d $10 0 .0 m illio n on D e c e m b e r 8 ,1 9 6 2 .
f N ew fa c ility .

T a b le I (c o n tin u e d )

In s titu tio n
A u s tria n N a tio n a l B a n k ......................................
N a tio n a l B ank o f B e lg i u m ....................................
B ank o f C an a d a .....................................................
B a n k o f D e n m a r k .....................................................
B a n k o f E n g la n d .....................................................
B ank o f F r a n c e .......................................................
G e rm a n Federal B a n k .........................................
B a n k o f I t a l y ..............................................................
B ank o f J a pa n ..........................................................
B a n k o f M e x ic o ...................................... ..................
N e th e rla n d s B a n k .....................................................
B ank o f N orw ay .......................................................
B ank o f Sw eden .......................................................
S w iss N a tio n a l B a n k ................................................
B a n k fo r In te rn a tio n a l S e ttle m e n ts:
S w iss f r a n c s - d o lla r s ...........................................
O th e r a u th o riz e d E u rop e a n
currencies-dollars ..............................................
Total ...............................................................................




.................
.................
.................

........
........
........
........
........
.........
.................
.................

........
.........
.........

1969

1970

+ 1 0 0 .0
+ 2 7 5 .0
—

—
—
—
—

1971

1972

+ 100.0
—
—
—
—
—
—
—
— ■
—
—
— + 250.0
__
——
—
—
—
—
—
-1 0 0 .0
—
—
+ 1 0 0 .0
—
—
—
—
— + 400,0

__
—
—
—
—
—
—
—
—
—
—
—
—
—

—

—

—

C+ 5 7 5 .0

—

—

—

—

—

—

+ 250.0 + 5 0 0 .0

1973

1974

__
50.0
+
—
400.0
+
—
+ 1 ,000.0
—
50.0
+
.— + 1 000.0
—
+ 1,000.0
—
+ 1,000.0
750.0 + 1 000.0
+
—
+ " ,000.0
—
50.0
+
—
200.0
+
—
50.0
+
—
50.0
+
—
400.0
+

—
+

250.0

-0- + 6 ,2 5 0 .0

1 /1 /7 6 to
1975 1 0 /3 1 /7 6
__
__
—
—
—
—
—
*—
—
+ 180.0
—
—
.—
—

__
__
—
—
—
—
—
—
—
—
—
—
—
—

A m ount of
fa c ility
1 0 /3 1 /7 6
250.0
1,000.0
2,000.0
250.0
3,000.0
2,000.0
2,000.0
3,000.0
2,000.0
360.0
500.0
250.0
300.0
1,400.0

—

—

—

—

—

—

1,250.0

+ 1 8 0 .0

-0 -

20,160.0

+ 2 ,0 0 0 .0

600.0

FRBNY Quarterly Review/Winter 1976

43

Table II

Federal Reserve System Drawings and Repayments under Reciprocal Currency Arrangements
M a rch 1962 th ro u g h O c to b e r 1976; in m illio n s o f d o lla rs e q u iv a le n t; d ra w in g s ( + ) o r re p a y m e n ts ( — )
A u s tria n
N a tio n a l
B ank

P eriod
1962:

N a tio n a l
Bank of
B e lg iu m

B ank o f
C anada

Bank of
E n g la n d

Bank of
Fra n ce

G e rm a n
F ederal
Bank

50.0

I..
II . .

+ 50.0

III . .

— 50.0

+
+

O u ts ta n d in g
I ..

-

-5 0 .0

It..

\ +

\—

20.0

(+
1 -

5.0
5.0

0-

-

;+
l-

0-

+

IV . .

1964:

15.0

0-

-

I ...............

15.0

-

0-

25.0
25.0

+ 10.0

50.0

10.0

50.0

( +20.0 (+ 1 0 .0
I -20.0 | — 10.0
-

0-

-

+ 12.5

— 113.0

( + 9.0
I -1 2 .5
9.0

f + 136.0
|- 1 1 3 .0
60.0

9 0
yu

\ + 550
{-1 1 5 .0

0-

— 15.0

-

I

1965:

-0 -

+ 37.5
( + 107.5
{-1 0 0 .0
45.0
+

I ..

■-

+

II . .

(+

IV . .

1966:

5+
1 -

0-

-

-0 -

; + i5 . o
I — 60.0

10.0

-

5.0

0-

0-

-

-

-

-

0-

+ 140.0
140.0

37.5
10.0
97.5
10.0
+ 76.2
—
85.4
105.8
+
—
+
—

III . .
IV . .
-

0-

I..
II . .

-

0-

-

+

100.0

-

(+
{ -

-

0-

112.1
-

-

0-

f + 3 2 5 .0
I — 225.0
85.0
15.0
-

15.0

311L0

-

-

0-

FRBNY Quarterly Review/Winter 1976
Digitized for 44
FRASER


-

0-

-

0-

0-

100.0

-0 -

150.0

20.0

-

(+

65.0

C+

)-

10.0

\—

20.0

—

—

35.0
-

35.0

+

-

0-

112.1

55.0
55.0

-

15.0

+ 100.0

—

40.0

]

j

\+
I—
i+
\+

0-

-

0-

75.0
5.0
55.0
15.0

+

15.0
185.0
28.0
33.0
42.0
127.0
25.0
250.0

-

-

040.0

-

40.0

-0-

( + 300.0
|-1 7 0 .0
130.0

75.0

—

280.0

100.0
45.0
95.0
{+
I -

200.0
55.0
145.0

-

0-

75.0

+ 185.0
+

15.0

;+ 2 8 5 .0
i — 85.0
400.0

- 55.0

65.0

+

75.0

-345.0

III . .
+

5.0
145.0

100.0

II . .

IV . .

0-

_ 1q n n
1300

-0 -

+112.1
0-

I..

O u ts ta n d in g

25.0
100.0

-1 8 9 .0

-

{ —

25.0

-175:0

- 3000

50 0

-

0-

; + i5 .o
[ - 120.0

88.8

+

-

f + 100.0

• 40.0

170.0

-

45.5

12.0

+ 130.0

l + 54.0
1 -1 2 4 .1

-

48.0

500.0

( + 300.0
(-3 5 0 .0

9.5

25.0

+ 400.0

53.1

80.0
5.0
75.0

-

- 60.0

350.0

1+

15.0
55.0

70.0

+ 350.0

0-

IV . .

1969:

— 50.0

+ 100.0

111 ..

O u ts ta n d in g

50.0

-

0-

+

5.0

+100.0

0-

30 0
30.0

50.0

100.0

-

I 50.0

95.0

( + 150.0
) - 82.0
{-1 6 8 .0

a g a in s t
B e lg ia n
fra n c s

:+ 2o.o

20.0

-0 -

10.0

0-

l + 60.0
I — 10.0

80.0

+

J + 10 0 .0

-

50.0

— 55.0

50.0

— 140.0

II . .

1968:

-0 -

I..

O u ts ta n d in g

50.0

-

50.0

— 3 5.0 '

III

1967:

-0 -

55.0
10.0

30.0
35.0

0-

-

I ..
II . .

IV . .
O u ts ta n d in g

+

+
+

\ — 40.0
f + 75.0
\ 80.0

III . .

O u ts ta n d in g

10.0

— 25.0

V

O u ts ta n d in g . . . .

-

0-

I I ...............
II I

a g a in s t
S w iss
fra n c s

+

£ + 40.0
' — 50.0
+ 60.0
-

S w iss
N a tio n a l
Bank

10.0
40.0
50.0

50.0

+ 150.0

III . .

O u ts ta n d in g

0-

-

N e th e rla n d s
Bank

\+
l-

50.0

IV . .

1963:

Bank of
Ita ly

0

Table II (continued)
Austrian
National
Bank

Period
1970:

I .................
I I
II I
I

V

O u ts ta n d in g ..........
1971:

-0 -

I .................
I I .................

I l l .................
I V .................
O u ts ta n d in g ..........
1972:

-0 -

I .................
I I .................

I V .................

( + 335.0
7 -1 2 5 .0
j + 1 2 5 .0
|- 2 0 5 .0
+ 260.0
-1 4 5 .0
455.0

-0 -

I .................

1973:

- f 50.0
f + 45.0
| -1 3 0 .0
+ 135.0
\ + 165.0
| — 110.0
210.0

\+
) —
c+
) -

I l l .................

O u ts ta n d in g ..........

National
Bank of
Belgium

20.0
10.2
10.2
35.0
55.0
415.0

-

25.0

f+

6.0
52.0

-

82.2

Bank of
C anada

Bank of
England

German
Federal
Bank

Bank of
France

B ankof
Italy

Swiss
National
Bank

N etherlands
Bank

against
Swiss
francs

BIS
against
Belgian
francs

145.0
— 130.0

+

+ 270.0
+
-0 -

-0 -

-0 -

-0 -

+

-0-

+ 7 5 0 .0
— 35.0
715.0

-

-0-

-0 -

200.0
+

300.0
1f + 130.0
| -3 0 0 .0
(+ 1 2 0 .0
i[ - 2 5 0 . 0

60.0
10.0
50.0

3 0.0

-0 -

-0 -

+

250.0

+

750.0

+ 6 0 0 .0

+ 35.0

1,000.0

600.0

35.0

300.0

50.0

.-0 -

-0 -

-0 -

150.0
450.0

-0 -

-0 -

f+
I -

—
-

300.0
300.0

-0 -

52.0

-6 6 3 .0

200.0

-0 -

f + 104.6
) -1 0 4 .6

-

-3 5 .0

130.0
570.0

-0 -

600.0

-0 -

600.0

-0 -

600.0

-0 -

600.0

-0 -

5.0

I I
II I
I V .................
O u ts ta n d in g ..........
1974:

-0 -

261.8

( + 4 7 .0
| — 47.0

-0 -

-0 -

-0 -

\
}
f
|

I .................
I I .................
(+
) (+

I l l .................
I V ................. *
O u ts ta n d in g ..........
1975:

-0 -

I .................
II

1.7
1.7
13.2
13.2
261.8

+

16.7

(+

13.1
29.8

I V .................

f+
(—

5 4.0 *
18.1
297.6

1975:

-0 -

I .................

I I .................
I l l .................
O c t o b e r .................
O u ts ta n d in g ..........

-0 -

-0 -

21A

i\ +
2.9
[—
2.9
-0 -

+ 2 5 5 .0
3.7
+ 130.4
— 122.8

-0 -

f + 3 0 1 .5
82.8
218.7

f + 4 5 .6
) - 5.1
-4 0 .5

f + 644.1
) — 25.0
( + 63.4
J -4 8 7 .7
-4 1 3 .5

-0 -

1[ +
7.6
I 7.6
[ + 38.0
[ — 34.8
3.2
+

49.0

J; +
]
-

47.3
90.6
8.8

565.0
-

193.8

(+
1 -

13.3
5.9
378.5

+

-0 -

-0 -

-0 -

-0 -

-0-

-0 -

-0 -

-0 -

-0 i +
I -

f + 133.9
} — 26.4
— 107.5

-0 -

19.6
19.6

-0 -

152.1
159 4

+
-0 -

86.5
— 83.7
-1 0 0 .0
-0 -

-0 -

-2 5 8 .8

I I I .................

O u ts ta n d in g ..........

f + 4 3 5 .6
) -2 7 8 .9
f + 21.0
( — 177.7
-0 -

1 96.Of
567.2

1+
l -

6 0 0 .0 i
20.0

- 1 ,147.2§
-0 -

— 600 0 t

-0 -

-0 -

* Amount by which the do llar countervalue of the Federal R eserve’s pre-August 1971 Belgian franc com m itm ents, adjusted for the
B elgian franc revaluation of 1971, was increased to reflect the two United States dollar devaluations of 1971 and 1973.
f Amount by which the do llar countervalue of the Federal Reserve's pre-August 1971 Swiss franc com m itm ents was increased
to take account of the two United States dollar devaluations of 1971 and 1973. This increase is reflected entirely in the
System ’s position with the Swiss National Bank because of a transfer of Swiss franc com mitments from the Bank for International
Settlem ents to the Swiss National Bank sufficient to keep Federal Reserve com m itm ents to the BIS within the $600 million swap facility.
t C onsolidation of Swiss franc swap debt.
§ The Federal Reserve repaid the outstanding $1,147.2 million equivalent of its pre-August 1971 Swiss franc swap indebtedness and
took down the sam e am ount on the newly created special swap line designed to refund the short-term obligation into a
m edium -term obligation, which will be reduced as drawings are repaid over the next three years.




FRBNY Quarterly Review/Winter 1976

45

Table III

Drawings and Repayments by Foreign Central Banks and the Bank for International Settlements (BIS)
under Reciprocal Currency Arrangements
M arch 1962 through O ctober 1976; in millions of dollars; drawings ( + ) or repaym ents ( — )___________________________________ ___
Austrian
National
Bank

Period
I...,
II . . .
III . . .
IV . . .
Outstanding

National
Bank of
Belgium

Bank of
Canada

National
Bank of
Denm ark

Bank of
England

Bank of Bank of Bank of Bank of
France
Italy
Japan M exico

Netherlands
Bank

BIS
against
G erm an marks

1962:

+ 250.0
-2 5 0 .0

0-

-

(+
1 1+
) (+
) -

1963:
II
III . . .
IV . . .
Outstanding
1964:

-

0-

-

0-

-

25.0
12.5
10.0
12.5
10.0
5.0
15.0
-0 -

0-

0-

-

0-

-

0-

0-

0-

-

0-

-

-

0(+
) (+
) (+
) f+

IV . . .
Outstanding

-

50.0
50.0

- 1 5 0 .0

15.0
85.0
65.0
J + 1 .2 7 0 .0
| — 1,105.0

1965:

0-

-

0-

-

0-

0-

-

0-

0-

-

0-

0-

-

0-

-

0-

-

0-

-

-

0-

-

-

0-

-

+ 50.0
( + 3 0 .0
]-3 0 .0
-5 0 .0

200.0

-

0-

-

0-

605.0
485.0
610.0
570.0
475.0
85.0
75.0
350.0
475.0

-

0-

-

0-

0-

-

—

475.0
4 “ 175.0
450.0
(+
225.0
1 -

1966:

IV . . .
Outstanding

-

0-

-

0-

+

17.6

-

17.6
-

-

0-

I

-

0-

-

0-

-

0-

I...

+ 250.0

II...

-1 2 5 .0
+ 30.0
20.0
+ 180.5
-1 8 3 .0
7.5

III . . .
IV . . .
Outstanding
I
+ 50.0
III . . .

-50.0

350.0

+

225.0

+

425.0

-1 2 5 .0

-

0-

600.0
1,050.0

+

50.0

+

+

545.0
645.0
600.0

-

-

200.0

25.0
25.0

+
-

-0 -

-0 ( + 25.0
{ - 25.0
( + 100.0
{ -1 0 0 .0

+ 74.0
58.5
+ 195.0
-1 0 4 .0
+ 244.0
-1 5 4 .0

-0 -

{ -0 -

850.0
100.0
1,150.0
50.0

|+
i+

0-

-

465.0
540.0
330.0
255.0

-

0-

-

0-

0-

-

-0 -

46 FRBNY Quarterly Review/Winter 1976



-0 -

650.0

-

0-

-

0-

( + 43.0
{ -2 4 3 .0
( + 182.0
{ - 39.0
( + 191.0
) -3 3 4 .0
(+ 4 2 1 .0
75.0
346.0

0-

-

10.0
200.0

0-

-

;+
+100.0
(+ 3 9 0 .0
40.0
+ 275.0
-2 9 5 .0
430.0

+

54.7

-

24.9

-

0-

-

0-

-

0-

29.8
-

0-

+

-4 6 1 .0
J+

-1 0 9 .7

-3 0 0 .0

0-

-

0-

82.2

J + 109.7
82.2

65.0
+ 300.0
65.0

-

66.0

-4 12 .0
’ + 306.0
-195.0
1 + 1 4 5 .0
-2 56 .0
1 + 1 2 6 .0
46.0
80.0
;+

( + 225.0
{ - 1 9 4 .0

450.0

-2 0 4 .0

IV . . .
Outstanding

—

75.0
75.0

(+210.0

50.0

{+1,000.0

IV . . .
Outstanding

(+
) -

350.0

III . . .

1969:

-

+
(+

-

0-

-

+100.0

IV . . .

1968:

0-

-

25.0

+

0-

-

III . . .

1967;

0-

25.0

I...
II . . .

Outstanding

-

+

-

0-

-

0-

-

0-

51.0
-131.0
' + 25.0
25.0
+
4.0
4.0
' + 62.0
62.0
-

0-

Table III (continued)
A u s tria n N a tio n a l
N a tio n a l B a n k o f
B a n k B e lg iu m

P eriod
1970:

B a n k of
C an a d a

N a tio n a l
Bank of
D e n m a rk

B a n k of
E n g la n d
—

I .................

650.0

B ank o f B a n k o f B a n k o f
Fra n ce
Ita ly
Japan
+ 100.0
-1 0 0 .0

N e th e rla n d s
B ank

+ 800.0
+ 200.0
-6 0 0 .0

I I ................. ■
I l l .................
I V ................. .
O u ts ta n d in g ..........
1971:

B a n k of
M e x ic o

-0 -

-0 -

-0 -

+

400.0

-

400.0
-0 -

-0 -

-4 0 0 .0

-0 -

-0 -

-0 -

-0 -

-0 -

BIS
a g a in s t
G e rm a n m arks
\ + 136.0
[-1 3 6 .0
| + 77.0
I - 77.0
l + 77.0
I - 77.0
' + 4 4.0
l - 44.0
-0 -

I ...................
I I
II I
I

V

O u ts ta n d in g ............

1972:

-0 -

-

0-

-

0-

-

0-

-

0-

(+
)~
(+
)~

I I
II I
I

V

O u ts ta n d in g ............

1973:

8.0
8.0
6.0
6.0
1.0
1.0
4.0
4.0

(+

I ...................

0

-0 -

-

0-

-

0-

-

0-

-

0-

-

0-

-

0-

-

0-

-

0-

l-

I ...................
I I
II I
I

V

O u ts ta n d in g ............

1974:

-0 -

-

0-

-

0-

(+
\ —
j+
| —
(+

26.0
26.0
76.0
76.0
65.0
65.0
j + 129.0
( —-129.0

I ...................
I I ...................

II I
I

+ 180.0
-1 8 0 .0

V

O u ts ta n d in g ............

-0 -

-

0-

-

0-

-

0-

-

0-

-

0-

-

0-

-

-0-

0-

" .............. ....................................................................................................................................................................j II I
...
I V
O u ts ta n d in g ............
1976:

..

+ 1 8 0 .0

-0 -

-0 -

-0 -

( + 130.0
1 -3 6 0 .0
-0 -

-0 -

-0 -

-0 -

-0 -

-0 -

I :
1 -

19.0
19.0
-0 -

i+
I i+
I -

14.0
14.0
37.0
37.0

-0 -

+ 500.0

I ...................
I I ...................

+

200.0

I l l ...................

+

100.0

O c t o b e r ...................
O u ts ta n d in g ............

1.0

{ —l i i 0

-0 -




-0 -

-0 -

-0 -

300.0

+ 3 6 0 .0
— 500.0
-0 -

-0-

-0 -

-3 6 0 .0
-0 -

-0 -

-0 -

FRBNY Quarterly Review/Winter 1976

47

This issue introduces the Bank’s Quarterly Review. (The
Monthly Review was discontinued after the October
issue.) The new publication is designed for in-depth
analysis of a range of domestic and international
economic and financial developments. All Monthly
Review subscribers will automatically receive the
Quarterly Review. We hope that you will be pleased
with the new publication.

FRBNY Quarterly Review/Winter 1976




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