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FEDERAL RESERVE BANK OF RICHMOND

MONTHLY
REVIEW
Fiscal Policy in the Sixties
The Space Industry in the District
Swiss Banks
The Fifth D istrict




FISCAL POLICY IN THE SIXTIES
The United States economy is today in the 94th
month of continuous prosperity, the longest expansion
ever recorded. G N P in both current and constant
dollars has been rising uninterruptedly since early
1961. Much of this growth has been associated with
important changes in the fiscal operations of the
Federal Government.
Fiscal A ction and the E con om y Fiscal p olicy
refers to the deliberate adjustment of government
spending and taxing activities with a view to in­
fluencing the level of economic activity. Policy also
influences socio-welfare and political developments
as well as defense stance. Changes in government
spending or taxation policies affect economic activity
in a number of ways. They may, for example, exert
an immediate impact on total spending in the
economy as the government alters the relationship
between what it removes from the spending stream
through taxation and what it injects into this stream
through its own outlays. Moreover, the govern­
ment’s budgetary operations determine the extent to
which it will borrow or retire debt in a given period
and the resulting effects on interest rates may affect
the spending plans of individuals and businesses.
In attempting to assess the impact of the Federal
Government’s operations on the economy, analysts
typically make searching studies of the Federal
budget. The budget developed as a part of the national
income and product accounts is perhaps the most
useful to measure the effect on the nation’s economic
activity. The National Income Accounts budget
records only the Federal Government’s transactions
in actual goods and services— without regard to when
payment or receipt of funds occurs, and omitting
purely financial transactions. Generally speaking, a
deficit in the N IA budget implies that the Federal
Government’s purchases are pumping more into the
spending stream than its tax receipts are removing,
and hence that the Government’s budgetary opera­
tions are stimulating the economy. A surplus has
the reverse implication.
A helpful tool in evaluating fiscal policy is the
concept of the “ net fiscal stimulus” (N F S ), as
measured by the change in the deficit or surplus
from one budget period to another.

This figure indi­

cates the change in the degree of fiscal stimulus or re­
straint, which is of course the matter of chief interest
in the analysis of current and prospective economic
conditions.

2


T o isolate the effects of discretionary policy action
analysts often use the concept of the “ high employ­
ment” budget, illustrated in the third chart. This
budget gives an estimate of the surplus or deficit that
would exist in the National Income Accounts budget
if rates of Federal spending and tax receipts in a
given budget were applied to an economy in which
all resources were fully employed.
T im e L ags Fiscal p olicy measures involve im ­
portant time lags. The need for fiscal action to alter
a developing business trend may not be immediately
apparent. Moreover, it takes time for authorities
to formulate a specific policy proposal and more time
for Congress to act upon the proposal. Once en­
acted there may be a further time lag as the effects
work their way through the economy.
Fiscal A ction s, 1961-65 B y historical standards,
the U. S. economy in the 1950’s performed extremely
well with respect to total output. Yet many observers
felt that its performance left much to be desired. In
the course of the decade, three business recessions
were experienced and after 1954 the unemployment
rate tended to stick at 5% or higher. Increasingly
economists noted the gap between actual G N P and
“ potential” G N P, i.e., the amount of production the
economy would have turned out if all resources were
fully employed. Data in the first chart show esti­
mates of the so-called G N P gap.
Between May 1960 and February 1961 the econo­
my experienced another serious recession. With
nearly 7% of the labor force unemployed and onefifth of manufacturing capacity idle, the new Adm in­
istration addressed itself to a series of measures aimed
at reducing unemployment, and promoting long-run
expansion. Am ong other things Government pro­
curement was accelerated, highway construction pro­
grams were speeded up, and minimum wage and
Social Security benefits were increased.
Throughout 1961 and early 1962 the gap between
potential G N P and actual G N P in constant dollars
narrowed. Yet the “ high employment” budget con­
tinued to show a surplus, implying that Government
tax and spending policies were exerting a net drag
on economic growth. In m id-1962 the gap expressed
as a per cent of potential G N P leveled off after de­
clining in 1961 and early 1962 and it appeared that
the recovery was beginning to falter.
In October 1962 the Kennedy Administration took
its first significant fiscal policy step to encour’

business expansion. Congress passed at that time
a new investment tax credit and the Treasury pro­
vided additional incentives to business investment by
allowing, for business tax purposes, accelerated
depreciation of capital assets.
Furthermore, after 1961 Administration econo­
mists had increasingly veered around to the view that
existing tax rates had to be adjusted downward if
full employment was to be achieved. Accordingly,
early in 1963 the Administration proposed a sizeable
reduction in tax rates. The purpose of the proposed
tax reductions was to encourage both consumption
and investment spending, and thus to stimulate out­
put. Congress, however, refused to act on the recom­
mendation and fiscal policy remained mildly restric­
tive throughout 1963. The gap between actual and
potential G N P continued, however, to narrow.
It was not until the following February that the
Revenue A ct of 1964 was enacted. The A ct reduced
personal income taxes more than 20% and corporate
taxes about 8 % . The reductions were made in two
stages, with the second cut taking effect in January
1965. Personal withholding rates were cut from
18% to 14%, beginning in March. Overall, the
reductions provided the private sector with an es­
timated $13 billion per year more for consumption
and investment. The effect of this increased spend­
ing power was not long in materializing. The G N P
gap was reduced to about $10 billion in 1965 from
over $23^2 billion in 1964 and from over $45 billion
in 1961.
Even with these substantial gains the economy
was still operating short of its hypothetical potential
in January 1965. A t that time it was proposed
that certain excise taxes imposed during W orld W ar
II be repealed. This recommendation was embodied
in the Excise Tax Reduction Act of June 1965,
which in two stages cut Federal excise tax receipts
by nearly $3^2 billion per year.
In summary, by the last quarter of 1965 the
economy was operating at a rate only about a half
million dollars below its hypothetical potential, with
the unemployment rate at only 3.7% . Real G N P
had grown at an average annual rate of 6 % since
1961, while the consumer price index had increased
at an average annual rate of only about 1.4%.
Fiscal Stimulus A fter 1965

Starting in 1965 Federal expendi­

tures accelerated sharply.

GROSS N A T IO N A L PRODUCT
$ Billions

850

5

Gap as a %
^ ^ o fP o te n tia l

-

-

A fter 1965 the record

of fiscal policy is not quite so auspicious as between
1961 and 1965.

education, Social Security benefits and poverty pro­
grams, as well as in agricultural programs.
Since these increased expenditures coincided with
a period of substantially full employment and were
felt to be necessary, Administration recommendations
called for increasing revenue. In January 1966 the
Administration recommended passage of the Tax
Adjustment A ct of that year, which was enacted in
March. The A ct in effect rescinded, or postponed,
excise tax reductions passed in 1965. Graduated
withholding tax rates on personal income were also
introduced, corporate tax payments were accelerated
and quarterly, rather than annual, payments were

The increases were not

a result of deliberate stabilization policy but were due
chiefly to increased U. S. involvement in Vietnam.

r

1

1955
Source:

_L

I

1 _L

i

i

1960

l

IN .

Department of Commerce, and Council
of Economic Advisers,

‘ Computed by the Federal Reserve
Bank of Richmond.

M ajor increases also occurred, however, in aid to



3


http://fraser.stlouisfed.org/
4
Federal Reserve Bank of St. Louis

required on Social Security taxes for the self-em­
ployed. The latter two measures merely shifted the
timing of cash payments, not the total magnitude.
This shift had the effect of raising total receipts in
1966 and probably also in 1967.
In both years, however, there were substantial and
growing deficits on a high employment budget basis,
with net fiscal stimulus to the economy. Current
dollar G N P had surpassed its theoretical potential
by the last quarter of 1966 and the unemployment
rate was well below the 4 % figure taken by many
to represent the full employment level. A t the same
time the consumer price level rose at an average an­
nual rate of about 3 ^ % from the third quarter 1965
to the end of 1966 as opposed to the average annual
rate of about 1.4% in the preceding four years.
As 1966 progressed it became clear that Federal
spending would continue to rise and that strong in­
flationary pressures would persist. Monetary policy,
meanwhile, had been tightened in late 1965 and in
early 1966 and by mid-summer the competition for
funds had resulted in sharply rising interest rates.
By late summer there were signs of impending dis­
turbances in the financial markets and fear of what
this would mean for the rest of the economy.
T o help ease inflationary pressures additional
fiscal action was proposed in September 1966. In
November Congress suspended both the investment
tax credit, effective October 10, and accelerated
depreciation options. The Administration also an­
nounced moderate expenditure reductions. These
fiscal actions helped to improve conditions in the
credit markets.
The economic advance was slowed in late 1966
and early 1967 by a massive inventory runoff. None­
theless, in January 1967 the Administration, antici­
pating a turnaround in inventory building, recom­
mended that Congress enact a temporary 6 % sur­
charge on both corporate and personal income taxes,
to become effective in July 1967. Congress refused
to act on the recommendation at the time and the
Administration did not press the issue. In fact, in
March it recommended the reinstatement of the in­
vestment tax credit, a recommendation which
Congress accommodated in June.
Economic expansion resumed in the second half
of 1967 and by late summer policymakers again were
faced with an overheating economy. W ith expecta­
tions of record Federal financing, private borrowers
competed aggressively to cover their expected needs
and long-term interest rates rose sharply despite
relatively easy monetary policy. A t the same time
rapid income growth at home was fueling a large
increase in imports, seriously aggravating the nation’s

balance of payments problem and threatening the
position of the dollar abroad.
The Administration in early August renewed its
request for a surtax, proposing an increase of 10%
instead of the previous 6 % . Key Congressmen,
however, insisted on expenditure reductions before
endorsing tax action. Meanwhile, the deficit for
the new unified budget, similar to the N IA budget
but including financial transactions, had reached an
estimated $25 billion for the 1968 fiscal year. The
net fiscal stimulus to business was substantial, with
both the National Income Accounts budget and the
high employment budget showing large deficits.
W hile G N P in current dollars was growing sharply,
much of this gain reflected price increases. The re­
newed inflationary pressures at home weakened the
already precarious U. S. balance of payments posi­
tion. The impact of these problems on U. S. finan­
cial markets, combined with a steady tightening of
monetary policy, led to further upward pressures on
interest rates and to growing concern over possible
disturbances in the markets.
Faced with these adverse developments, Congress
passed in June the Revenue and Expenditure Con­
trol A ct of 1968. This A ct provided for a 10% sur­
charge on personal income taxes (retroactive to
A p ril), and on corporate income taxes (retroactive
to January). These surcharges are scheduled to
expire in June 1969. The A ct also placed a ceiling
of $180.1 billion on Federal outlays for fiscal 1969.
This ceiling was $6 billion below the $186.1 billion
that had been projected in the January 1968 budget.
Expenditures for veterans’ affairs, Social Security
payments, Vietnam, and interest on the national debt,
however, are exempt from this ceiling, as are pay­
ments of the Commodity Credit Corporation, H ous­
ing and Urban Development, and Medicaid. Already
projections for expenditures in these areas have ex­
ceeded the January estimate. The latest estimate
by the Bureau of the Budget indicates that, because
of these increases, actual Federal outlays will be
about $185 billion for fiscal 1969.
Receipts, on the other hand, were originally ex­
pected to be increased by $10 billion as a result of
the surtax alone. The final increase in tax receipts
will, however, depend on the extent to which the
fiscal package restrains expansion of G N P and tax­
able income. A t this writing the Bureau of the
Budget estimates receipts will be about $182 billion,
thus yielding a fiscal 1969 deficit of about $3.0 billion.
W hile only projections, if these estimates are
realized, it would mean a $22 billion drop in the size
of the deficit from fiscal 1968 to fiscal 1969, a highly
restrictive net fiscal turnaround.
Wynnelle Wilson






The Space Industryln The Fifth District
On the morning of October 22, the Apollo 7

Space Flight Center.

It was the first major United

astronauts brought their 11-day, earth-orbiting flight

States laboratory devoted entirely to the investiga­

to a successful conclusion.

tion and exploration of space.

Flight directors hailed

This center was

the flight as a perfect mission and thus the pos­

established in 1959 and has more than 3,600 em­

sibility of landing men on the moon by next year

ployees.

came closer to reality.

This Apollo mission and

projects and responsibilities, Goddard is one of the

previous missions would not have been possible with­

few installations in the world capable of conducting

By virtue of its extremely wide variety of

out a great deal of aeronautical research and flight

a full-range, space-science experimentation program

testing.

— from theory, through design and construction of

Within the Fifth District are located several

highly important test centers.

satellites, and finally data-gathering test flights.

The largest of these test centers is the Langley
Research Center located at Hampton, Virginia.

At

On the campus of the University of North Carolina
at Chapel Hill, North Carolina is located the More-

one time it was the headquarters of the National

head Planetarium, the first major planetarium on a

Aeronautics and Space Administration.

college campus.

that the original eight astronauts

It was here

received

then-

Since the astronaut program began

in 1960, the Morehead Planetarium has been used

initial training for the Mercury Project— the first of

regularly for navigation and simulation training of

three phases in achieving the nation’s objective to

this country’s astronauts.

reach the moon.

Established in 1917, Langley R e­

search Center has a staff of more than 4,000 scien­
tists, engineers, technicians, and other supporting
personnel.

Laboratories and other facilities at Lang­

ley represent an investment by the United States of
some quarter of a billion dollars.

Research at Lang­

ley encompasses many fields and relates to a variety
of objectives.

These include launch vehicles, manned

and unmanned earth satellites, lunar vehicles, plane­
tary spacecraft, hypersonic flight vehicles, supersonic
aircraft of advanced design, vertical takeoff-landing
and short takeoff-landing machines, helicopters, and
subsonic aircraft.
Another important testing center in the District is
Wallops Station located at W allops Island, Virginia.
This station is mainly a launch site for missiles and
was established by the Langley Research Center in
1945. Employing about 500 people, W allops Station
is completely owned and operated by N A S A .

Engi­

neers and technicians, comprising a large part of its
personnel, are engaged in vehicle preparation, launch­
ing, tracking, and data acquisition. Many of the find­
ings in recent years are applicable directly to the
advancement of manned space flight, worldwide com ­
munications, and weather prediction.
Located at Greenbelt, Maryland is the Goddard

Various industries in the Fifth District are playing
an important role in today’s space program.

The

aluminum industry in the District is especially im­
portant.

The A pollo/Saturn V moon rocket con­

tains large quantities of aluminum in its welded
structure. The missile program is also making use
of aluminum. Both the Polaris and the Poseidon
use atomized aluminum powder as a solid fuel pro­
pellant. Extremely smooth-burning at high tem­
peratures, aluminum powders help assure greater
thrust resulting in greater range and velocity.
The chemical and fibers industries also have a
place of importance in the U. S. space program.

In

Richmond, Virginia for example, a large chemical
company produces material used in the space suits
worn by the astronauts.

The material is specially

designed to withstand extreme heat and temperature
changes.

The so-called “ close-out” crew, responsible

for sealing the astronauts in the capsule, also wear
suits of this material.
Electronic systems ranging from space rendezvous
equipment to television cameras are being manu­
factured by District industries for the U. S. space
program.

Because of its highly skilled labor force

and diversified industries, the Fifth District plays an
important role in the U. S. space program.

SWISS B A N KS
As a rule, the subject of banking generates little
interest outside the business world. Few people,
however, fail to perk up their ears at the mention
of Swiss banks. This unusual reaction is not due
to widespread knowledge concerning these institu­
tions but, on the contrary, may be attributed to
popular misconceptions and to the general air of
mystery which seems to surround their operations.
This article will attempt to dispel some of the mystery
and explain why Swiss banks do, indeed, occupy a
very special niche in the financial world.
B ackgrou n d T h e Swiss banking system differs
from its European counterparts primarily in the un­
usually large degree of freedom exercised by indi­
vidual banks and in the rigid enforcement of bank
secrecy. These characteristics are rooted deeply in
Swiss history.
The present Swiss state began as a military al­
liance between three German cantons, or states, in
1291. In 1648 the confederation became indepen­
dent of the H oly Roman Empire, and two hundred
years after that a federal constitution was written.
Shielded by an exceptionally rugged terrain, Swit­
zerland remained aloof from the turbulent European
scene, and her neutrality was officially recognized by
the major powers in 1815 by the Treaty of Vienna.
A t an early stage, the Swiss emerged as an indepen­
dent, hard-working people, skilled in the arts and
crafts. Today Switzerland is a confederation of 22
cantons and 3 half cantons, each of which has its
own legislature, executive, and judiciary. Just as
Swiss citizens jealously guard their personal privacy,
the cantons guard their prerogatives, and the Federal
Government has relatively little authority in areas
other than those explicitly specified by the Constitu­
tion, namely, foreign affairs, money and coinage,
post, and railroads. Taxes have remained pre­
dominantly a cantonal affair, and tax offenses are
generally treated as administrative, not criminal,
matters.
Until the First W orld W ar the development of
Swiss banking had paralleled that of most other
continental banking systems.

tered by the Federal Post Office. Another contrast
is that banks, acting as brokers, are the principal
members of stock exchanges.
The dramatic rise in the international importance
of Swiss banks occurred after the First W orld W ar.
W ith the breakdown of the gold standard in the
early 1930’s, most European countries turned to
isolationist economic policies including restrictions
on the export of currency and capital. These policies,
in conjunction with a number of other factors, con­
tributed to the severity of the depression which
spread throughout the continent. In contrast, Swit­
zerland, which emerged virtually untouched by the
war, adopted no such policies. Thus, as most Euro­
pean nations grappled unsuccessfully with inflation,
depression, and political instability, Switzerland stood
out more and more clearly as a haven for savings,
investment, and business enterprises.
Bank S ecrecy S ecrecy is the aspect of Swiss
banks which intrigues the world. It reflects the
Swiss view that one’s finances are as private a mat­
ter as one’s religion and equally deserving of free­
dom from governmental control. W hile most banks
maintain a confidential relationship with their cus­
tomers, few go to such lengths as Swiss banks to
preserve this relationship intact. The Swiss do not
feel obliged to enforce laws not of their own making.
A bank must open its books when so ordered by a
Swiss criminal court. A s long as their customers
do not break Swiss law or international law, how­
ever, the banks protect the depositors. Even the
existence of an account is not acknowledged to a
third party. The numbered account, which came
into being in the 1920’s, is another safeguard of
privacy, although in practice an unnumbered account
is equally secret. The numbered account is not an
anonymous account; a client’s identity is always
known to the top two or three executives of a bank.
The origin of the funds deposited is also generally
known, particularly in regard to large deposits, since
no bank will knowingly accept stolen money. In­
deed, most large Swiss banks will refuse any sizeable
deposit with a dubious past, or where tax evasion is
the obvious motive for opening an account.
In the early 1930’s the sanctity of Swiss bank ac­
counts was put to a severe test when Hitler ordered
all German citizens to declare their foreign holdings.

Am ong other things,

Gestapo agents dispatched to ferret out Swiss ac­

these systems differ from their American counter­

counts of German nationals scored some initial suc­

part in that checking accounts play a much less im­

cesses.

portant role.

In Switzerland, most small transfers

financial privacy, the Swiss Federal Government

of funds which are handled in the United States with

passed the Banking A ct of 1934 which authorizes

checks are cleared through giro accounts adminis­

fines and/or imprisonment for any bank employee


8


Partially in response to this violation of

who gives information respecting any account to any
third party not specifically authorized by the accountbolder. All foreign governments, the Swiss Federal
and cantonal governments, and all foreign and domes­
tic revenue authorities, are classified as third parties.
Strict bank secrecy often involves problems in the
matter of beneficiaries. If a depositor dies or dis­
appears without leaving a designated heir, the bank
will search for any legal heirs. Should the search
fail, Swiss law stipulates that the account escheats
to the bank after having lain dormant for 20 years.
Following the Second W orld W ar, Swiss banks were
left with numerous unclaimed deposits as many de­
positors had perished with their beneficiaries. For
years the supposed existence of these unclaimed
deposits generated fierce controversy and litigation
but Swiss law remained unchanged.
Banking Structure Switzerland is often de­
scribed as “ overbanked” with approximately one bank
per 4,000 citizens in a territory twice the size of
New Jersey, compared to a ratio of one bank per
14,000 citizens in the United States. Swiss banks
may be divided into seven categories.
1)
Big banks. The five big banks account for
about one-third of the assets of all Swiss banks.
The three largest, the Swiss Credit Bank, the Union
Bank of Switzerland, and the Swiss Bank Corpora­
tion have assets of approximately $2.5 to $3.0 billion
each. A s members of the Cartel of Swiss Banks,
the big banks establish common interest rate policies
but compete vigorously in other areas. Big bank
activities cover a wide range, but lately they have
come to specialize in short- or medium-term loans,
especially in the export-import field. The big banks
are also the most important stock brokers in Swit­
zerland, with dealings on both domestic and foreign
exchanges, and are the principal underwriters of
domestic stock and bond issues.

Moreover, they

2 ) Private banks. The 50 private banks are
among the oldest in Switzerland, with many dating
from the late 18th century. They are not incor­
porated and the partners are liable to the full extent
of their private fortunes. A s long as private banks
do not advertise or publicly seek business, they are
not required to publish any financial statements and
are exempt from certain provisions of the National
Bank Law governing the ratio of capital to liabili­
ties, and the maintenance of reserve funds. However,
they must file financial statements with the Swiss
National Bank. Any bank which does not publish
financial statements may not accept savings deposits.
The significance of private banks lies almost entirely
in the world of international finance.
3) Cantonal banks. Virtually every canton owns
and operates its own bank, and the deposit liabilities
of each bank are guaranteed by its cantonal govern­
ment. Their activities, predominantly mortgage
financing, are generally confined to the canton.
Cantonal banks account for about one-third of total
Swiss bank assets.
4) Other banks. W hile these banks are Swiss
corporations on Swiss soil, they are owned wholly
by foreigners and their business is almost entirely
foreign. The number and size of other banks has
mushroomed since W orld W ar II and some are as
large as big banks.
The remaining three categories include local banks,
savings banks, and loan associations. Local banks,
some of which are quite large, generally specialize
in mortgage loans. W hile virtually all Swiss banks
offer some type of savings account, savings banks
proper serve the small depositor and balances ex­
ceeding a certain amount receive a lower interest
rate. Loan associations, or banks, are found in nearly
every small community.

Their activities resemble

those of credit unions in this country.

are large dealers in foreign exchange and in gold.

Regulation and the Swiss National Bank

The big banks provide investment advisory and custo­

pared with banks in other countries, Swiss banks

dial services to their depositors who wish their funds

have always been uniquely unregulated.

put to work.

Much of Switzerland’s prominence in

their own circulating notes until the Swiss National

international finance derives from the status of big

Bank, established in 1905, began to exercise its note-

banks as international lenders.

issuing monopoly in 1907.

Switzerland current­

C om ­

They issued

In addition, the Na­

ly supplies about one-third of all funds in the growing

tional Bank was authorized to store the national

European currency market, a good portion of which

gold reserve, act as a national clearing house, and

comes from the big banks.

provide a limited degree of credit regulation.

receive

substantial

deposits

W hile these banks may

For

underdeveloped

the most part, regulation of Swiss banks has been

countries, very little money is reinvested there. The

directed at insuring efficient banking services and

big banks have numerous branches throughout Swit­

protecting private depositors.

zerland and a small number abroad.

Through sub­

of a number of banks in 1929, liquidity and capital

sidiaries, they run the largest Swiss investment trusts.

requirements were established to be enforced by




from

Following the failure

9

regular audits. Banks are audited by independent,
authorized firms and irregularities, if uncorrected
within a specified time, are reported to the Federal
Banking Commission. Audits and reports of con­
dition are not available to the Federal or cantonal
governments. All banks must submit balance sheets
to the National Bank at least annually to expedite
its function of money and credit regulation. Banks
establish their own interest rates; neither the Gov­
ernment nor the National Bank is empowered to
set ceilings, although the National Bank may express
approval or disapproval in regard to certain rate
changes. Until 1964, banks were not legally re­
quired to maintain reserves with the National Bank,
but in accordance with “ gentlemen’s agreements”
they usually maintained a minimum ratio between
their liabilities and their deposits with the National
Bank. These agreements also included measures
designed to counter threatening inflation.
In 1964, gentlemen’s agreements proved inade­
quate in stemming the inflationary pressures caused
by a tremendous inflow of foreign capital. The
Swiss legislature felt compelled to enact a series of
temporary measures aimed at curbing a domestic
real estate boom, discouraging the inflow of foreign
funds, and preventing such funds from entering the
Swiss domestic money supply. These controls,
which were administered by the central bank, in­
cluded among other things the prohibition of interest
payments on foreign deposits, the requirement that
net inflows of non-interest bearing funds be paid
into a frozen account at the central bank unless they
were re-exported, and ceilings on the growth of bank

aspects. The first arises from Switzerland’s role as
an international clearing house, featuring the Swisschartered Bank for International Settlements in
Basel. In recent years, frequent meetings in Basel
among prominent financial leaders seeking to bolster
confidence in the international monetary system have
heightened the prestige of this small country. W hile
Swiss neutrality and desire for financial independence
precludes membership in the International Monetary
Fund, her influence in the area of international fi­
nance is substantial.
The second aspect derives from the extensive ac­
tivities of Swiss banks as brokers and underwriters
in the Euro-capital market, and as brokers and deal­
ers in gold and foreign exchange. In the latter ca­
pacity, Swiss banks have sometimes been criticized
for abetting disturbing movements in the foreign
exchanges and in the gold market, thereby undermin­
ing key currencies. It should be borne in mind, how­
ever, that the veil of secrecy prohibits the disclosure
of the origin of their transactions regardless of
whether the bank is acting for its own account or as
agent for a client.
The third aspect is somewhat ironic in that Swiss
banks, a majority of which are very conservative,
have achieved an air of notoriety. Because of rigid
secrecy, statements made about the identity of Swiss
bank depositors cannot be proved or disproved, and
are left hanging. For example, swindled funds are
often suspected of having been spirited off to Swiss
vaults; international rackets, dope rings, and spy
rings are said to use them behind legitimate fron ts;
and many a current or deposed strong man is thought

credit.

to have siphoned off his country’s wealth into a per­

W ith the subsiding of inflationary pressures,

all of the mandatory controls were removed by the

sonal Swiss bank account.

spring of 1967.

Swiss banks have been accused of acting as fronts

A few, however, were shifted to a

voluntary basis under the auspices of the Swiss

In the United States,

in corporate raids and proxy battles.

Because inflation fostered by

The use of Swiss banks for tax evasion is another

inflows of foreign capital has continued to threaten

cause of notoriety, particularly in this country where

Swiss

willful evasion is a felony.

Bankers’ Association.
economic

stability,

is currently considering

the

Swiss

legislation

Parliament

which

would

A portion of any interest

or dividends earned on a Swiss account is withheld

broaden the hitherto limited control of the Swiss

in Switzerland for Swiss taxes, but may be credited

National Bank over monetary policy.

against United States taxes by filing the appropriate

Compulsory

reserve requirements would be the principal policy
tool.

The passage of this controversial legislation

papers.

Upon

doing

so,

however,

the

Internal

Revenue Service is alerted as to the existence of the

depends largely upon the willingness of the Swiss

account.

banks to surrender a portion of their highly prized

are not reported or repatriated.

freedom from central control.

port such gains is illegal, such funds naturally are

Should the proposed

Capital gains go completely untaxed if they
Since failure to re­

changes become law, Swiss banks would remain

seldom repatriated.

among the world’s least regulated banks.

French, German, and Italian depositors, it is thought

International Reputation

T h e international rep­

utation of Swiss banking can be said to have three

10


Compared to the number of

that relatively few Americans have Swiss accounts.
Jane F. Nelson

The

Fifth

District

AGRICULTURE: SPOTLIGHT O N

Weather and the cost-price squeeze vied for top
billing in this year’s agricultural review. Both
played important roles, although location and sea­
son of the year determined which played the lead.
W here weather was normal, the cost-price squeeze
took the spotlight; in localities where lack of rainfall
and the resulting drought stretched into months,
weather was the prime performer.
Latest information, brought together from official
sources, tells the story of Fifth District agriculture
in 1968. Briefly, it reads like this. Cash farm in­
come : likely down from 1967’s record level. Farm
d ebt: up. C osts: high and rising. P rices: for live­
stock, u p ; for crops, generally lower. Farm labor
fo rc e : smaller. Farmland values : increasing.
Weather’s effects were varied . . .
W here weather played the lead, it frequently
starred as the villain, exerting strongly unfavorable
influences on local farm production, income, and
credit conditions. But weather in 1968 played a dual
role, often taking the part of the hero. When cast in
this role, it rather unobtrusively produced very favor­
able results. The lack of spring freezes in most fruit
areas produced big crops of peaches and apples. The
peach crop turned out to be 139% larger than last
year’s short crop, while apple output was up slightly
over 1967’s excellent production. Fall harvest weath­
er was generally good, and harvesting proceeded
ahead of schedule. Widespread rains resulting from
Hurricane Gladys finally broke the late summer and
early fall drought, and pastures and fall-seeded small
grains responded well to the needed moisture.
The prolonged drought reduced yields per acre
of most spring-planted crops in the Carolinas, por­
tions of Southside Virginia, and in scattered pockets
in Maryland and W est Virginia. M ajor results:
Flue-cured tobacco production, with a combination of
lower yields and smaller acreage, was down 2 1 % ;
soybeans dropped 38% ; corn was cut 22% ; and
pecans were down 55% . Cotton yields were sharp­
ly lower, but because of larger acreage, production
was about three-fourths above that of 1967.

Soy­

bean and feed grain producers suffered a double
economic blow as the result of significantly smaller
crops and lower prices.
Livestock farmers as a whole enjoyed a fairly good



1968

year. Production of livestock and livestock products
was pretty much in line with 1967 levels. Strong
consumer demand for red meats was a big factor in
improved livestock prices, and dairy prices were
higher as the result of Government actions.
. . . and the cost-price squeeze continued . . .
Farmers generally continued to feel the tightening
of the cost-price squeeze. Those heavily dependent
upon crop income felt the pinch even more than live­
stock producers. Livestock prices averaged slightly
higher than in 1967 in all District states. Crop
prices, with the exception of those in Virginia, aver­
aged below a year earlier, however.
Farmers’ costs, meanwhile, continued to mount.
Prices paid by farmers rose to new record highs in
seven of the first ten months of 1968 and averaged
3.5% above those a year ago. The rural consumer
index of prices paid for items used in family living
averaged 4 % higher. Prices paid for production
goods, interest, taxes, and farm wage rates were up
3 % . Nearly all production items, with the excep­
tion of feed and fertilizer, were higher than a year
ago. Overhead costs were up substantially.
Adding further to many farmers’ costs was the
need to increase the volume of purchased inputs.
Indications are that farmers bought more fertilizer,
pesticides, and some other production goods. Still
others purchased additional machinery and equip­
ment and other capital goods in an attempt to offset
the decline in the number of farm workers and the
increase in farm wage rates. Some bought more
land at higher prices. LT
nder these conditions, farm­
ers’ demand for credit increased.
. . . but farmers’ equity position remained strong.
Though the cost-price squeeze and the upturn in
farm debt continued in 1968, most bankers contacted
in a recent survey of farm credit developments in­
dicated that generally the equity position of farmers
is still strong. True, the financial position of some
farmers is weaker, and there are signs that some are
borrowing at levels which may lead to future diffi­
culties. The majority opinion held, however, that
no more than the usual number of commercial farm­
ers are having difficulty in meeting their financial
obligations.
Sada L. Clarke

11

MONTHLY REVIEW
FEDERAL RESERVE B A N K OF

R IC H M O N D

T a b le o f C o n te n ts — 1 9 6 8
January

The Fifth District Economy in Focus—A Review of 1967
Fifth District Golf
Free Trade or Protection: An Old Controversy Renewed

William H. Wallace
Joseph C. Ramage
Jan H. W. Beunderman

February

Forecasts 1968—The Question Marks Grow Bigger
Foreign Tourism in the United States
Automation a t Fifth District Banks
The Fifth District—Saving in 1967

Joseph C. Ramage
Priscilla A. Gowen
Elizabeth W . Angle
W illiam H. Wallace

March

Population Is People
Peanuts: A Brief Biography
A Century of International Trade Policy 1840-1940
Charge Account Banking—Credit Services on the Move in the District

Carla W. Russell
Sada L. Clarke
Jan H. W. Beunderman
Eunice R. Dougherty

April

The New Unified Budget
Fifth District Ports—West Virginia
Disintermediation
The Fifth District—State Government Finances

Jimmie R. Monhollon
Mary A. Chappell
Jane F. Nelson
Joseph C. Ramage

May

Economic Cooperation in Europe Since 1945
Fifth District Ports—North Carolina
The Executive Gap
Soybeans: The “ Cinderella" Crop

Jan H. W. Beunderman
Dorothy E. Ferrell
Harmon H. Haymes
Sada L. Clarke

June

The Changing Role of Gold
Fifth District Ports—Maryland
A Census Profile . . . The Fifth District Farmer
The Fifth District—Economic Growth

Aubrey N. Snellings
Eunice R. Dougherty
Sada L. Clarke
W illiam H. Wallace

July

The Federal National Mortgage Association
Fifth District Ports—Virginia
The Gold Cover
The Fifth District—Commercial Bank Loans

Jane F. Nelson
Priscilla A. Gowen
Joseph C. Ramage
Carla W . Russell

August

Educational TV
Fewer but Larger Farms
Bonnie and Clyde in the 1960's
The Fifth District—Economic Review

Charlotte B. Carmichael
Sada L. Clarke
Carla W . Russell
William H. Wallace

September

The World Bank Group
Mortgage Terms
State and Local Borrowing in 1966
The Fifth District—Commercial Bank Investments

Jan H. W. Beunderman
Mary A. Chappell
Joseph C. Ramage
Carla W . Russell

October

Federal Regulation of Bank Holding Companies—I
Changing Consumer Spending Patterns
Fifth District Personal Income—1967
The Fifth District—Personal Income

William F. Upshaw
Eunice R. Dougherty
Priscilla A. Gowen
William H. Wallace

November

Federal Regulation of Bank Holding Companies—II
Fifth District Ports—South Carolina
The Food Stamp Program
The Fifth District—The Credit Card Boom

William F. Upshaw
Charlotte B. Carmichael
Charlotte B. Carmichael
Eunice R. Dougherty

December

Fiscal Policy in the Sixties
The Space Industry in the Fifth District
Swiss Banks
The Fifth District—Agriculture: Spotlight on 1968

Wynnelle Wilson
Priscilla A. Gowen
Jane F. Nelson
Sada L. Clarke


12



Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102