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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