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FEDERAL RESERVE BANK OF RICHMOND MONTHLY REVIEW Mobile and Modular Housing Fifth District Investors and the Bill Market The Flow-of-Funds Accounts •N * _ . JUNE 1970 MOBILE AND MODULAR HOUSING Since 1950 the construction of private one-family housing units has been declining, and in the last years of the decade of the 1960’s, the rate of decline has risen sharply. In 1969 one-unit private housing starts decreased 9.9 per cent from the preceding year. The housing shortage has become more pronounced in recent years not only because of the decline in housing starts, but also because of a faster-than-expected growth in the number of new households de manding housing units. In 1967 and 1968, the num ber of new households increased by an average of 1.5 million per year. Requirements for new homes, resulting from a growing population, and a demand for replacement units and second homes of approxi mately a half million per year, have been estimated at some 2 million new housing units annually. Less than three-fourths of that number of homes were built in 1969. The most important factors contributing to the national housing shortage are rising costs of con struction and financing. Although the price of ma terials has increased an average of only 1 per cent per year over the past three years, land costs in metropolitan areas rose between 10 and 25 per cent last year. Current union contracts for construction workers have provided wage increases of 10 to 20 per cent per year in recent years, and the wages for unorganized workers have risen at a similar pace. Financing costs have also moved up sharply, with both down payment requirements and mortgage rates homes has been the low cost of construction for these units compared to construction costs for con ventional homes. Labor, which accounts for as much as 50 per cent of on-site construction costs, rep resents as little as 10 per cent of the cost of a mobile home. Manufacturers of mobile homes employ semi skilled workers at wage levels comparable to those of other industrial workers. Building contractors, however, must pay much higher wages for skilled craft laborers. The changing composition of today’s population has also been a factor pushing sales upward. For many years, the largest groups of mobile home dwellers have been young couples and retired couples. Historically these two groups have accounted for 70 per cent of mobile home sales. Rapidly increasing life expectancy and the post W orld W ar II popula tion boom have made these two groups the fastest growing segments of our population. Growing popular acceptance has enhanced the sale of mobile homes significantly. Although many factors have contributed to their popularity, two of the most important have been improved construction and dura bility and the development of modern, well-planned mobile home parks. Each of these factors has been instrumental in the decision of many urban com munities to use mobile homes in redevelopment projects. rising. Overall, the cost of home building has risen at a rate of approximately 10 per cent annually the United States cannot afford to pay over $15,000 Mobile homes originally developed as an extension of the trailer industry. Although the construction of camping and travel trailers began in the 1930’s, it was not until after W orld W ar II that the house trailer became popular. These were usually 8 feet wide and 25 to 28 feet long. Units 10 feet wide and 34 to 60 feet long were developed in the 1950's. In 1962, 12-foot wide units were introduced and these have become increasingly popular. Larger sizes, as well as improvements in the quality of furnishings, have for a home. made mobile homes more attractive to low-to-middle during the past few years. In 1969 the average price for conventionally-built new homes was $19,225, $5,425 higher than the cost of a similar home in 1960. commonly Based on rules of thumb used by financial institutions, income statistics indicate that almost half of the families in During the past decade mobile homes have evolved as a partial solution to the low-cost housing problem. Manufacturers’ shipments of mobile homes qua drupled in the 1960’s (see Chart I ) . DEVELOPMENT OF THE MOBILE HOME MARKET income families whose demand for housing is re stricted to homes under $20,000. In spite of improved construction, better furnish One of the ings, and more living space, many people still as major reasons for the growth in sales of mobile sociate mobile homes with the trailer camps that 2 FRASER Digitized for mushroomed in the post W orld W ar II period. Evidence of the slowly changing image of mobile homes can be seen by examining current housing statistics. The Department of Commerce continues to exclude mobile homes from their housing statistics ; instead mobile homes are classified with vehicles, even though 80 per cent initially placed on a landsite are never moved. Mobility is not an important reason for purchasing mobile homes. Statistics indi cate that the average American family living in a conventionally-built home moves more frequently than the average mobile home dweller. The importance of mobile homes to the housing market should not be underestimated. These homes accounted for 90 per cent of all housing selling for under $15,000 in 1968. More than one-third of all single-unit homes started in 1969 were mobile homes. The median income of mobile home families was less than $1,000 below the 1968 national average of $8,632. One-fourth of the heads of mobile home families are skilled workers, and 15 per cent are professional workers. A recent Housing and Urban Development (H U D ) survey of families living in new mobile homes showed that 50 per cent of the heads-of-households were under thirty-five years old. Since the peak earning years are still ahead for most of these families, this partially explains why the median income of mobile home families is less than the median U. S. family income. The large per- C h art i CO M PARISO N OF H OUSIN G STARTS AND MOBILE HOME SHIPMENTS, 1960-1969 Thousands centage of retired couples also contributes to a lower median income level for mobile home dwellers. PROBLEMS FACING THE MOBILE HOME INDUSTRY Although the low cost of mobile homes makes them attractive for purchase by several income groups in the United States, the mobile home industry faces major obstacles in its efforts to assume an important role in reducing the national housing shortage. Am ong the most significant problems are those con cerned with park development, local zoning laws and tax structures, and availability of favorable financial terms for purchase of mobile homes and development of parks. Park Development U niversal C .I.T . Credit C or poration recently conducted a national survey of mobile home dealers to determine the major obstacles to future growth in the industry. Forty-three per cent of the dealers responding to the national survey cited shortage of parks as the main problem that should be solved to improve sales. W oodall Publish ing Company, which publishes the Mobile Home Park Directory, claims that there is a sizeable shortage of park space. Their figures show an in crease of 118,105 mobile home sites in 1969 com pared to a gain of 77,444 in 1968. Although W oodall compiles statistics on less than 55 per cent of the sites, the Company contends that the remaining sites are filled. Specific figures on the shortage of park space are very difficult to determine, since approxi mately 50 per cent of all mobile homes produced are placed in rural areas or backyards of suburban land developments. Recent ventures into construction of mobile home parks by corporate giants indicate a widespread feel ing among these firms that shortages of space will provide sufficiently attractive returns to warrant con tinued expansion in the industry. Some of the re cently developed parks are designed to give the ap pearance of a typical suburban housing development. Some parks also provide swimming pools, community centers, and golf courses. Zoning and Taxation A n oth er m ajor obstacle to future growth in the industry results from the re luctance of local government authorities to permit parks to be built in areas zoned for residential housing. These restrictions drastically reduce the quantity o f reasonably priced land available to park developers and result in the location of parks in sections that are unattractive for, and often far removed from, other residential housing. Source: Mobile Homes M anufacturers Association and U. S. Departm ent of Comm erce, Construction Review . Not only does this cause the head of the household to commute from outlying areas, but it often means that 3 schools and shopping centers are inconvenient for tne mobile home dweller. Recently some states have begun to regulate mobile and other factory-built housing rather than leaving supervision to local authorities. In Virginia, for e x ample, a law which will become ettective July 1971, provides that factory-built units and mobile homes meeting state specifications will be allowed in all lo calities. The opposition which county officials have expressed to this law illustrates why states must take the initiative in zoning regulations. Since the major criticisms cited by county officials have been over crowding of existing schools and increased need for new schools, an influx of factory-built homes into the counties may force local government officials to re evaluate the role of these homes in their overall tax structure. A t the present time, some states consider mobile homes as vehicles and issue license plates, while others treat them as personal property not subject to real estate taxes. One state considers them home steads if they are attached to the ground, and owners are permitted to claim a $3,000 homestead exemption. The various ways that governmental units approach the problem of taxing mobile home dwellers point to the need for further study in determining an ap propriate tax structure. C hart II A V ER A G E CON STRUCTION COST OF PRIVATE ONE-UNIT HOUSING, 1960-1969 D ollars (N O N FARM ) Source: U. S. Departm ent of Com m erce, Construction Review. F inancing T h e third m ajor problem con fron t ing the mobile home industry has been the financing of new homes and parks. Recent legislation should greatly ease financial conditions for both purchasers and developers. In 1968 and again in 1969 Congress passed housing legislation authorizing the Federal Housing Administration to insure mobile homes. The 1969 bill, passed in December, extended the maximum repayment period to 12 years and in creased the maximum permissible size of the loan to $10,000. In order to qualify for a loan, a borrower must plan to use the mobile home as his principal residence at least three-fourths of the year and must have F H A approval of the proposed site. Revised F H A regulations also provide more favor able conditions for park developers. They permit loans to be insured up to a maximum of $3,500 per space and permit repayment over a 40-year period. tions for mobile home purchases vary widely through out the country, currently ranging from the 8 to 9 per cent average on conventional home mortgages to the 18 per cent that other lenders charge for in stalment credit. The average effective interest rates are usually 11 to 12 per cent, because mobile homes are still considered vehicles and loans are made on an instalment basis. Since these loans yield a higher rate of return to financial institutions than most other loans, mobile home buyers have been able to finance their purchases in tight money periods. Many commercial banks and savings and loan as sociations, however, are reluctant to begin making mobile home loans. Financing in the past has been The former regulation limited the insurance to $1,800 financing for dealers. per space and the repayment period to 15 years. have become more and more active in mobile home Conventional retail financing of mobile homes is concentrated in a small number of commercial banks and finance companies which also provide inventory and park financing. Since 1965 finance companies Statistics indicate not only a currently similar to that of automobiles. The lending higher rate of return on mobile home loans than most institution usually buys consumer paper from the other types of loans found in the portfolios of fi dealer. Maturity terms range up to seven years for nancial institutions, but also a lower delinquency new homes and require only about a 10 per cent rate than loans on one- and two-family houses in down payment. sured by the F H A . Rates charged by financial institu 4 In an effort to allow Federal savings and loan as sociations to engage actively in mobile home financ ing, the Federal Home Loan Bank Board has en acted three changes. The recent ruling permits the savings and loan industry to lower immediately its C h art III CON TRACT RATE ON C O N V EN TIO N A L FIRST M O R TG A G ES FOR NEW HOMES, 1961-1969 Per Cent ratio of liquid assets to total deposits from 6 to Sy2 per cent, thus freeing additional funds for lending purposes; it formally authorizes Federal savings and loan associations to finance mobile hom es; and it allows them to lend up to 5 per cent of their assets for new and used mobile homes. Maximum maturity periods of 12 years are permitted for new homes and 8 years for used homes. OTHER DEVELOPMENTS IN HOUSING D espite a threefold increase in sales since 1960, mobile homes alone cannot fill the void in housing requirements. A likely candidate which has emerged in recent years to fill this gap is the related modular housing industry. Like mobile homes, modular homes are built in factories rather than at the resi dential site. One or more units are moved to the location and are then assembled at the site. The major advantages enjoyed by modular con struction firms over conventional contractors are obvious. Labor costs, as indicated earlier, are sub stantially lower for factory-produced housing than for conventionally-built units. Assembly line tech niques result in more efficiency and better quality control than is possible in on-site building. The rate of output per man-hour is also considerably higher for factory-built homes. M odular units are no longer limited to a small number of unattractive box-like structures. Several Note: Interest rate data for 1961 and 1962 are F.H.A. estim ates. Source: Federal Reserve Bulletin. obstacles. Problems similar to those facing the mobile home industry must be overcome if the po tential of the industry is to be realized. In some sections of the country, modular units are prohibited since local building inspectors must be able to examine wiring and plumbing at the home site. F H A officials travel to factories to check units as they are constructed, but local governments often do not provide factory inspection. Before factory-built housing receives general acceptance, the public must be convinced that the quality of workmanship equals or surpasses that of conventionally-built homes. firms now have the ability to produce single- or multiple-family housing units in a variety of shapes with choices of wood, aluminum, and brick-veneer W ith the total number of households expected to sidings. H U D ’s “ Operation Breakthrough” provides an in grow from approximately 63 million in 1970 to 84 million in 1985, total housing requirements in this dication of the importance of modular construction cou n try. will continue to increase. in satisfying future housing needs. have emerged as one possible means for satisfying a The project’s CONCLUSIONS major purpose is to develop methods for producing small portion of the housing needs. reasonably-priced high-density housing. greatest potential, H U D se however, lected 22 companies to participate in Government- modular construction. sponsored nationwide building projects. Mobile homes Perhaps the lies in multiple-unit Rising land and construction The em costs necessitate the development of methods that will phasis is apparent when examining the plans of the provide high-density low-cost housing, and modular award-winning firm s; for example, one H U D award construction appears to be the most likely candidate winner plans to build two 150-unit high-rise apart to meet these qualifications. ment houses using modular units. Modular construction, however, is not without its Clyde H . Farnsworth, Jr. H. Suzanne Jones 5 Fifth District Investors and the Bill Market In 1969 individuals, particularly small investors, became increasingly important as purchasers of Treasury bills. These obligations have traditionally been a popular short-term investment for banks and other financial institutions, nonfinancial corporations, state and local governments, and U. S. Government trust accounts. The Federal Reserve System carries out its open-market operations mostly through pur chases and sales of Treasury bills. Individual in vestors have shown little interest in Treasury bills, generally placing their funds in commercial bank savings deposits or with savings and loan associations or mutual savings banks where interest rate ceilings are fixed by the various regulatory agencies. In 1969, as rates paid on Treasury bills greatly exceeded these ceilings, individuals began increasingly to in vest their money directly in Treasury bills and other market instruments, bypassing the financial institu tions. This article discusses the changing par 6 ticipants in Fifth District Treasury bill auctions during 1969 and early 1970. A t present the Treasury sells four types of bills on a regular basis. Each month the Treasury auc tions $0.5 billion of bills maturing in nine months and $1.2 billion of bills maturing in twelve months. And each week the Treasury offers $1.8 billion of bills due in three months and $1.3 billion of sixmonth bills. The bills sold in these regular auctions replace maturing issues. In addition to its regular bill auctions, the Treasury occasionally offers strips of bills, tax anticipation bills, notes, and bonds. The Federal Reserve Banks act as agents of the U. S. Treasury in marketing the new Federal issues. The weekly auctions of three- and six-month bills are held each Monday at the various Federal Reserve Banks and their branches. Tenders for Treasury bills may be submitted through commercial banks, or directly to the Federal Reserve Bank by the subscriber or his agent. Often a single tender form from a commercial bank may contain bids from many investors. In 1969, as a growing number of investors entered the market, more and more banks began to charge a fee for this service. A s a result many investors in the Fifth District submitted their bids directly to the Federal Reserve Bank of Richmond or to its Baltimore or Charlotte Branches. The first chart shows a monthly average of the number of tenders submitted and the average issue rates for the weekly bill auctions. The average number of tenders submitted directly in creased from 57 in January 1969 to 272 in January 1970. The second chart shows that the number of sub scribers submitting bids in weekly auctions, whether directly or through banks, increased from an average of 310 in January 1969 to 992 in January 1970. The number of bids submitted by Fifth District banks, nonbank financial institutions, nonprofit in stitutions, state and local governments, and businesses remained relatively stable over the year. The bulk of the gain came from individuals whose bids num bered on average around 200 a week in early 1969 and 858 bids a week in January 1970. As the number of participants in weekly bill auc tions increased, the total dollar value of bids sub mitted rose. A s shown in the third chart the average ' weekly value of bids in the Fifth District climbed from $12.8 million in January 1969 to $31.4 million in January 1970. Not all of the rise was due to in creased participation of individuals in the market. W hile the number of banks and other institutions submitting bids did not grow substantially, there was an increase in the size of bids, particularly from banks, nonbank financial institutions, and state and local governments. The average size of bids from individuals remained relatively constant at about $20 thousand during most of 1969, but dropped to around the $16 thousand level in December 1969 due to the increased number of small bids. The peak of activity in weekly Treasury bill auc tions was reached in January and February 1970, after having begun to accelerate in July 1969. March 1970 saw a reversal of this trend. The Treasury De partment increased the minimum denomination of Treasury bills from $1,000 to $10,000, effective March 5, 1970. The increased minimum denomina tion of bids together with declining rates and the lifting of interest rate ceilings at banks and other thrift institutions led to reduced participation in Treasury bill auctions. The number of tenders o f fered in the Fifth District fell from 345 in February to 107 in March, primarily because of a decline in directly submitted tenders. The number of bids placed dropped from an average of 850 a week in February to 381 in March. This decrease was due almost entirely to reduced bids from individuals. The average size of individual bids increased to about $23 thousand in March, following the increase in the minimum denomination of Treasury bills. W ynnelle Wilson and M arjorie Solomon 7 THE FLOW-OF-FUNDS ACCOUNTS Though the first form of the flow-of-funds accounts had been developed by 1952,1 and has been published by the Board of Governors since 1955, knowledge of this system of accounts and of its possibilities for economic analysis appears to be limited to a few o f ficial and academic quarters. Yet, the information mobilized in these accounts is of great potential use fulness not only for the professional economist and the policy-maker, but also for observers of current and prospective conditions in the country’s financial markets. The flow-of-funds accounts provide a basis for m easuring financial flow s through the econom y. Dividing the economy into sectors, the accounts record purchases and sales of goods and services for each sector, capital flows to and from each sector, and changes in balances of money, other deposits, money market instruments, and financial positions in general. Like any other accounting framework, the flow-offunds rests on certain equalities. On a business balance sheet, assets equal liabilities plus net worth. Similarly, in the flow-of-funds accounts, one person’s financial asset equals another’s liability. This is the basic equation of the flow-of-funds framework. The conceptual usefulness of the flow-of-funds lies in its provision of a measurement of credit flows and of the monetary needs of the economy. Some con tinuous balance must be maintained between total credit actually used (borrow ed) by all sectors and total credit advanced by all sectors, including the monetary authorities. The flow'-of-funds accounts make use of this equality to analyze this balance. More importantly, the accounts offer a method of analyzing the relationship between credit flows and nonfinancial flows for each major sector. From such analysis inferences may be drawn respecting the amount of new money which must be supplied to the economic and financial system if economic growth is to proceed at capacity rate. E nough cash should be provided to support an expanding volume of transactions and to support additional purchasing power needed to buy the increment in output at stable prices. RELATION TO NATIONAL INCOME ACCOUNTS The flow-of-funds are closely related to national income-product accounts. The national income- product aspect of social accounting provides a means of viewing the economy’s real output produced and distributed in each sector, without specific informa tion about the money or financial flows that have accompanied income and production. The flow -offunds system is specifically concerned with the fi nancial sector and complements the national income approach by illustrating how one sector’s saving fi nances investment of another sector, and by showing the impact of financial transactions on income and product. In particular, saving is used either to ac quire assets or to reduce liabilities. STOCKS AND FLOWS The flow-of-funds data published in the Federal Reserve Bulletin are divided into ‘ sources’ and ‘uses’ and assets and liabilities. The ‘source-use’ classifica tion refers to flows, and asset-liability, to stocks of funds. These labels may be best understood by analogy with business accounting statements. T able I SUM M ARY STATEM ENT BASED ON N A TIO N A L INCOM E AND PRODUCT A CC O U N TS ($ billions) Federal Governm ent 1. G N P Expenditures 2. Proceeds received from fin al sales1 3. Line 1 minus line 2 4. Personal taxes minus transfer paym ents, grants, and net interest 5. Nl and P deficit 6. Sum of lines 4 and 5 States - 1964 ________ 1965-67 (total) 65.3 234.5 61.6 3.7 221.7 12.8 0.1 3.8 3.7 11.0 13.0 563.4 1,986.2 567.1 3.7 1,999.0 12.8 0.1 2.0 2.0 All O ther Sectors 7. G N P Expenditures 8. Proceeds received from fin al sale s2 9. Line 8 minus line 9 10. Personal taxes minus tran sfer paym ents, grants, and net interest 11. Net funds ad van ced to Federal Governm ent'5 12. Sum of lines 10 and 11 - 3.8 3.7 10.8 12.8 1 C orporate profits tax liability plus indirect business ta x and non tax liability plus contributions for social security insurance less subsidies minus current surplus of Governm ent enterprises. 2 G ross n ational income less 2. 3 G ross private saving plus state and minus gross investment. 1Morris A . Copeland, Study o f M oneyflow s in the United (N e w Y o rk : N ational Bureau of Economic Research, 1952.) The income statement of a firm represents a flow of in- Source: local governm ent surplus Departm ent of Com m erce, Survey of Current Business. come into and expenditures out of a business. The balance sheet is an instantaneous picture of the fi nancial position of the firm at a given point in time, usually the end of a year. Sources and uses of funds are analogous to the income statement, measuring increments in financial holdings of each sector. Assets and liabilities are similar to the balance sheet and present a picture of the stock of financial hold ings outstanding at the end of the year for each sector. The flow-of-funds accounts classify sectors as fol lows : households, businesses (corporate and non corporate), state and local governments, the Federal Government, the rest of the world, and the financial sector. The financial sector includes the monetary authorities, commercial banks, and nonbank financial institutions. The Treasury’s monetary accounts are outstanding, which had shown fairly stable growth at about 8 per cent per year from 1960 to 1965, slowed to a growth rate of 5 per cent in 1966 and 2 per cent in 1969. The 1969 rate followed 10 per cent rates of increase in 1967 and 1968. Bank credit flows, measured as a percentage of total credit, also reveal the effect of the monetary restraint. A s may be seen in Chart I-A , this percentage fell sharply in the first quarter of 1966 and 1969 and remained relatively low throughout each year. On the other hand, even though funds from bank credit fell sharply, the total volume of funds advanced in all credit markets was high in 1966 and 1969 when compared to previous years. Judging from the behavior of total credit extended by commercial banks, these institutions felt the effects of monetary included under the monetary authorities sector. stringency more than other lending institutions. SOME EXAMPLES The analytical usefulness of flow-of-funds data can be illustrated by considering credit flows in 1966 and 1969, both years of stringent credit restraint. Over both years, the economy experienced rising in terest rates accompanied by little growth in the money supply and bank reserves. The stock of bank credit The other major sources of credit are: (1 ) non bank financial institutions, which include savings and loan associations, mutual savings banks, insurance companies, etc. and (2 ) direct lending in security markets by nonfinancial sectors such as individuals and nonfinancial businesses. As shown in Charts I-B and I-C, it is clear that when bank credit flows declined, the resulting shortages of funds were met by direct lending and to some extent by nonbank financial institutions. T o illustrate, bank credit flows were reduced in Chart l-A C H A N G E S IN C RED IT FRO M COAAM ERCIAL B A N K S R ELA TIV E T O T O T A L C RED IT FLO W S Per Cent the first quarter of 1964. A t the same time, credit from direct lending and nonbank financial institu tions met the demand. During the monetary restraint Table II U. S. GOVERN M EN T SECTOR SOURES AND USES OF FUNDS ($ billions) Sources 1. Total nonfinancial sources 2. Increase in outstanding obligations 3. Increase in trade debt and m iscellaneous liabilities Total 1964 (A verage Per Year) 1965-67 1968 115.0 139.5 176.3 6.4 6.1 13.4 .9 2.1 2.2 122.3 147.7 191.9 52.3 12.9 22.8 8.3 23.3 .6 63.5 16.0 28.0 9.4 28.8 .2 78.0 21.5 33.5 11.6 38.2 1.7 Uses 4. 5. 6. 7. 8. 9. 10. Expenditures on defense O ther expenditures G ra n ts, donations, etc. Interest paym ents Insurance benefits Increase in cash Increase in other fin an cial assets Total Source: 3.9 3.9 11.0 124.0 149.4 192.1 Federal Reserve Bulletin. 9 of 1966, however, both bank credit and lending from nonbank financial institutions fell. Bank credit de clined in the first quarter of 1966, and the per centage of credit from nonbank financial institutions began to drop beginning in the fourth quarter of 1965. But direct lending began to rise during the first quarter of 1966. Commercial banks again felt the squeeze of tight money in 1969 when direct lend ing increased sharply in the first quarter. Credit flows from nonbank financial institutions did not diminish until the third quarter of that year. Both 1966 and 1969 were years in which direct lending supplied a large portion of credit. In ‘normal’ periods, bank credit and nonbank fi nancial flows remain fairly stable, and direct lending is relatively low. Credit funds tend to flow through intermediaries, e.g., banks, savings and loan associa tions, mutual savings banks, etc., during periods of nonrestrictive monetary policy. In contrast, the data suggest that a larger fraction of total funds advanced are supplied directly by other sectors of the economy during periods of monetary restraint. Interest rate ceilings and other regulations which affect the lend ing activities of the financial sector made it profitable for individuals and nonfinancial businesses, which ordinarily provided funds to the financial sector, to lend directly in the credit markets. The increased activity of individuals in Treasury bill auctions and sales in the past year is a good example of this point. In terms of long-run trends, it appears that there is an inverse relationship between credit supplied by financial institutions and by private investors. Uses of Funds Chart II presents the percentage shares of total credit flows going to each sector for the decade of the 1960’s. W hile state and local gov ernments and the foreign sector received a relatively constant share of credit, the other three sectors’ shares fluctuated a great deal more. The per cent share going to households was rela tively stable until the tight money period of 1966, when it decreased from 40.9 per cent in 1965 to 33.9 per cent. The household sector experienced an even greater reduction of about 10 percentage points in 1967. The proportion going into the business sector declined during the first half of the 1960’s but began increasing in 1965. In 1965, the Federal G ov ernment had a very low percentage, 2.4 per cent, of total credit funds raised. Its share rose to 5.1 per cent in 1966, and to 15.7 per cent in 1967. The rise in the Government’s share was at the expense of both the business and household sectors. When monetary policy eased in 1968, the household’s share increased, while the shares of business and Govern ment dropped by 6 percentage points and 2 per centage points, respectively. In 1969, the Federal Government was a net redeemer of debt, while busi nesses and households increased their share of credit flows. Considering the long-term trends, it appears that the business sector has been increasing its share of credit relative to the other sectors for the last five years. Financing the Government Deficit2 Chart II shows that the Government did little borrowing in 1965 and 1966 relative to the rest of the economy, but greatly increased its credit demands in 1967. Though its share fell back in 1968 from 1967, the Federal Government still maintained a large per centage share compared to the other sectors. Using national income accounts, it is possible to determine Federal nonfinancial receipts and ex penditures and the resulting surplus or deficit. Such receipts and expenditures can also be determined for the remaining sectors of the system. Table I presents the picture for 1964 and 1965-1967. During the 1965-1967 period, the Government had a total deficit of $12.8 billion. The other economic units, which include households, businesses, state and local governments, banking, and the rest of the world, had a nonfinancial surplus of $12.8 billion. Hence, the I9 60 Source: 1961 1962 1963 1964 Federal Reserve Bulletin. 10 1965 1966 1967 1968 1969 2This portion o f this paper is an updating o f Morris A . Copeland’s analysis, “ Some Illustrative Analytical Uses o f Flow -of-Punds D ata,” in N .B .E .R ., The Flow o f Funds Approach to Social A ccounting (P rinceton: Princeton University Press, 1962 ), pp. 195-238. deficit of the Government was financed by the sur plus of the other sectors, or by the lending of these sectors. This balance of deficit and surplus is the information which the national income accounts provide. The flow-of-funds accounts, on the other hand, show who purchased the Government bonds issued to finance the deficit and to what extent it was financed by the banking and monetary sector. Table II shows funds raised by the Government, and column 1 of Table III shows fund flows to the Government sector. The rest of Table III summarizes the other uses and sources of funds. From column 1 of Table III, it can be seen that the banking sector fi nanced $11.6 billion of the $12.8 billion deficit. The two tables reveal the intersectoral balance of the accounts. The Government deficit was made up by net borrowing (lines 2 and 3 minus lines 9 and 10). The other economic units had a nonfinancial surplus of $12.8 billion, and the funds they advanced, net of borrowing among themselves, equaled the net amount borrowed by the Government. This balance is analogous to that brought forth in the national income accounts, and adds meaning _______ i______i______i--------- 1--------- 1--------- 1--------- 1--------- 1---------1--------I960 Source: 1961 1962 1963 1964 Federal Reserve Bulletin. 1965 1966 1967 1968 1969 through the financial detail. National incomeproduct accounts indicate that income equals con sumption plus investment, saving equals income minus consumption, and, therefore, saving equals in vestment. This equality of saving and investment is the balance brought out in the national income ac counts. The additional financial detail illustrates clearly how the product and financial markets adjust to each other through different market mechanisms. In the product market, aggregate demand equals ag gregate supply, while in the financial market, there is an adjustment in the demand for and supply of loanable funds. Table SUMMARY AND CONCLUSIONS Many possibilities lie in the flow-of-funds data, detailed analysis of which can add greater insight into economic interactions and assist materially in policy making. The accounts are used regularly in the Fed eral Reserve System and the information they supply is used by other policymaking groups as well. Con tinuing efforts are under way in the System to im prove the quality of information they provide. The accounts also have more general usefulness, and it is remarkable that they are not regularly employed by economic analysts in the private sector of the economy. Sumiye Oknbo Ml OTHER SECTORS, SOURCES AND USE OF FUNDS 1965-67 TOTALS ($ billions) SO U RCES Sector 1 Increase in Federal Obligation Held 2 N ature of Item in Colum n 3 3 Sources a s in Colum n 2 4 Increase in Liabilities 6.5 Net Disposable Source— Nonfin. 1,775.5 77.5 1,846.5 6.0 11.6 Current Surplus Current Surplus 227.0 7.4 126.4 97.4 359.4 93.2 4.0 162.9 158.2 2,005.9 464.2 2,457.3 9 Increase in O ther Financial Assets 10 Total 1. Households 2. 3. Businesses Banking 4. O ther 0.7 Total 12.8 - - 6 7 8 G N P Expenditures N onfinancial Uses, n. e. c. Increase in C ash on Hand Households Businesses Banking O ther 1,430.3 274.7 2.1 1.5 278.2 0.0 0.0 0.0 Total 1,708.6 278.2 USES 5. 6. 7. 8. Total N onfin. Sources of Funds Source: Federal Reserve Bulletin. 12 - 5 Total 3 + 4 - 6 + 7 + 8 98.4 2.0 4.0 1.1 54.5 64.1 82.3 141.7 1,861.4 336.8 88.4 144.3 101.5 342.6 2,430.9
@FedFRASER