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F E D E R A L R E S E R V E B A N K OF R I C H M O N D M A R C H 1963 INTEREST AND CREDIT IN BUSINESS EXPANSION M onetary and credit conditions in 1962 were in fluenced to some extent by cyclical factors. Y et the behavior of some important financial indicators last year differed rather m arkedly from their behavior in the comparable stages of other recent cyclical move ments. T his article traces the movement of several interest rate and banking series from the troughs of the three most recent recessions. The purpose is to compare their behavior over the course of the latest upsw ing w ith their movement in the two previous recovery and expansion periods. Frequent reference is made to the charts at the foot of each page. INTEREST RATES Interest rates generally rise in a period of business recovery as loan demand quickens w ith the tempo of business. This rather normal pat tern began to develop in the early months of the 1961 recovery but was modified significantly in 1962. This is im m ediately evident from the charts at the foot of this page. The horizontal axes of these three charts meas ure the number of months from the troughs of the three most recent recessions. Trough months were A ugust 1954, A pril 1958, and February 1961, respec tively. The vertical axes show the absolute change in yields from these recession troughs m easured in basis points. The vertical line constructed on the eleventh month m arks the beginning of 1962, and the solid line to the right of this vertical represents last y e a r’s experience. BILL YIELDS The movement of 90-day T reasury bill yields is showm in Chart I. These yields moved irregu larly upw ard in 1962, closing the year 23 basis points higher than at the beginning. T his movement represented a continuation of a gradual upw ard creep from the recession lowr in F ebruary 1961. Y et in the 22 months after that trough bill rates had risen less than 50 basis points in contrast w ith increases of over 150 basis points in 1954-56 and almost 300 basis points in 1958-60. One reason for this is that bill rates did not fall as far in the latest recession as in previous ones and consequently did not have as far to rise in the en suing upswing. The 1960-61 recession wras m ilder than earlier ones and m arket factors put less down w ard pressure on rates generally. M oreover, for balance of paym ents reasons, m onetary and debt management policy actively sought to alleviate down w ard pressure on bill yields. The failure of interest rates to fall as far in the last recession is only part of the explanation for the sm aller rise of short rates in the current upswing. E specially important has been the posture of mone tary policy, which has remained relatively easy in comparison with past periods of business expansion. In addition, the pace of the 1961-62 advance has been more moderate and loan demand has not been e x ceptionally strong. Consequently, it has not been necessary for commercial banks to liquidate T reasu ry bills to meet loan demand as in the earlier expansions. In fact, forces w orking towards lower bill yields have been so strong over much of 1961-62 that rates might w'ell have declined in 1962 had it not been for the persistent efforts of the m onetary authorities and debt m anagers. W henever feasible, the Federal R e serve has supplied reserves by open market purchases outside the bill area, while the T reasury has added significantly to the supply of bills outstanding. LONG-TERM G O VERN M EN T BOND YIELDS Y ields on long-term Government bonds, as shown in the second chart, have risen relatively little since the trough of the last recession in contrast to more sub stantial increases in previous expansion periods. The reasons are essentially the same as those explaining the sm aller rise in bill yields. Perhaps the most interesting part of Chart II is the portion showing the movement of long-term yields in 1962. In previous upswings, these yields continued to rise somewhat even after the eleventh month of recovery, but they declined in 1962. This can be explained in part by easy money policy and by relatively weak loan demand. The downward drift has also been due to the change in Regulation O in Ja n u ary 1962. T his change has had a pervasive effect on the capital m arkets and has been an im portant factor in inducing commercial banks to lengthen their portfolios in order to increase earnings. Bond prices rose and yields fell from Ja n u ary until early summer, when m arkets were influenced by a widespread discussion of the desirability of a new combination of easy fiscal and tight monetary policies as a solution to the dual problem of a sluggish do mestic economy and sticky balance of paym ents deficits. Through Ju ly and early A ugust, prices de clined and yields rose. Then, as prospects of an early tax cut faded, the m arket reverted to the previ ous trend, with rates declining for the rest of the year. TAX-EXEMPTS Changes in M oody’s A aa index of yields on State and local government tax-exem pt bonds are shown in Chart III. This chart points up the impact of the change in Regulation Q. Through the first ten months of the latest upsw ing the change in tax-exem pt yields paralleled quite closely the e x perience of the 1954-56 recovery. A surge of com mercial bank buying after December 1961, however, pushed these yields down steadily, and at the end of 1962 they were almost 25 basis points below their level at the preceding trough. BAN KIN G The money supply has not grown very much during most of this cyclical upswing, and some observers have taken this as evidence that m onetary and credit policy has been too tight in the current expansion. Closer attention to banking develop ments as a whole, and to the growth of total liquid assets and of bank credit in particular, could well lead to an opposite interpretation. Charts IV through X II are designed to provide a broader view of the results of changes in banking activity in the most recent business expansion. These charts differ from the earlier ones in that cum ulative percentage changes are shown on the vertical axes. TOTAL LIQUID ASSETS T his series is a composite of the following six liquid asset ty p e s : (1 ) the money supply adjusted to exclude deposits of m utual savings banks and savings and loan associations; (2 ) time deposits at commercial and m utual savings b an k s; (3 ) savings and loan sh ares; (4 ) U nited States Gov ernment securities m aturing within one y e a r ; (5 ) U nited States Government savings bonds; and (6 ) postal savings accounts. Chart IV reveals clearly that the public’s holdings of liquid assets, seasonally adjusted, have grown more rapidly than in previous expansions. Liquid assets ceased to increase rapidly in the previous up swings after the fifteenth month, but liquidity in the current cycle has continued to grow at a brisk pace to the present time. Much of this growth can be attributed to rapid growth in time deposits. A s evidenced by Chart V , time de posits in the past have shown a distinct contracvclical movement, rising rapidly in recessions and tapering off or declining in recovery. In the 1961-62 expan sion, however, these deposits continued to move up at a rapid rate. T heir growth reflects in part the Federal R eserve’s policy of continued monetary ease and in part the tardiness of the 1961-62 pickup in consumer spending. P rim arily, however, it has re sulted from the change in Regulation Q. T his is evident from the sharp break in the curve which oc curred in December 1961, when the change in R egu lation Q was announced. TIME DEPOSITS m onetary policy than the money supply. In the latest business expansion, bank credit has grown con siderably more than in previous upswings. From the trough of the 1961 recession through 22 months of expansion, it increased over 14% as compared with an increase of only 7°/c in the two preceding expan sions. In 1962 alone bank credit grew by $18 bil lion, or 9 c/o. Changes in the composition of bank credit in the latest upswing have also differed sig nificantly from those in earlier business expansions. The money supply is defined as adjusted demand deposits of commercial banks plus currency and coin outside the T reasury and com mercial banks. Chart V I indicates that the money supply has grown less rapidly throughout most of the latest business expansion than in the correspond ing periods of previous cycles. Following a sharp rise in late 1961, it remained virtually unchanged at about $145 billion until October 1962. Stability in this period resulted in part from the public’s shift ing of demand deposits to time deposit accounts and in part from a drain on private deposits as large U nited States Government deposits were accumu lated. Since late last year, however, the money sup ply has grown rapidly and has finally caught up with its growth in previous upswings. GOVERN M EN T SECURITIES Cum ulative changes in commercial bank holdings of U nited States Govern ment securities, seasonally adjusted, are shown in Chart V II. N orm ally banks begin liquidating Gov ernment securities in the early months of recovery in order to make loans which yield a higher return. In the latest upswing, however, little liquidation has taken place. T his is another evidence of continuing easy money policy and also an indication of the slug gish pace of the current business advance. Banks have had ample reserves and have been able to meet the modest loan demand without liquidating Govern ment securities to any appreciable extent. Although total holdings of Government issues have remained virtually unchanged since the fifth month of recovery, the composition of holdings has changed significantly. A s noted earlier, rapid time deposit growth induced portfolio lengthening. As a fraction of total investments, under-one-year issues and issues m aturing within five years have decreased, while holdings m aturing in over five years have increased. Tim e deposits are not the full equiv alent of demand deposits. Nevertheless, in periods when significant amounts of demand deposits are being converted to time deposits, changes in bank credit m ay be a better indicator of the posture of OTHER SECURITIES T his series consists prim arily of tax-exem pt State and local government bonds. Gen erally other securities form a rather stable fraction of total investments since m any State and local gov ernment bonds possess lim ited m arketability. A s M O N EY SUPPLY BANK CREDIT VII. U. S. GOVERNMENT SECURITIES (SEASONALLY ADJUSTED) Cumulative Percentage Change Ap Aug VIII. OTHER SECURITIES IX. GROSS LOANS (SEASONALLY ADJUSTED) (SEASONALLY ADJUSTED) Feb June Months After Trough Chart V III reveals, however, bank holdings of these issues have increased at a rem arkable rate over the past two years. From the trough of the recession through 22 months of upswing, banks expanded their holdings of these securities by 36% as compared with 5 r/o increases in each of the two previous expansion periods. About 22% of the increase in the latest expansion came in 1962. only 9% as compared with a 32% increase in 195456 and a 24% increase in 1958-60. F inally, real estate loans have not increased as rapidly in the current as in previous expansions. Despite a sharp rise after the revision in Regulation O, Chart X II shows that the percentage increase in these loans in the current expansion still lagged slightly behind increases in the previous upswings. LOANS Loans at commercial banks in the present cyclical expansion have lagged behind earlier e x perience. As shown in Chart IX , the behavior of total loans, seasonally adjusted, in the early months of the latest upswing paralleled the 1958-60 exp eri ence. They soon fell behind earlier expansion rates, however, and after 22 months of recovery loans at all commercial banks had risen only 16%, as compared with increases of 19% and 29% , respectively, in the two earlier upswings. Several factors account for the slower loan growth in the latest experience. In the first place, the latest business expansion has been more moderate and ex penditures for inventories and plant and equipment have increased more slowly. Moreover, corpora tions have lately enjoyed large cash flows and an easier availability of low-cost funds in the capital market. A s a result, business loans, as shown in Chart X, increased only 13% over the first 22 months of this recovery as against gains of 35% and 16%, respectively, in the preceding two cyclical expansions. In addition, the demand for consumer credit at commercial banks has been w eaker in this expansion than in the previous ones. A s shown in Chart X I, consumer loans actually declined during the first seven months after the February 1961 trough and were below the trough level for the first full year of recovery. A fter 22 months, these loans had grown M onetary policy remained basically easy in 1962. The degree of ease was considerably great er than in the comparable stage of earlier cyclical movements and this greater ease wras reflected in money and capital m arkets and in the behavior of im portant banking statistics. U ntil late 1962, growth of the money supply was slow, with the total increase since the latest cyclical trough lagging behind the in crease in the comparable period of earlier business recoveries. On the other hand, expansion in bank credit, commercial bank time deposits, and the pub lic’s holdings of liquid assets continued w7ell in ad vance of previous cyclical upswings. The composition of bank credit changed signifi cantly in 1962, with banks moving more heavily into investments, p articularly tax-exem pt securities, and into real estate loans. T his w7as attributable in part to a rapid increase in time deposits and in part to sluggish loan demand in other areas. Interest rate movements in 1962 displayed some notable departures from normal patterns. Y ields on m ortgages, tax-exem pts, corporates, and long- and interm ediate-term Governments declined, while mon ey m arket rates remained stable or rose slightly. This divergent movement of long and short yields resulted prim arily from a record inflow of savings into finan cial institutions, including time deposits at commer cial banks, and from upw ard pressure on short rates exerted by the Federal Reserve and the T reasury. X. BUSINESS LOANS (SEASONALLY ADJUSTED) Cumulative Percentage Change +•35 SUM M ARY XI. CONSUMER LOANS XII. REAL ESTATE LOANS (SEASONALLY ADJUSTED) (SEASONALLY ADJUSTED) WHO H O L D S T H E NATION|_ 0& 6 The relative im portance of classes of Federal G ov ernm ent creditors has undergone some interesting changes in the past dozen years. The acco m pan y ing chart shows the growth of the national debt from the end of fiscal 1950 to the end of fiscal 1962, with each bar divided to indicate the am ount held by principal lender classes. The numbers within each division show the percentage of the national debt w hich that division represents. $ Billion 300 The proportion held by several classes of Federal Governm ent creditors declined over the period. Com m ercial banks, for exam ple, liquidated G o v ernment securities through most of the 1950's in order to m ake higher yielding loans. Since 1960, how ever, the proportional im portance of bank hold 21 .8% 19.3% 250 ings of Governm ent debt has increased som ew hat, reflecting relatively easy m onetary policy and the 23.1% 9.2% absence of strong loan dem and. cam e in 1961. 9.9% A ll this increase The proportion held by insurance com panies and 200 mutual savings banks declined steadily after 1950 8 . 6% as these institutions moved more heavily into real estate loans. The share held by in dividu als also 19.3% declined, due in part to shifts out of saving s bonds and other Governm ent securities into stocks and higher yielding bonds. 18.9% 18.4% 150 By I ■4 sS I#K ■ .1 8% 100 contrast, several lender groups increased their proportional holdings. Federal Reserve Sys tem holdings grew steadily, from $18.3 billion or 7.1% of the total in 1950 to $29 .7 billion or 9.9% at the end of fiscal 1962. Foreign and internation 23.7% ■ ......... 50 al investors also becam e increasingly important holders of Federal debt through the investment of large quantities of liquid funds acquired as a result of persisting deficits in the United States balance of paym ents. The growing relative im portance of United States Governm ent investment accounts reflects chiefly the expansion of Social Security and Civil Service pen sion funds up to 1957. State and local governm ents have become relatively larger holders of Federal debt chiefly as a result of two developm ents. In the first place, they have them selves raised large volum es of borrowed funds to finance capital im 1955 1950 Com m ercial □ I |____ I Federal Reserve Banks U. S. Govt. Investment Accounts Individuals provements and other outlays and have invested 1960 Insurance Com panies Mutual Savings Banks 1962 the proceeds in short-term Governm ent securities pending _ H C ° rp0rIi I State and Local Governm ents Foreign and International Other their use. M oreover, rapid ly growing State and local trust funds have been h eavy buyers of G overnm ent issues. THE INTERNATIONAL MONETARY FUND Among the crucial institutional props of the present international paym ents system is the International M onetary Fund, a cooperative financial venture in which more than 80 nations participate. Born in 1944 prim arily of the m onetary chaos that followed the breakdown of the gold standard in the early 1930’s, the Fund has emerged in the postwar years as an important key to the successful functioning of the modern substitute for the old gold standard—the gold exchange standard. The International M onetary Fund is committed to the goals of expanding the volume of world trade and thus the domestic prosperity of member countries. Its vast resources of gold, national currencies, and borrowing rights in member countries, and its m a chinery for consulting with countries and collaborat ing with other international organizations are directed toward these ends. B y providing needed support to distressed currencies, by actively w orking for realistic and stable exchange rates, and by seeking to elim i nate restrictions on payments among countries, it has contributed to a grow ing volume of world trade and prosperity. HISTORICAL BACKG RO U N D After the gold stand ard broke down in the early 1930’s, chaos developed in the system of international payments. In an effort to restore domestic prosperity, to insulate themselves from foreign economic disturbances, and to maintain balance in their international accounts in the face of drastic m onetary changes, countries adopted num er ous controls and devices designed to allow m anipula tion of paym ents to and from foreigners. These measures seriously disrupted the flow of international trade and investment and, on balance, probably ham pered recovery from the Great Depression. Sentiment for an institution like the International M onetary Fund represented in large measure a re action against nationalistic fetters on foreign com merce. The Fund and its sister institution, the In ternational Bank for Reconstruction and Develop ment, were established at the United Nation’s Mone tary and Financial Conference held at Bretton W oods, New Ham pshire, in Ju ly 1944, as a founda tion on which international cooperation in the field of economic and monetary policy could be built in the postwar period. 8 The specific objectives spelled out in the F und’s A rticles of A greem ent reflect the conviction that the monetary nationalism of the 1930’s could only diminish, over the long run, the level of world prosperity. Among these objectives are the elim ination of exchange controls and of such practices as competitive exchange rate depreciation, the achievement of stable exchange rates, and the restoration of m ultilateralism in international p ay ments among the important trading countries. Although these objectives have not been fully achieved, important progress has been made, especial ly over the past five years. A gainst a background of stepped-up international m onetary cooperation, wTorld trade has expanded, and relatively high levels of employment have been maintained. W hile m any exchange rates have been altered, sometimes w ith out the Fund’s approval, widespread rate m anipula tion as an instrument of trade policy has been sub stantially elim inated. M any countries continue to m aintain some controls over capital movements, and some countries even continue to lim it current tran s actions in goods and services. But since 1958, especially among the more important trading nations, giant strides have been taken toward greater freedom in both trade and foreign payments. Financial a s sistance to countries having balance of paym ents problems has perm itted this to be achieved with measures less severe and more gradual than would have been necessary otherwise. The Fund has not been solely responsible for this progress but its con tribution has been significant. SPECIFIC O B JECTIVES O RG A N IZA TIO N The Fund has a membership of more than 80 nations, each represented on its policy m aking Board of Governors. The Fund’s basic pow ers are vested in the Board. Among them are the power to adm it new' members, the authority to re quire members to w ithdraw , the right to approve changes in quotas, and the authority to perm it uni form changes in the par values of currencies of all member countries. V oting rights of member countries are roughly proportional to their contributions to the F und’s capital. Contributions in turn are related to various factors including the size of national income and foreign trade of members. Sm all nations are slight ly favored in voting rights since each nation has a minimum number of votes plus an addition propor tional to its quota. Thus the relative voting strength of large countries diminishes as new sm all members are added. The Fund’s Executive Directors, partly appointed by the five important member countries having the largest quotas and p artly elected by the rem aining countries, are responsible for day-to-day operations. They select a M anaging Director who conducts the ordinary business of the Fund with the help of some 500 employees drawn from more than 50 nations. RESOURCES The Fund has at its disposal the equivalent of more than $20 billion for loans to sup port currencies under stress in foreign exchange markets. These resources are made up of $3.2 bil lion of gold and $11.2 billion of national currencies subscribed by member countries, plus $6 billion of borrowing rights recently made available by 10 m ajor industrial nations. Some of the Fund’s gold has been invested in short-term United States Govern ment securities and most of the national currency holdings is in the form of nonnegotiable, noninterestbearing demand obligations, payable at face value by members in their currencies. QUOTAS On admission, each member is assigned a quota, which represents that country’s contribution to the Fund. Quotas originally were calculated from a formula based on such factors as the size of national income and foreign trade of member countries, but today they are negotiated. Quotas of large, w ealthy countries and countries that engage extensively in foreign trade are much greater than those of sm aller nations having little external commerce. The quota of the U nited States, for example, is $4,125 million, while the quotas of Laos and Nepal are only $7.5 million each. Quotas are broken down into gold and currency subscriptions. The total subscription of a country equals its quota. N orm ally, a country pays 25% of its quota in gold and 75% in its national currency. But the m onetary gold stock was so poorly distributed when the Fund was established that gold subscrip tions then were set at the lesser of either 25% of • quotas or 10% of net official holdings of gold and United States dollars. Since 1948 gold and cur rency subscriptions of new members have been set by the Board of Governors as fixed amounts or as fixed proportions of official reserves. About 21% of the quotas have been paid in gold, and about 74% have been paid in currencies. Some $762.5 million, roughly 5% of total quotas, has not yet been paid. The composition of the F und’s resources is shown in the accompanying table. BORROW ING AUTHORITY In recent years the movement toward greater freedom in m aking inter national paym ents has stim ulated international trade and investment and has led to the accumulation of large international balances that are subject to shifts among countries. Such shifts can place great strains on the international paym ents system and m any ob servers felt that larger Fund resources were needed to meet this new situation. A ccordingly, by w ay of supplementing the $14.4 billion of paid-in subscrip tions, the Fund obtained authority last year to bor row' up to $6 billion equivalent from 10 leading in dustrial nations: Belgium , Canada, France, W est Germany, Italy, Japan, the Netherlands, Sweden, the U nited Kingdom, and the U nited States. T his new borrowing authority becomes operative on agree ment between the Fund and the countries concerned that supplem entary resources are needed to prevent disruption of the international paym ents system. ACTIVITIES The Fund engages in a variety of ac tivities. In addition to its program s of financial as sistance to member countries, it conducts regular con sultations with member countries, collaborates with international organizations on international monetary problems, undertakes economic and m onetary re search, conducts training program s for qualified per sons from member countries, and publishes m any periodic and special publications. E xtending financial assistance to members is, of course, the F und’s most important activity. Loans and stand-by credits are made available to member countries which experience or anticipate balance of IN TERN A TIO N A L M O N ETARY FUND RESO U RCES Novem ber 30, 1962 Subscription Member Quota Gold Currency $ Million $ Million $ Million United States 4,125.0 1,031.2 3,093.8 United Kingdom 1,950.0 398.8 1,551.2 France 787.5 173.7 613.8 Germ any 787.5 147.4 640.1 India 600.0 77.5 522.5 Canada 550.0 137.5 412.5 Ja p a n 500.0 125.0 375.0 Netherlands 412.5 103.1 309.4 A u stralia 400.0 58.4 341.6 Belgium 337.5 84.4 253.1 Other 4,738.7 881.8 3,094.4 Total 15,188.7 3,218.8 11,207.4 Source: International M onetary Fund. 9 paym ents deficits resulting in pressure on the value of their currencies in foreign exchange m arkets. In this sense the Fund is a prop for distressed curren cies. Through use of the Fund’s resources, coun tries supplement their own reserves of gold and for eign exchange. They are thereby afforded additional time to solve their balance of paym ents problems without resorting to measures which m ilitate against international prosperity. Loans are usually referred to as “draw ings.” B roadly speaking, a member may borrow up to twice the amount of its quota. A country seeking a loan buys one or several currencies from the Fund, p ay ing the equivalent value in its own currency. The U nited Kingdom, for exam ple, when borrowing from the Fund might receive U nited States dollars, Ger man m arks, and French francs and pay to the Fund an equivalent value in pounds at the same time. Loans must be repaid within three to five years. Repaym ent takes the form of a repurchase of the bor rowing country’s currency with either gold or any one of 20-odd convertible currencies. It is not nec essary to repay the loan in the same currencies which were o rigin ally borrowed. A member which has agreed to an initial par value of its currency unit and has paid its subscription m ay borrow almost autom atically an amount equal to its quota minus the F und’s holdings of its currency. A request by a member for an additional 25% of its subscription is also likely to be viewed favorably by the Fund, provided the member is m aking reasonable efforts to solve the problems which make the borrow ing necessary. But requests which carry the Fund’s E X C H A N G E TR A N SA C TIO N S Through N ovem ber 30, 1962 Total Member D raw ings $ Million United K in g d o m ............................................................2,361.5 I n d i a ................................................................................ 575.0 F r a n c e ................................................................................ 518.8 B r a z i l ................................................................................ 368.4 A r g e n t in a ......................................................................... 327.5 C a n a d a ......................................................................... 300.0 Ja p a n ......................................................................... 249.0 A u s t r a l i a ......................................................................... 225.0 I n d o n e s i a ......................................................................... 152.5 United A ra b R e p u b l i c ............................................... 145.2 N e t h e r l a n d s .................................................................. 144.1 C h i l e ................................................................................ 139.7 O t h e r ................................................................................ 1,239.1 T o t a l ................................................................................ 6,745.8 Source: International M onetary Fund. 10 holdings of that member’s currency beyond 125% of its subscription require substantial justification. T hey are likely to be favorably received, however, when accompanied by a program of monetary and fiscal policies aimed at establishing and m aintaining a realistic exchange rate. The Fund m ay also waive the 200% of quota lim itation on drawings. W hile the Fund has total resources of over $20 billion, this amount does not represent the m axim um volume of loans that can be outstanding at an y one time. Loans are made only to countries suffering balance of payments deficits, and all countries can not sim ultaneously have deficits. A deficit in one country implies a surplus in some other country or countries. A s a rule, probably no more than onehalf of the total resources could be outstanding in loans at one time. Since beginning operations in 1946, the Fund has made total advances of $6,745.8 million. A t present $1,611 million in loans is out standing, most past drawings having been repaid. In recent years member countries have come to depend more on stand-by a r rangements than on actual drawings. Most draw ings today, in fact, are made against such arran ge ments, wrhich resemble line-of-credit agreements at commercial banks. Members enter into agreem ents with the Fund under which drawings m ay be made up to specified lim its and within agreed periods. The member must observe the conditions of the agree ment, however, to be eligible to make drawings. The Fund insists, for example, that borrowing countries adopt sound exchange, monetary and fiscal policies. Stand-by arrangem ents made since their inception in 1952 amount to $5,517 million, but only $1,565 million has been drawn against them. M ost of the agreements have expired or have been cancelled. A t present, about $1,500 million is available under stand by arrangem ents. STAND-BY AGREEM ENTS Another important activity of the Fund is its program of frequent consultations with member countries. Members which m aintain ex change restrictions on payments for current transac tions are required to consult annually with the Fund. A t these meetings efforts are made to assist members in progress toward elimination of m ultiple exchange rate systems and liberalization of exchange controls. W hile m any countries continue to rely upon m ultiple currency practices and more or less stringent ex change controls, the trend seems clearly to be in the direction of greater freedom in exchange markets. Inflationary domestic policies have been an important cause of the failure of m any countries to free inter national payments. CONSULTATION THE FIFTH DISTRICT Changes in m anufacturing employment reflect op posing forces, both of which are aspects of economic growth. Factory jobs tend to increase to meet the grow ing demand for goods as population grows and living standards rise. Technology’s steady improve ment of method and machine has the opposite effect. Over relatively short periods these trends m ay be obscured by more abrupt movements associated with business cycles. But over longer periods factory em ployment w ill tend to rise if demand increases faster than productivity and w ill fall if the reverse occurs. FACTO RY JO BS: DISTRICT UP, NATION DOW N D ur ing the past decade m anufacturing employment has continued to rise in the Fifth D istrict even though the national trend has been slightly downward. In 1953 the number of jobs in D istrict factories returned to the W orld W ar II high, 1,353,000. The figure fell below this level again in 1954 and 1955 but moved to new highs in 1956, 1959, 1960, and in 1962 when it reached 1,466,000. For the nation as a whole, private m anufacturing employment crested at 17.6 million 20 years ago in response to the stern demands of w ar. Thereafter the figure declined to a postwar low of 14.4 million in 1949, recovered in 1950, and has fluctuated since 1951 between a high of 17.5 million in 1953 and a low of 15.9 million in 1958. B y 1962 it was back up to 16.7 million. In general, the country appears to have been in a period of transition during which the effects of rapid prog ress in m anufacturing technology caught up w ith and began to outdistance the impact of grow ing demand for manufactured goods. combinations of human and mechanical resources to get more output per unit of input. Between 1954 and 1961 factory man-hours changed little, purchases of electrical energy representing m a chine utilization rose sharply, and value added by m anufacture, adjusted for price changes in order to approxim ate physical output, followed a risin g path about halfw ay between them. The chart on this page shows these trends through 1960 (1961 data were not available in time to be included) for the Fifth D istrict and the nation with all data converted to percentages of 1954 levels. D istrict man-hours and value added paralleled national figures from 1954 through 1957, wdiile D istrict power use lagged. After 1957, however, the D istrict overtook and passed the nation in growth of power utilization, moved sig nificantly ahead in man-hours, and m arkedly ahead in value added. E lectric power has steadily replaced manpower in the processes of production. In the D istrict the typical m anufacturer increased his use of electricity from 7.3 kilowatt-hours for each production worker man-hour in 1954 to 11.0 in 1960 and 11.7 in 1961. The figures were a little higher for the nation—7.7 in 1954, 12.1 in 1960, and 12.8 in 1961. In the PRODUCTIVITY RISING W hen large, diverse groups of people pool their resources of capital, labor, m an agement skill, technical and scientific knowledge, and market insights to produce and sell, they create an organism of great com plexity. Changes in any of its productive factors or in any pertinent aspect of its m arket w ill change its mode of operation. The purpose alw ays is to offer the customer the best product at the lowest price. No sum m ary treatm ent of these relationships can adequately explain or even describe them. But comprehensive statistics that are readily available can shed some light on the w ay in which manufacturers in general are shifting their 11 productive with respect to labor. T his industry achieved a level of $9.66 for price-adjusted value added per man-hour in 1954 and raised this figure to $16.00 by 1961. Tobacco m anufacturers, second in productivity, raised value added per m an-hour from $6.57 in 1954 to $11.45 in 1961. O ther im portant D istrict industries listed in order of declining productivity per man-hour are : foods; transportation equipm ent; prim ary m e tals; m ach in ery; p a p e r; stone, clay, and g la s s ; fabricated m e tals; fu rn itu re ; lu m b er; te x tile s; and apparel. The textile business, near the bottom of the list according to value added per man-hour, w as high in rate of improvement. W hen emphasis centers on rates of increase in efficiency w ith respect to labor, tobacco and chemicals change places at the head of the list, and textiles rank third. The tobacco indus try raised price-adjusted value added per man-hour three-fourths between 1954 and 1961. Comparable increases amounted to two-thirds in chemicals and one-half in textiles. Other industries ranked as fol lows : foods; transportation equipm ent; a p p a re l; stone, clay, and g la s s ; lu m b er; p ap e r; prim ary m et als ; fu rn itu re; m ach in ery; and fabricated metals. EFFICIEN CY RATINGS RISE process, as the chart above shows, productivity with respect to labor advanced sharply. Price-adjusted value added per man-hour rose 35%> between 1954 and 1961 in the D istrict and 33% in the nation as a whole. Physical productivity with respect to electric power declined, of course, as shown by the lower lines. But between 1954 and 1961 the price of fac tory labor rose about 30% while the price of indus trial power dropped nearly 5% . In only seven years manufacturers as a group have improved methods and equipment sufficiently to in crease output per unit of labor one-third. Since this is a national average, m any have raised productivity at a substantially faster rate. The fact that pro ductivity rose more rapidly locally than nationally suggests that the District has a good share of the more progressive industries. PRODUCTIVITY RATES Some m ajor industries that have achieved large gains in productivity are wrell represented in the Fifth District. Since rates and ratios can confuse as easily as clarify, it is helpful to make pertinent comparisons first and then look at the num erical values involved. Industries differ in productivity. Some create high value per man-hour, some low, the differences reflecting competitive conditions, internal technology, and many other factors. Industries also differ with respect to rates at which they are able to raise pro ductivity. A n industry with lowr productivity m ay showr the biggest gain in a given span of time. Of the nation’s m ajor industries with impor tance in the D istrict, chemical plants were the most 12 The ranking of D is trict industries shifts again when the rate of increase in purchases of electric power is the criterion. H ere the striking fact is that chemicals rem ain at the top, but tobacco products and textiles drop to the middle and the bottom of the range. Between 1954 and 1961 chemical plants raised purchases of electric energy 98% . The apparel industry occupied second place with a 95% gain. Most industries raised power purchases between 40% and 60% . The figure for tobacco products w as 56% , for textiles 23% . M anufacturing as a whole raised price-adjusted value added per man-hour one-third while increasing purchases of electric power three-fifths. T extiles in creased value added per man-hour one-half while power purchased rose less than one-fourth. F ab ri cated metals provide a sharp contrast w ith a 40% gain in power purchased accompanied by a mere 9% rise in value added per man-hour. The rapid changes that have occurred within industries and the wide variations that exist between the various industry groups provide convincing evidence of the dynam ic nature of the nation’s m anufacturing enterprise. VARIA TIO N S IN POW ER USE PH O TO CREDIT Cover—M arcellus W right & Son, Architects.
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