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FEDERAL RESERVE BANK OF RICHMOND MONTHLY REVIEW Regional Interest Rate Differentials Consumer Credit Commercial Paper Since 1966 The Fifth D istrict MARCH 1969 Regional Interest Rate Differentials A t one time the cost of borrow ed m oney differed Demands for credit, on the other hand, were often substantially, often dramatically, from one section of the country to another. In 1857, fo r exam ple, the strong as the return on invested capital was likely to be great. In such cases, businessmen and indi viduals were willing to pay high rates o f interest. City of L os A ngeles sold 20-year public im prove ment bonds which paid 12% a year. T he average yield on N ew England municipal bonds that year was only 4 .8 1 % . In 1860, savings banks in Cali fornia were reportedly paying 15% interest to their depositors. A t the same time the B ow ery Savings Bank of N ew Y o rk paid only 5 % / W h ile a number of factors were responsible for such large differentials, the m ost im portant was the vast expanse o f the country with its p oor com m unica tion and transportation facilities. This im peded the flow of money from one section of the country to another, and as a result, interest rates tended to re flect local supply and demand conditions. In the sparsely settled areas o f the South and W est, the relative scarcity o f loanable funds reflected under developed local credit markets and limited access to the m oney markets of E urope and the East Coast. 1These exam ples are taken fro m : Sidney Homer, A H istory o f In terest K ates (N ew B runsw ick: R utgers U niversity Press, 1963). $5,500 at 6 0 % annual interest.” That same year “ Jose Sepulveda ow ed $7,000 at rates varying be tween 4 8 % and 8 4 % a year. . . . In 1879, a M o n tana banker pointed out that ‘ 18% was the lowest rate know n in M ontana.’ ” Since that era, steady im provem ents in com m unica tion and transportation facilities have made it p os sible for borrow ers Board of G o vernors of the Federal Reserve System. in areas o f unusually strong credit demand to tap distant sources o f funds. Simultaneously, lenders in low interest rate areas have becom e able to shift their funds to sections where yields are higher. T his arbitraging has grad ually narrow ed sectional differentials. W o rk in g toward the same end was the develop ment of essentially uniform banking and other fi nancial facilities throughout the country, with e f fective interlinkage am ong the several sections p r o BANK RATES ON SHORT-TERM BUSINESS LOANS OF $200,0 00 AND OVER per Cent Source: Sidney H om er writes that “ In 1854, J. R . Y arba m ortgaged 17,000 acres in southern California for Per Cent vided through correspondent banking and a variety of financial agency services. T his trend was a c celerated by the establishment o f the Federal R e serve System in 1914. The 1920’s and 1930’s B y the early 1920’s re gional interest rate differentials had been markedly reduced. M arkets In his book, M o n ey R ates and M o n ey in the United S tates, W in field Riefler calculated for fou r geographic regions average in terest rates charged by member banks in cities under 15,000 on custom ers’ paper rediscounted with the Federal Reserve Banks. H e found average interest rates of 6 .0 0 % in the East, 7.4 5 % in the M iddle W est, 8 .2 5 % in the South, and 8 .4 9 % in the Far W est. W h ile these spreads are substantial com pared to today’s markets, they were far smaller than the differentials of the 19th century. the loan classifications fo r the period 1948-1966 appear in the chart. T he series was revised again in 1967 to im prove the hom ogeneity of the loans reported so as to isolate m ore effectively the impact of region on the interest rate averages. T o this end, the number o f loan-size classifications was increased from fou r to five, busi ness instalment loans and loans to foreign businesses were excluded, and revolving credits were reported separately. In addition, the number of financial centers reporting was increased from 19 to 35 and the number o f respondent banks raised from 66 to 126. Business Loan Rates in N ew York P erh a p s the m ost obvious fact which emerges from an exam ina tion of regional differences is the systematic tendency for interest rates to be low er in N ew Y o rk than elsewhere. T his should not be surprising since A dditional regional inform ation is provided in the Federal R eserve’s series on rates charged on cu s tomer loans. T his series, begun in 1919, originally N ew Y o rk is the financial center of the country and o f the w orld. T he apparatus fo r transferring funds from lenders to borrow ers is m ore highly developed included both com m ercial loans and time and demand loans on securities. F or the period 1919 to 1928 there than any place on the globe. it shows average rates of 5.2 4 % in N ew Y ork , 5.6 0 % in other selected cities in the N orth and East, and 6 .1 0 % in selected cities in the South and W est. T he spreads are considerably smaller than those in dicated in R iefler’s study. B eginning in 1928, the Federal Reserve regional interest rate series was revised to include only short term com m ercial and industrial loans and the num ber of reporting centers was standardized at 19. Business b o r rowers have access to many bank and nonbank fi nancial institutions, and large corporate borrow ers, in addition to the financial institutions, can tap the bond market, the com m ercial paper market, or borrow from abroad or directly from other non- financial corporations. Strong com petition and the existence of a number of sophisticated traders w ho arbitrage across various markets and various ma turities within markets tend to keep bank rates at the low er end o f the regional scale. the N orth and East, and 4 .4 5 % in the South and A s the chart indicates, from 1948 through 1966 rates on loans of $200,000 and over w ere generally lowest in N ew Y o r k and highest in the South and W est. These spreads are greater than those shown for the 1919-1928 period, due in part perhaps to W est. T his was also true in the other three smaller loan classifications with only m inor exceptions. F or statistical differences in the series, but m ore im portantly to the disruption of financial markets o c casioned by the Great Depression. T he revised series shows a steady narrow ing o f the spreads after 1939 when business conditions began to im prove. F o r the period 1940-1947, the average spread between the the period as a whole, average interest rates by size class o f loan are shown in Table I. This revised series shows average rates during the period 1928-1939 of 3 .1 7 % in N ew Y ork , 4 .0 0 % in highest and lowest rates was only 66 basis points, roughly half that of the preceding period. ( A basis point is one-hundredth o f one per cent.) Differences in the T w o Series A c o m p a ris o n o f Tables I and II suggests that regional variations may have been obscured in the statistics prior to the 1967 revision. F or one thing, the regional dif ferentials in the revised series are generally som e what larger. A lso, according to the new series, in terest rates on large loans are slightly low er in N ew Rates on Business Loans in the Postwar Period Y o r k than in the Southeast, but on smaller loans P rior to 1948, it was im possible to tell the extent this situation is reversed. to which observed regional differences in interest between the tw o regions are surprisingly small. rates were due to location or simply to regional d if ferences in the distribution of loans by size. A c A ctually the differences A striking feature of the tw o series is the sharp change in rate levels in cities o f the N orth and East cordingly, in 1948 the series on business loans was relative to other areas. revised to break out data on fou r loan-size classifica data these rates w ere constantly below those in the tions, as well as by region. South and W est, in the revised series this order Data on the largest of W hereas in the pre-1967 3 is sharply reversed. Part o f the seeming incon sistency between the tw o series may be due to fairly m ajor changes in the statistical com position of the newer series. T he p o st-1967 data show a marked tendency for regional differences in interest rates to diminish as the loan size increases. A s can be seen from Table II, differences between highest and lowest Table (1948 revision of series) N ew York City Size C lass $1,000 to 10,000 5.12 regional rates narrowed from 73 basis points for loans in the smallest size class to 38 basis points for $10,000 to 100,000 4.47 loans in the largest size class. $100,000 to 200,000 This is to be expected as firms borrow in g large amounts are generally not limited to the local market but are in a position to $200,000 and over All size classes com bined Movement of Rates over Tim e Note: Source: ments follow a marked cyclical pattern which is discernible in every region and for every size class of loan. Because o f the co n c e n tr a tio n of money and ca p ita l N ew m ark et Y ork , machinery rate m ove South and W est (.26) 5.47 (.35) 4.86 (.39) 4.94 (.47) 4.27 4.44 (.17) 4.56 (.29) *. v * 3.85 4.05 (.20) 4.25 (.40) 3.98 4.21 (.23) 4.52 (.54) Board of G o vernors of the Federal Reserve System . together. — — 5.38 Figures in parentheses show spreads over N ew York rates. an exam ination of the chart that bank rates in all sections of the country tend to Generally speaking, rate m ove North and East • shop around for the m ost attractive terms. It is clea r from I Interest Rates on Short-Term Business Loans A v e ra g e for 2nd Q u arte r through 4th Q u arte r 1966 By Size C la ss of Loan — T Li II Table II ■ Interest Rates on Short-Term Business Loans A vera g e for 1st Q u arte r 1967 through 2nd Q u arte r 1968 By Size C la ss o f Loan (1967 revision of series) in movements there might be expected to lead rate movements in other regions. Size C lass quarterly data reveals no syste matic tendency for this to o c South w est North C entral W est Coast 9,999 6.58 6 .55* 6.72 6.84 7.28 99,999 6.49 6.37* 6.52 6.68 6.96 6.90* .53 100,000 to 499,999 6.17 6.14* 6.30 6.42 6.52 6.68 .54 500,000 to 999,999 1,000 to $ 1,000,000 and over cur. If rates in N ew Y o r k do in fact respond first to changes in m onetary and credit con d i South east Spread Between N orth Lowest and east Highest ' 6.77* .73 10,000 to $ But close exam ination o f the N ew York City All size classes combined 5.96 5.97 6.17 6.18 6.21 6.41 .45 5.86 5.89 6.11 6.02* 5.98* 6.24 .38 5.94 6.11 6.26 6.18* 6.24* 6.54 .60 *Figure is out of order from low est to highest a s one reads from left to right. tions, the lead time is ap Source: Board of G o vernors of the Federal Reserve System . parently less than a quarter. There are, however, slight with market instruments and with the banks in differences am ong regions in the amplitude o f cyclical N ew Y o rk . Consequently, rate changes on large fluctuations in bank rates on business loans. A lm ost loans in one section o f the country tend to spread invariably changes in N ew Y o rk are greater than elsewhere, both during dow nsw ings and upswings. T he evidence using data from the 1948 revision is presented in Table III. T he changes in the table were com puted using the specific turning points of the respective series. Data since the 1967 revision, which cover a single period of rising rates— from roughly m id-1967 to m id-1968— confirm the co n clusion of greater cyclical volatility of rates in N ew Y ork . Table II I also suggests that rates are more cyclically volatile the larger the size o f loan, re across the land. M ortgage Rates U n til a fe w y ea rs a g o w h en the Federal H om e L oan Bank B oard began to collect regional m ortgage rate data on a systematic basis, such inform ation was scattered and fragmentary. Consequently, valid historical com parisons are d if ficult. T h e chart shows the effective rate on c o n ventional first m ortgages by m ajor geographic region. T he effective rate consists o f the contract rate of interest plus initial fees and charges. W h ile the T his is to be expected since regions on the chart are labeled the same as for the market for large loans tends to be nationwide. short-term business loans in the 1967 revision, they Bankers throughout the country must com pete both are not com posed of precisely the same financial gardless of location. 4 Table III C yclical C hang es in Bank Rates M easured in Basis Points (1948 revision of series) From Peak to Trough New York City Size C lass of Loan $ 1,000 10,000 100,000 200,000 to $ 10,000 to 100,000 to 200,000 and over North and East South and W est 19531954 19571958 19601961 19531954 19571958 19601961 1953 1954 19571958 19601961 -1 5 -1 3 -2 5 -2 7 -3 6 -5 2 -8 1 -8 8 -2 3 -3 1 -4 2 -51 — 11 -1 6 -1 9 -3 0 -2 1 -4 8 -6 3 -7 5 -1 4 —32 -3 7 —49 -1 2 -1 2 -1 8 -3 2 -2 0 -3 2 -4 8 -6 4 -21 -2 3 -3 6 -4 2 From Trough to Peak New York City Size C la ss of Loan $ 1,000 10,000 100,000 200,000 Source: to $ 10,000 to 100,000 to 200,000 and over North and East South and W est 19501953 19541957 19581960 1961 1966 19501953 19541957 19581960 19611966 19501953 1954 1957 19581960 19611966 96 105 115 127 88 110 140 149 64 92 129 138 101 124 140 148 52 86 115 135 72 104 124 141 47 92 113 131 85 136 145 150 46 75 97 130 75 97 114 133 59 85 107 118 100 112 124 130 Board of G o vernors of the Federal Reserve System . centers. EFFECTIVE RATES ON CO N VEN TIO N A L FIRST M O R TG A G ES ON NEW HOMES Per Cent These differences limit the com parability o f the mortgage series with the business loan series. T he chart shows m ortgage rates to be lowest in N ew Y o rk City and the Northeast and highest in the W est and Southwest. T his order is considerably different from that fo r short-term business loans. Part o f the explanation may lie in the existence of significant regional differences in the nonprice terms o f m ortgage contracts. Other data indicate that non price terms tend to be m ost liberal in those areas with the highest interest rates. Thus, if the cost element implicit in the nonprice terms were included in some sort o f weighted average cost o f m ortgage credit, the regional ordering o f this weighted cost might be different from that o f average effective rates. W ith respect to timing o f m ortgage rate changes, the series for the various regions m ove closely to gether, with m ajor turning points in the respective series coinciding almost exactly. T his suggests some geographic mobility o f m ortgage m oney but, m ore importantly, it reflects the dependence of the m ort gage market on general credit conditions. C o n c lu sio n Im p ro v e m e n ts in co m m u n ica tio n s have tied the cou ntry’s credit markets together so that changes in one sector o f the market or section of the country tend to be transmitted fairly prom ptly to other sectors and sections. But despite the ease with which funds flow geographically, regional in terest rate differentials have not been entirely elim i nated. Source: Federal Home Loan Bank Board. T his is evident even on the basis o f data which have been averaged over large geographic areas. Jimmie R. M onhollon 5 Consumer Credit Consum er credit outstanding has grow n rapidly There are tw o basic divisions in consum er credit, since W o rld W a r II, expanding from about $8.4 billion in 1946 to about $102.1 billion in 1967. E x em plifying the dramatic grow th and im portance of instalment and noninstalment. Noninstalment credit includes all consum er credit scheduled to be repaid in a lump sum, such as, single-payment loans, charge such credit, instalment credit, which has accounted for the bulk of consum er credit since W o r ld W a r II, accounts, and service credit. Instalment credit, which currently makes up about 8 0 % o f consum er financed 17% of consum er purchases in 1967 as com pared to 6 % in 1946. Thus, consum er credit credit outstanding, covers all credit that is scheduled to be repaid in tw o or m ore payments. T his cate g ory includes revolving credit and budget and coupon is not only an im portant indicator of econom ic ac tivity but also a measure of demands being placed on credit markets. O ver the years consum er credit has played a significant part in the grow th o f the accounts. Its fou r classifications are autom obile paper, other g ood s paper, hom e repair and m o d market for consum er durable goods although m ore ernization loans, and personal loans. The rate of grow th of consum er credit outstanding recently it has increasingly financed purchases of tends to be greater in periods of rapid business e x nondurables and services as well. pansion and slower during slow dow ns or declines in business activity. T h e grow th o f consum er credit is Consum er credit includes short- and intermediateterm credit extended to individuals through co m mercial banks, sales finance companies, retail outlets, and other financial institutions such as credit unions and consum er finance companies. It does not in clude real estate m ortgages and insurance policy loans. determined by the amount o f extensions o f new credit and repayments of outstanding credit. T ypically, the greater the rate of increase in the econom y the m ore rapidly new credit is extended. Repaym ents are governed prim arily by past extensions although current econom ic conditions may be reflected in d e linquencies or prepayments. T ypically, as extensions increase in a period of business expansion repay ments do also but at a slow er rate. In a business slow dow n both extensions and repayments fall off, but the decline in repayments is less pronounced. In the past tw o years consum er credit outstanding has grow n at an average annual rate o f 7 .5 % . This grow th rate closely parallels that o f G N P ( 7 . 5 % ) , personal disposable incom e ( 7 .1 % ) and consum er spending ( 7 . 4 % ) . A closer look at the tw o year period conform s to the typical pattern, although exceptions have occurred. T he first half of 1967 found the econom y in what has been called a “ m ini-” recession. G N P grew at a greatly reduced rate. G row th in personal incom e slackened and consum er spending, which had been slow in 1966 remained weak. Instalment credit had likewise grow n rather slow ly in 1966 when credit markets had been tight. In 1967 consum er credit grew even m ore slow ly though credit was readily available. A lso, consum ers tended to make rather large repayments on previously incurred debt. E x tensions and repayments w ere of about the same size and total consum er credit outstanding grew at an average annual rate o f only 1 .7% . A utom obile paper, which accounted fo r 3 0 % o f credit outstanding, was the weakest sector, actually falling at an average an nual rate o f 8 .0 % . 6 A V ER A G E CONSUM ER CREDIT O U TSTA N D IN G * Billions o f Dollars 1967 1 Total Consum er Credit 1968 II III IV 1 II III IV 95.6 96.5 98.2 100.2 100.9 103.4 106.8 110.6 N oninstalm ent Credit 19.2 19.6 19.8 20.4 20.6 21.1 21.4 22.3 Instalm ent Credit 76.4 76.9 78.4 79.8 80.4 82.4 85.4 88.3 30.1 30.0 30.8 30.7 30.7 31.8 33.2 33.9 Autom obile Paper * Not season ally adjusted. Source: Board of G o vernors of the Federal Reserve System . T he second half of 1967 saw some acceleration in overall econom ic grow th, with a step-up in the rate about, accounting fo r 3 4 .4 % of the increase in c o n sumer credit activity which took place in early 1968. In spite of the strong business expansion and the of increase in disposable personal in com e; but, the grow th of consum er spending was even slow er than rapid rate of increase in new consum er credit the it had been. T he counterpart of this sluggishness in consumer spending was a substantial increase in the saving rate. N ew consum er credit was being e x rate o f repayment on previously incurred credit fell slightly in early 1968, and total consum er credit out standing grew at an annual rate o f 6 .5 % . W ith the im position of the surtax in July 1968, tended at a rapid rate while repayments increased only slightly with the result that consum er credit the rate o f increase in consum er disposable incom e outstanding grew at an average annual rate o f 7 .8 % . fell. T he reduced rate o f grow th in disposable in com e was also a reflection of a slight decline in the rate of business expansion. Consumer spending, T he first half of 1968 was marked by renewed strength in the econom y. Business was expanding at a substantially faster rate in real as well as in how ever, money terms. T his v igor was effected by a drastic decline in the Disposable income, likewise, took a big leap forw ard. T he increase was m ore with a slight reduction in the rate at which people were saving and by a substantial increase in the rate areas o f consum er credit were strong. in the third quarter. prom pted in large part by consum ers’ attitude that they should “ buy now while it’s cheap.” In late 1968, expansion in consum er spending T he resurgence in spending was associated at which consumers were taking on new credit. sharply saving rate and a rapid increase in the rate at which new credit was being extended, which were in turn than matched by the rate of increase in consum er spend ing. advanced slow ed considerably, with little change in expendi tures for goods. G row th in consum er credit, though still high, was tapering off. W yn n elle W ilson A ll A utom obile paper was, however, the strongest factor in the turn CON SUM ER FIN A N CIAL RELATIONSHIPS Based on Figures S e a so n ally Adjusted a t an A n nual Rate / ■ : 10A7 . . . . 1 II ------------ IV Ill ' <, Personal Consum ption a s a % of Disposable Income 1 II L S ' <; 90.43 90.03 III IV 91.29 90.67 90.02 90.54 90.09 89.74 7.43 7.20 7.36 7.75 7.1 0 7.50 6.25 6.87 Consum er C redit Extended a s a % of D isposable Income 15.22 15.30 15.72 15.66 16.16 16.30 16.77 16.66 Consum er C redit Repaid a s a % of Disposable Income 14.97 Personal Saving a s a % of D isposable Income 14.80 14.86 15.01 14.90 14.93 14.88 15.08 Repaym ents/Extensions .97 .97 .96 .95 .92 .91 .90 .90 Extensions/Instalm ent Credit O utstanding* .24 .28 .28 .29 .26 .30 .29 .29 Repaym ents/Instalm ent C redit O utstanding* Annual Percentage Rate o f Increase in Extensions .26 .26 .26 .26 .27 .26 .26 .25 - 2 4 .5 2 7.77 18.43 5.76 25.68 12.54 16.89 4.10 4.04 7.07 10.90 4.07 11.97 6.96 10.16 3.55 Annual Percentage Rate of Increase in Repaym ents ........................ 1 ■ §1 * Not seasonally adjusted. Source: ‘ Departm ent of Commerce and Board of Governors of the Federal Reserve System V | ■p I f f W : 7 Commercial Paper Since 1966 A lthough the tight money episode of 1966 has faded into econom ic history, a number of its effects remain as a testimonial to its impact. M any business assurance o f a steady supply. W h ile directly placed paper is still the backbone of the market, its share has fallen from almost 8 0 % in 1965 to 6 5 % in 1968. men changed or m odified their usual practices in re T he second type o f com m ercial paper is sold to dealers w h o resell it to investors, often other co rp ora sponse to the drying up of credit and the resulting strain on their ow n liquid resources. One such change was to increase their use of com m ercial paper as a source of short-term funds. F rom the start of tions. T he principal issuers o f dealer paper are nonfinancial corporations although roughly 100 smaller finance com panies also use the dealer market. The 1966 through 1968 com m ercial paper outstanding rose $11.4 billion to a total of $20.5 billion, an dealer’s com m ission is ^ o f 1 % per annum on prim e paper. Generally speaking, these corporations d o not average annual increase of 3 3 % . This com pares with an average annual increase o f 15% for the previous three-year period. T his article discusses changes in the com m ercial paper market since 1966. sell paper on a continuous basis but use it to help finance seasonal or special needs, such as inventory accumulation. F or m ost of these issuers, the co m W h a t Is Commercial Paper? C o m m e rcia l paper is a short-term, unsecured prom issory note sold by a corporation either to a dealer or directly to an investor. Maturities vary from a few days to nine months and may be tailored to the investor’s speci mercial paper market is a less im portant source o f funds than bank borrow ing. Dealer paper may bear any maturity between one and nine months, but m ost maturities fall between three and six months. T here are currently seven national dealers in com m ercial paper, all leading N ew Y o rk investment houses. There are perhaps another half dozen smaller dealers fications. Paper maturing beyond 270 days must be registered with the Securities and E xchange C om across the country serving regional markets only. mission and largely because o f this requirement only $79 million of such paper is outstanding. T he S E C has ruled that proceeds from the sale o f unregistered paper may be used only for “ current transactions.” com m ercial paper in the national market, either through dealers or direct placement, w ithout first Like Treasury bills, com m ercial paper is sold at a discount, the effective interest rate being determined by the difference between the price and par. C om mercial paper differs from other m ajor m oney market instruments in having no form al secondary market. Commercial paper is marketed in tw o ways. The larger volum e of paper is placed directly with in vestors by about 20 large finance companies, such as General M otors A cceptance C orporation and C IT Financial Corporation. These companies must co n Ratings No co m p a n y u n d ertakes the sale of receiving a rating from the National Credit O ffice, a division o f Dun & Bradstreet. T he five ratings, which range from prim e to not recom m ended, are valuable to investors w ho may not be familiar with the details of the issuing firm ’s operations and fi nances. In deciding upon a rating for a corporation, the National Credit O ffice considers such factors as the corporation ’s net worth, its perform ance and fi nancial position com pared to that of its industry, its record over the previous ten years, its prospects for grow th and future earnings, and the quality o f its tinually raise funds to relend and short-term b o rro w management. ings are essential between sales of long-term deben are closely scrutinized, and in most cases a firm must tures. maintain a bank line of credit equal to its com m ercial F or these large finance companies, bank b o r A corporation ’ s banking relationships row ing is a less important source of funds than co m paper notes outstanding to receive a top rating. T he mercial paper. prim e rating is generally accorded a firm with a net A large concern may have over $1 billion of com m ercial paper notes outstanding at any worth o f $25 million or m ore if all other standards time, although several hundred million are met satisfactorily. average. dollars is H ow ever, the maintenance o f the large A com pany with a net worth o f at least $5 million is eligible for the next highest separate sales force necessary to place paper directly rating of desirable, and firm s with a net w orth of is justified not so much by the total value o f the $1.2 million or m ore can qualify for a rating of notes outstanding as by their almost daily issuance. satisfactory. Investors rated below desirable, and desirable paper is in in directly placed paper, prim arily in T here is no national market fo r paper dustrial corporations and utilities, accept a low er in creasingly confined to regional markets. terest rate than on dealer paper in return for the rating largely determines the interest rate it has to A firm ’s THE COST OF PRIME COM M ERCIAL PAPER funds, and in several states this restriction extended to state chartered savings banks. In the face o f such com petition, a number of smaller firm s, principally regional finance companies, were forced to withdraw from the national market. Despite the easier credit conditions which prevailed in 1967, the number of firm s issuing paper climbed to 391, a net gain of 41. O f the several factors which contributed to this increase perhaps the m ost im portant was a legacy of the previous year’s credit sca rcity : a new awareness by corporate treasurers of the desirability o f having alternative sources o f funds. Firm s were impressed with the dependability o f the com m ercial paper market throughout 1966 and many o f those eligible to tap it wished to establish contacts as insurance against another possible squeeze. C om panies which had entered the market on a m ore or less em ergency basis remained active in order to maintain contacts and to preserve a desirable fle x i bility in their financial program s. A nother factor which attracted issuers in 1967 was the widening o f the spread between com m ercial paper Source: Board of Governors of the rates and other sources o f credit available to corp ora Federal Reserve System . tions. A s shown in the chart, the cost o f borrow in g through sales of long-term bonds exceeded the cost pay and the acceptability of its paper to investors. R ecen t E x p a n sio n T w o o f the m o st strik in g of prim e com m ercial paper fo r the first time since 1965. W h ile bank rates declined in early 1967 and aspects of the recent boom in comm ercial paper are the rise in the relative im portance o f dealer paper and the phasing out o f nonprim e issuers. In 1966, INCREASE IN COM M ERCIAL PAPER BY TYPE com m ercial paper outstanding jum ped $4.2 billion, an increase o f almost 5 0 % from the previous year. A s in past years the greater part o f this increase was accounted for by directly placed paper. T he stringent credit conditions which prevailed in 1966, however, provided the impetus for the expansion o f the dealer market. Beginning roughly in the second quarter of 1966, corporations which were unable to secure requisite amounts of funds from banks searched for other sources and many qualified companies turned $ B i llio n s 5.01 4.0 42% 72% 3.0 52% to the com m ercial paper market. T he actual net increase in the number o f firm s selling com m ercial paper in 1966 was 15, bringing the total to 350. 2.0 H ow ever, the number o f new firm s which entered the market was far larger. T he bulk o f the entrants were large, prim e-rated corporations. 58% 1.0 - Paper sold by these corporations was eagerly sought 48° 28% by investors, often in preference to paper sold by smaller companies which had been in the market for some time. M any large corporations adopted the policy of purchasing only prim e-rated paper. 1966 A lso, several state legislatures stipulated that only prim e □ Source: D ealer Paper 1967 1968 Q Directly Placed Federal Reserve Bank of N ew York. name paper could be purchased by state controlled 9 then leveled off, com m ercial paper rates continued to plunge through the first half. T he spread between the fou r- to six-m onth prim e com m ercial paper rate and the prim e rate climbed to 85 basis points in June, com pared to a high of 21 basis points in 1966. W h ile dealer paper had constituted an expanding tional market by the nation’s largest corporations. Since 1966 the number o f finance com panies issu ing paper has declined from 134 to 122. T he w ith drawal from the national market o f smaller nonprim e finance companies has been partially offset by the establishment of captive finance com panies by large m anufacturing and retailing concerns. O f the approxim ately 200 m anufacturing firm s share of the total grow th in com m ercial paper since 1965, not until 1968 did it account for m ore than half o f the total increase in outstandings. T h e surge selling paper in 1968, around 40 entered the market in the last tw o years. A erospace and electronics firm s in dealer paper, which is illustrated in the bar chart, reflected the continued high cost o f long-term b o r have becom e much m ore active while manufacturers o f grain, flour, fertilizer, and seed, which used to be rowing, the maintenance of unusually large yield spreads favoring com m ercial paper over bank loans, and the rising tide of publicity concerning the market. prom inent issuers, have largely faded from the In addition, the recent expansion of several prominent market. A fter declining steadily as issuers of co m mercial paper, the number o f wholesalers and re investment houses into the com m ercial paper field spurred com petition and resulted in a m ore active tailers has increased gradually since 1966 and to gether totaled about 11% of all issuers in 1968. solicitation of business. T h e m ost interesting developm ent has been the emergence o f utilities as m ajor issuers. T en years M any companies w ere first induced to issue paper by dealers. B y O ctober 1968, the number o f issuers had jum ped to 477, com pared to 391 in all o f 1967. ago there were no utilities in the m arket; tw o years ago, only eight. T od a y nearly 100 utilities are active in Changing Composition of Issuers O v e r the yea rs, the market. Utilities have always depended heavily on sales o f long-term bonds and flotations the com m ercial paper market has becom e progres sively m ore exclusive even as the volum e outstand of stock to finance capital im provem ent and expan ing has soared. sion. W h ile the number o f issuers has Bank loans have been the chief source o f in terim funds. A s members o f a regulated industry, risen steadily in the last three years, there are still far few er than in the past. In 1920, for example, over 4,000 issuers accounted for about $1.3 billion o f paper these com panies are extrem ely cost-conscious and outstanding. terest rates since 1965. have been especially sensitive to the escalation o f in O n the eve of W o rld W a r II, about Quite naturally, therefore, 750 firm s w ere selling paper although three large utilities have been attracted by the relatively low er finance companies dominated the market. cost o f com m ercial paper. T he pie Jane F . N elson chart illustrates the increasing domination o f the na DISTRIBUTION O F ALL COM M ERCIAL PAPER ISSUERS BY NET WORTH $500,000 to $1 Mil. 1% i Decem ber 1966 Source: 10 N atio nal C redit Office. O ctober 1968 The Fifth District Personal Income T otal personal incom e and per capita personal incom e have m ore than doubled, both nationally and in the District, during the past twenty years. P er PERSONAL INCOME $ Millions sonal income, the total incom e received by individuals from all sources before personal taxes, is a m ajor com ponent in the national income accounts which, 600,000 - am ong other uses, are a measure o f econom ic growth. Per capita personal income, total personal incom e divided by the population, is an indicator o f the econom ic w ell-being of the individual, and the eco 400,000 nom ic conditions of various regions can be com pared by looking at these figures. O nly a partial c o m parison can be made on this basis, however, because taxes and the cost of living also vary from area to area. State rankings in total personal income tend, quite naturally, to follow population rankings, with the most populous states running ahead. A ccordin gly, in the Fifth District, V irginia led all states, follow ed by M aryland, N orth Carolina, South Carolina, W est V irginia, and the District of Columbia in that order. These rankings were the same as the total population ranking with the exception o f N orth Carolina which ranks first in population but third in total personal income. O n a per capita basis, however, the D is trict of Columbia ranked first last year, follow ed by M aryland. Both were well ahead of the national PERSONAL INCOM E Total Per C ap ita 1948 1968* A verage Annual G row th 1948-'68 $ mil. $ mil. per cent Md. 3,331 13,912 7.4 1,467 3,703 4.7 D. C. 1,644 3,661 4.1 1,957 4,525 4.3 1948 1968* dollars A verage Annual G row th 1948-'68 per cent V a. 3,624 13,977 7.0 1,130 3,040 5.1 W. V a . 2,126 4,503 3.8 1,120 2,495 4.1 N. 3,732 13,375 6.6 973 2,605 5.1 1,779 6,324 6.5 891 2,349 5.0 C. S. C. 5th Dist. 16,236 55,751 6.4 1,156 2,966 4.8 U .S . 208,878 682,772 6.1 1,430 3,416 4.5 * 1968 figures a re estim ated. Source: U. S. Departm ent of Commerce. W. Va. 1950 1955 1960 Note: 1968 figures estimated. Source: Department of Commerce. 11 average. V irginia, N orth Carolina, W est V irginia, and South Carolina follow ed in descending order. T he average annual grow th rate of total personal incom e and per capita personal incom e may be a District had grow th rates less than the national average. V irgin ia and N orth Carolina were the District better measure of econom ic grow th than the total leaders in grow th in per capita incom e with an average annual rate slightly over 5 % since 1948. amounts. W ith respect to total personal income. M aryland led the District with an increase o f more than 7 % per year over the twenty-year period from T h e U nited States average over the same period was 4 .5 % . W est V irgin ia and the D istrict o f Columbia again were below the national average, but the other 1948 to 1968. T he national average was slightly m ore than 6 % for the same period, and only W est V irginia and the District of Columbia in the Fifth Fifth D istrict states surpassed it. T h e 1968 rise in total personal incom e nationwide, according to the Department o f C om m erce, was the largest on record in absolute terms and the largest percentage gain since 1951. T he increase was p ri m arily attributable to payroll expansions. Gains were also made in transfer payments which are Governm ent payments to individuals which d o not involve payment for g ood s and services received by the Government. A n exam ple of this is Social Se curity benefits which increased in M arch 1968. N o n wage income, such as personal interest incom e and dividend payments, also increased. In the Fifth D is trict, the gain was held dow n by a lag in agricultural income. N ationw ide personal incom e increased 9 .2 % in 1968. In the Fifth D istrict the increase in per sonal incom e was somewhat higher at 9 .6 % . M a ry land led the D istrict with a grow th rate o f 10.5% follow ed by V irgin ia and South Carolina at 9 .9 % , the District o f Columbia at 9 .7 % , N orth Carolina at 9 .0 % , and W est V irgin ia at 7 .3 % . T h e grow th in total per capita incom e in the D is trict in 1968, however, lagged behind the United States average with the national figure at 8 .1 % and the Fifth D istrict reaching only 7 .6 % . T he District of Columbia led the District with an increase o f 9 .8 % follow ed by V irgin ia at 8 .4 % and M aryland at 8 .2 % . B elow the national average in per capita in com e gains were W est V irgin ia with a 6 .9 % increase. N orth Carolina at 6 .8 % , and South Carolina at 6 .2 % . K atherine M . Chambers 12
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