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FEDERAL RESERVE B A N K OF R I C H M O N D



M A Y 1965

UNITED STATES AGRICULTURAL EXPORTS
A m erican farmers and nonfarm workers alike have
a significant stake in the foreign market for agri­

during fiscal 1964 was equal to 16% o f the nation’s
total cash receipts from farm marketings in calendar

cultural products. Farm exports in fiscal year 1964
hit a record $6.1 billion, 2 0 % or about $1 billion
above a year earlier and m ore than double the 1953

year 1963.

low.

marketings in 1963. Comparable figures for D is­
trict states w e re : N orth Carolina, 2 8 % ; South

T he nation’s agricultural trade balance also

set an all-time record as exports outpaced imports,
continuing the highly favorable uptrend o f the past

B y com parison, the value o f agricultural

exports from the Fifth D istrict was equivalent to
nearly 2 2 %

o f farm ers’ total cash

Carolina, 2 4 % ;

V irginia,

receipts from

14% ; M aryland,

12% ;

several years illustrated in the accom panying chart.
(E x ce p t where otherwise indicated, all data used in

and W est V irginia, 5 % .
A further measure o f the im portance of the agri­

this article are on a fiscal year basis.)

cultural export market is provided by statistics on
farm employment.
Farm ers whose em ploym ent in

AGRICULTURAL TRADE BALANCE
United States
Fiscal Years 1959 to 1964
$ Billion
7

calendar year 1963 was attributable to the p rod u c­
tion of farm products for export accounted for 13%
of all farm w orkers in the nation. T h e comparable
proportion for the Fifth District was 1 5 % , ranging
from a low o f 4 % in W est V irgin ia to a high of
19% in N orth Carolina.
The proportions o f the output o f some o f the na­
tion’s farm products which are exported are also

6
Exports
5

—
Balance of Trade

PROPORTION OF FARM W ORKERS PR O DU C IN G
FARM PRODUCTS FOR EXPORT
United States and Fifth District by States, 1963
Per Cent

4

3

£
n
1959
Source:

i
i
1961
U. S. Department of Agriculture.

Importance of Farm Exports

i
1963

T h e U n ite d States

is the w orld ’s largest exporter o f farm products,
supplying over one fifth o f the w orld ’ s agricultural
exports in 1964. T hat year agricultural products
accounted for 2 5 % o f the dollar value o f our total
exports— up sharply from 19% in the tw o years 1953
and 1954 and the 1941 low o f 9 % .

Output o f 80

million acres o f the nation’s cropland— one out of
every fou r harvested acres— m oved abroad in 1964.
T he export value of all farm products shipped
Digitized for 2
FRASER


U. S.
Source:

5th.
Dist.

Md.

Va.

W. Va.

U. S. Department of Agriculture.

N. C.

S. C.

quite striking.

In

1964, for example, the export

market took three fourths of the nation’s wheat p ro­
duction, partly because o f the unusually heavy buying
o f Russia and other European cou n tries; tw o thirds
o f its rice c r o p ; three fifths o f the nonfat dry m ilk ;
over tw o fifths o f the tallow and soybean s; one third
o f its cotton, rye, and prunes; around one fourth of
the tobacco, lard, and dried whole m ilk; one fifth o f

Fifth District states w e re : South Carolina, $94.2 m il­
lion ; V irginia, $68.3 m illio n ; M aryland, $34.2 m il­
lio n ; and W e st V irginia, $5.2 million.
Distribution o f the nation’s and the D istrict’s total
value of farm exports by com m odities and com ­
m odity groups is shown in the accom panying chart.
Nationally, wheat and wheat flour account for 2 5 %
o f the total, by far the biggest proportion. N ext

AGRICULTURAL EXPORTS DISTRIBUTED O N THE BASIS OF VALUE
United States and Fifth District, Fiscal Year 1964
Per Cent
70
Tobacco
Unmanufactured
60

United States (% of U. S. total value)
Fifth District (% of District total value)

50

40

30

20

Other

10
Rice

Source:

U. S. Department of Agriculture.

the cottonseed, raisins, and dry edible b ea n s; and one
sixth o f the grain sorghum s and barley.
Financing, storing, and shipping such quantities of

com e feed grains and oilseeds and their products,

exports demands tremendous financial, storage, and
shipping facilities. T he nation’s farm exports in
1964 totaled 55 million long tons of cargo— enough
to fill over 1.5 million freight cars or 5,500 cargo
ships. In the movement o f these exports, an average

to ta l; and then fruits, nuts, and vegetables; to b a cc o ;
and rice. N on e of these last products account for
very large percentages o f the total value.

o f 15 shiploads left the United States each day, many
from Fifth District ports.
Geographical and Commodity Distribution

A ll

m ajor farm ing sections o f the country have an im­
portant stake in foreign
com m odities.

States

markets for agricultural

with

the

largest

shares

of

both contributing around 13% ; animals and animal
products and cotton, each accounting for 11 % o f the

In the Fifth District, tobacco exports make up an
overw helm ing 6 0 % o f the total value o f farm ex ­
ports.
N ext in im portance is cotton, follow ed
closely by animals and animal products, and oilseeds
and their products. Then com e the feed g ra in s;
fruits, nuts, and vegetables; and, lastly, wheat and
wheat flour.
Agricultural

Exports

in

Retrospect

A m e rica n

agricultural exports in 1964 were Illinois ($ 5 0 4 m il­

export trade in farm products began in V irginia with

lio n ), T exas ($484 m illion ), California ($421 m il­

the first shipment o f

lio n ), Kansas ($337 m illion ), Iow a ($331 m illion ),

C olony to England in 1613.

and N orth Carolina ($321 m illion ).
W ith N orth Carolina ranking sixth in value of

also

farm exports in 1964, the F ifth District as a whole
accounted for $523.3 million, or about 9 % , o f the

tobacco was destined to becom e king o f agricultural
exports in the colonial period. T o b a cco remained

national total o f $6.1 billion.

the United States’ most important export crop until




Contributions o f other

exported

southern

in

colonies,

tobacco

substantial
especially

from

the V irginia

R ice and indigo were
amounts
South

from

the

Carolina,

but

3

replaced by cotton in the period between the R evolu ­
tion and the W a r Between the States.
T hree com m odities— wheat, cotton, and tobacco—
have dominated the nation’ s agricultural exports
through much o f its history. Either wheat or cot­
ton was the leading farm export during most of the
past century. W ith the grow in g food shortages in
A sia, however, wheat has recently m oved well out
in the forefront. Feed grains and soybeans have
grow n so much in importance since W o rld W a r II

are to be permitted or n o t ; advance deposits on im­
ports ; im port discrimination as to source o f supply,
especially against the dollar a r e a ; and exclusion of
countries not party to bilateral agreements.
Still other problem s confronting the nation’s e x ­
porters o f farm products are such factors as health
and sanitary regulations which may be used to limit
imports or to discriminate as to source o f supply;
variations in the quality o f export p ro d u cts ; price

that the United States now has five m ajor agri­
cultural export com m odities— wheat, feed grains,

com p etition ; the lack o f foreign exchange on the part

cotton, soybeans, and tobacco.

tion

A nother first in the nation’s farm export trade took

o f some potential cu stom ers; and the supply situa­
for

the

product

concerned.

Efforts to Reduce Tariffs

T h e U n ite d

S ta tes’

place in the Fifth District in July 1964 when the
first shipment o f feeder cattle left N orfolk, V irginia,
bound for Genoa, Italy. Other feeder cattle ship­

and early Thirties was alleviated in part by the pas­

ments since then have gone from

sage of the R eciprocal T rade A greem ents A ct o f 1934,

N orfolk, Balti­

policy o f agricultural protectionism o f the Twenties

which authorized the Governm ent to engage in re-

m ore, and other southern ports.
Destination of Agricultural Exports T h e n a ­
tion’s farm ers shipped com m odities to over 150
countries in 1964, with slightly m ore than 6 0 % of

AGRICULTURAL EXPORTS
BY COUNTRY OF DESTINATION
United States, Fiscal Year 1964

the total value of these exports going to ten countries.
T h e top ten countries, as noted in the chart, were
Japan, Canada, U nited K ingdom , the Netherlands,
W est Germ any, India, Italy, U A R (E g y p t ), Belgiu m -L u xem bou rg, and France.
E urope with the European E conom ic Community,
the E uropean Free T rade Association, and the E u ro ­
pean Soviet B loc was the chief market area in 1964.
E urope was follow ed in order by Asia, Canada, Latin
A m erica, A frica, and Oceania (A ustralia and N ew
Z ealan d ). T h e E E C and the E F T A were the most
im portant markets, together accounting for slightly
m ore than one third o f the total.

Japan

742

Canada

United Kingdom

The Netherlands

I
West Germany

Farm Export Problems P e rso n s e n g a g e d in the
exportation o f United States farm products are con ­

India

fronted with many problem s. T he m ost familiar,
perhaps, are tariffs or im port duties. A particular

Italy

problem

in recent years has

been the policy

of

Com m on M arket countries to maintain a com m on

UAR (Egypt)

tariff against the products o f outside countries while
at the same time permitting com m odities to m ove

BelgiumLuxembourg

duty free within.
Then there are hosts o f nontariff trade barriers.

■ ■ ■ ■

1964 export total
$6,074 million

France

Som e of the problem s falling under this heading are
quantitative restriction s; variable levies or duties and
m inimum im port p r ic e s ; and conditional imports, in­

Other

cluding dom estic m ixing regulations and controls
making im ports conditional upon a country’s p ro­
duction, utilization, price, and so on. O ther barriers
of this nature are m onopolies which operate under
governm ental authority to determine whether imports
Digitized for 4
FRASER


0
200
400
600
$ Million
Note: Exports to C anada include commodities in bonded
storage awaiting shipment abroad through the St. Lawrence
Seaway.
Source: U. S. Department of Agriculture.

AGRICULTURAL EXPORTS: SALES FOR DOLLARS
A N D UNDER GO VERNM ENT P RO G RA M S
United States, Fiscal Years 1951 to 1964
$ Billion

cultural exports. T hese special Governm ent-financed
program s use four m a jor approaches: sales for
foreign currency, famine relief and donations, barter,
and long-term credit to encourage foreign nations
to increase their purchases o f U nited States farm
products.
T h e tw o principal Governm ent-financed program s
are P ublic L aw 480, or the A gricultural T rade D e­
velopm ent and Assistance A ct o f 1954, and the A ct
for International Developm ent o f 1961 which super­
seded the M utual Security A ct o f 1954.

T hese G o v ­

ernment-financed program s have helped to expand
U nited States agricultural exports significantly,
especially those to underdeveloped countries. D uring
the ten fiscal years ending June 30, 1955 through
1964, these Governm ent-financed program s accounted
for $14.3 billion, or 3 2 % of the $44.8 billion o f all
farm exports from the U nited States. E xports
under Public L aw 480 were by far the largest, con ­
tributing $12.2 billion or 2 7 % o f the total value of
farm exports. Sales fo r foreign currency in this
same ten-year period amounted to $7.7 billion, 17%
1951
Source:

1955

of the total agricultural export value or 6 3 % o f all
exports under Public L aw 480.

1960

U. S. Department of Agriculture.

Dollar Exports

It is fro m the co m m e rcia l sales

for dollars, however, that the nation’s balance o f pay­
ciprocal bilateral tariff reductions. Since then the
U nited States has made many efforts to reduce its
tariffs. T he 1934 A ct, in fact, was the beginning o f
a trend tow ard a series o f bilateral tariff agreements
that continued until the trend was interrupted by the
Second W o rld W ar.
A fter the war, the General A greem ent on T ariffs
and Trade, better known as G A T T , was form ed by

ments gets a healthy assist from farm exports. Out
o f the total export value o f $6.1 billion in farm
products in 1964, sales fo r dollars accounted for $4.5
billion or for 7 4 % of the total. T hese dollar sales
were about $1 billion or 2 8 % above a year earlier
and were nearly double the 1955 level, the first full
year P ublic L aw 480 was in operation.
(S e e the
accom panying chart.)

In contrast, nearly 9 0 % o f

many m ajor trading nations o f the world, including
the United States. O ut of negotiations under G A T T
came the resolution to expand international trade
through a multilateral approach to the reduction of

Fifth District farm sales abroad in 1964 were for
dollars.
D ollar exports o f farm products have trended up­
ward in recent years, and during the ten fiscal years

trade barriers.

since the passage of Public L aw 480 com m ercial sales
for dollars have amounted to $30.5 billion or 6 8 %

This multilateral approach in the

U nited States gradually served to replace previous
bilateral tariff and trade agreements.
M any sessions o f G A T T have been held, the first
in 1947.

Other sessions were held in 1949, 1951,

of the total value o f all farm exports. A num ber o f
factors have contributed to this uptrend in agri­
cultural exports for dollars. A m on g them are the

1956, and 1961, and during each session United

econom ic advances made in W estern E urope and

States tariff levels were low ered reciprocally.

U nder

Japan and the resulting increases in disposable in­

authority of the T rade E xpansion A ct o f 1962, the

com e ; stronger demand for meat and livestock con ­

purpose o f which, am ong other things, is to main­

sumer products as the result o f shifts in dietary

tain and enlarge foreign markets for A m erican p rod ­

h abits;

ucts, the U nited States is n ow taking part in the

European countries and Japan which have increased

sixth round of tariff negotiations under G A T T .

demand for feed grains, oilseeds, and high protein

Government Export Programs

m e a l; com petitive pricing o f some U nited

In a d d ition to the

grow in g

livestock

industries

in

W estern

States

efforts to reduce tariffs, the Governm ent finances

farm e x p o r ts ; and extensive market development ef­

foreign aid and relief program s which increase agri­

forts by the U nited States in many foreign countries.




5

CO NSTRUCTION LABOR A N D
OUTPUT INDEXES

CO NSTRUCTION OUTLAYS RELATED TO G N P
UNITED STATES

UNITED STATES

=£

—

1957-59=100

Per Cent of GN P
13

Value of Output
in Constant Dollars

Local Governments*

Construction Workers

residential

1950
Source:

m

?

1955
1960
U. S. Department of Commerce, Bureau of the
Census, and U. S. Department of Labor, Bureau
of Labor Statistics.

construction-has

shown

the

fastest

growth^ctor.

Private

Outlays both for buildings and for water and con-

jumping from 15% of all private construction in 1950 t ^ vation facilities rose to about two and one half tir
imes
2 8 % in 1964. Public utility outlays have changed cor*
——
1950 level. These three classes of public construcparatively little, holding at about one tenth of private ex
_ ...
,
.
.
. isn accounted for 8 5% of the 1964 total leaving only 15%
penditures. Other types of private construction remainecT
9
1
t small in volume and declined rather sharply in relativ^vlded am ong military facilities, residential buildings, a
importance.
Jt^ier public construction.

Rising productivity has been a significant development
in construction in recent years. Between 1950 and 1964
the period covered in the above chart, output rose 35
while the number of construction workers increased 28%
During the first half of the period, however, construction
worker employment rose more rapidly than output so
that productivity declined. After 1957 output rose con­
siderably faster than employment and productivity im­
proved accordingly. Output per production worker in­
creased about 13% in the final seven years shown on
the chart.




I

| Outlays for private construction rose only about 4%
year over the last 14 years, compared with 8 % for publi
qiblic construction expenditures almost tripled between
construction. Residential nonfarm buildings continued tc
M ia p e n nnrl 1QA4
?50 and 1964. During the 14 years, outlays for highaccount for the major portion of private outlays, althougn
they declined from 6 8 % of the total in 1950 to 58% in 196 ^P ys rose from $2 b 'H'on to $7 billion, replacing nonresiNonresidential buildings— the largest sector of private noitlfntial buildings as the largest category in the public

PRIVATE CO NSTRUCTION

PUBLIC CONSTRUCTION

UNITED STATES

UNITED STATES

Other
Residential Buildings
Military Facilities
W ater and Conservation Facilities
Nonresidential Buildings
Highw ays

Other
Farm Construction
Public Utilities
Nonresidential Buildings
Residential Buildings
(Nonfarm)

...

1950
1955
1960
* Estimated for 1964.
Source: U. S. Department of Commerce.

During the last 14 years, total construction outlays ranged
from a low of 10.
* G N P in 1951 to a high of 11.8%
rate decline, they rose a gain to
then tapered off to 11.1% in ~
ruction spending grew slowly
pace over the 14 year period.
in total construction since 1950
ifts in the volume of private outte construction plus state and
has maintained a virtually conthe relative importance of Fed- *
has declined. Federal construc2 % of
at its peak in 1952 but
fC
only 0.7% in

^ is

1950
Source:

1955
1960
U. S. Department of Commerce, Bureau of the Census.

*50
Source:

1955
1960
U. S. Department of Commerce, Bureau of the Census.

f,- -

-V
. -- V -- .V . ..

A s a rule, econom ic units, such as banks, other
business firm s, governmental units, or even indivi­
duals, find that their inflow o f cash receipts does not
norm ally coincide exactly with their cash disburse­
ments.

term credit instruments such as T reasury bills, com ­
mercial paper, bankers’ acceptances, negotiable cer­
tificates o f deposit, securities dealer loans and re­
purchase agreements, and Federal funds.

Each of

T he typical econom ic unit finds that on some

these instruments has been the subject o f articles in

days its cash holdings are building up because its

earlier issues o f this R eview .
In general, m oney market instruments are issued

receipts exceed its outlays. O n other days, it might
experience a sharp reduction in its cash balances be­
cause its spending outstrips its cash inflow.

by obligors o f the highest credit rating, with a cor­
respondingly high degree o f safety o f principal. M a­

O ne o f the m ost important reasons for holding

turities may run for as long as one year but usually

cash reserves is to bridge the gap between receipts

are for 90 days or less, and as a practical matter can

and outlays and to insure that a planned stream of
expenditures can be maintained independently of
cash inflow. T here are, o f course, other reasons for

be arranged to run fo r only a few days or even one

holding reserves. In particular, com m ercial banks
and certain other financial institutions must conform
with legal reserve requirements.

over, the market for these instruments is extrem ely

M aintenance o f cash reserves involves cost in the
form either of interest paid, as in the case o f b o r­
row ed balances, or o f interest foregone, as in the
case o f nonborrowred balances. F or many econom ic
units, especially large financial and nonfinancial
firms, these costs can assume significant proportions.
T o minimize such costs, econom ic units often seek
to keep their cash holdings at a minimum consistent
with their w orking needs and their legal require­
ments. T his may be done by holding relatively
riskless and highly marketable incom e-bearing assets
instead of cash and by establishing and preserving
their ability to borrow , at very short-term , at fa­
vorable interest rates.

day.

These instruments accordingly involve small

risk o f loss due to changes in interest rates.

M o re ­

broad and on a given day can absorb a large volume
o f transactions with relatively little effect on interest
yields. It also features highly efficient market ma­
chinery which allows quick and convenient trading in
virtually any volum e. Unlike organized securities
or com m odities markets, the m oney market has no
specific location. Like other im portant financial and
nonfinancial markets in this country, it centers in
N ew Y ork , but it is prim arily a “ telephone” market
and is easily accessible from all parts o f the nation
as well as from foreign financial centers. N o eco­
nom ic unit is ever m ore than a telephone call away
from the m oney market.
T he heart o f the m oney market’s machinery is
com posed o f some 45 or m ore “ m oney market banks,”

T h e institution o f the “ m oney

including the large banks in N ew Y o rk and other

m arket,” so-called, has evolved to meet the needs of
such econom ic units.

important financial cen ters; som e 20 Government

The M oney Market

T h e term “ m o n e y m a rk e t”

occurs frequently in financial literature and in fi­
nancial parlance but is seldom defined.

In general,

the term applies not to one but rather to a group of
markets, although in early periods of United States
financial history it was frequently used in a narrow'
sense to denote the market for call loans to securities
brokers and dealers.

A t other times in the past, it

securities dealers, some of w hom are large banks;
a

dozen - odd

com m ercial

paper

d ea lers;

a

few

bankers’ acceptance d ea lers; and a number o f money
brokers who specialize in finding short-term funds
for m oney market borrow ers and placing such funds
for m oney market lenders.

T he m ost important of

the last-mentioned group are the three m ajor F ed­
eral funds brokers in New' Y ork .
Market Participants

A p a rt fro m the g ro u p s that

has been em ployed broadly to embrace some lon g­

provide the basic trading machinery, m oney market

term as w'ell as short-term markets.

In its current

participants usually enter the market either to raise

usage, it generally refers to the markets for short­

funds or to convert tem porary cash surpluses into

Digitized for 8
FRASER


highly liquid interest-bearing investments. Funds
may be raised either through selling existing hold­
ings of m oney market instruments or through issuing
new instruments. T he issue and sale o f new m oney
market instruments is, o f course, a form o f b o rro w ­
ing. Generally, money market rates are below rates
on bank loans even for prime borrowers, and the
ability to borrow funds 011 the open market is c o r­

B y far the m ost im portant market participant is
the Federal R eserve System. T hrou gh the Federal
Open M arket T radin g Desk at the N ew Y o rk F ed ­
eral R eserve Bank, which executes the directives of
the Federal Open M arket Committee, the Federal
Reserve is in the market on a virtually continuous
basis, either as a buyer o r as a seller, depending on

respondingly advantageous.

ing the market is quite different from that o f other

G overnm ent

securities

financial conditions.

T he U. S. Treasury,

dealers,

many

comm ercial

T he System ’s purpose in enter­

participants. A s noted in greater detail below , the
Federal Reserve buys and sells in certain parts of

banks, large sales finance companies, and w ell-know n

the m oney market not to manage its ow n cash p osi­

nonfinancial corporations o f unimpeachable credit
standing borrow regularly in the m oney market by

tion m ore efficiently but rather to supply o r to with­
draw funds. T he point o f this is to provide ap­

issuing their own short-term debt obligations, which
com prise the standard m oney market instruments.
Suppliers o f funds in the market are demanders of

propriate m onetary and credit conditions for the
country at large. In addition, the Federal R eserve

m oney market instruments. Potentially, these in­
clude all those econom ic units that can realize a

enters the market on an agency basis, sometimes as
a buyer and sometimes as a seller, for the accounts

significant gain through arranging to meet cash re­
quirements by holding interest-bearing liquid assets

of foreign official institutions and for the U . S. T reas­
ury. Overall, the operations o f the Federal R eserve

in place of nonearning cash balances.

dw arf those of any other m oney market participant.

T he chief

participants on this side o f the market are com ­
mercial banks, state and local governments, large non­
financial businesses, and nonbank financial institu­

The M arket’s Significance F o r individual econom ic
units, the m oney market provides an important source

tions like insurance companies and pension funds.
Foreign bank and nonbank businesses are increas­

of

short-term

ingly important suppliers o f funds.

through the market, it is possible for borrow ers,

Since

borrow in g

on

there is a continuous

advantageous
flow

o f loan

terms.
funds

M O N E Y MARKET RATES
(M O N TH LY A V E R A G E S)

Per Cent Per Annum
5.00

y

/ ----------

{ 1 Time Certificates of Deposit (3-month)
H

Commercial Paper (4-to 6-months)

|

Bankers' Acceptances (90 days)

[~| Discount Rate
|

I

I

F
1960
Source:

I

I
M

I

1

I

I

I

I
N

1

1

1 /

Treasury Bills (3-month)

/_J____I
____I
____I ___I
_
____I
____I
____i
____I
___ 1
____I
____I
____L

F
J
A
J
1961
1963
Board of Governors of the Federal Reserve System and Federal Reserve Bank of New York.




A

Federal Funds

|

O

J
1964

9

surpluses and deficiencies.

F o r this reason, the F ed ­

through successive “ roll-overs” or renewals of loans,
to raise funds on a more or less continuous basis and
in this fashion to finance not only their immediate
cash requirements but also their w orking capital and

eral R eserve’s discount facilities must be considered
part o f the m oney market.
U se o f the discount w indow by banks as an alter­

some of their other capital needs.

B y bringing to­

native to other m oney market facilities may have im­

gether, quickly, conveniently, and to their mutual

portant implications for credit conditions. W hen
banks, on balance, add to their borrow ings from the

advantage those units with cash surpluses and those
with cash deficits, the market promotes a m ore in­
tensive use of the aggregate cash balances held in
the econom y.
T he market is especially important to com m ercial
banks in managing their m oney positions. T o this
end, banks in the aggregate are large-scale buyers
and sellers of most m oney market instruments,
especially Federal funds. In general, an efficient
m oney market mechanism makes fo r a m ore intensive
use of bank reserves and enhances the ability o f the
com m ercial banking system to meet the credit re­
quirements of the country at large. B y allow ing
banks to operate with low er margins o f excess re­

Federal R eserve, new bank

reserves are created.

B y contrast, when banks raise m oney elsewhere in
the m oney market, existing reserves are simply
shifted about in the banking system. Thus, in
m aking reserve adjustments, the choice by bankers
between the discount w indow and other parts o f the
m oney market will affect the total volum e o f reserves
in the banking system and may alter overall credit
conditions in the econom y.

T h e relationship between

the discount rate, which bankers pay on Federal R e­
serve borrow ings, and other m oney market rates in­
fluences bankers’ choices in this regard. Because of
this, m oney market developments that affect this re­

serves, it also makes the banking system m ore sensi­

lationship can also affect the outstanding volum e of

tive to central bank policy actions.
Finally, conditions in the m oney market provide

bank reserves. M em ber banks, within limits, are
free to m ove between the discount w in dow and other

an important guide for m onetary policy. T he m oney
market is an eminently free and competitive market,

parts of the market to take advantage o f any dif­
ferential that may exist and their shifts between

and the yields of m oney market instruments react
instantaneously to changes in supply and demand.

these tw o sources o f funds bring m oney market rates
into line with the discount rate. It is largely for this

A s a result, behavior o f the market provides perhaps

reason that m oney market rates tend to m ove closely

the

with the discount rate, as shown in the chart on page
9. It is also for this reason that changes in the F ed ­
eral Reserve discount rate have important implica­

m ost

immediately

available

indication

as

to

whether o r not credit is available in sufficient
amounts to meet demands in the econom y at large.
Changes in rates on money market instruments, in
flow s of funds through strategic sectors o f the m ar­
ket, in the ability of Governm ent securities dealers
to finance their inventories, and other objective m oney
market indicators, usually figure importantly in as­
sessments of current credit conditions.
The Federal Reserve and the Money Market

The

Federal Reserve System influences the m oney market

tions for the m oney market.
O f even greater significance for the m oney market
are the daily operations o f the Federal O pen M arket
T radin g Desk in tw o im portant subdivisions o f the
m arket: the T reasury bill market and the bankers’
acceptances market. Generally, the Federal Reserve
enters these markets on a m ore or less daily basis,
either to provide new bank reserves through pur­
chases o r to withdraw bank reserves through its

not only through open market operations conducted

sales.

at the N ew Y o rk Bank but also through the discount

are undertaken to compensate for the effects o f other

w indow s at all 12 Federal Reserve Banks.

factors affecting the flow o f bank funds into and out

C om ­

T o a large extent, Federal Reserve operations

mercial banks that are members o f the Federal R e ­

o f the m oney market.

serve System b orrow at the Federal Reserve as an

are undertaken to insure the sm ooth technical func­

alternative to selling m oney market securities or bor­

tioning o f the market mechanism.

row ing Federal funds to cover cash and

reserve

tions o f the greatest im portance from the standpoint

deficiencies.

T o a lesser extent, operations
But the opera­

Similarly, banks with cash or reserve

of the econom y are those undertaken to change basic

surpluses can repay outstanding borrow ings at the

m oney and credit conditions in the country as a whole.

Federal Reserve rather than invest the surplus in

Thus, in addition to its other functions, the money

money market instruments. Thus, for member banks

market also serves as the mechanism through which

the Federal R eserve discount w indow is an opera­

the Federal R eserve undertakes to influence basic

tional part o f the market mechanism for matching

m oney and credit conditions.

10



THE FIFTH DISTRICT
Fifth District business apparently continues to ad­
vance at a brisk pace, and m ost indicators are at
record levels. N onfarm employm ent and factory manhours still show strongly upward trends, and bank
debits, at last report, were rising to new high levels.
N ew business incorporations during the first two
m onths were running 8 % above year-earlier levels
and were particularly strong in February, usually the
year’s low month. Business failures in January and
February occurred about one fifth less frequently
than in the same months of last year, but a few large
ones pushed total liabilities o f failed businesses wrell
above 1964 levels. B roadly viewed, the District
business picture is bright, although the slow er rate
o f new business bookings in the past few months in
the construction industry dims the outlook slightly.
More W orkers, More Tim e

N o n fa rm

e m p lo y ­

has not been as strong as it was last spring and sum­
mer but has not fallen much below those high average
levels.

F o r perspective, last year’s contract award

values exceeded comparable 1963 levels by 6 % in
the first quarter, 4 % in the second quarter, and 17%
in the third, but dropped in the fourth quarter 10%
below the previous year’s figure. T his year, January
and February contract awards approxim ately equaled
last year’s fourth quarter averages and exceeded the
com parable year-earlier levels by narrow margins.
Strength in Manufacturing

P ro d u c tio n has c o n ­

tinued to set new records in m ost of the D istrict’s
principal manufacturing industries. T h e enduring
strength o f furniture demand has produced strong
and steady gains for m ore than tw o years. V olum e
so far this year has been running about 12% above
1964.

T he increase com pares quite favorably with

ment has increased substantially in every month so

1963 and 1964 gains which averaged 11 % .

far this year and has not declined in a single month
since A pril 1964. Recent gains have been con ­

the past six years the dollar value o f District furniture

sistently widespread but were strongest in February
when

employm ent rose

in

every

m ajor

nonfarm

category.
M anufacturing man-hours registered gains in eight
o f the past twelve months. Recently, a strong F ebru­

D uring

sales has increased m ore than 6 0 % with only a m inor
rise in prices.

T he recent strength o f the furniture

upswing is reflected in industry m an-hours which

ary rise was follow ed in M arch by a more limited
increase, a result of moderate gains in the Carolinas
tempered by mild declines in M aryland and W est
V irginia.
M an -h ou rs have increased somewhat
m ore in durable than in nondurable goods industries
even though textile mill man-hours (w hich account
fo r over one fourth of the District total) have ad­
vanced in every month since September.
Construction Signals Mixed

D istrict co n tra cto rs

experienced good business during most o f the past
tw o years, and employm ent expanded vigorou sly as
the large volume of new business pushed some firms
beyond normal capacity. In January, the rise was
interrupted for the first time in six months when the
seasonally adjusted job count dropped 1 .4% , but a
large part of the decline was reversed in the follow ­
ing month.

Unlike

employm ent, the behavior of

contract award statistics has been somewhat erratic
and difficult to characterize.



Generally, the series

The color computer, a new aid to textile processing, provides the
correct dye mixture to achieve any shade or combination of colors.

11

have risen in every recent month, beginning with a
4 % leap in O ctober and advancing nearly 14%
by M arch.
T extile mills are also operating close to top speed.
In contrast to the furniture story, however, textile
prosperity is a relatively recent development. The

marketing procedures have becom e m ore scientific
and much m ore effective than was the case just a
few years ago. N ew sources o f financing are also
helping to keep costs dow n during the current wave
o f new investment. W ith notable success, textile
firm s have recently offered bonds to the public at

pickup in the cotton sector of the industry began last
summer, a few weeks after enactment o f the one-price

large instead of relying almost solely on insurance
companies.

cotton law.

Despite one-price cotton and much new equipment,
it may still be difficult in the com petitive textile in­

T he law authorized equalization pay­

ments through the Department of A griculture to o ff­
set most o f the difference between dom estic and world
cotton prices. T he difference between these prices
was the result o f export subsidy payments on cotton

dustry to earn returns equal to those o f manufacturing

initiated for the purpose of reducing the domestic

com pared to rates ranging between 10% and 12%
for all manufacturing.

surplus.

Passage o f the bill was follow ed by only a

slight decline in prices. A fter a period o f un­
certainty, buyers o f cotton goods decided that further
reductions were unlikely, and a flood o f pent-up de­
mand was released. A lthough new orders began
rising last summer, m an-hours fluctuated unevenly
until early fall, when the strength o f demand became
well established. Between last O ctober and M arch
of this year, regular m onthly increases raised manhours a total of m ore than 8 % , an impressive gain
in so large an industry.
Textile Investment Soars
R is in g o u tla y s for
modernization and expansion continue to be an ou t­
standing feature o f textile progress.

F rom a level

of $500 million in 1960, national plant and equipment
expenditures rose to $760 million last year, and are
currently estimated at m ore than $1 billion for 1965.
This represents a 3 6 % gain over 1964, well ahead
of both the 18% investment rise expected in n on ­
durables generally and the 16% increase forecast for
all manufacturing industries. Plant and equipment
outlays planned for 1965 by textile producers rep­
resent around 17% o f the industry’s total net worth
at the beginning of the year— probably the highest
current modernization and expansion rate o f any
m ajor industry.
T he data on planned spending do not distinguish

industries in general. T extile earnings on stock­
holders’ equity have apparently remained below 10%

Looking Ahead

B e y o n d the g e n e ra lly fa v o ra b le,

if somewhat paradoxical, conditions o f the present and
the near future lies a considerable amount o f un­
certainty. R ight n ow the industry seems hard pressed
to satisfy demand despite the addition of m uch new
equipment and some 19,000 w orkers since this time
last year, but there are several potential problem s.
One is foreign com petition, which dom estic producers
hope to meet with the help o f low er costs on standard
fabrics and with a wider variety o f fabrics more
imaginatively styled.
T he immediate problem , however, is the uncer­
tainty surrounding this year’s cotton law. A change
in cotton marketing regulations w ould almost cer­
tainly have a significant impact on the industry.
T he bill enacted last year runs until July 31, 1966.
But orders for future delivery o f many cotton fabrics
already extend into the second quarter of next year,
and the terms under which mills will be able to
acquire cotton follow in g expiration o f the present bill
are rapidly becom ing a matter o f current concern.
E fforts have been made to launch a new cotton bill,
but so far without success. Differences o f opinion
am ong divergent interests have blocked progress, just
as they did last year.

Recent press reports suggest

that another month may pass before a bill can be

between expansion and replacement, but industry

drafted by the Adm inistration and sent to Congress

sources suggest that the bulk o f the new equipment

where additional time will be needed before a final

will replace less econom ical capacity.

decision can be reached.

W h ere com ­

T here may be a few’ months

pletely new mills are being built (as is the case with

left before uncertainties developing around this situa­

several large com panies) the prim ary aim is to cut

tion becom e as critical as they were a year ago.

costs on standard, large-volum e items by taking full
advantage o f recent developments in mechanization

Nevertheless, the textile industry may soon find its

and engineering.

Investment per employee in these

new mills is said to be in the vicinity o f $50,000.
New Tools for Management

G rea ter e ffic ie n c y

and low er costs also stem from the use o f computers.
W ith m ore and better information, management and

12



demand and supply patterns shaken up again while
still recovering from last year’s jolts.

PHOTO CREDIT
11. Burlington Industries, Inc.

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