Full text of Economic Quarterly (Federal Reserve Bank of Richmond) : November 1969

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FEDERAL RESERVE BANK OF RICHMOND

MONTHLY
REVIEW

Money And Credit In The
First Half Of 1969
State Government Expenditures
The Eurobond Market
The Fifth District

NOVEMBER

1969

MONEY AND CREDIT IN THE
FIRST HALF OF 1969
Since the first of the year, monetary policy has

of 1969 and at a smaller 0 .3 % rate in the months

taken a firm grip on the financial expansion that

of July and A ugust.

helped sustain the excessive grow th in aggregate de
mand which resumed roughly in m i d - 1967. A l

T he broad outline of factors underlying this be
havior is quite clear. T he Federal R eserve has been
applying increased pressure to the banking system.
A roun d the first of the year the monetary authorities

though the price indexes have not yet confirm ed
diminished inflationary pressures, the firm policy
stance has no doubt made a m ajor contribution in
m oving the econom y back toward a noninflationary
grow th path.

began to absorb reserves through open market opera
tions, i.e., through net sales o f Governm ent securities.

Controversy frequently surrounds the meaning of
a given description of monetary policy. F or example,

N on borrow ed reserves declined at a 3 .7 % annual
rate in the first half and at a 4 .2 % rate in the third
quarter. Banks borrow ed increasing amounts from

does restrictive policy mean (a ) that interest rates
are high or rising, ( b ) that bank credit or some

the Federal Reserve, keeping total reserves about un
changed in the first half, but in the third quarter

broader credit total is declining or grow in g much
m ore slowly, or ( c ) that the money stock or some

these declined at a 10.1% rate.
T he Federal Reserve exerted further pressure on

broader measure of liquidity is declining or grow in g

the banking system by not raising the ceiling on

at a distinctly slow er pace?
Frequently, not all o f these things happen at the

rates banks are permitted to pay on time and savings
deposits. W h en rising market rates made yields on
these deposits relatively unattractive late last year,
banks began to lose time deposits rapidly. Attrition
was initially most pronounced in large denomination

same time. F or example, while interest rates rose
sharply in the first half of 1966 and the period was
described as one of “ tight” money, bank credit,
money, and total liquid assets held by the nonbank
public continued to rise at approxim ately the same
rate as in the 1961-65 period.
Total private d o
mestic credit rose at an accelerated pacc.
T he contrast with the first half of 1969 is striking
in that not only have interest rates risen, but growth
rates of bank credit, m oney, and liquid assets have
declined sharply. Even the rate of growth of total
private domestic credit has declined slightly. A s a
result, probably all observers will agree that money
has been “ tight.”
In terest R a tes

In terest rates bega n risin g in the

fall of 1968 and continued to rise almost uninter
ruptedly throughout the first half of 1969.

T he d is

count rate was raised from 5.5 % to 6 %

in A pril,

and bankers raised the prime rate from 7 % to 7 .5 %
in M arch and further to 8 .5 % in June.

A period

of stability developed in market rates during the
summer

but

was

follow ed

further

increases

this fall.

money market centers. In response to high market
rates of interest, savers switched from time and
savings deposits to market instruments, but the
ultimate effect from the standpoint o f the banking
system as a whole was a conversion o f time and
savings deposits into demand deposits, which have
higher reserve requirements.
H ence, what started
as a loss of reserves at individual banks amounted in
the final analysis to an increase in average reserve
requirements for banks collectively. W ith average
reserve requirements rising and total reserves falling
because

T h e g r o w th o f bank cre d it (to ta l

loans and investments o f comm ercial banks)

has

fallen sharply from the 11.0% rate o f advance last
Bank credit, as measured by last-W ednesday-

open

market

operations,

banks

were

forced to make substantial adjustm ents in their lia
bility and asset structures.
Banks began to exploit the so-called “ nondeposit"
sources o f funds, i.e., they began to b orrow m ore
heavily in the E urodollar market, sell comm ercial
paper

B ank C redit

year.

certificates of deposit at money market banks, but has
long since spread to “ consum er type” time deposits
and even to savings deposits at banks outside the

through

bank

holding

companies

and

filiates, and sell loans and other assets under re
purchase

agreement.

Individual

banks

could,

course, increase their reserves in this fashion.

of
But

for the banking system as a whole the result was a

Reserve,

conversion of deposits into nondeposit liabilities and,

grew at an annual rate of only 3.0 % in the first half

consequently, a reduction in average reserve require-

of-m onth

data com piled by the Federal

branches.
A nother im posed marginal reserve re
quirements on E urodollar borrow ings and on the
proceeds of sales o f outstanding loans to foreign
branches.

MEMBER BANK RESERVES
$ Bil.

T he stringency of reserves, the scrambling o f banks
for funds, and the reduced grow th o f bank credit in
the first half must be view ed against the backdrop of
strong credit demands. In particular, business loan
demands were strong as internally generated funds
fell short of amounts necessary to finance business
capital spending and inventory investment. Business
loans at com m ercial banks expanded at an almost
15% annual rate in the first half, very rapidly by
historical standards.

T o meet these strong demands

in the face o f reduced reserve availability, banks used
the reserve base m ore intensively by adjusting their
liability structure as previously described.

In addi

tion, they liquidated investments at a rapid pace.
Total investments declined at an 8 .2 % annual rate
Source:

Board of Governors of the Federal Reserve
System.

in the first half follow in g a 7 .3 % increase in 1968.
M ost of the liquidation occurred in U . S. Government
securities, but holdings o f other securities declined

ments, partially offsetting the effects o f time and
savings deposit attrition.
R eflecting borrow in g in
the E urodollar market, A m erican banks increased
their liabilities to their branches located abroad from
about $6 billion in D ecem ber to slightly m ore than

TIME DEPOSITS AT LARGE COMMERCIAL BANKS
(NOT SEA SO N A LLY ADJUSTED)
$ Bil.

$14 billion in July. T he Federal R eserve did not
begin collecting inform ation on other nondeposit
sources of funds until M ay, but from M ay through
July bank liabilities in these categories increased
from about $2.3 billion to $4.4 billion.
E arly in the second half (Ju ly 2 4 ), the monetary
authorities m oved to limit access to some nondeposit
sources of funds by amending Regulations D, Q , and
M.

Regulation D governs member bank reserves;

Regulation Q , the payment of interest on d ep osits;
Regulation M , the foreign activities of member
banks. E ffective A ugust 25, 1969, repurchase agree
ments with nonbanks involving assets other than
Treasury and agency issues were defined as time de
posits, subject to reserve requirements and interest
ceilings.

Recent data indicate that this change has

been effective in reducing the sale o f assets under
repurchase agreement, and has put further pressure
on the liquidity position of banks by reducing the
potential liquidity of broad classes o f bank assets.
Other amendments have had the effect o f reducing
banks’
market.

incentives

b orrow

the

Eurodollar

O ne amendment required banks to include

in deposits subject to reserve requirements the socalled “ L ondon checks” and “ bills payable checks”
which are used in repaying borrow ings from foreign

Source:

Board of G o vernors of the Federal Reserve
System.

slightly in contrast to rapid increases earlier in the
decade.
T he cumulative weight of restrictive monetary

private domestic nonfinancial sector by liquidating
U. S. Governm ent securities, their share o f flow s
to this sector declined from 4 1 .0 % in 1968 to 2 8 .4 %

policy has been m ore evident since M ay. Bank credit

in the first half o f 1969.

has actually declined, and m ore importantly, per
haps, the rate of loan grow th has diminished. B usi
ness loans during the summer months grew at only
a 4 .3 % annual rate and other loans declined slightly.
Som e of this slow dow n may have been due to reduced
credit demands, but probably the most important
factor was the cumulative impact of tight money.
Liquidity positions have been eroded to the point
that banks are strenuously rationing credit. A s al
ready mentioned, banks raised the prim e rate a full
percentage point to 8 .5 % in early June, and a recent

O t h e r D e p o sit o ry In s titu tio n s N o rm a lly o th er
depository institutions, such as savings and loan as
sociations and mutual savings banks, find themselves
in much the same boat as com m ercial banks during
periods o f tight money. Lim ited as to the rates they
can pay on deposits by the regulatory authorities and
by the long-term nature o f their assets, they are
usually quite vulnerable to rising yields on market
instruments. Savings inflows held up very well in
the first quarter, however. A n d while they dipped

have further tightened the screws on their non

sharply in the second quarter, these institutions were
able to maintain their support o f the m ortgage
market mainly by reducing holdings o f liquid assets

price terms.

and by continued heavy borrow ing.

survey of bank lending practices reveals that banks

A s is typically the case in periods o f restrictive
monetary policy, the banking system’s share o f total

A s a result,

their share o f credit extended to the private domestic
nonfinancial sector in the first half remained at

lected by the Federal Reserve, declined from 39 .8 %

approxim ately the 17% level which prevailed in
1968. Savings inflows apparently have fallen sharply

in 1968 to 16.3% in the first half o f 1969, dow n

further in the third quarter, and it is doubtful if

credit flow s, according to flow of funds data c o l

substantially from the previous low o f 2 5 % in 1966.
W h ile banks strove to maintain their lending to the

their share o f the market can be maintained.
T o t a l C r e d it F l o w s

A n a n a ly sis o f ba n k cred it

alone or even of bank credit plus credit extended by

BANK CREDIT ANNUAL GROWTH RATES
ALL COMMERCIAL BANKS
________

Per Cent

BUSINESS
LOANS

LOANS

TOTAL
20 h- BANK
CREDIT

OTHER
U.S. G O V T.
SECURITIES SECURITIES

nonbank depository institutions may overstate the
degree o f restrictiveness of monetary policy. A fter
all, there are a num ber of alternatives which b o r
rowers may use in adjusting to pressures exerted by
the Federal Reserve. W h en the cost o f credit sup
plied by depository institutions rises and its availa
bility shrinks, borrow ers typically turn to other
lenders. A s a result, the slow er grow th o f credit
extended by depository institutions has been offset
to some extent by the lending activity of other
sectors o f the credit markets.

Total flow s of credit to the private dom estic non
financial sector remained very high in the first half
of 1969, dow n only slightly from the second half o f
1968 and up slightly from the average level for 1968
SELECTED YIELDS ON SELECTED DATES
-

W eek Ended

-10

Dec. 27

June 27

Sept. 19

90-day bills

6.22

6.30

7.13

4-6 month com m ercial paper

6.25

8.55

8.50

Bankers' acceptances

6.60

8.58

8.38

5.81
6.12

6.48

7.41

5-10 y e a r Governm ents

6.66

7.39

O ver 10-year Governm ents

5.82

6.03

6.34

Moody's A a a C orporates

6.53

7.03

7.16

M oody's A a a M unicipals

4.57

5.55

5.85

Short-term instruments

-1 5

Longer term instruments
3-5 yea r Governm ents
-

□

1961-1967

Source:

□

1968

■

1st half of 1969

Board of Governors of the Federal Reserve System.

as a whole. B orrow ers turned increasingly to funds
supplied by nondepository financial institutions and
by others within the private domestic nonfinancial
sector. Financial institutions other than banks and
savings and loan associations (credit unions, in
surance companies, private pension funds, etc.)
supplied credit in the first half in slightly greater
volume than in 1968, maintaining the 3 3 % share of

funds from the banks and savings and loan associa
tions, and instead of acquiring liquid claims on de
pository institutions savers acquired market instru
ments, many o f which were long-term , nonliquid
claims.
W h ile liquid assets have grow n at substantially
reduced

rates,

GNP

has

continued

advance

the market which they held in 1968. D irect lending
by others than financial institutions (individuals,
nonfinancial businesses and state and local govern

rapidly. A s a result, the liquidity o f the nonbank
public relative to G N P has declined sharply this
year, and the public has becom e less willing to sacri
fice liquidity and acquire nonliquid claims, doing so

m ents) became m ore important in the first half, ac

only at rising rates of return on market instruments.

counting for 2 1 .7 % com pared with 7 .9 %
Liquidity

in 1968.

W h ile an in crea se in d irect le n d in g

has tended to offset the reduced rate o f bank credit
grow th, there has not been an equal dampening of

Summary G ro w th o f cred it at d e p o s ito r y in stitu
tions has slowed dow n. Attracted by rising market
rates of interest, savers have channeled an increasing
fraction of their savings directly into market se

the restrictiveness of monetary policy measured from

curities.

the liquidity side.
M onetary restraint has been
readily apparent in the behavior of liquidity in
dicators. T he money stock grew at a 3 .8 % annual

institutions may have compensated to some extent
for the financing o f real econom ic activity that might
otherwise have taken place through such institutions,

rate in the first half o f 1969, down from 7 .0 % in

an accom panying increase in liquidity has not o c

1968.

curred.

A s the chart shows, other com m on measures

of liquidity either declined or grew more slowly.
T his behavior of liquidity is a consequence of
disintermediation and the changed com position of
total credit flows.

W h ile credit flow s outside the depository

Declines in liquidity relative to econom ic

activity may act as a brake on further grow th of
unintermediated credit and thus on the financing
of aggregate demand.

R ising interest rates diverted

W yn n clle W ilson and Jimmie R. M onhollon

LIQUIDITY

LIQUIDITY AND CREDIT MEASURES
A N N U A L GRO W TH RATES
Per Cent

Per Cent

M O N EY
SUPPLY
PLUS TIME
DEPOSITS

S A V IN G S
AN D LOAN
SH A RES AND
MUTUAL SA V.
DEPO SITS

N O N BAN K
H O LD IN GS
OF LIQUID
ASSETS

TOTAL
PRIVATE
DOM ESTIC
CREDIT

Source:

□

1961-1967

□

1968

■

1st half of 1969

Board of Governors of the
System .

Federal Reserve

Source:

U. S. Departm ent of Com m erce and the Board
of Governors of the Federal Reserve System .

Expenditures by the Fifth District states since
1955 also went primarily for education and high
w ays. The percentage of expenditures going for
education has ranged from a low of not quite 20 %
in M aryla nd in 1955 to a high of almost 50% in
North Carolina in 1966. Since 1955 highw ay e x
penditures have exceeded those for education on
occasion in both M aryla nd and Virginia. Currently,
however, h ighw ay disbursements hold second place
in all District states, ranging from around 16% of
total expenditures in M aryla nd to 26% in West V ir
ginia. Public w elfare payments as a percentage of
total expenditures declined between 1955 and 1968
in all District states except Maryland w here there
w a s an increase of seven percentage points. Hos
pital and health expenditures declined slightly over
the period in M aryla nd and North Carolina but in
creased in the other three states, and insurance

trust payments increased in all District states.

STATE G O V E R N M
Total state government expenditures in the U. S.
have more than tripled since 1955, and e xpen d i
tures for education alone have more than q u a d
rupled.
Disbursements for education have in
creased from almost 25% of total expenditures in
1955, to over 36% in 1968. Outlays for highw ays
have accounted for the next largest share of state
expenditures with nearly 24% of total disburse
ments in 1955, a high of almost 25% in both 1956
and 1959, and around 18% in 1968.
Insurance
trust payments have fluctuated from a high of
almost 14% of total expenditures in 1959 to a low
of 7 % in 1968, while expenditures for public w e l
fare and hospitals and health have remained
relatively stable percentages of the total. "Other"
expenditures go largely for natural resources and,
in 17 states including Virginia and West Virginia,
for liq uor stores.

TOTAL STATE EXPENDITURES BY PURPOSE
FIFTH DISTRICT
Fiscal Y e ar 1968

$ Millions
1,500

1,250 -

1,000 -

750

500 -

250 -

MD.
I
Education
|
H ighw ays
g] Hospital and

N. C.

Health

S. C.

VA.

W . VA.

§J Public W elfare
[5] Insurance Trust Paym ents
j| | Other

NT EXPENDITURES

DISPOSITION OF STATE EXPENDITURES
U. S. AN D FIFTH DISTRICT
Fiscal Y e a r 1968

Per Cent

Construction outlays made up the bulk of capital
outlay expenditures, both in the U. S., 82%, and in
the District states (from 77% in Maryland to around
83% in both Virginia and South Carolina). State
interest payments on debt exceeded $1 billion in
the U. S. in 1968, and reached $30 million in M a r y
land, the District high, and over $8 million in V ir
ginia, the District low.
As a per cent of total
expenditures interest payments have actually d e
creased in three District states since 1955.
Com
pensation of state employees and officers accounted
for between 21% and 24% of total expenditures
for both the U. S. and the District.

100

U. S.

MD.

N. C.

Intergovernm ental
Current O perations
C ap ital O utlay

STATE INTERGOVERNMENTAL EXPENDITURES
BY RECEIVING UNIT

S. C.

V A.

W. VA.

O ther (Assistance and
Subsidies, Insurance and
Repaym ents, and Interest
on Debt)

U. S. AND FIFTH DISTRICT
Per Cent

Fiscal Y e ar 1968

State governments in the U. S. gave over $10
billion to school districts in 1968, over $5 billion to
county governments and over $4 billion to mu
nicipalities.
In the District, North Carolina gave
over $550 million to her counties, followed by
Maryla nd at almost $292 million, and Virginia at
$226 million.
M aryla nd and Virginia gave their
municipalities over $190 million and over $161 mil
lion, respectively, to lead the District. South C a r o
lina's aid w a s concentrated on school districts
($178 million) as w as West Virginia's at $128
million.

S. C.
Counties
M unicipalities
School Districts

VA.

W. VA.

K atherine M . Chambers

Townships and Special
Districts
[~1 Combined and Un
allocable
Source:

U. S. Departm ent of Commerce.

A Brief Survey of

(2 ) u n d erw ritten b y a n a tion a l sy n d ica te , and
(3 ) sold p rim a rily to in v e sto rs in that co u n try .
W hereas a foreign bond issue is subject to all laws
and regulations of the country in which it is sold,

THE EUROBOND MARKET
The 1960’s have witnessed a number of changes
and innovations in the m oney and capital markets,
both at home and abroad. N ot the least of these has

a E urobond issue is generally exempt.

been the m eteoric rise of the E urobond market. This

unregistered, bonds to protect the anonym ity o f the
investor.
If the borrow in g corporation fulfills the

market is not, as the name implies, confined e x

In fact, the

E urobond market is virtually free of any direct regu
lation or control. A ll E urobonds are “ bearer,” or

clusively to E urope or European participants, but is

regulations of the country in which it is incorporated,

an international capital market utilized extensively
in the recent past by U . S. corporations.

income taxes need not be withheld from interest pay
ments. T he tremendous popularity of E urobonds

Origins of the Market

P rio r to the em e rg e n ce

of the E urobond market in 1963-64, borrow ers who

with investors can be explained in large part by the
ease with which taxes on them may be evaded.

wished to float issues outside their own national

Marketing a Eurobond Issue

borders chose a particular national market for the
sale, such as the U . S. or Switzerland, and denom i
nated all the bonds in the currency of the country
chosen. Until 1963, N ew Y o rk was the principal

problem s attends each flotation of E urobonds because

market for foreign bond flotations. W h ile U . S. in
vestors were the chief purchasers of these bonds, they
became increasingly attractive to foreign buyers be
cause their yields frequently exceeded those on bonds
sold domestically by the same borrow ers.

In addi

tion, foreigners considered dollar-denominated assets
attractive in their own right. The im position of the

sp ecia l set o f

the bonds must be attractive to investors o f many
countries. T he quality of the borrow er, the stability
and convertibility of the currency chosen, and free
dom from national taxation are am ong the principal
concerns o f potential investors. Principally in order
to avoid tax withholding requirements, most A m e ri
can corporations and some European ones establish
separate international financing subsidiaries, often
solely for the purpose of raising funds in the E u ro
bond market.
A lthough U . S. subsidiaries are

Interest Equalization T a x in July 1963, however,
spelled the end of N ew Y o rk as a m ajor foreign bond

usually incorporated in Delaware, L uxem bourg and

market. This tax is levied as a percentage o f the pur
chase price of a foreign security. W h ile it is paid by
the purchaser, in the case of bonds it generally is
shifted to the foreign seller w ho must offer a c o r

parent com pany generally guarantees bonds sold by
the subsidiary.

respondingly higher yield to attract U . S. investors.
M eanwhile, British authorities had been preparing
the ground for the rebirth of London as the principal
international capital market by easing pertinent legal
restrictions and reducing certain taxes.
Due to
balance of payments problems, however, the au

a n d /o r

thorities severely restricted access to the British bond

where from 50 to 100 firms assist in the marketing o f

the Netherlands Antilles are also popular bases. T he

A typical E urobond issue is sponsored by a syndi
cate com posed of four or five leading European banks
U.

S. investment houses.

T he managing

group then selects perhaps 20 to 50 m ore financial
institutions from several countries to assist in the
underwriting operation. These firms, in turn, form
selling groups in their own countries or areas to
effect the final placement of the issue. Thus, any

market to a preferred list of Commonwealth b o r

each E urobond issue, regardless of its size.

rowers.

most single institutions reach a relatively small num

The dollar-denominated bonds sold in M ay

Because

1963 by the Belgian governm ent through the London

ber o f investors, a large number of firm s is necessary

market, principally to n on-U . S. investors, may be

to tap effectively the multinational market. F urther

considered the first true E urobond issue.

more, the European capital market has very few

Nature of a Eurobond

E urobon d

issue

marketed by an international syndicate simultaneously
in a number of different countries.

A ll the bonds in

a given issue are denominated in the same currency.

large institutional investors.

O nce placed, the bonds

may be delivered simultaneously in several cities, but
payment is generally in one city.

Payment in dollar-

denominated securities is always in N ew Y ork .

E urobonds are generally sold to investors in countries

Demand for Eurobonds

other than the one in whose currency they are de

attracted by the high quality, high yield, and v ir

nominated.

tually tax-free nature o f Eurobonds.

In these respects a E urobond differs

W e a lt h y in d iv id u a ls are
The

Chase

from a foreign bond issue which is ( 1 ) denominated

Manhattan Bank estimates that 7 0 % to 8 0 % of m ost

in the currency of the country in which it is sold.

issues is bought by individuals. The identity o f these

individuals is harder to establish, however. A m eri
cans are discouraged from investing in E urobonds as
such purchases are subject to the Interest Equaliza
tion T a x. W h ile undoubtedly a number of A m eri
cans do buy E urobonds through Swiss or other
foreign banks, thereby evading this tax, they ap
parently do not constitute a m ajor class o f investors.

The Market 1964-1967 B e tw e e n 1964 and 1967
the volum e of E urobond offerings expanded steadily
from $700 million to $2.0 billion. D uring these years
the center of activity shifted first from L ondon to

British citizens are seriously hampered in the pu r
chase of any dollar-denominated straight debt asset
by foreign exchange controls. Until recently, h ow

active in the N ew Y o rk foreign market, continued to
be am ong the most frequent borrow ers. International

ever, other m ajor European countries outside Scan

L uxem bourg, and then diffused to include N ew Y o rk
and G erm a n y . S ca n d in a via n g o v e r n m e n ts and
private Japanese corporations, both o f which had been

institutions, particularly the European Coal and Steel
Com m unity and the European Investment Bank, also

dinavia placed no restrictions on the flow of funds

utilized the market. A s shown in the chart, however,

into the E urobond market.
Based on the origin of subscriptions, Switzerland

private non-U . S. corporations were the dominant
group of borrow ers until 1968. D uring these years,

is the most important source o f E urobond demand,
accounting for one-quarter to one-third of all pur

the proportion o f E urobond offerings denominated
in dollars climbed to about 9 0 % , with long-term
straight debt the m ost popular type.

chases.

A recent study by N. M . Rothschild & Sons

estimates that 6 0 % to 7 0 % of these bonds ultimately

In 1965, U . S. corporations entered the E urobond

is placed with n on-Sw iss residents.1 Italy, Belgium,
and the Netherlands have been important sources o f
demand at various times. Germany has been a m ajor
purchaser since early 1968 when E urobond rates

market for the first time.

exceeded domestic long-term rates.

ments position.

1 N. M. Rothschild & Sons, The Eurobond M arket. A study on
issuing and trading o f Eurosecurities prepared at the request o f
H igh Level Standing Group on Capital Markets o f the Business
Industry A dvisory Comm ittee to the Organisation for E conom ic
operation and Developm ent.
February 1969. p. 9.

the
the
and
Co

EUROBOND

In February o f that year,

the U . S. Government had requested voluntary co m
pliance by m ajor U . S . corporations to a set of guide
lines designed to im prove the U . S. balance o f pay
These guidelines curtailed direct e x

ports of capital for overseas development.

In their

search for capital, these corporations turned first to
overseas banks for credit, and, in the latter part of

FLOTATIONS

$ Bil.
BY TYPE OF

BORROW ER

3.5 -

3 .0

U. S. Com panies

Other Com panies

— [3 Governm ents
0

International
O rganizatio ns

2.5

1.5

1.0
1965

1966

1967

1968

Jan .-

1965

1966

1967

July

1965

1966

1967

1968

■

U. S. Dollar

W est G erm an Mark

□

Other

Jan .Ju ly
1969

Source: M organ G u ara n ty Trust Com pany of N ew York.

1969

[~~1 Long-Term Straight
g

Medium-Term Straight
and N egotiable CD's

□

Convertible

1968

Jan .Ju ly
1969

the year, to the E urobond market. E urobond sales
by U . S. corporations constituted about one-third o f
the total in 1965, a proportion which was not e x
ceeded until 1968. A s a corollary to the entrance
o f U . S. borrow ers, N ew Y o r k underwriters soon
became prominent in E urobond syndicates.
Events in 1968

issues dipped to 7 2 % of the total, with issues d e
nominated in W est German marks rising from 8 %
in

In 1968, the E u r o b o n d m arket

was deluged with offerings by A m erican companies
and the volum e of E urobond sales surpassed the com
bined total of the preceding tw o years.

its preferred position as the currency o f denom ination
for E urobonds. Despite the fact that all convertible
issues were denominated in dollars, dollar E urobon d

T he surge in

U . S. borrow in g was triggered by the replacement o f
voluntary balance of payments controls with m ore
stringent mandatory ones on January 1, 1968. U nder
the new controls, U . S. corporations were forced to
rely almost exclusively on overseas borrow in g to fi
nance their foreign operations. Am erican companies
accounted for $2.1 billion of the $3.6 billion total o f

1967 to 2 5 %

1968.

T he

m ark’s g row in g

popularity reflected investor confidence in the mark
and the desirability of holding such bonds should
the mark be revalued. B orrow ers were attracted by
the

significantly

low er

interest cost

m ark-de

nominated bonds com pared to dollar bonds.
Recent Developments A fte r a fast start in 1969
during which the trends of the previous year were
accentuated, the E urobond market staggered and then
stalled.
T otal E urobond offerings dropped from
$1.2 billion in the first quarter to $0.5 billion in the

E urobonds sold in 1968.
This dramatic change in the com position o f b o r

second. Several developments contributed to this d e
cline.
H igh and rising interest rates discouraged
some borrow ers and diminished the appeal o f lo n g

rowers was accompanied by an equally abrupt switch

term straight debt investments, as many investors

in the types of bonds sold. T he market fo r long-term

preferred short-term paper.

straight debt, which had hitherto absorbed the pre

term E urodollar market, which offered rates o f re

In particular, the short

ponderance of E urobond issues, apparently could not

turn in excess of 10% for 3-m onth deposits, rep

handle com fortably the influx o f new issues at the
prevailing interest rates, and most borrow ers were

resented keen com petition.

unwilling to pay substantially higher rates.

R ising interest rates on

mark-denominated bonds made them less attractive

W h ile

to bond sellers as the threat of revaluation was no

some borrow ers shortened the maturities on their
straight debt issues to insure successful sales, a m a

longer countered by a significantly low er interest
cost.
Concurrently, convertible issues became less

jority turned to bonds which were convertible into
com m on stock o f the parent com pany. T he net result

alluring to investors as U . S. stock prices plunged.
T w o other factors contributed to a slow dow n in o f

was that over half of the total volum e o f Eurobonds
sold in 1968 was convertible, com pared to 13% in

ferings by U . S. co rp o ra tio n s: direct foreign invest
ment controls were eased somewhat, thereby lessen
ing their dependence on the E urobond market, and
the heavy borrow in g of 1968 undoubtedly alleviated
the immediate need for new funds. Finally, G er

1967, and 8 6 % of all convertibles were sold by U . S.
companies. Indeed, virtually the entire grow th in the
E urobond market in 1968 was attributable to co n
vertibles as sales of long-term straight debt actually
declined.
Convertibles were fairly new to the international
bond market and proved to be extrem ely popular.

many, Italy, and Switzerland adopted measures re
stricting to some degree the volum e o f E urobonds
sold within their borders. These countries acted to
protect their relatively low er long-term dom estic

T h e special appeal of a convertible bond lies in the

interest rates and to insure the availability o f su f

com bination of a g ood yield as protection in a bear

ficient capital for dom estic investment.

market and the capital gains potential should the
share price of the com pany’s stock rise.

W ith U . S.

Conclusion

T h e fu tu re g r o w th and d ire ctio n o f

stock prices generally rising at that time, the co n

the E urobond market depends to a large extent on

version

Several

the health and stability o f m ajor currencies and the

mutual funds com posed solely of convertible E u ro

willingness of nations to permit foreigners to tap

bonds were launched.

their domestic sources o f investment funds.

option

was

also

highly

valued.

Sellers of convertibles ap

parently felt that the risk o f future equity dilution

T he

ever-expanding list of new borrow ers drawn to the

was m ore than offset by the ease of procuring funds

E urobond market and the variety o f instruments

at considerably low er interest rates than those pre

offered suggest that the market will continue to play

vailing on straight debt issues.
W h ile U . S. borrow ers dominated the E urobond
market in 1968, the dollar slipped somewhat from

an important and unique role in international finance
as long as underlying conditions are favorable.
Jane F . N elson

The Fifth District
ELECTRIC POW ER PRODUCTION 1963-1967

Evidence of the grow th in Fifth District popula

ranked only third, but in total production o f electri

tion, industry, and com m erce is found in the increas

cal energy it was consistently the largest with 38.7

ing production of electrical energy. Electrical energy

billion kilowatt hours in 1967. In the Fifth District
it has the largest population and the largest number
o f manufacturing establishments— both of which are

production grew at an average annual rate o f 9 .6 %
between 1963 and 1967, placing the Fifth District
well above the 7 .1 % rate of growth for the nation
over the same period.
Production

Generating

A s sh ow n in T a b le I, e le ctric p o w e r

production grew faster in the District of Columbia
than in any of the Fifth District states, despite a
sharp drop in production in 1965.

Sales of electric

power in W ashington actually rose in 1965, meaning
that,

while

production

was

cut

back,

additional

amounts of pow er were brought in from

sources

outside the city.
In terms of total production o f electric pow er the
District of Columbia ranked sixth with slightly over
one billion kilowatt hours in 1967.

South Carolina,

the fifth largest in total production, produced 13.7

Capacity

Carolina’s rate o f growth in production

F or

M a ry la n d ,

the

D is

trict of Columbia, and N orth Carolina, the average
rate o f grow th in production between 1963 and 1967
was greater than the average increase in generating
capacity, which suggests that they were able to make
m ore intensive use o f existing capacity. T he opposite
was true in V irginia, W est V irginia, and South
Carolina which increased their generating capacity
m ore than their production.
T he V irginia E lectric and P ow er Company, for e x
ample, reportedly attempts to maintain capacity 10%
to 15% in excess of that required by current demand
in order to have a reserve for emergencies.
Principal Customers

billion kilowatt hours in the same year.
North

sizable sources of demand for electric pow er.

In d u stria l firm s co n su m e d

the bulk of kilowatt hours sold in most Fifth Dis-

TABLE 1

PRODUCTION OF ELECTRIC EN ERGY IN THE FIFTH DISTRICT
(Millions of K ilow att Hours)
1963-1967

Maryland
District of Columbia
Virginia

1963

1964

1965

1966

1967

A verag e Annual
% Increase

12,496

13,920

17,272

18,868

20,915

13.9

708

871

564

919

1,018

15.4

21,912

23,090

23,371

23,813

23,404

1.7

West Virginia

18,219

18,889

19,225

23,220

27,359

11.0

North Carolina

24,937

28,189

31,183

35,162

38,705

11. 6

South Carolina

11,548

12,497

12,643

12,812

13,441

3.9

Source:

U. S. Departm ent of Commerce.

TABLE 2

INSTALLED G ENERATING CAPACITY
1963-1967
(1,000 Kilowatts)
A v erag e A n nual
% Increase

1963

1964

1965

1966

1967

M aryla nd
District of Columbia

2,699

3,312

3,676

4,038

4,101

11.3

537

0.0

Virginia
West Virginia
North Carolina

4,548

4,946

5,115

5,331

5,349

4.2

3,140
5,759

3,048

3,608

4,179

5,147

13.6

7,106
2,859

7,188

5.8

2,554

6,007
2,690

6,345

South Carolina

3,093

4.9

Source:

2,696

U. S. Departm ent of Com merce.

trict states.

W est V irgin ia was a case in p oin t;

6 4 .2 % went to industrial firms.

M uch of this in

there, in 1966 and 1967 only 2 0 .8 % of the kilowatt

dustrial demand for electric pow er originates in the

hours

mining industry.

sold

went

residential

customers

while

V irginia was the exception with

the m ajority o f sales goin g to residential custom ers.
TABLE 3

COMPOSITION

ELECTRIC POWER SALES

(M illions of K ilow att Hours)
Residential

Total

situation will change radically over the next decade.
Industrial

T he small nuclear plant w hich was constructed by
a group o f Fifth District utility companies and the

33,373

9,531
(28.56)

9,447
(28.31)

13,102
(39.26)

V irginia

35,775

12,465
(34.84)

8,741
(24.43)

10,942
(30.59)

W est Virgin ia

22,159

4,617
(20.84)

2,834
(12.79)

14,266
(64.20)

North C aro lin a

48,373

16,681
(34.48)

8,245
(17.04)

21,778
(45.02)

South C aro lin a

29,258

8,402
(28.72)

4,261
(14.56)

15,473
(52.88)

Note:

T h e F ifth D is trict has n o n u

Com m ercial

M aryland and
D. C.

Source:

Nuclear Power

clear pow er plants in service at present, but this

1966 and 1967

Bracketed figures are percentages of total.

A tom ic E nergy Com m ission at Parr, South C a ro
lina has gone out o f operation.

It was run for seven

years as an experimental model, and the lessons
learned from it are now being put to use in the c o n
struction o f large permanent nuclear pow er plants
in M aryland, V irginia, N orth Carolina, and South
Carolina.

U. S. Departm ent of Commerce.

R ob ert W . Chamberlin

F I F T H D I S T R I C T F IG U R E S — 1969 E D I T I O N
N ow Available Free O f Charge Upon Request From This Bank
This 100-page booklet is a compilation of economic statistics on the States and Standard
Metropolitan Statistical Areas in the District. Figures for the U. S. are also included.

Digitized for12
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