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JUNE 1969

IN THIS ISSUE

The Role o f U. S.
Government Demand
Deposits in the
Monetary P ro ce ss......... 3

Capital Spending in
Major Areas o f the
Fourth D is t r ic t.............. 12

FEDERAL

RESERVE

BANK

CLEVELAND

Additional copies of the ECONOMIC REVIEW may
be obta> ted from the Research Department, Federal
Reserve Bank of Cleveland, P. O. Box 6387, Cleve
land, Ohio 44101. Permission is granted to reproduce
any material in this publication providing credit is
given.

JUNE 1969

THE ROLE OF U.S. GOVERNMENT DEMAND
DEPOSITS IN THE MONETARY PROCESS
The behavior o f d iffe re n t m onetary variables in

article discusses the nature o f Government de

recent years has generated considerable discussion

posits and th e ir relationship to selected m onetary

about the nature and in te n t o f m onetary policy.

magnitudes.

One variable used freque n tly

interpret the

U. S. Government deposits have generally been

nature o f m onetary policy is the money supply.

excluded fro m any d e fin itio n o f the money supply

Occasionally, however, this measure has behaved

because they are n o t held by the public. However,

quite erratically over short periods o f tim e and in

there is reason to re-examine this exclusion. For

many cases has run counter to the stated in te n t o f

one

the monetary authorities. This behavior has, in

Treasury

tu rn , led to w ide discussion o f the factors, other

d ire ctly change the level o f the conventionally

than Federal Reserve actions, th a t influence the

defined

money

deposits can affect the

thing,

changes

deposits

in
at

supply.

the

dollar am ount o f

commercial
In

banks

can

a d d ition , Treasury

money supply, such as U. S. Government deposits

demand

at commercial banks.1 A lthough Treasury deposits

reserves. One measure o f the am ount o f reserves

are not the sole cause o f the erratic behavior o f the

available to the commercial banking system is the

money

reserve base.2 This measure is fre q u e n tly used as

supply, changes in the

level

o f these

use o f bank

deposits at commercial banks have contributed at
times to large changes in the money supply. This

The reserve base is derived from the summary of Factors

Affecting Bank Reserves (H.4.1) and Table A-4 in the
1

For example, see "Definitional Aspects of the Money

Federal Reserve Bulletin. This variable is also referred to

Supply," Economic Commentary, Federal Reserve Bank

as the monetary base. See, for example, L. C. Andersen

of Cleveland, November 9, 1968. Also see Albert L.

and J. Jordan, "The Monetary Base—Explanation and

Kraus, "The Money Supply," New York Times, February

Analytical Use," Review, Federal Reserve Bank of St.

26, 1969, p. 61.

Louis, August 1968.

ECONOMIC REVIEW

an indicator o f m onetary policy because the to ta l
reserve base is assumed to be free fro m influence

MECHANICS OF U. S. G O VERNM ENT
DEMAND DEPOSITS

by the banking system. A lthough various factors

A lthough Treasury deposits affect the behavior

supplying or absorbing reserves are n o t d ire ctly

o f commercial banks, it has generally been as

under the control o f the Federal Reserve System,

sumed th a t such deposits have little or no effect

others are. Therefore, the monetary authorities

on private econom ic a c tiv ity , since the Govern

can achieve any desired level o f the reserve base by

ment makes its payments fro m its accounts at the

altering the reserve factors under th e ir control in a

Federal

countervailing

fashion.

One derivation

Reserve banks. T hat is, the spending

o f the

stream fro m the Government in to the economy

reserve base includes Federal Reserve credit (Fed

relies upon the accounts at Federal Reserve banks

eral Reserve holdings o f U. S. Government securi

as the direct media and o n ly in d ire ctly involves the

ties, discounts and advances, and flo a t), the gold

accounts at commercial banks.

less

Treasury Balances at Commercial Banks. Tax

Treasury cash holdings. Other Federal Reserve

and loan accounts are the most im p o rta n t type o f

deposits and other Federal Reserve accounts are

Treasury deposits at commercial banks. Funds

subtracted fro m this figure. U. S. Treasury de

flo w

posits and foreign deposits are included in other

sources. Proceeds fro m the sale o f Treasury securi

stock, and Treasury currency outstanding

in to

tax and loan accounts fro m

several

Federal Reserve deposits. Other Federal Reserve

ties can be deposited d ire c tly in to these accounts.5

accounts include not o nly the capital accounts o f

Funds also come in to tax and loan accounts when

the Federal Reserve System but more im p o rta n tly

w ithheld income and em ploym ent taxes and cer

the System's holdings o f foreign currencies.

When

tain excise taxes are collected. A lthough these

Government deposits are transferred fro m com

taxes can be paid d ire c tly to the Internal Revenue,

mercial

these tax payments can also be made through a

banks

the

Federal

Reserve, other

Federal Reserve deposits increase, and other things

commercial bank th a t qualifies as a special deposi

being equal, the reserve base falls. As Treasury

to ry . Many banks th a t q u a lify as depositories fo r

balances

tax

Federal

Reserve banks are drawn

dow n, the reserve base increases.4

and

loan accounts aggressively so lic it tax

payments. In a d d ition , some q u arterly payments
o f income and p ro fit taxes are made in to tax and

loan accounts. F inally, the Treasury can transfer
Recently, other Federal Reserve accounts were separated

into two accounts in the Weekly Report of Condition

funds d ire c tly to its accounts at commercial banks

(H.4.1). Other Federal Reserve assets now appear as a

if its balances at the Federal Reserve banks are

source of reserves, while other Federal Reserve liabilities

larger than desired.

and capital appears as a use of reserves. The former
account includes foreign currency holdings, while the
latter account primarily includes the capital accounts of

As m entioned
Treasury

balances

earlier, the d o lla r volume o f
at commercial

banks varies

the Federal Reserve System.

considerably over the short run, p rim a rily because

See “Sources of Change in the Monetary Base,"
Economic Commentary, Federal Reserve Bank of Cleve
land, May 19, 1969.

In some Government financings, some special deposi

tories are encouraged to purchase the new issues by
crediting their tax and loan accounts.

JUNE 1969

the collection o f funds tends to be concentrated at

been determined and the effects on banks reserves

certain

have been considered, the banks concerned are

points

in tim e.

For example. Treasury

balances usually increase at or around tax collec
tio n dates, as most individuals and businesses w ait
u ntil

the

last m om ent to

n otified o f the amounts o f the call.
In the tim e th a t takes place between the call

pay th e ir taxes. A

and the transfer o f funds, the actual flo w o f funds

substantial in flo w also occurs when the Govern

in to the tax and loan accounts m ight be substan

ment raises funds through a new security offering.

tia lly d iffe re n t fro m the original forecasts. H ow

Transfer Process. Funds are transferred from

ever, adjustm ent can be made by "special” calls at

commercial banks to the Federal Reserve (or are

the Group C banks. Because the Group C deposi

redeposited in commercial banks) by means of

tories include the

nation's largest banks, it is

"calls” on the various banks th a t hold tax and loan

assumed th a t they can more readily absorb short-

accounts. Banks are divided into three call classifi

run changes in Government deposits and adjust

cations, based upon to tal deposit size. Group A

th e ir balance sheet positions more ra p id ly than can

depositories include banks w ith to ta l deposits o f

the smaller banks. Special calls can be made daily,

$200,000 or less. Group B depositories have to ta l

and the

deposits ranging fro m $200,000 to $500 m illio n ,

n o tifie d by 11 a.m. on the day the call becomes

and Group C depositories have to ta l deposits in

effective. These calls can be used to w ith d ra w

excess o f $500 m illio n . A lthough all three types o f

more funds fro m the commercial banking system,

banks th a t are concerned are usually

depositories are subject to regular calls made by

to cancel part or all o f a previous call, or to allow

the Treasury, Group C are also subject to special

the Treasury to redeposit funds in commercial

calls.

banks.

Group A depositories, the smaller banks, are
usually called only once a m onth, although calls

Special

calls are designed to

give the

Treasury better co n tro l and more fle x ib ility in
managing its deposits at the Federal Reserve.

can be more frequent. Because o f the regularity o f
Group A calls, the banks can plan fo r them . When

The to ta l am ount outstanding in tax and loan

necessary, the Treasury makes regular calls on

accounts varies substantially, as shown in the

Group B and C depositories on Mondays; however,

chart. The sharp flu ctu a tio n s reflect the irregular

additional calls can be made on Thursdays. Trans

in flo w o f tax payments and o u tflo w o f Govern

fers o f funds to the Treasury are then due from

ment

fo u r to seven days after the call is made. T hat is, if

attem pts to m aintain a fa irly stable average bal

calls are announced on Monday, payments fall due

ance at the Federal Reserve banks.

expenditures

as w ell

as the

Treasury's

on the fo llo w in g Friday and Monday, w hile calls
made on Thursday are due the next Tuesday,
Wednesday, and Thursday.
Calls

are

made

after

Treasury
Banks.

consultation

between

One

Balances
of

Federal

Reserve

the fu n ctio n s o f the

the

Federal

Reserve System is to serve as the fiscal agent o f the

Reserve officials and are

U. S. Treasury. Because o f its responsibility to

based on daily forecasts o f payments in to and out

assist the Government to place debt, make pay

Treasury and Federal

o f the Treasury accounts held at the Federal

ments to the public, redeem matured Treasury

Reserve banks. Once Treasury cash needs have

issues, and purchase Treasury securities fo r various

ECONOMIC REVIEW

UNITED STATES TREASURY DEPOSITS

I960
La s t e n try :

’61

D ecem ber

So u rce o f d a ta :

' 62

’6 3

' 64

' 65

' 66

’6 7

' 68

'69

1968

U. S . T r e a s u r y D e p a rtm e n t

Government trusts or investment funds, the Fed

It is necessary, therefore, fo r the Treasury to

eral Reserve is closely concerned w ith the flo w o f

maintain su fficie n t w o rkin g balances at the Fed

funds into and o u t o f the Treasury. Since almost

eral

all Treasury payments proceed fro m Federal Re

expenditures. Sim ilar to any other econom ic u n it,

Reserve

banks

order to

handle daily

serve accounts, nearly all funds received by the

Treasury balances should be adequate to cover

Government at one tim e or another pass through

daily transactions, ye t n o t to o large. Relatively

the Treasury's accounts at the Federal Reserve

large balances w ould n o t o n ly reflect an in e ffic ie n t

banks.

use o f funds, b u t could also have a restrictive

Digitized for 6FRASER

JUNE 1969
effect on commercial bank reserves.

equal, the conventional measure o f the money

The Treasury presumably has a general target

supply must fa ll. However, the reserves available to

balance th a t it attem pts to m aintain, over tim e, at

the banking system remain constant because no

the Federal Reserve banks. In order to accomplish

reserves were w ith d ra w n .

this goal, the Treasury adds or w ithdraw s deposits
from

comm ercial

banks in

order to

If it were desirable to maintain a given level o f

its

the money supply despite an increase in Treasury

balance at the Federal Reserve fa irly close to the

deposits, the Federal Reserve could provide addi

desired level. In this w ay, the Treasury attem pts to

tional reserves to the banking system. In this case,

, minim ize the effe ct th a t changes in Government

the reserve base w ould increase, and the decline in

deposits have on the reserves o f the commercial

the money supply due to Treasury actions w ould

banking system. It is apparent fro m the chart th a t

be offset. If the goal o f m onetary p o licy were to

Treasury balances at the

increase the money supply, bank reserves w ould

Federal

keep

Reserve have
the

have to be supplied in an even greater q u a n tity . In

balances in tax and loan accounts at commercial

other words, in periods when payments are made

remained

relatively

stable

compared w ith

banks. Since 1965, balances at the Federal Reserve

into Government demand deposits at commercial

have shown increased v o la tility , presumably due to

banks, the reserve base must be increased in order

the changed expenditure patterns associated w ith

to maintain a given level o f the conventionally

the Vietnam c o n flic t and more erratic receipts due

defined money supply, b u t if the money stock is

to changes in the tim in g o f tax dates and Treasury

to grow, on balance, the reserve base must be

financings.

increased by a larger am ount.

EFFECTS OF CHANGES IN
G O VERNM EN T DEMAND DEPOSITS

ment deposits fro m commercial banks to Treasury

On the other hand, if the transfer o f Govern

The Treasury's management o f its balances at
the

Federal

Reserve banks and at commercial

accounts at the Federal Reserve were to take place
w ith o u t a reduction

in these accounts at the

Federal

reserves available to

Reserve, the

the

banks has a very significant influence on the

commercial banking system w ould decline; th a t is,

conventionally defined

the reserve base w ould fa ll. However, the money

measure o f the money

supply. For example, if Treasury balances at the

supply or the volume o f private demand deposits

Federal Reserve banks are near the desired level

w ould n o t be affected.

and the Government is collecting tax receipts, the

When the Treasury draws down its deposits at

receipts w ill be redeposited, or allowed to remain

the Federal

Reserve to make payments to the

in tax and loan accounts at commercial banks.

private sector, and it is desirable to m aintain the

When this occurs, however, the conventionally

level o f the

defined money supply w ill decline, because de

w ithdraw n

fro m

posits are being transferred

means to

offset Treasury actions.

fro m

accounts o f

money supply, reserves must be
the banking system by other
If

it were

private economic units to th a t o f the Government.

desirable fo r the money supply to increase, the

The form er account is included in the conven

course o f action fo llo w e d by the m onetary a u th o r

tional measure o f the money supply, w hile the

ities w ould depend upon the desired grow th o f the

latter is not. Obviously, all other things remaining

money supply relative to the grow th o f the money

ECONOMIC REVIEW
supply induced by the Treasury operations. If the

formed measures are referred to as M3 (th a t is, M 1

monetary authorities desire a grow th o f the money

plus Government demand deposits) and M4 (M 2

supply above the grow th rate th a t w ould result

plus Government demand deposits).

from the Treasury operations, the Federal Reserve
w ould have to supply additional reserves.

The exact pattern o f response in any o f the
m onetary measures, th a t is, any measure o f the

Treasury flow s o f funds are n o t independent o f

money supply, depends on several factors, in c lu d

one another. Generally, when Treasury deposits at

ing among others, the lag pattern between changes

the Federal Reserve banks are reduced, they are

in the reserve base and changes in the money

replaced as q u ic k ly as possible in order to bring

supply, the private demand fo r currency in rela

Government balances back to the desired level. If

tio n to deposits at commercial banks, and the

this occurs, reserves in the banking system w ill not

q u a n tity o f reserves commercial banks are w illin g

change;

remain

to hold in relation to the am ount o f outstanding

constant, b u t the money supply w ill increase. In

deposits. However, this analysis does n o t a ttem pt

order to maintain a given level o f the money

to isolate the influence o f these various factors.

th a t

is, the

reserve base w ill

supply or to allow the money supply to grow, the

During the period under review, Government

reserve base w ould have to be reduced or increased

demand deposits fre q u e n tly were subject to large

at a slower rate o f grow th than w ould otherwise be

changes.

necessary.

changes in Treasury deposits on various m onetary

U. S. Treasury deposits at commercial banks

In order to emphasize the effects o f

aggregates, o n ly quarterly changes o f more than

can be an im p o rta n t influence on other m onetary

$500

variables. A change in Treasury deposits can have a

quarters in the 1960-1968 period, average Govern

m illio n

are discussed.

15 o f the 36

tw o fo ld effect: (1) changes can affect the rate o f

ment deposits changed by more than $500 m illio n .

growth o f the money supply; and (2) changes can

In 7 o f the 15 quarters, Government deposits at

alter the am ount o f reserves available to com m er

commercial banks increased by more than $500

cial banks.

m illio n (see Table I). As shown in Table I, the
quarterly increases d iffe r not o nly in terms o f size,

RECENT EXPERIENCE

but also in relation to effects on the reserve base

T o understand the effects o f changes in Govern
ment demand deposits on various m onetary vari

and the other m onetary measures.
As suggested earlier, if Government demand

1960 through 1968

deposits at commercial banks increase and if there

were analyzed. From these data, it is apparent th a t

is no offsetting action on the part o f the m onetary

changes in Government demand deposits have a

authorities, M 1 and M2 should decline, w hile M3

significant effect on any given measure o f the

and

ables, q uarterly data fro m

and

the

reserve base should

remain

In this

unchanged. If the reserve base is increased s u ffi

analysis, Government demand deposits are added

ciently to offset the decrease in private demand

to the components in the conventional d e fin itio n

deposits, M 1 and M2 should remain unchanged,

of the money supply (M 1) and to the components

but M3 and M4 should grow. If the reserve base is

increased in a greater am ount than necessary to

money

the

supply

broader

and

the

reserve

d e fin itio n

th a t

base.

includes tim e

deposits at commercial banks (M 2 ). These newly
Digitized for8 FRASER

maintain

the previous level o f private demand

JUNE 1969
TABLE I
Changes in M onetary Variables
Selected Quarters, 1961 —1968

Periods When

Seasonally Adjusted
Change in

Government Demand
Deposits Increased

Government
Demand Deposits

Seasonally Adjusted Annual Rate of Change
Reserve
Base

(bil. of $)
1961
1962
1964
1965
1967
1967
1968

IV
II
I
II
I
IV
I

+$1.3
+ 0.8
+ 0.6
+ 1.2
+ 1.1
+ 1.3
+ 1.3

+6.0%
+3.6
+4.8
+4.5
+6.6
+6.3
+7.3

+4.2%
+1.1
+2.3
+3.0
+3.5
+4.9
+4.4

+
+
+
+
+
+
+

6.6%
7.0
6.5
7.8
9.1
8.1
5.7

+7.9%
+3.2
+3.5
+5.3
+4.6
+9.0
+4.9

+ 9.1%
+ 8.6
+ 7.4
+10.8
+ 9.2
+10.0
+ 7.5

-$ 1 .1
- 0.6
- 0.9
- 0.9
- 1.5
- 0.6
- 0.9
- 2.1

+0.7%
+2.9
+5.5
+3.8
+6.9
+1.8
+5.3
+5.0

+3.1%
+2.5
+4.5
+5.2
+6.6
+0.4
+5.8
+6.8

+ 6.4%
+ 8.3
+ 8.3
+ 9.4
+10.7
+ 0.8
+11.2
+ 6.0

-0 .6 %
+0.8
+2.3
+2.8
+3.8
-0 .3
+4.8
+3.6

+ 4.7%
+ 6.5
+ 6.8
+ 5.6
+ 9.0
+ 0.6
+11.0
+ 3.8

Periods When
Government Demand
Deposits Decreased
1961
1962
1963
1965
1965
1966
1967
1968

II
I
IV
III
IV
IV
II
II

NOTE: Annual rates of change are based on quarterly averages derived from
monthly averages of daily figures.
Sources: Board of Governors of the Federal Reserve System and Federal Reserve
Bank of St. Louis

deposits, then M 1 and M2 should grow b u t at a

transfer o f demand deposits fro m private accounts

slower rate than M3 and M4 _

to Government accounts has a depressing effect on

In the seven quarters selected fo r discussion,

the expansion o f M 1 and M2>

the reserve base increased concurrently w ith Gov

During the 1960-1968 period, U. S. Govern

ernm ent deposits (see Table I). Since M 1 and M 2

ment deposits declined by more than $500 m illio n

also increased, the reserves supplied to the banking

in eight quarters

system apparently more than offset the decline in

Treasury deposits at comm ercial banks is usually

(see Table

I). A

decline in

private demand deposits. It can also be observed

accompanied by a rise in reserves available to these

th a t the grow th o f M 1 was slower than the growth

banks, as well as a rise in private demand deposits

o f M3 in all cases, as was the grow th o f M2

and M 1 and M2 , because the Government has

compared w ith M4 . It can be concluded th a t fo r

made payments o u t o f its accounts at the Federal

any given expansion

Reserve

in the reserve base, the

banks.

(Transfers

Federal

Reserve

ECONOMIC REVIEW
accounts to replenish Treasury balances do not

TABLE II

have to be made at the same tim e the Government

E lasticity o f the Money Supply
W ith Respect to the Reserve Base
Selected Periods

makes payments to private individuals; the lag,
however, is thou ght to be short.) If the reserve
base increases at this tim e, the grow th o f M 1 or
M2 can be quite large. As in the earlier example,
the reserve base increased in all eight cases in
w hich a decline in Government demand deposits
occurred. M 1 and M2 increased by large amounts
in all periods except one. The exception occurred
at the tim e o f the severe credit restraint in the fall

Periods When
Government Demand
Deposits Increased
1961
1962
1964
1965
1967
1967
1968

Elasticity

IV
II
I
II
I
IV
I

0.70
0.31
0.48
0.67
0.53
0.78
0.60

o f 1966. As w ould be expected, however, the
transfer o f funds did result in the larger grow th of
M 1 relative to M 3 , and M2 relative to M4 in all
cases.
One fu rth e r com m ent should be made concern
ing the relative grow th rates o f tw o o f the above
monetary measures. When Government demand
deposits are increasing, the rate o f grow th o f M 1
is, in most cases, considerably less than the rate o f

Periods When
Government Demand
Deposits Decreased
1961
1962
1963
1965
1965
1966
1967
1968

II
I
IV
III
IV
IV
II
II

4.43
0.86
0.82
1.37
0.96
0.22
1.09
1.36

grow th o f the reserve base. However, when Gov

Source: Federal Reserve B ank o f C levelan d

ernm ent

are decreasing, the

The calculated response o f the conventional mea

grow th rates o f the tw o monetary measures are

sure o f the money supply to the reserve base was

much closer together; in fact, in fo u r o u t o f eight

lower in periods when Government demand de

demand

deposits

cases, the grow th rate o f M 1 exceeded th a t o f the

posits were increasing than in periods when such

reserve base.

deposits were declining. It is, therefore, apparent
is

th a t if the grow th rates o f M 1 and the reserve base

obtained if the percent growth o f M 1 is divided by

are compared at d iffe re n t times, d iffe re n t conclu

convenient

measure

comparison

reserve base. The

sions could be obtained concerning the response of

resulting number is called the elasticity o f M 1 w ith

the money supply to the reserve base. Thus, an

respect to

the

percent grow th

o f the

the reserve base, and it shows the

analyst could be misled in to th in k in g th a t the

relative response o f the money supply to a given

money supply was growing to o slow ly fo r a giv.en

change in the reserve base. Elasticities fo r the

growth in the reserve base, when, in fact, Govern

periods under review are presented in Table II. In

ment demand deposits also were increasing and

periods when Government demand deposits de

absorbing

clined, the measure o f elasticity ranged fro m 0.82

support the grow th o f private deposits.

to 4.43, excluding the fo u rth quarter o f 1966. In

CONCLUDING COMMENTS

bank

reserves th a t

otherwise could

periods when Government demand deposits in

U. S. Government demand deposits at com m er

creased, the measure ranged fro m 0.31 to 0.78.

cial banks are an im p o rta n t influence on other

Digitized for10
FRASER

JUNE 1969

monetary measures in the short run. In particular,

these deposits was substantial. Moreover, these

changes in these deposits can affect the grow th

changes in Treasury deposits can affect the quan

rates o f other im p o rta n t monetary variables th a t

tity o f reserves available to the banking system and

are often used as indicators o f the current in te n t

lead to defensive operations on the part o f the

of m onetary policy. Such changes do n o t invali

Federal Reserve System. A better understanding o f

date the use o f these indicators, b u t they do make

monetary p olicy at any given tim e is possible only

the interpretation o f th e ir movements in a short

w ith

period o f tim e more d iffic u lt. In fact, in 15 o f the

factors th a t can affect the m onetary and reserve

36 quarters reviewed, the effect o f changes in

measures.

a fu lle r

understanding o f all the various

ECONOMIC REVIEW

CAPITAL SPENDING IN MAJOR
AREAS OF THE FOURTH DISTRICT
The regular spring surveys o f capital spending

eastern

Ohio

counties2

plan

spend

larger

plans o f m anufacturing and other selected business

amounts fo r new plant and equipm ent in 1969

firm s in several major areas o f the Fourth Dis

than they did in 1968. As shown in Table I, to ta l

Federal

1969 spending by all participating manufacturers

Reserve Bank o f Cleveland in A p ril, reveal th a t

is expected to exceed the actual 1968 to ta l by 14

tr ic t ,1 w hich

were conducted

by the

substantial increases in overall spending fo r new

percent. The expected 1969 increases in capital

plant and equipm ent are planned in 1969. The

spending are sim ilar in the durable goods and the

planned increases in the D istrict are sim ilar to the

nondurable

13-percent increase in capital outlays predicted fo r

percent, respectively).

goods

However,

firm s across the nation. Results o f the area surveys

group

(14 percent and

than

half the

anticipate

reduced

participating

are summarized below.

manufacturers

spending

NORTHEASTERN OHIO

m anufacturing companies, w ith nearly equal re

1970. A 24-percent decline is expected fo r all

A lm o st tw o o u t o f every three m anufacturing

ductions fo r the durable and nondurable goods

firm s participating in the survey in eight north-

groups (see Table I). Thus, to ta l spending in 1970
w ould drop to about 13 percent below the actual

1The surveys in northeastern Ohio (including Cleveland)

level o f spending in 1968.
Public u tilitie s operating in the eight n o rth

and Cincinnati were undertaken with the cooperation of
the

Greater

Cleveland

Growth

Association

and

the

eastern Ohio counties anticipate little change in

Greater Cincinnati Chamber of Commerce, respectively;
the Pittsburgh survey was conducted for the Federal
Reserve Bank of Cleveland by the University of Pitts
burgh.

Ashtabula, Cuyahoga, Geauga, Lake, Lorain, Medina,

Portage, and Summit counties.

JUNE 1969
TABLE I

plans fo r 1969 and lower than expected actual

Capital Spending by M anufacturing Firms
and Public U tilitie s
Eight Northeastern Ohio Counties*
(Spring 1969 Survey)
Year—to —Year Percent Change

spending in 1968. More than half o f the manufac
turing firm s participating in both the fa ll and
spring surveys upgraded th e ir spending plans fo r
1969 between the tw o survey dates, w hile in this
spring's survey, three o u t o f every fo u r companies

1968 (actual)
to
1969 (planned)

1969 (planned)
to
1970 (planned)

+14%
+14
+38
- 3

-2 4 %
-2 4
-4 1
-3 0

-2 0
+47

-1 7
-1 7

+44

+30
+13
-2 2

-2 2
-2 7
+83

+32
+20

-4 2
-6 8

+11
+ 1

-1 6
- 3

and

-1 8 %

facilities outside the Cleveland area. In the rubber

M A N U FA C TU R IN G
Durable goods
Ordnance
Primary metals
Fabricated
metals
Machinery
Electrical
equipment
Transportation
equipment
Nondurable goods
Food
Printing and
publishing
Chemicals
Rubber and
plastics
PUBLIC U T IL IT IE S

reported less actual spending in 1968 than they
had anticipated last fall.

CLEVELAND AREA
Capital spending plans o f m anufacturing firm s
in the Cleveland m etropolitan area closely resem
ble those o f manufacturers in the eight n o rth
eastern Ohio counties, reflecting the fact th a t the

fo u r counties included in m etropolitan Cleveland

+10%

TO TA L

form the nucleus o f the larger eight-county area. A
comparison o f the data in Tables I and II shows
th a t the spending pattern o f firm s in the eight
counties differs significantly fro m the pattern fo r
Cleveland-area firm s in o n ly tw o industries—rubber

* Ashtabula, Cuyahoga, Geauga, Lake, Lorain, Medina,
Portage, and Summit counties.

plastics and chemicals—both having major

and plastics industry, spending by A k ro n manufac
turers easily outweighs spending by all other firm s
in the industry in the northeastern Ohio area. On

Source: Federal Reserve Bank of Cleveland

the other hand, the construction o f a large new
plant in Ashtabula C ounty is cu rre n tly having a
the

level o f spending in the near term . Their

combined

outlays

are expected to

rise by

percent in 1969 and to decline by 3 percent in

marked influence on spending in the chemical
industry in the eight-county northeastern Ohio
area.
Cleveland-area

1970.
When surveyed in the fall o f 1968, manufac

m anufacturing

firm s

plan to

spend. 18 percent more fo r new plant and equip

turing firm s in the eight counties expected to

ment in 1969 than in 1968, as shown in Table II.

spend 15 percent less in 1969 than in 1968, w ith a

Spending is expected to drop back in 1970 by 22

p articularly severe reduction in the durable goods

percent, which w ould mean spending at a level o f

sector.

8 percent below actual outlays in 1968.

Therefore,

the

14-percent

increase

spending plans fo r 1969 indicated by the spring

In the Cleveland area, nondurable goods manu

survey sharply revises earlier expectations. The

facturers as a group expect to increase spending in

revision reflects a com bination o f raised spending

1969 by 35 percent, compared w ith an increase o f

ECONOMIC REVIEW
T A B LE II

expected to decline in 1970 as the installation o f

Capital Spending by M anufacturing Firms
Cleveland M etropolitan Area
(Spring 1969 Survey)
Year—to —Year Percent Change

modern equipm ent nears com pletion. In the trans
portation equipm ent industry, spending w ill rise
substantially in 1969 b u t w ill drop in 1970 as
construction o f new m anufacturing facilities pro
gresses.

1968 (actual)
to
1969 (planned)

1969 (planned)
to
1970 (planned)

+ 16%
3

-2 4 %
-3 1

- 18
+ 51

- 7
-1 9

out o f every $5 in 1968 (see Table III) . The rise

+ 39

reflects large construction projects in the trans

+ 32
+ 35
- 30

-2 0
- 7
+91

Durable goods
Primary metals
Fabricated
metals
Machinery
Electrical
equipment
Transportation
equipment
Nondurable goods
Food
Printing and
publishing
Chemicals
Rubber and
plastics

Spending fo r new structures is expected to rise
as a share o f to ta l capital spending by manufac
turing firm s in 1969 and 1970—accounting fo r
nearly $1 o u t o f every $4 spent, compared w ith $1

portation

T O TAL

+ 32
+102

-4 2
-3 2

+ 98

-2 6

+ 18%

-2 2 %

equipm ent, machinery, and chemical

industries th a t are in progress or planned fo r 1970.
A significantly larger p ro p o rtio n o f to ta l o u t
lays

the

Cleveland

area

is earmarked fo r

expansion o f m anufacturing facilities in 1969 than
in 1968 (see Table III) . The increased share is
particularly striking in the nondurable goods group
but is also noticeable fo r some industries in the

Source: Federal Reserve Bank of Cleveland

durable goods group.3

1970, spending fo r

expansion is expected to drop back to its 1968
16 percent by the predom inant durable goods

pro p o rtion . The results o f the spring survey give

group. On the other hand, the expected reduction

no indication o f capacity shortages. In fact, the

in outlays in 1970 is much smaller in the nondur

percent d is trib u tio n o f returns showing to o little ,

able than in the durable goods industries. Substan

enough, or to o much capacity, respectively, was

tial increases in planned outlays fo r 1969 in the

the same in the spring o f 1969 as in the fa ll o f

chemical

1968.

industry

and fo r

1970

in the food

industry account fo r the larger rise in spending by
the

nondurable goods group in

1969 and the

smaller decline in 1970. On the other hand, the
prim ary metal and the transportation equipm ent
industries, w hich account fo r about tw o -th ird s o f
all capital outlays by manufacturing concerns in

A lm ost fo u r o u t o f every five m anufacturing
firm s

responding to the question on financing

capital investments expect to rely exclusively on
3

Where year-to-year changes in the proportion of spend

ing for expansion appear inconsistent with changes in the
proportion for construction

in a given industry, the

the Cleveland area, largely determine the size o f

explanation can generally be found in the fact that some

the year-to-year changes in overall spending in the

questionnaires show

durable goods group. In 1969, investment in the

spending

breakdown between expansion and replacement; thus,

prim ary metal industries, especially basic steel, w ill

two

remain close to the high level o f 1968 but is

distributions.

Digitized14
for FRASER

a breakdown of total

between structures and machinery but fail to supply a
different

bases are

used in calculating percent

JUNE 1969
TABLE III

15 percent greater in 1969 than in 1968 (see Table

Capital Spending by M anufacturing Firms
Cleveland M etropolitan Area
(Spring 1969 Survey)
Percent D istrib u tio n o f Total Spending by Type*
(Between Structures and Equipm ent and
Between Expansion and Replacement)

IV ). Durable goods manufacturers expect to in
crease th e ir capital spending in 1969 by 30 percent
over 1968, in contrast to a 2-percent cutback by
nondurable goods manufacturers. Public u tilitie s
plan to spend 34 percent more in 1969 than in
1968.

Structurest

Expansion^;

1968 1969 1970 1968 1969 1970
Durable goods
Primary metals
Fabricated
metals
Machinery
Electrical
equipment
Transportation
equipment
Nondurable goods
Food
Printing and
publishing
Chemicals
Rubber and
plastics
TO TA L

In 1970, capital spending by manufacturers in
the area is expected to decline by 17 percent,

19%
9

23%
9

24%
10

64%
66

68%
76

63%
79

50
35

32
42

27
27

56
58

48
66

66
55

17
32
31

31
33
32

32
23
28

63
57
69

43
77
52

31
63
54

only 7 percent less in 1970 than in 1969.

40
30

41
35

29
28

30
86

69
93

60
74

T A B LE IV

20%

24%

63%

70%

63%

w hich w ould reduce the level o f spending to 5
percent below to ta l outlays in 1968. The expected
decline in spending in 1970 is greater among the
nondurable goods group than among the durable

* Based only upon returns in which these breakdowns
were supplied.
t Spending for equipment equals 100 percent less the
percent shown for structures.
$ Spending for replacement equals 100 percent less the
percent shown for expansion.
Source: Federal Reserve Bank of Cleveland

internal sources o f funds in 1969 and 1970; this is
v irtu a lly the same pro po rtion as in 1968. In 1969,
responding m anufacturing firm s expect to finance
internally more than three-fourths o f th e ir total
outlays, w hile in 1970, five-sixths o f to ta l outlays
w ill be internally financed. In 1968, three-fourths

goods industries. Public u tilitie s expect to spend

Capital Spending by C incinnati Area Firms
(Spring 1969 Survey)
Year—to —Year Percent Change
1968 (actual)
to
1969 (planned)
M A N U FA C TU R IN G
Durable goods
Primary and
fabricated
metals*
Machinery
Electrical
equipment
Transportation
equipment
Nondurable goods
Food
Paper
Printing and
publishing
Chemicals
PUBLIC U T IL IT IE S

1969 (planned)
to
1970 (planned)

+ 15%
+ 30

+ 62
+ 7

29
26

17%
14

+ 15
+106
2
1
- 18

25
23

- 33
+ 1
+ 34

74
33
7

12 %

+135

o f capital spending was internally financed.
TO TA L

C IN C IN N A TI AREA
Capital spending by m anufacturing firm s in the
seven-county C incinnati m etropolitan area w ill be

+ 23%

* Combined in order to preclude disclosure of individual
establishment data.
Source: Federal Reserve Bank of Cleveland

ECONOMIC REVIEW

Here

again,

spending plans fo r

1969 were

revised since the preceding survey. In the fall o f
1968, Cincinnati-area

m anufacturing firm s

had

anticipated a 3-percent decline in spending fo r
1969, w hile public u tilitie s had expected a 23-

TA B LE V
Capital Spending by C incinnati Area Firms
(Spring 1969 Survey)
Percent D istrib u tio n o f Total Spending by T yp e *
(Between Structures and E quipm ent and Between
Expansion and Replacement)

percent rise in th e ir capital investments. Between
Structurest

the tw o survey dates, one-half the firm s p a rtic i

1968 1969 1970 1968 1969 1970

pating in both surveys raised th e ir spending plans
fo r 1969, w hile actual 1968 outlays were less than
previously expected at a somewhat smaller number
of firm s. A ll o f the public u tilitie s raised th e ir
plans fo r

1969, w hile tw o-thirds o f th a t group

spent less than expected in 1968.
M anufacturing firm s participating in the spring
survey in the C incinnati area were almost evenly
divided between those planning to spend more and
those planning to spend less fo r new plant and
equipm ent in 1969 than in 1968. Nevertheless, the
level o f spending is expected to be higher in 1969

Expansion J

M A N U FA C TU R IN G
Durable goods
Primary and
fabricated
metals §
Machinery
Electrical
equipment
Transportation
equipment
Nondurable goods
Food
Paper
Printing and
publishing
Chemicals
PUBLIC U T IL IT IE S

37%
36

37%
41

29%
24

66%
57

73%
70

58%
61

27
52

8
40

32
32

34
53

12
78

4
69

13
39
45
45

42
33
33
47

13
37
47
49

70
76
60
79

68
76
61
24

62
55
37
15

44
30
37

39
28
38

6
28
45

67
90
71

79
89
72

84
84
76

T O TA L

37%

38%

35%

67%

73%

64%

than in 1968, due to the large size o f some o f the
spending increases, particularly in one industry.
Reduced outlays fo r

1969 are indicated fo r a

m ajority o f the industries included in Table IV . On
the other hand, more than tw ice as much spending
is planned in 1969 than in 1968 in the transporta
tio n equipm ent industry, including a m u ltim illio n
dollar construction project by one o f the large
national

corporations and sizable spending

creases by other area members o f the industry.
W ith o u t the c o n trib u tio n fro m the transportation

Manufacturers plan to use an even larger p o r

equipm ent industry, the manufacturing industries

tio n o f th e ir to ta l capital spending fo r expansion

as a group w ould show a 6-percent decline rather

o f facilities in 1969 than in 1968. The relative

than a 15-percent rise in spending fo r 1969.

increase, however, w ill be more than cancelled in

More than one-third o f total spending in 1969

1970 (see Table V ). No reasons fo r the increased

w ill be fo r construction, about the same p ro p o r

spending fo r expansion in 1969 can be gleaned

tio n as in 1968. In 1970, however, the share of

from

spending fo r construction is expected to decline in

proportions o f m anufacturing firm s w ith either

the m anufacturing group and to increase in the

"adequate”

public u tilitie s group (see Table V).

ported in both the spring and fa ll surveys.

Digitized 16
for FRASER

the questionnaires, as v irtu a lly the same

or "in s u ffic ie n t”

facilities were re

JUNE 1969

A b o u t fo u r o u t o f every five Cincinnati-area
m anufacturing

firm s in those tw o industries. Increased spending

in the stone, clay, and glass industry is in line w ith

obtain all o f th e ir needed funds fro m internal

large investments planned by manufacturers o f

sources in both 1969 and 1970, the same p ro p o r

building materials th ro u g h o u t the nation.

th e ir

tio n as in

supplying

capital

in fo rm a tio n

ments in new machinery and equipm ent by several

financing

firm s

investments

expect

1968. A t least 90 percent o f total

Spending plans by manufacturers fo r 1969 and

spending by reporting manufacturers is expected

1970 involve a noticeable reduction o f spending

to be financed in tern ally in 1969 and 1970, in

fo r construction, fro m $1 o u t o f every $4 in 1968

contrast to less than 80 percent o f actual outlays

to $1 o u t o f every $ 6 —$7 in 1969 and 1970. A

in 1968.

similar

cutback

in the

share o f spending fo r

structures in nonm anufacturing industries is not

PITTSBURGH AREA

expected u n til 1970 (see Table VI I).

Business firm s in the fo ur-county Pittsburgh

A b o u t one-third o f to ta l spending in 1969 is

m etropolitan area participating in the spring sur

earmarked fo r expansion o f present facilities by

vey plan to spend 12 percent more fo r new plant

manufacturers as well as by the entire group o f

and equipm ent in 1969 than in 1968. The major
co n trib u tio n to increased spending w ill come from

T A B LE VI

public u tilitie s and durable goods manufacturers;

Capital Spending by Pittsburgh Area Firms
(Spring 1969 Survey)
Year—to —Year Percent Change

in contrast, nondurable goods manufacturers and
some nonm anufacturing industries expect lower
outlays in 1969 than in 1968. In 1970, except fo r
the nondurable goods group (especially chemical

1968 (actual)
to
1969 (planned)

1969 (planned)
to
1970 (planned)

+ 5%
+ 11

-1 2 %
-2 0

+155
+ 3

-1 1
-1 2

+ 59
+ 10

-2 2
- 7

companies), all major industry divisions w ill con
trib u te to a 13-percent reduction in spending by
participating firm s (see Table V I). The planned
reduction w ould move the level o f to ta l outlays to
about 3 percent below the level fo r 1968.
The

results

o f the

spring survey show an

upward revision o f spending plans fo r 1969. The
fall 1968 survey indicated th a t, in 1969, capital
spending by all business firm s and by all manufac
turing firm s w ould decline by 5 percent fo r each
group. The spring 1969 survey indicates a rise in
spending fo r both the m anufacturing sector and all

M A N U FA C TU R IN G
Durable goods
Stone, clay.
and glass
Primary metals
Fabricated
metals
Machinery
Electrical
equipment
Nondurable goods
Food
Printing and
publishing
Chemicals
TRANSPO R TATIO N
PUBLIC U T IL IT IE S
R E T A IL TRADE

4
- 27
+ 15

-3 7
+23
-4 8

+
-

-2 9
+63
*
-1 1
-7 4

TO TAL

+ 12%

56
52
23
46
15

groups combined.
Among

m anufacturing

industries, the stone,

clay, and glass industry and the fabricated metals
industry stand o u t w ith large spending increases
planned

fo r 1969, reflecting substantial invest

-1 3 %

* No change.
Sources: University of Pittsburgh and Federal Reserve
Bank of Cleveland

ECONOMIC REVIEW
T A B LE V II

Nine-tenths o f all capital spending by Pittsburgh-area m anufacturing firm s furnishing in fo r

Capital Spending by Pittsburgh Area Firms
(Spring 1969 Survey)
Percent D istrib u tio n o f Total Spending by T yp e '
(Between Structures and Equipm ent and
Between Expansion and Replacement)

mation on financing is expected to be financed
internally in

1969, a slig h tly larger p ro p o rtion

than in 1968 b u t less than anticipated fo r 1970.
Four o u t o f every five responding firm s plan to

Structurest

Expansion $

1968 1969 1970 1968 1969 1970
M A N U FA C TU R IN G
Durable goods
Stone, clay,
and glass
Primary metals
Fabricated
metals
Machinery
Electrical
equipment
Nondurable goods
Food
Printing and
publishing
Chemicals
TR AN SP O R TA TIO N
PUBLIC U T IL IT IE S
R E T A IL TR A DE

26%

14%
15

8
20

T O TA L

16% 37%
14
38

finance all o f th e ir capital investment fro m in te r
nal sources in

1969 and 1970, compared w ith

33%
33

35%
27

three o u t o f every fo u r in 1968.

19
9

54
35

32
31

23
23

CONCLUDING COMMENTS
According to recent nationw ide surveys, both

22
11

34
5

22
37

18
44

30
49

public and private, 1969 w ill see a capital spending

35
47
3

9
5
3

13
23
4

57
29
53

48
39
62

18
57
50

ing in the

15
26

27
27

19
5
49
25
26

33
23
54
13

52
n.a.
47

three surveyed areas in the F ourth D is tric t indicate

a rise in spending fo r 1969 o f sim ilar proportions

23%

22%

66
11

31
n.a.
18

2
48
31

15% 30%

35%

38%

boom sim ilar in magnitude to the surge in spend

although o f m inor proportions, fo r three years
beyond 1969. Spending plans in at least tw o o f the

to those expected nationally. On the other hand,
substantially

n.a. Not available.
* Based only upon returns in which 1these breakdowns
were supplied.
t Spending for equipment equals 100 percent less the
percent shown for structures.
$ Spending for replacement equals 100 percent less the
percent shown for expansion.

1964-1966 period. A private survey

predicts fu rth e r rises in nationw ide capital outlays,

reduced outlays are predicted fo r

1970 in all three D istrict areas. In comparing the
regional survey results w ith the national pattern,
neither the s im ila rity in 1969 nor the divergence in
1970 should be overemphasized. Regional patterns
o f capital investment may deviate fro m the n ation

Sources: University of Pittsburgh and Federal
Bank of Cleveland

Reserve

al pattern fo r various reasons, including differences
in industrial m ix and differences in tim in g o f local
expansion or m odernization programs by m u lti
plant national concerns.

participating firm s.

Compared w ith

1968, this

The expected substantial increase in both re

represents a smaller share o f to ta l spending fo r

gional and national spending fo r 1969, together

m anufacturing and a larger share fo r all industries

w ith the rise in the share o f to ta l outlays desig

com bined. The proportion o f outlays fo r expan

nated fo r expansion, does n o t appear to reflect

sion is considerably smaller in the Pittsburgh area

need fo r additional capacity, since the u tiliz a tio n

than in the Cleveland and C incinnati areas (and

rate o f overall m anufacturing capacity has been at

also in the entire country) and w ill remain so

the rather low level o f 84 percent fo r the past tw o

despite a small rise expected in 1970.

years. Instead, it may be an indication o f "fo rw a rd

Digitized18
for FRASER

JUNE 1969
b u y in g "

in anticipation o f continued price in

1969, both regional and national, w ill depend in

creases fo r capital goods and construction. In any

large

event, fu lfillm e n t o f the current spending goals fo r

physical resources and financing.

part

upon

the

ava ila b ility

o f su fficie n t