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OCTOBER 1969

Regional Trends in
Steel P ro d u c tio n ............3

Securities o f U. S.
Government Agencies . .19

FEDERAL RESERVE



B A N K OF C L E V E L A N D

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OCTOBER 1969

REGIONAL TRENDS IN STEEL PRODUCTION

Since the end o f W orld War II, the Fourth

technological changes in steelmaking and an in ­

Reserve D istrict's share o f the nation's

creased emphasis by steel producers on building

steel production has declined markedly. For exam­

new plants closer to steel-consuming markets have

ple, in 1968, the fo u r steel-producing centers in

not

the Fourth D istrict accounted fo r about 38 per­

discusses some reasons fo r the recent shifts in the

cent o f the nation's o u tp u t o f steel, compared

d istrib u tio n o f steel production among the various

Federal

favored

the

Fourth

D istrict.

This article

w ith 47 percent in the early post-World War II

regional steel centers, w ith particular emphasis on

years. The Fourth D istrict's declining share o f steel

changes in the Fourth D istrict.

production

trend tow ard

Geographical Distribution of Production. D ur­

decentralization in steelmaking evident during the

reflects

a long-term

ing the post-World War II period, steel o u tp u t in

Tw entieth Century.

the United States grew at an average annual rate o f

The situation in the D istrict is associated w ith a
move away from

older steel-producing centers,

only 1.8 percent, w hich was considerably slower
than the grow th o f overall industrial production.

such as Pittsburgh and Youngstown, th a t a ttrib ­

In part, slow grow th

uted th e ir early developm ent to th e ir access to raw

increased substitution o f other materials fo r steel

materials used in steel ingot production. As steel

and a massive swing fro m surplus to d e fic it in the

technology improved and access to raw materials

United States trade balance fo r steel m ill products.

became less im portan t, steel capacity and pro­

Steel o u tp u t in the post-World War II period

in steel o u tp u t reflected

duction was directed to regions where steel was

has also been characterized by a continuing trend

historically in d e fic it supply and where the market

tow ard decentralization. Despite th a t trend, steel

fo r steel was growing most rapidly. On balance,

production




is still

concentrated

in fo u r major
3

ECONOMIC REVIEW

geographical steel centers—Chicago, Pittsburgh, the
Northeast Coast, and Y oungstow n.1 However, in

TECHNOLOGICAL CHANGES AND
PATTERNS OF STEEL OUTPUT

1968, these fo u r centers accounted fo r a smaller

Steel production requires large inputs o f raw

share o f the nation's steel o u tp u t than in 1947 (see

materials th a t account fo r an im p o rta n t part o f the

Table I).

to ta l cost o f production. Therefore, p ro x im ity to

A lthough the Fourth D istrict still ranks as the
dom inant

steel-producing

area

in

the

raw materials largely influenced the location o f

United

steel centers in the earlier years o f the industry's

States, grow th o f steel production in this region

development. However, consum ption o f raw ma­

has been nom inal during the post-World War II

terials per ton o f steel produced has been declining

period. For example, production in recent peak

over tim e. For example, in 1947, nearly 1.8 tons

years o f

1965 and 1966 barely exceeded the

of iron ore, 1.0 tons o f coke, and 0.4 tons o f

previous high fo r the D istrict (1955), w hile steel

limestone were required fo r each to n o f pig iron

ou tp u t in the United States exceeded the 1955

produced in the U nited States. In 1968, about 1.6

high as early as 1964. Nevertheless, the D istrict's

tons o f iron ore, 0.6 tons o f coke, and 0.2 tons o f

share (38 percent) o f to ta l o u tp u t o f steel has been

limestone were required fo r each to n o f pig iron

relatively constant during the 1960's, fo llo w in g a

produced.2

long-term
changed

decline. The
share

of

D istrict's

o u tp u t

since

relatively un­
1960 reflects

Because coking coal

had constituted a key

element in pig iron prod u ctio n , the steel industry

expansion in both Cleveland and C incinnati th a t

was

has largely been offset by continued deterioration

closely tied to sources o f coking coal. P ro x im ity to

historically

heavily

dependent

upon

and

in Pittsburgh's share and a relatively unchanged

rich coking coal deposits in southwestern Pennsyl­

position fo r Youngstown.

vania gave the Pittsburgh steel center its early

Table I also shows th a t Chicago has become the

advantage and dominance in the steel industry;

nation's largest individual steel-producing center

therefore, the area had a superior cost advantage

(having

tra d itio n a l

over other steel-producing centers o f the country.

displaced

Pittsburgh,

the

leader), w hile Youngstown fell fro m the th ird to

The advantage was su fficie n t to overcome the

fo u rth largest steel producer between 1947 and

advantage th a t rival steel centers had because o f

1968. The relative position among all steel centers

th e ir p ro x im ity to iron ore deposits.3 Develop­

improved fo r the Northeast Coast and D e tro it, but

ment o f the by-product coking process in the late

declined fo r B uffalo.

Nineteenth Century freed other steel centers fro m

These changes in geographical patterns o f steel
production

largely

reflect the changes in steel

dependence on coking coal fro m

southwestern

Pennsylvania and significantly reduced consump-

technology, steel pricing, and steel consum ption,
factors th a t are reviewed in this article.

2

American

Iron and Steel In stitu te , A n nual Statistical

Reports, 1948, 1957, 1960, and 1968.
1

For a description o f the producing d istricts and a more

complete discussion o f p roduction trends, see "Regional

3

The Pittsburgh Regional Planning Association, Region in

Trends in Steel P ro d u ction ,'' Econom ic Review, Federal

Transition (Pittsburgh, Pennsylvania: U niversity o f Pitts­

Reserve Bank o f Cleveland, November 1966, pp. 9-19.

burgh Press, 1963), pp. 262-263.

Digitized for
4 FRASER


OCTOBER 1969

TA B LE I
Steel Ingot Production
United States and Major Steel-Producing Centers
Selected Years
1 9 4 7 -1 9 6 8

M il. o f Net Tons

1947

1950

1955

1960

1965

1966

1967

1968

United States

84.9

96.8

117.0

99.3

131.2

134.1

126.9

131.1

Fourth D istrict

40.2

44.0

49.4

37.9

50.3

51.0

46.7

49.8

Others

44.6

52.9

67.6

61.2

80.9

83.1

80.2

81.3

United States
Fourth D istrict
Others

100.0%
47.4
52.6

100.0%
45.4
54.6

100.0%
42.2
57.8

100.0%
38.2
61.8

100.0%
38.3
61.7

100.0%
38.0
62.0

100.0%
36.8
63.2

100.0%
38.0
62.0

Chicago
Pittsburgh
Northeast Coast
Youngstown
D etroit
West
South
Buffalo
Cleveland
Cincinnati
St. Louis

20.2
26.3
12.1
13.2
3.7
5.1
4.7
5.0
4.7
3.2
1.7

19.7
25.0
12.5
12.5
4.8
5.6
5.1
5.0
4.7
3.2
1.9

20.2
22.5
13.8
10.8
5.1
5.5
5.3
5.6
5.2
3.7
2.2

20.9
20.2
14.5
8.4
6.6
6.2
5.7
5.2
5.6
4.0
2.7

20.1
19.8
13.9
8.6
7.4
6.4
5.9
5.4
5.1
4.8
2.6

20.3
19.7
13.6
8.3
7.5
6.4
5.9
5.8
5.5
4.5
2.5

20.8
19.2
13.9
7.8
7.2
6.5
6.5
5.7
5.3
4.5
2.6

20.4
19.3
13.8
8.2
7.0
6.5
6.4
5.5
5.9
4.6
2.4

Average Annual
Rate o f Change
in Production
1947-196!

Percent D istrib u tion
+1.8%
+0.6
+2.7
+2.1
+0.2
+2.5
-0 .9
+5.4
+2.8
+3.1
+2.0
+2.7
+4.0
+4.2

NOTE: Details may n o t add to totals because o f rounding.
Sources: American
Cleveland

tio n

o f coke.

Iron

and Steel

In stitu te

and

Federal

Reserve Bank o f

A d d itio n a lly , technical im prove­

early as the tu rn o f the T w entieth C entury.4 That

ments in blast furnaces and use o f beneficiated

trend encouraged the expansion o f steel centers in

(refined) ores have continued to reduce coke usage

major steel-consuming markets, such as Chicago

in more recent years.

and D e tro it, where h isto rica lly scrap has been in

Technological developments and discoveries o f

abundant supply. S im ilarly, the conversion o f low

new deposits o f iron ore have also played an

grade

im portant role in releasing the steel industry from

reduced ore usage per ton o f pig iron produced.

dependence on raw materials. Consum ption o f

iron

ore

in to

high grade ores has also

^W alter Isard, "Some Locational Factors in the Iron and

iron ore per ton o f pig iron produced had been

Steel

declining because o f increasing usage o f scrap as

Journal o f P olitica l Econom y, LVI (June 1948), p. 214.




Industry

Since the Early Nineteenth C e n tu ry,"

5

ECONOMIC REVIEW

Moreover, in the post-World War II period, the

relatively slow start in the United States, steel­

increase in im ports o f iron ore fro m Labrador and

making by the BOP grew rem arkably, fro m only

Venezuela

0.3 percent o f to ta l steel o u tp u t in 1958 to 37

has

encouraged

expansion

o f steel

centers along the Eastern seaboard o f the United

percent in 1968.6 Because an oxygen converter

States.

can produce 150 tons o f steel in less than 1 hour,

These developments have resulted in smaller
quantities o f raw materials consumed and shipped

compared w ith

12 hours

by the open hearth

process, its cost advantage over the open hearth

to steel-producing plants, which in tu rn has tended

process is considerable, ranging fro m an estimated

to reduce the importance o f locating steel plants

$2 to $10 per to n .7 As o f January 1969, the

near coal and ore sites. A ccordingly, the relative

industry had installed 54 m illio n tons o f oxygen

position

steel-producing centers,

steelmaking capacity in the U nited States, w ith

such as Pittsburgh and Youngstown, w hich owed

another 20 m illio n tons planned fo r startup during

th e ir prominence to p ro x im ity to coal, deterio­

1969 and 1970 (see Table II).

of

tra d itio n a l

Steel-producing centers located in or near the

rated, w hile other steel centers located favorably

largest steel-consuming markets o f the c o u n try,

w ith respect to markets grew.
Moreover, changes in the steelmaking process,

such as Chicago and D e tro it, show the largest

i.e., the conversion o f pig iron in to steel, adversely

actual and planned installation o f oxygen furnace

affected the industry position o f tra d itio n a l steel

capacity. In these three centers, the relative share

centers.

Nineteenth

o f oxygen steelmaking capacity exceeds th e ir share

Century o f the open hearth process o f converting

o f steel ingot production. For example, about 24

The adoption

late in the

pig iron firs t encouraged growth o f steel centers in

percent o f the existing or planned basic oxygen

major steel-consuming and steel-fabricating cen­

furnace capacity

ters. O ther more recent developments have con­

centered in Chicago, compared w ith 20 percent of

trib u te d

the nation's steel produced in th a t center in 1968.

fu rth e r

to

changing the geographical

in the U nited States w ill be

in the U nited

D e tro it w ill have about 15 percent o f the oxygen

States. The open hearth process, the dom inant

furnace capacity, compared w ith a 7-percent share

method o f steelmaking since the early T w entieth

o f to ta l ingot production.

d istrib u tio n

o f steel production

Century, is being rapidly replaced by the basic

Steel centers in the Fourth D is tric t accounted

oxygen process (BOP), w hich was developed on a

fo r 41 percent o f existing BOP capacity, compared

commercial

basis in

Austria

in

1952. A fte r a

5

0

of the Changing S tructure o f American Transportation

Reports, 1968, p. 68. Also, according to the American

See especially, Marvin J. Barloon, "T h e Interrelationship

Am erican Iron and Steel In stitu te , A n nual Statistical

and Changes in Industrial L o ca tio n ," Land Economics,

Iron and Steel In stitu te , steel produced by basic oxygen

Vol. X L I (May 1965), p. 177; Walter Isard and W illiam M.

furnaces actually exceeded open hearth production in

Capron, "T h e Future Locational Pattern o f Iron and Steel

August 1969; fo r the firs t eight months o f 1969, BOP

Production in the United States," The Journal o f P olitical

accounted fo r nearly 48 percent o f to ta l steel o u tp u t. See

Econom y,

The Iron Age, September 25, 1969, p. 165.

L V II

(A p ril

1949), p. 126; Allan Rodgers,

"In d u s tria l In e rtia —A M ajor Factor in the Location o f the
Steel Industry in the United States," The Geographical

^Joseph K. Stone, "O xygen in S teelm aking," S cie n tific

Review, V ol. 42 (January 1952), p. 58.

Am erican, V ol. 218 (A p ril 1968), pp. 24-32.

Digitized for
6 FRASER


T A B L E II
Location o f Oxygen Steelmaking Plants in the United States
January 1969

Steel-Producing Centers

Existing
Capacity

Percent
D istrib u tion

(m il. o f net tons)

Planned
Capacity
1969-1970

Percent
D istrib u tion

Total Existing
and Planned
Capacity

Percent
D istribution

(m il. o f net tons)

(m il. o f net tons)

F ourth D is tric t
11.4%
10.1
-0 - 0-

6.9
3.4
14.6
1.6

9.4%
4.6
19.7
2.2

4.3

21.5

26.5

35.9

16.0
7.9
14.8
4.7
2.8
8.7
4.1

9.2
2.5
2.8
-0 -0 1.0
-0 -

46.6
12.7
14.2
-0 -0 5.1
-0 -

17.8
6.8
10.8
2.5
1.5
5.7
2.2

24.2
9.2
14.6
3.4
2.0
7.7
3.0

100.0%

19.8

100.0%

73.8

100.0%

Cleveland
Cincinnati
Pittsburgh
Youngstown

4.7
1.4
14.6
1.6

8.6%
2.6
26.9
3.0

2.3
2.0
—0 —
—0 —

T otal F ourth D is tric t

22.2

41.1

8.6
4.3
8.0
2.5
1.5
4.7
2.2
54.0

O ther
Chicago
Northeast Coast
D e tro it
West
South
B uffalo
St. Louis
Total U nited States

NO TE: Details may n o t add to totals because o f rounding. Steel-producing
centers are grouped according to American Iron and Steel In stitu te steel
d istricts.
Sources: Iro n and Steel Engineer and Federal Reserve Bank o f Cleveland




ECONOMIC REVIEW

w ith 38 percent o f total ingot o u tp u t in 1968. In

required

Pittsburgh, steel producers sharply expanded th e ir

casting has led to a p ro life ra tio n o f numerous

BOP capacity (26.9 percent o f the installed to ta l)

small, nonintegrated steel plants th ro u g h o u t the

in an e ffo rt to halt or reverse the deterioration in

United States. In the steel industry, a m ajor capital

com petitive conditions in the area. However, w ith

investment is required in order to establish a fu lly

no fu rth e r additions planned in 1969-1970, Pitts­

integrated m ill.9 H istorically, a few large firm s

burgh's share o f

drop to about 20

accounting fo r the bulk o f production and sales

percent o f the to ta l. It appears th a t Youngstown

have characterized the steel industry, b u t estimates

w ill also undergo some deterioration in its com pet­

show th a t in 1967 there were about 31 small steel

itive position, because the lower cost BOP capacity

firm s w ith annual capacity ranging fro m 50,000 to

BOP w ill

fo r

electric

furnaces and continuous

in th a t center amounted to only 3 percent o f the

350,000

United States to ta l through 1968, w ith no plans

spread th ro u g h o u t the U nited States, w ith the
m a jo rity centered inland, p a rticu la rly in the South

fo r expansion reported fo r 1969-1970.

to n s.10

These small steel

plants are

Oxygen furnaces consume less scrap than open

and Southwest. In part, the small steel plant has

hearth furnaces, and this has led to a decline in

benefited fro m declining scrap prices th a t resulted

steel scrap prices. As a result, the use o f electric

from increased use o f the BOP. A ll b u t a few of

furnaces, w hich are large consumers o f scrap, has

the small plants use electric furnaces to convert

grown rapidly, accounting fo r about 12 percent o f

iron in to steel, and at least half o f the firm s have

steel o u tp u t in

1968, compared w ith nearly 5

installed continuous casting facilities or have plans

1947. Electric furnaces, along w ith

to install th a t process. Despite the success o f the

continuous casting o f steel, have fu rth e r tended to

small firm s, th e ir fu tu re expansion in to broader

loosen the dependence o f steel on raw materials in

product lines, especially in fla t rolled products, is

favor o f p ro x im ity to markets.

lim ited because o f the major capital investment

percent in

In the continuous casting method, molten iron

requirements fo r such facilities. Therefore, these

moves d ire ctly from the blast furnace into the

small mills have specialized in less sophisticated

form o f a semi-finished product, thereby e lim i­

bar m ill products (such as h o t rolled bars and

nating interm ediate costly operations. A lthough

concrete reinforcem ent bars) th a t involve a smaller

the continuous casting process presently accounts

scale o f operations.

fo r an insignificant share o f total steel production,
use o f this process is expected to increase rapidly,

BASING—POINT PRICING

especially since several major steel producers have
o
installed continuous facilities in recent years.

steel ingot production began early in the Twen-

A lthough the trend tow ard decentralization in

Growth of the Nonintegrated Steel Plant. The
smaller

investment

per

ton

of

steel capacity

9

A ccording to

one estimate, the annual cost o f an

integrated m ill w ith 4 m illio n tons o f capacity is about

g
An

estimated 8

capacity

has

been

m illio n

tons o f continuous casting

installed

in

the past tw o

years,

$1.6 b illio n . See G. J. McManus, "Steel Plants Seek a New
Stru ctu re ,” The Iro n Age, February 13, 1969, p. 103.

according to Business Week magazine. See " A Ribbon of
Steel Cuts Industry Costs,” Business Week, A p ril 19,

10See C. L. K obrin, "T h e Big Surge o f 'M in i' Steel

1969, pp. 71-72.

Plants," The Iron Age, November 23, 1967, pp. 68-75.

Digitized8for FRASER


OCTOBER 1969

tieth C entury, the basing-point system o f pricing

ta tio n used fo r delivery. In effect, steel producers

probably slowed the s h ift away fro m tra d itio n a l

in Pittsburgh could penetrate distant steel markets

steel-producing centers.11 Under the basing-point

w ith o u t absorbing any fre ig h t charges. Steel pro­

system o f pricing, steel sellers offered identical

ducers

used

a

single-basing-point

system

fo r

delivered prices to consumers regardless o f the

pricing, w ith Pittsburgh as the basing p o in t u n til

shipping location o f the producers. The basing-

1924, when the Federal Trade Commission de­

p o in t price was composed o f a base price fo r steel

clared

plus

method o f com petition.

a

railroad

fre ig h t charge fro m

the base

th a t

"P ittsburgh-P lus"

was

an

unfair

destination.

The basing-point pricing system also retarded

Under th a t system, fo r example, producers in

more rapid grow th in steel consumption in areas

Pittsburgh

away fro m

p o in t—P ittsburgh—to

the

buyer's

and Chicago could quote the same

delivery price to a consumer in Chicago. As a

basing-point locations because con­

sumers paid higher prices. Steel consumers ordinar­

result, the buyer paid a delivered price based on

ily tended to locate th e ir facilities near a basing-

Pittsburgh, whether or not shipments originated

p o in t to m inim ize costs; many b u ilt th e ir facilities

from there and regardless o f the mode o f transpor­

near Pittsburgh to take advantage o f lower costs in
th a t area. The secondary effects o f such decisions
by steel consumers, o f course, favored steel pro­

11

There is wide disagreement on this p o in t in existing

literature.

On the one hand, Isard and Capron state

"th e o re tic a lly , the choice o f a particular pricing system—

ducers in Pittsburgh, but technological and eco­
nomic

developments

whether f.o .b. m ill, a single-basing-point, or a m ultiple-

m ining

basing-point w ith or w ith o u t d iffe re n tia ls—has little im ­

described earlier.

pact upon the location o f basic steel ca p a city." See Isard

th a t

area's

had already
historical

cost

been under­
advantages

A fte r 1924, the industry adopted a m ultiple-

and Capron, op. c it., pp. 131-132. In a study o f the
Pittsburgh econom y undertaken in 1959 by the Pitts­

basing-point system th a t used several producing

burgh

Regional Planning Association, the basing-point

centers as basing-points. T hat system spread some

system o f pricing was absent fro m the discussion on

o f the advantage th a t Pittsburgh steel producers

reasons fo r the deterioration in the position o f Pittsburgh
as a steel-producing center. See Pittsburgh

Regional

had under the single-basing-point system. In 1948,

Planning Association, op. cit., especially Chapter 10, pp.

however, the United States Supreme C ourt, in a

261-290. For a d iffe re n t view point, see Carl Kaysen,

case involving the cement industry, declared th a t a

"Basing Point Pricing and Public P o lic y ," The Q uarterly

basing-point system was illegal; thereafter, when

Journal o f Economics, L X III (August 1949), especially
pp. 304-305, who concluded that "under Pittsburgh Plus,

the

steel

industry

adopted

f.o .b .

m ill

prices,

the rate o f expansion o f steel production in Chicago and

natural m arket forces became much more im p o r­

Birm ingham relative to Pittsburgh was probably slowed

ta n t influences in the investment decisions o f

down su b stan tia lly." See also George W. Stocking, Basing

steel-producing and steel-consuming firm s.

P oint Pricing and Regional Development (Chapel H ill,
North

Carolina:

U niversity

of

N orth

Carolina

Press,

1954), especially Chapters 4 and 5, pp. 60-111. Stocking
states th a t Pittsburgh Plus "...tended to retard the South's
production and consum ption o f iron and steel and thus
directly and in d irectly retarded the South's industrial­
iz a tio n ,"

p.

62.

For a sim ilar vie w p o in t, see Allan

Rodgers, op. c it., pp. 60-64.




TRENDS IN STEEL CONSUMPTION
In a ddition to changes in steel technology and
pricing, changes in the pattern o f steel consump­
tio n

influenced the trend tow ard m arket orien­

ta tio n in steel. Table III shows the d is trib u tio n o f
9

T A B L E III
D istrib u tio n o f Production and Consum ption o f Steel M ill Shapes and Forms
U nited States and Selected States
Selected Years
1 9 4 7 -1 9 6 3
___________ 1947_____________

__________1954____________

P ro d u ction *

C o n su m p tio n t

Production

United States

100.0%

100.0%

East
Pennsylvania
New Y o rk
New Jersey

35.3
29.6

Central
O hio
Illin o is
Indiana
Michigan
Wisconsin

45.9
20.4
8.3

South
Texas
West
C alifornia

Consumption

Production

100.0%

100.0%

00.0%

26.0
14.2
5.4
2.9

30.8
24.9

24.4
11.8
6.3
3.3

29.5
24.4

n.a.

57.8
12.9
12.7
5.7
17.2
4.7

46.9
18.6
8.1
14.0
4.8
n.a.

56.5
13.4
11.7
5.4
17.3
3.7

13.8
n.a.

10.6
1.9

16.2
n.a.

5.1
2.1

5.6
4.3

6.1
2.6

5 1

15 9

1963
Consumption

Production

Consumption

100.0%

100.0%

100.0%

22.4
10.4
5.6
3.4

28.2
23.0

19.7
9.2
4.9
2.9

45.9
16.2
8.1
14.8
5.4
n.a.

55.5
13.2
12.3
5.5
14.1
4.6

49.1
17.2
8.5
14.3
7.8
n.a.

58.5
14.3
11.6
6.3
17.0
4.1

11.8
2.5

17.8
n.a.

13.7
3.0

16.4
n.a.

14.1
3.1

7.3
5.4

6.8
3.0

8.5
6.3

6.2
3.0

7.8
5.4

NOTE: Details may not add to totals because o f rounding.
n.a. N ot available.
* For 1947, data fo r each region were adjusted upward to reflect a redistribution
o f pro d u ctio n figures th a t were aggregated to prevent disclosure; fo r 1954-1963,
data fo r Central and West were adjusted upward to reflect a redistribution of
data th a t were com bined to prevent disclosure.
t Data include consum ption by metal fabricating establishments and exclude
consum ption by metal producing plants, construction, mining, utilitie s, railroad
industries, and governm ent purchases.
J Includes Rhode Island and C onnecticut.
Sources: U. S. D epartm ent o f Commerce, Bureau o f the Census and Federal
Reserve Bank o f Cleveland




1958

5.1$

5.2$

OCTOBER 1969

steel consum ption and steel production during the

England states) accounted fo r the second largest

post-World War II period by illustrating the broad

shares o f the nation's steel o u tp u t and consump­

geographic areas o f steel surplus or d e fic it. The

tio n between 1947 and 1963. In contrast to the

table especially shows the tendency fo r a growing

Central Region, however, the Eastern Region was a

p roportion o f o u tp u t to be centered in d e fic it

steel

supply areas. (Such a comparison o nly suggests

ceeded consum ption. The Eastern Region's share

this

of both o u tp u t and consum ption o f steel products

m arket influence,

because steel

produced

"surplus”

area, i.e., steel p roduction ex­

w ith in a region is not necessarily consumed in the

declined

same region. The data on w hich Table III is based

production. In part, th a t loss in position reflects a

are available o n ly by state; 1963 is the latest year

decrease

fo r w hich data are available.)

Pennsylvania, due p a rtly to declining industries,

As shown in the table, the largest share o f the
nation's o u tp u t and consum ption o f steel products

as a p ro p o rtion o f the nation's steel

in

steel consum ption

and o u tp u t

in

such as the railroads and mining.
A lthough the bulk o f steel o u tp u t was h is to ri­

between 1947 and 1963 was accounted fo r by the

cally

Central Region (O hio, Illinois, Indiana, Michigan,

Illinois,

Wisconsin, and Missouri, which is not listed sepa­

tended to move to the South and West. Both

produced in Pennsylvania, Ohio, Indiana,
and

Michigan,

the steel

industry

has

rately b ut is included in the regional to ta l); the

regions accounted fo r a growing share o f national

region generally corresponds to the western half of

o u tp u t between 1947 and 1963. The South (South

the m anufacturing belt in the U nited States. Even

A tla n tic and South Central states) ranked as the

though the Central Region's share o f the nation's

th ird largest regional market fo r steel products in

consum ption o f steel products remained relatively

the United States. Between 1947 and 1963, steel

steady, and the relative share o f production rose

markets in the South nearly doubled in size, and in

between these years, consum ption ex­

1963, the area accounted fo r 14.1 percent o f the

ceeded production. The Central Region accounted

steel consumed in the U nited States. The rising

fo r about 60 percent o f the 24.5 m illio n ton

share o f steel o u tp u t in the West (the Pacific and

increase in steel

M ountain states) reflected both a rapidly rising

slightly

o u tp u t in the U nited States.
and

market fo r steel and a shortage o f steel in th a t

consum ption, the Central Region was still a d e fic it

region o f the c o u n try. The tonnage increase in

Despite

the

narrowing

between

o u tp u t

steel region in 1963, i.e., a region th a t consumed

steel consum ption in the West was more than

more steel than it produced. The largest d e fic it in

tw ice as large as in the nation in the period under

the Central Region was apparent in Michigan.

study, largely because o f a surge in steel consump­

The Eastern Region o f the United States (New
Y o rk, New Jersey, Pennsylvania, and the New

tion in C alifornia (see Table IV ).
As shown in Table IV , between 1947 and 1963,
steel consum ption

in

the

Central

Region rose

slightly faster than in the nation (49.0 percent,
12

Consumption data are not available fo r the separate

steel-producing centers shown in Table I; however, pro­
duction and consum ption data are available on a com par­

compared w ith 47.6 percent, respectively), w ith
considerably

larger gains in Ohio and Indiana.

able basis in Census reports and are therefore used in this

Steel consum ption in both the West and the South

section o f the article.

rose about tw ice as fast as in the nation, w hile




11

ECONOMIC REVIEW
T A B L E IV

lines, except alloy and stainless steel products,

Consumption o f Steel M ill Shapes and Forms
United States and Selected States
Selected Years
1 9 4 7 -1 9 6 3
(M il. o f net tons)

while in the Central Region, the share o f national
markets rose o nly fo r steel sheets and strip and fo r
plates. These changes in steel consum ption pat­
terns help to explain differences in growth rates o f
various

1947

1954

1958

1963

Percent
Change
1947-1963

United States

39.4

46.4

44.8

58.1

+ 47.6%

East
Pennsylvania
New Y o rk
New Jersey

10.3
5.6
2.1
1.1

11.3
5.5
2.9
1.5

10.0
4.6
2.5
1.5

11.4
5.3
2.8
1.7

+ 11.6
4.9
+ 33.8
+ 27.8

Central
Ohio
Illin o is
Indiana
Michigan
Wisconsin

22.8
5.1
5.0
2.3
6.8
1.9

26.2
6.2
5.4
2.5
8.0
1.7

24.8
5.9
5.5
2.5
6.3
2.1

34.0
8.3
6.7
3.7
9.9
2.4

+
+
+
+
+
+

South
Texas

4.2
0.8

5.5
1.2

6.1
1.4

8.2
1.8

+ 95.8
+140.3

West
California

2.2
1.7

3.4
2.5

3.8
2.8

4.5
3.1

+105.9
+ 83.9

steel-producing

in

the

U nited

For example, the Central

Region's share o f

consum ption o f bars and bar shapes (used m ainly
by the autom otive, construction, and machinery
and equipm ent industries) declined between 1947
and 1963, although the tonnage volume consumed
rose slightly.

49.0
62.7
35.1
62.2
45.9
29.0

centers

States.

Nearly

one-half o f the

nation's

capacity fo r bars in 1960 (the latest year fo r which
capacity data are available) was located in the
Fourth

D istrict, especially in Youngstown and

P ittsburgh.13 On the

other hand, the Central

Region's m arket share fo r sheets and strip (which
is used m ainly by the autom otive, building con­
tractors' products, and appliance industries and
w hich represents the largest steel market) rose in

Sources: U. S. Departm ent of Commerce, Bureau o f the
Census and Federal Reserve Bank o f Cleveland

the Central Region. Steel producers in the Fourth

consum ption

East showed the smallest

and cold rolled sheets and strip products, w hich

in the

D istrict have been noted fo r specialization in hot

relative increase, well below the average change fo r

made up more than one-half o f the D istrict's h o t

the U nited States. Those regions o f the co u n try

rolled sheet capacity in 1960. In fact, about 45

th a t showed the largest percent increases in steel

percent o f the sheet and strip capacity in the

consum ption; namely, the West and the South,

United States was located in the Fourth D istrict,

also increased

p a rticularly in C incinnati and Cleveland.

in

relative

im portance as steel-

producing regions o f the co u n try (see Table III).

As shown in Table I, C incinnati recorded one o f

Regional Trends in Product Markets. A t least

the fastest growth rates in production between

one

other

aspect

of

steel

consum ption

th a t

1947 and 1968, in part because o f the area's

affected the geographic d istrib u tio n o f steel pro­
duction

is trends in product consum ption. As

indicated in Table V, the share of steel consump­

13

tio n in the South and the West rose between 1947

Area,” M o n th ly Business Review, Federal Reserve Bank of

and 1963 fo r all major product lines. On the other

See "Steel

Finishing Capacity in a Heavy Industry

Cleveland, July 1961, p. 9. Data on product capacities fo r
steel-producing centers are taken fro m American Iron and

hand, the share o f U nited States steel consum ption

Steel In stitu te , D ire ctory o f Iron and Steel Works o f the

in the East declined substantially fo r all product

United States and Canada, 29th E dition, 1960.


12


TABLE V
Volum e and D is trib u tio n o f Consumption o f Steel M ill Shapes by Product
U nited States and Regions
Selected Years
1 9 4 7 -1 9 6 3
Products

Volum e (m il. o f net tons)

Total

United States
1947
1954
1958
1963

39.4
46.4
44.8
58.1

Bars and
Bar Shapes

Sheets and
S trip

Plates

Structural
Shapes

Wire and
Wire Products

A llo y and
Stainless
Steel

A ll
Other

5.7
6.5
4.9
6.0

15.7
18.8
18.1
26.1

4.6
4.8
4.8
6.1

3.4
3.9
3.8
3.9

1.8
1.8
2.1
2.5

2.7
3.5
2.9
3.8

9.6

20.0%
21.7
18.9
15.7

37.5%
29.7
29.9
24.5

41.2%
36.3
32.8
29.7

29.2%
23.4
22.4
19.9

23.9%
25.1
22.2
23.4

26.2%
24.1
22.2
21.9

5.5
7.0

8.2

Percent o f United States C onsum ption
East
1947
1954
1958
1963

26.0%
24.4
22.4
19.7

24.1%
21.6
19.9
19.9

Central
1947
1954
1958
1963

57.8
56.5
55.5
58.5

64.0
60.0
63.4
61.9

69.5
67.6
68.9
72.0

37.0
40.1
37.4
41.6

34.7
34.1
36.1
32.8

60.7
61.6
56.7
60.4

68.4
63.0
63.6
62.1

43.8
42.8
37.7
39.0

South
1947
1954
1958
1963

10.6
11.8
13.7
14.1

7.7
12.0
10.4
12.3

7.5
6.6
8.2
8.5

17.7
18.4
21.2
22.0

16.9
20.8
21.1
28.5

6.0
8.9
13.6
13.4

4.1
4.8
7.9
9.6

17.2
19.1
22.1
21.1

4.2
6.6
6.3
5.9

2.9
4.1
4.1
3.8

7.9
11.8
11.6
11.7

7.3
8.8
10.0
8.9

4.1
6.1
7.3
6.4

3.7
5.1
6.2
4.8

12.8
14.0
18.1
18.1

West
1947
1954
1958
1963

5.6
7.3
8.5
7.8

Sources: U. S. Departm ent o f Commerce, Bureau o f the Census and Federal
Reserve Bank o f Cleveland




ECONOMIC REVIEW

1960,

duction. O bviously, this "loss” in o u tp u t was not

about 82 percent o f the capacity o f C incinnati

specialization in fla t rolled products. In

shared equally among all steel-producing centers in

mills was fo r sheets and strip. The growth rate o f

the U nited States. Centers located in or near major

steel o u tp u t in Cleveland also exceeded the na­

ports o f en try were undoubtedly affected the

tional average during the post-World War II period,

most, along w ith inland producing centers th a t

also p a rtly because o f its high p ro p o rtio n (about

have a high p ro p o rtio n

56 percent) o f capacity in sheet products. (In

o u tp u t in products th a t are im ported.

o f th e ir capacity and

D e troit, w hich had the largest grow th rate during

The loss o f o u tp u t is even greater if the steady

the period, about 92 percent o f steel capacity in

erosion in U nited States steel exports since the end

1960 consisted o f sheets and strip).

o fW o r ld W a r ll is considered. From 1948 to 1957,
the volume o f U nited States exports o f steel m ill

FOREIGN TRADE AND STEEL
PRODUCTION TRENDS

products averaged about 3.7 m illio n tons annually,
compared w ith 1.1 m illio n tons o f im ports; as a

E xports and im ports o f steel m ill products have

result, there was a net surplus trade balance in

had d iffe re n t effects on production trends o f the

steel o f about 2.6 m illio n tons annually. Neverthe­

various

United

less, th a t period was already marked by a d e fic it

States. Despite the growing volume o f steel im ­

trade balance in w ire rods, bars, and w ire and wire

ports at all leading United States ports in recent

products (see Table V I).

steel-producing

centers

in

the

years, capital investment by domestic steel pro­

During the 1959-1968 period, exports o f steel

Leading steel

m ill products fell to an annual average o f about

producers in the Chicago area carried o u t vast

2.2 m illio n tons, w ith declining trends apparent

capital

1960's,

fo r several steel products. Since 1958, all major

despite the area's rise to a position as the second

products fo r w hich the U nited States had a net

ducers

has

n ot

expansion

been

in hibited.

programs during the

largest p o rt o f entry fo r im ported steel products in

surplus trade balance have shifted

the U nited States. Moreover, the grow th o f im ­

w ith the exception o f steel ingots, tin m ill prod­

in to d e ficit,

ports may have been an incentive to accelerate the

ucts, and railroad products. For most o f these

development o f new steelmaking technology. In

exceptions, the trade surplus has steadily d im in ­

States Steel C orporation has

ished (see Table V I). In general, the overall United

recently placed in operation a major rod fa c ility at

States trade position has shifted in to d e fic it, and

its Fairless Works in eastern Pennsylvania th a t is

the d e fic it has increased sharply since the mid-

intended to regain some o f the rod business th a t

1960's.

fact, the

U nited

was lost to foreign suppliers.

The

effect

of

im ports

on

various

steel-

Since 1959, when the trade balance in steel

producing centers o f the United States is d iffic u lt

shifted from net surplus to net d e fic it, the United

to determine because not all o f the steel im ported

States trade position in steel has steadily de te ri­

at various ports is necessarily consumed in the

orated because o f a rapid growth in im ports. In

same area, although foreign suppliers probably

1968, the volume o f steel product im ports rose to

ship to those United States ports closest to th e ir

a record 18 m illio n tons, w hich is the equivalent of

customers to m inim ize transportation costs. The

about 25

volume o f steel im ports by ports o f entry thus

m illio n tons o f domestic ingot pro­

Digitized 14
for FRASER


OCTOBER 1969

T A B LE V I
Net Trade Balance in Steel M ill Products
United States
Selected Years
1 9 4 7 -1 9 6 8
(M il. o f net tons)
1947

1950

0.6

-0 .1

1955

1960

1965

1966

1967

0.5
t

0.1
-0 .4

0.4
-1 .3

0.1
-1 .1

0.1
-1 .1

t
-0 .1
0.1
-0 .8
-0 .3
- 0 .5
0.6
0.9

- 0 .7
-0 .6
t
-1 .5
- 0 .7
- 0 .8
0.2
-2 .9

- 0 .8
-0 .9
t
-1 .6
- 0 .8
- 0 .8
0.2
-3 .3

- 1 .0
-1 .0
t
-1 .6
- 0 .8
-0 .8
0.1
-3 .8

-0 .4

-7 .9

- 9 .0

- 9 .8

Ingots, blooms, etc.*
Wire rods
Structural shapes
and piling
Plates
Rails and accessories
Bars and tool steel
Pipe and tubing
Wire and w ire products
Tin m ill products
Sheets and strip

1.1

-0 .1

0.6
1.1
0.7
0.3
0.6
0.9

0.1
-0 .1
0.6
t
0.5
0.7

0.2
0.2
0.1
-0 .1
0.3
-0 .2
1.0
1.1

Total steel m ill products

5.9

1.6

3.1

1968

-

0.3
1.6
1.4
1.7
t
2.3
1.3
1.0
0.1
6.9

- 1 5 .8

NOTE: Net trade balance represents the difference between exports and im ports.
* Includes skelp.
t Less than 100,000 ton d e ficit.
X Less than 100,000 ton surplus.
Sources: American
Cleveland

Iron

and Steel

In stitu te

and

Federal

Reserve Bank o f

provides a clue about the impact o f im ports on

growing volume o f im ports also had an adverse

various steel centers in the United States.

effect on some inland steel centers th a t specialized

As shown in Table V II, steel im ports were
concentrated in coastal steel centers o f the United

in high-im port volume products such as w ire and
wire products.

States during the mid-1950's. A b o u t 44 percent of

During the 1960's, new patterns emerged in the

the foreign steel th a t entered the United States in

com position o f im ports as well as in the regional

1955 came into ports in the Southern D istrict,

d is trib u tio n o f im ports (see Table V II). Im ports o f

w hile

all m ajor steel products, except fo r railroad and tin

about

18

percent

entered through

the

Northeast Coast ports, and most o f the balance

m ill

products,

grew sharply and

absorbed

an

came in to the West. (D e tro it accounted fo r an

increasing share o f the to ta l consum ption o f steel.

unusually large 17 percent o f steel im ports in 1955

The most remarkable rise in the volume o f steel

largely because o f a shortage o f domestic steel

im ports occurred in steel sheets and strip. Steel

ingots. Im ports fe ll sharply the fo llo w in g year.) In

sheets and strip accounted fo r nearly one-half of

general, although the steel-producing centers th a t

the 14.5 m illio n to n increase in the total volume

apparently were most heavily affected by im ports

o f steel im ports between 1960 and 1968, w ith the

in the mid-1950's were in or near coastal ports, the

balance o f the increase distributed thro u g h o u t all




15

T A B L E V II
Steel Im ports By Steel-Producing Centers
Selected Years
1955-1968
(Thous. o f net tons)
Northeast
1955

Chicago*

Coast

D etroit

West

South

Buffalo

Cleveland

St. Louis

Total §

20.2

0.3

120.6

0.2

-0 -

4.7

0.1

-0 -

Wire rods

0.1

25.1

-0 -

3.3

13.7

0.9

-0 -

-0 -

43.1

S tructural shapes and piling

1.7

54.9

8.8

16.1

112.4

0.2

0.4

0.7

195.3

Ingots, blooms, etc.

146.1

Plates

-0 -

0.3

0.1

1.0

0.1

0.1

-0 -

-0 -

1.6

Rails and accessories

-0 -

0.5

0.3

5.8

0.3

-0 -

-0 -

-0 -

6.9
171.7

Bars and to o l steel

0.2

20.0

2.2

8.4

140.5

0.2

0.2

-0 -

Pipe and tubing

0.2

2.3

-0 -

36.7

35.6

-0 -

-0 -

-0 -

73.9

Wire and w ire products

0.4

58.0

0.9

80.1

102.3

0.2

0.9

-0 -

242.8

-0 -

-0 -

-0 -

-0 -

-0 -

-0 -

-0 -

-0 -

-0 -

5.1

6.7

24.2

0.3

2.0

0.3

-0 -

-0 -

38.5

27.8

168.1

157.2

152.0

405.8

6.7

1.6

0.7

919.8

0.7%

0.2%

0.1%

T in m ill products
Sheets and strip
Total steel m ill products
Percent o f to ta l U nited States

3.0%

18.3%

17.1%

16.5%

44.1%

1960
Ingots, blooms, etc.

0.4

8.3

23.2

0.1

7.3

14.3

0.1

t

67.9

Wire rods

29.5

102.0

7.0

66.5

170.2

1.6

29.4

t

408.2

Structural shapes and piling

13.5

100.9

27.6

38.9

289.4

1.4

12.0

1.3

509.6

6.8

24.0

5.2

38.0

128.8

1.5

1.2

0.1

210.8

Plates
Rails and accessories
Bars and to o l steel
Pipe and tubing
Wire and w ire products
Tin m ill products
Sheets and strip
Total steel m ill products
Percent o f total United States




0.3

2.0

2.1

1.5

2.6

0.3

1.0

0.4

10.4

13.5

124.6

20.4

14.0

306.7

4.3

8.9

0.9

650.9

4.1

47.0

30.3

182.7

183.6

0.4

1.5

t

480.1

19.1

150.3

12.2

115.2

248.0

1.8

6.9

1.8

595.5

0.1

11.7

2.9

14.4

6.8

3.5

-0 -

-0 -

40.0

11.8
99.1

96.0

92.3

47.0

78.8

16.5

0.5

0.6

380.2

666.8

223.2

518.3

1,422.2

45.6

61.5

5.1

3,353.6

3.0%

19.9%

6.7%

15.5%

42.4%

1.4%

1.8%

0.2%

1965
Ingots, blooms, etc.

0.3

3.5

158.6

0.8

0.9

74.0

24.5

t

282.6

116.2

288.9

79.5

138.5

532.4

1.2

120.2

1.2

1,283.6

Structural shapes and p iling

50.2

197.2

104.4

143.2

402.2

1.1

18.0

t

928.8

Plates

40.7

80.0

100.6

143.4

368.6

1.3

29.1

0.1

773.9

1.0

5.7

7.4

2.9

3.2

0.7

1.7

t

24.0

137.8

236.9

166.1

168.4

768.9

12.0

46.3

t

1,641.8

Wire rods

Rails and accessories
Bars and to o l steel
Pipe and tubing

10.8

76.3

30.3

341.0

426.0

1.4

8.7

t

929.9

Wire and w ire products

35.5

212.5

42.1

148.2

362.6

3.9

28.2

1.2

866.2

0.2

23.8

11.0

43.6

13.8

0.1

5.4

t

145.0

Sheets and strip

472.0

583.4

97.2

284.9

t

3,507.2

864.8

1,708.3

574.2
1,704.1

537.0

Total steel m ill products

937.8
1,637.9

3,415.7

192.3

567.2

2.5

10,383.0

T in m ill products

Percent o f to ta l U nited States

8.3%

16.5%

16.4%

15.8%

32.9%

1.9%

5.5%

i

1968
Ingots, blooms, etc.

16.8

18.9

127.6

19.6

11.7

38.5

15.3

t

298.7

Wire rods

164.9

457.9

151.2

160.5

486.1

10.0

160.2

t

1,600.4

Structural shapes and piling

112.0

337.8

169.8

226.4

623.1

5.8

20.2

1.2

1,512.7

Plates

167.7

189.4

302.8

354.9

617.1

20.5

120.7

0.2

1,789.7

Rails and accessories
Bars and to o l steel

7.5

3.2

10.1

5.5

16.9

1.8

1.5

t

53.1

183.5

414.7

297.7

265.1

935.0

26.6

84.6

1.5

2,387.6

Pipe and tu b in g

37.3

138.8

253.4

416.1

705.1

7.5

13.3

0.6

1,617.9

Wire and w ire products

78.5

272.9

47.1

152.8

379.1

5.7

28.2

t

1,019.0

Tin m ill products

14.1

29.1

1.4

101.6

14.4

0.1

3.3

t

234.3

Sheets and strip

1,449.3

1,537.2

1,580.3

934.6

1,156.8

69.6

694.8

t

7,446.5

Total steel m ill products

2,231.6

3,400.0

2,941.4

2,637.1

4,945.4

186.1

1,142.0

3.5

17,960.0

Percent o f to ta l U nited States

12.4%

18.9%

16.4%

NOTE: Above list o f steel-producing centers excludes Pittsburgh, Youngstown,
and C incinnati because customs districts are not located in any o f these
steel-producing centers.
* Includes Chicago, M ilwaukee, and D uluth,
t Less than 100 tons.
J Less than 0.05 percent.
§ Total includes all customs districts, whereas components exclude customs
districts, such as Puerto Rico, Alaska, Hawaii, and the Mexican border.
Sources: Am erican
Cleveland

Iron




and Steel

Institute and

Federal

Reserve Bank o f

14.7%

27.5%

1.0%

6.4%

-0 -

ECONOMIC REVIEW

m ajor product lines, except fo r steel ingots and tin

fo u rth

m ill products.

somewhat larger percent was true fo r the West.

The

penetration

o f foreign steel in

inland

centers o f the United States is also related to the

of

steel

production

in th a t center; a

However, the ratio o f im ports to p roduction rose
sharply

fo r

inland

steel-producing

centers.

In

dram atic rise in im ports o f steel sheets. D e tro it,

1968, im ports in to D e tro it amounted to more

Chicago, and Cleveland emerged as major ports o f

than 40 percent o f local steel production (com ­

entry fo r steel products because the opening o f the

pared w ith

St.

Chicago and Cleveland, im ports accounted fo r 11

Lawrence Seaway in the late 1950's gave

o n ly 3 percent in

1960), w hile in

foreign steel suppliers d ire ct access to large steel

percent

markets in the in te rio r o f the United States. In

duction.

1968, D e tro it ranked as the largest single p o rt o f

CONCLUDING COMMENTS

and

18 percent, respectively, o f p ro ­

entry fo r steel im ports; Chicago ranked second in

The gravitation o f steel-producing centers to

importance. The South and the Northeast Coast

steel-consuming markets, coupled w ith major tech­

still

accounted

fo r the

largest shares o f steel

nological

changes

in

the

steel

industry,

have

im ports in to the United States in 1968, b u t the

w orked against im provem ent in the industry posi­

South includes ports in Houston and New Orleans,

tio n o f the F ourth D istrict, and against restoration

w hile the Northeast includes the ports o f New

o f the D istrict's position in the early post-World

Y o rk, Philadelphia, and Baltim ore.

War

II

period.

The

factors

th a t

led

to

the

F inally, one measure o f the effects o f steel

long-term production decline in Pittsburgh and

im ports on steel-producing centers in the United

Youngstown are u n like ly to be reversed in the

States is the relationship o f im ports to domestic

short run, although rapid im provem ent in steel

steel production. On th a t basis, im ports in recent

technology makes projections o f past trends haz­

years still appear to have made the largest inroads

ardous. Coastal and inland water-based steel cen­

in coastal steel-producing centers. For example,

ters located near markets w ill continue to have a

although im ports through ports in the Southern

cost advantage over rival centers; as a result, less

steel area accounted fo r a much smaller pro p o rtion

strategically located centers w ill have to achieve

o f to ta l steel im ports in 1968 than in earlier years

superiority in steel technology to compete effec­

(27.5 percent, compared w ith 44 percent in 1955),

tive ly. Because o f the marked expansion (possibly

they equaled about 40 percent o f domestic steel

over-expansion) o f steel facilities in the M idwest in

production in th a t region. S im ilarly, im ports into

recent years, steel producers in the F ourth D is tric t

the Northeast Coast steel center, the second largest

w ill be under intensified pressure to improve th e ir

steel im po rting region in tonnage, volum e, and

cost

share o f to ta l im ports, accounted fo r about one-

facilities.


18


position

to

avoid

relegation

to

marginal

ECONOMIC REVIEW

SECURITIES OF U. S. GOVERNMENT AGENCIES
Federal agencies have long been im p o rta n t in
the

money and capital markets in the United

States.

However, they

did

not become

major

insufficient. In more recent years, the objectives o f
Federal credit programs have been expanded con­
siderably to include attem pts to influence the flo w

participants in these markets u n til recent years.

o f resources to projects th a t are related more to

Between 1959 and 1968, the outstanding volume

social than economic goals and to prom ote greater

o f Federal agency debt increased fo u r and a half

resource u tiliz a tio n in the economy.

times, from slightly less than $8 b illio n to $36
b illio n . This increase was much greater than the 25

Housing and agriculture have tra d itio n a lly been

percent rise in Federal public debt, w hich in ­

the principal beneficiaries o f Federal credit pro­

creased fro m $288 b illio n in 1959 to $355 b illio n

grams, although

in 1968. The present im portance o f agency debt in

loans have been directed tow ard stim ulating ex­

the financial system is fu rth e r illustrated by the

ports, encouraging co m m u n ity development, help­

willingness o f most U. S. Government securities

ing small businesses, and aiding colleges, univer­

dealers to

sities,

make a m arket fo r Federal agency

and

increasing amounts o f

th e ir

students.

To

finance

Federal

these

issues.

programs, the Federal agencies in tu rn have issued

THE ISSUING AGENCIES

essence, Federal agencies act as financial interm e­

securities in borrowing fro m the private sector. In

Federal agency securities are debt obligations

diaries,

channeling

funds

fro m

the

public to

th at essentially result fro m lending programs o f

individual economic sectors. In certain cases, the

the U nited States Government. These programs

funds are loaned at lower rates than the borrowing

were in itia lly designed to remedy credit deficien­

costs to the agencies. This is a fo rm o f subsidy, in

cies in individual sectors o f the economy where

that the difference in interest paid and received is

credit flow s fro m private sources were considered

made up by funds fro m the U. S. Treasury.




19

ECONOMIC REVIEW

The agencies involved in providing credit to

gage Association (F N M A ), also know as "F annie

agriculture and housing account fo r the bulk o f

Mae.” This in s titu tio n was o rig in a lly chartered by

the outstanding agency securities. For more than

the Federal Government in 1938. U n til September

50 years, the Federal Land Banks (FLB ) have

1968, FNM A was entrusted w ith three separate

provided funds to local Federal Land Bank Associ­

functions. One program provides assistance to the

ations th a t, in tu rn , make long-term real estate

home mortgage market during periods o f credit

loans to farmers. Farmers can also obtain credit

stringency. This fu n c tio n

in d ire ctly through the Federal Interm ediate C redit

"secondary

Banks (FIC B ), w hich were established in 1923.

involves purchases and sales by FNM A o f FHA-

These banks discount and purchase notes o rig i­

insured and VA-guaranteed mortgages. Thus, when

is fo rm a lly know n as

m arket operations," and essentially

nating fro m loans extended to farmers by agricul­

the flo w o f private funds to the mortgage market

tural credit corporations, national or state banks,

is curtailed,

livestock

guaranteed

loan

companies, etc. The Banks fo r

Cooperatives (COOP) were organized in 1933 to

FNM A

purchases o f

Government

mortgages exceed sales in the sec­

ondary market. The other original programs o f

make loans to cooperatives engaged in marketing

FNM A were: (a) special assistance functions, such

farm products, buying farm supplies, or providing

as extending financial

farm

housing programs o f the Federal Government, and

business services. The C om m odity C redit

aid to certain types o f

C orporation (CCC) was form ed in 1933 to provide

(b)

fu rth e r assistance to farm ing. The specific fu n c ­

connection w ith existing FNM A mortgage p o rt­

management

and

liq u id a tio n

functions

in

tions o f this agency cover a rather w ide range o f

folios. The latter tw o functions o f FN M A were

activities

transferred

related to price support programs of

agricultural

com m odities

programs fo r

as well

as to export

ow ned

corporation

called

the

Government

products and other special

N ational Mortgage Association (G NM A) as a result

functions. Price support, however, has been the

o f the Housing and Urban Development A c t o f

CCC's

1968. Today, FNM A functions include secondary

major

farm

to the newly created, Government-

fu n c tio n , accomplished

p rim a rily

through farm loans on agricultural com m odities

market operations o n ly. The 1968 A c t also p ro ­

and storage facilities and through purchases and

vided

sales o f agricultural comm odities.
The Federal Government o rig in a lly capitalized

fo r

the

conversion

of

FNM A

fro m

an

ownership shared between Government and p ri­
vate interests to complete private ownership.

all o f the agricultural banks. A t present, however,

The Federal Home Loan Banks (F H LB ) were

most o f these banks are owned e ntirely by local

organized in 1932 to provide financial assistance

farm associations and cooperative organizations.

to the mortgage market. S pecifically, the eleven

(The FLBs were converted to private ownership in

regional FHLBs lend funds to th r ift in stitu tio n s

1947; the FICBs and COOPs changed fro m mixed

(m ostly savings and loan associations) th a t are

ownership to private enterprises in 1968.) Only

members o f the FHLB System. The loans are used

CCC is a w h o lly Government-owned agency.

to accommodate unusual credit demands on the

A n other major group of Federal agencies is

part o f these in stitu tio n s, arising fro m seasonal

concerned w ith extending housing credit. Fore­

factors as well as cyclical developments such as

most among these is the Federal N ational M o rt­

heavy w ithdraw als o f deposits due to "d isin te rm e ­


20


OCTOBER 1969

The dollar volume o f all outstanding PCs grew

d ia tio n .” The FHLBs have been w h o lly owned by
th e ir member th r if t institu tio n s since 1951 and are

rather rapidly, fro m $300 m illio n at yearend 1964

supervised by the Federal Government through the

to

$2.0

b illio n

in

1966.

Early

in

1967, the

Exim bank, w hich had previously sold o n ly regis­

Federal Home Loan Bank Board.
owned agencies have

tered PCs, began to issue fu lly marketable c e rtifi­

outstanding securities: the Federal Housing A d ­

cates; by the end o f 1967, FN M A and Exim bank

m inistration

Bank

PCs totaled $7.7 b illio n . As mentioned earlier,

(E xim bank), and the Tennessee Valley A u th o rity

FNM A was converted in to private ownership in

(T V A ). A t present, o nly the Exim bank has any

1968,

significance in the money and capital markets.

outstanding FN M A PCs was transferred to the

Both T V A and FH A each have o n ly about $0.5

newly-form ed G N M A . As o f Ju ly 31, 1969, to ta l

Three other

Federally

(F H A ),

the

Export-1 m p o rt

and the

responsibility

fo r servicing the

b illio n in outstanding issues, and neither agency's

outstanding PCs amounted to $10.4 b illio n , o f

securities are traded in the secondary market.

w hich $8.6 b illio n was issued by G N M A 2 and $1.8

The D istrict o f Columbia A rm o ry Board has
outstanding bonds o f about $20 m illio n th a t are

billio n

by the

Exim bank. A c tu a lly , the dollar

volume o f PCs has declined in 1969. The peak

also considered Federal agency securities. These

volume was reached in August 1968, when there

bonds were issued in 1960 to construct a stadium

were $11.2 b illio n in FNM A and Exim bank PCs

in the D istrict.

outstanding. FNM A has not sold any new PCs

CHARACTERISTICS OF
AGENCY SECURITIES

since August 1968; the Exim bank has not sold PCs
since June 1968. G N M A has yet to sell a new issue

Federal agency securities d iffe r when they are

under its own name.
O riginally, PCs were issued w ith fa irly

compared w ith other types o f securities as well as
among
heavily

themselves.
on

the

Such

comparisons

issuing agency.

It

depend

is possible,

maturities.

C urrently,

GNMA

has

long

outstanding

issues th a t do not mature u n til 1988, w hile the

however, to distinguish among three categories o f

longest m a tu rity o f Exim bank PCs is scheduled fo r

Federal agency issues: (a) participation certificates

retirem ent in 1982. Therefore, most PCs currently

(PCs); (b) CCC certificates o f interest; and (c)

outstanding are more o f a capital market instru­

notes, bonds, and debentures. PCs are securities

ment than a money m arket instrum ent; but, over

issued against a " p o o l" o f assets (usually loans) of

tim e, PCs w ill increase in im portance in the money

the participating agencies. Interest received from

market as th e ir term to m a tu rity declines.

the pooled loans is used to pay interest on the PCs.

Certificates o f interest are in many respects

Participation certificates are relatively new to the

similar to PCs. These CCC certificates were sold

Federal agencies as a debt marketing technique,

exclusively to eligible financial in stitu tio n s and

having emerged as an im p o rta n t instrum ent in
financial markets in 1964, when FNM A issued

2

$300 m illio n o f fu lly marketable PCs.1

or departm ents as follow s:

1

The Exim bank sold certificates o f participation against a

The $8.6 b illio n was shared by the participating agencies
Farmers Home A d m in istra ­

tio n , $1,166 m illio n ; Health, Education, and Welfare,
$212 m illio n ; Housing and Urban Development, $4,314

pool o f loans fro m its p o rtfo lio s in 1962. However, these

m illio n ; Small Business A d m in istra tio n , $1,007 m illio n ;

offerings were generally small and not marketable.

and Veterans A d m in istra tio n , $1,866 m illio n .




21

ECONOMIC REVIEW

were backed by a pool o f loans o rig in a lly made to

securities outstanding at the end o f Ju ly 1969,

farmers under price-support programs.

w ith $2.9 b illio n in discount notes and $5.2 b illio n

Interest

rates on such certificates were set by the CCC—the

in debentures.

last rate having been 7.00 percent. CCC certificates

The FICBs and COOPs also issue debentures, in

have always been issued w ith m aturities o f 14

both cases, the debentures are short-term obliga­

months or less—unlike PCs, which as noted, carried

tions. A ll the FICB and COOP debentures o u t­

much longer original m aturities.

standing at the end o f May were due to mature

Sales o f certificates o f interest were in itiated in

w ith in one year (see Table I). The FLBs issue

1953. Over the years, the dollar volume o f such

bonds secured m ainly by firs t mortgages on farm

certificates has varied according to the needs o f

properties. There were $6 b illio n o f such bonds

CCC. As o f July 31, 1969, there were $1.3 b illio n

outstanding as o f Ju ly 31, 1969, and all were

o f CCC certificates outstanding, most o f w hich

scheduled to mature before 1980.

were scheduled to mature before August 1, 1969.

Securities o f the

FHLBs are issued against

As o f m id-O ctober 1969, there were $521 m illio n

collateral o f guaranteed mortgages, U. S. Govern­

CCC certificates outstanding, scheduled to mature

ment securities, or cash assets. FHLB obligations

before August 1, 1970, although CCC maintains

w ith original m aturities o f more than one year are

the option to call the certificates fo r redem ption

classified

before m a tu rity. In August 1969, the CCC an­

one-year m a tu rity or less are specified as notes.

nounced th a t no new certificates o f interest w ould

These notes d iffe r fro m FN M A notes in th a t the
FHLB

be issued after August 29, 1969.3
The

remaining Federal agency securities are

somewhat more conventional in nature, consisting
m ainly

of

notes,

bonds,

and

debentures. To

as bonds, w hile those issued w ith a

issues carry

a fixed

(coupon)

rate o f

interest, w hile FNM A notes are sold on a discount
basis.
F inally, there are FH A debentures and the

finance its secondary market purchases, FNM A

D istrict

relies on the sale o f notes and debentures. The

generally

short-term notes are discounted at published rates

Secretary o f the Treasury has a u th o rity to redeem

th a t are closely gauged to the rates fo r Treasury

the debentures before m a tu rity ; the latter are

bills; i.e., rates on FNM A notes are set at a certain

scheduled to mature in 1979 w ith a 1970 call

level above the market rate on Treasury bills.

o p tio n .

These notes are marketed in much the same way as
commercial paper or bankers' acceptances. Sec­

of

Colum bia
long-term

bonds.

The

obligations,

fo rm e r are

although

the

Risk Considerations. Except fo r outstanding
G NM A

and

Exim bank

PCs,

the

D is tric t

of

ondary market rates on FNM A notes are published

Columbia stadium bonds, and the FH A deben­

fo r d iffe re n t m aturities, usually in the 30- to

tures, w hich are guaranteed by the Federal Gov­

270-day range. FN M A debentures, on the other

ernm ent in terms o f both principal and interest,

hand,

most agency securities are not guaranteed by the

are

orig in a lly

issued

w ith

interm ediate

m aturities—ty p ic a lly tw o to five years. As shown

United States Government. In fact, such securities

in Table I, there were $8.1

are often referred to as nonguaranteed agency

b illio n

o f FNM A

debt. Some fo rm o f Federal backing is, however,
3Federal Register, August 13, 1969, p. 13,078.


22


im p lic it fo r the nonguaranteed issues. In some

OCTOBER 1969

T A B LE I
Federal Agency Securities
As o f July 31, 1969

Total

Am ount
Maturing
W ithin
One Year

(m il. o f $)

(m il. o f $)

Debentures
I Bonds
V Discount Notes

$ 1,399

$ 1,411
2,721
2,150

No

Debentures
Bonds
i Debentures
' Discount Notes
Bonds

4,330
6,006

4,330
2,416

No
No

8,092

4,622

No

Type o f
Securities

Issuing Agencies

U. S. G overnm ent
Guarantee

U. S. Government Sponsored
Banks fo r Cooperatives
Federal Home Loan Banks
Federal Interm ediate
Credit Banks
Federal Land Banks
Federal National
Mortgage Association
D istrict o f Columbia

6,021

No

20

TOTAL

Yes

$25,868

$17,638

Certificates o f Interest
/ Debentures
< Participation Certificates
(. Discount Notes
Debentures

$ 1,293

$ 1,293

Yes

2,411

224

Yes

581

—

Yes

Participation Certificates
( Bonds
' Discount Notes

8,565

-

Yes

U. S. Government Owned
C om m odity Credit Corporation
E x p o rt-lm p o rt Bank
Federal Housing A d m in istra tio n
Government National
Mortgage Association
Tennessee Valley A u th o rity
‘ O TA L

735

360

$13,585

$ 1,877

No

Source: U. S. Treasury B u lle tin

cases, the Secretary o f the Treasury is authorized

issues as security fo r any advances obtained from

to buy Federal agency obligations. For example,

their Federal

the Treasury can purchase up to $1 b illio n o f the

1966, some agency securities can be purchased and

FHLB obligations. In other cases, the individual

sold on behalf o f the Federal Reserve System's

agencies

can

borrow

funds d ire c tly

fro m

the

Treasury. FN M A, fo r example, can borrow up to

Open

Market A ccount.

The high credit standing o f agency securities is

transactions.) It is apparent, therefore, th a t there

also indicated by the fo llo w in g : (a) most agency

is probably

issues can be used as collateral fo r Treasury tax

between

loan

accounts maintained

by

commercial

banks; (b) member banks can use some agency



(However, up to now

agency issues have o n ly been involved in Federal
Reserve repurchase agreem ents-never in o u trig h t

$2.25 b illio n fo r short periods o f tim e.

and

Reserve banks; and (c) since late

little

Federal

difference
agency

in terms o f

securities

and

risk

U. S.

Treasury issues. However, this may n o t be obvious
to a conservative p o rtfo lio

manager. Thus, the
23

ECONOMIC REVIEW

difference in interest rates on the tw o types o f
securities

is probably o n ly rem otely associated

OUTSTANDING

w ith relative risk.
T w o other characteristics o f agency debt are
w o rth n o tin g —call features and tax-status. W ith a

U. S. G O V E R N M E N T
B i l l i ons o f do l l a r s
25

few exceptions, agency securities presently o u t­
standing
previously

cannot be called before m a tu rity. As
indicated, the

FEDERAL AGENCY

SECURITIES NO T G U A R A N T E E D

TOTAL
MATURING
MATURING

20

IN

MORE

WITHIN

TOTAL
THAN

ONE

15

options. The latter can be called fo r redem ption in
whole or in part on three-m onths' notice.
Interest and any capital gains or losses on

10

DOf

5

agency securities are subject to Federal income

on

OUTSTANDING
ONE YEAR
f

Y E A R O R L ESS

D istrict o f Columbia

bonds and the FHA debentures both have call

by the

qd R

taxes, b u t—again w ith a few exceptions—not sub­
ject to state or local levies. Agency securities are,
however, subject to all estate inheritance and g ift

B ANKS FOR COO P E R A T I V ES

taxes. G N M A PCs and FNM A debentures do not
contain any specific exemptions fro m state or
local taxa tion.
FEDERAL

Trends in Recent Years. It is apparent th a t all
types o f agency issues are not equally significant in

I NT ER M EDI AT E CREDIT B A NKS

□ □.

n

□ r i □ □ □ LI

or even relevant to the money market. Some, such
as PCs and FH A debentures, are clearly capital
market instrum ents; others, such as the obligations
o f F N M A , are o f mixed character, depending on
the specific m a tu rity. On the other hand, all o f the
COOP and FICB debentures are short-term money
market obligations, w ith original m aturities o f less
than one year. The agencies th a t are cu rre n tly
most active in the money market are the farm
credit agencies—COOP, FICB, F LB —and the tw o
housing agencies, FHLB and FN M A. Outstanding
securities o f these five agencies constitute v irtu a lly
the entire am ount o f the nonguaranteed agency
debt.4
1959

The T V A debt is also nonguaranteed, but the individual
issues are generally o f small amounts and are not traded in
the secondary market.


24


Last entr y:
So a r c e o f

’ 61

’ 63

’ 65

1968
data:

’67
END

U. S. T r e a s u r y Bul l et i n

’ 69
OF

YEAR

OCTOBER 1969

The chart indicates trends in the dollar volume
o f outstanding

nonguaranteed securities in the

OWNERSHIP OF AGENCY DEBT
The U. S. Treasury conducts surveys o f the

1959-1968 period. In terms of aggregates, o u t­

ownership o f Federal agency issues th a t are sim ilar

standing

agencies

to its surveys o f the ownership o f regular U. S.

amounted to nearly $22 b illio n at the end o f 1968

Government securities. These surveys provide an

securities

fro m

the

five

o f w hich $14 b illio n were to mature w ith in one

incomplete picture, however, because in any given

year or less. In

year half or more o f the to ta l outstanding non­

1959, the total was about $8

b illio n . During the ten-year period, the three farm

guaranteed

credit agencies accounted fo r roughly half o f the

residual " o th e r" category. Nevertheless, the Treas­

nonguaranteed

debt.

The growth

in securities

issued by each o f the three farm credit agencies

ury

Federal agency debt is lumped in a

surveys

provide

the

best in fo rm a tio n

on

ownership cu rre n tly available.

has been quite steady. However, the grow th in
outstanding debt o f the tw o housing agencies has
been quite irregular, due p rim a rily to changing

Commercial
holdings o f

banks

have by

fa r the

largest

Federal agency securities fo r any

conditions in the mortgage market. Both FNM A

ownership group. In fact, th e ir holdings increased

and FHLB obligations increased sharply in 1966

fro m $1,505 m illio n in 1959 to $3,707 m illio n as

and 1969, largely as a result o f the expanded

of July 1969 (see Table II). Mutual savings banks

support the institution s provided to the housing

also increased th e ir ownership, fro m $405 m illio n

m arket during the year.

in 1959 to $1,290 m illio n in July 1969, w hile
holdings at savings and

Nonguaranteed

agency

securities

are fa irly

liquid; generally 60 to 70 percent o f the o u t­

loan

associations rose

irregularly, fro m $330 m illio n in 1960 to $957
m illio n

in

1969.

The

grow th

in

holdings at

standing issues in the past ten years fell in the one

insurance companies was especially pronounced

year or less m a tu rity category. The p ro p o rtion in

between 1959 and 1965, rising fro m $252 m illio n

this category

to $565 m illio n ; in subsequent years, however,

declined, on balance, fro m

69.0

percent in 1959 to 64.5 percent in 1968. However,

such

as o f July 31, 1969, this p ro p o rtion had again

amounted

holdings
to

declined,
$359

and

m illio n .

in

Ju ly

T hroughout

1969
the

moved up to 68 percent. A lthough the public

period, corporations have been im p o rta n t buyers

marketable debt is on average longer term than

o f agency issues, although th e ir holdings varied

agency debt, the marketable p ortion o f the public

w idely

debt m aturing w ith in one year increased fro m 42.5

holdings changed little between 1960 and 1968,

percent in 1959 to 45.9 percent in 1968. The 4%

but in relative terms, the reported corporate share,

percent statutory interest rate ceiling on U. S.

reflecting an incom plete sample, declined dras­

Government bonds no d o u b t contributed to this

tic a lly , fro m 11.1 percent o f to ta l outstandings in

development. Federal agency securities (as well as

1961 to 3.8 percent in Ju ly 1969.

fro m

year to

year.

On balance, such

Treasury bills and notes) are not subject to an
interest rate ceiling. The surge in m arket interest

The increased ownership

o f Federal agency

rates since the m id-1960's has made it impossible

debt by some public in stitu tio n s is probably the

fo r the U. S. Treasury to issue bonds.

most




conspicuous

recent

developm ent in this
25

T A B L E II
Ownership o f Nonguaranteed Federal Agency Issues
1 9 5 9 -1 9 6 9
(M il. o f $)
Owned By
U. S. G overnm ent accounts
and Federal Reserve banks
Commercial banks
M utual savings banks
Insurance companies
Savings and loan associations
Corporations
State and local governments
Held by all other investors
T otal am ount outstanding
* End o f year,
t As of July 31, 1969.
Source: U. S. Treasury B u lle tin




1959*

$

22
1,505
405
252
—
—
5,752

$7,917

1960*

$

37
1,424
466
266
330
880
—
4,503

$7,910

1961*

$

1962*

1964*

1963*

35
1,672
514
313
307
968
413
4,353

-0 $ 2,410
618
357
283
986
549
4,931

$

$8,574

$10,133

$11,704

29
2,867
695
400
270
1,208
540
5,698

$

12
2,645
754
444
307
767
818
6,382

$12,127

1965*

1966*

1967*

1968*

45
2,975
745
565
346
953
1,337
7,121

$ 1,356
2,997
929
531
431
715
1,380
10,909

$ 1,282
3,502
924
431
422
630
1,820
9,813

$ 1,461
3,782
1,011
378
512
857
2,849
11,331

$

$14,086

$19,249

$18,825

$22,179

$26,529

$

1 9 6 9t

402
3,707
1,290
359
957
1,002
3,573
15,239

OCTOBER 1969

market. U. S. Government accounts and Federal

Government agency securities. In contrast, the

Reserve banks owned

increased

agency securities

in

$22

m illio n

of

1959, but by

Federal

1968 such

holdings

of

U. S. Government and

Federal Reserve accounts came about largely as a

holdings had set a record o f $1,461 m illio n (6.6

result o f the strain on the housing m arket in recent

percent o f the to ta l). However, as o f Ju ly 31,

years. Since 1966, in an e ffo rt to moderate the

1969, holdings by U. S. Government accounts and

credit squeeze in the mortgage m arket, Govern­

Federal

$402

ment tru st funds have invested in large amounts o f

m illio n . The holdings at state and local govern­

the securities issued by FN M A and the Federal

ments included in the Treasury sample grew from

Home

$413 m illio n in 1961 to $2,849 m illio n in 1968

share o f ownership by corporations can in part be

(12.8 percent o f the to ta l), and in Ju ly 1969

explained by developments in other money m arket

Reserve

banks had declined

to

amounted to $3,573 m illio n .

Loan Banks. Finally, the decline in the

instrum ents, such as CDs or comm ercial paper,

Commercial banks as well as other financial

th a t as a rule o ffe r better returns than agency or

in stitutions, such as mutual savings banks, insur­

Treasury issues. Generally, there are o n ly self-

ance companies, and savings and loan associations,

imposed legal lim ita tio n s on the investment o f

th at have legal lim ita tio n s on the typ e o f invest­

corporations.

ments th a t they can make, fin d agency issues

Method

of

Sale.

Most

agency

securities—

particularly attractive. Such issues o ffe r many o f

especially coupon issues—are in itia lly sold through

the advantages o f o u trig h t Treasury issues as well

financial specialists know n as “ fiscal agents." The

as providing higher yields. Most agency securities

agencies maintain th e ir separate fiscal agents under

are considered legal investments and are accepted

contract. The agent must assemble a group o f

as security against deposits o f public funds, such as

investment banking firm s —banks, brokers, etc.—to

the Treasury tax and loan accounts at commercial

distribute the securities to retail buyers. (There are

banks. Consequently, when banks are in need o f

exceptions,

additional liq u id ity and hold both agency and

notes o f FNM A are issued exclusively through one

regular

probably

dealer firm .) Once sold. Federal agency issues are

choose to sell the latter, lower earning issues. This

traded in the secondary m arket in much the same

Treasury

issues,

they

w ould

however.

The

short-term

discount

may be an im p o rta n t reason behind the rise in the

way U. S. Government securities are. As men­

volume o f agency issues held by financial in s titu ­

tioned earlier, most dealers in U. S. Government

tions as a group during the 1959-1968 period.

securities also make markets in agency issues.

(During the period, holdings o f Treasury issues at

However, in terms o f volume o f trading, Federal

financial

agency issues rank far below regular Government

in s titu tio n s—although

much

larger in

dollar volume than holdings o f agency issues—

issues.

declined substantially.)
The same reason, essentially, also explains the

in t e r e s t r a t e r e l a t i o n s h i p s

increased holdings o f agency securities by state

Interest rates on all types o f debt in the free

and local governments. State laws often require

markets have soared during the 1960's, and yields

th a t investments on behalf o f state pension or

on agency issues are no exception. For example,

tru st funds be made in U. S. Government or

between




1961 and the th ird quarter o f 1969,
27

ECONOMIC REVIEW

TABLE III
Selected Money Market Yields
Annual Average
1 9 5 9 -1 9 6 9

Three-M onth
Treasury
Bills

Year

Three-M onth
Federal
Agencies

Three-M onth
Finance
Paper

Rates on Federal Agencies less:
--------------------------------------------------Three-M onth
Three-M onth
Treasury Bills
Finance Paper
(basis points)

1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969*

3.37%
2.87
2.36
2.77
3.16
3.54
3.95
4.85
4.30
5.33
6.43

3.69%
3.20
2.47
2.84
3.30
3.73
4.14
5.22
4.60
5.54
6.93

3.82%
3.54

+32
+33

(basis points)
-1 3
-3 4

2.68

+11

-2 1

3.07
3.40
3.83
4.27
5.42
4.89
5.69
6.87

+ 7
+14
+19
+19
+37
+30
+21
+50

-2 3
-1 0
-1 0
-1 3
-2 0
-2 9
-1 5
+ 6

NOTE: Rates on Treasury bills and Finance paper are annual averages o f daily
figures; rates on Agencies are annual averages based on single m on th ly
observations.
* First three quarters.
Sources: Federal Reserve B u lle tin and Salomon Brothers & Hutzler

yields on three-m onth m aturities o f agency issues

issues ranged fro m 7 basis points in 1962 to 33

rose fro m 2.47 percent to 6.93 percent (see Table

basis points in 1960 in favor o f agency issues.

III). In general, before 1969, increases in agency

Finance paper rates averaged 10 to 29 basis points

yields paralleled changes in Treasury yields. During

higher than rates on agency issues. But, in the firs t

the firs t three quarters o f 1969, however, yields on

three quarters o f I969, agency yields on average

agency issues rose considerably more than rates on

were higher than yields on finance paper.5 As

issues. M a tu rity fo r m a tu rity , agency

indicated earlier, the spread over Treasury b ill

yields are above yields on regular U. S. Treasury

rates can o n ly p a rtly , at best, be a ttrib u te d to

issues, b u t generally below yields on private issues

differences in

Treasury

risk

between the tw o types o f

such as commercial or finance paper, bankers'
acceptances, or CD rates in the secondary market.
For

example,

in

Table

III

m arket yields on

three-m onth m aturities o f agency issues fo r the
1959-1969 period are compared w ith yields on

5 lt should be noted, however, th a t yields on both finance
paper and Treasury bills are expressed on a discount basis,
whereas rates on agency

issues are on a bond-yield

equivalent basis; consequently, the comparison tends to

finance com pany paper and three-m onth Treasury

overstate the differences w ith b ill yields and understate

bills. The spread between rates on bills and agency

the differences w ith yields on finance paper.


28


OCTOBER 1969

securities. For example, PCs, which are backed by

In certain cases, agency borrow ing may have

a Government guarantee, s till carry higher rates (in

im p o rta n t im plications fo r m onetary p olicy. It is

the prim ary as well as secondary market) than

w idely recognized, fo r example, th a t m onetary

those on regular U. S. Treasury issues o f the same

policy sometimes severely affects mortgage credit

m a tu rity.

and

building

a c tiv ity .

Housing

credit

is also

affected im p o rta n tly by FN M A secondary market
The difference in yields, therefore, is probably

operations. Consequently, such agency operations

the result o f factors other than risk. One determ in­

must be given serious consideration in the conduct

ing fa cto r m ight be differences in "tra d e a b ility ."

o f monetary policy.

Treasury issues have been in the market fo r many
more years and in larger dollar volume than agency

An

aspect o f agency debt th a t has caused

securities. As a result, the investing public is better

considerable controversy in the past concerns the

acquainted

treatm ent o f agency securities in the

w ith

Treasury

issues.

In addition,

Government securities comprise a more homoge­

Federal

Budget. Before 1969, the borrow ing and lending

neous group than agency issues in terms o f tax

activities o f agencies either p a rtia lly or w h o lly

treatm ent, call features, o r marketing methods.

owned by the Federal Government were included

Generally, the secondary market fo r agency issues

in the cash version o f the Federal Budget, but only

is no t as well-developed as th a t fo r Treasury issues.

w h o lly

owned

agencies

were included

in the

volume o f individual

o fficia l adm inistrative budget. Moreover, in certain

issues is usually far greater than the

cases such as sales o f PCs, agency borrowings were

dollar volume o f single agency issues. An in d ivid ­

treated as negative expenditures in the Budget

ual agency offering rarely exceeds $0.5 b illio n ,

accounts—the

Furtherm ore,
Treasury

the

d ollar

ju s tific a tio n

being th a t the

PCs

whereas in current weeks, three-m onth Treasury

reflected sales o f Government assets (e.g., loans)

b ill offerings were more than three times greater

and

than th a t amount.

“ revenue”

th a t

Federal

proceeds
or

fro m

"reduced

Government.

PC sales constituted
expenditures" fo r the

Many

critics,

however,

argued th a t, in e ffect, PC sales represented a means

SOME ISSUES OF POLICY

o f Federal Government financing not at all d iffe r­

The issuance o f Federal agency securities has a

ent fro m direct U. S. Treasury borrow ing and th a t

considerable im pact on financial markets as well as

the final accounting result o f PC sales, which was

on overall economic a ctivity . Agency borrow ing is

to reduce the size o f Budget deficits (or alterna­

im portant in the to ta l demand fo r credit and,

tive ly, to increase Budget surpluses), was mislead­

therefore, exerts a direct influence on m arket rates

ing.

o f interest. In addition, to the extent th a t agency
securities represent funds entering the final expen­
d iture

stream—and

assuming

th a t

such

funds

The

conversion

fro m

mixed

to

com pletely

private ownership in 1968 o f F N M A , FICB, and

w ould n ot have entered otherwise—the new issues

COOP removed the operations o f these agencies

con tribu te to the overall level o f economic activ­

from the new Federal Budget. A t the same tim e, in

ity .

accordance w ith a recom mendation o f the Com­




29

ECONOMIC REVIEW

mission on Budget Concepts, it was decided th a t

raised concerning w hat e ffo rt, if any, should be

futu re sales o f PCs by agencies still owned by the

made tow ard achieving greater u n ifo rm ity among

Government (fo r example, the Exim bank) should

the securities o f individual agencies. For one thing,

no longer enter the Budget accounts as negative

some observers th in k th a t it m ight be desirable to

expenditures, but rather as borrowings sim ilar to

establish a common agency to market all or most

regular Treasury issues.

agency debt, rather than using many d iffe re n t

F inally, some policy questions also are often

agents as is done at present.

CORRECTION
ECONOMIC REVIEW , September 1969

Page 22
TABLE IV
Distribution of New Issues of State and Local Government Securities
Purchased by Private Investors
1 9 6 0 -1 9 6 8
The share fo r Commercial banks in 1967 should be 84.9% instead o f 34.9%.
Digitized for30
FRASER


OCTOBER 1969

RECENTLY PUBLISHED ECONOMIC COMMENTARIES
OF THE FEDERAL RESERVE BANK OF CLEVELAND
"Bank Holdings of Municipal Obligations (Fourth District)"
September 2, 1969

"Recent Changes in Corporate Balance Sheets"
September 8, 1969

"U. S. Private Investment in Canada"
September 15, 1969

"The French Franc: Some Historical and Contemporary Developments"
September 22, 1969

"Treasury Borrowing from the Federal Reserve System"
September 29, 1969

"Recent Inventory-Production Patterns in Autos"
October 6, 1969

"Negotiable Certificates of Deposit at Fourth District Banks"
October 13, 1969

"Withdrawing Bank Reserves With Matched Transactions"
October 20, 1969
Econom ic Com m entary is published weekly and is available without charge. Requests to
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31




Fourth Federal

Reserve District