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FEDERAL RESERVE BANK OF SAN FRANCISCO
MONTHLY REVIEW
SS T : At the Sound Barrier
Changing Loan Profile
APRIL
I 967
SST: A t the Sound Barrier
. , . The SST may be one of the most remarkable advances of our time
— or it may be an eardrum-shattering, budget-shattering disaster.
C h an gin g Loan Profile
, . . Long-term trends in Western banks' loan portfolios show the
impact of sharp gains in population, employment, and income.
Editor: W illiam Burke
M O N T H L Y REVIEW
April 1967
SST: At The Sound Barrier
supersonic transport program has
completed its preliminary design stage
and now stands at the threshold of its devel
opment phase — at which point it faces poli
tical and economic problems as difficult in
their own way as the sound barrier which
trans-sonic aircraft must break. The plane
may well be, as its supporters claim, one of
the most remarkable transport advances of
our time. On the other hand, it may be, as
some critics contend, an eardrum-shattering,
budget-shattering disaster that fails to pro
vide any of the efficiencies normally asso
ciated with advances in the aircraft art.
D e v e lo p m e n t of the SST undoubtedly
would reenforce a national asset of immense
value — the U.S supremacy in aerospace
capability. This plane, with its capability for
carrying 350 passengers over 4,000 miles at
a speed of 1,800 miles per hour, would be
one of the most productive long-range vehi
cles in history. (In a year’s time it could carry
as many passengers as six Queen M arys.) It
would reshape geography, making Asia as
close as Europe is today, and making Europe
much closer than the two coasts of this coun
try are today.
Even so, the SST is an exception to the
historic rule that a new model plane is always
superior to its predecessors in terms of bene
fits and in terms of costs. It meets these tests
vis-a-vis the jet transports operating today,
but its 2i/i-cent seat-mile o p e r a tin g cost
would be substantially above the cost of the
large and efficient 747 transport which is
slated to make its debut in 1969.
T
he
Facing Phase 3
The pros and cons of the argument have
received increasing attention now that the
program has completed its $300-million pre
liminary stages and prepares to enter its $ 1.1
billion development stage (Phase 3 ). The
Federal Government has picked up most of
the expenses associated with the program to
date and may be expected to do the same with
Phase 3. Beyond that stage, however, another
$700 million may be needed for flight testing
and further development, and perhaps $2Vi
billion for actual production costs. In these
later stages, the m anufacturer may be forced
to find private financing.
In the fiscal 1968 budget of the Federal
Aviation Agency, $800 million is included
for program financing. In the words of the
President’s budget message: “We are cur
rently considering the construction of a pro
totype supersonic transport. The allowance
for contingencies is adequate for covering
the possible cost of this effort should an
1
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FEDERAL
RESERVE
BANK
OF
SAN
affirmative decision be made to proceed.” That affirmative
decision came in late April, when the Administration
authorized the previously chosen prime contractors to pro
ceed with the construction of two prototype models.
FRANCISCO
U.S. Governm ent pays
most SST development costs
B illio n s of D olla rs
Anglo-French concord
84
1.5
Major interest in the development of a supersonic trans
port first developed abroad and has now culminated in the
---------- A IR L I N E S
M ANUFACTURERS
production of the Anglo-French Concorde, which is sched 10
uled to go into service in 1971. The British and French
governments became interested in this type of plane when
they found that the market for long-range subsonic jets
.5
FED ER A L G O VERNM ENT
had been preempted by the American 707 and DC-8, and
were reinforced in their decision when their entries in the
short-haul market (the Briltania and the Caravelle) were
outdistanced by the American 727 and DC-9. (President
de Gaulle made his triumphal tour of Latin
ident Johnson accelerated the design compe
America in a Caravelle, but before he could
tition, and this phase came to an end at the
begin his tour he had to cross the Atlantic on
beginning of this year with the choice of a
an American jet.
winning aircraft design.
Almost against their will, European air
In Phase 3, which is now getting under
craft designers found themselves being forced
way, the Government will support the con
across the sound barrier. The result was the
struction of two prototype planes for test and
Anglo-French agreement in late 1962 to
evaluation, with an initial 1968 appropriation
share the design and construction costs of
of $198 million. Total Phase-3 financing re
the Concorde. Seventy-two firm orders are
quirements are estimated at $ 1.1 billion, with
now in hand for this $ 16-million plane, which
the Federal Government putting up $900
will carry 136 passengers at a speed of 1,450
million, the prime contractors $139 million,
miles per hour. If and when the American
and airline purchasers $57 million ($1 mil
SST takes to the skies, however, the smaller,
lion for each aircraft now on order).
slower, and less technically advanced Con
For the entire program through Phase 3,
corde may find itself at a distinct competi
the cost for the airframe manufacturer would
tive disadvantage. (The British drop the final
be $203 million, and for the engine manufac
“e” in the spelling of the Concorde, and on
turer $86 million, including cost of new fa
occasion they give signs of wanting to drop
cilities. But the total cost to the Federal Gov
the program altogether.)
ernment through Phase 3 would be about
$1.2 billion.
W a sh in gto n 's role
FAA market projections suggest that the
On this side of the ocean, the FA A ini
g o v e rn m e n t would receive its investment
tiated an $ 11-million exploratory SST study
back in the form of royalty repayments if 300
in 1961. In 1963, the day after an American
planes are sold at $40 million apiece. If 500
airline ordered six Concordes, President Ken
sales are made, the Federal investment would
nedy pushed the program forward, declaring
be returned with 6-percent interest, and if a
that the SST was “essential to a strong and
maximum of 1,200 sales are made the Fed
forward-looking nation.” In m id-1965, Pres
eral investment would be returned with 12-
April 1967
M O N T H L Y REVIEW
percent interest. And, if the standard pro
jection of 500 sales is met, the makers might
be able to turn a profit around 1984 — a
decade after the first plane is delivered.
Seattle's role
For the airframe manufacturer (Boeing)
and for the Seattle area in general, the SST
program presages future prosperity but no
immediate large increase in jobs. At present,
about 1,500 employees are involved in the
SST design phase as the manufacturer awaits
the signal to begin the construction of two
prototype planes. In the distant future, how
ever, as the SST program moves into full pro
duction, perhaps 12,000 new aircraft jobs
would be created in the Seattle area. The pro
gram also would involve hundreds of subcon
tractors throughout the nation; six major
subcontractors have already been chosen to
work on fuselage, wing, and tail parts, and
altogether they will account for 69 percent,
by weight, of the completed aircraft.
As the program moves into the prototype
and production phases, it should thus bring
further prosperity to an already prosperous
region. Within a single year, Boeing’s back
log for subsonic jets and for space and de
fense items has jumped from $3.2 billion to
$5.3 billion. The firm is now building at Ev
erett, Washington, the world’s largest man
ufacturing p la n t— 160 million cubic feet-—
for the construction of the mammoth 747
transport plane. (Fully loaded, this plane
would weight more than twice as much as a
707 transport.) As construction proceeds on
this major project, the firm’s present 96,000
employment in the Puget Sound area will in
crease substantially. But then, as manpower
and facility requirements phase out for the
747 program, the SST program would be a
welcome addition to the firm’s workload.
Until recently, however, the program was
in a state of uncertainty, not so much because
of the technical problems associated with this
type of enterprise, although these are real
enough, but rather because of the argument
over whether the program is actually worth
its cost. Opponents of the SST do not claim
that the plane will never get off the ground;
rather, they argue that it should not be per
mitted to leave the ground without substan
tial modifications in program design. Sup
porters of the project, however, claim that the
benefits to be realized from the program are
so great that they far more than offset the
heavy costs which will be incurred.
Air: the new medium
The SST concept involves an interesting
engineering challenge, since the difference
between supersonic and subsonic vehicles is
comparable to the difference between surface
ships and submarines. The air at this speed
behaves like a new medium, and it requires
the development of radical designs and ma
terials to cope with these new physical forces.
As the plane approaches the speed of
sound — about 660 miles an hour at high
altitude — th e fo rc e re q u ir e d to push it
through the air rises abruptly. The sound
waves cannot outspeed the supersonic plane,
so the air in front of the plane is undisturbed
until the plane pushes it aside. This fact ac
counts not only for an intense sonic boom
but also for heat and pressure p ro b le m swhich give the aircraft peculiar handling
problems.
1
CONCORDE
FEDERAL
RESERVE
BANK
At the speed designed for the SST, it will
be operating in a so-called thermal thicket —
in a region where the aircraft cannot dissipate
the heat generated by air friction. As a solu
tion, aircraft fuel can be used as a heat sink,
with the engine fuel made to flow between
vital areas to keep aircraft parts from melt
ing, but intense heat problems still develop
when the fuel to the engines is cut off for
descent.
Problems of stress would also develop at
the plane’s c r u is in g a l t i t u d e , especially
around the cabin-pressure seals at door joints
and windows. A technical solution is feasible
— no windows — but this in turn might cre
ate psychological problems for passengers.
Stresses could also build up at the pivot of
the plane’s folding wing, which ranges from
a 20 degree sweep at takeoff to a 72 degree
sweep at maximum speed.
There are other technical problems, too.
Maneuverability: the SST would require al
most 200 miles to make a 180-degree turn at
supersonic speed. Atmospheric dangers: at
cruising altitude of 64,000 feet, the SST
would confront problems arising from cosmic
radiation. Balance: when the plane goes su
personic, its center of pressure undergoes a
change in relation to the center of gravity,
and the pilot has trouble maintaining control
over the craft.
OF
SAN
FRANCISCO
Sound: a new problem
Nonetheless, the major te c h n ic a l (and
cost) problem is the problem of sonic boom
— the e x p lo s iv e sound created when an
object moves through the atmosphere at su
personic speed because of the inability of air
molecules to move faster than the speed of
sound. The intensity of the boom is influ
enced by temperature and wind variation, but
mostly by the plane’s altitude, weight, and
shape — the greater the weight, the greater
the boom.
S o n ic -b o o m in te n s ity is measured by
pounds per square foot “over-pressure” —
the excess over the normal weight of the
atmosphere. The SST would probably exert
2 psf o v e r - p r e s s u r e in accelerating to its
cruising speed. In order to reduce this some
what painful noise to the more bearable range
of 1 psf over-pressure, either a smaller plane
would have to be designed or the plane
would have to fly at subsonic speed over
population centers — or not fly over such
centers at all.
However, seat-mile operating costs would
soar with the use of small planes or with
substantial restrictions on supersonic flight,
so that airlines might avoid purchasing such
planes on economic grounds alone. In 1964,
then FAA Administrator Halaby told a con
gressional c o m m itte e :
Jet-transport boom and Vietnam war create sharp
“The loss of market po
gains in aircraft employment, especially in W a sh in gton
tential due to such re
Thousands of Workers
strictions would probably
be so severe as to make
p r o d u c tio n of the SST
economically unfeasible.”
The cost of sound
The problem of sonic
boom is critical to the
success of the program
because it so closely af
fects the cost and pricing
April 1967
M O N T H L Y REVIEW
of each plane. Although the FA A now uses
a cost projection of $40 million per plane,
other projections have ranged between $28
and $50 million per plane — a critical dif
ference because airlines must reflect plane
prices in scheduling fares.
The FA A ’s maximum market projection
of 1,200 plane sales by 1990 is based on sev
eral important assumptions: 1) unlimited
operation will be permitted over crowded
areas despite the sonic-boom problem, and
2) a passenger surcharge will be levied by
airlines to help them recover the high pur
chase cost of SST planes. Critics question
each of these assumptions, however. They
argue that supersonic flying will be banned
over population centers of this country and
Europe, and that this step will take away
perhaps 60 to 80 percent of the SST market.
They also contend that if the International
Air Transport Association should enforce a
surcharge for supersonic flight, in order to
protect the huge investment of foreign air
lines in their subsonic jet fleets, perhaps onehalf of all potential SST passengers will be
lost to the subsonics.
Meanwhile, Back in the Holding Pattern
In coming decades, congested airlanes and congested airports may offset
most of the savings made possible by rapid jet aircraft, subsonic or supersonic.
Despite all the radar-com puter improvements in route control and tower operation,
it is apparent that the nation’s airspace and groundspace are not limitless.
In air route control, to maintain the proper horizontal and vertical separa
tion between planes, controllers must attempt to reserve for each single jet a mov
ing block of airspace 25 miles long, 10 miles wide, and Vj mile thick. Consequently
some routes are filled to capacity at peak hours; at such times tower operators are
forced to limit takeoffs until airspace becomes available and pilots are forced to
fly at inefficient jet altitudes or on roundabout routes.
On the ground, many major airports are operating near peak capacity right
now. Each of New Y ork’s three airports will reach absolute capacity within the
next one to five years, and the fourth airport now projected for that area will not
be ready for another decade. Chicago’s O ’Hare Airport, which now handles three
times the capacity of New Y ork’s Kennedy Airport, logs a landing or takeoff every
20 seconds during rush hours. Thus, at these and other major airports, delays are
frequent and costly in terms of both time and money.
Not surprisingly, the New York-Philadelphia run — which in 1940 could
be covered in 46 minutes with a 185 mile-per-hour DC3 — today requires 53 min
utes even with a 550 mile-per-hour modern jet. A ir traffic experts say that Ken
nedy A irport will be so crowded in 1969 that it will have an average two-hour wait
for runway clearance. The problem may ease somewhat as larger planes with larger
capacity come into service. But to the average SST passenger, who may pay a sur
charge for the privilege of flying from New York to Los Angeles in two hours’ time,
a two-hour wait on the ground may be frustrating indeed.
FEDERAL
RESERVE
BANK
Critics also contend that only a relative
handful, perhaps 1 out of every 20 Ameri
cans, would profit from supersonic travel, in
relation to the many who would be inconven
ienced. (The plane, in Senator Proxmire’s
view, would be a “booming, zooming gift to
the jet set.” ) One suggestion is that govern
ment pay special compensation to people
whose homes or nerves are damaged by liv
ing in the path of the sonic boom. But such
compensation could be rather expensive be
cause roughly half the national population
lives in areas that would be serviced by the
plane.
Returns to the government
83
Opponents also question why the Federal
government should be involved at all in such
an enterprise. Dr. Stephen Enke, former
chief of an SST study group in the Pentagon,
points out, “There are few modern instances
of the development with public funds of a
technologically advanced project that is to
be produced and used commercially by pri
vate firms.”
Speaking to a recent convention of the
American Economic Association, he argued
that the program should be continued only
so long as it is expected to earn a rate of
return comparable to that received by U.S.
industry generally. “If the U.S. government
is initially to finance 80 to 90 percent of the
U.S. SST’s development costs, and if up to
$4 or $5 billion of American resources must
somehow be invested in development and
manufacture before the program generates a
net cash inflow from sales to airlines, an
obvious economic test of SST’s justification
is its ability to earn the 10-15 percent rate
of return earned on an average by domestic
resources employed in U.S. industry.”
The program ’s rate of return depends on
the costs of development and manufacture,
operating costs and operating receipts per
plane-mile, and the availability of a large
OF
SAN
FRANCISCO
enough market of potential supersonic pas
sengers. Dr. Enke argues that the overall
rate of return could be 10-15 percent under
certain favorable assumptions but that the
return could just as well be negative under
equally plausible assumptions. “Perhaps the
best guess is an overall program rate of
return of zero to 5 percent. The simple truth,
however, is that such a complex and techni
cally advanced aircraft must be an invest
ment gamble in its first generation.”
Returns to the nation
Supporters of the SST contend that this
investment gamble must be taken because
of the broad national interests that would
be served by the SST p r o g r a m . Obvious
benefits would accrue to the nation in terms
of its balance of payments, its military and
commercial needs, its technological develop
ment, and especially its national prestige.
On balance-of-payments grounds, sales of
American SSTs at the expense of foreign
SSTs (such as the Concorde) might create a
substantial plus instead of a minus in the
nation’s international accounts. On the basis
of FA A market projections of 250 sales to
foreign airlines by 1990, about $10 billion
in export income could show up on the plus
side of the payments balance.
Critics of the program contend, however,
that export sales of American SSTs could
reduce export sales of American subsonic
planes, and that U.S. airlines could lose pas
sengers to foreign airlines operating U.S.made SSTs. Thus the balance-of-payments
effect would probably be only a fraction of
the export price of the SSTs — and in fact
c o u ld be n e g a tiv e if tourists spent more
money abroad as a result of easier access to
foreign countries.
Speed undoubtedly is a major argument in
favor of the SST program. An important con
sequence of supersonic travel would be to
bring distant places closer, especially since
M O N T H L Y REVIEW
April 1967
the efficiency of SSTs is increased on long
hauls. Even without such a vehicle, trans
pacific travel may rise fivefold within the next
decade, and the shortening of distances made
possible by the SST could make such tourist
projections look overly conservative in later
decades.
Supersonic speed, in addition to stimulat
ing commercial and pleasure travel, could
also have strong military benefits. According
to one study, a million combat troops could
be transported 4,000 miles away within a tenday period with a fleet of 400 SSTs. On the
other hand. Defense Secretary McNamara
contends that essentially the same results
could be achieved through the use of the
C5A, a much larger and more efficient sub
sonic transport which will begin flying in
1969.
Meanwhile, substantial technological fall
out has already occurred from the SST pro
gram. In particular, the program has stimu
lated enormous advances in the use of tita
nium. This sophisticated metal is still diffi
cult to work; it is formed at glowing cherryred temperatures, cut with gold-plated tools,
and welded in an inert atmosphere encased
in plastic bags. But with all these difficulties,
it has proven viable at the 500-degree tem
perature needed for supersonic flight, and in
addition has already been halved in price
from $20 to roughly $6-12 per pound.
On grounds of national prestige also, the
completion of the program u n d o u b te d ly
would reinforce the U.S. supremacy in aero
space capability. If the American SST is not
produced, the C o n c o rd e or (perish the
thought) the Russian TU-144 could well
dominate the airlanes of the world in future
decades.
Even the sharp critics of the program, such
as Dr. Enke, expect that a safe, profitable
and relatively noiseless SST “will be flying
well before the end of the ’70s.” The ques
tion thus is not whether the American SST
will get off the ground, but rather when.
— William Burke
T W E L F T H D IS T R IC T BU SIN ESS
Year
and
Month
Condition item s of a ll member banks
(m illio n s of d o llars, seasonally adju sted)
______________________________________________________________ ________
B an k
debits
31 c itie s
(1957-59
— 100)
Bank
ra te s :
short-term
business
loans
5.36
5.62
5.46
5.50
5.48
5.48
5.52
6.32
U .S .
Gov’t.
se cu ritie s
Demand
deposits
adjusted
Total
tim e
deposits
15,90S
16,612
17,839
20,341
22,915
25.561
28,115
29,858
6,514
6,755
7.997
7.299
6,622
6,492
5,842
5,444
12.799
12,498
13.527
13.783
14.125
14,450
14,663
14,341
12.502
13,113
15,207
17.248
19,057
21,300
24,012
25.900
109
117
125
141
157
169
182
217
1966: F eb.
M ar.
Apr.
M ay
June
Ju ly
A ugust
Sept.
Oct.
Nov.
Dec.
28,748
28,897
29,267
29,157
29,688
29,791
29,764
29.532
29,583
29,538
29,858
5,737
5,589
5,309
5,128
4,919
5,071
5,473
5,190
4,987
5.267
5,444
14,790
15,006
14,924
14,812
14,780
14,753
15,120
14,819
14,719
14,800
14,341
23,904
24,169
24,579
24.735
25,001
25,285
25,271
25,159
25,085
25,318
25,900
206
212
227
221
220
227
215
229
224
207
220
1967: Jan.
Feb.
30,274
29,923
5,468
5,889
14,437
14,376
26,134
26,425
228
233
Loans
and
discounts
1959
1960
1961
1962
1963
1964
1985
1966
5.89
6.18
6.58
6.62
In d u stria l production
Total
(1957-59 = 100)
nonfarm
___________________
employment
<1957-59
Refined
Lum ber
s= 100)
Petroleum
Steel
104
106
108
113
117
120
125
132
109
98
95
98
98
107
107
103
101
104
108
111
112
115
120
123
129
130
131
131
131
131
131
132
133
135
135
111
108
113
107
105
104
95
93
96
89
97
119
117
122
125
128
130
119
123
121
125
120
136
137
98
123
92
102
111
100
115
130
138
140
135
143
147
145
144
143
136
140
142
142
141
142
135
89
FEDERAL
RESERVE
BANK
OF
SAN
FRANCISCO
Changing Loan Profile
n
1966, as business loans soared and
mortgage funds dwindled, the allocation
of bank credit among the various sectors of
the economy became a subject of widespread
interest. But to gain perspective on these
recent shifts in credit flows, the longer-run
trends in bank loan portfolios should also be
examined. Such an analysis is particularly
relevant for Western banks in view of their
very rapid growth in the preceding decade
— growth which sharply enhanced their posi
tion nationally as suppliers of bank credit.
W hat were the major factors affecting
bank-credit growth and loanable-funds allo
cation in the West during the 1 9 5 5 -6 5
period? Obviously, banks in Twelfth District
states, like their counterparts in other sec
tions of the country, were influenced in their
lending policies by recessions and expan
sions and by the attendant shifts in monetary
and fiscal policies — in c lu d in g , in recent
years, actions related to the nation’s unfavor
able balance-of-payments position. Structural
changes in deposit composition also played
a significant role in shaping bank lending
policies. In addition, competition intensified
from a wide range of fast-growing nonbank
I
M a jo r economic indicators rise
more sharply in W e s t than elsewhere
Percent Change (1 9 5 5 - 6 5 }
100
90
financial institutions — p a rtic u la rly in the
fields of real-estate and consumer loans.
Shift toward the W e s t
But over and above these factors. Western
banks faced credit demands stemming from
a high rate of population growth, mainly due
to net in-migration; a large expansion in
employment; and a sharp rise in personal
income. For the decade as a whole, these
measures of economic activity in the nine
states of the District rose at a faster rate than
in the rest of the nation — a reflection of the
accelerated industrialization then taking place
in the West.
As the decade progressed, the annual rate
of increase of the civilian population gradu
ally slowed — from 4.1 percent in 1955 to
2.6 percent in 1965 — but still, in each year,
the gain for the Western states exceeded the
annual growth rate in the rest of the nation.
Moreover, total employment grew more rap
idly in the West than elsewhere in every year
of the decade, and personal income increased
at a faster pace in every year except 1965.
Thus, for the period as a whole, population
increased 37 percent in the West and only
15 percent elsewhere, while employment rose
by 31 as against 12 percent, and income by
92 as against 72 percent.
Not surprisingly, then, insured commercial
banks in District states exhibited a faster rate
of growth in total loans over the decade than
did their counterparts in the rest of the nation
— 171 vs. 144 percent, respectively. How
ever, the faster lending pace at Western banks
was accompanied by wider year-to-year fluc
tuations, particularly around cyclical turning
points. Nevertheless, the annual June-to-June
percentage increase in total loans (less loans
to banks) fell below the gain recorded else
April 1967
M O N T H L Y REVIEW
where in only three years — 1958, 1961, and
1965.
For one very significant category, business
loans, 1965 was the only year in which Dis
trict banks failed to exceed the national rate
of gain. The pace of consumer lending was
faster than in the rest of the nation in all but
three years (1957, 1961, and 1965). On the
other hand, Western banks failed to match
the national pace in mortgage financing in
seven of the ten years under review.
Before the effects of this rapid loan expan
sion on the composition of bank loan port
folios are examined, it should be noted that
the structure of loan portfolios traditionally
changes rather slowly over time. The magni
tude of outstanding loans at commercial
banks is so large that any reallocation of
funds must be relatively great to bring about
a significant percentage change in any single
loan category’s share of total outstandings.
Most real-estate loans, for instance, have
relatively long maturities and — except when
they are sold out of portfolio to institutional
investors —- continue to be carried in banks’
portfolios for many years.
In addition, at any given point in time,
banks’ freedom to allocate their loan funds
among categories of borrowers is restricted
by past commitments. Business lending, for
example, is sometimes subject to lines of
credit negotiated at earlier dates, while re
volving credit agreements and other forms of
loan arrangements also deprive bankers of
some of their autonomy over the timing of
loans. Other customer relationships, as well,
tend to inhibit banks from making abrupt or
large shifts from their existing pattern of loan
allocation.
Shift toward business loans
Notwithstanding these lim iting factors,
heavy demand for bank credit from the bur
geoning in d u stria l and commercial sector
brought about a marked shift in Western
Faster loan grow th in W e s t
reflects faster economic gains
Percent Chonge ( 1 9 5 5 - 6 5 )
0
50
100
150
200
250
bank loan portfolios in the 1955-65 period.
Banks normally give business loans a high
priority for available loan funds because of
such collateral benefits as compensating bal
ances and service fees, even though the rate
of return per se may be less favorable on
business loans than on other types of loans.
During this period of strong business de
mand for credit, then, Western banks chan
nelled an increasing proportion of their loan
able funds into financing the plant-equipment
expenditures and the la r g e r in v e n to r ie s
needed to meet the demands of a rapidly ex
panding economy. As a result, business loans
at insured commercial banks in the nine
Western states more than tripled in dollar
volume from June 1955 to June 1965.
How did this expansion of business credit
affect the composition of loan portfolios? In
June 1955, commercial-industrial loans con
stituted 30 percent of Western bank loan
portfolios; by June 1965, they made up 37
percent of the total. (The latter figure is
adjusted to include some loans to nonbank
financial institutions which prior to 1959
were classified in the commercial-industrial
loan category.) In contrast, the business-loan
share at banks in the rest of the nation in
creased only one percentage point, from 40
to 41 percent, over the same period.
FEDERAL
RESERVE
BANK
The rise in the business-loan share at Dis
trict banks was not constant over the decade,
but in the two recessions of the decade, the
secular trend was strong enough to offset
most if not all of the normal cyclical weak
ness. The sharpest rise in the business-loan
share occurred between m id-1955 and the
1957-58 recession. Then, except for seasonal
increases each December, the proportion de
clined very slightly until the 1959 cyclical
expansion. The 1960-61 r e c e s s io n again
brought a leveling off (but no decline) which
continued until the sharp upturn in 1965.
OF
SAN
FRANCISCO
— in contrast to the situation a decade ago,
when the ratio was 10 percentage points
lower. With some abatement in the rapid
secular growth which characterized the past
decade, the recent strong uptrend in the busi
ness share of total loan funds at Western
banks may moderate somewhat. This could
mean that business lending patterns of West
ern banks may reflect cyclical movements
more closely than heretofore. It could also
mean that their business lending patterns may
more closely resemble that of their colleagues
— allowing, of course, for some difference in
the West’s industrial and commercial mix.
Shifting pattern?
Over the decade, then, Western banks allo
cated larger amounts of credit to business
borrowers, both in absolute terms and rela
tive to other types of borrowers. In 1965 and
1966, these banks c o n tin u e d to divert a
higher percentage of their loan funds to busi
ness, but, for the first time in ten years, their
rate of business-loan expansion did not ex
ceed the national rate of increase — in fact,
it fell substantially below the headlong pace
which characterized developments elsewhere.
Does this signify a reversal of the pattern
of faster business-loan growth in the West?
The ratio of business to total loans is now
more nearly comparable to the national ratio
Decline in m o rtgage share
By 1960, business loans were the largest
single component of Western banks’ port
folios — exceeding real-estate loans for the
first time on record. Despite their declining
share, however, mortgages have continued
to account for a major part of total port
folios. Willingness to invest in mortgages —
a relatively long-term asset — has gone handin-hand with active solicitation of personal
savings deposits — o r d in a r ily a relatively
stable category of bank deposits. Thus, high
percentages of real-estate loans and of pass
book savings have long been a hallmark of
Western banking.
Commercial-industrial loans now dominate District-bank loan portfolios,
while m ortgage-loan share declines steadily over decade
I9 5 S
1965
P e rc e n t D i s t r ib u t io n
C o m m e rc ia l and In d u s t r i a l ( A d j u s t e d )
R e a l Esta te
4Q
C o m m e rc ia l and I n d u s t r ia l
30
{Adjusted)
20
C o n su m e r
10
A g r ic u lt u r e
i
92
A g r ic u lt u r e
C o n su m e r
1955
I960
1965
April 1967
M O N T H L Y REVIEW
In June 1955, real-estate loans made up
42 percent of the loan total at District insured
commercial banks, in contrast to a 23 percent
share at banks elsewhere. In the 1955-65
decade, Western banks doubled their mort
gage holdings, but even this rate of gain did
not keep pace with the rate of total loan
expansion. As a consequence, by June 1965
real-estate loans accounted for just under
one-third of Western banks’ to ta l lo a n s .
Meanwhile, the percentage for other banks
remained relatively unchanged, at around 23
percent.
A number of factors contributed to the
declining proportion of bank loan funds allo
cated to mortgage credit— including a down
turn in the building cycle in the last several
years of the decade. A slowdown in popula
tion growth was accompanied, at least in the
last several years, by problems of overbuild
ing in many Western areas. As a result, banks
became more s e le c tiv e in their mortgage
lending policies, especially in areas of over
building. During much of this period, more
over, interest-rate differentials became less
favorable to residential mortgages— particu
larly FH A and VA mortgages, where adjust
ments in rate ceilings tended to lag the up
ward movement in money-market rates. Fur
thermore, banks faced intense competition
Cost of Business Borrowing
The Federal Reserve’s quarterly business-loan survey was revised at the begin
ning of 1967, reflecting revisions in timing, in the sample of reporting banks, and in
reporting procedures. After adjustment for data revisions, the survey showed the
first decline in interest rates at Western banks in almost a year.
Business-loan data are now collected in the first fifteen days of the second
(rather than the third) month of each quarter. This shift in timing keeps the survey
from being influenced by the heavy borrowing associated with quarterly corporatetax dates. The new survey sample includes 13 banks (and 25 banking offices) in
Los Angeles, San Francisco, Seattle, and Portland— the same universe to be used in
the national release for Western banks. (The old survey covered 19 Western banks.)
The new survey collects data for three business-loan categories— short-term loans,
revolving-credit loans (which in this District are mainly short-term ), and long-term
loans (those with over-one-year m aturities).
For the first 15 days of February, the 13 reporting banks reported a 6.29-per
cent average rate on $238 million of new short-term business loans, a 6.24-percent
average rate on $457 million of loans made under revolving credit agreements, and
a 6.28-percent average rate on $11 million of long-term loans. Despite the larger
dollar volume of loans made under revolving credit agreements, there were only
1,473 such loans made in the February survey period, as against 2,304 short-term
loans.
The combined rate on all reported loans with maturities of one year or less was
6.28 percent— about 6 basis points below last December’s rate after adjustment for
revisions in survey data. But only 42 percent of the dollar volume of such loans
made in the first half of February carried the prime rate of 5% percent or less,
whereas 53 percent of the December total bore the then-prevailing prime rate of 6
percent.
FEDERAL
RESERVE
BANK
from savings and loan associations, which
increasingly impinged upon the banks’ share
of the market for real-estate loans, and, in
addition, attracted increasing amounts of in
dividual savings funds.
The flow of savings deposits was one of
the crucial determinants of banks’ mortgage
activity during this period. The ratio of realestate loans to savings has fluctuated within
a rather narrow range of 52 to 58 percent,
but has been drifting downward since mid1964. Meanwhile, the ratio of real-estate
loans to total time deposits has been declin
ing even more rapidly, primarily as a reflec
tion of the issuance of an increasing volume
of large-denomination negotiable time cer
tificates of deposit. These deposits are much
more volatile than savings or smaller-denomination time certificates and, therefore, are
not suitable for investment in long-term assets
such as mortgages.
The flow of savings and time deposits, par
ticularly savings, will continue to be a prime
determinant in the mortgage-lending policies
of Western banks. However, the shift toward
more interest-sensitive deposits, especially
large-denomination C D ’s, places restrictions
on the amount of such deposits that banks
can prudently use for long-term mortgage
investment. Furthermore, the West’s expand
OF
SAN
FRANCISCO
ed commercial-industrial sector should con
tinue to require a large share of available
loan funds. Thus, mortgages may not account
for as large a share of total bank-loan port
folios as they did in earlier years — at least
not unless the inward flow of migrants begins
to accelerate again, and thereby creates a
stronger underpinning for the regional hous
ing industry.
Over the decade, major shifts also oc
curred within Western banks’ mortgage port
folios — reflecting, in part, general trends in
the national mortgage market. In June 1955,
residential mortgages made up 84 percent of
total real-estate loans, but 10 years later they
accounted for only 70 percent of the total.
And, within the residential sector, conven
tional mortgages increased rapidly in impor
tance, from less than one-third of outstand
ings in 1955 to nearly 60 percent in 1965.
R e a l- e s ta te loans insured by the Federal
Housing Administration declined from 50
percent to 38 percent of the total, and loans
guaranteed by the Veterans Administration
dropped from 23 percent to less than 6 per
cent. Rate ceilings on Federally guaranteed
mortgages, which were not competitive with
other loan rates during much of this period,
plus some limitations on the availability of
funds, led banks generally to favor higher-
Conven+ional residential m ortgages account for almost half
of m ortgage portfolios, as F H A - V A share sharply declines
April 1967
M O N T H L Y REVIEW
yielding conventional mortgages.
While residential mortgages lost some of
their dominance, mortgages secured by com
mercial and industrial properties increased in
importance. These mortgages, which com
prised 13 percent of Western banks’ realestate loans in June 1955, represented 27
percent of the total in mid-1965 — only 2
percent below the proportion elsewhere in
the nation. As in the case of business loans,
this shift in mortgage lending reflected the
strong secular expansion in Western indus
trial and commercial activities.
Stability in consumer share
Consumers nearly tripled the amount of
their borrowing from Western banks over the
decade but, nonetheless, their share of total
loan funds increased only one percent —
from 19 to 20 percent. Despite the slackened
pace of Western population growth in the
latter part of the decade, the upward trend
in consumer loans was fairly steady during
this ten-year span except for the two reces
sion periods. The increase in consumer lend
ing was substantially greater in the West than
nationally, but the general pattern of consumer-loan distribution followed a similar
course. Thus, factors affecting consumer bor
rowing behavior nationally appeared to be
determinant in the West as well.
The shifts which developed in the consumer-credit market during this period were
much less pronounced than the shifts which
occurred in mortgage lending. Automobile
financing declined in importance but con
tinued to account for the largest proportion
(45 percent) of consumer loans, while other
instalment credit and single-payment loans
increased their share of the total. The recent
proliferation of bank credit-card programs
may lead to an accelerated expansion in the
instalment-credit field. However, since auto
mobile financing still accounts for the bulk
of consumer loans, fluctuations in car sales
will continue to be the pivotal factor in the
rate of bank credit extended to the consumer
sector.
Stability in farmers' share
In the last ten years, agricultural lending
by Western banks increased at almost twice
the national rate but, nevertheless, agricul
tural loans declined slightly as a percent of
Western loan portfolios. The greatest varia
tion occurred in bank holdings of loans guar
anteed by the Commodity Credit Corpora
tion. Part of this fluctuation was due to the
one-day measurement as of Call dates, for
maturities of these loans vary somewhat from
year to year depending upon the timing of
crop financing. Furthermore, banks frequent
ly sell their CCC loans prior to maturity if
the rate of return on these loans becomes
non-competitive with yields on alternative
types of investments. Other loans to farmers,
after allowing for seasonal adjustments, re
mained fairly steady as a percent of total
loans throughout this period.
The withdrawal of farm acreage due to the
expansion of urban and suburban develop
ments, which in the last decade nearly offset
new acreage brought under irrigation, can be
expected to continue in the future. Increased
costs of farm operations and more intensified
farming, however, may offset any reductions
in farm borrowing due to any net withdrawal
of land from agricultural production — at
least in the near future.
— Ruth Wilson
95
FEDERAL
RESERVE
BANK
OF
SAN
FRANCISCO
Western Digest
Discount Rate Reduced to 4 Percent
The Board of Governors unanimously approved actions by directors of ten
of the twelve Federal Reserve Banks — including the San Francisco Federal Re
serve Bank — to reduce the discount rate from 4 Vi to 4 percent, effective April 1.
Similar reductions were approved for the two remaining Banks in the following week
. . . This is the first time since August 1960 that a reduction has been posted in the
interest rate charged member banks on borrowings from their District Reserve
Banks. After being maintained at 3 percent for almost three years, the rate had
been raised in equal i/2 -percent steps in July 1963, November 1964, and December
1965. . . . The recent reduction, in the Board’s words, “is in line with recent declines
in m arket rates and in keeping with the Federal Reserve’s policy objectivs of assur
ing that the availability of credit is adequate to provide for orderly economic
growth.”
Sh arp Expansion in Bank C re d it
In March total credit at large commercial banks in the Twelfth District ex
panded $788 million, as loans adjusted increased $43 million and security holdings
rose $745 million. In the comparable period last year these banks increased their
loans $120 million and reduced their securities by $268 million. . . . The $94-million
increase in business loans in March was largely due to borrowing to meet mid-month
corporate tax payments. District banks also were heavy lenders to securities dealers
during the month. On the other hand, mortgage loans and consumer instalment
loans both declined, as they have in other recent months.
Softness in Industrial A c tiv ity
Severe weather in the Midwest and Northeast adversely affected the demand
for lumber and plywood in the late-winter period, so that wholesalers were forced
to make sharp price concessions to keep stocks moving. By mid-March, prices for
key Douglas fir and plywood items were about $12 per thousand board (or square)
feet below their exceptionally high levels of a year ago. . . . The copper shortage
showed further signs of easing in March, as a result of softening industrial and
military demand. The dealer price for refined copper dropped from 55 to 52 cents
a pound by late-March, and wire-scrap quotations fell below the producer price
for the first time in the last several years. . . . The February decline in Western
steel production extended into the following month. During the first three weeks of
March, production fell 7 percent below the year-ago output figure.
96
@FedFRASER