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.it FEDERAL RESERVE HANK OF JAN 2 01972 SAN FHANCISGfl am mi of p u u m im Monthly leview In this issue The SemSpir®(gI@Ms Metal F©<g#@ro®s ©k the i@rd!®r Decem ber 1971 The Semiprecious MefaB . . . The Ingredients were present In I97S for a sharp upsurge in silver prices, but speculators bet wrong and prices went down. Factories the Herder . . . Mexican workers in American plants — - but on the Mexican border have become quite numerous within the past several years. Editor: William Burke December 1971 MONTHLY REVIEW The Semiprecious Metal "E v e r y b o d y ” was sure that the p rice o f silver N on eth eless, industrial dem an d trends w ere w o u ld soar o n ce the U .S. T reasury stop p ed su p interesting in them selves. D o m e stic dem an d rose p ly in g the m arket in late 1 9 7 0 , bu t it turned ou t fr o m 102 m illio n ou nces in I 9 6 0 to a peak o f that "e v e r y b o d y ” w as w ro n g . F rom a qu ota tion 150 m illio n ounces in 1 9 6 6 , as the P en tagon , the o f $ 1 .8 0 an ou n ce at the tim e o f the last Treasury space agency, and industrial users in the private sale in N o v e m b e r 1 9 70 , the p rice w en t d o w n sector fo u n d in creasin g uses f o r this versatile and instead o f u p , reach in g $ 1 .3 1 an ou n ce in O c t o serviceable m etal. But then dem an d began to su b ber o f this year. M a n y traders are n o w referrin g side, finally reachin g 135 m illio n ounces in 1970 , to silver iron ica lly as a "sem ip reciou s m eta l,” in partly because o f la g g in g dem an d in certain sec v ie w o f its som ew h a t tarnished p e rfo rm a n ce d u r tors o f the econ om y, bu t also because o f the in g the last several years. u nrealistically h ig h prices q u oted by silver su p T h e in gredien ts w ere present in 19 71 fo r an u psu rge in silver prices. O n the su p p ly side, there pliers in the latter part o f the decade. In practically all m a jor ap plications, silver was the cessation o f Treasury sales, plus the usage has fa llen o ff in recent years after risin g shortages caused by strikes at the c o p p e r m ines sharply in the p re ce d in g h a lf-d eca d e. T h e p h o t o w h ich su p p ly (a s a b y p r o d u c t) a la rge share o f gra p h ic industry, w h ich accounts f o r m ore than the n a tio n ’s n ew ly m in ed silver. O n the dem an d o n e -fo u rth o f the total m arket, redu ced its p u r side, there was an im p ro v in g e c o n o m ic picture, chases by ov er 10 p ercen t ( in v o lu m e ) betw een plus an internation al m on etary crisis o f the type 19 65 and 1 9 7 0 , after a stron g 4 0 -p ercen t gain that has so fre q u e n tly created heavy speculative betw een I 9 6 0 and 1 9 6 5 . In contrast, the electri dem an ds in the past. B ut the u p w a rd p rice p res cal and electronics industry — an oth er o n e -fo u rth sures created by all these factors w ere sw a m p ed by the w e ig h t o f the m assive (a lth o u g h largely u n m ea su red ) su pplies o v e rh a n g in g the m arket as a co n seq u en ce o f the heavy specu lative b u y in g o f the late 1 9 6 0 ’ s. U.S. demand: how large? T o ta l U .S. silver con su m p tion ju m p e d fr o m 148 m illio n ou n ces in I 9 6 0 to 4 5 7 m illio n ounces in 1 9 6 5 , bu t then q u ick ly su bsided, fa llin g to 13 6 m illio n ou nces in 1 9 7 0 . But this sharp fluctua tion in d em an d w as due alm ost en tirely to the very heavy u tilization o f silver f o r coin a g e p u r poses in the 1 9 6 3 -6 5 p e rio d , fo llo w e d by the sharp d eclin e and eventual elim in a tion o f that m arket factor. U.S. consumption falls as coinage demand disappears, industry sluggish FEDERAL o f the total — RESERVE BANK increased its purchases sligh tly o v e r the past h a lf-d e ca d e and dram atically (7 5 OF SAN FRANCISCO SL®tig»ferm trend upward in most industrial applications p e r ce n t) ov e r the past d ecade as a w h o le . O th er industrial uses — and solders — such as f o r batteries, alloys, are substantially a b ove M illio n s of Troy O unces I9 6 0 levels, but o n e trad ition ally im p orta n t m arket — silverw are and jew elry — n o w purchases c o n siderably less silver than it d id a d eca d e ago. (D a ta n o w available d o n ot even indicate m u ch o f an u ptu rn f o r 1 9 71 , a year that sh ou ld have celebrated a record n u m ber o f silver w e d d in g anniversaries, ju d g in g fr o m the u p su rge o f m ar riages in early postw ar 1 9 4 6 .) The gap: how wide? F o r the n o n -C o m m u n ist w o r ld as a w h o le , sil ver usage in industry has increased fr o m 225 to nantly silver. (S in ce its discov ery in the 1 8 8 0 ’ s 3 5 8 ou n ces w ith in a d ecade because o f the rapid the C oeu r d ’ A le n e district has p r o d u c e d three increases re co rd ed in m arkets abroad. (B e tw e e n tim es as m u ch silver as N e v a d a ’ s fa b u lou s C o m I 9 6 0 and 1 9 7 0 , the increases w ere ro u g h ly 80 stock L o d e .) U tah and A r iz o n a betw een them percen t ab roa d as against 30 percen t in this accou n ted f o r an oth er 30 percen t o f the total, c o u n try .) In contrast, n ew silver p ro d u ctio n since they contain very la rge co p p e r m ines w h ich w o r ld w id e rose o n ly 2 0 percen t, fr o m 2 0 7 to 24 7 p ro d u ce silver as a b y p rod u ct. T h e rest o f the m illio n ou nces, ov er the sam e tim e-span. T h u s, n a tion ’ s p ro d u ctio n a g r o w in g g a p oth er M o u n ta in states. d e v e lo p e d betw een industrial cam e fr o m M on ta n a and usage and p ro d u ctio n , after a decade in w h ich M in e p ro d u ctio n in this coun try ju m p e d a l the trend h ad b een just the oth er w ay. A lth o u g h m ost 25 percen t betw een 1 9 6 4 and 1 9 7 0 , after co in a g e usage has fa lle n p recip itou sly in recent several decades o f relative stagnation, as h igh er years, the w id e disparity rem ains betw een total prices en ticed m in in g firm s to seek ou t n ew su p current co n su m p tion and p ro d u ction . plies. B ut despite the g ro w th in p ro d u ctio n and T h ro u g h o u t m o d e rn history, silver p ro d u ctio n the s lo w d o w n in con su m p tion , a substantial p r o has b een concentrated in the m ou n ta in ranges o f d u ction deficit existed th rou g h ou t the past decade the W e s te rn H em isp h ere. Last year, fo u r c o u n — - and the g a p dom estica lly w as w id e n e d in m ost tries alon e — Canada, the U .S ., M e x ic o , and Peru years by la rge increases in net exports. Last year, — the g a p w as 9 0 m illio n ou nces in this coun try and accou n ted fo r ab ou t tw o-th ird s o f total p r o d u ctio n in the n on -C om m u n ist w o rld . T h o s e fo u r 15 0 m illio n ou n ces w o rld w id e , and it was c o n nations gen erally boast ro u g h ly equ al shares o f siderably greater d u rin g the years o f heavy c o in the total m arket, w ith the actual figures s h iftin g age dem an ds. T h e U .S . T reasury was the p r in ci fr o m year-to-year as dictated by ch a n g in g p r o p a l fa ctor in c lo s in g this g a p , bu t at the cost o f d u ctio n o r m a rk etin g factors. lo s in g its ro le as a su p p lier o f silver coins. T h e U .S. led the w o r ld p r o d u c tio n race last year w ith 45 m illio n ou nces, fo llo w e d closely by 206 From 2 billion ounces .. . Canada. O v e r 4 0 percen t o f the U .S . total cam e T h e events o f the late 1 9 60 s co u ld scarcely fr o m Id a h o ’ s fa m ed C oeu r d ’ A le n e district, the have been foreseen a d eca d e earlier. T h e T rea s o n ly district in the w o r ld p r o d u c in g p re d o m i- ury beg a n the crucial d eca d e w ith h u g e stocks o f December 1971 MONTHLY REVIEW silver, as a result o f heavy purchases to su pport served as the effective p rice fo r m ost o f the p re silver prices d u rin g the lo n g p e r io d w h e n the ce d in g decade. m ines w ere p r o d u c in g far m ore silver than cou ld A con tin u ed p rice rise m u ch b e y o n d the $ 1 .2 9 be u sed fo r co in a g e and industrial n eeds. A t the m on etary value w o u ld have m ade it p rofita b le to en d o f m elt subsidiary coin s f o r their silver content, 1 9 59 , Treasury silver h o ld in g s totaled m ore than 2 b illio n ounces, nearly all o f w h ich thereby th reaten in g the con tin u ed circu lation o f was h e ld as reserve against silver certificates. silver coin a ge. T o p reven t this p ossib ility, the Two sign ifican t trends bega n to em erge at about that tim e, h o w e v er. T h e first w as the rapid acceleration in the d em an d f o r coins, u n d er the stim ulus o f an e x p a n d in g eco n o m y and the g r o w T reasury in July 1 9 63 resum ed the op e n sale o f silver at the fixed p rice o f $ 1 .2 9 per ou nce. . . . to I billion in g use o f v e n d in g m achines. T h e secon d w as the O v e r the n ext tw o years, an adequate v olu m e u psu rge in industrial requirem ents, u n til dem and o f silver coin a g e was m ain tained in circulation, fr o m that source eventually ex ceed ed current p r o bu t o n ly at the cost o f h u g e am ounts o f Treasury d u ction o n b oth a d om estic and w o rld w id e basis. T h e g r o w in g gap betw een p ro d u ctio n and c o n su m p tion w as m ade u p in la rge pa rt fr o m T rea s ury stocks o f fre e silver — stocks in excess o f reserves against silver certificates. T h e se stocks d r o p p e d by about 2 0 0 m illio n ou nces betw een A p r il 1 9 5 9 and N o v e m b e r 1 9 6 1 , at w h ich tim e sales w ere su spended. silver. In 1 9 6 4 and 1 9 65 alone, ov er 5 0 0 m illio n ou nces o f T reasury silver w ere u sed up in the p ro d u ctio n of silver coins, and 230 m illio n ou nces w ere sold in the o p e n m arket to k eep the p rice at a lev el w h ich w o u ld p reven t a w h olesa le w ith d ra w a l o f coin s fr o m circu lation . A ltog eth er, in the years 1 9 6 2 -6 5 , the Treasury used nearly 9 7 0 m illio n ou nces o f silver in ord er to m aintain an adequate v o lu m e o f circu latin g silver coin a ge. In the early 19 60 s, the G o v e rn m e n t fa ced a ra p id ly g r o w in g n eed fo r silver to m eet coin a ge dem an d, but the su p p ly co u ld n o t com e fr o m T h is am ou n t w as ro u g h ly equ ivalen t to the total p ro d u ctio n o f A m erica n m ines o v e r the p r e ce d in g quarter-century. d om estic p ro d u ctio n , w h ich w as already in a d e quate to m eet industrial dem an d. E viden tly, the R e c o g n iz in g that the con tin u ed usage o f silver fo r coin a ge pu rp oses w as n o lo n g e r possib le, o n ly practical solu tion w as to retire silver certifi cates fr o m circu lation , thereby fr e e in g the silver h e ld as a reserve f o r these certificates. T h e T rea s ury b e lie v e d — w ro n g ly , as it turned ou t — that the retirem ent o f silver certificates and their re World demand exceeds production, despite slump in coinage usage M illio n s of Troy O unces 0 pla cem en t w ith F ederal R eserve n otes w o u ld free 2 0 0 ________________ 4 0 0 ________________ 6 0 0 e n o u g h silver to m eet the T reasu ry’s coin a ge 1 1 1955 needs f o r decades to com e. Instead, the trem en dou s p ro d u ctio n o f coins U.S. H*'l Fo reign Production requ ired to k eep p a ce w ith the in creasin g d e | C O N S U M P T IO N m ands o f the e co n o m y cut d eep ly in to the T rea s u ry’ s silver su pply. In IndwTtrial 1 9 62 and 1 9 6 3 alone, nearly 2 0 0 m illio n ou nces o f T reasury silver w ere I3C5 H I Coinage 1 m mmm m ■ , , i i used f o r coin a ge. M o re o v e r, by m id - 1 9 6 3 , the pressure o f private m arket forces h ad d riv en the p rice o f silver to its m on etary valu e o f $ 1 .2 9 an ou n ce — fa r a b ove the $ 0 .9 0 flo o r w h ich had 1970 ± = r ... L n 207 FEDERAL RESERVE BANK OF SAN FRANCISCO C on gress in 1965 au th orized the p ro d u ctio n o f fo r m o f coins. But after a w h ile, it becam e e v i n o n -silv e r dim es and quarters, retainin g o n ly the den t that the su p p ly o f clad coin s was fu lly ad e 4 0 -p e rce n t silver h a lf-d o lla rs as a lin k to the past. quate, and that the rem a in in g su p p ly o f ou tstan d T h is leg isla tion naturally requ ired the M in t to in g silver coin s had b e com e lo ck e d u p in private g o o n a fo r ce d -d r a ft p ro d u ctio n sch edule to p r o h oards, lea vin g little flow b a ck to the Treasury. d u ce e n o u g h cu p ron ick el dim es and quarters to T h u s, in M a y 1 9 6 9 , this p r o h ib itio n w as lifted . m eet fu lly the e c o n o m y ’s circu lation needs. D e m a n d s o n the d w in d lin g T reasury stocks . . . and then to zero rem ained h ig h d u rin g this transitional p eriod . C on gress in 19 67 set aside 165 m illio n ounces In 1 9 6 6 and 1 9 6 7 , about 10 0 m illio n ounces w ere o f silver fo r the strategic stock pile, and stip u n e ed ed f o r 4 0 -p ercen t silver K e n n e d y halves, lated that any rem a in in g stocks c o u ld be sold at and nearly 30 0 m illio n ou nces w ere sold to m a in n ot less than the m on etary valu e o f $ 1 .2 9 an tain the $ 1 .2 9 price, u p to the tim e w h en sales ou nce. T h e n , in July, as the transition fr o m silver w ere h alted in M a y 1 9 6 7 . T h e n , another 100 to clad coin a g e w as co m p le te d , m illio n ou nces w ere exch a n ged f o r silver certifi au th orized the G en era l Services A d m in istra tion cates d u rin g the year p re ce d in g the red em p tion to auction o ff 2 m illio n ou nces a w eek at the g o the Treasury in g m arket p rice, w h ich was con sid era b ly h ig h er cu t-o ff in June 1 9 68 . In M a y 1 9 6 7 , the Treasury o rd ered a ban on than $ 1 .2 9 . W e e k ly sales w ere redu ced to 1.5 the m e ltin g ( o r e x p o r t ) o f coin s. T h is w as d on e m illio n ou nces in 1 9 6 9 , and all available stocks p rim a rily to k eep silver dim es and quarters circu w ere d isp osed o f by early N o v e m b e r 1 9 7 0 . A lt o la tin g d u rin g a p e rio d in w h ich su pplies o f clad gether, m ore than coin s w ere n o t con sid ered fu lly adequate f o r c o m m illio n w o r t h ) m ercial needs, 1 9 6 7 -7 0 p e rio d . and secon darily to en able the Treasury to b u ild u p its reserves o f silver in the 3 0 0 m illio n ou nces T h e T reasu ry’ s w ith d ra w a l fr o m the silver Seigniorage: Treasury M akes M oney T h e T reasu ry’s g en era l fu n d becam e $ 2 .3 b illio n richer d u rin g the 1 9 6 6 -7 0 p e rio d sim p ly because o f seign iora g e — that is, because o f a d d in g to the T reasu ry’ s assets the d ifferen ce betw een the fa ce valu e o f its coin s and the cost o f th eir c o m p o n e n t m aterials. T h e co in a g e system, o f course, is d esig n ed n ot to m a xim ize seign iora g e bu t rather to m eet the co u n try ’s needs f o r an adequate su p p ly o f circu la tin g coin s. N on eth eless, the seign iora g e w in d fa ll d id reduce the G o v e r n m e n t’s b o r r o w in g needs by an equ iv a len t am oun t d u rin g a p e rio d in w h ich the T reasu ry w as h ard-pressed fo r cash. T h e sh ift to a cu p ro -n ick e l currency was the m a jor reason f o r this substantial s e ig n io r age return since c o p p e r and n ick el are con sid era b ly less costly than silver. S eign iorage totaled o n ly $ 1 1 3 m illio n in fiscal 1 9 6 5 , bu t it soared to $ 6 5 0 m illio n in 1 9 6 6 and $ 8 3 4 m illio n in 1 9 67 because o f the heavy m in tin g o f cu p ro -n ick e l dim es and quarters in those tw o years. A s the transition to a clad co in a g e w as com p leted , seign iora g e tren ded d o w n w a rd , rea ch in g $ 2 5 5 m illio n in fiscal 1 9 7 0 . In a d d ition , d u rin g the fiscal years 1 9 6 8 -7 0 , the M in t turned $ 1 3 2 m illio n in to the gen eral fu n d as p rofit o n sales o f silver b u llion . 208 ($ 5 6 2 w ere au ction ed o ff d u rin g the December 1971 MONTHLY REVIEW som ew h a t by a p r o in this case by a series o f international financial lo n g e d con troversy o v er the p ro d u ctio n o f an crises, w h ich caused silver as w e ll as g o ld to be E isen h ow er silver-d olla r coin . T h e con troversy dem a n d ed as a specu lative h ed ge, and by a nine- m arket w as com p lica ted was resolved by legislation, sig n ed by the P resi m on th lo n g strike at n on ferrou s-m eta ls refineries, dent o n the last day o f 1 9 70 , that called fo r the w h ich p u lle d a large part o f the n orm al refinery m in tin g o f 150 m illio n E isen h ow er coin s c o n su pply o f silver o ff the m arket fo r a p ro lo n g e d tain in g 4 0 p ercen t silver. In M a y 1 9 7 1 , the San p e rio d o f tim e. Francisco M in t bega n p r o d u c in g these m em oria l N on eth eless, prices d r o p p e d fr o m the $ 2 .5 7 coins, p riced at $3 fo r "u n circu la te d ” coins and peak all the w ay d o w n to $ 1 .5 4 an ou n ce betw een $ 1 0 f o r " p r o o f ” coins. W h e n gen eral d istribu tion m id -1 9 6 8 and m id -1 9 6 9 - T h is sharp p rice break o f these c o lle cto rs’ pieces bega n this fa ll, dealers reflected the im p rov em en t in the international rep orted very heavy d om estic and fo r e ig n d e situation, the g ro w th o f su pplies resu ltin g fr o m m and, som etim es at tw ice the T reasu ry’ s asking decreased strike activity, the d ow n tu rn in both prices. coin a g e and industrial dem an d, and a fa ll-o ff in n on -silv er specu lative bu yin g. E isen h ow er dollars and K e n n e d y halves fo r g e n da m p en ed , n ot o n ly The 1970 leg isla tion au th orized Speculative interest because o f was the perverse eral circu lation , sim ilar in c o m p o s itio n to the m ov em en t o f prices, bu t because o f the prospect present quarters and dim es. o f increased su pplies created by the T reasu ry’ s ( T h e fo r m e r 4 0 d is co n tin u e d .) w ith d ra w a l o f its co in -m e ltin g ban and by its A ft e r 47 m illio n ou nces o f silver w ere allocated an n ou n cem en t o f con tin u ed auction sales th rou gh p ercen t silver h a lf-d o lla r was fo r p ro d u ctio n o f the m em oria l E isen h ow er d o l the fo llo w in g year. By late 1 9 6 9 , h ow ev er, prices lars, the o n ly silver le ft in G o v e rn m e n t hands rose again to the $ 2 .0 0 level as legislators fr o m consisted o f the 140 m illio n ou nces in a scaled- silv er-m in in g states began d o w n strategic stock pile, plus 3 m illio n o ld 9 0 - m int run o f E isen h ow er silver dollars — a p r o p ercen t silver dollars w h ich m ay be d isp osed o f posal that w o u ld have d ep leted the T reasu ry’ s at auction. By the tim e the curtain fe ll on this rem a in in g stocks m u ch faster than had origin a lly d e ca d e -lo n g dram a, m arket forces h ad d ep leted been anticipated. T reasury stocks o f rou g h ly 2 b illio n ounces o f silver. a d voca tin g a large Prices f e ll b e lo w the $ 2 .0 0 lev el in early 19 70 as the E isen h ow er-d olla r p ro p o sa l becam e b o g g e d d o w n in C on g ression a l debates, and then d r o p p e d Destabilized market as lo w as $ 1 .6 0 an ou n ce d u rin g the sp rin g T h e disappearance o f this key participan t fr o m m on th s. T h is d eclin e reflected n ot on ly the u n d er the m arket has h e lp e d accoun t fo r the severe p rice ly in g factors describ ed a b ove, but also the severe gyrations o f the past several years. T h e N e w stock-m arket d eclin e. In m any cases, m a rgin calls Y o r k p rice soared fr o m $ 1 .2 9 to $ 2 .5 7 an ou n ce fo r c e d stock-m arket participants to sell their sil betw een m id -1 9 6 7 and m id -1 9 6 8 , and then fe ll ver h o ld in g s to raise cash, and fa llin g silver back all the w ay to the orig in a l level o v er the f o l prices then led to m a rgin calls in lo w in g three years. this d o w n w a rd spiral in the silver m arket c o n U n til 1 9 6 7 a lid had been m ain tained on silver prices by the T reasu ry’ s com m itm en t to sell silver at the $ 1 .2 9 m on etary value. B ut o n ce the T rea s ury h alted sales at that o ld p rice and bega n to tinu ed, that m arket. A s m any speculators w ere fo r c e d ou t o f business. Grow ing disillusionment o ffe r o n ly lim ited am ounts at the g o in g m arket T h e m arket atm osphere d u rin g b oth 1 9 7 0 and price, m arket pressures all bu t g uaranteed a sharp 1971 reflected a g r o w in g d isillu sion m en t a m on g p rice u psu rge. T h o s e pressures w ere r e in fo rce d speculators, because o f the persistent fa ilu re o f 209 FEDERAL RESERVE BANK U.S.g Peru, and Canada mine two-thirds of world's silver OF SAN FRANCISCO w h en ever prices started to recover, as d isa p p o in te d speculators tried to u n loa d . A ft e r the b lo o d b a th they h ave b een th rou gh d u rin g the last several years, speculators m ay be M illions of Ounces 0 100 200 300 tem pted to reassess their estimates o f the d irec tion o f silver prices. T ru e e n ou g h , m in e p r o d u c tion consistently lags b eh in d con s u m p tion w o r ld w id e , and that g a p w ill h ave to be filled fr o m the stocks h e ld by speculators, n o w that Treasury stocks are n o lo n g e r available. T h e re are n o re li able data on the size o f these sp ecu lative stocks, but they are gen era lly estim ated at ab ou t 1 b illio n ou nces. W it h the w o r ld w id e p r o d u c tio n -c o n su m p tion g a p n o w ru n n in g ab ou t 15 0 m illio n ou nces annually, these sp ecu lative stocks co u ld be used u p in a relatively sh ort n u m b er o f years. Price elasticity? H o w e v e r, this lin e o f rea son in g concentrates on the risin g lo n g -te rm trend o f industrial c o n su m p tion , but tends to ig n o re the relatively stag the m arket to liv e u p to their p rice expectations. In particular, as was n oted at the outset, sp ecu lators e x p ected prices to soar w ith the en d o f T reasury silver sales in N o v e m b e r 1 9 70 , bu t m ost consum ers evid en tly had covered ation reflects the recent sluggish ness o f e co n o m ic activity w o rld w id e , but it p ro b a b ly also reflects a greater degree o f p rice elasticity fo r silver than their m a jor speculators had anticipated. Silver users in recent needs p r io r to that date, and m ost speculators too years have fo u n d cheaper substitutes fo r h ig h - had already b o u g h t in because this "su re th in g ” p riced silver. W h ile prices w ere rising, prim ary h ad been so w e ll advertised. C on seq u en tly, w ith prod u cers also increased their ou tpu t th rou g h n o n e w b u yin g, and n o u p w a rd p rice action, s p e c n ew m in e d iscoveries, o ld m in e reop en in g s, and ulators bega n to bail ou t o f the m arket, and prices im p ro v e d tu m b led sharply. Prices, w h ich h ad risen as h ig h secon dary refineries increased the recovery o f sil as $ 1 .8 5 an ou n ce in the w ake o f the m id -1 9 7 0 ver fr o m o ld scrap. D u r in g 1 9 7 0 , a p p roxim a tely p ro d u ctio n tech n olog y . M ea n w h ile, stock-m arket recovery, fe ll sharply d u rin g N o 60 m illio n ou nces o f silver w ere recla im ed w o r ld vem ber, and traded in a $ 1 .6 0 -$ 1 .7 5 range fro m w id e fr o m o ld x-ray film , p h oto-sen sitiz ed pa per, then u n til the sp rin g o f 1 9 71 . 210 nant lev el o f the past h a lf-d e ca d e . T h e latter situ and oth er secon dary sources, m ore than d o u b le T h e m arket w eaken ed again this sp rin g, and the am ou n t recovered in I 9 6 0 . H ig h e r prices also prices f e ll about 25 percen t betw een A p r il and b rou g h t sp ecu lative offerin g s in to the m arket, O cto b e r to $ 1 .3 3 an ou nce. T h is ren ew ed w ea k in clu d in g substantial am ounts fr o m the u nm eas ness reflected the failu re o f d em an d to rise as it u red h oards o f In d ia and the N e a r East. usually d oes d u rin g internation al crises, a lon g N o w , h ow ev er, the m arket is m ore con cern ed w ith the im p ro v em en t in su pplies b ro u g h t about about fin d in g a b o tto m than it is about d iv in in g by the en d o f the recent c o p p e r strike. T h ro u g h - the lo n g -te rm trend o f prices. Iron ica lly, a n ew ou t this p e rio d , sellin g ten d ed to be very heavy flo o r m ay be p r o v id e d by the Treasury, w h ich as December 1971 MONTHLY REVIEW o f a year a g o had b e liev ed it was com p letely out sidered as a flo o r to the entire m arket, since U .S. o f the market. m in e su pplies represent on ly a fra ction o f total A c c o r d in g to an a lm o st-forg otten clause o f the w o r ld su pplies, bu t it m ay w e ll serve as a resist C oin a ge A c t o f 1 9 6 5 , the T reasury is requ ired ance p o in t i f the recent p rice d eclin e continu es. to buy n e w ly -m in e d d om estic silver, w h en o f In the o p p o s ite direction , m ea n w h ile, the large $1.25 an ou nce. (T h is p ossib ility had h oards h e ld by speculators m ay w e ll exert a re seem ed so rem ote that the T reasury h ad to prin t straining in flu ence on u p w a rd p rice m ovem en ts the necessary fo rm s som ew h a t h u rried ly w h en fo r som e tim e to com e, since p rofit-ta k in g cou ld it recently began to receive inqu iries on p ossib le set in w ith every rally in the m arket. fe re d , at pu rch a ses.) T h e $ 1 .2 5 figure co u ld n ot be c o n William Burke 211 FEDERAL RESERVE BANK OF SAN FRANCISCO Factories on the Border M e x ica n w ork ers on A m erica n farm s have b e plants, strung ou t fr o m T iju a n a on the P acific to co m e relatively scarce since the term ination o f M a ta m oros on the G u l f o f M e x ic o , can be v iew ed the bracero p ro g ra m in 1 9 65 . H o w e v e r, M exica n collectiv ely as an oth er H o n g K o n g , but w ith c o n w ork ers in A m e rica n plants — but o n the M e x i siderably greater loca tion a l advantages than that can b o rd e r — h ave b e co m e qu ite n um erou s just Far Eastern m a n u fa ctu rin g center can boast. w ith in the last several years. T o ta l em p loym en t T h ese factories on the b ord e r are characterized o f the plants in v o lv e d in M e x ic o ’ s b o rd e r-in d u s try p ro g ra m m ay reach 4 0 ,0 0 0 by the en d o f 1 9 7 1 , and total p ro d u ctio n m ay equal $ 5 0 0 m il lio n this year, a cco rd in g to U .S. State D e p a rt m ent estimates. Because o f this p rogra m , M e x ic o by the fa ct that they im p ort m ost o f their e q u ip m en t and raw m aterials, and ex p o rt their entire p ro d u ctio n . In a d d ition , their op eration s are g e n erally la b or intensive, o f an assem bly or lim ite d is n o w the largest fo r e ig n assem bler o f U .S. c o m p rocessin g type. The M e x ica n G o v e rn m e n t p on ents f o r exp orts to this country. w aives its duties and regulations o n the im p orta E m p loy m en t and p ro d u ctio n h ave m o re than tion o f m achinery, eq u ip m en t and raw m aterials d o u b le d w ith in the past tw o years, spurred a lon g f o r these plants, as w e ll as its restrictions o n f o r by fa v o ra b le decision s o n the part o f the U .S. eign capital, so lo n g as the en d p rod u cts (m a in ly T a r iff C om m issio n and the M e x ica n assem blies o f U .S. c o m p o n e n ts ) are ex p orted . In G overn overall in du stria liza tion p o licy m ent. T h e 30 0 firm s o r m ore w h ich are active in contrast, M e x ic o ’s the p ro g ra m m a nu factu re a n u m ber o f produ cts, is d esign ed to d e v e lo p a m a n u fa ctu rin g industry but p red om in a n tly electronics and textiles. T h e ir w ith a h ig h national content. \ C A L IF O R N IA J S a n D ie g o _ , ' C alexico ^ Tijuana AAAAA M e x i c a li ^ AAAAAAA AAA N E W M E X IC O A R IZ O N A ______ J N o g a le s AAAA AA ------- > p l P a so • C iu d a d Ju arez AA ' A g u a Prieta AAA A \ KEY: ^ = 6 0 0 W o rk e rs TEXAS s c a l e s D o u g |a s ! *• *- * 8 ' Rio ,• C iu d a d • \ A c u n a A \ ^ £ a g|e p ass Pie dras N e g ra s A i \ Laredo N u e v o Lare d o « U A M E M P L O Y M E N T IN BO RDER-IN DU STRY PLANTS C O N C E N T R A T E D O N C A L IF O R N IA , TEXAS BO RDERS 212 \ December 1971 MONTHLY this is prim arily the la b or w h ich assem bles the Exceptional circumstances T h is e x ce p tio n to the g en era l industrialization p o licy d e v e lo p e d ou t o f the ex cep tion a l circu m stances of the m id -1 9 6 0 s . REVIEW M e x ic o h ad been prod u ct. F or U .S. custom s pu rposes, the p ercen ta ge o f U .S .-o rig in com p on en ts in a reim p orted p rod u ct p la gu e d by persistently h ig h levels o f u n e m p lo y takes in to con sid era tion o n ly those com p on en ts m ent, especially in the relatively ba ckw ard b ord er w h ich have m ain tained their identity. T h e re areas, and the p r o b le m w as accentuated in 1965 m a in der is con sid ered "v a lu e a d d e d ” fo r duty w h en the term ination o f the bracero p rogra m pu rposes. T h is co u ld in clu d e n ot on ly la b or costs, cut o ff em p lo ym e n t o p p ortu n ities in agricultural fixed overh ead , and any loca l raw m aterials, but operations n orth o f the bord er. C om m erce and also U .S .-o rig in com p on en ts w h ich h ave been Industry Secretary C a m p os Salas saw a solu tion tra n sform ed in d e v e lo p in g H o n g K o n g -sty le assem bly plants reasonable p rofit m argin. (lo s t their id e n tity ), as w e ll as a servicin g the A m e rica n m arket, and his p rop osa l T h e orig in a l intent o f this legislation was to was in corp ora ted in the e c o n o m ic p rogra m o f m aintain U .S . p ro d u ctio n by en cou ra gin g the use Presiden t D ia z O rda z. o f U .S. com p on en ts in fo re ig n -m a d e produ cts. T h e b o rd e r industry p ro g ra m (P ro g ra m a de In dustria liza cion F ron teriza ) was d esign ed sp e cifically to attract fo r e ig n m a n u fa ctu rin g op e ra tions, p rin cip a lly assem bly operation s, in an effort to p ro m o te the e co n o m y o f the depressed b ord er areas. T h e initial resolu tion perm itted M exica n H o w e v e r, the actual effect is a system w h ereby U .S . firm s u tilize lo w -w a g e u n sk illed la bor in certain d e v e lo p in g countries to assem ble p r o d ucts fo r the U .S. m arket. T h e system is co m m o n n ot on ly in M e x ic o , bu t also in H o n g K o n g , T a iw a n and K orea . or fo r e ig n -o w n e d firms to establish m a n u factu r T h e a d o p tio n o f a tem porary 10 percen t im in g operation s in the custom s zones centerin g p o rt surcharge by the U n ited States in A u g u st arou nd the n orth e rn -b ord er cities. H o w e v e r, a 1971 has created som e uncertainty ov er the p ro s resolu tion o f M a rch 1971 ex ten d ed the au th or pects fo r fu tu re g ro w th o f the b o rd e r industries. ized z o n e to a 2 0 k ilom eter-w id e strip a lo n g all But i f the surcharge is rem ov ed borders and coasts. R a w m aterials and eq u ip m en t co u ld be im p orted in -b o n d and d u ty -free, bu t all p ro d u ctio n w as req u ired to b e ex p orted . (B u t som e firm s op e ra tin g in " fr e e z o n e s ,” such as sh ou ld be little if any visib le soon , there effect o n the p rogra m . Recent upsurge T iju a n a and M e x ica li, w h ich h ave been in exist T h e rapid g ro w th this past year o f b ord er- ence f o r som e years, are perm itted to sell som e industry plants has been stim ulated by the U .S. T a r iff C om m ission rep ort (O c t o b e r 1 9 7 0 ) su p o f their p ro d u ctio n lo c a lly .) p o rtin g the con tin u ation o f the incentives granted T h e p r o g r a m ’ s success is due n ot o n ly to M e x i can in d u stria l-d ev elop m en t leg isla tion bu t also to U .S. tariff leg isla tion — specifically, Sections by Sections 8 0 6 .3 0 and 8 0 7 .0 0 . T h e C om m ission co n clu d e d that repeal o f this leg isla tion " w o u ld p ro b a b ly result in on ly a m od est n u m ber o f jo b s 8 0 6 .3 0 and 8 0 7 .0 0 o f the U .S. T a riff Schedule. b e in g returned to the U .S ., w h ich likely w o u ld U n d e r these sections, im p o rt duties are partially be m ore than offset by the loss o f jo b s a m on g e x em p ted o n U .S. p rod u cts assem bled ab roa d or w ork ers n o w p r o d u c in g co m p on en ts f o r ex p ort o n U .S . parts in corp ora ted ab roa d in to essentially and th ose w h o fu rth er process the im p orted p r o d fo r e ig n prod u cts. T h e duty is p a id o n ly o n the u cts.” com p o n e n ts o f the p ro d u ct n ot m a d e in this to la g w h ile this review w as u n d er w ay, but coun try — that is, o n the valu e a d d ed abroad. In the case o f the M ex ica n assem bly operations, G ro w th u n d er the p ro g ra m h ad beg u n ro u g h ly 10 0 n ew firm s began op era tin g on ce the T a riff C o m m is sio n ’ s su p p ort becam e assured. FEDERAL RESERVE BANK OF SAN FRANCISCO M o s t o f the firms in the border-in du stry p r o Pr@duefi@n for U.S. market soars within several years' time gram s are w h o lly -o w n e d subsidiaries o f U .S. com pa n ies. H o w e v e r, m any firms have ch osen nam es w h ich d o n ot id e n tify the parent com pa n y, and a la rge n um ber h ave been set u p u n d er the M illio n s of Dollars m antle o f already ex istin g subsidiary com pa n ies in M e x ic o . A ls o , a rapid ly g r o w in g n um ber o f com p a n ies are b e in g set u p as su bcon tractin g op eration s by either U .S. or M e x ica n business m en. N o th ird coun try has yet established a bord er-in d u stry plant, a lth ou gh several Japan ese firm s h ave expressed interest in W e s t Coast operations. State D ep a rtm en t estimates in dicate that total p ro d u ctio n o f these b ord e r plants w ill ap proa ch $ 5 0 0 m illio n in 1 9 7 1 . A r o u n d $ 3 5 0 m illio n o f this p ro d u ctio n w ill re-enter the U .S . u n d er Sec tions 8 0 6 .3 0 and 8 0 7 .0 0 , w ith duty assessed on $ 1 2 5 m illio n value a d d ed in M e x ic o . T o ta l p r o 0 . ■ ---- 1--------- 1---------1---------1--------- 1966 196 7 196 8 196 9 197 0 1971 P erhaps as m any as 3 3 0 firm s (in c lu d in g those Twin-city locations in the fre e z o n e s ) w ill be in op era tion at the end T h e m a jo r centers o f bord er-in d u stry activity o f 1 9 7 1 , a cco rd in g to State D ep a rtm en t estimates. are located , in tw in -city fa sh ion , directly across The con cen tra tion is heaviest in electric-elec the b ord er fr o m their A m erica n counterparts. tron ic p rod u cts and textiles, bu t n ew ventures A lm o s t 4 0 p ercen t o f the total jo b s in v o lv e d in have ap peared in m ore diverse fields, in clu d in g the p rog ra m are located in T iju a n a and M ex ica li d ism a n tlin g o f scrap railroad cars, f o o d p rocess (B a ja C a lifo rn ia N o r t e ) , o p p o s ite the C a liforn ia in g and p a ck a g in g, and assem bly o f m usical in cities o f San D ie g o and C a lex ico, respectively. strum ents, boats, and caskets. Y e t, o f the 3 1 ,0 0 0 O th er concentra tion s are in N o g a le s ( S o n o r a ) , w ork ers e m p lo y e d last sp rin g, 50 percen t w ere o p p o s ite e m p lo y e d by the electric-electron ic industry and (C h ih u a h u a ), o p p o s ite El P aso ( T e x a s ) ; N u e v o 20 percen t by the textile industry — and rou g h ly L a red o (T a m a u lip a s ), o p p o s ite L aredo ( T e x a s ) , 85 percen t w e re fem a le. H e re as elsew h ere th ro u g h o u t the w o rld , w o m e n w ork ers appear to be fa v o re d fo r the ted ious operation s in v o lv e d in these types o f industries. N o g a le s (A r iz o n a ); C iu d a d Juarez and M a ta m oros (T a m a u lip a s ), o p p o s ite B r o w n s v ille ( T e x a s ) . T h e total p o p u la tio n o f the cities o n the M e x i can side o f the b ord e r alm ost m atches the total M o s t o f the e m p loyees are p a id the m in im u m p o p u la tio n on the A m erica n side, at 2.2 m illio n w a g e; in clu d in g fr in g e benefits, this averages each. H o w e v e r, San D ie g o accounts fo r m ore ab ou t $ 0 .5 5 an h ou r. ( T h e U .S. m in im u m w a g e than h a lf o f the p o p u la tio n o n the A m erica n side, is $ 1 .6 0 .) 214 d u ction and value a d d ed u n d er this p rog ra m w ill have d o u b le d w ith in just tw o years’ tim e. Sk illed technical w ork ers receive a so that in m ost oth er tw in -city pa irin gs, the M e x i sign ifican tly h ig h e r salary, and m any textile firms can city is the larger on e. In each o f the last three o ffe r p ie c e -w o rk in cen tive systems b e y o n d the decades, p o p u la tio n has increased m u ch m ore m in im u m w age. rapid ly o n the sou th ern side o f the b o rd e r; d u r December 1971 MONTHLY REVIEW in g the 19 60 s, f o r exam ple, the M e x ica n ga in was tru ckin g firms, finance establishm ents, and retail 77 percent, as against a 1 7 -p ercen t increase on establishm ents o f the U .S. side. T h is p o p u la tio n u psu rge reflects, fr o m a m o n g oth er factors, the ability o f increased jo b jo b s in th eir com m u n ities, n o m atter w h ich side prospects to attract w orkers fr o m the in terior o f o f the b o rd e r the job s are located. In som e tw in - M e x ic o , first w ith the bracero p rogra m , and n o w city areas, M exica n s rep orted ly sp en d 4 0 percen t w ith the border-in du stry program . o f their in com es o n the U .S . side o f the b ord er. M ig ra tio n has also been stim ulated by the p r o s pect o f h ig h e r w ages, lo w th ou gh they m ay be in absolute terms. T h e M e x ica n G o v e rn m e n t set the basic daily m in im u m w age fo r the 1 9 7 0 -7 1 all types necessarily ben efit the creation o f n ew lig h t-m a n u fa ctu rin g Pros and cons A d v o ca te s of the bord er-in d u stry p rogra m claim that by loca tin g in a nearby area w h ere p e rio d at $ 2 .5 6 f o r M e x ic o City (F e d e r a l D is there is a p le n tifu l su p p ly o f lo w -w a g e and easily trict) bu t at $ 2 .8 8 f o r C iu d a d Juarez and $ 3 .6 8 trained la bor, U .S. m anufacturers are better able fo r Baja C a lifo rn ia N o rte . to m eet co m p e titio n in the U .S. markets fr o m the M e x ica n -A m e rica n colla b ora tion in the b o r der-in dustry p ro gra m perm its M e x ic o to take a d vantage o f its surplus o f lo w -w a g e w orkers and concentrate on la bor-in ten sive assem bly op era tions, and perm its the U .S . to take advantage o f its h ig h ly capitalized m a n u fa ctu rin g facilities and concentrate o n the p ro d u ctio n o f basic c o m p o nents. In som e cases, this co lla b ora tion takes place th rou gh the p a irin g o f plants in tw in -city location s, a lth ou gh this "tw in -p la n t” con cep t has n ot d e v e lo p e d nearly as m u ch as origin a lly p rodu cts b rou g h t in fr o m such places as the Far East and the Caribbean. ( W a g e s are considerably low er in the Far East than even in M e x ic o , but M e x ica n b ord e r firm s can o ffe r com p en sa tin g cost advantages, such as lo w transportation co sts .) T h e y also claim d efin ite benefits f o r U .S . firm s, since M e x ic o ’ s p roxim ity perm its adm inistrative, clerical, and w a reh ou sin g operation s — as w e ll as the m a n u factu re o f the basic p ro d u ct — to stay on this side o f the b ord er. O th er p oin ts in fa v o r o f the p rogra m are that it h elp s reduce M ex ica n u n em p loy m en t, p rov id es trainin g f o r M ex ica n an ticipated. U n d e r the "tw in p la n t” p roced u re, U .S. firms establish coun terpart operation s o n b oth sides o f the b order. T h e prod u cts are in itially processed w ork ers, and p rov id es a source o f fo r e ig n e x ch a n ge earnings fo r M e x ic o ’ s balance o f p a y m ents. in the U .S. plant, sh ip p ed to the M e x ica n p la nt O p p o n e n ts o f the p rogra m claim that it e n fo r la bor-in ten sive assem bly or fin ish in g, and courages firms seek in g lo w e r w ages to leave this then returned to the A m erica n side o f the b ord er coun try and g o to M e x ic o , thus creatin g h igh er as in spection , A m erica n u n em p loy m en t, because all such jo b s fin ish in g, p a ck a g in g and distribu tion . A m a jority created ab roa d are lost to this country. T h e same o f the U .S . firm s in v o lv e d in b ord er industries argum ent, o f course, is a p p lied to the m igra tion are loca ted in the b ord e r states; f o r instance, o f firms to H o n g K o n g , T a iw a n and K orea . fo r a d d ition a l operation s such m any T iju a n a firm s are tied in w ith L os A n g eles O f course, as the T a r iff C om m is sion has p o in te d electronics, clo th in g , and fu rn itu re firms. N o n e out, this loss is m ore than offset by the jo b s o f theless, o n ly a lim ited n u m ber o f U .S. b ord er- w ork ers p r o d u c in g com p on en ts f o r e x p o rt and industry firms have established a significant th ose o f w ork ers w h o fu rth er process the reim m a n u fa ctu rin g o p era tion in U .S . b ord e r cities p o rte d prod u cts. T h ese jo b s m ig h t b e lost i f the them selves. p rog ra m w ere to be term inated. M o re o v e r, M e x i T h e im p act o n the U .S . b ord e r cities thus is can consum ers d o n ot have the o p p ortu n ity to buy gen erally in direct, com p a ra b le to the secon dary at h o m e the produ cts w h ich they h e lp p rod u ce, im pact m a n ifested o n the M e x ica n side. U tilities, since the produ cts assem bled u n d er this p ro g ra m 2 15 FEDERAL RESERVE BANK OF SAN FRANCISCO m ust be e x p o rte d i f the firms are to q u a lify fo r Secretary T orres M a n z o h ave expressed som e res the sp ecia l border-area incentives. ervations about the con tin u an ce o f the p rog ra m T h e p ro g ra m is criticized, as the bracero p r o g ra m w as not, f o r fa ilin g to p r o v id e jo b o p p o r tunities f o r adult m ales. H ea v y m igra tion in to the b o rd e r areas also creates shortages o f h o u s in g, utilities, and m ed ica l services w h ich the lo ca l authorities fin d difficu lt to ov ercom e. O f course, the p ro g ra m w ill generate tax revenues that w ill h e lp pay f o r such p u b lic needs. in its present fo rm . T h e latter, sp ea k in g at T i juana last M ay, said that the b ord er-in d u stry p r o gra m is a "n ecessary e v il” w h ich p ro v id e s e m p loy m en t and trainin g to lo ca l w ork ers o n ly until such tim e as they m ay be a b sorb ed by M ex ica n industries. T h ese criticism s m ay fo re s h a d o w som e eventual revision s in the p rogra m , bu t fo r the foreseea b le fu tu re the p rospects appear fa v o r able f o r the con tin u ed g ro w th o f b o rd e r in d u s T h e bord er-in d u stry p rogra m , finally, m ay c o n tries, in v ie w o f the substantial benefits w h ich flict w ith the M e x ica n G o v e r n m e n t’ s lo n g -te rm result fr o m them f o r M e x ic o ’ s balance o f p a y d e v e lo p m e n t g oa ls, w h ich are to stim ulate the m ents. F or their part, U .S. firm s are lik ely to g ro w th o f basic industries u tilizin g lo ca l raw con tin u e s h o w in g interest in the p rogra m , c o n m aterials and to increase M e x ica n co n tro l o f sid erin g the substantial p rofit possib ilities in h e r assem bly operation s. F or this reason, b o th P resi ent in c o m b in in g la b or-in ten siv e assem bly op e ra d en t E cheverria and tions w ith ad va nced te ch n olog y . Industry and C om m erce Publication Staff: Karen Rusk, Editorial Assistant; Janis W ilso n , Artwork. Single and group subscriptions to the Monthly R e v ie w are available on request from the Administrative Service Department, Federal Reserve Bank of San Francisco P.O. Box 7702, San Francisco, California 94120 216 W . B.
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