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FED ER A L R E S E R V E BANK OF SAN FRANCISCO MONTHLY REVIEW The World Around Us Dollars from D. C. FEBRUARY 196 5 The W orld Around Us . . . Despite the sterling crisis, 1964 witnessed substantial progress in the production, distribution, and financing of worldly goods. Dollars from D. C. . . . Federal grants help fill the gap between the growing needs and limited resources of state and local governments. February 1965 MONTHLY REVIEW The World Around Us the course of 1964— the first of Not surprisingly, then, U. S. exports and two International Years of the Quiet the export surplus rose sharply last year— at Sun— outer space became increasingly populeast through the first three quarters— in re lated with flying or orbiting objects. The new sponse to high levels of business activity abroad. In addition, capital outflow into port satellites, known by such adventurous-sounding names as Syncom, Ranger, M ariner, and folio investments slowed, partly due to the Explorer, joined Telstar and Vanguard inhibiting effects of the interest equalization tax but also to the opening up of overseas (o u rs), Cosmos (theirs), and other pioneers capital markets to a larger volume of foreign in space. In addition, the Russians outdid security issues. Developments abroad were both themselves and us by successfully not wholly favorable, however, and the seeds launching the first multi-manned space ve of possible future distortions were by no hicle, appropriately dubbed Voskhod ( “sun means completely removed. rise” ). With all these foreign objects whirl ing around in space or hurtling at great speeds Toward a solution in Britain? toward the moon or Mars, attention may The most unfavorable development was the easily have been diverted from the more mun sterling crisis which occurred in the final quar dane happenings around us. ter of 1964. The British balance of payments Even so, events on Earth, although much situation had deteriorated rather steadily less spectacular, were no less important for throughout the year, as unfavorable exportthose concerned with the production and dis import developments and sizable long-term tribution of worldly goods and with interna capital outflows were reinforced by growing tional financing. Before the onset of the ster uncertainties about the underlying strength of ling crisis in the last quarter of the year, grati sterling. But the crisis was precipitated not fying progress had been made toward internal so much because of any new evidence regard and external balance in most of the industrial ing a weakening of the nation’s basic eco countries of the world and also in many of the nomic position, but rather because of a finan less developed areas. Payments surpluses or cial crisis of confidence brought on by the deficits were reduced in many countries; in growing payments deficit and the imposition flationary pressures were generally held un of a system of import surcharges. der control; money and capital markets The recent inadequate economic perform abroad were further broadened and liberal ized; and international economic and finan ance of the United Kingdom, in comparison cial cooperation was strengthened. with that of other industrial countries (espe These developments benefited the U. S. cially those in continental E u ro p e), is the out balance of payments position, as well as the growth of developments over a long period of position of other areas. After all, pressures time. The U. K. economy has fallen behind on deficit and surplus countries are lessened in its rate of economic growth, in exports, and and more easily borne when no country’s posi in technological innovation. Long-entrenched tion is excessively unbalanced in one direc labor and business practices have tended to tion or another. Balanced economic expan obstruct essential modernization and rational sion, furthermore, gives all countries a chance ization of British industry and to weaken to share in a rising volume of trade and fa Britain’s competitive position in both domes cilitates the most efficient allocation of re tic and foreign markets. sources and mobilization of savings. D uring FEDERAL R E S E R VE B A N K OF S A N F R A N C I S C O The present situation did not develop over night and is of such a nature that it will take time to correct. But the resources are there. Given the necessary determination, Britain’s economic position can be strengthened with out placing unbearable pressures on other countries. International re se rv e accretions and losses slower in 1964 M illions of Dollar* Toward international balance A part from the U. K. situation, 1964 gen erally was a successful year for world trade and finance. Judging from January-September changes in international reserves, which constitute the most current indicator of bal ance of payments trends, pressures stemming from substantial payments deficits or sur pluses moderated somewhat in 1964. Antiinflationary programs, measures curbing in flows of capital or encouraging capital ex ports, and intended or unintended increases in imports resulting from internal price pres sures— all of these contributed to the move toward international balance. (Subsequent disturbances in the exchange markets in con nection with the sterling crisis make finalquarter changes in reserves misleading as a measure of basic payments developments.) The payments surpluses of France, Ger many, Switzerland, the Netherlands, and Bel gium were much reduced, or even eliminated in some cases. Accumulation of gold and for eign exchange reserves was slower for coun tries such as Austria, Denmark, and A ustra lia. A t the same time, Italy succeeded in halt ing the drain on its international reserves as credit restraints contributed to a rapid im provement in its trade balance. Japan’s au sterity measures also helped reduce its pay ments deficit, although it still recorded a net loss of reserves for the year as a whole. Can ada, Spain, Sweden, and New Zealand also fared better than in 1963. The United States and the United Kingdom supplied reserves to the rest of the world through reductions in their monetary reserves and additions to their N o te: In d u stria l E u ro p e includes Com m on M a rk e t, Sweden, and Sw itzerland; o th e r high-incom e co u n tries include rest of W estern E urope, O ceania, an d S outh A frica; less devel oped co untries in clu d e all o th e r co u n tries n o t show n on ch art. Source: In te rn a tio n a l M o n etary F u n d liquid liabilities to foreigners. Dollar liabili ties to foreigners, however, grew less rapidly than sterling liabilities. During the January-August period, a strong degree of confidence in the interna tional economic and political situation bol stered official holdings of gold, as less of the new gold supply moved into private hands. Additions to existing Free W orld gold stocks came from new production, largely from South Africa, and from Russian gold sales to finance grain imports. In contrast to 1963, most of these net additions to foreign official holdings of gold did not come from U. S. stocks or from the already-depleted British gold stocks. As the sterling crisis developed, however, private demand for gold increased, and most of the new gold probably moved into private hands after August. Preliminary estimates place the rise in private holdings in 1964 around $1 billion, as a result of both industrial and hoarding demand. February 1965 MONTHLY REVIEW The relative calm on the international scene in the first nine months of the year was reflected in a relatively steady London gold price; the only price flurries were associated with such events as the rum or of an impend ing devaluation of the Italian lira, the illness of the Greek king, the British election, and occasional tensions in the Middle East. Ad ditional steadiness was imparted by the Rus sian gold sales and operations of the London gold pool, which acquired sizable amounts of gold in the first half of 1964. But the run on the pound which began in late September upset the previous stability of the gold market. Gold prices moved up as high as $35.19 in unofficial dealings by late December—exacerbated by inaccurate m arket reports of prospective French con versions of their dollar holdings into gold— before subsiding in the face of a strong U. S. Treasury statement which emphasized this nation’s confidence in the pound and reit erated its determination to maintain the gold price. During this period, the London gold pool was probably a net supplier to the m ar ket, in contrast to the first half of the year, when the U. S. acquired a substantial amount of gold as a result of its 50-percent participa tion in the pool. Toward foreign-trade expansion The expansion of world trade in 1964 con tinued to contribute to international pay ments equilibrium. Countries with large trade deficits, such as Japan and Italy, or countries with sizable export surpluses, such as Ger many, were able to bring their trade imbal ances down to reasonably manageable pro portions toward the end of the year. (In some cases, however, success in reducing imports had unfavorable repercussions on the exports of another major trading country; the decline in Italy’s imports, for example, was strongly felt by the U. K.) Where capital inflows had been an important factor in international re serve gains in 1963, as in the case of France, the Netherlands, and Belgium, changes in the merchandise trade balance last year worked in an offsetting direction. Among other m ajor industrial countries, Canada and the United States increased their trade surpluses, while the U. K. trade balance deteriorated as a result of a disappointing export performance and unexpected strength in imports, which was partly related to un certainties surrounding the future of sterling. Export earnings of the less developed coun tries as a group tended to fall off during the year because of the leveling off in economic expansion in the leading industrial countries and because of some weakening of interna tional commodity prices. Japan liberalized its import policies, as a condition for its move to currency converti bility for transactions by nonresidents in goods and services (under the provisions of Article V III of the IM F charter). Germany, Austria, and Spain also liberalized for antiinflationary reasons, following the example of France and Italy the year before. Prog ress also was made in the preliminaries to the “Kennedy R ound” of talks for tariff re- Exports continue to exp an d throughout most of 1964 M illions of Dollars INDUSTRIAL COUNTRIES 60 - 40 - L e tt Dovolopod Countries 1 0 ------ 1-------- 1------->------- 1------- L —— I ■ 1962 1963 L— J I 1 1964 N o te: C h art shows q u a rte rly d a ta a t an n u al rates, un ad ju sted for seasonal variatio n - in d u strial co u n tries include indus trial E u ro p e, U . S., U . K ., C anada, an d J a p a n ; for o ther definitions, see first c h a r t Source: In te rn a tio n a l M o n etary F u n d FEDERAL R E SE R V E BANK ductions. The Common M arket countries agreed on a common price for cereals (which paved the way for the inclusion of agricul tural commodities in the current negotia tions), and the U. S. and the Common M ar ket submitted relatively abbreviated lists of products to be excepted from the proposed reductions in industrial tariffs. As with many developments during the year, however, prog ress was not completely free of complicat ing factors. Higher grain prices within the Common M arket will boost production in the area, but will weaken this country’s competi tive position because the high support levels will have the effect of increasing the landed cost of American wheat. OF SAN FRANCISCO Output ab ro ad g row s less rapidly in 1964 than in 1963 1953 = 100 Toward infernal equilibrium The pace of economic expansion m od erated somewhat in the industrial countries in 1964 as inflationary pressures stemming from m anpower and capacity limitations and balance of payments problems slowed the rate of advance. Production in the United Kingdom, Canada, Belgium, and France leveled off after some increase earlier in the year. Japanese output continued to move up despite maintenance of credit restraints, but recessionary tendencies emerged in Italy as the deflationary measures adopted earlier be gan to take hold. Consumer dem and tended to weaken in most industrial countries except Germany. Investment dem and remained steady at high levels (except in France and Italy), although construction activity tapered off after an up surge early in the year. Exports generally were a less expansionary force than in 1963, and were decidedly unsatisfactory for the United Kingdom. Labor m arket tensions heightened in a num ber of countries and con tributed significantly to upward price pres sures, particularly in the Netherlands and Germany. Price indexes reflected the net impact of Source: O rganization for E conom ic C ooperation an d D evelopm ent. In te rn a tio n a l M o n etary F u n d . these m arket forces. Anti-inflationary meas ures helped dampen price increases in France, but similar measures were less successful in Italy. Prices continued to increase in Japan and the Netherlands, and around m idyear the indexes began to accelerate in the United Kingdom and Belgium. Price pressures were further reflected in money m arket rates. To com bat inflationary pressures, leading countries took a num ber of steps to raise the cost and reduce the availability of credit and to dampen demand and cost pressures. The conventional instruments of m onetary re straint— increases in central-bank discount rates and increases in commercial-bank re serve requirements—were employed in both industrialized and developing countries. In February 1965 MONTHLY REVIEW many instances, these measures were rein forced by various types of selective credit controls, such as penalty discount rates, more stringent rediscount quotas, ceilings on bank credit expansion, greater selectivity in lend ing, and tightening of consumer credit terms. In addition, they were reinforced in the Neth erlands, Belgium, and France by the adoption or extension of price ceilings. To forestall inflows of funds from abroad that would tend to nullify credit restraints, several nations introduced regulations requir ing banks to m atch specified proportions of their foreign liabilities with foreign assets. (Nevertheless, tight domestic credit condi tions encouraged banks in the Netherlands and Belgium to repatriate funds from abroad during most of 1964.) Fiscal policy was in creasingly employed to bolster the fight against inflation. Budget expenditures were cut back wherever possible, and Government security issues were floated to absorb excess liquidity. Prices continue to ad van ce in most industrial countries abroad 1958 = 100 Toward increased liquidity The resultant structure of interest rates in the m ajor industrial countries tended to en courage capital outflows from the United States toward countries with favorable growth patterns and higher interest rates. But the in terest equalization tax helped to keep down the movement of U. S.-owned long-term funds into portfolio investments abroad, while narrow money markets abroad and foreign restrictions on short-term capital inflows helped to keep short-term flows in check. But the United Kingdom-—until the sterling crisis—and Canada continued to attract con siderable amounts of American short-term money. The interest equalization tax also helped to broaden and liberalize foreign money and capital markets during the year. The volume of foreign capital issues offered in European capital markets in 1964 was probably more than $1 billion— about double the average Source: E uropean Econom ic C o m m u n ity , U n ited N ations for the past few years. Non-Commonwealth countries increased their borrowing in the London capital market, while foreign issues sold in Germany or denominated in Deutsche marks reached a sizable volume. A t the same time, a number of countries— particularly France and Italy— attempted to increase the efficiency of domestic money and capital m ar kets, to encourage individual saving, and to enhance the attractiveness of long-term in vestments to the individual investor. These developments were decidedly favor able. Over the longer run, the increased ca pacity of each country to meet its own needs for investment funds and eventually to sup plement the financial resources of countries less advantageously placed will reduce the FEDERAL R E S E R VE BANK Rising m oney m arket rates reflect inflationary pressures Percent Per Annum 1963 1964 Source: O rganization for Econom ic C ooperation a n d D evelopm ent drain on the few countries that today supply the bulk of financial assistance to the devel oping countries. The greater accessibility of foreign capital markets in 1964 increased private interna tional liquidity and thus reduced the need for official reserves. A significant amount of inter national liquidity also was made available to the monetary authorities of various countries encountering payments difficulties over the year. International assistance— either in the form of drawings on the International Mone tary Fund or central bank credits— was pro vided on a substantial scale to Italy in M arch and to the United Kingdom in the autumn sterling crisis. The Fund’s General Arrange ments to Borrow— a supplementary $6-billion standby credit arrangement concluded in 1962 among ten industrial countries— was activated for the first time in November in connection with the U. K. $1-billion drawing OF SAN FRANCISCO from the Fund. In addition, the network of Federal Reserve swap arrangements with for eign central banks and the Bank for Interna tional Settlements was used by the U. S. and other countries to meet tem porary strains in the international exchange markets. In September, at the annual meeting of the International M onetary Fund in Tokyo, IM F members agreed in principle to the ex pansion of liquidity through a general— but as yet unspecified— increase in member coun try quotas. In addition, the “Group of T en” industrial countries instituted a system of “multilateral surveillance”— involving the regular reporting of official means of financ ing payments deficits and surpluses— to facili tate balance of payments adjustments. Toward the future The outlook for 1965 for the m ajor indus trial countries abroad is generally favorable. The overall pace of expansion is expected to be somewhat slower than in 1964, but there should be further progress toward a balanced development of the various sectors of each nation’s economy. C urrent efforts to restrain inflationary pressures should tend to keep price increases smaller than in 1964. Japan, however, has already begun to ease its policy of credit restraint, and Italy is contemplating measures to stimulate its sagging economy. Investment demand is generally expected to rise at a brisker pace than in 1964, but consumer demand m ay be less expansionary in most countries except Germany. In addi tion, increases in output may be dampened by capacity limitations, particularly in Ger many and Belgium, and by the intensification of labor shortages in most countries other than Italy and France. Common M arket ex perts forecast only a 3-percent gain in output in the first quarter of this year above the yearago period, compared with a 10-percent gain in the comparable 1964 period. Productivity gains for industrial countries (other than MONTHLY REVIEW February 1965 France) are expected to be less easily achieved this year. Meanwhile, fiscal policy in the industrial countries continues to be tailored to the re quirements of anti-inflationary programs, with government expenditures and budget deficits smaller than in 1964. The French budget for the current fiscal year, for exam ple, is expected to register a small surplus for the first time since the late 1920’s. The payments position of most countries— whether in surplus or deficit— should be less lopsided in 1965, according to various offi cial and semi-official estimates. The impact of the import surcharges on U. K. imports should be felt early in 1965, but it will prob ably take longer for exports to respond to cur rent measures designed to stimulate sales abroad. The German trade surplus may be about as large as last year as exports level off and imports rise, but capital exports may in crease. In Belgium, a slower rise in exports may be accompanied by a slower rise in im ports. F o r the remaining industrial countries (except Jap an ), export demand may pick up while imports may rise more slowly; in Ja pan, current low levels of inventories point to possibly sizable replenishment of stocks from abroad. In the less developed countries, meanwhile, export earnings may show little further improvement, but the attainment of a more comfortable reserve position in 196364 may permit some increase in imports. In general, continued progress can be ex pected in 1965 toward internal and external equilibrium. Form ulation of an effective pro gram for strengthening the U. K. economy and restoration of confidence in the pound merit top priority, both for the U. K. itself and for the whole international payments system. Other new problems will of course arise from time to time, but 1964 provided ample evidence that the nations of the world have become more flexible, adaptable, and better equipped to meet contingencies as they arise. Meanwhile, as satellites hurtle through the void in their search for solutions to the mysteries of outer space, and as ministers hurtle from capital to capital in their search for a better system of international payments, the world’s trade surges steadily ahead. M onthly Review is published by the Research D epart ment of the Federal Reserve Bank of San Francisco. Individual and group subscriptions to the M onthly R e view are available on request from the Administrative Service Department, Federal Reserve Bank of San F ran cisco, 400 Sansome Street, San Francisco 20, California. 25 FEDERAL R E S E R VE BANK OF SAN FRANCISCO Dollars from D.C. the tum ult of Washing tripled during the same period. Between 1957 and 1963 alone, the income from grants more ton for the hurly-burly of academic life, Professor W alter Heller sparked a new tax than doubled. The variety of grant programs has also increased steadily; by A pril 1964, debate by proposing that the states receive an the “Catalog of Federal Aid to State and automatic distribution of some Federal reve Local Governments” fisted authorizations nues every year. U nder the Heller plan, the for Federal assistance to state and local gov Federal Government would assist the state ernments under 115 different programs. and local governments, beset as they are by State revenue from the Federal government the necessity of meeting rapidly expanding increased from $3.5 billion in 1957 to $7.8 public needs out of comparatively restricted billion in 1963, and Federal grants thus rose tax systems, through automatic transfers of from 18 to 23 percent of total general reve Federal tax revenues to be used at the dis nues of state governments. The greatest in cretion of the individual states. crease in recent years has been grants for The future of the Heller proposal is cer highway construction and related activities, tainly problematical, in view of the possible which more than tripled in the 1957-63 pe reluctance of Congressional and Administra riod. The interstate highway program ac tion leaders to relinquish fiscal responsibilities counted for much of this growth. During the to other jurisdictions, and again in view of the same period, grants to states for education in objections of administrators of present pro creased by more than 170 percent, and grants grams to the channeling of funds to other for state health and welfare programs grew uses. But whatever the fate of this proposal, by nearly 75 percent. the transfer of increased amounts of Federal State grants to the various units of local revenues to state and local governments government have grown in line with the reve through ongoing programs seems assured. nue that state governments have been able to The Federal grant-in-aid system, an exist ing system which lacks only the automatic and State-local budgets re ly discretionary features of the Heller plan, has increasingly on Federal grants already assumed a major role in the revenue Billions of Dollars structure of state and local governments. Throughout the postwar period, this type of intergovernmental expenditure has been largely responsible for filling the gap between the needs and resources of state and local governments, and for making possible the growth and improvement of public services which have been achieved in those jurisdic tions. efo r e B leaving Growth of grants In 1963, state and local governments were able to raise twice as much revenue from their own sources as they did a decade earlier, but their income from Federal grants more than N o te: C h a rt shows all sources of state-local gov ern m en t receipts except co n trib u tio n s for social insurance. Source: D e p a rtm e n t of C om m erce February 1965 MONTHLY REVIEW raise from their own sources. State grants to municipalities traditionally have been larger than the total volume of Federal grants—for tunately so, since the financial resources avail able to local governments are less easily ex pandable than are the financial resources of state governments. F o r example, property taxes are by far the most im portant source of tax revenue for local governments, but any increase in the revenue which can be raised from this source is strongly dependent upon increases in property values. (Property tax revenues have recently kept in step with reve nues from other sources, however, as a result of increases in assessments and in tax rates as well as increases in property values.) State grants to local governments increased from $7.3 billion in 1957 to $11.9 billion in 1963, in each year amounting to about 30 percent of the total general revenue of local governments. Most of the increase was in grants for education and health and welfare. Meanwhile, a small reverse flow of grant money has shifted from local governments to state governments, but this has accounted for only about 1 percent of the income of state governments. Not surprisingly, the increase in the inter governmental flow of funds has been especial ly high in the West. Between 1957 and 1963, the volume of Federal grants to state and lo cal governments in the Twelfth District in creased 145 percent. During that period, the contribution of Federal grants to the total general revenue of all District government units increased from 12 to 16 percent. Grants to state governments in the Dis trict from the Federal government increased more than 150 percent between 1957 and 1963. Grants to states for educational pur poses showed the greatest increase, more than tripling over the period, but highway and health and welfare programs grew almost as rapidly. In each specific case, Federal grants grew by more than state direct expenditures. Revenue from the Federal government fi nanced more than 40 percent of the direct expenditure of Twelfth District states in 1963, compared with slightly over 30 percent in 1957. Highway grants showed the greatest proportionate increase, but the growing im portance of grants for financing state expendi tures for education and welfare and health was also apparent. W hy grants? Generally speaking, the Federal system of grants-in-aid contains a variety of specific grants geared to specific programs, but with some differences in operational detail. A l though a few Federal grant programs allow administrative discretion to determine the al location of funds, most of the authorizations for such programs enumerate detailed con ditions for fund allocation. A given grant program usually contains two provisions to determine the share of funds each state will receive: one provision regarding the manner in which the appropriations for the program will be apportioned among the grantees as an offering of Federal aid, and another provision regarding the funds to be raised by each gran tee for its share of the project. The distribu tion of Federal grants is thus a function of the program needs, the financial needs, and the fiscal capacities of eligible recipient govern ments. In addition, the willingness of state and local governments to increase revenues in order to obtain matching funds is also a significant factor. Basically, grant programs are undertaken as a means of redistributing fiscal resources in order to induce recipient governments to undertake programs deemed socially desir able by the Federal and state governments. However, grants-in-aid are also a means of narrowing the gap between the fiscal needs and the fiscal resources of state and local units of government. The taxing and borrowing powers of local governments are limited by a myriad of constitutional and statutory restric F EDERAL RESERVE BANK tions; local governments, deriving their fiscal powers from the state, are generally depend ent upon property taxes as their major source of tax revenue. State governments, although possessing much more extensive tax resources than local governments, are still somewhat more restricted than the Federal Government in their ability to raise funds. In principle, then, grants-in-aid permit the collection of revenue from the most effective and efficient tax base, and the execution of governmental activities at the most efficient and effective level. Intergovernmental expenditure affects both the level and the direction of state and local government spending. Federal aid usually calls forth more expenditure than the amount of the additional revenue it provides, because matching requirements generally oblige state and local recipients to provide a certain pro portion of the money to finance any given project. Grants also affect the direction of state and local government spending, since all Federal grants and most state grants are authorized for specific uses in specific pro grams. The intergovernmental flow of funds in cludes more than just grants-in-aid in the strict sense of “gifts” (conditional or uncon ditional) from one governmental unit to an other. Revenue-sharing is another possibility; for example, states in which national forests are located receive 25 percent of the revenues from the operation of those forests by the D e partm ent of Agriculture’s Forest Service. In addition, loans, advances, and technical as sistance provide other types of intergovern mental aid. For w h at purpose? In fiscal 1963, 39 percent of total Federal aid to state governments consisted of high way grants. A nother 35 percent of total Fed eral aid went for public welfare, and yet an other 15 percent for education. Other im portant uses of grants were employment se OF SAN FRANCISCO curity administration, health and hospitals, natural resources, and airports. State grants are made to all types of lo cal governments — counties, municipalities, school districts, townships, and special dis tricts. M ore than half of the intergovernmen tal expenditure of states goes to school dis tricts, while counties and municipalities re ceive most of the remaining portion of state aid. States generally follow the Federal prac tice of utilizing grants to finance specific non recurring expenditures such as construction and research, but fully one-twelfth of state grants are made for “general local support.” Education is by far the most im portant function financed by state aid; in 1963, for the nation as a whole, 59 percent of state grants were made for that purpose. In the same year, public welfare accounted for 16 percent of the intergovernmental expenditure of states, and highway grants accounted for 12 percent more. District patterns In the West, the Federal Government sup plied about 16 percent ($1.8 billion) of the $11.6 billion of the total general revenue of state and local governments in 1963. In addi tion, state grants totaling $2.5 billion ac counted for a third of the general revenue of the District’s local governments. In 1963, revenue from Federal grant-inaid programs accounted for more than 40 percent of the total direct general expendi tures of Twelfth District states— a substan tially higher level than the rest of the country. These Federal grants financed about 37 per cent of the states’ expenditures for education, 44 percent of highway expenditures, and 90 percent of expenditures for health and wel fare. State governments actually received much more in public welfare grants than they spent directly, since m any of their welfare expenditures were incurred for activities car ried out at the local level. MONTHLY REVIEW February 1965 W estern com m unities dem and m ore schools, roads, health and welfare . . funds obtained from own taxes and from intergovernmental flow of funds LOCAL G O V E R N M E N T S STATE GOVERNMENTS B illio n s of D ollars 0 0 B illio n s of D o llars 1.0 1" 1.0 G R A N TS-IN -A ID U U U I^ ^ lim y HEALTH AND WELFARE OTHER Source: B ureau of th e Census (T w elfth D istric t d a ta ) Federal grants to local governments in the West are much smaller in volume than Fed eral grants to states. In contrast to the pat tern in the rest of the country, however, school districts in Twelfth District states received by far the largest proportion of Fed eral grants to local governments—more than half of the total received by all units of local government. The pattern of state grants to the various units of local government in the West also differs from the pattern in the rest of the country. A larger proportion of the total in tergovernmental expenditure by Twelfth Dis trict states is made for health and welfare (more than one-fourth of the total, compared with less than one-sixth elsewhere), while a smaller proportion is allocated for education (54 percent, compared with 60 percent) and for highways (9 percent, compared with 13 percent). The role of Federal grants in each individ ual state varies in line with its distinctive needs. In most District states, the largest portion of state revenues from the Federal government in fiscal 1963 was spent for high way construction and related activities. In Arizona, Idaho, Nevada, and Oregon, high way grants accounted for more than half of total Federal grants to states. But in Cali fornia, which received the vast bulk of the District’s share of Federal aid, one-third of state revenue from the Federal Government was spent on health and welfare, one-third on education, and only one-fourth on high ways. In sum, grant programs have provided an equitable method of financing projects (such as highway construction) in which national objectives are involved, and they have also stimulated state-local activity in such projects. They have provided a means of stabilizing state-local revenues, of extending assistance in recession periods, and of distributing tax proceeds collected at the most appropriate level of government to the jurisdiction best equipped to carry out the desired community objective. In view of these manifest advan tages, the continued expansion of grant pro grams in the rapidly-growing West appears all but certain. FEDERAL RESERVE BANK OF SAN FRANCISCO Western Digest Banking Developments A t year-end, Twelfth District weekly reporting banks had on their books $32,314 million in outstanding bank credit— up $452 million from the end-November figure. But Decem ber’s 1.4-percent increase failed to match the 2.4-percent gain recorded in the comparable month of 1963, when security and loan portfolios both increased at a faster p a c e .. . . Outstanding loans increased $410 million in December, reflecting both m id-month tax-connected borrowing and strength throughout the month in credit demand from the business sector, including sales finance and other nonbank financial institutions. Real estate loans, on the other hand, showed only a negligible gain during the m o n th .. . . Demand deposits adjusted increased 1.1 percent in Decem ber, for a somewhat smaller gain than in the year-ago month. But total time and sav ings deposits increased 3.1 percent ($556 million) as banks received unusually large seasonal deposits from states and political subdivisions. A $ 115-million gain in savings deposits, which reflected year-end crediting of interest, was greater than a year earlier and thus also helped to account for the year-end strength in the time-andsavings category. Employment and Unemployment Total employment increased 0.8 percent in California and 0.4 percent in W ash ington in December, on the strength of gains in both the farm and nonfarm sectors. In the nation as a whole, a drop in farm employment partly offset an increase in the nonfarm sector, and thereby held the gain in total employment to 0.2 percent. . . . Jobless rates in the region declined substantially in December, to 6.0 percent in California and to 5.4 percent in Washington. The national unemployment rate, al though somewhat lower, actually increased slightly during the month, to 5.0 percent. (A ll data seasonally adjusted.) Storm D am age Three weeks of stormy weather with heavy rainfall caused flooding and extensive damage in southern Washington, Oregon, and northern California during late Decem ber and early January. Roads and railway lines were washed out or blocked by land slides in some areas, and many bridges were destroyed by the force of flood waters carrying logs, building wreckage, and other debris. . . . Flood damage was especially severe along the Willamette River in Oregon and along the Eel and Russian Rivers in California. Total damage ran into several hundred million dollars, according to Arm y Corps of Engineers estimates. . . . The lumber industry suffered serious losses. Lum ber mills in Oregon and Washington were unable to resume operations until late January, and mills in northern California (with 4,000 lumbermen out of work) an ticipated an even longer delay. A single redwood mill in that region reported losing 18 million board-feet of logs and 22 million board-feet of cut lum ber in the washout. February 1965 MONTHLY REVIEW Condition Items of All Member Banks — Twelfth District and Other U. S. Billions of Dollars Recession Periods Billions of D ollars Billions of Dollars Recession Periods Billions of Dollars Source: Federal Reserve Bank of San Francisco. (End-of-quarter data shown through 1962, and end-of-month data thereafter; data not adjusted or seasonal variation.) BA N KIN G A N D CREDIT STATISTICS A N D BUSINESS INDEXES— TWELFTH DISTRICT1 (In d e x e s: 1957-1959 = 100. Dollar am ounts in m illions of dollars) Condition item s of all m em ber b a n k s2 Seasonally A djusted Year and M onth 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 Loans and disco u n ts3 U.S. Gov’t. securities Dem and deposits a d ju s te d 4 T otal tim e deposits Bank rates Bank on d eb its short-term Index bu sin e ss 31 cities5, 6 1o ans7, 8 Industrial production (physical volum e)6 Total nonagri cu ltu ral employ m en t D ep’t. sto re sa le s (v alu e)8 Lum ber Refined8 Petroleum S te e l8 7,751 8,703 9,090 9,264 10,827 12,295 12,845 13,441 15,908 16,628 17,839 20,344 22,915 25,561 6,370 6,468 6,577 7,833 7,162 6,295 6,468 7,870 6,495 6,764 8.002 7,336 6,651 6,522 9,512 10,052 10,129 10,194 11,408 11,580 11,351 12,460 12,811 12,486 13,676 13,836 14,179 14,505 6,713 7,498 7,978 8,680 9,130 9,413 10,572 12,099 12,465 13,047 15,146 17,144 18,942 21,172 57 59 69 71 80 88 94 96 109 117 125 141 157 169 3.66 3.95 4.14 4.09 4.10 4.50 4.97 4.88 5.36 5.62 5.46 5.50 80 84 86 85 90 95 98 98 104 106 108 113 117 68 73 74 74 82 91 93 98 109 110 115 123 129 99 101 102 101 107 104 93 98 109 98 95 98 103 87 90 95 92 96 100 103 96 101 104 108 111 112 97 92 105 85 102 109 114 94 92 102 111 100 117 22,915 6,651 14,179 18,942 167 5.47 118 136 112 110 107 23,256 23,544 23,763 23,953 24,102 24,394 24,836 24,865 25,257 25,140 25,339 25,561 6,575 6,832 6,893 6,559 6,541 6,489 6,215 6,170 6,507 6,473 6,668 6,522 14,332 14,222 14,287 14,243 14,170 14,347 14,369 14,362 14,674 14,573 14,545 14,505 19,342 19,520 19,685 19,773 19,813 19,876 20,152 20,195 20,452 20,602 20,792 21,172 163 167 165 169 166 167 166 175 166 173 178 167 119 119 119 119 119 119 119 120 120 121 121 122p 135 137 133 134 139 137 141 143 137 139 151 115 114 114 102 106 105 113 107 108 111 111 115 113 111 112 114 115 118 121 117 113 110 117 149 140 139 131p 121 p I21p 129p 132p 149p 140p 1963 December 1964 January February March April May June July August September October November December 5.47 5.46 5.51 5.48 1 Adjusted for seasonal variation, except where indicated. Except for banking and credit and department store statistics, all indexes are based upon data from outside sources, as follows: lumber, National Lumber M anufacturers’ Association, West Coast Lumberman’s Association, and Western Pine Asso ciation; petroleum, U.S. Bureau of Mines; steel, U.S. Department of Commerce and American Iron and Steel Institute; nonagricultural employment, U.S. Bureau of Labor Statistics and cooperating state agencies. 2 Figures as of last Wednesday in year or month. 3 Total loans, less valuation reserves, and adjusted to exclude interbank loans. * Total demand deposits less U.S. Government deposits and interbank deposits, and less cash items in process of collections. 5 Debits to demand deposits of individuals, partnerships, and corporations and states and political subdivisions. Debits to total deposits except interbank prior 1942. 6 Daily average. 7 Average rates on loans made in five major cities, weighted by loan size category. 8 Not adjusted for seasonal variation. p—Preliminary. r—Revised.
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