Full text of Economic Review (Federal Reserve Bank of San Francisco) : February 1967

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FEDERAL RESERVE BANK OF SAN FRANCISCO

MONTHLY REVIEW




Annual
Review
Issue

FEBRUARY
1967




Annual R e v ie w __ 1966

The Boom: '66 Style
The String Pulls Taut
Towards Balance?
The M arkets
Disintermediation
The W e st: Boom
The W e st: M o n e y
Signs of Growth







February 1967

MONTHLY REVIEW

The Boom: 66 Style
curtain rang down on the second third
of the twentieth century as 1966 came to
a close, and at this juncture the nation’s total
output reached almost three-quarters of a
trillion dollars. GNP rose sharply to $740
billion during the year, and although part of
that 8V2 -percent increase was eroded by ris­
ing prices, what was left was a solid 5 Vi-per­
cent increase in real output of goods and serv­
ices. The expansion in real terms thus was al­
most as great as in the preceding year, a year
of vigorous prosperity. The boom, without a
doubt, remained very much alive through
most of 1966.

T

he

Worth an A grade?
Professor Paul Samuelson, assessing the
year’s performance for the readers of News­



week, gave 1966 an “A ” grade in terms of
real growth. (“Who would have expected a
rise of 4 percent or more in the sixth year
of economic expansion?” ) He also gave the
year a good solid “A” for its employment per­
formance as the unemployment rate dropped
below 4 percent for the first time in a decade,
although he was forced to withhold an “A + ”
grade because of the persistence of structural
unemployment among teenagers and non­
whites.
But where price stability was concerned,
Professor Samuelson— and everyone else—
could give 1966 no better than a “C” grade,
since wholesale prices surged upward until
late in the year and since the consumer index
in particular jumped by 3 percent over the

FEDERAL RESERVE BANK OF SAN FR A N C IS C O
1965 level. Early in the year the economy suf­
fered from the demand-pull pressures typical
of wartime and business-investment booms,
as the military and civilian sectors each scram­
bled for resources; late in the year the econ­
omy was threatened by a cost-push type of in­
flation as the labor and management sectors
each struggled to maintain its share of income.
The 3-percent increase in consumer prices,
although it represented by no means a raging
inflation and although it was in line with what
the prosperous countries of Western Europe
are normally accustomed to, nonetheless
changed the entire psycholegical climate of
the boom. It helped erode the wage-price
guideposts, especially after an airline mechan­
ics’ strike was settled in midsummer with a
5-percent annual wage increase, and it under­
lay a sharp upsurge in interest rates and a
sharp downturn in confidence among the in­
habitants of Wall Street.

Grinding of gears
In policy terms, 1966 was marked by a
harsh grinding of gears. Fiscal policy played
a part in combating the price upsurge, as the
Treasury withdrew scheduled excise-tax re­
ductions, introduced graduated withholding
taxes, speeded up corporate tax payments, and
suspended temporarily the tax credit for busi­
ness investment. Even so, most of the burden
of suppressing the price upsurge fell upon
monetary policy. As practically all policy
weapons were called into play to reverse an
over-rapid increase in the money supply and
in bank credit, interest rates surged upward
to the highest levels since the 1920s. In the
autumn months, however, fiscal policy began
to play a stronger role and monetary policy
began to ease in response to easing pressures
throughout the economy.
At this point, industrial production stabi­
lized— it had grown at a 13-percent annual
rate during early 1966— as businessmen be­
gan to re-schedule production in order to deal



with their rapidly growing inventories. By late
year, then, the awesome uncertainties of mid­
summer were replaced by a more familiar
problem of maintaining rapid growth and
price stability in a context of full employment.
In this more familiar environment, the stock
and bond markets showed signs of life again
after their severe earlier buffeting.
Wall Street, until early February, was dom­
inated by the boom psychology which had
underlain the prolonged bull market of 196365. But then, when the fiscal implications of
Vietnam and the financial implications of tight
money were realized, the bulls disappeared
from the scene. Stock price indexes dropped
sharply from early February to mid-March,
slid again in late April and May, and then
dropped almost uninterruptedly through the
summer and early fall months amid the
crunching sounds of monetary screws and
splintering guideposts. In the fourth quarter,
however, stock prices began to turn upward
as monetary fears abated, and after a pause
for tax-loss selling in December, the market
rose sharply in early 1967.
Economic psychology thus was a key reality
on the 1966 scene. Yet, behind all the shifts
in psychology and all the shifting of policy
gears was a more basic shifting of resources
from one sector of the economy to another.
Between the first and fourth quarters of the
year, defense spending increased by fully onefifth and business fixed investment also rose
sharply. On the other hand, the consumer
sector, beset by rising prices of food and
other essentials and by decreased availability
of credit, reduced its spending for major postponable budget items; spending for autos was
in a declining trend after the winter quarter
and spending for new housing was off fully
one-fourth.

Stimulus of war
The most expansionary element in the 1966
picture was the war in Vietnam. Defense

February 1967

MONTHLY REVIEW

D e fe n se an d p la n t-e q u ip m e n t sp e n d in g spur economy to record heights,
despite lag in consumer sectors . . . rising prices cut into real gains
B illio n s of D o lla r s

Perce nt C h a n g e

Ratio Sc ale

GNP

1 9 5 7 -5 9 = 1 00
Equipm ent

CHANGE

P l a n t - E q u ip m e n t

160

A u to s

140
C o n su m e r Goods

In v e n to r y C h a n g e

120

D u ro b le M a t e r i a l s

IN D U S T R IA L

P R O D U C T IO N

100

spending for the year rose to $60 billion, and
in the fourth quarter it was at a $ 6 6 ^ -billion
rate— one-third above the early-1965 level.
New obligations for defense equipment rose
even more sharply, and these increases were
perhaps even more important than increases
in expenditures, since the greatest strain on
the economy occurs not when military pay­
ments are made but in the earlier period when
orders are placed and defense goods are pro­
duced.
The rapid growth of the U. S. economy and
the still limited nature of the conflict in Viet­
nam seemed to mean that the war had less im­
pact than earlier wars. In late 1966, defense
spending amounted to about 8 percent of
GNP, as against 13H percent during Korea
and 42 percent during World War II. The
difference was, however, that spending for
Vietnam came on top of sharply increased
spending for everything else, so that skilled
labor and manufacturing plant capacity were
under heavy pressure from mid-1965 on­
wards. Escalation in Vietnam came at a time
when productive resources were almost fully
utilized— unlike World W ar II or Korea— so



the marginal effect of the conflict may have
been greater than in those earlier periods.
However, the bulk of the growth in spend­
ing and order placement may have been
reached by late 1966; thus, although defense
order backlogs equaled almost one year’s pro­
duction at that time, Defense Secretary Mc­
Namara predicted that a period of stability
in both manpower needs and defense produc­
tion was near at hand.

Enough capacity?
Business plant-equipment spending, the
second major support of the 1966 boom, pre­
sented a somewhat similar pattern of growth.
Spending for structures and producers’ dur­
able equipment, at $79 billion in 1966, re­
flected the business sector’s scrambling for
new capacity to meet burgeoning demand. But
the pace eventually began to tell. Spend­
ing in the second half of the year grew only
about half as rapidly as during the first half,
and the gain projected for the first half of
1967 was only about one-third the size of
the early-1966 increase.

FEDERAL RESERVE BANK OF SAN FR A N C IS C O
The slower growth of business spending
was partly attributable to the late-1966 sta­
bility of physical production and of industrialcapacity usage. Thus, after a five-year expan­
sion that outdistanced all previous capitalgoods booms, the business sector apparently
caught up with its immediate overall require­
ments, as evidenced by the growing percent­
age of firms which judged their existing capac­
ity to be adequate to their current production
scheduling.
Moreover, the business sector by late 1966
found its investment plans restricted by the
increasing financial squeeze. Its near-term in­
vestment incentives were weakened by a
slackening in its internally generated cash
flow and in the credit flows available from
commercial banks and the money market—
and these incentives were further weakened
by the suspension of the investment-tax credit
on equipment and the accelerated-depreciation procedures on new building.

Too much inventory?
Business investment for inventories also
showed a pattern of over-rapid growth. The
change in business inventories, at about $ 11
billion for the year, was the highest since the
early Korean War period, and the fourthquarter rate of $16'/i billion was clearly un­
sustainable.
Inventory-sales ratios even in late year were
not overly high by historical standards, but
the composition of business stocks at this
time created grounds for worry. The rise in
the manufacturing stock-sales ratio, from 1.58
in early spring to 1.70 in late fall, was hard
to analyze, since this could have been con­
sidered simply a return to normal after the
massive depletion of stocks during the past
year or so. Besides, the ratio failed to show
any upsurge in stocks of finished goods— as
usually happens when over-stocking occurs—
in large part because one-fourth of the total
inventory increase was in defense products,



which are usually shipped when completed
and thus do not show in finished-goods in­
ventories.
Yet, by yearend, an obvious pile-up oc­
curred in finished goods of consumer durables,
both at the manufacturing and retail levels.
With auto dealer supplies up about one-tenth
over year-ago levels and with other consum­
er durables accumulating at the same time,
sharp reductions in production were then re­
quired to overcome the pile-up of stocks.

Problems of Detroit
Business’ inventory problems were simply
a reflection of the problems of family buyers,
especially buyers of automobiles. Actually,
total spending for autos and parts just about
matched the $30-billion figure reached in
1965, but the total figure masked the sales
decline which began in early 1966 and lasted,
except for a belated flurry at model clean-up
time, throughout the rest of the year.
The list of Detroit’s problems was rather
long. Aside from one always crucial factor— a
slower rate of growth of real disposable con­
sumer income— the list included the publicity
given to the auto safety issue, the re-imposi­
tion of the 7-percent excise tax on new cars,
and the rise in draft calls, which added 400,000 men to the armed services and thereby
subtracted many potential customers from
auto salesmen’s order books.
But even in the face of these depressive fac­
tors, and in the face also of an import up­
surge which increased the foreign penetration
of the American market from 5 percent to 7
percent, Detroit still managed to record its
fifth successive production record during the
1966 model year. Output for that period
reached about 8.5 million units, as against 8.3
million and 7.8 million, respectively, for the
two preceding model years.
The spring combination of sales slowdown
and continued output expansion led to a sharp
rise in dealers’ stock ratios— up from 1-.8

February 1967

MONTHLY REVIEW

W a ll S t.: like al! good things,
bull markets must come to on end
N.Y.S.E. tnd«x

Jan. 1,1966 = 50

months’ sales in March to 2.5 months’ sales
at the end of June. So, from April on, pro­
ducers cut their output to achieve a better bal­
ance with sales and inventories. Factory shut­
downs for model changes occurred earlier and
lasted longer than heretofore, and sales in­
centives through factory rebates increased
sharply. These incentives may have had some
impact not only in the sales flurry which oc­
curred at model clean-up time but also in a
continuation of the trading-up phenomenon.
Salesmen sold hard tops to more than half
of their 1966 customers, as against less than
one-third in 1963. And they also managed to
sell more and more higher-cost options; al­
most one-third of the 1966 models were airconditioned and about two-thirds included
power steering.

Problems of builders
Consumer spending for new housing, like
consumer spending for autos, also weakened
during the year— in fact, weakened spectacu­
larly. Expenditures for residential construc­
tion, at almost $26 billion, actually were ex­
ceeded only during the 1963-65 boom period,
but between the record high achieved in the
first quarter of 1966 and the fourth-quarter low,



spending fell off by almost one-fourth. More­
over, private housing starts, at 1.2 million
units, were one-fifth below the 1965 level, and
the late-1966 rate was actually the lowest of
the post-war period. Starts had been trending
downward since early 1964, largely as a re­
flection of the prolonged slump in Western
housing activity, but the slump spread to the
rest of the nation in 1966.
The housing recession, which took place in
the face of such favorable market factors as a
decline in the housing vacancy rate and an
increase in the marriage rate, could be attrib­
uted mainly to the short-circuiting of the
financial flows normally available to the hous­
ing industry. As one of the consequences of
the declining availability and the rising cost
of money, funds were persistently diverted
from the types of institutions which are the
heaviest participants in the mortgage market.
As their inflow began to dry up, these institu­
tions sharply reduced their new commitments,
and expenditures soon dropped precipitously.

Productivity and prices
Yet, with the exceptions noted, the overall
pattern of the year was one of sustained pres­
sures on production and on prices. As mar­
ginal resources were drawn into production,
and as facilities became more fully utilized,
the growth rate of labor productivity dropped
from an average of about 3 Vi percent in
the 1961-65 period to less than 3 percent in
1966. Standby equipment was forced into use
as manufacturing capacity utilization rose
from 89 percent in 1965 to 91 percent in
1966, and inexperienced workers (mostly
women and teenagers) were added to the la­
bor force because of the shortage of skilled
workers.
Consequently, as productivity gains decele­
rated, unit-labor costs— which had remained
almost stable during the preceding five-year

FEDERAL RESERVE BANK OF SAN F R A N C IS C O

period— jumped 2Vz percent between July
and November. Thus, management was force­
fully reminded of the need to bring costs under
control at a time when labor was forcefully
reminded of the erosion of its own position by
the 3-percent rise in consumer prices. As the
gain in labor productivity fell behind the rise
in consumer prices, the productivity-based
guideposts which had governed labor-management negotiations during the several preced­
ing years came under increasing fire and in
many cases were completely ignored.
The pressures of prosperity showed up in
rising prices, which sharply affected both the
nation’s growth record and individual house­
hold budgets. Wholesale price trends showed
some improvement as industrial prices stabi­
lized after midyear and as farm prices returned
to their late-1965 level after a substantial
early-1966 increase. But the consumer index
showed, in addition to minor increases for
rent and non-food commodity prices, a 4percent rise in food prices (for the second
straight year) and an even sharper rise in
service prices (including a 9-percent rise in
medical costs).
The behavior of wholesale industrial prices
was somewhat encouraging in view of the
sharp pressures on output generated by the
massive tax cuts of several years ago and by
the more recent acceleration of defense spend­
ing. At the same time, the behavior of con­
sumer prices for food and services was some­
what discouraging, since rising prices cut into
workers’ real take-home pay and thereby
created a sticky atmosphere for upcoming
labor contract negotiations, which would have
been difficult enough anyway in view of man­
agement’s problems with rising costs and re­
duced profit rates.

Labor’s gains and fosses
Labor’s position was strengthened during
1966, however, by sharp increases in employ­
ment. The civilian labor force grew by 1.3



million during the year, but the economy ab­
sorbed all of this labor force increase plus
about Vs million displaced farm workers and
Vz million unemployed workers. The 2.1million gain in nonfarm employment, which
was almost one-third greater than the average
increase recorded during the earlier years of
this business expansion, thus helped reduce
the unemployment rate from 4.6 percent in
1965 to 3.9 percent in 1966.
The adult male working population actually
declined, because of such factors as the re­
duced growth of the adult population, a low­
er labor-participation rate, and the increase in
draft calls, so women and teenagers thus ac­
counted for 90 percent of the 1966 rise in total
employment. Incidentally, 1967 will be some­
what different; the increase in the teenage pop­
ulation will be only one-sixth as great as the
1966 increase, and the maturing of the crop
of early postwar babies will add one million
adult males to the population.
The unemployment rate held at or below
the 4-percent level during the entire year, for
the first time in a decade, but while the jobless
rate among adult males dropped to a practical
minimum of 2 Vz percent, the jobless rate
among certain other groups remained far
above the national average. For non-whites,
the jobless rate was twice the average; for
teenagers, it was three times as high.
At the same time, consumers as a group re­
corded a much smaller increase in individual
incomes than in the several preceding years.
Per capita income, after adjustment for rising
prices and rising taxes, increased about 3Vz
percent over the year as against increases of
4 Vz to 5 percent in the tax-cut period of
1964-65. So consumers in 1966 were forced
to content themselves with a somewhat small­
er improvement than in those happier years
when the ravages of taxes and of inflation were
reduced.
On balance, individual consumers, like in­
dividual sectors of the economy, showed a

February 1967

MONTHLY REVIEW

C o n su m e r secto r b o lste re d by sharp employment gain and by improvement
in jobless rate, but rising taxes and rising prices limit increase in real income
R e a l P e r C a p it a Incom e

M illio n * of W o rk e r*

P e rc e n t C h a n g e

0

I

Perce nt U ne m ploye d

2

T e e n -a g e r t

AM W o r k e n
F e m a le *

T ra d e a n d Serw ic it

A d u lt M a l »

widely varying range of performance as well
as a widely varying range of psychology. As
always, these differences came out during the
Christmas shopping period. At that time, one
department store catering to luxury lovers of­
fered for $ 119 a split-level solid-cherry Per­

sian-lamb-lined doghouse, while another de­
partment store catering to a different clientele
offered for $1 a “depression survival kit,”
consisting of an NRA sticker, a list of New
York soup kitchens, and a set of instructions
for building an apple stand.

Foreign Investment
Copies are again available of the article “Can We Afford to Invest Abroad?’’,
which appeared in the September 1964 Monthly Review.
The article provides a background analysis of the role of private capital flows in
the U. S. payments picture. The discussion includes definitions of different types of
private capital investments, the location of our investments abroad, the short- and
long-run impact of private capital outflows on the balance of payments deficit, and
the implications of private capital exports.
Copies of the article are available on request from the Administrative Service De­
partment, Federal Reserve Bank of San Francisco, 400 Sansome Street, San Fran­
cisco, California 94120.




FEDERAL RESERVE BANK OF SAN FR A N C IS C O

The String Pulls Taut
U. S. economy in 1966 enjoyed its
ring in the fourth quarter. At the same time,
sixth consecutive year of expansion and
total reserves of the member banking system
the first complete year of full employment in contracted at a 2.1-percent annual rate and
the past decade. This otherwise welcome con­
the money supply declined at a rate of almost
dition of high employment proved to be a
1 percent.
rather mixed blessing, however, as the strong
Higher revenues but higher spending
demand for goods and for credit generated in­
flationary pressures that were reflected in
Several different steps were taken to in­
price increases well above those recorded
crease Federal revenues in 1966. In January,
earlier in this expansion.
the social-security system boosted its reve­
nues, not by increasing the tax rate but by
Public policy was on the side of restraint,
lifting the coverage on wages and salaries from
but the distribution of the burden was quite
$4,800 to $6,600. Congress later rescinded a
uneven, as monetary policy was forced to
scheduled reduction in excises on automobiles
carry most of the load. In spite of increases in
and a number of other items, and it also
Federal taxes, through recision of earlier re­
speeded
up the collection of corporate-income
ductions in excise taxes and a speed-up in pay­
taxes and placed the Federal personal-income
ment schedules, the net effect of the Federal
tax on a graduated withholding basis, to re­
cash budget was expansionary. The lack of bal­
flect more closely actual tax liabilities. Then,
ance between monetary and fiscal policy led to
in October, in an attempt to take some of the
severely stringent conditions in the money and
steam out of the boom in business spending
capital markets in the third quarter of the
for
plant and equipment, Congress suspended
year, and interest rates thus jumped to the
until next January the investment tax credit
highest levels in more than 40 years. Yet by
on new capital and the accelerated deprecia­
yearend, as the demand for credit slackened
tion allowance for commercial and industrial
and the likelihood of tax actions increased, the
building.
Federal Reserve eased its pressure upon bank
he

T

reserves and bank lending policies.

28

In addition to the sharp differences in the
incidence of monetary and fiscal policy, sig­
nificant shifts in policy also developed be­
tween the two halves of the year. In the first
half of the year, Treasury policy was relative­
ly restrictive, with a surplus of about $3.1
billion at a seasonally adjusted annual rate
(national-income accounts basis). However,
in this same period, reserves of the member
banks increased at an annual rate of 4.4 per­
cent and the money supply rose at an annual
rate of 4.7 percent. In the second half of the
year the roles were reversed. The Federal
budget was in deficit at a $2.7-billion annual
rate, with the largest part of the deficit occur­




February 1967

MONTHLY REVIEW

On the expenditure side of the ledger, na­
tional security outlays rose by more than $9
billion, reflecting the intensification of mili­
tary operations in Vietnam. Also, Federal
pay increases and the advent of the Medicare
program boosted nondefense spending in the
third quarter of the year.
The cash budget for 1966 showed a deficit
of around $7.5 billion. On a national-income
accounts basis, however, there was a very
small surplus, amounting perhaps to about
$0.2 billion. This budget concept, which fo­
cuses on the net Federal contribution to the
income stream of the economy, thus indicat­
ed a very modest degree of restraint, wholly
insufficient to contain the expansionary forces
in the private sector of the economy. (Some
observers argue that even this restraint was
illusionary because of the rapid upsurge in
new defense obligations, which rose more
sharply than expenditures during the year.) In
order to have acted as a brake upon the infla­
tionary pressures which a sharply rising level
of total demand for goods and services had
created, the budget surplus on an NIA basis
would have had to have been much larger than
it actually was.

Monetary policy takes hold
Federal Reserve policy measures took a
number of forms in 1966. The discount rate
remained at the 4Vi-percent level set in De­
cember 1965, But in its effort to make policy
more restrictive, the Federal Reserve relied
not only on open-market operations but also
on its controls over reserve requirements and
its ceilings on member-bank time-deposit in­
terest rates.
In July and again in September, the Board
of Governors increased by one percent the
reserve requirements against time deposits in
excess of $5 million. Promissory notes and
other forms of indebtedness of banks were de­
fined as deposits and made subject to reserve
requirements under the provisions of Regula­



tions D and Q. The maximum rate payable on
time deposits of multiple maturities and time
posits of less than $100,000 was reduced to
5 percent.
Perhaps as important as this reduction in
ceiling rates was the staunch retention of other
ceilings in the face of heavy pressures to raise
them. The maximum rate on negotiable time
certificates of $100,000 and over— a major
source of commercial bank funds over the
past five years— was held unchanged at
percent, and the ceiling rate on passbook sav­
ings deposits remained at 4 percent despite
massive shifts of funds from such deposits to
special savings certificates.
On September 1, Reserve Banks circulated
a letter to the member banks which stated that
a further increase in loans— especially busi­
ness loans— at the rate that had taken place
earlier in the year was not in the public in­
terest. Member banks were urged not to liqui-

M o n e ta ry p o licy sharply restrictive,
but fiscal policy eases in second half

FEDERAL RESERVE BANK OF SAN FR A N C IS C O

In te re st ra te s resp o n d to strain
of credit markets' summer crunch

ments against demand deposits. These, how­
ever, have been at their current levels since
1960.

Credit markets: the summer “ crunch”
C om m e rcia l P a p e r

D isc o u n t Rote (N Y .)
T re a s u ry B i l l *

L O N G -T E R M

M o r tg a g e s (New Home)

C o rp o ra t e Bond s

Treasury Bonds

M u n ic ip a l B o n d s

date securities to meet the demand for loans,
since this would simply place pressure on in­
terest rates in other financial markets. The
letter indicated that the Reserve Banks would
accommodate member banks for longer pe­
riods than usual at the discount window to
help banks readjust their business-loan port­
folios without selling off securities. This letter
was withdrawn late in December when it ap­
peared that the hitherto intense demand for
credit had begun to taper off.
Most of the monetary measures taken
throughout the year—aside from opcn-market
operations— were directed towards either in­
terest rates or reserve requirements upon time
and savings deposits. This is quite unusual in
a period of monetary restraint, for the more
usual approach to monetary restraint in this
area is through increases in reserve require


In July and August, as the money and cap­
ital markets came under considerable strain,
interest rates rose to their highest levels in
over a generation. The market yield on 91-day
U. S. Treasury bills climbed above the 5Vipercent mark, and for a time in late August,
the yield on certain intermediate-maturity
Treasury bonds reached the neighborhood of
6 V4 percent. The upward trend in interest
rates extended to corporate and municipal se­
curities as well as Treasury issues. While the
demands upon the credits markets were in­
creasing, the supply of funds entering the
markets declined. Savings and loan associa­
tions were hard pressed and the influx of funds
to commercial banks dipped well below the
year-earlier pace.
The sources of demand for credit were
readily identifiable. There was a heavy de­
mand for funds on the part of corporations,
both from banks and in the capital markets,
since a high rate of business spending and
higher tax liabilities came at a time when cor­
porate liquidity was declining. The Treasury,
meanwhile, after repaying about $5.4 billion
of debt in the first half of the year, borrowed
$10 billion of new money in the second half
to offset the usual seasonal decline in the flow
of receipts.
Federal agencies were yet another source
of demand for funds. Sales of agency securi­
ties mounted to $2.6 billion in the second
quarter of the year and remained high in the
following quarter. Ancillary to the Federal
agency securities were the offerings of partici­
pation certificates in pools of loans held by
various Federal agencies. These issues were
not new to the market, but their large volume
was both new and somewhat unsettling. In

February 1967

MONTHLY REVIEW

order to take some of the pressure off the
credit markets, President Johnson ordered a
suspension of the sales of participation cer­
tificates in early September.
The heights to which market yields on se­
curities rose during the summer added to the
banks’ problems. Yields were well above what
individual investors might earn on their funds
at savings-type institutions. This brought
about a process of “disintermediation”, where
individuals invested directly in securities ra­
ther than placing their funds with banks and
other financial intermediaries.
In early September interest rates started to




decline from their highs, and they receded
further during the remainder of the year. Cor­
porate offerings in the capital market were
well below the September figure, as were the
offerings of municipal issues. In addition, the
pace of business lending at commercial banks
slackened perceptibly after July.
The money and capital markets thus ended
1966 on an easier note, but it could hardly
be said that any real slack developed in these
markets. Interest rates continued to remain
at high levels by all historical standards. Still,
there was a return to a better balance between
the demand for and the supply of funds.

FEDERAL RESERVE BANK OF SAN F R A N C IS C O

Towards Balance?
international transactions of the U. S.
in 1966 were significantly influenced by
developments in the domestic economy as well
as by developments abroad. Attainment of a
high-employment level of output, while bring­
ing internal and external policy goals within
the same target area, also brought with it
mixed balance of payments effects. As cyclical
forces accelerated the long sustained domestic
expansion and propelled the economy beyond
the rate of resource utilization compatible
with general price stability, demand pressures
spilled over into the external sector, causing
expenditures for foreign goods and services to
rise. Both the trade surplus and the overall
goods-and-services surplus declined.

T

he

Tighter credit conditions in the U. S., espe­
cially during the summer months, reinforced
the voluntary programs designed to restrain
U. S. capital outflows. These conditions were
also reflected in a rising volume of U. S. liquid
liabilities to foreign banks, primarily branches
of U. S. banks abroad, especially during the
third quarter.
Rising defense expenditures at home and
abroad reflected our military presence in Viet­
nam. These outlays contributed to both direct
and indirect balance of payments drains. Do­
mestically, Vietnam expenditures during the
year were quite small in relation to our na­
tional output, but their marginal impact on
an economy already operating at a very high
level was probably much greater than this
relationship would suggest. This increment of
demand contributed indirectly to our total
payments abroad, as did direct foreign outlays
associated with our operations in Vietnam.

Deficit or surplus?
The net result of all these transactions is
open to differing interpretations, partly be­
cause of different results shown by alterna­



tive measures of the balance of payments. The
principal measures are calculated either on
the basis of changes in U. S. monetary assets
and liquid liabilities or on the basis of changes
in U. S. official-reserve transactions.
On the basis of official-reserve transactions
— which measures changes in U. S. reserve
assets and in liquid and certain nonliquid lia­
bilities to foreign official institutions— the first
three quarters of the year actually showed a
$0.7-billion surplus (seasonally adjusted an­
nual rate) because of a sharp improvement
in the accounts during the summer months.
This third-quarter improvement reflected the
British exchange crisis of last summer and the
vigorous efforts of U. S. banks to ease the
effects of tight-credit conditions at home by
gaining foreign deposits through their branches
abroad.
However, on the liquidity basis— which in­
cludes changes in private foreign holdings of
liquid claims against the U. S. as well as
changes in claims of foreign official institu­
tions and in U. S. reserve assets— the JanuarySeptember period showed a prospective an­
nual deficit approximating the previous year’s

MONTHLY REVIEW

February 1967

$1.3-billion liquidity deficit. But unlike 1965,
when virtually the entire deficit was “financed”
by a $ 1.2-billion decline in monetary reserve
assets, it appeared as 1966 drew to a close that
a major part of the deficit would show up
as a rise in liquid liabilities. However, our gold
holdings and IM F gold-tranche position to­
gether declined by over a billion dollars, but
this decline was partially compensated by a
rise of about half that amount in foreign cur­
rency holdings, principally British pounds.
Despite differences regarding the actual
size of the deficit— or surplus— there was
little doubt about the principal factors influ­
encing the U. S. payments situation last year.
Compared with 1965, the 1966 record re­
vealed a smaller trade surplus; a reduction of
the surplus on services account because of
mounting military expenditures; and some re­
duction in the rate of outflow of U. S. direct
investment and other private U. S. long-term

O v e r a ll p a y m e n ts situ atio n
improves, though import boom
reduces trade balance
B illio n s of D o lla rs




J a n . - Sept .

capital. Among the most important develop­
ments in our payments situation through the
third quarter was a substantial rise in U. S.
liquid liabilities to foreign private entities.
Nonmilitary Government grants and capital
outflows, excluding nonscheduled repay­
ments, appeared likely to exceed those of the
previous year.

Goods and services
As the year progressed, our international
transactions continued to reflect the war in
Vietnam and the very high level of economic
activity at home. Payments for goods and
services rose as military expenditures abroad
increased and as merchandise imports mount­
ed in response to the pressure of domestic de­
mand on available productive capacity. Re­
ceipts also rose, but as the year came to a
close it appeared that the goods-and-services
surplus would amount to some $5.1 billion,
considerably short of the $6.9 billion surplus
experienced in 1965. This decline reflected a
drop of more than a billion dollars in the trade
surplus as exports rose by 11 percent while
imports increased by nearly 20 percent. Mili­
tary expenditures abroad are believed to have
risen by over $700 million in 1966. Income
on U. S. investments abroad, projected from
seasonally adjusted data for nine months,
seemed likely to exceed last year’s receipts
by $400 million, but after netting out in­
creased payments to foreigners on their in­
vestments in the U. S., the year-to-year balance-of-payments gain from investment in­
come probably was on the order of $200 mil­
lion.
Substantial official payments to the U. S.
Government eased the U. S. payments posi­
tion in the third and fourth quarters. Signifi­
cant contributions of this type were $220 mil­
lion in advance debt repayments by France
and Italy in the third quarter, which improved
both the liquidity and official - reserve
transactions balances. There had been only

FEDERAL RESERVE BANK OF SAN FR A N C IS C O

minor nonscheduled debt repayments during
the preceding three quarters.
As the end of the year approached, the
Federal Republic of Germany announced the
payment of $450 milhon to offset U. S. mili­
tary expenditures in Germany. Of this amount,
$200 million represented early repayment of
German postwar debts to the U. S., while the
balance was for military goods to be supplied
by the U. S.
Our balance of payments was further aided
by a year-end $ 148-million payment covering
interest and part of the principal on U. S. post­
war loans to the United Kingdom. This is the
first payment on this debt since 1963.

Private capital flows
Total U. S. private capital— including re­
demptions and other transactions in foreign
securities, and before adjustment for corpo­
rate funds acquired abroad— continued to
flow abroad during January-September 1966
at about the same seasonally adjusted annual
rate as in 1965, although at a slower rate than
in 1963 and 1964.
After about midyear, however, the growth
in claims slackened; in the third quarter the
outflow declined to $713 million from $928
million and $1,094 million in the first and sec­
ond quarters, respectively. Of the total of
these amounts, $529 million represented re­
invested funds raised abroad through borrow­
ings and new security issues of U. S. corpora­
tions, After adjustment for such foreign fi­
nancing, the dollar outflow on U. S. private
capital account in 1966 probably represented
an improvement of some $0.5 billion com­
pared with the previous year.
Direct investment, which accounted for
most of the outflow, totaled nearly $2.4 billion
on a seasonally adjusted basis through the
third quarter. Of this amount, $313 million
represented funds raised abroad by U. S. cor­
porations. For the year as a whole, direct in­
vestment (after adjustment for funds raised



abroad) probably did not exceed $3 billion,
compared with $3.3 billion in 1965. Based on
incomplete data, the bulk of the direct invest­
ment flow in 1966 was to Canada and conti­
nental Western Europe.
Capital outflows arising from U. S. trans­
actions in foreign securities were probably
somewhat less than in the previous year. This
improvement occurred despite a rather large
first-quarter outflow, over $450 million, in
the form of purchases of securities newly
issued in the U. S. In the second quarter, such
purchases fell sharply, but subsequently rose
to $274 million on a seasonally adjusted basis
in the third quarter.
Short- and long-term claims of U. S. banks
on foreigners declined again in the third quar­
ter as they had in the first quarter. Taking into
account a rise of $124 million in the second
quarter, the balance of such claims through
September registered a decline of $253 mil­
lion, $174 million being in long-term and
$79 million in short-term claims. The reduc­
tion in short-term claims in the main reflected

P riv a te ca p ita l outflo w s reduced
under influence of guidelines
B i l l io n s of D o l l a r i

February 1967

MONTHLY REVIEW

reflows from Japan, while the decline in long­
term claims to a large extent involved trans­
actions with continental Western European
countries.
While the overall reduction in bank claims
of course is not attributable solely to the vol­
untary credit-restraint program, the program
has undoubtedly played a major role in switch­
ing the movement in bank claims from a $2.5billion capital outflow in 1964 just prior to the
beginning of the program, to inflows of $94
million in 1965 and $253 million through
September 1966.
However, strong domestic demands for
credit, in a period of credit restraint such as
prevailed during much of 1966, certainly were
more important than the program in restrain­
ing banks’ foreign lending. A t the end of the
year, U. S. commercial banks were still some­
what below the December 1964 base— and
nearly $900 million below the 109-percent
ceiling suggested by the Federal Reserve
guidelines for 1966.
During the first three quarters of 1966, non
bank financial institutions participating in the
program reduced their holdings of foreign as­
sets by $72 million.
Compared with a total outflow of $730 mil­
lion in 1965, this represents a substantial con­
tribution to the improvement of our balance
of payments.
As the year drew to a close the Board of
Governors issued new guidelines for financial
institutions cooperating in the President’s vol­
untary program to improve the nation’s bal­
ance of payments. The new guidelines for
banks retain the 1964 base and the previous
ceiling of 109 percent of that base. However,
banks are requested to limit the use of their
leeway as of September 30,1966, to a rate not
exceeding 20 percent thereof per quarter be­
ginning with the fourth quarter of 1966. In
addition, in order to give added stimulus to
priority credits, banks are requested to limit
the increase in credits other than those that



finance exports or which meet credit needs of
developing countries, over the amount out­
standing on September 30, 1966, to 10 per­
cent of the total possible expansion, or about
$120 million.
The program for nonbank financial insti­
tutions has been greatly simplified. The three
guidelines used in the 1966 program are re­
placed by a single guideline which permits an
increase of 5 percent during the 15 months
ending December 31, 1967, in assets covered
by that guideline. In addition, certain assets
such as bonds of the International Bank for
Reconstruction and Development and the
Inter-American Development Bank are now
excluded from the definition of “covered”
assets.
A revised program for nonfinancial cor­
porations, administered by the Department of
Commerce, has also been adopted. This calls
upon participating corporations to increase
their contributions to improving the balance
of payments in 1967 on major selected trans­
actions by at least $2 billion above the 1966
level. The specific target for direct-investment
capital transactions calls for corporations to
limit the average annual rate of these trans­
actions in programmed countries in 1966 and
1967 to no more than 120 percent of the an­
nual average level during the years 1962-64.

Movements of foreign capital
Foreign direct investment declined by $135
million in the third quarter after registering
nominal increases totaling about $50 million
through midyear, and $71 million for all of
1965. Foreign investment in U. S. securities
(other than Treasury issues) fell considerably
more during the summer period, declining
from $504 million in the second quarter to
some $145 million in the third. Over twothirds of this decline occurred in U. S. corpo­
rate securities issued to finance foreign invest­
ments. However, during the first three quar­
ters of the year, foreign investment in U. S.

FEDERAL RESERVE BANK OF SAN F R A N C iS C O

securities rose by $828 million compared with
a reduction of $456 million in the same period
of 1965.
During the third quarter, liquid liabilities
to all foreigners rose $630 million. Included
in this inflow was a $1,170-million increase
in liquid liabilities to foreign banks, mainly
foreign branches of U. S. banks, attributable
in part to the credit stringency in the U. S.
which caused banks here to seek dollar funds
abroad, and to the weakness of the British
pound during the summer months. Smaller,
but still substantial increases in such liabili­
ties had occurred in the first two quarters.
These movements reflected the ability of for­
eign branches of U. S. banks to pay higher
interest rates on deposits than their home
offices in the U. S. can pay. In response to
this, some transfer of private and official de­
posits from U. S. banks to U. S. branches
abroad evidently occurred. In addition, for­
eign private entities evidently sought to ac­
quire or hold additional dollar claims, thus
diverting such assets from foreign official en­
tities.

Equilibrium—still ahead
Most observers anticipated at year-end that
the 1966 deficit measured on the liquidity
basis would be greater than 1965’s $1.3-bil­
lion deficit. Although deficits of this size are
still far beyond the officially defined equilib­
rium range of ± $250 million, they are at
most only half as large as those of the preced­
ing two years and substantially below that of
any year since 1957. However, the emergence
of another fairly substantial deficit in 1966,
even if it were to be somewhat less when fin­
ally tallied than that of the preceding year, is
disappointing particularly in view of the vari­
ous efforts we have made to reduce it.
Even so, it is significant that the 1966 deficit
was held to a comparatively low level in the
face of increasingly active warfare in Vietnam
and some overheating of the economy at home.



In the absence of these developments the defi­
cit almost certainly would have been smaller—
perhaps considerably smaller— than it was.
The large third - quarter official - reserve
transactions surplus is impressive, but not
yet sufficiently reassuring as an indicator
of progress toward achieving a sustainable
equilibrium in our external accounts. The
surplus was accompanied by a very substantial
inflow of highly volatile foreign liquid capital
which can easily cease or be reversed. An eas­
ing of domestic inflationary pressures, accom­
panied by easier credit conditions such as were
developing here toward the end of the year,
would at least reduce pressures on U. S. bank
reserves and lessen the inducement for banks
to draw in deposits through their branches
abroad.
Similarly, the contribution of the British
pound crisis to the third-quarter inflow was
a unique occurrence, and an improvement in
the British reserve position could be expected
to lead to a transfer of liquid dollar assets from
foreign private to foreign official holders. Al­
though such a shift would have little effect on
the liquidity measure of the deficit, it would
of course worsen the deficit on the reserve
transactions basis.
The reduction in our trade balance in 1966
may not have run its course and may not be

February 1967

MONTHLY REVIEW

easily reversed if domestic demand remains
at high levels even though inflationary forces
are contained. If a wage-price spiral ensues
— and major labor contract negotiations are
close at hand— our competitive position in
world markets may be jeopardized. In these
circumstances our trade surplus could easily
decline further.
As the year ended, a satisfactory equilib­
rium in our international accounts on a long­
term sustainable basis remained a goal to be
achieved. If further progress is to be made and

ultimate success attained, appropriate domes­
tic policies will be an essential prerequisite.
Beyond this lies the potential of further devel­
opment of our financial relations with other
countries. Through this means the policies,
practices and mechanisms needed to facilitate
balance-of-payments adjustments may grad­
ually be developed. Progress in this field as
in other areas of international economic co­
operation may, and almost certainly will, be
slow, but its importance to the development
and expansion of the world economy can
hardly be overemphasized.

Knowledge, Science,
and Aerospace
This collection of Monthly Review articles describes the key role of “knowledge
investment”— education plus research and development—in the growth of the natonal and regional economies, and it emphasizes the advantage held by the West
in the economic-growth competition because of the region’s heavy concentration
of scientific talent. As a case in point, the report describes the important part that
the Western knowledge sector played in the past in attracting a major share of Federal
aerospace contracts— and the equally important part it played in cushioning the
decline when the aerospace boom subsided.
Copies of “Knowledge, Science, and Aerospace” and other Monthly Review
publications are available free upon request from the Administrative Service Depart­
ment, Federal Reserve Bank of San Francisco, 400 Sansome Street, San Francisco,
California 94120,




FEDERAL RESERVE BANK OF SAN F R A N C IS C O

The Markets
glance, the credit markets be­
h a v e d much the same in 1966 as in
1965, since a very large volume of funds was
again raised to finance the expenditures which
pushed GNP to another new peak. But net
funds borrowed, at $70 billion in 1966, actu­
ally fell below the 1965 total, and the chan­
neling of these flows also shifted strongly
during the year.
As in the preceding year, business borrow­
ing dominated the scene; in fact, business
firms absorbed an even larger percentage of
the total funds raised. With the exception of
the Federal government, none of the other
major sectors increased its share, although
each increased its total indebtedness.

A

t f ir s t

The most striking developments occurred
on the supply side rather than the demand
side. Here there were major shifts in the
sources of finance. The most important
change was the sharp decline in the commercial-bank position; the banks supplied only
20 percent of total credit in 1966 as against
40 percent of the total in the preceding year.
At the same time, nonbank financial institu­
tions also suffered a declining share, while
households increased their share and in fact

F in a n cia l in stitutions supply less
funds, but households act to fill gap
B i l l i o n s of D o l l a r s
r~~
Ra tio S c a l e

N on b an k Fin anc e

20.0

10.0
P r in o t e B u s i n e s s ond

5.0

S t a t e - L o c a l G ov e r n m e n t

3.0




R e se r v e

supplied almost as much funds as the com­
mercial banks. New developments also oc­
curred in the pattern of market instruments
used by borrowers to obtain funds.
Behind many of these changes stood mone­
tary policy, which aimed at restraining the
growth of credit and therefore introduced new
pressures on the capital markets. The most
obvious reaction to 1966’s monetary policy
was the rise of interest rates to levels not
seen for almost forty years. Yet interest rates,
no matter how much they attracted attention,
merely reflected the interaction of market
forces which must be explained individually.

Supply: restricted sectors
The commercial banks, which had supplied
$30 billion in funds to the capital markets in
1965, were only able to provide $17 billion of
1966’s total supply of $70 billion. This rever­
sal of the trend toward an expanded bank role
was of course due to monetary policy. Mone­
tary policy bears initially upon the banking
system, from where it spreads its impact
throughout the capital markets. The shift to­
ward greater tightness consequently was felt
very strongly by the banks, which had already
moved toward the limits of their lending ca­
pacity at the beginning of the year and were
therefore vulnerable to restrictions on their
lending capacity.
Other financial institutions, which felt the
greater restrictiveness through changes in the
supply of funds and the relative structure of
yields, were affected even more than the com­
mercial banks. These institutions reduced
their supply of funds from $27 billion in 1965
to $20 billion in 1966— and their share of
total flows was the lowest of the postwar pe­
riod. Within this sector, savings-and-loan as­
sociations suffered the biggest drop; their
lending fell to $4 billion for the year, or half
what it had been in the year before.

February 1967

MONTHLY REVIEW

Supply: growth sectors
The pressures on the usual institutional
lenders forced borrowers to search out alterna­
tive sources of funds. One major result was
a sharp increase in direct lending by house­
holds, which supplied $12 billion to the capi­
tal markets in 1966, vs. $3 billion in 1965.
With higher yields available on credit market
instruments than on bank deposits, a strong
incentive was provided for households to shift
to direct lending and away from indirect lend­
ing through financial institutions.
Households built up time and savings de­
posits at a slower rate than they had the pre­
vious year— $19 billion against $26 billion.
Their shift to other financial assets was con­
centrated in Treasury securities and statelocal government securities, as higher yields
in each case induced a significant shift in
funds. Substantial though smaller amounts
went into the purchase of corporate stock and
bond issues— in contrast to the earlier years
of the current expansion, when households
steadily reduced their direct holdings of stocks
and bonds.
The other important new source of lending
was the Federal government, which supplied
$7.5 billion in 1966, or half again as much
as in 1965. In particular, Federal agencies
such as the Federal National Mortgage Asso­
ciation acted to provide second ary-market
support when the usual credit sources found
it difficult to meet the demand for loans.
Meanwhile, the non-financial business sector
also stepped up its direct lending to take ad­
vantage of the higher yields of market instru­
ments and, in the case of trade credit, to sup­
ply needed finance to its customers. The total
volume of this business lending was $4 billion.
The scope of the major change in financ­
ing which occurred during 1966 shows up in
the shifting pattern of financial assets acquired
by lenders. Total demand and savings accounts
increased by only about $23 billion in 1966,
as against $40 billion in 1965. On the other



hand, publicly-held Federal securities in­
creased by practically $6 billion. More im­
portant still, the public acquired $14 billion
in credit market instruments—twice as much
as in any earlier year— as businesses found
that financial institutions could not supply
needed funds and thereupon turned to the di­
rect sale of credit instruments.

Demand: business and households
The non-financial business sector, one of
the strongest driving forces behind the 1966
expansion, raised more than $33 billion in the
credit markets during the year (as against
$30 billion in 1965) and thus pushed its
share of total financing to 45 percent. This
greater reliance upon external sources of
funds was not due to any lack in the growth
of internal funds, for gross savings increased
by $4 billion during the year to a record total
of $74 billion. But the even greater ($10 bil­
lion) rise of expenditures, to a total of $92
billion, forced business to turn to external
lenders.
Households, like business, had more in­
come in 1966. Personal income reached $506
billion, with a $3 5-billion increment, and per­
mitted consumer spending to rise to $478 bil­
lion. Nonetheless, consumer financial beha­
vior was influenced by 1966’s stringent credit
conditions. While households increased their
role as lenders in response to higher market
yields, they borrowed less than in either of
the two preceding years to finance their rec­
ord level of expenditures. The increase in
household indebtedness, $23 billion, was still
substantial, but reduced gains were recorded
in each of the major categories of household
borrowing, especially mortgages.

Demand: governments
The Federal government was the only sec­
tor (besides business) that raised more funds
during the year. Its total debt rose $9 billion
to a total of $280 billion at the end of 1966.
This increase was not, as might be expected,

FEDERAL RESERVE BANK OF SAN F R A N C IS C O
directly caused by greater Federal spending
programs, for the budget was practically bal­
anced on a national-income accounts basis.
Rather, the increase in debt was due to the
expanded lending activities of Federal agen­
cies.
The Federal government last year acted as
a giant financial intermediary, borrowing
from one part of the public to lend to another
part of the public, and thereby took over the
role which other institutions were unable to
play because of disturbed credit conditions.
Federal agencies floated almost $7 billion in
long-term issues in the securities markets, or
almost twice as much as in the two previous
years combined. But overall, Federal debt in­
creased more slowly than Federal revenues,
and the Federal share of total debt declined.
State and local governments, with net bor­
rowing of under $7 billion, expanded their
borrowing more slowly in 1966 than in 1965.
This slower growth is attributable in part to
monetary restraint, which caused the post­
ponement or reduction of various borrowings,
and in part to increased state-local revenues.
New municipal security issues raised $11
billion in gross receipts. Approximately onethird of these issues went for educational pur­
poses— somewhat less than the year before—
and another one-third was split between water
and sewage projects and highway and other
transportation projects. There was also a shift
in the composition of purchases. Higher yields
made municipals more attractive to individual
buyers and so households bought $4 billion
of these securities, while restrictive monetary
policy limited the commercial banks to ab­
normally low purchases of only $2 billion.

Tumult and flexibility
The first impression of 1966 is one of
change and tumult in the capital markets. But
the year also exhibited something else— the
marvelous flexibility of the nation’s financial
system. Here were markets which faced simul­



taneously a record demand for finance and a
restrictive monetary policy which bore most
heavily upon the prime sources of funds, the
banks and the nonbank financial institutions.
Yet the markets permitted, albeit with some
grinding of gears, a successful shift to alterna­
tive channels which had not been so fully uti­
lized before.
With a combination of more direct issues
and suitable price adjustments in the form of
different relative yields, a record volume of
financing was accomplished. This does not
mean that all borrowers or lenders were happy
with developments during the year; this
cannot be expected, since some adjustment of
plans is inherent in the adjustment process.
But the record for 1966 confirmed that the
financial markets can respond to changes in
relative prices of borrowed funds by re­
arranging patterns of financial flows around
the bottlenecks that inevitably arise.

February 1967

MONTHLY REVIEW

Disintermediation
proportion of total bank lending, businesses’
is not likely to be re­
share was much greater— over two-thirds,
membered by the nation’s bankers as
compared
with two-fifths the year before. Less
just another year. True, developments in a
than half of the major industrial sectors in­
number of respects suggested a retelling of
creased their borrowings more rapidly during
1965’s banking story— most notably a further
1966— most notably primary metals, machin­
vigorous demand for credit on the part of busi­
ery, transportation equipment, chemicals, and
nesses, and additional changes in the groundfood processors. But with the exception of
rules designed to affect the ability of banks
commodity dealers and the construction in­
and other financial institutions to compete for
dustry, borrowings by other industry groups
the supply of loanable funds. But there were
were still very substantial by historical stand­
some new twists as well.
ards.
In 1965, the combined effect of market
forces and regulatory changes enabled com­
The continuing strength of business loan
mercial banks to sharply expand their share
demand reflected the continued sharp rise in
of funds raised in and supplied to the credit
plant-equipment outlays, the need to finance
markets. In 1966, however, these factors
higher levels of inventory, and stepped-up tax
tended to reduce the banks’ role quite sub­
payments— all of which widened the gap be­
stantially. The process involved, known as
tween outlays and internally generated funds
“disintermediation,” meant in effect that busi­
and increased the need for external financing.
nesses, households and governments reduced
Nevertheless, banks accounted for a smaller
both their deposit flows into the banking sys­
proportion of business’ expanded credit needs
tem and their borrowings from the banking
in 1966, due in part to a progressive stiffening
system.
in both price and non-price terms of lending.
(The prime rate rose from 4 Vi percent in Jan­
As suppliers of credit, commercial banks
uary to 6.0 percent in August.) Reflecting
accounted for only one-fifth (about $17 bil­
these changes, the average rate on short-term
lion) of the total funds supplied to the credit
business loans made by banks in major finan­
markets in 1966— a little more than half the
cial centers increased by somewhat more than
proportion realized during the previous year.
And, in marked contrast to each preceding
a percentage point (to 6.31 percent) from De­
year of the 1961-66 business expansion, bank
cember to December, and the proportion of
credit growth, at a 6-percent annual rate, was
loans made at less than 6 percent dropped
slower than the pace of either total debt or
from 84 percent to 3 percent over that same
of GNP.
period.

N

in e t e e n six t y - six

Business boom

Boom curbed

The business sector, in 1966 as in 1965,
accounted for most of the rise in bank credit,
notwithstanding the absence of the special fac­
tors, such as the dock strike and threat of a
steel strike, which contributed to 1965’s ex­
ceptionally large rise in borrowings. At $10
billion, the net gain in business loans fell
somewhat short of 1965’s increase, but as a

During the first seven months of the year,
however, business loans expanded at an an­
nual rate of 22 percent (30 percent in June
and July) and gave little evidence of moderat­
ing in the face of higher borrowing costs. This
upsurge may have been due to a strong expectational element in loan demand, as corporate
treasurers correctly anticipated higher costs




FEDERAL RESERVE BANK OF SAN F R A N C IS C O
of raising funds not only from banks but in
the bond markets as well— a consideration
underscored by the late-summer rise in bond
yields to 40-year highs. In fact, to meet the
heavy business demands for funds, banks
greatly accelerated the liquidation of their se­
curity portfolios— particularly U. S. Govern­
ments— and this factor itself contributed to
the runup in yields.
Concerned over the implications of these
trends for orderly conditions in the security
markets, as well as for the banks’ own liquid­
ity, and concerned that the rapid rise in
business loans was contributing to inflationary
pressures, the Federal Reserve System moved
in midsummer to curb the growth of business
lending. One important measure was the let­
ter of September 1, which strongly urged
banks to curb their business loans while at the
same time assuring them that the discount
window would stand ready to assist in adjust­
ing their positions if necessary to forestall a
further liquidation of securities.
The restraining action taken by the banks
and the easing of market pressures generally
quickly reduced the growth in business loans,
to a 5 Vi-percent annual rate in the final quar­
ter of the year, and made possible the with-

B a n ks s u p p ly only half as much credit
as in ’65, despite business-loan boom
B i l l i o n s of D o l l a r s




drawal of the Federal Reserve letter on Decem­
ber 28.

Other demands on banks
While business again obtained the lion’s
share of bank credit in 1966, consumers and
mortgage borrowers also found accommoda­
tion, but, like their business counterparts, at
a higher cost and reduced volume. Consumer
loans rose by a little over $3 billion (8 per­
cent), with two-thirds of the increase repre­
senting auto financing. On balance, however,
banks financed only about two-fifths of con­
sumer credit, down from the one-half share
maintained in the earlier years of this business
expansion.
Mortgage portfolios rose by less than $5
billion (9 percent), as the banks just about
maintained their one-fifth proportion of a
sharply reduced total of real-estate loans.
While banks were holding their own, non­
bank financial institutions found their com­
bined share declining sharply; savings-andloan associations alone suffered a one-half re­
duction in net mortgage lending, and thereby
saw their share decline from one-third to less
than one-fifth of the total.

February 1967

MONTHLY REVIEW

B u sin e ss-lo a n g ro w th slo w s s h a rp ly in late '66 after first-half upsurge
. . . loan demand sparked by boom in durable-goods manufacturing
Cum ula te d Net C h a n ge
B ill io n s of D o lla r s

C u m u la te d C h a n g e
B ill io n s ol D o lla r s
-

M ETALSM A C H IN E R Y T RAN SPO RT.
E Q U IP M E N T

OTHER D U R A BLE
M A N U F A C T U R IN G

NONDURABLE

M A N U F A C T U R IN G

I
TRADETRANSP.

M IN IN G

■ II n

1964

Banks also sharply moderated their acqui­
sition of state-local government obligations
during 1966. As holdings of tax-exempt se­
curities rose by only about $3 billion, banks
garnered less than a third of the net increase
in municipal debt obligations— substantially
less than the average share of two-thirds real­
ized by banks in the earlier years of the cur­
rent expansion.
But more significant was the accelerated
liquidation of U. S. Government security
portfolios, as banks found their growth of re­
serves and deposits insufficient to meet the
credit demands of businesses, consumers and
local governments. Most of the $3*/^-billion
net decline in holdings of U. S. Governments
centered in short-term issues, and this decline
thus pushed one traditional measure of bank
liquidity, the ratio of short-term governments
to deposits, to a postwar low. (Another mea­
sure, the loan-deposit ratio, reached a yearend record of 67 percent for all member banks
and 84 percent for New York City member
banks.) But in the face of a slowdown in
loan growth, a generally improving reserve



1985

1966

C O N S T R U C T IO N

1966

position, and a rallying bond market, banks
exerted considerable effort to improve their
liquidity positions during the closing months
of the year.

Pressure on deposit side
“Liquidity” depends, of course, upon
sources of funds as well as their uses, and it
was on the sources or deposit side of the
ledger that some of the more interesting chap­
ters in 1966’s banking story were written. De­
mand deposits rose by only $V2 billion, just
a fraction of the 1965 increase, as households
and other sectors held working balances to
a minimum while shifting funds into highyielding time deposits and other debt instru­
ments. (In fact, households and governments
actually reduced their holdings of demand
balances and currency.)
On the other hand, time and savings de­
posits again showed a substantial increase, but
at $ 11 billion, the gain was little more than
half that of 1965. The slower growth in bank
reserves, the growing squeeze on business
funds, and the rise in market interest rates
all contributed to this slowdown in time-de-

FEDERAL RESERVE BANK OF SAN FR A N C IS C O
posit flows. In addition, advancing rates on
money-market instruments reduced the com­
petitive attractiveness of deposits subject to
the ceilings of Regulation Q— 4 percent on
passbook savings and, until late July, 5V2
percent on other time deposits.
In July, however, the ceiling was rolled
back to 5 percent on multiple-maturity time
deposits (other than savings) of 90 days or
more, and to 4 percent on such deposits of
less than 90 days maturity. In August, a
further rollback, from 5Vi percent to 5 per­
cent, was effected on single-maturity time de­
posits (other than passbook savings) of less
than $100,000. These moves, which were ac­
companied by the imposition of interest-rate
ceilings on savings-and-loan associations
and mutual savings banks, were specific­
ally designed to maintain “a viable com­
petitive balance” between banks and other
depositary type institutions and, hopefully,
to assure a greater flow of funds to housing.

D isin te rm e d ia tio n : banks account
for smaller share of credit flows
C o m m e r c i a l - B a n k S h a r e of C r ed it Fl o w s ( P e r c e n t )

0

10

44



20

30

40

50

60

(In 1966, the gross inflow of deposits into
S&L’s increased by 15 percent, but withdraw­
als were up by over 34 percent.)
In a series of related moves, reserves on
bank time deposits in excess of $5 million
(other than passbook savings) were raised
twice, from 4 to 5 percent in July, and to 6
percent the next month. By raising the cost
of funds to banks, the moves also were de­
signed to serve as an added inducement to
curtail business lending.
More significantly, no action was taken to
relieve the pressure on large-denomination
time certificates when the mid-summer rise
in market yields reduced the competitive at­
tractiveness of these instruments. The result,
in line with the intention of the monetary au­
thorities, was additional pressure on banks,
from the supply side, to moderate the pace
of business lending. As a result, large-denomi­
nation CD’s declined by about $3 V2 billion
between mid-August and mid-December, to
a level below that which prevailed at the be­
ginning of the year. But some recovery was
evident in the closing weeks of 1966, as the
competitive attractiveness of CD’s was en­
hanced by a fall in market yields from their
summer highs.
On balance, commercial banks again end­
ed the year with the lion’s share of the funds
(over 60 percent) accruing to depositarytype institutions. However, the principal mes­
sage of the attrition of deposits in late sum­
mer and fall was clear: banks could no longer
count with certainty on their ability to “buy
liquidity,” through such instruments as CD’s,
at whatever price dictated by market forces.

February 1967

MONTHLY REVIEW

The W est: Boom
Western economy surged upwards in
1966,
as personal income in the region
rose about 9 percent to almost $95 billion.
Measured by the yardstick of personal income,
the Twelfth District’s 1966 performance was
somewhat better than that of other areas, and
it was half again as good as the region’s very
respectable 1965 performance. Nonetheless,
the West like the rest of the country showed
scattered signs of sluggishness towards yearend.

T

he

Retail sales were generally buoyant in
Twelfth District States during the year, the
8-percent increase being roughly in line with
the national rate of gain. Auto sales were
somewhat stronger in the West than else­
where, despite a decline in new-car registra­
tions, but sales at other durable-goods stores
lagged the national pace.
The upsurge in income and sales was based
on the strong trend of employment in practi­
cally every industry except construction. As
total employment rose 5 percent— almost
equal to the total gain of the two preceding
years— substantial increases in activity were
recorded by the manufacturing, services, and
government sectors. Farm employment was
off, however, and construction jobs declined
by 4 percent over the year.
Some slackening in the pace of the busi­
ness expansion showed up in the employment
figures as the year progressed. Total employ­
ment in District States jumped by 1Vi
percent during the first quarter but grew some­
what more slowly in succeeding quarters of
the year. Thus, with the usual growth in the
number of job-seekers, the unemployment
rate rose gradually from a second-quarter
figure of 4 Vi percent to a fourth-quarter rate
of 5 percent, which was no better than the
rate prevailing in late 1965.



A gain in the stratosphere
Aerospace manufacturing, the locus of
Western troubles in 1963-64, was the locus of
Western prosperity in 1965-66. Employment
in this crucial industry rose by 138,000 be­
tween its early-1965 low point and late-1966
peak, and it rose by 90,000 in 1966 alone.
The aerospace boom was the key element in
California’s growth, where it accounted for
one-half of all new manufacturing jobs, and
even more so in Washington’s upsurge, where
it accounted for nine out of ten new factory
jobs.
This improvement was partly traceable to
the upturn in new defense business garnered
by District firms, which increased by 8 V2
percent in fiscal 1966 after two years of de­
cline. (In the rest of the country, however, new
Defense Department orders jumped 42 per­
cent in fiscal 1966.) This gain, which was offset
only to a small extent by a decline in space
awards, signalled an end to the problems which
had beset the industry from late 1962 until
early 1965.
The aerospace improvement was also sup­
ported by a continued influx of new orders for
commercial aircraft. This order inflow was so

E m p lo ym e n t s u rg e s in first half
but rises more slowly after midyear
T h o u sa n d s of P e r s o n s

2400

- Rotio Scale

2000
1800
1600
1400
1200

1000
800

M AN U FACTU RIN G

/

600

D e fe n se

FEDERAL RESERVE BANK OF SAN FR A N C IS C O
strong that it boosted backlogs at two major
District firms by three-fourths (to $6Vi bil­
lion) within a year’s time— and it was in fact
so strong that it caused severe scheduling and
financial problems for these manufacturers.
The order upsurge accentuated the problem
of securing adequately trained workers, and
it thus necessitated intensive training pro­
grams and extensive recruiting efforts. More­
over, as orders continued to mount during the
year, the difficulties of securing jet engines
and equipment from subcontractors in­
creased. Aircraft deliveries thus fell progres­
sively behind schedule, and by late Decem­
ber these delays prompted adjustments in pro­
duction scheduling at several firms.

Still in the depths
The sagging fortunes of the construction in­
dustry stood in sharp contrast to the growth
record of other regional industries. On the
heels of a slight 1965 decline, the industry
suffered an even sharper decline in 1966 as
new contract awards dropped from $9.0 bil­

lion to $8.2 billion over the year. Nonresidential and heavy construction expanded, but
not as rapidly as elsewhere, and the growth
in these sectors was far offset by the decline
in the moribund housing industry.
Residential construction contracts fell from
$3.8 billion in 1965 to about $2.7 billion in
1966. This slump reflected both the nation­
wide difficulties of financing mortgages in a
tight money market and the continued regionwide softness in housing markets. Even after
several years of declining construction activity,
demand factors remained relatively weak in
the Western market— witness the third-quar­
ter rental-vacancy rate of 10.2 percent (vs.
a 6.8 percent rate elsewhere) and the homeowner-vacancy rate of 2.3 percent (vs. 1.3
percent elsewhere). The drop in activity was
especially large in Southern California, with a
40-percent decline for the year— which was
not surprising, since this region had built up
the largest surplus of housing in the boom of
the early 1960’s.

INDEXES OF IN D U S TR IA L PRODUCTION —
(1957-59 =

TW E L F TH D IS TR IC T

100)

1959

1960

1961

1962

1963

1964

1965

1966p

86
93
96
94
90
92

112
76
86
91
99
102

119
99
97
105
92
111

127
105
101
105
86
100

128
103
98
105
86
117

129
96
93
102
85
132

140
93r
89r
114
116
138

145
110
95
128
130
140

A lum in um
C r u d e P etroleum
R e fin ed Petroleum
Natural G as

101
96
101
104

101
95
104
112

97
96
108
121

107
96
111
127r

118
97
112
14 4 r

135
97
115
148r

150
10 2 r
120
147r

165
1 11
122
148

Lumber
D o u g l a s Fir P l y w o o d

109
118

98
120

95
132

98
142

98r
160

108r
177

107r
180

104
180

C a n n e d Fruit
C an n e d V e ge tab le s
M e at
Sugar
Flou r
C r e a m e r y Bu tter

112
95
101
108
102
102

111
101
107
105
102
112

11 6 r
89
111
107
99
120

1 21 r
106
112
113
101
119

108r
96
115
120
94
103

141
100
126
138
96
T03

109r
97r
126 r
13 7 r
92
96

133
110
130
132
91
84

INDUSTRIAL PRODUCTION
Copper
Lead
Zinc
S ilv e r
G old
S teel In g o ts

p— Preliminary, r— Revised.
Source: Federal Reserve Bank of San Fiancisco.



FEDERAL RESERVE BANK OF SAN F R A N C IS C O

A e ro sp a ce boom sp a rk s re g io n a l re c o v e ry as defense employment jumps,
but inflow of defense orders lags behind inflow into other regions
D c f e n s t - S p o c c A w a rd s
T h o u sa n d s of W orke r*

900

30
O the r U.S.

20

10
500

1961

1962

1963

1964

I96S

1966

1967

Nonresidential building activity rose 4 per­
cent above the 1965 level, to $3 billion in new
contract awards. Sharp gains in factory and
hospital building, and the continued boom in
office building, offset declines in scattered
sectors elsewhere. The high level of industrial
building, a nationwide phenomenon, was
characterized in the region by a building boom
in aerospace factories, oil refineries, and alu­
minum reduction plants.
Heavy construction added a 9-percent
gain in 1966 to its even stronger 1965 per­
formance as new contracts rose to $2V2 bil­
lion over the year. Fewer highway and bridge
contracts were recorded during the year, but
big construction gains occurred at dams,
water-supply systems, and electric-power sys­
tems.

Tied to construction
The Western lumber industry, tied as it is
to the national construction industry, suffered
declines in output and prices during 1966.
Lumber activity spurted briefly during the
spring months because of temporary strength
in residential construction, strike hedge-buy­
ing, and heavy military and industrial de­



0

1964

1965

1966

mand. But from then until fall, orders plum­
meted in the industry as housing activity de­
clined nationwide and as customer inventories
were liquidated following the industry’s mid­
year labor-eontract settlement.
In the fall months, the prices of key grades
of Douglas fir (which had been 25 percent
above year-before levels in April) were some­
what below year-before marks, and plywood
prices showed even greater gyrations. Caught
in the squeeze between declining prices and
rising labor and stumpage costs, some smaller
Northwest mills closed down during this pe­
riod. The price situation improved somewhat
in the last two months of the year in line with
a slight improvement in orders and further
cutbacks in supply, but price quotations still
remained below year-earlier levels.
The Western steel industry, responding to
heavy demand from the nonresidential and
heavy construction sectors as well as from the
ordnance and other defense sectors, raised
output by 2 percent to 6.8 million tons for the
year. But Western output was supplemented
by a heavy influx of imports, as foreign pro­
ducers increased their share of the Western

FEDERAL RESERVE BANK OF SAN F R A N C IS C O

steel market from 22 to 25 percent over the
year.
Despite the growing tide of imports, do­
mestic steel producers boosted the price of
heavy plate to $2.95 a ton in March, and the
price of hot- and cold-rolled steel and strip to
$3.00 a ton in August. These price boosts
pushed the steel price index up about 2 per­
cent during the course of the year.

Busy farmers and canners
Another major regional industry, agricul­
ture, recorded a 7-percent rise in marketing
receipts, to $6.5 billion, because of a good
gain in crops and an even stronger rise in
livestock receipts. But this gain was smaller
than the national increase, and for that mat­
ter all regional states did not share in the
boom; receipts of Arizona farmers were hurt
by a decline in cotton acreage and receipts
of Idaho farmers were hurt by reductions in
wheat output and potato prices.
The volume of livestock marketings rose
during 1966 as an increased volume of beef
and poultry offset fewer marketings of hogs,
calves, and sheep. The upsurge in meat prices
also induced a sharp gain in imports as, for
example, beef imports rose by 12 percent and
canned meat imports by 40 percent. Crop out­
put meanwhile declined by 5 percent from the
1965 level, as crop yields fell off somewhat
and as harvested acreage dropped slightly to
19.4 million acres despite an acreage increase
in Northwest states.
The number of workers on Western farms
continued to drop during 1966 as average
monthly employment fell 6 percent to 590,000. Most of this decline occurred because of
a drop in the number of farm operators and un­
paid family workers, but some of the decline
was also due to the use of fewer foreign con­
tract workers in California. Wage rates of
hired workers rose in step with the national 8percent gain. Although some Western states
recorded below-average increases in wage



rates, the level of rates in all of these states
remained slightly or (in some cases) sub­
stantially above the U. S. level.
Western canners spent a busy year— in
contrast to their poor 1965 performance—
processing a record volume of fruits and veg­
etables. Suppliers of raw materials, especially
processing tomatoes, were far more abundant.
The output of tomatoes rose 28 percent to 3.2
million tons, with two-thirds of the crop be­
ing harvested by machine, and the output
of peaches also rose sharply as Washington
rebounded from its 1965 crop failure and as
California eased controls over output.
In view of this more abundant supply,
prices paid by canners were generally lower
than in 1965. Contract prices for tomatoes
were lower than the unusually high prices
which were offered to growers in 1965 because
of the supply uncertainty created then by the
termination of the bracero program. Contract
prices for most California deciduous fruits
were also lower than in 1965— except for
cling-stone peaches, which advanced in price
despite the heavier crop.

Strength in extraction
The region’s nonferrous-metals producers
expanded their production during the year,

H o u sin g a c tiv ity slu m p s disastrously
as demand slows and money tightens
T t io u ia n d i of O s a l H ii f U nits

February 1967

MONTHLY REVIEW

but not fast enough to keep up with the rec­
ord-breaking pace of military and civilian de­
mand. Producer prices remained under heavy
pressure, but prices were maintained by the
release of considerable quantities of copper
and aluminum from government stockpiles
and by the establishment of export controls
over copper. More than 400,000 tons of cop­
per and half that amount of aluminum were
sold from government stockpiles to meet civil­
ian and defense “hardship” needs.
Shortly after the year ended, however, cop­
per and aluminum producers finally pushed
through price increases. Refined copper prices
rose from 36 to 38 cents a pound, despite the
release of another 150,000 tons of stockpile
copper, and aluminum ingot prices rose from
2 \V i to 25 cents a pound.
Western crude-oil producers increased their
output by 10 percent during the year; Cali­
fornia producers provided most of this in­
crease, but Alaskan producers showed an
even sharper percentage gain. The increase in

Western supplies of crude supplied a modest
2-percent rise in refinery output and obviated
the need to increase crude imports. However,
Arabian and Canadian producers increased
their shares of the import market. The region’s
industrial boom meanwhile supported a 6percent increase in demand for refined prod­
ucts, and Western refineries also boosted their
shipments of assorted oil products to other
states and their shipments of jet fuel to the
Pacific war zone.
On balance, then, the West posted a very
respectable record in 1966, considering the
deep and prolonged recession in its important
residential-construction sector. The strong im­
provement in the aerospace and extractive
industries, the other major foundations of the
regional economy, brought about rapid gains
in employment and income and at least a
stand-off in the never-ending struggle against
unemployment. The continued recent strength
of these industries presaged brisk gains for
1967 as well— assuming at least a modicum of
recovery in the still-moribund housing sector.

W e ste rn ste e l in d u stry raises output
in response to construction and defense demand




49

FEDERAL RESERVE BANK OF SAN FR A N C IS C O

The West: Money
N 1966, as in 1965, major Twelfth Dis­
trict banks trailed behind the fast lending
pace set by large banks in the rest of the na­
tion. Even so, they posted a respectable 6percent gain for the year, despite a somewhat
erratic lending pattern: a small first-quarter
increase, followed successively by a sharp
gain, a net reduction, and finally another sharp
gain in the final quarter of the year. District
banks meanwhile made a small net addition
to their security holdings, whereas leading
banks nationally reduced their investments
to meet loan demand. Due to this diverse
movement, therefore, Western banks expand­
ed their total bank credit (loans plus invest­
ments) at a somewhat higher rate than did
their counterparts elsewhere. (These data
refer to the weekly reporting bank series un­
less otherwise noted.)
Western banks, in common with other
banks, faced intense competition last year
for time-and-savings deposits— for consumertype time deposits the competition probably
was more severe in the West than anywhere
else in the country. Yet, major District banks

I

ended 1966 with a 7-percent increase in total
time-and-savings deposits, almost double the
rate of gain experienced by major banks else­
where. This stronger performance was partly
due to their success in posting a small secondhalf increase in large-denomination certifi­
cates of deposit, in contrast to the very large
attrition in CD’s which occurred nationally.
On the other hand, Western banks fared less
well in demand-deposit growth than other
leading banks, and in fact they ended the year
with a small net decline in demand deposits.
From an earnings standpoint, 1966 was a
good year for Western banking. The upward
movement in interest rates on loans and in­
vestments more than offset the higher average
interest costs which banks had to pay on their
time deposits. Preliminary 1966 data indicate
that most District banks substantially in­
creased their net operating earnings over the
previous year’s depressed net-earnings level,
despite 1966’s massive shift in deposits from
lower-interest bearing savings accounts to
higher-interest bearing time certificates.
From another standpoint— growth in bank

T o ta l b a n k c re d it ris e s , but more slowly than in previous year,
as District weekly reporting banks lag in all loan categories
B i ll io n s of D o l l a n




1966 P e rce nt C h a n g e

1965 P e rc e n t C h a n g *

February 1967

MONTHLY REVIEW

D u ra b le -g o o d s manufacturers spark
strong gain in business loans
M ilita n t of D olla rs

-100

Du r ab le

0

200

100

300

Goods

Nond ur a b le

Mining

1965
1966
Trad*

T r a n s p . a n d U ti l it ie s

C o n s tr u c t io n

Oth er B u s i n e s s

•4—

B a r k e n ' Acceptance*

numbers— the record was somewhat different.
Only 3 new banks were opened (as against 28
in 1965 and 65 in 1964) and even that growth
was offset by a certain number of mergers and
consolidations, so that the District ended the
year with 10 fewer banks than it had when
the year began. New-branch activity also fell
off— 170 branch openings (and 5 closings)
in 1966 as against 237 openings in 1965. This
hesitancy to expand banking offices probably
reflected management’s increasing cost con­
sciousness and intensified deposit competi­
tion, as well as some reaction to the very
rapid expansion pace of the earlier years of
this decade.

Limited reserve pressure
Recourse to the discount window by
Twelfth District member banks was relatively
limited in light of the stringent monetary pol­
icy prevailing throughout most of 1966. De­
spite a third-quarter peak of $57 million, dis­
counting averaged only $35 million for the
year as a whole. Excess reserves meanwhile
averaged $31 million for the year. Thus, Dis­
trict banks recorded net borrowed reserves
of only $4 million in 1966— a mere fraction
of the $278-million total for all member banks
— and they actually posted net free reserves



in both the second and fourth quarters of the
year. (All data are on a daily average basis.)
Some reserve pressure was reflected in Dis­
trict Federal-funds transactions— purchases
and sales of uncommitted bank balances on
deposit with Federal Reserve Banks. The
twelve major District banks in the reporting
sample borrowed about $9 million from banks
in 1966 through net Fed-funds purchases
(daily average basis). A number of these Dis­
trict banks resold to Government securities
dealers some of the Fed funds they purchased
from banks, but others purchased Fed funds
primarily to adjust their own reserve positions.
West Coast banks continued to rank second
—next to New York City banks—as a moneymarket center for Fed-funds transactions.
Seven leading Western banks accounted for
19 percent of the rising volume of gross inter­
bank Fed-funds transactions in 1966, and an
even higher proportion (23 percent) of twoway transactions. (The latter is the amount
of offsetting sales and purchases of funds
made by an individual bank and indicates the
degree of “trading” in funds— as opposed to
purchases or sales to adjust a bank’s own re­
serve position.) Moreover, through frequent
Fed-funds sales to U. S. Government securi­
ties dealers, Western banks broadened their
participation in this sector of the money mar­
ket as well.
Last year, major District banks were gen­
erally successful in halting the accelerated
deterioration in liquidity which occurred the
previous year. In 1966, their loan expansion
of $1.6 billion was approximately the same
as their increase in daily average deposits.
Therefore, their loan-deposit ratio moved
during the year within a very narrow range—
from 71 to 72 percent— while loan-deposit
ratios elsewhere continued to edge upward.
But according to another yardstick, the ratio
of bank holdings of short-term U. S. Govern­
ment securities to total deposits, District
banks suffered some loss of liquidity. This

FEDERAL RESERVE BANK OF SAN FR A N C IS C O
ratio moved from 4.7 percent at year-end
1965 to a low of 2.0 percent in May, and
then up to 4.5 percent at the close of 1966—
slightly below the ratio of other leading banks.

Business loans predominate
Business demands for credit accounted for
the vast bulk of the District loan expansion,
as commercial-industrial loan portfolios of
weekly reporting banks rose by more than $1
billion over the year. Even so, this 12-percent
gain fell short of 1965’s business loan increase
— and fell short of the increase recorded by
leading banks elsewhere— largely because of
the West’s sharp third-quarter decline in busi­
ness borrowing. On the other hand, the West
bounced back with a sizable fourth-quarter
gain in commercial-industrial loans, in con­
trast to a continued lag in business loan ex­
pansion nationally.
Notwithstanding the lower over-all increase
in the volume of business borrowing, durable
and non-durable goods manufacturers relied
more heavily on bank credit than in the pre­
ceding year— reflecting the strength of these
sectors in the District’s economy and the fail­
ure of internally generated funds to keep pace
with their expanding financial needs. These
factors were particularly evident in the sub­
stantial increase in bank loans to manufac­
turers of transportation equipment and other
fabricated-metal products. (Increased financ­
ing needs in this sector also reflected the large
inventory build-ups created by delays in de­
liveries of parts by subcontractors.) On the
other hand, the public utilities and construc­
tion sectors added less to their bank debt than
they did in 1965.
Business borrowing in the West (and every­
where else) became progressively more costly
in 1966 as the rate charged prime borrowers
was increased and as rates charged other bor­
rowers were realigned with the higher prime
rate. The average interest rate on short-term



business loans made by banks in major Dis­
trict cities rose from 5.27 percent in Decem­
ber 1965 to 6.35 percent in December 1966.
But the average rate leveled off in the fourth
quarter, and non-price terms of lending also
tended to firm less than they did in earlier
quarters of the year.

Mortgages remain unpopular
District weekly reporting banks expanded
their mortgage portfolios last year at only half
the 1965 rate of increase, and for the second
successive year, these banks had a substan­
tially lower rate of expansion in this category
than leading banks nationally. The decline
in banks’ mortgage lending activity partly re­
flected the strong demand for credit from the
business sector, which, combined with a high
loan-deposit ratio, made banks reluctant to
channel their limited funds into long-term
mortgage commitments. The drop in savingsand-loan mortgage activity, on the other hand,
was related more closely to the sharp decline
in savings inflows. For both banks and S&L’s,

L e a d in g W e ste rn b a n k s account
for one-fifth of Fed-funds dealings
B i l l i o n * of D o l t o n

February 1967

MONTHLY REVIEW

S ELEC TED A S S E T AND L IA B IL ITY ITEM S OF W EEK LY REPORTING LARGE BANKS
IN TH E TW E L F TH FEDERAL RESERVE D IS TR IC T
(dollar amount in millions)

Twelfth District Net Change
Dec. 2 9 ,1965
Dec. 30, 1964
to
to
Dec. 28. 1966
Dec. 29. 1965

Twelfth District
Outstanding
Dec. 28, 1966

Dollars

Total loans an d investm ents
Loans adjusted a n d investm ents
Loans adjusted
Com m ercial an d in d u strial loans
Real estate loan s
A g ricu ltu ra l loans
Loans to n o n b an k fin a n cia l institutions
Loans for p u rchasin g or c a rry in g securities
To brokers a n d d ealers:
To others:
Loans to fo reign banks
O ther loan s (m ain ly consum er)
Total investm ents
U. S. Governm ent securities
Treasury b ills
Treasury certificates of indebtedness
Treasury notes and bonds m aturin g:
W ithin I year
1 to 5 years
A fte r 5 years
O ther securities
Total deposits (less cash items)
Total dem and deposits (less cash items)
Dem and deposits adjusted
Tim e an d s a v in g s deposits
S a v in g s deposits
Other time deposits IPC
C a p ita l accounts
Total a sse ts/ lia b ilitie s an d ca p ita l accounts

to

Dec. 28, 1966

Percent

Percent

Percent

$ 4 0 ,8 4 9
4 0 ,2 2 9
2 9 ,2 9 7
1 0 ,7 0 0
9 ,2 2 8
1 ,1 5 4
1 ,6 1 5

+
+
+
+
+
+
—

1 ,7 6 7
1 ,7 4 6
1 ,6 1 7
1 ,1 7 9
207
19
176

4 .5
+
4 .5
+
5.8
+
+ 1 2 .4
2 .3
+
1 .7
+
' ' ' 9 .8

+ 7 .6
+ 7 .5
+ 9 .5
+ 1 6 .5
+ 5.1
+ 4 .3
+ 1 0 .8

+ 4.1
+ 4 .0
+ 7 .3
+ 1 4 .8
+ 9 .9
+ 3 .9
+ 2 .3

509
1 69
297
6 ,1 0 6
1 0 ,9 3 2
5 ,2 4 7
1 ,0 5 5
99

+
—
+
+
+
—
+
+

279
1
1
157
129
457
30
99

+ 1 2 1 .3
—
0 .6
0 .3
+
2 .6
+
1.2
+
—
8 .0
2 .9
+

—
+
—
+
+
—
—

3 1 .6
1 4 .0
5 .6
9 .3
2 .9
11.2
1 5 .6
0

—
—
—

637
2 ,0 1 8
1 ,4 3 8
5 ,6 8 5
4 0 ,1 1 8
1 5 ,4 7 6
1 4 ,1 9 7
2 4 ,6 4 2
15,115
6 ,0 6 2
3 ,4 3 4
5 0 ,0 0 3

—
+
—
+
+
—
—
+
—
+
+
+

1 38
52
500
586
1 ,3 7 6
262
332
1 ,6 3 8
1 ,3 9 9
2 ,9 0 4
68
2 ,2 4 7

—

—
—
+
+
+
—
+
+
+
+
+
+

8.0
2 2 .7
6 .3
2 4 .4
6.8
0 .7
0 .6
1 2 .6
8.3
3 4 .2
6.1
7 .0

however, sluggish mortgage demand in South­
west areas contributed to the slump.
Western banks made fewer mortgage loans
as the year progressed; their net increase in
outstandings dropped from $168 million in
the first half of 1966 to $39 million in the
second half of the year. Data on outstandings,
however, understate actual participation in
mortgage markets, for many District banks sold
a very substantial volume of both newly-made
and seasoned mortgages out of their portfo­
lios to institutional investors.
As banks and S&L’s curtailed their lending,
mortgage recordings in major metropolitan



Other U.S.
Net Change
Dec. 29,1965

+
—
+
+
—
—
+
—
+
+
+

17.8
2 .6
2 5 .8
11.5
3 .6
1.7
2 .3
7.1
8.5
9 2 .0
2 .0
6.1

_

1.5
7 .6
3 .6
3 0

— 3 .6
— 6 .8
— 1 0 .0

— 19.1
+ 1.8
— 1 3 .5
— 0 .5
+ 2 .3
+ 0 .8
— 1.0
+ 4.1
— 6 .4
+ 2 0 .9
+ 4 .6
- f 6 .3

areas dropped about one-third below the 1965
level — and probably would have dropped
even more if home-owners and builders had
not accepted more first and second mortgages
themselves in order to sell their properties. In
this situation, mortgage interest rates rose
sharply; by fall, conventional rates on single­
family homes were almost one full percentage
point above year-ago levels.

Consumers borrow less
The slackened pace of consumer instalment
lending which prevailed in 1965 continued
into 1966. Fewer new-car sales meant less

FEDERAL RESERVE BANK OF SAN F R A N C IS C O

demand for automobile financing, and auto
paper thus accounted for only 50 percent of
the total increase in consumer instalment
loans, as against 56 percent in 1965. But this
shift was partly offset by a very rapid rise in
loans on other consumer goods paper, which
accounted for one-half of the 1966 increase as
against one-fourth in 1965.
The growth in loans on other consumergoods paper reflected the rapid spread of
credit-card programs, as an increasing num­
ber of Western banks committed themselves
to participate in such programs. One major
California-based system, which already boasts
two million card-holders, during the year
signed up co-operating banks in a number of
District cities as well as in Boston, Philadel­
phia and Dallas; a Washington bank initiated
its own plan; and a four-bank California sys­
tem meanwhile prepared to start another plan
in mid-1967.

Further shift from Treasuries
District weekly reporting banks ended 1966
with a small net increase in their total security
holdings, but with a continued shift in the com­
position of their portfolios. U. S. Government
security holdings declined 8 percent, somewhat
less than in 1965, with the reductions taking

W e ste rn b a n k s add to C D ’s
in contrast to attrition elsewhere
B il li o n s of D o ll a r s




place in long-term issues and in notes and
bonds maturing within one year. Total short­
term holdings of Treasuries, however, were
approximately the same magnitude as at yearend 1965.
In 1966, as in the previous year, District
banks increased their net purchases of other
securities. Banks added to their obligations of
states and political subdivisions in the first
half of the year, but reduced their holdings in
the last six months. Moreover, they followed
a similar pattern in acquiring Federal Agency
participation certificates— additions in the
first part of the year and liquidations in the
last half. As a result of these diverse move­
ments between U. S. direct-guaranteed securi­
ties and all other securities, District banks
ended the year with approximately the same
volume of total investments, but with a heavi­
er weighting in securities other than Treasury
issues.

Mixed deposit experience
Western bankers, like their counterparts
elsewhere, focused their major attention last
year on the competition for deposits. The ex­
panding loan portfolios of District banks did
not bring about a commensurate increase in
demand deposits. Although demand deposits
rose by an average $77 million during 1966
on a daily average basis, the volume of both
total demand deposits (less cash items in the
process of collection) and demand deposits
adjusted (less U. S. Government and inter­
bank deposits) was lower at year-end than
at the end of the previous year. In general,
then, District banks did little more than hold
their own as far as checking-account deposits
were concerned.
But District banks were far more successful
in attracting time-and-savings deposits, de­
spite the intense competition for savings funds
that prevailed throughout 1966— both from
other depositary-type institutions and other

February 1967

MONTHLY REVIEW

D rop in m o rtg a g e activity mirrors
deep slump in savings inflows

shifts ensued throughout the year between
these two deposit categories: savings deposits
decreased $1.4 billion at District banks and
other time deposits IPC increased by $2.9
billion, with about one-fifth of this increase
being in large-denomination time certificates.
In complete reversal of the 1965 pattern,
when New York City banks dominated the
issuance of large-denomination negotiable
CD’s, Western banks in 1966 posted a larger
dollar increase in CD’s than their Eastern
colleagues. Moreover, they added to these de­
posits even in the second half of the year, at
a time when New York City banks had an
attrition of over $1.5 billion. District banks
did lose some CD’s at certain times during the
July-December period when interest rate dif­
ferentials were strongly adverse, but they
managed to maintain far more stability in
these deposits than did other major banks.

forms of investments. The gain in total timeand-savings deposits was over $1.6 billion
from December to December, and even high­
er ($2 billion) on a daily average basis. Al­
though this was well below the record 1965
increase, District banks’ performance in this
area was far better than that of their com­
petitors in the savings-and-loan field.
There were widely divergent rates of
growth among time-deposit categories, due
partly to differences in permissible rates un­
der Regulation Q, and partly to rate differen­
tials between Regulation Q ceilings and other
money market rates. Early in 1966, a large
number of District banks offered various
forms of time certificates, tailored to attract
individuals’ savings, at rates substantially
higher than the 4-percent maximum rate on
regular savings deposits. As a result, large



In one important category— deposits of
states and political subdivisions— District
banks barely held the level reached in 1965,
when they experienced a 20-percent increase
in such deposits. Despite greater-than-seasonal gains in April, public deposits thereafter
declined rapidly, dipping below the year-ago
level before rising seasonally in December. A
lower volume of treasurers’ unused funds, due
to delayed bond issues, and the unfavorable
rate differential against CD’s in the last half
of the year accounted for this failure to at­
tract public deposits. Nevertheless, District
banks still held a far higher proportion of
public time deposits than did their counter­
parts elsewhere.

Dismal S&L experience
W estern savings-and-loan associations
came upon hard times during 1966. Their
net gain in savings over the entire year was
a meager $V^ billion — in contrast to a $2billion increase in 1965 and gains of almost
$4 billion in each of the several preceding
years— as savers shifted their funds to greener

FEDERAL RESERVE BANK OF SAN F R A N C IS C O

pastures in bank time accounts and govern­
ment and corporate securities.
The squeeze on District associations was
strongest during the spring months; in fact,
a net outflow of over $Vi billion actually oc­
curred during April. Associations thereupon
raised their savings dividend rates sharply in
an effort to retain funds, and by midsummer
this effort began to pay off, as District asso­
ciations held their own in the face of heavy
losses by their counterparts elsewhere
throughout the country. But despite this turn­
around and a late-year improvement in sav­
ings inflows, the year as a whole was dismal
indeed.
S&L lending activity was squeezed not only
by the decline of new savings but also by the
shriveling of other sources of mortgage money.
Mortgage repayments declined as new mort­
gage financing became more expensive and
less available, and mortgage sales in the East­
ern market -— normally an important source
of funds to Western associations — all but
disappeared. Thus, throughout 1966, newloan volume ran from one-third to one-half
below year-ago levels, and loan portfolios

D istrict b a n k s m a n a g e to halt
deteriorating liquidity situation
P ir e in t

P* r c« nt

55
LO A N S TO D E P O S I T S

U S G O VE R N M E N T S ECUR ITIES
W I T H I N ONE Y E A R TO DEPO SITS

showed a net gain of only $425 million for
the entire year.
On balance, the Western financial scene
presented in sharp focus the nationwide phe­
nomenon of a stringent competition for funds
taking place within a restrictive policy envi­
ronment. In the West as elsewhere, money
flows generally shifted away from bank and
(especially) S&L deposits and into creditmarket channels — and the lion’s share of the
funds made available through these shifting
channels was absorbed by business bor­
rowers, at the expense of mortgage and other
borrowers.

M onthly Review is edited by William Burke. Principal contributors to this issue included: William
Burke (U. S. business); Herbert Runyon (fiscal-monetary policy); Ernest Olson (balance of pay­
ments); Robert Johnston (credit markets); Verle Johnston (U. S. banking); George Dimmler,
Donald Snodgrass, John Booth, Joan Walsh, Yvonne Levy, and Adelle Foley (District business);
Ruth Wilson (District banking); Paul Ma (District highlights); R, Mansfield (artwork); and
Phoebe Fisher (editorial). M onthly Review is published by the Bank’s Research Department:
J. Howard Craven, Vice-president; Gault W. Lynn, Director of Research.

56



February 1967

MONTHLY REVIEW

Signs of Growth
mid-Pacific beaches to mid-Continent mountain ranges, abundant signs of
growth were evident throughout Twelfth Dis­
trict states during 1966. Growth showed up in
the tangible form of new schools, dams, fac­
tories, mine facilities, and airplane designs.
First of all, however, growth showed up in the
basic statistics.
The West, as already indicated, far out­
paced the rest of the U. S, in terms of employ­
ment growth. The rest of the country record­
ed a gain of over 2 percent in total employ­
ment— roughly in line with the gains in each
of the two preceding years— but every West­
ern region sharply raised its growth rate dur­
ing the year. The Northwest, with a whopping
7.3-percent gain, far outdistanced every other
region. But other Western areas also showed
quite respectable increases— 5.8 percent for
Northern California, 4.7 percent for Southern
California, and 3.8 percent for other District
states.
Increases in bank lending were not quite so
strong as elsewhere. Outside the District,
member banks increased their net loans by
9.0 percent; inside the District, the Northwest

F

rom

led the way with a 7.7-percent gain, while
California recorded a 6.3-percent gain and
other District states a 3.5-percent increase.
In all areas, the 1966 monetary squeeze held
the growth in bank loans to at least one-third
below the 1965 pace.
Price pressures were evident in all West­
ern cities last year, but less so than elsewhere
— in large part because of smaller increases
in food prices. The consumer price index rose
about 3 percent nationally, but the index rose
at a slightly slower pace in San Francisco and
Seattle and went up by only 2 percent in Los
Angeles.
In addition to the statistical evidence of
Western prosperity, other evidence can be
found in the industrial and financial perform­
ance of Western businessmen. Some of the
year’s highlights are given below.

California

Steel. Each of the West’s three major steel
producers made further progress in expanding
its facilities in California in 1966. One com­
pany completed another phase in the con­
struction of its new 6-million-ton fully inte­
grated steel complex underway at Richmond,
when it placed a 160,000ton-per-year continuous
E v e ry W e ste rn re g io n —especially Pacific Northwesthot-dip galvanizing line
outpaces rest of nation in employment growth
into operation alongside
E m p lo y m t n l- P « r c * n t C h o n g *
7.0 r~
the structural-steel fabri­
cating works opened the
6.0
S o u th e rn C a lifo rn ia
previous year. This same
N o r t h * ™ C a lif o r n ia
5.0
company also received a
Northwtst
01h*r U S
O thtr W . l t
$20-million contract for
40
construction of the venti­
lation caisson and trans­
30
bay underwater steel-tube
sections for the Bay Area
2.0
Rapid Transit District,
and a $2.7 million con­
1.0
tract from the Bonneville
Power Administration for
1966
1964




FEDERAL RESERVE BANK OF SAN F R A N C ISC O
11.000 tons of tower steel to be used in the
138-mile transmission line linking Federal
projects with Columbia River power plants.
Another major producer concluded a threeyear $119-million expansion program at its
plant at Fontana by adding a new galvanizedsheet mill. The third major producer placed
a new high-speed electrolytic tinning line into
operation at its Pittsburg works, thereby in­
creasing its capacity for serving the Western
canning industry. This company also plans to
install a continuous casting facility at its plant
in Torrance, at a cost of $5 to $10 million.
Aerospace. One major California-based
firm completed its major $75-million expan­
sion program at the Space System Center in
Huntington Beach. Most of the facilities of
the center are for the design, development,
and production of advanced space systems
and large vehicles, particularly for the $ 1.5billion Manned Orbiting Laboratory and $1billion Saturn programs. The same firm also
expanded the number of aircraft production
lines from two to three at its Long Beach
plant, as a result of a tremendous increase in
orders for commercial-jet aircraft. The com­
pany has expanded total employment en­
gaged in aircraft production from 20,000 to
47.000 over the past two years.
Another major California-based firm led
the list in defense prime-contract awards for
the fifth consecutive year, with 4.6 percent
($1.5 billion) of total awards. The company
is producing the $2-billion Poseidon missile
(an advanced new nuclear missile for Polaris
submarines), and is involved in the proposed
$20-billion Nike-X anti-missile system. It was
a losing finalist, however, in the design com­
petition for the 1,800-mile-per-hour super­
sonic transport (SST-2000), though it spent
about $20-million on project planning during
the past several years.
Petroleum. A huge oil field with a reserve
of about 100 million barrels was recently dis­
covered in a 1,600-acre field southeast of



Beverly Hills, a community not usually asso­
ciated with roughnecking. This field, with a
potential value of $300 million in oil and gas
income, is one of the biggest discoveries made
in California in 15 years.
Refinery expansion was substantial during
the year. One major firm completed its new
$ 80-million refinery at Richmond— a hydro­
cracking complex capable of converting heavy
petroleum oils to light stock by combination
with hydrogen. The 62,000-barrel-a-day fa­
cility will enable the plant to increase its out­
put of high-octane gasoline by 40 percent, and
at the same time sharply increase hydrogen
and asphalt production. Major construction
and expansion of refinery facilities also took
place at Torrance (100,000-barrels-a-day
crude oil processing capacity), Benicia (70,000-barrels-a-day) and Martinez (85,000barrels-a-day).
Construction. Skyscraper office buildings,
hotels, theaters, apartment houses and shop­
ping centers continued to rise in California
cities during the year. In the major metropoli­
tan areas alone, construction took place on
such projects as the following: the $650-million Foster City near San Francisco, the $500million Century City in West Los Angeles, the
$500-million “Multifamily Community” in
Ventura County; the $350-million Civic Cen­
ter in Los Angeles, the $200-million Hunting­
ton Harbor Marina in Los Angeles; the $200million Mariners’ Island in San Mateo, the
$200-million Redevelopment in Sacramento,
the $ 100-million Golden Gateway Redevel­
opment in San Francisco, and the $100-million “Rockefeller Center West” in San Fran­
cisco. San Francisco alone could point to con­
struction work on six skyscrapers ranging be­
tween 22 and 58 stories in height— and three
of these were bank buildings.
Public Works. California continued to lead
all other states in its public-works activity. A
sampling of these projects included: the $1-

February 1967

MONTHLY REVIEW

billion 75-mile Bay Area Rapid Transit Sys­
tem to be completed by 1971 to serve San
Francisco, Alameda and Contra Costa coun­
ties, the $205-million rebuilding and expan­
sion of the Port of Los Angeles to be com­
pleted in 1975, the $ 150-million expansion
of the Port of Long Beach (the largest manmade berthing facilities in the world) to be
completed in 1980, the $70-million 7-mile
San Mateo-Hayward bridge to be completed
in 1967, and the $12.7 million expansion pro­
gram for the Port of Oakland (including a 42acre terminal for containerized operations) to
be completed in 1968. In addition to current
highway work, highway engineers have on
their drawing boards a $5-billion plan for
about 1,600 miles of freeway to be built in
the Los Angeles area by 1980.
Engineering work continued on the $2.5billion California Water Plan, which is sched­
uled to deliver Northern California water to
most Southern California counties by 1972.
Meanwhile, Congress considered a proposal
to construct a $445-million nuclear-fueled
desalinization plant off the Southern Cali­
fornia coast. The 1.8-million kilowatt plant
would be designed to convert 150 million
gallons of sea water a day; production and
transportation costs are estimated at about
27 cents per thousand gallons, as against 20
cents per thousand gallons for water delivered
under the California Water Plan.

Pacific Northwest
Aluminum. A new entrant into the industry
began producing last year at a Bellingham
(Washington) plant which will eventually
rank as one of the largest aluminum plants in
the world and the largest in the Pacific North­
west. The 228,000-ton plant is scheduled for
completion in 1968 at a cost of $150 million.
Three other major aluminum producers, re­
sponding to the recent vigorous growth in de­
mand and to the availability of low-cost
hydroelectric power, announced plans for
adding a total of 210,000 tons of new capac


P rice p re ssu re s felt in West,
but less so than elsewhere

ity to their existing plants at Wenatchee, Ta­
coma, and Longview, Washington. In addi­
tion, a new company announced its intention
to build a new 130,000-ton-per-year plant
near Anacortes, Altogether, the 500,000 tons
of new capacity scheduled to come on stream
in Washington by 1970, plus the 40,000 tons
which will be added at Troutdale, Oregon,
represent 40 percent of the entire nation’s
total increase in aluminum capacity.
Plywood. A $2.5-million plywood plant,
which will have an annual capacity of 80million square feet, is under construction at
Kettle Falls, Washington, while a $2-million
specialty plywood-products plant with an ini­
tial capacity of 35 million square feet will be
built at Longview. Meanwhile, a new $4-million particleboard plant, designed to produce
50 million square feet a year, went into pro­
duction in July at La Grande, Oregon.
Aircraft. A major Seattle firm plans to dou­
ble its commercial plane production to 40 a
month by 1968 from the present rate of 20,
and has already begun to spend $250 million
for expansion of plants and equipment in or
near Seattle. It also hopes to complete this
September a new plant in Everett for the pro­
duction of the 747 subsonic commercial
transport. These “jumbo” jets are scheduled

FEDERAL RESERVE BANK OF SAN F R A N C IS C O
to carry 350 to 490 passengers at speeds of
more than 600 miles an hour.
This expansion program has pushed Seattle-area aircraft employment to an all-time
high of about 90,000— up one-half in the past
year, and one-fifth above the 1962 peak. Al­
though the employment pace began to slow
down around year-end— in part because of
shortages of skilled labor and delays of engine
supply— another upsurge in jobs will occur
if the Administration provides funds for build­
ing the variable-sweep-wing supersonic trans­
port (SST).
Electric Power. Two Northwest power
companies completed plans for a $ 118-mil­
lion, one-million-kilowatt, steam electric-power plant at Centralia, Washington. This huge
coal-fueled power complex will be supported
by a $ 2 1-million development of adjoining
coal fields and power transmission lines. Con­
struction will begin in 1969, and is scheduled
for completion in 1973. Nearby deposits of
coal are estimated at 500 million tons, suffi­
cient to operate at twice the planned capacity
for more than 40 years.
Construction. New commercial buildings
include a 50-story bank office building in Seat­
tle, a 25-story bank office building in Tacoma,
a 25-story hotel-shop complex in Seattle, and
Portland’s $ 56-million “Cascade Village”—
an urban renewal project consisting of highrise apartments, town houses, shopping cen­
ter and office building.
Public works. Major projects underway
last year included: on the Columbia River,
the $448-million John Day Dam (a multipur­
pose project with 1.4-million-kilowatt capac­
ity), Wells Dam, and the Wanapum Dam; on
the Snake River, the Lower Granite Dam, the
Lower Monumental Dam, and the Little
Goose Dam; and on the Cowlitz River, the
Mossyrock Dam. Construction work mean­
while was completed on the $ 165-million
dual-purpose nuclear reactor at Hanford,
Washington; the two generators, each with



400.000 kilowatts, combine to form the larg­
est nuclear-power plant in the world.

Mountain States
Copper. With copper in short supply, West­
ern producers concentrated their efforts on in­
creasing the capacity of their mines, mills and
smelters. Work continued on the four-year
$ 100-million expansion program underway at
the Bingham Canyon property in Utah. Upon
completion in mid-1967, the project will raise
mining and milling capacity at the site from
90.000 to 108,000 tons per day.
In Arizona, a $ 60-million stripping project
in progress to develop copper deposits in the
Twin Buttes area is expected to yield about
25.000 tons of ore per day by 1969, while a
$ 16.6-million project at Pima, scheduled for
completion by the middle of this year, will
raise mine and mill capacity from 18,000 to
30.000 tons per day. In Nevada, a $22-million copper project at Battle Mountain
reached initial production in October, and a
$4.5-million copper sulfide milling facility was
nearing completion at Weed Heights.
Iron ore. A deposit which could contain as
much as a billion tons of iron ore, and thereby
rank as the largest deposit of its kind in the
West, was recently discovered on the Walker
Indian Reservation, about 60 miles southeast
of Reno, Nevada. Preliminary drilling indi­
cates presence of 46-percent iron ore, convert­
ible into 68-percent pellets by conventional
methods, as well as ores with a copper content

February 1967

MONTHLY REVIEW

ranging from 0.8 to 1.5 percent, considered
commercial grade.
Silver. Silver producers in Idaho continued
to invest large sums of money to enlarge and
develop their mines in the Coeur d’Alene
region, in an effort to meet the rapidly in­
creasing demand for the metal. Shafts were
sunk at the Rainbow property to explore that
deposit at depth, while deeper veins were
worked for the first time at the Sunshine,
Galena, and Crescent mines.
Paper. A major Idaho firm continued its
$8 0-million capital-improvement program
last year in an attempt to diversify into ply­
wood, pulp and paper. In Arizona, a $32million pulp and paper mill was built near
Snowflake with a daily capacity of 210 tons
of newsprint and 180 tons of kraft linerboard.
Chemicals. Recent expansion at a Poca­
tello, Idaho plant has boosted output of sul­
phuric acid from 400 to 1,100 tons a day, and
has also increased production of ammonium
phosphate and anhydrous ammonia. Again, a
new fertilizer plant at Kellogg, Idaho, has
boosted ammonium phosphate capacity to
60.000 tons a year.
Construction. Financing problems have
plagued the construction industry, but con­
struction or planning continued apace on a
number of major projects. In Arizona, these
included the $ 15-million Arizona Interstate
Industrial Center in Phoenix, a $ 15-million
41-acre shopping center in Scottsdale, and a
$35-million residential resort community at
Rogersdale, east of Flagstaff, including about
5.000 home sites, a hotel-motel complex, a
golf course and swimming pool.
Public works. The $210-million Dworshak
Dam on the Clear Water River was started in
1966, and it will add 300,000 kilowatts of
electric power when completed in 1972. The
$70-million Hells Canyon Dam on the Snake
River between Idaho and Oregon, meanwhile,
continued under construction, and in Nevada,
two 750,000-kilowatt steam generators were



M o n e ta ry sq u e e ze holds growth
in bank loans below ’65 pace
Memtoer- Ban k Net L o a n s ( P e r c e n t C h a n g e )

0

5

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scheduled for installation at the Mohave Pow­
er Project in Clark County.
The bitterly contested plan to build two
power dams in the Grand Canyon was aban­
doned by the Administration in early 1967.
In the place of this $ 1.2-billion plan, Interior
Secretary Udall proposed a $719-million plan
involving the construction of a steam power
plant which would pump water out of the
lower Colorado River to supply Arizona
cities. But the revised plan was immediately
attacked by California and Colorado legis­
lators on the grounds that it ignored a basinwide approach to the problems of the Colo­
rado River basin.

Alaska and Hawaii
Petroleum. Alaska’s Swanson oil field in­
creased its average daily production last year
to about 535 barrels from each of its 55 wells.
But the Cook Inlet area, regarded as one of
the most important offshore sites in the nation,
produced over 1,000 barrels a day from each
of its four wells. This field claims a recover­
able oil reserve of about 150 million barrels.
Natural gas. In a joint Japanese-American
venture, a $50-million plant near Anchorage
was begun for converting natural gas into am­
monia and urea fertilizer for sale in Japan
and other export markets. Initial output from
this joint venture is expected in mid-1968. An­
other project, a $ 100-million natural-gas

FEDERAL RESERVE BANK OF SAN F R A N C IS C O

liquefaction facility, is now being planned by
five U. S. oil companies, with the goal of ship­
ping about 140 million cubic feet of gas a
year to the Japanese market.
Fisheries. Japanese investors showed in­
creased interest last year in Alaska’s fishing
industry— the state’s largest private industry
—by participating in two joint projects with
American firms. One was a $2-million can­
nery organized by a Seattle company and two
Japanese firms; the other was a $3-million
Seattle-Tokyo combine involving the opera­
tion of two salmon canneries.
Tourism. Hawaii’s tourist industry contin­
ued to prosper last year despite the sharp set­
back caused by a 43-day-long airline strike.
In view of recent decreases in airline fares
as well as increases in family incomes and lei­

sure time, the industry hopes to greet a mil­
lion tourists in 1970— almost twice the 1965
total of visitor arrivals, which in its turn was
double the 1960 figure. Total hotel accommo­
dations are expected to rise to 25,000 rooms
in 1970, up from 15,000 in 1965 — as resort
facilities are opened on Maui, Kauai, and
Hawaii, as well as on Oahu.
Construction. Honolulu continued to rank
among the top half-dozen cities in construc­
tion volume, although it is only fifty-fifth
among U. S. metropolitan areas in terms of
population. Large hotels and apartment com­
plexes continued to rise in Waikiki, with three
scheduled for completion in 1966, four in
1967, and still three more under planning. In
other construction, the area recently featured
the $22-million Financial Plaza of the Pacific,
the $67-million Ala Moana Shopping Center
(with 155 stores at Waikiki Beach) and the
$ 17-million State Capitol and Plaza — not to
mention the $350-million Hawaii Kai resi­
dential subdivision being developed near Pearl
Harbor.
Foreign trade. In order to expand Hawaii’s
role as a display, convention, sales and service
center for the Pacific area, a foreign trade zone
was opened at Honolulu’s Rainbow Island
last June. The zone includes 41,700 square
feet of duty-free storage space for foreign
products, and it includes a 36,000-squarefoot exhibition hall and offices. Customs du­
ties will be paid only when goods leave the
zone for consumption within the U. S. Future
expansion plans call for providing a 50-acre
area for processing, assembling, repackaging,
and relabeling a variety of products.

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