Full text of Economic Review (Federal Reserve Bank of San Francisco) : February 1968

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FEDERAL RESERVE BANK OF SAN FRANCISCO

MONTHLY REVIEW

Annual Review. . . . 1967

Not Quite So Great
Not Quite Full Circle
Pounds, Dollars — and Problems
Financing Patterns
Banking "67 Style
Outpacing the Nation
Calmer Sailing
Catalog of Expansion

February 1968

MONTHLY

REVIEW

■ Not Quite So Great
ineteen sixty-seven was not one of the
all-time-great years. The nation had
more than its quota of political problems,
both at home and abroad, and its economic
performance left something to be desired in
several different respects. The economy re
corded a measure of growth and a high level
of employment, but it failed to keep its costs
and prices in line and—especially after the
November devaluation of the British pound
—this failure created ominous implications
for the nation’s international payments posi
tion.
Total output of goods and services rose
5 Vi percent during the year to $785 billion.
In real terms, after adjustment for rising
prices, the gain amounted to only 2 Vi per
cent, the smallest since the 1961 recession.
Industrial production m eanw hile moved
sideways most of the year, averaging out at
58 percent above the 1957-59 base. (Coin
cidentally, production in the Common Mar

ket bloc followed the same general pattern
during 1967.)
Shifts in the economy
By year-end, the 80 million workers in the
national econom y were producing at an
$800-billion annual rate. (GNP at the be
ginning of the decade was only $500 bil
lion.) Both producers and consumers, how
ever, underwent a shift in attitudes over the
course of the year. When the economy
stopped growing in real terms in early 1967,
they were beset by fears of recession; when
price increases took hold in the more ebulli
ent atmosphere of late ’67, they became in
creasingly concerned over inflation. The psy
chological atmosphere, in a word, shifted
from fear of recession to fear of boom be
tween early and late year.
The late-year expansion developed rather
naturally out of the earlier pause. There was
no major accumulation of deferred demands,

Expansion @f defense sector, stability of fixed-investment spending, and
wild swings in inventories— along with price upsurge— mark "67 economy

1961

1963

1965

1967

1961

1963

1965

1967

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of the type that build up during a thorough
going recession to create the conditions for
a consequent boom. Even at year-end there
was little evidence of excess demand driving
buyers to scramble frantically for goods. But
just the same, business activity was definitely
advancing, skilled labor supplies were taut,
recession fears were forgotten, and inflation
fears instead were dominant, reinforced as
they were by a large Federal deficit and nu
merous price increases.

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pound makes a tax increase imperative.”)
The increase in taxes and the concomitant
decrease in Federal spending would be de
signed to reduce the deficit and thereby re
duce inflationary demand. Accomplishment
of those goals should help make U.S. goods
more competitive in world markets and im
ports less attractive to U.S. buyers, and thus
should stimulate the expansion of the trade
surplus, so that it can better provide the nec
essary support for U.S. military and eco
nomic activities abroad.

Shifts in policy

Public policy during this difficult year was
called upon to dampen the sharp swings of
business activity and business psychology—
that is, to ensure that neither recession nor
runaway inflation would be realized. Un
doubtedly, the stimulus provided by a large
budget deficit and an easier monetary policy
swamped the incipient downturn of early
’67.
By late year, however, some shifting of
gears became necessary to contain the threat
of inflation, and the problem was of course
compounded by the British devaluation and
the consequent attack on the dollar in the
world’s financial markets. Congress adjourn
ed without acting on the Administration’s
proposals to reduce the size of the Federal
deficit, but the Federal Reserve moved into
the breach with several cred it-tig h ten in g
measures.
Following a prolonged and inconclusive
debate over taxes, the House Ways and
Means C om m ittee promised early 1968
hearings on the Administration’s 10-percent
tax-surcharge proposal, after the Adminis
tration in turn promised a 2-percent cut in
Federal payrolls and a 10-percent cut in the
costs of “controllable” programs. (Secretary
Fowler: “I’m not sure the American house
wife will understand it, but I certainly be
lieve that the devaluation of the British

Vietnam impact
Military spending during 1967 provided
much of the pressure on the domestic econ
omy as well as on the U.S. international po
sition. Defense spending rose 20 percent
during the year to $75 billion—the sharpest
gain since Korean War days. Federal spend
ing for nondefense goods and services mean
while rose about 5 percent to $17 billion—
the smallest gain of any recent year except
1966. (State-local government spending as
usual rose about 10 percent, to $86 billion.)
Yet by year-end the growth of defense out
lays began to slow down, presaged by a year
long stability of military contract awards,
and some nondefense sectors were sharply
reduced, offsetting increases voted by Con
gress in military and civilian payrolls.
The economic dislocations caused by the
1965 escalatio n in Vietnam continued in
force throughout 1967. Vietnam’s continued
strong impact on the economy derived from
the fact that the size and duration of the con
flict were difficult to measure, and from the
fact that the military spending surge rein
forced the stimulus of the broadest tax cut in
history, and thus fell full force upon a fullemployment economy. The development of
sharp economic distortions is not at all sur
prising; rather what is surprising is the lack
of greater distortions and much more rapid

February 1968

MONTHLY

inflation in the wake of such a large and un
controllable historical event. But the econ
omy’s ability to handle this event has been
helped by the strength of underlying long
term growth factors, especially the recent
sharp gains in the nation’s labor force and
in its industrial capacity.

REVIEW

Rise in wholesale-price index
centered in industrial-goods sector
Annual Price Chang«( Percent)

Business impact
Most of the gain in cap acity stemmed
from the several preceding years’ boom in
business investment, since that boom defin
itely tapered off in 1967. Business capital
spending rose only about 3 percent to $82
billion—the smallest gain of the decade—
as a decline in industrial building offset most
of the strong increase in equipment pur
chases.
Businessmen opened the year with expec
tations of a somewhat higher level of plantequipment spending, but they were induced
to lower their sights as industrial production
leveled off and as capacity utilization rates
fell. They were also influenced by the very
high level of borrowing costs, with rates ap
proaching 7 percent on some co rp o rate
bonds. Nonetheless, corporations were will
ing, even anxious, to take advantage of long
term financing possibilities. More corporate
issues were issued in the first three-quarters
of the year than in the entire preceding year,
partly because of the cumulative financial
effects of the preceding investment boom,
and partly because of the attempt to rebuild
liquidity in the face of a possible shortage
of funds in the uncertain future.
In the inventory sector, purchasing agents
added only about $5 billion to business
stocks during 1967—about $8 billion below
the u n su stain a b le sto ck b u ild in g pace
achieved in the preceding year. In fact, an
$ 18-billion tu rn a ro u n d occurred between
late ’66 and mid ’67, as businessmen (espe
cially retail merchants) failed to increase

their stocks and thereby imparted the de
cidedly slack tone to early-year business ac
tivity. A moderate buildup then took place
in the latter part of 1967.
Surprisingly, inventories in durable man
ufacturing were still relatively high at yearend. Defense goods, which require a long
lead-time in production, accounted for a sub
stantial part of the rise in factory stocks. Be
cause of this and other factors, the inventorysales ratio in manufacturing rose from a
high 1.70 in late 1966 to an even higher level
of 1.75 in late 1967. And at year-end, pur
chasing agents again were stockpiling heav
ily—especially in steel, because of the indus
try’s mid-’68 labor contract deadline.
Consumer impact
Consumers responded to the rather uncer
tain business atmosphere during 1967 with
an appropriately cautious performance. Al
though personal income rose by about 7 per
cent to $626 billion, consumer spending rose
at a slower pace and the personal saving rate
thus jumped to 7 percent—the highest figure
in a decade and sharply above the average
1960-66 rate of about 5 Vi percent. Con
sumers were also concerned about the grow
ing bite of Federal and state-local personal

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taxes (plus social security), which increased
from 14.7 to 16.3 percent of personal in
come within only a two-year time span.
Consumer durables spending increased by
a modest 3 percent to $72 billion, as auto
sales fell a shade below the level of the two
preceding years while furniture-appliance
sales rose at a rather brisk pace. The latter
reflected in part the sharp improvement in
residential construction. While new housing
construction totaled only $24 Vi billion for
the year—the same as the 1966 figure, which
in turn was the worst since the 1961 reces
sion—the spending pace at year-end was
one-third ahead of the dismal pace of late
’ 66 .
The ’68 auto market was difficult to mea
sure because of strike activity at the start of
the model year; the ’67 model year, however,
was the first since 1961 to register a decline.
Sales of domestic models dropped to 7.9 mil-

C®s#°p >isi! in fla tio n reflects drop
in profits and rise In labor costs
1957-59 = 100

100

80
-

- 40
-

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lion units from the ’66 level of 8.5 million
units, but sales of foreign cars jumped 17
percent to 750,000 units. The contrast was
strikingly rem in iscen t of developments a
decade ago, since foreign cars in both in
stances sharply increased their market pene
tration to 9 percent of total U.S. sales. Now
as then, Detroit producers showed their pref
erence for higher-priced models; cars priced
over $2,500 increased from one-third to twothirds of total domestic production between
1961 and 1967.

Labor, costs, and prices
The uncertainty as well as the strong un
dertone exhibited by consumer markets re
flected developments in the nation’s labor
market. Civilian employment drifted down
ward during the early ’67 slowdown, but for
the year as a whole it rose 2 percent to 74
million. Unemployment averaged about 3.8
percent, the same as in the preceding year.
The jobless rate for unskilled workers was
several times that figure—and as the mid
summer riots revealed, the rate of unemploy
ment and underemployment reached 35 per
cent in some ghetto areas. At the same time,
skilled workers remained very much in de
mand; the jobless rate for the family-bread
winner category was below 2 percent for the
second consecutive year.
The early-year slack in business activity
showed up in declining job opportunities in
construction and durable manufacturing, and
also in a drop in the average factory work
week. But a strong market for skilled labor
led unions to demand (and to get) stiff in
creases in hourly wages. One result was the
7-percent increase in p erso n al incom e,
matching the 1966 increase. But after ad
justment for increases in population, prices,
and taxes, the end-result was only a 3-per
cent gain in real take-home pay, the smallest
gain of the last four years.

February 1968

MONTHLY

Price pressures showed up in a 3-percent
increase (for the second straight year) in
consumer prices, to a level 16 percent above
the 1957-59 base period. P ressu res also
showed up in the w h o lesale-p rice index,
which actually remained stable at about 6
percent above the 1957-59 base, but only
because of price weakness in farm and food
products and crude industrial m aterials.
Wholesale prices in the crucial in d u stria l
sector—for both materials and finished prod
ucts—increased sharply after midyear be
cause of the over-all improvement in the
demand outlook and because of rising labor
and other costs in critical m an u factu rin g
areas.
Higher manufacturing costs were associ
ated with higher wages and a falling rate of
capacity u tiliz a tio n , along with a related
slowdown in productivity growth. Output
per man-hour rose only 2 percent, or at
about half the average 1960-66 pace. Unit
labor costs in manufacturing, after remain
ing stable throughout the earlier part of the
decade because of productivity gains, thus
jumped 8 percent between mid-1966 and
late 1967. And the upsurge in cost pressures,
together with the slowdown in total demand,
cut sharply into corporate profit margins

REVIEW

after a six -y ear-lo n g period of expanding
profits.
In this area of cost control, 1967 unhap
pily repeated the experience of 1966. Dur
ing the prolonged earlier period of stable
costs, the pressure of output on capacity
grew slowly, the jobless rate declined slow
ly, productivity increased sharply—and total
employee com pensation advanced fairly
slowly under the pressure of industrial slack
and Washington guideposts. But during the
past two years, the labor market became in
creasingly tight, wage rates grew at an accel
erated pace, productivity grew at a deceler
ated pace—and the usual increase in total
labor costs went along with a drop in cor
porate output.
The London Economist best summed it
up: “It is not, in any sense, a comfortable
situation—concern about the dollar abroad,
wages and prices rising at home faster than
the United States is used to, interest rates at
record levels in the face of an easy monetary
policy, a huge deficit on the budget—and yet
no evidence of excess demand except what
can be produced by forecasts. The English
disease? Hardly. But it is the most discon
certing time for this huge, successful econ
omy in at least ten years.”

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Not Quite Full Circle
n 1967, both monetary and fiscal policy
were highly expansive. The Treasury ran
the largest deficit of any calendar year since
World War II, and the Federal Reserve sup
plied reserves to the banking system in the
largest volume since 1945. But in spite of
the expansive nature of policy, the financial
markets had problems in absorbing the rec
ord amounts of corporate and municipal se
curities that were marketed during the year,
and long-term interest rates rose to heights
not seen since the Reconstruction Era.

Income disappointing; outgo rising
The Federal budget u n d erw en t severe
pressure from both sides during 1967. Rev
enues for the first half of fiscal 1968 fell be
low the estimates made in January, while ex
penditures (chiefly for defense) rose rapidly.
The resulting deficit for calendar 1967 was
£e@fa@my stimulated by easy
monetary and (especially) fiscal policy

the largest since 1945— $12.6 billion on the
national-income-accounts basis, which mea
sures the economic impact of Federal pur
chases of goods and services along with Fed
eral transfers and grants-in-aid.
The Treasury borrowed a net total of
about $5.8 billion from the public during
the year, through the sale of its own securi
ties and participation certificates in pooled
Federal loans. The cash needs of the Treas
ury were concentrated in the second half of
the year, reflecting the “feast-famine” cycle
of revenue inflows. Consequently, a very
sharp turnaround occurred between the sec
ond and third quarters of the year as the
Treasury switched from being a net repayer
of debt to a net borrower.
In the spring, the Administration restored
the 7-percent investment-tax credit that had
been suspended the preceding November,
and it released about $2.1 billion of various
construction and mortgage assistance funds
that had similarly been frozen in late 1966.
However, as the Federal deficit soared, the
need for restrictiveness became apparent,
and the President p ro p o sed a 6-percent
(later raised to 10-percent) surcharge on
personal and corporate income-tax liabili
ties. Yet, by year-end, Congress had failed
to take any action on the proposal.
Monetary policy . . . and results
Nineteen sixty-seven was one of those
years which delight teachers of money and
banking looking for concrete examples of
policy change, since all three of the instru
ments of general monetary control were util
ized in the course of the year. In March, re
serve requirements against savings deposits
and time deposits of up to $5 million were
reduced from 4 percent to 3 percent, the
bottom of the discretionary range of reserve
requirements against such deposits. In April,

February I960

MONTHLY REVIEW

the discount rate on advances to member
banks was lowered from 4 14 to 4 percent.
Both of these actions followed the shift to
ward easier monetary conditions that was
initiated the preceding November.
Additionally, the Federal Reserve in the
first quarter increased its holdings of U.S.
Government securities by over $14 billion
through open-market operations. The re
serve position of the member banks moved
from small net borrowed reserves in Jan
uary and February to net free reserves of
$236 million in March. The member banks
maintained a comfortable cushion of net free
reserves through the remainder of the year,
although that cushion narrowed somewhat
in the fourth quarter.
In November, immediately upon the heels
of the British devaluation, the discount rate
was put back up to 414 percent. The in
crease was directly related to the defense of
the dollar in international financial markets,
but this action also served to bring the dis
count rate into line with domestic money
market rates. And by year’s end, “Fedwatchers” detected evidence of a change in
monetary policy away from the prevailing
degree of ease. In the last week of December
the Board of Governors announced an in
crease of 14 of 1 percent in reserve require
ments against demand deposits in excess of
$5 million, to take effect in January 1968.
The monetary expansion of 1967 owed
much to the open-market operations of the
Federal Reserve: the securities holdings of
the System Open Market Account increased
by over $514 billion during the year. This,
the largest net open-market purchase of se
curities for any year since 1945, was accom
panied by a record expansion in bank credit
and in the money supply. Total bank credit
increased by 11 percent, while the money
supply expanded at a 614-percent average
rate. The expansion of bank credit also owed
something to the very substantial increase in

Deficit widens as spending expands
and as revenues reflect business lag
Billions of Dollars

5
0
-5
-1 0 | -

-15

d e f ic it

1961

commercial bank time-and-savings deposits,
which grew sharply by 16 percent. The credit
expansion, incidentally, centered in securi
ties rather than loans; when loan demand
slackened in response to the corporate switch
to capital-market financing, the banking sys
tem became an active underwriter of govern
ment securities, p a rtic u la rly m u nicipal
issues.
Interest rates: up again
Interest rates moved up vigorously in the
second half of 1967, after trending down
ward during much of the first half. Short
term rates, as typified by the market yield
on 91-day Treasury bills, fell by about 114
p ercen tag e points from December 1966

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through the following June, reflecting the
Treasury’s redemption of tax-anticipation
bills and the increasing ease of monetary
policy. However, when the Treasury borrow
ed heavily from the public in the second half,
it centered its financing in tax-anticipation
bills or notes with fairly short maturities, and
this put strong upward pressure on short
term rates. The discount-rate increase in
mid-November also helped push up inter
est rates, and by December, the yield on 91day Treasury bills was up to 5 percent from
the midyear level of 3 Vi percent.
The turnaround in long-term rates came
much sooner in the year—in February for
top-quality corporate and municipal bonds,
and in March for long-term Treasury bonds.
There was steady pressure on long-term rates
as corporate and municipal securities came
into the market in unprecedented volume,
with corporates increasing by 36 percent
and municipals by 26 percent. Expectations
of high interest rates and fears of tighter
credit conditions led corporations to desire
long-term borrowing and led lenders to pre
fer short-term investments.
The effect of these forces is shown in the
changing shape of the yield curve for U.S.
Government obligations. At the end of De
cember, long-term yields had receded some-

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lu fe re s t rates reverse earlier drop
and surge upward again in late '67
Percent Per Annum

what from their highest levels but were still
well above the levels reached at the time of
the “crunch” in the summer of 1966. How
ever, short-term yields were still below 1966
peaks.

February 1968

MONTHLY

REVIEW

Pounds, Dollars—and Problems
he year was marked by several major
developments in the international econ
omy. On the plus side, international mone
tary authorities reached agreements on wide
spread tariff reductions and on the joint
international creation of a new monetary
reserve asset. On the other hand, the pound
sterling was devalued, and this was followed
by a speculative attack on the U.S. dollar
which was then repulsed by the Gold Pool.
In addition, the U.S. balance-of-payments
deficit worsened considerably, leading, at
the beginning of the new year, to the impo
sition of mandatory controls over U.S. direct
investment abroad, tighter guidelines under
the Voluntary Foreign Credit Restraint Pro
gram, and proposals for legislation to reduce
the deficit further.

New asset. . . and trade
After four years of intensive study and
discussion, members of the International
Monetary Fund met at Rio de Janeiro in
September and reached agreement on a
method for supplementing world gold and
foreign-exchange reserves in accordance
with long-range international liquidity needs.
The new reserve asset is in the form of a
Special Drawing Right (SDR) in the Fund,
available to all members of the Fund, and
is to be allocated among members in propor
tion to their IMF quotas. SDRs will be de
nominated in terms of gold, although not
convertible into gold, and their creation will
require approval by 85 percent of total IMF
votes.
At the end of June, the U.S. and 52 other
governments concluded the sixth round of
GATT trade negotiations — the Kennedy
Round — with an agreement designed to
facilitate the liberalization of world trade.
In all, tariff concessions were made by 37

participants who account for some 75 per
cent of world trade.
Substantial tariff reductions were negoti
ated on the $40-billion trade in industrial
products, amounting to an estimated 35percent reduction over the next five years.
U.S. import duties are to be halved on a wide
range of industrial goods, and reductions on
other items ranged from 30 to 50 percent.
Average tariff reductions on industrial goods
by this country’s major trading partners
will amount to about 35 percent by the Euro
pean Economic Community, 30 percent by
Japan, 24 percent by Canada, and 38 percent
by the United Kingdom.
Agreement was also reached on maximum
and minimum world wheat prices and on a
program of aid to developing countries which
will involve 4.5 million metric tons of grain
annually. Chemical products, treated in a
separate agreement, were accorded partial
and unconditional tariff reductions immedi
ately by the EEC and the U.K., while the
U.S. is to effect full tariff cuts on a limited
list of chemical products. Additional Euro
pean tariff cuts are to be conditional upon the
passage of legislation abolishing the American-selling-price system of valuation.
Background to devaluation
In November, the British government de
valued the pound from $2.80 to $2.40 de
spite strong support from the U.S. and other
countries in defense of the former parity.
Ever since the last devaluation in 1949, the
pound had experienced periodic fainting
spells, due primarily to speculation centering
on sporadic balance-of-payments weaknesses
and continuing reserve deficiencies—and to
domestic circumstances that seemed to place
greater emphasis on consumption than on
productivity and economic growth.

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Ho Sc paym ents d e c e it worsens
even before Hate-year financial crisis
Billions of Dollars

The devaluation came only after deter
mined efforts had been made to correct the
persistent disequilibrium in Britain’s external
accounts. These efforts centered around the
restraint of demand for the two-fold purpose
of holding down imports and of releasing
goods for export. To accomplish this, the
Government adopted a program of severe
monetary and fiscal restraint and imposed an
absolute standstill on prices and incomes dur
ing the last half of 1966.
As 1967 began, these measures appeared
to be taking hold. A large fourth-quarter sur
plus had developed in the basic balance on
current and long-term capital account, and
this development (with the continuing sup
port of foreign central banks and interna
tional financial institutions) dampened spec
ulative pressure against the pound. Basic
weaknesses in the British economy—overfull
employment, unsustainably high consump
tion levels, and the concomitant upsurge in
imports and diversion of goods from export

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to domestic markets—seemed well on the
way to solution.
As 1967 unfolded, however, the realiza
tion of these hopes receded further and fur
ther into the future. After the wage-price
freeze was lifted in January, wage rates
began rising again, and by September were
more than 3 V2 percent above the January
level. Meanwhile, the trade deficit re
appeared. Imports, already bolstered by the
end of a seamen’s strike and the lifting of an
import surcharge, increased even more rap
idly than expected. And exports failed to
provide adequate balance-of-payments sup
port, partly because of the slowdown in eco
nomic activity elsewhere in Western Europe
—particularly in West Germany, a major
market for British goods.
The outbreak of war in the Middle East
interposed further hurdles in Britain’s diffi
cult path towards balance-of-payments equi
librium. With the Arab oil embargo and the
closing of the Suez Canal, oil had to be
shipped to Britain over longer distances, with
payment in non-sterling currencies (and in
some cases at premium shipping rates), thus
placing a further drain on British reserves.
During the summer months, too, British ex
ports suffered from the dock strikes in Liver
pool and London, and also from the Arab
boycott on British goods.
Thus, a combination of unfavorable fac
tors, both at home and abroad, contributed
to a severe weakening of Britain’s interna
tional position. Sharply rising trade deficits
in August, September, and October under
mined confidence in the pound and touched
off a massive speculative capital outflow.

Devaluation and after
At that point, if devaluation were to be
avoided, Britain had no choice but to deflate
its economy severely, to impose various con
trols to relieve presure on the pound, and also
to liquidate its foreign assets and borrow

February 1968

MONTHLY

heavily from abroad to provide a transitional
cushion of reserves. The alternative to main
taining the current overvalued $2.80 parity
was to seek an improvement in competitive
position through devaluation, scaled so that
it would not be matched by other major coun
tries.
The case for devaluation was bolstered by
the presumed political impossibility of
achieving adequate internal discipline with
out this crisis signal, and also by the pre
sumption that devaluation was a necessary
step to membership in the European Eco
nomic Community. In any case, Britain opted
for devaluation.
The Government might well have pre
ferred the greater competitive advantage that
would have accompanied a deeper devalu
ation, but it recognized that a greater reduc
tion in the parity of the pound might jeopard
ize the trading interests of other major coun
tries and lead to offsetting devaluations in
the EEC and elsewhere in the industrial
world.
The new parity is backed by foreign
credits totalling some $3 billion, including
a $ 1.4-billion standby arrangement with the
International Monetary Fund. These cred
its, of course, are for the purpose of helping
Britain maintain the new parity while funda
mental adjustments are made in the domestic
economy. In order to safeguard the external
benefits of the devaluation and to create
domestic conditions more favorable to real
economic growth and higher levels of real
income based on rising productivity and out
put, the British government undertook a
stringent stabilization program in the post
devaluation period.
Initially, the Bank of England raised its
discount rate, from 6 V2 to 8 percent, and
requested the commercial banks to restrain
their lending. In addition, loan-payment re
quirements on installment purchases of auto
mobiles were raised and the maximum re

REVIEW

payment period reduced.
The second stage of the stabilization pro
gram followed in mid-January. Planned pub
lic expenditures are to be reduced by $720
million in 1968-69 and by almost $1 billion
in 1969-70. (These reductions are in addi
tion to those announced at the time of de
valuation.) Cuts are scheduled immediately
in education, health, welfare, and road and
housing construction. Reductions in defense
expenditures will be effective later; these
include withdrawal of virtually all British
forces “East of Suez,” cancellation of an
order for U.S. military planes, and the phas
ing out of the Royal Navy’s aircraft carriers.
The success of devaluation in restoring
equilibrium to the British balance of pay
ments will depend very largely on the will
ingness of Britain — and particularly the
British public — to accept the costs which
adjustment will necessarily impose. Prices
of imports, including food, are rising, while
increases in incomes must be restrained in
the interest of freeing goods for export and
of preserving the export price advantage
potentially conferred by the devaluation.
Not all this potential has been captured,
however; there has been some tendency for
prices on certain export products to rise in
a manner offsetting the devaluation benefits.
Nevertheless, if the British economy can be
restructured and the pattern of spending
altered to insure export-led economic growth,
both Britain and its currency should continue
to have an important place in the world
economy.

The U.S. problem . . .
The devaluation of the pound accentuated
the continuing U.S. balance-of-payments
problem. First, the British defensive actions,
involving liquidation of investments in this
country, contributed to a sizeable outflow of
dollars. Second, the U.S. also recorded some
further outflows and some trimming of in-

FEDERAL

RESERVE

BANK

flows that would otherwise have taken place.
Third, the overgeneralized loss of confidence
in reserve currencies caused the dollar as well
as the pound to come under sharp speculative
attack.
Yet the U.S., in cooperation with other
members of the Gold Pool, succeeded in
maintaining the established price of gold and
in stabilizing the international payments
mechanism in the wake of the British deval
uation. These operations involved heavy gold
sales by the Gold Pool.
December’s decline in the U.S. gold stock
— $900 million—dwarfed the $74-million
decline of November and greatly exceeded
the (relatively light) $ 196-million loss of the
first ten months of the year. (U.S. gold losses
for the year as a whole have been exceeded
in several recent years.)
Action was also taken to strengthen the
dollar’s defenses against future speculative
attacks. Federal Reserve swap arrangements
with foreign central banks were increased
from $5.0 to $6.8 billion. The narrowing of
the margin of “free gold” reserves served to
emphasize the need to remove the goldcertificate reserve requirement for Federal
Reserve notes, and thus to free some $10.6
billion of gold currently held as “backing”

Trad® balance suffers* with exports
as well as imports rising sluggishly
EXPORTS
Percent Change

IMPORTS
Percent Change

SAN

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for the note issue. Thus, in January, Con
gress began to consider legislation designed
to remove the gold backing.
Behind this turmoil was a distinct worsen
ing of the balance-of-payments deficit. On
the official-reserve-transaction basis, the U.S.
payments position shifted from a slight sur
plus in 1966 to a $2.9-billion annual deficit
in January-September 1967 — and it then
deteriorated sharply in the final months of
the year. The deficit was in the neighborhood
of $3.5 billion for the year as a whole.
Part of the sharp fourth-quarter deteriora
tion was due to special factors. One such
factor was the liquidation of Britain’s gov
ernment-held portfolio of U.S. stocks and
bonds, which involved a shift of some $500
million from long-term to short-term U.S.
liabilities, and thus a worsening of the deficit
by that amount. Another factor was a decline
in foreign official purchases of U.S. secur
ities with maturities of over one year. In
previous periods such purchases, counting
as capital inflows, helped to reduce the defi
cit.
Of greater basic significance, however,
was the fourth-quarter weakening of the
trade surplus — especially in December,
when the export surplus amounted to only
$79 million (seasonally adjusted), the small
est monthly figure in nearly three years. For
the year as a whole, the trade surplus totalled
$4.1 billion compared with $3.8 billion the
previous year. And other deficit factors in
cluded increased foreign-exchange expendi
tures in Vietnam, larger outflows of private
capital, and a substantially greater deficit on
travel account.
. .. and the U.S. program
To meet the worsening balance-of-pay
ments situation and to forestall any specula
tive attack which might be triggered by the
disappointing fourth-quarter results, the
President announced, at the beginning of the

February 1968

MONTHLY

new year, a comprehensive program to im
prove the U.S. balance of payments in 1968
by an estimated $3 billion. All sectors of the
economy were called upon to help carry out
this program, although its major impact will
be felt by the investment and tourist sectors.
Mandatory controls were imposed on U.S.
direct investment abroad, replacing the
direct-investment targets previously an
nounced for 1968. New direct-investment
outflows to continental Western European
countries and to certain others not heavily
dependent on U.S. capital are to be halted in
1968. In other developed countries, net new
U.S. direct investment outflows are to be lim
ited to 65 percent of the 1965-66 average,
while in developing countries such invest
ment outflows will be permitted up to 110
percent of the 1965-66 average. This part of
the program is designed to contribute $ 1 bil
lion toward improving the balance of pay
ments in 1968.
The Federal Reserve, with responsibility
for the voluntary credit restraint program,
set lower guideline ceilings for financial in
stitutions, and requested banks not to re-lend
long-term bank credits repaid by developed
countries of continental Europe and to re
duce by 40 percent the outstanding short
term credits to those countries. The new
regulations also included a request for a
5-percent cut in the holdings of foreign as
sets by nonbank financial institutions. With
the cooperation of banks and other financial
institutions, this part of the program is ex
pected to contribute some $500 million to
improving the deficit during the current year.
The program also calls upon U.S. citizens
to defer nonessential travel outside the West
ern Hemisphere during the next two years.
Moreover, legislation has been introduced
to tax the dollars spent abroad by U.S. trav

REVIEW

elers, above a certain daily minimum. This
part of the program is expected to result in
a substantial improvement in the travel ac
count.
A $500-million reduction in the net pay
ments impact of government expenditures
abroad is also envisioned by the program.
Foreign purchases of long-term U.S. secur
ities and defense equipment are to be en
couraged as offsets to the foreign-exchange
costs of maintaining U.S. troops overseas.
Efforts are also to be made to find ways to
reduce the foreign-exchange impact of per
sonal spending abroad by military personnel,
and to curtail the number of U.S. civilian
personnel assigned outside the U.S.
Longer-range measures include a five-year
export-promotion program to be carried out
under the direction of the Department of
Commerce, and improved export insurance
and export-financing guarantees through the
Export-Import Bank. Efforts are also to be
made to reduce non-tariff barriers to world
trade; hopefully, this would increase the U.S.
trade surplus by $500 million during the
current year. In addition, efforts are to be
made to encourage foreign investment and
travel in the U.S.
Analyzing these problems in its recent an
nual report, the Council of Economic Advis
ers concluded: “There is a clear need for a
new demonstration of the flexibility” of the
international payments system. No longer
can the world rely upon continued deficits
in the U.S. balance of payments for the crea
tion of adequate reserves. At home, there
will be needed (among other things) “a reso
lute and continuing attack on inflationary
pressures.” Abroad, there will be needed
“the cooperation of all countries, especially
those with persistent surpluses, in bringing
about better equilibrium.”

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Financing Patterns
he total amount of funds raised through
the financial markets reached a new
peak of $75 billion in 1967. Nevertheless, the
dollar increase over the previous year was
smaller than any other increase since the be
ginning of the decade. Moreover, total private
borrowing actually declined during the year,
as borrowing demands were concentrated in
the government sector, especially the statelocal government sector.
In 1967, commercial banks and other fi
nancial institutions emphasized their domi
nant place on the supply side of the market,
and households backed away from the glitter
ing role they had played in 1966 as direct
suppliers of funds. Moreover, Federal agen
cies declined in importance as financial inter
mediaries during 1967.
In brief, the financial markets recovered
from the turmoil of 1966 and continued the
process of supplying an increased volume of
funds to support the expansion of the econ
omy; They did so at a historically high level
of long-term rates, which indicated not only
the strength of private demand for funds but
also the expectation of continued expansion.

Supply: shifting channels

With the recovery of their lending ability,
commercial banks and other financial insti
tutions provided the principal channel for
the $75-billion flow of funds raised in the
financial system during 1967. Altogether
these financial organizations provided $66
billion, as against only $41 billion in the
preceding year of monetary restraint.
In early 1967, as monetary policy eased
and lower rates developed in money-market
and other short-term instruments, the com
petitiveness of these traditional financial in
stitutions allowed them to attract funds di
verted to other assets in the previous year.

The public’s bank deposits increased $33 bil
lion, and an additional $17 billion went to
deposits in other savings institutions. (Sav
ings and loan associations recovered sharply,
as their inflow of funds jumped from $4 bil
lion to $12 billion.) With their increased re
sources, these institutions responded with
increased lending— $35 billion for banks
and $15 billion for other savings institutions.
Insurance companies and pension plans sup
plied the remaining $17 billion in finance.
At the same time, the market showed less
reliance on those sources which had helped
bridge the financing gap of 1966. The U.S.
Government supplied only $3 billion last
year, down from nearly $8 billion in 1966,
as the lending activity of its agencies slowed.
Households, whose provision of a surprising
$11 billion of direct finance was so critical
in meeting the needs of 1966, turned around
to unload securities acquired in that year.
Household ownership of U.S. Government
bonds, state-local bonds, and corporate stock
fell, so that net security accumulation turned
negative, down $5 billion. Instead of lending
directly on the capital markets, households
reverted to their more typical role of indirect
lending, as they built up their deposits in
commercial banks and other savings institu
tions by roughly $45 billion.
Private demand
Private business demand (excluding that
of financial institutions) was as usual the
largest source of demand for finance in
1967. Private business borrowed $33 bil
lion — 44 percent of total borrowing — thus
matching the record high figure set the pre
vious year.
Business capital expenditures fell off
about $5 billion to about $90 billion in
1967. At the same time, gross business sav-

February 1968

MONTHLY

REVIEW

Fiiianeicil snorkels recover from
turmoil . . . private demand sluggish,
while financial institutions regain usual dominant position on supply side
B illio n s of D ollars

1961

1962

1963

1964

1965

1966

ing rose slightly to about $77 billion, thereby
reducing somewhat the need for outside
finance. Despite this increased flow of in
ternal funds, a considerable borrowing re
quirement remained that was successfully
financed, albeit at a record level of interest
rates.
The mix of borrowing shifted during the
year, as business placed greater reliance upon
security financing while reducing its bank
and mortgage borrowing. Corporate new is
sues reached a record $24 billion — 36 per
cent greater than 1966 and 60 percent above
the 1965 figure. The vast bulk of this was
debt financing, and as a result of this tre
mendous volume, interest rates on long-term
corporate bonds rose steadily through the
year. Altogether, manufacturing issues led
with over $10 billion in new flotations, and
public utilities followed with nearly $5 bil
lion.
A clear-cut reduction occurred in house
hold borrowing — a $3-bihion decline to
about $20 billion, the lowest level of borrow
ing since 1962. Total mortgage indebted
ness rose by only $12 billion, compared with
$14 billion in 1966 and a record $16 billion

1967

1961

1962

1963

1964

1965

1966

1967

in 1964. Consumer credit grew at a slower
pace — $5 billion as against $7 billion in
the preceding year. In general, households
slowed their accumulation of debt and in
creased their holdings of liquid financial as
sets, primarily bank deposits and other sav
ings instruments, and thus ended the year in
a more secure financial position.

Government demand
The Federal government increased its net
borrowing only marginally during 1967 to
just above $7 billion, but some significant
changes occurred in the composition of its
borrowing. The various Federal agencies
which had played such a vital intermediary
role in 1966, particularly in supporting the
mortgage market, recorded a large net re
duction in new lending in 1967. The revival
of lending power by private lenders reduced
pressures on these agencies, and in turn per
mitted them to reduce their net borrowing
by approximately $2 billion.
On the other hand, direct Federal borrow
ing increased by $5 billion as the Federal
budget deficit expanded. But although Fed
eral borrowing was very heavy in the second

FEDERAL

RESERVE

BANK

Meirke# re lie s m@re on usual sources
and less on those that bridged '66 gap

half of 1967, there was actually a more-thanseasonal retirement of Federal debt in the
first half of the year. In contrast to 1966,
when the Federal government acted as a
giant financial intermediary, the bulk of Fed
eral financing needs in 1967 arose from its
spending operations rather than its lending
activities.
State and local governments provided an
even greater source of new demand for fi
nance. These levels of government raised
some $10 billion net, for a one-third increase
over 1966, and thereby accounted for the
largest increase on the demand side of the
markets. This increase is typical of the
decade-long trend of rising state and local
borrowing. The trend was broken in 1966
when monetary restraint slowed borrowing,
but with the 1967 easing, issues which had

SAN

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been postponed earlier reappeared in very
heavy volume. The pace slowed somewhat
in the latter part of the year, but in total,
state-local bond sales jumped $3 billion for
the year.
Education continued to be the principal
purpose of state-local bond financing, ab
sorbing a little less than one-third of the
total. Utilities and conservation projects, to
gether with transportation issues, made up
another third. But industrial-aid bonds con
tinued to grow in importance as more local
ities turned to these issues as a means of
offering low-cost financing to attract indus
try. As late as 1965, sales of industrial-aid
bonds totaled only about $200 million; in
1967, they were above $800 million.
In sum, 1967 was a year with a record
volume of financing at record levels of inter
est rates. The mix of borrowing and lending
was typical of an expansion year, 1967 re
sembling most other recent years in this re
gard. While there was a small decline in net
private borrowing, the level attained was
quite consistent with the upward trend estab
lished at the beginning of the decade. No
doubt high interest rates restrained borrow
ing to some extent; nevertheless, financing
records were set in such important sectors as
the corporate-bond market even in the face
of these high rates. The most buoyant ele
ment in the demand for funds was govern
ment borrowing—federal, state and local.
In this and in several other respects, the 1967
pattern may well be repeated in 1968.

February 1968

MONTHLY

REVIEW

Banking ’67 Style
upported by a sharp rise in reserves,
commercial-bank deposits and earning
assets recorded their largest gains of the
postwar period during 1967. The growth was
accompanied, however, by a substantial shift
in the composition of bank assets—a change
which reflected the shift of business credit
demands to the bond and commercial-paper
markets, along with the increase in house
hold mortgage borrowing from non-bank
financial institutions such as savings and loan
associations. As a consequence, and in con
trast to their experience of the previous year,
banks sharply expanded their holdings of
Federal and state-local government secur
ities. In fact, banks were virtually the only
net supplier of funds to the public sectors.

Sharp deposit growth . ..
On the supply side of the ledger, the gen
erally easier stance of monetary policy in
1967 was reflected in a sharp rise in memberbank reserves — a 10-percent increase be
tween December and December. The gain
was accompanied, too, by a sharp decline in
borrowings from the discount window and
by a turnaround in the banking system’s re
serve position, from net borrowed reserves
of $271 million during the fourth quarter of
1966 to net free reserves of $177 million in
the closing months of 1967.
However, the swing in the net reserve po
sition had begun in late 1966, and by mid1967 member-bank free reserves averaged
about $300 million. Then, with the economy
showing signs of accelerated growth, there
was no further easing of reserve positions.
Indeed, some evidences of tightening became
noticeable in late 1967, including the raising
of reserve requirements on member-bank de
mand deposits of over $5 million per bank
(effective in January 1968).

Total deposits expanded in 1967 by about
$34 billion, or almost 12 percent—well over
double the 1966 increase. Furthermore, and
in contrast to the previous year’s $2-billion
gain, demand deposits rose by $9 billion, and
the total money supply (demand deposits
plus currency held by the public) increased
by $11 billion. But in 1967 as in 1966, time
deposits accounted for the greater part of the
increase in total bank liabilities, rising by $25
billion—double the previous year’s gain.
Households accounted for most of the
time-deposit increase, as they expanded their
holdings of both passbook savings (in con
trast to 1966) and higher-yield savings cer
tificates. Towards year-end, however, the
competitive pull of rising yields on alterna
tive forms of investment was evident in a
slower rate of growth in both types of ac
counts at banks.
For their part, businesses and other hold
ers added about $4.7 billion to their holdings
of large-denomination ($100,000 and over)
certificates of deposit, following a net liqui
dation of about $0.6 billion during 1966.
However, in this case too, some levelling off
was evident towards year-end, as banks were
unwilling or unable to match the rise in
market yields generally. This rise carried
yields on a wide range of instruments above
the 5 Vi-percent ceiling on certificates im
posed by Federal Reserve Regulation Q,
and thereby inspired fears of another round
of disintermediation such as occurred late
in 1966.
On balance, commercial banks in 1967
again garnered the lion’s share of savings
flows into depositary-type institutions —
about 58 percent. This represented a reduc
tion from the exceptionally large (two-thirds)
share realized during 1966, but was still
higher than the norm recorded during the
earlier years of this business expansion.

FEDERAL

RESERVE

BANK

Slackened loan growth . . .
With their vastly expanded supplies of
loanable funds, banks were able to increase
their loans and investments at a fairly vigor
ous pace, with the result that outstanding
commercial-bank credit rose in 1967 by
about $35 billion, or 11 percent. Not only
was this about double the rate of growth of
GNP, but it was also about double the previ
ous year’s gain in bank credit. Furthermore,
the banks’ share of all funds supplied directly
to the credit markets rose sharply to 47 per
cent in 1967 from only 27 percent in 1966
— the year of disintermediation. Moreover,
the pattern of credit allocation differed
markedly from that of 1966.
Business loans, which had risen by 13 per
cent in 1966 on the heels of an even larger
increase in 1965, rose at a more sedate (9percent) pace in 1967. Five of 22 major
classified industry sectors made net repay
ments of loans to large banks during the
year. (These industries included textiles, ap
parel and leather, transportation equipment,
construction, retail trade, and foreign busi
ness firms.) Nine other industry groupings
increased their borrowings by less than in
1966 — and in most cases by substantially
less. In fact, aside from a sharp rise in
bankers-acceptance financing, the only sec-

Ssoiics show m©dereife rise in loans
but bulge in investment portfolios
Billions of Dollars

SAN

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tors which improved on their previous year’s
performance were commodity dealers, petrolelum refiners, and primary-metals manu
facturers.
This slowdown in business borrowing re
flected a shift of corporate financing to the
commercial-paper market, and even more
particularly to the bond market, as corporate
treasurers sought to stockpile long-term
funds in anticipation of further increases in
borrowing costs and taxes. However, the
slowdown also reflected the sharply reduced
pace of business inventory accumulation in
1967. In any event, banks financed only
one-sixth of business’ external credit require
ments in 1967, compared with one-third in
1966 and two-thirds in 1965.
At the same time, the cost of business
borrowing trended downward in 1967, fol
lowing a succession of increases in the prime
rate to 6 percent in August of the previous
year. By April, the prime rate had generally
eased to 5 Vi percent, where it remained until
after the November increase in the discount
rate. Meanwhile, the weighted average rate
on short-term business loans, as reported by
banks in 35 centers throughout the nation,
declined to 5.96 percent in November from
6.13 percent in February.
Consumers, like businesses, also reduced
the pace of their bank borrowings in 1967
as consumer loans rose by only $2.5 billion
— much less than the average increment of
the preceding five years. Furthermore, and
in contrast to 1966, the increase centered in
credit-card and similar financing rather than
automobile financing. But in spite of the re
duced growth, banks still increased their
share of the total consumer-credit market,
from 45 to 52 percent. On the other hand,
a $4-billion increase in banks’ mortgage fi
nancing still meant a reduction in the banks’
share (from 24 to 19 percent) of the overall
mortgage market. This reduction largely
reflected the sharp expansion in home mort-

February 1968

MONTHLY

REVIEW

iMsiness@s exhibit much sm aller reliance on bank loans
during S967 than during 1965-66 durable-goods manufacturing boom
Cumulated Net Change
B illio n s of D ollars

Cumulated Change
B illio n s of Dollars
NONDURABLE
MANUFACTURING

1965

gage financing by savings and loan associa
tions, as S&L’s recovered from the excep
tionally depressed levels reached the previous
year.
. . . and bulging investment portfolios
While loans to businesses and consumers
thus moderated from the vigorous pace of
the two preceding years, commercial banks
sharply expanded their holdings of debt in
struments of Federal and state-local govern
ments in 1967. Banks added more than $6
billion to their holdings of U.S. governments
—a 12-percent increase—after three succes
sive years of liquidating governments in or
der to finance the burgeoning credit demands
of business and other private sectors. Mean
while, bank holdings of tax-exempt issues
rose even more sharply — by about $ 11 bil

1966

1967

lion or 25 percent. Thus, commercial banks
in 1967 absorbed virtually the entire net
increase in both types of government debt,
and thereby accounted for the sharp rise in
the banks’ share of total credit-market fi
nancing.
Commercial-bank liquidity improved dur
ing the year, since loans rose less rapidly
than deposits, and since a substantial portion
of banks’ newly acquired securities consisted
of short-term government obligations. The
ratio of loans to deposits declined from a
post-war high of about 66 percent at yearend 1966 to 64 percent at the end of 1967.
(The ratio dropped from 84 to 80 percent at
New York Reserve City banks.) The ratio
of short-term U.S. governments to deposits
at all commercial banks also improved, ris
ing from 6.1 percent to 6.5 percent over the
same time span.

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BANK

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Outpacing the Nation
he Western economy was something of
a paradox in 1967, showing signs of
sluggishness in several of its major industries,
yet ending the year with pluses over-all. In
terms of personal income, retail sales, and
employment, the Twelfth District economy
performed rather well; in fact, it outpaced
the nation once again in these measures of
aggregate economic activity.
Personal income in the District topped
$100 billion during 1967, ending the year
with more than a 7-percent increase. Al
though this was below the sharp 9-percent
advance recorded in the previous year, the
West once again in 1967 outpaced the rest
of the nation. Washington and Nevada scored
the largest gains, while California—which
normally accounts for roughly two-thirds of
District income— about matched the aver
age U.S. increase.
The income differential between the Dis
trict and the nation was reflected in the
retail-sales statistics. Whereas sales in the
nine Western states increased 5 percent dur
ing 1967, the national gain was only 3 per
cent. The regional strength in retail sales was
centered in autos and other durable-goods
stores.
Backing up these gains in income and con
sumption was a 3-percent increase in District
employment. Nearly all sectors showed in
creases for the year, even though the over-all
gain was the smallest since 1964 and consid
erably below the 5-percent expansion of
1966. The brightest spot was construction,
which recorded an employment rise for the
first time in four years.
On the other hand, both agriculture and
mining lost employment during the year; the
latter industry, of course, was hit hard by the
prolonged copper strike, and farm employ
ment has been on a downtrend for several

years. And with the usual additions to the
labor force, the District’s unemployment rate
(4.6 percent) remained stubbornly close to
the jobless figure for 1966.
Aerospace — still flying high
For the past few years, the District’s aero
space industry has been a stalwart leader in
the Western economy — and 1967 was no
exception. During the first three quarters of
the year, District firms recorded a 15-percent
increase in defense contract awards, and al
most one-half of the increase in awards na
tionally went to District firms — as against
only a one-tenth share of the 1966 increase.
Most of the District’s growth in defense work
was centered in California, while Washing
ton registered a slight decline.
Although the regional industry received
fewer awards from the national space
agency, employment was bolstered by the
boom in commercial jet-aircraft. The com
mercial sector was beset by production and
PefeBS© s e c to r dominates business
activity, in W est as elsewhere
Defense-Space Awards
Annual Change (Percent)

B illio ns of Dollars

1965

1966
Fiscal Years

1967

February 1968

MONTHLY

REVIEW

scheduling problems in
W estern housing in d u s try recovers from slump,
the early part of the
but nonresidentia! activity drops below earlier peak
year, but it recovered
M illio n s of Dollars
in subsequent months
to show a modest em
ployment gain for the
year. Order backlogs
remained large for
both subsonic aircraft
and the new superson
ic transport. So far,
107 delivery positions
have been reserved for
the American SST —
and in view of the
speculation that the
French-British Con
strong pace of the several preceding years.
corde is experiencing financial difficulties,
Only Arizona, Utah, and Washington
the market for the U.S. supersonic entrant
showed non-residential gains, while all other
may be further broadened.
District states lagged in this category.
Up from the depths — slightly
Nothing comes easy for the District’s con
Lumber and steel
struction industry. In 1966, non-residential
Despite decided improvement in housing
and heavy engineering construction expand
activity, the Western lumber industry under
ed while residential construction plummeted,
went its second year of declining output and
but in 1967, their positions were almost re
employment. After responding briefly to the
versed. As a result, total construction activity
housing upsurge early in the year, lumber
grew only slightly during the year, and there
output began to decline in the spring in the
by fell behind the national pace.
face of a slowdown in demand (and other
factors) and it dropped even further when
Nevertheless, housing starts in the West
posted an almost uninterrupted succession of
August’s disastrous forest fires created a
gains throughout August, before showing
shrinking log supply.
But by mid-summer, the improved hous
signs of leveling off. For the year as a whole,
ing market and the decline in lumber output
housing starts totaled 221,000 units, a 14led to strong upward pressures on Douglaspercent gain over 1966 and considerably
fir prices. These pressures intensified in the
better than the 9-percent average increase
late fall as unseasonably mild weather in the
recorded elsewhere.
East and Midwest permitted construction in
A noteworthy development was the recov
those areas to continue at a good pace.
ery of multiple units. Building permits for
District construction activity also had an
these dwellings topped the 1966 volume by
impact on the Western steel industry, which
about 30 percent, compared with a gain of
finished the year with an output of 6.6 mil
11 percent for single-family structures.
Non-residential and heavy construction,
lion tons — about 3 percent below 1966’s
record high. Although regional producers
on the other hand, failed to maintain the

FEDERAL

RESERVE

BANK

escaped most of the effects of the automobile
and steel-hauler strikes, the decline in de
mand for structural steel — associated with
the slowdown in industrial and heavy con
struction— made a decided impression on
Western output. Nonetheless, total produc
tion rebounded sharply in the final quarter
as an inventory buildup began in anticipation
of a possible mid-’68 steel strike.
Steel prices continued to rise during the
year, despite the persistent threat of foreign
imports. Domestic producers raised prices
on pipe and tube items in January, and fol
lowed this with hikes on steel plate and bars
in August. Finally, in December, they in
creased prices for hot and cold-rolled sheet
and strip by $5 a ton. Consequently, the fin
ished-steel price index rose about 2 percent
during the year.
Farmers and canners — contrasts
The District’s crucial agricultural industry
about matched its previous year’s perform
ance with $6.5 billion in marketing receipts.
California and Arizona crop production was
severely affected by the damp spring, which
reduced the output of deciduous fruits and
early spring vegetables. Cotton production
also suffered from the unfavorable weather,
as well as from insect damage. In contrast,
the abundant moisture benefitted District
D esp ite r@e@v@ry, Western share
of national housing market declines

SAN

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grain farmers; high yields, combined with a
sharp increase in acreage, boosted wheat
production in the Pacific Northwest by about
one-third.
Livestock marketings fell considerably be
low the year-earlier level, primarily as a re
sult of reduced sales from California feedlots. Poultry and egg production increased
substantially, however, and hatchings of both
broiler chicks and turkey poults were more
plentiful than a year earlier.
Western canning activity also was a study
of contrasts. Total production dropped from
the record volume of 1966 because of the
poor fruit harvest, but the vegetable pack
surpassed the previous high of 102 million
cases processed in 1956. Tomato production
continued to grow, and 80 percent of the
crop was harvested by machine.
Dampened by spring rains, the fruit pack
was the smallest since 1958. In California,
the output of cling peaches dropped from 30
to 23 million cases, and canned-pear output
plummeted from 6 million to 1 million cases
over the year.
With the reduction in supplies, canners
paid substantially higher prices for their raw
materials. Pears, for example, jumped from
$95 a ton in 1966 to $150 in 1967. Tomato
prices also climbed, from about $36 to $45
per ton, despite rising production.

Metals and oil — mixed
The District’s nonferrous-metals industry
was severely hampered by the prolonged
copper strike, which idled 25,000 mine and
smelter workers and brought copper produc
tion to a standstill throughout the second
half of the year. Copper production dropped
more than one-third below the 1966 figure,
and the drop would have been even greater
except for a significant increase in output
during the early months of 1967.
Copper shortages did not begin to appear

MONTHLY

February 1968

REVIEW

INDEXES OF INDUSTRIAL PRODUCTION — TWELFTH DISTRICT
(1957-59=100)

INDUSTRIAL PRODUCTION

1960

1961

1962

1963

1964

1965

1966

1967

C op p e r
Lead
Z in c
S ilv e r
Gold
S teel In g o ts

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
93
89
114
116
138

146
118
96
131
135
140

90
96
87
100
103
136

A lu m in u m
C rud e P e tro le u m
R efin e d P e tro le u m
N a tu ra l Gas

101
95
104
112

97
96
108
121

107
96
111
127

118
97
112
144

135
97
115
148

150
102
120
147

165
112
122
158

195
121
126
172

Lum ber
D o u g la s F ir P lyw ood

98
120

95
132

98
142

98
160

108
177

107
180

103
180

—

C anned F ru it
C anned V e g etab le s
M eat
S ugar
F lo u r
C re a m e ry B u tte r

111
101
107
105
102
112

116
89
111
107
99
120

121
106
112
113
101
119

108
96
115
120
94
103

141
100
126
138
96
103

109
97
126
137
92
96

135
113
130
132
91
85

105
115
131
116
91
105

until late October, however, principally be
cause of large stocks on hand and increased
imports. But at that point, the dealer price
of refined copper shot upward to 64 cents a
pound, almost 20 cents above its pre-strike
level.
The strike also affected the market for
silver, which is generally produced as a by
product in copper and other metal mining.
Domestic and international shortages, along
with the lifting of the U.S. Treasury’s $1,293
ceiling in mid-year, were reflected in a steady
climb of prices, climaxed by a record $2.17an-ounce quotation on the New York market
in late November.
The aluminum industry fared somewhat
better during the year, as new productive
capacity in the Pacific Northwest enabled
producers to achieve a record output of the

metal. The threat of overproduction ap
peared in the second and third quarters as
shipments dropped off, but demand recov
ered somewhat in the final quarter.
Petroleum refining activity came under
pressure in mid-1967 as a result of the
embargo on petroleum shipments by Arab
countries. Normally the District depends
upon imports, primarily from the Middle
East, for almost one-third of its crude oil
supplies. Thus, in order to maintain refining
activity during the affected period, Western
refineries obtained increased supplies from
sources within the District and from Canada.
Over the year, crude oil production in the
District increased nearly 7 percent, or 25
million barrels, with most of the gain coming
from California, Alaska, and a new field in
Arizona.

FEDERAL

RESERVE

BANK

SAN

FRANCISCO

Calmer Sailing
estern banks had relatively calm sail
ing in 1967 after the turbulence of
the preceding year, and they managed to
record a sharp gain in outstanding bank
credit during the year. Large District banks
expanded their loan portfolios by 5 percent
—just one percent short of the 1966 gain
—and they increased their holdings of se
curities by 18 percent. Therefore, total bank
credit expanded over 8 percent — nearly
double the rate of increase in the preceding
year.
The severe competition for time-and-savings deposits which had characterized earlier
years modified somewhat in 1967, as savings-and-loan associations as well as banks
now operated under legal interest-rate ceil
ings on deposits. In a reversal of the 1966
experience, large District banks gained pass
book savings as well as consumer-type cer
tificates, and overall reported an 11-percent

F@d"fynds a c tiv ity centered
in New York and Western banks
B illio ns of Dollars
1967
0
.2
4
.6
.8
GROSS SALES TO SECURITY DEALERS

1966
0

New York
SAN FRANCISCO
Chicago
Other D istricts

1
EZ
_ □

increase in total time-and-savings deposits.
District banks lagged behind the national
pace in this category; on the other hand,
they matched the performance of large banks
elsewhere with a 6-percent increase in de
mand deposits adjusted.
During 1967, Western banks were fairly
successful in repairing their liquidity posi
tions, which had been depleted during 1966.
In the first half of the year, large District
banks made heavy acquisitions of munici
pals, and about one-fourth of these holdings
at midyear carried maturities of one year or
less. In the latter half of the year, banks also
added to their short-term holdings of U.S.
Government issues. Thus, these increases in
short-term securities bolstered their ability
to meet future loan demands. Also, the less
rapid loan expansion and increased deposit
inflow last year reduced the loan-deposit
ratio of large District banks from 72.3 to
69.6 percent between December 1966 and
December 1967.
According to still incomplete data, 1967
was a year of record earnings for many
banks in the West. Interest-rate ceilings on
time-and-savings deposits helped curb the
rapid spiral in bank costs, and this was espe
cially important in the District, since West
ern banks traditionally hold a high pro
portion of time-and-savings to total deposits.
In addition, revenues of District banks in
creased along with those of other banks
when the prime rate of 5 Vi percent was
pushed back up to 6 percent late in the year,
at a time when business-loan demand was
also strengthening. Heavy investment in rel
atively high-yield municipal securities also
helped to increase the after-tax revenues of
Western banks.
Only six new banks were established in
District states in 1967, and this growth was
more than offset by 23 mergers and consoli-

February 1968

MONTHLY

REVIEW

D istrict bank cre d it expands twice as fast in '67 as in '66,
on strength of small gain in loans and sharp rise in security holdings
B illio n s of Dollars

dations. Thus, 1967 witnessed a further
net reduction of 17 in the number of banks
operating in the Western states. On the
other hand, 208 new branches were estab
lished and 9 were closed during the year, as
against 170 branch openings and 5 closings
during 1966.
Some reserve pressure
The reserve position of District member
banks was slightly easier in 1967 than in
the tight-money year, 1966, but the swing
was not as pronounced for Western banks as
it was for other member banks. In fact, dur
ing the first and again during the fourth
quarter, District bank borrowings from the
Federal Reserve Bank were greater than
their reserves in excess of requirements. For
the year as a whole, excess reserves of Dis
trict banks averaged $26 million while bor
rowings from the discount window averaged
$21 million — ranging from a high of $33
million in the first quarter to a low of $8
million in the third quarter. Thus, banks
recorded average free reserves of $5 million
for 1967 as compared with net borrowed
reserves of $4 million in 1966. (All data

Percent Change 1967

Percent Change 1966

are on a daily average basis.)
Continuing reserve pressure on District
banks also was evident in the relatively high
volume of borrow ing from other banks
through purchases of Federal funds (idle
balances of banks on deposit with Federal
Reserve Banks) and from co rp o ratio n s
under repurchase agreements. In 1967,
large District banks averaged $416 million
in net interbank Fed-funds purchases (as
against only $9 million in 1966), but a large
proportion of these purchased funds were
resold to U.S. Government securities dealers.
West Coast banks accounted for one-fifth
of the total volume of gross interbank trans
actions by large banks in 1967. This area
thus continued to rank second — next to
New York City — as a money-market cen
ter for Fed-funds tran sac tio n s. Further
more, these Western banks accounted for
almost one-third of Fed-funds sales to U.S.
Government securities dealers—a substan
tially broader participation in this sector of
the money market than heretofore.
Strong business demand
Business loans, with a $778-million (7-

FEDERAL

RESERVE

BANK

percent) increase, were the dominant factor
in the 1967 loan growth of Western banks,
although business demand lagged behind
the very vigorous 1966 pace. After a sea
sonal lull in the winter and early-spring
months, borrowing by commercial-industrial
firms rose by a near-record volume for the
June tax period, and then rose sharply again
in mid-September and in the latter part of
the fourth quarter. The gain in the last half
of the year exceeded the rate of increase at
other large banks, but the earlier slowdown
resulted in a smaller loan expansion for 1968
as a whole than was recorded elsewhere.
The durable-goods sector dominated busi
ness-loan demand in 1967 as it had in 1966.

SAN

FRANCISCO

M achinery manufacturers increased their
bank debt more than other durable-goods
p ro cesso rs, but transportation-equipment
m an u factu rers — the large borrowers in
1966 — made net repayments. Loans to
public utilities accounted for another large
portion of the loan expansion. Meanwhile,
in a reversal of the 1966 trend, Western
banks added substantially to their holdings
of bankers acceptances during 1967. Inci
dentally, banking offices outside the major
metropolitan centers garnered a larger share
of the expanded commercial lending last
year, whereas the 1966 increase was con
centrated predominantly in the major cities.
The cost of short-term business borrow-

SELECTiD ASSET AMP LIABILITY STEMS OF WEEKLY REPORTING LARGE BANKS
SN THE TWELFTH FEDERAL RESERVE DISTRICT
(dollar amount In millions)

Twelfth District
Outstanding
Dec. 27, 19671

1welfth District Ne Change
Dec. 29, 1965
Dec. 2 3, 1966
to
0
Dec. 28, 1966
Dec. 2 7 , 1967
Dollars

T o ta l lo a n s a nd a d ju s tm e n ts
Loa n s a d ju s te d a nd in v e s tm e n ts
L oans a d ju s te d
C o m m e rc ia l a n d in d u s tria l lo a n s
R eal e s ta te lo a n s
A g ric u ltu ra l lo a n s
L oans to n o n b a n k fin a n c ia l in s titu tio n s
Loa n s fo r p u rc h a s in g o r c a rry in g s e c u ritie s
To b ro k e rs a nd d ea lers:
To o th e rs :
L oa n s to fo re ig n b a n ks
C o n s u m e r in s ta lm e n t lo a n s
A ll o th e r lo a n s
T o ta l in v e s tm e n ts
U. S. G o v e rn m e n t s e c u ritie s
T re a s u ry b ills
T re a s u ry c e rtific a te s o f in d e b te d n e ss
T re a s u ry n ote s a nd b o n d s m a tu rin g :
W ith in 1 y e a r
1 to 5 ye a rs
A fte r 5 ye a rs
O th e r S e c u ritie s
T o ta l d e p o s its (le ss ca sh ite m s )
T o ta l d e m a n d d e p o s its (le ss ca sh ite m s )
D e m a n d d e p o s its a d ju s te d
T im e a nd sa v in g s d e p o sits
S a vin g s d e p o s its
O th e r tim e d e p o s its IPC
C a p ita l a c c o u n ts
T o ta l a s s e ts /lia b ilitie s a nd c a p ita l a c c o u n ts

1 Revised data
2 Partially estimated

Percent

$44,420
43,599
30,754
11,556
9,544
1,207
1,631

+ 3 ,5 4 0
+ 3 ,3 3 8
+ 1,430
+
817
+ 303
+
65
+
16

+
+
+
+
+
+
+

8.7
8.3
4.9
7.6
3.3
5.7
1.0

445
196
260
4 ,486
1,826
12,845
5,567
1,056
0

64
+
27
—
37
+
124
+ 218
+ 1,908
+ 317
—
1
—
99

—
+

12.6
16.0
12.5
2.8
13.6
17.5
6.0
0.1
100.0

733
2,636
1,142
7,278
4 3,833
16,494
15,004
27,339
15,615
7,736
3,568
54,764

+
96
+
617
—
296
+ 1,591
+ 3 ,6 8 9
+
999
+
788
+ 2 ,6 9 0
+ 496
+ 1,672
+
130
+ 4 ,7 3 1

+
+
+
+
—
+
+
+
+
+
+
+
+
+
+
+

15.1
30.6
20.6
28.0
9.2
6.4
5.5
10.9
3.3
27.6
3.8
9.5

Percent
+
+
+
+
+
+
—

4.5
4.5
5.8
12.3
2.3
1.7
9.8

Other U. S.
Net Change
Dec. 28, 1966
to
Dec. 27, 1967
Percent
+
+
+
+
+
+
—

10.7
10.4
6.5
8.5
6.2
6.3
3.9

+
+

16.1
16.7
8.4
2.0
8.9
20.5
16.0
33.9
100.0

L21.3
0.6
0.3
3.72
0
1.2
+
8.0
2.9
+

+
+
+
+
+

—
+

+
+

—
+
+

+
+
—
+
+
+
+

17.8
2.6
25.8
11.5
3.6
1.7
2.3
7.1
8.5
92.0
2.0
6.1

+
+
+
+
+
+
+
+
+

19.5
35.0
28.7
24.8
11.2
7.0
5.8
16.1
2.9
33.4
6.7
11.4

MONTHLY

February 1968

Purcsbie-geods sector continues
to dominate business-ban demand
Millions of Dollors
-100

""I"'

0
100
200
-------------1------------- 1------------ 1------------ i— ------ - r —

. ,

Durable Goods

300
----- 1

1
'1967

Nondurable

Mining

Trade

1966

1
]

Transp.and U tilitie s

Construction
Services

t
I----------------1

Banker's Acceptances

ing declined in Western metropolitan areas
during most of 1967, from an average rate
of 6.28 percent in the first half of February
to 5.97 percent in the first part of Novem
ber. However, the November increase in
the prime rate, to 6.00 percent, immediately
led to higher business borrowing costs and
to increased pressure on other loan rates as
well.

Mortgage upturn
Western banks and savings-and-loan as
sociations posted sharp gains in mortgage
lending in 1967, with the help of increases
of 10 percent or better in their savings in
flows. Despite a first-quarter decline, com
mercial banks improved slightly on their
1966 performance with a $303-million in
crease in mortgage loans, while S&L’s ex
panded their mortgage portfolios by about
$1.4 billion — three times the gain record
ed in 1966. Banks undoubtedly would have
scored a larger gain if they had not stepped
up sales of mortgages from their own port
folios to insurance companies and other in
stitutional investors.
These developments were accompanied
by a firming in mortgage yields following
some early-year sluggishness. In the West,
yields on 6-percent 30-year FHA mortgages

REVIEW

recovered an earlier 50-basis-point decline
and rose to 6.77 percent in December, while
yields on conventional mortgages for new
homes rose to 7.00 percent. In both cases,
rates were only slightly below those reached
at the interest-rate peaks of 1966.
Furthermore, the net growth in savings
at District S&L’s gave signs of tapering off
in the last half of 1967, partly because of
the competitive pull of rising yields on mar
ket instruments and the mid-year rollback
on interest rates payable by associations in
several major Western states. By year-end
the spread between the bellwether 90-day
Treasury bill rate and the rate on S&L pass
book -accounts, which had favored the latter
by as much as 190 basis points in June, was
reduced to about 13 basis points, thereby
prompting concern over the possibility of
another round of disintermediation such as
occurred in 1966. The growing signs of
money-market weakness also contributed to
a slower increase in new mortgage-loan com
mitments on the part of liquidity conscious
S&L’s; the December volume of commit
ments was only slightly higher than the June
figure, following a sharp increase in the first
half of the year.

Consumer caution
Despite the proliferation of credit-card
plans, overdraft privileges, and other spe
cial plans designed to encourage consumer
borrowing, Western consumers continued in
a cautious mood throughout 1967. Con
sumer instalment credit at large Western
banks rose by $124 million—a 3-percent
gain, as against the previous year’s almost
4-percent increase — thereby reflecting the
many uncertainties (political, civil, and eco
nomic) which plagued Westerners as well
as other Americans during the year. As a
consequence, the many special procedures
instituted by Western banks to facilitate bor
rowing in the highly competitive consumer

FEDERAL

RESERVE

BANK

area did not show spectacular results last
year, although they may well do so after this
initial breaking-in period.
District bank lending in other sectors fol
lowed divergent patterns last year. The level
of loans to non-bank financial institutions
remained consistently below the level of
1966 (except for December) as sales- and
personal-finance companies increased their
reliance on the commercial-paper market to
meet their borrowing needs. On the other
hand, loans to brokers and dealers for fi
nancing U.S. Government securities general
ly ran substantially above the year-before
pace throughout 1967. Agricultural loans,
with a 6-percent year-to-year gain, also
remained substantially above the 1966 level.

Popular municipals
Large banks took advantage of the early1967 breathing spell to expand their security
holdings again after the erosion of the pre
ceding year. However, U.S. Government se
curities accounted for only one-sixth of the
$ 1.9-billion expansion in investments. Dis
trict banks ended the year with only a nom
inal change in their Treasury-bill holdings,
but they recorded a substantial shift from
long-term bonds into issues maturing in
one-to-five years, along with some increase
in securities with maturities of one year or
less.
Municipal obligations, with their very at
tractive after-tax yields, accounted for the
bulk ($ 1.2-billion) of the increase in bank
security holdings. Purchases were concen
trated in tax warrants and other short-term
issues, along with substantial amounts of
state-local bonds with maturities of one year
or less. Thus, the improvement in banks’
liquidity positions centered largely in the
municipal segment of their portfolios. Dur
ing the year, Western banks also favored
Federal Agency participation certificates, increasing their PC holdings by $167 million.

SAN

FRANCISCO

Rapid deposit growth
Total deposits of large Western banks in
creased almost three times faster in 1967
than in 1966. Demand deposits adjusted,
after three years of little or no gain, rose
5Vi percent ($788 million) in 1967. In
addition, time-and-savings deposits expand
ed by $2,690 million. The 11-percent gain
in this category was considerably greater
than the increase in 1966, when disinterme
diation held the expansion to 7 percent de
spite higher rate ceilings on certificates dur
ing most of that year. This sharp increase
in savings inflows, along with the parallel
increase in S&L inflows, made possible the
strong recovery in District mortgage activity
over the year.
A major development in bank time-deposit behavior was the reversal of the de
cline in passbook savings, beginning in the
spring of 1967 and continuing throughout
the year. As passbook savings rose, how
ever, the rate of expansion in consumer-type
time deposits declined. Moreover, a net re
duction occurred in the fourth quarter as
Christmas Club accounts were paid out and
as su b stan tial withdrawals were made to
meet property taxes and prepaid California
income taxes.
In the first q u a rte r of 1967, Western
banks posted a $655-million net gain in
large-denomination negotiable CD’s, but de
posits of this type declined during most of
the rest of the year as their rates began to
push against the legal ceiling of 5Vi percent.
Still, for 1967 as a whole, the banks had a
$528-million year-to-year increase.
In the pub lie-fu n d s category, District
banks fared better in 1967 than in the pre
ceding year, as time deposits of states and
political subdivisions rose $213 million over
the course of the year. In fact, prior to the
usual seasonal runoff in April, public de
posits topped $3 billion for the first time in
history.

February 1968

MONTHLY

REVIEW

Catalog of Expansion
he diverse regional economies which
make up the nine-state District con
tinued to expand during 1967. The pace
was not quite so rapid as it was in overexuberant 1966, but ample evidence of the
broad-based strength of the boom can be
garnered from the long catalog of expan
sionary items listed below.
Diversity as well as strength' showed up in
regional em ploym ent data. The Pacific
Northwest and Southern California both in
creased by roughly 4 -p ercen t during the
year, and ocher District areas scored in
creases of 3-percent or more — roughly in
line with the performance of the rest of the
national economy.
Bank loan data exhibited a slower-thannational pace, just as in the several preced
ing years. The slowdown centered in Cali
fornia member banks, where net loans in
creased 3 Vi -percent, or som ew hat more
slowly than they did in either 1965 or 1966,
partly because of the early ’67 sluggishness
in mortgage lending. Pacific Northwest and
Mountain states meanwhile stepped up their
lending pace, with better than 7 Vi-percent
gains.
Retail prices in major Western cities re
flected both the early-year sluggishness and
the late-year upsurge in business activity.
The accelerated climb began in the spring
months, as food prices reversed a six-month
decline, and continued through the year,
augmented during the summer by increases
in C alifo rn ia cigarette, liquor, and retail
sales taxes. (Other contributing factors were
higher price tags on apparel and automo
biles, rising homeowner costs, and the con
tinued uptrend in consumer services.) For
the year as a whole, the Seattle and San
Francisco indexes slightly exceeded the na

tional increase of 2.8-percent. Los Angeles
consumer prices rose by 2.5-percent — but
here as elsew here, the increase was the
greatest since the beginning of the decade.

CALIFORNIA
Aerospace Both military and commer
cial orders helped to sustain aerospace ac
tivity in California last year. Defense pro
curement awards amounted to $6.7 billion
in the January-September period alone. The
list included the following: $65 million for
P3B aircraft; $51 million for Polaris A3
missiles and $35 million for engineering
services on the fleet ballistic-missile system;
$25 million for the Poseidon intercontinental
ballistic missile; $32 million for the Red
eye shoulder-fired battlefield missile; $675
million for the Manned Orbiting Laboratory
Program; $170 million for the Apollo Lunar
Launching Program; $64 million for the nu
clear rocket-engine program; and $29 mil
lion for 8 C9A hospital planes.
Commercially, the jumbo jet is the main
concern of many California-based aerospace
companies. And although the prime con
tract for the supersonic transport went else
where, a large proportion of sub-contracts,
estimated at $1.4 billion over the 5-8 year
development period, have been placed with
California firms.
Steel During 1967, the state’s only fully
integrated producer announced its intention
to increase its steel-making and fabricating
capability by one-fifth, at Fontana. Plans
call for the construction of a new plant for
the manufacture of raw steel, modernization
of existing bar and continuous-weld pipe
facilities, construction of a cold-rolled sheet
mill and a facility for the manufacture of
tinless tinplate.

FEDERAL

RESERVE

BANK

SAN

FRANCISCO

hospital construction is in progress in Tor
Another major producer plans to build
a structural steel fabricating plant on a 129rance, Santa Ana, Santa Rosa, Fresno, San
acre site adjacent to its Pittsburg works.
Jose and Oakland.
And a third major company will make its
Shipping Worldwide attention was fo
initial entry into the Western market with
cussed on Long Beach when that city pur
a plant — reportedly Northern California’s
chased the Queen Mary for $3.5 million.
first fully integrated facility — on a 3,300At a further cost of $1.5 million, the famous
acre river-front site in Solano County, about
ship will be converted into a 400-room hotel
40 miles northeast of San Francisco.
and a “Museum of the Sea.” Following this
Petroleum and gas A number of signif
up, San Francisco and other cities are now
icant developments were recorded by Cali
planning to bid on the Queen Elizabeth.
The expanded use of efficient containers
fornia’s petroleum and gas industry in 1967.
for freight shipping was a boon last year both
Total crude capacity reached over 1 million
barrels a day, and expansion was continued.
to ship-builders and to port construction.
One large shipping concern has begun a
Scheduled for completion in 1969 are a 70,$ 100-million replacement and conversion
000 b/d refinery at Benicia and a $ 100million unit at El Segundo.
program which will increase its containership capacity by 50 percent within the next
Construction Large residential-commer
few years. Another firm is planning to build
cial projects recovered along with the rest
a $45-million fleet of three 24-knot contain
of the construction industry in 1967. Among
er-ships for service in the Pacific; each ship
the projects planned or underway were: the
will have a cargo capacity of one million
$300-million Marincello community in Ma
cubic feet.
rin County; the $220-million Serramonte
Planned Community in Daly City; the $ 150The ports of Long Beach and Los An
million Embarcadero Center in San Fran
geles have long-term plans to increase ves
cisco; the $ 120-million Atlantic-Richfield
sel capacity by 150 percent. San Francisco
Plaza complex in Los Angeles; and the
has completed its $23-million Army Street
$ 100-million Silverado
project in Napa Val
E m ploym ent g ro w th , although strong, lags behind
ley.
'66
pace . . . Southland and Northwest score largest gains
Hospital facilities
Employment - Percent Change
and educational edi
fices continued to rise
7.0 in nearly every com
munity. At Stanford
6.0 h
University, 1967 saw
the completion of a
$ 114 - million Linear
Acceleration Center.
Plans were laid for
the construction of a
$3 8-million auditori
um - exhibition center
in downtown Los An
geles, and extensive

1965

1966

1967

February 1968

MONTHLY

Terminal. In Oakland, the $30-million 7th
Street Terminal will add 10 deepwater berths
when completed in 1969, and 8-12 more
berths will be added later on.
Public utilities The California Depart
ment of Water Resources, in conjunction
with the city of Los Angeles, has substan
tially expanded plans for hydroelectric pump
and storage facilities to be built in Los An
geles County. The revised plan would in
crease investment in the California Aque
duct Project to $1.7 billion from the earlier
estimate of $1.2 billion. It would generate
1.6 million kilowatts of electric power —
instead of 523,000 kilowatts as originally
intended — and would provide for the con
struction of four dams and reservoirs.
A major utility firm has announced plans
to build a nuclear power plant near Diablo
Canyon in San Luis Obispo County. The
cost would be $150 million and capacity
would exceed one million kilowatts. This
firm, incidentally, expects to double the size
of its overall $4.2-billion plant within the
next 10 years. In Southern California, an
other major utility expects capital spending
to exceed $640 million over 1967-68. As
part of a 5-year expansion program, the
company is now constructing several steam
generating plants that, when finished, will
add about 900 megawatts a year to its op
erating capacity.
In the planning stage are several major
projects: a $200-million, one-million-kilo
watt nuclear generating plant in Santa Bar
bara County; and a $ 169-million generating
station consisting of two 750,000-kw units
near Oxnard.
Transportation Bridge and highway con
struction reached a record level last year in
California. Major projects included: $27
million for a 4-lane high-level bridge to re
place Dumbarton Bridge between Alameda
and San Mateo Counties; $14 million for a

REVIEW

6-mile section of the Interstate freeway be
tween Stockton Channel and Hammer Lane
in San Joaquin County; and $14 million for
an overpass, ramps and roadways in Long
Beach.
Plans are already being formulated by
California’s major airports to service the ex
pected flood of traffic that will accompany
the introduction of jumbo and supersonic
transports. Los A ngeles plans to spend
$500 million over the next eight years for
a regional airport system, San Francisco has
a $98-million master plan, and at Oakland,
an $ 11-million m aintenance hangar, the
largest in the nation, will be built in 1968.
C o n stru ctio n of the Bay Area Rapid
Transit system — scheduled for completion
in 1972—progressed somewhat slowly during
1967. Major work was done on aerial struc
tures in Oakland, a 4-mile tube at the bot
tom of the Bay, and a tunnel through the
East Bay hills.
In Los Angeles, the Southern California
Rapid Transit District (SCRTD) has pro
posed the spending of $1.6 billion for a 62mile rapid transit system and augmented bus
service facilities (completion date 1975).
This huge project, involving the purchase
of 475 rapid-transit cars and 300 new buses,
would carry up to 327 million passengers
annually by 1980.

PACIFIC NORTHWEST
Aluminum Undaunted by a slight set
back in industry-wide shipments in 1967,
aluminum producers stepped up their plan
to expand primary and fabricating capacity.
Altogether, Pacific Northwest aluminum ca
pacity is expected to reach 1.5 million tons
a year by 1972, up from 600,000 tons in
1955 and one million tons in 1967.
A new entrant into the field began work
on a $ 142-million project at Warrenton,

FEDERAL

RESERVE

BANK

Sank lesrsdlrag p®<g@ slows in California
but not in other Western areas
Member-Bank Net Loans ( Percent Change)

Oregon; this project eventually will include
a 130,000-ton reduction plant and an alum
ina plant to process bauxite brought in by
ship from Australia. Another new producer,
after completing a reduction plant at Belling
ham, Washington, readied plans to add a
facility to produce electrical wire from mol
ten aluminum.
The o u tb reak of the
Northwest’s worst forest fires in a half-cen
tury — following the region’s hottest and
driest summer in memory—blackened mil
lions of dollars worth of timberland, idled
thousands of loggers, and played havoc with
the lumber market from the Pacific to the
slopes of the Rockies. Hardest hit were the
Cascade Mountains of Washington and Ore
gon and the Idaho panhandle near the Ca
nadian border. The fires forced the closure
of nine national forests at the height of the
logging season; this factor, together with a
sharp increase in log exports, created a se
rious shortage of logs which curtailed lumber
production throughout late 1967.
Log exports to Japan increased sharply
last year to more than 1.5 billion board feet.
Industry officials claim that these exports
are damaging the log supply available for
Forest products

SAN

FRANCISCO

domestic use and inflating Federal stumpage
prices, which have almost doubled since
1962. The major lumber and plywood as
sociations are urging the Federal govern
ment to establish a quota of 350 million
board-feet of logs available for export each
year from public timberlands, so as to re
lieve the position of small and medium-sized
domestic mills that depend on Federal tim
ber supplies.
The pulp and paper industry, although
operating at high levels, was faced with the
threat of over-capacity last year because of
sluggish demand for newspaper and un
bleached kraft. Expansion of facilities none
theless continued during 1967. One major
company completed a $60-million expan
sion program, while a newcomer to the field
readied plans to build a $40 million pulp,
paper and converting mill near Halsey; an
other firm will build a new plant in the
Yakima area.
Aerospace Employment in the SeattleEverett-Tacoma area topped 100,000 last
year, a new record. Output of the commer
cially popular model 727 was very strong,
and the total backlog of co m m ercial-jet
orders exceeded $5 billion at mid-year. This,
along with a potential $3 0-billion market for
the SST, assure a high level of production
into the next decade. Development costs for
the 400-passenger 747 jet transport have
already reached $700 million, and a further
$150 million will be spent on building the
prototype of the supersonic transport.
Defense contracts let to Pacific Northwest
firms last year included: $34 million for
maintenance and modification of military
aircraft and electronic systems; and $49
million for 9 wooden minesweepers for the
U.S. Navy.
Steel Construction began in 1967 on a
$35-million fully integrated steel-producing
complex at the Port of Portland’s Rivergate

February 1968

MONTHLY

Industrial District. The project will even
tually include electric-furnace facilities ca
pable of producing 150,000 tons of steel a
year (capable of expansion to 500,000 tons
a year), rolling-mill facilities for producing
large-size steel plates up to 3 inches thick
and 96 inches wide, and a plant to produce
pre-reduced pellets containing a minimum of
95 percent metallic iron. The new complex
will be able to supply the heavy regional
demand for large-size plates—-a demand
which cannot be met by the three steel mills,
with an annual capacity of about 700,000
tons, now operating in the Pacific Northwest.
Construction P ro sp e rity has caused
strong housing activity in parts of Washing
ton, typified by construction of three highrise apartments costing $40 million on a 20acre marina-lagoon site in Haughton. New
commercial projects in the area include:
$100 million for an industrial-residentialcommercial complex to be built over the next
15 years at Lynwood; $30 million for the
modernization of Lakewood Industrial Park
in Tacoma; and a $ 15-million shopping cen
ter in Eugene.
Utility firms have in the planning stages
a $130-m illion, one-million-kilowatt nu
clear-power plant at either Trojan or Beaver,
Oregon; a $ 150-million nuclear-generating
plant to be built in Bellingham, Washington;
and a $ 139-m illion , one-million-kilowatt
coal-powered generating station and power
transmission lines near Centralia, Washing
ton.
M O U N T A IN STATES
Copper A lthough the six-month-long
copper strike caused a severe decline in out
put, work continued on projects to expand
copper p ro d u ctio n capacity. The $100million program initiated in 1963 at the
Bingham Canyon property in Utah was
completed by mid-year; with the expansion
of concentrating and smelting facilities at

REVIEW

E x p o rt frcsde g r o w s rapidly
at all West Coast ports
B illio n s o f D ollars

the site, capacity rose from 200,000 to 300,000 tons per year.
The new Twin Buttes open-pit copper
mine continued under development twenty
miles south of Tucson, Arizona. When com
pleted in 1970, at a cost of $50-$60 million,
the mine will have an estimated capacity of
60,000 tons of copper per year.
Another company signed a contract with
the General Services Administration to de
velop a new ore body adjacent to the Esperanza mine in the Twin Buttes mining dis
trict, at a total cost of $151 million. When
in production, this property will rank with
the largest open-pits in the state, having an
eventual capacity of 68,000 tons a year.
When these and other new properties are
completed, total District capacity will rise
from 1.1 million tons to over 1.5 million
tons.
Silver The increase in the price of silver
spurred exploration activity in the Coeur
d’Alene region of Idaho. At the Rainbow
property, exploration work was scheduled

FEDERAL

RESERVE

BANK

at the 3,475-foot level. At the Galena mine,
plans were made to deepen one mine shaft
and to increase milling capacity from 500
to 800 tons daily.
Electronics Arizona took on increased
importance as an electronics center last year.
One electronics firm — the largest single in
dustrial employer in the state, with over
14,000 workers — received major contract
awards for armament fuses, electronic equip
ment, bomb fuses, and guidance and control
parts for Sidewinder guided missiles. The
Navy also awarded a $ 16-million contract
to an Arizona firm for work on the Walleye
television-guided glide bomb.
Petroleum and gas Exploration resulted
in significant discoveries of oil pools in the
Mountain States last year. One company
has already begun producing on the Navajo
Indian Reservation in Arizona. In Utah,
drilling was productive in the Wasatch Ter
tiary, in the Redwash area, and at Gregory
in the Green River Basin.
Chemicals Large-scale expansion pro
grams were continued by major chemical
firms in Arizona and Idaho. One project,
at Benson, will increase production of nitric
acid from 100 tons to 150 tons per day.
Another project, at Kellogg, will double sul
phuric-acid output to 215,000 tons a year.

Commercial complexes
began to sprout up in many Mountain areas
last year. In Nevada, a $320-million proj
ect was scheduled near Henderson, Clark
County; when completed, it will include a
civic center, shopping centers, a 500-room
hotel-apartment building, a housing devel
opment, and a 360-acre lake development.
Las Vegas projects include $80-million and
$5 0-million hotels and a $22-million shop
ping center. In Arizona, planning got under
way for a $40-million housing development,
shopping center, motel and golf course at
Flagstaff.
C onstruction

SAN

FRANCISCO

Utility companies scheduled work on $30
million of new facilities at Hell’s Canyon,
Idaho; $40 million for electric and gas in
stallations in Arizona; and $500 million for
a coal-burning power plant in the Raiparowits Plateau of S outhern U tah. Federal
Government spending centered around the
$ 115 -million drilling-tunneling-maintenance
work at the Atomic Energy Commission’s
Test Site near Las Vegas, and around a
$ 100-million building program for highways,
dams, and other structures in Idaho.
ALASKA AND H A W A II
Petroleum and gas Alaskan oil produc
tion jumped by the end of 1967 to over
130,000 barrels a day, mostly from the
Swanson River field. Two newly opened
fields each reported more than 100 million
barrels of oil reserves; in fact, the state’s
proved reserves have increased from an
estim ated 700 million to 1,300-million
barrels.
A number of major oil firms began fullscale development of a 40,000-acre portion
of Alaska’s Cook Inlet. Several other major
investments were made in petroleum activity,
and one firm meanwhile developed a new gas
discovery in the Beaver Creek area.
Travel Tourism in Hawaii expanded
sharply in 1967 with one million visitors
spending an estimated $420 million. This
represents a gain of about 40 percent over
1966. The Military Rest and Recuperation
Program attracted over 100,000 servicemen
and their dependents during the year.
Four new hotels opened during 1967.
These included a 288-room and a 525-room
hotel in Waikiki, as well as two smaller
hotels in Hilo. The number of hotel rooms
increased by 1,272 in Waikiki and 1,088
on the neighbor islands. The total has now
reached 18,000 hotel rooms, and 4,530 ad
ditional are still under construction.

February 1968

M O N T H LY R E V I E W

Transport Air travel to Hawaii contin
ued expanding in 1967, with the airlines
now carrying 95 percent of all visitors to
the Islands. One major airline last year in
creased its inter-island transportation serv
ice for travelers from the mainland. Another
airline plans to in tro d u ce 350-passenger
jumbo-jet service in 1969 with substantially
reduced fares — $80 from California and
$90 from Seattle-Portland.
In Alaska, air passengers and cargo vol
ume also increased rapidly in 1967. To
support this expansion, two major plans
have been developed: $7.5 million for cargo
handling facilities and other improvements
at Anchorage, and $9.4 million for an air
port at Gravina Island, Ketchikan.
Construction Waikiki is still the most
popular spot in Hawaii for new hotels and
high-rise condominium ap artm en ts. The
most notable developments announced dur
ing the year were a $ 100-million urbanrenewal project for the entire Waikiki area,
and a $50-million project for restoration and
improvement of the Royal Hawaiian Hotel.

In addition, a $ 180-million resort and resi
dential complex will be built at Kailua-Kona
on the Island of Hawaii.
Defense construction in Hawaii rose to a
record $600 million in 1967. The Island
of Oahu was announced by the U.S. Army
Defense Command as one of ten bases for
its N atio n al Sentinel System (long-range
anti-ballistic-missile system) at an estimated
installation cost of $100 million. Also, three
major utilities announced plans to invest a
total of $264 million in plant and equipment
during the 1967-71 period. With a view to
meeting rising demand for power in the
Oahu area, another company has a $ 100million, 5-year expansion program that will
add one new plant every other year.
In Alaska, the Federal government plans
to spend more than $20 million in the next
few years to explore the suitability of Amchitka as a site for underground nuclear
testing. In the utility field, a $40-million
project near Juneau calls for building a 112ft. dam on Long River with an 8,000-ft-long
power tunnel, a 1,400-ft-penstock and a
70,000-kilowatt power plant.

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 payments); Robert Johnston (credit markets); Verle Johnston (U . S. banking);
George Dimmler, Adelle Foley, Verle Johnston, Yvonne Levy, Donald Snodgrass, and Joan
Walsh (District business); Ruth Wilson (District banking); Paul Ma, Yvonne Levy and Joan
Walsh (District highlights); R. Mansfield (artwork); Donald Alexander (editorial); and
Phoebe Fisher (production). M onthly Review is published by the Bank’s Research Department:
J. Howard Craven, Vice President; Gault W. Lynn, Director of Research.

Full text of Economic Review (Federal Reserve Bank of San Francisco) : February 1968

FRASER