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V 0 s r~ MAR 1 8 1 9 7 0 FEDERAL RESERVE RANK DF mmm ink ofmmim SAN FRANCISCO Monthly Review Annual Review Issue February 1 9 7 0 Contending Forces Tightest Ever? Watershed Year Tight Money Revisited Disintermediating Year Slowdown Revisited Challenging Year Checklist of "69 February 1970 MONTHLY REVI EW Contending Forces uring 1969, inflationary and deflation ary forces contended with each other against a background of policy restraint. The pace of business activity gradually slackened over the course of the year, climaxed by an actual decline in industrial production after about midsummer. Even so, inflationary pres sures remained strong throughout the year, much to the discomfiture of policymakers and the public in general. GNP rose 7% percent during the year to $932 billion, but this increase consisted of a 3-percent rise in real (price-adjusted) GNP as against a 4 % -percent rise in prices. In contrast, 1968 posted a 5-percent increase in real GNP and a 4-percent rise in the gen eral price level. By late 1969, the growth of real GNP was down to zero, as soft spots developed in auto-buying, housing, and de fense purchases. But price trends still con tinued to accelerate. The 1969 economy was dominated by the campaign against inflation. Fiscal policy gen erated a $ 10-billion surplus (national-income basis) in 1969 as against a $5!^-billion defi cit in 1968. (Still, fiscal restraint was much stronger in the first half of 1969 than in the second half.) Monetary policy generated al most a $900-million level of net borrowed reserves, as against a $3 00-million average in the preceding year, and, after late spring, “tight money” spelled practically a zero growth in the money supply. D Mixed response The economy gradually responded to re straints, although the various indicators of market pressure did not all react in the same fashion. In the field of capacity utilization, the output-capacity ratio turned down in the fourth quarter after remaining flat through out several preceding quarters, while in the field of labor utilization, the average work week in manufacturing moved sideways throughout most of 1969. On the other hand, backlogs for durable goods rose about 4 per cent over the course of the year. The index of unit labor costs meanwhile jumped 4!^ percent, for the second straight year; in deed, the continued deterioration in this in dex, following a long period of stability throughout the earlier years of the decade, was a clear indicator of the economy’s failure to maintain stability. The 1969 economy was marked, too, by the attempt of many firms to ease the pres sure on profit margins by raising prices high er and higher. Yet, by late year, businessmen began to realize that such actions could not prevent setbacks to earnings in the face of declining volume. FEDERAL RESERVE BANK S@m@ indicators turn sluggish, but others still reflect cost pressures Change (Percent) -3 - 2 - 1 0 1 2 3 4 ------------- -------------- '------------ '— ---------'— — r i--------------*--------------1 Average Workweek The year thus encompassed only the first stage of a two-stage adjustment process— a slowdown in the spending trend which nec essarily precedes a slowdown in the price trend. The cost increases built into most wage contracts and purchasing commitments con tinued to cumulate during 1969. As 1970 opened, however, a combination of belowcapacity operations and heavy carrying costs for inventories increased the pressures for competitive price adjustments. Investment strong 28 The strongest element in the 1969 econ omy was fixed-investment spending, which jumped more than 10 percent, to $99 bil lion, as against a 6-percent increase in 1968. This business-spending upsurge continued throughout the entire year, and it added sub stantially to the nation’s stock of machinery, equipment, bricks, and mortar. Even so, about 4 percent of this gain represented price increases, in contrast to the 3-percent in creases in each of the two preceding years, and in striking contrast to the near-stability in prices in the early years of the decade. The demand for new business facilities in creased at a time when the usual determi nants of business investment pointed to some weakening in demand. Along with the busi ness slowdown, capacity utilization declined OF SAN F R A N C IS C O and corporate profits (and cash flow) fell off. Along with the policy restraint, new financing became hard to find, and the cost of money and equipment in some cases be came prohibitive. Moreover, a near-certain repeal of the investment tax-credit created an unfavorable outlook for future capitalgoods costs. In the face of those drawbacks, business men plunged ahead and spent record sums for new plant and equipment. Some firms added to the spending totals simply by order ing, under normal schedules, complex new equipment requiring long lead times in pro duction. Other firms ordered heavily because they planned on the basis of the long-term growth trend in their markets and paid little attention to what they regarded as the dimin ishing possibility of a severe recession. Still others, however, ordered their future capital equipment in 1969 because they felt that prices prevailing then would be much lower than those prevailing in the 1970’s. Government sluggish The Federal government, which had con tributed even more to the inflationary boom of the late ’60s than the business-investment sector, expanded its purchases of goods and services by only 2Vi percent in 1969, to $102 billion. This increase contrasted strikingly with the 10- to 20-percent increases posted in the three preceding years. And with a sharp 6-percent jump in prices of government pur chases, the Federal government purchased, for more money, a smaller volume of goods and services than it had bought in 1968. At the state-local level, meanwhile, spending jumped about 12 percent— as usual— with about half of that representing more goods and services and half representing higher price tags. The government sector was marked by a definite downtrend in defense spending. (The 1969 total exceeded the 1968 figure only February 1970 MONTHLY because of a mid-year boost in Federal pay rates.) The downtrend indeed may continue for the next several years, despite the Pen tagon’s lengthy shopping list for new mili tary hardware, as the share of GNP budgeted to defense spending may be smaller in fiscal 1971 than in any other year of the last two decades. C o n su m e r w o b b ly The hard-beset consumer—faced with a 10-percent surtax on income, stiff credit terms for big-ticket items, and higher price tags on almost all items— responded in some what predictable fashion. He paid the higher prices required for necessities, cut back on spending for postponable items, and mean while saved less of his income than usual in an attempt to maintain his customary stan dard of consumption. Savings amounted to 6 percent of disposable personal income in 1969, as against a 6Vi-percent savings rate, or better, in each of the three preceding years. Many people, of course, spent money with abandon— witness the Scarsdale millionaire, the first folk hero of the ’70s—but the aver age consumer last year handled his money REVI EW with an almost peasant-like caution. Espe cially in real terms, average consumer spend ing grew quite sluggishly. The average worker fought hard at the bargaining table to maintain (if not advance) his customary living standards. In major con tract settlements negotiated during 1969, union workers obtained an 8.2-percent an nual increase in wages and fringe benefits, as against a 6.6-percent gain in 1968 and a 5.5-percent gain in 1967. But such settle ments helped precipitate further boosts in prices. Even then, the individual consumer’s income, after adjustment for higher taxes and higher prices, increased only about 1 percent during the year— considerably below the 3- to 5-percent gains recorded in all the preceding years of the decade. Rising aggregates In the aggregate, consumers boosted spend ing for nondurable goods by 5 percent, to $243 billion. Still, practically all of this gain was eaten up by higher prices; for instance, food prices jumped 5 percent, more than they did during 1966’s farm supply shortage. In addition, consumers expanded spending for services by 9 percent, to $242 billion, but over half of this repre Business Investm ent alone shows substantial strength se n te d h ig h er price in 1969, but all sectors suffer from price inflation tags, as the average Billions of Dollars Price Change (Percent) price of services in creased 5 percent for the second s tra ig h t year. C o n su m ers a ls o boosted spending for durable goods by 8 percent, to $90 billion. A ll of the sales in crease was c o n c e n trated in the first half of the year, as the sec ond half saw an easing in dem an d fo r new FEDERAL RESERVE BANK OF SAN C@nswm@rs b®@§# spending considerably during year, but much ©f gain represents only higher pricetags B illio n s of Dollars cars, color TV sets, and furniture. (Here could be seen the workings of policy re straint; in this slowdown, the average annual price increase for durables dropped from 3 percent to 2 percent.) Yet, despite the slug gish pace in the final months of the year, new-car sales almost matched the strong 1968 figure. Sales of U.S. cars fell roughly 2 percent to 8.5 million units, but sales of im ports jumped 10 percent to 1.1 million units, with Japanese cars accounting for the vast bulk of that increase. Falling housing In the residential-construction sector, con sumers increased their spending by 6 percent to $32 billion. Still, this was entirely a price phenomenon, since construction costs jumped over 6 percent during the year, outstripping the sharp price gains of the 1967-68 period. And although new housing starts averaged 1.5 million units, equaling the 1968 average, building activity dropped one-third between 30 Price Change (Percent) FRANCISCO the beginning and the end of the year. U n d e rly in g pres6 sures for a potentially strong d em an d con tinued to develop dur ing 1969— for exam ple, the beginning of a substantial boom in G^^rLc.Fo)marriages and the de b' od cline in vacancies to low er t h a n u s u a l levels. But with hous ing price tags rising faster than prices gen erally, and with mort gage financing increas ingly difficult to obtain, these potentials failed to show up in actual purchases of new resi dences. What then of 1970? A policy-imposed slowdown on output is already here, and the next scene, according to the policy script, will unveil a slowdown in prices. But some pessimistic opinions have been expressed on this score; former Presidential adviser Wal ter Heller, for example, suggested recently that the U.S. economy will be lucky to aver age less than a 3-percent pace of inflation throughout the next decade. In his words, “Even when we get past the epidemic phase of inflation, it will still be endemic in the U.S. economy.” This may be too pessimistic a diagnosis; inflationary problems have been overcome before in the nation’s history. Even so, if the 1970’s are to become a model of price stability with full employment, the economy will require a great deal of self-restraint on the part of all sectors in the economic drama. MONTHLY F e b ru a ry 1970 REVI EW Tightest Ewer? o the businessman seeking to borrow money to carry inventories or to ex pand plant capacity, and to the prospective homeowner scrounging for mortgage funds, the suspicion may have arisen that money was tighter in 1969 than at any other time in recent history. And indeed, there is some basis for this opinion. The Federal Reserve pursued, throughout all of 1969, the policy of active restraint which it adopted in late 1968. Fiscal policy was also restrictive; the Treasury was in the black in every quarter of the year, registering the largest annual surplus since 1947. Thus, monetary policy and fiscal policy individually were more restrictive than in any other recent year, and together they presented the most stringent public-policy package in decades. The results of this re straint showed up in a heavy pressure upon bank reserves, a much slower rate of bankcredit expansion, and record-high levels of interest rates. T Surplus: high-water mark The Federal budget staged a most re markable turnaround between mid-’6 8 and mid-’69— a swing of over $23 billion, to be precise. From a $9 Vi -billion deficit in the second quarter of 1968, the budget went to a $ 13 Vi-billion surplus in the second quarter of 1969, at annual rates, primarily because of the 10-percent tax surcharge on corporate and personal incomes. From that high-water mark, however, fiscal policy began to move away from restraint and towards expansion. The surplus was halved in second-half ’69 because of the Federal pay raise and other expenditure boosts, and it will probably dis appear altogether in the present six-month period because of a reduction in the sur charge and an increase in social-security ben efits. The Treasury surplus in calendar 1969 enabled it to retire over $5 billion of debt in the hands of the public, compared with net borrowings of over $6 billion in 1968. The 1969 figures by themselves would indi cate that the Federal government was a net supplier of funds to the market, and that it thus helped to ease upward pressures on interest rates. These figures, however, do not take into account the actions of a number of Federal agencies, principally those concerned with the housing market, whose debt trans actions are no longer included in the Fed eral budget. Agencies were net borrowers of over $8 Vi billion in 1969—much of it in the second half of the year, when the Treasury itself was meeting most of its seasonal needs for cash. As a result, the Treasury and the agen cies combined were net borrowers for the year, and the concentration of their demands for funds in the second half of 1969 exerted a very considerable upward pressure on in terest rates. T igh t all the w ay The tightening of monetary policy that began in December 1968 was accomplished through the traditional instruments of con trol— but with some embellishments that rep resented responses to innovations introduced by the larger money-market banks. The dis count rate was increased from 5V\ percent to 5Vi percent in December 1968, and then raised again to 6 percent in April 1969. In April, too, reserve requirements against de mand deposits were raised by Vi of 1 per cent for both reserve city and country banks. FEDERAL RESERVE BANK Tex stsrelierg® causes budget to shift from deficit to surplus Billio n s of Dollars 1961 32 1963 1965 1967 1969 Open-market operations were also used throughout the year to maintain pressure upon the reserves of the banking system, forcing banks to increase their indebtedness to the Reserve Banks. Still, the most effective instrument of mon etary control was one which was used in a passive rather than an active fashion— that is, Regulation Q, which sets maximum in terest rates payable upon time-and-savings deposits. All through 1969, these maximum rates remained at the levels set in April 1968, even though yields on competing short-term investments had moved above the Regula tion Q ceilings as early as December 1968. Throughout 1969, then, commercial banks lost substantial amounts of large-denomination negotiable certificates of deposit (CD’s ) ; OF SAN F R A N C ISC O the total runoff amounted to more than $13 billion, or well over one-half of the total held at the beginning of the year. In the face of such a loss of funds, banks moved to re place the CD’s by various devices, includ ing borrowing in the Federal-funds market, borrowing Eurodollars from their foreign branches, and issuing commercial paper through their parent bank holding compa nies. The Federal Reserve responded to the use of Eurodollar borrowings and the sale of commercial paper by extending the cov erage of Regulation Q and Regulations D and M, which deal with bank reserve re quirements and deposits. In October, reserve requirements of 10 percent were placed against those advances of Eurodollar bal ances by foreign branches which were in ex cess of the outstanding balances in a given base period. By the end of the year, the Fed eral Reserve proposed to bring commercial paper sold by bank holding companies and affiliates under the reserve requirements of Regulation D and the interest-rate maximums of Regulation Q. Federal-funds trans actions between banks and corporations meanwhile were restricted by narrowing the definition of such transactions permitted to escape these general regulations. All of these measures tended to reduce the access of banks to sources of funds that had not previously been subject to regulation. Whether regarded as “loopholes” or as “safety valves,” these sources of funds be came objects of regulation because they en abled banks to escape some part of the policy pressure upon their reserve positions. Tightness: '66 vs. '69 It now seems clear that the tight money period of summer ’66 cannot hold a can dle to summer ’69— or even less to ’69 as a whole. With the single exception of the February 1970 M ON THLY Yield! <syr¥© for Treasuries in “ 69 stood well above peak '66 levels Yield money supply, all monetary aggregates showed a much greater degree of restraint in the second half of 1969 than in the com parable period of 1966. The money supply grew at a 0.6-percent annual rate in the sec ond half of 1969, as against a 1.0-percent decline in the comparable period of 1966. On the other hand, time-and-savings deposits declined by a 6.5-percent rate in the more recent period as against a 2.5-percent drop in the earlier period, while member banks’ net borrowed reserves were $948 million in sec ond-half ’69 as against $322 million in sec ond-half ’66. A comparison between the two years as a whole is even more striking. Monetary ag gregates actually increased in the full year 1966, as the expansion of the first six months more than offset the restraint of the second half. In contrast, monetary policy tightened sharply in the first half of 1969, so that the figures for the year as a whole present an overall picture of severe restraint. It can be argued that the duration of a policy of mon etary restrictiveness is just as important as the intensity of restraint. If this is so, then 1969—much more than 1966— should go down in the history books as “the year of the big squeeze.” REVIEW Higher than ever Finally, 1969 must be rated a frustrating one for the chronicler of interest-rate de velopments, since there are only a finite num ber of superlatives to describe the “new,” “record,” “high,” “peak” levels that were reached during the year. In the last week of the year, the yield curve for Treasury securi ties stood well above the peak reached in the September 1966 “crunch,” with the longest issues returning more than the shortest is sues did in 1966. The 8.10-percent yield posted on 91-day Treasury bills in the auc tion of December 29 would have been consid ered excessive in any sector of the money market in any year but 1969. The highest levels of yields were reached, in most cases, in the very last week of 1969. Provisions of the new tax-reform bill deal ing with bank treatment of capital gains on securities caused a heavy selloff of longerterm Treasury issues by banks, and thus boosted yields on these securities to their highs for the year. Yields on corporate bonds also reached their ’69 peaks in the last week of December, because of the very heavy vol ume of new issues coming onto the market at that time. In the tax-exempt sector, yields 1966 w€is b ad but 1969 was even worse Average Annual Change (Percent) 33 FEDERAL RESERVE BANK on outstanding issues ended the year well above the 6 V2 -percent level, even though the volume of new issues was held down by interest-rate ceilings. In the short-term area, rates rose sharply in the third quarter as banks bid vigorously for funds in the Federal-funds and Eurodol OF SAN F R A N C IS C O lar markets. The yield on Treasury bills also advanced in the same period, but the record rates in that sector were reached in the last week of the year, because of heavy selling by foreign holders of bills, and also because of dealers’ inventory reductions triggered by rising finance costs. 1970— First Policy Moves n late January, the Federal Reserve Board of Governors raised the maximum interest rates that commercial banks can pay on time deposits under the Board’s Regulation Q. On ordinary time deposits, it raised maximum rates from a range between 4 and 5 percent to a range between 4Vi and 5% percent; on large nego tiable CD’s ($100,000 and over), it raised maximum rates from a range between 5 Vi and 614 percent to a range between 614 and 714 percent, depending on ma turity. The higher maximums may help stem the very serious outflow of funds from large CD’s— these deposits have dropped from $24 billion to $1014 billion since December 1968. The Federal Home Loan Bank Board thereupon moved, albeit “reluctantly,” to authorize savings-and-loan associations to pay higher interest rates on a wide variety of savings instruments. S&L rates remained slightly higher than those of commercial banks on ordinary time deposits, but matched bank rates on large time deposits of $100,000 and over. The Federal Reserve Board also announced that it is considering a 10-percent reserve requirement on funds obtained by member banks through the issuance of commercial paper or similar obligations by bank affiliates, including a member bank’s parent company. (Commercial paper issued by bank holding companies or their affiliates jumped from $1 billion to $4 billion in the last half of 1969.) But in late February the Board announced that it had decided to defer action at this time “in order to avoid additional stringency in money and credit conditions.” In announcing these first major policy measures of 1970, the Board said, “The dual moves were taken within the framework of continued over-all credit restraint and were based on these considerations: a rebalancing of the Board’s regulatory structure in the light of recently expanded authority in this field and de velopments in financial markets; a readjustment of structure of maximum interest rates payable by commercial banks for deposits to bring it somewhat more in line with going yields on market securities; the need for greater equity in the rates that may be paid for smaller savings balances, and a desire to encourage longer-term savings in reinforcement of anti-inflationary measures.” I 34 February 1970 M O N T H LY REVIEW Watershed Year istorians generally look back upon 1929 as a “watershed year”— a time when an old order of things reached a climax, and a new one was born. Students of internation al finance may well look upon 1969 as an other such year, since developments in ex change markets, in gold, and in international financial institutions point to a fundamental change in the international order. H Dimensions of progress Today’s international monetary frame work was established with the general re sumption of convertibility in 1959. After some minor alterations in the early ’60s, the pattern of rates held quite firm for the better part of the decade, but then began to col lapse in 1967. This led to a series of parity adjustments: in 1967, the sterling devalua tion, and in 1969, the 11.1 percent devalua tion of the franc and the 9.3 percent revalua tion of the deutschemark. These parity changes were carried out with less perturbation than might have been ex pected. Central bankers evidently benefited from the 1967 sterling experience and the 1968 gold-pool crisis. The franc devaluation, in particular, was managed with a finesse that caught speculators off guard and mini mized disruption in the exchange markets. The German action in floating the mark prior to formal revaluation was an imaginative move which succeeded in easing a mounting exchange crisis while meeting various prob lems associated with a change of govern ment. These currency realignments, along with the earlier devaluation of the pound, relieved the stresses and strains associated with cur rency maladjustments and contributed nota bly to calmer and more stable exchange mar ket conditions. As a result of these changes and of associated policies, the pound has gained strength, enabling the British to re duce their external debt; French reserves have shown some tendency to rise; and German reserves, although greatly reduced from their speculative peak, are still at quite acceptable levels. Following the parity changes, negotiations within the Common Market broke previous impasses. British membership in the EEC seems more likely now that France has altered its unalterable opposition. Another important result of these negotiations was the establishment of a “mini-Fund” to help recycle speculative flows within the EEC. S e rm o a iy (until late '69) and U.S. post strong increases in reserves Billions of Dollars FEDERAL RESERVE BANK OF SAN F R A N C I S C O Japan emerged last year with the second largest GNP in the western world. This im pressive performance was sustained by a healthy export sector; in 1968-69, for the first time in many years, Japan was able to enjoy substantial external surpluses along with very rapid growth. Japan’s growth, however, has been accom panied by a higher degree of inflation than would be considered acceptable in the U.S., not to mention Europe. At present, Japan is spared external constraints on its ex pansionary growth policy because the effects of inflation on Japan’s international com petitive position are offset to a considerable degree by inflation in other countries. Though a part of Japan’s external surplus can be traced directly to transactions in support of American armed forces in Asia, it is ques tionable whether even success in America’s Vietnamization policy will seriously hurt Japan’s balance of payments; the U.S.-gen erated inflation that helps to support Japan’s payments surplus seems to be even more difficult to de-escalate than the war that caused it. Capital mobility 36 ings on rates that banks may pay for funds from domestic sources. However, this growth in borrowing tapered off abruptly when the Federal Reserve imposed reserve require ments on Eurodollars borrowed by U.S. banks from their foreign branches. Yet, while the borrowing of money for use in the United States tended to work against the general trend of domestic monetary policy, American firms’ borrowing of long-term money in the Eurobond market for foreign expansion was encouraged because it supported U.S. balance-of-payments policies. A large portion of new Eurobond flota tions in early 1969 took the form of con vertible issues. But in April, as the New York stock market started to decline, convertibles fell out of favor, and the widespread belief in a deutschemark revaluation made BM-denominated issues extremely popular. (In re turn for the borrower’s exchange risk, rates on these issues were often several percentage points lower than those on dollar-denominated issues.) Finally, after the revaluation of the DM, the market began to turn again to the dollar as the unit of account for Euro bond issues. Shift in UoSo balance The theoretical issues raised by the pres ence or absence of international capital mo bility have been increasingly overcome by events. International mobility of short-term capital is a fact, and its name is Eurocurren cy. The Eurocurrency market, after a fan tastic growth in 1969, probably amounts now to $35-$40 billion—roughly half as large as the world’s total gross monetary reserves. Nonetheless, the high mobility of Euro dollars— the major Eurocurrency—has cre ated some problems for U.S. and other mon etary authorities. During 1969, American banks borrowed Eurodollars heavily, largely as a reaction to the Federal Reserve’s tightmoney policy— including Regulation Q ceil The increased mobility of international capital has helped to prove to the world what M @ st © I mi®|©r industrial nations record slower growth of output Annual Change (Percent) 0 5 10 15 February 1970 MONTHLY was once considered merely the self-serving opinion of a few American economists: that this country’s role in international finance is a very special one, and that the standards of rectitude applicable to a reserve-currency country need not properly be the same as those applicable to other countries. It may be no coincidence that the U.S. balance of payments has generally been strong in recent crisis periods. Even so, the situation in 1969 was ambig uous to the layman because of the especially wide divergence between the two major measures of the U.S. balance of internation al payments. The official-settlements balance —plus $2.78 billion— showed considerable strength, while the liquidity balance— minus $6.99 billion— showed something else again. The official settlements balance includes cer tain nonliquid U.S. liabilities to official for eigners, while the liquidity balance excludes those items but includes liquid liabilities to private fo re ig n e rs and to foreign central banks. Heavy borrowing by U.S. banks from the Eurodollar market increased Eurodollar rates which stimulated a flow of U.S. and foreign official dollars to the Eurodollar market, thus increasing the U.S. liquidity deficit while enhancing the official-settlements surplus. But the process began to reverse itself in midsummer, after the Federal Reserve moved to decrease the attractiveness of the Euro dollar market as a source of member-bank reserves. In the third quarter, the officialsettlements balance showed a deficit for the first time since early 1968, while the liquid ity balance posted a reduced deficit and then (according to preliminary reports) moved into surplus in the final months of the year. The U.S. slightly improved its merchan dise-trade balance, but this (although en couraging) was far below the annual surplus of $5 billion or so recorded in every year of REVI EW T ra d e su rp lu s remains weak8 but olficiaS-settlements balance strong the mid-decade. Contributing to increased outflows was a rise in the rate of direct in vestment abroad, from about $3 billion to $4 billion a year. In the other direction, foreign purchases of U.S. securities exhibited wide fluctuations, generally reflecting the state of the New York stock market. Until the market decline last spring, such pur chases ran about $1 billion per quarter, but they then fell to only about one-third of that figure later in the year. C o o p e ra tio n — behind the scenes Dramatic features of the developing new era lie in the realm of inter-central bank cooperation. Some of these joint efforts, such as the creation of Special Drawing Rights, took place in the public eye. Equally impor tant activities were sequestered behind closed doors. For example, meetings held at the time of the Franco-German currency crisis of late 1968 (and subsequently) led to the parity changes of 1969. These conferences enabled France and Germany to ascertain how large a change each could make without inviting competitive changes that would vitiate their own actions. Furthermore, they enabled the authorities to assemble packages of support for the beleaguered currencies, so as to foil FEDERAL RESERVE BANK speculators and leave the discretion as to timing up to the countries involved. In this connection, central bankers have now come up with a new counter-speculative device — recycling — whereby countries re ceiving an influx of international liquidity re lend it to the losing countries. The concept, bom out of the German crisis, is already attaining a more formal existence in the new EEC “mini-Fund” package. Negotiations between the U.S. and South Africa, both bilateral and within the IMF, resolved the loose ends remaining from the two-tier gold arrangement of 1968. South Africa intends to sell its newly mined gold on the free market as its balance of pay ments require. However, when the freemarket price is at $35 or below, South Africa shall have the right, under certain restrictions, to sell its output for that period to the IMF. Other provisions in the agree ment regulate the use of South Africa’s mone tary gold stock and allow South Africa to use gold incident to other IMF operations. South Africa will restrict its gold dealings to IMF and the private market. — and on stage The development that really gave 1969 its “watershed” status was the creation of Spe cial Drawing Rights (SDRs) in the Interna tional Monetary Fund. The so-called “paper gold” will start off modestly, but may in time become the prime international reserve medium. The success of SDRs will depend on how well they combine the relative ad vantages of gold and convertible currencies, which are the legal tender required by central banks to intervene in the exchange markets and fulfill their international obligations under the rules of the IMF. The IMF made its first distribution of this 38 OF SAN F R A N C ISC O new international-reserve asset by allocating $3.4 billion in SDRs at the beginning of 1970. Roughly one-fourth of the total went to this country, and other large sums went to other industrial nations. (The U.S. Treasury will account for its SDRs in much the same way as it accounts for its gold holdings.) The IMF now plans to distribute $3 billion in SDRs at the beginning of each of the next two years. Under present a rra n g e m e n ts, S pecial Drawing Rights will serve a limited but never theless vitally important function, backing up working balances of dollars and other con vertible currencies. The U.S. will probably maintain a passive posture with SDRs, offer ing them as an alternative to gold to nations desiring to convert their excess dollar hold ings, and accepting them in exchange for replenishing dollar balances of foreign cen tral banks. Special Drawing Rights can be expected to serve a useful function in maintaining a satis factory level of what the IMF calls “reserve ease.” In general, this means that SDRs will be issued in sufficient quantities to insure a large enough and sufficiently growing stock of reserves, so that countries enjoying balance-of-payments surpluses will feel amply supplied with reserves and not pursue the kind of restrictive policies that increase the burden of adjustment on the deficit countries. In sum, last year witnessed a realignment of exchange rates, a greater flow of funds in international capital markets, and a growing understanding of the U.S. role in providing liquidity to those markets. The year also wit nessed a growing sophistication of central bankers, reflected in the expansion of centralbank swap arrangements, in the development of recycling operations, and in the creation of “paper gold.” MONTHLY January 1970 REVI EW Tight Money Revisited eavy b u sin e ss d em an d s fo r funds clashed with restrictive monetary pol icy to make 1969 a year of stress and strain in the financial markets. The year began with interest rates at record or near-record highs — and it ended with still higher rates. But despite the fantastic cost of money in 1969, the total amount of new funds raised in the financial markets fell only to $86 billion, or just about $10 billion less than the 1968 record. (The estimates, based on flow-of-funds data, are still preliminary.) On the demand side of the market, total financing remained high because of heavy borrowing by nonfinancial business. Funds raised in this sector increased by about onequarter over the 1968 figure, and business thus accounted for over half of the total funds raised during the year. In contrast, net borrowing declined on the part of the U.S. government and its agencies, more than offsetting the sharp increase in the business sector. H Business demand soars Total business capital expenditures totalled $111 billion — $12 billion over the record 1968 level— and thus generated an enormous demand for external as well as internallygenerated funds. The existence of heavy busi ness demands for funds was not surprising, but the size of those demands was indeed startling. Altogether, the net amount of funds raised by business in the financial markets reached a record $47 billion in 1969. Internal so u rc e s of c o r p o r a te fu n d s amounted to $64 billion, hardly any more than the 1968 figure, since a $2-billion rise in before-tax profits was offset by higher corporate taxes and dividend payments. This failure of internal funds to grow shifted the full burden of heavier corporate-investment spending onto the financial markets. Corporations relied upon the securities markets as their principal source of outside funds. On a gross basis, corporate long-term security offerings set a new record of almost $28 billion, despite the rise in interest rates to record levels. (On a net basis, new issues provided almost $15 billion in funds.) Com mon and preferred stock issues amounted to $8Vi billion — almost twice the 1968 figure — and the remaining $19 billion came from bond sales. B u s in e s s d e m a n d puts heavy pressure ©n financial markets in 1969 Billions of Dollars FEDERAL RESERVE BANK The bond markets provided the clearest indication of the pressures on the financial system. The yield index for Aaa corporate bonds reached 7.84 percent at the end of December, in contrast to a year-before fig ure of 6.45 percent, and 9-percent rates on new issues were common at year-end. Corporations received additional finance through commercial bank loans, $9 billion, and through mortgages, $4 billion. Neither of these figures was much higher than in 1968, although the prices paid were mark edly higher. So to meet the remaining part of their financial needs, corporations were forced to turn to other sources— in particu lar, to the commercial-paper market. The intensive reliance on the commercialpaper market was indeed a major feature of the financial year. By the end of November, the total amount outstanding reached $33 billion, for a $ 13-billion increase in a single year. Prominent in this upsurge were the commercial banks, which entered this mar ket through their one-bank holding-company parents. In the last half of 1969 alone (the first period in which these dealings were re ported), bank-related paper went from about $1 billion to over $4 billion, and helped fill the gap left by the decline in bank deposits, their normal source of funds. i@ nk d e p e slfs fa il to provide funds, so borrowers turn t© credit markets Billions of Dollars OF SAN F R A N C IS C O None of the other private sectors was a factor in the expansion of financial demand. Households, the major borrowing sector in 1968, actually declined slightly during 1969 to about $31 billion. In this category, home mortgages increased by $1 billion to about $16 billion for the year, even in the face of rising rates and shortages of funds, while net instalment and other consumer credit fell more than $2 billion to about $9 billion. Government demand slumps The major decline in financial demand reflected the policy shift from an expansion ary to a restrictive fiscal policy. In 1969, the Federal government and its agencies were net lenders of $6 billion in the financial markets, as against $13 billion in borrow ings in the previous year. This reduction in borrowing was the obverse of the Federal government’s policy of increased fiscal re straint. Without this shift, the strains on the financial system would have been even more severe. Independent Federally-sponsored agen cies, such as the Federal Home Loan Banks and the Federal National Mortgage Associa tion, were important direct borrowers during the year. These agencies, in effect, obtained funds to provide financing to financial in stitutions and individuals whose normal sources were impaired as a consequence of general monetary restraint. Since the agen cies’ lending almost matched their borrow ing, their operations appeared small on a net basis. But their gross demands on the capital markets were substantial— $9 billion in 1969 as against $3 billion in 1968— and thereby reinforced the pressures on rates in the mar kets where their securities were issued. State and local governments, like the Fed eral government, cut their net borrowing dur ing the year. The net total dropped $1 bil lion to a $9-billion figure, but gross proceeds dropped $5 billion to a $ 12-billion total. February 1970 MONTHLY While the Federal decline was in effect a part of the fiscal-monetary stabilization pol icy, the state-and-local decline was more the result of that policy. The sharp drop in their proceeds reflected their vulnerability to the high interest rates associated with a restric tive monetary policy, since many of them are subject to legal restrictions on the inter est rates they can pay on new issues. The Fed eral government itself has a rate ceiling on its long-term issues, but it has the option of raising funds through short-term issues in years of high interest rates. For many local governments, there is often no way of avoid ing rate ceilings, so that high rates mean that issues simply cannot be sold. With these pressures operating in the mar ket, the rates paid on outstanding state-andlocal issues climbed to record levels, reaching a 6.91-percent yield for seasoned municipal bonds in December. Furthermore, uncertain ty about the future treatment of the tax-ex empt status of municipal securities tended REVI EW to reinforce this upward pressure on rates. The differential between corporate and mu nicipal-bond rates narrowed from 1.70 per cent in January to 1.21 percent in Decem ber, and this differential was even narrower at certain times during the year. Although education issues absorbed the largest share of state-and-local funds, their share of the total fell from about one-third in 1968 to just one-quarter in 1969, largely because of the effect of interest-rate ceilings. Transportation issues, on the other hand, in creased from about one-sixth to one-fifth of the total. But industrial-aid issues, which had formerly been widely used by local gov ernments as a means of attracting new indus tries, dropped very sharply in 1969 because of the removal of tax exemption for large issues of this type, and for all practical pur poses disappeared as a major source of de mand. Supply side reflects strains The changing positions in the market of the various suppliers of funds testify elo quently to the financial strains which devel oped over the course of the year. In particu lar, the impact of monetary policy was apparent in the restricted role of the com mercial banks as suppliers of funds. Nonfinancial sectors, usually of minor importance on the direct supply side of the market, be came the major source of the additional funds demanded by borrowers. High interest rates served the function of attracting funds directly from lenders who normally are only indirect providers of funds. In this sense, 1969 was a repetition of 1966, when another peak in interest rates induced nonfinancial lenders to step in to provide needed financing. But last year, commercial banks’ lending was cut more severely and the level of interest rates was even higher than in 1966. 41 FEDERAL RESERVE BANK Y@®r of stress and strain marked by peak levels of interest rates Percent Per Annum OF SAN F R A N C IS C O of their funds, posted a $20-billion gain in re sources during the year, slightly above their 1968 inflow. But their gain failed to offset the great decline in commercial-bank lending ability, and borrowers were forced to turn, as they did in 1966, to direct issues in the markets. Atypical lenders 42 In 1968, as in 1967, commercial banks had been the major source of net funds sup plied to the credit markets. But in 1969, their net lending slumped to $12 billion, only a fraction of the previous year’s level. Total deposits declined for the first time in a decade, with most of the decline centered in time deposits, whose rates had become in creasingly less competitive in the face of rising yields on other securities. Savings-andloan associations also supplied less funds than in 1968, but their perform ance was still stronger than that of the banks. Nonbank financial institutions—life insur ance companies, private pension funds, and state-and-local government retirement funds — helped alleviate the situation by supplying $32 billion in funds, close to their previous year’s performance. These institutions, being largely protected by the contractual nature Since borrowers in this situation were will ing to pay high prices for funds, lenders who ordinarily would have placed their surplus funds in the market through financial inter mediaries were persuaded to operate directly in the market. The biggest jump occurred in the household sector, where the amount of funds directly supplied reached $19 billion; this was far above 1968’s normal figure of $4 billion and even above 1966’s previousrecord figure of $12 billion. Individuals became major buyers of securi ties ordinarily of interest only to specialized buyers—Treasury bills, for instance. (In the third quarter, the household sector purchased Treasury securities at a $3 9-billion annual rate.) But while households replaced the usual private financial buyers in the market for Treasury securities, they failed to increase their bank and other savings deposits, reflect ing their sensitivity to the low ceiling rates payable on such deposits. Moreover, they sharply reduced their corporate-stock hold ings, while posting fairly normal increases in purchases of corporate bonds and investmentcompany stock. Overall, then, the household sector allocated its usual purchases of fi nancial assets to new uses, reflecting the change in relative yields available on those assets. The business sector responded in the same fashion as households. First of all, corpora tions economized on liquid assets; in fact, they kept their liquid assets unchanged while increasing liabilities by $50 billion. At the same time, corporations made major shifts February 1970 MONTHLY in their financial-asset holdings, becoming major direct suppliers of funds at the same time that they were creating heavy demands for funds. The business sector supplied $11 billion ($10 billion by corporations) directly to credit markets, and thus made a greater contribution than the commercial-banking sector to the markets. At the same time, corporations sharply reduced their holdings of time deposits, be cause of the decreasing attractiveness of the yield on large certificates of deposits issued by banks. Corporate time deposits fell by over $8 billion, cutting sharply the lending ability of commercial banks. In the last half of the year, corporations also began to dis pose of their U.S. government securities. On the other hand, corporations increased their holdings of commercial paper — up $8 bil lion in 1969 as against $5 billion in 1968— and made net purchases of $2 billion in state-and-local government securities. Atypical year Heavy corporate demand for funds in 1969 resulted in record interest rates in an environment of increasing monetary restraint. As capital expenditures rose to record levels, corporate treasurers showed their willingness to pay the necessary price to obtain financing. High interest rates generated the needed REVI EW funds, but only by attracting the primary sources of national saving, households and business, to provide savings directly through the purchase of credit-market instruments. But financial institutions, who ordinarily function as the principal channel of savings to the ultimate investor, were hemmed in by interest rate ceilings and thus found them selves unable to compete effectively for funds. The corporate demand was satisfied as some potential borrowers, principally stateand-local governments, were rationed out of the market. At the same time, the Federal government cut its demand for funds in line with its fiscal-policy shift, although its agen cies increased their intermediary role. Com mercial banks meanwhile had their lending ability reduced by heavy monetary-policy pressure on reserves— and reduced further by interest ceilings which reduced their abil ity to hold onto certain funds in their posses sion, and sharply increased the difficulty of their bidding successfully for new funds. All in all, 1969 strongly resembled 1966, with its sharp increase in direct issue of debt and its heavy restrictions on commercial banks and similar institutions. In 1969, how ever, the pressures on the institutions were more severe and the interest-rate levels were even higher than they were in that earlier tight-money period. This annual-review issue was edited by William Burke and Karen Rusk. Principal contribu tors to this issue included: William Burke (U. S. business); Herbert Runyon (fiscal-monetary policy); Richard Gorin (balance of payments); Robert Johnston (credit markets); Verle John ston (U . S. banking); Adelle Foley, Verle Johnston, Yvonne Levy, Donald Snodgrass, and Joan Walsh (District business); Ruth Wilson, Molly Anderson and Barbara Burgess (District bank ing); Paul Ma and Yvonne Levy (District highlights); and R. Mansfield (artwork). Monthly Review is published by the Bank’s Research Department: J. Howard Craven, Senior Vice Presi dent; Gault W. Lynn, Director of Research. FEDERAL RESERVE BANK OF SAN F R A N C ISC O Disintermediating Year ast year was one which the nation’s bankj ers— and their customers— are not like ly to forget in a hurry. On the heels of 1968’s record $39-billion gain, total bank credit out standing (flow-of-funds basis) increased in 1969 by only about $10 billion. At the same time, the banks’ principal source of funds— their deposits— declined by over $4 billion, for the first such decline in over 20 years. Consequently, the banks had to work hard to find the funds to meet even that $ 10-billion increase in credit. They did this by expanding their net borrowed reserves, by selling large amounts of loans out of portfolio (mostly to affiliates), and by borrowing a substantial volume of Eurodollars from their own foreign branches. I Radical shift 44 The most dramatic chapter in 1969’s bank ing story involved a radical shift in the banks’ own sources of funds. First and foremost, this shift was evident in a record $ 11-billion decline in commercial-bank time-and-savings deposits, a decline which contrasted sharply with at least modest net gains in such deposits at other depository-type institutions. Most of this decline was attributable to a heavy ($13 billion) attrition in relatively high-yielding, large denomination CD’s, as businesses drew upon these funds to help finance their rising expenditures or to take advantage of the even higher yields available on market instruments. For similar reasons, public treasurers effected a $2-billion reduction in their holdings of CD’s, and consumers reduced their holdings of low-yielding (4percent) passbook accounts by about $3 billion while increasing slightly their holdings of somewhat higher-yielding certificate ac counts. The banks’ loss of time-and-savings depos its was partly offset by a $7-billion increase in demand deposits: households, businesses, and public treasurers alike built up their working balances to finance larger current expenditures. Still, the banks’ $4-billion net decline in deposits required alternate sources of funds with which to finance the continued expansion of bank credit, and it was the tap ping of these other sources of funds which provided an added dimension to 1969’s bank ing drama. About $6 billion was acquired through borrowing Eurodollars from abroad — a process which became increasingly expensive, however, as the year progressed and as Euro dollar rates topped 10 percent. An additional $4 billion was raised through the sale of commercial paper by bank-affiliated holding companies, with the funds being used to buy loans out of banks’ portfolios. MONTHLY February 1970 lysIness^Sogiii strength dominates 1969 banking year Change (Billions of Dollars) REVIEW The banks, of course, also utilized more traditional supplemental financing, by dou bling their borrowings from the Federal Re serve Banks and in some cases by sharply expanding their borrowings of reserves from other banks in the Federal-funds market. However, the Fed-funds market provided net funds only as banks worked their existing reserves harder and more efficiently. Strong growth . . . as banks cut back sharply ©n security holdings Change (Billions of Dollars) . . „ and suffer severe reduction in deposit inflows Change (Billions of Dollars) . . . while borrowing more from other banks and the Fed Change (Billions of Dollars) 1963 1965 1967 In the face of a greatly restricted supply of loanable funds, relieved only in a limited fashion by the techniques noted above, the banks nonetheless found themselves faced with a continuing strong demand for credit throughout the year. This demand arose from all sectors, but predominantly from business. Consumer loans rose by about $3 billion— less than the $5 billion gain of the previous year, but still greater than the average annual increase of the decade as a whole. This gain, moreover, represented about 37 percent of the total consumer credit extended by all lenders during the year—but this represented a significant decline from the banks’ share of the year before. The banks’ total real-estate loans also rose by about $5 billion; again, this was a smaller increase than during the previous year, but it still exceeded the average annual gain of the preceding decade. Even after allowing for a substantial increase in secondary-market pur chases of mortgages by government agencies, the commercial banks’ share of credit pro vided to the nation’s strained mortgage mar kets declined only slightly in 1969, to 18 percent. This achievement was made even more notable in view of the banks’ heavy at trition of time-and-savings deposits, the funds traditionally committed to the financing of mortgages. But in 1969, as in 1968, the credit spot light centered upon the heavy credit demands of the nation’s non-financial business com- 45 FEDERAL RESERVE BANK munity— demands related in part to the fi nancing of inventories, in part to the need for working capital generally, and in part to the financing of new plant and equipment. Fur thermore, business credit demands remained strong even in the face of a steady and sharp rise in borrowing costs. The banks’ prime lending rate jumped from 6 V4 percent to 8 V2 percent between December and June, while the proportion of loans made at a rate of less than 8 V2 percent dropped from 98 per cent to only 4 percent over the course of the year. In 1969 as a whole, bank portfolios of business loans rose by about $9 billion (or 9 percent), only slightly less than the pre vious year’s record gain. Moreover, 18 of 20 major domestic industries increased their borrowings during the year. Even so, the banks’ sharply increased costs and reduced OF SAN F R A N C IS C O availability of funds helped divert a substan tial volume of business financing to the bond and equity markets. As a result, the banks’ share of all funds raised by the business com munity declined from 27 percent to 20 per cent, substantially below the 30- to 40-per cent share they garnered in several other recent years. On balance, total bank loans during the year increased by about $20 billion (or 9 percent), double the gain in total credit ex tended by commercial banks. That increase in loans had to be financed in part by a re duction of almost $11 billion in security portfolios, all of it centered in holdings of U.S. Governments. On the other hand, a small ($1 billion) increase occurred in hold ings of municipal obligations, as banks con tinued their customary role as a net supplier of funds to the state-and-local government sector. Reprints AwaiDafele A Time for Sharing . . . Crisis in the State House (24 pp. 1969)— Two articles on problems of state-and-local government finance. Credit— and Credit Cards (16 pp. 1969) — Report on recent developments in bank credit cards and check credit plans throughout the nation. Silver: End of an Era (32 pp. 1969)— Report on silver coinage, industrial devel opments, and silver mining in the West. Copper: Red Metal in Flux (60 pp. 1969)— Historical study of copper mining, copper markets, and the outlook for the future. Law of the River (16 pp. 1968)— Report on present and future sources of water supply for the Pacific Southwest to meet its 21st-century needs. The Redwoods (12 pp. 1969)— Study of the economic issues involved in the Red wood National Park along California’s northern coast. Wages and Prices . . . Men of Steel (20 pp. 1968)— Two labor-market articles. Centennial Summer (12 pp. 1967)— Report on Alaskan industrial and resource development as providing vast potential for the growth of this area. 46 February 1970 M ONTHLY REVIEW Slowdown Revisited he Western economy continued to ex pand in 1969, but its rate of real growth slowed significantly, at least partly because of conditions in the increasingly depressed aerospace-manufacturing industry. Many sec tors of the regional economy surged ahead as before, but the general atmosphere was more reminiscent of the sluggish years of the mid decade than of the Vietnam-induced boom of the later ’60s. Personal income in the West, as in the nation, increased about 9 percent over the year, although the bulk of this was offset by price increases. Wage-and-salary increases in the service industries, trade, and govern ment were higher in the West than elsewhere, but the reverse was true in such key sectors as manufacturing and agriculture. Retail sales in the West kept pace with the 4-percent nationwide advance, with non durables slightly better and durables slightly worse in the region than elsewhere. In this region, sales at food outlets and gasoline ser vice stations increased significantly — about 10 percent — while the automotive group barely kept up with the year-earlier pace. At the same time, consumers found no re lief from inflation. Prices in most Western cities rose about five percent in 1969 — ex cept in San Francisco, which exceeded the national rate of 5.4 percent. Most of the strain on budgets came from increases in gro cery, apparel, medical-care, and homeowner costs. In 1969 a moderate standard of living for a family of four cost well over $10,000 in major Western urban centers, according to T sample budgets compiled by the Bureau of Labor Statistics. Nonfarm employment in the Twelfth Dis trict states increased about 3 Vi percent over the year, nearly matching the gain recorded elsewhere. This increase, however, fell con siderably short of the region’s 4-percent gain of the preceding year. In the manufacturing (excluding defense), distribution, service, and government sectors, the West outpaced the nation in year-to-year employment gains. Substantial declines in aerospace employ ment, however, caused the defense category to drop 5 percent in the West and 1 percent elsewhere over the year. Reflecting the incipient signs of slowdown, the regional unemployment rate failed to im prove by any significant amount over the 1968 figure. At about 4.5 percent, the West’s jobless rate remained a full percentage point above the rate prevailing elsewhere. Aerospace — grounded District aerospace firms slumped under the impact of sluggish order inflows, which resulted in a second consecutive year of em ployment declines. The 1969 decline, which spelled 59,000 lost jobs, left the West’s aero space payrolls standing at 663,000. Most of the decline occurred in California, but the rate of decline was greater in Washington (17 percent) than in California (7 percent). The loss was a reflection of falling orders from the military and the space agency, as well as reduced manpower requirements for commercial-jet production. Nationally, aero FEDERAL RESERVE BANK space employment eased after trending up ward in 1968. Prime defense-contract awards were down 18 percent from the late ’68 level. But on a more hopeful note, research-and-development contracts were about the same as a year ear lier, with the District’s share rising from 38 to 42 percent of the national total. Space con tracts in the District declined 25 percent be tween the first half of 1968 and the first half of 1969. A generation gap meanwhile de veloped in the commercial sector, as the pro duction of current jet models declined and firms prepared instead for production of the super-size jets of the 1970’s. Employment ©©mftlieues ft® fail in aerospace manufacturing . . . but job pace remains strong in other Western industries M illio n s OF SAN FRANCISCO Construction • sky high — Despite much publicized difficulties in housing — continuing rises in construction costs and fears of reduced mortgage financing — 1969 was a banner year for construction activity in the West. Total construction spending in the District hit a record $11.3 billion in 1969 —-18 percent over the pre vious year and triple the national increase (F. W. Dodge contract data). Homebuilding in the West, although off to a slow start, finished up with 319,000 starts for the year, a 9-percent gain over 1968 in contrast to a 4-percent national decline. Still, homebuilding activity was somewhat uneven in various areas; Oregon and Washington registered losses of 7 and 27 percent, respec tively, but these were more than offset by gains of 25 percent or more in Los Angeles, Phoenix, and Las Vegas. More than half of all new units built were multiple units, re flecting the cost and financing considerations which dominated building decisions during the year. Non - residential and heavy - engineering construction showed an even sharper rise in 1969. Overall, spending on such projects increased by about 25 percent over the year; for the non-residential field this was double the national gain, and for the heavy-engineer ing sector it was triple the U.S. increase. Lum ber, steel — mixed The Western lumber industry saw its hopes for a record ’69 diminished by the national slowdown in housing activity, which helped send new orders (and prices) plummeting from the peak levels of early spring. A heavy early-year inflow of orders from homebuild ers, coupled with seasonal production prob lems, pushed wholesale softwood - lumber prices up 18 percent in the first quarter of 1969, 41 percent above a year earlier. But spring and summer brought a housing slow down, a run-off of inventories by wholesalers, February 1970 MONTHLY and a Presidential directive to reduce defense purchases. Orders and prices fluctuated in the fall months but then spiralled downward, so that softwood-lum ber price quotes in December were 14 percent below the yearearlier level. The softwood-plywood index followed in step by plunging more than onethird below its 1968 mark. Steel production in the West rose almost 2 percent to a record 7.1 million tons for the year, despite a growing volume of imports. Elsewhere in the nation, imports declined sharply as a result of exceptionally strong European demand, voluntary import quotas, and the absence of the strike threat which had led to a particularly heavy influx of for eign steel in 1968. Domestic steel producers, operating against a background of strong worldwide demand, upped prices several times during the year: in April on hot-rolled carbon and alloy bars; in June on structural shapes, plates, and re inforcing bars; and in August on sheet, strip, and other flat-rolled products. These in creases boosted the steel price index by 5 percent for the year. Agriculture — marking time Cash receipts to District farmers exceeded $7 billion in 1969— a new record—with live stock and livestock products topping last year’s levels and crop returns holding even. Despite the increase in gross returns, the in come picture for District farmers (particular ly in California) was somewhat darkened by rising production costs, but preliminary esti mates suggest that net income per farm may also have risen. Total crop output, while not matching 1968’s record levels, was still well above pre vious years. Throughout the District, pro duction of fruits and nuts increased, with deciduous fruits in the Pacific Northwest re covering from their 1968 declines. Arizona’s record citrus crop contributed to the Dis trict’s strong gain in that category. REVIEW Construction activity rises faster in W est than in rest of nation M illions of Dollars Declines in field crops and fresh and pro cessing vegetables contributed to California’s 6-percent decline in crop volume. Cotton growers in California and Arizona, moreover, were plagued by bad weather and pesky in sects. In the livestock sector, beef production increased as producers attempted to take ad vantage of the highest beef prices since Ko rean War days. Even so, increased costs of feed and feeder cattle offset some of the cattle producers’ increases in net income. Returns also rose in other sectors, as pork, poultry, and egg prices increased during the year. Extractive industries -— strong Metal prices forged ever upward as pro ducers struggled to keep up with strong worldwide demand. Copper mine produc tion surpassed 1966’s record high, while the producer price of copper rose from 42 to 52 cents, reflecting the rise in world demand and the shortage in supply created by production problems overseas. Then, in early 1970, the price reached 56 cents a pound— almost half again as high as the figure quoted prior to the 1967-68 mine strike. This latest price boost triggered a Government investigation into pricing policies and market conditions in the industry. FEDERAL RESERVE BANK The price of silver trended downward dur ing the year, in striking contrast to the situ ation in other metals markets. The price decline reflected the relative stability of in ternational currencies, which reduced spec ulative interest in the metal, and also reflected the outlook for sharply increased supplies be cause of the removal of the Treasury ban on private melting of silver coins. With the narrowing of the deficit between new production and industrial consumption, bidding slowed at the Government’s weekly auctions, despite a reduction in Treasury of ferings from 2.0 to 1.5 million ounces weekly. Silver prices consequently dropped from $2.03 an ounce in January to $1.56 an ounce in July— the lowest level since the Treasury abandoned the $1.29 ceiling in July 1967. Even after a year-end recovery to $1.80, sil ver prices were still well below July 1968’s record high of $2.56 an ounce. Favorable market conditions in the alu minum industry pushed production and ship ments to record highs, while keeping a close balance between supply and demand. Onecent price increases in January and October OF SAN F R A N C IS C O brought the ingot quotation to 28 cents a pound, the highest level in many decades. The highlight of the year for the petro leum industry was the $900 million sale of oil leases on Alaska’s North Slope. Little in formation is yet available about drilling in the area, but indicated reserves are sufficient to warrant construction of a billion-dollar pipeline to move oil south from the site. The year’s bad news came from the Santa Barbara Channel, where a massive offshore oil leak began early in 1969. Drilling was allowed to continue on the Federally leased property in an effort to ease the underground pressure, but seepage persisted and contro versy increased concerning the continued drilling. Over one-fourth of the oil produced in California now comes from offshore leases. Petroleum refining activity in the West meanwhile rose about 5 percent in 1969, partly on the basis of increased foreign crudeoil imports. (The dependence on foreign crude should ease, however, as supplies be come available from Alaska’s North Slope.) The increased domestic demand for petro leum products came largely from non-military markets, especially for gasoline and jet fuel. IN D EXES OF INDUSTRIAL PRODUCTION — TWELFTH DISTRICT (1957-59 = 100) IN D U S T R IA L P R O D U C T IO N 1961 1962 1963 1964 1965 1966 1967 1968 1969 Copper Lead Zinc Silver Gold Steel Ingots 119 99 97 105 92 111 127 105 101 105 86 100 128 103 98 103 86 117 129 96 93 102 85 132 140 93 89 115 116 138 146 118 96 129 135 140 98 97 87 101 104 136 126 86 76 101 98 142 162 83 75 122 128 145 Aluminum Crude Petroleum Refined Petroleum Natural Gas 97 96 108 121 107 96 111 127 118 97 112 144 135 97 115 148 150 102 120 147 165 112 122 158 195 122 128 147 204 139 138 154 268 145 141 170 Lumber Douglas Fir Plywood 95 131 98 140 98 155 108 167 107 174 103 167 97 156 106 168 104 159 Canned Fruit Canned Vegetables Meat Sugar Creamery Butter 116 89 111 107 120 121 106 112 113 119 108 95 115 120 103 141 100 126 138 103 109 97 126 137 96 135 113 130 132 85 103 114 129 116 105 132 121 133 136 115 138 93 135 144 116 February 1970 M O N TH LY REVIEW Challenging Year estern banks had to deal with a num ber of new, tough challenges in the closing year of the decade. Faced with mounting reserve pressures and with prob lems of disintermediation, which caused a massive $2.4-billion net outflow of deposits, banks showed surprising skill and inventive ness in finding alternative sources of funds to meet continuing heavy demands for credit. Yet, Twelfth District commercial banks as a whole posted only a $204-million (0.4 percent) gain in total credit in 1969— and large District banks actually suffered a small decline in total credit, since their loan expan sion was more than offset by a reduction in their securities holdings. District commercial banks recorded a $2.2-billion increase in loans, on a balancesheet basis, and this represented a 5 Vi-per cent rate of expansion, in contrast to the 13percent gain of the preceding year. Business borrowers accounted for a higher proportion of the banks’ total loans than they did in 1968 but, even so, the business-loan increase was less than half the previous year’s gain. Sim ilarly, the rise in mortgage financing was held to little more than one-third of the 1968 gain, and the consumer instalment-credit gain was also smaller than in the year before. These balance-sheet data, however, under state the total loan demand initially accom modated by District banks in 1969, since large amounts of loans were removed from banks’ balance sheets and sold outright to bank holding companies, affiliates, and for eign branches. The actual increase in total loan accommodation thus was about 50 per W cent greater than the stated increase, and the business and mortgage gains were over 80 percent greater than indicated by balancesheet data. Search for funds The deposit outflow in 1969 centered on time-and-savings deposits— demand deposits rose by about $800 million. Spiralling moneymarket rates, mounting taxes and cost-ofliving increases led to an accelerating rate of attrition in time deposits as the year pro gressed. Individual savings, as well as large corporate CD’s, were involved in the heavy $3.2-billion run-off. The banks’ major prob lem thus was to find funds to meet these de posit withdrawals and to satisfy the sustained heavy loan demand. First of all, District banks ran off or sold both U.S. Government and other securities, for a $2.0-billion (12 percent) reduction in investments. But even this amount was in sufficient to meet their needs, so they then sought additional funds from other sources. They sharply increased their borrowing at the Federal Reserve discount window, and they also made increased use of Federal funds to meet reserve deficiencies. In addition, they borrowed more heavily from corporations under repurchase agreements, and substan tially increased their borrowings of Euro dollars — either from their own foreign branches or from foreign banks or dealers. Finally, in the latter half of the year, many banks turned to outright sales of loans from their portfolios, with the parent holding com- FEDERAL 52 RESERVE BANK pany selling commercial paper and using the proceeds to purchase loans from its banking subsidiary. The events of 1969 led to a significant erosion in bank liquidity. As loans continued to expand in the face of the substantial de posit decline, the loan-deposit ratio at large District banks jumped to 79.6 percent at year-end from the 71.0-percent figure of the year before — well above even the 72.4percent figure reached in the 1966 tightmoney period. Even after adjustment to in clude Eurodollar deposits, the 1969 ratio was at an all-time high. As further evidence of weakened liquidity positions, Western banks suffered a decline in their security-deposit ratio, from 5.6 per cent to 3.4 percent over the year, as they re duced their holdings of short-term Treasury and municipal securities. Banks also placed greater reliance on borrowed funds to finance their asset expansion; for large District banks, in fact, the increase in borrowed funds ex ceeded their total increase in assets over the year. Yet, the 1969 environment did have some favorable aspects — especially in the profit column. Most Western banks followed the national pattern and increased (in three steps) the rate they charged prime loan cus tomers to a record 8 Vi percent. On the basis of increases in the prime rate and in other loan rates, which are “tied” to the prime rate, the average return on bank loans rose sharply during the year. On the negative side, bank costs increased — particularly for borrowed funds, as strong demand pushed rates on Federal funds and Eurodollars to record highs. Nevertheless, according to preliminary re ports, the revenue gain far exceeded the in crease in expenses, so that operating earnings rose well above the previous record set in 1968. Substantial offsets occurred in both years, however, since both years were “cap- OF SAN F R A N C IS C O W@s#@ra barnfes ©©mft™® to m aintain stro n g loan pace Change ( Billions of Dollartt) . . . but at the expense o f h e avy cutbacks in securities Change (Billions of Dollars) fo r first tim e in tw o d e c a d e s Change (Billions of Dollars) ital loss” years for many District banks. But despite 1969’s heavy losses— associated with large sales of securities on markets that had fallen as interest rates rose— the 1969 netincome figure was also well above the 1968 figure. Search for reserves Despite the decline in deposits, required reserves of District member banks were $245 million higher in 1969 than in 1968, on a daily-average basis. This paradox (higher February 1970 MONTHLY reserves in the face of declining deposits) was partly due to a shift in the composition of deposits — the decline in time deposits, which carry a relatively low reserve require ment, and the rise in demand deposits, which carry much higher requirements. In addi tion, required reserves rose because of the April increase in requirements against de mand deposits and the October imposition of reserve requirements on certain Eurodollar holdings. The daily average volume of borrowing at the Federal Reserve discount window reached $123 million— nearly double the volume of discounting of the previous year. Excess re serves meanwhile declined, and net borrowed reserves (borrowed reserves less excess re serves) rose to $73 million— more than twice the 1968 average. District banks also relied more heavily on the Federal funds market as a source of funds to cover reserve deficiencies. (In 1968, by way of contrast, they relent to Governmentsecurities dealers a high proportion of the Fed funds purchased from other banks.) In 1969, District banks were net interbank Fed-funds sellers (lenders) only during the first quarter of the year; during the rest of the year, they steadily increased their purchases (borrow ings) and sharply reduced their Fed-funds sales to securities dealers. In the aggregate, then, District banks were average net pur chasers of $38 million during the year— a shift from average sales of $136 million in 1968— and many District banks were much more substantial borrowers than this aggre gate total indicates. Meeting the pressures Nonetheless, District banks were able to meet the strong pressures on their resources only by turning to somewhat unconventional sources of funds. Despite their increased borrowings from the Federal Reserve and increased Fed-funds purchases from other REVIEW Western banks0 balance sheets show light-money impact most strongly -2 0 -1 5 -1 0 i 1 Annual Change (Percent) 1 -5 ■ 0 5 1 0 ------------ 1 ------------- 1 1 5 i LOANS 0 1 l West Real Estate SECURITIES ^ I9 6 9 < ^ U.S. Government ----- j^ mT ^ > I9 6 8 --------------------- 1 DEPOSITS 1 Time and Savings Demand ’ ' f ‘ = 5 -------- 1 — >% • 1 banks, these traditional sources of funds ac counted for only a small part of their total inflow of funds in 1969. During the first quarter, large District banks obtained more than one-half of their increased funds from sales of Governments and other securities, and obtained other sig nificant amounts from Eurodollar borrowings and increased time-deposit inflows. They used most of these added funds to expand their loan portfolios and to make Fed-funds sales to banks and dealers. In the second quarter, banks continued to sell off securities, although to a smaller extent than before, and obtained added funds from purchases of Fed funds, as well as from in creases in demand deposits and Eurodollar borrowings. They used most of these new funds to expand loans, but diverted about 15 percent of the total into meeting timedeposit withdrawals. By the third quarter, large District banks used almost the entire increase in their funds to meet payouts of time deposits. (They re corded only a small increase in loans on their balance sheets, largely because of outright sales from their portfolios.) Eurodollar bor rowings increased as a source of funds, along with continued sales of securities. Finally, the situation intensified in the FEDERAL RESERVE BANK fourth quarter. Virtually the entire increase in funds in that period went to meet timedeposit withdrawals— indeed, loans showed a net decline, and thus became a source rather than a use of bank resources. For other funds, banks relied upon the seasonal in crease in demand deposits (over one-third of the total), and sales from securities (onefourth of the quarterly increase). Altogether, the total expansion in District banks’ funds showed a marked slippage as the year pro gressed, reflecting the mounting pressure on bank resources. OF SAN F R A N C ISC O S l@ w d i@ w i in banks' funds reflects heavy pressure on resources Fulcrum of pressure 54 Total deposits at District member banks declined by $2.4 billion in 1969— in sharp contrast to the $5.7-billion increase of the preceding year. (This was the first time since 1948 that Western banks had recorded a year-to-year decline in deposits.) The pri vate demand-deposit component, after a de cline in the first five months, posted increases in the latter half of the year. But time-andsavings deposits declined by $3.2 billion, wiping out almost all of the preceding year’s gain. Large District banks last year suffered a $545-million decline in consumer-type de posits— passbook savings and small certifi cates of deposit. They posted a net gain in the first quarter, although a substantial amount of funds shifted out of regular 4-per cent passbook accounts into the widely-ad vertised 5-percent open accounts. Large tax payments halted the growth in consumer savings in the second quarter, and heavy net outflows then occurred in the last two quar ters as higher rates of return on other forms of investment attracted individual savings funds. November’s Christmas Club pay-outs, and the year-long rise in living costs, which forced some individuals to dip into their sav ings, added to attrition. Meanwhile, massive withdrawals of large negotiable CD’s occurred as money market rates rose— and remained— above the 614percent ceiling rate on CD’s. Even so, the 40percent ($1.6 billion) rate of attrition in this category was less than that experienced by large banks nationally. The run-off ac celerated through the third quarter, and then tapered off in the last few months of the year. In this period, domestic corporations con tinued to reduce their CD’s, but foreign gov ernments and institutions increased their de posits, which are not subject to rate ceilings. Large District banks also experienced a $ 1.2-billion reduction in public time deposits, which more than cancelled out the abnormal ly large increase of the preceding year. This large outflow was in part a technical readjust ment, but it also reflected the placement of public funds in other forms of investment bearing higher rates of interest— as well as a failure of public authorities to obtain funds from bond issues. (Many issues could not be floated simply because ceilings on rates which public authorities were legally permitted to pay on flotations were well below general money-market rates.) Meeting business demands District banks had difficulty in meeting the heavy business demand for funds in 1969. Moreover, most of the $1-billion increase for February 1970 MONTHLY the year was confined to the first two quar ters, on a seasonally adjusted basis. Begin ning about mid-year, District banks stepped up their outright sales of business loans, mainly to their own bank holding companies. But even after adjustment of the data to in clude these sales, business loans actually showed a decrease in the final quarter of the year. All major business borrowers, except mining firms, increased their bank-held debt in 1969. The largest gain was posted by dur able-goods manufacturers, with particularly heavy borrowing from the transportationequipment sector. In the public-utilities cate gory, transportation accounted for the largest increase in financing. Construction loans rose only nominally, and foreign business loans and bankers acceptances declined. Because of the shortage of loanable funds, District banks pursued an increasingly re strictive lending policy in 1969. The average interest rate charged by large-city banks on REVIEW regular short-term loans reached 8.81 percent in November—up from 6.62 percent a year earlier. Rates on loans made under formal revolving-credit agreements also rose to 8.64 percent — up from 6.50 percent. Besides charging higher loan rates, Western banks were stricter in enforcing compensating-balance requirements and were less willing to make loans for speculative or non-productive purposes. New customers and non-local customers found it much more difficult to get credit accommodation. Meeting other demands Large District banks posted an 8-percent ($426 million) gain in consumer instalment loans, in contrast to the 14-percent yearearlier gain. (The discrepancy was smaller, however, after adjustment for a substantial amount of loans sold out of portfolio.) This reduced rate of expansion largely reflected the cutback in auto purchases by Western SELECTS© ASSET AW© LIABILITY ITEMS ©F WEEKLY REPORTING LARGE BANKS (dollar amounts in millions) T W E LFT H Dec. 31, 1968 to Dec. 31, 1969 Dec. 31, 1969 Dollars $49,814 37,752 14,552 11,043 1,318 1,867 439 325 268 5,580 2,360 12,062 4,566 6,505 991 47,057 17,552 27,715 14,851 9,074 2,632 2,357 4,020 63,211 O T H E R U.S. Met Change Outstandings Loans gross adjusted and investments Loans gross adjusted Commercial and industrial loans Real estate loans Agricultural loans Loans to nonbank financial institutions Loans for purchasing or carrying securities: To brokers and dealers To others Loans to foreign banks Consumer instalment loans All other loans iotal Investments U.S. Government securities Obligations of states and political subdivisions Other securities Total deposits (less cash items) Demand deposits adjusted Time and savings deposits Savings deposits Other time IPC Deposits of states and political subdivisions (Neg. CD’s $100,000 and over) Capital accounts Total assets, liabilities, and capital accounts D IS T R IC T Dec. 27, 1967 to Dec. 31, 1968 Percent 259 + 1,785 + 844 + 492 + 71 + 201 + + + + + — + -7 7.90 + 19.69 + 3.36 + 8.27 + .85 -1 4.49 -2 3.43 - 7.63 — 9.99 — 4.82 + 3.15 - 9.77 - 6.63 - 6.90 -3 1.53 -3 9 .1 9 + 5.37 + 2.01 342 64 + 426 + 20 -2 ,044 -1 ,3 9 7 — 537 110 -2 ,385 + 536 -3 ,0 0 2 -1 ,055 — 673 -1 ,212 -1 ,519 + 205 + 1,245 Net Change .52 4.96 6.16 4.66 5.69 1.21 Percent Dec. 31, 1968 to Dec. 31, 1969 Percent 12.95 14.42 18.50 9.57 2.97 2.08 + 1.60 + 7.20 + 11.09 + 5.08 - 5.62 +10.82 +72.57 +39.27 .39 + 14.16 + 2.16 + 9.38 + 5.76 + 13.91 + 2.50 + 16.34 + 12.78 + 12.03 + 1.56 +25.63 +36.75 +33.43 + 4.67 + 10.49 — 18.10 - 6.19 - 8.32 + 10.55 .79 -1 1.85 -1 8.10 — 7.27 — 4.58 — 5.50 + 1.98 -1 4.99 - 4.12 -2 2.16 -4 9.98 -5 4.69 + 6.02 + 3.34 + + + + + + 55 FEDERAL RESERVE BANK consumers. Financing of other consumer goods increased faster than in 1968. Person al-loan financing meanwhile fell below the 1968 increase. Credit extended under creditcard and related plans (which are included in the consumer-credit data) continued to ex pand, just as in past years. Western banks slowed down their pace of mortgage financing in 1969, largely as a consequence of their heavy outflow of time deposits. On a balance-sheet basis, large District banks showed a 1969 increase of 4.7 percent ($492 million) in real-estate loans, compared to a 9.6-percent expansion in 1968. These figures, of course, understate the volume of mortgage-loan extensions, since Western banks sold a large volume of mort gage loans to their bank holding companies and to others during the year. Savings-and-loan associations, the other foundation of the Western mortgage industry, were also forced to moderate their lending pace in the face of a net deposit outflow. (Altogether, they posted a net savings loss of $127 million, due to heavy losses in Califor nia and Nevada, which offset modest gains in other District states.) Nevertheless, by sub stantially increasing their borrowings from the Home Loan Banks and by reducing their holdings of cash and Government securities in line with a reduction in legal liquidity re quirements, District S&L’s achieved a quite respectable gain in their mortgage portfolios —just over $2 billion, actually a shade more than their strong 1968 gain. In the mortgage sector as in other lending 56 OF SAN F R A N C IS C O sectors, the growing stringency of loanable funds became increasingly evident as the year progressed. As one evidence, S&L commit ments to make future loans declined by more than a third (to $404 million) over the course of the year. As further evidence, mort gage lending rates rose to new peaks during the year; for example, rates on conventional new-home loans exceeded 9 percent as the year came to a close, well above the na tional average. Rough road ahead? Western banks successfully weathered the difficulties of 1969, but they entered 1970 in a much more vulnerable position. For one thing, their security holdings are substantially below the level of a year earlier. About one half of the 1969 decrease occurred in short term maturities, and their flexibility is further limited by collateral requirements. In the first month of 1970, moreover, Western banks experienced further losses in savings deposits, and corporate CD’s also continued to lag as recent changes in Regula tion Q left ceiling rates still below general money-market rates. In addition, banks faced the prospect of a new reserve require ment against, as well as rate ceilings on, the use of funds obtained through commercial paper sold by their subsidiaries or bank holding companies. Thus, as the new year began, District banks were hard-pressed to find the funds to meet all the new demands upon their resources. February 1970 MONTHLY REVIEW Gh©eklast of ’69 espite the slowdown in some segments of the regional economy, industries in all Twelfth District states produced a num ber of highly tangible achievements last year. The following is a summary of their accom plishments in 1969 and their plans for 1970. D California A erospace Although the aerospace indus try felt the impact of reductions in Federal spending, it received a number of large or ders for both aircraft and missiles. By yearend, a $471-million order had been placed for the Navy’s S-3A, a carrier-based anti submarine aircraft, and a $ 155-million order fer Polaris and Poseidon missiles. Three con tractors are vying for construction contracts for the new B1 strategic bomber (formerly known as the Advanced Manned Strategic Aircraft), with research expected to cost $100 million and the final program amount ing to a hundred times that sum. Activity increased in the commercial sec tor with two producers showing a backlog of 380 orders for “airbuses,” valued at more than $6 billion. To handle these orders a to tal of $ 105 million is being spent by two firms on building new plants in Palmdale and Long Beach and on expanding and improving ex isting facilities. Met® Is A $ 6-million expansion program at a Fontana plant will increase its steel ingot making capacity by 500,000 tons to 3.4 mil lion tons per year. A new $25-million alumi num technology center at Pleasanton is ready for occupancy; a staff of 400 scientists and engineers will use the center to conduct re search programs in aluminum, nickel, and specialty metals. Two new aluminum fabricating plants opened in California. A Sacramento electri cal cable plant, built by a Canadian firm, houses drawing machines capable of finishing aluminum wire at 8,000 feet per minute; it has a capacity of 40,000 tons per year of 3 -inch redraw rod. In addition, an alumi /s num extrusion and anodizing plant is now in operation at Pomona. Petroleum Oil production exceeded a mil lion barrels a day, thanks to new wells in pro duction in the Wilmington field, offshore leases in the Santa Barbara Channel, and thermal recovery in Kern County. However, massive leakage in the Santa Barbara Chan nel caused a slowdown in drilling there. New oil fields were discovered at several locations, including Castle Rock Springs in Lake County. A new gas pool near Grimes in Colusa County promised average produc tion of 1.2 billion cubic feet a day. A $ 100-million oil-refinery expansion at El Segundo was completed during the year. Construction began on a $5 0-million refinery at Wilmington, complete with flashing unit, coking unit, boiler house, water-treatment facility and storage, and production-handling equipment. Plans for the future include a $ 13-million expenditure for a 30,000-barrelper-day crude-oil processing plant at Wil mington, and a $ 10-million refinery in Beau mont, Riverside County. Forest Products Particleboard was the fastest growing segment of the market. A $6million particleboard plant, with an annual capacity of 80-million square feet, will be built by 1971 in Mendocino County. Also, a $3-million plant will be built at Dinuba in Tulare County. FEDERAL 58 RESERVE BANK Construction One highlight of 1969 was San Diego’s 200th anniversary; the comple tion of several large new buildings and shop ping centers contributed to the celebration. A hotel construction and expansion boom meanwhile continued in San Francisco. On the drawing boards or under construc tion in ’69 were numerous projects, including: the $350-million Otay Ranch Community in San Diego; the $300-million Warner Ranch Urban Center in Woodland Hills; the $200-million Yerba Buena Center in San Francisco; the $ 110-million Ferry Port Plaza in San Francisco; the $ 100-million complex on a man-made peninsula at Emeryville; the $ 100-million recreation and camping devel opment at McClure Lake near Yosemite Na tional Park; a $ 100-million commercial land development at El Segundo; a $93-million downtown regional shopping center in Oak land; and an $85-million waterfront com plex in San Francisco. Public Utilities Record spending of $340 million by a major Northern California utility will add about 2 million kilowatts to the sys tem capacity between 1969 and 1973. In cluded in the project are: a 1,660,000-kilowatt atomic power plant near Diablo Canyon in San Luis Obispo County; a 750,000-kw power plant at Pittsburg in Contra Costa County; a 117,000-kw addition to the Belden hydroelectric project on the Feather River in Butte County; and a 55,000-kw ad dition to the Geysers power plant in Sonoma County. Another Northern California utility started building the $ 180-million, 847-megawatt Rancho Seco nuclear power plant, scheduled for completion by 1973. A major utility in Southern California set aside $341 million for constructing power facilities, as part of a total investment of $ 1.4 billion designed to produce more than 3.5 million kilowatts of new generating capacity by 1972. The same company also planned a $300-million, 1.5-million-kw coal-fired OF SAN F R A N C ISC O steam electric-generating plant in the Victor ville area of the Mojave Desert, and a $ 179million addition of two 750,000-kw electric generating units in Huntington Beach. An other utility meanwhile announced several construction projects totaling $185 million, including the 1,250,000-kw Castaic power project in Southern California. Transportation As work continued on the state’s 2,165-mile share of the national inter state highway system, some $500 million worth of bids were called for during the first half of the year. San Francisco Interna tional Airport began work on a $ 160-million project designed to prepare for the arrival of the new jumbo jets and supersonic trans ports. In the ocean-transport field, one ship ping concern completed a $40-million exsion program, increasing its fleet by four ships and its shipping capacity by 2,350 con tainers. Pacific Northwest Two new 40,000-ton potlines came on stream last year at Tacoma and Longview. These projects, along with sev eral earlier ones— especially a new reduction plant at Ferndale, Washington— added 572,000 tons of new capacity in the 1965-69 period, or more than half of the nation’s total new capacity. Projects in the planning stage include a 100,000-ton smelter near Goldendale, Wash ington; a 135,000-ton plant at Astoria, Ore gon; and potline additions to existing plants at Longview, Washington, and Troutdale, Oregon. These projects will raise annual pro duction capacity in the region from 1.4 mil lion tons in 1969 to 1.7 million tons by 1972. Steel A $35-million fully integrated steel complex at the Port of Portland’s Rivergate industrial park, as well as a steel rolling mill at McMinnville, Oregon, came into produc tion in 1969. The Portland facility is the first in the Pacific Northwest to process iron ore Aluminum February 1970 MONTHLY directly into steel, and it includes a rolling mill for producing the type of large-size steel plates in demand by shipyards and other heavy steel fabricators. Raw steel produc tion will reach 150,000 to 200,000 tons in 1970. F@resf Products Despite the slowdown in the 1969 market, forest-product companies planned several expansion projects. The most extensive is a $24-million complex at Klam ath Falls, Oregon, which will employ 300 workers when it is completed in the early ’70s. It will include a new plywood mill ca pable of producing 90-million square feet annually, along with a particleboard plant with a capacity of 56-million square feet. Other Oregon plans include: an $8-million project which will triple capacity at a Springfield particleboard plant; a $ 14-million paper-mill expansion in Albany; a $5-million particleboard plant enlargement at La REVIEW Grande; and a new particleboard plant at Coos Bay. Meanwhile, a plant for prefabri cating homes came into production at Hoquiam, Washington, and another such plant was enlarged at Chehalis. Aerospace The aerospace industry in the Pacific Northwest faced a year of retrench ment in 1969. Cutbacks and delays in Fed eral defense and space projects and in the SST program severely affected the industry. Employment fell from a 1968 peak of 105,700 to 84,000. Defense contracts amounted to $60 mil lion, chiefly for Minuteman missiles. NASA spent $19 million for the construction of four Lunar-Rover vehicles to be used in 1971-72. Unfilled government orders at the end of September amounted to $294 million for military aircraft and $264 million for the missile and space programs. Commercial-aircraft production declined sharply from 1968 levels, but backlogs last fall totalled $4.7 billion. Production delays occurred on the 747 transport, but the first of these jumbo jets then went into scheduled service in January 1970. Petroleum and Chem icals A major oil firm began construction of a $ 100-million re finery near Bellingham, Washington; it will be the largest refinery in the Pacific North west, with a capacity of 100,000 barrels a day. Another firm started a refinery with 10,000 b /d capacity at St. Helens, Oregon, on the Columbia River. Alaskan oil, com bined with the growth of Pacific Northwest industrial sites and markets, is expected to bring a long-term boom in refinery construc tion to this area. A $20-million magnesium plant is sched uled for completion in 1971 near Dallesport, Washington, to produce 48,000 tons of mag nesium and 100,000 tons of chlorine annual ly for sale to the aluminum, pulp and paper, and food-processing industries. Also, a $3million magnesium plant with a 100,000-ton FEDERAL RESERVE BANK annual capacity is included in an $ 8-million expansion program under way at a titanium facility at Albany, Oregon. Construction Both residential and com mercial construction eased off in the Pacific Northwest as a result of the slowdown in general business activity in the area. The largest project now being constructed is the $ 175-million, 650-acre Oregon residential development between Portland and Lake Os wego, including the Mount Sylvania Recrea tion Center. Hotel and recreational construction con tinued to boom throughout the year, how ever. In Washington some $100 million is being spent on the construction or expan sion of hotels, motels, and stadiums to handle increased travel and convention business. Extensive projects include: a $40-million, 50,000-spectator stadium in Seattle; a $ 30million, 40-story office tower in Portland; the $3 0-million Progress Center shopping complex near Tigard, Oregon; a $25-million recreation complex near Oregon City; and a $20-million convention center in Tacoma. In Washington, a utility firm began con struction of a $50-million, 1.4-million-kw steam electric-power plant at Centralia. An other firm will build a $200-million, 1,000megawatt nuclear-generating plant on Kiket Island in Skagit County. Tr©nrQsp©rfofl©Eni Construction progressed on a $68-million, 2,159-foot double-deck bridge and freeway spanning the Willamette River in Portland. Both Seattle-Tacoma and Portland International airports were involved in major expansions; a $ 100-million invest ment for each airport is expected to meet growth needs to the year 2000. Mountain States 60 C opper Two new copper facilities began operating in Arizona: a mine and concentra tor capable of processing 30,000 tons of ore per day in the Twin Buttes district; and a OF SAN F R A N C ISC O $35-million plant to treat silicate copper ore at Ray. In addition, plans were announced for a $ 100-million development at the Met calf copper mine near Morenci, Arizona; the mine is expected to reach an initial capacity of 50,000 tons of copper by about 1973. A 500-million-ton copper ore body will be developed at the Lakeshore property on the Papago Indian Reservation south of Casa Grande, Arizona. An underground mine and sulfide-flotation concentrator with a capacity of 8,000 tons/day are planned at cost of $100 million. A 4,000 tons/day leaching plant to treat oxide ores is scheduled for the San Xavier mine. Another project to increase Arizona’s cop per-refining capacity is a 200,000-ton, $34million plant near the San Manuel smelter— whose capacity, incidentally, is now being expanded from 110,000 to 185,000 tons per year. The new plant will produce cathodes and continuous cast rod through an ad vanced casting method which by-passes the traditional production of wirebar. Magnesium Several projects will help ex tract minerals from Utah’s Great Salt Lake: A $70-million plant capable of recovering 45,000 tons of magnesium, 81,000 tons of liquid chloride, and 48,000 tons of gypsum annually; a $26-million brine-processing plant for producing magnesium chloride; and a $22-million facility for extracting potash, sodium sulphate, magnesium chloride and other minerals. A $ 10-million plant came on stream in Utah during the year to process ore from the Brush beryllium mine near Spor Mountain, and another is planned for the same area. Iron ©re A major iron-ore deposit, discov ered near Yerington, Nevada, is estimated to contain a quarter-billion tons of iron ore, three-tenths of one-percent of which is cop per. This discovery could lead to the location in this region of a basic steelmaking facility, or a copper mine and processing plant. February 1970 MONTHLY REVIEW Gold Operations began last year at the $9-million Cortez open-pit mine and mill, which quickly became the third largest pro ducer of gold in the nation. This leach cya nide plant now turns out more than 400 ounces of metal daily. Silver Development and exploration in the Coeur d’Alene district of Idaho increased, as silver producers prepared for the day when the U.S. Treasury ceases to supply silver to the market. At the Sunshine mine, construc tion began on a $2-million refinery to handle 2,000 tons of concentrate per month. Work is in progress to deepen shafts at the Ga lena, Lucky Friday, Star-Morning and Cres cent mines. Some $ 17-million worth of exploration projects are under way in this district, includ ing exploration at a depth of at least 4,500 feet in the Caladay area. Other important projects include exploration of a block of claims comprising the Coeur Project near the Galena mine; exploration at the Camp and Consolidated Projects; and diamond drilling at the Crescent Evolution property, west of Osborn. Petroleum cured Exploration and de velopment of oil-and-gas projects continued at a high rate during the year. One firm an nounced it would spend $11 million during 1969 to drill 144 wells. Another company planned $10 million for expansion of a 21,000-barrel-a-day catalytic cracking unit in Salt Lake City. A erospace Arizona firms received defense contracts for $23 million of bomb fuses and radar sets, and $13 million for automated data-processing systems. A Utah firm won an Air Force contract of $20 million for con structing first-stage Minuteman missile en gines, along with $42 million for building and testing a prototype version of a hardened Minuteman missile site near Cedar City, Utah. C onstruction C o m m erc ia l construction continued at a high level, as plans for major hotels, shopping centers and condominiums included: a $ 150-million, 4,000-room hotel addition in Las Vegas; a $ 60-million planned community in Tempe, Arizona, consisting of garden apartments, a shopping center and hotel; and a $35-million shopping center in Murray, Utah. Under study is a multi-purpose nuclear desalting plant in the Great Salt Lake area which could cost over $1 billion. The plant would have maximum capacity of 100 mil lion gallons-per-day of desalted water, 1,000 megawatts of power, and 1.32 million poundsper-hour of processed steam. Other utility building plans include a $600million, 5-million-kw coal-fired power plant near Lake Powell, Utah, and a $300-million generating plant in Salt Lake City. Also on the drawing boards is a $3 00-million electric generating plant with a capacity of 2.3-million kw near Page, Arizona. Alaska and Hawaii Pefreleiam and Gas The after-effects of the oil strike on Alaska’s North Slope domi nated the news in 1969. The year witnessed a $900-million sale of oil leases, as well as advanced planning for construction of a $900-million, 800-mile Trans-Alaska pipe- 61 FEDERAL RESERVE BANK line system. The oil reserve on the North Slope is reported to be the richest ever found in the U.S., with estimates of recoverable reserves ranging from 15 billion to 40 bil lion barrels. Some 13 oil firms are already drilling in the area, and more are scheduled to follow. A major oil company has announced it will spend up to $90 million for three tank ers to haul its oil to West Coast refineries. Construction of a refinery is nearing comple tion at Kenai, with two more scheduled for Fairbanks. A 1,000-barrel-a-day crude-oil topping plant at Prudhoe Bay will produce Arctic fuel for heating units and heavy-equip ment engines. In Hawaii, meanwhile, con struction is under way on a $ 60-million oil refinery at Barbers Point, Honolulu, with a capacity of 50,000 b/d. Forest Prodjuefs A U.S. company has en tered into a contract with a Tokyo-based paper company calling for the sale of $600million worth of Alaskan pulp and lumber over a 15-year period. Shipments will come from a $75-million pulp and sawmill com plex the company expects to complete in Alaska in 1973. CoistruefiOM The oil strike brought a building boom to Alaska, particularly in the hotel, commercial, and apartment-house fields. Plans were announced for “Seward’s Success— The Twenty-First Century City” to be built on some 3,200 acres in Anchor age. Scheduled for completion in five years, the city will be built in four phases, each accommodating 5,000 persons. It will be a totally enclosed and climate-controlled city 62 OF SAN F R A N C IS C O with office facilities, commercial mall, sports arena, schools, residential mall, and transpor tation system of moving sidewalks without automobiles. The construction of hotels, condominiums and apartment houses continued at a rapid pace in Hawaii. Long-range plans were an nounced for several resort communities, com plete with residential, commercial, and rec reational facilities, on Oahu and neighboring islands. Major projects planned or under way include: the $ 850-million Wailea Pua Kuleana (City of Flowers) at Wailea Beach on Maui; the $446-million South Kohala de velopment and a $300-million regional ocean-side development on Hawai; and a $244-million resort town on Molokai. Pyblie Utilities The $50-million Snettisham hydro-electric power plant near Juneau is scheduled for completion in 1972. It will supply 46,700 kw of power from the Long Lake portion and 23,350 kw from the Crater Lake portion of the project. In the planning stage is a power-generating complex near Fairbanks, capable of producing up to 45,000 kw of electricity for existing utility firms. A Hawaii utility earmarked $27 million for capital expenditures in 1969 and another $143 million for the next five years. Under construction, at an $ 18-million cost, is an 86,000-kw generating station in Honolulu. New Pacific airline route awards, along with the advent of the jumbo jets, have necessitated a $250-million master plan to expand the Honolulu International Airport. Development work may continue through 1985, with one key feature being the completion of a reef runway in 1972. Transportation MONTHLY February 1970 REVIEW Growth and Diversity rowth and diversity continued to be the twin hallmarks of the Western econ omy in 1969. Nonfarm employment in creased during the year in each of the Dis trict’s four major regions — and over the entire course of the decade, each of these areas recorded at least a one-third increase in employment. Southern California alone employed 4.1 million workers in 1969—more than any single state except New York, Penn sylvania, Illinois, and California itself. North ern California employed 2.8 million workers, the Pacific Northwest 1.9 million, and the Mountain states 1.2 million. G Annual Change (Percent) Millions Nonetheless, the growth pace slowed some what in the West during 1969. Nonfarm em ployment grew by about 3.4 percent—rough ly in line with the national increase, but below the region’s 4.1-percent figure of 1968. Southern California and the Pacific North west accounted for the slower pace; both areas scored respectable employment gains in 1969, but nothing to compare with their sharp 1968 gains. In contrast, Northern Cal ifornia moved ahead at close to its 1968 pace, while the Mountain states recorded a sub stantial advance. Annual Chang® (Parcant) 0 Each of California’s major centers grew at a slower rate, the slowdown being most marked in the state’s focal point, Los Ange les-Orange County. Honolulu, in contrast, posted another strong increase in employ ment. In the Northwest, formerly booming Seattle slowed considerably, but the outlying center of Anchorage sharply expanded its job opportunities on the basis of the Alaskan oil boom. Growth patterns varied, city by city, in the Mountain area— but booming Phoenix continued to boom. 2 \ ' 4 1 -- 5 - 6 1 1 8 1 10 1 1 ---
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