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FEDERAL RESERVE BANK OF SAN FRANCISCO MONTHLY REVIEW IN T H I S I S S U E Trees, Parks, & People Surging Power Liquidity, East & West JUNE 1967 Trees, Parks, and People . . . The redw ood-area econom y will continue to depend on trees, but it will depend increasingly on parks and people too. Surging Power . . . Electric-power consum ption by W e stern industries has risen almost 50 percent over the past several years. Liquidity, East and W e st . . . Bank liquidity has declined everywhere during the postwar period, but District banks have suffered a smaller relative decline. Editor: W illiam Burke MONTHLY REVIEW June 1967 Trees, Parks, and People northw estern corner of California— an area closer to C anada than to South ern California in terms of distance, climate, and economic resources— contains some su perlative redw ood trees, many of them hun dreds and even thousands of years old, which conservationists w ant to m aintain for the benefit of the nation’s population of a thousand years from now. The area also con tains a w ood-products industry which cuts and processes tim ber for the benefit of the population of today. The conflict between these two worthy purposes lies at the heart of the controversy over the establishm ent of a Redwood N ational Park in the region. The type of controversy that has devel oped here — a controversy over a govern mental attem pt to attain long-term goals through the reallocation of resources within a small narrow ly-based local economy— may be encountered m ore and m ore frequently in this increasingly crowded nation in future years. In this particular case, a num ber of T he long-term objectives are designed to be met through the national-park proposals — the preservation of a unique scenic asset, the prom otion of ecological balance, the prom o tion of proper resource-m anagem ent proce dures, the stim ulation of tourism , and the creation of a more diversified local economy. This article, although not concerned with the pros and cons of this sometimes heated con troversy, attem pts to cast some light on the econom ic issues involved by describing the present structure of the redw ood area’s econ omy and the direction in which it may be heading. The coast redwood Two types of trees are commonly called redw oods— the big tree of the Sierra N evada (Sequoia gigantea) and the coast redwood (Sequoia sem pervirens)— bu t only the latter is involved in the recent park proposals. The California coast redw ood once inhabited a great p art of the northern hem isphere, and FEDERAL RESERVE BANK fossil rem ains have been found in Alaska, C anada, G reenland, Europe, and A sia. Cli matic changes, however, have limited the natural range of this redw ood to the fog belt, 6 to 30 miles wide, of the coast of California, from southern M onterey C ounty to the south ern tip of Oregon. The dense, pure stands of superlative redwoods are mainly found on flat land, usually near a creek o r river. (O nly about 5 to 10 percent of the redw ood region is flatland.) T he redw oods on the slopes are usually sm aller and are mixed with Douglas fir and other conifers. The redw ood is a fast-growing tree and is considered to be of com m ercial size in 40 to 120 years, depending on soil conditions and the intended usage of the logs (pulp, particle board, or lu m b er). M ost redwoods die w ith in 400 to 600 years, but some have lived beyond 1,000 years— the oldest one is 2,200 years old. These trees are usually found on flat ground near creeks or rivers and have lived m uch longer than the average tree be cause of flooding and silting. W hen two to three feet of fine silt is deposited around a redw ood during a flood, the tree develops a OF SAN FRANCISCO new root system and is given a new lease on life through the new nutrients and increased m oisture-absorbent area. Thus, the extrem e longevity and size of some redw oods are due to natural flooding. O n the slopes, redwoods do die, but the species is ever-living because of the ability of trees to sprout w henever the parent tree is killed or disabled. P erpetuation of the red wood forest can be accom plished by cutting the trees before they die of old age, or by leaving the forest in its natural state, includ ing exposure to fires and floods; over-protec tion may result in groves dying out. W here the trees are R edw ood and mixed redw ood forests ac count for 1.6 to 1.9 million acres of commer cial forest land, m ostly in Del N orte, H u m boldt, and M endocino Counties. R em aining old-growth redw ood accounts for 275,0 0 0 to 340.000 acres, m ostly on private land. (Som e 50.000 to 60,000 acres of old growth are in state parks, although less than 7 percent of such acreage consists of superlative prim eval redw oods.) A nother 4 5 0,000 acres of land which has been selectively logged still con Lumber production in redw ood area drops below earlier peak . despite decline, wood-products industry still dominates local economy B illio n s of 8oard-Feet 120 W O O D -P R O D U C T S E M P L O Y M E N T June 1967 MONTHLY REVIEW tains considerable am ounts of old-growth redwood. The two counties affected by the Redwood National Park proposals, Del N orte and H um boldt, contain large am ounts of national forest land and other public land holdings. The national forest lands, which are largely in the eastern portion of the counties, con tain Douglas fir and other whitewoods, but little redwood. The bulk of the redwood forest, except for that portion in state parks, is on private land. In establishing a national park, therefore, about 28,000 acres of pri vate land and 15,000 acres of state-park land, mainly in Del N orte County, would be set aside under the A dm inistration proposal, while about 78,000 acres of private land and 12,000 acres of state-park land in H um boldt County would be set aside under the Sierra Club plan. A ction on these and several alter native proposals is still pending before C on gress. The stock of redw ood saw tim ber on com mercial forest land, according to U. S. Forest Service estimates, dropped from about 36 to 31 billion board-feet between January 1953 and January 1963. In the same period, the stock of redwood growing stock, which in cludes not only saw tim ber but also trees too small to be classified as sawtim ber, dropped from about 38 to 33 billion board-feet. R e liable estimates are not available for Douglas fir, the other main com m ercial tree in the redwood region, but it is generally agreed that the volume of Douglas fir on private land has been significantly reduced by the heavy cutting of the past 15 years. Timber and people The economy of H um boldt and Del Norte Counties is heavily based on forest products. The lum ber and w ood-products industry em ploys 29 percent of the labor force in Del N orte C ounty and 22 percent of the labor force in H um boldt County. M oreover, these percentages understate the im portance of M o st redw ood forest lum ber and wood products to the local econ omy, for that industry makes possible the existence of derivative econom ic activities, such as wholesaling and retailing, services, and even local government. The economy of the region faces severe problem s in the near future regardless of the fate of the national-park proposal, partly because of declining tim ber availability and partly because of declining trends in both em ploym ent and production since the hous ing boom of a decade ago. Redw ood p ro duction has held up better in this region than other softw ood-lum ber production, bu t p ro duction in 1965 was roughly 5 percent below earlier peak levels. A nd a firm which owns land within the proposed park area harvested less than half as much acreage in 1965 as it did at the peak of its operations in 1958. M ost forestry experts agree that the cut of lum ber in the redwood region will have to fall considerably if the area is to supply tim ber on a continuing basis. In H um boldt County, for example, a shift to sustained-yield opera tions could require a reduction in the tim ber cut from the recent level of 1,280 million board-feet to about 900 million board-feet in 1975 and 750 million board-feet in 1985. FEDERAL RESERVE BANK Em ploym ent prospects in the lum ber and w ood-products industry will be influenced by other factors besides the projected drop in production. Rising productivity through autom ation is expected to contribute to a reduction in em ployment. O n the other hand, the present trend tow ard greater tim ber utilization is expected to provide an increas ing num ber of jobs for each million boardfeet of cut tim ber. Tw o pulp mills are al ready in operation near E ureka (H um boldt C o u n ty ), while an integrated forest-products com plex is under construction and a saw mill has been operating for several years near Crescent City (D el N orte C o u n ty ), within the boundaries of the proposed national park. Projects of this type, which are designed to meet the dem and for those products with the greatest m arket potential— for exam ple, pulp and various form s of particle-board and chipboard— will not eliminate the depend ence of northw estern C alifornia on a tim ber economy. Y et, opportunities to diversify in other directions are somewhat limited. E x pansion of other m anufacturing industries is limited by high transportation costs, because as more people obtain more tim e and money N ational-park visits soar Millions of Visitors 122 OF SAN FRANCISCO of the area’s distance from m ajor population centers. Fishing and agriculture also may not grow m uch beyond present size. A nd the discovery of m ajor m ineral resources may be ham pered by the region’s discontinuous rock form ations. The redw ood region does contain m ajor w ater resources, for it receives the heaviest rainfall of any p a rt of California, but the developm ent of w ater resources for export to other areas is likely to stim ulate econom ic activity for the m ost p art only during the period in which facilities are being construct ed. H ow ever, one m ajor opportunity for economic diversification is in the field of tourism and recreation— which leads to the question of the proposed national park. Parks and people T he m ain purpose of any national park is to preserve a unique scenic asset— and every one involved in the present controversy agrees that the redw oods are just such an asset. They are the tallest trees in the world, they can be found in their natural state only along the northern coast of California, and they provide alm ost u n p a r a l l e l e d scenic beauty. In view of the nation’s growing population and its fixed land base, however, friction may increasingly develop betw een the attem pt to preserve natural areas such as this for recre ational purposes, and the attem pt to utilize such areas to m eet other econom ic needs of society. The n atio n al-p ark proposal thus gives rise to discussions concerning ecologi cal balance and proper resource m anagem ent — and it also focuses attention on the am ount of tourism -based diversification which it may generate in the local economy. R apid increases in the n ation’s recreational needs are expected on the basis of the con tinued expansion in p er capita income, leisure time, travel, and population. T he num ber of visits to all national parks has risen at an increasing rate throughout this century, m ore June 1967 MONTHLY REVIEW Parks.. 1, O R EG O N C A L IF O R N IA / Proposed N ational Park A d m in istra tion Proposal C rescent C | Existin g State Parks Klam ath Proposed N a tio na l Park S ierra Club Proposal . Present and Proposed M E X IC O 123 FEDERAL RESERVE BANK than doubling in the last decade alone. Simi lar growth trends have been shown by W est ern national parks and C alifornia state parks. A ccording to official estimates of park visits, recreation activities should increase fourfold in C alifornia between 1958 and 1980. R ecreation activities in the redw ood area should increase at a slightly faster rate, so that the N orth C oast share of the state total may rise from 2.0 to 2.2 percent. But, as these figures suggest, the area m ay well rem ain a secondary recreational center, p a rt ly because of its cool, cloudy w eather and partly because of its distance from m ajor population centers. Yet, despite such disadvantages, the draw ing pow er of the redwoods is still very great. In 1958, 23 percent of the visitors to Jedediah Smith R edw ood State Park (D el N orte C ounty) came from the San Francisco Bay A rea, 21 percent from the Los Angeles area, and 35 percent from outside C alifornia— and sim ilar figures are projected for 1980. R ecreation is a seasonal activity in the N orth C oast region, just as it is at every other state and national park in the West. In the 1964-65 period, about 80 percent of day and overnight use at Jedediah Smith Park oc curred between July and September. M ore over, border crossings on U. S. 199 and 101. the redw ood highways, were more concen trated during the sum m er quarter than were Redw ood-region park use concentrated in summer months Th o u s a n d s of V i s i t o r D a y s 0 100 75 25________ 50 Sightseeing Resl of Ye ar July-Septem ber Overnight Da y Use JED 124 S p e c i a l Use □ SM IT H PARK 125 OF SAN FRANCISCO border crossings on Highway 99, the main north-south route. A national p ark would help m eet the growing need for recreational facilities in the N orth C oast region, but existing p ark areas also have a role to play in this regard. The 25 state parks— with their 105,000 acres — could be developed further, especially since eight of them have no facilities for cam ping o r picknicking at present. The 365,000 acres opened up by the lum ber industry for public use and the 753,0 0 0 acres of national forest in H um boldt and Del N orte Counties already provide facilities for fish ing, hunting, and hiking. A nd future plans envision the developm ent of the region’s wa ter resources through the building of reser voirs on the Eel, Trinity, and K lam ath R iv ers. These reservoirs, being located in the w arm er inland section of the region, could be u sed fo r w a te r -o rie n te d re c re a tio n a l activities. Park supporters argue that the develop m ent of the park area for recreational p u r poses would assist the diversification of the N orth C oast economy. Since lum ber p ro duction in the area may drop during the next two decades, and since increased m e chanization could counteract the effect of increased tim ber utilization, em ploym ent in the forest-products industry m ay well decline in the near-term future. B ut as recreational facilities are developed, increased tourist expenditures in Del N orte and H um boldt Counties would also m ake possible the em ploym ent of m ore persons in the trade and service industries. Im pact: local jobs O ne analysis, prepared by A rth u r D. L it tle for the N ational Park Service, considers the direct and indirect effects of future tim ber production and tourist attendance in Del N orte County on other local industries. A s suming the adoption of the A dm inistration’s plan for a national park, the study estimates June 1967 MO NTHLY REVIEW that em ploym ent in the county will be re duced by 250 in 1973, but raised by 1,650 in 1983, relative to the situation w ithout a park. Em ploym ent in the forest-products industry alone would be 600 lower in 1973 but only 140 lower in 1983. This study’s conclusions have been criti cized as being overly optimistic, on the grounds that they do not take full account of the seasonality of recreation-oriented jobs in the area— although the study does note that the tourist season is only about 100 days long. The study has also been criticized for assuming that the large forest-products complex now p a r t l y com pleted on land within the proposed park boundaries will be constructed somewhere else in the county if the park is established. A second study, prepared by H. Dewayne Kreager for the redw ood industry, analyzes the effects of a p ark removing 22,000 acres in Del N orte C ounty or 41,000 acres in H um boldt C ounty, This study concludes that total em ploym ent in Del N orte County would decline im m ediately by 440 jobs, and that 165 m ore jobs would be lost in the future because of the loss of potential new-growth tim ber on w ithdraw n land. The correspond ing figures for H um boldt County would be an im m ediate loss of 729 jobs and a future loss of 425 jobs due to lost potential growth on w ithdraw n land. FEDERAL RESERVE BANK Figures cited in this second study suggest that direct em ploym ent losses could be offset by additional tourist “visitor-days” of 576,000 in Del N orte and 1,104,000 in H um boldt C ounty. These figures are not u n at tainable, since the N ational Park Service estim ates th at the proposed park in Del N orte C ounty w i l l attract an additional 1,200,000 visitor-days in 1978, and 2,500,000 in 1983. F urtherm ore, estimates of the num ber of tourists required to m ake up for job losses do not take into account the “ m ul tiplier” effect of the tourist dollar, a portion of which will be spent by local recipients in buying goods and services from other local residents. M ost em ploym ent generated by the park will be seasonal. As already noted, tourism in H um boldt and Del N orte Counties— and at m ost W estern national parks— is concen trated in the sum m er months. Park em ploy m ent thus should be concentrated in the sum m er period, and park positions also may be filled by non-residents to a large extent. But the park should, of course, contribute to year-round em ploym ent in the initial years when facilities are being constructed. OF SAN FRANCISCO revenue, however, since provisions would be m ade for some sort of tem porary in-lieu paym ent. T he A dm inistration bill, for ex am ple, contains a provision for paym ents to Del N orte C ounty of 3 /5 of 1 percent of the fair m arket value of private property dis 1166 M illion placed by the park. T he p ay m ent form ula could be adjust ed by Congress after five years, so that some uncertainty could rem ain regarding the duration and am ount of in-lieu tax pay ments. A fter several years of park operation, on the other hand, assessm ent rolls should be bolstered by the construction of m otels, hotels, restaurants, and other facilities to serve an increased num ber of tourists. Sharp rise in recreation activities projected fo r 1980 in C alifornia parks and also in state's N orth Coast region Im pact: local taxes 126 The establishm ent of a n a t i o n a l park would also have an im pact on the local gov ernm ent units in the redw ood area. Tim berland, tim ber, and forest-products plants ac count for over two-fifths of total assessed valuation in Del N orte C ounty and over one-fourth of total assessed valuation in H um boldt C ounty. T he A dm inistration’s park plan would reduce the assessm ent rolls in Del N orte C ounty by about $3 million, or 10 percent, while various alternative plans would probably reduce the H um boldt County assessment r o l l s by a som ew hat sm aller am ount, depending on the final decision re garding park boundaries. The establishm ent of a park would prob ably not cause an im m ediate loss of tax M i l l i o n s of A c t i v i t y D a y s 0 5 10 “ i--------------— 20 i---------------------1-------------------- r - Tota l N o r t h C oas t Sw imming 1958 “1 1980 235 Million Comping P icnick ing B ootingFi»hing 1958 1980 C A LIF O R N IA June 1967 M ON TH LY REVIEW The counties affected will still face the problem of dim inishing timber assessments over the next several years, w hether or not a national park is developed. The rem aining volume of tim ber on land which has been 70 percent or m ore logged is not taxed, so that as lum bering activity continues to out pace new tim ber growth— as is projected for at least the next two decades— the assessed value of tim ber will decline. This loss may be partially offset, however, by additions to the tax rolls of new plants as the woodbased industries move tow ards m ore com plete tim ber utilization. W hatever the outcom e of the controversy over the national-park proposal, there is w idespread agreem ent th at the northw estern corner of C alifornia will rem ain strongly based on a tim ber economy, especially after the transition to a sustained-yield cutting policy is com pleted. A t the same time, the scenic attractions of this magnificent big-tree country— along with the rapid expansion of the national dem and for recreation— should provide increasing opportunities for redwood area businessm en to diversify into touristbased activities. — Jacob Toby and Robert Hermanson A rtw ork by R, Mansfield 127 FEDERAL RESERVE BANK OF SAN FRANCISCO Surging Power W estern industrial pow er consum ers have sharply increased their electric-pow er purchases, using alm ost half again as m uch pow er in early 1967 as they did just four years earlier. A ccording to a new series developed by the Federal R eserve B ank of San Francisco on the basis of data supplied by 15 reporting utilities, the index of electricity consum ption by Twelfth D istrict m anufacturing and mining firms reached 141 in A pril 1967 (1 9 6 3 = 10 0 ). T he series shows a strong uptrend over the last several years, interrupted by occasional softness as in late 1962 and again in late 1966. The d ata are not adjusted for seasonal variation, since the tim espan covered — m id -1962 to date — is too short to perm it accurate adjustm ent for seasonal m ovements. T he survey coverage, although not com plete, is broad enough to cover all but the smallest electricity users. A ccording to Survey of M anufactures data, 52.5 billion kilow att-hours were sold to all Twelfth D istrict industrial users in 1964, and rep o rt ing utilities in the Federal Reserve sample accounted for over tw o-thirds of th at total. Coverage will soon be about 80 percent, partly because of an increase in the num ber of reporting utilities, but it will not reach 100 percent because the utilities do not report electricity consum ption by small firms as is done by the Survey of M anufac tures. Rising e le ctricity usage T he prim ary-m etals industry, especially alum inum , is the largest consum er of electricity in the Tw elfth District. This industry is only the seventh largest regional rises strongly in recent years . aluminum and mining firms show sharpest gains in power requirements Electric-pow er use by W estern firms Index, 1963 = 100 Index, 1963 = 100 150 Transportation Equipment M achinery 128 (962 (965 1964 1965 1966 1967 MONTHLY REVIEW June 1967 industry, accounting for less than 5 percent of value added by D istrict m anufactur ers, but it uses over one-third of all electricity generated in the D istrict. M oreover, it shows the greatest growth of any D istrict industry, with its electricity usage rising to 154 percent of the 1963 average in M arch of this year. T he largest W estern industries, transportation equipm ent and m achinery— each with over 15 percent of total value added— are relatively small electricity consum ers. B ut each has sharply expanded its electricity usage in recent years to m eet the heavy dem ands of defense and business custom ers. In M arch, the pow er consum ption index rose to 137 for transportation equipm ent and 143 for m achinery (electrical plus non-electrical). A nother m ajor regional industry, food and kindred products— with 14 percent of total value added— is m ost notew orthy for its sharp fluctuations in pow er usage. B etween the post-harvest peak and the w inter low each year, the food industry’s pow er needs fluctuate as m uch as one-third. B ut with all that, the industry has exhib ited a strong growth trend over the past several years. L um ber and wood products, which accounts for 7 percent of value added by D istrict m anufacturing, has shown less growth in pow er usage. T he industry reached its peak in consum ption a year ago, declining later in line with softening business conditions, so that now (despite recent strength) its index is only 18 percent above the 1963 base. — Joan Walsh ELECTRIC POWER C O N S U M P T IO N — TWELFTH DISTRICT M A N U F A C T U RIN G A ND M IN IN G FIRMS (1963 = 100) 1962 January February March April May June July August September October November December — — — — — — 91.0 99.0 94.7 95.7 95.5 94.4 1963 93.4 90.4 92.3 94.9 99.0 99.9 102.4 104.8 103.9 106.4 105.6 107.0 1964 1965 1966 1967 107.1 105.9 108.5 110.5 112.6 110.2 112.1 113.8 114.0 115.5 112.4 117.4 116.3 112.4 120.3 122.5 121.6 121.4 122.5 125.1 124.1 126.5 125.5 127.0 128.0 124.9 131.2 129.7 132.7 133.5 137.3 139.1 139.5 137.2 135.2 139.6 141.1 135.6 142.6 141.1 — — — — — — — — FEDERAL RESERVE BANK OF SAN FRANCISCO Liquidity, East and West I any business, a com m ercial bank j m ust stand ready to m eet the due claims of legitimate creditors when presented for settlement. Unlike m ost businesses, how ever, a com m ercial bank’s liabilities usually consist predom inantly of claims due “today” — its dem and deposits. A b an k ’s problem of standing prepared to m eet tenders by credi tors for settlem ent is thus considerably m ore com plex than the parallel problem of other businesses. P art of the creditors’ claims on a com m ercial bank m ay be m et by concurrent inflows of cash. Nevertheless, the claims on a bank’s cash often exceed expected money inflows, and sometimes the expected money inflows do not fully materialize. H ence, a prudent bank m ust m aintain a cushion of cash and assets readily m arketable into cash (hopefully, w ithout lo ss)— in short, it m ust m aintain “liquidity.” balance sheet, including the liabilities which represent potential claims on assets as well as the assets themselves. This is the rationale underlying such basic and traditional m eas ures of bank liquidity as the ratio of short term governm ent securities to deposits and the ratio of loans to deposits. W ith respect to the claims arising from the present deposits of a com m ercial bank, the liquidity cushion m ust be sufficient to cover not only expected withdrawals and adverse clearings but also those unpredict able deposit drains which sometimes reach substantial proportions. In addition, t h e cushion m ust suffice to cover withdrawals and adverse clearings arising from deposits to be engendered in the im m ediate future, especially deposits c re d ite d in the lending process, which are unaccom panied by cash. This would include provision for withdrawals and adverse clearings resulting from both the im plem entation of current loan com m it m ents and the servicing of extra loan dem and that the bank decides to meet. Nevertheless, these ratios may still be use ful in tracing differences in these particular aspects of liquidity, both through time and through space. It is thus instructive to look at the principal changes affecting the struc ture of bank assets and liabilities in recent years, along with the relative im pact of these changes upon bank liquidity, E ast and W est. ik e Both sides o f balance sheet By its very nature, the concept of “liquid ity” m ust encom pass both sides of a b an k ’s The limitations of such ratios have, of course, long been recognized. F o r example, the actual liquidity of two banks (o r even two groups of banks) with the sam e loandeposit ratio may differ considerably depend ing upon a host of factors: the com position of their loan portfolios, the com position and m aturity distribution of security holdings, the existence or absence of a secondary m ar ket for various types of assets, the structure and relative volatility of deposits, the pres ence or absence of seasonality in both loan dem ands and deposit flows, access to Federal funds, and so on. G row th and shrinking liquidity Since the end of W orld W ar II, the loandeposit ratios of com m ercial banks in both the Twelfth D istrict and the rest of the nation have risen virtually w ithout interruption. This developm ent— a reflection of rising postw ar levels of em ployment, incom e, and expendi ture— was largely m ade possible by the huge liquidity, in the form of holdings of U.S. G overnm ent securities, acquired by the banks in the course of helping to finance W orld W ar II. A t the end of 1945, in the W est as June 1967 MO NTHLY REVIEW elsewhere in the nation, portfolios of U.S. G overnm ent securities represented 75 per cent of total bank credit outstanding, while loans am ounted to less than 20 percent of deposits. By the end of A pril 1967, loans of U.S. com m ercial banks constituted twothirds of their outstanding credits. In the early post-w ar years, and, in fact, until the beginning of the expansion of the ’60s’, Twelfth D istrict m em ber banks out perform ed their counterparts elsewhere in most m ajor loan categories— and in some cases did so by a substantial margin. By the end of 1950, District banks' loans as a pro portion of deposits (less cash item s) had already reached 43 percent, a slightly higher proportion than at New Y ork City member banks and considerably higher than the 33percent figure posted at m em ber banks else where. A nd in the following year, Twelfth District banks’ loans exceeded their invest ments, a condition not realized by mem ber banks elsewhere (except New Y ork City) until 1956. The decade of the ’50’s was a period of considerable expansion for b a n k s every where, but particularly for W estern banks. The faster W estern pace stem m ed from a v i g o r o u s expansion in job opportunities (partly in response to defense dem ands of the K orean W ar and the Cold Wa r ) , which triggered an attendant increase in im m igra tion to the District and a surge in local population. O ver the 1950-60 decade, Dis trict employment rose by 30 percent and population by 40 percent— in both cases, increases 2Vi times as great as those in the rest of the nation. A nd banking data showed a similar (although narrow er) disparity; District bank deposits, for example, rose by 71 percent, com pared with gains of 32 per cent in New Y ork City and 44 percent at mem ber banks elsewhere. Shifts in structure These gains were accom panied, too, by shifts in the relative com position and struc ture of bank assets and liabilities, shifts which in some respects found District banks and their counterparts elsewhere becoming more like one another, while at the same time, Twelfth D istrict banks experienced a relatively sm aller decline in their liquidity. This reflected the fact that the growth of de posits relative to loans was more rapid at D istrict banks than at banks elsewhere. As a result, D istrict banks’ loan-deposit ratio rose more slowly over the decade— about 19 percentage points, to 61.7 at year end 1960 — com pared with a 25-point increase (to 67.8 percen t) at New Y ork R eserve City banks and a 21-point increase (to 53.5 p er cent) at m em ber banks in the rest of the nation. Furtherm ore, structural changes in loan portfolios, as exemplified by the declining relative im portance of long-term m ortgage loans, also led to a com paratively sm aller loss of liquidity by Twelfth D istrict banks. R ealestate loans actually d o u b l e d in dollar am ount at D istrict mem ber banks in the 1950-60 period, but their share of total loans declined from 40 to 35 percent over the decade. O utside of the District, realestate loans rose som ew hat more rapidly, but as a percent of total loans rem ained fairly steady— at about 5 percent in New Y ork City and 25 percent elsewhere. A t the same time, business loans — virtually all short-term loans— increased m ore rapidly at D istrict banks than elsewhere. The businessloan share of total loans thus rose slightly in the D istrict, to 35 percent, but declined from 65 to 59 percent in New Y ork and from 42 to 35 percent elsewhere. O ther measures In general, the other widely used liquidity m easure considered here— the ratio of short- FEDERAL RESERVE BANK SAN FRANCISCO term G overnm ent security holdings to de posits (less collection ite m s)— showed even m ore deterioration over the decade than the loan-deposit ratio. D istrict banks suffered a 1-percentage point decline in this ratio, to 5.8 percent, between 1950 and 1960. (T he ratio rose by 2 percentage points at New Y ork City banks, to 8.8 percent, but de clined by 1Vz points to 7.2 percent at banks elsew here.) Actually, D istrict-bank holdings of short-term G overnm ents increased 46 p er cent over the decade, and their holdings of longer-term G overnm ents and m unicipal se curities also advanced more rapidly than at other banks. Yet, with their very substantial inflow of deposits, they found themselves with less liquidity than their counterparts in the rest of the nation. these funds are an unencum bered reservoir of liquidity per se; rather, the greater part, by far, represents reserves required in sup port of deposits. Furtherm ore, because of the relatively high proportion of low-reserve tim e deposits in the D istrict banks’ total, their required reserves were com paratively small in relation to their deposits— 21 percent in 1960, com pared with 38 percent at New Y ork banks and 25 percent at other banks. But even when cash is excluded from the num erator, the ratio still shows that Twelfth D istrict banks started and ended the 1950-60 period with less liquidity than banks outside of the District. A similar picture is draw n by a m ore re fined variation of this ratio, which again uses deposits as a denom inator, but includes in the num erator not only bank holdings of short-term U.S. G overnm ents but also cash and loans to banks (including Federal funds) plus loans to brokers and dealers in govern m ent securities. (L oans of this type are in cluded in the num erator because they have a very short m aturity and are useful for ad justing tem porary variations in reserve posi tions.) Percent On the basis of this m easure, the liquidity of Tw elfth District banks declined by about a point, to 27.8 percent, from the end of 1950 through the end of 1960, while the ratio rose 6 points, to 54.2 percent, at New Y ork City banks and declined 5 points, to 33.2 percent, at m em ber banks in the rest of the nation. Thus, D istrict banks both entered and ended the period with less liquidity than their counterparts elsewhere, but, in com parison with other banks outside of New Y ork City, they sustained a relatively sm aller liquidity decline in the interim. 132 OF The inclusion of cash in the num erator of the liquidity ratio does not m ean that weaken everywhere, but to smaller extent in D istrict Liquidity ratios 40 L O A N S / D E P O S IT S Inverted Scale 100 --------------------------------------------------------0Q 40 C A SH + S H O R T - T E R M G0V*TS. + D E A L E R L O A N S / D E P O S IT S - Other U.S. \ June 1967 M ON TH LY REVIEW 1961-66: something new L ast year was the sixth year of sustained expansion in the nation’s economy—-an ex pansion which witnessed both a 50-percent growth in G N P and an accom panying surge of activity in the credit m arkets, as consum ers, businesses and governments increased their combined debt by 50 percent to help finance rising levels of expenditure. In this process, and in their capacity as both recip ients and suppliers of loanable funds, the nation’s commercial banks played a greatly expanded role. Total bank credit grew by a w hopping 60 percent, and the banks there by increased their m arket share to one-third of all funds supplied to the credit m arkets — com pared with less than one-fifth during the 1955-60 period. This enlarged share reflected the increased ability and willingness of banks to compete for interest-bearing time deposits, as four successive changes in Federal Reserve R egu lation O raised the m axim um rates payable on various categories of time deposit. As a result, total time deposits at the nation’s banks rose by 121 percent over the 1961-66 period, and such deposits jum ped from 30 to 46 percent of total deposits. In the Twelfth District, time deposits almost doubled, to just under 60 percent of total deposits— a share much greater than achieved elsewhere, despite the relatively slower growth of such deposits at D istrict banks. W ith their sources of funds thus consisting increasingly of nondem and deposits, banks felt less constraint in shifting their asset po rt folios in the direction of longer-term and, generally speaking, higher-yielding assets. Because such newly available assets bolstered banks’ earnings, banks also sought to “buy deposits” in order to finance their further acquisition. This developm ent first served to narrow the yield spread by limiting the rise in yields on longer-term debt instru ments and hastening the rise of yields on bank liabilities. T h e o v e ra ll re s u lt of the changing asset and liability mix was a further — and by some measures an appreciable— decline in liquidity. D uring the 1961-66 economic expansion, D istrict banks failed to m aintain as wide a margin over other regions as they did during the 1950-60 decade, notw ithstanding a relatively rapid rate of growth in D istrict incom e and em ploym ent. Bank deposits in creased 51 percent and bank loans 82 per cent over the 1961-66 period, but these gains surpassed the gains elsewhere by only a n a r row margin; in fact, the loan increase was far less than that recorded by New Y ork banks. Continued liquidity decline Loan-deposit ratios deteriorated every where during this period, most notably in New Y ork City. A t Twelfth D istrict banks, this ratio increased 12 percentage points to 73.9 percent at year-end 1966, while at New Y ork banks it rose 20 points to 87.8 percent, and at other banks it rose 12 points to an estim ated 65.6 percent, by the end of the period. Similarly, the ratio of short-term U.S. G overnm ents to deposits showed a com para tively sm aller decline (b u t to a lower absolute level) at D istrict banks— a 2-point decline to 4.0 percent, in contrast to slightly larger declines in other centers, to year-end 1966 ratios of 6.1 percent in New Y ork and 5.1 percent elsewhere. In each case the decline in liquidity resulted from a sharp rise in de posits and a much sm aller gain in short-term security holdings. (M eanw hile, banks in each region severely reduced their holdings of longer-term U.S. Governm ents but sharply expanded their portfolios of other securities.) And, according to the m easure which re lates the sum of short-term U.S. G overn m ents and loans to banks, brokers, and governm ent-securities dealers to deposits, FEDERAL RESERVE B A N K OF S A N F R A N C IS C O Twelfth D istrict banks experienced a slight reduction in liquidity, to 5.9 percent— again, below the figures prevailing elsewhere, and significantly so in relation to the New Y ork banks. D ro p in cash share of assets reflects narrowing o f yield spread Perc ent C om plicating factors There are additional com plications, how ever, in assessing the significance of these developm ents in term s of their im pact upon bank liquidity. F o r example, none of these liquidity ratios allows for the immobilizing effect upon security portfolios of collateral requirem ents. In the Twelfth District, all states perm itting banks to hold public de posits (except U tah ) require from 100 to 120-percent collateral on such deposits. Since District banks, relative to other banks, m ain tain a higher ratio of public funds to total deposits and a lower ratio of security hold ings to deposits, they have a greater pro portion of their investm ent portfolios im mobilized for purposes of collateral. A t yearend 1966, the am ount thus immobilized was over two-fifths of total securities, as against one-fourth at the New Y ork m em ber banks and one-third at m em ber banks elsewhere. (This assumes a collateral requirem ent of 100 per cent for banks in the rest of the nation as well as in the D istrict.) O n the other hand, D istrict banks in some respects may be relatively less vulnerable to a liquidity squeeze stem ming from sudden deposit withdraw als, since interest-sensitive time deposits have grown more slowly than elsewhere. F rom the end of 1963 to mid1966, large-denom ination time certificates accounted for only about 20 percent of the net increase in D istrict banks’ total deposits and for over 40 percent of the increase at the large New Y ork City banks. (Elsew here, the proportions were much the same as in the Tw elfth D istrict.) A t one time, of course, time deposits were considered relatively “stable,” at least relative to dem and deposits, and hence, the larger were time deposits in relation to total deposits, the lesser was the presum ed need for liquidity. But in an era characterized by increasing sensitivity on the p a rt of the public to interest-rate differentials, the “sta bility” of certain categories of interest-yield ing deposits came to assume highly volatile dimensions. In the sum m er of 1966, when the rise in m arket yields passed the rate ceiling pay able on C D ’s under the term s of R egulation O, this volatility becam e very evident. By D e cem ber, the volum e of C D ’s had declined by over $3.5 billion from a sum m er peak of $18 billion, with New Y ork banks ac counting for over half of the decline. Else where, and m ost notably in the Twelfth District, w h e r e large-denom ination C D ’s am ount to only 6 percent of deposits, the decline was much less. But the principal lesson of 1966’s banking story— perhaps the principal lesson of the 1961-66 banking June 1967 MONTHLY REVIEW story— -was that banks can not count with certainty on their ability to “buy liquidity” at w hatever price dictated by m arket forces, and m ust therefore m aintain a cushion of liquid assets for financing unexpected de posit withdrawals. Liquidity and the future But several other factors— some already present, others likely to become more im p o rtan t in the future— are also relevant to any discussion of bank liquidity. One such factor is the rise in the volume of am ortized loans which has accom panied the growth of all types of loans— a growth which has tended to lengthen the m aturity of bank loan portfolios. A second factor is the rapid recent ex pansion of Federal-funds tra n s a c tio n s (a m ajor com ponent of “loans to banks,” in the num erator of the liquidity ra tio s). This developm ent helps account for the smaller volume of m em ber-bank borrowings at the discount window during the recent tightmoney period than in previous periods of credit restraint. Twelfth District banks, in spite of their com paratively low level of liquidity, tradi tionally have taken relatively m odest re course to the discount window. As Profes sors R ichard Towey and R obert Lindsay noted in their contribution to the Symposium, California Banking in a Growing Economy, the proportion of total reserves acquired by Twelfth District country banks by borrowing through the discount window has been ap preciably lower than at country banks else where, while borrowings by D istrict reserve city banks also have been m uch less than elsewhere. M ore recently this disparity has m oderated somewhat, but the dem onstrated ability of Twelfth D istrict banks to limit their access to the discount window while operating with lower liquidity indicates a relatively more efficient m anagem ent of re serves. This efficiency, in turn, reflects the struc tural factors w h i c h characterize D istrict banking, including the very high degree of branch banking. B ranch systems, operating in a highly diversified econom y, are able to shift funds from one locality to another, in response to the credit needs of a particular sector at a particular time, w ithout a loss in reserves. M oreover, the high ratio of Dis trict banks’ time to total deposits, and p ar ticularly of passbook savings to total deposits, has enabled D istrict banks to economize on their holdings of reserves, other cash, and liquid assets. Several proposals affecting m ortgage fi nancing could also have beneficial im plica tions for D istrict-bank liquidity. F o r exam ple, the developm ent of a broad and active secondary m arket for mortgages and munici pals could be useful, in view of the relative im portance of these instrum ents in District banks’ asset portfolios. The increasing use of electronic equip m ent could reduce the need for liquidity by enabling banks to effect a much closer m an agement of their cash and portfolio posi tions. O n the other hand, the expansion of certain services— including “instant credit” through the credit card — could require greater liquidity to make up for reduced bank control over this segment of their loan portfolios. A t any rate, both the concepts and the m easures of bank liquidity, which have un dergone considerable change in recent years, are likely to undergo further modifications in the years ahead. A nd m ost certainly the changes will be w atched closely by the nation’s bankers— E ast and West alike. — Verle Johnston 135 FEDERAL RESERVE BA N K OF S A N F R A N C IS C O Western Digest Increase in Bank C re d it Total bank credit at large Twelfth D istrict com m ercial banks rose $134 million in M ay, after declining slightly in the early p art of the quarter. H ow ever, loan portfolios fell $177 million— exceeding the reduction in M ay 1966. . . . N et repay m ents by securities dealers and business corporations were mainly responsible for the lower level of loans. Relatively small loan gains were recorded in the real estate, consum er goods, and agricultural categories. . . . D istrict banks continued to enlarge their holdings of securities in M ay. D uring the m onth, they added $114 million in T reasury issues, largely T reasury bills, and meanwhile added $228 million in m unicipals— about one-third in w arrants and short-term issues and tw o-thirds in longer-term tax-exem pts. M ixed Trends in Deposits Private dem and deposits rem ained relatively stable at D istrict banks between the end of A pril and the end of M ay, but U.S. G overnm ent deposits declined $317 million. A $208-m illion increase in tim e-and-savings deposits was not large enough to offset this decline in total dem and deposits. . . . T he tim e-deposit increase fell considerably short of the year-ago increase. Tn further contrast to a year ago, the increase in individual savings was about evenly divided between regular passbooksavings accounts and consum er-type time certificates. D istrict banks also posted a net increase of nearly $100 million in outstanding large-denom ination C D ’s. C o urt Ruling on Snake River Dam The Supreme C ourt in early June halted plans by four private utilities to con struct a $2 5 7-million dam on the Snake R iver between Id ah o and Oregon. The C ourt reversed a low er-court ruling which had supported a 1964 decision by the Federal Pow er Commission to perm it private rath er than public developm ent of the dam site near the junction of the Snake and Salmon Rivers. . . , The m ajority (6 -2 ) opinion raised the question w hether the dam should be built at all, since there are already eight dam s on the Snake and C olum bia Rivers dow nstream from this site, and since nuclear pow er may provide the m eans for meeting the future pow er requirem ents of the Pacific Northw est. W eather and A griculture R ainy, cold w eather during the spring m onths sharply reduced production prospects for m ost deciduous fruits in W estern states, but the extra m oisture also helped boost the yields of grain crops and helped develop excellent pasture con ditions. . . . Poor spring w eather meanwhile reduced labor requirem ents for many fruit and vegetable crops. But because of the unusual concentration of harvest periods, the available labor supply may yet fail to meet requirem ents this fall.
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