Full text of Economic Review (Federal Reserve Bank of San Francisco) : March 1969

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FED ERA L
RESERVE
HANK OF

SAN FRANCISCO

Monthly Review
In this issue

Bank Earnings: IViore Records
Western Central Bank
Farming: Will s69 IVIatch '68?
TalSs Tall Timber Prices

LIBRARY
APR"?

B E E

1969

BM W 0 1 P H I l l t L P i k

March 19B9

icrnk icsrningss M e re R e c o rd s
... Twelfth District member banks outpaced their counterparts
elsewhere, as they set new earnings records during 1968.

W e ste rn C e n tra l Bank
. .. In its 55th year, the San Francisco Federal Reserve Bank
expanded the scope of its central-banking operations.

Farmings W W Match '68?
oID
. . . Cash returns from marketings jumped 7 percent in the
West last year, as against a 3-percent gain elsewhere.

¥®i ISb Toll T im b er P rice s
.. . Congress and the White House begin to investigate as lumber
prices rise even faster than other industrial-materials prices.

Editors WiSlidim iurk®

March 1969

M ONTHLY

REVIEW

Bank Earnings: More Records

ast year was a profitable— though turbu^ lent—year for the nation’s commercial
banks, as they joined the large parade of
industrial firms reporting record earnings and
profits. There was a great deal of churning
around during the 1968 financial year: banks
experienced a relatively quiet first quarter, a
second quarter of considerable monetary re
straint, a third quarter of rapid credit expan
sion (following the Congressional passage of
fiscal-restraint measures), and a fourth quar
ter marked again by the pinch of restraint.

first time this favorable situation had occurred
since 1959.*
In view of rising interest rates and profit
able investment opportunities, most banks
selected 1968 as a “loss” year— a year for
selling selected securities and taking capital
losses as a tax offset. In many instances, the
proceeds from such sales were reinvested in
securities bearing significantly higher yields.
Therefore, capital losses taken last year may
contribute to a higher average return on se
curities in 1969.

Record interest rates sharply boosted rev
enues from both loans and securities, al
though they also contributed to 1968’s higher
operating costs. Moreover, in the face of the
high rates available in the money market,
banks managed to hold— in fact, sharply ex
pand— their demand and time deposits dur
ing most of the year.

‘ E a rn in g s data for the la s t several years are not en tirely comparable
because many banks are now changing th e ir accounting procedures
from a cash to an accrual b asis, in lin e w ith new disclosure reg u la
tions of bank supervisory agencies. F o r those banks, loan and security
ratio s may be affected somewhat durin g the in itia l change-over period.

Twelfth District member banks outpaced
banks nationally, and in the process they set
new peaks in both operating earnings and
profits. Net current operating earnings of
District banks jumped to $709 million—more
than 17 percent above the 1967 figure. Net
profits after taxes meanwhile reached $379
million, also a new peak. However, this figure
was only 8 percent higher than the 1967
profit figure, because of the capital losses in
curred on securities sales and the sharp rise
in other non-operating costs.
Western banks posted a 15-percent gain in
total operating earnings on the strength of
sharp revenue gains from loans, securities,
and other sources. Operating expenses of
District member banks also spiralled upward,
and at a faster pace than in the preceding
two years. Nevertheless, costs increased at
a slightly slower pace than revenues — the

Banks 1 operating earnings rise
more sharply than after-tax profits
Millions of Dollars

FEDERAL

RESERVE

BANK

Loan income soars
Current operating revenues of District
member banks jumped from $3.1 billion in
1967 to $3.6 billion in 1968. Three-fourths
of this half-billion-dollar increase came from
loans, which in the preceding year had ac
counted for slightly under one-half of the
gain. In contrast, revenue from security
holdings contributed only one-sixth of 1968’s
total revenue increase, compared with over
one-third in 1967. In many ways, then, 1968
resembled another tight-money year— 1966
— except that the earlier year’s gains were
based even more on loan portfolios and even
less on security holdings.
Last year’s $338-million (16 percent)
increase in District banks’ loan income de
pended largely upon a 14-percent rise in the
volume of outstanding loans. Record busi
ness demand for credit spearheaded the loan
expansion, but consumer loans— a category
that carries higher effective rates than most
other lending categories— also expanded rap
idly. More dramatically, however, the aver
age rate of return on loans soared to 7.24
percent— 37 basis points higher than 1967’s.
During the year, banks posted four changes
in the prime rate — the key rate offered to

SAN

FR A N C ISC O

business customers with top credit rating. The
6 percent rate prevailing at the beginning of
1968 was increased to 6 V2 percent in early
April. There was one interim decrease to 6 V4
percent (6 percent at a few banks from late
September to mid-November); then two in
creases in quick succession brought the rate
to 63 percent as the year closed. As the
A
prime rate rose, other loan rates rose too.
Security income rises
District banks experienced a $74-million
(14 percent) rise in security income as they
added substantial amounts of securities as
well as loans to their asset portfolios. (But
although security holdings rose by 10 per
cent, the expansion rate was only half the
pace of 1967, when banks took advantage
of lagging loan demand to rebuild their liquid
ity positions.) Non-Treasury obligations ac
counted for three-fourths of the increase in
bank holdings, just as they did in 1967. In
fact, District banks acquired unusually large
amounts of municipal issues in the last half
of the year, as the volume of such flotations
increased contra-seasonally and yields moved
sharply upward.
Security yields did not advance as rapidly

Banks o b tain v a s t bulk of earnings from loan expansion-— just as in '66
(but not '67) . . . rising interest rates boost time-deposit interest costs
B illion s of Dollars

March 1969

MONTHLY

EARNINGS AND EXPENSES OF
TWELFTH DISTRICT M EMBER BANKS
(M IL L IO N S O F D O LLA R S )
J968p
Earnings on loans
Interest and dividends on
U. S. Governm ent securities
O th er securities
Service charges on
deposit accounts
TrUst departm ent earnings
O th er earnings
Total earnings
Salaries, wages, and benefits
interest on tim e deposits
Other expenses
Total expenses
Net current earnings
Net recoveries and profits
(— losses)1
O n securities
O n loans
Other
Total net recoveries and
profits (
— losses)1
Net profits before income taxes
Taxes on net income
Net profits after taxes
Cash dividends declared

1967

2,493.8

2,155.5

284.6
311.1

254.9
266.5

207.7
97.0
163.0
3,557.2
869.2
1,369.6
609.2
2,848.0
709.2

198.8
86.4
132.6
3,094.7
779.9
1,197.8
513.3
2,491.0
603.7

—
—
—

55.1
132.7
18.3

—
—
—

4.9
115.4
9.8

—

205.9
503.3
124.4
378.9
200.3

—

130.1
473.6
122.9
350.7
193.1

P— P re lim in a ry
U neludes tran sfers to (— ) and from ( - - ) valuation re serves
N ote: D etails may not add due to rounding.
Source: Federal Reserve B ank of San Francisco

in 1968 as in 1967, but they still contributed
significantly to the sharp rise in revenues.
The average rate of return on bank holdings
of U. S. Government securities was 4.80 per
cent— 24 basis points above the 1967 aver
age. (Average yields on Government secur
ities generally were considerably higher than
4.80 percent in 1968, but the average return
to the banks was held down by their large
holdings of securities acquired earlier at much
lower yields.) The average (pre-tax) yield
on bank holdings of other securities was 3.88
percent—up 11 basis points over the year.
Two other itemized sources of revenue—
service charges on deposit accounts and trustdepartment earnings — rose by W 2 and 12
percent, respectively. “Other current rev
enue” — a catch-all category which includes
(among other things) revenue from foreign
operations and Federal-funds transactions —
was again (at 23 percent) the fastest growing
item of revenue.
But expenses rise to©
Total expenses of District member banks
rose 14 percent in 1968 to a record $2.8 bil

REVIEW

lion. This cost increase was greater than in
either of the two preceding years — signifi
cantly greater than in 1967, in fact.
But banks’ largest cost item — interest
payments on time-and-savings deposits — in
creased at a slower rate than in other recent
years. For one reason, the proportion of total
deposits subject to interest payments re
mained almost constant in 1968, in contrast
to significant increases in every other year
of the decade. Even so, this major expense
item rose by $172 million, partly because of
a $3.4-billion (12 percent) increase in the
volume of time deposits, and partly because
of a 19 basis-point rise (to 4.58 percent)
in the average rate paid on such deposits.
Interest rates on time deposits rose for sev
eral different reasons. The Federal Reserve
Board raised permissible ceiling rates on
large-denomination time certificates in midApril, and many banks paid the new maxi
mum CD rates during the spring and again
during the final months of the year. More
over, many savers continued to transfer funds
from regular passbook savings (with 4-per
cent maximum interest rates) to consumertype time certificates (with 5-percent rates),
and many placed their new savings funds into
higher-paying certificates rather than into
regular passbook accounts.
Intense competition for deposits and high
start-up costs once again inhibited the estab
lishment of new banks in the District, but
these same factors also served as a spur to
bank mergers. In 1968, only one new mem
ber bank was established in the District, but
there were thirteen mergers and three with
drawals from System membership— leaving a
total of 181 District member banks at the end
of 1968. The establishment of new branch
offices proceeded at its usual rapid pace, as
an increase of 124 offices brought the total
to 3,698 by year-end.
Wage, salary, and employee-benefit costs
of District member banks rose by $89 million
in 1968 — a faster rate of increase than in

FEDERAL

RESERVE

BANK

Soaring IifeET^sf rcaf@s boost
banks" earnings-— and deposit costs
Percent

1957

1959

1961

1963

1965

1967

either of the two preceding years. Increased
payroll expenses reflected — aside from regu
lar wage-and-salary boosts — the staffing re
quirements for newly established branch of
fices and newly established banking services.
District member banks hired 1,446 additional
officers and 6,383 new employees in 1968,
for increases of 7 percent in each group.
Banks' borrowing costs rise . . .
As an indication of the year’s firmer mone
tary pressure, District banks paid twice as
much ($70 million) for borrowed funds in
1968 as they did in 1967. Early in the year,
and again in December, member banks bor

SAN

FRANCISCO

rowed heavily from the Federal Reserve
Bank’s discount window, so that their aver
age discounting for the year was three times
greater than in 1967. In the last half of the
year they also borrowed heavily from other
banks through the purchase of Federal funds
— idle balances of banks on deposit with the
Federal Reserve — and increased their bor
rowings from the Eurodollar market and from
corporations under repurchase agreements.
Not only was the volume of borrowing
greater, but the cost of funds also rose during
1968. In 1967 the San Francisco Bank’s dis
count rate had been 4 percent until late No
vember, when it was raised to 4 Vi percent.
In 1968, however, the Bank made four
changes: March 15 (5 percent), April 26
(5Vi percent), August 30 (514 percent) and
December 20 (5V2 percent). Thus, borrow
ing became far more expensive for banks in
1968 than in 1967. In addition, the effective
rate on Federal funds averaged 5.66 percent
— 144 basis points above the 1967 average.
However, D istrict banks re-lent a large
proportion of their interbank Fed-funds
purchases to U. S. Government securities
dealers, so some of the borrowing costs at
tributable to Fed-funds purchases actually
were offset by interest revenue on such loans.
. . . and non-operating costs cut profits
District banks’ net loan losses declined

SELECTED OPERATING RATIOS OF TWELFTH DISTRICT M EM BER BANKS

m a m m a l

(P E R C E N T R A TIO S )
—

illllll

Increase
or
Decrease

7.24
4.80
3.88
18.26
9.76
5.15

6.87 **1*11111
4.56
3.77
t if f i f If
16.24
9.44
5.19 1 m W m »

+ .37
+ -24
+ -11
+2.02
+ .32
- .04

4.58
56.88

4.39
56.74

1968p

Earning ratios:
Return on loans
Return on U.S. G overnm ent securities
Return on other securities
C urrent earnings to capital accounts
Net profits after taxes to capital accounts
Cash dividends to capital accounts
O th er ratios:
_ interest paid on tim e deposits to tim e deposits
T im e deposits to total deposits

1967

11*1111 1

+
+

.19
-14

p—P re lim in a ry

N ote: These ratio s are computed from aggreg ate d ollar amounts of earnings and expense item s of Tw elfth D is tric t member
banks. C a p ita l accounts, deposits, loans and secu rities item s on which these ratio s are based are averages of Call Beport
data as of Decem ber 31, 1966, Ju n e 30, 1967, and Decem ber 30, 1967; and as of D ecem ber 30, 1967, June 29, 1968, and
D ecem ber 31, 1968.
Source: F e d e ra l Beserve B an k of San Francisco

March 1969

M ONTHLY

REVIEW

District banks outperform other banks-— despite smaller increases
in revenues— because of slower growth of expense items
Percent Change

‘ From 1965 forw ard, Includes employee benefits

slightly — to $73 million — in 1968, revers
ing the upward movement of the two preced
ing years. Nevertheless, because of expanded
loan portfolios, banks transferred an addi
tional $133 million to their loan-loss reserves.
Banks also posted a $57-million figure in net
security losses, in marked contrast to 1967’s
low $6 million figure, and higher even than
the $47-million capital loss recorded in tight-

money 1966. The net change in reserves for
securities was a plus $5 million.
After adjusting net current earnings for net
losses on loans and securities and other losses,
and for transfers to reserves, banks posted
$503 million in net profits before taxes. They
paid out $124 million for Federal and state
taxes, so that net profits after taxes amounted
to $379 million. Net profits thus rose by

SELECTED ASSET AND LIABILITY ITEMS OF ALL MEMBER BANKS
TWELFTH DISTRICT, DECEMBER 31, 1968
(M IL L IO N S O F D O LLA R S )
A s of
Dec. 31,
1968p

As o f
Dec. 30,
1967

Net loans and investm ents1
Loans and discounts net1
Com m ercial and industrial loans
Real estate loans
Loans to individuals
Agricultural loans
U.S. G overnm ent obligations
O th er securities
Total assets

51,938
37,036
14,212
10,802
7,181
1,383
6,391
8,511
63,813

46,073
32,476
12,315
9,831
6,363
1,326
6,038
7,559
57,246

+5,865
+4,560
+ 1,897
+ 971
+ 818
+
57
+ 353
+ 952
+6,567

+
+
+
+
+
+
+
+
+

Total deposits
Dem and deposits
Total tim e and savings deposits
Savings
Other tim e, IPC
Public tim e
Capital accounts

56,000
24,152
31,848
16,489
10,197
3,940
3,983

50,778
22,293
28,485
16,260
8,022
2,944
3,789

+5,222
+ 1,859
+3,363
+ 229
+2,175
+ 996
+ 194

+ 10.28
+ 8.34
+11.81
+ 1.41
+27.11
+33.83
+ 5.12

p— P re lim in a ry
'T o tal loans (including F e d e ra l funds sold) m inus v aluation reserves.
N ote: D e ta ils may not add to to tal due to rounding.

Changes from
Decem ber 30, 1967
D ollars
Percent
12.73
14.04
15.40
9.88
12.86
4.30
5.85
12.59
11.47

Selected loan item s which follow are rep o rted gross.
Source: F ed eral Keserve B an k of S an Francisco

FEDERAL

RESERVE

BANK

SAN

F R A N C ISC O

PERCENT CHANGES IN SELECTED EARNINGS AND EXPENSE ITEMS
OF TWELFTH DISTRICT MEMBER BANKS
All
1967-1968 1966-1967
Earnings on loans
Interest and dividends on securities
U .S. G overnm ent
O th er
Service charges on deposit accounts
T ru s t Departm ent earnings
O th er earnings
Total earnings
Salaries, wages and benefits
Interest on tim e deposits
O th er expenses
Total expenses
Net current earnings
Net profits before incom e taxes
Taxes on net income
Net profit after taxes
Cash dividends declared

+ 15.7
+ 14.3
+ 11.6
+ 16.8
+ 4.5
+ 12.3
+22 .7
+ 14.9
+ 11.4
+ 14.3
+ 18.7
+ 14.3
+ 17.5
+ 6.3
+ 1.2
+ 8.0
+ 3.7

+ 6.4
+ 2 5 .3
+ 16.1
+ 3 5 .7
+ 5.7
+ 8.5
+3 2 .3
+ 10.0
+ 9.8
+ 14.7
+ 10.4
+ 12.2
+ 1.6
+ 11.1
- 7.9
+ 19.8
+ 10.3

15 L a rg e s t1
1967-1968 1966-1967
+ 16.5
+ 13.7
+ 11.6
+ 15.5
+ 4.1
+ 13.1
+ 2 2 .6
+ 15.4
+ 11.7
+ 14.9
+20.1
+ 14.9
+ 17.9
+ 5.5
— 0.9
+ 7.6
+ 4.8

+ 6.3
+ 2 8 .6
+ 19.1
+ 3 8 .0
+ 5.0
+ 8.6
+29.0
+ 10.3
+ 10.0
+ 14.9
+ 10.8
+1 2 .6
+ 1.7
+ 12.8
- 8.5
+22 .5
+ 10.8

Other
1967-1968 1966-1967
+ 11.3
+ 16.9
+ 11.7
+2 5 .7
+ 6.0
+ 5.3
+ 2 3 .6
+ 12.3
+ 9.9
+ 10.7
+ 12.9
+ 11.5
+ 15.1
+ 10.5
+ 11.1
+ 10.2
- 2.6

+ 7.1
+ 11.6
+ 6.5
+20 .7
+ 97
+ 8.0
+ 16.2
+ 8.4
+ 9.0
+ 14.0
+ 8.9
+ 10.5
+ 0.8
+ 2.7
- 4.8
+ 6.4
+ 6.7

in c lu d e s all D is tric t m em ber banks w ith to ta l deposits of $500 m illion and over as of December 31, 1968.
Source: F e d e ra l Reserve B ank of San Francisco

$28 million in 1968 — only one-half of the
increase realized in 1967, when non-operat
ing costs (including income tax payments)
were unusually low for District banks.
The fifteen largest member banks in the
District—banks with deposits of $500 million
or over— posted relatively higher gains than
other banks in net operating earnings during
1968, because of a faster rate of growth in
loan revenues. But high non-operating costs
left the largest banks with less than an 8-per
cent increase in net income after taxes, com
pared with a 10-percent gain recorded by
other District banks.

New factors for 1969?
The new year had hardly begun when
banks across the country raised their prime
rate to a record 7 percent, and then in midMarch they shattered this record by raising
the rate to IV 2 percent. This development
of course augured well for the future trend
of bank revenues— especially in view of the
increased volume of loans in their portfolios.
At the same time, banks faced several un
favorable factors on the cost side, reflecting
the increased restrictiveness of monetary pol
icy after mid-December. District banks paid
higher rates for discount-window borrowings
and for Fed-funds purchases, and those
banks which turned to Eurodollars as an

offset to a loss of CD’s found the gross in
terest quotations on these borrowed funds
to be even higher than Fed-funds rates.
In the first two months of 1969, District
member banks experienced a ( seasonally ad
justed) reduction in total deposits — in con
trast to the rapid growth in deposits in the
latter half of 1968. Declines occurred in time
deposits, largely because of run-offs in large
CD’s, and also in private demand deposits.
Furthermore, not much growth can be ex
pected in March and April, as individuals
may withdraw more savings than usual to
meet their higher Federal income-tax bills.
District banks reduced their loans in Janu
ary but expanded them in February, on a
seasonally adjusted basis. In both months,
however, they substantially reduced their
holdings of both Treasury issues and other
securities, in reaction to the increased pres
sure on banks’ reserves and their significant
deposit losses. To the extent that reserve pres
sures led to security sales, banks were forced
to take some unplanned capital losses— which
could mean another year of relatively high
non-operating deductions from current earn
ings. Of course, very attractive yields were
available to any banks that were able to ac
quire securities during early 1969.
Ruth Wilson

March 1969

MONTHLY

REVIEW

Western Central Bank
he Federal Reserve Bank of San Fran
cisco completed its 55th year in 1968
with a continued expansion of its central
banking operations. The Bank is a major
component of the nation-wide Federal Re
serve System, created in 1913 to regulate the
flows of money and credit through the na
tional economy.
The twelve regional Reserve Banks, co
ordinated by the Board of Governors in
Washington, D. C., handle a number of
central-banking operations for commercial
banks, business firms, and governmental units
within their respective regions. In the case of
the Twelfth District, the Federal Reserve
Bank of San Francisco has such responsibil
ities in the states of Alaska, California, Ha
waii, Idaho, Nevada, Oregon, Utah, Wash
ington, and most of Arizona. Branch offices
are located in Los Angeles, Portland, Salt
Lake City, and Seattle.

Higher reserves, higher borrowing
Under the law, each member bank is re
quired to maintain a certain proportion of
its deposits in a reserve account with its re
gional Federal Reserve Bank. At the end of
1968, member-bank reserve accounts at the
Federal Reserve Bank of San Francisco to
taled $3.7 billion, up from $3.4 billion at the
end of 1967.
In 1968, the San Francisco Reserve Bank
helped member banks make up reserve defi
ciencies by lending a total of $12.0 billion,
compared with $4.9 billion in 1967. Daily
average member-bank borrowings more than
tripled over the year, rising to $65 million
from the 1967 average of $21 million. This
sharp upsurge in borrowing reflected the
heavy credit demands and the tight policy
pressures on member-bank reserves during
the inflationary boom of 1968 — and, as in

earlier boom years, it took place in the face
of a steep increase in the cost of borrowing.
Unsettled conditions in the international
monetary situation and continued inflationary
pressures and fiscal uncertainties at home re
sulted in four changes in the discount rate,
as was described in the preceding article.
(The discount rate— the interest rate charged
to borrowing banks—is determined by the
directors of each Reserve Bank, subject to
review by the Board of Governors.) This
rate, which had been 4 percent as late as
November 1967, was 5Vi percent at the end
of 1968.
Reserve Bank personnel helped deal with
several changes in stock-market regulations
which were promulgated by the Board of
Governors during the year. The Board raised
margin requirements under Regulations T
and U, and also adopted a new Regulation
G, extending margin requirements — like
those already applicable to brokers, dealers,
and banks — to other lenders on credit for
stock-market transactions. In addition, Re
serve Bank personnel continued to adminis
ter the voluntary foreign credit restraint pro
gram for banks and nonbank financial insti-

Memfeer ban ks b@rr@w more at
higher discount rates during '68 of Dollars
PercTjnt
Millions

FEDERAL

RESERVE

BANK

Thousands

tutions, in an effort to alleviate presssures on
the nation’s balance of payments.

Money . . . coin . . . currency
The transfer of funds between member
banks in this Federal Reserve district and
member banks in other districts rose sharply
in 1968 as in other recent years, largely as a
result of increases in Federal funds transac
tions, check collections, and transactions in
volving U. S. Treasury obligations. The bulk
of these transfers was handled on the Federal
Reserve System’s leased-wire network —
which is scheduled to be replaced by a com
puterized wire network by the end of 1969.
During 1968 alm ost 505,000 telegraphic
transfers were made, amounting to a total
dollar value of slightly over one trillion dol
lars. In comparison with 1967, transfers were
up 15 percent by number and almost 24 per
cent in dollar volume.
While the so-called “checkless” society
may someday become a reality, Western busi
nessmen and households again last year wrote
an increasing number of checks. The San
Francisco Reserve Bank and branches han
dled more than 756 million cash items in
1968, an increase of almost 40 million items
over the previous year. The total dollar value
of checks collected in 1968 was $177 billion

SAN

F R A N C ISC O

— off about 3 percent from the 1967 level,
principally because of changes in settlement
procedures. The Bank also handled 825,000
noncash items with a dollar value of over
$4 billion. This was an 8-percent increase in
dollar volume, reflecting the continued expan
sion in processing of Government letters of
credit.
Coin and currency operations continued at
a high level in 1968. (A member bank may
obtain coin and currency by making with
drawals from its account at the Reserve Bank;
a nonmember bank may obtain supplies di
rectly from the Reserve Bank with charges
made to a designated member-bank’s reserve
account.) Coins received and counted totaled
1,416 million pieces with a dollar volume of
$154 million. Currency received and counted
totaled 760 million pieces with a dollar vol
ume of almost $6.0 billion. Gains for the year
were 5 percent or more in each category.
Heavy fiscal activity
The Reserve Banks, acting as fiscal agents
for the Federal government, were involved in
a variety of activities related to the Treasury’s
debt operations, including the issuance and
redemption of Government securities and the
administering of Treasury tax-and-loan ac
counts. In the Twelfth District these activ
ities continued at a high level in 1968.

Larger rsymfeer ©# cheeks
collected during 1968
Billions of Dollars

1956

Millions

I960

1965

March 1969

M ON THLY

REVIEW

VOLUME OF OPERATIONS

1968

Checks collected
N oncash collection item s
Coin counted
C urrency counted
T ransfers o f funds
U.S. Savings Bonds handled
O ther Governm ent securities handled

1966

Percent
Change
1967-68

176,469
4,423
154
5,960
1,021,000
1,314
63,200

182,531
4,090
147
5,499
823,723
1,341
58,745

179,457
2,821
124
5,276
697,399
1,288
55,345

- 3.3
+ 8.1
+ 4.7
+ 8.4
+23 .9
- 2.0
+ 7.5

1968

Checks collected
N oncash collection items
Coin counted
C urrency counted
Transfers of funds
U.S. Savings Bonds handled
O ther Governm ent securities handled

D ollar Am ount
(M illions)
1967

N um ber (Thousan ds)
1967

1966

Percent
Change
1967-68

756,525
825
1,415,600
760,133
505
28,186
1,032

716,757
827
1,343,486
716,429
438
26,243
851

676,273
864
1,186,931
691,048
390
24,421
883

+ 5.5
- 0.2
+ 5.4
+ 6.1
+ 15.2
+ 7.4
+ 2 1 .2

The volume of marketable Government se
curities issued, serviced and retired was up
22 percent in number and eight percent in
amount over the previous year. (The num
ber was over one million; the dollar volume,
over $63 billion.) During 1968, there were
140 offerings of negotiable Government se
curities, including the regular 13-week and
26-week series of Treasury bills.
The volume of activity in U. S. Savings
Bonds continued to grow in 1968 with a 7percent increase in the number of bonds is
sued, serviced, and redeemed, to a total of
over 28 million. Sales of U. S. Savings Notes
(Freedom Shares) increased during the year,
as in mid-year the Treasury authorized all
issuing agents to sell the Savings BondFreedom Share combination over the counter
instead of limiting Freedom Share purchases
to bond-a-month or payroll-savings plans. In
October, paying agents were given authority
to redeem Freedom Shares that had been
held at least one year.
Another major fiscal-agency function was
the processing of Federal tax deposits from
employers of employees’ withheld income
taxes, social-security taxes, and certain other
taxes. (These taxes generally are deposited
with qualified commercial banks, there being
427 such banks in the Twelfth District.)

Both the number of deposits and the dollar
amount of processed tax deposits showed
substantial increases during the year. Some

Coin and currency transactions
increase in number and dollar volume

I960

1965

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3.2 million deposits were processed (up 16
percent) and these totaled $13.5 billion in
volume (up 17 percent). These increases
were due in part to an Internal Revenue
Service ruling requiring employers to make
monthly deposits of withheld taxes over
$ 100 .
Other signs of growth
As a part of its supervisory role, the San
Francisco Federal Reserve Bank in 1968
examined all state-chartered member banks
in the Twelfth District — 40 banks, 299
branch offices, and 35 trust departments. In
addition, examinations were made of six
foreign-banking corporations headquartered

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in the District. Field examinations were also
conducted in connection with applications by
state member banks for the establishment of
de novo domestic branch offices. The process
ing of merger applications continued at an
accelerated pace in 1968.
In midsummer an examination office was
established at the Los Angeles Branch to
facilitate the exam ination of banks and
branches in that area. Previously, these as
signments had been handled out of the San
Francisco Head Office.
To handle the Bank’s growing data-processing needs more efficiently, a new com
puter system was installed in the San Fran
cisco headquarters in late 1968. In about a

COMPARATIVE PROFIT AND LOSS STATEMENT
(T H O U S A N D S OF D O LLA R S )
1968

1967

1966

Total earnings .........................................................................................
Net expenses .........................................................................................
C urrent net earnings ...................................................................
N et addition ( + ) o r deductions ( — ) ..............................................

.................$390,669
.................
24,594
................. 366,075
................. +1,131

302,002
22,677
279,325
+341

259,985
21,700
238,284
— 168

D istribution o f Net Earnings:
Net earnings before paym ents to U.S. T re a s u ry .................
D ividends ..............................................................................................
Interest on Federal Reserve n o te s..............................................
Transferre d to s u rp lu s ......................................................................
Total .................................................................................................

................. 367,206
.................
4,889
................. 356,754
.................
5,563
................. 367,206

279,666
4,513
270,023
5,130
279,666

238,116
4,391
231,975
1,750
238,116

COMPARATIVE STATEMENT OF CONDITION
(T H O U S A N D S O F D O LLA R S )
Decem ber
31, 1968

Decem ber
31, 1967

Decem ber
31, 1966

A S S E TS
Gold certificate reserves .................................................................. . 1,286,391
106,948
Federal Reserve notes of other b a n k s ...........................................
O th er cash ...............................................................................................
22,756
7,000
Discounts and advances ..................................................................
Total U.S. Governm ent se curities.................................................... . 7,694,527
908,061
Uncollected items .................................................................................
8,741
Bank prem ises ........................................................................................
340,492
Other a s s e t s ................................................ ............................................

1,318,498
81,883
37,040
63,000
6,992,563
997,972
8,960
252,377

1,572,548
87,148
32,175
58,000
5,983,146
1,006,392
9,390
160,400

10,374,916

9,752,293

8,909,199

L IA B IL IT IE S A N D C A P ITA L A C C O U N TS
Federal Reserve Notes ....................................................................... . 5,656,691
Deposits:
M em ber banks — reserve a cco un ts........................................... . 3,656,371
U.S. T re a su re r — general a cco un t...........................................
1,706
29,040
Foreign ..................................................................................................
O th er deposits ...................................................................................
78,455
Deferred availability cash ite m s ......................................................
727,077
56,081
O th er liabilities ......................................................................................
169,495
Total capital accounts

5,155,150

4,681,767

3,441,491
119,034
18,200
57,568
762,385
40,096
158,369

3,248,511
2,495
20,960
84,839
691,929
30,589
148,109

10,374,916

9,752,293

8,909,199

Total assets

Total liabilities and capital accounts

March 1969

MONTHLY

Fiscal-agency transactions increase,
although savings-bond volume lags

year the new computer will be tied in with
the Federal Reserve’s nationwide computer
ized wire network for the transfer of money,
securities, and economic data.
Higher assets, higher earnings
Total assets of the Federal Reserve Bank
of San Francisco were $10.4 billion on De

REVIEW

cember 31, 1968 — up about 6 percent over
the 1967 year-end figure. The increase re
flected larger holdings of Government secur
ities in the Federal Reserve System’s Open
Market Account, of which this Bank’s share
totaled $7.7 billion at year-end. The average
rate of earnings on these holdings was 5.32
percent, compared with 4.66 percent in 1967.
As a result of this higher yield and the
increase in average holdings, earnings from
this source increased over 25 percent, to
$377 million, during 1968. Earnings on
member-bank borrowings more than tripled
during the year, to over $3 million, reflecting
heavier member-bank reliance on the dis
count window and the higher cost of borrow
ing. Another major source of earnings ($10
million) was from holdings of foreign secur
ities. (This Bank’s holdings amounted to
$193 million on a daily average, substantially
above the 1967 figure of $74 million.)
Altogether, total current earnings of the
San Francisco Federal Reserve Bank expand
ed from $302 million in 1967 to $391 million
in 1968, on the basis of the earnings increases
noted above. The Bank’s net expenses rose
from $23 million to $25 million in the same
time-span. About $5 million was paid to
member banks in the form of dividends, and
roughly $6 million was transferred to surplus
to bring that account to the level of paid-in
capital stock. Remaining net earnings of
$357 million were paid to the U. S. Treasury
as interest on Federal Reserve Notes.
Donald Alexander and Karen Rusk

Publication Staff: R. Mansfield, Artist; Karen Rusk, Editorial Assistant.
Single and group subscriptions to the Monthly Review are available on request from the Admin
istrative Service Department, Federal Reserve Bank of San Francisco, 400 Sansome Street,
San Francisco, California 94120

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RESERVE

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Farming: Will ’69 Match '88?
et income of the nation’s farmers rose
to $14.9 billion in 1968 from the
$ 14.2-billion total of the year before. The
1968 figure has been surpassed only once
in the past two decades — in 1966, when the
total was swollen by the shortage-inspired
price upsurge which developed during that
unusual year.
The recent boost in returns reflected a re
versal of 1967’s sharp price declines as well
as a record volume of marketings for many
(but not all) commodities. But the advance
in marketing receipts was largely offset by the
inexorable rise of production costs. Thus,
most of the increase in total income depend
ed on higher Government payments — up
from $3.1 to $3.7 billion because of heavier
payments to feed-grain producers.

Different pattern in '68
Cash returns from marketings jumped 7
percent in the West, as against a 3-percent
gain elsewhere, primarily on the basis of inCcish re c e ip ts expan d for farmers
in W est as well as elsewhere
Billions of Dollars

I9 6 0

creased returns from field crops and a strong
recovery for California’s fruit and vegetable
crops, which had suffered heavy weather
damage in 1967. For all District states, crop
returns jumped 8 percent to $4.1 billion,
while marketings of livestock and products
rose 4 percent to $2.8 billion.
Elsewhere in the nation, cash returns
showed a somewhat different pattern. Crop
returns were close to their 1968 figure of
$14.4 billion, as cutbacks in fruit (mostly
citrus) marketings tended to offset heavy
marketings of cotton, food grains, and feed
grains. Livestock m arketings meanwhile
jumped 5 percent to $22.8 billion, on the
strength of both higher output and higher
prices of meat animals.
On the basis of projections developed at
the U. S. Department of Agriculture’s annual
outlook conference this February, the na
tion’s farmers may achieve a slightly lower
level of net income in 1969 than in 1968,
with farm costs outrunning projected in
creases in cash marketings and Government
payments. The anticipated advance in mar
keting receipts is based on expected increases
in both crop and livestock production; to
date, only minor changes are expected in
prices received by farmers. The anticipated
rise in Government payments is based on
expected increases in payments to cotton and
wheat producers.
... to affect '69?
The 1969 income situation for Western
farmers will of course reflect these national
trends, but it will also reflect the difference
in structure between the W estern farm

March 1969

M ONTHLY

REVIEW

j__ i__ 1

_l__ L

econom y and th a t Western farm prospects affected by differences
fo u n d elsew h ere. in product mix and in production-cost structure
Generally speaking,
C A SH R E T U R N S
PRODUCTIO N E X P E N S E S
the highly diversified Percent W EST
100
Government Payments
Western farm sector
— Other Crops
bases its prosperity
- Cotton
— - Feed Grains
on a different mix of 80 ~
— - Food Grains
products than the na
— Fruits and Nuts
tional industry does, 60 and the highly organ
Vegetables
ized Western industry 40
— - Eggs and Poultry
confronts a different
— Dairy Products
s tr u c tu r e of costs
20
than that faced by
—
o th e r segm ents of
American agriculture.
penses may also bring about a different pat
In the Agriculture Department’s projec
tern in net farm income. In particular, West
tions, livestock and products should experi
ern farms require substantial inputs of hired
ence a substantial increase in returns, but
labor, because of the still-substantial handsince this source accounts for only about 40
labor requirements of fruit and vegetable
percent of farm returns in the District as
growers. (Of course, the West continues to
against 55 percent elsewhere, Western farm
make rapid strides in mechanizing produc
ers may not benefit to the same extent that
others will from this advance. And in view of
tion and harvesting operations.) But hiredlabor wage rates nationwide have risen 10
the modest increase projected for crop re
percent over the past year— as against a 3turns nationwide, perhaps only a small in
crease can be expected regionally from this
percent rise in the overall cost of such pro
major source of Western farm receipts.
duction items as feed, fertilizer, and machin
The different structure of production exery. Consequently, Western cost patterns
may vary widely from those prevalent else
where, especially since hired labor accounts
Higihep receipts reflect more vol
for 17 percent of Western production ex
ume, reversal of "67!s price declines
1957-59=100
penses as against 7 percent in the rest of the
nation.
A continuation of such cost trends in 1969
could result in greater cost pressures on
Western farm operators than on their coun
terparts in other regions of the nation. Then
again, if the A griculture D epartm ent’s
projections turn out to be correct and the
largest advances in cash returns occur in
non-Western specialties, the regional farm
economy may find it doubly difficult to
match its strong 1968 performance this year.
Donald Snodgrass

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Western Digest
Drop in Aerospace Jobs
Western aerospace-manufacturing firms recorded an employment decline of
2,900 in January, as aircraft production continued to slacken. About 714,000 work
ers are now employed in the regional industry, following the 5-percent drop of the
past 12 months. . . . Industry observers expect the downtrend to be halted in the
near future, however, as production lines begin to tool up for the next generation of
jet transports. For example, prime-contracting and sub-contracting for the model
747 airbus should create new job opportunities in both Washington and California
aircraft plants.
Mixed Trends in Housing
Harsh winter weather helped cause a 24-percent drop in housing starts in the
West in January. The decline — from an annual rate of 307,000 units in December
to a 234,000-unit rate in January — contrasted sharply with a 22-percent gain in
the nation as a whole. . . . Continued tightness in the Western housing market mean
while was indicated by late-1968 vacancy data. During the fourth quarter, the
vacancy rate for home-owner units dropped from 1.4 to 1.2 percent, and on rental
units, from 6.2 to 6.1 percent. These data pointed to the tightest regional housing
market of the past decade — as did also the record levels of (conventional) mort
gage rates, which in the West exceeded even the national figure of 7.23 percent in
January.
Strengthening Steel Demand
Steel production increased strongly in early 1969 throughout the nation, but
especially at Western mills, as the prolonged period of sluggishness that followed
the mid-’68 labor-contract settlement came to an end. By late February, Western
production was 11 percent above the year-ago level, while production nationwide
still lagged 3 percent behind the early ’68 pace. The improved production figure
reflected not only the strength of total demand but also a slowdown in the import
boom, as a result of the East Coast dock strike and the adoption of voluntary quotas
by European and Japanese producers. . . . Because of the improved order situation,
most producers raised the price for hot-rolled sheets by $12 a ton in mid-February.
This latest increase in effect restored the price of the product to the figure that pre
vailed prior to last November’s $25-per-ton rollback.
Petroleum Moratorium
Interior Secretary Hickel declared a moratorium on the sale of offshore Federal
leases following the development of a massive oil leak in the Santa Barbara Channel
in January. . . . Petroleum producers meanwhile readied plans to exploit Alaska’s
Arctic bonanza. A 420-mile road between Fairbanks and the new oil field is already
under construction, and planning is underway for a 48-inch 800-mile pipeline,
costing $900 million, which will carry North Slope petroleum to Valdez on the
Gulf of Alaska.

March 1969

MONTHLY

REVIEW

Tall, Tall Timber Prices
onsumers and b u ild e rs a lik e have
watched lumber and plywood prices
soar sky-high over the past year, and they
have responded to each rise with increasing
displeasure — so much so, in fact, that a
White House committee and several Con
gressional committees have recently begun to
investigate the problem. In 1968, on an an
nual-average basis, the wholesale-price in
dex for Douglas-fir lumber shot upward by
20 percent, while the index for softwood ply
wood registered a 30-percent gain.
More important, prices this year have
moved to still higher ground; between Janu
ary 1968 and January 1969, the wholesaleprice indexes for Douglas-fir lumber and
other softwoods jumped 30 to 40 percent,
while the index for softwood plywood almost
doubled. February figures, moreover, are

likely to show much larger year-to-year
gains. In late February, the price of randomlength Douglas fir 2 by 4’s in carload lots
for shipment to the East Coast reached $132
per thousand board-feet. That price was 48
percent above the level prevailing a year
earlier. The price of dry Douglas-fir studs,
another key homebuilding item, reached
$140 per thousand board-feet— and that was
56 percent above its year-ago mark. Pine
prices rose so dramatically in February that
many quotes matched plywood’s spectacular
(double-a-year-ago) price performance.
The lumber-and-wood products category
has been by far the fastest rising commodity
group in the wholesale-price index. Last
year’s 13-percent increase contrasted sharply
with the 3-percent increase in the overall
industrial-commodity index. In fact, the rise

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in that category was several times greater
than the increase registered by any other
major industrial group. It far overshadowed,
for example, the substantial (4-percent) in
crease in metal and metal products.
Alarming as it undoubtedly is, the recent
spurt in lumber prices should first be placed
within a somewhat longer-term perspective.
Those buying lumber at today’s record prices
may find little consolation in the fact, but
wood product prices have not advanced sig
nificantly over the past decade as a whole.
The wholesale-price index for Douglas-fir
lumber rose only slightly over the entire
1959-67 period before it jumped sharply in
1968. The softwood-plywood index actually
dropped by one-fifth between 1959 and 1967
— under the impact of excess capacity and a
declining housing market—before 1968’s in
crease carried it slightly ahead of its 1959
level.

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any efforts to provide residences for low- and
moderate-income families.” National goals,
according to the Housing and Urban Devel
opment Act of 1968, encompass the con
struction or rehabilitation of 26 million hous
ing units over the next decade, including 6
million units for low- and moderate-income
families, in order to realize the objective of
a “decent home for every American family.”
The widespread fears about rising lumber
prices stem from lumber’s importance as an
element in total housing costs. According to
various estimates, lumber can account for
one-seventh to one-fifth of the total construc
tion cost of a single-family dwelling. Any
substantial increase in lumber and plywood
prices, therefore, has a dramatic impact on
the total cost of the unit. By these calcula
tions, a 40-percent increase in lumber prices
could, by itself, raise the cost of constructing
a $20,000 home (less land) by as much as
$1,600.
Builders' lament
While the increase in lumber prices has far
The National Association of Home Build
exceeded the increase in other construction
ers— composed of over 50,000 builders in
costs over the past year, it would seem unfair
every state of the Union—has recently ex
to point to the lumber industry as “the” vil
pressed “deep concern that extensive lumber
lain in rising housing costs or to blame that
shortages and resultant price increases could
industry alone as an obstacle to the achieve
endanger national housing goals and wreck
ment of our nation’s housing goals. Nearly
all construction ma
terials have risen in
Lumber emerges from bargain basement
price over the last
as prices shoot sky-high over past year
Percent Change (Jan.-Jan.)
year — not to men
1957-5 = 100
0
20
40
60
80
100
140
tion the cost of la
bor. But even more
important, siz e a b le
increases have oc
120
curred in other parts
of the housing-cost
package — such as
land, financing, and
taxes — and th ese
100
u n d o u b te d ly have
had an equally sub
stantial im p a c t on
total housing costs.
80
1961

1963

1965

1967

MONTHLY

March 1969

Prices rise for all industrial
products, but especially for lumber
Percent Change
-2
0
2

Demand versus supply
The recent spiral in lumber and plywood
prices provides a classic example of what
happens when sharp demand pressures con
front a limited current supply. Lumber mills
in the Douglas-fir region raised their produc
tion by 9 percent in 1968, while mills in the
Western-pine (inland) region achieved a 7percent gain. Plywood mills boosted their
production 14 percent to a record 14.7 bil
lion square-feet. (In Washington and Oregon
alone, output rose 10 percent to 10.1 billion
square-feet — also a record.) Yet, despite
these increases, production fell short of rap
idly bulging order books. Unfilled orders for
softwood lumber at year-end were about a
third above the year-ago figure, while stocks
were down substantially.
Although recent statistics are unavailable
on the consumption of lumber and plywood
by major use, the 1967-68 recovery of resi
dential construction undoubtedly has pro
vided a major stimulus to demand. Housing
starts in 1968 topped 1.5 million units, after
rising from a low of 1.2 million units in 1966
to 1.3 million units in 1967. Moreover, the
(seasonally adjusted) pace of private housing
starts in January 1969 reached a near-record
level of 1.8 million units, and wholesalers
consequently bought heavily in expectation
of a record year for residential construction.

REVIEW

Subsequent pressure on prices was mostly
attributable to supply problems rather than
buoyant demand. By the end of February,
orders in the Douglas-fir and Western-pine
lumber regions lagged considerably below
their year-earlier pace. (Incidentally, military
shipments to Vietnam, which had jumped
sharply during the 1965-67 buildup, declined
somewhat during 1968.)
Log-export drain
The industry’s ability to raise production
further was adversely affected in 1968 by
the limited availability of log supplies, as ex
ports from Washington and Oregon— des
tined mainly for Japan— reached a record for
the sixth consecutive year. Log exports dur
ing the first three quarters of 1968 almost
matched the entire 1967 total, and for 1968
as a whole, exports jumped almost one-third
to roughly 2.5 billion board-feet.
The timber harvest in Washington and
Oregon apparently rose little or not at all, so
that their exports rose to about 13 percent
of the total log supply, up from 10 percent
in 1967. In 1960, by way of contrast, log
exports amounted only to about 100 million
board-feet, or less than 1 percent of the total
Washington-Oregon timber supply.
In response to complaints from small- and
medium-sized mills that found themselves

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New o rd ers fo r lum ber
respond to '68 housing upsurge
Millions of Units

Billions of Board-Feet

priced out of the market by the Northwest’s
log-export boom, the Federal Government
took action last April to limit the export of
logs from certain Federally-owned lands. At
that point, Agriculture Secretary Freeman
set an export ceiling by announcing that all
but 350 million board-feet of timber sold
from Federal lands in western Washington
and western Oregon during the next 14
months would require domestic manufacture.
In Secretary Freeman’s words, the action
was taken “to help the domestic forest-prod
ucts industry by assisting them in obtaining
adequate supplies of logs.” He added, “A
market situation has developed that has made
an increasing proportion of timber from the
Northwest unavailable for domestic primary
manufacture, leading to unemployment and
to some mill curtailment in communities de
pendent on Federal timber.”
But despite this development, exports con
tinued to expand as the Japanese turned in
creasingly for supplies to regions outside the
scope of the ruling. These included private
and publicly-owned timberlands east of the
Cascade Mountains — the so-called Inland
Region — as well as all of California’s for
ests and all state and privately-owned timberlands in the Pacific Northwest. Not surpris

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ingly, then, log exports from California—
which had begun to accelerate in 1967— rose
five-fold in 1968, to almost 200 million
board-feet. Exports from the regions affected
by the restriction also continued to rise be
cause the order did not affect contracts al
ready made at the time of the policy decision.
These developments thus prompted fur
ther industry pressure to extend the earlier
ruling—both in duration and in geographical
area. Thus, in October, President Johnson
signed — in an amendment to the Foreign
Assistance Act — a limitation which restrict
ed log exports from all Federal lands west of
the one-hundredth meridian (through Kan
sas) to an annual total of 350 million boardfeet for the 1969-71 period. Exports could
exceed that level only if — in the judgment
of the Secretaries of Agriculture and Interior
— certain species of unprocessed timber were
deemed to be surplus to the needs of do
mestic users. But private and state-owned
lands, comprising almost half the total timber
supply, are exempted from this limitation.
Fewer mills, more snowstorms
Some industry analysts have argued that
mill closures in 1966 and 1967 prevented the
industry from expanding production further
last year. According to unofficial reports,
about 25 plywood plants and 60 sawmills
closed down in western Washington and
western Oregon during that period alone, be
cause of their inability to pay the high log
prices being offered by the Japanese and the
larger American mills.
Many Pacific Northwest lumbermen claim,
however, that log shortages have placed a
limitation only on current production— not
on overall capacity. In fact, their viewpoint
seems to be substantiated by past production
statistics. Small, inefficient, and inadequately
financed mills have been dropping out of the
industry for many years now, yet this process
has not prevented the industry as a whole
from raising production in response to rising

March 1969

M ONTHLY

demand when log supplies have been avail
able. Over 200 lumber mills shut down in
the West in the 1961-64 period alone, but
despite this 10-percent decline in the total
number of mills, production rose more than
13 percent (2Vi billion board-feet) during
that period. Most of the mills that dropped
out of business were small, each having an
annual capacity of less than 10 million boardfeet. But meanwhile, 42 new mills opened
during the same period, each with an annual
capacity of at least 25 million board-feet.
This winter’s snowstorms — which have
dumped up to 30 inches of snow on the
ground in key lumber-producing areas —
have sharply curtailed recent production.
During the worst period (late January),
lumber production in the Douglas-fir region
dropped to only half-capacity and plywood
production slipped to two-thirds of capacity.
Despite some subsequent improvement, pro
duction in the Coastal (Douglas fir) and
Inland regions through late February was 7
percent below the comparable 1968 produc
tion level. With logging operations in low
elevations sharply curtailed from western
British Columbia down to western Oregon,
log supplies are likely to remain tight for
some time to come.
In this situation, competition among Jap
anese buyers and domestic producers for
available timber supplies has led to heavy
bidding for stumpage — timber for sale on
the stump. Thus, the average stumpage price
for Douglas fir sold from national forests
west of the Cascades rose 47 percent in 1968.
(The average price in the fourth quarter
reached $92.90 per thousand board-feet —
more than double the late-1967 quotation.)
The 1968 increase was roughly four times the
average annual increase in stumpage prices
for the entire 1963-67 period.
Supply versus demand
If the “allowable cut” is insufficient to
meet current demands for lumber, a sharp

REVIEW

increase in supplies clearly will be required
if the increased wood demands of the future
are to be met. But just as clearly, producers’
willingness to make advance stumpage com
mitments at today’s prevailing sky-high prices
— thus subjecting themselves to a cost-price
squeeze if lumber prices should decline —
suggests their strong confidence in the future
trend of prices for the finished product.
According to the housing goals set down
in the Housing and Urban Development Act
of 1968, the construction of new and reha
bilitated homes could exceed 2 million units
by the early 1970’s— and could even double
1968’s rate of 1.5 million units by 1975. If
this pace of homebuilding is achieved, the
use of lumber in residential construction (in
cluding mobile homes) could rise from 14
billion board-feet in 1968 to well over 20
billion board-feet by 1975.
Lumber of course will be needed for more
than just residential purposes, since homebuilding historically has accounted for not

Exports jump to S3 percent
of Northwest's timber harvest

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much more than one-third of the total lumber
consumed in this country. If past patterns
prevail, lumber consumption, including that
used in nonresidential construction, could
rise from 41 billion board-feet in 1968 to
well over 60 billion board-feet by 1975 . . .
And these increased demands do not include
those expected in other forest-product areas,
such as plywood, pulp and paper, and a
host of other uses.
The expected increase in wood-products
demand naturally has stimulated much dis
cussion regarding the adequacy of timber
supplies, the methods of increasing timber
yields and growth, and the financial obstacles
to optimum management of public lands.
Foresters generally concede that the burden
of meeting the large increase in future de
mand for timber will fall heavily upon the
Western region of the country and within that
region upon the Federal land-management
agencies, namely the U.S. Forest Service and
the Bureau of Land Management.
The West — including the Pacific Coast
and Rocky Mountain states — accounts
roughly for three-fourths of all the softwood
lumber and four-fifths of all the softwood
plywood produced in the entire nation. Vir
tually all of the nation’s remaining stands of

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old-growth sawtimber are concentrated in
that region, with a major portion in Oregon,
Washington, and Idaho.
The key: Federal lands
Federal lands are by far the largest single
supplier of raw material for the forest-prod
ucts industry, accounting for slightly over
one-half of the commercial forest land in
the Pacific Coast states and two-thirds of the
commercial timberland in the West as a
whole. Most Western mills are dependent on
public timber to some extent, with the de
pendency of the small and medium-sized
mills being particularly great. Private timber,
which met most of the demand during earlier
decades, has declined steadily as a source of
timber during the postwar period.
Federal foresters and other lumbermen
agree that the most promising opportunities
for increasing the annual allowable cut in the
West are to be found through intensified
management of our public and private for
ests. In their eyes, the basic problem facing
the forest-products industry is one of increas
ing growth-per-acre sufficiently over the long
run to offset the decline in available timberland which results from the withdrawal of
commercial lands for roads, power lines,
dams, wilderness areas, and parks. (Two
such parks were established in 1968: Red
wood National Park in California and North
Cascades National Park in Washington.)
The managers of the Federal forests em
phasize one point: any sustained increase in
the allowable cut on national forests must be
preceded by such measures as reforestation
of nonstocked land, thinning, stand improve
ment, more complete salvage, increased pro
tection against destructive agents, and in
creased access-road construction. When those
measures are taken, according to U.S. Forest
Service studies, the allowable cut on national
forests in the Douglas-fir region could even
tually be increased by two-thirds through
intensified timber culture.

February 1969

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The producers of forest products generally
believe that the allowable cut on national
forests could be increased at the present
time, without endangering future supplies, by
means of accelerated harvesting of over
mature stands and shorter rotation periods
(the growing period required before secondgrowth timber may be harvested). Achieving
a compromise between their position and that
of the Federal forest managers may depend
upon Congressional appropriation of enough
funds to allow the intensified forestry work
necessary to assure adequate timber growth
to compensate for shorter-term liquidation
of old-growth timber.
Unsatisfied with long-term solutions, how
ever, builders and lumbermen early this year
began to press for more immediate answers
to the log-supply problem. The newly formed
Joint Coordinating Committee of the Hous
ing and Forest Products Industries asked
for an immediate increase in the annual
timber harvest from Federal lands, consistent
with good management practices, while the
National Association of Home Builders
called for an embargo on all exports of tim-

REV I EW

ber, lumber and wood products.
Public pressures soon brought some con
crete results. To begin with, Congress re
sponded to the widespread demands for a
study of the lumber industry’s problems, as
was noted at the outset.
In addition, President Nixon took steps
in late March to relieve the pressure on
prices. The President issued several direc
tives: to the Defense Department, to hold
its purchases to a minimum; to the Agricul
ture and Interior Departments, to increase
Federal timber sales by 910 million boardfeet; and to the Interstate Commerce Com
mission, to help relieve the boxcar shortage
which has hampered the movement of lum
ber from the Northwest’s forests to the na
tion’s building sites.
The lumber industry obviously must deal
with the rapid rise in the price of its products
if it hopes to ward off a widespread switch
over to substitute materials. In the mean
while, in the absence of increased timber,
it is striving to make the most out of what is
available by improving utilization of its log
supplies.
Yvonne Levy

State-Local. ABorrowing::;i. 1966l
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The impact of tight money on the 1966 borrowing plans of large state-and-local
governments in the Twelfth District was analyzed in an article which appeared in
the October 1968 Monthly Review. Copies of this article are still available, along
with detailed tables comparing the experience of Western units and large govern
mental units elsewhere during the year 1966.
Copies are also available of a similar report which analyzes the borrowing ex
perience of smaller governmental units during the 1966 tight-money period. Smaller
units participating in the Federal Reserve survey included counties with less than
250,000 population, municipalities with less than 50,000 population, school dis
tricts with less than 25,000 enrollment, and special districts with less than $5 million
in debt outstanding.
Single copies of either or both reports (with tables) can be obtained upon re
quest from the Administrative Services Department, Federal Reserve Bank of San
Francisco, 400 Sansome Street, San Francisco, California 94120.

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Publications
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. 1968) — Historical study of copper mining,
copper markets, and the outlook for the future
Farm Lending in the West (20 pp. 1968) — Results of 1966 farm loan survey
Credit — and Credit Cards (12 pp. 1968) — Report on recent developments in
bank credit cards and check credit plans throughout the nation.
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
Price Tag on the Nation’s Health (12 pp. 1968) — Report on medical care costs
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 growth of this area
Trees, Parks and People (12 pp. 1967) — Study of the economic issues involved,
in the Redwood National Park along California’s northern coast
Down the Ways (12 pp. 1967) — Report on U.S. and foreign shipbuilding in
dustries
Aluminum—Lightweight Rebounding (24 pp. 1966) — Study of aluminum pro
duction and aluminum markets and their importance in the national economy
Men, Money and the West (60 pp. 1964) — Historical survey of national and
regional developments and growth over the past half-century

Individual and bulk copies are available by writing to:

Administrative Services Department
Federal Reserve Bank of San Francisco
400 Sansome Street
San Francisco, California 94120

Full text of Economic Review (Federal Reserve Bank of San Francisco) : March 1969

FRASER