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MONTHLY REVIEW TWELFTH FEDERAL RESERVE DISTRICT FEDERAL RESERVE B A N K OF SA N FRANCISCO MAY 1953 PACIFIC COAST OIL INDUSTRY IN TRANSITION arrival in San Francisco harbor on May 20, 1953 of the world’s largest tanker, bringing 273,000 bar rels of Arabian crude oil to a California refinery, sym bolizes the end of an era in the history of the California petroleum industry.1 Together with the approaching completion of a 718-mile pipe line, designed with a capac ity to permit the ultimate shipment of 300,000 barrels a day of Alberta crude oil to the Pacific Coast, the largescale import of Eastern Hemisphere petroleum into what was until quite recently a surplus oil-producing area raises the curtain on a new chapter in Western oil his tory. The California petroleum industry appears in fact to have reached a major turning point in its career. This is, in a word, the long-predicted transition of the region from the position of a large surplus producer and ex porter of petroleum products to a status of mere selfsufficiency in oil production and use. This shift has been a gradual one and is not yet complete, but it has gone far enough to permit an appraisal of its main features, with some indication of probable future trends.2 h e T Relative isolation of the California petroleum industry Historically, California oil producers have operated pretty much in isolation from the main body of the Amer ican petroleum industry. Separated by long distances from other producing areas and also from important con suming centers outside its immediate territory, the West ern industry has in the main pursued an independent course, producing primarily for its local market but nor mally having a substantial surplus for outside shipment. For a considerable period of time, notably from about 1923 to 1940, following the discovery and rapid exploita tion of the great oil fields in the Los Angeles Basin in the early 1920’s, very large quantities of both crude oil and finished products, chiefly gasoline, were shipped to the Atlantic Coast and to various offshore markets. Much *T h e tanker Petroking, of 38,000 dead-weight tons capacity, is one of three identical vessels recently built in Japanese shipyards. The Standard Oil Company of California has chartered this vessel for a five-year term and will take delivery this summer of a sistership, the Petroqueen. The two vessels are to be operated regularly between Sumatra and Arabia and the refineries of the Pacific Coast. (See page 63 below.) 2 The possibility of substantial oil recovery from the coastal “ tidelands” of the Pacific Coast is not considered in this paper. Statements contained herein with respect to the petroleum outlook of the region take no account of such potentialities. B y an A ct of Congress approved M ay 22, 1953, (Public Law Number 31) title to certain offshore tidelands was trans ferred from the Federal Government to the respective coastal states. of the oil shipped in those years was practically dumped on the world’s markets for whatever price it would bring.1 In the absence of a compulsory conservation policy, many California crude oil producers at that time dis played the typical pioneer attitude in their exploitation of a cheap and relatively abundant, though limited, nat ural resource. Most of the larger firms, concerned with maintaining permanent sources of supply, followed rela tively conservative practices, so far as the competitive situation allowed. However, with literally hundreds of independent producers actively competing for the lim ited quantity of crude oil obtainable from a given oil field, little heed was paid in far too many cases to long-run policies of conservation. In the light of hindsight, there can be little doubt that the development of the great Cali fornia oil fields discovered in the 20’s was over-hasty and unduly wasteful. Field after field repeated the familiar story of highly competitive drilling and rapid develop ment with flush production for a few years, often result ing in glutted markets and unremunerative prices. Then followed, in many cases, a long drawn-out period of de clining output frequently involving rising costs of pro duction and the periodic shut-in of unprofitable wells. It was a period during which oil consumers both at home and abroad got a real price bonus. Cheap fuel oil in the Pacific Coast markets played an important part in stimulating the development of Western industry, being in fact in many cases the only fuel to be had. Public utili ties and private industries designed their power plants to use fuel oil while railroads and steamship lines were quick to convert from coal to oil-burning equipment. 1 For a more detailed discussion of the petroleum supply and demand situ ation in California during the period before 1950, see “ W estern Power and Fuel Outlook,” pp. 23-34, published as a supplement to the M o n t h l y R e v i e w for November 1950. Also in This Issue Home M ortgage Liquidity and Secondary M ortgage Markets Ownership of Demand Deposits— Twelfth D i s t r i c t . . 70 66 62 FEDERAL RESERVE B A N K OF SA N FRANCISCO Cheap ocean transport by tanker made California fuel oil and gasoline available as a basic energy and heating resource for the Pacific Northwest, British Columbia, and Alaska, and also for Hawaii and trans-Pacific mar kets. The Japanese military and naval program of the 30’s was undoubtedly aided by the availability of abun dant supplies of California crude and fuel oils and inci dentally provided an outlet which the industry eagerly grasped as a support to depressed markets and burden some inventories. A 20-year struggle with inventories— 1923 to 1942 In spite of rapidly growing local and regional markets for all kinds of petroleum products and notwithstanding the large volume of outside shipments just indicated, the California oil industry was plagued for nearly 20 years (from 1923 to about 1942) with heavy and often unman ageable stocks, particularly of crude petroleum and of residual fuel oil— the “ low end” of the refining process. Total stocks held by refiners in District Five1 early in 1930 reached the extraordinary level of nearly 190 mil lion barrels, a figure greater than the annual crude oil production of California in each of the years from 1931 to 1934. Although production was sharply curtailed dur ing most of the decade of the 30’s, inventories remained high in relation to annual production and consumption right up to the eve of W orld W ar II and were in fact an important safety factor in helping to meet the abnormal demands of the war period. During the war, production of crude was stepped up to maximum attainable rates in practically every Califor nia oil field, including the partial utilization of the Elk Hills naval reserve which had been largely shut in during the 30’s. The war itself not only used up much of the ex isting stocks above ground but also took a huge bite out of the industry’s basic raw material in underground re serves. Crude production was boosted from an average annual level in 1939-41 of 226 million barrels, a rate equivalent to about 619,000 barrels a day, to an average level of 307 million barrels in 1943-45 (842,000 b /d ), a rate exceeding even the flush production of 1929 when output stood at 293 million barrels, a daily average of 802,000 barrels. While an intensive drilling campaign during the five years 1941-45 brought in nearly 6,000 new wells for a net increase of nearly 50 percent in the number of active producing wells, including the reopening of those shut in during the curtailment of the 30’s, the results of the ef fort to discover significant new fields were largely dis appointing. In fact, few large new oil fields have been discovered in California since 1936 when the great W il mington field was brought in.2 From 1938 to date, W il mington has consistently been California’s leading oil producer, with a cumulative output to the end of 1952 exceeding 600 million barrels and with an estimated re maining reserve of 394 million barrels. Even the large 1 This refers to District Five of the U . S. Bureau of Mines grouping, which consists of California, Oregon, W ashington, Arizona, and Nevada. M ay 1953 wartime production from the Wilmington field, however, failed to offset the dwindling output of the older fields in the Los Angeles Basin where the excessive production rates of the 20’s had taken their toll. High postwar dem and and impending local shortage In the peak months of war production, in mid-1945, California crude oil output was running at a rate above 940,000 barrels a day and, for the year as a whole, aver aged about 894,000 daily. Following the letdown in de mand at the end of the war, production fell off somewhat in 1946, but the rapidly continuing influx of population into the Pacific Coast region and the extraordinary indus trial expansion which marked the postwar years put re newed pressure on the oil industry to provide more motor and industrial fuels. Except for a brief turndown in 194950, California crude oil output has continued to increase and during March of this year passed the million-barrela-day rate for the first time. The increasing postwar demand gave renewed impetus to the search for new oil in California. More than 10,000 new oil wells were completed in the State in the six years 1947 to 1952. The number of active producing wells has steadily risen (except in 1949) from less than 15,000 at the beginning of 1940 to more than 31,000 today. The average output per well, however, has fallen from about 40 barrels per day in 1940 to less than 33 in 1952, as more of the older fields approach exhaustion. This means production at higher cost per barrel of output. Not only are the older fields less productive than during their hey day, but some of them have required expensive repressuring in order to maintain production. Much of the output of the newer fields and of the newer wells comes from deeper levels, which involves heavier drilling outlays. Supplementing crude oil production, California oil fields also yield appreciable quantities of natural gasoline and liquefied petroleum gases such as butane and pro pane. This additional output has averaged close to 80,000 b/d during the past three years, making the total supply of liquid hydrocarbons of California production well over a million barrels daily. Even the current high pro duction rate is inadequate to supply the rising demand for petroleum products in the West Coast market, tem2 M ajor California oil fields, i. e., those having an estimated ultimate re covery of 100 million barrels or more, discovered since 1936 are as follow s: (m illions of barrels) Year of Field discovery 1937 Rio B r a v o .......... Coalinga Nose . . 1938 Coles Levee, N o r th ... 1938 San Ardo .......... . 1947 Cuyama, South 1949 Cumulative Estimated Estimated production remain ultimate to end Production ing recovery of 1952 in 1952 reserves 115 63.8 4.3 51.2 380 200.8 16.8 179.2 150 67.4 5.9 82.6 100 8.3 88.2 11.8 160 37.7 14.0 122.3 Source: O i l a n d G a s J o u r n a l, January 26, 1953, p. 289. A ll of these fields are in central California; not a single “ m ajor” discovery has been made in the Los Angeles Basin since W ilm ington. The gross in crease of California’s underground petroleum reserves in the years 1946 to 1952 inclusive has come almost 90 percent from the extension of known fields and the revision of previous estimates of their recoverable oil con tent rather than from the discovery of new fields or new pools. The total of new oil added through both procedures during those seven years was 2.9 billion barrels; total removal through concurrent production was nearly 2.4 billion barrels, making a total net gain in reserves of about 535 mil lion barrels. M O N T H L Y REVIEW May 1953 P e tr o le u m S u p p ly a n d D e m a n d D is t r i c t F iv e — S itu a tio n in 1946-531 (data in t h o u sa n d s of b a rre ls p e r d a y ) Receipts Production from withinoutside Total District District current Five Five supply 1946 923 17 940 1947 982 14 996 1948 1,001 IS 1,016 1949 986 23 1,009 1950 975 16 991 1951 1,052 37 1,089 1952 1,064 79 1,143 19533 ............ 1,080 95 1,175 Shipments Increase outside or District decrease Five in stocks 92 +42 116 + 8 110 +44 111 +50 173 — 76 152 — 37 130 +37 142 +25 Apparent consumption in Dist. Five 806 874 862 848 894 974 976 1,008 1 Total petroleum, including natural gasoline, condensate, etc., and petro leum products. 2 First quarter. Source: U . S. Bureau of M ines, P e t r o l e u m S it u a t i o n i n D i s t r i c t F iv e . porarily at an abnormally high level because of the heavy concentration of military demand on California refineries occasioned by the war in Korea. Military purchases of petroleum products in District Five exceeded 112,000 b /d in 1951. This figure was reduced to about 78,000 b /d in 1952 by diverting a larger fraction of military pur chases to Gulf refineries; military demands on West Coast producers have been running at approximately that rate during the current year. However, the opinion is prevalent in the trade that a permanent reduction of military purchases in District Five much below an annual rate of 100,000 barrels a day is not to be expected. This means close to 10 percent of the total petroleum pro duced within the area. Badly balanced output of California refineries; the problem of heavy fuel oil The supply situation is further complicated for the Pacific Coast refineries because so many California crudes yield a very high proportion of the less desirable low-end or “ residual” heavy fuel oil as contrasted with the higher yields of gasoline and other light distillates obtained from the general run of Texas and Mid-Continent crudes. Thus, to take a typical recent month, the average yield of residual obtained in February 1953 by all California refineries was 36 percent of total refinery input as com pared with an average of 18.3 percent for all the refin eries in the United States, average yields in Texas of around 14 percent, and in the Oklahoma-Kansas-Missouri district an average of only 10 percent. Stated in another way, California refineries were able to get only 52 barrels of gasoline and other light distillates (diesel oil, kerosene, etc.) out of each 100 barrels (or equiva lent) of total refined products, while the general average for the United States industry as a whole was 71.5 bar rels, for Texas refiners around 74 barrels, and for the Oklahoma-Kansas-Missouri group about 78 barrels. Some California refiners have made very heavy in vestments in recent years in supplementary refining fa cilities designed to obtain higher yields of the light dis tillates so much in demand, since some of their traditional markets for the low-end products have tended to dry up. In certain cases they have almost disappeared, as exem plified by the replacement of oil-burning locomotives by 63 Diesel-driven power. Natural gas has also made severe inroads on industrial uses of fuel oil, notably in the elec tric utility industry and also in the general heating field. Another way to help meet this problem of badly balanced production resulting from the intractable nature of their local raw material is to supplement refinery runs of Cali fornia crudes by blending natural gasoline with the re finery product, or by using other types of crudes which produce a higher proportion of the lighter distillates. There are obvious limits of supply to both procedures. No great quantity of natural gasoline is to be had, and the desirable high gravity crudes are far away and costly to obtain.1 The current demand-supply position on the West Coast A summary statement of the demand-supply situation within District Five appears in the accompanying table covering the seven-year period 1946 to date. While all the items except inventory changes have increased greatly since 1946, it will be noted that by far the greatest rate of growth is shown by receipts of petroleum and petro leum products from points outside the District. Such re ceipts averaged about 15,000 b /d in 1946-48, a rate equivalent to the crude oil output of the old Santa Fe Springs oil field in those years. Receipts from outside the District had jumped by 1952 to a daily rate of nearly 80,000 barrels, a figure exceeding the output in that year of any California oil field. Stated in another way, oil from outside points supplied less than 3 percent of the District’s apparent total consumption up to 1950, but in 1952 it represented 8 percent of such consumption and during the first quarter of this year has been approaching 10 percent. Imports of oil from the Eastern Hemisphere As indicated at the beginning of this article, a substan tial part of District Five’s current receipts of oil is com ing from foreign sources. Experimental cargoes of crude petroleum from Venezuela and Arabia were brought in by California refineries in the first half of 1949, aggre gating somewhat over a million barrels. No very large volume of foreign oil, however, entered this area until 1951. Beginning in that year, California refiners, chiefly the larger firms, have imported considerable quantities of high gravity crude, partly from Venezuela and partly from sources as distant as Borneo and Sumatra and even Saudi Arabia. These imports averaged about 11,400 bar rels daily in 1951 and 34,700 b /d in 1952. During the first quarter of 1953 they have continued at a rate which is expected to average between 50,000 and 60,000 barrels daily for the whole year. Already in the first five months of this year a leading California oil company which has extensive commitments in Sumatra and Arabia has brought in not less than 47 tanker cargoes of high gravity crude oil from those areas, aggregating about 6 million barrels. JFor a discussion of the special problems for California crude oil producers and refiners posed by low gravity crudes and residual fuel oil, see “ W e st ern Power and Fuel O utlook,” pp. 28-30, 33. 64 FEDERAL RESERVE B A N K OF SA N FRAN CISCO M ay 1953 The basic freight rate established by the United States Maritime Commission for tanker shipments of crude oil from the Borneo-Sumatra range to California ports is approximately $1.50 per barrel. Single voyage spot rates are currently quoted at about 40 percent off this basic figure, yielding a net charge of around 90 cents per bar rel; rates for long-term charters would be less. Costs from the Persian Gulf are correspondingly higher. Even from Venezuela, transportation to California refineries involves a distance of at least 3,900 miles and the pay ment of Panama Canal tolls. There is also a current tar iff duty of 10.5 cents per barrel on imports of light crude oil, which is defined as oil of 25 degree gravity or higher. It is reasonably apparent, therefore, that importing for eign crudes from such distant points is a relatively costly business and would probably not be resorted to if ade quate supplies could be had from nearer sources. leum products, or about 33,000 barrels a day. Another new project, a 310-mile line extending from Sinclair, a refining center in Wyoming, to Salt Lake City was also put in operation in 1952. This is the Pioneer Pipe Line, having a daily capacity of 12,000 barrels a day and de signed for the shipment of refined products. Its operation is planned to tie in with the lines from Salt Lake City to the Pacific Northwest. Still another new project is the proposed Yellowstone Pipe Line, a 593-mile line capable of moving 14,000 barrels per day of refined products from Billings, Montana, to Spokane. Already the refining of Colorado and Wyoming crudes in Utah and their dis tribution in the Intermountain area has relieved the pres sure on California refineries to a marked degree. This line of development promises to continue as additional sources of supply are brought into production in the Rocky Mountain area. Oil from the Rocky Mountain area Oil from Canada Foreign imports are not the only source of supplemen tary oil supplies for the area served by Pacific Coast pe troleum refiners. In addition to the 13 million barrels of crude oil which came into District Five in 1952 from foreign sources, another 15 million barrels of petroleum came from other parts of the United States, chiefly the Rocky Mountain states. This consisted largely of re fined products from Utah and Wyoming, with some tanker shipments of crude from Texas. The markets for petroleum products in the Intermountain region, for merly supplied predominantly by shipments from Cali fornia refineries, have for a number of years been served by refineries at Salt Lake City and at such points as Billings, Montana, and Casper and Sinclair in Wyoming. These refineries operate on crude oil produced in the Rocky Mountain states. A thriving oil refining industry has developed in re cent years in the Salt Lake City area which now has a capacity for handling about 66,000 barrels of crude oil per day, most of which comes by pipe line from Colorado and Wyoming. Up to 1945 high gravity crudes from rela tively nearby Wyoming oil fields supplied the major re quirements of the Salt Lake City refineries, but more re cently the chief source of supply has been the rapidly growing Rangely field in northwestern Colorado. Smaller quantities of crude are also obtained from Utah oil fields, partly by pipe line and partly by rail and truck. Salt Lake City has recently become an important dis tributing center of refined oil products not only in its local territory but also to parts of the Pacific Northwest. A 560-mile pipe line for transporting refined products was opened in 1950 extending to Pasco, Washington, lo cated on the Columbia River near the Hanford atomic energy project. Contracts have recently been let for the extension of this line to Spokane. Growing demand for petroleum products in the Intermountain area led to the installation in 1952 of a parallel pipe line from Salt Lake City to Boise, Idaho. These two lines will make possible the shipment of 12 million barrels a year of refined petro Much more significant is the approaching completion of the Trans Mountain Pipe Line extending from Ed monton, Alberta, to Vancouver, British Columbia. This line will carry crude petroleum from the newly devel oped Alberta oil fields across the Canadian Rockies to the Pacific Coast where it will be available both for re fining for the local market and for export, either as crude or in refined form. The exploration and development of oil resources in the Canadian Prairie Provinces, particularly in Alberta, has been one of the outstanding events of recent years in the world’s petroleum industry. The discovery of the im portant Leduc oil field near Edmonton in February 1947 gave a tremendous impetus to further exploration in the area. Upwards of $1 billion is said to have been spent since that time by Canadian and American oil companies in exploration and development work, especially in A l berta, and the point has now been reached when largescale exploitation and shipment can begin. Up to 1950 actual production in Alberta had been re stricted to supplying the requirements of the Prairie Provinces because long distance transportation facilities were lacking. Late in that year the Interprovincial Pipe Line was placed in operation between Edmonton and Superior, Wisconsin. This line has not only permitted the export of Canadian oil to the United States but has also appreciably relieved the economy of eastern Canada from its heavy dependence upon imported oil, which had come predominantly from the United States. Crude pro duction in Alberta in 1952 was at a rate of about 162,000 barrels per day and the current “ allowable” production is at a rate of about 201,000 b/d. The spectacular devel opment of new oil reserves in Alberta is currently re ported to have reached a total at the end of 1952 exceed ing 1.7 billion barrels, roughly equal to one-half the esti mated remaining California reserves. Resources of this magnitude will permit the efficient production of crude oil at a rate approaching 300,000 barrels a day. With the continuance of new oil discoveries in Alberta at the rate May 1953 m o n t h l y r e v ie w of the past few years, it is estimated that the efficient production rate could rise by 1955 to a daily output of 400,000 barrels. Plans for a long distance pipe line from Alberta to the Pacific Coast have been under more or less active discus sion since 1939. Even at that time it was foreseen that a large surplus of crude oil would be developed in the Canadian Prairie Provinces which must seek an outlet on the world’s markets. The increasing difficulty of find ing new crude oil reserves in California, together with the rapid development of substantial supplies in western Can ada, has created the basic condition requisite to the suc cess of pipe line transportation of petroleum over the Rocky Mountains to the Pacific Coast. The Trans Mountain Pipe Line was originally financed through the backing of a group of important American and Canadian oil companies, including several California producers.1 The total cost of the 718-mile line, extending from Edmonton to Vancouver, with a southward exten sion of 30 miles to a point near Bellingham, Washington, will not be far short of $100 million. This figure includes the cost of pumping stations, storage facilities, tidewater docks, and other facilities. Construction of the line by a San Francisco engineering company began early in 1952 and its completion is scheduled for October of this year. Having a diameter of 24 inches, the line is designed for an ultimate capacity approaching 300,000 barrels a day. It has an initial throughput, on the basis of three pump ing stations, of 120,000 b/d. A fourth station is already under construction which would permit shipments by 1954 at a daily rate of 150,000 barrels. The initial tariff to be charged for transporting crude oil from Edmonton to Vancouver has been indicated at 45 cents per barrel. The whole area of the Pacific Northwest, including most of Oregon, Washington, and British Columbia, as well as Alaska, has depended up to the present almost entirely upon California as the source of its oil supply, both for motor and industrial fuels and for heating pur poses.2 In years marked by severe winters this has some times involved a rather tight supply situation for heating oils, especially at the distributor level. The market for petroleum products in western Oregon, Washington, and British Columbia is estimated at about 285,000 barrels per day in 1952.3 Much the greater part of the petroleum requirements of the whole region has been supplied by tanker shipments from the California refineries in fin ished form, with relatively limited shipment of crude oil to local tidewater refineries. The refining capacity of the entire area has consisted of three small refineries at Van couver, having a total daily capacity of about 28,000 bar rels, together with two small asphalt plants located at 1 The original sponsors of the Trans Mountain Oil Pipe Line Company, which will operate the pipe line, w ere: Gulf O il Corporation, Imperial Oil, L td ., Shell Oil Company, Standard Oil Company of California, Union Oil Company of California, and Richfield Oil Corporation. *T h e refinery of Imperial Oil, Ltd. at Vancouver, B. C ., imported small quantities of Borneo crude in the first half of 1952 and since September of that year has brought in some 5,000 barrels per day of crude by tank car from Alberta. 8 Petroleum Administration for Defense, “ Transportation of O il,” D ecem ber 1951, page 39. 65 Portland and Seattle, plus a still smaller refinery at Spo kane which has operated somewhat intermittently on crude shipped by tank car from Montana. The aggregate refinery consumption of crude oils for the whole area has probably averaged somewhat under 40,000 barrels per day in recent years. The early availability of abundant supplies of Alberta crudes of relatively high gravity will soon change this picture drastically. Two of the existing refineries at Van couver are to be enlarged from a total current capacity of about 20,000 b /d to nearly double that figure. More important is the decision of a leading California com pany,1 not presently a factor in the Northwest refining situation, to construct a modern 35,000 barrel per day refinery at Ferndale, Washington, on Puget Sound about midway between the Canadian border and Bellingham. This plant will be connected by a 12-mile lateral 16-inch pipe line with the southern terminus of the Trans Moun tain Pipe Line. Construction work on the new refinery is to begin during the summer of this year and comple tion is scheduled for the fall of 1954 by which time the necessary pipe line connections will also be installed. Designed to produce over 26,000 barrels per day of gasoline and other light distillates, together with some 6,000 b /d of fuel oil, the new Ferndale refinery will mark an important event in the petroleum history both of the Pacific Northwest and of California as well. Together with the concurrent expansion of already existing refin ery capacity in Vancouver, it will almost double the crude oil input of the Northwestern refining industry.2 Even more significant is the fact that this whole regional devel opment, based on the relatively short haul of crude oil from Alberta made possible by the Trans Mountain Pipe Line as contrasted with the longer distances and narrow ing supplies from California, will relieve the pressure on California oil fields which are already being pushed to the practical limit of efficient operation. The outlook for future supplies Changes sometimes occur very speedily in the oil in dustry. Ready examples are provided by the rapid trans formation in the Pacific Coast inventory situation be tween 1948 and 1950 and by the upsets in the whole world supply and demand position occasioned by the closing down of the Iranian oil fields and the Abadan refinery in 1951. Confident prediction as to the probable future course of events in the oil industry is to be avoided un less the prophet is willing to hazard his reputation. Some things, however, can be said with relative cer tainty. The “ chronic surpluses” which plagued the Cali1 General Petroleum Corporation, a subsidiary of Socony-Vacuum Oil Com pany, Inc. 2 Tw o other leading California oil companies, sponsors of Trans Mountain Pipe Line, have taken preliminary steps to construct modern refineries of substantial size in the Pacific Northwest which would make use of the new Canadian oil supplies. The Shell Oil Company has just announced that it is considering the construction of a 50,000 barrel per day refinery, probably to be located at Anacortes on Puget Sound between Seattle and Bellingham. The Standard Oil Company of California has recently pur chased a large tract of land north of Seattle with frontage on Puget Sound suitable for a large refinery location. 66 FEDERAL RESERVE B A N K OF SA N FRANCISCO M ay 1953 fornia oil industry during most of its history— except during war years— seem to be definitely a thing of the past. The growth in demand for petroleum products in this area definitely exceeds the rate of increase in domes tic supply. For a considerable period now California has been “ producing” its crude petroleum reserves at a higher rate than most other oil-producing areas of the country. New oil in the quantities needed to satisfy the expand ing markets of the Pacific Coast states is proving more difficult to find and more costly to produce. Unless there should be an early development of some new source of energy, such as atomic power for industrial use, or un less large new supplies of high gravity crude are discov ered in the submerged offshore tidelands and made avail able at economic costs, it seems fairly certain that this region will soon have to look to other parts of the world for a substantial part of its petroleum requirements. Where are these essential energy supplies to come from? The known surplus oil-producing areas of the world are relatively few in number and the distribution lines from these areas to the chief consuming markets are, for the most part, fairly definitely established. The great Texas and Mid-Continent oil fields will probably continue to supply the major requirements of the central and eastern sections of the United States, supplemented increasingly by the large export surplus of Venezuela and other Caribbean countries. The phenomenal increase in petroleum output of the Middle East, great as it is, prom ises to be absorbed by the growing needs of Western Europe as oil replaces coal as a fuel, and by the require ments of the newly developing industries of Asia itself. distant time such presently undeveloped areas as the W illiston Basin of North Dakota-Montana-Saskatchewan. In the still more distant future, when we really “ run out of oil,” loom the enormous shale deposits of Colorado which yield a usable substitute for crude petroleum. It is sig nificant that one of the large California oil companies has been conducting a long-time experimental project de signed to test the relative economy of obtaining liquid fuels from shale, as compared with the cost of refining crude petroleum.1 The current heavy imports of oil from the Eastern Hemisphere are probably only a temporary stopgap to bridge over the interval until Alberta oil reaches the Coast in substantial quantities. Heavy trans portation costs would handicap Middle Eastern oil, and even Sumatra or Borneo oil, in competition with the more economical pipe line transportation from Alberta, not to mention the greater hazards involved by the trans-Pacific voyage in time of war. The proposal to bring in Texas oil by pipe line to southern California refineries is also not entirely dead and might be revived if and when con ditions warrant. Meanwhile California oil producing con cerns, large and small, are actively engaged in prospect ing for petroleum in many outside areas, notably in Utah, where the largely unexplored Uinta Basin contains dis tinct possibilities of significant oil discoveries. The large San Juan Basin at the junction of the four states Arizona, New Mexico, Colorado, and Utah, which presently is an important producer of natural gas but has not yet been adequately prospected for oil, is also regarded as a fav orable possibility for future development of oil for the motors of California.2 The most promising sources for future supplies of crude oil to supplement the local California resources appear to be Canada, Texas, Venezuela, the Rocky Moun tain area, in about that order, and possibly at some more 1 The Union O il Company of California. See “ W estern Power and Fuel O utlook,” pp. 41-48. 2 See “ Oil Supply and Demand in the W e s t ,” a speech by Robert L . M inckler before The National Association of Financial Analysts Socie ties, San Francisco, M ay 5, 1952. See also “ Oil and Gas in the Rockies,” a report by Dorsey Hager, Consulting Geologist, for J. A . H ogle & Com pany, Salt Lake City, February 13, 1953. HOME MORTGAGE LIQUIDITY AN D SECONDARY MORTGAGE MARKETS of proposals to improve secondary mortgage . markets have been made during the past five years. These proposals have emanated from mortgage bankers, Federal agencies involved in mortgage financing, and Congress. Some of them visualize essentially a private secondary market, although Government assistance of one kind or another is often involved in the plans, while others propose a sort of Federal Reserve System in the mortgage markets. All proposals evidence dissatisfaction with the existing markets as well as the desire to have mortgages become a more liquid asset than they are at present. This article very briefly describes the secondary market, the nature of liquidity, and the extent of Govern ment operations which affect the mortgage market. It also brings out some aspects of the areas in which further study would be desirable. The secondary mortgage market is a term generally used to describe transactions in existing mortgages after they have been originated. In this respect this market is A va r i e t y analogous to the stock exchanges which deal primarily with old issues originally marketed by investment houses at an earlier date. In the secondary mortgage market the principal sellers are the commercial banks and mortgage companies who originate mortgages and sell them to longer-term investors such as insurance companies, sav ings banks, savings and loan associations, and others. A buyer, however, may also be a seller and vice versa. Just as a well-functioning stock exchange adds to the ability of a listed corporation to market a new issue of its stock because purchasers will be able to dispose of it readily should the need arise, so a well-functioning secondary mortgage market enhances the ability of borrowers to ob tain funds at lower rates than would prevail if no sec ondary market existed. The importance of the secondary mortgage market arises from the enormous dollar volume of home mort gages outstanding, the fact that the holders of such mort gages require liquidity in different degrees, and the M ay 1953 uneven geographical distribution of savings available for investment. The needs of some lenders for ready cash impel them to sell the mortgages they originate to longerterm investors. Similarly, the fact that new savings may exceed the amount of local investment leads to purchases of mortgages in other localities. The volume of mortgage debt outstanding is shown in Table 1, which also exhibits the holdings of different types of lenders and the changes in their holdings since 1939. Although comparable figures are not available for lenders in the Twelfth District, some useful information can be gleaned from mortgage record ings, which are shown in Table 2. The principal sharp distinctions between lenders in this District and the na tion are that commercial banks and individuals are rela tively more active in the District in originating mortgages, and savings and loan associations, and particularly mutual savings banks, are less important. The nature of liquidity The desire for liquidity is satisfied in greater or less degree, depending upon the character of the commodity involved and the nature of the market. The general mean ing of liquidity is clear enough: nearness to money. Thus a 90-day Treasury bill is a close substitute for cash, a 30year Government bond a less close substitute, and a 30year mortgage is an asset even farther removed from money. It may be useful to distinguish two aspects of liquidity: (1 ) the ability to convert an asset into money promptly, and (2 ) the ability to realize a sum upon con version which is close to the amount paid for the asset or to the value at which it has been carried on the books of the owner. The first property of liquidity (which is often called shiftability) is best secured by assets which lend them selves to easy classification. Such is the case for common stocks of the larger corporations in this country. These securities are labeled, their nature generally understood, and sufficient information is readily available to permit reasonably accurate grading of the security. These factors contributing to shiftability are strengthened by the exist ence of organized exchanges for dealing in such securi ties— such as the New York and American stock ex changes. An organized exchange permits continuous in formation as to the prices at which persons will buy and sell a particular security. It also requires specific informa T able 1 Mortgage Debt on Nonfarm 1- t o 4-Family Properties United States, 1952 tion on each security as a prerequisite to listing it on the exchange. The professional trader, who flourishes best on an organized exchange, provides the important serv ice of filling in small gaps in the market as they occur or of making the market less “ thin” than it would otherwise be. This is accomplished by “ making a market” for the security, that is, overcoming temporary imbalances be tween supply and demand by assuming a temporary long or short position in the security. An exchange, then, is useful in furnishing a greater degree of liquidity in the sense of shiftability than would be possible in personal ized dealings between buyers and sellers. Activities of the Federal Government affecting mortgage liquidity The secondary market in real estate mortgages has long suffered from the fact that terms vary considerably from one mortgage to another, thus making this debt instru ment difficult to grade and classify. Standardization of mortgage types would therefore do much towards giving mortgages more liquidity in the sense of shiftability. In this connection it is important to examine the activities of the Federal Government in the mortgage field and their influence on liquidity. Insurance and guarantees: The most important cur rent activities on the part of the Federal Government which influence mortgage liquidity take the form of re ducing the risk on certain types of mortgages and of par ticipating directly in the secondary market for mortgages. Mortgages on homes which are made by approved lending institutions and which meet certain standards are eligible for insurance from the Federal Housing Administration to protect the lender against loss of principal caused by default on the part of the borrower and subsequent fore closure of the mortgage. Under the Servicemen’s Read justment Act of 1944, as amended, the Veterans’ Admin istration is empowered to guarantee home mortgage loans up to 60 percent of the amount of the loan or $7,500, whichever is less.1 The extent to which such insurance and guarantees have made themselves felt in a rather 1 The original percentage and amount stipulated in the 1944 legislation were 50 percent and $2,000. These were changed first to 50 percent and $4,000, and in the H ousing A c t of 1950 were changed to the figures shown in the text above. T able 2 E stimated A mount of N onfarm M ortgages of $20,000 or Less R ecorded in 1952— U nited States and T welfth D istrict1 / -------Preliminary estimates o f loans held------- Amount Percent of total Percent increase since 1 9 3 9 1 1 ,2 5 0 30 20 11 19 417 808 194 462 2 ,2 1 0 9 ,1 2 5 4 16 2 ,1 1 0 194 100 268 ( th o u sa n d s o f Type of lender Savings and loan associations. . . Life insurance c o m p a n ies............ M utual savings banks ................. Commercial banks ........................... Federal National M ortgage Association .................................... Individuals and others ................. Total ................................................. Source : H om e Loan Bank Board. 67 M O N T H L Y REVIEW d o lla rs) 1 7 ,5 9 0 1 1 ,8 0 0 6 ,1 8 0 5 8 ,1 5 5 ---- Type of mortgagee Savings and loan associations ............ , , , Commercial banks . . Individuals .................... ______ Insurance companies ......... Mutual savings banks; . . . . Miscellaneous ............ ......... Total ........................... ......... Amount in millions f-------of dollars------- N United Twelfth States District 6 ,4 5 2 3 ,6 0 0 2 ,7 5 8 1 ,4 2 0 1 ,0 7 1 891 724 317 1 ,1 3 7 2 ,6 5 1 31 464 1 8 ,0 1 8 3 ,4 9 8 Twelfth District as Percent percent (-------of total-------\ of United Twelfth United States District States 36 20 15 8 6 15 31 25 21 9 1 13 17 25 26 22 3 18 ---- ----. — 100 100 19 1 Includes all Twelfth Federal Reserve District states except Nevada. Source: H om e Loan Bank Board. 68 short number of years is evident in Table 3. The volume of F H A and V A mortgages which have been issued in Twelfth District states is shown in Table 4. At the end of 1952, over 44 percent of all mortgage debt outstanding on nonfarm 1- to 4-family houses was partly underwritten by the Government either through F H A insurance or V A guarantees. Although conventional mortgages were in the majority, representing 56 percent of all outstand ing mortgages, this may be compared with the last prewar year, 1941, when conventional mortgages represented more than four-fifths of all outstanding debt. Standardization of terms: The increase in Govern ment-underwritten mortgage debt has greatly increased liquidity, in the shiftability sense, of mortgages. This has come about both through the decline in the amount of risk borne by the lender and in the more standard minimum terms upon which the mortgages are made. For example, Section 203 FHA-insured mortgages must be grouped according to risk characteristics. In practice this is done by assigning a numerical rating which indicates the de gree of risk. Such risk is gauged by analysis of three groups of risk elements: (a) mortgage credit elements which focus on the borrower, (b ) real estate elements which relate to the property, and (c ) loan elements which pertain to the mortgage instrument itself. Private lenders in recent years have similarly made use of mortgage risk rating systems. This wider use of risk elements in clas sifying mortgages has made many mortgage terms more uniform and has thus contributed to shiftability. Federal National Mortgage Association: In addition to furnishing this direct aid to liquidity by decreasing risk and increasing standardization of terms, the Federal Gov ernment also participates directly in the secondary mort gage market through the Federal National Mortgage As sociation. This agency was established in 1938 to buy and sell FHA-insured mortgages and through such trans actions to establish and make a market for such paper and thereby encourage construction and investment by pri vate institutions. Its authority was enlarged on July 1, 1948, to purchase GI mortgages. As of the end of 1952 the Association held $2,242 million of mortgages of which T able 3 M ortgage D ebt O utstanding on N onfarm 1- to 4-F amily Properties— U nited States, 1939-1952 86 percent were VA-guaranteed, and currently holdings are around $2.5 billion. In practice, the acquisition of a large part of VA-guar anteed mortgages resulted virtually in direct lending by the Government. As the 4 percent rate on V A mortgages became increasingly unattractive to lending institutions, the authority of the Federal National Mortgage Associa tion to purchase from a lender was increased from 25 per cent of his eligible mortgages to 50 percent in August 1948, and then to 100 percent in October of 1949. This led to the use of the commitment process whereby lend ers would make 100 percent advances to builders with F N M A committed in advance to purchase the resultant mortgages. As a result of this virtually direct lending the Association reached the end of its lending commitment within six months, and over $2 billion was furnished the housing market directly from the Government. In April 1950 the funds available were increased from $2.5 billion to $2.75 billion, but the additional $250 million could be used only for purchasing mortgages on an over-the-coun ter basis since the authority to commit funds for future mortgage purchases was eliminated.1 In addition to adding liquidity to the mortgage market both directly and indirectly, the Federal Government has other important activities in the nonfarm residential mort gage-lending area. Federal Home Loan Banks: The Federal Home Loan Banks constitute a system of regional banks established in 1932 to provide credit and other facilities for savings and loan associations and similar institutions in connec tion with their home mortgage lending if they are mem bers of the system. In addition, the Home Loan Bank Board, which supervises the Federal Home Loan Banks, has subsequently been authorized to establish and direct the Federal Savings and Loan Insurance Corporation which presently guarantees shares in associations of the savings and loan type up to $10,000 per saver. At the end of 1952 membership of the system included 4,028 sav1 The gross authorization of F N M A was increased to $3,650 million in July 1952, but mortgages other than defense or disaster mortgages are still limited to $2.75 billion. F N M A ’s secondary market function is limited in several ways. I t can deal only in certain types of mortgages, can buy only limited amounts from any one lender, and can deal only with the origin ating institution. T able 4 FHA and V A Insurance and Guarantees T w elfth District (in millions of dollars) / ------- Government-underwritten-------\ Total End o f year 1939 ...................... 1940 ...................... 18.4 1941 ...................... 18.2 1942 ...................... , . 1943 ...................... 17.9 1944 ......................, 1945 ...................... 23.1 1946 ...................... . 1947 ...................... , 28.2 1948 ...................... 37.5 1949 ....................., 1950 ......................, , 45.1 51.9 1951 ...................... 1952P .......... .. p M ay 1953 FEDERAL RESERVE B A N K OF SA N FRANCISCO Total 1.8 2.3 3.0 3.7 4.1 4.2 4.6 6.3 9.6 12.5 15.0 18.9 22.9 25.4 FH Ainsured 1.8 2.3 3.0 3.7 4.1 4.2 4.1 3.7 3.8 5.3 6.9 8.6 9.7 10.8 VAguaranteed O’. 5 2.6 5.8 7.2 8.1 10.3 13.2 14.6 C on ventional 14.5 15.0 15.4 14.5 13.7 13.7 13.9 16.8 18.6 20.8 22.5 26.2 29.0 32.8 Preliminary. Sources: H om e Loan Bank Board, Federal Housing Administration, V et- erans’ Administration, and Federal Reserve System. V A home loans, principal amount approved cumulative through ----- December 25, 1952------N Amount Percent of United (millions of States1 dollars) Area 0.3 51 2,604 14.2 California ............... 40 0.2 9 0.6 105 0.3 57 U tah ........................ 388 2.0 W ashington . . . . Twelfth District United 3,355 S t a t e s .. 19,040 17.6 FH A -insu red home mortgages z— cumulative 1935-1951— > Amount Percent of (millions of Unired dollars) States1 172 1.1 2,743 16.7 84 0.5 0.3 45 1.4 222 159 1.0 648 4.0 4,074 24.9 16,388 1 Only the continental United States is included. Source: Veterans’ Administration, Federal Housing Administration. May 1953 M O N T H L Y REVIEW ings and loan associations, 23 savings banks, and 5 insur ance companies. From 1932 through the end of 1952 the eleven district Federal Home Loan Banks had made ad vances to their member institutions of nearly $4,626 mil lion and had outstanding advances at the end of 1952 of $864 million to over 2,000 members. The San Francisco Federal Home Loan Bank (which serves the seven Twelfth Federal Reserve District states plus Alaska, Ha waii, Montana, and Wyoming) had the largest volume of outstanding balances at the end of 1952, such balances representing over 20 percent of all outstanding advances of all Home Loan Banks. By the middle of 1952 the Gov ernment’s original investment of nearly $125 million in the capital stock of the Banks had been repaid, and they are thus now completely owned by their member institu tions which had an investment of over $315 million in the stock of the Banks at the end of last year. Direct Federal activities: In addition to this indirect effect on the mortgage markets, although as shown there has actually been some virtually direct lending, the Gov ernment does participate directly in the housing field through direct loans and construction and ownership of housing. The Veterans’ Administration wras temporarily authorized in 1950 to make direct loans to veterans where VA-guaranteed loans were not available from private sources. These loans are limited to a total of $150 million. This authority is scheduled to expire on July 1, 1953, although a bill has been introduced to extend it. The Pub lic Housing Administration undertakes to assist local housing authorities in the construction, ownership, and management of low-rent public housing projects by means of capital loans and annual cash contributions to serve as a continuing subsidy. This agency also directly under takes emergency housing projects. It is apparent, then, that the activity of the Federal Government in the field of housing and mortgage finance is extensive. For purposes of analysis it may be useful to classify the different ends served by its activities. One class of activities undertaken by the Government serves indirectly to encourage home building by standardizing the terms of mortgages which are insured or partly guar anteed. Another class of activities enters directly into the home construction market by direct loans, subsidies, guar antees, and insurance. The distinction between these ac tivities, although one of degree only, is important. The first activity in standardization of mortgage terms serves to improve the operation of the market without interfer ing with the allocation of economic resources which takes place in response to prices and costs. The second form of activity, which affects interest rates on mortgages directly or which completely avoids the private market by direct lending, alters the normal forces that operate in the free market in the interests of conforming with certain social policies Congress considers desirable. Privately organized mortgage exchanges As contrasted with these Federal Government activi ties we may note some interesting developments in private 69 arrangements which will act to give mortgages more ready convertibility than they now possess and which, of course, do not directly affect the allocation of resources. At least two organized mortgage exchanges have been announced within the past year. One is in New York and it plans to find buyers and sellers for mortgages listed with it. The other market, which is now in operation, is in Toronto, Ontario. At present its operations are limited to dealings in second mortgages because of the high yields which are expected to attract investing interest. To accomplish its purpose it is necessary for this exchange to grade mortgages. This is done by rating them on the basis of a twenty-one point system of valuation, including a visual inspection of the property. Mortgages are then grouped into four classes and listed with the ask prices for the mortgages. Bid prices are also advertised for mortgages of different classes. The exchange, in order to provide continuity, guarantees to buy upon its own ac count, if necessary, any mortgage in a particular class for the bid price published. A brokerage fee is charged the purchaser and the seller, but the latter is also required to pay the necessary valuation and legal costs of classifying his mortgage. The purpose of the exchange was summar ized in its announcement: “ The Mortgage Exchange was originally organized to place the sale of mortgages upon an equal basis with the sale of stock and bonds. In the past, while a ready mar ket was found to be available for mortgages, great de lays were experienced in having prospective purchasers examine properties, and in arriving at a figure for the final consummation of the sale. Further delays were ex perienced in completing the transactions, and doing the necessary paper work to transfer the title to the mort gage sold. This method of disposing of mortgage securi ties was in sharp contrast with the quick, easy and sure method of disposing of stocks and bonds on the various exchanges listing them. The quick and ready market available to stocks and bonds in spite of the fact that prices could fluctuate is a very great attraction to the in vestor, and while mortgages had very desirable features, the delays and uncertainty of disposing of them depre ciated their attractiveness to investors in comparison to the attraction held by stocks and bonds.” This is not only a good summary of the problem repre sented by mortgage liquidity but also points out clearly the fact that only one aspect of liquidity is considered— the ability to readily dispose of an asset. The price may still fluctuate, however. Problems of price stability for mortgages Actions taken by private exchanges and the Govern ment in their attempts to increase the liquidity of mort gages through grading and the assurance of organized trading contribute in no small measure to liquidity in the sense of shiftability. Their influence on price stability, however, is extremely limited at best. The market price for fixed-return debt instruments such as mortgages is determined by the trend of interest rates, the market ap praisal of the quality of the obligation at any given time, and many other factors in the general economic situation. This necessarily implies a certain degree of price flexibil ity in a free economy. These realities cannot be avoided by the holders of mortgages. They have invested in long- 70 FEDERAL RESERVE B A N K OF SAN FRANCISCO term loans which yield a higher rate of interest than shorter-term fixed-rate securities and in so doing have necessarily sacrificed liquidity in the sense of absolute price stability. W ere it possible to remove the risk of price fluctuation from the mortgage market it would be logical to expect a decline in the interest return on mortgages to rates approaching those on very short-term Government bonds. This aspect of mortgages and the mortgage market is sometimes overlooked by those who request liquidity “ at all times and in all circumstances.” Price stability in the mortgage market might be achieved, within narrow ranges, by a central agency buy ing and selling mortgages as temporary imbalances de velop— a function analogous to the professional trader in the stock market. If a market could be organized for mortgage trading, such speculators could be expected to develop in response to the profit opportunity available. However, for very large deviations, especially if pro longed, the almost unlimited resources of a central bank of issue would be necessary. An illustration might serve to make the point. The stock market was highly organized in 1929 but it was completely unable to cope with the de cline in stock prices which took place subsequently, de spite some valiant attempts by certain wealthy individuals. The sums of money involved are so large, and the pos sible success of an individual or a group in stabilizing the market so uncertain, as to make necessary the interven tion of a body which can create the sums of money neces sary to give full liquidity. A central savings institution cannot serve this purpose adequately since more than the mobilization of available funds is necessary in a crisis. When most investors simultaneously desire to obtain cash by selling their investments, new money must be created if the price of investments is not to fall precipitously. There appear to be no positive reasons for insulating the price of mortgages from fluctuations in the economy, although this might be accomplished by the creation of a central bank of issue to deal in mortgages. No one has seriously suggested that the stock market be accorded the kind of price stability in mind for the mortgage mar ket, and the closest approach to it— the stability of Gov ernment bond prices— was a policy directly resulting from war financing and has now been rejected. In the absence of very clear reasons for this kind of favored treatment, the mortgage market can increase its liquidity only by increasing shiftability, and this will be a great step for ward ; but its liquidity arising from price stability can be M ay 1953 derived only from the more general stability imparted to the economy by more general policies affecting money, credit, investment, and the price level. Some of the problems facing a central mortgage bank in its endeavors to insure liquidity have been outlined briefly. It should also be noted, however, that the more modest present activities of the Federal Government to increase the liquidity of mortgages, which have been de scribed above, are not without problems of their own. Predominantly, the problems arise from the fact that fix ing one of the terms of the transaction (the interest rate, for example) regardless of changing economic conditions is likely to result in changes in other terms of the transac tion. For example, in recent months the fixed rate on F H A and V A loans was below market rates on compar able investments, and consequently the price of these mortgages dropped below par. Furthermore, the drop in price of the mortgage loans may in turn have resulted in some increase in the price of houses to compensate the builder for the decreased market value of the mortgage. This is only one of many illustrations of this general type of problem. Examination and coordination of the many activities of the Federal Government which affect the liquidity of mortgages is presently necessary so as to centrally mar shal those activities which would prove desirable on a national basis, if some are not to be eliminated. This reconsideration of the role of Government in the mort gage markets, both direct and indirect, should be given some impetus by the facts that the authorization granted the Federal Housing Commissioner to insure mortgage lenders expires July 1, 1955, and the ability of veterans to secure VA-guaranteed loans expires July 25, 1957. The existence of the Federal National Mortgage As sociation may be terminated by the Housing and Home Finance Administrator, acting upon his own authority or in consultation with Congress, whenever he thinks the need therefor no longer exists. A thorough study of this subject at this time is by no means premature in light of the scope and complexity of the problems in the mort gage area. Institutions created to meet needs at an earlier time require reorientation in a period of full employment and particularly in the midst of inflation. The establish ment of a series of local private exchanges, to be succeeded at some time by a national exchange, and the coordination of Federal activities to assist this development would appear to offer a promising avenue of approach. OW NERSHIP OF DEMAND DEPOSITS— TWELFTH DISTRICT or the third successive year, demand deposits of indi viduals, partnerships, and corporations increased in F the Twelfth District and in the nation, according to the Federal Reserve System’s annual survey of demand de posit ownership. In the year ending January 31, 1953, Twelfth District demand deposits rose 4 percent to a new high of $10.5 billion while the national over-all increase was estimated at 3 percent. On both the District and national levels, however, these figures show a smaller percentage rise than that of the pre vious year, and the increase is not as evenly distributed among the ownership categories listed in the survey. Several factors have been operating in the economy to cause this slowing in the rate of increase of demand de posit balances. General business activity tended to level off in 1952 after large increases in the previous two years May 1953 71 M O N T H L Y REVIEW of mobilization activity. Wholesale prices continued the downward drift that had started in 1951. Corporate prof its declined and farm net income remained about the same as in 1951, although consumer income increased. Money market stringency may have also had some effect. Cash balances may have been drawn upon to finance busi ness expansion, which continued to be high in the District and the nation. With increased interest yields, money that was previously held in demand deposits may have been shifted to time deposits or invested in other interestbearing assets. Percent Changes, January 1952-January 1953, in D emand D eposits of I ndividuals, Partnerships, and Corporations T welfth D istrict r Balances under $10,000 + 3 + 7 H5 -6 -4 b6 b6 -9 r6 Type of holder Manufacturing and mining . Retail and wholesale trade Other nonfinancial.................... Total n onfin ancial............... Financial .................................... Total domestic business . . Personal ....................................... Other1 ............................................ Total ......................................... ------ Size of account------Balances Balances $10,000over $25,000 $25,000 — 3 + 5 + 13 + 2 + 11 + 11 + 2 + 11 + 7 + 9 + 10 + 3 — 2 — 10 — 1 + 11 + 4 + 2 Total — 1 + 5 + 10 + 4 + 9 + 5 + 1 + 10 + 4 1 Nonprofit associations, foreign deposits, and trust funds of banks. Manufacturing and mining balances decline In sharp contrast with the previous year’s 14 percent increase, and with a current increase of 3 percent in the nation as a whole, the District’s manufacturing and min ing concerns show a 1 percent drop in their demand de posits. The decrease was concentrated in accounts of over $25,000. This drop cannot be said to reflect an absolute decline in mining and manufacturing activity. Although some industries did not gain during the year, manufactur ing employment in the District as a whole increased, and at a greater rate than in the nation. Business loans in the District expanded in 1952 but by a smaller percentage than nationally. Balances in other lines of business activity rise Marked increases in other sectors were a result of quick ening activity, particularly in the fields of construction and public utilities, and of the increase in consumer credit that took place following the suspension of Regulation W . Demand deposits of retail and wholesale traders showed a large dollar increase, mainly in accounts with balances under $25,000. Department store sales rose in 1952 while stocks and the stock-sales ratio declined, indicating that inventory liquidation may have contributed to the growth in trade balances. The “ other nonfinancial” sector, which includes public utilities, construction, and service indus tries, showed both the largest dollar increment and the greatest percentage rise, thus accounting for the greatest share of the total increase in deposits— approximately 32 percent. Insurance companies continued to build up their bal ances in the District at a high rate; the rate of increase was 17 percent in the year ending January 31, 1952, and 19 percent in the most recent year. By comparison, insur ance balances rose only 7 percent on the national level during the last year. This growth of insurance deposits contributed to a 9 percent rise in total District balances of financial establishments. Nationally, there was only a 3 percent increase in such balances. Total personal balances rise despite decline in farmers’ balances Demand deposits of Twelfth District farmers, which had increased 17 percent in the previous year, decreased 1 percent— a drop slightly larger than that shown on the national level. The effects on the farmers’ cash position of lower prices received for their produce in 1952 and con tinuing high costs were apparently not entirely offset by bumper crops and increases in total farm loans. “ Other personal” accounts rose 2 percent in both the District and the nation. The “ Other” sector registered a large percentage in crease. This encompassed a 48 percent rise in foreign bal ances held in the District, which are a small part of the general category, however. Demand deposit balances of bank trust funds increased 8 percent in the District while decreasing slightly in the nation, and nonprofit organiza tions increased balances in both the District and the nation. E s tim a te d D is t r ib u tio n by O w n e r s h ip o f D e m a n d D e p o s its o f I n d iv id u a ls , P a r t n e r s h ip s , a n d C o r p o r a tio n s T w e lfth D is t r ic t a n d U n ite d S ta te s, on S e le c te d D a t e s 1950-53 (in millions) —Twelfth District- ' ............... January 1952 $ 1,680 1,820 1,220 January 1953 $ 1,660 1,910 1,340 4,300 4,730 4,910 + 950 1,020 1,110 + January 1950 $1,180 1,560 1,100 January 1951 $1,480 1,700 1,120 Total nonfinancial ................... .................................... 3,840 ......................................... .................................... 850 Type of holder M anufacturing and mining . . .................................... Retail and wholesale trade . . . .................................... Other nonfinancial ...................... .................................... Financial — United States r % change Jan. 1952 to Jan .1953 — 1 + 5 + 10 - \ % change J a n .1952 to Jan .1953 + 3 + 2 + 6 January 1952 $21,300 14,800 10,500 January 1953 $21,900 15,100 11,100 4 46,600 48,100 9 8,900 9,200 57,400 + 3 7,200 + 3 +3 . . . .................................... 4,690 5,250 5,750 6,010 + ~5 55,500 Farmers .............................................. .................................... Other p e r s o n a l............................... .................................... 750 2,700 750 2,890 880 3,020 870 3,090 — + 1 2 7,200 25,800 2 6 ,2 0 0 0 +2 .................................... 3,450 3,640 3,900 3,950 + 1 33,000 33,400 + 1 440 490 540 + 10 5,500 5,700 $9,320 $10,140 $10,510 $94,000 $96,500 Total domestic business Other1 ................................................ Total .................................................................................... $8,570 1 Nonprofit associations, foreign deposits, and trust funds of banks. N o t e : Figures may not add to totals because of rounding. + 4 +4 + 3 May 1953 F E D E R A L R ESER VE B A N K OF S A N F R A N C IS C O BUSINESS INDEXES—TWELFTH DISTRICT1 (1947-49 average = 100) In d u strial p ro d u ction (p h ysical v olu m e )* Year and m o n th 1929 1931 1933 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1952 March April M ay June July August September October November December 1953 January February March Petroleum* Lum ber C ru d e 97 51 41 54 70 74 58 72 79 93 93 90 90 72 85 97 104 99 112 114 107 108 110 94 117 108 106 109 116 105 99 116 117 120 R e fin e d C e m e n t 87 57 52 62 64 71 75 67 67 69 74 85 93 97 94 100 101 99 98 106 107 78 55 50 56 61 65 64 63 63 68 71 83 93 98 91 98 100 54 36 27 33 58 56 45 56 61 81 96 79 63 65 81 96 104 103 103 100 112 116 128 124 112 106 107 108 107 107 107 107 107 107 108 117 118 114 129 126 125 131 131 142 133 126 107 108 109 115 117 123 105 131 126 115 114 114 116 116 122 122 113 120 Lead* 165 100 72 86 96 114 92 93 108 109 114 100 90 78 70 94 105 101 109 89 86 96 95 89 87 68 81 78 80 85 78 77 85 84 Copper* 105 49 17 37 64 88 58 80 94 107 123 125 112 90 71 106 101 93 115 115 112 115 117 116 W heat flour* T o ta l nonagri T o ta l C ar D ep ’ t R etail m f’g cu ltu r a l loadings store food E le c tr ic e m p lo y em p lo y ( n u m sales prices power ber)* m en t4 m ent (v a lu e )2 St It 14 90 29 29 26 30 34 38 36 40 43 49 60 76 82 78 78 90 86 75 87 81 84 81 91 87 87 88 98 101 112 108 113 98 101 95 96 108 119 136 144 88 86 90 '* 4 7 54 60 51 55 63 83 .... ‘ ÌÓÓ 101 96 95 99 102 99 103 110 114 112 112 112 100 101 106 100 98 105 119 127 100 101 111 113 114 114 114 115 116 116 109 113 116 99 92 96 141 154 142 118 118 118 131 133 134 112 112 115 116 99 105 122 104 100 102 125 126 125 126 127 129 128 130 130 130 106 105 102 164 158 142 141 147 150 150 153 145 146 141 138 30 25 18 24 28 30 28 31 33 40 49 59 65 72 91 99 104 98 105 109 114 77 81 72 77 82 95 121 87 84 90 103 99 96 97 96 88 102 68 52 66 94 97 100 108 98 102 100 94 102 121 135 131 170 164 163 132 70 80 96 103 * *89 129 190 138 110 100 100 113 115 86 85 91 186 171 116 114 118 128 119 116 117 112 114 151 112 124 80 72 109 116 119 87 95 101 68 210 110 101 E x p o r t s Im p o r ts 64 50 42 48 48 50 48 47 47 52 63 69 114 116 115 115 114 114 114 113 114 115 103 106 118 114 106 98 108 96 W a te rb o rn e foreign trade**4 185 207 187 144 153 142 145 135 148 *57 81 98 121 137 157 200r 157 143 143 182 187 293 253 319 194 232 195 187 113 BANKING AND CREDIT STATISTICS—TWELFTH DISTRICT (amounts in millions of dollars) C o n d itio n Item s o f all m e m b e r b a n k s 7 Y e ar and m o n th L oans U .S . D em an d deposits and G o v 't d i s c o u n t s s e c u r itie s ad ju sted* T o ta l tim e deposits 2,239 1,898 1,486 1,537 1,682 1,871 1,869 1,967 2,130 2,451 2,170 2,106 2,254 2,663 4,068 5,358 6,032 5,925 7,105 7,907 8,844 495 547 720 1,275 1,334 1,270 1,323 1,450 1,482 1,738 3,630 6,235 8,263 10,450 8,426 7,247 6,366 7,016 6,392 6,533 6,627 1,234 984 951 1,389 1,791 1,740 1,781 1,983 2,390 2,893 4,356 5,998 6,950 8,203 8,821 8,922 8,655 8,536 9,244 9,940 10,504 2,267 2,360 2,425 2,609 3,226 4,144 5,211 5,797 6,006 6,087 6,255 6,256 6,720 7,522 1952 April M ay June July August September October November December 7,850 7,921 8,062 8,114 8,270 8,444 8,605 8,805 8,844 6,313 6,238 6,258 6,507 6,469 6,473 6,765 6,808 6,627 9,408 9,306 9,501 9,643 9,679 9,908 10,125 10,281 10,504 6,924 6,985 7,083 7,143 7,197 7,249 7,336 7,331 7,498 1953 January February M arch April 8,816 8,838 8,983 9,054 6,633 6,474 6,299 6,173 10,390 9,911 9,937 7,490 7,551 7,560 7,597 1929 1931 1933 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 10,011 B an k rates on short-term bu sin ess loans* M e m b e r ban k reserves and related Ite m s 1* Reserve C oin and bank C o m m ercia l T reasu ry cu rren cy in cre d it11 ' op e ra tio n s12 o p era tio n s12 c ir c u la tio n 11 — 1,790 1,727 1,609 2,064 + 2,101 2,187 2,221 3.20 3.35 3.66 3.95 3.95 3.96 3.95 21 + + 4.01 21 2 2 6 1 3 2 2 + + — — + + 4 + 107 + + 214 98 + — 76 9 + — 302 17 + 13 + 39 + — 7 + + + — + + — + + — — + 0 34 176 52 211 45 213 230 236 72 299 138 83 220 16 154 110 163 227 90 240 192 148 596 -1 ,9 8 0 -3 ,7 5 1 - 3 ,5 3 4 - 3 ,7 4 3 - 1 ,6 0 7 510 + 472 930 - 1 ,1 4 1 - 1 ,5 8 2 -1 ,9 1 2 + + + + + + + + + 4-1 23 154 150 219 454 157 276 245 420 ,000 +2 ,826 + 4 ,486 + 4 ,483 + 4 ,682 ,329 + 698 — 482 + 378 ,198 4-1 ,983 ,265 +1 +1 +2 - 237 174 97 208 126 153 294 29 240 + + + + + + + + + - 263 119 147 278 + — 4+ 102 185 190 288 163 213 267 79 422 136 13 240 240 _ + + + + + + + + + + + 6 48 18 14 38 3 20 31 96 227 643 708 789 545 326 — 206 — 209 — 65 — 14 189 + 132 + + + + + + + + + _ + + B ank d ebits Index 31 cities*’ » (1 9 4 7 -4 9 Reserves 175 147 185 287 479 549 565 584 754 930 1,232 1,462 1,706 2,033 2,094 2,202 2,420 1,924 2,026 2,269 2,514 100)2 42 28 18 25 30 32 29 30 32 39 48 61 69 76 87 95 103 102 115 132 140 13 49 29 7 49 4 32 34 2,341 2,347 2,209 2,333 2,535 2,363 2,527 2,616 2,514 135 128 144 134 134 144 146 141 157 77 2,565 2,491 2,394 2,378 146 148 161 152 12 22 18 11 1 Adjusted for seasonal variation, except where indicated. Except for department store statistics, all indexes are based upon data from outside sources, as follows: lumber, various lumber trade associations; petroleum, cement, copper, and lead, U .S. Bureau of Mines; wheat flour, U .S. Bureau of the Census; electric power, Federal Power Commission: nonagricmtural and manufacturing employment, U .S. Bureau of Labor Statistics and cooperating state agencies; retail food prices, U.S. Bureau of Labor Statistics; carloadings, various railroads and railroad associations; and foreign trade, U .S. Bureau of the Census. * D aily average. * N ot adjusted for seasonal variation. 4 Excludes fish, fruit, and vegetable canning. 1 Los Angeles, San Francisco, and Seattle indexes combined. • Commercial cargo only, in physical volume, for Los Angeles, San Francisco, San Diego, Oregon, and Washington customs districts; starting with July 195Q, “ special category” exports are excluded because of security reasons. 1 Annual figures are as of end of year, monthly figures as of last Wednesday in month or, where applicable, as of call report date. * Demand deposits, excluding interbank and U .S. G ov’t deposits, less cash items in process of collection. Monthly data partly estimated. * Average rates on loans made in five major cities during the first 15 days of the month. 10 End of year and end of month figures. 11 Changes from end of previous month or year. 11 Minus sign indicates flow of funds out of the District in the case of commercial operations, and excess of receipts over disbursements in the case of Treasury operations. 11 Debits to total deposit accounts, excluding inter-bank deposits. 14 Retail food prices reflect January 1953 Consumer Price Index revisions. r— revised.
@FedFRASER