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FEDERAL RESERVE BANK OF SAN FRANCISCO MONTHLY REVIEW Credit—and Credit Cards Time-Deposits Trends Brushfire: Korea vs. Vietnam SEPTEMBER 1967 Credit— and Credit Cards . . . Bank credit cards account for only one-sixth of the credit-card business, but their future looks promising, especially in the W est. Time-Deposit Trends . . . Savings finally turned upward in early 1967, while other deposit categories showed mixed results, Brushfire: Korea vs. Vietnam . . . Although Vietnam's impact on the Western economy has been less than Korea's, the similarities are still striking. Editor: William Burke September 1967 MONTHLY REVIEW Credit— and Credit Cards 1B| HE bank credit card has now spread across the country, bringing both op portunities and problems to the banking system. As late as two years ago, bank credit-card plans were relatively unimpor tant except in California; almost everywhere else, they were limited to local merchants and operated by small to medium-sized banks. But last year m arked a major turn ing point for these plans. In early 1966, some of the nation’s largest banks, undoubtedly impressed by the profit ability of existing credit-card plans, decided to enter this field, and the largest operator (Bank of Am erica) announced the creation of the first nationwide system through a na T tional licensing scheme. In response to these developments, still more banks decided to issue credit cards. By the end of 1966 new plans were either operating or in the plan ning stage in the Pacific Northwest, the Chi cago area, and many areas of the East; the credit card was now the latest in thing. Although the bank credit card has basked in the spotlight for several years now, rela tively few reliable statistics were available on the subject until quite recently. Even now, the available statistics combine bank credit cards with other plans which, though often regarded as substitutes, are not exactly the same as credit cards. The other types are check-credit plans and nonbank credit-card FEDERAL RESERVE BANK plans— which include the so-called travel and entertainment (T&E) cards such as Ameri can Express, Diners Club and Carte Blanche. Type I: check credit Check-credit is a method whereby a bank automatically makes consumer loans on a pre-arranged revolving credit. The customer applies for a line of credit and, if the applica tion is accepted, an account is opened on borrowed funds against which the borrower writes checks. In some plans, checks with distinctive designs are provided to identify check-credit accounts, while in other cases, ordinary checks with no special identification beyond the account number are employed. Overdraft plans are similar in that the existing account of a customer is assigned an additional line of credit by the bank to cover overdrafts. The overdrafts may be ac cidental or deliberate; in the latter case the line of credit plays the same role as a checkcredit account. For both the check-credit and the over draft plan, the check remains the instrument for making purchases, and so the adoption of either variation involves minimum changes in existing banking procedures. Both types District holds one-third of credit outstanding in all bank-credit plans Percent No of 6ankt (627) Total Credit (809 Million Dollars) OF SAN FRANCISCO of plan compete with credit cards because of their provision of revolving credit, but they avoid the heavy administrative costs and the credit-control problems of a creditcard plan. Furtherm ore, customer-pleasing features such as check-guarantees can easily be added through the use of identification cards or special checks designed like trav ellers checks. Nevertheless, in comparison to the bank credit card, these plans do not produce significantly large increases in credit volume. The reason, as will be seen, lies in the special characteristics of the credit card. Type II: T&E card Intermediate between the check-credit plan and the bank credit-card plan is another revolving-credit plan, the T&E card. Because of some obvious similarities, the bank credit card and the T&E card are frequently lumped together, but they appeal to different m ar kets, and banks play different roles under each plan. With the bank credit card, banks run the entire operation, extending credit from the day a merchant deposits a sales draft to the time the cardholder pays his bill. With the T&E card, a bank becomes involved only if the cardholder, after signing the appropriate bank agreement, decides to let his bill go on a revolving-credit basis or to use his card to borrow from the bank. The principal advantage of the T&E card is that it allows the bank a credit-card serv ice to its customers with a minimum of direct expense; the bank only has to set up an or ganization to administer revolving credit. But at the same time, the bank will not obtain as large a volume of operations from this plan as it would from its own plan. First of all, T&E cardholders generally have su perior credit ratings and therefore are less likely to resort to revolving-credit to pay their bills — and when they do so, they tend to be in debt for only short periods of time. T&E cards thus are basically a conveni- September 1967 MONTHLY REVIEW Everything Card “Dear Customer: We’re sending you Everything, and it costs you nothing.” So read the blurb which a major New York bank used in a recent mailing of a million “Everything Cards” to a half million of its select customers. Some 21,000 retail establishments in the New York metropolitan area, mostly clothing and other soft-goods stores, are enrolled under the plan. . . . The first day’s response to the new plan literally blew a fuse at the bank’s specially installed switchboard, despite the use of 77 special phone lines for clearing credit purchases above floor limit and for handling “instant” loans at bank branches. ence service for people who want to avoid carrying cash but who do not need credit on a regulary scheduled basis. Furthermore, T&E cardholders need not even sign up with a bank to obtain revolving credit, since they can repay major transportation expenses on a time-payment basis with the card company. This is the only exception to the require ment that accounts are due when billed, but it is an important one, since these big-ticket items are the ones most likely to be deferred and most likely to have otherwise required bank financing. Type 111: bank credit card The prime advantage of the bank credit card is its simplicity: banks can even use it to attract loan demand without first establish ing a regular banking relationship in the traditional sense with the customer. Card holders do not have to be depositors of the bank which issues the card. Thus, in effect, the card-issuing bank is able to make con sumer-type loans to other banks’ customers as well as its own. One alternative, check-credit, is at a dis advantage because most people, when plan ning on m ajor purchases, will obtain re volving credit through a retail store rather than through a bank. In contrast, the bank credit card fits easily into habits already es tablished by department-store and oil-company cards. In the public’s mind, this is just another plastic credit card, but one with a greater acceptance at a number of different businesses. And in further contrast to checkcredit and overdraft plans, there is no need to minimize the number of transactions in order to avoid service charges on the check ing account. Another alternative, the T&E card, also has important shortcomings. The excellent credit rating of T&E cardholders means that they are least likely to resort to revolving credit, the stage where the bank finally makes a loan under this plan. In contrast, bank credit cards rely upon a mass market— they are designed for local expenditures on a wide range of items and are issued to people with average incomes. Of course there is some overlapping of markets, in regard to both the cardholders who use these cards and the purchases they make. Yet the fact remains that the bank relies upon a high volume of revolving credit for its credit-card revenues. There is no membership fee for the cardholder and mer chant discounts tend to be low. Therefore, the interest from revolving credit must be the main source of income, and the bank’s goal must be to stimulate the regular use of cards by a large number of people for a wide range of purchases. A high volume of card transactions is required to support the credit balances needed to produce suffi cient interest income. 173 FEDERAL 174 RESERVE BANK A fully-operational credit-card organiza tion has other advantages too. As it is geared to handle a mass of small transactions with a minimum of decision-making, this organ ization can easily take over from the bankoffice level those functions whose processing costs are high relative to their return. A prime example would be small personal loans; in some banks, all personal loans below a cer tain size are processed as credit-card cash advances, and overdraft facilities for depos itors can be treated in a similar fashion. There are also the benefits arising from the usual requirement that merchants accepting cards open an account with the bank oper ating the plan. In practice this requirement is a further source of new customers; since many merchants dislike having several ac counts, non-card banks tend to lose accounts to the card-issuing bank. The major disadvantages of a full creditcard plan are simply the reverse of its ad vantages. Mass issuance of cards and high volume of transactions create both heavy start-up costs and high credit risks. The lat ter can be a particularly difficult problem, since the mass distribution of cards, which is at the heart of the plan’s ultimate profit ability, prevents application of unduly re strictive credit standards. Lack of a regular banking relationship with all cardholders also increases risk. The pressures to recover initial expenses and to reach a profitable level of operations too quickly may force a bank to be overly generous in its initial issue of cards and may thereby expose it to even higher credit losses. The first few years are the key ones: this high-cost period determines whether a bank abandons its credit-card plan, as some major banks have done in the past, or whether it finally achieves a profitable position. In a well-run plan, the profits can be substantial — but so too are the costs of reaching that position. OF SAN FRANCISCO The statistics Statistics on the credit-card phenomenon are rather scanty, but some data are available from the April 27 Call R eport of the three Federal bank-regulatory agencies. As of that date, $809 million in credit was outstanding at the 627 banks which offered some kind of plan. Unfortunately, no exact breakdown is pos sible between bank credit-card plans and T&E cards and check-credit plans, although it is estimated that about 60 percent of the total is in bank credit-card systems and the remainder in other plans. M oreover, there are probably more than 627 banks involved with credit cards, since in many areas (Illi nois, for example) correspondent banks offer cards and service merchants but do not carry any credit balances. In the Call Report, also, some banks probably over-stated their lend ing, while others did not report at all, be cause of some confusion as to what kind of loans should be classified as credit-card and check-credit loans. Despite these quali fications, however, the returns do permit some useful generalizations to be made on the subject. At the moment, credit cards and check credit appear to be a big bank’s game. Of the 40 largest banks — those with deposits of $1 billion or more -— all but five offer some kind of credit-card or check-credit plan, and in the $500 m illion-$l billion deposit-size category, over two-thirds of the banks have a plan. Thereafter, percentage participation falls off rapidly with size. For banks with less than $5 million in deposits, fewer than .5 percent offer a credit plan. Yet 48 percent of the banks with credit out standing under these plans had less than $50 million in deposits. Credit cards and other credit plans are concentrated in a few geographic areas, prin cipally the Pacific Coast, the Midwest and the North East. The Twelfth District leads, MONTHLY September 1967 having twice the credit outstanding of any other district — or about one-third of the national total — and it is followed by the Chicago and the New York Federal Reserve Districts. On a state basis, the leaders are California, New York, Pennsylvania, Illinois and Massachusetts, in that order. In terms of numbers, the Chicago District is first be cause of the local predominance of unit banks. In the field of bank credit cards alone, the San Francisco District’s role is even more striking — bank credit cards account for perhaps 80 percent of the District’s creditplan outstandings, as against roughly 50 per cent elsewhere. Indeed, with the single ex ception of Alaska, the credit card is a regular feature of the District banking scene. California leads the way in bank credit cards, followed by Illinois (C hicago), Penn sylvania (Philadelphia and Pittsburgh), and New York. As of the April Call Report, New York City did not have any major bank credit card in operation; that area’s large total in outstanding credit was due largely to T&E cards and check-credit. However, one major New York City bank has since started a credit-card operation, and still others might follow. REVIEW Effects on banking practice The key to a successful credit card pro gram lies in the control of credit— for exam ple, supervising the distribution of cards with their associated lines of credit, and super vising their subsequent use to prevent ex cessive indebtedness and, most important, fraud. Generally the task of credit control is greatest during the first years, but it then becomes more manageable as the bad cards are gradually eliminated. Credit supervision is ultimately a technical problem but by no means a minor one. Another aspect of credit control concerns the policy of each bank regarding the amount of credit it commits relative to its total re sources. The total commitment can be sub stantial, since cash advances are a regular feature of most plans. Additionally, since these lines are unsecured and automatic, the bank may expose itself to unpredictable surges in credit demand which it must meet by adjusting its asset protfolio. The bank cannot reduce credit lines that have been widely advertised without destroying much of its earlier selling efforts aimed at creating a credit-card habit. The mass distribution of cards makes it administratively difficult to cut back on credit lines; thus the success BANK CREDIT CARDS AND CHECK-CREDIT Total Cred it O utsta n d in g as of A p ril 25, 1967 (Am ounts in m illions of dollars) N ational banks Federal Reserve D istrict 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Boston New York Philadelphia Cleveland R ichm on d Atlanta C h icag o St. Louis M in n ea p olis K an sas City D allas Sa n Francisco Total No. of banks Total credit No. of banks Total credit 28 34 23 27 16 51 78 22 15 29 19 30 44 61 20 54 18 40 95 10 4 10 3 248 11 25 7 1 5 7 12 6 1 6 3 6 13 46 40 * 372 607 90 *Less than $50,000. Source: Federal Reserve Board of Governors. State m em ber banks State non-m em ber banks No. of banks Total credit Alf banks No. of banks Total credit 59 116 66 55 31 48 122 13 4 12 10 272 809 1 2 13 8 11 9 8 7 23 48 17 6 5 11 12 5 11 47 70 39 36 28 81 138 45 22 40 33 48 150 165 52 627 12 3 18 2 * 2 9 6 1 2 5 9 2 * * 175 FEDERAL RESERVE BANK OF SAN FRANCISCO capable of handling transactions more quick ly and cheaply. The techniques which can process sales-drafts can also do the same thing for checks. Thus the credit card— al though it may be an indirect step toward a more sophisticated payments transfer me chanism— in the meantime tends to increase the banks’ burdens. W est dominates large-bank activity in credit-plan accounts Effects on banking structure 1000 of a credit-card plan may require a bank to make fundamental policy changes in its credit priorities. There is also the administrative problem of handling the mass of paper created by the credit card. It may well be that the credit card reduces reliance on checks and thereby reduces the burden of handling checks. In deed, the credit card is quite likely to reduce the number of checks written, since one check per month can pay for a num ber of transactions that normally require payment by separate checks. But one problem is now replaced by another; the bank now must process an even larger volume of paper, in cluding both the sales drafts that would nor mally be paid by check and those that replace former cash purchases. 176 The immediate effect of the credit card is an increase in internal clearing problems. Ultimately, some have argued, it is a step toward the “checkless society.” This is true only in the sense that the system puts pres sure on the banks to develop a technology As the statistics indicate, the credit card is typically a service, offered by medium-or large-size banks. The high start-up costs put a premium on financial strength, and the re cent trend to regional and national coverage points even more to the advantages of size. Consequently, there is concern that the credit card will weaken the competitive position of the smaller banks. But this pessimism may be unwarranted, since the major banks are now adapting their plans to allow varying degrees of participa tion by smaller banks. A prime example is the California Bankcard Association, where by 73 banks of varying sizes have formed a joint program. Under this program , a cen tral organization owned by the banks and set up as a non-profit organization takes care of certain tasks created by the use of a com mon card. The individual banks can share fully in all plans of the credit-card program, regardless of size. In fact, approximately one-third of the membership consists of banks with deposits of $10 million or less. In an alternative development, the Bank of America under its licensing program has permitted correspondent banks of its li censees to issue BankAmericards under their own name or some common name, and to extend credit if they wish. This arrangement is being used in Colorado and Ohio. A nother variation is the agency-bank arrangement, whereby a bank avoids the risk of a full credit-card operation by participating on a limited basis, accepting sales-drafts deposited September 1967 MONTHLY by merchants and processing card applica tions of its customers. The agency arrange ment, besides being widespread on the Pa cific coast, is dominant in the Chicago area, where unit banking makes it essential to achieve adequate coverage. These new variants of the normal pattern of “o n e -b an k -o n e-card ” help encourage smaller banks who are trying to enter the credit-card field. As there is no inherent bar rier to the entry of smaller banks, it is still too early to tell whether the credit card will ultimately shift the competitive advantage more towards larger banks. Quite apart from inter-bank competition, the bank credit card may also affect the po sition of banks relative to other financial institutions. Bank credit cards are already involved in business accounts-receivable fi nancing and in some consumer-credit activi ties previously financed by non-bank institu tions. However, banks are limited in their ability to take over larger-sized contracts by their relatively low credit limits (often only $300) and by credit requirements which are stricter than those of many consumer-finance companies. Nonetheless, the basic adminis trative machinery of a credit-card plan can, in principle, be adapted to larger credit con tracts, and thereby can support the expan sion of the banks’ competitive position in the lending field. But this relative improvement should not be exaggerated. Bank credit cards now ac count for about one-sixth of all credit ex tended by credit cards, but this still leaves five-sixths in other hands. Moreover, they amount to less than 1 percent of all non-auto REVIEW consumer credit ($62 billion outstanding in A pril). Therefore, bank credit cards have far to go before they can become a dominant factor in consumer credit, let alone in bank lending. Future Effects? Bank credit cards, to conclude, have at tracted well-deserved attention since they are an important innovation in banking serv ices. For the individual bank, the credit card presents a difficult management choice of whether or not to enter this field. If the bank does decide to enter, then there are critical operational problems created by the issuance and control of cards. And while these prob lems can be costly and difficult to resolve, the trend is toward greater bank participation in this or similar credit programs. After all, cards can be very profitable, and besides they may be necessary as a defensive reaction to a competitor’s program. In the overall banking system, credit cards currently absorb only a small part of total bank resources, and they are not yet an es sential banking service. Partly for this reason, the most im portant policy tasks of the regu latory agencies at this time are likely to be in supervision — to insure that there are proper credit standards — and in market structure — to preserve the ability of small banks to compete in this area — rather than in the area of monetary control. All in all, the bank credit card may create difficulties for individual banks, but its recent growth testifies to its ability to provide a useful and popular banking service. Robert Johnston Publication Staff: R. Mansfield, Chartist; Phoebe Fisher, 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 177 FEDERAL RESERVE BANK OF SAN FRANCISCO Time-Deposits Trends IM E and savings deposits rose sharply as monetary policy eased during early 1967, but growth was more striking in other areas of the country than in the Twelfth District. The strengthening of deposit flows shows up clearly in a detailed Federal R e serve survey of member-bank deposits con ducted in late April. M ore recent (but incomplete) data indicate a continued ex pansion of deposits — and if anything, an acceleration in some deposit categories. T San Francisco District still boasted the larg est volume of passbook-savings activity. Passbook savings Savings deposits increased throughout the country between late-January and late-April ’67, in sharp contrast to the 1966 experi ence. In this District, passbook savings rose at close to a 1-percent annual rate, to $15.4 billion, whereas elsewhere they increased at a 5-percent annual rate. The slower regional rate of growth, following a greater-than-national decline last year, caused a slight re duction in the District’s share of such de posits — from 23 percent in late 1965 to 2\V2 percent this past spring. Even so, the The inflow of funds into savings this year, like the substantial outflow during 1966, reflected the sophisticated response of savers to interest-rate considerations. During 1966, the 4-percent ceiling rate lagged behind other deposit rates and behind m arket rates (such as the Treasury-bill rate ), and funds con sequently flowed out of such deposits. D ur ing the early part of this year, on the other hand, as the easier tone in the m arket brought the bill rate below 4 percent, savers again began to see the attractions of the traditional passbook form of savings. The District share declined despite the fact that District banks tended to pay the 4-percent ceiling rate on practically all (99 percent) of their savings deposits, not only during the late-April survey but also at the time of each preceding survey. In contrast, banks elsewhere paid below the maximum 4-percent rate on 13 percent of their deposits this past January and April. Inflow into passbook savings improves after 1966 decline . . . weakness largely due to higher returns available on other instruments Percentage Held, by Maximum Rate Paid Billio n s of Dollars Annual Change (P e rc e n t) 100 80 60 - 4 .0 0 % 40 20 Less Thon .1 J_ R ate Spread (P e rc e n t) MONTHLY September 1967 REVIEW High rates stimulate sharp expansion of consumer-type deposits . . . W e s t offers highest rates, so W e s t outpaces nation until recently Billions of Dollars Perce n ta g e H eld, by Mo«imum R ate Paid 15.0 100 1 0 .0 Annual Change ( Percent) Rate Spread (Percent) - May Jon. Apr. 1966 1967 1967 S.F. SF Olher Olh«f Dec. 1965 May 1966 Consumer-type time Consumer-type time deposits continued to expand rapidly in all Districts during the most recent survey period, although the growth was not quite so explosive as it was during 1966. These deposit instruments, all under $100,000, include savings certificates, savings bonds, and other negotiable and nonnegotiable instruments, as well as time de posits on open account. The San Francisco District posted a 22percent annual rate of gain in such deposits during January-April 1967 — only half the rate of gain reported elsewhere. But in ear lier survey periods, covering roughly the first and second halves of 1966, consumertype deposits in this District increased at annual rates of 218 and 72 percent, respec tively — far greater gains than those reported elsewhere. With deposits of $4.0 billion on the books this past April, the District’s share of the total thus was 14Vi percent as against only 6 percent in December 1965. The rapid growth of consumer-type de posits reflects the higher return available S.F. S.F. Other Other 1995 Jon.1967 Apr. 1967 from them than from passbook savings. After rate ceilings were first raised above AV2 per cent in December 1965, District member banks on successive survey dates paid maxi mum rates of over 4 Vi percent on 93 per cent of their deposits. (In fact, prior to the Federal Reserve rollback of rate ceilings last summer, they paid over 5 percent on 60 percent of their deposits.) Yet, all this time the ceiling rate on passbook savings remained at 4 percent. In the rest of the nation, member banks have consistently paid a lower maximum rate on consumer-type deposits than have their Western counterparts. This April, for example, they paid over AV2 percent on 74 percent of such deposits. Yet in the latest survey period, with consumer-type deposits as with passbook savings, they increased their deposits faster than District banks de spite a lower structure of deposit rates. But the Western banks’ performance was affected of course by the higher rates offered by the highly competitive savings-and-loan associa tions in this region. ! 79 FEDERAL RESERVE BANK Business-type time Business-type time deposits, especially the large-denomination time certificates of over $100,000 denomination, posted mixed re sults during each of the survey periods. New York, which accounts for about two-fifths of such deposits, experienced large declines in late 1966 and early 1967, but other Dis tricts— especially San Francisco and Chicago — meanwhile posted substantial gains. (This summer, however, m ajor New Y ork banks recorded a very large increase.) San Fran cisco, with $3.1 billion on the books this past April, at that time accounted for 18 percent of business-type deposits. This District overshadowed the national performance during each survey period, de spite a gradual slowdown in its rate of growth. In two survey periods last year, it posted 49-percent and 29-percent annual gains, respectively— far in excess of the na tional growth— and in January-April 1967, it posted a 9-percent annual gain at a time when the New Y ork decline was causing a net decline nationally. The slower District growth this year re OF SAN FRANCISCO flected a reduction in rates offered on large CD’s. Maximum rates of over 5 percent were paid on 99 percent of such deposits on the January survey date, but on only 12 percent of such deposits in late April. (In April, maximum rates of AVi percent or less were offered on three-fourths of the total.) The same downward shift in rates was evident elsewhere; maximum rates of over 5 percent were paid on 67 percent of C D ’s in January, but on only 15 percent of such deposits in April. The spread between the ceiling rate on CD ’s and the Treasury-bill rate widened to 165 basis points in April, but the reduction in effective CD rates and the continued com petition for funds affected the inflow into business-type deposits. The San Francisco District, as mentioned above, reported a slowdown in its inflow early this year. Most notably, New York suffered a 27-percent annual rate of decline in the January-A pril period— a decline more than twice as great as the one it recorded during the 1966 tightmoney period— before staging a sharp turn around this past summer. William Burke Western banks a ttra ct increasingly large share of business-type deposits . . . slower growth in early '67 reflects rate reductions on large C D 's Billio n s of Dollars Percentage Held, by Minimum Rate Paid 10.0 100 1-1 - Rolio S c a le S-F. 180 S.F. Other Other Dec. 1965 May 1966 Annual Change (Percent) S.F. Other Apr.1967 Dec. |965 Rate Spread (Percent) September 1967 MONTHLY REVIEW Brushfire: Korea vs. Vietnam H E nation is now involved in its second limited war of the last 15 years. In each case, military requirements reached be yond existing inventories of military person nel, materiel and equipment to utilize some of the nation’s general resources, including those that had to be bid away from civilian use. Military actions became significant, in 1950 and again in 1965, when the national economy was already at a high level of ac tivity. Some slack was available both times — more so at the time of Korea than Viet nam— but manpower and machinery were fairly well utilized before either of these military actions got underway. World W ar II, in sharp contrast, began when the nation was operating well below its potential. In mid-1950, when full-scale invasion of South Korea brought an end to an uneasy peace, 87 percent of the nation’s m anufactur ing capacity and all but 5.4 percent of its labor force were already being utilized. In m id-1965, when escalation of the Vietnam conflict took place after several years of limited American involvement, 89 percent of the nation’s manufacturing capacity and all but 4.6 percent of its labor force were at work. T Towards full utilization During that earlier brushfire war, military expenditures of the Departm ent of Defense rose from $12 billion in fiscal 1950 to $44 billion in fiscal 1953. During the present conflict, DOD spending has risen from $46 billion in fiscal 1965 to perhaps $76 billion in fiscal 1968. (Thus, outlays attributable to Vietnam have jumped almost $30 billion over the last several years.) Although the dollar increases are com parable, the overall burden was larger in the Korean conflict of 1950-53. Military ex penditures then increased from 5 to 12 per cent of the nation’s output of goods and services, whereas spending now has risen from 7 to 10 percent of GNP. Also, in the first two years of armed strife, the armed services expanded from 1.5 to 3.6 million men in the Korean war and from 2.7 to 3.4 million in the Vietnam war. Besides, it must be remembered that in the interval between the two conflicts the civilian labor force in creased about one-fourth and manufacturing capacity practically doubled. Because of the larger buildup during the Korean conflict, the movement of civilians into the military services was greater then than now. Moreover, the military at that time relied more heavily on those who were likely to be in the work force, such as re servists and National Guardmen, whereas the military today depends on the conscrip tion not only of workers but of many who are outside the labor force. Consequently, the unemployment rate dropped more steeply during the Korean conflict, from 5.4 to 2.5 percent, as against a downtrend of 4.6 to 3.9 percent during the present war. Korea: three stages A detailed examination of the Korean-war period reveals a sharp expansion of employ ment paralleling the expansion of military demand. Rising civilian demand of course played an important role in GNP and em ployment growth, but a sizable share of the increased labor requirement was attributable directly or indirectly to the war effort. Nonfarm employment rose substantially between June 1950 and June 1953. National employment increased at a 4-percent annual rate during this period and Western employ ment increased at a 6Vi-percent rate, with strong gains being reported by almost every industry. Aircraft plants, especially in the FEDERAL RESERVE BANK Korean period displayed faster rise in jobs, faster decline in jobless Milli ons of W orker 60 Ratio Scale Vietnam \ _ OTHER U.S. 40 ..................... .. Korea 30 20 10 Vietnam WEST Korea / Unemployment Rote (Percent) 6 (Korea) Ot her 1950 1965 182 1952 1967 West, added workers at a much faster rate than did other installations. Employment gains were notable throughout Twelfth Dis trict states, but (Southern) California, Ida ho, and Nevada expanded far more rapidly than others. This expansion largely reflected the West’s increasing share of DOD contract awards, from 16 percent in fiscal 1951 to 22 percent in fiscal 1953. The first stage of the conflict, between June 1950 and April 1951, was marked by sharp employment gains— especially in the West, which grew 50 percent faster than the rest of the nation. This rapid expansion was made possible by the greater slack then avail able in the Western economy; in June 1950 the jobless rate in the District was 7.6 per cent, as against 5.4 percent nationally. M ore over, the expansion was made possible by accelerated migration into this region; Cali fornia, for example, had 73 percent more inmigrants in fiscal 1951 than in the pre ceding year. OF SAN FRANCISCO The second stage, between April 1951 and April 1952, was marked by a slowdown in Western growth and by the stabilization of employment elsewhere. Nationally, activity declined in the auto, textile, and furniture in dustries, but these industries were relatively unim portant in the West’s industrial struc ture. In this region, meanwhile, employment in aircraft plants continue to increase sharply, but activity declined in the construction and lumber industries, in part because of Federal Reserve restrictions on mortgage lending. In the third stage of the conflict, between April 1952 and June 1953, national business activity became stronger and at the same time more diverse, being concentrated in other industries than aircraft. Regional busi ness activity also accelerated, but most of the growth occurred in California, since a con tinued slowdown in construction and lumber hampered the further expansion of the Northwest economy. Vietnam: two years In the Vietnam conflict, nonfarm employ ment rose substantially between June 1965 and June 1967, increasing at a 4.1-percent annual rate in the nation and at a 4.3-percent rate in the West. The West’s slightly faster rate of growth was made possible, just as before, by the greater slack already existing in the regional economy; the jobless rate in June 1965 was 5.5 percent in the West as against 4.5 percent elsewhere. The faster Western pace was also made possible by con tinued in-migration, although the migration rate in the last several years was lower than it was during either the Korean conflict or the early 1960’s. The growth of employment, during the present conflict as during Korea, has depend ed heavily on the aircraft sector. Growth has been most notable in the Seattle area; here an aerospace expansion, based on the commercial-aircraft boom as well as on Vietnam September 1967 MONTHLY REVIEW demands, has stimulated the expansion of many other industries. (Construction, for example, has been strong in Seattle but very weak in other Western areas.) West, unlike nation, grew faster during Korean-war period Perhaps the most notable aspect of the recent period, however, has been the failure of the West to outstrip other areas as it did during the Korean period. In the present conflict, the W est’s share of DOD contract awards has actually declined, from 27 per cent of the total in early 1965 to 20 percent in late 1966. Moreover, expansion has been hindered by production problems in plants producing commercial aircraft. In those in stallations, the delivery of engines and com ponents has failed to keep up with orders, causing some retrenchment in hiring activity. This pause, coming at the same time as the recent weakening in business investment spending, has contributed to the first-half ’67 sluggishness in the District’s economy. I— i---------- ---------- r Annuol Change (Percent) -5 0 5 1I0 40 ir 45 50 - r- 55 1 TOTAL Aerospace Other Mtg r - ■Vietnam Government Vietnam Construction WEST OTHER U.S. £ Trade Service W h y the periods differ The West’s faster rate of growth during the Korean period was sparked by a greater gain in aircraft manufacturing. Of course that growth started from a very low level of activ ity, whereas the recent growth occurred when the aircraft industry was already booming because of commercial-jet orders. The re gional aerospace industry has lagged slightly behind its national counterpart’s 13-percent growth rate over the past several years, whereas it exceeded the national growth rate with a 55-percent annual gain during the Korean period. not possessed the same large reservoir of idle facilities as heretofore. Consequently, the rise in regional aerospace employment, although noteworthy, has failed to match the phe nomenal growth of the earlier period. In construction, activity was stimulated during the Korean period— at least during the initial stages of that period— by the re gion’s need for housing and manufacturing facilities to handle the inflow of defense work and defense workers. In the last several years, on the other hand, the defense expansion came at a time when housing was overbuilt. Besides, with a reduced rate of in-migration, new demand for housing decreased except in such areas as Seattle, and with a reduced availability of money, mortgage funds all but disappeared. The regional defense-manufacturing indus try received a rising share of an increased volume of DOD contracts during the Korean period. Besides, it was able to take advantage of this increased inflow because of its reser voir of idle workers and manufacturing facil ities. More recently, however, the industry has received a declining share of a rising volume of DOD contracts— and besides, has In sum, business activity in the West has responded more slowly to Vietnam-war de mands than it did a decade-and-a-half ago to Korean requirements. Thus, despite the many striking similarities between the two periods, the growth pattern has been some what more modest to date in the present episode. Donald Snodgrass FEDERAL RESERVE BANK OF SAN FRANCISCO Western Digest Changes in Bank C red it Commercial-bank credit declined seasonally by nearly $250 million at large District banks during August, with the reduction divided about equally between loans and investments. Most of the loan decrease was due to sizable repayments by petroleum refiners, retail firms, and saies-finance companies. The bulk of the reduc tion in investment portfolios was in Treasury bills. O verproduction of Petroleum ? The flow of crude petroleum to District refineries has surpassed processing activity in recent weeks, and inventories of crude have consequently increased. Im ports of foreign crude have outstripped year-ago levels, and increased supplies have also been received from Alaska and from domestic sources outside the District. . . . O n the national scene, fears of overproduction have now replaced the earlier fears of shortage inspired by the Mideast crisis. After an initial upsurge in production, the Louisiana petroleum regulatory agency cut back production and the Texas authorities announced plans to follow suit. Soon thereafter, the Arab countries announced that they would resume oil shipments to this country as well as to Britain and West Germany. Farm Labor Developments Although California’s harvest season was nearing its peak, employment of tem porary domestic workers declined 19 percent (30,000) below the year-ago figure during August. But because of the greater-than-usual bunching of harvests in early September, the California Farm Labor Service filed a request to im port 9,625 Mex ican nationals for harvest work, and the U. S. Labor Departm ent eventually permit ted the importation of 8,100 workers. Last year, 7,800 contract foreign workers were employed during the peak harvest period. Prolonged C op p er Strike Despite heavy production losses caused by the two-month-old shutdown of copper mines and refineries, the strike has had only a minor effect to date on the dealer and exchange markets. The spot quotation for the metal on the London Metal Exchange has risen only 3 cents a pound— from 45 to 48 cents a pound— since midJuly. This easiness reflects the fact that fabricators’ stocks are still considered sufficient to meet defense and civilian demand. However, Administration leaders met with the m ajor copper firms and union negotiators in early September in an effort to settle the strike before it endangers the defense program and the regional economy.
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