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FEDERAL RESERVE BANK
OF ST. LOUIS
APRIL1972
Outlook for Farm Income and Food Prices... 16
V o l. 5 4 , No. 4
FEDERAL RESERVE
BA N K OF ST. LO U IS
A P R IL
1972
RECENT REVIEW ARTICLES
1971
Month
o f Issue
1972
Title
Month
o f Issue
Title
Sept.
A Monetarist View of Demand Management:
The United States Experience
High Employment Without Inflation: On the
Attainment of Admirable Goals
Jan.
G o v ern m en t D eb t, M o n ey and E con om ic
Activity
A Critical Look at Monetarist Economics
Comments on a Monetarist Approach to De
mand Management
Oct.
Slowing in Money Growth: The Key to Success
in Curbing Inflation
Money Stock Control and Its Implications for
Monetary Policy
Feb.
The Economy in 1972
Operations of the Federal Reserve Bank of
St. Louis — 1971
Projecting With the St. Louis Model: A Prog
ress Report
Nov.
Monetary Policy and Relative Prices in an
March The 1972 National Economic Plan: An Experi
ment in Fiscal Activism
Monetary Expansion and Federal Open Market
Committee Operating Strategy in 1971
Has Monetarism Failed? — The Record Ex
amined
In co tn es P olicy
German Banks as Financial Department Stores
The Flexible Exchange Rate: Gain or Loss to
the United States
Regional and Multilateral Dimensions of the
United States Balance of Payments
Dec.
1971— Year of Recovery and Controls
Determinants of Commercial Bank Growth
Digitized for Page
FRASER
2
April
Recent Monetary Growth
U.S. Balance-of-Payments Problems and Policies
in 1971
Outlook for Farm Income and Food Prices
Recent Monetary Growth
by NORMAN N. BOWSHER
ONETARY growth has been quite uneven since
early 1971. On average, this expansion has been slower
than in 1967 or 1968 but faster than in 1969 or 1970.
Research at this Bank indicates that the trend rate of
money growth is an important determinant of the rate
of inflation and that marked and sustained changes in
the rate of monetary expansion exercise an important
short-run influence on output. Furthermore, the lagged
effects of a change in the rate of monetary expansion
on prices and output differ. This article traces the
course of recent monetary expansion and discusses
some of the factors causing this expansion.
Course of Monetary Expansion
From January to July 1971 the money stock, defined
as private demand deposits and currency outside
banks, increased at an annual rate of 11.6 percent.
Money Stock
Ratio Scale
Ratio Scale
M o n t h ly A v e r a g e s o f D a ily F igu
B il li o n s o f D o l l a r s
B illio n s o f D o l l a r s
S e a s o n a l ly A d ju s t e d
250,----------
----------.250
This was more rapid than any other six-month expan
sion since the beginning of the daily average series on
money (1947). By comparison, money rose at a 5.7
percent annual rate from early 1970 to early 1971, the
same rate which prevailed from late 1966 to 1971.
Some of the rapid injection of money during the
late spring and summer of 1971 was undesired. The
Federal Open Market Committee (the chief policy
making group of the Federal Reserve System) dur
ing May, June and July issued directives to the Fed
eral Reserve Bank of New York calling for “moderate”
or “more moderate” growth in the monetary aggre
gates.1 However, chief emphasis in day-to-day opera
tions was placed on attaining some firming in money
market conditions.
Growth in money slowed abruptly after July last
year, and from July to December the money stock in
creased at a slow 0.8 percent annual rate. The change
from the previous six months was the sharpest sus
tained decline in the rate of increase in the daily aver
age series on money. The rate of increase from July to
December was less than in 88 percent of all consecu
tive five-month periods since early 1948.
During the final four months of 1971, the Federal
Open Market Committee desired faster money
growth.2 At both the September and October meet
ings, directives called for moderate growth in mone
tary and credit aggregates through a gradual easing
of money market conditions. At the November meet
ing “somewhat greater growth” of monetary aggre
gates was sought, and appreciably easier money mar
ket conditions were requested and achieved. At the
December meeting the Committee agreed to promote
that
. . degree of ease in bank reserves and money
1967
1968
1969
1970
1971
P e rc e n ta g e s are a n n u a l rates o i c h a n g e for p e rio d s in dic a te d
L atest d a t a p lo tte d :M a rc h
1See “ Record of Policy Actions” of the Federal Open Market
Committee, released about 90 days after each meeting and
published in the Federal Reserve Bulletin.
2Ibicl.
Page 3
F E D E R A L R E S E R V E B A N K OF ST. LO U IS
Since December money has again increased rapidly.
From December to March the increase was at a 9.8
percent annual rate. According to the released “Record
of Policy Actions” for January 11, open market opera
tions were to be directed more toward achieving de
sired growth rates in member bank reserves than
previously. This change in emphasis was for the
purpose of facilitating desired expansion in monetary
aggregates.
M oney Stock Determination
The money stock is determined by the interaction
of a number of forces stemming from the institutional
characteristics of the financial system, the public’s be
havior, and the actions of policymakers.3 The effect
of policy actions as distinguished from other forces can
be presented conveniently by the following identity
which expresses the money stock ( M ) as a function of
two explanatory variables:
M = mB
The variable “ B” is the monetary base, which consoli
dates those factors under direct control of the mone
tary authorities. The multiplier (m ) is a ratio express
ing those factors determined by the nature of institu
tions, public behavior, and the size of Government
deposits in commercial banks. The observed money
stock ( M ) is by definition the product of the base and
the multiplier.
The monetary base can be expressed in terms of
either its “sources” or “uses.” Sources of the base in
clude Federal Reserve credit, Treasury currency, and
the gold stock. A net increase in the base caused by
changes in its sources means a corresponding change
in the total of member bank deposits at the Federal
Reserve and currency in circulation, the “uses” of the
base.
Since the total sources are dominated by the actions
of monetary authorities, the total level of reserves and
currency supplied is likewise controllable. Changes in
the sources of the base which are not entirely under
the control of monetary authorities, such as changes
in the gold stock, can be neutralized by the Federal
Reserve through open market operations.
Studies at this Bank show that the multiplier has
been fairly stable, and that most past movements can
be largely explained. These observations lead to the
conclusion that the base acts as a severe constraint on
the growth of the money stock. Thus, prolonged ac
celerations or decelerations in the growth of money
are unlikely without either similar accelerations or de
celerations in the growth of the base or explainable
changes in the multiplier.
Recent Trends in the Base and
Its Components
The monetary base rose at an 8.9 percent annual
rate from January to July 1971. Although this was
Monetary Base and Federal Reserve Credit
Ratio Scale
Billions of D o lla rs
Ratio Scale
Billions of D o lla rs
M o n t h ly A v e r a g e s o f D a i l y F ig u r e s
S e a s o n a lly A d ju ste d
100
100
95
95
+3.6%
5
90
91.6
+7.3% ^
85
Honelar
Base
ll
+
+70%,
+ 1 2 3 % ^ ^
+6.1%
.4%
fy
78.3
+ 8 .6 % /
70
70
+28%
65
65
+ 9 .2 % ^ ^
60
/
60
2
Federa 1 Reserve C edit L
55
55
i X
50
O-
<5
0
5
t
45
1967
1968
1969
o
-Q
t
R
R
4
*
I
1970
t u
1971
R
50
N
i
I
t
45
1972
a n d n o n m e m b e r b a n k s. A d ju stm e n ts a re m a d e for reserve re qu ire m e nt c h a n g e s a n d
shifts in d e p o sits a m o n g c la sse s of b a n k s. D a t a a re c o m p u te d b y this b ank.
l2_Total Fe d e ra l R eserve credit ou tstan d ing in clu d e s h o ld in g s o f securities, loans, float, a n d
"o th e r" assets. A d ju stm e n ts a re m a d e for reserve requirem ent c h a n g e s a n d shifts in
d e p o sits a m o n g c lasse s of b a n k s. D a ta a re c om p ute d b y this b an k .
Page 4
80
75
75
P e r c e n t a g e s a r e a n n u a l r a t e s o f c h a n g e fo r p e r i o d s in d ic a te d .
3For a more complete discussion of the money supply process,
see Albert E. Burger, T he Money Supply Process (Belmont:
Wadsworth Publishing Co., 1971).
90
85
+2.4%
80
□ . U s e s of the m o n e tary b a se are m e m b e r b a n k re se rv e s a n d c u rre n cy h e ld b y the public
The amount of private nonbank holdings of demand
deposits and currency supported by a given level of
1972
the base depends on actions taken by the public,
banks, and the Treasury, as summarized in the money
multiplier. These include the ratio of excess reserves
to deposits banks desire to hold, the distribution of
deposits between different types of accounts, and the
amount of currency relative to demand deposits which
the public desires to hold. For example, an increase
in the public’s demand for currency relative to de
mand deposits, or an increase in the demand by banks
for excess reserves, will tend to decrease the multi
plier, and, for any given size of base, will lead to a
decline in the supply of money.
Jon 67
market conditions essential to greater growth in mone
tary aggregates.”
A P R IL
L a t e s t d a t a p lo tte d : M a r c h
F E D E R A L R E S E R V E BA N K OF ST. L O U IS
A P R IL 1972
interest rates, reflecting among other things, Federal
deficits and net flows of funds out of the country. In
terest rates rose substantially, credit markets became
tighter, and the System purchased a sizable volume of
securities in an effort to avoid a more rapid tightening
of credit conditions.
somewhat slower than the 11.6 percent rate for money
in the same period, it was in the 99th percentile of all
possible consecutive six-month periods since January
1948. The trend of the base from late 1966 to late 1970
was at a 5.4 percent rate. By comparison, the base
rose at a 4.4 percent trend rate from the fall of 1961
to late 1966 and at a 1.6 percent trend rate from early
1952 to the fall of 1961.
In addition, the Reserve Banks increased their loans
to member banks by $450 million in the January to
July 1971 period, which also added to the monetary
base. Although these advances were in response to
demands for credit by member banks, the System
encouraged such borrowing by estab
lishing a more attractive discount rate.
In early January the discount rate was
5.50 percent, while in early July the
discount rate was 4.75 percent.
C hange
Actions of the Federal Reserve System were the
chief causal force in expanding the monetary base in
early 1971 (Table I). In fact, other factors affecting
T a b le I
Sources o f M o n e ta ry Base
(D o lla r A m o u n ts in M illio n s )
Jan. 1 9 7 1
Ju ly 1 9 7 1
Am ount
A n n u a l Rate
$ 6 1 ,3 2 3
$ 6 5 ,6 6 0
$ + 4 ,3 3 7
+ 1 4 .6 %
370
820
Federal Reserve Credit:
H o ld in g s of Securities
lo a n s to M e m b e r B a n ks
Float a n d O th e r F.R. A sse ts
Total Federal Reserve C redit
+
450
—
701
4 ,8 5 2
4 ,1 5 1
$ 6 6 ,5 4 5
$ 7 0 ,6 3 1
$ + 4 ,0 8 6
$ 1 0 ,7 3 2
$ 1 0 ,3 3 2
$ -
400
7 ,1 5 7
7 ,4 3 7
+
280
1 ,0 2 8
— 1 ,5 4 6
—
518
729
939
+
210
$ 1 7 ,5 9 0
$ 1 7 ,1 6 2
$—
428
—
4 .8
$ 8 4 ,1 3 5
$ 8 7 ,7 9 3
$ + 3 ,6 5 8
+
8.9
+ 1 2 .7
O th e r S ou rces of Base:
G o ld Stock
T re a su ry C urrency
T re a su ry F.R. D ep osits
( A b s o r b B ase )
A ll O th e r
Total O th e r Sources
M o n e ta r y B ase
-
N O T E : Averages o f daily figures, seasonally adjusted
the base tended to reduce it, on balance. Among these
other factors was a $400 million net sale of gold to
foreign Governments and a $518 million build-up in
Treasury deposits at Reserve Banks.
Ratio S e a l*
This decline in the discount rate con
trasted sharply with a rise in competi
tive rates from early 1971 to July, which
also made borrowing from Reserve
Banks more attractive. One competing
rate is the Federal funds rate — that
rate by which individual banks with
temporary reserve shortages can bor
row funds from other banks with
excesses. Although such inter-bank bor
rowing satisfies the demand of one
bank for reserves, it does not add to
the total reserves in the banking sys
tem. The Federal funds rate averaged
4.14 percent in January and 5.31 perInterest Rates
Ratio S e a l*
Federal Reserve credit, the major source of changes
in the base, rose at an extremely rapid 12 percent
annual rate from January to July last year. The bulk
of the gain resulted from sizable net purchases ($4
billion) of securities by the System. From January
through April 1971, monetary expansion was encour
aged by the Federal Reserve System. The economic
recovery was in its initial stages and seemed fragile.
Also, there had been a shortfall in money growth
from its desired level in the final quarter of 1970, for
which some recovery was sought.4
From early May through July, a more moderate
growth in monetary aggregates was desired. However,
in this period, great upward pressures were acting on
4“ Record of Policy Actions,” Federal Reserve Bulletin (April
1971), pp. 320-327.
Page 5
FEDERAL RESERVE
BA N K OF ST. LO U IS
A P R IL
cent in July. Another rate which competes with the
discount rate is the 3-month Treasury bill rate. Indi
vidual banks can attract a larger portion of the exist
ing reserves by selling Treasury bills, but the rate on
3-month bills increased from 4.44 percent in January
to 5.39 percent in July.
rates, borrowing from Reserve Banks became a less
attractive method for individual banks to correct re
serve deficiencies. The Federal funds rate, for ex
ample, fell from 5.31 percent in July to 4.14 percent
in December, and the 3-month Treasury bill rate
dropped from 5.39 percent to 4.01 percent over the
same period.
Growth in the base slowed abruptly beginning in
August. After going up at a rapid 8.9 percent annual
rate from January to July, the base rose at a sluggish
3.6 percent rate from July to December. Injections of
Federal Reserve credit became markedly smaller, and
most other factors affecting the base operated to re
duce it. The largest single other factor was a further
$380 million build-up in deposits at Federal Reserve
Banks by the Treasury.
From December 1971 to March 1972 the monetary
base rose at a rapid 11.5 percent annual rate. The in
crease was caused by net purchases of securities by
the Federal Reserve System. Loans to member banks
by Federal Reserve Banks remained at a nominal level
since the discount rate hovered above most market
rates during this period. Other factors absorbed the
base on balance.
Recent Trends in the Multiplier
T ab le II
Sources of M o n e ta ry Base
(D o lla r A m o u n ts in M illio n s )
Change
Ju ly 1 9 7 1
Dec. 1 9 7 1
Am ount
$ 6 5 ,6 6 0
$ 6 7 ,8 0 5
$ + 2 ,1 4 5
820
107
A n n u a l Rate
Fed eral Reserve Credit:
H o ld in g s o f Securities
Loan s to M e m b e r B a n k s
Float a n d O th e r F.R. A sse ts
Total Fed eral Reserve C redit
—
713
+
736
4 ,1 5 1
4 ,8 8 7
$ 7 0 ,6 3 1
$ 7 2 ,7 9 9
$ + 2 ,1 6 8
$ 1 0 ,3 3 2
$ 1 0 ,1 3 2
$ -
200
7 ,4 3 7
7 ,611
+
174
1 ,9 2 6
—
380
494
—
445
$ 1 7 ,1 6 2
$ 1 6 ,3 1 1
$—
851
$ 8 7 ,7 9 3
$ 8 9 ,1 1 0
$ + 1 ,3 1 7
O th e r So u rc e s of Base:
G o ld Stock
T re a su ry C urren cy
T re a su ry F.R. D ep osits
(A b s o r b B a se )
A ll O th e r
Total O th e r Sou rces
M o n e ta r y B ase
— 1 ,5 4 6
-
939
N O T E : A verages o f daily figures, seasonally adjusted
System holdings of Government securities rose at
an 8 percent annual rate from July to December 1971,
after rising at a 15 percent pace earlier in the year.
As noted earlier, the System intended to provide for
a greater growth in money during the final five months
of 1971 than actually occurred. However, interest rates
were declining, reflecting among other things, some
reduction in inflationary expectations as well as the
investment of funds in this country by foreign central
banks. With rates declining, System actions to pro
vide reserves were taken cautiously to avoid causing
an excessive downward movement in interest rates.
Outstanding loans to member banks by Federal Re
serve Banks fell sharply from an $820 million average
in July 1971 to a $107 million average in December.
The discount rate, which was 4.75 percent in early
July, was 4.5 percent in late December. However, in
view of the much greater decline in most market
Page 6
1972
+
8 .0 %
+
7.5
As in the past, the multiplier rela
tionship between the monetary base
and money has changed little since
early 1971. Movements that occurred
in the multiplier tended to supplement
those in the base, and can be explained
by other economic developments.
In January 1971 the multiplier aver
aged 2.559, meaning that the average
money stock in the period was slightly
more than 2.5 times as large as the
average level of the base. By July the
multiplier had risen to 2.590. The in
— 11.5
crease in the multiplier was at a 2.4
+ 3 .6
percent annual rate in this period,
accounting for 21 percent of the un
precedented increase in money (the
rise in the base accounting for the other 79 percent).
The growth of time deposits slowed markedly dur
ing the summer, freeing more of the base to support
money. This caused the multiplier to rise. The be
havior of time deposits can be attributed to the much
Multiplier 1
R a tio
R a tio
— •'N
r '\ .
£
-
=
JAN. FEB. MAR. APR. M A Y JUNE JULY AUG. SEPT. OCT. N O V . DEC. JAN
FEB
1111
~ -
=
2.542
1. 1M i l
1971
[J. Ratio of m oney stock (Mj) / m onetary bose.
Latest d a ta plotted: week e nd ing A p ril 5. 1972
MAR
1972
APR
FEDERAL RESERVE
BA N K OF ST. LO U IS
A P R IL
1972
multiplier. Both of these developments
followed their usual response to changes
in interest rates, business activity, and
the base.
T a b le III
Sources o f M o n e ta ry Base
(D o lla r A m o u n ts in M illio n s )
Change
Dec. 197 1
M a r. 1 9 7 2
Am ount
A n n u a l Rate
$ 6 7 ,8 0 5
$ 7 0 ,5 4 4
$ + 2 ,7 3 9
+ 1 7 .2 %
107
99
Federal Reserve Credit:
H o ld in g s of Securities
L oa n s to M e m b e r B a n k s
Float a n d O th e r F.R. A sse ts
Total Federal Reserve Cred.t
-
8
4 ,8 8 7
3 ,7 5 7
-1 ,1 3 0
$ 7 2 ,7 9 9
$ 7 4 ,4 0 0
$ + 1,601
$ 1 0 ,1 3 2
$ 9 ,5 8 8
$—
544
7,6 1 1
7 ,8 5 9
+
248
+
9.1
O th e r Sou rces of B ase:
G o ld Stock
T re a su ry C urren cy
T re a su ry F.R. D ep osits
(A b s o r b B a se )
A ll O th e r
Total O th e r Sources
M o n e ta r y B ase
— 1 ,9 2 6
933
+
993
494
—
655
+
161
$ 1 6 ,3 1 1
$ 1 7 ,1 6 9
$ +
858
$ 8 9 ,1 10
$ 9 1 ,5 6 9
$ + 2 ,4 5 9
N O T E : Averages o f daily figures, seasonally adjusted
sharper rise in interest rates on most money market
instruments than in rates paid by banks on time and
savings deposits. Also, during the first seven months
of 1971, currency in the hands of the public rose less
rapidly than demand deposits. This also increased
the multiplier. Demand for currency generally reflects
trends in smaller retail sales, and so currency usually
rises at a slower rate than demand deposits in periods
of accelerated injections of the base. Another factor
increasing the multiplier was a decrease in Treasury
deposits at member banks.
By December 1971, the multiplier declined to 2.561,
decreasing at an annual rate of 2.7 percent in the
period from July. This change in the multiplier ac
counted for about one-third of the slowdown in money
after July; the slower expansion in the base accounted
for the other two-thirds. Several factors acted to re
duce the multiplier. First, market interest rates de
clined more sharply than rates paid on time deposits.
Consequently, time deposits rose at a faster pace from
September to December than in the previous three
months, causing a decline in the multiplier. Second,
currency continued to rise at a moderate rate with
the expansion of retail sales, with the result that the
currency/deposit ratio went up, also reducing the
The multiplier in March this year
was slightly less than in December
last year. Hence, the rapid growth in
money from December to March was
occasioned by changes in the base. The
decline in the multiplier from Decem
ber to January and the increase in the
following month, reflected movements
in Treasury deposits at member banks.
Conclusions
+ 2 2 .8
Growth in the money stock has been
irregular since early 1971. From Jan
uary to July last year, money rose at
a record pace. During the remainder
of the year, money changed little. Since late last year,
money has again risen rapidly.
+ 1 1.5
Monetary policymakers in 1971 recognized the de
sirability of somewhat less rapid growth of money
during the late spring and early summer and a less
severe and prolonged deceleration in money after
July. Nevertheless, money grew very unevenly, and
it appears that changes in Federal Reserve credit
were the major source of the uneven growth. Other
factors affecting the monetaiy base were relatively
minor, while changes in the money multiplier were
small and tended to supplement changes in the base.
The discrepancy between monetary actions and in
tentions during much of this period, with regard to
the aggregates, can be explained in great part by the
concern about possible effects of wider movements in
interest rates and other money market conditions.
From the viewpoint of money market conditions,
monetary developments may be interpreted as re
strictive, even when the System is supplying funds
rapidly to moderate a rise in market rates. Conversely,
it appears that conditions are easy, even though the
System may be adding only slowly to reserves to slow
a decline in interest rates.
Page 7
U.S. Balance-of-Payments Problems
and Policies in 1971
by CHRISTOPHER L. BACH
HE MAGNITUDE of the United States balanceof-payments deficit and concern about the effective
operation of the international monetary system domi
nated thinking about U.S. payments problems and
policies in 1971. Dollar outflows had long been critical
to the functioning of the Bretton Woods system, but
the continuous accumulation of dollars by foreigners,
the relative fixity of exchange rates, and effectively
integrated money and capital markets led many to
seek reform of the international monetary system dur
ing 1971. The objective of most proposed reforms was
to diminish the importance of the dollar in the sys
tem’s operation and to promote a more effective means
of adjusting countries’ external payments positions,
including that of the United States.
For years, dollar deficits had been beneficial to both
U.S. and foreign residents. Foreigners used the dollars
to finance trade imbalances and to minimize costs of
holding liquid transactions balances in several cur
rencies. Countries chose to use dollars to meet their
exchange rate stability obligations as members of the
International Monetary Fund (IM F ). New York
money and capital markets served as the primary
source of funds (dollars) for American and foreign
enterprises and dollars played a critical role in the
formation and development of an important interbank
market for funds — the Eurodollar market.
As U.S. payments deficits persisted, the supply of
dollars in the hands of foreign residents became more
than was necessary for minimal foreign private liquid
ity purposes and for exchange into American goods
and financial instruments. The willingness of private
foreigners to hold additional dollar deposits ( or dollar
claims) above minimum levels declined after the mid1960s when the potential dollar claims exceeded the
available gold stock. Evidence of the decline in de
mand for dollars was indicated by their sale to central
banks by private foreigners. It was the continuing
dollar deficits plus the decline in the willingness of
http://fraser.stlouisfed.org/
Page 8
Federal Reserve Bank of St. Louis
foreigners to hold dollar balances that finally hindered
effective operation of the international monetary sys
tem in 1971.
In May, official foreigners indicated their unwill
ingness to accumulate more dollars. On August 15 the
United States indicated it was no longer willing to
tolerate the projected balance-of-payments deficits. It
suspended convertibility of dollars into gold, imposed
an import surcharge, and announced its intention to
seek a realignment of parity rates and multinational
cooperation on reform of the international monetary
system.
Reactions to the Deficit
Reactions to the U.S. payments deficit in 1971 were
divided into two time periods by the President’s an
nouncement of August 15.
Prior to August 15
Recent marked reserve accumulation among in
dustrial countries other than the United States began
in 1970. Little importance was attached to the fact at
that time. Many nations had seen some decline in the
foreign exchange component of their reserves from
preceding years with the flow of short-term dollars
from Europe to the United States. The reserve in
flows in 1970 returned the reserve balances to their
previous levels, but as the U.S. deficit increased
in 1971, reserve accumulation became a source of
concern.
In early April, all major currencies began to appre
ciate against the dollar in the forward exchange mar
kets because of the large interest-rate differentials
between this country and abroad, and perhaps, in
anticipation of an impending formal decline in the
relative value of the dollar. Many industrial countries
had difficulty in restraining domestic inflation while
meeting their exchange-rate stability responsibilities
FEDERAL R ESER V E
A P R IL 1972
BA N K OF ST. LO U IS
T a b le I
O ffic ia l Reserves o f Selected Industrial Countries,
1 9 6 8 -7 1 *
(B illio n s of D o lla rs; End o f P erio d)
1971
C o u n try
U nited States
U nite d K in g d o m
1968
1969
1970
M a rc h
Ju ne
S e p te m
ber
D ecem
b er* *
$ 1 5 .7
2.4
$ 1 7 .0
2.5
$ 1 4 .5
2.8
$ 1 4 .3
3.3
$ 1 3 .5
3 .6
$ 1 2 .1
5 .0
$ 1 3 .2
6 .6
2.2
4 .2
5 .3
2.5
9 .9
2.4
3.8
5 .0
2.5
7.1
2.8
5 .0
5 .4
3.2
1 3 .6
3.1
5 .5
6 .0
3.5
15.8
3.2
5 .7
6.1
3 .5
1 6 .7
3 .4
7 .3
6 .7
3 .6
1 7 .0
3 .5
8.2
6.8
3.8
1 8 .4
Belgium
France
Ita ly
N e th e rla n d s
W e st G e rm a n y
April and early May the threemonth rate climbed to about 7.5
percent and overnight rates on
individual days reached 45 per
cent or more. In late May and
June the rate receded, but in
late July and August the threemonth rate rose again to nearly
a 9 percent level with the over
night rate soaring to 200 per
cent on the last day of August.
The country most sensitive to
the U.S. deficit and international
financial conditions in the first
half of the year was Germany.
♦Includes $3.4 billion SDR allocated on January 1, 1970. and $2.9 billion allocated on January
Faced with a particularly large
1971. The U.S. share in these allocations was $867 m illion and $717 million, respectively.
♦♦Reserve figures are restated to reflect the anticipated rise in the dollar price o f gold from $35 to
inflow
of dollars, substantial do
$38 an ounce and the realignm ent o f currencies in late December.
mestic
inflation, and interest
S ou rce: International M onetary Fund
rates well above the Eurodollar
under the rules of the IMF.1 Swap lines with Belgium,
and most European money market rates, the Bundes
the Netherlands, Switzerland and Germany were acti
bank suspended its foreign exchange operations in
the wake of a $1 billion inflow over May 3-4, and an
vated in an attempt to reduce declines in U.S. reserve
additional $1 billion inflow in the first forty minutes of
assets. Further action by the United States to slow the
trading on the morning of May 5. The Frankfurt
dollar outflow involved the renewed sale by the Exmarket reopened on May 10 with an announcement
port-Import Bank and the U.S. Treasury of special
by the Bundesbank that trading limits for the mark
three-month certificates of indebtedness to foreign
would be suspended temporarily, although the official
branches and agencies of U.S. banks. Several foreign
parity was to remain unchanged. This action per
central banks lowered their discount rates in late
mitted the German government to continue its restric
March and April in order to narrow, or even reverse,
tive stabilization policies. It chose to supplement the
the interest arbitrage spreads which had been in
action by announcing on June 2 an increase in banks’
favor of domestic currencies in the first quarter.
minimum reserve requirements of 15 percent across
the board, while the requirements against foreign
The Eurodollar market remained calm in the first
liabilities were raised to twice the level of the new
quarter of 1971 as it had throughout 1970. Eurodollar
domestic requirements.
rates declined as many Eurodollar borrowings were
repaid, particularly by U.S. banks, and rates fell well
Shortly after the German decision, speculative pres
below most European interest rates. In contrast to
sures shifted to other “strong” national currencies. The
normal times of 1970 and early 1971,when the Euro
Netherlands subsequently permitted the guilder to
dollar market served as an international intermediary
fluctuate and Belgium strengthened its two exchange
rate system — one official and one financial — and per
both for depositors seeking high rates of return on
mitted the latter to appreciate. Switzerland and
their money balances and for borrowers seeking lower
Austria raised their parities by 7.07 and 5.05 percent,
cost credit than they could obtain at home, the Euro
respectively.
dollar market took on an increasingly speculative tone
Canada
Ja p a n
Sw ed e n
Sw itz e rla n d
3 .0
2.9
.8
4.3
3.1
3 .7
.7
4 .4
4 .7
4.8
.8
5.1
4.8
5 .9
.9
4 .6
in the second quarter of 1971. As exchange rate un
certainties increased and banks and businesses bor
rowed funds in the Eurodollar market for conversion
into domestic currencies, the rate rose rapidly. In
Hinder rules of the IMF, countries were responsible for
limiting exchange-rate fluctuation to one percent on either
side or parity throughout most of 1971. After December 18
the range or permissable exchange-rate fluctuation was in
creased to 2% percent on either side of parity for most
countries.
4 .9
7 .8
1.0
5.1
5 .0
1 3 .4
1.0
6 .5
5 .7
1 5 .4
1.1
7 .0
The release of the second quarter U.S. balance-ofpayments data indicated a marked deterioration in
the U.S. external position, and when combined with
the behavior of fluctuating exchange rates in July and
August, offered additional evidence that the dollar
might need to be devalued. U.S. reserve assets had
diminished to about $12.1 billion in mid-August from
$14.6 billion at the beginning of the year, and nearly
45 percent of the $2.5 billion decline came in early
Page 9
F E D E R A L R E S E R V E B A N K OF ST. LO U IS
A P R IL 1972
Selected Short-Term M o n ey M a rk e t Rates
En d -o f-M o n th D a ta
P e rce n t
P e rc e n t
10
9
8
7
6
5
4
0
10
9
8
August. Although the United States again drew heav
ily on its swap lines of credit, private and public
pressures to convert dollars into other currencies and
ultimately U.S. reserve assets became overwhelming.2
The United States suspended convertibility of the
dollar into gold on August 15.
August 15
In addition to the suspension of dollar convertibility
and a program designed to reduce unemployment
and domestic price-wage pressures, the President’s
program of August 15 imposed an additional tax ( sur
charge) of 10 percent on goods imported into the
United States. The apparent purpose of the surtax
was to set the stage for useful international negotia
tions to achieve a realignment of currencies and a
better access to foreign markets for American pro
ducers. As a related measure, the President ordered
a 10 percent reduction in foreign aid.
T a b le II
Selected Countries Affected b y the
U.S. 10 Percent Sup ple m e ntal Duty on Im ports
7
6
5
4
0
11
10
9
8
7
6
5
0
1970
In d u stria l
C ou ntries
Jap an
Canada
G e rm a n y
Ita ly
U nited K in g d o m
B e lgiu m -L u xe m b o u rg
France
N e th e rla n d s
Percent
o f Total
Exports
Affected
Exp o rts
Affected
a s Percent o f
D om estic G N P
29%
16
9
9
8
5
4
3
3%
4
2
1
1
2
1
1
N O T E : E xports based on 1970 annual data com piled b y U .S. De
partm ent o f S ta te ; G N P based on annual data fo r latest
year available, prim arily fro m various OECD sources.
The President’s Economic Report describes the im
port surcharge as applying only to “goods on which
duties had been reduced under reciprocal trade agree
ments, and in no case . . . was it to raise a duty be
yond the statutory rate. Where it was limited by the
statutory ceiling, the surcharge was less than 10 per
cent. On automobiles, in particular, the tax amounted
only to 6.5 percent. Furthermore, all imports subject to
mandatory quantitative restrictions were exempt from
the new tax. Such goods included petroleum, sugar,
1971
Source: W o rld Financial M ark e ts. M o r g a n G u a ra n ty Trust C o.
Note-. The follow ing interest rates w ere used:
B elgium - 4-month Fo nds d e s Rentes certificates
C a n a d a - 3-m onth prim e finance com pany pap er
F r a n c e -3 -m o n th interbank m oney again st private p a p e r
G e r m a n y - 3 -m o n t h interbank deposits
Ita ly -in te rb a n k d e p o sits of u p to one-m onth maturity
Japan — call m o ney rate
United K in g d o m -3 -m o n th local authority d e p o sits
United States — 3-month prime industrial p a p e r
E u ro d o lla r rate-p rim e b a n k 's bid rate for 3-month d e p o sits in London
http://fraser.stlouisfed.org/
Page 10
Federal Reserve Bank of St. Louis
2Federal Reserve swap lines with foreign central banks and
the Bank for International Settlements were drawn on in the
amount of $3,565 million between January 1 and August 13.
During the same period $1,330 million in current and pre
vious drawings were repaid by use of foreign currency
balances and Special Drawing Rights, through U.S. borrow
ing from the International Monetary Fund, and through the
sale of special securities to foreign official institutions. On
August 15 there was a total of $3,045 million of swap in
debtedness outstanding compared to $810 million on
January 1.
F E D E R A L R E S E R V E B A N K OF ST. LO U IS
meat and dairy products, certain other agricultural
products, and cotton textiles covered by the LongTerm Textile Agreement. The surcharge affected about
one-half of U.S. imports.”3 Subsequent announce
ments confined the Job Development Tax Credit to
domestically produced machinery and equipment as
long as the import surcharge remained in effect.
Despite the price freeze on domestically produced
items, prices of imported goods were allowed to rise
by the full amount of the additional duty imposed.
Prices of items assembled or produced in the United
States with foreign components would also be allowed
to rise by the amount of the additional duty levied on
the foreign components. The President also removed
the 7 percent excise tax on autos which was applica
ble to imported as well as domestic cars.
After August 15
The European exchange markets were closed for a
week following the President’s announcement. When
the markets reopened, no major industrial country
except France tried to maintain the value of its cur
rency against the dollar within the one percent upper
limit of its parity rate. In France, the foreign exchange
market was separated into a market for dollars re
ceived as a result of international trade, in which the
French continued to intervene to maintain the parity
value, and a “financial franc” market in which all
other exchanges were transacted. Although severe re
strictions were imposed on inflows of funds through
the financial franc market, the exchange rate was
allowed to find its own level.
The Japanese government initially tried to purchase
all dollars offered at the ceiling rate, but in face of a
$4.4 billion inflow in August, it was later forced to
suspend the rate and limit intervention so as to permit
about a 5 percent rise relative to the dollar in the
subsequent month. Other administrative actions to
assist in limiting the appreciation of the yen relative
to the dollar over the remainder of the year included
placement of a ceiling on all nonresident free yen
deposits that Japanese commercial banks might re
ceive, prohibition of prepayment of trade bills to Ja
panese exporters, and a request that banks not in
crease their Eurodollar borrowing. Many of these ex
change controls were relaxed early in 1972.
Many other countries also imposed restrictions on
foreign exchange transactions, but still permitted the
3Economic Report of the President, 1972, p. 148.
A P R IL 1972
value of their currencies to fluctuate relative to the
dollar. From time to time central banks intervened
in markets to limit the pace at which their currencies
appreciated relative to the dollar. By early Decem
ber, it was clear that a set of regulated exchange rates
between foreign currencies and dollars had emerged
which was substantially different than at the begin
ning of the year. Many of the new exchange rates
were formalized shortly after the Smithsonian agree
ment of December 18 by the declaration of temporary
“central values,” and the announcement by the United
States of its willingness to raise the dollar price of gold
by 8.57 percent and remove the import surcharge.
Simultaneously, most countries agreed to permit exchange-rate fluctuations within a 2.25 percent range
on each side of the central value.4
4Numerous alternatives were available to the United States
in seeking a realignment of exchange rates after August 15.
The desire to realign exchange rate patterns could have been
achieved by: (1 ) permitting exchange rates to float upward
to their new and higher levels vis-a-vis the dollar; (2 )
devaluation of the dollar against other currencies; (3 ) re
valuation of other currencies against the dollar while leaving
the value of the gold content of the dollar unchanged; and
(4 ) a combination of devaluation of the dollar with respect
to gold and a change in the exchange rates of other nations
vis-a-vis the dollar and each other. In the end, the latter
path was chosen.
One of the considerations in determining the extent of
exchange-rate realignment was the state of the U.S. balance
of payments. The Administration concluded that the size of
the required correction would be an exchange rate realign
ment necessary to bring a turnaround of $13 billion. Their
calculations were as follows:
1. Under conditions of reasonably full employment in
both the United States and other major trading countries,
the U.S. deficit on current account ( excluding U.S. Gov
ernment grants) for 1972 was projected to be $4 billion
on the basis of the exchange rates and other trading con
ditions in effect in April 1971.
2. The annual outflow for Government grants and credits
plus private long-term capital flows from the United States
to countries other than Western European nations, Canada,
and Japan was estimated at $6 billion, or just over one-half
of one percent of the U.S. gross national product. The
average annual outflow for these purposes during the 5year period from 1967 through 1971 was about $5V2 billion.
3. A secure payments position would require that this
estimated $6-billion capital outflow be covered by a surplus
on current account. Since the projected “ full-employment”
current account for 1972 was in deficit by $4 billion,
achieving a surplus of $6 billion required an improvement
of $10 billion in the U.S. current account.
4. Two other factors caused additions to this basic esti
mate. The first was an allowance of $1 billion a year to
cover a persistent outflow, which the data collection net
work does not capture. This outflow, which is shown as
“ errors and omissions” or unidentified transactions in the
accounts, fluctuates from year to year, but it has been con
sistently negative since 1960, the average level being
around $1 billion. The second factor was an allowance of
$2 billion to provide the prospect of a small surplus on
basic balance, to cover persistent short-term capital out
flows or to serve as a margin of safety against errors in the
underlying assumptions and calculations. With the addition
of these two factors, the turnaround required for the
United States to achieve a secure position was estimated
to be $13 billion. [Economic Report of the President, 1972,
pp. 154-155.]
Page 11
F E D E R A L R E S E R V E B A N K OF ST. LO U IS
A P R IL 1972
average basis. About two thirds of the total trade
of the United States is conducted with these
countries. Against all currencies that revalued rela
tive to the dollar, the effective devaluation was
about 9.7 percent on a trade-weighted basis. These
countries account for about 80 percent of total U.S.
trade. Finally, against all currencies of the world, in
cluding those which did not change their exchange
rate with the dollar as well as those who did — such
as Israel, Ghana, South Africa, and Yugoslavia — the
effective dollar devaluation on a trade-weighted basis
was about 7.5 percent. By December 31, currencies of
the 14 countries in the table had appreciated only
9.05 percent relative to the dollar on a trade-weighted
basis.
Balance of Payments Analysis
On a yearly basis, the United States balance of pay
ments was in deficit by $22 billion on a liquidity
basis and $29.8 billion on an official settlements basis
in 1971, compared to deficits of $3.8 billion and $9.8
billion, respectively, in 1970. The liquidity deficit
averaged $3.4 billion from 1965 to 1969 and $2.8 bil
lion from 1960 to 1964. The official settlements balance
averaged about zero from 1965 to 1969 and a negative
T a b le III
E x c h a n g e -R a te C h a n g e s
Percentage Changes
Against the U.S.
Dollar from preMay 1971
Parities*,
Expressed in
Trade-Weighted
Average Changes
Against a G roup
U.S. Cents
New
Central
Rates
of Major Currencies
Market
New
Market
Rates
Central
Rates
D ec. 31
Rates
Dec. 31
Japanese yen
British pound
German mark
0.00
+
+ 16.87
+ 8.57
+ 13 .5 8
0.00
+ 7.87
+ 14.37
+ 6.35
+ 12.01
-1 0 .3 5
+ 5.58“ *
+ 11 .9 3
+ 0.67
+ 4.54
- 9.05
+ 5.44
+ 10.34
- 0.43
+ 4.24
French franc
+ 8.57
1.31
-
2.20
+
7.48
+ 6.45
+ 5.28
-
Italian lira
-
1.90
Belgian franc
Dutch guilder
+ 11.57
+ 11.57
+ 13.87
+ 11.61
+11 .3 3
+ 11.75
+
+
+
1.51
1.17
3.89
+
2.76
2.79
+ 11.59
+ 7.45
+
+
-
1.17
+ 6.56
+ 6.47
+ 6.12
0.60
1.31
1.41
2.12
3.39
0.22
+ 7.49
+ 7.49
+ 8.57
+
-
+
+
+
-
1.04
-
1.46
0.24
-
1.16
1.15
United States dollar
Canadian dollar
Swiss franc
Austrian schilling
Danish krone
Norwegian krone
Swedish krona
Australian dollar
9.59
6.26
♦pre-June 1970 fo r Canada
The effective devaluation of the dollar based on the
new central rates for the 14 countries indicated in
Table III was 10.35 percent on a trade-weighted
Page 12
**A central rate has not been set fo r the Canadian dollar. The December
17, 1971 m arket rate is used in lieu o f a central rate.
S ou rce: World Financial M arkets, M organ Guaranty Trust Company,
January 19, 1972, p. 3. F or m ethod o f com putation see the article
a ccom p anying their table, and the O ctober 18, 1971 issue o f the
same publication.
FEDERAL RESERVE
A P R IL 1972
BA N K OF ST. LO U IS
stantial adverse movements on
trade and long-term capital ac
counts as well.
T a b le IV
U.S. B alan c e o f Paym ents, 1960-71
(B illio n s o f d o lla r s)
T yp e o f transaction
M e rc h a n d ise trad e b a la n ce
Exports
Im ports
M ilit a ry tran saction s, net
B a la n c e on investm ent incom e1
U.S. investm ent a b ro a d
F oreign investm ent in the
U nited States
B a la n ce on oth er services
1 9 6 0 -6 4
a v e ra g e
1 9 6 5 -6 9
a v e ra g e
1968
1969
$ 5 .4
2 1 .7
-1 6 .2
$ 2.8
3 1 .3
— 2 8 .5
$ 0 .6
3 3 .6
-3 3 .0
$ 0 .7
3 6 .5
-- 3 5 . 8
2.1
4 2 .0
-3 9 .9
$ -2 .9
4 2 .8
-4 5 .6
— 2 .4
— 2 .9
-3 .1
-2 .9
3 .9
5.1
5.8
8 .6
6 .2
9 .2
— 1.2
— 2.8
— 3 .0
— 1.0
B a la n ce on oth er long-term
ca p ital flow s4
B A L A N C E O N CURRENT A C C O U N T
A N D L O N G - T E R M C A P IT A L
O F F IC IA L R ESER V E T R A N S A C T IO N S
BALANCE
F in anced b y c h a n g e in:
N o n liq u id U.S. G o ve rn m e n t a n d
U.S. b a n k liab ilitie s to fo re ig n
official agencies®
Liquid liab ilitie s to fo re ign
official age n c ie s
U.S. official reserve asse ts, net
— 4.8
—
—
-1 .5
1.3
1.4
-.7
— 1.1
— 1.2
— 1.3
— 1.4
-1 .5
-0 .8
5 .2
3 .3
1.3
.7
2.2
— 1.8
— 1.8
— 1 .7
— 1.6
-1 .7
-2 .0
1.5
— .4
-.9
.4
-2 .8
— 1.8
-3 .0
— 3.3
-2 .9
— 3 .2
-2 .4
-3 .3
-3 .5
— 4 .4
-4 .7
— 4 .5
.1
.3
.3
.8
1.0
-0 .2
-2 .2
— .6
1.9
.4
-.7
— 2.2
— 1.3
— 2.9
3 .3
— 1.8
Errors a n d unrecorded tran saction s
T ra n sa ctio n s in U.S. liq u id liab ilitie s to
o th er than fo re ig n official a ge ncies.
net
-5 .2
0 .7
—
T ra n sa ctio n s in U.S. liq u id short-term
asse ts, net
-4 .6
8 .0
1 2 .7
3 .6
— 1.1
N E T L IQ U ID Y B A L A N C E
6.2
1 1 .4
2.0
B a la n c e on n o n liq u id short-term
priva te cap ital flows
A llo c a tio n s o f spe cial d ra w in g rights
1.2
-3 .4
6 .0
1 0 .5
2.5
B A L A N C E O N CURRENT A C C O U N T
B a la n ce on direct p riva te investm ents
U.S. direct investm ent a b ro a d
F o re ign direct investm ent in the
U nite d States
—
-3 .3
4 .4
B A L A N C E O N G O O D S , S E R V IC E S,
A N D R E M IT T A N C E S
G o ve rn m e n t G ra n ts '1
1.2
$
1971
5 .9
B A L A N C E O N G O O D S A N D S E R V IC E S 2
Private rem ittances a n d go ve rn m en t
p e n sio n s
—
1970
1.0
—
-9 .3
.2
— .6
— .5
-2 .5
— .5
— 2 .6
— 1.1
-1 0 .9
—
— .1
.1
.8
3.3
1.1
1.0
-3 .0
— .2
-3 .4
.1
-1 .8
— 1.0
— 2.8
— 2.2
Is )
{ )
.7
-.6
<5 )
.9
.7
— 6.1
— 3.8
-2 2 .0
.1
.2
-1 .1
3.8
8 .7
— 6 .2
1.6
2 .7
-9 .8
2.3
— 1.0
-.3
-3 .1
— .9
— .5
— 1.2
—
— 1.6
-.6
—
7 .6
2.5
— 6 .7
-2 9 .8
— .2
2 7 .6
2.3
JInc!tides direct investment fees and royalties.
2Excludes transfers under m ilitary grants.
3Excludes m ilitary grants o f goods and services.
1Excludes official reserve transactions and includes transactions in some short-term U .S. Governm ent
assets.
‘ Less than $0.05 billion.
“Excludes U .S. Governm ent nonliquid liabilities to foreign official agencies other than official reserve
agencies.
N ote — Details will not necessarily add to totals because o f rounding.
S o u rce : D epartm ent o f Commerce.
$2.2 billion from 1960 to 1964. Much of the deteriora
tion of the balances in 1971 over 1970 reflected un
certainties associated with interest-rate differentials,
and anticipated changes in the par value of the dollar
and other exchange rates. However, there were sub
Current Account
The trade account, which is
an important component of the
current account, declined from
a surplus of $6.8 billion in 1964
to a deficit of $2.9 billion in
1971. Strikes had a particularly
adverse effect on the balance in
1971, but deterioration can more
generally be attributed to (1 )
the gradually increasing over
valuation of the dollar relative
to other currencies, and (2 ) the
relative income, output, and
price trends in Europe and the
United States. The effect of in
come, output, and price move
ments on the trade balance is
discussed below.
As a general rule, movements
of U.S. nonagricultural exports
are related to income and out
put movements in other indus
trial nations. The accompanying
chart shows that the rate of ex
pansion in foreign industrial pro
duction varied between five and
ten percent over the decade, and
that fluctuations in the rate of
expansion resulted in nearly si
multaneous and wider fluctua
tions in U.S. export growth. The
increase in the rate of expansion
in foreign industrial production
in 1967 and 1968 was followed
by an acceleration in U.S. export
growth, and a subsequent de
cline in the rate of foreign in
dustrial production in 1970-71
by a deceleration in U.S. export
growth.
Movements in U.S. imports
are related to movements in U.S.
GNP. Variations in GNP growth
over the decade were accompanied by simultaneous,
but wider, fluctuations in import growth. However,
this explanation does not appear to be as valid in
analyzing the import performance of 1970 and 1971
as in earlier years.
Page 13
FEDERAL RESERVE
BA N K OF ST. LO U IS
Determinants of U.S. Foreign Trade Position
Percent C h a n g e from C orresp ond ing Period 1 Y e a r Earlier
Se m i-A n n u a l D a ta
Percent Changes in U.S. Nonagricultural Exports
A P R IL
1972
T a b le V
U . S . R e la t iv e C o s t a n d
P r ic e P o s it i o n , 1 9 6 1 - 1 9 7 1
.......
. c
.
U nit V a lu e o f Exports
of M a n u fa c tu re d G o o d s :
U nite d States
C o m p e tito rs*
----------- ------------— --------—
1963 — 1 0 0 **
1961
1962
1963
1964
1965
1 0 0 .2
1 0 0 .2
1 0 0 .0
1 0 0 .7
1 0 4 .0
10 1 .1
9 9 .8
1 0 0 .0
1 0 1 .5
1 0 2 .5
1966
1967
1968
1969
1 0 6 .9
1 1 0 .2
1 1 2 .7
1 1 7 .6
1 0 4 .3
1 0 5 .6
1 0 5 .5
1 0 9 .3
1/1970
11/1970
111/1970
IV / 1 9 7 0
1/1971
11/1971
111/1971
1 2 3 .0
1 2 4 .0
1 2 4 .0
1 2 4 .0
1 2 8 .0
1 2 7 .0
1 2 6 .0
1 1 4 .3
1 1 6 .5
1 1 7 .8
1 1 7 .2
1 1 8 .0
12 1 .0
1 2 4 .0
1961
1962
1963
1964
1965
1 0 2 .0
1 0 1 .6
1 0 0 .0
9 8 .6
99.1
9 8 .5
9 8 .7
1 0 0 .0
9 9 .6
1 0 3 .3
1966
1967
1968
1969
1 0 0 .8
1 0 3 .7
10 7 .7
11 1 .6
1 0 5 .5
1 0 5 .4
1 0 3 .9
1 0 6 .0
1/1970
11/1970
111/1970
IV / 1 9 7 0
1/1971
11/1971
111/1971
1 14.1
1 1 4 .4
1 16.2
1 1 6 .2
1 1 8 .0
1 1 9 .0
12 0 .0
1 1 0 .3
1 1 3 .7
1 1 7 .3
12 1 .1
12 1 .0
1 2 3 .0
1 2 9 .0
U nit L a b or C ost in M a n u fa c tu rin g :
(M ain Econom ic Indicators)
1_1_U.S. nonagricultural exports are adjusted to exclude autom otive exports to C a n a d a
a n d exports of aircraft.
[^Ind ustrial production in C a n a d a , United Kingdom , G erm any, France, Italy, and Japan
w eighted by these countries' percentage shares in U.S. exports.
[3 Excludes autom otive imports from C an a d a.
Note; Sem i-annu al a v e ra g e s of monthly or quarterly data.
Price as well as income movements determine the
pattern of trade flows. Until late 1969 prices of goods
exported from the United States rose substantially
faster than those exported by the United States’ com
petitors. However in 1970 and 1971, export prices of
competitors rose 8.4 percent compared to 2.4 percent
for U.S. goods, thereby improving the U.S. relative
export position. Much of the relative improvement
was apparently due to rapid domestic inflation in
Europe (indicated by a rapid rise in costs per unit of
production) which spilled over into the export sectors
in 1970 and 1971.5
5Although both price and income movements proved more
favorable to the United States in 1970 and 1971 than in
previous years, much of the improvement can be attributed
solely to the different cyclical positions of the United States
and most European nations, and represents no fundamental
improvement in the U.S. trade position. Both the OECD
and the Federal Reserve Board have begun work to develop
data on “ cyclically adjusted” trade balances. The OECD s
preliminary cyclical adjustment estimates indicate that the
observed U.S. surplus of $2.2 billion on current transactions
(excluding Governments grants) in 1970 was $2.4 billion
higher than it would have been under “ normal” conditions
(defined as a condition of normal high employment in all
O ECD countries). U.S. calculations indicate a 1970 adjust
ment for cyclical and other special factors of $2.8 billion, or
an adjusted deficit of $0.6 billion. A similar adjustment for
Page 14
♦ W eig h ted a v e r a g e f o r B e lg iu m , C a n ada. F r a n ce , G e rm a n y , Italy,
J apan, Netherlands, Sweden, and United Kingdom.
** Ad justed fo r changes in exchange rates.
S o u rce : D epartm ent o f Labor, International M onetary Fund, Council
o f E conom ic Advisers.
Private and Government Capital Accounts
A major component of the outflow of private capital
in the 1960s has been private U.S. direct capital in
vestment abroad. In the early 1960s the outflow aver
aged $1.8 billion, compared to $3.3 billion from 1965 to
1969. It reached $4.4 and $4.5 billion in 1970 and 1971,
respectively. This outflow has been more than offset
in most years by income on U.S. investments abroad
(included in the current account) and by foreign di
rect investments in the United States. The flow of
foreign direct investment to the United States in
creased markedly in 1969 and 1970 when cyclical
conditions were favorable, but diminished to a deficit
of $0.2 billion in 1971.
the first three quarters of 1971 indicates the underlying trade
balance was much less favorable than the observed figure of
$0.1 billion. Economic Report of the President, 1972, p. 153.
FEDERAL RESERVE
BA N K OF ST. LO U IS
Private financial short-term capital flows generally
respond to the stocks of assets held by U.S. and for
eign residents as well as changes in those stocks, and
the level of and changes in interest-rate differentials.
In periods of greater than normal uncertainty, such as
existed in part of 1971, speculative transactions may
obscure these fundamental economic relationships.
The major change in financial capital flows in 1971
was an increase in certain nonliquid short-term pri
vate capital outflows (loans by banks and nonbanks
to finance foreign trade) by $2.0 billion to $2.5 billion
from an average outflow of $0.5 billion in 1970. Errors
and omissions increased to a $10.9 billion deficit in
1971 from a $1.1 billion deficit in 1970. A small por
tion of these errors and omissions (about $1 billion)
represents errors in data collection and reporting. The
remainder of the errors and omissions is probably
highly interest-rate sensitive and reflects speculative
short-term capital flows not captured by normal re
porting procedures.
The net liquidity balance deteriorated in 1971 be
cause of adverse movements on trade account, long
term private capital, and errors and omissions. The
deficit was $22 billion in 1971, compared to deficits
of $3.8 billion in 1970 and $6.1 billion in 1969.
The change in accounting procedures made in mid1971, which included liquid short-term assets along
with liquid liabilities to other than foreign official
agencies as a financing item of the net liquidity bal
A P R IL
1972
ance, decreased the net liquidity deficit by $1.1 billion
in 1971, while increasing it $0.2 billion in 1970. The
accounting change which included nonliquid U.S.
Government and long-term U.S. bank liabilities to
foreign official agencies as financing items of the liq
uidity balance decreased the liquidity deficit by a bil
lion dollars or less in each of the last three years.
Official Settlements Balance
The official settlements balance increased to a $29.8
billion deficit in 1971 from a $9.8 billion deficit in 1970
and a $2.7 billion surplus in 1969. The shift from sur
plus to deficit in the past two years reflected net out
flows of liquid private capital in addition to the ad
verse movements on trade account, long-term private
capital, and errors and omissions which contributed
to the liquidity deficit. These liquid dollar movements
shifted from inflows of $3.2 billion and $8.8 billion in
1968 and 1969, respectively, to outflows of $6.0 billion
and $7.8 billion in 1970 and 1971, respectively. Much
of the outflow was associated with repayment of Euro
dollar liabilities of U.S. banks to their foreign branches
and agencies.
The official settlements balance was financed in
1971 by a reduction in reserve assets of $2.3 billion
and a net increase of liquid and certain nonliquid
liabilities to foreign official agencies of $27.4 billion.
Most of the reduction in reserve assets occurred be
fore August 15.
Page 15
Outlook for Farm Income and Food Prices1
by CLIFTON B. LUTTRELL
A C C O R D I N G to the United States
Department of Agriculture both gross
and net farm income will rise sharply
this year. The physical volume of farm
product sales will remain at about 1971
levels, but rising demand will cause
prices to average somewhat higher. The
slower growth in farm production will
tend to reduce the rate of increase in
food supplies, which along with rising
food demand, points to higher average
food prices than last year.
T a b le I
F A R M IN C O M E
(B illio n s )
C a sh Receipts
G o ve rn m e n t Paym ents
R ealized N o n m o n e y Incom e
R ea lized G ro s s Incom e
Farm E xp e n se
R ea lized N e t In c o m e * *
1960
1965
1970
1971 *
1972*
$ 3 4 .2
$ 3 9 .4
$ 4 9 .2
$ 5 1 .6
$ 5 3 .6
.7
2.5
3 .7
3.2
4 .4
3.2
3.1
3 .6
3.8
3.8
$ 3 8 .1
$ 4 5 .0
$ 5 6 .6
$ 5 8 .6
$6 1 .8
2 6 .4
3 0 .9
4 0 .9
4 2 .9
4 4 .4
$ 1 1 .7
$ 1 4 .0
$1 5 .7
$ 1 5 .7
$ 1 7 .4
$ 2 ,9 5 3
$ 4 ,1 9 2
$ 5 ,3 6 9
$ 5 ,4 5 9
$ 6 ,1 4 6
N et Incom e Per Farm
(d o lla rs)
♦Data fo r 1971 are estimates and 1972 data are projection s.
* ^Com ponents m ay not add to totals because o f rounding.
Realized net farm income in 1972
may exceed that of 1971 by 10 to 15
percent, according to the U. S. Department of Agri
culture. Gross farm income is expected to rise $3 to
$3.5 billion from the record $58.6 billion in 1971, and
production expenditures may increase only $1 to $1.5
billion, resulting in a realized net income gain of $1.5
to $2 billion from the 1971 estimate of $15.7 billion.
This would be one of the largest annual income gains
to farming in recent years. Average income per farm
is expected to exceed $6,100, a gain of 13 percent
from a year earlier.
Most of the expected gain in gross farm income will
be from increased receipts from livestock products
and higher Government payments. Receipts from live
stock product marketings may rise about $2 billion
from $29.7 billion last year, and Government pay
ments to farmers may rise $1.25 billion from last
year’s $3.2 billion. Crop receipts are expected to re
main near their $21.9 billion level of last year.
Total farm production expenditures may rise about
$1.5 billion, continuing their long trend upward, but
at a slower rate than in most recent years. Since 1965,
such expenses have risen at the average rate of $2
billion per year, reflecting both the uptrend in volume
of production items used by farmers and a high rate
of inflation. In the five years prior to 1965, at a time
of little inflation, total farm production expense rose
less than $1 billion per year.
'T h e outlook portion o f this article is a summary of the re
ports given at the 50th National Agricultural Outlook Con
ference in Washington, D. C., during the week of February
22, 1972.
Page 16
Farm Product Supply, Demand, and Prices
Little overall change in the physical volume of farm
product sales is expected in 1972 from last year’s
levels. Total food output may be sufficient for per
capita consumption to remain near 1971 record levels.
After climbing for six consecutive years, the quantity
of red meat supplied per capita this year may aver
age slightly less than the 192 pounds in 1971. Reef
output will be up moderately, partially offsetting some
expected declines in veal, lamb, mutton, and some 4
to 5 pounds less pork per capita. Output of chicken
will be sufficient to provide an increase in consump
tion from the record 41.6 pounds per person in 1971,
but the gain may be smaller than in most recent
years. Turkey production is expected to increase
slightly from the 1971 level. Per capita supplies of
red meat and poultry combined will thus remain near
the levels of a year ago.
Egg output will likely be down from the relatively
high levels of last year because of the recent decline
in the laying flock. Although dairy product supplies
are expected to rise, a portion of the increase will
likely be removed from the market through Govern
ment price support operations.
Given normal weather conditions, crops will be
in greater supply in 1972 than in 1971. Total proc
essed vegetable stocks are slightly larger than a
year ago. Winter and spring vegetable crops may
increase slightly from last year’s levels. Citrus crops
may equal those of last year, but more efficient juice
FEDERAL RESERVE
B A N K OF ST. LO U IS
extraction methods may enhance the supply of citrus
products. Potato stocks are down slightly from last
year, but are about the average of recent years.
A large feed grain crop was produced in 1971
which, combined with a carryover from the previous
year of 34 million tons, resulted in record feed grain
stocks of 239 million tons. The resulting lower prices
may lead to more liberal feeding, and total domestic
feed grain usage this year may reach 184 million tons.
Exports will probably total about 21 million tons, the
same as a year ago. Carryover at the end of the cur
rent market year may total 55 million tons, up 22
million from last year and the largest volume of carry
over stocks since 1964.
The impact of the large quantity of feed grains on
domestic food prices will, however, be reduced as a
result of Government price support programs. The
large stocks will tend to hold prices near the Govern
ment loan rate throughout the marketing year, thus
preventing any major seasonal price increases. The
Government price supports will prevent any major
reductions. Government support prices for most grain
crops in 1972 are unchanged from 1971 levels with
the announced support prices: for corn, $1.08 per
bushel; oats, $0.54 per bushel; and rye, $0.89 per
bushel. The support price for barley was raised from
$0.81 to $0.86 per bushel.
Rice stocks are likewise in excess supply for the
current marketing year beginning August 1, 1971.
Carryover stocks were up 13 percent from a year
earlier, and coupled with the larger 1971 crop, re
sulted in a rice supply of 104.4 million cwt., about
three times the expected domestic use for a year. Ex
ports, however, may be up from the 46.5 million cwt.
of last year, with most of the gain arising from sub
sidized export programs. Despite the excess stocks,
prices will be supported by the Government at some
what higher levels than last year, and cash receipts
for the 1972 crop will likely be somewhat higher.
W heat supplies are at the highest level in nine
years as a result of the record 1971 harvest of 1,640
million bushels and the above average carryover
stocks of 730 million bushels. The total supply of 2.4
billion bushels exceeds the previous year’s level by 115
million bushels. Domestic wheat usage plus exports
may total about 1.4 billion bushels, resulting in carry
over stocks at the end of the current market season
of almost one billion bushels — the largest carryover
since 1963.
Wheat is grown under a two-tiered Government
price support program — one price for wheat used for
A P R IL
1972
domestic food and the other for wheat used primarily
for livestock feed and for export. The program for
1972 is little changed from that of a year earlier. The
Government loan rate is $1.25 per bushel, but the
total support price for that portion of the crop used
by the domestic food industry will be 100 percent of
parity, or somewhat above the $2.93 per bushel in
1971. The voluntary set-aside acreage for payment is
up to 75 percent of domestic wheat allotments in
1972, whereas in 1971 there was no payment for
voluntary set-aside acreage.
Soybean stocks are down from the 1970-71 total,
and carryover into next year may be down to a mini
mum operating level. Stocks in the current marketing
year total 1,268 million bushels compared with 1,354
million bushels a year earlier. Domestic crushings this
year may not exceed 725 million bushels, down from
760 million last year, and exports are expected to be
down somewhat from the 422 million bushels of a
year earlier.
Soybean prices have risen sharply in recent weeks,
and the price for the year is expected to average well
above $3 per bushel, the highest since 1947-48. With
this increased price incentive, planting intentions are
up. Even so, stocks are expected to remain relatively
small for another year. The outlook is for relatively
high prices for the 1972 crop and another gain in cash
receipts from soybean sales.
Cotton planting restrictions have in recent years re
sulted in a relatively short supply. Smaller beginning
stocks and below average production for the past two
years may lead to the smallest stock of cotton in more
than two decades. The 1971 crop of 10.4 million bales
was only slightly above the previous year’s crop and,
with distribution for the two years totaling almost 23
million bales, carryover stocks at the end of the cur
rent year may not exceed 3.5 million bales. As a re
sult, prices have increased sharply since mid-1971.
Cotton has for several decades faced intensive com
petition from man-made fibers. Domestic mill con
sumption in the calendar year 1971 totaled 19 pounds
per person, down from 22 pounds in 1958. Its share of
the fiber market slipped to 37 percent in 1971, com
pared with 68 percent in 1958. In contrast, man-made
fiber usage reached a record high of 31.4 pounds per
capita in 1971, or 61 percent of the fiber market, com
pared with 10 pounds per capita and 30 percent of
the market in 1958.
Tobacco stocks, which like cotton are held in check
by Government production control programs, are
somewhat lower this marketing year than a year ago.
Page 17
FEDERAL RESERVE
BA N K OF ST. LO U IS
A P R IL 1972
The 1971 tobacco crop was 6 percent less than a year
earlier, and tobacco stocks, while still ample, are down
3 percent. This year’s marketing quotas for flue-cured
and burley tobacco are down 1 and 4 percent, respec
tively, from 1971 levels. Tobacco use has trended
downward for several years, and this trend is likely
to continue through the current marketing year.
Prices received by farmers, however, are at record
levels under the price support program, and the man
datory supports will be up 4.8 percent for this year’s
crop. Thus, cash receipts to growers are likely to rise
somewhat.
Prices received by farmers for most products sold in
early 1972 averaged well above those of early 1971
and are expected to remain above last year’s levels
throughout the year (see Table II). In January, aver
age prices received were 13 percent above year ear
lier levels. By February, however, the gap between
1972 and 1971 prices narrowed to 9 percent as prices
this year rose more slowly than last year. The year-toyear difference will likely remain below that of Janu
ary throughout the remainder of 1972.
T a b le II
AVERAGE
to average higher than last year, but may decline later
in the year if supplies increase as expected.
Milk prices may average above 1971 levels through
the first quarter of the year, and broiler and egg prices
will likely average higher than last year’s levels
throughout the year. On the other hand, prices of
fresh fruits and vegetables, which have in recent
months been far above year earlier levels, are ex
pected to dip below 1971 levels since supplies will
probably be larger than the freeze-damaged crops of
early last year.
Outlook for Food Prices
Rising private and Government demand for farm
products and food and slower growth of the quantity
available this year may cause food prices at grocery
stores to average about 4 percent above the 1971 level.
Much of the expected average increase in farm prod
uct prices for the year may have already occurred
as a result of sharp increases for meat animals early
in the year.
T a b le III
PRICES R EC EIV ED BY F A RM ER S
C o m m o d ity a n d U nit
Feb. 15,
1971
A ll w h eat, per bu.
$
Feb. 15,
1972
FARM A N D
Percent
Change
(F e b ru a ry
FOOD
1971
PRICE C H A N G E S
to F e b ru a ry
1972)
Percent
1.41
$
1 .3 4
-
5 .0 %
Rice, ( r o u g h ) , per cwt.
5 .4 4
5 .5 7
2.4
C orn, p er bu.
1 .4 3
1.09
-2 3 .8
O a ts , per bu.
0 .6 7 5
0 .6 3 6
-
C otton, A m e rica n u p la n d , per lb,.
0 .2176
0 .3 0 2 7
S o y b e a n s , per bu.
2 .9 2
3 .0 0
A ll beef cattle, per cwt.
Steers a n d h eifers, per cwt.
H o g s, per cwt.
A ll m ilk, so ld to p lan ts, per cwt.
M ilk e lig ib le fo r fluid m arket
B roilers, live, per lb.
5.8
39.1
2 .7
2 8 .5 0
3 2 .6 0
1 4 .4
3 0 .9 0
3 5 .3 0
14.2
1 9 .2 0
2 5 .7 0
3 3 .9
5.91
6 .0 6
2.5
6 .2 9
6.41
1.9
0 .1 3 7
0 .1 4 6
6 .6
In d e x o f Prices Received
112
122
C ro p s
105
111
5 .7
Livestock products
117
131
11.9
5 .4 %
F oo d at hom e
5.8
C e re a ls a n d b a k e ry products
1.3
M e a ts, poultry, a n d fish
1 1 .2
D a iry products
2.5
Fruits a n d ve ge ta b le s
O th e r fo o d s at hom e
1 0 .0
—
0.1
C o n su m e r Price In d e x 1
C om m o d ities less fo o d
2.3
W h o le s a le Price In d e x 2
A ll com m odities
4 .0
Farm products
6 .0
Prices Received b y Farm e rs2
A ll farm products
8 .9
8 .9
S ou rce: U .S . Departm ent o f A gricu ltu re, W ashington, D. C., A g ri
cultural P rices (F ebruary 29, 1972).
Meat animal prices this January averaged more than
25 percent above those of a year earlier, reflecting
major increases in prices of hogs and beef cattle.
Prices for hogs have declined from their relatively
high January and February levels, but are expected
to remain above last year’s levels throughout the re
mainder of 1972 as a result of an expected reduction
in per capita pork supplies. Beef prices are also likely
Page 18
Food1
1U. S. D epartm ent o f Labor, Bureau o f Labor Statistics, W ashing
ton, D. C.
C alcu lated from data published in E conom ic Indicators (M arch
1972). P repared fo r the J oin t E conom ic Comm ittee by the Council
o f E conom ic Advisers, 92nd Congress, 2nd Session.
In contrast to a 9 percent rise in farm product
prices, the average of all food prices rose only 5.4
percent and food at home rose 5.8 percent during the
twelve months ending February 1972 (see Table III).
The farmer’s share of retail food cost likewise in
creased during the past year. During the twelve
months ending November 1971, while farm prices
were rising 7.5 percent, the farmer’s share of retail
food costs for urban workers rose from 36 to 39 per
FEDERAL. R E S E R V E
BA N K OF ST. LO U IS
cent. In the same period, the farm-retail spread por
tion of food cost rose less than one-tenth of a percent,
despite a three to four percent general inflation.2 The
deflated food processing and marketing margin thus
actually declined, a movement which often occurs
during periods of rapid increases in farm prices.
Meat, poultry, fish, fruit, and vegetable prices rose
at substantially higher rates than the average for all
foods in the year ending February 1972. Meats, poul
try, and fish prices rose 11.2 percent, with most of the
increase occurring in the last six months when prices
of hogs and cattle were bid up to substantially higher
levels. Fruit and vegetable prices rose 10 percent,
with most of the gain occurring in the first half of the
year because of the cold weather last winter and
spring, which reduced supplies of vegetables and de
stroyed part of the citrus crop.
Ultimately, rising demand for food by consumers is
reflected throughout the producing, processing, and
distributing sectors. Thus, processing and marketing
margins may rise further this year, offsetting the de
cline last year. Such developments may cause some
what greater food than farm product price gains.
Impact on Consumer Costs
Consumers have been disturbed by the relatively
sharp increases in food prices since late 1971. Food
expenditures at home and away from home currently
account for about 16 percent of disposable personal
income, down from 20 percent in 1960. Still food
remains one of the major items in the typical house
hold budget.
Prices of raw farm products are exempt from price
controls under Phase II of the price-wage control
program. Thus, when farm product prices are bid up
as a result of changed supply and demand conditions,
the regulations permit processors and retailers to raise
their prices to consumers and to maintain customary
percentage margins. With the recent rise in food de
mand relative to supply and the resulting increase in
food prices, some consumer groups have requested
that price controls be placed on food products.
In reply to the pressure for such controls, the Secre
tary of Agriculture at the National Agricultural Out
look Conference made four points:
F irst: F a rm ers ha v en ’t ca u sed inflation. The base
period for government statistics is 1967. Since that
time the price of food has risen less than most of the
other main components of the Consumer Price Index.
2U. S. Department of Agriculture, The Farm Index (February
1972), p. 23.
A P R IL 1972
In 1971, the Am erican consum er bou gh t her fo o d
supply, the best in history, w ith only 16 percent o f
her take-hom e incom e, the low est percentage ever,
in any country. A nd it is likely to go low er in 1972
w ithout price controls on food .
There is no lack o f food . Farmers have d on e their
job. T h ey have d ou b led the per capita supply o f b eef
during the past tw o decades. T h e per capita fo o d
supply for 1972 is likely to b e at least equ al to that
o f 1971. Farmers are n ow engaged in converting last
year’s abundant feed grain crop into meat, milk and
eggs, and they w ill deliver the fo o d if their markets
are allow ed to operate.
T h e reason for rising fo o d prices is that consum ers,
w ith their increasing incom es, have bid these prices
up. A n d consum ers w ant m ore service w ith their
fo o d , w h ich adds to price. Farmers are not to blame.
S e c o n d : C ontrols w o n t w ork. Controls w ere tried
during the O P A days o f W orld W a r II, as som e o f
the older p eop le here w ill rem em ber. W h at w as the
result? Black markets, rationing, priorities, subsi
dies, allocations, regulations, and a w hole host o f g o v
ernm ent officials checkin g prices, w eighing packages,
and hauling p eop le into court. A n d em pty m eat
counters. W h at g ood does a consum er get from a low
price for b eef if no b eef is available at that price?
P rice controls w o n ’t w ork for com m odities as perish
able, as seasonal and as varied in quality as fo o d
products. W h en the w ar was over w e got rid o f price
controls on food , with w idespread consum er support
for their ending.
Som e consum ers, either too young to kn ow or too
forgetfu l to rem em ber, m ay think they w ant controls.
T h ey should read history. It w ou ld b e easier to learn
the difficulties o f price control for b e e f and pork b y
reading history than it w ou ld be to learn w hile stand
ing in a qu eu e at a h alf-em pty m eat counter.
T h ird : F a rm incom e shou ld not b e sup p ressed .
Per capita in com e o f farm p eop le in 1972 is likely to
average about three-fourths as high as average per
capita incom es o f non-farm residents. In 1972, real
ized net in com e from farm ing is likely for the first
time to exceed the previous record o f $17.1 billion
registered in 1947, tw enty-five years ago. F or w hat
other m ajor sector o f the econ om y is an in com e equal
to that o f a quarter o f a century ago thought to be so
high that it needs to b e suppressed b y G overnm ent
action?
F o u rth :
A gricu ltu re is com petitive. T h e main
cause o f the present inflation is the exercise o f co n
centrated econ om ic pow er b y special interest groups.
This p ow er is exercised b y labor union leaders w ho
dem and and receive unrealistic w age increases for
their m em bers. Concentrated econ om ic p ow er is also
exercised by industrial firms and by the service
trades through adm inistered pricing. T h e W est Coast
dockworkers, w h o have been receiving $7.76 per
hour, including fringe benefits, have just negotiated
a w age increase that w ill, at the end o f three years,
bring their com pensation, including fringe benefits,
up to $9.94 per hour. As another exam ple, during the
year before the President’s E con om ic Stabilization
Page 19
F E D E R A L R E S E R V E B A N K OF ST. LO U IS
A P R IL 1972
Alternative Means of Reducing Food Costs
FOOD E X P E N D IT U R E S-IN C O M E TRENDS
1929
1935 1940 1945 1950 1955 19 6 0 1965 1970 1975
BASED ON DATA OF DEPARTMENT OF COMMERCE.
& PRELIMINARY
U.S. DEPARTMENT OF AGRICULTURE
Program went into effect, the price of barbed wire
increased 11 percent.
These goods and services are priced administra
tively, which means that competitive market forces
are sharply restricted. The Economic Stabilization
Program is properly focused on these particular sec
tors, which is where most of our present inflation
originates.
In contrast, agriculture is highly competitive,
sometimes harshly so, and is therefore not in need
of control.
While the Secretary’s view (that concentrated eco
nomic power caused the present inflation) is widely
held, there are other explanations.3 Nevertheless, the
data confirm his view that food prices have risen less
than the average of other consumer prices in recent
years. From 1964 to January 1971, the price of all
consumer items increased at the annual rate of 3.6
percent, while food prices rose at the rate of only 3.4
percent. Food expenditures have been a declining
portion of disposable personal income, dropping from
22.2 percent of such income in 1950 to 16.3 percent
in 1971. Furthermore, food costs as a percent of total
disposable income are expected to decline again in
1972, despite some further increases in food prices.
3W e have no evidence that large unions and business firms
exercise greater power now than during the period 1953 to
1961 when the post-World War II inflation was slowed to a
one percent rate. Monopolistic power of labor unions or of
businesses can cause misallocation of resources and higher
levels of unemployment, but it is doubtful that they have
been a major cause of the current inflation. For example,
the high rates o f inflation during W orld War II and the
Korean War were reduced by a slower rate of monetary
growth. The money stock from 1953 to 1961 rose only 1.4
percent per year and prices only 1 percent, as measured by
the wholesale and consumer price indices. This slower rate of
inflation was achieved while a larger percent of the labor force
was unionized than is the case today. The share of nonagricultural workers in unions declined from 34 to 28 percent and of
total workers from 25 to 23 percent during the period 1953-68.
W e likewise have no evidence of an increase in monopoly
power in commodity markets. The fifty largest manufacturing
Page 20
If the objectives of public policies are to reduce
food costs and encourage economic growth, means
are available which offer greater opportunities for suc
cess than the direct controls method. As pointed out
by the Secretary of Agriculture, if supply and de
mand, including Government demand through price
support operations, are in equilibrium at current
prices, any reduction in price through direct controls
will mean that consumers must face empty retail
grocery shelves. Furthermore, any attempts at such
control will require a large number of enforcers, tak
ing manpower from the production of other goods and
services, thereby reducing output and increasing in
flationary pressure.
Other means of reducing food costs include such
actions as freeing international trade and reducing our
domestic farm price support and production control
programs. Both methods would release manpower
from the less productive to the more productive sec
tors of agriculture and the rest of the economy,
thereby increasing total production of goods and
services.
The immediate elimination of import restrictions on
meat and sugar could have an important dampening
effect on domestic prices. An increase in meat imports
would tend to reduce prices for frankfurters, luncheon
meats, ground beef, and a variety of canned and fro
zen meat products. The removal of the sugar quota
would result in a decline in domestic sugar prices of
about $.043 per pound.4 D. Gale Johnson, of the
firms had 23 percent of value added in 1954 and 25 percent
in both 1963 and 1966. Shipments accounted for by the
largest four firms in each of twenty-two selected industries
showed little change in concentration from 1947 to 1966.
Furthermore, firms during this period experienced rising com
petition from manufacturing firms abroad.
In contrast to the view that imperfect labor and commodity
markets are an important cause of inflation, research at this
Bank indicates that the rate of money growth is the chief
cause. In the recent inflation from 1965 to 1970 the money
stock grew at a 5 percent rate, wholesale prices at a 3 percent
rate, and the general price index at a 4 percent rate. Earlier
inflations have likewise been associated with high rates of
money growth.
The relatively long lag between slower money growth and
its impact on prices has probably been disappointing with
respect to the progress made in slowing the rate of inflation to
date. Expectations based on past trends in prices and wages
continue to provide inflationary momentum. It is during such
periods that the monopoly powers of labor unions and some
businesses are most noticeable, since wages and prices often
continue to rise despite under-utilization of resources. This
momentum may extend over a period of three or four years,
following a prolonged and relatively high rate of monetary
expansion, as occurred in 1967 and 1968.
4Based on New York wholesale price differential between sugar
for domestic and foreign use in November 1971.
F E D E R A L R E S E R V E BA N K OF ST. LO U IS
University of Chicago, reported at the recent Agricul
tural Outlook Conference that:
A t the present time the sugar program im poses an
additional cost o f approxim ately $1 billion on con
sumers and taxpayers; this com pares to total cash
receipts from production o f sugar cane and sugar
beets in dom estic areas o f about $700 m illion in 1970.
T h e cost to consum ers is calculated as over and
a b ove the im port cost o f sugar and assumes that
w orld m arket prices w ou ld increase if the U. S. in
creased its im ports o f sugar. It is obvious that the
econ om ic losses to consum ers and taxpayers far ex
ceed any net gains to producers o f sugar in the
U nited States; it is equally obviou s that both those
n ow produ cin g and consum ing sugar cou ld b e m ade
better off b y other arrangem ents.5
In addition to consumer gains from reduced import
restrictions on farm products, any concessions we can
obtain through bargaining with our world trading
partners for reduced restrictions on farm exports will
provide a greater market for our farm products. W e
probably have a relative production advantage in sev
eral major farm commodities. The exports of such
commodities could be increased with reduced trade
restrictions, and our farmers would gain by selling
more of the products that they can produce with
greatest efficiency.
A reduction in the nation’s farm price support, pro
duction control, and related programs probably would
not lead to a major change in output of farm products.
Lower price supports would tend to reduce produc
tion. On the other hand, a relaxation of production
controls, including the acreage rental program, would
tend to increase production and production efficiency.
Domestic use of farm products would probably not
increase significantly. Gains in production efficiency
would lead to somewhat lower prices for farm prod
ucts and food. Lower food prices would in turn lead
to some upgrading of diets, thereby providing a mar
ginal gain in domestic farm commodity and food
consumption.
Commercial exports of farm products, however,
would be expected to increase as a result of both
somewhat lower average prices and a change in re
source use to the production of commodities where
we have the greatest comparative advantage. The
lower prices would make our commodities more at
tractive abroad. By changing to the production of
those products where our comparative advantage is
greatest, both this nation and our trading partners
BSimilar inefficiencies in the U. S. sugar program were found
by Thomas H. Bates in “ The Long-Run Efficiency of United
States Sugar Policy,” American Journal of Agricultural E co
nomics (August 1968), pp. 521-535.
A P R IL
1972
abroad would reap the advantages of international
specialization. On the other hand, a reduction in ex
port subsidies would result in some decline in the
exports of commodities shipped under these programs.
There is little evidence that the farmer is achieving
substantial gains from the price support and acreage
control programs. In fact, as pointed out so succinctly
by D. Gale Johnson, the gains were in the form of a
windfall to those who owned land when the programs
began and offer little benefit once farm land prices
and labor adjust to the new income flows.
T h e nature o f agricultural produ ction is such that
efforts to create a cartel under guidan ce and subsidy
from W ashington w ill alm ost certainly lead to dis
appointing results. T h ere is no w ay to restrict entry
into agriculture. Thus if a program w ere to result in
higher returns for agriculture through price supports
and acreage restrictions, potential producers w ill at
tem pt to enter the field. O ne w ay that this can be
d on e is to b u y land w h ich has attached to it the right
to p rod u ce the particular com m odity. A fter a fairly
short tim e land prices w ill b e b id up and n ew p ro
ducers w ill find that it is no m ore profitable to p ro
d u ce this particular crop than a num ber o f others.
This is not a h ypothetical case, bu t is essentially w hat
has h appen ed in tob a cco, w here acreage controls,
marketing quotas, and p rice supports have been
maintained for tw o d ecades.B
6D. Gale Johnson, “ Government and Agriculture: Is Agricul
ture A Special Case?” T he Journal of Law and Economics
(O ctober 1958), p. 128. For a further discussion of this topic
see John F. Floyd, “ Effects of Farm Price Supports,” Journal
of Political Economy (April 1965), pp. 148-158. Floyd points
out that the benefits of such programs take the form of a
windfall, that is, the gain is once and for all. Thus, there is
little advantage in these policies for the landless and for the
person about to enter the industry. Armen A. Alchian and
William R. Allen in University Economics, 2nd ed. (B el
mont: Wadsworth Publishing Company, Inc., 1968), p. 347,
provide an analysis of the windfall aspects of our national
farm program. G. S. Tolley in “ Management Entry into U. S.
Agriculture,” American Journal of Agricultural Economics
(November 1970), p. 492, suggests that the basic agricultural
income problem is one of low-level management being
outmoded.
Alternative views relative to the farm price support and
production control programs are presented by Willard W.
Cochrane in The City Man’s Guide to the Farm Problem
(Minneapolis: University of Minnesota Press, 1965). Coch
rane states, “ If the full excess productive capacity of Ameri
can farming of the early 1960’s were to be eliminated by
lower prices, the decline in the level of farm prices could be
as much as 40 percent, and the decline in aggregate net
farm income as much as 60 to 70 percent” (p. 126). Earlier
however, in the same publication, Cochrane states, “ Govern
mental price and income support has provided farmers with
assistance and service, but the programs are costly, the longrun income results debatable, and the whole policy subject
to intense controversy” (p. 11). Similarly, the National Ad
visory Commission on Food and Fiber in Food Needs and
U. S. Agriculture in 1980, Technical Papers, Volume 1
(August 1967), pp. 51, 52, points out the excess capacity in
agriculture and the major adjustments that would be neces
sary for a return to free market prices.
Both of these studies contend that in the absence of Gov
ernment price supports and production controls, excess caPage 21
FEDERAL RESERVE
BA N K OF ST. LO U IS
A P R IL
T a b le IV
U N IT E D STATES D E P A R T M E N T O F A G R IC U L T U R E
BUDGET O U T LA Y S1
Function
1967
A ctual
1971
A ctu al
1972
Estim ated
( B illio n s)
A gricu ltu re a n d Rural
Develop m en t
$ 3 .7
$5.1
$ 7 .3
Incom e Se c u rity-
0.4
2.3
2.9
Food fo r Peace
1.5
0 .9
1.1
N a tu ra l Resources
O th e r 3
Total
N u m b e r of Farm s in U.S.
(t h o u s a n d s )
O u t la y s per Farm
(d o lla rs)
0 .3
0 .8
0 .9
— 0 .5
-0 .6
$ 5 .8
$ 8 .6
$1 1.6
3 ,1 4 6
2 ,8 7 6
2 ,831
$ 1 ,8 4 4
$ 2 ,9 9 0
$ 4 ,0 9 8
-0 .1
*A11 years are on a fiscal year basis. Outlays include expenditures and
net lending.
2Listed as Health and W elfare in 1967.
3N et receipts.
S ou rce: U. S. D epartm ent o f A griculture, Demand and P rice Situa
tion (F ebruary 1968 and 1972).
Another benefit from some dismantling of the farm
program would be a reduction in Governmental ex
penditures. Outlays of the U. S. Department of Agri
culture for fiscal 1972 are estimated at $11.6 billion,
$3 billion more than in 1971 and double the volume
of these expenditures in 1967 (see Table IV). Such
expenditures are expected to total $4,098 per farm in
1972, 37 percent more than a year earlier and more
than double that of 1967. Not all of these costs are
associated with the objective of larger farm incomes.
pacity will have an unfavorable impact on farm incomes.
Over the longer run, however, as pointed out by many econ
omists, agricultural capacity adjusts to income changes.
Higher returns to resources in agriculture relative to resources
in other sectors provide incentive for resources to move into
farming. Conversely, reduced incomes in agriculture lead to
reduced capacity. See Zvi Griliches, “ Estimates of the Aggre
gate U. S. Farm Supply Function,” Journal of Farm E co
nomics (M ay 1960), pp. 282-293; Lowell E. Callaway,
“ Mobility of Hired Agricultural Labor: 1957-1960,” Journal
o / Farm Economics (February 1967), p. 47; Larry Langemeier and Russell G. Thompson, “ Demand, Supply, and
Price Relationships for the Beef Sector, Post-World War
II Period,” Journal of Farm Economics (February 1967),
p. 174; Randolph Barker, “ Appropriate Methods for Estimat
ing the Short-Run Elasticity of Supply for Milk,” Journal of
Farm Economics (August 1965), p. 841; A. J. Raymer and
Keith Cowling, “ Demand for Farm Tractors in the United
States and the United Kingdom,” American Journal of Agri
cultural Economics (November 1968), pp. 896, 906; and
Luther G. Tweeten and C. Leroy Quance, “ Positivistic Meas
ures of Aggregate Supply Elasticities: Some New Ap
proaches,” American Journal of Agricultural Economics (M ay
1969), p. 352.
http://fraser.stlouisfed.org/
Page 22
Federal Reserve Bank of St. Louis
1972
Agricultural research and extension work, soil conser
vation, forestry, and a number of the traditional func
tions of the US DA would remain if the price support,
production control, and related expenditures were re
moved. But, the total costs of these traditional func
tions of the Department probably don’t exceed 10
percent of its current budget.7 The major portion of
its expense could thus be eliminated in the absence
of the price support and production control objectives.
Conclusions
In summation, the outiook is for higher farm in
comes in 1972. Gross farm income will probably rise
$3 to $3.5 billion from a year earlier, largely reflecting
higher returns from livestock products and increased
Government payments. Net farm income may rise $1.5
to $2 billion, the sharpest year to year gain in recent
years, and average income per farm is expected to
exceed $6,100. Prices for farm products will also aver
age higher than last year.
Food prices will average higher than a year ago, re
flecting increases in both processing and marketing
margins and farm product prices. The increases have
resulted in pressure for price controls on food. More
efficient means of reducing food prices are to be
found in freeing up international trade and reducing
farm production controls and price supports. Any at
tempt to directly control food prices while such pro
grams exist would involve one arm of the Federal
Government supporting farm prices and another arm
attempting to depress them.
The removal of import barriers would result in
lower prices for a number of important food items,
and to the extent that foreign nations reciprocate,
markets for our farm products would be increased.
Reduction of the price supports and production con
trols would result in more efficient use of national re
sources, reduced Federal cost, and offer greater assur
ance of success at reducing food costs than attempts
at direct controls. A reduction in the production con
trol and price support programs would provide incen
tive for resource adjustments within the farm sector
and between the farm and non-farm sectors, thus in
creasing the output of all goods and services.
7D. Gale Johnson, “ Government and Agriculture,” p. 122.
F E D E R A L R E S E R V E BA N K OF ST. LO U IS
A P R IL
1972
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Page 23
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