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FEDERAL
OF ST. LOUIS

BANK
JANUARY 1976

Foreign Trade and Exchange
Rate Movements in 1975
Food Production and Prices
Perspective and Outlook ..

Vol. 58, No. 1

1975 —Year of Economic Turnaround
NORMAN N. BOWSHER

1 HE past year was one of significant economic
turnaround, with the influence of monetary and fiscal
developments superimposed on the continuing transi
tion from the economic disarray of the two previous
years. In 1973 and 1974 the economy was subjected
to a sharp rise in the cost of energy, crop failures,
price controls, and the implementation of environ
mental, safety, and consumer protection programs
which directly reduced productive capabilities across
the economy. As a result, total real output declined
from the fall of 1973 to the fall of 1974, even though
growth of aggregate demand for goods and services
slowed only moderately. Continued strength in de
mand, at a time when production was shackled, re
sulted inevitably in a substantial increase in the price
level. Then, in late 1974, growth of total demand was
curtailed, intensifying the decline in production and
prolonging the recession.
Economic recovery began in 1975, aided in large
part by several factors. Most price controls were elim
inated in 1974, harvests improved in 1975, and the
economy gradually adapted to the higher energy
prices and other restraining influences on output.
Productive capabilities expanded during the year,
albeit from a much smaller base, permitting output
of goods and services to increase in a more usual
manner in response to the growth of total spending.
In addition, monetary and fiscal actions, which in
late 1974 had aggravated the recession, became stimu
lative in 1975, thereby influencing the timing of the
economic turnaround and speed of recovery. The

Page 2

Federal government reduced taxes, granted rebates,
and increased its expenditures sharply, adding signi
ficantly to disposable incomes of households and busi
nesses. Monetary growth was accelerated in an effort
. . to foster financial conditions conducive to stimu
lating economic recovery, while resisting inflationary
pressures. . .
These two developments — adjustments to supply
constraints and stimulative policy actions — contrib
uted to a pronounced economic recovery during the
summer and fall. In addition, the rate of inflation
subsided as the adjustment to supply limitations of
1973 and 1974 neared completion. Despite these im
provements, overall economic performance at yearend
was disappointing to many observers. In December
about 8 million people said they wanted work but
could not find a satisfactory job at the wage desired.
Inflation still continued at a relatively high rate.

PRIOR INFLUENCES ON
ECONOMIC DEVELOPMENTS
Economic developments in 1975 were greatly influ
enced by events in the immediately preceding years.
An understanding of these events is crucial in ascer
taining what factors contributed to the depressed
state of the economy in early 1975, the subsequent
economic turnaround, and the moderation in the rate
of inflation.
1“Record of Policy Actions” of the Federal Open Market Com
mittee, Federal Reserve Bulletin (August 1975), pp. 505-12.

FED ERAL RESERVE BANK OF ST LOUIS

Economic performance depends on both the de
mand for goods and services and the ability of the
economy to supply them. Productive capacity gener
ally expands as a result of growth in the labor force,
additions to plant and equipment, improved skills of
workers, better management techniques, and the ex
pectation of long-term profit. Because these develop
ments have generally provided for a fairly steady rate
of growth of productive capability, nearly all attention
in aggregate economic analysis has been focused on
forces affecting the demand for goods and services.
The ability of the economy to produce has generally
been projected to grow at some trend rate varying
from about 3 to 4.5 percent a year.
However, since the imposition of price controls in
1971, changes in normal supply relationships have
become an important force in shaping economic de
velopments, especially since 1973. While total spend
ing for goods and services was rising rapidly, the
economy was hit by a number of supply constraints.
Through the monopolistic actions of OPEC (Organi
zation of Petroleum Exporting Countries) and other
producing nations, oil supplies were reduced and
energy costs increased sharply. Adverse weather con
ditions, both here and abroad, resulted in widespread
crop failures and increases in food prices.
Far reaching price controls and resource allocation
programs, in effect until early 1974, prevented firms
from adjusting to higher production costs, prompting
some marginal facilities to be closed and plant expan
sions to be postponed. Production in “downstream”
industries was hampered by “shortages” for a time,
and later by higher prices for inputs. Compliance with
environmental and safety laws consumed resources
and added further to costs, while making adjustment
to all the other changing forces more difficult and
costly.
Also, during the past several years laws and regula
tions which were adopted for consumer, environmen
tal, or other purposes have tended to discourage sav
ing and investment — the ingredients essential for
future economic growth. For example, more of the
nation’s income has been channelled through social
security, the food stamp program, and other transfer
payments which tend to bolster consumption relative
to saving. Maximum returns on savings accounts in
banks and thrift institutions were held nearly constant
while the inflation rate increased, causing real losses
to holders of these funds.
These interferences to the production process re
duced the output capabilities of the nation. In re

JANUARY

1976

The Tren d of O u tp u t

(J_The trend of output was determined from the regression lnQ=5.7292+.0092t, which was estimated from
quarterly data for the 1/1947 - 11/1971 period. The coefficient (.0092) is the estimate of the trend rate
of increase of output for the period. The line has been extrapolated beyond 11/1971.
(2.Gross National Product at I9S8 prices.
|3. Dashed line is an estimate of the trend of reol growth after the supply constraints. The new trend
rote of growth of capacity is tentative at this time.
The shaded area in 1973-75 represents the recent economic contraction. The first section (1973-74)
represents the period of constraints on oggregate supply, while the portion since late 1974 was
induced by restriction of aggregate demand. The remaining shaded areas represent periods of
business recessions as defined by the National Bureau of Economic Research.
Latest data plotted: 3rd quarter

sponse, real output peaked in late 1973 and began
declining, despite a 7 percent annual rate of increase
in aggregate demand. From the fourth quarter of
1973 to the third quarter of 1974 real product de
creased at a 3.5 percent annual rate. The rate of
inflation intensified as the economy moved into the
recession. This development appeared contradictory
to some, but is just what must be expected when the
amount of goods available is cut unexpectedly and
demand continues to increase. The constraints on pro
duction caused the bulge in the rate of price increases
by reducing the availability of goods and services re
lative to the demand for them.
In addition, the growth rate of the money stock,
which had averaged 6 percent per year since 1965,
slowed markedly to a one percent rate from June 1974
to January 1975. The pause in the growth of the
money stock was followed, as it usually is, by a slower
expansion in total spending on goods and services in
the fall of 1974, and the recession was intensified.
The economy was thus in great disorder as the year
1974 ended. Production was falling sharply from both
the influence of constraints on supply and a slower
growth in aggregate demand. Industrial production,
which had declined at a 2 percent annual rate from
November 1973 to September 1974, dropped at a 24
percent rate in the final three months of 1974. At the
same time, inflation was severe, with consumer prices

Page 3

FEDERAL R ESER V E BANK OF ST. LOUIS

JANUARY

having risen 12 percent and wholesale prices 21 per
cent in 1974.

M o n e y Stock
Ratio S u i t
Billioas of Dollars

DEVELOPMENTS IN 1975
INFLUENCING THE ECONOMY
In such a climate, some stimulation from monetary
and fiscal actions was believed appropriate, and early
in 1975 policies were adopted which were designed
to expand total spending. Although little was done by
the government to remove or relax the existing sup
ply constraints, or even to facilitate adjustment, the
economic system continued to adapt to their
influence.

1976

Monthly A verages of Doily Figure
Seasonally Adjusted

3201
----------- ----3 1 0 ---------------3 00 ---------- ----290 ---------------280 ----------------

Ratio Seal*
B illioas of Dollars

320

270 ---------------260 ---------------250 ---------------240 ---------------230 ---------- — -

Expansionary Monetary Actions
Early in 1975 monetary actions became much more
expansionary, but the pace of monetary injections
moderated after June. Growth in the monetary base,
which is dominated by the Federal Reserve credit
component, increased at an 8 percent average annual
rate from January to December 1975. From January
to June, the increase was at a 10 percent rate, but
thereafter it was at a 6 percent pace. The base sup
ports expansion of the money stock, and over extended
time periods growth rates of base and money have
usually been similar.
In the early summer, the Federal Reserve System
announced publicly its longer-run targets for mone
tary policy, which included a target range of money
growth of 5 to 7.5 percent from the second quarter
of 1975 to the second quarter of 1976.2 From January
to June, when the recession was at its deepest stage,
money was expanded at a 10 percent pace, up con
siderably from the one percent rate which prevailed
during the previous seven months.
After June 1975, the expansion of the money stock
slowed, bringing the growth rate of money within the
target range. From the second quarter to the fourth
quarter of 1975, money rose at an estimated average
5 percent annual rate, slightly less than the average
since 1965.

Stimulative Fiscal Actions
Taxing and expenditure actions by the Federal gov
ernment, which had already become stimulative in
late 1974, were even more expansionary in 1975. A
decline in tax receipts and an increased growth in ex-Of course, such targets can be revised at any time as economic
conditions change. Initially, the 5 to 7.5 percent target for
money was from March 1975 to March 1976.

Page 4

1967

1968

1969

1970

1971

1972

Percentages are annual rates of change lor periods indicated,
la te st data plotted: December

penditures had caused the deficit in the national in
come accounts budget to rise to a $25 billion annual
rate in the fourth quarter of 1974 — substantially
higher than the $2 billion average rate in the previous
five quarters.
In the first three quarters of 1975, tax receipts in
the national income accounts budget were $20 billion
(annual rate) lower than in the three previous quar
ters, partially as a result of the rebates in the spring
and early summer and lower withholding rates effec
tive June 1. Moreover, Federal expenditures jumped
at a 19 percent annual rate in the first three quarters
of 1975, after rising at an already rapid 11 percent
pace from the end of 1970 to the end of 1974. As a
result, in the first three quarters of the year, the na
tional income accounts deficit leaped to $76 billion
(annual rate). The largest previous annual deficit
since World War II was $22 billion in 1971, and the
peak war deficit was $55 billion in 1944.

Market Adaptation to Supply Constraints
Decisions are made and actions are taken by eco
nomic agents which move resources to their highest
expected returns; once a resource plan is imple
mented, however, it is costly and time-consuming to
change. For example, machinery designed to produce
one commodity is not easily converted to the produc
tion of another. Employees cannot be quickly re
trained in jobs requiring different skills. Hence, when
unexpected supply constraints, such as the increase in
energy prices, cause many forms of activity to be cur
tailed, total output decreases markedly. Since adjust
ment to such a development takes time, the produe-

FEDERAL RESERVE BANK OF ST. LOUIS

JANUARY

1976

tive capacity of the system recovers only gradually.
To the extent that these events and regulations make
some of the existing productive equipment obsolete,
the ability to produce goods and services is reduced
permanently.
The performance of productivity is consistent with
the view that the markets did adjust somewhat to the
supply constraints. Output per hour of all persons,
after a slight contraction in the first quarter of 1975,
rose at a 7 percent annual rate from the first to the
third quarter. This was a marked reversal from the
4 percent decline during 1974 when higher energy
costs, combined with environmental and other controls,
made existing capital less efficient. For comparison,
during the 1969-70 recession, output per hour of all
persons rose at a 1.7 percent pace, and in the first two
quarters of recovery increased at a 5 percent rate.

RESPONSE OF THE ECONOMY IN 1975
The response of the economy to expansionary de
velopments in 1975 was not immediate. The recession
deepened in early 1975, with the turnaround delayed
until spring. Inflation, on the other hand, began sub
siding early in the year.

Recession Continues In Early 1975
Total spending on goods and services changed little
from the third quarter of 1974 to the first quarter of
1975. By contrast, total spending had risen at an
average 8 percent annual rate from 1965 to 1974. A
contributing factor in bringing the growth of spending
to a halt was the marked reduction in the growth of
the money stock which had begun in mid-1974.
Although total spending was about unchanged from
the fall of 1974 to the spring of 1975, market forces
and government actions produced different impacts
on various sectors of the economy. Sales of automo
biles fell at a 31 percent annual rate from the third
quarter of 1974 to the first quarter of 1975. This drop
reflected many factors, including the jump in gasoline
prices, higher auto prices resulting from mandated
safety and pollution devices, and the inability of au
tomobile manufacturers to quickly alter the types of
autos produced in response to changed consumer de
mand. Housing expenditures dropped at a 42 percent
rate, in part because of a large existing stock of homes
and a pronounced rise in construction and land costs
in recent years.
Also, after growth of spending on goods and serv
ices began to falter in late 1974, business inventories

began to contract sharply. From the fourth quarter of
1974 to the first quarter of 1975, the decline was at a
$19 billion annual rate. Earlier, businessmen had built
up inventories to unusually high levels relative to
sales, partly to hedge against possible shortages if
price controls were reimposed and partly because of
profit opportunities with sharply rising prices. By
contrast, consumer expenditures for services and non
durable goods and government purchases continued
to expand in late 1974 and early 1975.
Real output, which began contracting in late 1973,
declined sharply in late 1974 and early 1975. From
the third quarter of 1974 to the first quarter of 1975
the gross national product in real terms fell at a 10
percent annual rate. Industrial production dropped at
a precipitous 23 percent rate from October 1974 to
the trough in April 1975, with firms in most industrial
categories sharing in the decrease. The greater drop
in output beginning in the fall of 1974 reflected pri
marily the pause in growth of total spending.
According to most measures of economic activity
the 1973-75 recession was the deepest since the 1930s.
For example, from the peak in late 1973 to the trough
in early 1975, real output declined 8 percent. By com
parison, in the 1969-70 contraction real output de
creased 1.4 percent. Nevertheless, the 1973-75 adjust
ment was mild when compared with the 31 percent
drop in real output from 1929-33.
During the recession, employment displayed more
strength than most other broad measures of activity.
Demand for goods and services rose relatively rapidly

Page 5

JANUARY

FED ERA L R ESER V E BANK OF ST LOUIS

1976

during much of the recession, and employment con
tinued to rise during most of the period. Environ
mental and energy constraints affected capital intensive
industries most severely, and consumption patterns
shifted toward services and those commodities which
utilize a relatively large proportion of labor. Total
employment rose in the initial state — November
1973 to September 1974. From September 1974 to
March 1975, when production fell sharply, employ
ment did decline. However, even before production
turned up, employment began to expand. Relative
strength in employment is reflected by the fact that
63 percent of the noninstitutional population of labor
force age (16 through 64) was employed in early
spring, compared to 62.4 percent in the relatively
prosperous year of 1965.
Despite the large number of people working, the
number unemployed rose substantially during the
1973-75 recession. Unemployment rose from less than
5 percent of the labor force in 1973 to a peak of about
9 percent in May 1975. During the previous recession
the unemployment rate rose to about the 6 percent
level. In some areas of the nation, however, a number
of jobs remained unfilled, despite large unemploy
ment in the area.

In the spring of 1975, growth of total spending on
goods and services began to accelerate. Short-run
stimulative forces affecting total spending included
the tax reductions and rebates which added to dis
posable incomes of households. In addition, there was
a rapid increase in Government spending. The rate of
money stock growth increased sharply early in the
year.

U n e m p lo y m e n t R a t e
? • “ •■*

S e a s o n a lly A d juste d

9
8.3

3
o

1967

1968

~r
1969

~i
1970

1971

1972

1973

1974

1975

Source: U.S . Department of Lobo
a te s t d a ta plotted: D ecem ber

The paradox of high unemployment at a time
when a large portion of the population held jobs re
flects a rise in the labor force participation rate. A
larger proportion of women have entered the labor
force in recent years. Also, second and third members
of many households have sought jobs to maintain
income or to meet the higher costs of living.

Page 6

As a result of these expansive forces, total spending
on goods and services rose at a 13 percent average
annual rate from the first to the third quarter of 1975.
Starting in the spring of 1975, production began in
creasing, in response to both the increase in spending
and a continued dissipation of the constraints on pro
duction. From the first to the second quarter real
gross national product rose at a slow 2 percent annual
rate, but in the following quarter it jumped at a 13
percent pace. Industrial production inched up from
April to May and increased at a 17 percent annual
rate from May to September.
The pace of the economic recovery moderated dur
ing the fall. Growth in retail sales hesitated from July
to September, and industrial production increased at
a 4 percent annual rate from September to November.
Both fiscal and monetary developments became less
expansive after mid-year.
As a result of expanding output, employment rose
at a 4 percent annual rate from March to September,
about double the growth rate of population of working
force age. From September to December employment
changed little, but payroll employment, which usually

FEDERAL R ESER V E BANK OF ST LOUIS

JANUARY

1976

advanced at a 7 percent annual rate in the first eleven
months of 1975, following a 12 percent jump in 1974.
The general level of prices (GNP deflator) increased
at a 6 percent pace in the first three quarters of 1975,
after rising 12 percent in 1974.
Despite these gains in 1975, the rate of inflation
remained relatively rapid. From 1955 to 1965, general
prices crept up at an average 2 percent per year rate,
and from 1965 to 1973 prices rose at an average 4
percent rate. The 6 or 7 percent rate of inflation in
1975 reflected primarily demand conditions. Earlier
fiscal and monetary developments had stimulated
total spending excessively and had gradually built up
higher price expectations and upward price pressures
as some prices responded sooner than others to the
expansion in demand. In addition, some constraints
remained which probably reduced the ability of the
economy to produce certain commodities.
fluctuates less within short periods, increased at a 2.5
percent rate. By December the unemployment rate
declined to 8.3 percent, a marked decrease for an
early recovery period when producers usually ex
pand production by using existing employees more
efficiently.

Inflation Subsides
The bulge in the pace of inflation, which was felt in
1973 and 1974, peaked in late 1974, and the recorded
rate of price increases decelerated in 1975. The eco
nomy was again able to expand production in 1975,
and consumption patterns shifted in response to the
earlier sharp shifts in relative prices. Consumer prices
G e n e r a l Price In d ex *
R atio S e a l*

1958=100

R atio S e a l*

1958=100

Source: U.S. Deportment of Commerce
■As used in National Income Accounts.
Percentages are annual rates of change for Deriods indicated.
The five percent jump in prices between the two doshed lines represents the estimated effect on the
price level of the constraints on production.
Latest data plotted: 3rd quarter

ECONOMIC OUTLOOK
The bicentennial year of 1976 will probably be one
of continued increases in output. The upward thrust
of spending, production, and employment, despite
some loss of momentum last fall, appears to be strong
as the new year commences. Although starting from a
much lower base than in previous recovery periods,
productive capacity is now rising at a more normal
rate. Moreover, monetary developments in 1975 were
expansionary, on balance, and the targeted money
growth through the first three quarters of 1976, if
attained, should contribute to a further strengthening
in total spending during the year. Although the data
probably understate the degree of capacity utilization,
the nation still has idle resources, and the individuals
and businesses that own these resources have an in
centive to make them productive and profitable.
Hence, it is likely that 1976 will be a year of continued
economic recovery and expansion.
The rate of inflation, which moderated in 1975,
should slow further in early 1976. Continued adjust
ments by businesses and consumers to the higher cost
of energy and other constraints on output should
cause the rate of price increase to moderate. Never
theless, significant progress in reducing inflation dur
ing 1976 is unlikely in view of the price expectations
generated by the average 6 percent rate of growth in
the money stock since 1965 and the continued upward
push on prices as the adjustment to this trend of
money permeates the economy.
Despite the generally optimistic outlook, it is
likely that both underutilization of resources and in

Page 7

FED ERA L R ESER V E BANK OF ST. LOUIS

flation will remain problems throughout 1976 in view
of the current state of production, dislocations caused
by the exogenous constraints on production, and the
price expectations gradually built up over the past
decade. Vigorous attempts to solve quickly either the
unemployment or inflation problem singly would
probably cause the other to intensify.
Faster progress could be made at reducing the rate
of inflation while contributing to economic expansion

Page 8

JANUARY

1976

by improving the functioning of the nation’s market
system. Actions should be taken to make prices more
responsive to demand and supply shifts and to im
prove economic efficiency and incentives. These in
clude reducing subsidies, tariffs, and import quotas,
eliminating restrictions on production, encouraging
capital formation, improving skills of workers, and
modifying minimum wage laws to improve job oppor
tunities for the inexperienced and handicapped.

Foreign Trade and Exchange Rate
Movements in 1975
HANS H. HELBLING

IN T E R N A T IO N A L economic relations of the
United States, just as domestic ones, were heavily
influenced by the recession of 1974-75 and by the re
sultant economic policies undertaken by most U.S.
trading partners. U.S. merchandise trade responded
to both the longer-term depreciation of the dollar and
to differences in the severity and timing of the reces
sions here and abroad. Short-term fluctuations in
capital movements and exchange rates were domi
nated by differential growth in output, differences in
monetary and fiscal policies, and differences in inter
est rates among trading nations.

Comparative Rates of Change of Industrial Production
Annual R a te s of C h an g e fro m P re v io u s Four Q u a rters
Percen t

After briefly sketching economic conditions prior to
1975, this article discusses the trade and exchange
rate developments which occurred during 1975. In
addition, a listing of some institutional developments
which will probably have an influence on international
economic activity in the future is provided.

ECONOMIC SETTING
The recessions experienced in the major industrial
countries in 1975 represented a continuation of a
cyclical downswing which started in late 1973. In
early to mid-1973, most countries had been concerned
about high and accelerating rates of inflation and had
adopted policies intended to reduce inflationary pres
sures. These policies usually took the form of reduced
rates of monetary growth. This was most pronounced
in Germany, Japan, the Netherlands, Switzerland, and
the United Kingdom.
Sources: C a n a d a --T h e M inister of Industry, Trade, a n d Commerce,- G erm any-.Deutsche

The recessions were aggravated in late 1973 when
the Organization o f Petroleum Exporting Countries
(O PEC ) imposed an embargo on oil exports. Expec
tations were that the embargo would adversely affect
real economic growth in the industrial countries, but
that business slowdowns would not degenerate into
severe recessions. In addition, stimulative economic
policies were considered inappropriate at this time, as
policymakers were still concerned with inflation.

Bu n d e sb an k; J a p a n -T h e Ban k of Jap an; United Kin gd o m - Central Statistical
O ffice; U nited States--Federal Reserve Board

Toward the end of 1974 and into early 1975, how
ever, economic conditions in most countries deterio
rated more rapidly than expected, and most foreign
countries responded with stimulative monetary poli
cies. In contrast, monetary growth declined in the
United States from die third quarter of 1974 through
the first quarter of 1975.

Page 9

FEDERAL R ESER V E BANK OF ST. LOUIS

JANUARY

1976

Table 1

INDUSTRIAL PRO D U CTIO N
Com pounded Annual Rates of C h a n g e
United States

Belgium

— 26%

-26%

-12%

— 35

— 52

1974 November
December
1975 Ja n u a ry

Canada

France

Germ any

Italy

Jap an

— 40%

-1 0 %

-35%

— 28%

-2 7

-4 3

-32

-3 3

— 45

Netherlands United Kingdom
0%

— 32

— 25

-4 3

-2 3

— 19

— 16

March

-1 2

-3 5

-4 0

A p ril

—

— 41

— 44

-1 0

February

-2 1

M ay

1
2

12
-55

— 2

-2 7
0

8
3

-2 8

-3 5

June

Ju ly

-5 5

August

— 45

September

— 11

-1 1
0

16
1

—

— 19
— 18
-21

-4 8

-1 7

— 12

-2 1

305

— 21

— 10

October

November

N A — N ot Available
Sources: Canadian Statistical R eview , The M inister o f Industry, Trade, and C om m erce; E conom ic Statistics M onthly, The Bank o f Japan :
Econom ic Trends, U .K . Central Statistical Office : International Financial Statistics, I M F ; Main E conom ic Indicatoi'S, OECD : MonthUt
R ep ort o f the Deutsche Bundesbank, Deutsche Bundesbank ; Federal Reserve Board.

In early 1975 the consensus among analysts was that
real economic growth in most industrial countries
would resume in the second half of 1975, with recov
ery abroad preceding that of the United States. By
mid-year, however, the U.S. economy appeared to be
moving out of the recession, while its major trading
partners were still searching the economic horizon for
signs of a turnaround.1

ernments, including Belgium, France, Japan, the
Netherlands, and the United Kingdom, also an
nounced the introduction of stimulative fiscal meas
ures. At this time it appears that the economies of
Canada, Germany, and Japan, in addition to the
United States, have moved out of the recession, while
for many other countries a turnaround has not yet
materialized.

As economic activity in the United States improved
early in the second half of 1975, many foreign policy
makers became impatient with the pace of recovery
(or lack thereof) in their own countries. Suspecting
that more stimulus on the part of the United States
would not be forthcoming, many foreign governments
adopted a new series of economic policy measures,
mainly in the fiscal area. For example, in August
Germany announced a supplementary budget propos
ing an increase in expenditures of more than 15 billion
marks for new construction programs and unemploy
ment assistance. Denmark, at that time, also
announced a new program to stimulate the economy
via a combination of tax reductions and expenditure
increases. Beginning in September, various other gov

In summary, the economies of major industrial
countries were in different stages of recovery during
1975. Adjustments to prior output shocks and re
straints were nearing completion and stimulative fiscal
and monetary policies were beginning to take effect.
While the recovery was relatively strong in the
United States, it was just beginning to manifest itself
in some of the foreign trading nations in the latter
half of the year. Thus, the differential rates of eco
nomic recovery were primarily responsible in shaping
international transactions in 1975.

'For example, an economic forecast issued in October by OECD
for the organization’s 24 member countries suggested a com
bined annual rate of decline of 2.5 percent. In July, for
comparison, the organization’s forecast suggested a decline
of GNP of only 1.5 percent. However, in its October forecast,
the OECD noted, that for the member countries as a whole,
the low point in economic activity has already passed.

Page 10

MERCHANDISE TRADE DURING 1975
The depth of the U.S. recession, as well as the
decline in the international value of the dollar which
began in 1971, manifested itself in smaller U.S. pur
chases from, and relatively larger U.S. sales to, foreign
trading partners. This resulted in a $10.6 billion excess
of U.S. merchandise exports over imports in the first
eleven months of 1975. Beside the depreciation of the

FEDERAL R ESER V E BANK OF ST LOUIS

JANUARY

N o m in a l a n d Effective D o lla r D e v a lu a tio n

M e r c h a n d is e T r a d e
R e lit Scale
B illio ns of D ollars

1
1

S e a so n a lly A djusted
Monthly Data

1976

P e r e nt

P e rc e n t

tio Scfllt
lillio a s of Dollars
0

-2 ~

■2

-4

-6
N o m in a l Dot ar Deva lua t on
-8

-1 0

-12

-16

-18

-2 0

1973

1974

1975

Source: U.S. Department of Commerce
‘ Exports, as well as imports since 1974, are reported on a fa .s . value basis. Imports prior to 1974
are reported on a customs value basis.

. 11 . >6

/ /
\V
K /\ A v
\
V

-14

-1 0

V '

-12

-14

-16
.1
-18

-2 0

E ffe c ts e D o lla r De valuation

While in the first quarter of 1975 the rate of increase
of U.S. merchandise exports slowed to a 9 percent
annual rate (compared to a 28 percent annual rate in
the fourth quarter of 1974), U.S. imports decreased
absolutely at a 33 percent annual rate (compared to
a 10 percent annual rate of increase in the fourth
quarter).2
During the second quarter of 1975, U.S. merchan
dise exports exceeded merchandise imports by an
impressive $13.4 billion annual rate. In this period
both exports and imports declined absolutely at annual
rates of 20 percent and 40 percent, respectively.
During the third quarter, U.S. merchandise exports
still exceeded imports, but by less than during the
second quarter. This occurred as both merchandise
exports and imports shifted from negative to positive
rates of growth. In terms of product categories, U.S.
agricultural exports increased somewhat compared to
last year, and manufactured goods, such as machinery
and transport equipment, increased substantially over
1974. While merchandise exports to Japan declined
during the first half of 1975. those to Western Europe
increased.
2The growth rates of merchandise trade are calculated from
balance-of-payments data.

-2 2

-2 4

dollar, some additional factors contributed to this
turnaround in U.S. merchandise trade. Agricultural
exports remained relatively high and OPEC purchases
of U.S. goods increased from about $4 billion in the
first three quarters of 1974 to about $7 billion in the
first three quarters of 1975.

-2 2

-24

-26
1970

1971

1972

1973

1974

1975

S o u rc e s : IM F a n d the F e d e r a l R e s e rv e B a n k o f N e w Y o rk
N o te : N o m in a l d e v a lu a t io n is m e a s u re d b y the c h a n g e in the d o ll a r p r ic e o f g o ld .
E ffe c tiv e d e v a lu a tio n is m e a s u re d b y th e a p p r e c ia t io n o f e le v e n m a jo r c u rre n c e s
r e la tiv e to the p a r v a lu e s w h ich p r e v a ile d a s o f M a y 1 9 7 0 . T he a p p r e c ia t io n i
then w e ig h te d b y s e p a ra te e x p o r t a n d im p o rt s h a r e s w ith th e U n ite d S ta te s
b a s e d o n 19 7 2 t r a d e d a t a .
L a te s t d a t a p lo t t e d : D e c e m b e r

THE U.S. DOLLAR EXCHANGE RATE
On balance, the U.S. dollar appreciated during 1975.
However, there were two distinct exchange rate
phases in 1975 during which the U.S. dollar first fell
and then rose in value vis a vis the major foreign
currencies. The first phase extended through the first
quarter of 1975; the second phase extended from
April to the present.

First Phase
The dollar exchange rate began to depreciate in
September 1974 and continued to decline through the
middle of the first quarter of 1975. As measured on a
trade-weighted basis, the international value of the
dollar in September 1974 was 14 percent below its
May 1970 value/* In March 1975 the dollar’s value
had fallen 18 percent below its May 1970 value —
a 29 percent decline from September 1974.
The general decline in the value of the dollar dur
ing this period may be attributed to interest sensitive
short-term capital outflows. Because the decline in
business activity was generally more pronounced in
the United States than abroad, a sharp drop in the
:!The trade-weighted dollar depreciation is measured by the
appreciation of eleven major currencies relative to the par
values which prevailed as of May 1970.

Page 11

FEDERAL R ESER V E BANK OF ST LOUIS

JANUARY

S e le c t e d Sh ort-Term M o n e y M a r k e t R a t e s 1

U.K.

apan /n

Canada

\L_/ /Y

................................. ....................................
Eurodollar

,j/

jpf iul

\\ ^

.................................

.................

.. i 11 i i r , ..................... ,7

1976

States conveyed signs of impending economic recov
ery, while, as was mentioned earlier, recovery abroad
was not yet visible. In addition, U.S. short-term in
terest rates began to rise relative to short-term rates
in other countries. As a result, the incentives for
short-term capital inflows began to shift in favor of the
United States. During the second quarter, net short
term private capital outflows decreased from the first
quarter annual rate of $25.5 billion to an annual rate
of $10.6 billion.
During the third quarter a continuation of the sec
ond quarter trend led to a further appreciation of
the dollar. Short-term interest rate differentials in
creasingly favored inflows of short-term private capital
into the United States, and the United States regis
tered a third quarter net inflow of short-term private
capital of $18.5 billion. Thus, the appreciation of the
U.S. dollar during the second and third quarter can
be largely attributed to both the rise in U.S. short-term
interest rates relative to those in other countries and
the subsequent changes in short-term capital flows.

SOME INSTITUTIONAL CHANGES
IN 1975
Related to Exchange Rates

1973

1974

1975

Q_The following rates were used:
Belgium—4-month Fondes des Rentes certificates
C an ad a—3 month prim e finance com pany paper
France— 3-month in terbank money against private paper
G erm any—3-month in terbank deposits
Italy—interbank deposits of up to one-month maturity
Japan — coll money rate
United Kingdom—3-month local authority deposits.
•3-month interbank deposits
United States—3-month prime industrial paper
Eu rod ollar— prim e bonk s bid rate for 3-month deposits in London

demand for credit resulted in a decline in U.S. short
term interest rates relative to those in other countries.
As illustrated in the accompanying chart and in Table
II, during the first quarter of 1975, U.S. short-term
interest rates were falling relative to those in Belgium,
France, Germany, and the United Kingdom. As a
result, the incentive to invest in these countries in
creased and holders of short-term dollar-denominated
assets switched to short-term assets denominated in
other currencies.

The first quarter decline of the dollar exchange rate
precipitated changes in some institutional arrange
ments within the area of international finance. For
example, in mid-March four Middle East countries
severed the link between their currencies and the
U.S. dollar. Iran, Saudi Arabia, Kuwait, and Quatar
announced the decision to tie the exchange rates of
their currencies to SDRs.
In addition, the European Economic Community in
late March decided to terminate the relationship be
tween the communities’ Unit of Account (U A ) and
the U.S. dollar.4 The UA is now valued in terms of a
basket of member country currencies. The intent was
to insulate internal EEC financial settlements from
fluctuations in exchange rates of member countries
vis a vis the U.S. dollar.
In June, OPEC decided to replace the U.S. dollar
with SDRs for valuation of oil as of October 1. How
ever, on October 1 OPEC reversed its previous deci
sion and decided to retain the U.S. dollar as the cur
rency in which oil prices are denominated. In June

Second Phase
Several developments began during the second
quarter of 1975 which led to the appreciation of the
dollar. Various economic indicators in the United

Page 12

4The Unit of Account (UA) is the basis for each member
countries’ financial relationship with the community. For
example, payments and contributions under the common
agricultural policy and the community budget are expressed
in terms of Units of Account.

JANUARY

FEDERAL R ESER V E BANK OF ST LOUIS

1976

Table II

INTEREST RATE DIFFERENTIALS BETW EEN THE UNITED STATES
A N D SELECTED FO R EIG N C O U N TR IES

Ja n u a ry
February

United Kingdom

Canad a

France

Germ any

0 .8 6 %

- 0 .1 4 %

- 5 .4 4 %

- 2 .9 4 %

- 0 .3 2 %

- 3 .1 9 %

- 7 .5 7 %

- 0 .9 3

- 3 .7 2

- 2 .4 7

- 1 .8 5

- 3 .4 7

- 6 .2 8

- 0 .4 7

Italy

Ja p an

Belgium

March

0 .0 7

- 0 .7 9

- 2 .5 3

- 1 .7 8

- 3 .5 3

- 3 .0 3

- 6 .1 6

April

1.21

- 0 .2 7

- 1 .3 4

+ 1.41

- 3 .5 9

- 1 .0 9

— 2 .65

M ay

0 .6 8

— 0.91

- 1 .8 2

+ 2 .43

- 5 .3 2

- 1 .0 7

- 1 .7 6

June

0.61

+ 0 .1 4

- 2 .5 2

+ 2.81

- 7 .8 9

- 0 .3 9

- 1 .2 0

- 0 .2 9

- 0 .2 6

- 2 .0 4

+ 2.21

- 7 .2 9

- 1 .2 9

- 1 .6 7

0 .3 7

+ 0 .2 6

- 1 .3 8

+ 2.6 7

- 5 .5 1

— 1.13

- 0 .1 9

September

- 1 .0 9

- 0 .4 0

- 3 .0 9

+ 1.31

— 6 .8 4

- 2 .0 9

- 0 .7 8

October

- 2 .4 2

- 1 .5 7

- 3 .8 0

- 0 .4 2

— 9 .5 5

- 3 .4 2

- 2 .6 7

November

— 1.92

— 0 .9 4

- 2 .5 5

+ 0 .5 3

- 9 .4 2

— 3 .6 7

- 3 .3 0

December

— 1.40

— 0 .9 2

- 1 .9 0

+ 1.30

- 7 .9 0

- 3 .9 0

- 3 .1 5
- 5 .0 2

Ju ly
August

Ja n u ary

- 3 .1 4

- 0 .3 9

- 3 .5 2

- 0 .7 9

- 7 .8 9

- 6 .3 9

February

— 2 .65

- 0 .5 2

- 3 .2 8

+ 0 .1 5

— 5 .4 0

- 6 .6 5

- 4 .4 0

March

— 1.44

— 1.04

- 2 .5 4

+ 0 .6 6

— 6 .5 4

— 3 .9 2

A pril

— 1.03

— 1.81

— 1.66

+ 1.22

— 5 .0 3

— 5 .28

- 3 .5 3

May

- 1 .3 0

— 2 .0 6

- 1 .8 0

+ 0 .6 5

— 4 .5 5

- 5 .5 5

- 4 .3 6

June

-1-0.10

— 1.16

- 0 .9 0

+ 1.35

- 3 .9 0

- 4 .6 5

- 3 .2 1

Ju ly

- 0 .0 2

- 1 .2 9

- 0 .6 5

+ 2.18

- 4 .5 2

— 3 .9 0

August

+ 0 .6 3

- 1 .9 9

- 0 .1 7

+ 2 .7 3

- 2 .9 2

— 3 .6 7

- 3 .5 5

September

+ 0 .7 6

- 2 .5 1

+ 0 .0 8

+ 2 .96

- 1 .5 4

- 2 .5 4

- 3 .6 0

October

- 0 .1 5

- 3 .0 3

- 0 .8 3

+ 1.95

- 1 .9 5

— 1.95

- 5 .5 8

November

- 0 .2 9

— 3 .8 2

- 0 .9 7

+ 1.81

— 2 .0 9

— 1.59

- 5 .2 8

N o te : The interest rate series used for each country is delineated in the chart entitled "Selected Short-Term Money Market R ates." The interest
rate differential is com puted by subtracting the respective fo re ig n interest rate from the IT.S. interest rate.
S ou rce: W orld Financial Markets. M organ Guaranty Trust Company.

the SDR was equivalent to about $1.25 and the dollar
had been declining. Currently, the SDR is equivalent
to about $1.17 and the dollar has been rising. As a
result of this rise in the value of the dollar relative
to the SDR, it became advantageous for OPEC to
continue the dollar-oil price valuation.
Another event which was related to exchange rates
was the decision by France in July to rejoin the Euro
pean currency float known as the “Snake.” This ar
rangement was instituted in March 1973 in order to
maintain a maximum margin of ± 2.25 percent for
exchange rate fluctuations in transactions among mem
ber currencies. France had withdrawn from the
“Snake” in January 1974. Presently, the countries par
ticipating in the “Snake” are Belgium, Denmark,
Germany, Luxembourg, the Netherlands, Norway,
Sweden, and France.

Related to the International Monetary System
In early September, the International Monetary
Fund (IM F ) held its annual meeting and reached

agreement on steps to reduce further the role of gold
in the international monetary system. In essence, the
127 member countries of the IMF agreed to terminate
the concept of the “official price” of gold. It was
agreed that one-sixth of the gold stock currently held
by the IMF (25.6 million ounces) would be gradually
sold over the next two years. Another one-sixth will
be returned to member countries in proportion to
their original contributions. No agreement was
reached, however, regarding the nature of a future
exchange rate system.
In mid-November an economic summit meeting
of the heads of state and finance ministers of
the United States, France, Germany, Great Britain,
Italy, and Japan was held in Rambouillet, France. The
purpose of the meeting was to coordinate economic
policies of the participating countries. The com
munique issued at the end of the meeting consisted
primarily of general statements about the common
pursuit of policies that would reduce unemployment
and inflation. Of significance, however, was the agree
ment to counter erratic fluctuations in exchange rates.

Page 13

JANUARY

FED ERAL RESERVE BANK OF ST. LOUIS

1976

Although the communique did not specify how
erratic exchange rate fluctuations are to be removed,
outside observers generally believed that official in
tervention in foreign exchange markets was the tool
with which to achieve these goals. Moreover, the
communique noted that a rapprochement of U.S. and
French views regarding the international monetary
system was achieved and that this would facilitate
agreement on outstanding issues of international
monetary reform.

effective balance-of-payments adjustment or to gain
an unfair competitive advantage over other members.” 5

Finally, in early January 1976 a meeting of the
Interim Committee of the IMF was convened in
Jamaica for the purpose of discussing these outstand
ing issues. At this meeting an agreement was reached
among the 127 member countries of the IMF per
mitting individual member countries the option to
choose from among three types of exchange rate
systems. Individual countries will have the option of
either adopting a floating exchange rate system,
pegging their currencies to other currencies, or estab
lishing a par value for their currency in terms of
SDRs. In addition, it was agreed that a general par
value system could be reintroduced if 85 percent of
the member countries’ votes favored such a step.
Presently, the votes of the United States represent
about 20 percent of the total.

SUMMARY

Of particular significance was the agreement that
the floating exchange rate system would take the
form of a “clean” float. That is, countries who avail
themselves of floating exchange rates should “avoid
manipulating exchange rates . . . in order to prevent

Page 14

To achieve a “clean” float, countries are required
to “seek to promote stability by fostering orderly
underlying economic and financial conditions and a
monetary system that does not tend to produce erratic
disruptions.”6 The above requirement is consistent
with the view that stable underlying economic con
ditions are conducive to stable exchange market
conditions.

During 1975 the world economy was subjected to
the forces of recession. The U.S. recession was both
more severe and more short-lived than that of its
trading partners. This, in turn, was conducive to first
a declining and then to a rising U.S. dollar exchange
rate. U.S. trade performance was affected by these
developments, as witnessed by the fact that U.S.
merchandise exports exceeded U.S. merchandise im
ports by $10.6 billion during the first eleven months
of 1975.
Although early in 1975 there were expectations that
foreign economic recovery would precede that of the
United States, it turned out that foreign economic re
covery was, and in some cases still is, lagging behind
that of the United States. It is expected, however, that
economic growth in most industrial countries will re
sume in 1976, though at relatively low rates.
5The Wall Street Journal, January 12, 1976.
B
Ibid.

Food Production and Prices —
Perspective and Outlook
CLIFTON

LUTTRELL

HE United States Department of Agriculture
(U SD A ) provides an annual appraisal of the outlook
for food prices and consumption. The outlook for 1976
was presented at the National Agricultural Outlook
Conference, Washington, D.C., November 17-20, 1975.
This article discusses the outlook as presented by the
USDA within the context o f some recent food indus
try developments which had a major impact on food
prices.
From the consumer viewpoint the outlook for food
production and food prices this year is improving.
Food prices turned sharply upward in 1972 and rose
at an annual rate of 13 percent during the three years
ending in July 1975. Since July, however, they have
advanced at a 2 percent annual rate and are not ex
pected to rise at more than a 4 to 5 percent annual
rate during the first half of 1976.
In contrast to the generally declining per capita
production and sharply rising prices experienced since
1972, food production this year is expected to increase
and the rate of food price inflation is expected to de
cline. The larger quantity of crops harvested last fall,
as compared to a year earlier, will provide greater
amounts of fruits, vegetables, sugar crops, and live
stock feed, and will likely contribute to an expected
upturn in the production of most livestock products
in the months ahead. The greater production of food
will tend to have a dampening effect on price increases.
Much of the rise in food prices since 1972 was
caused by a series of short-run supply constraints and
unexpected surges in demand in the food industry. A
number of short-run disturbances, such as those asso
ciated with the operation of the OPEC ( Organization
of Petroleum Exporting Countries) cartel, erratic do
mestic crop production, a number of health and en
vironmental protection measures, and the imposition
of wage-price controls, led to reduced short-run per
capita supplies o f farm products and food. The re
alignment of world currencies coupled with some crop
failures abroad led to an unanticipated increase in

Price Changes for Food
and Selected Farm Products

1972

U 73

l» 74

U 75

Sou rce: U.S.D.A. A g ric u ltu ra l P rices, D a iry Situation, Poultry a n d E g g Situation, Livestock
a n d M e a t Situation, a n d U.S. Departm en t o f Labor.

export demand for U.S. farm products. Also contribut
ing was an increase in domestic demand for food re
sulting from the rapid increase in government food
assistance programs such as food stamps and vari
ous child nutrition programs. The cost to the govern
ment of such programs totaled $6.9 billion in 1975,
about 45 percent more than in 1974 and five times
that of 1969.

Livestock Feeding Costs Led Food Price
Increases
The accelerated rate o f food price inflation since
1972 was led by a sharp increase in feed prices and
livestock feeding costs. Production of feed grain
(about 80 percent corn) declined somewhat in 1972
from the 208 million short tons of the previous year;
however, demand for feed grain rose. As a result of
unfavorable weather conditions abroad and, thus,
unexpected grain purchases, export demand rose
sharply. Exports increased from 27 million tons in the
marketing year 1971-72 to 43 million tons in 1972-73.
Domestic demand for grain was likewise rising. D o
mestic grain feeding rose from 149 million tons in
1971-72 to 156 million tons in 1972-73. Total feed
grain usage rose to 216 million tons in 1972-73, well
above 1972 production, and carryover stocks declined

Page 15

FED ERA L R ESER V E BANK OF ST. LOUIS

JANUARY

Table I

FEED G R A IN S

Total

End of Year
Stocks
(m illion
short tons)

1972-73

1 15.1

1 9 9 .9

17 3.2

43.1

2 1 6 .3

3 2.4

1 9 7 3-7 4

1 2 1 .4

2 0 5 .0

1 7 1 .0

4 4 .4

2 1 5 .4

22.2

1 9 74 -75

1 2 2 .6

165.1

1 32 .8

3 9 .2

1 7 2 .0

15.8

1 9 7 5 -7 6 *

1 2 2 .9

204.1

1 4 7 .0

5 0 .0

1 9 7 .0

2 4.0

Production
Acres (m illion
(m illio n s)
short tons)

Usage
(m illio n short tons)
Domestic
Exports

* Forecast.
S ou rce: “ Outlook fo r Feed” (a presentation) by James J. N aive at the N ational A gricultural
Outlook Conference, N ovem ber 19, 1975.

about one-third to 32 million tons. Consequently, feed
grain prices spurted (see accompanying chart). For
example, com prices, which averaged $1.08 per bushel
in the marketing year 1971-72, rose to $1.57 in 1972-73,
and $2.55 in 1973-74. Protein feed costs likewise rose
sharply, more than doubling from late 1971 to 1972.
The price of protein declined somewhat in 1973 and
1974, but remains about 50 percent above the late
1971 level.

Higher Prices Serve as an Incentive for
Increased Feed Production
In response to higher prices in 1972, feed grain pro
duction rose somewhat in 1973 (Table I). Acreage
planted to feed grains was increased about 5 percent,
and production rose about 3 percent over the prior
year. Both export and domestic demand for feed, how
ever, continued upward; consequently, total usage in
the marketing year 1973-74 again exceeded produc
tion, resulting in the second sizable decline in carry
over stocks.
Feed grain prices continued to rise sharply into
1974 and acreage planted to feed grains was again
increased. Extremely poor weather conditions, how
ever, resulted in a 20 percent decline in feed grain
yields from the 1973 level. Com prices, representative
of all feed grains, continued up, rising from $2.55 per
bushel in the 1973-74 marketing year to $2.95 per
bushel in 1974-75.

Incentive for Feeding Declined
Prices of food and livestock products generally did
not rise as fast as feed prices, however, and profit
from feeding operations declined (see chart). For
example, the average price of choice steers at Omaha
rose 17 percent from 1972 to 1974, while feed grain
prices jumped 77 percent. In the first three quarters
of 1975, prices of choice steers averaged 22 percent
above the 1972 level, while feed grain prices averaged

Page 16

1976

62 percent higher. Since feed
is the major portion of the
total cost of cattle feedlot oper
ations, the result has been losses
over the past two years. Hence,
cattle feeding declined, drop
ping from 26.1 million head in
1972 to an estimated 22.4 million
in 1975. The total number of
cattle on farms, however, con
tinued to increase throughout
1975.

The number of cattle on farms takes a relatively
long time period to adjust to changes in supply and
demand conditions for beef. The sharp buildup in
cattle herds in the 1971-73 period reflected favorable
feeder cattle prices. The number of cattle and calves
on farms rose from 171 million head in early 1971, to
197 million in early 1975. With the reduced feeding
and sharp decline in prices of feeder cattle in 1974,
packers began to buy increasing numbers of cattle
directly off pastures and the rate of increase in the
number of cattle on farms declined. The number on
farms is expected to level off this year, despite some
improvement in the feed/beef price relationships.
Hog farmers were able to adjust production to the
higher feeding costs more rapidly than cattle pro
ducers. Sow farrowings began to decline sharply in
early 1971. The decline moderated in late 1972 and
through 1973, but farrowings turned down sharply
again in late 1973 and continued down through most
of 1974. The number of hogs on farms rose slightly in
early 1974 as a result of a larger feed grain crop in
1973, but declined about mid-year after it became
apparent that the 1974 corn crop would be substan
tially below the average of recent years.

Nonfed Cattle Slaughter Rose . . .
Part o f the negative impact on meat production
resulting from the decline in livestock feeding was
offset in 1974 and 1975 by the increased slaughter of
lower quality nonfed cattle. Such animals declined in
price until it became profitable to slaughter them di
rectly off the farms and ranches. Consequently, total
beef production in 1975 exceeded that of a year
earlier.

. . . But Per Capita Production of Livestock
Products Declined
Per capita production of all animal products de
clined about 4 percent from 1971 to 1975, with de

FEDERAL RESERVE BANK OF ST. LOUIS

clines occurring each year except 1974. The decline
would have been much sharper had not cattle farmers
and ranchers shifted from herd-building toward
herd-reduction.
While per capita beef consumption rose 2 percent
in 1975, total per capita meat production and con
sumption declined. The decline reflected a 17 percent
drop in pork consumption. Meat consumption per
person generally declined from 1971 through 1975,
dropping 6 percent during the five-year period.
Dairy and poultry production have generally fol
lowed the pattern of beef cattle and hogs, with de
clining per capita production in most years since 1972.
Such production of broilers and turkeys declined 5
percent and 10 percent, respectively, from 1972 to
1975. Per capita egg production declined 10 percent
during the period and milk production declined a
fraction of one percent.
The reduced output and sharp increase in prices of
animal food products caused increased demand for
other foods. Consumption of fresh and processed
fruits per person rose 10 and 8 percent, respectively,
from 1972 to 1975; that of processed vegetables rose
6 percent, and consumption of fresh vegetables re
mained unchanged. Nevertheless, total food consump
tion per person declined about 3 percent from 1972 to
1975.

Share of Income Spent on Food Rose

JANUARY

1976

Table II

PERCENT O F D ISPO SA BLE PERSO N AL IN CO M E
SPENT O N FO O D
Food for Use
at Home

Food at Homa and
A w ay f rom Home

20 .0 %

1960

1 6 .2 %

1965

14.6

18.1

1970

12.7

16.2

1972

12.0

15.4

1973

12.5

15.9

1974

13.3
13.4

16.8

1975*

17.0

* A verage fo r first three quarters o f year only.
S ou rce: U SD A N ational Food Situation

(N ovem ber 1975), p. 11.

increase of food prices. With a lower rate of food price
inflation in prospect, food expenditures as a proportion
of total personal income will tend to level off and the
downtrend could well be resumed.
The turnaround in food production and price pros
pects for 1976 largely reflects a return to longer-run
supply and demand conditions following the short-run
disturbances which occurred during the period from
1971 through 1974. Such disturbances in a market
economy are self-correcting. Farmers will adjust their
capital, labor, and other inputs to increase the produc
tion of those commodities for which expected prices
and costs of production provide sufficient profit incen
tive. Farm production is more responsive to price
changes in the long run than in the short rim.

With rising prices and relatively inelastic demand
for food, the percent of disposable personal income
spent on food increased even as the amount of food
consumed declined (Table II). The percent of such
income spent on food had generally trended down
ward for several decades. In 1972, however, it began
to increase, with the share spent on food for home use
rising from 12 percent to 13.4 percent during the
three years ending in 1975. The proportion spent on
all food rose from 15.4 to 17 percent during this
period.

The higher prices for livestock feed provided the
incentive for the large crops last year. With the in
creased incentive and the termination of government
restrictions on planting, total production of grain and
soybeans was sufficiently large to more than offset the
rising demand for domestic use plus exports. Feed
grain production was up about 23 percent from 1974.
The larger quantity has resulted in lower feed prices
and greater incentive for increased feeding. Feed
prices in mid-December 1975 averaged 13 percent
less than a year earlier, while the average price of all
livestock products was 20 percent higher.

Declining Rate of Food Inflation This Year

Farmers are responding to this improved potential
for profit. Placements of cattle on feedlots began to
pick up in late 1975 after a two-year decline. On
December 1 the number of cattle on feed in seven
major feeding states was up 25 percent from a year
earlier. On September 1, hog producers indicated
plans to increase farrowings ( for the DecemberFebruary pig crop) 6 percent from the previous year;
if realized, this would be the first quarterly increase

Large crops were harvested in 1975, and larger
supplies of most foods are in prospect for 1976. Total
crop production was about 10 percent above that of a
year earlier. While the production of livestock prod
ucts this year probably will not greatly exceed that of
a year ago, a turnaround from the low rate of pro
duction in mid-1975 is in prospect. This rebound is
expected to contribute to a slowdown in the rate of

Page 17

FED ERA L R ESER V E BANK OF ST. LOUIS

JANUARY

1976

Table III

YEAR-TO-YEAR C H A N G E S IN W H O LESA LE F O O D
Fruits and Vegetables

Poultry

Meats

PRICES
Eggs

Dairy
Products

All
Food

Fresh and
Dried

Processed

1970-71

7 .6 %

3 .5 %

—

1971-72

6.2

4.7

+ 12.6

1972-73

+ 3 1 .7

8.3

+ 27.2

+ 5 3 .0

+ 5 9 .8

+ 10.5

1973-74

+ 1 4 .4

+ 19.3

—

2.3

— 11.2

—

3.1

+ 11 .7

+ 18 .7

1 9 7 4 -7 5 *

—

+ 13.9

+ 15.1

+ 17.3

—

1.5

1 975 -76**

up
seaso nally

7 .4

up
moderately

0 .8 %

beef up
m oderately;
pork down
slightly

—

0 .8 %

— 2 0 .5 %

3 .8 %

1 .8 %

3.0

2.8

5.5

down
slightly

2.9

down
slightly

3.6

up
moderately

+ 2 0 .6

9.3

up
moderately

♦Average o f first nine m onths o f each year.
♦♦Expected change in retail prices from late 1975 to the first half o f 1976.
S ource: U SD A N ational Food Situation (N ovem ber 1975), p p . 7-10 and 35.

in farrowings since the December 1972-February 1973
quarter. Total red meat production in the first half of
this year will likely be about the same as in the first
half of 1975, but production in the second half should
be greater than a year earlier. With the more favor
able milk-feed price relationships, milk production in
early 1976 is likely to exceed that of early 1975. With
the decline in feed prices, egg production increased
in late 1975 and is expected to continue upward in
early 1976. Favorable feed/broiler price ratios point to
an increase in broiler production in the first half of
1976, up to 10 percent above the level of a year
earlier.

SUMMARY
In contrast to the sharp increase in food prices ex
perienced since 1972, only moderate increases are
expected this year. Large crops of grain and soybeans
were harvested last fall which resulted in lower prices
for livestock feed. The lower feed prices and the rela
tively high prices for livestock products provided
greater incentive for livestock production. Conse

Page 18

quently, livestock production is beginning to increase.
Larger quantities of fed beef, pork, poultry, eggs, and
milk are in prospect for the second half of the year.
The prospective slowing in the rate of increase in
food prices this year reflects the adjustments of our
market economy to longer-run conditions. This adjust
ment to more fundamental determinants follows a
period from 1972 to 1974 when short-run, price-increasing disturbances dominated. As a result of poor
weather conditions in both the United States and
abroad, as well as the depletion of domestic grain
stocks, the price o f livestock feed more than doubled
in the 1972-74 period. The prices of livestock prod
ucts rose more slowly and the incentive for livestock
production declined in this period. Last year, how
ever, farmers responded to the higher priced feed
with near record crops and the feed/livestock prices
have returned to more normal relationships. Hence, a
rising rate of output of livestock foods is in prospect,
and the larger output will result in a slower rate of
price increase for such products. In addition, the prices
of fruits and vegetables may rise only moderately.

FED ERAL R ESER V E BANK OF ST. LOUIS

JANUARY

1976

REVIEW INDEX - 1975
Title

Issue

Title

Issue

Jan.

A Primer on Inflation: Its Conception, Its Costs,
Its Consequences
Unusual Factors Contributing to Economic
Turmoil
The St. Louis Equation and Monthly Data
Monetary Effects of the Treasury Sale of Gold

July

The Changing Competition Between Commer
cial Banks and Thrift Institutions for
Deposits
Paying More Taxes and Affording It Less
Balance-of-Payments Concepts — What Do They
Really Mean?

Feb.

Inflation: Its Cause and Cure
Operations of the Federal Reserve Bank of St.
Louis — 1974
Financing Government Through Monetary Ex
pansion and Inflation

Aug.

The Monetary-Fiscal Mix Through Mid-1976
Observed Income Velocity of Money: A Misun
derstood Issue in Monetary Policy
Income and Expenses of Eighth District Mem
ber Batiks

Mar.

The 1975 National Economic Program: Another
Exercise in Fiscal Activism
Prospects for Food and Agriculture in 1975

Sept.

Apr.

The FOMC in 1974: Monetary Policy During
Economic Uncertainty
A Monetary View of the Balance of Payments
Revision of the Monetary Base

Grain Exports and Inflation
Explanation of the Growth of the Money Stock:
1974-Early 1975
Real Money Balances: A Good Forecasting
Device and a Good Policy Target?

May

June

Public Policy for a Free Economy
Inflation, Unemployment, and Hayek
International Trade and Finance Under the
Influence of O il— 1974 and Early 1975
Two Stages to the Current Recession
A Monetary Model of Nominal
Determination

Income

The Relationship Between Monetary Base and
Money: How Close?
Selection o f a Monetary Aggregate for Eco
nomic Stabilization
The Postwar Economic System In Germany:
Creation, Evolution, and Reappraisal

Nov.

Oil Price Controls: A Counterproductive Effort
Bank Failures and Public Policy

Dec.

Crowding Out and Its Critics
The Origin and Impact of Inflation

Page 19

Full text of Review (Federal Reserve Bank of St. Louis) : January 1976

FRASER