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For Release on D e l i v e r y Monday, May 18, 1970 11:00 a . m . ( E . D . T ) LIQUIDITY DEMANDS, FISCAL POLICY, AND THE TASKS OF MONETARY MANAGEMENT Remarks by Andrew F . Brimmer Member Board o f G o v e r n o r s o f t h e F e d e r a l Reserve System before the 17th Annual Monetary of A m e r i c a n Bankers Conference the Association The Homestead Hot S p r i n g s , V i r g i n i a May 18, 1970 LIQUIDITY DEMANDS, FISCAL POLICY, AND THE TASKS OF MONETARY MANAGEMENT By Andrew F. Brimmer* The s u b s t a n t i a l d e c l i n e i n the l i q u i d i t y o f t h e p r i v a t e s e c t o r i n r e c e n t years - - and p a r t i c u l a r l y d u r i n g 1969 — has c l e a r l y become a m a t t e r of major i n t e r e s t t o everyone concerned w i t h the h e a l t h and progress of the American economy. This awareness i s a l s o w i d e l y shared w i t h i n the F e d e r a l Reserve System. Looked a t a l o n e , i n my p e r s o n a l judgment, the situation would c e r t a i n l y w a r r a n t the p u r s u i t o f a monetary p o l i c y which would a l l o w a f a i r l y r a p i d r e s t o r a t i o n o f l i q u i d i t y i n b o t h the f i n a n c i a l and n o n f i n a n c i a l s e c t o r s o f the economy. Unfortunately, be viewed i n i s o l a t i o n , however, the c u r r e n t s i t u a t i o n cannot and t h e need to accomplish o t h e r press- ing o b j e c t i v e s o f n a t i o n a l economic p o l i c y suggests t o me t h a t ^Member, Board o f Governors o f the F e d e r a l Reserve System. I am g r a t e f u l t o s e v e r a l members of the Board's s t a f f f o r a s s i s t a n c e i n the p r e p a r a t i o n o f these remarks. Miss E l e a n o r J . S t o c k w e l l and Miss Eleanor P r u i t t both helped w i t h the a n a l y s i s o f trends i n c o r p o r a t e l i q u i d i t y . M r . F r e d e r i c k M. S t r u b l e helped w i t h the a n a l y s i s of changes i n commercial bank l i q u i d i t y , and M r . P e t e r J . Feddor d i d t h e computer programming on which the l a t t e r a n a l y s i s was based. -2- the p r o v i s i o n to what the principal of increased economy seems indicate to meet that precision, it far from what is banks, but it is trends becomes c l e a r especially true also that in in close of the liquidity some e x t e n t the against are of opinion, policy year inflation. examined is surface. commercial nonfinancial corporations. esti- last situation position for of I n my t o be on t h e liquidity cannot the basic for the a c t u a l might appear to kinds the b a t t l e it true even demands large. to abandoning element when t h e more c l o s e l y , This these w h i c h has been p u r s u e d as an e s s e n t i a l different While they are d i s t r e s s i n g l y of monetary r e s t r a i n t Moreover, a magnitude even the roughest t h e m w o u l d be t a n t a m o u n t and a h a l f of t o be d e m a n d i n g c a n n o t be s e t a s a task of monetary p o l i c y . be q u a n t i f i e d w i t h mates liquidity I n the case o f commercial banks, the u s u a l m e a s u r e s o f l i q u i d i t y ( b a s e d on l o a n d e p o s i t r a t i o s ) show a s h a r p d e c l i n e o v e r t h e l a s t few y e a r s . H o w e v e r , when s a l e s o f l o a n s and n o n d e p o s i t sources o f funds a r e t a k e n i n t o account, the l i q u i d i t y p o s i t i o n of c o m m e r c i a l b a n k s shows much l e s s d e t e r i o r a tion. I n f a c t , the i n s t i t u t i o n s in the f r o n t ranks o f the i n d u s t r y - - the dozen or so m u l t i - n a t i o n a l b a n k s w i t h r e a d y a c c e s s t o t h e E u r o - d o l l a r m a r k e t - - may h a v e e x p e r i e n c e d a s l i g h t improvement i n t h e i r l i q u i d i t y positions over t h i s period. I n t h e case o f n o n f i n a n c i a l c o r p o r a t i o n s , i t i s e v i d e n t t h a t t h e enormous demand f o r l i q u i d i t y has been g e n e r a t e d by t h e continued high r a t e of f i x e d investment -3- i n an e n v i r o n m e n t o f s e v e r e m o n e t a r y r e s t r a i n t . To m a i n t a i n t h i s pace, c o r p o r a t i o n s r e l i e d h e a v i l y on s h o r t - t e r m f u n d s . For example, i t i s e s t i m a t e d t h a t l a s t y e a r a b o u r $10 b i l l i o n o f demand f o r n e t new f u n d s was s h i f t e d f r o m l o n g - t e r m m a r k e t s t o t h e b a n k i n g system and t h e commercial paper m a r k e t . To some e x t e n t , t h e l a r g e volume o f c o r p o r a t e f i n a n c i n g i n long-term markets thus f a r t h i s year r e f l e c t s an e f f o r t t o r e s t r u c t u r e c o r p o r a t e balance sheets. However, i t a p p e a r s t h a t a s u b s t a n t i a l s h a r e o f t h e p o t e n t i a l demand f o r l o n g - t e r m funds f o r t h i s purpose i s s t i l l o v e r hanging the market. The a d v e r s e i m p l i c a t i o n s o f such a s i t u a t i o n - - f o r b o t h l o n g - t e r m i n t e r e s t r a t e s and t h e a v a i l a b i l i t y o f l o n g term funds f o r other s e c t o r s - - a r e s t r i k i n g l y obvious. T h i s a d v e r s e i m p a c t may be p a r t i c u l a r l y s e v e r e on S t a t e and l o c a l g o v e r n m e n t s . A f t e r a subs t a n t i a l s h o r t - f a l l i n l o n g - t e r m b o r r o w i n g by t h e s e u n i t s i n 1969 compared w i t h t h e p r e v i o u s y e a r , S t a t e s and l o c a l i t i e s g r e a t l y s t e p p e d up m a r k e t o f f e r i n g s i n t h e e a r l y months o f t h i s year. However, t h e i r most r e c e n t e x p e r i e n c e s u g g e s t s t h a t - - once a g a i n - - t h e y a r e l i k e l y t o e n c o u n t e r a d i f f i c u l t s i t u a t i o n i n t h e months ahead. The a l r e a d y t r o u b l e s o m e p r o s p e c t s may w e l l be c l o u d e d f u r t h e r by t h e d e t e r i o r a t i n g p o s i t i o n o f t h e F e d e r a l budget. While i t is obviously d i f f i c u l t to p r o j e c t o f Government r e c e i p t s and e x p e n d i t u r e s o v e r year, likely it seems f a i r l y the the r e s t of c e r t a i n that t h e F e d e r a l Government t o have a much b i g g e r i m p a c t on t h e c a p i t a l d u r i n g t h e c o u r s e o f 1970 t h a n was a n t i c i p a t e d Government's trend this is markets earlier. L a s t J a n u a r y , when t h e b u d g e t message was s e n t t o C o n g r e s s , i t was e x p e c t e d t h a t t h e F e d e r a l Government w o u l d r e p a y on a n e t b a s i s a b o u t $ 2 . 6 b i l l i o n o f d e b t h e l d by t h e p u b l i c . -4- I n s t e a d i t now l o o k s as t h o u g h t h e Government may end up w i t h n e t b o r r o w i n g f r o m t h e p u b l i c o f a p p r o x i m a t e l y $3 b i l l i o n by June 30. F o r c a l e n d a r y e a r 1970, n e t b o r r o w i n g f r o m t h e p u b l i c may exceed $ 4 - 1 / 2 b i l l i o n - - i n c o n t r a s t t o n e t repayment o f $4 b i l l i o n l a s t y e a r . M o r e o v e r , t h e i m p a c t o f Government a g e n c i e s on t h e c a p i t a l m a r k e t may a l s o be s u b s t a n t i a l . D u r i n g t h e f i r s t f o u r months o f t h i s y e a r , t h e p r i n c i p a l a g e n c i e s had n e t b o r r o w i n g s o f $ 4 . 7 b i l l i o n - - n e a r l y 2 1 / 2 t i m e s t h e amount r e c o r d e d i n t h e same p e r i o d l a s t y e a r . In f a c t , t h e J a n u a r y - A p r i l volume t h i s y e a r was more t h a n o n e - h a l f o f t h e t o t a l r e c o r d e d f o r 1969 as a w h o l e . Thus, i t appears t h a t c l a i m s on t h e c a p i t a l m a r k e t o r i g i m t i n g w i t h F e d e r a l Government a g e n c i e s i n 1970 may be c o n s i d e r a b l y l a r g e r t h a n t h o s e r e c o r d e d i n 1969. I n e s s e n c e , when one p u l l s funds which the p r i n c i p a l sectors would l i k e i n t h e money a n d c a p i t a l m a r k e t s , that these competing o b j e c t i v e s In fact, short-falls stantial -- positions. of mystery: together it t h e demands t o see satisfied becomes p a i n f u l l y c a n n o t be a c h i e v e d i n in particular full. liquidity these pressures i s not a m a t t e r t h e F e d e r a l Reserve System - - as t h e c e n t r a l bank - - obvious s e c t o r s may w e l l be sub- thus f u r t h e r aggravating already s t r a i n e d How t o a l l e v i a t e for c o u l d p r o v i d e enough r e s e r v e s nation1s to assure that t h e e x p a n s i o n o f bank c r e d i t and t h e money s u p p l y w o u l d be l a r g e enough t o meet f u l l y Alternatively, the p u b l i c t h e demands o f t h e public. c o u l d r e v i s e downward i t s spending and i n v e s t m e n t p l a n s t o b r i n g them more i n t o l i n e w i t h a v e r y -5- moderate Federal rate of growth Reserve, in The a c t u a l a combination of the two moderation principal in sectors the best t h e demands of excess t h e economy, a l m o s t as price the expected output the time while of level. primary the the In contribution the p u b l i c , reduced the reflect inflation of of the headway of impact today on remains p o l i c y measures such measures c a n n o t be for the the personally on prices, bank to pressing believe the present on for overlooked. central satisfying at in E v e n when we a l l o w impact I substan- pressure has h a d l i t t l e ago. toward that juncture is the to inflation. these remarks, these general observations fully. of Commercial Commercial banks a r e sharply considerable inflation campaign a g a i n s t Position While impact of monetary p o l i c y a r e d e v e l o p e d more Liquidity this was a y e a r of originating The p a c e o f current the rest funds reducing l a g between the demands o f task reinforce in t h e r e may be some s c o p e make a m o d e s t liquidity for year and e m p l o y m e n t a n d t h e tenacity Thus, last s t r o n g as i t the s o l u t i o n w o u l d be a t h e economy. the the general s u p p l i e d by outcome most l i k e l y , would has b e e n made i n demand i n liquidity approaches. I n my own v i e w , tial the their liquidity Banks generally during thought the last to have year. Judged -6by t h e t r a d i t i o n a l true. all For example, s t a n d a r d s o f bank l i q u i d i t y , the r a t i o c o m m e r c i a l banks s t o o d a t is 72.0 a t t h e end o f l a s t year, the r a t i o t h e end o f t h e l a s t week i n F e b r u a r y . occurred, and as o f A p r i l further, and r e a c h e d 7 3 . 4 t h e r a t i o was 7 2 . 8 . i n l i q u i d i t y was p a r t i c u l a r l y marked a t For i n s t a n c e , ratio has banks. a t Reserve C i t y member banks i n New Y o r k , 1968 t o 1 0 2 . 9 a t end o f during The d e c l i n e the l a r g e s t of loans to t o t a l d e p o s i t s rose from 83.5 a t 103.9 a t this S i n c e t h e n a modest d e c l i n e 29, t h e end o f l a s t y e a r ; t h e end o f F e b r u a r y and s t i l l it the t h e end o f rose f u r t h e r stood a t 1968. substan- D u r i n g t h e e a r l y months o f climbed s t i l l at December, t h e c l o s e o f 1966 (when m o n e t a r y r e s t r a i n t was a l s o t i a l ) , t h e r a t i o was 6 5 . 8 . certainly of loans to t o t a l deposits compared w i t h 6 4 . 7 a y e a r e a r l i e r and 6 3 . 8 a t At this to 102.6 a t the April. It i s g e n e r a l l y known, bank l i q u i d i t y measures i s the d e c l i n e l a s t y e a r as r e f l e c t e d i n t h e the net r e s u l t in commercial traditional of a s i z a b l e expansion i n w h i l e d e p o s i t s r e m a i n e d v i r t u a l l y unchanged. loans Moreover, some t y p e s o f d e p o s i t s on w h i c h banks have come t o depend h e a v i l y registered substantial declines denomination-negotiable i n 1969. certificates For e x a m p l e , of deposit large (CD's) out- s t a n d i n g a t c o m m e r c i a l banks d r o p p e d f r o m $ 2 2 . 8 b i l l i o n on December 31, 1968, t o $ 1 0 . 9 b i l l i o n a y e a r l a t e r . on Partly -7- to compensate nondeposit for this sources If of in funds Euro-dollars i n commercial bank cated attrition, the -- especially a r e added t o liquidity following numerous in banks to total 1969 a p p e a r s turned Euro-dollars. deposits, less sharp, 83.5 76.3 Unadjusted Adjusted for Euro-dollars 72.0 69.7 102.9 86.0 of the is revealing, but once we f o c u s a s w e l l sources of It compare on o t h e r the period of situation severe monetary statistics used a r e e a c h w e e k by a b o u t of a t for borrowing e v e n more e n l i g h t e n i n g types a l s o w o u l d be h e l p f u l over a longer deposits to account of For i n 1969 w i t h restraint. those reported 340 banks. least about time. of trace this that For this total and other liquidity in 1966 one -- another analysis, the aggregate commercial the Reserve t h e s e banks has and i n by evidence purpose, the F e d e r a l Each o f $100 m i l l i o n , three-fifths to to for nondeposit f u n d s a n d once we g r o u p t h e b a n k s b y s i z e characteristics. of ratio expanded volume o f E u r o - d o l l a r emerges changes liquidity 31) R e s e r v e C i t y Member Banks i n New Y o r k 64.7 63.7 A m e r i c a n banks account (December Euro-dollars the considerably period indi- Unadjusted Adjusted for The a d j u s t m e n t might decline as to Deposits o f Loans A.11 C o m m e r c i a l Banks 1969: the figures: Ra t i o 1968: to bank Board total they assets. -8- However, t h e y a l s o h o l d a l m o s t 90 p e r c e n t o f t h e CD's and t h e y a c c o u n t for v i r t u a l l y a l l o f the E u r o - d o l l a r and c o m m e r c i a l p a p e r s o l d by banks v i a Liquidity C o n d i t i o n s by S i z e o f their outstanding, borrowings affiliates. Banks As measured by t h e t r a d i t i o n a l loan to deposit ratio, c o m m e r c i a l bank l i q u i d i t y dropped q u i t e s h a r p l y f r o m t h e end of 1966 t o t h e end o f 1969. the r a t i o of total As may be seen i n T a b l e 1 loans to t o t a l deposits rose substantially on a v e r a g e a t a l l w e e k l y r e p o r t i n g banks o v e r t h i s Furthermore, at t h i s advance was q u i t e p e r v a s i v e , t h e w e e k l y r e p o r t i n g banks i n a l l decline in l i q u i d i t y severe a t period. as i t t h e l a r g e r w e e k l y r e p o r t i n g banks the smaller weekly r e p o r t i n g The r a t i o was somewhat more (which have o p e r a t e d w i t h somewhat more d e p l e t e d l i q u i d i t y than a t occurred size categories. i n d i c a t e d by t h i s traditionally reserves) banks. W h i l e l o a n / d e p o s i t r a t i o s no d o u b t p r o v i d e a good i n d i c a t i o n o f t h e changes w h i c h o c c u r i n bank over long periods of time, of they are f a r t h e changes i n bank l i q u i d i t y short periods of time. (attached), from p e r f e c t liquidity measures c o n d i t i o n s which occur This i s p a r t i c u l a r l y fairly over t h e case when banks a r e faced w i t h p r e v i o u s l y unforeseen problems t h a t a f f e c t their o p e r a t i o n s and - - as a r e s u l t - - a r e r e q u i r e d t o make a d j u s t m e n t s -9- i n b a l a n c e s h e e t p o s i t i o n s by i n t r o d u c i n g new methods for o b t a i n i n g f u n d s and by e x p l o i t i n g e x i s t i n g a r r a n g e m e n t s more intensively. The p e r i o d f r o m 1966 t o 1969, e s p e c i a l l y part of t h i s p e r i o d , was j u s t the such a t i m e , as banks latter experienced simultaneously exceptionally s t r o n g demands f o r l o a n s , i n a major source o f d e p o s i t f u n d s , and a marked s l o w i n g i n growth r a t e of o t h e r sources o f d e p o s i t known, banks i n t h e U n i t e d S t a t e s , banks, responded t o t h i s vigorously funds. particularly attrition the As i s widely large commercial s i t u a t i o n by s e e k i n g f u n d s more from nondeposit sources. These s o u r c e s included b o r r o w i n g more h e a v i l y f r o m F e d e r a l Reserve Banks and i n the F e d e r a l f u n d s m a r k e t and a c q u i r i n g f u n d s i n l a r g e v o l u m e from the E u r o - d o l l a r market. m a r k e t was t a p p e d f o r affiliates In addition, the commercial paper f u n d s as bank h o l d i n g companies and began s e l l i n g paper i n o r d e r t o g a i n f u n d s t h a t could be used to a c q u i r e l o a n s p r e v i o u s l y h e l d on bank b o o k s . I n v i e w o f t h e g r e a t i m p o r t a n c e assumed by t h e s e activities liquidity it seems a p p r o p r i a t e t o examine d e v e l o p m e n t s i n bank f r o m a somewhat b r o a d e r p e r s p e c t i v e . This can be done by l o o k i n g a t a b r o a d e r measure o f t h e b a l a n c e p o s i t i o n of banks. to t o t a l The r a t i o o f l o a n s , n o t t o d e p o s i t s , liabilities, w i t h adjustments but f o r l o a n s a l e s t o bank h o l d i n g companies and a f f i l i a t e s and c o m m e r c i a l paper sheet sales -10b y t h e s e h o l d i n g companies and a f f i l i a t e s made where will serve the purpose. Table 2. It i s obvious necessary, These c a l c u l a t i o n s a r e p r e s e n t e d that a decidedly d i f f e r e n t impression o f t h e changes w h i c h have o c c u r r e d i n bank l i q u i d i t y i s gained from t h i s data. sources of liquidity funds i s conditions three-year period. Once t h e g r e a t e r use o f taken i n t o account, still is t h a t the although indicated ratios. Among M u l t i - N a t i o n a l , Major Regional, similar impression of r e l a t i v e liquidity d e v e l o p m e n t s a t w e e k l y r e p o r t i n g banks can be g a i n e d by at a different grouping o f these banks. For t h i s ( i n a d d i t i o n t o bank s i z e ) of -- i n c l u d i n g volume o f b u s i n e s s l o a n s , h o l d i n g companies and a f f i l i a t e s On t h e b a s i s o f t h e s e c r i t e r i a , bank importance f u n d s m a r k e t and t h e money m a r k e t i n g e n e r a l , borrowing, the stress a c o n s i d e r a b l e number o f o t h e r f o r e i g n l e n d i n g and E u r o - d o l l a r looking purpose, banks can be r e c l a s s i f i e d a c c o r d i n g t o c r i t e r i a w h i c h the Federal and Banks A generally attributes this disparity size, i s decidedly less s t a r k than i s in Liquidity Large Local bank A second i m p o r t a n t c o n c l u s i o n p r o v i d e d by by t h e l o a n t o d e p o s i t Variations nondeposit appears t h a t p o s i t i o n s among banks o f d i f f e r e n t observable, s i n c e 1966 r e m a i n e d e s s e n t i a l l y unchanged o v e r t h i s b r o a d e r measure o f bank l i q u i d i t y in liquidity it in in volume and a c t i v i t i e s by i n t h e c o m m e r c i a l paper m a r k e t . 20 w e e k l y r e p o r t i n g banks w e r e -11- i d e n t i f i e d as m u l t i - n a t i o n a l b a n k s . U s i n g t h e same but emphasizing importance i n v a r i o u s regions of criteria the country, a n o t h e r 60 banks were d e s i g n a t e d m a j o r r e g i o n a l b a n k s . The r e m a i n i n g w e e k l y r e p o r t i n g banks were t h e n c a l l e d l a r g e local banks. An e x a m i n a t i o n o f T a b l e 3 shows t h a t among l o a n / d e p o s i t the relationship r a t i o s a t t h e s e t h r e e g r o u p s o f banks and t h e changes i n t h e s e r a t i o s between 1966 and 1969 w e r e essentially similar i n p a t t e r n to t h a t p r e s e n t e d by t h e tables r e f l e c t i n g d e v e l o p m e n t s a t w e e k l y r e p o r t i n g banks g r o u p e d on the basis of s i z e alone. A t t h e end o f 1966, multi-national banks were o p e r a t i n g w i t h t h e h i g h e s t l o a n t o d e p o s i t ratios w i t h t h e m a j o r r e g i o n a l banks n e x t i n o r d e r . T h i s same o r d e r continued to p r e v a i l a t the r a t i o s t h e end o f 1969 a f t e r r i s e n quite sharply at a l l t h r e e groups o f b a n k s . If ment o f bank l i q u i d i t y d e v e l o p m e n t s were made on t h e of these r a t i o s , tions at i t w o u l d be q u i t e c l e a r that an assessbasis liquidity condi- t h e m u l t i - n a t i o n a l and r e g i o n a l banks w o u l d be j u d g e d t o have d e t e r i o r a t e d c o n s i d e r a b l y o v e r t h i s more so t h a n a t the other w o u l d a l s o be c l e a r three-year period large weekly r e p o r t i n g banks, but that a l l t h e g r o u p s o f banks a substantial erosion in their had positions. experienced it -12However, as was t h e case when t h e w e e k l y r e p o r t e r s classified liquidity on t h e b a s i s o f s i z e a l o n e , different once a measure o f bank i s used w h i c h t a k e s i n t o a c c o u n t t h e r e c e n t utilization of nondeposit liquidity changes i n t h e s e r e l a t i v e p o s i t i o n s p o s i t i o n s and o f is obtained. seen i n T a b l e 4 , d i s p a r i t y among t h e r a t i o s at As may be of loans Moreover, this n a r r o w e d d u r i n g t h e t h r e e y e a r s e n d i n g i n December, period, liabilities total disparity 1969. the r a t i o of loans plus loan sales to total p l u s c o m m e r c i a l paper s a l e s d r o p p e d s l i g h t l y a t multi-national of to t h e t h r e e groups o f banks i n 1966 was much l o w e r t h a n among t h e l o a n t o d e p o s i t r a t i o s . Over t h i s heavy funds by b a n k s , a d e c i d e d l y impression of r e l a t i v e liabilities banks and r o s e m o d e r a t e l y a t the other the two g r o u p s banks. T h i s a l t e r n a t i v e measure a l s o g i v e s a s h a r p l y contrast- i n g i n d i c a t i o n o f t h e g e n e r a l changes i n l i q u i d i t y w h i c h at were t h e s e b a n k s between 1966 and 1969. b a n k s , as p r e v i o u s l y n o t e d , that their the broader Indeed, a t positions over t h i s multi-national l i q u i d i t y measure t h e s e banks may have e x p e r i e n c e d a s l i g h t liquidity the occurred improvement period w h i l e a t the occurred. in other two g r o u p s o f banks o n l y a v e r y m i n o r d e c l i n e i n l i q u i d i t y t o have suggests seems -13These t r e n d s i n bank l i q u i d i t y They s u g g e s t c l e a r l y for s h o u l d be k e p t i n m i n d . t h a t to a considerable extent the quest f u n d s b y c o m m e r c i a l banks has been s t i m u l a t e d b y a n t o a c h i e v e - - and m a i n t a i n - - a h i g h l e v e l o f e a r n i n g rather t h a n by a s i m p l e a t t e m p t Moreover, i n the l a s t have been f u r t h e r strengthened, their liquidity positions T h u s , one must q u e s t i o n t o w h i c h banks m i g h t be e x p e c t e d t o employ a increase i n resources liabilities t o revamp t h e s t r u c t u r e o f as opposed t o e x p a n d i n g t h e i r e a r n i n g I n my o p i n i o n , we s h o u l d e x p e c t a r e l a t i v e l y on t h e l a t t e r Corporate rather t h a n on t h e and the sizable their assets. greater emphasis former. Liquidity Corporate l i q u i d i t y holdings sheets. as a c c e s s t o b o t h d e p o s i t s n o n d e p o s i t s o u r c e s has i m p r o v e d . extent assets to r e s t r u c t u r e balance few m o n t h s , effort of currency, securities to t h e i r persistently l a s t year. as measured by t h e r a t i o deposits, corporate and s h o r t - t e r m m a r k e t a b l e total current l i a b i l i t i e s * f o r many y e a r s and r e a c h e d a n a l l (See T a b l e 5) of - - has time D u r i n g most r e c e n t y e a r s , declined low the *This construction of a l i q u i d i t y r a t i o i s not a v a i l a b l e from published data since holdings of s h o r t - t e r m marketable s e c u r i t i e s o t h e r t h a n U.S. Governments a r e n o t r e p o r t e d s e p a r a t e l y but are included, along w i t h miscellaneous current accounts, i n the i t e m " o t h e r c u r r e n t assets.11 The two l i q u i d i t y r a t i o s shown i n T a b l e 5 may be t h o u g h t o f as p r o v i d i n g a n u p p e r and lower l i m i t . -14liquidity p o s i t i o n o f c o r p o r a t i o n s as a g r o u p has s e a s o n a l l y i n the f i r s t declined t h r e e q u a r t e r s and r e c o v e r e d p a r t the d e c l i n e i n the f o u r t h of quarter. One e x c e p t i o n t o t h i s p a t t e r n o c c u r r e d f r o m m i d - 1 9 6 7 to mid-1968. term f i n a n c i n g I n t h a t p e r i o d , a s u b s t a n t i a l volume o f (which vas i n p a r t a n t i c i p a t o r y ) long- was accompanied by a m o d e r a t i o n i n t h e g r o w t h o f s h o r t - t e r m d e b t s , a q u i c k e n i n g i n t h e r a t e o f l i q u i d a s s e t a c c u m u l a t i o n and a t e m p o r a r y i n the y e a r - t o - y e a r decline in liquidity. o c c u r r e d i n 1969, when l i q u i d i t y quarter; as a r e s u l t , exception d e c l i n e d through the the drop f o r s h a r p - - much s h a r p e r t h a n i n Another halt fourth t h e y e a r as a w h o l e was u n u s u a l l y 1966. While the continued e r o s i o n i n corporate l i q u i d i t y a m a t t e r o f some c o n c e r n , level for it is i m p o s s i b l e t o say w h a t specific the c o r p o r a t e u n i v e r s e i m p l i e s a c r i t i c a l l y p o s i t i o n f o r a s i g n i f i c a n t number o f i n d i v i d u a l illiquid corporations. U n e a s i n e s s has a r i s e n each t i m e t h e o v e r a l l r a t i o r e a c h e s a new l o w , b u t t o d a t e c o r p o r a t i o n s have a p p a r e n t l y been a b l e accommodate t h e m s e l v e s to the reduced l e v e l of Part of the p e r s i s t e n t reflects credit erosion i n corporate d e c l i n e d more m o d e r a t e l y . Part of liquidity open-book extended to business customers; w o r k i n g c a p i t a l both sides of trade c r e d i t to liquidity. t h e c o n t i n u e d e x p a n s i o n i n t h e volume o f (which r e f l e c t is transactions) t h e change r e f l e c t s ratios have the -15- d e v e l o p m e n t o f new s o u r c e s o f f u n d s a f t e r 1966 - - a striking example b e i n g t h e use o f t h e c o m m e r c i a l p a p e r m a r k e t by larger public u t i l i t i e s . efficient Still another p a r t r e s u l t s management o f cash a s s e t s . liquidity needs, Finally, it or a t l e a s t p r a c t i c e s , f r o m more s h o u l d be n o t e d vary considerably i n d u s t r i e s and p r o b a b l y among companies i n t h e same For e x a m p l e , d u r i n g the 1960fs, average r a t i o s a t liquidity average among industry. some i n d u s t r i e s w i t h the s t a r t of the p e r i o d reduced relatively that below- their as much as some i n d u s t r i e s w i t h above- ratios. By i t s e l f , the h i s t o r i c a l l y low l e v e l o f f o r c o r p o r a t i o n s as a w h o l e - - and f o r c o r p o r a t i o n s major i n d u s t r i e s liquidity i n most - - may have g i v e n r i s e t o s i g n i f i c a n t t h i s year t o h a l t or slow i t s strong contributory continuing erosion. However, a f a c t o r i n the narrowing i n l i q u i d i t y l a s t y e a r was t h e heavy r e l i a n c e by c o r p o r a t i o n s short-term borrowings on to finance f i x e d investment. t h e s e b o r r o w i n g s may c o n t i n u e t o be r o l l e d - o v e r , positions relatively Some o f b u t many c o r p o r a t i o n s a r e u n d o u b t e d l y under p r e s s u r e t o r e p l a c e w i t h more permanent efforts them funds. Sources and Uses o f C o r p o r a t e Funds While a p a r t i c u l a r to a particular t y p e o f f i n a n c i n g c a n n o t be m a t c h e d type of outlay (since corporations tend to acquire -16a p o o l o f f u n d s t o use f o r a v a r i e t y o f p u r p o s e s ) relationships the years. However, t h e s e were q u i t e I n a s s e s s i n g t h e demand f o r one c a n assume t h a t , i n general, f u n d s by on i n t e r n a l l y Likewise, to relying in t h e y c a n be t h o u g h t o f as p r e f e r r i n g Against this uses - - t o use such as For example, credit. conceptual background, one can readily (See T a b l e i n 1968, o u t l a y s on p l a n t and e q u i p m e n t By 1969, p l a n t and e q u i p m e n t e x p e n d i t u r e s climbed t o $77.2 b i l l i o n , billion. investment I n the f i r s t (of With respect t o $81.8 b i l l i o n for $68.0 $4.9 $14.5 corporate fixed (at a seasonally and t h e u n c o v e r e d m a r g i n r o s e t o $ 1 9 . 5 t o s h o r t - t e r m s o u r c e s and uses o f term borrowings to outlays quarter of t h i s year, ( a t $17.0 b i l l i o n ) inventories, ( w h i c h t o t a l e d $11.5 funds, billion). billion. short- were u n u s u a l l y l a r g e net trade c r e d i t , 6). had and t h e gap had w i d e n e d t o spending rose f u r t h e r adjusted annual r a t e ) , short- exceeded i n t e r n a l l y g e n e r a t e d f u n d s by a b o u t billion. borrowing, inventories t h e g r o w i n g p r e s s u r e s on c o r p o r a t e l i q u i d i t y t e r m uses sequence on s h o r t - t e r m funds r a i s e d i n t h e money m a r k e t . and t h e e x t e n s i o n o f t r a d e billion) finance generated funds, l o n g - t e r m c a p i t a l market term funds to f i n a n c e s h o r t - t e r m trace distorted corporations, they would p r e f e r l o n g - t e r m o u t l a y s w i t h l o n g - t e r m funds - - and l a s t l y general among s o u r c e s and uses o f c o r p o r a t e f u n d s have developed over l a s t year. certain and o t h e r relative short- -17Based on p a s t r e l a t i o n s h i p s , i t would appear t h a t 1969 a b o u t $10 b i l l i o n o f demand f o r n e t new f u n d s - w a s in shifted f r o m l o n g - t e r m m a r k e t s t o t h e b a n k i n g system and t h e commercial paper market. raised This is equivalent to half t h e amount t h r o u g h n e t new bond and s t o c k i s s u e s and t h e n e t i n c r e a s e c o r p o r a t e m o r t g a g e d e b t l a s t y e a r , and i t r a i s e d i n t h e s e forms i n any y e a r p r i o r if an a d d i t i o n a l r a t e l i q u i d i t y would s t i l l o f the exceeds t h e amount t o 1966. Moreover, $10 b i l l i o n had been o b t a i n e d i n l o n g - t h a n s h o r t - t e r m m a r k e t s i n 1969, in the d e c l i n e even rather in over-all corpo- have been t h e s h a r p e s t f o r any y e a r 1960fs. The l a r g e volume o f c o r p o r a t e f i n a n c i n g i n markets thus f a r t h i s y e a r , long-term together w i t h the f r e q u e n t state- ments t h a t such f u n d s a r e t o be used t o r e p a y s h o r t - t e r m d e b t s , w o u l d seem t o s u g g e s t t h a t a s u b s t a n t i a l p a r t o f t h e likely r e s t r u c t u r i n g o f c o r p o r a t e b a l a n c e s h e e t s has a l r e a d y place. first However, p r e l i m i n a r y quarter flow-of-funds (as shown i n T a b l e 6) b u s i n e s s as a w h o l e , indicate that, for for I n t h e same p e r i o d , short of the r i s e in the corporate the expansion i n l o n g - t e r m f i n a n c i n g t h e e a r l y months o f t h e y e a r f e l l investment. estimates taken in fixed t h e volume o f new short-term b o r r o w i n g was w e l l b e l o w t h e 1969 a v e r a g e , b u t n e t investment i n short-term assets declined s u b s t a n t i a l l y more. -18- L o n g - T e r m C o r p o r a t e Debt Financing As shown i n T a b l e 7, c o r p o r a t i o n s have a l r e a d y a r e c o r d volume o f l o n g - t e r m f u n d s so f a r quarter, p r i v a t e and p u b l i c bond o f f e r i n g s and t h e amount f o r billion. If t h e second q u a r t e r the l a t t e r m a t e r i a l i z e s , be as much as $ 1 3 . 9 b i l l i o n , rate. i n 1970. The h i g h e s t p r e v i o u s I n the t o t a l e d $5.8 is projected at the f i r s t half In 1969, billion. g r o u p s i s a l s o shown i n T a b l e 7. and r e a l e s t a t e - d o l l a r volume o f -- u t i l i t i e s , grew a t a r a t h e r issues, The s p u r t was until The o t h e r communications, b o r r o w i n g by t h e c o m m u n i c a t i o n s major and finance s t a b l e r a t e i n terms the f i r s t half industry. in particularly of o f 1970, when t h e huge AT&T o f f e r i n g caused a b u l g e i n t h e p r o p o r t i o n d o l l a r volume f i g u r e s borrow- the p e r i o d of monetary s t r i n g e n c y marked i n t h e case o f m a n u f a c t u r i n g f i r m s . categories industry The s u r g e o f l o n g - t e r m the previous year i s a l s o e v i d e n t . industrial $8.1 t o t a l may The t r e n d o f l o n g - t e r m b o r r o w i n g by m a j o r following billion, l e v e l o f b o r r o w i n g was a c h i e v e d t h e volume amounted t o $ 1 8 . 3 i n 1967, first o r n e a r l y $28 b i l l i o n a t an a n n u a l i n 1967, when $22 b i l l i o n o f bonds were o f f e r e d . ing borrowed of Nevertheless, show, bond i s s u e s by m a n u f a c t u r i n g as the firms i n 1970 w i l l show a l a r g e i n c r e a s e o v e r 1969, even s h o u l d t h e r e be a tapering o f f f r o m t h e r a p i d pace i n t h e f i r s t half of the year. -19The r e m a i n i n g two c a t e g o r i e s — f i n a n c e and e s t a t e and t h e r e s i d u a l " o t h e r " tion, (which i n c l u d e s c o m m e r c i a l , and e x t r a c t i v e erratically. financial It industries) the -- real transporta- fluctuate s h o u l d be n o t e d t h a t t h e g r o w t h i n somewhat the c a t e g o r y i n 1969 was buoyed by a r a p i d e x p a n s i o n the mortgage i n v e s t m e n t trust of i n d u s t r y , which channelled a s u b s t a n t i a l volume o f new f u n d s f r o m b o t h t h e e q u i t y and bond markets i n t o income-producing p r o p e r t y development. I n summary, such change as a p p e a r s i n t h e d a t a p e r c e n t a g e c o m p o s i t i o n o f bond i s s u e s o v e r t h i s p e r i o d that manufacturing firms with a resulting i s s u e s by such f i r m s w i t h t h e r e t u r n o f directly Utility more related to c a p i t a l outlays, hospitable industry r e f l e c t (bonds and n o t e s m a t u r i n g i n l e s s t h a n 10 y e a r s , until issues) show t h a t t h e more borrowing but predominantly t h e r e was a l m o s t no such b o r r o w i n g t h e second q u a r t e r o f 1969. For t h e y e a r as a w h o l e , t h e s e s h o r t e r m a t u r i t y bonds a v e r a g e d a b o u t 1 1 . 8 p e r c e n t t o t a l P u b l i c bond o f f e r i n g s . (No d a t a a r e a v a i l a b l e m a t u r i t i e s o f p r i v a t e bond o f f e r i n g s . ) in volume. The d a t a a v a i l a b l e on i n t e r m e d i a t e - t e r m five-year t o be more and t h e f l u c t u a t i o n s behavior of the t o t a l d o l l a r in s u r g e i n bond bond f l o t a t i o n a p p e a r s the percentage share o f the u t i l i t y volatile suggests tend to delay l o n g - t e r m f i n a n c i n g p e r i o d s o f monetary r e s t r a i n t , c a p i t a l markets. on of on The t o t a l v o l u m e of -20s u c h bonds and n o t e s i n t h e f i r s t billion, or 16.7 per cent o f t o t a l p u b l i c bonds. No e s t i m a t e is available at this second q u a r t e r , b u t t h e d o l l a r volume i n A p r i l and May t h u s far s t i l l time f o r q u a r t e r o f 1970 was $ 2 . 6 has been r e l a t i v e l y It is relationships intermediate maturities in the large. too e a r l y to estimate t o what e x t e n t t h e characterizing corporate historical f i n a n c i n g may s t i l l o p e r a t i n g i n the present quarter. Yet, substantial l o n g - t e r m f i n a n c i n g aimed a t share of the p o t e n t i a l it seems l i k e l y be r e s t r u c t u r i n g c o r p o r a t e balance sheets s t i l l w i l l t h e market at midyear. The i m p l i c a t i o n s be o v e r h a n g i n g o f such a situation, f o r b o t h l o n g - t e r m i n t e r e s t r a t e s and t h e a v a i l a b i l i t y term funds f o r other sectors, are not a t a l l that a of long- encouraging. B o r r o w i n g by S t a t e and L o c a l Governments As y i e l d s on S t a t e and l o c a l government i s s u e s t h r o u g h most o f the f i r s t quarter of this year, it l o o k as t h o u g h t h e volume o f l o n g - t e r m s e c u r i t i e s these u n i t s i n 1970 w o u l d be s u b s t a n t i a l l y g r e a t e r $11.8 b i l l i o n recorded l a s t year. began t o o f f e r e d by than and t h e A p r i l c l i m b e d t o $1.7 b i l l i o n - - a l e v e l o n l y s l i g h t l y below 1969. the I n M a r c h , new i s s u e s o f term m u n i c i p a l debt quickened n o t i c e a b l y , peak month i n declined long- volume the -21- However, a f t e r m i d - A p r i l , l o c a l government i s s u e s l o s t t h e m a r k e t f o r S t a t e and some o f i t s momentum. Commercial b a n k s , w h i c h had been a m a j o r s o u r c e o f s u p p o r t i n M a r c h , to moderate t h e i r purchases o f m u n i c i p a l s a f t e r mid-April. M o r e o v e r , an I n t e r n a l Revenue S e r v i c e c h a l l e n g e o f deductability deposits) o f i n t e r e s t p a i d on bank f u n d s also a depressing f a c t o r . added f u r t h e r than time i s s u e s was The b u i l d - u p o f d e a l e r ( e s p e c i a l l y of longer m a t u r i t i e s ) the (other w h i c h were used t o a c q u i r e t a x - e x e m p t began inventories to market pressures. In t h i s environment, the calendar of issues f o r s a l e i n May and June began t o r i s e r a t h e r s e v e r a l i s s u e s were p o s t p o n e d . apparent t h a t new i s s u e t o t a l s Thus, it scheduled slowly, became and increasingly i n t h e s e months may be somewhat l o w e r t h a n t h e a v e r a g e f o r the f i r s t quarter — w h i c h was a b o u t $ 1 . 3 b i l l i o n p e r m o n t h . As t h e second g o t under way, that average f o r million t h e r e was some i n d i c a t i o n the monthly t h e second q u a r t e r m i g h t be as much as $200 higher. At t h i s time, the backlog of a u t h o r i z e d issues w h i c h no o f f e r i n g d a t e has been f i x e d i s q u i t e l a r g e . m o r e , a number o f S t a t e and l o c a l u n i t s have r a i s e d rate ceilings, quarter and s e v e r a l o t h e r s have s u b m i t t e d t h e for Furtherinterest question -22- to t h e i r it electorates t o be d e c i d e d i n coming m o n t h s . And when i s r e c a l l e d t h a t l o n g - t e r m b o r r o w i n g by S t a t e and local governments i n 1969 may have f a l l e n as much as $5 billion below the planned l e v e l , the one can see r e a d i l y i s already set for a p o t e n t i a l l y that s i z a b l e expansion new m u n i c i p a l b o r r o w i n g i n t h e months ahead - c o n d i t i o n s become even m o d e r a t e l y Trends i n F i s c a l As I if stage in market receptive. Policy indicated at the o u t s e t , I am p e r s o n a l l y about the basic d i r e c t i o n o f the Federal budget. a r i s e s as much f r o m t h e p o t e n t i a l impact of the This concerned concern Government's b u d g e t on t h e c a p i t a l m a r k e t as f r o m t h e i m p a c t o f t h e G o v e r n ment s e c t o r on t h e r e s t o f t h e economy. A l t h o u g h one must a l w a y s be somewhat u n c e r t a i n the f i n a l that outcome o f F e d e r a l r e c e i p t s and e x p e n d i t u r e s , the Federal budget w i l l be much l e s s o f a i n f l u e n c e on t h e economy d u r i n g f i s c a l y e a r June 30) t h a n was t h o u g h t l i k e l y message was s e n t t o C o n g r e s s . $3.6 b i l l i o n It exceed $ 1 . 0 b i l l i o n . it appears restraining 1970(ending l a s t J a n u a r y when t h e b u d g e t At t h a t (measured on a n a t i o n a l was a n t i c i p a t e d . about time, a surplus income a c c o u n t s of basis) now l o o k s as t h o u g h t h e s u r p l u s may n o t F o r t h e c a l e n d a r y e a r 1970, there -23- may a c t u a l l y be a d e f i c i t of a t l e a s t $5.0 b i l l i o n . d i r e c t i o n has been e v i d e n t f o r some t i m e . surplus For i n s t a n c e , (at a seasonally adjusted annual r a t e ) o f $13.5 b i l l i o n steadily billion i n t h e second q u a r t e r to $7.7 b i l l i o n the s u r p l u s dropped s h a r p l y I n t h e second q u a r t e r , o f 1969. I n the f i r s t It result in a substantial deficit Nevertheless, features) through the r e s t of be i n the on a deficit. h o w e v e r , we s h o u l d d i s t i n g u i s h c l e a r l y between t h e i m p a c t o f the G o v e r n m e n t ' s b u d g e t on t h e economy and t h e i m p a c t o f For t h i s p u r p o s e , f o c u s on t h e h i g h employment b u d g e t it t h e economy i s g r o w i n g i n r e a l run potentials. billion is helpful to measures expenditures terms c l o s e t o i t s Using t h i s measure, economic (which e s s e n t i a l l y t h e e x p e c t e d r e l a t i o n s h i p between r e c e i p t s a n d if million. i n t h e NIA b u d g e t . I n any assessment o f f i s c a l p o l i c y , c o n d i t i o n s on t h e b u d g e t . of Security as 1970 ends, t h e b u d g e t , NIA b a s i s , w o u l d p r o b a b l y s t i l l $6.7 t o a b o u t $300 the increase i n Social T h i s d e f i c i t may t h e n t a p e r o f f year. eroded t h r e e months b e n e f i t s and F e d e r a l pay ( w i t h t h e i r r e t r o a c t i v e will the r e a c h e d a peak i n t h e t h i r d q u a r t e r and t o i n the f o u r t h q u a r t e r . t h i s year, The t r e n d i n long- t h e r e was a d e f i c i t i n the Government's accounts i n calendar year of 1968, $10 this -24- indicating clearly that source of i n f l a t i o n a r y However, r e f l e c t i n g t h e F e d e r a l Government was a m a j o r p r e s s u r e s i n t h e economy i n t h a t t h e e f f e c t s o f t h e 10 p e r c e n t surcharge adopted i n mid-1968, the calendar year year. income 1969 r e c o r d e d a h i g h employment s u r p l u s o f $ 5 . 3 b i l l i o n . So, as a result the Govern- of a discretionary change i n f i s c a l p o l i c y , ment s h i f t e d f r o m a p o s t u r e o f economic s t i m u l a t i o n t o one o f restraint against this -- a posture thoroughly c o n s i s t e n t w i t h the inflation. Through t h e f i r s t quarter of t h i s s t a n c e was f a i r l y w e l l m a i n t a i n e d . second q u a r t e r , a shift campaign year, However, d u r i n g t o w a r d f i s c a l ease i s occurring ( a l t h o u g h i t may be t e m p o r a r y ) m a i n l y r e f l e c t i n g h i g h e r pay and S o c i a l S e c u r i t y b e n e f i t s . For t h i s h i g h employment d e f i c i t may r e - a p p e a r . quarters of will this calendar year, p r o b a b l y remain below i t s r e v e n u e s may r i s e more s l o w l y . b u d g e t may show a s u r p l u s Trends in Federal At this Government w i l l the This current will arise But f o r t h e l a s t long-run potential, two growth and F e d e r a l t h e h i g h employment i n the l a s t h a l f of t h i s year. Financing juncture, have fiscal Federal period a small t h e r a t e o f economic Thus, the it seems e v i d e n t that the Federal t o b o r r o w s u b s t a n t i a l l y more money year from the than i t anticipated combination of last during January. a short-fall in revenue -25- and h i g h e r o u t l a y s . Last January, receipts for fiscal 1970 were e s t i m a t e d a t $ 1 9 9 . 4 b i l l i o n and o u t l a y s a t $ 1 9 7 . 9 y i e l d i n g an e x p e c t e d s u r p l u s o f $ 1 . 5 b i l l i o n . i n g t h i s a n t i c i p a t e d outcome, Partly t h e Government t h o u g h t be a b l e t o make n e t d e b t r e p a y m e n t s t o t h e p u b l i c billion. billion, reflect- it of might $2.6 As e v e n t s have u n f o l d e d t h i s p r o s p e c t has changed measurably. Reflecting lower-than-expected corporate and t h e c o r r e s p o n d i n g s l o w e r r i s e i n corporate tax profits payments, F e d e r a l b u d g e t r e c e i p t s may be a l m o s t $3 b i l l i o n b e l o w the J a n u a r y e s t i m a t e s , w h i l e o u t l a y s may be as much as $ 1 b i l l i o n higher. So r a t h e r than achieving a surplus of $1-1/2 t h e r e may be a d e f i c i t deficit, of $2-1/2 b i l l i o n . To f i n a n c e billion this t h e Government may have t o u n d e r t a k e n e t b o r r o w i n g from t h e p u b l i c a m o u n t i n g t o as much as $3 b i l l i o n d u r i n g t h e c u r r e n t f i s c a l F o r c a l e n d a r y e a r 1970, i t i s much more d i f f i c u l t make an assessment o f t h e p r o s p e c t f o r F e d e r a l Government ing. t h a t i n 1969, However, i t w i l l be r e c a l l e d r a n a budget s u r p l u s of $5.3 b i l l i o n . debt repayment o f $ 4 . 1 b i l l i o n . the f i r s t will half of this year, almost c e r t a i n l y b i l l i o n o r more. If level. borrow- t h e Government This permitted net On t h e b a s i s o f t r e n d s during t h e b u d g e t f o r t h e y e a r as a w h o l e show a s i z a b l e d e f i c i t this materializes -- p e r h a p s o f $5 t h e r e w o u l d have t o be n e t b o r r o w i n g f r o m t h e p u b l i c o f an amount a t l e a s t that to close to year. -26Thus, to relieve the some o f repaying debt, pressure because to its cover Demand f o r Federal the Government, pressures in which the capital may a g a i n b e c o m e a s o u r c e of t h e need of Funds by F e d e r a l F e d e r a l Government, volume principal spurt in to the d i r e c t the prospective in calendar the previous heavily larger of c a p i t a l market year year. 1969, almost A substantial to channel for this the year, market amount in support current F o r May a n d J u n e , the volume of for about the three part calendar In times of first the housing. year the billion. of Home capital is for first $4.7 b i l l i o n half If of four funds borrow this 1 9 7 0 may be ^ F e d e r a l Home L o a n B a n k s , F e d e r a l I n t e r m e d i a t e C r e d i t B a n k s , F e d e r a l N a t i o n a l M o r t g a g e A s s o c i a t i o n , Banks f o r C o o p e r a t i v e s , and F e d e r a l Land Banks. account. this t h e s e a g e n c i e s may $0.8 of about the Federal of the impact be t a k e n i n t o topped the they obtained about an average monthly r a t e materializes, funds to volume o f agency b o r r o w i n g . on a n e t b a s i s . at additional a g e n c i e s * b o r r o w e d on a n e t b a s i s The o u t l o o k months by b o r r o w i n g demands o f L o a n Banks a n d t o FNMA, b o t h o f w h i c h another able Agencies i n a g e n c y b o r r o w i n g c a n be t r a c e d markets market to borrow a considerable b o r r o w i n g by Government a g e n c i e s must a l s o $9.1 billion 1969 was deficit. In addition The f i v e in -27- about $ 6.0 b i l l i o n . ease o f f I n the l a s t s i x months, somewhat, b u t i t may s t i l l Thus, u n l e s s s u b s t a n t i a l i n agency b o r r o w i n g p l a n s t h e pace may t o t a l $5.0 billion. downward r e v i s i o n s a r e made (which are not c u r r e n t l y expected), the u n f o l d i n g evidence s t r o n g l y suggests t h a t t o t a l b o r r o w i n g i n c a l e n d a r y e a r 1970 for l a s t year. term c a p i t a l Concluding This, w o u l d exceed agency that t o o , w i l l mean added p r e s s u r e i n t h e long- markets. Observations A t the b e g i n n i n g o f these remarks, cannot r e c o n c i l e I stated that t h e p r o v i s i o n o f enough c e n t r a l b a n k t o meet t h e s t r o n g demands f o r l i q u i d i t y w i t h t h e of the f i g h t against inflation. s h o u l d be g i v e n t o t h e l a t t e r I n my j u d g m e n t , I credit continuation priority objective -- although I also t h i n k a modest a d d i t i o n t o bank r e s e r v e s and b a n k c r e d i t should be p e r m i t t e d o v e r t h e c o u r s e o f t h i s y e a r . hand, I w o u l d p e r s o n a l l y w a n t t o make s u r e t h a t credit On t h e o t h e r the g r o w t h i n bank i s k e p t s m a l l enough t o dampen any t e n d e n c y f o r activity t o expand a t a r a t e to restore price t h a t would undercut the economic effort stability. J u s t w h a t t h e optimum r a t e o f g r o w t h i n bank credit w o u l d have t o be t o a s s u r e t h i s d e s i r a b l e outcome i s h a r d estimate. However, I am c o n v i n c e d t h a t i t most o b s e r v e r s - - and p a r t i c u l a r l y to i s w e l l below what those o p e r a t i n g i n the -28financial s e c t o r o f t h e economy - - w o u l d l i k e t o s e e . this position, ments a t I f u l l y appreciate the f a c t that total In adopting l o a n s and c o m m e r c i a l banks r o s e by o n l y 2 . 4 p e r c e n t i n 1969. second h a l f , invest- In t h e a n n u a l r a t e o f g r o w t h was 0 . 7 p e r c e n t , b u t i f sales are included, of t h i s year, annual r a t e , t h e i n c r e a s e was 2 . 0 p e r c e n t . loan I n the f i r s t quarter t h e r e was a d e c l i n e o f 0 . 2 p e r c e n t a t a s e a s o n a l l y but i n c l u s i o n of However, adjusted l o a n s a l e s w o u l d show a r i s e o f 2 . 7 p e r c i r c u m s t a n c e s have changed significantly. i n b o t h F e b r u a r y and M a r c h , t o t a l bank c r e d i t rose a t an annual r a t e o f 3.3 per cent but i n A p r i l the r a t e climbed t o 6.0 per The money s u p p l y - - whose e r r a t i c by 2 - 1 / 2 p e r c e n t behavior i s widely recognized - - But i n t h e f i r s t quarter of t h i s t h e r e was a n i n c r e a s e o f 3 . 8 p e r c e n t , a t a s e a s o n a l l y a d j u s t e d somewhat, b u t So f a r i n May, t h e pace o f e x p a n s i o n has f o r t h e month as a w h o l e i t few months. c o u l d w e l l exceed 5 p e r s t a n t i a l g r o w t h was r e c o r d e d i n March and A p r i l * cent. rapidly sub- I n the l a t t e r t h e r i s e was 22 p e r c e n t , a t a s e a s o n a l l y a d j u s t e d a n n u a l of W h i l e t h e s e d e c l i n e d by 5 . 3 p e r c e n t i n 1969 ( w i t h the a t t r i t i o n c o n t i n u i n g through February of t h i s y e a r ) , alone, year, slackened Time and s a v i n g s d e p o s i t s a t c o m m e r c i a l banks have a l s o r i s e n i n the l a s t of annual I n A p r i l t h e money s u p p l y s p u r t e d upward a t an a n n u a l r a t e 10.7 per c e n t . cent. expanded i n 1969, w h i l e t h e a n n u a l r a t e i n t h e second h a l f t h e y e a r was o n l y 0 . 6 p e r c e n t . rate. cent. i n more r e c e n t m o n t h s , m a i n l y i n r e s p o n s e t o a modest change i n m o n e t a r y p o l i c y , For example, the month rate. -29I n view of these recent t r e n d s , a p a r t i c u l a r l y cautious course must be f o l l o w e d by t h e c e n t r a l bank i n o r d e r t o a v o i d e x c e s s i v e l y e x p a n s i o n i n d e p o s i t s and bank I credit. am n o t u n m i n d f u l o f t h e a c c u m u l a t e d p r e s s u r e s * on l i q u i d i t y t h e m a j o r s e c t o r s o f t h e economy - - n o r o f t h e p r e s s u r e s b e i n g currently i n the c a p i t a l markets. t o expect t h a t p a r t i c i p a n t s public, Rather, I believe i t i n a l l of these sectors is reasonable ( p r i v a t e as w e l l as r e a l i z e t h a t a l l o f t h e i r demands c a n n o t be met s i m u l t a n e o u s l y t o succeed i n t h e e f f o r t t o check inflation. in registered t h e F e d e r a l Government as w e l l as S t a t e and l o c a l u n i t s ) rapid will i f we a r e Table 1 Loan t o D e p o s i t R a t i o s W e e k l y R e p o r t i n g Banks (December 1966 and 1969) Item 1966 A l l Weekly Over Reporting $1 b i l l i o n $500 m i l l i o n Less to $1 than $500 (36 65 to 85) 69 (38 to 102) (57 71 to 85) (58 79 to 102) (47 66 to 79) (46 71 to 97) (36 63 to 83) (38 67 to 82) Banks in Total 1969 Deposits billion million NOTE: R a t i o s f o r t h e d i f f e r e n t groups o f banks were o b t a i n e d by a v e r a g i n g i n d i v i d u a l bank r a t i o s . Numbers i n p a r e n t h e s i s i n d i c a t e the range of i n d i v i d u a l bank r a t i o s i n each g r o u p i n g . Dates are f o r December 2 1 , 1 9 6 6 , a n d December 2 4 , 1 9 6 9 . These d a t e s were s e l e c t e d to exclude the i n f l u e n c e of y e a r - e n d f i n a n c i a l d e v e l o p ments . Table 2 L i q u i d i t y Ratios ( R a t i o s o f Loans A d j u s t e d t o L i a b i l i t i e s Weekly R e p o r t i n g Banks (December 1966 and 1969) Item Adjusted) 1966 1969 61 (35 t o 78) 61 ( 3 2 t o 81) 64 (54 t o 75) 64 (46 t o 76) $500 m i l l i o n t o $ 1 b i l l i o n 62 (43 t o 74) 62 (44 t o 74) Less t h a n $500 m i l l i o n 59 (35 t o 78) 61 (32 t o 81) A l l Weekly R e p o r t i n g Banks Over $ 1 b i l l i o n i n T o t a l Deposits NOTE: Data f o r 1966 a r e r a t i o s o f t o t a l l o a n s t o t o t a l l i a b i l i t i e s and f o r 1969 a r e r a t i o s o f t o t a l loans a d j u s t e d f o r l o a n s a l e s t o bank h o l d i n g companies and a f f i l i a t e s t o t o t a l l i a b i l i t i e s i n c l u d i n g c o m m e r c i a l paper i s s u e d by bank h o l d i n g companies and a f f i l i a t e s . R a t i o s f o r t h e d i f f e r e n t groups of banks were o b t a i n e d by a v e r a g i n g i n d i v i d u a l bank r a t i o s . Numbers i n p a r e n t h e s i s i n d i c a t e t h e r a n g e o f i n d i v i d u a l bank r a t i o s i n each g r o u p i n g . Data a r e f o r December 2 1 , 1966, and December 2 4 , 1969. These d a t e s were s e l e c t e d t o e x c l u d e t h e fluence of year-end financial developments. in- T a b l e 3 Loan t o D e p o s i t R a t i o s Weekly R e p o r t i n g Banks (December 1966 and 1969) Item 1966 A l l W e e k l y R e p o r t i n g Banks Multi National Banks—^ Major Regional 2/ Banks- Other Large Banks 1969 65 (36 t o 85) 69 (38 t o 102) 73 (58 t o 85) 82 (58 t o 102) 66 ( 5 1 t o 80) 74 (53 t o 97) 64 (36 t o 8 3 ) 66 (38 t o 88) NOTE: R a t i o s f o r t h e d i f f e r e n t g r o u p s o f banks were o b t a i n e d by a v e r a g i n g i n d i v i d u a l bank r a t i o s . Numbers i n p a r e n t h e s i s i n d i c a t e t h e r a n g e o f i n d i v i d u a l bank r a t i o s i n each g r o u p i n g . Dates a r e f o r December 2 1 , 1966, and December 2 4 , 1969. These d a t e s were s e l e c t e d t o exclude the i n f l u e n c e of year-end f i n a n c i a l developments . 1/ These banks were s e l e c t e d on t h e b a s i s o f a number o f c r i t e r i a i n c l u d i n g s i z e , volume o f b u s i n e s s l o a n s , i m p o r t a n c e i n t h e F e d e r a l Funds m a r k e t i n p a r t i c u l a r and t h e money m a r k e t i n g e n e r a l , volume o f f o r e i g n l e n d i n g and p a r t i c i p a t i o n i n t h e E u r o - d o l l a r m a r k e t . 2 J The same c r i t e r i a as those l i s t e d i n f o o t n o t e 1 were used t o s e l e c t t h e s e 60 b a n k s . However, t h e s e b a n k s , i n g e n e r a l , a r e s m a l l e r and e a c h r e g i o n o f t h e c o u n t r y was g i v e n r e p r e s e n t a t i o n . Table 4 (Ratios Liquidity Ratios o f Loans A d j u s t e d t o L i a b i l i t i e s W e e k l y R e p o r t i n g Banks (December 1966 and 1 9 6 9 ) Item Adjusted) 1969 1966 A l l Weekly R e p o r t i n g Multi National Major Other Regional Large (35 61 to 78) 61 (32 t o 81) (52 65 to 70) 64 (46 t o 76) 61 (50 t o 75) 62 (47 t o 75) 60 to 78) 60 (32 t o 81) Banks Banks—^ 2/ Banks- Banks (35 NOTE: D a t a f o r 1966 a r e r a t i o s o f t o t a l l o a n s t o t o t a l l i a b i l i t i e s and f o r 1 9 6 9 a r e r a t i o s o f t o t a l l o a n s a d j u s t e d f o r l o a n s a l e s t o b a n k h o l d i n g c o m p a n i e s and a f f i l i a t e s t o t o t a l l i a b i l i t i e s including c o m m e r c i a l p a p e r i s s u e d by b a n k h o l d i n g c o m p a n i e s and a f f i l i a t e s . R a t i o s f o r t h e d i f f e r e n t groups of banks were o b t a i n e d by a v e r a g i n g i n d i v i d u a l bank r a t i o s . Numbers i n p a r e n t h e s i s i n d i c a t e t h e r a n g e of i n d i v i d u a l bank r a t i o s i n each g r o u p i n g . D a t a a r e f o r December 2 1 , 1 9 6 6 , and December 2 4 , 1 9 6 9 . These d a t e s w e r e s e l e c t e d t o a v o i d r e f l e c t i n g year-end f i n a n c i a l developments. 1/ These b a n k s w e r e s e l e c t e d on t h e b a s i s o f a number o f c r i t e r i a i n c l u d i n g s i z e , volume of business l o a n s , importance i n the F e d e r a l F u n d s m a r k e t i n p a r t i c u l a r a n d t h e money m a r k e t i n g e n e r a l , v o l u m e o f f o r e i g n l e n d i n g and p a r t i c i p a t i o n i n t h e E u r o - d o l l a r m a r k e t . 2/ The same c r i t e r i a a s t h o s e l i s t e d i n f o o t n o t e 1 w e r e u s e d t o s e l e c t these 60 b a n k s . However, these banks, i n g e n e r a l , are s m a l l e r a n d e a c h r e g i o n o f t h e c o u n t r y was g i v e n r e p r e s e n t a t i o n . Table 5 Corporate Liquidity- Liquicl i t y Ratios ( p e r c e n t o f t o t ;i l c u r r e n t l i a b i l i t i e s) End o f Year Cash and U . S . Governments 1961 1962 1963 1964 1965 1966 1967 1968 1969 38.4 37.0 35.4 32.6 29.1 25.4 24.0 23.4 19.3 Cash, Governments and " o t h e r " current assets Changes f r o m pr<s v i o u s Cash, Governmentts and " o t h e r " current assets 46.7 45.6 44.8 42.3 38.9 35.3 34.5 34.4 30.1 Total Current Liabilities 15.0 17.3 14.0 27.4 24.9 9.9 29.6 39.9 5.2 6.4 1.1 3.7 .5 1.4 9.9 -.6 Level 1961 1965 1969 year-end ( b i l l i o n s of 72.8 89.2 100.4 dollars) 155.8 229.6 333.8 S o u r c e . - S e c u r i t i e s and Exchange Commission, C u r r e n t A s s e t s and L i a b i l i t i e s o f U.S. C o r p o r a t i o n s . S e r i e s e x c l u d e s b a n k s , s a v i n g s and l o a n a s s o c i a t i o n s , i n s u r a n c e c o m p a n i e s , and i n v e s t m e n t c o m p a n i e s , b u t i n c l u d e s o t h e r f i n a n c i a l c o r p o r a t i o n s and c o r p o r a t e f a r m s . P r e s e n t s e r i e s d a t e s f r o m 1961. Table 6 Flows o f Funds, N o n f i n a n c i a l (Billions of Corporations dollars) 1970* (1st quarter 1966 1967 1968 1969 51.5 41.8 9.7 4.6 .6 4.5 59.5 50.5 9.0 4.0 1.4 3.6 76.8 61.2 15.6 10.2 1.2 4.2 82.7 61.2 21.5 14.7 2.3 4.5 81.0 63.1 17.9 12.9 - .8 5.8 83.6 62.7 20.9 12.1 4.3 4.5 85.7 62.3 23.4 13.1 7.1 3.2 41.0 L o n g - t e r m uses P l a n t & equipment 37.0 Residaitial constr. 2.3 D i r e c t invest.JL' 1.7 48.5 44.1 2.1 2.3 65.7 61.6 1.1 3.0 68.7 63.8 2.2 2.7 71.2 68.0 2.3 .9 82.1 77.2 2.9 2.0 87.6 81.8 2.3 3.5 S h o r t - t e r m s o u r c e s , , ,, 3 . 0 Bank l o a n s , n . e . c - r 3 . 0 Other loans 0 4.7 3.8 .9 9.3 7.9 1.4 7.8 6.4 1.4 13.2 9.6 3.6 17.1 10.9 6.2 S h o r t - t e r m uses Change i n inventories Net Trade C r e d i t O t h e r , n e t 3/ 8.5 8.8 12.3 13.5 16.1 11.5 3.8 4.7 3.9 -.1 5.9 4.5 -1.6 14.4 3.5 -5.6 6.4 6.2 .9 6.5 9.2 .4 7.4 6.4 -2.3 3.6 9.3 -9.1 Discrepancy 5.0 6.9 8.0 8.2 6.9 7.1 5.3 Long-term sources I n t e r n a l funds C a p i t a l market Bonds Stocks Mortgages 1/ E x c l u d e s d i r e c t i n v e s t m e n t f i n a n c e d by f o r e i g n s e c u r i t y are also excluded from long-term s e c u r i t y issues. 2/ Includes 3/ * loans r e p o r t e d f o r bank h o l d i n g c o m p a n i e s a n d C u r r e n t a s s e t s ( o t h e r t h a n i n v e n t o r i e s and t r a d e c r e d i t ) borrowed c u r r e n t l i a b i l i t i e s (other than trade d e b t ) , Seasonally adjusted annual r a t e . flotations, affiliates. less non- O 1964 i-1 1962 5.5 5.5 which Table 7. P r i v a t e arid P u h l i c Bond O f f e r i n g s , by I n d u s t r y ( M i l l i o n s of D o l l a r s ) F inane i a 1 and Real E s t a t e Other Total 808 3,762 2,108 13,720 3,252 1,815 1,747 2,887 15,562 9,894 4,217 1,787 2,383 3,686 21,962 1968 5,669 4,408 1,725 2,158 3,422 17,382 1969 4,401 5,410 1,963 2,738 3,786 18,298 F i r s t h a l f o f 1970 1/ F i r s t Quarter Second Q u a r t e r 4,200 2,200 2,000 2,880 1,280 1,600 3,050 750 2,300* 1,900 700 1,260 1,870 870 1,000 13,900* 5,800 8,100* Manufacturing Utilities 1965 4,712 2,332 1966 5,861 17 F i r s t h a l f and second q u a r t e r , * I n c l u d e s AT & T r i g h t s o f f e r i n g of $ l e 6 Source: 1970, a r e estimated by F e d e r a l Reserve Board. S e c u r i t i e s and Exchange Commission. Communications billion.
@FedFRASER