Business Conditions: February 1968

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A review by the Federal Reserve Bank of Chicago
Business
C o n d itio n s
1968 February
Contents
Trends in banking and finance
The 1968 starting line 2
A reappraisal
The world food problem and
the U.S. farmer 9
Gold: Legacy of a bygone era 13
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in banking and finance
The 1968 starting line
T„,
year begins with economic activity will be permitted to take place through addi­
high and rising rapidly. This is reflected in tions to bank reserves by the monetary au­
such measures as industrial production, em­ thorities and (2) the extent to which the
ployment, and consumer spending. Gains are banks compete successfully with market se­
being made in response to strengthening of curities and obligations of nonbank financial
basic demand, the gradual fading of the institutions both in the procurement and the
effects of last fall’s strikes, and the anticipa­ placement of funds.
tion of possible strikes later this year. Inven­ Last year’s slackened loan growth and
tories of materials and merchandise are rising rapid reserve expansion provided some cush­
and substantial additional stockpiling is ex­ ion for meeting potential loan demand in the
pected, especially of steel and steel products. months ahead, but banks have little leeway
Spending by the federal government, though in boosting their total credit independent of
not expected to rise as fast as last year, re­ their ability to expand deposits. Federal
mains stimulative, and outlays for state and Reserve aims call for the provision of reserves
local projects continue a rapid rise. to support money and credit expansion as
Financing projected levels of activity— needed to facilitate growth of production and
at least in the first half of 1968—promises consumption. But the system must also under­
to require at least as much credit as last year. take to keep spending from rising faster than
How much of this will be reflected in the potential output. A return toward price sta­
growth of bank credit will depend largely on bility must be a high priority objective in
two factors: (1) the deposit expansion that 1968 not only for domestic reasons but be-
BUSINESS CONDITIONS is published monthly by the Federal Reserve Bank of Chicago. Dorothy M. Nichols was
primarily responsible for the article "Trends in banking and finance" and Roby L. Sloan for "The world food problem
and the U.S. farmer."
Subscriptions to Business Conditions are available to the public without charge. For information concerning bulk mailings,
address inquiries to the Federal Reserve Bank of Chicago, Chicago, Illinois 60690.
Articles may be reprinted provided source is credited.
Annual Report: The 1967 Annual Report of the Federal Reserve Bank of Chicago contains the
bank's financial statements, brief reviews of last year's developments in business, agricul­
ture, and banking, and a 40-page illustrated feature article: "The Chicago area—an economic
2 perspective." Copies of the Annual Report may be obtained by writing to the bank.
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Business Conditions, February 1968
cause of the adverse effect of further inflation was borrowing heavily to finance its large
on the balance of payments and the position deficit. Holdings of governments rose most
of the dollar as a world currency. at large city banks, and about half of their net
If demand is excessive, as suggested by the acquisitions consisted of Treasury bills.
price increases already taking place, some Government securities provide a reservoir
expenditures will have to be curtailed or post­ of liquidity, because they can be sold or
poned. One way of doing this would be to allowed to run off when funds are needed for
boost taxes, thereby slowing the growth of loans. However, several factors limit this
disposable income. Another would be to re­ flexibility in the current environment.
strain spending by holding a tight rein on the • A large part of the Treasuries are
availability of credit. Still another would be to pledged as collateral for public deposits.
reduce or postpone some government spend­ Holdings are currently only about a billion
ing. Even with the assumption that taxes will dollars above the “rock bottom” levels
be raised in the current session of Congress, reached in mid-1966.
some slowdown from last year’s record • Because of the sharp increase in interest
growth in bank credit seems appropriate. rates in the past two years, large capital losses
Should demands for credit be strong enough would accrue from the sale of most inter­
to push market rates well above the interest mediate and long-term issues now in bank
ceilings on time deposits, many banks would portfolios.
again find their ability to acquire loanable • Little net reduction in bank holdings of
funds severely limited. Treasury securities can be expected in the
face of the forthcoming volume of new issues
Where district banks stand for which banks will be important distribution
The charts on pages 4 and 5 show the channels.
changes in loans, investments, and deposits at Banks continue to acquire large amounts
Seventh District member banks in the past of municipal and agency securities. The total
three years. On the basis of the relationship amount of these securities in bank portfolios
between their loans and deposits, these banks has nearly tripled since the end of 1960. They
appear less able to accommodate the credit now make up about a sixth of the earning
demands likely to be associated with a further assets of Seventh District member banks. The
upsurge in business activity than they were steady climb in bank holdings of municipal
two years ago. Whatever leeway they have issues reflects not only the steady increase
stems from developments last year, when an in the supply of these securities but also
expansive monetary policy allowed a record their favorable after-tax yield compared with
11.5 percent growth in deposits—more than yields on direct Treasury obligations. While
twice the 1966 gain—and the posture of many state and local securities are long term
monetary policy in the months ahead. and not readily marketable, about 30 percent
Investments rose faster than loans last of last year’s increase at large banks in leading
year, with U. S. governments up 8 percent cities was in tax warrants and other short­
and other securities, including municipal and term notes and bills that will provide an in­
federal agency issues, up 21 percent. Much of flow of funds in the near future.
the increase in governments came in the
second half of the year, when the Treasury —continued on page 6 3
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billion dollars
3 0
Seventh District member banks
29 Seventh District member banks
LOANS account for most of the growth of
bank credit. But expansion was not as fast
in most of 1967 as in the 1965-66 period of
strong demand that accompanied sharply
rising economic activity. For 1967 as a
whole, total loans of district member banks
'loans and discounts
rose 10 percent compared with a gain of 9
percent for all commercial banks in the
nation.
U. S. GOVERNMENT SECURITY holdings
show an uptrend since mid-1966 but hold­
ings are still only moderately higher than
two years ago. Aside from the amounts
held for various collateral purposes, changes
in holdings largely reflect the timing of
Treasury financings. About the same pro­
portion of governments maturing in one
year were held nationwide by member
banks in mid-1967 as two years before—
43 percent.
■ H j______
HpRmni
MUNICIPAL and GOVERNMENT AGENCY
SECURITIES continue to attract bank funds.
District member banks acquired $1.3 billion
of these issues in 1967—an increase of 20
percent. These securities constitute 16 per­
cent of earning assets of the banks. In mid-
1967, about 20 percent of state and local
securities held by all member banks in the
U. S. had maturities within one year.
Note: All are end-of-quarter figures except reserves which are
quarterly averages of seasonally adjusted monthly figures.
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Business Conditions, February 1968
billion dollars
begin 1968 in high gear
DEPOSIT GROWTH resumed at a rapid
pace in 1967 after the easing of monetary
policy. Time deposits provided the major
thrust. Total deposits of district member
banks rose 11 percent during the year, but
as market interest rates rose toward year-
end, inflows of time deposits again leveled
off.
BANK LIQUIDITY, measured by the loan-
to-deposit ratio, improved modestly in 1967
as deposits rose faster than loans. Large
banks accounted for all of the improvement,
mainly through aggressive sales of nego­
tiable CDs. At country banks, the ratio was
virtually unchanged in late December from
the year-earlier level.
BANK RESERVES were supplied by the
Federal Reserve system at a 10-percent rate
of growth last year, following a contraction 1965 1966 1967
in the second half of 1966 and an average billion dollors
annual rate of growth of about 3 percent
from 1957 to 1966. The rapid expansion in
reserves helped support renewal of vigor­
ous economic growth.
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—continued from page 3 increase in loans at district member banks
amounted to about $2.5 billion last year and
Meanwhile, loans, which now comprise was larger than in 1966.
more than 60 percent of all district member
bank deposits, have continued to rise, though Deposit trends
not as fast as in the 1965-66 boom. Commer­ Although demand deposits accounted for
cial and industrial loans rose more than usual part of last year’s deposit growth, a resur­
in the first half of 1967, largely because of gence in time deposits was mainly respon­
corporate borrowing to meet the accelerated sible. The growth of time deposits had leveled
tax payment schedule. But later in the year, off in 1966, largely because yields on money
business use of bank credit weakened, at least market securities rose above the ceiling rates
in relation to expected demands, until very banks were allowed to pay on large negotiable
near the end of the year. The slower growth time CDs (certificates of deposit).
of bank loans to business—in the face of With the shift to expansionary monetary
rising economic activity—reflected the large policy, yields declined and CDs again became
amount of funds raised by corporations in competitive. By the end of November, city
the capital markets—more than 60 percent banks in the district had boosted the volume
greater than in the same period in 1966. of CDs to about a fifth more than their mid-
In the year as a whole, city banks of the 1966 peak.
district reported a total gain of 11 percent These banks also had sizable gains in
in business loans, compared with 14 percent smaller time certificates and open account
in 1966 and a spectacular 24 percent in 1965. time deposits but small declines in passbook
Expansion in consumer and real-estate loans savings on which they could pay only 4 per­
also slowed last year. Nevertheless, the total cent interest.
Most of the inflows of new savings were
apparently in the form of certificates. Many
Spreads between long and
banks, small and large, sought to attract funds
short-term yields were
by offering certificates with various denom­
unusually wide in 1967 inations, maturities, and renewal provisions
at rates above that for passbooks. But by
percent year-end, nearly all large banks were offering,
on all types of time and savings deposits, the
maximum rates allowed by regulations. A
large number of small banks, however, still
had room to raise their rates. In the market
for large negotiable CDs, only maturities of
less than three months were still competitive
with yields on competing money-market
securities.
Deposit gains, more than the weaker loan
demand, were responsible for the reduction
in loan-to-deposit ratios in 1967. Total loans
of Seventh District member banks were 61.1
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Business Conditions, February 1968
percent of total deposits at the end of Decem­ vided by the Federal Reserve System. The
ber—down only 1.5 percentage points from reserve base of the banking system, after ris­
the peak reached in the fall of 1966. More­ ing only 2 percent in 1966, was up more than
over, all this decline was due to large banks 10 percent last year, accommodating concur­
in major cities, where individual ratios still rently large gains in deposits and credit.
range up to 80 percent or more. Loans at
smaller banks continued to creep higher in Monetary policy factors
relation to deposits. These relationships point to the critical
Within loan portfolios, however, are some importance of monetary policy in the banks’
important sources of liquidity. Total loans ability to meet credit demands. In the first
include holdings of bankers’ acceptances, half of 1967, reserve expansion was intended
overnight loans to other commercial banks to stimulate renewed growth in the economy
(federal funds), and loans to security dealers. and offset the depressing effects of the mas­
In the last six months, large district banks sive inventory adjustment then in process.
have been fairly heavy net sellers of federal Reserves continued to be provided rapidly
funds. Many small banks have also used this during the second half, despite developing
market as a temporary outlet for short-term labor shortages and upward price pressures.
money. But rising interest rates indicated that even
Decisions about the reinvestment of these the large volume of funds supplied was falling
funds are made daily. Repayment of funds short of credit demands. Several factors mit­
borrowed to meet tax liabilities—a major igated against cutbacks in the rate of reserve
reason for last year’s business borrowings— growth. These included some doubts about
will also provide funds to meet new loan de­ the underlying strength of the economic ex­
mands. Considering these factors, liquidity pansion, concern that higher interest rates
has undoubtedly improved more than the would be unsettling to international exchange
relatively small shrinkage in loan-deposit markets and would again have unfavorable
ratios indicates. repercussions on housing construction, hopes
Nevertheless, the banking system as a for greater restraint on federal spending and
whole cannot expand total credit by liquidat­ an increase in income taxes, and a need to
ing short-term assets. It can only change the provide market stability for the very large
composition of credit. New loans can be made volume of Treasury borrowings. Before year-
as outstanding credits mature or as they are end, however, and following promptly on the
sold, forcing the issuers of the assets liqui­ heels of the devaluation of the British pound,
dated to obtain financing from investors other increases in the discount rate and, beginning
than banks—probably at higher rates. in January, increases in the reserve require­
Clearly, deposit growth is the basic source ments at large banks signaled the Federal
of bank credit. And while individual banks Reserve System’s growing concern with in­
can acquire funds by bidding them away from flation and the prospects of excessive demand
other banks, the banking system as a whole in 1968. The growth in reserves and bank
can gain deposits (aside from slippages due credit was much reduced in December.
to excess reserves and shifts among banks
with different reserve requirements) only to January visibility low
the extent the supporting reserves are pro­ Interest rates on marketable securities de- 7
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dined substantially in the first half of January suming that any such strains will be moderate.
even though prospects for further expansion In the first place, credit demands may not be
in income and spending appeared increas­ as great as some banks expect. Many corpora­
ingly firm. Investors stepped up their pur­ tions that sold bonds last year can draw on
chases of securities, and dealers’ stocks those funds in the months ahead. Temporary
declined. Optimism mounted that policy investment of the proceeds was partly respon­
actions, either already announced or ex­ sible for short-term rates falling well below
pected, would be effective in holding credit long rates last year. Furthermore, the decline
demands to amounts commensurate with the in yields in the bond market since mid-
flow of savings under conditions of a more November has both dampened investors’
moderate rate of monetary expansion. But inclinations to wait for still higher yields and
because of seasonally strong investment de­ encouraged the marketing of issues that had
mand, January readings provide notoriously been postponed earlier. In the second place,
unreliable clues to forthcoming trends. Unless the implementation of monetary policy—
there is marked moderation in the economy’s even a more restrictive policy if that proves
growth, the respite could be short lived. necessary—will be designed to prevent net
What are the implications for the banks? liquidation of bank credit and avoid unduly
Probably some strains are ahead, especially severe strains on financial markets.
in the first quarter. In addition to the $8 And finally, there is evidence that banks
billion the Treasury is expected to raise be­ and other depository institutions are some­
fore the end of March—much of which banks what less vulnerable to the loss of funds
will acquire initially—many of the large through the attraction of higher yields on
banks also expect substantial demand for marketable securities than they were two
business loans to finance larger inventories, years ago. This has resulted from a more
meet tax payments, and in some cases to widespread recognition by depositors of the
avoid paying the high rates on borrowings in importance of the reciprocal relationship be­
capital markets. tween banks and business and, perhaps most
Banks appear prepared to accommodate important, the smaller proportion of highly
some increase in loan demand although the interest-sensitive money now placed with
adjustments required for them to make such financial institutions. Since year-end, neither
loans have some impact on short-term money personal savings funds nor CD money have
markets. Their maneuverability appears flowed out in the amounts many institutions
limited, except as reserves increase further. had expected.
If loan demand increases to a great extent, To the extent there may be financial strains
either a significant cutback in reserve growth ahead, they seem likely to be greatest in the
or a rise in yields on money-market securities short-term market. A narrowing of the re­
above the maximum rates authorized on CDs cently wide spread between long and short­
could force tightening of bank lending pol­ term rates would be more in keeping with the
icies. normal pattern in a period of sharply rising
There are, however, strong reasons for as­ economic activity and strong credit demand.
8
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Business Conditions, February 1968
A reappraisal
The world food problem
and the U. S. farmer
T he adequacy of world food supplies has out the world, but largely in countries that
been a matter of concern for years. The de­ can ill afford the added burden.
cline in commodity stocks and world grain While definitions differ, countries are com­
production has caused many observers, mind­ monly grouped according to levels of per-
ful of expanding population, to call for all- capita income—those with annual incomes of
out production to eliminate the “world food roughly $500 or more being classified as
shortage.” In response, the government re­ developed and those with incomes less than
laxed some of its programs in 1967, farmers $500 being classified as developing. More
sharply expanded production, and grain than two-thirds of the world population is in
prices dropped. The result has been that many developing countries. All of these countries
now question whether there really is a world are probably experiencing population growth
food shortage. rates estimated at more than 2 percent a
It is hard to measure food consumption year. The rapid increase in population in
levels in most areas of the world. Many these countries has resulted largely from a
countries do not know the number of their marked reduction in their death rates. In
populations or how fast they are growing. De­ many of these countries, the mortality rate per
tailed information on production is often even thousand people has been reduced more than
more fragmentary. Nevertheless, most spe­ half in the last 20 years—due largely to wider
cialists on the subject would argue that a application of public health and sanitation
significant part of the world’s population is practices. The death rate in one Asian coun­
suffering from malnutrition. But that does not try reportedly dropped 40 percent in the first
mean there is a strong economic demand for year after the introduction of DDT.
food or that American farmers will be called Birth rates have always been high in these
on to increase production. countries, compared with developed coun­
tries, and have changed little with the decline
Population in death rates. As a result, the average rate
Demographic changes, and especially pop­ of population increase in these countries is
ulation increases, contribute most to the food estimated at about 2.4 percent a year com­
problem. World population was about 1.5 pared with less than 1 percent before 1945.
billion in 1900—roughly twice what it had Although the developed countries had high
been two centuries before. In little more than death rates as well as high birth rates in the
half a century, the population doubled again; early stages of their development, birth and
and it is now estimated at about 3.5 billion. death rates have tended to decline together.
The increase has not come uniformly through­ Because of this, population increases for these
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countries have not averaged more than 1.2 have shown a downward trend in food output
percent a year for any extended period. At since the mid-1950s—Sweden, which has re­
present rates of population growth, the time duced production as a matter of policy, and
required to double the population in most Algeria and Uruguay. At least 11 countries
developing countries is 18 to 27 years. By were able to expand output at an annual rate
contrast, it is 55 to 88 years in most devel­ of at least 4 percent, and another 16 increased
oped countries. output by more than 3 percent. The United
States and some of the other developed coun­
Production tries with policy aims of keeping production
Most countries have achieved sizable in­ in line with relatively slow rises in demand
creases in agricultural production since the were among those with the lowest rates of
mid-1950s. World food production has in­ production increase.
creased more than a third in the last decade.
Although the rate of growth in food produc­ Imbalance—per-capita production
tion varies between countries, both developed On the average, per-capita food production
and developing countries have increased their in developing countries has remained about
outputs at about the same rate for the past constant in recent years, with these countries
decade—2.4 percent a year. Of the 55 coun­ doing little more than keeping up with their
tries belonging to the United Nations Food rapid increases in population. Meanwhile in
and Agriculture Organization, only three developed countries, per-capita production
has increased about 12 percent.
Food production in countries of South
Both total and per-capita Asia, North Africa, and the Caribbean ap­
production show rapid advances pears to have actually fallen behind popula­
tion growth, resulting in lower consumption
in developed countries*
per person. In South Asia—particularly in
India and Pakistan—the drop appears to be
only the temporary result of unfavorable
weather in 1965 and 1966. These countries
were making slow progress in boosting per-
capita grain production until the 1965-66
drought. The record harvest forecast for
1967-68 may allow resumption of the sub­
continent’s long-run upward trend in per-
capita production. Because India and Pakis­
tan loom so large among the developing coun­
tries—together they account for more than a
third of the population of such countries—
their progress (and setbacks) in food produc­
tion greatly influence views of the aggregate.
Other developing countries have continued
to make progress—some in sizable steps.
* North America, Europe, USSR, Japan, Republic of South
Over roughly the past decade, for example,
Africa, Australia, and New Zealand.
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