will not be a net borrower or supplier of funds in the money market.29 A balanced budget is expected to result from increased income tax revenues as current income tax rates are maintained, although there may be increased Government expenditures for present and new programs. There has been no attempt to calculate whether there will be a significant increase in the amount of long-term Federal debt, and an offsetting reduction in outstanding short-term Federal debt, or the possible effects of such a change. Judging from attempts to follow such a policy in recent past years, it is assumed that there will not be a significant lengthening in the average term of the Federal debt during the decade of the sixties which would have a measurable effect upon the market demand for long-term funds.

On the assumption that net Federal borrowing will not be a factor, the net market credit requirements for the Government sector would come wholly from State and local governments. The total net credit requirements of State and local governments, to be met from market sources as well as from other sources, was estimated on the basis of past annual net increases of total liabilities of these governments, as shown in the flow of funds data of the Federal Reserve Board.

Since the projected credit requirements are all in terms of stable prices, estimates were made of the annual amounts and percentage increases in outstanding liabilities, assuming there had been no yearto-year increases in prices of goods and services purchased by State and local governments during 1947-59. The past annual net increases in liabilities were reduced by an amount equal to expenditures by State and local governments that arise from annual increases in the prices of goods and services purchased by the governments, reasoning that the necessary increase in liabilities would have been that much less.30 The balances of the annual net increases in total liabilities, which might be termed increases in total liabilities assuming stable prices, were then used to derive annual percentage increases in outstanding liabilities of State and local governments.

These "stable price" net increases in liabilities as a percentage of the total liabilities outstanding at the end of the preceding year showed a declining trend. The percentage increases ranged between 6 and 10 percent in 1950-54 but only between 5 and 8 percent in 1955-59,31 In line with this historical pattern, the outstanding total liabilities of State and local governments were projected (in table 14) in constant 1959 dollars at an annual rate of increase of 6%1⁄2 percent a year through 1970. On this basis, the annual constant dollar net increase in total liabilities of State and local governments would rise from $5.4 billion in 1960 to $10.2 billion in 1970.

29 This is a departure from the projection of the National Planning Association which assumes that the outstanding Federal debt will increase by 14 percent a year. The NPA projection includes assumptions of substantial reductions in tax rates. The reduction in Federal income tax rates in the NPA projection is related to a further assumption of a decrease in defense expenditures. In this study there is no assumption of a decrease in defense expenditures or in tax rates. It is assumed that the additional tax revenues arising from increased incomes will pay for expansion of Government programs and new programs so that the Federal budget will be in balance. The continuation of present Federal income tax rates would result in lower disposable personal income of about $10 billion to $11 billion and also in lower personal savings of about $10 billion by 1970 (as the latter two figures are projected in appendix table III-A, with savings as a residual of disposable personal income after deduction of consumption expenditures), than in the NPA projections. 30 See appendix table II-G.

31 See appendix table II-H.

Two sources of credit from which minor parts of this total increase might be met were projected at the same small amounts as had been shown in recent years-an increase in Federal Government loans was projected at a rate of $0.2 billion a year and an increase in trade debt at a rate of $0.1 billion a year. (No attempt was made to calculate the effect of past price changes since the amounts are relatively so small that the price changes probably would not be significant.)

TABLE 14.—Derivation of annual net increases in State and local government liabilities by type of credit, 1947-70

[In billions of dollars; current dollars for 1947-59; 1959 dollars for later years]

1947-59, all columns: Federal Reserve Board, Flow of Funds, Federal Reserve Bulletin, August 1960, p. 943.

1960-70: Col. 1: Projected at a 6.5 percent annual increase. (See appendix tables II-G and II-H for back data adjusted to a comparable "stable price" basis).

Col. 2: Derived from col. 1.

Col. 3: A residual of col. 2 minus cols. 4, 5, and 6.

Cols. 4 and 5: Projected on basis of experience of last few years. The amounts are so small, that the effects of price changes would be neglible.

Col. 6: Projected on basis of 1958-59 experience, adjusted to reflect proportionately the 1959 to 1960 red uction in net increase in total liabilities resulting from the adjustment to a "stable price" basis. A slight upward trend is shown to reflect an expected increase in State and local government employment as public service activities expand to serve a growing population.

It is assumed that the net increases in loans from the Federal Government would be met from a larger, balanced Federal budget and would not constitute a demand upon the money market for credit. A more important item of the State and local governments' net increase in liabilities that does not constitute a market demand is their employee retirement funds. They are a liability of the governments in the sense that a savings intermediary has as a liability the deposits which become available for investment in various credit and equity instruments. These funds have been increasing at an accelerating rate in past years, reaching a peak net annual increase of $1.9 billion in 1958 but declining to $1.2 billion in 1959. On the basis of the

recent experience, the 1960 amount might be estimated at $1.6 billion, but after making an adjustment proportionate to the 1959 to 1960 reduction in the net increase in total liabilities resulting from the "stable price" projection, the projected 1960 net increase is about $1.3 billion and a gradual increase is projected, to $1.8 billion in 1970. This gradual increase was projected despite the assumption of stable prices because it is expected that there will be an increasing number of people employed by State and local governments as they have to furnish public services to a growing population, and the retirement funds will grow with the number of employees.

The amounts of net increase in credit from these three sources-the Federal Government, trade debt and consumer savings in retirement funds were then subtracted from the projected total net increases in liabilities to arrive at the amount of credit that would have to be obtained through the issuance of State and local obligations. The use of this residual method produces a 1960 net increase in the outstanding amount of State and local obligations of only $3.8 billion (as compared with $5.2 billion in 1959), but the net annual increases rise to $8.1 billion by 1970. It is recognized that the projected 1960 net increase may be somewhat low, even on the assumption of stable prices which would tend to hold down dollar expenditures and the total net increase in liabilities. Considering the downward trend in percentage increase of total liabilities on a "stable price" basis, however, the entire projection through 1970 of the annual mounts of net increase in State and local obligations probably is reasonable. Estimated net increases in consumer credit

Since World War II (excluding the Korean war years of 1951 and 1952 that were subject to regulation W credit controls-and the reaction therefrom after May 1952) in prosperous years, when personal consumption expenditures showed a big increase over the preceding year, there was also a sizable net increase in outstanding consumer credit. Thus, during the years 1947-59, exclusive of recession years (1949, 1954, and 1958) and years greatly influenced by credit controls (1951 and 1952), the annual net increase in outstanding consumer credit expressed as a percent of the annual increase in personal consumption expenditures over the previous year ranged between 17.6 percent and 33.7 percent, averaging 26 percent. The latter ratio was projected in relation to projected increases in expenditures to derive a net annual expansion of $4.7 billion in consumer credit during the 1961-70 decade.32

In justification of the projection, it can be reasoned that in our present-day social economy, in years of high level economic growth, roughly one-fourth of the annual increase in consumption expenditures has to be supported by a net extension of consumer credit. This seems to be plausible in the light of (1) the sensitivity of the economy to the volume of consumer durables produced and marketed, and (2) the relatively high proportion of sales of consumer durablesparticularly automobiles that are financed with consumer credit. Since a high level economy has been posited, it is reasonable to assume high volume sales of consumer durables and a concomitant further expansion in outstanding credit.

32 See appendix table II-I.

A possible limitation upon the growth of outstanding consumer credit is the repayment burden, frequently indicated by the amount of outstanding consumer credit as a percentage of disposable personal income. It should be noted, however, that the significance of a particular percentage that is used as an index of the consumer credit burden will vary, depending upon the average term for repayment. For example, consumer debt with an average repayment term of 24 months will be one-fourth less of a drain upon current income than consumer debt with an average repayment term of 18 months. Some lengthening of consumer finance terms undoubtedly was a factor in the growth of consumer credit from about 10 percent to about 15 percent of disposable personal income over the last decade. Some further extension of consumer credit terms would tend to offset the increase in repayment burden of the projected increase in outstanding consumer credit, which would make the outstanding total equal to about 18.5 percent of disposable personal income in 1970.

TABLE 15.—Estimated annual net increases in outstanding consumer credit by credit sources, 1950-70

[Amounts in billions of dollars; current dollars for 1950-59; 1959 dollars for later years]

1950-59: all columns: American Life Convention-Life Insurance Associationof America, Joint Investment Bulletin, No. 396, May 11, 1960, "Sources and Uses of Funds in the Capital Market, 1948-1959." 1960-70: Col. 1: From appendix table II-I, col. 4.

Cols. 2, 3, and 6: Col. 2 projected to show commercial bank share (43 percent) of net increase in total outstanding consumer credit roughly in line with experience of prior years when the net increase in the outstanding total ranged between $3.5 and $5 billion. Col. 3 projected to reflect the tendency of recent years for department stores to hold relatively less of their consumer credit paper, in order to maximize the use of working capital for other purposes. (See C. A. Dauten," Recent Trends in the Field of Consumer Credit," Journal of Finance, May 1960, pp. 206-220.) Col. 6 projected on the basis of continued growth of service credit, and the continued growth of credit unions which have been the most specatuclar gainers in the installment credit business. (See Dauten, ibid.)

Cols. 4 and 5: Division of col. 3; long-term credit to come from that portion of sales and finance companies expansion through long-term credit issues and stock issues.

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A further projection was made of the 1961-70 net increases of $4.7 billion per year in outstanding consumer credit, to derive estimated increases in outstanding consumer credit by credit sources (see table 15). In making these estimates, various developments in the consumer credit business in recent years were considered. Of primary importance has been the growing position of credit unions in the consumer credit field. These organizations, although still accounting for a minor part of outstanding consumer credit, have increased their share of consumer credit holdings at a faster rate than any other source of consumer financing. Therefore, it has been estimated that "individuals and others," which includes credit unions whose main investment outlet is in consumer credit, will continue to increase their holdings of consumer credit annually in 1961-64 by the peak amount experienced in 1959, showing a slight acceleration over the rest of the sixties. Individuals and others would thus account for approximately one-fourth of the projected net increases in consumer credit. Of the other two major sources of consumer credit, it is estimated that commercial banks will contribute $2 billion and corporations about $1.5 billion of the required $4.7 billion per year of net increase in outstanding consumer credit. The projected share to be contributed by the commercial banks is roughly in line with the commercial bank proportion in prior years when the total net increase in outstanding consumer credit was in the neighborhood of $4 to $5 billion.

A slight decrease has been projected in the net amount of consumer credit to be provided by corporations, offsetting a slight increase in the amount to be provided by individuals and others (including credit unions). The projected decrease in the share to be provided by corporations is based on the developing tendency of department stores to hold less of their own consumer credit paper, enabling them to use more of their available funds for other working capital purposes, rather than for consumer credit.

In the projection, the net increase in outstanding consumer credit to be provided by corporations has been divided into short-term and long-term sources. The "long-term" does not mean long-term consumer credit but represents the basic form in which the funds will be acquired in the market. About three-fourths of all the net increase in consumer installment credit supplied by corporations in recent years had been supplied by sales finance corporations and consumer finance corporations.33 Based on the past capital structure of these corporations, it is estimated that funds for about half of their net increase in outstanding receivables in the future will be provided through the sale of long-term debentures and through the issuance of stock. The other half of the required funds would be provided from the sale of shortterm commercial paper and from commercial bank loans. There would be additional expansions in short-term consumer credit provided by corporations through department stores and other organizations. All of the commercial bank consumer credit and the consumer credit to be provided by individuals and others (including credit unions), would be short-term credit. Therefore, of the estimated $4.7 billion per year increase in outstanding consumer credit during the 1960's, about $3.6 to $3.7 billion would be net additions to outstandings bor

33 See A. Dauten, "Recent Developments in the Field of Consumer Credit," Journal of Finance, May 1960, pp. 206-220, particularly table 2.