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federal reserve bank of bosfon January 5, 1955 To the M em ber B a nks of the F ed er a l R eser v e B a n k of B o sto n : I am pleased to transm it the 1954 annual report of the Federal Reserve Bank of Boston. You w ill observe that much of this report is given to an analysis of New Englan d’s economic grow th since 1920. We have chosen that year as our starting point because detailed statistics on the region have only been generally available since the end of World War I. The heartening facts brought out in this report show th at a grow ing popu lation, expanding incomes, and increasing productivity provide a foundation on which New Englanders m ay base sound expectations for the region’s continued progress and development. On behalf of the directors and officers, I w ish to express appreciation for the cooperation received throughout the year from the staff of this institution, from bankers, and from leaders of agriculture, commerce, and industry in the First Federal Reserve D istrict. table off contents A Review of N ew En glan d ’s Economic Progress......................... 5 Principal Operations of the B a n k ................................... 19 Summary of Principal Changes in Statem ent of C on dition . . . . 20 Com parative Statem ent of C on ditio n ........................ 22 Com parative Statement o f Earnings and Expenses...................... 23 L ist of Officers, Directors, and C om m ittees................................... 24 I n the sm allest of the country’s regions and w ith but meager m aterial resources, the people of N ew England have built an outstanding economy — complex, resilient and dynamic. Its com plexity grow s in part out of its more than three centuries of development. Its resilience and dynamics stem from the N ew Englander’s basic character and the society which he has created. New En glan d ’s six sovereign and sometimes vehemently independent states contain only six per cent of the country’s population — considerably less than the New York-New Jersey m etropolitan area alone. Yet, “ there were probably not 10 countries in the world w hose annual income equaled N ew E nglan d’s , ” reported the Council of Economic Advisers to the President in 1951. “ If the country as a w h ole,’ ’ they continued, “ produced as much income per square mile as New England . . . the national income would be raised to . . . about three times the current income of the country.’ ’ a review of new england’s economic progress The Y ankee’s w ays o f earning a living are as varied as the region’s land scapes. He fishes the blue A tlantic, raises everything from potatoes to wrapper tobacco, quarries granite and marble, teaches the young in internationally famous institutions, sells insurance around the globe, researches things and ideas from atom s to public opinion, bankrolls businesses throughout the w orld, and collects a handsome sum annually from vacation visitors to the region. All these are im portant, and lend color and liveliness to the New England economic scene. 5 S C H O O L AG E POPULATION BY 1965 THERE W ILL BE ONE M ILLION MORE N EW ENGLANDERS. But for generations, the prime source of new money for N ew England has been the processing of imported raw m aterials into an incredible array of products sold to the nation and the world. What keeps New England a vigorously goin g concern are its 24,000 manufacturing plants — up 50 per cent in number since 1939 — its m illion and a half industrial w orkers, and its $6 billion m anufacturing payroll. N ew Englanders take justifiable pride in their vast recreational industry and in the products of their farm s, forests, and fisheries. But manufacturing is the basic and largest source o f income in every New England state. New England, says the U. S. Departm ent of Commerce, is the most mature, most high ly developed industrial area in the country — which means of course in the western hemisphere. The essence of all successful industrial economies is change, and in New England there have been m ajor economic changes since World War I that have conspicuously improved the w ell-being of N ew Englanders. To explore New E n glan d ’s progress through change is the purpose o f this report. new england’s progress through! ch an ge Today there are nearly 10,000,000 persons in N ew England, w ith some 2,000,000 of these added during the last 34 years. M ost o f these new residents were born here, though there have been periods o f grow th by in-migration. And this population increase is in itself a dem onstration of economic progress, for had New England been unable to compete in the m arkets of the w orld, its people would have sought opportunity elsewhere. The decade ahead is likely to add still another m illion to the number of persons living in the six states. Probably no other single economic fact w ill be of more importance to the region. This grow ing population w ill demand still further expansion of public and private facilities, and w ill provide new m arkets for many of the region s producers. In this fact lie both the need and the opportunity for a continuing expansion of economic activity. Another million people by 1965 w ill necessitate New England s finding 400,000 new jobs, and of alm ost every im aginable variety. The region’s labor force is made up of the 4,000,000 persons w ho w ork outside their homes. It is the productivity of this w ork force which largely determines how much the people of New England can buy and save. B y anticipating and meeting the changing requirements of their highly developed economy — and in this they have shown commendable foresight and ag ility — New Englanders have constantly put more people to w ork and increased their productivity. Since 1920, some 780,000 workers have been added to the region’s total employment roll. And this grow th in productive manpower has, in turn, enabled N ew England to m aintain its income grow th. But the sim ple statistics of employment gains hide vital changes w hich have taken place since 1920 in the w ays by which N ew Englanders earn a living. Over the last 34 years, about 830,000 workers have joined the ranks of the region’s service industries. This 70 per cent increase grew prim arily N EW EN G LAND EM PLOYM ENT EXPANSION CO N TIN U ES 7 1920 30 INCREASING PRODUCTIVITY ALLO W ED 40 50 *54 SHIFT T O SERVICE INDUSTRIES. out of two factors. Of first importance were the demands of industry and the swelling population for additional facilities and service by agencies of transportation, communication, utilities, finance, insurance and govern ment. The second factor w as further demand for doctors, lawyers, teachers and other personal services resulting from higher personal incomes. These two factors combined to absorb N ew E n glan d ’s increased labor force into the service industries. There is nothing unique to N ew England in this greatly enlarged relative importance of service employment. It is part of a process going on in most economies where income is steadily rising. In fact, the propor tion of New England workers presently engaged in these occupations is sligh tly smaller than that of the country as a whole. The unusual feature in the grow th of the service industries in New England w as the w ay it came about. W hile the n ation ’s service industries could draw from the farm labor force, this w as not possible in New England. In 1920, N ew England had only seven per cent of its w orkers in farming, forestry and fishing, in contrast to the national proportion of growth patterns off service industries 28 per cent. The grow th o f the region’s service industries had to come, therefore, at the expense of m anufacturing grow th. Indeed, between 1920 and 1954, the proportion of New E n glan d ’s w ork force employed in manufacturing dropped from 53 per cent to 42. But the latter figure is 8 still one-third greater than the national average. And it is not only con firmation o f N ew Englan d’s dependence on m anufacturing, but also evi dence of the region’s manufacturing strength in generating higher incomes to support expanding service employment. By the sale o f New England manufactured articles to the rest of the nation and the w orld, the region is able to pay for the foodstuffs and raw m aterials which it must im port. And it is the incomes earned in manu facturing operations which provide the basic m arket for a large portion o f N ew E nglan d’s service industries. Unless there is discovered w ithin the region some tremendously valuable raw m aterial, New England must look to its manufacturing skills for maintenance of its income. The average level of m anufacturing employment in New England in 1953 w as about the same as the 1920 level. Yet during these years, indi vidual incomes o f an expanding population increased by one-half, even after adjustment for changes in price levels. O bviously a fundamental change in the character of N ew En glan d ’s m anufacturing activity took place during that period to enable the same number of workers to support more people at higher income levels. T his change, the m ost striking development in the region’s manu facturing history, has been the shift in labor force to higher-paying, more productive industries — to industries in which N ew E nglan d’s m anufac turers hold a better position in relation to their com petitors in other areas. The transition in m anufacturing activities has been marked by the significant increase in the relative importance of m etalw orking activities — up from 30 per cent of the total m anufacturing employment in 1919 to M ETA LW OR KIN G JOBS EXPANDED SHARPLY; 9 SOME NONDURASLES C O N TR A C TE D . WORKERS SHIFTED IN TO INDUSTRIES W ITH HIGHER LABOR PRODUCTIVITY. 41 per cent o f the total in 1954. Other durable-goods m anufacturing also increased sligh tly, so that the proportion o f total m anufacturing accounted for by nondurable-goods industries decreased from 63 to 51 per cent of the total. The slow , steady contraction of N ew E n g lan d ’s textile industry has been the m ost publicized, and certainly the dom inant factor, in the dim inishing importance o f nondurable-goods industries in the region. The loss in 34 years of 275,000 textile m anufacturing jobs w as especially difficult for the region because of its reliance on the industry, and the degree of dependence on textiles by m any com munities. Despite this long record of contraction, the textile industry is still New Englan d’s largest single em ployer group. And those firms which remain have demonstrated their ab ility to produce effectively in New England. N ew E nglan d’s em ploym ent gain s in the years ahead w ill be facilitated if jobs lost in the textile industry do not have to be replaced. The im pact of the n ation ’s defense program helped speed the transi tion in New E nglan d’s m anufacturing activity . M ilitary needs are pre dominantly of the hard-goods variety. T heir procurem ent, together with the construction o f productive capacity for defense, further stim ulated the expansion of-durable-goods m anufacturing in N ew England. Between 1947 and 1953, 63 per cent o f all new m anufacturing jobs added to the region ’s economy were in just tw o product categories electrical machinery and transportation equipm ent. The demand for electronic parts, radar, aircraft instrum ents, fire control devices, aircraft and naval ships all energized expansion o f the m etalw orking branch of lO N ew England manufacturing. The transition in m anufacturing activity means that New England is m aking improved use of its m ost im portant resource — manpower. The N ew England labor force is being steadily “ up-graded.” Output from an hour of labor in the durable-goods industries now exceeds output from a com parable hour in the nondurables by 10 per cent. The average net product per man-hour in New En glan d ’s expanding industries in 1952 was $3-94 as against $2.86 in the industries which have contracted since 1919. There is encouraging evidence, too, that New England is im proving its com petitive position in the national m anufacturing economy. In those industries where New England is grow ing the fastest, the net product per man-hour is also advancing the m ost rapidly. G ains in net output per worker in the region exceed those of the nation in six of the eight industries w hich are increasing net output per worker m ost rapidly in the United States. Those six industries — prim arily m etals — account for 41 per cent of all N ew En glan d ’s manufacturing employment. T his record is partially explained by the fact that New England manufacturers, except those in the textile industry, generally enjoy com petitive w age advantages over manufacturers in other areas. For the region as a w hole, the transition to durable-goods m anufac turing has also raised the annual income of the w orkers. The average w age and salary income per worker for the years 1950 through 1952, in the industries w hich have shown long-term employment increases in New England, was about $3,500. In the industries w hich have been declining it w as only $3,000. 11 PER CENT INCREASE IN NIT OUTPUT f i t MAN-HOUR 1M7-U 0 20 40 60 EXPANDED lf lf -5 3 N ON ELECTRICAL M ACHINERY C O N TR A C TE D 1919-53 PRODUCTIVITY G AIN S ARE H IG H ES T IN TH E EXPANDING INDUSTRIES. INDUSTRIES. EXPANDING ENGLAND'S NEW IN HIGHER ARE WAGES ANNUAL AVERAGE Unfortunately individual w orkers’ sk ills are not generally or easily transferable between industries. The social costs of the transition, as measured in unemployment, loss of sk ills, forced retirement, and forced worker m igration, have been great. These social costs w ill be reduced by strengthening New En glan d ’s rem aining textile firms, by retraining d is placed employees, and by other measures now being taken to relieve the stress of the transition. The rise in individual incomes in N ew England, in dollars of constant buying power, has continued throughout the transition period and has consistently exceeded the United States average. The region ’s per capita income is now $1,824, seven per cent higher than the national average of $1,709. In terms of 1954 dollars, per capita income in New England has grown by one-half since 1929, reflecting the expanded output from each man-hour of labor. New Englanders still practice their traditional thrift. Individual holdings of U. S. savings bonds, savings deposits and life insurance equities continue to expand. These liquid savings in the region now total about $2,033 per person, a level some 43 per cent above that for the country. And the Y ankee’s steadily rising income has enabled him not only to save more, but to spend more as well. After adjustm ent for price increases, the record shows that retail expenditures per person in New England have climbed by about 57 per cent since 1929, and have been constantly above the national average since then. It is the com bination of a concentrated area and a large m anufacturing population, w ith both high incomes and high savings, that makes the area so rich a m arket for both consumer and industrial products. 12 N ew Englanders have displayed self-reliance and organizational ability in attacking the trouble spots which inevitably appear in a rapidly changing economy. As employment opportunities in certain areas dim inished, primarily because of displacement in the textile industry and shifts w ithin the region in the shoe industry, many communities devised economic re development program s. Through the commendable ingenuity of local committees, they have appraised community resources, effectively sized up their problems, and moved energetically to secure newer and more diversified employment opportunities. In many instances the community industrial base has been reconstructed on a firmer footing, frequently through the activity of a local industrial foundation. By using locally contributed funds, these foundations have often been able to erect new buildings and lease them to enterprises requiring expanded quarters. A pioneering effort in New England is represented by the form ation of development credit corporations. The establishment of new firms and the grow th of sm all enterprises has long been recognized as im portant a n e w tool - development credit in the region’s economic development. Faced w ith the fact that equit) capital and long-term loans were needed by small enterprises to expand their activities, N ew Englanders moved w ith forthrightness to establish organizations to meet those financial needs. 13 Five of the New England states have active development credit corporations and the sixth has such a corporation in the form ative stage. By buying stock totaling $1,000,000, originators of the development credit corporations have been able to secure pledges of loans from financial institutions totaling $15,000,000. These organizations, still in their infancy, have only begun to tap the $61,000,000 fund which is potentially available. The $5,000,000 of loans and commitments which they have already made represents a revolving fund which w ill be loaned again as repayments build up. The effectiveness of credit corporation activities is magnified by the additional loans often granted by commercial banks after the credit corporation has investigated a loan application and made a favorable report. Successful establishm ent and operation of these development credit corporations is a striking testim onial to the alertness of the N ew England business and financial communities in meeting their responsibilities to promote the grow th of sm all enterprises. Still another example of action to assist industrial and technological grow th is N ew En glan d ’s development of venture-capital organizations. These corporations, designed to aid the financing o f new companies based on new products with technological prom ise, supply either equity funds or credit as required. U sually they w ork closely w ith the companies in which they invest to help assure their success. The forces which brought about the economic changes in New England described in these pages have not yet spent their energy. Indeed, REAL IN C O M E PER PERSON IN NEW ENGLAND 14 change is inevitable in the w ays in which New England people work, and in the goods and services they offer in domestic and world markets. Over the last generation the region has been able to expand its income by sh iftin g its m anufacturing operations to more productive industries. A t the same tim e, many of the area’s traditional industries have survived the transition by means of improved management techniques, by the in stallation of new equipment in new or modernized plants, and by the development o f new methods and new products. One may expect the N ew Englander to continue indefinitely the ad ap tab ility he has demonstrated for three centuries. As new economic problems arise — and problems are inherent in change — he is certain to find new devices and processes for solving them. And in many cases the rigors of the present transition have whetted his foresight and brought him to the point of deliberately forcing “ the shape of things to com e.” N ew England is singularly fortunate in its facilities for breeding ideas for new things and for new w ays of m aking old things. While the region has only six per cent of the country’s population, it has eight per 0--------------------------------------1938 adaptability plus new ideas cent of the n ation ’s institutions of higher learning, and 13 per cent of th o se-aw arding higher degrees. These establishments are now training some 14 per cent of the n ation ’s scientists. Though not all specially 15 *40 ‘45 *50 SAVINGS PER PERSON IN NEW ENGLAND HAVE EXPANDEO BY 40°o SINCE 1938. S4 qualified graduates of New England institutions can remain here, the area’s cultural background provides a powerful stim ulus to scientists to seek employment opportunities w ithin the region. New England is recognized as an outstanding center o f advanced research. And research-based industries offer expanding employment and investment opportunities as well as im portant new m arket developments. The region has more than 11 per cent of the n ation’s industrial research laboratories, and more than 13 per cent of the laboratories in the instruments, electrical equipment and machinery industries. These facilities ably serve the New Englander in building new ideas. The scientist-businessman is pointing the pathw ay to the region’s industrial grow th. As an illustration, the plastics industry w as born here. And from sm all beginnings, it has expanded to the point where the region now produces about one-third of the national output of fabricated plastics and provides about one-quarter of the national employment in plastics fabrication. Another industry w ith exceptional promise for New England is electronics. Between 1939 and 1953 the industry provided about one-fifth of the total grow th in the region’s manufacturing employment. At present an estimated 15 per cent of the n ation ’s electronic firms are located in New England. PER PERSON IN 1»S4 DOLLARS 1200 RETAIL SALES A field w ith a vast potential for New England is that o f applied nuclear science. The region is already actively engaged in exploring this potential, but to maxim ize the possibilities New Englanders must be constantly alert to development patterns which are changing rapidly. 0 ------- -------------------------------- 1»2» '35 '40 '45 'SO '54 RETAIL SALES PER PERSON IN N EW EN G LAND HAVE INCREASED 5 7 % SINCE 1929. 16 M l MILLION W ithin the area is a sizeable reservoir of nuclear experts w ho have gained experience in regional and national laboratories. New England has received 12 per cent of the domestic shipments of radioactive isotopes and 15 per cent of the concentrated stable isotopes during the first five years of A E C ’s distribution program . These radioactive m aterials are being used in the fields of medicine, instruments and industrial applications o f many types. New England has gained experience, too, through constructing the w orld ’s first atom ic submarines, and a broadening of the application of atom ic propulsion to other vessels would certainly insure expanded activity in the region ’s shipyards. Even as this report is written, New England is deep in the design of an atom ic power plant for aircraft. When construction of atom ic motors for land vehicles becomes economically feasible, the region should thus have secured a substantial head start. T w o N ew England universities are now building research reactors and nuclear science laboratories, and are insuring the area’s continued participation in the fruits of atom ic research. And finally, a company P O TEN TIAL MEMIERS M AY PLEDGE AN A D DITION AL FOkTY MILLION D OLLA tS. P 17 S TOCK AUTHORIZED — FIVE M ILLION S TOC K SOLD — ONE MILLION CREDIT C ORP ORATIONS LOANED $5 MILLION O F A PO TE N TIAL $41 MILLION FUND. atomic possibilities for the region formed by several New England utilities has associated w ith a m ajor chemical producer to exploit atom ic energy for electric power and other purposes as soon as it becomes com mercially feasible. FUNDS PLEDGED BY M E M B E R S -. FIFTEEN MILLION DOLLARS GROWTH OF FIRMS IN lUSINISS — A SAMPLE OF 13* FIRMS ISO --------------- 1900 '1 0 20 *30 ’40 ‘52 ELECTRONICS FIRMS HAVE INCREASED RAPIDLY IN NEW ENGLAND. It is obviously too early to foresee all the new production that w ill be required to support the harnessing of atom ic energy for peacetime uses. But certainly the region’s instrument industry w ill play a critical role in developing devices for use in treatment, measurement, control, and safety in medicine and in the laboratories and industrial plants related to nuclear development. New England’s economic strength is perpetually self-renewing — based on the vitality and resourcefulness of its people. New E nglan d’s vitality is evidenced by new procedures and organizations w hich have strengthened its industrial activities and promoted the establishm ent and grow th of new enterprises. New E nglan d’s resourcefulness is demon strated in shifts of its manufacturing activities into industries w ith higher productivity which, in turn, generate higher incomes for the region’s grow ing population. The New England story is a dynamic demonstration that a mature industrial civilization can contain the seeds of rebirth and revitalization. And it confirms those words written more than 100 years ago by John Low ell, founder of the Low ell Institute: “ The prosperity o f my native land, New England . . . must depend hereafter, as it has heretofore depended, first on the moral qualities, and secondly on the intelligence and information of its in h abitan ts.” 18 principal operations Transaction Volume in Pieces or Units (Daily Average) 1954 Volume in Dollars (Annual Total) 1953 1954 Discounts and A dvances.................................. 5 6 Currency Sorted and C ounted........................ 1,056,935 Coin Counted and W rapped........................... 1953 834,305,220 $ 1,926,457,250 1,057,553 1,703,123,671 1,778,727,854 3,280,546 3,344,290 74,989,550 73,115,150 Check C ollection s.............................................. 1,016,110 995,002 57,643,213,535 58,105,459,486 Noncash Collections: N otes, D rafts, and Corporate Coupons 3,866 3,527 318,975,982 296,276,805 Safekeeping of Securities: Pieces Received and D elivered.............. Coupons Detached for C ollection ........ 1,214 1,303 1,166 1,304 9,992,654,000 29,772,054 12,342,150,000 27,094,151 Transfers of F u n d s............................................. 281 268 40,816,881,124 29,517,680,170 Issues, Redemptions and Exchanges: U. S. Securities (Direct O b lig a tio n s).. U. S. Savings B o n d s................................. A ll O ther...................................................... 931 41,637 11 12,690,282,822 875,591,079 18,589,000 U. S. Government Coupons P a id ................. 2,051 953 38,678 5 2,161 112,360,033 10,117,570,851 786,123,549 12,307,325 106,864,142 Federal T axes: D epositary Receipts and Direct R em ittances................................... 1,885 1,806 1,173,206,132 1,124,427,612 19 $ The decrease of $6.5 m illion in our gold certificates reflects the net of transactions w ith other Federal Reserve Banks and of member banks w ith the other districts. A favorable balance on private account by member banks was more than offset by losses on inter-Reserve bank transactions and on Treasury transactions. Because we may now hold and pay out Federal Reserve Notes of other Federal Reserve Banks, as authorized by Congress in Ju ly , our holdings of notes of other Federal Reserve Banks increased about $11 m illion. Loans and Advances at year-end were alm ost entirely loans on gold to foreign central banks. Our member banks borrowed relatively little during this year because ample reserves were made available through open m arket purchases by the System in the first h alf of 1954 and later through a reduction in required reserves. U. S. Government Securities represent our allocation of the holdings o f the System Open M arket Account. sum m a ry off principal change s Uncollected Cash Items decreased $29 m illion. Aside from the usual seasonal forces affecting this account the decline reflected greater ef ficiency in operations and improved transportation facilities. 20 With regard to our liabilities, Federal Reserve Notes declined $24 m illion, due in part to the new provision regarding Federal Reserve Notes, as mentioned previously, and to a moderate decline in issue since the record peaks in 1953. Member Bank Reserve Accounts dropped $53 m illion, reflecting largely reduction in reserve requirements, as well as the Treasury's call in late December on Member Bank T ax and Loan Accounts. The latter accounts for the increase in the U. S. Treasurer’s Account. Our ratio of gold certificates to note and deposit liabilities combined, improved sligh tly, to 43-5 per cent. Net Earnings of $16.2 m illion were $7.8 m illion less than in 1953, the result prim arily o f a lower average earning rate on our holdings of U. S. Securities, and of lower average holdings of securities during the year. Net Expenses were $800,000 less than in 1953. After dividend payments of $883,000 to our member banks, 90 per in statement off condition cent, or $13.8 m illion, w as transferred to the U. S. Treasurer in payment of interest charge on Federal Reserve Notes levied under Section 16 of the Federal Reserve Act. The rem aining $1.5 m illion w as added to surplus (Section 7). 21
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