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OCTOBER 1 9 5 3 business FEDERAL RESERVE BANK OF PHILADELPHIA TUAL SAVINGS B A N KIN G ngs banks stimulate th rift and direct money into investment, ite new problems and intense competition, hrive so long as they meet the needs of many small savers. IN THIRD DISTRICT STATES ayments in 1952 climbed to a new record. me here continues above the national level. TA X CHANGES AN D TAKE-HO M E PAY A \any individuals will have no increase in their take-home pay, when income taxes are cut and Social Security payments rise. CURRENT TRENDS Additional copies of this issue are available upon request to the Department of Research, Federal Reserve Bank of Philadelphia, Philadelphia 1, Pa. MUTUAL SAVINGS BANKING About $26.5 billion in assets and 20 million de positors— this in a nutshell describes mutual sav ings banking in the United States today. The total assets figure testifies to the fact that mutual savings banking is a big business indeed; but the 20 million depositors show that the industry is still performing its original function of meeting to the benefit of the depositors, in dividends, or some specific needs of many small savers. in a reserved surplus for their greater security.” Mutual savings banks are, in many ways, like other financial institutions, but the similar char acteristics are combined in such a manner as to Savings o f “ tra d e sm e n, mechanics, la b o re rs, se rva n ts and o th e rs . . . ” make them unique. Like commercial banks, they accept deposits and extend credit, but the deposits The first mutual savings bank to begin operations in the United States— The Philadelphia Saving of mutual savings banks are not transferable by Fund Society— opened its doors for business on check in the same way as are deposits of com December 2, 1816. Six years earlier the first mod mercial banks, and are not, therefore, accepted ern savings bank, had been established, appro as a means of payment. Like savings and loan priately enough, in Scotland by Henry Duncan, a associations, mutual savings banks prorate earn minister who is generally considered to be the ings among the people who turn over their savings founder of the savings bank movement. Accord to them, but the savers are not shareholders. Like ing to its charter, the Philadelphia bank was “ es most other financial institutions, mutual savings tablished for the sole purpose of receiving and banks are run by boards of directors (or trustees) investing in public stock* or substantial security that have the power to select the operating officers on real estate, such small sums as may be saved and prescribe general policy— but the boards are from the earnings of tradesmen, mechanics, la not selected by the depositors and are, in effect, borers, servants, and others, and of affording to self-perpetuating groups. industrious persons the advantages of security Thus a mutual savings bank is, in the words and interest.” of the Supreme Court of the United States, “ an The reference in the charter to “ tradesmen, me institution in the hands of disinterested persons, chanics, laborers, servants, and others” provides the profits of which, after deducting the necessary expenses of conducting the business, inure wholly the essential clue for understanding the savings * In those days, “ public stock” referred to bonds and notes of government. 3 business re v ie w bank movement. In the early years of the nine But the need for such savings institutions was teenth century, when the Industrial Revolution not enough. was gaining momentum, many people among the commendable in purpose, come into existence only New enterprises, no matter how laboring groups found that for the first time as the result of promotion. And promotion will their incomes were large enough to permit the normally be found only when the prospect of thrifty to set aside something for the proverbial profit is strong. Since there seemed to be very “ rainy day.” little hope of profit in institutions catering to the In addition, the growing pains of industrialization tended to increase the need of savings needs of low-income groups, the organi the individual for a liquid fund of savings. An institution that would meet the savings require zation of savings banks was undertaken by groups of socially conscious citizens of the community. ments of the lower-income groups was needed— In keeping with the underlying purpose of the specifically one that would provide a high degree mutual savings banks, these organizers, who later of safety and liquidity and at the same time afford acted as “ managers” or “ trustees” for the banks, a return to the saver. served without pay. DEPOSITS AND NUMBER OF MUTUAL SAVINGS BANKS IN THE UNITED STATES (Selected years 1 8 2 0 -1 9 5 3 ) BILLIONS $___________________________________________________________________________ _______________ 4 __________ NUMBER OF BANKS b u s in e ss In addition to meeting many of the needs of the re v ie w The “ typica l” m utual savings bank small saver, there is another equally important The 528 mutual savings banks operating in the side to mutual savings banking— the flow of funds United States range in size from less than one-half back into the spending stream. Mutual savings million to over one billion dollars in total assets. banks transfer the savings of their customers into In addition, policies relating to types of assets the building of houses, factories, machinery, and held, methods of computing interest-dividends, tools. In performing these functions, they con etc., vary widely among banks. Because of this tribute to economic growth and consequently to diversity in size and character it is dangerous to a rising standard of living. Of course, mutual generalize by referring to the “ typical” mutual savings banks are not alone in performing these savings bank. For illustrative purposes, however, functions today, but they were the first institu such a generalization is useful. tions in this country to devote themselves pri marily to this task. N o rth o f B a ltim o re and east o f Buffalo The picture of growth, illustrated in the chart, What are some of the characteristics of the typical mutual savings bank? Probably the bank is between 50 and 100 years old and is located within 300 miles of New York City; it is under the general supervision of a board of trustees is more significant when it is realized that or managers, about 15 in number, who for all mutual savings banks are found in only 17 of practical purposes serve without pay and are the 48 states. Furthermore, 87 per cent of the among the leading business and professional men assets are concentrated in only four states— New in the community. The board initially consisted of the bank’s organizers, and vacancies have been filled by vote of the remaining members. The York, Massachusetts, Connecticut, and Pennsyl vania. As of the end of 1952, New York was far ahead with $14.8 billion in assets (58 per cent of board has delegated authority to a group of offi the total), followed by Massachusetts with $4.1 cers consisting of a president and various and billion (16 per cent), Connecticut with $1.7 bil sundry other officials, including several vice presi lion (7 per cent), and Pennsylvania with $1.4 dents, a treasurer, assistant treasurers, and so on. billion (5 per cent). This is why mutual savings Bank operations are under the supervision of banks are often said to be located “ north of Balti these officers. In a well-run institution, they are more and east of Buffalo.” a busy group of people. The concentration of mutual savings banks in the eastern part of the nation results from sev eral factors. Probably most important is the fact that at the time the movement got under way the Balance sheet o f the “ average” m utual savings bank conditions tending to foster such institutions were Further insight into the nature of present-day found in the industrialized East. As these condi mutual savings banking can be gained by con tions developed elsewhere other types of financial structing a balance sheet for the “ average” mutual institutions, mainly commercial banks and sav savings bank, obtained by dividing each of the ings (or building) and loan associations, stepped asset and liability items on the consolidated state in to provide many of the services that savings ment for all banks by 528— the total number of banks supplied. mutual savings banks in the country. 5 business re v ie w THE “AVERAGE” MUTUAL SAVINGS BANK — JUNE 30, 1953 A SSETS L IA B IL IT IE S % of Thous. of dollars Cash ........................................ .$ 1,642 U. S. Gov't securities.............. . 17,953 State & municipal securities. 746 Other se c u ritie s.................... . 6,059 Real estate mortgages......... 22,653 299 Other loans ........................... 652 Other a ss e ts........................... Total ................................ . $50,004 Thous. of dollars total 3.3 35.9 1.5 12.1 45.3 .6 1.3 Deposits ........... Other liabilities Surplus ............. ........... .. .$44,735 .................... 424 .................... 4,845 $50,004 100.0% Compared with other financial institutions which % of total 89.5 .8 9.7 100.0% Eight states, including Pennsylvania and Dela provide facilities for the safekeeping and in ware, set no such limits; but it is common prac vestment of savings, our “ average” mutual sav tice for the banks themselves to do so. ings bank, with $50 million in assets and $45 mil tistic might be somewhat misleading, however, . . . and in te re s t paym ents are m oderate in am ount because the 100 largest banks (less than one-fifth The “ average” depositor in our “ average” mutual of the total) hold almost three-fourths of all savings bank received an interest-dividend credit lion in deposits is a large institution. This sta mutual savings bank deposits. Thus the “ typical” of 2.47 per cent on his funds during the first six institution would be much smaller in size. months of 1953. This rate is about half again as large as that paid at the end of World War II, Deposit accounts are sm all . . . reflecting both the general rise in money rates A statement of condition can give only a super that has occurred (the banks are now receiving ficial impression of mutual savings banking. Take a higher rate of return on their investments) and “ deposits” for instance. The statement of condi increased competition from savings and loan asso tion does not reveal that the average account is ciations and commercial banks. Today’s rate is about $1,170— thus pointing up the fact that these the highest paid since 1937. Although higher than banks, as has been mentioned, cater to the needs that offered by most commercial banks, it is some of the small saver. State laws limiting the size of what lower than the rate paid by many savings accounts reflect this philosophy. and loan associations. Some sample statutory limits are: New York $10,000 Connecticut M o st deposits are insured 20,000 As of the end of last year, 493 (93 per cent) of the Massachusetts 7,500 (for,a single-name account;, 529 mutual savings banks, holding 97.6 per cent $15,000 for a joint account) of all deposits, participated in some sort of de posit insurance plan. Two hundred and six were New Jersey 25,000 6 b usiness re v ie w members of the Federal Deposit Insurance Cor policyholder is small ($5,000 in New Y ork), sav poration, which insures deposits up to $10,000 ings banks in the three states had nearly $700 per account, and the remaining 287 banks were million of such insurance in force at the end of covered by one of the state plans now in opera 1952. Savings bankers argue that by eliminating tion in Massachusetts, Connecticut, and New the insurance salesman on small policies they are Hampshire. The 188 banks in Massachusetts must providing an important service on an economical be members of the Mutual Savings Central Fund, basis. which insures in full all deposits of member insti tutions. In Connecticut, 65 of the 72 banks are Su rp lu s members of the Savings Banks Deposit Guarantee For our “ average” mutual savings bank, surplus Fund, which also insures deposits of member in is equal to nearly 10 per cent of assets and almost stitutions in full. Of the remaining banks in Con 11 per cent of deposits. Surplus as a percentage necticut, four are members of the Federal Deposit of deposits is significant for several reasons. In Insurance Corporation. The Savings Bank Asso the first place, surplus is a “ buffer” account— it ciation of New Hampshire— a voluntary associa provides a margin of safety to depositors in case tion that functions almost entirely as a deposit insurance institution— has provided protection of asset shrinkage; thus losses up to 11 per cent for all 34 of the mutual savings banks in that without threatening depositors’ rights. In addi state. tion, (In 1953 some of the banks in the state of total deposits could theoretically be absorbed the ratio is significant because some became members of the Federal Deposit Insur ance Corporation.) states require that when surplus reaches a certain School savings and savings bank life insurance increased. Two other services that do not show on the bal much added significance since the passage of the percentage of deposits, such as 25 per cent, the interest-dividend payment to depositors must be The ratio of surplus to deposits has taken on ance sheet deserve mention. The first— promo Revenue Act of 1951. For some time there has tion of school savings— tends to develop the thrift been a difference of opinion as to the taxing of habit among children of school age, and has the by-no-means-incidental result of creating both cooperative enterprises such as mutual savings banks. This Act provided that, for the first time, good will and future customers for savings banks. mutual savings banks would, effective January 1, At the end of 1952, savings banks held over $63 1952, be subject to regular corporate income million of such deposits, representing the savings taxes ( a maximum of 52 per cent on all but the of over 2 million school children. Most savings first $25,000 of net incom e). Congress, however, bankers agree, however, that operation of a school tempered the legislation by exempting all income savings plan is a costly project. paid as interest-dividends to depositors and all The second service is by no means unprofitable. income added to surplus, so long as surplus is In the states of Massachusetts, New York, and no greater than 12 per cent of deposits. Thus any Connecticut, savings banks are permitted to pro income earned while surplus is more than 12 vide low-cost, over-the-counter life insurance for per cent of deposits, and not paid out as interest- their depositors. Although the statutory limit per dividends, is subject to the regular corporate in 7 business re v ie w come tax (mutual savings banks are fully exempt variably a safe one, a safe asset may sometimes from excess profits taxes). There is little doubt not be very liquid. that the tax as applied will tend to step up interest- Compared with commercial banking, the prob dividend payments. It may also stimulate sav lem of maintaining safety of assets in mutual sav ings banks to invest in tax-exempt issues of state and local governments. ings banks is just as important, while that of The fact that our “ average” bank appears to be banks have the authority to require about 90 days’ well below the 12 per cent limit is decidedly mis notice of withdrawal; however, because for some time now it has been general practice to require leading. Published statements of banks are gen liquidity is somewhat less pressing since mutual erally ultra-conservative; in the past, funds that would normally be allocated to surplus have been little or no withdrawal notice, mutual savings used to write down the value of assets to relatively meet withdrawals on demand. Liquidity of assets low levels. banks attempt to maintain sufficient liquidity to Bankers believe that it adds to the is therefore by no means an insignificant consid prestige of their institution if they can afford to eration in the formulation of investment policy.* carry on their books a $15 million building at Finally, investments must be profitable if mutual one-fifth of that amount. For tax purposes, how savings banks are to continue to pay savers a ever, the “ true” values of the assets must be competitive rate that will attract and hold deposits. used. This raises the ratio of surplus to deposits and might well pull our “ average” bank up into the taxable bracket. Sa fe ty f ir s t . . . The nature of savings bank deposits, originating as they do with small savers, makes it even more The “ b a nke rs’ dilem m a” Achieving and maintaining the delicate balance among safety, liquidity, and profitability con fronts the management of all financial institutions whose primary role is that of investing other peo ple’s money. It is sometimes referred to as the “ bankers’ dilemma.” The nature of the dilemma is simple; but its solution is difficult and varies widely among different types of financial institu tions. Simply stated, the problem is that of main taining the proper degree of safety and liquidity of assets, at the same time earning a return suffi cient to attract funds. The nature of the problem is readily grasped when it is realized that the safest and most liquid of assets— cash— is at the same time the least profitable, while loans and investments that pay the highest rates frequently lack both safety and liquidity. Although a liquid asset is almost in 8 important that safety be the primary considera tion in investment policy. In nearly all of the 17 states in which mutual savings banks operate, therefore, their investments must be selected from lists set up by either the legislature or a super visory authority. Only two states— Maryland and Delaware— follow the “ prudent man” rule under which selection of investments is left primarily to the banks themselves, and even in these states investment portfolios are subject to rigid exam ination. State laws regulating the investment of savings bank funds are quite varied. Most states permit investment in United States Government securi ties, securities of state and local governments, first mortgages on improved real estate (usually limited to a percentage of total assets), mortgages * T o assure a source o f liquidity, 23 banks are members of the Federal Home Loan Bank System and three belong to the Federal Reserve System ; but these 26 banks hold less than 2 per cent of the assets o f all mutual savings banks. business re v ie w insured or guaranteed by the Federal Housing A d wise they will face a gradual loss of funds to com ministration and the Veterans Administration, peting financial institutions. The drive for earn and the debt securities of railroads, public utili ings is reflected in the large proportion of mort ties, and industrial corporations. Holdings of gages held. This percentage has been increasing bonds of business corporations are, in general, steadily since the end of World War II, when subject to a number of limitations and regula mortgage loans accounted for less than one- tions relating to the percentage of assets that can fourth of total assets. Mutual savings banks, in be placed in any one industry, and the past finan common with other financial institutions, have, cial record of the particular corporation. during the past eight years, liquidated Govern The influence of state regulation and the gen ment securities in order to obtain funds for other, erally conservative policies of savings-bank man more profitable types of credit extension. Thus agement are reflected in the assets, as shown in holdings of Government securities relative to total the balance sheet of our typical bank. assets have declined steadily from the peak of 63 Nearly two-fifths of total assets are in the form of cash per cent reached in 1946. and United States Government securities. Bonds The need for earnings has prompted the banks of public utilities and railroads dominate the to petition their state legislatures for authority to “ other” securities, which account for about one- invest a portion of their funds in corporate stocks. eighth of total assets. As can be seen, the largest A few states now permit such investment. For slice— 45 per cent— of assets is in real-estate mort example, Pennsylvania savings banks are now gages, but almost half of these are insured or allowed to invest in equity securities an amount guaranteed by the Federal Housing Administra not greater than 5 per cent of assets (book value) tion and the Veterans Administration, while the or 50 per cent of unimpaired surplus, whichever remainder are, in most states, written for only is less. The underlying reason for these moves to 60 to 66-2/3 per cent of the value of the pledged increase earnings— namely, the pressure of com petition from other financial institutions— is dis property. cussed further below. . . . but p ro fita b ility is im p o rta n t, too Safety comes first; but mutual savings banks must also strive to make profitable investments, other- Prob lem s o f com petition Since mutual savings banks compete for savings in only 17 states, it would not be accurate to com INTERESTED IN INTEREST? pare them with nation-wide financial institutions. The chart on page 12 shows the trend since On the 16th of January, 1869, an account was 1941 in the 17 states where the banks operate. opened at a local mutual savings bank with a It shows that savings and loan associations hold $ 15 deposit. Since that date $2,568 was deposited a higher proportion of savings deposits than thev and $878.93 withdrawn making a net deposit of did pre-war, and that mutual savings banks and $1,704.07. The balance on January I, 1952 was commercial banks have lost proportionately. Since $22,456.37. the war, however, mutual savings banks have con So that $20,752.30 in interest was earned over the 83 year period. sistently held about 44 per cent of the savings ( continued on p a ge-lB ) 9 business re v ie w b usiness re v ie w MUTUAL SAVINGS BANK DISTRICT (B ILLIO N S ) DEPOSITS U.S. (BILLIO NS) SAVINGS BANKING IN THE THIRD DISTRICT MORTGAGES Ten mutual savings banks operate in the Third mutual savings banks, but this percentage has Federal Reserve District, which comprises the declined since 1941. eastern two-thirds of Pennsylvania, the southern half of New Jersey, and all of Delaware. Of the Deposits of savings banks in the district have grown steadily over the past 20 years to keep pace with the national trend SHARE OF "SAVINGS" IN 1941* Third District savings banks as compared with six Pennsylvania banks, four are in Philadelphia, I) The most striking fact about the operation of the rest of the banks in the United States is the with Johnstown and West Chester boasting one make-up of their investment portfolios. Mutual each. New Jersey is represented by two mutual savings banks in the Third District hold less than savings banks, one in Trenton and one in Burling one out of every four dollars of assets in the form ton. of real-estate mortgages; the national average is 3 RD Both of the Delaware banks are in W il mington. slightly less than one out of two. District banks Five of the ten district banks are among the (2) In 1941 local savings banks held a smaller proportion of institutional "sa v in g s*" than did those in the 17 states which have mutual savings banks the dominant type of investment in this Reserve both the second largest and second smallest of 17 STATES sus 37 per cent for the nation as a whole. Thus among Third District mutual savings banks— District is in the category referred to as “ other all such banks in the nation are in this district. securities,” which consist primarily of debt secur For the ten banks combined, total assets amount ities of public utilities, railroads, and industrial to $1.4 billion; deposits, $1.2 billion; and sur corporations. It is apparent that savings banks plus, $154 million. in the Third District channel more funds into For the three states in the Third Federal Re serve District— Pennsylvania, New Jersey and (6) And much more into "o th e r" (mostly business securities.) The mutual savings banks in this area are old tury mark, and a sixth reaches it in 1954. The mutual savings banks.) youngest was established in 1890. This proportion of sav The many ings held by local mutual savings banks has varied By 1952 the share held by savings banks had declined in the 17 states ouf remained about the same on the d istric t states. Somewhat less in United States Government securities institutions; five of the ten have passed the cen mercial banks, savings and loan associations, and (3) (5) parts of the country. banks represent 22 or 23 per cent of total institu 17 STATES UNITED STATES real estate— than do most savings banks in other tional savings (defined here as savings in com PA. N.J. AND DEL. 3R D DISTRICT business operations— and less to Government and Delaware— savings deposits in mutual savings SHARE OF "SAVINGS" IN 1952* Mutual savings banks in the d istrict put rela tively less funds into mortgages Government securities— 31 per cent of assets ver United States; but there is wide diversity of size UNITED STATES U.S. GOVERNMENT SECURITIES also hold a smaller proportion of United States 75 largest (in terms of total deposits) in the PA. N.J. AND DEL. (4) DISTRICT years of successful operations have provided a little since 1941. For the 17 states in which sav wealth of experience that should be of great help ings banks compete, a larger proportion of insti to these savings banks in meeting the problems of tutional savings— about 43 per cent— is held in the future. Savings is here defined as time deposits in mutual savings banks, and commercial banks and shareholdings in savings and loan associations. 10 11 b usiness re v ie w LONG-TERM SAVINGS IN SELECTED INSTITUTIONS poration and the Federal Savings and Loan In surance Corporation (the latter does not insure (Measured in the 17 states in which mutual savings banks operate) liquidity, however). Mutual savings banks have thus lost an important competitive advantage. Savings bankers are aware of their position. PER CENT Recently, they have exerted renewed efforts to ex tend their services through the establishment of additional branches (the 528 banks now operate 244 branches). Recent attempts to widen the privilege of writing savings bank life insurance have met with failure. More successful have been their attempts to stimulate earnings through a widening of state regulations concerning invest ments. In some areas, more vigorous advertising has tended to offset some of the competition— but competitors advertise too. Sum m ary 1942 1944 1946 1948 1950 1952 The 528 mutual savings banks now operating in in commercial banks, savings and loan associa tions, and mutual savings banks. In the 1930’s, mutual savings banks had a dis the United States perform valuable economic functions in stimulating thrift and channeling the savings of the public into productive uses. After tinct competitive advantage because of their long 137 years of successful operation, savings banks record of safety. This is illustrated by the rela are now old and respected institutions. Their tive movement of funds into mutual savings banks future, although by no means bleak, is threatened and away from commercial banks and savings by the growth of competitive institutions. The and loan success with which this competition will be met associations during the depression years 1931-1933. Today, the safety of savers’ depends, as always, primarily on the people who funds is assured in most commercial banks and make up savings banking— the trustees, the offi most savings and loan associations through the cers and employees, and, by no means to be for operation of the Federal Deposit Insurance Cor gotten, the depositors. INCOMES IN THIRD DISTRICT STATES Higher incomes were received by the people of states increased five per cent from $27 billion to Delaware, New Jersey and Pennsylvania in 1952 $28.4 billion. This percentage increase was the than ever before, according to figures recently same as the gain in the entire country. Delaware, published by the Department of Commerce. Dur- New Jersey and Pennsylvania had increases of six ing 1952, income payments to individuals in these per cent, seven per cent and four per cent respec- 12 business re v ie w tively. Total payments in the three states com bined are now triple the 1940 payments and almost triple the 1929 payments. Where income payments* originate, how they fluctuate, and their rate of increase over previous years reflect the kind of local economy we live in. * These income figures include all payments received b y individ uals : wages and salaries, proprietors’ income (farm and indus trial), property income (dividends, interest, net rents and royalties), and “ other” income, such as relief, social security, state benefit payments, veterans’ pensions and bonuses, and state and local government workmen’s compensation and re tirement payments. An in d u stria l area Income figures for the tri-state area emphasize the advanced industrial development characteristic of the Third Federal Reserve District. Thirty-three per cent of total income was derived from manu facturing payrolls, a considerably higher propor tion than in the entire country, where only 24.5 per cent of total income came from that source. Also, a smaller share of income was in the INCOME PAYMENTS IN THREE STATES (DEL., N. J. AND PA.) AS COMPARED WITH THOSE IN THE UNITED STATES PER CENT CHANGE Changes in income payments in the United States and three-state area 25 20 15 1 0 5 0 -5 -10 -15 -2 0 B ll IIII IB a n 1 IT H Three States L. —1 United States -2 5 1930 I PER CENT I 1935 I I 1940 | I I 1945 I I I 1950 1952 I 13 b usiness re v ie w form of proprietors’ profits and a larger share Declining share o f the n a tio n ’s income went to employees in the form of wages and Despite large gains since pre-war days and the salaries. In the three states, 73.2 per cent of all prosperous, twenties, this area has been losing its income received was in the form of wages and proportionate share of the nation’s income pay salaries, compared with only 68.5 per cent in ments. In 1929, the three states received 13.1 per the United States. Conversely, only 10.8 per cent cent of the country’s total; in 1952 they accounted of income in the three states went to proprietors, for only 11.1 per cent. Their share began to drop compared with 15.2 per cent in the United States. Finally, agriculture was much less important in in the 30’s and in the 40’s it declined even more as shown by the chart. However, a significant fact is this area as a source of income. Only 1.7 per cent that since 1945 their share has remained slightly of income here came from agriculture, whereas, over 11 per cent of total income payments. 6.7 per cent of the income in the United States came from that source. P e r capita income advantage declines In 1952 per capita income in the three states was Changes in income paym ents less extre m e $1,764, which was $125 higher than the figures for the entire country. New Jersey and Delaware Fluctuations of income payments in the tri-state both ranked in the first eight states, with $1,959 area have generally been more moderate than and $2,260 respectively. The figure for Pennsyl those in the country as a whole. Last year, both vania was $1,710. Over the past decade, per capita areas had a rise of five per cent, but, with some income has been consistently higher here than in exceptions from year to year, local income pay the country as a whole. However, the spread has ments increased or declined less than national been narrowing; it was 16.2 per cent higher in income payments. 1940 but only 7.6 per cent higher in 1952. In the years of the great depression, income payments declined less rapidly at the local level “ Leveling up” than nationally, and the same was true in the The facts that our share of the nation’s income has recession of 1949. When income payments have declined from 1929 to 1945 and that we are losing increased over a period of years, the rise in local our relative advantage in per capita income, are income payments has not usually kept pace with probably due, not to our deficiencies as much as the national increases. However, a careful study to the rapid rate of growth in other less developed of the chart on the preceding page will show that areas in the country. The three states have not there are many years which are exceptions to been “ leveled down” to the status of the rest of this generalization. the country; other areas have “ leveled up.” 14 b usiness re v ie w TAX CHANGES AND TAKE-HOME PAY Personal income taxes are to be reduced and the $70 a week— will find little change or an actual Social Security payroll tax is to be increased on decline in their pay checks. This means that January 1, 1954. The impact of these changes on roughly half— the lower half— of all income re consumer incomes and Government receipts is not entirely revealed by the total dollar amounts ceivers would notice a decrease or no increase in take-home pay during 1954, since about four out involved. of five workers are covered by Social Security, According to the Revenue Act of 1951,, indi vidual income taxes will be reduced by about 10 and since the median income in 1952 was about $3,400. per cent all along the line next year. This means What the chart does not show, because it is on that people will pay about $3 billion less in per an annual income basis, is that the tax relief for sonal income taxes. But also under the present many families will have most of its impact in the law, wage and salary earners next January 1 will latter part of the year. The Social Security tax is begin to pay 2 per cent Social Security tax on levied on the first $3,600 earned and is not pro their earnings up to $3,600 a year. The rate now rated over the year. This means that the head of is 1Y2 per cent on the first $3,600. Self-employed a family of four earning $4,500 a year or about persons covered under the law will pay 3 per cent on the first $3,600, as compared with the present $87 a week will have his income tax deduction on the weekly pay check cut from $7.13 to $6.44. 21/4 per cent. The increase in these payments is That represents a saving to him of 69 cents. On expected to come to about $.6 billion. the other hand, on his first $3,600 of pay, his So cial Security tax will go from $1.31 to $1.74. So Effects on consumer income and spending that until October, by which time he will have In total dollars, the estimated income tax reduc earned $3,600, his net increase in weekly take- tion of $3 billion far exceeds the rise in Social Security payments of about $.6 billion. The fav orable balance of $2.4 billion is somewhat mis leading, however, in terms of how many people NET EFFECT OF SCHEDULED TAX CHANGES ON TAKE-HOME PAY OF A FAMILY OF FOUR DOLLARS will have their take-home pay increased by these changes. The probability is that for about half of all wage and salary earners the larger slice taken by the Social Security tax will siphon off more dollars than are saved on the income tax cut. The chart shows how this collision between a reduction and a rise in tax payments will work out for families of four who are covered by Social Security. As can be seen, families with incomes before taxes of less than $3,600— about $ 2400 $ 3000 % 3600 $ 4200 $ 48 0 0 $ 5400 $ 6000 15 b usiness re v ie w home pay will be only 26 cents. While the over-all 1954. Since many lower-income families stand to income tax reduction is about 10 per cent, the pay out more in taxes and moderate-income fami tax cut for families in this income class will mean lies will receive tax relief in but small amounts a saving of just 3.6 per cent over the first nine late in the year, it seems likely that if tax reduc months or so of the year. For the last three tion stimulates any general increase in demand months, this rise will be more than doubled, since from the “ mass market” it will come late in the no more Social Security tax payments will be year. required. The chart below shows the approximate dates Effect on G overnm ent receipts next year when workers with various weekly rates Although, from the standpoint of individuals, the will have earned the full $3,600 on which they $3 billion income tax reduction will be partially must pay Social Security tax. offset by higher Social Security payments, Gov The charts show that the $2.4 billion scheduled ernment budget balancers will miss the entire to be released to individuals will practically all sum. Funds collected as Social Security payments go to those making in excess of $3,600 a year, and that a portion of this hike in take-home pay are not figured in the regular budget, so that the added $.6 billion collected from employees will will not be effective until the latter months of not be applied to budget receipts. But this money, DURATION OF SOCIAL SECURITY PAYMENTS until needed for payments to individuals, will be made available to the Government through the purchase of Government securities by the Trust Fund. WEEKLY W AGES The higher Social Security tax will also tend to reduce budget revenues. This will come about because Social Security payments by employers on the first $3,600 of each worker’s salary are also to be raised from l 1 to 2 per cent, or about /^ $.6 billion. Businesses deduct the Social Security tax as a cost, so that their regular income tax liabilities will tend to be reduced as the Social Security tax is increased. CURRENT TRENDS Business forecasters currently seem to be im fore, among words like “ recession” , “ set-back,” mersed in'semantics. The reason, of course, is that “ downturn,” and so on. Probably the* most popu many of them are trying to convey the thought lar term is “ readjustment” . In fact, the word is that business activity may decline slightly— but used so frequently that whether or not one agrees not drastically. Fine distinctions are made there with such a forecast, a brief look at what it means 16 b usiness re v ie w might be worth-while. In many cases, “ readjustment” is used crudely “ Re a d ju stm e n t” comes to the m ortgage m a rk e t to mean simply “ what goes up must come down.” The term “ readjustment” has been employed by In more sensitive hands the word implies that the Housing and Home Finance Administrator to changes are expected which will require adapta describe the current situation in the mortgage tion to new conditions. In this sense, of course, market. Those in the mortgage business have been it loses much of its impact but at the same time much more inclined to use the word “ tight.” After becomes more meaningful. For adjustments are talking with representative concerns in this Fed being made all the time in our economy— not so eral Reserve District we conclude that while the smoothly as textbooks might imply, it is true; but market here is tight some improvement is ex pected shortly. one of the virtues of an economy which relies on freedom in the market place is that adjustments Apparently, there are no noteworthy instances take place rather automatically and impersonally. of builders or mortgage companies holding exces These adjustments are not a one-way street. The sive amounts of completed loans which cannot be postwar inflation was an adjustment— a process disposed of in a secondary market. But both VA in which prices corrected an imbalance between and FHA mortgages are selling at discounts of pent-up demand and inadequate capacity to pro three to four points. Some lenders are completely duce everything at once. For the past two years or out of the market for mortgages coming under so the economy as a whole has been in relative Government programs. And those who are buying balance at rather stable prices. Nevertheless, ad are doing business on a strict quota basis. Fur justments in specific areas of the economy have been going on constantly. Perhaps the most recent thermore, down payments and maturity require and outstanding example is in agriculture. ments are more rigid than formerly. Our reports indicate that advance commitments are very hard Most of the forecasters who use the term “ re to get; frequently they are obtained only by pay adjustment” recognize all this, of course. But they ing a one per cent commitment fee. The situation apparently believe that the over-all level of busi with respect to conventional financing is said ness activity will decline because adjustments in to be somewhat easier, with a 5 per cent rate prevailing. a number of sectors of the economy will bunch together at the same time. This, they point out, is Builders tell us that there are far fewer firm in contrast to the “ rolling adjustments” which take-out commitments on houses still in the “ blue prevented the postwar boom from collapsing. print” stage than at this time last year. Most of The concept of “ readjustment” also implies a them are for conventional financing. Although change in attitude. Businessmen reflect this when local builders seem to agree on a continuing they say that the business environment will be strong demand for houses, they nevertheless pre more competitive. They recognize the hard fact dict a drop in starts over the next six to nine that a “ readjustment,” if and when it comes, may months. They are acquiring land more slowly put the less efficient producer out of business. A now, and proceeding much more cautiously in “ readjustment” might also require thinking again developing tracts in their possession. in terms of somewhat smaller magnitudes rather than ever-rising indexes of activity. Mortgage lenders are watching the money mar ket closely. And there have been reports that the 17 b usiness re v ie w recent rise in prices of Government securities and If the availability of mortgage money does im the decline in interest rates have induced some to prove as expected, it will be interesting to watch regard mortgages in a more favorable light. Our the trend of housing starts in coming months. latest spot check among a few lenders in this Those who felt that the recent downward trend district appears to confirm these reports, but it provides no tangible evidence of an actual change in either the nature or the volume of transactions. Some lenders, who were completely out of the market for VA and FHA mortgages are now said was prompted mainly by a shortage of mortgage money will be looking for a revival of activity in home building. On the other hand, those who be lieved that fewer housing starts reflected some thing more basic— a weakening of demand— will to be at least ready to enter negotiations for this paper. However, advance commitments still seem not be surprised if a downtrend continues in this to be as difficult to obtain as ever. field. 18 F OR T HE R E C O R D . . . Factory* Third Federal Reserve District Per cent change Per cent change Departm ent Store U n ite d States Check Payments Employ ment Payrolls Sales Stocks LO C AL A ugust 1953 from SUMMARY mo. ago year ago 8 mos. 1953 from year ago O UTPUT M anufactu rin g p ro d u c tio n . . . + 1 * + 5* + 9* Construction c o n tra c ts !........... - 1 7 + 14 -1 5 C o a l m in in g ................................ - 1 - 5 - 1 5 EMPLOYM ENT A N D IN C O M E Factory em ploym ent.................. August 1953 from mo. ago year ago 8 mos. 1953 from year ago + 2 + 7 + 10 - 7 + 14 + - + + + 13 TRADE** Departm ent store s a le s............ - Per cent Per cent change change A ugust A ugust 1953 from 195 3 from mo. ago mo. ago year mo. ago ago + 1 + 1 + 4 + 5 - + 2 + 13 2 5 year ago year mo. ago ago + 1 + 3 + 4 -1 1 year mo. ago ago + 2 1 1 0 + + + 5 8 4 + 15 - 3 - 4 0 + 12§ + 4 + 4 + 14 - 3 - 3 “l“ 1 + 12§ + + - 0 1 1 1 1 9 6 - 2 + 11 + 3 + 10 0 0 0 + 10 + Of + 1t 0 0 + 1 1 3 + 3 + 11 - 1 - 2 + 4 + 8 + 0 + 15 - 2 + 4 + 0 + 5 + 1 + 11 + 9 + 6 + 10 + +1 + 2 + 1 + 11 + 8 + 9 + + 1 0 T re n to n ......... -1 + 5 W ilk e s -B a rre +1 0 W ilm in g to n .. + 5 Y o rk .............. + 1 2 + 9 - year ago 6 + 5 + 7 9 0 7 -1 3 + 14 8 PRICES Of + 7 +1 1 0 P h ila d e lp h ia . 0* + 4* + 8* + 2* + 14* + 18* B A N K IN G ( A ll member banks) D eposits....................................... - 1 Loans............................................. 0 Investments................................... 0 0 U.S. G ovt, se cu ritie s.............. O t h e r ......................................... 0 C heck paym ents......................... — 14§ 2 1 §20 C litie s *Pennsylvania fP h ila d e lp h ia * * A d ju ste d for seasonal varia tio n . JBased on 3-month moving averages. Per cent Per cent Per cent change change change A ugust A ugust August 195 3 from 19 5 3 from 195 3 from Lancaster. . . + C onsum er..................................... CHANGES R e a d in g . . . . + 4 + 10 - 1 0 + 2 2 - 6 -6 + 12 - 4 -1 2 + 2 + +9 -2 + 18 - + 7 + 3 + 20 + 15 + 12 + 1 + 22 + 3 - 7 + + 2 + 4 -4 7 9 + 2 + 7 - 9 + 9 + 4 -1 8 4 + 15 + + 3 9 5 +24 - 3 3 +38 * N o t restricted to corp o ra te limits o f cities but covers areas of one or more counties. 19
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