Full text of Business Review (Federal Reserve Bank of Philadelphia) : January 1963

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

:EDERAL RESERVE BANK OF PHILADELPHIA
■

Monetary Discipline: A Reappraisal
Competition in Banking: A New Old Problem
1 9 6 2 : Accommodation in the Political Economy

JANUARY 1963

editorial

In the past few years the Federal Reserve has been grappling with
its most difficult problem since the days of the “ pegs” over a decade
ago. This is the question of how to stimulate expansion of the
domestic economy and at the same time strengthen the balance of
payments.
The problem has been difficult because the two objectives, at least
in the short run, are in conflict. The usual prescription for a slug
gish economy is plentiful and cheap money; but while this medicine
may stimulate the domestic economy, it also may stimulate an outflow

M O N ETA R Y

of short-term capital and thus aggravate the balance of payments.
Conflicting objectives, of course, are nothing new to the Federal

DISCIPLINE:

Reserve. The problem of the pegs, for example, was a conflict be
tween supporting prices of Government securities and restraining

A REAPPRAISAL

inflation. That conflict was finally resolved by abandoning the former
objective in favor of the latter. What makes the current conflict

d ls - c i- p lin e (dYs'eplYn), n., v., -plined, -plining. — n.
1. training to act in accordance with rules; drill: military
discipline. 2. instruction and exercise designed to train
to proper conduct or action. 3. punishment inflicted by
way of correction and training.

more difficult, perhaps, is that the Federal Reserve is seeking a solu
tion without abandoning either objective. This, in the view of some
observers, flies in the face of orthodox doctrine. They would direct
policy primarily toward the external problem at the expense of the

The American College Dictionary

internal.
The orthodox prescription for a continuing external disequilibrium
has been “ monetary discipline.” As used in the past, this has meant
tight money and high interest rates. Not only has this prescription
been tested time and again in the past, but it has been applied quite
recently in a number of countries. Those, and particularly those
abroad, who urge us to pursue this course, therefore, have some very
substantial evidence to support their view.
Why, then, has the Federal Reserve not applied this orthodox
prescription? One reason is that monetary discipline, in its old sense,
is not appropriate to our current problem. Ours is not a problem of
inflation, but one of inadequate demand.
This is not to say, of course, that the Federal Reserve favors
undiscipline. It is to say that the term “ monetary discipline” needs
to be reappraised in the light of the particular problem facing us.
That is what this brief editorial attempts to do.
According to the dictionary quotation cited above, one definition
of the word “ discipline” has to do with acting in accordance with
rules. It was in this sense that nations

BUSINESS REVIEW

(Continued on Page 26)

is produced in the Department of Research. David P. Eastburn was primarily responsible for the edi

torial, "M onetary Discipline: A Reappraisal;" Bernard Shull for the article "Com petition in Banking: A

New Old Problem;" and

Jack C. Rothwell for "1962: Accommodation in the Political Economy." The authors will be glad to receive comments on their
articles.
Requests for additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of Philadelphia, Phila
delphia
I, Pennsylvania.

COMPETITION IN BANKING:
A NEW OLD PROBLEM
and

“ . . . free competition . . . obliges

competition

regulation serve the public side

all bankers to be more liberal in

where it is not understood.

by side. While regulation plays

dealing with their customers, lest

banking,

competition

an important role, most author

their

ities would like to rely on com

away.”

rivals should carry

petition as much as possible.

them

survive

VOICES FROM THE PAST
American

Adam Smith

cannot

democracy

posed to the concentration of

Yet there have been recent trends that appear
to endanger the rivalry that already exists.

financial and economic power in private hands.

Bank mergers, holding companies, chain bank

heritage; it creates a predisposition in favor of

ing, and perhaps other practices have seemed

Opposition to monopoly is part of our political
competition.

to promote the concentration of market power.

In a society opposed to monopoly on prin

Banking authorities, government agencies, and

ciple, the theories of Adam Smith were sooner

courts of law have been called upon to help

or later bound to find special favor. Smith had

preserve competition.

reasoned that rivalry was an automatic mechan

Decisions on mergers and other kinds of pro

ism of social control, for while each individual

posals must be made. And they must reflect sev

“ intends only his own gain . . ., he is . . . led by

eral considerations, for these decisions are not

an invisible hand to promote an end which was

approached in an intellectual vacuum. First of
all, our history, our experience, and our laws

no part of his intention.” Throughout the world,
and until the end of World War II, only the

tell us that rivalry is socially beneficial. Secondly,

United States had antitrust laws designed to

modern economic research confirms this view,

preserve and encourage competition.

but in its analytic penetration reveals how diffi
cult it is to identify the forces of competition.

Early banks and large numbers

Finally, the difficulties are compounded in bank

In banking, it was never quite clear that compe

ing markets which, in many ways, are quite dif

tition alone was sufficient to promote the public

ferent from industrial markets.

welfare. Controversy dates back at least as far

These three considerations, which we here ex

as the First and Second Banks of the United

plore, intertwine, and fuse, not into a simple

States.

technique for making decisions, but into an
approach to the problem. As yet there are no

The First Bank of the United States operated
from 1791 to 1811. It was not rechartered when

simple techniques. We must face the issues in

its 20-year life expired. The Second Bank of the

their full complexity, for experience teaches that

United States, also chartered for twenty years.

fell dead in 1832, four years before its charter

There were about

ran out.

over 12,000 in 1900. If large numbers are

These institutions performed useful and im
portant

banking

services.

But,

despite

their

achievements, or perhaps because of them, they

750 banks

1853

and

synonomous with competition, then the bank
ing system was in the process of becoming very
competitive.

were unpopular. For one thing, monetary re
striction, though frequently necessary, has al

The need for regulation

ways been unpopular. In the restriction exercised
by these banks, many saw the hand of monopoly

still believed they saw large and powerful banks

and special privilege. Thomas Jefferson opposed

restricting credit. Many farmers and business

the First Bank when Hamilton proposed it. He

men in the West and South sincerely believed

This was by no means clear to some people who

told George Washington that it “ delivers us up

that their financial problems were caused by the

bound to the national bank” which is “ free to

monopolistic credit policies of Eastern bankers.

refuse all arrangements, but on their own terms,

William Jennings Bryan rallied these dissatisfied

and the public not free, on such refusal, to

constituents in his presidential campaign in 1896.

employ any other bank.” Andrew Jackson took

He lost; but in 1913 Congressman Pujo took up

his overwhelming presidential victory in 1832

the issue. His committee studied banking con

as a mandate to destroy the Second Bank. “ The

centration and reported that “ . . . concentration

present corporate body,” Jackson proclaimed,

of the control of banking resources and conse

“ enjoys . . . a monopoly of favor and support,

quently credit . . . has grown apace in the City

and, as a consequence, almost a monopoly of

of New York . . .”

foreign and domestic exchange.”
A tendency toward freer competition in bank

At the same time, others were concerned about
the periodic overextension of credit. For time

ing grew out of opposition to alleged monopoly

after time during these years, money panics and

by the Congressionally chartered banks. As soon

crises occurred. Between the two points of view

as the Second Bank was out of the way, New

— one of underextension and one of overexten

York first and then other states passed laws

sion of credit— it became clear that the public

permitting anyone who could meet minimum

interest required more than just large numbers

administrative requirements to establish a bank.

of privately owned banks. Other social controls

The so-called “ free banking laws” opened the

had to be designed.

door to large numbers of banks and also to
intense rivalry.

Controls had never been entirely absent from
hanking in the United States. The Federal and

Even during the Civil War, when the Federal

State Governments had made periodic attempts

Government began chartering banks again under

to assure the soundness of their banking systems.

the National Banking Act, Congress no longer

But it was not until 1913 that a comprehensive

took it upon itself to grant special charters. The

system was worked out and embodied in the

national banking system, in several respects, ap

Federal Reserve Act. The Federal Reserve Sys

plied the free bank principle on a national scale.

tem was given considerable influence over the

The number of banks in the United States grew

supply of bank reserves and, through this sup
ply, the price of bank credit.

rapidly in the latter part of the 19th century.

Other controls were developed subsequently

pendent banks has declined and with amazing

— many during the turmoil of the 1930’s. Since

consistency. In 37 of the 42 years between 1920

the 1930’s and until recently, the questions of

and 1962, the number of banks has dropped.

bank solvency and liquidity had superseded the

Today there are a little over 13,000 banks. There

problem of monopoly. The financial reconstruc

will probably be fewer next year.

tion of the thirties, the establishment of sound

There is no one reason behind the decline in

banking, and a decline in numbers of banks in

numbers of banks. There are several that were

recent years has tended to bring the question

more or less important at different periods of

of monopoly back to the forefront.

time.

Decline in the banking population

about 5,500 banks from 1921 to 1929. Bank

In 1920 there were close to 30,000 commercial

failure was a more important cause than any

banks in the United States with 31,500 offices.

other. There were almost 6,000 suspensions and

Both the number of banks and banking offices

liquidations. Many took place in rural areas

have since declined. After reaching a low point

which did not enjoy the general prosperity.

T h e T w en ties. There was a net decline of

in the 1940’s, the number of banking offices has

While a large number of absorptions and

banks have expanded their

consolidations were consummated during the

operations by establishing new branches. In

period— close to 4,000— many seem to have been

trended upward;

contrast, ever since 1920 the number of inde-

associated with the extremely high mortality
rate. One way of avoiding liquidation was to

THE RISE AND FALL OF BANK POPULATION
The number of banks* in the United States increased
rapidly through the 19th century. It reached a peak of
about 30,000 in the early 1920’s. Ever since, the banking
population has declined. Bank failure in the late twenties
and early thirties accounted for most of the decrease. But
in recent years mergers have been the chief cause.
THOUSANDS

have the bank absorbed by a going concern.
Early in the decade the number of new banks
increased. As the decade wore on, however, the
number of failures and mergers went up, and
fewer new banks were established.
In 1929 there were still almost 25,000 com
mercial banks in the United States.
T h e T h irties. The bank failures of the 1920’s
were simply a forewarning of the disaster that
was to come. From 1930 to 1933, over 9,000
banks suspended operations or liquidated. In
addition, there were over 2,000 consolidations
and absorptions. After the reorganization of the
banking system in 1933, only about 15,500
commercial banks remained. The “ Great Depres
sion” was the “ grim reaper” of the banking
industry.
In the remaining years of the 1930’s, the num

* Includes all banks.
Source: Historical Statistics of the United States Colonial Times to 1957;
Federal Deposit Insurance Corporation, Annual Report, I960.

ber of banks slowly declined. Suspensions and
liquidations were cut

( Continued on Page 12)

N EW

R E LEA SE

Forecasts for 1963. The Department of Research has
compiled and analyzed a number of predictions made by
businessmen, economists, and Government officials. This
compilation includes a summary of forecasts for the
economy as a whole and particular sectors of the econ
omy. The more important indicators are presented in
chart form.
Copies of this release are available on request from
Bank and Public Relations, Federal Reserve Bank of
Philadelphia.

N EW

R E LEA SE

Defending the Dollar. A persistent deficit in our balance
of international payments has resulted in substantial
drains on our gold reserve.
To help the layman understand this problem, the
Federal Reserve Bank of Philadelphia has just released
"Defending the Dollar." This pamphlet, written by Clay
J . Anderson, Economic Advisor and officer of the Bank,
is designed for the general reader rather than the expert
in international economics.
Copies are available for educational purposes. Re
quests should be addressed to Bank and Public Relations,
Federal Reserve Bank of Philadelphia, Philadelphia I,
Pennsylvania.

1962: ACCOMMODATION IN
TH E POLITICAL ECONOMY
In years gone by the study of man’s efforts to

city to produce than existing effective demand

satisfy his material wants was dubbed “ political

could accommodate, leading to keen competition

economy,” thus emphasizing the important role

for existing sales and pressure on prices. Finally,

of Government in advancing national economic

costs had become rigid, difficult to trim. With

welfare.

pressure on prices and with costs difficult to cut

Today Government still retains an important
role in the economic sphere. But the relationship

came the squeeze on profits, on the lifeblood of
the enterprise system.

between Government and the private sector of

The environment in which the consumer func

the economy is an exceedingly fluid one, con

tioned in 1962 cannot be so easily outlined.

stantly adjusting to the everchanging pressures

Around four million of him were unemployed,

of international relations and domestic wants.

the result of structural difficulties and a less than

In many respects economic developments dur

desirable growth rate. The great majority, how

ing 1962 were highlighted by this flux, by the

ever, over 67 million, had jobs and seemed little

seeking of a new accommodation between private

worried about the future course of the economy.

and public— a sort of feeling-out process. The
events around which this process turned were

The stock market was still booming. Speculative
profits were being made by an army of small in

varied: the steel controversy, the stock market

vestors. The cult of equities it was called— a cult

crash, the Cuban crisis, to name a few. But be

in which growth was the byword, inflation the

fore we review these developments, let’s take a

mainstay.

look at the environment in which Government,

But if speculative enthusiasm marked many

business, and the consumer functioned in 1962.

individuals, the environment in which Govern

For

ment operated in 1962 was a far more somber

this environment

greatly influenced

the

course of events during the year.

one. The new administration came to grips as
never before with the stern realities of interna

1962: THE SOCIAL, ECONOMIC, AND
POLITICAL ENVIRONMENT

tional

relations.

Moreover,

Government

evi

denced increasing awareness that a strong, viable

The main concern of the business community as

economy is an essential prerequisite for success

it rode into 1962 can be summed up in two

in international affairs. And in a world as com

words:

the

plex as ours an economy capable of producing

squeeze were varied. Most of the gaping voids

armaments is not enough to assure power and

created by the war years had been filled— voids

security. Not only must we arm, for example,

in durable consumer goods, housing, and other

but we must keep our house in order in the

areas. Hence sales were not so easy to come by.

process. We must not let our prices get out of

Moreover, business had built up a greater capa

line lest our foreign trade and receipts he dis

profit

squeeze. The

reasons for

rupted. We need foreign earnings, among other

was threatened. Yet, with round-the-clock nego

reasons, to pay for troops abroad. Moreover, we

tiations and a real desire by all parties to avoid

must maintain the dollar as the bulwark of the

the economic consequences of a work steppage,

world payments system, lest a disruption cause

a strike was avoided and a settlement was

great difficulty if not a collapse in the free world

reached. But in little more than a week after

economy.

the settlement, several of the large steel com

This, then, is the setting in which Govern

panies announced price hikes and Government

ment, business, and the consumer entered 1962-—

leaped into the fray to secure a roll-back of

business

profit

prices to previous levels. Government felt that a

squeeze; many consumers and businessmen still

price hike might set off another cost-price spiral,

on a speculative cloud; Government plotting a

thus making it more difficult to compete with

course to national survival in a jungle of com

foreign goods, harder to improve our balance of

peting nation states and alliances.

payments and stem our gold outflow.

greatly

concerned

with

the

The events that followed resulted in a retrac

1962 IN REVIEW

tion of the price hikes. Both Government and

Nineteen hundred and sixty-two passed into the
statistical record books as a year of slow growth,

business agreed on the need for profits and mod
ernization. They disagreed on means to attain

uncomfortably high unemployment, and rela

these ends. An accommodation was reached.

tively easy credit conditions. Though early pre

But this accommodation was to have an im

dictions had gross national product expanding

portant impact on another economic sector— on

as much as 10 per cent, this measure of total

the millions of investors who were just now be

spending for current output rose from about

coming a bit disenchanted with the pink cloud of

$519 billion in 1961 to an estimated $553 billion

the equity cult.

in 1962, 6.7 per cent in current dollars or 4 per

In December 1961, the Dow-Jones industrial

cent in constant prices, a good but far from

stock average hit an all-time high of 734.91.

spectacular year. Meanwhile, unemployment re

During the first quarter of 1962 it see-sawed

mained well over 5 per cent of the labor force

around the 700 level. In April it dipped down to

and credit conditions remained relatively easy.

the 670 area. It appeared that an orderly reaction

But 1962 will not be remembered primarily

was occurring in an over-priced stock market.

for its contributions to gross production and

Then came the steel controversy, the price

financial statistics. In the economic sphere the

hike, the retraction, and the selling wave that

year was highlighted, as already mentioned, by

approached panic proportions. Most observers

a shifting in the ever-fluid relationship between

felt the sequence of events signified a new and

the private and public sector— a process of feel

profound realization on the part of investors, a

ing out and accommodation— an attempt at rec

realization that many of the forces promoting

onciliation of the approaches toward mutual

the postwar inflation had been spent and that

objectives.

Government was prepared to take vigorous ac
of this

tion to prevent price hikes which might damage

process came in the early spring. Contract nego

our competitive position and undermine the in

tiations in the steel industry began and a strike

ternational financial position of the dollar. Thus

The most important manifestation

the cult of the equity received a serious blow,

island aimed, many observers felt, at a quick

based largely as it was on the premise that in

about-face in the world balance of power. Ten

flation would continue to boost corporate profits

sion grew, then the quick action of the United

and that common shares would provide a haven

States Government had its effect. On a quiet

in the inflationary gale.

Sunday morning, the Soviet Union agreed to

Inflation did not now seem inevitable. The

dismantle the installations. One of the most criti

strong Government stand on prices had been a

cal confrontations of the nuclear powers had

significant factor in the break, according to most

ended and the decisive action of the American

observers. The feeling out and accommodation

Government had yielded distinct dividends.

between public and private had had its effect on
the investor.

The economy, which had been waiting since
the stock market crash for, as one analyst put it,

Then came a series of moves on the part of

the other shoe to drop, now felt a renewed

Government to assure business that Government

coursing of blood through its fiscal veins. An

shared its concern for profit margins and mod

intangible feeling spread that this nation was

ernization and that Government was willing to

still young and vigorous, that the future course

take steps to secure these objectives.

of political and economic events was by no means

In July, the Treasury announced approval of

predetermined, that this nation could make the

a broad program which allowed business firms

future. The feeling-out, sizing-up process be

to take greater depreciation allowance on plant

tween public and private was complete for 1962.

and equipment. This meant that firms could re
duce their tax payments and utilize these tax

A LOOK AHEAD

earnings for modernization purposes if they so

Though the relationship between Government

desired. In September, Congress approved legis

and the private sector of the economy is a fluid,

lation allowing businesses investing in plant and

ever-changing one, the form this relationship

equipment to take a 7 per cent income tax credit.

assumes in the long run will be determined by

And all the while the administration voiced its

what the people want. People, of course, are a

desire to see a flat reduction in corporate and

diverse group with different views and different

individual income tax rates in the coming year,
aimed at giving business a shot in the arm and

may represent one of the main problems con

improving our lagging growth rate.

fronting our economy in 1963.

wants. It is quite possible that this very diversity

Despite these developments, however, business

For years the forward momentum of the

sentiment remained somewhat less than buoyant.

American economy was largely the result of eco

Then came a stroke of lightning which was to

nomic voids created during World War II. Now

have a sobering effect on the nation, but which

many of these voids have been filled. The econ

later was to bring a ray of sunlight into the

omy must depend on other sources of strength

economy. That bolt was the deepening concern

in the years to come if it is to move ahead. A

over developments in Cuba.

tax cut could do much to stimulate economic

Despite pledges to the contrary, intelligence

activity. Economic ties with an enlarged Euro

reports confirmed that the Soviet Union was

pean Economic Community would open up a

constructing offensive missile installations on the

market for American goods rapidly approaching

300 million persons. And here is where the prob
lem of national diversity comes in.
Within each nation there are geographic re
gions and income classes. Regions often special

LOCAL BUSINESS INDICATORS
Third, Federal Reserve District
Percent change 1961 to 1962
Employment (15 areas)*
Factory payrolls*

.....................................

..................................................

......................................... +

ize in one or more types of economic activity—

Factory working time*

say, coal production or textiles. The interests of

Electric power consumed by manufacturers* . . . .

one region do not necessarily mesh with those of

Anthracite coal output*

another when it comes to questions such as for
eign imports and taxes. Nor will the interests of
wage earners, capital, and management.
This clashing of interests is, of course, a

+ 8

....................................... — 4

Construction contracts:
Residential*

+15

......................................................

+10

Nonresidential*
................................................. +26
Public works and utilities*
........................ + 6
C ar loadings (Philadelphia region— 52weeks)
Retail sales, total (excluding

.. +

nationalc h a in s )* *. +10

natural thing in a diverse society, perhaps even

Department store sales*

a desirable thing. But for the good of the nation

Automobile registrations (48 counties, eastern
Pennsylvania)** ................................................ +10

we must reconcile our desires through the po

Bank debits (20 cities)*

....................................... + 4

....................................... +13

litical process if we are to avoid an inertia
impossible to overcome in our efforts to move

* First eleven months.
** First ten months.

ahead economically.

THE THIRD DISTRICT IN 1962
Business

the 15 major labor market areas in the District,

Within the Third Federal Reserve District in

were in the 12 per cent or more unemployed

1962 business activity paralleled that of the na

class compared to one area at the same time last

tion in many respects. The pace of economic

year. Only three areas were reported in the 9 to

the picture was perhaps a bit better. Two areas

activity started off on a brisk note, slowed down
in the third quarter, then picked up in the final
three months.
All district business indicators rose during the
year, as shown in the table, with the sole excep

UNEMPLOYMENT IN M A JO R LABOR MARKET
AREAS
Third Federal Reserve District
N u m b e r o f a re a s

tion of coal output. Notably, construction went
ahead at a rate comparable to that in the nation
as a whole, paced by nonresidential building.

N o v . '62

N o v . '61

N o v . '60

Retail sales and department store sales rose at a

Percent of labor
force unemployed:

rate slightly higher than that in the nation.

1.5 to 2.9% ..........

3.0 to 5.9% ..........

6.0 to 8 . 9 % ..........

9.0 to I I . 9 %

........

12% or m o r e ........

In the manufacturing area, electric power con
sumption rose 8 per cent, while employment, pay
rolls, and working time showed gains of one,
five, and two percent respectively.
Unemployment was still a big problem, with
the rate in the Philadelphia metropolitan area
pegged solidly above that in the nation. Within

Total number . . .

THIRD DISTRICT BAN KING
(Millions S)

Dec. 31, 1960

Reserve C ity Banks
Loa ns
1nvestments
Deposits
Country Banks
Loans
Investments
Deposits

Dec. 31, 1961

Change
in 1961

Dec. 26, 1962

Change
in 1962

2,292
928
4,007

2,430
1,085
4,256

+ 138
+ 157
+249

2,615
1,017
4,169

+ 185
- 68
— 87

3,032
2,433
5,792

3,317
2,531
6,152

+285
+ 98
+ 360

3,454
2,717
6,418

+ 137
+ 186
+266

11.9 per cent category, however, compared to

Loan deposit ratios at District reserve city

five last year. Other categories remain unchanged
with the exception of the 1.5 to 2.9 range where

banks rose from slightly above 65 per cent to
around 70 per cent, while loan deposit ratios at

one labor area was added over last year.

country banks remained around 55 per cent
throughout the year.

Banking
Net loans of Third District reserve city banks

Reserve bank operations

forged ahead during 1962 at a rate roughly com

During the year 1962, 158 member banks, about

parable to that in the nation as a whole. The

35 per cent of the total number, borrowed from

growth rate of net loans at country banks, how

the Reserve Bank. The average daily balance ex

ever, fell behind those of similar institutions in
the nation as a whole. District country banks

tended to member banks declined to $2.8 million
in 1962 from $4.2 million in 1961.

added sizeable volumes of securities to their

Collection of checks showed an increase over

portfolios while reserve city banks liquidated

1961. In all, almost 197 million ordinary checks

securities on balance.

were cleared, with an aggregate face amount of

The rate of growth in total deposits for both
reserve city and country banks fell behind that

over $66 billion. Transfers of funds and cur

in the nation as a whole, primarily because of

though coins counted declined slightly. Over

slackening in the rate of growth of time deposits

$12.4 billion in marketable securities were de

after midyear.

livered or redeemed.

rency counted also increased over last year,

C O M P E TITIO N IN B A N K IN G

OF NUMBERS AND MARKETS

( Continued from Page 5)

It is a long way from a general concern about

to about one-tenth the rate of the 1920’s; merg

numbers of banks to a careful analysis of the in

ers continued substantially below the level of

tensity of competition in banking markets. But

the 1920’s, and even a few new banks were

it is only on the basis of careful analysis that

established. In 1939 there were still over 14,500

recent trends can be evaluated and specific cases

banks in operation.

settled.

R ec en t Y ears. The decline in bank numbers
during the 1940’s continued at a very slow pace.
Suspensions and liquidations, following the re

The numbers
The merger movement of the 1950’s has played

forms of the 1930’s, have been insignificant.

only a minor role in the decline in bank popu

There were fewer than 100 mergers in each year

lation. Moreover, the merger movement of re

of the decade.

cent years seems rather unimportant when com

But few new banks have been chartered in

pared to that of the 1920’s.

recent years. Banking authorities have felt that

But this comparison should not be taken

much of the distress in the 1920’s and 1930’s

as proof that the recent tendency toward con

had been brought about by too many banks and

centration is unimportant. It is true that the

have been cautious in approving new banking

number of banks declined only 4 per cent from

charters.1 Stability has generally been a more

1952 to 1961, compared to an 18 per cent decline

important consideration than rivalry; stability

in the twenties. But when the recent declines in

sometimes has seemed to require one bank in a

bank population are adjusted for growth in the

community, rather than two or three.

human population and the economy banks serve,

The major

change, which

accelerated

the

decline in bank numbers in the 1950’s, was
a revival of merger activity.

Between

are roughly comparable.

1952

and 1961 there were almost 1,600 mergers.
The movement picked up speed after

the declines of the last decade and the twenties

1953.

There was a net decline of about 670 banks
over the decade.
As large banks absorbed small banks and

TW O DECADES OF DECLINE
The decline in numbers of commercial banks in the 1920’s
was significantly greater than over the last decade. But
when the declines are adjusted for increases in popula
tion and gross national product, they are roughly com
parable.
PER CENT

converted them to branches, local, state, and
federal authorities began to express concern

about the impact. As banks that had grown
large through merger began to merge with one
another, consolidations took on added impor

-10

-2 0

tance. It became significant to some that less
than half the number of banks operating in

-3 0

1920 were in business in 1961.
-4 0

1 Annual Report of Federal Deposit Insurance Corporation, I960,
p. 36.

Source: Board of Governors; U.S. Department of Commerce.

In the 1920’s the number of banks per person
in the United States fell 25 per cent; from 1952

incipient, if not actual, growth of monopoly
power by the largest banks.

to 1961, 18 per cent. In the 1920’s the number of
banks per dollar of Gross National Product fell 31

The market

per cent; in recent years, 37 per cent. Moreover,

Mere numbers, however, no matter how they are

even these comparisons tend to underestimate

handled, processed, turned, or twisted can never

the recent decline in the number of independent

alone reveal how much rivalry exists or how

banks. For bank holding companies, in recent

effective competition is. For the rivalry that

years, have expanded and eliminated the actual

counts is the economic rivalry that takes place

independence if not the appearance of independ

in markets-— loci of space and time where buyers

ence of many banks absorbed into their networks.

and sellers meet.

Fewer banks, and large banks that are grow

In T h e o ry . A monopoly exists when only a

ing rapidly, have resulted in an increase in the

single seller occupies the market. A single seller

proportion of total deposits owned by the largest

facing many buyers across the market has a

banks. In 1948 the 100 largest banks in the

distinct bargaining advantage. He can demand

United States held 45 per cent of total bank

an advantageous price and earn a very high

deposits; in 1962 the 100 largest held 48 per

profit. A monopolist, by virtue of his isolation,

cent of total deposits. To some observers, look

is simply in a better position to “ buy cheap” or

ing at the past and into the future also, this

“ sell dear” than most others.

increased concentration in recent years is a

Competition exists when there are many inde

matter of concern. The trend seems to reflect an

pendent sellers vying for the patronage of the
same customers. Each customer is then protected

NUMBERS AND CONCENTRATION

from exploitation by his ability to take his busi

As the number of banks has declined in recent years,
the proportion of deposits held by the 100 largest banks—
a concentration ratio— increased. To some observers, a
rising concentration ratio suggests increased market
power for the largest banks.
PER CENT

NUMBER

ness elsewhere.
The finding of monopoly or competition al
ways hinges on the definition of the “ market.”
And the market is always difficult to define. It
includes those sellers who compete with one
another in offering a specific product to a given
group of customers. But the market can be de
fined narrowly to exclude many sellers who
transact business on the fringe of the market;
if it is, the market may seem to be dominated
by only a few sellers. If, on the other hand, the
market is defined broadly to include sellers on
the fringe, it will usually appear more competi
tive.

* As of June 30, 1962.
Ratios are as of end of year; number of banks, midyear.
Source: Board of Governors; Recent Developments in the Structure of Banking,
A Special Staff Report of the Federal Reserve System sub
mitted to the Select Committee on Small Business, U.S. Senate,
January 5, 1962.

There are several kinds of fringe sellers who
might be thought of as “ not quite” or “ just
about” belonging to a particular market. There

are those, first of all, whose products are a little

the same or similar products and sells to the

different. In most markets, each seller’s product

same group of customers. It is in the crucible

tends to be a little different, if only because of

of the market that the forces of competition must

different brand names and trade-marks. The

be examined.

practical question that frequently arises is how

In B an k in g. A commercial bank is not a

to distinguish between products that purchasers

product. It is an institution that produces and

feel they can easily substitute for one another—

sells a number of products. It is the rivalry a

and which therefore are competitive— and prod
ucts which they do not feel are close substitutes.

evaluated.

bank faces in selling each product that must be

For example, some years ago, a District Court

The traditional and semi-unique products that

had to draw a line between close and distant sub

banks deal in are demand deposits and short

stitutes for cellophane. The Court held that wax

term business loans. For many years most au

paper and aluminum foil, among other products,

thorities believed that banks should confine their

were sufficiently close to cellophane to compete

lending to short-term commercial credit. These

in the same market. In fact, the Court found that
all flexible packaging materials were close

business loans are relatively liquid assets; a
banker, whose liabilities are payable on demand,

enough substitutes to be classified as a single

must first learn, Walter Bagehot said, to distin

product. The Court might have found a monop

guish between a mortgage and a promissory

oly in the production and sale of cellophane;

note, his business being concerned with the

instead it found competition in the production

latter.

and sale of what it considered the appropriate
product— flexible wrapping paper.
Another kind

line must frequently be

Commercial bankers who are today competing
vigorously for time deposits and investing heav
ily in real estate loans do not tend to look at their

drawn. Some producers may be geographically

business as being so confined. Today it is difficult

remote from the principal market. Their remote

to conceive of banks as specialists in the produc

ness may reflect the high cost of transporting

tion and sale of any one or two products. Banks

their product. It follows that these producers are

obtain funds from individuals and businesses

only partially, if at all, competitive with others

that want checking accounts, individuals who

even though they may sell identical products.

want savings accounts, and governments and

Thus, in a number of investigations it has be

businesses that want to invest their excess cash

come clear that the manufacture and sale of

for brief periods of time. With these funds, they

cement is carried on in regional markets. The

purchase

costs of shipping the product are so high as to

notes from businesses and individuals, mort

preclude national competition. While national

gages and other kinds of earning assets. In a

rivalry does not exist, it is still difficult to draw

recent court case involving the merger of two

Government

securities,

promissory

a geographic line, setting one market off from

banks, the Justice Department isolated 8 or 9

another.

separate and distinct product lines.

The market is the crucial concept in evaluating

In the purchase or sale of some products,

the forces of competition. The effective rivalry a

banks face intense rivalry from nonbank financial

firm faces comes from other firms that produce

institutions. In attempting to induce individuals to

THE PRODUCT LINES OF BAN KING

geographic extent of the market must be care

Banks deal in many types of “ products,” as this per
centage distribution of assets and liabilities in June 1962
shows. At one time most bank assets were business loans
and most liabilities were demand deposits. While business
loans and demand deposits are still important, banks
have diversified and expanded their operations in other
areas.

fully limited if the intensity of competition is not

PER CENT

to he exaggerated.
The large number of banks scattered through
out the nation— and

13,400

is still a large

number despite the recent declines— are not all
competitive with one another in any meaningful
sense. These banks transact most of their busi
ness in a patchwork quilt of small local and
regional areas. In any one area, a bank tends to
be isolated from the rivalry of other banks
located in other areas.
There are several principal reasons for this.
Bank depositors are generally limited, by the

PER CENT

costs of inconvenience, to banks in the imme
diate vicinity of their daily journeys from home
to work and back home again. A bank borrower,
whose principal asset when he goes to borrow is
his character, is frequently limited by his friend
ship and acquaintance with the local bankers.
While it is difficult for many bank customers
to go to banks outside their local area, it is often
impossible for a bank outside the local area to go
to the potential customer. Banking offices, even
of national banks, are confined within state

Source: Board of Governors.

borders and by state laws. There are 51 juris

place their money in savings deposits, many

dictions, each with a different set of banking

commercial banks may have to compete with

regulations. In practice this means that a bank

mutual savings banks and savings and loan as

in California may not open a branch in any

sociations. To most customers, today, there is

other state; a bank in Pennsylvania may not

little difference in the quality of a savings deposit

open a branch in a county outside those con

at any of these institutions. In extending con

tiguous to the county in which it has its main

sumer credit and in purchasing mortgages, the

office; and a bank in Illinois may not have any

commercial hank may find other financial insti

branches at all. The relative immobility of both

tutions competing for the same earning assets.

banks and many types of bank customers serves

Since a variety of substitutes exists for many
products in which banks deal, the mere number

to break up the United States into a series of
geographic sub-areas.

of commercial banks in a market does not fully

As a result, we would expect banking business

measure the degree of rivalry in the sale of at

throughout the United States to conform highly

least some products. On the other hand, the

with the geographic distribution of income and

population. And this is indeed the case. The

have broader and more distant alternatives. In

number of people in an area and their income

a somewhat arbitrary way, we may say that a

go a long way toward explaining differences

bank may deal with locally limited customers,

in bank deposits among areas.2

regionally limited customers, and geographically

It is true, nevertheless, that in the sale of any

unlimited customers. Of course, these customer

particular product a bank may deal with differ

categories do not do justice to the variety of

ently restricted customers. The geographic limit

customers that actually exist. But they demon

of the market is not necessarily the same for all

strate a principle. A bank that handles nine

in a given locality. Some, perhaps most, will be

products and deals with three different classes

restricted to local sources of credit. Others may
PEOPLE, INCOME, AND DEPOSITS
The distribution of bank deposits among the several states
in the United States largely reflects the distribution of
population and income. In the first scatter diagram, the
“ average” increase in deposits as income goes up is shown
by the fitted line. The dots represent the actual data for
each state. In the second diagram it can be seen that
deposits also rise as population increases.
TOTAL DEPOSITS (BILLIONS OF DOLLARS)

of customers in the sale of each, is operating in
27 distinct markets. It may be able to exercise
monopoly power in some and may have to com
pete vigorously in others.
In the sale of some products, at least, banking
markets seem to be geographically expanding.
Improved transportation and communication in
recent years have given bank borrowers and
depositors access to banks that they could not
make contact with 20 or 30 years ago. In fact,
the merger movement and branch banking can
be seen as part of a larger movement— the ex
pansion of bank markets. When markets expand,
banks formerly protected from one another by
distance find themselves seeking patronage from
the same customers.
There are no certain lines that can be drawn
between geographic market areas, nor between

TOTAL DEPOSITS (BILLIONS OF DOLLARS)

close and distant substitute products. There are
no

sure

distorted

fire

techniques

images

when

to compensate
lines

are

for

misdrawn.

THE DIFFERENCES IN BANKING
The difficulties of identifying and evaluating the
forces of competition in banking markets are
further complicated by the “ differentness” of
banking. Special characteristics tend to veil the
true extent of rivalry.
Equations for the regression line and coefficients of determination:
Deposits = —366.1 + .55 Income; r2 = .97
Deposits = —930.6 + 1.37 Population; r2 = .94
There were 50 observations including District of Columbia but ex
cluding New York.
Source: Board of Governors; U.S. Department of Commerce.

2 Simple correlation analyses associating deposits and income,
deposits and population among the 50 states in 1961 and deposits
and population for 188 metropolitan areas in I960 yielded ex
tremely high coefficients of determination. For states, the deposit
variance explained by income or population was over 93 per cent.
For metropolitan areas, the deposit variance explained by popu
lation was close to 75 per cent.

As already mentioned, banks deal in many

demand

deposits.

Within

the

limits

set

markets. The extent of their involvement means

these direct regulations, monetary policy has

that we must study the numbers, sizes, and loca

an influence on the level and changes of rates

tions of financial institutions— not only commer

cial banks— in the sale of a variety of products

authority

all

financial

to different classes of customers. In reaching

amount

decisions, we cannot simply determine the inten

reserves.

has
of

markets;
an

banking

for

influence

the
over

resources

monetary
the

total

through bank

sity of competition in one product market; for

We would normally expect a noncompetitive

we are concerned with a summary judgment on

bank to earn larger profits than a competitive

the intensity of competition faced by the institu

institution. But all banks are limited by regu

tion as a whole.

lation over the prices they can charge for

Regulation tends to conceal the potential as

credit and the prices they can pay for deposits.

well as limit the actual forces of competition in

For this reason alone, profits of banks facing

banking. All states carefully regulate new entry

different competitive situations might be diffi

into banking. Branching is also regulated and all

cult to distinguish.

states prohibit banks from having branches that

There is still another reason why profit differ

straddle state lines. A market might potentially

ences might not reflect competitive differences.

be highly competitive and yet show little evi

While banks, like other enterprises, seek profit,

dence of this rivalry because of supervisory

they have higher liquidity requirements than

policies established to meet other objectives.

most; they have obligations to their depositors
as well as to their stockholders. It is conceivable

There are other ways, besides looking at the
structure of banking markets, however, to ob
serve the forces of competition. We expect effec

that banks not really challenged by intense ri

tive competition to result, for the most part, in

liquidity requirements. These are the ones who

certain kinds of performance; we expect a lack

can “ afford to play it safe.” In other words, the

valry will have exaggerated notions of their

of competition to result in different kinds of

noncompetitive

performance. For example, we would normally

easier” rather than “ live better.” He may ac

expect competitive sellers to charge lower prices

tually have lower profits than the competitive

and have smaller profits than noncompetitive

banker.

banker may

choose

to “ rest

sellers. But in banking markets, no matter how

That policies and practices tend to conceal

intense the rivalry, the extent of the differences

evidence of rivalry is clear; but the evidence

are restricted in various ways. Regulation once

should only be hidden, not absent. It should be

again, and the character of the business are great

found in the kinds of things we want banking

homogenizing forces that make it difficult to dis

competition to do for us.

tinguish between competitive and noncompeti
tive results.

As in Adam Smith’s day— recalling the quota
tion at the beginning of the article— rivalry can

In most states, usury laws set maximum rates

protect the customer from the abuses of monop

banks can charge for loans. Federal regulations

oly. The protection offered by competition in

prescribe maximum interest rates on time de

banking today is not so much from a high

posits and prohibit the payment of interest on

monopoly price as it is from price discrimina

tion and, perhaps, an unjustified exclusion from

American preference for competition and special

credit altogether. If a bank customer has access

problems that called for controls. When banking

to many alternative sources of credit— and this

instability became especially serious, competi

is what we mean when we say a bank is faced

tion as an objective was more or less relegated

with competition— his bank would have to charge

to the background. The establishment of a sound

him no higher price for credit than justified by

banking system over the last quarter of a century

costs, or run the danger of losing his patronage

and a decline in the number of independent

to a rival bank. If all customers have access to

banks has revived a concern for rivalry in bank

alternative sources of credit, all must be dealt

ing markets.

with equally and in accordance to the costs of
doing business with them. When, on the other

Along with the fear that mergers and other
developments will reduce competition, there is

hand, some have alternative sources and others

a growing feeling that competition should be

do not, price differences and perhaps unjustified

given a greater role to play in banking. Many

exclusion from credit become possible and, at

people believe that banking can now safely be

discrimination— price

unleashed from the type of regulation that tends

differences not based on differences in cost— to

to prevent intense rivalry-—that protect banks

the point of exclusion from credit is not only

from one another... Interest rate maximums on

unfair; it could seriously injure competition by

time deposits and entry restrictions grew out of

hampering competitive businessmen whose de

problems that may no longer exist.

times,

profitable.

Price

ficiency is not incompetence or a lack of foresight,

Numerous problems arise in judging the in

but only a lack of alternative sources of credit.

tensity of competition faced by banks. Banks,

The extent of price discrimination is, perhaps,

locally oriented institutions primarily, operate in

one measure of the degree of monopoly power

many markets. Some of the markets are geo

in banking markets.

graphically growing. And in some, banks com

Competition may be measured in another way.

pete with other financial institutions. Judgments,

It is conceivable that competitive banks are more

based on a careful analysis of the facts, have to

responsive to changes in monetary policy than

be made to set off markets— to draw the appro

noncompetitive

priate lines between effective and ineffective rivals.

banks.

For

monetary

policy

works through the supply of reserves a bank has

The uniqueness of banking also complicates

at its disposal. Competitive banks would tend to

the problem. For it tends to cloak the forces of

adjust their prices— interest rates— quickly, per

competition. The threat of rivalry from new

haps altomatically, to changes in supply condi

banks has been curtailed by regulations designed

tions as well as to changes in demand; noncom

to insure the soundness of banks. Regulation and

petitive banks might well react more slowly

the need to maintain liquidity may tend to make

— particularly when the supply of funds increases

at least some kinds of bank performance quite

and free market rates tend to fall.

similar, regardless of the degree of competition
in the markets.

CONCLUSIONS

If we do take the road toward more enter

The existing mixture of free enterprise and pub

prise and less regulation in banking, it be

lic regulation in banking evolved out of an

comes increasingly important to devise means

to preserve rivalry and to prevent the develop

blithely assume that their wholesale elimina

ment of excessive market power. Not every

tion is consistent with the preservation of the

thing that injures competitors, or eliminates

competitive system. We must recognize com

them from business, injures competition. On

petition in banking for what it is; not a self-

the other hand, competitors are a necessary

perpetuating system, but one that must be con

ingredient

scientiously supported and encouraged.

for

competition

and

cannot

D IR E C T O R S A N D O F F IC E R S

A t the election held in the fall of 1962, two new directors were
elected by member banks to serve for three-year terms beginning
January

I, 1963. Benjamin F. Sawin, Vice Chairman of the Board

and Chairman of the Executive Committee of Provident Tradesmens
Bank and Trust Company, Philadelphia, Pennsylvania, was elected
as a Class A director by banks in Group I. He succeeds Frederic
A. Potts. Banks in Group 2 elected Ralph K. Gottshall, Chairman
of the Board and President of Atlas Chemical Industries, Incorpo
rated, Wilmington, Delaware, as a Class B director to succeed R.
Russell Pippin.
The Board of Governors of the Federal Reserve System reap
pointed David C. Bevan as a Class C director for a three-year term.
W alter E. Hoadley was redesignated as Chairman of the Board of
Directors and Federal Reserve Agent, and Mr. Bevan as Deputy
Chairman of the Board of Directors for the year 1963.
The Board of Directors reappointed Howard C. Petersen, Presi
dent,

Fidelity-Philadelphia

Trust Company,

Philadelphia,

Pennsyl

vania, to serve as a member of the Federal Advisory Council to
represent the Third Federal Reserve District for the year 1963.
W allace M. Catanach, Vice President in charge of Accounting,
Budget, and Emergency Planning functions, retired on September
30, 1962 and Harold M. Griest, an Examining Officer, retired on
December 31, 1962.
Effective October I, 1962, Hugh Barrie, Assistant Vice President,
became Vice President. He is the Bank's Planning Officer and is in
charge of Data Processing. John R. Bunting, Jr., formerly Business
Economist, was made Vice President in charge of the Bank and
Public Relations and the Credit-Discount functions. Harry W . Roeder,
Assistant Vice President, became Vice President with responsibility
for Accounting and Cash functions. He also is senior officer in
charge of Emergency Planning and serves as the Bank's Budget
Officer. Also effective October I, 1962, Russell P. Sudders, Assist
ant Cashier, became Assistant Vice President assigned principally
to Accounting operations, and Lawrence C. Murdoch, Jr., Economist,
became an officer in the Bank and Public Relations function, with
the title of Business Economist.

D IR E C T O R S A S O F J A N U A R Y 1, 1963

Term expires

Group

December 31
CLASS A

BEN JAM IN F. SA W IN

1965

Vice Chairman of Board and Chairman of Executive Committee,
Provident Tradesmens Bank and Trust Company,
Philadelphia, Pennsylvania

J. MILTON FEATHERER

1963

Executive Vice President and Trust Officer,
The Penn’s Grove National Bank and Trust
Company, Penns Grove, New Jersey
3

EUGENE T. GRAMLEY

1964

President, Milton Bank and Safe Deposit
Company, Milton, Pennsylvania
CLASS B

FRANK R. PALMER

1964

Chairman, The Carpenter Steel Company,
Reading, Pennsylvania

RALPH K. GOTTSHALL
Chairman of Board and President,

1965

Atlas Chemical Industries, Inc.,
Wilmington, Delaware
3

LEONARD P. POOL

1963

President, Air Products and Chemicals, Inc.,
Allentown, Pennsylvania
CLASS C
WALTER E. HOADLEY, Chairman

1963

Vice President and Treasurer,
Armstrong Cork Company,
Lancaster, Pennsylvania
DAVID C. BEVAN, Deputy Chairman

1965

Vice President, Finance, Pennsylvania Railroad Company,
Philadelphia, Pennsylvania
W ILLIS J. W IN N
Dean, Wharton School of Finance and Commerce,

1964

Philadelphia, Pennsylvania

OFFICERS AS OF JANUARY 1 1963

KARL R. BOPP
President

ROBERT N. HILKERT
First Vice President

ZELL G. FENNER
Assistant Vice President

HUGH BARRIE
Vice President

RALPH E. HAAS
Assistant Vice President

JO H N R. BUNTING, JR.
Vice President

G EO RGE J. LAVIN
Assistant Vice President
and Assistant Secretary

JO SEPH R. CAMPBELL
Vice President
NORMAN G. DASH
Vice President
DAVID P. EASTBURN
Vice President

HENRY J. NELSON
Assistant Vice President
RUSSELL P. SUDDERS
Assistant Vice President
JO SEPH M. CASE
Chief Examining Officer

MURDOCH K. G O O D W IN
Vice President, General Counsel
and Assistant Secretary

JAC K H. JAM ES
Examining Officer

HARRY W . ROEDER
Vice President

LEONARD MARKFORD
Examining Officer

JAM ES V. VERGARI
Vice President and Cashier

G. W ILLIAM METZ
Examining Officer

RICHARD G. W ILG U S
Vice President and Secretary

JA C K P. BESSE
Assistant Cashier

EVAN B. ALDERFER
Economic Adviser

W ILLIAM A. JAM ES
Personnel Officer

CLAY J. ANDERSON
Economic Adviser

W ARREN R. MOLL
Assistant Cashier

LAWRENCE C. MURDOCH, JR.
Business Economist

FRED A. MURRAY
Director of Plant

EDWARD A. AFF
Assistant Vice President

HERMAN B. HAFFNER
General Auditor

S T A T E M E N T O F C O N D IT IO N
FEDERAL RESERVE BANK OF PHILADELPHIA
End of year
(000's omitted in dollar figures)

1962

1961

ASSETS
Gold certificate reserves:
Gold certificate account................................................
Redemption fund— Federal Reserve notes......................

$ 917,611
75,965

$ 906,959
71,517

Total gold certificate reserves....................................

$ 993,576

$ 978,476

Federal Reserve notes of other Federal Reserve Banks........
Other cash .......................................................................
Loans and securities:
Discounts and advances................................................
United States Government securities..............................

52,668
16,465

43,635
12,852

663
1,679,215

2,185
1,658,963

Total loans and securities..........................................

$1,679,878

$1,661,148

Uncollected cash items .....................................................
Bank premises....................................................................
All other assets..................................................................

475,946
3,282
19,837

439,443
3,521
13,590

Total assets ..............................................................

$3,241,652

$3,152,665

$1,863,328

$1,890,074

824,688
44,812
15,080
5,257

829,237
10,696
15,370
3,211

LIABILITIES
Federal Reserve notes........................................................
Deposits:
Member bank reserve accounts......................................
United States Government..............................................
Foreign..........................................................................
Other deposits .............................................................
Total deposits............................................................

$ 889,837

$ 858,514

Deferred availability cash item s........................................
All other liabilities ...........................................................

404,360
3,473

323,808
3,347

Total liabilities ..........................................................

$3,160,998

$3,075,743

CAPITAL ACCOUNTS
Capital paid i n ..............................................................
Surplus ..........................................................................

26,885
53,769

25,641
51,281

Total liabilities and capital accounts..........................

$3,241,652

$3,152,665

Ratio of gold certificate reserves to deposit and Federal
Reserve note liabilities combined..................................

36.1%

35.6%

EARNINGS AND EXPENSES
FEDERAL RESERVE BANK OF PHILADELPHIA
(000’s omitted)

1962

1961

Earnings from:
United States Government securities..............................

Total current earnings................................................

58,880

377

Other sources................................................................

53,954
180

59,257

54,134

8,584

434

8,119
624

383

364

Net expenses:
Operating expenses* ....................................................
Cost of Federal Reserve currency..................................
Assessment for expenses of Board of Governors............
Total net expenses ....................................................

9,401

9,107

Current net earnings..........................................................

49,856

45,027

111

200

Additions to current net earnings:
Profit on sales of U.S. Government securities (n et)..........
Transferred from reserves for contingencies (n e t)..........

—

All o th e r........................................................................

—
1

144

Miscellaneous non-operating expenses ..........................

Total deductions........................................................

Net additions ....................................................................

200

Net earnings before payments to U.S. Treasury..................

49,916

45,227

Dividends p a id ..................................................................

1,565

1,472

Paid to U.S. Treasury (interest on Federal Reserve notes) . . . .

45,863

40,136

Transferred to or deducted from (—) Surplus....................

2,488

3,618

Total additions ..........................................................

201

Deductions from current net earnings:

* After deducting reimbursable or recoverable expenses.

V O L U M E O F O P E R A T IO N S
FEDERAL RESERVE BANK OF PHILADELPHIA
1962

1961

1960

196,700
27,300
14,100
734

181,100
26,300
16,200
732

176,700
25,000
17,200
707

682
163
264,300
444,400
1
566
310

677
149
260,300
476,200
1
544
317

698
145
295,000
451,200
2
529
326

439

406

419

7,699
6,856
1,221

8,650
6,756
1,119

7,872
6,657
1,043

$ 66,200
6,165
254
164

$64,600
5,866
274
166

$64,500
5,131
283
150

39,031
108,662
1,844
52
485
2,406
872

36,395
90,676
1,783
55
564
2,240
851

34,707
87,251
2,072
54
2,712
2,182
861

12,807

10,998

10,557

396
468
158

405
377
156

386
405
142

Number of pieces (000's omitted)
Collections:
Ordinary checks*............................................
Government checks (paper and c a r d )..............
Postal money orders (c a rd )..............................
Non-cash items................................................
Clearing operations in connection with direct sendings and wire and group clearing plans** . . . .
Transfers of funds ..............................................
Currency counted................................................
Coins counted ....................................................
Discounts and advances to member banks............
Depositary receipts for withheld taxes..................
Postal receipts (remittances) ................................
Fiscal agency activities:
Marketable securities delivered or redeemed . . .
Savings bond transactions—
(Federal Reserve Bank and agents)
Issues (including re-issues) ..........................
Redemptions ..............................................
Coupons redeemed (Government and agencies) . . .
Dollar amounts (000,000’s omitted)
Collections:
Ordinary checks*............................................
Government checks (paper and c a r d )..............
Postal money orders (c a rd )..............................
Non-cash items................................................
Clearing operations in connection with direct sendings and wire and group clearing p lan s**........
Transfers of funds ..............................................
Currency counted................................................
Coins counted ....................................................
Discounts and advances to member banks............
Depositary receipts for withheld ta x e s ................
Postal receipts (remittances) ................................
Fiscal agency activities:
Marketable securities delivered or redeemed . . .
Savings bond transactions—
(Federal Reserve Bank and agents)
Issues (including re-issues) ..........................
Redemptions ..............................................
Coupons redeemed (Government and agencies) . . .
* Checks handled in sealed packages counted as units.
* * Debit and credit items.

Yet discipline cannot b6 thrown overboard.

M O N E TA R Y D IS C IP LIN E
( Continued from Page 2)

Our balance of payments difficulties have brought

applied monetary discipline under the inter

this home to us. So long as we live in a com

national gold standard. The logic and elegance

munity of nations and enjoy the kind of free

of this system of rules had— and still have—

economic institutions that we do, we cannot

immense appeal. Symptom, prescription, cure—

pursue domestic expansion

regardless of

its

one flowed inevitably from the other. Loss of

effects on our external relations. So we have

gold reserves called for monetary restriction;
this in turn raised interest rates and reduced
costs and prices; hence, balance would be re

been groping for a solution somewhere between

dressed through imports of capital and net

the Economic Journal, Lord Keynes made a sage

exports of goods and services.

observation that is helpful in our pursuit of this
solution.* He wrote:

According to the dictionary, another definition

rigorous rules and complete freedom of action.
In his last article, published posthumously in

of discipline is “ punishment inflicted by way of

. . .

correction. . . .” Under the international gold

time, to remind contemporary economists that

standard, monetary discipline came to have this

the classical teaching embodied some perma

further connotation. If, for example, one nation

nent truths of great significance, which we

I find myself moved, not for the first

behaved prodigally, the rules forced it to re

are liable today to overlook because we asso

trench. And, in fact, the rules helped to prevent

ciate them with other doctrines which we can

prodigality. From experience, nations learned

not now accept without much qualification.

that if they misbehaved they would be punished.

There are in these matters deep undercurrents

In this sense, monetary discipline picked up

at work, natural forces, one can call them, or

moral overtones— walk the straight and narrow

even the invisible hand, which are operating

or else. . . .

towards equilibrium. If it were not so, we

But the discipline of this system proved to
be inequitable. One nation was likely to be

could not have got on even so well as we have
for many decades past. . . .

was

But in the long run these expedients will

forced to make adjustments in its own domes

work better and we shall need them less, if the

tic economy in order to help correct the im

classical medicine is also at work. And if we

punished

for

another’s

wrongdoing.

balance caused by others. It might have to

reject the medicine from our systems alto

restrict not because it had inflated its econ

gether, we may just drift on from expedient

omy but because others were experiencing de

to expedient and never get really fit again.

flation. And the discipline was harsh; it some

One can find many evidences of these strong

times meant recession and unemployment. As

“ natural forces” at work. Just recently Nikita

considerations

Khrushchev was quoted as saying:

social

welfare

grew

important, nations were unwilling to tolerate

We should remember Lenin’s injunction to

these remedies. They became reluctant to en

be able, if necessary, to learn from the capi

trust themselves to the workings of mechani

talists— to imitate whatever they have that is

cal rules. They insisted on being masters of
their own destiny.

good and profitable.
* June, 1946, pp. 185-186.

No matter how thorough the controls, a planned

inflated or over-expanded. But our situation is

economy which goes against economic forces

different. The balance of payments problem has

faces an uphill battle. Evidences of natural forces

more complex causes. And resources in our

are clearly apparent in our balance of payments.

economy are not over-expanded but underutil

The lesson from Keynes’ preachment is not
that we must resign ourselves to these natural

ized.

forces; not that we can exercise no influence

of choices, therefore, not just in money. We

over the course of events. The discipline which

must, for example, decide which items in the

we seek must recognize the strength of funda

balance of payments are most important to us

We need discipline in a whole wide range

mental economic forces, but within this limit it

—for political and military as well as economic

must also allow for the intelligent exercise of

reasons. We cannot have unlimited foreign and

discretion.

military aid and investment abroad and still

The solution, it turns out, is nothing new. In

expect a trade surplus to make up the difference.

fact, it is as old as economics itself. The essence

In short, the solution is not just monetary

of economics, after all, is the satisfaction of

discipline but economic discipline. It is not the

unlimited desires by means of limited resources;

indiscriminate application of rules; but, recog

and in the process we must make choices. Be

nizing the strength of fundamental economic

cause we cannot have everything at once, we

forces, it is the application of intelligence to the

must exercise discipline in making these choices.

making of choices. This type of discipline may

This is the kind of discipline needed in our

not enable us to achieve complete success in the

present situation.
Monetary discipline, in the old sense, implied

twin objectives of domestic growth and balance
of payments equilibrium, but it offers more

a choice— less domestic income and employ

promise than automatically putting the brakes

ment. This choice was called for when a nation

on money and credit.

Full text of Business Review (Federal Reserve Bank of Philadelphia) : January 1963

FRASER