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1914

Will business soon run into bottlenecks that
will force prices up? More and more observers,
fearful of inflation, are asking this question as
they see output rising month after month.
The broad question of whether the country
is in fact heading for inflation is impossible to
answer with any certainty at this point, of
course, and we don’t propose to attempt an
answer here. But it may be possible to draw
some inferences about one aspect of the problem
— the relationship between capacity and prices.
Experience during the postwar period indi­
cates that as manufacturing approaches full use
of capacity, prices rise. Common sense would
suggest such a generalization and the statistics,
even after making allowances for the difficulties
of measuring capacity, seem to bear it out. What
has tended to happen in the past is that prices
C a p a c ity

a n d

In fla tio n

have risen fairly gradually as output has moved
from, say, 70 to 80 to 85 per cent of capacity.
When it has reached 90 per cent and beyond,
prices have risen much more rapidly. The first
prices to move, and the ones that have moved
most sharply, are those for more sentitive com­
modities and raw materials; others have fol­
lowed, spreading the rise throughout the price
structure.
This

happened

most

strikingly

after

the

1949 recession. Between the last quarter of
1949 and the second quarter of 1950 (at the
time of the Korean outbreak), output increased
from 76 to 86 per cent of capacity; wholesale
industrial prices rose 2 per cent. But in the next
three quarters output advanced to 93 per cent
of capacity and prices rose by 15 per cent. Es­
sentially the same thing happened to a lesser
( Continued on Page 14)

BUSINESS REVIEW is produced in the Department of Research. David P. Eastburn was primarily responsible for
the editorial "Capacity and Inflation,” Lawrence C. Murdoch, Jr. for “What is Brewing?” and J. Allan Irvine and Evan B. Alderfer
for “The Good Earth Athirst.” 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,
DigitizedPhiladelphia, Pennsylvania 19101.
for FRASER


X
i

WHAT IS

^ BREWING?

Nobody knows when beer was “ invented.” Some

were in operation and their famous product was

historians say man made a beverage of fer­

shipped to many parts of the hemisphere. By

mented grain and water before he discovered
fire. We know for sure that beer existed 6,000

the time of the Revolution, beer was a universal

years ago and that it was commonplace in

less other cultures for at least 60 centuries.

ancient Egyptian, Greek and Roman civiliza­
tions.

drink in America, just as it had been in count­
In the 1840s, a wave of immigrants from Ger­
many introduced lager beer to America. It was

Beer made the dark ages a little lighter and

an event of profound importance to the modern

refreshed many a knight in armor after a hot

brewing industry. Lager was lighter in body,

summer day’s joust. The Magna Carta mentioned

color and alcoholic content than other beers of

beer

King

the day. Americans took to its sparkle and taste

Henry VIII was reputed to have consumed a

almost immediately. New breweries were estab­

gallon of ale for breakfast every day. Christo­

lished to produce lager and it made more than

pher Columbus used part of the Queen’s jewelry

one city famous.

and so

did

Charlemagne— often.

to buy beer for his voyages to the New World.

Brewing prospered in America throughout the

Over a century later, the Mayflower chose to land

last half of the nineteenth century. Per capita

at Plymouth Rock because, as a passenger said,

consumption of beer and ale rose to an all-time

“ Our victuals were much spente— especially our

high of over 21 gallons in 1911. After prohibi­

beere.”

tion, the beer wagon began to roll with over 700

During the eighteenth century, Philadelphia

newly opened breweries aboard. When the sol­

became “ pre-eminent” in the Colonial brewing

diers and sailors returned from World War II

industry. A number of commercial breweries

they apparently went on a well-deserved spree.




3

business review

THE DIFFERENCE IN DRINKING

of all consumer goods and services increased

Consumption per capita (20 years and over).

more than 90 per cent.

IN DEX 1 9 5 0 = 1 0 0

The state of the brewing industry and its suc­
cess in solving its problems rates more than
intramural notice,

whether one

approves

of

alcoholic beverages or not. With total yearly
sales approaching the $6 billion mark, it ranks
as one of America’s 20 largest manufacturing
industries. Raising grain and hops, turning them
into a beverage and getting it to the customer
creates jobs for more than a million people.
Brewing is of particular importance in the
Third

Federal

Reserve

District

states.

New

Jersey and Pennsylvania together account for 18
per cent of the industry’s employees and for 17 of
Sales of beer and other alcoholic beverages
soared in 1946 and 1947.

its value added by manufacture. For all manufac­
turing industries, the two-state figures are 14

Then brewing encountered serious difficulties.

per cent and 13 per cent. Pennsylvania ranks

As one analyst put it, “ the industry was running

second in the nation in the number of breweries

hard just to stand still.” A look at the record

and sixth in output. New Jersey holds down the

confirms that, until recently, brewing in America

tenth spot in number of breweries and is fourth

had been standing still while competitive indus­

in output.

tries made important strides.

Local breweries face many of the same prob­
lems as breweries across the nation do— in fact,

A lack o f sp a rk le

the difficulties seem to be aggravated here. The

Per capita consumption of beer and ale in the

Pennsylvania production index has slipped below

United States has trended down since 1950. Even

the national in the last decade. Solutions to

when people below beer drinking age are ex­
cluded from the calculation, per capita con­

H O W LOCAL BREWING COMPARES

sumption is just about stable, except for a

Pennsylvania and New Jersey as percent of
United States— 1958.

jump in the last two years. In comparison, per
adult consumption of wines increased 8 per cent
and distilled spirits 33 per cent.
Although the number of beer drinkers has
grown somewhat since 1950, the percentage of
the adult population that drinks beer has re­
mained virtually constant. So has the percentage
of adult women that drink beer.
Dollar sales of beer and ale increased about
40 per cent over the last 14 years, while sales

4




0
PER CENT

5

10

15

20

business review

brewing’s problems, therefore, might have a par­

differentiate their products in other ways. Pack­

ticular impact on the Third District economy.

aging was one method. First came cans, next was

In this article, we take a look at American

one-way bottles, then six-packs and 12-packs,

brewing and probe some of its problems, poli­

then 7 - ounce and 16-ounce bottles. Recently,

cies and potentials. The main conclusion: brew­

brewers have adopted flip-top cans and flop-top

ers have begun facing their problems with posi­

bottles, and now you can even get a small

tive action. But that’s giving away our story.

aluminum keg that fits into your refrigerator.

Come wander with us through this major Amer­

(Unlike beer in cans and bottles, keg beer is not

ican industry. W e’ll start with the product itself.

pasteurized but kept under refrigeration and,
therefore, is supposed to taste better.)

W h o can tell the difference
Connoisseurs will be horrified at this statement,

Enter the a d m an

but it is likely that a sizable majority of the

Madison Avenue has a record of success in help­

American consuming public has difficulty dis­

ing to give individuality to hard-to-identify

tinguishing one brand of the pervasive lager beer

products such as aspirin, gasoline, flour, corn

from another. Many manufacturers, in an effort

flakes and others.

to satisfy what they regard as a homogenized
public taste, turn out similar “ light, smooth,

THE M AKING OF BRAND NAMES

dry” products. Newsweek magazine emphasizes

Advertising as a percent of sales.

this point when it reports the following state­

PER CENT

ments from typical consumers. “ After two swal­
lows they all taste the same.” “ Beer is beer to
me. So I buy whatever’s cheap.” Our national
practice of drinking beer colder and faster than
Europeans do, further reduces whatever ability
we might have to discriminate among brews.
In other words, American brewers seem to sell
what the economist might call a “ poorly differen­
tiated product.” When this happens in an indus­
try,

competition

tends

to

be keen.

Indeed,

Printer s Ink magazine describes competition in
brewing as “ savage” and “ cannibalistic.”
A common way firms meet keen competition is
to try to distinguish their product— attempt to
make it as different as possible from all others.
But brewers encountered the century-old belief

As you might expect, brewers are heavy ad­

that Americans will drink nothing but “ light,

vertisers. Their ad budgets run to about 7 per

smooth, dry” lager beer and, during much of the

cent of sales, which is higher than the figures

postwar period, they hesitated to change the

for soft drinks, whiskey, and wines. The average

tried-and-true recipe. Instead, they sought to

for all manufacturing industries is only 1.4 per




5

business review

cent. Furthermore, brewers’ advertising outlays

responsible for a lot of sameness. Moreover,

have increased faster than those of* their com­

some critics are convinced that moderation is

petitors during the postwar period.

not an effective sales appeal. It is true that about

There is more brand identity and loyalty than

30 per cent of those who do not drink beer dis­

there used to be, of course, but advertising has

approve of alcohol but it is doubtful if advertis­

not been so effective with beer as with many

ing can convert many of them to customers.

other products during the last decade. There are

For such reasons, the industry is beginning to

several reasons, according to those experienced

wonder if it has received full value from the bil­

in the field.

lions of dollars spent for advertising since 1946.

Television Magazine claims the problem with
beer advertising is “ sameness.”

Perhaps brewers didn’t know so much about their

It continues,

customers as they might. But this, like so much

“ Put a different brand name on one brewer’s

else in brewing’s marketing strategy, has changed

commercial and few viewers would know the dif­

in the last few years.

ference.” Printer’s Ink magazine says, “ A num­
The guzzler

ber of tried-and-true themes are used over and
over again.” Pierre Martineau of the Chicago

A good bit of research has been done in recent

Tribune feels that beer advertising has “ . . .

years, and the American beer drinker has come

locked itself into a rigid, limiting stereotype.

into better focus. Take a look at this composite

. . .” In other words, some believe that advertis­

picture based on a study made for the American

ing has not enjoyed great success in differen­

Can Company and on other recent reports.

tiating beer because too many of the ads them­
selves are undifferentiated.

The typical beer drinker is young, male, mar­
ried and lives in an urban area. He is neither
poor nor rich with a yearly income of between

The fun ob se ssio n

$5,000 and $10,000.

This situation came about quite understandably.

He drinks almost twice as much beer at home

Beer has long suffered from an inferiority com­

as in bars or restaurants. He drinks three times

plex. Brewers believed, with justification, that

as much as his wife does— if she happens to be

the public has an image of beer as a low-status,

the one woman in three who drinks it at all. She

workingman’s beverage, mostly for fat, sweaty

buys 40 per cent of all beer used in their home,

men to drink in the summertime.

however.

Brewer after brewer set out to show that beer

The typical beer drinker consumes a rather

really was a high-class beverage that belonged

large quantity each week. He has it on about

anywhere. Thus a parade of young patrician

five different occasions and he “ guzzles” two-

couples began marching through the mass media

and one-half bottles, or cans, each time. Heavy

having carefree fun and delicately drinking beer.

beer drinkers, defined as the 47 per cent of all

They were shown, glass in hand, lolling before

drinkers who take more than two cans every

fireplaces in ski lodges, relaxing on the decks of

day,

cup-defending sloops and frolicking about on

consumed.

sandy strands.
The “ beverage of moderation” theme also was

6




account

for

78 per

cent

of

all beer

Our subject has about a quarter of his daily
intake with meals and a quarter before the

business review

early evening hours. He drinks only slightly

At least one American company is backing

Hot

ale with a major advertising campaign this year.

weather makes a big difference for he downs al­

Others are producing the old English favorites,

most 50 per cent more in the summer than in the

porter and stout, which are dark in color, some­

winter.

what bitter, and less carbonated than American

more

on

weekends than

on

weekdays.

brews. Bock, a zesty dark beer, is likely to get
W h a t M r. Typical m igh t tell us

a zesty promotion when its traditional selling

Y ou’ll never meet our typical beer drinker and

season arrives next Spring.

his wife for they are creatures of averages and

Malt liquor is the “ really big” new item. It is

estimates. Nevertheless, the industry is begin­

flatter and sweeter than lager and it has a higher

ning to listen to the story they tell.

alcoholic content. It tastes a little like a mixture

Mr. Typical seems to be saying that, to him,

of beer and ginger ale and not all beer drinkers

beer is not a status drink to be poured daintily

are going to like it. Nevertheless, it’s distinc­

down the side of a conical glass in a ski lodge,

tive, and more than one brewer is introducing

or on a 50-foot sloop. Beer is simply a cold,

it with an expensive promotional campaign.

bubbly beverage with a somewhat sharp tang.

Still in the pre-drawing stage are improved

Beer is good for slaking thirst, good for wash­

low-calorie beer, which failed in an earlier trial,

ing down food and good to have alongside while

and non-alcoholic beer. Brewers have intensified

watching television. Beer itself may be a bev­

their research efforts and more new products

erage of moderation but the average drinker’s

and modifications of old ones can be expected

six quarts a week is not exactly moderate.
Recently, brewing has begun to react to such

before long.

information with a noticeable decrease in the
“ young patricians” type of advertising, which
apparently

had

difficulty

in convincing

Mr.

Typical that beer goes better with canapes than

WHERE THIRST HAS G ONE
Per person consumption — 1963.
G A LL O N S

pretzels. The ads now are pushing a positive,
beer is theme: beer is refreshing, beer is cooling,
beer is good for quenching thirst, etc.
V a r ie t y y o u can taste
After several decades of attempting to differen­
tiate their products with fancy packages and
heavy advertising, brewers now have started to
produce and promote a wider range of products.
A number of firms have made arrangements to im­
port foreign beers which have always offered a
variety of taste and sight sensations. Imports still
account for only 1 per cent of the total Ameri­
can consumption, but the total is climbing fast.




7

business review

The American public now is getting a real
choice of malt beverages. The industry has high

of milk, and roughly the same as an equal
amount of orange juice or cola drink.

hopes that the 20 per cent of the adult popula­

Don’t be surprised to see a campaign to sell

tion which avoids beer because it doesn’t like

beer to women as a not-so-fattening drink. The

the taste will find something appealing in the

use of beer in cooking also may be emphasized.

new range of flavors, colors and carbonations.

The experts look for more beer ads in the
women’s magazines and on daytime television.

The h an d th at rocks the cradle
now crad le s “ on the ro c k s”

A n a m b e r river

Back when this century was young, the man of

Beer is made by grinding barley, malt and other

the house would light his after-dinner cigar and

grains, adding water and cooking the mixture

stroll down to the corner saloon for an evening

in large copper kettles. Hops, an herb, are added

of song, story and “ suds.” His lady would stay

towards the end of the cooking process. A sweet

at home and read Louisa May Alcott or crochet

liquid called wort is drawn off and fermented

an antimacassar. Then came universal suffrage

in tubs for seven to 12 days. A second fermenta­

and the flapper and Mother began to join Father

tion in refrigerated vats lasts between two and

at the neighborhood speakeasy.

six weeks. Finally, the beer is filtered and

Since World War II, women have taken to

packaged.

alcoholic beverages in ever-increasing numbers.

It is a delicate process, for small variations

But they seem to prefer mixed cocktails, cordials

in ingredients, timing and temperature can ruin

and today’s lighter liquors to malt drinks. Only

oceans of unborn beer. For many centuries,

one-third of all women over 21 drink any beer

brewing has been a highly skilled art and secret

and distaff drinkers account for less than one-

formulas have been passed from father to son.

sixth of all beer consumed. These figures have

The industry has been proud of its long tradi­

been virtually unchanged for fifteen years, at

tion and many brewers boast of the fact that

least. You could say the ladies are a great “ un­

they make beer “ the same way our founder,

tapped” market for brewers and a serious cam­

Herr Fliigelhorn, did 150 years ago.”

paign to convert more women to beer can be
expected.
One of the main reasons women drink so little

With all due respect for tradition, any manu­
facturing process 150 years old is likely to
cause problems. How

do

you

find

old-time

beer is because they think it is fattening. This

brauermeisters in today’s labor market, for ex­

impression goes back to the stereotype picture

ample? As a result, brewing is abandoning

of the corpulent German braumaster with a

time-honored

hearty smile on his red face and a heavy stein

machinery.

methods

and adopting modern

in his hand. Beer is made of yeast and grain

The first fully automated brewery has just

and, like bread, will add weight if taken in

opened. Old-time tubs and vats have been elim­

sufficient quantities. But beer does not contain

inated and the ingredients flow continuously

an unusually high number of calories. One 12-

through “ a maze of stainless steel pipes, coils

ounce bottle typically carries about 140 calo­

and tanks.” A computer replaces Herr Fliigel­

ries— or less than a martini, or an 8-ounce glass

horn at the controls. This automated brewery is

8




business review

supposed to cost less to build and to operate

turn a nice profit. The only advertising media

than competing installations. Production is said

necessary were words from the lips over which

to be more flexible and quality is easier to

the product flowed.
At the beginning of the twentieth century

control.
Stepped-up research is making other impor­

some 43 breweries were operating in Philadel­

tant breakthroughs. A super-fine filter has been

phia. As in the nation, the number fluctuated

developed to strain out the microscopic yeast

around an all-time high until prohibition. After

enzymes and prevent further fermentation. This

the “ noble experiment” ended, and particularly

eliminates the need for pasteurization, without

after World War II, the number of brewing

which brewers hope bottled and canned beer

firms declined sharply. Today there are only about

will taste as if it came right out of an oaken keg.

150 independent breweries in the nation and

“ Instant,” or concentrated, beer is now pos­

just two in Philadelphia.

sible. A new process takes much of the water out

“ Savage” competition was one reason for this

of beer, reducing its volume by 75 per cent. The

sharp decline in numbers. Many of the less

resulting concentrate can be stored cheaply and

efficient operations drained their vats and closed

in less space, which means that brewers might

forever and others disappeared via the merger

be able to operate automated plants for longer

route. The most important factor was the shift

runs at peak efficiency. Shippers don’t have to

to home consumption. Before prohibition about

lug all that water around and this, if it results in

80 per cent of all beer used was sold from kegs

lower prices, could open up vast new markets

in taprooms and other public places. Now 80

both at home and abroad. When the “ beer syrup”

per cent is sold in cans and bottles, mostly for

nears Mr. Typical’s neighborhood it can be recon­

drinking at home. This change in consumption

stituted by replacing the water and fizz and then

patterns turned beer into what the Wall Street

it is packaged for his wife to pick up at the mar­

Journal calls “ a mass-produced, widely distrib­

ket. This raises the possibility someday of a “ fran-

uted and mass-marketed product.” The small

chised-bottler”

brewer

system, such as exists in soft

drinks. Present regulations would have to be

was left waiting for

the man with

growler in hand, the man who was no more.
Seeking to cash in on the economies of scale,

changed to make it possible, however.
The use of beer concentrate may affect the

many of the leading brewers bought or built

structure of the brewing industry which, as

facilities in major market areas and thereby

you shall see, already has undergone sweeping

achieved

changes.

tribution. Others extended their sales network

something

resembling national dis­

over many states to blanket large geographical
C h ain b re w in g
In

nineteenth

regions. As a result, the larger firms garnered
century

Philadelphia

the

an increasing share of the market. In 1950

brewer’s open wagon, stacked with kegs, and

brewers with total assets of $50 million and

pulled by snorting Percherons, was a common

over accounted for about 20 per cent of the

sight on Market and Chestnut Streets. The typ­

industry’s sales; ten years later their share was

ical brewery served several dozen neighboring

44 per cent.

saloons and found this business sufficient to




Although brewing is much more concentrated

9

business review

THE BIG G RO W BIGGER

the largest firms already have chains of brew­

Percent of industry sales accounted for by brewers
with assets o f:

eries across the nation, the concentrate “ may be
too late” to mean a major saving in shipping

PER CENT

costs. Nevertheless, it could enable these brew­
eries to export a larger part of their production.

$ 5 0 M ILLION
A N D OVER

For the local or regional firm, “ instant” beer
$5 0 M ILLION
A N D OVER

75

could be a stepping-stone to the national market
where only the giants now tread. These medium­
sized firms, with access to new markets, might

$1 0 M ILLION
TO $5 0 M ILLION

have to expand to compete effectively in produc­

50

tive capacity, efficient distribution, packaging in­
$1 0 MILLION
TO $5 0 MILLION

novations and advertising. The very small brew­
ery, already in serious trouble, may find the going
even rougher.

25
UNDER $ 1 0 M ILLION

Conclusion
UNDER $1 0 M ILLION

0

1950

I960

As you can see, brewing is in a state of sweeping
and pervasive change. No longer content with

than it used to be it is not considered such when

time-honored concepts of production, product

compared to other industries. In seven out of ten

lines, packaging, distribution and marketing, it

United States industries, the four largest firms

is adopting new ideas in all these fields.

account for a greater percentage of output than

For years the industry tended to explain away

they do in brewing. This helps explain the com­

its problems by citing the low birth rates of

petition that exists in the industry and why this

the 1930s which meant fewer young adults to

competition is strongly oriented to prices as well

drink beer in the 1950s. “ Ah, but just wait

as to packaging and advertising. A wave of price

until the ‘war babies’ come of age,” spokesmen

cutting has recently swept brewing and the index

used to proclaim. “ They’ll mean prosperity the

for beer has lagged below the over-all cost of

likes of which we’ve never seen before.” In the

living index for almost a decade.

last few years, however, brewing has started

It’s just speculation, but the new beer concen­

taking more positive steps to widen its market

trate, if it proves feasible and popular, could

by convincing a larger percentage of the adult

affect the concentration of the industry. Since

population to drink beer— moderately, of course.

10




THE GOOD EARTH
ATHIRST

The Philadelphia Federal Reserve District is a

The damage varied from one locality to an­

highly industrialized area, but 40 per cent of its

other, depending upon local patterns of precipi­

37,000 square miles is in farms— dairy farms,

tation, types of local agriculture, and prevailing

feeder-cattle

ways of coping with the moisture deficiency.

farms,

poultry

farms,

vegetable

farms, fruit farms and, most of all, diversified

Unfortunately,

1964 is the third consecutive

farms that produce a variety of agricultural

year of inadequate rainfall.

products.
Among the region’s 80,000 farms are some of
the best on earth;

Parched crops

but no farm, howsoever

Corn and hay crops, so important to the region,

good, can prosper without water. This year the

suffered considerably. Meadows were lush and

good earth was athirst with a serious shortage

green in the spring. The first cutting of grass

of rainfall and few farms escaped the climatic

was good; the second cutting was also good in

adversity.
Fields were parched in the Atlantic Coastal

some areas; just so-so, in others. But the third
cutting, in most places, was so poor that it

Plain of South Jersey and Delaware, in the rich

hardly justified the effort of harvesting. Early

rolling countryside of the Piedmont, in the

season adequacy of moisture also helped the

Great Valley that arches northeastward from

winter wheat crop, but not all spring wheat es­

Bedford to Scranton, in the Allegheny Plateau,

caped the drought.

and in the Northeast Dairy Region. The long-

Corn likewise got off to a good start but de­

delayed rain in the closing days of September

teriorated

came too late. The drought throughout most of

lengthened. On cruising through the countryside

the growing season left its mark on crop yields,

late in the summer, we observed numerous

on quality of the harvest, on the flow of farm

stands of stunted corn, probably late planting,

income, and on agricultural balance sheets.

whose yellowed and shrunken leaves foretold a




progressively

as the dry summer

11

business review

poor harvest. In all too many fields, stalks were

tables; nevertheless, livestock farmers suffered

short and corn for grain was below average.

real hardships. Third District agriculture is a

Numerous corn cribs and silos are not being

feed-deficit area; its feeder cattle, dairy cows,

filled to capacity this year.

and poultry consume far more feed than the

Lack of moisture had similarly adverse effects

region

grows— which

requires

feed

imports

upon other field crops such as rye, oats, and

from the West. When drought strikes here,

soybeans.

In some areas, soybeans dropped

costs rise because our farmers must buy more

their blooms, resulting in fewer pods. Parched

from the Western granaries. This year’s short­

pastures

forage

age of pasture, fodder, and cattle grains re­

With respect to vegetable crops, experience

normally stored for winter consumption, and

was much the same— reduced yields and inferior

they had to buy cattle feed much earlier than

quality except for

early harvested varieties.

usual. Long before next year’s crops become

Vegetable growers equipped for irrigation ob­

available, local farmers will have made huge

tained good yields but at considerable cost of

outlays for purchased feed.

afforded

poor

grazing,

and

crops produced disappointing yields.

pumping

water.

Growers

without

quired farmers to draw on home-grown feed

irrigation,

In the emergency, buying and fattening beef

however, had disappointing yields. Potato yields

cattle for market, which is normally big business

were generally below average but blueberries,

in Lancaster and other nearby counties, are

cranberries, and peppers did right well.

being curtailed. Herd expansion has stopped, at

Fruit growers, for the most part, were for­
tunate and have few complaints. The peach crop

least for the time, because it is too costly under
present circumstances.

was large and of good quality. The apple crop

Dairy farmers, seeking to ward off mounting

was also of good yield, though some growers

bills for purchased feed, are culling their herds.

report inadequate sizing, resulting in an abun­

By keeping only their heaviest producers of

dance of small apples. The irrigated apple or­

milk of high quality and disposing of inferior

chards in Adams and Franklin counties, of

cows, the dairy farmers are improving effi­

course, could cope with the drought. Cherry

ciency of operations.

growers had a large crop.

Nevertheless, many farmers are in trouble,
are running out of money and are forced to

Livestock
District farmers

borrow.
are predominantly

livestock

Banks

eagerly

accommodate

and

other

lending

operators

of

agencies
well-run

producers. Last year, for example, Pennsylvania,

farms, but borrowed money adds to the cost of

New Jersey, and Delaware farmers cashed in

farming.

$795 million from the sale of livestock and live­
stock products in contrast with only $371 mil­

Production costs

lion cash sales of field crops. Of course, crops

Costs of production generally have been rising.

and livestock are closely interdependent; when

Some of the increases, as already observed, are

one suffers so does the other.

directly attributable to the drought— such as the

No livestock in the district died of thirst

need for more irrigation and larger outlays in

despite the low rainfall and receding water

interest on borrowed money for feed purchases.

12




business review

Conventional costs of farm operation are also

of them suffered heavy losses. Anyone who is

on the increase. The trend of wages for hired

familiar with the broiler business knows how

labor is ever upward, especially in this district

difficult it is to make a profit on 15- to 16-cent

where so many of the farmers must compete

broilers. Recently, markets have improved; but

in a labor market strongly influenced by job

very soon broiler producers will encounter the

opportunities in manufacturing industries and

competition of holiday turkeys, in addition to

other nonagricultural pursuits. Numerous farm

the normal competition with red meat.

respondents

with

throughout

the

whom
district

we
also

communicated
report

rising

Poultrymen who feed chickens for the pro­
duction of eggs are also in a highly competitive
race, but for the most part they did better than

taxes.

the broiler men. Prices of eggs were somewhat
disappointing last spring and through much of

M a r k e t a n d prices
Businessmen are often heard to complain about

the summer, but subsequently prices have risen.

the vicious squeeze between costs and prices.

Egg production in the district continues to meet

In that respect, farmers are no different from

heavy competition from the South.

other businessmen; but unlike some other busi­

Fruits and vegetables as a class commanded

nessmen, farmers operate in highly competitive

good prices. Fruits sold on the fresh market,

markets where they have little or no oppor­

especially the packaged fruits, brought satis­

tunity to command prices they would like to

factory returns. Peach growers did very well,

receive. Thus far this year, however, farmers

and so did many of the apple growers. Tomatoes

of this region have encountered reasonably
satisfactory market and price situations, with

for the fresh market commanded good prices,

some exceptions.

tomatoes were sold at prices which some of the

as did most other vegetables;

but canhouse

Dairy farmers, as a class, have at least had

growers said were not high enough to offset the

the satisfaction of reasonably stable prices for

light yield and the extra cost of irrigation. Not

milk. Of course some of the milk-check money

all harvests have yet moved off the farms, so

went into higher feed outlay.

their prices are still to be determined. Among

Beef-cattle feeders also had their troubles.

these are potatoes and tobacco. In Lancaster

Feeder cattle bought last fall and fattened for

County, cigar tobacco is a big money crop but

sale early in 1964 brought prices which left the

prices for the 1963 crop were disappointing,

farmers little or no return for their labors.

which resulted in curtailed acreage planted this

Feeders who bought cattle this spring and fat­

year. The price of this year’s late crop, however,

tened them for September markets fared better.

is bound to be affected adversely because of

Varied

experiences

poultrymen,

depending

were
upon

encountered
whether

by

early frost damage.

their

flocks were broilers or layers. Broiler people

C a p ital e x p e n d itu re s

encountered extremely rough going from the

The drought has definitely caused a setback in

fall of 1963 until the late summer of this year.

capital expenditures, and such expenditures as

Production was so great and prices so low that

are being made are seldom for purposes of

very few producers made any money, and many

expansion.




Numerous

farmers,

however,

are

13

business review

continuing to make capital outlays for modern­

that respect, farming is like any other business.

ization. Pressed by rising wage rates and other
cost

increases,

labor-saving

dairy

farmers

equipment.

Both

are

installing

dairymen

and

Financial status
The third consecutive year of drought has im­

beef cattle men are spending money to modern­

paired the financial status of farmers. The more

ize their barns, to build silos, and to improve

prosperous farmers have had to dip deeper into

their

old-

their reserves, and others are back in debt as

fashioned chicken houses with modern layer

herds.

Poultrymen

are

replacing

they were at the beginning of the year; and all

houses with automated equipment for watering

too many will wind up 1964 with a larger debt
carryover than a year ago.

and feeding the birds and for collecting the eggs.
Apple growers are installing production lines

Farm land values continue to rise, though at

for polishing, grading, and packaging. In al­

a somewhat diminishing rate, except for farms

most every field of specialized agriculture, mod­

in the orbits of suburban expansion. There is

ernization takes the form of mechanized and

no great activity in farm real-estate transactions

automated equipment. Most of the mechaniza­

among farmers but there is an abiding demand

tion and modernization is done with borrowed

for additional acreage on the part of some

money, but only after careful economy studies

farmers who want to expand for

to assure a reduction in operating costs. In

efficiency of operations.

increased

(Continued from Page 2)
extent after the 1954 recession. Following the

sures, shrinking profit margins, leveling or de­

1958 recession, capacity utilization and prices

clining productivity, etc. But the fact that this

both rose but output never did reach the 90 per

relationship has prevailed in the past has raised

cent level and there was no upward explosion

a question whether it will prevail soon again.

of prices.

And the question is particularly pertinent be­

This is simply a bare-bones description of a
postwar phenomenon— not an explanation of

cause manufacturing output is now somewhere
around 88 per cent of capacity.

how it came about. There were many, many

If 90 per cent is indeed the critical point to

complex forces at work: increasing wage pres­

watch, what is the possibility that output will

14




business review

reach this level during the coming year? This

ness Economists is correct in forecasting an in­

will depend on two things: how much business

crease in 1965 output of only 3 per cent. Then

spending on plant and equipment increases capac­

the rate of utilization might very well decline.

ity, and how fast business expands output. With­

Or suppose Fortune magazine is correct in esti­

out attempting to predict either, it is possible, by

mating the addition to capacity to be around a

making some assumptions, to get an approxi­

7 per cent annual rate. This, combined even with

mate fix on the rate of utilization of capacity

1964’s rapid pace of output, would raise the

that might prevail.

rate of utilization relatively little.

Consider the following combinations of possi­
bilities

which

relate

increases

in

In short, given the large volume of capital

capacity

expenditures, and given the difficulties of main­

(across the top) with increases in output (down

taining the current high rate of increase in out­

the side) to arrive at the rate of utilization of

put throughout 1965, it is possible that capacity

capacity (in each box) by the end of 1965. If

will not be put to the strains which some now

output and capacity rise at about the same pace,

foresee. If so, price pressures would not be so

the rate of utilization will stay about the same—

severe as some now fear.

88 per cent. If capacity rises faster than output,

This is not to say that some bottlenecks may

the utilization rate will decline; if it rises not

not appear— in fact may not already be with us.
Nor does it mean to suggest that some prices

so fast, the utilization rate will increase.

If capacity rises at an annual rate of—
3% 4% 5% 6% 7% 8%
If production
rises at an
annual rate
of—

3%
4%
5%
6%
7%
8%

88% 87% 85%
89
88 87
90
89
88
92
91
89
92
90
93
94
93
92

84%
86
87
88
89
90

83%
84
86
87
88
89

82%
83
84
86
87
88

What is a reasonable assumption? The reader

may not rise— indeed industrial raw materials
prices have been increasing for about a year.
But it does suggest that the pervasive and at
times explosive increases that occurred in 1950
and 1955-1956 may not be in the cards.
Increases in prices of raw materials always
precede a general rise in prices; but a general
rise in prices does not always follow an increase

can take his choice, depending on his business

in raw materials prices. The fact is that, al­

forecast for the coming year. It might help to

though sensitive prices have been moving up­

point out, however, that output has risen so far

ward, they have advanced less than in any other

this year at the very favorable annual rate of

expansionary phase during the postwar period.

8 per cent; capacity has been increasing during

And another fact is that, contrary to earlier ex­

the past year or so at an annual rate of about 5

perience, the over-all level of wholesale indus­

to 6 per cent. If these conditions continue

trial prices has actually declined in the current

through 1965, the rate of utilization of capacity

expansionary phase of the business cycle as

will rise from around 88 per cent to around 91

manufacturing output has moved up from about

per cent. In this case, if history repeats, there

78 to 88 per cent of capacity.

could be severe pressure on prices.
But suppose the National Association of Busi­




Things seem to be enough different to cause
serious question whether history will repeat.

15

F O R T HE R E C O R D . . .
BILLIONS $

INDEX

M EM B ER B A N K S 3RD F.R.D.

BANKI NG
A

/I

a

t\J

f

a

y j
V

T

|
I f
Iff
1

1

CHECK
PAYMENTS
(20 CITIES)

J

i f _________
!
/
n

VJ

1

^

A

y\ h i \ r >
1
7
y
1/
1
*
V

1
i /

!

i

A
/
/

DEPOSITS

LO A N S

4*
INVESTMENTS

2 YEARS
AGO

YEAR
AGO

AUG.
1964

2 YEARS
AGO

Third Federal
Reserve District

Per cent change

8
Aug. 1964
from

Employ­
ment

mos.
1964
from
ye ar
ago

8

ye ar
ago

mo.
ago

year
ago

mos.
1964
from
year
ago

+ 3

mo.
ago

+ 7

Payrolls

Sales

Check
Payments

Per cent
change
Aug. 1964
from

LO C A L
CH AN GES

+ 6

Aug. 1964
from

Per cent
change
Aug. 1964
from

Per cent
change
Aug. 1964
from

Per cent
change
Aug. 1964
from

mo.
ago

M A N U F A C T U R IN G

+ 1
+ 1
+ 1
+ 2

+ 5
+ i
+ 1
+ 5

+ 7
- 1
+ 1
+ 3

C O N S T R U C T I O N * * ..................

-1 3

+ 5

+ 14

-1 8

-

7

+ 6

C O A L P R O D U C T IO N ................

+44

+ 4

+ 5

+48

+

1

+

TRADE” *
Department store sa le s...........
Department store sto ck s...........

-

3

+ 6

+ 8

1

+ 6
+10

+ 5
+ 9

+

+

2

+

2

- 3

-

5

+
+

+12

+ 17

B A N K IN G
(All member banks)
D e p o sits.................................
Loans.....................................
Investments.............................
U.S. G ovt, securities..............
O t h e r ...................................
C heck paym ents......................

‘ Production workers only.
“ Value of contracts.
‘ “ Adjusted for seasonal variation.




year
ago

mo.
ago

Lehigh Valley. . . +

1

2

+

2

+

Harrisburg.......

1

+

1

+

+

1
4

year
ago

+

mo.
ago

+
+

1

mo.
ago

-

8

4

year
ago

-

2

— 4

+ 9

-1 5

Lancaster.........

+

1

+

1

+

2

+

6

-

4

+

2

-

7

+ 13

+

3

-

1

+

2

+

3

-

5

+

9

-

9

-

1

+

2

-

4

+

3

0

-

3

+ 10

Reading..........

+ 1
+ 1
+ 2
- lit

year
ago

Philadelphia. . . .

1

+ 8
+ 13

1
1

+

0

1

+ 7

+

1

+

o

+

3

4“ ^

—

7

Scranton.........

+

1

+

1

+

3

+

7

-

6

Trenton...........

+ 13

0

Of +

st

-1 2

+

2it

0
0

+ 10
+ 8

- 8
+ 14
+ 11

bit +

lit

0
+

1

+

l

+

I

+

3

+

6

-

3

+

8

-4 5

-1 8

W ilkes-Barre. . . +

1

+

1

+

3

+

7

+

2

+

3

-

+

8

Wilmington......

+ 2

- 5

PRICES
C on sum e r...............................

Department
Storet

Factory*

SU M M ARY

Electric p ow er consum ed .......
Man-hours, t o t a l*..................
Employment, total....................
W a g e in c o m e *.......................

AUG.
1964

United States

Per cent change

YEAR
AGO

-

2

+

1

-

8

+ 10

+

3

-

3

-1 2

-

1

Y o rk...............

+

1

+

3

+

1

+ 11

+

5

+ 10

-

+41

5

0
+

t20 Cities
{Philadelphia

1

4

‘ N ot restricted to corporate limits of cities but covers areas of one or more
counties.
{Adjusted for seasonal variation.