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Good Air for the Great Society
Why the Bulge in the Corporate Bond Market?
The Race for Savings

BUSINESS REVIEW

is produced in the Department of Research. Evan B. Alderfer was primarily responsible
for the article “Good Air for the Great Society,” Hugh Chairnoff for “Why the Bulge in the Corporate Bond Market?” Jack C. Rothwell
and John F. O’Leary, Jr. for “The Race for Savings.” 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,
Philadelphia, Pennsylvania 19101.

GOOD AIR
FOR THE GREAT SOCIETY

Air is our most indispensable natural resource.
Without food, a person can live several weeks;
without water, several days; without air, only
several minutes. Who would have thought that
the air we breathe would become a matter of
serious social concern! But it has.
One of the first bills President Johnson signed
while convalescing from recent surgery was the
Clean Air Act Amendments and Solid Waste
Disposal Act. On signing the bill, October 20,
1065, the President said: “We have now reached
the point where our factories, our automobiles,
our furnaces, and our municipal dumps are
spewing 150 million tons of pollutants annually
into the air we breathe.” Air is no longer the
economists’ classic example of a free good. On
the floor of the atmospheric ocean where most
of us move and have our being, pollution is so
bad in many communities as to jeopardize pub
lic health and life itself.
In the closing weeks of October last, people
in Los Angeles were coughing and choking in
one of the worst smog episodes in that city’s
experience. But we Easterners need not be smug,
for smog killed 17 citizens of Donora, Penn
sylvania, in 1948; and about 200 deaths in

New York City in 1953 were attributed to a
similar cause. Thus far Philadelphia has had
no such disaster, but the city has atmospheric
pollution aplenty.
W hence all the pollution?

Air, you may remember from a course in chem
istry, is a mixture of gases—about 78 per cent
nitrogen, 21 per cent oxygen, and minor traces
of elements such as argon, helium, and hydro
gen. Anything else is an impurity.
Nature herself contributes some impurities
such as sulfur dioxide, hydrogen sulfide (rottenegg odor), and methane, resulting from volcanic
eruptions, forest fires, and decay of vegetation.
When the Indonesian volcano Krakotoa exploded
in 1883, clouds of volcanic dust darkened the
skies over a vast area and finer particles were
diffused over a large part of the earth.
The biggest polluter, however, is man—mod
ern man, 20th century, sophisticated, techno
logically wise man. We befoul the air by the
burning of fuels to generate electricity, to heat
our homes and to propel our automobiles, trains,
planes, and missiles; by the processing of raw
materials in our factories; by the application
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of pesticides and fertilizers to increase crop
yields; by the explosion of nuclear weapons; by
the clearing of land; by the construction of
roads and buildings; and by the burning of
leaves, trash, and garbage. Each of these daily
activities corrupts the air we breathe and occa
sionally, depending upon local weather condi
tions, chokes to death a number of citizens.
W here th e re ’s fire . . .

The earth’s supply of air is fixed in amount,
but it is used in enormous quantities for pur
poses other than breathing. The burning of a
ton of coal consumes about 27,000 pounds of
air; a gallon of fuel oil, about 90 pounds; and a
pound of natural gas, approximately 18 pounds.
The burning of a tankful of gasoline by a motor
vehicle requires about a ton of air. Approxi
mately 3,000 cubic miles of air are utilized
annually to satisfy the oxygen requirements of
the fossil fuels burned in the United States
alone. Where there’s fire, there’s smoke; and
where there’s smoke there’s atmospheric con
tamination.
Smoke is unburned particles of fuel. In a
former generation there was a saying, “Vote
Republican and the smokestacks will be smok
ing.” In our time the stacks smoke no matter
how you vote. Across the land enormous quan
tities of fly ash emerge from the stacks of fac
tories and electric utilities, as well as from the
millions of chimneys of private dwellings. The
soot settling on the exterior of buildings makes
dirty-faced architecture; and airborne particles
permeating the interior of buildings smudge
walls, trim, draperies, and rugs. The annual
cost in deterioration of materials, damage to
crops and livestock is estimated to run in excess
of $11 billion.
Along with the nuisance of dust and grime of
Digitized for4 FRASER

particulates are the unhealthful effects of gases
accompanying the burning of fossil fuels. As
suming an average sulfur content of 2 per cent,
the coal burned each day in the country dis
charges 48,000 tons of sulfur dioxide, which in
terms of volume would pollute the air to a
height of 400 feet over an area greater than
that of Pennsylvania.
The country’s motor vehicles daily pour into
the atmosphere 250,000 tons of carbon monox
ide, 4,000 to 12,000 tons of nitrogen oxides,
and 16,000 to 33,000 tons of hydrocarbons. In
addition to the impurities arising from incom
plete combustion of fuels, there are also factory
wastes from metallurgical, chemical, refining
processes, and rubbish incineration. And now
to top off the conventional forms of air pollu
tion comes the deadly fallout of nuclear wea
ponry, the testing of which has thus far been
confined largely to the Northern Hemisphere.
Unbridled “technological progress” may yet
require all of us to wear gas masks.
The w orst pollution is in cities

Air pollution has become a menace because
most of the people are now huddled in cities
and their suburbs, where most of the atmos
pheric poisons are generated. Two-thirds of the
population of the United States live in the 212
standard metropolitan statistical areas, which
have a combined area of 310,000 square miles
—less than 10 per cent of the country’s total
area. Not counting the suburbs, over half of
the people of the United States live in cities
which occupy less than 1 per cent of the na
tion’s land area.
A full list of our cities or metropolitan areas
with air-pollution problems is too long to enu
merate here. Some, like Boston, Baltimore, and
Cleveland, have serious sulfur dioxide pollu-

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AIR POLLUTION IGNORES POLITICAL BOUNDARIES

Source: Staff Report to Committee on Public Works, U. S. Senate.

tion. Others, like Los Angeles, Salt Lake City,
and Washington, have serious automobile-ex
haust pollution. Still others, like Charleston,
W. Va., Phoenix, Ariz., and Wilmington, Del.,
have much suspended particulate matter—smoke,
dust, and fumes. Most of the large cities, such
as New York, Chicago, Detroit, and Philadel
phia, have everything.
Critical areas in the Philadelphia Federal
Reserve District, in addition to PhiladelphiaCamden and Wilmington, include Johnstown,
Scranton, Harrisburg, and Reading. Major,
though not yet critical, problems also exist in
some of the other cities of the district.
Moreover, air pollution is no respecter of
political boundaries. In a number of areas,
many urbanized localities are located closely
enough together so that pollution from one may

adversely affect another. Such problems are
often of an interstate nature, as shown on the
map. Note especially the almost unbroken chain
of standard metropolitan statistical areas from
Boston to Washington. Depending upon how
the wind blows, a lot of people occasionally in
hale each other’s dirty air. State and local of
ficials, in 1961, reported “major” air-pollution
problems in 308 urban places. Regional weather
conditions in certain areas occasionally inten
sify the ill effects of pollution.
How bad w eather w orsens b ad a ir

Under normal conditions, air becomes cooler
at a rate of 5° F., for every thousand feet you
rise above the ground. That helps to clean the
air of pollutants because warm air currents rise
into the cooler upper air, carrying with them
the contaminants from below.
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Occasionally, however, on windless days a
layer of warm air intervenes at an intermediate
altitude, thus forming a “lid” over a city. Com
bustion fallout then strikes a low ceiling and
traps the accumulating pollution in the limited
air space underneath. Meteorologists call the
phenomenon a thermal inversion; that is, air
standing on its head.
Such adverse local weather conditions may
be intensified by hills, mountains, lakes, and
oceans. The Los Angeles Basin, for example, is
a bowl bordered on three sides by mountains
and on the fourth by the Pacific Ocean. Cool
air slides down the mountainsides blocking an
inversion across the Basin, like an air-tight
cover, confining the region in a blanket of its
own thickening and sickening effluents.
Cities are man-made traps for bad air be
cause buildings obstruct the flow of air, creat
ing pollution problems in the maze of city streets
forming valleys between architectural canyons.
The heat of the sun beating down on the hydro
carbons and nitrogen dioxide given off by mul
titudes of mot'or vehicles causes chemical reac
tions resulting in highly toxic “photochemical
smog” that darkens the atmosphere, irritates the
eyes, and induces coughing and labored breath
ing.

dences of its harmful effects on health are over
whelming.
The common cold and other upper respiratory
tract infections are known to occur more fre
quently in areas which have high pollution
levels. Chronic bronchitis is another disease as
sociated with and aggravated by air pollution,
as numerous studies have plainly shown. Pulmo
nary emphysema (a disease affecting the tiny
air sacs of the lungs, resulting in oxygen depri
vation) may ultimately have adverse effects on
the heart. In recent years, deaths from pulmo
nary emphysema have risen rapidly, especially
among males. Bronchial asthma, another respir
atory infirmity, is aggravated by air pollution
in many cases. Air pollution is also under strong
suspicion as a cause of lung cancer, which is
responsible for rising rates of mortality. Evi
dence of this suspicion is the fact that the lung
cancer rate is higher in cities than in rural
areas and higher in big cities than in smaller
cities.
Air pollution is a definite hazard to land,
water, and air transportation because it reduces
LUNG CANCER IS HIGHER IN CITIES
Benzene-Soluble Organics in Suspended Particulates

Effects of a ir pollution

Air pollution is a health hazard to which a grow
ing majority of American citizens are exposed
daily. When an airliner crashes and brings sud
den death to all aboard, the tragedy makes the
headlines in bold-faced type. How much pro
longed misery and early deaths are caused by
air pollution no one really knows, and such
deaths seldom get into the papers because slow
suffocation is such an undramatic way to expire.
Indeed, it is difficult to prove that anyone’s
death was caused by air pollution; but the evi
Digitized for6 FRASER

M ortality Rates of Cancer of Trachea, Bronchus, and Lungs fo r White Males
Deaths per 100,000 Inhabitants

Source: Staff
U. S. Senate.

Report

Committee

Public

Works,

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visibility. “Obstruction to vision” by dust, haze,
sand, and smoke has been cited as a cause of
accidents on our airways, highways, and water
ways, with resultant injuries and deaths.
In addition to property losses previously
mentioned, air pollution is costly to agriculture.
Crops damaged by some forms of air pollutants
are corn, peaches, beans, rye, barley, tobacco,
and leafy vegetables like spinach, endive, and
broccoli. Moreover, cattle foraging on alfalfa
and clover tainted with airborne fluorides suffer
serious disease.
W h a t’s b e in g done about it?

Fortunately, some efforts are being made toward
the abatement of air pollution. Unfortunately,
air pollution is growing faster than the clean-up
campaign, in part because the seriousness of the
public menace is underestimated and in part
because abatement hits the pocketbook nerves of
the polluters—which, incidentally, includes al
most everybody.
Industry is estimated to be spending $300
million a year on the installation and operation
of special equipment and changes in materials
and production processes, as well as research de
signed to reduce air pollution. Government
spending at all levels on enforcement and re
search is estimated to be $35 million annually
—over half of which is federal money.
The Federal Government took active interest
in 1955 with a law designed to provide research
and technical assistance relating to air-pollution
control. The latest law, mentioned at the outset,
empowers the Department of Health, Education,
and Welfare to establish standards for the con
trol of automobile and diesel truck emissions.
According to press reports, such standards when
established by HEW are to go into effect in Sep
tember, 1967. Air monitoring is already taking
place at 250 stations throughout the country

that provides information on suspended particu
late matter in urban and non-urban locations in
every state.
The basic objectives of the federal program
are to improve the status of knowledge about
the causes and effects of air pollution, to dis
seminate such knowledge through technical as
sistance to states, communities, and industries,
and to stimulate all levels of government, indus
try, and the general public toward greater airpollution control efforts. The Federal Govern
ment treads a bit lightly, based on the philosophy
that primary responsibility for regulatory con
trol rests with state and local governments.
State and local government control of air
pollution is spotty. In 1961, only 17 states were
spending as much as $5,000 a year on airpollution programs, and over half of the total
outlays were made by California. Michigan
Senator Pat McNamara’s 1963 questionnaire
addressed to all the state governors revealed
that 33 of the states had some type of airpollution control laws but the others did not.
The questionnaire also revealed that only 15
had some control authority. Generally, though
with some exceptions, the most progressive
states were the ones with the most pollution,
and also the heavily populated and most indus
trialized.
California, where tailpipe pollution is the
major problem, has done more to clean her air
than any other state. In 1961, California re
quired hlow-by devices to be installed on all
new cars by 1963 to reduce crankcase emissions.
More recently, California law requires new cars
to have control devices that reduce exhaust
emissions by two-thirds.
Pennsylvania, New Jersey, and Delaware are
among states that have taken active measures
to control air pollution. In 1958, Pennsylvania
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SOURCES OF AIR POLLUTION EMISSIONS IN PHILADELPHIA
S U L F U R D IO X ID E E M IS S IO N S

H Y D R O C A R B O N E M IS S IO N S
TRANSPORTATION

initiated a comprehensive state-wide survey of
air pollution in the Commonwealth. Results of
the survey made by the Pennsylvania Depart
ment of Health and the Public Health Service
Digitized for
8 FRASER

N IT R O G EN D IO X ID E E M IS S IO N S

P A R T IC U L A T E E M IS S IO N S

of the U. S. Department of Health, Education,
and Welfare were published in a comprehensive
1961 report. A total of 801 communities, in
cluding over 80 per cent of the state’s popula

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tion, were surveyed. Ninety-one communities—large, medium, and small—were found to have
air-pollution problems of major proportions. In
the job of cleaning the Commonwealth’s atmos
phere, considerable progress has already been
made by both state and local authorities as well
as by numerous industries. Pittsburgh has under
gone a remarkable transformation. The wide
spread shift from coal to gas for home heating
and the installation of air-cleaning devices in
the Steel City’s open-hearth capacity have re
duced the dust fall to about half of what it was
formerly.
Philadelphia, in contrast to Pittsburgh, has
a more diversified industrial structure; the
city’s major sources of air pollution are sulfur
dioxide and nitrogen dioxide emissions of indus
trial origin and, of course, automotive hydro
carbons and particulates, as shown in the illus
tration. The city’s Air Pollution Control Section
has a modest staff of people and a small budget
to carry out its major functions of prevention,
inspection, and engineering. Prevention means
passing on newly installed combustion facilities
of new construction. Inspection means going
over existing combustion facilities, domestic
and industrial, offering suggestions for improved
operation. Engineering has to do with technical
advice on equipment. The city’s Air Pollution
Section also has a traveling crew to spot sources
of emissions and to investigate complaints.
W hat m ore could be done?

Most states and municipalities, however, are
regrettably deficient in air-pollution control.
Although they have “thou-shalt-not pollute” laws
on the books, enforcement is feeble and appro
priations are parsimonious. All states and local
governments together spend anuually about 8
cents per capita on air-pollution control. Eight

cents worth of prevention, however, makes im
perceptible dents on the case loads of physicians
and morticians.
What state and local governments might well
do for their citizens is, first, ascertain the inten
sity and types of impurities of the air in their
respective jurisdictions; second, establish mini
mum standards of tolerable impurities in their
ambient air; third, enact appropriate legislation
to enforce compliance with the established stand
ards; and, fourth, appropriate sufficient funds
to employ competent medical and engineering
talent for administrative purposes. Admittedly,
it is easier to prescribe than to carry out; but the
fact that effective control exists in some localities
is prima facie evidence that it can be done.
Industry is to be complimented for such anti
pollution measures as have already been taken,
like the installation of filters, scrubbers, elec
trostatic devices, and the construction of tall
stacks. But most industries could do a great deal
better. Fossil fuel-burning industries are the
heavyweight polluters, notably the electric power
utilities, the steel and metallurgical industries,
and the petroleum refineries. Many of these have
done much to reduce the emission of particu
lates, but huge volumes of noxious gases still
pour out. Much of the sulfur dioxide contami
nation, for example, could be eliminated by
shifting to low-sulfur coal without much increase
in cost of kilowatts to consumers. One engineer
ing journal, referring to the various stack emis
sions, points out that “careful fuel selection and
attention to fundamental principles of combus
tion can eliminate some of these entirely and
reduce the amount of others such as fly ash.”
M ultitudes of sm okem obiles

The country’s 80 million automobiles and
trucks that choke urban and suburban streets
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and expressways also choke up metropolitan
atmospheres with unburned hydrocarbon cor
ruption. The internal combustion engine is an
infernal air contaminator.
The trouble with the spark-fired internal com
bustion engine is that it doesn’t combust all the
fuel fed to it. Unburned hydrocarbons escape
through tailpipes in enormous volume. More
over, motor companies, in their competitive zeal
to build cars that outperform each other, have
souped up the motors with herculean horsepower
and jackrabbit acceleration, thereby making the
modern motor car a superpolluter.
When a thermal inversion clamps a lid over a
city its citizens are trapped in an atmosphere
of tailpipe vapors, and there is nothing they can
do but inhale the poisonous air and endure the
smarting of eyes until the arrival of a breeze
strong enough to clear the atmosphere. In last
year’s “Clean Air” hearings in Washington,
Maine’s Senator Muskie, addressing a repre
sentative of the Automobile Manufacturers As
sociation, said: “It strikes me . . . that if you
develop for California for its 1967-model cars,
a device which will substantially reduce the
emissions from the automobile exhaust, that it
would be a service to the country to make that
available on every new car sold in America.”
The Senator’s statement elicited a reply con
cerning the need for a tremendous amount of
work to be done. Purification of tailpipes would
be ever so much better for public health than
glorification of tailfins.
W hat n e xt?

Learned lectures delivered before professional
societies frequently end with a plea for further
study. Air pollution can also stand more re
search, but there comes a time when the fruits
of research must be translated into action.

It is already well known that air pollution is
a national nuisance; that it has adverse effects
on public health; that the majority of people
are victims of the scourge; that the menace is
getting worse instead of better because all the
fires of pollution are raging faster than the ardor
for abatement. To be sure, there is need for
more education, more missionary work, because
the severity of atmospheric litter is still not
comprehended by many people, including some
five- and six-digit executives.
But the major reason for so little action is
that abatement costs money. There’s the rub.
To equip a $200,000 open-hearth steel furnace
with an electric precipitator to capture the stack
dust costs about $150,000 additional. In some
industries the additional cost of installing a con
trol device is proportionately smaller; in others,
greater. Substantial reduction of motor-vehicle
emission, however, could be achieved without
much additional cost, according to one motor
company. Modification of the engine is said to
cost no more than $14 to $19 per car at the
factory.
Leading concerns in major industries have
established high standards of production with a
minimum of air pollution by non-revenue-producing expenditures of considerable amount for
appropriate installations. There are reasonably
clean steel mills, petroleum refineries, coal
burning power plants; but the socially conscious
corporations are in the minority.
Suppose all fossil fuel-burning installations
were cleaned up with the best anti-pollution
know-how. Suppose all incinerators, all motor
vehicles, all dusty, dirty, fumy, smoky, and
smelly installations were taken to the laundry.
The consumers of their goods and services
would, of course, pay the tab in higher prices
for their products; but would the cost be pro

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hibitive? It might run to $3 billion, perhaps
$5 billion. Even at twice the latter figure, it
would just about offset the estimated annual
cost of property damage caused by air pollu
tion. And about 200 million people would be
breathing pure air—not so pure as it was when
the Mayflower docked, but much, much better
than it is now.
Postscript

The carbon dioxide which we exhale is not a
pollutant in the ordinary sense, and it consti
tutes only a tiny fraction of the atmosphere but
it plays an important role in the life processes
of the world’s flora and fauna. Green plants,
utilizing the energy of sunlight, manufacture
carbohydrates from carbon dioxide and water,
and release oxygen. Man and other breathing
animals use oxygen and release carbon dioxide;
thus plants and animals are mutually interdepend

ent in what scientists call the “carbon cycle.”
Carbon dioxide, however, is also produced
whenever we burn carbonaceous fuels such as
coal, gas, oil, wood, or paper. All this burning
since the turn of the century has increased the
carbon dioxide in the atmosphere by an esti
mated 10 per cent, according to one authority—
faster than plants and the oceans can absorb it,
and may be the cause for the slight warming of
the Northern Hemisphere that has taken place
since then.
The Conservation Foundation says that the
carbon dioxide build-up, while not yet alarming,
may eventually cause the polar icecaps to melt,
raising the ocean levels and submerging lowlying cities like New York, Philadelphia, and
Washington. It is suggested that the reader, if
he is still with us, not worry too much about this
hazard because it is .not imminent and is a
matter in need of further research.

WHY THE BULGE IN THE CORPORATE BOND MARKETS
CHART 1.
Corporate bond issues in 1965 should total around
$14 billion, a record for any one year and the third
consecutive year in which corporate bond issues
have exceeded $10 billion. Why this bulge? The
following charts throw some light on this question.
Gross Proceeds from Corporate Bond Issues*
Billions of Dollars

CHART 2.
Since 1961, expanding demand for goods and serv
ices has reduced substantially the level of excess
capacity in the economy. As the actual rate of
capacity utilization nears the preferred rate, as it
has particularly since mid-1964, business has re
sponded by increasing its physical capacity to
produce.*
Rate of Capacity Utilization of the
Manufacturing Sector

CHART 3.
Increasing the physical capacity to produce requires
capital expenditures. Indeed, business outlays for
plant and equipment have been one of the strong
points of the business expansion which began in
1961. Moreover, the rate of increase in capital ex
penditures has accelerated since 1964. Estimated
expenditures in the fourth quarter of 1965 are 56

CHART 4.
Spending for plant and equipment moves in a reg
ularly recurring seasonal pattern. From a low point
in the first quarter of the year, expenditures rise
sharply in the second quarter, roughly level-off in the
third quarter, and rise sharply again in the fourth
quarter. While cyclical factors have led to record
capital spending this year, seasonal factors have
led to bulges in the second and fourth quarters.
Expenditures for Plant and Equipment
(Not Seasonally Adjusted)
Annual Rates (Billions of Dollars)

Source: S.E.C. Statistical Bulletin.

CHART 5.
The major source of funds for financing capital ex
penditures and additions to net working capital is
internally generated funds, primarily the sum of
retained earnings and depreciation allowances. In
ternally generated funds in the past few years de
clined in the third and fourth quarters. Thus far in
1965, the rate of internal funds generation has
followed this pattern. This means that internal funds
have tended to be low when capital spending has
been high, as shown by . . .
Internally Generated Funds of
Manufacturing Corporations
Quarterly Rates (Billions of Dollars)

Source: FTC-SEC Quarterly Report for Manufacturing.

to Net Working Capital for
Manufacturing Corporations

Forecasters see capital spending continuing at a
rapid rate in 1966. A resurgence in the rate of flow
of internally generated funds is not expected. Con
sequently, the high level of demands for corporate
long-term external financing (of which 80 percent
has been bond issues during the current expansion)
seems likely to continue in 1966. The corporate
bond market should have another busy year.

More and more bankers are asking whether rates paid on savings and time deposits should be hiked
to provide a competitive edge in the scramble for the savings dollar. Alternatively, they wonder
whether less costly ways exist to attract time deposits. Answers to these questions are important in
the hotly competitive market for savings and indeed may yet determine who wins . . .

Throughout the 1950’s, savings and loan asso
ciations were winning the race for savings. In
the last few years commercial banks have been
turning the tables.
The percentage share of combined time and
savings deposits held by commercial banks,
savings and loan associations and mutual sav
ings banks in the U.S. over the last decade and
a half looks like this:
1964

1950

1961

Savings and Loan Associations

Commercial Banks

Mutual Savings Banks

100%

A similar table for the Third Federal Reserve
District shows the same pattern of development:
1950

1961

Savings and Loan Associations

Commercial Banks

Mutual Savings Banks

1964

100%

During the fifties, bankers in the nation and
the Third District saw their share of the savings
market plummet as savings and loan associations
14

took the lion’s share of the savings dollar. Later,
bankers in the District, as in the U.S., reversed
the downward trend.1
In view of the likelihood that the race for
savings will continue at a hectic pace, an anal
ysis of past shifts may tell us much about the
outcome of the race in the future. To the econo
mist, this involves such interesting questions as
the interest-elasticity of the supply of savings;
to the banker, it is a very real problem of
dollars-and-cents importance.
FACTORS AFFECTING SHARES

The economist and the banker would agree that
it is hard to single out the most important fac
tors at work in determining the volume of sav
ings. There is a whole group of forces at work
in the environment: the size and growth of the
local population, the size and growth of in
comes, the number of saving institutions present
in a community, and so on. Our analysis sug
gests that the volume of savings in an area is
influenced significantly by such environmental
i Unlike their colleagues nationally, however, mutual sav
ings bankers in the Third District managed to hold their
share of the market fairly constant over the period, perhaps
reflecting to some extent the relatively high geographical
concentration of mutual savings banks in the District com
pared to most other parts of the country.

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considerations over which the individual hanker
has little or no direct control.
The share of savings that a particular institu
tion may get is influenced by at least two other
factors, and these are things over which institu
tions have more direct control: interest rates
paid for savings deposits and number of offices
Ithe convenience factor). To examine the effects
these controllable factors have on market shares,
let us look first at competition between com
mercial banks and savings and loan associations.
Then we will take a look at competition for
savings deposits among commercial banks.
Com m ercial b a n k s, sa vin gs and loans,
and interest rates

As shown in the chart on the following page,
throughout the 1950’s and so far in the 1960’s,
the average interest rate paid by savings and
loan associations has been higher than that paid
by commercial banks. As one might expect in
such a situation, the S & L’s have increased their
share of the savings market.
But their gain has not been steady; one can
discern a definite stair-step pattern in the chart.
These stair-step jumps upward in the S & L’s
share of deposits have come when the premium
paid by savings and loans has suddenly widened
(or failed to narrow much)—periods which
seemed to be associated in the main with years
of business cycle recession and recovery.
One possible reason for this pattern concerns
the types of assets in which the two institutions
invest their funds. Savings and loans put their
money to work primarily in residential mort
gages. Mortgages are relatively high-yielding
assets (which means that savings and loans his
torically have been able to pay a higher price
for savings). Moreover, the supply of mortgages
has been rising steadily since 1950 (which

means that savings and loans had a steady out
let for their higher-cost savings funds).
Commercial banks, on the other hand, have a
greater need for liquidity. They place a much
smaller percentage of their funds into mortgages
and other higher-yielding assets (which histori
cally has tended to limit the interest rates banks
pay on time and savings deposits). Moreover,
the assets in which banks have tended to invest
more heavily over the years (business loans and
investments) not only provide a lower yield on
average, but also provide a less stable outlet
for funds. Loan demand is subject to wide vari
ation over the business cycle.
These differing characteristics, then, have
helped to produce the pattern shown in the
chart. As the business cycle turns down, loan
demand at commercial banks declines and as a
result banks tend to compete less aggressively
for time deposits. The gap between the rate of
interest paid by savings and loan associations
and commercial banks tends to widen, propor
tionately more savers take their money to the
S & L’s, and the commercial bank share of the
savings market declines.
As business conditions pick up, banks need
loanable funds more; they compete more ag
gressively for savings and the interest-rate gap
narrows. But with the keen competition that
exists, it is difficult for banks to regain their
relative share of the savings market. Once people
have shifted savings accounts, a big difference
in interest rates may be required to get them to
move back again, or to attract new deposits.
As the chart also shows, however, the pattern
since 1961 has been different. During this long
period of sustained economic growth, the S & L’s
share of time deposits started to trend down
ward in the District and the nation.
At least two factors have enabled banks to
15

b usiness re v ie w

These charts show the relationship between interest rates paid by commercial banks and savings and
loan associations (horizontal scale) and the share of the combined savings market held by the two
institutions (vertical scale). The line moving from right to left indicates that the differential in interest
rates paid by S & Us over rates paid by commercial banks has declined over the period 1950-1964.
One can discern a definite stair-step pattern— the S & Us share seems to take quantum leaps. These
stair-step jumps upward in the S & Us share of deposits come when the premium paid by savings and
loans suddenly widens {or fails to narrow much) ; periods which seem to be associated in the main
with years of business cycle recession and recovery.
RELATIONSHIP BETWEEN SAVINGS AND LOAN SHARE OF THE
SAVINGS MARKET AND RATE DIFFERENTIALS

(1950-1964)

Savings and Loan Share (Per Cent)

D IST R IC T

compete more effectively for time deposits in
recent years. For one thing, the period since
1961 has been characterized by a strong de
mand for bank loans while residential construc
16 FRASER
Digitized for

tion and the demand for mortgages has not
been so vigorous. Secondly, commercial banks,
continuing a trend that began earlier, have been
putting more of their funds into mortgages and

b usin ess re vie w

higher-yielding consumer loans. Thus banks
have had the incentive to compete more vigor
ously for time deposits and this—coupled with
rising ceilings on rates permitted by supervisory
authorities—has helped reduce the interest rate
differential between banks and S & L’s and halt
the erosion of commercial banks’ share of the
savings market.

cent, respectively. On the national scene, how
ever, savings and loans and commercial banks
added offices at the same rate—2.4 per cent.
Thus District bankers may have reduced the
impact of the rate gap by getting relatively
closer to savers.
CHANGE IN NUMBER OF OFFICES
AVERAGE ANNUAL RATE
1950-1964

The District vs. the Nation

The rate premium in favor of savings and loan
associations historically has been higher in the
District than in the nation. In the last decade
and a half rate differences in the District, on
average, have ranged from .8 to 2.4 percentage
points in favor of S & L’s; in the nation the
premium has been between .7 and 1.7 percent
age points in favor of savings and loan associa
tions. Yet, even though the rate differential puts
District commercial banks at a greater dis
advantage relative to their national counter
parts each year, still the commercial bank share
of combined S & L-commercial bank savings
has been higher in the District (and the com
mercial bank share of the market has not de
clined at a noticeably more marked pace). One
thing that may help to explain this seeming
paradox between the local and national situa
tions is a second factor over which the individ
ual banker has some control—the number of
offices. Convenient access is even more impor
tant to many people than interest rates in de
termining where to put their savings.
Com m ercial b a n ks, sa vin gs and loans,
and offices

The accompanying table indicates that the num
ber of commercial banking offices expanded at
a much faster rate than savings and loan offices
in the Third District—2.8 per cent versus .4 per

District

Nation

Commercial Banks

+ 2 .8 %

+ 2.4 %

Savings and Loan Associations

+ .4%

+ 2.4 %

The interest rate — office tra d e -o ff

Should a bank or savings and loan rely on
interest-rate differentials or convenience (num
ber of offices) to attract savings deposits? The
answer—it depends. Our data suggest the an
swer lies somewhere in between those two ex
tremes and depends on the market environment.
The following table summarizes four differ
ent types of market situations depending on
interest-rate differentials and number of of
fices.2 Along the top of the table is the amount
by which the rate paid by savings and loans
exceeds the rate paid by commercial banks.
Down the side is the ratio of commercial bank
offices to savings and loan offices. And in each
box in the table is the savings and loan share
of the savings market.
2 Values for this table were derived from data for com
mercial banks and savings and loan associations in 60
Third District counties for 1963. The office ratio for a county
was designated by inspection as high if the number of com
mercial bank offices per savings and loan office was greater
than 4. Interest rate premiums were considered high if the
difference between the rate paid by savings and loan asso
ciations and the rate paid by commercial banks was equal
to or greater than .5 percentage points. The savings and loan
share of the combined savings market held by S & L's and
commercial banks was computed for each county. Then,
each county was placed into one of four groups on the basis
of rate differential and office ratio. The four groups were:
both rate differential and office ratio high; both rate
differential and office ratio low; rate differential high,
office ratio low; and rate differential low, office ratio high.
Once the four groupings were obtained, the average rate
differential, office ratio and market share for each group of
counties was computed. Those values appear in the table
above. Several different class intervals for classification pur
poses produce essentially similar results.

b usin ess re v ie w

Rate Premium in Favor
of Savings and Loan
Associations
(percentage points)
.30

.90

Number of Commercial
8 to 1
5%
Bank Offices per S a v i n g s -----------------------and Loan Association Office 2 to 1
32%

7%
36%

The different types of market situations are:
1. Rate premiums slightly in favor of savings
and loans (.30) and the number of offices
strongly in favor of commercial banks (8 to 1)
—S & L’s get only 5 per cent of the market,
the worst showing.
2. Rate premiums highly in favor of savings
and loans (.90) and the number of offices highly
in favor of commercial banks (8 to 1)—where
the spread in interest rates is wider, the S & L
share is 7 per cent of savings.
3. Rate premium slightly in favor of savings
and loans (.30) and the number of offices only
somewhat in favor of commercial banks (2
to 1)—the S & L share is 32 per cent of the
market even though the rate differential is only
slightly in their favor.
4. Rate premium highly in favor of savings
and loans (.90) and the numbe5* of offices only
somewhat in favor of commercial banks (2
to 1)—in markets where S & L’s compete
strongly on both terms, interest rates and con
venience, they get the largest share—36 per cent
—of any other combination of factors.
The best strategy for competition seems to be
to use both weapons—interest rates and number
of offices, but the strongest attraction for time
deposits appears to be offices—the convenience
factor. Bankers have always stressed conve
nience^—one-stop banking—and our findings
seem to bear out their experience.
Com petition betw een com m ercial banks

The banker has to worry not only about the
savings and loan around the corner but also
18 FRASER
Digitized for

about the commercial bank across the street,
Again, he must decide how much to compete
on the basis of interest rate and how much on
the basis of convenience.
The following table summarizes four other
market situations depending on interest rate
differentials and number of offices.3 Along the
top of the table is the average amount by which
the rate paid by “high-paying” banks exceeds
the rate paid by “low-paying” banks. Down the
side is the ratio of offices of “high-paying”
banks to offices of “low-paying” banks. And in
each box in the table is the share of savings
held by the “high-paying” banks.
Rate Premium in
Favor of
"High-Paying” Banks
(percentage points)

Number of Commercial
Bank Offices of “ HighPaying” Banks per Office
of "Low-Paying” Banks

.20

.72

1 to 1

48%

52%

3 to 1

71%

These situations lead to the same general
conclusions as the earlier comparison of com
mercial banks and savings and loan associa
tions:
1. Rate premiums slightly in favor of highpaying banks (.20) and the number of offices
roughly even (1 to 1)—the high-paying banks
get 48 per cent of the market, the worst showing.
s Values for this table were derived from data for commer
cial banks in 60 Third District counties for 1963. In each
county, commercial banks were ranked according to rates
of interest paid on time and savings deposits, then divided
into two groups at the median interest rate paid. Rate differ
entials were obtained by taking the difference between the
average rate paid by banks above the median rate in that
county and the average rate for banks below the median.
The office ratio for each county was derived by dividing the
total number of offices of banks above the median interest
rate by the total number of offices of banks below the me
dian rate. Thus, observations consisted of 60 rate differen
tials and office ratios. Each county was classified into one
of four groups: (1) rate differential high (greater than .4)—
office ratio high (greater than 1.5); (2) rate differential low
(less than .4)—office ratio low (less than 1.5); (3) rate differ
ential high—office ratio low: and (4) rate differential lo w office ratio high. Market shares are for those banks above
the median interest rate as a per cent of total tim e and sav
ings deposits held by commercial banks. After classification,
the average rate differential, office ratio and market share
for each group was computed. Those values appear in the
above table. Different class intervals produced similar
results.

b usin ess re v ie w

THE PHILADELPHIA STORY

Philadelphia banks are reaching out for money to lend. To get savings funds, commercial banks
now are paying 4 per cent on regular savings—and 4V2 per cent on savings bonds (certificates
of deposit). The high rate makes the banks more competitive with other institutions in the
Philadelphia area. Philadelphia now is, also, more competitive with other major cities in the
nation, especially New York.
Increases in rates paid by Philadelphia banks apparently were not motivated by inability to
compete with other financial institutions in the area or with banks in other market centers.
On the contrary, even before the recent rate hike, the banks had been able to increase their share
of total savings in Philadelphia and had been holding their own in comparison with reserve
city banks throughout the nation.
Chart A shows shares of combined time and savings deposits held by commercial banks
(reserve city banks), mutual savings banks and savings and loan associations in Philadelphia.
Despite the fact that reserve city banks paid lower rates—they paid V2 per cent less than mutual
savings banks or savings and loan associations—their share of the combined savings held by
the three institutions increased from 16 per cent in the last quarter of 1961 to 17% in the second
quarter of 1965.
Philadelphia banks have maintained their share of total time and savings deposits held by all
reserve city banks in the United States, even though interest rates paid were somewhat lower.
Philadelphia reserve city banks’ share of total savings deposits of all reserve city member banks
was approximately 2 per cent during the period 1961-64; their share of other time deposits ranged
narrowly around 3.5 per cent. Time deposit money moving in and out of New York City reserve
city banks apparently involved other reserve city banks than those in Philadelphia.
CHART A

CHART B

AMONG INSTITUTIONS IN PHILADELPHIA

AMONG RESERVE CITY BANKS IN THE U.S.

Per Cent

business re vie w

2. Rate premiums highly in favor of highpaying banks (.72) and the number of offices
roughly even (1 to 1)—where the spread in in
terest rates is wider, the high-paying banks’
share is 52 per cent of savings.
3. Rate premiums slightly in favor of highpaying banks (.20) and the number of offices
highly in favor of high-paying banks (3 to 1) —
the high-paying banks get 71 per cent of the
market.
4. Rate premiums highly in favor of highpaying banks (.72) and number of offices highly
in favor of high-paying banks (3 to 1)—highpaying banks still get 71 per cent of the market.
Thus, it would seem the same general pattern
of market shares occurs when one compares
different market situations among commercial
banks or when one compares savings and loan
associations versus banks. Banks that pay higher
rate premiums and have number of offices
strongly in their favor get larger shares of the
savings market (though offices seem to exert
the stronger pull).
Rates vs. offices— som e ge n e ra l
considerations

There are, of course, a legion of factors and
problems to consider in deciding whether to
compete by way of rates or offices or both. If
a banker chooses to compete on the basis of
rates, he must consider the effects a change in
rates may have on his bank. An increase in
rates may bring more time and savings dollars
into the bank, but interest paid for time and
savings deposits is also an expense item in a
bank’s profit-and-loss statement. When the rate
on time deposits rises, that rate applies not only
to new deposits but to the time funds already
deposited in the bank. Thus, the banker must
judge whether or not a rate hike will bring in
Digitized 20
for FRASER

enough new funds to be loaned out at high
enough yields to cover the additional costs on
deposits already held. In other words, a banker
may find that total interest expenses rise faster
than the income that comes from new funds
brought in by the rate change.
It may be less expensive for the banker to
consider the alternative of establishing or ac
quiring branches. Whether this is a better alter
native depends, among other things, on a com
parison between the total cost of additional
offices versus the total cost of raising interest
rates in relation to funds likely to be gained.
If, when costs are compared (and other bene
fits of new offices are determined), the same
amount of new savings deposits can be gener
ated more cheaply by increasing the number of
offices, that may be the economic thing to do.
Another consideration, however, is that acquir
ing offices is a decision that usually involves
capital expenditures that are committed for
relatively long periods of time. Competing on
the basis of offices may not have the same degree
of flexibility as does rate competition.
Another approach to rate competition (as
Philadelphia banks are demonstrating) is the
“segmentation” of markets. New instruments,
or forms of saving, may permit banks to offer
higher rates at the margin without involving
all the savings and time deposits on their books.
A new instrument, say a savings bond, permits
the bank to compete for funds at the time it
needs money badly on the basis of interest rates.
By offering the new higher rate only on that
instrument, the bank may be able to attract
funds without having the higher rate apply to
deposits it has already. There will be leakage,
of course, from people switching from one type
deposit to the new type. But the net rise in
total interest expense is likely to be less than

business re v ie w

if there were an across-the-board rise in interest
rates.
These are but a few factors bankers will con
sider in deciding upon an optimum strategy to

compete for savings. They are important ones,
however, and how they are combined will sig
nificantly influence the outcome in the years
ahead of the race for savings.

business review
FEDERAL

RESERVE

BANK

PHILADELPHIA

TABLE O F C O N T E N T S— 1965
JANUARY

(A nnual R e p o rt Issue)

The Second F ifty Years
The T oil and T urm oil o f U rb an Renewal
1964: The Expansion th a t W o u ld n 't Die

FEBRUARY

A n A p p ro a c h to M o n e ta ry Policy F orm ulatio n
The Case o f th e Vanishing M etals
Return to th e C ity — F act o r Fancy?

MARCH

F ederal Funds and th e P rofits Squeeze— a N e w Aw areness a t
C o u n try Banks
Excising Excises

A P R IL

P ortla nd C e m e n t
W h a t's C o m in g U p is G o in g U p

MAY

The D elaw are V alley and th e Big East C o a s t Ports
Class o f '6 5 : H a ve D iplo m a, W ill . . .?
C a p ita l S p e n d in g : O n w a rd and U p w a rd

JU NE

N a tio n a l G oa ls and In te rn a tio n a l R e sp o n sib ility: S ounding a
C han nel Between th e Shoals
A H a lf-C e n tu ry o f Federal Reserve P olicym aking, 1 9 14 -196 4
J u ly th e F ourth C a m e Early This Y e a r

JU LY

C onsum er C r e d it in th e A m e ric a n Econom y— V ig o r o f Y ou th
o r M id d le A g e S pre ad ?
A F oun da tion o f Sand

AUGUST

The P o ta to : Prince o r Pauper o f V e g e ta b le s?
The In n o va tio n Industry

SEPTEM BER

H o w to Run a River
V ie tn a m : H o w M uch H e a t a t H o m e ?
The Seventies Belong to th e Susquehanna

OCTOBER

To Spend, or N o t to Spend
The F oun da tion o f th e A u to m o b ile M o u n ta in
Farmers Assess D ro u g h t D am age

NOVEMBER

P hila delph ia and Its C o m p e tito rs
D is tric t Banks R e p o rt on R evolving C heck C r e d it: F irst Phase
A -O K , A ll Systems G o

DECEM BER

G o o d A ir fo r th e G re a t S ociety
W h y th e Bulge in th e C o rp o ra te Bond M a rk e t?
The Race fo r Savings

F O R THE R E C O R D . . .
BILLIONS $

INDEX

Third Federal
Reserve District

United States

Per cent change

MEMBER BANKS, 3RD F.R.D

Factory*
Employ
ment

Payrolls

Department
Store Salest

Check
Paymentsf

Per cent
change
Oct. 1965
from

SUMMARY
Oct. 1965
from
mo.
ago

year
ago

10
mos.
1965
from
year
ago

mo.
ago

MANUFACTURING
Electric power consumed. . . .
Man-hours, t o ta l* ....................
Employment, to ta l......................
W age incom e*..........................

- 2

year
ago

10
mos.
1965
from
year
ago

Oct. 1965
from

+10

+ 9

mo.
ago

year
ago

mo
ago

year
ago

mo.
ago

year
ago

mo.
ago

year
ago

0
0
+ 1

+ 6
+ 7
+ 4
+10

+
+
+
+

Lehigh Valley. . . .

+ 4

+ 19

CONSTRUCTION**....................

+ 13

+ 15

+ 8

+ 5

Harrisburg...........

+ 2

+ 5

+23

COAL PRODUCTION.................

+ 17

+ 12

+ 7

Lancaster.............

TRADE***
Department store sales.............
BANKING
(All member banks)
Deposits......................................
Loans...........................................
Investments.................................
U.S. Govt, securities...............
O th e r........................................
Check payments***...................

9
7
4
9

LO C A L
CH AN G ES

+ 11

+ 5

+ 1
+ 1
0
0

+ 6
+ ii

+ 7
+ 11
+ 1
- 6
+ 13

Philadelphia.........
Reading................

+1
- It

- 2

-1 0
+ 10
+ 12t

+ 12t

+
+

o t + 2J +

*Production workers only
**Value of contracts
***Adjusted fo r seasonal variation

9
+ 14
+ 2
- 6
+ 15
+ 10

0
0
0

+ 2 + 2
+ 2 + 2

PRICES
Consumer....................................

+ 9
+ 15
+ 2
- 6
+ 16
+ 9

1
1
3

t ! 5 Cities
^Philadelphia

Scranton..............

+ 13

+10

+ 3

+ 12

+ 9

+ 3

+ 10

+ 9

+26

+ 12

+ 6

+22

+ 12

+ 4

+ 5

+ 8

+ 15

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

+ 3

+ 12

W ilkes-Barre. . . .

W ilm ington.........

+ 19

+ 10

+ 8

+ 15

York.....................

+ 4

+ 13

+ 9

*N o t restrictec to corporate imits
counties.
1'Adjusted fo r seasonal variation.

+31
+

cities but covers areas of one or more