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Federal' ,
Reserve
Bank' 0'"
Cleveland
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,Tbe lIIu~tralions used
in the 1986 annual
report were. created',
~y a Clevilland
,

- ar11s.tusing color .
xerography: ~hll
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watches o~ the Cliver '
, are a reminder,that
economic ~ystems
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,are constantly

, ~h~nging_~ve~time.

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Our 1986 annual report examines the economies of the four largest cities In the
Fourth Federal Reserve District - Cincinnati, Cleveland, Columbus, and
Pittsburgh. _

These cities began the nineteenth century with similar

advantages - natural resources, skilled labor, transportation routes - but they
havefollowed dramatically different economic paths. Today, the four economies
range from struggling to successful. _

In this essay, we discuss how

cities within a relatively small geographical area can experience such economic
diversity. We consider the significance of comparative advantageand the aging
of dominant Industries in explaining economic disparities across regions. We .
also suggest ways In which we can affect our own economic future.

3

The President's Foreword
4

Common Bonds, Divergent Paths:
An Economic Perspective of Four Cities
20

Comparative Financial Statement
22

Directors
23

Officers

Karen N. Horn, President

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The' President's Foreword

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OIJr nation's econor,ny showed many
signs' of strength in 19.86. The eco- .
nomic expansion continued and interest rates remained low. Perhaps one of .
'the most impressive aspects of - the
past two years is the enorrnousrestructuring that has taken place in our
economy during a period of overall sta'bility and growth.
_ Although this process' began long
ago, it ,is 'difficult, even for those of us ' (
who have been close to the process, to
compreheri9 the extent and scope of these changes. Once-prominent industries have declined, in absolute or in
.relative importance. Under the pressure
'of competition, nationally and locally
important firms have. been forced to
alter operations and restructure facilities. Economic restructurinq is .usually
painful torthe people and the communities involved, but if change is inevitable and leads to a better world, then .
much has been accomplished ..
T'he results of restructuring ~feevi~
dent 'in the emerging economic struc- .
tureot the Fourth Federal Reserve District. An assessment df the ultimate
. outcome for area iridustries has been:
greatly complicated by large swings in'
the exchange rate of the do!lar, but two
observations can be. made concerning
, the future of the Fourth District arnrthe
United 'States economies. First, the
, manufacturing
sector will probably
" f,emain strong but will employ a smaller
proportion of the labor force and .second, the service sector willcontlruie to
grow, as, measured both by-employ, ment and by output.
.
These likely, outcomes raise several
issue's for management, labor, and
education. But perhaps the central
issue facing us is, how can we as a
people better adapt to ecopornic
change? The' 1986 annual report
essay, "Common Bonds, Diverqent
Paths," analyzes how four cities within
the Fourth District have been affected
, by the forces of economic change, and
we hope. that if will provide some insights into the process of (change.'
As many of you may know, I will be
resigning as president of the Federal Reserve Ban~ of Cleveland in early April
to accept position in the private sec,tOL My five years wit~ t,he Bank have
been extremely rewarding, and I leave

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. with the satisfaction of having achieved
many goals. I will miss the energy, c~ativity, and commitment of this Bank's
directors; officers, and staff.
_This Bank has been most fortunate
in having the leadership of William H.
Knoell (president and chief executive
officer of Cyclops Corporation); who
retired from our Board ot Directors
after serving as a member since 1981
and as chai iman I and Federal Reserve '
-Agent since 1984. Special' thanks go to
the directors on our Cleveland Board
.who have, completed their terms of ser'vice: J, David Barnes (chairman and
chief executive officer, Mellon Bank),
who has served since 1981; and John
R, Hall (chairman of the .ooard and
chief executive officer, Ashland Oil,
lnc.), who has served since 1984. '
We, are also grateful for the contributions of Dr. Robert E. I Boni (chairman.ot the board and chiet.executive
officer, Armcolnc.), who has served as
.chairman of the Cincinnati. Board since
1984; Vernon J.. Cole (executive vice '
president and chiet executive otficer..
Harlan National Bank), who has-served
on our Cincinnati Board since 1984;
and G.R. Rendle (president and chief
executive officer, Gallatin National
Bank), who has served- on our.Pltts-'
burgh Board since 1984. Their valuable
. and dedicated service 'and guidance, as
well as that of all the directors and the
members .ot the 1986 Small Bank and
Small Business Advisory Councils,are
certainly appreciated,
Igreatly enjoyed being a part of this
organization, and I will miss my association with the many fine people in the
Federal Reserve System' and' in the
Fourth District comrnuoltles:

Sincerely,

Karen N: Horn
President
March 12, 1987
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"Jt ~as the best of ·times:it

was the 'worst' of times ... it '~as',the
spring of hope, it wa~ ,the wint'et of ,despair.:'

, ChBf/es Dickens. A Tale of Two'Cllles. 1859'

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Dickens's ~aga A Tale of Two Cities is~a'
, like spirit of the region. Unlike the East
reminder that cities with seemingly comCoast, the Midwest had no prior expe.rnonbonds - of historyandcommerce
". rience-with industrialization" and con· can folloW divergent paths. TDe same
sequently no exis~ing institutions. or
is true in our present-dayeconomy ..
. norms to' stand in the way of 'change.
y
'The United States is often.portrayed
In~tead" the area was ripe for new ven- ..
as a monolithic economy, within' which
turesand offered opportunities for indi->
various regions march in' step. This is
vidualsto pursue their dreams.
far from the truth. The country is a patchMaJlY of the natural resources.availwork of different regional ..economles.;
able to the entrepreneurs of.a century
.
linked by a market system, through,
ago can stili be.tound here. In fact,the
whi.ch people, capital.Ideas, and tech"
range of available resources has expandnoloqy moveback and-forth, A similar'
, ed- to include the' capital stock andtype of di,versity and interconnectedinfrastructure of a hig'h-income'society,
ness exists within the Fourth District. cultural arnenities, skllled labor •...and'
The Fourth Districtcovers a relative- well-developed educational systems.
Iy small geographical area. It includes
But, while these resources are still
air of Ohio: western Penrisyl:vania, eastattractive to firms, the problems+ot
ern Kentucky, and the W.est Virginia
tndustrial-bett cities seem to outweigh
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· panhandle. Yet, much like the cities of
tre advantages. High wage.rates, unions,
London an~ Paris during the time of.
high energy prices, cold winters, high,
,
Dickens's novel, .the tour larqest cities
taxes, and / a det~rioratinginfrastrucof the Fourth District - Cincinnati,
ture are all cited as contributors to an
.0
" Cleveland',
Columbus,
and
Pittsburghunfavorable business climate.
, .
stand in stark contrast to each other.
The CursBof .Success It can be ar_Cincinnati and Co1umbus are keepinggu~'d that the industrial empires forged'
. , pace, with or surpassing national emduring the early years stand in the way
ployment and population growth 'rates,
'of_future progress. This was ~ot inten-, -,
while Cleveland 'and Pittsburgh have ,
tiona/. Rather, according to the indus- ,
fallen behind.
trial lif~ cycle theory, the sheer size of
What, caused some of' the cities,
these industries and their dominance of
within the' District to' fare better a~
the region significantly affected their
times than others? There is no-simple
local economies in ways that produced
ans!>,er, but' economists tr,aditianally
resistance to chanqe.
have focused on resource endowment, '
-The industries' demand for labor
and cost, factors,
especially the cost of ' .
drove up wages and employed the best
'
labor and, capita/. Another Bart, of the - . and the brightest workers and manaqers. Their desire' to build new plants
explanation: lies in the region's histori'c'al devetopmentand theindustries that
tied up financial resources. Thei~large
came to dominate the local. economies .
scale of operation' comered resources _ '
airdrnarkets: Moreover. as these dorniThe frlse ind Falfol a Region The'rise
of the Midwest as anindustrlal center
nant industries matured, institutions
, is relatively easy to understand. During
and coalitions formed to preserve the
the'late 1800s, the "industrial belt" cit- ,
industries that had brought employment
, ies had a 'comparative advantaqein the
and prosperity to the, reqion. These
forces created a barrier, to)h.e develproduction of steel, automobiles, and
oprnent of new economic activities arrd machine tools because of their' near-weakened the comparative .advantaqs
·ness to iron ore and other raw material
of doing business in these areas.
inputs" as well as.theireasy access to
,
This. theory of the natural
evolution
, the Great takes-and the Ohio River. '
.
Equally iTllPortant was the- frontier- , ' . of an industry and a .community sheds ,~
light on several things that are puzzling'
about the FoOrth District economy.

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First, .it helps t~ explain whymany
torical ~ccident favored some indus- ~
industries within the region' have lost
' tries more than others" these cities
jheir comparative advantaqe. Second,
' began to Jake divergent paths. :
it provides a better understanding of
We, will 160~ first at. the economic
.the economic diversity among various
hentaqe of each city, and thendlscuss
cities inthe FourthDistrict.
how it helps toexplairi present em'ployCommon ~onds. Divergent Paths ThiSrTlent
patterns. Using-both the.locational
, essay examines the diversity of four \ ' ' advantage and the industrial life cycle
major cities within the FOlJI'thDistrict - ,·theories,'
we explain how 'such diverse
. Cincinnati, Cleveland, Columbus, and
growth trends can exist within arelativePittsburgh. Each city, at some time i~~
Iy small geographical area. Finally, Y"e
_ its history, shared many of the same
describe the potential' growth sectors
basic 'manufacturing' industries. Howand the conditions that are necessary to . ,
ever, as locationaladvantaqe and His,I~uncbregiori~ into anew economic era.
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\.. A.ihough the iich~woodlalld ~as' probabl~ among, the\greatest .
. ,forests ever to grace the earth', the .settler~ were' more interested in . ,
,other 'riches."
.\ " .
Ohlo's N'alural Heritage. 1979

Past Advantages, ,

The Fourth District experienced.its industrial renaissance rludnq the early
part of this century, prima~ily because
of the comparative advantages the re, gion offered at thattime in the produc-' tion of steel, automobiles, and machine
'tools. As one might expect, the, major
cities in the Fourth Distrlct.hadsimilar
characteristics, .such as an abundaA~e
of raw materials' and, well-developed
transportation systems'.
. As result of these similarities, many
of the sarne'industries emerged in each
.,gity'during thereqion's initial develop-.
ment. Over a' relatively short.penod of' ,
. , ' _ time, however, a weed.ing-out process' ,
'left ,some industries more' heavily en-;,
trenched in certain partsot theDistnct,
than in others. This subsequentlyled to'
the development of different industrial
structures in the major cities.
,
Pittsburgh The.cemparative advantaqes of Pittsburgh wer~ apparent early _
-in , jts development. The citY's access to
abundant natural resources led to-the
rapid expansion ~f its manufacturing
base during the late;·1800s.
-.
- The region offered qreat.reserves 9f
, . high-quality coking coal, local/deposits
·of iron ore, and valuable deposits of
sandsand clays for use in glass and clay
products. Natu~al routes ottransporta-:
tion were provided by 'several major '.
. waterways leading into Pitt§.burgh. The' .
.: convergence of three.rnajor.river valleys
" / . allowed easy access to the city. '. "
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. Cleveland
Cleveland's prominence
as an early' nineteenth-century trade
.and commerce center-developeo from
its position on the Ohio and Erie Canal;
which was completed in 1832. Cleveland's .strateqic location made it way
station. to fhe West and, .with the
· developmentot ports. a leadinq ship"
· ping.center on Lake.Erie.
In the mid-1800s,. "Cleveland also
benefited from the opening of therail.roads' from the, discovery of vast iron
oreresoerces in the,neighboring Lake Su- ,
'perior region,.and from the development
of the coal and petroleum lndustrles."
These factors encoura,ged industrial di~
versity in Cleveland and made 'the city
a center for mercantile activity.
,Clnclnn~tI Cincinnati was ,also strategically.iocated near a major waterway
- the Ohio River. However. because the
city had a greater abundance of aqricul· tural resources' than mineral resources,'
it followed a different path from' Cleveland and Pittsburgh. The economy inictially developed around agriculture and
-, livestock. Canals and a major railroad
were built to facilitate transportation
of wheat, com, and other farm produce,
"<, For many years, Cincinnati was the
most-irnportantmillinq
center west of
the Appalachians. It was' also -nick-'
named "Porkopolis" . because the 'pork- .

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packing business was very prosperous.
Livestock also supplied the material for
. ' the food, lard, Jsoap, candle, and
, leather industries.
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After the Civil War, the character of
Cincinnati's industri~,s' changed. The
devastation of. the South eliminated the
once-flourishing southern market for
Cincimati's- whiskey, salt pork" com
meal, and textiles. Also, heavy industries, notably steel a,nd iron, suddenly
became a mainstay of the American
economy, but Cincinnati had neither.
the iron ore nor the coal that was,
needed to smelt it.
- - Consequently, the cities along take
Erie, such as Cleveland,' ornear the coal.
fields.such as Pittsburgh, surpassed Cincinnati in population and industry. In. stead of specializing in one or two dom'iriant industries, Cincinnati expanded
into
variety of industries, includir)g
machine tools and consumer products.
Columbus The early economic development Of Col~mbus was i,nfJuenced
by the decision to locate. the state's
'capital there and, later, the state's larg- ~
est. university. One of the reasons for
,Io.cating the capital high on the east
bank of the Scioto River was its central
'location within the state, a feature that
has contributed to Its prosperity today.
At first, Columbus's manufacturing

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was constrained by the relatively limited
resqurces available nearby and by the
small size of the markets it- served,
Most of the. businesses catered primarily to 'the needs of the region.,Binderies
'were opened to serve the trade' generated by the state and county governments, and toundrles and handicraft
shops catered to the farm market.
.,
Local transportation and trade-institutions .began to flourish as the capital'
cltyurewln
size' and influence. Initially, processing agricl,Jltural raw materials was the city's principal 'industrial
activity. As the city developed further, .
manufacturing gradually replaced much
of the' processing of agricultural ray.!
materials. Seginningin 18:19, the, carriage and buggy industry began its long
and famous dElVelopment in Columbus .
After' 1830, the clty's position was
greatly enhanced by'theopening of the
Ohio and Erie Canal and' by the extension westward of the' National Road.
Later; the construction of railroads provided even greater access to resources
and markets, which gave rise to a host
of new activities within the community.
The expansion of trade, especially with '
, southeastern Ohio communities, led to
the development of an extensive merchandising system within the region, which
has not cbanged appreciably since then.
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Economic progress, in a. capitalist society, means turmoil:".
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Jos~ph A. Schump8ter: 1942
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Present Diversity

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A century and a half of economic
metamorphosis has created four unique
metropolitan areas. Today, Clncinnati,
Cleveland, Columbus, and Pittsburgh
account for more than 40 percent of
. the Fou'rth District's 1-6 million inhabitants. Among these metropolitan .areas,
population ranges from 1.3 million for
Columbus.to 2.2 million.for Pittsburgh.
, Employment Trends Three distinct employment trends characterize the development of these four cities over the last
two decades. Between 1964 and 1985,
Columbus outperformed tha natlonal.
growth rate for total employmeht, Cin-

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~cinnati lagged slightly behind, and Cleveland and Pittsbu'rgll fell far behind.
Over, this period: total nonfarm employrnent in Columbus rose by more than
90 percent, while total employment in
Cincinnati grew nearly 50 percent (see
figure 1). Jotal employment in Cleveland and Pittsburgh increased by only 18
percent and 11 percent, respectively.
.
'These differences in trends are even
more striking over the last two busi/ ness cycles. Since the business cycle
peak of 1980, Cincinnati's employment
has grown at a rate almost equal to the
national rate of 12.4 percent, and
Columbus has substantially surpassed
'it. During the same' period, Cleveland
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FO!lr separate
economies have
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evolved from a
similar historical
'beginning: (from lell
to right) Pittsburgh. /

Cleveland. Cincinnati.
and Columbus.
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U'.S.
Cincinnati
Cleveland

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COlumbus
Pittsburgh'
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Growth Trends for Employment'
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(Percent of 1964 employment)

Figure 1

'. 100
80 1964

1986

Figure 2

has struggled' to returnto
its 1980
'even smaller- concentratton 6f manutacemployment level, while Pittsburgh;
" 'turing employment than that of·.Columbus. :
Colurnbus.Cinclnnati, and' Cleveland
, rernainse percent belo~ i~s 1980 level.
- Not orily do the total employment,
exoertencec'stmllar, but less dramatic, '
compositional change, Today, Pittstrends of each city differ, but employ, burgh and Cdlumbus show strong simiment patterns also vary sub,stahtially'
across groad economic _sectors within
larities, as do, Cincinnati and Cleveland,'
'based' on the distribution of. employeach city. Between 1964 and 1985, Cin- '
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cinnati experienced a 1.6 percent rement across br0a~ industrial cateqories.
ductionin manufacturing employment,
,Manufacturing Employment' Theco,mwhile service' sector employment .rose
position of the manufacturing sector
provides further evidence of the similartszpercenttsee
figures 2 and .3):
Columbus experienced expansion in all
ities betweenCplumbus and pittsburgh,
as well as some. of thedissirnllarities
'
of . its ~r6ad sectors; but its, most '
impressive growth was in services; 'among all four cities. An analysis, of '
where employment rose 205 percent.
" employment patterns across industries
Employment patterns in Cleveland's
shows that Pittsburgh's reliance on prland Pittsburqh's manufacturing and ser, mary metals-has fallen dramatically. A
vices industries have diverged dramati'decade ago, more than 40 percent ol '
, - cally. Pittsburgh lost half of its manutacPittsburgh's manufacturing
employ. tur,ifl9 jobs between 1964 .and 1985, but ' , ment was in primary metals, particu'doubled its service jobs. Cleveland lost'
larly blast furnaces; 'today, that' per26 percent' of its manufacturing jobs, '
centage has dwindled to 15 percent.
but more than doubled its service jobs. '
, The shift aw~y from primary.metals
has left Ptttsburgh with a much more'
Employment' Composition
Because of
, -'diversHied rnanutacturinq 'base. Pitts. the unevenqrowth rates across sectors.
. theeconom'ic
composition ot these
- burgh ties Columbus for the most diver- .
metropolitan areas changed considersifted manufacturing sector among the,
ably between '1964 and 1985. Each city
four cities.' Cincirnati has the highest
followed more or less the national tran-:
, concentration of manufacJuring activ- ,
sition trorn manufacturjng to services,
ity, while Cleveland has the, highest
concentration of. employment in any ,:
'Qut each changed at a different pace.
In 1964, Cincinnati, Cleveland, and
one rnanutacturinq industry, machinery,
The diversity' among the fOUf cities '
,Pittsburgh
had very similar 'economiG
is further illustrated" by, the relative
structures. Manufacturing's share of
.total employment averaged about 37
concentrations of specific. industries
percent, services' accounted tor about
within each city" We measure a city's
14
percent,
and
wholesale
and
retail
degree of specialization by comparing
I
<. trade claimed .20 percent:· Columbus
the percentage ot.a city's employment
differed' from, the other three/ with a
" within a particular industry to the per,
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centaqe ot total employment of the'
smaller manutacturinqbase and a larger government sector.
.
• ' four cities within that industry,
.
Using this definition, we find that,
.But since 1'964, the composition of
,within the manufacturing sector, Cleve- "
each citv'seconomy I.!aschanged considland specializes in machine tools and
r erably. Pittsburgh experienced the most
dies and measuring and analyzingdramatic transformation. Its manufacturing base fell frern 3Fpercent'in' f964 to '
equipment; Columbus produces leather,
1Q' percent in 1985, while its service In-',
Clay', and glass products, and electrical
eqUipment; and Cincinnati is noted for
dustry rose from 16 percent to 29 per, automobile assembly and chemicals,
-"cent (see figure:4). As a result, instead'
- mostly soap' and household, products,
.' , 'of 6eing the most industrialized city,'
. Pittsburgh still specializes in.primary
, ,Pittsburgh has now become the least indusjrialized of all four cities ,- ~ith an ' \ metals, although certainly nb~ as much
as in past years, :
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, , The dominance nt certain industries
, in the four metropolitaneconomies
reIlects, to large extent', the historical
development of the regi?n, Today, Pittsf-

. Services
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340

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. 1986

'60 1964

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, burgh's roster of largest companies still
includes industrial giants that were es, / tablished during the industrial Doom.
But alongsid,e these companies stand'
more service-orientec
companies,
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Cleveland's present industrial base
also reflects, to a large extent, its early,
roots. But, 'like Pittsburgh, Cleveland
can boast that a few service orgarriza- ,tions, such as health-care centers, are
, movinq into-Its top, ranks'. ,€incinnatl's
'local economy, thQugh changing" is

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.siill associated with companies that
produce consumer nondurable products,
Even though Columbus companies, '
, manufactured, at various times, every-'
thing from steam locomotives to autornobiles, no one industry dominated the
economy. Like Cincinnati, Columbus's inc'
dustrial base.remains much more diversified than that of Cleveland orPittsburgh" Public and private service-related'
'institutions predominate, including re- ,
searoh centers and a major university.

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"The veil of macroecQnomic ,aggregates 'conceals ~. all the dra;a of
the events .. the rise and fall ,of products, -technologies, and ,',
industries, and the accompaovi;ng transformation of the spatial, and
, ~ccupational distriliution of the population: "
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, Willl~m_Nordhalls and JamBS Tob/". 1972',

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"jha Data;mlnants of Growth

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The economic hlstorles.ot the four cities
' Althougl1 differences in the tradition.reveal that, ih the early stages oj devel-'
alcomponents.ot cost:" wages, unions,
. opment, each city fo~tered many of the, ~ . capital costs - help to explain location
same industries. However, overtime,
::decisions
on a national, scale, they do,
many of these Jndustries tended ,to'
not lend as much insight into w,hat goes
concentrate in just one or two of the
on within regions. In particular, cost
fourcities.'
'
differences do not explain'the divergent'
Industries naturally took hold inreemployment trends ~mQngthe four tit- gions where they had cost advantages '
, ies considered, Cost differences also do,
resulting from various locational charr 'not explain why regions lose their com-acteristics, TOday, cost advantaqes
' parative advantaqein the production of
ani still important in the location decicertain goods and services. ,- "
sions.ot firms.'
r
Un'8xplaln,edEmployment Changes There
Locatlort Datar~lnants According to
are two problems with relying solely on '
recent 'surveys, the -tactors businesses
cost differences t~ explain the ernploy-".
, consider most in deCiding where to locate '
rnent: patterns among the tour cities,
plants are low labor costs, pr,oductivity
Firs( there is simply not enough, variaof workers, favorable labor climate, proxtion .arnonq the production costs to
, imity to markets andscppliers, and effiaccount for the large differences in em- ,
-cient transportation tacilitles." ,
ployrnent-qrowth rates, Thernaqnitude
These survey responses are supported
of' these cost differences among the
by recent statistical analysisot location
four cities 'is:small compared to the
determinants of 'both small businesses ,', variation across the.coimfry. For examand bran,ch plants of large firms done by, ' ' 'pie: in 1983, labor Gosts arnonc -the
" , Randall W, EberisaFld Joe A. Stone jn
four cities, ranged: from 5,1, percent,
"Labor Cost Differentials: Causes and
above the national .averaqe for Cleve-. ,Consequences.wThey find that open:
' land to 2.2 'percent,be!ow the' national'
ings of manufacturing firms in a-nation- ,
averaqe for Columbus. In contrast.ta-"
.al sampte-of 50 metropolitan areas reveal
bor cost differentials for .a. sample
that three factors dominate the location
the 43 largest metropolitan
areas
co decision: labor costs, the concentration
throughout the country ranged from 18~1
of union representation,' and the user- '
percent above the national average for
cost of capital. Factors-that d,9..nQtsigNew York, to 10.7 percent below' the
nificantly attect firm location include -" national average for Tampa.
lOcaltax rates, metrepolitan population:
, 'and energy prices.'

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The second problem is that the differences in costs between- cities do not
correspond to expected differences in
employment changes. Because .labor
costs make up a large share ~f total
costs, neoclassical economics would
suggest that em-ployment growth would
- be greatest where labor costs are lowest. This, however, does not appear to
be the case within the District. For exam.)
pie, among" ourtour cities, Columbus
showed·the largest employment growth·
, between 1964 and 1985~ but it also had
the second-highest labor costsin 1974.
(
Pittsburgh, on the other hand,' had
the lowest labor costs of the four cities
and had the lowest employment growth.
By 1983, some of these anomal,ies between costs and employment growth
were corrected, presumably .due -to the
market forces that created them: wages
ih Pittsburgh increased,' while, those in
Columbus fell. Nevertheless; the correlations are still inconclusive, and, it is
unclear whether cost differences ire
causing employment changes or whether employment changes are' ~ausing . cost differences.
Other Locational Detirmlnants .' A com- .
plete list- of characteristics that arein-

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tegrated into a firm's location decision
would include
broader range of con-siderations, such as the skill level of
the' labor force' and local amenities.
While these locational determinants are
very difficult to measure, it appears that.
the relationship between these factors
and employment change is often not
what we would expect. 'For instance,'
highly skilled labor is considered a positive factor in firm location. decisions .
But, despite. Pittsbllrgh's high percent:
age of scientists and engineers, it still,
has the lowest employment growth rate .
among the 'four District cities.
Overall, attractiveness of the area,
which may include notonly favorable
climate, but also ameriities such as cultural attractions, affordable housing,
and ,good medical facilities, is alsoim.portant to location. decisions. According
to a recent edition
of Places -Rated
A'imanac, which takes into account
these attributes and others, Pittsburgb
is rated first in the country, Cleveland
seventeenth,' Cincinnati thirty-first, , and
Columbus seventy-fifth.' If we accept
this ranking system, the current employment growth rates of these cities run.'
counter to their relative attractiveness.
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,.And/wheil giant new Indu~ri8s 'hav~ spenttheir force, it may take'
a"lo'ngtime before' something else of '~qual magnitude emerges;'
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Alvin H8ns~iI.1949

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,The Long Wav~ of Change

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tion, and different' labor requirements
.Cost\differences and amenity differences
, and organizational structures. "
.
) ,explain some of the variation in employ, rnent change across regions, but they do '
The- Aging cilAn Industry 'There are
not help much in explaihinq the diverthree ways tn which the aging of a
. gent paths 'of our four, cities. The ques-region's dominant industry may lead to
a region's economic decline. First, as
tion remains, why are. regions that
were.once attractive toyounq, innova'an industry aqes, it tends to lose its
entrepreneurial energy arid imagination.
tive firms less attractive today? ,
The theory of industrial life cycles, ' . Studies have shown that the number of
or industrial aging, picks up where the
innovations per employee is larger for
small, and usually younger firms, than,
locatlonal' advantage theory leaves off "
, by explaining why a region's comparafor larger firms.s
.
One reason .tor this is the changing
tive advantage may change over time.
character of a firm's management as it
The ·driving force of change, according
to this theory, is an industry's natural
jollows the aging-proces~. Early stages
ofdevelopment are marked by innovaevolution from invention to innovation
to mass production. Each stage of devel- /
tions and QY trial and error - thus, the
need for a flexible management struoopment is characterized by different
growth rates.different levels of innovature ~nd attitude. Later stages of devel. oprnent involve mass production and the
'sta~daraization of the production pro-

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, Figure 4

•

1964 - Services

•

1985 -, Services

•

1964 - Manufacturing

•

1985 - Manufacturing
,

SITart, of Employment
u.s,

40

Cincinnati 40

o

Columbus 40

o

Pittsburgh 40

11

(Perc~nt of tota/)

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.cess. At this point, management may
During its initial development, the steel
become less concerned with creation of
industry did' riot have a primary location;
. ,new products and technoloqies and more ~
instead, steel firms could be found oper- .
concerned with the- successful largeating throughout the country.
scale production of existing products ..
Probably the first blast furnace to be
In addition to management's change
put in operation in the American coloin emphasis, there is a change in organntes was at Sauqus.Massachusetts. in
izational structure of the firm. Douglas
'1645.10 This was followed within avery
E. Booth, in "Long Waves and Uneven
few years by several other furnaces and
.. Regional Growth," argues that some Orforges built in .various parts of New
ganizationalstr.uctures, prevalent in rna. England. In 1675, the first iron works
-turefirms, keep managers and workers
.outside New England was erected in
ignorant of how various aspects of the
New Jersey.
, Pennsylvania, which would' eventuproduction process fit toqether.' With~
out this involvement, they have noinaillY become the.leaoinq iron and steel.
centive O[ ability to take the necessary I
manufacturing state in the nation,did
risks involved in adopting innovations.
not have its first iron enterprise until'
A second way in which the industrial ,
1716. The ore deposits found in eastern.
, . life cycle may hamper a region's growth
Pennsylvania and New Jersey w~r'emuch
is that a few ihdustries may dominate
richer
and more extensive., than those of
.
the local marketplace. Dominant indusNew England, and 'provided the basis
tries may keep.skilled labor and entrefor the expansion of the colonial iron
preneurial motivation.in short supply.
industryafter 1730. Between 1716 and
As long as these industries offer suffi1776, ,60 blastfurnaces and forges were
cientlyhigh-paying ,secure job oppor-.
, built in.the colony of Pennsylvania .:
tunities to area workers, there is little
After 1800, the industry expanded
unemployed talent and little incentive '
substantially. It spread westward and
to start up newventures.!
'
. to some southern. states' so that by,
A third effect of dominant. industries
1860, there were 'iron works of one
type ot another in almost .everystate.
on a region's economy involves the prolifer.ation of local special-interest
Hpwever, as firms 'began expanding.
.: groups. These groups, which inclu~e latheir operations, competition increased,
bor unions, trade associations, and poland the pressure to find cheap raw
itical coalitions, have an, interest in
materials and labor gave producers in
preserving the benefits they derive from
and around Pennsylvania a clear advantage. This advantage iasted until
tne mature 'industries"
Mancur Olson points out in his thesis
the 1960s,· when foreign imports from
of "institutional sclerosis": .that these
developing countries began to enter the
groups can contribute to the 'decline of United St~t~s:
their region.g, One way they do this i,s .
Because New England did not concentrate Jts . resources in steel producti~n,···
to lobby for favorable legislative and
administrative rules, or to act in colluthe movement of steel out of the region
sion to intluence pricesand wages ..
appears not to have had such a devastating 'effect on its local economy. In
Besultant higher costs reduce the-cornpetitiveness of existir)g firms and dis, contrast, as the steel industry came to.
courage the entrance of new firms. '
d6!11inatethe economy of western Penn"sylvania, labor, capital, and public reMuch of the evidence to support this
theory is rooted in the economic histcsources were all geared toward producing
steel. During steel's heydiy, workers,
ries of regions. AmO'l9 nations, Great-:
Britain relinquished its lead in' manu, managers, and government officials ...
facturing around the turn-of the century I
positioned themselves to extract as (
to rapidly developing Germany and the
-rnuch as possible from the industry. As
United States. 'Now the manufacturing
the industry declined, resources were
sector in the United States and other
slow to move away from what had been
.a stable source of income and support.
. developed countries is facing intense
competition from East Asian countries.
The Sleel Ipduslry Example . Theevolution of steel production offers an interesting example of the effect of product
cycles on variousreqionat economies.

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. Fourth Federal
Reserve District

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employment Is
s~lftlngfrom

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manufacturing to
.

services.

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Industrial Cycles .' Long waves of de- ;
city: For Pitts_burgh, the zenith came in
velopment for each of the/Fourth District
19,47; for Cleveland, it came in 1969;
'. and for Cincinnati' and Columbus, the
,'cities under discusslon provideinsiqht ,
-years were 1974 and 1973,'respectiveJy.
into the present economic conditions of
these areas. Comparing each city's manlt.is possible ttiat employment changes
ufacturing employment. growth. rates' ,
within the District may offer too pessiwith the nation's fron'l1899 to the pres- mistic
view of manufacturlng. Over.
.,. ent reveals industrial cycles that char,
time, . technological' improvements in ,acterize each city's development:
production processes are expected to
_ --For example, tnrouqhout this period,
reduce the amount of labor required to'
produce a unit otoutput. A better indithe growth rate of Pittsburgh's manu- .;
cator of manufacturing activity is value
facturing sectorconsistently trailed the,
nation's growth rate, except for a briet' -, added - the value .otthe goqds produced, minus' the cost of materials.
spurt in the 1920s and the mid-1950s.
We find that growth rates of manuCleveland's rnanufacturlnq-ernployment
facturing
value added for the four cities ,
grew faster than the nation's through(adjusted
by the GNP price deflator)
out the first third of the century, and
_.~ then laggecj behind thereafter. 01'), the
show trends similar to those toundin '
\
.
. 'employment chances. These trends / "
_ other hand, Columbus showed highersupport the conclusion that the decline
. than-average growth between .1909
,
in Pittsburgh's manufacturing- sector
'and 1970, with only a slight setback
occurred
before the other cities' de- t
during .the GreatDepr~ssion.
cline. Furthermore. it suggests that"
Another indication of differences in inColumbus's industrial cycle may not
J dustrial cycles is the date in which manufacturing employment peaked in each '
~et have reached the rnature ~age.

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Progress in~n~~s~rvdepend~'very largely on the enterprise' of "
deep~thinkillf men, who ate ah~ad of the.times in thei~ ideas."
.

William ELlis, 1818
,

Futur8"Gro~h PrOs,8cts
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- . When conslderinq a reqion's future
" growth prospects, one usually rattles
- off a litany of comparative advantages
"and disadvantaqes of dOing business-in
the area. However, we have fo'und that
tocuslnq Ona.checklist.ot pros and cons.
of the four Fourth District cities under
" consideration, does not. satisfactorily
explain their different growth paths. .'.":
. The notion that an industry's life
cycle affects a region's economy offers
an interesting point Qf departure from
the (JsuaJway ~f thinking about a region's future. One' lesson drawn from
this view is that if a region ties its fate"
.too closely to, a particular industry,"
then it. will follow the cycle ·of. that
industry. Thisinference can be.stated
in 'a different way~ a region may n.eed ,
to.sever its past dependence on a few
matureindustries in order tcposltion
itself for future development.
There" is some historical precedent
for this view . Boston's economy had to
be virtually purged of its reliance "on
'the textile industry before it was ready
to nurture new, innovative firms. If

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such a declihe of a ~egi9n'S'base.industries is a necessary -precondition for
adva'ncing to another wave of development, then the erosion of Pittsburgh's manufacturing base (primarily
in basic steelproduction) is setting the
, stage for Pittsburgh's renaissance,
There are' already signs' of , Pittsburgh's rebirth. As ,we'pointed out ear- '
lier, Pittsburgh's economyis looking
more and more like Columbus's, with the .nonrnanutacturinq sectors, especially ,
services, increasingly domiriating the
economy. As Pittsburgh's share of mese.,
-hi.9her-grow~h~sectors increases, its entire economy may begin to turn around.
Of the fou'r' cltles.conslderee in this
region, CoJumbus has been ,the least
dominated bya few incustries. Although
this may have ~I.owe(j its growth in the
past, now Columbus is 'free to devote
its resources to high~growth lndustrles..
'This is already apparent'in'its successfal spawning of business services,

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lhe Emergence of Services "As ser-.
services, appear to benefit from econvices and other, service-producing iromies of scale or scope. As these se(dustries (wholesale and retail trade;
vice providers expand, the prices fdr
transportation and public utilities; fi- _ ' ' their services may fall, which may fur- ,
I .nance, insurance, and reat estate; and
. ther boost the demand for their products,
qoverrment) continue to increase in irnService Sector Producllvlty Contrary
portance, there is somequestion wh~ther
., to the common perception that there is
these activities can sustain a local econlittle room for productivity growth withomy. Some of the major concerns are: in the service sector, someservices ap1. Can the service sector maintain its
pear to be experiencing sizeable produc- growth. unaffected by manufai;tur-ti~itygains.
For example, a study done
ing's decline?
by James Brian Quinn and Christopher
· 2, Can the service sector increase its
E. Gagnon; "Will Services Follow Manuproductivity?
factoring into Decline?" finds that ~ub3: Can the service sector pull' "new"
stltutlons of services for manufacturing
'dollars into the local economy, in
. qoodsrnay increase productivity and
"the same way the manufacturing
, value added in real terms." According
sector has' traditionally done? / :
to their findings, measured value adde\d
Service Sector Growth There are
in some servlce sector industries is at
several reasons to, expect growth in the
least as high as in manufacturing.
,
. service-producinq sector - despite de-,
. ~ -It is likely that the use of high-tech
· clines in manufacturing: Much of the
manufacturing products in services has'
growth in services is occurring as busiled to productivity gains in the service
nesses increase their outside purchases
'sector. Recent studies show that serof services, such as accountinq.adver- vice firms are heavy users of sophist itising, engineering, and law. If a non.catec manufae-turing goods. Some 80
service business, such as a manutac-,
percent of th.e computing, communiCa- .'
turinq plant or a construction tirm.contions, and related information technol-> '
tracts out its service jobs instead ofogies equipment sold in the United
providing them in-house, the jobs move
States in 1982 went to the service secfrom being:classifiedas nonservice jobs
'tor,' and in Great Britain 70 percent of
'.- to service jobs. Also, the. difficulty of
all computer systems sold in 1984
operating sophisticatednew information
went to the service sector."
,and production facilities has made-It
Large service firms (e.q., insurance
· more economical for many businesses to
companies, airlines, utilities, cornmun-:
contract out-services rather than train
ications companies, banks,' hospitals,
" workers or hire highly skilled workers
and retail. chains) may also encourape
to Provide these services internally. In
the development of new manufacturing
, other instances, services are direct subtechnology. Many service industries
stitutes for manufacturing products'. For
havethe resources and the rationale
- example, some firms have found that it
.not only to purchase 'technology, but
makes more financial sense to rent equipalso to help manage its conception.
ment than to buy it.'
design, and development."
.
. There is some coocern that the recent
Service Sector -ExportebllLty Finally,
increases in the demand for services by
the conventional view Of the service- I
businesses may be only a temporary ad·producing sector (particularly the ser',justment phenomenon. But many ofthe
vice and ,retail, industry) was that it
forces causing the increased demand for
grew onlyas a result o'f a healthy
services are unlikely to disappear in the
manufacturing sector, and did not gennear future. Many firms are finding iterate wealth for an area. This percep, too difficult or expensive to provide the
tion of the service sector has ahanged
necessary services themselves. In addi~recently. The, service-producing sector'
tion, many types of services: such as
isan exporting sector, and therefore
medical" financial, and transportation
does have the potential to directly spur
local economic expansion. .There are
basically two ways to export' services:
activities may be transported'and sold
}-:
. to persons outside the area {e.g., an
irisurance carrier)', or individuals may"
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travel tothe cityto purchase services
. this reflects the D.eginningof a trend to(e.g.; a regional medical facility).
ward the exportation of these industries.
The exportability of many services
The Future of Manufacturing The ser- .
has been enhanced by developments in,
vice sector's dramatic rise does not
comrnunicatien, intorrnatron, and trjlnsnecessarily mark the deindustrializaportation Jechnologies. For example,tion
of the nation or of the Fourth Diswith the relative decrease in the costs'
trict. In tacf as mentioned previously,
of these technologies, it is no longer
the relationship between' manOfacturnecessary for essential components of
ing growth and service sector growth is
/ management to be -located near the
often complementary. The two' sectors
scene of production.
may work together to create a healthy,
Technological innovations andjhe in-.
vibrant economy.
creasing integration of the world econoManufactliring will continue to be-a
my have caused many types of services
basic component of the nation's econto be traded not only across the counomy and the Four~h Dlstrlct's.In fact,
try, but' across the world, International
it stlllclaims roughly the same percentrade in services (excluding returns from
tage of GNP that 'it did after World War
foreign investment) reached more than
II', even though its employment share
20. percent. of merchandise I trade by
has plunged sharply, Flj!thermore,the
1980 and has conti hued to go UR,14
<
four cities' share of nationalmanutacThere remains, however, the question'
turing output has fallen only' 1.5 per-'
concerning the export potential of service- 'certtage
points between 1947 and1982,
producing firms in this District. One
from 5.8 percentto 4.3 percent.
', way to Qet a sense of the export potenfuture manufacturing will more than
tial of the service producersin this area'
likely take two divergent paths,simulis to look at how successful we have
taneously. The two paths for future manbeen in the past. A way of measuring
ufacturing involve the increased rnechanwhether services are exported from 'or'
ization of production processes and an
imported into a region is, to determine
increased use of highly skilled labor, '
the. location quotient for an, area's
The first path IS towardmore mechservice-producing industries The loca-,
anized processes, which rely on robottion quotient is the share of employment
icsand other -hiqh-tech, labor-savinq
, in an lndustfy ln'a.specific region dividdevices. In this field, the fourth Dised by the national share of employment
trict enjoys two major advantages.
inthat industry. Barring major differFirst, the Fourth District has been a
ences in demand torservices.arnonq citpioneer in the development and manuJes, cities with la~ger location quotients
facturing of robotic equipment. Second, i
are probably exporting that industry's
its industries, in particular steel and
services to cities with smaller quotlents.
' automobile manufacturing, are 'heavy,
Accordiog to a recent study, the
users of robotics, and will increase their
service-producing sectors within the
dependence on mechanizationas they
Fourth District'cities appear to be con- _, attempt to streamline production costs:
centrated in slightly to moderately exAs a result, even tho'ug~ steel and autoportable services." One.striking excepmobile manufacturing may be considered
'tion is,Pittsburgh, with its concentration
mature industries from the point of view
of engineering services- a 'moderately
. of products, they may be advancing to
, to highly exportable service. Tile ex- ,
another generation of production techporting of engineering services generniques that place them 01] the innovaated an estimated- 13,000 jobs for the _
tion phase of the industrial cycle.
Pittsburgh economy in 1982,..
,
.In some Fourth District clties. there
also appears to be a concentration of
industries that have not been characterized by' export activlty.In particular,
Clev~landshows evidence of having a COI)- '
centi'ation of accounting, audit, and book-,
.keepinq services - industries that are
ranked the lowest of all of the 53 industries exal)1inedJn.export activity. Perhaps
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The second path for future manufaconly' 334 jobs,' In percentage-terms,
. turing development involves very laborthiswas a loss 01 31 percent for Cleve- -,
.tntensive processes that require the' .
land, compared with only 2 percent Ior
craftsmanship of skilled technicians.
Columbus. Employment losses due to
This type -of activity is. also related to
_contractions.. on the -other hand.. are
the imovatlon phaseot product and proroughly the same for the two cities ..
'cess development. For example, high'columbus arid Cleveland also differ'
tech products, such -as satellites, air- -,
significantly
in the performance of
craft; and even robotics, are not
small versus large high-t~ch firms, .For
assembled on an assembly line, but by
. example, puring the 1980-1982 period,
teams of highly skilled technicians.
several I~rge, high~tech firms headAlthough the Fourth District engages inquartered outside Ohiopulled their.
some of tilis type ,of manufacturing,
operations out of Cleveland, resulting'.
these industries are still concentrated .
in a 56' percent decline in the city's
in the Northeast and Southwest.
employment in large, high-tech firms. ' "
,_ Experience with High Tecfi _ Even in
In contrast, Columbus had virtually no
areas (hat have a high concentration of
change in employment by-large, out-of. -mature industries, there.are new, highstate" high-tech firms ..
tech firms emerging. The opening of.
There, ace at I least three'possible'
new firms in cities within the Fourth
explanations tor, t~e ,high nurnberot
, District.may
indicate the imminent
high-tech employment losses in Cleve-- .
.replacernent of the, more traditional,
land. The first is that Cleveland's busimaturing industries.
ness
environment' is not' cenducfveto ,
-.,
,"
Columaus and Cleveland arecontrastsustaining newbuslnesses. The second
ing examples of higll-tech employment
is that the new ventures are tied to old
change: arnonq, our four' cities .. At the
, product lines that have- run their
low end, Cleveland lost 22-percent of
.course. The third, which is less region- ' .
its high-tech workers between 1980 '
'ally' specific, is that the new firms'are
and ;1982, ,-while' Columbus gairi~d 12
~engag~d-in untried products and tech:
" percent over the 'same period. These
nologies with high failure rates. AII_
- aggrega!e numbers :d,o not Jell the full
three illustrate -the ~ffect. of .product '
story, however.
.
cycle apd industrial aging on a region's' ,
>Ficst, Cleveland's hiqh-tech employ. future growth potential.
'rnent is still. much higher than Colum_' The Benefits of Diversity'. It is a jact
bus's. Cleveland boasted 37,000 highof industrial life that as industries age
tech jobs.in 1982, while Columbus had,
and struggle
remain competitive, they.
25,000. .Second, the percentaqe in-'
cut costs by. shedding workeraFor a' region to experiencesteady Or increas-. ,
crease in high-t~ch employment due to
, , the openings of new firms was not that
ing employment growth, either new, in, different between ffie two cities from
novative firms must be nurtured while .'
"1980 to; 982. Ctevelanc experienced ~n
older, larger-scale firms are sustained;
, 11 percent increase; Qolum.bus had a 14 - . or product 'a~d process 'innovations,
- percent lncrease. The increase i~ employmust be continually-developeo by older
ment due to the expansion ofexistmq
firms. But not all regions can easily
firms was' approximately the same for
: testerthis type Qf-economic diversity.
'
the two 'cities,' at around percent.
, A .concentration of older firms mayWhere Cleveland loses out lsin tile
develop; which wOlild have a tendency
'closings of hig~-te~h firm.s~ Cleveland
to reduce innovative activities,
lost 15,000 jobs irom closings during,
Diversity, either within a region or
the 1980-1982 period; Columbus lost
- among regions, has several benefits for '
promoting future eeonornic growth, For
example, grO:wing industries in .one
/,
area can absorb the resources released
from declining industriesin other areas.
As compani.es within one part of the

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Products.
'\

technologies. and, .
jndustrles rise and
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fail in Telatlve

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Importance as

economle,s change

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region grow and demand more products,
the Cleveland 'area between 1975 and
suppliers trom neighboring areas may
1980, The,growing Columbuseconomy
also grow.
.
may later serve as a major market for
For instance; the decline of the steel Cleveland's companies - and engender
,industlY in Cleveland and- Pittsburgh,
future employment growth in Cleveland.
• and the move to make it more efficient,
Finally, the entryo! new firms into a ,
have left many workers without jobs.
closely knit economy creates a competAt t~e same time, Oolumous's expan. itive environment. This may induce the
sion has absorbed some of the dismore entrenched tirms to adopt cost, placed workers. Migration statistics
saving innovations at a faster rate than
show that Columbus was one 01.' the
. if they remained isolated- by aistance
largest recipients of individuals, .leaving
from. their nearest competitors. .

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. ,"There is nothing ~or~dangerous to manage tha~ the qreation' 0':
a new order of t~ings ..: the initiator has_the enmity of aU who
, would profit' by the preservation of the old institution, and' mer,e
lukewarm defenders of those who would 'gain by the new ones.'"
Niccolo Mach/mill, c. 1520
,

The Lesson of Risk

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In this essay, we highlighted the diversilooked at the second theory, the natu. ty within the Fourth District and consid- .
ral a~ing process of industries. This
ered some explanations for the diver- , industrial life cycle explanation suggent employment growth paths of its
gests that, as industries mature, they
four largest cities. We found that at .
shift their energies from deve.lopi,ng
this'. point in ,the region's economic
new products arid technologies to cut- ,
development, Columbus isgro'wing
ting costs. At the same time, they
most quickly; and has replaced Cleve-"
monopolize resources
that otherwise" . '
, tan? and. Pittsburgh a~ the region's
would be directed to more innovative,
growth leader.'
.' ,
but riskier, ventures.
.
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Columbus's growth is buoyed primar- ,
'. One Iessontrom this exploration into
ily by business seryices, while Cincin-, .
the economic development of tl!e~e four.
nati and Cleveland continue to rely to a
cities is that a prerequisite for future
large extent on their traditional indus- growth is the abilitv to break with the
, tries. Pittsburgh" on the other hand, is
apparent secuntyotthe past and a will-experiencing a dramatic transformation ingnessto assume the risks of the futute. >
from a.manufacturinq-domlnared econToo many regions havelearned this les'orny to a service-oriented one..
son the hard way by tying their future
We presented two complementary exto familiar but declining industries.
planations of the observed differences
. Perhaps the success Of the United
In theemployment growth rates, of -the
states in genera~ing more than 30 mil- '
four 'Fourth Distric] cities. The first
lion new jobs since ,1970 rests with its
.explanation is based on locational ad-:
regional diversity. This diversity offers
vantages, with specific references to
ample opportunities for the kind of in, differences in factor costs and locationdustrial restructuring necessary to proalarnenities. This explanation 'provides
mote future growth. One of the bright .
. - insight into Why various industries origpoints on the Fourth District's, horizon,
inally concentrated in certain areas .:
is' that it', too" has this diversity.
To explain why cities appear to lose
Whether this will lead to future .growth
their comparative
advantage. ~we
.oepends, in part, on the willingness of
/.
its managers and work force to rekindle
, I
an entrepreneurial spirit and to 'be »
receptive.to change.
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Footnotes

References

1, . The lJegree of manufacturing concentration
is measured by the percentape of total. employment iri the tour largest two-digit SIC categories of manufacturing industries, divided by
total employment.
-, .
2, Fortune Market Research Survey, Why Cor-.
porate America Moves Where (Time lnc.;
1982). p, 9;_Joint Economic Committee, Location of High Technology Firms and Regional
Economic Development (GovemrnentPrtntlnq
,office, 198.2), p;2S,
'.
. 3. Randall W, Eberts and Joe A, Stone, "Labor
Cost Differentials: Causes and Consequences,"
Federal Reserve Bank of Cleveland, Economic
Commentary, December 1, 1986,
,''..
4, Labor costsin this analysis-ieclude the
hourly wage paid to workers within a metropolitan labor market. The user cost 6f capital is a
composite measure of interest costs,' depreciation, and 10cC!Itaxes arid is best described as
the currentdollar price of renting a unit of capital for a sinple-perlod.
. ,

Basche, James R, "~liminating Bar;:iers to
lntemational Trade and Investment in Services,"
, The Conference Board ResearCh Bulletin, no,
,- 200 (1986),
Booth, Douglas E, '(Long Waves and Uneven
Regional Growth," Southern Economic Journal,
vol, 5~, no, 2 (October 1986), pp. 448-460,
Boyer, Richard, and Savageau, David. Places
Rated Almanac, Chicago: Rand McNally, 1985,
Eberts, Randall W,' and Stone, Joe A, "Labor
Cost Differentials: 'Causes and Consequences,"
Federal Reserve Bank.of Cleveland, .Economic
'Commentary (December 1, 1986), Fortune Market Research Survey, Why Corporate America Moves -Where, NewYork: Time
'Inc"1982,
I
,
", Hogan, William T, Economic History of the Iron
and Steellngustry in the United States; vol. 1,
parts I and II. Lexington: Lexington Books, 1971._
\
Kamien, Mort I., and Schwartz, Nallcy L.
Market Structure and Innovation, Cambridge, '
Mass,: Cambridge University Pl!lSS, 1982,
,

5, Richard Boyer and David Savaqeau, Places
RateiAlmanac
(Rand McNally, 1985),
'
,

~

•

I

6! Mort I. Kamien and Nancy L. Schwartz,
Market Structure and Innovation (Cambridge
University.Press, 1982),'
7, Douglas E, Booth, "Long Waves and unevenRegional Growth," Southern Economic Journal,
-vol. 53, no, 2 (October 1986), pp, 448-460,
"

,

a

8, For example,
number of "back-alley"
entrepreneurs sprang up in the Pittsburph area
after long layoffs of steelworkers prompted
" them to find other ways of ,making a living
without le'!ving the area,
9, Mancur Olson, The Rise and Decline of,
Nations: Economic Growtli, Stagflation, and
Social Rigidities (Y~le University Press, 1982),

,
"

',I

,.

10, William T, Hoqan, Economic History of the
Iron anr! Steel Industry in the United States,
vol. 1, parts I and II (Lexinqton B60ks, 1971),
11. James Brian Quinn and Christopher E.' Gag- ,
, non, "Will Services Follow Manufacturing into
Decline? ," 'Harvard Business Review, no! 6
"(November-December 1986), p. 96,

,

Olson,Mancur. TheRiseand Decline of Nations:
Economic Growth, Stagflation, and Social Rigidities, New Haven: Yale University Press, 1982,
'Pittsburgh Regionar Planning Association,
Region~ith a Future:
Economic Study of the
Pittsburgh'Region, Pittsburgh: 'University of,
Pittsburgh Press, 1963,
Quinn, James Brian,-and:Gagnp'n, Christopher 'E,
"Wi II Services Follow Manutacturing into
'Decline?" Harvard Business Review, no, 6
(November-December 1986), pp. 95-103,
U,S: Congress, Joint Economic Committee,
Location of High Technology Firms and
Regional Economic Development, Washington:Government Printing Office, 1982,
U, S, Nfltional Study on Trade in Services:
mission by the' United States Government
General Agreement on Tariffs and Trade,
Washington: Government Printing Office,

,

13,

Quinn and Gagnon, "Will Services Follow
Manufacturing Into Decline?," p. 97,
14, U,S, National Study on Trad,e iQ 'Services:'
A Submission by the United States Government
to the General Agreement on Tariffs and Trade,
1984 '(Gov.er:nment Printing Office, 1984),
15, Erica Groshen, "Service IndustrY Employrnent: Is the Fourth District Becoming ServiceIntensive?" Federal Reserve Bank of Cleveland,
Ecqnomic Commentary (forthcoming),

19

,

McLaughlin, GlenQ E, Growth of American
Manufacturing Areas, Pittsburgh:- University of
, Pittsburgh, Bureau of Business Research, 1938,"

12, Richard Kirkland, "Are Service Jobs Good Jobs?" Fortune (JuneJO, 1985), p. 38; and
"lntormatiop Makes the Money Go Round," City
of London survey, The 'Economist (July 6,
1985),p, 5,
;.

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A Sub-,
to the.
1984,
1984,

, Comparative, financial. Statement

,-.

. For yearsended December 31
.

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. Statement of
,Condition

Assets

1986
.
65_0./00.0.,0.0.0. , $ . 6,35,0.0.0.,0.0.0.
270.,00.0.,0.0.0./
314,0.0.0.,0.0.0.
:33,248,199
32,8?6:8D6 .
/

.Gold certificate account .........•...
'. . . . . . . . .. $
- 'Special dra~ingr!ghts certificate accou~t : ...•.
, ..
Coin ... ,:..... '.. ~ ·.r ••• ; .: ••••••
..: -:.:. •••••.•••.••
~ Loans and securities: -,
Loans to depository institutions·
-.'......•
,'
- 2o.5',9Qo.,o.o.o.)
-Federal agency obligations bought outright . .-....
, I, 459,763,588
U.S. government securities:
. Bills
,
"," :.....
: 6,0.94-,0.13,0.60.
t-{ot~s "
: .. .'
:
:. :'
"~ . ..4;()o.9,564,83~ , .
, Bonds
)
:. '0 1,510.,589,0.56'
.
Total u.s. government securities
.11,60.5,166,955
Total loans and securities .......•
:~......
12,270.,890.,543 . Cash items in process of collection .'
,......
375',30.5,0.15
Bank premises
_ .:,
: "," . : .
31,540.,886
bther assets
'...
/ n1;968 ,876- .
tntenfistrict settlement account ' .:
;......
'247,216,0.13
,

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'TOTAL

.

4,993,731 ;997
3195,4,442,0.18
1A,45,438 ,895
10.,393,612,910.
11,0.27,943,848
431',748,745
-28,367,930.'
660.,983,418
. 2t5,D~8,992 .

I

ASSETS

....

•. ..•........
\

Liabilities
Federal Reserve notes
Deposits:
• Depository
lnsfltutions
.

: /:

.....

$j4,694,169,532-

.

~13,3D1 ,969,739

,.'

:. .$12,482,0.60.,679

.

$11,341,,421,819

.
.. :..................
,I,

,:.'. .. .. .. ...

(.

; ... . ;..

1,125,625}95
.9,60.0.,0.0.0.
43,575,'363
1 ,17a,8D1 ,158 '
" 434,129;847
133,!3161285

'\

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TOTAL LlABILIT1ES

-

........•..........

~.•...

$13,0.87,969,139

'$14,471,540.,932

Capital paid in ~
Surplu~
:

'
:

..: .........•.
.: .. ;,

.',

$
:..

111,314,30.0.
111,314,30.0.:

, TOTAL CAPITAL ACCOUNTS
:
,•..
$
222;6?8,6DD
TOTAL,I:.IABILITIES AND CAPITAL ACCOUNTS " : • $14,6Q4,169,532.

(

10.7,0.0.0.,30.0.
10.7,0.0.0.,30.0.' ,

$ 214;0.0.0.,600.
. $13,30.1 ,969,739 ~

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....

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"Capital a~counfs '-

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t ;527,.,564,394
9,0.0.0.,0.0.0.
..
Other deposits .. ~ , ....•..........
'.. .'
.'
,'. 26,90.3,549
Total deposits,
' .. '. .. ::.-.:
,
1,563,467 ,~43
Deferred availability cash items
.' ..', ; . '; .;,
,297,722,195
Other liabilities
:.. :
.. ,
.'....
I'
128,290.,115

Foreipn ; ........•..

\

_153,376,40.0.:
4?o.,954,53.8.

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Income and
~xpenses

.,

Curranl Incoma '-

1986
1985
"
~,
Interest on loans ,
'. ;
:
: •.. "
67~,180 "
$
2,106,227
96,4,682,089 _
941,194,643. '
Interest on government securities
I ••• '••• ," ••
Earnings on foreign currency . :-.'
; .. .,
,.
,14,566,789
23,~94,141
Income from .services
'
;
' .
36,425,345
38,173,955
. 498,'154 '
All other income •.. ,
:
: ..•...•
~ ',' .~.
, 415,209
Total Current income . /
'. :
'. ' $1,004,052,128
$1,018,278,604
58,961,.748
Current operating expenses ' .. ',' i •••••.• ; ••••••••
,
'61,?98,377
Cost 6f earnings credits
, ~,581 ,389
8,534,049 '
/

< ••••

s

•

••••••

'CURRENT NETINCOME
\

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,

' ••

:

: -,••

e- •••

$ '950,782,807

$ .933,172,362

,

Profit and lOll
Additions to current Ret income
'Profit on foreign exchange transactions .:
;.' ,$ 118,237,824
Profit on sales of government securities -'. ; .. :
"
" 3,918;5,60
All other additions
,
-:
9, 1~ ,
Total additions ..• ; ...•.......
~ .. '. ;..
.122,165,518

s

.

"

1

s

,

$

77,442,770
5,627,610,
/
5,239
83,075,619

'

Deductions from current net income
Loss on foreign exchange transactions,
'All other deductions
,.:. ' '
Total deductions
, .. '..
Net additions or deductions.
:

,'

.

-05,032,520
$
5;032,520
$ 117,132,998 '

.

$

.
:.

,v •••••••

~

:

-0- ,
434,824
$' / ' ' 4~4,824 ~
,$ ~2,640,795
'$

$

Assallmanls by Board 01 Governors

,

\

Board of Governors expenditures
Federal Reserve currency costs .. : .. , .....•..
, Total assessments by Board of Governors' :
.~

1

.

,

: ..
. " $

,

'5,865,800
11',299,418
1J,165,218

$

4,902,500
" 10,450,559
$ 15,353,059

,

,NET INCOME AVAltABLE
_/

I

PISIr.lbulioll;of nal Incoma .

FOR DISTRIBUTION ' ....
z:

'$'1,'033;140,142

_

,

Dividends paid ............•....•...........
Payments to U',So'Treasury
'(lnterest on Federal Reserve notes)
Transferred to surplus,
.. ; .. .Totaldlstributed .;. '..• '
~

$1,018,070,543
!

'

$,

\

6,590,413

'$ , ' 6,349;649.;

,
1,022,,235,729 : .. ,
, 4,314,000
; .
'....•
:$1,033,140,142

1,008~680;244
, 3;040,650
$1,018,070,543

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Feder:al
Reserve
Bank of,
'Cleveiaod
Directors'
I

Cincinnati

Chairman
& Federal Beserve Agent
William H.'Knoell
President
& Chief Executive Officer
Cyclops Corpor?ltion -,

Chairman
Chairman
Owen B. Buller
.. James t Haas
Retired Chairman of the Board
President
The Procter &' Gamble
/ & Chief-Operating Officer'
Company
National Intergroup, Inc,
Cincinnati, Ohio
-/
Pittsburgh, Pennsylvania

•

As of December 31, 1986

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Pittsburgh, Pennsylvania ,
. Sherrill Cleland
Deputy Chairman'
\.
President
E. Mandell de Windt
'Marietta College
Retired Chaifman' of the Board' Marietta, Ohio
saton COfi{Jorapon
Cleveland, Ohio
J. David Barnes
'Chairman/
& Chief Executive Officer

)

. Mellon Bank
Pittsburgh, Pennsylvania

.

Raymond O. Campbell
Chairman, President
& Chi~f fxecutiv.e Officer
Independent State
.
Bank. of Ohio- '
Columbus, Ohio
Daniel M: Galbreath
President
John W, Galbreath Company
Columbus, Ohio
.
John R. Hall..
Chairman of the Board
.
,
,"
( & 'ChierExecutive Officer
,

\

Pittsburgh

Cleveland

Ashland Oil, Inc.
AShland, Kentucky
Richard O.Hannan
Chairman of the Board
. & Chjef Executive Officer
Mercury Instruments, Inc.
Cincinnati, Ohio

Charles L: Fuellgra', Jr. ,
Chjef Executive; Officer
Fuellgraf Electric Company
' Butler, Pennsylvania

Vernon J. Cole

Lawrence F. Klima

, Executjve Vice President
& Chief Executive Officer,
Harlan National Bank.
H~rla'n, Kentiicky

President
The First National Bank
of Pennsy1vania
Erie, Pennsylvania .

Robert A. Hodson .:
President

JamesS. Pasman, Jr.
Former Vice Chairman

& 9hief Executive-Ottice:
1st Security Bank
Hillsboro,~hio

Aluminum Gomp;my of America
Pittsburgh, Pennsylvania

Kate Ireland
National Chairman
Frorytier Nursing Service
Wendover, Kentucky

President
&·Chief Executive Officer
'Gallatin National Bank
Uniontown, Pennsylvania

Jerry l. Kirby
Chairman. of the Board

Karl M. von der Heydan
. Senior Vice President ,~'Finance

& Chief Executive Officer
Citizens Federal Savings "
' & Loan Association _
Dayton, Ohio
Don' Ross
Owner
Dunreath Farm
Lexington, Kentucky,
./

G. R. Rendle

,

& Chief Financial. Officer' ',H.J. Heinz Company
' Pitt$bargh, .Pennsylvania
,

Milton A. Washington
Preside.nt '
& Chief Executive Officer
Allegheny Housing Rehabilitation
Co!poration
Pittsburgh, Pennsylvania
-

(

John R. Miller
Former President
& Chief Qperating Officer
Standard Oil Company of Ohio
Cleveland,
. , Ohio
/'

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William A. Stroud
Chairman & President
First-Knox "!a'tional Bank
Mount Vernon, Ohio
/

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Federal
Reserve
Bank of
Cleveland
Officers
As of March 1, 1987

Karen N. Horn
President

WIlliam C. Schneider. Jr.
Vice President

William H. He~drlcks
First Vice President

Mark S. Sniderman
Vice President
& Associate Director
of Research

Randolph G. Coleman
Senior Vice President
John M. Davis
Senior Vice President
& Director of Research
John J. Ritchey
Senior Vice President
& General Counsel

Robert Van Valkenburg
Vice President
Andrew W. Watts
Vice President
& Regulatory Counsel
Martin E. Abrams
Assistant Vice President

Lester M. Selby
Senior Vice President
& Secretary

Oscar H. Beach. Jr.
Assistant Vice President

Samuel D. Smith
Senior Vice President

Margret A. Beekel
Assistant Vice President

Donald G. Vlncel
Senior Vice President

Terry N. Bennett
Assistant Vice President

Robert F. Ware
Senior Vice President

Thomas J. Callahan
Assistant Vice President
& Assistant Secretary

John J. Wixted. Jr.
Senior Vice President
Andrew J. Bazar
Vice President
Jake D. Breland
Vice President
Andrew C. Burkle. Jr.
Vice President
Jill Goubeaux Clark
Vice President
& Associate
General Counsel

Randall W. Eberts
Assistant Vice President
& Economist
John J. Erceg
Assistant Vice President
& Economist
Robert J. Faile
Assistant Vice President
Robert J. Gorius
Assistant Vice President
Norman K. Hagen
Assistant Vice President

Patrick V. Cost
Vice President
& General Auditor

David P. Jager
Assistant Vice President

Lawrence Cuy
Vice President

Rayford P. Kallch
Directing Officer

Creighton R. Frlcek
Vice President

ElenaM. McCall
Assistant Vice President

John W. Kopnlck
Vice President

R.Chrls Moore
Directing Officer

Robert W. Price
Vice President

Sandra Planallo
Assistant Vice President

Edward E. Richardson
Vice President

James W. Rakowsky
Assistant Vice President

Susan G. Schueller
Assistant Vice President
& Assistant General Auditor
Burton G. Shutack
Assistant Vice President
Peter D. Skaperdas
Assistant Vice President
& Assistant Director
of Research

r:

William J. Smith
Assistant Vice President
Edward J. Stevens
Assistant Vice President
& Economist
Walker F. Todd
Assistant General Counsel
& Research Officer
DarelJ R. Wittrup
Assistant Vice President
Cincinnati Branch

Charles A. Cerino
Senior Vice President
Roscoe E. Harrison
Assistant Vice President
David F. Weisbrod
Assistant Vice President

"

Jerry S. Wilson
Assistant Vice President
Pittsburgh Branch

Harold J. Swart
Senior Vice President
Raymond l. Brinkman
Assistant Vice President

'I

Lois A. Rlback
Assistant Vice President
Robert B. Schaub
Assistant Vice President
Columbus Office

Charles F. Williams
Vice President

David E. Rich
Assistant Vice President

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. Fe~eral Reserve Bank
,

of Cleve!al}lf ,

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" ill" ~

MAIN OfFICE
'East,pth Street and
Superior A venue
"' Cleveland,
44~'14
. 215.579.2000

all

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CINCINNATI, BRANCH "

v

'¥', "

150 East 4th Street
Cincinnati, 'OIL 45204
513.721.4187

"

PITTSBURGH BRANCH
717 Grant Street
,Pittsburgh, PA . 15219
'4 f2.261. 7800

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COLUMBUS REGIONAL
GH£CK "ROCESSING CENTER

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This annual report was prepared
by the Research Department
and the Public Information
Department, federal Reserve
Bank of 'Cleveland. ·P.O. Box,
6381, CI~veland, OH 44101 ..
For additfonaf c~pies of this
report, contact the Public
lntormation Department,
Federal Reserve Bank of
Cleveland, 21Q.579.2047., .. ~

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965 KiQgsmilt Parkway
Columbus, OH 43229
614.846]050

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Design: Jamie Feldman
Photography: Ki Ho Park
. lIIustratio~. Betty Blakeslee

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