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January Can Credit Controls Be Controlled? District Economy in '71 — On the Way Up A Salute to King Coal o Can Credit Controls Be Controlled? . . . Selective credit controls are gaining in favor, but can they be as selective as pro ponents hope? District Economy in '71 — On the Way Up . . . Although unemployment trended up ward in the District last year, the regional economy showed some signs of a moderate build-up. A Salute to King Coal . . . The Methuselah of the fuel industries may be Number 3 now, but new technology and coal's bountifulness indicate there's plenty of life in the old boy yet. BUSINESS REVIEW is produced in the Departm ent of Research. Ronald B. W illiam s is A rt Director and M anager, G raphic S e rv ice s. The authors w ill be glad to receive com m ents on th eir articles. Requests fo r additional copies should be addressed to Public Inform ation, Federal R eserve B ank of Philad elphia, Philadelphia, Pennsylvania 19101. Can Credit Controls Be Controlled? The Federal Reserve Bank of Philadel phia is sponsoring a study of selective credit controls. The study includes investi gations of their equity, efficiency, and work ability. The conclusion of this article bears on only one aspect of these controls — their tendency to expand. An examination of other aspects of the selective credit issue is necessary before general policy conclu sions can be reached. by James M. O'Brien skyscraper in Cleveland, why not an addi tional schoolhouse in Poughkeepsie or a zoo in Sheboygan? Suggestions for giving the country's economic engine more direc tion have been advanced for some time. One that is gaining in favor is something called selective credit controls. Last year Buildmore Industries added a giant new skyscraper to its arsenal of cap ital, a full two stories higher, management said, than the "Tower of Babel" built the year before by its closest competitor. This year Gofast Motor Corporation has begun construction of three new plants strategically located, according to its "Letter to the Stock holder," to keep more Americans on the move even more. These and other corporate expansions no doubt are designed to in crease profits, but what do they do to so ciety's welfare? It is now part of the con ventional wisdom that the products turned out by free enterprise are not necessarily those that fill our bag of national priorities. Many public-spirited citizens, though in habitants of skyscrapers and drivers of autos, are prodding their elected officials to help keep capitalism on the right track. Instead of another auto plant in Detroit or a new AIMING CREDIT Since credit finances a hefty chunk of our production costs, the argument goes, selective alteration of the flows of credit can be a cheap but effective means to re channel the flow of resources. This policy would make it more (or less) expensive to finance projects according to their social priority. For example, housing construction might get a shot in the arm if the govern ment subsidized mortgage payments, and business investment might be turned off a little by a special tax on interest from 3 JANUARY 1972 BUSINESS REVIEW now make skyscraper loans instead of the banks. Soon regulation will have to be ex tended to these lenders as well. And, on and on will go the confrontation between loopholes and regulation. In the end, limiting selective credit con trols to a specific type of lender will likely prove difficult, causing regulators to redefine their control in terms of uses and types of credit. Yet, expectations may still outstrip realities. If the government regulated auto mobile credit, for example, it might reduce the volume of auto credit without much re ducing the amount of credit for auto-financ ing. Suppose controls were imposed on auto credit. Rather than financing, say, 50 per cent of the car on credit, you might finance only 30 per cent, and spend what you had saved for a new TV to make up the difference. Then you could borrow to buy the TV. And although you might not resort to such deviousness, your neighbor might claim that his loan is for home improvements when it's really for a new automobile. How might authorities determine the ulti mate purpose of credit? There are two ap proaches, each leading to more interference. One is an examination and policing of the uses of credit not being intentionally regu lated. For example, the regulators might have lenders submit for review all consumer loans so as to reduce the substitution of auto credit for other forms of consumer credit. This way would be expensive both to regulators and lenders. Increased costs of processing loans for supposedly nonregulated uses would tend to discourage these loans as well as the intentionally regulated ones. The other alternative is expanding the regulations to other uses of credit that would be difficult to distinguish from the intentionally regulated use. For example, credit for purchasing consumer durables might be brought under the auto credit controls. While regulators may lean toward the latter approach, because the direct cost to them is likely to be less, both ways lead corporate bonds. If government could in duce Buildmore's banker not to lend to Buildmore, there might be one less sky scraper and, possibly, one more schoolhouse.' Selective credit controls are usually seen as an alternative to direct government spending on social goods. Credit controls supposedly entail fewer administrative costs for the gov ernment and substantially less interference in the economic affairs of its citizens. So proponents argue that by giving credit a push here and a pull there, we can maintain some control over our economy without giving up the best features of free enterprise. LIKELY GROWING PAINS Few solutions to economic problems are perfect. A cloud that comes with the silver lining of selective credit controls is replete with loopholes. The ingenuity of economic man and the malleability of markets seem limitless, and no legislation yet has been able to plug all possible loopholes. Conse quently, if selective credit controls are to be effective, more and more government regu lation is likely to be required to block escape hatches as they develop. Suppose, for example, the powers-that-be decide we are building too many skyscrapers and that the best medicine is selective credit control. Soon, a tax or some form of restric tion is imposed on the income earned by banks on skyscraper loans. The tax is limited to banks because these are the main sup pliers of credit to builders of skyscrapers, and the regulatory agency wishes to limit the regulation and policing. Before long, banks might well be out of the skyscraper loan business as untaxed lenders, such as mortgage and finance companies, find them selves with a competitive advantage. They ' A limited use of selective credit controls already exists. Various types of credit subsidies are used to aid the financing of housing, a tax exemption is given on income earned from municipal bonds, and credit for purchasing or carrying securities is subject to mar gin requirements (the last will be analyzed below). 4 FEDERAL RESERVE BANK OF PHILADELPHIA to extending the selective credit controls to uses of credit not intended for regulation.2 And as controls expand to new lenders and to new uses of credit, so does the role of the Government in the economy. The result is increased cost to both regulator and regulated, reduced efficiency of eco nomic markets, and more governmental interference in private decisions. This, of course, does not mean that selective credit controls must be counted out; it merely means that we must approach them with the same careful evaluation of costs and benefits demanded by any proposed eco nomic policy. A LESSON FROM HISTORY: WIDENING THE NET When stock prices plunged in the fall of 1929, Americans saw their hard-earned sav ings evaporate. Everyone has his own theory of what went wrong, but for many the cul prit was "excessive" use of credit. Before the Great Crash, this theory goes, credit provided optimistic investors the where withal to bid up stock prices to supposedly unsustainable levels that led to the sharp and deep price contraction of October 1929. Spurred by its responsibility to the public 2 Selective credit controls can take the form of a subsidy rather than a tax. When a subsidy is used to reduce the costs of acquiring or extending a particular type of credit for a particular use, the problem con fronting the regulatory authorities is how to keep everyone from jumping on the bandwagon. If home building is the favored type of investment, a ''house'' may be a home with a decreasing frequency. Bor rowers, for any purpose, can be expected to seek the cheapest source of credit. In addition, there will be some incentive for privileged individuals or groups to borrow "low ” (borrow from the subsidized source) and lend "high" (lend these funds for nonsubsidized uses). As with restrictive credit controls, the regula tory agency must have the means to determine the ultimate uses of credit. It will have to have some con trol over the portfolio activities of lenders that ex ceeds the specific types of credit and investment pur posely being subsidized. As lenders and borrowers become more familiar with the workings of the regu lations, greater controls may become necessary. 5 welfare, Congress enacted legislation in 1934 aimed at reducing "excessive" use of credit for equity purchases. The Board of Gover nors of the Federal Reserve System was given the responsibility of administering the law. The Board was empowered to set a lower limit on the down payment that a bor rower makes when he borrows for the pur pose of buying or carrying equity. For ex ample, the current limit is 55 per cent which means a borrower must put down at least 55 per cent of the price of the security at the time of purchase. This limit or margin requirement has ranged between 40 and 100 per cent in past years but has always been substantially above what security credit lenders usually required before 1934. Margin requirements on security credit provide us with a good example of this country's experience with clear-cut selective credit controls. On the books since 1934, margin requirements aim to limit credit flowing to a specific type of use — equity purchases. In later years, security credit reg ulation has tended to loosen its selectivity regarding who and what type of credit fall under its net. Bringing in Previously Unregulated Lend ers. Initially the Federal Reserve Board im posed margin requirements only on credit extended by brokers and dealers (Regula tion T).3* In 1934 only brokers and dealers were extending much security credit; con sequently, there was no immediate need to regulate other lenders. Ftowever, as the stock market rebounded in the spring and summer of 1936, John Q. Investor found his banker a convenient source of security credit and a convenient alternative to his regulated broker. Nineteen months after the regulation of brokers' and dealers' credit, 3 The margin regulation applied to brokers and dealers belonging to national security exchanges and those doing business with such members. A primary source of reference for the factual history of security credit regulation is Frederic Solomon and Janet Hart, "Recent Developments in the Regulation of Security Credit," Journal of Public Law, XX (1971), 167-213. JANUARY 1972 BUSINESS REVIEW to buy or carry securities (Regulation X). The practical effect of this regulation is to bring security credit obtained from foreign sources under regulation. therefore, the Board applied margin require ments to security credit extended by banks (Regulation U). The Board argued that con trol of banker's security credit was necessary for fair and effective regulation. The net of security credit regulation had begun to widen. With the extension of margin regulations to bankers' credit, many borrowers during Bringing Unregulated Credit Uses Under Security Credit Regulation. The purpose of margin requirements was, and is, to restrict the "excessive" use of credit for purchasing and carryin g e q u ity. C re d it exten d ed for other purposes is not intended to be reg ulated. However, faced with the dilemma of determining the true purpose of credit, the regulators have felt the need to extend their authority, at least marginally, into other uses of credit.5 Although regulating credit for purchasing or carrying bonds is not an objective of margin requirements, the Board, in 1967, felt that it had to subject convertible bonds (bonds which can be exchanged into stock at the option of the holder) to margin re quirements. When John Q. Investor buys a convertible bond, it is often with the inten tion of switching it for stock. Before 1967 this option provided the investor with a way of purchasing equity without being subject to margin requirements. To close this loop hole the Board announced that it would impose margin requirements on convertible bonds. However, the requirements were lower than those on true equity, apparently to compromise with the borrower who does not intend to make the switch to equity. During the 1960's an extension into life insurance came about because of the in creased popularity of equity funding plans offered by mutual funds, by which the investor received a package of mutual fund shares and life insurance. The plan is espe cially attractive to the investor interested in buying both insurance and stocks. He can pay cash for the stock or equity and then the 1950's and 1960's sw itch e d to lenders traditionally not given to extending security credit.4 Ironically, these unregulated lenders would often obtain their credit from banks with little or no margin. After several limited attempts at reducing the circumventions, the Board, in 1968, applied margin require ments to credit from any domestic lender not currently subject to them who made security credit an important part of its busi ness. This extension brought under regula tion security credit being extended by tax-exempt foundations, partnerships, corpo rations, factors, credit unions, and savings institutions among others. Thus the Board brought all domestic lenders under its con trol; but regulation of lending sources had still not come the full route. Foreign lending in the 1960's revealed an other flaw in the security credit regulations. Some investors borrowed from foreign banks to buy securities at a margin lower than that required on domestic security credit. Since foreign banks can and do bor row from U.S. sources, they became an intermediary process in the circumvention of margin requirements. In compliance with the Foreign Bank Secrecy Act of 1970, the Board of Governors for the first time re quired borrowers to comply directly with margin regulations whenever they borrowed 4 In 1963 the Securities Exchange Commission, in its Special Study of the Securities Markets, contended that unregulated lenders were more important than ever before. The Study identified 58 lenders of se 5 It is possible that there currently exist loopholes curity credit and noted that there was evidence of or circumventions more serious than those which numerous others that operate quietly with a small have been closed or stopped because the cost of amount of customers. The study recommended that closing these was judged to be too great. unregulated lenders be controlled. 6 FEDERAL RESERVE BANK OF PHILADELPHIA borrow on it to pay the insurance premium. The Board ruled in 1969 that it would regard credit for purchasing life insurance in this plan as subject to margin requirements when the equity is used as collateral. Here again another difficulty arises concerning the true nature of security and nonsecurity credit, and the applicability of selective controls. Because of the difficulties and costs in volved in detailed regulation of lenders other than banks and brokers, the Board has put some limits on their nonsecurity credit. An example is that these lenders may not have both security and nonsecurity credit outstanding to the same borrower. Security credit regulation has been plainly predisposed to expansion. Its growth indi cates the difficulty of limiting a credit con trol to a specific type of lender. Originally covering only brokers' and dealers' credit, security credit regulation now embraces the gamut of lenders. Difficulties of limiting the control to a specific use of credit are also illustrated. Determining the ultimate pur pose of a loan is a difficult and expensive task6 so that, when faced with uncertainty as to the use of a type of credit, regulators have often widened the uses of credit being regulated. CONTROLLING CREDIT COULD BE COSTLY 6 The costs associated with margin regulation of security credit are difficult to assess although they have probably not "gone through the roof." Part of the burden has fallen on existing regulatory bureaus or organizations so that these costs become submerged with that of its other activities. Part of the burden has also probably fallen on those regulated as they have had to determine whether they should impose margin requirements on credit they extend. If these lenders take this responsibility seriously, then they too (and their customers), incur part of this policing cost. Security credit lenders also bear the costs of the in creased paper work required to meet the Board of Governors registration and reporting requirements. Perhaps even more difficult to assess is the effective ness of security credit regulation in reducing the ex cessive use of security credit. Partly the problem is in defining what is "excessive use of security credit" and partly there is a problem of isolating the effects of margin requirements on the "excessive" indicators. See Bogen, J. L., and Kroos, H. E., Security Credit (Englewood Cliffs, N.J.: Prentice-Hall, 1960), pp. 114127; Cohen, J., "Federal Reserve Margin Requirements and the Stock Market," Journal of Financial and Quantitiative Analysis, I (September, 1966), 30-54; 7 If society desires a reorientation of pro ductive resources toward more “ socially" oriented goals, it will have to pay the price. The price tag will include not only the “ pri vate" products lost by shifting resources from their production to the production of social goods, but also the cost of transfer ring the resources. Resources will be used in maintaining a government agency to carry out the policy and in requiring private individuals or businesses to meet legal re quirements (such as keeping records). There will also be a political cost in the sense that government will play a larger role and the individual a smaller one in choosing what he does with his own resources or income. In short, there will be no free lunches. While there may be no free lunches, some lunches may be cheaper than others. Selective credit control proponents feel that their policy would be an inexpensive way to rechannel resources to achieve social goals. And they may well be right. However, both reason and at least some experience with this approach suggest that controls, if they are to be effective, will expand to plug exist ing and developing loopholes. Expansion makes selectivity more difficult and raises the cost to society. These added costs must be recognized when evaluating the merits of selective credit controls. Selective controls, then, may be compared to an artificial organ, and the U. S. eco nomic system to the human body. A doctor of medicine would be negligent if, in im planting the artifact, he did not consider the full effects that such an operation would Moor, T. G., "Stock Market Margin Requirements," Journal of Political Economy, LXXIV (April, 1966), 158-67. JANUARY 1972 BUSINESS REVIEW to consider the problems and complications that can be expected to follow the attempt to selectively control credit. ■ have on the patient. A "doctor" of political economy would likewise be negligent if, in advocating selective credit controls, he failed n n FORECASTS FOR 1972 NOW AVAILABLE The Department of Research has compiled and analyzed a number of predictions for 1972 made by businessmen, economists, and Government officials. This compilation includes a summary of forecasts for the economy as a whole as well as for particular sectors of the economy. The more important indicators are pre sented in chart form. Copies of this release are available upon request from Public Services, Federal Reserve Bank of Philadelphia, Philadelphia, Penn sylvania 19101. Li 8 FEDERAL RESERVE BANK OF PHILADELPHIA District Economy in '71 — On the Way Up by Kathryn L. Kindi Economic activity in the Third Federal Re serve District built up slowly in 1971. In both the region and the nation, construction gains laid the groundwork for a year of hesitant recovery. By mid '71, retail sales in the District showed some signs of strength ening. Nevertheless, unemployment con tinued to climb through '71. Those who were employed saw their earnings rise, but — especially prior to NEP* — inflation took a heavy toll. ing construction contracts advanced 22 per cent, while in the Third District private building awards moved ahead 13 per cent. Although lagging the nation, the regional gain last year was a big improvement over the .6 per cent decline registered in 1970. When awards for public construction are included, the Third District did slightly bet ter than the nation in 1971. Total construc tion contract awards — residential and non residential building plus public works construction — rose over 18 per cent in the District, almost 2 per cent ahead of the national step-up. LOCAL LUMINARIES Solid gains in building construction and, after midyear, modest improvement in re tail trade paved the way for some firming of the regional economy in 1971. Although economic advances fell short of hopes for swift recovery in all sectors of the economy, the bright spots were indeed welcome following the generally depressed conditions of 1970. Particularly striking was the turnabout in private residential and nonresidential build ing construction. Nationally, awards of build As the District economy started to get off the ground, consumers began to show less reluctance to spend. Auto sales especially bounced back vigorously. A look at the chart reveals that registrations of new passenger cars (a rough proxy for new car sales) picked up markedly during '71. General re tail activity, except in the Lancaster area, however, did not show the same bounce, at least through midyear. But unofficial sound ings of department store executives in the Third District since midyear suggest that re tail sales were more buoyant during the closing months of 1971. *NEP (New Economic Policy) refers to the economic programs announced by the Administration on August 15, 1971, and afterward. 9 BUSINESS REVIEW JANUARY 1972 R O B U S T G A I N S IN C O N S T R U C T I O N CONTRACT AW ARDS . . . Percentage Change in Value of Residential and Nonresidential Building Construction Contracts Awarded □ 20 UNITED STATES b □ THIRD DISTRICT 10 -5 1967 1968 1969 1970 1971" 1970 1971* Percentage Change in Value of Total Building and Public Works Construction Contracts Awarded 1967 1968 * Based on first 11 months. Source: F. W. Dodge Corp. 1969 10 FEDERAL RESERVE BANK OF PHILADELPHIA A N D A M O D E S T U P T U R N IN R E T A I L A C TIV ITY S T IR R E D T H E R E G IO N A L E C O N O M Y IN ’71. MONTHLY DEPARTMENT STORE SALES* Percentage Change ♦Based on first 7 months. Source: Department of Commerce, SMSA Basis. Percentage Change in Registration of New Passenger Cars 15 □ UNITED STATES □ THIRD DISTRICT 10 5 0 -5 -1 0 -15 1967 1968 1969 ♦Based on first 10 months. Source: U.S. Data, Automotive News. 11 1970 1971* JANUARY 1972 BUSINESS REVIEW An unemployed worker is unlikely, how ever, to be a spendthrift consumer. And, despite some upswing, recovery of the re most of 1971. But the unemployment rate in the region trended upward in '71, and, as the end of the year neared, the rate of unemployment in the District stood seventenths of a percentage point higher than in gional e co n o m y w as not strong enough to January. hold down unemployment. Not only did employment in the District decline and un employment rise, but also the average work week increased only slightly from the de pressed level of 1970. In contrast to 1970, in 1971 the rise in the rate of District unemployment exceeded that of the nation. Nationally, the unemployment rate fluctuated around 6 per cent during This rise in unemployment in '71 ap peared to be concentrated within the weak manufacturing sector. Manhours worked in manufacturing fell over 6 per cent last year, even more of a drop than in '70. And al though most of the decline in manhours in '71 occurred before midsummer, factory activity remained sluggish through much of the second half of 1971 as well. UNEMPLOYMENT — A LONGER SHADOW H O W EV ER , U N EM PLO YM EN T C O N T IN U E D T O R IS E . . . UNEMPLOYMENT UNEMPLOYMENT Per Cent Per Cent *Based on first 11 months. Source: U.S. Data, Department of Labor. 12 FEDERAL RESERVE BANK OF PHILADELPHIA Percentage Change in Manhours Used in Manufacturing in the Third District AN D M A N H O U RS TO F A L L . Percentage Change in Manhours Used in Manufacturing in the Third District THE WAGE-PRICE PICTURE Workers in the region earned more money in '71 — but they, and all other residents of the Third District, also faced higher prices. Both wages and prices continued to climb, regionally as well as nationally. Late last year NEP did, of course, exert downward pressure on increases in paychecks and price tags. Nonetheless, wages advanced faster than in 1970, but the rate of inflation slowed appreciably. In real terms, therefore, the average wage earner in the region actually fared better during 1971 than during 1970, or during the expansive late 60's for that matter. The average worker in the Third District upped his real purchasing power by almost 3 per cent, outdistancing real gains posted by employees elsewhere in the nation. '■ ’'Based on first 11 months. 13 BUSINESS REVIEW JANUARY 1972 A L T H O U G H P R IC E S R O S E R A P ID L Y , E S P E C IA L L Y P R IO R T O N E P , . . . Percentage Change in Consumer Price Index BANKING — A MIRROR REFLECTION 1967 1968 1969 1970 On the whole, banking trends last year reflected the moderate upturn occurring in the real sector. As the demand for loans improved modestly and funds became more readily available, loans by member banks advanced steadily. In fact, the increase in loans approved in the District during 1971 remained slightly ahead of the national pace. In the District, as well as across the nation, bankers' investment activities turned about dramatically. With monetary policy on a course of more moderate ease and fol lowing a downturn in securities holdings during 1970, investments by District mem ber banks jumped over 25 per cent last year. Once again, activity within the District was stronger than in other areas of the country. 1971* * Based on first 11 months. Source: Department of Labor. ONWARD TOWARD '72 In short, District policymakers and busi nessmen attempted in '71 to recoup some of the losses of the previous year. The re gional recovery got off to a slow start, but, by year's end, retail trade and other non manufacturing activities had picked up. And, as the impact of NEP begins to be felt throughout the entire economy, production and sales are likely to accelerate more rapidly. This improvement in economic con ditions is consistent with the expectations of area executives, who anticipate some solid gains in regional business activity within the coming months (see box). The challenge of '72 is to sustain the recovery while holding the line on inflation. ■ LA ST YEA R W AGE AD VAN CES O U T S T R IP P E D P R IC E IN C R E A S E S . Percentage Change iri Average Weekly Earnings in Manufacturing 1967 1968 1969 1970 1971* * Based on first 11 months. Source: U.S. Data, Department of Labor. 14 FEDERAL RESERVE BANK OF PHILADELPHIA IN G E N E R A L , B A N K I N G D E V E L O P M E N T S Percentage Change IN '71 R E F L E C T E D H E S I T A N T G R O W T H INVESTMENTS 30 IN T H E R E A L S E C T O R . LOANS Percentage Change -1 0 -----------------------------------------------1967 1968 1969 1970 1971* Note: Investments include U.S. Government obligations and other securities and apply for member banks only. Data is for last Wednesday of each month. * Based on first 11 months. Source: U.S. Data, Board of Governors of the Federal Reserve System. Note: Loans include both loans and discounts and apply for member banks only. Data is for last Wednesday of each month. * Based on first 11 months. Source: U.S. Data, Board of Governors of the Federal Reserve System. THIRD DISTRICT BUSINESSMEN LO O K TOW ARD 72 The Federal Reserve Bank of Philadelphia conducts a monthly Business Outlook Survey. This survey is designed to gain insight into current and near-term economic conditions in the Third District, an area that includes the eastern two-thirds of Penn sylvania, the southern half of New Jersey, and Delaware. Executives of manufacturing firms with 500 or more employees are polled with regard to their readings of local business activity. Now four years old, the Business Outlook Survey was instituted at the request of the regional business community. Copies of the monthly summary of the Outlook Survey may be obtained by writing to Public Services, Federal Reserve Bank of Phila delphia, Philadelphia, Pennsylvania 19101. OUTLOOK FOR 1972 Business executives in the Third District are generally optimistic about the regional outlook for 1972, as many key indicators point toward a brisker pace of economic activity. More than one-third of the Business Outlook Survey's respondents plan to boost the size of their work forces. About seven in ten anticipate a rise in both new orders and sales within the next six months. Also, the capital spending outlook is stronger now than it has been since early 1969. And inflationary psychology, which has diminished since mid 1971, is expected to be held in check this year. In short, area manufacturers expect the tempo of business activity to quicken in the months ahead without a resurgence of inflation. 15 BUSINESS REVIEW JANUARY 1972 A Salute to King Coal by Evan B. Alderfer* Coal is an old industry — threatened by natural gas and petroleum, newly menaced by nuclear power. But it would be prema ture to write King Coal's obituary. To be sure, the coal industry has had a long life, but its future could conceivably be longer than its past because of the sweeping changes that are taking place in the broad field of energy. Coal is plentiful, widely dis tributed, and more popular than ever be cause of technological developments that make this fossil fuel more accessible, cheaper, and cleaner in a pollution-con scious age. first. After World War II, however, the rail roads, one of the major markets for the black rock, dealt the coal industry a nearfatal blow, when they shifted from coal burning steam locomotives to oil-burning diesels. Within a comparatively short time, the 130-million-ton railroad market for coal disappeared completely. Although blast fur naces continued to use coke derived from coal to smelt iron ores, about half the steel works and rolling mills abandoned coal and coke for oil and natural gas, more conven ient fuels for firing furnaces. Coal lost an additional third of its market when other manufacturing industries switched to oil and gas. Moreover, retail deliveries of soft coal for household heating shrank to a tenth of their former tonnage. Only two soft coal markets improved — exports and sales to the electric power util ities. Exports more than doubled, and the electric utilities now burn four times their early post-World War II tonnage. The net HARD TIMES Early in the twentieth century, oil and nat ural gas began edging gradually into the fuel market, a field so long dominated by coal that little thought was given them at *Dr. Alderfer, now retired, is a former Economic Adviser of the Federal Reserve Bank of Philadelphia. 16 FEDERAL RESERVE BANK OF PHILADELPHIA ing the "output per man-day is roughly 100 per cent higher, than in underground min ing, average recovery is 60 per cent higher, and operating costs are 25-30 per cent lower." Currently, over a third of the indus try's output comes from strip mines. Though the productivity of the strip process is high, it surely lacerates the land scape! Removal of 25 to 50 feet of over burden to get at the coal seam leaves long windows of "spoil banks" with intervening trenches. After all the coal is extracted, the place is often left a desolate scene with rust-colored puddles of acid mine water, rubbish dumps, and abandoned equipment. Nevertheless, strip mining need not leave behind a scene of lunar desolation. In Eng land and Germany, for example, topsoil is first removed and stored. Then, after re moval of the coal, the land is returned to its former contour, and finally, the topsoil is replaced. Getting Coal to Market. Getting coal to market has puzzled both mine owners and coal buyers. Most mines are far from mar kets, and coal is heavy and costly to haul. Railroads still do the lion's share of coal transportation. One approach to lower costs is the fleet train. Pennsylvania Power and Light Company uses a stable of five fleet trains of specially built coal cars that shuttle between coal mines in western Pennsylvania and the company's power plants in the east ern part of the state. Ten-thousand tons can be loaded and unloaded in a jiffy. And, the savings are certainly worth the invest ment in rolling stock. The quest for lower-cost transport has also led to use of pipelines. Coal, finely ground and mixed with water to form a slurry, can be pumped through a pipeline. Coal from a mine in eastern Ohio was pipe lined to Cleveland until railroad freight rates made this venture unprofitable. A plan to pump coal from West Virginia and Penn sylvania to the Atlantic Seaboard never ma terialized, because of legislative and rightof-way obstacles than technical difficulties. overall change leaves coal consumption about where it was a quarter-century ago. The coal industry has hardly stood still. Quite the contrary: competitive fuels have forced the industry to make numerous improvements, especially in mining and marketing. COAL'S PROCESSING Mechanizing to Meet the Challenge. Mechanization, more than anything else, has kept coal alive and competitive.1 Over half the coal mined today is still obtained by tunneling underground, but pick and shovel have long since given way to power tools which have greatly increased produc tivity. Extensive use is made of the "contin uous miner," a one-man-operated machine somewhat resembling a giant mole. With whirling teeth that rip coal from the seams and legs, the continuous miner sweeps the coals onto a conveyor for loading. Another modern technique applicable in some mines is "longwalling." This under ground process employes a power-driven, steel-tipped plow or whirling planer that shaves coal from a long surface, much like slicing cold cuts in a delicatessen. At the same time as the loosened coal tumbles onto a conveyor, movable hydraulic sup ports hold up the room — an important safety feature for the miners. In strip mining, employed where coal seams lie near the surface, specialized ma chinery has greatly improved productivity. Power shovels first bulldoze the overlay of earth until the veil of coal is laid bare; then they scoop up the coal. The early power shovels and draglines scooped up only a few cubic yards of earth at a time. Today's larg est power shovel is as tall as a 21-story build ing and gobbles up 270 tons of rock and dirt in one bite. As a consequence, the Geological Survey reports, that in strip min 1 Despite improved methods, miners are still ex posed to the hazards of roof falls, explosions of coal dust, and black-lung disease from coal-dust inhalation. 17 BUSINESS REVIEW JANUARY 1972 A 273-mile, 18-inch pipeline from an Ari zona mine to a Nevada power plant is now under construction. in coal land and coal companies. Only two of the ten largest coal companies remain in dependently owned; oil companies, mineral concerns, and conglomerates own or con trol the others. Moreover, the top 20 pro ducers of natural gas are oil concerns, some of which also have interests in nuclear energy. Still other oil companies have bought or leased large tracts of coal land. Permits for coal prospecting on Federally owned land and on Indian reservations are up sharply. Coal has gotten hot for two reasons: The insatiable and anticipated demands of the electric utility, synthetic gaseous, and liquid fuels industries, plus coal's widespread abundance have enhanced the commodity's popularity. The Bounty and Its Whereabouts. Accord ing to the latest estimate of the Geological Survey, known reserves recoverable under present conditions are 200 billion tons. That is over 250 times this year's production — a comforting statistic for the coal-burning electric utilities. These widely distributed coal deposits are within 37 states, as the map shows. The northern Appalachian basin was the first to be developed because of its proximity to population and industrial centers. Pennsyl vania, long the leading coal producer, has been superseded by both West Virginia and Kentucky. These three states, along with fourth-ranking Illinois, currently produce two-thirds of the industry's output. From the standpoint of reserves, the rich est region is the northern Rocky Mountain basin which embraces parts of Montana, Wyoming, Idaho, and the Dakotas. Most of the deposits in the Dakotas and some in Montana are lignite, the lowest-rank coal in energy per ton, but not to be despised. Sub stantial coal deposits are also found in the southern Rocky Mountain basin which includes parts of Colorado, Utah, Arizona, and New Mexico. The two Rocky Mountain basins are estimated to have the biggest chunk of the country's coal reserves. PENNSYLVANIA'S CHESTNUT RIDGE Instead of railroading bulky coal from the mine to a distant power plant, why not build the power plant atop the mine and send the kilowatts to market by wire? That is now being done, thanks to improvements in long-distance transmission. Most Phila delphia - Baltimore - Washington consumers get electricity from a trio of huge minemouth plants atop Chestnut Ridge, an im mense coal-bearing mountain in western Pennsylvania. The three plants — near Johns town, Conemaugh, Homer City, and Key stone— devour 1,700 tons of coal an hour around the clock. At Keystone one can see a pile of coal, over a million tons high, col lected to assure uninterrupted service, and it is estimated that the underground mine has enough coal to feed the plant for 30 years. Four vase-shaped cooling towers, 325 feet high, curb any thermal polluting of the little steam that supplies the water. Tower ing above everything are two 800-foot high stacks that disperse into the upper atmo sphere whatever combustion by-products that may escape the electrostatic precipi tators. A bit mine-mouth complex, such as Chest nut Ridge, affords savings in unit costs of power by reason of its large scale set-up. These savings and benefits accrue on a pro rata basis to the suppliers of the capital, which was contributed by the member power companies of the Pennsylvania-New Jersey-Maryland Interconnection. (See "Pres sures in the Powerhouse," Business Review, April 1971.) SUPPLIES AND DEMANDS Improvements in mining and moving coal have kept the industry abreast of its com petitors. But, coal is doing more than vie with other fuel industries; it is acquiring a new look. Blue-chip concerns are investing 18 FEDERAL RESERVE BANK OF PHILADELPHIA The Call of the West. Over 75 per cent of the country's 45 billion tons of economically strippable coal lies in 13 states west of the Mississippi River. Many of these deposits have the added attraction of being unusually thick — one bed of coal in Wyoming, for example, is almost 90 feet thick. Western coal seams are said to be on average about 12 times thicker than those in the East. Yet another quality of western coal that enhances its value is its low sulfur content. With growing awareness of air pollution, states and municipalities are imposing stricter limits on the sulfur content of coal used by electric utilities. Standing at the head of the list in tonnage of low-sulfur COAL F IE L D S (FR O M U N IT E D strippable coal and lignite are four western states — Wyoming, Montana, New Mexico, and North Dakota. Coal-burning electric utilities have been operating for a long time in the West, and new plants are going up in Texas, New Mexico, and Washington state. Moreover, western coal is coming east. Chicago utilities have brought low-sulfur coal from Montana and Wyoming, and are considering low-sulfur coal from Colorado, Utah, and New Mexico. Coal's Lifeline. Instead of fading out, coal's lifeline may be growing stronger and longer at the expense of at least one major com petitor— natural gas. Natural gas is clean, convenient, and calorific; it is widely used O F T H E U N IT E D STATES 19 G E O L O G IC A L STATES. SURVEY) JANUARY 1972 BUSINESS REVIEW When nuclear power plants entered the picture it was thought they would choke off coal's lifeline. Today, however, the 22 operable nuclear plants have less than 3 per cent of the electric utility industry's total generating capacity. Nuclear plants still face technical, economic, and environmental problems: they cost more to build than con ventional plants; they generate more heat that creates problems of thermal pollution of waterways; they are not considered com pletely safe by the public. Moreover, it may be at least 1980 or later before the nuclear power plants under construction or on order will become operable; in the mean time, coal-burning plants will have to be constructed to accommodate the everincreasing demand for electric power. Presently, the country's energy is fur nished by the big three: petroleum, natural gas, and coal, in that order of importance. Petroleum supplies most of the energy be cause of its hold on the transportation mar ket. Gas is the cleanest and scarcest. But, even though outranked in present usage, coal is by far the richest in backlog and still has a lot of fight for the future. ■ for heating and cooking in homes and in dustries. The fuel's market has steadily ex panded, supplying one-third of the country's total energy. It ranks next to petroleum, with which gas is often associated in its geological habitat. The very success of natural gas, however, has resulted in such heavy drafts upon the underground storehouse that diminishing reserves are causing concern. At current rates of consumption, estimated reserves of natural gas will be exhausted in a few dec ades. Coal reserves, however, are plentiful for several centuries. Anticipation of the impending scarcity and rising cost of natural gas has spurred research on gasification and liquification of coal. Pilot plants for coal gasification have been in operation for several years, and commercial production may not be far off. Utilization of strip-mined coal for gasifica tion promises to open a large market for western coal. According to a press report, a large number of sites west of the Mississippi have already been chosen for construction of strip-mining and coal-processing plants. 20 FEDERAL RESERVE BANK OF PHILADELPHIA ANNUAL OPERATIONS AND EXECUTIVE CHANGES DIRECTORS AND OFFICERS At the election held in the fall of 1971, James H. Dawson, President and Chairman of the Bo ard , Bank of D e la w a re , W ilm in g to n , D e la w a re , w as e le cte d by m em b er banks in Electoral Group 1 as a Class A Director for a three-year term beginning January 1, 1972. He succeeds Harold F. Still, Jr., President, Central Penn National Bank, Bala Cynwyd, Penn sylvania. C. Graham Berwind, Jr., President, Berwind Corporation, Philadelphia, Pennsylvania, was elected by member banks in Electoral Group 2 as a Class B Director to fill the unexpired portion of the term of Henry A. Thouron, former Chairman of the Board, Hercules Incor porated, Wilmington, Delaware, whose term expired December 31, 1971, and for a new term of three years beginning January 1, 1972. M r. Thouron resigned on February 4, 1971. The Board of Governors of the Federal Reserve System redesignated Bayard L. England, former Chairman of the Board, Atlantic City Electric Company, Atlantic City, New Jersey, as Chairman of the Board of Directors of this Bank and Federal Reserve Agent for the year 1972. John R. Coleman, President, Haverford College, Haverford, Pennsylvania, was appointed Deputy Chairman of the Board for the year 1972. The Board of Directors selected G. Morris Dorrance, Jr., Chairman of the Board, President and Chief Executive Officer, The Philadelphia National Bank, Philadelphia, Pennsylvania, to serve again during 1972 as the member of the Federal Advisory Council from the Third Federal Reserve District. The Board of Directors of this Bank, with the approval of the Board of Governors, reappointed David P. Eastburn as President and David C. Melnicoff as First Vice President, each for a statutory term of five years, beginning March 1,1971. Subsequently, Mr. Melnicoff resigned to accept the post of Deputy Executive Director on the staff of the Board of Governors, effective October 12, 1971. The Board of Directors appointed Mark H. Willes, formerly Vice President and Director of Research, to complete the unexpired portion of the present term of office of First Vice President. 21 JANUARY 1972 BUSINESS REVIEW Henry J. Nelson, Assistant Vice President, retired from the Bank on March 31,1971. Effective April 1, 1971, several changes occurred in the official staff. Kenneth M. Snader was promoted to Vice President from Assistant Vice President and placed in charge of the newly organized Computer Services function. James H. Muntz was promoted from Depart ment Head in the Department of Accounting to Accounting Officer. David H. Scott was promoted to Examining Officer, replacing the retiring Leonard E. Markford. J. David Stoner was added to the official staff as an Assistant Counsel. On June 25, 1971, Warren J. Gustus resigned as Economic Advisor to the President to accept a position with an insurance company. Effective August 16, 1971, Lawrence C. Murdoch, Jr., Vice President-Staff became Vice President and Secretary, assuming the duties of the Office of the Secretary formerly per formed by William F. Staats who left the Bank to accept a teaching position at Louisiana State University. Effective September 1, 1971, Miss Evelyn G. Battista was appointed Personnel Officer to replace David P. Noonan who retired August 31, 1971. Miss Battista was formerly Depart ment Head of the Personnel Department. Effective October 12, 1971, Edward G. Boehne was promoted to Vice President and Director of Research to replace Mark H. Willes who left the Department of Research to become First Vice President. Effective January 1, 1972, W. Lee Hoskins and Ira P. Kaminow were appointed as Research Officers and Economists. Thomas K. Desch was promoted to Assistant Vice President, re placing James P. Giacobello who left to accept a position with a commercial bank. Donald J. McAneny was promoted to Chief Examining Officer, filling the vacancy caused by the promotion of Mr. Desch. Dominic L. Matteo was promoted to Check Processing Officer. Max Klass, Regulations Officer, resigned to accept a position with a commercial bank. 22 FEDERAL RESERVE BANK OF PHILADELPHIA DIRECTORS AS OF JANUARY 1, 1972 Term expires December 31 GROUP 2 3 1 3 1 2 CLASS A WILLIAM R. COSBY Chairman of the Board, Princeton Bank and Trust Company Princeton, New Jersey RICHARD A. HERBSTER President, Lewistown Trust Company Lewistown, Pennsylvania JAMES H. DAWSON President and Chairman of the Board Bank of Delaware Wilmington, Delaware 1973 1974 CLASS B EDWARD J. DWYER Chairman of the Board and Chief Executive Officer ESB Incorporated Philadelphia, Pennsylvania PHILIP H. GLATFELTER, III Chairman of the Board and President P. H. Glatfelter Company Spring Grove, Pennsylvania C. GRAHAM BERWIND, JR. President and Chief Executive Officer Berwind Corporation Philadelphia, Pennsylvania CLASS C BAYARD L. ENGLAND Ventnor, New Jersey JOHN R. COLEMAN President, Haverford College Haverford, Pennsylvania 1972 1973 1974 1972 1973 EDWARD W. ROBINSON, JR. President and Chief Executive Officer Provident Home Industrial Mutual Life Insurance Company Philadelphia, Pennsylvania 1972 23 1974 BUSINESS REVIEW JANUARY 1972 OFFICERS AS OF JANUARY 1, 1972 DAVID P. EASTBURN, President MARK H. WILLES, First Vice President JOSEPH R. CAMPBELL, Senior Vice President WILLIAM A. JAMES, Senior Vice President JAMES V. VERGARI, Senior Vice President and General Counsel EDWARD A. AFF, Vice President HUGH BARRIE, Vice President EDWARD G. BOEHNE, Vice President and Director of Research JOSEPH M. CASE, Vice President NORMAN G. DASH, Vice President RALPH E. HAAS, Vice President ALEXANDER A. KUDELICH, Vice President G. WILLIAM METZ, Vice President and General Auditor LAWRENCE C. MURDOCH, JR., Vice President and Secretary KENNETH M. SNADER, Vice President JAMES A. AGNEW, Assistant Vice President JACK P. BESSE, Assistant Vice President HUGH CHAIRNOFF, Assistant Vice President D. RUSSELL CONNOR, Assistant Vice President and Assistant Secretary THOMAS K. DESCH, Assistant Vice President RICHARD W. EPPS, Research Officer and Economist W. LEE HOSKINS, Research Officer and Economist JOSEPH R. JOYCE, Assistant Vice President IRA P. KAMINOW, Research Officer and Economist EUGENE W. LOWE, Assistant Vice President WARREN R. MOLL, Assistant Vice President RUSSELL P. SUDDERS, Assistant Vice President DONALD J. McANENY, Chief Examining Officer EVELYN G. BATTISTA, Personnel Officer SAMUEL J. CULBERT, JR., Bank Services Officer GEORGE C. HAAG, Public Services Officer HILIARY H. HOLLOWAY, Assistant Counsel and Assistant Secretary JACK H. JAMES, Examining Officer A. LAMONT MAGEE, Assistant General Auditor DOMINIC L. MATTEO, Check Processing Officer JAMES H. MUNTZ, Accounting Officer STEPHEN M. ONDECK, Examining Officer DAVID H. SCOTT, Examining Officer J. DAVID STONER, Assistant Counsel 24 FEDERAL RESERVE BANK OF PHILADELPHIA STATEMENT OF CONDITION FEDERAL RESERVE BANK of PHILADELPHIA End of year (000's omitted in dollar figures) 1971 1970 ASSETS Gold certificate account .............................................................. Special Drawing Rights C ertificate.......................................... Federal Reserve notes of other Federal Reserve Banks . . Other cash ............................................................................................ $ 471,490 23,000 81,867 10,321 $ 721,185 23,000 60,448 9,761 Loans and securities: Discounts and advances........................................................... United States Government securities................................ Total loans and securities.................................................... 400 3,849,646 $3,850,046 150 3,261,250 $3,261,400 Uncollected cash ite m s................................................................... Bank premises .................................................................................... All other assets ................................................................................. Total a sse ts................................................................................. 803,108 3,281 39,739 $5,282,852 693,676 2,533 42,670 $4,814,673 LIABILITIES Federal Reserve n o te s..................................................................... $3,237,391 $2,933,550 Deposits: Member bank reserve accounts ........................................ United States Governm ent...................................................... Foreign ............................................................................................ Other deposits............................................................................. Total deposits ........................................................................ 1,164,006 155,230 14,280 22,030 $1,355,546 1,163,059 64,016 6,375 16,474 $1,249,924 Deferred availability cash items ............................................ All other liabilities .......................................................................... Total lia b ilitie s........................................................................ 581,435 31,662 $5,206,034 529,336 29,919 $4,742,729 CAPITAL ACCOUNTS Capital paid i n ............................................................................... Surplus ............................................................................................ Total liabilities and capital accounts........................... 38.409 38.409 $5,282,852 35.972 35.972 $4,814,673 Ratio of gold certificate reserve to Federal Reserve note lia b ility ................................................. 14.6% 24.6% 25 BUSINESS REVIEW JANUARY 1972 EARNINGS AND EXPENSES FEDERAL RESERVE BANK of PHILADELPHIA (000's omitted) 1971 1970 Earnings from: United States Government securities............................................. Other sources ......................................................................................... Total current earnings..................................................................... $192,792 $194,106 754______________4,064 $193,546 $198,170 Net expenses: Operating expenses* ............................................................................. Cost of Federal Reserve cu rre n cy................................................. Assessment for expenses of Board of Governors.................... Total net expenses............................................................................. 14,241 12,631 1,508 1,196 1,680______________1,078 $ 17,429 $ 14,905 Current net earnings .................................................................................. $176,116 $183,265 Additions to current net earnings: Profit on sales of U.S. Government securities(n e t)............... All other ...................................................................................................... Total additions .................................................................................... $ 5,218 424 2________________189 5,220 $ 613 Deductions from current net earnings: Miscellaneous non-operating expenses........................................ Total deductions ............................................................................... $ 420_________________ 14 420 $ 14 Net additions ................................................................................................. $ Net earnings before payments to U.S. Treasury........................... Dividends paid .............................................................................................. Paid to U.S. Treasury (interest on Federal Reserve notes) . . . . Transferred to or deducted from (-) S u rp lu s.............................. $180,916__________ $183,864 $ 2,238 $ 2,082 $176,241 $179,827 $ 2,437 $ 1,955 * After deducting reimbursable or recoverable expenses 26 4,800 $ 599 FEDERAL RESERVE BANK OF PHILADELPHIA VOLUM E OF OPERATIONS FEDERAL RESERVE BANK of PHILADELPHIA Number of pieces (000's omitted) Collections: Ordinary checks* ................................................................................................................................ Government checks (paper and card) ................................................................................... Postal money orders (card) ......................................................................................................... Non-cash items .................................................................................................................................... Food stamps redeemed ................................................................................................................... Clearing operations in connection with direct sendings & wire & group clear ing plans** ............................................................................................................................................... Transfers of funds .................................................................................................................................. Currency counted .................................................................................................................................. Coins counted ......................................................................................................................................... Discounts and advances to member banks ........................................................................... Depositary receipts for withheld ta x e s ....................................................................................... Fiscal agency activities: Marketable securities delivered or redeemed .................................................................... Computerized marketable securities (Book entry transactions) .............................. Savings bonds and notes (F.R. Bank and agents) Issues (including reissues) ........................................................................................................... Redemptions ......................................................................................................................................... Coupons redeemed (Government and agencies) ............................................................... 1971 1970 1969 412,949 39,689 12,917 993 73,807 386,878 38,050 13,022 876 51,492 363,658 33,933 13,708 899 29,581 606 349 368,459 801,081 (a) 1,691 606 325 349,173 752,489 607 308 334,891 803,868 1 1 1,296 1,293 355 15 557 7 569 18 11,511 7,557 856 10,932 9,098 867 10,187 9,229 996 $126,693 10,506 236 2,243 124 $120,156 9,553 240 1,775 76 $116,717 9,421 241 1,464 42 76,689 515,117 2,837 106 2,260 7,294 69,340 404,927 2,650 4,607 6,344 66,946 351,524 2,494 103 6,289 7,012 11,297 30,902 11,155 7,286 11,603 5,966 586 360 159 491 497 146 428 530 380 Dollar amounts (000,000's omitted) Collections: Ordinary checks .................................................................................................................................. Government checks (paper and card) .................................................................................. Postal money orders (card) ......................................................................................................... Non-cash items .................................................................................................................................... Food stamps redeemed ................................................................................................................ Clearing operations in connection with direct sendings & wire & group clear ing plans** ............................................................................................................................................ Transfers of funds .................................................................................................................................. Currency counted .................................................................................................................................. Coins counted ......................................................................................................................................... Discounts and advances to member banks .............................................................................. Depositary receipts for withheld taxes ..................................................................................... Fiscal agency activities: Marketable securities delivered or redeemed ................................................................... Computerized marketable securities (Book entry transactions) .............................. Savings bonds and notes (F.R. Bank and agents) Issues (including reissues) ...................................................................................................... Redemptions ..................................................................................................................................... Coupons redeemed (Government and agencies) ................................................................. * Checks handled in sealed packages counted as units ** Debits and credit items (a) Less than 1,000 rounded 27 102
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