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FEDERAL RESERVE BANK OF RI CHMOND 1963 ANNUAL REPORT FEDERAL RESERVE BANK OF RICHMOND FORTY-NINTH ANNUAL REPORT MAJOR TRENDS AND PROBLEMS IN THE POSTWAR ECONOMY F !• I) K I: A I. : U K S K R V E B A \ K 0 F R JC H M 0 X D TO O U R M E M B E R B A N K S : It is a pleasure to present the 1963 Annual Report of the Federal Reserve Bank of Richmond. This year’s report features major trends in the national economy since World W ar 11. Also included in the report are comparative financial statements, a brief summary of our operations, and a current list of officers and directors of our Baltimore, Charlotte, and Richmond offices. On behalf of our directors and staff, we wish to say thank you for your cooperation and support throughout 1963. Sincerely yours. Chairman of the Board. President. CONTENTS M A JO R T R E N D S A N D P R O B L E M S IN T H E P O S T W A R E C O N O M Y An Introductory Note _____ ____........................... ..... ..... The Setting ........................................... .......... ........... The Trends .................................. ............................. ....... . ....... ........................... ........... Two Major Developments ................ ...... ...... ................. ............... ........... The Slow-Growth Complex ............................................................ Some Recent Signs of Change ............................ ....... S U M M A R Y O F O P E R A T IO N S ............................... ........ ................. ............. . C O M P A R A T IV E ST A T E M E N T O F C O N D IT IO N C O M P A R A T IV E S T A T E M E N T O F E A R N IN G S A N D E N P E N S E S ... F E D E R A L R E S E R V E B A N K O F R IC H M O N D — Directors . F E D E R A L R E S E R V E B A N K O F R IC H M O N D — ( )fficers .................... B A L T IM O R E B R A N C H — Directors and Officers . ___ ___ ___ ..... _____ ______ C H A R L O T T E B R A N C H — Directors and Officers ................ ....................... ....... MAJOR TRENDS AND PROBLEMS In recent years the performance of the American economy has come under increasing scrutiny and criticism. Eco nomic literature is heavily sprinkled with analyses of, and speculation about, economic growth and the factors which promote or retard it. The need to stimulate growth was a major issue in the 1960 Presidential campaign. More recently, the question has been debated extensively in connection with the proposed Federal tax reduction. At times the discussion has concen trated on the whole economy, while at others it has dealt with certain major components. The time period covered has been sometimes long and some times short. This has meant that fre quently the issues were not clearly joined and the different discussants were not always talking about the same things. Almost two decades have passed since the end o f World W ar II. In those two decades the environment and the behavior pattern o f the United States’ economy have been considerably different from those prevailing before the war. Perhaps, therefore, the pres ent may be an appropriate time to take a long and broad look at the be havior of the whole economy and of its major components in the postwar period. Such is the purpose of this report. Among its other uses it may, as was its original purpose, serve as 4 IN THE POSTWAR ECONOMY An Introductory Note a general framework or background to afford some perspective for discus sions of the short-range business outlook. After a brief look at the general postwar environment of the economy, the first operation will be to examine a number of statistical series, a few of which deal with the economy as a whole, but most of which show the behavior of certain major economic sectors. In each of these, particular attention will be devoted to the rate of growth. Following that, consideration will be given to a few of the more important developments of the period in an attempt to provide some expla nation as to why they occurred. Next, a complex of the more troublesome current problems will be discussed and an attempt made to show their inter relationships and causes. Finally, some recent changes which seem to be evolving will be noted and evaluated. There are a great many statistical series which to some extent measure the behavior of the whole economy or its many parts. It is not easy to select a small number of series which will give the kind of composite picture needed here. All of the major series are interrelated in some fashion and changes in any one of them are to some extent both cause and effect of changes in others. For the present purpose, 12 major series have been selected. These are data which are well known and readily available. No attempt has been made to refine or adjust them, since the purpose here is to paint the picture in broad strokes. The original data used show official index numbers, current dollar values unadjusted for price changes, or other appropriate units of measurement. The one exception to this is the figure for Gross National Product which is shown in both current and in constant (1954) dollars. The charts are based on quarterly averages; where the data appeared originally as monthly figures, quarterly averages have been computed. \ here \ appropriate, the figures are seasonally adjusted and in many cases they are stated in terms of annual rates. On the charts, annual growth rates appear as superscriptions above the lines repre senting the data. The year 1947 was chosen as the starting point since 1946 was too much affected by transition from war to be representative. To indicate changes from prewar conditions, a 1939 or 1940 figure is plotted on most of the charts as a reference point. The ma terial charted extends through the third quarter of 1963, the latest data avail able at this writing. The original intention was to treat the whole postwar period together, but early study of the data revealed that substantial and fairly persistent changes of trend took place about 1957 in most series. For that reason, it seemed that in computing rates of growth the data would yield more useful information if the whole period were broken into two subperiods with 1957 as the dividing year, and rates of growth computed for each sub period. The choice of time periods for such comparisons always raises the troublesome problem of compar ability of terminal years. Iror the first subperiod—-1947-1957— there is no great problem since both years were years of high-level economic ac tivity. For the second subperiod, the comparison is between 1957, which marked the peak of a business cycle, and 1963. It is impossible at this time to say whether 1963 also recorded a cyclical peak, but it was almost as far from the previous cyclical trough as was 1957. In this respect it would seem that 1963 is reasonably comparable with 1957. The annual rates of growth were computed by converting annual aver ages to logarithms and determining the line of best fit for those values. This method avoids giving undue weight to extreme or untypical values occurring in terminal years. Figures for 1963 were estimated from data for the first three quarters. 5 The Setting As a preliminary it may be helpful to note briefly the broad and general characteristics which have marked the economy since W orld W ar II. In this connection there were two important developments which did not occur. X o .M a j o r D e p r e s s i o n Contrary to all past experience following major wars, there was no broad, general de flation with its accompanying depres sion. In fact, the economy has not had a sharp business decline nor a major depression in 25 years— since 1938. This is the longest such period in the past century. The late Per Jacobsson, for many years managing director of the International Monetary Fund, thought that the absence of a postwar deflation was due largely to relatively effective wage and price controls dur ing the war and to the very high de gree o f liquidity, relative to wages, prevailing in the immediate postwar period. Xo M a j o r T a x R e d u c t i o n The other thing which did not happen was a major reduction in Federal taxes. 1 here was a substantial reduction in 1948 but this was followed by a sharp increase after the outbreak of the Korean War in 1950. In the case of the corporate income tax, the standard rate <that applying to income above SX-'.OOO) was raised far above the highest rate of W orld W ar II— from 3N to ?2 per cent— an increase o f over •v per cent. 1 his top rate has con tinued until the present. I here was a general tax reduction in 1954, but it w a s relatively small and there was no reduction in the higher brackets of the individual income tax. Within the pa>t two years substantial relief in the forni of more liberal allowances for 6 depreciation and an investment tax credit has been granted. For the past year and a half there has been wide spread discussion of a general tax re duction which might amount to as much as $10 or $13 billion. This has been greatly delayed and at this writ ing the outcome is uncertain, but even if it is adopted it, plus earlier reduc tions, would still fall far short of the major reductions which have followed other major wars. o rean W a r Among the major fea tures of the period was the Korean War, which lasted from 1950 until 1953. This provided a considerable stimulus to economic activity and prob ably had an appreciable effect in rais ing rates of growth for the 19471957 period. K P o p u l a t io n G r o w t h Population re corded a vigorous and accelerated growth throughout the period, follow ing a period of slow growth in the 1930’s. The annual rate of growth varied between 1.7 and 1.9 per cent. Over the whole period from 1947 to 1963 the total population, including the numbers gained by the admission of Alaska and Hawaii, increased by approximately 31 per cent. M oney a n d L iq u id A ssets The country inherited from the war a greatly swollen money supply and tre mendous amounts of other liquid as sets, both of which received another boost during the Korean War. In recent years the money supply has expanded rather slowly as the economy grew up to the initial oversupply. O t h e r C h a r a c t e r is t ic s O t h e r im portant features may be noted more briefly. First, residential mortgages and consumer credit increased by m ore than $200 billion during the period. This amount supplemented consumer incomes in the purchase of homes and durable consumer goods. Second, at the beginning of the period there w as an enormous demand for homes and durable goods, built up during the Great Depression and the war. During the period that backlog was worked down r steadily and fairly rapidly until it may be said to have disappeared in recent years. Third, the period w as marked by the continuation and strengthening of the practice of grant ing annual wage increases. Fourth, there was a steady and rapid rise in the costs of government, caused by the Korean W ar, the cold war, rapid ur ban growth, enormously increased needs for schools and highways, great ly expanded welfare programs, and many, many other factors. Finally, foreign competition increased greatly, especially after 1958, primarily as a result of rapid industrial growth in Europe and Japan and the stabiliza tion of a number of major currencies. A T h e m e In a nutshell, the American economy since W orld War II has functioned at a high and rising to e l of production and consumption. It has been by a considerable margin the most productive economy the world has ever known. It has been marked by four recessions which became pr0 gressively shorter; they also becam e milder except for the increase in un employment. For the first t e n - ) ear pe riod, the rate of economic growth quite high, partly because of accuniu lated demand and the Koiean ^ Since 1957 the rate has been som what lower. The Trends P r o d u c t The fluc tuations of G N P outline the behavior of the economy as a whole and provide a backdrop for the examination of the other series, many of which are com ponents of G N P . An accompanying chart shows the growth of G N P over the whole period in both current and constant (1954) dollars. On either basis it is evident that the recessions were short and mild. The downswings usually did not last more than six to nine months, and in all cases G N P had surpassed its previous high not later than 18 months after the down turn. In no case did the maximum decline amount to more than 5 per cent and usually it was much less. The 1960-1961 decline was less than 1 per cent— hardly more than a brief levelingoff in the advance. Based on current dollars, the annual growth rate in the 1957-1963 period was about one fourth less than in the previous ten years. Over the whole period, G N P in cur rent dollars grew by about 150 per cent; from $234 billion to about $585 billion. Based on constant dollars, the growth for the entire period was ap proximately 74 per cent, indicating that one half of the growth in current dollars was due to rising prices. On the same constant dollar base, the annual growth rate in the 1957-1963 period was about 3.4 per cent, or 0.6 percentage point less than in the pre ceding ten years. GROSS N AT IO N A L 1’K O IH U T G ross N a t i o n a l m p l o y m e n t a n d U A d ju ste d Annual Rat 700 500 300 1940 1947 194 9 1951 1953 1955 1957 1959 llllilll 70 m il 65 + y\ 55 1 50 .1 • /* * djuste d / / 45 u • 1963 CIVILIAN EM PLO Y M EN T Millions of Persons 75 60 1961 J E S e a so n a lly S B.l m r 1940 1947 ■ im iiiiiiii 1949 1951 1953 1955 1957 1959 1961 1963 n e m p l o y m e n t Between 1947 and 1963 civilian em ployment rose from 57.8 million to about 69 million— an increase of 11 million, or 19 per cent, in 16 years. At first glance that would appear to 7 be a healthy and adequate increase. Yet unemployment was the cause of widespread and growing concern dur ing much of the period. I he reason, of course, was that the labor force was growing faster than the number of available jobs. As noted above, the population in creased bv 31 per cent over these 16 years, lhe civilian labor force ex panded from (j 0.2 million to approxi mately 73 million— an increase of only some 22 per cent. The primary reasons for this comparative lag in the growth of the labor force were two: (1) much of the population increase was concen trated in the younger age groups which still were not in the labor force in l% 3 ; and (2 ) a larger proportion of the young people aged 14 to 25 were staying in school longer. Both of these facts mean that the numbers entering the labor force in the years immediately ahead will be increased greatly. The comparatively small difference between an increase of 22 per cent in the labor force and an increase of 19 per cent in employment was responsi ble for the growth and persistence of the unemployment problem. Employ ment grew by only a little more than 1 per cent per year from 1947 to 1957 and showed little change after that de spite a somewhat more rapid growth in the labor force. As a consequence, both the number of the unemployed and the rate of unemployment in relation to the labor force rose in the latter period. The annual rate of increase in the number of unemployed since 1957 was more than three times the rate for the previous ten years. This is one of the trends which will be examined in greater detail later, with an attempt to isolate some of the causes. measure of physical production in the economy and as such is less affected by changing prices than many of the other series. It is a relatively volatile index but, even so, the fluctuations during the period under study were quite mild. The largest decline from peak to trough, based on quarterly averages, was about 12 per cent and the typical decline was 7 or 8 per cent. The decline in the rate of growth in this area after 1957 was not as large as it was in some other areas or in GXP. The total increase in the index over the whole period was 89 per cent. In comparison with the pop ulation increase of 31 per cent, this gives some indication of the increase in per capita consumption of physical goods. In manufacturing, which accounts for the great bulk of industrial pro duction, employment increased by only a little more than 10 per cent. Com pared with the increase of 89 per cent in output, this reflects the great strides which have been made in in creasing productivity in this held. It also suggests one of the major causes of the unemployment problem. Out of the increase of about 13 million in the labor force, manufacturing has em ployed only a little more than a million and a half since 1947. Thus, the bur den of providing employment for the great bulk of the increase in the labor force has fallen on the non manufacturing area. The burden has been accentuated by the tend ency of wages in the nonmanufac turing area, where increases in pro ductivity have been relatively low, to rise at the same rate as wages in man ufacturing. where increases in produc tivity have been relatively high. The index of industrial production is a broad X I n d u s t r ia l P r o d u c t io n kw P la n t p e n d itu re s and E q u ip m e n t E x Business expenditures for new plant and equipment constitute the largest component of gross private do mestic investment. Currently the pro portion is nearly one half. These ex penditures serve as a good indicator of the vigor of economic growth, especially in the industrial area. As a rule investment expenditures are likely to fluctuate more widely and more erratically than most other eco nomic series, especially those more close ly connected with consumer spending. This is particularly true of expendi tures for new plant and equipment. On several occasions they have re versed direction within a general up swing or downswing. \ hen the move \ ments were connected with movements in the economy as a whole, they tended to lag somewhat behind most other indicators. During the whole period these expenditures registered quarterto-quarter declines 23 times compared with 12 such declines shown by GNP. In the four postwar recessions plant and equipment expenditures declined by amounts ranging from 7 to 20 per cent. The largest decline came in 1957-1958 and the smallest in 19601961. Along with industrial production, these expenditures grew by about 90 per cent over the entire period, but their rate of growth was considerably higher in the first ten years and much lower thereafter. As the chart shows, they reached a peak in 1957, declined sharply in 1957-1958. and failed to reach the 1957 peak in the 1958-1960 upswing. The failure of this important indicator to equal its former peak has often been cited as evidence of the sluggishness of business investment and of the abortive or incomplete na ture of the 1958-1960 recovery. The chart shows also that, over the period, expenditures for new plant an equipment as a per cent of G X P fell from 8.8 in 1947 to 6.7 in 1963. This indicates that this important and stra tegic part of private investment has not been keeping pace with the econ omy as a whole. a l u e of N ew C o n s t r u c t io n The series giving the value of new con struction put in place covers nearly all types of new construction and major alterations— re sid e n tial, in d u s tria l, commercial, and governmental. The industrial and commercial segments overlap the expenditures for new plant and equipment discussed above. Residential construction is the largest single component of new construction, usually comprising 55 per cent or more of the total. In recent years total con struction has made up more than 10 per cent of GN P. Construction activity was very low during the Great Depression and World W ar I I and consequently a very large accumulated demand had built up by the end of the war. This was further accentuated by the rapid population growth of the past 20 years and by the great migration to urban areas. Especially in the residential area, activity has been further stimulated by extensive new arrangements for financing home ownership. Strength ened and sustained by all these forces, construction activity scored a greater advance than any other major series examined here. The total gain was 260 per cent and the annual growth rate in the first period was nearly 10 per cent. The sharp drop in the growth rate since 1957 reflects the working down of the accumulated backlog and a small drop in the rate of family formation. A brief look at the major compo nents of this series shows the rapid increase of construction activity by V INDEX OF IN D U ST RIA L PRODUCTION 1957-1959=100 140 S e aso na ll y Ad|usted 10 2 80 40 R lllllllllllllllll 194 0 1947 194 9 1951 1953 1955 1957 1959 1961 1963 EXPENDITU RES FOR NEW PLANT AND EQU IPM ENT Sea son al ly Adjusted A n n u a l Rates ■ $ Billions 60 50 Per Cent l»^ I I I I I I I I I I + 2.2 + S.2 5 1 94 0 1947 1949 1951 1953 1955 1957 1959 1961 1963 V ALU E OF N E W CONSTRUCTION Seasonally Adjusted Annual Rates illions $ Billions ____ 70 60 IIIIWMIIII m r a is g ■ . ■ ■ m I 194 0 194 7 s i m ............. .......... ........I I ■ B • 1 S 19 4 9 S S 1951 m S 1953 S 1955 n 1957 S n 195 9 i m +4.8 ■ m m 1961 196 3 15 public authorities during this period. Despite the pressing need, public con struction was a little slow getting started after the war and consequently the figures start from a comparatively low base in 1947. But over the whole pe riod the value o f total public construc tion increased by 464 per cent com pared with an increase o f 214 per cent in total private construction and 256 per cent in private nonfarm residential construction. In the past six years, however, the annual growth rate of public construction has been the same as that for private construction despite heavy outlays for the Interstate High way System and other major under takings. P ersonal I nco m e Personal income serves two purposes as an economic indicator. On the one hand, it indicates fairly accurately the compensation in dividuals receive for participating in economic activity, although some of its minor elements are not closely re lated to production or indeed, as in the case o f unemployment insurance, may have an inverse relationship. On the other hand, it measures fairly well the flow o f consumer purchasing power available for spending although, again, there are exceptions; taxes, debts, and other similar arrangements may drain off income before it can be spent for goods or services. Personal income has risen quite steadily in recent years. A s the chart shows, the only significant decline was in 194S-1949. In 1953-1954 and 19571958 the maximum declines were less than 1 per cent, while in 1960-1961 the quarterly averages showed no de cline at all, although the advance was slowed to 1.1 per cent over a period o f three quarters. The annual growth rate for personal tercyclical fluctuations, probably be cause o f the dominance o f unemploy ment insurance payments. From 1950 until the middle o f 1963, however, they rose steadily and fairly rapidly o f approximately 209 per cent. Per capita personal income naturally showed a considerably slower rise than the total because o f the steady popu lation growth. The per capita figure rose from SI ,329 to about $2,440— an increase o f 84 per cent. This was somewhat more than twice the increase in the index o f consumer prices during the same time. P e r so n a l C o n s u m p t io n E x p e n d i The figures fo r personal con sumption expenditures show broadly what consumers did with their income. A glance at the chart shows two domi nant features: a remarkably stable and relatively high growth rate, and a steady and fairly rapid increase in the importance o f services. The increase for the entire period was from $165 billion to about $393 billion— or ap proximately 125 per cent. Expenditures showed even smaller fluctuations than did personal income. Interestingly enough, the largest fluc tuations were caused by the panic buy ing near the beginning o f the Korean W ar. In the third quarter o f 1950 and the first quarter o f 1951 expenditures t u r e s jumped by approximately 8 and 6 per cent, respectively, and in the en suing quarters fell by about 2 and 3 per cent, respectively. Except for these aberrations, the total did not decline by more than 1 per cent at any time during the 16 years, and in all cases the declines lasted only one or two quarters. The rate o f growth was compara tively high in the 1947-1957 period, because o f the dominance o f the steeply and the drop thereafter was quite mod erate. Since prices rose somewhat less after 1957, the difference in real terms was even less than that shown by the rising figures on the chart. showing small declines in only three widely separated OASI quarters, payments. probably They in has been creased from $11.8 billion in 1947 to very close to that fo r G N P. Over the Outlays on durable goods did not about $37 billion in 1963— an increase change greatly in relative importance, 10 income entire period the total grew from $191.6 billion to about $462 billion— an increase of 141 per cent. The major components o f personal income show considerable variations in their behavior. Labor income is by far the largest component, comprising over two thirds of the total. Quite naturally, it fluctuated closely with the total, although occasionally it may move slightly in the opposite direction as it did in the fourth quarter o f 1960. Its increase over the whole period was about 160 per cent. The component "Proprietors’ and Property Income” is the sum o f five separate series comprising such items as rent, dividends, interest, and farm and professional income, which make up altogether a little less than one fourth of the total. T o some extent fluctuations in the individual items offset each other so that the total at times shows an erratic behavior pat tern. Over the period the composite total increased by about 99 per cent. Transfer payments make up the smallest but the most rapidly growing of the three components. They com prise such items as unemployment in surance, O A S I payments, other social security benefits, military pensions, and similar income, most o f which are related only indirectly, if at all, to current economic activity. Until 1950 they showed wide and generally coun but purchases o f nondurable goods de clined from over 56 per cent of the total to less than 46 per cent. The d if ference, o f course, was accounted for by services, which rose from 31 per cent to over 41 per cent o f the total. The approximate increases for the entire period w e re : nondurable goods, 79 per cent; durable goods, 146 per cen t; and services, 200 per cent. The figures for services made the remark able record o f showing an increase for every quarter during the 16 years. During the entire period they grew a little more than twice as fast as the total for durable and nondurable goods combined. 1 he rates o f increase shown here indicate that consumer expenditures were a sustaining, and not a restrain ing, force in the economy as a whole. A fter allowances for the effects of the Korean W ar and the smaller price rise since 1957, the growth rate during the past six years compares quite favorably with the rate for the 1947-1957 period. In the free enter prise economy o f today corporate profits play a strategic role. Profits, or the prospect for profits, exert a dominant influence on corporate in vestment which, in turn, is a major factor affecting economic growth. C o rpo rate P r o f it s Corporate profits after taxes repre sent the earnings available to corporate owners— the return to the owners of corporate equity capital. Conceptually, profits are made up o f three distinct elements. First, there is implicit in terest on the equity capital; this would be computed at the “ pure" or “ risk less" rate o f interest. Second, there is the premium fo r riskbearing— a rate which would vary from firm to firm depending on the risk involved. Final ly, there is the reward for business leadership and management— some- PEKSOXAL INCOME S e asonally ■ H n u A d ju s te d Annual n Rat m n s 300 200 194 0 194 7 1949 1951 1953 1955 1957 1959 1961 1963 PERSONAL CONSUM PTION EXPENIMTURES $ Bi ■I ■■ 400 350 300 250 ■I Tota + .5 / s ■■Bi i m mm w ■■ fto M I W ■ I W I I H I 10 0 Services 50 i i i i s ' 01940 1947 1949 1951 1953 — 1955 1957 — 1959 1961 i 1963 11 thing approaching the economists con cept of “ pure protit. All o f these vary from time to time but the last two especially are subject to wide and erratic fluctuations and can, of course, be negative. The concept of corporate profits which is used in practice is neither precise nor stable. < >ne of the most un certain and changeable factors attectmg it is the allowance to be made for capital brought in by the sale of stock. In several cases downward fluctuations occurred when the economy as a whole was moving up and the declines asso ciated with recessions usually lasted longer than did the declines in G X P or in most other economic series. The following tabulation shows most of the quarters during which corporate profits declined and the approximate extent of the declines: depreciation. First, a value must be 1948-1949 ............ 4 q u a rte rs placed on the capital goods, and then 1950-1951 ............ 3 q u a rte rs 36 p e r cent a time period must be set during which 1952 3 q u a rte rs ............10 p e r cent it will be used up or become obsolete. 1953 2 q u a rte rs ............24 p e r cent Moth of these quantities are subject to 1956 considerable variation. The allowances 1957-1958 ............ 4 q u a rte rs ............31 p e r cent permitted by tax laws have a consider 1959 2 q u a rte rs ......... ...12 p e r cent able effect on practice. In the past 15 . ............ 3 q u a rte rs ............ 1960-1961 ....... 4 q u a rte rs ............29 per cent ............10 p e r cent .. 20 p e r cent years depreciation allowances permitted Altogether, profits showed a quarter- by Federal tax laws have been in to-quarter decline 30 times between creased two or three times, the last the first half of 1947 and the middle of 1963. Over the whole period profits increased by about 49 per cent, which is approximately one-third of the in crease registered by personal income. time in 1962. Also in 1962 there was allowed certain a credit tvpcs of against taxes investments for which also affects the amount of after-tax profits. In the early part o f the period covered here, corporate profits were probably overstated to some extent, while in the past two years they have been stated more accurately or perhaps understated in some instances. Ihese changes have been partially responsi ble for the slow growth of profits noted below and have accentuated the decline G o v e r n m e n t R e c e ip t s The figures in this series include the revenue receipts o f Federal, state, and local govern ments, adjusted to eliminate duplica tions. On the one hand, such receipts indicate roughly the level of govern mental activity and, on the other, they reflect the burden o f taxes and other similar payments on the economy. X o single statistical series on public finances is entirely satisfactory for measuring the impact o f public activi ties on the economy. Quite often pub lic purchases o f goods and services, a major component o f G X P , are used for this purpose, but they are very inadequate as indicators of the tax load and they omit entirely the large and rising total o f transfer expendi tures. The series used here emphasizes private payments to governments, a cost factor, and understates govern mental activity to the extent that defi cits are incurred, or overstates it by the amount o f any surpluses. These figures include some payments received bv governments for goods and businesstype services, but they are relatively The annual growth rate of profits in the first subperiod was quite low. The somewhat higher rate for the second minor. Two subperiod was due largely to the higher earnings in 1962 and 1963; before those years there had been very little increase over 1957. is that total receipts have increased As a per cent of GXP, total corpo rate profits have declined persistentlv dominant trends are evident from a glance at the chart. The first steadily and fairly rapidly over nearly the whole period. The second is that state and local receipts have increased faster than Federal despite large Fed eral expenditures fo r the Korean War, and substantially. The rate in 1947 was 7.8 per cent; in the past two vears the cold war, space explorations, and it has been near 4.5 per cent. This rep contrast is even greater than shown corporate proiits showed wide fluctu- resents a decline of over 40 per cent, here, because Federal grants-in-aid to ations from year to year, with only a state and local governments were sub moderate upward trend despite very despite the sharp improvement of total profits in recent years. The more sig large amounts o f new investments in nificant figure of corporate profits as in the process o f eliminating duplica the corporations covered, in the form a return on equity will be discussed later. tion. Those grants have been increas in profits as a percentage of equity capital. In the period covered by this study, either o f retained 12 earnings or new other m ajor projects. Actually, the tracted from the state and local totals ing rapidly in recent years. Total public receipts almost tripled during the 16 years. This was the re sult of an increase of about 160 per cent in Federal receipts and a rise of approximately 300 per cent in state and local receipts. Annual rates of growth were only moderately lower after 1957 despite the fact that the Korean W ar was included in the earlier period and despite smaller price rises and somewhat slower rates of economic growth in the past six years. During the first three years—-19471949— there was no significant change in total receipts. This was the result of a substantial decline of Federal receipts offset by the slowly but steadi ly rising total of state and local re ceipts. The decline in Federal receipts was caused by the repeal of the excess profits tax, the 1948 tax reduction, and some decline in economic activity. Beginning in 1950 the Federal total zoomed upward for three and a half years for an increase of over 85 per cent because of the Korean War. The tax reduction of 1954 and an economic recession brought a decline of 13 per cent. Since the third quarter of 1954 Federal receipts have moved up with only a few interruptions and the total is now approaching twice the 1954 low point. State and local receipts have moved upward at varying rates but in no quarter of the 16 years did they CO RPORATE PROFITS AFTER TAXKS S easonally A d ju ste d Annual Rates ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ I I H E S sH Er i S P H 1940 1947 1949 1951 1953 H M h i i r a H 1955 M 1957 h i s a H M 1959 H 1961 1963 GO V ERN M EN T RECEIPTS Seasonally Adjusted Annual Rates $ Billions 160 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ I show a decline. As a per cent of GN P, total receipts have risen irregularly but substantially — from 24.4 to 28.8 per cent. This represents a rising and inflexible cost factor on business units and consum ers and, as has been increasingly rec ognized in the past two years, exerts a drag on economic growth. P r ic e s H 1940 1947 i 1949 i 1951 i i 1953 i i 1955 i 1957 i i 1959 i 1961 i 1963 Prices are major indicators of the health of an economy, because 13 substantial price changes may seriously affect both the production o f goods and services and the distribution of income. Further, large price move ments are likely to be in considerable measure the result o f improper fiscal a n d /or monetary policies. As the ref erence points on the chart show, the really large price changes took place before 1947, most o f them in 1946 follow ing the release o f inflationary forces pent up during the war. Wholesale prices showed only four significant movements during the pe riod. A fter a moderate decline during the recession o f 1948-1949, they rose sharply by nearly a fifth during the early part o f the Korean W ar and then lost about a third o f the advance bv the middle o f 1953. For about two vears thereafter they were compara tively stable. From the middle o f 1955 until early 1958 they rose by about 8 per cen t; since the latter date they have fluctuated within a range o f about 1 per cent— perhaps the longest period of such stability in our history. The total increase for the whole period was about 23 per cent. There have been wide variations in the behavior o f different groups of wholesale prices. T o a considerable extent this was due to the fact that the price structure in 1947 still re tained much distortion caused by the war. since some prices require much more time than others to adjust to changed conditions. Farm products as a group declined by about an eighth between 1947 and 1963, while proc essed food prices were rising by about 10 per cent and the prices o f other, mainlv industrial, products were rising by a third. Consumer prices showed smaller in 1948-1949, they moved up by more than 13 per cent during the first two years of the Korean W ar. They did not decline appreciably thereafter but were quite stable for about four years. A fter a significant rise from early 1956 to the latter part of 1958, they hesi tated briefly and then began a slow, steady rise which has continued to the present. Since early 1959 no quarter has registered a decline and the total has advanced by about 6 per cent. The advance for the whole period was about 37 per cent. As was true in the wholesale field, different groups of consumer prices behaved differently. Commodities other than food showed the smallest rise—about 23 per cent. Food prices rose by about 29 per cent, while services in creased by about two thirds. In recent years consumer prices have risen somewhat more than whole sale prices for three principal reasons. First, the consumer price index is fairly heavily weighted with prices for services, which, as noted above, have had the greatest rise. Many o f the service prices are closely geared to wages which have risen steadily. Sec ond, commodities at retail are more highly processed and therefore embody more labor than commodities at the wholesale level. They are thus more sensitive to rising wages. Third, the process of producing and distributing goods is subject to many taxes (other than specific sales taxes). Goods sold at retail are subject to more such taxes, which have been rising. Gen erally, taxes are costs of production, so it was inevitable that, in whole or in part, they would be shifted to the retail prices o f the commodities. both the structure and level of interest rates have experienced three distinct periods o f change in addition to the usual cyclical changes. Until early 1951 interest rates were strongly affected by the Federal Re serve’s policy, continued from the war period, o f supporting the prices of Government securities. This policy was modified somewhat with the pas sage o f time, but it remained a major market force. A bout the middle of 1947 the specific support price for Treasury bills was removed and that accounted for the steep rise in the yields on bills fo r the next year and a half. Long-term rates, however, showed no significant trend from 1947 through 1950. A fter the Treasury-Federal Reserve A ccord o f 1951, all rates began a slow and irregular advance, restrained some what by the terms o f the A ccord and the need to finance the Korean War. The recession o f 1953-1954 brought a general decline in rates, but this was follow ed by an extensive rise, lasting until the latter part o f 1957. During the 1957-1958 recession there was a significant but rather short decline in rates, lasting only about three quarters. In the last half o f 1958 and through out 1959 rates m oved up sharply, reaching, in the latter part o f 1959 and earlv 1960, the highest levels in about 30 years. Several factors, espe cially the 434 Per cent interest ceiling on Government bonds, caused short term rates to rise faster and farther than long-term rates, and for a brief time the yield on Treasury bills was above the yield on long-term Govern ment bonds. Generally, the whole pe The level o f interest riod from 1951 to early 1960 saw a fluctuations but a larger total advance rates is a m ajor factor affecting eco movement in both the structure and during the period. A fter a small decline nomic activity and growth. Since 1947 level o f interest rates back toward a 14 I n t er est R a tes "normal" situation such as prevailed before 1930. The third distinctive period of in terest rate developments began about the middle of 1960 as the economy moved into a mild recession and the balance-o f-payments problem became acute. The distinguishing feature of this period was a conscious effort by fiscal and monetary authorities to in fluence interest rates. They wished to prevent short-term rates from fall ing to such a low level that they would have encouraged an outflow of short term funds, thus increasing the deficit in the balance of payments. At the same time, in order to stimulate the domestic economy, they wished to make credit freely available and hoped that long-term rates would hold steady or decline. Several devices were used in the effort to realize these twin goals. The Treasury substantially increased the use of short-term securities in its financing. The Federal Reserve Sys tem reduced certain reserve require ments of member banks, allowed them to count vault cash as reserves, and be gan purchasing longer-term securities in its open market operations. Increased supplies of savings and a relatively slow growth in the demand for invest ment funds also helped to hold down or lower long-term rates. These efforts met with a considerable measure of success. The yield on the critical three-month Treasury bill did not fall below 2.1 per cent, whereas in previous recessions it had dropped well below 1 per cent. By late 1963 it had risen above 3.5 per cent. While this was going on, the yield on high-grade corporate bonds first rose moderately PRICE INDEXES 1957-1 959 = 100 1 20 ■ e s s a s ■ « ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ i g 194 0 1947 H 1949 i i n 1951 1953 n 1955 a n 1957 n 1959 i n 1961 1963 INTEREST YIELDS Per Cent Per Annum ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ I ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ...* , ■ ■ ■ ■ ■ ■ I m m m m t I f llB B n a n 194 0 1947 194 9 1951 1953 1955 1957 1959 1961 1963 and then eased off somewhat so that by late 1963 it was only very' slightly above the low point reached in early 1961. 15 several recent years. The 1960-1962 produce a surplus or a deficit on "reg Probably no other economic average was $3.8 billion, but in the ular transactions.” This is the balance development o f recent years has re first half of 1963 the figure zoomed resulting from normal, recurring trans ceived more attention in this country to an annual rate of $5.2 billion. These actions. From time to time, however, than the deficit in the United States’ exports o f capital reduce a surplus there may be special, essentially non balance or increase a deficit in the balance of recurring, payments. advance and nonscheduled payment of B a l a n c e m e n t s I of of P n t e r n a t io n a l international a y payments. Many technical and complex factors transactions some part o f such as the a debt by a foreign enter into a country’s balance of pay The third major factor in the pay ments. All that can be done here is to ments account of the United States is debtor. Such a payment reduces the note briefly the movements o f a few made up o f government loans and deficit for a particular period but could m ajor factors in the balance of the grants under the foreign aid program. be misleading if it were interpreted United States in the postwar period. These items also reduce a surplus or to be a normal, recurring development. Later an attempt will be made to as increase a deficit. From $6.1 billion Thus, it has now become customary certain some o f the causes. in factor to show the balance o f payments on dropped to around $2 billion in the “ regular transactions” and also after The international exchange o f goods 1947 the figure for this the middle 1950’s and then rose slowly to (som e or all) special transactions. Un largest sums involved in the balance of nearly $3 billion. The 1960-1962 aver less otherwise noted, the concept used payments. In addition to trade in mer age was $2.8 billion, but in the first here is for regular transactions. It is chandise or commodities, this category half of 1963 the figure rose sharply to now in order to trace briefly the course includes also income from investments an annual rate o f $4.1 billion. o f the surpluses and deficits. and services is responsible for and payments for shipping services, In addition to these three major A large surplus o f $4.6 billion in insurance, tourists’ expenditures, and items, there is always a residual item 1947 almost disappeared by 1949, pri many other such services. In the case in the balance of payments labeled marily because o f a sharp drop in the of it includes “ errors and omissions” or “ unrecorded trade balance. A deficit o f $3.6 billion expenditures abroad, transactions.” This is the amount re ensued in 1950 as the trade balance which recently have been running at quired to make the two sides o f the fell even more sharply because of the a rate o f about $3 billion per year. account balance. It represents errors Korean W ar. E xcept for a very small The balance for all o f these items is of transactions deficit in 1951 and a large one in 1953, the “ balance on goods and services.” which are not covered by the system the latter caused by another sharp drop the also United military States estimation and also Since 1947 the United States has o f reporting. It is generally believed in the trade balance, deficits fluctuated consistently had a surplus on its goods that most such transactions represent around $1 billion through 1956, de spite a rising outflow o f capital. In and services account, although in 1953 movements o f and 1959 the amounts were negligible. short-term funds. During the 1950’s 1957 there was a small over-all surplus In most years it has varied between the figure was positive, indicating some because o f $2 billion and $5 billion per year. For inflow o f resulting from the Suez crisis. the three years 1960-1962 it averaged years, however, the trend was sharply- S4.7 billion. reversed Another important component of appeared, capital, especially o f capital. In the past four and large negative figures indicating that there was surplus The comparatively small deficits of these years were not a cause of wide spread concern. The United States had probably of a very large gold reserve, the dollar ment o f private capital. In each year funds in addition to those officiallv was a scarce currency, and the claims since W orld W ar II Americans have recorded. The 1960-1962 average o f against this country created by the made investments abroad in amounts deficits were used to build up the liquid about $1 billion in the all unrecorded transactions was $871 million. earlv vears to well over $3 billion in The movements of the above factors quently, although the deficits between 16 outflow trade the balance o f payments is the move rising from a considerable the large reserves o f many countries. Conse 1950 and 1957 amounted to over $10 billion, very little gold was lost. In 1958 the first o f the large and continuing deficits appeared. U. S. BALANCE OF PAYM ENTS. BY QUA RTERS Surplus ( + ) or Deficit ( — ) $ Millions + 300 0 Reced ing from the high level caused by the Suez crisis, the trade balance sharply in both 1958 and 1959. fell + 1000 D efi cits of more than $3.5 billion on all reg ular transactions were incurred in both years and there were substantial out flows of gold. In 1960 the balance on - 2000 goods and services recovered sharplv but at the same time outflows on both government and private capital 194 0 194 7 194 9 1951 1953 195 5 1957 1961 1963 ac counts rose by large amounts and the deficit showed only a small improve ment. In 1961 the balance on goods and services improved further and the deficit declined significantly Expenditures for New Construction 260 but the gold outflow, though reduced, remained substantial. P E R C E N T A G E IN C R E A S E S , 1947-1963 In 1962 the trade and serv Government Receipts ......... Gross National 195 Product, Current Dollars ices balance declined moderately, gov Personal ernment grants and loans rose a little, Personal Consumption and recorded capital outflows were off Index of Industrial Production substantially, but unrecorded transac Expenditures for New Plant and Equipment tions were quite large. A s a result, the Gross National Product, Constant 1954 Dollars deficit on rose Corporate Profits Gold Consumer Price regular transactions from $3 billion to $3.6 billion. losses were about $900 million. In the first half o f 1963 the trade and services balance wras up, Income Expenditures After . Taxes 125 89 89 74 49 Index Wholesale Price Index Civilian 149 141 Employment . . . . . . . . . . . ..... 23 19 but there were sharp increases in both govern ment grants and loans and in the out flow of private capital. In July the Federal Reserve System increased the discount rate and President Kennedy proposed the interest equalization tax to curb the outflow of long-term capi tal and other measures to reduce the deficit. The outflow o f capital was re duced sharply in the second half of 1963 but at this writing it appears that the deficit for the year 1963 will be substantial. 17 A A N N U A L RA T ES O F G R O W T H , 1957-1963 S u m m a r y of T The trends r e n d s (per cent) discussed above show that since W orld .......................... -........................................................... +6.8 W ar II the American economy has Gross National Product, Current Dollars .............. -............................................ + 4.9 Government Receipts Personal Income Personal Consumption ......... -..................................................................................... ... + 4 . 8 Expenditures ................................................................... +4.6 Index of Industrial Production ........................................................................... + 4.2 functioned at a high level. The tabula tion on the preceding page shows the percentage increases in the m ajor series from 1947 to estimated 1963, arranged in descending order. Expenditures for Ne w Construction .................................................................... ... +4.1 Gross Hourly National Product, Constant Earnings in Manufacturing 1954 Dollars ................................................ ... + 3 - 4 ..... ............................................................... ... +3 .1 Expenditures for Ne w Plant and Equipment .......................................................... + 2 . 2 Civilian Employment .............. .......................................................................... Corporate Profits as Return on Equities' ............................................................ In recent years the rate of growth has slowed in all segments— substan tially in some and quite moderately in others. The period has been marked +1 -1 by recurring — 2.6 become recessions which have progressively shorter and milder except for the behavior o f un employment. Each recovery has peaked out with a higher rate o f unemploy ment, and probably a larger amount o f unused resources, than the one be fore it. Some sectors o f the economy have been affected more than others by the declining growth rate. The accompany ing table shows rates o f growth for the period from 1957 to 1963 for certain significant indicators, arranged in de scending order. (T w o o f these indica tors will be discussed later.) The top six series all show annual growth rates above 4 per cent. The three series at the Ijottom show very small growth rates or a decline. Em ployment and expenditures for new plant and equipment are closely re lated to the behavior of corporate profits. These series would seem to be the ones which are exerting a drag on the growth o f the economy and the behavior o f corporate profits appears to be a significant key to that behavior. 18 Two Major Developments A t this point two major develop ments o f the postwar period deserve brief attention. They represent com binations o f various elements of the M O N EY SUPPLY $ Billions ■ Seasonally Adjusted H O H H H Per Cent M M H H trends discussed above. They are the decline o f inflation and a significant change in the length and configuration o f business cycles. T h e ured D e c l in e by I of n f l a t io n wholesale prices, Meas inflation definitely waned over the postwar pe riod. Indeed, for the past six years it may be said to have disappeared entirely. Further, this happened with out any significant deflation appearing at any time, whereas a general and sub stantial deflation had come to be re garded as almost inevitable in any ________ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ B a m im m m H ~ n I _ j ^ n K 9 i i n 9 n i 6 s f f i » n s s s n n u m ■■■■■■■■■■■■iiggsa | iiiiiii period follow ing a major war. These developments excite little interest to day and the American people appar ently regard them as normal events o f recent history. But in the light of historical developments and o f condi tions around the world today they rep 25 ■ oPHHHHHIHHH 194 0 1947 1949 1951 1953 195 5 1957 1959 1961 1963 resent a very significant change in the economic environment. Such a degree o f price stability is a rare exception rather than the rule. It would seem that four factors were primarily responsible for this price behavior. First, the money supply was brought under better control after a very sharp rise during the war. An accompanying chart shows the varia tions in the money supply and its low rates o f annual growth during the period. These low rates were closely connected with the large oversupplv of money existing at the start of the 19 period and the steady rise in its velocity did not, except for an occasional small were shorter although larger than the or rate o f turnover. These aspects are drop for one quarter, show another declines in the money supply, both ab discussed further below. decline until 1957. There was a drop solutely second factor was the gradual o f less than 1 per cent in 1957 and with most other series, the growth rate reduction in the accumulated backlog another of a little more than 2 per cent did not decline appreciably after 1957. o f consumer demand for houses and in 1959-1960. Over the whole period the increase A and relatively. In contrast durable goods. As those demands were The failure of the money supply to was about 143 per cent compared with reduced total demand pressed less in grow as fast as G N P has been cited increases o f 33 per cent in the money supply, 149 per cent in G N P , and 89 sistently 011 the available supply and as evidence that the money supply grew the pressure on prices was reduced. too slowly and thereby exerted a defla per cent in industrial production. As Closely related to this was a third fac tionary influence and discouraged eco a per cent o f G N P money activity de tor— a great increase in the productive nomic growth. But it is clear that the clined slowly until 1952 but has been capacity o f American industry. Many efficiency or effectiveness of the money relatively stable around 42-45 per cent dollars were invested in supply depends 011 the velocity or speed since that time. It showed a small up new plant and equipment and great with which it circulates as well as on turn in 1962 and 1963. advances its total amount. The turnover of the billions o f were made in technology. One recent study has computed the demand deposit component of the new investment in manufacturing alone money supply— which is by far the between 1947 and 1957 at a little over larger component— is fairly well indi >S100 billion or about $10 billion per cated by the turnover o f demand de T he C h an g in g B usin ess C ycle A s previously noted, postwar cycles have tended to become shorter and, in most respects, milder. These features are shown clearly in the accompanying year. The result o f this additional in posits in 343 of the country’s largest vestment and progress cities, excluding New York City. That was a tremendous increase in the ca rate approximately doubled between trend on the upside since by late 1963 1947 and 1963. it had already run well over 30 months. technological pacity o f industry to produce the goods The consumers wanted. A fourth factor was increased fo r eign competition, especially in recent years. Automobiles provide an out standing example o f this. The principal causes o f the increased competition were the recovery and modernization o f European and Japanese industries and the convertibility o f major Euro pean currencies after 1958. T iie table. The present cycle has broken the M oney A c tivity In order to show was 1949-1954 cycle lengthened undoubtedly somewhat by the more clearly the effects of rising ve Korean W ar. W ithout it, the table locity a computation was made which might have shown a perfectly smooth incorporated the trend. It will be noticed that the up money supply and the rate o f turnover swings have been shortened somewhat changes in both of deposits. A n index o f the rate of more than the downswings, and this turnover of demand deposits in the has aroused some concern with respect 343 cities was computed. The demand to the possibilities o f economic growth. deposit component of the money sup It has given rise to claims that in the ply was then multiplied by this index. upswings the “ brakes" were applied During the post T o this figure was added the currency with more force than was used in ap war period G N P rose more rapidly than component o f the money supply. For plying stimulation in the downswings. M o n e y S u p p l y the money supply and consequently the want o f a better term, this total is ratio o f the money supply to G N P called "money activity.” P rofessor R. A . Gordon has listed a number of factors which have caused declined steadily from 48 per cent to A n accompanying chart shows that about 26 per cent. The money supply after 1949 this total rose at a steady (1 ) grew slowly but it experienced only a and fairly rapid rate. It declined at began to taper o ff before the peak in few small declines. It fell nearly 2 per the same times as the money supply, general business. (2 ) Residential hous cent in 1948-1949. But after 1949 it but, except in ing usually tapered off early in the 20 1960, those declines the changed behavior o f the cy cle: Generally, inventory investment upswing and turned up well before the low point. (3 ) W ages and prices re M O N E Y A C T IV IT Y $ B illions S easonally A d ju ste d sisted cyclical declines, incomes were stabilized, and consumer spending was a strong stabilizing force. (4 ) ■ The ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ volatility o f corporate profits in re cessions has meant that the decline of undistributed corporate profits and liiimiir--~”J B B corporate income taxes made a major contribution posable toward incomes. sustaining (5 ) dis m Government y i i i i i m i i n spending was a much larger portion o f G N P and that spending tended to be stable or countercyclical. (6 ) A larger proportion o f workers was employed ,J ---------------------- ------------- I by governments and in the service industries; in these areas unemploy 194 0 1947 194 9 1951 1953 1955 1957 195 9 1961 1963 ment does not develop as quickly nor go so far as in manufacturing and T H E P O S T W A R B U S IN E S S C Y C L E trade. Looked at more specifically and from Complete Cycle* a different angle, there are several Period reasons for Percentage Chonges in G N P * ' Length in Months Downswing Upswing Downswing Upswing the shorter and milder 19 4 5 -4 9 discussed below have curtailed the have *** 13 - 43.5 — 2.7 3.4 44 35 9 +24.9 34 25 9 -16.4 been cushioned by easy money policies, by BUSINESS IN V EN TORIES AN D M A N U FA C T U R ERS’ U N FILLED ORDERS the operation o f automatic stabilizers, and by the absence of speculative excesses. j Billions S easo n a lly and A m ong strictly the U n filled cyclical probably the most important O !■ ■ ■ ■ ■ ■ ■ ■ rders forces, r a n m policy. The accumulation I H B and 20 liquidation o f inventories have always been important causes o f cyclical fluc- ^ n i H factor has been a significant change in inven tory A d ju ste d 120 10 0 I nven to r ies 3.3 •Measured fro m trou gh to trough. ••Measured fro m highest and low est poin ts reached by G N P and not necessarily from retevence points o f the cycles. •••Not com puted sin ce u p sw in g started b efore 19-17. On the other hand, in periods o f reces forces 11 45 19 5 4 -5 8 forces which normally push business deflationary 37 53 1958-6 1 activity up sharply in boom periods. sion 48 19 4 9 -5 4 cycles. First, the secular movements ^ k S i s s s s s s l l l l l l l l l l l l l ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ vn 1 94 0 E 1947 1 94 9 1951 1953 1955 1957 195 9 1961 196 3 21 tuations. This was especially true in ventories they have, to get the infor the ten years immediately after W orld mation more promptly and thus to W ar II when, despite two declines, the maintain the amounts they desire. In book value o f manufacturing and trade some cases these new methods have inventories grew at an annual rate of shown that certain slow-moving models 6 per cent. Indicative of the change or designs were not necessary or not which has occurred, the annual growth worth their costs. rate dropped to 2.4 per cent in the Several minor factors also have had The chart on the pre their effects on the levels of invento ceding page shows the fluctuations in ries. Interest rates have been higher and past six years. these inventories and in the closely re this has meant an increase in costs for lated series of manufacturers’ unfilled those units which borrow to carry in orders. The reduction in the ampli ventories. Conversely, for those com tude of the swings in these two series is panies which provide their own funds most striking. for carrying inventories there has been There are a number of reasons for the opportunity to earn more in the the reduced fluctuations of these series. money market on any funds freed from A s noted earlier, prices have been no investment ticeably more stable in recent years, cases the savings on labor and rent and this has reduced the inclination o f made in possible inventories. by lower In some inventories manufacturers and merchants to spec w^ere not insignificant. Also, in some ulate in inventories or to hedge against states and localities the taxation o f in price increases. This tendency has been ventories has been a factor tending to encouraged by the appearance o f ex keep them to the lowest feasible level. cess capacity in manufacturing plants Finally, the movement toward lower faster and inventories has tended to feed on itself. more flexible transportation facilities and the development o f As businessmen have come to antici which have insured the prompter deliv pate more moderate swings in the cycle, ery of orders and thus made it feasible they have not stocked up on inventories to maintain a given level o f sales with as much as form erly, and this in turn smaller inventories. Still another factor has contributed to milder cycles. An promoting lower levels o f inventories certain other commodities in anticipa o f electronic equipment and new statis tion of strikes. tical techniques. These permit business phenomenon except to the extent that men to know more accurately what in the extensive stockpiling o f steel and control, many o f them based on the use 22 exception to this, however, has been has been better methods o f inventory such actions generate cycles. But this is not a cyclical The Slow-Growth Complex The preceding analysis and discus sion lead up to the hard core of the group o f economic problems which beset our economy. F or convenience this may be labeled “ the slow-growth com plex.” It includes a moderately slow rate o f economic growth, a rel atively high rate o f unemployment, and large deficits in the balance of pay ments. There are differences o f opin ion as to whether the rate o f economic growth is unduly low in comparison with previous peacetime periods. It is true that the growth rate o f the past three years is not greatly below the rate which prevailed in such previous periods but it is also true that it is appreciably below the rate o f which the economy is capable. In the same way, there are questions about the ac curacy o f the measurements o f un employment and about the economic significance o f such unemployment as does exist. A s noted below, that sig nificance is sometimes exaggerated. But after allowance fo r these qualifi cations it is still true that unemploy ment is a persistent problem, and that the rate is higher than it need be. CH ARGES T O A C C O U N T OF C O R P O R A T E BUSINESS $ Billions 200 ■ S easonally ■ ■ ■ A d ju ste d Annual ■ Rates ■ ■ ■ ■ ■ 10 0 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ h iB S jg sg g g g sssiiS & H 194 0 1947 19 4 9 1951 1953 195 5 1957 195 9 1961 1963 The elements in this complex are interrelated and are, in turn, related to rising production costs, declining corporate profits, and the low rate of business investment. These interrela tionships do not constitute a full ex planation o f the present economic dilemma, but they are among the im portant causes. A n examination o f the complex may well begin with a con sideration o f corporate profits. Corporate P r o f its Total corporate profits in this country have not shown 23 a vigorous growth rate since W orld W ar ii. Despite tens o f billions of dollars o f new business investment, total profits, whether before or after taxes, have risen only slowly and er ratically, and have lagged well behind the growth rate o f the economy as a whole. The chart 011 the preceding page shows, for all U. S. corporations, the allocation of corporate gross product as between compensation to employees, in direct taxes, and profits before income taxes. The latter is a total figure and reflects the very large additional in vestment in corporate enterprises made during these years. M ore significant figures, of course, are those which show earnings or in come per unit of capital. Another chart shows corporate profits after taxes as a return on equity capital. For a comparison o f trends, another line on that chart shows average hourly earn ings o f employees in manufacturing. These latter figures do not include most of the large and growing amount o f fringe benefits. A recent study esti mated those benefits at a figure of about $20 billion, somewhat more than the total of corporate dividends. Despite the importance of the sub ject, there are no satisfactory data 011 corporate profits related to equity capital. A s P rofessor George Stigler has stated: “ Considering how often our economic system is described as 'capitalistic' or 'the profit system,’ it is paradoxical that we have rel atively little information 011 the stock o f capital or the rate of profits it yields in various industries.” The data used here to show corporate profits as a return on equity were compiled liv The First National City Bank of X ew Y ork. and the (These are annual data 1962 figures are the latest available.) They are based on a sample 24 o f large corporations and, in the words of the Bank’s publication, . . are biased in favor o f success, embracing practically all o f the largest and most successful corporations.” Even so, the figures show that since 1947 the rate o f return has declined steadily and significantly, falling from 12.3 per cent in 1947 to 9.1 per cent in 1962. In a study o f profits in the manu facturing field, Professor Stigler was able to examine data from corporations o f all sizes since they were derived from income tax returns. The rates o f return he found reflect the inclusion of smaller and less successful corpo rations and hence were substantially below those noted above but the trend and pattern were much the same. He computed rates which declined fairly steadily from 10.38 per cent in 1947 to 6.29 per cent in 1957. The declining rates o f return shown in both o f these series are all the more significant be cause they occurred at a time when interest rates were rising substantially and, as noted above, the total of cor porate profits necessarily includes a large element of implicit interest cost. The chart on hourly earnings and rates of return shows dramatically the divergent movement of the compensa tion o f employees and the compensation o f capital. In the 1957-1962 period, while hourly rates were growing at an annual rate of more than 3 per cent, the rate of return on equity was declining by 2.6 per cent per year. This followed a ten-year period in which the divergence had been even greater. mand afforded by inflation disappeared. This, together with the increase in producing capacity noted earlier, in tensified domestic competition at the same time that competitive pressure from abroad was being stepped up. Meanwhile, costs— especially those oc casioned by rising taxes and wage in creases in excess o f productivity— continued to move up steadily. Con sequently, producers found themselves in a tight squeeze between relatively stable prices and rising costs. In the tax area, indirect taxes (which here mean all those other than income taxes) have increased more rapidly than corporate revenues. There have been some increases in state taxes on corporate income, but the chief in crease was in the Federal tax. As noted earlier, the principal rate in the Federal tax was raised in 1950 to a level 30 per cent above the highest rate reached during W orld W ar II and it has remained there since that time. This made the standard rate 52 per cent and, as President Kennedy noted in January 1963, made the Fed eral Government the “ senior partner A number addition the econom y needed struc o f factors have been responsible for the relatively low levels of corporate profits. As the economy moved toward stability in the general price level, the artificial and unhealthy stimulus to de tural changes to restore a more normal R easons for the T rend in business profits.” This profit squeeze in turn took its toll upon the economy by holding down employment in the face of a growing labor force, by pushing up the rate o f unemployment, by discour aging business investment, and prob ably by adding to the deficit in the balance of payments. In short, the sort o f situation developed in which mere stimulation o f demand was not enough to cure the nation’s economic ills. In relationship between costs and prices o f final goods in view o f the vital role played by business profits in the eco nomic process. U n e m plo ym e n t — S om e C onn ota Today, t h e u n e m p l o y m e n t prob lem— though serious wherever it hits — is fortunately quite a different mat ter from what it was during the Great Depression. Some indication o f how conditions have changed is afforded by the following statement in a report on certain aspects of unemployment in 1961 by the U. S. Department of L a bor: “ The government’s statistics on unemployment . . . have never been intended as a measure o f financial need or hardship. Although unemployment is a serious matter fo r many families, it cannot be assumed that every un employed person is in dire financial t io n s H O U RLY EARNINGS AND RETU RN ON CORPORATE EQUITIES Per C e n t Dollars li a r s 24 3.0 ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ iRiiii____ imm.% IIIIIIBBBB8illl!ll m m ■ ■ m ■ n S n m m s s S S m i B m a m s s s i i i !* ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ 1940 1947 1949 1951 1953 1955 1957 195 9 1961 1963 straits.” T o a large extent the relatively bet ter positions of the unemployed today as compared with those o f their pred ecessors 30 years ago stem from five factors. First, unemployment today exists against the backdrop o f an ex tensive and comprehensive system o f unemployment insurance, supplemented in a growing number o f cases by sim ilar systems financed by employers. In addition, various form s o f public as sistance are available, including direct or general relief. Second, as noted earlier, the recessions o f the past 20 years have been quite mild and short and there are some grounds fo r hoping that this will continue to be the case. Third, in today’s society a great many families have two or even three members employed, so that if the head of the family loses his job there is often a regular wage or salary check coming in. The extent o f this condition is shown by the Department o f L abor’s study o f unemployment in 1961 men tioned above. O f the 9.6 million who were unemployed fo r five weeks or more in 1961, 8.8 million were in fam- 25 ilies and the median income of those families was $4,413. The head of the family was the one unemployed in 5.3 million cases, and those families had a median income of $4,148, of which the head contributed about three fifths despite the fact that on an average he was unemployed for four months. In 3.4 million cases the head received un employment compensation which offset about two fifths of the loss of family income caused by unemployment. Another reason why conditions are different today is that more families have built up reserves in the form of insurance, liquid savings, an equity in a home, or in other forms. The above study showed that 46.9 per cent of the families involved used savings, the median amount of which was $396. Finally, more of the unemployment today is discretionary in the sense that there are jobs of some kind which the unemployed could fill, even if those jobs are below the level to which they are accustomed. U n e m p lo y m e n t— S o m e C ause s U n employment in a nation may result from many complex factors. Tech nological change is sometimes one of the most important. A t one end of the scale, technological change destroys jobs, often in large numbers, while at the other end it may create more jobs than can be filled because of the lack of necessary training. Such forces are quite evident today in the persistent shortages of workers in a wide range of technical skills at the same time there are large pools of unemployed, the reluctance of workers to leave their home communities or the industry in which they are experienced. If husband and wife are working in different in dustries they may especially be reluc tant to move, since both may not be able to find employment in the new en vironment. Improper monetary policies can also result in unemployment. If, for ex ample, monetary policy is too “tight.” it will contribute to a slowdown in the economy. Conversely, if it is too “easy,” it will foster an inflationary build-up which may burst and result in declining business activity and reduced employment. Similarly, unwise fiscal policies can contribute to unemployment. A grow ing high-employment economy requires not only wise expenditure policies but also a reasonable tax structure. If taxes weigh too heavily on the con sumer, they may result in insufficient demand to remove goods from the market, thereby cutting the demand for labor. Conversely, if taxes unduly dis courage investment in business plant and equipment, similar employment effects may occur. business profits narrowed in recent years, employers naturally searched for methods of reducing costs. It is an elementary and basic principle of economics that when one factor of pro duction is relatively more costly than others, producers will economize in the use of that factor. Labor has been a relatively costly factor in recent years. Faced with that condition, em ployers have been under pressure to reduce wherever possible the amount of labor they use. They have usually accomplished this saving of labor by improving tech niques or by using more machinery, or both. In this respect producers have been favored during the past five years by relatively stable machinery prices. An accompanying chart shows that from 1947 to 1957 average hourly earnings in manufacturing and prices of machinery and equipment moved up roughly together. But since 1957 hourly earnings have risen at an an nual rate of over 3 per cent while machinery prices have flattened out; over the six-year period as a whole, machinery prices have risen at an an Unwise wage policies and practices and social legislation can also add to nual rate of less than 1 per cent, and for the past three years they have been almost completely stable. W ith this unemployment problems. The adoption of overly generous minimum wages increasingly favorable ratio between can, for example, effectively exclude from the labor force those whose pro ductivity is below the minimum wage. Similarly, fringe benefits that vary natural to expect that producers would favor production techniques that use a maximum of machinery and a min with the number of workers rather wages and machinery, it would be only imum of labor. In the first than with the number of hours can B u s in e s s unskilled workers and workers with obsolete skills. Another important cause is geo lead to a “stretch out” of workweeks at the expense of employment. ten years after the war expenditures The level and trend of wages may at an annual rate of about 6 per cent. graphical and industrial immobility— also be causes of unemployment. As In the four years from 1957 to 1961 26 In v e s tm e n t for new plant and equipment increased there was a net decline and only within the past two years has the total risen above the 1957 figure. The net ad vance for the whole six years has been only a little more than 6 per cent. Further, a large majority of the ex penditures in the past six years was for replacement and modernization rather than for expansion of capacity. The 1962 issue of McGraw-Hill’s sur vey of business investment plans stated: “Perhaps one of the most striking findings of this survey is that once again manufacturing firms plan to devote 70% of their investment to replacement and modernization. This is roughly the same proportion they have devoted to such purposes every UNEM PLOYM EN M illio n s o f P e r s o n s IIIIIIIIIIIIIIIIII I flE fc c s a s d H 1940 1947 1949 1951 1953 1955 1957 1959 1961 1963 year since 1958.” Apparently the pressure of rising wages forced producers to install costcutting equipment in order to econo mize on labor. This had the effect of restraining the increase in, or actually reducing, employment. To create new 195, 195 = ioo 9 W AGES AND M A C H IN ERY PRICES n n ing to induce producers to make such i ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ I v x ! ■ Ih h H ::I ^ jobs to take care of some part of the growing labor force, substantial new investments to expand capacity would have been necessary. But the profit outlook was not sufficiently encourag n ■ h ■ h ■ ■ i investments. So a large part of the investments made was defensive, neg ative, and cost-reducing in character rather than positive and expansionary. Beyond this immediate effect, new business investment plays a strategic role in the economy as a whole. It is ordinarily a principal channel through ^^■■■■■■■■■■■■n 1940 1947 1949 1951 1953 1955 1957 1959 19 61 1963 which savings are put to work and through which the income multiplier operates. In this light, the low rate of growth in new plant and equipment in the past six years appears as one 27 ■ of the major reasons for the relatively slow growth in the economy as a whole. B a l a n c e o f P a y m e n t s The problem presented by the balance of payments is another complex and difficult one. As in the case of unemployment, this one must be discussed in summary fash ion. It may be profitable first to note some relationships among the different accounts in the balance of payments and then to look for some causes. First, it is pertinent to note that the deficit is not caused by an unfavor able balance on the trade and services accounts. As noted earlier, surpluses in that area have usually run between four and eight billion dollars per year. Second, Government outlays abroad have been a major factor affecting ing that the aid be taken in the form of goods and services rather than in dollars. In this way the money is spent in this country and the dollars cannot get abroad to increase the liquid claims of foreigners on this country. The discussion of foreign aid is frequently conducted on the implicit assumption that if all aid could be tied the amount would be of little or no importance. This overlooks two considerations. First, the amount would still be a matter of some importance in the domestic budget and the problem of holding down the increase in ex penditures in that budget is now a matter of major concern. Second, the above assumption means that if aid were cut off the present recipients would not use dollars earned elsewhere to purchase goods and services now being received as aid. Undoubtedly this latter is true to a large extent but probably not entirely. folio capital into new foreign issues . . and cited figures to show that this was true for 1962 and the first half of 1963. It is now possible to point out a significant relationship between the developments described above and the deficit in the balance of payments. Domestically we have had a rather low rate of economic growth, relatively high unemployment, and a low level of capital investment. To counteract those forces and to foster a more vigorous rate of growth, we have fol lowed a relatively easy money policy. But that policy has not been as easy, particularly in the area of short-term interest rates, as it would have been except for the balance-of-payments problem. During the past three years, expenditures abroad. Military expend itures in foreign countries and Gov ernment loans and grants have been running at a level of six to seven bil lion dollars per year. It is not correct to say that these outlays are the cause of the deficit since they are only a part of total spending and lending abroad. It is pertinent to observe, however, that that of private capital movements. In recent years outflows of long- and unrestricted capital market, has led to short-term capital funds have fluctu outflows of both long-term and short these outlays are relatively inflexible, ated widely but have usually been be term funds. Those outflows have been and that they are determined almost entirely by political considerations. Both of these features mean that these items are less affected by the normal operations of economic forces than are private spending and lending. In tween two and four billion dollars per a major factor in the balance of pay year. Again, it is not correct to say ments. In a nutshell, the American The third and final major area of the balance of payments account is when the international problem has been most acute, interest rates in the United States have been low relative to those in Europe. This difference in interest rates, coupled with the fact that this country has the world’s larg est, best organized, and only really that these movements are the cause of market the deficit, although in a given period which to borrow because of favorable has been a good one in they may be responsible for most or interest rates, but it has not been a recent years the effect of economic aid to foreigners on the balance of pay all of the changes which take place. good one in which to invest because Last August Secretary Dillon stated of a low and declining rate of profits. ments has been reduced significantly by the practice of “tieing” the aid to that the recent increase in the deficit So both Americans and “. . . is due almost entirely to the have American sources; that is, by requir accelerating outflow of long-term port abroad. 28 borrowed here and foreigners invested Some Recent Signs of Change Eventually almost all trends change and the changes may go far toward diminishing or wiping out troublesome problems created by earlier trends. In the past two or three years there have been signs that some of the trends discussed above are slowly changing. It is the purpose of this final section to comment briefly on some of those signs of change. W ages Recently there have been two important developments affecting wages. The first was official recog nition that over most of the postwar period wage increases were too great to permit economic growth without inflation. This was accompanied by an announcement of guideposts to indi cate what increases are believed to be economically correct. Second, the rate of wage increases has declined and has approached the rate of increase in productivity. In its 1962 Annual R eport the Coun cil of Economic Advisers presented figures showing that from 1947 to 1961 increases in hourly compensation (wages and salaries plus most supple ments or fringe benefits) of all em ployees had consistently exceeded in creases in output per man-hour, fre quently by 100 per cent or more. After an extended analysis of the relation ships among prices, wages, corporate profits, and economic growth, the Council arrived at its central guidepost for wage increases which was: “The general guide for non-inflationary wage behavior is that the rate of in crease in wage rates (including fringe benefits) in each industry be equal to the trend rate of over-all productivity increase.” This goal, to be attained through collective bargaining rather than legislation, was endorsed by the President in his Economic Report. The Council presented data show ing that from 1955 to 1961 the annual increase in average hourly earnings and average hourly compensation de clined steadily, with the over-all de cline amounting to about 50 per cent. In October 1963 the Bureau of Labor Statistics reported that “General wage changes under major collective bar gaining agreements have tended to become smaller in recent years.” The amount of the decline was from about ten cents per hour in the mid-fifties to about seven or eight cents in the past two years. Other studies have shown similar trends. Also, several reports have shown that the rate of wage in creases in the United States has been substantially lower than in Western Europe. For example, one study cov ering the year from July 1962 to July 1963 showed that gross hourly wages increased by the following percent ages: United States, 2.7; Great Brit ain, 3.4; West Germany, 5.7; France, 9.5; and Italy, 11.0. If these differ ences continue they will be of con siderable significance to the balance of payments. The recent pattern of wage be havior, together with steps taken by employers to control labor costs, has had a distinct and favorable effect on labor costs per unit of output. In the first two upswings of the postwar period those costs rose substantially. But in the upswings of 1958-1960 and 1961-1963 those costs, after two and a half years of recovery, were sig nificantly belozv the levels prevailing at the troughs. T axks There have also been major developments affecting taxes. Here, too, there has been official recognition that the burden of taxes is a hindrance to full employment and a drag on eco nomic growth. This was accompanied by a three-pronged program, two parts < t which have already been accom > plished, to reduce the tax load. In 1962 the Treasury put into effect a new and substantially more liberal depreciation schedule to be used in computing income for tax purposes. Also in 1962 Congress enacted a pro vision allowing a limited tax credit for new investments made by taxpay ers. It is estimated that these two changes reduced corporate tax liabili ties tor 1962 by about $2}4 billion. The third component of the program is a broad and substantial reduction in Federal taxes on personal and cor porate incomes. The proposal has been pushed vigorously for more than a year and a bill to accomplish it was passed by the House of Representa tives in September 1963, but at this writing its late is uncertain. As passed by I he House, the measure would re duce personal tax liabilities by an aver age ot 18.7 per cent, with larger re ductions in the lower brackets and .smaller reductions in the higher brack ets. Also, certain new features would give additional relief to the lower brackets, while changes in the pro vision allowing the exclusion of certain dividends and tax credits against others would reduce the relief in the higher brackets. The effect of these changes would be generally to reduce the rates of the personal tax to a level well below the peak rates reached dur ing W orld W ar II. I he measure would reduce corporate tax liabilities 30 by an average of 9.8 per cent, which would leave the rates substantially above the peak rates of World W ar II. Further, corporations would not real ize the full benefits from the reduction during a transition period of about five years; the date for paying taxes would be advanced each year until cor porations would be on a current basis. The slowdown in wage increases, the more favorable tax provisions, the prospect of more tax C o rp o ra te P r o fits relief to come, and a relatively high level of business activity all combined to boost corporate profits in the past two years. They rose to a new high level in 1962 and registered significant billion in the fourth quarter of 1963. This would be an increase of about 23 per cent in two and a half years. The rise has been accompanied by a slow but steady rise in the rate of utilization of manufacturing capacity. This indicates that the increase in plant and equipment has been justified and affords some grounds for expecting that the rise will continue for a while into the future. Spending for plant and equipment is significant for several reasons. As pointed out earlier, it constitutes per haps the most important channel only a very few industries failing to participate in the advance. It was the through which savings are translated into investment, thus permitting the income multiplier to work in the pri vate economy. It is also an important indicator of the confidence of business men in the prospects for the intermedi first time in ten years that profits had shown significant gains for two con ate future. Finally, it lays the ground work for greater and more efficient secutive years. The profits were, of course, computed after taking advan tage of the enlarged allowances for depreciation. Computed without these allowances, the profits would have been considerably larger. production in the future. Domestically additional gains in 1963. The gains were general and widespread, with E x p e n d it u r e s fo r N e w P la n t and Larger corporate profits and a more favorable tax environment have been important factors in stimulat ing the increased spending for new E q u ip m e n t plant and equipment which began in the third quarter of 1961. During the recovery of 1958-1960 plant and equip this could bring higher wages and/or larger profits. Internationally, it could mean more effective competition with other countries and perhaps some im provement in the balance of payments, both by increasing the surplus on trade and services account and by reducing capital outflows because of an im proved business outlook. T h e L e n g t h e n in g C y c le As noted earlier, postwar business cycles, espe cially the periods of expansion, have shown a definite tendency to become ment expenditures did not regain the level of $37.7 billion reached in the third quarter of 1957. But this figure shorter. The current cycle has proved to be an exception to that generaliza was surpassed in the third quarter of 1962. Then, after declining moderately trend. Contrasted with periods of months and 25 months for the two for two quarters, the total moved up again and was expected to pass $41 previous cycles, the current upswing has continued for more than 30 months tion and may mark a change in the and if it lasts until February 1964 it will reach 36 months. Undoubtedly many factors have contributed to this change, but three which appear to be among the more significant are the rise in corporate profits, a change in the pattern of residential construc tion, and a booming automobile indus try. These were supported by a con tinuing policy of relatively easy money which, in turn, was facilitated by the relatively slow' rise in wage rates. In 1954-1955 corporate profits reached their peak only five quarters after the cyclical trough. In 1958-1959 the peak was reached after only four quarters. In the current cycle profits continued to rise, with only minor in terruptions, for nine quarters and if, as appears likely, they continue to show gains to the end of 1963, the run will have been extended to 11 quarters. It seems quite likely that the more favorable profits picture has had a fairly direct and beneficial effect on expenditures for plant and equipment, employment, volume of output, and other phases of economic activity. In these ways the larger profits have contributed to the lengthening of the period of business expansion. In earlier cycles rising interest rates exerted a restraining effect on resi dential construction fairly early in the periods of business expansion. This caused residential construction to “peak out” and turn downward early in the cycle. The opposite happened near the troughs of the cycles, and these effects probably contributed to the shortening of the cycles. In the current cycle the include an abundance of savings, com petition of commercial banks for mort gage loans, and official efforts to hold down all long-term interest rates. As a result, after two and a half years of business expansion interest rates on residential mortgages were, in most parts of the country, significantly lower than they were at the trough of the cycle. Responding to these lower interest rates and a generally favorable en vironment, residential construction has moved up throughout the current pe riod of business expansion. In the third quarter of 1963 expenditures for residential nonfarm construction stood at the highest point on record and in September and October 1963 housing starts moved up sharply to new highs. The volume of expendi tures involved here necessarily made a contribution toward the extension of the period of relatively high business activity. Finally, the automobile industry, for whatever reasons, has had two con secutive years of very high produc tion and sales, with favorable prospects for a third good year to come. The two years which are past have already helped to lengthen the present period of business expansion. If the third boom year is realized it will be a new pattern for the industry and also a major contribution toward a further lengthening of the upswing. It is, of course, too early to say whether these three developments will continue and help to change the pat tern of future cycles. But the cyclical rise in interest rates generally has been quite gentle and moderate. In the case pattern is continually changing as the of mortgage loans, several special fac ments and it would not be unreason able to expect that for a while the tors have been at work to hold interest rates down or push them lower. These net result of a multitude of develop trend might be toward longer cycles. 31 SUMMARY OF OPERATIONS The year 1963 was characterized by significant increases in many of the operating functions of the Richmond Reserve Bank. The number of checks cleared reached an all-time high of 326,339,000— 25 million more than in 1962—-and the dollar value rose to a record $115.6 billion. Currency ship ments and receipts climbed to more than $5.6 billion, up 5 per cent from the 1962 figure. Wire transfers of funds totaled almost $141 billion, 18 per cent more than the previous year. earnings which remained, amounting to $56,413,810.49, were paid to the Treas ury as interest on Federal Reserve notes. In response to a slightly less easy monetary policy, member banks stepped up their borrowing at the discount dents, and other interested individuals; and over 281,000 copies of other pub window to $5.95 billion, more than double the volume in 1962. A significant decrease was experi enced in one area of operations— the handling of coins. Outgoing shipments Capital stock rose to $24,569,650.00 as a result of an increase in the capital and surplus of District member banks. Publications and statistical reports of the Bank continued to be popular and were widely distributed during the year. Approximately 140,000 copies of our M onthly R eview were sent to bankers, businessmen, educators, stu lications were distributed by the Bank. In addition to the annual college survey, in which suitable publications and receipts totaled $156 million, down about $5 million from 1962. The drop and films are offered for classroom use to professors of economics and related subjects, the Bank conducted its second high school survey to en courage the teaching of economics at is attributable to the nationwide coin shortage that has been growing more that level. Over 800 high schools in the Fifth District requested publica acute each of the last several years. Among the factors apparently con tributing to the shortage are an in tions in response to the survey. Early in 1963 our traveling money crease in coin collecting, rising busi nished with new cases and easels. Two ness activity, and more extensive use of vending machines, parking meters, and similar devices. new counterfeit exhibits were added to bring the total number of displays exhibits were refurbished and fur to eleven. The exhibits, which are bor Net earnings before payments to the rowed for one-week periods, remain U. S. Treasury rose $7 million to a quite popular with District member record $62,842,503.34. Member banks banks. received 6 per cent statutory dividends Our annual Operations and Policy of $1,391,692.85, and the Bank’s sur in capital) was increased $5,037,000.00 was attended by 230 bankers, represent ing 146 District member banks and to bring it to $49,139,300.00. 32 Seminar was held in April of 1963. plus account (surplus is twice the paid- branches. The net It New Federal Reserve Notes On November 26 the Bank, along with other Reserve Banks, began is suing one-dollar Federal Reserve notes. These notes will replace one-dollar sil ver certificates, which are being retired to conserve the silver for coinage. The new notes, like other Federal Reserve notes, are secured primarily by gold certificates and U. S. Government se curities. Check Collection By April 1963 all three of our offices were equipped with high-speed check handling equipment on a rental basis. Richmond installed a Burroughs B-270 in November 1962, and a second Burroughs high-speed system was in stalled in November 1963. Baltimore and Charlotte acquired IB M 1412 equipment in March and April re spectively, and both offices plan to re place this equipment with a higherspeed document handling system, the IBM 1420, early in 1964. At the Richmond office about four hundred thousand country items— ap proximately 80 per cent of the average daily volume of country items received for collection— are processed in the high-speed unit each day. Plans are being made to process Government card checks and postal money orders on the high-speed equipment early in 1964. At the Baltimore Branch, where an IB M 1419 Reader-Sorter replaced the original IB M 1412 in November 1963, about 145,000 country items— approxi mately 60 per cent of the daily average volume of country items received for collection— are processed each day. At the Charlotte Branch, where the IB M 1412 is still in use, 60,000 country items— approximately 30 per cent of the average daily volume of country items received for collection— are processed each day. At all three offices low-speed encod ing equipment is utilized to qualify items in the amount held for electronic processing. It is contemplated that some units of the encoding equipment, as well as some of the conventional proof machines, will be released as the number of incoming items qualified for high-speed handling increases. New Member Banks Twelve newly-formed Fifth District banks entered the Federal Reserve System during the year, and three former nonmember banks converted to System membership. Member banks opening for the first time during 1963 were: January 2 1 First National Bank of -— Hillandalc, Silver Spring, Mary land. [une 5— National City Bank of Balti more, Baltimore, Maryland. July 1— First National Bank of Boone, Boone, North Carolina. July 1— Security National Bank of Roanoke, Roanoke, \irginia. July 23— Public National Bank, Wash ington, D. C. August 5— Ilorry County National Bank, Loris, South Carolina. August 16— Commonwealth National Bank of Arlington, Arlington, \ir ginia. September 5 -Peoples National Bank of Prince Georges County, Suitland, Maryland. September 25— The Colonial National Bank of Alexandria, Alexandria, Y irginia. November 13—The National Bank of Kosslvn, Arlington, \irginia. December 2— Madison National Hank, Washington, D. C. December 16— National Bank of Com merce of Fairfax County, Falls Church, Virginia. The Farmers and Merchants Bank of Craig County, New Castle, \ir ginia, joined the System on May 15; Citizens National Bank of Southern Maryland. Lexington Park, Maryland, formerly Citizens Bank of St. Mary's, joined on May 27; and the First Na tional Bank of Smithfield, Smitlffield, North Carolina, formerly the Johns ton County Bank, became a member on September 16. Changes In Official Staff The year 1963 brought about one official promotion and the appointment of three new officers. \ elford S. \ Farmer, formerly General Counsel, was named \ice President and Gen eral Counsel in December. Edward L. Bennett, R. Henry Smart, and Chester D. Porter, Jr.. were appointed to the position of Ex amining Officer also at the end of the year. 33 COMPARATIVE STATEMENT OF CONDITION D e c e m b e r 31, 1963 ASSETS: Cold certificate account ........................................ D e c e m b e r 31,1962 $ 845,296,215.72 $ 894,629,406.31 117,529,535.00 100.516.830.00 Redem ption fund for Federal Reserve notes 962,825.750.72 995,146,236.31 Federal Reserve notes of other banks ......... 38,672,250.00 36.860.300.00 Other cash ......................................................... 9,012,572.85 25.644.066.01 Discounts and advances ................................ 2,854,000.00 995,000.00 TOTAL GOLD C ERT IFIC A T E RESERVES U. S. Government securities: Bills ..................... .................... 289.926.000.00 165.733.000.00 Certificates ............................. 494.678.000.00 894.553.000.00 Notes ....................................... 1.241.139.000.00 727.296.000.00 325.206.000.00 280.729.000.00 TOTAL U . S. G O V E R N M E N T S E C U R IT IE S 2.350.949.000.00 2.068.311.000.00 TOTAL L O A N S A N D S E C U R IT IE S ................. 2.353.803.000.00 2.069.306.000.00 Cash items in process of collection 588,826,970.10 572,259,096.25 ....... ............................. 5,106,576.07 5.116,166.03 Other assets .......................... ................. 24.272,087.52 22,311,118.99 $3,982,519,207.26 $3,726,642,983.59 $2,703,309,890.00 $2,525,031,750.00 706,662,802.47 761,009,058.90 79,381,427.35 27,944,548.68 ................................................... 7,520,000.00 11,700,000.00 Other ...................................................... 8,073,593.22 10,181,264.10 Bonds ..................................... Dank premises O T A L ASSETS L IA B IL IT IE S : Federal Reserve notes ........................... D eposits: M ember bank— reserve accounts U. .. S. Treasurer— general account Foreign total d e p o s it s .................... 801,637,823.04 810,834,871.68 398,382,082.78 320,368,007.44 5,480,461.44 4,254,904.47 3,908,810,257.26 3,660,489,533.59 24.569.650.00 22.051.150.00 49.139.300.00 44.102.300.00 $3,982,519,207.26 >3,726,642,983.59 $ $ Deferred availability cash items Other liabilities ................................. TOTAL L IA B IL IT IE S C A P IT A L A C C O U N T S : Capital paid in ..................... Surplus ....................................... T O T A L L IA B IL IT IE S AND C A P IT A L A C C O U N T S Contingent liability on acceptances purchased for foreign correspondents 34 4,319,300.00 3,784,500.00 COMPARATIVE STATEMENT OF EARNINGS AND EXPENSES E A R N IN G S : 1963 Discounts and advances ............................... S 75,645,680.58 95,994.62 17,251.30 67,888,038.78 12,281,791.59 11.541.987.12 358,300.00 896.476.88 301,900.00 684,468.53 13,536,568.47 12,528,355.65 62,786,322.71 55.359.683.13 20.748.73 36,890.59 130,618.22 33,988.44 57,639.32 164,606.66 1,458.69 67,425.28 56,180.63 97,181.38 $62,842,503.34 $55,456,864.51 $ 1,391,692.85 56,413,810.49 $ 1,272,977.39 50,222,987.12 5,037,000.00 3,960,900.00 $62,842,503.34 $55,456,864.51 $44,102,300.00 5,037,000.00 TO T AL C U RREN T E A R N IN G S ^ 238,006.42 67,479,037.72 157,607.00 13,387.64 76,322,891.18 Interest on U . S. Government securities Foreign currencies ..... -....................... ....... O ther earnings ......... .......... ...................... ...... 563,9(>4/>8 $40,141,400.00 3,9o0,900.00 $49,139,300.00 $44,102,300.00 $22,051,150.00 2,552,250.00 $20,070,700.00 2,049,450.00 24,603.400.00 33,750.00 22,120,150.00 69,000.00 $24,569,650.00 $22,051,150.00 EXPENSES : O p e r a tin g expenses ( in c lu d in g depreciation on b a n k prem ises) after d e d ucting reimbursements received for certain Fiscal Agency and other expenses ................. ...... Assessments for expenses of Board of Governors .................................................... .............. Cost of Federal Reserve currency .......... ................................................ ............................ ......... NET E X P E N S E S CURRENT NET E A R N IN G S .................................................................... A D D IT IO N S T O C U R R E N T N E T E A R N IN G S : Profit on sales o f U . S. Governm ent securities (net) A ll other ................................. .................................................. TOTAL A D D IT IO N S D E D U C T IO N S F R O M _______ ___ _ C U R R E N T N E T E A R N IN G S Net additions .................. .................. ....... ....................... ......... N E T E A R N I N G S B E F O R E P A Y M E N T S T O U. S. T R E A S U R Y Dividends paid ............................... ................................................ P aid U . S. Treasury (interest on Federal Reserve notes) Transferred to surplus .................................................................. TOTAL SURPLU S ACCOUNT Balance at close of previous year ... A ddition account of profits for year BALANCE AT CLOSE OF CURRENT YEAR .................................. C A P IT A L S T O C K A C C O U N T (Representing am ount paid in, which is 50% of am ount subscribed) Balance at close of previous year .......... ................................................... ............................ Issued during the year .......................... .... .................... ........... ......... Cancelled d u ring the year ................................................... ........ B A LA N C E AT CLOSE OF CU RREN T ......... YEAR 35 FEDERAL RESERVE BANK OF RICHMOND Director§ (December 31, 1963) Edwin Hyde Chairman of the Board and Federal Reserve Agent William H. Grier Deputy Chairman of the Board David K. Cushwa, Jr. President, The Washington County National Savings Bank Williamsport, Maryland (Term expires December 31, 1965) Addison H. Reese President, North Carolina National Bank Charlotte, North Carolina (Term expired December 31, 1963) Succeeded by: Robert T. Marsh, Jr. Chairman of the Board First & Merchants National Bank Richmond, Virginia (Term expires December 31, 1966) CLASS A ■ J. McKenny Willis, Jr. Director, Maryland National Bank Easton, Maryland (Term expires December 31, 1964) CLASS B Robert Richardson Coker Robert E. L. Johnson Raymond E. Salvati President, Coker’s Pedigreed Seed Company Hartsville, South Carolina (Term expires December 31, 1964) Chairman of the Board, Woodward & Lothrop, Inc. Washington, D. C. (Term expires December 31, 1966) Chairman of the Board, Island Creek Coal Company Huntington, West Virginia (Term expires December 31, 1965) C LA SS C Edwin Hyde William H. Grier Wilson H. Elkins M E M B E R F E D E R A L A D V IS O R Y COUNCIL Robert B. Hobbs 36 President, Miller & Rhoads, Inc. Richmond, Virginia (Term expires December 31, 1964) President, Rock Hill Printing & Finishing Company Rock Hill, South Carolina (Term expires December 31, 1966) President, University of Maryland College Park, Maryland (Term expires December 31, 1965) Chairman of the Board The First National Bank of Maryland Baltimore, Maryland (Term expired December 31, 1963) Succeeded by: John F. Watlington, Jr. President Wachovia Bank and Trust Company Winston-Salem, North Carolina FEDERAL RESERVE BANK OF RICHMOND Officers Edward A. Wayne Aubrey N. Ilellin P r e s id e n t Robert P. Black F ir s t V ic e P r e s id e n t J. Gordon Dickerson, Jr. V ic e P r e s id e n t V ic e P r e s id e n t Donald F. Hagner V ic e P re s id en t and G en era l C ou n sel Edmund F. Mac Donald V ic e P r e s id e n t V ic e P r e s id e n t B. U. Ratchford V ic e P r e s id e n t a n d C a sh ier V ic e P r e s id e n t Raymond E. Sanders, Jr. John G. Deitrick A s s is ta n t V ic e P r e s id e n t William B. Harrison, III H. Ernest Ford A s s is ta n t V ic e P r e s id e n t A s s is ta n t V ic e P r e s id e n t Joseph F. Viverette A s s is ta n t V ic e P r e s id e n t and S ec reta r y J. Lander Allin, Jr. A s s is ta n t C a sh ier Arthur V. Myers, Jr. A s sista y it C a s h ie r A s s is ta n t C a sh ier A s s is ta n t C a s h ie r Wythe B. Wakeham R. Henry Smart Chester D. Porter, Jr. A s s is ta n t C a s h ie r E x a m in in g O ffic e r E x a m in in g O ffic e r E x a m in in g O ffic e r Robert L. Miller John E. Friend G. Harold Snead G en era l A u d ito r A s s is ta y it V ic e P r e s id e n t Edward L. Bennett Clifford B. Beavers A s s is ta n t C a s h ie r John C. Horigan C h ief E x a m in er A s s is ta n t V ic e P r e s id e n t Victor E. Pregeant, III James Parthemos V ic e P re sid e n t and S e n io r A d v is e r Stuart P. Fishburne A s s is ta n t V ic e P r e s id e n t V ic e P r e s id e n t Upton S. Martin V ic e P r e s id e n t Joseph M. Nowlan John L. Nosker Welford S. Farmer Roger P. Schad A s s is ta n t G en era l A u d ito r 37 BALTIMORE BRANCH Directors (December 31, 1963) Joseph B. Browne President, Union Trust Company of Maryland Baltimore, Maryland (Term expires December 31, 1965) E. Wayne Corrin President, Hope Natural Gas Co. Clarksburg1 W est Virginia , (Term expires December 31, 1965) Leonard C. Crewe, Jr. President and Treasurer Maryland Fine and Specialty W ire Company, Inc. Cockeysville, Maryland (Term expires December 31, 1964) Harry B. Cummings Vice President and General Manager Metal Products Division, Koppers Company, Inc. Baltimore, Maryland (Term expires December 31, 1966) Harvey E. Emmart Senior Vice President and Cashier Maryland National Bank Baltimore, Maryland (Term expires December 31, 1964) Martin Piribek Executive Vice President The First National Bank of Morgantown Morgantown, W est Virginia (Term expires December 31, 1964) J. N. Shumate President, The Farmers National Bank of Annapolis Annapolis, Maryland (Term expired December 31, 1963) Succeeded by: John P. Sippel, President The Citizens National Bank of Laurel Laurel, Maryland (Term expires December 31, 1966) Officers Donald F. Hagner V ic e P re sid en t B. F. Armstrong A ssista n t Cashier 38 A. A. Stewart, Jr. C a s h ie r E. Riggs Jones, Jr. A s s is ta n t C a sh ier A. C. Wienert A s s i s t a n t C a sh ier CHARLOTTE BRANC (December 31, 1963) George H. Aull Directors Consulting Economist The South Carolina National Bank (Term expired December 31, 19G3) Succeeded by: James A. Morris, Dean School of Business Administration University of South Carolina Columbia, South Carolina (Term expires December 31, 19GG) Wallace W. Brawley Pi'esident The Commercial National Bank of Spartanburg Spartanburg, South Carolina (Term expires December 31, 1964) J. C. Cowan, Jr. Vice Chairman of the Board Burlington Industries, Inc. Greensboro, North Carolina (Term expires December 31, 1965) W. W. McEachern President, The South Carolina National Bank Greenville, South Carolina (Term expires December 31, 1966) G. Harold Myrick Executive Vice President and Trust Officer First National Bank Lincolnton, North Carolina (Term expires December 31, 1965) Joe H. Robinson Senior Vice President Wachovia Bank and Trust Company Charlotte, North Carolina (Term expires December 31, 1964) Clarence P. Street President, McDevitt & Street Co. Charlotte, North Carolina (Term expires December 31, 1964) Officers Edmund F. Mac Donald V ic e P r e s id e n t Winfred W. Keller A s s is ta n t C a s h ie r Stanhope A. Ligon C a sh ier Fred C. Krueger, Jr. A s s is ta n t C a sh ier E. Clinton Mondy Assistant Cashier