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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.

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 more
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 was
an enormous demand for homes and
durable goods, built up during the Great
Depression and the war. During the
period that backlog wras worked down
steadily and fairly rapidly until it
may be said to have disappeared in
recent years. Third, the period was
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 el
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 became
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

A d ju ste d

Annual

Rat

700

500

300

1940 1947

194 9

1951

1953

1955

1957

1959

llllilll

m il

+
y\
55

1
50

•
/* *

djuste d

/
/

45
u

•

1963

CIVILIAN EM PLO Y M EN T

Millions of Persons
75

1961

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

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

n d u s t r ia l

r o d u c t io n

P la n t

p e n d itu re s

and

E q u ip m e n t

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

INDEX OF IN D U ST RIA L PRODUCTION
1957-1959=100
140

S e aso na ll y Ad|usted

120

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

■

•1

S
19 4 9

S
1951

S
1953

S
1955

n
1957

n
195 9

i m
+4.8

■

m
1961

196 3

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

o n s u m p t io n

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

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,

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

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

■

A d ju s te d

Annual

Rat

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
+

/■■Bi
s
i
m
mm
■■wfto

I W

■

I I H

I W

100

Services

i i i i

s '

01940

1947

1949

1951

1953

—

1955

1957

—

1959

1961

1963

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

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

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

o v e r n m e n t

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

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 S E sH r
E

i S

P H

1940 1947

1949

1951

1953

h h

i i r a
H

1955

1957

i s a

1959

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
1953

i
1955

i
1957

i
1959

i
1961

i
1963

Prices are major indicators

of the health of an economy, because

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

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

n t er est

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

n
1957

n
1959

i n
1961

1963

INTEREST YIELDS
Per Cent Per Annum

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ I
■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■
...* ,
■ ■ ■ ■ ■ ■ I
m m m m t

If llB B n a n n iS S
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.

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

a l a n c e

m e n t s

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.

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

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

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

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

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

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

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.

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.

A N N U A L RA T ES O F G R O W T H , 1957-1963

u m m a r y

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

the

behavior

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

Per Cent

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

e c l in e

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

________

■ ■ ■ ■ ■ ■ ■ ■ ■ ■

■H B a m im m m
~

I _ j ^

i i n

9
n

i 6
s

f f i » n
s

■■■■■■■■■■■■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

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

and

relatively.

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

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

h an g in g

usin ess

C ycle

previously noted, postwar cycles have
tended to become shorter and, in most
respects, milder. These features are
shown

clearly

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

oney

c tivity

In order to show

was

1949-1954 cycle

lengthened

undoubtedly

somewhat

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

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.

o n e y

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

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

liiim iir--~”J
B
B

corporate income taxes made a major
contribution
posable

toward

incomes.

sustaining

(5 )

dis

Government

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

---------------------- -------------

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

below

have

curtailed

the

forces which normally push business
On the other hand, in periods o f reces
deflationary

forces

have

19 4 5 -4 9

***

19 4 9 -5 4

- 43.5

— 2.7
3.4

19 5 4 -5 8

+24.9

-16.4

been

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,
by

the

absence

speculative

excesses.

j Billions

S easo n a lly

and

A m ong

strictly

the

n filled

cyclical

probably the most important

!■ ■ ■ ■ ■ ■ ■ ■

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

100

I nven to r ies

3.3

1958-6 1

cushioned by easy money policies, by

and

Downswing

Upswing

•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.

activity up sharply in boom periods.
sion

Downswing

Upswing

the shorter and milder

cycles. First, the secular movements
discussed

Percentage
Chonges in G N P * '

Length in Months

i s

l l l l l l l l l l l l l

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

vn
1 94 0

1947

1 94 9

1951

1953

1955

1957

195 9

1961

196 3

tuations. This was especially true in
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

their effects on the levels of invento

ceding page shows the fluctuations in

ries. Interest rates have been higher and

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

possible

inventories.
by

lower

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

and the development o f

Several minor factors also have had

The chart on the pre

past six years.

ventories they have, to get the infor

faster and

inventories has tended to feed on itself.

more flexible transportation facilities

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

exception to this, however, has been

has been better methods o f inventory

the extensive stockpiling o f steel and

control, many o f them based on the use

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

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

■ ■ ■ ■ ■ ■ ■■ ■ ■ ■ ■ ■ ■ ■ ■ I

100
■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

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

r o f its

Total corporate

profits in this country have not shown

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

easons

for

the

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.

n e m plo ym e n t

—

om e

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

3.0

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

iRiiii____ imm.%
IIIIIIBBBB8illl!ll
m

■

s s S

i B

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-

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

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
IflE fccsa sd 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, 1959 = ioo

W AGES AND M A C H IN ERY PRICES

■■■■■■■■■■■I

ing to induce producers to make such

p
::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

i H

!■ ■ ■ ■ ■ ■

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

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

good

one

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.

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.

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

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

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

Our annual Operations and Policy

of $1,391,692.85, and the Bank’s sur

Seminar was held in April of 1963.

plus account (surplus is twice the paid-

was attended by 230 bankers, represent

in capital) was increased $5,037,000.00

ing 146 District member banks and

to bring it to $49,139,300.00.

branches.

The net

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
ASSETS:
Cold certificate account ........................................

D e c e m b e r 31, 1963

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

.....................

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

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

...............................

Interest on U . S. Government securities
Foreign currencies ..... -....................... -.......
O ther earnings ......... .......... ...................... ......
TO T AL C U RREN T E A R N IN G S

563,9(>4/>8

75,645,680.58
95,994.62
17,251.30

^ 238,006.42
67,479,037.72
157,607.00
13,387.64

76,322,891.18

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

$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

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

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

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

Donald F. Hagner

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.

Clifford B. Beavers

A s s is ta n t C a s h ie r

A s s is ta n t C a sh ier

E x a m in in g O ffic e r

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

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

Robert L. Miller

John E. Friend

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

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

Welford S. Farmer

Roger P. Schad
A s s is ta n t G en era l A u d ito r

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

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

Full text of Annual Report of the Federal Reserve Bank of Richmond : 1963 Annual Report

FRASER