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Exploring Hydrospace Country-Style Wizardry: Bankers Are Managing With Less Excess Reserves E xploring Hydrospace . . . Man’s last frontier lies beneath the sea. C ountry-S tyle W izardry: Bankers Are M anaging W ith Less Excess Reserves . . . Changes in country bank reserve management make monetary policy more effective. NEW PUBLICATION MAINSPRINGS OF GROWTH: studies of the structure of the Philadelphia Metropolitan Economy. This pamphlet, composed of twelve articles from past Business Reviews, treats the subjects of employment, wages, banking, port commerce, economic growth policies, and the research and development industry in Philadelphia. Copies are available upon request from Bank and Public Relations, Federal Reserve Bank of Philadelphia, Philadel phia, Pennsylvania 19101. BUSINESS REVIEW is produced in the Department of Research. Evan B. Alderfer is Editorial Consultant. Donald R. Hulmes prepared the layout and artwork. The authors will be glad to receive comments on their articles. Requests for additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania 19101. EXPLORING HYDROSPACE by Henry A. Watson Man lias only two vast frontiers left to him: outer divers have made descents to depths of more space and the ocean. Developing and exploring than 300 feet, but the average range of their space rests almost entirely with the Government. apparatus limits them to between 200 and 250 On the other hand, much of the impetus for de feet. veloping and exploring the ocean has come from To go deeper, the oceanographer must use private enterprise. Not only does hydrospace offer specially designed craft to withstand great pres a challenge to industry, hut also the potential of a good monetary return. Before hydrospace can sures. Sea pressures reach seven tons per square inch at six and one-half miles. The first of these become one of the country’s major industrial mar craft, the bathysphere, was constructed in 1930 ket areas, billions of dollars will have to be spent and was able to descend to a depth of 3,028 feet, to observe, explore, record and understand it. hut movement was restricted. In 1948 the bathyscathe was built to permit movement under its What is hydrospace? own power and has descended into the sea’s Hydrospace is that vast expanse known as the deepest known trench, a depth of 35,800 feet. ocean. Its 140 million square mile area covers Man has not stopped with the bathyscathe. He over 70 per cent of the earth’s surface. The study of it is called oceanography, defined in various has designed some 27 different types of maneu verable craft that permit a depth range from 300 ways depending on the concern and interest of the definer. Oceanography as used here refers to to 36,000 feet. the study of and activities within the ocean having Spurred on by discovery and extraction of petroleum and development of underwater craft, significant scientific or technical content. both industry and Government have been open Hydrospace is a hostile environment for man. Oceanographers have traditionally used the known sciences of biology, geology, chemistry and ing vast new vistas for economic development of the ocean. No doubt the leading industrial pio physics in the quest to solve the ocean’s mysteries. neer in oceanics, in terms of experience and in vestment, is the oil industry. Since the first drill But the obstacles of storms, darkness of the ing rigs went to sea in the 1940’s, more than depths, extreme cold, and unfriendly sea life are $31/6 billion has been invested. Today over 16 fast being overcome as new techniques are per per cent of the total world oil production comes fected. from offshore wells, and is expected to increase to 25 per cent by 1975. With the knowledge that Present developments and future opportunities petroleum deposits have been located off the The development of considerable equipment has coast of New Jersey, potential for the oil industry to some degree resolved the problems of environ in the Delaware Valley appears excellent. ment. Depending on the surface for air, the tra ditional diving suit with its heavy metal helmet by a hostile environment has spurred the industry is suitable for depths of about 250 feet. Scuba to conduct extensive research on underwater com- Constant danger to offshore operations posed 3 b usin ess r e v ie w munities where workers CHART 1 will live in glass-domed DEVELOPMENTS IN THE CONQUEST OF HYDROSPACE houses. It is envisioned that by 1975 most station ary platform installations will be located ocean bottom. on the In addition to oil, sup plies of natural gas and numerous deposits of val uable minerals have been encountered on the conti nental slopes. These min erals include magnesium, cobalt, copper, nickel, iron, tin, coal, silver, gold, sulphur, and diam onds. The mining of some of these, such as tin, iron ore and diamonds, has actu ally begun. Experts pre dict that off-shore mining will be a $50 million a year industry within ten S o u rce: National Association o f Manufacturers. years, and within 30 years the ocean is expected to be a major source of grown annually in a single surface acre of the many known raw materials. water. Production of ocean foods is climbing at Perhaps the most important wealth offered to the world from the ocean is food and most par a rate of 15 per cent a year and is likely to reach the $5 billion level by 1970. ticularly protein. This basic nourishment is in The ocean is virtually one large chemical plant great demand by an estimated two-thirds of the providing sources of exciting new medical dis world population. But it is also in very short coveries. Marine pharmacologists have already supply. The development of a fish meal concen extracted from sea creatures chemicals that kill pain, inhibit the growth of certain tumors, fight trate which has been recently approved by the Food and Drug Administration has been ac claimed as the solution to the world’s problem viruses, and stimulate the heart. of “ protein hunger.” Man presently is hauling in from the ocean over 60 million tons of fish yearly. was salt to flavor his food. Desalted water was a waste product. Today this situation is reversed, This is only a tiny fraction of the fantastic volume with the most valuable of its ingredients, potable actually available. It has also been demonstrated water, being extracted very economically. Since that 50 tons of algae for chicken feed can be the first desalination plant went into operation in One of man’s first products from the ocean b usin ess re v ie w 1952, the cost of operation has dropped from $4 ocean water for swimming, sports fishing, skin per thousand gallons to 25 cents. diving, boating, surfing and the like is becoming Soon, the ocean may also be used as a source even more popular. Ocean recreation in the of power. Once it is harnessed, power will come United States is estimated to be a $4 billion an from the winds, waves, tides, currents, organic nual business. It is expected to grow to $7 billion matter in the sea, and from temperature differ by 1975. ences. We are all aware of the greatly expanding de mand for recreational facilities along our coast. Use of the shore, inland waterways, and nearby The U.S. Government in hydrospace Government involvement in hydrospace started with the birth of the Republic when industry first looked to the Government for protection and assistance. Among its earliest acts, the Congress established a seagoing revenue service, a navy, CHART 2 POTENTIAL AREAS FOR DEVELOPMENT OF ECONOMIC RESOURCES and a marine hospital service. In the 19th century, the Navy, the Coast and Geodetic Survey and the Smithsonian Institution (founded in 1846) actively encouraged a working relationship with the scientific community and its many ocean-oriented agencies. The Navy, how ever, was the first organization to approach the subject scientifically. It was Commander Matthew Fontaine Maury who charted the currents, prov ing that they exerted great influence on the cli mate and were immense streams with stability and direction. His book, The Physical Geography of the Sea, published in 1855, still serves as the basis of our modern science of oceanography. The twentieth century ushered in a new era for oceanography, as well as many new cooperating agencies. The National Research Council, Na tional Academy of Science, Bureau of Commer cial Fisheries, National Science Foundation, and the Atomic Energy Commission are the most out standing. More recently, the Interagency Com mittee on Oceanography has taken the lead in development of guidelines and a long-range na tional oceanographic plan. Along with this, the President’s Science Advisory Committee on Oceanography has recommended that the objec tive of the national ocean program be, “ effective S o u rce: W ood s H o le Oceanographic Institution, M assa chusetts. use of the sea by man for all purposes currently 5 b usin ess r e v ie w considered for the terrestrial environment: com CHART 3 merce; industry, recreation and settlement; as GOVERNMENT SPENDING IN OCEANICS, 1958 TO 1980 well as for knowledge and understanding.” Millions of Dollars Achievement of this objective will require close cooperation and harmony among the Govern mental, academic, scientific, and industrial sectors of the economy. In 1966 four major events transpired that eventually will guide the United States program in oceanics. 1. The Effective Use of the Sea, a report prepared by the President’s Science Advisory Committee, contained observations and recommendations to guide the Government’s future ocean activity. 2. The Marine Resources and Engineering De velopment Act established a presidential level council to develop, maintain, and coordinate a comprehensive, long-range marine science pro gram. Oceanics and the Delaware Valley Many of the developments which have contributed to the advancement of oceanics had their founda tions on the Delaware River. Benjamin Franklin first conceived the idea of determining ocean temperatures and measuring currents by towing a bucket over the side of a ship. The chart he made 3. The Sea Grant Colleges and Program Act of the ocean’s course, temperature, speed and supports educational programs in sea-grant col depth saved mariners two weeks in sailing time. leges and other institutions’ laboratories. During that period, Philadelphia became Ameri 4. The Navy established an Office of Oceanog raphy with direct responsibility to the Chief of Naval Operations. ca’s most active port and the center of the country’s commercial, maritime, and civic life. The Navy was established here with the commis sioning of the “ Alfred” in 1775. Also in that year Because of the ocean’s importance to national security, Government spending in oceanography the Marine Corps was founded in one of the Philadelphia Water Street taverns. has been steadily increasing. Current annual The Delaware River at the end of the 18th cen spending is $310 million. It has been recom tury, as today, included much commercial ship mended that by 1971 spending be increased to ping and shipbuilding activity. In 1788, John $600 million. It is further envisioned that by the Fitch put America’s first steamboat into opera year 1980 the Government will be spending over $10 billion yearly on military ocean projects. tion at the foot of Arch Street. It was at the fa mous Humphreys Southwark Yard that the U.S. Comparing this magnitude to present Government Navy’s first frigate was launched. The Philadel phia Navy Yard, the first in the country, was spending of $5 billion a year on space, one can being established on that site in 1800. By 1820, Stephen thought of as the great research and development Girard was berthing his fleet on the Delaware, market area of the future. and Philadelphia was America’s leading port. easily see why oceanography 6 is now b usin ess re v ie w Local industry is jumping in feet first Electric is working on a buoy system and devel Today, with the national surge of interest in oping the technology necessary to design a com hydrospace, many industries in the Delaware plete modular undersea vehicle system for use Valley such as petroleum, shipbuilding, elec down to 12,000 feet. G.E. has also been conduct tronics, communications, and instruments have ing research for the past three years on the appli turned full attention to the ocean. The Exide In cation of computers to water pollution control. dustrial Division of the Electric Storage Battery Leeds and Northrup is engaged in instruments and Company, for example, has supplied batteries data-processing research for oceanography. The for submergihles since the first submarines were Tele-Dynamics Corporation is developing mete built. The company is also nOw experimenting in orological and oceanographic instruments. These a 20,000-foot equivalent pressure tank to develop external batteries for submarine use. The Sun and many other companies are engaged in re search for pressure vehicles, sensing and record Shipbuilding and Dry Dock Company has just ing instruments, underwater engineering, corro completed a twinsphere pressure craft for Lock sive control, multi-channel sonar, microwave re heed's 0,000-foot undersea vehicle “ Deep Quest.” lays, remote manipulations systems, and under water photography. Sun Ship is also presently working on pressure test chambers for the Navy. Philco-Ford is con In a recent study conducted by the Oceanic ducting research in underwater acoustics. General Task Force of the Chamber of Commerce of Greater Philadelphia, 73 manufacturing firms CHART 4 TOTAL MANUFACTURING INVOLVEMENT IN OCEANICS Percentage of Ocean Activity participated in a survey related to current activ ities in the field of oceanics.1 Although the com mittee realized that these firms do not represent the complete involvement in oceanics, it felt that they did comprise a representative sample. The survey has permitted for the first time an overall view of ocean-related manufacturing by major category in the Delaware Valley area. The results indicate that while very few firms devote their entire operations to oceanics, many are involved to some extent, and some are in as many as three categories. Approximately 50 per cent reported all current ocean activities in the field of defense. Present involvement in design, research and development, testing or engineering is 50 per cent; in electronics and instrumentation. 58 per cent. Forty-four per cent are concerned United States N o t e : Categories include turing business. S o u rces: with raw materials and mining. Although under-1 Delaware Valley only ocean-related manufac U .S .— W ood s H ole Oceanographic Institution. Delaware Valley— O ceanic Task F o r ce; delphia Cham ber o f Com m erce. Greater Phila 1 Oceanics in this article is defined as any business whose incom e is directly or indirectly derived from oper ations in or related to the ocean’s surface, column or bottom. 7 b usin ess r e v ie w water construction and shipbuilding is a highdollar volume business, only 21 per cent of the THE OCEAN’S BASIN firms indicated activity in this field. Food and It was once believed that the ocean's bottom was a huge, nearly smooth, scooped-out hole. Years of investigation and study now show that the ocean floor has three distinct subdivisions, (a) The Continental Shelf is defined as a shal low submarine plain of varying width forming a border to a continent and typically ending at the steep slope which extends to the oceanic abyss. The 1958 Geneva Convention on the Continental Shelf, which was ratified by the United States in June 1964, established the shelf from low-water line at the coast seaward to a depth contour of 600 feet. For the United States, the establish ment of the 600-foot depth contour has added about 25 per cent to its territory, making avail able about 850,000 square miles of wet real estate, (b) The Continental Slope is that area extending from the 600-foot depth contour to the deep sea bottom, containing tremendous submarine canyons or trenches, steep cliffs, mountain ranges, hills, plateaus, valleys, plains. And, (c) the ocean bottom is that part of the floor which lies at the foot of the Continental Slope and which is termed the abyss. food products from the sea appear to be the most neglected category. The survey made no attempt to determine involvement in the areas of academic training, recreation or transportation. The universities have also plunged in Educational institutions in this region have re sponded well to the demands imposed on them by the hydrospace age. Although only a few have specialized in oceanics, many offer programs in related fields. For 20 years the University of Pennsylvania’s Department of Pharmacology has conducted hy perbaric research for the “ U.S. Navy’s Man and the Sea” project. The Department of Archeology is recognized as the world leader in underwater archeology research. And the University’s oceanics-related research in environmental sciences, specifically in gas exchanges with the ocean’s surface, has also been a major contribution to The University of Delaware’s oceanographic the field. and marine science programs were started in CHART 5 1950 and offer a Master of Science and Ph.D. REPORTED FIRM INVOLVEMENT IN OCEANICS BY FIELD OF ACTIVITY degree in marine biology. The Lehigh University Percentage of Firms Marine Science Center was founded in 1962. St. Joseph’s College has also started an active pro gram. Rutgers, New Jersey’s state university, in its Agricultural Experiment Station, concentrates extensive oceanographic efforts in three areas: biology, tidal studies, and shellfish research. Drexel Institute of Technology is largely in volved in problems such as water pollution and waste disposal. Drexel is also performing re Electronics Defense Design R&D Raw Materials Ocean Oriented Activity Construction Food & Food Products N o te : Involvem ent ranges from one to three categories. S o u rce: Oceanic Task Cham ber o f Com m erce. 8 F o r ce; Greater Philadelphia search in water resources, marine erosion and other geological shoreline phenomena. Two outstanding nonprofit research institutions also giving substantial support to oceanography b usin ess re v ie w are the Franklin Institute Research CHART 6 Laboratory and the University City PORT DEVELOPMENT EXPENDITURES PLANNED AND IN PROGRESS, 1965 TO 1985 Science Center. The Franklin Insti tute’s research history goes back to Millions of Dollars 1830 when it was awarded the first Governmental contract for research on steam boiler explosions aboard naval vessels. Down to the sea in ships The most ancient of uses of the ocean by man undoubtedly was for trans portation. Today over 90 per cent of the world’s goods measured on a weight-mile basis are transported over water. And it is estimated that the United States alone will require 400 million tons of foreign overseas ship ments by the year 1970. A few years ago, the Delaware River Port Authority determined that 96,300 persons in the Delaware Valley were engaged in port-dependent jobs. In addition to the area’s basic facili ties which are marine-oriented, there are over 1,000 manufacturing con cerns involved in port activities. Total domestic and foreign waterborne com merce moving on the Delaware River, which improvement program of $225 million places reached 110 million tons during 1965, can be the area third in the nation with 14.2 per cent of attributed directly to this port-oriented complex. reported planned public investment. But, with a Public-supported construction and renewal of new era opening in ship-building bringing into terminal facilities have, however, virtually stood still. Philadelphia has only recently realized the use larger vessels, even this outlay will not be enough to keep pace with the changes being made importance of modern facilities to handle the by the industry. cargoes being generated. To remedy this and to Private industrial terminals, on the other hand, service their industrial complex with greater efficiency, the Delaware River Ports, just as many have constantly updated their facilities. A good example of forward thinking is the recent forma other United States ports, have undertaken and tion of the Delaware Bay Transportation Com projected improvement programs covering five pany. This new venture will undertake construc tion of a deepwater unloading platform in Dela to 40 years. Philadelphia’s planned 20-year port 9 b usin ess re v ie w ware Bay for oil tankers. A pipeline will link the platform to the shore. With tankers as large as 500.000 tons in a new era of shipbuilding, this Faced with the potential and present capabil ities. the Delaware Valley has two major courses action is needed as present facilities will soon be of action open. The first course is directed at creating an increased research and development obsolete, not to consider the problem of maneu atmosphere aimed at acquiring long-term Govern verability in the river. ment oceanic work. One such action attempting to acquire a proposed East Coast oceanographic Let's get into our scuba gear center is presently under way. The second course Even though the Delaware Valley has established is to promote an increased awareness of oceanics. the broadness of its interest in oceanics and many firms are engaged in supplying products, the community as a whole lags behind in its overall These two courses of action, supplemented with the present level of activity being generated in the level of activity. Looking at need and demand, it is apparent that both must be met in the years field through involvement, will help give the impetus needed for the Delaware Valley to move into this expanding field. Awareness of the oppor to come. A void does exist, however, because of tunities along with increased research and develop older industries that continue using methods de veloped decades ago— methods that are antiquated ment work will create the supply of skilled work and inadequate for the demand that is to come. turn, the availability of skilled help will escalate ers available for the new oceanic activities. In The advantages of oceanics have not yet been the activities of existing manufacturing firms and translated into terms that these industries can also attract new industries into the field. Knowl understand. edge is the key to economic use of hydrospace. 10 COUNTRY-STYLE WIZARDRY: BANKERS ARE MANAGING WITH LESS EXCESS RESERVES by Hugh Chairnoff A great number of changes have occurred in our This article discusses these changes in reserve banking system during the last 15 years. Some of management at country banks and indicates that these changes are especially noticeable at the they are distinctly different reflections of the need country banks, those banks outside major metro for and cost of liquidity. politan areas in which the financial sophisticates practice their wizardry. DECLINING EXCESS RESERVES One such change is unique to the country bank Each banker must consider the cost of carrying sector. Whereas reserve city hankers always have non-earning liquid assets such as excess reserves. carried negligible levels of excess reserves, coun What is this cost? It is the revenues foregone by try bankers have been steadily reducing the ex cess reserves they carry.1 Yet, bankers relied on the discount window to a considerably lesser extent in the 1960’s than in the 1950’s (see Charts 1 and 2 ). The Philadelphia Federal Reserve District has a story of its own. Country bankers here always have carried lower excess reserves than country not bolding earning assets. On the other hand, there is the cost of carrying an insufficient amount of non-earning liquid assets. It is the risk and uncertainty that deposit drains will force the banker to borrow reserves, sell earning assets at a loss, or call loans to customers. The excess re serves each banker will maintain is determined by comparing the cost of being too liquid (carrying bankers elsewhere. But borrowed reserves, once higher than the national level, now also are lower unnecessary than for all country banks. These differences could reflect the fact that country banks here are ing an insufficient amount of non-earning liquid larger on the average than country banks in all assets). Over the past 15 years, country bankers other districts, though a number of other factors apparently have decided that the cost of being are important too. too liquid has risen relative to the cost of being amounts of non-earning liquid assets) with the cost of being too illiquid (carry too illiquid. 1 E x cess reserves are the difference betw een legal re serves actually held and legally required reserves. E x cess reserves can be used to support increases in derived deposit liabilities or to directly acquire earning assets. Or, bankers m ay retain excess reserves in order to meet clearinghouse deficits to the exten t th ey are expected. The ratio o f excess reserves to total reserves indicates the exten t to which bankers have elected to retain re serves for the latter purpose. Borrow ed reserves also are expressed as a percentage o f total legal reserves. It should be pointed out that essentially similar trends w ould be obtained if deposits or required reserves were used in place o f total legal reserves. Increasing costs of too much liquidity The increasing cost of too much liquidity is illustrated by the 3-month Treasury bill rate. Except for recession years, the bill rate has been rising strongly, as indicated in Chart 3. In 1951, country banks sacrificed an average annual re turn of $15.20 for each $1,000 of excess reserves ll b usin ess r e v ie w CHART 2 CHART 1 Country bankers have persistently reduced the level of excess But they have had less need to use the discount window for reserves they carry . . . most of the 1960’s . . . BORROWED RESERVES AS A PERCENT OF TOTAL RESERVES* EXCESS RESERVES AS A PERCENT OF TOTAL RESERVES* Per Cent Per Cent held. By 1966 the sacrifice jumped to an annual has tended to reduce their need for non-earning average of $48.88, more than a threefold increase assets for two reasons. For one thing, time and in 15 years.2* Strong inducement, indeed, to re savings deposits have a lower average variability than demand deposits. That is, these deposits fluc duce excess reserves. But the sacrifice of liquidity that is implied in this trend must be weighed tuate more closely around their average level than against the . . . do demand deposits. Moreover, the growth of Declining costs of illiquidity tent and of greater magnitude than demand de Though country bankers have been reducing their posit growth. For another, time deposits carry excess reserves, liquidity may still appear ade relatively fixed maturities. Bankers have more quate to them. The changing deposit structure notice to prepare for the drain at maturity. From 2 Country bankers, o f course, did not invest their e x all country banks grew from 34 per cent to 48 per time and savings deposits has been more persis 1951 through 1966, time and savings deposits at cess reserves only in short-term Treasury securities. Like excess reserves, cash assets o f country bankers, includ ing short-term Treasury securities, declined as a per cent o f total assets from m ore than 3 5 per cent in 1951 to about 16 per cent in 1966. 12 cent of total deposits. Another factor contributing to improved sta bility of the deposit structure is the major effort b usin ess re v ie w by business firms and individuals to reduce their bankers to their city cousins have enhanced the checking performance of country bank earnings with account balances to the minimum. Businesses and individuals, like banks, have felt out seriously jeopardizing their liquidity. the sting of the steeply rising cost of too much Other types of liquid earning assets also are liquidity. As a result, more and more banks have available as a hedge between liquidity and prof been left with a hard core of demand deposits itability. These assets include commercial paper that can be counted on as a relatively permanent and finance company paper, interbank loans source of reserves than in earlier years. (very similar to federal funds), and interbank deposits. The first three types are classed as Bankers can have their cake and eat it too loans in bank reports. Yet they offer liquidity Bankers, thoughtful people that they are, have not gone “ whole hog” in trading their non-earn advantages that greatly exceed the liquidity prop erties of the general notion of a loan.4 ing assets for earning assets. As a matter of fact, Though country bankers have been holding a a number of money market instruments have relatively stable proportion of their total cash grown in popularity precisely because they per assets in the form of deposits at other banks, mit bankers, among others, to acquire assets with they have been holding relatively larger amounts out sacrificing too much liquidity. Perhaps one in other types of bank balances. Time deposits of the most prominent examples is federal funds. held by country banks grew from less than Si These overnight and weekend loans by country billion in the early 1950’s to an average of around S i5 billion in the 1960’s— another indi 3 The federal funds market and its impact on country banks in the Third District have been discussed at length in the M arch 1965, A pril 1966, and August 1966 issues o f the Business Review. CHART 3 LIQUID ASSETS AS A PERCENT OF TOTAL ASSETS* seems that in the eternal conflict between liquidity and profitability, country bankers thus far have C ountry bankers also have been reducing their liquid assets under the upward thrust o f interest rates . . . Per Cent cation of the trade-off of a small amount of liquidity for valuable earning power. Thus, it been able to have their cake and to eat it as well. DECLINING BORROWED RESERVES Bill Rate Another indication that country bankers seem to have successfully adjusted to a lower level of excess reserves is the fact that they have resorted to relatively less borrowing of reserves from the Federal Reserve. Increased skill in managing their reserve positions plus the greater availabil ity of alternative sources of liquidity have per mitted smooth adjustment to these lower levels. The change in country bank use of borrowed * Liquid assets include cash assets as well as Treasurysecurities maturing in less than one year. * * Estim ated. 4 The loan-to-deposit ratio, an oft-used measure of bank liquidity, has risen steep ly over the last 15 years from 32.5 per cent in 1951 to about 59 per cent in 1966 for all country banks. This measure does not dis criminate among the divergent liquidity characteristics present in the loan accounts. 13 b usin ess re v ie w reserves depicted in Chart 2 cannot be explained These changes in reserve management do have from a long-run perspective. Wide swings in the significance for monetary policy. When country use of borrowed reserves indicate that the factors hankers idled an average of 10 per cent of their producing reduced reliance on excess reserves are legal reserves, policymakers had to be concerned not dominant with respect to borrowed reserves. that excess reserves might be used to offset a To bankers and to the monetary authorities, policy of restraint. How restrictive the Federal borrowing reserves from the Federal Reserve is Reserve had to be to accomplish its objective de a temporary expedient. Resort to borrowed re serves depends on the availability of other sources of reserves, such as the sale of liquid earning assets, the relative cost of the alternative sources, pended on the probability that these excess re serves would be used for bank credit expansion. Now, with excess reserves at a low level, policy makers are not so concerned. The desire to carry and the extent and nature of the need for tem less excess reserves has made the string connecting porary reserves. These factors do not appear to hank reserves and bank credit more taut— the be under the influence of the persistence of time. commercial banking system’s responsiveness to Their impact tends to vary with the proximate and current monetary situation. Thus, explaining monetary policy has been enhanced. In turn, monetary policy has become more effective as a the behavior of borrowed reserves is a complex means for achieving economic stabilization. affair beyond the scope of this article. On the other hand, bankers’ desire to carry less excess reserves has complicated policymakers’ IMPLICATIONS lives a little bit. Holders of interest-bearing Country bank reserve management has changed financial assets look to a healthy economy for in two respects over the last 15 years. On the liquidity. Country bankers, as holders of increas one hand, country bankers have come to view ing amounts of financial claims against the the risk of carrying insufficient amounts of non private sector, have grown more dependent on earning liquid assets over longer periods of time the economy for safety. Thus, the commercial as a declining risk. Coupled with rising liquidity hanking system has become less insulated from costs the effects of an unhealthy economy. Public authorities, already standing as lenders of last and greater availability of alternative sources, this view has led them to persistently reduce the excess reserves they are willing to resort, much prefer to provide adequate liquidity carry. Secondly, these same country bankers have in a healthy economy rather than in an unset found less need to resort to the discount window tling situation. Consequently, financial stability when monetary conditions increase the need for reserves beyond the more permanent variety. some 15 years ago. 14 looms larger as a policy objective than it was FOR THE R E C OR D . . . INDEX Third Federal Reserve District Per cent change SUMM ARY United States Per cent change Feb. 1S67 from mo. ago year ago 2 mos. 1967 from year ago Feb. 1967 from mo. year year ago Manufacturing Employment 2 mos. 1967 from year ago LO CA L CH AN GES Metropolitan oLdiisiica i Areas* Payrolls Check Payments** Total Deposits*** Per cent change Feb. .967 from Per cent change Feb. .967 from Per cent change Feb. 1967 from Per cent change Feb. 1967 from mo. ago year ago mo. ago year ago mo. ago + - — 2 MANUFACTURING Production ............................. Electric power consumed Man-hours, total* ........... Employment, total ............. Wage income* .................. CONSTRUCTION** ............... COAL PRODUCTION ............. 0 —4 -5 0 —5 +9 0 + 5 — 5 + 2 — 1 + 6 — 6 + 2 6 — 2 + 2 + 3 0 + 16 + - - -1- 4 + 4 + 4 Trenton 1 1 ............ — 13 Altoona .............. + — 1 7 1 — 4 - 4 + + + 6 2 0 - 0 + 3 + 3 +3 Of + 6 + 10 + 0 - 8 + 9 + 7f + + + 1 9 9 iot 1 — 1 2 + 2 + 3 - 2 +- 6 + 6 + 4 - 8 + 16 — 1 + 10 + 11 3 - 3 + 0 + 14 6 - 4 - 1 4- 2 - 9 1 + 4 - 4- 5 + 7 Lehigh Valley . - 1 + 1 - 4 + + + Philadelphia ..... 0 + 2 - 0 - - 6 1 + 5 - 1 Wilkes-Barre ... o* •Production workers only ••Value of contracts •••Adjusted for seasonal variation + 3* + 3f 0 0 + 1 + 1 + 3 0 0 + 3 ................... - + 10 1 + + —2 2 8 8 + - 3 - 4 - 4 0 + 3 - 8 + 6 0 + 5 2 - 4 — 1 — 1 + - 3 + 2 3 + 8 - 5 -10 + + 1 -3 9 + 7 + 9 + 1 + 6 + + 1 1 + 7 + 5 5 + 15 0 + 5 York 4- 1 + + 11 0 - 2 0 0 4 Reading ............ 9 2 year ago 0 3 Scranton ............ - + 16 + + + + 2 4 10 13 +30 mo. ago -1 2 9 Lancaster ......... + 6 +10 + 7 0 Johnstown ....... + 2 year ago -1 1 Harrisburg ....... 5 PRICES Wholesale............................... Consumer ............................... Wilmington ..... Atlantic City ... BANKING (All member banks) Deposits .................................. Loans ....................................... Investments........................... U.S. Govt, securities .... Other ...................................... Check payments*** ........... Banking + 7 - 2 + 9 2 + 9 + 2 + 14 2 + 3 115 SMSA’s ^Philadelphia •Not restricted to corporate limits of cities but covers areas of one or more counties. **AII commercial banks. Adjusted for seasonal variation. •••Member banks only. Last Wednesday of the month.
@FedFRASER