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OF PHILADELPHIA
Housing In The 1970’s —What
can The Federal Reserve do
about it?
Boosters of Black Business
In Philadelphia
Bank Competition and
Monetary Policy
FEDERAL RESERVE BANK

FEDERAL RESERVE BANK

A P R IL 1370

BUSINESS R E V IE W

is produced in the Department of Research. Ronald B. Williams is Art Director. The authors will
e glad to receive comments on their articles.
Requests for additional copies should be addressed to Public Information, Federal Reserve Bank of Philadelphia, Philadelphia,
'ennsylvania 19101.

A B O U T T H IS IS S U E
N ow that it is becom ing widely known that the Federal R eserve has m ade a m odest
m ove tow ard le ss m onetary restraint, hope is grow ing that som e of the w orst distor
tions of tight m oney will soon be behind us. It is especially hoped that funds for hous
ing will begin to flow more easily.
Even should this be the case (and the first article in this issu e su ggests that such
a result is by no m eans a sure thing), the effects of recent experien ces with tight money
have m ade people more aw are than ever that m onetary policy bears down unevenly on
different sectors of the economy. And many are questioning w hether these uneven im
pacts are n ecessary or desirable. They feel that the in terests of the nation might be better
served if som e scarce funds were diverted from establish ed and often large bu siness
borrow ers into housing, the ghetto, and other areas of grow ing social concern.
The first article in this issue, “ H ousing in the 1970’s— W hat Can the Federal Reserve
Do A bout It?” , d iscu sse s the outlook for housin g in both the short- and the longer-run.
It su ggests that, contrary to the usu al view, the Federal R eserve should be concerned
about who has ac c e ss to limited su pplies of fun ds and recom m ends that techniques be
developed to provide more effective control over where the m oney goes as well as how
much m oney in all is available.
The second article, “ B oosters of Black B u sin ess in P h iladelph ia,” describ es efforts to
aid black entrepreneurs form and build their own b u sin esses. It points out the crucial need
for adequate capital and reports on the action s som e Philadelphia b an ks and other insti
tutions have taken to m ake funds available fo r this purpose.
The third article, entitled “ Bank Com petition and M onetary P olicy,” does not question
the need for channeling more funds into housing or any other socially desirable area, but
it does question the value of attem pts by the Federal R eserve to induce such flows. It
su ggests that the social and econom ic costs in term s of reduced bank com petition that
w ould be required to achieve such tran sfers of funds w ould outw eigh the benefits that
w ould be gained.
There are, of course, no easy and pat solutions to difficult problem s. In order to gain
m ore of one objective, it is often n ecessary to give up part of another objective. And
reason able men can differ on how and to what degree this should be done. While the
articles in this R eview d iscu ss only a few of the many issu e s involved, it is hoped that
they will stim ulate thinking about the m any trade-offs that m ust be considered in at
tem pts to prom ote the national w elfare.

Housing in the 1970's—
What Can The Federal
Reserve Do About it?*
by David P. Eastburn, President
Federal Reserve Bank of
Philadelphia

We enter the 1970’s with housing at or near
the top of our list of social concerns. The Hous
ing Act of 1949 declared “ a decent home . . .
for every American family” as a national goal.
And the Housing Act of 1968 quantified this
objective by saying that every American family
could have a decent home if we as a nation
could construct or rehabilitate 26 million living
units in the coming decade.
This is a goal set by Congress and presumably
reflects what the people of this country want.
As we move through the 70’s, the people will
have to decide how badly they want to achieve
this goal— as compared with cleaner air and
water, better transportation, a fairer shake for
the disadvantaged, world peace, and all the
other things that our restless and demanding
society is grasping for. The 1970’s will be a
decade in which all these various demands will
be pressed more insistently than ever before.
It will be a time, therefore, in which the basic
economic fact of life— namely, that there ain’t
no free lunch— must be before us constantly.
Resources are limited and we can’t always have
everything we want just when we want it. But
it will be a time when impatience with this fact
will be a constant source of irritation.
Given this general environment, what are
the prospects that our society can achieve the
goal of substantial growth in available housing;
and, more specifically, what can the Federal
Reserve do about it? An answer to these ques
tions can’t come just by looking at the pros
pects for long-run growth alone. Housing has
not been blessed in the past by steady growth;
one of its main problems has been cycles. There
fore, a big problem in meeting any long-run

* An address given at The First Pennsylvania Corpora
tion's Conference on “ Real Estate— The Environmental
Intersection,” February 16, 1970, in Philadelphia.

As we focus down on the housing cycle, the
obvious problem confronting us as we begin the
70 ’s is the outlook for 1970. The grimmest part
of the housing cycle is staring us in the face
right now. With starts now around 1.2 million
(and averaging only 1.5 million over the past
two decades), a yearly average for the 1970’s of
2.6 million seems light years away.
But the important question is whether what
happens in this first year gets us off to a good
start for the rest of the decade. It is always pain
ful to experience a cut of almost 50 percent in
housing activity— and this is what we are likely
to have before we come out of this current cycle
— but the hurt can be more nearly bearable if
it is helpful in launching housing on a firm and
sound footing for coming years.
Unwinding Inflation. What is the likelihood
that the inflation battle now being waged will be
won soon so that housing can move forward
promptly? Frankly, the outlook is very un
certain.
Progress is being made. We have been fight
ing the worst inflation we have had in 20 years.
So an essential step in the fight against inflation
has had to be a reversal of inflationary economic
policies. This occurred in late 1968 and through
out 1969. High federal deficits were turned
into small surpluses through tax increases and a
tight rein on expenditures. Monetary policy, too,
shifted into a posture of restraint. Whether
measured by bank reserves, money supply, or
interest rates, money was tight in 1969 and still
is tight today.

What of prices? They keep rising rapidly. But
this is the last place to see the results of the
attempt to cool the economy. Every slowdown
in memory has brought at least some relief from
rising prices— not instantly, of course, but in
time. It’s too early to tell if we’ve turned the
corner on inflation, but we are on the right
road.
The important question is what happens in
the next few months. I believe that the Federal
Reserve must be careful not to ease the firm
grip of monetary policy too abruptly. In 196667, the economy was allowed to accelerate too
rapidly, and inflation was more serious nine
months after the mini-recession than it was nine
months before. We in the Federal Reserve are
mindful of that episode three years ago as we
chart the course for policy in the coming
months.
Turning Housing Around. What would this
kind of policy— one of caution in relaxing
restraint— mean for housing in the immediate
future? In a nutshell, it would mean that starts
would get worse before they got better. An
upturn would not be likely until late 1970 and
this upward readjustment would be slow.

A P R IL 1970
B U S IN E S S R E V IE W

T H E C U R R E N T SCENE

The results are showing— but slowly. In an
economy as large and complex as ours, con
sumer and business reactions lag behind policy
actions. It took about half a year for the brak
ing action of monetary and fiscal policy to start
slowing the pace of a speeding economy. But
since last summer, the cooling in the economy
has been obvious. Retail sales have been slug
gish, industrial production has been sliding, and
employment gains have been sharply reduced.
In the last quarter of 1969, real output actually
declined a bit. So the economy has responded
to the medicine prescribed for it.

F E D E R A L R E S E R V E B A N K O F P H IL A D E L P H IA

goal for housing will be the path in getting
there— the up-and-down cycle. This, of course,
is where the Federal Reserve comes into the
picture.

Behind this picture in housing, of course, is
what would likely happen in financial institu
tions. Until the interest rate spread between
open market instruments and deposits narrows
significantly, the flow of deposits into mortgage
lenders is not likely to improve very much.
Even if it should improve shortly, the avail
ability of mortgage funds may not immediately
respond. Savings institutions have dipped pretty
far down into their liquidity barrels and have
engaged in record borrowing from Federal
Home Loan Banks as well as others. Therefore,
it seems likely that before improved savings
flows would dramatically affect housing starts,
some attention would be given to squeezed
liquidity positions and debt repayment on the
part of savings institutions.
So, considering the lags involved, for housing
to get back on a vigorous expansionary path
soon, the Federal Reserve would have to ease
drastically and rapidly.

I have strong reservations whether this would
be good for the economy. Inflationary psychol
ogy is still deeply imbedded. Unless public
policymakers are extremely careful, all the
progress in cooling the economy could be
wiped out in only a few months and inflation
ary pressures could be back with us stronger
than before.
Housing has a great deal at stake in the out
come of current policy decisions. In the short
run, caution in relaxing restraint will delay the
recovery in starts. But in the longer run, the
chances of achieving ambitious goals for the
70’s will be greatly enhanced. It is easy to say
and difficult to practice, of course, but patience
now can pay big dividends in the future.
C O N FR O N TIN G A NEW DECADE
Let’s take the optimistic view that housing
will gradually emerge from the current period
on a sound footing and be prepared to move vig
orously to meet the needs of the 1970’s. What
are the chances that starts can move steadily
upward in the early part of the decade and reach
a plateau of 2.5 million units later in the dec
ade? This is the path that is charted so appeal
ingly in the latest report of the Council of
Economic Advisers.
The answer depends heavily on two things:
(1 ) whether the overall economy will follow
a steady non-inflationary growth path; (2 )
whether fundamental structural changes can be
made in the mortgage and housing industries.
Prospects for Steady Growth? This is not the
time to lay out an economic forecast for the
1970’s, even if I had one in which I had any
faith. What we have to weigh is the possibility
that policym akers— including the Federal
Reserve— can avoid the kinds of excessive

The Fed’s Role. What does this imply for the
Fed? Obviously, the Federal Reserve cannot sim
ply supply enough money and credit to the econ
omy at all times so that housing is never pinched.
This would be like supplying enough money and
credit at all times so that no one is unemployed.
A big part of the unemployment problem is
structural; many people are unable to qualify
for jobs because they need basic training and
education. Inflating the rest of the economy is
no way to solve either structural unemployment
or, in many cases, depressed housing activity.

Market Imperfections. This makes the second
point vitally important: are we likely to see
fundamental structural changes which will enable
mortgage lenders to compete more effectively for
funds and builders to compete more effectively
for resources when both are scarce? Is it possi
ble, in other words, that even if the Fed must
impose restraint at times in the 70’s that housing
can avoid bearing the brunt of it?
The problem, as is increasingly recognized,
is that there is not perfect competition among
markets. When money is tight and interest rates

If the Federal Reserve is to do anything about
the impact of tight money on housing, there
fore, it must do it directly and specifically. At
the moment I would say that there is not much
sympathy for this view in the Fed. No Fed
eral Reserve official I am acquainted with is
happy that such a large burden of monetary
restraint is borne by housing. It doesn’t make

A P R IL 1970

In short, if this prospect is realistic, the hous
ing industry would be naive in assuming that
a steady growth path in the 70’s is very likely.
And, in turn, an ambitious goal of housing pro
duction stands a good chance of being frustrated
by the same old cycle problem that has plagued
the industry in the past.

These are all to the good. They are the ideal
and fundamental solution— make mortgages and
housing competitive. But will these reforms do
enough, will they come soon enough, to enable
housing to follow that smooth growth path in
the 70’s that is so appealing? I am skeptical.
Fundamental reform is always difficult because
it conflicts with vested interests and the law of
inertia. Although I would like to see the effort
pressed vigorously, I would not look for com
plete success in the 1970’s.

B U S IN E S S R E V IE W

rise, specialized mortgage lenders have difficulty
competing. Now that this has become painfully
apparent several times in recent years, serious
efforts are underway to make fundamental
changes. Fanny Mae, Ginny Mae, Home Loan
Bank operations, variable rates on mortgages, a
secondary market for conventionals, and many
other approaches are being tried or 'proposed.

F E D E R A L R E S E R V E B A N K O F P H IL A D E L P H IA

expansion in the economy— and hence the
need for severe restraint— that plagued us
several times in the 1950’s and since 1965. It
is hard not to be overly influenced by the
immediate situation, but I find it very unlikely
the Federal Reserve can get through the 70’s
without at some time having to exercise con
siderable restraint. There have been few times
in history when the economy has gone along for
very long before overdoing it. During the first
half of the 60’s, it did grow steadily without
inflation, and housing benefitted. But this was
a time when unemployment was fairly high. In
the 70’s we are unlikely to have the same kind
of slack resources to draw on. Social pressures
will tend to keep policymakers striving for low
unemployment. Strong and competing demands
for scarce resources seem to me likely to make
inflation, if not a constant problem, a recurring
threat.

our life any easier. In fact, the hot water we
are now in with Regulation Q— and all the re
sulting loophole-plugging operations with Euro
dollars, federal funds, and commercial paper
— can be traced to a desire to protect housing
against tight money. But Regulation Q hasn’t
been notably successful in directing funds into
mortgages, and it is quite understandable that
some people in the Fed might react by wishing
we had never gotten into this business in the
first place.
The traditional view in the Fed— that we
should influence only the total volume of funds
and let the market decide who is to get them—
has been strengthened by our experience with
Regulation Q. I believe, however, that we
should be concerned where the funds go. For
one reason, they may flow in a way that com
plicates our job of stabilizing the economy. And,
for another, the public apparently cares very
much about the flow of funds. To the extent
the public makes its views known through its
representatives in Congress— as it has in the
case of housing— the Federal Reserve must care
equally as much. I believe this view is likely to
prevail in the 70’s.
But the problem is that we have no effective
way of channeling where the funds go. If
housing is not to bear the brunt every time
tight money rolls around, the Fed will have to
develop new techniques for allocating funds.
Just what these techniques might be, I ’m not
sure. I have recently suggested that the Fed
might explore possibilities for influencing the
flow of funds by concentrating on the asset side
of the balance sheet rather than the liability
side. Instead of trying to direct funds into
housing by interest rate ceilings and deposit

flows, the Federal Reserve might impose dif
ferent reserve requirements on different kinds
of assets. If it seems desirable to encourage a
flow into mortgages, the reserve requirement
could be low. I have not explored the implica
tions of this approach very far, so I ’m not sure
it would be an effective solution, but we must
pursue every possibility if we are to avoid
onerous controls each time there is a crisis.
SUMMING UP
So where, in summary, does all this leave
housing in the 70’s?
First, prospects for substantial growth in
housing starts in the 70’s will be enhanced if
the current fight against inflation is successfully
waged— even if this may delay recovery in the
immediate period ahead.
Second, because inflation may still be a re
curring problem and call for tight money at
times in the 70’s, it is probably unrealistic to
expect housing starts to follow a smooth growth
path and no longer be plagued by cyclical ups
and downs.
Third, basic reforms to make mortgages and
housing more competitive should be pressed
forward. But complete success is probably too
much to hope for.
Finally, the Federal Reserve has no effective
way to channel funds into housing— or any
where else. I believe the Fed should be con
cerned about where funds flow and should try
to devise new ways to accomplish this.
If I am correct in this analysis, the housing
goal for the 1970’s is far from a shoo-in. A lot
of hard and imaginative work remains to be
done.

1 W . E. Burghardt DuBois, The Philadelphia Negro:
A Social Study (Tenjamin Bloom, Inc.: New York,
1899), p . 123.

A P R IL 1970
B U S IN E S S R E V IE W

by Kathryn L. Kindi

F E D E R A L R E S E R V E B A N K O F P H IL A D E L P H IA

Boosters of Black
Business in
Philadelphia

To-day . . . the application of large capital
to the retail business, the gathering of
workmen into factories, the wonderful suc
cess of trained talent in catering to the
whims and taste of customers almost pre
cludes the effective competition of the
small store. Thus the economic condition
of the day militates largely against the
Negro; it requires more skill and experi
ence to run a small store than formerly and
the large store and factory are virtually
closed to him on any terms.1
This conclusion was reached by a black author
in Philadelphia . . . in 1899! Unfortunately, the
economic climate for black business today bears
a strong resemblance to that of seventy-one
years ago. Major barriers to the establishment
and maintenance of significant black enterprise
persist. Both capital flow into black businesses
and capital accumulation by black businessmen
are minimal. Moreover, relatively few Negroes
possess marketing, production, and manage
ment skills essential to successful business op
eration.
Recent focus on economic progress for Ne
groes in general and the economy of the black
ghetto in particular has been directed at the
dearth of black business. National attention has
keyed on the development of black entrepre
neurship, and public and private resources have
been diverted toward this end. As reported in
Business Week, President Nixon vowed during
his campaign that “ The new approach . . . ought
to be oriented toward more black ownership,
for from this can flow the rest: black pride,
black jobs . . . .” In March, 1969, the Office
of Minority Entrepreneurship was added to the

list of federal agencies sponsoring minority
business programs.
Across the country, local resources have been
mobilized as well. For example, the Greater
Cleveland Growth Corporation, offering exten
sive loan aid and advisory services, attempts to
find black businessmen and potential entrepre
neurs to fill inner-city economic needs. The
Greater Detroit Board of Commerce sponsors
an “ Adopt a Business” program aimed at en
couraging established companies to help minor
ity businesses over the myriad stumbling blocks
which often spell failure for a new enterprise.
The Allegheny Conference in Pittsburgh directly
finances black-owned and -operated companies.
In Philadelphia, a growing number of public
and private groups seek to incubate black busi
ness. We report here on fifteen organizations

in the city, listed in the appendix to this article,
which figure prominently in the total of Phila
delphia’s efforts to assist the black businessman.
Included are government, business, financial,
and community organizations, each offering
somewhat different services.
WHICH PHILADELPHIANS HELP?
Government functions as a leader and catalytic
agent. Through agencies such as the Small Busi
ness Administration and the Model Cities
program, it provides financial resources and
coordinating mechanisms. Financial institutions
furnish risk capital, emphasizing the client’s
motivation and similar personal qualities. Other
organizations— for example, Greater Philadel
phia Enterprises Development Corporation
(G PED C ) and Businessmen’s Development

B L A C K B U S IN E S S : T H E IS S U E S
A ctive encouragem ent of b lack entrepreneurship is one of sev eral routes that can
be taken to im prove the econom ic and social conditions of N egroes. The cam paign
to prom ote b lack b u sin ess ow nership is intended to open the door to self-em ploy
ment, as w ell as to stim ulate black pride and creative effort. Proponents of this
cam paign hope to build efficient black firms which will serve varied m arkets, yield
su bstantial profits, and produce significant in creases in black em ploym ent and black
control of b u sin ess asse ts. M oreover, optim istic observers hope that independent
com m unity vo ices— voices backed by green pow er— will emerge.
While com m entators agree on the appro priaten ess of these objectives, m any doubt
that black b u sin ess program s can achieve their goals. Critics note that black enter
prises are typically u ndercapitalized retail and service establishm en ts. Providing
little em ploym ent and often victim s of bad m anagem ent, these firms cannot com
pete su ccessfu lly with larger and m ore efficient operations. Even when profitable,
the am ount of incom e generated by these b u sin e sses m ay be insignificant. O pponents
of black entrepreneurship program s suggest that resources devoted to these efforts
might better be u sed to raise levels of education and set up training program s which
w ould enable N egroes to com pete in the labor m arket at large.
The debate on the pros and cons of b lack entrepreneurship is not likely to be
resolved in the near future. S u c c essfu l b u sin e sses grow slow ly, and the history of
the cam paign to prom ote black b u sin ess is a short one. We m ust allow current pro
gram s sufficient time to achieve their goals before we com plete their tally-cards.

Corporation (B D C )— offer professional advice
and consulting services. Franchisers take on
black owner-operators, while other businesses
tender special considerations in procurement.
Many individual executives offer their expertise
through volunteer counseling pools, such as the
one maintained by GPEDC. The academic com
munity provides educational resources through
both student and faculty participation. Finally,
community groups, including Mantua Commu
nity Planners Inc., Young Great Society, and
the Urban Coalition, work to open needed com
munication lines between the black and white
communities and to muster local enthusiasm and
support.
FEEDING M ONEY IN TO BLACK BUSINESS
While capital for a new business is always hard
to find, difficulties are compounded for minority
businessmen. Traditional credit channels, which
require a borrower to have some of his own
financial resources, are closed to the black with
no equity capital. In addition, inexperience or
previous failures may handicap the Negro in
need of financial backing.
Groups in Philadelphia are responding to
these credit problems. First, some organizations
provide pre-loan assistance and direct the poten
tial businessman to a loan source. Second, many
of these groups and others have established
funds of capital for loan in high-risk situations.
Pre-Loan Assistance. The potential business
man may approach a lending agency, often after
having been refused a loan via conventional
channels, with the aid of a group such as
Greater Philadelphia Enterprises Development
Corporation or Businessmen’s Development
Corporation. These organizations examine the
proposed project, developing, in the process,
background information useful to the lender.

They then refer the client to the most suitable
loan source.
Initial screening by the organizations is de
signed to weed out unrealistic proposals. Ap
plicants who survive this process benefit from
comprehensive professional evaluation. The
staffs of GPEDC and Job Loan and Urban
Venture Corporation ( JL& U V C), among others,
thoroughly scrutinize each proposition for its
technical feasibility. The location under con
sideration, proposed scale of business opera
tions, and capital requirements are all examined
with an expertise the inexperienced rarely
possess. In the course of such an inquiry, sug
gestions may be made to improve the prospectus,
and the entrepreneur often will be alerted to
previously unforeseen difficulties.
Once the evaluation has been completed, the
client will be referred to one of several loan
sources— perhaps a commercial bank, Job Loan
and Urban Venture Corporation, or the Small
Business Administration. The organization re
sponsible for initiating the borrower-lender
relationship may help prepare the loan applica
tion and other necessary papers. A staff member
of GPEDC or SBA often will accompany the
applicant to the lending institution. Efforts are
also made to have an accountant present in
order to avoid later financial difficulties caused
by misunderstanding.
The Loan Source. In Philadelphia, commer
cial-bank money is available directly, with or
without a government guarantee, and indirectly,
through a special pool of bank funds— Job Loan
and Urban Venture Corporation. Many clients
go straight to the bank after screening and pre
loan assistance by organizations such as BDC
and GPEDC. Other would-be businessmen,
often designated as higher risk borrowers, are
referred to JL&UVC. Through this nonprofit

group, originally established in April 1968 as
Job Loan Corporation2, eight banks pool the
higher-than-average risks associated with many
loans to minority businessmen. Programs of
the Small Business Administration (for exam
ple, Operation Business Mainstream, and its
predecessor, Project OW N) also help break
the ice at the commercial bank by offering the
institution a federal guarantee of the loan.
Some federal government funds are available
to black enterprises via Operation Business
Mainstream, and also through the SB A Local
Development Loan Program. The Small Business
Investment Act of 1958 defines local develop
ment companies as private “ enterprises . . .
with the authority to promote and assist the
growth and development of small-business
concerns.” 3 The Small Business Administration
makes loans to these companies, which in turn
lend to small businesses for investment in plant
and equipment. Historically important in rural
development, this program now gives priority
to job creation within the inner city.
In Philadelphia, low-cost financing to promote
industrial development is available through the
Philadelphia Industrial Development Corpora
tion, a conduit for funds controlled by the
Pennsylvania Industrial Development Authority.
These state resources have been used by at least
two other groups— Greater Philadelphia Com
munity Development Corporation and GPEDC.
One additional source of capital is the black
community itself. An example of the way in
which minority businessmen may draw upon
this economic base is the self-help experience
of Zion Investment Associates. In 1962, the
Reverend Leon Sullivan, pastor of the Zion
2 See Susan R. Robinson, “ Moving Money Into
Ghetto Businesses,” Business Review, Federal Reserve
Bank of Philadelphia, October, 1968.
3 Small Business Investment Act of 1958, Title 1,
Section 103.

Baptist Church, asked 50 members of his
congregation to pool ten dollars a month for 36
months in an investment cooperative plan. For
the first 16 months this money was to be placed
into a nonprofit charitable trust. The contri
butions of the final 20 months were put into
an investment corporation for profit-making
purposes. The Reverend Sullivan’s pleas drew
over 200 responses, and Zion Investment Asso
ciates was on its way to launching the Progress
Plaza shopping center, Progress Garment Manu
facturing Company, and Progress Aerospace
Enterprises, Inc.
How Much Money Is Available? The amount of
money available to individual businessmen by
way of these programs is typically small. Some
observers argue that the amounts provided are
also inadequate— that a relative lack of capital
right from the start impedes a firm’s progress
and success.
Although the sums of money lent minority
businessmen vary within a wide range, and are
influenced by the character of the lending in
stitution and the requirements of the entre
preneur, the average black business loan comes
to about $15,000. For example, in its two and
one-half year history, GPEDC has been instru
mental in the approval of approximately 50
small business loans averaging between $15,000
and $20,000. In only two cases, however, was
the amount involved later considered inadequate
by GPEDC and a cause of serious difficulties to
the entrepreneur.
From April, 1968, to the close of 1969, Job
Loan and Urban Venture Corporation approved
315 loans totaling $3.4 million. Over two-thirds
of these loans were for amounts under $10,000,
and only 23 were for sums of $25,000 or more.
Loans initiated by BDC have varied between
$300 and $120,000.

BEYOND T H E M ONEY
Unfortunately, even the black entrepreneur with
money in hand often encounters problems—
problems just as serious as that of obtaining
capital. Poor business management often leads
to the demise of an enterprise which, with the
right guidance, might have succeeded. Account
ing, management, marketing, and production
problems are not peculiar to the black entrepre
neur. But they are all the more critical for a new
firm operated by inexperienced personnel on a
shaky capital foundation.
Thus, besides financial aid, the Negro often
requires business training and management as
sistance. Both individual counseling sessions and
group education programs are conducted in

A P R IL 1970

The Person-to-Person Approach. The prob
lems faced by a particular businessman many
times are solved by the application of profes
sional and technical expertise. Several organi
zations which provide pre-loan assistance to
minority businessmen also offer post-loan
counseling services. In fact, clients are often
required to submit periodic reports of their
progress, including financial statements. Staff
members contact some, if not all, of the new
businessmen during their first months of opera
tion, offering the services of successful business
men and professionals on a volunteer or
nominal-fee basis when problems do arise.
Business counseling and management assist
ance are also available to the entrepreneur who
lacks such strong organizational ties. One
growing source of expertise is Business Practice
Service, a university-affiliated organization.
Through this group, graduate students in bus
iness courses at the Wharton School of Finance
and Commerce of the University of Pennsylvania
counsel minority businessmen. Based on the
premise that training can occur through expo
sure and cooperative work, the effort aims
toward structuring mutually beneficial relation
ships— the entrepreneur has access to a source
of business expertise, and the business student
gains the opportunity to apply his knowledge
in the small-business context.
Individual counseling has not proven to be
problem-free, however. Meetings between coun
selor and client are sometimes ill-timed, and
personality clashes do occur. Clients sometimes
consider criticism a personal affront and are
distrustful of advice. Conversely, counselors
may adopt paternalistic, condescending attitudes,
naturally resented by minority businessmen.

B U S IN E S S R E V IE W

Philadelphia to alleviate current difficulties and
prevent future ones.

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Owners of large businesses require extensive
c a p it a l c o m m itm e n ts— su re ly la rg e r than
$15,000, and often greater than $100,000. Cer
tain facilities in Philadelphia are equipped to
service these clients. For example, if a borrow
er’s capital requirements exceed the $100,000
maximum of JL&UVC, arrangements can and
have been made with the Southeastern Penn
sylvania Development Fund to make supple
mentary sums available. In addition, loans
by the Pennsylvania Industrial Development
Authority and the Local Development Loan
Program of the Small Business Administration
often amount to several hundreds of thousands
of dollars.
Nevertheless, financial resources available to
black entrepreneurs are limited. The Negro
himself can provide little of the necessary
equity, and commercial banks and other finan
cial institutions are understandably wary of
committing large amounts of capital to high
risk ventures. Furthermore, federal and state
funds available to individual businessmen are
restricted.

Group Education Programs. Although group
education is probably not the best approach to
individual problems, it does avoid some diffi
culties of the person-to-person approach. The
classroom situation provides opportunity for
significant progress in upgrading general levels
of education and basic business skills, yet pre
serves more of the clients’ independence. Group
education also may be more efficient— large
numbers of entrepreneurs with similar problems
can be reached at one time. With these ad
vantages in mind, many organizations promoting
black business in Philadelphia have initiated
programs for group instruction.
Greater Philadelphia Enterprises Develop
ment Corporation, for example, conducts
seminars and discussion groups concentrating
on the practices and problems of minority
entrepreneurs operating in each sector of the
economy. Job Loan and Urban Venture Cor
poration, in cooperation with the Pennsylvania
Institute of Certified Public Accountants, spon
sors group sessions to help clients keep their
financial records in good order. The purpose of
this program is two-fold: to show the business
men that they are not, indeed, alone in their
problems; and to enable the accountants to
discover the nature of these difficulties and
suggest workable solutions.
The education of one particular group of
businessmen— minority contractors— is one of
the goals of a new business management and
technical training course conducted by a leading
management consulting firm under the auspices
of the Urban Coalition. Enrollees in this pro
gram also can benefit from a $500,000 revolving
loan fund for marginal minority contractors.
The academic community also is involved in
group instruction. The Community Wharton
Education Program offers courses in business
and basic education in an evening school pro

gram open to both workers and self-employed
businessmen. Begun in January, 1969, by seven
community organizations and several members
of the Wharton School faculty, the full-scholar
ship program demands that each of its 85
students enroll in two courses per semester.
Volunteer faculty lecture on accounting, finance,
marketing, management, business law, and eco
nomics. Remedial reading and mathematics are
also included in the curriculum.
EVALUATIN G BLACK BUSINESS
Many organizations are making an all-out effort
to provide the Philadelphia Negro with tech
nical information and financial backing. What
is the overall effect of these programs? Where
does black business currently stand?
Philadelphia’s Black Entrepreneurs. Many
fledging black businessmen are opening retail
and service outlets— barber and beauty shops,
grocery marts and restaurants, laundries and dry
cleaning establishments, and service stations and
repair shops. Traditionally popular with Negro
entrepreneurs, these activities require relatively
little capital and can be run on a “ mom and pop”
basis.
In increasing numbers, blacks also are going
into lines of business long closed to minorities.
Easier access to larger amounts of capital and to
training and management assistance has in
creased black ownership of medium and large
firms. For example, Zion Investment Associates
has formed two companies, an aerospace firm
and a garment manufacturing firm. Two clients
of Greater Philadelphia Community Develop
ment Corporation, an electronic parts plant and
a tire recapping operation, project a combined
employment of over 325 people. Although the
thrust of Operation Business Mainstream is
toward the retail and service sectors, this SB A

Looking Ahead. The experience of only a few
years is not enough to judge the ultimate effect
of programs in Philadelphia engaged in pro
moting black entrepreneurship. Furthermore,
the information required to document present
accomplishments is at best inadequate and often
nonexistent. Few organizations have estimates
of job creation or detailed records of the
financial positions of their clients.
Nevertheless, reasons for hope and further
endeavor flow from many of the efforts which
have been made to help the black entrepreneur.
Today’s Negro businessman can expect to profit
from both past and current endeavors to pro

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mote black enterprise. Initial accomplishments
of blacks who have benefitted from these pro
grams have stimulated black pride and com
munity support. Their businesses have generated
income and employment, and they have formed
the base for better trained black businessmen.
Furthermore, the financial institutions which
helped these first black entrepreneurs now may
be better equipped to meet the Negro business
man’s demands. Bank loan officers have become
both more approachable to the urban black and
more familiar with his special loan requirements.
More extensive assistance will be needed,
however, if black business ownership is to con
tribute significantly to black economic develop
ment. In addition to capital, successful firms
require expert management and technical abili
ties. Many believe that counseling currently
available is only a limited substitute for manage
ment experience in established firms as a method
for transmitting the skills and resources of bus
iness executives to black entrepreneurs. In fact,
communicating these talents and mobilizing
greater capital funds remain among the most
pressing problems in the development of black
enterprise.
Clearly, a strong commitment -to black busi
ness ownership already has been made. It
appears, however, that if this campaign is
to achieve its goals, those who accept the
strategy of “ black capitalism” must continue
to develop and implement more encompass
ing programs.

F E D E R A L R E S E R V E B A N K O F P H IL A D E L P H IA

undertaking also assists firms operating in other
industries.
Special arrangements often help the Negro
get off to a good start. Franchise operations per
mit independent ownership, yet assure the
minority entrepreneur of a quality product,
national advertising, and market evaluation and
management assistance. Corporations boost mi
nority businesses by placing orders for their
output: both Progress Aerospace Enterprises,
Inc. and Progress Garment Manufacturing
Company have benefited from such ties. In
the public sector, a program administered by
SBA enables black entrepreneurs to secure gov
ernment contracts at higher than competitive
bidding prices in the expectation that eventually
these minority companies will function inde
pendently in competitive markets.

APPENDIX: MAJOR BLACK BUSINESS PROGRAMS
IN PHILADELPHIA

In the preceding pages, we have made reference to specific groups in
Philadelphia which are aiding black businessmen. The following is a brief
description of each of these organizations in which we have highlighted
any purpose or program unique to a group’s endeavors to further black
entrepreneurship.
B usiness Practice Service. Graduate students at the Wharton School of
Finance and Commerce of the University of Pennsylvania offer consulting
services to minority entrepreneurs through Business Practice Service. Clients
are referred to BPS by JL&UVC and SBA, as well as by community organi
zations and other businessmen. BPS’ members, working in teams of two,
spend at least six hours a week on each case, assisting potential entrepreneurs
as well as new and established businessmen. Last year the organization also
sponsored a Minority Business Symposium—a series of panels and informa
tion centers on current business problems and opportunities and the eco
nomic and social institutions which influence them. Since its start in
September, 1968, BPS has more than doubled in size, expanding from 15 to
36 teams of consultants.
Businessm en's D evelopm ent Corporation. Incorporated in 1965, BDC was
one of the first groups organized in Philadelphia to fill the need for adequate
financing for small businesses. Three thousand shareholders, all members of
minority races, provide a broad base of community support for BDC’s efforts.
While its services are available to everyone, BDC seeks to show that blacks
in particular can successfully own and operate businesses. BDC offers the
potential entrepreneur legal and accounting advice before referring him to
the Small Business Administration or The First Pennsylvania Banking and
Trust Company. A fee for these services is included in the loan application.
There is no charge, however, in the event that the loan is not approved. Plans
also are underway to establish a nonprofit institute to expand counseling
assistance.
C o m m u n ity W harton Education Program . CWEP is an evening school pro
gram designed to offer business education and remedial reading and mathe
matics courses to both workers and self-employed businessmen. Each of
seven community organizations and five inner-city high schools may recom
mend prospective students to a committee responsible for admissions. Volun
teer faculty from the Wharton School of Finance and Commerce of the
University of Pennsylvania instruct enrollees, and community counselors help
solve vocational, medical, and other problems encountered by program par
ticipants. CWEP has experienced a high drop-out rate among its students—
30 percent during its first semester (Spring 1969)—because of changes in
work-shifts, medical problems, and lack of ability or motivation. Not a degree
granting program, it serves a predominantly black student body numbering
about 85. While currently operating at capacity, CWEP will probably expand
as more funds become available.
G reater Philadelphia C o m m u n ity D evelopm ent C orporation. GPCDC focuses
on developing job opportunities for the disadvantaged and on promoting
opportunities for black managers and entrepreneurs, particularly in medium
and large businesses. GPCDC was founded in autumn 1968 by a group of
young professionals believing that broadly based, adequately financed enter

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prises are essential to inner-city development. These established businessmen,
now members of GPCDC’s board of directors, actively assist staff professionals
in investigating loan applicants and their business proposals. Currently,
GPCDC relies largely on loans made by the Pennsylvania Industrial Develop
ment Authority, although the corporation is itself empowered to be a lending
agency. GPCDC also plans to conduct post-loan inquiries to see if the corpo
ration and its clients are accomplishing their goals.
G reater Philadelphia Enterprises D evelopm ent C orporation. Incorporated
in early 1967, although not fully staffed until January, 1969, GPEDC func
tions in three areas. As a local development company, it participates in
SBA’s Local Development Loan Program. GPEDC has used this vehicle to
finance Poplar Plaza, a shopping area which offers supermarket, gas station,
and pharmaceutical facilities. GPEDC also is a conduit for loans by the Penn
sylvania Industrial Development Authority. Finally, the organization helps the
small businessman. This nonprofit agency provides extensive pre-loan and
post-loan counseling services. Emphasizing black business ownership, the
group endeavors to promote economic development of the inner city.
GPEDC, administratively financed by the Economic Development Agency and
several local sources, also assists community groups in need of information
and professional services.
Jo b Loan and Urban Venture C orporation. In April, 1968, eight commer
cial banks in Philadelphia pledged $2 million for loan to minority business
men through Job Loan Corporation. Founded as a subsidiary of Southeastern
Pennsylvania Development Fund, this private venture capital group acquired
its present name and nonprofit status in 1969. The key to JL&UVC is a
combination of willingness on the part of commercial banks to pool the
higher-than-average risks associated with loans to minority entrepreneurs and
availability of continuing management assistance to these businessmen. The
organization screens business proposals, provides loans to those applicants
whose projects offer a good chance for success, and supplies post-loan coun
seling. JL&UVC serves a five-county area, although its loans are concentrated
in Philadelphia proper. Participating banks have doubled their initial com
mitment to this program. JL&UVC has also expanded into the area of
commercial mortgages, and may become involved in industrial mortgage and
lease guarantees.
Mantua C o m m u n ity Planners Inc. MCP was organized in January, 1967,
to coordinate the programs of community and religious groups trying to
bring a positive social and economic environment to Mantua—an 82-block
neighborhood in West Philadelphia whose 22,000 residents are predomi
nantly black. MCP staff members monitor the economic development of the
area, offer advice to new entrepreneurs, and maintain a close rapport with
established businessmen. In addition, MCP carries on a continuing effort to
foster community cooperation, sponsoring a newsletter, a radio program, a
community newspaper, and open community meetings.
Model Cities. The Model Cities pilot project is concerned with the eco
nomic and social development of a “ model block”—from Spring Garden to
Cumberland Streets, and between Fairmount Park and Broad Street. MC
goals include employment for neighborhood residents, ownership of facilities
by community residents, and increased availability of goods and services at
competitive prices. The Model Cities program also is an attempt to fill a
need for continuing resources, research, and coordination. A local agency,
federally financed, Model Cities is developing specific projects to foster devel
opment in Philadelphia.

Philadelphia Investors, Inc. Philadelphia Investors, Inc. was formed by a
group of black professionals as a medium for capital accumulation, business
education of its investor-members, and involvement in enterprises relating
to the black experience. Interested in any profitable venture, PI realizes it
cannot ignore investment activities in the total economy. Social concern,
however, creates interest in jobs for blacks and in being a venture to which
blacks can relate. Chartered in January, 1969, PI anticipates owning subsidi
aries as well as helping others establish independent businesses. It currently
holds 70 per cent interest in “ Black Book,” a local television program, and is
in the process of acquiring real estate.
T h e Philadelphia Urban Coalition. The Philadelphia Urban Coalition was
formed in 1968 as an alliance to alleviate social inequities, and as a structure
through which existing government, business, and community organizations
could coordinate and expand their efforts. An activator whose role is primarily
catalytic and supportive, UC is involved in several areas of community devel
opment, including manpower, housing, health and welfare, and education.
Thirty-four per cent of its total distribution of funds in 1969 was allotted to
economic development. Proposals are under study to stimulate inner-city
commercial development and to establish a centralized system of referral for
business counseling. Other UC projects include the General and Specialty
Contractors Association of Philadelphia and a management training course for
minority contractors.
Sm all B usiness Adm inistration. SBA attempts to involve the private sector
and local government in the campaign to aid minority entrepreneurs. SBA
offers federal guarantees on commercial bank loans, helps clients negotiate
with lending institutions, provides counseling and management assistance,
and sometimes itself becomes the loan source. Minority loans by SBA are
closely supervised, and clients are encouraged to attend management
workshops. SBA help for minority entrepreneurs is primarily available
through Operation Business Mainstream, whose thrust is toward the retail
and service sectors, and the Local Development Loan Program, which
addresses opportunities in all industries. The latter is geared to providing
substantial sums for large projects such as shopping centers.
S traw berry M ansion C ooperative Association, Inc. Dissatisfied with nearby
stores, residents of the Strawberry Mansion area organized the SMC in late
1967 to provide quality food products at reasonable prices. A victim of
inexperience and extensive flooding damage, this group is still struggling to
gain its footing. Employees now include a managerial trainee and three parttime workers. Growing business and a successful raffle have eased financial
difficulties at the 30th and Cumberland Street mart, and SMC expects to
reach the break-even point before mid-1970.
United C o m m u n ity D evelopm ent Corporation. An outgrowth of a nonprofit,
interdenominational organization designed to provide the consumer with
better quality products at more reasonable prices, UCDC is a joint venture
of several groups concerned with the physical and economic development
and stabilization of West Philadelphia neighborhood areas. Its first project is
a shopping center to provide space for established and new businesses and
for other social and training facilities. A study group has reported favorably on
the prospects of developing such a shopping area in the vicinity of 52nd and
Chestnut Streets, and efforts are now being made to secure adequate low-cost
financing.
Y o u n g G reat Society. YGS, in cooperation with Mantua Community
Planners Inc., encourages the economic and social development of Mantua.
18

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The group, whose staff includes professional planners and architects, is
promoting a community shopping plaza', a job training center, and neigh
borhood improvement programs. YGS is also planning to establish the
Mantua Industrial Development Corporation, which will provide office space
and manufacturing facilities for light industry.
Z io n Investm ent Associates. Founded by the Reverend Leon H. Sullivan,
Zion Investment Associates is a private organization promoting free enter
prise in the interest of the black community. Funds subscribed to the 10-36
Plan, a community savings arrangement in which participants contribute ten
dollars a month for 36 months, provide an economic base for this group’s
activities. The Plan has made possible the construction of a shopping center
and two manufacturing firms. Progress Plaza, the commercial center, provides
space for 16 stores, ten of which are owned by black entrepreneurs and all
of which are black-managed. The manufacturing subsidiaries include an
aerospace firm, initiated with the assistance of General Electric Company,
and Progress Garment Manufacturing Company, launched with the help of
The Villager, Inc. An entrepreneurial training center has also been developed
within the present organization.

Bank Competition and
Monetary Policy
by Guy E. Noyes*

In 1920 Prof. Chester Arthur Phillips published
a book entitled Bank Credit: A Study of the
Principles and Factors Underlying Advances
Made by Banks to Borrowers-1 Directly or in
directly every student of money and banking
since has been reared on Phillips. While Phil
lips’s book itself has been little used as a text
since the 1930’s, it has literally been rewritten
a thousand times in texts on money and bank
ing that have been the basis for courses in our
colleges and universities— and his analysis has
survived the years very nearly intact.
In many ways this has been a good thing.
Certainly the Phillips analysis represented a
great advance over that of his predecessors— it
is more accurate to think of the loan as the
father of the deposit than vice versa and it is
well to understand that a 10 per cent reserve
requirement (O , happy d ay !) permits the com
mercial banks taken all together to parlay their
loans and deposits tenfold on the basis of an
infusion of new reserves, but a single bank, the
“ Mad River National Bank of Springfield,
Ohio,” can expand its loans by only $122,000
on the basis of $100,000 borrowed from the
Federal Reserve Bank of Cleveland, assuming
the 10 per cent reserve requirement and an
automatic 20 per cent reciprocal balance (O,
still happier day!). These are good things to
know and it is well that millions of eager young
minds have learned them.
But along with these venerable truths the
students who grew up on Phillips, directly or
indirectly, have also acquired a wholly unreal
istic notion of the almighty market power of

* Senior Vice President and Chief Economist, Morgan
Guaranty Trust. This essay was selected from Men,
Money and Policy, published in limited edition by the
Federal Reserve Bank of Philadelphia.
1 The Macmillan Company, New York, 1920. Page
references are to a 1931 reprint.

2 Op. cit., p. 51.

3 To those who know that I had the good fortune
to take my first course in economics under Karl Bopp
in the summer of 1931, let me say that I am not ac
cusing him of using this pedantic crutch. On the con
trary, I seem to recall a very vigorous and earnest young
man filling a blackboard that covered one whole side of
the room with individual bank T accounts before he
finally unveiled the magic 10 to 1.

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This snug little monopolist who ran Prof.
Phillips’s Mad River National in Springfield,
Ohio, has been taken as a microcosm for the
banking industry by several generations of stu
dents who have grown up to be Congressmen,
Federal Reserve Board members, Federal Re
serve Bank presidents, Comptrollers of the
Currency, and Chairmen of the FDIC— to say
nothing of the thousands who are professors of
money and banking, some of whom are inter
mittent members of the President’s Council of
Economic Advisers. And, of course, like Keynes
and Friedman, Phillips has suffered at the hands
of his followers. Phillips never said it, but there
is hardly an economist now alive, who, con
fronted by the uncomprehending faces of the
eight o’clock section of Economics A or the
friendly, but confused, countenances of the local
Rotary, has not blurted out, in the course of an
effort to explain deposit creation, “ Think of the
banking system as one large bank.” fn fact, there
is hardly an economist now alive who hasn’t
blurted it out so often that he has slipped into

F E D E R A L R E S E R V E B A N K O F P H IL A D E L P H IA

A DRAGON SLAIN

the habit of thinking that way himself.3
Of course, we all know that the commercial
banking system in the United States isn’t one
large bank and can’t be expected to behave like
one. But I am not sure we are as acutely aware
as we should be of just how misleading this
“ simplifying” assumption has been and con
tinues to be.
Except in a few rural areas— and they are
fast becoming fewer and farther between—
competition among banks is intense, in fact,
fierce. This is, when one considers it, hardly
surprising. From the earliest days of our national
existence, competition among banks has been
protected and nourished by public policy. As
every high school history student knows, the
dragon of nationwide banking, in the form of
the Second Bank of the United States, was so
effectively slain by Andrew Jackson in 1836
that it has been hard to even make much politi
cal capital out of the issue since. The threat of
a “ money monopoly” has been rolled out from
time to time as a subject of campaign oratory,
as it was by the Populists in the late 19th cen
tury, but the old dragon has properly been
regarded by the public with about as much awe
as the balloon version of a comic strip character
in a Thanksgiving Day Parade.
The pervading and overpowering philosophy
was well-expressed by the Banking and Cur
rency Committee of the House of Representa
tives in its report on “ The Bank Holding
Company Act of 1955” when it said, “ The
United States early in its history . . . adopted

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the commercial banker over his customers. It
may or may not have been true in the 1920’s,
but it certainly isn’t true today. Prof. Phillips’s
banker had no problem in expanding or con
tracting the loans of his bank— he simply said
“ yes” or “ no” in a positive, if courtly, manner.
His style is well-illustrated in a little discussion
of “ derivative” balances. “ You are straining
your credit,” says the banker to the credit
seeking customer, “ and, with tight money staring
us in the face, I shall have to ask you to keep
a more liberal balance in relation to loans than
previously, as a requisite to additional accom
modation.” 2

a democratic ideal of banking. Other countries,
for the most part, have preferred to rely on a
few large banks controlled by a banking elite.
There has developed in this country, on the
other hand, a conception of the independent
unit bank as an institution having its ownership
and origin in the local community and deriving
its business chiefly from the community’s indus
trial and commercial activities and from the
farming population within its vicinity or trade
area.” If this bucolic ideal is not precisely the
reality of today, it is certainly closer to it than
the “ monied oligarchy” Jackson “ exterminated”
in the words of Bostonian David Heughon—
who may have been slightly prejudiced, as were
many New York financiers of the period, be
cause the Second Bank was headquartered in
Philadelphia.
TH E LAST RESO RT
In fact, of course, competition reaches its
pinnacle in the efforts of larger banks to attract
and hold a share of the business of large na
tional and multinational corporations. Because
of the legally enforced fragmentation of the
commercial banking system, no single bank is
large enough to accommodate alone the financial
needs of any of our larger corporations. Most
large companies have four or five continuing
banking connections, and some have hundreds
ranging over banks of all sizes. In terms of
market power, this puts the corporate treasurer
in an extremely favorable position. He can al
ways play the banks with which he has estab
lished relationships off against one another, or,
alternatively, play all or any of them off against
100 more or less identical banks that would be
delighted to provide him with more or less
identical accommodation. Moreover, quite aside
from the practical problems that the intensely
competitive banks would have in trying to deal

jointly with a large customer, they are legally
prohibited, except with explicit permission of
the customer, from even discussing with one
another the terms and conditions on which they
will lend to him. At least in the initial stages of
negotiation, banks must rely wholly on the
integrity of the borrower for any information
as to the terms and conditions on which other
banks are prepared to accommodate him.
In these circumstances bankers who deal
with large corporations are, if not exactly in,
very close to the position one New York banker
described when he said, “ Sure, we would turn
down a loan to a good corporate client who had
maintained good balances with us over the
years, but not until after we had sold our build
ing and all the furniture.”
What are the implications of this for mone
tary policy? It depends, of course, on what
monetary policy is trying or should be trying
to do. If one feels that the task of monetary
policy is to establish some desired rate of in
crease in the narrowly defined money supply,
the consequences are comparatively minor. The
problems of measuring the rate of increase in
money that has been or is actually taking place
or in determining what rate of increase is opti
mal are magnified only very modestly by the in
tensity of competition for “ business” business.
In this case, as in others, the pressure to ac
commodate business borrowers may produce
allocative effects that will cause the monetary
authority to falter in its determination to adhere
to a given money supply objective when credit
demands are generally strong, but in the view
of the true monetarist this is only evidence of
human fraility— not the product of the competi
tive process. This problem of the contribution
of hypercompetition to the selective impact of
general policy will be touched on again in con
nection with other alternative objectives of

G EN ER AL C O N TR O L IN TAC T
If we abstract from the Q ceiling distortions
(which is difficult to do in the current setting
in which their impact is so pervasive), it does
appear that the inability of banks to ration
credit to large business borrowers, especially in
the early stages of a move toward credit re
straint, operates to lessen the precision and in
crease the time lag with which the monetary
authorities are able to control the rate of growth
of total bank credit, the bank credit proxy or
the broadly defined money supply. In the long
run the availability of reserves must operate as
a limiting factor, but for a considerable period
footings on both sides of bank balance sheets
can expand at a rather high rate even in the
face of an extremely parsimonious policy of new
reserve creation by the central bank. The rea

4 There has been very little empirical work in this
field. While I would not pretend to have researched the
literature thoroughly, I am encouraged to believe that 1
have not overlooked any highly significant contributions
by the fact that a recent article on the subject did not
refer to anything that had escaped my attention. This

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sons for this do not have to be explained to
the typical reader of this sort of paper who is
doubtless thoroughly familiar with the factors
affecting member bank reserves and their re
lation to the volume of money and bank credit.
Suffice it to say that in the circumstances set
forth and in the short-run, banks are pre
pared to go far beyond the optimal, equilibrium
or profit-maximizing point in the intensity with
which they utilize total reserve balances and
the extent to which they pull reserves normally
occupied in other ways into the “ member bank
balance” component of the uses of the monetary
base.
How much this delays the ability of the cen
tral bank to achieve control over monetary ag
gregates, such as the broadly defined money
supply, depends importantly, of course, on how
ruthless it is prepared to be in the pursuit of
its objective. Even the most strong-willed,
broad-definition monetarist would doubtless find
himself compelled to employ some gradualism
in stemming an excessive rate of growth in
bank credit or broadly defined money, and there
can be little doubt that the willingness of banks
to compete for funds, among themselves and
with others, to satisfy the borrowing demands of
their customers enhances this problem. But even
so, the problem is one of timing and the deter
mination of the authorities, and one would con
clude that, if control over the broader banking
system aggregates is the appropriate objective of
policy, then competitive conditions in the bank
ing industry aggravate only modestly the dif
ficulty of achieveing that objective.4

F E D E R A L R E S E R V E B A N K O F P H IL A D E L P H IA

policy where it appears to play a more impor
tant role.
If one leans to the broader money supply, or
the closely related bank credit proxy, as the ap
propriate objective of policy, the problem is
more complicated, especially if one includes in
the defined objective all or part of the claims
arising from the money market fund raising
activities of banks. These problems become
overwhelming if one injects the further compli
cation of a sub-market Regulation Q ceiling,
but that is another story. Sub-market Q ceilings
are a sufficient evil unto themselves and have
amply demonstrated their capacity to produce
such massive distortions as to make rates of
change in any of the conventional broad mea
sures of bank credit and money practically
meaningless. In these circumstances the modest
contribution to the confusion that stems from
the relative market power of banks and their
customers seems insignificant.

Substantially the same conclusion emerges if
one accepts interest rates or some other broad
measure of credit conditions as an objective.
In fact, it can be argued that a desired level of
market rates can be achieved more rapidly than
might otherwise be the case because of the
intensity with which banks are prepared to
compete in funds markets. But the problem of
selective impact, or burden sharing, is more
visible, if not more acute, and, therefore, more
likely to interfere with policy formulation. If
the authorities are focusing on general credit
conditions as the objective, it is hard for them
not to be aware of conditions in the separate
markets and succumb to the temptation to
moderate their general objectives in order to
relieve what seem to be unduly harsh condi
tions in specific markets— and again, the
intense competition among banks to accom
modate business borrowers tends to amplify
the problem. The wide swings in bank partici
pation in the market for state and local obliga
tions is an obvious case in point.
But while the highly competitive structure
we have chosen to maintain and encourage in
the United States banking system may compli
cate the problems of conducting a general

article, “ The Banking Structure and the Transmission of
Monetary Policy,” by Sam Peltzman in The Journal o/
Finance, Volume XXIV, -No. 3, June 1969, pp. 387411, addresses itself primarily to the question of how
the market structure affects the speed with which de
posit growth is influenced by changes in reserves or
reserve requirements. The results cannot be directly
related to the judgmental observations in this paper,
since the categories used by Peltzman do not necessarily
reflect the differences in market power as between banks
and their customers. In a general way, however, the fact
that the differences in bank structure which Peltzman ex
plores make only modest differences in the speed with
which policy changes are transmitted would seem to sup
port the proposition that if the rate of deposit change is
the objective of policy, the intensity of competition
among banks plays a comparatively unimportant role
in the efficiency with which policy operates.

monetary policy directed to any of the above
objectives— and increase the temptation to
superimpose selective controls to “ even out”
the burden— it cannot be said to frustrate such
policy or even make it significantly less effective.
SELECTIVE EFFECTS O U T OF REACH
However, there is one objective that appears
to be literally beyond the reach of general mone
tary policy under present competitive conditions.
This objective is the more or less precise regula
tion of the rate of increase in business loans at
commercial banks. If this is taken to be an
appropriate immediate objective of monetary
policy, i.e., if effective control of the rate of
bank business-loan expansion is assumed to be
the essential financial link through which mone
tary policy makes its contribution to overall
economic stability, then monetary policy simply
cannot do what it is supposed to do with the
tools it has to work with, given the present
distribution of market power as between banks
and their business customers. If one goes fur
ther— as, once started down this path he might
logically proceed— and adopts the objective of
regulating the total flow of credit to business
borrowers from all sources, then the attainment
of the objective in present circumstances and
with the present policy tools is even more re
mote from reality.
Thus, if one sincerely believes that it is es
sential to stable economic growth that the mone
tary authorities be able to influence directly and
promptly the availability of credit to business
borrowers, he must conclude either that a basic
change in banking structure is needed which will
reallocate market power in such a way as to
permit banks to pass on to business borrowers
more effectively restraint imposed on them by
the monetary authorities or that the monetary

A P R IL 1970

avoidable even if broad guidelines were pro
vided by a government agency. Business credit
simply cannot be regulated by the type of
“ down-payment” and maturity regulations that
have been used in the case of consumer install
ment credit and real-estate credit regulation.

Doubtless some students of the monetary
mechanism will conclude that the national in
terest requires a de-intensification of the zeal
with which banks compete with one another
for business customers and accommodate their
credit needs even at times when policy is limit
ing the growth of total money and bank credit.
They also will reason that this can be most
equitably done by superimposing some form of
selective regulation on top of the existing gen
eral authority to regulate the growth of broad
aggregates or influence general credit conditions.
But we should all be very clear just what we
would be doing if we follow that path— we
would be impairing with one hand the com
petitiveness that we have so zealously pro
tected with the other. One would want to be
very sure that regulating business-loan volume
is an essential objective of monetary policy. I,
for one, am not.

B U S IN E S S R E V IE W

TO O HIGH A PRICE?

F E D E R A L R E S E R V E B A N K O F P H IL A D E L P H IA

authorities should have the explicit power to
regulate selectively the volume of business bor
rowing, probably from nonbank as well as bank
sources. Meanwhile it makes no sense to belabor
either the central bank or the private banking
system for not doing something neither of them
has within its power.
While the change that would be needed is
put above in terms of two alternatives, it could
just as well have been expressed in terms of
two ways of doing the same thing— reducing
the market power of the corporate borrower. If
we move toward any form of selective regula
tion of bank lending, it would be, in effect, an
abridgment of the benefits borrowers enjoy as
a result of the banking competition we have
pursued so vigorously through legislation and
regulation. The fact that it would be done
under the banner of public policy does not
change its character. It is for this reason that
jurists have always concluded that efforts to
regulate business credit, like the “ voluntary”
credit restraint program of the Korean War
period, can work only under the protective
umbrella of an exemption from the Sherman
Act. In order for selective regulation of bank
lending to work, some sort of collaboration
among banks with regard to which loans are
appropriate and which are not, would be un

NOW AVAILABLE

TH E M YTH OF FISCAL POLICY:
TH E M O N ETARIST VIEW
One of the liveliest debates among economists in recent years is the
relative importance of fiscal vs. monetary policy in determining the
level of national income. Economist Ira Kaminow outlines both sides
of this controversy in the pamphlet, “ The Myth of Fiscal Policy: The
Monetarist View,” which has been reprinted from the December, 1969
Business Review.
Copies of the pamphlet are available upon request to the Public
Services Department, Federal Reserve Bank of Philadelphia, Philadelphia,
Pennsylvania 19101.

FOR THE R E C O R D ...
INDEX

SUM M ARY

Third Federal
Reserve District

United States

Per cent change

Feb. 1970
from
mo.
ago

year
ago

2
mos.
1970
from
year
ago

Feb. 1970
from
year
ago

mo.
ago

Manufacturing

2
mos.
1970
from
year
ago

LO C AL
CHANGES
Standard
Metropolitan
Statistical
Areas*

MANUFACTURING
Production ...................
Electric power consumed
Man-hours, total* . . .
Employment, total . . . .
Wage income* .............
CONSTRUCTION** .........
COAL PRODUCTION . . . .

+ 2

2
+ 1

+
+

0
0
+ 6

1
1

1
+ 24

+ 35

1
5
+ 41

Trenton ........
7
+ 12

+
+

9
9

6
+ 4

BANKING
(All member banks)
Deposits .......................
Loans ............................
Investments .................
U.S. Govt, secu rities..
Other .........................
Check payments*** . . .

1
1
1
- 2
- 1
+ 2t

2
6
-1 0
-1 6
- 6
+121
+

2
7
-1 0
-1 7
- 5
+
+121 +
+

0
1
3

1
2

1
7
- 8
-1 4
- 3
+ 10

2
8
- 9
-1 6
- 3
+ 10

PRICES
Wholesale .....................
Consumer .....................

+ It

•Production workers only
••Value of contracts
•••Adjusted for seasonal variation

+ 7t

+ 6t

Payrolls

Check
Payments**

Total
Deposits***

Per cent
change
Feb. 1970
from

mo.
ago

year
ago

mo.
ago

+ 2

year
ago
3

+ 7

0
+ 1

+ 5
+ 6

1 15 SMSA's
^Philadelphia

year
ago

mo.
ago

+ 12

+ 9

+ 10

mo.
ago

year
ago
7

+ 21

+21

+ 5

Altoona ........

+ l

+ 1

+ s

+ 5

Harrisburg . . .

+ 1

+ 9

+ 14

+48

+ 4

+ 10

+ 7

+ 9

+ 7

+ 15

+ 10

8
1

Johnstown . . .
"
-

Employ
ment

Atlantic C it y ..

+
-

Wilmington ..

Banking

Lancaster

. ..

+ 1

Lehigh Valley.

+ 1

+ 2

Philadelphia .

+ 3

+ 12

+ 2

+ 6

+ 4

+ 2

+ 10

+ 2

-2 0

R e a d in g ........

Scranton . . . .

" 1

Wilkes-Barre .

+ 2

+ 3

+ 2

+ 8

+ 2

Y o r k ...............

+ 4

+ 10

+ 2

+ 11

•Not restricted to corporate limits of cities but covers areas of one or
more counties.
••All commercial banks. Adjusted for seasonal variation.
••"Member banks only. Last Wednesday of the month.

Full text of Business Review (Federal Reserve Bank of Philadelphia) : April 1970

FRASER