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AUGUST 1957
business review
FEDERAL RESERVE
BANK OF
PHILADELPHIA
EPING INFLATION: THE PICKPOCKET
PROSPERITY
on is a vice of so frightful mien,
hated needs but to be seen;
o oft, familiar with her pace,
i, then explain, then embrace.
— W ith profound apologies to Alexander Pope
MATURE ECONOMY
The new mature economy thesis is different from its predecessor.
It isn't shrouded in gloom. It has a Hollywood ending— happy.
THIRD DISTRICT BANKING
Expansion in loans during first half year accompanied by decline
in investments. Substantial increase in total earnings over a
year ago largely offset by higher current expenses.
Additional copies of this issue are available
upon request to the Department of Research,
Federal Reserve Bank of Philadelphia,
Philadelphia 1, Pa.
Creeping
Cost of Living Rose to New Record in June for
money, and money will do almost anything for
10th Month in a Row— WALL STREET JOURNAL,
July 25, 1957
people. Money is a captivating, circulating, mas
querading puzzle.
Ask an economist about money and you may be
A simple act of inflation is to blow air into a toy
sorry. He will tell you that money is a medium of
balloon. Kids love it. A more sophisticated form
exchange, a standard of value, a store of value,
of inflation is to blow too much money into the
and a standard of deferred payments. See what
economy. Some adults love it because it creates a
we mean!
feeling of prosperity.
How money works as a medium of exchange,
Not prosperity, but a feeling of prosperity. For
we first discovered at a tender age when we found
what does it profit a man if he gets twice as much
with great delight that pennies buy lollipops. As
money, when it costs three times as much to live?
we became bigger operators, we developed bigger
Money bewitches people. They fret for it, and
wants that required bigger money. Bigger wants
they sweat for it. They devise most ingenious ways
are taken care of nicely with 2 1/ 2'" by 6 " paper
to get it, and most ingenuous ways to get rid of it.
portraits of various notables— Washington for
Money is the only commodity that is good for
a dollar, Lincoln for five dollars, Hamilton for ten,
nothing but to be gotten rid of. It will not feed
and so on. These are freely passed from hand to
you, clothe you, shelter you, or amuse you unless
hand with almost total disregard as to whose
you spend it or invest it. It imparts value only in
portrait is worth what. That’s what “ medium of
parting. People will do almost anything for
exchange” means.
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The claim that money is a standard of value is
ated, does not always behave as it should and the
one of those things. If money were the standard
telltale evidence of the misbehavior of money is
of value that it is supposed to be, the same amount
the behavior of prices.
of money would always buy the same amount of
goods. But it doesn’t. We know from recent ex
THE BEHAVIOR OF PRICES
perience that the dollar is slipping because it takes
Prices seldom stand still for any length of time.
more of them to get the essentials of life. The one-
When the housewife goes to market she may ob
dollar silver certificate is identified as one dollar
no less than 15 times on the face and 10 times on
serve that coffee and potatoes cost a cent or two
the back— and so it is. But in the market place,
less than the week before, and that pork and butter
cost two or three cents more. A price-conscious
it’s not the dollar it used to be. The dollar is a
housewife is also quick to observe similar changes
standard of value but not a stable standard like a
in department-store merchandise. At the same
yard or a gallon or a ton.
time that prices of linens and yardgoods may be
The claim that money is a store of value also
requires some apology. When you check a suitcase
falling, the prices of men’s shirts and children’s
shoes may be rising. That’s the way life is.
full of personal belongings at a baggage counter,
Price changes are the inevitable result of chang
you get a ticket or a claim check and go about your
ing conditions of demand and supply in markets
business confident that you can reclaim the bag
where freedom of competition prevails. Increasing
upon surrender of the ticket. If, upon doing so,
demand or diminishing supply tends to bring
you find that half of your clothing and other per
about higher prices, and decreasing demand or
sonal effects have been removed, you would set up
increasing supply tends to bring about lower
a big howl, saying, “ I’ve been robbed.” In like
prices. Moreover, changing prices are not only
manner, if you tucked $100 under the mattress
passive results of changes in supply and demand
several years ago for safekeeping, you find you
but also active causes thereof. Rising prices stim
have been robbed because those dollars buy less
ulate production and discourage demand, and
in today’s markets.
falling prices encourage demand and discourage
As a standard of deferred payment, money also
production.
leaves considerable to be desired. The investor that
Prices are the automatic regulators that tend to
today buys a 10-year bond for $1,000 is entitled
keep production and consumption in line with
to $1,000 in 1967, but who knows what the pur
each other. In the performance of this function,
chasing power of the dollar will be in 1967? If the
however, it is quite common for the prices of some
dollar will be worth more than it is at present, the
goods and services to be rising while the prices of
investor makes a speculative gain; if it will be
others are falling, and that is the point we wish to
worth less, he will suffer a speculative loss. The
stress here.
dollar can be as fickle in the future as it has been
in the past.
Living as we do in a money economy there is
THE MISBEHAVIOR OF MONEY
When prices of everything are going up, it is not
nothing for free. Everything costs money. Every
because everything is worth more, but because the
thing has its price, and the price is always so much
dollar is worth less. The value of a good is its
money. Now money, as has already been insinu
power to command another good in exchange for
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itself. If a pencil costs 10 cents and a pen costs a
dollar, it means that a pen is worth ten pencils, or
a pencil is worth one-tenth of a pen. Should prices
of everything double, then pens would sell for $2
and pencils for 20 cents each. Ten pencils would
W HAT CHANGING PRICES DO TO
THE BUYING POWER OF THE DOLLAR
INDEX (1947-49=100)
SEM I-LOG
20 0 -a
v.wssawK
160-
m
- ■- -
PURCHASING POWER
OF THE DOLLAR
still exchange for one pen, and inasmuch as prices
of all things have doubled, their exchange ratios
or value remain the same. But something has hap
pened to the value of the dollar. It has been cut in
half. That’s inflation.
Again, should prices of everything be halved it
would not be because everything is worth less but
because the dollar is worth more. That’s deflation.
During a period of inflation, prices rise and the
dollar loses purchasing power. During a period of
Now look what has happened during the past
deflation, prices fall and the dollar gains purchas
three decades. In the years of the Great Depres
ing power.
sion from 1930-1933, consumer prices took quite
How money misbehaves is shown by the chart
a slide. You can see what World War II did to the
with only two lines. The line labeled “ Consumer
cost of living. Note the rise in consumer prices
Prices” is the official consumer price index com
from 1940 to 1943. After the end of the war, con
sumer prices took another big jump. They seemed
piled by the Bureau of Labor Statistics, and it
measures the changes in prices of goods and serv
to have reached a plateau in the stretch between
ices purchased by families of city wage earners
1952 and 1955, after which they again started
and salaried clerical workers. The index is based
upon prices of about 300 items in 46 cities. In
moving upward. The index rose from 60 in 1940
to 120 at present, which means that we now pay
short, the line shows how the cost of living rises
one dollar for what cost only 50 cents in 1940.
and falls with respect to a base period (1947-1949
World War II caused most of the inflation.
=
100) to which the line is anchored.
The other line labeled “ Purchasing Power of
War requires weapons and wampum
the Dollar” is the same story translated so that it
Producing weapons for war is inflationary. Out
shows what happens to the value of the dollar
put of civilian goods is reduced to a minimum as
when consumer prices rise and fall. You can see
productive facilities are pressed into the making
that the two lines are reciprocal, as indeed they
of weapons. The gainfully employed, however,
must be because when the cost of living rises, the
receive wages for their work regardless of whether
purchasing power of the dollar falls and it takes
they make bazookas or butter. But civilians don’t
more dollars to maintain your standard of living.
spend their money for munitions, so the extra
When consumer prices fall, the purchasing power
bazooka money which is not taken away from
of the dollar rises and it takes fewer dollars to buy
them in taxes churns up prices in the butter market
the goods and services to which you are accus
despite desperate efforts to prevent it. War always
tomed.
fills the purse faster than the pantry.
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War is inflationary in still another way— the
support program supplied the high-powered re
way it is paid for, or rather the way it is not paid
serve dollars needed to support the swelling money
for. The cost of the war not raised by taxes is bor
supply.
rowed by selling bonds. Government bonds bought
Inflation seems to be an inevitable by-product
by people, savings banks, insurance companies,
of war. This is confirmed by the long-run record
commercial and industrial corporations come out
of wholesale prices, shown in the accompanying
of savings, and such bond buying is not inflation
chart. All the mountain peaks are the handiwork
ary.
Not so the buying of bonds by commercial
flation that out-flated all inflations. Printing
of Mars. Germany, after World War I, had an in
banks. The bonds they buy feed the fires of infla
presses turned out paper marks by the trainload,
tion because they do not buy bonds out of their
and the cost of living rose 1,200 billion times.
savings but out of money which they create. The
money comes right off the keyboard of the book
Mortgages, bonds, and other long-term contracts
keeping machine in the bank. Technically, such
policies were not worth the postage required to
money is called “ demand deposits” against which
notify the company of the decease of the policy
the borrower can draw checks.
became absolutely worthless, and life insurance
holder. What started out as just a little inflation
wound up in complete collapse and chaos.
“ There she blows!”
After World War II a lot of the Government bonds
To be sure, no one is advocating that we go on
a gigantic inflationary fling and wreck our econ
were turned into money, and that can be done
omy like the Germans wrecked theirs. But why not
faster than making automobiles, so there was more
try a little inflation, just a few cents worth a year
inflation. People cashed their bonds at the banks,
— an “ ever normal” debasement of the dollar, a
lenders sold Governments to make loans, and the
planned inflationary prosperity?
Federal Reserve as the ultimate buyer under the
THE CHARM OF CREEPING INFLATION
Creeping inflation has charm, seductive charm.
A LONG LOOK AT WHOLESALE PRICES
IN D E X ( 1 9 4 7 - 4 9 = 1 0 0 )
It is a delusion, but such a delightful delusion. It
affords an apparently easy way out of so many of
the daily difficulties that confront us.
Creeping inflation sends up prices on the secu
rities markets, farmers wishing to sell out get
fancy prices for their farms, businessmen find it
easier to make profits that come from inventory
appreciation and higher selling prices, and work
ers get higher wages. The prosperity doesn’t ring
true, but it rings the cash registers because there
is more money around. People on fixed incomes
do not share in the additional money unless they
own a share or two of stock, in which case they
get a whiff of prosperity.
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Creeping inflation is a monetary patent medi
ducing and consuming goods and services at the
cine, an economic elixir. It is a soothing com
rate of $434 billion a year. Last year we were pro
pound containing syrup sweet to the taste, and
ducing and consuming at the rate of $415 billion.
alcohol to dull the senses. Recommended doses:
With pride we point to the $19 billion increase.
2 to 3 per cent a year. It is good for all diseases of
But that was in dollars, and don’t forget that con
the body economic. Will prevent falling pricitis,
sumer prices rose over 3 per cent during the past
underflourishment, profit deficiency, and inven
year, so a large part of the increased prosperity
tory indigestion. Creeping inflation is a habit
was phoney. Well over half of the gain was nulli
forming economic tranquilizer.
fied by the depreciation in the purchasing power
Because creeping inflation wears a false face of
of the dollar. And yet there are a lot of grown-up
prosperity, many people are easily fooled by it.
people who still believe in Santa Claus. Confus
First, it is tolerated, then it is accepted, and finally
ing money with wealth, they think that if every
it is rationalized. In fact, the rationalizing has
body has more money everybody is better off.
already begun. We are told that the country is con
Well, suppose the Government were to adopt a
fronted with a choice of three evils. We must ac
policy of creeping inflation, say, 3 per cent a year
cept enough unemployment to keep labor costs
so frequently advocated. Consider the factory
from rising, or impose direct Government controls
worker, head of a family, making $6,000 a year.
over wages and prices, or embrace creeping infla
Knowing that the cost of living will rise 3 per cent
tion. The first is socially undesirable, the second
each year, he will demand an escalator clause so
is politically impossible in times of peace— which
that his wages will go up automatically with the
leaves creeping inflation as the least of the three
rising cost of living. By so doing he contributes to
evils. So goes the argument.
further inflation because contracts of this kind
Is it true that we must choose some form of
cause price increases to spread far and wide.
Consider the school teacher, age 40, whose only
evil? To say so does not necessarily make it so. It
has not been proven that the only solution to heavy
income is his salary. What a dreary prospect creep
unemployment is ever-rising prices. On the con
ing inflation holds for him! A 3 per cent yearly
trary, if inflation is allowed to run its course we
increase in the cost of living is tantamount to an
may
annual cut in salary. Creeping inflation picks his
ultimately
precipitate
unemployment
of
really serious proportions.
pocket year after year. When he is 65 and ready to
retire, his dollars will have shrunk to 47 cents, and
THE PICKPOCKET OF PROSPERITY
a $3,000 annual retirement income will have less
Simply because all our business reckoning is done
than $1,500 purchasing power. Government work
in dollars, it is so easy to fall for the fallacy that
ers, hospital employees, social service workers,
more dollars bring more prosperity. The essence
and many other salaried people will have their
of prosperity is not more dollars, but more goods
pockets picked in this kind of “ prosperity.”
and services. We can consume only what we pro
Creeping inflation makes suckers out of savers.
duce. If we want to consume more, we must pro
It would systematically pick the pockets of the 100
duce more— and there is no money magic that will
million holders of life insurance policies, the 15
enable us to consume more than we produce.
million savings and loan shareholders, the 14 mil
Currently we— all 170 million of us— are pro
lion employees with pension rights under private
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plans, the 66 million people covered by social
THE COURSE OF CREEPING INFLATION
security, and the 67 million with savings deposits
Pocket-picking is going on right now, all around
in commercial and savings banks. It is a delusion
us. The cost of living has already gone up 20 per
to think that creeping inflation— a mere 2 or 3
cent above the 1947-49 base period, as shown by
per cent a year— does no harm. A 2 per cent an
the “ All Items” line in the chart. As might be ex
nual rise, compounded, would double the price
pected, some items rose more briskly than others.
level about every 35 years. A 3 per cent annual
The clothing dollar was the best behaved and the
rise would double prices about every 23 years.
Moreover, there is a world of difference between
food dollar also did not get too far out of line.
The bad actors were housing, which includes rent,
a fortuitous creeping inflation, such as we are now
and transportation costs. These costs rose 25 and
having, and a planned creeping inflation. Suppose
35 per cent, respectively.
the Government were to accept as a national policy
the inevitability of a 2 or 3 per cent annual infla
tion. As citizens would come to know that the
Government is not only accepting but seeking a
slow and steady depreciation of the dollar, they
would realize that there is no point in holding
insurance policies or putting money into savings
accounts, savings bonds, and other forms of dollar
assets. Instead of saving, they would put their
money into real estate, commodities, equity secu
rities, and other forms of investment that ride
with the rising tide of inflation. It would make us
a nation of speculators rather than savers.
It is naive to believe that a deliberate policy of
2 or 3 per cent inflation could be maintained in
definitely. Inflation, by its very nature, feeds on
itself, and it would not be long before creeping
inflation would accelerate to running inflation and
For four years we seemed to have achieved
ultimately galloping inflation. Moreover, if we are
price stability. From 1952 to early 1956 the cost
simple-minded enough to believe that a little in
of living held very steady. Rents rose during this
flation brings a little prosperity, then why not
period but the declining cost of food helped to
double the inflation and double the prosperity?
keep the over-all average on a fairly even keel.
Having gone that far, let’s redouble the inflation
Early in 1956, however, the cost of living re
and redouble prosperity. If more money is the
sumed its upsurge and all of the components, in
royal road to prosperity, it is easy to make our
cluding food, joined in the advance. In June 1957
selves fabulously wealthy.
the cost of living was about 5 per cent above the
Inflation, wherever and whenever it is tolerated,
March 1956 level when the uphill march began.
is a pickpocket of prosperity, and the bigger the
That is a very high rate of depreciation for the
inflation the bigger the pocket picking.
American dollar.
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CAUSES OF CREEPING INFLATION
pushers. Fed up with having their pockets picked
Currently, the critics can’t agree as to the causes
by the rising cost of living, workers demand more
of our creeping inflation. One group says it is
wages. Fearful of what higher wage costs will do
basically demand pulling prices higher, and the
to their profit margins, employers resist the de
other group says it is rising costs pushing prices
mands of workers. Then starts the collective bar
higher. Let us examine the debate between the
gaining— the democratic process of table thump
“ demand pullers” and the “ cost pushers.” The
ing. In due time an agreement is reached, and the
demand pullers stress the fact that we have in our
betting on the sidelines is on the question of how
economy three great groups of spenders— namely,
much prices will be raised as a result of the higher
consumers,
wages.
business,
and government— whose
combined actions exert a powerful pull on prices.
It should not be necessary to raise prices if the
The country’s 170 million consumers, as a
wage increases do not rise faster than the in
group, have a lot of pull. They stepped up their
creases in labor productivity. That all the wage
expenditures from $231 billion in 1953 to a cur
increases taking place are “ necessary” is both
rent annual rate of $278 billion. Most people love
alleged and denied. In any event, it appears that
to spend and will do so at the drop of a down
price increases always follow on the heels of wage
payment.
Governments are easy spenders. They spend $87
billion a year for things no one can possibly ob
ject to— common defense and general welfare. But
defense and welfare are costly commodities with
bigger price tags each year.
Businessmen are courageous spenders. The
amount of money they put into new plant and
equipment since the end of World War II has
amazed everybody including the businessmen
themselves. In the past four years, they have spent
increases, and because wages are the largest cost
component in so many industries it is difficult to
escape the conclusion that rising wages have
something to do with creeping inflation.
Moreover, some of the wage agreements have
escalator clauses that gear the wage rates right
into the cost of living. An escalator clause pro
vides that for every change of so many decimal
points in the B.L.S. index of consumer prices, the
workers shall automatically get an increase or de
crease of so many cents in their basic wage rates.
Last April when the cost of living rose three-tenths
over $160 billion for this purpose, and this year
of 1 per cent, about a million-and-a-half workers
they are spending at the rate of $49 billion. Busi
in the automobile, electrical, and farm-equipment
nessmen, governments, and consumers are a
industries got automatic pay boosts of several
powerful trio of demand pullers, and it is hardly
cents an hour. Sooner or later the increased costs
becoming for any one of them to hold the others
of production break out in higher prices of these
responsible for contributing toward inflation.
items, and up goes the cost of living. Then the
The table-thumping theory of wages
other automatic pay increase. Sure enough, in
workers in escalated industries are entitled to an
Creeping inflation is also aided and abetted by a
May, the official cost of living rose another three-
vast army of cost pushers. The country’s 66 mil
tenths of 1 per cent and up went the wage rates.
lion workers are potential cost pushers, and the
The June increase in the cost of living jacked up
18 million organized workers are organized cost
wage rates another notch. More and more union
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ized workers are jumping on the escalator band
increased only 1 per cent, but it circulated 8 per
wagon, and you can see why.
cent faster. That helped inflation to creep.
Inflation automation
Wage escalation is automated inflation without
THE CURE FOR CREEPING INFLATION
Dollars without goods do no good
vacuum tubes, transistors, or printed circuits. It
We need not be unduly concerned about the rela
is built-in inflation. Once installed it is automatic,
tive merits of the push-or-pull argument. One
requires no servicing or adjustment, never wears
thing we do know, and know full well, is that there
out. It has no moving parts except wages and the
can be no inflation without an over-abundance of
cost of living. Rising costs of living drive up
money that leaves a gap between total spending
wages, and rising wages drive up the cost of living.
The cost pushers are only seeking to escape the
and the available supply of goods. Dollars without
goods do no good.
ravages of inflation. Workers are trying to pre
Sometimes it is advocated that the best way to
serve their standard of living, and businessmen
close the gap is to produce more goods. Increased
are trying to preserve their profit margins. But in
production alone, however, will not solve the prob
lem because extra output means extra input. The
pushing up prices, both of them are helping to
bring about the very thing they seek to avoid.
additional man-hours and the extra flow of mate
Everybody’s price is someone else’s cost.
rials together with increased profit on the extra
Is creeping inflation caused by demand pullers
output will yield additional income— so we have
or cost pushers? It is not a case of one or the
not made any progress toward licking inflation.
other; both forces are at work. Trying to assess
The gap remains.
their relative importance in the current inflation
A more effective way is to remove the surplus
ary climate is like trying to determine which blade
money that’s doing the damage to the dollar. Mak
of the scissors does most of the cutting. But we
ing money scarcer means people will have to pay
do know that demand pullers and cost pushers
more to borrow it. Money, like everything else,
together are cutting down the dollar.
has its price and the price is the interest rate.
Whether demand pulling or cost pushing, the
The interest rate is determined in the credit
inevitable side-car of rising prices is money—
market in the same way that the price of steers is
sufficient money to support the rising prices. How
determined in the cattle market. Droves of steers
eagerly and easily banks accommodate the de
stampeding the market depress prices; a big de
mand for more money has already been observed,
mand in the face of light shipments boosts prices.
and currently businessmen are borrowing heavily.
In the credit market, borrowers— consumers, busi
Prices, however, are not solely dependent upon
nessmen, and governments— seek funds from the
how much money is at work but also upon how
lenders: insurance companies, mutual savings
hard the money supply is working. Money goes
banks, savings and loan associations, and com
round and round from butcher to baker to lipstick
mercial banks.
maker, and the same amount of money going
When the borrowers want more funds than the
around twice as fast has the same effect on prices
available supply of the lenders, interest rates go
as twice the amount going around at the former
up and money is said to be “ tight,” in the jargon
rate of circulation. Last year the money supply
of the trade. Interest rates have been rising and
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money has been tight for over a year, primarily
hurt them harder than tight money.
because the demand has been greater than could
be supplied out of savings.
The Federal Reserve is commended by some
Uncle Sam spends over
a billion dollars a week
and condemned by others for allowing money to
It is difficult, if not impossible, to curb creeping
get tight and for raising the discount rate, which
inflation without some help from Uncle Sam. He
is the interest that commercial banks must pay
is a big operator who spends at a rate in excess of
when they borrow from the Fed. Control over the
a billion dollars a week, and that has a terrific im
money supply is exercised by regulation of the
pact on our economy. Like so many of us, he finds
reserves available to commercial banks so that
it hard to live within his income and when he
growth in the money supply will not put excessive
doesn’t, he adds to the inflationary pressures.
pressure on the demand for goods and services
available.
Money taken from us in the form of taxes re
duces our spending power, to be sure, but if the
In restricting the supply of money and credit,
Government spends the money inflationary pres
spending borrowed funds is discouraged because
sure is not reduced one whit. If the Government
of the increased price of money— the higher rate
spends more money than it takes from us in taxes,
of interest. In effect, higher-priced money is sub
inflationary pressures are increased.
stituted for higher-priced goods. The available
Uncle Sam could really be helpful in the fight
supply of money and credit then goes to those who
against inflation if he learned not only to live
are willing to pay the higher price for borrowed
money. So money becomes “ tight” not through an
within his income but to have a good surplus
when inflation threatens. If the Federal Govern
actual reduction in the supply of money and credit
ment wants stable money and lower interest rates,
but because of increased demands of borrowers.
it can have them by reducing its expenditures and
Had the Federal Reserve obliged with enough
its heavy demands on the money market.
credit to satisfy all the demands, it would have
In days gone by, unscrupulous sovereigns de
added greatly to inflationary pressures without
based their currencies by nicking the coin of the
adding to the supply of goods, and prices would
realm, which had disastrous results. By tolerating
have shown an even greater rise.
creeping inflation— which is the pickpocket of
Tight money is said to pinch the small business
prosperity— we could go down the same road. With
man and to interfere with the construction of
mass prosperity and mass savings, economic wel
much-needed schools, roads, and housing. So it
fare requires a dollar that is kept sound both as a
does, but so do rising prices or direct rationing.
medium of exchange and a store of value. Which
There is no painless way to stop inflation. If it is
would you rather have— a stable economy built
allowed to continue unchecked, ever-higher prices
on a stable dollar or a wobbling economy built on
and ever-rising costs will hurt more people and
a woozy dollar?
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THE NEW MATURE ECONOMY
A few years ago we heard a lot of the saying “ Old
THE NEW “ MATURE” ECONOMY
soldiers never die, they just fade away.” It seems
The new thesis has not as yet been announced as
to some of us who read the literature on economics
such, but its general outline is fairly well defined.
that old ideas don’t even fade away, they’re just
It says that 1957 is the first year of an “ interim”
reclothed to fit the times.
One explanation for the depression of the 1930’s
period. This interim period will be characterized
was called “ the mature economy thesis.” Many
About 1965 or so, a new era will be ushered in
will remember it and shudder. Contemplating it
when the economy will burgeon forth at 1947-1956
doesn’t make for pleasant reflection. Briefly, it
speed once more.
by noticeably slower growth in business activity.
said that our population totals were growing and
The slower growth interim period comes about
would continue to grow only very slowly; our
because: (1) War-created shortages of homes,
capital plant was completed and additions to it
cars, appliances, etc. have been filled. (2) The age
would not involve tremendous expenditure; our
composition of our population is such that family
frontiers were closed— there was no room to push
formation is taking place at a much slower rate
out.
To be sure, not everyone accepted this diag
than in the earlier postwar years. (3) Our capac
nosis, even in the 1930’s. But it made a deep im
rent and forseeable requirements.
ity to produce is more adequate in terms of cur
pression. It haunted us during the war years and
It says, too, that our three big spending groups
shortly thereafter. (How much reconversion plan
are showing signs of advancing age. Maturity is
ning was based on the expectation of 8 to 10
overtaking consumers, businessmen, and govern
million unemployed in 1946 and 1947?) Slowly,
ment leaders.
however, we moved away from the shadow of the
The mature consumer
mature economy thesis.
The recession of 1949 was barely observable.
Certainly there are many who agree that con
Some refused to call what happened in 1953 and
sumers are showing signs of new maturity. To
early 1954 anything more than a mild readjust
some it seemed until recently that consumers’
ment. Boom in 1955 clinched it. The mature econ
tastes were very limited. All consumers wanted
omy thesis was just one of those ridiculous notions
were newer, bigger and better houses, cars, and
that in times of stress gain acceptance, or so it’s
television sets.
Now, however, consumers have changed their
been said.
Now, however, a new mature economy thesis
ways of living a little. They are settling down, im
may be developing. It is different from the first. It
proving their homes by gardening, adding an out
isn’t shrouded in gloom. It has a Hollywood end
door fire place, an extra bathroom, recreation
ing— happy.
room, or bedroom.
12
business re v ie w
Instead of buying a new car as soon as pay
profits for his firm. As such, the new mature busi
ments on the old one stop, consumers are looking
nessman’s spending is said to be much more stable
to other areas of spending. Advertisements remind
— less subject to sudden violent swings one way
them that a swimming pool can be installed in the
or the other.
back yard for the price of a new car. Some con
The original mature economy thesis was pretty
sumers have figured out for themselves that if they
much an explanation for the virtual collapse of
drive their present car even after its ashtrays are
business spending on new plant and equipment in
full, they can afford an occasional trip to the shore
the 1930’s. The new mature economy thesis pur
or mountains, a dinner out for the whole family
ports to prophesy that spending on plant and
every now and again, a new suit for dad before
equipment has reached a plateau from which as
the old one looks frayed, and, of course, another
cent will come only very slowly until later in the
new hat for mother.
1960’s.
Like homes and cars, television sets are still
On the surface, there is much to support the new
popular but they don’t seem to command quite as
thesis. Certainly, capacity in many industries
much consumer attention as heretofore. Consum
seems more adequate than heretofore in the post
ers now talk of a piano for the recreation room,
war period. For example, we have proven that we
air conditioning for at least one bedroom, a
can make more houses, cars, and television sets
clothes dryer in the basement, and an automatic
than we are currently consuming. But the chang
dishwasher in the kitchen. Records, rock and roll
ing nature of consumer demand prophesies inade
and classical, are enjoying new and increased at
tention. Hi-fi sets and tape recorders are being
quate capacity in other lines.
Also, while the age structure of our population
bought at all levels of the income ladder. Lobster
makes for a relatively low level of household
tanks and high priced appetizer counters in neigh
formation, it also promises slower growth in our
borhood supermarkets are signs of the times.
working population. And many businessmen are
Yes, a case can be made for calling the con
guessing that wages and salaries will continue to
sumer mature. But exactly what do we mean when
climb. What these forces suggest is that employ
we talk of mature consumers. Are we talking about
ers will be under constant pressure to invest in
people withdrawing from the market place and
labor-saving machinery.
hoarding funds under the mattress? Or do we
The new mature businessman, therefore, may
mean to say that consumers have sharpened their
find himself investing more in the next 10 years
taste buds, and are searching for new ways ( most
than he did in the past decade. This may sound
of which cost money) of enriching their lives.
fanciful to some, but it is a real probability.
The mature businessman
The mature government
The new mature businessman is said to be much
It seems that government ^pending as a portion of
different from his pre-war counterpart. He is not
our total product has been expanding since most
frightened into hasty, ill-timed actions by gyra
of us can remember. There has been good reason
tions in the stock market. He thinks in the long
for this. In a society like ours, the demand for
run not the short run. He thinks of the broad social
services from government is constantly growing
implications of his actions as well as the effect on
— not only for traditional services but also for
13
business re v ie w
new services. During many of our lifetimes the
notes very old age and senility. If the word
government has taken on new services such as
“ mature” were taken without these connotations,
economic
it might be fairly descriptive of the current scene.
policy, and the encouragement of steady economic
growth. Of course, the main reason government
Our economic system seems more adult than in
earlier years, and only a few would deny that
spending is so high today has to do with wars—
our major consuming groups have grown up.
lending,
underwriting,
anti-cyclical
past and potential.
If the interim period were changed to “ transi
tion period” it might suit better also. What seems
The new mature economy thesis says that gov
ernment spending as a part of total spending has
to be happening is that, for the moment at least,
hit its peak. For the next few years, at least, it will
the demand for some traditional items of mass
be a slowly declining part of Gross National Prod
consumption may be running out of steam. In the
uct. This seems to presuppose some relaxation of
meantime, new mass markets for air conditioning,
international tensions, since other government
hi-fi sets, dishwashers, outboard motors, and the
spending seems almost certain to increase. Cer
like are developing.
tainly state and local spending for schools and
In the past, transition periods have been
highways looks as if it will continue to climb. And
punctuated by recessions and depressions. De
anyone projecting a decline in the demand for
clines in the demand for business bellwethers so
Federal services is betting against the odds.
shocked the investing community as to cause
It is entirely likely that government spending
sharp drops in capital spending. This time the
will form a smaller part of total spending in the
transition
near future. This, however, seems to depend upon
bridged. More mature (adult) reactions on the
promises
to
be
more
successfully
a marked reduction in demand from the military.
part of business leaders is one reason. Another is
As good a guess as any might be that the govern
the very heavy volume of Government spending,
ment sector will continue to take about the present
which tends to cushion the reverberations coming
bite from the total income pie.
as a result of increases and declines in consumer
demand for different products. The fact is, our
CONCLUSIONS
economy could very possibly enjoy at least as
To some extent, the whole question is a matter of
rapid a rate of growth in the “ transition” period
semantics. Mature economy, unfortunately con
ahead as it has over the years since the war.
14
b usiness re v ie w
FIRST-HALF BANKING-THIRD DISTRICT
Outstanding credit of member banks in the Third
present year. The average level in the last half of
Federal Reserve District increased relatively little
June was $8,231 million, as compared to $8,040
in the first half of 1957, duplicating performance
million in the corresponding period of 1956. Part
a year earlier. Loans expanded and investments
of this increase, less than one-third, was due to the
declined in both periods, but the changes were
merging of nonmember banks into member banks
smaller this year. The higher level of loans and
of the Federal Reserve System. The over-all in
somewhat higher rates of return contributed to
crease was largely in time deposits.
further growth in the total income of banks, but
Earnings of member banks in this District
rising expenses and subsequent adjustments pro
totaled over $174 million in the first half of 1957,
vided sufficient offsets to cause a decline in profits
according to preliminary tabulations. The increase
available for distribution.
over the corresponding period a year ago was
Over the six months ended June 26, growth in
more than $13 million, after mergers are taken
loans approximated $150 million or nearly 4 per
into account. This increase, due mainly to growth
cent. This increase, while substantial, was about
in loan portfolios and some increase in rates of
$100 million less than in the corresponding period
return on earning assets, was largely offset by
a year earlier. The bulk of the increase was out
heavier current expenses, with the result that net
current earnings were up only $1^2 million. To
arrive at the amount available for distribution,
side of Philadelphia, while in the earlier period
increases in loan portfolios were more equally
divided between Philadelphia institutions and
further adjustments have to be made. The figures
banks elsewhere in the District. The latest date for
show an increase in net losses and transfers to
which loan details are available for all member
valuation reserves and a moderate increase in in
banks is June 6. Compared with the turn of the
come taxes, with the result that net profits were
year, the figures show expansion most pronounced
down $2 million to approximately $27^2 million.
in commercial and industrial loans, with smaller
Dividend payments increased.
increases in consumer paper and miscellaneous
loans and virtually no change in those on real
M EM BER
Th ird
C ha ng e fro m
F i r s t h a lf
a year
1957*
a go **
....................................
$ 3 8.0
+ $
O n l o a n s ...............................................
1 0 9 .7
estate. The lack of change in the latter was the re
sult of a decrease at Philadelphia banks and a
BANKS
Fed. Res. D is tric t
(M illio n s $)
E a r n in g s :
further rise outside of the city. Later in June,
On
business loans increased further, reflecting cor
O t h e r e a r n i n g s .................................
26.8
T o t a l e a r n i n g s ..............................
$ 174.5
porate borrowing over the income tax period.
Near the middle of the year, deposits of all
member banks in the District were higher than
s e c u r it ie s
C u r r e n t e x p e n s e s .................................
1 1 0 .6
N e t c u r r e n t e a r n i n g s ........................
$ 6 3.9
to
r e s e rv e s
.........................................
T a x e s on in c o m e ....................................
gain in the last half of 1956. As in other recent
C a sh d iv id e n d s d e c la re d
10.3
+
2 .0
+ $ 1 3. 4
+
1 1.9
+ $
1.5
14.2
+ $
3.1
2 2.3
27.4
+
- $
A
2 .0
17.0
+
1.8
N e t lo s s e s a n d t r a n s f e r s
they were a year earlier, reflecting a substantial
years, deposits declined in the first half of the
U
+
N e t p r o f i t s ................................................
............
$
$
* P r e lim in a r y t a b u la t io n .
* * A d ju s t e d
f o r m e rg e rs , e t c .
15
FO R TH E R E C O R D . . .
BILL!
^
1
MEMBER BA N KS 3RD F. R D.
BANKING
D EPO SITS
/ \
y^Li
il/A tk
_ / \ A
8
7 CHECK PAYM ENTS
(20 CITIES)
6
LO A NS
—
-
__________________
4
T
IN V ES TM E N TS
2 YEARS
\GO
Third Federal
Reserve District
Per cent change
mo.
ag o
OUTPUT
M anufacturing production. . .
0
C o a l m ining................................ + 1 2
EM PLO YM EN T A N D
IN C O M E
Factory employment (T o t a l) .. .
0
+
TRADE**
Department store s a le s ............ +
+
B A N K IN G
( A ll member banks)
Deposits.......................................
Lo a n s............................................
Investments..................................
U .S. G ovt, securities..............
O t h e r .........................................
C h e ck paym ents........................
1
5
2
year
ago
6
mos.
1957
from
year
ago
-4
-4
+7
-2
0
Per cent change
Ju n e
1957 from
6
mo.
ag o
year
ag o
mos.
1957
from
year
ago
0
+6
+2
+5
+2
-1
0
0
0
0
+1
+1
+2
+4
+5
+
+
-
1
2
3
4
+3
+4
0
0
+
-
1
7t
+2
+1t
+3
+5
-1
0
-2
+ 3 t
+2
+2
+1
+2
-2
-3
0
-2
+2
+3
+2
+7
+8
-3
-4
-2
-3
+1
+4
0
01
•Based on 3-month moving avera ge s.
••Adjusted for seasonal variation.
16
+31
+ 3t
+1
t2 0 C itie s
{Ph ilad e lp h ia
LO CA L
C H A N G ES
C h e ck
Payments
Per cent
Per cent
change
change
June
Ju n e
1957 from 1 957 from
mo.
ag o
Sales
Payrolls
year mo.
ag o ago
Stocks
Per cent
Per cent
Per cent
change
change
change
Ju ne
Ju n e
Ju n e
1957 from 1 957 from 1957 from
year mo.
a so ag o
year mo.
ago ag o
year mo. year
ago ago ag o
0
-2
-4
+2
-
8 -
1
H a rris b u rg . .
+1
+3
+2
+9
-
3 +
3
Lancaster. . .
+2
-1
+2
+4
-9
+10 -
8 +
2 -
8 -
3
P h ila d elp h ia.
0
+1
+1
+5
-1
+
3 -
7 +
8 -
9
0
R e a d in g........
0
-2
0
+1
-3
+17 -1 0 +19 -1 7
Scranton. . . .
+1
-1
+
2 . +2
-7
+
4 -
8 -
3 -
Trenton.........
0
-1
+1
+6
+9
+
4 -
1 +
7 -1 0 +25
2 -
+1
+4
-1
+7
PRICES
Consum er.....................................
Employ
ment
JUNE
1957
Department Store
Factory*
United States
SUMM ARY
Ju n e
1957 from
YE * R
AC7O
+3
+3
+3
+4
-
6
4 -
2
1 +10
W ilk e s -B a rre . + 1
+1
+2
+6
-3
-
1 -
7 +
W ilm in g to n .. .
0
+3
+2
+7
0
+
6 -
7 +11 + 15 +
1
Y o r k .................
+1
-5
+2
-3
+8
-
1 -
7 -
5
8 -
3 -
•Not restricted to corporate limits of cities but covers are a s of one or
more counties.
@FedFRASER