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A Difference in Paychecks . . . Paychecks of workers in the Philadelphia Federal Reserve District are in part a matter of geography. The Changing Public Debt . . . Significant shifts in the structure and ownership of Federal and state and local government debt have implications for the liquidity of financial institutions and for monetary policy. B U S IN E S S R E V IE W is produced in the Department of Research. Evan B. Alderfer is Editorial Consultant. Donald R. Hulmes prepared the layout and artwork. The authors will be glad to receive comments on their articles. Requests for additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania 19101. Last month we pointed out large disparities among metropolitan areas within the Third Federal Reserve District in employment, groivth and unemployment.* The differences do not stop there, 1 for there is also . . . A DIFFERENCE IN PAYCHECKS by Richard W. Epps Curiously, as new plants are being established into three distinct groups, as shown in Chart 1. in some areas of the Third District workers are Wilmington, Trenton, Philadelphia, and Allen- moving out. These contrasting trends both result town-Bethlehem-Easton from approximately the same causes. People move out because there are too many workers wages.2 The average worker in Wilmington, the top district area, gets about $150 a week. At the for available jobs and pay is low. Businessmen other end of the scale are three fairly low-wage need workers to produce their products, and the areas: less they have to pay to get workers the better Hazleton— with workers in the Wilkes-Barre- Altoona, lead with fairly high Scranton, and Wilkes-Barre- off they are. A pool of unoccupied workers and Hazleton area averaging only about $80 a week. low pay, then, is attractive to them. But the businessman is interested in a par The spread between the highest- and lowest-wage ticular measure of wages when he compares areas— just how much he will have to pay per hour for a worker in a particular occupation. Even after adjusting raw wages to represent areas is over 80 per cent. Between the two extremes are five more areas averaging between $1 and $2 of each other: Johnstown, Reading, Lancaster, York, and Har risburg. similar occupation and work-week composition — looking at wages as a manufacturer would Inside the averages view them in deciding where to locate— we find So much for average pay checks. What happens substantial differences among areas. Moreover, in large part these contrasts are growing, with when we adjust these wages for differences in types of workers?4 Wilmington, for example, has the rich getting richer and the less-well-off getting a large number of engineers and male workers; comparatively worse off. Scranton and Wilkes-Barre-Hazleton have more unskilled employees and a larger share of female The wage record The metropolitan areas2 in the Third District fall * 'S ee “ From Surplus to Shortage,” Business Review, July, 1967. 'There are 13 areas in the Third Federal R eserve D is trict defined as Standard M etropolitan Statistical Areas b y the U .S. Bureau of the Budget, Office of Statistical Standards. The num ber of these areas included in vari ous portions o f this analysis varies from 10 to 12, d e pending upon availability of the required data. 3A detailed wage analysis for Philadelphia is reported in the February, 1967, Business Review in an article en titled “ Inside Philadelphia W orkers’ P a y Envelopes.” i The wages were adjusted b y (1 ) estimating the wage advantage or disadvantage which results from each area’s occupation-sex com position, and (2 ) rem oving this ad vantage or disadvantage from the average wage of the area. The advantage-disadvantage is based on the wage that would be exp ected if all local em ployees received the average national wage o f their occupation-sex classifi cation. These data are only available for 1 9 6 0 ; thus the adjustm ents shoidd be regarded as approximations. 3 b usin ess r e v ie w CHART 1 DIVERSITY IN WEEKLY WAGES Wide variations among the raw average wages in metropolitan areas of the District (the bars on the left) are reduced somewhat by an adjustment for variations in the occupation-sex composition of each local workforce. A verage w eekly wages. A verage w eekly wages adjusted fo r differe n ces in occupation and sex com position. D olla rs workers. These differences in types of workers partially explain the wage contrast. A second way of adjusting is to take account Chart 1 shows the actual wage for each area of the length of the work-week. Considering manufacturing only and forgetting about all and the wage level adjusted for occupation and other industries in each area, we notice some sex composition. Generally, the higher-pay areas rather large discrepancies in length of the work also have the kinds of workers that would week. Chart 2 shows the effect of this further normally command higher wages anywhere. But adjustment.1 Differences, once again, are dimin ’ they still pay more than the sex-occupation com ished, but considerable variation remains. position would suggest. The opposite is true in the low-pay areas. They have more of the types Beneath the differences of workers who usually command a low wage, We started out with a difference of better than and pay even lower wages than such sex-occupa 80 per cent between the average pay check in tion compositions would suggest. the highest- and the lowest-wage area. Now, after adjusting for types of workers and length of The same worker filling the same type of job with the same duties, in other words, would work-week the difference is more like 15 per cent. command more pay in Wilmington than he Again, this figure is important. It is $12 a week, or $624 a year— enough to buy a small foreign would, say, in Scranton. After accounting for the occupation and sex structure, the 80 per cent variation in average wage is reduced but not eliminated. This first adjustment of the raw wages, then, still leaves big differences among areas. 4 car every three years, or to pay one semester’s college tuition every year.5 5The wage level for the sex-occupation-hours com posi tion was determined by w eighting the wage levels, which were already adjusted for occupation-sex com position, by the length of the work-w eek in each area. b usin ess re v ie w CHART 2 HOURS MAKE UP MORE OF THE WAGE DIFFERENCE Variation in the length of the workweek makes up much of the difference in ivages among areas (considering only wages of manufacturing workers). Wages adjusted only for occupation and sex composition o f the labor force (shown by the bars on the left) have more variation than do wages adjusted for occujxition, sex, and workweek composition (shown by the bars on the right). W ages of m an u fa c tu rin g w o rk ers adjusted fo r occupation and sex com position o f th e labor fo rce . W ages of m an u fa c tu rin g w o rk ers adjusted fo r occupation, sex, and w orkw eek com position. D o lla rs Sources: D a ta a re fro m E m ploym ent and Earnings Statistics for States and Areas, U .S . D ept, o f C o m m erce; 1960 Census of Population, U .S . D ep t, o f C o m m erce. What we have done thus far is to reduce the Scranton comes out the lowest. percentage variation so that we are looking at Chart 3 compares, for manufacturing, the the difference in pay which a businessman might average weekly wage of each area adjusted for expect to find in locating in one area or another sex composition, occupation structure, and length of work-week (as seen in Chart 2) to the average and in offering the same types of jobs in each area. A second question arises— one that is im portant to those having a long-term interest in an area. What causes the differences in pay, and what may be done about them? There are several weekly wage appropriate for the industrial mix of each area. The industrial mix turns out to be a particularly important element for the extreme areas. The low wages in Scranton and Wilkes- answers. Two are of principal importance: high- Barre-Hazleton are the product of a heavy con and low-paying industries and productivity. Let’s centration in low-wage industries which manu facture nondurable goods, particularly apparel, take these one at a time. and an under-concentration in high-wage indus Mix of industries tries which manufacture durable goods such as The balance among industries that normally pay primary metals. At the other extreme, Wilming high or low wages can affect an area’s average ton’s high wages are a result of the chemicals pay check. For example, one of the principal complex, and Allentown-Bethlehem-Easton’s of a reasons Wilmington achieves such a high ranking large share of metals manufacturers. is that much of its employment is concentrated in the chemicals industry — an industry which What makes a high-wage industry? typically pays high wages. Each area’s industrial One of the main items in an industry’s wage setting process is the amount an industry can composition is unique, meaning something dif ferent for the average wage and, in part, explain afford to pay its workers. This is largely a result ing the inter-area pay differences. Wilmington’s of productivity. If productivity is high, such industrial structure gives it the largest edge; that the industry can make a substantial profit, 5 business re v ie w CHART 3 THE INDUSTRY MIX IS IMPORTANT IN DETERMINING WAGES The wage level suggested by the balance among industries that typically pay high wages and those that usually pay low wages (charted on the horizontal axis), has much to do with the wage variation that remains after adjusting for sex, occupation, and workweek differences (registered on the ver tical axis). M a n u fa c tu rin g W age Adjusted fo r Sex, O ccupation, and W orkw eek (D o llars) Chart 4.) In Wilmington, productivity is above what the industry composition suggests. As one goes down the scale, the actual productivity turns out, in every other area, to be less than would be suggested by industry composition. This means that manufacturing in Scranton, for in stance, not only has low-productivity and the associated low wage which results from its disad vantageous mix of industries, but has addition ally low productivity which puts a further dent in incomes. The lower-wage areas have at least a twofold problem. First, they have industrial structures which, under normal circumstances, mean low productivity and consequent low wages. Second, they have other factors (one of which is analyzed below) producing lower productivity and wages than can be traced simply to their industry mix. Anatomy of productivity Output of workers is, in large part, a result of workers can be paid a fairly high wage. On the other hand, if product per worker is low, a high wage would be difficult to pay even by the most altruistic owners. In the chemicals industry, where production methods are highly automated and a vast com plex of equipment is used, product per worker is high. In the apparel industry the amount of equipment is relatively limited; it takes a lot of labor to turn out the products, and productivity and wages are low. Thus, Wilmington has the highest productivity per worker; Scranton and Wilkes-Barre-Hazleton tie for last among the areas. But productivity suggested by the industry composition does not agree completely with actual productivity.6 (See 0Productivity suggested b y the industrial com position is what each area’s productivity would be if all of the local industries operated at the productivity rates of their national counterparts. 6 the tools they are given to work with. In the examples of the chemicals and apparel indus tries, differences in the amount of equipment used are important in determining the different production levels per worker. Hence, areas with low productivity have rela tively low levels of investment in factories and machinery. Chart 5 points this out. Productivity and investment figures decline together. Capital investment, in turn, is partly the result of the wage level, because the industrialist has two factors to use in production— labor and capi tal. If labor is cheap and capital (machinery) is fairly expensive, the industrialist will use more labor and less capital. If labor is expensive, he will be more lavish with capital than labor, always seeking the cheapest combination. Inas much as wages have been low for some time in many areas of the Third District, this partly explains the low level of investment. Of course, b usin ess re v ie w CHART 4 WORKER PRODUCTIVITY IS LOW For all areas except Wilmington, productivity, shown by the bars at the left, is below the rate suggested by the local types of industries, recorded by the bars on the right. This means that industries in these areas are generally operating at lower produc tivity levels than their counterparts elsewhere. Actual produ ctivity rates. Produ ctivity rates ap p ro p ria te fo r th e m ix of high-and low -productivity indus tries . V a lu e A dde d in M a n u fa c tu rin g p e r E m p lo yee H o u r (D o lla rs ) other elements are important in determining the levels of capital investment. For example, the range of technology available for any particular production process may be limited. Men’s shirts must be sewed individually, by one person using one sewing machine. The industrialist may not CHART 5 LOW WORKER PRODUCTIVITY RESULTS PARTLY FROM LOW CAPITAL INVESTMENT The vertical axis represents productivity, and the horizon have many alternatives in the way he combines tal represents capital investment. There is a strong tendency capital and labor. Still, in almost every industry for productivity to increase with increasing capital invest there is some range of choice, with the wage ment. P ro d u c tiv ity (V a lu e A d d ed p e r H o u r p e r Em plo yee; D o lla rs ) level being a factor in selecting the process to WILMINGTON* use.7 The connection between investment and wages completes a circle. Low wages often lead to low • PHILADELPHIA 7Lack of capital investm ent, independent of the ivage level, might result fro m : (a ) Poor or uncertain prospects for growth o f an area or of firms in the area lim iting the willingness of lending institutions to extend credit and o f enterprises to go into debt. ( b ) Capital in place m ay be particularly old and of a lower-than-normal efficiency. This might be especially the case in lagging areas where the rate of renewal of capital is probably low. ( c ) There may be an overly large num ber of small sized firms which cannot make use of the more capitalintensive, large-scale, production techniques. (d ) M anagem ent may not be familiar with the newer, more capital-intensive production technology. • UNITED STATES LANCASTER % HARRISBURG • JOHNSTOWN > WILKES BARRE-HAZLETON • SCRANTON C a p ita l E x p e n d itu re p e r W o rk e r p er H o u r (D o lla rs ) S o urce: Five y e a r av e ra g e fig u re s fro m The Census of Manufacturing, and th e Annual Survey of Manufacturing ( 1 9 5 8 1 9 6 3 ) . 7 b usiness r e v ie w capital investment; low capital investment leads to low productivity; and low productivity makes it necessary for an industrialist to pay low wages. CHART 6 WAGE DIVERSITY MAY BE INCREASING Generally, the low-wage areas have experienced the slowest The circularity of the problem is a major com increases in wages and the high-wage areas the fastest. The plexity because it poses both the question of where and how to break in. vertical axis records the per cent groivth of the wage level in each from 1958 to 1966. The horizontal axis records the rate of growth suggested hy changes in the mix of high- and Wage trends Adding to the problems of low wages and low productivity are the directions in which the wages have been moving. Generally, the high- low-ivage industries. Two patterns are present. First, the lowwage areas are generally the slower growing. Second, much of the wage growth is explained by the change in industry mix. P e r C e n t G row th ( 1 9 5 8 - 1 9 6 6 ) wage areas have experienced faster increases in wages than have the low-wage areas, thus ex panding the spread among areas. Chart 6 points out this record. Of the lowwage-paying areas, one — Altoona — has broken out to perform strongly, achieving fourth posi tion among the areas for which records are available. But the other two low-wage areas — Scranton and Wilkes-Barre-Hazleton— remain at the bottom of the list. Trenton, Allentown-Bethlehem-Easton, and Reading — along with A l toona —- fill out the upper third of the list. All the elements underlying differences in wage levels among areas are also involved in wage changes. But, except for the industry-mix factor, effects have been small or changes have not been measured. Chart 6 shows wage changes that Sources: E stim ates based on d a ta fro m U .S . D ep t, o f C o m m e rc e , B u re a u o f th e C e n sus, County Business Patterns; U .S . D e p t, o f C o m m e rc e , O ffice o f B us. E con., Sur vey of Current Business; U .S . D e p t.o f L a b o r, B u re a u o f Lab o r S ta tis tic s , Em ploy ment and Earnings Statistics for States and Areas. would have been suggested by changes in the mix together with actual changes in wages. The two are very close, indicating the importance affects all areas in the same way, however. The of industry mix. other three factors produce differences among There are four components involved in the areas. Which of the other three is most impor change of industry mix: two deal with wage-level tant varies from area to area. For Reading the changes; one deals with alterations in the propor shift of employment— the employment compo tion of employment in each industry; and one nent— has been the major factor. In particular, incidental factor deals with the interaction of the decline of employment in textiles— a low- wage and employment changes. By far the most wage industry — and the expansion of employ important factor has been the first— the amount ment in machinery and electrical equipment of wage increase common to all industries. This manufacturing (both high-wage industries) are the 8 b usin ess re v ie w CHANGES IN INDUSTRY M IX The changes in wage level suggested by each area’s industry m ix, which have had a large impact on wage growth (see Chart 6 ) , resulted m ostly from two factors. The first is the shift in balance o f em ploym ent betw een highand low -wage level industries. The second is distribution o f em ploym ent betw een industries that experienced fast and slow wage growth. The table lists how each area stood on these factors and which o f the two was the more important in the 1958-1966 period (as indicated in the footn ote). Results o f the industry m ix were best in the areas in the upper left-hand box, having both a shift to highwage industries and concentrations of industries receiving the fastest wage grow th. T hose in the low er right-hand box fared the worst, experiencing a net shift to low-wage industries and having concentrations of businesses that received the low est wage growth. Trenton was an exception. A ccord ing to the industry-m ix changes it should have had very little w age-level growth. In fact, for reasons not exam ined in this article, it had the fastest wage growth o f all the areas. Shift of employment between industries paying high and low wages Distribution of employment between fast and slow wage-growth industries Concentration in fast wage-growth industries Concentration in slow wage-growth industries Shift to high-wage industries Reading1 Allentown-Bethlehem-Easton2 York2 Philadelphia1 Lancaster1 Wilkes-Barre-Hazleton2 Shift to low-wage industries Wilmington2 Altoona2 Johnstown2 Harrisburg1 Scranton2 Trenton1 1E m p loym en t shift. 2IF age growth. major reasons for the wage-growth lead. In con trast, the strong wage expansion in Wilmington are reasons for optimism, however. First, Al toona, one of the low-wage areas, has experi has been mainly a reflection of above-average wage gains in the chemicals industry— the second enced rapid wage growth. Second, recent signs in wage component— not of a shift in employment areas, indicate the beginnings of a turnaround. from one industry to another. Table 1 lists each In the past few years substantial employment Wilkes-Barre-Hazleton, another of the low-wage area’s standing on these two factors, and indi gains in this area have occurred in some of the cates which has been the more important. high-wage, durable-goods manufacturing indus tries. Third, low-wage areas have some of the Fortunes on balance normal economic processes going in their favor. Wage differences among metropolitan areas are Low wages often attract employers. If rapid rises in employment should thus occur, employment greatly reduced when adjusted for types of workers and length of the work-week. But dif markets will become tight, leading to some in ferences still exist and may be increasing. There creases in wages. 9 THE CHANGING PUBLIC DEBT by William F. Staats Two decades ago, states and local governments held by public owners jumped from just over owed about 57^ out of every $10 of public debt 23 per cent in 1946 to 41 per cent in 1966. The outstanding. The Federal Government owed the remaining $9.43. Now, the proportions are $2.40 and $7.60, respectively. At the same time, owner amount of Federal debt owned by the private sector has dropped by about $23 billion to less ship of the debt has been changing; a much smaller proportion of Federal debt and a larger ings by financial institutions fell $40 billion from 43 per cent to 22 per cent of the total proportion of state and local government debt now are held by private investors. accounted for 44 per cent of the decline in What do these changes suggest for the quality of investment portfolios of financial institutions? holdings of financial institutions. In marked contrast with Federal debt, the pro For markets for public debt ? For m onetary policy ? than three-fifths of the total outstanding. Hold outstanding.3 Commercial banks alone have portion of state and local obligations held by the private sectors has increased from about 82 per Shifts in public debt Total public debt outstanding has increased 58 per 3Includes commercial banks, and insurance companies. mutual savings banks, cent since 1946. But Federal Government debt outstanding has risen only 27 per cent while state and local government debt has soared about 572 per cent.1 In the process, state and local obligations have increased from about 6 per cent of total public debt to over 24 per cent, as CHART 1 STATE AND LOCAL AND FEDERAL DEBT AS PERCENTAGE OF TOTAL PUBLIC DEBT, 1946-66 Per Cent shown in Chart 1. In addition, significant changes have occurred in the ownership of both Federal and local gov ernmental obligations. Obligations of the Fed eral Government have shifted from “ private own ers” to “ public owners.” 2 As shown in Chart 2, the proportion of Federal Government debt 1A g en cy issues are not considered part o f Federal debt because they are not all fu lly guaranteed by the U.S. Government. In many cases they do represent “ public” d e b t; however, in other cases they only represent owner ship in a pool of private debt held by the agencies. 2“ Private owners” includes individuals, m ost privately ow ned or operated financial institutions, and nonfinancial corporations. “ P ublic owners ” are U nited States G overn ment agencies and trust funds, Federal R eserve Banks, and state and local governm ental entities. 10 S ource: A nnu al R eport o f th e S e c re ta ry o f th e T re a s u ry , 1 9 6 4 - 6 5 . In fo rm a tio n for 1 9 6 6 secured fro m T re a s u ry D e p a rtm e n t. b usiness re v ie w Governmental agencies have expanded hold CHART 2 OWNERSHIP DISTRIBUTION OF FEDERAL GOVERNMENT DEBT Per C e nt ings of Federal securities for various reasons. First, growth of Government trust funds such as the Federal Old Age and Survivors Insurance Fund (Social Security) whose assets are invested in Federal Government securities results in expanded Federal ownership of its own debt. Second, the Federal Reserve System’s holdings of United States Government securities has grown as the Fed has relied primarily on open market operations to provide the economy with money and credit. And third, state and local govern ments— particularly through their pension funds — have sharply increased their investments in Federal debt. In summary, the shift in ownership of Federal Source: A n n u a l R e p o rt o f th e S e c re ta ry o f th e T rea s u ry , 1 9 6 4 - 6 5 . In fo rm a tio n fo r 1 9 6 6 se c ure d fro m T re a s u ry D e p a rtm e n t. debt has resulted from both a decreased demand from the private sector— particularly from finan cent to just under 95 per cent. Moreover, that owned by financial institutions has jumped from 31 per cent to over 52 per cent. Individual investors have held a fairly stable proportion of Federal as well as state and local government debt so that most of the shifts in ownership of public debt can be attributed to cial institutions— and an increased demand from governmental entities and agencies. Implications for financial institutions Investors have a wide array of investment alter natives from which to choose and a variety of financial institutions — particularly to commer needs to be satisfied. Basically, the needs of a cial banks. Their reallocation of resources for depository financial institution are two — earn merly held in United States Government securi ties has been prompted primarily by profit con ings and liquidity. The financial manager’s job siderations. Caught in a web of rising costs and those assets which earn most are least liquid — with loan demand lagging inflows of deposits, that is, they are least readily converted into cash is made difficult by the unfortunate fact that commercial bankers have sought to place funds quickly without loss. And conversely, those in in higher-yielding investments. After-tax yield vestments with greatest liquidity earn least. So, differentials have caused the shift out of Federal the problem of investment management is to debt obligations and into state and local govern construct a portfolio which balances earnings ment securities.4 * against liquidity. To accomplish this, the finan *See “ The M o v e to M u n ic i p a l s F e d e r a l R eserve Bank of Philadelphia , Business Review, Septem ber 1966, and “ Com m ercial Banks and the Municipal Bond M a rket,” Federal R eserve Bank of Philadelphia, Business Review, February 1967 for discussions o f the dimensions and im plications of bank investm ent in state and local govern ment bonds. cial manager must include several types of in vestments in his portfolio, each type contributing in different measure to earnings and liquidity. Now, what is the effect of substituting state and local government securities for Federal Gov- li b usin ess re v ie w eminent securities in the portfolios of financial only in the 1959-1960 period did the differential institutions? The answer lies in the relative between municipal yields and those on Federal earnings-liquidity of bonds fail to decrease. In other recent periods securities. As for earnings, municipal securities carry mix of the two types of generally rising interest rates, the differential narrowed as prices of state and local obligations higher after-tax yields than Federal Government fell faster than prices of Federal securities. Thus, securities of comparable maturity. The question of liquidity is less clear. although Federal debt and most state and local There are two elements of liquidity — a price the latter tend to be somewhat less liquid than Federal securities. element and a time element. The time element obligations have about the same marketability, can be labeled marketability and defined as the If we adopt the accountants’ “ going concern” convertibility of assets into cash immediately (with no regard for price). Marketability is a necessary but not sufficient condition to liquidity. concept and assume that financial institutions are not going out of business, the shift from Fed Thus, an asset may be highly marketable and yet illiquid if it can be sold quickly hut only at a loss. United States Government securities and most municipal bonds can be converted into cash eral debt to state and local debt does not neces sarily result in weakened institutions. Over time, greater earnings of a portfolio heavily weighted with municipal bonds may result in a larger, more diversified portfolio and, therefore, a more viable institution.5 But at any point in time, such 6 quickly.'"’ And, except under extreme conditions a portfolio probably would be less liquid than such as occurred during some days in 1966, one heavily weighted with United States Govern existing marketing channels and institutions are ment securities. able to accommodate trading in both types of Thus, some concern over asset values was evi obligations. For a large volume of issues there dent in 1966 when market prices of municipal is no perceptible difference in marketability securities plummeted to the lowest levels in four between state and local debt and Federal secu or five decades. Although prices of other fixed- rities. income securities also dropped sharply last year, But because of interest-rate variability, fixed- greater relative losses were chalked up in state income securities may have to be sold at a loss. and local government bonds largely because of There may be a difference in the price stability of each type of security. While statistical evi heavy liquidations by large commercial banks. dence is difficult to secure, municipal bonds The possible adverse liquidity effect upon financial institutions of the switch from Federal appear to have relatively larger price fluctuations than United States Government securities. For debt to state and local obligations may be elimi example, in two of the three recent periods of restrictive monetary policy, yields on municipals provements in the secondary market for munici nated or at least substantially reduced by im pal bonds. Many improvements have been made rose faster than yields on Government securities in this market — and probably more are yet to of roughly similar maturities. Chart 3 shows that come. In time, perhaps, fluctuations in municipal 5O f course, there are som e municipal bonds which appeal to investors only in a lim ited geographical area. Securities such as these may be difficult to sell in the secondary market. 0In certain instances, gains in current earnings may be partially or w holly offset by somewhat higher capital losses which may be sustained on the sale o f municipal bonds during periods of lofty interest rates. Digitized for12 FRASER b usin ess re v ie w CHART 3 YIELD DIFFERENTIAL BETWEEN LONG TERM UNITED STATES GOVERNMENT SECURITIES AND LONG-TERM MUNICIPAL SECURITIES FOR SELECTED PERIODS OF RESTRICTIVE MONETARY POLICY 1955 1956 1957 Source: Federal R eserve Bulletin a nd The W eekly Bond Buyer. bond prices may be moderated so that liquidity characteristics of state and local government result, prices may swing more widely. How would a thinner Government securities securities will market affect monetary policy? The principal more closely match those of United States Government securities. tool of counter-cyclical monetary policy is the Implications for monetary policy Federal Reserve’s open market operations— the purchase and sale of Federal Government debt. A second implication for the future of these When the Federal Reserve buys Governments in shifts of public debt is that the market for United States Government securities may become “ thin the market, their prices tend to be pushed up, resulting in lower interest rates. Then, these ner” and price fluctuations may tend to increase. Here’s why. One of the major criteria of a good changes are communicated to prices and interest rates in other markets. When securities are sold, securities market is that there should be a free the directions of change are reversed. interplay between the largest possible number A thin Government securities market would of buyers and sellers so as to assure price con intensify the potential impact of open market tinuity from one trade to the next.7 As the volume of Federal Government securities in the private operations on interest-rate levels. So, the Fed eral Reserve System probably could achieve a sector drops, the number of buyers and sellers desired interest-rate effect with a smaller volume shrinks and the market becomes thinner. As a of transactions. 7Irwin Friend, et al., The Over-the-Counter Securities Markets (N ew Y o r k : M cG raw -H ill B ook Com pany, Inc., 1958), pp. 3-4. open market transactions — the other being the But the rate effect is only one of the results of bank-reserve or money-supply effect. Thus, sup 13 b usin ess re v ie w pose the Fed decides that economic conditions securities would be for the Fed to conduct open warrant an increase of commercial bank reserves market operations in certain debt issues of Fed through open market operations. A thin Govern ment securities market would make it more eral Government agencies. difficult to accomplish the desired increase in reserves without wide price and, consequently, Conclusions interest-rate fluctuations. The aforementioned implications assume a con In such a case, consideration could be given, tinuation of shifts in composition and ownership of the debt in the same direction as during the assuming appropriate legislative changes, to open market operations involving other types of past two decades. This assumption seems war ranted. The demands on state and local govern securities. Theoretically, the Federal Reserve ments for roads, schools, hospitals, and other could conduct open market transactions in mu services will continue to increase. And although nicipal securities. But there are practical and Federal Government debt also will be increasing operational difficulties (not to mention social in the years ahead, it seems likely not to expand and political implications) involved in such a so fast (barring, of course, all-out war) as other public debt. So the probability is a further shift policy. For example, municipal bonds are ex tremely heterogeneous— they are issued by thou sands of government entities in the United States in the composition of public debt away from ranging from the City of New York to the Ysleta Federal to state and local government debt. Moreover, it seems likely that the direction of (Texas) Independent School District and from change in ownership will continue. Public agen the State of Montana to the Running Springs cies will have to increase their holdings of Gov Ranch Protection District in California. At the ernment securities to meet needs of trust funds present time there are perhaps more than 100,000 and to expand bank reserves and the money different issues outstanding with more than 6,000 supply. Some of these needs will be met by new being added annually. The problems of selecting and trading issues would be much more formida issues of Federal debt, but some will also be drawn from debt now held by financial institu ble should the Federal Reserve have to rely upon municipal securities in open market operations tions. The shift of Federal debt from private hands (largely financial institutions) to public instead of upon United States Government obli hands may well continue. gations.8 Perhaps a more likely result of a continued While there is no immediate cause for concern over the slow thinning of the market for Govern shrinkage in the supply of Federal Government* ment securities, both public officials and financial *There are, o f course, other alternatives to open market operations in municipals. A n alternative som etim es m en tioned calls for the Federal R eserve System to conduct a type o f open market operations in Federal Funds. expected to keep closer tab on the shift of Federal 14 managers in planning for the future may be debt out of portfolios of financial institutions. FOR THE R EC O R D INDEX BILLIONS $ Third Federal Reserve District United States Per cent change Per cent change June 1967 from SUMMARY 6 mos. mo. ago year ago from year ago Manufacturing June 1967 from 6 mos. mo. ago from year ago year ago Metropolitan o Id li oLi Cd 1 Areas* MANUFACTURING + CONSTRUCTION** .............. COAL PRODUCTION ........... - 1 0 0 0 +34 1 0 - 6 0 — 2 +64 - 5 + + + + 3 3 1 1 8 0 — 1 i Check Payments** Total Deposits*** Per cent change June 1967 from Per cent change June 1967 from Per cent change June 1967 from Per cent change June 1967 from mo. ago year ago + + mo. ago year ago Wilmington ..... +12 - 2 year ago - 5 + 7 Trenton ............ Altoona .............. + 2 + Harrisburg ........ 0 3 + 2 - — 1 + 4 + 2 + 1 + 6 + 7 + 5 - 4 + 16 + 9t + + + + 7 9 3 5 13 0 + 2 — 1 3 + 6 + 4 + 10 + 2 + 5 + 17 + 12 + 4 + 6 + 6 + 7 0 + 1 + 13 + 7 + 13 + 2 + 1 3 -1 0 - 4 0 - 1 0 - 7 + 5 0 + 8 0 + 6 + 6 + 15 0 + 10 1 + 1 — 4 0 — 2 - Lancaster ......... - 6 - 8 — 8 - 11 + 6 4 - 0 - 3 1 - 4 - Philadelphia ..... + 1 - 1 0 - 1 + 4 1 - 3 Lehigh Valley .. 0 1 0 1 - + 7 Johnstown ....... 1 + 1 1 3 0 + 3t - ago year mo. ago - 1 Atlantic City .... + 6 - 3 mo. ago + 2 BANKING (All member banks) Deposits .............................. Loans ................................... Investm ents........................ U.S. Govt, securities .... Other ................................. Check payments*** .......... Banking Payrolls Employment LOCAL CHANGES 1967 1967 Electric power consumed Man-hours, total* .......... Employment, total ............ MEMBER BANKS, 3RD F.R.D. 1 0 + 4 - 1 + 6 0 + 5 + 13 - 2 + 8 - 1 -3 9 - 2 + 2 + 3 + U ‘ Production workers only “ Value of contracts “ ‘ Adjusted for seasonal variation + 3t + 3t 0 0 + : 3 0 1 + — 2 — 4 + 11 + 15 + 3 + 2 + + + 2 + 8 0 + 8 + 1 — 2 — 2 + 2 — 5 + 7 0 + 8 York .................. + 1 0 + + 4 - + 2 1 + 4 + 11 PRICES Consumer ............................ + Wilkes-Barre .... 8t Reading ............ Scranton ............ + + t l5 SMSA’s ^Philadelphia 3 1 1 8 1 - ‘ 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.
@FedFRASER