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DECEMBER 1949 THE BUSINESS REVIEW FEDERAL RESERVE BANK OF PHILADELPHIA OPERATION BOOT STRAP • . . how Third District communities are using their own capital to build industry [VCCIK- Many towns in the Third District are helping themselves to a brighter future. A number are doing this through industrial development corporations which raise money and help industry acquire new plants. Towns in the anthracite area are especially active in enlarging and diversifying their industrial structure. This issue presents: the reasons for industrial development activity, details about what towns are doing, some pros and cons on the question of giving subsidies to attract industry, and a discussion of how these activities help to meet the shortage of capital. THE MONTH'S STATISTICS Strikes interrupted the industrial recovery begun in September, but nondurable lines made further employment gains and construction activity increased. Bank deposits stayed close to 1949 peaks. THE BUSINESS REVIEW OPERATION BOOT STRAP How Third District Communities Are Using Their Own Capital to Build Industry “God helps them who help themselves” is a proverb Third District communities are putting to practical use. Many towns suffering from unemployment and instabil ity have taken their future into their own hands. A num ber have created “industrial development corporations” to raise money for use in helping industry acquire new plants. No two communities have exactly the same probblems; no two communities are doing exactly the same things. It is important for communities to solve their own problems. But experience has shown that it is not enough to “go out and get an industry.” The community must undertake an intensive and critical self-analysis, must know what it needs, and how to get it. Wherever this is done community development programs can be a vital force in promoting both economic stability and a high standard of living. WHY INDUSTRIAL DEVELOPMENT ACTIVITY? Behind all of this activity is economic change of one kind or another. If the change is the kind that hurts a com munity and if the community does not have a diversified industrial structure that can absorb the shock, something must be done. One of the reasons our American economy turns out more goods and services than any other is that it offers maximum incentives to discover new and better things. This has meant a high and rising standard of living, but it has also meant change and instability. New and grow ing industries often have meant declining old ones. Some areas have expanded, others have contracted. And, in addition, the whole economy has been subjected to alter nating extremes of prosperity and depression. An example of economic change, the basic long-run type, which has meant instability for an important part of the Third District’s economy is the decline in the an thracite industry. The exhaustion of coal deposits, mech anization of mines, and competition from other fuels have posed an increasingly serious problem to people in http://fraser.stlouisfed.org/ Page 120 Federal Reserve Bank of St. Louis the anthracite area. All areas and all sectors of the econ omy have felt the ups and downs of the business cycle, but some more than others. Variations from season to season have been another type of economic change which has presented problems to some communities. These are the basic reasons for industrial development activities. Some communities have been more vulnerable than others because their industrial structure has not been diversified. Specialization—the opposite of diversifica tion—has been a basic factor in our rapid growth, but it has also meant greater vulnerability to change. Com munities which are most active in promoting industrial development are those which need to diversify their in dustrial structure. Diversification may mean many different things, de pending pretty much on what we are trying to accom plish by it. We sometimes think of diversification as a way of becoming self-sufficient. With minor exceptions, the United States has a diversified economy in this sense. So, if the industrial distribution in the United States is used for comparison, we can get some indication of how diversified, relatively, the industrial counties in the Third District are.* As the map indicates, by this measure the most highly diversified area in the Third District sur rounds Philadelphia where metals and textiles are par ticularly important. The least diversified areas are the an thracite and bituminous coal mining regions; Blair Coun ty, Pennsylvania, where railroad repair shops are a major source of employment; and Gloucester County, New Jer sey, where oil refining is dominant. We often think of diversification also as a way of in sulating an area against adverse economic change—sim ply not putting all of our eggs in one basket. The object, of course, is to avoid total collapse of the economy and to be able to recover sooner if one industry declines. All in dustries are affected by the swings of the business cycle, * A percentage distribution of employment among eleven major industry groups was calculated for the United States and for each industrial county in the Third District. The percentage for each industry group for the United States was subtracted from the percentage for each group for a given county. The resulting deviations were totaled disregarding signs, producing a rough indication of the relative diversification of the county’s industrial structure. THE BUSINESS REVIEW so diversification cannot insulate an area completely against such changes. But because the durable goods in dustries usually feel the widest swings from prosperity to depression, the community producing mostly nondurable goods will tend to be a more stable one. Diversification may even minimize the impact of seasonal fluctuations by spreading the work more evenly during the year. WHAT ARE THIRD DISTRICT COMMUNITIES DOING? While no two communities are doing exactly the same things, certain patterns are apparent. Most towns are try ing to solve their problems by bringing in industry. There is nothing new in this, of course. As far back as the last PEN THE THIRD FEDERAL RESERVE DISTRICT INDUSTRIAL COUNTIES industry least diversified INDUSTRY LESS DIVERSIFIED INDUSTRY MOST DIVERSIFIED Diversification is sometimes used to mean other things, such as an industrial structure which fits in with the type of labor available. Towns in the anthracite area, for ex ample, generally look for industries employing men. What ever diversification may mean, this is what most com munities are striving for when they promote industrial development. They are apt to say they want a “balanced economy.” century, towns throughout the Middle West, for example, were actively engaged in attracting railroads and indus tries. Many towns have had industrial development funds for years. One of the oldest is the Scranton Industrial Development Company, which was formed in 1914. Dur ing the depression, other communities became active, often trying to outbid one another for industry. The war brought many changes, but seemed to intensify rather Page 121 THE BUSINESS REVIEW than alleviate the problem of diversification. Toward the end of the war and during the early post-war years, cities were planning how to hold the industries which they had acquired during the war, or how to attract new industries to help ease the transition to peace-time activities. In dustrial development activity spurted. TOWNS WITH CORPORATIONS Pennsylvania Allentown—Allentown Business Extension Corp. Altoona—Altoona Enterprises, Inc. Bellefonte—Bellefonte Industrial Development Corp. Clearfield—-The Clearfield Foundation, Inc. Eldred—Eldred Real Estate Corp. Freeland—Freeland Industrial Development Corp. Hazleton—Hazleton Industrial Development Corp. Johnstown—Johnstown Industrial Commission, Inc. Lansford \ Tamaqua / Coaldale \ Panther Valley Industrial Association Summit Hill V Nesquehoning/ Nanticoke—Nanticoke Industrial Commission Pottsville—Pottsville Industries, Inc. Reading—Greater Reading Development Fund Scranton—Scranton Lackawanna Industrial Build ing Co., Scranton Industrial Development Co., Scranton Plan Corp. Shamokin and nine surrounding communities— Shamokin Area Industrial Corp. Shenandoah—Shenandoah Chamber of Progress Wilkes-Barre—Wyoming Valley Industrial Develop ment Fund, Inc., Wyoming Valley Industrial Build ing Fund, Inc. Delaware Laurel—Laurel Industries, Inc. TOWNS WITH OTHER ARRANGEMENTS TO PROVIDE FOR ERECTION OF INDUSTRIAL BUILDINGS Tyrone Pennsylvania Williamsport Bangor York Chambersburg Delaware Downingtown Dover Dushore Lewes Lebanon Middletown Lock Haven Smyrna Pittston Page 122 The most highly developed form appears in the indus trial development corporation or foundations. In a study of such organizations, the Tulsa Chamber of Commerce has defined them as corporations “provided with funds by public subscription or donation, created for the pur pose of encouraging the industrial development of the community by providing services of a financial nature to new or established industry.” In its survey conducted in early 1949, the Tulsa Chamber obtained information about 72 active foundations in cities of all sizes all over the country. There are undoubtedly more for which no information is available. In the Third Federal Reserve District at least 17 com munities have a corporation to provide financial aid to industries. About as many towns have some other method of providing for the financing of industrial buildings, and still other communities are considering the formation of a corporation. The accompanying list has been derived from several sources, including the Pennsylvania Department of Commerce and the Pennsylvania State Chamber of Commerce. It may not be complete, but it is the most comprehensive we have been able to obtain. A survey made by this Bank and information provided by the Pennsylvania State Chamber of Commerce and the local Chambers of Commerce throughout the District show that the aggressiveness with which a community pursues industrial development depends on how great the need is; things are being done where people feel something must be done. The following examples are given to illustrate different approaches to different problems. They are not intended to cover the entire field, but serve only as case histories. One type of community is that in which industry is relatively diversified. Examples of this type are York, Reading, and Williamsport. In York, the objective of in dustrial development activity is to maintain a balanced economy; industrial prospects are screened very carefully. Since there is no pressing need for new industry, York has no industrial development fund or corporation and is opposed to giving free financial aid. The community it self does not finance industry. Instead, the Chamber of Commerce acts as middleman between the prospective concern and financing interests. If possible, the Chamber will make arrangements for an insurance company to build a plant for the concern and then lease it to the in dustry for a number of years. In the case of smaller com panies, it may be necessary to work out other financial arrangements. THE BUSINESS REVIEW Reading has had, since 1947, a fund which it calls “The Greater Reading Development Fund,” set up to do three things: (1) aid industrial expansion in Reading and Berks County; (2) sponsor adequate housing, transpor tation, and cultural facilities; and (3) plan the develop ment of the City of Reading and its environs. The fund was obtained by issuing 30-year 2 per cent debentures. Like York, Reading is opposed to giving free financial aid to industries. But with that exception, the fund can be used in a wide variety of ways—investment in real estate, mortgages, bonds, stocks, promissory notes, and open accounts. Nevertheless, the fund has not yet been used. One reason, perhaps, is that there is no really ur gent need for new industry. There may be a tendency, therefore, to seek only top-grade concerns. In most cases, such concerns do not need community financing. This raises a question as to how much risk an industrial de velopment corporation should assume, and if the need for additional industry is not really pressing, whether a fund is needed. In past years, Williamsport has offered grants to at tract new industries. Recently, however, consideration has been given to raising funds and setting up an indus trial development corporation similar to those in other areas. In contrast to York, Reading, and Williamsport, Johns town and Altoona are essentially one-industry towns. In Johnstown, steel mills employ a large proportion of the labor force. Bituminous coal accounts for another big share of the county’s employed. While both industries are important to our economy, they have been subject in the past to sharp ups and downs during the business cycle, and in recent years to uncertain labor conditions. At one time, Johnstown, like many other communities, made pay ments of one sort or another to attract industry. Since 1945, however, it has carried on its industrial develop ment activities through the Johnstown Industrial Com mission. This was formed to obtain a branch of the Sylvania Electric Company during the war. Using contribu tions of businessmen and citizens, the Commission bought property and leased it to the industry. Sylvania closed down its branch after the war but the Commission has been willing to finance other new industries. Negotia tions have been carried on with several concerns, but in every case, before the deal was completed, private in vestors became interested and took over the financing. Here is an interesting case where a small industrial fund has helped to stimulate the flow of private financing. Altoona is even more of a one-industry town than Johnstown. Here the Pennsylvania Railroad repair shops employ a large proportion of the community’s labor force. The community is vulnerable not only because of this ex treme concentration, but by the fact that the trend to ward Diesel locomotives may mean a general decline in the need for repair services. In addition, the town needs industries to employ female labor. Partly for this reason, Altoona Enterprises, Inc., was formed in 1946. Funds have been raised by donations, which go into the revolv ing fund of the Chamber of Commerce, and by the sale of debentures. Using these funds, Altoona Enterprises will pay 15 per cent of the cost of a plant. The industry itself pays 10 per cent of the cost, and the remaining 75 per cent is financed by first mortgage with an insurance company. The plant is amortized over a period of 11 years, during which time the holders of debentures are paid interest at the rate of 43/> per cent. Each bond holder is permitted to buy one share of $1 par stock for every $100 of bonds owned. This stock does not pay divi dends but allows the holder to participate in control. Since its formation, Altoona Enterprises has brought in two industries employing 700 people. While many communities in many parts of the District are promoting industrial development, towns in the an thracite area have been the most active. Scranton is the largest city in the area. It has taken perhaps the most vigorous and successful steps of any anthracite com munity to compensate for the decline in the anthracite industry and to diversify its industrial structure. Its ex perience in industrial development goes back for many years. The Scranton Industrial Development Company has been in existence since 1914, giving financial assis tance to established industries. Using $250,000 provided by the sale of stock, SIDCO makes non-bankable char acter loans to existing industries. The loans usually run from three to five years and bear rates comparable to those prevailing in the market. More recently, SIDCO has bought a number of vacant buildings and sold them to industries and has built three new plants, selling one and leasing the other two. The original capital invest ment of SIDCO is still intact, and dividends were paid out recently for the first time. This organization appears to be unique in the Third Federal Reserve District both in its lending activities and in the fact that it has de clared dividends. The Scranton Lackawanna Industrial Building Com pany is more typical of the kind of organization other Page 123 THE BUSINESS REVIEW communities in the anthracite area have set up. SLIBCO was formed in 1946 to finance the construction of build ings for new and established industries in Scranton and Lackawanna County. Funds were obtained by issuing $1,400,000 of 15-year 4 per cent debentures. The remain ing cost of the plants has been met by first mortgages held by a Scranton bank pool. The buildings are leased to industries on a long-term basis with an option to pur chase. Mortgages and debentures are being paid off from annual rentals. SLIBCO so far has built 11 plants, em ploying over 1,500 people. In 1946, Scranton also formed the Scranton Plan Cor poration solely for the purpose of buying from the War Assets Administration land, building, and facilities oc cupied during the war by the Murray Corporation of America. Fifteen-year 4 per cent first mortgage bonds of $1,200,000 were sold to the citizens of the community. The plant has been leased to the Murray Corporation on a five-year basis, with a five-year renewal clause and an option to purchase at any time. Wilkes-Barre has a plan somewhat similar to Scran ton’s. The Wyoming Valley Industrial Development Fund, Inc., was established in 1939 to secure new industries, promote the growth of existing local concerns, and in general help develop more jobs and larger pay rolls. Its functions were broadened a year later by the creation of a wholly owned subsidiary, the Wyoming Valley Indus trial Building Fund, to buy, lease, mortgage, manage, and sell land and buildings for industrial purposes. Over $300 000 was raised by outright subscriptions from individ uals and businesses. Second mortgage bonds were also issued to get money for particular projects. In the past five years, funds have been supplied to help three com panies buy vacant buildings and to assist two others to build new facilities. The local banks have helped in sev eral cases by lending on first mortgages as much as 60 per cent of the cost. The five industries helped since the war now employ 1,850 people. Similarly, Pittston has sold $170,000 of 4 per cent debentures, using this money and that obtained by a first mortgage with local banks to finance the construction of four new plants now employing about 700 people. In fact, Pittston was the first community in the anthracite area to finance a plant, erecting a building for the American Chain and Cable Company in 1945. Pottsville Industries, Inc., was established a number of years ago to help build a plant for a concern moving into Pottsville. Over 9,000 shares of stock were sold to Page 124 citizens and businesses of the community. With the help of the local banks, Pottsville Industries not only built the original plant but recently completed an addition to the plant. The Chamber of Commerce is also constantly carrying on other developmental activities which are be yond the scope of this article. Shenandoah has raised over $500,000 by public sub scription and is now completing the construction of a building to be occupied by an industry expecting to em ploy several hundreds of people, 80 per cent of whom will be men. The occupant of the building will amortize a mortgage over a period of twenty years. In all of the cases illustrated thus far, the communi ties merely help industry pay for a plant over a period of years. Annual rentals include both interest and amortiza tion of the plant. Some other communities in the anthra cite area, however, have contributed part of the cost of buildings. Hazleton, for example, is the envy of the entire anthra cite area for the concerted effort of its citizens in con tributing toward a new plant for the Electric Auto-Lite Company. Hazleton, facing an early depletion of its coal resources, raised some years ago an industrial develop ment fund which it used to make mortgage loans, ad vances on machinery and, in a few cases, outright contri butions to industries. The Hazleton Industrial Develop ment Corporation was later established to help finance the construction of the Auto-Lite plant. Contributions of over $600,000 were obtained from businessmen, employ ees, and others in less than three weeks. Five hundred thousand dollars of this was used for the new building, together with $700,000 in the form of a 2 per cent mort gage supplied by six local banks. The rest of the cost— $2,300,000—was borne by the Auto-Lite Company. The company agreed to pay $90,000 to Hazleton annually for ten years, at the end of which time the plant reverts to the company. While these payments are more than sufficient to pay off the mortgage they will not be enough to in clude a normal rate of interest or amortization of the plant. In the case of Lansford the procedure is somewhat dif ferent. The Panther Valley Industrial Association, Inc., which was organized in 1944, is unique in that it com prises a group of five communities. The Association has raised over $500,000 from donations, partly through pay roll deduction, and has used over $400,000 of this to build a plant for the Bundy Tubing Company. The Association agreed to pay 44 per cent and Bundy 56 per THE BUSINESS REVIEW cent of the construction cost. Bundy owns the building and makes no annual payments to the Association. It agrees, however, to employ 700 men at capacity opera tion, distributing the jobs equally among the five par ticipating towns. Another group of communities consists of those which have raised money and formed a corporation but have been unable, as yet, to secure a new industry. Shamokin, for example, has raised $340,000 through donations. This money the Shamokin Area Industrial Cor poration is prepared to use in a number of ways: (1) to erect a building to be amortized by the industry over a period of years; (2) to contribute the site and pay 50 per cent of the cost of a building, half of which is amor tized over a period of years; (3) to pay the excess in construction cost over either $4 a square foot or the pre war cost of construction; (4) to give $2 a square foot toward construction of a building; (5) to contribute the down payment and the site for the building. Freeland is another example of a community with funds ready but no industry as yet. Getting started relatively late in the game, Freeland organized last spring the In dustrial Development Corporation. The people of the community contributed $89,000 in cash, which the Cor poration is ready to lend to industry or use in buying, building, selling, or leasing land and industrial build ings. It is also willing to provide free land and give in dustries the free use of buildings if necessary. WHAT ABOUT SUBSIDIES? Depending on how urgently they need industry, commu nities in the Third District have varying attitudes toward giving financial or other aid without a normal financial repayment. Where industry is well diversified, opinion is against concessions. In the first place there is no necessity for it, and in the second place industries already in the community dislike such preferential treatment. Some com munities used to give subsidies of one sort or another— outright cash payments, paying the industry’s moving cost, and the like—but are now opposed to the practice. This may be because they are better off industrially than they once were, and their own manufacturers now object. Even in areas where industry is relatively less diversified, opinions are likely to differ. Communities which would not give cash payments or contribute part of the cost of a plant will arrange for lower assessments for property tax ation. Others may be opposed to concessions in princi ple but when confronted with an imminent problem of at tracting industry may find the competition so strong that they become willing to make a financial contribution. A manual published by the Pennsylvania State Cham ber of Commerce in cooperation with the Pennsylvania Department of Commerce gives this advice: “Certain towns and communities, because of certain deficiencies such as geographic location, lack of industrial experience, inadequate industrial real estate, bad labor history, etc., are given little or no consideration by industries seeking new locations because such conditions tend to raise locat ing and operating costs to a prohibitive high level. There fore, when dealing with financially sound industries, under such conditions, certain towns and communities can jus tify additional and unusual requirements of any given new enterprise, providing that such necessary community investment is considered an investment in the economic future of the community or area. Although it is admitted that very occasionally there are justifiable cases of this last-named type, communities should offer gifts only as a last resort. When it is done, most careful consideration should be given (a) to the integrity of the firm, and (b) to the ability of the community to remove the local obstacles to profitable local operation.” Whether or not subsidies are justified must seem like an academic question to communities facing the bleak future of declining incomes and population. The follow ing paragraphs give some of the pros and cons; they do not attempt to say whether subsidies are good or bad. A laissez faire economy—a “hands-off” economy—is supposed to result automatically in the best location of industry. Left to its own devices, so the theory goes, in dustry will naturally seek the best location from the point of view of lowest costs and maximum profits. It will weigh all of the important factors—things like the loca tion of production materials, availability of labor, sites, industrial fuel, transportation and distribution facilities, power, water, nearness and extent of the market, the nature of living conditions—and come up with the most econom ical location for its operations. Because it is most eco nomical for the industry, it will be most economical for all concerned. A “problem area,” therefore, should not be bolstered by subsidies or any other means. The very fact that it is a problem area indicates that it is un economic. Unfortunately, the answer is not so simple as that. In dustries sometimes make mistakes in picking their loca tions. And since competition is not perfect, inefficient Page 125 THE BUSINESS REVIEW firms often stay in operation. The process of trial and error means a rapid turnover in industry—new concerns being started, others folding up—and thus a tendency to ward under-utilization of resources. Finally, labor does not move as readily as we might like. People may not know of opportunities elsewhere, they may not have the skills necessary to change jobs, or they may simply pre fer to stick with the home town even though it is going down hill. Many things are being done to correct these defects in the economic machine. Industries and communities alike are analyzing what they have and what they need, and are making their findings available. Wider knowledge of em ployment opportunities also makes it easier for labor to move from place to place, and better education makes them better able to take advantage of these opportunities. The community can help along these lines to make the economy work better. When a community gives industry a concession, how ever, it does more than this. It abandons a “hands-off” policy. In the short run it may find itself competing with nearby communities for bigger and better concessions. In the longer run, it may contribute to the uneconomic lo cation of industry. A subsidy may be justified on a tem porary basis if it puts an area on a competitive basis. This is the same argument some people give for a tariff to protect “infant industries.” Whether or not an area has what it takes to be competitive, however, is a question that needs intensive analysis. If it is found that an area can compete, a gift or concession might be considered an investment in the community’s economic future. Even if an area cannot be competitive, there are argu ments for giving subsidies to industry. A subsidy involves some cost. Often it is a tangible cost, such as a cash con tribution by the citizens. Sometimes it is less tangible, but there is always a cost. The question is whether the cost of the subsidy is less than the cost of allowing an area to col lapse. In a completely free and competitive economy, for example, people would be forced to move out of a de pressed area. But this in itself involves some cost, both the costs of moving and setting up new facilities some where else, and the social costs of breaking up the com munity. There are some costs an accountant cannot meas ure. Those who move away are usually the most aggres sive, leaving the community weaker than it was before. And when people leave a community it has a multiplying effect. When employed miners, for example, move out this means a smaller demand for goods sold in local stores, Page 126 which in turn forces some retailers to close down and move out too—and so the process continues. If the area collapses, there may be a tremendous waste of capital al ready invested in the area. There is even a cost if nothing is done; it shows up in lower per capita incomes. Since communities have decided that the answer is to bring industry in, with or without subsidies, they should consider bringing in industries which will give them a diversified economy. Greater diversification may entail some loss in efficiency but should result in more stability. It may be that a community must strike a mean between two desirable objectives: on the one hand, growth which comes from efficiency and specialization; and, on the other hand, stability which comes from diversification. It is quite likely, however, that there is a good deal of room for greater diversification in many cases without impair ing efficiency. People who are engaged in industrial development ac tivities stress again and again the need for community self-analysis. If a community puts itself above the mar ket place in deciding the location of industry, it should make its decisions according to rational economic prin ciples. Industry plans its location carefully; if commu nities do not plan their development activities equally carefully, they may get the worst of the bargain. A SOLUTION TO THE CAPITAL SHORTAGE? Many people feel that one of the biggest financial prob lems of the post-war period has been a shortage of ven ture capital. They give several reasons for this shortage; heavy taxes, growing institutionalization of savings, and a growing search for security are some of the more out standing. They often have in mind the type of concerns usually financed by the various community development programs—those not prominent enough to enjoy easy ac cess to private financing facilities. The way most com munities are meeting this situation is through long-term lease. The industry then can avoid tieing up its cash in plant and according to present accounting procedures need not show a debt on its balance sheet. How much industrial development corporations are contributing to a solution of the venture capital prob lem depends a good deal on what is meant by the term “capital shortage.” As some use the term they think merely of long-term funds put into fixed assets. In this sense, the industrial development corporations are help ing to solve the shortage, for with a few exceptions their THE BUSINESS REVIEW 9 * t funds are put to long-term use in fixed assets. Many people refer to a shortage of “equity capital.” Strictly speaking, equity means ownership and implies participation in both profits and losses. The industrial development corporations are not providing ownership funds, and in the rare case where they have been ap proached by an industry to do so, usually have found that the industry’s financial structure is too unsound to warrant it. Moreover, most communities hesitate to in volve themselves in ownership problems. Funds supplied by the communities are more in the nature of “debt money,” since they entail fixed payments out of income, than they are “ownership money.” From the industry’s point of view, one main advantage of renting a plant under long-term lease rather than bor rowing to build a plant is a lower tax burden. If the in dustry borrows to build its own plant, it can deduct from earnings the interest payments and normal depreciation. If it leases a building from a community corporation, it can deduct the annual rental, a figure ordinarily larger than normal interest and amortization. Some industries and communities may find that their agreements mean more taxes than they expected, for it is not yet clear whether those lease agreements which have repurchase options will be considered for tax purposes the same as an ordinary loan with title held as security. A more im portant point for the industry to consider, however, is that a long-term lease can be just as much of a burden as a long-term mortgage. A third term often used is “risk capital.” In many cases, this means the same thing as equity capital but may also mean merely an investment of any kind in a risky enterprise. In this sense, most of the industrial develop ment corporations are taking risks. The towns needing in dustry badly, of course, are particularly willing to take risks. But they are taking a different kind of risk than individuals do when they invest. Communities experience a monetary gain only indirectly through increased em ployment. They merely try to avoid a monetary loss so that they can keep their fund intact to bring in other in dustry. The risk which they are taking is more of a com munity risk. This is particularly the case where funds are given away. The risk is in choosing one or more indus tries and relying on them to solve the community’s eco nomic problem. CONCLUSIONS Industrial development activity in the Third Federal Re serve District shows more than anything else that com munities are doing something about their own future. Many of them are using their own capital to help finance the construction of plants. These funds may not be equity or ownership capital but they do contribute in a small way to the solution of whatever shortage of long-term financing there may be. And they do show that the spirit of venture is not absent from the economic scene. What communities are doing is far preferable to an appeal to the government for help. The near-term outlook for industrial development ac tivity is not as bright as it has been. Most changes in the location of industry take place through the expansion of existing industries, not through relocation. Industrial development activities, therefore, are likely to be more successful, from the community’s point of view, during periods of business expansion such as we have had since the war. The rate of expansion has slowed down in the past year, so it will be harder to “go out and get an in dustry.” But the need for communities to analyze their needs and plan their activities—perhaps with greater emphasis on encouraging their own existing industries— is even more compelling. ♦ c Page 127 THE BUSINESS REVIEW THE MONTH'S STATISTICS Strikes took a heavy toll in output and income during the month of October, interrupting the industrial recovery which seemed so promising in September. Manufacturing production dropped 12 per cent. In Pennsylvania, factory pay rolls were 15 per cent below the previous month’s. Anthracite miners went back to work in October, and coal mining in this district snapped back to near-normal. The strikes affected durable goods output in three ways. First, and most severely, the stoppages hit the firms directly involved in disputes. Second, shortages slowed or stopped operations of plants whose inventories of steel were low. Third, many firms that had adequate inventories reduced output because their customers’ operations were crippled. The month was not without bright spots, however. The nondurable goods industries made further gains in employment, department stores sales declined much less than might have been expected, and residential construction contract awards rose. Although total contract awards declined seasonally from the previous month, they were 36 per cent above those of October, 1948, and the unfavorable difference between the first ten months of this year and last was reduced to only 6 per cent Construction activity will probably continue to be a sustaining force in the economy for some months. All indications point to a rapid recovery from strike losses during the remainder of the year. Latest reports from depart ment stores show that year-end retail buying is not quite up to last year’s levels in dollar terms; but with employment and income running high, there is little doubt that the Christmas season will be a happy one for the stores. Deposits at member banks in leading cities of the District continued close to the highest levels of 1949 during most of No vember, and somewhat above a year ago. Loans increased further from October to November, reflecting principally expan sion in real estate and miscellaneous loans, which include credit extended to consumers. In the case of business loans, there was some decline toward the close of the month from peak levels for the fall period; they continue below a year ago! SUMMARY Third Federal Reserve District United States Per cent change Per cent change Oct. 1949 fr<>m Oct. 1949 from mo. ago mo. ago 10 mos. 1949 from year year ago ago OUTPUT Manufacturing production... . -12* -26* -13* - 5 Construction contracts............. - 4 +36 - 6 + 2 +117 — 12 —27 —16 EMPLOYMENT AND INCOME Factory employment................. -12* -23* -10* - 3 -15* -29* _ 9* TRADE** Department store sales............. - 6 - 1 BANKING (All member banks) Deposits........................................ Loans............................................. Investments................................. U. S. Govt. Securities............. 0 tlier........................................... +1 + i + 2 + 2 + 1 -14 - 8 + + + + 0 2 7 6 9 - 6 + + 0 5 1 2 4 - 5 + 2 + 2 0 + 2 0 10 mos. 1949 from year year ago ago -13 +45 —66 -11 -11 — 7 +1 0 + 9 + 9 +n - 8 + 5 -27 - 9 - 7 + + 0 3 1 2 4 PRICES * Consumers.................................... - 1 ot - St - It - 1 OTHER Check payments......................... +13 + 3 + 5 - 5 - 4 - 3 + 1 — 8 - 3 - 5 — 6 - 1 - 1 * Pennsylvania. ** Adjusted for seasonal variation, f Philadelphia. Digitized Page for FRASER 128 Factory* LOCAL CONDITIONS Allentown........................ Department Store Employ ment Payrolls Sales Stocks Per cent ch ange Oct 1949 fr om Per cent ch ange Oct 1949 fr om Per cent ch ange Oct 1949 fr om Per cent change Oct. 1949 from mo. ago year ago mo. ago year ago -39 mo. ago year ago mo. ago year ago Check Payments Per cent change Oct. 1949 from mo. ago year ago -27 -36 -29 Altoona............................... -47 -64 -61 -73 Harrisburg......................... -22 -29 -22 -33 Johnstown......................... -70 -73 -78 -82 Lancaster........................... + 1 - 8 + 3 -12 0 Philadelphia...................... - 1 -12 - 2 -12 + 2 -13 +12 - 8 +19 + 9 Reading.............................. - 4 -14 - 2 -17 + 4 -16 + 8 -11 + 9 0 Scranton............................. +1 - 8 + 1 — 9 0 - 9 +1 -11 Williamsport..................... - 4 -14 - 2 -17 Wilmington....................... - 8 -15 -15 -21 York....................... -11 + 6 -16 Trenton............................ Wilkes-Barre..................... +1 -11 +n - 6 + 6 - 4 0 - 5 + 8 - 3 + 4 + 6 - 6 -18 +11 -12 - 1 -13 + 2 -16 +13 - 3 0 -15 * Not restricted to corporate limits of cities but covers areas of one or more counties. THE BUSINESS REVIEW MEASURES OF OUTPUT EMPLOYMENT AND INCOME Per cent change October 1949 from month ago MANUFACTURING (Pa.)*.................. - 12 Durable goods industries........................ - 23 Nondurable goods industries.................. 0 year ago 10 mos. 1949 from year ago -26 -41 - 6 -13 -16 - 8 - 1 + i + 5 - 1 - 5 + 6 + 3 - 2 - 1 - 2 + 2 - 1 + 2 - 51 - 13 0 + 2 - 4 - 2 + 5 - 1 -14 -10 + 9 -16 - 9 - 6 - 2 -16 - 7 -43 - 3 -19 -64 -35 -30 -16 -24 - 6 -11 - 4 -13 -17 - 4 - 9 -19 -12 - 2 - 8 - 3 -25 - 7 -13 -16 -18 -20 -12 - 3 -24 -15 COAL MINING (3rd F. R. Dist.)f. . . +117 Anthracite.................................................... +136 Bituminous.................................................. - 57 -12 0 -87 -27 -26 -32 CRUDE OIL (3rd F. R. Dist.)tt......... - -13 -11 Foods............................................................. Tobacco......................................................... Textiles......................................................... Apparel......................................................... Lumber......................................................... Furniture and lumber products............. Paper............................................................. Printing and publishing........................... Chemicals..................................................... Petroleum and coal products................. Rubber.......................................................... Leather.......................................................... Stone, clay and glass................................ Iron and steel.............................................. Nonferrous metals..................................... Machinery (excl. electrical).................... Electrical machinery................................. Transportation equipment (excl. auto) Automobiles and equipment.................. Other manufacturing................................ CONSTRUCTION — CONTRACT AWARDS (3rd F. R. Diet.)**............ Residential................................................... Nonresidential............................................ Public works and utilities........................ 6 +36 +15 +28 +84 - 4 + 10 - 3 - 16 - 6 -10 -21 +26 ♦Temporaryseries—notcomparable with former production indexes. **Source:F.W.DodgeCorporation. Changes computed from 3-month moving averages, centered on 3rd month. tU. S. Bureau of Mines. tfAmerican Petroleum Inst. Bradford field. Pennsylvania Manufacturing Industries* Employment Average Weekly Earnings Payrolls Per cent change from Per cent change from mo. year ago ago Average Hourly Earnings % % chg. from year ago Indexes (1939 avg. =100) Oct. 1949 (In dex) mo. ago All manufacturing.. . Durable goods industries................. Nondurable goods industries................. 99 -12 -23 220 -15 -29 $49.63 - 7 $1,288 - 4 99 -23 -36 205 -26 -43 53.67 -10 1.417 - 3 100 +1 - 6 238 +1 - 4 46.04 + 2 1.177 0 129 88 76 90 77 +1 + 2 + 3 - 1 -11 - 2 -14 -10 - 1 -18 270 204 200 231 184 - 1 +1 + 6 - 2 - 4 + 2 -13 -10 + 4 -15 46.77 30.37 46.73 36.04 44.54 + + + + 4 2 1 5 4 1.131 .780 1.193 .922 1.098 + 3 + 1 - 1 - 5 +1 87 116 + 4 + 2 -10 - 3 212 269 + 7 + 3 -10 - 1 44.90 50.01 - 1 + 2 1.025 1.193 - 2 + 5 135 108 0 - 2 - 2 -14 291 239 - 3 0 + 2 -13 61.14 52.83 + 4 + 1 1.639 1.325 + 5 + 3 149 95 87 0 +1 - 1 - 4 -33 0 311 175 188 - 1 +1 - 1 - 3 -38 0 63.49 45.94 36.86 + 1 - 7 - 1 1.671 1.353 1.047 - 2 + 2 115 61 99 - 1 -48 -12 -17 -57 -29 257 115 205 +1 -53 -13 -19 -65 -36 51.26 50.54 53.96 - 3 -19 -10 1.273 1.446 1.404 + 1 - 5 - 3 162 0 -23 341 +1 -27 53.32 - 6 1.421 + 3 200 +1 -15 433 +1 -16 60.66 - 2 1.528 - 1 191 - 5 -21 381 - 5 -24 60.78 - 3 1.570 0 126 128 0 + 5 - 7 - 8 280 263 - 3 + 8 _ 2 - 7 60.92 42.90 + 5 + 1 1.539 1.171 + 5 + 2 Foods.......................... Tobacco..................... Textiles...................... Apparel...................... Lumber...................... Furniture and lumber products... Paper.......................... Printing and publishing............... Chemicals.................. Petroleum and coal products................... Rubber....................... Leather...................... Stone, clay and glass.......................... Iron and steel........... Nonferrous metals.. Machinery (excl. electrical)................ Electrical machinery............... Transportation equipment (excl. auto)............. Automobiles and equipment........ .. Other manufacturing Oct. 1949 year (In ago dex) 1949 from year ago 1949 * Production workers only. TRADE Per cent change Third F. R. District Oct. Oct. 1949 from 1949 Indexes: 1935-39 Avg. =100 (Index) Adjusted for seasonal variation month year ago ago SALES Department stores.................... Women’s apparel stores.......... 259 210 - 6 - 6 +11* -14 -24 +10* 230 204 - 1 - 3 + 5* - 8 - 8 -16* Sales 10 mos. 1949 from year ago Per cent change from year ago — — — — ♦Not adjusted for seasonal variation. Third F. R. District - 6 - 7 - 4* STOCKS Recent Changes in Department Store Sales in Central Philadelphia Departmental Sales and Stocks of Independent Department Stores 2 4 6 i Stocks (end of month) % chg. % chg. % chg. Oct. 10 mos. Oct. 1949 1949 1949 from from from year year year ago ago ago Ratio to sales (mo nths’ sup ply) October 1949 1948 Total — All departments........................................ -15 - 7 - 7 2.8 2.6 Main store total......................................................... Piece goods and household textiles.................... Small wares................................................................ Women’s and misses’ accessories........................ Women’s and misses’ apparel.............................. Men’s and boys’ wear............................................ Ilousefurnishings..................................................... Other main store...................................................... -14 -16 - 7 -15 -27 -21 - 1 - 9 - 7 - 7 - 3 - 5 - 7 - 5 -10 - 9 - 7 - 9 - 7 - 4 + 3 - 1 -14 -15 3.0 3.1 3.8 3.1 2.1 4.1 2.7 3.8 2 8 2.9 3 7 2 8 1.5 3 3 3.1 4.1 Basement store total................................................. Domestics and blankets......................................... Small wares................................................................ Women’s and misses’ wear................................... Men’s and boys’ wear............................................ Ilousefurnishings...................................................... Shoes............................................................................ -19 - 4 - 8 -25 -26 - 3 -12 - - 7 - 8 0 - 5 - 7 -15 0 1.9 2.2 2.1 1.6 2.5 1.7 2.8 1 7 2.3 1 9 1 3 2 0 2.0 2.4 Nonmerchandise total.............................................. -12 - 3 6 4 5 5 7 7 7 THE BUSINESS REVIEW CONSUMER CREDIT BANKING Sales Sale Credit Receiv ables (end of month) % chg % chg. % chg. Oct. 10 mos. Oct. 1949 1949 1949 from from from yearago yearago yearago Third F. R. District Department stores -20 -12 + 7 - 8 - 3 - 4 - 4 -13 4-15 0 -11 -10 - 5 + 7 Furniture stores Loans made Loan Credit Third F. R. District + 7 Loan bal ances out standing (end of month) % chg. % chg. % chg Oct. 10 mos. Oct. 1949 1949 1949 from from from yearago year ago year ago Consumer instalment loans +45 - 5 +18 +17 + 9 - 6 + 7 +16 +17 + 2 + 9 +21 MONEY SUPPLY AND RELATED ITEMS Changes in— United States (Billions $) Oct. 26, 1949 Money supply, privately owned........................................ 168.0 +1.4 - .1 Demand deposits, adjusted.............................................. Time deposits.................................................................... Currency outside banks..................................................... 84.6 58.4 24.9 +1.4 0 + .i - .5 +i.i - .7 18.5* - .5* -4.1* Turnover of demand deposits............................................ four weeks year Commercial bank earning assets....................................... 119.8 +i.i +5.7 Loans................................................................... U. S. Government securities............................................. Other securities..................................................................... 41.9 67.7 10.2 + .2 + .9 0 + .3 +4.5 + .9 Member bank reserves held................................................ 16.1 + .i -3.9 Required reserves (estimated).......................................... Excess reserves (estimated).............................................. 15.3 .8 + .2 - .1 -3.8 - .1 Changes in reserves during 4 weeks ended October 26, reflected the following: Effect on reserves Net payments by the Treasury..................................... Decline in Reserve Bank holdings of Governments. . Decline in loans to member banks............................... Other transactions............................................................. Change in reserves___*................................................ + — — — .8 .4 .2 .1 + .1 * Annual rate for the month and per cent changes from month and year ago at leading cities outside N. Y. City. PRICES Oct. 1949 (Index] Index: 1935-39 average =100 Per cent change from month ago year ago 189 210 202 179 — 1 — 2 - 1 0 — 8 —13 -10 — 5 169 169 198 185 121 145 192 152 — 1 0 — 1 0 0 +1 0 0 — — — — Consumer prices Fuel.................................................................................. 3 3 5 6 + 2 — 6 0 OTHER BANKING DATA Noy. 23, 1949 All com Farm modi prod ties ucts 188 188 188 188 188 Source: U. S. Bureau of Labor Statistics. http://fraser.stlouisfed.org/ Page 130 Federal Reserve Bank of St. Louis 206 206 206 206 204 Foods 201 202 202 202 200 Other 178 year Weekly reporting bonks — leading cities United States (billions $): Loans — Commercial, industrial and agricultural................ Security............................................................................ Real estate...................................................................... To banks.......................................................................... All other........................................................................... 13.8 2.0 4.3 .2 4.3 + .i + .i + a 0 + a - 1.8 + .2 + .3 0 + .5 Total loans — gross.................................................. Investments..................................................................... Deposits........................................................................... 24.6 42.4 75.2 + .4 - .5 - .3 - .8 + 5.1 + 1.4 Third Federal Reserve District (millions $): Loans — Commercial, industrial and agricultural................ Security............................................................................ Real estate...................................................................... To banks.......................................................................... All other........................................................................... 478 33 108 10 306 - + + + + Total loans — gross.................................................. 935 Investments.................................................................... 1,828 Deposits........................................................................... 3,052 Weekly Wholesale Prices—U. S. (Index: 1935-39 average = 100) Chan ?es in— four weeks Member bank reserves and related items United States (billions $): Member bank reserves held....................................... Reserve Bank holdings of Governments.................. Gold stock.......................................................................... Money in circulation...................................................... Treasury deposits at Reserve Banks......................... 16.0 17.7 24.5 27.5 .4 + + + 2 0 5 4 9 57 6 17 5 31 + 16 - 43 - 13 + 2 + 182 + 83 + + .1 .3 .1 .2 0 - 3.9 - 5.3 + .4 - .8 - 1.2 + + + + + 18 19 i 20 .1% — 468 - 50 - 203 + 142 +11.4% Federal Reserve Bank of Phila. (millions $) 179 179 1,213 Federal Reserve notes.................................................... 1,611 Member bank reserve deposits.................................... 743 Gold certificate reserves............................................ .. . 1,249 Reserve ratio (%)............................................................| 51.1% TABLE OF CONTENTS-1949 THE BUSINESS REVIEW FEDERAL RESERVE BANK OF PHILADELPHIA 1949: Is Recession “Just Around the Corner”? . . . Consumer Spending ... In the Stores . January . February ............................................. Buying on Credit........................................................................................................................ . February Spending versus Saving . February Bank Operations, 1948 G. I. Lending ......................................................................................... .................................................................................................. . . March ................................................................................................................................. . . March The Number Language of Business . . . April ...................................................... Construction and Mortgage Finance: A New Picture .................. The Black Diamond Country .................. ........................................................................... The Business Situation: A Mid-Year View ...................... May June .................. July State and Local Finance ......................................................................................... . . August Investing in Municipals ......................................................................................... . Return of the Deficit ...................................................................................................... The Role of Public Works......................................................................................... Tobacco: Weed of Wealth .................................................................................... Capital Expenditures in 1950 Operation Boot Strap August September September . October ............................................................................ November ...................................................................................................... December
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