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DECEM BER 1960
"T h e Fed Is In The Market”
Vault Cash
The Third District In The ’ 5 0 ’s
FEDERAL
RESERVE
BANK
OF
PHILADELPHIA
"THE FED
“ The Fed is in.” This is a rumor that often spreads
of the market at any time and, within broad limits,
through the money market. It may well be true.
in any amount that seems desirable.
The Federal Reserve Bank of New York is a fre
All open market transactions are conducted un
quent buyer or seller in the Government securities
der the authority and general supervision of the
market— sometimes as agent for the Federal Open
Federal Open Market Committee. The Committee
Market Committee of the Federal Reserve System
consists of the seven members of the Board of
and sometimes as agent for the Treasury, foreign
Governors and five of the presidents of the Federal
central banks, and some of the member banks (a
Reserve Banks. The president of the Federal Re
service for member banks rendered by the Reserve
serve Bank of New York is a permanent member,
Banks).
and the other four memberships rotate among the
Purchases and sales of Government securities
remaining eleven Reserve Bank presidents so that
made for the Federal Open Market Committee are
each serves as a member of the Committee every
commonly referred to as open market operations.
two or three years. In practice, all of the Reserve
When the Federal Reserve Bank of New York
Bank presidents are invited and do attend the
purchases Government securities for the Open
meetings of the Committee which are usually held
Market Account, it increases bank reserves and
every three weeks in Washington. All of the presi
puts additional funds into the market. When it
dents participate in the discussion at the meetings,
sells securities it reduces bank reserves and with
but only the five who are official members of the
draws funds from the money market. As a tool of
Committee are entitled to vote.
monetary policy, open market operations have the
The Open Market Committee formulates policy.
great advantage of flexibility. The System on its
It determines whether the immediate objective to
own initiative can put funds in or take them out
be achieved by open market operations is more
Digitized for2
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business review
restraint, more ease, or to keep conditions about
W h a t the m a rk e t d oe s
the same. It would be cumbersome for the Com
The money market, as other markets in a free
mittee to actually execute the transactions to im
economy, developed to meet certain needs. Cash
plement its policies. To perform this task, the
receipts are rarely in just the right amount and
Committee has designated the Federal Reserve
received at the right time to meet payments. This
Bank of New York as its agent, and a senior officer
is true for all spending units— families, business
of the Bank approved by the Committee is ap
firms, banks, and government. The problem of
pointed Manager of the Open Market Account.
bridging the gap between payments and receipts
The Manager has the responsibility of carrying
is universal. At times, receipts are larger than
out policy as determined by the Committee— of
payments; at other times, payments exceed re
making the purchases and sales in the market to
ceipts. Either we must build up a surplus when
implement the Committee’s directive. He also
receipts are in excess, or borrow to meet the
keeps the Committee informed of conditions and
shortage when payments are greater than receipts.
developments in the money market and of the
Most individuals and business firms meet this
transactions executed for the Open Market A c
problem by using the services of commercial
count. Daily, weekly, and tri-weekly written re
banks. Receipts are deposited in the banks, and
ports summarizing factors affecting bank reserves
checks are drawn as needed to make payments.
and the availability of funds in the money market,
The deposit balance builds up when there is an
and developments in the Government securities
excess of receipts; it can be drawn down to meet a
market are submitted to members of the Board of
Governors and the presidents of the Reserve
temporary excess in payments. If the deposit bal
ance is inadequate, it may be supplemented by
Banks. The Manager and his officers are also in
borrowing. Smaller commercial banks often use
frequent telephone conversation with various
their larger city correspondents in the same way
members of the Committee and their staffs.
to help bridge the temporary gaps between inflows
This article is concerned with implementing
and outflows of funds. This process of balancing
open market policy rather than how policy is
receipts and expenditures tends to pass surpluses
formulated.* It deals primarily with how open
and shortages along to the larger institutions in
market operations are conducted and some of the
financial centers.
problems encountered. Before going into open
How do these larger institutions meet tempo
market operations, let’s first take a look at the
rary shortages? A widely used source is the money
market in which these transactions are executed.
market.
Institutions with
highly
marketable,
short-term securities can readily obtain funds by
THE M O N E Y M A R K E T
selling securities in the money market; those with
The money market as the term is commonly used
temporary excesses can purchase highly liquid
refers to the market in which short-term Govern
earning assets. Thus the money market is a source
ment securities, commercial paper, and other
of funds for holders of marketable short-term
short-term credit instruments are bought and sold.
securities; it affords an outlet for institutions
seeking some income from temporarily idle funds.
* For a description of the work of the Open Market Committee
and how monetary policy is formulated, see "M on e tary Policy:
How Decisions Are M a d e ," Business Review, Federal Reserve Bank
of Philadelphia, August I960.
The money market registers shifts in the
supply of and the demand for short-term funds
3
business review
throughout the country. For example, depositors
in trade, buyers and sellers, and facilities for
in a bank in Miami may withdraw substantial
bringing the two together.
sums of currency to meet customer demands for
The stock in trade of the money market consists
cash. To obtain funds, the bank might draw on
of high-quality, marketable short-term securities
its balance in a correspondent bank in New York
and similar credit instruments, mainly short-term
City or sell short-term Governments. In either
Treasury securities and deposit balances in the
case the pressure is transmitted to New York,
Reserve Banks, commonly referred to as federal
the nation’s principal money market.
funds. There are $36 billion of Treasury bills out
standing, $25 billion of Treasury certificates, and
There are pronounced seasonal swings in the
public’s demand for currency. Typically, currency
$14 billion of other Treasury securities maturing
flows from the banks prior to holidays and re
within one year. Bankers acceptances total about
turns to the banks once the holiday period is
$1.7 billion, and commercial paper— excluding
over. Currency flows are especially large at the
finance company paper placed directly with inves
Christmas season.
tors— totals about $1.3 billion. The daily volume
Heavy withdrawals
before
Christmas are a substantial drain on bank re
of transactions in short-term Treasury securities
serves and tend to increase the demand for funds
ranges from several hundred million dollars to
in the money market. The return flow after
well over a billion dollars, and the volume of
Christmas adds several hundred million dollars
federal funds transactions is even larger. Trans
to bank reserves and tends to increase the sup
actions in bankers acceptances and commercial
ply of funds in the market. Bank depositors
paper total much less than either short-term Gov
write millions of checks every day to pay bills,
ernments or federal funds.
and collection of these checks shifts substantial
The money market is predominantly an institu
sums among banks, some gaining and others
tional market. Data on the distribution of the
losing funds. The tremendous volume of Treas
ownership of short-term Government securities
ury transactions— receipts and disbursements—
provide a clue as to the principal buyers and
is also constantly shifting funds among banks
and other institutions.
sellers. Recent data show that commercial banks
held 12 per cent of the Treasury bills, large non*
The volume of these commercial, financial, and
financial corporations 14 per cent, U. S. Govern
Treasury transactions shifting funds into and out
ment investment accounts and the Federal Reserve
of the money market runs into several billion
System 9 per cent, and 65 per cent by all other
dollars every business day. The bulk of the trans
investors, such as foreign central banks and state
actions flows through the reserve accounts of the
and local governments. The ownership distribu
money market banks. Fortunately, the net effect
tion of other short-term Governments is similar.
on reserve positions is only a fraction of the total
Bankers acceptances and commercial paper are
volume of transactions. Even so, such transactions
held largely by commercial banks.
may supply or withdraw several hundred million
The money market is an over-the-counter mar
dollars in a single day.
ket, not an organized market such as the stock
Structure o f the m a rk e t
actions are executed in a large trading room.
The money market has three main parts: a stock
The core of the market consists of 17 dealers
exchange or a commodity exchange where trans
4
business review
specializing in Government securities, most of
daily adjustments in their reserve positions. For
them with head offices in New York City. Some of
daily or other very short-term adjustments, the
the dealers also handle bankers acceptances and
federal funds market is more suitable than short
commercial paper. These dealers— some banks
term securities because there is no spread be
and some non-bank— have a network of branch
tween bid and offer quotations and no risk of a
offices covering the entire country. Branch offices
price change. The federal funds rate is thus a
are connected with the head office by private wire.
sensitive indicator of the reserve position of the
It is through this network of offices that buy and
larger banks in financial centers.
sell orders from all over the country are funneled
into the head offices, mostly in New York City.
THE T R A D IN G D E S K *
A buy or sell order placed with a branch office in
On the ninth floor of the Federal Reserve Bank of
San Francisco or Houston will ordinarily be ex
New York is the trading room, commonly referred
ecuted by a trader in the head office in New York
to within the System as the Trading Desk. In this
a few minutes later. Orders are consummated
room there is a large U-shaped desk, and on the
over the telephone and the price is determined
wall facing the open end of the U is a large quota
by negotiation. It is a highly competitive and
tion board on which the latest bid and offer prices
impersonal market, so that bid and offer prices
of the different issues of Government securities
for a particular security differ little, if at all,
are posted. Sitting around the Desk are usually
among the dealers at any one time.
five or six traders, each with a private wire to the
The federal funds market is a segment of the
money market of increasing importance. This is a
Government securities dealers and in a position
that he can readily see the quotation board. An
market in which deposit balances in Reserve Banks
are traded. Transactions are commonly referred
officer of the Bank is always on hand to supervise
activities in the trading room.
to as purchases and sales of federal funds, although
in reality they are in the nature of short-term
Buy, sell, or do n o th in g t o d a y ?
loans. The bulk of the transactions is over
The job of the Trading Desk is not to make policy
night, unsecured loans. Another type of transac
but to carry out policy as determined by the Open
tion is the repurchase agreement. In this type of
Market Committee. The Manager of the Open
transaction, the borrower, for example, sells short
Market Account faces the decision each morning
term Governments under an agreement to re
of whether purchases or sales are needed in order
purchase the securities at a specified time, and at
to carry out the Committee’s directive. Action may
an agreed price and rate of interest. The repur
be needed merely to offset the effects of market
chase agreement has become an important source
factors already explained— to prevent market
of financing for Government securities dealers,
tightness or ease inconsistent with current policy.
and dealers will usually tailor the maturity to fit
Transactions executed for this purpose are some
the needs of the purchaser.
times referred to as “ defensive” operations. Aside
The larger commercial banks in financial cen
from offsetting temporary tightness or ease caused
ters account for the bulk of the transactions in
by market factors, the Manager may need to buy
federal funds. These institutions try to keep fully
invested and in order to do so, most of them make
* For a more complete description of the work of the trading
desk and open market operations, see a booklet by Robert V.
Roosa, Federal Reserve Operations in the Money and Government Securities
Markets, published by the Federal Reserve Bank of New York.
5
business review
or sell securities to produce conditions that con
form to the current goals of monetary policy.
market. As the market opens, the Desk gets the
opening quotations on federal funds, opening bid
In making a decision, the Manager avails him
and offer quotations on Government securities
self of all relevant information. As each work day
and, as soon as available, rates of the New York
begins, assembling and interpreting data and
City banks on loans to Government securities
other information are the principal activities at
dealers. At intervals during the day, reports are
the Trading Desk.
received from the dealers as to their financing
One helpful source of information is the latest
available data on reserve positions of the money
needs. This information is put on a spread sheet
market banks, the major factors likely to affect
to show the progress of each dealer in obtaining
reserves, and the availability of funds in the mar
needed funds.
Statistics do not tell the whole story. At best
ket. Bank reserve positions are of crucial impor
they show only what has happened; some with
tance because they reflect the impact of money
little, others with a longer time lag. To complete
market transactions and influence the banks’
the picture, other sources of information are
capacity to make loans and investments.
needed. Beginning at 9:30 each morning, the
Data on reserve positions of the money market
banks are available early in the morning, includ
Manager or one of his officers meets with senior
representatives of two of the Government securi
ing reserve balances and required reserves as of
ties dealers. The firms are rotated so that each
the opening of business, borrowing from the Re
dealer has equal opportunities in being repre
serve Bank, and purchases and sales of federal
sented at the meetings. At these meetings, the
funds. Market factors, however, are certain to
dealers give their views on conditions in the mar
alter reserve positions. Consequently, the Manager
ket and the factors influencing the availability of
of the Account needs a better indicator of what
funds and the prices of securities. Federal Reserve
reserve positions are likely to be today. To meet
officials are very careful to give no clues as to what
this need, the research departments of the Federal
Federal Reserve policy may be. As soon as the
Reserve Bank of New York and of the Board of
market opens, the staff at the Trading Desk begin
Governors each prepare projections of the major
to contact dealers to learn how the market is open
factors affecting bank reserve positions. The pro
ing, whether prices of Governments, corporates,
jection sheet prepared for the Trading Desk gives
and municipals are steady, firm, or easy, how re
daily estimates for a period of four weeks. Esti
cent new issues are behaving, and any other sig
mates of the major market factors affecting re
nificant information as to forces at work in the
serves— float, currency in circulation, Treasury
market. Somewhat later, one of the officers con
operations, gold and foreign operations, and re
tacts the men in charge of the money position of
quired reserves— are based largely on the histori
the money market banks to see how reserve posi
cal pattern of behavior of each factor. Estimates
tions are shaping up.
of reserve positions covering the next few weeks
By 11 o’clock the Manager has obtained and
are of considerable significance to the Desk, as
analyzed enough data and other information to
is indicated later.
get a pretty good “ feel” of the market— whether
Data on reserve positions are supplemented by
funds are scarce or readily available. He is then
other indicators of the availability of funds in the
in a position to make a tentative decision as to
Digitized for6
FRASER
business review
whether the Fed needs to release or withdraw
have to sell securities. Repurchase agreements
funds in order to maintain conditions consistent
put funds into the market for a short period—
with the Open Market Committee’s directive.
usually for a few days, but never for more than
The 11 o’clock call was instituted a few years
15 days. When the agreement expires, the dealer
ago to provide a closer liaison between the Man
repurchases the securities and the reserves created
ager and the Committee. A three-way telephone
by the purchase are automatically extinguished.
hookup brings together the Manager, a member
The length of time the additional funds are
of the Board of Governors or his representative,
likely to be needed is the important factor in de
and one of the presidents currently serving as a
ciding between outright purchases and repurchase
member of the Open Market Committee. The
agreements. Here the reserve projection sheet is
conversation begins with a report by the Man
quite helpful. Rp’s are especially well suited for
ager or one of the other Account officers on price
meeting needs of only a few days’ duration. They
trends and other significant developments in the
avoid “ whipsawing” the market with outright pur
securities market, the federal funds rate, bank
chases followed shortly by sales, a feature of
rates on loans to Government securities dealers,
considerable significance when the market is thin
and the latest information on bank reserve posi
and sensitive. Repurchase agreements are thus a
tions. Following this report, the Manager usually
useful and frequently used technique in imple
gives his tentative decision on plans for imple
menting Federal Reserve policy. Repurchase trans
menting the Committee’s directive. Committee
actions are with nonbank dealers; bank dealers
members or their representatives on the telephone
have access to Federal Reserve credit through the
hookup then give their views, and a decision is
reached as to whether securities should be pur
discount window.
Let’s suppose next that projections indicate ad
chased or sold and if so, in what amount. Or the
ditional funds will be needed for some time, and
decision may be that no action is required. Condi
the decision is to buy outright approximately
tions may change so quickly that the decision
$50 million of Treasury bills or other short-term
reached at the 11 o’clock call may have to be
securities. There are certain underlying principles
modified. The Manager of the Account has suffi
that govern the execution of open market trans
cient leeway to make changes to meet later devel
actions. First, all purchase and sales transactions
opments. If an unusual or a serious problem
are with Government securities dealers. Trans
arises, the Chairman occasionally arranges a tele
actions are executed with all Government securi
phone meeting of the entire Committee.
ties dealers who meet certain basic requirements
such as creditworthiness and a readiness to make
O u trigh t purchases or r p ’s?
markets by taking a position in Government se
Suppose the decision is that the Fed should put
curities. Second, the Desk trades with dealers on
$50 million into the market. The next question is
a freely competitive basis. This means that each
how this should be done—outright purchases or
dealer is given an opportunity to submit offers
repurchase agreements with nonbank dealers.
(or bids when the System is selling securities).
Outright purchases put funds into the market
Offers are accepted on the basis of lowest prices
without any string attached. To withdraw an
until the $50 million., or whatever amount the
equivalent amount of funds, the System would
System wants to buy, is reached. The amount of
7
business review
business going to each dealer is determined by
Outright purchases may be for cash or regular
which dealers submit the best offers or bids, as
delivery. If for cash, delivery and payment are the
the case may be.
same day; if regular, delivery and payment are
Sometimes the maturity distribution of the Sys
the following day. The advantage of cash trans
tem’s portfolio enters into the decision of which
actions is that the System can put funds into or
offers to accept. If the System doesn’t hold bills of
withdraw them from the market the same day.
a certain maturity or if holdings of some maturi
Because of the time required to make physical
ties are small, preference may be given to these
delivery and payment, it is difficult to execute
maturities as well as a lower price. Substantial
holdings of issues maturing in January and Febru
cash transactions later than 12 or 1 o’clock. Trans
actions for regular delivery can be executed until
ary facilitate absorbing reserves created by the
the market closes at 3:30 p.m.
return flow of currency from circulation.
In carrying out these principles, the Desk usu
C O O R D IN A T IO N W IT H TREASURY
ally makes outright purchases and sales by means
O P E R A T IO N S
of a “ go around” to all the dealers. To execute
Financing the Federal Government generates a
our assumed decision for outright purchases of
huge volume of transactions. In fiscal year 1960,
approximately $50 million, the officer in charge of
Treasury cash receipts from the public totaled
the Trading Desk would assign each trader two
$95 billion, and payments to the public, over
or three dealers to contact. The objective is to
$94 billion. A large volume of transactions is
contact all dealers within a period of three to five
also required in managing a Federal debt of
minutes in order that all will be submitting bids
about $290 billion.
on an equal basis. As offers are submitted, the
The bulk of Treasury receipts is deposited in
officer enters them on a spread sheet. When the
tax and loan accounts in the commercial banks,
go-around is completed and the offers are re
but expenditures are paid mainly with checks
corded, the officer determines which will be ac
drawn on balances in the Reserve Banks. When
cepted. All offers “ on the market” might be needed
the Treasury transfers funds from its tax and loan
to make up the $50 million; however, offers usu
accounts in the commercial banks to the Reserve
ally exceed the quantity to be purchased, in which
Banks there is a corresponding reduction in bank
case the best offers are accepted until the desired
reserves. When Treasury checks paid out in meet
amount is reached. As soon as the decision is
ing expenses are deposited in commercial banks,
made, the traders notify the dealers whose offers
the banks acquire reserves when the checks are
have been accepted. The entire go-around is usu
sent to the Reserve Banks for collection.
ally completed in less than 20 minutes.
Occasionally, the market may be so sensitive
Federal Reserve and Treasury officials cooper
ate closely in order to avoid the otherwise disturb
that the Manager decides to accept offers made
ing effects of Treasury operations on bank re
voluntarily by dealers instead of conducting a
serves and the money market. Treasury calls on
go-around which might have a disturbing effect
tax and loan accounts in the commercial banks
on the market. Such offers would not be accepted,
are scheduled with the objective of keeping total
however, unless in line with prices currently
Treasury balances in the Reserve Banks at ap
quoted in the market.
proximately the same level. This tends to minimize
8
business review
the impact of Treasury operations on bank re
action immediately following tends to lower prices
serves and the availability of funds in the money
and inflict losses on purchasers of the new issues,
market.
Treasury officials confer with officials at the
which in turn might make it more difficult for the
Treasury in future refunding operations.
Trading Desk in scheduling these calls. Estimates
of changes in the Treasury’s balance and the
C O N C L U S IO N S
schedule of calls needed to keep the balance stable
Open market operations are the most commonly
are compared and discussed. Of course, the final
used tool of monetary policy. This tool has great
decision on scheduling the calls is made by the
flexibility both as to timing and the amount of
Treasury.
funds released or absorbed. Policy is determined
There is also close cooperation with Treasury
by the Federal Open Market Committee, but re
officials in debt management operations. The
sponsibility for executing the transactions is dele
Chairman of the Board of Governors and the
gated to the Manager of the Open Market Account.
Secretary of the Treasury, as well as senior mem
A variety of problems is encountered in imple
bers of their staffs, are in frequent consultation.
menting the Committee’s policies. Float, Treasury
Treasury officials are in close touch with officials
operations, currency flows, gold flows, and other
of the Trading Desk, the latter being an impor
market factors combine to produce large and
tant source of information on trends and develop
unpredictable changes in bank reserves and the
ments in the Government securities market.
supply of funds in the money market. Treasury
Treasury officials try to price their new issues
operations involved in meeting Federal expendi
in line with market rates so that the offering will
be successful. Federal Reserve officials in turn
tures and in managing the large Federal debt
would have severe repercussions in the market
attempt to time open market operations and other
unless carefully managed and unless unavoidable
monetary actions so as to interfere as little as
disturbing effects were offset by open market
possible with Treasury financing operations. The
operations.
System tries to avoid open market transactions on
To offset the disturbing impact of market fac
the day of a Treasury bill auction in order not to
tors over which the System has no control and to
disturb the market. System officials also attempt to
try to maintain reserve and credit conditions con
avoid tightening or easing actions just prior to,
sistent with the Open Market Committee’s direc
during, or immediately following a Treasury re
tive is the primary task of the Trading Desk. It is
financing operation. Restrictive or easing actions
not an easy task. Managing the Open Market Ac
just prior to a financing operation make it difficult
count successfully requires knowledge of the
for the Treasury to determine the rates required
money and securities markets, and the skill that is
for the new issues to be successful. Restrictive
acquired through extensive experience.
9
The Board of Governors of the Federal Reserve System amended its Regulation D effective November 24
to allow member banks to count all vault cash as reserves. In addition, the reserve requirement for
central reserve city banks was lowered from 1 7 ^ to 16^2 Per cent of net demand deposits (effective De
cember 1) and country bank reserve requirements were raised from 11 to 12 per cent (effective Novem
ber 24). The amendments were designed to provide the reserve base for the annual hike in loan and
currency demand associated with the Christmas season. How did Third District banks fare under these
revised rules ?
Based on recent levels of vault cash and demand deposits, every district member bank gained
reserves. Country banks netted over $37 million while reserve city banks gained more than $25 million
in additional reserves. These changes and the factors contributing thereto are shown in the table below.
VAULT CASH A N D MEMBER BANK RESERVES
THIRD FEDERAL RESERVE DISTRICT*
(Thousands of dollars)
Reserve City Banks
Required reserves based on 16y2 per cent of net dem and
and 5 per cent of time d e p o s it s .................................................................
Currency and coin h e l d .................................................................................
Currency held as reserves prior to N ovem ber 24 ..............................................
Additional reserves made a va ilab le .....................................................
$455,072
45,900
20,292
2 5 ,6 0 8 **
Country Banks
Required reserves based on 12 per cent of net demand
deposits and 5 per cent of time d e p o s it s .....................................................
Required reserves based on I I per cent of net dem and
deposits and 5 per cent of time d e p o s it s .....................................................
420,963
Additional reserves required ..............................................................
25,977
Currency and c o i n .......................................................................................
Currency held as reserves prior to N ovem b er 24 ..............................................
121,937
58,292
Ad ditional reserves m ade a v a ila b le ....................................................
Less additional reserves required (see a b o v e ) .......................................
63,645
25,977
Additional reserves made availab le .................................................
37,668***
* Based on reserve periods ended Novem ber 16.
* * 5 . 6 per cent of required reserves.
* * * 8.4 per cent of required reserves.
10
446,940
THE
THIRD DISTRICT
IN THE ’5 0 ’s
The Third Federal Reserve District is one of the
electric power consump
world’s great concentrations of industry, extend
tion series is an imper
ing from the steel mills of Johnstown at its western
fect substitute for gross
limit to the famous Fairless Works in the East,
product statistics, but it
from the diversified industries of Trenton and
does provide an idea of
the Lehigh Valley to the chemical plants in W il
the
mington. Its economic composition is much like
economic activity in the district, and it is less
the nation’s. Manufacturing is dominant both
subject to influences not reflected in gross prod
here and nationally; within the manufacturing
uct than are other possible measures.
classification, the district’s industries represent
a fairly good cross section of the country’s. It is
When one compares the electric power con
sumption by district manufacturers with that of
natural to view such an economy as behaving very
the nation (Chart 1, page 14), the similarities in
much like the nation’s, to feel that its trends and
the two series are striking, particularly until the
fluctuations will reproduce those in the country
recession low of 1958 was reached. But thereafter,
as a whole. But such assumptions bear examina
differences began to appear. Before 1958 almost
tion. What has been the district’s recent course?
every shift in the national series was duplicated
In this resume we consider over-all measures of
in the district; after that the local data fluctuated
economic activity and what they show concerning
more, even at times moving in opposite directions
the district’s development in recent years.
from the national figures. Furthermore, since early
general
trend
of
Two useful measures of total economic activity
1959 the district measure has lagged perceptibly
in the Third District are electric power consump
behind the national one. It appears then that
tion and bank debits. In the United States, fluctua
manufacturing activity has not increased as fast in
tions in electric power consumption closely follow
the district as in the nation. If the nationwide as
fluctuations in the gross national product. (See
sociation of power consumption with gross product
page 13.) This association lends some support to
holds also for the district, neither has total activity.
the use of power consumption data on a district
We should like next to examine power con
basis as a substitute variable— a stand-in— for
sumption in subregions of the district, taking care
the nonexistent series which, if we had it, we
to define the regions so as to include places which
might call gross district product. Admittedly, the
are rather like each other in kinds of economic
('Continued on page 14)
11
business review
MEASURING THE DISTRICT’S GROSS
BANK DEBITS A N D G R O SS NATIONAL
PRODUCT
PRODUCT
Each quarter, the United States Department of
Commerce produces estimates of the gross national
United States
(Index: 1957 = 100)
PER CENT
product. This is our most useful single measure of
over-all output of economic goods and services. It
reflects the ups and downs of the national economy
and the pattern of its growth. Unfortunately, there
are no comparable sets of statistics for local econ
omies. The substantial resources necessary for
producing them never have been forthcoming. To
discover the course of total economic activity in
a district, we must find some consistent set of data
which will serve to mirror approximately what is
happening.
Some candidates for this honor just do not
* Outside New York City.
* * Revised series.
qualify. For instance, total employment would
seem to reflect total activity. But economies can
accounts. They reflect total economic activity,
and do grow without commensurate increases in
because when business is good bank accounts are
employment, because of increases in mechaniza
more active; when business falls off, fewer trans
tion and improvements in techniques for produc
actions result in less use of accounts. But bank
ing goods and services. Similar reasoning excludes
debits reflect also the increasing use of bookkeep
some other possibilities. In fact, review of the
ing entries instead of cash transfers in business.
statistical series available for all or parts of the
More people use checks, for example; more people
Third District points to two possible sets of data:
are paid by check. So even if business did not
bank debits and manufacturers’ consumption of
grow, bank debits would, not because of more
electric power.
economic activity, but only because bank accounts
Bank debits are charges to demand deposit
12
are being used more often by more people. The
business review
ELECTRIC POWER CO NSUM PTION IN
MANUFACTURING A ND G R O SS NATIONAL
PRODUCT
United States
{Index: 1957 = 100)
PER CENT
electric power. In fact, power consumption in
creases faster than industrial production for a
number of reasons, among which the most im
portant are the drive to replace manpower with
machines in the production process and the fact
that the processes used in today’s rapidly advanc
ing technology add greatly to power consumption.
But gross national product also grows faster
than industrial production, for many of the same
reasons as electric power consumption. More effi
cient, power-consuming, productive equipment
releases workers into occupations other than goods
production. Their efforts swell the non-goods
sectors of gross product— personal and public
services of all kinds, cultural activities which gen
erate expenditures, and so on. The result is that
electric power consumption increases in about the
same way as the gross national product.
first chart shows this. The line representing bank
In fact, over the eight years since electric power
debits has a steeper slope than the gross national
consumption data for the nation first were con
product line because bank debits grow not only
as the economy grows, but also for other reasons.
structed, the correlation with gross national prod
Nevertheless, to the extent that this upward ten
The power consumption data, being relatively
dency is common to several bank debits series,
more affected by the volatile manufacturing sector
they still may be useful in making comparisons
of gross national product, swing up and down
among areas.
Consider now the other possible indicator. An
industrial economy consumes a great deal of
uct has been quite good, as the second chart shows.
more, but the timing of turns in the series and
their average upward movements coincide fairly
well.
13
business review
('Continued from page 11)
C H A R T
1
ELECTRIC POWER CO NSUM PTIO N IN MANUFACTURING
United States and Third Federal Reserve District
{Index: 1954 = 100)
PER CENT
activity. For the Third District, a reasonable
classification would break out the Delaware Val
CHART 2
BANK DEBITS
from the Lehigh Valley west to Harrisburg, the
United States and Areas in the Third Federal Reserve
District
{Moving Averages of Indexes, 1952 = 100)
anthracite areas in the northeast, and the manu
PER CENT
ley, the east central industrial cities extending
facturing region in central Pennsylvania around
Johnstown and Altoona. But electric power con
sumption statistics are in such form that it just is
not practicable at present to break them down
appropriately. There is, however, another series
which may serve— bank debits. As is indicated
on page 12, bank debits also correlate fairly well
with gross product statistics. Bank debits for subregions of the district and for the United States
are shown on Chart 2.
Chart 2 reveals that the parts of the region
have varied substantially in growth. The indus
trial areas in the Delaware Valley have kept pace
reasonably well with the nation. Elsewhere, one
would expect bank debits to increase less, because
14
business review
TABLE 1
Per Cent Increase in
Bank Debits, 1952-1959
Area
Delaware Valley
East Central
Anthracite
Central
Per Cent Change in Total
Employment, 1952-1959
+
+
-1
-
+ 6 0 .3
+ 4 7 .7
+ 2 7 .8
+ 3 7 .6
2.3*
2.4
1.8
9.1
* Nonagricultural employment instead of total employment for W ilm ington segment of Delaware Valley.
TABLE 2
Per Cent Change in
Population, 1950-1960
Area
Per Cent Change in Total
Employment, 1950-1960
+ 18.5
+ 16.8
+ 13.5
-1 0 .9
- 3.5
+ 1 1.7
+ 9.1
+ 9.5
-1 5 .4
- 7.1
United States
Delaware Valley*
East Central
Anthracite
Central
• W ilm ington has been omitted from Delaware Valley due to unavailability of data.
bank debits tend to grow more slowly outside large
Determinations of all causes and the relative
financial centers, and in this district such centers
weights to assign to each will require consider
are concentrated in the East. But the retardation
ably more information than is now available.
observable on the chart is too great to be attributed
solely to this. The different regions definitely ex
flect the same record as other measures. They have
Employment and population in the district re
hibit different rates of change. The smaller con
grown most where economic activity has been
tribution of the less rapidly growing areas is
greatest. Tables 1 and 2 show how, as the eastern
reflected in total economic activity in the district,
regions grew in population and employment, the
and helps explain why over-all measures of dis
trict business lag somewhat behind national ones.
others declined.
Table 2 shows something else. In none of the
In the Third District the steel industry provides
district areas has either employment or popula
a high proportion of total manufacturing output.
tion quite kept pace with the national average.
Certainly part of the explanation for the recent
Employment and population reflect the pattern
lag exhibited by the district when compared with
previously shown— a growth in recent years not
the nation lies in this fact. But it is difficult to
quite commensurate with the country’s, and lag
ascribe to it the entire explanation for the lag,
ging greatly in central and northeast Pennsylvania.
because bank debits lagged in parts of the district
even in years when steel was a booming industry.
continue? These are questions as old as the study
Our data so far do not provide adequate detail to
of economics. Some of the answers are obvious—
attempt precise measurement of how much of the
the decline of a great industry or exhaustion of
lag observed is attributable to one or another in
land; some— questions requiring forecasts of fu
Why have these situations developed? Will they
dustry or activity. Mining clearly is one culprit;
ture events— must await the passage of time; some
steel is one;
answers may be found in the incomplete yet
undoubtedly
there are others.
15
business review
sometimes suddenly revealing data which eco
this summary we have used such data to outline
nomic regions produce because they exist, as
how economic activity in the Third District de
by-products of the business of the moment. In
veloped in recent years.
16
business review
b u s i n e s s r e v ie w
FEDERAL
RESERVE
BANK
OF
PHILADELPHIA
TABLE O F C O N T E N T S — 1960
JAN UARY
(Annual Report Issue)
Henry VIII Revisited
W h a t the '5 0 's Told Us A b o u t the '60 s
Business and Banking in 1959
FEBRUARY
M agne tic Ink and the Paper Mountain
Is M onetary Policy Stifling Economic G ro w th ?
W h a t Should the W a g e of Labor Be?
MARCH
O f the M aking of M a n y Books
Philadelphia Office Buildings in I960
Bank Earnings in 1959
APRIL
$52 Billion on the C uff
A C ro ss of G o ld ?
MAY
H ow Banking Tames Its Paper Tiger
W ill M anufacturers Practice W h a t They Preach?
O u r I960 H ousing M arket
JUNE
Behold the G rocers' Supermarket
H ow Banking Tames Its Paper Tiger— Part II
JULY
H ow Banking Tames Its Paper Tiger— Part III
Resort Business Looks Promising
AU G U ST
M onetary Policy— H ow Decisions A re M a d e
The Business Outlook— From a Returning
Vacationist
SEPTEMBER
The St. Lawrence Stairway to the Sea
Unemployment in a G row ing Economy
OCTOBER
The Public's Portfolio
Down on the Farm
(Supplement) M anagerial G row th— W ithout
Inflation
N O V EM BER
Capital Spending Turns Down
Furniture: Durable but Different
DECEMBER
"The Fed is in the M a rke t"
Vault C ash
The Third District in the '50's
17
Additional copies o f this issue are available
upon request to the Bank and Public Relations Department,
Federal Reserve Bank o f Philadelphia,
Philadelphia 1, Pa.
FO R
TH E
RECORD...
MEMBER BAN KS 3RD F.R.D.
BILLI D N S $
BANKING
-C H E C K PAYMENTS
^
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(20 CITIES]
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DEPOSITS
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INVESTMENTS
3
:
2 YEARS
AGO
Third Federal
Reserve District
United States
Per cent change
Per cent change
SU M M ARY
Oct. I960
from
mo.
ago
year
ago
10
mos.
I960
from
year
ago
Oct. I960
from
mo.
ago
year
ago
Factory*
0
-3 2
+ 18
0
— 1
1
+ 1
+ 1
+ &
+ 7
+ 4
+ 6
+ 5
10
mos.
I960
from
year
ago
+ 4
— 3
+ 2
0
— 1
+ 2
+ 4
+ 2
+ 4
— 1
LO CA L
CH AN GES
Stocks
Per cent
change
Oct. I960
from
Per cent
change
Oct. I960
from
Per cent
change
Oct. I960
from
Per cent
change
Oct. I960
from
year mo.
ago ago
year mo.
ago ago
+ 2
+ 4
+
+ 4
— 1
1
Lehigh Valley — i + 18 +
1 — 5
year mo. year
ago ago ago
0 -
2 + 17
— 1 — 4 +
year mo.
ago ago
Per cent
change
Oct. I960
from
3 +35
3 + 10 +
Lancaster ...
+
Payments
Sales
Harrisburg ..
EMPLOYMENT A N D
IN C O M E
Factory employment
(Total) .......................
Factory wage incom e.....
Department Storef
Payrolls
mo.
ago
— i
— 10
+ 8
OCT
196C
Employ
ment
OUTPUT
Manufacturing production.
Construction contracts ...
Coal mining ................
YEAR
AGO
+ 2
-
2
1 + 2
— 7 -
i -
3 + 4 + 4 -
8
3
+ 7 +
3 -
1 +
7
5
+
3 — 3 +
7
-
2 — 7 + 4 -
Philadelphia
0 +
1 -
1 +
1
Reading ....
0 -
2 +
1 -
2 -
3 -
3 -
0
+ 9
— 9
- II
— 4
+ 7
Trenton .....
0 +
1 + 2 + 7
5
0 -
TR AD E*
Department store sales ... +
Department store stocks . .
4
0
1
+
+
1
6
+
Scranton ....
BA N K IN G
(All member banks)
Deposits ......................
Loans ..........................
Investments ..................
U.S. Govt, securities.....
Other .........................
Check payments ...........
1 + 4
0 + 1
1
0
+ 4
0
+ 5
0
+ 3
Of - 4f
+
+
+
—
—
+
2
1
1
7
8
2
4f
PRICES
Consumer .....................
ot + It + 2f
‘Adjusted tor seasonal variation.
|20 Cities
+
—
+
+
+
-
1
1
4
5
1
3
0
0
+
+
+
+
—
+
+
+
3
6
1
2
1
1
1
1
+
0
2
^Philadelphia
Wilkes-Barre
-
-
1 — 4 -
1
2 -
7 -
2
7 + 9 -
5
9 -
0
8 -
2 — 1 -
6
0
0 + 2 + 4 +
5
0 +
0 +
6 +
York .........
3
0 — 4
+
1 + 9
5 + 8 +
0 +
W ilm ington . — 2
— 2 -
+ 3 +
1 — 1 -
5
1
5 + 7
0 — 8 -1 0
*N ot restricted to corporate limits of cities but covers areas of one
or more counties.
fAdjusted tor seasonal variation.
19
@FedFRASER