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FEDERAL RESERVE BANK OF PHILADELPHIA E 1963: The Year the Torch Was Passed Statement of Karl R. Bopp Before Congressional Committee How Does Our Region Grow? B U S I N E S S R E V I E W is prod uced in the Department of Research. Bertram W . Zumeta was prim a rily responsible for the article, "H o w Does O ur Region G row ?" The author would be glad to receive comments on his article. Requests fo r additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of Philadelphia, Penn sylvania 19 10 1. 1963: THE YEAR THE TORCH WAS PASSED* The year 1963 was one of progress, problems, Time, the world knew the President had been and crisis. The progress came as the nation shot. At 2:36 p.m. Assistant White House Press moved ahead to produce goods and services in Secretary Malcolm Kilduff announced that the record volume. Real gross national product, for President was dead. example, increased by almost 4 per cent and the How would the world react? One of the first industrial production index rose 7 per cent. As indicators was the stock market. The news hit a result, per capita personal income climbed to the floor of the New York Stock Exchange about about $2,500 and corporate profits before taxes 1:40. There were rumors too that the Vice Presi rose to a record level of over $50 billion. Despite this progress, many problems re mained. Unemployment clung stubbornly above 5 % per cent of the labor force. Our balance of payments again showed a deficit. dent had been shot. What happened then has become history. The market plummeted. To quote the New York Herald Tribune:1 The only rationalization the brokers could find for the fantastic declines in some stocks was the But 1963 will not be remembered primarily fact that some panic sellers couldn’t see what for statistics nor even for our continuing and difficult problems. More likely, we shall remem prices they were getting for their stocks in their ber it for tragedy and for the panic this tragedy desire to unload ‘at the market.’ Stop-loss orders obviously were triggered in machine-gun fashion could have carried in its wake. The year 1963 and the situation seemed to be getting almost ended with the assassination of the President, out of control when the Exchange decided to stop and this tragic event had the potential to set off trading altogether Friday at 2:09 p.m. an international money panic of major pro portions. Yet it did not. Today I want to discuss the 7 sat in the board room Friday,’ said one large investor, ‘and I was appalled at what 1 saw. I heard one individual tell his man, “ Sell question of why it did not. The story is little me out at any price” and I winced. What hap known but of great importance, for it depicts pens to people?’ the resources and techniques developed through In about 29 minutes, 2.2 million shares were the years both to deal with crisis and to aid in traded, more than in many entire days in recent solving basic balance-of-payments problems. The years. The Dow-Jones industrial average plunged story of crisis begins on the fateful day of about 24 points. High Voltage Engineering fell November 22. from a high of 4 1% to 28% . Delta Airlines de Shortly after 1 :30 p.m., Eastern Standard * An address by Karl R. Bopp, President o f the Federal Reserve Bank of Philadelphia, before the Monday Afternoon Session, Janu ary 27, 1964, o f the American Bankers Association National C re d it Conference held at the Bellevue-Stratford H ote l, Philadelphia, Pennsylvania. clined from an opening of 62 to 52. Would the panic spread? What would officials 1 David Deich, " A fte r a Panic— a Rebound," New York Herald Tribune, November 24, 1963, Section 3, p. 2. 3 business review do who were responsible for orderly world finan of fear and speculation that culminate in inter cial and economic conditions? What must be national panic? going on in their minds? The bedrock of such unreasoning fear is shock Officials in the Fed, the Treasury, and other and uncertainty. Questions pile upon questions. agencies reflected the universal and immediate The President is killed? The Vice President also emotion of shock, incredulity, disbelief. But a may have been shot? Who will take command? job was there and it had to be done. Action must What will be the policies of those who take replace shock. The possible sources of inter command? Will the Soviet Union take some step national panic must be sorted out and the many methods and resources available to counter that during the emergency which might endanger world security? And a most important question, panic must be considered. what if foreigners who own literally billions of What, then, might precipitate an international money panic? U. S. dollars rush to convert these dollars into their own currencies and into gold; rush to do You, as bankers, are already familiar with the so because they fear this very rush, fear they inner workings of panic. Bank runs are classical must be first in line in order to get their funds examples. As you know, runs have occurred out of a country that may not be able to main when depositors fear that banks might not be tain the value of its currency? To further propel able to pay off depositors in full. the rush, will currency speculators add to the The United States acts as a sort of inter cascading stream of dollars descending upon national banker. Other nations hold dollars for world currency markets? And what if Americans many of the same reasons a family or business themselves should join in the rush to get out of firm holds deposits— as working balances to fi an asset which may decline precipitously in nance trade, to earn income, or as an emergency value, to get out of dollars and into foreign reserve against contingencies such as a crop currencies? failure. One of the reasons countries prefer to These are the types of uncertainties which pre hold dollars as working balances and reserves cede panic and the types of forces which propel is that the United States Treasury stands ready it. As in most cases where supply exceeds de to redeem these dollars in gold for friendly mand at prevailing prices, the rush to unload foreign governments and central banks. Dollars dollars on world currency markets tends to drive are “ as good as gold.” the price of dollars down. If dollar exchange Yet once the fear spreads that the United rates do begin to fall, then the panic may reach States may not be able to redeem dollars in gold a second dimension. Dollar holders who at first or in foreign currencies, or once foreigners fear stood steadfast may falter and add to the supply that they may be able to redeem dollars in lesser of dollars. Finally, if it seems that the United and lesser amounts of their own currencies—they States and cooperating foreign nations and world may demand payment for their dollars just as organizations will be unable to hold out against your depositors demand currency for their de the run, there is the chance that some foreign posits. Thus, it is possible to have a run on a central bank which previously had been absorb currency just as it is possible to have a run on ing dollars might crack and demand gold for a bank. But what forces propel the pyramiding dollar holdings. There is the chance that other 4 business review central banks might follow. With panic and uncertainty in the air, world in time of crisis— methods and resources which could supplement the sale of gold? finance and world trade tend to grind toward a The United States may obtain foreign cur halt. Who wants to lend money to finance ex rencies from the International Monetary Fund. ports in such an atmosphere? Who wants to These may be used both to absorb dollars com export for promises of future payment? As ex ing into foreign exchange markets and to buy ports fall, jobs in export industries are lost and those held by central banks and others in excess incomes decline. As jobs are lost and incomes of what they wish to hold. In recent years, fall, the world may plunge into the rancorous countries have obtained both gold tranch credits depths of depression. and additional funds in amounts up to 200 per Although central bankers must sort out in cent of their quota. A theoretical drawing of this their minds the possible sources of panic, they nature and magnitude by the United States would must be quick to consider the methods and re total a little over $5 billion. sources available to counter them— methods and Then there are the so-called “ General Agree resources which have been worked out in the ments to Borrow” concluded in Paris in 1961 by most minute detail over the years by govern 10 member countries ments and central banks. The basic question is States). Under this agreement, the IMF may ob (including the United this: how can we best absorb the avalanche of tain the equivalent of $6 billion of group cur dollars which could conceivably descend upon rencies and use this to extend additional credit the market? to IMF members. The first and most obvious resource is the huge United States gold supply. Though we have The network of credit facilities available to defend the dollar is further augmented by the lost gold in recent years, we still have around so-called “ swaps” arrangements. Under these ar fifteen-and-a-half billion dollars worth of the rangements, the Federal Reserve and 11 foreign yellow metal and even during a panic (perhaps central banks (plus the Bank for International I should say especially during a panic) people Settlements) have set up reciprocal “ lines of and governments will accept gold. Thus we can credit.” For example, the Bank of France will sell gold to absorb dollars coming into the allow the Fed to draw up to 500 million francs, market. And the world may rest assured that we and the Fed in turn will let the Bank of France stand ready to sell gold— down to the last bar if draw 100 million dollars. The Fed can use these necessary— to meet our international obligations. funds to absorb dollars offered on the foreign The Federal Reserve has ample power under the exchange markets or to purchase dollars owned Federal Reserve Act to suspend statutory gold by foreign central banks. Swap agreements have requirements against Federal Reserve notes and added more than $2 billion to the funds available liabilities and thus to make any part or all of for defense of the dollar. our gold holdings available to sell to foreign monetary authorities and international insti tutions. Another 'technique for absorbing dollars (though generally thought of as a form of medium-term credit), could be used for short But what other methods and resources are term accommodation in case of need. This tech available to the United States to absorb dollars nique is the issuance of the special securities 5 business review popularly called “ Roosa bonds” after the dis of the dollar, the bulwark which one considers tinguished Under Secretary of the Treasury. at a time such as November 22, 1963. Such bonds may be issued by the U. S. Treasury But there was still another asset, one which— to foreign governments and central banks for though intangible— may have been in retrospect payment in dollars. Such a sale of bonds for as valuable in defending the dollar as any yet dollars would, of course, effectively remove dol mentioned. That asset was a sudden intensifica lars from foreign hands. At present, there are a tion in awareness of the human condition, of the little over $850 million of Roosa bonds out fragile nature of human life, the temporality of standing. Rounding out the international network of human existence— the condition that binds us all together as human beings. cooperative arrangements which could be called Perhaps it was the disproportion of the act of upon to absorb dollars in time of crisis are the assassination that brought about this intensifica ad hoc type of agreements which have been tion of feeling— that a man with a $12 gun could worked out to aid central banks in time of spe cial need. A good example is the so-called “ Basle kill the President of the United States, could kill the head of a state whose immense power and credits” of more than $900 million extended by resources place it supreme among nations. European central banks to the Bank of England Yet whatever the reason, the feeling existed, during the 1961 sterling crisis. Such spontaneous and it was buttressed by the cooperative network agreements reflect the cooperative attitude and of dollar defenses. With this bulwark, the re understanding concern of the world central bank action of European central bankers contacted by ing community for those of their number caught the Fed on the evening of November 22 was this: in special situations of stress. “ Tell us what we can do.” Indeed, the Bank of Yet on the afternoon of November 22 there was even more to consider. Canada acted to support the dollar without even waiting to be asked. The United States economy is essentially viable The type of environment in which the Fed and strong. The ability to produce and the de operated on that November day is perhaps best mand for the fruits of production are the real illustrated by quoting the words of Charles A. strength of any economy. As long as we can Coombs, special manager for foreign operations produce efficiently in a world which has an effec of the Federal Open Market Committee. As re tive demand for that production, there will be ported in a recent article in the American a basic demand for the dollar. This is not to say Banker, Mr. Coombs has this to sa y r that we do not have problems— among the most I was having lunch in the dining room when important, the persistently high rate of unem there was a phone call. Someone told me the ployment and the continuing balance-of-payments President has been shot. I jumped up and went deficit. Yet essentially the economies of this na over to talk with Al Hayes. . . . tion and of the free world remain strong. Then I rushed off to the trading room on the This basic strength, plus the network of de seventh floor. By that time the news was on the fensive arrangements, and the cooperative atti ticker and there seemed to be some suggestion tude of the world’s central bankers and govern ments— these were the bulwark for the defense 6 2 James R. Ham bleton, "D o lla r's tio n ," American Banker, pp. 1-2. Defense— Study in Coopera business review that something had happened to Vice President periencing are not of the classical mold. Tradi Johnson. tionally, a payments deficit was associated with I thought that something had to he done domestic overexpansion. A country which paid immediately to prevent any ‘ bubbling up’ in the out to foreigners more than it received was as foreign exchange market of the kind of panicky sumed to be doing so because it was buying too selling we were seeing in the stock market. large a volume of goods abroad on net balance So 1 put in a big block of one currency and and too many securities. It bought too large a said to sell at the prevailing rate. Then, I threw volume of goods, the reasoning went, because in two more blocks. This all happened, oh say, domestic industry was producing at capacity and within a minute of my seeing the news on the hence could not provide sufficient goods to meet tic k e r.. . . demands. This tended to drive up wages and Almost simultaneously, l realized the Bank of prices and thus to encourage imports of lower- Canada was in there supporting the dollar— priced foreign goods and discourage high-priced without our having asked for help. . . . domestic exports. The result: a net outflow of . . . Right away l was on the phone to Switzer funds on trade account. land— it was night there, of course, and l got A second source of imbalance in the classical Ikle at home. . . .W e all have each other s home model was a net outflow of funds to purchase phone numbers. . . . We agreed to offer whatever foreign securities. The reason why such an out Swiss francs were called for to keep the dollar flow occurred, the reasoning went, was that in firm. terest rates abroad were higher than those at Then I called the Bank of England and three or four more banks, alerting them, again reach home. ing everyone at home. The reaction was the same enough— if prices were too high and interest everywhere: *Tell us what we can do.’ rates too low, then take action to lower prices The way to right such a deficit seemed simple The net result of the cooperative action: there and raise interest rates. The policy measure was hardly a bump or ripple in the foreign ex which could accomplish the task: tight money. change market. Quoting Mr. Coombs again, “ It was the easiest (crisis) of all to handle.” The central bank simply made less money and credit available. With less money and credit pur I would like to take the next few moments to suing a limited amount of goods, domestic prices illustrate how the defensive measures just de would tend to fall. With less money to borrow, scribed are of great assistance in dealing with interest rates would tend to rise. Both trade and our basic balance-of-payments deficit. The de capital accounts would improve and balance-of- fensive measures are not, of course, a solution payments equilibrium would be restored. to our balance-of-payments problem. They pro This was the classical remedy. Tight money vide us rather with an important assist in the could be applied rapidly; it would help both effort to solve our payments problem. The nature the trade and capital accounts; it was consistent of that assist can be summarized in a single with both internal and external difficulties. word: time. Yet our present deficit is not of this classical We need time because the world in which we nature. We are not producing at capacity and live and the payments difficulties we are ex forcing wages and prices up. Indeed, at the same 7 business review time our international payments are in deficit, Cuban missile threat to the assassination— this we have substantial unemployment; we are pro network also helps us absorb dollars in the ducing and consuming at less than our capacity. longer-run Moreover, much of the capital leaving the coun equilibrium. transition to balance-of-payments try is not induced by interest rate differentials. Again let me emphasize the fact that we have Hence a resort to the classical procedure of tight not solved our payments problems. Indeed, there money, though the measure can be implemented is much left to be done. Our network of de quickly and efficiently, would be injurious do fensive measures simply gives us time to diag mestically and of dubious utility on the inter nose our payments ills and apply the right medicine. national front. But if we are not to use the classical measures, In closing, let me say that the year just ended what avenues are open to an attack on the was a trying one, a year of national grief, na balance-of-payments problem? tional introspection, and national trial. Yet our To make a long story short, the measures must be consistent with our particular type of pay ments difficulties. Today we have a net export democratic institutions have so far measured up to this trial. In his inaugural address— that cold, windy surplus and thus a net inflow of funds from day in January over three years ago— President abroad on trade accounts. But this is not enough Kennedy said this, and I quote: to cover the outflow of funds for the network of Let the word go forth from this time and military installations and attendant personnel place, to friend and foe alike, that the torch has abroad, and for other Government payments plus been passed to a new generation of Americans the flow of private investments to foreign nations. — born in this century, tempered by war, dis In short, the balance-of-payments problem to ciplined by a hard and bitter peace, proud of day is not solely economic. In large measure it our ancient heritage. .. .Let every nation know is the economic reflection of a socio-political . . . that we shall pay any price, bear any burden, problem. Such problems take time to solve. The meet any hardship, support any friend, oppose cold war did not start nor will it end in a day. any foe to assure the survival and the success Thus the same defensive network which has of liberty. served us so well in time of crisis— from the 8 In the year 1963, the torch was passed again. Statement of KARL R. BOPP PRESIDENT, FEDERAL RESERVE BANK OF PHILADELPHIA before the SUBCOMMITTEE ON DOMESTIC FINANCE of the COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES i nursaay, j a ry j u , ivo^ Mr. Chairman and Members of the Committee: seems to me that a board consisting of eleven My name is Karl R. Bopp. I have been a members who devote their entire time to the member of the staff of the Federal Reserve Bank business of the Board would be unwieldy. Chair of Philadelphia since September 1941 and Presi men of the Board of Governors who have ex dent since March 1, 1958. Before I came to the pressed their view on the matter of size have Bank I was on the faculty of the University of favored a reduction rather than an enlargement from the present number. Certainly membership Missouri. It is a privilege to appear before you to testify on several of the bills that are before you relating to the Federal Reserve System. My on the Board would be less attractive as one of eleven or twelve than as one of seven or five. introductory statement is brief. Although there As to term and tenure, the bill would reduce might be some advantage to the Committee to the term from fourteen years to four and would hear the full statement before you raise ques make tenure of appointive members subject to tions, please do not hesitate to interrupt me at removal by the President. An appointive member any point if you prefer to do so. would be ineligible for reappointment for four years. Since the maximum term is four years, H .R . 9 6 3 1 : average tenure would be shorter and turnover I begin with H.R. 9631, “ A bill to increase to would necessarily be rapid; there could be little twelve the number of members of the Federal continuity except that provided by the staff. An Reserve Board, and for other purposes.” individual without independent wealth and in Section 1 would reorganize the Federal Re come would be forced to give thought to his next serve Board by increasing its size, reducing the position almost from the time he began to learn term and tenure of its appointed members, and about the responsibilities of membership; and changing its structure and composition. his next position would necessarily become a With respect to size, the bill would increase matter of increasing concern as the end of his the membership from seven to twelve, including term approached, since even top performance the Secretary of the Treasury as Chairman. It would not qualify him for another term. 9 business review The bill would change the structure and com Committee to replace the present Federal A d position of the Board. It would make the Secre visory Council. The proposed Committee would tary of the Treasury Chairman. This would place be so large that its deliberations would likely be on the Secretary a new responsibility that is too time consuming to hold able members or its inconsistent with an existing responsibility. As results would likely be perfunctory. Secretary, he is the largest borrower in the Section 3 would transfer the powers, duties, world by a wide margin. As borrower he ap and functions of the Federal Open Market Com propriately desires the lowest borrowing cost mittee to the new Board. To abolish the Federal possible. As Chairman of the new Board, he would head the agency with the largest single Open Market Committee would change the basic character of the System. It would eliminate the portfolio of government securities, an agency most important opportunity for public service whose primary concern is to promote credit and hence seriously reduce the attractiveness of conditions appropriate to the entire economy, the presidencies of the Federal Reserve Banks, including but not limited to the Government. with resulting deterioration in the quality of the The sad experience of many countries, includ managements and of the services performed by ing our own, with putting these conflicting re those banks. I continue to agree with the view sponsibilities in the hands of a single individual expressed by the Patman Subcommittee in 1952 leads me to conclude that it should not be done. that “ the present arrangement serves a useful An additional difficulty would be occasioned by having the Secretary serve as Chairman of purpose and (that there is) . . . no reason to disturb it.” the Board. He would rarely find time actually to Section 4 would direct the Comptroller Gen attend meetings. This, at any rate, was the ex eral to make an annual financial and manage perience before 1936 and I would anticipate ment audit of the Board, the Reserve Banks and no change. Unfortunately, this is a function that their Branches. Chairman Martin has described should not be delegated. The bill would provide also for a Vice Chair present auditing procedures which, by deliberate man, designated by the President from among ment. President Bryan submitted a statement to the appointive members, who would be the ac the Patman Subcommittee in 1952 which demon tive executive officer of the Board. It is probably strates that this change would not produce the desirable to have a chief executive officer but the desired results. It would reduce the authority of brevity of the maximum term would militate the directors, who are a driving force to in design, are independent of operating manage against efficiency and continuity of operations. crease efficiency. It would divert the attention of In describing the qualifications of appointive management from continuous and occasionally members, the bill requires fair representation of bold new efforts aimed at promoting efficiency certain specified interests and of geographic di to the negative approach of concentrating on visions. I would prefer the law to specify that avoiding risks. every member be qualified and selected to repre sent the public interest and that residential qualifications be eliminated. Section 2 would create a Federal Advisory 10 H .R . 9 6 8 5 : This bill would subject the Board and the Re serve Banks to appropriations by the Congress. business review President purely logical proposition a Federal Reserve Bryan, to which I have already referred, demon Bank could operate not only without capital stock states that this change would not achieve either and surplus but with a very large deficiency The supplementary statement by better monetary policy or greater operational (i.e., with liabilities far in excess of assets). efficiency. The reason is that the only logical needs for The Congress could expose the country to the assets are to secure earnings and to meet the hazard of seriously interupting our payments claims of creditors as they arise. Since earnings mechanism by subjecting the Reserve System to are now far in excess of expenses, fewer earning Congressional appropriations. An efficient sys assets would still be adequate to meet this need. tem of payments: collection of checks, provision The two large liability accounts are for Federal of currency and coin, is indispensable to sus Reserve notes and member bank reserve deposits. tained economic growth. Interruption in the There is no possibility that these accounts, which smooth flow of checks or inability to secure now total about $50 billion will fall below, say cash could cause panic. To assure that there $30 billion— or even $40 billion. Logically, no would be no such interruption in these functions assets are needed to meet claims that will never — which vary widely and at times unpredictably be made, hence the Reserve Banks could operate — the System would either (1) have to be given logically with liabilities far in excess of assets. wide discretionary authority by the Congress, or I develop this logic of the case to indicate that (2) would have to defend a budget of sufficient meaningful living involves more than logic. size to meet maximum possible needs. Grant of Reserve Bank stock is a means of tying mem wide discretionary authority would defeat the purpose of subjecting the System to Con ber banks and bankers more closely to the Sys tem. It provides a business-like method for elect gressional appropriations. Budgets designed to ing six directors. Dividends on the stock are a meet maximum needs, on the other hand, would partial offset against the lower earnings of mem tend inevitably to increase costs. Experience with ber banks which result from their higher effective the severe coin shortages in recent years demon reserve requirements. Elimination of stock would states that deficiency appropriations are no de make some observers restive because they would pendable solution. view it as indicative of a movement toward basic monetary changes such as nationalization of the H R. 3 7 8 3 : The bill would retire Federal Reserve Bank stock banking system. There is no demonstrated need or prospect of benefit to offset these advantages and substitute certificates of membership. As a of the change. 11 HOW DOES OUR REGION GROW? The three states of the Third Federal Reserve District have grown at very different postwar period. Delaware and New Jersey might appropriately say, “ How our region Pennsylvania must retain the question mark, however, for a fair number of the forces mine regional employment in the United States— though not so many as formerly— still Penn’s Commonwealth. rates in the does grow !” which deter do not favor There is a fascinating paradox in the economic terms, the interplay between population move growth of the Third Federal Reserve District. ments and shifts of industry determines which The District contains the State of Delaware and regions shall have the fastest increases. Popula a great deal of New Jersey and Pennsylvania. tion draws industry, and industry draws people. These three states, contiguous, highly developed, Start somewhere in time, with the nation’s lying right in the middle of the nation’s most industrial establishments located according to the densely populated region, are growing quite dif distribution of the resources industry requires: ferently. In Pennsylvania, population, employ labor effort and labor skills, natural sites and ment, and income are increasing less than in the materials, the productive equipment and plants nation, and this does not seem unreasonable. created earlier by man. Differences in the growth After all, the Northeast had a head start; now of each region then can occur if population other parts of the country are moving ahead; shifts, if technology changes, if plants and equip it isn’t likely that fast growth can be maintained ment wear out or natural resources become ex everywhere forever. But move east a bit. Dela hausted. A shift of population enlarges a market ware and New Jersey are spurting ahead at somewhere, and industry, seeking profits, estab rates substantially greater than the country. lishes itself where it can serve the market. First, They too were early starters in the regional industries which make heavy things for con competition. sumers will grow up near the new market— In an age when distance means less and less, construction is a good example. Then, industries in a country where foreigners remark on how which alike people and places seem, how can regions Eventually, if the market and the industries serve those industries will move in. so close together, almost of an age, and all with serving it become large enough in scale, it will a history of intense economic development, grow pay to build plants that can only operate on a so differently? large scale, such as steel mills. Big industries D e te rm ina nts o f re gio nal g ro w th A host of influences affect the way economic mies, in many lines, that go with just being where related producers are. The process becomes activities— buying, selling, production— distrib almost self-sustaining. attract other industries, too; there are econo ute themselves among 12 regions. In broadest The same thing can happen sparked by a shift business review New Jersey and Delaware have been acquiring people, jobs, and dollars faster than the nation. Pennsylvania has not. GROWTH OF POPULATION, EMPLOYMENT, AND PERSONAL INCOME— 1940-1960 PERCENTAGE INCREASES POPULATION of technology— a new discovery which creates plants near some resource essential to the new technology. The growth of steel-making is a good example. Areas like Pittsburgh, located at some optimal point between markets, ore, and coal, grew with steel technology. Now some of them are threatened by a combination of resource exhaustion, changes in technology, and popula tion shifts which conspire to make new loca tions attractive. Nothing is really quite simple, of course. The whole process works through an exceedingly complex network of interacting influences. One way to think about what influences regional growth is to try to specify all the interactions and all the determining factors, important, not so im portant, and of lesser weight still, and all the interconnections between stimulus and response. From such a massive effort may come a repre sentation of the whole system in all its interrela tionships, a detailed model which will enable decision-makers to trace the results that are likely to flow from given changes. Some day, persistence, genius, analysis, and luck will produce such models. Meantime, com munity decisions have to be based on simpler attempts to isolate the fundamental influences that are important everywhere, and the specific factors that have great weight in particular re gions. Regions must attempt to take advantage of factors which work in their favor, modify the effects of adverse forces where possible, and avoid wasting resources trying to fight un stoppable trends in technology, movements of population, and their consequences. The im portance o f change Decisions concerning location of industry are governed by how the world changes. In a phrase of economics, they are made at the margin. 13 business review When pros and cons are carefully balanced, a relatively small change— an increment in a cost, perhaps— can upset the balance. The cost in The manufacturing belt contains almost half the nation’s population and provides about half its jobs. The western part of the region has been growing at about the national pace; the East has not. crease may have been minor in the scale of a firm’s operations, but profits, too, often are a small percentage. Profits are the goal; added costs take away profits; as cost increments pile up, they swing more and more decisions. The Northeast,1 which contains the Third Federal Reserve District, is itself mostly con tained in the great Manufacturing Belt which holds nearly half the nation’s industrial resources and population— the nucleus of America’s pro ductive strength. It is a massive, powerful eco nomic region. But at the margin where decisions are made, it often is not the winner. vantage for the Northeast in location decisions. The facts o f re d istrib u tio n It is not an absolute disadvantage; the region Population is growing less rapidly in the North is and will continue to be an industrial heart eastern United States than in any other part of land. But northeastern locations often turn out the country. At the same time, changes in tech to be marginal ones in weighing the pros and nology have tended to make many industries cons of where to produce goods and services. even more responsive than formerly to the pull of markets. The richest portion of the North The state o f Pennsylvania east’s still vast endowment of natural resources Pennsylvania has received the full impact of the has been exploited; discoveries elsewhere, and forces working against the Northeast as an in new technology, have opened up other resource supplies. specializing in making products for which it is dustrial location. An economic region lives by The growth of the nation has made it feasible especially well adapted, and selling them to other to put large-scale plants in regions which for regions. Such industries constitute an economic merly were not large enough to support them. base; they are “ export” industries in the sense New plants are more efficient than old plants; that their products go to other regions (not nec this creates a competitive cost advantage for re essarily foreign countries) in exchange for the gions where important new capacity is built. specialized products of those regions. Pennsyl Within the Manufacturing Belt itself, these vania’s mix of export industries unfortunately factors have been at work, too. Markets and in inclines toward those which are no longer grow dustrial capacity have grown faster in its western portion. ing rapidly; some are even contracting. Mining is the most obvious case in point, but there are more. 1 W e have here, fo r convenience, added Delaware to the N o rth east region as it is usually defined. 14 The great bulk of activities which constitute a business review region’s economic base is in farming, mining and industries like textiles, which is now only about manufacturing. Other industries, such as services, half as important in the industrial distribution finance, trade and construction, tend to live off as it was just after the war. the export industries they serve, or on the per Pennsylvania’s case was greatly influenced by sonal incomes generated in the first place by a sequence of events which obviously cannot be the export industries. In Pennsylvania, as in traced to a single factor. Early in the sequence most parts of the nation, agriculture contributes would come the effect on population growth of proportionately less and less to the economic the state’s losing comparative advantage in min base. In mining, the state has borne the full ing and some manufacturing activities. Resultant brunt of technological change and, to some ex migration in turn affected rates of natural in tent, of resource exhaustion. crease, and the growth of Pennsylvania’s popu The declining contributions of agriculture and lation dropped off sharply. Meanwhile technol mining have had repercussions on the state’s ogy was changing, incomes were rising, transport strength as a market, and consequently on its conditions changed drastically, and the conse attraction for market-oriented industries. Popu quent closer orientation of industry to markets lation has declined in many agricultural and reinforced the disadvantage of the state in the mining portions of the state, or has increased market-pull phase of competition for new plants. very slowly, because of migration to areas— While it is certainly true that Pennsylvania’s often out of the state— where jobs were more troubles stemmed in great part from input disad plentiful. young vantages— resource exhaustion and obsolescence workers has damped the state’s rate of natural increase. The net result: Pennsylvania’s total — the effect of market growth elsewhere on the region’s ability to pull in industry cannot be population, and its pull as a market, have grown discounted. quite slowly. Percentage of Manufacturing Employment, 1960, in Industries with National In creases in Excess of 20 Per Cent, Region________________________________________ 1950-1962 The departure of vigorous The problem is intensified by the nature of Pennsylvania’s distribution of manufacturing in dustries. These constitute the largest part of its export base, and the one part which is not de clining. Fifteen years ago, only about two-fifths Pennsylvania United States New Jersey Delaware 43 54 61 68 of the state’s manufacturing activities were in New Je rse y and D elaw are— luck, location rapidly growing industries such as machinery, and urban sp ra w l chemicals and fabricated metals products. De Economic activity in a disadvantaged region can creases since then in the state’s declining indus redistribute into portions of it, causing strong tries, particularly textiles and metals, operated growth in sections while the entire region may to increase the proportion in growing industries be slowing down. This happened in New Jersey to about 45 per cent. This figure is below the and Delaware, and it happened apparently for a national proportion, and is substantially less than host of special reasons. Some of them can be in Delaware and New Jersey. The mix of manu clearly identified; some await much more de facturing activity in the state thus has remained tailed investigation than is possible here. on the side of slow growth, despite declines in Both states had, and have, industrial distribu- 15 business review tions which lean strongly toward growing activi ties. Delaware has most of its eggs in one PER CAPITA PERSONAL INCOME DOLLARS basket, the chemicals industry, although its rap idly increasing stake in transportation equipment has somewhat improved the state’s manufacturing diversification. Farming in Delaware has re tained a greater share of employees than it could in the other two states; it still constitutes a sig nificant share of the economic base. This offsets a little the high-growth implications of the manufacturing distribution, but even so the state’s basic activities are weighted toward grow ing industries. In New Jersey, manufacturing is the basic activity. The industry mix is heavily on the side of high growth, with electrical machinery and chemicals alone accounting for more than onequarter of all manufacturing employment in the state. Undoubtedly it is an oversimplification to at tribute a favorable mix of industry in a state to luck. Yet there is a considerable admixture of fortune involved in the fact that one of the world’s best-managed and fastest-growing com panies started out in Delaware rather than at some appropriate site in a neighboring state. In fact, fortune favors both states in their loca tions. They are directly in the urban corridor of the great metropolitan region that stretches down it received much of the population which flowed to these centers. Population, and high-income population at that, draws industry. The sequence traced out for Pennsylvania worked in the op posite direction for New Jersey. Delaware benefited also from exceptionally high rates of natural increase, associated with its higher percentage of rural population. Dela ware’s population grew in an interesting pattern. Relatively high rural population and associated high rates of natural increase ordinarily make for migration out of a region. Delaware, how ever, had considerable migration into the state— a good example of the pull that industrial growth can exert on population. Percentages of 1950 Population the Atlantic coast to Washington. They have im portant access advantages, to water as well as land carriers. Both states are small enough that these access advantages weigh heavily in the total reckoning of their competitive positions. In the case of New Jersey, a very special factor operated to enhance its market potential. Region Pennsylvania United States New Jersey Delaware Natural Increase 1950-1960 + + + + Net Civilian Migration 1950-1960 12.3 16.7 13.5 20.1 — 4.0 + 2.0 + 12.1 + 18.4 The sum o f the o b se rva tio ns This was suburbanization. Lying between the If there is a moral to this story of economic metropolitan centers of New York and Phila growth, it must be that having a vigorous lineup delphia, in an age of rapid urbanization New of export industries is essential to a region. Jersey became a net importer of income because Through the interaction of jobs attracting peo- 16 business review pie, and people, as markets, attracting more in fortunes of a company or a person— when the dustry, a spurt of growth in the export sector causes of the downturn seem to have run out can initiate a process that, in effect, feeds on of steam. It is difficult at that point to perceive itself. Pennsylvania has been passing through a where the lift will come from to spark a recov sequence of this sort, but in the opposite direc ery. Pennsylvania as an economic region may be tion. It has caused migration out of the state nearing such a turning point. What might initi and inhibited growth. The other two states have ate a lift? There are several possibilities. been in upward phases, with people moving in One is its open areas of natural beauty. and economic activity increasing at rates above Amenities of living are an increasingly impor the national average. Where do they now stand? tant regional asset. With incomes high and grow In Pennsylvania, the decline of mining, which ing, with more people footloose in the sense that was very important in initiating the sequence of they live on income, often as retired persons, growth-inhibiting shifts, has about run its course, with more companies footloose in that modern but the state is left with a distribution of produc industry is less tied to resource inputs than for tive activity which, relative to other regions, merly, a region can find that climate or other does not especially lean to or away from the advantageous living conditions pull people and initiation of a growth sequence. The state also is firms to it. Florida is an obvious case in point. not improving in relative market pull, having as Pennsylvania has many possibilities of this sort, it does less population growth than some other lying as it does near regions of high income parts of its region. But with mine closings no and high population density where recreational longer pouring large numbers of people each year onto the labor market, the worst is over. facilities are becoming ever scarcer. Amenities certainly played a part in New There comes a point in every downward phase Jersey. Surburbanization in a sense reflects a of human activity— in the business cycle, in the search for amenities. The appeal of the seashore Delaware has the highest proportion of property income in the nation. PROPERTY INCOME AS PERCENTAGE OF TOTAL PERSONAL INCOME, 1962 PER CENT ________ helps explain why South Jersey has the highest population growth in the state. The mix of industry in Pennsylvania, though still not on the side of growth, has moved a little in that direction since the war. The growing in dustries of today increasingly depend on re search and educational institutions for intellec tual maintenance and as suppliers of personnel. Pennsylvania has several educational centers which could act as magnets for industry, and efforts are underway in the state to exploit and to improve these assets. The continued market appeal of New Jersey and Delaware is enhanced by their being im porters of income. In Jersey, the suburbanites bring it back every night. In Delaware, it comes 17 business review by mail— the state has the highest proportion of the few industries which make up its export property income in the country. Special factors— wealth, suburbanization, in base. By the same token, of course, it can re dustrial distribution— produced growth in New that would be submerged in the sheer size and Jersey and Delaware that exceeded what might variety of a larger state. New Jersey seems sure ceive a stimulus from favorable developments have been predicted in view of their northeastern to benefit from further suburbanization, but position in the country. It is quite possible that probably at a slower rate. The state’s strategic these forces may have had their greatest effect. location in Megalopolis, however, and the accel Delaware particularly is vulnerable to any im portant changes in the competitive positions of erating development of its southern portion, seem to make statewide growth inevitable. 18 FOR THE R E C O R D • • • INDE) BUSINESS 130 DEPARTMENT STORE S/<LES, DIST. (1957-59 = 100. SEASONALLY DJ.I FACTOR Y PAYROLLS, DIST. 1 / , I (1957-59 = i \ 100 ! P i tj> s\ no 1 I CONSUMER PRI : e s , p h il a . (1957-59 = 100) FACTORY EMPLOYMENT, DIST. (1»57= 100) 90 80 70 2 YEARS AGO YEAR AGO DEC. 1963 Third Federal Reserve District United States Per cent change Per cent change Factory* Department Storef Employ ment Payrolls Sales Stocks Check Payments Per cent change Dec. 1963 from Per cent change Dec. 1963 from Per cent change Dec. 1963 from Per cent change Dec. 1963 from Per cent change Dec. 1963 from mo. ago mo. ago mo. ago mo. ago mo. ago year ago +21 +21 +12 +21 SU M M A R Y Dec. 1963 from 12 mos. 1963 12 mos. 1963 LOCAL CHANGES year ago mo. ago year ago year ago - mo. ago year ago Dec. 1963 from 2 + 6 + 5 - i + 2 + 1 - i 0 1 - 9 + 7 +10 - i 0 + 1 + 3 - 4 + 9 + 8 Lancaster.............. - i - 1 + 1 - + 9 + 9 + 4 Philadelphia......... 0 - I 0 + 2 + 1 +14 MANUFACTURING Electric power consumed........... + 1 Man-hours, total*........................ 0 0 Employment, total.......................... 0 Wage income*............................... + - 2 1 0 + 2 + 14 - 2 - 1 + 1 C O N STRUC TIO N **........................ - 2 9 +10 COAL PRODUCTION...................... - 3 + 6 + 9 TRADE*** Department store sales................. + 1 2 0 Department store stocks............... + 7 + 5 0 BANKING (All member banks) Deposits.......................................... + 1 4" 6 Loans............................................... + 3 + 9 Investments..................................... 0 + 3 0 - 6 U.S. Govt, securities................... 0 +23 Other............................................ Check payments............................. + 2 0 t + 1 ot - Reading................ + 1 + 5 + 8 + 4 - 2 +20 + 7t + 2 + 2 + 2 + 1 + 2 +20 + 7 + 11 + 2 - 6 +21 + 11 + 7 + 11 + 4 - 4 +22 + 9 ot + 3 t + 2 t 0 0 0 + 2 + ‘ Production workers only. “ Value o f contracts. •“ Adjusted fo r seasonal variation. 0 Trenton................ - 1 + 3 + Wilkes-Barre. . . . 2 - 1"20 Cities jPhiladelphia 0 1 year ago 1 + 6 +n 0 + 16 + 0 + 2 + - year ago year ago — 2 + 2 Scranton.............. + 1 +10 1 + 2 5 + 1 + 4 + 19 + 1 2 - 2 + ^ +12 8 - 3 + 5 + 16 + 8 +12 5 + 14 + - 6 +10 8 - 1 + + 10 + 8 7 7 +45 6 5 + 10 + 2 0 + 2 +22 4 2 + 11 + 10 + 2 5 2 - i + + 7 5 + 16 + 0 + 1 + York...................... + +20 + 16 + 1 + 6 + 7 + + 8 +15 + 1 + Wilmington.......... + PRICES Consumer....................................... year ago - 0 + 9 + 9 •N ot restricted to corporate limits of cities but covers areas o f one or more counties. tAdjusted fo r seasonal variation.
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