Full text of Business Review (Federal Reserve Bank of Philadelphia) : January 1960

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JANUARY

1960

Henry VIII Revisited
The problems and temptations o f money creation.

W hat the ’5 0 ’s Told Us About the ’ 6 0 ’s
Business and Banking in 1 9 5 9

FEDERAL




RESERVE

BANK

OF

PHILADELPHIA




NEW RELEASES
Weekly Financial Barometers is a 48-page booklet de­
signed to show how to interpret the reports of member
banks and the Federal Reserve Banks. In addition to a
description of these reports, it contains tables, charts and
glossary of terms.
Forecasts for 1960. The Department of Research has com­
piled and analyzed several score predictions made by
businessmen, economists and Government officials. This
compilation includes a summary of forecasts for the econ­
omy as a whole and particular sectors of the economy.
The more important indicators are presented in chart form.

Copies of these releases are available on request of
the Department of Research, Federal Reserve Bank of
Philadelphia.

The Problems and Temptations o f Money Creation
SCENE l

the presses. A little inflation is better than un­

Place: A classroom in one of America’s oldest

employment . .

and most respected universities

SCENE 2

Characters: The professor, his students
Time: The present

Place: A town meeting

“ Fundamental change!” roared the distin­
guished professor of economics, his students

Characters: The candidate, voters
Time: The present

hanging on every word. “ In the past 30 years

“ . . . And, fellow citizens,” the candidate con­

our economy has undergone fundamental, struc­

tinued, “ let me point out that the greatest chal­

tural change. No longer do we

lenge we will face in the coming decade is growth.

have the same competitive mar­

The Soviet Union’s output is growing at a rate

kets our

of 6 to 7 per cent a year. Our output has grown

elementary textbooks
sellers

only about 3 to 4 per cent a year. To sustain

with no one individual able to

our position of strength in the cold war we must

influence

increase our rate of growth. We must spend

describe— a number

are

great

price.

of

Today

there

concentrations

of

power.
“ Today labor unions can force wages up

more on basic scientific research and education,
build more rockets, send up more satellites.
“ Yet we want to maintain our present stand­

faster than we can increase productivity. Giant

ard of living, have new cars, homes, refrigera­

business enterprises can pass these higher costs

tors, television sets.

on to the consumer in the form of higher prices.

“ The only way we can

And to maintain existing levels of employment

satisfy all these desires

we must buy all goods produced, even at higher

is to increase our ability

prices. Where will we get the money needed to

to produce, to augment

buy the same volume of goods at higher prices?

our growth. And since

If need be, we must create the money, turn on

low interest rates spur




3

productive effort, we must call on our monetary

“ Old Copper Nose,” as King Henry was called,

authorities— on the Federal Reserve— to main­

had indeed been at it again. Between 1526 and

tain low interest rates.”

1546, the silver content of the English shilling

Since interest rates are determined by the

was reduced nearly 70 per cent. Henry melted

demand for and supply of funds, the candidate

the coins that his tax collectors brought into his

might have concluded, the Fed can reduce rates

mint and added base metal such as copper,

only by increasing the supply of lendable funds,

thereby creating additional money to finance his

by creating money.

spending programs.
Because the output of goods failed to keep

SCENE 3

pace with the expansion in the money supply,

Place: London

(and because people refused to accept debased

Characters: An old fishmonger, assorted herring

coins at full face value) prices rose significantly.

Time . . .

Rising prices, in turn, created a number of seri­

. . . The year was 1544. A chilly autumn wind

ous social problems. Inflation meant a redistri­

chased swirling fingers of fog through the stalls

bution of purchasing power between those with

of Billingsgate Square, the central fishmarket

relatively fixed incomes and those with fluctuat­

of London. The old fishmonger smiled with sat­

ing incomes. It meant a steady deterioration in

isfaction at the silver shilling he clutched in his

the value of savings.

hand. In its place just a moment before had been
a string of plump, fresh herring. He had made

THE PAST, THE PRESENT, AND THE FUTURE

the morning’s first sale while the shadows of

Today, as in 1544, when money is created faster

night still lingered.

than goods can be produced, prices tend to rise.

The raised edges of
the

shilling

Here merge the past, the present, and the future.

somehow

Whether the year is 1544, 1944, or 2044, prices

made the old fishmonger

rise. Whether the government creating money is

feel warm and secure.

royal or republican, dictatorial or democratic,

What a pleasant sensa­

prices rise. Whether the money is created by

tion he felt as he ran his

melting and adding base metals or by turning

oily thumb over the em­

on printing presses, prices rise. Whether the

bossed profile of Henry

money is used to build castles, wage wars, con­

VIII. He tilted his head for a closer look at the

struct dams, or speed economic growth, prices rise.

coin in the first grey streaks of dawn.

If money is such an important part of our

It was then that the smile faded from his lips.

lives, who has the power to create it, to deter­

For the first time he felt the chill of the morning.

mine the quantity which will circulate? Ultimate

What once had been a splendid silver coin was

authority over money creation has always been

now worn and blotched. Through a thin coating

vested in the sovereign body politic, the State.

of silver, Henry V III’s nose protruded in a dull

Under the absolute monarchies of yesteryear,

relief of copper.

the State exercised this power directly. The king

“ Blimey,” he thought, “ Old Copper Nose ’as
been at it again.”

4




decided both how much money he would spend
and how much would circulate.

With the coming of representative democracy,

pendulum may be swinging once more toward

the people of many countries asked their gov­

unified control over money creation and spend­

ernments to circumscribe this ultimate author­

ing; toward combining the day-to-day power to

ity, to submit to checks and balances. Such

create money with the power to determine the

limits reflect the

direction and magnitude of current government

. . wishes of the electorate

as well as the fear of the administration of the

spending programs.

day that unlimited power may be abused by the
administration of the morrow because of partisan
pressures or embarrassing fiscal difficulties.” 1
Limitations

on

the

SOVEREIGN CONTROL OVER MONEY
CREATION: REGNUM PLUG NICKELUM

State’s money-creating

For hundreds and hundreds of years the power

power were accomplished through a delegation

to create money was solely the prerogative of

of the money prerogative. The State remained

kings, princes, and emperors. And this power

the ultimate authority in money matters; its

came in very handy, for the sovereign was con­

agents carried out the function. Through history,

tinually beset by problems of finance. He had

the State first allowed private bankers to deter­

to finance wars, to pay the expenses of the court,

mine the amount of money which would circu­

and to meet the many other costs of State affairs.

late. Then power to determine the limits of the

To meet these expenses, the sovereign devised

money supply was delegated to professional

a number of plans. He taxed, borrowed, em­

money managers or central banks.

barked on elaborate programs of military con­

Yet from time to time, world events brought

quest, operated State-owned industries for profit,

pressures on the State to reexamine its monetary
prerogative; to attack new and complex social

and when revenues from these other sources were
insufficient to cover expenses, he debased the cur­

and economic problems through its money-cre­

rency. Indeed, for every king who maintained

ating powers. Wars, depressions, and struggles

monetary stability there were countless others

for international political status were but a few

who adulterated the currency in as many differ­

of the pressures on governments to kindle the

ent ways.

melting pot or switch on the presses of State.

Like Henry VIII, some melted the coin of the

In this article we present an impressionistic

realm and added base metals. This method was

portrait of the broad historical sweep of money

a favorite not only of medieval European mon-

creation. We

shall examine the fundamental

historical cycle described above: the pendulum­

archs, but also of the Roman emperors who
came before them.

like swings of the power to create money between

Some sovereigns were so matter-of-fact about

sovereign governments, private banks, and cen­

the business of debasement that they neglected

tral banks. We shall take a look at the abuses

to maintain even a semblance of relationship

which can result when the power to create and

between precious metal and the coin of the realm.

spend money is subject to the same immediate

The English historian Macaulay describes the

authority. We shall examine the forces which

reign of James II of England in the following

have led many to suspect that the historical

terms:
“ . . . pots, pans, knockers of doors, pieces

1 Karl R. Bopp, "N a tio n a liza tio n of the Bank o f England and the
Bank of France," The Journal of Politics, Vol. 8, No. 16 (August 1946).




of ordnance which had long been past use,

5

were carried to the mint. In a short time

The practice of “ sweating” was widespread.

lumps of base metal, nominally worth near

The sweater extracted particles of precious metal

a million sterling, intrinsically worth about

from the surface and edges of coins by shaking

a sixtieth part of that sum, were in circu­

them together in a bag.
Other sovereigns used the technique of “ drill­

lation. A royal edict declared these pieces to
be legal tender in all cases whatever. A

ing and plugging” to debase the currency. The

mortgage for a thousand pounds was cleared

core of the coin was drilled out and molten iron

off by a bag of counters made out of old

or bronze poured in.

kettles . . .” 2

And then there was “ recoinage.” The monarch

And there were other ways in which the sov­

would call in old coins, issue new ones of the

ereign could debase the currency in the days

same denominations and quality, but at lower

before the printing press. Some kings (as well
as citizens at large) were given to clipping small

weights.
What did the citizenry think of all this mone­

slices off the edges of coin. Fifty clips and the

tary mischief? In general they were appalled.

debaser had the wherewithal to create

But the practice was deeply ingrained

five new coins.

in the monarchical culture. While a '

TH E SILVER C O N TEN T OF ROME’S CURRENCY
AND W H Y IT W A N ED
Reign
began
(A.D.)

Emperor

Per cent
silver

98
1 17

Trajan
Hadrian

93
87

138

Antoninus Pius

75

161
193

Marcus Aurelius
Septimius Severus

68
50

218

Elagabalus

43

235
238

Maximinus
Gordian

35
28

244

Philip

0.5

268

Claudius Victorinus

0.02

Reason for debasing
Debauched the currency to extend Rome's boundaries
Rimmed the empire with elaborate and expensive
military fortifications
Great humanist but fiscal failure: lowered taxes; gave
to the poor; debased the currency
Fought costly defensive wars on all sides
Came to power and stayed there by lavishing ex­
pensive favors on the legions
Pursued pleasure with all his might and with all
Rome's resources
Scourged empire brutally fo r personal gain
Financed the civil and foreign wars of a disintegrat­
ing empire
Battled contenders fo r the royal robes under the
aegis of a crumbling currency
Held invaders in check with strength of sword and
the melting pot of the imperial mint

Sources: Humphrey Michell, "Th e Ed ict o f D io cletia n," Canadian Journal of Economics and Political Science, February 1947. Encyclopaedia Briltanica
2 Thomas B. Macaulay, The History of England from the Accession of James II, (Philadelphia: J . B. Lipp inc ott, 1868) Vol. I l l , pp. 169-170.

6




private
zen

citi­

caught

clipping
coin
be

MONEY HAS BEEN CREATED
BY COINAGE
FOR HUNDREDS OF YEARS

a

racy replaced the divine right of kings. And with
this popular assumption of power went the right

might

to create money.

hanged,

branded

fundamental face lifting. Parliamentary democ­

Yet hardly had Parliament withdrawn its foot

on

from the royal seat of King James’ breeches

the cheek, or

when money creation began to slip out of the

relieved of an

legislative grasp.

ear, the sov­
ereign

Who dared to poach on the Parliamentary pre­

con­

rogative? None other than the money lender, the
fledgling banker.

sidered it his
p re ro g a tiv e
to debase the
currency. In­
deed,

cur­

rency debase­
ment

was

The coiner pictured here has just
placed a blank metal disk between
two dies and is proceeding to ham­
mer the disk into a coin.

THE PENDULUM SWINGS: MONEY
CREATION PASSES FROM SOVEREIGN TO
PRIVATE HANDS
Since time immemorial, there have been bankers.
They have plied their trade in ancient Babylon,

even given a sonorous Latin name, morbus numericus, as though it were an established principle
of common law. The people resented it, but they
could do little about it.
One indication of popular discontent with the
situation was implicit in the concept of the
moneyage. It was not rare for an entire kingdom
to pledge a moneyage— a heavy tax levied triennially as a recompense for the king not to alter
or debase the coin which he was entitled to do by
his sovereign prerogative.
Even when a moneyage was pledged, however,
the sovereign sometimes reneged on the agree­
ment. Debasement often seemed the only way to
extricate the kingdom from financial embarrass­
ment.
And such a valuable mechanism was given its

coining was introduced: the coining press. The coiner
in the pit has placed a blank between two dies. The
four workmen will turn the wheel, sending a screw
column and die spinning down on the blank. The
pit man must be nimble: otherwise he will lose a
finger joint, as many have done before him.

full share of praise. Kings and princes hailed

Greece, and Rome. But they did not begin to

control over the money supply as one of their

create money until the end of the seventeenth

most priceless privileges. But they were not to

century.

enjoy this privilege forever. Beginning in Eng­

Prior to that time the banker was simply a

land toward the end of the seventeenth century

financial middleman. If his depositors should

the concept of the monarchy was undergoing a

leave 20 gold coins with him for safekeeping, he




7

might lend out a portion of these, feeling that all

gold as a reserve to redeem notes on demand.

his clients would not demand repayment on the

Chances were that only a small and reasonably

same day. But he could lend only the 20 coins

predictable amount of notes would be presented

left with him and no more. The banker thereby

for payment in any one day, most likely in

increased the rate of circulation of existing

amounts which could easily be met from the

money. But he could not increase the over-all

banker’s gold reserve.

supply of money.
Soon,

however,

the banker was to
become more than

THE BANKER: FROM
FINANCIAL MIDDLEMAN TO
CREATOR OF MONEY
Early bankers could lend only the gold coins
left on deposit with them. They could not cre­
ate additional money.

Thus the banker no longer needed to limit his
lending to the 20 gold coins he held as deposits.
He might have several times 20 coins outstanding
in bank notes, the exact amount depending on

a mere middleman.

the rate at which the notes were presented for

He was to discover

repayment. And later, as people began to use

the possibilities of

checks, the banker could lend simply by crediting

the bank note.

a checking account.
In short, either by manufacturing bank notes

The bank note
began

its

career

or by crediting a checking account, the banker
became a creator of money.

humbly enough, as

But why did the State allow the banker to

the banker’s receipt
for a deposit of
gold. It was valua­
ble to the depositor

A t most, the enterprising banker pictured here
could lend 20 gold coins. If prudent, he would
lend even less, preferring to keep some coins
in reserve to p a y any of his depositors who
might wish to withdraw their funds.

only as a means of getting his money back. Yet it

participate in money creation?

At first, the

banker’s notes were simply not considered money.
O nce borrowers and others began to a c ­
cept the banker's notes, he could create
money.

could not have taken long for the banker and his

Instead, they were
thought of as a sort
of warehouse receipt,

client to recognize the latent possibilities in this

a promise to pay

receipt.

gold or silver on de­

With his gold receipt, the banker’s client

mand.

could take advantage of a real convenience.

They

contracts

were

between

When he needed to make a payment, he could

the banker and his

simply give the creditor his gold receipt instead

customer.

And

of going to his banker, withdrawing gold and de­

everyone, including

livering it in person. The creditor, in turn, could

bankers,

pay his creditor in the same fashion. And so the

basic

process could continue a dozen times or more.
The banker’s receipt or “ bank note” became a
medium of exchange, a sort of “ stand-in” for
gold.

Rather than lending the 20 gold coins, he
could keep them as a reserve in his safe
lending his notes instead. He might lend
notes worth 40 gold coins, feeling that all
of the notes would never be presented for
payment in coin on the same d ay.

had

freedom

the
to

enter into contracts.
There were still
other reasons why

the State did not circumscribe the activities of the

Seeing his receipts circulating as a means of

banker. Since the purse of government often con­

payment, the banker began to get ideas. If mer­

tained little more than a velvet lining, the banker

chants and others accepted his notes, why not

might come in handy in a fiscal pinch. Moreover,

lend notes rather than gold coin, keeping the

the explosion of economic activity associated with

8




the commercial and industrial revolutions stimu­

sented for payment at any time by other banks

lated a strong demand for money, both for in­

or by individuals, bankers would carefully limit

dustrial investment and to facilitate an unprece­

the volume of notes they issued.

dented expansion in trade. The development of

And if this were not enough, there existed a

the philosophy of laissez faire popularized the

second safeguard against overissue— the so-called

idea that government interference in business,

“ real bills” doctrine. According to this theory,

even in the business of creating money, should

if bankers issued money only to finance produc­

be held to a minimum. Indeed, laissez faire was

tion— goods in process— there would be no prob­

to set the stage for an unprecedented expansion

lem of overissue. Such loans would be self-

in banking. And with this expansion came a

liquidating; they would be repaid from sales in

concentration of money creation in private hands.

a few months. Thus the money supply would not
outgrow production. There was no danger of an

LAISSEZ-FAIRE BANKING

overissue of money— or so the theory ran.

The year was 1763. The bespectacled professor

In a period dominated by such ideas, the num­

sat down at his desk, inked his quill, and began

ber of banks and bankers multiplied rapidly. In

to compose the lecture he would deliver to his

1750 one authority tells us that there were not

students on the following day.

yet a dozen “ bankers’ shoppes” outside London.

“ . . . Give monopolies to no bank . . . en­

By shortly after the turn of the century, there

courage the erection of as many as possible.

were about 800 note-issuing banks in Great

When several are established in a country,

Britain. Across the sea, in the United States,

a mutual jealousy prevails, they are continu­

the number of banks increased from 88 in 1811

ally making unexpected runs on one another.

to 208 in 1816. By mid-century, notes of nearly

This puts them on their guard and obliges

1,500 different banks were in circulation.

them to provide themselves against such de­

The private banker

could

create

a note­

mands . . . it is manifest that banks are bene­

issuing bank with only a little capital, the ability

ficial to the commerce of a country, and that

to attract deposits of gold and silver, and access

it is a bad police to restrain them.” 3

to a printing press. Relatively little governmental

And so the eminent Professor Smith applied

regulation was encountered.

his laissez-faire ideas to the business of banking.

Though governments still retained the right

Let the government keep hands off. Competition

to issue money, it became increasingly bad form

and competition alone was needed to assure that

to do so. Only in time of war was the State likely

the proper number of banks issued the proper

to reassert its prerogative in fundamental fash­

volume of bank notes. Overissue, so characteris­

ion. This was the heyday of laissez faire, the

tic of sovereign money creation, would be a

golden age of private control over money crea­

problem of the past. Since bankers were re­

tion.

convert their notes into gold on

But the era was not without its monetary prob­

demand, and since these notes might be pre­

lems. And dark those problems were. One word

quired to

summed them up: panic!
3 Edwin Cannan (Ed .) Lectures on Justice, Police, Revenue and Arms,
delivered by Adam Sm ith at the University o f Glasgow in 1763.
(New York: Kelley and M illm an, Inc.), 1956, p. 195.




Mere mention of the years 1753, 1773, 1793,
and 1825 brought chills to the spine of the most

9

conservative banker. During these periods of

tablished. But how? Should the State once more

crisis bank runs were everyday occurrences.

assume the day-to-day task of money creation?

Failures were legion.

Two hundred years ago perhaps it would have.

Production

and

trade

ground to a halt. Prices and employment under­

But this was the nineteenth century, the heyday

went mercurial gyrations. Like the sovereign be­

of laissez faire. Walter Bagehot, in his classic

fore him, the private banker proved a poor

Lombard Street, summed things up some years

money manager. It was evident that something

later by pointing out that government manage­

had to be done.

ment of the money and banking system would
mean that “ . . . a trade peculiarly requiring con­

ENTER THE CENTRAL BANK

sistency and special attainment would be man­

Two distinct maladies affected money and bank­

aged by a shifting and untrained ruler. In fact,

ing: overissue of notes and lack of a source of

the whole plan would seem to an Englishman

ultimate liquidity.
The first malady proved epidemically con­
tagious. In spite of Adam Smith, the pledge of

of business palpably absurd; he would not con­
sider it, he would not think it worth consider­
ing.” 4

convertibility, and the real bills doctrine, the

Panic or no, the prevailing ideas could be

lure of profit and the pink haze of business op­

capsuled in a single sentence: that government

timism often led the banker to overextend his

governed best which governed least.

credit, to issue notes excessively against his

Solutions to monetary problems were twofold:

limited supply of gold and silver. With such a

(1) allow the banks to continue creating money

pyramiding of credit on a small base of liquid­

but limit by statute their ability to do so, and

ity, any unexpected event might set off a money

(2) encourage or create some “ prime bank” to

crisis— a war, the fear of foreign invasion, ru­

assume the function of lender of last resort, to

mor as to the ability of the banks to meet their

buy when everyone wished to sell.

demand liabilities.

In short, central banks were established. The

With such an event, bank notes would come

Bank of England, The Bank of France; all the

home to roost. Long queues of depositors and

world’s leading nations took advantage of the

note holders would line the dusty streets and fill

concept of the central bank.

the marble lobbies of the banks. To meet demands

In the United States the Federal Reserve Sys­

for cash, all banks would become sellers of se­

tem was created by Congress in 1913. With the

curities and callers of loans. Everyone sought

Treasury, the Fed became the principal source

to turn his assets into cash, to sell. No one

of paper money. The Federal Reserve Act re­

wanted to buy. There was no ultimate source of

quired member banks to keep reserves against

liquid funds from which the banks could borrow

their deposits. The System was charged by Con­

or discount their commercial paper. Result: bank

gress among other things “ . . . to furnish an elas­

failures, loss of savings, heartbreak.

tic currency and . . . afford means of rediscount­

But what was to be done about the panics?

ing commercial paper. . .■ .” In a sentence, the

How was the problem to be solved? It was obvi­

Fed was to manage the money supply in the

ous that note issue should be limited and that

public interest.

some ultimate source of liquidity should be es­

10




4 W a lte r Bagehot, Lombard Street, (London, 1873) p. 329.

Thus the historical pendulum of money crea­

cipitously. In one day, October 29, 1929, the

tion had completed its first full swing. From the

New York Times industrial averages fell 43

sovereign, the power to determine the limits of

points, with sales volume exceeding 16 million

money creation was assumed by the private

shares. Suicide rates in New York City leaped

banker; then delegated to the professional money

from 15.7 persons per 100,000 population in

manager or central bank. And though policy ob­

1928 to 21.3 per 100,000 in 1932. And unem­

jectives were to shift through time, the central

ployment, the most telling statistic of all, reached

bank remained firmly at the helm of the money

a total of 13 million by 1933. Almost one out of

supply throughout the remainder of the nine­

every four persons in the labor force was un­

teenth and early twentieth centuries.

employed.

But hardly had the twentieth century passed

What was to be done about these deplorable

its thirtieth anniversary, when the pressures of

conditions? Economists and legislators racked

the times prompted the State to undertake the

their brains for explanations and for policy

first in a series of fundamental reappraisals of

measures that would relieve the mounting pres­

its position in the scheme of money creation. To

sure. Many patchwork measures were under­

some observers, the historical pendulum of money

taken. Perhaps the most significant program was

creation appeared to be losing momentum in its

deficit spending, the so-called “ pump priming”

swing toward the independent central bank.

measures.
Stated very simply, the deficit spending theor­

THE STATE, THE TW ENTIETH CENTURY,
AND MONEY CREATION

employment had resulted from the large drop

The State’s monetary reappraisal was not con­

in total spending. The remedy, therefore, was to

ceived

in

a vacuum.

The reevaluation

ists decided that the decline in production and

was

increase spending. If the private sector of our

prompted by the pressure of real events; of fun­

economy— consumers and businessmen— would

damental and far-reaching social, economic, and

not spend more, then the public sector must

political upheavals. The first of these events was

take up the slack, spending on bridges, highways,

to be graphically imprinted in the minds of men

schools, and relief. Only then could we again

for years to come. It was the Great Depression

enjoy full employment and capacity production.

of the 1930’s.

But how was the government to finance this
increase in spending? More taxes might well

Money and the Great Depression

absorb funds that would otherwise be spent by

Of course the world had seen panics and periods

individuals and businesses, thus bringing no net

of business stagnation before. The eighteenth

increase in spending. To borrow existing savings

and nineteenth centuries had their full share.

could deprive industry of the funds it needed,

But nothing heretofore could compare in depth

discouraging any spark of investment that might

or breadth with the depression of the 1930’s.
By 1933, one of the worst years of the depres­
sion, total spending in the United States as

still be flickering. The answer, then, was to en­
courage the banking system to create money.
And, said some economists, creating money to

measured by gross national product was one-

reemploy workers would cost society nothing.

third less than in 1929. Stock prices fell pre­

They reasoned that labor, to the individual busi­




ll

ness, was a variable cost which ceased when em­

eluding the Continental currency created to

ployment ceased. But to the economy as a whole,

finance the fighting. It was true in America dur­

labor was a fixed or overhead cost which went

ing the Civil War when “ greenbacks” depreciated

on whether the worker was employed or not.

substantially as a result of overissue; in France

After all, workers had to eat! Thus it paid so­

during the Revolution when the assignats became

ciety to create the money to employ workers as

bits of worthless paper; and in Germany during

long as they produced something more than

and after World War I, when at one time 300

nothing. Moreover, if money creation should

paper mills worked at top speed to deliver note

help to increase prices, so much the better. For
the drop in prices which accompanied the depres­

paper to the Reichsbank while 150 printing com­
panies kept 2,000 note presses running night and

sion was considered a burden on debtors and a

day solely to print Reichsbank notes. In short,

detriment to recovery in production and employ­

when borders are threatened the State reasserts

ment.*
Thus over the years the theoretical way was

its monetary prerogative.

paved for State deficit spending. And under the

estimated that total military expenditures of the

new theories the central bank would be justified

combatant nations surpassed $1 trillion, over

in creating the money needed by the State to

6 times those of World War I. Remembering

finance these expenditures. Deficit was piled on

that $1 billion is a thousand million, and $1 tril­

And World War II was no exception. It is

deficit throughout the depression years, and

lion a thousand billion, one can readily realize

economic conditions slowly improved. Yet when

the astronomical size of these expenditures. As

the depression had waned, there were other pres­

in the past, this spending was financed in the

sures on the State to assert a larger role in money

established pattern: partly by taxing, partly by

creation. For by that time Poland had been at­

selling bonds to patriotic citizens, and partly by

tacked. World War II had begun.

creating money.

The monetary prerogative and World
W ar II

Germany did during World War I, by turning

In one sense, wars in the twentieth century have

phisticated technique which became possible with

been no different from wars in the past. That

development of modern deposit banking and a

sense: the supply of money and the extent of the

broad securities market.

Some of the belligerents created money just as

sovereign’s role in money creation still tend to
vary directly with external pressure on national
borders.
So it was in Rome during the barbarian in­
vasions; in France and England in the 100
Years’ War; in America during the Revolution­
ary War when the phrase “ not worth a conti­
nental” described anything of little value, in­
* Many economists concluded, however, th a t an increase in the
money supply would raise production rather than prices since we
were operating our industrial plant fa r below capacity. Thus money
creation would not lead to debasement.

12




on the printing presses. Others used a more so­

A simplified illustration of the sophisticated
system would run something like this. The cen­
tral bank would buy government securities in the
open market, paying for them with newly cre­
ated bank reserves as shown in the illustration
above. The banking system could use these re­
serves to buy new issues of government securi­
ties. Some of these new securities could be sold
to the central bank, new reserves created, and so
the cycle would begin anew.

It was a long
way from the R o­
man

technique,

IN A MODERN DEPOSIT BANKING SYSTEM MONEY IS CREATED
IN A ROUND-ABOUT FASHION . . .

but it had similar
results. Through
direct

controls

and

rationing,

prices could

be

1. W h e n t he c e n t r a l
banker decides that the
money supply should be
increased . . .

. . . he buys Government
securities from a Govern­
ment securities dealer.

held down during
the

war,

even

though

demand

deposit

money

might increase a
thousandfold. But
after the war. . . .
Thus the world

2.

He enters his new as­
set — the securities — in his
books and credits the re­
serve account of the com­
mercial bank where the
Gove rnme nt securities
dealer keeps his checking
account, thus creating new
bank reserves.

+ GOVT. SEC.
P S + COMM. BANK (RESERVES)

GOVT. SEC.

had seen two cata­
clysmic upheavals since the twenties— depres­

3
.

sion and World War II. What other pressures
was the twentieth century to exert on the sov­
+ RESERVE

ereign and his monetary prerogative?

+ SEC. DEALER

The war, in fact, was to have a secondary im­

This commercial bank
in turn enters the reserves
in its books as an asset and
credits the securities deal­
er's checking account.

pact on the State’s conception of its role in money
creation. For World War II was the fountainhead
of the postwar stampede toward economic devel­
opment. But what did economic development have
to do with money and the State?

Money, the State, and economic
growth

4
.

W it h a d d itio n a l re ­
serves, the bank can make
new loans. In lending, the
bank simply credits the bor­
rower's checking account,
thereby creating new de­
mand deposit money.

The war acquainted many of the underdeveloped
countries of the world with new goods and new
techniques. It aroused new wants in the masses
of the underprivileged.
The native squatting in the burning sands of

the fruits of machine production.
Just as desire for the good life affected the
individual citizen, so it pervaded his government.

saw jeeps and K-rations. The South

And the State took steps to satisfy these desires.

American Indian heard glowing tales of air­

Government ministries were soon buzzing with

planes and ships, of cigarettes and electricity.

elaborate plans to construct roads, dams, and

With this awareness came desire; desire to par­

electric generating facilities; to build steel mills,

ticipate in the better things of life; to share in

oil rigs, and petroleum refineries. In a few

Africa




13

words, desire for the better things of life led to
State-encouraged or directed programs of eco­
nomic development.
But how were the underdeveloped nations to

INFLATION AND ECONOMIC DEVELOPMENT
. . . When money is created faster than goods can
be produced, prices tend to rise, the currency is
debased.

finance their development programs? The world
recognized the desirability of economic develop­
ment, yet the means to achieve that end was a
problem.
Some nations chose traditional methods of
finance, encouraging savings, and soliciting for­
eign loans. Others took what appeared to be a
more direct route to economic development.
Since they regarded available savings as insuffi­
cient to provide the funds needed to raise pro­
duction to desired levels, many countries re­
asserted their age-old monetary prerogative. They
charged their central banks with the task of
financing growth. The central banks were to
create the money needed to bid resources away
from other uses and into development programs;
to finance through inflation. No longer was
the central banker an independent, professional
money manager. He was an engine of inflation;
just as he would have been as royal coiner to
Henry VIII.5

Note: O utp ut is here measured by gross national product in
Bolivia, gross domestic product elsewhere.
Sources: United Nations, International Monetary Fund.

Depression, war, economic growth— were there
still other pressures on the State and its mone­

Money, growth, and the cold war

tary prerogative? The answer was yes, for the

Cold war competition between the world’s two

fever of economic growth was not destined to

great power blocs began shortly after World

be the exclusive preserve of the world’s under­

War II. It has continued to this very moment. It

developed nations. Growth was to receive great

is intense, now.

emphasis even in the developed lands. And just

This competition has placed a high priority on

as war had sparked the desire for growth in

economic growth. The Soviet Union, as noted

the underdeveloped countries, so it was to feed

earlier, is expanding its gross national product

that flame in the great and powerful nations. But

at a rate of 6 to 7 per cent a year, concentrating

it was war of a different kind— cold war.

on industrial investment and research, on drill
presses and generators, sputniks and hydro­
electricity. Meanwhile, the United States’ GNP

5 Fo r a lucid discussion of the theory and consequences of eco­
nomic development by way o f inflation, see Federal Reserve Bank
of New York "In fla tio n and Economic Development," Monthly
Review, August 1959, p. 122.

14




has grown at an annual rate of 3 to 4 per cent
with more emphasis on the production of con­

sumer goods, on cars, refrigerators, and tele­
vision sets.
This presents a pressing problem. If we are to
sustain our position of strength in the cold war,

Depression, war, growth, cold war— are there
yet other pressures on the State and its monetary
prerogative?

Once again the answer is yes.

That pressure: the concept of cost-push inflation.

yet continue to raise our high standards of living,
most agree that we must raise our rate of

Cost-push pressures and money creation

growth; raise our output per man-hour, even in­

The cost-push theory of inflation rests on the

crease our man-hours. Only then can we satisfy

premise that fundamental changes have taken

all our wants and desires. Only then can we have

place in our economy during the twentieth cen­

missiles and automobiles, space research and

tury. The theory points out that business firms

split-level houses.

have expanded in size and influence. Labor

But while most agree that growth is desirable,

unions have grown in strength and bargaining

indeed imperative, the plan we should follow to

power. Indeed, according to the cost-push thesis,

achieve that growth is a subject of great and

labor today is so powerful at the bargaining

heated debate. And of the many plans offered,

table that it can push up wages faster than pro­

the age-old solution— the “ money answer” —

ductivity (output per man-hour). Consequently,

seems to some the most expedient of all.

costs per unit of output increase. And rising

The “ money answer” has many variations.

costs are a source of great concern to manage­

Some emphasize the desirability of improving

ment.

our private standard of living. Others consider
the real challenge of our times to be in the pub­

As costs rise, management has two choices. It
can absorb the increased cost and thus experi­

lic sector, in education, basic research, and

ence falling profit margins; or it can pass costs

defense.

on to the consumer in the form of higher prices

Yet whatever the point of emphasis, all vari­

if in a market position to do so. Since business

ations of the money answer have one factor in

has grown in influence and market power, there

common. They call on the central bank to main­

is a tendency to choose the latter alternative— to

tain low interest rates as a spur to productive
effort. How would such a central bank policy

raise prices rather than lose profits.

affect the money supply?

the State? Plenty, say the cost-push theorists.

But what does this have to do with money and

An interest rate is a price, the price of money.

In 1946, Congress passed a law— the Employ­

Like any other price, the level of interest rates

ment Act of 1946— which, among other things,

depends on supply and demand. To hold interest

calls upon the Federal Government to help main­

rates down, a central bank would have to in­

tain maximum employment. To achieve this ob­

crease the supply of lendable funds. It would

jective, it is necessary for virtually all goods

have to create money. In such a situation the

produced to be purchased, even at higher price

supply of money would probably bear little

levels generated by cost-push pressures. If some

relation to the production of goods. Prices would

goods are not bought, business will lay off

tend to rise. As in the underdeveloped lands, the

workers. There will be unemployment.

central banker would be minting the silveroid
shilling of Henry VIII.




But where will we get the additional money to
purchase the same amount of goods at higher

15

prices? Not every salary of every worker will

companied by an upward trend in interest rates.

be raised.

The rate on long-term Government bonds has

For a time, we shall be able to draw down our

climbed from 2% per cent at the end of the war

cash balances and savings accounts. But there is

to more than 4 per cent today as all sectors of

a limit to the extent people will spend their hard-

our economy have stepped up their borrowing to

earned savings and part with cash. At this point

finance an ever-increasing volume of expendi­

they will decrease their consumption. Then, con­

tures. Similarly, short-term rates on Treasury

clude the cost-push theorists, the Federal Gov­

bills have soared beyond 4 % per cent from a

ernment is forced to step in. To maintain em­

war-depressed level of %ths of 1 per cent, also in
response to rising credit demand.

ployment, the State must take steps to increase
the amount of money available for spending. In

With an expanding gross debt and a rising in­

short, it would be forced to manufacture money.

terest rate structure, Government interest costs

Once more the central banker would become a

have increased significantly. In fiscal 1951 the

handmaiden to Henry VIII.

Government spent $5.7

Depression, war, growth, cost-push inflation:

billion

servicing the

Federal debt. For fiscal 1960, it is estimated that

the twentieth century has cloaked its monetary

debt service will exceed $9 billion. Today, in­

pressures in diverse identities. And in recent

terest charges alone are greater than the total

years, these pressures have assumed yet a new

national budget as late as the year 1940.

alias. Who could guess that the very mechanism

High costs have led to an intensive search for

through which we have created money in the past

ways to relieve the debt servicing burden. From

would generate pressures to manufacture even

this search have come at least two possible

more money in the future? It might seem odd,

answers.

but that is precisely what has happened. Prob­

Many recommend reducing the size of the

lems connected with the enormous war-induced

debt, using budgetary surpluses generated dur­

national debt have led many to advocate meas­

ing years of business prosperity to pay off holders

ures that would put the sovereign back in the

of Government securities.

business of creating money— creating money

Others would call on the Federal Reserve

with little reference to the needs of commerce

System to help reduce interest costs by depress­

and trade.

ing interest rates, by “ supporting the Govern­
ment securities market.” Yet, as noted earlier,

Money and the national debt

the Fed can reduce interest rates only by in­

In 1929, the national debt was a little less than

creasing the supply of lendable funds, by cre­

$20 billion. By 1940, the deficits of the depres­

ating money. Thus, to consistently support a

sion years pushed the nation’s I.O.U.’s past the

given level of interest rates, the central bank

$50 billion mark. Then came the long, grim war

might well be forced to allow an economically

years. Government budgets soared, shoving the

undesirable expansion in the money supply.

debt beyond $275 billion in 1945. At present,
the Federal Government’s gross indebtedness
exceeds $290 billion.
And since the war, rising debt has been ac­

16




IN CONCLUSION
Deciding how much money should circulate is
no easy task. It was not easy in the sixteenth

century, in the nineteenth century, nor today.

Yet, in spite of the progress of the central

Kings and emperors have been entrusted with

banker, we have seen that there are fundamental

the task. In many cases they were guided more

pressures on the State to attack new and complex

by current problems of State finance than by

economic and social problems through its money-

the over-all interest of the public.

creating powers. The problems of growth, cold

Private bankers fell heir to the job of manag­

war, and changing market structure have led

ing the money supply. But in spite of such nine­

some to recommend the age-old solution of

teenth century incantations as convertibility and

money debasement.

“ real bills,” they proved poorly prepared to ac­

Will we accept this solution? The subjects of

cept the challenge of money creation— a chal­

a monarchy had little choice in days when kings

lenge in which the profit motive is a poor sub­

ruled by divine right. But today we live in a

stitute for over-all viewpoint and public interest.

democracy. The people have the final say. What

Finally, central bankers were given the task.

could lead the people to accept monetary debase­

In their early days they, too, lacked the experi­

ment as a solution to the problems of the times?

ence, broad outlook, and professional qualifica­

Two factors work in favor of those who advo­

tions required for successful management of the

cate a systematic program of monetary debase­

money supply. Even at the turn of the present

ment. One is a question of knowledge, the other

century they did not envisage a positive monetary

of objectives.

policy designed to even out fluctuations in the

As to knowledge, while citizens of a democ­

business cycle. They might refuse to adopt a

racy can indeed do something about currency

thorough-going policy of monetary ease during

debasement, it is difficult to arouse sufficient re­

periods of depressed business activity. Or they

sentment against would-be debasers. Such resent­

might expand the credit base too rapidly during

ment seems to vary inversely with the sophisti­

the upswing in the business cycle.

cation of the technique used to debase. In olden

But through the years the central banker ac­

days, when people could see the result of debase­

quired an expanding fund of theoretical and

ment in the nose of the personality adorning the

technical knowledge— knowledge he needed to

coin, it was easy to arouse the ire of the citizenry,

help him set his objectives, knowledge of the

even though they could do little to stop it. In an

tools required to carry out those objectives. In

economy in which money is created through a

short, the central banker has become an ever

process of central bank purchases of securities

more effective money manager. Broadly speak­

and commercial bank lending, it is difficult to

ing, he attempts to adjust the money supply so

keep the eyes of an audience off the ceiling when

as to promote a flow of spending just sufficient

one mentions the procedure by which the State

to purchase all the goods and services a fully

can debase the currency. If we are to avoid

employed and constantly growing economy can

once and for all the consequences of monetary

produce at prices that are relatively stable. It is

debasement, we must have more knowledge of

a difficult task— one that requires topnotch pro­

monetary problems and procedures.

fessional training,

first-hand experience,

and

A second factor assists those who advocate a

keen, perceptive judgment. The viewpoint must

systematic program

be over-all; the motive, public interest.

That factor is simply this: the ends sought by




of

currency

debasement.

17

such

debasement

are

extremely

desirable—

insufficient, greater taxes would be a fairer

growth, full employment, military security. But

answer than currency

debasement.
equitably

Better a

even if currency debasement could bring us

modern-day moneyage,

these desirable ends (which is most doubtful)

inflation— the cruelest and most arbitrary tax

we should realize that there are alternative means

of all.

to achieve them. Is currency debasement the
better of the alternatives?
If the problem of cost-push unemployment re­

based than

It has been said that history repeats itself—
that men do not learn from the errors of the
past. Today, it is possible that we have reached

sults from changed market structure and power

an important juncture in the historical cycle of

concentration, it would seem more logical to at­

money creation. This juncture involves a funda­

tack the problem at its roots, within that market

mental choice. Will we continue to insulate the

structure rather than “ solving it” by debasing

function of money creation from the day-to-day

our currency. If we need greater public expendi­

financial pressures that beseech the sovereign?

tures in the areas of education, basic research,

Or will we follow the lead of Henry V III— Old

and defense why not first try to redirect some of

Copper Nose revisited? These are the problems,

our existing public expenditures? If this proves

and the temptations, of money creation.

18




WHAT THE ’5 0 ’s TOLD US ABOUT

A rash of books and articles on the 1960’s re­

shape the future— then it would seem fruitful

minds us that a decade is ending, a new one be­

to try to determine what the fifties told us.

ginning. Much of what we read suggests that
the 1960’s will be like the 1950’s only more so.

At the outset let it be clear that what we’ve
learned may or may not prove to be eternal

Maybe this is an accurate projection. Certainly

truth. Recall that in the latter 1920’s we thought

the future is a continuation of the past. But in

we were in a “ new era of perpetual prosperity.”

looking back over our own lifetime, the 1950’s

In the 1930’s we thought we had a “ mature

seem quite different from the 1940’s, which

economy.” And who can forget that in the early

seemed quite different from the 1930’s, which

1940’s, it was generally believed that the popula­

seemed quite different from the 1920’s.

tion would reach a maximum of about 153 mil­

More than this, casual reflection strongly sug­

lion between 1970 and 1980.

gests that what took place and what we learned

At the time each made a lot of sense. To some

in the previous decade shaped the character of

extent, too, the apparent truth of each led to the

the succeeding decade. The excesses, the specula­

events and actions which have made these no­

tive binge in the 1920’s, led to the depression-

tions seem so naive in retrospect. In other words,

ridden next ten years. So, too, did desperation

what we believe to be true shapes our actions,

and preoccupation with internal affairs in the

whether or not we can look back later and see that

1930’s lead to the war-torn 194-0’s. Finally, the

it was false.

previous two decades, predominantly character­

So what we are looking for in our Impressions

ized by depression and war, shaped the 1950’s.

from the Fifties is not ultimate truth. Rather it

If this is more than just a little true— that

is what at this moment of history our society

events and impressions of the immediate past




believes to be the truth. Now for the search.

19

1949 VS. 1959

tone of many articles and speeches of that time

It is difficult to get at a subject as large as this.

suggested that prices might go back to pre-war

One way to start is to recreate 1949. What were

levels— or close to it.

we reading, thinking, and doing then? Follow­

There seemed to be general agreement, too, that

ing this, a brief fill-in on the intervening years

the years immediately preceding World War II

should help us with our conclusions.

were the norm; that war and postwar years
were abnormal; that unemployment and business

Remembering 1949

distress would return once the economy got back

Take yourself back to 1949 and try to see
us as we were then. It isn’t easy. Many things

on a peacetime footing.
The stock market was sluggish. It hardly began

that seem obvious now were not so obvious then.

to register the postwar boom. Some— and many

It is almost embarrassing to remember some of

were business leaders— suggested that it had be­
come obsolete.

them.

Our business commu­

The first really postwar cars were on display.
They were longer, lower, and more powerful

nity

than their pre-war counterparts. Television was

concerned about Social­

seemed

terribly

a bold new force in our society. Everyone was

ism. What was happen­

beginning to want to own a set, and sales re­

ing in Great Britain and

flected this urge. The impact of this new Goliath

elsewhere

on other industries— such as motion pictures,

anxiety. A continuous

heightened

spectator

stream of articles about

sports— on our mores, and on our politics was

“ Socialism U.S.A.” or

radio,

publishing,

advertising,

and

“ Creeping Socialism,” or “ Socialism by Default”

being widely discussed.
Swing was still king. Phonograph records were

poured from the business press.

selling well, and seemed ready to boom when the

Out of this anxiety sprang an interest in “ Big

battle of speeds was settled. Consumers pondered

Government.” Paper work imposed on business­

about 33% , 45, and 78 r.p.m. records, and

men by bureaucrats was frequently a subject of

seemed to be deciding that they wanted to be

heated conversation. Many believed that Big

able to play all three. Night clubs, restaurants,

Government could be made significantly smaller

movies, and spectator sporting events had been

by applying business practices to encourage effi­

doing capacity business since the war. A lot of

ciency.

money and attention was going into clothing as
returning

G.I.’s replenished

their

wardrobes

Similarly, the enormity of the public debt was
a source of comment and concern. We weren’t

and their wives adopted new-length skirts. Food

sure how to live with it— or even if we could.

sales began to soar as consumers upgraded their

Government securities prices were being sup­

menus.

ported under an agreement between the Treasury

But 1949 was the year of our first postwar re­

and the Federal Reserve System. A change in this

cession. This sobered us. Some of our leading

policy, it was feared, would create uneasiness

economists and business writers were suggesting

about the nation’s credit and disorder in financial

that inflation was about over. More than this, the

markets.

20




Signs symptomatic of chronic illness were dis­

position in the world. Few doubted that we

cernible in certain of our basic industries, i.e.,

would occupy about the same position in the

farm, coal, and railroad. Farm surpluses re­

world society ten years later.

vealed our ability to produce more food than

But America had some nagging doubts about

we were willing to consume. Coal had lost rela­

itself. Mostly they concerned our business sys­

tively to oil and natural gas as a source of fuel

tem. Heads all over the nation nodded when a

energy. Fare increases pushed the cost of rail

famous businessman in early 1950 cautioned:

travel above air. More freight was going by truck

“ The thing that hit us in 1929 cannot be as­

and plane, too.

sumed not to happen again. Personally I have

Labor-management strife was constantly in

been waiting for years for the ax to fall, and I

the news. Labor unions, shored up by legislation

am becoming more convinced momentarily that

and favorable public opinion in the 1930’s, met

it is not far away.” The depression was not

management head-on in tests of strength in the

forgotten.

healthy business climate of the latter 1940’s.
Awesome displays of sheer power sent thinkers

Some specifics on the fiftie s

searching for new ways of settling labor-man­

Between 1949 and 1959 a lot happened. And

agement differences.

probably few could agree on just what should be

A call for a new credo was sent out by our
business community. “ Where are our bright

chronicled. But here is a fast romp through the
period.

young conservative writers?” businessmen asked.

At the turn of the decade, it was almost pos­

It was apparent to nearly all that a good many
of the rules of the economic game as played in

sible to detect a nationwide sigh of relief. Sacri­
fices, heartaches, and burdensome problems of

America were changed in the 1930’s. But what

the forties were behind us. It seemed only right

did these rule changes mean? It was still es­

that by some natural law the ten momentous

sentially the same game— or was it?

years of the forties should be balanced by a dec­

Beyond our borders the fall of China to the

ade of comparative tranquility in the fifties. If

Communists made the biggest impression on

this is what many of us thought, or wished, we

Americans. Many blamed traitorous actions of

were brought up short by the outbreak of fight­

some Americans “ in high places.” “ Reds” were

ing in Korea about six months after the “ tranquil

searched out. At times it seemed as if we “ found”

decade” began.

more than existed.

Of course, we know now that it was a false

To summarize in a sentence how we felt in

start. The fifties were not to be like the forties

1949, perhaps it could be said that we were

after all. The war was relatively short-lived and

proud of our position in the world order, but

never demanded the same all-out effort required

somewhat apprehensive about our business sys­

for World War II.

tem under peacetime conditions. We had played

But we learned quite a bit from the Korean

a decisive role in bringing the big war to a suc­

incident. Some of what we learned most of us

cessful conclusion. Development of the atomic

haven’t forgotten. For example, we learned how

bomb and clear superiority of our industrial

necessary it was to maintain a posture of mili­

machine made us confident of our preeminent

tary readiness, and what a tremendous produc­




21

tive machine we had. Guns and butter were both

contracts out of the question unless (3) wage

supplied without inflation once the initial phases

rates were tied to changes in over-all prices.
Opponents pointed out that as these agree­

of scare-buying were over.
Important, too, we became convinced that

ments spread another “ built in” inflationary bias

be

would be added to our economic system. In other

checked if Government securities prices were not

words, price rises would beget cost rises which

permitted to move more freely. The huge Gov­

would beget price rises, etc.

damaging

inflation

probably

could

not

ernment debt couldn’t be isolated or ignored. It

What did we learn from this new type agree­

was within the playing field. It had to get into
the economic game. Pegs were pulled from under

ment? Possibly that its proponents and opponents
were both right, to some extent at least.

Government securities prices, and monetary pol­

The recession of late 1953 and early 1954 and

icy was used to help check rather than feed

the subsequent recovery period contained many

inflation.

economic lessons. This recession came about

But the Korean war obscured other lessons.

as the economy adjusted to a substantial reduc­

The recession of 1949 had been reversed and

tion in Government spending made possible by

business activity was bursting through to new

the end of fighting in Korea. The brevity and

peaks when the fighting started. In the frantic

shallowness of the recession showed us again

buying period that followed, perspective was

that a decline in defense spending did not have

lost. Some were left with the impression that the

to bring about a severe contraction in over-all

outbreak of fighting had brought us out of a re­

business activity.

cession.

It illustrated, too, that tight money was not a

Certain sectors of the economy, lagging since

fetish of our money managers. Money tightened

the end of World War II, got new life and hope

after pegs were removed from the Government

from activity generated by the Korean crisis.

securities market in 1951. It continued tight as

Old factories and shipyards were reactivated.

business boomed in 1952 and on into 1953. But

But as the war crisis passed, basic postwar

even before many of our comprehensive indica­

trends re-emerged. Chronic employment prob­

tors of activity turned down, actions were taken

lems amid general nationwide prosperity popped

to begin to reverse this policy.

up again in a few of our older industrialized
areas.
One of the big stories of the early fifties in­
volved a new type labor-management agreement

These prompt monetary measures, reduction
in income tax rates, plus built-in stabilizers—
unemployment insurance— went a long way to­
ward moderating the recession.

forged in Detroit. In essence, what it did was

A new confidence in our business system be­

tie hourly wage rates to changes in the cost of

gan to become evident. In the ensuing recovery

living, in theory— to the Consumer Price Index,

and boom, the stock market, long quiet, began

in fact.

to assert itself. Investors seemed at last to believe

Its proponents, among other things, said: (1)
longer-term union-management contracts were

that ours maybe was not a mature economy after
all.

desirable, but (2) the recent history of sharp

Business activity zoomed in 1955. A tre­

changes in the over-all price level put long-term

mendous surge in demand for houses and cars

22




nearly doubled. Real income per capita
= 3 j[

grew slowly then declined in the recession. In other words, over-all price and
wage rises occurred despite the fact that
over-all demand was not excessive.
Within the broad totals the changes

in the latter half of 1954 and into 1955 sparked

were even more mystifying. For example, sales of

this boom. Changes in credit terms, which made

American-made automobiles fell below year-ago

money seem easier for house and car buyers,

levels in 1956, 1957, and 1958. In fact in 1958,

made an important contribution to the surges in

40 per cent fewer cars were sold than in 1955.

demand. Many insured mortgages were written

Employment in the automobile industry in each

for 30-year maturities, and auto loans of 36-

year was below year-ago levels. Yet in each of

month maturities became commonplace.

those years the price of new cars rose, as did

Hard competition between two giant auto­
mobile manufacturers put a severe strain on
dealer-producer relationships in this period. New

the hourly wage rate.
These developments and others called for ex­
planations.

Was there no longer

rhyme

or

dealer franchise agreements were worked out to

reason in the economy? Just what kind of a busi­

prevent what the dealers construed to be over­

ness system do we have anyway?

loading.

Rhyme and reason have not left, some said.

“ Motivation Research” became a familiar term

It is just that we have a new type inflation—

to nearly all Americans in these mid-fifties. Why
we buy what we buy is not easy to determine—

“ cost-push inflation.” Briefly, the cost-pushers
said that large corporations and large labor

especially in an economy as affluent as ours was

unions were powerful enough to set prices and

becoming. Some depth studies by motivation re­

wages irrespective of current market conditions.

searchers

why

Prices were thus pushed higher by cost-plus

some items sold and others did not. In general,

pricing, not pulled higher by excessive demand.

the attention paid “ M.R.” served as a constant

In a related vein, but not specifically associ­

provided

fascinating

reasons

reminder as to just how far our economy had

ated with conditions in the three years observed,

progressed from the days when items could be

much was written and said about the “ new cap­

readily classified as necessities or luxuries.

italism” evolving in the United States. What

The behavior of our economy in 1956, 1957,

might loosely be called laissez-faire economics

and 1958 emphasized the changed character of

had been a less than totally adequate explanation

our business system. Prices rose throughout

of our business system for quite some time. It

those

was

was still used as a more or less official creed of

fairly level after hitting a peak in 1955, until it

years.

Yet,

industrial production

the businessman in the late 1940’s. By the fifties,

plummetted sharply in late 1957 and early 1958.

developments in our economy were such as to

Unemployment

cause our business system to seek a new creed.

also

leveled

after

declining

sharply in 1955. It never got back to the lows

In general, attempts at forging a new justifi­

attained in 1951, 1952, and 1953. In the re­

cation fell into two main categories: (1) those

cession, beginning late in 1957, unemployment

that said that prices, profits, and resource allo-




23

cation still are determined essentially by the in­

Finally, in 1959 the steel strike has given us

visible hand of competition— though perhaps a

a comeuppance. Coming on the heels of Russian

different kind of competition; and (2)

scientific achievements and boasts about their

those

who said that the new managers are the guiding

future economic potential, it has added to our

hand that determines prices, profits, and re­

small but growing national inferiority complex.

source allocation in a beneficent way.

Rightly or wrongly, Americans in all walks of

But in spite of all of the thought that has gone

life wonder where are we heading if we can do

into the development of a new business creed,

nothing to prevent these incredibly expensive

we still do not have one. In fact, the laissezfaire doctrine— or something closely akin to it—

strikes.

probably has as much support from the busi­

America, 1959 style

ness community as any of the newer philosophies.

The ten generally prosperous years of the fifties

In the latter 1950’s, irrefutable evidences of

have changed us a great deal. As a nation we are

Russian scientific achievements had a tremen­

better fed, better housed, better clothed, better

dous impact on our society. On October 4, 1957,

transported, and better equipped than we were in

the Russians shocked and bewildered us with

1949— better than we or any other nation have

their first Sputnik. Attitudes of the American

ever been.

people have changed drastically since that time.

Looking back at the section that briefly de­

At the subconscious level, at least, our society

picted how we were in 1949, some changes are

became

a little uneasy,

perhaps

conscience-

quite apparent. For example, cars are getting

stricken. It was as if we suddenly said to our­

shorter and less

selves: “ Here we are fussing around with useless

powerful; no one

decorations,

considers

while the

Russians

are making

serious scientific advances.”

the

stock market ob­

The automobile industry observed that many

solete; Socialism

consumers no longer wanted elaborate orna­

seems not to be an

mentation

issue any longer;

and

functionless

chrome.

Apparel

makers strove for simplicity. At local levels it

Big Government

was easier to get a bill passed to raise teachers’

pretty

much

is

salaries. College professors found more sym­

taken for granted;

pathetic ears. Scientific wizards began to replace

consumer

football players as the big men on campus.

gets a lot more

debt

In addition to these observable changes that

attention; prosperity and inflation are taken for

the Sputnik helped cause, it has had another

the norm; and unemployment and business dis­

more profound effect. The sudden realization

tress are abnormal.

that we are not the best and first in everything

Other things have not changed so much, how­

has given us a slight inferiority complex. For the

ever, or it seems the more they have changed

first time, Americans seem not so willing to take

the more they have stayed the same. The impact

for granted that in the long-run our way will

of television on our mores is still being widely

automatically be the world’s way.

discussed. Grave problems in the farm, coal, and

24




railroad industries remain unsolved. Labor-man­

of the world’s big issues have perhaps made us

agement strife is in the news. The call for a new

more interested in ourselves than formerly. It’s

business creed grows louder but is otherwise

as if we turned away— decided to get back to

unchanged.

something we have a chance of comprehending.

The changes just mentioned and the things that

We psychoanalyze ourselves, try to determine

haven’t changed, of course, are important. They

why we really do what we do, say what we say,

are also fairly obvious. We have only to look

act the way we act. Many more of us are pre­

around to see them. It is more interesting to try

occupied with our own health. Businessmen are

to discern some of the more subtle differences

forever talking about heart attacks, and their

between our society in 1949 and 1959— keeping

wives about cancer.

in mind the very substantial improvement in our

We feel that we are more sophisticated than

material well-being, keeping in mind, too, that

we were in the forties. We think we use our in­

improvement in our material well-being has

comes more wisely, and don’t just buy something

contributed to these other changes.
It seems safe to start out by saying that one

flashy to impress our neighbors. We’re more
cynical about advertising, but probably just as

change in our society since 1949 is that differ­

affected by

ences among us have narrowed. Proportionately

“ square,” although most of us have a hazy im­

more of us live in about the same manner. We

pression about just what that means. Foreign

it.

We

abhor

being

considered

own our own homes, buy a new car when we

goods are more likely to appeal to us. For the

think we need one, take vacations. Fewer among

time at least, they strike us as being different and

us are rock-ribbed Republicans or staunch Demo­
crats. Religious differences may have blurred

sophisticated. They provide variety in our con­
suming lives. They are a kind of subconscious

somewhat also. All around us, the steel strike

offset to the narrowing of differences all around

notwithstanding, there seems to be more of a

us.

tendency to try to find common ground for
agreement.
Other distinctions seem to have blurred, too.

In fact, the narrowing of differences in in­
comes and elsewhere is probably having a large
effect on our spending habits. Because most of

Things aren’t so clear as they used to be and

us can afford to do nearly the same thing as the

there’s no use kidding ourselves that they are.

next fellow, we have a sort of compulsion to do

Right and wrong are not so easily distinguished.

something different. New style trends are more

There are many more self-confessed sinners

difficult to establish. When almost everyone can

among us, and many fewer self-styled saints.

afford to be in style there’s less point to it.

Fewer among us think we have the answers.

Women’s clothes have no dominant theme at

More of us have come to the conclusion that

present. Women are beginning to wear what

many of life’s problems cannot be solved at all.

they like, think they look best in, feel gives

The threat of an atomic war is so terrifying to

them individuality, distinction. Men’s clothing

us as to lose its ability to frighten us at all.

stores must carry a variety of suit styles; Ivy,

Most of us seem numb at the prospect. Many

Continental, and American Ambassador at least

have adopted a fatalistic attitude toward it.

seem to

The enormity and seeming insolubility of many




be

necessary. Men’s shirts feature

pointed, round, eyelit, tab, spread, semi-spread,

25

and button-down collars. And there appears to

cause, probably, only a few impressions from

be no dominant trend. It seems as if a new

the fifties have been etched deeply enough into

cigarette brand name comes on the market every

the subconscious of our society to change sub­

month. Rambler, Thunderbird, Corvair, Cor­

stantially how we shall live in the 1960’s.

vette, Imperial, Dart, Falcon, Valiant, and Lark

And they are not necessarily the impressions

are all rather recent additions to the automobile

that come immediately to mind. Some observers

sweepstakes. There is an unmistakable trend away

have said that America at present feels fat,

from following the leader; an unmistakable urge

humorless, a little ashamed, and pessimistic.

to express ourselves, achieve an identity through
our spending patterns that we feel we are losing

Maybe
so,
but these im­

elsewhere.
In 1949 it was possible to say that Americans

pressions are

did not question their preeminent position in the

of a mood of

world order, but were apprehensive about the

the moment.

way their business system might work under

They grow out of Russian moon rockets, quiz

peacetime conditions. Attitudes have changed.

show scandals, and the steel strike. They will pass.

Now there is a feeling that we have lost stand­

Other impressions will remain. It is possible

the products

ing in the world order. The previously men­

to select three powerful, pervasive impressions

tioned Sputniks have a great deal to do with

that we as a people have consciously and sub­

this feeling. But we think we see other evidences

consciously gleaned from the fifties. We as a

of our declining position. We read about an out­

society think we have learned:

flow of gold, we see automobile imports rising

1. That we shall probably never again have a

and exports falling, and we learn that Russia

depression remotely resembling the ca­

and some other nations are growing industrially
more rapidly.
Paradoxically, we have much more confidence

tastrophe of 1929.
2. That Socialism is not just around the
corner.

about our own business system than was the

3. That Russia is a strong— and will grow to

case ten years ago. The dreaded depression never

to be a stronger— economic challenger for

happened. It didn’t even come close. Rising

the heavyweight

prices have plagued us, but until now, at least,

world.

have not overwhelmed us. To be sure, we’ve had

championship

of

the

Let it be re-emphasized that what a society thinks

a recession every fourth year or so. But most

it has learned has not always proved to be eter­

people have been affected only slightly. In any

nal truth. Any one or all three of the pervasive

event, the recessions have been nothing like the

impressions mentioned could appear as foolish in

Great Depression.

the 1970’s as the new era philosophy of the
1920’s looked in the 1930’s, or the mature econ­

Impressions from the fiftie s— an influence
on the sixties

omy thesis of the 1930’s looks today. The point

This brief run-through of the fifties is incom­

may well influence the behavior of our society

plete. Yet it is also, in a sense, excessive be­

in the 1960’s. But how?

26




is, however, that each of these three impressions

The depression

in the fifties will its partial erosion release ac­

Let’s start with number one— the idea that the

tivity in the sixties? Very likely.

Great Depression doesn’t haunt us as in former

As a potential depression sinks further from

years. Probably no event, not even World War

view, other economic problems will probably

II, so shocked and scared Americans as the

be seen in new perspective. The persistent rise in

Great Depression. To say that it has influenced

over-all price levels may not be so glibly ac­

our thinking ever since is an understatement.

cepted. It may be seen as a problem in its own

The effects deriving out of our preoccupation

right. This will be even more likely, if, as is

with averting another depression have been

nearly sure to happen, the influx of foreign

manifold. In a broad, general way very likely

goods continues. Price comparisons among na­

memories of the depression caused us to sell

tions may loom larger in the sixties. Nearly all

ourselves short in the fifties. Almost anything

of us will probably be in more of a mood to

that went wrong with the economy was compared

halt persistently rising prices. Therefore, more

with the depression and tolerated by most of us.

likely we will be successful in doing just that.

Persistently rising prices were compared with

Recessions, statistically, will probably approxi­

the depression and tolerated— in some quarters

mate what we’ve experienced in the fifties. They

lauded. The recessions that hit every third or

will seem larger in the sixties, however. The

fourth year seemed shallow and brief, perhaps

Great Depression yardstick probably won’t be

because we compared them with the Great De­

the standard against which they are measured.

pression. So what if farm surpluses were piling

But by seeming larger, actually they could get

high in storage bins, if some facets of our tax
system seemed out of tune with the times. Don’t

smaller. A free society that is convinced it can
never suffer another Great Depression is ready to

rock the boat too hard! Remember the Great

try to prevent recessions periodically scheduled

Depression.

every fourth year or so.

This is, perhaps, an overly simple picture of

Other economic problems left over from the

the way we as a society have been influenced by

fifties similarly will seem larger in the sixties;

the Great Depression. Obviously, not all of us

actually, perhaps, get smaller. The prosperous

were so preoccupied with the spectre of another

decade behind us provides a new backdrop for

depression as to close or even half-close our eyes

comparison. It, along with the lessened fear of

to other problems in our economy. But a good

depression, will bring about a general raising of

many of us in our society did, and even many

our economic sights.

who thought their eyes were wide open could
not persuade

themselves

that any economic

Socialism

problem could begin to compare with the next

It is almost difficult— maybe a little embarrass­

depression.

ing— to remember how wrought-up we were

This is possibly as it should have been; in any

about the menace of Socialism in the early fifties.

event, it’s how it was. We needed the fifties,

Though we are still on guard, the temper of our

each year of the period, to rid ourselves of the

times has changed dramatically.

lingering depression psychosis.
If this psychosis has been a stultifying force




For a variety of reasons, Socialism in this
country seems not so imminent today— in fact, it

27

seems quite remote. Perhaps it was never im­

Despite our long lead and seeming invinci­

minent. But a lot of people thought it was and

bility as economic champion of the world, recent

their actions and the actions of others were in­

evidence suggests Russia will make the match a

fluenced by this feeling. Naturally, therefore,

lively one. Russian Sputniks have tended to off­

if this feeling no longer exists— at least not

set some of our vaunted evidences of higher liv­

nearly to the same degree— its absence might be

ing standards. Other spectacular achievements

expected to influence us in the sixties.
Much as with the fear of depression, the fear

by Russian scientists are to be expected. Ameri­
can scientists are preparing to answer in kind.

of Socialism to some extent caused us to sell our­
selves short in the fifties. This was particularly

Again the general effect is to bring about a
raising of sights, a feeling that what has seemed

true in the earlier years of the decade. New ideas

good enough won’t do, an environment that

were suspect, in part, simply because they were

encourages more and bolder new ideas.

new. Only orthodox ideas were encouraged by
the general climate. Imaginations were con­

Conclusion

stricted.

A pattern, therefore, is established. If out of the

By now, we’re no longer constantly looking

fifties three pervasive impressions have been

back over our shoulders at a conjured-up so­

formed, and if the three impressions have the ef­

cialistic menace. The climate has changed. The

fects outlined here, then the course is clear. The

nonconformist is not inhibited from espousing

sixties will not be like the fifties after all. Our

changes. New ideas are sought out and viewed

values could undergo a big change. A high stand­

hopefully. Imaginative thinking is encouraged.

ard of living will likely be taken for granted.

No one can say exactly what this means for

Persistent inflation and periodic recessions will

the sixties. Probably, however, it means that our

grow less tolerable. The rest of the world will

society will have more new ideas to “ chew on”

seem more important to us. We’ll probably be

than in the fifties. And not only might we de­

much less contented, smug, and stuffy than we

velop more ideas, we might also find they are

were for most of the fifties. But maybe we’ll

bigger and bolder ideas.

have a lot more to be contented about. In ridding

Russia

we’ve made our society— the freest in the world

Finally, Russia may have a large influence on

— freer. We have removed from our subconscious

us in the sixties. Of course, Russia influenced our

two forces that have narrowed our viewpoint

ourselves of two psychoses in the past decade

actions in the fifties. But for the most part in

and submerged new ideas. How strong and im­

the fifties our drive was to stay ahead of Russia

pregnable a position this puts us in to face the

militarily. In the sixties Russia has promised to

challenges of the sixties!

challenge us on the broadest economic grounds.

The change in the character of our society

The rate of growth in the Russian economy is

will probably come about slowly and almost im­

being watched carefully. Economic growth in

perceptibly. It has begun already. When the

this country came in for a great deal of study

change becomes more apparent the tendency for

this past year, but will probably come in for

many people will be to look back and say, “ This

considerably more in the sixties.

was the turning point. This was the event that

28




caused the change.” They will not be wholly

it took to leave us with the impression that a

right, no matter what they choose. All days and

depression wouldn’t recur or Socialism was re­

all events leave us with impressions no one of

mote. Other times one day and one event can

which is completely decisive because each is the

have tremendous impact-—as with the shattering

unconscious product of that which has gone be­

suddenness of the first Sputnik. But all the days,

fore. Of course some are infinitely more im­

all the events, and all the impressions from the

portant than others. Sometimes it takes many

fifties have helped change us, and if it had not

days and many events to form one powerful im­

been for each of them the sixties would not be as

pression— as with all the days and all the events

they will be.




29

BUSINESS AND BANKING
IN 1959
Business activity, measured by gross national

of indicators, the only unfavorable changes from

product, reached record levels in 1959, although

1958 were in the output of anthracite coal and in

the strike in the steel industry beginning in July

construction contracts awarded for public works

cast a massive shadow over the economic scene.

and

Comparison of average levels with those in 1958

time, electric power consumption, car loadings,

utilities.

Factory

payrolls

and

working

reveals increased employment, production and

residential

construction, higher personal income, and more

sales all show gains. Another favorable indicator

construction

contracts,

and

retail

active retail trade. Accompanying these changes,

is to be found in the capital expenditures of

prices at wholesale for commodities other than

manufacturers.

farm products and foods rose early in the year,

total rose from $314 million in 1958 to $357

In the Philadelphia area the

consumer prices have been tending upward, and

million in 1959, and it is expected that this level

money rates have advanced to the highest levels

will be maintained in 1960. Taken as a whole, the
indicators make a surprisingly good showing in

of the postwar period.

view of the impact of the steel strike upon an

Business conditions in the Third District

area which turns out much primary steel and is

The Third Federal Reserve District shared in the

studded with steel-consuming industries.

general recovery, although some of the gains

Despite the improvement in general business

recorded here were less marked than in the

over the past year, figures for 14 labor market

country as a whole. In the accompanying table

areas in the Third District show that 6% per cent

BUSINESS

INDICATORS

Third Federal Reserve District
Percent change 1958 to 1959
Change
Employment (14 a re a s ) * ..................................
Unemployment (14 areas)* ............................
Factory payrolls* ................................................
Factory working tim e* .......................................
Electric power consumed by manufacturers*
Anthracite coal output* ...................................
Construction contracts:
Residential* .....................................................
Nonresidential* ..............................................
Public works and u tilitie s* .........................
* F irs t eleven months.

** F irs t ten months.

30




+
1%
— 16
+
9
+ 4
+ 8
— 9
+26

+ 9
— 49

Change
Car loadings (Philadelphia re gion)* ........................... + 7 %
Retail sales, total (excludingnational chains) * * . . + 1 0
Department store sales* .................................................. + 5
Automobile registrations (48 counties, eastern
Pennsylvania)** ............................................................ + 2 7
Bank debits (20 cities) * .................................................. + 1 1

UNEMPLOYMENT

IN

MAJOR

LABOR

MARKET

AREAS

Third Federal Reserve D istrict
Number of Areas
Nov. '59

Nov. '58

Nov. '56

Nov. '57

Percent of labor force unemployed:
1.5 to 2 .9 %
3.0
5 .9 %
6.0
8 .9 %
9.0
11.9%
12% or more

0

....................................................................
.....................................................................
.....................................................................
.....................................................................
.....................................................................

0
J_

Total nu m b e r................................................ ........

13

3
5

3
5

I

2

4

3

_4

_0

_0

13

2

7

I

7

13

13

Source: U . S. Department o f Labor.

of the labor force was unemployed in November

half-billion dollars was exceeded only in 1955,

1959. Obviously, the District still faces a major

and was four times as great as in 1958.

problem in coping with distressed areas, partic­

Unlike 1958, when easier reserve positions in­

ularly in the anthracite region, where production

duced banks to add heavily to their investments,

of coal has been declining from year to year.

holdings of securities were reduced considerably

Late in 1959 substantial labor surpluses were

in 1959. To maintain reserve positions, banks

reported in nine minor labor market areas and in

borrowed more actively from the Reserve Bank

three major areas the per cent of labor force

and purchased substantial amounts of federal

unemployed was 12 per cent or more, according

funds from other lenders. These changes re­

to estimates of the United States Department of

flected chiefly the operations of reserve city

Labor.

banks, which reported net borrowed reserves
over most of the year. Country banks as a group

Commercial bank operations

continued to have free reserves, but the average

The demand for bank credit was strong during

for the year was lower than in 1958.

1959, whether for mortgage money, business

Changes over the past two years in some of the

loans, or consumer credit. In meeting this de­

principal statement items are summarized below.

mand, member banks in the Third Federal Re­

Credit expansion and rising money rates and

serve District increased their loans from $4,347

bond yields were reflected in the earnings of

million at the end of 1958 to $4,911 million late

banks. Consolidated reports for the year as a

in December 1959. This increase of well over a

whole are not yet available, but figures for the

MEMBER

BANKS

Third Federal Reserve D istrict
Dec. 3 1,
1958

Change in
1958

Dec. 30,
1959

Change in
1959*

Loans ....................................................................................... . . 4,209
Investm ents............................................................................ . . 3,174

4,347
3,589

+ 138
+415

4,91 1
3,321

+564
-2 6 8

Total earning a ss e ts.............................................. . .
Deposits (less cash items in process of collection) . . .

7,936
8,549

+553
+517

8,232
8,710

+296
+ 161

(M illio n s $)

Dec. 3 1,
1957

7,383
8,032

‘ Through December 30.




31

first six months of 1959 indicate the trend. Com­

was due in part to the increasing use of federal

parison with a year earlier showed a pronounced

funds transactions as a means of adjusting re­

increase in total earnings, principally from loan

serve positions. Fiscal agency operations involv­

portfolios, and a partly offsetting increase in

ing marketable securities also increased mark­

current expenses. Higher net current earnings

edly, a reflection of numerous issues for cash and

did not tell the whole tale; adjustments changed

extensive refunding operations during 1959.

the picture materially. Charge-offs and losses

Of special interest is the designation of this

were heavier than in early 1958, and profits on

Bank as one of five Reserve Banks to test pilot

securities dropped sharply. These developments
were only partly balanced by lower income tax

installations of high-speed electronic equipment
for processing checks. This affords us the op­

payments. Net profits available for distribution

portunity to observe and test the effectiveness of

were down materially from the level a year

such equipment for the handling of checks hav­

earlier, when profits on securities were excep­

ing magnetic ink imprints. Cooperation from

tional, but were more in line with experience in

banks and business concerns is necessary for

other recent years.

continued progress in the adoption

of such

checks, as recommended by the American Bank­

Reserve Bank operations

ers Association. Testing of the new equipment is

Lending operations of the Reserve Bank were

particularly timely as a rising tide of paper

more active in 1959. While exceeded in some of

checks is anticipated. Our selection is part of a

the other postwar years, credit extended to mem­

System program to evaluate equipment that will

ber banks increased to a daily average of $42 mil­

enable the Reserve Banks to continue to im­

lion in 1959 from $13 million in 1958. Moreover,

prove their services to member banks.

the number of banks accommodated— 224— was

Bank and public relations activities of the

the largest in any year since the early 1930’s, de­

Bank represent its response to the very real pub­

spite a reduction in the total number of members

lic interest in the Federal Reserve System and

as a result of mergers and consolidations.

its operations. This response includes visits to

Service operations of the Bank showed diverse

banks, addresses, and compliance with requests

changes from 1958 to 1959. In number, the

for tours, films, coin exhibits, and publications.

volume of checks handled increased moderately,

There was a substantial increase in the number

and increases also were reported in transfers of

of tours through the Bank conducted for or­

funds and in the processing of depository re­

ganized groups. Chapters of the American In­

ceipts for withheld taxes. But the record shows

stitute of Banking accounted for about one-

declines in the number of pieces of currency

fourth of the 2,000 visitors. In December an ex­

and coin counted, in postal money orders, non­

perimental two-day conference was held for

cash collections, and in the handling of post­

second echelon officers of member banks with

masters’ deposits. Plus signs predominate in the

deposits of $8—
15 million. At this conference

dollar figures. Particularly significant was the

many facets of bank operations were discussed,

growth in transfers of funds from $49 billion in

particularly those involving relations with the

1957 and $59 billion in 1958 to nearly $70 bil­

Reserve Bank, and economic developments were

lion in 1959. This growth in transfers doubtless

explored.

32




D IR E C T O R S AN D O FFICERS
In the fall of 1959, Frederic A. Potts, President of the Philadelphia National Bank, was
elected a Class A director by the banks in Group I. He succeeds Geoffrey S. Smith
and will serve fo r a term of three years beginning January I, I960. R. Russell Pippin
was reelected as a Class B director by the banks in Group 2.
The Board of Governors of the Federal Reserve System appointed David C. Bevan,
Vice President, Finance, of the Pennsylvania Railroad Company, as a Class C director
for a term ending December 31, 1962. He succeeds Lester V. Chandler. Henderson
Supplee, J r. was reappointed Chairman of the Board of this Bank and Federal Reserve
Agent fo r the year I960, and W alter E. Hoadley, J r. was named Deputy Chairman.
Casim ir A. Sienkiewicz will continue as the D istrict's representative on the Federal
Advisory Council during I960, under appointment by the Board of Directors of this
Bank.
Effective January I, I960, Warren R. Moll, formerly Head of the Department of
Collections, was appointed as an Assistant Cashier.




33

D IR E C T O R S A S OF JA N U A R Y 1960

Term expires

Group
CLASS A
1

FREDERIC A .PO TTS

December 31
1962

President, The Philadelphia National Bank,
Philadelphia, Pennsylvania
2

WILLIAM B. BROSIUS

1960

President, National Bank of Chester County
and Trust Company, West Chester, Pennsylvania
3

O. ALBERT JOHNSON

1961

President, The First National Bank of Eldred,
Eldred, Pennsylvania
CLASS B
1

FRANK R. PALMER

1961

Chairman, The Carpenter Steel Company,
Reading, Pennsylvania
2

R. RUSSELL PIPPIN

1962

Treasurer, E. I. du Pont de Nemours & Company,
Wilmington, Delaware
3

BAYARD L. ENGLAND

1960

Chairman, Atlantic City Electric Company,
Atlantic City, New Jersey
CLASS C
HENDERSON SUPPLEE, JR., Chairman

1961

President, The Atlantic Refining Company,
Philadelphia, Pennsylvania
WALTER E. HOADLEY, JR., Deputy Chairman

1960

Treasurer, Armstrong Cork Company,
Lancaster, Pennsylvania
DAVID C. BEVAN
Vice President, Finance, Pennsylvania Railroad Company,
Philadelphia, Pennsylvania




1962

OFFICERS AS OF JANUARY 1960

KARL R. BOPP
President

ROBERT N. HILKERT
First Vice President
JOSEPH R. CAMPBELL
Vice President
WALLACE M. CATANACH
Vice President
DAVID P. EASTBURN
Vice President
MURDOCH K. GOODWIN
Vice President, General Counsel
and Assistant Secretary
PHILIP M. POORMAN
Vice President
JAMES V. VERGARI
Vice President and Cashier
RICHARD G. WILGUS
Vice President and Secretary

NORMAN G. DASH
Assistant Vice President
ZELL G. FENNER
Assistant Vice President
GEORGE J. LAVIN
Assistant Vice President
and Assistant Secretary
HARRY W. ROEDER
Assistant Vice President
JOSEPH M. CASE
Chief Examiner
RALPH E. HAAS
Assistant Cashier
ROY HETHERINGTON
Assistant Cashier
WILLIAM A. JAMES
Personnel Officer

EVAN B. ALDERFER

WARREN R. MOLL

Economic Adviser

Assistant Cashier

CLAY J. ANDERSON

FRED A. MURRAY

Economic Adviser

Director of Plant

JOHN R. BUNTING, JR.
Business Economist
EDWARD A. AFF
Assistant Vice President
HUGH BARRIE
Assistant Vice President




HENRY J. NELSON
Assistant Cashier
RUSSELL P. SUDDERS
Assistant Cashier
HERMAN B. HAFFNER
General Auditor

35

ST A T E M E N T OF C O N D ITIO N
FEDERAL RESERVE BAN K

OF

PHILADELPHIA

End of year
(000’s omitted in dollar figures)

1959

1958

1957

ASSETS
Gold certificate reserves:
Gold certificates...............................................
Redemption fund— Fed. Res. notes.................

$1,050,113
60,965

$1,037,847
60,195

$1,182,730
60,901

Total gold certificate reserves....................

$1,1 11,078

$1,098,042

$1,243,631

Fed. Res. notes of other Fed. Res. Banks............
Other cash............................................................
Loans and securities:
Discounts and advances...................................
Industrial loans.................................................
United States Government securities..............

43,544
18,085

47,991
16,950

38,556
15,057

43,055
—
1,517,281

6,720
1,509,042

5,490
173
1,384,545

Total loans and securities............................

$1,560,336

$1,515,762

$1,390,208

Due from foreign banks......................................
Uncollected cash items.........................................
Bank premises......................................................
All other assets.....................................................

1
394,830
4,036
14,638

1
332,939
4,245
8,181

1
345,425
4,513
12,740

Total assets...................................................

$3,146,548

$3,024,1 1 1

$3,050,131

$1,807,990

$1,751,391

$1,738,756

892,994
37,645
22,968
32,548

863,417
22,996
16,215
4,013

874,740
30,221
23,870
12,955

LIABILITIES
Federal Reserve notes. .......................................
Deposits:
Member bank reserve accounts......................
United States Government..............................
Foreign..............................................................
Other deposits.................................................

—

Total deposits...............................................

$ 986,155

$ 906,641

$ 941,786

Deferred availability cash items.........................
All other liabilities................................................

281,609
1,513

275,287
1,253

279,334
623

Total liabilities.............................................

$3,077,267

$2,934,572

$2,960,499

$

$

$

CAPITAL ACCOUNTS
Capital paid in.....................................................
Surplus— Section 7 ...............................................
Surplus— Section 13b..........................................
Reserves for contingencies...................................
Total liabilities and capital accounts..........
Ratio of gold certificate reserves to deposit and
Federal Reserve note liabilities combined....
Commitments to make industrial advances.........

22,819
45,638*
—

824*
$3,146,548

39.8%
—

21,894
59,607
8,038

21,192
55,923
4,489
8,028

$3,024,1 1 1

$3,050,131

—

41.3%
—

Net of adjustments authorized by Board of Governors of the Federal Reserve System.




$

46.4%
26

EARNINGS AND EXPENSES
FEDERAL RESERVE BANK OF PHILADELPHIA
(000's omitted)

1958

1959

1957

Earnings from:
U.S. Government securities..............................
Other sources...................................................

$

48,848
1,510

$

42,317
341

$

43,036
2,172

Total current earnings..................................

$

50,358

$

42,658

$

45,208

$

7,006
343

$

6,810
210

$

6,494
211

Total net expenses.....................................

$

7,776

$

7,428

$

7,233

Current net earnings............................................
Additions to current net earnings:
Profits on sales of U.S. Government securities
(net)..............................................................
Transferred from reserves for contingencies
(net)..............................................................
Reimbursement for fiscal agency expenses
incurred in prior years.................................
Ail other...........................................................

$

42,582

$

35,230

$

37,975

$

11

$

10

$

10

Net expenses:
Operating expenses*......................................
Cost of Federal Reserve currency...................
Assessment for expenses of Board of Gover­
nors ...........................................................

Total additions.............................................
Deductions from current net earnings:
Reserves for contingencies...............................
Retirement system (adjustment for revised
benefits)........................................................
All other............................................................

427

408

528

7,208**
113

—
3
$

7,222

$

10

$

123

$

—

$

10

$

14

—

604
1

—

1

3

Total deductions...........................................

$

2

$

11

$

619

Net additions or deductions ( —)........................

$

7,220

$

-1

$

-4 9 6

Net earnings before payments to U.S. Treasury. .

$

49,802

$

35,229

$

37,479

Dividends paid.....................................................
Paid to U.S. Treasury (interest on Federal Re­
serve notes)......................................................
Transferred to or deducted from ( —) Surplus.. . .

1,349

1,294

1,263

62,421

30,541

32,594

$ -13,968**

$

3,393

$

3,622

* After deducting reimbursable or recoverable expenses.
** Net of adjustments authorized by Board of Governors of the Federal Reserve System.




37

VOLUM E O F O P E R A T IO N S
FEDERAL RESERVE B AN K

OF PHILADELPHIA

1959

Dollar amounts (000,000’s omitted)
Collections:
Ordinary checks...............................................
Government checks (paper and card)............
Postal money orders (card).............................
Non-cash items.................................................
Clearing operations in connection with direct
sendings and wire and group clearing plans**
Transfers of funds................................................
Currency counted.................................................
Coins counted.......................................................
Discounts and advances to member banks.........
Depositary receipts for withheld taxes..............
Postal receipts (remittances)................................
Fiscal agency activities:
Marketable securities delivered or redeemed
Savings bond transactions—
(Federal Reserve Bank and agents)
Issues (including re-issues)............................
Redemptions.................................................
Coupons redeemed (Government and agencies)
* Checks handled in sealed packages counted as units.
** Debit and credit items.

38




168,000
26,400
19,700
800

162,800
46,600
21,900
1,000

742
133
299,200
491,100
2
505
328

792
119
303,100
511,500
1
492
347

864
115
314,600
425,000
2
486
423

353

334

345

7,536
6,766
953

$

1957

173,600
24,200
17,900
700

Number of pieces (000's omitted)
Collections:
Ordinary checks*.............................................
Government checks (paper and card)............
Postal money orders (card).............................
Non-cash items.................................................
Clearing operations in connection with direct
sendings and wire and group clearing plans**
Transfers of funds................................................
Currency counted.................................................
Coins counted.......................................................
Discounts and advances to member banks.........
Depositary receipts for withheld taxes..............
Postal receipts (remittances)................................
Fiscal agency activities:
Marketable securities delivered or redeemed
Savings bond transactions—
(Federal Reserve Bank and agents)
Issues (including re-issues)............................
Redemptions.................................................
Coupons redeemed (Government and agencies)

1958

7,930
6,223
941

8,944
7,461
906

64,300
4,974
287
157

$

61,100
4,890
306
140

$

63,206
5,876
337
156

33,267
69,826
2,074
52
6,262
1,981
842

31,004
58,972
2,072
52
1,559
1,806
825

31,194
49,315
2,120
45
11,903
1,799
870

12,771

10,832

10,798

382
531
128

413
462
112

444
620
101




Additional copies of this issue are available
upon request to the Department of Research,
Federal Reserve Bank of Philadelphia,
Philadelphia 1, Pa.