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BUSINESS
R E V I E W

January 1969

o
Monetary Policy, Debt Management, and Even Keel
The Phillips Curve: A Dilemma for Public Policy
Inflation Versus Unemployment
Keeping Pace with the Nation: Third District
Economic Trends in 1968
Monetary Policy: Lessons for the Future

Monetary Policy: Lessons
for The Future
by David P. Eastburn
This is a particularly appropriate time to recall the saying that
those who do not learn from history are condem ned to repeat it.
In the field of m onetary policy at least five im portant lesson s can
be learned from 1968. None of them is new. All of them, u n for
tunately, involve problem s that hold little hope for com plete
solution except over a considerable period to time. But they are
so b asic that m onetary policy cannot be entirely effective until
they are solved.
Lesson #1. Monetary policy cannot count on
timely and flexible fiscal policy.

A good part of the problem s encountered by the Federal Reserve
in 1968 can be attributed to failures of fiscal policy. During the
latter part of 1967 and the first half of 1968, the Federal Reserve,
anticipating and hoping that C ongress w ould increase taxes, did
not m ove so vigorously to slow down expansion of money and
credit as it might have.
Although belatedly, C ongress did act. This fact, plus the tax
cut of 1964, indicates that progress can be m ade in the future
tow ard more flexible use of fiscal policy. But it also su ggests
strongly that progress will be disappointingly slow.
In form ulating policy, the Federal Reserve authorities will not
be able to count on tim ely and flexible fiscal action. A s a result,
money at tim es m ay be tighter than would otherw ise be the case.
Lesson #2. Lags require good forecasting.

M onetary policy is more sophisticated than it has ever been.
There w as a time when policym akers would have been delighted
with the quantity and quality of econimic inform ation they are
now getting on the recent past. Now, because the Federal Reserve
increasingly recognizes that m onetary policy acts with a lag, it is
concentrating more and more on inform ation about the future.
There is little agreem ent on w hat the lag is, but there is a consenus that policy no longer can be form ulated sim ply on the b asis
of the recent past.
(Continued on Page 23)

B U S IN E S S R E V IE W

is produced in the D epartm ent of Research. Evan B. A lderfer is Editorial Consultant; Ronald B.
William s prepared the layout and artw ork. The authors will be glad to receive com m ents on th e ir articles.
Requests for additional copies should be addressed to Public Inform ation, Federal Reserve Bank of Philadelphia, Philadelphia,
Pennsylvania 19101.

BUSINESS REVIEW

Monetary Policy, Debt
Management, and Even Keel
by Warren J. Gustus
1 96 8
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| E V E N -K E E L P ER IO D S

EVEN KEEL, 1968

In 1968, a year of strong inflationary pressures,
the Federal Reserve maintained a policy of even
keel during six Treasury financings— i.e., a pol
icy of no major change in monetary policy. As
the calendar indicates, eight of the 12 months
had even-keel periods in them.

The article following focuses on the policy
of even keel against the broader backdrop of
the relationship between monetary and debt
management since the end of World War II.
And it looks at some of the costs and benefits
that even keel may entail.

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Sun Mon

The monetary historian has no difficulty in find
ing examples to demonstrate that control over
the money supply has been a dangerous power
to entrust to government. On the other hand,
he also can give abundant reasons why control
cannot be placed in private hands. For cen
turies, people throughout the world, including
in the United States, have feared that govern
ment would resort to the printing press to
finance its expenditures. And as recurring infla
tions have shown, the fear has not been
unfounded.
In this country, until 1914, central banking
and Treasury operations were not separated.
The Treasury had long exercised central bank
ing powers which were no less potent because
they were not so labeled. But in 1914 a some
what novel attempt to solve the problem of
monetary control was begun with the formation
of the Federal Reserve System as an agency
3

BUSINESS REVIEW

with quasi-independent status within the Gov
ernment. Nevertheless, it is clear that the peo
ple who wrote the Federal Reserve Act did not
believe the central bank can be independent of
the Government. Nor have subsequent officials
of the Federal Reserve and the Treasury believed
it. From inception of the Federal Reserve, both
it and the Treasury have been constantly adapt
ing to each other and developing working rela
tions in areas of joint responsibility. One such
area is debt management.
Still, for many years, problems of coordinat
ing debt management and monetary policy were
minor ones. Thus, when the Federal Reserve
was founded the public debt was small and
problems in its management were slight. The
fiscal ideal was a balanced budget. In large
measure, monetary management was to be
achieved automatically through operation of the
international gold standard.
Now with a federal debt in excess of $300
billion and a federal budget amounting to 20
per cent of national income, it is clear that
coordination of monetary and debt management
policies is essential. It is not always so clear
how they should be coordinated nor what the
priorities should be in the event they conflict
with each other.

price of Government securities meant loss of
monetary control. Banks could obtain additional
reserves merely by selling securities to the Fed
eral Reserve at the pegged price. Consequently,
the Federal Reserve and the Treasury negotiated
an Accord which provided for discontinuance
of all-out support of prices of Government
securities.
Even after the Accord the Federal Reserve
continued for a while its support policy when
the Treasury was raising new money or refund
ing an outstanding issue. But in December,
1952, support of Treasury financings was dis
continued as well.
The Federal Reserve then re-examined the
whole question of its operations in Government
securities markets, and in 1953 established
operating policies limiting its intervention in
them. One of these policies was that:

Post-World War II developments

A major purpose of this policy was to pro
mote a free, self-sustaining market for Govern
ment securities and to avoid the possibility of
again pegging the market. This policy was
strictly adhered to except for two occasions, in
1955 and 1958, when the market had become
disorderly.
In 1961 the Open Market Committee dis
continued the statement of operating policies
adopted in 1953. The reasons for this were

During World War II and for a number of
years afterward, the Federal Reserve supported
prices of Government securities and assured the
success of Treasury financings at those prices.
At first the overruling priority was to see that
lack of funds did not impede effective prosecu
tion of the war. Later, the concern was that
abandonment of support would create great dis
ruption in the market for Government securities
and seriously upset the economy. By 1951, how
ever, it had become clear that pegging the
4

Operations for the System Account in the
Open Market, other than repurchase agree
ments, shall be confined to short-term secur
ities purchases (except in the correction of
disorderly markets), and during periods of
Treasury financing there shall be no pur
chase of (1 ) maturing issues for which an
exchange is being offered, (2 ) when-issued
securities, or (3 ) outstanding issues of com
parable maturities to those being offered for
exchange.1

1 See policy record of the Federal Open Market Com
mittee, September 24, 1953.

BUSINESS REVIEW

several, including the belief that an original
purpose for publishing the policies had been
achieved, i.e., to help in defining more clearly
the System’s operations in the Government
securities market and in facilitating the transi
tion from a rigidly controlled to a freer market.
But in discontinuing the statement, the Open
Market Committee made clear that this was
not a decision to change the basic position of
the System in relation to the Treasury or the
market. It had no intention of pegging Govern
ment securities prices or of creating artificial
conditions in the market when the Treasury was
conducting financing operations.
The policy of even keel

In short, from the end of World War II down
to 1961, the Federal Reserve was engaged in a
series of steps to re-order priorities. In the
process, it shook off the commitment to peg
prices of Government securities— a policy which
had hobbled its ability to regulate money and
credit. But the Federal Reserve, like other cen
tral banks, has continued to feel a responsibility
not to complicate the Treasury’s job of manag
ing the debt. This responsibility is expressed in
the term “ even keel.” To quote from an official
publication:
While the System has believed that its power
to create money should not be used to sup
port these financings, it has recognized that
concurrent monetary actions may affect their
success. Consequently, the Federal Reserve
has come to pursue whenever feasible what
is known as an ‘even keel’ monetary policy
immediately before, during, and immediately
after Treasury financing operations.2

years, its significance has increased recently. One
reason is that with the growth of inflationary
pressures many have been concerned with the
constraint it may pose for monetary policy. In
addition, the Treasury has had to come to the
market to raise large amounts of new money
to finance substantial budget deficits. A further
complicating factor is the decline in average
maturity of the federal debt, and the implica
tions this may have for the frequency of refund
ing operations. Average maturity has been
decreasing because the Treasury has not been
able to sell long-term debt at interest rates
above the 4lA per cent ceiling imposed by law.3
In light of these considerations, questions
have been raised about the need for even keel,
its costs, and its benefits.
What is even keel?

Both in definition and practice, even keel is an
elusive concept. In general, most market partici
pants understand that even keel is a policy by
the Federal Reserve of avoiding actions during
Treasury financings that would signify a shift
in monetary policy. Even keel is a commitment
to neutrality by the Federal Reserve, but this
commitment is particularly important to the
Treasury during periods of monetary restraint.
Then a move toward more restraint might in
volve higher interest rates and capital losses to
Government securities dealers underwriting the
issue. It could even trigger a failure of the
financing.
Under most circumstances, even keel means
no change in the discount rate and no change in

3 Currently, the problems are not unique that the ceil
ing has created for debt management. Thus, during
1959-1960, the rate ceiling was restrictive. At the same
time, the maturity schedule was heavy and a record
2
Federal Reserve System: Purposes and Functions budget deficit occurred in fiscal 1959. Further, the
(Washington, D .C .: Board of Governors of the Federal
Treasury was having to finance a seasonal deficit. But
Reserve System), November, 1966, pp. 38-39.
this does not make them any the less troublesome.

Although even keel dates back a number of

BUSINESS REVIEW

reserve requirements because these moves are
visible evidence of a policy shift. It generally
means that the Federal Open Market Committee
will adopt neither a more nor a less restrictive
policy, and that actual operations will be con
ducted in such a way as to suggest no policy
change to the market.
Beyond these rather general concepts, even
keel becomes more difficult to define. It depends
to a great extent upon the market situation pre
vailing at the time. Although the aim is to keep
reserve availability roughly the same, with free
or net borrowed reserves and federal funds
fluctuating in a fairly narrow range, a greaterthan-normal ( or less-than-normal) supply of
reserves may be necessary to keep the money
market steady. From an operational viewpoint,
during periods of even keel open market oper
ations are conducted so as to maintain a steady
tone in the money market.
Even keel usually begins a few days before
announcement of a Treasury financing and
continues until a few days after payment and
delivery of the securities. In the period before
announcement of a financing and its terms, the
Treasury is canvassing the possibilities. Any
change in market conditions then would make
it more difficult for the Treasury to tailor the
issue to meet its own needs and those of the
market. Between announcement and delivery,
the market is deciding on its subscriptions.
From the Treasury’s viewpoint, this is the most
critical period because the success of an issue
is determined then. The period after the books
close and while an issue is being distributed
is important because of the implications for
future Treasury financings. If dealers see the
value of their holdings undermined as a result
of a change in monetary policy, they may be
reluctant to participate in future offerings, par
ticularly if one comes along soon.
6

Reasons for even keel

The Government securities market is a key mar
ket in the economy, with particular impor
tance for the Federal Reserve and the Treasury.
The Treasury raises new money there and
refinances outstanding securities; private inves
tors use the market to adjust their liquidity and
as an investment outlet; and the Federal Reserve
uses this market in conducting open market
operations, one of the major instruments of
monetary policy.
Most of the transactions are effected through
dealers, one of whose functions is to make mar
kets by buying and selling securities for their
own accounts. These dealers must be willing and
able to maintain inventories of securities to
accommodate customers when there are no
immediate offsetting transactions. They are a
key element in a key market.
There are relatively few dealers, all of them
operating with slender equity-to-total-funds
ratios and handling very large flotations of
securities. Without even keel, they might suffer
windfall profits or losses as a result of changes
in monetary policy during Treasury financings.
For example, if an increase in monetary restraint
and a sharp increase in interest rates were to
occur before dealers had distributed an issue
to investors, the markdown in their holdings
could cause them serious financial difficulties as
well as making them reluctant to underwrite
succeeding issues. On the other hand, an easing
of policy that brought about a decline in inter
est rates could result in windfall profits not
justified by any economic function the dealers
perform.
Impact of even keel

Government securities dealers have come to
expect and depend on even keel. The Treasury

BUSINESS REVIEW

relies on it in conducting its financings. The
Federal Reserve recognizes even keel as part of
its responsibility as a central bank. Thus, there
are strong reasons for its existence and con
tinuation. Nevertheless, it is also important to
consider the implications of even keel for mone
tary policy.
Economists agree that lags exist between a
change in monetary policy and the full effects
of the change. They do not agree on the dura
tion and variability of the lags. In view of this
uncertainty, it is hard to make a strong case
that postponement of a change in monetary
policy for several weeks does much harm.
However, when the Treasury is in the market
frequently, postponement of policy changes
may have more serious consequences.
In considering the impact of even keel on
timing of monetary policy, one must allow also
for the interval needed to accomplish a shift
in policy. About three free weeks between
even-keel periods is the minimum necessary for
the Federal Reserve to act. A week or two usu
ally is required for the market to become aware
that policy has been changed. Of course, if the
policy change involves a change in the discount
rate or in required reserves, recognition is
instantaneous. Most of the time, however, open
market operations are the policy tool used and
they involve a lag between change in policy and
recognition of the change. An additional week
may be desirable to allow the market to adjust
to a new policy; otherwise the Treasury could
face considerable difficulty in financing in a
market not fully adjusted to a shift in Federal
Reserve policy.4*
Much of the time when even keel is in effect
the Federal Reserve would not want to change
4 Even if the policy shift is toward ease, the financing
could be complicated because of uncertainties about the
appropriate price and terms for an issue.

policy anyway. To count up the duration of
even keel and the time necessary to bring about
policy shifts, therefore, may overstate the con
straint on monetary policy. But even when a
change in policy is not the issue, even keel may
result in rates of growth in money and bank
credit that are undesirable in terms of eco
nomic stability. The reason is that during evenkeel periods the primary monetary policy objec
tive is to maintain stability in money market
conditions. As a result, bank reserves, money
and credit have to be allowed to grow at what
ever rate is consistent with money market sta
bility. Sometimes these rates of growth will be
consistent with those necessary to accomplish
monetary policy goals but sometimes they will
not.
Of course, the Federal Reserve can attempt
to make compensatory changes in monetary pol
icy outside of even-keel periods. For example, if
a slowdown in growth of money and credit has
to be postponed for, say, three weeks, policy
can concentrate the desired changes at the end
of the even-keel period. Sometimes, this is the
case; and when it is, even keel poses no great
problem for the timing of monetary policy.
But when the Federal Reserve wishes to pursue
a gradually more restrictive policy, sustained
or frequent periods of even keel make it more
difficult to compensate later for inaction. A dan
ger is that sudden and sharp policy shifts will
cause disruptions in money and credit markets.
Looking to the future

For more than a half-century since the Federal
Reserve was formed, ways have been sought for
better coordination of debt management and
monetary policy. Nor is it likely that this evolu
tionary process has been completed. Given even
keel as the latest manifestation of this broad
problem, what might be the path of the future?
7

BUSINESS REVIEW

One way of coordinating debt management
and monetary policy, of course, would be to
consolidate responsibility for them in one
agency.5 On economic grounds, such an arrange
ment has much to recommend it, but in the
foreseeable future, at least, any changes will be
much less radical.
A constructive and feasible step— once Con
gress becomes convinced of the need— would
be to eliminate the 4 V4 per cent ceiling rate
on Government securities with a maturity of
more than seven years. In June, 1967, Congress
redefined Treasury notes to include maturities
out to seven years instead of just to five. Since
the 41 per cent rate ceiling does not apply to
/4
Treasury notes, the new legislation permitted
debt managers some more leeway. However,
with a three months Treasury bill now yielding
above 6 per cent, the leeway is gone. In recent
years the Treasury has been unable to sell
longer-term debt at the ceiling rate, issuing
instead shorter-term securities to which the
ceiling does not apply. As a result, the average
maturity of the debt has been declining. At the
end of October, 1968, the average maturity of
marketable interest-bearing public debt was
down to the 10-year low of four years. Almost
49 per cent of this debt was due within a year.
The ceiling has not accomplished its purpose
of minimizing debt costs. For one thing, the
Treasury was not able to take advantage of the
lower rates a few years back, while at the same
time lengthening the debt. Rates then, while
lower, were still above the ceiling. In addition,
non-interest costs of the debt may have been
increased if more frequent refundings and

hence higher flotation costs result from the
shortened maturity of the debt.6
Within the limitations of its powers, the
Treasury is constantly trying to regularize financ
ings and reduce uncertainties associated with
them. With a typical financing running into the
billions, anything that reduces uncertainty about
the timing, amount, and type of financings is
desirable. To the extent that uncertainty in
these areas can be decreased prior to announce
ment of a financing, money market conditions
should become more stable during financings
and the need for even keel less. In fact, the
Treasury in recent years has made considerable
progress in achieving more systematic debt
management, including the regular rollover of
bills and the raising of new funds by increments
to the bill auctions, neither of which has been
regarded as requiring an even-keel policy.
A less promising possibility in the future is
shortening the duration of even-keel periods.7
From 1959 to 1968 a few even-keel periods
have been as short as 19 work days and a few
as long as 30 days or more. But the heavy con
centration of even-keel periods between 22 and
24 days over this long a time span suggests that
chances for shortening its duration may be
limited.8
The Federal Reserve has established some
precedent for flexibility in policy during an
even-keel period. For example, the policy direc
tive covering open market operations from

8 Flotation costs are hard to compute because much
of these are not out-of-pocket. Nevertheless, they are
costs as real as the interest on the debt.
7 Duration of even keel has been estimated by adding
five work days before announcement of a financing and
five work days after delivery of securities to number of
work days between announcement and delivery. In
5
Under one variant of this proposal the Treasury practice, even-keel duration after delivery may vary from
would borrow any funds it needed from the Federal
five days depending on such things as size of issue,
Reserve and use any excess receipts to repay it. The
dealer inventories, and market expectations.
Federal Reserve would be responsible for buying and
8 Over 50 per cent of the even-keel periods between
selling securities in the market to attain monetary
1959 and 1968 lasted 22 to 24 days. Only about 20 per
objectives.
cent lasted fewer days than this.

BUSINESS REVIEW

February 7, 1968 to March 5, 1968 was to
maintain firm conditions in the money market
but to modify operations to the extent per
mitted by Treasury financing if bank credit
appeared to be expanding as rapidly as pro-

MARGINAL RESERVE MEASURES
3.1 Dollars

CZ) EVEN-KEEL PERIODS

jected. As the charts show, even keel has not,
in fact, meant fixity of particular money mar
ket rates. While the main thrust of operations
is reflected in relative stability of rates on fed
eral funds and dealer loans, and in marginal
reserve measures, these variables have fluctu
ated within even keel. Still wider fluctuations
may be practicable.
Another possibility would be for the Federal
Reserve, in rare and particularly difficult cir
cumstances, to support a Treasury financing by
direct purchases but offset this operation by
open market sales. For example, in August,

1950, the Board of Governors and the Federal
Open Market Committee announced their inten
tion:
. . to restrain further expansion of bank
credit consistent with the policy of maintaining
orderly conditions in the Government secur
ities market.” 9 Later, the Open Market Com
mittee purchased $8 billion of Government
securities maturing on September 15 and Octo
ber 1 to assure the success of a Treasury refund
ing operation. At the same time, the System
made sales of other securities from its port
folio to offset the additions to bank reserves.
All this took place before the Federal Reserve
and the Treasury had reached their Accord in
March, 1951. The kind of circumstances which
gave rise to the action would not be present
when the operations of both agencies are coordi
nated as well as now. Nevertheless, other situa
tions might conceivably arise which would
require a sudden change in monetary policy
in the midst of a Treasury financing operation.
If so, the earlier example illustrates how the
Federal Reserve could prevent an offering from
failing and yet accomplish its monetary objec
tives.
9 See Thirty-Seventh Annual Report of the Board of
Governors of the Federal Reserve System, p. 2.
9

BUSINESS REVIEW

SUMMING UP

The experience of the past quarter of a century,
viewed against the backdrop of monetary his
tory, demonstrates that the relation between
treasuries and central banks continues to
change. The relevant question is not now nor
has it been whether the Federal Reserve should
be independent of the Treasury or subservient
to it. Thus, even so dramatic a development as

the Accord in 1951, looked at closely and in
light of subsequent developments, turns out to
be a re-ordering of goals rather than an asser
tion of independence by the Federal Reserve.
The relevant question is how to order policy
priorities and effect compromises at a minimum
cost to the economy. The policy of even keel
involves one of the areas of priority and com
promise.

Forecasts for 1969
Now Available
The Department of Research has complied and analyzed
a number of predictions made by businessmen, econom
ists, and Government officials. This compilation includes
a summary of forecasts for the economy as a whole and
particular sectors of the economy. The more important
indicators are presented in chart form.
Copies of this release are available on request from
Public Information, Federal Reserve Bank of Philadelphia,
Pennsylvania 19101.

BUSINESS REVIEW

The Phillips Curve: A Dilemma
For Public Policy
Inflation versus Unemployment
by Sheldon W . Stahl
It is probably common knowledge among many
that the present economic expansion far exceeds
any other sustained advance recorded in United
States economic history. Yet, increasingly, amidst
unparalleled prosperity and with a high likeli
hood of its continuance, a growing chorus of
public and private discontent is being heard.
For a concomitant of the high rates of eco
nomic growth in recent years has been price
inflation— a phenomenon perhaps better known
to most than the longevity of the expansion.
For those who make public policy, counter
ing inflation will rank high in terms of prior
ities. At the private level, concern also is high.
For example, at its meeting in October, 1968,
the Business Council— an organization composed
primarily of the heads of the largest business
corporations in the United States— was reported
to have endorsed the view that unemployment
rates of 5 to 6 per cent should be tolerated in
order to fight inflation. Although such pro
posals are not likely to serve as guidelines to
public policy, they do dramatize what may well
be the major economic problem facing policy
makers in 1969— the trade-off between unem
ployment and inflation.

Chart 1
WAGE CHANGES IN COLLECTIVE
BARGAINING SITUATIONS,
1963-1967
(Medium Percentage Change* Negotiated)
5

_ _ _ _ _1
_ _ _ _ _ ____________1
_
____________1 _ _ _
_ _ _ _ _1
_ _
_
1963

1964

1965

1966

1967

•Equal Timing
Source: U.S. Department of Labor

WAGES, PRICES, UNEMPLOYMENT,
AND PROFESSOR PHILLIPS

The American economy has been expanding for
nearly eight years, but the past three have been
marred by a departure from relative price sta
bility. As Chart 1 shows, since 1965 the econ
omy has experienced an accelerated upward
pressure on wage rates. During the first nine
months of 1968 the average annual rate of
increase in wages and benefits in major collec
11

BUSINESS REVIEW

tive-bargaining settlements was about 6 per
cent. First-year wage adjustments were approx
imately 7.5 per cent as compared to less than 6
per cent for 1967. Thus, wage pressures not
only continued in 1968, but actually intensified.
Throughout much of the postwar period, in
fact, the behavior of wages has closely paral
leled that of prices. During periods of inflation,
wages tended to rise more rapidly than at times
of relative price stability. This pattern has sug
gested to many observers a causal relationship
between wages and prices, with wage increases
putting pressure on costs and subsequently exert
ing an upward push on prices. A second hypoth
esis held that even in those instances where
wages might not initiate price inflation, they
necessarily had to follow price rises. Otherwise,
aggregate demand could not be sustained at the
new higher level; without the wage validation
of price increases, the inflationary process would
be terminated.
Current theories of inflation are an amalgam
not only of these two hypotheses but of other
non-wage explanations as well. Nonetheless,
growing recognition of the vital role of wages
in price determination as well as recent wageprice developments have imbued the whole
process of wage determination with a height
ened element of public interest.
The pivotal role of wages in the inflation
equation has led to increasing familiarity with
the term “ Phillips curve.” Working with data
for Great Britain, Professor A. W. Phillips
examined the relationship between aggregate
unemployment and aggregate money wage rates.1
He found a clear link between the two variables,
with higher rates of wage gains associated with
1 A. W. Phillips, “ The Relation Between Unemploy
ment and the Rate of Change of Money Wage Rates
in the United Kingdom, 1861-1957," Economica, N o
vember, 1958, pp. 283-299.

lower rates of unemployment. The regression
curve which described this relationship has
come to be known as the Phillips curve,
although this same term is often used to depict
the relationship between rates of unemployment
and price changes rather than wage changes.
Simply stated, Phillips and others found that
low rates of unemployment tend to be associated
with large wage increases of an inflationary
character. Thus Government policymakers dur
ing such periods are confronted with the di
lemma of choosing between some admixture
of unemployment and inflation, and must try to
adjust the level of aggregate demand to attain
this mix.
The productivity factor

Chart 2 shows annual changes in real Gross
National Product, prices, and productivity, com
pared to the unemployment rate during the
period 1948-1967. The data suggest that lower
rates of unemployment usually are generated
by high rates of aggregate economic growth.
Higher unemployment, on the other hand, usu
ally is associated with low rates of growth. In
1950, 1955, 1959, and in 1962, when rapid
growth failed to lower unemployment sharply,
the explanation is found primarily in the behav
ior of output per manhour. In each of these
instances, the economy was recovering from
a period of recession, and initial gains in indus
trial productivity and in hours of work were
very large. Gains in employment tended to be
small relative to increases in output, since out
put could be increased with few added work
ers. At the same time, however, the rise in
prices in these years, as measured by the
G.N.P. price deflator, was about one-half as
great as the average for 1948-1967, as both
unit labor costs and prices benefited from the
salutary effects of higher productivity.

BUSINESS REVIEW

Although increased productivity does dampen
somewhat the short-run gains in employment
as the economy grows, it is vitally important
both to relative price stability in the long run
and ultimately the longevity of the economic
advance itself. In fact, much capital investment
is motivated by the desire to enhance longerrun productivity. To be sure, even with modest
gains in productivity, price stability can be
maintained if wage demands are modest. How
ever, the farther along the economic advance,
the smaller are the gains realized in productivity
as margins of idle plant capacity are absorbed
and workers with requisite skills become increas
ingly scarce.
These are precisely the circumstances which
give rise to the relationship between wages
and unemployment observed by Phillips. When
aggregate demand is growing and productivity

gains are moderating, the relative demand for
labor intensifies as the supply of labor becomes
tight. Lower unemployment is reflected in
aggressive wage demands and large wage gains
push unit labor costs— and prices— upward.
Each successive increase in consumer prices
becomes part of the rationale for new and
higher wage demands.
The recent record

This process largely explains what has hap
pened to the American economy since mid-1965.
Following the 1960-61 recession, the economy
made considerable inroads into the pool of
unemployed labor. In 1965, unemployment had
dipped below 5 per cent of the labor force, and
the margin of unutilized manufacturing plant
capacity had declined to the point where there
was little slack to accommodate new demand.
13

BUSINESS REVIEW

It was at this point that the Vietnam war esca
lated. The pressure of this sizable additional
demand, compressed into a relatively short
time, had predictable consequences. Wage and
price increases accelerated sharply. Unemploy
ment fell significantly through early 1966, then
became locked into a narrow range of move
ment. As Chart 2 shows, unemployment aver
aged 3.8 per cent of the labor force both in
1966 and 1967. For the year 1968, the over-all
unemployment rate was somewhat lower.
Events of the past three years have shown
that when the unemployment rate falls below
4 per cent, additional injections of spending
beyond the real productive capabilities of the
economy carry— for most of us— an unaccept
ably high cost in terms of inflation.
Another view

However, there are those who might regard
the costs of inflation as acceptable if unemploy
ment could further be reduced. Since further
reductions would primarily benefit the disad
vantaged, such a view should not be dis
missed lightly. It is true, of course— as the
experience of World War II and the Korean
War clearly show— that unemployment could
be forced below present levels, given sufficient
stimulation of the economy.
However, the accomplishments of a wartime
economy under a comprehensive set of con
trols allocating materials and labor, and limiting
wage and price increases, are not appropriate
standards. Without Government controls,
explicit price increases during these wars would
have been much greater than they were. Recent
experience suggests that price increases in the
3 to 4 per cent range have not been associated
with a substantial lowering of unemployment
from levels of three years ago.*
14

Moreover, there is the real question of what
rate of inflation would result if public policy
aimed, for example, merely at holding unemploy
ment within a range of, say, 3V2 per cent to 4
per cent. Past relationships as expressed in a
given Phillips curve may indicate that at times
this range of unemployment has been accom
panied by annual price increases of more than
4 per cent. But, how long would prices rise by
4 per cent if it became generally known that
this was public policy? For example, would
labor unions, anticipating sustained inflation,
increase their wage demands by amounts at
least equal to expected price rises? Would pro
ducers’ demands for new plant and equipment
become increasingly a function of expected
increases in the prices of these goods? Would
wholesalers and retailers attempt to beat
expected price hikes by laying in inventories
in excess of those warranted by current sales
levels? In short, would the expectation of con
tinued inflation lead to greater inflation?
There would seem to be ample evidence that
when expectations of continued inflation become
widespread, events such as those hypothesized
above do, in fact, occur. Thus, inflation spirals
and becomes self-reinforcing. The Phillips curve
is a static concept; while inflation is a dynamic
process. Once inflation is accepted as public
policy, the Phillips curve on which such a pol
icy may be predicated would shift adversely in
response to spiraling price increases.2 This illus
trates the danger in trying to base public policy
on an assumed static relationship between unem
ployment and price changes when, in fact, the
relationship may continually be shifting.

2 An adverse shift in the Phillips curve means that
any given rate of unemployment would be associated
with a higher rate of price increase; or, for any given
rate of price increase, there would be associated a higher
rate of unemployment.

BUSINESS REVIEW

Chart 3
SELECTED UNEMPLOYMENT RATES, 1948-1967
Per Cent

What might be done?

If continuing inflation is not to be tolerated,
what can public policy do? And what are the
implications of these choices? One method of
dealing with this problem is to impose Gov
ernment controls on prices and wages. This
choice, however, is highly undesirable. Such
controls, especially in the absence of extreme
wartime conditions, are both anathema and of
questionable effectiveness. Non-price rationing,
in place of the market mechanism, distorts the
whole pattern of rational allocation of resources.
Experience has shown that the imposition of
general price-wage controls inevitably leads to
evasion and spawns a proliferation of increas
ingly specific controls. The costs to our eco
nomic system might well exceed whatever
benefits such controls might bestow.
An alternative to wage-price controls is the
strategy of trade-off— trying, through monetary
and fiscal policy actions, to slow down the rate
of growth in the economy in order deliberately
to create slack and remove some of the pres
sure on resources, particularly labor. This means

acceptance of temporarily higher levels of unem
ployment in order to slow down inflation.
BEHIND THE PHILLIPS CURVE

Although the concept of the Phillips curve may
be helpful in trying to quantify the terms of the
trade-off, it deals with a problem that has con
fronted public policymakers many times in the
past. The really new element in the dilemma is
the increased concern about the implications of
the trade-off for different groups in our society.
As over-all unemployment has declined during
the economic growth of the 1960’s, emphasis
has shifted from overriding considerations of
how many people are unemployed to the ques
tion of who are unemployed. Concern today is
over where the heaviest burden of any trade
off, in terms of higher unemployment, will be
borne.
Chart 3 clearly shows, for example, the strik
ing disparity between the decline in joblessness
for all workers and the experience of teenage
workers. The persistent gap between whites
and nonwhites is also apparent, with the latter
15

BUSINESS REVIEW

experiencing at least double the rate of unem
ployment of the former. And it shows that the
fortunes of blue-collar workers, especially the
semi-skilled and unskilled, are more adversely
affected by economic recession than those of
other groups. It is this disparate nature of
unemployment that has to be considered in
weighing the implications of any trade-off strat
egy. For sustained prosperity, while bringing
about absolute improvements, has not greatly
improved the relative positions either of the
young (non-white youths in particular) or non
whites generally. The burden of any rise in
over-all unemployment will fall heaviest on these
same groups. Since the disadvantaged include
the least skilled and least productive, they are
among the last to be hired when demand is
strong and the first to be laid off when demand
weakens. Furthermore, the experience of 19571958, when both economic recession and infla
tion coexisted, should temper the confidence of
advocates of a sizable trade-off in fewer jobs as

a vehicle for bringing about a prompt arrest of
inflation.
Looking ahead

Moreover, the problem is likely to become more
severe in the future. As Chart 4 shows, non
whites in the labor force are expected to increase
much faster than whites. Young people— 16 to
24 years of age— both white and nonwhite are
expected to enter the labor force in especially
large numbers. By 1975, nonwhites aged 16 to
24 years will account for more than one-fourth
of the total nonwhite labor force, as compared
to about one-fifth of the total a decade earlier.
These are the least skilled and the least experi
enced in the labor force. Nonwhites in the most
productive 25- to 44-year age group, on the
other hand, will represent a smaller proportion
of the labor force in 1975 than they did in 1965.
This same pattern of change is applicable to the
white component of the labor force as well.
Given this outlook on the labor-supply side,
Chart 5

Chart 4

PROJECTED EMPLOYMENT
CHANGES FOR PERSONS 16
YEARS AND OVER BY OCCUPA
TION GROUP, 1965-1975

PROJECTED LABOR FORCE
CHANGE BY COLOR AND AGE,
1965-1975
0

Per Cent
30

__________________________ 0

Per Cent
30

Color and age
TOTAL, 16 YEARS AND OVER
WHITE
16-24 Years
45-64 Years
25-44 Years
65 Years and Over
NONWHITE
16-24 Years
25-44 Years
45-64 Years
65 Years and Over
Source: U.S. Department of Labor: “Manpower Report of the President”, April 1968

-3 0

-2 0

-1 0

Per Cent
Source: U.S. Department of Labor: "Manpower Report of the President” , April 1968

FUTURE LABOR SUPPLY IS OUT OF PHASE WITH FUTURE LABOR DEMANDS
16

BUSINESS REVIEW

what are the employment opportunities which
will confront this labor force? Unfortunately,
the future employment profile, shown in Chart
5, is seriously out of phase with the labor-force
profile shown in Chart 4. For example, oppor
tunities are expected to be greatest for highly
skilled professionals and technicians, and least
for either semi-skilled or unskilled blue-collar
workers. Although employment of skilled bluecollar workers is projected to rise by about onefourth, participation of younger workers, and
nonwhites in particular, in this growth appears
quite limited because of lack of training or
other barriers. Growth in both the clerical and
service sectors may hold some promise for dis
advantaged groups, although skill requirements
would still present a formidable obstacle.
Thus, both for the near term and the some
what longer term, the structure of unemploy
ment will remind public policymakers that the
attempt to purchase less inflation via rising
unemployment has serious costs, both economic
and social.

The fundamental solution

Despite these costs, however, moderating infla
tion probably will entail rising unemployment,
since such a trade-off seems unavoidable. The
road back to price stability may not be short and
a good deal of patience will be required. Recog
nizing this, public policy may be able to make
the required trade-off more palatable. For exam
ple, if the time horizon for a return to price
stability is lengthened, the costs in terms of
higher unemployment rates might be mini
mized.
Ffowever long the adjustment process, a fun
damental attack on those factors which have
shaped the structure of unemployment is a
must for a long-term solution. Intensification

of manpower training to upgrade the skills of
the labor force and increase its productivity and
earnings is one of the most-needed steps. Beyond
this, elimination of barriers to labor mobility
and discriminatory barriers to free entry into
the job market, strengthening of competition,
and recognition of the increasingly adverse
impact of rising statutory minimum wages on
employment of those with little skill would all
be part of a simultaneous attack not only on
unemployment but also on inflation itself. By
increasing the productive resource base in these
ways, such efforts not only would enlarge the
real output potential of the economy, and
thereby favorably shift the Phillips curve, but
they also would bring more of the disadvantaged
into the economic mainstream.
This joint approach represents, in part, an
alternative either to direct controls or to a
costly trade-off in terms of high unemployment.
But the immediate problem remains that of a
trade-off. The reality of inflation at present and
the likelihood of its persistence in the months
ahead, as well as the time needed to correct
more fundamental structural problems, point
toward some measure of rising joblessness as a
likely cost of moderating inflation.
Perhaps the degree of price inflation or the
pace of wage increases since 1965 would have
been appreciably lower if aggregate demand had
grown in a more orderly fashion. The economy
might very well have been subjected to far less
stress than it actually was. The lesson which
clearly emerges from the experience of the past
three years is that effective stablization policy
is not possible without a coordinated and re
sponsive mix of both fiscal and monetary actions.
With such a mix, applied at the right time—
the need to choose between the Scylla and
Charybdis of inflation or unemployment would
be significantly reduced.
17

BUSINESS REVIEW

Econom ic activity in the Third Federal R eserve D istrict during 1968 kept pace with the
rapid advance of the national economy. Production and sales were strong and labor m ar
kets rem ained tight. Prices rose at a faste r clip than for the nation as a whole. Loans, in
vestm ents and dep osits at m em ber banks also advanced, reflecting national financial trends.

Keeping Pace With The Nation:
Third District Economic
Trends in 1968
by Edward G. Boehne
Production and sales

Workers in the Third District produced more
goods in 1968 than during the previous year.
As measured by electric power consumed by
industrial firms, manufacturing activity in the
district registered a substantial increase in 1968,
rising 10.1 per cent over 1967 as shown in
Chart 1.

Chart 2
VALUE OF CONSTRUCTION*
I

]

U N IT E D STATES

]

TH IR D DISTRICT

I
I

Chart 1
ELECTRIC POWER
CONSUMPTION OF
MANUFACTURERS IN THE
THIRD DISTRICT
Percentage Increase

------- 1
------- 1
------- 1
_____ I_____ I_____
-1 0

Percentage Change
‘ Including Public Works and U tilities
“ Based on First 11 Months
Source: U.S. Data, F.W. Dodge Corp.

•B a s e d on First 1 0 M onths

Construction activity, including residential,
nonresidential and public works, also showed
considerable strength in the district, outpacing
the nation as a whole. As indicated in Chart 2,
construction nationally rose just over 17 per cent
in 1968, while the district recorded an increase
of just under 47 per cent. The 1968 rate of gain

BUSINESS REVIEW

Chart 4
DEPARTMENT STORE SALES*

Chart 3
Lancaster, Pa.

NEW PASSENGER CAR
REGISTRATION

Philadelphia, Pa.

Reading, Pa.

Scranton, Pa.

Trenton, N.J.

Wilkes-Barre, Pa.

United States

1967

I
_____

-5

'Based on First 10 Months of 1968
Source: Department of Commerce, Data on SMSA Basis

Labor markets

1968*

I _ _ _ _ _ _ _ _ _I _ _ _
_ _ _I _ _I _ _ _ _ _ L
_
_
_
-1 0

Percentage Change
’ Based on First 10 Months
Source: U.S. Data, Automotive News

for the district boosted by a whopping 145 per
cent rise in public works construction, was nearly
quadruple that posted in 1967.
While people in the Third Federal Reserve
District were producing more in 1968, they
also were consuming more. For example, fol
lowing a decrease in 1967, registration of new
passenger cars ( a rough proxy for new car sales)
in the district rose by slighty more than 11 per
cent in 1968— 2 per cent higher than in the
nation ( Chart 3 ).
Also, department store sales in the Third
District were strong in 1968; however, sales
performance was mixed throughout the district
as indicated in Chart 4. In Philadelphia and
Reading, sales paralleled the nation while in
Lancaster, Trenton and Wilkes-Barre they were
considerably below, and in Scranton consider
ably above the national rate of growth.

Because of the vigor in business activity, labor
markets in the Third District remained tight in
1968— even tighter than for the nation as a
whole. As shown in Chart 5, the unemployment
rate for the region was 3.1 per cent, down
slightly from 3.3 per cent in 1967, and still onehalf of 1 percentage point below the national
average.
Chart 5
UNEMPLOYMENT RATE
Percentage

Source: U.S. D ata, D ep artm en t of Labor

BUSINESS REVIEW

Chart 6
AVERAGE WEEKLY HOURS
WORKED
Hours

U N IT E D STATES

For those participating in the work force
last year, earnings also set a new record as
indicated in Chart 7. In the district, weekly
earnings climbed an average of nearly $6 per
week in 1968 to $117. The increase in the
nation was $7 and average earnings for the
year were $122 per week— $5 higher than in
the district.

Chart 8
CONSUMER PRICE INDEX
1 9 5 7 -5 9 = 1 0 0

1965

1966

1967

1 96 8*

•B ased on First 11 M onths
Source: U .S. Data, D ep artm en t of Labor

Employees in the district worked an aver
age of 39.8 hours per week in 1968— about the
same as they worked in 1967 (Chart 6 ).
Nationally, the figure was slightly higher at
40.2, suggesting workers put in more over
time in the nation than in the district.

Source: U.S. Bureau of Labor Statistics

Prices

But along with a tight labor market and record
wage levels also came higher prices. The Phila
delphia Metropolitan Area experienced substan
tial inflation in 1968— even more than the
nation as a whole. Consumer prices (Chart 8)
jumped 6.3 per cent* in the Philadelphia area
compared to a national increase of 5.6 per cent.*
Consumer services continued to be in the van
guard of inflationary pressures.
* November 1967 to November 1968.
20

BUSINESS REVIEW

Chart lO
Chart 9
DEMAND DEPOSITS*

TIME DEPOSITS*
Percentage Increase

Percentage Increase
1CT
□

UNITED STATES

0
‘ Mem ber Banks Only, Data for Last Wednesday of Each Month
“ Based on First 11 Months

•M e m b e r Banks Only, Data for Last Wednesday of Each Month

Source: U.S, Data, Board of Governors of the Federal Reserve System

••B a s e d on First 11 Months
Source: U.S. Data, Board of Governors of the Federal Reserve System

Banking and finance

Banking trends reflected both robust business
activity and conditions in the financial markets.
As a result, banks experienced sharp increases
in loans, investments and deposits.
At member banks in the Third Federal
Reserve District, demand deposits and time
deposits showed substantial advances in 1968
as shown in Charts 9 and 10. Compared to
1967, demand deposits were up 6.4 per cent in
1968 and time deposits 13.1 per cent.
Loan volume at Third District member banks
jumped 9.8 per cent compared to a national
increase of 8.9 per cent. Much of the advance
was accounted for by the behavior of business
loans.

BUSINESS REVIEW

Chart 12
INVESTMENTS*
Percentage Change

Bank investments— holdings of U.S. Govern
ment and other securities (primarily state and
local)— also moved up rapidly in 1968 (Chart
12). Nationally, bank investments chalked up
an 11.1 per cent gain, while at Third District
member banks investments increased 13.4 per
cent from 1967 to 1968.

**B ased on First 11 Months
Source: U.S. Data, Board of Governors of the Federal Reserve System

In short, for the Third District as well as for the nation 1968 was a year of prosperity— record
production, record sales, record wages, and record employment. But it was also a year of inflation—
the most in nearly a decade and a half. How to regain some semblance of price stability without
losing prosperity remains in 1969, as it was in 1968, the primary economic problem facing the nation
and the district.

BUSINESS REVIEW

(Continued from page 2)

Unfortunately, as 1968 illustrates, ability to
perform is not equal to desire. Very few econo
mists, both inside and outside of the Federal
Reserve, correctly foresaw the strength of the
economy following the tax increase and spend
ing cuts enacted by Congress at midyear. As a
result, many who earlier were concerned about
overkill are now worried about another burst of
inflation in 1969. Had economists seen the out
look six months ago as they see it now, mone
tary policy quite possibly would have been more
restrictive.
Here again, however, the solution will be
slow in coming. Not only will economists have
to learn much more about lags, but they will
have to improve their ability to forecast the
future.
Lesson #3. Multiple guides and objectives
require trade-offs.

Adherents to the quantity theory of money have
found it hard to understand why the Fed per
mitted money to expand so rapidly at times in
1968. One explanation is the fact that increases
frequently were greater than the Federal Reserve
expected.
One reason for this, in turn, is that the
money stock is not the only thing the Federal
Reserve was trying to influence. The Board’s
staff does, as a matter of standard procedure,
estimate by how much money and credit aggre
gates are likely to change in the short run, given
certain conditions in the money market. These
projections can miss, even if those money mar
ket conditions are maintained, whenever there
is a shift in the relation between such conditions
and the demand for money and credit.
This less-than-perfect ability to forecast the
important variables is one price of multiple
guides to policy. Life in the Fed would be much

simpler if single-minded attention could be given
to one guide— whether the money stock or
interest rates— and letting the market determine
the value of all other variables. Because the Fed
has an eclectic theory of linkages between policy
action and economic behavior, it does not do
this.1
A solution to the problem of conflicting
guides to policy can come only over a period of
some time. The day may arrive when economists
can describe with reasonable certainty the rela
tionships among the many variables involved.
On that day, it won’t matter whether policy
guides are stated in terms of money stock, bank
credit, interest rates, or whatever; one will serve
as well as another.1 Economists are a long way
2
from the necessary understanding of the econ
omy and financial system to make that possible.
The chances of solving the problem of trad
ing off one ultimate objective against another
are even more remote. Some policymakers will
put more stress on full employment than stable
prices. Some will give greater weight to inter
national matters than others. Hopefully, econo
mists will be better able to tell policymakers
the consequences of trade-offs, but policymakers
will still have to make the difficult value
judgments.
Lesson #4. Even keel can be inflationary.

During 1968, as the calendar in the first article
in this Review indicates, the United States
Treasury came to the market a number of times.
Inasmuch as it is customary for the Federal
Reserve to maintain an even keel in money mar
1 Most officials of the Federal Reserve have such a
theory. In addition, since some individuals may empha
size one guide and some another, the combined result
is an eclectic view.
2 Of course, some may be more appropriate than others
for operational reasons.
23

BUSINESS REVIEW

kets during Treasury financing operations, the
Fed found itself constrained from making any
major change in policy during a fair proportion
of the year.
As the article points out also, an even-keel
policy may mean that changes in policy are
delayed, not taken at all, or more drastic and
packed into a shorter period when they are
taken. In 1968, the even-keel policy probably
caused money to be easier than otherwise would
have been the case.
This poses a logical question for the future.
Given the likely increase in the public debt over
the years to come and given problems of length
ening the maturity of the debt, an even-keel
policy could at times hamper attempts to bring
inflationary pressures under control.3 Of course,
the central bank cannot ignore the financial
needs of its Government, but at the same time
it must make sure it carries out its responsibility
for monetary control. One lesson from 1968 is
that ways might well be considered to lessen the
inflationary implications of even keel in the
future.
Lesson #5. Competition solves many problems.

Although not in the center of the stage as in
1966, disintermediation lurked in the wings for
most of 1968. Concern about the effect of mone
tary policy on savings flows caused the Federal
Reserve to be less restrictive than might have
been the case otherwise.
It is easy to conclude that the simple lesson
is to remove ceilings on interest rates on time
and savings deposits. But the resulting impacts
on savings institutions and the mortgage mar
3 Although even keel works both ways— that is, it
constrains monetary policy from easing as well as tight
ening— in practice it is not likely to be completely
symmetrical. The greater problem is encountered on
the restrictive side.
24

ket could be most severe. Monetary restriction
does have unequal impacts on various parts of
the economy, and the Federal Reserve can’t
overlook the fact.
The ideal solution to these unequal impacts
is to work toward freer flows of funds among
financial markets. Some minor progress in this
direction since the 1966 crunch is indicated,
for example, by the fact that usury laws have
been changed and statutory interest-rate ceilings
on FHA and VA mortgages have been removed,
at least for the time being. However, when it
comes to broadening the powers of savings and
loans and mutual savings banks, equalizing tax
burdens, and other such basic steps to heighten
competition among the various types of financial
institutions, there is solid resistance. The econ
omists’ idealized conception of a free competi
tive market for savings and mortgages is a long
way off.
THE OUTLOOK

In examining the past to find lessons for the
future, there is always a tendency for any insti
tution to look for reasons beyond its control
why things may have turned out less than per
fectly. Yet it is a fact of life that in many
respects the difficulties of 1968 stemmed from
deep-seated problems which will take a long
time to solve. We do not have a sufficiently
flexible fiscal policy; we do have a great deal to
learn about lags and about predicting the future;
we do have multiple guides and objectives that
often call for trade-offs; we do have a large and
growing federal debt that must be financed; and
we do operate in credit markets that are imper
fectly competitive.
In 1969 these same problems will confront
the Federal Reserve, some in even greater
intensity.

BUSINESS REVIEW

• On the fiscal front the most important
decision will be whether to extend the 10
per cent surcharge beyond June 30. Given
the economic strength that now seems
likely to prevail in 1969, the case for exten
sion is strong indeed. Given recent experi
ence with tax changes, however, it would
be unrealistic for the Fed to make the
easy assumption that extension will be
accomplished.
• Recognizing that despite the fiscal package,
inflationary pressures were persisting, the
Fed in late 1968 moved toward more
monetary restraint. As the Federal Reserve
determines policy early in 1969, it will be
influencing the course of events later in the
year and even in 1970. At that time, just
possibly, the problem may be a weakening
economy. The lot of the forecaster again
will not be a happy one.
• Moreover, the trade-offs among the various
guides and objectives of monetary policy
are likely to become even more difficult to
make in 1969. What levels of interest
rates might accompany efforts to slow
growth of the money stock to, say, an an
nual rate of 4 per cent this year? No one
can say now, but they might well be so
high as to pose serious problems for finan
cial markets. And as the second article in
this Review indicates, policymakers will
face even more starkly than in 1968 the
trade-off between a stable dollar domes

tically and internationally and a low level
of unemployment.
• A silver lining in the clouds looming over
1969 is the likelihood that the Treasury
will need to be in the market for funds
less heavily, although perhaps not less fre
quently. Hopefully, there will be less con
straint from an even-keel policy and more
room for the Federal Reserve to maneuver.
• Although demands from the Treasury may
be less, a continuation of inflationary pres
sures would pose substantial problems for
another sector— housing and mortgage mar
kets. This was the area hardest hit by the
credit crunch of 1966. If the Federal
Reserve is obliged to tighten further in
1969, implications for housing could be
especially great in view of the fact that
housing needs have become more pressing
relative to available supply than they were
in 1966. Regulation Q seems destined to
be in the spotlight again.
Given the persistence of these complex and
basic problems in 1969 and probably for some
years to come, one group of observers has con
cluded that monetary policy would best be
reduced to a simple rule: increase the money
stock by some constant rate. A more realistic
point of view is that these difficult problems
call for even greater discretion, flexibility, and
imagination than before.

BUSINESS REVIEW

DIRECTORS AND OFFICERS

At the election held in the fall of 1968, Mr. Harold F. Still, Jr., President, CentralPenn National Bank of Philadelphia, Philadelphia, Pennsylvania, was elected by
member banks in Electoral Group 1 as a Class A Director for a three-year term
beginning January 1, 1969. He succeeds Mr. Howard C. Petersen. Mr. Henry A.
Thouron, President, Hercules Incorporated, Wilmington, Delaware, was re-elected
by member banks in Electoral Group 2 as a Class B Director for a like term.
The Board of Governors of the Federal Reserve System redesignated Dr. Willis
J. Winn, Dean, Wharton School of Finance and Commerce, University of Penn
sylvania, Philadelphia, Pennsylvania, Chairman of the Board of Directors of this
Bank and Federal Reserve Agent for the year 1969. Mr. Bayard L. England,
Chairman of the Board, Atlantic City Electric Company, Atlantic City, New
Jersey, was redesignated Deputy Chairman of the Board for 1969. Mr. D. Robert
Yarnall, Jr., President, Yarway Corporation, Blue Bell, Pennsylvania, was reap
pointed a Class C Director for a term of three years beginning January 1, 1969.
The Board of Directors of this Bank selected Mr. George H. Brown, Jr., Chair
man of the Board, Girard Trust Bank, Philadelphia, Pennsylvania, to serve during
the year 1969 as the member of the Federal Advisory Council from the Third
Federal Reserve District.
Appointments to officer positions in this Bank during the year included: Albert
Spencer, Jr., Assistant Vice President on February 1; Hiliary H. Holloway,
Assistant Counsel on June 19, Mark H. Willes and William F. Staats, Senior Econ
omists, George C. Haag, Public Information Officer, and Eugene W. Lowe,
Securities Officer, effective January 1, 1969. Also effective January 1, 1969,
eight officers were promoted to new positions: Joseph R. Campbell, David P.
Eastburn, David C. Melnicoff, and James V. Vergari, former Vice Presidents, to
the newly created position of Senior Vice President; Warren J. Gustus, formerly
Research Officer and Economist, to Economic Adviser; Sheldon W. Stahl, formerly
Research Officer and Economist, to Senior Economist; D. Russell Connor,
formerly Assistant Secretary and Building Officer, to Assistant Vice President and
Assistant Secretary; and James A. Agnew, formerly Assistant Cashier, to Collec
tions Officer.

BUSINESS REVIEW

DIRECTORS AS OF JANUARY 1, 1969

Term expires
December 31

Group

CLASS A
HAROLD F. STILL, JR.
President, Central-Penn National Bank of Philadelphia
Philadelphia, Pennsylvania

1971

ROBERT C. ENDERS
President, Bloomsburg Bank-Columbia Trust Co.,
Bloomsburg, Pennsylvania

1969

H. LYLE DUFFEY
Executive Vice President,
The First National Bank of McConnellsburg,
McConnellsburg, Pennsylvania

1970

CLASS B
1

PHILIP H. GLATFELTER, III
President, P. H. Glatfelter Co.,
Spring Grove, Pennsylvania

1970

HENRY A. THOURON
President, Hercules Incorporated
Wilmington, Delaware

1971

EDWARD J. DWYER
President, ESB Incorporated,
Philadelphia, Pennsylvania

1969

CLASS C
WILLIS J. WINN, Chairman
Dean, Wharton School of Finance and Commerce
University of Pennsylvania
Philadelphia, Pennsylvania

1970

BAYARD L. ENGLAND, Deputy Chairman
Chairman of the Board
Atlantic City Electric Co.,
Atlantic City, New Jersey

1969

D. ROBERT YARNALL, JR.
President, Yarway Corporation,
Blue Bell, Pennsylvania

1971

BUSINESS REVIEW

OFFICERS AS OF JANUARY 1, 1969

KARL R. BOPP, President
ROBERT N. HILKERT, FIRST VICE PRESIDENT
JOSEPH R. CAMPBELL, Senior Vice President
DAVID P. EASTBURN, Senior Vice President
DAVID C. MELNICOFF, Senior Vice President
JAMES V. VERGARI, Senior Vice President and General Counsel
EDWARD A. AFF, Vice President
HUGH BARRIE, Vice President
NORMAN G. DASH, Vice President
WILLIAM A. JAMES, Vice President
G. WILLIAM METZ, Vice President and General Auditor
LAWRENCE C. MURDOCH, JR., Vice President and Secretary
JACK P. BESSE, Assistant Vice President
JOSEPH M. CASE, Assistant Vice President
D. RUSSELL CONNOR, Assistant Vice President and Assistant Secretary
RALPH E. HAAS, Assistant Vice President
WARREN R. MOLL, Assistant Vice President
HENRY J. NELSON, Assistant Vice President
KENNETH M. SNADER, Assistant Vice President
ALBERT SPENCER, JR., Assistant Vice President
RUSSELL P. SUDDERS, Assistant Vice President
JAMES P. GIACOBELLO, Chief Examining Officer
THOMAS K. DESCH, Examining Officer
WILLIAM L. ENSOR, Examining Officer
JACK H. JAMES, Examining Officer
LEONARD E. MARKFORD, Examining Officer
WARREN J. GUSTUS, Economic Adviser
WILLIAM F. STAATS, Senior Economist
SHELDON W. STAHL, Senior Economist
MARK H. WILLES, Senior Economist
JAMES A. AGNEW, Collections Officer
SAMUEL J. CULBERT, JR., Bank Services Officer
GEORGE C. HAAG, Public Information Officer
HILIARY H. HOLLOWAY, Assistant Counsel
EUGENE W. LOWE, Securities Officer
A. LAMONT MAGEE, Assistant General Auditor
DAVID P. NOONAN, Assistant Personnel Officer

BUSINESS REVIEW

STATEMENT OF CONDITION
Federal Reserve Bank of Philadelphia
End of year
(000’s omitted in dollar figures)
ASSETS
Gold certificate reserves:
Gold certificate account .......................................
Redemption fund— Federal Reserve notes . . . .

1968

1967

$ 494,258

560,613
101,189

Total gold certificate re s e rv e s .........................
Federal Reserve notes of other Federal Reserve Banks
Other cash ...................................................................
Loans and securities:
Discounts and advances .....................................
United States Government securities ................

$ 494,258
35,064
4,901

661,802
48,728
8,610

100
2,810,204

1,430
2,525,715

Total loans and securities ..............................
Uncollected cash items ............................................
Bank premises ............................................................
All other assets ..........................................................

$2,810,304
634,903
2,359
257,666

$2,527,145
631,426
2,433
98,935

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

$4,239,455

$3,979,079

$2,615,923

$2,444,268

991,103
522
11,660
13,321

853,005
76,536
7,280
26,460

LIABILITIES
Federal Reserve notes ..............................................
Deposits:
Member bank reserve a c c o u n ts ............................
United States Government ...................................
Foreign ...................................................................
Other deposits ........................................................
Total deposits ...................................................
Deferred availability cash items ..............................
All other liabilities .....................................................

$1,016,606
520,863
20,499

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

$4,773,891

$3,915,428

CAPITAL ACCOUNTS
Capital paid in ........................................................
Surplus ...................................................................

32,782
32,782

963,281
493,311
14,568

31,826
31,826

Total liabilities and capital a c c o u n ts ..............

$4,239,455

$3,979,079

Ratio of gold certificate reserve to
Federal Reserve note lia b ilit y ..............................

18.9%

27.1%

BUSINESS REVIEW

EARNINGS AND EXPENSES
Federal Reserve Bank of Philadelphia
(000’s omitted)

1968

1967

Earnings from:
United States Government s e c u ritie s .........................
Other sources .................................................................

$136,300
4,604

$110,223
1,440

Total current e a rn in g s ..............................................

$140,904

$111,663

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

9,584
1,385
750

8,742
1,016
567

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

$ 11,719

$ 10,325

Current net e a rn in g s ..........................................................

129,185

101,338

Additions to current net earnings:
Profit on sales of U.S. Government securities (net) . .
All other ..........................................................................

41
427

40
77

Total additions

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

Deductions from current net earnings:
Loss on sales of U.S. Government securities (net) . .
Miscellaneous non-operating e xpe nse s.......................
Total deductions ........................................................

468

—
9
$

117

—
2
$

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

459

115

Net earnings before payments to U.S. T re a s u ry ............

$129,644

$101,453

Dividends paid

Net additions

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

126,754

Paid to U.S. Treasury (interest on Federal Reserve notes)
Transferred to or deducted from (— ) S u rp lu s ..............
* A fter deducting reim bursable or recoverable expenses.

1,934

956

1,854
97,703

1,896

BUSINESS REVIEW

VOLUME OF OPERATIONS
Federal Reserve Bank of Philadelphia
Number of pieces (000’s omitted)
Collections:
Ordinary checks* .....................................................
Government checks (paper and card) ..................
Postal money orders ( c a r d ) .....................................
Non-cash items ........................................................
Food stamps redeemed ..........................................
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 b a n k s ..............
Depositary receipts for withheld ta x e s .......................
Postal receipts (remittances) .....................................
Fiscal agency activities:
Marketable securities delivered or redeemed . .
Computerized marketable securities (Book entry
transactions) ........................................................
Savings bonds and notes (F.R. Bank and agents)
— Issues (including reissues) ............................
Redemptions ........................................................
Coupons redeemed (Government and agencies) . . . .
Dollar amounts (000,000’s omitted)
Collections:
Ordinary checks ........................................................
Government checks (paper and card) ...................
Postal money orders (card) ...................................
Non-cash items ........................................................
Food stamps redeemed ............................................
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 b a n k s ..............
Depositary receipts for withheld taxes .....................
Postal receipts (remittances) .....................................
Fiscal agency activities:
Marketable securities delivered or redeemed . . . .
Computerized marketable securities (Book entry
transactions) ........................................................
Savings bonds and notes (F.R. Bank and agents)
— Issues (including reissues) ............................
Redemptions
........................................................
Coupons redeemed (Government and agencies) . . . .

1968

1967

1966

324,500
32,800
14,600
832
22,633

283,400
32,700
17,300
846
17,391

276,600
30,800
18,200
832
9,766

655
271
319,700
492,377
(a)
1,056
271

706
248
305,200
560,700
(a)
799
282

697
233
297,500
403,800
1
662
280

482

536

621

—

10,506

9,934
7,260
1,070

9,512
6,993
1,072

$100,774
8,952
253
1,258
31

$ 94,422
7,983
248
1,104
23

$ 88,836
6,993
254
827
13

61,742
250,695
2,351
58
1,193
5,695
1,008

54,568
219,815
2,258
63
323
3,935
929

49,908
192,718
2,205
45
1,806
3,348
914

14,091

13,571

14,913

7,877

—

468
403
394

459
385
435

464
381
342

* Checks handled in sealed packages counted as units.
* * D ebit and credit item s
(a) Less than 1,000 rounded.

Full text of Business Review (Federal Reserve Bank of Philadelphia) : January 1969

FRASER