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An Economic Approach to Family Size:
A New Perspective on Population Growth

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january/february 1976

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Tax Cuts and Economic Activity:
The Role of "Financing"
The Fed in Print
Annual Operations and Executive Changes

An Economic Approach to Family Size:
A New Perspective on Population Growth
. . . A growing body of evidence indicates
that the rising value of an individual's time
affects decisions about family size. This ec­
onomic approach to childbearing decisions
yields a less pessimistic outlook for future
population growth.
Tax Cuts and Economic Activity:
The Role of "Financing"
. . . Although the initial effect of a tax cut is
expansionary, the longer term impact on the
economy depends on how the government
responds to the resulting loss in revenue.

On our cover: Washington Crossing the Delaware, by Emanuel Gottlieb Leutze. The event
which this famous painting depicts occured Christmas night, 1776, when Washington's
troops ferried across the icy Delaware River in order to make a surprise attack the next
day on the Hessians garrisoned in Trenton, New Jersey. This advance led to the American
victory at Princeton on January 3, 1777, which caused the British to withdraw from western
New Jersey. These winter victories secured a safe post of observation for the winter at
Norristown, and restored the colonists' confidence in their ability to defeat the British armies.
Emanuel Gottlieb Leutze (1816-1868) was born in Gmund, Wurttemberg. He came to
Philadelphia as a child and studied art there. Leutze painted Washington Crossing the Dela­
ware in 1851. He was in Germany at the time, and used the Rhine as a model for the
Delaware. (The Metropolitan Museum of Art, Gift of John Stewart Kennedy, 1897.)

BUSINESS REVIEW is produced in the Department of Research. Ronald B. Williams is Art

Director and Manager, Graphic Services. The authors will be glad to receive comments on
their articles.
Requests for additional copies should be addressed to Public Information, Federal Reserve
Bank of Philadelphia, Philadelphia, Pennsylvania 19105. Phone: (215) 574-6115.



FEDERAL RESERVE BANK OF PHILADELPHIA

An Economic
Approach to Family
Size: A New
Perspective on
Population Growth
By Donald J. Mullineaux

People are becoming increasingly anxious
at the prospect that we humans will someday
procreate ourselves right back into our an­
cestral cave dwellings. This is hardly a new
worry. Thomas Malthus, the most pessimistic
of a breed Carlyle dubbed the "dismal scien­
tists/' averred almost 200 years ago that popu­
lation growth would inevitably outstrip man's
ability to feed and clothe himself. Misery and
distress would come to characterize the
human condition. Experience has belied the
Malthusian prophecy as living standards have
risen sharply in most areas of the world. Yet
Parson Malthus's theory of population and
calamity has shown remarkable resiliency.
Like some rubber-legged heavyweights,
Malthus has been down but never out. In­
deed, in two recent and highly publicized
studies1, the Malthusian outlook has resur­

faced, fortified by computer analyses of the
world economy and psychosociopolitical
theorizing.
Until recently, economists have had rela­
tively little to say about Malthus's views con­
cerning fertility and population per se. The
Malthusian prophecy was considered faulty
because it neglected the saving grace of
technology, and nothing needed to be said
about family size. Indeed, nothing could be
said, since family size was determined mainly
by noneconomic factors. Some economists
have recently had a change of heart, how­
ever. They emphasize that both logic and
evidence indicate that economic variables
play a role in fam ily decisions about
childbearing. One economic approach —
sometimes referred to as the "household
model"— suggests that neglecting the impact
of prices on family size can lead to poor fore­
casts of population growth. In addition, the
household model clarifies the relation of
education and family size. Finally, the out­
look for population growth suggested by this

1
See Donella H. Meadows et al., The Limits to Growth
(New York: Universe Books, 1972) and Robert L. Heilbroner, An Inquiry into the Human Prospect (New York:
W. W. Norton and Company, 1974).



3

BUSINESS REVIEW

JANUARY/FEBRUARY 1976

approach allows a much more optimistic view
of mankind's future than the bleak Malthu­
sian scenario.

are ignored, explaining and predicting
human behavior and its consequences (such
as population growth) will be at best difficult
and at worst fallacious.
A popular approach involves treating each
household as a miniature firm.2 A firm pur­
chases materials, equipment, and manpower
to produce some product. Sim ilarly, a
household purchases goods and services and
combines them with its own available time
("manpower") to produce things which give
satisfaction to household members. A
household for instance employs materials
such as bread, wine, steak, vegetables, and
the like along with shopping and preparation
time to "produce" a meal. Just as the amount
a business manufactures depends on what it
has to pay for raw materials and for labor,
what a household "produces" depends on
the prices of household goods and the value
of family members' time. This "household
model" also suggests that as the price of a
husband's or wife's time increases relative to
the prices of other goods, a household will
switch to activities requiring less time (just as
a firm substitutes machines for labor when
wages rise relative to equipment rentals).
The "services" provided by children repre­
sent one form of satisfaction produced in
many households. Children yield their par­
ents productive services (such as mowing
lawns, washing dishes, "doing chores," and
the like) as well as nonproductive services.
Economists term the latter "psychic income"
and it includes the sum of the innumerable
joys of watching and helping children grow.
Since children yield these services over time,
from an economic viewpoint they can be
considered akin to "durable goods." Like
durables in general, children are costly. Ex­
penditures on food, clothing, health mainte­
nance, education, recreation, and so on can

AN ECONOMIC VIEW OF FAMILY SIZE: THE
DEMAND AND SUPPLY OF CHILDREN

In recent years, economists have begun to
apply their logic and methods in a number of
areas once considered beyond the pale of
economics. Decisions concerning marriage,
childbearing, migration, criminal behavior,
church attendance, suicide, and even (with
tongue in swollen cheek) teeth brushing have
all been subjected to economic analysis.
Sociologists and psychologists have, of
course, long studied these kinds of
phenomena. The explanations of economists
are not intended to displace or denigrate
their efforts, but rather to complement
psychological or sociological theories and
hence provide a fuller elucidation of human
behavior.
Many people are offended by the sugges­
tion that children can be treated like any
other economic good. Parents in particular
are likely to resist attempts to attach a "price"
to their children. The reason is that society
uses prices to measure value, and most
mothers and fathers would not assign a
monetary value to their children (although
the neighbors' children are often considered
"priceless" in quite a different sense than our
own). Economists seek to apply their logic to
childbearing, however, not to debase the
human qualities of children or parents, but to
gain insights into behavior which may be use­
ful for problem solving. In other words,
economists are trying to abstract from the ex­
tremely large number of factors affecting fam­
ily size and isolate those elements they un­
derstand best. This is not to suggest that all
behavior is motivated solely by economic fac­
tors. Economists make no claim to complete­
ness when studying the demand for children
(though this is no less the case for au­
tomobiles or theater tickets). The point is that
where economic factors play some role and



2Not all economists employ the same framework in
studying family size. For an alternative approach to the
one outlined in this article, see Harvey Leibenstein,
“ The Economic Theory of Fertility Decline," Quarterly
Journal o f Economics 89 (1975): 1-31.
4

FEDERAL RESERVE BANK OF PHILADELPHIA

average does increase with income. Thus,
income changes cannot explain the long-run
decline in birth rates in most developed
economies. According to the "household
model," declining family size is accounted for
mainly by three factors: (1) increases in the
average "quality" level of children; (2) the ris­
ing "price" of children; and (3) increases in
the average education level of parents.

run into many thousands of dollars. In addi­
tion, there will be "psychic costs" to child­
raising since growing up produces parental
heartaches as well as joys.3
If children can be thought of as resembling
other durable goods in a broad sense, then
economists can apply their reasoning to de­
rive suggestions about how people are likely
to behave in making decisions about family
size. For instance, the demand for "satisfac­
tion" from children should fall when the
"price" of children rises. As children become
more expensive relative to other means of
satisfaction, parents should want to bear and
raise fewer children. This presumes of course
that the other factors affecting fertility— both
econom ic and noneconom ic — are un­
changed. Applying economics to childbear­
ing decisions also would suggest that house­
holds should desire more children as family
income rises (that is, if children are what
economists call "normal" goods). Here is one
point where an economic application appears
to hit a snag. For the evidence is quite clear
that over time and in almost all the various
cultures of the world the birth rate falls as
income increases. In the same vein, wealthier
families typically have fewer children than
families with lower standards of living. Look­
ing at the relation between family size and
income in isolation, however, can be mis­
leading. Economists must try to "control"
for the effects of other factors which may im­
pinge on childbearing decisions. Recent
studies show, for example, that once we take
account of the effects of changes in the "qual­
ity" and "price" of children, family size on

Quantity vs. Quality of Children. The house­
hold model approach to family size suggests
that children can be viewed much like other
durable goods which are desired for the
"services" they provide. At first glance, it
seems vulgar or offensive to contend that
children are wanted for their "services."
However, economists define "services" quite
broadly. Indeed, any kind of "good feeling"
that a parent would attribute to having a son
or daughter would be considered a "service"
from the economist's viewpoint. Friendly
greetings on arriving home, long walks in the
woods, and games of catch in the backyard
are all part of the "service flow" from chil­
dren.
In many cases, households would like to
increase the services provided by durable
goods. There are two ways to accomplish
this. More units of the good in question can
be acquired, or alternatively, a higher quality
unit (more BTUs or horsepower) can be pur­
chased. Economists have carried over the
quantity-quality distinction to their discus­
sion of the demand for children. In particular,
they note that "services" from children can
be increased either by adding to the size of
the family or by boosting the "quality" of the
children parents already have.
By injecting "quality" into their analysis of
family size, economists do not mean to
suggest that some children are "better" in
some moral sense than others. Instead they
are simply emphasizing that some parents
spend more on raising a family of given size
than others. Rather than add further to family
size, parents may opt for summer camp and
nursery schools for the children they already

^Parents presumably compare the benefits of an addi­
tional child with the costs involved (such a calculation
is, of course, rough at best and perhaps not even con­
sciously undertaken) and adjust their reproductive be­
havior to add to the size of the family whenever benefits
exceed costs. Some may find thinking about behavior
this way crass or offensive. It should be remembered,
however, that the economic approach is not intended
to be the sole explanation of all we do. In addition,
whether or not the household model is useful can only
be judged in terms of its ability to explain and predict
human behavior.



5

BUSINESS REVIEW

JANUARY/FEBRUARY 1976

vices. There is good reason to believe that the
relative price of children has been rising
sharply over time, at least in the developed
countries. The reason is that the "services"
that children provide are produced in the
home using a resource whose value (relative
price) has risen considerably— namely, the
parents' (especially the mother's) time.
The dollar cost of the goods and services
used in child rearing is only part of the total
cost of children. Economists also reckon the
"opportunity cost" of the time spent with
children as part of the "price" of children.
These opportunity costs represent the value
parents would attach to alternative uses of the
time and energy they allot to their children.
For instance, to devote her time to her chil­
dren, a mother foregoes opportunities to
earn income in the job market or enjoy lei­
sure activities. Indeed, the "production" of
child services requires an extraordinary
amount of the parents' tim e, especially
when children are young. In the jargon of
economists, producing satisfaction from
children is very "tim e-intensive." Hence,
this time or opportunity cost forms an inte­
gral part of the "full price" of children.
The value of the opportunities a mother
foregoes to raise children can be considered
the price of her time, and likewise for the
father. For women who spend at least part of
their time working in the labor market, their
"real wage" (inflation-adjusted earnings) can
be taken as a measure of the price of time. In
the U. S. as well as in other developed econ­
omies, real wages have increased sharply
over time (see Chart 1). Hence, the value
of time has been increasing. A rising price of
time translates into an increased price of
children relative to other goods and services
because children are more time-intensive
than other kinds of durable goods. Economic
logic dictates that as the relative price of chil­
dren rises, people will shift to less time­
intensive activities to economize on an in­
creasingly scarce resource (time).
Some studies have considered the statisti­
cal relationship between family size and the

have. Indeed, households cannot avoid
choosing between quantity and quality ex­
penditures in childraising since no family has
unlimited resources.
For most durable goods, expenditures on
quality seem much more responsive to in­
come gains than does spending on quantity.4
Several economists have argued that this is
likely to be the case for children as well. They
note that high-income families typically have
only slightly larger or even smaller numbers
of children than low-income families, but
they spend more on each child. There is
some disagreement about why this might be
the case. Some have argued that social pres­
sures dictate that children's living standards
are inexorably linked to those of their
parents. Other economists have contended
that producing "quality" children becomes
"cheaper" as incomes rise. Whatever the
underlying reason, it is clear that ignoring
the quality-quantity distinction in relating
income and size of family can lead to mis­
leading conclusions since quality can "sub­
stitute" for quantity to some extent. Still
another factor which must be taken into
account, however, is the "p rice" of chil­
dren relative to other goods and services.
The Cost of Raising or "Price" of Children. In

these inflationary times, everyone recognizes
that rearing a family has become an increas­
ingly expensive proposition. But it is difficult
to think of any activity that isn't costing more
today than yesterday. In fact, childbearing
will be discouraged not by inflation per se,
but by increases in the "price" of children
relative to the prices of other goods and ser­

4For example, one well-known study estimates that if
total income in the U. S. doubles, total spending on
automobiles would rise 200 percent. However, spend­
ing on additional numbers of cars would rise by only 31
percent. The difference reflects increased expenditures
on quality. See Gregory C. Chow, The Demand for Au­
tom obiles in the U n ited States (Am sterdam , The
Netherlands: North-Holland Publishing Company,
1957).



6

FEDERAL RESERVE BANK OF PHILADELPHIA

CHART 1

price of parents' time.5 The relationship be­
tween the father's wage and family size is
unclear, but several studies have found that
a higher value of the mother's time is as­
sociated with a lower number of children in
the family. These studies typically use a wo­
man's wage or number of years of education
as a measure of the value of time. Years of
schooling are of course only a "proxy" mea­
sure for the value of time. Some researchers
employ this measure because wage-rate in­
formation is not available for a large propor­
tion of women — mainly those who spend all
of their time working in the home. The value
of the housewife's time must exceed her po­
tential wage in the labor market or she would
devote at least some of her time to working
outside the home. Studies have shown that
the value of the housewife's time will depend
on a number of factors,6 but that education is
especially important. Education increases
productivity in work at home by improving
the ability to acquire, evaluate, and use in­
formation concerning matters such as con­
sumer products and health maintenance.
Since education also has a positive effect on
earnings outside the home, it clearly affects
the demand for children via its influence on
the value of time. But education's impact on
family size is not limited to the demand side.
It also influences the supply of children by
affecting a couple's ability to control the size
of their families.

AS TH E VALUE OF T IM E HAS INCREASED
SHARPLY IN TH E POSTWAR PERIOD IN THE
U. S . . . .
All W orkers
D o lla rs/h o u r

M edian Annual
Earnings For W om en

TH E BIRTH RATE HAS DROPPED
S IG N IFIC A N TLY .

Education and the Supply of Children. Chil­
dren are unique when viewed in an economic
light since they are generally "supplied" by
the same individuals who "demand" their
"services"— namely, their parents. Having a
child is not a perfectly predictable event,
1950
S ource:

1955

1960

1965

1970
5Several studies in the “ household model" approach
to fertility can be found in T. W. Schultz, ed., New
Economic Approaches to Fertility, published in the
Journal o f Political Economy 81 (1973): S1-S299.

Statistical A bstract of the U. S. & U. S.
D epartm ent of C om m erce, Current P opu­
lation Reports P -60 Series.




6See Reuben Gronau, “ The Effect of Children on the
Housewife's Value of Tim e/' in T. W. Schultz, ed.,
Economic Approaches to Fertility, pp. S168-S199.
7

JANUARY/FEBRUARY 1976

BUSINESS REVIEW

ing the impact of economic variables on
population growth. Once prices are taken
into consideration, the outlook for the
"human condition" stands at considerable
variance with the well-known Malthusian
view.

however, so that parents cannot expect to be
completely successful in matching their
“ supplies" and "demands" for satisfaction
from children. But couples are not com­
pletely at the mercy of chance in supplying
children. They can exercise some control
over the likelihood of having a child.
Trying to increase or reduce the chances of
having a child is typically a costly activity.
Many couples spend both time and money
on family planning. Other kinds of costs may
also be involved, such as any expectation of
impaired physical health or any conflict with
religious beliefs. Couples are willing to bear
some of these costs to reduce the chances of
having an unplanned child.
Some couples may be more efficient at
family planning than others, however. In
particular, better-educated couples may be
able to reduce the chances of having an un­
planned child more efficiently than the lesseducated. Researchers have developed evi­
dence which supports this claim. Some have
argued that this finding simply reflects the
fact that better-educated couples want fewer
children (the demand side) and hence have a
greater incentive to plan family size more ef­
fectively. At least one study has taken the de­
sired number of children into account as a
factor in determining family size, and it still
remains true that better-educated couples
are more effective at family planning.7
Within the context of the "household
model" approach to family size, then, educa­
tion clearly plays a leading role in contribut­
ing toward an explanation of birth rates.
Since it affects both the demand and supply
of children, it exerts a clear influence on the
"price" of children which has been increas­
ing over time. The notion that the "price"
of children is important for predicting family
size and population growth is a key one. It
differs sharply from past thinking which as­
signed a role only to income when consider­

THE LONG-RUN IMPLICATIONS OF THE
"HOUSEHOLD MODEL" OF FAMILY SIZE:
DOOMSDAY OR PROSPERITY?

Almost all "theories" of population be­
havior suggest that at some point growth in
the number of people on our planet will
come to a halt. Many thinkers are at odds,
however, about the likely condition of the
world once birth rates achieve rough con­
gruence with death rates to produce what
demographers call a "population equilib­
riu m ." M althus's own conclusion was
straightforward and depressing. Calamity and
misery will characterize the human condition
in population equilibrium. Recently, the Mal­
thusian outlook appears to be making more
and more converts (see Box 1).
The economic approach to fertility out­
lined in the "household model" yields a
different and more optimistic answer about
mankind's future. It suggests that population
equilibrium is compatible with high living
standards and a prosperous human condition.
Prosperity prevails over calamity mainly be­
cause the "household model" visualizes a
different set of factors underlying a decline in
birth rates than the Malthusian approach.
Malthus and his followers see increases in
the relative prices of the services of natural
resources as the key factor accounting for a
leveling off of population growth. Land or
energy prices become so high that families
can no longer afford to feed or house addi­
tional children. According to the "household
model" approach, however, an increase in
the relative price of human time is the
driving force which eventually brings world­
wide birth rates in line with death rates.
Procreation is limited in this scenario by the
high price (opportunity cost) of children
themselves.

7See Robert T. Michael, "Education and the Derived
Demand for Children," in T. W. Schultz, ed., Econom­
ic Approaches to Fertility, pp. S128-S164.



8

FEDERAL RESERVE BANK OF PHILADELPHIA

BOX 1

POPULATION AND CALAMITY: THE MALTHUSIAN VIEW
Social and natural scientists as well as mathematicians have long been intrigued by the implica­
tions of continuously growing numbers of people competing for living space on a finite planet.
Thomas Malthus (in essays published in 1798 and 1830) contended that population growth sails
along without bound as long as wages remain above the level required for subsistence. W hile
the sum total of people grows and grows, the quantity of land is essentially fixed. Hence,
increasing demands for food require that farmers turn to less and less fertile land. These inferior
fields yield less and less output per acre (an example of the "law of diminishing returns"). As
population doubles and redoubles, the earth is in effect halved until it shrinks so much that food
production falls below the level necessary to sustain life. According to Malthus, population
growth is eventually held in check by starvation and malnutrition, and hence misery and want
characterize the human condition.
Except for incidents isolated in time and space, the Malthusian prediction of calamity has gone
unfulfilled. Indeed, during the last 200 years living standards have risen sharply rather than
fallen. Technological improvement in agricultural production is generally recognized as the
providential savior which continuously redeems mankind from a Malthusian hell. Recently,
however, debate has resurfaced concerning the outlook for future growth and prosperity, de­
spite projected advancements in technological wizardry. In particular, a group of scientists and
mathematicians has constructed a computerized "m odel" of the world economy. They employ a
system of mathematical equations to predict future economic activity and population growth.
Their conclusion is that continued economic growth is impossible. The earth's natural resources
will soon be exhausted, they contend, and increased industrial activity will shortly strangle us in
pollution. Furtherm ore, increasing population will eventually outrun the world's capacity to
produce food, and famine will result. Because of the nature of the suggested interaction be­
tween depleted resources, pollution, industrial production and population growth, technolog­
ical innovation cannot prevent or even long forestall the advent of doomsday. These research­
ers conclude that setting explicit limits on growth in capital (factories, trucks, machines, and the
like) and population represents the only means of preventing the eventual realization of the
Malthusian forecast.
The conclusions of any mathematical model, however, are only as strong as its weakest
equation. O ne area where the analysis of the neo-Malthusians (as well as Malthus himself) can
be challenged concerns the relationship between population growth and economic variables.
Malthusians suggest that income is the only relevant economic variable for explaining and
predicting fertility and population growth. They fail to consider the impact of prices — in particu­
lar the "p rice " of children— on parents reproductive behavior. The household model approach
to fertility— which emphasizes the role of the "p rice " of children (and its relation to the price of
tim e)— yields a different and more optimistic picture of the future.

Since no amount of technological virtuosity
can squeeze more than 24 hours out of a day,
time can be considered the ultimate
economic resource constraint. Indeed, the
present scarcity of time relative to other re­
sources is reflected in long-run changes in
relative prices. In the U. S., for example,
wages adjusted for inflation— a rough mea­
sure of the price of time — have moved



sharply upwards since the Great Depression
(see Chart 2). In fact, total real compensation
per hour at work in manufacturing increased
between 1929 and 1970 more than four times
as much as did the rent paid for the services
of farmland in the U.S. As time becomes in­
creasingly more expensive, economic logic
dictates that households and firms will substi­
tute material goods for human time and en9

JANUARY/FEBRUARY 1976

BUSINESS REVIEW
CHART 2
TH E VALUE OF T IM E SHOW S A SHARP UPW ARD TREN D OVER TH E
LONG RUN IN TH E U. S.
Dollars/hour

gage in less time-intensive activities. If these
trends continue on a worldwide basis (see
Box 2 on the less-developed economies), the
high price of time may become the basic con­
straint which determines the upper limit of
economic growth and population increases.8
The basic logic is simple. Time is fixed in sup­
ply and is becoming more and more expen­
sive. Yet consumption takes time. Hence,
eventually it is no longer "worth it" to add
to the production stream because no time is
available to consume the benefits. But the
high price of time guarantees— indeed is
synonymous with — continued prosperity
once growth in production and population
ends.

economic approach to family size, an issue
economists in the past have considered out­
side their analytical domain. While it does
not pretend that economics has all the
answers, it does suggest that students of
population growth may err in their explana­
tions and predictions if they neglect the
impact of relative price changes on family
behavior. In particular, changes in the value
of time are likely to exert an influence on
birth rates over time and across families. This
economic view also clarifies the nature of the
several channels through which changes in the
average level of education affect the rate of
procreation. Finally, the economic approach
foresees a future for mankind which stands at
considerable variance with the well-known
Malthusian prophecy of gloom and doom.
Although some remain skeptical about the
"household model" approach, the evidence
accumulated thus far seems sufficiently
favorable for policymakers to take account of
the issues raised in an economic approach

SUMMING UP

The "household model" represents an
8For some discussion about the reasons for the
increasing value of time, see T. W. Schultz, "The In­
creasing Economic Value of Human Time," American
Journal of Agricultural Economics 54 (1972): 843-50.



10

FEDERAL RESERVE BANK OF PHILADELPHIA

BOX 2

Can Economists Apply Their Fertility Approach
to the Less-Developed Countries?
The optimistic outlook for the household model for mankind's future presumes that the
relative price of time will continue to rise and that this approach is a useful analytical tool for
predicting future population behavior. Some researchers have questioned the validity of this
economic approach, particularly as it applies to the less-developed countries (LD Cs). In these
econom ies, human time is cheap and women have relatively few opportunities to earn income
outside the home. In addition, life expectancy is lower, infant mortality higher, and the availabil­
ity of family planning techniques (including information about them) is less widespread and
hence more costly than in developed economies. The nature of the benefits of children may also
differ in LDCs. In particular, more parents may invest in children with a view toward having their
offspring support them in old age. This pension m otive for having children undoubtedly bulks
larger in childbearing decisions in less-developed economies where governments have yet to
devise public retirement programs (such as Social Security in the U .S.) and where capital mar­
kets are not well suited to private pension savings.
None of these differences in the overall economic environment rules out the application of
the "household model" to family size decisions in less-developed economies in principle.
Rather, they require that the mode of analysis be revised to make it more relevant to economies
with different characteristics than those of developed econom ies.* This, of course, does not
guarantee that this overall approach will successfully explain and predict family size in LDCs.
That is for empirical testing to decide, and such tests are just beginning to be undertaken.
At the same tim e, there is little evidence that the Malthusian approach is best fitted for the
study of family size in LDCs. Per capita income is in general not falling in these countries. In
addition, there are appreciable gains in living standards which are reflected in improved health
conditions and longer life expectancy. M oreover, birth rates are falling in a number of LDCs.
None of this is to suggest that LDCs or even some developed economies do not have a
population "p ro b le m ." In fact, an economic approach to family size clarifies the nature of an
overpopulation problem and suggests what may be required by way of a solution. The problem,
simply stated, is "too many people" relative to some "desired" population from the point of
view of society (as perceived by some agent of society— the government or a planning agency).
Such a problem could stem from parents ending up with more children than they want or it may
reflect that couples demand more children than is socially desirable. In reality, both factors no
doubt play a role. This means, however, that policies designed to reduce the cost of family
planning (by devising inexpensive and morally acceptable family planning methods, for exam­
ple) cannot guarantee a solution to an overpopulation problem. Modern family planning
methods only make it easier to control family size. They do not reduce the desired size of the
fam ily. To accomplish this, the government must either alter the incentives for childbearing (by
changing the "p rice " or rate of return on children) or directly curtail the freedom of some or all
families to choose the number of children they desire. Pills and propaganda are not enough to
curb overpopulation, as the economic approach to family size makes clear.

*For an analysis in this vein, see Philip A. Neher, "Peasants, Procreation, and Pensions," American
Economic Review 61 (1971): 380-89.




11

BUSINESS REVIEW

JANUARY/FEBRUARY 1976

of the large puzzle known as human nature.
Hence, the contributions of the other social
sciences must also be taken into consider­
ation in designing policies. The “ household
model" approach indeed tells us that dooms­
day is not the inevitable natural legacy of
mankind. But from this we should not con­
jecture that the only other feasible outcome
is prosperity and bliss.
J

when designing population programs. In
particular, assessments of the impact of
various policies on the “ price" of children
would seem desirable. Finally, the optimistic
conclusions of the “ household model" about
mankind's destiny should not be taken as a
signal for complacency in the face of some
obvious population problems in many parts
of the world. Economists study only a part

SELECTED READINGS
Becker, Gary S. “ An Economic Approach to Fertility." in Demographic and Economic
Change in Developed Countries. National Bureau Conference Series 11. Princeton,
N.J.: Princeton University Press, 1960.
DeTray, Dennis N. “ Child Quality and the Demand for Children." Journal o f Political
Economy 81, No. 2, supplement (1973): S70-S95.
Gronau, Reuben. “The Effect of Children on the Housewife's Value of Time." Journal of
Political Economy 81, No. 2, supplement (1973): S168-S199.
Leibowitz, Arleen. “ Home Investments in Children." Journal o f Political Economy 82,
No. 2, supplement (1974): S111-S131.
Michael, Robert T. “ Education and the Derived Demand for Children." Journal of Politi­
cal Economy 81, No. 2, supplement (1973): S128-S164.
Schultz, Theodore W. “ Population Equilibrium: The High Value of Human Time." Jour­
nal of Political Economy 82, No. 2, supplement (1974): S2-S10.
---------. “ The Value of Children: An Economic Perspective." Journal o f Political
Economy 81, No. 2, supplement (1973): S2-S13.
Willis, Robert J. “ A New Approach to the Economic Theory of Fertility Behavior." Journal
of Political Economy 81, No. 2, supplement (1973): S14-S64.




12

FEDERAL RESERVE BANK OF PHILADELPHIA

Tax Cuts and
Economic Activity:
The Role of
"Financing"
By Nariman Behravesh and
Donald L Raiff
The ideas of economists and political phi­
losophers, both when they are right and
when they are wrong, are more powerful
than is commonly understood. Indeed the
world is ruled by little else. Practical men,
who believe themselves to be quite exempt
from any intellectual influences, are usually
the slaves of some defunct economist.
— John Maynard Keynes, The General
Theory of Employment, Interest and Money
(1936)

Few economists would deny that the initial
effect of a tax cut is expansionary. But, be­
yond the initial effect the impact on the
economy can be quite varied. It turns out
that the overall effectiveness of a tax cut de­
pends on how the government responds to
the resulting loss in its revenue. In particu­
lar, it makes a great deal of difference
whether the government "finances" a tax
cut by trimming expenditures, by borrowing
solely from the public, or by borrowing from
the central bank as well as the public.

Keynes is a defunct economist, but his
ideas have proved more durable than his
person— as he indeed warned they might.
One Keynesian notion, that government can
combat an economic slowdown by cutting
taxes, has become com m onplace, even
among noneconomists. If the government
withholds fewer dollars for taxes, then con­
sumers have more take-home pay to spend.
More spending in turn means more produc­
tion and more jobs, and an end to the busi­
ness slowdown. What could be more obvi­
ous?



BASIC ECONOMICS SUGGESTS A TAX CUT IS
STIMULATIVE . . .

"Eighty-five cents for me and fifteen cents
for Uncle Sam." This saying represents the
man-in-the-street's view on taxation. The
more an individual has to set aside to cover
his tax bill, the less he has available to spend
on goods and services. Herein lies the
power of fiscal policy. By reducing the taxbite on each wage earner's paycheck, the
government increases after-tax or "disposa­
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JANUARY/FEBRUARY 1976

BUSINESS REVIEW

come due, if it doesn't have enough cash to
meet its obligations, it has to borrow the dif­
feren ce. There is no escape from the
economist's notion of a "budget constraint"
which simply states that expenditures can­
not exceed revenues. The major source of
revenue for all governing bodies (including
the Federal Government) is taxation. Hence,
when taxes are cut, the loss in revenue must
somehow be made up.
Two options are available: First, the gov­
ernment could reduce its expenditures by
the amount of a tax cut so that revenues and
expenditures remain in balance. Or second,
the government can replenish revenues by
borrowing.2 If the government decides to
borrow, there are two principal sources of
loanable funds: the public (which includes
foreign borrowers as well as individuals and
businesses which reside in the U. S.) and the
central bank (which in the U. S. is the Fed­
eral Reserve System). How the government
chooses to "offset" the revenue loss from a
tax cut alters the ultimate impact of the fiscal
policy change on the economy's level of ac­
tivity.

ble income."1 Hence, workers retain a
greater proportion of their gross income to
spend. (Not all of the tax reduction will end
up in more consumption spending; some of
course will be saved.)
Business firms as well as individuals pay
taxes on their income and a cut in business
taxes is also likely to add to overall spending
in the economy. The reasoning goes like
this: If a business wants to buy a new
machine or put up a new building, it must
either dip into its earnings or borrow the
necessary funds from private lenders. When
the government cuts business taxes, after­
tax earnings are increased. Then, business
can use the cash freed up by the tax cut to
pay higher dividends to their stockholders
or to expand the scale of operations. Either
of these activities will boost overall spend­
ing. A rise in dividends will augment per­
sonal income and increase consumption
spending. Rising business expenditures on
plant and equipment will also add to total
spending by increasing what economists call
"investment."
Following this logic, a cut either in per­
sonal or corporate income taxes increases
overall spending in the economy. It does so
by boosting disposable personal income and
after-tax earnings retained for business ex­
pansion. This represents only the first chap­
ter of the story, however. A tax cut may also
have an impact on government spending or
credit markets. In certain instances, these
secondary effects can partially offset, and in
the extreme, fully neutralize the initial im­
pacts of a tax reduction.

REVENUE "OFFSETS" AND THE EFFECT OF A
TAX CUT
Cutting Expenditures. If the Federal Gov­
ernment cuts spending to make up for the
revenue loss from a tax cut, it will counteract
the stimulus to the economy from the tax
reduction. A tax cut represents an injection
of spending power into the stream of
economic activity; but a drop in government
spending serves to offset that stim ulus.
While consumers and businesses are spend­
ing more, the government is spending less.

. . . BUT THE FINAL OUTCOME DEPENDS ON
HOW THE GOVERNMENT "PAYS" FOR THE
TAX CUT

Like the rest of us, the government must
ultimately pay for what it buys. When its bills

relatively small effect on lifetime average income and
hence will have little effect on consumption (see
Appendix).

'Some economists believe that consumption depends
on one's expected lifetime income and are, therefore,
doubtful that a one-time tax rebate will have any
substantial effect. They argue that a rebate will have a

2
Another alternative for "offsetting" the revenue loss
from a tax cut would be for the government to sell some
of its assets or increase the fees it charges for certain
services it provides to the public. However, this alterna­
tive is not considered in the text.




14

FEDERAL RESERVE BANK OF PHILADELPHIA

Borrowing from the Central Bank. When the
Treasury borrows money to replace de­
pleted revenues, this increases the total de­
mand for credit, other things being equal.
Hence, interest rates will tend to rise unless
the supply o f credit is likewise increased. One
way for credit to expand is for the Federal
Reserve to step up its purchases of govern­
ment securities.
There are legal limits on the amount the
Treasury can borrow directly from the Fed
(the current limit set by Congress is $5 bil­
lion). However, there are no limits on the
amount of Treasury lOUs the Fed can buy in
the market for government securities. These
purchases increase the supply of money and
credit,4 thus allowing the Fed to indirectly
finance the tax cut. If the increase in the
supply of credit equals the increase in de­
mand for credit, then the government can
borrow with no upward pressure on interest
rates. Indeed, rates may actually fall if credit
supplies expand by more than demand.
When the Fed allows some portion of the
rise in government debt to be financed by
increases in the supplies of money and cred­
it, it is usually said that the Fed has
"monetized" a portion of the debt. Since
debt monetization moderates or lessens
interest-rate pressures5 and since lower rates

In fact, if taxes and government spending
are cut by the same amount, the overall level
of economic activity may actually decline.
Why? Because all the proceeds of a tax cut
are typically not spent by consumers and
businessmen. Rather a portion will be saved.
Hence, only part of a tax cut finds its way
into the spending stream , but the full
amount of the matching drop in government
spending is removed from the flow of spend­
ing. Thus, the net effect of a given tax cut
matched by a like reduction in government
spending may be a lower level of economic
activity than would have occurred without
the tax cut, other things being equal.
Borrowing from the Public. If the govern­
ment wishes to maintain its level of spending
when taxes are reduced, it can compensate
for the revenue shortfall by borrowing from
the public. This process may also serve to
offset some of the stimulative impact of the
tax cut on economic activity. Unless there is
a simultaneous decline in the demand for
loans by private borrowers, attempts by the
government to tap the credit markets to
offset a drop in tax revenues will increase
interest rates beyond what they would have
been. Any increases in the cost of borrowing
will tend to discourage expansion in the pri­
vate sector. Thus, the higher interest rates
will serve to “ crowd out" some private bor­
rowers who will reduce their spending as a
result. If the increase in interest rates is suf­
ficiently large, the decline in spending it
produces will completely offset the stimulus
stemming from the tax cut. However, if the
government can borrow with only moderate
effects on interest rates or with no effect at
all, then there will be no "crowding out" to
speak of. The net impact of a tax cut "fi­
nanced" through borrowing from the public
in such a case would be a rise in economic
activity.3

creased government debt will have to be paid for by
future increases in taxes. With some foresight, indi­
viduals may see that if the current tax cut is financed by
future tax increases, then they may not be better off in
the long run. If this is the case, the public may not wish
to spend the money it receives from the tax cut, but will
save it to pay for those future tax increases!
4
The process works like this: the Fed pays for gov­
ernment securities with a check drawn on itself which
eventually gets deposited in a bank. This means banks
have more funds available for lending, which increases
the supply of credit. And since the loans they make
represent additions to borrowers' checking accounts,
the money stock is also increased.
interest rates cannot remain perpetually lower as a
result of a tax cut financed by debt monetization. As
economic activity expands, upward pressure on rates
will result. And if the accompanying expansion gener­
ates expectations of future inflation, interest rates could

3lt can be argued that the tax cut stimulus will be
further weakened if the public perceives that the in


15

JANUARY/FEBRUARY 1976

BUSINESS REVIEW

suits of some experiments of this kind are
reported below. Several caveats should be
noted in interpreting these results, however.
First, the results are specific to the computer
model employed; a different model may
give different results. Second, the computer
model is only an approximation to the way
the economy works. And third, the results
depend on the economic environment exist­
ing at the beginning of the time period ex­
amined in these exp erim en ts. If the
economy had been in a more (or less) rosy
state than at present the results of the exper­
iments would be different. The results re­
ported in the various experiments show the
change in economic activity expected as a
result of shifts in policy. We focus on six key
variables— "real" GNP (GNP adjusted for
inflation), disposable income (in current
dollars), the unemployment rate, the infla-

induce additional private spending, a tax cut
financed through the purchase of securities
by the central bank as well as the public has
the potential to yield more stimulus than any
of the other cases.
WHAT HAVE COMPUTER MODELS TO SAY
ABOUT ALL THIS?

The previous discussion had little to say
about the size of the effects of a tax cut
under different assumptions about how the
government offsets the revenue loss. One
way to try to get a handle on this is to use a
computer (“ econom etric") model of the
economy to estimate the impacts of different
kinds of policy changes (see Box). The re­
end up higher than their initial levels as lenders build
"inflationprem ium s" into interest rates to compensate
for future erosion of their purchasing power.

BOX

USING ECONOM ETRIC MODELS
TO DETERMINE THE EFFECT O F ALTERNATIVE POLICIES
An econometric model is a set of interrelated mathematical equations. These relation­
ships are based on economic theory and, subsequently, are estimated (quantified),
using the available economic data. The combination of theory and data can provide an
approximation to the structure of the economy.
The variables of interest to the forecaster may be called the internal variables of the
model. To a large extent the main internal variables are dependent on each other. But
these internal variables are also influenced by policy variables (government spending,
taxes and the money supply) and their own past values.
If the model is to be used for predictions, the forecaster must supply the historical
data and the likely policy changes for every period being predicted. The model can then
be solved for the values of the internal variables. Often the forecaster may want to make
adjustments to the model to correct for the past errors of the model and to account for
changes in the economy that the model cannot pick up.* The final product of this fine
tuning may be called a base simulation.
*See Nariman Behravesh, “ Forecasting the Economy with Mathematical Models: Is It Worth the Effort?"
Business Review of the Federal Reserve Bank of Philadelphia, July/August 1975, pp. 15-25.




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FEDERAL RESERVE BANK OF PHILADELPHIA

To determine the effects of policy changes on the economy, the model user can
change the policy assumptions in the model and allow these new assumptions to feed
through the system. A comparison of these "alternative solutions" with "base simula­
tion" provides an approximation of the effects of policy changes.** Although these
forecasts may be subject to error, the models do provide reasonable estimates of the
overall impacts of policy shifts.
The computer model used in this article is a modified version of the MIT-Penn-Social
Science Research Council model. It was used to generate a "base simulation" of
economic events over eight quarters (two years)*** under the assumption that taxes are
unchanged and the money stock is growing at a moderate rate. We are only concerned
with six of the variables predicted by the model: real GNP (CNP adjusted for changes in
inflation), disposable personal income (in current dollars), the unemployment rate, the
inflation rate (percent change in the implicit deflator for GNP), and interest rates. The
90-day Treasury-bill rate and the Moody's AAA corporate-bond rate are used as measures
for short- and long-term interest rates. After obtaining the base simulation values for
these variables, the assumptions about economic policy were changed in a manner de­
signed to reflect each of the cases discussed in the text. For example, we assumed that
taxes were cut and that government spending dropped to "offset" the revenue loss. We
then allowed the computer model to grind out values for all six variables mentioned
above in the new policy environment. This allows us to compare the new predicted
value of real GNP, say, with the anticipated value before the policy change (the base
simulation result). We also go through the same procedure for the other two kinds of
policy: a tax cut financed by borrowing from the public and a tax cut financed (at least
in part) by borrowing from the Fed, as well as the public.
Since we want to emphasize the effect of policy changes rather than the base simula­
tion itself, we do not report the values for each variable before the change in policy
occurred. Rather we present the change in the value of each variable relative to the base
simulation— the simulation with no change in fiscal policy or monetary policy. However,
the first part of the base simulation used is roughly similar to what we have observed in
1975.
**lf, however, the structure of the economy is altered by such policy changes, the comparison of
base and alternate simulations of a given, unchanging model will not yield good estimates of the
effects of those policy changes.
***To study the full impact of any policy change, it is desirable to simulate the model for longer periods.
However, there are some difficulties associated with longer-run simulations which limit the information
gained from such exercises.




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JANUARY/FEBRUARY 1976

BUSINESS REVIEW

tion rate, and short-term and long-term
interest rates.

things to turn out with no change in fiscal
policy are shown in Graph I. It shows that
the level of economic activity is reduced by
such a policy. Real GNP is lower for this case
than when there were no tax or expenditure
cuts. And as a result of the fall in real GNP,
the unemployment rate is higher. The price
level is reduced, however, as demand is
dampened. Interest rates are also lower. The
model suggests, then, that the restrictive

A Tax Cut With A Spending Cut. In this case,
the government does not allow the tax cut to
increase the size of the budget deficit, but
rather cuts its spending in line with the drop
in revenues. The size of the assumed tax and
spending cuts is $15 billion. The results of
this policy relative to how we might expect




GRAPH

C H AN G ES R E S U LT IN G FROM TAX C U T WITH M ATCHING E X P E N D IT U R E C U T

Percent

Q1

Q2

Q3

Q4

Q5

Q6

Q7

Unemployment Rate

Q8
Disposable Income

Tax
Cut

Short-Term Interest Rate

18

FEDERAL RESERVE BANK OF PHILADELPHIA
GRAPH II

C H A N G ES

R E S U LT IN G

FROM TAX C U T WITH GO VERNM ENT BORROW ING FROM T H E P U B L IC

Real GNP

Unemployment Rate

(1958) Dollars (Bils.)

Percent

_ ..
.
Dollars (Bils.)

Disposable Income

Tax
Cut

Q1

Q8

Short-Term Interest Rate

Percent

Long-Term Interest Rate

Q1

effect of a cut in government spending more
than offsets the stimulative effect of a re­
duction in taxes.

penditures by borrowing solely from the
public. The results are shown in Graph II.
This kind of fiscal policy change results in
an increase in real GN P, but its impact
reaches a peak several quarters after the tax
cut. The impact on real GNP then tends to
wane over succeeding quarters. The un­
employment rate remains slightly lower
throughout the two-year period, but the in­
flation rate is higher during the four quarters

A Tax Cut Financed by Government Borrow­
ing from the Public. In this experiment, taxes

are again reduced by $15 billion. Rather than
reduce spending, however, the government
allows its budget deficit to grow, financing ex­



Q8

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JANUARY/FEBRUARY 1976

BUSINESS REVIEW

following the tax cut. Disposable income
rises by more than the decrease in taxes as a
result of the cumulative increase in the level
of economic activity.
Why does the impact of the tax cut on the
level of GNP tend to diminish over time? The
change in interest rates shown in Graph II
provides the answer. Unless there is con­
siderable slack in financial markets, the in­
crease in government borrowing in the cred­
it market will push up interest rates.6 The
increase in borrowing costs will reduce pri­
vate spending. The fall in interest-sensitive
spending begins to offset the initial in­
creases in consumption resulting from the
tax cut. Over the two-year horizon of the
experiment we do not observe a complete
offset, however. Private borrowers are only
partially "crowded out" of credit markets by
the government borrowing. If the resulting
trend observed in real GNP were to continue,
however, the decline in private spending pro­
duced by rising interest rates, in turn, would
completely offset the increase in consump­
tion spending.

levels that would have occurred if the gov­
ernment had not decided to cut taxes and
borrow from the public. (This of course as­
sumes the Fed can predict what those inter­
est rates would have been.) Alternately, the
Fed could simply peg interest rates at the
time of the tax cut— supply enough credit to
keep interest rates unchanged.
In the first case we assume that the Fed
knows what interest rates would prevail in
the absence of a tax cut. It then attempts to
keep short-term rates in line with this pat­
tern by buying government securities. The
stepped-up purchase of government lOUs
increases the supply of money and credit. If
interest rates are the same as they would
have been without the tax cut, then the
"crowding out" effect which resulted in the
previous case would be eliminated. The net
result is a stronger stimulus to real GNP and
a lower unemployment rate than would re­
sult if the tax cut were "financed" by bor­
rowing solely from the public (compare
Graph III with Graph II). This is not a costless
gain, however, for the increased growth in
money also means a higher inflation rate
than would have otherwise occurred.
A second scenario considers the possibil­
ity that the Fed may not be able to predict
what rates would have occurred in the ab­
sence of a tax cut. Hence, it simply pegs
short-term interest rates at whatever level
was prevailing at the time of the change in
fiscal policy. In an economy with expanding
activity, interest rates will normally rise to
reflect increasing demands for money and
credit. Hence, the Fed can only succeed in
restraining rising interest rates by speeding
up the growth of the supply of money and
credit. Therefore, this "pegged-rate" ap­
proach generates the fastest growth in the
money supply of all the options.7

A Tax Cut Financed by the Fed. Another
possibility is for the Federal Reserve to fi­
nance the tax cut by stepping up the supply
of new money and credit. Several options
would be open to the Fed. For instance, the
Fed could try to increase the supply of credit
enough to maintain interest rates at the
6ln the model used this effect comes about as the
demand for money increases more rapidly than the
supply of money. The demand for money increases as
GNP rises. However, not all computer models of the
economy yield this result. In some models, the impact
on interest rates of government borrowing depends
on whether the government issues short-term or long­
term securities. In particular, if it sells mainly short­
term issues, then long-term rates may fall and invest­
ment (which depends on long-term rates) may increase
rather than fall. For an example of a model of this kind,
see Patric Hendershott, “ The Impact of a Tax Cut:
Crowding O ut, Pulling In and All That," Salomon
Brothers Center for the Study of Financial Institutions,
Working Paper No 59, New York University, November
1975.




7
The differential impact on interest rates from the two
types of accomodative monetary policy (compare
Graphs III and IV) is in part due to the rising interest
rates in the base simulation. Thus a policy that attempts
to peg interest rates at first quarter levels must offset
the initial pattern of rising interest rates plus the
20

FEDERAL RESERVE BANK OF PHILADELPHIA

GRAPH III
C H AN G ES

Q1

Q2

Percent

Q3

R ES U LT IN G FROM TAX C U T WITH ACCOM M ODATIVE
IN T E R E S T R A T E S K E P T AT PR E-TAX C U T L E V E L S

Q4

Q5

Q6

Q7

Q8

Inflation Rato

Q1
Dollars (Bils.)

02

Q3

M O N ETARY

Q4

Q5

Q6

Disposable Income

P O LIC Y :

Q7

Q8

________

+1

-

-

-1

I

_____________________________I____________________________
Q1
Q8

Q1

The results are shown in Graph IV. Real
GNP is higher in this experiment than in all
the others and the unemployment rate is
substantially below the no-tax-cut case by
the end of two years. At the Same time, the
inflation rate is higher than results from any

other policy. Interest rates are lower than in
any of the other alternatives, but may even­
tually rise to levels higher than in previous
cases. The higher level of economic activity
and expectations of still higher prices could
push rates higher in the period beyond the
end of the computer experiment. A policy
designed to hold interest rates down yields
some early gains in terms of increased activ­
ity and lower unemployment but it involves

increase in rates due to the tax cut. This is accomplished
by expanding the supply of money much faster in the
“ pegged rate" experiment than the experiment which
holds interest rates at the base simulation levels.




Q8

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JANUARY/FEBRUARY 1976

BUSINESS REVIEW

GRAPH IV
C H A N G ES

R E S U LT IN G

FROM TAX C U T WITH

ACCOM M ODATIVE

M O N ETARY

PO LIC Y :

IN T E R E S T R A T E S PEG G ED AT F IR S T Q U AR TER L E V E L S

Q1

Q2

Q3

Q4

Q5

Q6

Percent

Percent

Q7

Q8

Inflation Rate

Short-Term Interest Rate

Q1
Dollars (Bils.)

Percent

Q3

Q4

Q5

Q6

Q7

Q8

Disposable Income

Long-Term Interest Rate

the costs and benefits of the various financ­
ing alternatives along with the merits of the
tax cut itself. Policywatchers must also con­
sider the total picture when assessing the
likely outcome of a tax cut. When the tax cut
is "financed" by a more generous monetary
policy (whichever version), overall stimulus
to economic activity will likely be greater
than when the loss in government revenues
is covered entirely by borrowing from the

substantial costs down the road when soci­
ety has to pay the inflation price.
SO WHAT ABOUT A TAX CUT?

The moral of the story is simple. There is
very little one can say about the effects of a
tax cut unless we know how the government
will respond to the loss in revenue thAt re­
sults. Hence, policymakers must consider



Q2

22

FEDERAL RESERVE BANK OF PHILADELPHIA

public. Borrowing from the public (initially at
least) involves higher interest rates than bor­
rowing from the central bank. Finally, when
the government cuts its spending as taxes are
reduced, the net effect is probably a con­

traction in economic activity. Thus, despite
conventional wisdom to the contrary, it is a
mistake to view a tax cut as an expansionary
policy without considering how the govern­
ment will respond to the drop in revenues.

APPENDIX
GRAPH V
C H AN G ES R ES U LT IN G FROM A TAX R E B A T E
Percent

Q1

Q2

Q3

Q4

Q5

Q6

Percent

Inflation Rate

Percent

Short-Term Interest Rate

Q7

Unemployment Rate

Q8
Dollars (Bils.)

Percent

Disposable Income

Long-Term Interest Rate

A prevalent feeling among economists today is that tax rebates and temporary tax cuts
have no long-term impact on the economy. A two-year projection of the economy with
such a tax cut bears out these beliefs. The stimulative effects of a $15 billion tax rebate
spread over the second and third quarters of the forecast wash out within six quarters (a
year and a half), and leave the economy close to where it was before the tax cut by the
end of two years (assumes borrowing from the public).
S



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JANUARY/FEBRUARY 1976

BUSINESS REVIEW

The malaise and the myth —
Phila Sept 75 p 3

The Fed in Print

BANK COMPETITION
The changing competition between com­
mercial banks and thrift institutions for de­
posits—
St Louis July 75 p 2

Business Review Topics,
Third Quarter 1975,
Selected by Doris Zimmermann

BANK EARNINGS
Bank profits in 1974—
Chic July 75 p 13
Income and expenses of Eighth District
member banks— 1974—
St Louis Aug 75 p 20

Articles appearing in the Federal Reserve
Bulletin and in the monthly reviews of the
Federal Reserve banks during the third quarter
o f 1975 are included in this compilation. A
cumulation o f these entries covering the years
1972 to date is available upon request. If you
wish to be put on the mailing list for the
cumulation, write to the Publications De­
partment, Federal Reserve Bank o f Philadel­
phia.
To receive copies of the Federal Reserve
Bulletin, mail two dollars for each to the Fed­
eral Reserve Board at the Washington address
on page 30. You may send for monthly re­
views of the Federal Reserve banks free of
charge, by writing directly to the issuing
banks whose addresses also appear on page
30.

BANK HOLDING COMPANIES
A valuation approach to bank holding
company acquisitions—
Rich July 75 p 9
The performance of individual bank hold­
ing companies—
FR Bull Aug 75 p 472
BANK LIQUIDITY
Rebuilding bank liquidity—
Atlanta Aug 75 p 128
BANK LOANS— BUSINESS
Business loans in recession —
Atlanta July 75 p 112
Loan commitments to business in United
States banking history—
Rich Sept 75 p 15

ALABAMA
Banking structure in Alabama—
Atlanta Sept 75 p 137

BANK LOANS— CHARGE OFFS
Accounting for loan charge offs—
Atlanta Aug 75 p 118
Bank loan losses: A fresh perspective—
Phila Sept 75 p 18

BALANCE OF PAYMENTS
Balance of payments concepts—
what do they really mean?—
St Louis July 75 p 14
Measuring the United States balance of
payments—
NY Aug 75 p 183

BANK SUPERVISION
Toward early warning of changes in banks'
financial condition: A progress report—
NY July 75 p 157

BANK ACCOUNTS
Customer profitability analysis
Part II: Analysis methods at major banks—
Kansas City Sept 75 p 11

BANK TAX
Income taxation of commercial banks—
Kansas City July 75 p 3
BANKING STRUCTURE
Factors affecting bank structure change*.

BANK CAPITAL
Banking's capital shortage:



24

FEDERAL RESERVE BANK OF PHILADELPHIA

The New England experience, 1963-74—
Bost July 75 p 16
Banking structure in the Sixth District
states—
Atlanta Sept 75 p 134
Banking structure in Florida—
Atlanta Sept 75 p 142

CERTIFICATES OF DEPOSIT
Changes in reserve requirements influence
volume and maturity—
Dallas Aug 75 p 1
COLDWELL, PHILIP E.
Statement to Congress, July 16,1975 (bank
statements)—
FR Bull July 75 p 416

BUCHER, JEFFREY M.
Statement to Congress, July 8, 1975 (leas­
ing)—
FR Bull July 75 p 413
Statement to Congress, July 17, 1975 (con­
sumer credit)—
FR Bull Aug 75 p 474

COMMERCIAL POLICY
The Trade Reform Act: Provisions and po­
tential—
Minn Oct 75 p 5
CORPORATE FINANCE
Corporate security sales soar— record vol­
ume boosts liquidity—
Chic Aug 75 p 3
Recent developments in corporate fi­
nance—
FR Bull Aug 75 p 463

BUDGET
Recent trends in Federal budget policy—
FR Bull July 75 p 396
BURNS, ARTHUR F.
Statement to Congress, July 24, 1975
(monetary policy)—
FR Bull Aug 75 p 491
Statement to Congress, July 29, 1975 (busi­
ness forecasts) —
FR Bull Aug 75 p 497
Statement to Congress, September 4, 1975
(grain)—
FR Bull Sept 75 p 574

CREDIT RATIONING
Credit allocation and commercial banks—
Chic Aug 75 p 13
DEMAND DEPOSITS
Advertising for demand deposits—
Chic Sept 75 p 10
DISCOUNT OPERATIONS
District seasonal borrowing in 1974—
Minn July 75 p 10

BUSINESS FORECASTS & REVIEWS
KEYS FOR BUSINESS FORECASTING avail­
able—
Rich July 75 p 15
Financial developments in the second
quarter of 1975—
FR Bull Sept 75 p 539

ECONOMIC STABILIZATION
INTERNATIONAL ASPECTS OF
STABILIZATION PRICES available —
Bost July 75 p 30

BUSINESS INDICATORS
Forecasting with a deflated index of leading
series—
Bost Sept 75 p 15
Real money balances: A good forecasting
device and a good policy target?—
St Louis Sept 75 p 11

FEDERAL ADVISORY COUNCIL
Quarterly survey of bank policies with re­
spect to credit use—
FR Bull July 75 p 405
FEDERAL RESERVE BANKS AUDIT
Analysis of System expenditures—
FR Bull Aug 75 p 534

CALIFORNIA
California— end of growth?—
San Fran Sum 75 p 25



FEDERAL RESERVE BANKS— BRANCHES
Miami branch of the Federal Reserve Bank
25

BUSINESS REVIEW

JANUARY/FEBRUARY 1976

Grain exports and inflation—
St Louis Sept 75 p 2

of Atlanta opens July 1, I975—
FR Bull July 75 p 460
FEDERAL RESERVE BOARD
Membership of the Board of Governors of
the Federal Reserve System, 1913-75—
FR Bull July 75 p 407
ANNUAL REPORT available—
FR Bull July 75 p 459

HOLLAND, ROBERT C.
Statement to Congress, July 16, 1975 (bank
supervision)—
FR Bull July 75 p 419
Statement to Congress, July 22, 1975 (bank
failures)—
FR Bull Aug 75 p 486

FEDERAL RESERVE— FOREIGN EXCHANGE
Treasury and Federal Reserve foreign ex­
change operations—
N. Y. Sept 75 p 199

INCOME PERSONAL
The Sixth District share of personal income
in Mississippi, Louisiana, and Tennessee—
Atlanta Aug 75 p 126

FOOD STAMP PLAN
The food stamp program—
Chic July 75 p 3

INDUSTRIAL PRODUCTION INDEX
Western manufacturing production—
San Fran Sum 75 p 21
Changes to Texas index present different
picture—
Dallas Sept 75 p 8

FOREIGN ASSETS IN U. S.
Foreign investment in the Ninth District—
Minn July 75 p 6
FOREIGN DEPARTMENT BANK
International banking: Part I —
Chic Sept 75 p 3

JACKSON, PHILIP C.
Appointment confirmed June 25, 1975—
FR Bull July 75 p 459
Statement to Congress, September 15,1975
(real estate)—
FR Bull Sept 75 p 578

FOREIGN EXCHANGE
The dollar at home and abroad—
Phila Sept 75 p 14
FOREIGN TRADE DOMESTIC EFFECTS
Adjustment to import competition —
Bost July 75 p 3

LABOR MARKET
The recession's impact on labor markets—
Minn July 75 p 3
On labor market indicators—
Rich July 75 p 3

FUEL
The battle for energy independence:
How much of a good thing?—
Phila July 75 p 3
Western resources: Key to the nation's
energy future—
San Fran Sum 75 p 3

MEXICO
Inflation in Mexico and recession in U. S.
threaten maquiladora accomplishments—
Dallas July 75 p 1

GEORGIA
Banking structure in Georgia—
Atlanta Sept 75 p 148

MITCHELL, GEORGE W.
Statement to Congress, June 25, 1975
(municipal finance)—
FR Bull July 75 p 409
Statement to Congress, September 9, 1975
(Regulation Q) —
FR Bull Sept 75 p 576

GRAIN
A new record wheat crop:
Will it reduce farm income?—
Atlanta Aug 75 p 124




26

FEDERAL RESERVE BANK OF PHILADELPHIA

REGULATION Q
Amendment September 1, 1975—
FR Bull July 75 p 440
Amendment September 2, 1975—
FR Bull Aug 75 p 513

MODELS (STATISTICS)
Forecasting the economy with mathemati­
cal models: Is it worth the effort?—
Phila July 75 p 15
MONETARY POLICY
Observed income velocity of money: A
misunderstood issue in monetary policy—
St Louis Aug 75 p 8
The strategy of monetary policy—
Rich Sept 75 p 3

REGULATION Y
Interpretation: Courier activities—
FR Bull Sept 75 p 588
REGULATION Z
Amendment August 8, 1975—
FR Bull July 75 p 459
Amendment August 8, 1975—
FR Bull Aug 75 p 513
Amendment to cover Fair Credit Billing Act
September 15, 1975—
FR Bull Sept 75 p 600

MONEY SUPPLY
The monetary-fiscal mix through mid1976—
St Louis Aug 75 p 2
Explanation of the growth of the money
stock: 1974-early 1975—
St Louis Sept 75 p 5

SWAP ARRANGEMENTS
Reciprocal currency arrangements—
FR Bull Sept 75 p 602

MORTGAGES
Solving the long-range problems of hous­
ing and mortgage finance (Morris)—
Bost July 75 p 26
Letter re: Emergency Housing Act of
1975 —
FR Bull Aug 75 p 535

TAX AND LOAN ACCOUNTS
Treasury cash balances—
Kansas City July 75 p 12
TAXATION
Paying more taxes and affording it less—
St Louis July 75 p 9

MORTGAGES VARIABLE
Purchasing-power mortgages—
Dallas Sept 75 p 1

TRANSFER OF FUNDS
ECO N O M ICS OF A NATIONAL ELEC­
TRONIC FUNDS TRANSFER SYSTEM avail­
able—
Bost July 75 p 30

PHILLIPS CURVE
Wages and unemployment: A state analysis
of the Phillips curve—
Atlanta July 75 p 106

UNEMPLOYMENT
Recent developments in the theory of un­
employment—
Kansas City Sept 75 p 3

PREAUTHORIZED PAYMENTS
New bill-paying service—
FR Bull Aug 75 p 534
PROPERTY TAX
100 percent assessment: Higher taxes or
more inequity?—
Bost Sept 75 p 3

WALLICH, HENRY C.
Statement to Congress, June 25, 1975
(capital)—
FR Bull July 75 p 411
Statement to Congress, July 21, 1975
(foreign exchange rates)—
FR Bull August 75 p 480

REGULATION M
Amendment August 25, 1975—
FR Bull Sept 75 p 587




27

JANUARY/FEBRUARY 1976

BUSINESS REVIEW

BUSINESS REVIEW
FEDERAL RESERVE BANK O F PHILADELPHIA
TABLE O F CONTENTS— 1975
JANUARY

APRIL

"Why Not Pay Interest on Member Bank Re­
serves?" by Ira Kaminow
"Should the Fed Sell Its Services?" by W. Lee
Hoskins
Annual Operations and Executive Changes

"Is There a Future for Economic Man?" by
David P. Eastburn
"The Cost of Buying: It Takes More Dollars
But Less Work" by John G. Bell
"Philad elp hia City and School District
Budgets: A Year of Austerity" by William A.
Cozzens

FEBRUARY
"Which School Resources Help Learning? Ef­
ficiency and Equity in Philadelphia Public
Schools" by Anita A. Summers and Barbara L.
Wolfe

MAY
"Central Banking across the Atlantic: An­
other Dimension" by James M. O'Brien
"Inventory Valuation Adjustments Greatly In­
fluence Corporate Earnings" by Robert Christ­
ian, Jr.
" A Perspective on Stagflation" by John J. Seater

MARCH
"Indexing Inflation: Remedy or Malady?" by
Vincent A. Gennaro
" 'Yields' on Checking Accounts Rise In Re­
cent Years"
"Regional Wrap-up '74: Doldrums Descend
On District Economy" by Howard Keen, Jr.
The Fed in Print by Doris Zimmermann




JUNE
"Anatomy of a 'Fiscal Crisis' " by Anthony M.
Rufolo
28

FEDERAL RESERVE BANK OF PHILADELPHIA

"Rising Medical Care Expenditures: A Growing Role for the Public Sector by Robert H.
Friedman
"Restrictive Labor Practices in Baseball: Time
for a Change?" by Janice M. Westerfield

Stuart A. Schweitzer
"The Fed in Print" by Doris Zimmermann

JULY/AUGUST

"The Fed in a Political World" by David P.
Eastburn
"The Rising Cost of Buying a New Home" by
James J. Bacci
"Slowdowns and Recessions: What's Been
Government's Role?" by Donald L. Raiff

OCTOBER

"The Battle for Energy Independence: How
Much of a Good Thing?" by Timothy H. Han­
nan
"The Auto Industry: Slowdown in Sales, Stall
in Jobs" by Clara Prevo
"Forecasting the Economy with Mathematical
Models: Is It Worth the Effort?" by Nariman
Beh raves h

NOVEMBER

SEPTEMBER

"Selective Credit Policies: Should Their Role
Be Expanded?" by Ira Kaminow and James M.
O'Brien

"Banking's Capital Shortage: The Malaise and
the Myth" by Ronald D. Watson
"The Dollar at Home and Abroad" by John G.
Bell
"Bank Loan Losses: A Fresh Perspective" by

DECEMBER




"Jobs in Philadelphia: Experience and Pros­
pects"
29

FEDERAL RESERVE BANKS AND BOARD O F G O V ER N O R S
Publications Services
Division of Administrative Services
Board of Governors of the
Federal Reserve System
Washington, D. C. 20551
Federal Reserve Bank of Atlanta
Federal Reserve Station
Atlanta, Georgia 30303
Federal Reserve Bank of Boston
30 Pearl Street
Boston, Massachusetts 02106
Federal Reserve Bank of Chicago
Box 834
Chicago, Illinois 60690
Federal Reserve Bank of Cleveland
P.O. Box 6387
Cleveland, Ohio 44101
Federal Reserve Bank of Dallas
Station K
Dallas, Texas 75222




Federal Reserve Bank of Kansas City
Federal Reserve Station
Kansas City, Missouri 64198
Federal Reserve Bank of Minneapolis
Minneapolis, Minnesota 55440
Federal Reserve Bank of New York
Federal Reserve P.O. Station
New York, New York 10045
Federal Reserve Bank of Philadelphia
925 Chestnut Street
Philadelphia, Pennsylvania 19105
Federal Reserve Bank of Richmond
P.O. Box 27622
Richmond, Virginia 23261
Federal Reserve Bank of St. Louis
P.O. Box 442
St. Louis, Missouri 63166
Federal Reserve Bank of San Francisco
San Francisco, California 94120

30




F D R LR S R EB N
K K A
E E V
A K

F E D E R A L R E S E R V E B A N K o f P H ILA D ELP H IA

BUSINESS REVIEW

JANUARY/FEBRUARY 1976

DIRECTORS AND OFFICERS
In November 1975, Edward W. Robinson,
Jr., Vice President, North Carolina Mutual
Life Insurance Com pany, Philadelphia,
Pennsylvania, resigned his Class C Director­
ship. The Board of Governors has not yet
appointed a replacement.
Effective January 1, 1975, Peter M. DiPlacido, Paul E. Kirn, Jr., and Lawrence C.
Santana, Jr., were promoted to Assistant
Vice Presidents. At the same time three
persons were promoted to official status:
Glennie M. Matthewson II became Assistant
Counsel, Donald J. Mullineaux became Re­
search Officer and Economist, and Ronald
D. Watson became Research Officer and
Economist. The following officers received
new titles: Ira Kaminow became Vice Pres­
ident and Economic Advisor and W. Lee
Hoskins became Vice President and Director
of Research.
On January 13, Robert E. Matthews joined
the Bank as Assistant General Auditor, suc­
ceeding A. Lamont Magee, who took early
retirement on January 31.
Effective February 3, D. Russell Connor,
Assistant Vice President, became the officer
responsible for construction of the new
building. Lawrence L. Murdoch, Jr., Vice
President and Secretary, became the senior
officer responsible for planning and imple­
menting the move, including the purchase

The Board of Governors of the Federal
Reserve System redesignated John R. Cole­
man, President of Haverford College, Haverford, Pennsylvania, as Chairman of the
Board of this Bank for 1976. John W. Eckman, President and Chief Executive Officer
of Rorer-Amchem, Inc., Fort Washington,
Pennsylvania, has been appointed by the
Board of Governors of the Federal Reserve
System to a three-year term as a Class C
Director, replacing Edward J. Dwyer, Chair­
man of the Board, ESB, Incorporated, Phila­
delphia, Pennsylvania, who completed his
term of office. At the same time, Mr. Eckman
was named Deputy Chairman for 1976.
James Patchell, President and Chief Execu­
tive Officer of the National Bank and Trust
Company of Gloucester County, Woodbury,
New Jersey, has been elected by member
banks in Electoral Group 2 as a Class A
Director of this Bank for a three-year term,
replacing John H. Hassler, President, The
City National Bank and Trust Company of
Salem, New Jersey, who completed his term
of office.
James F. Bodine, President and Chief
Operating Officer, First Pennsylvania Bank
N. A ., has been renamed to serve during
1976 as the member of the Federal Advisory
Council from the Third Federal Reserve
District.



32

FEDERAL RESERVE BANK OF PHILADELPHIA

DIRECTORS AND OFFICERS
(continued)
of new furniture, furnishings, and equip­
ment.
On February 28, Kenneth M. Snader, Vice
President, retired from the Bank.
On March 3, James F. Gaylord joined the
Bank as Vice President in charge of the
Human Resources Departm ent, and on
March 20, he was designated Equal Employ­
ment Officer of the Bank.
On March 17, Richard L. Smoot was ap­
pointed as a Vice President with responsi­
bility for Operations Improvement.
On April 14, Judith H. Helmuth, formerly
Computer Services Officer, joined the staff
of the Vice President for Operations Im­
provement, as Operations Improvement
Officer.
On June 30, Joseph M. Case, Vice Presi­
dent, retired from the Bank.
Effective July 1, Konstanty G. Adack be­
came Senior Vice President— Accounting
and Systems, replacing Robert R. Swander,
who resigned from the Bank. Mr. Adack
retained responsibility for the Protection,
Building, Printing, Purchasing and Records
Management departments.
Effective August 1, Lawrence C. Murdoch,
Jr., Vice President and Secretary, assumed
responsibility for the newly created Office
of Consumer Affairs. Mr. Murdoch remained



responsible for Public Services and media
relations and remained responsible for the
move to the new building. In addition, Mr.
Murdoch continued as the Bank's Secretary
and became the focal point for handling out­
side requests under the Freedom of Informa­
tion Act.
On September 30, Hugh Barrie, Senior
Vice President, retired from the Bank.
Effective November 6, Alexander A. Kudelich, Vice President, assumed direct respon­
sibility for the check function. Richard L.
Smoot, Vice President, took over direction
of Cash and Fiscal Operations. He remained
responsible for the Operations Improve­
ment effort. William E. Roman, Vice Presi­
dent, moved from Check Operations and
took charge of the Accounting Department.
Richard W . Epps, Vice President, began
heading an expanded Operations Planning,
Analysis and Research Department as well
as the Budget function. Jack P. Besse, Assis­
tant Vice President, joined Mr. Smoot and
Ms. Helmuth in Operations Improvement.
Also effective November 6, Stanley J. Forst
became Director of Computer Applications,
and Anita A. Summers became Research Of­
ficer and Economist.
On December 31, George C. Haag, Public
Services Officer, retired from the Bank.
33

JANUARY/FEBRUARY 1976

BUSINESS REVIEW

DIRECTO RS AS O F JANUARY 1, 1976___________________
JOHN R. COLEMAN, Chairman of the Board and Federal Reserve Agent
JOHN W. ECKMAN, Deputy Chairman
TERM EXPIRES
DECEMBER 31

GROUP
CLASS A
1

WILLIAM B. EAGLESON, JR.
Chairman of the Board and President
Girard Trust Bank
Bala-Cynwyd, Pennsylvania

1977

2

JAMES PATCHELL
President and Chief Executive Officer
National Bank and Trust Company of Gloucester County
Woodbury, New Jersey

1978

3

THOMAS L. MILLER
President
Upper Dauphin National Bank
Millersburg, Pennsylvania

1976

CLASS B
1

1976

WILLIAM S. MASLAND
President
C. H. Masland & Sons
Carlisle, Pennsylvania




34

FEDERAL RESERVE BANK OF PHILADELPHIA

D IRECTO RS AS O F JANUARY 1, 1976
CLASS B

2

C. GRAHAM BERWIND, JR.
President and Chief Executive Officer
Berwind Corporation
Philadelphia, Pennsylvania

1977

3

HAROLD A. SHAUB
President and Chief Executive Officer
Campbell Soup Company
Camden, New Jersey

1978

CLASS C

JOHN R. COLEMAN
President
Haverford College
Haverford, Pennsylvania

1976

JOHN W. ECKMAN
President and Chief Executive Officer
Rorer-Amchem, Inc.
Fort Washington, Pennsylvania

1978

Member of the Federal Advisory Council

JAMES F. BODINE
President and Chief Operating Officer
First Pennsylvania Corporation and the First
Pennsylvania Banking and Trust Company
Bala-Cynwyd, Pennsylvania



35

1976

JANUARY/FEBRUARY 1976

BUSINESS REVIEW

OFFICERS AS OF JANUARY 1, 1976
David P. Eastburn, President
Mark H. Willes, First Vice President
Konstanty C . Adack, Senior Vice President
Edward G. Boehne, Senior Vice President
Hugh Chairnoff, Vice President and Lending Officer
Thomas K. Desch, Vice President
Richard W. Epps, Vice President
James F. Gaylord, Vice President
Hiliary H. Holloway, Vice President and General Counsel
W. Lee Hoskins, Vice President and Director of Research
*lra Kami now, Vice President and Economic Adviser
Alexander A. Kudelich, Vice President
Donald J. McAneny, Vice President and General Auditor
G. William Metz, Vice President
Lawrence C. Murdoch, Jr., Vice President and Secretary
William E. Roman, Vice President
Bipin C. Shah, Vice President
Richard L. Smoot, Vice President
Evelyn G. Battista, Human Resources Services Officer and Assistant Secretary
Jack P. Besse, Assistant Vice President
D. Russell Connor, Assistant Vice President
Samuel J. Culbert, Jr., Bank Services Officer
Peter M. DiPlacido, Assistant Vice President
Stanley J. Forst, Director of Computer Applications
Judith H. Helmuth, Operations Improvement Officer
Kathleen C. Holmes, Research Officer and Assistant Secretary
Paul E. Kirn, Jr., Assistant Vice President
Edwin C. Lodge, Statistical Officer
Frederick M. Manning, Chief Examining Officer
Dominic L. Matteo, Payments Mechanism Officer
Robert E. Matthews, Assistant General Auditor
Glennie M. Matthewson, 1 , Assistant Counsel
1
Warren R. Moll, Assistant Vice President
Arthur L. Morath, Jr., Banking Structure Officer
Donald J. Mullineaux, Research Officer and Economist
Stephen M. Ondeck, Examining Officer-Commercial
Joseph J. Ponczka, Fiscal Operations Officer
Lawrence C. Santana, Jr., Assistant Vice President
David H. Scott, Regulations Officer
Anita A. Summers, Research Officer and Economist
Robert A. Wallgren, Examining Officer— Trust
Ronald D. Watson, Research Officer and Economist
Elizabeth S. Webb, Assistant Counsel
*On Leave



36

FEDERAL RESERVE BANK OF PHILADELPHIA

STATEMENT OF CO N D ITIO N
FEDERAL RESERVE BANK OF PHILADELPHIA
End of Year

(000s omitted in dollar figures)

1975

1974

ASSETS

Gold certificate account ....................................................................................
Special Drawing Rights Certificate ............................................................
Federal Reserve notes of other Federal Reserve banks ...................
Other cash ................................................................................................................

$ 667,401
31,000
84,884
6,862

$ 450,111
23,000
81,816
10,164

Loan and securities:
Discounts and advances ..........................................................................
Federal Agency obligations ...................................................................
United States Government securities ..............................................

9,400
356,571
5,092,335

23,235
265,883
4,526,831

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

5,458,306

4,815,949

Uncollected cash items ....................................................................................
Bank premises ......................................................................................................
Operating equipment ........................................................................................
All other assets ......................................................................................................
Interdistrict settlement account ...................................................................

344,775
51,001
2,891
77,023
—
460,296

343,481
30,942
0
67,078
163,620

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

$6,263,847

$5,986,161

Federal Reserve notes ........................................................................................
Deposits:
Member bank reserve acco u n ts..........................................................
United States Government ...................................................................
Foreign ..............................................................................................................
Other deposits .............................................................................................

4,634,985

4,468,137

710,428
544,174
12,342
18,720

864,771
151,723
14,210
28,558

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

1,285,664

1,059,262

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

193,064
65,302

309,618
65,288

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

6,179,015

5,902,305

Capital paid in .............................................................................................
Surplus .............................................................................................................

42,416
42,416

41,928
41,928

Total liabilities andcapital accounts ..............................................

$6,263,847

$5,986,161

Ratio of gold certificate reserve to Federal Reserve note liability

14.4%

10.1%

Total loans and securities

Total assets
LIABILITIES

CAPITAL ACCOUNTS




37

JANUARY/FEBRUARY 1976

BUSINESS REVIEW

EARNINGS AND EXPENSES
Federal Reserve Bank of Philadelphia

(000s omitted)

1975

1974

Earnings from:
United States Government securities ..............................................
Other sources ...............................................................................................

$345,742
1,234

$328,474
7,377

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

$346,976

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

26,891
2,871
1,565

$335,851
23,670
2,295
2,009

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

$ 31,327

$ 27,974

Current net earnings ...........................................................................................

$315,649

$307,877

Additions to current net earnings:
Profit on sale of U.S. Government securities (net) .....................
Miscellaneous nonoperating income .................................................

2,067
125

0
151

Total additions

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

$

2,192

Deductions from current net earnings:
Loss on sales of U.S. Government securities (net) .....................
Loss on foreign currency transactions ..............................................
Miscellaneous nonoperating expenses ............................................

0
11,364
278

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

$ 11,642

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

9,450
306,199

Dividends paid ......................................................................................................
Paid to U.S. Treasury (interest on FederalReserve notes) ................
Transferred to or deductedfrom (- ) Surplus .........................................

$ 2,517
303,194
488
$306,199

$

*After deducting reimbursable or recoverable expenses.




38

151
2,291
1,664
2,254

$

6,209
6,058
301,819

$

2,490
298,993
336
$301,819

FEDERAL RESERVE BANK OF PHILADELPHIA

VOLUM E OF OPERATIONS
Federal Reserve Bank of Philadelphia
Number of pieces (000s omitted)
Collections
Ordinary checks* ...............................................................................
Government checks (paper and card) .....................................
Postal money orders (card) ............................................................
Noncash items ......................................................................................
Food stamps redeemed ...................................................................
Clearing operations in connection with direct
sendings and wire group clearing plans** .................................
Transfers of funds ........................................................................................
Currency counted ........................................................................................
Discounts and advances to member banks .....................................
Depository receipts for withheld taxes ............................................
Fiscal agency activities:
Marketable securities delivered or redeemed .....................
Computerized marketable securities (Book
entry transactions) ..........................................................................
Savings bonds and notes (Federal Reserve Bank and agents)
Issues (including reissues) ............................................................
Redemptions ........................................................................................
Coupons redeemed (Government and agencies) .......................
Dollar amounts (000,000s omitted)
Collections:
Ordinary checks* ...............................................................................
Government checks (paper and card) .....................................
Postal money orders (card) ............................................................
Noncash items ......................................................................................
Food stamps redeemed ...................................................................
Clearing operations in connection with direct
sendings and wire and group clearing plans** .......................
Transfers of funds ........................................................................................
Currency counted ........................................................................................
Discounts and advances to member banks .....................................
Depository receipts for withheld taxes ............................................
Fiscal agency activities:
Marketable securities delivered or redeemed .....................
Computerized marketable securities (Book
entry transactions) ..........................................................................
Savings bonds and notes (Federal Reserve Bank and agents) .
Issues (including reissues) ............................................................
Redemptions ........................................................................................
Coupons redeemed (Government and agencies) .......................
*Checks handled in sealed packages counted as units.
**Debits and credit items.




39

1975

1974

1973

556,136
49,333
9,492
905
125,347

547,080
41,313
9,295
1,007
121,528

545,463
38,052
11,285
963
89,494

573
534
413,140

585
382
377,043

2,185

572
448
380,085
3
2,196

378

431

289

19

16

18

12,375
8,266
615

12,015
8,728
536

12,589
8,609
592

$188,803
18,950
272
3,580
381

$184,597
15,134
268
3,195
254

$164,136
13,433
226
2,698
172

99,742
910,043
3,390
10,556

97,912
914,436
3,227
16,760
10,659

98,938
616,427
3,058
15,502
9,754

12,678

12,808

11,452

37,907

16,379

30,560

601
469
439

671
559
377

680
540
356

2

2,038

business review
FEDERAL RESERVE BANK
OF PHILADELPHIA
PHILADELPHIA, PA. 19105




BUSINESS REVIEW
FEDERAL RESERVE BANK OF PHILADELPHIA
TABLE OF CONTENTS— 1975
JANUARY

APRIL

"Why Not Pay Interest on Member Bank Re­
serves?" by Ira Kaminow
"Should the Fed Sell Its Services?" by W. Lee
Hoskins
Annua! Operations and Executive Changes

"Is There a Future for Economic Man?" by
David P. Eastburn
"The Cost of Buying: It Takes More Dollars
But Less W ork" by John C. Bell
"P h ilad e lp h ia City and School District
Budgets: A Year of Austerity" by William A.
Cozzens

FEBRUARY
"Which School Resources Help Learning? Ef­
ficiency and Equity in Philadelphia Public
Schools" by Anita A. Summers and Barbara L.
Wolfe
MARCH
"Indexing Inflation: Remedy or Malady?" by
Vincent A. Gennaro
" 'Yields' on Checking Accounts Rise In Re­
cent Years"
"Regional Wrap-up '74: Doldrums Descend
On District Economy" by Howard Keen, Jr.
The Fed in Print by Doris Zimmermann



MAY
"Central Banking across the Atlantic: An­
other Dimension" by James M. O'Brien
"Inventory Valuation Adjustments Greatly In­
fluence Corporate Earnings" by Robert Christ­
ian, Jr.
" A Perspective on Stagflation" by John J. Seater
JUNE
"Anatomy of a 'Fiscal Crisis' " by Anthony M.
Rufolo

FEDERAL RESERVE BANK

m
. y i 'f *

"Rising Medical Care Expenditures: A Growing Role for the Public Sector" by Robert H.
Friedman
"Restrictive Labor Practices in Baseball: Time
for a Change?" by Janice M. Westerfield
jULY/AUGUST
"The Battle for Energy Independence: How
Much of a Good Thing?" by Timothy H. Han­
nan
"The Auto Industry: Slowdown in Sales, Stall
in Jobs'' by Clara Prevo
"Forecasting the Economy with Mathematical
Models: Is It Worth the Effort?" by Nariman
Behravesh
SEPTEMBER

"Banking's Capital Shortage: The Malaise and
the Myth" by Ronald D. Watson
"The Dollar at Home and Abroad" by John G.
Bell
"Bank Loan Losses: A Fresh Perspective" by



Stuart A. Schweitzer
"The Fed in Print" by Doris Zimmermann
OCTOBER
"The Fed in a Political World" by David P.
Eastburn
"The Rising Cost of Buying a New Home" by
James J. Bacci
"Slowdowns and Recessions: What's Been
Government's Role?" by Donald L. Raiff
NOVEMBER
"Selective Credit Policies: Should Their Role
Be Expanded?" by Ira Kaminow and James M.
O'Brien
DECEMBER
"Jobs in Philadelphia: Experience and Pros­
pects"