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JULY 1962
BUSINESS
REVIEW
The Foreign Exchange Market
Restoration in Vacationland
FEDERAL
R E SE R V E
BANK
OF
P H IL A D E L P H IA
B U S IN E S S
R E V IE W
is produced in the Department o f Research.
Clay J. Anderson was primarily respon
sible for the article “ The Foreign Exchange
Market,” and D. Russell Connor and J.
Allan Irvine for “ Restoration in Vacationland.” The authors will be glad to receive
comments on their articles.
Requests for additional copies should be
addressed to the Department of Public In
formation, Federal Reserve Bank o f Phila
delphia, Philadelphia 1, Pennsylvania.
THE FOREIGN EXCHANGE MARKET
“ What is the quote on Canadian dollars? I am
market in the United States and some of the
expecting payment in Canadian dollars in about
factors influencing foreign exchange rates.*
60 days, do you think the rate will hold or should
I sell for 60 days future delivery?” Other cus
THE NATURE OF THE MARKET
tomers inquire as to the current quotation on
A foreign exchange market is similar to any
sterling, French francs, and other foreign cur
other market in that it has stock-in-trade, buyers
rencies. This type of conversation is repeated
and sellers, and facilities for bringing buyers and
many times every day in the foreign department
sellers together.
of a large commercial bank.
Many business firms and individuals are in
Institutional structure
terested in foreign exchange rates (the prices
of foreign currencies), and rates are quoted in
The foreign exchange market is not an organized
market such as a stock or commodity exchange.
the financial section of most large metropolitan
There is no single trading place where orders are
papers. A sample of recent New York quotations
executed. It is an over-the-counter market similar
is shown in the illustration. Changes in foreign
to that for Government securities, and transac
exchange rates may decrease (or increase) the
tions are executed over the telephone.
number of dollars received by exporters, owners
The core of the market in the United States
of foreign investments, and others receiving pay
consists of a relatively small number of com
ment in foreign currencies. They may increase
mercial banks and agencies of foreign banks in
(or decrease) the cost of imports, a trip abroad,
New York City. Some of the larger banks in
and other transactions calling for payment in
other financial centers buy and sell foreign
foreign currencies.
exchange and maintain positions in some of the
Payment in international transactions involves
major foreign currencies. The bulk of the foreign
exchanging one country’s currency for that of
exchange business, however, is handled by a
another. Foreign exchange markets provide the
dozen or so large New York City commercial
facilities for such exchanges— for the purchase
banks.
and sale of foreign currencies.
This article deals with the foreign exchange
* For a more com plete analysis, see A la n R. Holm es: "The
New York Foreign Exchange M a rk e t," Federal Reserve Bank of
New York.
3
business review
The larger banks with active foreign depart
ments maintain deposit balances abroad in the
and sellers together. He does not buy and sell
as a principal.
principal foreign currencies and have skilled
United States banks and other foreign ex
foreign exchange traders who do the actual buy
change dealers may also use foreign exchange
ing and selling of foreign exchange. In rendering
markets abroad to adjust their positions. A bank
services to their customers, these banks are
with too much sterling may request its London
constantly engaging in transactions which add
correspondent to sell sterling for dollars. This
to their foreign currency deposits abroad. They
may be the most convenient method of adjust
buy bills of exchange from business firms,
purchase travelers’ checks payable in foreign
ment, especially near the close of the business
day or if there is little demand here for sterling.
currencies, and buy dividend warrants and bond
coupons from United States investors owning
If, on the other hand, a United States bank runs
short of sterling it may buy sterling from or
foreign securities. Sometimes United States banks
through its foreign correspondent.
sell dollars to foreign banks wanting to build up
A United States bank may adjust its foreign
their deposit balances in the United States. Other
exchange position through swap transactions
foreign exchange transactions with customers
tend to draw down their deposit balances abroad.
with a foreign correspondent, the United States
bank crediting the account of its foreign cor
They may sell drafts payable in foreign curren
respondent in dollars and the foreign correspond
cies to importers and to United States investors
ent crediting the United States bank with an
making payment for foreign securities. Purchases
equivalent amount in foreign currency. Under
and sales of a foreign currency seldom com
current
pletely offset each other, with the result that a
demand for foreign currencies in the United
bank’s position may increase one day and decline
States may soon show up in the form of an
the next.
increased supply of dollars abroad; or a demand
practices
of
adjusting
positions,
a
Banks dealing in foreign exchange want to
for dollars abroad may result in an increased
maintain working balances in foreign currencies
supply of foreign currencies in the United States.
sufficient for day-to-day operations, but try to
Smaller banks, which do not maintain balances
avoid excess balances because of the risk of
abroad, can still meet the foreign exchange needs
fluctuations in foreign exchange rates. Frequent
of their customers. Such banks may acquire and
adjustments in foreign exchange positions are
dispose of foreign exchange for their customers
therefore necessary.
through city correspondents which do participate
A bank may turn to other United States banks
directly in foreign exchange markets. Through
to dispose of an excess or cover a shortage in
correspondent relationships, the bulk of foreign
a foreign currency; however, banks do not deal
exchange transactions is funneled to a few large
directly with each other. Instead, they deal with
banks which maintain foreign balances and deal
foreign exchange brokers whose primary func
directly with banks abroad.
tion is to put banks and other foreign exchange
Settlement between United States banks and
dealers with excess positions in touch with those
foreign banks is now made mainly by debits
with shortages. The broker receives a small
and credits to deposit accounts. The dollar has
commission for his service of bringing buyers
become the most widely used currency in inter
4
business review
national transactions, and New York City has
sale in the United States market comes from
become the leading international money center.
several sources. Payment for some of our exports
Consequently, foreign banks that deal actively in
is still by means of drafts drawn on foreign
the major currencies maintain deposits in New
banks and payable in foreign currencies. Such
York City banks, and large United States banks
drafts are sold to United States banks or other
with an active foreign exchange business main
foreign
tain deposits abroad in the principal foreign
foreign currencies are sometimes drawn in pay
currencies.
ment of securities sold abroad and by United
exchange
dealers.
Drafts payable in
States companies remitting interest, dividends,
Stock-in-trade
and profits from overseas branches and sub
A frequent question is, what is actually bought
sidiaries. Foreign tourists and visitors in the
and sold? The answer is foreign currencies or
United States may cash travelers’ checks payable
claims payable in foreign currencies, commonly
in foreign currencies or draw drafts in foreign
referred to in the market as foreign exchange.
currencies under letters of credit. Speculators
The bulk of the volume consists in the transfer
may sell foreign exchange purchased previously
of deposits in foreign currencies from one owner
and,
to another, such as sterling deposits in London
maintain balances in foreign currencies abroad
of
course,
United
States banks which
banks or franc deposits in French banks. Deposit
also sell foreign exchange to meet demands of
transfers are authorized by cable and by mail.
their customers.
Checks, drafts, and coupons payable in foreign
Basically, the demand for foreign exchange
currencies are also bought and sold in foreign
exchange markets.
comes from those needing to make payment
abroad. American importers buy drafts to pay
There are some transactions in foreign coins
for goods invoiced in foreign currencies. This
and paper money. Tourists going abroad some
is still a common method of payment in certain
times buy small quantities of foreign coins and
commodities, such as rubber, jute, and tin, which
currency to use upon arrival pending such time
are often invoiced in sterling, and imports of
as they may conveniently cash a traveler’s check.
Swiss watches which are usually invoiced in
But the volume of transactions in foreign coins
Swiss francs. Other sources of demand in the
and currency is small.
United States for foreign exchange are investors
desiring to pay for securities purchased abroad;
Sources of demand and supply
United States companies remitting interest, divi
The fact that a large part of our exports and
dends, and profits on funds borrowed from
imports is invoiced and paid in dollars means
abroad;
that a large part of the foreign exchange trans
agencies of foreign banks desiring to return
actions involved in our foreign trade bypasses
funds previously transferred here; and specu
the United States market. The exchange of
lators who buy foreign currencies expecting to
foreign currencies for dollars is made mostly in
sell them later at a higher price.
foreign exchange markets abroad rather than
in the United States.
The supply of foreign exchange offered for
American tourists traveling abroad;
The mechanics of making payment should not
obscure the fact that, except for unilateral trans
fers,
international transactions result in the
5
business review
exchange of one currency for another. United
importer, on the other hand, would find United
States payments abroad supply dollars to for
States goods cheaper in that he could get $3.00
eigners— they result in the conversion of dollars
worth for a pound sterling instead of $2.80.
into foreign currencies or transfer the ownership
of dollars to foreigners. Receipts from abroad
Countries
belonging
to
the
International
Monetary Fund agree to maintain market rates
(foreign payments to the United States) result
within a range of 1 per cent above and 1 per
in an increase in foreign balances owned by
cent below the established par values of their
Americans or a reduction of dollar deposits
currencies.
owned by foreigners. Therefore, a net deficit in
the United States balance of payments tends to
rates of their currencies within even narrower
limits. The par value of sterling is $2.80, and
build up deposits owned by foreigners in United
the upper and lower limits are fixed at $2.82
States banks; a net surplus tends to build up
and $2.78. The fact that most countries belong
our deposits abroad in foreign currencies.
to the I.M.F. and have agreed to stabilize the
Some
countries
maintain
market
value of their currency means that most foreign
Foreign exchange rates
exchange rates fluctuate only within narrow
Foreign exchange rates are prices— prices of
foreign
currencies
expressed in terms
of
limits.
a
country’s own money. Recent New York quota
FORWARD EXCHANGE
tions as shown in the illustration were: pound
The major foreign currencies can be purchased
sterling $2.8085, Canadian dollar $0.9244, French
and
franc $0.2041, and German mark $0.2506
( “ spot” )
sold
for
future
delivery.
as
well
Futures
as immediate
transactions
are
A foreign exchange rate reflects demand and
commonly referred to as forward exchange.
supply forces in the market for a particular
The forward exchange market is similar to the
foreign currency. Rates fluctuate, often during
futures market for commodities. Foreign cur
the course of a business day as the demand-
rencies can be bought and sold for delivery at
supply relationship shifts. An increased demand
a specified future date and at a price agreed
for sterling may cause the price to rise, say,
upon when the contract is made. Purchases and
from $2.80 to $2.81; or an increase in supply
sales of major foreign currencies for delivery
in the New York market might lower the price
in 30, 60, 90 days, and even up to six months
from $2.80 to $2.79.
Wide fluctuations in foreign exchange rates
are common in the United States market. Occa
sionally, futures transactions for longer terms
increase risk, and discourage trade and inter
are negotiated, but foreign exchange dealers
national financial transactions. To illustrate: a
enter into such contracts only when they can
jump in the price of sterling from $2.80 to $3.00
arrange to hedge their position.
would tend to raise the cost of imports from
England even though commodity prices there
Uses of the forward market
remained the same. A United States importer
The forward exchange market makes it possible
contracting
totaling
for those engaging in international transactions
100,000 pounds sterling would have to pay
to protect themselves against the risk of exchange-
$300,000 instead
rate fluctuations. To illustrate: an importer may
to
buy
6
of
English
goods
$280,000.
The
English
business review
contract to buy goods from an English exporter
loss on the forward transaction. If, on the other
for 1,000 pounds sterling which at the current
hand, the price declines, the gain on the forward
rate of exchange would amount to $2,800; if,
transaction would offset a loss on its sterling
however, the price of sterling has gone up by
holdings acquired at a higher price. Dealers also
the time the goods arrive and payment is to be
use the spot market to hedge their position in
made, the cost will be more than the importer
forward contracts.
anticipated. When he contracts to buy the goods
United States purchasers of foreign securities
he could protect himself against the exchange-
may cover the exchange risk involved through
rate risk by buying at the current forward rate
the forward market. When interest rates on
1.000 pounds sterling for delivery at the time he
short-term investments are higher abroad, as
is to make payment for the goods. An exporter
they have been recently, there is an inducement
who has priced his goods in a foreign currency
to invest in short-term foreign assets to take
to yield a certain number of dollars may like
advantage of a higher yield. A United States
wise find his dollar proceeds reduced because
investor buying 90-day British Treasury bills
of a drop in the price of the foreign currency.
would have to buy spot sterling to pay for them.
He can protect himself by selling this foreign
At maturity 90 days hence, he would receive the
currency for future delivery or, in the ter
face value of his bills in sterling. If in the
minology of the market, by selling forward
meantime the price of sterling has declined, he
exchange.
would suffer a loss when converting his sterling
An exporter may not be able to determine in
into dollars. The investor could protect himself
advance the exact date his goods will be shipped
and therefore when he will have his foreign
against loss by selling sterling for 90 days future
delivery at the same time he purchases British
Treasury bills.
draft for sale. Importers also are often unable
to determine the day on which they will need
to make payment abroad. Because of such un
Speculators use the forward exchange market
not to hedge against the risk of exchange-rate
certainties, foreign exchange dealers enter into
fluctuations but to profit from them. A speculator
forward contracts giving the seller or buyer the
would buy forward exchange when he expects
option of offering or taking delivery on his
future contract at any time within a period of
the rate to rise, hoping to sell the currency or
one or two weeks. Rates on option contracts are
He would sell for future delivery (sell short) if
likely to be a shade above or below comparable
he expects the price to fall. If the price does
futures maturing on a fixed date.
decline, he can acquire the currency for delivery
at least close out his forward contract at a profit.
Commercial banks and other foreign exchange
at less than his selling price. Willingness of
dealers use the forward market to hedge their
speculators to take risk makes it possible for
positions in foreign currencies. If a bank buys
others to cover their risk in the forward market.
100.000 pounds sterling in the spot market, it
can cover its position by selling sterling forward.
Relation between spot and forward rates
If the price of sterling rises, and spot and
Unless the spread between spot and forward
forward rates move together, the gain on hold
rates for a foreign currency is about equal to
ings of 100,000 pounds sterling would offset the
the difference in comparable interest rates in the
7
business review
United States and the foreign country, there is
Interest-arbitrage transactions, although op
an inducement to shift funds to take advantage
erating in that direction, do not always maintain
of the higher rates. For example, if the spot
equality between interest-rate differentials and
price of sterling is $2.81 and three-month for
the cost of covering the exchange risk. Some
ward sterling is $2.79, the discount on forward
investors are usually willing to buy higher-
sterling is equivalent to 2.85 per cent interest
yielding foreign securities without covering the
at an annual rate.* If the current yield on three-
exchange risk. Speculators, as we have seen, buy
month Treasury bills is 3 per cent and the yield
and sell foreign exchange hoping to profit from
on three-month British Treasury bills is 5.85 per
rate fluctuations. Moreover, many investors in
the United States, either because of legal restric
cent, the cost of hedging by selling 90-day
absorbs the
tions or unfamiliarity with foreign exchange
difference in yield. A United States investor who
practices, are unable or unwilling to engage in
covers his exchange risk would find the net
interest-arbitrage transactions. For reasons such
return on British bills the same as that on United
as these, the volume of arbitrage transactions is
forward sterling (2.85 per cent)
States bills. A 6 per cent yield, however, on
often insufficient to maintain the spread between
three-month British bills would enable a United
spot and forward rates at so-called interest-rate
parity.
States investor to cover his foreign-exchange risk
and get .15 per cent higher return on British
bills. Under these circumstances, United States
FOREIGN MARKETS IN DOLLARS
investors could obtain a higher net return on
A recent development is that some foreign banks
British bills, and short-term funds would likely
accept deposits denominated in dollars, and to
flow from the United States to England.
some extent these deposits serve as a means of
An outflow of funds to take advantage of the
payment. The most important “ foreign market”
higher net return on British bills would tend to
in dollars is in London, with smaller markets in
eliminate the profit opportunity. As already
some of the financial centers of Western Europe
indicated, a United States purchaser of British
and in Canada. The market in Europe is often
bills would buy spot sterling to pay for the bills
referred to as the Euro-dollar market.
and sell 90-day forward sterling to cover his
A distinguishing feature of foreign markets
exchange risk. The resulting increased demand
for dollars is that banks accept deposits de
for spot delivery and increased supply of for
nominated in dollars and make dollar loans to
ward sterling would widen the spread between
customers. In the terminology of the market,
the two rates and increase the cost of hedging
foreign banks “ accept” deposits denominated in
an investment in British Treasury bills. The out
dollars and “ place”
flow of short-term funds would tend to raise
customers. In short, deposits in foreign banks
interest rates here and lower them in England.
denominated in dollars are transferred from
Thus, interest-arbitrage transactions narrow the
owner to owner, and borrowed and lent much as
differential in interest rates and widen the spread
deposits in United States banks.
between spot and forward rates.
»
$2.81— $2.79
---- ------- X 4 = 2.85% at an annual rate.
8
(lend)
dollars with their
Several types of transactions are fairly com
mon in foreign markets for dollars. Foreign
importers may borrow dollars from a foreign
business review
bank to pay United States exporters. Sometimes
States on time deposits. It has been estimated
importers borrow dollars to pay for exports from
that branches of United States banks hold a
countries other than the United States.
substantial
Foreign markets for dollars developed, in
part
of
total
dollar
deposits
in
London. Their dollar deposits are used to make
part, because they offer certain advantages to
loans to business firms wanting dollars, and to
importers and borrowers. For one thing, these
make advances to their head offices in the
markets may serve as a supplement to lines of
United States.
credit with United States banks and thus enable
CONCLUSIONS
foreign borrowers to obtain more dollars. Resi
dents
of
Communist
countries
have readier
Foreign exchange markets are an integral part
access to dollars in foreign markets than in
of the modern world economy. There is no single
the United States. International differences in
monetary unit that is generally acceptable in
interest rates may enable borrowers
to get
international transactions. As a result, settlement
dollars more cheaply in foreign than in United
of such transactions usually requires exchanging
States markets.
one nation’s currency for another’s. Foreign
Foreign owners of dollars also derive advan
exchange markets, in which foreign currencies
otherwise, they would not offer their
may conveniently be bought and sold, promote
dollars in foreign markets. Foreign banks some
trade and financial transactions among countries.
tages;
times pay higher rates on deposits than United
Even though foreign exchange markets facili
States banks. Commercial banks in the United
tate settlement, they do not alter the basic fact
States are prohibited from paying interest on
demand deposits and the ceiling on time deposit
that international transactions are essentially an
rates is frequently below rates paid abroad.
balance-of-payments surpluses tend to accumulate
exchange of goods and services. Countries with
Another advantage is that rates on Euro-dollar
deposit balances in countries with deficits. In
deposits are commonly quoted in four time
effect,
classifications: call, seven-day, one-month, and
goods, services, or capital for deposits in foreign
three months. This practice is especially attrac
banks, or other foreign short-term assets. Foreign
tive to owners of dollars wanting a time deposit
for only a short period.
are not of value in themselves. They are of
the surplus countries
are exchanging
deposits and short-term investments, however,
States banks
real value only to the extent they meet a need
recently began participating in the Euro-dollar
for working balances and monetary reserves,
Foreign
branches of
United
market. These branches have usually paid more
or can later be used to acquire goods and
on dollar deposits than rates paid in the United
services.
9
RESTORATION IN VACATIONLAND
Vacation time is at hand, and what is more
Seashore resorts in New Jersey and Delaware
delightful than a cottage at the shore or a cabin
were hit hard by the March, 1962 storm which
in the hills! Thousands go down to the sea where
caused 21 casualties and over $100 million of
the waters surrender reluctantly to the land,
property damage. Unfortunately, most of the
leaving long stretches of sand alternately washed
home owners who suffered partial or complete
and dried in flowing and ebbing tides. Other
destruction of their properties were not covered
thousands go up into the mountains, where the
by insurance against water damage, which was
landscape is laced with placid lakes and rippling
apparently the greatest cause of loss. Damage to
streams. The ideal vacationlands are where land
public property is compensable through several
and water meet under sunny skies and gently
channels, but available funds fall far short of
blowing winds.
needs.
Where land and water meet, however, great
Our pre-season survey of the resort business
danger lurks when Nature gets angry. High
shows prospects in the Poconos as good or better
winds, high tides, and flash floods bring destruc
than usual, but in some sections of the seashore
tion and death when vacationlands are visited by
optimism is tempered with caution. Though
hurricanes or furious nor’easters. In 1954, Carol
remarkable progress has been made in recon
struck a blow at New England. In 1955, Diane
struction of storm damage to rental housing,
brought devastation to the Poconos. This year
boardwalks and associated facilities, early vaca
a mad nor’easter wrought havoc on our nearby
tion shoppers were loath to sign up for advance
Delaware and New Jersey resorts. Though the
reservations and were more disposed to settle for
damage to the stricken areas is terrifying, it is
week-ending. A more complete story of the winter
amazing how quickly they recover.
storm and the summer’s prospects follows.
10
business review
THE UNFINISHED TALE OF “ CAT 3 1 ” *
CAT
31,
cious
but once in 80 years. First, the moon was new—
the
capri
a lunar phase that causes high tides. Second, the
nor’easter
low-pressure system responsible for the precipi
wickedly
6-8,
tation brought with it winds gusting up to
1962, is still a
72 m.p.h., and these whipped the tides still
continuing story.
higher. Third, turbulence in the upper air cur
Its
rents prevented the low-pressure system from
of
March
waterlogged
an
following its customary course out to sea and
unfinished tale of
instead held it along the coast continuously for
immense and as yet not fully measured costs.
three days.
wake
trails
Its aftermath involves past, pending, and pro
Each succeeding tide flooded higher than the
posed legislation; construction in progress, and
one 12 hours earlier. In the words of one eye
controversy
witness, “ The tide just couldn’t seem to get back
in
prospect;
and
governmental
agencies at all levels. Banks, insurance com
out to sea, and finally the water just overran
panies, public utilities, the American Red Cross,
everything.” Water intrusion was noted from
and private citizens have intertwining roles. The
New England to the Carolinas, in lesser degree
middle of the narrative is just now beginning;
at the extremities, and with its most devastating
an end to the story may not be written until
focus on New Jersey and Delaware.
generations have passed, depending on the twist
the tale takes.
New Jersey hardest hit
There are few final and accurate statistics avail
Born in innocence
able to illustrate the enormity of the storm loss
The weather forecast on Monday, March 5, for
in New Jersey. The several sources offering
Atlantic City and vicinity read: “ Cloudy today
appraisals differ in detail, and much enumerating
and tonight with a chance of some rain develop
is still taking place. But by making judgments
ing this evening. Mostly cloudy and cooler on
and projections of surveys compiled by various
Tuesday (March 6th ).” But the predicted rain
agencies involved,f these tragic numbers come
of Monday night also brought with it snow, sleet,
to light:
and wind. Flood tides unexpectedly rose 10 feet
Private loss
above normal, and residents soon understood
14 persons killed, more than 1,300 injured
that something unusual was happening.
What transpired was a coincidence of three
or ill.
1,360 dwellings, 579 other buildings lost or
meteorological phenomena, estimated to occur
totally destroyed; 14,000-plus dwellings and
* " C A T 31" derives fro m insurance term in o lo g y. The N a tio n a l
Board of Fire U n d erw riters designates a disaster a "c a ta s tro p h e "
if the insured dam ag e to fixed properties, in any one state, is
estim ated to be in excess of $1 m illio n . It also assigns a serial
num ber to the catastrophe. This p ractice, begun in 1949 with a
hurricane in Texas, has c a rried through one 99-number cycle and is
now in the second such series. The storm of March 6-8, for New
Jersey, was thus term ed "C a ta s tro p h e # 3 1 ," in e vita b ly shortened
to " C A T 31."
buildings damaged.
Upwards of 40,000 insurance claims, estit Including the Division of C iv il Defense and o ther New Jersey
agencies; U. S. A rm y C orps of Engineers and o ther federal
agencies; banks, p u b lic utilities, insurance companies; and an
excellent human co m p ila tio n by the Red Cross.
11
business review
mated in mid-June to result eventually in
payments in excess of $10 million.
Public
utilities
expenditures
Bureau term that covers losses ranging
between $500,000 and $5 million.
for
service
More than 2,600 insurance claims— no es
restoration and replacement of property and
timate of eventual payments.
equipment, more than $2 million.
Red Cross expenditures for individual and
Red Cross expenditures for individual and
mass care, $70,000 including grants-in-aid
mass care, $650,000 including grants-in-aid
for dwellings and furnishings, $45,000.
for dwellings and furnishings, $400,000.
Over-all private loss, Delaware: initially es
Over-all private
timated at $11.2 million, now believed to
exceed $15 million.
loss,
New
Jersey:
$45
million-plus.
Public loss
Public loss
It is not now feasible to apportion public
loss
into
the many
categories
affected.
Over 90% of the private and public loss in
Delaware is confined to one county— south
Some “ loss” is final, in that it may never be
ernmost Sussex.
restored; some “ loss” represents repair and
Over-all public loss, Delaware: $20 million.
replacement costs; some “ loss” represents
diversion of funds, etc. Yet it can fairly be
The second shock
said that the great area of public loss in New
As the initial shock of CAT 31 receded along
Jersey concerns beaches and their protective
with the flood waters, property owners began to
works— some 70% of the total.
assess their losses and marshal their assets. They
Over-all
public
loss,
New
Jersey:
$35
million-plus.
searched out their insurance policies . . . and
then the second shock of the storm poured over
many of them. Evidently, if they read their
Delaware suffered proportionately
policies right, the great bulk of damage to their
Delaware sustained much less storm damage
homes, caused by wave-wash, tidal water, flood
than New Jersey. But merely to list naked num
ing, was not covered. Water damage was speci
bers would overlook the fact that Delaware is
fically excluded. Thus begins a lengthy chapter
little more than one-fourth the size of New
in the Tale of CAT 31.
Jersey, and that compared with 100 miles of
As policyholders soon realized to their dismay,
exposed shoreline in New Jersey, Delaware has
homeowner-type
only 55 miles exposed. In relative terms, Del
tended coverage, embraced about everything but
insurance
policies,
with ex
aware also suffered grievously. (Statistics are
water damage. Losses from fire, explosion, fall
subject to the same qualifications as those for
ing objects, wind damage are covered. Even
New Jersey.)
small boats roofed over are “ covered.” Compre
Private loss
12
hensive automobile insurance covers auto loss
Seven persons killed.
for whatever reason. “ Wet marine” policies cover
316 dwellings, 25 farm buildings, 175 other
boats, docks, piers, bridges from water damage.
buildings lost or totally destroyed; 3,600-
But when it comes to fixed property— homes—-
plus structures of all types damaged.
only a wave-wash endorsement covers water
“ Code 6” crop damage— a U. S. Weather
damage, whether wind-driven or rising.
business review
WAVE-WASH ENDORSEMENTS
Insurance coverage against water damage to
fixed property goes back some 20 years. Follow
ing the hurricanes on the East Coast in 1944,
insurance companies offered protection against
water damage in the form of endorsements to
regular policies. But these were necessarily ex
pensive, premiums ranging from $1.50 to $4.50
per $100 coverage, depending on the location of
the property and other factors. Usual homeowner policies affording fire and extended cov
erage, but not water damage, averaged about
50 cents per $100 coverage. The few wave-wash
endorsements taken out then were soon lapsed
by the policyholders when succeeding years
passed flood-free.
In 1951, floods in Kansas and Missouri caused
insurance companies to re-examine their position
on flood insurance. An engineering firm was
hired to carry out a technical phase of the study.
Based on the engineers' findings, it was decided
that insurance against the peril of floods could
not successfully be written.
The question lay dormant until August, 1955,
when floods caused severe damage in the North
eastern states. Again, insurance companies em
ployed engineers to re-check their position, and
the study was broadened to investigate meteor
ological and other causative factors.
Influenced by the results of these engineering
studies, insurance companies concluded that "spe
cific flood insurance covering fixed-location prop
erty in areas subject to recurring floods could
not feasibly be written because of":
1. The certainty of loss inherent in floods (as
opposed to the "uncertainty" or accidental loss
in regard to fire, explosion, falling objects, etc.).
2. The catastrophic nature of floods.
3. The reluctance or inability of property
owners to pay the high premiums necessary to
make such insurance self-sustaining.
These reasons have latterly been supplemented
by these adducements:
4. It is not practicable to include flood insur
ance with other coverage on fixed-location
property generally, because while other natural
disasters are unpredictable as to locale, floods do,
and will, recur in a given area whenever condi
tions there are causative.
5. Mandatory flood coverage for all property
owners, including those beyond the vulnerable
area, would manifestly be unfair, and is not con
sistent with a prime principle of insurance—
namely, to spread the risk only among those sub
ject to the risk.
Federal insurance— alive, but barely
Insurance aid from the Federal Government
offers little immediate promise to victims of CAT
31, although such insurance is the law of the
land. In 1956, Congress passed the Federal Flood
Insurance Act, setting up the Federal Flood
Indemnity Administration for just such emer
gencies as the storm of March 6-8. But Congress
did not appropriate funds to activate the pro
gram then or since.
Disasters subsequent to 1956 have caused
periodic attempts to resuscitate FFIA. The latest
attempt is a. resolution of the Conference of
Governors of Atlantic Coast States, meeting in
Atlantic City, April 18, petitioning President
Kennedy to ask the Congress to revive FFIA. The
resolution is now under study, and is another
unfinished chapter in the story.
Current insurance status
Over two-thirds of the insurance claims arising
from CAT 31 have been closed; but many of the
remaining claims are sizable and are the subject
of dispute. The crux of the controversy is wind
damage
(covered)
versus water damage
(ex
cluded). Who is to say how much wind damage
was done to a house before it washed out to
sea?
All parties concerned agree that some
claims eventually will go to litigation, that some
will still be unresolved at year’s end.
Very few wave-wash endorsements were in
effect in New Jersey at the time of the storm;
an officer of a large insurance company says
“ surprisingly few.” He finds this not at all dis
13
business review
turbing, for, despite their high cost, wave-wash
additional monies to OEP. Half of the $10
endorsements have “ proved unprofitable.”
million is earmarked for reimbursement of the
Insurance companies have found no new cir
U. S. Army Corps of Engineers, the remaining
cumstances in CAT 31 to alter their decision
$5 million for municipal projects employing
that flood insurance cannot be privately written
private contractors or state or municipal em
successfully. They hold that if flood insurance
ployees.
is to be written it must be Government-sub
sidized.
Federal aid— Office of Emergency
Planning
In the public-loss sector there are more avenues
Ten million dollars falls far short of the ap
plications for OEP aid from New Jersey, let
alone those from Delaware and other affected
areas. By June 15, New Jersey had processed
125 applications for municipalities, exclusive of
Corps of Engineers’ work, totaling $22.5 million.
to financial reimbursement for storm damage
Delaware had by then processed 61 applications
than in the private area. Many local, state, and
of both kinds, totaling $4.4 million. At mid-June,
federal instrumentalities contribute toward re
New Jersey had received about $2.5 million
lief, restoration, and repair of public facilities.
from OEP; Delaware nothing. Some local offi
In the van of these agencies is the Office of
cials feel that Congress has no alternative but
Emergency Planning.
to vote the additional funds on grounds that
When the President has declared a disaster
there is no difference in the kinds of projects
area to exist, OEP can provide federal financial
already paid for and those for which there are
assistance to state and local governments for
no current funds.
these purposes:
Health and sanitation emergency measures.
Federal aid— Small Business
Administration
Emergency repairs and temporary replacement
Another federal agency that can aid in disasters
of streets, roads, bridges, dikes, levees, and
is the Small Business Administration. It cannot
drainage facilities.
give funds but can lend funds at 3 per cent in
Emergency repairs and temporary replacement
terest to individuals, businesses, and nonprofit
of public buildings, plants and equipment.
organizations for the purposes of repair and re
Protective measures and debris clearance.
There are two key words that limit OEP’s
placement of homes, furnishings, buildings, fix
endeavors: the first is “ public,” which in general
tures, machinery and equipment, and inventory.
prohibits repair to private facilities. The second
Commercial banks, at their option, may or may
is “ temporary,” which has come to mean that
not participate in these loans.
extent necessary to provide time for more perma
Soon after CAT 31 struck, the SBA opened
nent repair and not to construct better facilities
local offices within the affected area, staffed by
than existed prior to the disaster.
its own employees and, in large number, by
Following CAT 31, OEP allocated $10 mil
personnel on loan from commercial banks and
lion to New Jersey; nothing to Delaware. This
the Federal Reserve Bank of Philadelphia. Under
allocation virtually exhausted OEP’s funds, and
its Disaster Loan Program, the SBA, as of June
as of mid-June the Congress has yet to vote
14, had approved 862 applications from New
14
business review
Jersey and Delaware for loans amounting to
Government will do. The problem is one of
$9 million. Of these, 343 were for homes ($1.1
simultaneous equations with each factor now
million) and 519 for businesses ($7.9 million).
unknown or at best an approximation.
The great majority of these applications was
from
New
Jersey.
The
largest
single
loan
Attempts at answers
($585,000) was made to Steel Pier, Atlantic City.
The State of New Jersey, most damaged of all
Commercial bank participation in these loans
the states by CAT 31, among other things, has:
is estimated to approximate 2 per cent of the
Extended its horse-racing season, earmarked
total $9 million. One reason for this modest
revenues from the extension to storm-damage
participation is that the purpose of the SBA is
repair.
to make loans that private lenders will not make.
Voted a “ Special Beach Erosion Fund” of
Banks find SBA home loan participations not
$4 million, to provide matching funds to
particularly attractive because of the 3 per cent
municipalities, out of the general treasury.
maximum interest charge imposed by the SBA,
Voted a “ Storm Relief Fund” of $2.5 million,
and sometimes because of the lengthy terms of
to provide matching funds to municipalities,
such loans. Banks may charge as much as 6 per
out of the general treasury.
cent on their share of SBA participations for
Voted to waive local financial participation in
business loans, and much of New Jersey and
the special beach erosion and storm relief
Delaware banks’ current participation is concen
funds if 10 per cent or more tax ratables were
trated in the business category.
lost.
State and local financing
Empowered the Commissioner of Banking to
make it possible for financial institutions to
State and local sectors lend themselves least
ease mortgage terms in several respects for
readily to accurate description and statistical
properties within the disaster area.
tabulation. Each day seems to bring a changed
Similarly, local governments have disbursed
plan, a revised total, an amended ambition, a
budget surpluses to begin storm repair, have
different schedule.
diverted funds from other projects to storm
This is not a criticism. On the contrary,
repair, have begun to issue bonds, and have at
as far as they could the states have moved
tempted special assessments. But these measures,
with alacrity and objectivity, and generally so
as those of the state, serve only to underscore
have the municipalities. But their interdependence
the root question: Ultimately, where’s the money
makes it difficult to resolve many issues stem
coming from?
ming from the storm. The basic question of
whether to be content with just essential, and
One clear area
temporary, restoration or whether to extend re
Among the concerns of the Federal Reserve Bank
storative projects to a permanent basis cannot
of Philadelphia is the effect of the storm on
be answered independently by either a state or
commercial banks within the Third District.
a municipality. What a municipality is able to
Precise evaluations could be made, and the status
do depends on what its state will do. What a
of the banks is clear. The banks suffered only
state is able to do depends on what the Federal
minor physical damage.
Determined
and in
15
business review
some instances heroic efforts by bank officers
individuals and by financial institutions other
and employees kept the banks in service almost
than commercial banks. While there may be
without interruption throughout the storm.
more loss in this sector, judgment bonds accom
Commercial banks have little exposure to loss
on mortgaged properties in the affected areas.
panying mortgages offer substantial protection to
mortgagees against abandonment of property.
Commercial bank policy concerning mortgages
Direct loans by commercial banks were some
on shore-front property is conservative— it re
what higher than the normal seasonal upturn
quires substantial
ability to
because of the storm but well within the banks’
repay. Surveys by state banking authorities and
individual banks indicate that while some stretch
own lending capabilities. (Borrowings by mem
ber banks from the Federal Reserve Bank of
equity,
assured
out of mortgage terms may be expedient, there
Philadelphia were nil.) There was no significant
will be little eventual loss.
or sustained run-off of deposits following the
There is general agreement that the bulk of
storm; most banks showed a higher, not a lower,
mortgages on shore-front properties is held by
deposit structure for comparable dates in 1961.
RESORT PROSPECTS
In addition to the first shock of the big storm—
on its good
the loss of life and property destruction— and
behavior,
the second shock, the discovery that much of
busy vacation
a
the damage was not covered by insurance, was
season is an
a third potential shock— the loss that might be
ticipated. On
suffered in the resort business, so important to
the basis of
the seashore economy. That question was a point
early
in-
of special inquiry in our early-season survey just
quiries and bookings, the Poconos should have
completed.
one of the best, if not a record, year.
Though Cat 31 left in its wake shifted shore
lines, twisted
boardwalks,
weakened bridges,
Reconstruction progress encouraging
teetering buildings, and roadways buried under
Storm-damaged areas are making a remarkable
tons of sand, “ operation clean-up” wrought un
recovery. There are exceptions, but that is the
believable restoration in the months succeeding
over-all picture at the seashore. In places where
the catastrophe. Just prior to the opening of the
property
season, bankers and businessmen along the coast
needed repairs were completed in short order.
line reported that sufficient progress had been
But where damage was more basic, it is taking
made to accommodate the expected vacationers.
much more time for complete restoration.
damage
was
relatively
superficial,
Early reservations were somewhat slow but it is
Housing accommodations are said to be in
believed that the inevitable hot and humid days
fairly good shape even in some of the hardest-
may bring near-capacity crowds as usual.
hit areas. All-out efforts are in progress to make
In the Poconos, where the weather has been
16
beach-front
facilities
more
attractive to this
business review
year’s vacationers who will be arriving for their
Advance reservations show mixed trend
annual sojourn of “ fun in the sun.” Washed-out
Proprietors of hotels and motels in our leading
bathing beaches have been restored in some
mountain resorts report that they had more
places; in others, work is being pushed as rapidly
early inquiries this year and that advance reser
as possible. Most resorts have either rebuilt or
vations have shown a sizable increase over pre
Finishing
season 1961. Given a good break on weather,
touches are being applied now to get adjacent
the current season could be among the best
are
rebuilding
their
boardwalks.
stores and amusement facilities in better shape
in their experience. Demand for housekeeping
for the summer’s influx of visitors. Heavy en
cottages has been much more active than a
gineering projects like rebuilding flattened sand
year ago, with some places finding their listings
dunes
break
nearly filled for July. Reports from both adult
waters have been the real time-consumers in this
and children’s camps in the Poconos are opti
tremendous clean-up job.
mistic. Those operated for the “ small fry” are
and reconstructing jetties
and
looking toward capacity operations again this
Transient business looks good
year.
Some fine early-season weather seems to have
Advance reservations are the weakest in shore-
prompted heavier week-end traffic to many of
resort business as a whole. Vacationers have
our resort areas this year. Even before Memorial
been looking over their old “ stamping grounds”
Day, popular vacation spots in the mountains
with what seems like an unusual amount of de
and at the seashore were playing host to steadily
liberation this year. In many places, early in
increasing numbers of short-staying guests. In
quiries were about on a par with those in other
the
overnight
years. But considerable hesitation has been in
bookings increased sharply at motels and hotels.
evidence when it came to making firm commit
weeks following
that holiday,
Patrons in restaurants once more were standing
ments in areas of the seashore not restored to
in line for service. And in many places proprie
their pre-storm status. Wherever reconstruction
tors of gift shops and other retail stores spoke
has been completed, landlords and realtors say
of being impressed by their growing volume of
that advance bookings are in good shape.
business.
These pre-season visits necessarily were only
Rates a little higher in some places
two-day affairs because both Memorial Day and
Although rate changes do not appear to have
Fourth of July came at mid-week this year.
been pronounced anywhere in our vacationland,
Nevertheless, over several recent weekends a
some “ big name” places in the Poconos report
number of resort areas were reporting traffic
small increases this season. In some cases they
congestion and a volume of business very nearly
reflect higher operating costs, in others they are
comparable to the three-day affairs which came
intended to help cover the expense of improved
in other years. Most bankers and businessmen
facilities. Most of the advances are said to affect
seem to feel that the spending patterns of these
hotel and motel rates.
short-staying vacationers are about in line with
A heavy demand over weekends seems to have
those of 1961 and former seasons noted for the
prompted motels in some shore resorts to go to
excellent volume of their resort business.
peak-season rates somewhat earlier than usual
17
business review
this year. Increases in rates for other types of
a few new or expanded motel facilities. Cottage
seashore accommodations
construction in some places seems to have con
have not been re
ported. Nor are reductions contemplated at this
tinued at a moderate pace. One of our larger
time, except possibly in the case of older guest
seashore communities also added to its roster
houses the thought is expressed that concessions
of motels, but cottage building in our whole
might be needed to compete successfully with
shore resort area was of little consequence this
what some of the newer facilities have to offer.
year. Too many houses, both owner-occupied
and for rent to vacationers, needed to be put
Length of stay a little shorter
back together or moved to new foundations after
The long-term trend toward shorter reservation
the storm. Repairs to torn-up boardwalks and
periods but more frequent visits continues very
shattered store fronts accounted for the balance
much in evidence this season. In recent years
of building activity in the heavily damaged
coastal resorts.
vacationers have demonstrated a preference to
use their more liberal time allowance to go more
places and cover more ground than was the
1962 Resort business hard to predict
custom a decade or so ago. The almost meteroic
rise in motels has been one important factor;
It is hard to predict a full season’s business on
the basis of the pre-season performance of week
continuing improvement in highways leading to
end vacationers. Even advance reservations don’t
vacationlands has been another. And now a third
always give too clear a picture. This year,
reason why people lean toward a shorter stay is
largely because of the storm damage at shore
concern over weather.
resorts, it is especially difficult to make a reason
Our seashore resorts in particular note the
ably accurate forecast at this time. Pocono
increasing reluctance of vacationers to take up
Mountain resorts see an excellent July virtually
residence for more than two weeks at a time.
assured. And several of our seashore vacation
The terrific beating some of these places took
spots are looking at that month with a consider
from last winter’s storm seems definitely to
able degree of confidence.
have played a part in decisions to make shorter
Elsewhere along the coast a feeling persists
stays this year. Hotels and motels have grown
that peak-season business is coming somewhat
accustomed to
one- or two-week reservation
later than usual this year. As seen now, early
periods and they may not see too much difference
July may be off somewhat from a year earlier.
this year. The real difference may be felt in the
But businessmen in these seashore areas recover
cottages, where reservation periods generally run
ing more slowly from their storm damage expect
from three weeks to a month or more.
vacation spending to pick up as the season pro
gresses.
They
are
counting
on
late-summer
Building activity accents repairs
business to help make up for what appears to
Several Pocono Mountain resorts can boast of
be a late start.
18
F O R TH E R E C O R D . . .
Third Federal
Reserve District
United States
Per cent change
Per cent change
Factory*
Department Storef
Employ
ment
Payrolls
Per cent
change
May 1962
from
Per cent
change
May 1962
from
mo.
ago
mo.
ago
Check
Payments
Sales
Stocks
Per cent
change
May 1962
from
Per cent
change
May 1962
from
Per cent
change
May 1962
from
mo.
ago
mo.
ago
mo.
ago
S UM M ARY
May 1962
from
mo.
ago
year
ago
5
mos.
1962
from
year
ago
May 1962
from
mo.
ago
year
ago
5
mos.
1962
from
year
ago
LO CA L
CH AN GES
MANUFACTURING
Electric power consumed.......
Man-hours, total*..................
Employment, to tal....................
Wage income*........................
CONSTRUCTION**
COAL PRODUCTION
+
TRADE***
Department store sales............
Department store stocks...........
+ 1
+ 3
BANKING
(All member banks)
Deposits.................................
loans......................................
Investments.............................
U.S. Govt, securities..............
O th er...................................
Check payments......................
+ 3
0
0
0
+ 5
+
+
+
+
1
0
1
1
1
4
7f
9
4
2
8
16
8
+ 13
+ 4
+ 2
+ 8
+25
+ 14
+ 9
+ 8
+ 6
+
+
+
+
+
+
+
+
+
+
+
+
5
4
8
9
7
9t
0
+ 9
+ 12
0
+ 4
+ 4
+ 14
+ 4
- 1
+
+ 1
+ 2
+n
+ 7
+ 6
+ 4 +
+ 9
+ 10
4- 5
+ 16t +
0
1
0
0
0
5
6
+ 7
+ 8
+ 9
+ 4
+22
+ 10
+ 17
+ 12
+
6
+ 8
+ 7
+ 10
+ 7
+19
+ 12
PRICES
Consumer...............................
•Production workers only.
••Value of contracts.
•••Adjusted for seasonal variation.
ot
ot + I t
0
0
0
+ 1
0
+ 1
f20 Cities
{Philadelphia
year
ago
year
ago
year
ago
0 + 6 +
i
Harrisburg........
0 - 2
0 +
Lancaster.........
0 + 4 -
1 +11
- 9 + 14 +
Philadelphia. . . .
0 +
0 + ^
+
Reading...........
0 + 5 - 1 + 12
Scranton..........
1
+ 4 +1
+1
0
0 +
Wilkes-Barre. . .
0 +
1 - 2
Wilmington.......
0
York................
0
+ 2
0 +
+ 15
+
1
+ 9
Trenton...........
year
ago
0 +
5
+ 2 +
1
7 + 6
2 + 10 + 3 + 1 0 + 9 + 8
- 2 + 11
- 9 +
- 3 + 12 +11
2 +
3 + 6 + 9 + 5 -
+n
8 + 15
+ 5
i
year
ago
- 4 + 7 +
- 1 + 6 -
1 + 3 - 4 +
9 +
1 + 4 +
+ 6
4 + 4
1
0 + 3 + 6
1 +
1 +
1 + 8
6 + 6
0 +32
1 + 5 + 10 + 2
•N o t restricted to corporate limits of cities but covers areas of one or more
counties.
{Adjusted for seasonal variation.
@FedFRASER