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Financial In stitu tio n s in a Changing E nvironm ent
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FINANCIAL INSTITUTIONS
IN A CHANGING
ENVIRONMENT
by Karl R. Bopp*

It is a distinct pleasure to be with you today in
observance of the 150th anniversary of the sav
ings bank movement in this country. It was in
1816—the morning of December 2, to be exact
—that Mr. Curtis Roberts of Philadelphia walked
into the office of the Philadelphia Saving Fund
Society and became the first depositor at a
mutual savings bank. Mr. Roberts left $5 with
PSFS. At the end of the day, the new institution
had accumulated a total of $25 in deposits.
Today, deposits at mutual savings banks total
more than $53 billion. If Mr. Roberts and the
Reverend Duncan could be with us today, they
would be astounded to learn that savings banks
now number over 500 with some 1,200 offices
serving depositors who hold more than 22 mil
lion savings accounts. They would no doubt
be pleased to find that savings banks hold the
mortgages of 3 million families and that $8
billion in new mortgage loans were made last
year alone.
Mr. Roberts and the Reverend Duncan prob
ably would nod approvingly as well (if they
could be coaxed away from the marvel of tele
*Mr. Bopp, President of the Federal Reserve Bank of
Philadelphia, gave this talk at the 46th Annual Confer
ence of the National Association of Mutual Savings
Banks, Philadelphia, May 18, 1966.

vision and granulated detergents) at the aggres
siveness of the 150-year old savings bank indus
try, an aggressiveness highlighted this year by
the quest for federal chartering and the power
to make consumer-type loans.
Today, in your sesquicentennial year, I should
like to look both backward and forward with you. I
should like to discuss some of the factors important
in both the past and present evolution of savings
banks and financial institutions in general.
This may seem at first blush a bit “far out” to
you at a time when we all face complex and
pressing problems every day. Interest rates, de
posit flows, employee turnover—these and count
less other factors occupy much of our time and
energies. However, before I am finished, I hope
to be able to suggest some important implica
tions for you in taking such a broad view.
First, let me sketch briefly the broad factors
important in the growth of savings banks and
other financial institutions.
It is not difficult to see why financial institu
tions developed and prospered in the United
States, a nation with great industrial potential,
bountiful natural resources, and an expanding
population. As our nation grew we needed funds
to finance business and agriculture. We needed

BUSINESS REVIEW is produced in the Department of Research. Donald R. Hulmes prepared the layout and art
work. The authors will be glad to receive comments on their article's.
Requests for additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of Philadelphia,
Philadelphia, Pennsylvania 19101.

bu siness re v ie w

mortgage money and depositories for our sav
ings.
To meet our growing financial requirements,
the following alternatives were possible:
1. Existing financial institutions could expand
their operations to encompass new needs, or
2. Additional institutions could be established
as financial demands evolved.
In fact, existing institutions were either reluc
tant to meet or unable to satisfy fully our dynamic
demand for financial services. As a result, new
institutions were established as new needs be
came more evident. But let us turn back the pages
of time and see for ourselves.
Our first financial institutions, of course, were
commercial banks. The first chartered bank in
our young country appeared in 1781. By 1834,
we had 500 banks. By 1861, we had 1,600.
Banks developed in response to increasing
demands for hand-to-hand currency and a need
for commercial and agricultural credit. They met
both of these needs by lending their own per
sonal bank notes to merchants and others. The
loan transaction provided credit. The borrower
put the notes into circulation in payment of his
own obligations, thereby increasing the supply of
currency. Later, of course, commercial banks
went heavily into the demand deposit business.
But the early banks did not provide nearly the
range of services that banks do today. Bankers
felt, first of all, that the nature of their liabilities
prohibited them from making either long-term
business loans or housing loans. Since their de
posits and bank notes were payable or redeem
able on demand, and since only a fractional re
serve was held against these liabilities, they rea
soned that their credit activities should be limited
to short-term loans of 30- to 60-day maturity.
Such loans, they believed, would insure a con
tinuous inflow of funds and thus easily enable
them to meet their demand liabilities.

Nor did bankers concern themselves with con
sumer lending. To lend for consumption pur
poses, they felt, was to violate the very principle
on which banking was built—thrift. Finally, and
in spite of their emphasis on thrift, bankers made
no provision for interest-paying time deposits.
We can see, then, that a number of voids were
evident in our growing economy—voids destined
to be filled, if not by bankers, then by someone
else.
Rising incomes in the United States and the
expansion of urban population helped emphasize
one of our first and most pressing financial voids.
Early in the nineteenth century more people be
gan to accumulate savings. Most individual sav
ings, however, were not large enough to justify
the purchase of stocks or bonds. Some alternative
outlet was needed, one which would be safe,
liquid, and yield some interest.
At the same time an acute housing shortage
was developing on our Eastern Seaboard. Immi
gration from abroad had begun to swell Phila
delphia, Boston, New York, and other cities. Ex
panded housing facilities were urgently needed.
Public-spirited men began to ponder these
problems. They concluded that institutions should
be set up to encourage thrift by accepting in
terest-paying deposits. And what, they asked,
would be more reasonable than to invest these
funds in mortgages?
The result was the mutual savings bank. The
nation’s first mutual, as already noted, was
opened in Philadelphia in 1816. In the same year,
a second was chartered in Boston. But the de
mand for mortgage credit grew faster than the
mutual savings bank. In 1831, another type of
institution was established, the savings and loan
association. The savings and loan association,
served the same function as the mutual, accumu
lating savings and making mortgage loans.
Along with the growing demand for mortgage
3

bu siness r e v ie w

funds, an increasing flow of long-term business
capital was required as we built new factories,
expanded our railroads, and as we pressed west
ward toward the Pacific.
Fortunately, the rising demand for capital
funds coincided with a second developing eco
nomic need. People in the United States were
becoming security-conscious. With our rising in
comes, we had begun to think not only of the
present hut also of the future. We became willing
to part with a portion of our present income to
assure our future economic well-being. In short,
we became interested in insurance.
The need for security thus gave rise to a new
and important source of funds. And this partic
ular source was peculiarly suited to long-term
uses. Unlike bank deposits, insurance-type pay
ments were more regularly received and less
likely to be withdrawn. Moreover, it was found
that current claims could generally be met from
current receipts. Thus liquidity was less of a
problem. Funds channeled into insurance-type
institutions could be committed for the long term,
to finance our burgeoning industrial expansion
and to meet further housing needs.
Given the needs, the insurance-type institutions
began to appear. Fire, casualty, marine, and then
life insurance companies were first on the scene,
followed by trust companies, private pension
funds, and much later, investment companies.
Some, including the insurance companies, had
prototypes in operation even before the signing
of the Declaration of Independence. But the real
period of development and expansion came after
1850, with the unprecedented expansion in in
dustrial activity and real incomes.
But not all of our rising incomes were paid
into trust funds, savings deposits, or insurance
premiums. Between 1850 and 1900, the United
States economy was gradually assuming the highconsumption personality that so well characterizes

it today. Who could resist the gaily painted bi
cycles pouring off our production lines? What
young housewife could forego that wonderful in
vention, the sewing machine? Consumer sales
soared.
And rising sales of consumer goods were ac
companied by an expanding demand for con
sumer credit. Characteristically, however, existing
institutions were reluctant to enter this new and
unexplored field. They looked at the consumer
down the length of their collective noses. Where
credit was extended, it was usually the seller of
goods who obliged.
This situation, however, was to be short-lived.
Some of the first institutions specializing in con
sumer credit were the prototype personal finance
companies which began to appear in the 1870’s.
They were followed by credit unions in the early
1900’s. At first, these institutions lent not to
facilitate the purchase of specific consumer goods
but to tide the borrower over some temporary
emergency that had arisen in his life.
Later, in the twentieth century, personal finance
companies and credit unions finally became im
portant sources of credit for specific durable
consumption. Then, along with their new com
petitors, the sales finance companies, they were
quick to respond to the wails of the infant which
was to become the giant of American industry,
the automobile.
In 1900 there were about 8,000 automobiles
in the United States. By 1917 almost 2 million
units a year were sold. And with the automobile
came radios, washing machines, refrigerators,
toasters, etc., etc. The modern period of con
sumer credit had begun. Where consumption
loans had been calculated in millions of dollars,
they were now expressed in billions! Consumers
had become the backbone of big business.
All of these developments did not escape the
eye of the commercial banker. He saw the grow

b u siness re v ie w

ing demand for housing, for business capital,
and for consumer credit. And he was not unaware
of the profits which accrued to the specialized
financing institutions. But throughout the nine
teenth century and part of the twentieth, the
demands for his traditional ware—short-term
commercial credit—were generally adequate to
absorb most of his funds and thus keeep him in
an orthodox frame of mind.
Let his traditional demands become inadequate
though, and the banker might prove less orthodox
than many suspected. Indeed, he might reverse
the entire trend of the development of financial
institutions in the United States. Rather than
specialization, he might usher in a new era of
diversification in financial services.
In the 1930’s, after the first financial shocks
of the great depression were spent, we had the
first real test of the banker’s orthodox preference
for short-term lending, for his excess reserves
skyrocketed while commercial loans became
scarce.
With surplus funds, the banker began to cast
about for additional borrowers. In his quest, he
noticed certain structural changes that had de
veloped in our economy—changes which might
help him bridge the yawning gap between shortand long-term lending. The Federal Reserve
System gave him a source of credit on which
he could draw in case a liquidity crisis should
arise. The growth of commercial bank time de
posits provided funds less subject to sporadic
and sudden withdrawal. The introduction of
Government-insured mortgages and of a second
ary mortgage market added to the safety and
liquidity of mortgage lending.
The structural changes plus the existence of
surplus funds turned the trick. Mortgage loans,
long a staple of the rural banker, became a much
more significant portion of the urban banker’s
loan portfolio. The banker became ever more

willing to make long-term loans to business. And,
noticing that the sales finance companies didn’t
“go under” during the depression as he had
expected, the banker began lending on a larger
scale to consumers. The age of specialization had
indeed given way to the age of diversification.
The structure of our financial institutions was
changing toward its present-day form.
The point of this brief chronology, is that a
changing environment has called forth the devel
opment of new institutions to meet new needs.
Therefore, the first phase of development was the
creation of a variety of specialized financial in
stitutions.
Then came a second phase, one in which the
specialized institutions saw green grass in the
other fellow’s back yard. In a very general sense
—and like all analogies, this should not be
pressed too far—the development of financial
institutions has been similar to biological evolu
tion. The simple organism which washed ashore
somewhere eons ago, found a new environment
and adapted. As it adapted and developed, it
became an increasingly complex being. Similarly,
financial institutions, orginally more like singlecelled entities, have become more complex as
they have adapted to a changing environment in
order to survive.
Let me emphasize, however, that today’s finan
cial manager is not a passive pawn of his en
vironment. He acts as well as reacts. You and
other leaders in the financial sector cause change.
You help shape economic conditions, financial
markets, statutory and regulatory provisions, and
social attitudes just as your development is affect
ed by these factors. Much of the impetus for
change lies with financial institutions themselves.
An example of the fate awaiting those financial
institutions which fail to adapt or are unable to
adapt to a changing environment is found in the
postal savings system. Several weeks ago the
5

bu siness re v ie w

President signed a bill which abolished the sys
tem. Although it was a competitor of mutual
savings banks, you had little cause for joy at its
demise. The postal savings system was in fact an
obsolete competitor. It had outlived its purpose,
so Congress killed it. Had the system over the
years been able to adapt, to find new purposes,
to compete vigorously, it would not have shriveled
up or have been cast away.
I should like to look briefly at some of the
principal arenas in which this dynamic process
of adaptation and competition is taking place at
the present. After this I shall attempt to define the
environmental factors responsible for the present
flux.
As for the arenas, financial institutions—as
you well know—are slugging it out in markets
which range all the way from consumer loans
to mortgages and from savings deposits to busi
ness financing.
In the mortgage markets, the old competitors
are hard at it. In an effort to compete more
effectively, mutual savings banks are engaged in
a well-publicized struggle to secure federal char
tering, thus opening new geographical frontiers
for expansion. As you well know, one problem
is that mutual savings banks have been missing
out on much of the cream of residential mortgage
demand which occurred in the Southwest and
West—areas not served by savings banks. The
extent of the competition for mortgages is well
illustrated by the fact that, since 1960, commer
cial banks have increased their mortgage hold
ings by 71 percent.
In the consumer lending field, efforts are un
derway by organizations of savings banks and
savings and loan associations to secure statutory
and regulatory permission to make consumer
loans. Moreover, life insurance companies are
making more loans against cash value of policies
and thereby competing in the consumer loan
6

market as well as in the real estate mortgage
market. Indeed, loans to holders of life policies
are no minor item; they stood at 4.8 per cent
of total life insurance company assets at the end
of 1965.
Life insurance is not sacrosanct either. Mutual
savings banks in New York, Massachusetts, and
Connecticut have long been active in the field,
and creation of the Savings Bank Life Insurance
Co. of Connecticut has made possible the exten
sion of SBLI to other states as well.
And the changes which are occurring are not
limited to the asset side of the balance sheet.
Competition for desposits is intense. Commercial
banks, which had found themselves trying to
finance longer-term assets with liabilities payable
on demand, have found it necessary to rely more
on longer-term liabilities. But they could not
compete effectively with savings banks and sav
ings and loan associations which had access to
longer-term deposits by paying higher rates of
interest. The revolutionary changes in commer
cial banks’ scope of operations justified more
intense competition for deposits. Innovations
were made in savings and time deposit accounts
and new terminology was employed in bank ad
vertising and the so-called savings race was on.
The new competition for savings is now a fact—
a sometimes painful fact—of life for all financial
institutions.
Other areas of intense competition are evident
in the struggle between savings and commercial
banks. Mutual savings banks today scarcely re
semble those of a few decades ago. They now
compete with commercial banks in offering safe
deposit facilities, selling traveler’s checks, and
providing collection facilities for depositors.
Savings banks as yet do not accept demand de
posits; but savings are paid virtually on demand
and a depositor can draw a money order against
his account. Other dramatic changes among fi

bu siness re v ie w

nancial institutions have occurred in recent years,
with the result that mutual savings banks, sav
ings and loan associations, and commercial banks
are just not so different now as they once were.
All these examples point out this second kind
of adaptation. Financial institutions are en
croaching upon each other’s areas of operation.
The growing complexity and blurring distinc
tions among institutions in our increasingly
complex society is completely natural. We note
it in other areas of society. The sciences no
longer can be divided simply into such branches
of learning as chemistry, biology, astronomy,
physics, and the like. We now have bio-chemistry
and astro-physics, for example. Even the old
familiar classifications of industry are increas
ingly meaningless.
It seems to me there are at least two very
basic enviromental reasons for current com
petition among financial institutions. One has to
do with the desire of the various institutions
to isolate themselves from the effects of contract
ing or confining specialized markets. The other
concerns the modified attitude of many regula
tory authorities.
As for markets, I think managers of financial
institutions are aware that in a rapidly changing
economy their area of specialization may not al
ways continue to grow adequately. For example,
after two decades or so of rather feverish activity,
the housing market has turned soft in many
areas of the country in recent months. The fact
is that multi-celled institutions may be better
able to adapt to changes in the environment than
their uni-celled counterparts. Damage to a single
cell poses less danger to the whole institution.
Security, stability and growth require a more
complex structure. Therefore, financial institu
tions became more complex through diversifica
tion into new areas and expansion of their base
of operations.

A second cause of institutional change is a
modified attitude of many regulatory authorities.
As the bitter memories of the early 1930’s fade
(and as public policies have evolved to help in
sulate the economy from convulsive disruptions),
authorities have become more receptive to inno
vation.
We have witnessed broad expansion in the
powers of commercial banks in recent years
which has enabled them to compete more vigor
ously with many types of nonbank institutions.
And as each of these institutions finds itself com
peting with commercial banks on home territory,
it seeks regulatory permission to counterattack
in an area which had previously been the private
domain of commercial banks. We have a domino
effect which soon has affected many different
types of institutions.
We have seen how several types of financial
institutions have, under present-day supervision
of the regulatory authorities, adapted to change
and how the lines of demarcation between insti
tutions and markets have become blurred. All of
this adds up to increased competition.
Is increased competition among financial in
stitutions desirable? This is a crucial question.
And it is one which is more difficult to answer
than appears at first glance.
Certainly one of the most desirable social
effects of increased competition is that the public
is given more options in selecting the most fa
vorable benefits from its relationships with finan
cial institutions. A prospective homeowner has
more financing alternatives where mutual savings
banks, commercial banks, and savings and loan
associations compete. Similarly, an automobile
buyer has more options if he can look to several
types of institutions for financing. Furthermore,
we may expect individual institutions to be able
to operate more efficiently through the flexibility
provided by a broader base of operations. These
7

b usiness r e v ie w

factors should yield better service at less cost to
people seeking satisfaction of a broad array of
needs.
There is, however, an aspect of increased com
petition among financial institutions which may
carry a substantial social cost. When financial
institutions bid vigorously for the opportunity
to lend money, credit standards may be forced
downward. Where reduced yields on high-quality
loans result from increased competition, manage
ment may seek to compensate by securing higher
yields on lower quality loans. Assumption of
excessive risks, however, may weaken the entire
financial system. The dangers as well as the real
opportunities emphasize the vital importance of
high-quality professional management for finan
cial institutions.
Certainly we cannot allow competition among
financial institutions to approach Spencer’s no
tion of survival of the fittest. Society long since
has acted to modify the harshness of this
philosophy. Regulation of financial institutions
is desirable to protect the institutions and the
public as well.
But regulation should not be brandished as a
shield against competition. The health of society
depends on a balance of the two forces of regu

Digitized for 8FRASER

lation and competition.
Moreover, it should be noted that, if financial
institutions desire to play in the same ball park
—compete for the same depositors and for the
same financial assets—it is only equitable that
they be subject insofar as possible to the same
set of rules. Laws and regulations, unless uni
form, confer undue advantage.
At present many institutions possess special
advantages. These range from various forms of
tax advantage to privileged concessions such as
the ability to underwrite municipal bonds and
deal in United States Government securities. If
financial institutions are to compete more across
the board, then that competition must be fair
and equitable.
In short, the problem of financial institutions
and authorities today is to foster innovation, to
nourish adaptation, to promote flexibility—all
while maintaining a sufficient degree of safety
—so that the financial sector is best able to serve
society in an ever-changing environment. Your
concern and mine is that each change, innova
tion, and adaptation is aimed at maximizing the
vigor, flexibility and safety of the financial sys
tem so that it best meets the needs of a changing
economy.

HOW MANY JO B S
CAN ONE JO B MAKE?
b y Bertram W. Zumeta

The making of $1 million worth of furniture
requires more labor than the manufacture of
$1 million worth of chemicals. Therefore, Phila
delphia, with a labor surplus, should seek to
develop furniture making in preference to the
manufacture of chemicals.
True or false?
Probably false. Several factors work together
to determine an industry’s total impact on
employment in a region. Its requirement for
direct labor is only one of them.
The regional employment potential
of manufacturing industries

Suppose an apparel plant employing 70 workers
can deliver one million dollars of products in
a year. Its products and efficiency are average
for the industry; some other mills require over
80 people, some as few as 50, to make a million

dollars worth of product. Again, on the average,
such an apparel plant requires goods and serv
ices, and its employees spend in such a way, that
about three additional (“indirect” or “induced”)
jobs exist for each basic job in the plant (workers
to supply the plant with the raw materials and
other things it needs for production and to make
the goods and supply the services its own em
ployees require to meet their day-to-day living
needs).
But many of those additional jobs are not in
the metropolitan area where the plant is located.
The textile mills that supply it may be in another
state, for instance. An apparel plant in the Phila
delphia Metropolitan Area, of the type assumed,
probably generates indirect and induced employ
ment in the region amounting to only one job
for every two basic employees in the plant.
Therefore, such a plant in the Philadelphia
9

bu siness re v ie w

area accounts for about 105 jobs: 70 direct ones
plus another 35 indirect and induced jobs.
By comparison, a typical plant manufacturing
scientific instruments in Metropolitan Philadel
phia accounts for about 90 jobs: 50 directly,
plus 40 via indirect and induced employment.
And there are other differences between the
two industries which bear upon their job-gen
erating potential. Employment in apparel manu
facturing is not increasing very much; instru
ments manufacturing ranks third among all
manufacturing industries in recent growth and
second in expected growth. So, ten years hence,
if national growth trends prevailed here, the
Philadelphia area could expect the 105 apparel
jobs to have grown slightly, but the 90 jobs
in instruments manufacturing could have become
more than 100 also.
Moreover, local growth trends in the two in
dustries diverge from their national counter
parts, and this situation presents another compli
cation. Apparel has failed to keep pace with
national growth for a number of years; by con
trast, employment in instruments manufacturing
in the Philadelphia area has been growing faster
than in the nation for more than a decade. Taking
this into account, a fair guess would put the
expectation for the apparel plant’s employment
effect no higher than 100, and would lift the
expectation for the instruments plant even higher
than the previous estimate, which was 112.
Of course, these are only expectations. The
apparel firm might have the brightest ideas in
the industry, and promote them vigorously. The
instruments firm could be moribund. Then all
bets are off. But if, as assumed, they are typical
of their industries and region, the one which
directly employs fewer people promises more
total jobs in the area in a few years.
This example illustrates at least six important
factors that help determine the job-generating
io

potential of different industries:
1. Direct labor requirements—the number of
workers the industry needs in order to produce a
given output.
2. Indirect labor requirements—the number
of workers other regional industries employ in
supplying the initiating industry with the goods
and services it requires.
3. Induced labor requirements—so called be
cause the workers in the initiating industry and
its regional suppliers spend in the region; their
spending induces employment in regional indus
tries that provide goods or services the workers
buy.
4. The industry’s growth prospects. A growing
industry is likely in a few years to generate more
jobs than a static or declining one, other things
being equal.
5. The industry’s regional competitive advan
tage. Other things usually aren’t equal. If an
industry is shifting its operations very rapidly
to the South or West, employment in that indus
try in the Northeast may expand slowly, even
though it is generally a growth activity.
6. The local industry’s aggressiveness. There
are strong and weak firms in every line. An in
dustry with bright prospects may perform indif
ferently in a region because local management
isn’t very good. This is another aspect of com
petitiveness—linked to inward factors rather than
to the outside influences postulated in (5).
This way of looking at the situation really
says two very important things about an indus
try’s contribution to employment in an area. At
any point in time, that contribution depends on
the extent to which the industry is a heavy user
of direct labor and on the extent to which the
local expenditures of the industry and its em
ployees in turn generate more employment. As
time passes, the contribution will grow or decline
depending on the growth of the industry gener-

bu siness re v ie w

TABLE 1
There is a great deal of variation in the job-generating power of the several in du stry groups because
of d iffe rin g requirem ents fo r direct labor, d iffe re n t “ in d ire ct” and “ in du ced” labor requirem ents, varia
tio n s in grow th rates am ong industries, and com p etitive differences between local industries and th e ir
national counterparts. Here the various industries in th e Philadelphia area are ranked in accordance with
the num ber o f jobs they m ig ht be expected to generate 10 years hence per each $1 m illio n of present output.
This is only one of several possible bases of ranking. O ther ways o f looking at the data are illustrated in
Tables 2, 3, and 4.

In d u s tr y

T y p ic a l D ir e c t
E m p lo y m e n t p e r
$1 m illio n o f
d e li v e r y t o
f in a l d e m a n d *

D ir e c t , I n d i r e c t a n d
In d u c e d L o ca l
E m p lo y m e n t
E xp re s s e d as
M u ltip lie r o f
D ir e c t E m p lo y m e n t *

T o ta l
Jobs
I m p lie d
Now

P r o s p e c t iv e
N a t io n a l
R a te o f
G r o w th ,
N ext
D ecade*

T o ta l J o b s
I m p lie d
in T e n
Y e a rs

L o c a l In d u s tr y ’ s
E m p lo y m e n t G ro w th
v s . N a t io n a l
C o u n te rp a rt, 1 9 5 9 -6 5 :
(a ) m o r e r a p id ;
(b ) s l i g h t la g ;
(c ) p r o n o u n c e d la g

P rinting & publishing
Ordnance and
accessories
Electrical m achinery
F urniture & fixtures
Instrum e nts

1.8

112

15 %

129

57
49
68
50

1.8
1.9
1.6
1.8

103
93
109
90

18
28
9
24

122
119
119
112

c
c
c
a

Apparel
Lum ber & wood
Rubber & plastics
Stone, clay & glass
T ransp ortatio n equip.

70
72
46
51
40

1.5
1.6
1.9
1.9
1.9

105
115
87
97
76

3
8
20
6
22

108
106
104
103
93

c
c
b
a
a

M achinery
Fabricated m etals
Paper
Leather
Chem icals

45
42
39
55
28

1.9
1.9
1.9
1.6
2.2

86
80
74
88
62

6
11
18
- 3
13

91
89
87
85
70

c
c
b
c
b

Prim ary m etals
Textiles
Food
Petroleum
Tobacco

35
40
27
10
13

2.0
1.7
2.0
2.8
2.0

70
68
54
28
26

- 3
-1 3
2
- 7
-1 5

68
59
55
26
22

a
c
b
b
c

* Data and sources are discussed on p. 15.

ally and the extent to which the local industry’s
competitive performance causes it to exceed or
fall short of that growth.
How do all these factors lock together to deter
mine the job-generating potential of specific
industries? Though no one can answer this ques
tion definitively, some information exists with

respect to at least the first five items listed.*
Table 1 lists the 20 major manufacturing in
dustries in the Philadelphia area, ranked accord* The sixth factor may be reflected in some of the find
ings given below. But it could be separated from the
others only on the basis of knowledge of specific firms
and managements—information not available for this
analysis.
11

bu siness r e v ie w

TABLE 2
Here industries o f the Philadelphia area are ranked according to the estim ated num ber o f jobs th a t
m ig ht be expected in 10 years fo r each existing d ire ct job. It is assumed th e ir growth w ill m atch the
grow th of th e ir national counterparts.
1. High
In d u s tr y

Petroleum
refining
Chemicals
Electrical
m achinery
T ransportation
equipm ent
Rubber and
plastics
Instrum ents
Paper

II. Average
Job
E x p e c t a t io n

2.60
2.50
2.43
2.32
2.26
2.24
2.23

In d u s tr y

Ordnance and
accessories
Fabricated
m etals
P rinting and
pu blishing
Food processing
Stone, clay and
glass
M achinery
Prim ary m etals

ing to the total jobs which might be expected 10
years hence for each $1 million of present output.
Printing and publishing heads the list, but a
glance at the last column of the table reveals
that printing and publishing has not recently
grown here at a rate anywhere near that of the
printing and publishing industry in the nation. In
fact, printing and publishing showed no employ
ment growth in the Philadelphia area between
1959 and 1965, while the national industry
gained almost 10 per cent in total employment.
Other bases of comparison might be more
appropriate than jobs per $1 million of present
output. If a decision hinged on the best use of a
piece of industrial land, for instance, the analysis
could be made in terms of jobs per acre of land.
Other possible bases of comparison might be
direct jobs per $1 million of total investment,
or per unit of local investment required to at
tract a firm.
Finally, it often may be appropriate to com
pare industries on the basis of the total employ
ment implied by an existing direct job in each
industry. In other words . . .
12

III. Low
Job
E x p e c t a t io n

2.14
2.12
2.08
2.04
2.02
2.02
1.94

In d u s tr y

Jo b
E x p e c t a t io n

F urniture and
fixtures
Tobacco

1.75
1.69

Leather

1.55

Apparel

1.54

Textiles

1.48

Lum ber and
wood

1.47

How many jobs can one job make?

There are two aspects to this question. In the
first place, the multipliers given in Table 1 are
estimates of how many jobs one job makes now.
A job in printing and publishing really repre
sents 1.8 jobs in total in the area, one direct
and 0.8 through indirect and induced employ
ment. A job in petroleum refining represents
2.8 jobs in total, after allowing for the indirect
and induced demands associated with it.
This does not mean that having a refinery
necessarily is superior to having a printing
plant. Printing is lavish with labor and economi
cal with space; refining requires plenty of space
but distributes very few direct employees in
that space. By concentrating on the total employ
ment implications of a single job, we are abstract
ing from such considerations. But the question
nevertheless is of considerable interest, for as all
industry becomes more automated, each direct
job becomes more important.
Furthermore, most metropolitan regions live on
their manufacturing industries. This is because
their economic health depends in large degree on

bu siness re v ie w

Philadelphia area is given by
the multipliers in the second
Here local in du stries w ith high, average and low job-generating
column of Table 1. An esti
potential are grouped according to how well they have kept pace
mate that takes into account
w ith th e ir national counterparts.
not only the present situation
but also the influence of pro
spective growth rates is given
in Table 2.*
Electrical
Rubber and
1. High
Instrum e nts
In Table 2, the 20 manufac
m achinery
plastics
T ransportation
Chemicals
eq uipm ent
turing industries have been
Paper
divided into three groups ac
Petroleum
cording to the estimated num
refining
ber of jobs in ten years per
Printing and
Food
Stone, clay
II. Average
pu blishing
processing
and glass
each direct job now. Group I,
Ordnance and
Prim ary m etals
designated “High,” contains
accessories
Fabricated
industries for which this figure
m etals
exceeds 2.2; Group II—“Aver
M achinery
age”—contains those between
Apparel
None
III. Low
None
1.9 and 2.2; Group III—
Lum ber and
wood
“Low”—contains those below
Furniture and
1.9. The groupings were made
fixtures
by taking into account natural
Leather
Tobacco
gaps, or breakpoints, in the
Textiles
sequence of numbers.
Table 2 in effect says that
their competitiveness in industries that serve wide interindustry relationships and rates of indus
—usually, national—markets. These are largely trial growth imply that an existing job in
manufacturing industries, though a number of the new kinds of manufacturing (Group I)
nonmanufacturing activities also serve national promises more employment to the region than
an existing job in the more traditional industries
markets (insurance is a good example.)
For this reason, the total employment effect (Group III). It is, of course, based on average
represented by a direct worker in each manu industrial conditions, not exceptional cases. It
facturing industry is a matter of significant inter abstracts from the direct labor intensitivity, space
est, particularly when the prospective growth of demands and good or poor management potential
the worker’s industry is brought into the picture. of particular firms in specific industries. It is
He represents his region’s means of earning its geared to the combined present and prospective
job implications of one worker directly employed
way in the world.
by a typical firm in each industry.
TABLE 3

J o b - g e n e r a t in g P o t e n t i a l
o f a n E x is t in g W o r k e r
i f In d u s tr y ’ s L o ca l
G ro w th M a tc h e d E x p e c te d
N a t io n a l G r o w t h

L o c a l I n d u s t r y ’ s E m p lo y m e n t G r o w th R e c o r d
v s . N a t io n a l C o u n t e r p a r t , 1 9 5 9 - 1 9 6 5

M o r e ra p id

b . S lig h t la g

P r o n o u n c e d la g

Present and future effects

An estimate of the present situation with respect
to the 20 major manufacturing industries in the

* Table 2 simply expresses the estimates of jobs ten
years hence (fifth column of Table 1) as ratios to the
estimated direct employment now (first column, Table l.\
13

bu siness r e v ie w

Table 2 embodies the assumption that each
local industry will match the growth of its
national counterpart. This has not happened and
very probably will not happen. The recent
experience of Metropolitan Philadelphia in this
regard can be combined with the information in
Table 2 by asking how well each industry has
been keeping pace with the corresponding in
dustry in the nation. This is done in Table 3.
Obviously, a job in the industries at upper left
in Table 3 holds far more promise than one in
those at lower right. As one moves up the righthand column, it becomes more and more impera
tive to work at improving local competitiveness,
for the top industries there would have a great
deal of potential if they could come closer to
matching the employment growth of their na
tional counterparts.
Table 3 provides a starting point for think
ing, by summarizing the general implications
of an existing basic job in each industry. Com
bined with information on how intensively
an industry uses labor, space and other resources,
and on how well the firms in it are managed, it
makes possible a degree of discrimination among
industries and firms with respect to their job
generating potential.
Growing job potential in Metropolitan
Philadelphia’s industrial structure

The Philadelphia area has been drawing an in
creasing share of its direct employment from
industries with high job-generating potential.
We have grouped manufacturing industries into
three classes according to their estimated job
potential. Table 4 shows that Metropolitan Phila
delphia has been gaining employment in most
of the industries that have high potential, and
losing in most of those that have low potential.
Furthermore, the gains here have been greater
than the gains nationally, with the major excep
14

tion of the electrical equipment industry. Also,
Philadelphia is losing low-potential industries
faster than the nation.*
TA B LE 4
The percentage changes in each in d u stry’s pro
portionate share o f to ta l m an ufacturing em ploy
m ent indicate th a t P hiladelphia’s in du strial
em ploym ent is sh iftin g in to in du stries w ith high
job-generating potential.
P e r c e n ta g e C h a n g e s in S h a re s
o f E m p lo y m e n t , 1 9 5 9 - 1 9 6 5

I n d u s t r ie s

P h i la d e lp h ia
M e t r o p o lit a n A re a

U n it e d
S ta t e s

1. High job potential
Petroleum refining
Chemicals
Electrical m achinery
T ransportation equip.
Rubber and plastics
Instrum ents
Paper

-2 2
6
2
9
20
25
6

-2 3
4
11
1
15
3
1

3
4
5
10
10

2
-1 0
- 5
9
1

Furniture and fixtures
Tobacco
Leather
Apparel
Textiles
Lum ber and wood

1
-4 4
-2 3
- 2
-2 1
-2 0

4
-1 8
-1 2
2
-1 0
-1 5

Group III total

-1 1

Group 1 total
II. Average job potential
Fabricated m etals
P rinting and
publishing
Food processing
Stone, clay and glass
M achinery
Prim ary m etals
Group II total
III. Low job potential

* These conclusions from Table 4 of course refer to
shifts into industries with high potential per direct
employee. Some of these industries are not labor-inten
sive. Each direct job they provide has a high jobcreating impact, but they do not provide a great many
direct jobs.

b u sin e ss re v ie w

In conclusion

The findings presented above have many limita
tions: they assume “typical” firms, for example,
when in fact a very aggressive company in the
low job-generating class may produce more in
the way of jobs than a sleepy firm in the high
job-generating category. The findings also rely
on statistical projections of growth rates.
They also possess virtues: they assemble what
is known concerning these issues in one place,
and relate each aspect to the other aspects.
Therefore, they may provide a useful starting
point for thinking.
As anyone knows who has had to make them,
decisions must be based on assumptions. As
sumptions are better when they stem from
sound information; however, the information
actually available seldom is complete or unas
sailable. Nevertheless, incomplete information,
judiciously employed, makes possible premises
for decision-making a bit more reliable than
when it is based on common lore or sheer guess
work. If this discussion makes possible some im
provement in the premises upon which regional
decision-making necessarily must be based, it will
have served its purpose.
Appendix
The data in colum ns 1 and 2 o f Table 1 are end
results o f research carried ou t by James R.

W estkott fo r the Federal Reserve Bank o f Phila
delphia. His find in gs are described in Employ

ment Multipliers for the Philadelphia Metropolitan
Area.
Briefly, the in fo rm atio n was derived by using
the 1958 in p u t-o u tp u t stud y of the U.S. eco
no m y" and m od ifyin g the em ploym ent m u lti
pliers fo r the U.S. by ta kin g in to account general
knowledge o f where industries in the Philadelphia
area obtain th e ir in p u t requirem ents. The o u t
come was the local em ploym ent m ultipliers in
colum n 2 o f Table 1.
The in p u t-o u tp u t data are in considerably
greater detail than the oth er in fo rm atio n used.
Consequently, em ploym ent m u ltip lie rs are avail
able fo r 79 industries. The m onograph by W est
ko tt gives the direct, indirect, induced em ploy
m ent and the em ploym ent m u ltip lie rs fo r the 79
industries in th e U.S. and in M etropolitan Phila
delphia. The assum ptions underlying these esti
mates are reviewed in detail in th e monograph.
The national grow th projections (col. 4 of table
1) are by the National Planning Association.
The record of recent com p etitive perform ance
is derived from analysis of em ploym ent data pub
lished by the Bureau of Labor Statistics, U.S.
D epartm ent of Labor, and the Philadelphia
O ffice o f the Bureau of Em ploym ent Security,
Pennsylvania D epartm ent of Labor and Industry. *

* Goldman, Morris R., Martin L. Marimont and
Beatrice N. Vaccara, “The Interindustry Structure of
the United States, A Report on the 1958 Input-Output
Study,” Survey of Current Business, Volume 44, Num
ber 11, November, 1964, pp. 10-29; and National
Economics Division Staff, “The Transactions Table of
the 1958 Input-Output Study and Revised Direct and
Total Requirements Data,” Survey of Current Busi
ness, Volume 45, Number 9, September, 1965, pp.
33-49.

FOR THE R E C O R D . . .
BILLIONS $

SUM M ARY

M a n u fa c tu r in g

T h ird F e d e ra l
R e s e rv e D is t r ic t

U n ite d S ta te s

Per c e n t change

P e r c e n t c h an ge

A p r il 1966
fro m
year
a go

m o.
a go

MEMBER BANKS, 3RD E.R.D.

4
m os.
1966
fro m
year
a go

A p r il 1966
fro m
year
ago

m o.
ago

E m p lo y
m ent

4
m o s.
1966
fro m
year
a go

LOCAL
CHANGES
S ta n d a rd
M e tr o p o lita n
A re a s *

+
E le c t r ic

p o w e r co nsu m e d

M a n -h o u rs ,

to ta l*

E m p lo y m e n t, t o t a l
W age in c o m e *

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

+ 10

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

+36

...........

-3 3

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

C O N S T R U C T IO N **
COAL

...........

PRO D U C TIO N

-2 7

+ 10

+ 10
6

-2 8

-2 1

Per c e n t
change

Apri ly b b

frc m

f r 3m

year
a go

Per c e n t
ch a n g e
ly b b
fro m

Per c e n t
change

Apri

year
ago

m o.
a go

T o ta l
D e p o s its * * *

m o.
ago

April ly b b
frc m

year
ago

m o.
ago

9
W ilm in g to n

—

C heck
P a y m e n ts * *

P a y r o lls

April ly b b

m o.
ago

M A N U F A C T U R IN G

B a n k in g

......

A tla n t ic

C ity ....

T re n to n

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

A lto o n a

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

+15

+33

+ 11

+ 13

+ 11
+ 13

+ 12

+20

+ 16

-3 0

+10
+

B A N K IN G

H a rris b u rg

.........

J o h n s to w n

.........

L a n c a s te r ...........

+ 10

5
0

+ 11

+ 10

( A ll m e m b e r b a n k s )
D e p o s its
L oa ns

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

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

+ 10

+ 13

+ 14

—

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

p a y m e n ts ** *

+ u t

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

U .S . G o v t, s e c u r it ie s
O th e r

—

In v e s tm e n ts

C heck

....

.........

+ 11

+ 12

+ 15f

+ 16

+ 15

L e h ig h

V a lle y

W h o le s a le

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

C onsum er

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

‘ Production workers only
“ Value of contracts
“ ‘ Adjusted for seasonal variation

4
3

f l5 SMSA’ s
fPhiladelphia

+17

+ 11

—

R e a d in g

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

+ 16

+ 10

S c ra n to n

...........

+10

+ 14

+ 11

+13

+ 14

....

+12

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

+ 15

W ilk e s - B a rr e

PRIC E S

P h ila d e lp h ia ......

+23

Y o rk

‘ Not restricted to corporate lim its of citie s but covers areas of one
or more counties.
“ A ll commercial banks. Adjusted for seasonal variation.
‘ “ Member banks only. Last Wednesday of the month.