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STATE DOLLARS
TO SCH O O L DISTRICTS

POPULATION GROWTH IN THE
THIRD DISTRICT: SCORECARD
FROM THE CENSUS
THE HOUSEHOLD AS A SAVER

THE FED IN PRINT

JUNE 1971

State Dollars to School Districts
. . . A heady combination of programs char
acterize Commonwealth attempts to equalize
educational opportunities across the state,
but criticisms remain.
Population Growth in the Third District:
Scorecard from the Census
. . . Recent trends reveal new areas of
growth and relative decline in both District
and nation.
The Household As A Saver
. . . Expected changes in family character
istics suggest that financial institutions may
be put to a further test in the race for
household savings.

BUSINESS REVIEW

is produced in the Department'bf Research. Ronald B. Williams is Art Director. The authors will
be glad to receive comments on their articles.
Requests for additional copies should be addressed to Public Services, Federal Reserve Bank of Philadelphia, Philadelphia,
Pennsylvania 19101.

FEDERAL RESERVE BANK OF PHILADELPHIA

State Dollars To
School Districts
by Kathryn L. Kindi

The United States public education bill
more than doubled in the last decade.
Rapidly rising costs, as well as increas
ing demand for quality education, spelled
faster paced spending. In Pennsylvania
alone, expenditures for public education
charted an upward course from $353 mil
lion in 1950 to $821 million in 1960, and
in 1970 reached $2,052 billion.
Local school districts shoulder the respon
sibility of actually providing education serv
ices, but, individually, most school districts
cannot or are not willing to generate enough
new revenues to meet mounting expendi
ture pressures. Since Federal funds offer
only minimal aid, local educators turn to
state governments for fiscal relief. And the
response has been impressive. So steady has
been the growth of state support that
Commonwealth aid currently covers almost
50 per cent of the nonfederal public educa
tion bill (see Chart 1).
Additional State dollars certainly help
school districts meet burgeoning costs and

responsibilities. But the impact of these
funds depends both upon their amount and
the way they are distributed. On both
counts, critics are outspoken. Many protest
that the local share of education costs con
tinues to exceed limited district resources.
Some authorities dispute the way in which
State funds are funneled to school districts.
Municipal officials, in particular, claim many
of their special problems require more
consideration.
WHY STATE SUPPORT AT ALL?
"The General Assembly shall provide for
the maintenance and support of a thorough
and efficient system of public education to
serve the needs of the Commonwealth."'
To fulfill this Constitutional obligation, and
to assure a measure of equality of educa
tional opportunity across the state, Com1
Constitution of the Commonwealth of Pennsyl
vania 1968, Article III, Section 14.
3

JUNE 1971

BUSINESS REVIEW

CHART

COM M ON W EALTH
P U B L IC

CO FFERS

ED U C A T IO N

1963

1964

ABSORB

A LARG E SH ARE O F THE

B IL L .

1965

1966

1967

1968

1969

1970

Source: Statistical Report, Pennsylvania Department of Education, 1970.

monwealth goals include provision of at
least a minimum education offering to all
Pennsylvanians. Two problems facing local
jurisdictions, however, may thwart achieve
ment of this goal. First, many of the benefits
of education provided in one locale may
spill over into nearby and distant commu
nities, making the original area less willing
to support single-handedly its public school
programs. Second, local jurisdictions are
not equally capable of financing even a
minimum of education opportunities.
Benefit Spillovers. School districts hire
teachers, purchase texts, and construct build
ings in the rendering of education services.
The return on each of these investments
takes the form of a more productive and
wealthy citizenry. Not only does each young

student chalk up lifetime income gains, but
the community at large benefits from his
increased tax payments, reduced demand
for public programs, and perhaps greater
participation in local government.
Population mobility spreads benefits of
education — sometimes far beyond spend
ing district boundaries. A draftsman trained
in York, for example, may choose to settle
and apply his skills to a job in Erie. Indeed,
increasing migration results in more and
more of each community's students depart
ing for distant towns and cities — before
repaying their hometown economy, in the
form of taxes, for what they received in
education services.
When many returns on a community's
investment in education do not benefit local
4

FEDERAL RESERVE BANK OF PHILADELPHIA

local tax efforts. Community X, with an
available tax base of only $9,500 per pupil,
may resort to onerous levies to support a
level of education expenditures Community
Y, with a base of $32,000 per pupil, easily
maintains. In the extreme, districts with
bumper enrollments but ailing tax bases
may not be able to support even a
minimal offering.
To lessen the burden of these inter
district inequalities, and to assure some pre
determined level of expenditures per pupil,
a state may aid some or all of its school
districts. In fact, equalization of local tax
burdens in support of a basic package of
education services is an explicit goal of the
subsidy plan in Pennsylvania, as in many
other states.

taxpayers, sole reliance on local support
may jeopardize both quantity and quality
of services provided. Less schooling than the
total amount desired by all beneficiaries
may be provided unless all of those bene
ficiaries pick up part of the bill. Efforts to
shift public school financing to higher levels
of government reflect one attempt to en
courage allocation of resources to education
despite local spillovers. Because states en
compass many locales, benefits are less
likely to spill out of these larger areas than
out of local school districts. And, utilizing
broader taxing powers than those available
to local units, states can reimburse local
areas particularly hard-hit by education
outflows.
Unequal Fiscal Capacity. Sizable differ
ences often exist among local districts in
resources that can be taxed to raise revenue
for education. Aging urban areas, with de
clining tax bases but growing low-income
populations, are hard pressed to keep up
public service levels. These and other
municipalities also may contain vast acres
of tax-exempt real estate, depleting the base
upon which property taxes, the mainstay
of local finance, can be levied. Some rural
communities, too, face declining property
values and find supporting a full-fledged
education program increasingly difficult. Yet,
at the same time, property-rich suburban
enclaves easily meet the costs of more and
better public education services.
In Pennsylvania, a school district's "fiscal
capacity" is legally determined by the value
of its "taxable real property per pupil,"
standardized across the state for differences
in assessment. Although the statewide aver
age value of this measure stands at $16,700,
wealthy districts report real property values
per pupil several times greater than those of
poor locales.2 Certainly, without outside aid,
such inequalities may severely influence

ABC's OF THE PENNSYLVANIA SUBSIDY
The Commonwealth relies upon a heady
combination of programs to lessen the
uncertainties of benefit spillovers and to
insure that less wealthy areas are able to
meet their education responsibilities. A
basic or "foundation" program of services,
financed by Pennsylvania and each school
district according to its ability, lies at the
heart of the subsidy plan. As shown in
Chart 2, over 65 per cent of State funds for
public education team up with local dollars
to offer each child a minimum bundle of
education opportunities. Another 9 per cent
of Commonwealth school aid helps local
districts cope with special cost problems
associated with providing education services
to both low-income and very concentrated
and very sparse populations. And the re
maining State education dollars, more than
25 per cent of the total, help support spe
cial programs, such as construction and
transportation services.
The "Foundation" Program. A foundation
package ideally encompasses all of the edu
cation services essential to each student's
development. Actually, in the Pennsylvania
program, "equal opportunity to education"

2 Taxable real property ranges below $10,000 per
pupil in some school districts, above $70,000 per pupil
elsewhere.

BUSINESS REVIEW

jUNE 1971

CHART 2
M OST S T A T E D O L L A R S TO S C H O O L D IS T R IC T S T A K E A C C O U N T O F
L O C A L F IS C A L C A P A C IT Y .
Per Cent
100

1 Equalizing Grants

1 Flat Grants

) FOUNDATION PROGRAM

)

DENSITY — SPARSITY
SCHOOL CONSTRUCTION

TRA MSPORTATION AND HOMEBOUND INSTRUCTION
POVERTY PAYMENTS
GRANTS FOR SPECIAL SERVICES*
0
Source: Pennsylvania Public School Finance 1969-70, Pennsylvania D e p a rtm e n t o f Education and
U.S. O ffice o f Education.
•T h e s e in clu de g ra n ts fo r special ed u cation program s; c o m m u n ity colleges and te c h n ic a l institu tes; vocational
edu cation; h ea lth services; ed u catio n of th e d ea f, blind, and palsied; tu itio n fo r n o n re side nt o rp h a n s and fo s te r
child re n; co u n ty sup erviso ry expenses; d rivers' tra in in g ; edu cation o f ch ild re n o f m ig ra n t laborers; s a n ita ry
sew age disposal p la n t operation; aid to fin a n c ia lly distressed districts; and p a y m e n ts in lieu o f tax fu n d s. In
197 0 special fu n d s also w ere g ra n te d to P h ilad elp h ia and Pittsb urgh. P aym ents fo r public school e m p lo y e e s 'r e
tire m e n t and social s ec u rity are not included.

On the whole, the Commonwealth aims
to shoulder half of foundation program
expenditures. The exact share of a particular

is measured in dollar amounts. The founda
tion level included in the subsidy system
approximates the average amount spent per
pupil, throughout the state, on basic instruc
tion costs — teachers' salaries, supplies, and
other schoolroom costs.3

tures except health service, transportation, and homebound instruction costs, debt service, capital outlay,
and outgoing transfers to community colleges and
technical institutes. From this subtotal, tuition pay
ments received and intergovernmental transfers for
special programs must be deducted.

3 Actual instruction costs, for purposes of subsidy
grant determination, include all General Fund expendi-

FEDERAL RESERVE BANK OF PHILADELPHIA

ments exceed 50,000 pupils receive a special
boost — a "super-density" payment of 15
per cent of total instruction costs. And rural
jurisdictions may benefit from sparsity sub
sidies, grants available to districts with less
than 50 residents per square mile, regardless
of school district size.
Both density and sparsity subsidies are
designed to reflect varying fiscal capacities.
The poverty payment, however, is a flat
grant per pupil, distributed without regard
to the relative wealth of any local district.
The Commonwealth allocates a subsidy of
$120 to each district for every school-age
child in the area whose family receives
annual income of less than $2000 or Aid
to Dependent Children funds.
All of these grants are functional subsi
dies, limited only in that they must be used
to beef up education services. In some areas
they pack a heavy punch. Philadelphia, for
example, expects to gain over $34 million
in 1971 density payments alone. Overall,
however, these grants account for less than
9 per cent of State support of public ele
mentary and secondary education.
Grants for Special Services. Fifteen other
subsidies are earmarked for special pro
grams. Three of the 15 — the subsidies for
construction, transportation, and homebound instruction — reflect varying fiscal
capacities among local jurisdictions, and total
over 40 per cent of all special purpose
funds. The remaining categorical grants are
flat grants, based on quantitative measures,
for example, numbers of pupils or a per
centage of total costs. Services such as
driver education, special education of ex
ceptional children, health care, vocational
education, and community college and tech
nical instruction are all supported, in part,
by these State dollars.

district's instruction costs that may be
charged off to the State depends upon the
relative ability of that local unit to carry
its own load. If a district's fiscal capacity
falls below that of the "average district,"
Commonwealth aid will add up to more
than 50 per cent of local instruction ex
penses. Conversely, should the local fiscal
base exceed the "average," State aid will
fall short of half basic expenditures. Al
though districts with higher ability receive
only limited aid, then, poorer units may
reap substantial benefits.
In short, the foundation program clearly
establishes a commitment to at least a
minimum opportunity for education within
the Commonwealth. Pennsylvania contrib
utes to the basic instruction program of
each student in a district in inverse pro
portion to the local unit's ability to pay.
This local tax capacity is measured by the
market value of taxable real estate per pupil
relative to the statewide average. Because
the Commonwealth will share only those
basic expenses below some maximum dollar
amount, one final provision allows any dis
trict to choose to offer, and finance inde
pendently, a more extensive program of
instruction services.
Density, Sparsity, and Poverty Grants.
These subsidies are designed to tackle spe
cial cost problems including transporting
students in far outlying communities, ade
quately compensating urban school staffs
for higher costs of living and poorer work
ing conditions, and operating educational
enrichment programs for disadvantaged
youth throughout the state. In addition,
temporary supplem ents, such as 1970
"Operation Bootstrap" payments to jack up
expenditure levels in low-spending districts,
sometimes boost total public instruction
outlays.
According to provisions of the density
payment plan, districts with more than
10,000 people per square mile are reim
bursed for a share of instruction expenses
over $400 per pupil. Districts whose enroll

CHALKING UP THE CRITICISMS
The "how" and "how much" of the Penn
sylvania subsidy system underline the Com
monwealth's commitment to provide educa
tion services to all Pennsylvania youth. But
7

BUSINESS REVIEW

JUNE 1971

many educators and financial planners give
the current State system less than an "A "
rating. Some remain unconvinced that real
estate values best measure local ability to
support education. Other authorities fault
some of the subsidy's cost-related features,
and municipal officials strive for more effec
tive recognition of the problems facing ur
ban educators. Rural educators, too, stress
that their expenditure problems merit more
attention. Still others question whether or
not the Pennsylvania plan, as presently de
signed, can ever achieve "equality of edu
cational opportunity."
Real Estate — the Best Yardstick? In each
school district, the State aid package de
pends in great part upon the value of local
real estate. But is this measure really the
best gauge of all resources available to sup
port education? Real estate levies tap only
one part of each community's wealth.
Stocks, bonds, and savings accounts, for
example, are other means of holding wealth.
Moreover, to the extent that wealthy indi
viduals hold more of their assets in these
non-real-estate forms than do poorer citi
zens, taxes on land and buildings may cap
ture much more of the wealth of poor than
of rich locales. Consequently, the State plan,
in effect, may favor wealthy districts.
Equity considerations aside, however, ad
ministrative problems associated with a tax
on real estate are numerous. The market
value of real property often is difficult to
measure and, hence, may be subject to
political manipulation. Assessment proce
dures may vary from community to com
munity. Thus, the assessed value of real
estate, and its market value as determined
by the State Tax Equalization Board, may be
by no means equalized. And because no
State agency has the power to change local
assessments, entrenched practices may limit
access to potentially taxable resources. In
view of all of these problems, many ob
servers urge investigation of other levies.
Too Little, Too Late? Several provisions of
Pennsylvania legislation governing grants to

public schools may thwart achievement of
State subsidy goals. Two in particular — cost
measurement and cost reimbursement pat
terns— may shortchange less wealthy or
high-cost areas.
In the foundation plan, the State aid
formula applies to actual instruction ex
penses per pupil or a maximum amount
fixed periodically by the General Assembly
to represent average instruction costs per
pupil. Currently, the level of State support
is limited to the first $550 of basic instruc
tion expenses. No matter how steep the
costs of a district's program, and how lim
ited that district's resources, the State share
will be cut off at the $550 level.4*Moreover,
because no built-in mechanisms take ac
count of increases resulting from inflation
ary pressures, which have dealt education
and other public services a particularly hard
blow, maximum State aid may fall below
even average instruction costs.
A delayed reimbursement schedule com
pounds these troubles. Most State reim
bursements are based on the previous year's
expenditure pattern and are not paid until
these tallies are in. For example, 1969-70
appropriations were payable on the basis
of 1968-69 attendance data. Such lags in
measurement of burden may mean that
State payments in any one year fall short of
the State share of expenditures incurred
during that year. And, in order to meet cur
rent costs, a district may have to resort to
the costly procedure of deficit financing.
We cannot conclude that because these
and other limitations exist, they always
come into play. But when such constraints
do operate, they hamper efforts to achieve
a reasonable match between local resources
and expenditure responsibilities, and, in
combination, may prove extremely powerful.
4 At the other end of the resource spectrum, a dis
trict may recoup a minimum of $55 or 10 per cent of
basic instruction costs per pupil, whichever is lower,
although its fiscal capacity ranks several steps above
that of any other area.
8

FEDERAL RESERVE BANK OF PHILADELPHIA

these purposes.6 In the present subsidy
plan, however, it is implicitly assumed that
every jurisdiction has access to all, or an
equal percentage, of its tax revenue to meet
the costs of public education. No special
compensation is tendered to those areas
suffering greater-than-average pressures on
their tax dollars because of "municipal over
burden."
Specialized Needs. The demand for
education is far from uniform. In part be
cause of poverty, insecurity, language bar
riers, and other deprivations, significant
numbers of public school students require
special attention. And, as has been shown
for Philadelphia and Pittsburgh, a great
many of these disadvantaged youth are "city
kids."7 The school districts in urban locales,
then, and in other areas facing comparable
problems, are pressed to exert extra effort
at added cost. And, if equal opportunity to
education is indeed a Commonwealth goal,
the State must be willing to absorb a sig
nificant share, if not all, of these added
costs.
The Pennsylvania subsidy plan, however,
does not directly admit of the possibility
that unequal expenditures well may be nec
essary to provide equal opportunities. The
density and poverty payments, at best, are
gross and inadequate substitutes for enrich

For instance, not only did average instruc
tion costs across the state reach over $600
per pupil in 1970, but also estimated 1971
instruction expenses run even higher.
The Urban Complaint. Other problems
which are concentrated in certain geo
graphic areas also may dampen education
activities.5 In particular, city school officials
claim that State subsidies do not attack
several major problems associated with ur
ban education. Municipal overburden and
the specialized needs of a disproportion
ately large number of pupils top the list.
Municipal Overburden. Urban offi
cials in areas such as Philadelphia face the
problem of financing “ over-used" municipal
services — and, as a result, education may
suffer. Central cities not only must serve a
highly concentrated and diverse residency,
but also must respond to the demands of a
large nonresident population. Many metro
politan dwellers crowd city streets, work in
mid-town business firms, and enjoy city
recreation and cultural centers. If nonresi
dents' city tax payments fall short of non
residents' use of in-town services, the munic
ipal service burden grows. "Municipal over
burden" takes over as relatively larger
and larger proportions of tax resources are
preempted to finance police and fire pro
tection, street maintenance, sanitation, and
other custodial services.
Currently, some urban Pennsylvania gov
ernments, particularly Pittsburgh and Phila
delphia, allocate two-thirds of their total
tax revenue to maintain municipal serv
ices. Meanwhile, nearby suburban locales
use only 40 cents of each tax dollar for

6 In Philadelphia, taxes for education amount to
28 per cent of total collections; taxes for general
services, 72 per cent. In Bucks County, 57 per cent
and 43 per cent, respectively; Montgomery County,
57 per cent and 43 per cent; Chester County, 63 per
cent and 37 per cent; and Delaware County, 48 per
cent and 52 per cent. These figures are for 1968.
7 Government Consulting Service, Fels Institute of
State and Local Government, "Special Education and
5
Rural expenses, for example, are pushed up by the Fiscal Requirements of Urban School Districts in
Pennsylvania," University of Pennsylvania, Philadel
costs of maintaining special services and duplicate
phia, 1964. Twelve per cent of all state pupils but
education facilities to reach all students in outlying
over 40 per cent of pupils in low-achieving districts
areas. But sparsity payments to rural school districts
attend Philadelphia public schools. Suburban students
do not directly recognize these and other specific
account for proportionally fewer students in lowproblems. In addition, sparsity and density payments
achieving areas, while students in rural areas account
both are subject to arbitrary limitations and must be
for approximately one-quarter of all state pupils and
deducted from basic instruction costs before calcula
of pupils in low-achieving districts.
tion of foundation program expenditures.

JUNE 1971

BUSINESS REVIEW

upon total costs of educating each public
school pupil. Observers who question the
adequacy and equitability of real estate as
a measure of wealth propose personal in
come taxes, direct taxes on total wealth,
Federal block grants, and even complete
State financing. Other critics note that the
development of adequate information and
measuring systems would enable more real
istic evaluations of the effectiveness of all
education expenditures.
State officials are aware of the short
comings of school subsidy financing. Ac
cordingly, the General Assembly this year
set up the Pennsylvania Commission on
School Finance. In addition to determining
whether the subsidy system fosters equal
opportunity to education throughout the
state, this Commission has investigated the
merits of the real estate wealth measure,
categorical aid programs, and accountability
in education activities.
As the demand for education services
continues to rise, so also will costs. Yet high
tax burdens and steadfast resentment of
new encumbrances militate against easy
solutions to the problems of school plan
ning policy. Growing attention to the state
wide benefits of education and education
expenditure problems is an important step
towards bringing "equality of educational
opportunity" to fruition.
■

ment programs for disadvantaged youth.
Population density affects the costs of
school site acquisition and construction,
but only indirectly expenditures for in
struction. The poverty payment also may
miss its target. Not only is the amount
small and eligibility criteria very selective,
but no guarantee exists that the funds will
aid only those students for whom they are
intended.
TOWARDS THAT "A + "!
State legislation in support of public edu
cation treads a narrow line between politi
cal feasibility and economic reality. Con
sequently, the subsidy system often may fail
to meet effectively the problems encoun
tered in school planning policy. And popu
lar suggestions for reform reflect far-ranging
criticism.
Proposals focus on both improved allo
cation of education resources currently
available and increased financing of instruc
tion programs. Suggested changes include
adjusting the State aid formula to include
consideration of municipal overburden, and
more closely coordinating State poverty
funds and Federal programs which com
pensate for education problems rooted in
social and economic deprivation. Alterna
tively, it is suggested that the current plan
be replaced by one reimbursement based

FEDERAL RESERVE BANK OF PHILADELPHIA

THE STATE SHARE
More than three of every four Commonwealth dollars in aid of education work to
equalize differences between local resources and expenditure responsibilities. The
share of these funds each district will receive is partially determined by the following
formula:
STATE AID RATIO = 1.00

State market value per weighted pupil
State aid, then, depends upon both the number of pupils in a district and the wealth
of the district compared to other areas across the state. District expenditures are
computed per pupil, or more precisely, per weighted pupil. In the Pennsylvania sub
sidy plan, weights reflect the assumption that costs increase as a student matriculates
to higher levels. For example, a weight of .5 is assigned to a kindergartner, 1.00 to an
elementary pupil, and 1.36 to a high school student. A district's enrollment is defined
as its Weighted Average Daily Membership (WADM).
Fiscal capacity is measured by market valuation of taxable real property, as computed
annually for each district by the State Tax Equalization Board. Each unit's relative
capacity is determined, as shown above, by dividing district market value per weighted
pupil by the comparable statewide average. And, the constant terms reflect the Com
monwealth's commitment to support, on the average, 50 per cent of basic instruction
expenses.
Having determined the aid ratio, a simple calculation yields the amount of basic
instruction aid each district stands to gain. The aid ratio is multiplied by the actual
instruction expense per WADM or $550, whichever is less, and then by the total
WADM of the district.

JUNE 1971

BUSINESS REVIEW

Population Growth In The
Third District: Scorecard
From The Census
CHART

P O P U LA T IO N
OF

THE

GROW TH

T H IR D

SLO W ED

D IS T R IC T

D U R IN G

M OST

THE

M ET R O P O L IT A N

1 9 6 0 ’S .

Per Cent

40
30

-1 0

z
o
I—
CD
z
_l
£

o
o
hZ
5
h-

DC
LU
(—
CO
<
o
z

<
Q
_l_
X

3
X

z
o
Hz
LU
o:

o
a:
Z>
00
CO
oo

oc
<

>
■
LU
_I
_l
<
>
“
mT
L“
m

0 .

o
z
Q
<
LU
QC

AREAS

FEDERAL RESERVE BANK OF PHILADELPHIA

CHART 3

CHART 2
BECAU SE THE
SLOW ED

M IG R A T IO N

N A T IO N

FROM

THE

N A T I O N ’S R U R A L A R E A S

ITS E X P A N S IO N

M ET R O P O L IT A N

Percentage Change in Population

D E C L IN E D

IN T O

AREAS

. . .

Percentage Rate of Migration

CHART 5
B U T T W O A R E A S W IT H IN T H E

CHART 4
AND

P O P U L A T IO N

S H IFT ED

T H IR D

GROW TH

D IS T R IC T ,

IN P A R T F R O M

TO TH E SOUTH.

IN D U ST R IA L D E V E L O P M E N T

Percentage Share Total National
Population Growth

EFFORTS,
TREND,
OF

FO UGH T TH E

LARGELY

AROUND
DEEP

FROM

T U R N IN G

A DECADE

D E C L IN E .

Percentage Change in Population

S ource: B ureau o f th e Census. U nited S tates D e p a rtm en t of Com m erce.

B E N EF IT IN G

IN T EN SE

BUSINESS REVIEW

JUNE 1971

The Household
As A Saver
by James M. O'Brien

attracting the savings of individuals will be
related to its ability to provide the saver
with assets which serve a variety of pur
poses. The current attempts of savings and
loan associations and mutual savings banks
to win checking deposit privileges may,
therefore, play an important role in their
competitive position in the market for indi
viduals' savings. From still another angle,
the significance of the role of interest rates
in the saver's portfolio decision becomes
apparent. Moreover, it is likely that in the
future the average saver will be taking even
a closer look than he has in the past at the
spread between what he can earn by hold
ing stocks and bonds and what he receives
by putting his funds into savings deposits.

In this age of "affluence/' a great deal of
time is devoted to studying the buying habits
of the individual. The producers of our na
tion's goods and services continuously try
to learn about the makeup and preferences
of their customers. For financial institutions,
however, it is not just how the individual
spends, but how he saves which is impor
tant. Yet the marketing analyst has been less
active in this area. The information that ex
ists is widely scattered in academic journals
and specialized studies. By pulling together
a good part of this information, we should
be able to sharpen our view of the saver.1
Looking at the composite picture of the
saver from one angle suggests that the com
petitive edge of a financial institution in
1 The description of the individual's savings be
havior to be presented is taken from a review of
mostly empirical research undertaken by economists
over the last 20 years. A selected bibliography is
presented in the Appendix.

THE BUNDLE OF ASSETS —
A REFLECTION OF GOALS
The typical individual accumulates wealth
for a variety of reasons, and he usually finds

FEDERAL RESERVE BANK OF PHILADELPHIA

important motives. Even without these
goals, the uncertainty of what tomorrow
might bring prompts the typical saver to
keep something in his financial cupboard.
For most individuals, the product to satisfy
these needs is a savings account. Unlike a
checking account, it pays the saver some
reward, and, unlike equity, there is almost
no chance of capital loss.
Savings deposits are also used to finance
durable purchases. In this case the saver
treats his savings deposits as a “ revolving
fund." Savings earmarked for longer run
purposes is temporarily drawn down to
make or help make a durable purchase,
such as a new auto or home furnishings.
Insurance reserves also comprise an im
portant share of the wealth of many house
holds. However, few savers consider these
reserves as a good means for meeting their
long-term savings objectives; rather, they
take out insurance primarily to reduce risk.

that no one asset will adequately do the
job.2 As a result his saving will flow into at
least several assets — the variety increasing
with the level of saving. To be sure, the
distinction among the character and uses of
some assets is more sharply drawn than
among others. Nonetheless, there are enough
common denominators in asset usage so
that patterns between accumulation motives
and asset preferences do emerge.
All individuals need to keep some bal
ances on hand to meet regular weekly or
monthly expenditures for things such as
food, utilities, and recreation. The typical
individual relies almost exclusively on check
ing deposits and, to a lesser extent, currency
to fill this need. But goods and services are
not the only regular purchases a household
might make. A small but important group of
households — the wealthy — buy and sell
stocks and bonds regularly, and for this pur
pose checking deposits are likely to prove
a useful medium.3
Thus for his regularly recurring transac
tions, the saver has found the convenience
of the checking deposit more important
than the interest return he might receive by
trying to manage his budget with some
other type of financial asset.
While some balances are held by all indi
viduals to meet day-to-day expenditures,
the biggest chunk of the savings of most
people serves longer run objectives. Retire
ment is perhaps the most important of these
aims, but children's education, the purchase
of a home, and a long vacation are other

FAMILY'S CHARACTERISTICS AFFECT
ITS SAVINGS DECISIONS
Since families adapt their asset holdings
to their needs, we should not expect each
family to hold the same bundle of assets.
Among other things, differences in circum
stances create differences in goals and
potentialities for the family's savings. For
example, the larger family has a relatively
greater demand for durable goods; older
households have had a longer time to ac
cumulate financial assets; and wealthier
households have more opportunities for
profitable investment in stocks and bonds.
Looking at households in terms of some of
their characteristics reveals definite patterns
of asset composition. (The evidence is sum
marized in the Table in the Appendix.)

2 The terms household, individual, and family are
used interchangeably here to refer to all persons liv
ing in a single dwelling unit. Total assets or wealth is
defined to include financial assets and real assets but
exclude human wealth and the business assets of pro
prietorships and closely held corporations.
3 Approximately 3 per cent of the household sector
owns about 42 per cent of household wealth. The
estimate is based on data from D. S. Projector, "Sur
vey of Financial Characteristics of Consumers," Fed
eral Reserve Bulletin (March, 1964), Vol. 50, No. 4,
pp. 285-293.

Wealth. As its wealth increases, the house
hold devotes a larger share of wealth to
investment assets (stocks, bonds, and real
estate) and a smaller share to liquid assets
(checking deposits, savings deposits, and
15

BUSINESS REVIEW

JUNE 1971

savings bonds), life insurance, housing, and
durable goods.4
Investment assets become more important
as wealth increases because wealthier house
holds face a different situation than their
poorer counterparts. The prospect of having
a significant share of wealth here today and
gone tomorrow, even though not too likely,
must weigh quite heavily on the asset de
cisions of the less wealthy. However, as
wealth rises, the rules of the game change
perceptibly. To some degree the dice be
come loaded as the wealthier household,
with more to invest, can spread its invest
ment around and reduce the odds against
taking a capital loss. But unfavorable move
ments in securities prices is a catching ill
ness so that diversification as an explanation
can only take us so far.
What may be even more relevant in
understanding the greater importance of in
vestment assets to the wealthy is the differ
ences in incentives offered to the differ
ent levels of wealthholders. Investing costs
money — brokerage fees, subscribing to The
Wall Street journal — and takes time —
getting advice from your broker, reading
The Wall Street journal. However, the more
you want to invest, the smaller is the cost
per dollar of investment since significant
economies in time and expense are real
ized when the size of the investment in
creases. Also, the preferential tax treatment
of capital gains set against rising income tax
rates provide even more incentive for the
wealthy family to put a larger share of its
funds into investment assets. The economies
realized in costs of investing and the tax
laws make the monetary reward net of costs
associated with investment assets rise with
wealth. This induces the wealthier house
hold to put a larger share of its wealth
into these assets.
Occupation. While costs and risk act to
deter households from holding stocks and
4 Housing and possibly life insurance increase as a
proportion of wealth in the lower wealth ranges.

other investment assets, they do not affect
all households equally. Individuals in man
agerial and professional occupations tend to
be more familiar and in closer touch with
securities markets than those in other occu
pations. The corporate executive or lawyer
thus finds it somewhat less expensive and
time-consuming, and perhaps less risky, to
hold securities than does the blue-collar
worker. Consequently, those in managerial
and professional occupations tend to put a
higher share of their wealth into investment
assets than do those in other walks of life,
even with the same level of wealth.
Self-employed businessmen are also in
relatively close contact with financial mar
kets, but their preference for marketable
securities is not so strong as that of sal
aried executives or professionals. The selfemployed businessman is, however, differ
ent in one important respect — the major
share of his total wealth tends to be in
his own business, that is, as equity in an
unincorporated business or closely held cor
poration. Given optimism in his own busi
ness prospects and a desire for some stabil
ity in his wealth, he tends to put the major
share of his saving back into the business
and a hefty part of the remainder into
liquid assets.
Age. The younger generation behaves
differently than the older generation in many
ways. Not the least of these is how they
allocate their wealth. The older household
— the age of the head greater than about
45 years — tends to put a high share of its
savings into liquid and investment assets.
Meanwhile, the younger household exhibits
a relatively strong preference for durables,
housing, and life insurance. One possible
explanation is that the old have acquired
different savings habits than the young.
More likely, the differences in their asset
demands primarily reflect differences in
their position in the "life cycle." In the
formative years, when the household's sav
ings is relatively low, it keeps up its con
sumption standards partly by devoting a

FEDERAL RESERVE BANK OF PHILADELPHIA

THE BUNDLE IS SHUFFLED IN RESPONSE
TO INTEREST RATE CHANGES
In the aggregate, asset holdings of house
holds change in response to interest-rate
changes. There are several reasons for this.
First, while the typical saver may generally
regard interest rates as a minor factor in his
asset decision process, the wealthy saver
does not. For him the return on his wealth
is important, and, accordingly, he is more
sensitive to changes in interest rates. This
relatively small number of wealthy house
holds owns such a large proportion of total
wealth that it plays an important role in the
asset behavior of the household sector as
a whole. Second, some assets serve similar
purposes, and here even the typical saver
can be expected to take into account
changes in interest rates.
Both of these reasons make savers willing
to substitute across a relatively wide spec
trum of assets. Higher interest and dividend
rates paid on various savings deposits,
stocks, or bonds will induce the household
sector to hold a smaller amount of checking
deposits. The continuous increase in the
rates paid on savings deposits over most of
the past 20 years has reduced the attrac
tiveness of the highly liquid checking ac
count to even the typical saver. Moreover,
it is not too surprising to find checking de
posits responding to the yield on market
able securities, since an important share of
the checking deposits of wealthy families
may serve as a short-term alternative to
holding securities.
Since banking and savings institutions
issue liabilities of essentially the same char
acter, most savers take a pretty close look at
the interest rates offered by these various
institutions before deciding in which institu
tion to put their money. In addition, if
all such institutions raise their savings de
posits rates relative to rates paid on other
types of assets, they will witness an influx of
funds not only at the expense of household
checking deposits, but also of marketable
securities.

large share of its savings to assets high in
consumption services — housing, durables,
and life insurance — and a correspondingly
smaller share to assets relatively high in
savings services — savings deposits, stocks,
and bonds. In the middle and later middle
years, the household takes advantage of its
higher income and savings to build up its
stock of savings assets, especially for retire
ment purposes.
In retirement years the household keeps
a large part of its wealth in liquid form to
meet current expenditures not covered by
its sharply reduced income. That part of its
consumption assets, such as housing and
durables, not sold or cashed in is directly
consumed by allowing the asset to depre
ciate. This asset behavior of the retired
reflects the final stage in the household's
life cycle. The continuing importance of in
vestment assets in the wealth of the oldest
age groups is more difficult to explain. The
large holdings of investment assets among
retired households may partly reflect savings
habits built up during middle-age.
Children. The family with more children
demands more insurance, living space, and
durables. Add these higher demands to the
increased difficulty of accumulating savings,
and it is not surprising to find that the share
of its savings devoted to savings deposits,
stocks, and bonds falls as the number of
children increases.
Just as was the case with age, the rela
tively low level of savings assets of large
families may reflect an attempt to maintain
a consumption standard per dependent.
During that time interval when there are
more children, the savings per dependent
is lower than during other times, such as
after the children have left home. As a
result, relatively little saving is devoted to
long-term objectives, such as retirement. The
dearth of long-term savings may be made
up when income and savings per dependent
are higher; in other words, when there are
fewer children.

JUNE 1971

BUSINESS REVIEW

Bonds compete for the savings of the
wealthy not only with deposits but also with
stocks. Since both stocks and bonds are
held primarily for their monetary return, it
is not surprising to see household holdings
of these assets respond to changes in their
respective yields.
Finally, it may be that the rates paid on
savings deposits influence not only the
household's demands for other financial
assets but also its demand for durable
goods. The "revolving credit" function of
savings deposits for durable purchases,
noted earlier, opens -the door to the pos
sibility that such purchases may be sensitive
to rates paid on savings deposits. When
these rates rise, impromptu decisions to
withdraw funds from a savings account may
be less frequent, or planned purchases may
be postponed.

effect, gives the saver an "asset" having a
variety of uses. The current attempt of sav
ings and loan associations to obtain check
ing deposit privileges is simply a way for
them to gain or possibly just hold their own
in the race for the household's savings.
Second, since savers respond to interestrate changes, corporate and institutional
borrowers can, and do, compete on another
level. For example, banking and savings in
stitutions compete, via interest rates, both
among themselves and also with corpora
tions and government who issue stocks and
bonds. Consequently, ceilings on the inter
est rates of checking and savings deposits
put these institutions at a competitive dis
advantage when economic activity is at a
high level. During periods of generally high
interest rates, savers may shift their funds
from deposits to the high-yielding market
able securities.
The extent of each of these two kinds of
competition will depend not only on house
hold preferences, but also on the ability of
borrowers to compete in either way. The
corporation generally is less willing to tailor
its issues to the saver's goals. For this reason,
it is forced to offer the saver a relatively
high return. On the other side, restrictions
on interest payments have probably tended
to force financial institutions to compete
more in the form of non-interest-rate serv
ices than otherwise would have been the
case.
In days ahead the inventiveness of finan
cial institutions to woo the saver with non
monetary services in lieu of interest pay
ments may be tested even further. Projec
tions on the characteristics of U.S. families
indicate that the numbers in managerial and
professional occupations relative to other
occupations will continue to rise; family
size, decrease; the proportion of young
households to older households, increase;
and, most important, per capita real wealth,
continue to increase. The net effect of these
changes is likely to be that the average
saver will be more attracted to the high

COMPETITION FOR THE SAVINGS
DOLLAR — PROSPECTS FOR THE FUTURE
On the whole the saver appears to be
quite strongly motivated by family goals in
deciding how to accumulate wealth, but he
also keeps in mind the return paid on vari
ous assets. These dual considerations sug
gest that the issuers of liabilities, such as
financial institutions and corporations, will
compete with each other for a place in the
household's portfolio on two levels.
First, there will be an incentive for bor
rowers to tailor their liabilities to satisfy the
particular savings goals of wealthholders.
For example, the ability of savings institu
tions to capture a significant part of the
saver's wealth rests on the importance most
savers attach to having a significant part of
their funds readily available. In addition, the
borrower who is able to provide savers with
an asset which can satisfy multiple goals will
have a special advantage. The "full service"
characteristic of commercial banks provides
one such example. By making available to
its customers different types of deposits plus
other services, the commercial bank, in

FEDERAL RESERVE BANK OF PHILADELPHIA

yields of marketable securities than he has
been in the past.5 It may just be that the
ability of existing financial institutions to
pay competitive rates on their liabilities will
be crucial in determining whether they can
hold on to their present share of household
wealth.

age structure would, by itself, be sufficient to off
set this tendency. An important underlying assump
tion in this forecast is that changes in the various
characteristics will be distributed among U.S. house
holds in a manner which is similar to their previous
distribution. For example, an increase in wealth might
not have the expected effect if it also changed its
distribution in such a way that younger households
received a larger share of the increase than was pre
viously the case.
■

5 It is doubtful that the projected change in the

APPENDIX

have received the most attention and gen
erally appear to have the greatest effect on
the composition of the household's wealth.
The defining of the various asset categories
was to a great extent dictated by the pro
cedures used in the studies which were
reviewed.
It should be kept in mind that what is
being considered are the effects of household
characteristics on the proportion of wealth
held in the various types of assets rather
than the effects on the absolute amounts
held. Also the relations described in the
Table are ceteris paribus types of relations.
That is, they represent the results of attempts
to measure the "pure" effects of changes in
particular household characteristics on the
various asset proportions by holding other
things constant.

a. Asset Demands and Household
Characteristics
The Table presented below summarizes
some of the major findings that studies
of the composition of household wealth
have produced. Some of the household
characteristics not included whose effects
on asset behavior have been studied are
income, education, race, marital status, and
location. These variables were omitted from
consideration here because the evidence
of their effect on asset composition was
judged inconclusive: either there were too
few studies and contradictory results or a
failure to isolate sufficiently their effects
from that of other factors. The characteris
tics that were considered are those which

BUSINESS REVIEW

JUNE 1971

TABLE
EFFECTS OF CHANGES IN HOUSEHOLD CHARACTERISTICS
ON ASSET COMPOSITION
INCREASES IN:
OCCUPATION**
WEALTH

Liquid
Assets

Decreases

Investment
Assets
Increases

Means that Life
the share
Insurance
of wealth
held in:
Housing

Durables

Decreases

Decreases
(but increases
if wealth
remains below
approx. $30,000)

Decreases

Professional
SelfTechnical
employed
Management

AGE OF HEAD
Up to
45 Yrs.

CHILDREN

Over
45 Yrs.

(less than 4)

Increases

Decreases

Increases

Decreases

Increases

Decreases

Increases

Decreases

Increases

Decreases

Increases

Decreases

Increases

*See below for definitions of terms used in the Table. Some of the references used to make up
this Table are included in the selected bibliography below.
**Compared to other occupation categories.

FEDERAL RESERVE BANK OF PHILADELPHIA

D E FIN ITIO N S
Assets**
Liquid:

Demand deposits and savings deposits of all financial institutions.

Investment:

Publicly traded common and preferred stock in corporations other
than closely held corporations, marketable private and government
bonds of all maturities, real estate. Holdings in stock dominate invest
ment assets.

Life Insurance:

The premium or cash surrender value of the life insurance policy.

Housing:

Estimated market value of housing for personal use.

Durables:

Estimated market value of household durables including automobiles.

Miscellaneous:

Assets held in trust, withdrawable amounts from profit-sharing and
deferred-income plans, and assets such as royalties, patents, and
commodity contracts.

Household Characteristics
Wealth:

The total value of the asset components defined above of net outstanding debt.

Age of Head:

The age of the head of the household, usually the principal income
provider.

Number of
Children:

The number of dependents in the household less than 18 years
of age.

Management
and
Professional:

Households where head is classified as being in a managerial or
professional occupational category.

Self-employed
Business:

Households where the head is classified as being in a self-employed
business occupational category.

*Different studies do not always employ the same definitions so that these definitions represent those
most commonly used and are generally close approximations to other definitions used.
**Assets refer to the value of the asset net of any debt associated with the asset.

JUNE 1971

BUSINESS REVIEW

b. Sources of Reference
The information used to make up this
review comes from the largely empirical
literature dealing with household asset be
havior. In all, some 40 references were
c.

used, dating from the early 1950's to the
present. The vast majority of these refer
ences relied on data provided by surveys
of households to produce their results. A
selected bibliography is presented below.

Selected Bibliography

1. Barlow, R., Brazer, H. E., and Morgan, J. N. Economic Behavior of the Affluent. Washing
ton, D .C.: The Brookings Institution, 1966.
2. Brady, D. S. "Influence of Age on Savings and Spending Patterns." Monthly Labor Review,
July-December, 1955, Vol. 81, pp. 1240-1244.
3. Crockett, J., and Friend, I. "Characteristics of Stock Ownership." American Statistical
Association, Business and Economics Statistics Section, Proceedings, 1963, pp. 146-168.
4. DeLeeuw, F. "The Demand for Housing: A Review of Cross-Sectioh Evidence." Review
of Economics and Statistics, February, 1971, Vol. LI 11, No. 1, pp. 1-10.
5. Duesenberry, J. S. "The Portfolio Approach to the Demand for Money and Other
Assets." In The State of Monetary Economics, National Bureau of Economic Research,
pp. 9-24. New York: Columbia University Press, 1965.
6. Ferber, R. "Factors Influencing Durable Goods Purchases." In Consumer Behavior,
Vol. II, L. Clark, pp. 75-112. New York: New York University Press, 1955.
7. Hamburger, M. "The Demand for Money by Households, Money Substitutes, and Mone
tary Policy." journal of Political Economy, December, 1966, Vol. LXXIV, No. 6, pp. 600-623.
8. ------------- . "Interest Rates and the Demand for Durable Goods." American Economic
Review, December, 1967, Vol. LVII, No. 5, pp. 1131-1152.
9. ------------- . "Household Demand for Financial Assets." Econometrica, January, 1968,
Vol. 36, No. 1, pp. 97-112.
10. Krenin, M. E., Lansing, J. B., and Morgan, J. V. "Analysis of Life Insurance Premiums."
Review of Economics and Statistics, February, 1957, Vol. 39, No. 1, pp. 46-54.
11. Krenin, M. E. "Factors Associated With Stock Ownership." Review of Economics and
Statistics, February, 1959, Vol. 41, pp. 12-23.
12. Lampman, R. J. The Share of Top Wealth-Holders in National Wealth, 1922-1956. Prince
ton: Princeton University Press, 1962.
13. Lee, T. H. "Income, Wealth and the Demand for Money: Some Evidence from CrossSection Data." Journal of the American Statistical Association, September, 1964, Vol. 59,
No. 307, pp. 746-762.
14. ------------- . "Substitutability of Non-Bank . Intermediary Liabilities for Money: The
Empirical Evidence." The journal of Finance, September, 1966, Vol. 21, No. 3, pp. 441-451.
15. Lippit, V. G. Determinants of Consumer Demand for House Furnishings and Equipment.
Cambridge: Harvard University Press, 1959.

FEDERAL RESERVE BANK OF PHILADELPHIA

16. Mueller, E., and Lean, J. 'The Savings Accounts As a Source For Financing Large Expendi
tures." journal of Finance, September, 1967, Vol. 22, No. 3, pp. 375-393.
17. Mueller, E., and Osborne, FI. "Consumer Time and Savings Balances: Their Role in
Family Liquidity." American Economic Review, May, 1965, Vol. LV, No. 2, pp. 265-274.
18. Thompson, L. E. "Income Velocity, Liquid Assets of Flouseholds and Nonfinancial Corpo
rations, And Monetary Policy." In Stabilization Policies, Commission on Money and
Credit, pp. 270-330. Englewood Cliffs: Prentice Hall, 1963.
■

JUNE 1971

BUSINESS REVIEW

The Fed in Print
Business Review Topics
Selected by Doris Zimmermann

BANK CREDIT CARDS
The boom spreads to the Southwest —
Dallas Jan 71 p 6

For the first time analytical articles ap
pearing in the Federal Reserve Bulletin are
included in this compilation, beginning with
the January 1971 issue. Copies of the Federal
Reserve Bulletin are available from the Fed
eral Reserve Board for sixty cents each,
mailed to the Washington address on page
29. You may send for Business Reviews of
the Federal Reserve Banks, free of charge,
by writing directly to the issuing banks,
whose addresses also appear on page 29.

BANK CREDIT PROXY
Bank credit proxy — Cleve
Feb 71 p 3
BANK DEPOSITS
Banking: A rerun in reverse —
Atlanta Jan 71 p 7
BANK HOLDING COMPANIES
Federal laws regulating bank mergers
and the acquisition of banks by
registered bank holding companies
— Cleve Jan 71 p 18
Bank Holding Company Act
amendments 1970 — F R Bull
Jan 71 p 29
The 1970 amendments to the Bank
Holding Company Act:
Opportunities to diversify (Hayes)
— N. Y. Feb 71 p 23
Operating policies of bank holding
companies — Part I — F R Bull
Apr 71 p 283

AIR TRANSPORT
Slowing down the airlines —
San Fran March 71 p 64
BALANCE OF PAYMENTS
Revised guidelines — F R Bull
Jan 71 p 9
Trade and the payments balance —
Chic Jan 71 p 17
Annual review 1970 — San Fran
Feb 71 p 30
U.S. balance of payments and
investment position — F R Bull
Apr 71 p 269

FEDERAL RESERVE BANK OF PHILADELPHIA

BURNS, ARTHUR F.
The basis for lasting prosperity —
Rich Jan 71 p 2
Statement to Congress Feb 19, 1971 —
F R Bull March 71 p 233
Statement to Congress March 10,1971
— F R Bull March 71 p 240
Statement to Congress March 31,1971
(Credit control) — F R Bull
Apr 71 p 303
BUSINESS FORECASTS AND REVIEWS
The Southeast in 1970 — off but ahead
of U.S. — Atlanta Jan 71 p 2
Review and outlook — 1970-71 —
Chic Jan 71 p 2
1971: Economic outlook — Kansas City
Jan 71 p 3
Perspective '70 available — N.Y.
Jan 71 p 6
Outlook for 1971 — Phila Jan 71 p 19
Forecasts 1971 — Rich Feb 71 p 8
Annual review 1970 — San Fran
Feb 71 p 17
CAPITAL m a r k e t
Capital markets and interest rates in
1970 — St. Louis March 71 p 2

BANK HOLDING COMPANY ACT 1956
Antitrust and the new Bank Holding
Company Act: Part I — Rich
Feb 71 p 2
Antitrust and the new Bank Holding
Company Act: Part II — Rich
March 71 p 3
BANK LIABILITIES
Liability management banking —
Atlanta Feb 71 p 22
Annual review 1970 — San Fran
Feb 71 p 41
BANK LIQUIDITY
Some financial guides from 1970
(Coldwell) — Dallas Feb 71 p 1
BANK LOANS
Changes in bank lending practices,
1970 — F R Bull Apr 71 p 298
BANK STATEMENTS
Liability management banking:
Appendix — Atlanta Feb 71 p 32
BANKING STRUCTURE
The challenges for small banks
(Mayo) — Chic March 71 p 10

COMMERCIAL PAPER
Commercial paper: 1970 — San Fran
March 71 p 57

BRANCH BANKING
Changes in banks, branches, and
banking offices in the Fourth
District 1965-1970 — Cleve
Feb 71 p 11

CONSTRUCTION INDUSTRY
Construction activity — Chic Jan 71 p 9
Construction: Stunted growth —
Atlanta Jan 71 p 12

BRIMMER, ANDREW F.
Statement to Congress April 7,1971
(Reserve requirements) — F R Bull
Apr 71 p 303

CONSUMER EXPENDITURES
The consumer: A reluctant spender —
Atlanta Jan 71 p 10
Consumer spending and economic
activity — Kansas City Feb 71 p 3

BROKERS
The securities business and
consciousness III (Eastburn) —
Phila Jan 71 p 3

CORPORATE FINANCE
Corporate financing in 1970 —
F R Bull Jan 71 p 1
COST OF LIVING
Metropolitan living cheaper in Texas
than in most other states —
Dallas March 71 p 6
25

BUSINESS REVIEW

JUNE 1971

DIFFUSION INDEX
Diffusion indexes and economic
activity — Cleve Jan 71 p 3
DISCOUNT OPERATIONS
Determinants of member bank
borrowing — Kansas City
Feb 71 p 11

FEDERAL RESERVE BANKS-EARNINGS
(Cont'd)
Earnings and expenses in 1970 —
F R Bull Jan 71 p 75
FEDERAL RESERVE BANKS-OPERATIONS
Annual operations and executive
changes — Phila Jan 71 p 20
Operations 1970 — St Louis Feb 71 p 8

ECONOMIC STABILIZATION
Stabilization policies and employment
— St Louis Feb 71 p 2
The 1971 national economic plan —
St Louis March 71 p 11

FEDERAL RESERVE— CREDIT CONTROL
Money and banking — Chic Jan 71 p 21
FEDERAL RESERVE— FOREIGN EXCHANGE
Treasury and Federal Reserve foreign
exchange operations — N. Y.
March 71 p 43 ,
Treasury and Federal Reserve foreign
exchange operations — F R Bull
March 71 p 189

EDGE ACT
Appendix (technical) — St Louis
Jan 71 p 12
EURODOLLARS
Reserves amended Jan 15, 1971 —
F R Bull Feb 71 p 121
Reserves against Eurodollar
borrowings— F R Bull Apr 71 p 328

FEDERAL RESERVE SYSTEM PUBLICATIONS
The Fed in print— Phila March 71 p 72
FINANCIAL INSTITUTIONS
SUPERVISORY ACT
Act approved Dec 31,1970 — F R Bull
Feb 71 p 121

EXPECTATIONS
Expectations, money, and the stock
market — St Louis Jan 71 p 16
FARM CREDIT
Farm capital and credit trends in
Virginia — Rich Jan 71 p 8
Farm financial and credit conditions —
Rich March 71 p 11

FISCAL POLICY
Annual review 1970 — San Fran
Feb 71 p 22
FOREIGN INVESTMENT
Direct foreign investment of the U.S.—
Cleve March 71 p 15

FARM OUTLOOK
Agricultural outlook 1971 —
Kansas City Jan 71 p 13
Agriculture: A year of bountiful
production — Atlanta Jan 71 p 15
Agricultural developments — Chic
Jan 71 p 12

GAS INDUSTRY
Natural gas — its impending shortage
and potential abundance — Dallas
Jan 71 p 1
HOUSING AND URBAN DEVELOPMENT
ACT OF 1970
Act approved Dec 31,1970 — F R Bull
Feb 71 p 121

FEDERAL RESERVE BANKS-DIRECTORS
Chairmen, agents, and directors
appointments— F R Bull
Jan 71 p 64
List o f — F R Bull Feb 71 p 149

INCOME, PERSONAL
Price increases slow gains in real
income — Dallas March 71 p 1

FEDERAL RESERVE BANKS-EARNINGS
The Federal Reserve System paid the
U.S. Treasury $3,493,000,000
during 1970 — Atlanta Jan 71 p 17

INDUSTRIAL PRODUCTION INDEX
Annual Review 1970 — San Fran
Feb 71 p 35
26

FEDERAL RESERVE BANK OF PHILADELPHIA

INFLATION
Inflation in a sluggish economy —
trouble for monetary policy
(Hayes) — N.Y. Jan 71 p 3
Recovery from an inflationary recession
— Phila Jan 71 p 8
The fight against inflation: Barebone,
jawbone, or lawbone? — Phila
Feb 71 p 3
Postwar business cycles compared —
Chic March 71 p 2

MONEY SUPPLY
The revised money stock: Explanations
and illustrations — St. Louis
Jan 71 p 6
The supply of money in the U.S.
Part I — the institutional
development— Rich Jan 71 p 13
The supply of money in the U.S.
Part II — the monetary framework
— Rich Feb 71 p 12
MORTGAGES
Mortgage, construction, and real estate
markets— F R Bull March 71 p 167

INTEREST RATES
Interest on deposits — F R Bull
Apr 71 p 328

MUNICIPAL FINANCE
Restructuring the municipal bond
market— Bost Jan 71 p 47
The financial future of city and school
government in Philadelphia —
Phila March 71 p 3
Response of state and local
governments to varying credit
conditions— F R Bull
March 71 p 209

LABOR COSTS
Postwar business cycles compared —
Chic March 71 p 2
LIQUIDITY
Rebuilding America's liquidity
(Mayo) — Chic Feb 71 p 2
MISSISSIPPI
Mississippi in 1970: Paddling against
the current — Atlanta
March 71 p 52

ONE-BANK HOLDING COMPANIES
Registration statements Feb 17, 1971 —
F R Bull March 71 p 265

MOBILE HOMES
Bank financing of mobile homes —
F R Bull March 71 p 179

OPEN MARKET OPERATIONS
Record of policy actions — F R Bull
Jan 71 p 21
Monetary aggregates and money
market conditions in — F R Bull
Feb 71 p 79
Record of policy actions — F R Bull
Feb 71 p 105
Record of policy actions — F R Bull
Apr 71 p 303

MODELS (STATISTICS)
Wharton available — F R Bull
Jan 71 p 76
Population, labor force, and potential
output: Implications for the
St Louis model — St Louis
Feb 71 p 15
Econometric models: What they are
and what they say for 1971 —
Atlanta March 71 p 42
MONETARY POLICY
The implementation problem of
monetary policy — St Louis
March 71 p 20

PRICES-STABILIZATION
Current stabilization policy —
St Louis Jan 71 p 2
Price stability— Kansas City
March 71 p 15

MONETARY STABILIZATION
Exchange rate reform? — San Fran
Jan 71 p 3

PUBLIC WELFARE
Welfare reform and income
supplements — Bost Jan 71 p 2

JUNE 1971

BUSINESS REVIEW

UNIFORM RELOCATION ASSISTANCE . . .
ACT OF 1970
Act approved Jan 2, 1971 — F R Bull
Feb 71 p 121

RECESSIONS
Postwar business cycles compared —
Chic March 71 p 2
RECREATION INDUSTRY
Tenth District recreational water —
Kansas City March 71 p 3

VALUE ADDED TAX
The value added tax in Europe —
Chic Feb 71 p 9

REGIONAL ANALYSIS
Regional economy slips in 7 0 —
Phila Jan 71 p 14

VOLUNTARY FOREIGN LOAN CREDIT
RESTRAINT 1965
Revised guidelines— F R Bull
Jan 71 p 9
Effects of VFCR program — F R Bull
Jan 71 p 76
Survey of foreign lending available —
F R Bull March 71 p 265

REGULATION Z
Amended April 5,1971 — F R Bull
March 71 p 246
SERVICE INDUSTRIES
Services: Bridge over troubled city
waters — Phila Feb 71 p 14

WAGES — STABILIZATION
The wage-profit battleground —
Phila Feb 71 p 12

SPECIAL DRAWING RIGHTS
Experience with special drawing rights
— Cleve March 71 p 3
TIME DEPOSITS
Changes in time and savings deposits
July-Oct 1970 — F R Bull
Apr 71 p 285

FEDERAL RESERVE BANK OF PHILADELPHIA

FEDERAL RESERVE BANKS AND BOARD O F GOVERNORS
Federal Reserve Bank of Kansas City
Federal Reserve Station
Kansas City, Missouri 64198

Publications Services
Division of Administrative Services
Board of Governors of the
Federal Reserve System
Washington, D. C. 20551

Federal Reserve Bank of Minneapolis
Minneapolis, Minnesota 55440

Federal Reserve Bank of Atlanta
Federal Reserve Station
Atlanta, Georgia 30303

Federal Reserve Bank of New York
Federal Reserve P.O. Station
New York, New York 10045

Federal Reserve Bank of Boston
30 Pearl Street
Boston, Massachusetts 02106

Federal Reserve Bank of Philadelphia
925 Chestnut Street
Philadelphia, Pennsylvania 19101

Federal Reserve Bank of Chicago
Box 834
Chicago, Illinois 60690

Federal Reserve Bank of Richmond
P.O. Box 27622
Richmond, Virginia 23261

Federal Reserve Bank of Cleveland
P.O. Box 6387
Cleveland, Ohio 44101

Federal Reserve Bank of St. Louis
P.O. Box 442
St. Louis, Missouri 63166

Federal Reserve Bank of Dallas
Station K
Dallas, Texas 75222

Federal Reserve Bank of San Francisco
San Francisco, California 94120

REPRINT AVAILABLE
Since current interest in inflation continues unabated, we have reprinted the Feb
ruary, 1971 issue of the Business Review containing "Fight Against Inflation: Barebone,
Jawbone, or Lawbone?" Also included in this issue are "Services: Bridge Over Troubled
City Waters?" and "The Wage-Profit Battleground." To obtain copies, direct your re
quest to Public Services, Federal Reserve Bank of Philadelphia, Philadelphia, Penn
sylvania, 19101.

FOR THE R E C O R D ...

2 YEARS
AGO

Third Federal
Reserve District

April 1971
from
mo.
ago

MANUFACTURING
Production ..............................
Electric power consumed
Man-hours, total* ...........
Employment, t o t a l..............
Wage income* ......................
CONSTRUCTION** ..............
COAL PRODUCTION ...........

year
ago

+ 2
-10
- 7
- 2
+ 27
+ 13

0
- 9
- 7
- 2
+ 2
+ 6

April 1971
from
mo.
ago

0
i
2
1
1
+ 211
+ 2

LOCAL
CHANGES

Per cent change

4
mos.
1971
from

year
ago

Standard
Metropolitan
Statistical
Areas*

Wilmington

PRICES
Wholesale
Consumer

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

+ 15
+ 10
+ 27
+ 13
+ 37
+ 9f

ot + 6t

•Production workers only
••Value of contracts
•••Adjusted for seasonal variation

+ 14
+ 10
+ 24
+ 11
+ 33
+ It

+ 6t

Per cent
change
April 1971
from

Banking

Payrolls

Check
Payments**

Total
Deposits***

Per cent
change
April 1971
from

month
ago

year
ago

month year
ago
ago

+ 6

+ 21
+ 4

+ 17
+ 16

+ 4
+ 13

1
0
0
- 3
+ 3
+ 2

+ 16
+ 7
+ 22
+ 4
+ 27
+ 15

+ 15
+ 6
+ 23
+ 19
+ 26
+ 15

0
0

+ 3
+ 4

+ 3
+ 5

115 SMSA’s
^Philadelphia

month
ago

year
ago

month year
ago
ago

+ 14

+ i

+ 16

+ 7

+ 1

+ 29

Trenton

...........

Altoona

...........

+ i

+ 12

+ 10

+ 23

+ 1

+ 18

+ 5

+ 1

+ 87

+ 3

+ 14

+ 5

+ 12

Harrisburg . . .
. ..

+ 9

Lehigh Valley .

Philadelphia

Reading ...........

+ 1

Lancaster
0
+ 1
+ 2
0
+ 3
+ 3f

Employ
ment

Atlantic City

Johnstown
BANKING
(All member banks)
Deposits ................................
Loans .........................................
Investments ...........................
U.S. Govt, securities . .
Other ......................................
Check payments*** . . . .

APR.
1971

Manufacturing

United States

Per cent change
SU M M ARY

YEAR
AGO

-4 2

+ 5

+ 26

+ 2

+ 6

+ 1

+ 14

+ 6

+ 9

+ 2

+ 13

+ 16

+ 14

+ 2

+ 18

+ 13

+ 9

+ 10

+ 4

+ 20

Wilkes-Barre

+ 1

+ 4

+ 8

+ 1

+ 14

York

+ 3

+ 1

-40

Scranton

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

•Not restricted to corporate limits of cities but covers areas of one
or more counties.
••A ll commercial banks. Adjusted for seasonal variation.
* • ‘ Member banks only. Last Wednesday of the month.

Full text of Business Review (Federal Reserve Bank of Philadelphia) : June 1971

FRASER