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MAY

19 6 0

How Banking Tames Its Paper Tiger
W ill Manufacturers Practice What They Preach?
Our 1 9 6 0 Housing Market

FEDERAL

RESERVE

BANK

PHILADELPH IA

HOW
BANKING TAMES ITS PAPER TIGER

This is the first of a series on bank mechanization.
Subsequent articles will discuss the results of a survey
of Third District member banks. Here we introduce

THE TASK AND THE TOOLS.
problems that plague many banks. “ We just
Banking is on the edge of an exciting new age,

can’t find all the people we need,” is a common

the electronic age. Devices that actually read,

lament. And the new equipment may help banish

machines that sort checks faster than the eye can

an old bugaboo, handling checks.

see, computers that analyze loan applications—

There is also the question of what the elec

these already exist and there is no telling what

tronic age will do to banking. What will be its

is on the drawing board.

impact on the merger movement, on the struc

It’s what these miracle machines will do for

ture of the banking system? Can small banks

the industry that is exciting most bankers. They

keep up with electronics? How? We hope our

will help stabilize rising costs which have been

survey will shed light on questions such as these.

pinching profits. By doing this, they will make

But we are not limiting our study to electronics.

it easier for banking to raise the extra capital

Far from it. We are interested in, and will report

it must have in the 1960’s.
Electronic machines will lessen the personnel

on, most of the major types of machines that
banks use today.

business review

TH E CHALLENGE

The number of savings accounts is up 33

The age of tubes and transistors is arriving in

per cent.

the nick of time. Banking is not now a highly

Commercial loans have grown by 113 per cent.

mechanized industry. It will have to use con

Checking account activity

siderably more and better machines if it is to

(debits)

has in

creased 163 per cent.

continue to serve properly our expanding econ

Mortgages have swelled 290 per cent.

omy. The banking paperwork load is already

Consumer instalment credit has mushroomed

heavy and it’s growing all the time. Take checks,

850 per cent.
And there’s more expansion to come. Over

for example.
Processing checks is banking’s biggest job.

the next decade our population will be increasing

Each check passes through 2 1/3 banks on its

almost 2 per cent each year. Incomes probably

way home and is handled up to 20 times. In

will move up even faster. Economic activity as

1952 about 8 billion checks were written. Today

measured by gross national product is slated

the figure is 13 billion and by 1970 it will soar

for a 40 to 50 per cent increase during the 1960’s

to over 22 billion. A staggering total! That many

according to many experts. All this growth

checks taped end to end would reach to the

means more bank customers and a greater de

moon and back 6 times.

mand for bank services.

CHECK AND DOUBLE CHECK
Estimated number of checks written each year.

ther fatten the paper tiger. First is the develop

Two trends within banking itself should fur
ment of intricate new services such as revolv

BILLION

ing check credit, charge-account banking, lockbox collection plans, and many others. Second is
a shift into activities that require more detailed
processing. Banks are clipping fewer coupons and
making more commercial loans, mortgages, and
loans to consumers. Instead of concentrating
on a few big clients from a downtown office,
banks now are wooing millions of small cus
tomers from myriad suburban branches. All
these trends are well-established and expected
to continue.

1940

1950

I 960

1970

Help w anted

G ro w th rig h t down the line

Since World War II banks apparently have ex

The coming cascade of checks is not the only

panded operations more by hiring extra people

reason why banking will need more mechaniza

than by using better equipment. Commercial

tion. Almost all other bank operations will be

bank employment has increased 65 per cent

growing too, generating tons of additional paper

since 1946 compared with 20 per cent for total

work.

nonagricultural employment. Some people won

Look

what’s happened

in commercial

banks during the postwar period. . . .

der why future expansion can’t be accomplished

business review

in the same manner, with humans rather than

have been hovering near 8 per cent of total capi

hardware.
MORE PEOPLE WORK IN BANKS
Employment in all insured commercial banks
as a percentage of nonagricultural employment.

tal accounts since 1950. Banks, however, have
been earning more on their loans and invest
ments— gross earnings per dollar of assets have
increased 50 per cent from 1950 to 1957.1 The
reason that this extra income hasn’t boosted
profits more is, of course, that expenses have
risen also. Wage and salary costs, for example,
rose 98 per cent from 1950 to 1957.
If inflating costs continue to pinch profits,
banking may have trouble getting enough addi
tional capital in the future. Retained earnings
would be a smaller source and the sale of addi
tional stock might be more difficult. Investors
tend to put their money where it will earn the
highest return. They may slight banking in favor

The answer is that there just won’t be enough

of other industries with a better profit record.

people. If banking employment continues to grow

Banking must raise many billions of dollars of

the way it has in the past fifteen years, every

new capital in the coming decade in order to

body then in the labor force would be working

keep pace with our growing economy. If it

in a bank by the year 2100. In fact, banking is

doesn’t, the quality o f banking services could

having trouble finding enough workers right

suffer and this could, in the end, impinge on

now. Clerical help is scarce. The low birth rates

our nation’s ability to grow.

of the 1930’s plus earlier marriages and mother

Many bankers, therefore, are looking to mech

hood have trimmed the supply of young female

anization as a method of stabilizing costs and

workers. Demand, on the other hand, has swelled

preserving profits. Mechanization can reduce the

tremendously. With operations growing in size

need for additional labor and increase over-all

and complexity, business and industry need more

efficiency to boot.

and better information and they need it fast.

NO BOOM IN BANK PROFITS
Net profits as a percentage of capital accounts.
Figures are for all insured commercial banks.

Reflecting this demand, one out of every four
help-wanted ads in a recent Sunday edition of a

PER CENT

Philadelphia newspaper offered clerical employ
ment. In the face of this supply-demand situation
it looks as though banking will have to pay
higher and higher salaries to expand employ
ment significantly.
The personnel situation leads one to expect
additional mechanization and so does the profit
situation.
The after-tax profits of

commercial

banks

1951

1953

1955

1957

1 W e chose 1957 as a comparative date because 1958 was distorted
by the recession and by unusual p ro fits on the sale of securities.
Fig ure s fo r 1959 are not yet available.

business review

“ W h a t w ill happen to my job?”

breaks, chatter. Why not let the machines take

The specter of layoffs worries many bank em

over the dull, stultifying jobs and save people

ployees who recognize the trend to machinery.

for the thing they do best— thinking?

It’ s a very natural fear. Ever since the industrial

So, if you worry about what will happen to

revolution, workers have been concerned about

your job when they tote in that new machine—

being replaced by machines. Weavers in England

don’t. Your job may be shifted or upgraded but

and France got so scared that they banded to

there is not much chance that you will be

gether and smashed the “ pernicious engines”

eliminated.

they thought were taking their jobs.
Economists assure us that machines don’t

A CAVALCADE OF H A R D W A R E

create unemployment in the long run. The rea

The first piece of equipment ever used by a

soning, amply substantiated by experience, goes

banker was a pointed stick. Banking was born

something like this. The use of machinery means

in Babylonia 4,000 years ago and the first rec

lower costs. Lower costs mean any one or a

ords were scratched on clay tablets. Centuries

combination of higher profits, higher wages,

later toga-draped bankers in Phoenicia were

and lower prices. All three increase over-all

posting papyrus scrolls with pens made from

spending power. This extra demand will create

reeds. Chinese bankers used the first calculating

new jobs for the workers who were originally

machine— the abacus— around 600 B.C., and

displaced by the machines.

they also were first to use paper.

Bank workers have little cause to worry, even
about short-run unemployment. There is such

The ancient Greeks and Romans had a highly
developed banking system but they contributed

a strong demand for bank labor, regardless of

little to the advancement of the tools of the

mechanization, that any reasonably competent

trade. In fact, the next major milestone in rec

employee who is replaced by a machine will very

ord-keeping wasn’t passed until the Middle Ages.

likely be absorbed elsewhere in the same bank.

Then the decimal system and Arabic numerals

Banking has a very high labor turnover rate and

replaced Roman numerals throughout much of

jobs

Europe.

This

Imagine

trying

open

frequently— it’s the young ladies

again, getting married and having babies.
The installation of machinery tends to up

greatly
to

simplified

figure

the

calculation.
interest

M CLXXIV denarii at VI per cent per annum!

grade some workers in both prestige and pay.

In 1642, Blaise Pascal built a machine that

Banks tend to draw on their existing staff for

could add figures, and Gottfried Leibnitz fol

personnel to operate new equipment and this

lowed with a multiplying device in 1693. During

applies even to electronic computers. Thus many

the next 200 years many inventors worked on

workers are rescued from routine, boring jobs

the problem of substituting “ brass for brains”

and given something that makes better use of

but few practical machines were developed dur

their true skills. Charles Babbage, a pioneer in

ing the period.

the development of calculating machines, called

As late as 1890 banking did most of its work

arithmetic “ one of the lowest operations of the

by hand. Clerks perched on high stools and inked

human intellect.” Nor are humans very good at

entries in ponderous ledgers. Male secretaries

it— they make mistakes, daydream, take coffee

copied letters in “ fine round hands.” Officers

business review

scratched interest computations with goose-quill

book and to post simultaneously the bank’s ledger

pens.

card. The customer hands the teller his deposit

The mechanical revolution started in offices

or his withdrawal ticket and passbook. The teller

and banks shortly before the turn of the present

inserts the book and a ledger card into the

century. Once begun, it gained momentum rap

machine. He then keys in the old balance plus

idly. First came the writing machine, the type

the current transaction, strikes a button and,

writer, then the adding machine, and then a

presto— the transaction and new balance are

whole procession of equipment. By 1914 a book

entered on both book and card. Mortgage and

on office management found the following among

instalment loan payments may also be recorded

the machinery in general use: cash registers,

by this machine.

punched-card tabulators, addressing machines,

Proof machines. Sorting is their specialty. The„

billing machines, duplicating machines, photo

operator takes a mixed-up pile of

copiers,

check-signing

documents and drops them one by

Sounds like an inventory of a modern office or

the machine. The operator indexes

automatic

typewriters,

one in the proper pocket or bin in

equipment, and folding machines.
bank, doesn’t it? It well could be, because be

the amount of each document on

tween 1914 and after the end of World War II

the keyboard and the machine keeps track of the

no really new machines were introduced. Many

total in each pocket plus a grand total.

modifications and improvements were made, of

Conventional

bookkeeping

machines.

These

course, but most of the equipment used during

are members of the adding machine family but

these years belonged to long-established families.

they also have some typewriter blood in them.

In the mid-1950’s the first electronic computer

Bookkeeping machines can enter dates and sym

was installed in a bank and in 1957 electronic

bols as well as amounts on a ledger card. Some

bookkeeping machines were introduced. A new

species even have a typewriter keyboard so that

age began to dawn in banking.

the operator can fully describe an entry. One

M eeting the m achinery

uses in banking is keeping

Banks use a wide range of machines from post

track of checking accounts.

of their most important

age meters to pencil sharpeners, from computers

Each account has a ledger

to coin changers. There are far too many types

card on which a summary

to discuss or even mention here. We shall con

of all transactions and a

fine ourselves to the mainstream machines, those

running balance is main

through which a major operation flows.

tained. The operator in

Window posting

machines. These are the

serts the card into the machine, picks up the

“ front men” for banking’s gang of working ma

old

chines. They greet the public

and the machine computes and prints a new

from their perch in the teller’s

balance.

window. Their job is to print

balance,

Electronic

deducts checks,

bookkeeping

adds

machines.

deposits,

Bankers

a receipt or record in the cus

know these machines as “ tronics.” Maybe you’ve

tomer’s saving account pass

seen their calling card— black stripes on the

business review

back of a checking account

Punched cards first met paper work during

statement. These stripes con

the processing of the Census of 1890. The coun

tain finely powdered iron and

try was growing fast and tabulating the Census

carry information in the form

was becoming a staggering manual job. The

of magnetic charges. The oper

Census of 1880 wasn’t published until after 1884

ator slips the ledger card (part

and it was estimated that the results of the 1890

of which becomes your state

Census wouldn’t be available until after the

ment) into the machine. Then she keys in the

1900 Census had been taken. Herman Hollerith,

account

deposit

an engineer, was engaged to solve the problem

ticket. The machine compares this number to

and he did so by inventing a calculating ma

the one it reads from the magnetic stripes to

chine that used punched paper cards. The ma

make sure the right account is being posted.

chine chewed up the mountain of reports and the

number

from

check

If the numbers match, the operator may pro

census was published in good time. Thereafter,

ceed to enter the check or deposit. After auto

punched-card equipment spread to business, in

matically picking up the old balance from the

dustry, and banking.

stripes, the machine either adds or subtracts

Many kinds of machines can be used in a

the entry, computes a new balance and mag

modern

netizes it on the stripes. The machine also

types, however, are the key punch which is used

punched-card

installation.

The basic

prints a record of

each transaction on the

to translate original information into holes in

front of the card in regular ink for human

a card; the sorter, of late quiz show fame, which

eyes to read.

distributes a deck of punched cards into desig

Punched-card

tabulating

equipment.

These

nated pockets; the tabulating and printing ma

holes

chine which does the arithmetic and writes

punched in a card. The position of the holes

down the answers. While these machines are the

stands for letters and numbers. As the cards

backbone of any installation, you also may find

feed into the machine, “ fingers” of electricity

such supporting equipment as collators, verifiers,

feel where the holes are, like a blind man read

and card reproducers on the job.

machines

get

their

information

from

ing Braille. The equipment can do many types of
computations and turns out the answers on car

Electronic computers. Computers are wonder
fully fast and accurate.
A large computer can

pets of paper.
The idea of using punched cards to introduce

do in less than a second

information into a machine is not new. Joseph

a job that would take

Jacquard used them to guide the operation of a

the fastest clerk a week

loom in 1780. Air was

to do

blown through holes in

don’t be overawed by computers. They are just

the cards

trigger

dumb machines; in fact, the only thing they can

levers and, under this

do is count. By counting, they can add and sub

guidance,

looms

tract and with these abilities, they can multiply

were able to weave the

and divide. And that’s all. That’s enough in most

most intricate patterns.

cases, for the most complicated mathematical

to
the

by hand. But

business review

problems can be broken down into these gram

livered. It is estimated that several hundred

mar school essentials.

banks are at some stage in this gestation process.

The first electronic computer, the ENIAC, was

A new, solid-state (this means it uses transis

made right here in Philadelphia during World

tors) computer looks for all the world like a

War II. It was constructed by two University of

bunch of square, pastel-hued refrigerators scat

Pennsylvania professors to solve ordnance prob

tered around a room. It has four basic parts:

lems for the Army. The ENIAC was a ponderous

(1) the input units shoot information into the

pioneer containing some 30,000 vacuum tubes in

computer from punched cards, magnetic tape or,

a space as big as a house. It toiled long and

with modifications, from checks and other ori

well, however, and was retired only a few years

ginal documents; (2) the processing section is

ago.

where the actual computations are performed;

The ENIAC and its first brothers were used to

(3) the storage unit remembers figures that are

solve scientific problems and it was not until

being calculated and instructions that the ma

1951 that a computer was applied to office

chine has been given; (4)

work. The Census again showed the way. In

spew out the answers on punched cards or mag

1953, a private company installed a computer

netic tape or sometimes printed on paper for

and the rush was on.

humans to read. This, greatly simplified, is what

In the latter 1950’s computer design took a

the output devices

those “ refrigerators” do.

giant step forward. Tiny transistors replaced

Let’s see how one kind of computer might

vacuum tubes with great reduction in space re

handle the job of posting demand deposit ac

quirements, maintenance, and heat generated—

counts. A prerequisite is that every account be

both in the computer and under the operator’s

numbered. When a batch of checks and deposit

collar. Today there are about 2,500 computer

tickets is received, it is put in numerical order.

systems in use. About one-third of these are

The account number, the amount of the item,

used primarily for scientific purposes. The re

and whether it is a debit or credit are magne

mainder tackle the paper work of business.

tized on a tape. This tape is run into the machine

The Bank of America was the first bank to

with another showing yesterday’ s account bal

install a computer. It put its famous ERMA to

ances. The machine matches the account num

work in 1956. At the present time, only a hand

bers, deducts checks, adds deposits, strikes a new

ful of banks operate computers but the number

balance and magnetizes it on another tape— all

is expected to grow rapidly in the next few

in the wink of an eye. The new tape is then run

years. Several new models have been introduced

through a high-speed printer to get a readable

which are especially appropriate for bank ac

record in case anybody wants to know his exact

counting and banks are showing plenty of inter

deposit balance. The machine also can be in

est. There is quite a time lag between interest

structed to handle checks on which payment has

and operation, however. The bank can spend

been stopped, and those with insufficient funds

several years just making studies to determine

behind them.

if it wants a computer and what kind. Then,

We have described the popular “ sequenced”

if the bank places an order, it may have to wait

type of computer which stores basic records on

another year or two before the computer is de

reels of magnetic tape. There is another way a

business review

computer can be used for deposit accounting.

The magnetic inscription may include a num

It is called “ random access.” Here the master

ber to identify the bank, the depositor’s account

records— the current balance for each account,

number, and the amount of the check. Inasmuch

etc.— stay inside the computer itself in an extra-

as deposit tickets also may be processed by the

large memory unit. The computer can pick out

same machinery, there is a code to distinguish

any account at random and up-date it in a frac

debits from credits.

tion of a second.

These identifying numbers are printed in a

Computers have other important banking jobs

common language developed by the American

besides deposit accounting. They are, or soon

Bankers Association. This means the same type

will be, keeping track of consumer and mortgage

face will be used in the same way all over the

loans, figuring payrolls, and accounting for trusts.

country. The characters can be read by people

In fact, there are almost unlimited possibilities

as well as by machines. They may look a bit

for using computers in banking. There is no

weird at first, but they are really only lumpy

reason why they can’t do market research or

Arabic numerals. For example, this is the year

credit analysis. And why not ask a computer to

HE.0

pick the best possible location for a new branch

Magnetic

ink

checks

can,

course,

or to solve management and policy problems?

handled by old methods, too. They are just the

It is possible, for example, for a computer to

same as any other check except for the inscrip

figure how to run a bank so as to maximize

tion.

profits and minimize risks.

Printing in magnetic ink is not expensive. It
now adds slightly to the cost of a check but as

Bre a k ing the check b a rrie r

printers get more experience and volume, the

Banking is at last on the verge of a major

extra cost may disappear entirely. There is,

breakthrough in check handling. Machines to

however, another problem that could inhibit the

do this job have recently been developed. They

wide use of magnetic ink.

can sort checks as to the bank on which they
are written, or by accounts within a bank. The

The m ost im p o rta n t

new equipment can run totals, prove batches and

5 / 8 th s inch in banking

pass information along to a computer that posts

Many checks will have to be redesigned because

accounts. And it’s all automatic— virtually un

the magnetic inscription pre-empts a strip fiveeighths of an inch wide along the bottom of the

touched by human hands.
It sounds like magic but it’s really magnetism.

check. Redesigning won’t be too much of a prob

Each check wears a “ dog tag” written in ink

lem on the checks that banks issue themselves

that contains minute particles of iron. As the

but there may be more difficulty in cases where

checks pass through the machines at speeds

companies print their own. Some firms like to

from 750 to 1,500 per minute, the ink is magne

work advertising into their checks. We have

tized. An “ eye” reads the impulses set up by the

seen checks shaped like motor boats and sau

ink, translates them into numbers,

sages, checks with pictures of factories and com

machine

acts

according

received.

the

and the

information

pany

presidents, checks

the size of

half a

newspaper page. You could even write a valid

business review

check on a golf ball if you want to. Bankers

Luckily, these banks soon will be installing

will have to sell their customers on the neces

magnetic ink reading equipment. These machines

sity of using the more standardized magnetic

should be able to handle the greatly increased

ink checks— not that magnetic ink rules out

check traffic of the 1960’s, and will prevent the

imagination in check design but it does im

collection system from bogging down, provided

pose restrictions. Checks should be of a size

enough banks cooperate and get magnetic ink

that fits into the machines and regular print

on their checks. A high percentage of incoming

ing should stay five-eighths of an inch from the

checks must bear their bank’s code number to

bottom.

make the use of magnetic ink equipment efficient

In addition, some bankers themselves may

on a check-transit operation.

have to be sold on magnetic ink. The reading
machines are expensive and many of the smaller

“ Buck R o g e rs” banking

banks will not be

A computer plus magnetic ink reading equipment

able to afford them.

can bring automation to all phases of check

So, some small-bank

processing. Here’s one way it might work, assum

e x e cu tiv e s m ig h t

ing the best of all possible worlds where every

w o n d e r,

“ Why

check is preprinted with magnetic ink bank and

should I go to the

account numbers. When the checks are received,

trouble

the batch totals are proved

getting

and the dollar

my checks printed with magnetic ink when I can’t

amounts are printed on the checks in magnetic

use the equipment? What’s in it for my bank?”

ink, all in the same operation. Then the checks

Simply this: the maintenance of an efficient check-

go into a sorter-reader, which by reading the

collection system is an obligation of the banking

magnetic ink, separates them into “ transit items”

industry. It will benefit all banks and, more im

which are drawn on other banks, and “ on us”

portant, it will enable them to give better service

items or checks written on accounts within the

to their customers.

bank.

We now have a smooth collection system.

The “ transit items” are further sorted by ma

Checks speed to their home banks in several

chine and sped on their journey to their home

days or less. People who deposit checks in their

banks. The “ on us” items are arranged in ac

accounts get the use of the money quickly or if

count number order— automatically, of course.

a check bounces they learn about it in time to

Then the reading machine tells their number

take prompt action.

and dollar amount to the computer. The com

The present system won’t remain efficient in

puter posts the items to the proper accounts and

definitely, however. The billions of additional

figures a

checks that will be written in the 1960’s could

handled in essentially the same manner. At the

new balance.

Deposit

tickets

are

clog the collection pipelines. Primary pressure

end of the month the proper tapes are run

points will be the Federal Reserve Banks and the

through the printer and customers’ statements

large correspondent banks because these are the

are prepared. There even are machines to stuff

funnels through which many checks on the move
must pass.

envelopes and “ lick” stamps.

As far as we know only one or two banks now

business review

W E ’RE GOING TO BE A GUINEA PIG
The Federal Reserve wants to find out which magnetic ink equipment and systems will best suit
its check-clearing operations. Pilot installations will be established in five Reserve Banks. Each
one will use the machinery of a different manufacturer and the Stanford Research Institute will
coordinate the whole project.
The Federal Reserve Bank of Philadelphia is going to participate in the experiment. W e will
try out equipment made by the International Business Machines Corporation. Delivery is
expected in late I9 6 0 and the trial will last 6 months.
In order to get maximum information from the test, we should use as many "liv e " checks as
possible. The success of the experiment, therefore, depends in part on how many checks we
receive with their A .B.A . routing symbol-transit number preprinted in magnetic ink in the
approved 5/8 inch strip.
O ur "laboratory" may turn up information that will be of value to commercial banks planning
to use sim ilar equipment. W e will welcome visito rs when things get rolling. The Business Review
will announce the date.

have such a system, but many others have the

chines as appropriate for a specific bank. Each

equipment on order. It won’t be too long before

bank must study its own situation and decide

automated check processing is widely used by

what new equipment, if any, best suits its needs.

the largest banks.

In making such decisions it may be helpful
for banks to know what machines other banks

Coming attrac tio n

of the same size have. We are making a survey

You have seen some of the ways banking is try

of the machinery in use in all Third District

ing to tame its paper tiger. Of course, we can’t

member banks and shall publish the results in

recommend any of the above-mentioned ma

subsequent issues of the Business Review.

W ILL MANUFACTURERS PRACTICE
WHAT THEY PREACH?

This Bank’s surveys of manufacturers’ capital spending in 1 9 6 0 indi
cate that the high levels originally planned will be surpassed. New
orders, however, show no sharp upturn. Can this be reconciled with
optimism concerning capital spending?
Last fall, manufacturers indicated their expend

O th e r Th ird D istric t areas show increases

itures for plant and equipment in 1960 would

The upsurge in spending for plant and equip

be almost as high as the highest ever achieved.

ment extends to establishments in the Trenton,

This spring, checking back, we found plans re

Wilmington, and Lehigh Valley areas, which in

vised all along the line. Most of the changes are

comparison to 1959 are up 61, 31, and 11 per

upward.

cent, respectively. In each region, the spring re

The findings for Philadelphia parallel those
for the nation. Manufacturers in the Philadelphia

check disclosed substantial upward revisions of
last fall’s estimates for 1960.

area expect to spend $410 million for plant and
equipment in 1960. That is 15 per cent more

Tw o in d u strie s run counter to the

than in 1959; for the United States, the com

general patte rn

parable figure is about 25 per cent. Firms here

Examining the findings for Philadelphia, one is

have increased their planned capital spending in

struck by the uniformity of the improvement.

1960 by 8 per cent since last fall; national sur

Even where industries indicate declines in capi

veys report upward revisions of about the same

tal expenditures since 1959, the totals now given

magnitude.

represent increases from the projections

The capital expenditures predicted for 1960

for

1960 they made last fall.

by Philadelphia area manufacturers exceed by

Only the apparel and petroleum industries fail

4 per cent the previous high of $394 million in

to show either an increase in capital spending

1957. Firms producing durable goods expect

over 1959 or an upward revision of last fall’s

to spend 26 per cent more this year than last;

estimates for

nondurables manufacturers plan to spend 6 per

manufacturers are relatively small, but petro

cent more.

leum is especially important in the Philadelphia

1960. Expenditures by apparel

business review

ESTIMATED CAPITAL EXPENDITURES OF MANUFACTURERS
IN THE DELAWARE AND LEHIGH VALLEYS
1959 AND 1960
Expenditures
(Millions $)
1959
Philadelphia Metropolitan Area
A ll manufacturing

I960

Per cent
change

Per cent change
in I960 estimate

1959-1960

Fall— Spring

357.2

409.9

14.8

7.6

Durables
Lumber & furniture
Stone, clay & glass
Primary metals
Fabricated metals
Machinery (excl. elec.)
Electrical machinery
Transportation equipment
Instruments & misc.

157.8
1.3
16.4
41.2
19.5
21.3
37.5
10.8
9.7

198.8
1.7
9.0
70.2
20.2
27.6
47.6
15.2
7.3

26.0
30.8
— 45.1
70.4
3.6
29.6
26.9
40.7
— 24.7

1l . l
21.4
9.8
37.1
— 16.5
— 21.6
30.8
—
3.2
10.6

Nondurables
Food & tobacco
Textiles
Apparel
Paper
Printing & publishing
Chemicals
Petroleum
Rubber
Leather

199.4
27.8
3.6
6.0
25.4
14.2
64.0
47.7
10.3
0.3

21 l . l
33.7
7.3
1.6
31.5
6.5
69.0
43.3
17.5
0.7

5.9
21.2
102.8
— 73.3
24.0
— 54.2
7.8
— 9.2
69.9
133.3

4.5
0.0
135.5
— 1l . l
—
1.9
47.7
36.6
— 28.2
10.1
133.3

Trenton
A ll manufacturing

13.8

22.2

60.9

32.1

Wilmington
A ll manufacturing

39.5

51.7

30.9

38.2

Lehigh Valley
A ll manufacturing

45.8

50.8

10.9

53.0

capital spending totals. The increase in capital

estimates made at the turn of the year. Capital

spending

spending is an important ingredient of prosper-

nondurables

manufacturers

much smaller in Philadelphia than in the nation.

ity, and therefore the news that it is likely to

Cutbacks by the local petroleum industry ex-

increase in 1960 is welcome indeed. Some ob-

plain most of this lag.

servers nevertheless are troubled by the seem

W h e re are the new o rd e rs?

spending really is to reach new heights in 1960,

So far in 1960, the news concerning business has

shouldn’t new orders be spurting upward?

ing lag in manufacturers’ new orders. If capital

been mixed, in contrast to the very optimistic

The fact is that manufacturers’ new orders

business review

On the graph below, the broken line shows manufacturers' new orders fo r the U .S. since 1948
quarterly, as reported by the U .S. Department of Commerce. The solid line represents capital
spending by manufacturers quarterly, as reported by the Department of Commerce and the Securi
ties and Exchange Commission. Both series are seasonally adjusted.
The blue arrows indicate important upturns in new orders and in capital expenditures. The black
arrows point to important downturns. Two conclusions are evident: upturns and downturns in capital
spending have lagged several quarters behind the turns in new orders: when capital spending has
swung upward fo r several quarters, as now, new orders at the same point in time have maintained
an approximately level course, at a high rate.

MANUFACTURERS’ NEW ORDERS AND CAPITAL SPENDING

United States, 1948-1960.

MANUFACTURERS' N EW ORDERS
(QUARTERLY TOTALS IN BILLIONS OF DOLLARS)

MANUFACTURERS' CAPITAL SPENDING
(QUARTERLY DATA AT ANNUAL RATES IN BILLIONS OF DOLLARS)

have been higher than now only once before— in

Reasoning from the patterns shown on the

the second quarter of 1959. Orders lead capital

chart, the relationship between new orders and

spending considerably; sharp increases in new

capital spending does not appear unusual; new

orders precede capital spending upturns by sev

orders already have increased rapidly, and the

eral months. When new orders reach a high

lagged rise in capital

spending that should

level, they tend to stay there, while capital ex

follow is occurring approximately as in earlier

penditures respond by continuing upward until

postwar years. Of course, to some extent both

they too level off, not to turn down again until

new orders and capital spending have been in

some time after new orders drop. The chart above

fluenced by the long steel strike.

shows this relationship for the postwar era.

Past relationships suggest that capital expendi-

business review

ESTIMATED DIRECTION OF CHANGE IN CAPITAL EXPENDITURES
1961 RELATIVE TO 1960
Per Cent of Firms
Higher
Fall
Philadelphia Metropolitan Area
A ll manufacturing

No Change

Spring

Fall

Spring

Lower
Fall

Spring

Durables
Lumber & furniture
Stone, clay & glass
Primary metals
Fabricated metals
Machinery (excl. elec.)
Electrical machinery
Transportation equipment
Instruments & misc.

20
27
5
9
15
31
30
9
17

26
31
21
38
24
28
23
0
29

63
66
62
77
65
53
57
73
75

53
54
53
33
58
51
50
58
71

17
7
33
14
20
16
13
18
8

21
15
26
29
18
21
27
42
0

Nondurables
Food & tobacco
Textiles
Apparel
Paper
Printing & publishing
Chemicals
Petroleum
Rubber & leather

18
18
10
16
23
16
24
55
19

16
21
17
6
16
18
24
33
4

68
58
84
82
50
60
47
36
75

63
48
66
94
56
64
38
34
69

14
24
6
2
27
24
29
9
6

21
31
17
0
28
18
38
33
27

Trenton
A ll manufacturing

W ilm ington
A ll manufacturing

Lehigh Valley
A ll manufacturing

tures should remain high until after new orders

noncommittal. Most of them hedged by saying

clearly turn downward. But the past never repeats

they thought they would spend in 1961 at about

itself exactly. A small straw in the wind may be

the same rate as in 1960. Those who specified a

found in our Delaware and Lehigh Valley surveys,

change leaned slightly in the direction of a rise

in which manufacturers were asked to make . . .

in 1961. Now this pattern is different in two
ways. First, although about half the firms still

Projections fo r 1961

say, “ No Change,” more of them than before are

Last fall, opinions concerning capital spending

willing to specify in what direction they expect

in 1961 were mixed. Firms understandably were

their capital expenditures to move. Second, the

business review

INVENTORY EXPECTATIONS OF PHILADELPHIA MANUFACTURERS IN 1960
Increase
Fall
19%

A ll manufacturing

No Change

Spring
16%

Fall

Spring

69%

68%

Decrease
Fall
12%

Spring
16%

Durables
Lumber & furniture
Stone, clay & glass
Primary metals
Fabricated metals
Machinery (excl. elec.)
Electrical machinery
Transportation equipment
Instruments & misc.

24
14
14
21
28
23
41
8
32

18
17
5
13
22
17
20
9
39

63
72
67
71
55
64
54
67
63

62
58
85
74
51
59
60
64
61

13
14
19
8
17
13
5
25
5

20
25
10
13
27
24
20
27
0

Nondurables
Food & tobacco
Textiles
Apparel
Paper
Printing & publishing
Chemicals
Petroleum
Rubber & leather

14
13
8
12
14
22
29
12
21

14
13
8
7
30
22
19
22
12

74
81
75
74
76
61
66
88
73

73
84
68
72
70
74
81
56
69

12
6
17
14
10
17
5
0
6

13
3
24
21
0
4
0
22
19

balance of opinion now is
negative; more firms expect
declines

than

expect

Manufacturing establishments in the
Philadelphia area expect production and
employment to hold approximately con
stant in I960.

They are almost evenly di
vided between those who ex
pect inventories to increase

creases. The differences from

in 1960 and those who expect

last fall are not large, but

decreases, with the majority

they do indicate some change

finding refuge in the “ No

in the direction and strength

Change” column. Again, the

of opinions.

change since last fall in these
predictions is negative. Last

In ve nto rie s

fall those who were willing

Further slight evidence of

to specify the direction in

caution concerning the fu

which their inventories would

ture is apparent in the Phila

go in 1960 split three to two

delphia manufacturers’ pro

in favor of increases; now

jections of inventory changes.

they split evenly.

OUR 1960 HOUSING MARKET
“ What are 1960 housing prospects in this area?”

size has been held down. A widespread practice

We have asked that question and some others of

seems to be to finish a sample, sell from this,

builders, lenders, and realtors operating in the

then start a few more. “ Testing the market” is

Philadelphia Federal Reserve District. No one

the term builders apply to this type of operation.

has pat answers to any of our questions. Nearly

It’s not the method they prefer, but in what

everyone seems to feel the building sector of

many have described as a “ thin market,” it ap

the economy is slowly recovering from the ef

pears to be their only choice. In some areas the

fects of last fall’s exceptionally tight mortgage

bulk of current activity is in the lowest price

money and the highest home financing costs in
over two decades.

range; in others, builders seem to be concen
trating on the middle bracket. Activity is prob

Basically, the over-all situation this spring is

ably slowest everywhere in houses built to sell

described as healthy enough. Builders say they

for above $25,000. Today these are mostly cus

carried few completed houses over the winter;

tom jobs, built on order from individuals’ speci

that they are adjusting their operations to a

fications.

sales market just beginning to show promise of
seasonal improvement. Lenders see some easing

Sales o f new houses have

in the supply of mortgage money and expect

been disappointing

an increasing flow of funds as the season pro

Although builders have been encouraged by the

gresses. Realtors tell us sales of existing proper

number of persons inspecting new houses, most

ties that had been sticky are moving at a slightly

of them seem at a loss to explain why more sales

faster pace. They also say rental trends are firm

agreements are not being written. Some think

and they have very few listings of houses for

the high cost of borrowed money is a major

this market.

factor. Others call attention to the behavior
of the stock market, the miserable weather

B u ild e rs are m aking fe w e r s ta rts

of early spring, or the fact that predictions of a

So far this spring builders have started fewer

booming economy in 1960 have not materialized.

houses than a year ago. In extreme cases there

In any case, the sales picture this spring appears

are reports of cutbacks of as much as 50 per

to be improving at something less than the nor

cent. In nearly all parts of the District project

mal seasonal rate.

business review

Old houses are m oving a t a

most builders because of the discounts prevailing

slig h tly fa s te r pace

on mortgages backed by Federal insurance and

Most realtors tell us that old houses have been

guarantees. Savings and loan associations are

selling somewhat more promptly in recent weeks

reported to be providing a substantial volume of

but that sales still are below the level of a year

conventional funds and both savings banks and

ago. No significant increases are reported in the

life insurance companies are said to be increas

number of old houses on the spring market.

ing the size of their loan portfolios.

properties

F.H.A. lending activity is picking up slowly

seemed more of a problem that at present. In this

in some areas. Discounts on these mortgages

area of the market, activity has improved most in

have diminished somewhat in recent weeks and

Earlier this

year

financing

these

houses not more than five years old. Existing

on the average range from 2 to 3 points as com

properties in older neighborhoods close to com

pared with 5 points or more charged when the

mercial and industrial zones are described as

mortgage market was tighter. These loans are

persistently sticky, unless priced well below the

being employed more and more on existing

market.

properties. V.A. mortgages are said to finance
a very small proportion of all sales. Prevailing

Rental tre n d s continue firm

high discounts ranging up to 8 to 10 points dis

A slowly rising trend in rents persisted over

courage builders from offering V.A. mortgages,

much of last year but in recent months no signif

and owners of existing properties object to the

icant changes have been reported. According to

loss they must absorb in their selling price.

the Bureau of Labor Statistics, the 1959 increase

The price of mortgage money shows no sign

in Philadelphia, for example, was a little less

of weakening, in spite of the somewhat larger

than IY j per cent, compared with 2 per cent

supply currently available. Conventional loans

the preceding year and almost 4 per cent in 1957,

bring 6 per cent in our area, with only scattered

following the removal of all wartime controls.

reports of 5% per cent on exceptionally good

Most realtors speak of very few listings in

risks carrying down payments of 50 per cent or

houses for rent, but of a fairly wide choice this

more. About the only easing reported in terms

spring in small apartments. Inquiries for all

on conventionals is the fact that savings and loan

rental properties have increased and a fairly

associations are making more 90 per cent loans

strong market is said to be in prospect this

than formerly. In the case of F.H.A.’s, the newly

year.

implemented schedule of down payments per
mits a smaller amount of cash on houses costing

M ortgage m oney has eased but

more than $14,000. This, however, is a minimum

ra te s rem ain high

schedule, not necessarily applying in all markets.

Lenders describe the supply of mortgage money
as generally adequate for all current needs. The

Construction costs have climbed a

situation, while still tight compared with the

little fu rth e r

spring of 1959, has improved since last fall.

Building materials appear to be the only com

Conventional loans are said to account for the

ponent of construction costs that has not con

bulk of new home financing and are preferred by

tinued to push upward. Builders say that today’s

business review

relatively small volume of homebuilding must

B u ild e rs’ plans are on a m odest scale

be given most of the credit for this measure of

Although most of the builders we talked with

stability. Wage rates in the building trades are

appeared generally optimistic concerning 1960

expected to advance again in the near future

as a whole, their watchword for the present was

and several instances of increases already have

caution. Most of them say they have fairly sub

been reported in our area. Perhaps the greatest

stantial programs for this year but that new

push on homebuilding costs this year is coming

projects will be unshelved only as conditions in

from land values and the expense of developing

the sales market warrant. Land is being ac

new homebuilding sites. Some builders tell us

quired more slowly than last spring and the

land prices have risen very steeply since last

development of new tracts is proceeding just

spring, particularly where suburban shopping

ahead of actual construction needs. If sales of

areas are planned. Cutting through streets and

houses show the improvement some builders

the installation of water lines and sewers are

say they expect and all of them hope for, 1960

said to be taking a significantly larger propor

could still be a reasonably good homebuilding

tion of the construction dollar this year than last.

year.

FO R T H E R E C O R D . . .
MEMBER BAN KS 3RD F.R.D.

BILL ONS S

B A N K IN G

DEPOSITS

a
* /V.V
V / r

V
W

CHECK PAYMENTS
(2 0 CITIES)

i !

■

4
LOANS

INVESTMENTS

2 YEARS
AGO

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

P e r cent change

SU M M A RY

U n it e d

m o.
ago

year
ago

m o s.
I9 6 0
fro m
year
ago

Factory*

S ta te s

3
M a r. I9 6 0
f ro m
m o.
ago

year
ago

m o s.
I9 6 0
fro m
year
ago

LO C A L
C H A N G ES

MARCH
i9 6 0

Department Sto re f
Check
Payments

Employ
ment

Pay ro lls

Sales

Stocks

Per cent
change
M ar. I960
from

Per cent
change
Mar. 1960
from

Per cent
change
M ar. I960
from

P e r c e nt change

3
M a r . I9 6 0
fr o m

YE AR
AC30

Per cent
change
Mar I960
from

mo. year mo. year mo. year mo. year mo. year
ago ago ago ago ago ago ago ago ago ago

O U TPU T
M a n u fa c t u rin g p r o d u c t io n .
C o n s t r u c t io n c o n t ra c t s . . .
C o a l m in in g ..............................

0
+45
- 5

-2 7
2

+ 2
-2 1
- 2

— i
+36

—

— 6
0

EM PLO YM EN T AND
IN C O M E
F a c t o ry e m p lo y m e n t
( T o t a l) ...........................................
F a c t o ry w a g e in c o m e ..........

1
0

+
+

2
4

+
+

1
3

+
+

— 2 +

— 6 +

2
9

— 3 +

6 — 4 +

Lancaster . . . .

0 +

Philadelphia .

0 +

3 +

2 +

1 +

5 -

+ i i

+ 9

+ 9 +

3 +

6 6 +

9 +

5 + 10 -

5 +

2 -

1 +

8 +

2 +

TR A D E *
D e p a rtm e n t s t o re s a le s . . .
D e p a rtm e n t s t o r e s t o c k s . .

0
0

+
+

( A ll m e m b e r b a n ks)
D e p o s it s ........................................
L o a n s ................................................
In v e s t m e n t s .................................
U . S . G o v t , s e c u r it ie s ..........
O t h e r ..............................................
C h e c k p a y m e n ts .....................

1
1

2
2
1

+
—
- I
—

—

1
12
9
I
3
9f

+
+
—
—
-

1
12
9
12
2
9f

1
2
3
0

—
-

+ M

+
-1
—
-

1
12
3
17
3
10

+
-1
-1
—

0
12
4
7
2

P RIC ES

• A d ju s t e d

........ -

Scranton ........

B A N K IN G

C o n su m e r

Reading

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

ot +

f o r s e a s o n a l v a r ia t io n .

+ 2\
|20 C it ie s

1
0

3 +

0 +

+ 4 +

2 + '6 +

5 + 12 + 15

^ +

4 +

^ P h ila d e lp h ia

0 — 1

1 +

Trenton .......... — 3 +

1 — 4 +

— 7 + 12 — 3 + 10 +

W ilke s-B a rre . — 1 +

1 -

1 +

-1 0

W ilm in g to n .. -

0 -

2 -

— 7 +

Yo rk ................ -

1 +

-1 2

2 +

1 +

2 +

9 + 14 +

3 +

1 +

2 + M +21

2 -

6 +

1 +

— 4 -

7 — 1

6 +

*N o t restricted to corporate lim its of citie s but covers areas of one
o r more counties.
fA djuste d fo r seasonal variation.

Full text of Business Review (Federal Reserve Bank of Philadelphia) : May 1960

FRASER