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November 1953
business review
"EDERAL RESERVE
ANK OF
PHILADELPHIA
IN A BUSINESS CIVILIZATION
by Alfred H. Williams, President.
FOR INDUSTRIES ON THE DELAWARE
outlays keep increasing forever? Maybe not,
again next year, say local manufacturers.
ES — A TROUBLE SPOT?
Many larger durable goods firms in this area intend to cut stocks.
INDUSTRY LOOKS AT EMPLOYMENT
Employment looks pretty stable over the next six months.
CURRENT TRENDS
BANKS IN A BUSINESS CIVILIZATION
What distinguishes commercial banks from other enterprises?
By A lfred H. W illiams, President
Federal Reserve Bank of Philadelphia
Before the Annual Fall Conference of the Robert Morris Associates
Opening Session, Monday, October 12,1953—Atlantic City, N. J.
A word at the outset about the nature of this
talk. It is built around two questions:
Are there essential differences between the
14,000 banks of the country and the four
million other business enterprises?
What light do these differences throw on the
development of bank leadership?
My hope is not to find unassailable answers
to these questions but rather to stimulate you
men to think about the special significance of
banking in a competitive economy and espe
cially to think about bank leadership, which in
the future will come largely from groups such
as the Robert Morris Associates.
For background purposes, let us consider the
role that Business plays in this country. We have
created in the United States what is essentially
a Business Civilization. This fact struck me with
full force when, more than twenty years ago, I
went to Europe for a year to study industrial
conditions. In the evening, after-dinner conver
sation in mixed company would turn to litera
ture, music, art, international relations, edu
cation, economics but never to business, as
business. Business was considered petty and
2
demeaning, not worthy of discriminating and
cultured minds. It was much more difficult for
the businessman to achieve status in European
society than the professor, the civil servant, the
artist, or the army officer. Here in this country,
after a round of golf, the club house talk veers
to business. Business cuts into the conversation
after the card game. Business is our meat and
wine. Business is in the warp and woof of the
social fabric of America. Business, with its
dynamism, is the source of much of the zest that
characterizes our national life as a whole.
The nature of commercial banking
It is the competitive struggle in the market
place that creates the economic driving force of
America. Four million separate enterprises or
competitive units, exclusive of agriculture, com
pose the business sector of our economy. Among
these four million industrial and commercial en
terprises there are 14,000 that differ sharply
from all others. These are the commercial banks
of the country. These banks—employers of your
Robert Morris Associates—are, in important re
spects, in a class by themselves. What sets them
apart?
business re v ie w
First, with very few exceptions, all four mil
lion enterprises must do business with the 14,000
commercial banks. This is because we live in a
credit and checkbook economy. Whether he be
a manufacturer, merchant, mine operator, or
broker, the businessman cannot operate without
using a bank. The services rendered by a bank
are a sine qua non in the conduct of every mod
ern business. This gives to banks great social
opportunities and heavy responsibilities.
There is another major distinction to be
drawn between commercial banks and other
types of business concerns. Banks have unique
opportunities, when other enterprises come to
them for credit, to get to know them and to
help them. They get an inside look at the other
man’s business. In business, as in medicine, this
is the age of the specialist. Like the general
practitioner in medicine, the banker is a general
practitioner. He has opportunities to keep abreast
of the problems of the dairyman, the retailer,
the tanner, the building contractor. By reason
of the fact that he must continuously exercise
business judgment in a wide variety of fields,
he acquires skills that enable him to assist in
the sound development of both the individual
enterprise and the community in which it op
erates. He may help in a positive way by extend
ing credit and also in a negative way by re
fusing to grant credit. No other group of
enterprises possesses the unique opportunities of
banks to know what goes on in individual busi
nesses of the country and to transmute this
knowledge into sound credit action and wise
business counsel. It is more than alliteration to
say that banks can be builders of businessmen.
Let us stop for a moment to reflect about the
present system of credit extension. Credit is
essential to businessmen. They cannot get along
without it. It is the yeast in the economic dough.
If a businessman, seeking credit from his bank,
is denied a loan or is not satisfied with the
terms, he can under our competitive system try
his case in another bank. The bank wishes, if
it is at all possible, to extend credit because it
stands to gain from the transaction. Loans are
the principal source of its earnings. You credit
men who hand down the verdict have come to
know your business customers pretty well. Your
judgment as to their business acumen and moral
probity is a better screen than one based on
political influence or rationing. Mistakes are
made, but by and large it is a successful method
of achieving distributive justice. If an applicant
for credit cannot obtain it at any bank, the
chances are that he is not credit-worthy. Roland
Robinson in his book. The Management of Bank
Funds, has this to say about the capacity of banks
to handle this important social function of ex
tending credit.
“Almost every other function performed by
commercial banks could be as well done by
some other agency. Banks have no profit
advantage in other lines; in some aspects,
such as investment management, commer
cial banks probably are at a distinct dis
advantage when their position is compared
with that of other institutional investors.
“However, banks can lend. That is the
business they are best fitted for by tradi
tion, organization, and position. No other
existing agency could take their place. With
out bank credit, a good share of the small
and moderate-sized business would wither
and die. Lending is not only a good so
cial service, it is profitable. It is, indeed,
the most profitable aspect of commercial
banking.” *
The role that commercial banks thus play,
* By permission McGraw-Hill Book Company, Inc.
3
business re v ie w
through the exercise of the credit function, in
the discovery and development of new enter
prise talent, is a vital function in our competi
tive economy. It is a method by which we aid
the resourceful and efficient and snub the in
competent and untrustworthy. Banks can be
proud of their role in assisting new managerial
talent to constantly well up from beneath. The
role is, to be sure, hazardous. Robinson in the
work just referred to comes to the conclusion
that bank lending has its “sobering aspects.”
Many of the concerns seeking bank credit are
relatively small, they are moderately young,
and they tend to make less than average profits.
On the other hand, they are repeat customers
of banks and, since they are growing concerns,
are more likely to use bank credit than those
well stabilized.
Finally, banks differ from other types of busi
ness in still another important respect—they
operate not only as individual enterprises but
also as a banking system. Congress recognized
this and deemed it necessary to supervise their
group or system behavior. Public authorities do,
of course, supervise individual banks. Witness
the work of bank examiners, state and federal,
in appraising the assets and management of the
individual bank. But this is not the type of su
pervision now under discussion. We are here
concerned with a quite different type—that ex
ercised by means of general credit controls.
Role of the Federal Reserve system
Why does the free enterprise system of bank
ing not automatically give us appropriate group
behavior and thus make unnecessary general
credit controls? If we rely wholly upon com
petitive forces to furnish credit in the volume
and with the timing needed to maintain steady
prices, high level employment, and a rising
4
standard of living, it is highly likely that we
would have more instability than we now have.
The tendency would be for bank loans to ex
pand when profit possibilities are greatest—
generally in a period of rising prices and infla
tionary pressures. Conversely, when the profit
outlook has deteriorated—usually in a period of
deflation, recession or falling prices—the tend
ency would be for banks to press for collection
of loans. When banks make new loans they ex
pand the money supply. When the loans are
repaid the money supply is reduced.
Since the demand deposits of banks are by
all odds the largest part of the country’s money
supply, this natural tendency of each bank to
follow its own self-interest creates profound
changes in the quantity of money. These large
changes in the quantity of money in turn have
profound effects on economic growth and sta
bility. We have had impressive demonstrations
of these facts in recent years. Economic insta
bility may well prove to be the Achilles heel of
our enterprise system. In an attempt to over
come this weakness, Congress has created the
Federal Reserve System and passed the Full
Employment Act. The Federal Reserve System
has been given a mandate, with commensurate
power to influence the supply, the cost, and the
availability of money and credit. It is important
that the instruments of credit policy—open mar
ket operations, discount rates, and reserve re
quirements—be used with flexibility by those
in authority. It is equally important that they
be fully understood and accepted by commercial
banks. Indeed, enlightened, long-run self-interest
dictates that all elements in the economy—labor
leaders, farmers, manufacturers, and merchants,
as well as bankers—should come to understand
what the Federal Reserve System is trying to do
and why it acts as it does. Some bankers have
b usiness re v ie w
objected in the past to central bank discipline.
At present, objections seem to be at a minimum.
Further efforts to achieve thorough, understand
ing of the workings of the economy should be
made. Current programs of bank leaders to im
prove understanding not only by bankers but by
business generally are highly commendable. Just
as bankers are builders of individual businesses,
so they should be leaders in a general war
against economic illiteracy.
Summarizing to this point: Banks as indi
vidual enterprises are highly important to our
national welfare because they service all other
business with vitally needed credit and financial
counsel, and assist in the discovery and growth
of new business talent. Banking as a system can
effect profound changes in the money supply. It
is, therefore, crucial that bankers understand not
only the management of the individual bank but
also the operation of the banking system, includ
ing the Federal Reserve System, and give to the
latter informed cooperation. This is the best way
to assure continuance of the vital role that com
mercial banking now plays in our business civil
ization. What characteristics of banking leader
ship are needed to achieve these goals?
Basic elements of banking leadership
Top flight banking leadership in a democratic,
competitive economy such as we hope to retain
consists, in my judgment, of four basic elements.
They are presented here without reference to
their order of importance. The first is technical
competence—the understanding and mastery of
a special field. To have a deep and thorough
knowledge of a given field of business—bridge
building, newspaper publishing, railroad opera
tion, department store merchandising, or com
mercial banking— gives to its possessor great
opportunity to serve his fellowman and, by the
same token, brings rich rewards to the posses
sor. Organized banking is in the forefront of
American business in providing professional
training to achieve such competence.
A second basic element is a broad intellectual
outlook. I am not now thinking about formal
training in college but about what happens in
the afteryears to one’s intellectual interests. How
wide-ranging and vigorous are the mental proc
esses? A few examples will illustrate. Business
leaders are helped by a knowledge of history.
History gives comprehension of social change
by providing a basis for comparison. It gives
one a tie to the past, a sense of continuity; it
thereby provides a feeling for trends and builds
up protection against panic arising from shortrun changes.
Broad intellectual outlook includes interest in
the field of foreign relations. No young banker
who aspires to leadership should be provincial
in his outlook. Insight into the nature and poli
cies of other governments will broaden our views,
make our prejudices more malleable and help us
assist our own country in living with the rest of
the world. A knowledge of literature assists one
to become a leader. I am impressed with the
number of men of large affairs who have in
creased their knowledge of life by means of lit
erature. Good literature gives sound insight into
motives—vicarious insight. An exposition on life
from the pen of a master supplies fruitful anal
ogies and spiritual insight and inspiration.
A third basic element is social intelligence.
This may be roughly defined as capacity to un
derstand and deal with men, especially men in
groups. Frequently men are skilled in person-toperson relationships. Place these men before their
professional association or an investigating com
mittee, or a trade union, and they prove to be
inept and unsuited for the assignment.
5
business re v ie w
Mass action is increasingly a characteristic of
human behaviour, of how objectives are reached.
There is increasing interest among social scien
tists in the art of handling men in groups. Young
bankers should take a look at the literature.
Studies and experiments are under way in such
matters as clear-cut definition of problem, com
promise of differences, conduct of group discus
sion, channels of communication, and the nature
and dynamics of group action.
This element of social intelligence ties directly
into the field of public relations which is of un
usual importance in banking. Time limits pre
vent an exploration of the historical, psychologi
cal, legal, and economic aspects of the public
relations problems of banking. Suffice it to say,
there is “pay dirt” in the developments just re
ferred to above.
Finally, a fourth element in top-grade leader
ship is a well-knit set of ethical, moral, and
spiritual values. These values set up a central
drive, within the leader, of interest in and re
spect for the other fellow—his personality and
worth as an individual. To those of you who
would become leaders I say, if you have a spark
of interest in your fellowman, fan it into a
flame. If you succeed, there follows an integra
tion of your many loyalties, some of which
hitherto, no doubt, have been conflicting. If
you are entirely successful you will achieve the
inner poise and strength so necessary in these
days of economic doubt, social tension, personal
frustration, and seeming defeat.
Banking, no less than other areas of business,
can take more leadership of the sort here envi
sioned. I realize I have given you a counsel of
perfection; this is as it should be in a democ
racy. In a democracy, “life is a becoming, never
an arrival.” Democracy has been referred to as
a hard central core of agreement, surrounded by
a bewildering diversity of objectives and values.
I submit for your consideration the thought that
the hard core of value in America is contained
in Ruskin’s line, “There is no wealth except life.”
ELECTION OF DIRECTORS
As this issue went to press, the following announcement was made by W illiam J.
Meinel, Chairman of the Board of the Federal Reserve Bank of Philadelphia:
"M r. W m . Fulton Kurtz, Chairman of the Board, The Pennsylvania Company for
Banking and Trusts, Philadelphia, Pennsylvania, was elected unanimously by mem
ber banks in Electoral Group I as a class A director for the three-year term
ending December 31, 1956.
"M r. Warren C. Newton, President, O. A. Newton and Son Company, Bridgeville, Delaware, was reelected unanimously by member banks in Electoral Group
2 as a class B director for the three-year term ending December 31, 1956.
"N ine ty per cent of the Group I banks and eighty per cent of the Group 2 banks
voted in this election. The interest evidenced by this participation is most gratifying."
6
E IG H T H C A PITA L
T r E X P E N D IT U R E S S U R V E Y
in
Prefa ce
The economy of the United States has been op
erating at practically full stretch ever since 1946,
a year of demobilization readjustment. At vari
ous times during the eight-year-old boom, usu
ally around the turn of the year, it appeared
that the boom was about to burn out. The big
gest threat occurred in 1949. But the 1949 re
cession, if it may be called that, turned out to be
little more than an inventory readjustment. Once
again near the turn of the year we are approach
ing a period when a number of businessmen feel
that the trend of business is about to change,
that the boom has now really run its course.
In the light of recent developments, everyone
is diligently surveying the business scene in
search of telltale evidence of what may lie ahead.
And so are we. We have just completed our
eighth annual survey of capital expenditures in
the Philadelphia area in the hope that it may
give us a clue as to prospective changes in the
business climate. We asked local industrialists
how much money they spent on capital improve
ments during the past year and how much they
were planning to spend in the year ahead.
We asked them about their inventory policies,
whether they were planning to increase, decrease,
or maintain inventories at present levels. We
also asked whether they expected their employ
ment to rise, fall, or hold.
The results are surprising. Business concerns
in this area, except for the railroad and utility
group, are planning to increase their capital
outlays, inventories show a tendency toward
softening, and employment is expected to de
cline slightly. Modifications and exceptions are
explained in the following articles.
It is always tempting to read too much into
an interpretation of the results of such a survey.
Numbers look so accurate and finite, but busi
ness can change so fast and unexpectedly. In
ventories, for example, are notoriously volatile.
When businessmen shift from a mood for in
creasing inventories at an annual rate of $7
billion, as they did in late 1948, to a mood for
decreasing inventories at an annual rate of $5
billion, as they did in late 1949, the shift leaves
its effect on the business climate. That amounted
to a change of $12 billion.
Capital expenditures change less dramatically.
Like icebergs, they build up slowly and melt
away slowly. They exert powerful long-run ef
fects on our economy.
Employment is more than men on payrolls.
Our survey shows only that; it shows nothing
about hours of work, productivity, rates of pay,
turnover, male versus female, and other aspects
of employment that influence and are influenced
by the general trend of business.
7
business re v ie w
CAPITAL FOR INDUSTRIES
ON THE DELAWARE
Manufacturing enterprises along the Delaware
spent $314 million for plant expansion and new
machinery last year. Next year they intend to
enlarge and modernize still more. Plans call for
an increase of $58 million, or 18 per cent, mak
ing a total of $372 million. That’s the story in
a nutshell, and it does not include the new Fair
less mill which is now a going concern.
This is not a forecast on our part; it is what
local business men told us about their expendi
tures last year and their plans for next year.
The expected increase comes as somewhat of a
surprise, since the talk throughout the country
is that business activity in 1954 will not quite
measure up to 1953. Employment, production,
income, and almost anything else you could
mention are at, or near, an all-time record.
It is more or less the consensus that at long last
the post-war boom is over the hill. Next year is not
going to be a year of depression—just recession.
Perhaps not even recession, but just relaxation.
In line with that thinking, it is rather widely
believed that the record $27.8 billion which
businessmen throughout the country are spend
ing for new plant and equipment this year is
also a peak and that next year’s outlays will
be somewhat lower. This opinion is reinforced
by the belief that post-war capital outlays cannot
keep on increasing forever.
If it be true that capital outlays, country-wide,*
are heading for a decline and, in Philadelphia,
* As we go to press, Business Week reports the results of the
nationwide survey by McGraw-Hill. Their survey shows a pros
pective decline of 8 per cent by manufacturing concerns for 1954.
8
bound for further increases, what is the explana
tion? If it should turn out that local investment
plans do not conform, it is probably because
Philadelphia is different. This area is under
going a kind of renaissance. As an industrial
center, the Delaware River Valley has all the
natural advantages it has always had—soil,
topography, climate, water supply, location, and
accessibility to the sea. Some years ago the area
went through a period of carelessness—a time
when some of these natural resources were
allowed to corrode. Now the region is under
going a major “spit-polish job.” Streams are
getting a cleaning; removal of silt and sludge
is making them more navigable, and the con
struction of plants for the disposal of sewage
and factory wastes is making the waters more
potable. High-speed turnpikes facilitate the flow
of traffic to the west, the north, and the south.
CAPITAL EXPENDITURES 1953 AND 1954
Petroleum and Coal
Chemicals
Machinery (Except Electrical)
Primary Metals
Electrical Machinery
Fabricated Metals
Food and Tobacco
Textiles
Paper
Printing and Publishing
Transportation Equipment
Miscellaneous
Lumber and Furniture
Stone, Clay, and Glass
Rubber and Leather
Apparel
I
0
10
20
30
40
MILLIONS $
50
60
business re v ie w
The Pennsylvania Turnpike is being extended
eastward to the Delaware and ultimately will
connect with the New Jersey Turnpike. An
improved international airport is nearing com
pletion in Philadelphia and another bridge is
about to leave the drawing boards, to span the
Delaware to improve accessibility in all directions.
In Philadelphia, old landmarks are disappear
ing and new ones are taking their place. In
central Philadelphia, the Pennsylvania Rail
road’s Broad Street Station and the “Chinese
Wall” have disappeared, making way for a
large redevelopment program to be known as
Penn Center. Independence Hall is no longer
facing obsolete and empty office buildings—
they have been removed to make way for green
grass, shrubbery, and a shaded walk. The
Schuylkill Expressway is moving south from
the Pennsylvania Turnpike to central Philadel
phia. A high-speed expressway is to be built
along the western bank of the Delaware River.
Not only in Philadelphia proper, but through
out the entire Delaware River Valley area great
changes are taking place. Upstream, where
Bucks County farmers harvested their spinach
crops only three years ago, are Levittown and
Fairless Hills, which together make a community
large enough to rank among Pennsylvania’s
twelve largest cities. Downstream, just below
Wilmington, a steadily rising volume of com
merce flows over the Delaware Memorial Bridge
—a graceful span of steel connecting Delaware
and New Jersey.
Concurrent with all these developments, new
plants are springing up in the area, longestablished plants are expanding and improving
their facilities, and others are moving out of the
heavily populated core into the counties sur
rounding Philadelphia where they have more
“elbow room.” Manufacturing operations can
be carried on more economically in one-story
structures than in multi-story plants. Power
companies are expanding their productive fa
cilities, as they must, to stay ahead of the rapidly
growing demand.
Along with all these developments, popula
tion in the Philadelphia metropolitan area has
increased about 18 per cent since 1940. Con
sidering all the civic and transportation im
provements, on the one hand, and the industrial
expansion and modernization on the other, it is
difficult to tell which is cause and which is effect.
There is no denial of the fact, however, that
there has been an awakening—a re-examination
of the potentialities of the area and a quickening
spirit which permeates the entire region. Per
haps further analysis of the current survey may
lay bare other reasons for the prospective in
crease in local investment.
E x p a n s io n in n o n d u r a b le s
It is the manufacturers of nondurable goods
who are planning the largest increases in ex
penditures in the year to come. Their plans
call for an outlay of $259 million next year,
in contrast with actual expenditures of $209
million last year, which is an increase of 24 per
cent; however, plans vary widely from one in
dustry to another, as shown in the accompany
ing table. Manufacturers of petroleum and coal
products contemplate the largest increase in
outlays, in actual dollars. As a matter of fact,
the large petroleum refineries along the Delaware
and the Schuylkill are so dominant that they ac
count for slightly over 40 per cent of the total
scheduled outlays for new plant and equipment of
all area manufacturers in 1954.
Producers of food and tobacco products plan
the largest increases, percentagewise, though in
9
business re v ie w
ESTIMATED CAPITAL EXPENDITURES IN THE
PHILADELPHIA METROPOLITAN AREA
(Thousands $)
IN D U S T R Y
All manufacturing ..............................................
Durable goods ...................................................
Nondurable goods ...............................................
Food and tobacco ...............................................
Textiles ................................................. .............
Apparel .................................................................
Lumber and furniture............................................
Paper ...................................................................
Printing and publishing .......................................
Chemicals ............................................................
Petroleum and coal products ..............................
Rubber and lea th er..............................................
Stone, clay, and glass .........................................
Primary metals .....................................................
Fabricated metals ...............................................
Machinery (excluding electrical) ..........................
Electrical machinery.............................................
Transportation equipm ent....................................
Miscellaneous .......................................................
actual dollars they are completely overshadowed
by the petroleum refineries. The chemical com
panies are also planning to increase their capital
outlays substantially, and the manufacturers of
apparel are the only other producers of non
durables planning further expansion.
Declining capital outlays are reported by the
printers and publishers and by manufacturers of
textiles and paper products. The largest declines
in the nondurables group are reported by the
textile people, who reported a 43 per cent
decline for next year.
Producers of durable goods, as a class, plan
modest increases of 7 per cent for 1954; but,
again, there is anything but uniformity among
the various members in this group. Plans vary
from decreases of almost 20 per cent in the
10
To ta l actual
expenditures
Sept. 1952Sept. 1953
A nticip a ted
expenditures
Sept. 1953Sept. 1954
314,394.9
105,321.6
371,887.4
1 13,013.2
209,073.3
258,874.2
+ 23.8
14,742.1
13,626.2
1,160.2
4,874.0
1 1,997.5
9,409.8
39,027.2
1 16,557.3
2,553.0
4,136.1
20,797.5
17,085.7
24,152.3
18,664.5
8,570.0
7,041.5
26,026.6
7,750.7
1,320.4
4,019.0
10,603.8
8,347.5
48,018.5
154,725.1
2,081.6
5,671.7
21,514.3
17,807.1
23,915.2
15,163.1
18,642.7
6,280.1
+
—
+
—
—
—
+
+
—
+
+
+
—
—
+
—
Percent.
change
+
+
18.2
7.3
76.5
43.1
12.3
17.6
II.6
1 1.3
23.0
32.4
18.5
37.1
3.4
4.2
1.0
18.8
1 17.5
10.8
electrical machinery industry to a huge increase
of 117 per cent among producers of transporta
tion equipment. “Transportation equipment” is
a term totally devoid of glamour, like the word
“durables.” In the Delaware River Valley
region, transportation equipment means such
things as automobile assembly plants, motor
trucks, streamlined trains, dry-cargo merchant
vessels and oilers, rotary aircraft, motorcycles,
bicycles, and horse-drawn vehicles.
In our survey taken last year (September
1952), producers of transportation equipment
showed a sharp contraction in capital outlays
— a decline from $25 million to $81 million.
,A
The latest survey shows that their actual ex
penditures were $81 million, but for next year
/b
they plan to increase it to $18.6 million. Pro
business re v ie w
ducers of stone, clay, and glass products also
plan a sizable increase (37 per cent). This
group of industries also produces a great
variety of products consisting of such things
as cement, building stone and crushed stone,
glass bottles, window glass, chinaware, chemical
and laboratory glassware, etc.
Electrical machinery, consisting of radios,
television, electric motors, transformers, switch
gear, and the like, shows a somewhat surprising
19 per cent decrease. Perhaps the reason is that
electrical machinery manufacturers went $2
million over their year-ago estimates for actual
outlays of $18.5 million. Producers of primary
metals and manufacturers of finished metal
products (the latter embracing a bewildering
variety of things), contemplate only small fur
ther increases in capital outlays, as the table
shows, and manufacturers of machinery (ex
clusive of electrical machinery) report prac
tically no change.
FUTURE CAPITAL OUTLAYS BY
RAILROADS AND UTILITIES
Railroads and utilities in the Philadelphia metro
politan area spent $120 million fo r new plant and
equipment during the year ended September
1953. For the year ending September 1954, they
plan to spend $1 18.5 million— a decrease of less
than 2 per cent.
Among concerns within the
group, plans differ— as they do among manufac
turers. The railroads plan reduced capital outlays,
and the utilities plan to invest just as much or
slightly more in 1954 than in 1953.
Construction vs. equipment
One thing which the table does not and cannot
reveal (in order to preserve the identity of
individual companies reporting to us) is that
the bulk of scheduled increases in money out
lays for next year is for new plants and plant
additions rather than for new machinery and
equipment. That most of the increase should be
for plant rather than equipment is indeed a
surprise. This is contrary to the findings of a
year ago and it is also contrary to trends in
recent surveys made by others which show a
diminishing emphasis on plant construction and
greater emphasis upon modernization of equip
ment. Frankly, we do not know what accounts
for the reversal of the local trends.
Will the plans stick?
What are the chances that manufacturing con
cerns in the Delaware Valley area will actually
spend the $372 million as scheduled? In our
survey made in 1952, industrial concerns re
ported that they planned to increase capital
outlays by 4 per cent over the preceding year.
Actually, they increased their expenditures 14
per cent, as the latest survey shows. Perhaps
the only thing that proves is that construction
usually costs more than you think.
Going back to earlier years, in making a com
parison of actual expenditures with projected
expenditures, we get little comfort as to the
reliability of the predictions. In the fiscal year
ending September 1951, Philadelphia manufac
turers spent about 25 per cent more than they
had estimated at the beginning of the year.
Similarly, in the fiscal year ending September
1950, they spent about 12 per cent more than
they had estimated at the beginning of the year.
In each of the three years preceding, however
—that is, in the years September 1947, 1948,
11
business re v ie w
and 1949, they spent slightly less than the
reported estimates.
Does more investment
mean more capacity?
We have been asked frequently whether the
moneys invested in new plant and equipment
result in that much increased manufacturing
capacity. Consequently, in our latest survey, we
asked the firms specifically whether their ex
penditures would result in an increase in the
capacity of their plants. Almost half of those
who replied to this question said yes and the other
half said no. Those who said no, presumably
were making expenditures for the purpose of
either improving the quality of their products or
for the purpose of reducing cost of production,
but not to increase the volume of output.
Sources of funds
With respect to sources of funds, our latest study
shows little change from peceding surveys. A
fraction over 88 per cent of the planned $372
million to be spent next year is to come out of
the resources of the companies making the ex
penditures; 9 per cent of the funds are to be
obtained from banks, and the remainder from
other sources. Among other sources the securi
ties market is negligible.
All industries, of course, do not conform to
the general pattern just cited. For example, tex
tile manufacturers plan to get 24 per cent of
their funds from banks; manufacturers of elec
trical machinery, 28 per cent; and producers
of petroleum and coal products, 15 per cent
from banks. Apparel manufacturers are in a
class by themselves in the sense that they are
the only major industry group that is entirely
independent of outside sources for funds, but
12
the total amount they are spending for expan
sion and renovation is not large; in fact, it is
the smallest, as the table shows.
A final observation
The amount of money that American business
has spent on new plant and equipment in the
post-war period is staggering. During the past
four years (1950 to 1953, inclusive) alone, it
amounted to $100 billion, according to reports
of the Department of Commerce and the Securi
ties and Exchange Commission. This includes
enterprises in manufacturing, mining, railroads,
transportation other than railroads, public utili
ties, commercial, trade, service, finance, com
munication, and construction. The only areas
excluded are agriculture and outlays charged
to current account.
Each year there are those who think we are
over-built and that henceforth such expenditures
are sure to decline. To be sure, the day will
come, and may be at hand, when expenditures
will decline; but it is easy to overlook several
aspects of the large money outlays. First, the
cost of new machinery and equipment and con
struction costs have been steadily rising. For
example, the printer who buys an automatic
letter press today pays about $26,000 to replace
an old press bought for $12,000. Similarly,
today the full-fashioned hosiery manufacturer
has to lay out $37,000 for a knitting machine
(legger) in contrast with $17,000 for a machine
bought in 1941. Of course, the machines are
not identical, and this is the second point—
the new knitting machine has more sections, it
is a higher gauge (probably a 63 instead of a
51, which means that it knits a finer-mesh stock
ing) and there are other improvements.
Another reason for high volume of capital
expenditures is that they consist, in part, of
business re v ie w
special plant and equipment for national de
fense. Construction contracts of almost S3
billion for national defense have been awarded
in the United States between July 1951 and
June 1953, according to a recent release by the
Assistant Secretary of Defense. Then, too, it is
easy to overlook the impact of technological
change and obsolescence. Both machinery and
factory buildings, particularly the former, are
seldom kept in use until they are completely
worn out. As soon as a new machine tool or a
new lift truck appears on the market the manu
facturer will make a sharp-pencil calculation,
technically known as an economy study, and if
the results are in favor of the new machinery,
out goes the old equipment.
History shows that industrial equipment has
increasingly high mortality. A noted economist
made the observation, almost a half century ago,
that wholesale destruction of productive equip
ment as a result of a war, earthquake, or
similar major catastrophe was, in fact, not much
worse than the destruction of productive equip
ment that goes on constantly by reason of de
preciation and obsolescence. In our day the
ravages of obsolescence and depreciation are
much greater than they were in his day.
Technical notes
The first six surveys covered manufacturing con
cerns in Philadelphia County only. The latest and
last year’s include the Philadelphia metropolitan
area; that is, the eight counties consisting of
Philadelphia, Bucks, Montgomery, Delaware, and
Chester on the west side of the river, and Camden,
Burlington, and Gloucester counties on the east
bank of the Delaware. Currently, this area em
ploys 617,000 people in manufacturing industries
( September 1953). Representative manufacturers
in the major industries of this region were asked
how much money they had spent from September
1, 1952 to September 1, 1953 on (a) new con
struction, and (b) on equipment; also what
expenditures they planned to make in the next
year beginning September 1, 1953. Replies were
received from approximately 500 concerns, and
the sample was “blown up” to give the trend
of all industry in the area.
INVENTO RIES-A TROUBLE SPOT?
Since early 1950, inventory holdings have been
trending upward. In terms of past records, this
is a fairly long period of uninterrupted accum
ulation of stocks. Recently, the rate of accumu
lation has slowed considerably, and many ob
servers look for some liquidation in the near
future.
In view of this concern over future inventory
changes and in the interest of securing addi
tional information about business in the area,
the Federal Reserve Bank of Philadelphia in
cluded questions on inventories in its annual
capital expenditures survey this year. Four hun
dred and sixty-one firms, representing about half
of the total manufacturing employment in the
eight-county area, answered these questions. Sev
eral conclusions are apparent after summarizing
their replies:
13
business re v ie w
1. By far the largest number of firms expect
to maintain their inventories at present levels
over the next few months, seasonal considera
tions aside. But about four times as many firms
intend to decrease their inventories as intend to
increase them.
2. Larger firms, particularly among durable
goods producers, show a greater tendency to
want to decrease inventories.
3. Half of the firms intending to alter their
inventory positions expect the change to be
substantial.
4. The most frequent comments made by pro
ducers expecting to decrease inventories have to
do with slackening business and a now plentiful
supply of raw materials.
100%
Twenty-five per cent of
the firm s who intend
to decrease inventories
hold 43 p6r cent of
the value of current stock
43%
Most say present levels are right
Of the 461 manufacturers replying to our ques
tions, 319 or about 69 per cent, intend to main
tain inventories at present levels except for nor
mal seasonal changes. But 116 firms or 25 per
cent plan to draw down stocks, and only 26
firms expect to increase their inventories. This
seems to indicate that a clear majority of the
producers surveyed are satisfied with their cur
rent inventory positions or are at least adopting
a “wait-and-see” policy for the next few months.
On the other hand, of those intending to change
their inventory policies, the ratio is better than
four to one for a decrease.
. . . but many of the larger durable goods
firms are cutting down
In analyzing manufacturers’ inventory intentions,
as revealed in the survey, two additional obser
vations are important from the standpoint of
potential effect on aggregate demand. First, dur
able goods producers intending to decrease in
ventories have a more than proportionate share
14
0%
of current inventory holdings. That is to say,
they have been the big accumulators of stocks
in the recent past. Second, nearly half the pro
ducers planning to decrease their inventories say
the change will be substantial.
There is a fairly sharp cleavage between man
ufacturers of durable and nondurable goods.
About 30 per cent of the durable goods produc
ers, holding 64 per cent of durable goods stocks,
say that they are going to draw down their
stocks over the next three months. On the other
b usiness re v ie w
hand, 21 per cent of the manufacturers of non
durables, who hold 13 per cent of total inven
tories of this group, predict a short-run decline
in their stocks. Over-all, 25 per cent of the firms
surveyed who expect a decline in inventories
hold 43 per cent of current stocks; whereas the
small group of producers who expect to enlarge
inventories, at present hold a less than propor
tionate share of total inventories.
Roughly half of the manufacturers of durable
and nondurable goods who expect a decline be
lieve that the drop will be substantial. In other
words, 12 per cent of the firms surveyed are
going to decrease inventories substantially, as
compared with about 3 per cent of the producers
who intend to increase inventories substantially.
Apparel producers and transportation
equipment makers most pessimistic
As the table shows, there are some fairly sharp
differences in the inventory plans among manu
facturers of nondurables. Within this group, for
example, of the 24 printing firms surveyed, only
two smaller* companies intend to decrease inven
tories—and none substantially—as compared
with three moderate-sized printing firms who are
going to increase their stocks. Conversely, 10 of
the 26 apparel producers answering our ques
tions intend to allow their stocks to run off a
bit. None, at the moment, intends to increase its
stocks.
Industrial classifications on the durable goods
side show much less difference of opinion. The
percentage of firms intending to allow inven
tories to decline varies between 44 per cent for
transportation equipment manufacturers and 26
per cent for electrical machinery makers, and in
no durable goods industry group are there more
firms who plan to increase stocks rather than
decrease them.
PERCENTAGE DISTRIBUTION OF
MANUFACTURERS' SHORT-RUN
INVENTORY PLANS
No Change
A ll manufacturing. .
Durable goods.........
Nondurable goods .
Food and tobacco. .
Textiles ....................
Apparel ..................
Lumber and furniture
Paper ......................
Printing and
p u b lish in g ...........
Chemicals .............
Petroleum and coal
products .............
Rubber and leather.
Stone, clay, and glass
Primary metals . . . .
Fabricated metals. .
Machinery (exeluding electrical)
Electrical machinery
Transportation
equipment .........
M iscellaneous.........
Increase
Decrease
69
6
25
64
6
30
74
5
21
85
10
5
64
4
32
62
—
38
79
—
21
19
77
4
83
10
7
78
7
15
100
76
73
—
—
5
—
19
27
64
8
28
57
8
35
62
5
33
65
9
26
50
6
44
72
4
24
Business activity and inventories:
cause and effect
Most of the manufacturers who are decreasing
inventories point to an expected worsening of
business conditions as a cause. Comments such
as “customers aren’t buying,” “falling prices,”
or “inventory too high for anticipated sales” are
typical. Next to these comments, the most fre
quently used reason for decreasing stocks has
to do with the now plentiful supply of raw
materials. Apparently, for the past two years or
so when raw material shortages were character
istic in many industries, producers over-bought
in order to provide an adequate supply and
insure uninterrupted production. With normal
supply lines now feeding in raw materials, the
need for this extra buying has diminished.
15
business re v ie w
On the plus side, most of those who plan to
increase inventories give as their reason rising
sales which warrant larger stocks. The next most
important cause for firms to increase inventories
is new products. A small minority of firms ex
pects some involuntary increase in inventories.
These are going to continue purchasing stocks
at the present rate, but expect a temporary slow
down in sales.
Over-all, nine out of ten of the 116 manu
facturers who intend to decrease inventories,
and three out of four of the 26 who intend to
increase inventories are doing it as a reflection
of current business activity or a prediction of
future sales volume. It is well to remember that
their aggregate action will help to determine
business levels as well as reflect their individual
estimates of these levels.
INDUSTRY LOOKS AT EMPLOYMENT
Manufacturers in the eight-county area plan
little change in employment over the next six
months. There may be some cutbacks in certain
“hard goods” industries which have expanded
their work forces tremendously in the past year,
but these will be offset to some extent by increased
employment in “soft goods.” Over-all, it looks
as though September’s employment of 617,100
in manufacturing may be shaved a fraction—
eight-tenths of a per cent— by next spring.
This outlook for industrial employment is
based on estimates received from 500 firms
which participated in our current survey of
capital expenditures and inventories. They em
ploy more than half of all workers in manu
facturing in this area.
From September 1952 to September 1953,
15,000 workers were added to the payrolls in
this area. Since the Korean outbreak, 90,000
have been added to work forces. It is estimated
that a substantial part of this added employment
has come as a direct or indirect result of
Government spending for defense purposes. At
the moment there is reason to look forward to
reduced defense spending. The economy appears
to be facing a period of slow transition away
16
from near war-time footing. This survey indicates
that for the next six months, the transition will be
a smooth one.
Almost half of the reporting firms anticipate no
change in manpower requirements. Nearly one
in three companies surveyed expects to increase
employment, and the remainder—about 20 per
cent—think their employment will decline. The
decreases, however, are somewhat larger than
the increases, so that employment, which stood
at 617,100 in September, may drop 1900 by
December and 4900 by March.
Three industries, transportation equipment,
primary metals, and fabricated metals—all
heavy industries—foresee a cut of 8200 in their
forces by March. Of this cut, 5400 will come
from transportation equipment industries. About
half of the reporting firms in transportation
equipment expect to reduce their forces by next
March. About 40 per cent in primary metals
and 25 per cent in fabricated metals expect to
take similar actions. These declines, if they
take place, would still leave these industries,
in the aggregate, with 4800 more workers than
in September 1952 and 38,600 more than at
the start of the fighting in Korea.
business re v ie w
ESTIMATED EMPLOYMENT IN THE
PHILADELPHIA METROPOLITAN AREA
(000's
omitted]
IN D U S T R Y
All manufacturing ...............................................
Durable goods ...................................................
Nondurable g o o d s...............................................
Food and to b ac c o ...............................................
Textiles .................................................................
Apparel ...............................................................
Lumber and furniture .........................................
Paper ...................................................................
Printing and publishing.......................................
Chemicals ...........................................................
Petroleum and coal products..............................
Rubber and le a th e r.............................................
Stone, clay, and g lass.........................................
Primary metals ...................................................
Fabricated metals ...............................................
Machinery (except electrical)..............................
Electrical machinery ...........................................
Transportation equipment .................................
Miscellaneous .....................................................
On the other hand, machinery and electrical
machinery manufacturers plan to increase work
forces by about 2400 over the next six months.
These and other small changes within the dur
able goods sector will work to partially offset
the employment reduction planned by transpor
tation equipment, primary metals, and fabri
cated metals makers. For the durable goods
industries as a whole, however, employment is
expected to decline by 6600 by March.
Septem ber
1953
December
1953
March
1954
617.1
312.3
304.8
55.9
55.9
60.4
9.3
21.9
33.8
37.4
24.2
15.3
13.2
38.3
49.7
48.9
60.8
58.8
33.3
615.2
309.4
305.8
56.8
56.0
60.3
10.0
22.0
34.0
37.3
24.2
15.2
13.1
37.2
48.9
49.4
61.3
56.9
32.6
612.2
305.7
306.5
55.9
56.9
60.8
10.1
22.0
33.5
37.7
24.3
15.4
12.9
36.5
48.7
50.1
62.0
53.4
32.0
Percent,
d istrib u tio n
Sep t. 1953
1 0 0 .0
50.6
49.4
9.1
9.1
9.8
1.5
3.5
5.5
6.0
3.9
2.5
2.1
6.2
8.1
7.9
9.9
9.5
5.4
Nearly all of the industrial classifications
within the nondurable goods group plan to in
crease employment slightly over the next six
months. Textile manufacturers, who intend to
hire about 1000 workers by next March, lead
the list. The printing and publishing industry
is the only nondurable group which foresees a
decline in employment. It is estimated that total
employment in nondurables will show a gain of
1700 by March.
17
CURRENT
TRENDS
Someone with a sense of humor summarized
the business outlook: business, look out! Yet,
quite recently, excellent earnings reports, a
rising stock market, and generally good business
have produced optimistic comments on the out
look, despite some impending trouble spots. This
optimism comes as a refreshing contrast to recur
ring predictions of readjustment.
In fairness, though, it should be recognized
that almost all those who foresee a downturn
emphasize that the decline will be slight. They
are not really pessimistic. When pressed, they
might say that the decline in industrial pro
duction should be no greater than 15 per cent,
and very probably less.
The following table is presented to give a
rough idea of the relative size of those reces
sions (or depressions) which most of us can
remember. It may help to put into perspective
the downturn which many observers are now
predicting. These figures show the percentage
declines in a few major indicators during four
periods.
1921
Personal income. . .
Mfg. employment. .
Ind. production . . .
Wholesale prices . .
Stock p ric e s...........
n.a.
31%
33
44
32
19 3 2
5 1 %
45
54
40
85
19 3 8
19 4 9
12%
23
33
15
44
5%
14
17
8
17
N ote: Percentage declines were measured from peak to
trough and do not necessarily constitute the same
tim e periods in each case.
A drop of 15 per cent in industrial production,
although it seems large, would be a little less than
the decline during the 1949 downturn. It would be
less than half the decline in the 1921 and 1938 re
cessions and, of course, much less than the drop
during the Great Depression.
But we have come a long way since 1949.
18
PER
CENT
b usiness re v ie w
The economy is now operating on such a high
level that declines of 1949 magnitude would
still leave us better off than at any other time
in our history except for the past few years.
Judging by most of the indicators in the table,
we would be about back to where we were at
the time of the Korean outbreak—at the crest
of the post-war boom. Industrial production,
wholesale prices, manufacturing employment,
stock prices, would be at mid-1950 levels. Per
sonal income and gross national product would
be even better—a little higher than they were
in the third quarter of 1952.
This is not a forecast, of course, and it is
unrealistic to assume that 1949 history would
repeat. But even rough figuring like this sug
gests that if a readjustment is ahead, it may
involve a readjustment of our concept of “good
business” as much as anything else.
A glance at the money market
Business has been slow to confirm the predic
tions of a downturn, but changes have taken
place rapidly in one important area of the
economy—in the money market. Interest rates
reached a peak in early June. During the past
five months, as the chart shows, they have
declined substantially and rapidly, particularly
since mid-September. The most precipitous drop
has been in the rate on Treasury bills—at one
time almost 2 V per cent and now 1.31 per
2
cent. Yields on long-term Government 2^2 and
3 1/4 per cent bonds have also dropped. Rates on
prime commercial paper have followed the
downward movement, as have Federal funds.
The Federal Reserve discount rate remains at
2 per cent.
One of the reasons for the change has been
that bank loans have not risen as much as ex
pected. Last year, loans of weekly reporting
member banks started to go up around the
end of July. This year they started to climb at
about the same time, but thus far their increase
has amounted only to $1.4 billion as compared
with $2.5 billion in the same period of 1952.
Another reason for the change in money rates
is that the Federal Reserve has been increas
ing its holdings of Government securities. The
System has bought off and on since last May.
These reserves are in addition to those freed
by the reduction of reserve requirements in
July. The volume of member bank borrowing
from the Federal Reserve Banks has remained
fairly low.
■ n B SiB AH KHS
UHftGF HHMHX
Additional copies of this issue are available
upon request to the Department of Research,
Federal Reserve Bank of Philadelphia,
Philadelphia 1, Pa.
FOR T H E
RECORD...
Factory*
T h ird Fe d e ra l
Reserve D istric t
P e r cent change
P e r cent change
Septem ber
1953
from
9
mos.
1953
Septem ber
1953
from
9
mos.
1953
from
yea r
ago
mo.
ago
O U TPU T
M anufacturing production. . .
Construction c o n tra c ts!...........
C o al m in in g .................................
- 1*
0* + 8*
0 - 4 +12
+10
-2 7
-1 7
EM PLO YM EN T A N D
IN C O M E
Factory employment..................
-
TR A D E**
Department sto re s a le s ............
B A N K IN G
( A ll member banks)
D e p o sits.........................................
Lo a n s...............................................
Investm ents...................................
U .S . Govt, s e c u ritie s ..............
O t h e r...........................................
Check payments.........................
year
ago
1
+
3
7
-1 5
+
2
+
+
2
+
3
2
0
-1 1
0
+
2 * + 7*
7* + 17*
2
8
+
4
+
2
+
+ 4
+13
2
2
+ 4
+14
2
3
+ 1
+
_j_ 4
+
+
+13
2
2
5§ +
+
9
+ 4
+ 14
- 2
3
+ 1
+ 8
Of
Of +
0
0
+
1
1
+
1+
mo.
ago
yea r
ago
-1
+1
+
P e r cent
change
Sept.
1 9 5 3 from
mo.
ago
year
ago
Pe r cent
change
Sept.
1 9 5 3 from
mo.
ago
Pe r cent
change
Sept.
1 9 5 3 from
yea r mo.
ago ago
yea r
ago
1
+
5 +11
+
5 +
1
+
6 +
7 +
3
R e a d in g . . . .
-1
0
0
+ 8
-2
+13
0
+2
-2
0
+
5
-1
+10
+
8 +31
-3
+
9 +
8 +
5 +10
-1
-6
-
2 +
-5
+
9 +
7 +
3 + 15
-1
+ 2
+
5
-1
-3
-
1 +26
-2
-
3 -
1
+
9 +25
+ 5
+
6
7
1
0
1
1
0
0
9§ + 1 1 § + 1 0
1
0
1
1
0
year
ago
0
0
+
+
Per cent
change
Sept.
1 9 5 3 from
0
P h ila d e lp h ia .
-
0
2
1
*Pennsylva nia
fP h ila d e lp h ia
§ 20 C itie s
**A d iu ste d fo r seasonal va ria tio n . {B a se d on 3-month moving averages.
0
Stocks
S a le s
7
5
mo.
ago
La nc a ster. . .
1* +
0* +
P a y ro lls
Pe r cent
change
Sept.
1 9 5 3 from
+12
+ 3
- 6
0
-
+
PR IC ES
C o nsum er......................................
LOCAL
CHANGES
from
year
ago
yea r
ago
Check
Payments
Em ploy
ment
mo.
ago
SUM M ARY
Department Sto re
U n i ted States
T re n to n ..........
-1
W ilk e s - B a rre
0
0
W ilm in g to n . .
0
+7
Y o r k ................
0
+8
0
-3
+18
0 -
-1 1
-3
7
0 -
+
4
-1
+
6 +
-2
+12
-
1 +12
2 +
4 +16
2 +27
7 +10
-
+
4
9 +18
* N o t restricted to corporate lim its of c itie s but covers area s o f one o r
more counties.
@FedFRASER