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Economic Growth
and
Local Action
Americans are disposed to direct action. Faced
with problems, they demand immediate and vig
orous confrontation, attack, subjugation. Faced
in particular with lagging growth in their cities
or regions, they want to save companies, repel
the threatened takeover of a local enterprise,
bolster a local management which may have
deteriorated.
These are good and necessary actions; they
are first aid. The causes of the problems may be
deeper, however. Inescapably, there are at work
in the world forces which change markets,
change technology and products—and hence the
profits of local companies.
Human skills in management or promotional
drive do affect the economic growth of cities
and regions, but so do other influences. One is
the kind of industries in which the region spe
cializes. If it specializes in slowly expanding in
dustries, its economy may grow slowly—unless
management is unusually aggressive. Or if a
region specializes in rapidly expanding indus
tries, it should grow at a good rate— unless
management is incompetent.
Beyond these factors of regional specializa
tion and ability, there remains a long list of
important locational influences, many of them
out of reach of local control. They have to do
with access to resources and markets-—consid
erations which are changing in relative impor
tance. Technology, which has created new de
mands, new industries, and new methods of pro
duction, makes access to materials and natural
resources less important and access to markets
more important. In some industries, physical ac
cess means less than the need for highly skilled
(Continued on Page 17)
B U S IN E S S R E V IE W
is produced in th e D ep artm ent of Research. Bertram W. Zu m eta was prim arily responsible
for the editorial “ Economic Growth and Local A ction,” Evan B. A lderfer for “ The Egg and the C h icken” and W illiam D. Schwartz
for “ Renaissance of th e Rails?” The authors will be glad to receive com m ents on th e ir articles.
Requests for additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of P hiladelp hia,
P h iladelp hia, Pennsylvania 1 9 1 0 1 .
THE EGG AND THE
CHICKEN
We still do not know which came first but at
long last we have an answer—an economic an
swer. Today, the egg is first, but not by very
much. Last year, eggs contributed $1,811 mil
lion to the country’s gross farm income; and
broilers, $1,058 million. What a bountiful bird
is the chicken!
To the best of our knowledge, all birds lay
eggs; but the chicken is the champ. Other birds
lay bigger eggs, or smaller eggs, or rounder
eggs, or fancier eggs; but for mass production,
the domesticated hen reigns supreme as the avian
queen. A healthy hen lays over 200 eggs in a
year; the record is in excess of 350 eggs.
Consider the egg
The hen’s egg is one of Nature’s largest single
cells— a tidy container of 55 different chem
icals, a storehouse of nutrition, an architectural
masterpiece, and the hen’s hope of posterity.
The interdependence of structure and function
of the several parts is a wonder to behold. Said
T. W. Higginson, a writer of a former gener
ation: “ I think if required on pain of death
to name instantly the most perfect thing in
the universe, I should risk my fate on a bird’s
^_5
5
f'SS'
Alexis Romanoff, in his exhaustive treatise
of the egg, says that if you remove a sizable
piece of shell and shell membrane from the
upper side of a fresh egg, you will find an
opaque circular white spot, usually visible on
the surface of the yolk. That little white spot,
called the blastodisc in the unfertilized egg
(blastoderm in the fertilized egg) is the tiny
spark of life from which the embryo arises. In
case you wonder which is the upper side of
an egg—since they do not come marked “ this
side up”-—please read on. The little seed of life
is cradled and nourished by the yolk, the most
important part of the egg—if indeed any part
can be called more important than another.
The yolk is kept near the geometric center
by a ropy structure (see illustration) that spi
rals clockwise toward the blunt end and counter
clockwise toward the sharp end of the egg. This
ingenious design restores the embryo of an
egg, which has been turned, to the uppermost
position when the egg comes to rest. Thus the
embryo is always in the best position to absorb
the bodily heat of the incubating hen.
A small air cell develops at the blunt end as
the new-laid egg cools from the temperature of
the hen’s body. The air cell gives the fully de
veloped chick its first breath before breaking
out into a much larger atmosphere.
The outer covering, or
INTERNAL STRUCTURE
eggshell, of the hen’s egg
OF A N EGG
AIR CELL
is a calcareous container,
brown or white depend
ing on the species, which
is translucent when newlaid but opaque upon
drying. Though ever so
thin, the shell has sur
SHELL MEMBRANES
prising strength because
Source: Poultry and Egg Na
of its ovoid shape which
tional Board.
utilizes the structural principle of the arch; any
point of the shell is part of an arch. The eggshell
must be strong enough to support the brooding
3
business review
hen and yet weak enough to allow the fully devel
oped chick to peck its way out.
When chickens punctuated barnyards
A half-century ago an egg was only an egg.
Eggs were produced as an agricultural sideline
by nondescript chickens on almost all farms.
In 1910, for example, chickens were “ kept” on
almost nine-tenths of the country’s more than
6 million farms. Flocks were small, averaging
about 50 birds, and they were either Plymouth
Rocks or White Leghorns or New Hampshires,
or Rhode Island Reds, or any combination
thereof. When not bathing in the dust, the
chickens scratched in the barnyard for food
which was supplemented with a daily toss of
shelled corn. For shelter, the chickens were
given a wooden house of sorts which had little
equipment other than slats for perching and a
row of boxes lined with straw or something for
laying. Money from the sale of eggs was pin
money for the housewife or perhaps one of the
children who tended the chickens. When hens
outlived their laying life, they were slaughtered
for the meat—an alleged piece de resistance
for the visiting minister.
Beginning in the early 1930’s, major changes
occurred in egg production. First, dual-purpose
flocks were replaced by single-purpose strains
bred especially for their egg-laying potentiali
ties. Second, as techniques improved for “ sexing” chicks, only female chicks were sold by
hatcheries. Third, egg productivity per hen was
greatly increased as a result of continuing im
provements in breeding, feeding, disease con
trol, and over-all poultry management. These
developments were accompanied by increased
production by fewer farmers with larger flocks
in favored regions where operations became
highly integrated.
4
Egg production is no longer an agricultural
sideline; it is serious business, and big business.
A substantial part of the country’s annual out
put in excess of 60 billion eggs comes from
highly specialized chicken farms with large
flocks cared for in a controlled environment.
Large-scale production sometimes runs to flocks
of 100,000 birds or more, but far more com
mon is the one-man or one-family unit of 10,000
to 15,000 birds in areas near large population
centers.
The interstate egg race
One might suppose that consumer preference
for fresh eggs and their perishability would
favor local lay for local markets. That supposi
tion seems to be supported by the map entitled
“ Egg Production, 1963.”
All states produce eggs, but some more than
others. Last year, ten states produced half the
country’s eggs—the ten with output of over 2
billion each. California ranked first by a huge
margin, on account of her large population
and her remoteness from the other so-called eggshed areas. Iowa was second and comfortably
ahead of Pennsylvania which ranked third.
These two states, along with Ohio, Indiana, Il
linois, and Minnesota, constitute a great egg
belt arching right through the heart of the Corn
Belt.
Pennsylvania’s number-three position is being
seriously challenged by Georgia, which is about
in the middle of a rapidly rising band of South
ern states. Seven of the nine states, with over
50 per cent increase in egg production during
the past decade—as shown on the map “ The
Shift in Egg Production, 1953-1963”—were the
Southern states describing an arc from North
Carolina to Arkansas. Is the rising competition
of the South in eggs going to duplicate what
business review
EGG PRO DU CTIO N,
1963
that region did in broilers, as pointed out in
previous issues of the Business Review? First,
let us look into pertinent economic aspects of
the egg business.
Introduction to egg economics
If it were possible to slice a hen into a left
and right half without doing her any harm or
interfering with her production, it would be
amazing to observe her mass-production facil
ities for laying eggs. Raw materials, in the form
of food and water, are taken in and processed
sequentially by various organs in her assembly
line plumbing. First is the formation of the
germ cell. Further down the line occurs the ac
cumulation of the yolk, then the other non
living materials such as the layers of albumen,
and finally the egg envelopes, including the
shell at the end of the line.
Man has learned to cooperate with the hen
by facilitating her mass-production technique.
By observation and experiment, he discovered
that the White Leghorn has the best productive
facilities of all the species. He found that the
hen’s ouput depends upon her input; therefore
he feeds her the hen’s choicest menu—a mash
consisting of a full-course dinner so that she
gets her minerals and vitamins along with all
the other nutritional requirements. He learned
that light stimulates the reproductive cycle and
that hens like to do their work in the morning,
so electric lights are turned on very early and
hens go to work in the simulated pre-dawn sun
rise. Hens are delicate creatures, averse to noise
and foul air, easily catch colds and other dis
eases—so they are kept inside in well-ventilated
houses and are supplied with proper medica
tion. Result: egg production per bird has gone
5
business re v ie w
THE SHIFT IN EGG PRO DU CTIO N,
1 9 5 3 -1 9 6 3
"“Wan*
NORTH
DAKOTA
MINNESOTA
WISCONSIN
MICHIGAN
SOUTH
DAKOTA
; -------
D oming
\
PENNSYLVANIA
JEBStf
IOWA
NEBRASKA
INDIANA
ILLINOIS
COLORADO
O f,
KANSAS
/ west
VIRGINIA
^ V ir g in ia
MISSOURI
KENTUCKY
>
o'0 '**
1
ten n essee
OKLAHOMA
SOUTH
carouNa
ARKANSAS
a * iz o n a
MEXICO
MISSISSIPPI
ALABAMA \
TEXAS
LOUISIANA
I OVER
I
I I TO
r ~ l 1 TO
I
I OVER
50%
50%
20%
20%
INCREASE
INCREASE
DECREASE
DECREASE
flO 'D
R *
Source: United States Department of Agriculture,
up, and up, and up, and so has the quality of
output.
“ Chickens at work, no admittance”
So read the sign posted at one Pennsylvania
chicken house, whereupon we drove on and
visited another hennery. The electrically lighted,
windowless house was of cinder-block construc
tion, 32 feet wide and 280 feet long, with a
well-insulated aluminum roof. The owner-oper
ator and his wife greeted us in a small room
doubling as an office and a washroom for clean
ing the eggs. In an adjacent room—the “ cooler”
—crated eggs are kept in prime condition await
ing pickup.
Before entering the chickens’ big living and
laying room, we had to put on plastic boots
lest we track in disease germs from previous
hen houses visited. Down the long, long avian
6
corridors ran four blocks of cages separated by
concrete runways. There were four rows of
cages in each block, and each cage caged three
hens allowing each bird about three-fourths of
a square foot of space. The entire room accom
modated 11,000 birds—all White Leghorns.
Inside the big room everything is automatic:
down the length of each row and accessible to
each chicken is a trough supplying fresh water;
immediately below is another trough supplying
chicken feed. Each day throughout the laying
period, lights go on automatically at 1 a.m.
and off at 3 p.m. Slightly tilted cage floors
cause freshly laid eggs to roll gently onto a
moving belt that delivers the eggs to the receiv
ing station adjacent to the office, where they are
washed automatically and placed into cartons
holding 30 dozen each. So highly automated
is the operation that the operator and his wife
business review
who tend the 11,000-bird flock are planning to
build another chicken house of comparable size
in order to keep busy. A laying hen house really
resembles an egg factory, but the owners prefer
to regard themselves as farmers.
A newly built chicken house of this type is
started with the purchase from a hatchery of
20-week-old pullets, the age at which they are
about to “ drop” eggs. At 25 weeks about half
of them will be laying, then comes a 60-week
period of lay, after which the production curve
declines to a point where the hens become a
liability. Thereupon follows a two-week clean
out. The “ old” hens are sold to processors for
conversion into chicken soup, the building is
thoroughly cleaned and readied for a new flock
of pullets, beginning another 67-week cycle.
Revenue obtained from the sale of outgoing
hens is less than the cost of incoming pullets.
Eggs on parade
Daily, or several times a week, trucks make the
rounds to pick up cases for delivery to a central
processing establishment which may be a pro
ducer-cooperative or an independent operator.
Here the eggs are prepared for market by an
other mass-production assembly line.
With the aid of a hand-operated tool equipped
with suction cups, a clutch of 30 eggs is trans
ferred deftly from the open case to a moving
belt. At successive stages in the parade, the
eggs are washed, dried, candled, graded accord
ing to weight, and packaged by the dozen into
cardboard containers familiar to the housewife
shopping at a supermarket.
Candling is no longer done with candles. At
the candling station along the moving belt, the
eggs pass over electric illumination from below
which enables the attendant to identify defects
such as blood spots, cracks, and other imperfec
tions. Defective eggs are removed; the others con
tinue to the weighing station where an electronic
device directs the eggs into carriers according to
size—ranging from peewees to jumbos. The
farmer is paid on a sliding scale depending upon
the number of marketable eggs of the various
grades, the small eggs going at discounts and the
larger sizes commanding premiums.
Want to go in the egg business?
Well, the first piece of discouraging news is the
cost of the chicken house. A modern chicken
house capable of accommodating 10,000 birds,
now the conventional size, costs $30,000 to
$40,000 or more, depending upon the degree
of automation. Another big item is the cost of
the pullets. The purchase of 10,000 pullets 20
weeks old, the usual starting age, costs $18,000
or more at current prices. To be sure, financing
can be obtained if you lack the resources and
are a good risk, but borrowed money adds in
terest to all the other costs.
Money to finance the egg business is often
secured from the Farm Credit Administration.
Medium-term loans of seven years or less to
modernize or build additions are obtained from
the Production Credit Administration. Longerterm loans for construction of new houses are ob
tained from Federal Land Banks. Financial assist
ance in the purchase of pullets is often furnished
by the hatchery supplying the chicks or local feed
companies or perhaps a local bank. Some banks,
however, are a bit wary of chicken loans because
of unfavorable experience in the past.
Many poultrymen also have credit arrange
ments with their feed suppliers who assist them,
particularly over the early period of the cycle
until egg income exceeds feed outgo. Chickens
are voracious eaters and if they are expected
to lay well they must be fed well. A 10,000-bird
7
business review
EGG PRODUCTION A N D
PRICES
CENTS PER DOZEN
MID-MONTH EG G PRICES RECEIVED BY FARM ERS-UNITED STATES
TOTAL MONTHLY PRODUCTION OF E G G S -U N IT E D STATES
MILLIONS OF CASES (THIRTY DOZEN PER CASE)
1955
1956
1957
1958
1959
I960
1961
1962
1963
1964
Source: United States Department of Agriculture.
flock may gobble up $35,000 worth of feed
through its laying cycle.
In addition to the feed bill, always the major
operating cost, are other expenses: electricity,
repairs, sanitation and medication, bird insur
ance, building and equipment insurance, taxes,
record keeping, and miscellaneous items. Health
maintenance of the flock is most important and
very costly if neglected; dead birds are a dead
loss, and lay no eggs. Fortunate is the operator
who can keep mortality below 15 per cent dur
ing the life cycle of the flock.
More egg economics
Another frustrating aspect of the business is
the unrepealable law of supply and demand.
8
The greater the production, the lower the price.
Proof of the statement is apparent in the chart
“ Egg Production and Prices.” Please observe
two noteworthy aspects of the double panel—
the trends and the jumpy contours. Both are
caused by the age-old economic law. The longrun trend of production is upward, that of
prices is downward. Annual production rose
from 59 billion eggs in 1955 to 63 billion in
1963. The average annual price declined from
39^ a dozen in 1955 to 34^ in 1963.
Upon closer examination of the chart, you
will note that in some years production and
prices part company throughout the seasons of
the year. The hens are chiefly responsible for
that. The instinct for reproduction among chick -
business review
ens, like other birds, occurs in the spring. Egg
laying coincides with the time of general revival
in Nature, and summer is devoted to care of
offspring. By domestication and selective breed
ing, man has considerably altered the hen’s
habits; nevertheless, she still tends to revert to
the cycle of her ancestral jungle fowl and pro
duces more eggs in the first half of the year
than in the second. Hence the spring flood of
eggs and declining prices followed by fall falloff of eggs and rising prices.
Today’s laying hen is a highly productive egglaying machine. In the course of a year she will
lay a spate of eggs weighing several times her
own weight. Competition is such, however, that
in his quest for profits the farmer must always
keep a close watch on feed prices and egg
prices. For him, feed prices are never low
enough nor egg prices high enough, but he is
constantly striving for the golden mean—max
imum egg revenue at least cost. How he fares
is portrayed in the chart “ Egg-Feed Price
Ratio,” which means the number of pounds of
EGG-FEED*
PRICE RATIO— UNITED STATES
Hen-house cost accounting
Among the poultryman’s expenses cited several
paragraphs ago was an item called “ record
keeping.” It is one of the smallest of the ex
pense items but one of the most important.
Preoccupied with all the work of taking care
of their laying flocks, too many operators are
careless bookkeepers. The poultryman who does
no more than make jottings on a calendar or
on the backs of stray envelopes is likely to use
his first big egg check to buy a 275-horsepower
dreamboat instead of applying the money on
the feed account or a payment on principal and
interest on his building and equipment.
The smart operator budgets revenues and ex
penses. He sets up a cash-flow sheet which
shows, through the course of a flock’s cycle, the
inflow of income from the sale of eggs, the out
flow for feed, and all other expenses so that pe
riodic cash deficits and surpluses may be an
ticipated. Of course, he will not know his profits
or losses precisely until clean-out time when
the old flock is displaced by a new one, but a
running record of cash flow is an indispensable
adjunct to good management.
POUNDS
* Number of pounds of poultry ration equal in value to one
dozen eggs.
Source: United States Department of Agriculture.
poultry ration that can be purchased with the
money received from the sale of one dozen
eggs. When the curve rises, the poultryman is
glad; when it falls, he is sad. His fortunes are
forever fluctuating.
Philadelphia’s eggy hinterland
There are not many egg-laying chickens in Phil
adelphia, but it is flanked by a huge egg-pro
ducing region of a score of nearby counties in
southeastern Pennsylvania, Delaware, and in
central and southern New Jersey—for the most
part in the Philadelphia Federal Reserve Dis
trict.
The eggiest county in this hinterland is Lan
caster, which is also first in many other things
including high-priced land. Where land brings
$1,000 to $1,800 an acre, farmers must practice
intensive agriculture; and the hen fits into that
scheme beautifully. On a fifth of an acre one
9
business re v ie w
HINTERLAND EGG PRO DU CING COUNTIES
THIRD FEDERAL RESERVE DISTRICT
PENNSYLVANIA
A
1
Source: United States Department of Commerce.
can erect a chicken apartment to house 10,000
birds; and the county’s fertile acres produce
rich yields of corn.
Still another reason explains the importance
of egg production in Lancaster and the rest of
the Philadelphia region: the proximity of a
big market, the biggest in the country. The Phil
adelphia metropolitan area itself is a sizable
market for fresh eggs, and within easy truck
ing distance is the New York metropolitan co
lossus where the density of population ap
proaches that of the hen houses. A steady stream
of refrigerated trailer trucks haul cases of eggs
from shipping points such as Lancaster, York,
Vineland, and Toms River to the New York
market. Of course that market is also served
by caravans of trucks rolling in from more dis
tant points.
10
The great egg roll
Years ago, local markets were supplied with
eggs by local poultrymen. Now eggs are trucked
great distances as a result of improved trans
portation facilities for the shipment of eggs
from large egg-surplus areas to large egg-deficit
areas. Large-scale motorized shipment links
large-scale production with big supermarkets.
Eggs roll in any direction to local or distant
markets wherever the best returns are obtain
able for the producer.
Egg marketing is highly competitive and sub
ject to sudden changes. This may be illustrated
business review
with respect to recent changes in origin of eggs
for the New York market. Until about 1958,
New York was supplied almost exclusively from
nearby and Midwestern states, notably Iowa
and Minnesota which also shipped eggs to
Southern markets. With the rise of production
in the South, especially Georgia and North
Carolina, the South has become a surplus area
and ships eggs to New York. Moreover, much
of the Midwest surplus that used to go South
now goes to the New York market in larger
quantities, intensifying the competition for pro
ducers close to New York City and Philadel
phia. Egg production in New York State, New
Jersey, and Pennsylvania has declined substan
tially in the past decade. Pennsylvania and New
York are down 11 per cent; New Jersey is
down 25 per cent.
To be sure, it costs more to ship eggs to New
York from the South or the Midwest than from
the Philadelphia area. In the competition for
the New York market, local producers have
about a two-cent-a-dozen cost advantage in
transportation and case exchange arrangements
over Georgia producers, but Southern producers
have developed cost advantages to overcome
their transportation handicap. Georgia pro
ducers save in costs of feed which is railed in
from the Corn Belt in “ Big John” cars; they
have lower labor costs, and they make exten
sive use of integrator-contract system of pro
duction patterned after the broiler industry. The
contract grower provides the poultry house,
labor, and electricity, and the integrator pro
vides the layers, feed, medication, and super
vision. By this arrangement it is much easier
for a farmer to become a contract egg producer
than to start a conventional enterprise.
It should not be assumed, however, that Penn
sylvania and New Jersey producers are about
to surrender. On the contrary, they are fighting
the competition vigorously. In Lancaster
County, for example, scores of new chicken
houses have been built in the past few years
and the new houses have the latest in construc
tion design and automation. Local producers
are knowledgeable in genetics, dietetics, and
stress quality eggs that bring premium prices.
Moreover, they know their costs.
“ Adam’n Eve on a ra ft”
That cryptic order, or its Beatle-ese equivalent,
shouted at the cook for two poached eggs on
toas't isn’t heard so frequently as it was when
PER CAPITA C O N S U M P TIO N OF EGGS—
UNITED STATES
NUMBER
* 1964 is estimated.
Source: United States Department of Agriculture.
we ate at the hash house near the college cam
pus. Eggs are just as nutritious and just as
good, if you like eggs, as they were a genera
tion ago but people eat fewer than formerly.
Per capita consumption, as shown in the chart,
has declined from the World War II peak of
402 to an estimated 313 last year.
An egg is a compact 77-calorie conglobulation of protein, minerals, vitamins A and D,
and others. The egg is a nutritional gem, can
be served in an astonishing variety of ways, is
an indispensable ingredient of thousands of de
lectable dishes, is widely used—fresh, frozen,
11
business review
or powdered—by bakers, confectioners, and
mayonnaise makers, and is used also for non
food purposes by artists, leather tanners, fur
riers, cosmeticians, and scientists in medical
research. Nevertheless, per capita consumption
is declining.
Various reasons are cited for the decline,
such as the bad American habit of eating no
breakfast or wolfing a dunked doughnut, work
ing wives who have no time to cook, TV and
breakfast cereal box-top appeals directed to
small fry, and the cholesterol scare of older
folk. We are unable to appraise the importance
or reliability of any of these alleged explana
tions. All we know is that the per capita curve
has been slipping and that makes the competi
tion tougher.
The growing intensity of competition in eggs
is analogous in many respects to what has hap
pened in the broiler industry. Not too many
years ago the Delmarva Peninsula was the un
12
disputed leader in production of broilers. Soon
other areas, notably the South, arose to chal
lenge Delmarva. Competition became a beakand-claw affair with feathers flying. The
Peninsula survived, but not without great trans
formation by way of improvements and modern
ization in production and marketing operations.
Now Southern layer houses are giving egg
producers in the Philadelphia region a hard
time. And the competition is being intensified
as some Southern broiler houses are being con
verted to layer houses. In the struggle, weak
and inefficient operators are bound to be elim
inated. Survivors in the race will be the strong,
the innovators, the record-keeping, cost-cutting
practitioners bent on recapturing the best mar
kets with quality eggs.
In all probability eggy chickens will survive
as did meaty chickens, despite the current im
pression that the chicken-egg argument might
shift from which came first to which went last.
American railroads have been taking it on the
chin for many years now, but there are signs
they have had enough of playing the sparring
partner. Once kingpins of the giant transpor
tation industry, the railroads have been con
fronted with a multitude of problems including
their own internal difficulties, strong labor
unions, regulation, and competition from other
carriers. Now some of these difficulties may be
easing, and a new, brighter era may be dawn
ing for the long downtrodden railroads.
Starting only a few years ago to set the
stage for effective competition, the railroads
have so far only halted the downward spiral in
their share of available business. Yet there are
enough indicators pointing to improvement in
the railroads’ competitive position to encourage
further examination at this time. Without mak
ing a comprehensive evaluation of the state of
the railroad industry, let us take a brief look
at where railroads once stood, where they stand
now, and where they seem to be heading as
movers of goods and people.
The root of the problem
There was a time when railroads dominated
intercity traffic, with the lone exception of those
areas along major navigable waters. That was
a century ago, however. Then, angry farmers
landed a haymaker by getting railroads placed
under Government regulation. Forty years later
Henry Ford and others substituted the gasoline
motor for the horse. Thus were set in motion
the forces that have so tarnished the rails’ for
mer majesty.
DISTRIBUTION OF UNITED STATES INTERCITY
FREIGHT TRAFFIC— M ILLIO NS OF MILES
PER CENT
Sources: Interstate Commerce Commission; Civil Aeronau
tics Board; Corps of Engineers; The Bureau of Railway Eco
nomics; A.A.R.
First among carriers, the rails’ share stands
at about 43 per cent of intercity freight traffic,
a far cry from their near-monopoly of the last
century. The chief gainer at the rails’ expense
has been the trucking industry, which today en
joys about 24 per cent of the market. The rail
roads’ problem has been how to compete.
Rcrilroading’s “ New Look”
Innovation has thrived in the rail industry in
recent years. New methods, new equipment, and
new attitudes have combined to make railroads
more efficient, more reliable and more com
petitive.
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business review
When business was bad during the depression
and in the post-World War II years, rail men
had no incentive to invest new funds. In every
year after 1929, except 1942 and 1943, Class I
railroads—those with annual operating revenues
of $3 million or more, accounting for nearly
99 per cent of the operating revenues of all
line-haul railroads—have shown a net return on
invested capital of under 5 per cent.1 In other
words, in most years this capital could have
earned as much, if not more, in high-grade cor
porate bonds. In 1964, according to one es
timate, profits of the railroad industry should
approximate $750 million, a gain of about 15
per cent over 1963. If achieved, this will rep
resent a return of about 3.5 per cent on invested
capital, up from 3.1 per cent last year.
Management in this decade has been deter
mined to improve the situation, and the outlook
for profits is brighter.2 This determination has
generated optimism about future prospects, and
this in turn has manifested itself in new capital
outlays and improvements in service. Momen
tum, the effect of cumulative results and ex
pectations, is picking up in the rail industry.
Profitable piggybacking
Piggybacking has caught the public eye as a
symbol of the railroads’ resurgence. It is one
of the railroads’ answers to the decentralization
and dispersal of industry. Before its introduc
tion at the end of the 1950’s, goods were
1 By comparison, profits of nonfinancial corporations after
taxes have been consistently above 5 per cent of net worth
since 1950, and in recent years between 6 and 7 per cent.
2 Investors, too, are confident that rails have a strong
future. Railroad shares were among the leaders in percent
age gain during the first half of 1964, some rising about
100 per cent in value. Another sign of investor confidence
is an increased interest in bonds of railroads which have
been in rough straits for many years and which now may be
in a position to turn a profit. Some bonds which previously
stood little chance of being redeemed are being refinanced
on favorable terms for investors, or are being paid off when
they fall due.
14
shipped by truck to the railroad, loaded into a
boxcar, unloaded into a truck at the destina
tion, and sent on to the receiver. Piggybacking
is an artful union of the advantages of trailer
trucks and railroads. It starts with a trailer
truck being loaded at the customer’s depot,
then driven to the freight yard. There the trailer
is loaded on a flatcar and shipped as part of a
train. At the destination, the trailer is unloaded,
hooked to a tractor and driven to the recipient.
Piggyback is generally faster, cheaper, more
versatile, and safer for goods—there are smaller
and fewer damage claims. Flatcars, after all,
are indifferent to what’s being carried in the
trailers on their backs.
Piggyback trains travel at speeds as high as
70 miles an hour, significantly faster than the
average conventional freight train. Most im
portant, piggyback flatcars earn considerably
more revenue than conventional boxcars.
Piggyback rates are frequently lower than
regular freight rates, and thus more competi
tive with truckers’ rates. Railroads also have
lowered other rates in an effort to strengthen their
market position. Rate reduction attracts more
business and promotes larger total revenue with
respect to commodities and services that are sen
sitive to transportation charges.3
Versatility plus
The more competitive posture of the railroads
3
The exact effect of a rate cut on total revenue depends
on how sensitive shippers are to these charges. Because of
the comparability of many services offered by truckers and
railroads, their substitutability, the demand for railroad
services in many regions may be quite sensitive. If rate re
duction does, in fact, produce more business, this will tend
to affect unit costs. Railroads, with their heavy overhead,
are a business of decreasing costs. For example, $10 of over
head cost distributed over 100 ton-miles entails a ten cent
a ton-mile cost, but this per ton-mile cost is reduced to one
cent if the line carries 1,000 ton-miles of freight. In contrast
with the railroads, the trucking industry has much smaller
proportions of overhead to total costs.
business review
evidences itself in other ways. Greater attention
is being given to the improvement of service
to the shipper. Many freight trains now are
scheduled just as passenger trains are, and op
erate at passenger train speeds. For example,
it now takes one full day less than previously
to ship goods from the West Coast to the Mid
dle West.
Piggyback service, however, is not applicable
to products which cannot be stacked in a truck
trailer. To accommodate shippers of agricul
tural products, coal, and other bulk goods, rail
roads are now offering unitized train service.
A unitized train carries one product to one cus
tomer. This cuts the rails’ cost and thus the
rate they charge customers. The railroads pi
oneered this service in 1961 when the threat of
moving coal by pipeline slurry became serious.
The rate for shipping coal by unitized train is
below the regular charge for moving a carload of
coal. Public utilities, which buy large quantities
of coal to generate electric power, are extremely
sensitive about their fuel costs.
Another innovation has been the design and
purchase of special-duty railroad cars. The Nor
folk and Western Railway has advertised prom
inently in national publications that: “ A decade
ago most of our railroad freight was hauled in
just seven different types of equipment (rail
road cars). Today the N & W can assign any
of 36 different kinds to a customer.” Other
lines also offer wide varieties of equipment.
Many of the railroads have introduced com
puters to take over routine clerical work and
also to control equipment use more efficiently.
This has resulted in lower costs and faster
scheduling. One device not yet in use involves
marking each freight car with a radioactive
code which would be read and recorded by
machines stationed at different points on a sys
tem’s track network. This would enable a line
to know where its rolling stock was at any
given time.
The albatross— I
Passenger service is anathema to most of the
nation’s rail lines. There are two distinct kinds
of service involved, intercity passenger service
and commuter passenger service. The former
may be profitable for a few lines, but the latter
is almost never profitable.
Intercity passenger service was once a strong
contributor to the industry’s profits. While most
had to make do with coaches, luxurious parlor
cars and elegant dining cars were provided for
the well-heeled clientele for which rail trans
portation was the way to get from one part of
the country to another. Then came the auto
mobile and the airplane. Almost overnight the
public had alternative modes of transportation.
One could drive from Philadelphia to New
DISTRIBUTION OF UNITED STATES INTERCITY
PASSENGER TRAFFIC— M ILLIO NS OF MILES
PER CENT
Sources: Interstate Commerce Commission; Civil Aeronau
tics Board; Corps of Engineers; The Bureau of Railway Eco
nomics; A.A.R.
15
business re v ie w
York. Admittedly it took a bit longer, but the
adventurous American spirit was undaunted.
As planes grew larger and could cover more
territory more safely, there emerged an alterna
tive way to go from Philadelphia to Pittsburgh,
and then to Chicago, and then to San Francisco
and beyond.
Railroad passenger service fell upon hard
times. With the decrease in number of passen
gers came a decrease in the quantity and qual
ity of the services offered. Equipment was per
mitted to wear out, quality of service fell and
much rail travel became a second-class form
of conveyance. Only in the West is passenger
service more than a shadow of its old self.
There, scenic routes and better service lure and
keep passengers from the newer means of trans
portation.
There are those who argue that Eastern rail
roads, for the most part, would like nothing
better than to abandon all passenger service. It
is not difficult to understand the railroads’ dis
enchantment with carrying passengers. Since
1947 the lines have shown an annual deficit on
passenger operations ranging from $394 million
in 1962 to $724 million in 1957. There is con
siderable debate over the cost accounting proce
dures used by the roads to compute this deficit,
but we shall not enter into it here.
The revolution in intercity passenger travel
has had a snowballing effect on rail service.
Business fell off, generating lower-quality serv
ice, which in turn generated a further falling
off of business. As the chart shows, unlike the
freight situation, railroads’ share of intercity
passenger traffic is still declining.
The albatross— II
Existing commuter service almost everywhere
is unsatisfactory to passengers and railroads
16
alike. When train service into the major cities
was the only available means of transportation,
commuter business was better. But the intro
duction of the family car, suburban bus service,
and construction of new super highways in and
around big cities have ruined railroad com
muter business. In several big cities, including
New York and Chicago, major highways lead
ing into the city run parallel to, frequently
right next to, commuter tracks.
To a visiting Martian boarding a rush-hour
commuter train, it would seem impossible that
commuter service was anything but enormously
profitable. He would be deluded, however. The
reason is simple: railroads must have enough
equipment and personnel to service rush-hour
crowds, but most of the day the equipment and
personnel do nothing, or very little. Moreover,
labor costs on commuter runs are extraordinarily
high in terms of revenue produced when com
pared with freight. It is not easy to hire several
hundred employes for the total twenty hours of
morning and evening peak movement per week.
One hope for the future is faster trains,
which have been tried with some success in
Japan and elsewhere. This would cut the dollar
volume of capital equipment necessary to serv
ice existing routes. Another is considerable im
provement in service to make rail travel a de
sirable, and preferable, alternative to driving
into town for shopping, theater and work. Still
another approach has its advocates. They argue
that commuter service is an integral part of the
over-all metropolitan transit complex, and
should thus be coordinated with intracity fa
cilities. In Philadelphia and environs, the com
muter lines—the Reading and the Pennsylvania
—are partially subsidized by communities
served by the railroads. The Philadelphia Trans
portation Company, the publicly owned opera
business re v ie w
Conclusion
The outlook is brighter for the railroad indus
try. Progressive management has started a drive
to return the rails to their former eminence.
Over the next several years the difference in
the transportation industry’s competitive strug
gle should be that it will be a battle between
two more nearly equal groups. The prosperous,
young trucking firms now have rejuvenated rail
roads with which to compete, rather than shades
of once-great corporate giants.
Their virility underestimated by almost ev
eryone, the rails have been enjoying improved
operating statistics and higher marks from in
vestors. By adapting to the times, railroads may
be turning the tide in their favor. In an age of
specialization, they are making their bid as
transport specialists. How successful they will
be depends upon the ability of their marketers
and managers. After the darkness of over a
half century, the renaissance of the rails may
be getting underway.
(Continued from Page 2)
technicians, management, and professional tal
ents. All these factors, changing rapidly in a
rapidly changing world, affect decisions con
cerning where production will take place.
These decisions very often do not involve
overt relocations. Companies do not have to
fail, or even leave, for a metropolis to fall be
hind in economic growth. Companies and in
dustries can make very substantial shifts in lo
cation of their facilities without formally leav
ing an area. In this continually changing world,
they must keep shifting so as to optimize their
competitive positions. Those that stay in non
competitive activities— and locations—lose out.
A region’s economic growth then depends on
the nature of the region’s specializations, on
how competitive conditions dictate shifts in the
bases of operations of companies, and on how
companies meet these challenges. The region
therefore must pay attention to the fundamen
tals of productive factors and markets. It is on
these that companies base their decisions in an
effort to sharpen their competitive positions.
The task is to blunt the influence of adverse
forces, enhance favorable local effects, and find
ways of adjusting to forces local action cannot
affect.
tor of all public transportation facilities in the
city, is closely coordinated with rail service to
the suburbs.
17
THE FED’S FIFTIETH
ANNIVERSARY
Before the start of business on November 16,
directors, officers, and employees of the Federal
Reserve Bank of Philadelphia and a number of
their associates in the banking community, gath
ered in the main banking room to celebrate the
50th Anniversary of the opening of this Bank.
Robert N. Hilkert, First Vice President, presided
at the brief ceremony, Alfred H. Williams,
former President, spoke of his long experience
with the Federal Reserve System, and Karl
R. Bopp, President, made the following re
marks :
The only certainty about the challenges which
this Bank will face during the next 50 years is
that they will be unlike those of the last 50. It
is equally true, I am sure, that, just as our Bank
today is far different than the Bank which
opened—and which was envisioned—in 1914,
so the Federal Reserve Bank of a few decades
from now will be a far different institution than
the one we know.
Even now, the new technology of electronic
data processing is transforming the nature of
the tremendous and vital task of check collec
tion. The developments that are now foreseeable
will change many of the familiar physical as
pects of the process, and, beyond this, it is likely
that further improvement will have repercus
sions throughout the entire business community.
Data processing and the rapid computation it
provides will also create changes in the handling
and analysis of information—changes so vast
and involving so many variables which cannot
now be adequately manipulated, that they are
18
likely to give rise to new tools of banking prac
tice and monetary policy.
The business community almost certainly will
have a different structure two generations hence
—though we cannot now foresee its form—and
social relationships will be profoundly affected
by it. The Federal Reserve System will be called
upon to provide new services and may, in fact,
be confronted with the need for developing en
tirely new standards of economic performance
and new objectives.
Adaptation to change will not be a new phe
nomenon for the Federal Reserve Bank. The
unique structure of the Federal Reserve System,
providing liaison with business, close working
relationships with both the legislative and ad
ministrative branches of government, and a
measure of independence, has conferred a high
degree of flexibility and responsiveness on both
the Banks and the Board of Governors.
At this Bank, we have developed in the past,
and shall continue in the future to develop, the
people whose outlook and abilities are consistent
with the System’s mission—people who are able
to make the guiding principles of the founders
of the System into living, viable forces in the
changing real world in which we live. This re
quires a careful balance of individual freedom—
freedom to innovate and question—with re
sponsibility for day-to-day proficiency on the
assigned job. In fact, this balance is a counter
part of that required by the unique structure of
the Federal Reserve System, which calls for both
independence of judgment and responsibiltiy of
business review
action in the whole sphere of the Fed’s interest.
We shall strive to maintain this balance in the
years ahead.
Fifty years ago to the day, our Bank opened
for business at 406 Chestnut Street. Ernie Jones
opened the doors that day in 1914, and we are
all delighted that he is here with us
help usher in our second half-century.
Ernie, will you now come with me
guests into the main entry of the Bank
open the doors to the events of the
years.
today to
and our
and help
next 50
19
FOR THE R E C O R D
•
BILLIONS
INDEX
•
•
$
M EMBER B A N K S 3RD F.R.D.
BUSINESS
_________r
130
DEPARTMENT STORE SA .ES, DIST.
.
J
/
(1957-1959 = 100, SEASONA LY ADJUSTED)
S
120
FACTORY PAYROLLS, DIST.
\ j
(1957-1959 = 100)1
\ f \ r\ f
w
1
100
_______
,
FACTO RY EMPLOYMENT, DIST.
(1957-1959 = 100)
C O N SU M ER PRICES, PHIIA.
(1957-1959=: 100)
90
80
70
2 YEARS
AGO
YEAR
AGO
SEPT.
1964
Third Federal
Reserve District
United States
Per cent change
Per cent change
Department
Storef
Factory*
Employ
ment
Payrolls
Sales
Check
Payments
Per cent
change
Sept. 1964
from
Per cent
change
Sept. 1964
from
Per cent
change
Sept. 1964
from
Per cent
change
Sept. 1964
from
SUMM ARY
mo.
ago
year
ago
9
mos.
1964
from
year
ago
Sept. 1964
from
9
mos.
1964
mo.
ago
year
ago
+ 7
+ 6
0
+
1
+ 6
3
-
1
0
LOCAL
CHA NGES
year
ago
+ 3
Sept. 1964
from
Electric power consumed. . . .
Man-hours, to ta l* ....................
Employment, to ta l......................
W age income*..........................
year
ago
mo.
ago
0
mo.
ago
MANUFACTURING
+ 3
+ 2
+ 1
+ 4
+n
+ 4
+ 5
+ 8
7
0
+ 1
+ 3
-
1
0
COAL PRODUCTION.................
+
2
+ 5
+ 5
Lehigh V a lle y .. .
+ 12
-
TRADE***
Department store sales.............
year
ago
mo.
ago
year
ago
+ 3
+ 2
+u
+ 4
+ 5
Harrisburg.........
-
1
+ 1
-
2
+ 8
+ 4
-
Lancaster...........
+ 1
+ 3
+ 1
+10
+ 2
+ 5
+ 10
+26
+ 4
+ 1
+ 5
+ 3
+ 4
+ 4
-
5
+ 1
+ 4
+ 14
+
+ 17
8
Philadelphia. . . .
+
+
+
+
+
+ 5{
+ 8
+10
+ 2
- 3
+ 11
5t + 7 t
5
9
2
5
16
+
+
+
+
+
+
5
2
3
3
2
7
+ 9
+ 13
+ 2
- 3
+ 10
+10
+ 7
+ 13
0
- 7
+ 13
+11
Consumer...................................
•Production workers only.
••Value o f contracts.
•••Adjusted for seasonal variation.
ot + i t
+
n
0
0
0
+1
+
|2 0 Cities
{Philadelphia
0
1
+ 1
+ 2
+ 2
-
1
Scranton............
-
1
+ 2
-
2
+
5
+
1
+ 2
Trenton..............
-
3
-
3
+
1
+ 5
-
4
-
1
+16
Wilkes-Barre. . .
-
1
2
-
3
+
3
-
5
+
3
+ 6
+ 11
W ilmington. . . .
+ 3
+ 1
+ 1
0
+ 2
+ 1
+ 3
Reading.............
PRICES
mo.
ago
+
CONSTRUCTION**...................
BANKING
(All member banks)
Deposits.....................................
Loans...........................................
Investments.................................
U.S. Govt, securities..............
O ther........................................
Check payments........................
year
ago
+ 6
+ 5
+ 19
+22
-
3
0
+ 18
+11
York...................
0
+ 9
0
+ 15
-
8
+ 13
0
+44
+
1
-
1
•N o t restricted to corporate limits of cities but covers areas o f one or more
counties.
{Adjusted for seasonal variation.
@FedFRASER