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D im e s , D o lla rs , a n d D r iv e -in W i n d o w s B a n k in g : A n In d u s try of Id e a s a n d In n o v a tio n F a r m e r s H a d G o o d C r o p s — B u t L o w P r ic e s Additional copies of this issue are available upon request to the Department of Research, Federal Reserve Bank of Philadelphia, Philadelphia 1, Pa. DIMES, DOLLARS, DANK DRIVE-IN W IN D O W S The Story of Financial Institutions in a Competitive Economy Stop ten passersby at random. Ask each what chief source of capital funds. Why, just the other thought first enters his mind when someone day we negotiated the biggest loan deal in our mentions history from the Granite Life Insurance Com the Chances are term “ financial you pany. . . .” will get ten differ ent answers. The busy house w ife , institution.” h u r r y in g about the countless This is the first of two articles describing our finan ments would evolution next month’s Some people would Business Review we look at financial institutions in the emphasize particu Third Federal Reserve District. lar in s titu tio n s , of financial institutions. In chores involved in managing a And so the com cial institutions. This month we discuss the nature and modern go. some would stress household, might say, particular financial services. By the time you had “ Financial institutions are banks. Like the First finished your tenth interview you would probably National where we keep our checking account. have a pretty good idea of the variety of financial We find it a real convenience in paying bills. institutions and the diversity of services offered. And those marvelous new drive-in windows. 55 But you would still need to organize your answers to get an over-all perspective. Only The rising young executive might stress dif then could you gain an insight into the eco ferent institutions and different services. He nomic reason for the existence of financial in might answer, “ Financial institutions are our stitutions. 3 business review F IN A N C IA L IN ST IT U T IO N S IN PERSPECTIVE cial institutions. In 1958 there were 54 million Just suppose that our tenth passerby had been checking accounts in the United States, a little an economist. How would he react when we over one account for each of our 50.4 million mentioned the term “ financial institution” ? households. In addition, there were about 96 He might say that financial institutions are so varied that we can best understand them by mentioning some of the characteristics million savings accounts, almost two for each household. and On the lending side, the financial institutions functions which most of them have in common. First of all, he would probably tell us that covered in the chart held $236 in consumer loans for each man, woman, and child in the most financial institutions collect the funds of United States, $990 in business loans and se individuals and others who don’t spend all of curities, and $702 in mortgage loans. their income and lend them to individuals, gov Thus, financial institutions are quite impor ernments, and businesses which spend more than tant to our everyday lives— so important that it they currently take in.1 Thus they are our prin is difficult to see how we ever did without them. cipal purveyors of credit, helping to determine But we did— for thousands and thousands of the direction of economic activity in the United years. States. Second, he might mention that financial in THE EM ERGENCE OF F IN A N C IA L stitutions hold what are called “ intangible fi IN ST IT U T IO N S nancial assets.” These are written promises to Before we could have financial institutions, it repay, was necessary to have money. Before we had resulting from the lending-investing process mentioned above. They include mort money, it was necessary to have something to gages, loan notes, and corporate and govern exchange. Before we had something to exchange, ment securities. it was necessary to have a surplus over our Finally, our economist would probably tell us that the diversity of financial institutions is in minimum subsistence needs. Thus, the his torical development of financial institutions is itself a sort of common characteristic. Their inextricably entwined in man’s quest through activities may differ markedly, yet under one or the centuries to satisfy his material wants. By the other of the above criteria a wide variety following this quest we can find out why finan of businesses still qualify as financial institu cial institutions emerged and why such varied tions. Some, for example, are principally en forms exist today. gaged in making short-term business loans. Some make only consumer loans. Some buy M a n in a se lf-su b siste n t econom y stocks, some buy bonds. Some accept savings Far back in the misty eons of time— about deposits, others collect premiums. 1,000,000 to 20,000 years B.C.— man lived in From the enclosed chart we get an idea of the wide variety of services provided by our finan caves and stalked his food deep in the dangerfilled primeval forest. His name was Java, Pe king, Heidelberg, and Neanderthal. He seemed 1 He might also mention the peculiar case of commercial bank lending and investing which creates money within limits determined by the Federal Reserve System. But this is a story which our limited space precludes us from telling. 4 as much ape as human. His was the stone age. This early man had no financial institutions. business review Indeed, he had only the rudest of tools— sharp some tasks, while others were more skillful at pebbles and fractured flints— to assist him in different chores. One could grow more grain extracting from a grudging nature the minimum per acre, another could turn out more and better necessary to clothe his hairy form and fill his plows in a day’s work, and still another could growling stomach. With little enough to live on, make better cooking pots in less time. he certainly had nothing left over to save or Man recognized these facts. Since it now took exchange. With nothing to save or exchange, less than the entire community to produce suffi there was no place for financial institutions. cient food for all, he decided that it was to his But man did have certain assets which set him advantage to specialize along those lines in off uniquely from the rest of the animal world. which he was most talented and exchange the He had a complex brain, a tool-grasping hand, products of his labor. In this way he could pro and the capacity for social cooperation. His duce more with the same amount of effort, progress was to come largely through improve thereby raising his standard of living. Man be ments in these basic assets— innovations in the gan to work not only for himself but also for a tools and techniques he used to battle nature market. He had developed an exchange econ for his survival— and improvements in societal omy. organization. Thus the first two requisites of the financial As the centuries moved along, man’s unique institution were established. Man had an eco assets proved their worth. From chipped flint and nomic surplus and had begun to specialize and sharp pebbles, he went on to develop spears, bows, and arrows. He learned to domesticate exchange. But still the recipe was incomplete. Man had to develop money and an economic animals. And his crowning achievement, he dis need before financial institutions would appear covered agriculture. as we know them today. The change wrought by agriculture in man’s way of life was nothing short of revolutionary. M a n in a m o n e y econom y With his new techniques he found it possible to In the early exchange economy, trade was bur produce enough for his own needs and more. dened by the difficulties of exchange. These diffi Although he had not the foggiest notion of it culties arose because goods were most often at the time, he had established the first requisite bartered. in the inexorable train of events that was to lead Barter had several defects. In the first place, to the development of financial institutions— problems arose from a multiplicity of values. a surplus above that necessary to satisfy his Whereas the worth of a few oft-traded goods creature wants. But he still had far to go. He might be well-known and easily remembered— had to develop an exchange economy, money, one cow for ten bushels of grain, ten goats for and a need for financial institutions. one wife— problems of valuation multiplied as the goods offered for trade increased. It was M a n in an e a r ly e x c h a n g e econom y necessary to quote goats in terms of bananas; As the ages passed, important economic changes bananas in terms of grain and goats; grain in took place. Man noticed that some of his fellows terms of hunting knives, bananas, and goats; had become particularly adept at performing hunting knives in terms of goats, bananas, grain, 5 NET FLOW OF FUNDS THROUGH FINANCIAL INSTITUTIONS DURING 1958* (/N BILLIONS OF DOLLARS) SOURCES OF FUNDS * Excludes flows of funds through Federal Reserve System USES OF FUNDS Source: Federal Reserve Board and so on. Pity the poor housewife at the super standard of value. Now, cows, hunting knives, market if such conditions existed today! grain, bananas, and wives could all be quoted A second difficulty lay in bringing the two in terms of one commodity— money— thereby parties to a transaction together. For example, if relieving the confusion of multiple valuation. Eklieb, the farmer, should come to town desiring Second, money served as a convenient medium a few tankards of ale, he might bring a suck of exchange. Eklieb, the farmer, could sell his ling pig to offer in exchange. Garth, the brewer, grain however, might be well supplied with pork, de would be more than willing to accept, knowing siring only ox hides. Oogmo, the potter, might that some possessor of ox hides would in turn need pork but have no ale or ox hides to ex accept it from him. change. Poor Eklieb might die of thirst before for money which Garth, the brewer, At first, many seemingly odd things were he could find someone who (a) wanted pork, used as money (and still are by some groups). and (b) had ale or ox hides. These included commodities such as salt, corn, To overcome these inconveniences, man in or wheat; animals like cows, oxen, or goats; vented money. Money served him first as a many kinds of teeth— porpoise, whale, shark, 6 business review dog; woodpecker scalps, feathers, hatchets, fish another, whenever all of the prerequisites had hooks, and shells. Soon, however, man developed been met. a preference for the more durable and conven ient metals to serve as his medium of exchange. In ancient Babylonia, Greece, Rome, England, and on the Continent, financial institutions Surplus, exchange, money— all that remained sprouted like daisies in a summer meadow. But for the development of financial institutions was nowhere were the variations and refinements to a need. And that need was soon to be felt. be of such scope as in the New World, in the United States of America. M a n in a credit econom y As population and incomes rose, and as mar THE D EV ELO PM EN T OF F IN A N C IA L kets widened, a corresponding expansion of in IN ST IT U T IO N S IN THE UNITED STATES dustrial and commercial activity took place. To It is not difficult to see why financial institu support this expansion, the early merchant or tions appeared in the United States, a nation manufacturer productive with great industrial potential, bountiful natural capacity. Often, however, his needs were so resources, and an expanding population. But needed additional great as to exceed his available funds. In such rather than just one or two, today we have cases he was forced to turn to others to borrow more different types of financial institutions the gold and silver which society had begun to than we have fingers to count them on. Why? accept in exchange for its goods and its labor. The diversity of financial institutions stems proached his family and friends to meet his basically from the variety of financial needs which emerged in this country. As our nation capital requirements. Or he may have taken in grew we needed funds to finance business and a partner of means. As both domestic and agriculture. We needed mortgage money and foreign markets continued to widen, however, depositories for our savings. The early entrepreneur probably first ap more new businesses were established and ex isting ones sought further to enlarge their pro ductive capacity. Supplementary financing was To meet our growing financial requirements, the following alternatives were possible: 1. Existing financial institutions could ex required, sometimes in large amounts. While pand their operations to encompass new the early Neolithic potter needed only a small needs, or investment in clay and wheel, the pottery manu facturer of Babylon, Alexandria, Phoenicia, or 2. Additional institutions could be established as financial demands evolved. Athens— often serving an international market In fact, existing institutions were either re — required buildings, inventory, and an expand luctant to meet or unable to satisfy fully our ing labor force. dynamic demand for financial services. As a Thus, along with the development of an eco result, new institutions were established as new nomic surplus and a money economy, a need needs became evident. But let us turn back the for credit became apparent. Herein were all the pages of time and see for ourselves. fundamentals necessary for the emergence of financial institutions. And emerge they did, one S h ort-term com m ercial le n d in g by one— first in one city or kingdom, then in Our first financial institutions were commercial 7 business review banks. The first chartered bank in our young expansion of urban population helped emphasize country appeared in 1781. By 1834, we had 500 one of our first and most pressing financial banks. By 1861, we had 1,600. voids. Early in the nineteenth century more Banks developed in response to: creasing demand for hand-to-hand (a) in currency, people began to accumulate savings. Most in dividual savings, however, were not large and (b) a need for commercial and agricultural enough to justify the purchase of stocks or credit. They met both of these needs by lending bonds. Some alternative outlet was needed, one their own personal bank notes to merchants and which would be safe, liquid, and yield some others. The loan transaction provided credit. interest. The borrower put the notes into circulation in At the same time an acute housing shortage payment of his own obligations, thereby in was developing on our Eastern Seaboard. Im creasing the supply of currency. migration from But the early banks did not provide nearly Philadelphia, abroad had begun to swell Boston, New York, and other the range of services that banks do today. cities. Expanded housing facilities were urgently Bankers felt, first of all, that the nature of their liabilities prohibited them from making either needed. Public-spirited men began to ponder these long-term business loans or housing loans. Since problems. their deposits and bank notes were payable in should be set up to encourage thrift by accepting They concluded that institutions gold on demand, and since only a fractional interest-paying deposits. And what, they asked, gold reserve was held against these liabilities, would be more reasonable than to invest these they reasoned that their credit activities should funds in mortgages? be limited to short-term loans of 30- to 60-day The result was the mutual savings bank. The maturity. Such loans, they believed, would in nation’s first mutual was opened in Philadelphia sure a continuous inflow of funds and thus in 1816. In the same year, a second was char easily enable them to meet their demand lia tered in Boston. But the demand for mortgage bilities. credit grew faster than the mutual savings bank. Nor did bankers concern consumer lending. To themselves with lend for consumption In 1831, another type of institution was estab lished, the savings and loan association. Though purposes, they felt, was to violate the very it had different organizational characteristics, principle on which banking was built— thrift. the savings and loan association served the same Finally, and in spite of their emphasis on thrift, function as the mutual, accumulating savings bankers made no provision for interest-paying and making mortgage loans. time deposits. We can see, then, that a number of voids C a p ital fun ds an d econom ic security were evident in our growing economy— voids Along with the growing demand for mortgage that had to be filled, if not by bankers, then by funds, an increasing flow of long-term business someone else. capital was required as we built new factories, S a v in g s d ep o sits a n d m o r tg a g e le n d in g westward toward the Pacific. expanded our railroads, and as we pressed Rising incomes in the United States and the 8 Fortunately, the rising demand for capital business review funds coincided with a second developing eco bicycles pouring off our production lines? What nomic need. People in the United States were young housewife could forego that wonderful becoming security-conscious. With our rising in invention, the sewing machine? Consumer sales comes, we had begun to think not only of the soared. present but also of the future. We became will And rising sales of consumer goods were ac ing to part with a portion of our present income companied by an expanding demand for con to assure our future economic well-being. In sumer credit. Characteristically, however, ex short, we became interested in insurance. isting institutions were reluctant to enter this The need for security thus gave rise to a new new and unexplored field. They looked at the and important source of funds. And this par consumer down the length of their collective ticular source was peculiarly suited to long noses. Where credit was extended, it was usu term uses. Unlike bank deposits, insurance-type ally the seller of goods who obliged. payments were more regularly received and less But this situation was to be short-lived. As likely to be withdrawn. Moreover, it was found robins are the harbingers of spring so financial that current claims could generally be met from needs are the precursors of financial institutions. current receipts. Thus liquidity was less of a Some of the first institutions specializing in problem. Funds channeled into insurance-type consumer credit were the prototype personal institutions could be committed for the long finance companies which began to appear in the term, to finance our burgeoning industrial ex 1870’s. They were followed by credit unions in pansion and to meet further housing needs. the early 1900’s. At first, these institutions lent not to facilitate the purchase of specific con Given the needs, the insurance-type institu tions began to appear. Fire, casualty, marine, sumer goods but to tide the borrower over some and then life insurance companies were first on temporary emergency that had arisen in his the scene, followed by trust companies, private life. pension funds, and much later, investment com including the insurance com goods consumption, for they provided liquidity during times of stress which otherwise would panies, had prototypes in operation even before have had to come from saving— and saving, of the signing of the Declaration of Independence. course, is abstaining from consumption. panies. Some, But indirectly they facilitated durable But the real period of development and expan Later, in the twentieth century, personal fi sion came after 1850, with the unprecedented nance companies and credit unions finally be expansion in industrial activity and real in came important sources of credit for specific comes. durable consumption. Then, along with their C on su m e r le n d in g they were quick to respond to the wails of the But not all of our rising incomes were paid into infant which was to become the giant of Amer trust funds, savings deposits, or insurance pre ican industry, the automobile. new competitors, the sales finance companies, miums. Between 1850 and 1900, the United In 1900 there were about 8,000 automobiles States economy gradually assumed the high- in the United States. Fifty years later there were consumption personality that so well character almost 50 million. And with the automobile izes it today. Who could resist the gaily painted came radios, washing machines, refrigerators, 9 business review toasters, etc., etc. The modern period of con commercial bank time deposits provided funds sumer credit had begun. Where consumption less subject to sporadic and sudden withdrawal. loans had been calculated in millions of dollars, The introduction of Government-insured mort they were now expressed in billions! Consumers gages and of a secondary mortgage market had become the backbone of big business. added to the safety and liquidity of mortgage lending. The b a n k e r b re a k s his b o n d s The structural changes plus the existence of All of these developments did not escape the surplus funds turned the trick. Mortgage loans, penetrating gaze of the banker. He saw the long a staple of the rural banker, became a growing demand for housing, for business cap much more significant portion of the urban ital, and for consumer credit. And he was not banker’s loan portfolio. The banker became ever unaware of the profits which accrued to the more willing to make long-term loans to busi specialized financing institutions. But through ness. And, noticing that the sales finance com out the nineteenth century and part of the panies didn’t “ go under” during the depression twentieth, the demands for his traditional ware as he had expected, the banker began lending — short-term commercial credit— were generally on a larger scale to consumers. The age of adequate to absorb most of his funds and thus specialization had indeed given way to the age keep him in an orthodox frame of mind. of diversification. The structure of our finan Let his traditional demands become inade quate though, and the banker might prove less cial institutions had reached its present-day form. orthodox than many suspected. Indeed, he might reverse the entire trend of the development of financial institutions in the United States. Rather than specialization, he might usher in a In conclusion This is the story of our financial development— new era of diversification in financial services. from one to many institutions, from specializa In the 1930’s, after the first financial shocks tion to diversification. And running thread-like of the great depression were spent, we had the through the story is one paramount idea— first real test of the banker’s orthodox preference change. for short-term lending, for his excess reserves Change is inherent in the very nature of skyrocketed while commercial loans began to financial institutions. They are designed to pro go begging. vide financial services. Demands for financial With surplus funds, the banker began to cast services change as our economic wants and ob about for additional borrowers. In his quest, he jectives change. To meet these shifting demands, noticed certain structural changes that had de it is necessary for us to adjust our traditional veloped in our economy— changes which might ideas of the nature and functions of financial help him bridge the yawning gap between short- institutions. and long-term lending. The Federal Reserve In short, financial institutions have been and System (established in 1913) gave him a source still are an evolving concept. They have changed of credit on which he could draw in case a in the past. They will continue to change in the liquidity crisis should arise. The growth of future. 10 B A N K IN G : A N INDUSTRY OF IDEAS A N D IN N O V A T IO N Ever notice how many things you can buy to significant development that began in the 1930"s day which were not even known a few years and 1940’s was the branch movement which ago? took banking services to the suburbs. Hi-fi, wash-and-wear clothes, wonder drugs, push-button sprays, instant this, auto Individual banks, as well as the system as a matic that— the list seems endless. Manufac whole, have been broadening their operations. turers, realizing the importance of innovation As late as the 1930’s, many banks concen in modern markets, constantly strive to improve trated on a particular phase of the business. their products. And so do bankers. Banks, too, are offering One bank might emphasize its trust depart ment while another would serve large corpora more new services than ever before. Banks now tions almost exclusively. In the past decade or have charge account and revolving check credit two, plans, postal lock box arrangements, and ac smaller ones have been rounding out their ac counting services. You can get a bank loan to buy a boat, a helicopter, or swimming pool. We were relatively dormant and added others to read about a bank that even provides small extend a more complete line of service. certified checks for merchants to give away in however, most large banks and many tivities. They have built up departments that Now with the standard services offered widely, banks have been thinking up new ones at an stead of trading stamps. Banking’s bumper crop of innovations is the accelerated rate. But why the freshet of new latest stage in a long-run trend toward broader features at this time? Before the answers, let’s services. Early in this century, the commercial examine some of banking’s new product line banking system specialized in short-term com more closely. mercial loans. In the 1920’s, the system added to its repertoire mortgages and loans secured SERV ICES N E W AND OFTEN USED Consumer credit was There is nothing new under the sun, the old adopted widely in the 1930’s. Then came the adage tells us. Perhaps not. Perhaps many of term loan with maturity over a year, the amor banking’ s new services are adaptations of old tized loan, and the equipment loan. Another ideas. But it makes little difference here. The by stocks and bonds. 11 business review things of which we shall speak, if not all recently turns the slips over to the bank and receives created, have achieved new importance in the credit for the face amount less a discount of 5 past several years. While all may not be new to to 7 per cent. The bank handles all collection banking, they are new to many banks. matters. At the end of each month, it bills the We have assembled the following album of customer for his purchases. He has the option innovations from talks with local bankers, cur of paying the entire sum right away or extend rent publications, and other sources. It is by no ing payments over a number of months. Most means complete. A lot we had to leave out due banks have put a limit on the amount that any to space limitations and, to be sure, a lot we didn’t find out. But we hope that it will give the one customer may owe. This plan is designed for the small retailer, reader an idea of what is going on in banking. giving him, at reasonable cost, a credit plan with The fact that we mention a service does not which to compete with large merchants and de mean that we endorse it. partment stores. The service relieves the shop keeper of credit worries and permits him to W h a t ’s new for in d iv id u a ls concentrate on merchandising. The bank gets a Revolving check credit is one of the most talked profit from the discount and a foot in the door about trends in retail banking. Less than a year for new loan and deposit business. Mr. and ago only a handful of banks offered the service; Mrs. Consumer get a lot of new opportunities to today hundreds do and every week brings an say “ charge it.” Tuition payment plans finance college and pri other batch. Revolving check credit is an application of vate school educations. This service differs from the line-of-credit principle to consumers. Once other consumer loans in that it makes provision approved, the customer may borrow automati for deferring and extending repayments. Some cally and continuously within certain limits. For local banks will permit repayments to run a a discussion of the subject in some detail, see year or more after graduation, while in other the September 1959 issue of the Business Re areas where the state guarantees college tuition view. loans, repayments do not even start until the Charge account plans are banking’s entry in the credit-card field. The service has gained considerable acceptance in the past learner has become an earner. In most cases the application forms are kept several on campus where they are filled out and sent years, with about 125 banks now offering it. to the bank. Loans are made to parents, guard This is the way a typical ians, and sometimes to the scholars themselves. plan works. Denial bills may be discounted and financed The bank signs up an as at certain banks. After drilling and filling, the sortment of retail stores and dentist sells his bill to the bank at a discount. issues charge cards to se The bank then undertakes to collect from the lected individuals. Card hold patient, often in a series of installments. The ers may charge purchases at transaction in many ways resembles the one any participating store; where an automobile or appliance dealer dis they simply present their card and sign the sales slip. The retailer 12 counts sales paper at a bank. business review In the medical field, one West Coast bank well-versed in inheritance laws call on pro operates a plan which combines health insur spective customers to explain how the bank’s ance and a credit card to be used for doctors’ trust department can save money and trouble. fees. True, this is a business-development device but In-plant banking brings certain banking serv ices to employees on the job. There are several it can be of distinct benefit to those with estate problems. variations. When the business warrants, banks Retirement plans for self-employed business may set up permanent branches on company and professional people are another relatively property. In other instances, the banks may new trust service. These plans, already going furnish a company’s personnel office with a strong, will receive a big boost if Congress supply of loan and deposit forms which, when grants a retirement tax concession to the self- prepared, are forwarded to the bank. Some firms employed. Such a bill has been introduced' in will deduct loan repayments and saving and several sessions but has not yet passed. checking account deposits from an employee’s Banking has other new ideas up its sleeve for individuals. To name a few: group life insur pay check. Executive transfer departments have been set ance for mortgagors, financial plans for bowling up by several banks. The idea is to help execu leagues, personal money orders, and, a light tives of multi-office com touch, one bank buys a favorite tobacco and reg panies get settled when ularly mails it to a client who is overseas in the they move into town. The Government service. bank will make loans to cover moving expenses W h a t ’s new for b u sin e ssm e n ? and will help the new Lock box collection plans are a fast-spreading arrival find a home and place a mortgage. It feature in commercial banking. Their purpose is recommends doctors, lawyers, brokers, and ad to reduce the time it takes to turn accounts re vises on schools, taxes, transportation, etc. ceivable into collected cash. The service builds good will with both the A company directs its customers to address company and the executive. The bank, of course, their remittances to a certain post office box. hopes that the new resident will do all his future The participating bank has a key to the box and banking business there. makes frequent pickups— often hourly. The Insurance premium loans help people spread bank opens the envelopes, takes out the invoices the cost of insurance. The bank pays the insur and checks, matches the two, and credits the ance company once a year, taking advantage of checks to the company’s deposit account. Thus the lower annual premium rate. The insured the checks wind up as spendable cash a day or then repays the bank in 12 equal installments. more sooner than they would if mailed directly Several policies may be included so that a fam to the company. The bank then forwards the in ily’s total insurance bill can be handled in one voices to the company for bookkeeping purposes. monthly payment to the bank. National concerns often establish a network of Estate planning is a popular service in these days of high incomes and high taxes. Experts lock-box plans using banks in areas where their customers are concentrated. 13 business review While lock-box service may help a bank get system also is used to settle inter-line freight and hold good commercial accounts, it may bills where several carriers are involved in the prove quite costly. Sometimes a large number same shipment. of small items such as utility bills or gasoline These plans simplify bookkeeping procedures bills must be handled. Also, there and cut collection time for the participating are concerns that put pressure on companies. Although reputedly not big money banks to do a lot of extra work on makers for the invoices— preparing cash jour valuable entree to other business. nals, making double photostats, and the bank, the plans provide Accounting service is being offered a by a so on. Because of the time and number of banks. The bank is appointed treas labor involved, some banks charge a fee for the urer or fiscal agent for an organization and in service, while others offer it only to large de that capacity pays all bills, computes and pays positors. salaries, pays taxes and insurance, maintains Account reconciliation plans are designed for records, and prepares statements. This frees the companies who use punch-card checks. The bank customer from routine accounting duties and sorts the checks it receives into numerical order, enables him to devote his time to other things. lists them on a journal sheet, and indicates each The bank is reimbursed on a fee basis. It should outstanding check. Also shown are opening and be mentioned, however, that a bank’s legal closing balances for the period. This informa power to act as treasurer for certain types of tion helps companies that write checks in volume organizations has not been fully established in reconcile their accounts. all jurisdictions. Salary deposit arrangements virtually elim Bookkeeping service is available to the cus inate payroll checks. A firm sends its bank a tomers of certain banks. It is offered under the list of each employee and his net pay along with copyrighted plan of a Princeton, New Jersey, one check for the total pay roll. The bank sets corporation. Bank customers using the service up a free checking account for each employee mark each check and each deposit ticket with a and credits his pay to it. The employee may descriptive code number. The bank processes write checks on his account immediately. The the items in the usual way and, as a final step, company benefits by not having to draw a key punches a card for each. At the end of the number of checks, and the employee is saved accounting period, the bank sends the cards to a trip to the bank. Salesmen and others who are the nearest machine accounting service bureau frequently on the road find this service espe where they are sorted, listed, and totaled. The cially convenient. information thus obtained can be used by a Freight payment plans are operated by more customer to prepare balance sheets, tax returns, than a dozen major banks. The clearing house and many other statements. The bank charges a principle is used. Both shipper and carrier— fee based on the volume of business the client generally truckers but sometimes railroads— does. maintain accounts with the bank. Validated Research and advisory services for bank cus freight bills are paid by debiting the shipper’s tomers have been around for a long time but account and crediting the carrier’s account. The recently the number of banks offering such 14 business review services and the larger cities, is keener now than ever before. more banks now are offering economic forecasts, has grown considerably. In addition, the rivalry between bank and non industry analyses, and marketing surveys to bank lenders such as sales finance companies, their customers. Also spreading is the bank small loan companies, insurance companies, and “ letter” many more is said to have intensified. (often a small magazine) More containing commentary on economic subjects of national Economists tell us there are two general ways and local interest. Hundreds of banks now issue for business firms to compete: in prices and in letters on a regular basis. Some banks em products. Price, or interest-rate competition, is ploy their own writing staffs while others pur not so important in banking because of legal chase the letter already prepared and send it out restrictions, tradition, and other reasons. Banks under their own name. As a general rule, any are more likely to compete by differentiating one interested can subscribe free of charge. and improving their products. They try to win A relatively new idea is the bank-sponsored new customers by giving more, better, and newer seminar for local businessmen and other groups. kinds of service than their competitor down the A guest expert invited by the bank leads dis street. cussions of pertinent prob lems in The general level of interest rates has edged business manage up in recent years. Corporations, large and ment, personal finance, etc. small, have not missed the fact. They have ac Other popular services ex quired the habit of figuring their cash require tended to businessmen are ments closely and investing temporarily idle funds, usually in short-term U. S. Government expanded facilities for the purchasing and safekeeping of securities, administration securities. This has pinched the banks who and previously held these invested funds as de profit-sharing plans, and draft-collection plans. of pension posits.1 Because banks cannot pay interest on demand deposits, they have tried other ways to W H A T S P A R K S IN N O V A T IO N compete with attractive market yields. Giving Which comes first, a new banking service or the new services is one method they have chosen. demand for it? Like the old poultry puzzler, Cyclical changes in the money supply have there is no pat answer. In many instances new played a two-way part in the search for new services are introduced to meet a definite need. banking services. In recessions, the supply of Thus, in our dynamic economy, the changing lendable funds rises relative to demand and demands of banks’ customers are an important banks grow hungry for borrowers. Slack times, spur to innovation. But in other cases the service therefore, usually finds banks thinking up new may come first. Banks may hit upon a new idea ideas to stimulate loan business. On the other and, using Madison Avenue techniques, make hand, in boom periods the supply of lendable their customers wrant it. funds does not keep pace with demand. Money Many other factors have contributed to bank becomes “ tight” and many banks seek to attract ing’s accelerating rate of innovation. Competi and hold deposits-—without which the individual tion is a major one. According to reports from bankers, competition among banks, especially in 1 The process of investing does not decrease deposits for the banking system as a whole but it does redistribute deposits among banks. 15 business review bank cannot make loans— by extending new as a whole, but many of them seem to be more services. pertinent to large city banks. For example, the Over the .years, bank management has changed use of in at least two ways that may have stimulated younger, complex machinery, better-trained the hiring of and the executives, innovation. Many banks, largely as a result of struggle to retain corporate balances are more mergers and natural growth, are better able to characteristic of big, metropolitan banks. Possi attract well-trained, aggressive executives, men bly this is the reason that the mainstream of and women who recognize the need for im proved services and have the ability and knowl towns to the rural areas. Revolving check service edge to implement and operate such services. was Boston-born and lock boxes were pioneered innovation appears to run from cities to smaller The youth movement is another basic man in Detroit. Charge account plans, while con agement change. Banking’s postwar expansion ceived in a medium-sized Long Island bank, has enabled competent young executives to move did not achieve wide national acceptance until up quickly. Many now hold positions of consid several “ giants” adopted them. erable influence. Because they are young, these bankers are likely to be less set in their ways C H A N G E W ILL C O N T IN U E and a little more willing to try out a new idea. The rate of innovation in banking is not likely The increased use of machine accounting is to slow in the near future. In fact, it might well another spur to innovation. Many accelerate. Banking is now only on the threshold large banks now have punch card of automation. As banks use more machines— installations and many yet to be invented— there is no telling tronic computers. some have elec Machinery has made it possible for banks to offer what new services will develop. One interesting possibility advocated by many new services which would not Leonard Andrews, a banker and advertising be feasible with manual methods. In addition to man, is Controlled Credit Communication. This enabling innovation, machines have, in some idea, Mr. Andrews claims, could eliminate as cases, impelled it. A bank finding it doesn’t have much as 75 per cent of all checks written an enough internal work to utilize new equipment nually. You, as a customer, authorize your bank fully may offer new services to customers in to pay bills for you by deduction from your order to get capacity operation and thereby cut checking account. Utilities, insurance, mortgage, unit costs. rent— anything that comes due regularly— would People pack up and move more than they be covered. The bank combines all payments to ever did. One person in five, it is said, changes each creditor and settles the total with one check. his residence every year. Thus more people are Thus, multitudes of individual checks would breaking established banking ties and are shop never need to be written. So far as we know, no ping around for new ones. This plus the fact bank has yet adopted this scheme and maybe that people are more knowing about banks and none ever will. We mention it only as a possi banking services make it necessary for banks bility for the future. to be up to date in everything. The factors we have mentioned apply to banks 16 These are exciting days in banking. New ideas are popping all the time. But, as one business review Experts further caution banks that are think might expect, rapid evolution also brings some ing about adopting a new service. In order to problems and confusion. Many of the new serv ices may prove inappropriate but many others VL justify it fully, the business gained or retained will find a permanent place in banking. Since 1 must offset the cost of the service; the bank it’s difficult to tell in advance which will be f j! otherwise would be giving away slices of profit. which, a certain amount of risk is involved with 1 innovation. It should also be pointed out that It is said, therefore, that banks should make sure their cost accounting techniques are sharp some of the services we have mentioned could enough to find out exactly what each new service be of doubtful legality in certain jurisdictions. costs and how much benefit it brings. 17 FARMERS HAD G O O D CROPS- BUT LO W PRICES How are crops in the tri-state area of Pennsyl other crops in Pennsylvania. Actually, about the vania, New Jersey, and Delaware? Pretty good only widespread damage that could be blamed say county farm agents, but prices are too low. on the weather was the freezing of grain planted Most of the complaints about prices concerned last fall. These losses occurred over the winter poultrymen and vegetable farmers. Dairymen in the absence of adequate snow cover. A large with excellent part of this acreage was replanted to spring field crops and our tobacco growers appeared to be in the strongest posi crops which matured nicely. Pastures provided tion. However, living expenses and production plenty of feed for livestock over the entire sea costs have increased for all farmers. They are son to mid-September, when a cold spell ended in the middle of a two-way squeeze. The out the growth of most grasses. come: a strong possibility that farm income may decline this year, in spite of good crop yields. Field crops ran to h igh y ie ld s Corn for both silage and grain seems to be the most promising of all field crops. Some county Farm ers h ad a g o o d g r o w in g se aso n agents say it is the best they have seen in a Weather conditions over most of the 1959 grow long time. This crop matured rapidly in the ing season favored substantial yields of generally hot, humid weather of late August, thus min high-quality crops. There were some exceptions, imizing the danger of frost damage. Hay was like the rains that from time to time plagued another large crop this past season, with farmers vegetable growers in New Jersey and short in some areas making third and fourth cuttings. periods of dryness which temporarily retarded Above-average yields are reported for early- Digitized for 18 FRASER business review and late-summer potatoes, but production may consequence in this area, did not fare so well. be somewhat less than a year ago because of a It was too wet at harvest time and considerable smaller planted acreage. Quality is said to be trouble was experienced with mold after the high in the leading growing areas. Soybeans, berries were boxed and crated. an increasingly important crop in Delaware, may at least equal the high yields reported last V e g e ta b le g ro w e rs h ad their p rob lem s year. Early season vegetables grown chiefly for the fresh market are said to have been high on both P e n n sy lv a n ia tobacco is an excellent crop yield and quality. Sweet corn, Lancaster County farmers, who grow nearly all seems to have been a good crop. But some of of this tobacco, are looking for record or near the later vegetables, record yields this year. The September 1 esti processing, were a disappointment to mate indicated a harvest of about 55 million farmers. Frequent rains in July, followed by pounds. This would be an increase of 8 per high temperatures and excessive humidity com cent over a year ago and 14 per cent above the bined to reduce the yield and quality in some including particularly, tomatoes for many 1948-1957 average. Because of a high moisture areas. Harvesting operations were interrupted content, some difficulty was experienced in cur and we heard many reports of increasing diffi ing the early crop. Later tobacco has been har culty in controlling insect pests and plant dis vested under more favorable weather conditions. eases. Conditions seemed to vary widely among Last season’s crop was sold early at good prices and it is expected that this situation will be re vegetable growers in this District, but those in New Jersey and Delaware appear to have ex peated. The tobacco growers seem to have been perienced the greatest problems, not the least of fortunate this season, as little or no damage which were low prices. from hail or frost was reported to this highly vulnerable crop. Fruit prospects lo o k p ro m isin g Peaches were labeled a good crop almost N e w J e rse y cran be rry gro w e rs are everywhere this year. The fruit was well-sized, optim istic had good color, and market prices were not too An estimated 110,000 barrels of cranberries, bad. In the case of summer apples, however, mostly in Burlington and Ocean Counties, may supplies seemed to run well ahead of the de be produced this year. This would be a crop mand. Reports from the commercial growing nearly one-fourth larger than the one harvested areas of fall and winter apples continue en in 1958 and would exceed the ten-year average couraging. All three states in this District are by about 28 per cent. Current reports indicate* looking for much larger crops this year than last that quality is high, the berries are large, and and production is expected to be considerably they have colored nicely. Although production above the ten-year average. Most growers say in competing states also is much larger than a they expect a better price on packaged |ruit; year ago, the carry-over from last season is said moreover, processors’ prices in southern Penn to be small, so the marketing prospects should sylvania are reported somewhat higher than a be bright. Blueberries, another small fruit of year ago. 19 business review D a iry m e n are w e ll o ff for fe ed importantly, it costs the farmer more to pro Two successive seasons of excellent feed and duce the things he sells. This was an especially forage crops have strengthened the position of good year for virtually all feed crops, so in this virtually all our dairymen. Milk production has respect the drain on his pocketbook has eased continued high all year. Markets have shown a bit. Not so with the wages he must pay for considerable stability and price-wise we have help. The farmer must compete with the rising heard few complaints. Production costs, always wages paid by industry. Machinery, an increas high on a dairy farm, have been held down as a result of abundant pasturage. Most of our county ingly important item in the struggle to improve efficiency, also costs more this year. Rising land agents tell us their dairymen will have to buy values are a fine thing in themselves, if a farmer very little feed this year. They also say, that with decides to part with some of his acreage. But the good returns from this season’s operations, many times they also imply higher taxes, par most dairymen can continue their spending to ticularly for those who live near growing urban increase the size and quality of herds, modernize developments. Thus, from the cost standpoint, or enlarge dairy barns, and install additional 1959 is just another year in which expenses labor-saving equipment. weighed a little more heavily against income. P oultrym en h ad a n o th e r b a d y e a r Farm cash incom e is o ff fro m a y e a r a g o Over-production that plagued the poultrymen Receipts from the sale of farm products in the in 1958 appears to have stayed with them this three states included in the Philadelphia Federal year. The situation has been especially bad for Reserve District have been running below 1958 those who raise broilers. Most farmers with levels since early spring. The decline has not laying flocks are said to have fared little better been very great, but it must be remembered that until late in the season, when egg prices rose a 1958 was not a spectacular year from an income little. Some are inclined to blame integration in standpoint. Over much of the current season, the broiler industry for too heavy production cash income from crops has continued well and continued troubles marketwise. Under this above year-ago levels, offsetting in large part plan, the poultryman builds the houses and sharp declines in receipts from livestock and cares for the birds, but does not own them. They livestock products. Lower prices received this belong to the companies who supply the feed. year for poultry, eggs, and hogs were chiefly Usually, the farmer receives a flat fee for raising responsible for the relatively poor showing made the chicks to marketable weights. When this by the livestock component of cash income. operation shows a profit, the grower receives a As shown by the accompanying table, Penn share— but this year profit margins are said to sylvania farmers are making out somewhat bet have about reached the vanishing point on per ter this year than their neighbors in Delaware sistent low prices. and New Jersey, where the agricultural economy Production costs a re cree p in g up tively, are big cash crops in these two states. The living expenses of farmers are still rising— And, as previously indicated, there has been just as are those of everyone else. But, more too much poultry around this past season. is less diversified. Broilers and eggs, respec 20 business review Farm C a s h Income — 8 months 1959 vs. 1958 Pennsylvania New Jersey Delaware dairyman will label this one of his better years. Crops Livestock and products Total Tobacco farmers and fruit growers will have to 1% 6 — 14 they know for sure what kind of a season they - 10 — 19 7 — 7 — 3 2 — 3 — 1 + 13% + + 1 4 Three States + United States + 5% Source: U.S. Department of Agricultur e wait until their crops have been sold before have had. Right now, prospects look bright for both of them. Those who raised vegetables for the fresh market and for processing no doubt feel they worked mighty hard for their returns. For the poultryman, whose broilers and eggs Looking ahead to what remains of the 1959 crop season, it seems quite likely that the brought such low prices, this was the second discouraging year in a row. 21 NEW PUBLICATION 45 Years of the Federal Reserve Act is a revision of the article (40 Years of the Federal Reserve Act) which ap peared originally in the Annual Report of the Federal Reserve Bank of Philadelphia for 1953. It gives a brief description of the Act, the historical development of the A ct since its beginning, and a synopsis of the major changes over the four and a half decades it has been in effect. This publication is available on request from the Department of Research, Federal Reserve Bank of Philadelphia. 22 FOR TH E RECORD... BILLIONS Third Federal Reserve District mo. ago year ago Factory* Employ ment Per cent change 8 mos. Aug. 1959 from 1959 from year year mo. ago ago ago A ug. 1959 from 8 mos. 1959 from year ago LO CAL CHAN GES - 5 — 3 + 17 + 5 + 7 + 3 + 1 — 13 -2 5 + 3 — 16 +37 + 9 - II -1 0 + 15 + 7 + 3 EMPLOYMENT AN D IN C O M E Factory employment (Total) ....................... Factory wage incom e..... - 3 — 7 + 1 + 5 + 2 + 10 - — 9 - 1 - 2 + 8 + 6 + + 1 + 5 Department Storet Payrolls Sales Stocks Check Payments Per cent Per cent Per cent Per cent Per cent change change change change change Aug. 1959 Aug. 1959 Aug. 1959 Aug. 1959 Aug. 1959 from from from from from mo. ago OUTPUT Manufacturing production. Construction contracts ... Coal mining ................ MEMBER BANKS 3RD F.R.D. United States Per cent change SU M M ARY $ year mo. ago ago year mo. ago ago year mo. ago ago year mo. ago ago year ago — 13 — 10 — 23 — 8 — — 9 — 2 — 19 — 3 — 10 + ii — 15 1 Lancaster .... 0 + 6 0 + 13 - i i + 1 - 1 + 10 - 8 + Philadelphia . - 2 + 1 - 3 + 9 - 8 - 2 - 3 + 10 - 8 + 14 + 2 + 7 + 1 + 16 - 6 0 — 4 + 8 - 6 + 5 8 TRADE* Department store sales ... Department store stocks .. 1 1 + 2 + 8 + 7 B A N K IN G (A ll member banks) Deposits ...................... Loans .......................... Investments .................. U.S. Govt, securities..... Other ......................... Check payments ........... Reading ..... Scranton ..... 0 + 1 - 2 - 2 — 1 + I2f - 1 2 + + — — + 3 12 5 6 4 1If + + + + Of + It + + 1 + 2 0 + 1 — 1 - 9f 5 8 3 4 + + — 2 + 12 + + + + + + 4 9 2 1 7 9 0 1 + 0 1 14 9 11 PR IC ES W holesale ................... Consumer ..................... ‘ Adjusted for seasonal variation. It f20 Cities 0 0 + ^Philadelphia + 2 - 1 + 1 0 - Trenton ....... — 2 + 3 — 4 + 10 - 5 - 7 + 11 0 + 9 - 5 + 4 1 — 3 + S + 5 -1 3 -1 0 9 - 6 + 3 + 10 — 6 + 7 W ilm ington .. — 5 0 - 5 + 4 - 2 - 1 + 6 -1 6 + 17 York ........... + 4 0 + 5 + 7 — 10 - 5 - 3 + 8 -1 0 + M Wilkes-Barre . + 4 + 9 + 3 + 13 6 - ‘ Not restricted to corporate limits of cities but covers areas of one or more counties. (Adjusted for seasonal variation.
@FedFRASER