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4M*

F E D ER A L R ESE R VE B A N K O F R I C H M O N D



D EC EM B ER 1964

THE POPULATION’S CHANGING AGE STRUCTU
Population changes play a vital role in the per­
formance of the economy and have been a m ajor
factor in the extended prosperity experienced in this
country since W orld W a r II. This applies not only
to grow ing overall numbers, which have an obvious
and immediate effect on the aggregate demand for
goods and services, but also to changes in the age
characteristics of the population. Changing age com­
position exerts an impact not only on the volume
of goods and services demanded, but also on the
kinds of goods and sendees which must be pro­
duced to meet this demand. It also affects im­
portantly the skills and the mobility of the labor
force, as well as its overall supply.
On the average, the population of the U nited States
is grow ing younger. W hile life expectancy has been
extended significantly, population has increased most
rapidly in the more youthful age groups and as a
result, the average age has been lowered. T his trend
has been evident since the early 1950’s, and one of
its clearest manifestations to date has been the in­
creasing pressure for additional educational fa­
cilities to accommodate the grow ing school- and
college-age population. Probably more significantly,
the economy has been called upon to provide each
year more and more new jobs suited to the capa­
bilities of young persons entering the labor force.
T his article exam ines recent and prospective
changes in the age structure of the population and
discusses briefly their economic implications. B e­
cause of the breadth of the subject, only the broader
related effects are considered. The reader wT is
ho
especially interested in population changes can find
more detailed information in the “Current Popula­
tion R eports,” published periodically by the Bureau
of the Census, and the “ Population B ulletin,” pub­
lished eight times a year by the Population Reference
Bureau, Inc. of W ashington, D. C.
T he F ig u re s T h e sh ift to w ard a yo u th -d o m in ated
age structure reverses a long standing trend in A m eri­
can history. From the beginning of the nation until
the 1950’s, the average age of the population moved
Digitized for 2
FRASER


steadily upward. Between 1820 and 1900, the
median age, which divides the younger half from the
older, rose from 16.7 years to 22.9 years. A fter 1900,
the rise w as more rapid. B y 1950, the median had
reached a peak of 30.2 years. The current re­
versal has reduced the median age rapidly. A t the
end of last year, it had fallen to 28.5 years. Bureau
of the Census analysts now expect the trend to a more
youthful age structure to continue at least until 1975
and possibly beyond 1985. B y 1970, according to the
most conservative Census forecast, half the popula­
tion w ill be under 27.4 years of age.
The prim ary factor in the current trend has been
the continuation of the post-W orld W a r II baby
boom. In 1946, the first full year of the boom, there
were 3.3 million live births in the U nited States,
approxim ately 500,000 more than in 1945. In 1946,
the birth rate per 1,000 persons in the total popula­
tion rose to 24.1, up 3.7 from the previous year. The
rate peaked the following year at 26.6 but remained
above 24 until 1960. The number of births con­
tinued to rise, reaching a m axim um of 4.3 million in
1961. L ast year the rate fell to 21.7 per 1,000, but
because of the increased size of the population, the
number of births was only about 200,000 below the
1961 record.
Census experts now expect that the number of
births w ill increase each year through 1985, assum ing
that peace and prosperity are maintained. Their
most conservative projection, Series D, shows the
average annual birth rate during the period increas­
ing from an average of 19.9 between 1965 and 1970
to 20.9 between 1975 and 1980. A ccording to this
projection, the number of births per year w ill decline
slightly until 1967 and then rise steadily to the 5m illion-a-year m ark in 1985. The Series A projec­
tion, the highest of the four current population fore­
casts, predicts an annual average rate of 24.1 between
1965 and 1970 followed by five-year averages above
25 until 1985. T his would mean a continuous in­
crease in the number of births, w ith nearly 7 mil­
lion in 1985.
The effects of the continuing baby boom upon the

age structure are shown in the chart at the bottom of
this page. Between 1940 and 1950, the number of
children in the age group under five increased 54% ,
reflecting the large number of births during and im ­
m ediately following the w ar. The number of pre­
school children increased by another 25% in the next
decade, w hile the ranks of the kindergarten- and
gram m ar-school-age group, 5 to 13, grew by 47% .
A t the same time, the number in the high-school-age
bracket, 14 to 17, increased 33% . The lower birth
rates since 1960 have slowed the rate of increase
at the preschool levels, w hile both the high-schooland college-age groups have grown by approxi­
m ately 20% .
If the Census B ureau’s conservative projections
are correct, the number of preschool children w ill de­
cline slightly during this decade, and the size of the
5-to-13-year group w ill increase only 12%. A ccord­
ing to the high-level projections, however, both
groups w ill again register increases, the younger
group gaining around 18%, and the older about 15%.
In either event, the high-school-age group is expected
to increase 39% and the college group 56% as the
initial wave of postwar births reaches these age
brackets.
The number of older people also has increased
appreciably since 1940, due largely to continuing
m edical progress and w ider distribution of its bene­

fits. A s illustrated in the chart, the number of people
over 65 rose 36% between 1940 and 1950, 32% be­
tween 1950 and 1960, and should rise another 21%
in this decade. In addition, the number of people
45 to 64 years of age has been increasing rapidly
for some time. D uring the last two decades, their
numbers rose by 16% and 20% , respectively. A n­
other 15% rise is expected to occur between 1960
and 1970. These increases in the older groups, how­
ever, have been overshadowed by the rising number
of children and young people.
C h an ges in the D istrict C h an ges in p o p ulation
age structure in the F ifth D istrict have differed but
little from those in the nation as a whole, as the chart
at the top of page 4 illustrates. The minor dif­
ferences which have been evident have been chiefly
in the rates of change among various age groups.
Since 1940, the number of children and younger
people has grown less rapidly in the D istrict than
in the nation, even though birth rates in the five
states and the D istrict of Columbia generally have
been above the national average. T his has been due
in large part to the outm igration of younger families
w ith their children. The slight decrease in the D is­
trict’s 22-to-44-age group between 1950 and 1960,
the only difference in direction of change, also re­
flects the effect of outm igration.
Throughout the period 1940 to the present, the

DISTRIBUTION OF POPULATION BY A G E GROUPS
UNITED STATES, SELECTED YEARS
Millions
60
I

| 1940

n
50

1950

I

I 1960

■ B 1963

40

30

20

10

Under 5
Source:

5-13

14-17

18-21

22-44

45-64

65 and over

U. S. Department of Commerce, Bureau of the Census.




3

number of retirees and older w orking people has in­
creased more rapidly in the D istrict. One reason
for this has been net in-m igration of older people into
the District. Another has been the m arked re­
duction in the death rate, particularly in M aryland,
V irgin ia, and South Carolina. Death rate reduc­
tions in those states have been more than twice as
great as the average reduction for the nation.
Because of the difficulty of predicting m igration,
the B ureau of the Census does not project changes
in the age structure of state populations. If the
changes since 1960 can be taken as indicative of pros­
pective trends, it would appear that the past relation­
ship between D istrict and national changes w ill hold
throughout this decade.
Som e B ro ad E ffects P erh ap s the m ost sig n ific a n t
effect of recent population change has been p sy­
chological. Despite various problems which have
arisen as the population has increased, the growth
has generally been viewed as beneficial, in and of
itself. T his attitude has been an important factor
helping to create the aura of optimism pervasive in
the economy throughout most of the postwar period.
The feeling that the future had to be bright because
population was expanding has been fairly widespread.
More concretely, businessmen have seen in the
grow ing number of younger people an opportunity to
introduce more and more new products appealing to
youth. In the last several years, automobile m anu­
Digitized for4
FRASER


facturers have designed models specifically for the
younger set. Garment m akers have m ade available
an increasing number of styles for teenagers. The
toy m arket, oriented entirely to the youngest con­
sumer group, has expanded at a rapid pace, and toy
departments of stores in every part of the nation have
been filled w ith a variety which would have over­
whelmed customers 20 years ago. The extent to
which businesses generally are now directing their
efforts toward selling to a younger group of con­
sumers is evident in m agazine and television adver­
tising. Potential buyers are exhorted to “be lively”
and “think young.”
The increased number of older people has had less
effect upon the demand for goods than upon that for
services. T his is especially true in the case of medical
services and is reflected in the figures on spending
for medical care, which show a better than 100% in­
crease between 1950 and 1963. It is reflected also in
the current debate about a Federally-sponsored
program of medical insurance for the retirementage group.
T he D em and for H o u sin g P o p u latio n chan ges
have had a m arked effect upon the housing market.
In recent years, the rapid rate of population growth
has provided the stim ulus for a high level of resi­
dential construction activity. A s fam ilies w ith chil­
dren moved to the suburbs during the late 1940’s and
the 1950's, the demand for single-fam ily homes

steadily gained strength. B y 1959, new housing starts
of private one-fam ily dwellings had risen to slightly
more than 1.2 million. The current outlook for
residential construction appears generally favorable,
since even the most conservative Census forecast sees
a population increase of more than 10 million between
now and 1970.
It seems likely, however, that there w ill be a con­
tinuing shift in the type of living-space demanded,
w ith more people looking for apartm ents rather than
houses. U ntil last year, the demand for new onefam ily homes showed a distinct tendency to taper
off, while a grow ing share of total construction out­
lays was being channeled to the building of ap art­
ments. In large part, this trend could be explained
by the increasing number of single w orking people
and young families, as those born in the immediate
postw ar years reached the w orking and m arriage age.
A lso, m any of the grow ing number of older couples
w ere apparently returning to apartm ent living.
Census projections suggest that, despite the recent
downturn in apartm ent construction, the shift aw ay
from one-family homes might be expected to ac­
celerate during the rem ainder of this decade.
T h e D em and for E d ucatio n A s the num ber of
young people has grown, there has been tremendous
pressure on the nation’s school system. Between
1950 and 1963, elem entary school enrollment rose
7.4 million and secondary enrollment 9.2 million.
The effects of this pressure have been evident all over
the nation. Construction of new physical facilities
has created by itself a sm all boom, as annual capital
outlays have risen from $664 million in 1950 to $3.2
billion last year. In the seven years from 1955 to
1962, the number of elem entary and secondary school
classrooms was increased by more than 300,000. A
more important and less easily filled need has been
that for more public school teachers. W hile the task
is by no means completed, institutions of higher
learning have done a rem arkable job in helping to
fill the teacher gap. From 1950 to 1963, the num ­
ber of elem entary school teachers increased 321,000
and the number of secondary teachers 326,000.
Colleges and universities also have experienced
grow ing pressure. Enrollment in institutions of
higher learning rose 1.8 million between 1950 and
1963, necessitating an increase in faculty of almost
200,000. Complete figures on outlays for plant ex ­
pansion are not available, but state-supported insti­
tutions alone increased their annual spending from
$417 million to $1.2 billion.



D uring the 1960’s, the rate of increase in enroll­
ment should slow somewhat at the elem entary level,
but is expected to increase at the secondary and col­
lege levels. C learly, the grow th problems of A m eri­
can education are far from over.
Y outh and Jo b s T h e m ost serio u s sin g le c h a l­
lenge to the economy presented by the risin g number
of young people has been the need for more new jobs.
In the late 1950’s, approxim ately 200,000 persons
under 25 were entering the labor force each year.
The number is now estim ated to be above the
600,000-a-year level and m ay be expected to in­
crease further. Thus far, the economy has assim i­
lated most of these younger w orkers, but m any ob­
servers fear that the task m ay become increasingly
difficult. In the final analysis, the matter would
seem to hinge on education. If most of the young
w orkers come to the labor force qualified to handle
jobs requiring higher skill levels, they should have
only lim ited difficulty finding employment. O ther­
wise, however, the picture m ay be bleak, both for the
individual and the economy. Current trends indicate
that machines rather than men w ill be doing many
of the low-skill jobs of tomorrow.
A F in a l N ote For the lo n g run, the im p licatio n s
of the shift to a youth-dominated age structure go
far beyond the com paratively minor effects discussed
above. There is a distinct possibility that the present
trend m ay continue well past 1985, bringing with it
important social changes. A s the number of younger
people increases, it seems reasonable to assume that
our economic and political leadership w ill be more
youthful. Such a trend already is evident on the
political scene and, to a lesser extent, in the business
wT
orld. Also, there should be changes in consump­
tion patterns, probably with more emphasis on goods
and services associated w ith leisure and recreation
activities of younger people.
To many demographers, the most significant
aspect of the population trend is sim ply the magnitude
of the projected increase in numbers. One hundred
years hence, according to the most conservative fore­
cast, there w ill be three quarters of a billion A m eri­
cans, compared writh less than 200 million now. Writh
the vast resources base at our disposal, and assum ing
continued technological progress, this projection is
no cause for dire concern. But obviously, a four­
fold increase in population w ill necessitate broad
changes not only in consumption patterns, but also
in the A m erican w ay of life in general.
5

WHO LENDS 'O FARMERS?
n

f;

Farm-Mortgage Loans

Noft^Real-Estate Loans
$ Mil.
$ Mil.
40

60

30

20 -

1950

i i i__1 i

1955

1

1_

I

1960

!
0
1950

1

1

!

1 r
1955

1

i

i

1 I
1960

i

Ol____I— I— I— I___I___ I___ I___ I___ I___ I___ I___ I___ L
1950
1955
1960

i

$ Mil
200

___ ___
—
— —
_i___ I I I___ I I— 1 I i— I—
1960
1955

1950

$ Mil
300

I

$ Mil.

120

90 -

200
60

100
30 -

1950

$ Mil.

i 2o r

60

1950

H
■
□

FE D E R A L
FARM ERS
LIFE

LAND

[~~| AL L O P E R A T I N G
■

BANKS*

HOME

IN SU R A N C E

1955

ADM INISTRA TIO N
C O M PAN IES
BANKS

IN D IVID U A LS A N D OTHERS

‘ Includes loans o f the Federal Farm M ortgage Cor­
poration. The C orp oration’s authority to make new
loans, except incidental to liquidation, expired July 1,
for1947, and its loans were bought by the Federal Land
FRASER
Banks on June 30, 1955.

Digitized
http://fraser.stlouisfed.org/
Source:
U. S. Departm
Federal Reserve Bank of St. Louis ent

o f A griculture.

■ Fifth Distrirmers' total
farm -m ortgage debt on jary 1, 1964 hit
a record $872 million, lO gher than a ye ar
earlie r and more than threees the 1950 level.
®
Their non-real-estate indebted, at $359 million,
w a s also at a record level for tlate, some 10% larger
than at the beginning of 1963 and thnid one-fourth times the
1950 figure.
|
With the burgeoning creeeds of m odern-day ag ri­
culture, lending to farm ers has become big less.
Banks have a lw a y s
been an im portant source of farm credit, b id it facilities of other ag ricu l­
tural lending agencies have expanded g rean d competition has intensified.
M any com m ercial banks as a result are now em ng specialists in farm credit and
tailoring their services to meet the specialized neof today's farm ers.
■ The Dis­
trict's m ajor institutional lenders in the farm-mortc field are, in order, comm ercial
banks, the Federal Land Banks, life insurance companicnd the Farm ers Home A dm inistra­
tion.
Individuals and other nonreporting lenders, how evre relatively more im portant in this
field than an y institutional group.
In non-real-estate farm t, District banks still hold a sizable
lead over other lending institutions.
Production credit assoc is are second in im portance, with the
Farm ers Home Adm inistration a distant third.
A s the accompany charts show , both the volume and pro­
portion of farm loans held by banks and other m ajor lenders in the rict v a ry considerably from state to state.

1950

1955

__I _I —L
1 _I —I

1955

j_L
.

1960

1960

H
I

FARMERS
I

[~l

HOME A DM INISTRA TION

P R O D U C T IO N

CREDIT

A SSO CIA TIO N Sf

ALL O P E R A T I N G B A N K S j

tlncludes Federal Interm ediate Credit Bank loans to
and discounts fo r livestock loan com panies and agri­
cultural credit corporations.
JExcludes loans guaranteed by the Comm odity Credit
Corporation.

F IN A N C IN G

FEDERAL DEFICITS

Deficits in the Federal Government’s budget un­
doubtedly exert an impact upon the economy, al­
though there is some disagreement among observers
as to the nature and magnitude of the influence.
A n y increase in the Government’s spending relative
to its receipts is likely to have at least some direct ef­
fect on total expenditures and hence on aggregate
demand for goods and services. Moreover, increases
in the Government’s demand for loan funds w ill
likely affect interest yields and may influence spend­
ing by the general public by encouraging the substi­
tution of liquid earning assets for money balances.
In addition to these broader effects, deficits exert
important effects on the economic system ’s m onetary
and financial mechanism. The ultim ate impact de­
pends to a significant degree on the kinds of dis­
turbances introduced in this mechanism, and these, in
turn, hinge on the manner in which the deficits are
financed. T his article exam ines the alternative chan­
nels for financing Federal deficits with a view to as­
sessing their effects on bank reserves, on the public’s
holdings of money and Government securities, and
on interest rates.
It should be pointed out at the beginning that the
impact of an increase in Government expenditures or
a reduction in taxes is expansionary, causing real
national income to increase if there is some under­
utilization of resources, or prices to increase if re­
sources are fully employed. W hen the Federal Gov­
ernment adds to the spending stream by p aying out
more than it takes aw ay in taxes, the injection of
spending stim ulates the economy unless wholly offset
by a decline in private spending. W hether or not
this “fiscal” impact of the deficit w ill be amplified or
partially or wholly offset w ill depend on the method
of financing.
Financing A lternatives In g en eral, the F ed eral
Government can finance an excess of expenditures
over receipts in any of four w ays. It can (1 ) draw
down its cash balances, (2 ) sell securities to the non­
bank public, (3 ) sell securities to the Federal R e­
serve, or (4 ) sell securities to commercial banks.
These alternatives are not m utually exclusive, of
course, and in actual practice some combination of
them is generally utilized. For clarity, however, it
is probably desirable to describe the effects of each
separately.
Drawing Down Cash Balances T o tak e a con­
crete exam ple, suppose that Federal expenditures in

8


a given quarter exceed revenues by $1 billion, leaving
a deficit of that amount to be financed. If the T reas­
ury were able and w illin g to draw down its cash
balances, it obviously could finance the deficit w ith­
out borrowing.
The economic and financial effects depend to a
considerable extent on whether the T reasu ry reduces
the deposit balances it holds at the Federal Reserve
or those held at commercial banks. If the T reasury
finances the entire deficit by draw ing down balances
at the Federal Reserve, the result w ill be more ex ­
pansionary than if balances are reduced in tax and
loan accounts at commercial banks. Checks drawn
on the Federal Reserve to cover the deficit wind up
as an increase of $1 billion in private deposits in
commercial banks. W hen the checks are presented
for collection at the F ederal Reserve, member bank
reserve accounts increase by the same amount. Since
only part of the additional reserves are needed to back
the increased private deposits, the excess reserves
provide the base for a multiple expansion of bank
credit and the money supply.
In actual practice, however, financing a deficit by
draw ing down cash balances is less expansionary than
implied above. A s a m atter of policy, the T reasury
keeps its w orking balances at the Federal Reserve at
a fairly constant level. Consequently, it wT
ould prob­
ably issue a call on its tax and loan accounts at
commercial banks in order to replenish its balances
at the Federal Reserve. T his would have the effect
of unw inding the changes described in the previous
paragraph, and member bank reserves would be the
same as at the beginning. The only substantive
change would be the increase in the statistically
measured money supply resulting from the transfer
of T reasury deposits at commercial banks, which are
not counted as part of the money supply, to private
deposit accounts, which are included in the money
supply statistics.
This method of financing would clearly not offset
the stim ulative “fiscal” impact of the deficit. Rather
it would probably provide moderate additional
stim ulus, since the public’s liquidity position would
be improved as the result of its acquisition of new
money balances form erly held by the Government.
Selling to the Nonbank Public Sh ould the T re a s­
ury sell $1 billion worth of certificates, notes, or
bonds to the nonbank public and spend the proceeds,
the public would wind up w ith the same amount of

money (dem and deposits) as before but w ith $1
billion more in securities. Moreover, commercial
banks would find their reserve positions unchanged
from the initial level.
T his can be illustrated with the following Taccounts. (a ) If the nonbank public buys $1 billion
of securities from the T reasury and pays for them
w ith checks drawn on deposit accounts at commercial
banks, clearing the checks would involve the follow­
ing changes at commercial banks and Federal R e­
serve B a n k s:
COM M ERCIAL BANKS
Billions of Dollars
Liabilities

Assets
Reserves

-1

Private Demand Deposits

-1

FEDERAL RESERVE
Billions of Dollars
Liabilities

Assets

M ember Bank Deposits

-1

U. S. Treasury G e n eral
Account

+1

(b ) A s the T reasury spends the $1 billion, the public
deposits it in commercial banks, and the changes
above are reversed.
COM M ERCIAL BANKS
Billions of Dollars
Liabilities

Assets

+i

Reserves

Private Demand Deposits

+1

FEDERAL RESERVE

the economy an expansionary boost? No definitive
answ er to this question is available, but most analysts
would probably answ er in the affirm ative. Although
the public as a whole ends up with the same amount
of money (dem and deposits) as before, a redistribu­
tion of money within the public sector has occurred.
Those who bought the Government securities volun­
ta rily adjusted their liquid asset positions, givin g up
money for bonds, thereby indicating they did not
need the money for immediate spending. On the
other hand, those who received money as a result of
the Government’s fiscal operation acquired something
of a w indfall and presum ably would soon adjust their
rate of spending to their new higher incomes. Thus,
it can be argued that a rise in the velocity of money
occurs.
On the negative side, it should be noted that the
increased supply of securities on the m arket tends to
push interest rates upward, thereby tending to re­
strain private spending for goods and services by
m aking expenditures for financial assets relatively
more attractive. Spending m ay also be reduced as
rising interest rates result in capital losses on the
public’s fixed-income assets.
S e llin g to th e F ed e ral R eserv e A t the o th er e x ­
treme, the T reasury could finance the deficit by sell­
ing securities to the Federal Reserve. The central
bank would pay for the securities by crediting the
T reasu ry’s account. W hen the T reasury pays out
the proceeds, the public’s money holdings rise. De­
posit of the new money in banks raises bank deposits
and reserves in identical amounts and creates excess
reserves which m ay be used for credit and m onetary
expansion. The result would be clearly expansionary.
In terms of T-accounts, the effects m ay be traced
out as fo llo w s:
(a ) The central bank buys $1 billion of securities
from the T reasury.

Billions of Dollars
Assets

FEDERAL RESERVE
Billions of Dollars

Liabilities
M ember Bank Deposits

+1

U. S. Treasury G en eral
Account

-1

The net effects on the balance sheets of the Fed
and the commercial banks are, of course, nil, and
all relevant accounts return to their pre-deficit values.
T here is, however, an increase of $1 billion in the
Government securities holdings of the nonbank public
resultin g from the public’s acquisition of the new
bonds.
Does a F ederal deficit financed in this w ay give



Assets
Governm ent
Securities

Liabilities

+ 1

U. S. Treasury G en eral
Account

+ 1

(b ) The T reasury spends the proceeds w ith the
public, which deposits them in commercial banks.
COM M ERCIAL BANKS
Billions of Dollars
Assets
Reserves

Liabilities
+1

Private Dem and Deposits

+1

9

FEDERAL RESERVE
Billions of Dollars
Assets

Liabilities
Member Bank Reserves

+ 1

U. S. Treasury G en eral
Account

—1

Both the public’s money holdings and commercial
banks’ reserves increase by the amount of the deficit.
A dditional m onetary expansion would then take
place as banks put their excess reserves to work.
In fact, however, substantial deficits cannot be
perm anently financed by selling securities directly to
the Federal Reserve. The System is authorized to
buy securities directly from the T reasury, subject to
the restriction that the amount outstanding cannot
exceed $5 billion at any time. This is regarded by
the T reasu ry only as a source of tem porary accom­
modation, and in practice the authority is almost
never used.
S e llin g to C o m m ercial B an k s T h e econom ic ef­
fect of financing a deficit through selling securities
to commercial banks would vary, depending on the
action taken by the Federal Reserve. If the central
bank did not supply member banks with reserves with
which to purchase the T reasu ry securities, the eco­
nomic impact would be much the same as if the
T reasu ry had sold securities to the nonbank public.
If, on the other hand, the Federal Reserve supplied
reserves equal to the amount of the bond issue, the
effect would be the same as if the Federal Reserve
had bought the securities directly. M any inter­
mediate possibilities obviously exist between these ex­
tremes. T he System , for example, m ight decide to
supply ju st that amount of reserves which would
enable banks to acquire the T reasury issues without
liquidating other earning assets.
To elaborate the first case, assume the commercial
banks were fully loaned up, having no excess reserves.
The commercial banks could purchase $1 billion of
Government securities only by liquidating an equiva­
lent amount of loans and/or investments. Such
liquidation would reduce the public’s holdings of
money by $1 billion, exactly offsetting the increase
resulting from the Government’s excess of expendi­
tures over tax receipts. So far as the commercial
banks are concerned, the net effect would be nothing
more than a substitution in bank portfolios of Gov­
ernment securities for other loans and/or invest­
ments. If banks bought the new securities by liqui­
dating other investments, the economic impact would

10


be almost precisely the same as if the T reasury had
sold the new securities to the nonbank public. The
public would end up with the same amount of money
as before but with $1 billion more in securities
(those liquidated by the b an ks).
Interest rates
would tend to rise, and the expansionary impact of
the deficit would be p artially offset. If banks made
room for the new Governments by letting loans run
off, the result would be slightly different. Instead
of ending up w ith more securities than before, the
nonbank public would wind up with less indebtedness.
On the other hand, if the central bank provided
the commercial banks wT
ith reserves equal to the
amount of the deficit, banks could buy the new Gov­
ernments without liquidating other loans and invest­
ments and have reserves to spare. W hen the T reas­
u ry disbursed the proceeds of the bond sale to meet
its obligations, the Government checks would be de­
posited in commercial banks and private deposits
would rise by $1 billion. Since bank reserves
would increase by a like amount, the result would be
identical to that achieved when the Federal Reserve
bought the securities directly. Only a fraction of the
reserves would be needed to support the new private
deposits, and a m ultiple expansion of bank credit and
the money supply would result as banks lent and
invested their excess reserves.
S u m m ary A ssu m in g th a t m em ber b an ks o perate
with a minimum of excess reserves, as they have in
recent years, the economic effect of financing a deficit
through the banking system depends prim arily on
the action taken by the Federal Reserve. If the
System supplies no additional reserves, purchases by
commercial banks are v irtu ally equivalent to pur­
chases by the nonbank public. If the System supplies
reserves equal to the amount of the new T reasury
issue, purchases by banks are equivalent to direct
purchases by the Federal Reserve. The critical
question, therefore, is not who buys the bonds but
w hat course of action the central bank decides to
follow. T his in turn depends prim arily on economic
conditions. If a national em ergency requires a large
increase in Government expenditures at a time when
labor is fully employed and prices are rising, restric­
tive m onetary policy would be in order. A t the
other extrem e, w ith national income falling and un­
employment rising, appropriate policy m ight call for
aggressive reserve expansion. Between the extrem es,
proper m onetary policy m ight assume an almost in­
finite variety of postures. The point is that no method
of financing a deficit is inherently “sound.” Sound
financing w ill depend entirely on the environmental
setting.

THE FIFTH DISTRICT
No feature on the calendar of business events in­
volves more fanfare than the year-end bulge in con­
sum er spending. E arlier each fall, so it seems, store
decorations and advertising begin featuring the cele­
brations that m ark the end of one year and the begin­
ning of another. And customers, more cooperative
than at any other time of year, eagerly raise their
spending power to a seasonal peak with savings from
the past and borrowings from the future. To help
those whose aspirations are more affluent than their
pocketbooks, merchants have steadily liberalized and
expanded their credit plans. Although almost every­
one participates in this annual shopping spree to one
degree or another, few are fam iliar w ith the details
of its character and significance. A review of re­
tail trade patterns for last year and for this year to
date m ay be as good a guide as any to what m ay
reasonably be expected in the approaching holi­
day season.
L ast Y ear’s Patterns In the absence of seaso n al
differences, retailers would expect to do about one
twelfth of their annual business each month. More
than one tenth of last y ear’s business, however, both
locally and nationally, was transacted in December.
November volume last year w as slightly over the
monthly average so that November and December
together accounted for nearly one fifth of the total
for the year.
N ationally, nine main classes of retailing establish­
ments are regularly responsible for nine tenths of
all sales. In 1963, food stores accounted for 24%
of total sales, automobile and accessories dealers for
19% , general merchandise (m ostly department and
v ariety) stores for 12%, gasoline stations for 8% ,
restaurants for 7% , lumber, hardware and farm
equipment dealers for 6% , apparel stores for 6% ,
furniture and appliances dealers for 5% , and drug
stores for 3% . According to 1963 data, the two
most important groups, automotive and food, were
least affected by seasonal variations. Sales trans­
acted in December amounted to less than one twelfth
of the total in the automotive group and slightly more
than one twelfth in foods. November last year was
a sligh tly better sales month than December for
automotive dealers and just as good as December
for foods.



J K

The least important categories showed a moderate
response to seasonal influences. For furniture and
appliance stores, both November and December were
better than average, and the two months together
accounted for over one fifth of this group’s 1963
sales. For drug stores, however, November was
ju st an average month while December sales were
about one third above average.
Strong Seasonal in General Merchandise T he
general merchandise and apparel groups displayed
the greatest response to seasonal change last year.
N ationally, about one fourth of the y e a r’s business
in these groups was done in the last two months of
the year, with December accounting for 15% of the
annual total. General merchandise stores in the Dis­
trict showed somewhat less year-end concentration
than did those in the nation as a whole. In the ap­
parel group, however, the opposite w as true, with
year-end business relatively more important locally
than nationwide.
Department store statistics cover a com paratively
small sector of the general merchandise class of re­
tail trade, but one in which year-end volume is un­
usually important. D uring the past few years,
December has typically accounted for one sixth of
annual department store volume in the District, and
November and December taken together have nor­
m ally contributed more than one fourth of total
annual sales.
Jobs in Trade at Seasonal Peak To h andle the
sharp increase in activity toward the end of each
year, m any extra w orkers are added to store payrolls.
The right-hand graph on page 12 shows the pattern
of seasonal grow th in D istrict trade employment
during 1963. The values plotted are seasonal index
numbers with 100% representing the average monthly
level.
T rade jobs were consistently under the monthly
average early in the year, close to but still below
average during late spring and summer, slightly above
the monthly norm in early fall, and distinctly above
average only in the final two months of the year.
More than 17,000 w orkers were added to trade p ay­
rolls in November last year and over 48,000 more in
December. As the chart shows, the buildup in Dis­
trict trade employment actually continued slowly but
11

steadily from the seasonal low in F ebruary to the
December peak, when the total exceeded one million
for the first time. At the end of last year the figure
w as 84,000 above its m idyear level and 117,000, or
about 13%, higher than the February low. If the
usual patterns prevail, the one million figure w ill be
reached this year in November, and another 50,000
or more w ill be added in December.
P rofits Show Sharp Seasonal Rise To m an y de­
partm ent and other general merchandise stores,
Christm as business is even more important than the
employment and sales figures suggest. Y ear-end busi­
ness is generally transacted at maxim um m ark-up.
On the other hand, the tem porary help tends to be
less efficient than the regular employees. But fa­
vorable factors, such as good m ark-ups and capacity
utilization of facilities, more than offset unfavorable
ones and produce substantially w ider profit m argins.
The November-December season, which accounts for
about one fourth of annual volume, provides an even
larger fraction of annual profits.
G rowth in Retail Sales B oth re ta ilin g and w h o le­
saling activities have grown steadily in the D istrict
since the current business upswing began nearly four
years ago. The left-hand chart above shows the
grow th of total trade employment during this period.
Seasonally adjusted monthly figures for each of the
past three years and the current year to date are
plotted to emphasize year-to-year growth, which has
proceeded at a 3c average annual rate. Seasonal
/c
adjustm ent raises figures that are seasonally low and
Digitized for12
FRASER


reduces those that are seasonally high, using cor­
rection factors that represent each month’s typical
deviation from the average monthly level. Because
of seasonal adjustm ent, none of the figures plotted in
the left-hand chart exceeds the one million level.
Since regular monthly estim ates of total District
retail sales are a relatively recent development, mean­
ingful comparisons between trade employment and
sales volume cannot yet be made. Moreover, the
period for which sales data are available is too short
to allow reliable seasonal adjustm ent. U nder these
circum stances, the device of rating this y e a r’s per­
formance against last y e a r’s, despite m any short­
comings, probably provides as useful a picture as any
and allows some significant com parisons between
the D istrict and the nation.
U sing average volume in the first quarter as a
base, D istrict retail sales rose 10% through Septem­
ber of this year w hile the increase for the nation as
a whole was 9% . Comparable gains in 1963 were
3% in the District and 5% nationally. Total retail
sales for the first nine months of 1964 exceeded those
in the same period of 1963 by 8% in the District
and 6% in the nation. T his 8% rise in D istrict re­
tail sales was accomplished with less than a 3% rise
in wholesale and retail employment combined.

PH O TO CREDITS
C o ver—Jack and Jill School; University of North C aro lina
at C hapel Hill; A. H. Robins C om p any, Inc.; Senior
Center, Inc.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102