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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.