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FEDERAL RESERVE BANK OF RICHMOND JULY 1963 THE NEW LOOK IN BANKING STRUCTURE Changes in the banking system of the United States in the past decade have been sufficient to cause w ide spread public interest and some concern. T his in terest has resulted in a grow in g public discussion devoted to an appraisal o f the adequacy o f the country’s banking system and involving proposals for changing both the legal fram ework within which banks operate and arrangements for bank regulation and supervision. Som e o f these proposals already have led to significant Federal and state legislation. A lthough the history o f banking in the United States is a chronicle o f change, the changes o f the past decade have differed somewhat from those of earlier periods. T h e number o f com m ercial banks in this country increased about tw o and one-half times in the first tw o decades o f this century, and by 1920 they numbered almost 30,000. M any o f these were small banks located in small towns. T his period of overexpansion was follow ed by a large number of suspensions and m ergers in the 1920’s and the virtual collapse of the com m ercial banking system in the early 1930’ s. B y 1933, the num ber of com m ercial banks in the U nited States had fallen to 14,500, less than half the 1921 figure. Recent changes in the banking system have in volved an increase in the num ber of com m ercial bank ing offices and a grow th in banking combinations, with a decline in the num ber o f independent banks. T he controversy arising from these developments re flects the pow erful forces at work, with forces of change grow in g out of underlying econom ic and social development and the forces o f restraint based on the traditional Am erican fear o f concentrated econom ic pow er, especially in the financial field. FORCES FOR C H A N G E kinds o f banking services. Population shifts centered these newr demands on areas served inadequately or not at all by existing banks. areas. Finally, increasing costs and automation p ro vided additional incentives for expansion. NATURE OF THE CH A N G ES In the decade ending Decem ber 1962, the number of com m ercial banks in the United States declined by 619, as the num ber o f new banks organized was insufficient to offset de creases resulting from suspensions, consolidations, voluntary liquidations, and other changes. In spite o f the decline in the num ber of banks, however, total banking offices increased by 6,175 as the num ber o f branches and additional offices rose by 6,794. M ergers and the grow th o f branch banking may have been the m ost important aspects o f the changes in the banking system in recent years, but they were by no means the whole story. Important changes not reflected in these statistics include the grow th o f systems involving the linking together o f banking units through stock ownership. T he grow th and de velopm ent o f nonbank financial institutions also p ro vided added financial facilities. T he manner in which additional services were p ro vided in a particular area was influenced to an im portant degree by the legal framewTork wTithin which the change occurred. Commercial banks in the United States operate in a unique legal fram ew ork, with federally and state-chartered banking systems operating side by side in each state, and with both Federal and state laws applying to most types o f bank expansion. E conom ic grow th is a p roc Similarly, changes in the industrial and com m ercial structure led to needs for additional and different banking services in new State law determines the status of branch banking in each state for national as w'ell as for State ess of change and the grow th in our econom y in the banks. past decade significantly changed the environment in which our banking system functions. Population in of the Bank M erger A ct o f 1960 which requires the creased and per capita income rose. N ew industries M ost bank mergers fall under the provisions approval of one of the three Federal supervisory agencies, and the Bank H old in g Com pany A ct o f 1956 developed, others shifted their geographic locations, requires approval of holding com pany acquisitions by and the average size of business units increased. the B oard o f G overnors of the N ot Federal R eserve only did population increase, but it shifted regionally, System. from rural to urban areas, and from central cities by law, but various types o f acquisitions may be to the suburbs. subject to provisions o f the anti-trust laws. Chain banking is not specifically controlled D if G row th in per capita income contributed to changes ferences in the banking laws o f the several states go in saving and consum ption patterns and created a far toward explaining differences in state banking need for increased banking services and for new structures. 2 BRANCH BAN KIN G Branch banking exists when a single bank, having one charter and one corporate existence, carries on business through multiple o f fices. It has long been a source of controversy in the United States and recent changes in banking structure, along with proposals to change branching laws, have given the controversy new life. A dvocates o f branch banking claim it strengthens tions engage in a com petitive struggle for new markets. In the process they are said to coerce and intimidate small independent bankers into selling out to them. Opponents o f branch banking also claim that branch banking would lead to a sacrifice o f local interest to the banking system. In past periods o f widespread bank failures, a great many o f the failing banks were of the com m unity and must operate according to strict rules laid dow n by the head office. T o the small unit banks, often with poorly trained managerial claim that branch systems m obilize the supply o f funds personnel and with resources and markets too limited and facilitate the flow o f credit within the econom y, opponents argue they drain needed capital out o f local that of the head office city. Branch managers, they say, are likely to be uninform ed as to the credit needs to permit diversification o f assets. Proponents of branch banking argue that with greater resources and larger markets, branch systems can achieve the diver sification needed organizations may for soundness. permit the Further, comm unities larger development into the cities. Finally, a branch manager is considered likely to be more impersonal than a local banker in considering loan applications, and it is feared he might give too little consideration to such things as character o f the applicant and the and retention of m ore capable management. It is said that branch banks facilitate the transfer o f funds from surplus areas to areas where funds are needs o f the comm unity. It is not the purpose o f this article to evaluate in short supply, thus achieving a m ore complete these arguments. mobilization of resources than would be possible in however. F or example, while it is unquestionably true that our unit banking system has had a great a unit banking system. A lso, branch organizations are said to en joy econom ies o f scale which lower A ll o f them have been disputed, many m ore failures than branch banking systems in operating and overhead costs. A dvocates o f branch banking maintain that because of the ability to other countries, it may be argued that the unsound areas which could not support even a small unit bank banks have been eliminated from our system and that deposit insurance and basic changes in our financial and econom ic systems make it highly unlikely that bank failures will ever again be a serious problem . O n the other hand, many deny the assertion that offering limited services. On the other side of the argument, the claim that bank operates in a loan market limited in size to the centralize some functions, and because it is unneces sary to erect expensive buildings for each office, a branch system can provide full banking services in branch bankingJeads to m onopoly. T he typical unit local com m unity. Since a great many comm unities are served by only one bank, and many others by only branch banking leads to m onopoly carries great weight in this country because o f a traditional fear of concentrations of econom ic power. Opponents say that branch banking results in fewer banks and that tw o or three, it is argued that in these limited market areas, a high degree o f m onopoly might exist even in a unit banking system. Indeed, it is often said fewer banks mean reduced competition. A closely related argument is that expansion tends to become an end in itself, and a few rapidly expanding institu that the establishment of a branch, either de novo or through merger with an existing bank, may well CH A N G ES IN THE NUMBER OF COM M ERCIAL BANKS AND BRANCHES, 1952-1962 All Com m ercial Banks Increase Prim ary organizations U nclassified Decrease Suspensions Consolidations and absorptions: Converted into branches Other V oluntary liquidations U nclassified Net change Branches and A dditional O ffices De novo branches established Banks converted into branches Discontinued branches O ther changes http://fraser.stlouisfed.org/ Net change Federal Reserve Bank of St. Louis - Cum ulative Chang e 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 67 64 3 132 4 75 73 2 216 3 116 116 123 123 97 97 199 3 164 8 145 117 28 172 3 135 135 240 4 91 89 2 163 3 137 2 113 112 1 153 9 184 183 1 189 2 1,146 1,109 37 1,765 41 92 23 10 3 65 175 31 7 204 27 5 166 23 7 134 23 3 126 25 5 148 18 3 106 25 4 126 13 5 40 164 18 4 1 5 1,441 226 53 4 619 788 126 53 874 164 47 + 861 + 991 5,643 1,440 387 + 98 + 6,794 280 92 19 + 353 -1 4 1 -1 2 4 341 174 28 6 + 481 442 203 44 + 1 + 602 - 76 522 166 36 + 652 - 72 501 134 30 + 1 + 606 - 67 540 126 30 + 9 + 645 - 27 584 148 48 + 91 + 775 - 2 771 107 52 + 2 + 828 - increase rather than reduce competition in a given locality. Branches may be ESTABLISHMENT OF BRANCHES established by m erging tw o banks and operating one of the banks as a branch of the other, or through the establishment of a branch de novo. A lthough state banking laws generally govern the establishment of branches within a state, Federal banking agency ap proval is also necessary in most cases. National banks in a given state are permitted to establish new branches, subject to approval by the Com ptroller of the Currency, to the extent that state law permits branching by State banks. State banks that are members o f the Federal Reserve System need the approval of the B oard o f Governors, and insured nonm embers need the approval of the Federal D e posit Insurance Corporation. In establishing branches by use of the m erger technique, approval of the m erger itself is necessary. T he Bank M erger A ct of 1960 provides that if the continuing bank is to be a national bank, approval of the Com ptroller of the C urrency is req u ired ; if it is to be a State member bank, approval o f the Board of G overnors is required; and if it is to be an insured nonm em ber bank, the F D I C must approve. If the continuing bank is to be a state-chartered bank, ap plication for approval must be made to the state as well as the Federal authority. Restrictive state laws on branch banking do not rule out mergers, o f course, if the com bining banks m erge their assets and operate from one location. Since most m ergers and con solidations result in the establishment of a branch, however, not many mergers occur in states prohibit ing or severely restricting branch banking. In the past decade, 7,083 branches and additional offices of com m ercial banks were established. O f these, 5,643 were de n ovo branches and 1,440 were conversions of banks into branches through merger or consolidation. Discontinuances and other changes reduced the num ber of branches by 289, resulting in a net addition of 6,794 branches in the decade. In approxim ately 8 6 % of the consolidations and absorp tions, the acquired bank w-as converted into a branch. BANK HOLDING CO M PAN IES banking are the separate banking systems In contrast to branch each with its own board o f directors and officers and subject to the same laws as other banks in the same jurisdiction. Because holding com pany systems are made up o f separately chartered banks, they are m ore decentralized than branch systems and may possess m ore organizational flexibility. Since directors o f subsidiary banks are often local citizens, each bank is able to retain its local character. T he extent o f control exercised by the holding com pany management over the activities of subsidiary banks varies greatly from one system to another. Sometimes the directors and senior officers o f the holding com pany are included on the boards o f af filiated banks, and occasionally directors o f affiliated banks serve, somewrhat as representatives o f their respective banks, on the board o f the holding com pany. In any event, directors o f each subsidiary bank represent the stockholders o f the bank, and in most cases the holding com pany is the dominant stockholder. Perhaps m ore often than not the directors and o f ficers o f the individual banks make decisions on in dividual loan applications, with the holding com pany establishing general loan policy. Investment ac tivities, on the other hand, are subject to much m ore centralized control by the holding com pany. It is not unusual for the holding com pany to provide an investment service to subsidiary banks involving almost com plete supervision o f portfolios. Bank holding companies can provide a num ber of valuable services to subsidiary banks. In addition to investment services, these may include centralized p u rch asin g; legal, accounting, and tax s e rv ice s; and assistance in im proving operations. Som etim es the leading bank o f a grou p serves as a training ground for future management personnel in other banks o f the system. ducts Frequently, the holding com pany co n periodic examinations of subsidiary banks, analyzes their operations, and reports to the directors o f the bank and the holding company. W h ile the holding com pany organization has certain ownership. advantages in com parison with other form s, it lacks G roup banking is a term sometimes applied to ow n er the flexibility o f the branch organization in loan and ship of stock in one or more banks by a holding deposit com pany. Chain banking refers to stock ownership separate banking units and the legal loan limit for in several banks by an individual or a small group o f each bank in a group is determined by its ow n capital individuals, often a family. through control do act as holding companies. Banks in a holding com pany system are separately chartered institutions, over units involving A bank holding com pany is a corporation organized under the laws o f a state. In m ost cases the holding com pany does not engage in banking, but some banks stock Branch, group, and chain operations. resources. T he group is com posed of In branch systems, how ever, the loan banking are not mutually exclusive, however, since limit for each branch is the same as that fo r the branch systems may be included in groups or chains. w'hole system. Digitized4for FRASER It is sometimes argued that group organization permits a subsidiary bank to lend in excess of its legal limit because of the ease o f arranging for other banks in the group to participate in a loan. Because o f a provision o f the H old in g Company A ct which has been interpreted to require participating subsidiary banks to join at the outset in making a loan, however, Com pany A ct provides that an out-of-state holding com pany can acquire shares or assets o f a bank only if the state into which it wishes to expand specifically authorizes such acquisitions by an out-of-state bank holding com pany. Since no state has specifically authorized such acquisitions, the effect has been to prevent registered holding companies from making new acquisitions across state lines. it may be easier for an independent bank to arrange a participation with a correspondent than for tw o sub sidiary banks in a holding com pany system to do so. One o f the advantages of the branch organization is the ability of the system to mobilize and transfer companies having subsidiary banks in 31 states were funds within the system. Because the group is com posed of separate banking units, and because members registered under the provisions of the Bank H oldin g Com pany A ct. In addition, a num ber of holding companies are not subject to the registration require ments and are not included in these figures. of a group are not permitted to lend to the holding company or to other banks in the group, some o f this mobility o f funds is absent. The holding com pany organization is sometimes regarded as little more than a means of getting around restrictions on branch banking. It is true that in Bank holding companies are relatively most im portant in the M idw estern and Pacific regions. O ver half of the deposits of all com m ercial banks in Nevada, M ontana, Utah, and M innesota are held by holding com pany subsidiaries. In seven other states, six of which were in these two regions, .33% or more of states which prohibit or severely restrict branching, group or chain banking may be a substitute for multiple office banking, but the holding com pany is also found in states having little or no restrictions on branch banking. total deposits o f com m ercial banks were held by holding com pany subsidiaries. It is also true that, unlike branch systems, holding SUM M ARY In recent years a significant feature of bank expansion has been a grow th o f branch and company groups may operate across state lines. On June 30, 1962, 12 holding companies controlled banks group banking accom panied by a reduction in the number of banks. T he pace at which change is taking place is quickening. P roposals are being made to in more than one state. One controlled banks in 11 states with deposits of $5.3 billion, an amount equal change the laws pertaining to bank expansion but to 13.1% o f all com m ercial bank deposits in the 11 states. State law may prohibit group banking within a particular state, however, and the Bank H oldin g _ A s the accom panying EXTENT OF GRO UP BAN KIN G map shows, the importance o f group banking varies geographically. A t the end o f 1961, 46 bank holding just what legal changes will be made, if any, are not apparent at this time. BANK HOLDING COMPANIES BY STATES, DECEMBER 1961 /A — -------- ... // — 4 ^ 0 NTANA 13 5 2 .2 34 (NORTH D A K O T A \4 I------------------ \ " T ---------------- j z 3 8 .7 1 2 ----------! MEV a h a / \ 1 0 .4 \ 4 r umh ' '— j 'i' 1 42 i 13 Banks controlled by holding companies f I nuCH. \ ^ 8.7/> \ ______ M \ n J K 7 OHIO 4 ky. ^ * 2.5.7: U .6 / 4 ’° - i --------------- T r'*T EN N ESS EE y ^ C^R° ' ' GEORG'^ j r ...... L TEXAS ^ N um ber of holding co m p an ies 17 j2 2 7 I \ 2 .7 / , : (____ V ’,,6 • _ .j \ r--~_ n---- 3 JLO U lS IA N A lP y'J-A A ' .---- g J a ll er 7 A V " " " KANSAS ------- r -----------1 3 Digitized FRASER 3 3 . 0 for Deposits as a p ercentage of http://fraser.stlouisfed.org/ commercial bank deposits Federal Reserve Bank of St. Louis l I n 12 8 | ' j * T. - U .. ------------------- r r *35.81i 1— 5 ------ -- \2 ! • \ IO W A L 24V/T 35.S 7 4 ^ , !---------------^ v 2 c 1 I 'iMissouRiS0.5 J ------------------ ------- C A LlFO R fjlA K\ f 1 J NEBRASKA COLORADO I 6 j 33.0*1 615 I 18 .7 I I i2 4 5 2 3 i i i \ 5 2 U 11 i SOUTH D A K O T A _____________ V W I S C . L i 1 * *,/ \ W YOM ING V io.o;\ 4 0 . 5 \ M1NNESOTV ^ y ^ w n P \ f o 23 0-9 Keys for Forecasting Wholesale Prices C han g es in the over-all level of prices and changes in the price structure influence the economy at every level. Com m odities flow through a stream of transactions, each of w hich involves determ ination of a price. The economic forecaster is interested in price m easures at the various transactions levels as w ell as in p articular economic sectors. This article discusses m easures of prices at the production level. A subsequent article in this series w ill consider m easures of prices at the retail level an d prices of goods and services m aking up gross national product. W H O L E S A L E PRICE I ND EX The most com prehensive m easure of the g eneral com modity price level is the monthly index of w ho lesale prices, compiled by the Bureau of Labor Statistics. The W holesale Price Index is designed to m easure changes in prices of all commodities sold in the country's prim ary m arkets. Thus it focuses on prices paid by the first large-volum e class of buyer. The index is not designed to m easure prices received by w ho lesalers, jobbers, or distributors. The official BLS index of w ho lesale prices is a v a ila b le back to 1890. Since that time there has been no change in the basic purpose of the index, w hich is to m easure price changes on prim ary m arkets. There have been, how ever, a number of m odifications in the calculation methods and the scope of the index. C O V ER A G E Prices are currently collected for more than 2 ,0 0 0 commodities, ranging from raw m aterials to finished products. Precise specifications are draw n for each comm odity. Insofar as possible, the index m easures price changes other than those occasioned by m odifications in quality, quantity, or in terms of sale. The prices relate to a p articular INDEX O F W HOLESALE PRICES 1 9 5 7 -1 9 5 9 = 1 0 0 (Monthly A verage) 1 9 5 7 -1 9 5 9 = 1 0 0 day of the month, usually Tuesday of the w eek containing the 15th. Com m odities are selected on the basis of an an aly sis of each industry and its im portant products. A ll must be established products, in both the technical and the m arket sense. COM PONEN T INDEXES Because of the breadth of the index, it is possible to publish a large number of com ponent price series. The com prehensive monthly index is subdivided into two m ain categories: (1) farm products and processed foods, with a sep arate index for each; and (2) all commodities other than farm products and foods. The latter category is further subdivided into 13 m ajor product industry groups. Separate indexes are also computed for numerous subgroups, product classes, and in d ivid u al prod ucts. W hen disclosure is not involved, the unit prices of individual commodities are also published. Three series of special purpose indexes are prepared by regrouping commodities included in the com prehensive index. One set relates to additional commodity groupings, such as "all foods" and "construction m aterials." The second set, w hich breaks all prices down by stage of pro cessing, has three m ain categories, subdivided according to end-use and durability, as illustrated in the second, third, and fourth charts on this page. The third set, w hich groups all prices by durability of the product, is a v a ila b le for all commodities, for total m anufactures (illustrated in the fifth chart), and for total raw or slightly processed goods. The indexes for the m ajor commodity groups and sub groups are a v a ila b le from 1890; those on product classes, from 1947 fo rw ard . Indexes for two special commodity groups—all foods and construction m aterials—have been extended back to 1926. Indexes for the other special com modity groups, for the vario us stages of production, and for d urable and nondurable goods are a v a ila b le from 1947. CONSTRUCTION O F THE INDEX The in d ivid u al price series are combined into indexes by a method of "w eighting ." The w eights represent the relative im portance in terms of v alu e of sales of the in d ivid u al series to the total valu e of all commodities flow ing into prim ary m arkets during a selected period. Each series is assigned its own w eight plus the w eight of commodities it w a s selected to represent. Effective with the Ja n u a ry 1961 indexes, the w eights are based on 1958 sales valu es, adjusted for price changes between 1958 and December 1960. The w eighting structure is revised periodically w hen data from the industrial censuses become a v a ila b le . The current base period, 1 957-5 9 = 1 0 0 , w a s instituted with the Ja n u a ry 1962 d ata. The index is not adjusted for seasonal variatio n. THE W EEKLY INDEX A s an interim m easure, a w eekly w holesale price index is calculated as an estim ated per centage change from the latest monthly com prehensive index and converted to index form for publication. The w eekly index is based on Tuesday prices of app ro xim ately 200 of the commodities included in the monthly index and on estimated prices of the others. Component indexes are published w eekly for farm products, processed foods, and industrial commodities. The w eekly indexes are not m ain tained as a continuous series. M AJOR CO M M O DITY GRO UPS Industrials All Commodities Farm Products and Processed Foods BY STAGE OF P R O C ESSIN G ......... -------- * Finished Goods _______ Interm ediate M aterials Crude M aterials CO N SU M ER FIN ISH ED G O O D S E X CLU D IN G FO O D PRODUCER FIN ISHED G O O D S M anufacturing N onm anufacturing TOTAL M AN UFACTURES Durable ---N ondurable On June 4, 1963, the President signed into law a piece o f legislation which marked another milestone in the long history of silver as a monetary metal. Since 1900, when the Gold Reserve A ct placed the United States officially on the gold standard, silver has played a secondary role in the monetary system. It has been used in silver dollars and subsidiary coin and as backing for silver certificates. T od a y less than 3 % o f the United States money stock (coins, paper m oney, and demand deposits adju sted) rests a floor under the price o f domestically mined silver since 1934. T he Silver Purchase A ct o f 1934, as amended in 1946, required the T reasury to purchase newly mined dom estic silver at 9 0 ^ cents per ounce and permitted the purchase o f foreign silver at the world market price and the sale of free silver from T reasury stocks at a price o f not less than 9 0 ^ cents per ounce, plus handling charges. T he rise in the price o f silver above the T reasu ry’s buying price in on a silver base. T he bulk of this is represented by some $2 billion o f silver certificates which are com 1959 made the purchase provision of the old legisla tion inoperative, and the sales provision has been in operative since N ovem ber 1961 when the President posed almost entirely o f $1 bills. W h ile silver is instructed the Secretary of the Treasury to make no relatively insignificant quantitatively, it provides the basis for the “ convenience” m oney— the $1, 50-cent, sales o f silver at less than its monetary value o f $1.29 per ounce. T he new law, therefore, removes from 25-cent, and 10-cent denominations— without which the books a piece of legislation rendered obsolete by no m onetary system could function smoothly. market developments over the past few years. A s a corollary to the repeal of silver purchase law's, the new PROVISION S OF THE ACT T he new legislation p ro vides for the replacement o f silver certificates by per mitting the Federal Reserve to issue notes in $1 and $2 denominations. The silver certificates presumably will be retired only as fast as their silver backing is needed for coinage. Therefore, the transition from silver certificates to Federal Reserve notes can be expected to take place gradually over a period of many years. T o insure the maintenance o f adequate silver back ing during the transition period, the new law requires the Treasury to hold an amount of silver equal in m onetary value ($1.2929 per ou n ce) to the face amount of all silver certificates outstanding. This provision enables the holders o f silver certificates to law also revokes the 50% transfer tax on silver bul lion which was designed to discourage speculation. NEED FOR THE NEW LEGISLATION T he changes which the new law makes in the role of silver in the monetary system and in the T reasu ry’s m ethods o f dealing in the metal were dictated by changed con d i tions in the silver market that have been in process for some time. D uring the decade o f the 1950’s, the free w orld ’s consum ption o f silver consistently e x ceeded its production and the N ew Y o rk price for silver fluctuated near the T reasu ry’s selling price o f 9 \ y2 cents per ounce most of the time. In early 1959 the market price m oved above the T reasu ry’s selling price for the first time in a generation, and users of exchange them for silver dollars or, at the option of silver turned to the T reasury as a source o f supply. the Secretary of the T reasury, for an equivalent A s market prices continued upward, Treasury sales amount of silver bullion. o f free silver became progressively heavier and free T he law also restricts the use o f “ free” silver, or silver stocks were reduced from 202 million ounces silver which the Treasury holds in excess o f the at the beginning of 1959 to about 25 million ounces amount necessary to redeem outstanding certificates. when the President ordered the Treasury to stop sales It forbids T reasury sales o f free silver in the open in late N ovem ber 1961. market at a price low er than its m onetary value W ith the suspension of sales, the price o f silver in ($1.2929 per ounce ) but allows sales at a lesser price the N ew Y ork market rose immediately to about to Governm ent agencies and departments. $1.00 per ounce and by the end o f the year reached It envis ages the eventual use o f most free silver for the a level o f $1.05 per ounce. F o r the first seven coinage of silver dollars and subsidiary coins. months of 1962 the price fluctuated between $1.01 In addition, the new law repeals the silver purchase and $1.05, but from the beginning o f A ugust through legislation under which the Treasury has maintained m id-O ctober, the price rose rapidly to about $1.20 Digitized 8for FRASER where it stabilized for the rest of the year. Since the first o f 1963 the price has taken another sizable jum p to a level o f about $1.28, which is only slightly below silver’s m onetary value o f $1.29. In the absence of Congressional action, the price of silver wrould probably have continued to rise due to steadily increasing w orld consumption o f silver, primarily for use in industry and the arts. In ad dition, the Treasury w ould soon have found it neces sary to enter the market to purchase silver for its added some $146 m illion per year to the cou ntry’s balance o f payments deficit. T he replacement o f $1 silver certificates with F ed eral R eserve notes, as provided for in the new law. will make available to the T reasury about 1.3 billion ounces o f silver when the whole operation is com pleted. A ccord in g to T reasury estimates, this amount plus existing free silver and the amount freed by retirement of higher denomination silver certificates, will meet coinage needs for the next 10 to 20 years. coinage needs, which currently amount to about 75 million ounces per year, and to meet the nation’s grow in g requirements for $1 certificates. EFFECT ON VALUE O F OUR CU RREN CY T he removal of silver backing from part o f our currency will not Since the President’ s executive order o f N ovem ber 1961, the Treasury has been retiring silver certificates for many years the value o f silver certificates has not in denominations of $5 and above. T his m ove will eventually free some 285 million ounces o f silver, m aking it available for coinage. A ccord in g to recent testimony by the Secretary o f the Treasury before the Committee on Banking and Currency, this silver, plus the T reasu ry’s free stock o f about 30 million ounces, w ould have been exhausted sometime in 1965 had the new law not been enacted. Thereafter, silver for coinage purposes would have been available only through the w orld market at wyorld market prices. Since domestic production of silver norm ally falls far short o f dom estic industrial consumption, all purchases w ould have had to be made abroad. cause any change in the value o f our m oney because depended on the silver held as backing. E xcept for a brief period in late 1919 and early 1920, a dollar has always been w orth m ore than the silver behind it. T his is still true, even after the rapid increase in the price of silver which has taken place since N ovem ber 1961. A t the present price o f about $1.28 per ounce, the 7 7 /1 0 0 o f an ounce o f silver behind a $1 silver certificate is wrorth only 98^4 cents. A t the trough o f the Great Depression in 1933, the com m ercial price o f bar silver in N ew Y o rk averaged about 35 cents an ounce and the backing behind a $1 silver certificate was worth only 27 cents. Therefore, the value of these certificates and the value o f all our currency A s has depended on public confidence in the financial suming prices o f $1.29 per ounce and yearly require ments of 75 m illion ounces for coinage and 38 million and fiscal integrity o f the Federal Government. T he replacement of silver certificates wTith Federal R e ounces for backing for $1 certificates, this would have serve notes will in no way debase our currency. The greater use of silver for coinage purposes has accounted for most of the increased consumption of silver during recent years. Total Treasury silver stocks continued to fa ll in 1962 but free stocks rose due to the retirem ent of high denom ination certificates. F or TREASURY SILVER STO CK U. S. SILVER CONSUM PTION Mil. Fine O z. Mil. Fine O z. (End of Y ear) Mil. Fine Ox. Silver C ertificates C oinage Industry and Arts 200 150 100 50 '50 '52 '54 '56 '58 '60 '62 9 rency Committee estimated that the total drain probably will not exceed $35 to $40 million per year. THE NEW PRICE CEILIN G FOR SILVER T he require ment to redeem silver certificates, on demand, in silver dollars or equivalent silver bullion puts an effective lid on the market price of silver at $1.29 an ounce so long as existing Treasury stocks are available for such redemption. The maintenance o f this ceiling, however, could lead to heavy losses o f T reasury silver which otherwise could be used for coinage. If there were no ceiling and if market forces should push the price o f silver above $1.38 per ounce, it would then becom e profitable to melt down smaller silver coin, and the continued circulation o f dimes, quarters, and half dollars wrould be threatened. T he only solution w’ould then be to reduce the silver co n tent of the coins to make them less valuable as sources of bullion. A s a matter o f fact, such a solution was adopted in 1853, the year in which the present system of subsidiary coinage was established. In that year, soaring silver prices led to a general disappearance of small coins, with accom panying serious in con venience in the nation’s business comm unity. PERM ANENCY OF THE PRESENT SOLUTION T he permanency o f the solution set forth in the new legis lation depends, of course, on the conditions o f demand and supply in the silver market. Should market forces put strong upward pressure on silver prices Silver consumption has exceeded production for years but the price rose only after the Treasury suspended sales in late 1961. many years most o f our currency has been in the form o f Federal Reserve notes and these have always been as readily acceptable to the public as silver certificates. EFFECT ON FREE GOLD Since Federal R eserve notes must be backed 2 5 % by gold, the substitution o f F ed eral R eserve notes for silver certificates will result in and consequent large-scale redemptions rapidly de plete Treasury stocks, C ongress might be forced to reduce the silver content o f subsidiary coin fairly soon. If, on the other hand, the price o f silver stabilizes around current levels, the recent legislation might provide an effective solution to the silver problem for many years to com e. In the long run, there is some chance that recent high prices will stimulate greater production, and on the demand side the high prices are likely to stimulate greater utilization o f a small reduction of our free gold, or that part of our substitutes. F or the shorter run, however, it appears certain gold stock not required as backing for Federal R e that demand will continue to outpace additions to new serve note and deposit liabilities. output. Since a p p roxi Thus, significant price rises can be avoided mately $2 billion of silver certificates are currently only to the extent that unused supplies are either outstanding, the shift will ultimately involve a re thrown on the market or allowed to diminish market duction in free gold o f about $500 million. demand. In recent months, price increases have been The shift will take place gradually, how ever, and tem porarily slowed dow n by sizable dishoardings of will not reduce free gold by that amount immediately. Current Treasury plans call for the retirement o f only policy, which amounts to a significant dim inution in about $100 million of silver certificates a year, the demand since it removes the necessity o f T reasury amount necessary to meet coinage needs. purchases, can be expected to have a larger effect in T he result Chinese and M exican silver. T he new T reasury ing drain on free gold might accordingly amount to the same direction. as little as $25 million per year. Secretary Dillon hold the line on prices long enough to allowr e x in his recent testimony before the Banking and C ur panded output to match the pace of increased demand. Digitized for 10FRASER T he new policy is designed to THE FIFTH DISTRICT Fifth District business conditions have maintained increases in m anufacturers’ new orders, backlogs, and a gradually upward course with m ost indicators, both shipments accompanied by small declines in inven tories also suggest continued strength. Steel and a general and specific, providing evidence o f im prove ment. Favorable developments have continued to few other industries, such as those m entioned paren dominate the few statistical series that are available weekly. Thus, insured unemployment, reflecting thetically above, may well be exceptions to this gen eralization. But otherwise, if any significant weak broad coverage of the District econom y, has continued to decline at a distinctly better than seasonal rate. nesses are developing in the current District situation, Department store sales have been im proving gradually since A pril, when a rather sharp decline occurred. A nd bituminous coal production and shipments have maintained good levels. Other statistics also show that recent gains are probably firm ly based. Seasonally adjusted n on farm employm ent rose slightly in M ay as a result of a modest amount o f new strength in the nonm anu facturing sector. A s has rather frequently been the case, the principal gains occurred in services and service-type enterprises such as those engaged in they remain effectively camouflaged. SUMMER AND THE OPEN ROAD A bout this time of year residents of the Fifth District, along with people in other parts of the country, become unusually rest less, in some cases even adventurous. T he symptoms spread like a virus, eventually to epidemic p rop or tions. T he ailment is sim ply the urge to “ get up and g o ,” and it defies any sort o f adjustm ent for seasonal variation. So, with at least as much effort as ever goes into a day’s wrork, they make elaborate prepara tions and spend their hard-earned vacation time going places and doing things. Increasingly, travelers turn transportation and related activities, financial and similar services, and government. construction em ploym ent The high level o f remained unchanged in M ay, while jobs declined slightly in trade and mining. Em ployment in nondurable goods industries THE INTERSTATE H IG H W A Y SYSTEM IN THE FIFTH DISTRICT re n mained unchanged in M ay, but jobs in factories making durable goods declined slightly. A lthough small reductions were typical o f manu - ' /U - - ) — / / / H ogfrsi ✓ town r \i 's' ~ / A i- facturing employment, these were generally offset by increases in the length of the workweek. Thus, sea sonally adjusted factory m an-hours in M ay rose 1 % in durables and nearly 2 % in nondurable goods in dustries. O nly three of the District’ s m ajor industry groups (electrical m achinery; stone, clay, and glass products; and paper) failed to contribute to the M ay rise. STRAWS IN THE WIND more general Sources o f statistical and inform ation possessing certain pre dictive implications have also remained quite steadily favorable. F or instance, a substantial rise in new construction contracts occurred in A pril. In the same month District building permits neared an alltime high and continued strong in M ay although at a somewhat low er level. O pen to traffic Recent reports o f modest Toll roads U nder construction D esignated routes Charleston to automobiles for freer expression o f the urge to go. Last year set a record for new passenger car registra tions in the Fifth District, exceeding the 1955 peak by 6 % . A n d 1963 registrations through the first four months were running fully 1 8 % ahead o f 1962. Clearly, a new era o f highway travel is in the making. are shared between Federal and state governm ents on a 50-50 basis. D uring 1962, the value of contracts awarded for highway construction involving n o F ed eral aid at all made up one-fourth o f the total in the District com pared with one-sixth for the country T his summer and in summers to com e motorists generally will travel under m ore favorable conditions as a whole. Since 1956 Federal receipts from taxes on fuels, lubricating oils, and m otor vehicle use have been ear than ever before. marked in a Federal highway trust fund, and all dis T he network o f interstate high ways being constructed as a cooperative Federal-state effort is the prim ary factor responsible for the change. A s of the first o f this year 1,200 H IG H W A Y STATUS miles o f interstate highways were open to traffic within the boundaries o f the Fifth District. W o rk had begun on an additional 1,000 miles, with 450 actually under construction and the rest in engineer ing or righ t-of-w ay stages. A nother 1,200 miles were under preliminary study or planned, bringing total designated system mileage within the District to 3,400. T he designated total includes about 350 miles in M aryland, 30 in the District of Columbia, 1,050 in V irginia, 530 in W est V irginia, 770 in N orth Carolina, and 680 in South Carolina. M aryland has made the greatest relative progress toward com pleting its share of the system with 4 4 % of the projected total open to traffic and another 4 8 % under way. bursements are from this source. D uring 1961 such Federal tax collections totaled $212 million in the Fifth District. H ighw ay contracts awarded in volving Federal funds totaled $257 million in 1961 9 0 % of which, about $231 million, will eventually be paid from the Federal trust fund. Contracts quali fying for Federal assistance in 1962 amounted to $259 million. A ccord in g to present schedules the entire system will be com pleted by 1972. ON THE SAME STREET O fficial statistics for 1961 report the total length o f highways, roads, and streets in the United States at 3,573,000 miles. T he D istrict’s share was 253,400 miles, 7 % of the national total. The interstate mileage by only 1 .3 % system will increase total in the District and 1 .1 % in the nation. N orth Carolina actually has nearly half its designated W ith these figures in mind, it is interesting to mileage open to traffic but only an additional 27 % speculate on the far-reaching effects o f these spacious under way. new arteries. South Carolina has about one-third in M any a m otorist has packed up his use and one-fifth in process; W est V irginia, one- car, left his own familiar neighborhood, stopped from fourth in use and one-fifth in p ro ce s s; and V irginia, time to time in unfamiliar but friendly environs one-fifth in use and tw o-fifths in process. hundreds or even thousands of miles from home, and A s the map on page 11 shows, the long sweep of gained from the experience a perhaps unspoken reali Interstate R oute 81, cutting diagonally across V irginia zation that, despite their many differences, A m ericans through the Shenandoah Valley, accounts for much in a very real sense all live on the same street. of the state’s relatively large share o f the D istrict’ s pletion o f the new highway network will give this total feeling a stronger foundation than it ever had before. system mileage. Writhin the District these C om M ost of T ourists are already plentiful enough to make many the District mileage represents highways fanning out inadequate stretches o f highway look like M ain Street to the South and W est from the population concentra on Bargain Day. tions along the upper East Coast. routes fall basically into three classifications. Consequently, the opening o f each These are crossed new section o f the interstate system is greeted with by a series o f arteries connecting the M idw est with enthusiasm by both local and long-distance travelers. M iddle and South Atlantic centers o f industry and T he econom ic implications o f these developm ents, trade. particularly with respect to the grow in g tourist trade, Finally, there are the shorter connecting roads will be the subject of “ T he Fifth D istrict” article in and bypasses in the vicinity of the larger cities. FIN A N CIAL FACTORS T he Federal G overnm ent’s share varies according to the type of highway. interstate system is being financed 9 0 % assistance and 1 0 % by the states. The by Federal W h ere Federal aid is available for construction or im provem ent of highways that are not part of the new system, costs Digitized for 12FRASER the A ugust issue. PH O TO CREDITS 8. Federal Reserve Bank of Richmond 11. M ap—Com mittee on Public A ffa irs of the Am erican Petroleum Institute.
@FedFRASER