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F E D E R A L R ESER VE B A N K OF R IC H M O N D



JULY

1964

The banking system of the United States has
undergone significant structural changes in the past
decade. The general direction of these changes has
been toward a reduction in the number of banks and
an increase in the number of branches, with a steady
grow th in total banking offices. In large measure,
these trends represent the effort of the banking com­
m unity to accommodate its facilities to such basic
economic and social forces as those associated with
population grow th and urbanization, rising personal
income, rapidly increasing business volume, the de­
velopment of new industries, and the relocation of
existing industries. These and other changes have
created a need for additional and different banking
services and for banking services in new areas.
T h e D istrict and the N ation G en erally, the sam e
forces m aking for change nationally have also ap­
peared in the Fifth D istrict. It is not surprising,
therefore, that changes in the banking structures of
Fifth D istrict states have closely paralleled those in
the rest of the nation. In m any respects the rate of
economic and social change in the D istrict in the
past ten years has exceeded that in the nation as a
whole. P er capita income has grown faster in the
District, risin g slowly and steadily toward the na­
tional average. In manufacturing, both the number
of establishments and total employees as well as pay­
rolls and value added by m anufacturing have risen
faster in the D istrict than in the nation. A t the
same time, employment and income in Fifth District
agriculture have declined in relative importance.
Since state law largely determines the banking
structure within a state, the w ay in which additional
banking services were provided in a particular state
depended greatly on the banking laws of that state.
The Fifth D istrict is a rem arkably good model of
the nation insofar as state banking legislation is con­
cerned, with some D istrict states imposing very few
restrictions on branching, one state prohibiting
branching entirely, and others falling somewhere be­
tween these extrem es. A ccordingly, some states
have experienced a rapid growth in branches, while
in others legal restrictions ruled out or lim ited this
method of providing additional facilities. Also, in

2


one Fifth District state bank holding companies are
an important element in banking structure.
W hile changes in D istrict banking structure in the
1954-1963 period generally followed national trends,
there have been some significant differences. Both
the D istrict and the nation have experienced a de­
cline in the number of banks, for exam ple, but the
rate of decline in the D istrict has increased while
that for the nation has fallen.
The number of new banks formed and the number
absorbed through m ergers and consolidations largely
determine the change in the total number of banks.
For the U nited States, new banks have been o rga­
nized at an accelerated rate in recent years, especially
in 1963, and the reduction in numbers resulting from
m ergers and consolidations has been somewhat
sm aller than in earlier years. In the District, on the
other hand, the rate of new bank formations has also
risen recently, but it has been more than offset by
consolidations and m ergers.
Thus, in the five years 1954-1958, the number of
banks in the U nited States fell by 4 8 0 ; in the next
five years there was a net increase of 69. In contrast,
the number of banks in the Fifth D istrict declined
by 50 in the 1954-1958 period, and by 109 in the
succeeding five years. The strikin g difference be­
tween national and D istrict experience in the latter
period, however, is greatly influenced by develop­
ments in 1963. The national increase of 143 in that
year more than offset small declines in the preceding
four years, w hile in the D istrict the decline continued
at about the same pace as in other recent years.
In both the D istrict and the nation the number
of branches and additional offices has grown at a
steadily increasing rate. T his has much more than
offset the decline in head offices, and the total number
of banking offices has grown rapidly. N ationally,
the average annual increase in branches and additional
offices was about 50% larger in the five years ending
with 1963 than in the im m ediately preceding five
years. In the Fifth D istrict, the average annual in­
crease in the most recent five-year period was more
than double that of the earlier period.
D istrict C h an ges A t the end of 1953 th ere w ere
1,047 banks and 645 branches in the Fifth District.

B y the end of 1963 the number of banks had fallen
to 888 and branches had increased to 1,681. The
number of state banks declined by 122 in the decade
and the number of national banks was reduced by
37, for a total reduction of 159. The result of these
changes was a growth of 877 in total banking offices.
The tempo of change in the D istrict has stepped
up significantly in recent years. From 1954 through
1961, the number of new banks organized each year
ranged between four and six. In 1962, ten were or­
ganized and in 1963 the number jumped to 19.
Between 1954 and 1961 the number of banks absorbed
through m erger or consolidation varied from nine to
25 per year, but it was 40 in 1962 and 42 in 1963.
Sim ilarly, the number of branches and additional
offices also grew at an increasing pace. M ergers
have contributed to this growth as most merged banks
have been converted into branches. But de novo
branching was a more important factor, especially
after 1960. Between 1954 and 1959 the number of
de novo branches established annually ranged between
51 and 76, but it soared to 137 in 1962 and 166 in
1963. The number of branches discontinued each
year has also risen in recent years, but this has not
been a very important factor.

fundamental changes in the economic environment.
In some instances, notably V irgin ia, the banking de­
velopments were significantly influenced by new
legislation.
North Carolina had the largest increase in banking
offices during the decade, with a net addition of 328.
It also showed the largest decrease in banks, how­
ever, as 74 were absorbed through m erger and only
four were new ly organized. The establishment of 355
de novo branches, conversion of 70 banks into
branches, and the discontinuance of 27 branches re­
sulted in a net increase in branches of 398.
Although V irgin ia had a sm aller net gain in bank­
ing offices than North Carolina, alterations in that
state’s banking structure were among the most
significant in the District. For exam ple, V irginia
had the largest number of new banks organized of
any D istrict state, with 24, and wras second only to
North C arolina in m ergers and consolidations, with
60. The increase of 282 in the number of branches
also w as second to North Carolina. This resulted
from the establishment of 232 de novo branches, con­
version of 57 banks into branches, and the discon­
tinuance of seven branches.
Changes in V irg in ia’s banking structure were
greatly influenced by banking legislation passed in
1962, which perm itted banks to acquire branches
anyw here in the state through the m erger process.
Prior to that, V irgin ia banks generally were per­
mitted to operate branches only within narrow ly re­
stricted geographical lim its. The most obvious result

C h an ges b y S ta te s T h ere w ere som e b an k in g
changes in all District states in the past decade, a l­
though the number and kinds of changes varied
greatly from state to state. For the most part,
changes w ithin p articular states were associated with

CH A N G ES IN NUMBER O F COM M ERCIAL BANKS AND BRANCHES
FIFTH DISTRICT*
1954-1963
1959

1954-1958

1960

1962

1961

1963

Change
1954-1963

All Com m ercial Banks
1,047

997

981

960

941

911

N ew banks organized

24

6

4

5

10

19

68

M ergers and absorptions

73

22

25

24

40

42

226

911

888

....

Num ber of b anks, beginning of period

V olun tary liquidations and suspensions

1

Net Chang e

-

....

....

....

997

N um ber of banks, end of period

981

960

941

___

50

-

16

-

21

-

19

1
-

30

-

23

-

159

Branches a n d A ddition al O ffices
Num ber of branches, beginning of period

645

996

1,085

1,207

1,319

1,483

____

De novo branches established

303

76

102

98

137

166

882

Banks converted into branches

63

21

25

23

38

40

210

Branches discontinued

15

8

5

9

11

8

996

1,085

1,207

1,319

1,483

1,681

____

Num ber of branches, end of period

351

+

301

+

O'
00

+

+

Net C hang e
C hang e in Banking O ffices

56

+

122

+

112

+

164

+

198

+ 1,036

73

+

101

+

93

+

134

+

175

+

877

* Including five W est Virgin ia counties w hich fa ll outside the Fifth District.




3

of the new law was a sharp jum p in the number of
m ergers and the emergence of several regional and
statewide branching system s. Of the 60 m ergers in­
volving V irgin ia banks in the decade ending De­
cember 1963, 33 occurred in the final two years, and
experience in the first half of 1964 indicates no re­
duction in the rate at which m ergers are occurring.
M aryland was third in terms of net increase in
banking offices in the decade. As in V irgin ia, the
rate of change increased greatly toward the end of
the period. Of 12 new banks formed in the decade
five were established in 1963, and of 48 m ergers con­
summated, 20 occurred in the final two years. More
than one third of the 153 de novo branches established
w ere formed in the final two years.
South Carolina was second only to V irgin ia in
the number of new banks formed during the period,
but ranked fourth in the number of m ergers effected.
The rate at which banks were organized did not
change m arkedly over the period, although the
average number organized per year wT higher in
as
the second half than in the first half of the decade.
In terms of m ergers and absorptions, however, the
experience of South C arolina was sim ilar to that of
the three states discussed earlier. Of the 29 m ergers
consummated, 15 occurred in the final three years
of the decade.
The number of banking offices in the D istrict of
Columbia increased by 19 in the decade. The net
change resulted from the establishment of three new
banks, the absorption of eight banks through m erger,
and an increase of 24 in the number of branches.
W est V irg in ia was the only D istrict state to show
no change in the number of banking offices in the
ten-year period. The seven new banks organized
were exactly offset by the absorption of seven banks
through m erger. W est V irgin ia law does not permit
the operation of branches.

Effects on D istrict Banking T h e s tru c tu ra l
changes described above resulted in most District
states in an increase in banking offices relative to the
population served and an increased concentration of
deposits and control over banking outlets. A s the
chart on page 5 shows, population per banking
office has declined in every D istrict state in the last
ten years in spite of substantial growth of population
in most of these states.
The D istrict of Columbia experienced the largest
decline in population per banking office, a drop of
3,254. T his was partly because of a growth in bank­
ing offices, but a decline in population w as also a
contributing factor. It should be noted, however,
that the D istrict of Columbia had one of the highest
figures throughout the period.
North C arolina and South Carolina had the largest
relative growth in banking offices among D istrict
states, and both experienced relatively large declines
in population per banking office. The drop of 3,200
in South Carolina w as second only to that in the
D istrict of Columbia, but the number of people per
bank was still above the Fifth D istrict average in
1963. North Carolina recorded a decline of 2,626,
and in 1963 had the sm allest number of people per
banking office of any District state.
In M aryland and V irgin ia, where population grew
relatively more rapidly, population per banking office
declined considerably less than in other D istrict
states. N evertheless, only North C arolina had fewer
people per banking office in 1963 than V irgin ia.
W est V irgin ia had the sm allest reduction in popu­
lation per banking office, in spite of a loss of popula­
tion during the period. T his w as because the num­
ber of banking offices remained unchanged.
Banking Concentration A no th er re su lt of the
changes in banking structure has been an increase

C H A N G E S IN THE N U M BER O F C O M M E R C IA L B A N K S A N D B R A N C H ES
*

FIFTH D ISTRICT STA TES
1 9 5 4 -1 9 6 3
D.

All commercial banks
Member banks
National
State
N onm ember banks

C.

Md.

Va.

-

5
4
2
2

-

36
19
12
7

-

36
20
10

-

10

-

1

-

17

-

16

Branches

+

24

+

187

+

+

19

+

151

+

246

* Including five counties w hich fa ll outside the Fifth District.


4


N. C.

S. C.

Total

12
2

- 159
66
— 37

-

70
20
15

-

+

1
2

-

3

-

5

-

2

-

29

+

1

-

50

-

10

-

93

-

282

Total banking offices

W. Va.*

___

+
....

398

+

145

+ 1,036

+

328

+

133

+

877

in concentration of control over banking outlets and
an increased concentration of deposits. In 1953,
about 20% of D istrict banks maintained branches,
with an average of 3.0 branches for each bank having
branches. In 1963, about 35% of the banks had
branches, and the average number of branches per
branch system was 5.4.
Branch banking appears to be more extensive in
M aryland and North C arolina than in other D istrict
states, although in recent years both South C arolina
and V irgin ia have had a substantial grow th in the
number of banks having branches. Because the
D istrict of Columbia is a sm all area entirely metro­
politan in character, branching and concentration
figures for that area are not comparable to those
for Fifth D istrict states.
In M aryland, over 43% of all commercial banks
operated branches in 1963, compared w ith about 21%
in 1953. Over the decade, the average number of
branches operated by branching banks rose from 4.1
to 6.3 and in 1963 more than two thirds of com­
m ercial banking offices were operated by five banks.
About one third of North Carolina banks operated
branches in 1953, and by 1963 more than one half
did so. D uring this period the average number of
branches per branch system rose from 3.5 to 8.1,
and five banks operated well over half of all offices
in 1963. North C arolina has more regional and
statew ide system s than other District states. A t the
end of 1963, for example, less than one third of all
branches were located in the head office city or
county. T his compares with about 40% in South
Carolina, almost 60% in M aryland, and 67% in
V irgin ia.
Less than 15% of South Carolina banks had
branches in 1953, but the number had risen to almost
37% by 1963. The number of offices per branch
system also increased, and by 1963 more than two
thirds of the banking offices in the state were
operated by five banks.
Although over 40% of V irgin ia banks had branches
in 1963, branch system s in V irgin ia were generally
sm aller than in the three states just mentioned. In
1963, for example, the average number of branches
in each branch system was 3.5, compared with an
average of 5.4 for all District states perm itting
branching, and the five largest branch system s ac­
counted for only about one third of the banking
offices in the state.
Accompanying the growth of branch banking was
an increased concentration of deposits in several Dis­
trict states. This was most pronounced in North
Carolina, where the percentage of total deposits held



POPULATION PER BAN KIN G OFFICE

District of Columbia
1954

RRRRRRRRRRRRRRRRRRRRR
RRRRRRRRRRRRRRRRRRRRI

1 6 K m ltR R R H R R K R IIIIK
9 3 X illV X IIIIH X X IIR K K IIIV I
Maryland

1954 rrrrrrrrrrrrrrrrrrrrrrrrrrrrri

16 M R R R R R R R R R R R
9 3 R R R R R R R R R R R 1!
Virginia

15 R R R R R R R R R R R R R
94 R R R R R R R R R R R R I
16 R R R R R R R R R R A
93 R R R R R R R R R R
West Virginia

15 R R R R R R R R R R R R R R R R R R
94 R R R R R R R R R R R R R R R R R
16 R R R R R R R R R R R R R R R R I
93 R R R R R R R R R R R R R R R R
North Carolina

15 R R R R R R R R R R R R R I
94 R R R R R R R R R R R R R
16 R R R R R R R R R R
93 R R R R R R R R R I
South Carolina

15 R R R R R R R R R R R R R R R R R
94 R R R R R R R R R R R R R R R R I
16 R R R R R R R R R R R R
93 R R R R R R R R R R R )
Fifth District

15 R R R R R R R R R R R R R R R
94 R R R R R R R R R R R R R R
16 R R R R R R R R R R R )
93 R R R R R R R R R R R
H

Equals

3 00

Persons

by the five largest banks rose from just under 42%
in 1954 to ju st over 63% in 1963. In the same
period, the share of total deposits held by the five
largest M aryland banks rose from about 44% to a l­
most 53% , and in V irgin ia it went from 25% to 34% .
Two D istrict states showed declines in deposit
concentration in the period. In South Carolina, the
share held by the five largest banks fell from 45% to
about 43% , and in W est V irgin ia it dropped from
27% to about 21% .
C onclusion In a w o rld of so cial and econom ic
change the survival of an institution m ay well de­
pend upon its ability to adapt to a new environment.
The m any changes in the commercial banking system
in recent years, of which structural changes are only
a part, reflect the efforts of the banking community
to meet challenges presented by a changing environ­
ment. In the process, there have been changes in
the very nature of commercial banking itself.
5

TOTAL LIQUID ASSETS
HELD BY THE PUBLIC

THE PUBLIC’S IQUID ASSETS

CO M PO SITIO N O F LIQUID ASSETS
Dem and Deposits Plus Currency

Time Deposits

U. S. Governm ent Savings Bonds

record to m liquid* j&sH
’
ll
v - .
gSlfis^tc., excejj| the l( j

U. S. Governm ent Securities*
(M aturing W ithin One Year)

Savings and Loan Shares

The public's holdings of liquid assets am ounted to n#arly^
$495 billion at the end of 1963. Since 1946, they hovt- in­
creased steadily, at an avera g e ann ual rate of beftier than
4% , compounded ann ually.

Postal Savings System

;>me

Per Cent of Total
V alued : a t p ar and including Federal agency
securities. Data before 1950 include securities
c alla b le w ithin one year.
The composition of liquid assets has undergone a significant
change since 1946. G e n erally, the public has shown a grow ing
propensity to hold less w ealth as money balances and more in
the form of interest-bearing liquid assets. Time and savings
deposits, including those at mutual savings banks, and savings
and loan shares h ave grown in relative im portance chiefly at
the expense of money balances and U. S. Savings Bonds.

RATIO O F LIQUID ASSETS TO G RO SS N A TIO N A L PRODUCT
(Based on Q u arterly Figures at Season ally Adjusted Annual Rates)
er Cent




RATIO O F CO M M ERCIAL BAN K DEPOSITS
PLUS CU RREN CY TO LIQUID ASSETS

A s a fraction of G N P, liquid assets holdings declined sharply
in the e arly p o stw ar period and rem ained on a gentle
do w n w ard trend through 1960. This trend has been re­
versed, at least tem porarily, in recent y ears. The rather
rhythmic movement in this series is due m ainly to cyclical
sw ings in GN P.

As a fraction of total liquid assets, commercial bank deposits and currency fell from 60% in 1947 to 53% in 1959.
This fraction has rem ained rem arkably stable, however,
since 1960.

PRIME C O M M ER C IA L PAPER*

Commercial paper, defined to include what the
Federal Reserve Bulletin calls “commercial and
finance company paper,” means short-term prom is­
sory notes which some large business companies sell
at a discount to dealers or institutional investors to
raise cash. Since the notes are usually unsecured
and bear only the name of the borrower, only large
corporations w ith impeccable credit ratings are able
to obtain funds in this w ay. Notes are issued in
even denominations ranging upward from $5,000.
M aturities commonly v ary from four to six months
on paper placed through dealers and from 30 to 270
days or longer on paper placed directly with investors.
Since about 1920, when the General Motors A c­
ceptance Corporation pioneered in placing paper di­
rectly, commercial paper has been distinguished as
either dealer paper or directly placed paper. The
first type is sold by borrowers to dealers, who in turn
sell it to investors in the market. D irectly placed
paper, on the other hand, is sold by the borrower to
the lender directly, by-passing the dealer. Due to
the necessity of m aintaining a trained staff and a
complex network of contacts, only about 18 large
finance companies placed paper directly in 1963.
H istory of Commercial Paper T h e h isto ry and
development of commercial paper have been almost
exclusively American. In its early use, commercial
paper was issued by a buyer to a manufacturer or
seller in payment for a specific shipment of goods.
The recipient usually endorsed the note and sold it
either to his own bank or to a dealer specializing in
such paper. E arly notes carried the names of both
maker and payee and were issued in odd denomina­
tions, according to the value of the transactions.
In the 1920’s, borrowers included manufacturers,
wholesalers, and retailers in a wide variety of product
lines. V irtu ally all paper was handled by dealers,
and banks held by far the largest portion of the
amount outstanding. In our system composed of
thousands of banks, and especially before the Federal
Reserve System w as established in 1914, the com:;:This a rticle relies h ea vily on the follow ing excellent
w o rk : R ichard T. Selden, Trends and Cycles in the
Commercial Paper Market, N ational B ureau of Eco­
nomic Research, 1963.
Digitized for 8
FRASER


m ercial paper m arket allowed banks, in effect, to
make loans outside their local m arket areas. Thus,
commercial paper provided a means whereby idle
bank funds could be shifted from one part of the
country to another.
Although no secondary m arket existed, banks re­
garded commercial paper as highly liquid because
the impersonal nature of the loan usually meant
there would be no requests for extensions or re­
newals. Moreover, paper provided banks with an
opportunity to diversify portfolios at rates of interest
which compared favorably with yields on alterna­
tive investments. Since borrowers were subjected to
thorough credit investigations and were required by
dealers to m aintain open credit lines with banks equal
to the amount of paper outstanding at all times,
commercial paper proved a relatively safe invest­
ment. As an additional advantage after 1914, paper
defined as “eligible” by the Federal Reserve could
be rediscounted when banks needed tem porary funds.
Although the volume of directly placed paper in­
creased during the 1920's, the total volume of com­
mercial paper outstanding declined. One factor
contributing to this decline was the great bull market
in stocks in that period. R isin g stock prices ap­
parently induced m any borrowers to meet their needs
for w orking capital by floating new stock issues.
Between 1929 and 1933, when the demand for short­
term business credit was drastically curtailed as the
economy plunged into depression, the outstanding
volume of commercial paper fell off precipitously.
From 1933 to the outbreak of W orld W ar II the
amount outstanding increased rapidly, reflecting gen­
eral economic improvement, the grow ing role of con­
sum er credit in financing consumer durables, and the
rapid rise of finance companies. The dearth of con­
sum er goods during W orld W ar II produced a
decline in outstandings from 1940 through 1945.
In the postwar period, however, the amount out­
standing rose from $178 million in Jan u ary 1946 to
$7,765 m illion in Ja n u ary 1964. Despite this growth,
commercial paper continues to comprise only a rel­
atively sm all segment of total money m arket paper.
Direct Placements T he rap id g ro w th of d ire c tly
placed paper justifies separate treatm ent of this sector

of the commercial paper m arket. General Motors
Acceptance Corporation began placing paper directly
in 1920, and in 1934 several other large finance com­
panies adopted the practice. From the beginning,
the amount of direct paper outstanding grew im­
pressively. There was a sharp, though tem porary,
decline during the Great Depression, but by 1935
direct paper outstanding equaled the volume of dealer
paper. D uring W orld W a r II direct placement
ceased entirely but wT resumed shortly after the end
as
of hostilities. The volume of directly placed paper
grew rapidly and in most recent years has exceeded
by a substantial m argin the volume placed through
dealers.
Before W orld W a r II commercial banks were
reluctant to hold directly placed finance paper, p artly
because bankers tended to look askance at paper
which arose m ainly out of financing consumption
rather than production. T his reluctance has con­
tinued down to the present time but for a sub­
stantially different reason. In the postwar period
bankers themselves have entered the consumer credit
field, and some have hesitated to finance competitors
in this area. The large growth in alternative
secondary reserve assets, such as T reasury bills, has
also been a factor. A s a result, the great bulk of
direct paper is held outside the banking system and
chiefly by nonfinancial corporations.

dealer perm it closer scrutiny of the financial condi­
tion of borrowers. M oreover, the borrowers them­
selves are larger, better-known firms with higher
credit ratings. L iquidity has improved because direct
borrowers frequently agree to repurchase their notes
in case lenders should suddenly need cash. M a­
turities have become better suited to investor pur­
poses as direct borrowers have tailored terms to
coincide w ith investors’ needs for cash. To some
extent this practice has also been adopted by finance
companies which place their paper through dealers.
The cost of borrowing has been lowered as a result
of increased competition among dealers and also as
a result of declining interest rates during the Great
Depression. In the twenties dealer commissions
w ere usually a flat Y ^ o, regardless of m aturity.
This amounted to an annual cost of 1% on 3-month
paper. W hen short-term interest rates dropped

M a rk e t C h an ges P ra c tic es in the com m ercial
paper m arket today differ significantly from those
in the 1920’s. For one thing, the number of both
dealers and borrowers has declined sharply. T his has
been due m ainly to the emergence of large finance
companies which rely almost exclusively on the com­
m ercial paper m arket for their w orking capital.
M any of these companies place their paper directly,
w hile those which borrow chiefly through dealers
tend to dominate the dealer m arket. U nlike in­
dustrial and commercial companies, finance com­
panies that borrow through dealers are in the market
for large amounts on a more or less continuous basis.
Dealers have, therefore, found it more profitable to
work w ith these and have tended to drop borrowers
who seek funds only interm ittently. A s the number
of borrowers has declined, competition among dealers
has become more intense and attrition has taken
its toll.
The growth of finance companies has contributed
to im proving the quality and liquidity of commercial
paper, broadening the range of m aturities, and low er­
ing the cost of borrowing. The quality of dealer
paper has improved because the fewer borrowers per



9

below 1% in the thirties the commission was more
than half of the total borrowing cost. In the face of
this movement dealers abandoned the flat commission
and began to derive their compensation from the
spread between the buying and selling prices which
varied with conditions. For some years now the
minimum spread for the best paper has been % %
per annum, which, on 3-month paper, is only one
fourth of a flat *4% commission.
B o rro w ers T he n um ber of m an u factu rers, w h o le­
salers, and retailers borrowing in the commercial
paper m arket has decreased from about 2,250 in 1922
to about 280 in 1963. Firm s in these lines rely
heavily on bank credit for working capital and turn
to the commercial paper m arket for supplem entary
funds only in times of heavy seasonal or cyclical de­
mand. Most of their paper is placed through dealers.
B y contrast, the number of finance companies bor­
row ing in the commercial paper market has increased
from nine in 1920 to 137 in 1963. Although these
companies represent only 32% of all borrowers
in the m arket, they accounted for about 87% of
outstanding commercial paper at the end of 1960.
Today, there are three m ajor types of finance com­
panies— sales finance, personal loan, and business
finance companies. Of the three, sales finance com­
panies are the most important, from the standpoint
of both the number that borrow and the amount of
paper outstanding. In 1963, 74 such companies
borrowed in the commercial paper m arket. The 18
large firms which place paper directly accounted for
73% of all commercial paper outstanding.
Personal loan companies, business finance com­
panies, and the sm aller sales finance companies rely
p rim arily on bank credit to meet their short-term
needs and use the dealer paper m arket as a supple­
m entary source. N evertheless, they probably account
for the bulk of dealer paper outstanding. The large
sales finance companies, on the other hand, rely p ri­
m arily on commercial paper for short-term funds and
use banks as a sort of back stop.
A d v an tag es to B o rro w ers T he p rin cip al a d ­
vantage of commercial paper over bank credit is its
lower relative cost. Its total cost is generally below
the prime rate on bank loans, even after allow ing for
the dealer commission charge (o r the adm inistrative
cost of direct placem ent) and the cost of m aintaining
open credit lines as insurance. From 1960 through
1962, the cost advantage of commercial paper has
been particularly pronounced and explains in large
part the sharp increase in commercial paper out­
standing which occurred during the period.
Evidence of borrower sensitivity to cost differ­
Digitized for10
FRASER


entials is provided in the chart on page 9 which
showrs the behavior of dealer paper over the course
of the business cycle. Dealer paper norm ally de­
clines during the expansion phase of the cycle and
expands sharply during the recession phase. This is
due m ainly to the fact that bank rates are sticky
while commercial paper rates are flexible, closely
paralleling the fluctuations in T reasu ry bill rates.
As rates fall during recession periods, borrowing
through the commercial paper m arket becomes rela­
tively cheaper and borrowers shift from bank loans
to paper. The converse tends to occur during ex ­
pansion periods.
A factor on the supply side is also important in
explaining the cyclical behavior of dealer paper.
Banks still hold a sizable fraction of dealer paper,
and during recessions when customer loan demand
slackens, they become more w illing to supply funds
to the dealer paper m arket. In the expansion phase,
on the other hand, banks prefer to extend customer
loans and, therefore, buy less dealer paper than
formerly.
L en d ers T h e m ost s trik in g ch an ge in the lender
side of the commercial paper m arket since the 1920’s
has been a substantial increase in the number of non­
bank investors and an accom panying decline in the
role of banks. T his trend has been especially pro­
nounced in the postwar period. Although banks hold
more paper now' than ever before, their share of the
total m arket has been drastically reduced.
The most important new lenders in the m arket are
the nonfinancial corporations, which have gone
heavily into commercial paper for several reasons.
In the 1930’s they were greatly attracted to com­
mercial paper when banking legislation forbade the
paym ent of interest on demand deposits. Corpora­
tions found a ready substitute for demand deposits
in direct paper which finance companies would tailor
to m ature on dates corresponding with corporate cash
needs. In the postwar period risin g interest rates
have induced corporate treasurers to look intensively
for appropriate short-term investments. W hile short­
term Government securities, especially T reasury
bills, are the most popular means of employing
tem porary cash funds, commercial paper offers a
greater yield for only a small additional risk. Cor­
porations are increasing their commercial paper hold­
ings and presently hold over half of the paper that
is directly placed.
In addition to banks and nonfinancial corporations,
trust funds, college endowment funds, and insurance
companies also find commercial paper an attrac­
tive investment.

THE FIFTH DISTRICT
Despite some uncertainties, Fifth D istrict business
appears to have made the transition from spring to
sum mer w ith little if any loss of momentum. The
evidence is somewhat more m ixed than a month or
so ago, but this m ay be due to some extent to random
variations or mere statistical aberrations. Such in­
consistencies, which m ay arise in any data series,
serve as constant reminders that business analysis is
far from an exact science. Even without such com­
plications, when an indicator turns downward it takes
some time to ascertain whether or not it has passed
a true peak.
Questions of this kind affect the interpretation of
recent declines in some m ajor D istrict indicators.
The behavior of seasonally adjusted bank debits is
often erratic, and the 6% drop that occurred in M ay
after a record high in A pril could be largely a re­
flection of random influences. Some man-hours and
employment series displayed weakness in A pril and
M ay, but chiefly in the form of less-than-seasonal in­
creases. Thus, on a seasonally adjusted basis, total
nonfarm employment declined in A pril and em ploy­
ment in durable goods m anufacturing, mining, and
contract construction fell in M ay. Factory manhours data for the latter month also showed some
weakness in textiles, fabricated metals, paper prod­
ucts, electrical machinery, and stone, clay, and glass.
Despite these declines, total factory man-hours,
seasonally adjusted, rose 0.4% in M ay and total non­
farm employment, on the same basis, also recorded
a slight increase. M an-hours gains were larger in
the D istrict’s durable goods industries than in non­
durables, with p rim ary metals, lumber, furniture,
and transportation showing notable strength. Among
the D istrict’s nondurables industries, substantial in­
creases were scored in foods, tobacco products, ap­
parel, and chemicals. Except for the hesitation in
A pril, District nonfarm employment has risen more
than seasonally every month since last September.
Fast Pace in Furniture S e a so n a lly ad ju ste d fu r­
niture factory man-hours rose sharply in M ay and
were just a hair below the all-tim e high set in M arch
of this year. Most of the industry’s indicators con­
tinue to show strength with gains over last year in
the neighborhood of 15%. Seasonally adjusted sales



of furniture and home furnishings retail stores na­
tionally declined slightly in A pril from a record level
of $711 million in M arch. The M ay figure is not
yet available, but there is some evidence of renewed
gains. Cum ulative for the year to date, these sales
are running 16% above 1963 and 34% ahead of
1961. Population changes and high-level construc­
tion activity are basic factors in the recent surge of
furniture demand and these factors continue to augur
well for the industry’s near-term future.
Perspective on Furniture District furniture manu­
facturers have been riding the crest of the current
business expansion. The grow ing teen-age and
young m arried population has been an important
factor in the present wave of residential building, and
new homes almost alw ays call for at least some new
furniture. Young folks increasingly display firm,
well-defined interests in furniture. Older couples
are also' moving to new homes, frequently apartm ents,
and in the process often brighten their new surround­
ings with new furniture. W ith the current fast pace
in new construction extending to business structures,
public facilities, and institutions such as schools, hos­
pitals, and churches, prosperity in the furniture in­
dustry seems solidly based indeed.
The statistical indicators reflect this strength. Dis­
trict furniture employment last year averaged 73,000,
almost one fifth of the national total. B y A pril
this year D istrict furniture jobs had increased to
75,800, up 12,800 since F eb ruary 1961. Furniture
employment has been risin g about twice as fast in
the D istrict as in most other parts of the country.
Such gains in employment are especially impressive
in a m ature industry and in a period of risin g ef­
ficiency. N ationally over the past three years, furni­
ture industry man-hours have increased about one
fifth compared to a one-third rise in output as m eas­
ured by the furniture and fixtures component of the
Industrial Production Index. Prices rose in 1961,
1962, and 1963 but have remained stable so far this
year. W holesale prices are now about 2.4% higher
than in early 1961 on household furniture and 1.5%
higher on commercial furniture.
Labor Markets Im prove D istrict labor m arket
conditions continue the steadily im proving trend
11

that began in 1961. In A pril, unemployment in
the Fifth D istrict (excluding the D istrict of Co­
lum bia) had declined to 259,700, 4.3% of the labor
force. The national rate w as exactly one percentage
point higher. R ates among the five states varied
considerably. M arylan d ’s and South C arolina’s,
each 4 .0 % , and V irg in ia’s, 3.1% , wrere below
the D istrict average. North Carolina equaled the
D istrict rate. W est V irgin ia's 8.2% exceeded the
national as well as the D istrict figure.
The need for seasonal adjustm ent, not yet available
for District labor force data, is quite apparent in the
accom panying charts. These charts show quarterly
changes in employment and unemployment from 1960
through the first quarter of 1964 for the nation and
the D istrict. For purposes of comparison, data are
also shown for the states that m ark extrem es of
variation within the District. Despite sharp seasonal
fluctuations, the trends in these series over the four
years are clearly apparent. D istrict employment
rose in A pril to 5,832,000, nearly 96% of the labor
force. A pril employment w as 1.7% higher this year
than in 1963 and 6.6% greater than in the same
month of 1961. The A pril unemployment rate was
4.3% this year, down from 6.6% in 1961, 4.8% in
1962, and 4.5% in 1963.
M arylan d ’s growth, from 1,050,000 jobs in A pril

12


1961 to nearly 1,150,000 in the same month this year,
a gain of 9.5% , w as the fastest among District states.
A ll m ajor sectors of employment increased except
mining, w ith the sharpest gains occurring in govern­
ment, services, and construction.
W est V irginia, on the other hand, continued to
experience slow contraction in its job m arkets. Em­
ployment decreased from 542,100 in A pril 1961 to
539,500 in the same month this year. Most of the
lost jobs w ere in m ining, but sm all reductions also
occurred in tr a d e ; in transportation, communication,
and public u tilitie s; and in finance, insurance, and
real estate enterprises. Contract construction employ­
ment, however, rose 25% over the three-year period,
and jobs in durable goods m anufacturing increased
nearly 10%.
Employment and unemployment would norm ally
be expected to trend in opposite directions and this
has been the case in all D istrict states except W est
V irgin ia, where the labor force declined. The M oun­
tain S tate’s labor force numbered 629,500 in A pril
1961 but only 588,800 in the same month this year,
a drop of 40,700 or 6.5% . The employed segment
of the W est V irgin ia labor force has changed only
slightly in the past three years, but the number of
unemployed has dropped to alxmt half its pre­
vious m agnitude.