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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.