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FEDERAL



R E S E R VE

BANK

OF

RICHMOND

MARCH

1966

The Taxation of Capital
Most questions of tax policy are controversial but
few have stimulated such heated or prolonged argu­
ment as the question of appropriate treatment of
capital gains and losses. Debate on the problem has
been going on for the past 52 years, since the ratifica­
tion of the Sixteenth (Incom e T a x ) Amendment,
and the end of the discussion is not in sight. The
present Federal capital gains tax is criticized both
as a severe impediment to the free workings of capital
markets and as a flagrant tax loophole. The matter
of proper treatment remains a dilemma because it
presents an array of unresolved conflicts in and
among concepts of income, equity considerations,
revenue needs, administrative requirements, the de­
sire to avoid harmful effects upon markets for capital
assets and investment incentives, and various other
objectives of taxation.
This article reviews the existing system of capital
gains taxation and discusses some of the current
problems.

the sale of such assets is capital gain. Most gains
made in this country today arise from sales of co r­
porate common stocks. Gains on the sale of real
estate run a poor second, and gains on other property
are of relatively minor importance.
Capital gains are distributed in a highly progres­
sive fashion among income groups. For those in
the top brackets, net gains constitute a major source
of income, even though total gains are a relatively
small fraction of total personal income for the entire
population. By contrast, net losses are concentrated
heavily in the middle-income groups.

asset.
In practice, the distinction between capital gains
and income is not an easy one to draw. The legal
definition of capital assets is determined by Con­
gress and the Courts. A t any given time, it rep­
resents a compromise between theoretical exactness
and the vagaries which inevitably are present in real

Background of the Tax The capital gains tax
is a special form of Federal income taxation. During
the first four years of the Federal tax, 1913-1916,
no legal distinction was made between capital gains
and ordinary income. This policy drew only limited
criticism, as income tax rates were quite low, even
for those in the highest income brackets. In 1917,
income tax rates soared and pressure began to build
for special consideration for gains. Four years later,
the law was changed to grant special treatment to
capital gains of individuals but not those of corpora­
tions. The Revenue A ct of 1921 defined capital
assets as property acquired and held by the individual
taxpayer, for a period of more than two years, for
profit or investment whether or not in connection
with his trade or business. Excepted from this basic
definition was property held for the personal use of
the taxpayer or his family and stock-in-trade or other
property of a kind that would properly be included
in the inventory of the taxpayer if on hand at the
close of the taxable year. The A ct provided that
gains from the sales.of capital assets should be taxed
at a rate not to exceed 12.5%, while losses from sales

world situations.

of such assets could be offset fully against all income.

Basic Facts A capital asset may be defined gen ­
erally as any asset or property held for the further
production of wealth or as a source of income. A
capital gain (or loss) is realized when such an asset
is sold at a price higher (or lower) than was paid
for it. The gain which accrues from the sale of the
source of income may be distinguished, conceptually
at least, from the flow of income arising from the

Such definitions can never be

clear-cut and always embody numerous specific ex­

Special tax treatment for gains was not granted to

ceptions.

corporations until 1942.

The Revenue A ct of that

Generally, however, land, buildings, manufacturers’

year, which provided the basis of the current system,

equipment, stocks, bonds, and like assets, are classi­

gave corporations tax privileges equivalent to those

fied as capital assets and appreciation realized from

of individuals.

Digitized for 2
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Since 1921, Congress has made numerous modifi­
cations in both the definition of capital assets and
the approved treatment of gains. Limitations of
space preclude even a listing of the changes here. It
may be noted as a generalization that the changing
tax laws have been, in a sense, a series of semi­
controlled experiments, each of which has drawn
sharp criticism from one group or another.

into capital gains. “ Collapsible” corporations and
partnerships are perhaps the best known devices.

Underlying Principles In each revision of the
law, however, two broad principles have been fol­
lowed. First, only those gains actually realized on
sales of assets have been taxed, despite the fact that
it has long been argued by competent authorities that
taxing gains as they accrued would theoretically be
a more desirable system. Second, capital gains con­
sistently have been given preferential treatment rel­
ative to income from wages, salaries, and rents—
the “ ordinary” forms of income.
The “ realization principle” has been accepted be­
cause Congress has recognized that taxation on an
accrual basis would create an unreasonable, if not
impossible administrative burden. In attempting to
obtain accurate estimates of annual appreciation and
depreciation of assets such as houses, land, and
capital equipment, for example, the Federal Govern­
ment would be faced on a nationwide basis with all
of the problems that local governments currently con­
front in administering taxes on personal property.
Given acceptance of the realization criterion, equity
would seem to dictate that capital gains of indi­
viduals should be taxed at a lower rate than recurring
income. The tax on ordinary income is quite pro­
gressive. It would be difficult to justify pushing an
individual into a tax bracket well above his normal
bracket simply because in a particular year he realizes
a gain which has been accruing over a longer period.
The lower rates on gains serve as a partial substitute
for an income averaging provision.
This argument loses much of its force in the case
of corporations, because the corporate income tax
recognizes only two brackets, under $25,000 and
over $25,000. The “ need for averaging” justification
would be fully valid only if a corporation had ordi­
nary earnings of less than $25,000 and the realization
of gains pushed taxable income into the surtax
bracket, or if an excess profits tax with a series of
progressive graduations were in effect. The princi­

The Tax Law Today The definition of capital
assets is more complex in the present law than it was
in the A ct of 1921. Such assets are defined as all
property held by the taxpayer except: (a ) stock-intrade and property includable in inventory, (b ) prop­
erty held for sale to customers in the ordinary course
of the taxpayer’s trade or business, ( c ) business
property subject to an allowance for depreciation,
(d ) real property used in business, (e ) a copyright,
literary, artistic, or musical composition which is the
result of the taxpayer’s personal effort, ( f ) notes or
accounts receivable acquired in the ordinary course
of business, and (g ) certain Government obligations
sold at a discount. Also, the minimum holding
period for eligibility for special tax treatment has
been shortened to six months.
The maximum rate of tax on gains of individuals
is now 2 5% , double the original rate. But relative
to existing rates on ordinary income, treatment is
more favorable now than in 1921. The taxpayer is
given two options in computing his tax on capital
gains. Under the first option, he may elect to in­
clude in his total taxable income 50% of the excess
of net long-term capital gains over net short-term
losses. He then pays the regular personal income
tax rates upon all income including these net gains.
Under the second option, he may elect to exclude net
capital gains from his regular taxable income and pay
a flat rate of 2 5% . A similar system of alternatives
limits corporate tax liability on net long-term capital
gains to the same maximum.
For individuals, losses realized on the sale of capital
assets within a given year may be fully offset against
gains and against ordinary income up to $1,000. The
law also provides for a one year carry-over, with the
same offset rules applying in the succeeding year.
The rules applying to corporate capital losses differ
from those applicable to individuals in that corpora­
tions may offset losses only against capital gains, but
a five year carry-over is allowed on losses from
normal capital transactions and a ten year carry-over
is allowed if the loss arises from foreign expropria­
tion of assets.
Beyond its basic tenets, the existing body of capital
gains tax law is extremely technical and confusing to

pal thesis advanced today to justify special treatment

most laymen.

of corporate gains is that tax advantage encourages

ment has been granted to more and more assets,

certain types of useful investment.

mainly as a result of pressure applied by interested

Not surprisingly, the lower tax rate on gains has
given rise to a multitude of elaborate schemes for
avoiding taxation by conversion of ordinary income



Over the years, capital gains treat­

groups, and the granting of these exceptions has
greatly increased the complexity of the law.
Generally, contemporary reasoning seems to be that

3

REALIZED NET CAPITAL G AIN SV
United States, 1954-1963

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

Individuals

1955

1954

1956

1957

1958

1959

1960

1 961

*The totals for corporations a re net long-term cap ital gains reduced by net short' ■term capital losses.
a re net g ains from sales of cap ital assets in adjusted gross income.
Source:

U. S. Treasury Department.

capital gains treatment should be granted for any one
of three reasons. First, as noted, special tax con­
sideration is often deemed appropriate in lieu of an
averaging device. Second, certain sources are not
considered capable of bearing the full burden of
ordinary income taxation. For example, sales of
land with unharvested crops are granted capital gains
treatment on the assumption that such sales nor­
mally reflect unusual— “ forced sale” — circumstances.
Third, preferential tax rules are sometimes felt to be
necessary as incentive devices. Under the Small
Business Investment Act of 1958, to cite one illus­
tration, special treatment is provided for gains from
sales of small business securities on the assumption
that this concession acts as a stimulus to a socially
desirable form of investment.
Unanswered Questions

Despite years of debate,

many important questions regarding both the theory
and practice of capital gains taxation are still un­
resolved.

1
<
The

Tw o

diametrically opposed schools

of

thought exist even on the basic questions of whether
or not gains ought to be taxed at all.

Those who

favor the tax contend that capital gains, whether
Digitized for 4
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realized or not, add to the wealth of the individual
or the corporation in the same way as salaries, divi­
dends, and profits and should be treated accordingly.
As a corollary to this general thesis, proponents point
out that most gains are realized on common stock of
corporations and argue further that stock appreciation
reflects mainly corporate policies of retaining and
accumulating profits. The undistributed profits that
underlie these gains should, according to their view,
be taxed just as distributed profits are taxed.
Those wT
ho oppose the tax argue basically that
gains are not income but capital and that a tax on
capital is not sound economic policy. Also, some
opponents contend that gains are in large measure
illusory, reflecting increases in the general price level.
In this connection, however, it should be noted that
wage and salary increases are probably no less related
to inflationary illusion than capital gains. Whatever
its theoretical merits, opposition to the tax is not
without significant political support, especially in
other countries. In 21 countries, including Austria,
Belgium, France, W est Germany, and Switzerland,
there is no tax on gains after some minimum hold­
ing period. England only recently began to tax them.

Among those who agree that capital gains should
be taxed, there is virtually no concensus on how the
ideal system ought to be set up, or, stated more ex­
actly, how the existing system should be changed.
Ideas about definition of assets, rates, and exceptions
are as numerous as the “ experts” in the field.
The Economic Effects
E conom ists generally
agree that the primary effects of capital gains taxation
are on economic growth. H ow the influence of the
tax is to be viewed depends upon the way the analyt­
ical question is framed. If the effects of the present
system of capital gains taxation are compared to the
effects that might be expected if gains were taxed at
the same rates as ordinary income, it can be shown
that the existing system of preferential treatment is
a stimulus to growth. If, however, the tax is con­
sidered against the alternative of no tax at all, it
may be shown to retard development of the private
sector— if possible effects of Federal spending of the
revenues are ignored. But this, of course, is true
of all taxes.
Detailed analysis suggests that the two most im­
portant direct effects of the tax are upon the supply
of savings and the mobility of capital. The nature
of these direct effects is best pointed up by tax vs.
no tax comparisons.
Under the present taxing system, savings are re­
duced relative to what the supply would be in the
absence of the tax. Recent empirical studies have
shown that most individuals realizing capital gains
save and invest the proceeds rather than spending
them for current consumption. Thus, in effect, the
tax is paid out of savings, or out of capital, which is
the same thing. It does not follow from this analysis,
though, that the final effect of the government’s action
has to be adverse to growth. If, to cite just one
possibility, the revenues from the tax are spent to
improve schools and thereby upgrade the quality of
the labor force, the final net effect may be to ac­
celerate the national growth rate.
The tax rules now in effect restrict the mobility
of capital. This is often referred to as the “ lock-in”
effect. A s noted previously, gains are taxed only
when realized. Further, there is provision in the
existing law which allows transfer of capital assets
at death without payment of the tax. Given this
combination of rules, some individuals are encouraged

be reduced, without lowering the present tax rates,
by requiring periodic constructive realization (ap­
praisal of asset values for tax purposes), or at least,
constructive realization at the death of the holder
of the assets.
The Growing Importance of Capital Gains The
dollar volume of capital gains realized annually has
risen rapidly since W orld W ar II and is now at a
record level. A s shown in the chart on page 4, net
gains of individuals doubled and net gains of cor­
porations trebled between 1954 and 1963. During
the 11 year period ending in 1964, total revenues
from the tax doubled, as may be seen in the chart on
this page.

By contrast to total revenues from the

personal and corporate income taxes, the dollar yield
from capital gains taxation is still small.

In 1964,

the gains tax brought in only about 3% of total
revenues from the two income taxes.

But over the

past decade, revenues from capital gains have in­
creased roughly 10% more than total income tax
revenues, and gains tax yields appear to be rising at
an increasing rate.

In the light of these considera­

tions, the question of appropriate tax policy with
respect to capital gains should be increasingly in the
limelight in the next several years.

to continue to hold assets which they would sell in
the absence of a tax upon realized gains.

There are

no very firm estimates of the magnitude of this lockin effect, but several recent studies have suggested
that the dollar volumes involved are substantial.
Critics of the tax point out that this problem could



5

Histor

(Did

O

f

t

a l e m

—

WINSTON-SALEM, NORTH CAROLINA

Founded 1J66

South of business district in Winston-Salem, North
Carolina, is 1 Salem, a small community centered on a
town square Twenty-two buildings, scattered within the
four- by eigl >lock area, have been restored, and seven of
these are ope tourists. Others are scheduled for restora­
tion in the n future.
Two hun d years ago last January, a group of twelve
men began c truction of Salem. The location of the town
<
square and s< ral buildings had been planned and approved
by members the Moravian Church. Salem was to be the
religious, cul al, and craft center for villages planned for
the area. T men and women who settled here were
highly skille well-educated, devout people. They never
numbered m than 400. They were so far from the major
<
trade centersiat they made all they needed except a few
items such**,»Rss and some types of hardware.

Restoration of Old Salem has developed under the super­
vision of Old Salem, Incorporated, with the close coopera­
tion of Salem College and the Moravian Church, and is di­
rected toward re-creating Salem as it was in 1830. Only a
small amount of reconstruction has been necessary, and
many original furnishings are in use.
Old Salem, Incorporated, has been operating since 1950.
It has grown from one paid employee in 1950 to 78 in 1965.
Its income is received from rentals of restored buildings,
sales of craft items, visitors’ admission fees, a biennial grant
from the State of North Carolina (the latest one for
$100,000), endowment funds (valued at $805,000 in April
1965), and individual gifts. As of July 1965, $3,500,000 had
been received through donations.
An estimated 40,000
people visited Old Salem in 1965, 22,000 more than in 1950.
The number has increased appreciably each year.

C o d '*

___

The sanctuary of H om e Moravian Church, shown here

Digitized for on the right, was dedicated in 1800. The church was the
FRASER
center of community life, and church leaders also served
http://fraser.stlouisfed.org/
as directors of the tow
Federal Reserve Bank of St. Louisn’s government and activities.

C n u rc h

This brick and frame structure, the Single Brothers House, was the home,
meeting hall, and workshop for the single men of Salem. The original brick
and timber building was completed in 1769. The all brick portion was added
in 1786. Craftsmen work today in nine shops inside.

The furnishings in this classroom of the B oys School, which is now the
W achovia Museum, are representative of those used in 1828. The people of
Salem placed strong emphasis on education, and the instrument on the right
is indicative of their love for music*

These hostesses are outside the John V ogler House, home
of Salem’s silversmith and clockmaker.
Behind is the
Anna Catharina House. M ost Old Salem buildings open
directly onto the sidewalk, with large yards in back.

District Agriculture
and the

?

New Farm Programs cFifth District agriculture in 1966 is likely to be
significantly affected by two major farm laws en­
acted last year. They are the Tobacco AcreagePoundage A ct and the Food and Agriculture Act.
Both are directed at bringing supplies of major farm
commodities into line with current demand. They
concentrate on tobacco and cotton, two commodities
that have been piling up in increasingly burdensome
surpluses, and are patterned to some extent after pro­
grams which have proven quite successful for feed
grains and wheat. Both Acts offer the farmer a
wide range of choice as to how he may adjust his
individual operations to the objective of surplus
reduction.
THE TOBACCO ACREAGE-POUNDAGE ACT
Government programs to limit tobacco output for
price maintenance purposes have been in effect since
1933, except for the 1939 crop. Sharp yield increases
have limited their success recently, however, and large

Digitized for 8
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amounts of tobacco have moved into Government
warehouses through price-support operations. R e­
duced allotments under the acreage programs re­
tarded but did not reverse the trend. Stocks con­
tinued to grow and quality was frequently sacrificed
in the race for higher yields.
The Tobacco Acreage-Poundage A ct was passed
last April. It limits the poundage that can be
marketed as well as the acreage that can be planted.
In order to allow for different weather conditions and
field sizes from season to season, growers are per­
mitted to market up to 110% of their poundage
quota, with overages in a given year subtracted from
the following year’s quota. By the same token, the
quota of a farmer who markets less than his quota
in a given year will be increased by a corresponding
amount the following year.
W hen given the option of adopting or rejecting
acreage-poundage controls in a referendum held in
May, growers of flue-cured tobacco voted to operate

under the program in 1965-67. The early success of
the program is illustrated in the first chart which
shows the reversal of the trend of increasing sup­
plies last year. Moreover, in the first year under
the program, quality improved and growers received
over $6.00 more per hundred pounds than in 1964.
A referendum of hurley tobacco growers will be held
March 10 to determine whether the acreage-poundage
program will be extended to this type of tobacco.
Other types of tobacco will continue to operate under
the older acreage allotment programs.

The law specifies a mandatory \2l 2% cut in
/
acreage for all participating farms and offers addi­
tional inducements to those who cut back acreage
as much as 25% or even 35% . Price-support loans
averaging 21 cents per pound for Middling 1-inch
cotton are offered to all participants. Acreage taken
out of production and conserved qualifies participants

THE FOOD AND AGRICULTURE ACT

share that would be used domestically and is called
the domestic allotment.
Assume a farmer has a 100-acre total allotment

O f equal significance for Fifth District farmers is
the Food and Agriculture Act, passed last October.

for diversion payments of 10.5 cents per pound times
their projected farm yield. In addition a direct pricesupport payment of 9.42 cents will be paid on 65%
of the farm’s total allotment.

This is the estimated

WHEAT

FEED GRAINS

8,000

7,000

2,000

Total Utilization

6,000

1,500

Total D isapp earance

1,000
1962
Source:

1964

1960

1962

1964

U. S. Departm ent of Agriculture.

This is an omnibus law which provides for a major
change in the cotton program, introduces a cropland
retirement program similar to the Soil Bank of the
1950’s, and modifies the feed grains, wheat, wool,
and dairy products programs. The Act establishes
programs for the affected commodities for a four
year period, 1966-69.
The following paragraphs outline the provisions of
the Food and Agriculture Act that bear most directly
on Fifth District farming.
Cotton The cotton program em bodied in the
Food and Agriculture Act is a sharp departure from
those provided by earlier laws, and compared with
other commodity programs, offers a wider range of
alternatives. The program is voluntary, but non­
participating growers will be subjected to a penalty
of 50% of the June 15, 1966 parity price on market­
ings in excess of allotments.



and a 500-pound per acre projected yield which he
obtains. Assume also that he takes only the manda­
tory ( 1 2 ^ % ) cut. He will receive:
8 7y2 acres x 500 lbs. x 21^ loan payment
-(- \2l 2 acres x 500 lbs. x 10.5^ diversion
/
payment -(- 65 acres domestic allotment
x 500 lbs. x 9.42^ price-support pay­
ment =. $12,905.25
Special consideration is given to small farmers,
those with an allotment of 10 acres or less or total
projected production of 3,600 pounds or less, and
no acreage reduction is required to receive program
benefits. Small farmers will be eligible for the direct
price-support payments on their domestic allotment
plus diversion payments of 35% on their total allot­
ments even though no acreage is actually diverted.
By diverting up to 35% of their total allotments,
they may earn additional diversion payments. Par­

9

ticipating growers on small farms are also eligible
for price-support loans on the cotton they produce.
Cotton farmers also have the alternative of leas­
ing or selling their allotments, and owners of more
than one farm may transfer their allotments from
one farm to another. Such transfers cannot be made
across state lines under any circumstances but can be
made across county lines if two thirds of the eligible
growers voted favorably in the November 23, 1965
referendum. Producers in 73 counties in the Fifth
District, 55 of them in North Carolina, voted for
transfers out of the county.
Nationally, slightly more than one million acres of
cotton allotments have been transferred by one or
another of these methods for the 1966 crop year.
In the Fifth District allotments on 78,566 acres were
leased, 11,453 acres were sold, and 3,305 acres were
transferred by owners of more than one farm by the
December 31, 1965 deadline.
Even growers who do not wish to participate in
the acreage reduction program have an alternative
under the 1965 law, i.e., production for export. An
export market acreage of 250,000 acres was estab­
lished for 1966. A grower who produces for the
export market is not eligible for price-support loans
or payments on any farm on which he has a sub­
stantial or controlling interest. Furthermore, his
entire production must be sold for export. Farmers
applied for slightly over 100,000 acres for the export
market, all outside of the Fifth District.
Feed Grains T h e voluntary program for feed
grains, in effect since 1961, is extended for four more
years. The objective is a reduction from the 1965
carryover of 55 million tons to a level between 45
and 50 million tons. In an effort to achieve this,
price-support loans and price-support payments are
made available only to those farmers who remove
20% or more of their feed grain base from produc­
tion.

Diversion payments at the rate of 50% of the

loan rate times the projected yield of the farm will
be made on that portion of the base above 20% that
is diverted.

The first 20% of the land which is

taken out of feed grain production must be applied
to approved conservation uses, but additional diverted
land may be planted to soybeans, and growers will
still be entitled to the price-support payments they
could have earned if feed grains had been planted.
Cropland Adjustment Program The Cropland
Adjustment Program is designed to remove about
40 million acres from crop production and to place
them in conservation uses under five-to-ten year
contracts.
Conservation uses include permanent

10


vegetative cover, trees, wildlife, and recreation
practices. Additional incentive payments are avail­
able if the operator agrees to open the land for rec­
reation purposes. As a possible means of obtaining
even more land for recreation uses, the program
features financial aid to State and local governments
“ in the establishment of practices or uses which will
establish, protect, and conserve open spaces, natural
beauty, wildlife or recreational resources, or prevent
air or water pollution. . .
W hile the land retirement feature of C A P is remi­
niscent of the Conservation Reserve of the Soil Bank
Act, the means of attaining the goal is substantially
different. Restrictions are imposed on the amount of
land that can be retired in any one locality in order
to avoid the harsh economic impact that was some­
times experienced in areas of heavy signup under the
Soil Bank. Speculative participation is discouraged
by a provision that the land must have been in the
same ownership for the past three crop years; some
exceptions are permitted, subject to review by county
Agricultural Stabilization and Conservation Service
committees. A s was the case with the Conserva­
tion Reserve, all or part of the farm may be placed
under a C A P contract, but further restrictions are
imposed on what are considered eligible farms or
eligible lands.
Eligible farms are defined as those which were
operated in the prior year for one of the following
purposes: (1 ) crops were planted for harvest or
were harvested, (2 ) acreage was diverted under one
of several Government land retirement programs,
(3 ) a Conservation Reserve contract expired on De­
cember 31, 1965, and the farm was not operated in
1965 in anticipation of a CAP-type program, or (4 )
the farm was not cropped, due to natural disaster.
Eligible lands must be part of such a farm and must
have been devoted to one of the following uses in one
of the three years prior to the contract: (1 ) row crops
or small grains planted for harvest or harvested,
(2 ) diverted under the feed grain, wheat or cotton
program, (3 ) certain lands under another Govern­
ment retirement program on which contracts have ex­
pired, or (4 ) certain tame hay cropland.
Payment rates are based on farm yield and pro­
duction data. Rates are 40% of the county pricesupport loan on barley, corn, grain sorghum and
wheat, 6 cents per pound for cotton lint, and 3.5
cents per pound on peanuts. Tobacco rates vary
from 12 cents per pound on flue-cured and burley
down to 6 cents on cigar filler and binder. Other
cropland on the farm will be eligible for adjustment
payment rates varying nationally from $3.00 to
$7.00 per acre.

THE FIFTH DISTRICT
The current business expansion has now lasted
half a decade. For about four years, policymakers
were concerned mainly with the possibility that de­
mand might weaken, ending the growth process
before full employment could be reached. During the
fifth year the pattern of growth began to change, but
not because of any weakening in aggregate demand.
On the contrary, spending continued to rise, and by
the end of 1965 attention had shifted from sustaining
the upswing to keeping it within sustainable bounds.
Consumers continued to buy new cars in record or
near-record volume. Construction, planned as well
as in process, maintained a strong upward course.
Business spending increased as manufacturers at­
tempted to expand capacity and increase inventories
in line with demand. In some industries, dwindling
supplies of labor and materials spawned upward
pressures on costs and prices and added to the
problems of planning ahead.
An Uneasy Balance A healthy econ om y requires
a balanced flow of capital, labor, and materials into
production in response to the pull of demand. Cer­
tain factors emerging in the District economy in
recent months seem capable of upsetting this balance
if they continue to develop. In the textile industry,
for example, capacity already committed to a heavy
backlog of civilian orders must be converted to De­
fense production. Furniture manufacturers report
certain hardwoods and veneers becoming more dif­
ficult to obtain with prices gradually creeping up.
Short or at best uncertain supplies of nonferrous
metals are creating problems for many of the Dis­
trict’s metalworking industries.
Contractors have
also found certain essential materials increasingly
difficult to obtain. Delays have affected some ordi­
nary items such as reinforcing rods in addition to a
variety of special structural components. A wide­
spread labor shortage, however, seems to be the most
difficult problem of all.
Skilled workers were reportedly hard to find more
than a year ago. Since then, business has expanded
considerably and new additions to productive and
distributive facilities continue to approach completion.
Thus the search for trained or trainable people has
become more and more intense and seems bound to



-£ '
M

continue for some time at the present fast pace. As
a result, the cost of finding and training workers has
been rising, a trend that will probably continue.
Help-Wanted Ads Soar A dditional perspective
on the state of the job market is provided by an index
compiled by the National Industrial Conference
Board measuring the volume of advertising placed
in city newspapers across the country by employers
in search of employees. When the national HelpWanted Index and the unemployment rate are
charted together for the past 15 years, they move, of
course, in opposite directions but otherwise show
quite similar business cycle patterns. In 1964, how­
ever, the unemployment rate continued to drop
slowly toward 4 % while the Help-Wanted Index
started rapidly upward. Last fall the index sky­
rocketed, rising an average of 10 points a month.
When the 52 cities from coast to coast that com­
prise the index are listed according to November
figures, two dynamic urban centers of the Fifth Dis­
trict, Charlotte and Washington, are right at the top,
and Richmond is eighth. The national index in
November was 180 (19 5 7 -5 9 = 1 0 0 ) after rising one
third from the previous November. In contrast, the
Charlotte index was 322, up one h alf; the Washing­
ton index was 313, up more than one third; and the
Richmond figure was 247, up more than two fifths.
In the December ratings, Washington and Richmond
posted further gains while Charlotte declined.
The meaning of such rapid gains is not entirely
clear, largely because of the questionable compar­
ability of the base figures from which the changes
were measured. Nevertheless, faced with increas­
ingly serious obstacles in their search for workers to
staff new offices, factories, and stores in a rapidly
expanding economy, employers are turning more and
more to advertising and are incurring additional ex­
penses as a result.
National Labor Market Ratings T he Departm ent
of Labor measures availability of labor in centers
of

production

and

employment

throughout

the

country, rating them on both present conditions
and the outlook reflected in local employers' esti­
mates of manpower requirements balanced against

11

the expected supply. Despite evidence all last year
of a strong demand for labor, the December ratings
placed none of the nation’s 150 major labor market
areas in Group A , which would signify “ overall labor
shortage.” The number of areas classified in Group
B, “ low (1.5 % to 2 .9 % ) unemployment,” however,
rose over the year from 27 to 48. During the same
period the number in Group C, “ moderate (3.0 % to
5 .9 % ) unemployment,” dropped from 94 to 8 3 ; and
those in Groups D, E, and F, “ substantial (6.0 % or
m ore) unemployment,” numbered 19 in December
1965 compared to 29 a year earlier.
Although these national ratings do not indicate
acute shortages in the general labor supply, they do
show a significant reduction in surplus labor over
the past year. Furthermore, by the Fourth Quarter
of 1965 most areas were plagued by specific scarcities
of considerable intensity, particularly of experienced
workers. A s a result, according to the Department
of Labor, occupational opportunities were relatively
plentiful at the beginning of 1966 for engineers,
scientists and technicians, skilled and semiskilled
metal workers, medical and health workers, school
teachers and college instructors, and certain types of
craftsmen, mechanics, and service workers.
In the Fifth District, Charlotte was reclassified in
December from Group C to Group B and was one
of the nation’s three major labor markets that ad­
vanced to a higher rating. Among all areas, 47%
of those located in the Fifth District were rated “ B ”
compared to 32% nationally, 40% in the District
were rated “ C ” compared to 55% nationally, and
13% were rated “ D ” or lower in both the District
and the nation. The “ B ” rating was accorded
Washington, all four major areas in Virginia, and
two of five major areas in North Carolina.
The Statistical Record T he follow in g table co m ­
pares labor force trends in the District since 1960
with patterns of national growth.
Per Cent Chang e 1960-1965
Civilian
Labor Force

Civilian
Em ploym ent

Unemploym ent
Rates (%)

Unem ploym ent

1960

1965

8

-1 2

5.6

4.6

5th Dist.

10

12

-2 5

5.0

3.4

Md.
Metro. D.
V a.
W. Va.

12
25

15
25
12
- 1
10
6

-33
6
-2 6
-4 2
-1 5
-1 9

5.6
2.6
4.1
11.5
4.5
4.4

3.4
2.2
2.7
7.0
3.5
3.4

N. C.
S. C.

C.

11

-6
9
5

Local Reports Reflect Strength L abor m arket
reports from localities around the District quite con­
sistently show further increases in employment and
employment opportunities. In Maryland, besides
strong seasonal increases in retail trade and in Fed­
eral Government jobs, substantial gains occurred in
December and continued in January in transportation,
primary metals, and electrical equipment. Em ploy­
ment in construction has continued at all-time highs.
The factory workweek and average hourly earnings
in the Baltimore area have continued to rise. In­
creasing amounts of overtime have been reported in
a number of industries.
Washington shows much the same picture except
that manufacturing activity is comparatively small.
Nearly 50,000 jobs were added in the Washington
area during 1965, almost three times as many as in
the previous year.
Virginia’s record is similar. New workers have
recently been hired by producers of textiles, apparel,
paper, and chemicals, and high levels of employment
prevail in furniture, metals, transportation equipment,
machinery, and electrical equipment.
In the Carolinas, jobs and job opportunities have
continued to increase in textiles, furniture, chemicals,
machinery, and electrical equipment, with smaller
but significant gains in stone, clay, and glass products, (
transportation equipment, paper and paper products,

7

u. s.

changes ranged from a 13% rise in Maryland to a
2 % decline in W est Virginia. Labor force participa­
tion (the ratio of labor force to population) rose a bit
in the District while declining slightly in the nation.
A few developments reflected in the table are of
special interest. The growth of the labor force in
metropolitan Washington since 1960 has been so
rapid that the number of unemployed persons rose
even though the unemployment rate dropped from
2.6% to 2.2% of the civilian labor force. In W est
Virginia, part of the striking decline in the number
of unemployed reflected continued declines in the
labor force. Elsewhere in the District, Maryland
registered the largest gains in labor force and em­
ployment and the sharpest drop in unemployment.

and printing.
Locally, statewide, throughout the District and
across the nation, the demand for labor has continued
to rise in virtually all sectors of economic activity.

PH O TO CREDITS

The changes shown in the table were accompanied
by population increases of 8 % in both the District
and the nation. Within the District, population

12


C o ver—Francis I. duPont & Co.
corporated.

6. & 7. O ld Salem , In­

M ap—O ld Salem , Incorporated.

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