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July-August 1966
Economic Advance and Unemployment . . . page 3
District Banking, 1961-65 . . . . . . . . page 11
FEDERAL RESERVE BANK
OF KANSAS CITY
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this publication.
ECONOMIC ADVANCE
AND UNEMPLOYMENT
Bu
Sheldon W. Stahl
ss of th
TUnited Stat s paago,s dthethe Congr
Employment Act
WENTY
YEAHS
of 1946. The action was taken in response to
concern over the existence of a serious unemployment potential, following the release of
millions of personnel from the Armed Forces
and the termination of war production-with
the attendant discharge of workers-at the
close of World War II. The Act established a
Council of Economic Advisers to the President
and created th Joint Economic Committ
of the ongr ss to maintain a continuing
watch on the national economic scene. Most
important, howev r, the legislation committed
the Federal Governm nt to pursue such economic policies as might be conducive "... to
promote maximum employment, production,
and purchasing power."
In the 2 decades since the Employment Act
was passed, the record of the United States in
promoting maximum employment has been
mixed. The U. S. economy has experienced
four recessions during the postwar period and,
although these fluctuations in business activity all may be described as relatively moderate, the rate of unemployment in each
successive recovery peak was higher than in
the one that preceded it. From 1947 through
1965, the unemployment rate varied considerMonthly Review
•
July-August 1966
ably, ranging from below 3 p r c nt to nearly
7 per cent. Unemployment averaged approximately 5 per cent for the entire period, while
for the 6 years from 1958 through 1963 it did
not fall below 5.5 per cent and averaged 6 per
cent. Thus, it should be recognized that,
while the unemployment rate fell below 4 per
cent early this year, this more favorable turn
in the unemployment picture is of relatively
recent origin. Even at that, one should recognize that th aggregate unemploym nt rate
provid s but on dimension of the magnitude
of the problem, since the aggr gate rate encompasses many diverse rates.
Unemployment repres nts the most overt
waste of resources. Productive manpower
which goes unutilized represents lost output
for society which cannot be recouped. Estimates made by the President's Council of
Economic Advisers in the 1965 Economic
Report of the President point out that had the
unemployment rat in 1964 been 4 per cent,
rather than the 5.2 per cent rate which prevailed that year, th gross national product
(GNP) would have been about $27 billion
larger. Although I ss easily measured, the
social costs involved in overly high rates of
unemployment undoubtedly are significant as
well. This article will explore the relationship
3
Economic Advance and Unemployment
between economic growth and the problem of
unemployment, and their implications for
public policy.
THE ECONOMIC GROWTH FACTOR
Because employment opportunities are a
function of the state of the economy, it readily
can be seen that on of the prime requisites
for high levels of manpower utilization is a
correspondingly high level of aggregate economic activity. This point may be driven
home forcefully by noting-as was don in the
1966 Manpower Report of the President-that,
given the expected in rcasc in the civilian
labor for c of about ] .6 million p 'oplc for the
current y ar, th economy would have to provid approximat ly 4,500 new jobs a h day31,000 new jobs each w ck-or 134,000 new
jobs each month. It should be emphasized,
however, that even if the economy succeeds
in supplying this number of jobs, the rate of
unemployment need not change. Only if more
than this number of jobs were made available
during the year, or if the growth in the labor
force were less than projected, would the
level of unemployment fall. As a matter of
economic judgment, how ver, r ducing unemployment by making available the maximum
number of productive jobs may be prefcrr d
to the specious improvement in unemployment levels which may come from a diminished growth in the labor force.
It has been indicated that there is a direct
relationship between the level of aggregate
economic activity and the level of employment or unemployment. It also should be
pointed out that changes in employment levels
are responsive to at least two oth r basic
variahl s-productivity and hours of work ( or
workweek). Thus, to the extent that real
gains in GNP are trac able to rising productivity, employment growth will be smaller
than if real GNP had increased without any
accompanying productivity gain. For example, if the relative increase in real GNP should
4
fall below the rate of gain in productivity for
any given year, then employment may show
no advance or may register an actual decline.
Conversely, should real G P increase faster
than productivity, employment will rise. The
reader should be cautioned, however, lest he
reach the erroneous conclusion that employment growth would be continually maximized
if productivity gains were held to a minimum.
Increased productivity allows both labor and
capital to share in the fruits of economic advance in the form of higher wages and great r
profits. At the same time, it is the k y vehicle
in preserving r lativc pric stability. As the
npswing progresses, if productivity gains diminish, unit labor costs will he aff 'Clcd adv 'rs ly and upward pr ssurc will be x rt d
on costs and pric s generally. As these pressures mount, the threat of inflation and declining profit margins could endanger the
longevity of the economic advance itself and,
thereby, any prospective growth in employment which would stem from real GNP gains.
Hence, the role of continued productivity
gains in sustaining economic growth must be
given considerable weight in any appraisal of
the laborsaving impact which thes gains
might have on cmploym nt levels.
In discussing the impa t of productivity on
employment growth, it should be understood
that the preceding examples implicitly assume
no change in the actual number of hours
worked. Clearly, this impact could be offset,
to some extent, by a decrease in the number
of hours worked by each employee. Hours of
work actually have exhibited a secular, or
long-run, downtrend between 1947 and 1965,
indicating that labor has, chosen to take part
of its productivity gains in the form of redue d hours.
In addition to the long-run behavior of productivity and length of workweek, it is important to spell out the cyclical, or shorter-run,
behavior of these variables, since their impact
on employment growth over the business
Economic Advance and Unemployment
cycle is notably different than over the longer
period. For example, in the case of hours of
work, the observable postwar secular trend
opera ted to enhance employment growth. The
cyclical behavior of this variable, however,
has a distinctly negative impact on the growth
of employment in the risin g phase of the business cycle. As the economy moves upward
from a cyclical trough, the length of th e workweek typically rises from its reduced level at
the trough of th e cycle to progressively higher
levels. Thus, as aggregate demand gains
strength and the demand for labor increases,
th e len gthenin g of the workw ck partly und cr·u ls th o employment growth which would b'
associ,1 lecl wi th a give n aclvanc' in real GNP.
Prodnclivity, on the other hand , exhibits a
cyclical behavior which, up to a point, is
favorable to employment growth as the upswing lengthens. Gains in physical output
typically are large in the early phases of the
upswing, because of considerable unutilized
plant capacity as well as a large pool of experienced, unemployed workers. Given these
circumstances, productivity gains are correspondingly high. However, as the level of
economic activity continues to move hi gher,
outp11t gains h come more difficult to realize
in th e face of ris ing rates of capacity utilization and shrinking numbers of un employed
laborers with requisite skills. These fac tors
contribute to a tapering off in th e rate of productivity gains, and, consequently, the farther
along in the upswing, the less would be the
laborsaving impact of productivity gains on
employment growth. Once again the reader
is cautioned to refer to the earlier caveat
regardin g th e impact of productivity on employment growth.
Table 1 shows annual changes in real GNP,
employment, and related data for the period
1947-65. The purpose of th e preceding paragraphs was to point out that, although the
GNP-employment relationship may b e direct,
it is far from simple. Any conclusions which
Monthly Review
•
July-August 1966
Table 1
ANNUAL CHANGES IN REAL GROSS
NATIONAL PRODUCT, EMPLOYMENT,
AND RELATED DATA, 1947-65
Per Cent Change
Abso lute Change (Mi lli ons)
Re al
Tota l
UnGross
Tot al
Private
Tota l Civi lian emNoti onal Employ- Output Per Employ- Labo r p loyYear
Product
ment Monhou r':'
ment
Force
ment
- 1-.3_ l._3_
::: :;:
1947-48 - -4 .-52 .3
3.4
-1.2
1948 -49
-0.7
0.1
2. 4
l .4
0 .7
-0.3
1949-50
9 .6
2 .3
9 .2
1.3
1.0
7 .9
4 .6
-0.2
-1.3
19 50 -5 1
1.7
1.0
19 5 1-5 2
3 .1
2.9
-0.2
0 .4
0 .3
0 .1
-0. l
195 2- 53
4.5
4 .6
0.9
0 .8
l .5
- 1.4
-1.7
- 1. l
1953- 54
2 .7
0.7
1.7
-0.7
19 54 -5 5
7. 6
3.4
4 .3
2. 1
l .4
-0.l
1.8
1.7
-0. l
19 55- 56
2. 8
1.8
1956- 57
1.4
2.7
0.4
0 .5
0 .3
0.1
-I . I
-1 .6
- 1.0
195 7 -58
2. 3
0 .7
1.7
6.4
-0.9
1958 - 59
4 .0
1.6
0 .7
2.5
19 5 9 - 0
2.5
1.7
1.2
l. l
1.2
0.1
1960 -6 1
1.9
2 .7
0 .1
1.0
0 2
0 .9
l 9G I (>2
6.6
I .G
1.1
-0.8
5 .2
0 .3
1962 Cd
1.4
.I
I.I
'1 .0-1·
1.0
0 .2
I <J 3 (, 4
r · .J·I·
I .'..,
I.
2 .2
./.
- 0 .3
I .9•1
•
1% '1 '.>
1.4
- 0 .4
2.6
2.4
1.8
Av roqe,
19 47 -65
.9
1.2
3. 4
0 .8
0.9
0.1
::,La bor force basis.
,::::, L ss t han l 0 0,000 .
·!·Revised a s of July 1966.
SOURCE: Manpower Report of the President and A Report on
Manpower Requirements,
Resources,
Utili:z:ation, and Training,
U. S. Deportment of Labor (Washington: U. S. Government
Printing Office, Morch 1966), Tobie l 0, and Economic Report
of the President (Washington: U. S. Government Printing
Office, January 1966), To b ie C- 31.
may be drawn from an examination of the
table, therefore, must be subject to qualification. Nonetheless, certain val id points can be
made regarding th e economy's growth and
employment-un employment record.
It already has been established that productivity has been rising at an average rate
of about 3 per cent a year during the postwar
period-although the rates of change may vary
widely from year to year. The downtrend in
hours of work-though not significant in its
impact in any single year-over the same
period has been roughly .5 per cent a year,
thus partly offsetting the laborsaving effect
of productivity gains. This suggests that, as a
general rule-assuming a 3 per cent annual
average productivity gain-for employment
growth to occur, the average annual increase
in real GNP would have to exceed 2.5 p er
cent. As Table 1 shows, for the period 1947-65
the average annual increase in real GNP has
5
Economic Advance and Unemployment
been 3.9 per cent, while employment has
advanced at an average annual rate of 1.2
per cent.
A closer examination of Table 1 lends support to the general rule just stated. For example, in three recessionary periods-1948-49,
1953-54, and 1957-58-real GNP showed either
no change or a decline. In each of these cases,
total employment declined. In the brief 196061 recession, real GNP rose by less than 2 per
cent. Productivity gains in that period, however, were below 3 p er cent; consequently,
total employment showed a small increase.
In connection with the important rol e which
prncl11ctiv il y chan ges ·an play in employ ment
g rowth for an y give n ye,1r, an examination of
the years 195,5-57 proves instructive. ln ] 9,5455, real GNP rose by 7.6 per cent while total
employment advanced by 3,::1 p er cent, or, by
some 2 million jobs. In 1955-56 with a rise
in real GNP of only 1.8 per cent, the percentage increase in total employment was four
fif tbs as large as the year before. In terms of
actual numbers, 1955-56 showed an increase
in jobs about 85 per cent as great as 1954-55.
The key difference b etween these 2 years, in
which markedly different real GNP gains
were associated with only narrow differences
in cmploym nt growth, was the productivity
factor. In 1954-55, output per manhour rose
by more than 4 p er cent, but in 1955-56 it
actually registered a small decline. When, in
1956-57, productivity again turned upward at
a rate of nearly 3 per cent, a real GNP gain
not very different from a year earlier produced an employment gain only one sixth as
large as in the preceding year. Further examination of Table 1 strongly suggests that,
where widely differing employment changes
may he associated with specified real GNP
gains, the key factor making for that difference is productivity.
Given the postwar trends in productivity
and hours of work, a real GNP growth rate of
about 2.5 per cent would, on the average,
6
suffice to maintain total employment constant. For employment growth to occur, real
GNP would have to rise in excess of 2.5 per
cent per year. However, in order to keep
unemployment from rising, or, still more
important, to low r unemployment, an annual
growth rate in real GNP considerably higher
than 2.5 per cent would be required. Growth
in real GNP must not only be able to offset
the rise in productivity, but, additionally, it
must be able to absorb the continuing flow of
entrants into the labor force. Clearly, any
step-up in the rate of labor force growth over
the postwar average corr sponclingly would
raise the minimum rate of re al GNP growth
nccclccl lo rc<lu ·' 11ncmploymcnt.
As shown in Tahl 1, the re ·ord of the U. S.
economy in lowering unemployment has been
less successful than its achievements in expanding total employment. During the postwar period, unemployment has fallen in only
10 out of 18 years. Although there have been
two occasions during those 10 years of falling
unemployment when the rate of growth in
real GNP was less than 4.5 per cent-1951-52
and 1955-56-it is interesting to note that
1951-52 was marked by a very slight rise in
th e labor force, while in 1955-56, the very
large increase in the civilian labor force was
offset largely by an actual decline in productivity. Thus, in each of these cases, growth
in real GNP did not have to contend with
either of the elements which operate against
lowering unemployment levels. In the remaining years when unemployment levels
were reduced, real GNP growth ranged from
4.5 per cent per year to a high of 9.6 per cent.
From the limited evidence in Table 1, 4.5 per
cent appears to represent the minimum real
GNP growth rate needed to lower unemployment levels, based on productivity and labor
force trends which have prevailed during the
postwar period. Should the trend rate of increase in productivity rise above 3 per cent,
or should labor force growth accelerate, a still
Economic Advance and Unemployment
higher rate of growth in real GNP would be
needed to lower the level of unemployment.
Data on projected labor force growth for the
remainder of this decade from the U. S. Department of Labor, Bureau of Labor Statistics,
indicate that such an acceleration is to be
expected. The following paragraphs will take
a closer look at projections of manpower demand and supply and their implications for
unemployment in the period ahead.
LOOKING AHEAD
The Bureau of Labor Statistics estimates
that the civilian labor force will grow hy an
cstimat cl 7.7 million p ·rsons between 196.5
and 1970, or at a11 average annual increase in
excess of 1.5 million. The significance of this
anticipated rate of increase may be grasped
by noting, in Table 1, that for the entire postwar period the annual increase in the civilian
labor force averaged less than 1 million persons. During the first half of the 1960's,
the average absolute change approximated 1
million annually. There was one occasion1955-56-when the labor force growth was in
excess of the 1965-70 projected rate, and several other occasions- including 1947-48, 195455, 1963-64, and 1964-65- when the labor force
grew at rc:!tes close to those anticipated for the
next 5 years. However, the data clearly show
that at no time during the postwar years has
there been an extended period of high labor
force growth such as that being contemplated
for the latter half of this decade. The labor
force-employment experiences of 1955 and
1956 were viewed in detail earlier in this
analysis. Some comment on 1964 and 1965
also may be instructive. In the past 2 years,
labor force increases have approached those
levels projected for 1965-70. Real GNP gains
in 1964 and 1965 averaged well above the
postwar record, while productivity gains averaged somewhat below the postwar trend rate.
As a consequence, employment in 1964 and
1965 advanced by a total of 3.3 million-or at
Monthly Review
•
July-August 1966
Table 2
PER CENT DISTRIBUTION OF THE TOTAL
LABOR FORCE, BY SEX AND AGE,
1965-75
Sex and Age
Both Sexes
196 5
1970
1975
l 4 years and over
14 to 24 years
25 to 44 years
45 years and over
4 5 to 6 4 years
6 5 years and over
100.0
2 1 .5
41.l
37.4
33 .4
4 .0
100.0
23.6
38 .9
37.5
33 .8
3 .7
100.0
24 . l
39 .9
36.0
32.5
3.5
66 .0
13 .4
28 .3
24 .3
2 1.6
2 .7
6 4.9
14.7
26 .7
23.5
2 1. 1
2 .5
64.4
14 .9
27.4
22 . l
19.9
2.2
3 4 .0
8. 1
12. 8
13 . 1
11 .9
I .2
35. 1
8 .9
I 2.2
14 .0
12.7
I .3
35.6
9 .2
12.5
13 .9
12. 7
1.3
Male
14 years and over
14 to 24 years
25 to 44 years
45 years and over
4 5 to 6 4 years
65 years and over
Female
14 yea rs and ove r
14 t·o 24 years
25 to 44 years
45 years a nd ove r
4 r:- lo 6 4 y o rs
65 years ond over
OURCE : Manpower Report of the Prcsjdcnt and A Report on
Manpower Requirements, Resources, UtiliJ:otion, and Training,
U. S. Department of La bor (Washington : U. S. Government
Printing Offi ce, March 1966 ), Table E-4 .
an average annual rate twice as high as for
the entire postwar period. Unemployment in
those same 2 years fell by 700,000, in contrast
with an annual average increase of 100,000
for the 1947-65 period.
To provide for an increase of 7.7 million
persons in the civilian labor force during the
remainder of this decade, the economy must
generate an average of more than 1.5 million
new jobs each year simply to keep pace with
the flow of new entrants. It should be pointed
out that such a performance by the economy
would not offset the impact of productivity
gains during the period, nor would it lower
unemployment levels. Along with the expected sharp rise in the rate of growth in the
labor force, the economy will have to contend
with the additional factor of the changing
composition of the labor force-in particular,
the increasing proportion of younger workers.
Table 2 shows the per cent distribution of
the total labor force by sex and age for the
years 1965, 1970, and 1975. Although the data
in the table include members of the Armed
Forces, the Bureau of Labor Statistics' esti7
Economic Advance and Unemployment
mate of a 7.7 million increase in the civilian
labor force for 1965-70 is only slightly different from the estimated change in the total
labor force for the same period, thereby implying essentially no change in the level of
the Armed Forces. Thus, data in Table 2
would tend, almost wholly, to reflect the behavior of the civilian labor force. Assuming
that no drastic change will occur in the lev 1
of the Armed Forces between 1970 and 1975,
the data in Table 2 for that period as well
may be interpreted as reflecting civilian labor
force behavior.
An exam ination of th data shows that only
tho ] 4- to 21-y ar-old ag gro up-for both
sex's- is exp ·led to incr asc its p r · nla g'
distribution of the labor fore b tw en 1965
and 1975. The rising proportion of femal s
45 years and over during that same period
is offset by a d ecline in th e male component
of that age group. Thus, younger workers
will form an increasingly important part of
the manpower pool in the next decade. It
may b e helpful to draw on the unemployment
experience of this group in the recent past to
form some conclusions regarding th e future
impli ations of these xpectcd chang s in
labor force compo ition . In 1957, wh n the
aggr gate un mployrnent rat -4.3 p r c ntwas about the sam as the prevailing rat in
1965-4.6 p er cent- the unemployment rate for
white teenagers was 9.9 per cent as compared
to an unemployment rate of 18 per cent for
nonwhite teenagers. In 1965, the unemployment rates for these same two groups were
12.2 per cent and 25.3 per cent, respectively.
Thus, after almost 5 years of economic expansion, both groups of teenagers were characterized by a worsenin g of th ir unemploym nt
positions, with nonwhites main taining double
the white unemployment rate in both p eriods.
In the case of workers in the 20- to 24-yearold age group, th e res pective unemployment
rates for white males for 1957 and 1965 were
7.1 per cent and 5.9 p er cent; for nonwhite
8
males, 12.7 per cent and 9.3 per cent. White
females in this age group had an unemployment rate of 5.1 per cent in 1957 and 6.3 per
cent in 1965; while nonwhite females had a
12.2 per cent un mployment rate in 1957 and
13.7 per cent in 1965. Although the relative
position of both white and nonwhite males,
20 to 24 years old, improved between 1957
and 1965, their unemployment rat s-as in the
case of teenagers-were sti11 above the over-all
unemployment rate in both years. This indicates that younger workers-including the
teenage gro up-continu e to be at a disadvantage in sharing th e employm nt h .nefits
of a growin g 'Conom y.
Th ' re arc a numb ' r of r asons to explain
the plight of youn g r work rs . First, a sizable
proportion of youths will, during any giv n
period, either be new entrants to the labor
force or in the job-changing category. Both
these groups are marked by a high degree of
short-term-transitional-unemployment. Their
familiarity with the mechanics of the job
market is limited, and their lack of experience
or seniority makes them highly susceptible to
layoffs . Amon g youths with less than a high
school ed ucation, unemp]oym nt is ven more
of a prob] m- with un mploym nt rate about
doubl thos of hi gh school graduat s. Gcnrally, most t nage a nd old r yo uths will find
employment in those occupations where skill
requirements are low, and, consequently,
where both earnings and job security are
correspondingly low. These basic factors underlying the high unemployment rates for
younger workers have b een compounded as a
consequence of two observable trends. First,
th unemployment problem of youths has
b en intensifi d by demographic factors-such
as th e post-World War II "baby boom"which have added substantia1ly to th e younger
component of the labor force, and promise to
continue to do so in th e future-a point emphasized arly in the analysis. Second, the
rate of growth of unskilled jobs has been
Economic Advance and Unemployment
Table 3
ACTUAL ND PROJ CTED EMPLOYMENT,
BY MAJOR 0 CUPATION GROUPS, 1960-75
Projected•:,
Actual
1960
Number
(millions)
Molor Occupation Groups
TOTAL EMPLOYMENT
White -collar workers
Professional, technical, and kindred
workers
Managers, officials, and proprietors,
Cle~7c;~f~~~rkindred workers
Sales workers
Blue-collar workers
Craftsmen, foremen, and kindred
workers
Operatives and kindred workers
Laborers except farm and min
Service workers ( including private
household)
Farmworkers
Formers and form managers, laborers,
and foremen
Per
Cent
Distribution
Number
(millions)
1975
1970
1965
Per
Cent
Distribu tion
Number
(millions)
Per
Cent
Distribution
Change
Change
1960-65
1965-75
Number
(millions)
Per
Cent
Distribution
Number
(mi llions)
Per
Cent
Number
(millions)
Per
Cent
88.7
100.0
5.5
8.2
165
22.9
66.7
100.0
72.2
100.0
81.2
100.0
7.5
11.2
8.9
12.3
11.1
13.7
13 .2
14.9
1 .4
18.8
4. 3
48.6
7.1
9.8
4.4
10.6
14.7
6.6
7.3
11.2
4 .7
10.2
15.5
6.5
8.4
13.2
5.3
10.3
16.3
6.5
9.2
14.6
5.8
10.4
16.5
6.5
0.3
1.4
0.3
3.9
14.1
7.1
1.9
3.4
1.1
25.3
30.8
23.0
8.6
12.0
3.7
12.8
18.0
5.5
9 .2
13.4
3.9
12.8
18 .6
5.3
10.4
14.2
3.7
12.8
17.5
4.6
11.4
14 .8
3.7
12.8
16.7
4.2
0 .7
1.4
0.2
7.7
11.7
5.2
-0.2
-4.0
8.3
12.5
9 .3
12.9
11.0
13.5
12.5
14 .1
1.0
11.9
3.2
33 .8
5.4
8.1
4.3
5.9
3.9
4.8
3.5
3.9
- 1.1
-20.9
-0.8
- 17.9
2.2
23.6
10.5
1.4
*Based on an assumption of 3 per cent unemployment.
SOURCE: Manpower Report of the President and A Report on Manpower Requirements, Resources, Utiliz:otion, and Training, U. S. Department of
Labor (Washington: U. S. Government Printing Office, March 1966), Table E-6.
lagging behind the growth of higher skilled
occupations-jobs which typically are not
available to the relatively unskilled younger
entrant to the labor force.
One of the more impressive aspects of the
urrcnt economic expansion has be n th e
turnaround in blu -collar employment growth
from th 1957-60 expcri nee wh n ueh employm nt d dined by more than half a million.
In particular, the increase in unskilled bluecollar workers in 1964 and 1965-300,000 in
total-following a period of more than 10
years of no growth, was especially welcome
at a time when sharply rising numbers of
untrained teenagers were entering the labor
mark t. However, in spite of the improved
position of semiskilled and unskill d bluecollar workers durin g this expansion, these
two groups still ac ounted for nearly one third
of all unemployment in 1965. In addition,
their un mployment rates remain d well
above the rates for either skilled blue-collar
workers or white-collar workers, and also well
above the over-all unemployment rate.
Monthly Review
•
July-August 1966
Table 3 provides estimates of projected
employment by major occupation groups
through 1975. The outlook for growth in the
semiskilled blue-collar category in the next
decade points toward a slowing down in employm ent growth from the 1960-65 rate. For
the unskillcd- nonfann Jaborcrs-group, a decline by 4 p r cent in th n xt decade is
exp e ted, in contrast with an incr ase of 5
per cent recorded b etween 1960 and 1965.
Skilled blue-collar employment, on the other
hand, is expected to grow at a rate three
times faster than in the past 5 years. Among
white-collar workers, the outlook calls for
stepped-up employment growth over 1960-65
rates in the next decade. The expected
growth in s r ice-worker employment is
equally bright. The outlook for farmworkers
is for a continuation of declining employment
1 vels.
The projections of either reduced or negative employment growth among the semiskilled and unskilled categories of blue-collar
workers, shown in Table 3, take on added sig-
9
Economic Advance and Unemployment
nificance in the context of an expected stepup in the rate of labor force growth in the
next decade. Since the younger entrants into
the labor force typically find access to the job
market at the lower end of the skill spectrum,
the projected shrinkage in these employment
opportunities coming in the face of accelerated increases in the 14- to 24-year-old component of the labor force furth er compounds
the problem of younger workers.
SOME FINAL THOUGHTS
The subject of un employmen t encompasses
a wide sw ' cp and , in the comsc of this
analysis, of ncccssi ly, mu ·h has be ·n left
unsaid. Emphasis Iias b 'en placed on th
plight of th e younger worker group, because
the problems of this largely unskilled group
pose a most difficult dilemma for public
policy planners. Considerable attention has
been directed toward the relationship of economic growth to the problem of aggregate
unemployment. It was shown that, in a
10
dynamic economy, one has to run very fast
to keep from falling behind, and faster still
to move ahead. That lesson is applicable to
the problem of un employment for particular
groups as well. An indispensable prerequisite
to an improved unemployment picture for
certain disadvantaged groups is a rapidly
growing economy. The dramatic improvement in unskilled employment in 1965 attests
to this. ·w hile high rates of grow th in national
output are indeed a necessary condition for
reducing unemployment, the structure of the
U. S. unemployment problem also indicates
that rapid econom ic growth alone is not
s1d'fici ·nt. More finel y horH'd weapons will
liav • to IH' for g( d and hro11 gl1l to b('ar on
parlicular c:irc-11 msta 11ccs. In an economy operatin g at relatively high rates of resource
utilization- measured in the aggregate- the
cost of additional economic growth comes
quite high. The dilemma facing public policy
makers is to weigh that cost against the
economic and social costs of unemployment
in all its dimensions.
District Banking, 1961-65
By Frederick M. Struble
economic expansion moves
A ws 1l inlo its sixth
year with no signs of
Tilt-: cu mlE T
termination , a rev i 'W of major developments
at mcmh r banks in th Tenth Federal Heserve District over th first 5 y ars of this
period seems appropriate. This article provides this review and attempts to place these
recent developments in perspective by answering the questions: How has the recent
experience of District member banks differed
from their experience in the 1950's? In what
ways has it been similar?
DEPOSIT DEVELOPMENTS
At the end of 1965, total deposits of memb r banks in the T nth Federal Reserve Disb·ict stood at $11.4 billion, approximately $2.8
billion above their level a t the end of December 1960, a date which roughly corresponds
to the beginning of the current business expansion. This increase of nearly 32 per cent
was truly remarkable, surpassing the deposit
growth recorded in the entire 9 years pre·cd ing Lhis period.
This expansion app ars even mor ' r markable when it is ·ompar ·<l with th growth in
deposits that took place in preceding periods
of expansion. As shown by Table 1, banks
did not usually experience large deposit gains
during the periods of economic expansion in
the 1950's. To the contrary, a sharp slowdown
in deposit growth usually occurred. Deposits
increased only 1 per cent over the 35-month
expansion period ending July 1957 and only
2.8 per cent in the following 25-month expansion period ending May 1960. Moreover, it is
apparent that the recent developments in both
demand and time and savings accounts differ
markedly from those in earlier periods. To be
sure, the recent growth in time and savings
deposits conh·asts more dramatically with developments in earlier expansion periods, but
the behavior of demand deposits also is
markedly different, as demand deposits in-
Table 1
DEPOSIT GROWTH AT MEMBER BANKS
IN THE TENTH FEDERAL RESERVE
DISTRICT
IN SELECTED PERIODS
Data For
Period
Aug . 1954-July 1957
Apr . 1958-May 1960
Dec. 1960-Dec. 1965
Monthly Review
•
No . of
Months
35
25
60
Demand Deposits
In Millions
Per
of Dollars
Cent
---=T26 -2.0
-20
-0.3
+7.9
+540
July-August 1966
Total Deposits
Time Deposits
Per
Per
In Millions
In Millions
Cent
of Dollars
of Dollars
Cent
--:+i99 +ia.9 ~ +T."o
+2 .8
+212
+232
+16.3
+31.9
+2,217
+122.4 +2,757
11
District Banking, 1961 -65
creased moderately contrasting with declines
in earlier periods.
The periods compared in this table are not
strictly comparable. The current period under
consideration-with a length of 60 monthswas roughly twice as long as the two earlier
periods. Moreover, the data for the earlier
periods encompass developments over the full
expansion phase from trough to peak, while the
recent data reflect developments only from
the trough to some date well short of the
peak. Nonetheless, it is obvious that, even
if full allowance is made for these discrepancies, the recent developments represent a
marked d partur from past cxpcri 'nc .
Growth in total deposits at aJI member
banks in the Nation over th first 5 years of
the current xpansion was even greater than
at District member banks-total deposits expa{lded 42.7 per cent in the Nation compared
with a gain of 31.9 per cent in the District.
And, as was true for District member banks,
this recent growth at all member banks in the
Nation contrasts sharply with their experience
in preceding expansion periods. This similarity provides a very important clue for explaining the recent deposit b havior at District member banks. With the advent of our
mod rn communications system, our regional
banking community has been well int grated
into the national financial system, so that to
a major extent developments at District member banks reflect the effects of forces dominating conditions at all banks in the country.
One must look to these factors which affected
deposit developments throughout the Nation
over the period under consideration to find
the explanation for the recent record deposit
growth in the Dish·ict.
A major factor encouraging the recent deposit growth at commercial hanks was the
sharp advance in income and savings that took
place over the 5-year period, for this advance
generated a substantial increase in demand for
various types of financial assets. However,
12
although this development created a climate
conducive to deposit growth, it quite obviously was not the only factor responsible
for the recent growth. Preceding periods of
economic expansion also generated sharp increases in savings which led to increased
demand for various types of financial assets;
yet this did not lead to unusual deposit growth.
In these earlier periods, a slowdown in growth
of the reserve base available to the banking
system and a sharp increase in interest rates
on other financial assets-an increase relative
to the rates that banks were ahle to offer on
their deposits- act d as constraints on the ability of commer 'ial hanks to capture a shar of
the rising savings vol um'. In the current expansion p 'riod th 'SC constraints were r ,]axed.
Changes in Hcgulation Q ov 'r this p riodchanges which increased the maximum interest rates banks were permitted to pay on time
and savings deposits-enabled banks to compete effectively for a share of the rising savings that were channeled into various forms
of financial assets. In addition, the Federal
Reserve System followed a relatively easy
monetary policy during the early years of this
period and, even when monetary policy was
tightened, this did not- as in earlier expansion
periods-result in a marked slowdown in the
availability of bank reserves.
The effects of these factors on the growth in
deposits at District member banks can be detected in Table 2. The influence of a relatively
easy monetary policy and relatively low interest rates on competing forms of financial
assets in 1961 is in evidence, as demand deposits increased 7.3 per cent and time deposits
rose 18.6 per cent. Over 90 per cent of the
total 5-year growth in demand deposits was
recorded in this 1 year. In addition, the expansion in time deposits was greater than in
every other year of the period except 1962.
The effects of the first of four changes in
maximum rates payable on time and savings
deposits made effective on January 1, 1962,
District Banking, 1961 -65
Table 2
DEPOSIT GROWTH AT TENTH DISTRICT MEMBER BANKS
1961-65
1961
Demond Deposits
Time Deposits
Total Deposits
1964
1963
1962
1965
In M illions
of Dollars
Per
Cent
In M illions
of Dollars
Per
Cent
In M illions
of Dollars
Per
Cent
In Millions
of Dollars
Per
Cent
In Millions
of Dollars
Per
Cent
~
+7.3
+18 .6
+9.6
-205
+ 527
+322
-2.8
+ 24.5
+ 3.4
+148
+447
+ 595
+IT
+7 5
+449
+ 524
+l.0
+14.4
+5 .0
-----:+26
+0.4
+12 .8
+4.4
+337
+833
also are clearl y indicated, as growth in time
deposits over that year was 24.5 per cent. This
advance in time deposits was partly at the
e ·pcnsc of demand deposits h Id at District
hanks, as the drop in dc>mand deposits in
1962 w01 ild scc-rn lo snggcsl. A much more
important SOIIIT<' of f1111ds for the grow th in
time deposits, howc er, , 011hl appear lo ha c
come from funds which otherwise would have
been placed in other types of financial assets.
The competitive position of banks was reinforced by further upward movements in
maximum permissible rates on July 17, 1963,
ovember 24, 1964, and December 6, 1965.
These additional increases permitted banks
to offset the effects of rising interest rates on
competing financial ass ts as the p riod
progress cl, increases induced by a continued
strong credit d •mancl and a slowly tight ning
monetary policy. Over the final 3 y ars of
the p riod, time deposits continued to xpand
at historically high rates, although th r was
a noticeable decline in annual rates of expansion over this period. Growth in demand deposits was generally weak over this period.
The behavior of demand and time deposits
over this recent period augmented a trend
in the composition of deposit accounts that
may be traced to th early 1950's. Since that
time, th re has been a generally steady upward
movcm nt in th proportion of time and savings deposits in total deposits at District banks.
This ratio moved slightly above 35 per c nt
at the end of 1965, up from 22.9 per cent at
the end of 1960 and 10.5 per cent at the beginning of the 1950's.
Monthly Review
•
July-August 1966
+1 6.7
+ 6.1
+457
+483
Entire Period
In Millions
Per
of Dollars
Cent
+540
+2,217
+2,757
+7.9
+122.4
+31.9
ASSET DEVELOPMENTS
The funds obtained from the record expansion in deposits over the 5 years ending last
December enabled District member banks to
make s11hslantial additions lo th ir holdings of
earning assets, as total loans inncasecl 6.'3.3
per cent and total invc slmcnls 16.4 pN 'nt.
The advances in these a ·counts fc lJ somewhat
short of those recorded at all member banks
in the Nation, where total loans increased 69.5
per cent and total investments expanded 23.7
per cent. In the process of expansion, the
structure of their asset portfolios was altered
considerably. In many respects, these alterations closely coincided with the types of restructuring that occurred throughout the
1950's, particularly during the periods of economic expansion in that decade.
As indicated in Table 3, th composition
of as ct growth at District m mber banks
varied considerably over the period. In 1961,
total investments increased as rapidly as total
loans, as almost 60 per cent of the expansion
in total investments over th e entire period
occurred in this 1 year. In the following
years, however, a continued strong demand
for loans, together with a smaller expansion
in total deposits, held down the growth in
total investments. In fact, in 2 of the final 4
years of this period, moderate reductions were
made in investment holdings, although for the
4 years as a whole a net advance was recorded.
In contrast to the slowdown in investment
growth, th growth in loans remained strong
throughout the period with the largest an13
District Banking, 1961 -65
Table 3
ASSET GROWTH AT TENTH DISTRICT MEMBER BANKS
1961-65
Loons and Investments
Total Loons
Total Investments
U. S. Treasury
Securities
Other Investments
1961
1962
1963
Thousands Per Thousands Per Thousands Per
of Dollars Cent of Dollars Cent of Dollars Cent
746,876 1().4 541,286 6]i 497,260 ~
423 ,326 10.4 434,936
9 .7 501,263 10.2
323,550 10.4 106,350
3.1
-4,003 -0. l
238,791
84,7 59
10.0 -24,3 75 -0.9 - 113,258 -4.4 - 15,866 - 0 .6
11 .8 130,725 16.3 109,255 11.7 126,650 12. l
nual advance actually occurring in 1965. Substantial gains were recorded in all major loan
categories over the 5-year period. The largest
absolute ga in was recorded in business loans
as these accounts increased $758 million, or
by 55 per cent. Ahsol11tc growth in other
major categories was not as great but the percentage increases in th sc categories exec dcd
the growth in business loans. The advance in
these loan categories in both absolute and percentage terms were: real-estate loans, up $543
million or by 87 per cent; nonguaranteed loans
to farmers, up $414 million or by 65 per cent;
and consumer loans, up $679 million or by 79
per cent.
The structure of investment accounts was
altered considerably over this period. Holdings of U. S. Treasury securities, after increasing rather sharp1y in 1961, dechned in each
of the fo1lowin g 4 years. In contrast, ''o ther
investrnents"-mainly state and local bonds and
federal agency issues- increased consistently
and substantially throu ghout the period. The
net result of these developments was a 5 per
cent decline in holdings of U. S. Treasury
issues and an 87 per cent increase in holdings
of other securities. This reduced the proportion of U. S. Treasury securities in total inTable· 4
ASSET RATIOS AT DISTRICT MEMBER
BANKS ON SELECTED DATES
Dec.
1950
Loon/ Total Asset
27.3
Cash/ Total Asset
27.0
U.S. Treasury/ Total Investment 82.9
14
1964
1965
Thousands Per Thousands Per
of Dollars Cent of Dollars Cent
660,3 70 7A
6 45,440 '7::7
549,586 10. l
673,710 11 .3
110,784
3. 1
-28,270 - 0 .8
Dec.
1955
315·
25 .l
79.0
Dec.
1960
39.0
20.8
76.9
Dec.
1965
47.4
17.5
62.7
196 1-65
Thousands Per
of Dollars Cent
3,091 ,232 43 .0
2,582,82 1 63.3
508,41 1 16.4
-205,696 -8.3 -120,404 -5.0
177,426 15.2
628,8 15 87.4
vestment holdings to roughly 63 per cent,
down from about 77 per cent at the start of
the period.
CHANGES IN DISTRICT BANK
LIQUIDITY
The pcrc -ntagc increase in total loans at
District member banks was almost twice as
large as the gain in total assets. Consequently, the ratio of loans to total assets increased
further over the period. In addition, changes
in two other measures also give some indication of a decline in liquidity at District member banks. As previously discussed, the proportion of U. S. Treasury securities in total investment holdings of District member banks
declined over th e period. Since U. S. Treasury securities arc generally more marketable
than other types of investments, the decline
in this ratio would appear to imply a reduction in th e liquidity of member bank ass t
portfolios. The proportion of cash assets in
total asset holdings also declined over the
period, dropping from 20.8 per cent to 17.5
per cent. While it is widely recognized that
each of these ratios are but crude measures
of bank liquidity, taken together the changes
in these indexes would appear to point rather
clearly to a substantial reduction in the liquidity position of member banks over the recent
period.
This development is not unique to the
period under discussion, as the measures of
these ratios in Table 4 clearly indicate. To
the contrary, the liquidity of District member
District Banking, 196 1-65
banks has declined almost steadily since the
early 1950's with only minor interruptions in
this trend occurring during periods of recession.
Several reasons can be given for this almost
steady decline in liquidity positions. One of
these is that the stark comparison of the current position with that prevailing in the early
1950's gives a somewhat distorted pictur .
Quite clearly, District member banks were
then in what might be called an excess liquidity position. For example, the loan to total
asset ratio was not much higher than it was at
the end of ·w orld War II wh n it was at a
historically low 1cvcl. Moreover, exp ricncc of
the past _,() years has kd lo a co nsiderable reass ·ssmcn l of th need for liquidity b y banks.
Pref r 'n · s for a given condition of liquidity
in asset portfolios depend, to a great xtent,
upon an assessment of how likely it is that
substantial declines in deposits will occur.
And postwar experience would seem to indicate to banks that this contingency is much
less likely today than it was believed to be
20 years ago, for total deposits of all member
banks in the District, as well as in the Nation , have increased almost steadily since the
end of the War.
A further fa -tor that quite possibly helps
to xplain past declines in liquidity positions
is the previously mentioned trend toward a
greater proportion of time and savings deposits
in total deposits. Historically, the volatility of
these deposits, particularly the savings deposits, is much lower than that of demand deposits, and it seems likely that this has led Dis-
trict member banks to reappraise their need
for maintaining a highly liquid asset portfolio.
Each of these considerations provides a
fairly acceptable explanation for the demonstrated willingness of District member banks
to reduce their liquidity positions in the past.
It is a matter of judgment, of course, whether
they also lead to the conclusion that a further
reduction in liquidity will b permitted in the
future. The fact that changes in these liquidity
measures over the current expansion period
occurred at least as rapidly as in the 1950's
suggests, however, that District member banks
will permit som forth r d clin in th ir
liq11idity positions. Supporting this ·on lusion
is the a<ld('d facl that th ' liquidity of Distri t
m ·mh 'r banks, at 1 ast as indicat cl by a comparison of the loan-ass t ra tios, remains higher
than that for all member banks in the Nation.
These comments apply only to the decisions
of member banks in the aggregate. It is quite
possible, of course, that preferences will differ
markedly among individual banks. However,
it is difficult to find any particular group of
banks in the District in which the logic of
th se statements would not seem to apply.
For example, one type of grouping-by sizeinitially might indicate marked differences in
preferences amon g groups of banks. In this regard, however, Table 5, which compares d velopments in loan-asset ratios a t six groups of
banks classified according to size, is worth examining. Two characteristics of the data in
this table are most striking. The first is the
rather marked similarity in the levels of these
Table 5
LOAN-ASSET RATIOS AT DISTRICT MEMBER BANKS
GROUPED ACCORDING TO DEPOSIT SIZE ON SELE TED DATES
1950
1955
1960
1965
Under $1 Million
in Deposits
30.5
35 .0
39.6
49.3
$1-2Million
in Deposits
29.9
$2-5 Million
in Deposits
25.9
$5-lOMillion
in Deposits
33 .6
40.2
46.8
30.4
38.6
47 .5
29.5
37.1
47.1
24.8
$10-50 Million
in Deposits
24.3
30.2
39.1
46.8
$50 Million and Over
in Deposits
27.5
34.0
44.3
51.0
NOTE : These ratios were computed by averaging arithmetically the ratios of individual banks in each size group.
M onthly Review
•
July-August 1966
15
District Banking, 1961-65
ratios at the different groups of banks at the
end of 1965. While differences do exist, they
are not wide and there does not appear to be
any consistent relationship between size and
the level of this ratio. For example, the ratio
for the smallest group of banks is higher than
for any other group except the very largest.
The second interesting characteristic is the
general similarity in the manner in which these
ratios have changed over time. Again, to be
sure, there are some differences in the changes
in these ratios over the full 16 years among
the cliff rent size groups of banks. But, in
g ncral, th orrclation among th · changes is
obviously quit• high.
SUMMARY AND CONCLUSIONS
Periods of rapid economic expansion customarily have generated strong demands for
credit at member banks in the Tenth Federal
Reserve District and the current expansion
period has been no exception. The manner
in which the current expansion has been financed to date differs markedly, however. In
contrast to past experience, District member
banks were able to increase their deposit accounts sufficiently from 1961 to 1965 to finance not only a substantial growth in total
loans but also a mod rate increase in their
investment holdings. Growth in total assets
lagged substantially behind the gain in total
loans over the period, however, and as in past
periods of expansion, the ratio of loans to total
assets increased further. In addition, the ratio
of cash assets to total assets was reduced and
the proportion of U. S. Treasury securities in
investment portfolios declined. Thus, District
member banks began the sixth year of the current expansion with greatly expanded asset
and deposit accounts but substantially reduced liquidity positions.
Over the first 6 months of this year total deposits increased only .8 per cent compared
with gains of 2.2 per cent and 2.4 per cent during the same periods in 1965 and 1964. It
seems a safe assumption that growth in deposits throughout the remainder of this year,
at least, will fall short of that recorded in
earlier years of this expansion. The effects of
the tight monetary conditions currently prevailing would seem to point in this direction.
Moreover, with interest rates on competing
financial assets already at historically high
levels, the competitive opportunities that
banks deriv d from the increases in maximum
rates allowed under Regulation Q in recent
years would app ar to hav diminish d. Final ly, lho r ·cent Hegulation Q changes- ·hang s
rcslri ·ting th e rate of int ')'('St banks ·an pay
on multiple maturity time d 'posits to 5 per
cent for certificat s with first maturity over
90 days, and 4 per cent on those with first
maturity of less than 90 days-and the increase
in reserves required to be held against time
deposits may place a further dampening influence on deposit growth at District member
banks.
While it is possible to point to these factors
which suggest a slowdown in deposit growth
in coming months, there ar few signs that a
comparable reduction in loan demand will
occur. Although the growth in total loans
during th first half of thjs year f 11 below
that record d in 1965 and 1964, the advanc
was sizeable. This expansion took place
against a background of reduced liquidity
positions at District member banks, which
suggests that the banks found it necessary to
meet a large part of this demand despite the
further effects this would have on their
liquidity positions.
Taken tog thcr, these proj ctions of deposit
growth and loan d mand indicate that the
coming months will be a particularly challenging period for member banks in the Tenth
Federal Reserve District.
@FedFRASER